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5 CORPORATE RESPONSIBILITIES, CONSUMER STAKEHOLDERS, AND THE ENVIRONMENT

5.1 Corporate Responsibility toward Consumer Stakeholders

5.2 Corporate Responsibility in Advertising Ethical Insight 5.1

5.3 Controversial Issues in Advertising: The Internet, Children, Tobacco, and Alcohol Ethical Insight 5.2

5.4 Managing Product Safety and Liability Responsibly Ethical Insight 5.3

5.5 Corporate Responsibility and the Environment

Chapter Summary

Questions

Exercises

Real-Time Ethical Dilemma

Cases 12. For-Profit Universities: Opportunities, Issues, and Promises 13. Fracking: Drilling for Disaster? 14. Neuromarketing 15. WalMart: Challenges with Gender Discrimination 16. Vioxx, Dodge Ball: Did Merck Try to Avoid the Truth?

Notes

OPENING CASE

U.S. health care spending related to obesity in 2013 was $190 billion. The newly released United Nations (UN) report on global nutrition does not make for very uplifting reading: amid an already floundering global economy, the reality of a fattening planet is dragging down world productivity rates, while increasing health insurance costs to the tune of $3.5 trillion per year —or 5% of global gross domestic product (GDP).1 Obesity in the workforce leads to expensive health care, interruptions in productivity, and days absent from work. Obesity and overall weight gain in the American population changed from a problem to a crisis when it

Weiss, Joseph W.. Business Ethics : A Stakeholder and Issues Management Approach, Berrett-Koehler Publishers, Incorporated, 2014. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/apus/detail.action?docID=1565988. Created from apus on 2019-06-15 17:18:23.

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was made an issue of public concern by the Food and Drug Administration (FDA) and the National Center for Health Statistics (NCHS). A survey conducted from 2007–2009 indicated that 34.4% of the U.S. adult population was overweight or obese.2 An even more striking statistic is found in the weight increase experienced by children and adolescents in the United States. Current research estimates that 17% of children and adolescents (12.5 million children), ages 2 to 19, are overweight or obese. Higher prevalences of adult obesity were found in the Midwest (29.5%) and the South (29.4%). Lower prevalences were observed in the Northeast (25.3%) and the West (25.1 %).3 Carrying excess weight causes an increased risk for medical conditions, including coronary heart disease, stroke, hypertension, sleep apnea, and some forms of cancer. The rise in obesity comes despite efforts by First Lady Michelle Obama to promote healthy eating, and New York mayor Michael Bloomberg’s size restriction on sugary drinks. The problem has become so profound that the U.S. Health and Human Services Department actually declared obesity a disease affecting the population in 2004. On June 18, 2013, the nation’s largest physicians’ group classified obesity as a medical “disease,” despite the recommendations of a committee of experts who studied the issue for a year.4

In a 2006 survey of 1,000 households, conducted for Medicine & Law Weekly, results showed that 51% of the households would like to see fast food restaurants under the regulation of the government, while only 37% were opposed to such an action.5 Consumers are suggesting that they are looking for more regulations to be placed on the fast food industry to provide them with a wider variety of healthier meal options.

Another reason cited for the overall increase in overweight and obese individuals in the United States is the ease of selecting calorie-packed foods and the high cost associated with eating healthy. The Centers for Disease Control and Prevention has pointed out that the availability of foods that are high in fat, sugar, and calories has made it increasingly more convenient for consumers to select those foods.6 Availability is not the only factor at play. A downward trend in the cost of calories, combined with a downward trend in physical exertion at work, has also contributed significantly to the rise in obesity.7

Fast food chains have reacted to consumers’ demand for healthier menus by making changes to their menus and marketing strategies. McDonald’s has a new “Go Active” campaign, featuring new, healthy menu items, such as salads topped with chicken and a new fruit and walnut salad. Many of these changes have been targeted at children’s nutrition. The “What’s Hot in 2012” survey from the National Restaurant Association revealed the top-10 menu trends for 2012:

1. Locally sourced meats and seafood. 2. Locally grown produce. 3. Healthful kids’ meals. 4. Hyper-local items. 5. Sustainability as a culinary theme. 6. Children’s nutrition as a culinary theme. 7. Gluten-free/food allergy-conscious items.

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8. Locally produced wine and beer. 9. Sustainable seafood. 10. Whole-grain items in kids’ meals.

A report from the Yale University Rudd Center for Food Policy and Obesity noted that approximately 84% of parents with children aged 2 to 11 took their families to a fast food restaurant weekly. Although fast food restaurants are reevaluating their menus to include more healthful options for children, the study showed that of 3,039 kids’ meal combinations possible, only 12 met the nutritional criteria for preschool-age children and only 15 met the criteria for older children.8 Subway leveraged the story of Jared Fogle, the Indiana University student who once weighed 425 pounds. By making Subway’s healthy sandwiches a part of his daily diet, and combining them with regular exercise, Fogle was able to lose 245 pounds in a year. On March 25, 2013, a leaked internal memo showed that McDonald’s believed it would lose 22% of its 18–34-year-old customers to what’s perceived as the healthier option, sandwich chain Subway, without adding the “wrap” onto its menu.9

The FDA has also joined the fight against obesity by initiating programs to “count calories.” Its goals include pressuring fast food companies to provide more detailed and accurate information about nutrition content to their diners as well as educating consumers. With the partnership between the fast food chains and the FDA, consumers stand to be better informed about their options to become and remain healthy. Restaurants and company web sites now provide consumers with nutritional information for menu items. Restaurants have teamed up with nutritionists who can offer helpful suggestions. When presented with healthier options, it’s in the hands of consumers to make the right choices to improve their health.

5.1 Corporate Responsibility toward Consumer Stakeholders As the largest national economy in the world, the United States produced $16.2 trillion worth of goods and services (GDP) in 2012. China’s growing economy earned it the second place slot, with a GDP of 8.2 trillion in 2012.10 Consumer spending in the United States accounts for about two-thirds of total economic activity. Consumers may be the most important stakeholders of a business. If consumers do not buy, commercial businesses cease to exist. The late management guru Peter Drucker stated that the one true purpose of business is to create a customer.11 Consumer confidence and spending are also important indicators of economic activity and business prosperity. Consumer interests should be foremost when businesses are designing, delivering, and servicing products. Unfortunately, this often is not the case. As this chapter’s opening case shows, giving customers what they want may not be what they need; also, not all products are planned, produced, and delivered with consumers’ best health or safety interests in mind. Many companies have manufactured or distributed unreliable products, placing consumers at risk. The effects (and side effects) of some products have been life-threatening, and have even led to deaths, with classic cases being the alleged effects of the Merck drug Vioxx, the Bridgestone/Firestone tires on the Ford Explorer, tobacco products and cigarettes that contain nicotine, the Ford Pinto, lead-painted toys, and numerous other

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examples. At the same time, the majority of products distributed in the United States are safe, and people could not live the lifestyles they choose without products and services. What, then, is the responsibility of corporations toward consumer stakeholders?

Corporate Responsibilities and Consumer Rights Two landmark books that inspired the consumer protection movement in the United States were Upton Sinclair’s The Jungle (1906), which exposed the unsafe conditions at a meat-packing facility, and Ralph Nader’s Unsafe at Any Speed (1965), which created a social expectation regarding safety in automobiles. Then Fast Food Nation: The Dark Side of the All-American Meal (2001) by Eric Schlosser, followed by The Carnivore’s Dilemma (2008) by Tristram Stuart and Robert Kenner’s 2008 documentary Food, Inc., investigated the nature, source, production and distribution of food in the United States in particular. George Ritzer’s The McDonaldization of Society (2011) drew attention to the pervasive influence of fast food restaurants on different sectors of American society, as well as on the rest of the world. In providing “bigger, better, faster” service and questionable food products, McDonald’s has been the leader in creating—or reinforcing—a lifestyle change that, as the opening case shows, contributes to obesity. Morgan Spurlock’s 2004 documentary, Super Size Me, also explored the fast food industry’s corporate influence and encouragement of poor nutrition for profit.

As Steven Fink’s issues evolution framework in Chapter 3 illustrated, a “felt need” arises from books, movies, events, and advocacy groups, and builds to “media coverage.” This then evolves into interest group momentum, from which stakeholders develop policies and later legislation at the local, state, and federal levels. This same process has occurred and continues to occur with consumer rights. The books and documentaries mentioned here have contributed to articulating and mobilizing the issues of obesity, unsafe cars, and quality of life to the public.

The following universal policies were adopted in 1985 by the UN General Assembly to provide a framework for strengthening national consumer protection policies around the world. Consider which policies apply to you as a consumer:

1. The right to safety: to be protected against products, production processes, and services which are hazardous to health or life.

2. The right to be informed: To be given facts needed to make an informed choice, and to be protected against dishonest or misleading advertising and labeling.

3. The right to choose: to be able to select from a range of products and services, offered at competitive prices, with an assurance of satisfactory quality.

4. The right to be heard: to have consumer interests represented in the making and execution of government policy, and in the development of products and services.

5. The right to satisfaction of basic needs: to have access to basic essential goods and services, adequate food, clothing, shelter, health care, education and sanitation.

6. The right to redress: to receive a fair settlement of just claims, including compensation for misrepresentation, shoddy goods or unsatisfactory services.

7. The right to consumer education: to acquire knowledge and skills needed to make informed, confident choices about goods and services while being aware of basic consumer

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rights and responsibilities and how to act on them. 8. The right to a healthy environment: to live and work in an environment which is nonthreatening to the well-being of present and future generations.12

From an ethical perspective, corporations have certain responsibilities and duties toward their customers and consumers in society:

• The duty to inform consumers truthfully and fully of a product or service’s content, purpose, and use.

• The duty not to misrepresent or withhold information about a product or service that would hinder consumers’ free choice.

• The duty not to force or take undue advantage of consumer buying and product selection through fear or stress or by other means that constrain rational choice.

• The duty to take “due care” to prevent any foreseeable injuries or mishaps a product (in its design and production or in its use) may inflict on consumers.13

Although these responsibilities seem reasonable, there are several problems with the last responsibility, known as “due care” theory. First, there is no straightforward method for determining when “due care” has been given. What should a firm do to ensure the safety of its products? How far should it go? A utilitarian principle has been suggested, but problems arise when use of this method adds costs to products. Also, what health risks should be measured and how? How serious must an injury be? The second problem is that “due care” theory assumes that a manufacturer can know its products’ risks before injuries occur. Certainly, testing is done for most high-risk products; but for most products, use generally determines product defects. Who pays the costs for injuries resulting from product defects unknown beforehand by consumer and manufacturer? Should the manufacturer be the party that determines what is safe and unsafe for consumers? Or is this a form of paternalism? In a free market (or at least a mixed economy), who should determine what products will be used at what cost and risk?14

Related to the rights presented above, consumers also have in their implied social contract with corporations (discussed in Chapter 4) the following rights:

• The right to safety: to be protected from harmful commodities. • The right to free and rational choice: to be able to select between alternative products.

• The right to know: to have easy access to truthful information that can help in product selection.

• The right to be heard: to have available a party who will acknowledge and act on reliable complaints about injustices regarding products and business transactions.

• The right to be compensated: to have a means to receive compensation for harm done to a person because of faulty products or for damage done in the business transaction.15

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These rights are also constrained by free-market principles and conditions. For example, “products must be as represented: Producers must live up to the terms of the sales agreement; and advertising and other information about products must not be deceptive. Except for these restrictions, however, producers are free, according to free-market theory, to operate pretty much as they please.”16

“Buyer Beware” and “Seller Take Care” The age-old principle of “let the buyer beware” plays well according to free-market theory, because this doctrine underlies the topic of corporate responsibility in advertising, product safety, and liability. In the 1900s, the concept of “let the seller take care” placed responsibility of product safety on corporations17 (which we discuss later in this chapter under product liability). Several scholars argue that Adam Smith’s “invisible hand” view is not completely oriented toward stockholders.

Consumer Protection Agencies and Law Because of imperfect markets and market failures, consumers are protected to some extent by federal and state laws in the United States. Five goals of government policymakers toward consumers are:

1. Providing consumers with reliable information about purchases. 2. Providing legislation to protect consumers against hazardous products. 3. Providing laws to encourage competitive pricing. 4. Providing laws to promote consumer choice. 5. Protecting consumers’ privacy.18

Some of the most notable U.S. consumer protection agencies include:

1. The Federal Trade Commission (FTC): deals with online privacy, deceptive trade practices, and competitive pricing.

2. The Food and Drug Administration (FDA): regulates and enforces the safety of drugs, foods, and food additives, and sets standards for toxic chemical research.

3. The National Highway Traffic Safety Administration (NHTSA): deals with motor vehicle safety standards.

4. The National Transportation Safety Board (NTSB): handles airline safety. 5. The Consumer Product Safety Commission (CPSC): sets and enforces safety standards for consumer products.

6. The Department of Justice (DOJ): enforces consumer civil rights and fair competition.

Governmental and international agencies also work to protect consumers’ legal rights. The Consumer World web site (http://www.consumerworld.org/pages/agencies.htm) has an extensive list of consumer protection agencies that includes the United States and international countries, including India, Hong Kong, Korea, Mexico, Canada, and Estonia, as well as other

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http://www.consumerworld.org/pages/agencies.htm

European countries. The strategic vision of the EU consumer policy “aims to maximise consumer participation and trust in the market. Built around four main objectives the European Consumer Agenda aims to increase confidence by: reinforcing consumer safety; enhancing knowledge; stepping up enforcement and securing redress; aligning consumer rights and policies to changes in society and in the economy.”19

5.2 Corporate Responsibility in Advertising Advertising is big business. Direct marketing advertising was 54.3% of the total advertising spending in 2009, while 2010 total direct marketing spending was estimated at $153.3 billion.20 Figure 5.1 shows ad dollars spent by the industry in 4th quarter 2012 over 2011, according to Nielsen.

The extent to which advertising is effective is debatable, but because consumers are so frequently exposed to ads, it is an important topic of study in business ethics. The purpose of advertising is to inform customers about products and services and to persuade them to purchase them. Deceptive advertising is against the law. A corporation’s ethical responsibility in advertising is to inform and persuade consumer stakeholders in ways that are not deceitful. This does not always happen, as the tobacco, diet, and fast food industries, for example, have shown.

Figure 5.1 Ad Dollars Spent by Selected Industry and Percentage Change Fourth Quarter 2012 over Fourth Quarter 2011

Source: Adapted from Nielsen. (March 14, 2013). U.S. ad spend increased 2% in 2012 on strong Q3. Nielsen.com. http://www.nielsen.com/us/en/newswire/2013/u-s--ad-spend-increased-2--in-2012-on-strong-3q.html.

Ethics and Advertising At issue, legally and ethically for consumers, is whether advertising is deceptive and creates or contributes to creating harm to consumers. Although advertising is supposed to provide information to consumers, a major aim is to sell products and services. As part of a selling

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http://www.nielsen.com/us/en/newswire/2013/u-s--ad-spend-increased-2--in-2012-on-strong-3q.html

process, both buyer and seller are involved. As discussed earlier, “buyer beware” imparts some responsibility to the buyer for believing and being susceptible to ads. Ethical issues arise whenever corporations target ads in manipulative, untruthful, subliminal, and coercive ways to vulnerable buyers such as children and minorities. Also, inserting harmful chemicals into products without informing the buyer is deceptive advertising. The tobacco industry’s use of nicotine and addictive ingredients in cigarettes was deceptive advertising.

The American Association of Advertising (AAA) has a code of ethics that helps organizations monitor their ads. The code cautions against false, distorted, misleading, and exaggerated claims and statements, as well as pictures that are offensive to the public and minority groups. The following questions can be used by both advertising corporations and consumers to gauge the ethics of ads:

1. Is the consumer being treated as a means to an end or as an end? And what and whose end? 2. Whose rights are being protected or violated intentionally and inadvertently? And at what and whose costs?

3. Are consumers being justly and fairly treated? 4. Are the public welfare and the common good taken into consideration for the effects as well as the intention of advertisements?

5. Has anyone been or will anyone be harmed from using this product or service?

The Federal Trade Commission and Advertising The Federal Trade Commission (FTC) and the Department of Labor (DOL) are the federal agencies in the United States appointed and funded to monitor and eliminate false and misleading advertising when corporate self-regulation is not used or fails. Following is a sample of the FTC’s guidelines:

The FTC Act allows the FTC to act in the interest of all consumers to prevent deceptive and unfair practices. In interpreting Section 5 of the act, the Commission has determined that a representation, omission or practice is deceptive if it is likely to:

• mislead consumers • affect consumers’ behavior or decisions about the product or service

In addition, an act or practice is unfair if the injury it causes, or is likely to cause, is:

• substantial • not outweighed by other benefits • reasonably avoidable

The FTC Act prohibits unfair or deceptive advertising in any medium. A claim can be misleading if relevant information is left out or if the claim implies something that’s not true. For example, a lease advertisement for an automobile that promotes “$0 Down” may be misleading if significant and undisclosed charges are due at lease signing. In addition, claims must be substantiated, especially when they concern health, safety, or performance. The type of evidence may depend on the product, the claims, and what experts believe is necessary. If

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your ad specifies a certain level of support for a claim (e.g., “tests show X”), you must have at least that level of support.

Sellers are responsible for claims they make about their products and services. Third parties—such as advertising agencies or web site designers and catalog marketers—also may be liable for making or disseminating deceptive representations if they participate in the preparation or distribution of the advertising or know about the deceptive claims.21

Pros and Cons of Advertising Advertising is part of doing business, and not all advertising is deceptive or harmful to consumers. The arguments, both for and against advertising, raise awareness that provides information to both companies and consumers in their production and consumption of information and transactions. General ethical arguments for and against advertising are summarized below.

Ethical Insight 5.1

Signs of an Advance-Fee Loan Scam: “Red Flags” from the FTC

• A lender who isn’t interested in your credit history. A lender who doesn’t care about your credit record should give you cause for concern. Ads that say “Bad credit? No problem” or “We don’t care about your past. You deserve a loan” or “Get money fast,” or even “No hassle—guaranteed” often indicate a scam.

• Fees that are not disclosed clearly or prominently. Any up-front fee that the lender wants to collect before granting the loan is a cue to walk away, especially if you’re told it’s for “insurance,” “processing,” or just “paperwork.” Legitimate lenders often charge application, appraisal, or credit report fees. It’s also a warning sign if a lender says they won’t check your credit history, yet asks for your personal information, such as your Social Security number or bank account number.

• A loan that is offered by phone. It is illegal for companies doing business in the United States by phone to promise you a loan and ask you to pay for it before they deliver.

• A lender who uses a copy-cat or wannabe name. Crooks give their companies names that sound like well-known or respected organizations and create web sites that look slick.

• A lender who is not registered in your state. Lenders and loan brokers are required to register in the states where they do business. To check registration, call your state attorney general’s office or your state’s Department of Banking or Financial Regulation.

Source: Federal Trade Commission. (2012). Consumer Information, Advance-Fee Loans. http://www.consumer.ftc.gov/articles/0078-advance-fee-loans.

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http://www.consumer.ftc.gov/articles/0078-advance-fee-loans

Arguments for Advertising Arguments that justify advertising and the tactics of puffery and exaggeration include:

1. Advertising introduces people to, and influences them to buy, goods and services. Without advertising, consumers would be uninformed about products.

2. Advertising enables companies to be competitive with other firms in domestic and international markets. Firms across the globe use advertisements as competitive weapons.

3. Advertising helps a nation maintain a prosperous economy. Advertising increases consumption and spending, which in turn creates economic growth and jobs, which in turn benefits all. “A rising tide lifts all ships.”

4. Advertising helps a nation’s balance of trade and debt payments, especially in large industries, such as the food, automobile, alcoholic beverage, and technology industries, whose exports help the country’s economy.

5. Customers’ lives are enriched by the images and metaphors advertising creates. Customers pay for the illusions as well as the products advertisements promote.

6. Consumers are not ignorant. Buyers know the differences between lying, manipulation, and colorful hyperbole aimed at attracting attention. Consumers have freedom of choice. Ads try to influence desires already present in people’s minds. Companies have a constitutional right to advertise in free and democratic societies.22

Arguments against (Questionable) Advertising Critics of questionable advertising practices argue that advertising can be harmful for the following reasons. First, advertisements often cross that thin line that exists between puffery and deception. For example, unsophisticated buyers, especially youth, are targeted by companies. David Kessler, former commissioner of the FDA, referred to smoking as a pediatric disease, since 90% of lifelong smokers started when they were 18 and half began by the age of 14.23

Another argument is that advertisements tell half-truths, conceal facts, and intentionally deceive with profit, not consumer welfare, in mind. For example, the $300—$400 billion food industry is increasingly being watched by the FDA for printing misleading labels that use terms such as “cholesterol free,” “lite,” and “all natural.” Consumers need understandable information quickly on how much fat (a significant factor in heart disease) is in food, on standard serving sizes, and on the exact nutritional contents of foods. This is increasingly relevant as food-marketing efforts increase. In 2010, for example, $1.24 trillion of food was supplied by food-service and food-retailing operations, which together make up the food- marketing system.24 At stake in the short term for food companies is an outlay of between $100 million and $600 million for relabeling. In the long term, product sales could be at risk.

