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BUSINESS ETHICS

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BUSINESS ETHICS A Stakeholder and Issues Management Approach

SIXTH EDITION

Joseph W. Weiss

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Business Ethics Copyright © 2014 by Joseph W. Weiss

All rights reserved. No part of this publication may be reproduced, distributed, or transmitted in any form or by any means, including photocopying, recording, or other electronic or mechanical methods, without the prior written permission of the publisher, except in the case of brief quotations embodied in critical reviews and certain other noncommercial uses permitted by copyright law. For permission requests, write to the publisher, addressed “Attention: Permissions Coordinator,” at the address below.

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Sixth Edition

Paperback print edition ISBN 978-1-62656-140-3 PDF e-book ISBN 978-1-62656-141-0 IDPF e-book ISBN 978-1-62656-142-7

2014-1

Book produced by: Westchester Publishing Services

Cover design: Dan Tesser / pemastudio

Interior illustration: Westchester Publishing Services

Indexer: Robert Swanson

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Brief Contents

Chapter 1 Business Ethics, the Changing Environment, and Stakeholder Management

Chapter 2 Ethical Principles, Quick Tests, and Decision-Making Guidelines

Chapter 3 Stakeholder and Issues Management Approaches

Chapter 4 The Corporation and External Stakeholders: Corporate Governance: From the Boardroom to the Marketplace

Chapter 5 Corporate Responsibilities, Consumer Stakeholders, and the Environment

Chapter 6 The Corporation and Internal Stakeholders: Values-Based Moral Leadership, Culture, Strategy, and Self-Regulation

Chapter 7 Employee Stakeholders and the Corporation

Chapter 8 Business Ethics and Stakeholder Management in the Global Environment

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Contents

Preface

Acknowledgments

Case Authorship Chapter 1 Business Ethics, the Changing Environment, and Stakeholder Management

1.1 Business Ethics and the Changing Environment

Seeing the “Big Picture”

Point/CounterPoint

Environmental Forces and Stakeholders

Stakeholder Management Approach

1.2 What Is Business Ethics? Why Does It Matter?

What Is Ethics and What Are the Areas of Ethical Theory?

Unethical Business Practices and Employees

Ethics and Compliance Programs

Why Does Ethics Matter in Business?

Working for the Best Companies

1.3 Levels of Business Ethics

Asking Key Questions

Ethical Insight 1.1

1.4 Five Myths about Business Ethics

Myth 1: Ethics Is a Personal, Individual Affair, Not a Public or Debatable Matter

Myth 2: Business and Ethics Do Not Mix

Myth 3: Ethics in Business Is Relative

Myth 4: Good Business Means Good Ethics

Myth 5: Information and Computing Are Amoral

1.5 Why Use Ethical Reasoning in Business?

1.6 Can Business Ethics Be Taught and Trained?

1.7 Plan of the Book

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Chapter Summary

Questions

Exercises

Real-Time Ethical Dilemma

Cases

1. Bernard L. Madoff Investment Securities LLC: Wall Street Trading Firm

2. Cyberbullying: Who’s to Blame and What Can Be Done?

Notes

Chapter 2 Ethical Principles, Quick Tests, and Decision-Making Guidelines

2.1 Ethical Reasoning and Moral Decision Making

Three Criteria in Ethical Reasoning

Moral Responsibility Criteria

2.2 Ethical Principles and Decision Making

Ethical Insight 2.1

Utilitarianism: A Consequentialist (Results-Based) Approach

Universalism: A Deontological (Duty-Based) Approach

Rights: A Moral and Legal Entitlement-Based Approach

Justice: Procedures, Compensation, and Retribution

Virtue Ethics: Character-Based Virtues

The Common Good

Ethical Relativism: A Self-Interest Approach

Immoral, Amoral, and Moral Management

2.3 Four Social Responsibility Roles

2.4 Levels of Ethical Reasoning and Moral Decision Making

Personal Level

Organizational Level

Industry Level

Societal, International, and Global Levels

2.5 Identifying and Addressing Ethical Dilemmas

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Ethical Insight 2.2

Moral Creativity

Ethical Dilemma Problem Solving

12 Questions to Get Started

2.6 Individual Ethical Decision-Making Styles

Communicating and Negotiating across Ethical Styles

2.7 Quick Ethical Tests

2.8 Concluding Comments

Back to Louise Simms . . .

Chapter Summary

Questions

Exercises

Real-Time Ethical Dilemma

Cases

3. Ford’s Pinto Fires: The Retrospective View of Ford’s Field Recall Coordinator

4. Jerome Kerviel: Rogue Trader or Misguided Employee? What Really Happened at the Société Générale?

5. Samuel Waksal at ImClone

Notes

Chapter 3 Stakeholder and Issues Management Approaches

3.1 Stakeholder Theory and the Stakeholder Management Approach Defined

Stakeholders

Stakes

3.2 Why Use a Stakeholder Management Approach for Business Ethics?

Stakeholder Theory: Criticisms and Responses

3.3 How to Execute a Stakeholder Analysis

Taking a Third-Party Objective Observer Perspective

Role of the CEO in Stakeholder Analysis

Summary of Stakeholder Analysis

3.4 Negotiation Methods: Resolving Stakeholder Disputes

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Stakeholder Dispute Resolution Methods

3.5 Stakeholder Management Approach: Using Ethical Principles and Reasoning

3.6 Moral Responsibilities of Cross-Functional Area Professionals

Marketing and Sales Professionals and Managers as Stakeholders

R&D, Engineering Professionals, and Managers as Stakeholders

Accounting and Finance Professionals and Managers as Stakeholders

Public Relations Managers as Stakeholders

Human Resource Managers as Stakeholders

Summary of Managerial Moral Responsibilities

3.7 Issues Management, Integrating a Stakeholder Framework

What Is an Issue?

Ethical Insight 3.1

Other Types of Issues

Stakeholder and Issues Management: “Connecting the Dots”

Moral Dimensions of Stakeholder and Issues Management

Types of Issues Management Frameworks

3.8 Managing Crises

How Executives Have Responded to Crises

Crisis Management Recommendations

Chapter Summary

Questions

Exercises

Real-Time Ethical Dilemma

Cases

6. The BP Deepwater Horizon Explosion and Oil Spill: Crisis and Aftermath

7. Mattel Toy Recalls

8. Genetic Discrimination

Notes

Chapter 4 The Corporation and External Stakeholders: Corporate Governance: From the Boardroom to the Marketplace

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4.1 Managing Corporate Social Responsibility in the Marketplace

Ethical Insight 4.1

Free-Market Theory and Corporate Social Responsibility

Problems with the Free-Market Theory

Intermediaries: Bridging the Disclosure Gap

Point/CounterPoint

4.2 Managing Corporate Responsibility with External Stakeholders

The Corporation as Social and Economic Stakeholder

The Social Contract: Dead or Desperately Needed?

Balance between Ethical Motivation and Compliance

Covenantal Ethic

The Moral Basis and Social Power of Corporations as Stakeholders

Corporate Philanthropy

Managing Stakeholders Profitably and Responsibly: Reputation Counts

Ethical Insight 4.2

4.3 Managing and Balancing Corporate Governance, Compliance, and Regulation

Ethical Insight 4.3

Best Corporate Board Governance Practices

Sarbanes-Oxley Act

Pros and Cons of Implementing the Sarbanes-Oxley Act

The Federal Sentencing Guidelines for Organizations: Compliance Incentive

4.4 The Role of Law and Regulatory Agencies and Corporate Compliance

Why Regulation?

Laws and U.S. Regulatory Agencies

Laws Protecting Consumers

Laws Protecting the Environment

4.5 Managing External Issues and Crises: Lessons from the Past (Back to the Future?)

Chapter Summary

Questions

Exercises

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Real-Time Ethical Dilemma

Cases

9. Conscious Capitalism: What Is It? Why Do We Need It? Does It Work?

10. Goldman Sachs: Hedging a Bet and Defrauding Investors

11. Google Books

Notes

Chapter 5 Corporate Responsibilities, Consumer Stakeholders, and the Environment

5.1 Corporate Responsibility toward Consumer Stakeholders

Corporate Responsibilities and Consumer Rights

Consumer Protection Agencies and Law

5.2 Corporate Responsibility in Advertising

Ethics and Advertising

The Federal Trade Commission and Advertising

Pros and Cons of Advertising

Ethical Insight 5.1

Advertising and Free Speech

Paternalism, Manipulation, or Free Choice?

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

Advertising and the Internet

The Thin Line between Deceptive Advertising, Spyware, and Spam

Advertising to Children

Protecting Children

Tobacco Advertising

The Tobacco Controversy Continues

Alcohol Advertising

Ethical Insight 5.2

5.4 Managing Product Safety and Liability Responsibly

How Safe Is Safe? The Ethics of Product Safety

Ethical Insight 5.3

Product Liability Doctrines

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Legal and Moral Limits of Product Liability

Product Safety and the Road Ahead

5.5 Corporate Responsibility and the Environment

The Most Significant Environmental Problems

Causes of Environmental Pollution

Enforcement of Environmental Laws

The Ethics of Ecology

Green Marketing, Environmental Justice, and Industrial Ecology

Rights of Future Generations and Right to a Livable Environment

Recommendations to Managers

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

Chapter 6 The Corporation and Internal Stakeholders: Values-Based Moral Leadership, Culture, Strategy, and Self-Regulation

6.1 Leadership and Stakeholder Management

Defining Purpose, Mission, and Values

Ethical Insight 6.1

Leadership Stakeholder Competencies

Example of Companies Using Stakeholder Relationship Management

Ethical Insight 6.2

Spiritual Values, Practices, and Moral Courage in Leading

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Failure of Ethical Leadership

Ethical Dimensions of Leadership Styles

How Should CEOs as Leaders Be Evaluated and Rewarded?

6.2 Organizational Culture, Compliance, and Stakeholder Management

Organizational Culture Defined

High-Ethics Companies

Weak Cultures

6.3 Leading and Managing Strategy and Structure

Organizational Structure and Ethics

Boundaryless and Networked Organizations

6.4 Leading Internal Stakeholder Values in the Organization

6.5 Corporate Self-Regulation and Ethics Programs: Challenges and Issues

Ethical Insight 6.3

Organizations and Leaders as Moral Agents

Ethics Codes

Codes of Conduct

Problems with Ethics and Conduct Codes

Ombuds and Peer-Review Programs

Is the Organization Ready to Implement a Values-Based Stakeholder Approach? A Readiness Checklist

Chapter Summary

Questions

Exercises

Real-Time Ethical Dilemmas

Cases

17. Kaiser Permanente: A Crisis of Communication, Values, and Systems Failure

18. Social Networking and Social Responsibility

Notes

Chapter 7 Employee Stakeholders and the Corporation

7.1 Employee Stakeholders in the Changing Workforce

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The Aging Workforce

Generational Differences in the Workplace

Steps for Integrating a Multigenerational Workforce

Ethical Insight 7.1

Women in the Workforce

Same-Sex Marriages, Civil Unions, Domestic Partnerships, and Workforce Rights

The Increasing Cultural Mix: Minorities Are Becoming the Majority

Educational Weaknesses and Gaps

Point/CounterPoint

Mainstreaming Disabled Workers

Balancing Work and Life in Families

7.2 The Changing Social Contract between Corporations and Employees

Good Faith Principle Exception

Public Policy Principle Exception

Implied Contract Exception

7.3 Employee and Employer Rights and Responsibilities

Moral Foundation of Employee Rights

The Principle of Balance in the Employee and Employer Social Contract and the Reality of Competitive Change

Rights from Government Legislation

Employer Responsibilities to Employees

Employee Rights and Responsibilities to Employers

Employee Rights in the Workplace

Other Employee Rights and Obligations to Employers

Ethical Insight 7.2

7.4 Discrimination, Equal Employment Opportunity, and Affirmative Action

Discrimination

Equal Employment Opportunity and the Civil Rights Act

Age and Discrimination in the Workplace

Comparable Worth and Equal Pay

Affirmative Action

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Ethics and Affirmative Action

Reverse Discrimination: Arguments against Affirmative Action

Ethical Insight 7.3

7.5 Sexual Harassment in the Workplace

What Is Sexual Harassment?

Who Is Liable?