One of the great paradoxes of Americans today is their obsession with diet and health, while having one of the worst diets in the world. Also noted earlier, more than two-thirds of adults and more than one-third of children in the United States are obese or overweight. Food industry executives say that customers ask for low-fat food but rarely buy it. For many

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Americans, the problem is not just that they are consuming so much fat, it is that they don’t know what they are eating. While government standards for weight and other recommended health-related metrics change, the 2010 government-recommended daily caloric intake of adult men in the United States is between 2,000 and 3,000, depending on age and the level of physical activity; the recommended calories for adult women is 1,600–2,400, also depending on age and level of physical activity. This range is still current in 2014. Many Americans far exceed those recommendations, in part because of their increasing reliance on restaurant food.25

Advertising and Free Speech Because ads are often ambiguous, sometimes misleading, and can omit essential facts, the legal question of “free speech” enters more serious controversies. In commercial speech cases, there is no First Amendment protection if it can be proven that information was false or misleading. In other types of free speech cases, people who file suit must prove either negligence or actual malice.26

Should certain ads by corporations be banned or restricted by courts? For example, should children be protected from accessing pornography ads on the Internet? Should companies that intentionally mislead the public when selling their products be denied protection by the court? 27 The U.S. Supreme Court has differentiated commercial speech from pure speech in the context of the First Amendment. (See Central Hudson Gas and Electric Corporation v. Public Service Commission, 1980, and Posadas de Puerto Rico Associates v. Tourism Company of Puerto Rico, 54 LW 4960). Pure speech is more generalized, relating to political, scientific, and artistic expression in marketplace dealings. Commercial speech refers to language in ads and business dealings. The Supreme Court has balanced these concepts against the general principle that freedom of speech must be weighed against the public’s general welfare. The four-step test developed by Justice Lewis F. Powell Jr. and used to determine whether commercial speech in advertisements can be banned or restricted follows:

1. Is the ad accurate, and does it promote a lawful product? 2. Is the government’s interest in banning or restricting the commercial speech important, nontrivial, and substantial?

3. Does the proposed restriction of commercial speech assist the government in obtaining a public policy goal?

4. Is the proposed restriction of commercial speech limited only to achieving the government’s purpose?28

For example, do you agree or disagree with the conservative plurality on the Supreme Court that has argued in the tobacco smoking controversy to give more free speech rights to tobacco companies? This has been suggested by Lawrence Gostin: “The [Supreme] [C]ourt has held that the FDA lacks jurisdiction to regulate cigarettes. The court observed that Congress, despite having many opportunities, has repeatedly refused to permit agency regulation of the product. Thus, Congress has systematically declined to regulate tobacco but has also

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preempted state regulation. Moreover, the Supreme Court’s recent assertion of free speech rights for corporations prevents both Congress and the states from meaningfully regulating advertising. To the extent that commercial speech becomes assimilated into traditional political and social speech, it could become a potent engine for government deregulation. And, perhaps, that is the agenda of the court’s conservative plurality.”29

The commercial speech doctrine remains controversial. The Supreme Court has turned to the First Amendment to protect commercial speech (which is supposedly based on informational content). Public discourse is protected to ensure the participation and open debate needed to sustain democratic traditions and legitimacy. The Supreme Court has ultimate jurisdiction over decisions regarding the extent to which commercial speech, in particular, ads, and cases meet the previous four standards.

Recent judicial decisions regarding a number of areas, (including consumer privacy, spam, obesity, telemarketing, tobacco ads, casino gambling advertising, and dietary supplement labeling (see Greater New Orleans Broadcasting Association Inc. v. United States and Pearson v. Shalala) have sent the message that “The government’s heretofore generally accepted power to regulate commercial speech in sensitive areas has been restricted.” Regulators have prohibited certain advertisements and product claims based on the government’s authority to protect public safety and the common good. The courts have sent the government (namely, the FDA) “back to the drawing board” to write disclaimers for claims it had argued to be inconclusive. The FDA’s regulatory power has currently been curtailed.30

Paternalism, Manipulation, or Free Choice? Moral responsibility between corporate advertisers and consumers can also be viewed along a continuum. At one end of a spectrum is paternalistic control; that is, “Big Brother” (the government, for example) regulates what consumers can and should hear and see. Too much protection can lead to arbitrary censorship and limit free choice. This is generally not desirable in a democratic market economy. At the other extreme of the continuum is free choice and free speech that are not regulated by any external government controls. Vulnerable groups —children, youth, the poor for example—may be more at risk from predatory advertisements, for example, unregulated pornography and scam advertising. Between these extremes, corporations develop ads to both create and meet consumer demand to buy products and services. The moral and commercial control corporations have in this space can constrain free choice through researched ads that range between puffery, ambiguity, exaggeration, half-truths, and deception to serve corporate interests. Ideally, corporations should seek to inform consumers fully and truthfully while using nonmanipulative, persuasive techniques to sell their products—assuming the products are safe and beneficial to consumer health and safety. Enforcement of advertising can also be viewed along this continuum. Outright bans on ads

can result in court decisions that determine a corporation’s right to free speech under the Constitution. The latest such complaint comes from Columbia Law Professor (and former senior adviser to the Federal Trade Commission) Tim Wu in the New Republic article titled, “The Right to Evade Regulation: How Corporations Hijacked the First Amendment.”

Wu criticizes court decisions protecting commercial speech rights as a return to the Weiss, Joseph W.. Business Ethics : A Stakeholder and Issues Management Approach, Berrett-Koehler Publishers, Incorporated, 2014. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/apus/detail.action?docID=1565988. Created from apus on 2019-06-15 17:18:23.

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discredited Lochner era of the early twentieth century, when some judges began interpreting the Due Process Clause as a license that allowed them to overturn economic legislation based on their own economic policy preferences.31 At the other end of the spectrum, when actual harm and damage can be shown to have occurred as a result of and/or related to deceptive advertisements, the legal system intervenes. As moral and legal disputes occur over specific ads on the paternalism versus manipulation continuum, debate also continues as a matter of perception and judgment from different stakeholder views. In the following section, specific controversial issues of advertising online, children and youth as targets of advertising, and tobacco and alcohol ads are discussed.

5.3 Controversial Issues in Advertising: The Internet, Children, Tobacco, and Alcohol

Advertising and the Internet Advertising on the Internet and cell phones presents new opportunities and problems for consumers. The ubiquity of Internet and cell phone communication and advertising is evident from these growing indicators:

• 4.85 billion people worldwide are expected to use mobile phones by 2015. • 37% of consumers access social media on a mobile phone. • 82 million Americans are expected to be using tablets by 2015. • Mobile ad spending is expected to grow to $2.55 billion by 2014. This total includes spending for messaging, display, search, and video formats for mobile advertising.

• Total spending on mobile advertising will soar from roughly $8.5 billion this year to more than $31.1 billion in 2017, while overall online ad spending will grow from $42.3 billion to $61.4 billion during the same period. By 2017, eMarketer expects that about 60% of search ad spending will be devoted to mobile devices.

• Mobile is also forecast to account for a larger share of display dollars, though not quite to the same extent as search. By 2017, 48.4% of online display advertising (including banners, video, rich media, and ads such as Facebook’s Sponsored Stories and Twitter’s Promoted Tweets) will be on mobile devices (including tablets), up from an estimated 21.7% this year.32

In addition, YouTube’s mobile business will generate approximately $800 million in 2013. According to Martin Pyykkonen, an analyst from Wedge Partners, YouTube accounted for about 10% of Google’s $14 billion in sales in last quarter of 2013, with as much as 25% of YouTube revenues coming from mobile.33

The social networking web sites also draw large numbers of unique and returning viewers. For example, according to comScore, Inc.’s Video Metrix service, Google Inc., including YouTube, drew 154 million unique viewers in March 2013 and Facebook Inc. had 64 million unique viewers in the same period. Over 182,000 million unique viewers in the United States

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watched 39.3 billion online videos during this same period. Video ad views totaled 13.2 billion.

Google sites topped the 2012 U.S. unique web visitors list with 191.4 million visitors; while Facebook drew overall viewer engagement with 10.8 percent of online minutes spent. Google, Facebook, Yahoo, Microsoft, AOL, and Amazon were the top six sites on both these metrics during the 2012 year.34

The ubiquity of ads on the Web continues to cause ethical problems, particularly for parents and those who wish to protect youth from a host of mobile media instant access via cell phones and pop-up ads, and exposure to web sites and advertisements dealing with sex, pornography, violence, drinking, and tobacco.

Pop-up and pop-under ads (ads that open up in a separate browser window) are used on some of the most visited web sites. In place of TV commercials that confront consumers with 30-second product introductions, the new “advertainment” shorts (also known as “commission content”) that pop up on different mobile devices present product or service information to the viewer through a story. For example, Madonna starred in a BMW-funded film directed by her husband. “You’re not using a product-based appeal, you’re using an image-based appeal.” It is important to mention that while stars such as Justin Bieber, Miley Cyrus, Lindsay Lohan, Lady Gaga, and Snooki draw attention to large numbers of virtual viewers in ads and infomercials, once their perceived and/or actual reputation is tainted, the attention can also turn.35

The Thin Line between Deceptive Advertising, Spyware, and Spam In addition to undesirable pop-up ads and other aggravating forced online advertising, is the more serious problem of Internet spyware and spam—which problems are now global because of the Internet. The U.S. House of Representatives Judiciary Committee passed the Internet Spyware Prevention Act of 2004, predicting that the problem of spyware would be solved. The act carries penalties of up to five years in prison for using spyware that leads to identity theft. The Department of Justice was given $10 million to find ways to fight spyware and phishing—the act of sending email to a user falsely claiming to be an established legitimate enterprise. There have been other bills introduced by Congress to curb spyware and related Internet crimes.

The debate continues over whether or not congressional legislation and laws can stop Internet spyware and spam. Critics of congressional action alone argue that both industries and government must work to end spam and spyware.36 Europe, also involved in solving cybercrime as well as daily scam-ming, takes a wider stakeholder involvement approach that includes legal enforcement and educating industry representatives and consumers. The European Cybercrime Convention, sponsored by the Council of Europe, provides a treaty for combating global cybercrime. The cybercrime convention was approved by 30 countries, including Canada, Japan, South Africa, and the United States, and has been ratified by eight countries.37 In December 2010, Canada’s government passed the Canadian Anti-Spam Law (CASL), designed to regulate specific areas of electronic commerce, including what are known as commercial electronic messages (CEMs). These encompass SMS messaging, social media messaging, and e-mail communications. Although the enforcement date has not yet been set,

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enforcement is expected to begin in 2014.38 Figure 5.2 shows the seriousness of Internet spam, spyware, and data breach statistics by industry.

The FTC has extensive guidelines for online advertising. For example, this governmental agency offers “Clear and Conspicuous Disclosures in Online Advertisements.” The following is only a sample from the FTC web site.

When it comes to online ads, the basic principles of advertising law apply:

1. Advertising must be truthful and not misleading. 2. Advertisers must have evidence to back up their claims (“substantiation”). 3. Advertisements cannot be unfair.39

Figure 5.2 Internet Spam, Spyware, and Crime

The FTC’s web site states that a particular disclosure is clear and conspicuous under the following conditions:

• the placement of the disclosure in an advertisement and its proximity to the claim it is qualifying;

• the prominence of the disclosure; • whether items in other parts of the advertisement distract attention from the disclosure;

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• whether the advertisement is so lengthy that the disclosure needs to be repeated; • whether disclosures in audio messages are presented in an adequate volume and cadence and visual disclosures appear for a sufficient duration; and

• whether the language of the disclosure is understandable to the intended audience.40

The following section presents specific advertisement issues in the areas of children and youth (as targets) and tobacco and alcohol.

Advertising to Children It is estimated that half of American children have a television in their bedroom, and “one study of third graders put the number at 70%. And a growing body of research shows strong associations between TV in the bedroom and numerous health and educational problems.” With the advent of mobile phones, gaming consoles, tablets, laptops, smart TVs, and e-readers, children are exposed at early ages with access to the Internet. Microsoft asked 1,000 adults who were non-parents and parents, “How old is too young for kids to go online unsupervised?” Eight years old was the average age given that children were allowed independent Internet and device use.41

This is a disturbing number given the unlimited availability of and exposure to explicit sexual, pornographic, and other questionable content on ads and web sites, mixed with carefully crafted entertainment that is enhanced by new technologies. Should children and youth be exposed to the uncontrolled Internet through mobile phones and be able to log on from their computers, or from computers in libraries and cyber cafés, to web sites showing explicit sexual and pornographic pictures and videos? At issue is both how much protection can and should parents and guardians exert over children, and how much government protection through censorship does the public want? Although many telecom providers offer controls for parents, as do private firms through products such as CyberPatrol, CYBERsitter, and WebTrack, the issue also remains one of principle: How much regulation interferes with free speech for all? Moreover, file-sharing technologies and availability of pornography and other questionable content for children provide opportunities not only for users to see explicit material, but to share the content instantly.

Another ethical problem involves companies targeting children at too early an age— between 8 and 9 years old with ads. The phenomenon known as age compression—KGOY (“kids getting older younger”)—refers to “tweens” (between childhood and teenage years). This market is targeted by such companies as Alberto-Culver, Estee Lauder, Procter & Gamble, and Unilever. The tween market was estimated to be between $7 and $8.5 billion in 2012. Marketing strategies include products such as youth hair care, cosmetics, and skincare.42 Children at this age are more vulnerable to persuasive techniques.43 Rosalind Wiseman, the author of Queen Bees and Wannabes, stated her opinion about the lack of responsibility of parents of children who are permitted to buy questionable products for their children’s ages: “Mothers and fathers do really crazy things with the best of intentions. I don’t care how it’s couched, if you’re permitting this [i.e., allowing the purchase of these products] with your daughter, you are hyper-sexualizing her. It’s one thing to have them play around with makeup at

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home within the bubble of the family. But once it shifts to another context, you are taking away the play and creating a consumer, and frankly, you run the risk of having one more person who feels she’s not good enough if she’s not buying the stuff.”44

Protecting Children European, Asian, African, and North American countries are addressing issues on advertising to children. The Children’s Online Privacy Protection Act (COPPA) and the FTC’s implementing rule took effect April 21, 2000. Commercial web sites directed to children younger than 13 years old, or general audience sites that are collecting information from a child, must obtain parental permission before collecting such information. The FTC also launched a special site at http://www.ftc.gov/kidzprivacy to help children, parents, and the operators understand the provisions of COPPA and how the law will affect them.45 In 1974, the Children’s Advertising Review Unit (CARU) of the National Advertising Division of the Council of Better Business Bureaus was created to develop guidelines for self-regulating children’s advertising (see http://www.caru.org/guidelines/guidelines.pdf). CARU approaches companies that violate COPPA. In May 2008, CARU recommended and received approval from the operator of the web site http://www.stardoll.com to “modify the site to assure it is in compliance with CARU’s guidelines and the federal Children’s Online Privacy Protection Act (COPPA).” CARU observed that the Stardoll web site offered “a virtual world where visitors can design fashions for paper dolls and play other dress-up games.” When registering for basic membership on the site, visitors must first select one of the following two options: “12 year [sic] and under” or “13 year [sic] and under.” Potential members who clicked on the “12 year and under” link were asked to enter their gender and a username, password, and e-mail address. Once that information was submitted, the next screen asked for a parent’s e-mail address. After CARU requested changes to the web site, Stardoll decided to implement a neutral age-screening process and tracking mechanism.46

Advertising and media companies are also working with government agencies to change media strategies.47 For example, the Media Monitoring Project (MMP) was created in South Africa because of increasing rates of obesity in children. The European Advertising Standards Alliance (EASA) and the European Sponsorship Association (ESA) joined together in January 2008 to form the Joint Arbitration Panel that will review “and adjudicate on consumer complaints about event sponsorship, an issue that is generally not covered in the ethical codes of most self-regulatory organisations (SROs) in Europe.”48

Tobacco Advertising Critics argue that tobacco and alcohol companies, in particular, continue to promote products that are dangerously unhealthy and that have effects that endanger others. According to the World Health Organization (WHO), cigarettes are “the only legal product that kills half of its regular users when consumed as intended by the manufacturer.”49

Eighteen percent of American adults were cigarette smokers in 2012, according to a report released by the National Center for Health Statistics.50 The tobacco industry spent

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http://www.ftc.gov/kidzprivacy

http://www.caru.org/guidelines/guidelines.pdf

http://www.stardoll.com

approximately $8.2 billion in 1999 on traditional magazine direct-to-consumer advertising. Cigarette companies reportedly are targeting low-income women and minorities in their ads and focusing less on college-educated consumers. Three-thousand new teenagers and youth begin smoking each day. One out of three is predicted to die from tobacco-related illnesses— many when they are middle-aged.51

The Marlboro man, the infamous and now defunct Old Joe Camel, and other cigarette brands linked adventure, fun, social acceptance, being “cool,” and risk-taking to smoking. Several new tobacco products have been produced to entice youth and smokers. “Cigarettes, smokeless tobacco, and cigars have been introduced in an array of candy, fruit, and alcohol flavors. R. J. Reynolds’ Camel cigarettes, for example, have come in more than a dozen flavors, including lime, coconut and pineapple, toffee, and mint. Flavorings mask the harshness of the products and make them appealing to children; new smokeless tobacco products have been marketed as ways to help smokers sustain their addiction in the growing number of places where they cannot smoke. In addition to traditional chewing and spit tobacco, smokeless tobacco now comes in teabag-like pouches and even in dissolvable, candy-like tablets. . . . New products and marketing have been aimed at women, girls and other populations. The most recent example is R. J. Reynolds’ Camel No. 9 cigarettes, a pink-hued version that one newspaper dubbed ‘Barbie Camel’ because of marketing that appealed to girls.”52

Despite the fact that cigarette brand product placement in movies was banned by the 1998 Tobacco Master Settlement Agreement, cigarettes appeared in two out of three top-grossing movies in 2005. More than one-third of the movies were youth-rated films. The number of movies with tobacco-related scenes has gone down since 2005, but in 2010 more than 30% of top-grossing movies rated G, PG, and PG-13 had tobacco scenes. And studies show that young people who see smoking in movies are more likely to start smoking.53

The Tobacco Controversy Continues The tobacco controversy took yet another turn in 2004 when the DOJ brought the largest civil action against the tobacco industry, alleging that the industry defrauded and misled the public for 50 years regarding health risks of cigarette smoking. The DOJ requested $280 billion from the industry to repay its “ill-gotten” profits. A final judgment and opinion was issued in August 2006, finding big tobacco companies guilty of violating racketeering laws and defrauding the public. The U.S. Supreme Court made this ruling final in June 2010 by refusing to hear any further appeals. Tobacco companies are now prohibited from misleading and false advertising and must submit annual marketing data to the government. Ill-gotten profits must be surrendered to the government.54

William Schultz, a former DOJ lawyer who helped develop the case, states that, “What the government will argue is that the tobacco industry had a strategy to create doubt over health risks that made smokers more hesitant to quit, and those not smoking more likely to start. The fraud is that the companies knew about the health risks but created doubt and controversy about them to maintain their sales.”55 The lawsuit “has the potential to significantly transform the industry—forcing it to increase cigarette prices sharply, to change how it markets and promotes its product, and to spend billions for stop-smoking programs.”56

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The Supreme Court ruled unanimously in June 2001 that states have no right to restrict outdoor tobacco advertising near schools and public parks. The ruling, a victory for tobacco companies, followed a Massachusetts case that prohibited tobacco ads within 1,000 feet of public parks, playgrounds, and schools.57 The 2001 ruling raised questions regarding the topic of advertising and free speech, for example: Does a corporation have the same free speech rights under the First Amendment to purchase advertising as people have to air political, social, and artistic views? For most of the nation’s history, the Supreme Court has said that commercial speech (offering a product for sale) does not deserve the same protection as political speech. In a series of cases from the Rehnquist Court, “businesses were given powerful new First Amendment rights to advertise hazardous products.”58 While the battle between antismoking and prosmoking stakeholders continues, the paramount issue for antismoking proponents ranges from a total ban on all tobacco products to this statement by Dan Smith, president of the American Cancer Society Cancer Action Network: “The future is a smoke-free country where in public places, you can go and it’s smoke free. I also think the future is much higher taxes on tobacco products.”59

Alcohol Advertising Alcohol abuse is the third-leading cause of preventable death in the United States.60 The following statistics explain why:

• Percent of adults 18 years of age and over who were current regular drinkers (at least 12 drinks in the past year): 51.5%.

• Percent of adults 18 years of age and over who were current infrequent drinkers (1–11 drinks in the past year): 13.6%.