Tangible Employment Action and Vicarious Liability

Sexual Harassment and Foreign Firms in the United States

7.6 Whistle-Blowing versus Organizational Loyalty

When Whistle-Blowers Should Not Be Protected

Factors to Consider before Blowing the Whistle

Managerial Steps to Prevent External Whistle-Blowing

Chapter Summary

Questions

Exercises

Real-Time Ethical Dilemma

Cases

19. Preemployment Screening and Facebook: Ethical Considerations

20. Women on Wall Street: Fighting for Equality in a Male-Dominated Industry

Notes

Chapter 8 Business Ethics and Stakeholder Management in the Global Environment

8.1 The Connected Global Economy and Globalization

Ethical Insight 8.1

Globalization and the Forces of Change

8.2 Managing and Working in a “Flat World”: Professional Competencies and Ethical Issues

Shared Leadership in Teams’ Competency

Ethical Insight 8.2

Global Ethical Values and Principles

Know Your Own Cultural and Core Values, Your Organization’s, and Those with Whom You Are Working

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Cross-Cultural Business Ethical Issues Professionals May Experience

8.3 Societal Issues and Globalization: The Dark Side

International Crime and Corruption

Economic Poverty and Child Slave Labor

The Global Digital Divide

Westernization (Americanization) of Cultures

Loss of Nation-State Sovereignty

8.4 Multinational Enterprises as Stakeholders

Power of MNEs

8.5 Triple Bottom Line, Social Entrepreneurship, and Microfinancing

The Triple Bottom Line

Social Entrepreneurs and Social Enterprises

Microfinancing

8.6 MNEs: Stakeholder Values, Guidelines, and Codes for Managing Ethically

Employment Practices and Policies

Consumer Protection

Environmental Protection

Political Payments and Involvement

Basic Human Rights and Fundamental Freedoms

8.7 Cross-Cultural Ethical Decision Making and Negotiation Methods

External Corporate Monitoring Groups

Individual Stakeholder Methods for Ethical Decision Making

Four Typical Styles of International Ethical Decision Making

Hypernorms, Local Norms, and Creative Ethical Navigation

Chapter Summary

Questions

Exercises

Real-Time Ethical Dilemmas

Cases

21. Google in China: Still “Doing No Evil”?

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22. Sweatshops: Not Only a Global Issue

23. The U.S. Industrial Food System

Notes

Index

About the Author

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Preface

The sixth edition of Business Ethics: A Stakeholder and Issues Management Approach continues the mission of providing a practical, easy-to-read, engaging and contemporary text with detailed real-time contemporary and classic cases for students. This text updates the previous edition, adding fourteen new cases in addition to other new features discussed below.

We continue our quest to assist colleagues and students in understanding the changing environment from combined stakeholder and issues management approaches, based on the theory and practice that firms depend on stakeholders as well as stockholders for their survival and success. Acting morally while doing business is no longer a joking or even questionable topic of discussion. With the near shutdowns of the U.S. government, the subprime lending crisis, global climate changes, the fading middle class in America and other countries, China’s continuing economic expansion, and India’s inroads into the global economy, the stakes for the global economy are not trivial. Ethical behaviors are required, not optional, for this and future generations. Learning to think and reason ethically is the first step.

Business ethics is concerned with doing what is right over what is wrong, while acting in helpful over harmful ways, and with seeking the common good as well as our own welfare. This text addresses this foundational way of thinking by asking why does the modern corporation exist in the first place? What is its raison d’être? How does it treat its stakeholders? Business ethics engages these essential questions, and it is also about the purpose, values, and transactions of and between individuals, groups, and companies and their global alliances. Stakeholder theory and management, in particular, are what concern nonfinancial as well as the financial aspects of business behavior, policies, and actions. A stakeholder view of the firm complements the stockholder view and includes all parties and participants who have an interest—a stake—in the environment and society in which business operates.

Students and professionals need straightforward frameworks to thoughtfully and objectively analyze and then sort through complex issues in order to make decisions that matter—ethically, economically, socially, legally, and spiritually. The United States and indeed the whole world are different after the 9/11 attacks. Terrorism is a threat to everyone, everywhere, as the Boston bombings showed. Also threatening are the ongoing corporate scandals, the consequences of the Arab Spring, security issues worldwide, immigration problems, the inequalities in income distribution and wealth, the decay of the middle classes—all of these affect graduating students and those who wish to attend a university or college but cannot afford to. Business ethics affects our professional and personal relationships, careers, and lives, and this text attempts to identify and help analyze many of these issues and opportunities for change, using relevant ethical frameworks and reasoning.

The New Revised Sixth Edition: Why and How This Text Is Different

This edition builds on previous success factors to provide:

1. A competent, contemporary text grounded in factual and detailed research, while being easy to read and

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applying concepts and methods to real-time business-related situations.

2. Interesting and contemporary news stories, exercises, and examples.

3. In-depth, real-time customized cases (twenty-three in this edition) specifically designed for this book.

4. Ethical dilemmas experienced by real individuals, not hypothetical stories.

5. A detailed chapter on both stakeholder and issues management methods, with step-by-step explanations, not summarized or theoretical abstractions.

6. A straightforward business and managerial perspective supported by the latest research—not only a philosophical approach.

7. One of the most comprehensive texts on the topics of workforce and workplace demographics, generational trends, and issues relating to ethical issues.

8. Comprehensive coverage of the Sarbanes-Oxley Act, federal sentencing guidelines, and codes of conduct.

9. Personal, professional, organizational, and global perspectives, and information and strategies for addressing ethical dilemmas.

10. A decision-maker role for students in exercises and examples.

This edition adds features that enhance your ethical understanding and interest in contemporary issues in the business world. It also aligns even more closely with international Association to Advance Collegiate Schools of Business (AACSB) requirements to help students, managers, and leaders achieve in their respective fields. Additions and changes include:

• A Point/CounterPoint exercise has been added to several chapters to challenge students’ thinking and arguments on contemporary issues. Topics include “too big to fail” (TBTF) institutions; advertising on the Boston bomber; student loan debt; and file sharing and other forms of online sharing.

• Twenty-three cases, of which fourteen are new and three updated, dealing with national and international issues.

• Updated national ethics survey data is included throughout the text.

• New perspectives on generational differences and ethical workplace issues have been added.

• Each chapter has new and updated lead-off cases and scenarios to attract students’ attention.

• Updated data on global and international issues.

• Updated research and business press findings and stories have been added to each chapter to explain concepts and perspectives.

• Chapter 1 includes a section on personal ethics with Covey’s maturity continuum and cases on cyberbullying and Madoff’s Ponzi scheme.

• Chapter 2 now covers more material on personal ethics and has a section explaining the foundations of ethics with cases on Jerome Kerviel, rogue trader, Sam Waksal (ImClone), and the Ford Pinto.

• Chapter 3 is now the stakeholder and issues management chapter with a section explaining stakeholder theory in more depth with a lead-in case on the BP oil spill and aftermath in the Gulf of Mexico. Cases include genetic discrimination and the Mattel toy recalls.

• Chapter 4 has updated research throughout with new Ethical Insight inserts and cases on conscious

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capitalism, Goldman Sachs, and Google Books.

• Chapter 5 includes cases on fracking, for-profit education, neuromarketing, and gender discrimination.

• Chapter 6 includes new cases on Kaiser Permanente, and social networking and social responsibility.

• Chapter 7 remains a leader in the field on depth and coverage of current trends on generational differences, gender, and population changes. Cases include Facebook and Preemployment, and women on Wall Street.

• Chapter 8 features new research on skills and ethical capacities in international/global management and leadership. The “dark side” of globalization is updated with research on ethical issues in developing and underdeveloped countries. Cases include sweatshops and the U.S. industrial food system.

An Action Approach

The sixth edition puts the students in the decision-maker role when identifying and addressing ethical dilemmas with thought-provoking cases and discussion questions that ask, “What would you do if you had to decide a course of action?” Readers are encouraged to articulate and share their decision-making rationales and strategies. Readers will also learn how to examine changing ethical issues and business problems with a critical eye. We take a close look at the business reporting of the online editions of the Wall Street Journal, 60 Minutes, the New York Times, Businessweek, the Economist, and other sources.

Stakeholder and Issues Management Analysis

Stakeholder analysis is one of the most comprehensive approaches for identifying issues, groups, strategies, and outcomes. In the sixth edition, these methods are presented in an updated and more integrative Chapter 3. This chapter offers a useful starting point for mapping the who, what, when, where, why, and how of ethical problems relating to organizations and their stakeholders. Issues and crisis management frameworks are explained and integrated into approaches that complement the stakeholder analysis. Quick tests and negotiation techniques are presented in Chapters 2 and 8.

• A new instructor’s manual and PowerPoints.

• Streamlined case teaching notes.

• Suggested videos and web sites for each chapter.

Objectives and Advantages of This Textbook

• To use an action-oriented stakeholder and issues management approach for understanding the ethical dimensions of business, organizational, and professional complex issues, crises, and events that are happening now.

• To introduce and motivate students about the relevance of ethical concepts, principles, and examples through actual moral dilemmas that are occurring in their own lives, as well as with known national and international people, companies, and groups.

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• To present a simple, straightforward way of using stakeholder and issues management methods with ethical reasoning in the marketplace and in workplace relationships.

• To engage and expand readers’ awareness of ethical and unethical practices in business at the individual, group, organizational, and multinational levels through real-time—not hypothetical— ethical dilemmas, stories, and cases.

• To instill self-confidence and competence in the readers’ ability to think and act according to moral principles. The classroom becomes a lab for real-life decisions.

Structure of the Book

• Chapter 1 defines business ethics and familiarizes the reader with examples of ethics in business practices, levels of ethical analysis, and what can be expected from a course in business ethics. A Point/CounterPoint exercise engages students immediately.

• Chapter 2 has exchanged positions in the text with the former Chapter 3. This chapter engages students in a discussion of ethics at the personal, professional, organizational, and international levels. The foundations of ethical principles are presented in context with contemporary ethical decision- making approaches. Individual styles of moral decision making are also discussed in this section. Although the approach here is a micro-level one, these principles can be used to examine and explain corporate strategies and actions as well. (Executives, managers, employees, coalitions, government officials, and other external stakeholder groups are treated as individuals.)

• Chapter 3 introduces action-oriented methods for studying social responsibility relationships at the individual employee, group, and organizational levels. These methods provide and encourage the incorporation of ethical principles and concepts from the entire book.

• Chapter 4 presents ethical issues and problems that firms face with external consumers, government, and environmental groups. How moral can and should corporations be and act in commercial dealings? Do corporations have a conscience? Classic and recent crises resulting from corporate and environmental problems are covered.

• Chapter 5 explains ethical problems that consumers face in the marketplace: product safety and liability, advertising, privacy, and the Internet. The following questions are addressed: How free is “free speech”? How much are you willing to pay for safety? Who owns the environment? Who regulates the regulators in an open society?

• Chapter 6 presents the corporation as internal stakeholder and discusses ethical leadership, strategy, structure, alliances, culture, and systems as dominant themes regarding how to lead, manage, and be a responsible follower in organizations today.

• Chapter 7 focuses on the individual employee stakeholder and examines the most recent, new and changing workforce/workplace trends, moral issues, and dilemmas employees and managers face and must respond to in order to survive and compete in national and global economies. This chapter has been described as a “must-read” for every human resource professional.

• Chapter 8 begins by asking students if they are ready for professional international assignments. Ethical and leadership competencies of new entrants into the global workforce are introduced, before

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moving the discussion to global and multinational enterprises (MNEs) and ethical issues between MNEs, host countries, and other groups. Issues resulting from globalization are presented along with stakeholders who monitor corporate responsibility internationally. Negotiation techniques for professionals responsibly doing business abroad are presented.

Cases

Twenty-three cases are included in this edition, fourteen of which are new and three thoroughly updated.

Chapter 1

1. Bernard L. Madoff Investment Securities LLC: Wall Street Trading Firm

2. Cyberbullying: Who’s to Blame and What Can Be Done?

Chapter 2

3. Ford’s Pinto Fires: The Retrospective View of Ford’s Field Recall Coordinator

4. Jerome Kerviel: Rogue Trader or Misguided Employee? What Really Happened at the Société Générale?

5. Samuel Waksal at ImClone

Chapter 3

6. The BP Deepwater Horizon Explosion and Oil Spill: Crisis and Aftermath

7. Mattel Toy Recalls

8. Genetic Discrimination

Chapter 4

9. Conscious Capitalism: What Is It? Why Do We Need It? Does It Work?

10. Goldman Sachs: Hedging a Bet and Defrauding Investors

11. Google Books

Chapter 5

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?

Chapter 6

17. Kaiser Permanente: A Crisis of Communication, Values, and Systems Failure

18. Social Networking and Social Responsibility

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Chapter 7

19. Preemployment Screening and Facebook: Ethical Considerations

20. Women on Wall Street: Fighting for Equality in a Male-Dominated Industry

Chapter 8

21. Google in China: Still “Doing No Evil”?

22. Sweatshops: Not Only a Global Issue

23. The U.S. Industrial Food System

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Acknowledgments

This book continues the practice that has endured over the last several years that I have been teaching business ethics to MBA students and executives. My consulting work also informs this edition in numerous ways. I would like to thank all my students for their questions, challenges, and class contributions, which have stimulated the research and presentations in this text. I also thank all the professional staff at Berrett-Koehler who helped make this edition possible and the faculty and staff at Bentley University who contributed resources and motivation for this edition. I am grateful to Michael Hoffman and his staff at Bentley University’s Center for Business Ethics, whose shared resources and friendship also helped with this edition.

I also recognize and extend thanks to those whose reviews of previous editions were very helpful, and whose comments on this edition were instructive as well: Anna Pakman, Ohio Dominican University; Buck Buchanan, Defiance College; Francine Guice, Indiana University-Purdue University Fort Wayne; Lois Smith, University of Wisconsin; Ross Mecham, Virginia Polytechnic Institute and State University; Christina Stamper, Western Michigan University.

Special thanks go to Laura Gray, Lu Bai, and Matt Zamorski, former and current graduate students at Bentley University, without whose help this edition would not have been possible.

Joseph W. Weiss Bentley University

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Case Authorship

Editing help was provided by Laura Gray, Lu Bai, and Matt Zamorski.

Case 1 Bernard L. Madoff Investment Securities LLC: Wall Street Trading Firm

Alba Skurti, Bentley University, under the direction of Professor Joseph W. Weiss, Bentley University.

Case 2 Cyberbullying: Who’s to Blame and What Can Be Done?

Roseleen Dello Russo and Lauren Westling, Bentley University, under the direction of Professor Joseph W. Weiss, Bentley University.

Case 3 Ford’s Pinto Fires: The Retrospective View of Ford’s Field Recall Coordinator

Dennis A. Gioia, Professor of Organizational Behavior, Smeal College of Business, Pennsylvania State University, provided the personal reflections in this case. Michael K. McCuddy, Valparaiso University, provided background information and discussion questions.

Case 4 Jerome Kerviel: Rogue Trader or Misguided Employee? What Really Happened at the Société Générale?

Steve D’Aquila, Bentley University, under the direction of Professor Joseph W. Weiss, Bentley University.

Case 5 Samuel Waksal at ImClone

Amy Vensku, MBA Bentley student under the direction of Professor Joseph W. Weiss, and edited and adapted for this text by Michael K. McCuddy, Valparaiso University and Matt Zamorski, Bentley University.

Case 6 The BP Deepwater Horizon Explosion and Oil Spill: Crisis and Aftermath

Jill Stonehouse and Bianlbahen Patel, Bentley University, under the direction of Professor Joseph W. Weiss, Bentley University.

Case 7 Mattel Toy Recalls

Mike Ladd, Bentley University, under the direction of Professor Joseph W. Weiss, Bentley University.

Case 8 Genetic Discrimination

Jaclyn Publicover, Bentley University, under the direction of Professor Joseph W. Weiss, Bentley University.

Case 9 Conscious Capitalism: What Is It? Why Do We Need It? Does It Work?

John Warden, Bentley University, edited by Professor Joseph W. Weiss.

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Case 10 Goldman Sachs: Hedging a Bet and Defrauding Investors

Dean Koutris and Jess Sheynman, Bentley University, under the direction of Professor Joseph W. Weiss, Bentley University.

Case 11 Google Books

Steve D’Aquila, Bentley University, under the direction of Professor Joseph W. Weiss, Bentley University.

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

Alicia Cabrera and Nate Pullen, Bentley University, under the direction of Professor Joseph W. Weiss, Bentley University.

Case 13 Fracking: Drilling for Disaster?

Lauren Casas and Ned Coffee, MBA Bentley students, under the direction of Professor Joseph W. Weiss, Bentley University, with editorial revisions made by Laura Gray, Matt Zamorski, and Lu Bai.

Case 14 Neuromarketing

Eddy Fitzgerald and Jennifer Johnson, Bentley University, under the direction of Professor Joseph W. Weiss, Bentley University.

Case 15 WalMart: Challenges with Gender Discrimination

Michael K. McCuddy, the Louis S. and Mary L. Morgal Chair of Christian Business Ethics and Professor of Management, College of Business Administration, Valparaiso University.

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

Sean Downey, Bentley University, under the direction of Professor Joseph W. Weiss, Bentley University.

Case 17 Kaiser Permanente: A Crisis of Communication, Values, and Systems Failure

Sarah O’Neill, Bentley University, under the direction of Professor Joseph W. Weiss, Bentley University.

Case 18 Social Networking and Social Responsibility

Adam Schilke, Kimberly Benevides, and Eden Kyne, Bentley University, under the direction of Professor Joseph W. Weiss, Bentley University.

Case 19 Preemployment Screening and Facebook: Ethical Considerations

Carl Forziati, Bentley University, under the direction of Professor Joseph W. Weiss, Bentley University.

Case 20 Women on Wall Street: Fighting for Equality in a Male-Dominated Industry

Monica Meunier, under the direction of Professor Joseph W. Weiss, and adapted and edited for this text by

29

Michael K. McCuddy, Valparaiso University.

Case 21 Google in China: Still “Doing No Evil”?

Professor Joseph W. Weiss, Bentley University, edited by Lu Bai.

Case 22 Sweatshops: Not Only a Global Issue

Michael K. McCuddy, the Louis S. and Mary L. Morgal Chair of Christian Business Ethics and Professor of Management, College of Business Administration, Valparaiso University.

Case 23 The U.S. Industrial Food System

Brenda Pasquarello, Bentley University, under the direction of Professor Joseph W. Weiss, Bentley University.

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1 BUSINESS ETHICS, THE CHANGING ENVIRONMENT,

AND STAKEHOLDER MANAGEMENT

1.1 Business Ethics and the Changing Environment

Point/CounterPoint

1.2 What Is Business Ethics? Why Does It Matter?

1.3 Levels of Business Ethics

Ethical Insight 1.1

1.4 Five Myths about Business Ethics

1.5 Why Use Ethical Reasoning in Business?

1.6 Can Business Ethics Be Taught and Trained?

1.7 Plan of the Book

Chapter Summary

Questions

Exercises

Real-Time Ethical Dilemma

Cases

1. Bernard L. Madoff Investment Securities LLC: Wall Street Trading Firm

2. Cyberbullying: Who’s to Blame and What Can Be Done?

Notes

OPENING CASE

Blogger: “Hi. i download music and movies, limewire and torrent. is it illegal for me to download or is it just illegal for the person uploading it. does anyone know someone who was caught and got into trouble for it, what happened them. Personally I dont see a difference between

downloading a song or taping it on a cassette from a radio!!”1

The Recording Industry Association of America (RIAA), on behalf of its member companies and copyright owners, has sued more than 30,000 people for unlawful downloading. RIAA detectives log on to peer-to-peer networks where they easily identify illegal activity since users’ shared folders are visible to all. The majority of these cases have been settled out of court for $1,000—$3,000, but fines per music track can go up to $150,000 under the Copyright Act.

The nation’s first file-sharing defendant to challenge an RIAA lawsuit, Jammie Thomas-Rasset, reached the end of the appeals process to overturn a jury-determined $222,000 fine in 2013. She was ordered to pay

31

this amount, which she argued was unconstitutionally excessive, for downloading and sharing 24 copyrighted songs using the now-defunct file-sharing service Kazaa. The Supreme Court has not yet heard a file-sharing case, having also declined without comment to review the only other appeal following Thomas-Rasset’s. (In that case, the Court let stand a federal jury-imposed fine of $675,000 against Joel Tenenbaum for downloading and sharing 30 songs.) “As I’ve said from the beginning, I do not have now, nor do I anticipate in the future, having $220,000 to pay this,” Thomas-Rasset said. “If they do decide to try and collect, I will

file for bankruptcy as I have no other option.”2

Students often use university networks to illegally distribute copyrighted sound recordings on unauthorized peer-to-peer services. The RIAA has issued subpoenas to universities nationwide, including networks in Connecticut, Georgia, Kansas, Michigan, Minnesota, New Jersey, Pennsylvania, Rhode Island, Texas, Virginia, and Washington. Most universities give up students’ identities only after offering an opportunity to stop the subpoena with their own funds. As in earlier rounds of lawsuits, the RIAA is utilizing the “John Doe” litigation process, which is used to sue defendants whose names are not known.

RIAA president Cary Sherman has discussed the ongoing effort to reach out to the university community with proactive solutions to the problem of illegal file-sharing on college campuses: “It remains as important as ever that we continue to work with the university community in a way that is respectful of the law as well as university values. That is one of our top priorities, and we believe our constructive outreach has been enormously productive so far. Along with offering students legitimate music services, campus-wide educational and technological initiatives are playing a critical role. But there is also a complementary need for enforcement by copyright owners against the serious offenders—to remind people that this activity is illegal.”

He added: “Illegally downloading music from the Internet costs everyone—the musicians not getting compensated for their craft, the owners and employees of the thousands of record stores that have been forced to close, legitimate online music services building their businesses, and consumers who play by the rules and purchase their music legally.”

On the other hand, once the well-funded RIAA initiates a lawsuit, many defendants are pressured to settle out of court in order to avoid oppressive legal expenses. Others simply can’t take the risk of large fines that juries have shown themselves willing to impose.

New technologies and the trend toward digital consumption have made intellectual property both more critical to businesses’ bottom lines and more difficult to protect. No company, big or small, is immune to the intellectual property protection challenge. Illegal downloads of music are not the only concern. A new wave of lawsuits is being filed against individuals who illegally download movies through sites like Napster and BitTorrent. In 2011, the U.S. Copyright Group initiated “the largest illegal downloading case in US history” at the time, suing over 23,000 file sharers who illegally downloaded Sylvester Stallone’s movie The Expendables. This case was expanded to include the 25,000 users who also downloaded Voltage Pictures’ The Hurt Locker, which increased the total number of defendants to approximately 50,000, all of whom used peer- to-peer downloading through BitTorrent. The lawsuits were filed based on the illegal downloads made from an Internet Protocol (IP) address. The use of an IP address as identifier presents ethical issues—for example, should a parent be responsible for a child downloading a movie through the family’s IP address? What about a landlord who supplied Internet to a tenant?

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Digital books are also now in play. In 2012, a lawsuit was filed in China against technology giant Apple for sales of illegal book downloads through its App Store. Nine Chinese authors are demanding payment of $1.88 million for unauthorized versions of their books that were submitted to the App Store and sold to consumers for a profit. Again, the individual IP addresses are the primary way of determining who performed the illegal download. Telecom providers and their customers face privacy concerns, as companies are being asked for the names of customers associated with IP addresses identified with certain downloads.

Privacy activists argue that an IP address (which identifies the subscriber but not the person operating the computer) is private, protected information that can be shown during criminal but not civil investigations. Fred von Lohmann, senior staff attorney with the Electronic Frontier Foundation, has suggested on his organization’s blog that “courts are not prepared to simply award default judgments worth tens of thousands

of dollars against individuals based on a piece of paper backed by no evidence.”3

1.1 Business Ethics and the Changing Environment

The Internet is changing everything: the way we communicate, relate, read, shop, bank, study, listen to music, get news and “TV,” and participate in politics. Of course the last “third billion” of people in undeveloped

countries are not participating on broadband as is the rest of the world,4 but they predictably will, first through mobile phones. Businesses and governments operate in and are disrupted by changing technological, legal, economic, social, and political environments with competing stakeholders and power claims, as many Middle Eastern countries in particular are experiencing. Also, as this chapter’s opening case shows, there is more than one side to every complex issue and debate involving businesses, consumers, families, other institutions, and professionals. When stakeholders and companies cannot agree or negotiate competing claims among themselves, the issues generally go to the courts.

The RIAA, in the opening case, does not wish to alienate too many college students because they are also the music industry’s best customers. At the same time, the association believes it must protect those groups it represents. Not all stakeholders in this controversy agree on goals and strategies. For example, not all music artists oppose students downloading or even sharing some of their copyrighted songs. Offering free access to some songs is a good advertising tactic. On the other hand, shouldn’t those songwriters and recording companies who spend their time and money creating, marketing, distributing, and selling their intellectual property protect that property? Is file sharing, without limits or boundaries, stealing other people’s property? If not, what is this practice to be called? If file sharing continues in some form, and ends up helping sales for many artists, will it become legitimate? Should it? Is this just the new way business models are being changed by 15–26 year olds? While the debate continues, individuals (15 year olds and younger in many cases) who still illegally share files have rights as private citizens under the law, and recording companies have rights of property protection. Who is right and who is wrong, especially when two rights collide? Who stands to lose and who to gain? Who gets hurt by these transactions? Which group’s ethical positions are most defensible?

Stakeholders are individuals, companies, groups, and even governments and their subsystems that cause and respond to external issues, opportunities, and threats. Corporate scandals, globalization, deregulation, mergers, technology, and global terrorism have accelerated the rate of change and brought about a climate of uncertainty in which stakeholders must make business and moral decisions. Issues concerning questionable

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ethical and illegal business practices confront everyone, as the following examples illustrate:

• The subprime lending crisis in 2008 involved stakeholders as varied as consumers, banks, mortgage companies, real estate firms, and homeowners. Many companies that sold mortgages to unqualified buyers lied about low-risk, high-return products. Wall Street companies, while thriving, are also settling lawsuits stemming from the 2008 crisis. In 2013, “Hundreds of thousands of subprime borrowers are still struggling. Subprime securities still pose a significant legal risk to the firms that packaged them, and they use up capital

that could be deployed elsewhere in the economy.”5 In 2011, Bank of America announced that it would “take a whopping $20 billion hit to put the fallout from the subprime bust behind it and satisfy claims from

angry investors.”6 The ethics and decisions precipitating the crisis contributed to tilting the U.S. economy toward recession, with long-lasting effects.