• Number of alcoholic liver disease deaths: 15,990. • Number of alcohol-induced deaths, excluding accidents and homicides: 25,692. • 79,000 annual deaths attributed to excessive alcohol use.

“Up to 40% of all hospital beds in the United States (except for those being used by maternity and intensive care patients) are being used to treat health conditions that are related to alcohol consumption,” and approximately 15 million of the full-time employed workers in the United States are heavy drinkers of alcohol.61 Almost 3 million children have serious alcohol problems but less than 20% get the needed treatment.

The Centers for Disease Control and Prevention report that “Alcohol is the most commonly used and abused drug among youth in the United States, more than tobacco and illicit drugs. Although drinking by persons under the age of 21 is illegal, people aged 12 to 20 years drink 11% of all alcohol consumed in the United States. Over 90% of this alcohol is consumed in the form of binge drinking. On average, underage drinkers consume more drinks per drinking occasion than adult drinkers. In 2008, there were approximately 190,000 emergency room visits by persons under age 21 for injuries and other conditions linked to alcohol.”62

Alcohol ads also raise problems for consumers. Critics of alcohol ads argue that youths continue to be targeted as primary customers, enticed by suggestive messages linking drinking

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to popularity and success. Anheuser-Busch has been castigated for advertising its alcohol- heavy Spykes “Liquid Lunchables” which come in a colorful, two-ounce container in “kid- friendly flavors like Spicy Mango, Hot Melons, Spicy Lime, and Hot Chocolate.” As the watchdog consumer nonprofit Center for Science in the Public Interest (CSPI) noted about this drink, “these so-called Spykes aren’t juiceboxes, they’re malt liquor with more than twice the alcohol concentration of beer.”63

Ethical Insight 5.2

Are Minors (Individuals under the Legal Drinking Age) Personally Responsible for Their Voluntary Choices? Should Minors Be Punished as Adults?

On November 13, 2003, Ayman Hakki filed a lawsuit in Washington, DC, against several alcohol producers. The suit claimed that in an effort to create brand loyalty in the young, the defendants had deliberately targeted their television and magazine advertising campaigns at consumers under the legal drinking age for more than two decades.

Hakki asked for damages that included all of the profits the defendants had earned since 1982 from the sale of alcohol to minors. He also sought class-action status for his suit. The plaintiff class consisted of all parents whose underage children had purchased alcohol in the last 21 years.

What is your opinion regarding the following quote? “Suits against tobacco and alcohol companies for targeting youthful purchasers reflect a particular philosophy regarding people under the legal drinking or smoking age: they are too immature to take full responsibility for their actions. This philosophy is in serious tension with the approach that has increasingly come to dominate our society’s approach to juvenile criminal justice: when minors commit crimes, they ought to be held accountable and punished as adults.”

Sources: Colb, S. F. (December 3, 2003). A lawsuit against “big alcohol” for advertising to underage drinkers. FindLaw.com. http://writ.news.findlaw.com/colb/20031203.html, accessed February 25, 2014. Social host liability. (author not identified). FindLaw.com. http://injury.findlaw.com/accident-injury-law/social-host-liability.html, accesssed February 25, 2014.

Product labeling and packaging are also two critical issues that are related to advertising. In a 2008 poll conducted by the Opinion Research Corporation, 1,003 Americans aged 21 and over were asked to identify the information that consumers consider most important on an alcohol label. The following results were reported:

• 77%: labels on products showing the alcohol content. • 73%: the amount of alcohol shown in each serving. • 65%: the calories shown in each serving. • 57%: the carbohydrates in each serving. • 52%: the amount of fat in each serving.

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http://writ.news.findlaw.com/colb/20031203.html

http://injury.findlaw.com/accident-injury-law/social-host-liability.html

It was noted that “These findings reinforce a previous online survey conducted for Shape Up America! in December 2007, which reported that 79 percent of consumers would support alcohol labeling that summarizes the Dietary Guidelines’ advice.”64

5.4 Managing Product Safety and Liability Responsibly Managing product safety should be priority number one for corporations. As a sign in one engineering facility reads, “Get it right the first time or everyone pays!” Product quality, safety, and liability are interrelated topics, especially when products fail in the marketplace. As new technologies are used in product development, risks increase for users.

How Safe Is Safe? The Ethics of Product Safety Each year, thousands of people die and millions are injured from the effects of smoking cigarettes, and using diet drugs, silicone breast implants, and consumer products such as toys, lawn mowers, appliances, power tools, and household chemicals, according to the Consumer Product Safety Commission (CPSC). But how safe is safe? Few, if any, products are 100% safe. Adding the manufacturing costs to the sales price to bolster safety features would, in many instances, discourage price-sensitive consumers. Just as companies use utilitarian principles when developing products for markets, consumers use this logic when shopping. Risks are calculated by both manufacturer and consumer. However, enough serious instances of questionable product quality and lack of manufacturing precautions taken occur to warrant more than a simple utilitarian ethic for preventing and determining product safety for the consuming public. This is especially the case for commercial products such as air-, sea-, and spacecrafts, over which consumers have little, if any, control.

Are cigarettes safe products? “Tobacco is the leading preventable cause of death in the United States. Cigarette smoking causes about one of every five deaths in the United States each year,” about 443,000 deaths annually.65

Are other types of drugs safer than nicotine and additives in cigarettes? A metaanalysis (i.e., “the first comprehensive scientific review of both published studies and unpublished data that pharmaceutical companies have said they own and have the right to withhold”) by the British medical journal, the Lancet, found that “most antidepressants are ineffective and may actually be unsafe for children and adolescents.” This is an interesting finding in light of a recent Mayo Clinic study that found nearly 70% of Americans are on at least one prescription drug and more than half receive at least two prescriptions—many of which are antidepressants.66

The meta-analysis study reported that youth (ages 5–18) should avoid certain antidepressants—Paxil, Zoloft, Effexor, and Celexa—because of the risk of suicidal behavior with no benefit from taking the drug. Prozac was found an effective drug for depressed children and had no increased suicide risk.67 Doctors signed more than 164 million prescriptions for antidepressants in 2008, according to IMS Health, making antidepressants one of the most prescribed drugs in the United States.68 It is interesting to note that, according to the study, the British government recommended against the use of most antidepressants for children, except

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for Prozac. EU regulators have recommended against Paxil being given to children, and the U.S. FDA has requested drug manufacturers warn more strongly on their labels about possible links between the drugs taken by adolescents and “suicidal thoughts and behaviors.”

Consumers also value safety and will pay for safe products up to the point where, in their own estimation, the product’s marginal value equals its marginal cost; that is, people put a price on their lives whether they are rollerblading, sunning, skydiving, drinking, overeating, or driving to work.69

Product Safety Criteria: What Is the Value of a Human Life? The National Commission on Product Safety (NCPS) notes that product risks should be reasonable. Unreasonable risks are those that could be prevented or that consumers would pay to prevent if they had the knowledge and choice, according to the NCPS. Three steps that firms can use to assess product safety from an ethical perspective follow:70

1. How much safety is technically attainable, and how can it be specifically obtained for this product or service?

2. What is the acceptable risk level for society, the consumer, and the government regarding this product?

3. Does the product meet societal and consumer standards?

These steps, of course, do not apply equally to commercial aircraft and tennis shoes. Estimates regarding the monetary value of human life vary. As Ethical Insight 5.3 illustrates,

a recent methodology estimates the value of a human life at $129,000.

Ethical Insight 5.3

What Is the Value of a Human Life? $129,000

Stanford economists Stefanos Zenios and his colleagues at the Stanford Graduate School of Business used kidney dialysis as a benchmark. Every year, dialysis saves the lives of hundreds of thousands of Americans who would otherwise die of renal failure while waiting for an organ transplant. It is also the one procedure that Medicare has covered unconditionally since 1972, despite rapid and sometimes expensive innovations in its administration. To tally the cost-effectiveness of such innovations, Zenios and his colleagues ran a computer analysis of more than half a million patients who underwent dialysis, adding up costs and comparing that data to treatment outcomes. Considering both inflation and new technologies in dialysis, they arrived at $129,000 as a more appropriate threshold for deciding coverage. “That means that if Medicare paid an additional $129,000 to treat a group of patients, on average, group members would get one more quality-adjusted life year,” Zenios says. Based on patient surveys, one “quality-of-life” year is defined as about two years of life on dialysis.

Take the $500,000 death benefit the government pays families when a soldier is killed in

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Iraq or Afghanistan. Or the cost calculations that for-profit health insurers make to determine how much coverage they’ll give customers. In fact, at least some Americans seem at ease with allowing money to play a prominent role in health care decisions.

The study showed that for the sickest patients, the average cost of an additional quality-of- life year was much higher, at $488,000. “It is difficult to justify the burden and expense of dialysis when persons have other serious health conditions such as, for example, advanced dementia or cancer,” says co-author Glenn Chertow, a nephrology professor at the Stanford School of Medicine. “In these settings, dialysis is unlikely to provide any meaningful benefit.” But with organs, including kidneys, for transplant so scarce, is it justifiable to deny these patients a chance to live through dialysis? It is a question, Zenios says, that everyone should approach with trepidation. “What is the true value of a human life? That’s what we’re asking people.” He adds, “I wouldn’t pretend to know.”

Source: Kingsbury, K. The value of a human life: $129,000. (May 20, 2008). Time.com. http://www.time.com/time/health/article/0,8599,1808049,00.html, accessed January 8, 2014.

Regulating Product Safety Because of the number of product-related casualties and injuries annually and because of the growth of the consumer movement in the 1960s and 1970s, Congress passed the 1972 Consumer Product Safety Act, which created the CPSC. This is the federal agency empowered to protect the public from unreasonable risks of injury and death related to consumer product use. The five members of the commission are appointed by the president. The commission has regional offices across the country. It develops uniform safety standards for consumer products; assists industries in developing safety standards; researches possible product hazards; educates consumers about comparative product safety standards; encourages competitive pricing; and works to recall, repair, and ban dangerous products. Each year the commission targets potentially hazardous products and publishes a list with consumer warnings. It recently targeted Cosco for the faulty product design of children’s products. The death of an 11-month-old in July 1988 in a Cosco-designed crib was never reported by the company, even though the company began to redesign the product. Cosco was forced to pay a record $1.3 million in civil penalties to settle charges that it violated federal law by failing to report hundreds of injuries and the death.71

The CPSC is constrained in part by its enormous mission, limited resources, and critics who argue that the costs for maintaining the agency exceed the results and benefits it produces.

Consumer Affairs Departments and Product Recalls Many companies actively and responsibly monitor their customers’ satisfaction and safety concerns. A number of companies are using cell phone text messages to add more interactivity to their ads and consumer support. In addition, increased real-time mobile messaging, social networking services, Web browsing, and personal information management applications are being offered by some companies like Microsoft, to not only keep in touch with its customers but to also provide entertainment for them. Microsoft has teamed with Sony Ericsson Mobile Communications to give consumers more control over digital content.72 Another way that

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http://www.time.com/time/health/article/0,8599,1808049,00.html

companies can help consumers is by recalling their products when defects are noticed. Many companies aggressively and voluntarily recall defective products and parts when they

discover them or are informed about them. Mattel recalled over 700,000 toys in 2007 because of lead-paint issues. When unsafe products are not voluntarily recalled, the Environmental Protection Agency (EPA), National Highway Traffic Safety Administration (NHTSA), FDA, and CPSC have the authority to enforce recalls of known or suspected unsafe products. Recalled products are usually repaired. If not, the product or parts can be replaced or even taken out of service. American autos are frequently recalled for replacement and adjustment of defective parts.

Amitai Etzioni, a noted business ethicist, argues that “There is, of course, no precise way of measuring how much more the public is willing to pay for a safer, healthier life via higher prices or taxes, or by indirect drag on economic growth and loss of jobs. In part this is because most Americans prefer to deal with these matters one at a time rather than get entangled with highly complex, emotion-laden general guidelines. In part it is also because the answer depends on changing economic conditions. Obviously, people are willing to buy more safety in prosperity than in recession.”73

Product Liability Doctrines Who should pay for the effects of unsafe products, and how much should they pay? Who determines who is liable? What are the punitive and compensatory limits of product liability? The payout in 2001 in litigation and settlements in diet-pill cases alone totaled $7 billion. Merck settled its Vioxx case with a $4.85 billion payout to settle approximately 50,000 lawsuits, with payouts beginning in August 2008. An additional $950 million was paid along with a guilty plea made to a criminal misdemeanor charge of illegally marketing Vioxx in November 2011. The $950 million includes a “$321.6 million criminal fine and $628.3 million to resolve civil claims that Merck sold Vioxx for unapproved uses and made false statements about its cardiovascular safety.” In 2013 Merck agreed to pay $23 million to settle claims it duped consumers into buying the drug.74

Sixty companies have filed for bankruptcy court protection, and defendant companies and insurers have spent approximately $54 billion to date to settle asbestos liability-related lawsuits from products used in the 1970s. More than 600,000 asbestos-related suits have been filed, and many are still being resolved to this day. In February of 2012, for example, a $19.5 million settlement was offered as a part of the suit against W. R. Grace & Co. for the victims of asbestos exposure from its vermiculite plant located in Libby, Montana. A $43 million settlement was previously approved in 2011 for 1,128 victims of asbestos, approximately 400 of whom were killed.75

The doctrine of product liability has evolved in the court system since the early twentieth century, when the dominant principle of privity was used. Until the decision in MacPherson v. Buick Motor Company (1916), consumers injured by faulty products could sue and receive damages from a manufacturer if the manufacturer was judged to be negligent. Manufacturers were not held responsible if consumers purchased a hazardous product from a retailer or wholesaler.76 In MacPherson, the defendant was ruled liable for harm done to Mr.

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MacPherson. A wheel on the car had cracked. Although MacPherson had bought the car from a retailer and although Buick had bought the wheel from a different manufacturer, Buick was charged with negligence. Even though Buick did not intend to deceive the client, the court ruled the company responsible for the finished product (the car) because—the jury claimed—it should have tested its component parts.77 The doctrine of negligence in the area of product liability was thus established. The negligence doctrine means that all parties, including the manufacturer, wholesaler, distributor, and sales professionals, can be held liable if reasonable care is not observed in producing and selling a product.

The doctrine of strict liability is an extension of the negligence standard. Strict liability holds that the manufacturer is liable for a person’s injury or death if a product with a known or knowable defect goes to market. A consumer has to prove three things to win the suit: (1) an injury happened; (2) the injury resulted from a product defect; and (3) the defective product was delivered by the manufacturer being sued.78 Absolute liability is a further extension of the strict liability doctrine. Absolute liability

was used in Beshada v. Johns Manville Corporation (1982). Employees sued Johns Manville for exposure to asbestos. The court ruled that the manufacturer was liable for not warning of product danger, even though the danger was scientifically unknown at the time of the production and sale of the product.79 Medical and chemical companies, in particular, whose products could produce harmful but unknowable side effects years later, would be held liable under this doctrine.

Legal and Moral Limits of Product Liability Product liability lawsuits have two broad purposes. First, they provide a level of compensation for injured parties, and second, they act to deter large corporations from negligently marketing dangerous products.80 A California jury awarded Richard Boeken, a smoker who had lung cancer, a record $3 billion in a suit filed against Philip Morris in 2001. In 2007, a Los Angeles judge ruled for Boeken’s 15-year-old son on an issue related to his lawsuit against Philip Morris, which he argued was liable for the death of his father. The $3 billion suit awarded earlier had been reduced to $55 million. Boeken (age 57) died in January 2002, seven months after the verdict. The disease had spread to his spine and brain.81 The legal and moral limits of product liability suits evolve historically and are, to a large degree, determined by political as well as legal stakeholder negotiations and settlements. Consumer advocates and stakeholders (for example, the Consumer Federation of America, the National Conference of State Legislators, the Conference of State Supreme Court Justices, and activist groups) lobby for strong liability doctrines and laws to protect consumers against powerful firms that seek profits over consumer safety. In contrast, advocates of product liability law reform (for example, corporate stockholders, Washington lobbyists for businesses and manufacturers, and the President’s Council on Competitiveness) argue that liability laws in the United States have become too costly, routine, and arbitrary. They claim liability laws can inhibit companies’ competitiveness and willingness to innovate. Also, insurance companies claim that all insurance-paying citizens are hurt by excessive liability laws that allow juries to award hundreds of millions of dollars in punitive damages because insurance rates rise as a

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result. However, a two-year study of product liability cases concluded that punitive damages are

rarely awarded, more rarely paid, and often reduced after the trial.82 The study, partly funded by the Roscoe Pound Foundation in Washington, DC, is the most comprehensive effort to date to show the patterns of punitive damages awards in product liability cases over the past 25 years. The results of the study are as follows:

1. Only 355 punitive damages verdicts were handed down by state and federal court juries during this period. One-fourth of those awards involved a single product—asbestos.

2. In the majority of the 276 cases with complete posttrial information available, punitive damages awards were abandoned or reduced by the judge or the appeals court.

3. The median punitive damages award for all product liability cases paid since 1965 was $625,000—a little above the median compensatory damages award of $500,100. Punitive damages awards were significantly larger than compensatory damages awards in only 25% of the cases.

4. The factors that led to significant awards—those that lawyers most frequently cited when interviewed or surveyed—were failure to reduce risk of a known danger and failure to warn consumers of those risks.

A Cornell study reported similar findings.83 Furthermore, an earlier federal study of product liability suits in five states showed that

plaintiffs won less than 50% of the cases; a Rand Corporation study that surveyed 26,000 households nationwide found that only 1 in 10 of an estimated 23 million people injured each year thinks about suing; and the National Center for State Courts surveyed 13 state court systems from 1984 to 1989 and found that the 1991 increase in civil caseloads was for real- property rights cases, not suits involving accidents and injuries.84

Contrary to some expectations, another study found that “judges are more than three times as likely as juries to award punitive damages in the cases they hear.” Plaintiffs’ lawyers apparently mistakenly believe that juries are a soft touch, and “they route their worst cases to juries. But in the end, plaintiffs do no better before juries than they would have before a judge.” The study also found that the median punitive damages award made by judges ($75,000) was nearly three times the median award made by juries ($27,000).85

Product Safety and the Road Ahead As outsourcing practices continue and new technologies are increasingly used in products, problems for both corporations and consumers will persist. Corporations face issues of cutting costs and increasing quality to remain competitive, while at the same time sacrificing some control over their manufacturing processes through outsourcing. Consumers must trust corporations’ ability to deliver safe and healthy products, including food, drugs, toys, automobiles, and medical products. Consumer stakeholders must rely on government agencies such as the FDA and the CPSC to monitor and discipline corporations that violate basic safety standards and practices. Consumers can also use the many watchdog nonprofit groups that

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monitor and advise on the quality of different projects. Consumer Reports (http://www.ConsumerReports.org) is one such organization. Corporations must rely on state- of-the-art monitoring and safety programs in their respective industries—such as Six Sigma (http://www.6-sigma.com), ISO 9000 (a quality assurance program), and other Total Quality Management (TQM) programs.

5.5 Corporate Responsibility and the Environment There was a time when corporations used the environment as a free and unlimited resource. That time is ending, in terms of international public awareness and increasing legislative control. The magnitude of environmental abuse, not only by industries but also by human activities and nature’s processes, has awakened an international awareness of the need to protect the environment. At risk is the most valuable stakeholder, the earth itself. The depletion and destruction of air, water, and land are at stake. Consider the destruction of the rain forests in Brazil; the thinning of the ozone layer; climatic warming changes from carbon dioxide (CO2) accumulations; the smog in Mexico City, Los Angeles, and New York City; the pollution of the seas, lakes, rivers, and groundwater as a result of toxic dumping; and the destruction of Florida’s Everglades National Park. At the human level, environmental pollution and damage cause heart and respiratory diseases and skin cancer. The top environmental concerns include climate change; energy, water, biodiversity, and land use; chemicals (toxics and heavy metals); air pollution; waste management; and ozone layer depletion.86

We will preview and summarize some of the issues to indicate the ethical implications. The purpose here is not to present in great detail either the scientific evidence or all the arguments for these problems. Rather, our aim is to highlight some issues and suggest the significance for key constituencies from a stakeholder and issues management approach and related ethical implications and concerns.

The Most Significant Environmental Problems

Toxic Air Pollution More people are killed, it is estimated, by air pollution (automobile exhaust and smokestack emissions) than by traffic crashes. The so-called greenhouse gases are composed of the pollutants carbon monoxide, ozone, and ultrafine particles called particulates. These pollutants are produced by the combustion of coal, gasoline, and fossil fuels in cars. A 2013 American Lung Association report noted that “Still, over 131.8 million people—42 percent of the nation —live where pollution levels are too often dangerous to breathe,” and “roughly half the people (50.3%) in the United States live in counties that have unhealthful levels of either ozone or particle pollution.” The top five most polluted cities 2013 by ozone levels are: Los Angeles, CA; Bakersfield, CA; Visalia, CA; Fresno, CA; and Sacramento, CA. The five most polluted cities at the time of writing by year-round particle pollution are: Bakersfield, CA; Visalia, CA; Phoenix, AZ; Los Angeles, CA; and Hanford, CA.87 Figure 5.3 shows America’s Top Five Global Warming Polluters.