• The corporate scandals in the 1990s through 2001 at Enron, Adelphia, Halliburton, MCI WorldCom, Tyco, Arthur Andersen, Global Crossing, Dynegy, Qwest, Merrill Lynch, and other firms that once jarred shareholder and public confidence in Wall Street and corporate governance may now seem like ancient history to those with short-term memories. Enron’s bankruptcy with assets of $63.4 billion defies imagination, but WorldCom’s bankruptcy set the record for the largest corporate bankruptcy in U.S. history (Benston, 2003). Only 22% of Americans express a great deal or quite a lot of confidence in big business,

compared to 65% who express confidence in small business.7 Confidence in big business reached its highest point in 1974 at 34%, and even during the dot-com boom in the late 1990s it hovered at 30%. The lowest rating of 16% was polled in 2009 after the subprime lending crisis, and although public confidence has slightly increased, the significant differential in American confidence between big and small business belies a

public mistrust of big business that may not be easily repaired.8

• The debate continues over excessive pay to those chief executive officers (CEOs) who posted poor corporate performance. Large bonuses paid out during the financial crisis made executive pay a controversial topic, yet investors did little to solve the issue. “Investors had the opportunity to provide advisory votes on executive pay at financial firms that received TARP funds in 2009, and they gave thumbs up to pay packages at every single one of those institutions. This proxy season, with advisory votes now widely available (thanks to the Dodd-Frank Act), only five companies’ executive compensation packages have received a thumbs down from

shareholders.”9 The Bureau of Labor Statistics noted that while median CEO salaries grew at 27% in 2010, overall worker pay only increased by 2.1%. “It’s been almost three years since Congress directed the Securities and Exchange Commission to require public companies to disclose the ratio of their chief executive officers’ compensation to the median of the rest of their employees’. The agency has yet to produce

a rule.”10 An independent 2013 analysis by Bloomberg showed that “Across the Standard & Poor’s 500 Index of companies, the average multiple of CEO compensation to that of rank-and-file workers is 204, up

20 percent since 2009.”11

• Some critics on the right of the political spectrum argue that companies are becoming overregulated since the scandals. Others argue there is not sufficient regulation of the largest financial companies. The Sarbanes- Oxley Act of 2002 is one response to those scandals. This act states that corporate officers will serve prison time and pay large fines if they are found guilty of fraudulent financial reporting and of deceiving

34

shareholders. Implementing this legislation requires companies to create accounting oversight boards,

establish ethics codes, show financial reports in greater detail to investors, and have the CEO and chief financial officer (CFO) personally sign off on and take responsibility for all financial statements and internal controls. Implementing these provisions is costly for corporations. Some claim their profits and global

competitiveness are negatively affected and the regulations are “unenforceable.”12

• U.S. firms are outsourcing work to other countries to cut costs and improve profits, work that some argue could be accomplished in the United States. Estimates of U.S. jobs outsourced range from 104,000 in 2000 to 400,000 in 2004, and to a projected 3.3 million by 2015. “Forrester Research estimated that 3.3 million U.S. jobs and about $136 billion in wages would be moved to overseas countries such as India, China, and Russia by 2015. Deloitte Consulting reported that 2 million jobs would move from the United States and Europe to overseas destinations within the financial services business. Across all industries the emigration of

service jobs can be as high as 4 million.”13 Do U.S. employees who are laid off and displaced need protection, or is this practice part of another societal business transformation? Is the United States becoming part of a global supply chain in which outsourcing is “business as usual” in a “flat world,” or is the working middle class in the United States and elsewhere at risk of predatory industrial practices and ineffective

government polices?14

• Will robots, robotics, and artificial intelligence (AI) applications replace humans in the workplace? This interesting but disruptive development poses concerns. “The outsourcing of human jobs as a side effect of globalization has arguably contributed to the current unemployment crisis. However, a growing trend sees humans done away with altogether, even in the low-wage countries where many American jobs have

landed”.15 What will be the ethical implications of the next wave of AI development, “where full-blown autonomous self-learning systems take us into the realm of science fiction—delivery systems and self-driving

vehicles alone could change day-to-day life as we know it, not to mention the social implications.”16 AI also extends into electronic warfare (drones), education (robot assisted or led), and manufacturing (a Taiwanese company replaced a “human force of 1.2 million people with 1 million robots to make laptops, mobile

devices and other electronics hardware for Apple, Hewlett-Packard, Dell and Sony”).17 One futurist predicted that as many as 50 million jobs could be lost to machines by 2030, and even 50% of all human jobs by 2040.

These large macro-level issues underlie many ethical dilemmas that affect business and individual decisions among stakeholders in organizations, professions, as well as individual lives. Before discussing stakeholder theory, and the management approach that it is based on, and how these perspectives and methods can help individuals and companies better understand how to make more socially responsible decisions, we take a brief look at the broader environmental forces that affect industries, organizations, and individuals.

Seeing the “Big Picture” Pulitzer Prize-winning journalist Thomas Friedman, continues to track megachanges on a global scale. His 2011 book, That Used to Be Us: How America Fell Behind in the World It Invented and How We Can Come Back, suggests an agenda for change to meet larger challenges. His books, The World Is Flat 3.0, and The Lexus and

35

the Olive Tree, vividly illustrate a macroenvironmental perspective that provides helpful insights into

stakeholder and issues management mind-sets and approaches.18 Friedman notes, “Like everyone else trying to adjust to this new globalization system and bring it into focus, I had to retrain myself and develop new lenses to see it. Today, more than ever, the traditional boundaries between politics, culture, technology, finance, national security, and ecology are disappearing. You often cannot explain one without referring to the others, and you cannot explain the whole without reference to them all. I wish I could say I understood all this when I began my career, but I didn’t. I came to this approach entirely by accident, as successive changes in my

career kept forcing me to add one more lens on top of another, just to survive.”19

After quoting Murray Gell-Mann, the Nobel laureate and former professor of theoretical physics at Caltech, Friedman continues, “We need a corpus of people who consider that it is important to take a serious and professional look at the whole system. It has to be a crude look, because you will never master every part or every interconnection. Unfortunately, in a great many places in our society, including academia and most bureaucracies, prestige accrues principally to those who study carefully some [narrow] aspect of a problem, a trade, a technology, or a culture, while discussion of the big picture is relegated to cocktail party conversation. That is crazy. We have to learn not only to have specialists but also people whose specialty is to spot the

strong interactions and entanglements of the different dimensions, and then take a crude look at the whole.”20

POINT/COUNTERPOINT File Sharing: Harmful Theft or Sign of the Times?

This exercise provides a more complete case with student interaction.

“I watch some of my favorite shows on hulu.com for free and I buy others on Amazon or iTunes. I pay a fee to use Pandora for ad-free internet radio, or Spotify for specific music playlists. But like many of my friends, I don’t own a TV, so when there is no other way to access a show, I will download it from a torrent [file-sharing] site.”

—Interview with a Generation Y “Millennial”

The Recording Industry Association of America (RIAA), on behalf of its member companies and copyright owners, has sued more than 30,000 people for unlawful downloading. RIAA detectives log on to peer-to-peer networks where they easily identify illegal activity since users’ shared folders are visible to all. The majority of these cases have been settled out of court for $1,000—$3,000, but fines per music track can go up to $150,000 under the Copyright Act.

The nation’s first file-sharing defendant to challenge an RIAA lawsuit, Jammie Thomas-Rasset, in 2013 reached the end of the appeals process to overturn a jury-determined $222,000 fine. She was ordered to pay this amount, which she argued was unconstitutionally excessive, for downloading and sharing 24 copyrighted songs using the now-defunct file-sharing service Kazaa. The Supreme Court has not yet heard a file-sharing case, having also declined without comment to review the only other appeal following Thomas-Rasset’s.

Students often use university networks to illegally distribute copyrighted sound recordings on unauthorized peer-to-peer services. The RIAA issues subpoenas to universities nationwide, including networks in Connecticut, Georgia, Kansas, Michigan, Minnesota, New Jersey, Pennsylvania, Rhode Island, Texas, Virginia, and Washington. Most universities give up students’ identities only after offering an opportunity to stop the subpoena with their own funds. As in earlier rounds of lawsuits, the RIAA is utilizing the “John Doe”

36

litigation process, which is used to sue defendants whose names are not known.

RIAA President Cary Sherman cites the ongoing effort to reach out to the university community with proactive solutions to the problem of illegal file sharing on college campuses, saying, “It remains as important as ever that we continue to work with the university community in a way that is respectful of the law as well as university values. . . . Along with offering students legitimate music services, campus-wide educational and technological initiatives are playing a critical role. But there is also a complementary need for enforcement by copyright owners against the serious offenders—to remind people that this activity is illegal and . . . costs everyone.”

On the other hand, once the well-funded RIAA initiates a lawsuit, many defendants are pressured to settle out of court in order to avoid oppressive legal expenses. Others simply can’t take the risk of large fines that juries have shown themselves willing to impose.

New technologies and the trend toward digital consumption have made intellectual property both more critical to businesses’ bottom line and more difficult to protect. No company, big or small, is immune to the IP protection challenge. Illegal downloads of music are not the only concern. A new wave of lawsuits is being filed against individuals who illegally download movies through sites like Napster and BitTorrent.

In 2011, the U.S. Copyright Group initiated “the largest illegal downloading case in U.S. history” at the time, suing over 23,000 file sharers who illegally downloaded Sylvester Stallone’s movie, The Expendables. This case was expanded to include the 25,000 users who also downloaded Voltage Pictures’ The Hurt Locker, which increased the total number of defendants to approximately 50,000 who used peer-to-peer downloading through BitTorrent. The lawsuits are filed based on the illegal downloads made from an IP address.

Digital books are also now in play. In 2012, a lawsuit was filed in China against technology giant Apple for sales of illegal book downloads through the App Store. Nine Chinese authors are demanding payment of $1.88 million for unauthorized versions of their books that were submitted to the App Store and sold to consumers for a profit. Again, the individual IP addresses are the primary way of determining who performed the illegal download. Telecom providers and their customers face privacy concerns, as companies are being asked for the names of customers associated with IP addresses identified with certain downloads.

Privacy activists argue that an IP address (which identifies the subscriber but not the person operating the computer) is private, protected information that can be shown during criminal but not civil investigations. Fred von Lohmann, senior staff attorney with the Electronic Frontier Foundation, has suggested on his organization’s blog that “courts are not prepared to simply award default judgments worth tens of thousands of dollars against individuals based on a piece of paper backed by no evidence.”

Instructions: (1) Each student team individually adopts either the Point or CounterPoint argument and justifies their reasons (arguments using this case and other evidence/opinions). (2) Then, either in teams or designated arrangements, each shares their reasons. (3) The class is debriefed and insights shared.

POINT: File sharing is theft, and endangers the entire structure of incentives that allows the creation of digital media. Downloading even one song illegally has severe costs for the musicians and the owners and employees of the companies that produce songs, and legitimate online music services, not to mention consumers who purchase music legally. Those responsible, even peripherally, for illegal file sharing should be tracked down by any means possible and held accountable for these costs and damages.

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COUNTERPOINT: The generation that grew up with the advent of digital media has a well-cultivated expectation of ease and freedom when it comes to accessing music, television, and books using the Internet. Companies are willing to capitalize on that ease to boost their profits. It is unethical to use technology and the legal system to “make examples” of those (possibly innocent bystanders whose IP addresses were used by others) who are simply showing the flaws and gaps in distribution strategies.

SOURCES The exercise was authored by Taya Weiss and draws on the following sources:

Brian, M. (January 7, 2012). Apple facing $1.88 million lawsuit in China over sales of illegal book downloads. http://thenextweb.com/apple/2012/01/07/apple-facing-1-88-million-lawsuit-in-china-over-sales-of- illegal-book-downloads/, accessed March 7, 2012.

Kravets, David. (March 18, 2013). Supreme Court OKs $222K verdict for sharing 24 songs. Wired.com. http://www.wired.com/threatlevel/2013/03/scotus-jammie-thomas-rasset/, accessed January 8, 2014.

Kirk, Jeremy. (2008). U.S. judge pokes hole in file-sharing lawsuit. Court ruling could force the music industry to provide more evidence against people accused of illegal file sharing, legal experts say. InfoWorld.com. http://www.infoworld.com/article/08/02/26/US-judge-pokes-hole-in-file-sharing- lawsuit_1.html, accessed March 7, 2012.

McMillan, G. (May 10, 2011). Are you one of 23,000 defendants in the U.S.’ biggest illegal download lawsuit? Time.com. http://techland.time.com/2011/05/10/are-you-one-of-23000-defendants-in-the-us- biggest-illegal-download-lawsuit/, accessed March 7, 2012.

Pepitone, J. (June 10, 2011). 50,000 BitTorrent users sued for alleged illegal downloads. CNNMoney.com. http://money.cnn.com/2011/06/10/technology/bittorrent_lawsuits/index.htm, accessed March 7, 2012.

Recording Industry Association of America. (March 2008). New wave of illegal file sharing lawsuits brought by RIAA. RIAA.com. http://www.riaa.com/newsitem.php? news_year_filter=2004&resultpage=10&id=D119AD49-5C18-2513-AB36-A06ED24EB13D, accessed March 7, 2012.

von Lohmann, F. (February 25, 2008). RIAA File-Sharing Complaint Fails to Support Default Judgment. Electronic Frontier Foundation. https://www.eff.org/deeplinks/2008/02/riaa-file-sharing-complaint-fails- support-default-judgment, accessed February 19, 2014.

Environmental Forces and Stakeholders Organizations and individuals are embedded in and interact with multiple changing local, national, and international environments, as the above discussion illustrates. These environments are increasingly merging into a global system of dynamically interrelated interactions among businesses and economies. We must “think globally before acting locally” in many situations. The macro-level environmental forces shown in Figure 1.1 affect the performance and operation of industries, organizations, and jobs. This framework can be used as a starting point to identify trends, issues, opportunities, and ethical problems that affect people and stakes in different levels. A first step toward understanding stakeholder issues is to gain an understanding of environmental forces that influence stakes. As we present an overview of these environmental forces here,

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think of the effects and pressures each of the forces has on you.

Figure 1.1 Environmental Dimensions Affecting Industries, Organizations, and Jobs

The economic environment continues to evolve into a more global context of trade, markets, and resource flows. Large and small U.S. companies are expanding businesses and products overseas. Stock and bond market volatility and in-terdependencies across international regions are unprecedented, including the European market and the future of the euro, which is challenged by some defaulting economies. The rise of China and India presents new trade opportunities and business practices, if human rights problems can be solved in those countries. Do you see your career and next job being affected by this round of globalization?

The technological environment has ushered in the advent of electronic communication, online social networking, and near-constant connectivity to the Internet, all of which are changing economies, industries, companies, and jobs. U.S. jobs that are based on routine technologies and rules-oriented procedures are vulnerable to outsourcing. Online technologies facilitate changing corporate “best practices.” Company supply chains are also becoming virtually and globally integrated online. Although speed, scope, economy of scale, and efficiency are transforming transactions through information technology, privacy and surveillance issues continue to emerge. The boundary between surveillance and convenience also continues to blur. Has the company or organization for which you work used surveillance to monitor Internet use?

Electronic democracy is changing the way individuals and groups think and act on political issues. Instant web surveys broadcast over interactive web sites have created a global chat room for political issues. Creation of online communities in the 2004, 2008, and 2012 presidential campaigns have proved an effective political strategy for both U.S. parties’ fundraising programs and mobilizing of new voters. Have you used the Internet

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to participate in a national, local, or regional political process?

The government and legal environments continue to create regulatory laws and procedures to protect consumers and restrict unfair corporate practices. Since Enron and other corporate scandals, the Sarbanes- Oxley Act of 2002 and the revised 2004 Federal Sentencing Guidelines were created to audit and constrain corporate executives from blatant fraudulence on financial statements. The Dodd-Frank Act of 2010 established the Consumer Financial Protection Bureau, whose mission is to protect consumers by carrying out federal consumer financial laws, educating consumers, and hearing complaints from the public, and more

recently that Bureau has been functioning to help citizens with credit card abuses in particular.21

Several federal agencies are also changing—or ignoring—standards for corporations. The U.S. Food and Drug Administration (FDA), for example, has sped up the required market approval time for new drugs sought by patients with life-threatening diseases, but lags behind in taking some unsafe drugs off the market.

Uneven regulation of fraudulent and anticompetitive practices affects competition, shareholders, and consumers. Executives from Enron and other large U.S. firms involved in scandals have been tried and sentenced. Should the banks that loaned them funds also be charged with wrongdoing? Should U.S. laws be enforced more evenly? Who regulates the regulators? The subprime lending crisis raises some of the same questions. Who can the public trust for advice about mortgages and substantial loans? Who is responsible and accountable for educating and constraining the public in such transactions in a democratic, capitalist society?

Legal questions and issues affect all of these environmental dimensions and every stakeholder and investor. How much power should the government have to administer laws to protect citizens and ensure that business transactions are fair? Also, who protects the consumer in a free-market system? These issues, which are exemplified in the file-sharing controversy as summarized in this chapter’s opening case, question the nature and limits of consumer and corporate laws in a free-market economy.

The demographic and social environment continues to change as national boundaries experience the effects of globalization and the workforce becomes more diverse. Employers and employees are faced with aging and very young populations; minorities becoming majorities; generational differences; and the effects of downsizing and outsourcing on morale, productivity, and security. How can companies effectively integrate a workforce that is increasingly both younger and older, less educated and more educated, technologically sophisticated and technologically unskilled?

In this book these environmental factors are incorporated into a stakeholder and issues management approach that also includes an ethical analysis of actors external and internal to organizations. The larger perspective underlying these analytical approaches is represented by the following question: How can the common good of all stakeholders in controversial situations be realized?

Stakeholder Management Approach How do companies, the media, political groups, consumers, employees, competitors, and other groups respond in socially ethical and responsible ways when they effect and are affected by an issue, dilemma, threat, or opportunity from the environments just described? The stakeholder theory expands a narrow view of corporations from a stockholder-only perspective to include the many stakeholders who are also involved in how corporations envision the future, treat people and the environment, and serve the common good for the

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many. Implementing this view starts with understanding the ethical imperatives and moral understandings that corporations that use natural resources and the environment must serve, as well as providing for those who buy their products and services. This view and accompanying methods are explained in more detail in Chapters 2 and 3 especially and inform the whole text.

The stakeholder theory begins to address these questions by enabling individuals and groups to articulate collaborative, win—win strategies based on:

1. Identifying and prioritizing issues, threats, or opportunities.

2. Mapping who the stakeholders are.

3. Identifying their stakes, interests, and power sources.

4. Showing who the members of coalitions are or may become.

5. Showing what each stakeholder’s ethics are (and should be).

6. Developing collaborative strategies and dialogue from a “higher ground” perspective to move plans and interactions to the desired closure for all parties.

Chapter 3 lays out specific steps and strategies for analyzing stakeholders. Here, our aim is to develop awareness of the ethical and social responsibilities of different stakeholders. As Figure 1.2 illustrates, there can be a wide range of stakeholders in any situation. We turn to a general discussion of “business ethics” in the following section to introduce the subject and motivate you to investigate ethical dimensions of organizational and professional behavior.

Figure 1.2 Primary vs. Secondary Stakeholder Groups

1.2 What Is Business Ethics? Why Does It Matter?

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Business ethicists ask, “What is right and wrong, good and bad, harmful and beneficial regarding decisions and actions in organizational transactions?” Ethical reasoning and logic is explained in more detail in Chapter 2, but we note here that approaching problems using a moral frame of reference can influence solution paths as well as options and outcomes. Since “solutions” to business and organizational problems may have more than one alternative, and sometimes no right solution may seem available, using principled ethical thinking provides structured and systematic ways of decision making based on values, not only perceptions that may be distorted, pressures from others, or the quickest and easiest available options—that may prove more harmful.

What Is Ethics and What Are the Areas of Ethical Theory? Ethics derives from the Greek word ethos—meaning “character”—and is also known as moral philosophy, which is a branch of philosophy that involves “systematizing, defending and recommending concepts of right

and wrong conduct.”22 Ethics involves understanding the differences between right and wrong thinking and actions, and using principled decision making to choose actions that do not hurt others. Although intuition and creativity are often involved in having to decide between what seems like two “wrong” or less desirable choices in a dilemma where there are no easy alternatives, using ethical principles to inform our thinking before acting hastily may reduce the negative consequences of our actions. Classic ethical principles are presented in more detail in the next chapter, but by way of an introduction, the following three general areas constitute a framework for understanding ethical theories: metaethics, normative ethics, and descriptive

ethics.23

Metaethics considers where one’s ethical principles “come from, and what they mean.” Do one’s ethical beliefs come from what society has prescribed? Did our parents, family, religious institutions influence and shape our ethical beliefs? Are our principles part of our emotions and attitudes? Metaethical perspectives address these questions and focus on issues of universal truths, the will of God, the role of reason in ethical

judgments, and the meaning of ethical terms themselves.24 More practically, if we are studying a case or observing an event in the news, we can inquire about what and where a particular CEO’s or professional’s ethical principles (or lack thereof) are and where in his/her life and work history these beliefs were adopted.

Normative ethics is more practical; this type of ethics involves prescribing and evaluating ethical behaviors— what should be done in the future. We can inquire about specific moral standards that govern and influence right from wrong conduct and behaviors. Normative ethics also deals with what habits we need to develop, what duties and responsibilities we should follow, and the consequences of our behavior and its effects on others. Again, in a business or organizational context, we observe and address ethical problems and issues with individuals, teams, leaders and address ways of preventing and/or solving ethical dilemmas and problems.

Descriptive ethics involves the examination of other people’s beliefs and principles. It also relates to presenting—describing but not interpreting or evaluating—facts, events, and ethical actions in specific situations and places. In any context—organizational, relationship, or business—our aim here is to understand, not predict, judge, or solve an ethical or unethical behavior or action.

Learning to think, reason, and act ethically helps us to become aware of and recognize potential ethical problems. Then we can evaluate values, assumptions, and judgments regarding the problem before we act. Ultimately, ethical principles alone cannot answer what the late theologian Paul Tillich called “the courage to

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be” in serious ethical dilemmas or crises. We can also learn from business case studies, role playing, and discussions on how our actions affect others in different situations. Acting accountably and responsibly is still a choice.

Laura Nash defined business ethics as “the study of how personal moral norms apply to the activities and goals of commercial enterprise. It is not a separate moral standard, but the study of how the business context poses its own unique problems for the moral person who acts as an agent of this system.” Nash stated that business ethics deals with three basic areas of managerial decision making: (1) choices about what the laws should be and whether to follow them; (2) choices about economic and social issues outside the domain of

law; and (3) choices about the priority of self-interest over the company’s interests.25

Unethical Business Practices and Employees The seventh (2011) National Business Ethics Survey (NBES), which obtained 4,800 responses representative

of the entire U.S. workforce,26 reported an ethical environment unlike any we have seen before in America: “American employees are doing the right thing more than ever before, but in other ways employees’

experiences are worse than in the past.”27 The survey findings are summarized below in terms of the “bad” and “good” news found in the workforce:

The “Bad” News

• Retaliation is on the rise against employee whistle-blowers, with 22% of employees who reported misconduct experiencing some form of retaliation.

• More employees (13%) feel pressure to compromise their ethical standards in order to do their jobs.

• The number of companies with weak ethical cultures has grown to near-record highs, now at 42%.

The “Good” News

• The workplace is experiencing the lowest levels of misconduct, with only 45% of employees witnessing misconduct.

• A record high (65%) of those employees now report misconduct.

• Management is improving its oversight and increasing efforts to raise awareness about ethics—34% of employees felt more closely watched by management, and 42% of employees recognized increased ethical awareness efforts.

The authors of the survey note that an ethical downturn is on the horizon. The economic decline and high unemployment have created a unique ethical environment fueled by other modern factors like social networking. “Research has revealed a significant ethics divide between those who are active on social networks

and those who are not.”28

Specific Types of Ethical Misconduct Reported The top five most frequently observed types of misconduct were: misuse of company time (33%), abusive behavior (21%), lying to employees (20%), company resource abuse (20%), and violating company Internet use policies (16%). Types of misconduct with the largest increases included: sexual harassment, substance abuse,

insider trading, illegal political contributions, stealing, and environmental violations.29

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Many employees still do not report misconduct that they observe, and fear of retaliation is increasingly valid. “When all employees are asked whether they could question management without fear of retaliation, 19 percent said it was not safe to do so.” The most common forms of retaliation include: exclusion by management from decision and work activity (64%), cold shoulder attitudes from other employees (62%), verbal abuse from management (62%), not given promotions or raises (55%), and cut pay or hours (46%). This retaliation can lead to instability in the workplace by driving away talented employees. “About seven of 10

employees who experienced retaliation plan to leave their current place of employment within five years.”30

Ethics and Compliance Programs Ethical components of company culture include: “management’s trustworthiness, whether managers at all levels talk about ethics and model appropriate behavior, the extent to which employees value and support ethical conduct, accountability and transparency.” Eleven percent of companies in 2011 had weak ethical cultures. Companies can reduce ethics risks by investing in a strong ethics and compliance program: “86% of

companies with a well-implemented ethics and compliance program also have a strong ethics culture.”31

The Retaliation Trust/Fear/Reality Disconnect Of the 65% of employees who reported witnessing misconduct in the 2011 NBES, 22% (or approximately 9 million employees) experienced retaliation. These victims of retaliation are far more likely to report misconduct to an outside source, rather than to a member of management. This can have many negative

consequences for stakeholders involved.32

Reporting rates are much higher in companies that have well-implemented ethics and compliance programs; only 6% of employees in companies with strong ethics and compliance programs did not report observed misconduct.

It is interesting to note the impact of social networking on the ethical environment of a company. According to the 2011 NBES:

• “Active social networkers report far more negative experiences of workplace ethics. As a group, they are almost four times more likely to experience pressure to compromise standards and about three times more likely to experience retaliation for reporting misconduct than co-workers who are less active with social networking. They also are far more likely to observe misconduct.” Seventy-two percent of active social networkers surveyed observed misconduct; 42% felt pressure to compromise standards; and 56% experienced retaliation after reporting misconduct.