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http://www.ConsumerReports.org

http://www.6-sigma.com

Air pollution and greenhouse gases are linked to global warming, as evidenced in:

• The five-degree increase in Arctic air temperatures, as the earth becomes warmer today than at any time in the past 125,000 years.

• The snowmelt in northern Alaska, which comes 40 days earlier than it did 40 years ago.

• The sea-level rise, which, coupled with the increased frequency and intensity of storms, could inundate coastal areas, raising groundwater salinity.

• The atmospheric CO2 levels, which are 31% higher than preindustrial levels 250 years ago.88

Nationally, carbon dioxide emissions are a major source of air pollution. America’s top five warming polluters (by CO2 emissions from company-owned or -operated power plants) are listed in Figure 5.3. These companies had estimated annual CO2 emissions of 70 million tons and reported 2003 revenues of $4.4 billion.89 Internationally, greenhouse gas emission statistics show that Spain had the largest increase in emissions, followed by Ireland, the United States, Japan, the Netherlands, Italy, and Denmark. The EU, Britain, and Germany had emission decreases during this period (see Figure 5.4).

Figure 5.3 America’s Top Five Global Warming Polluters

Figure 5.4 Global Non-CO2 Percent Emissions Change in 6 Regions

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To stabilize the climate, global carbon emissions must be cut in half, from the current 6 billion tons a year to under 3 billion tons a year. This reduction can be accomplished by producing more efficient cars and power plants, using mass transit and alternative energy, and improving building and appliance standards. These changes would also help alleviate energy crises as well as global warming and air pollution.90

Water Pollution and the Threat of Scarcity Approximately 1 billion people worldwide lack access to improved water sources. This lack of access comes with a heavy price. Some 2 million deaths a year worldwide are attributable to unsafe water and to poor sanitation and hygiene, mainly through infectious diarrhea. Cholera is still reported to the World Health Organization (WHO) by more than 50 countries, and about 260 million people are infected with schistosomiasis. Unsafe levels of arsenic and fluoride in water supplies have exposed millions to cancer and tooth damage. The “increasing use of wastewater in agriculture is important for livelihood opportunities, but also associated with serious public health risks. 4% of the global disease burden could be prevented by improving water supply, sanitation, and hygiene.”91

Water pollution is a result of industrial waste dumping, sewage drainage, and runoff of agricultural chemicals. The combined effects of global water pollution are causing a noticeable scarcity. Water reserves in major aquifers are decreasing by an estimated 200 trillion cubic meters each year. The problem stems from the depletion and pollution of the world’s groundwater. “In Bangladesh, for instance, perhaps half the country’s population is drinking groundwater containing unsafe levels of arsenic. By inadvertently poisoning groundwater, we may turn what is essentially a renewable resource into one that cannot be recharged or purified within human scales, rendering it unusable.”92 It is estimated that the United States will have to spend $1 trillion over the next 30 years to begin to purify thousands of sites of polluted groundwater. An EPA report estimated that it could cost between $900

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million and $4.3 billion annually to implement one of the tools under the Clean Water Act for cleaning up the nation’s waters.93 It will require an integrated global effort of public and private groups, of individuals and corporations, to begin planning and implementing massive recycling, including agricultural, chemical, and other pollution controls to address water protection and control. Many companies have already begun conservation efforts. Xerox has halved its use of dichloromethane, a solvent used to make photoreceptors. The firm also reuses 97% of the solvent and will replace it with a non-toxic solvent. The Netherlands has a national goal of cutting wastes between 70% and 90%.

Causes of Environmental Pollution Some of the most pervasive factors that have contributed to the depletion of resources and damage to the environment include:

1. Consumer affluence. Increased wealth—as measured by personal per capita income—has led to increased spending, consumption, and waste.

2. Materialistic cultural values. Values have evolved to emphasize consumption over conservation—a mentality that believes in “bigger is better,” “me first,” and a throwaway ethic.

3. Urbanization. Concentrations of people in cities increase pollution, as illustrated by Los Angeles, New York City, Mexico City, Sao Paulo, and Santiago, to name a few.

4. Population explosion. Population growth means more industrialization, product use, waste, and pollution.

5. New and uncontrolled technologies. Technologies are produced by firms that prioritize profits, convenience, and consumption over environmental protection. Although this belief system is changing, the environmental protection viewpoint is still not mainstream.

6. Industrial activities. Industrial activities that, as stated earlier, have emphasized depletion of natural resources and destructive uses of the environment for economic reasons have caused significant environmental decay.94

Enforcement of Environmental Laws A number of governmental regulatory agencies have been created to develop and enforce policies and laws to protect the general and workplace environments. The Occupational Safety and Health Administration (OSHA), CPSC, EPA, and the Council on Environmental Quality (CEQ) are among the more active agencies that regulate environmental standards. The EPA, in particular, has been a leading organization in regulating environmental abuses by industrial firms.

In the 1970s, the EPA’s mission and activities concentrated on controlling and decreasing toxic substances, radiation, air pollution, water pollution, solid waste (trash), and pesticides. The EPA has since used its regulatory powers to enforce several important environmental laws such as:

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• The Clean Air Act of 1970, 1977, 1989, and 1990: The latest revision of this law includes provisions for regulating urban smog, greenhouse gas emissions, and acid rain, and for slowing ozone reduction. Alternative fuels were promoted and companies were authorized to sell or transfer their right to pollute within same-state boundaries—before, pollution rights could be bought, sold, managed, and brokered like securities.

• The Federal Water Pollution Control Act of 1972: Revised in 1977, this law controls the discharge of toxic pollutants into the water.

• The Safe Drinking Water Act of 1974 and 1996: Established national standards for drinking water.

• The Toxic Substances Control Act of 1976: Created a national policy on regulating, controlling, and banning toxic chemicals where necessary.

• The Resource Conservation and Recovery Act (RCRA) of 1976: This legislation provides guidelines for the identification, control, and regulation of hazardous wastes by companies and state governments. The $1.6 billion Superfund was created by Congress in 1980. It provides for the cleanup of chemical spills and toxic waste dumps. Chemical, petroleum, and oil firms’ taxes help keep the Superfund going, along with U.S. Treasury funds and fees collected from pollution control. One in four U.S. residents lives within four miles of a Superfund site. It is estimated that 10,000 sites still need cleaning, and it may cost $1 trillion and take 50 years to complete this work.95

• Chemical Safety Information, Site Security, and Fuels Regulatory Relief Act of 1999: Created standards for storing flammable fuels and chemicals.

The Ethics of Ecology Advocates of a new environmentalism argue that when the stakes approach the damage of the earth itself and human health and survival, the utilitarian ethic alone is an insufficient logic to justify continuing negligence and abuse of the earth. For example, Mark Sagoff argues that cost- benefit analysis can measure only desires, not beliefs. In support of corporate environmental policies, he asks, “Why should we think economic efficiency is an important goal? Why should we take wants and preferences more seriously than beliefs and opinions? Why should we base public policy on the model of a market transaction rather than the model of a political debate? Economists as a rule do not recognize one other value, namely, justice or equality, and they speak, therefore, of a ‘trade-off’ between efficiency and our aesthetic and moral values. What about the trade-off between efficiency and dignity, efficiency and self-respect, efficiency and the magnificence of our natural heritage, efficiency, and the quality of life?”96

This line of reasoning raises questions such as these: What is a “fair market” price or replacement value for Lake Erie? The Atlantic Ocean? The Brazilian rainforest? The stratosphere?

Five arguments from those who advocate corporate social responsibility from an ecology- based organizational ethic include the following:

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1. Organizations’ responsibilities go beyond the production of goods and services at a profit. 2. These responsibilities involve helping to solve important social problems, especially those they have helped create.

3. Corporations have a broader constituency than stockholders alone. 4. Corporations have impacts that go beyond simple marketplace transactions. 5. Corporations serve a wider range of human values than just economics.97

Although these guidelines serve as an ethical basis for understanding corporate responsibility for the environment, utilitarian logic and cost-benefit methods will continue to play key roles in corporate decisions regarding their uses of the environment. Also, judges, courts, and juries will use cost-benefit analysis in trying to decide who should pay and how much when settling case-by-case environmental disputes. Some experts and industry spokespersons argue that the costs of further controlling pollutants such as smog outweigh the benefits. For example, it is estimated that the cost of controlling pollution in the United States has exceeded $160 billion. It costs the EPA $7 billion a year to regulate air pollution, and the benefits range from $19 billion to $167 billion.98 A WHO study has estimated that air pollution will cause 8 million deaths worldwide by 2020. How many lives would justify spending $160 billion annually? Although some benefits of controlling pollution have been identified, such as the drop in emissions, improvement of air and water quality, cleanup of many waste sites, and growth of industries and jobs related to pollution control (environmental products, tourism, fishing, and boating), it is not clear whether these benefits outweigh the costs.99 One question sometimes asked regarding this issue is: Would the environment be better off without the environmental laws and protection agencies paid by tax dollars?

Green Marketing, Environmental Justice, and Industrial Ecology An innovative trend in new ecology ethical thinking is linking the concepts of green marketing, environmental justice, and industrial ecology.100 Green marketing is the practice of “adopting resource conserving and environmentally-friendly strategies in all stages of the value chain.”101 The green market was estimated at 52 million households in the United States in 1995. One study identified trends among consumers who would switch products to green brands: 88% of consumers surveyed in Germany said they would switch, as would 84% in Italy, and 82% in Spain. Nearly 70% of respondents across the globe said they were somewhat to very willing to spend more on a green product, compared to the same product without green features. Only 11% of respondents were not willing at all to spend more money for green features. In open-ended comments, many analysts noted that the recession heavily influences their buying decisions at the current time, and cutting costs seems more important to the average consumer than purchasing green products. Respondents would, however, buy green products if the price were not significantly higher.

In write-in responses, some respondents expressed concern that green products are not necessarily healthier or better for the environment, even though they claim to be. According to one respondent from the EU, “It’s sometimes hard to know how much of that is just marketing and how sustainable green products are in the longer term rather than just being good to

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someone’s conscience.”102 Companies are adopting green marketing as a competitive advantage and are also using green marketing in their operations. For example, packaging materials that are recyclable, pollution-free production processes, pesticide-free farming, and natural fertilizers.

Environmental justice is “the pursuit without discrimination based on race, ethnicity, and/or socioeconomic status concerning both the enforcement of existing environmental laws and regulations and the reformation of public health policy.”103 Linking environmental justice to green marketing involves identifying companies that would qualify for visible, prestigious awards—such as the Edison Award—for producing the best green products. To win the award, companies need to demonstrate that they had, for example, (1) produced new products and product extensions that represented an important achievement in reducing environmental impact, (2) indicated where and how they had disposed of industrial and toxic materials, and (3) incorporated recycling and use of less toxic materials in their strategies and processes.

The green marketing and environmental justice link to industrial ecology is made in the long-range vision and practice of companies’ integrating environmental justice into sustainable operational practices on an industrywide basis. Industrial ecology is based on the principle of operating within nature’s domain—that is, nothing is wasted; everything is recycled.

Rights of Future Generations and Right to a Livable Environment The ethical principles of rights and duties regarding the treatment of the environment and multiple stakeholders are (1) the rights of future generations and (2) the right to a livable environment. These rights are based on the responsibility that the present generation should bear regarding the preservation of the environment for future generations. In other words, how much of the environment can a present generation use or destroy to advance its own economic welfare? According to ethicist John Rawls, “Justice requires that we hand over to our immediate successors a world that is not in worse condition than the one we received from our ancestors.”104

The right to a livable environment is an issue advanced by William T. Blackstone.105 The logic is that each human being has a moral and legal right to a decent, livable environment. This “environmental right” supersedes individuals’ legal property rights and is based on the belief that human life is not possible without a livable environment. Therefore, laws must enforce the protection of the environment based on human survival. Several landmark laws have been passed, as noted earlier, that are based more on the logic related to Blackstone’s “environmental right” than on a utilitarian ethic.

Recommendations to Managers Boards of directors, business leaders, managers, and professionals should ask four questions regarding their actual operations and responsibility toward the environment:

1. How much is your company really worth? (This question refers to the contingent liability a firm may have to assume depending on its practices.)

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2. Have you made environmental risk analysis an integral part of your strategic planning process?

3. Does your information system “look out for” environmental problems? 4. Have you made it clear to your officers and employees that strict adherence to environmental safeguarding and sustainability requirements are a fundamental tenet of company policy?106

Using the answers to these questions, an organization can determine its stage on the corporate environmental responsibility profile. The stages range from Beginner (who show no involvement and minimal resource commitment to responsible environmental management) to Proactivist (who is actively committed and involved in funding environmental management).

Finally, managers and professionals can determine whether their company’s environmental values are reflected in the following ethical principles presented in R. Edward Freeman and Joel Reichart’s article, “Toward a Life Centered Ethic for Business.”107 The Principle of Connectedness. Human life is biologically dependent on other forms of

life, and on ecosystems as a whole, including the nonliving aspects of ecosystems. Therefore, humans must establish some connection with life and respect that it exists because living things exist in some state of cooperation and coexistence. The Principle of Ecologizing Values. Life exists in part because of the ecologizing values

of linkage, diversity, homeostatic succession, and community. There is a presumption that these values are primary goods to be conserved. The Principle of Limited Competition. “You may compete [with other living beings] to the

full extent of your abilities, but you may not hunt down your competitors or destroy their food or deny them access to food. You may compete but may not wage war.” (We would add to the last sentence, “without just cause.”)108

Chapter Summary The ethical principles related to corporate responsibility toward consumers include: (1) the duty to inform consumers truthfully; (2) the duty not to misrepresent or withhold information; (3) the duty not to unreasonably force consumer choice or take undue advantage of consumers through fear or stress; and (4) the duty to take “due care” to prevent any foreseeable injuries. The use of a utilitarian ethic was discussed to show the problems in holding corporations accountable for product risks and injuries beyond their control. These principles continue to apply in contemporary advertising online, through cell phones, and media.

Businesses have legal and moral obligations to provide their consumers with safe products without using false advertising and without doing harm to the environment. The complexities and controversies with respect to this obligation stem from attempts to define “safety,” “truth in advertising,” and levels of “harm” caused to the environment. The Federal Trade Commission’s guidelines for online marketing show that this agency has considerable power and legitimacy in informing the public about ads; it also serves as a useful watchdog on corporate advertising and product regulation. Arguments for and against advertising were

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presented, with problematic examples of false advertising from the food and tobacco industries highlighted.

Product safety and liability were discussed through the doctrines of negligence, strict liability, and absolute liability. The legal and moral limits of product liability were summarized. States are now moving to limit punitive damages in product liability cases, and tort reform is predicted to change the direction of product liability litigation toward more protection for manufacturers than for injured consumers.

Corporate responsibility toward the environment was presented by showing how air, water, and land pollution is a serious, long-term problem. Federal laws aimed at protecting the environment were summarized. Increasing concern over the destruction of the ozone layer, the destruction of the rain forests, and other environmental issues has presented firms with another area where economic and social responsibilities must be balanced. Innovative concepts and corporate attitude changes were discussed. Green marketing, environmental justice, and industrial ecology principles are being practiced by a growing number of corporations, particularly in Europe—especially since green products and clean manufacturing processes (and certifications) offer a competitive advantage. An innovative move by some corporations is to include environmental safety practices in the strategic, enterprise, and supply-chain dimensions of industrial activities and practices. A diagnostic enables a company to identify its stage of social responsibility toward the environment.

Questions 1. What advertisements—and where do these appear (TV, Internet, print)—do you find “unethical” but legal? Explain.

2. What ethical principles of advertising apply to consumers in all cultures and countries? Explain.

3. Identify some problems associated with the free-market theory of corporate responsibility (discussed in Chapter 4) for consumers? Compare this view with the social contract and stakeholder perspectives (also discussed in Chapter 4) of corporate social responsibility.

4. Where does the liability of a company end and the responsibility of consumers begin for products? Explain your answer as you define this question more specifically.

5. What constitutes “unreasonable risk” concerning the safety of a product? Identify considerations that define the safety of a product from an ethical perspective.

6. Do you believe the environment is in trouble from climate change and global warming, or do you believe this is “hype” from the press and scientists? Explain.

7. Evaluate and comment on this statement: “North American and European countries have created waste, pollution, and environmental devastation for decades, even centuries. Is it fair that countries like China and India should have the same sanctions now regarding their use of technologies, fuels, and other polluting devices as North America and Europe?”

Exercises Weiss, Joseph W.. Business Ethics : A Stakeholder and Issues Management Approach, Berrett-Koehler Publishers, Incorporated, 2014. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/apus/detail.action?docID=1565988. Created from apus on 2019-06-15 17:18:23.

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1. Identify a recent example of a corporation accused of false or deceitful advertising. How did it justify the claims made in its ad? Do you agree or disagree with the claims? Explain.

2. In a paragraph, explain your opinion of whether the advertising industry requires regulation. 3. Can you think of an instance when you or someone you know was affected by corporate negligence in terms of product safety standards? If so, did you or the person communicate the problem to the company? Was any action taken regarding the defective product? Explain.

4. Do you believe cigarette, cigar, and pipe smoking should be banned from all public places where passive smoking can affect nonsmokers? Explain. Use the following (or other) web sites to argue your position: http://www.cdc.gov; http://www.tobacco.org; http://www.thetruth.com; http://www.trytostop.org; http://www.cancer.org; http://www.getoutraged.com.

5. Find a recent article discussing the environmental damage caused by a corporation’s activities. Recommend methods the firm in the article should employ to reduce harmful effects on the environment.

6. Find a recent article discussing an innovative way in which a corporation is helping the environment. Explain why the method is innovative and whether you believe the method will really help the environment or will only help the company promote its image as a good citizen.

Real-Time Ethical Dilemma

Questionable Conflict of Interest I am a project manager who supports corporate-citizenship-funded programs for our large insurance company. I am responsible for helping choose proposals to support for environmental, community education, and alumni related projects. Last year, the division in which I work facilitated 120 sponsorships, engaged 100 employees, and provided nearly 25 speakers to various programs.

We have a set of criteria to guide our decision-making process and to help proposals that demonstrate real need. This focus aligns with the mission of the company. Still, there are many organizations with proposals that are high profile, legacy, and/or ones also supported by executives at our firm. These executive-backed requests sometimes receive preferential treatment over the requests that do meet our needs criteria. Several individuals and groups in the company who are aware of these exceptions either shrug it off or feel comfortably conflicted.

Executives form close ties with some of the groups who receive funding without going through our formal process. A dilemma our group faced last year occurred when one executive pressured us to fund a nonprofit that his sister founded. It was a small nonprofit with an environmental focus in an unassigned area and community in which our Program operates. Since this is not the only time executives have bypassed our company policy, it is one that smacked of nepotism!

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http://www.cdc.gov

http://www.tobacco.org

http://www.thetruth.com

http://www.trytostop.org

http://www.cancer.org

http://www.getoutraged.com

While I hesitate to judge whether or not this particular executive was right or wrong, I continue to have issues with the assumed power and authority that executives in our firm take to trump our mandated mission and decisions with regard to funding needy programs. What more should I have done (should I do) to stand up for my personal and professional beliefs?

My reasoning to execute the sponsorship of that particular program was because I was afraid of the backlash if I did not act. The organization has created a culture where this is acceptable and even though I am not comfortable with this part of our culture, I cannot do much to change it at this point. I cringe at this particular situation and others since I was raised with an ethic of fairness and acting justly toward others. If all people cannot act in a certain way, then no one should act that way. It is difficult managing this process in the real world because people and organizations inevitably have competing interests, stakes, and power in the hierarchy of a company.

Questions 1. What exactly is the conflict of interest here? 2. Is this a serious conflict of interest or just a “business as usual” situation? Explain. 3. What would you have done in this situation before the executive took a decision to fund the sister’s program if you had been this project manager? Explain.

4. Describe the ethical principles (or reasoning) you used in your answer to question 3.

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Cases

Case 12 For-Profit Universities: Opportunities, Issues, and Promises

Background For-profit colleges and universities, compared to their public institutional counterparts, are governed and operated by private corporations. Enrollment in for-profit institutions over the past 20 years has increased 225%, taking in approximately 12% of all postsecondary students —2.4 million as of the 2010–2011 academic year. Estimates for 2013 indicate that the top 50 for-profit colleges and universities headcount totals over 1,260,000. Because public community colleges, or many private universities, cannot meet this level of demand from primarily working adults, part-time students, and working parents with students, for-profit institutions provide an option for those who would otherwise not be able to receive a college education.

Competitive advantages of for-profit institutions include “flexible scheduling with year- round enrollment, online options, small class sizes and convenient locations.” These characteristics attract a large and growing student population entering the education market. It seems the entrepreneurial wave of for-profits has and continues to serve a niche that traditional universities and institutions of higher learning have not served, and perhaps cannot serve, at least to date.