• Active social networkers, as discussed in this chapter’s opening case, are also more likely to believe that questionable behaviors are acceptable. Forty-two percent of active social networkers felt that it was acceptable to blog or tweet negatively about their company or colleagues; 42% felt that it was acceptable to buy personal items on a company credit card as long as it was paid back; 51% felt it was acceptable to do less work as payback for cuts in pay or benefits; 50% felt it was acceptable to keep a copy of confidential work documents in case you need them in your next job; and 46% felt that it was acceptable to take a copy of work software home for use on their personal computer. Only about 10% of non-active social networkers felt that

these activities were acceptable.33 Are you an active social networker? Do these results resonate with you?

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These findings suggest that any useful definition of business ethics must address a range of problems in the workplace, including relationships among professionals at all levels and among corporate executives and external groups.

Why Does Ethics Matter in Business? “Doing the right thing” matters to firms, taxpayers, employees, and other stakeholders, as well as to society. To companies and employers, acting legally and ethically means saving billions of dollars each year in lawsuits, settlements, and theft. One study found that the annual business costs of internal fraud range between the annual gross domestic profit (GDP) of Bulgaria ($50 billion) and that of Taiwan ($400 billion). It has also been estimated that theft costs companies $600 billion annually, and that 79% of workers admit to or think about stealing from their employers. Other studies have shown that corporations have paid significant

financial penalties for acting unethically.34 The U.S. Department of Commerce noted that “as many as one- third of all business failures annually can be attributed to employee theft.” Experts have estimated that

approximately 40% of fraud and theft losses to American businesses are internal.35

Relationships, Reputation, Morale, and Productivity Costs to businesses also include deterioration of relationships; damage to reputation; declining employee productivity, creativity, and loyalty; ineffective information flow throughout the organization; and absenteeism. Companies that have a reputation for unethical and uncaring behavior toward employees also have a difficult time recruiting and retaining valued professionals.

Integrity, Culture, Communication, and the Common Good Strong ethical leadership goes hand in hand with strong integrity. Both ethics and integrity have a significant impact on a company’s operations. “‘History has often shown the importance of ethics in business – even a single lapse in judgment by one employee can significantly affect a company’s reputation and its bottom line.’ Leaders who show a solid moral compass and set a forthright example for their employees foster a work

environment where integrity becomes a core value.”36 A study of the 50 best companies to work for in Canada (based on survey responses from over 100,000 Canadian employees at 115 organizations, with input from 1,400 leaders and human resources professionals) found that integrity and ethics matter in the following ways: there is more flexibility and balance; values have changed; and organizations are valuing new employees more

since the demographics have changed.37 These changes are explained next.

Integrity/Ethics What is the degree to which coworkers, managers, and senior leaders display integrity and ethical conduct? Eighty-eight percent of employees at the top 10 best employers agreed or strongly agreed that coworkers displayed integrity and ethical conduct at all times, whereas only 60% felt that way at the bottom 10 organizations. With respect to managers, the numbers were 90% at the top 10 and 63% at the bottom 10 organizations. A bigger difference existed with regard to whether senior leadership displayed integrity and ethical conduct at all times, with 89% of employees at the top 10 best employers agreeing or strongly agreeing,

whereas less than half—48%—felt that way at the bottom 10 employers.38

The same study found that “engagement is higher at organizations where employees feel they share the same values as their employer” and that “sense of ‘common purpose’ can increase employee commitment,

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especially amongst older workers.” The authors also noted that “a perceived lack of integrity on the part of co- workers, managers and leaders has, as expected, a detrimental effect on engagement. What was perhaps unanticipated in the study findings, however, was the really negative opinion of the ethics of senior leadership at low-engagement organizations.”

Working for the Best Companies Employees care about ethics because they are attracted to ethically and socially responsible companies. Fortune magazine regularly publishes the 100 best companies for which to work

(http://money.cnn.com/magazines/fortune/best-companies).39 Although the list continues to change, it is instructive to observe some of the characteristics of good employers that employees repeatedly cite. The most frequently mentioned characteristics include profit sharing, bonuses, and monetary awards. However, the list also contains policies and benefits that balance work and personal life and those that encourage social responsibility. Consider these policies described by employees:

• When it comes to flextime requests, managers are encouraged to “do what is right and human.”

• There is an employee hotline to report violations of company values.

• Managers will fire clients who don’t respect its security officers.

• Employees donated more than 28,000 hours of volunteer labor last year.

The public and consumers benefit from organizations acting in an ethically and socially responsible manner. Ethics matters in business because all stakeholders stand to gain when organizations, groups, and individuals seek to do the right thing, as well as to do things the right way. Ethical companies create investor

loyalty, customer satisfaction, and business performance and profits.40 The following section presents different levels on which ethical issues can occur.

1.3 Levels of Business Ethics

Because ethical problems are not only an individual or personal matter, it is helpful to see where issues originate, and how they change. Business leaders and professionals manage a wide range of stakeholders inside and outside their organizations. Understanding these stakeholders and their concerns will facilitate our understanding of the complex relationships between participants involved in solving ethical problems.

Ethical and moral issues in business can be examined on at least five levels. Figure 1.3 illustrates these five

levels: individual, organizational, association, societal, and international.41 Aaron Feuerstein’s now classic story as former CEO of Malden Mills exemplifies how an ethical leader in his seventies turned a disaster into an opportunity. His actions reflected his person, faith, allegiance to his family and community, and sense of social responsibility.

On December 11, 1995, Malden Mills in Lawrence, Massachusetts—manufacturer of Polartec and Polarfleece fabrics and the largest employer in the city—was destroyed by fire. Over 1,400 people were out of work. Feuerstein stated, “Everything I did after the fire was in keeping with the ethical standards I’ve tried to maintain my entire life, so it’s surprising we’ve gotten so much attention. Whether I deserve it or not, I guess I became a symbol of what the average worker would like corporate America to be in a time when the American

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dream has been pretty badly injured.” Feuerstein announced shortly after the fire that the employees would stay on the payroll while the plant was rebuilt for 60 days. He noted, “I think it was a wise business decision, but that isn’t why I did it. I did it because it was the right thing to do.”

Figure 1.3 Business Ethics Levels

Source: Carroll, Archie B. (1978). Linking business ethics to behavior in organizations. SAM Advanced Management Journal, 43(3), 7. Reprinted with permission from Society for Advancement of Management, Texas A&M University, College of Business.

Feuerstein could have taken the $300 million in insurance and retired, or even offshored the entire operation. Instead, he paid out $25 million to his employees and rebuilt the plant. Feuerstein spent the insurance funds, borrowed $100 million more, and built a new plant that is both environmentally friendly and worker-friendly. It is also unionized. Feuerstein was invited to President Clinton’s State of the Union address and serves as an icon in the business ethics and leadership community, regardless of the fate of Malden Mills

going forward.42

Asking Key Questions It is helpful to be aware of the ethical levels of a situation and the possible interaction between these levels when confronting a question that has moral implications. The following questions can be asked when a problematic decision or action is perceived (before it becomes an ethical dilemma):

Figure 1.4 A Framework for Classifying Ethical Issues and Levels

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Source: Matthews, John B., Goodpaster, Kenneth E., and Laura L. Nash. (1985). Policies and persons: A casebook in business ethics, 509. New York: McGraw-Hill. Reproduced with permission from Kenneth E. Goodpaster.

• What are my core values and beliefs?

• What are the core values and beliefs of my organization?

• Whose values, beliefs, and interests may be at risk in this decision? Why?

• Who will be harmed or helped by my decision or by the decision of my organization?

• How will my own and my organization’s core values and beliefs be affected or changed by this decision?

• How will I and my organization be affected by the decision?

Figure 1.4 offers a graphic to help identify the ethics of the system (i.e., a country or region’s customs, values, and laws), your organization (i.e., the written formal and informal acceptable norms and ways of doing business), and your own ethics, values, and standards.

In the following section, popular myths about business ethics are presented to challenge misconceptions regarding the nature of ethics and business. You may take the “Quick Test of Your Ethical Beliefs” before reading this section.

Ethical Insight 1.1 Quick Test of Your Ethical Beliefs

Answer each question with your first reaction. Circle the number, from 1 to 4, that best represents your beliefs, if 1 represents “Completely agree,” 2 represents “Often agree,” 3 represents “Somewhat disagree,” and 4 represents “Completely disagree.”

1. I consider money to be the most important reason for working at a job or in an organization. 1 2 3 4

2. I would hide truthful information about someone or something at work to save my job. 1 2 3 4

3. Lying is usually necessary to succeed in business. 1 2 3 4

4. Cutthroat competition is part of getting ahead in the business world. 1 2 3 4

5. I would do what is needed to promote my own career in a company, short of committing a serious crime. 1 2 3 4

6. Acting ethically at home and with friends is not the same as acting ethically on the job. 1 2 3 4

7. Rules are for people who don’t really want to make it to the top of a company. 1 2 3 4

8. I believe that the “Golden Rule” is that the person who has the gold rules. 1 2 3 4

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9. Ethics should be taught at home and in the family, not in professional or higher education. 1 2 3 4

10. I consider myself the type of person who does whatever it takes to get a job done, period. 1 2 3 4

Add up all the points. Your Total Score is:_______

Total your scores by adding up the numbers you circled. The lower your score, the more questionable your ethical principles regarding business activities. The lowest possible score is 10, the highest 40. Be ready to give reasons for your answers in a class discussion.

1.4 Five Myths about Business Ethics

Not everyone agrees that ethics is a relevant subject for business education or dealings. Some have argued that “business ethics” is an oxymoron, or a contradiction in terms. Although this book does not advocate a particular ethical position or belief system, it argues that ethics is relevant to business transactions. However, certain myths persist about business ethics. The more popular myths are presented in Figure 1.5.

A myth is “a belief given uncritical acceptance by the members of a group, especially in support of existing

or traditional practices and institutions.”43 Myths regarding the relationship between business and ethics do not represent truth but popular and unexamined notions. Which, if any, of the following myths have you accepted as unquestioned truth? Which do you reject? Do you know anyone who holds any of these myths as true?

Myth 1: Ethics Is a Personal, Individual Affair, Not a Public or Debatable Matter This myth holds that individual ethics is based on personal or religious beliefs, and that one decides what is right and wrong in the privacy of one’s conscience. This myth is supported in part by Milton Friedman, a well-known economist, who views “social responsibility,” as an expression of business ethics, to be unsuitable for business professionals to address seriously or professionally because they are not equipped or trained to do

so.44

Figure 1.5 Five Business Ethics Myths

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Although it is true that individuals must make moral choices in life, including business affairs, it is also true that individuals do not operate in a vacuum. Individual ethical choices are most often influenced by discussions, conversations, and debates, and made in group contexts. Individuals often rely on organizations and groups for meaning, direction, and purpose. Moreover, individuals are integral parts of organizational cultures, which have standards to govern what is acceptable. Therefore, to argue that ethics related to business issues is mainly a matter of personal or individual choice is to underestimate the role organizations play in shaping and influencing members’ attitudes and behaviors.

Studies indicate that organizations that act in socially irresponsible ways often pay penalties for unethical

behavior.45 In fact, the results of the studies advocate integrating ethics into the strategic management process because it is both the right and the profitable thing to do. Corporate social performance has been found to increase financial performance. One study notes that “analysis of corporate failures and disasters strongly suggests that incorporating ethics in before-profit decision making can improve strategy development and

implementation and ultimately maximize corporate profits.”46 Moreover, the popularity of books, training, and articles on learning organizations and the habits of highly effective people among Fortune 500 and 1000 companies suggests that organizational leaders and professionals have a need for purposeful, socially

responsible management training and practices.47

Myth 2: Business and Ethics Do Not Mix This myth holds that business practices are basically amoral (not necessarily immoral) because businesses operate in a free market. This myth also asserts that management is based on scientific, rather than religious

or ethical, principles.48

Although this myth may have thrived in an earlier industrializing U.S. society and even during the 1960s, it has eroded over the past two decades. The widespread consequences of computer hacking on individual, commercial, and government systems that affect the public’s welfare, like identity theft on the Internet (stealing others’ Social Security numbers and using their bank accounts and credit cards), and kickbacks, unsafe products, oil spills, toxic dumping, air and water pollution, and improper use of public funds have contributed to the erosion. The international and national infatuation with a purely scientific understanding of U.S. business practices, in particular, and of a value-free marketing system, has been undermined by these events. As one saying goes, “A little experience can inform a lot of theory.”

The ethicist Richard DeGeorge has noted that the belief that business is amoral is a myth because it ignores the business involvement of all of us. Business is a human activity, not simply a scientific one, and, as such, can be evaluated from a moral perspective. If everyone in business acted amorally or immorally, as a pseudoscientific notion of business would suggest, businesses would collapse. Employees would openly steal from employers; employers would recklessly fire employees at will; contractors would arrogantly violate obligations; and chaos would prevail. In the United States, business and society often share the same values: rugged individualism in a free-enterprise system, pragmatism over abstraction, freedom, and independence. When business practices violate these American values, society and the public are threatened.

Finally, the belief that businesses operate in totally “free markets” is debatable. Although the value or desirability of the concept of a “free market” is not in question, practices of certain firms in free markets are.

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At issue are the unjust methods of accumulation and noncompetitive uses of wealth and power in the formation of monopolies and oligopolies (i.e., small numbers of firms dominating the rules and transactions of certain markets). The dominance of AT&T before its breakup is an example of how one powerful conglomerate could control the market. Microsoft and WalMart are examples. The U.S. market environment can be characterized best as a “mixed economy” based on free-market mechanisms, but not limited to or explained only by them. Mixed economies rely on some governmental policies and laws for control of deficiencies and inequalities. For example, protective laws are still required, such as those governing minimum wage, antitrust situations, layoffs from plant closings, and instances of labor exploitation. In such mixed economies in which injustices thrive, ethics is a lively topic.

Myth 3: Ethics in Business Is Relative In this myth, no right or wrong way of believing or acting exists. Right and wrong are in the eyes of the beholder.

The claim that ethics is not based solely on absolutes has some truth to it. However, to argue that all ethics is relative contradicts everyday experience. For example, the view that because a person or society believes something to be right makes it right is problematic when examined. Many societies believed in and practiced slavery; however, in contemporary individuals’ experiences, slavery is morally wrong. When individuals and firms do business in societies that promote slavery, does that mean that the individuals and firms must also condone and practice slavery? The simple logic of relativism, which is discussed in Chapter 2, gets complicated when seen in daily experience. The question that can be asked regarding this myth is: Relative to whom or what? And why? The logic of this ethic, which answers that question with “Relative to me, myself, and my interests” as a maxim, does not promote community. Also, if ethical relativism were carried to its logical extreme, no one could disagree with anyone about moral issues because each person’s values would be true for him or her. Ultimately, this logic would state that no right or wrong exists apart from an individual’s or society’s principles. How could interactions be completed if ethical relativism was carried to its limit? Moreover, the U.S. government, in its vigorous pursuit of Microsoft, certainly has not practiced a relativist style of ethics.

Myth 4: Good Business Means Good Ethics This myth can translate to “Executives and firms that maintain a good corporate image, practice fair and equitable dealings with customers and employees, and earn profits by legitimate, legal means are de facto ethical.” Such firms, therefore, would not have to be concerned explicitly with ethics in the workplace. Just do

a hard, fair day’s work, and that has its own moral goodness and rewards.49

The faulty reasoning underlying this logic obscures the fact that ethics does not always provide solutions to technical business problems. Moreover, as Buchholz argued, no correlation exists between “goodness” and

material success.50

It also argued that “excellent” companies and corporate cultures have created concern for people in the workplace that exceeds the profit motive. In these cases, excellence seems to be related more to customer service, to maintenance of meaningful public and employee relationships, and to corporate integrity than to

profit motive.51

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The point is that ethics is not something added to business operations; ethics is a necessary part of operations. A more accurate, logical statement from business experience would suggest that “good ethics means good business.” This is more in line with observations from successful companies that are ethical first and also profitable.

Finally, the following questions need to be asked: What happens, then, if what should be ethically done is not the best thing for business? What happens when good ethics is not good business? The ethical thing to do may not always be in the best interests of the firm. We should promote business ethics, not because good ethics is good business, but because we are morally required to adopt the moral point of view in all our dealings with other people—and business is no exception. In business, as in all other human endeavors, we must be prepared to pay the costs of ethical behavior. The costs may sometimes seem high, but that is the risk

we take in valuing and preserving our integrity.52

Myth 5: Information and Computing Are Amoral This myth holds that information and computing are neither moral nor immoral—they are amoral. They are in a “gray zone,” a questionable area regarding ethics. Information and computing have positive dimensions, such as empowerment and enlightenment through the ubiquitous exposure to information, increased efficiency, and quick access to online global communities. It is also true that information and computing have

a dark side: information about individuals can be used as “a form of control, power, and manipulation.”53

The point here is to beware the dark side: the misuse of information, social media, and computing. Ethical implications are present but veiled. Truth, accuracy, and privacy must be protected and guarded: “Falsehood, inaccuracy, lying, deception, disinformation, misleading information are all vices and enemies of the Information Age, for they undermine it. Fraud, misrepresentation, and falsehood are inimical to all of

them.”54

Logical problems occur in all five of the above myths. In many instances, the myths hold simplistic and even unrealistic notions about ethics in business dealings. In the following sections, the discussion about the nature of business ethics continues by exploring two questions:

• Why use ethical reasoning in business?

• What is the nature of ethical reasoning?

1.5 Why Use Ethical Reasoning in Business?

Ethical reasoning is required in business for at least three reasons. First, many times laws do not cover all

aspects or “gray areas” of a problem.55 How could tobacco companies have been protected by the law for decades until the settlement in 1997, when the industry agreed to pay $368.5 billion for the first 25 years and then $15 billion a year indefinitely to compensate states for the costs of health care for tobacco-related illnesses? What gray areas in federal and state laws (or the enforcement of those laws) prevailed for decades? What sources of power or help can people turn to in these situations for truthful information, protection, and compensation when laws are not enough?

Second, free-market and regulated-market mechanisms do not effectively inform owners and managers how to respond to complex issues that have farreaching ethical consequences. Enron’s former CEO Jeffrey

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Skilling believed that his new business model of Enron as an energy trading company was the next big

breakthrough in a free-market economy. The idea was innovative and creative; the executive’s implementation of the idea was illegal. Perhaps Skilling should have followed Enron’s ethics code; it was one of the best available.

A third argument holds that ethical reasoning is necessary because complex moral problems require “an intuitive or learned understanding and concern for fairness, justice, [and] due process to people, groups, and

communities.”56 Company policies are limited in scope in covering human, environmental, and social costs of doing business. Judges have to use intuition and a kind of learn-as-you-go approach in many of their cases. In Microsoft’s previous alleged monopoly case, for example, there were no clear precedents in the software industry—or with a company of Microsoft’s size and global scope—to offer clear legal direction. Ethics plays a role in business because laws are many times insufficient to guide action.

1.6 Can Business Ethics Be Taught and Trained?

Because laws and legal enforcement are not always sufficient to help guide or solve complex human problems relating to business situations, some questions arise: Can ethics help? If so, how? And can business ethics be taught? This ongoing debate has no final answer, and studies continue to address the issue. One study, for example, that surveyed 125 graduate and undergraduate students in a business ethics course at the beginning of a semester showed that students did not reorder their priorities on the importance of 10 social issues at the end of the semester, but they did change the degree of importance they placed on the majority of the issues

surveyed.57 What, if any, value can be gained from teaching ethical principles and training people to use them in business?

This discussion begins with what business ethics courses cannot or should not, in my judgment, do. Ethics courses should not advocate a set of rules from a single perspective or offer only one best solution to a specific ethical problem. Given the complex circumstances of many situations, more desirable and less desirable courses of action may exist. Decisions depend on facts, inferences, and rigorous, ethical reasoning. Neither should ethics courses or training sessions promise superior or absolute ways of thinking and behaving in situations. Informed and conscientious ethical analysis is not the only way to reason through moral problems.

Ethics courses and training can do the following:

• Provide people with rationales, ideas, and vocabulary to help them participate effectively in ethical decision-making processes

• Help people “make sense” of their environments by abstracting and selecting ethical priorities

• Provide intellectual insights to argue with advocates of economic fundamentalism and those who violate ethical standards

• Enable employees to act as alarm systems for company practices that do not meet society’s ethical standards

• Enhance conscientiousness and sensitivity to moral issues, and commitment to finding moral solutions

• Enhance moral reflectiveness and strengthen moral courage

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• Increase people’s ability to become morally autonomous, ethical dissenters, and the conscience of a group

• Improve the moral climate of firms by providing ethical concepts and tools for creating ethical codes

and social audits58

Other scholars argue that ethical training can add value to the moral environment of a firm and to relationships in the workplace in the following ways:

• Finding a match between an employee’s and employer’s values

• Managing the push-back point, where an employee’s values are tested by peers, employees, and supervisors

• Handling an unethical directive from a boss

• Coping with a performance system that encourages cutting ethical corners59

Teaching business ethics and training people to use them does not promise to provide answers to complex moral dilemmas. However, thoughtful and resourceful business ethics educators can facilitate the development of awareness of what is ethical, help individuals and groups realize that their ethical tolerance and decision- making styles decrease unethical blind spots, and enhance discussion of moral problems openly in the workplace.

1.7 Plan of the Book

This book focuses on applying a stakeholder management approach—based on stakeholder theory—that is integrated with issues management approaches, along with your own critical reasoning to situations that involve groups and individuals who often have competing interpretations of a problem or opportunity. We are all stakeholders in many situations, whether with our friends, network of colleagues, or in organizational and work settings. Because stakeholders are people, they generally act on beliefs, values, and financially motivated strategies. For this reason, ethics- and values-based thinking is an important part of a stakeholder and issues management approach. It is important to understand why stakeholders act and how they make decisions. The stakeholder and issues management approach aims at having all parties reach win—win outcomes through communication and collaborative efforts. Unfortunately, this does not always happen. If we do not have a systematic approach to understanding what happens in complex stakeholder relationships, we cannot learn from past mistakes or plan for more collaborative, socially responsible future outcomes. A schematic of the book’s organization is presented in Figure 1.6.

Chapter 2 provides a foundation of ethical principles, quick tests, and scenarios for evaluating motivations for certain decisions and actions. A stakeholder management approach involves knowing and managing stakeholders’ ethics, including your own. Chapter 3 provides a systematic approach for structuring and evaluating stakeholder issues, strategies, and options at the outset. Step-by-step methods for collaborating and for forming and evaluating strategies are identified. Chapter 4 then examines an organization’s corporate governance and compliance before Chapter 5 looks at how organizations manage external and business issues stakeholders. Chapter 6 looks at internal stakeholders, strategy, culture, and self-regulation in corporations

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and discusses rights and obligations of employees and employers as stakeholders. Chapter 7 analyzes current trends affecting employees in corporations and Chapter 8, the final chapter, examines globalization and views nations as stakeholders to examine how multinational corporations operate in host countries and different systems of capitalism.

Figure 1.6 Plan of the Book

Chapter Summary

Businesses and governments operate in numerous environments, including technological, legal, social, economic, and political dimensions. Understanding the effects of these environmental forces on industries and organizations is a first step in identifying stakeholders and the issues that different groups must manage in order to survive and compete. This book explores and illustrates how stakeholders can manage issues and trends in their changing environments in socially responsible, principled ways. Thinking and acting ethically is not a mechanical process; it is also very personal. It is important as a professional in an organization, to integrate personal with professional experiences and values.

Business ethics deals with what is “right” and “wrong” in organizational decisions, behavior, and policies. Business ethics provides principles and guidelines that assist people in making informed choices that balance economic interests and social responsibilities. Being able to think of other stakeholders’ interests can better inform the moral dimension of your own decisions. This is one aim of using a stakeholder management approach.

Seeing the “big picture” of how ethical issues begin and transform requires imagination and some “maps.” Because business ethics apply to several levels, this chapter has presented these levels to illustrate the complexity of ethical decision making in business transactions. When you can “connect the dots” among these dimensions, more options for solving problems morally are opened.

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The stakeholder management approach also provides a means for mapping complicated relationships between the focal and other stakeholders, a means of identifying the strategies of each stakeholder, and a means for assessing the moral responsibility of all the constituencies.

Five common myths about business ethics have been discussed. Each myth has been illustrated and refuted. You are invited to identify and question your own myths about business ethics. Ethical reasoning in business is explained with steps to guide decision making. Here are three reasons why ethical reasoning is necessary in business: (1) laws are often insufficient and do not cover all aspects or “gray areas” of a problem; (2) free- market and regulated-market mechanisms do not effectively inform owners and managers on how to respond to complex crises that have farreaching ethical consequences; and (3) complex moral problems require an understanding and concern for fairness, justice, and due process. Ethical reasoning helps individuals sort through conflicting opinions and information in order to solve moral dilemmas.

Ethical education and training can be useful for developing a broad awareness of the motivations, values, and consequences of our decisions. Business ethics does not, however, provide superior or universally correct solutions to morally complex dilemmas. Principles and guidelines are provided that can enhance—with case analysis, role playing, and group discussion—a person’s insight and self-confidence in resolving moral dilemmas that often have two right (or wrong) solutions.

Questions

1. Refer to Figure 1.1 to identify three specific environmental influences that the organization for which you work (or the institution in which you study) must address to survive and be competitive. Explain how these influences, pressures, and opportunities affect you, and ask yourself how ethically do you accomplish your work and goals.

2. What are the three major ethical issues you face now in your work or student life? What is “ethical” about these issues?

3. Identify some benefits of using a stakeholder approach in ethical decision making. How would using a stakeholder management approach help you plan and/or solve an ethical issue in your working life? Explain.

4. What is a myth? Which, if any, of the five business myths discussed in this chapter do you not accept as a myth (i.e., that you believe is true)? Explain.

5. Identify one myth you had/have about business ethics. Where did it originate? Why is it a “myth”? What led you to abandon this myth, or do you still believe in it? Explain.

6. Identify three reasons presented in this chapter for using ethical reasoning in business situations. Which of these reasons do you find the most valid? The least valid? Explain.

7. Is the law sufficient to help managers and employees solve ethical dilemmas? Explain and offer an example from your own experiences or from a contemporary event.

8. What are some important distinctive characteristics of ethical problems? What distinguishes an ethical from a legal problem?

9. What (if any) specific attitudes, values, beliefs, or behaviors of yours do you think could be changed from an ethics course? Explain.