Trouble in Paradise For-profit higher education universities and colleges have entered the eye of the storm on Capitol Hill over the last few years with regard to questionable recruiting practices and use of taxpayer funds that have not resulted in gainful employment and promised results for many students. Although for-profit universities have garnered the favor of Wall Street investors and have formed a powerful lobbying group to promote for-profit interests, questions continue to surface as the boundaries between traditional academia and the business of higher education blur.

Congressional Investigation The 2012 report of a two-year investigation into for-profit colleges by the U.S. Senate’s Health, Education, Labor, and Pensions Committee, comprised primarily of Democratic Party legislators, revealed staggering statistics that have resulted in intense scrutiny by the federal government, creating a call to action for regulation to monitor for-profit institutions. According to other recent investigations, currently “more than $30 billion in taxpayer funds flow to the [for-profit] schools each year” and “about 60% of for-profit colleges receive over 70% of their revenue from U.S. government programs.” These statistics, combined with some for- profit student testimonies about the “dishonest” and “fraudulent” practices of their educational institutions, have resulted in lawsuits. One such lawsuit reached settlement on July 26, 2013,

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after a “for-profit college in Richmond, Va., agreed to pay $5 million in a class-action settlement filed by eight former students, who argued that the training/education they received was a sham.”

Senator Tom Harkin of Iowa led the investigation into for-profit schools and stated that “in this report, you will find overwhelming documentation of exorbitant tuition, aggressive recruiting practices, abysmal student outcomes, taxpayer dollars spent on marketing and pocketed as profit, and regulatory evasion and manipulation.” He added that “These practices are not the exception—they are the norm. They are systemic throughout the industry, with very few individual exceptions.”

The storm has continued to build since 2010 as the pressures for legislation increased, driven by senate investigations, increasing litigation, and courts setting precedents. For-profit education probes began in 2010 when press reports started to “raise questions about the quality of proprietary institutions.” “These questions stem from the rapid growth of this industry over the last few years, reported aggressive recruitment of students by such institutions, increased variety in the delivery methods used to provide education to students, and the value of the education provided by such institutions.”

College, Inc., PBS, and For-Profit Universities A Public Broadcasting Service (PBS) documentary filmed in 2010 named College, Inc. profiled the for-profit college industry, its historical roots, certain business practices, investors’ interests, and issues surrounding the industry. The film examined the application of “private sector principles” to the education industry. The documentary’s profile of Michael K. Clifford, a pioneer for-profit education investor and deal-maker, provided a lens to view for- profit education as an opportunity for investors to both realize a financial return on their investment, while also achieving so-called philanthropic goals; that is, helping failing U.S. universities and colleges keep their doors open for students. (One of his specialties is buying faltering private U.S. colleges).

Bringing a combination of what Clifford calls the “Three M’s: Money, Management, and Marketing,” investors have been able to turn around some of the failing institutions and leverage significant value-adds, such as accreditations, while helping the universities bring in huge profits using an improved profit business model. Although there are concerns about the for-profits’ “business model,” the PBS documentary points out that “‘Nonprofit’ colleges which pay their leaders executive salaries while operating multi-billion dollar sports franchises have long since ceded the moral high ground when it comes to chasing the bottom line.”

Pressures on the For-Profit Sector These external probes have jolted some in the for-profit educational sector as facts from the investigation and large monetary settlements are highlighted by the media. For-profit supporters, however, continue to focus on the impetus of creating these needed institutions, asserting that they “provide very necessary services for rural people and for people learning certain trades” and primarily “help accommodate the mushrooming demand for higher education.” political supporters, many of whom are Republicans, continue to point out the

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advantages of for-profit education out of concern about the regulatory legislative framework proposed by the Obama administration that emphasizes the “need to look for ways to improve the bad players, but not cast a wide net over the industry.”

Key Issues The for-profit higher education sector’s growth and controversy over its business model and practices have triggered reaction and questioning at the state and federal government levels. Some of the primary issues include: the quality of education of these institutions; the amount of money in scholarships and loans they receive from the federal and state governments; the recruiting tactics they use to attract students; and the failure of their graduates in finding jobs.

The National Conference of State Legislatures noted that “Critics of for-profit institutions argue that many schools and programs leave students with large amounts of debt, few employable skills, and at a greater risk of not completing a degree at all. This is of greater concern because of the heavy federal subsidies that for-profit institutions receive. . . . Lawmakers have begun to look for ways to better hold these schools accountable for graduating students that can find gainful employment, not be overburdened with large debt they are unable to pay back, and in this way ensure taxpayers are getting a good return on their investment.” A key concern regarding for-profits’ business practices stems from the previously quoted statistics that said “more than $30 billion in taxpayer funds flow to the schools each year” and “about 60% of for-profit colleges receive more than 70% of their revenue from U.S. government programs.” The industry seems fundamentally subsidized by public taxpayers who are the source of the money for these loans. As a consequence, a nervous climate of uneasiness has developed that reflects the same concerns that preceded the recent U.S. subprime lending and housing crisis.

A June 24, 2010, New York Times article titled “Battle Lines Drawn Over For-Profit Colleges” pointed out that “one source of contention was the planned appearance at the hearings of Steven Eisman, a hedge fund manager known for having predicted the housing market crash. He has recently compared the for-profit college sector to the subprime mortgage banking industry—arguing that both grew rapidly based on lending to low-income people with little ability to repay the loans.” For-profit schools make up nearly half of all student defaults. For-profit schools claim to give students who have been turned away from other institutions the opportunity of a higher education, but the reality is that the wider net they have cast primarily includes lower-income individuals who do not have the propensity to be able to pay back these loans, therefore creating an effective “house of cards” and a predicted “student loan bubble.”

Statistics from the U.S. Department of Education also showed that for the Fiscal Year (FY) 2011 two-year and official FY 2010 three-year period, “For-profit institutions continue to have the highest average two- and three-year cohort default rates at 13.6 percent and 21.8 percent, respectively. Public institutions followed at 9.6 percent for the two-year rate and 13 percent for the three-year rate. Private non-profit institutions had the lowest rates at 5.2 percent for the two-year rate and 8.2 percent for the three-year rate.” In addition, “the average tuition at for- profit colleges is $14,000 a year, compared with $2,500 at community college and $7,000 in- state tuition at a public four-year college, the report found. . . . Students take out larger loans—

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and default more often.” Given the current economic conditions, “with costs soaring, incomes stagnating and little help from government; it was not surprising that total student debt, around $1 trillion, surpassed total credit-card debt last year.” The findings of the for-profit universities investigations are pressuring states to increase monitoring of those institutions. State legislatures in Connecticut, California, Michigan, Delaware, and Maryland have already implemented criteria related to such monitoring.

Concluding Comments It is in the interests of states and the federal government to effectively but fairly regulate for- and not-for-profit higher education institutions for all stakeholders. With regard to this case, it is also in the interests of for-profit universities and colleges to legally and ethically attract and recruit students, as well as charge rates similar to comparable competitors, and to produce graduating students who can find gainful employment given their education, skills, and abilities. The role of both the federal and state legislatures is to provide “safeguards and transparency for students, hold schools accountable for providing meaningful degrees, and evaluate allocation of state student aid.”

How and in what ways for-profits will fit into the mix of a changing education landscape in the United States and internationally remains to be seen—especially given the rise of massive online open curriculum (MOOC) initiatives, rising student debt at all higher educational institutions, and the need for different types of jobs and skills in this century.

Questions for Discussion 1. What are the main issues in this case with the for-profit higher university and college education sector?

2. Watch the online video College, Inc. produced by PBS. Evaluate PBS’s role in making the video and its content. Is this a fair, objective account of for-profits? Why? If not, what information is needed in the video? Explain your reasoning.

3. Identify some of the major stakeholders and issues using your answers and findings in the above questions, and this case. After reviewing the major stakeholders’ interests, arguments, and facts regarding these issues, what did you discover? What and whose arguments and information did you find most compelling to help resolve the controversy? Where do you now stand and why on for-profit university institutions and practices? Explain.

Sources This case was developed from material contained in the following sources:

Blumenstyk, Goldie. (March 2, 2012). For-profit colleges compute their own graduation rates. Chronicle of Higher Education. http://chronicle.com/article/For-Profits-Develop/131048/, accessed July 28, 2013.

Carey, Kevin. (May 10, 2010). “College, Inc.” Chronicle of Higher Education. Brainstorm. http://chronicle.com/blogs/brainstorm/college-inc/23850, accessed July, 2013.

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http://chronicle.com/article/For-Profits-Develop/131048/

http://chronicle.com/blogs/brainstorm/college-inc/23850

College Completion: Who graduates from college, who doesn’t and why it matters. Chronicle of Higher Education. http://collegecompletion.chronicle.com/table/, accessed July 28, 2013.

Fain, P., and S. Jaschik. (2013). Obama on for-profits. InsideHigherEd. http://www.insidehighered.com/news/2013/08/26/obama-speaks-directly-profit-higher- education-noting-concerns-sector#ixzz2iPDydhPh, accessed January 7, 2014.

Lewin, Tamar. (July 29, 2012). Senate Committee report on for-profit colleges condemns costs and practices. NYTimes.com. http://www.nytimes.com/2012/07/30/education/harkin-report- condemns-for-profit-colleges.html, accessed January 7, 2014.

Maggio, John (writer), and Martin Smith (writer). (2010). College, Inc. [Documentary]. United States: Frontline.

Marklein, Mary Beth. (July 26, 2013). For-profit college settles class-action lawsuit. USAToday.com. http://www.usatoday.com/story/news/nation/2013/07/26/for-profit-college- settlement/2590877/, accessed July 27, 2013.

National Conference of State Legislatures (NCSL). (July 2013). For profit colleges and universities. NCSL.gov. http://www.ncsl.org/research/education/for-profit-colleges-and- universities.aspx, accessed January 7, 2014.

Schouten, Fredreka, and Christopher Schnaars. (July 24, 2013). For-profit colleges giving big to helpful House members. USA Today.com. http://www.usatoday.com/story/news/politics/2013/07/23/for-profit-colleges-contributions- house-regulations/2579041/, accessed July 27, 2013.

Stiglitz, Joseph E. (May, 12, 2013). Student debt and the crushing of the American dream. NYTimes.com. http://opinionator.blogs.nytimes.com/2013/05/12/student-debt-and-the- crushing-of-the-american-dream/, accessed July 27, 2013.

The top 50 online colleges and universities by headcount. (July 9, 2013). Eduventures.com. http://www.eduventures.com/2013/07/the-top-50-online-colleges-and-universities-by- headcount/, accessed January 7, 2014.

U.S. Department of Education. (September 30, 2013). Default rates continue to rise for federal student loans. ED.gov. http://www.ed.gov/news/press-releases/default-rates-continue-rise- federal-student-loans, accessed January 7, 2014.

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http://collegecompletion.chronicle.com/table/

http://www.insidehighered.com/news/2013/08/26/obama-speaks-directly-profit-higher-education-noting-concerns-sector#ixzz2iPDydhPh

http://www.nytimes.com/2012/07/30/education/harkin-report-condemns-for-profit-colleges.html

http://www.usatoday.com/story/news/nation/2013/07/26/for-profit-college-settlement/2590877/

http://www.ncsl.org/research/education/for-profit-colleges-and-universities.aspx

http://www.usatoday.com/story/news/politics/2013/07/23/for-profit-colleges-contributions-house-regulations/2579041/

http://opinionator.blogs.nytimes.com/2013/05/12/student-debt-and-the-crushing-of-the-american-dream/

http://www.eduventures.com/2013/07/the-top-50-online-colleges-and-universities-by-headcount/

http://www.ed.gov/news/press-releases/default-rates-continue-rise-federal-student-loans

Case 13 Fracking: Drilling for Disaster?

In a lively 2013 CNN article, “Fears of Quakes and Flammable Tap Water Hit Britain as Fracking Looms,” Dan Rivers and Ben Brumfield write, “The fear of fracking has come to Britain, replete with worries about potential earthquakes and tap water tainted with natural gas that bursts into flames at the strike of a match.” The lifting in May 2013 of a ban on extracting (drilling) for natural gas found in rock layers deep underground in the town of Balcombe in southern England has several hundred protesters worried. Perhaps they have seen the American documentary Gasland II (2013) by Josh Fox, which shows several American homeowners losing the value of their properties and homes to certain energy corporations’ drilling and releasing flammable gas in their kitchen sinks.

The debate over this drilling process in the United States and now in England has proponents and opponents stating their claims and arguing for very large stakes. Opponents fear for their homes and property values and potentially may have to leave their residences (many already have) because of the aftereffects and devastation caused. Proponents, including President Obama, see natural gas on U.S. soil as an energy-independent national strategy. Cuadrilla, the British energy company waiting to drill in Balcombe, “believes there is about 200 trillion cubic feet of gas under the ground just within one of its local license areas. To put that figure into context, the United Kingdom uses about 3 trillion cubic feet of gas a year.”

What Is Fracking? Hydraulic fracturing or “fracking” is a process used to retrieve natural gas that is otherwise inaccessible. This technology was first developed in the late 1940s and involves pumping a mixture of water, sand, and chemicals—the “fracking fluid”—deep underground to break up shale rock formations and release pockets of gas. Fracking usually occurs when a new well is drilled, but wells may be fractured multiple times to increase gas extraction. In its lifetime, a well can be fracked up to 18 times; 90% of all oil and gas wells in the United States are “fracked” to boost productivity, according to the Interstate Oil and Gas Commission.

First, a well is drilled until it nears the shale layer, typically 5,000 to 12,000 feet below ground. The bore then changes direction and continues drilling horizontally. After the drill is removed, production casing is inserted, and cement is pumped through and around the casing. The cement is installed to prevent anything from getting into the fresh water aquifers. Explosive charges then puncture the casing and cement on the horizontal portion of the drilled tunnel. A mixture of water, sand, and chemicals is pumped down the well and out of these apertures at high pressures. The fracking fluid is over 99% water, but contains over 500 different chemicals. As a result, a single “frack job” can require as much as 5 million gallons of water. The mixture fractures the rock and allows the trapped gas to escape into the well bore.

The fracking process not only requires millions of gallons of water but also results in large amounts of toxic waste. Some wastewater comes back up the well and must be collected. This wastewater contains dissolved solids such as sulfates and chlorides, metals, and other

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potentially hazardous components. Conventional municipal sewage or drinking water treatment plants cannot remove the sulfates and chlorides. Instead, the fracking fluid must be sent to a treatment plant, injected into underground disposal wells, or mixed with fresh water and reused.

Benefits Experts have known for years that natural gas deposits existed in deep shale formations, but until recently the vast quantities of natural gas in these formations were not thought to be recoverable. Hydraulic fracturing makes the drilling process more efficient and makes available vast new reserves of natural gas across the country. Natural gas plays a key role in meeting the United States’ energy demands, supplying about 22% of the total. The Energy Information Administration estimates that there is more than 1,744 trillion cubic feet of technically recoverable natural gas that exists within the United States, 60% of which is contained as shale gas, tight sands, and coaled methane. The total amount of this resource is estimated to be able to provide enough natural gas to the United States for the next 90 years. Separate estimates of the shale gas resource extend this supply to 116 years.

Shale formations in the United States containing large quantities of natural gas are concentrated in the Northeast Appalachian range and the Rocky Mountain range of the West. The Marcellus Shale formation, which extends from West Virginia and eastern Ohio through Pennsylvania and into southern New York, could become one of the world’s most productive natural gas fields. It is estimated that this area alone possesses 500 trillion cubic feet of gas or more, enough to supply the entire East Coast for 50 years. The majority of “fraccisdents” have taken place across Pennsylvania in this Marcellus Shale formation, potentially compromising the Delaware River, Monongahela River, and Susquehanna Rivers. With the help of fracking, natural gas currently satisfies nearly one-quarter of the nation’s power needs. At current drilling rates and consumption levels, it’s expected to provide more than half the nation’s natural gas by 2030, according to an MIT study.

President of the American Chemistry Council (ACC), Cal Dooley states, “One of our highest priorities in this country is to establish energy security and to reduce our dependence on imported oil. . . . We see a game-changer here with our ability to capitalize on what is estimated to be a 100-year supply of natural gas in shale deposits.” This abundant domestic supply of natural gas has provided the United States with a competitive edge in overseas markets and a source for consumption within the country.

Sara Banaszak, senior economist for the American Petroleum Institute (API) further states, “Developing domestic supplies of natural gas will mean billions of dollars in government revenue and reductions in greenhouse gas emissions.” The industry boasts that gas is cleaner than oil or coal, emitting less pollution when burned. In May 2010, an industry-financed study conducted at Pennsylvania State University estimated that gas companies spent $4.5 billion developing the Marcellus Shale formation in Pennsylvania. As a result, it has generated $389 million in state and local tax revenue and more than 44,000 jobs.

Instant Millionaires Weiss, Joseph W.. Business Ethics : A Stakeholder and Issues Management Approach, Berrett-Koehler Publishers, Incorporated, 2014. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/apus/detail.action?docID=1565988. Created from apus on 2019-06-15 17:18:23.

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The natural gas boom in the United States has resulted in big businesses compensating local individuals for the use of their land to drill. Money is earned in signing bonuses, as well as royalties from the amount of gas extracted. Other landowners cashed in by leasing their mineral rights and allowing gas companies to drill horizontally under their properties. One company, Chesapeake Energy, claims to have contracted with a million American households. This modern-day gold rush has enabled struggling locals to become practically millionaires overnight.

Homeowners are offered anywhere from $350 to $30,000 an acre. With additional royalties, this can be a very tempting offer. Rowena Shager of Louisiana negotiated to lease her land. Within a short time, fracking fluid had polluted her family’s drinking water. She states, “If I thought I was putting my family’s life in jeopardy, or taking away from the value of my property, I never would have signed.” A significant number of families are unaware of the potential risks involved when signing contracts with natural gas companies and have suffered negative consequences as a result.

Environmental and Health Concerns The fracking process has received significant attention in the threats it poses to the environment and human health, particularly water and air pollution across the country. Regulators say that flushing too much of this wastewater into a river could severely harm animals. In 2009, 16 cattle dropped dead near a Chesapeake Energy drilling site in Louisiana after drinking from a mysterious fluid used by drillers that had flooded off during a storm.

Fracking has also been responsible for well-water contamination, filling a basement with methane and blowing up a house in Ohio, and poisoning 17 crows in Louisiana, according to a statement from U.S. environmental group Sierra Club. Nonprofit organization Natural Resources Defense Council (NRDC) warns that fracking could also trigger earthquakes in certain areas.

The industry maintains its position that hydraulic fracturing has been safe for decades, yet homeowners are coming forward with an entirely different story. Because fracking takes place thousands of feet below the water table where groundwater settles, local drinking water is at risk for contamination. Residents in six states have documented more than 1,000 cases of water contamination as a result of hydraulic fracturing. In the documentary Gasland (2010), Josh Fox travels across the country meeting families that have been affected by hydraulic fracturing. From these interviews, there is evidence that drinking contaminated water has caused headaches, brain damage, asthma, cancer, arsenic poisoning, and loss of taste and smell.

The small town of Dimock, Pennsylvania, is at the heart of the drilling debate. Cabot Oil drilled over 40 wells in just a few months. Gas then contaminated local drinking wells, making the water so hazardous that families are able to ignite their drinking water and start a fire. In late 2009, a group of 19 Dimock residents sued Cabot in federal court for contaminating their wells and devaluing their real estate. The case was finally settled in December 2010, with Cabot Oil and Gas Corporation agreeing to pay $4.1 million to the families affected by methane contamination attributed to faulty Cabot natural gas wells. The settlement also requires Cabot to offer and pay to install whole-house gas mitigation devices in each of the

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affected homes. Once the terms of the agreement have been met, Cabot plans to resume operations in Dimock.

Environmental Protection Agency (EPA) A 2004 hydraulic fracturing study by the EPA found no evidence of water-table contamination. The study concluded that 80% of the chemicals degrade underground or are recovered. Due to criticisms of the study, as well as increased attention on fracking, the agency has recently begun a new two-year study of hydraulic fracturing. In March 2012, the EPA released test results concluding that Dimock’s water contamination does not pose any risk to human health. The arsenic levels were deemed safe; however, the water of six homes did contain sodium, methane, chromium, and bacteria. Many residents have lost all trust in their drinking water and say they will never use it again. The EPA is continuing its tests of Dimock homes’ drinking water.

It has asked nine natural gas services providers to voluntarily disclose data on chemicals used in hydraulic fracturing. These gas companies include BJ Services, Complete Production Services, Halliburton, Key Energy Services, Patterson-UTI, PRC, Inc., Schlumberger, Superior Well Services, and Weatherford. The EPA intends to use this data in this study underway to determine whether fracking has an impact on water quality for residents living in the vicinity. By November 2010, Halliburton was the only company that refused to voluntarily submit data. As a result, the EPA has issued a subpoena to Halliburton in order to gain this information.

Congress and Regulation Congress enacted the Clean Water Act in 1972 and the Safe Drinking Water Act in 1974, giving the EPA the power to set national standards regarding maximum acceptable levels of water- contaminates in public water systems. The Safe Drinking Water Act also authorizes states to create regulations to protect their underground drinking water sources, as long as each state complies with the EPA’s minimum requirements and receives EPA approval.

The George W. Bush administration introduced the Energy Policy Act (EPACT) of 2005 that exempted oil and gas companies from certain federal regulations protecting drinking water, amending the Safe Drinking Water Act. Bush’s vice president Dick Cheney was chairman and CEO of Halliburton Corporation from 1995 to 2000. His former employment and strong ties to the gas and drilling industry certainly influenced the legislation.

EPACT changed the definition of “underground injection” to exclude “the underground injection of fluids or propping agents (other than diesel fuels) pursuant to hydraulic fracturing operations.” This amendment, which came to be known as the “Halliburton Loophole,” exempted fracking from federal law and gave jurisdiction and authority over hydraulic fracturing operations to the states. Meanwhile, most state oil and gas regulatory agencies do not require companies to report the volumes or names of chemicals being used in extraction. According to the nonprofit Oil and Gas Accountability Project, one of the country’s dirtiest industries enjoys the exclusive right to “inject toxic fluids directly into good quality groundwater without oversight.” This is a significant issue because Americans get approximately half of all drinking water from underground sources.

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In 2009, U.S. Representative Diane Degette (Democrat, Colorado) introduced a bill called the Fracturing Responsibility and Awareness to Chemical Act (FRAC Act). Under this bill, gas producers would be required to disclose chemical identities of all constituents of the fracturing fluid, making this information available on a web site.

This would allow emergency crews and first responders to have access to the chemical identities in the case of an emergency. The bill would also close the Halliburton Loophole. As of 2013, Congress has not passed this bill.

State Legislation More than 30 states have varying degrees of shale production or exploration. A significant number of states’ legislation is based on rules laid down by Colorado following many stakeholder discussions. After documented damage from fracking within the state, Colorado implemented a comprehensive drilling plan including: practices to minimize the negative effects on communities and the environment; drilling at a required distance from homes; and reporting chemical identities.

Drilling in the Northeast is the most recent, while hydraulic fracturing operations in the southern and western areas of the country are much more established. Drilling into the Marcellus Shale formation has spurred up controversy and resistance. Pennsylvania passed regulations on fracking in November 2010, requiring disclosure of a Material Safety Data Sheet with a list of additives used in drilling. In December 2010, New York tried to place a temporary ban on fracking until May 2011, in order to study environmental impacts. Governor David Paterson vetoed the bill, stating that it would put many people out of work. Instead, he issued an executive order instituting a moratorium that extended until July 1, 2011, beyond the date specified in the original bill. Oil companies are pleased because this executive order makes a distinction between the types of drilling, allowing horizontal drilling but disallowing vertical. Recently the cities of Pittsburg, Pennsylvania, and Buffalo, New York, have enacted altogether bans on hydraulic fracturing.

New York State will possibly not be allowing fracking anytime soon, with drilling giant Chesapeake Energy reportedly abandoning its fight to retain land leases in portions of the state sitting atop vast natural gas reserves. “We can’t speak to what drove Chesapeake’s decision. However, it’s fundamental that organizations prioritize their resources and make decisions based on the known business climate. They do not embrace uncertainty,” said Jim Smith, spokesman for the Independent Oil and Gas Association of New York.

Questions for Discussion 1. Do you think U.S. self-dependence on natural gas is worth the contamination of water supplies?

2. Should fracking be allowed to continue given the risks and damage to the environment? Why or why not?

3. If you were a top executive at Chesapeake Energy or Cabot Oil, for example, how would you persuade homeowners to sell your company the use of their land for drilling? How would your personal and corporate ethics guide you?

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4. What role does legislation play in holding fracking companies accountable to ethical behavior?

5. In your opinion, how should fracking companies respond to the new EPA study regarding hydraulic fracturing?

Sources This case was developed from material contained in the following sources: City council to weigh stance on tougher fracking regulations. (August 7, 2013). CBSLA.com. http://losangeles.cbslocal.com/2013/08/07/city-council-to-weigh-stance-on-tougher- fracking-regulations/, accessed January 7, 2014.

Cupas, Angela C. (Winter 2009). The not-so-safe drinking water act: Why we must regulate hydraulic fracturing at the federal level. William and Mary Environmental Law and Policy Review, 33(2), 605–635.

EPA asks gas services firms to voluntarily disclose fracking info. (September 13, 2010). Chemical Week.

EPA issues subpoena for hydraulic fracturing data. (November 8, 2010). Chemical Week. Fracking across the United States. (2012). EarthJustice.org. http://earthjustice.org/features/campaigns/fracking-across-the-united-states, accessed April 2, 2012.

“Fracking” for energy in Northeast: boon or doom? (November 11, 2010). NBCNews.com. http://www.nbcnews.com/id/40135664/ns/us_news-environment/#.UsvAKfQW2So, accessed January 7, 2014.

Fracturing Responsibility and Awareness of Chemicals Act. Wikipedia.org. http://en.wikipedia.org/wiki/Fracturing_Responsibility_and_Awareness_of_Chemicals_Act, accessed January 7, 2014.

Gasland. (2010). Dir. Fox, Josh. [Documentary] International WOW Company. Jenkins, Holman, W., Jr. (October 6, 2010). Americans (sort of) love fracking; the Northeast’s shale gas boom is being domesticated. WSJ.com.

Krauss, C., and T. Zeller. (November 6, 2010). When a rig moves in next door. NYTimes.com. http://www.nytimes.com/2010/11/07/business/energy-environment/07frack.html? pagewanted=all, accessed April 2, 2012.

Legere, Laura. (December 16, 2010). “DEP drops Dimock water plans; Cabot agrees to pay $4.1 million to residents.” Times Tribune. http://thetimes-tribune.com/news/gas- drilling/dep-drops-dimock-waterline-plans-cabot-agrees-to-pay-4-1m-to-residents- 1.1077910, accessed February 6, 2014.

Lustgarten, Abrahm. (April 30, 2009). 16 cattle drop dead near mysterious fluid at gas drilling site. Propublica.org. http://www.propublica.org/article/16-cattle-drop-dead-near- mysterious-fluid-at-gas-drilling-site 430, accessed February 25, 2011.

Martin, Sheena. (January 10, 2011). US shale rush poses challenges. ICIS. Chemical Business, 279 (2), 28.

Natural gas “fracking” debate draws hundreds. (September 14, 2010). CBSNews.com.

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http://losangeles.cbslocal.com/2013/08/07/city-council-to-weigh-stance-on-tougher-fracking-regulations/

http://earthjustice.org/features/campaigns/fracking-across-the-united-states

http://www.nbcnews.com/id/40135664/ns/us_news-environment/#.UsvAKfQW2So

http://en.wikipedia.org/wiki/Fracturing_Responsibility_and_Awareness_of_Chemicals_Act

http://www.nytimes.com/2010/11/07/business/energy-environment/07frack.html?pagewanted=all

http://thetimes-tribune.com/news/gas-drilling/dep-drops-dimock-waterline-plans-cabot-agrees-to-pay-4-1m-to-residents-1.1077910

http://www.propublica.org/article/16-cattle-drop-dead-near-mysterious-fluid-at-gas-drilling-site

http://www.cbsnews.com/stories/2010/09/13/national/main6862186.shtml, accessed January 21, 2011.

Phillips, S. (March 15, 2012). EPA’s test results show safe drinking water in Dimock. StateImpact. http://stateimpact.npr.org/pennsylvania/2012/03/15/epas-test-results-show- safe-drinking-water-in-dimock/, accessed April 2, 2012.

Rivers, D., and B. Brumfield. (August 7, 2013). Fears of quakes and flammable tap water hit Britain as fracking looms. CNN.com. http://www.cnn.com/2013/08/07/world/europe/uk- fracking/, accessed January 7, 2014.

Roosevelt, Margot. (June 18, 2010). Gulf oil spill worsens—but what about the safety of gas fracking? LATimes.com. http://latimesblogs.latimes.com/greenspace/2010/06/gulf-oil-spill- bp-hydraulic-fracturing-gas-fracking-.html, accessed February 2, 2011.

Scheer, R., and D. Moss. (December 26, 2010). Fracking. EMagazine.com. http://www.emagazine.com/earth-talk/fracking, accessed January 22, 2011.

Shaleionaires. (November 14, 2010). Prod. Bar-On, Shachar and Meghan Frank. 60 Minutes. CBS.

Testimony on Energy and Mineral Resources. (June 4, 2009). GWPC Testimony to the House Committee on Natural Resources, Appendix 15, DEC Statements. Division of Mineral Resources, New York State. (January 4, 2009). Appendix 15, Hydraulic Fracturing—15 Statements from Regulatory Officials. http://www.dec.ny.gov/docs/materials_minerals_pdf/ogsgeisapp2.pdf.

Wolfgang, B. (August 7, 2013). As N.Y. fracking ban drags on, leading energy company backs out. WashingtonTimes.com. http://www.washingtontimes.com/news/2013/aug/7/ny- fracking-ban-drags-leading-energy-company-backs/, accessed January 7, 2014.

Zeller, Tom, Jr. (December 11, 2010). New York governor vetoes fracking bill. NYTimes.com. http://green.blogs.nytimes.com/2010/12/11/new-york-governor-vetoes-fracking-bill/, accessed February 3, 2011.

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http://www.cbsnews.com/stories/2010/09/13/national/main6862186.shtml

http://stateimpact.npr.org/pennsylvania/2012/03/15/epas-test-results-show-safe-drinking-water-in-dimock/

http://www.cnn.com/2013/08/07/world/europe/uk-fracking/

http://latimesblogs.latimes.com/greenspace/2010/06/gulf-oil-spill-bp-hydraulic-fracturing-gas-fracking-.html

http://www.emagazine.com/earth-talk/fracking

http://www.dec.ny.gov/docs/materials_minerals_pdf/ogsgeisapp2.pdf

http://www.washingtontimes.com/news/2013/aug/7/ny-fracking-ban-drags-leading-energy-company-backs/

http://green.blogs.nytimes.com/2010/12/11/new-york-governor-vetoes-fracking-bill/

Case 14 Neuromarketing

Background Information Contemporary consumers have access to millions of products. The days when a consumer entered a store looking for a pair of sneakers and had only two options are over. First, markets have expanded to online as well as physical locations. Secondly, markets are now saturated with different brands, pricing, and payment options—all competing for consumers’ attention. A present challenge for marketers is to determine what consumers want, need, and are likely to buy—both online and in physical locations.

Since almost 90% of consumer purchasing decisions take place at what can be considered an “unconscious” or perhaps “subconscious” level, it has not always been easy to accurately identify the drivers of consumers’ buying behaviors—until now. Neuromarketing is a recent phenomenon that takes this observation into consideration to develop marketing strategies corporations can use. The term neuromarketing was coined in 2002 by professor Ale Smidts and refers to a practice that combines neuroscience and marketing to delve into the unconscious minds of consumers.

Neuromarketing technology provides a starting point to understand how consumers react to marketing stimuli, how they make their decisions, and what moves them from a potential customer to a buyer. The application of neuroscience can result in “a better identification and understanding of the cerebral mechanism that fundament the consumer’s behavior.”

A main tool used in neuromarketing is functional magnetic resonance imaging (fMRI). fMRI is a technology that allows tracking the brain’s responses when exposed to different stimuli. Using an fMRI, brain activity can be recorded non-invasively, without any risks of radiation. Another available technology to neuromarketers is the electroencephalogram (EEG) test. EEG tests measure electrical activity within the brain and can be utilized with software to produce several different views of the brain. EEG tests use flashes of red and yellow to show which area of the brain is engaged by the stimuli. This is considerably useful to researchers and marketers, given that each different part of the brain correlates with a different function. In addition to fMRI and EEG tests, neuromarketing also encompasses eye-tracking and galvanic skin response (GSR) tests. Eye-tracking technology can determine exactly where a person is looking; it allows for the monitoring of pupil movement. The technology allows marketers to determine if users are having trouble locating information or navigating through a web page, or if they are failing to see information altogether. GSR tests, on the other hand, measure the degree of electrical conductance across the surface of skin and can indicate emotional responses.

Since neuromarketing has increased in popularity, several companies have become frontrunners in the market. NeuroFocus, with a team of neuroscience and marketing experts from U.C. Berkeley, MIT, Harvard, and Hebrew University, is one of the market leaders. The company has recently been backed by the Nielsen Company, a worldwide leader in marketing and advertising research and have numerous Fortune 100 clients ranging from automobile manufacturers to consumer packaged goods, as well as major cable television and motion

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picture industries. EmSense, another neuromarketing vendor, combines neuroscience experts from MIT,

Harvard, and Stanford with marketing experience from Pepsi-Cola, Disney, and Gillette. Like NeuroFocus, EmSense has worked with large companies like Microsoft. NeuroFocus’ portfolio offers solutions for advertising, instore, videogame, packaging and online marketing elements. Sands Research is a company that offers neuroscience-based research. In addition to using technology like EEG tests and eye tracking, Sands has worked to develop its own system of scoring media, the Neuro Engagement Factor (NEF). The NEF ranks marketing elements, like advertisements, on a scale of 1 to 5 based on the level of consumer engagement. The company’s technology has attracted clients like Sam’s Club and Chevron and has also allowed it to conduct insightful studies on Super Bowl advertisements.

Another company that incorporates neuromarketing insights and related methods into its strategy is Hyundai. Hyundai recently employed the use of EEG technology to test consumer reactions to a new 2011 test model. Using a test group of 15 men and 15 women, Hyundai asked participants to stare at different parts of the model, while monitoring the electrical activity in their brains. A manager of brand strategy, Dean Macko, stated, “We want to know what consumers think about a car before we start manufacturing thousands of them.” Macko expects the company to make adjustments to the model’s exterior based on the EEG reports.

The Weather Channel (TWC) has also chosen to utilize neuroscience. In this case, TWC was looking to optimize its on-air promotions for one of its series, “When Weather Changed History.” To do this, the company teamed up with NeuroFocus and utilized three different neuroscience technologies for the study: EEG tests, eye-tracking technology, and GSR. These methods tested viewers’ neurological and biophysical responses to three different promotions. The study was aimed at answering four different questions: “Are the spots effective? What about each of them is more or less effective? How well do they convey the intended messages? How do we build the most effective final versions of the spots?” To answer these questions, NeuroFocus measured metrics like attention, emotional engagement, and memory retention. Each spot was scored based on these metrics, providing valuable insights: “TWC’s marketing team welcomed this research, because the information was clear, intuitive, quantitative, and objective. It was also well received because it helped pinpoint how we could improve the effectiveness of our promos.”

Uma Karmarkar cites the example of junk-food giant Frito-Lay, which in 2008 hired a neuromarketing firm to look into how consumers respond to Cheetos, the top-selling brand of cheese puffs in the United States. Using EEG technology on a group of willing subjects, the firm determined that consumers respond strongly to the fact that eating Cheetos turns their fingers orange with residual cheese dust. In her background note, Karmarkar cites an article in the August 2011 issue of Fast Company, which describes how the EEG patterns indicated “a sense of giddy subversion that consumers enjoy over the messiness of the product.”

Ethical Issues Associated with Neuromarketing Since the field of neuromarketing is gaining momentum and attention, it has also experienced resistance from those who oppose this type of research based on ethical reasons. Among the

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most vocal of these opponents is the nonprofit consumer protection group Commercial Alert. This agency is raising awareness about the ethical implications of neuromarketing, namely: Is it ethical to conduct such research and development, since these techniques and activities could open the door to unprecedented and possibly abusive influence over consumers? The following five questions raise additional ethical concerns about neuromarketing.

Ethical Question 1: Does the practice of “reading people’s minds”—or at least observing brain scans to get clues on how consumers react to targeted buying practices and objects—give marketers an unfair and potentially harmful advantage over consumers?

Neuromarketing practices could potentially give corporations an unfair advantage over consumers’ choices and buying activities. Because marketers could gain access to a consumer’s inner thoughts and opinions, some of which the consumer may not even be aware, this power could easily be misused. According to a Fast Company article by Kevin Randall, “consumer advocates and other groups have claimed neuromarketers are exploiting people to ‘sell us crap we don’t need’ and creating unhealthy and irresponsible addictions and cravings.” Advocacy group Commercial Alert agreed. In a letter sent to Senate Commerce Committee chairman John McCain in 2004, the group quoted Adam Koval, a neuromarketing pioneer, stating that this new technology “will actually result in higher product sales or in getting customers to behave the way [corporations] want them to behave.” These arguments raise an ethical question with regard to whether a company should have this type and amount of power over consumers’ buying behavior.

Ethical Question 2: What if neuromarketing is used by politicians or groups with extreme political interests? Consider the effects of a political party utilizing neuromarketing to influence voter decisions. If these groups have the power to learn from their constituents’ thoughts and opinions, they could also have an enormous advantage in persuading them to vote a certain way in elections. Some advocacy groups fear that this power will be abused by politicians. In the letter sent to Senator McCain by the advocacy Commercial Alert, the group noted that “political consultants have already teamed up with neuroscientists . . . to conduct neuromarketing experiments to gauge the effectiveness of political advertising.” The power of neuromarketing could also potentially be exploited by extreme political or social groups to engage in dangerously effective propaganda campaigns. What if extremist regimes had had this technology? Could they have been even more powerful in their anti-Semitic campaign and perhaps faced less resistance from enemies around the world? Writers in Fast Company and Commercial Alert even go so far as to suggest that neuromarketing could be used by some politicians or extremist groups to “brainwash” the public into accepting their political or social viewpoints.

Ethical Question 3: When does knowing an individual’s subconscious thoughts cross the line of privacy invasion? Since the September 11 attacks and subsequent Patriot Act legislation, privacy has been a hot

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topic. The introduction of neuromarketing aggravates issues of individual privacy. It was questioned whether recording a person’s telephone conversations or tracking Internet activity was an invasion of privacy, and gaining access to an individual’s subconscious thoughts is far more serious. Some marketers argue that this technology is advantageous in that it can reveal a consumer’s inner feelings or motivations that cannot be obtained through a focus group, either because the person is unaware of them or because he or she lies about them. But shouldn’t the consumer have the right to disclose only the information that they are conscious of and deem acceptable to share with a corporation? Circumventing the individual’s judgment on these matters through the use of neuromarketing could be considered an unfair violation of privacy.

Ethical Question 4: Could increases in marketing effectiveness lead to higher levels of “marketing-related diseases” that are already having harmful effects on American society? Consumer advocacy groups have long argued that corporations use marketing to promote so- called marketing-related diseases, including obesity, diabetes, smoking-related illnesses, alcoholism, and eating disorders, such as anorexia and bulimia. Consumer advocates feel that some marketers and marketing practices that glorify ultrathin models or excessive alcohol consumption play a major role in perpetuating these diseases in the American society. With the effectiveness that could be added to these types of advertisements through the use of neuromarketing, some fear that these illnesses will become even more pervasive, especially among young people who are traditionally more susceptible to marketing messages. According to Commercial Alert’s letter to Senator McCain, “The use of neuromarketing by companies that produce tobacco, alcohol, junk food, or fast food could be damaging to public health. For example, what if Neuromarketing helped tobacco companies to increase the effectiveness of their marketing by a mere 2%? Smoking causes 440,000 premature deaths in the United States annually. A back of the hand calculation suggests that this could eventually cause approximately an extra nearly 9,000 premature deaths per year.”

Ethical Question 5: Related to the above issue, could neuromarketing be used to irresponsibly target young consumers? Some marketing practices often and more easily influence the youth in a society. Children and teenagers are known to be the easiest segments to target and persuade through mass-media advertising and other marketing tactics. Consumer protection groups have been formed to fight against corporations that are believed to be unethically targeting children, particularly during children’s television programming. Commercial Alert has been a major player in this area, stating that “Corporations regularly promote . . . to children and teenagers degraded values and products including materialism, addiction, violence, gambling, pornography, anti-social behavior, etc. Any increase in the effectiveness in the marketing of these values and products could impact the character of millions of Americans.” With neuromarketing technology, these organizations will have greater power to influence levels of demand among already susceptible groups of consumers.

The Stakeholders Weiss, Joseph W.. Business Ethics : A Stakeholder and Issues Management Approach, Berrett-Koehler Publishers, Incorporated, 2014. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/apus/detail.action?docID=1565988. Created from apus on 2019-06-15 17:18:23.

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The focal stakeholders in this case are the neuromarketing companies, such as NeuroFocus, EmSense, and Sands Research. Other stakeholders include: experts in both marketing and neuroscience that invest in neuromarketing companies; experts against neuromarketing; brands that utilize neuromarketing in their strategy; brands that do not utilize neuromarketing; neuromarketing competitors (i.e., traditional marketing agencies); consumers; Commercial Alert and other consumer rights groups; political groups; the media; lawyers; and legislatures.

Neuromarketing companies are forming coalitions with marketing and neuroscience experts. Gaining the support of experts supports the argument that neuromarketing is an ethical, efficient, and effective practice. Neuromarketing companies are also forming coalitions with companies such as Frito-Lay, Pepsi-Cola, Microsoft, and Hyundai. However, experts and consumers who are not in agreement with the use of neuromarketing are forming their own coalitions to improve awareness of the ethical implications of neuromarketing. The New York Times and Fast Company, as noted earlier, have started covering the issue in recent years. Blogs such as Robert Dooley’s “Neuromarketing: Where Brain Science and Marketing Meet” (http://www.neurosciencemarketing.com/blog/) have cropped up to discuss questionable issues about neuromarketing. PBS has also run programming and hosted discussions on the issue on its web site.

Whether or not and to what extent neuromarketing practices are used in ethically questionable ways remains a topic of debate. Mapping the stakeholders and their different interests and strategies will help clarify who may be getting hurt and who may also benefit.

Questions for Discussion 1. Do you believe that neuromarketing is unethical or an innovative business practice? Explain. 2. Do all or most companies that market products and services use questionable techniques to influence and persuade customers?

3. Are you personally concerned or bothered by the neuromarketing techniques described in this case? Explain.

4. What moral responsibilities, if any, should marketing companies have—especially those firms using neuromarketing techniques? Explain.

Sources This case was developed from material contained in the following sources:

Alexander, James. (September 1, 2009). Neuromarketing to viewers. Cable360.net. http://www.cable360.net/programming/Neuromarketing-to-Viewers_37342.html, accessed March 28, 2012.

Boricean, Veronica. (November 15, 2009). Brief history of neuromarketing. International Conference on Economics and Administration. http://www.itchannel.ro/faa/119_pdfsam_ICEA_FAA_2009.pdf, accessed March 28, 2012.

Burkitt, Laurie. (November 16, 2009). Neuromarketing: Companies use neuroscience for consumer insights. Forbes.com. http://www.forbes.com/forbes/2009/1116/marketing- hyundai-neurofocus-brain-waves-battle-for-the-brain.html, accessed March 28, 2012.

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http://www.neurosciencemarketing.com/blog/

http://www.cable360.net/programming/Neuromarketing-to-Viewers_37342.html

http://www.itchannel.ro/faa/119_pdfsam_ICEA_FAA_2009.pdf

http://www.forbes.com/forbes/2009/1116/marketing-hyundai-neurofocus-brain-waves-battle-for-the-brain.html

Carmichael, Mary. (November 9, 2004). Neuromarketing: Is it coming to a lab near you? PBS.org. http://www.pbs.org/wgbh/pages/frontline/shows/persuaders/etc/neuro.html, accessed January 9, 2014.

Commercial Alert. (November 30, 2003). Commercial Alert asks Emory University to halt neuromarketing experiments. Commercial Alert.org. http://www.commercialalert.org/issues/culture/neuromarketing/commercial-alert-asks- emory-university-to-halt-neuromarketing-experiments, accessed March 28, 2012.

Commercial Alert. (July 12, 2004). Commercial Alert asks Senate Commerce Committee to investigate neuromarketing. CommercialAlert.org. http://www.commercialalert.org/issues/culture/neuromarketing/commercial-alert-asks- senate-commerce-committee-to-investigate-neuromarketing, accessed March 28, 2012.

Company overview. (February 1, 2010). Neurofocus.com. http://neurofocus.com/company.htm, accessed March 28, 2012.

Elliott, Stuart. (March 31, 2008). Is the ad a success? The brain waves tell all. NYTimes.com. http://www.nytimes.com/2008/03/31/business/media/31adcol.html, accessed March 31, 2012.

Eye movements and point of gaze. (2009). EyeTracking.com. http://www.eyetracking.com/technology/learn/, accessed March 28, 2012.

Nobel, Carmen. (February 1, 2013). Neuromarketing: Tapping into the “pleasure center” of consumers. Forbes.com. http://www.forbes.com/sites/hbsworkingknowledge/2013/02/01/neuromarketing-tapping- into-the-pleasure-center-of-consumers/, accessed January 7, 2014.

Randall, Kevin. (September 15, 2009). Neuromarketing hope and hype: 5 brands conducting brain research. Fast Company. http://www.fastcompany.com/blog/kevin-randall/integrated- branding/neuromarketing-hope-and-hype-5-brands-conducting-brain-resear, accessed March 28, 2012.

Reda, Susan. (April 2008). Marketing’s next (brain) wave. SandsResearch.com. http://www.sandsresearch.com/Stores_Article.aspx, accessed March 28, 2012.

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http://www.pbs.org/wgbh/pages/frontline/shows/persuaders/etc/neuro.html

http://www.commercialalert.org/issues/culture/neuromarketing/commercial-alert-asks-emory-university-to-halt-neuromarketing-experiments

http://www.commercialalert.org/issues/culture/neuromarketing/commercial-alert-asks-senate-commerce-committee-to-investigate-neuromarketing

http://neurofocus.com/company.htm

http://www.nytimes.com/2008/03/31/business/media/31adcol.html

http://www.eyetracking.com/technology/learn/

http://www.forbes.com/sites/hbsworkingknowledge/2013/02/01/neuromarketing-tapping-into-the-pleasure-center-of-consumers/

http://www.fastcompany.com/blog/kevin-randall/integrated-branding/neuromarketing-hope-and-hype-5-brands-conducting-brain-resear

http://www.sandsresearch.com/Stores_Article.aspx

Case 15 WalMart: Challenges with Gender Discrimination

The Civil Rights Act of 1964 forbids gender-based discrimination in the employment arena. Section 703 of this act specifies that:

It shall be an unlawful employment practice for an employer to fail or refuse to hire or to discharge any individual, or otherwise to discriminate against any individual with respect to his compensation, terms, conditions, or privileges of employment, because of such individual’s race, color, religion, sex, or national origin.

It shall be an unlawful employment practice for an employer to limit, segregate, or classify his employees in any way which would deprive or tend to deprive any individual of employment opportunities or otherwise adversely affect his status as an employee, because of such individual’s race, color, religion, sex, or national origin.

In Dukes v. WalMart Stores, Inc., Betty Dukes, the lead plaintiff along with five other plaintiffs and the class that they represent, charged that “WalMart discriminates against its female employees by advancing male employees more quickly than female employees, by denying female employees equal job assignments, promotions, training and compensation, and by retaliating against those who oppose its unlawful practices.” In addition, the plaintiffs sought to end WalMart’s discriminatory practices, to receive relief for the class, and to secure punitive damages. Dukes v. WalMart Stores, Inc. also alleged that WalMart’s underlying culture and policies contributed to the discrimination that the plaintiffs experienced.

“The theories pursued in the Dukes litigation involve what are known as ‘glass ceiling/sticky floor’ allegations of employment discrimination that female employees are relegated to low-paying positions and are unable to be promoted into better paying and higher- level managerial jobs.” Note that “These arguments manifest an aggressive approach by the plaintiffs’ bar to establish the class-worthiness of claims stretching over multiple facilities with assertions that pay and promotion claims are readily susceptible to class-action treatment based on expert testimony that such claims are truly common and typical.” According to data supplied by statistical consultant Richard Drogin on behalf of the plaintiffs, WalMart had an established pattern of discrimination against women. In his statistical report, Drogin concluded that “Women employees at WalMart are concentrated in the lower paying jobs, are paid less than men in the same job, and are less likely to advance to management positions than men. These gender patterns persist even though women have more seniority, have lower turnover rates, and have higher performance ratings in most jobs. The shortfall in female earnings, pay rates, and promotion rates has a high degree of statistical significance.”

WalMart’s expert witness, Joan Haworth, an economist who had provided testimony in more than five dozen employment cases, reached different conclusions regarding pay disparity at the giant retailer. She claimed that “Drogin’s analyses did not adequately take into account crucial factors, like the number of hours worked and whether they included night-shift work, which pays more. But her overarching criticism was that his approach amounted to pretending that a single person was making all promotion and pay decisions throughout WalMart nationwide, when, according to depositions, most pay determinations were made at the store manager level or, in the case of certain specialty department employees, at the district manager level.” She concluded that “more than 90% of class members worked at stores where women were statistically no worse off than men. WalMart’s argument, then, was that if a class action

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must be filed, it should be brought against the specific stores with disparities favoring men.”

Class Action or Not? Perhaps the most contentious issue in the Dukes v. WalMart Stores, Inc. case has been whether or not a class action is warranted. A class-action filing is affected by Rule 23 of the Federal Rules of Civil Procedure, which prescribes the conditions under which class-action suits may be brought to Federal courts. Rule 23(a) outlines the prerequisites for a class action. They are: “(1) the class is so numerous that joinder of all members is impracticable; (2) there are questions of law or fact common to the class; (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class; and (4) the representative parties will fairly and adequately protect the interests of the class.”

WalMart challenged the legal validity of a class action in the case, arguing, in a September 24, 2003 hearing before U.S. District Judge Martin Jenkins, that the lawsuit should be broken into separate class actions against each of the 3,473 stores across the United States because decisions about pay and promotions are largely made at the store level. On June 22, 2004, Judge Jenkins ruled that six current and former WalMart employees from California may represent all female employees of WalMart who worked at its U.S. stores anytime since December 26, 1998. In his findings, Judge Jenkins said that the evidence presented by the plaintiffs “raises an inference that WalMart engages in discriminatory practices in compensation and promotion that affect all plaintiffs in a common manner.”

Judge Jenkins’ ruling is potentially momentous because “Class-action litigation is unlike a single plaintiff lawsuit in that the stakes are enormous and the exposure to a corporation increases geometrically if the plaintiffs are successful. The holy grail of class-action litigation for both sides is the class certification decision. . . . Practically speaking, victory or defeat in the class certification process casts the die for a corporation’s exit strategy from class-action litigation.”

Enter the United States Court of Appeals for the Ninth Circuit On appeal to the Ninth Circuit, located in San Francisco, California, WalMart claimed that the proposed class failed to meet the commonality prerequisite of Rule 23(a)(2), since local store managers had autonomy in making salary and promotion decisions. However, “the plaintiffs said this hands-off approach itself constituted the common policy that impacted class members —arguing it fostered discrimination by allowing individual managers to make excessively subjective decisions based on gender stereotypes.” In support of this position, plaintiffs presented evidence from an expert witness, sociologist William Bielby, who based his testimony on so-called “social framework analysis.” Bielby testified that “a strong and widely shared organizational culture promotes uniformity of practices throughout an organization,” and that such a culture “could be inferred from such factors as WalMart’s emphasis on the company’s founder and its history, a mission statement defined by core values, [and] frequent communication about the culture to employees.” Allan King, an interested observer who has a doctorate in labor economics and a law degree, says, “There is no such thing as social framework analysis. . . . But it will be a challenge for defendants to persuade the court that

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what they [i.e., plaintiffs’ expert witnesses] regard as a methodology is not.” Ultimately, the Ninth Circuit used Bielby’s testimony to support its finding that commonality had been demonstrated for the class. The court wrote, “Evidence of WalMart’s subjective decision- making policy raises an inference of discrimination and provides further evidence of a common practice.”

On February 6, 2007, the United States Court of Appeals for the Ninth Circuit affirmed, on a 2–1 vote, U.S. District Court Judge Martin Jenkins’ decision to certify a class that had grown to approximately 2 million women in the lawsuit against WalMart. The class includes the more than 2 million women who have worked at any of the company’s more than 4,000 retail stores nationwide since December 26, 1998. Writing for the majority, Judge Harry Pregerson “deferred to the district court’s ‘broad discretion’ to certify and did not amend any of its findings.” Most of the Ninth Circuit Court’s opinion addressed the commonality prerequisite of Rule 23(a)(2). The Ninth Circuit’s opinion said that “Plaintiffs demonstrated that WalMart had a corporate policy of discrimination (because the policy was corporate-wide, it would be in effect at every WalMart store and thus would be common to every female WalMart employee).” However, in a strongly worded dissent, Judge Andrew J. Kleinfeld said the appellate decision “poses a considerable risk of enriching undeserving class members and counsel, but depriving thousands of women actually injured by sex discrimination their just due.”

In response to the Ninth Circuit’s ruling, Theodore J. Boutrous Jr., an attorney representing WalMart, said, “We recognize this is another step in what is going to be a long process. It’s a technical legal ruling that only certifies the lawsuit as a class action, but does not address its merits.” Boutrous also expressed the belief that WalMart has a strong argument for obtaining further review from either the full Ninth Circuit Court or the United States Supreme Court, “because the majority rule conflicts with many Supreme Court decisions as well as many recent decisions from other appellate courts around the country that ‘have rejected precisely the direction taken by the [Ninth Circuit] court.’” However, Brad Seligman, representing the WalMart plaintiffs, said the appellate court was now the second court to rule on the class certification issue and “it’s clear WalMart is going to have to face the music and justify its practices, and we are very optimistic this case will ultimately be returned to trial.” In fact, WalMart asked the full Court of Appeals for the Ninth Circuit to reconsider the 2–1 approval of the class.

In May 2011, the Supreme Court started hearing the Dukes v. WalMart Stores, Inc. case. In June, “the Court ruled that the case could not proceed because the 1.5 million current and former WalMart employees suing the company for alleged sex discrimination could not legally constitute a ‘class.’” Therefore, WalMart successfully defended its position, and from then on the criteria for getting a class-action suit approved has been much stricter.

Potential Implications of Dukes v. WalMart Stores, Inc. Observers say the 2–1 decision by the Ninth Circuit Court of Appeals does not break any new legal ground even though it could end up costing WalMart billions of dollars. Rather, the primary significance of the ruling is the unprecedented size of the class action. Anthony J.

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Oncidi, an attorney with Proskauer Rose LLP in Los Angeles, said Judge Kleinfeld’s strong dissent in the 2–1 ruling suggests that other Ninth Circuit judges may also believe that the 2–1 majority ruling is not really appropriate, which could lead to a reexamination by the full appellate court. Ultimately, the Supreme Court “may respond to business community demands that it ‘tighten up class certification’ in the same way it tightened rules on punitive damages.”

Although Dukes v. WalMart, Inc. may not break any new legal ground, employers nonetheless may want to rethink their practices. As Susie Gibbons, an attorney with Poyner & Spruill L.L.P. in Raleigh, North Carolina, says, “The huge potential liability of this case represents an expansion of the class action vehicle as a weapon of attack against employers, and it should cause all companies of any size to review their own hiring and promotional practices. . . . If I were a risk manager at a company, I would want to analyze this case to look at what the vulnerabilities were that ended up causing this problem for WalMart.” Writing in Fortune magazine, Roger Parloff and Susan Kaufman point out that although racial or gender quotas and preferences are illegal, “they will obviously be tempting to employers who want to avoid being hit with class-action employment discrimination lawsuits. For there is only one sure-fire way to inoculate oneself against such suits, and that is to have workforce numbers that look good even when analyzed by a plaintiffs’ expert. And the cheapest and fastest way to get those is to use quotas or preferences.”

Mary Swanton, writing in InsideCounsel, says that “employers can use the findings in Dukes to assess their vulnerabilities. For example, companies could test how their corporate culture would stand up to a sociologist’s analysis. They also could look at how their decision- making processes can be made more objective and whether they have processes in place to ensure their managers implement non-discrimination policies.” Meg Campbell, with Ogletree, Deakins, Nash, Smoak & Stewart, says, “If they [employers] take the lesson of this court’s analysis and look at what they are doing and how they can do it better, they’ll put themselves in the best defensive posture in the event of litigation.”

Parloff and Kaufman also remark, “The WalMart rulings could end up representing a high- water mark. . . . The underlying legal battles seem destined for the [United States] Supreme Court. The urgent question is whether the current [Supreme] Court with its staunchly conservative five-justice majority, sharp aversion to race-conscious remedies, and weak respect for prior precedent will allow this situation to persist. The WalMart suit may be the case that gives us the answer.”

Questions for Discussion 1. Based on the stated human resources philosophy of WalMart, would it be likely that the company would discriminate based on gender differences? Explain.

2. Put yourself in the role of the plaintiffs. What ethical arguments would you offer in support of their allegations?

3. Put yourself in the role of WalMart. What ethical arguments would you offer to counter the plaintiffs’ allegations?

4. What do you think the plaintiffs meant by their allegation that WalMart’s culture is a significant contributor to gender discrimination?

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5. Is a class action against WalMart justified? Explain your position. 6. Explain how the outcome of Dukes v. WalMart Stores, Inc. is important for major stakeholders in the case, including the American society.

Sources WalMart’s corporate web site asserts that: “WalMart will not tolerate discrimination in employment on the basis of race, color, age, sex, sexual orientation, religion, disability, ethnicity, national origin, veteran status, marital status or any other legally-protected status.” Against this backdrop of professed commitment to equal opportunity, WalMart faces an ongoing battle in the gender discrimination class action suit Dukes v. WalMart Stores, Inc. filed on June 19, 2001 in United States District Court for the Northern District of California.

This case was developed from material contained in the following sources: Burns, G. (September 4, 2003). Class action no bargain for WalMart: 1.5 million could be added to bias suit by women. Chicago Tribune. http://www.againstthewal.com/new_page_4.html#Class_action_no_bargain_for_WalMart, accessed April 27, 2008.

Civil Rights Act of 1964, Section 3. (1964). http://memory.loc.gov/ammem/awhhtml/awlaw3/civil.html, accessed April 27, 2008.

Drogin, R. (2003). Statistical analysis of gender patterns in WalMart workforce. Berkeley, CA: Drogin, Kakigi & Associates, 46. http://www.walmartclass.com/staticdata/reports/r2.pdf, accessed April 27, 2008.

Dukes v. WalMart Stores, Inc. First amended complaint, 2. http://www.coalitointlc.org/dukeswalmart61901.pdf, accessed April 27, 2008.

Fanibanda, B. D. (2007). Dukes v. WalMart: The expansion of class certification as a mechanism for reconciling employee conflicts. Berkeley Journal of Employment & Labor Law, 28(2), 591.

Greenwald, J. (February 12, 2007). Biggest-ever bias suit may fuel tort trend. Business Insurance, 41(7), 1.

Greenwald, J. (February 12, 2007). Companies urged to examine employment practices. Business Insurance, 41(7), 29.

Maatman, G. L., Jr. (September 5, 2005). “Dukes” class action may be hazardous: Employment practices exposure cited as courts assess gender discrimination. National Underwriter Property & Casualty, 35.

Parloff, R., and S. M. Kaufman. (October 15, 2007). The war over unconscious bias. Fortune, 156(8), 100.

Rittgers, Anna. (June 22, 2011). WalMart v. Dukes ruling actually protects women—and all Americans. Christian Science Monitor. http://www.csmonitor.com/Commentary/Opinion/2011/0622/WalMart-v.-Dukes-ruling- actually-protects-women-and-all-Americans, accessed January 7, 2014.

Rule 23. Class actions (a) Prerequisites to a class action. Rule 23 of the Federal Rules of Civil Procedure, 507. http://www.rand.org/pubs/momgraph_reports/MR969/MR969.appa.pdf,

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http://www.againstthewal.com/new_page_4.html#Class_action_no_bargain_for_WalMart

http://memory.loc.gov/ammem/awhhtml/awlaw3/civil.html

http://www.walmartclass.com/staticdata/reports/r2.pdf

http://www.coalitointlc.org/dukeswalmart61901.pdf

http://www.csmonitor.com/Commentary/Opinion/2011/0622/WalMart-v.-Dukes-ruling-actually-protects-women-and-all-Americans

http://www.rand.org/pubs/momgraph_reports/MR969/MR969.appa.pdf

accessed April 27, 2008. Swanton, M. (April 4, 2007). Dukes of hazard: 9th Circuit decision paves way for massive discrimination class actions. InsideCounsel, 24.

WalMart statement of ethics. (Revised January 1, 2005). http://www.walmartstores.com/medi/resources/r_2032.pdf, 13, accessed April 27, 2008.

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http://www.walmartstores.com/medi/resources/r_2032.pdf

Case 16 Vioxx, Dodge Ball: Did Merck Try to Avoid the Truth?

Overview On September 30, 2004, Merck & Company (“Merck”) voluntarily withdrew Vioxx (rofecoxib), its blockbuster arthritis drug that had been on the market since 1999. Since 2001, Merck had been facing accusations that Vioxx increased the risk of heart attack and stroke for those patients taking the drug for longer than 18 months. In a press release announcing the voluntary, worldwide withdrawal, Merck executives felt that although Merck could continue marketing the drug with new labels that incorporated the results of recent trials, the responsible action was to remove the product from the market. Since the withdrawal, thousands of lawsuits have been brought against Merck, and several questions remain, most notably: Did Merck suppress data early on, and will Merck be able to withstand the thousands of lawsuits that will take place in the coming years?

The Beginning Millions of Americans suffer from arthritis pains, with levels of pain that vary from minor to severe. Arthritis is a general term that means “joint inflammation,” and there are more than 100 different types of rheumatic conditions and diseases that can cause joint inflammation. Different types of non-steroidal anti-inflammatory drugs (“NSAIDs”) can be taken, ranging from ibuprofen to naproxen. The Cox-2 inhibitors were new drugs that were developed to block the Cox-2 enzyme, which is responsible for sending chemicals within the body that cause pain and inflammation. Merck and Pfizer, two of the largest pharmaceutical companies in the world, burst onto the scene in 1999 with their Cox-2 inhibiting drugs, Vioxx and Celebrex. Buoyed by the emerging trend of direct-to-consumer (“DTC”) marketing, these companies began a marketing blitz targeting the general public.

In 2001, the National Institute for Health Care Management Research and Educational Foundation released a report on the growing DTC trend. The report showed that in 2000, Merck spent $160 million to advertise Vioxx, as compared to PepsiCo’s $125 million to advertise Pepsi, Budweiser’s $146 million to advertise its beer, and Pfizer’s $78 million to advertise Celebrex. This caused Merck’s sales of Vioxx to increase 360% from 1999 to 2000, while Pfizer’s sales of Celebrex increased 58% in that same period. Before the drug was approved, Merck had followed industry standard testing procedures. In 1998 however, an internal trial, study “090,” revealed a higher number of cardiovascular problems in patients taking the drug, compared to those not taking Vioxx. The study showed that patients taking Vioxx were six times more likely to have a cardiovascular event than those taking a different arthritis drug or placebo. Merck felt that this test was too small (978 patients), and not statistically significant. Merck received approval from the FDA in 1999 to begin selling the drug, just behind Pfizer’s release of Celebrex.

Merck’s Studies

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In 1999, Merck launched another study on Vioxx, entitled VIGOR. The VIGOR study was the Vioxx Gastrointestinal Outcomes Research Study, and included 8,000 patients. The purpose of this study was to determine if Vioxx was any less damaging on the stomach than naproxen. NSAIDs, such as naproxen, have side effects that often include gastrointestinal problems and can cause abdominal pain, heartburn, and/or diarrhea. Of the 33 million Americans taking NSAIDs, between 10 and 50% develop these side effects; many so severely that they must stop taking NSAIDs due to stomach ulcerations. The Cox-1 enzyme produces mucus that protects the stomach lining, and many NSAIDs, such as naproxen, block both the Cox-1 and the Cox-2 enzymes. The benefit of these new Cox-2 inhibiting drugs was that the Cox-1 enzyme was not blocked, and could thus continue to protect the stomach lining.

The results of this test proved that Vioxx did produce significantly less upper gastrointestinal events than naproxen. However, the tests revealed additional information: Patients taking Vioxx for more than 18 months were five times more likely to suffer a heart attack than those who took naproxen. At the time, Merck executives stated that this finding was due to naproxen’s ability to protect the heart, not due to any specific issue with Vioxx. These results were published in the New England Journal of Medicine in 2000. At that time, many industry experts began to doubt the safety of Vioxx based on the results of the VIGOR study and the “090” study. Despite the results of these studies, Merck continued its advertising in 2000 and 2001. Between 1999 and 2003, Merck generated approximately $2.3 billion in sales. In 2001, the FDA recommended that Merck include warnings on Vioxx labels, and also took issue with a misleading promotional campaign.

In a letter to Raymond Gilmartin, the president and CEO of Merck, Thomas Abrams, a director in the division of drug marketing, advertising, and communications, warned Merck that it had made false statements, used unsubstantiated claims, omitted risk information, and used audio conferences to promote Vioxx for unapproved usages and unapproved dosage. Note that “Abrams has been on all sides of drug marketing, from receiving promotions as a pharmacist to creating promotions as a member of industry to regulating promotions as the head of DDMAC. As such, he’s in good position to see the big picture.” The following is an excerpt from the letter:

You have engaged in a promotional campaign for Vioxx that minimizes the potentially serious cardiovascular findings that were observed in the Vioxx Gastrointestinal Outcomes Research (VIGOR) study, and thus, misrepresents the safety profile for Vioxx. Specifically, your promotional campaign discounts the fact that in the VIGOR study, patients on Vioxx were observed to have a four-to five-fold increase in myocardial infarctions (MIs) compared to patients on the comparator non- steroidal anti-inflammatory drug (NSAID), Naprosyn (naproxen).

In 2002, Merck added language to the Vioxx label that disclosed the cardiovascular risks that were associated with Vioxx. Despite these warnings and the studies, Vioxx accounted for $2.5 billion in sales in 2003 alone, with more than 91 million Vioxx prescriptions written throughout the history of the drug.

In 2000, Merck began a different study, this time to determine if Vioxx could successfully prevent the recurrence of colon polyps. This study was called APPROVe: the Adenomatous Polyp Prevention on Vioxx trial. The results of this trial echoed the results of the prior trials. Of the more than 2,600 patients that took part in the trial, those patients taking Vioxx for more than 18 months found themselves at a higher risk for cardiovascular events than those on a

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placebo. Specifically, the Vioxx patients were twice as likely to suffer an event as those not taking Vioxx. It was with this information that Merck decided to pull the drug in 2004.

Dodge Ball and Vioxx While Merck was busy conducting internal studies, the sales force was being trained to handle the increasing amount of questions regarding the risks of cardiovascular events. When salespersons called on physicians, the questions of the risks were more frequent, such as, “I am concerned about the cardiovascular effects of Vioxx” and “I use Celebrex. I’m concerned with the safety profile with Vioxx.” The name of this document was “Dodge Ball Vioxx.” The 46- page document described the activities used to train the sales force, and included Jeopardy!- like question-and-answer sections to help the Vioxx reps learn how to correctly answer or deflect physicians’ questions. A 12-page list of categories was presented to the sales force, but many representatives were very concerned with the process. In a 2004 interview with 60 Minutes, a rep who did not wish to be named said, “We were supposed to tell the physician that Vioxx did not cause cardiovascular events; that instead, in the studies, Naproxen has aspirinlike characteristics which made Naproxen a heart-protecting type of drug where Vioxx did not have that heart-protecting side.” The rep added, “I put my reputation on the line. I gave my physicians my word that Vioxx was a safe, effective product and it’s been pulled from the market because it was killing people.”

The final page of this 46-page training document highlighted the five top messages for Vioxx in 2000, and, in the last paragraph, stated, “This document must not be copied, distributed, or shown to anyone outside the company.” This training document was one of the areas the FDA commented on when it notified Merck that it was engaging in promotional campaigns attempting to minimize the risks associated with Vioxx.

Outside Opinions and Studies When the internal Merck studies, “090” and VIGOR, were released, many in the medical community were concerned with the results, especially considering that Vioxx was a potential blockbuster drug that could be used by more than one hundred million worldwide. One such critic was Dr. Eric Topol, who was the chief of cardiovascular medicine at the Cleveland Clinic. Topol first began questioning the studies and Merck’s responses in 2001. On October 21, 2004, Topol published an article in the New England Journal of Medicine, in which he outlined the case against Merck and the FDA. As he recounted the results of the “090,” VIGOR, and APPROVe studies, he noted that “Only by happenstance, in a trial involving 2600 patients with colon polyps who could not have been enrolled if they had had any cardiovascular disease” was it discovered that there was an increased risk of cardiovascular events. Topol felt that neither Merck, nor the FDA, had fulfilled their responsibilities to the public based on the risks that were seen in the earlier studies. His own research of Cox-2 inhibitors and other medicines available showed a “very substantial worrying risk of heart attacks and strokes.” He added, “So if you have Study ‘090,’ and you want to discount that somehow, then you have VIGOR. You’ve got two trials now. You have essentially lightning striking twice. That’s independent replication. That’s really serious confirmation. This is

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unequivocal. This is a problem.” Merck researchers responded to Dr. Topol’s “Perspective” article with their own “Correspondence.” In this correspondence, the researchers stated that Topol’s timeline was false, and that other studies conducted by Merck did not show any increased risks in cardiovascular events versus placebo.

A common trend in the industry is that doctors consult for financial firms. A December 2004 edition of Fortune magazine identified a potential conflict of interest for Topol. He was on the scientific advisory board of a hedge fund, the Biomedical Value Fund, run by Great Point Partners. This fund, with more than $170 million in assets, performed very well in 2004, and much of this was due to the firms “shorting” of Merck. Selling “short” is a term used to describe when an investor is looking to profit from a stock’s falling price. In a performance summary published in September 2004, Great Point Partners singled out Topol for his contribution to the increased earnings. “Vioxx, while good for your arthritis, can be very bad for your heart. Eric Topol, M.D., of our Medical Advisory Board, has been singing this tune since 2002, and we were on the right side [short] of that situation.” When Fortune confronted Topol with this information, he immediately resigned from the board. Since this time, Merck lawyers have introduced this information to build the case that Topol has a personal “vendetta” against Merck. In late 2005, Topol was demoted at the Cleveland Clinic. In February 2006, Topol announced that he would be leaving the clinic to teach at a nearby medical school.

The Recall and Initial Lawsuits On September 30, 2004, Merck voluntarily withdrew Vioxx from the market after the results of the APPROVe trial. Merck had made it clear that this was a voluntary recall, and that it was due to the heightened risk of cardiovascular events. Merck’s CEO and president, Raymond Gilmartin, maintained that Merck could have relabeled the packaging to include warnings about the cardiovascular risks, but concluded that the voluntary withdrawal was the “responsible” action to take. But the already skeptical medical community was aware of the “090” and VIGOR studies. One month later, a study conducted by the FDA using information from approximately 1.4 million patients in the Kaiser Permanente health care organization found that the use of Vioxx more than tripled the patient’s risk of a cardiovascular event. Based on the number of Vioxx prescriptions written between 1999 and 2003, the study estimated that Vioxx may have contributed to more than 27,785 heart attacks or sudden cardiac arrests. This was initially published by the Wall Street Journal, but the results were never published by the FDA.

After the recall, word of the studies and their results began reaching the public. The legal system became flooded with activity. On August 19, 2005, the first lawsuit against Merck reached its conclusion in a Texas courtroom. Carol Ernst sued Merck, claiming that her husband Robert died in 2001 of an irregular heartbeat caused by Vioxx. Ernst’s lawyer argued that Merck continued with an aggressive marketing campaign for Vioxx, even though it was aware of the increased risk of a cardiovascular event for patients taking Vioxx. The jury agreed with Ernst, and awarded $229 million in punitive damages and $24.4 million in compensatory damages. Texas law sets a cap on punitive damages, however, and analysts believe that they may be reduced to $1.6 million. Merck maintains that they will fight the results of this decision.

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As of January 31, 2006, Merck faced 9,650 Vioxx-related lawsuits. In 2004, Merck set aside $675 million to use for legal fees in defending itself in the Vioxx lawsuits. In 2005, Merck used $285 million, and was forced to replenish this reserve with another $295 million, bringing the total to $685 million for legal fees alone. Merck has yet to pay any damages, including the $253 million awarded to Carol Ernst in 2005. However, Merck is prepared to fight each lawsuit separately and not push for a class-action lawsuit. In the three lawsuits previously filed against the company, Merck lost one case, won one case, and had a mistrial declared in the third. Jury selection for a retrial of the mistrial began on February 6, 2006, and a fourth case was underway in Texas for the heart attack death of a 71-year-old man.

Vioxx and Merck: Update Merck’s official web site announces that “The meeting of the thresholds with enrollment documents in compliance with the Settlement Agreement would obligate Merck to pay $4.85 billion in installments into the resolution fund. In 2007, the Company recorded a pretax charge of $4.85 billion, which represents the fixed amount to be paid by the Company to settle qualifying claims.

The thresholds are: (a) 85% or more of all eligible MI claims; (b) 85% or more of all eligible IS claims; (c) 85% or more of all eligible claims claiming death as an injury; and (d) 85% or more of all eligible claims alleging more than 12 months of use.”

As of March 31, 2008, the claims administrator reports more than 28,250 eligible MI claimants have initiated enrollment and more than 16,750 eligible IS claimants have initiated enrollment. Of these, more than 5,500 eligible MI and IS claimants alleging death as an injury have initiated enrollment, and more than 27,500 eligible MI and IS claimants alleging more than 12 months of use have initiated enrollment. Each of these numbers appears to represent at least 94.5% of the eligible claims in each category. These numbers do not include an additional 5,500 enrollees whose eligibility has yet to be determined.

On Thursday [July 17, 2008] more than 97% of eligible U.S. claimants had elected to participate in its $4.85 billion proposed Vioxx settlement, an adequate number to trigger funding of the program.”

“The company expects that the distribution of interim payments to qualified claimants will begin in August and will continue on a rolling basis until all claimants who qualify for an interim payment are paid,” Merck said in a news release. A Merck spokesperson said on July 17, 2008 that over 48,500 of approximately 50,000 people registered as eligible injuries had enrolled in the program.

With the increase scrutiny on corporate social responsibility, and the serious consequences that can arise if a pharmaceutical company is accused of violating public trust, companies such as Merck have been doing business on a slippery slope. Industry analysts reported after Vioxx’s settlement that “the FDA has become far more careful about approving new medicines in the wake of the Vioxx withdrawal and criticism of the agency’s oversight of the medicine.”

Pharmaceutical companies have created many lifesaving drugs over the years, and have helped hundreds of millions of people. However, if a company is perceived to act unethically and violates the public trust, that company stands to face not only more lawsuits, but the loss of

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customers and the financial resources that help these companies succeed. Will this settlement be the last for Merck? Or, is this just another cost of doing business for the pharmaceutical giant operating in a highly profitable and uncertain industry sector?

Aftermath Merck in 2011 also paid an additional $950 million in a later settlement that completed Merck’s marketing practices by the government. In yet another 2013 settlement, customers claiming to have been “duped” into purchasing Vioxx were reimbursed $23 million. Vioxx has cost Merck over $5.8 billion. “The settlement of a seven-year U.S. government investigation brings Merck closer to resolving the mountain of litigation that followed the company’s 2004 withdrawal of the big-selling drug from the market after a study showed it increased the risk for heart attacks and strokes. It marks the latest big payout by a drug company to settle health- care fraud allegations, underscoring heightened government scrutiny of the way drug makers do business.”

Questions for Discussion 1. What were the first warning signals that Vioxx may have been unsafe for patients? 2. Who was responsible in this case for stopping the harm that occurred from the Vioxx drug, and at what point could the harm have been prevented? Explain.

3. Summarize Dr. Topol’s ethics as demonstrated in this case. What were his motives here? 4. What role did the sales force representatives play in this case? 5. Who ultimately is to blame in this case for the harm caused by Vioxx? 6. Should Merck be singled out as a major culprit in this case or is this “business as usual” for pharmaceutical companies?

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Notes 1. “Globesity”: U.S. junk food industry tips global scales. (September 7, 2013). RT.com.

http://rt.com/usa/us-obesity-food-global-regulation-551/, accessed January 6, 2014; and Kalaidis, J. (February 25, 2013). Should the U.S. adopt a fat tax? The Week. http://theweek.com/article/index/240554/should-the-us-adopt-a-fat-tax, accessed January 6, 2014.

2. Shieds, M., M. Carroll, and C. Ogden, (March 2011). Adult obesity prevalence in Canada and the United States. National Center for Health Statistics Data Brief No. 56. http://www.cdc.gov/nchs/data/databriefs/db56.pdf, accessed December 8, 2011.

3. Centers for Disease Control and Prevention (CDC). (January 11, 2013). Overweight and obesity: Data and statistics. CDC.gov. http://www.cdc.gov/obesity/childhood/data.html, accessed January 6, 2014; CDC. (August 16, 2013). Obesity prevalence in 2012 varies across states and regions. CDC.gov. http://www.cdc.gov/obesity/data/adult.html, accessed January 6, 2014.

4. Wood, L. (January, 30, 2006). Obesity has become such a problem that the US Health and Human Services have declared it a disease. PRWeb.com. http://www.prweb.com/releases/2006/01/prweb338077.htm, accessed February 3, 2014; RT.com. (June 19, 2013). Americans fatter than ever, obesity officially called a “disease.” RT.com, http://rt.com/usa/obesity-disease-americans-record-957/, accessed February 3, 2014.

5. Health promotion: Survey finds consumers want healthier fast foods. (February 10, 2006). Medicine & Law Weekly, 182; CDC. (May 16, 2011).

6. Overweight and obesity: Causes and consequences. (n.d.) CDC.gov. http://www.cdc.gov/obesity/causes/index.html, accessed December 8, 2011.

7. Philipson, T., and R. Posner, (July 30, 2010). Fat new world: Technology spawned the obesity plague. It can also provide a cure. Wall Street Journal. http://online.wsj.com/news/articles/SB10001424052748703940904575395513421527100, accessed January 6, 2014.

8. Stensson, A., and P. Carroll, (December 8, 2011). Hottest restaurant menu trends in 2012 include healthful kids’ meals and locally sourced ingredients, according to National Restaurant Association. Yahoo! News. http://www.restaurant.org/Pressroom/Press- Releases/Hottest-Restaurant-Menus-Trends-in-2012-Include-He, accessed February 3, 2014.

9. Jared’s Journey. Subway.com. http://www.subway.com/subwayroot/freshbuzz/website/jareds_journey/default.aspx, accessed December 8, 2011; Strasser, A. R. (March 25, 2013). McDonald’s new ‘McWrap’ plays on public perception of healthy food. ThinkProgress. http://thinkprogress.org/health/2013/03/25/1770241/mcdonalds-mcwrap-healthy-food/, accessed January 6, 2014.

10. World Bank. (July 1, 2013). GDP ranking. World Bank. http://databank.worldbank.org/data/download/GDP.pdf, accessed February 24, 2014.

11. Drucker, P. (1973). Management: Tasks, responsibilities, practices, 61. New York: Harper & Row.

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http://rt.com/usa/us-obesity-food-global-regulation-551/

http://theweek.com/article/index/240554/should-the-us-adopt-a-fat-tax

http://www.cdc.gov/nchs/data/databriefs/db56.pdf

http://www.cdc.gov/obesity/childhood/data.html

http://www.cdc.gov/obesity/data/adult.html

http://www.prweb.com/releases/2006/01/prweb338077.htm

http://rt.com/usa/obesity-disease-americans-record-957/

http://www.cdc.gov/obesity/causes/index.html

http://online.wsj.com/news/articles/SB10001424052748703940904575395513421527100

http://www.restaurant.org/Pressroom/Press-Releases/Hottest-Restaurant-Menus-Trends-in-2012-Include-He

http://www.subway.com/subwayroot/freshbuzz/website/jareds_journey/default.aspx

http://thinkprogress.org/health/2013/03/25/1770241/mcdonalds-mcwrap-healthy-food/

http://databank.worldbank.org/data/download/GDP.pdf

12. Consumers International. (2011). Consumer Rights. Consumers International. http://www.consumersinternational.org/who-we-are/consumer-rights, accessed February 24, 2014.

13. Velasquez, M. (1988, 1998). Business ethics concepts and cases, 2nd and 4th eds. Englewood Cliffs, NJ: Prentice Hall.

14. Velasquez, M. (2001). The ethics of consumer protection. In Hoffman, W., Frederick, R., and Schwartz, M., eds., Business ethics, 4th ed., 424. Boston: McGraw-Hill.

15. Boatright, J. (1999). Ethics and the conduct of business, 3rd ed., 273. Englewood Cliffs, NJ: Prentice Hall.

16. Velasquez, M. (2002). Business ethics: concepts and cases, 335–344. Upper Saddle River, NJ: Prentice Hall.

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Boston: Irwin McGraw-Hill. 24. Foley, K., T. Goodman, and B. McElroy, (August, 2012). Bridging the gaps funding and

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28. See Steiner and Steiner. (2000). Business, Government, and Society, 9th ed., 596. Boston, MA: McGraw-Hill.

29. Gostin, L. (2002). Corporate speech and the constitution: The deregulation of tobacco advertising. American Journal of Public Health, 92(3), 352–355.

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http://www.consumersinternational.org/who-we-are/consumer-rights

http://europa.eu/rapid/press-release_IP-12-491_en.htm

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http://www.ftc.gov/bcp/menus/consumer/data/privacy.shtm

http://rsfsocialfinance.org/wp-content/uploads/downloads/2012/08/Rockefeller-Paper.pdf

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http://seekingalpha.com/article/1519172-analyst-report-youtube-revenue-likely-3-7b-in-2013-video-ad-sellout-low-at-14

http://boletines.prisadigital.com/US-Digital-Future-in-Focus-2013.pdf

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54. Ibid. Weiss, Joseph W.. Business Ethics : A Stakeholder and Issues Management Approach, Berrett-Koehler Publishers, Incorporated, 2014. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/apus/detail.action?docID=1565988. Created from apus on 2019-06-15 17:18:23.

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