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10. Identify and describe a specific belief or behavior of yours that you feel could be changed through taking a course in ethics.

Exercises

1. Invent and state your own definition of “business ethics.” Do you believe that ethics is an important factor in business transactions today? If you were the CEO of a corporation, how would you communicate your perspective on the importance of ethics to your employees, customers, and other stakeholder groups?

2. Conduct your own small survey of two people regarding their opinions on the importance of unethical practices in businesses today. Do your interviewees give more importance to economic performance or socially irresponsible behavior? Or do they think other factors are more important? Summarize your results.

3. You are giving a speech at an important community business association meeting. You are asked to give a presentation called “An Introduction to Business Ethics” for the members. Give an outline of your speech.

4. Explain how a major trend in the environment has affected your profession, job, or skills—as a professional or student. Be specific. Are any ethical consequences involved, and has this trend affected you?

5. Review Kohlberg’s levels and stages of moral development. After careful consideration, briefly explain which stage, predominantly or characteristically, defines your ethical level of development. Explain. Has this stage influenced a recent decision you have made or action you have taken? Explain.

6. You are applying to a prestigious organization for an important, highly visible position. The application requires you to describe an ethical dilemma in your history and how you handled it. Describe the dilemma and your ethical position.

Real-Time Ethical Dilemma

You are a staff associate at a major public accounting firm and graduated from college two years ago. You are working on an audit for a small, nonprofit religious publishing firm. After performing tests on the royalty payables system, you discover that for the past five years, the royalty payable system has miscalculated the royalties it owes to authors of their publications. The firm owes almost $100,000 in past due royalties. All of the contracts with each author are negotiated differently. However, each author’s royalty percentage will increase at different milestones in books sold (i.e., 2% up to 10,000 and 3% thereafter). The software package did not calculate the increases, and none of the authors ever received their increase in royalty payments. At first you can’t believe that none of the authors ever realized they were owed their money. You double check your calculations and then present your findings to the senior auditor on the job. Much to your surprise, his suggestion is to pass over this finding. He suggests that you sample a few additional royalty contracts and document that you expanded your testing and found nothing wrong. The firm’s audit approach is well documented in this area and is firmly based on statistical sampling. Because you had found multiple errors in the small number of royalty contracts tested, the firm’s approach suggested testing 100% of the contracts. This would mean (1) going over the budgeted time/expense estimated to the client; (2) possibly providing a negative audit finding; and (3) confirming that the person who audited the section in the years past may not have performed procedures correctly.

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Based on the prior year’s work papers, the senior auditor on the job performed the testing phase in all of these years just before his promotion. For some reason, you get the impression that the senior auditor is frustrated with you. The relationship seems strained. He is very intense, constantly checking the staff’s progress in the hope of coming in even a half-hour under budget for a designated test/audit area. There’s a lot of pressure, and you don’t know what to do. This person is responsible for writing your review for your personnel file and bonus or promotion review. He is a very popular employee who is “on the fast track” to partnership.

You don’t know whether to tell the truth and risk a poor performance review and jeopardize your future with this company, or to tell the truth, hopefully be exonerated, and be able to live with yourself by “doing the right thing” and facing consequences with a clean conscience.

Questions 1. What would you do as the staff associate in this situation? Why? What are the risks of telling the truth for

you? What are the benefits? Explain.

2. What is the “right” thing to do in this situation? What is the “smart” thing to do for your job and career? What is the difference, if there is one, between the “right” and “smart” thing to do in this situation? Explain.

3. Explain what you would say to the senior auditor, your boss, in this situation if you decided to tell the truth as you know it.

Cases

Case 1 Bernard L. Madoff Investment Securities LLC: Wall Street Trading Firm

Bernard L. Madoff Investment Securities LLC was founded in the 1960s as a small investment firm on Wall Street. With $5,000 in savings from summer jobs and at the age of 22, Madoff launched the firm that in the 1980s would later rank with some of the most prestigious and powerful firms on Wall Street. Madoff began as a single stock trader before starting a family-operated business that included his brother, nephew, niece, and his two sons. Each held a position that was quite valuable within the company.

Madoff had also created “an investment-advisory business that managed money for high-net-worth individuals, hedge funds and other institutions.” He made profitable and consistent returns by repaying early investors from the money received from new investors. Instead of running an actual hedge fund, Madoff held this investment operation inside his firm on the seventeenth floor of the building where only two dozen staff members were permitted to enter the secured area. No employee dared question the security and confidentiality of the “hedge fund” floor due to the prestige and power that Madoff held. The $65 billion investment fund was later discovered to be fraudulent, involving one of the largest Ponzi schemes in history and shattering the lives of thousands of individuals, institutions, organizations, and stakeholders worldwide.

The Man with All the Power Bernard Madoff’s charisma and amiable personality were important traits that helped him gain power in the

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financial community and become one of the largest key players on Wall Street. He became a notable authoritative figure by securing important roles on boards and commissions, helping him bypass securities regulations. One of the roles included serving as the chairman of the board and directors of the NASDAQ stock exchange during the early 1990s. Madoff was knowledgeable and smart enough to understand that the more involved he became with regulators, the more “you could shape regulations.” He used his reputation as a respected trader and perceived “honest” businessman to take advantage of investors and manipulate them fraudulently. Investors were hoodwinked into believing that it was a privilege to take part in Madoff’s elite investments, since Madoff never accepted many clients and used exclusively selective recruiting in order to keep this part of his business a secret.

Madoff was even able to keep his employees quiet, telling them not to speak to the media regarding any of the business activities. While several understood something was not right, they ignored suspicions due to Madoff’s perceived clean record and aura: “He appeared to believe in family, loyalty, and honesty. … Never in your wildest imagination would you think he was a fraudster.”

Dr. Meloy, author of the textbook The Psychopathic Mind, states that “typically people with psychopathic personalities don’t fear getting caught. . . . They tend to be very narcissistic with a strong sense of entitlement.” This led many analysts of criminal behavior to observe similar traits between Madoff and serial killers like Ted Bundy. Analysts discovered several factors motivating Madoff toward a Ponzi scheme: “A desire to accumulate vast wealth, a need to dominate others, and a need to prove that he was smarter than everyone else.” Whatever the motivating factors were, Madoff’s behavior was still criminal and affected a large pool of stakeholders.

Early Suspicions Arise Despite the unrealistic returns and questionable nature of Madoff’s business operations, investors continued to invest money. In 2000, a whistle-blower from a competing firm—Harry Markopolos, CFE, CFA— discovered Madoff’s Ponzi scheme. Markopolos and his small team developed and presented an eight-page document that provided evidence and red flags of the fraud to the Securities and Exchange Commission (SEC)’s Boston Regional Office in May 2000. Despite the SEC’s lack of response, Markopolos resubmitted the documents again in 2001, 2005, 2007 and 2008. His findings were not taken seriously: “My team and I tried our best to get the Securities and Exchange Commission (SEC) to investigate and shut down the Madoff Ponzi scheme with repeated and credible warnings.” Because Madoff was well respected and powerful on Wall Street, few suspected his fraudulent actions. The status and wealth that Madoff had created gave him the means to manipulate the SEC and regulators alike.

Negligence on All Sides The negligence and gaps in governmental regulation make it very difficult to point to only one guilty party in the Madoff scandal. The SEC played a crucial role by allowing Madoff’s operations to carry out for as long as they did. For over 10 years, the SEC received numerous warnings that Madoff’s steady returns were anything but ordinary and nearly impossible. The SEC and the Financial Industry Regulatory Authority, “a non- government agency that oversees all securities firms,” were known to have investigated Madoff’s firm over eight times but brought no charges of criminal activity. Despite the red flags and mathematical proof that

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Markopolos presented, SEC staff allowed Madoff’s operations to continue unchallenged. Spencer Bachus, a politician and a Republican member of the U.S. House of Representatives, stated that “What we may have in the Madoff case is not necessarily a lack of enforcement and oversight tools, but a failure to use them.” Unfortunately, there could be another side to the story. David Kotz, currently the SEC’s inspector general, planned an ongoing internal investigation to understand the reasoning behind the negligence and to determine if any conflict of interest between SEC staff and the Madoff family could have been part of the problem. Arthur Levitt Jr., who was part of the SEC and a chairman from 1993 to 2001, had close connections with Madoff himself. He would rely on Madoff’s advice about the functioning of the market, although Levitt denies all accusations. In September 2009, it was officially stated that no evidence was found relating to any conflict of interest: “The OIG [Office of Inspector General] investigation did not find evidence that any SEC personnel who worked on an SEC examination or investigation of Bernard L. Madoff Investment Securities LLC had any financial or other inappropriate connection with Bernard Madoff or the Madoff family that influenced the conduct of their examination or investigatory work.”

Unfortunately, the SEC is not the only party to blame. JPMorgan Chase has also been criticized for its actions regarding the Madoff scandal. Instead of investing client’s money in securities, as Madoff had promised to do, he deposited the funds in a Chase bank account. In 2008, federal court documents show that “the account had mushroomed to $5.5 billion. . . . This translates to $483 million in after-tax profits for the bank holding the Madoff funds.” As one of Chase’s largest customers, Madoff’s account should have been monitored closely. Internal bank compliance systems should have detected such red flags. Unfortunately, Madoff was savvy enough to move millions of dollars between his U.S. and London operations, making it seem like he was actively investing clients’ money. The massive account balances of investors should not have been difficult to overlook. Don Jackson, director of the SecureWorks Counter Threat Unit Intelligence Services, noted that “The only way to stop this kind of fraud is for the bank to know its clients better and to report things that might be suspicious. It really comes down to human control.” This was an area of weakness for JPMorgan Chase at the time.

Where Were the Auditors? For Madoff to successfully perpetrate such a large scam spanning more than a decade, he needed the help of auditors to certify the financial statements of Bernard L. Madoff Investment Securities. The company’s auditing services were provided by a three-person accounting firm, Friehling & Horowitz, formerly run by David Friehling. For over 15 years, Friehling confirmed to the American Institute of Certified Public Accountants (AICPA) that his firm did not conduct any type of audit work. Because of this confirmation, Friehling did not have to “enroll in the AICPA’s peer review program, in which experienced auditors assess each firm’s audit quality every year . . . to maintain their licenses to practice.” Friehling & Horowitz had in fact been auditing the books of Madoff for over 17 years, providing a clean bill of health each year from 1991 through 2008. Authorities state that if Friehling provided integrity in his findings, the scandal would not have continued for as long as it did: “Mr. Friehling’s deception helped foster the illusion that Mr. Madoff legitimately invested his client’s money,” stated U.S. Attorney Lev Dassin. In addition to receiving total fees of $186,000 annually from the auditing services provided to Madoff, Friehling also had accounts in Madoff’s firm totaling more than $14 million and had withdrawn over $5.5 million since the year 2000. Friehling

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deceived investors and regulators by providing unauthorized audit work and verifying fraudulent financial statements. Given the size of the accounting firm, a red flag should have been raised. Madoff’s operations were too large in size and complexity for the resources of a three-person accounting firm.

Revealing the Fraud As the U.S. economy entered the 2008 recession period, investors began to panic and withdraw their money from Madoff’s accounts, totaling more than $7 billion. Madoff was unable to cover the redemptions and struggled “to obtain the liquidity necessary to meet those obligations.” He confessed to his sons that the business he was running was a scam. On December 11, 2008, Bernard Madoff was arrested by federal agents —one day after his sons reported his confession to the authorities.

Global Crisis The Ponzi scheme that Madoff ran for more than a decade affected the lives of thousands of individuals, institutions, organizations, and stakeholders worldwide. A 162-page list was submitted to the U.S. Bankruptcy Court in Manhattan detailing the affected parties. The lengthy list consisted of some of the wealthiest investors and well-known names around the region: “They reportedly include Philadelphia Eagles owner Norman Braman, New York Mets owner Fred Wilpon and J. Ezra Merkin, the chairman of GMAC Financial Services.” Talk show host Larry King and actor John Malkovich were on the list, among others. Many investment-management firms, such as Tremont Capital Management and Fair-field Greenwich Advisors, had invested large amounts in Madoff’s funds and were hit the hardest financially. Major global banks, “including Royal Bank of Scotland, France’s largest bank, BNP Paribas, Britain’s HSBC Holdings PLC and Spain’s Santander” were also known to have lost millions. Charitable foundations, such as the Lautenberg foundation; and financial institutions, including Bank of America Corp., Citigroup, and JPMorgan Chase were all stakeholders in the Madoff scandal. Ordinary individuals also invested much of their life savings into what they believed was a “once in a lifetime opportunity.” William Woessner, a retiree from the State Department’s Foreign Service, agreed that the investors “were made to feel that it was a big favor to be let in if you didn’t have a lot of money. It was an exclusive club to belong to.” It has been reported that individual losses were between $40,000 to over $1 million in total. There were 3,500 investors from New York and more than 1,700 from Florida.

The repercussions of Madoff’s Ponzi scheme have been emotional as well as financial. A French aristocrat and professional investor living within the suburbs of New York, Rene-Thierry Magon de la Villehuchet, had invested almost $1.4 billion in Madoff’s accounts. He had invested both his and his client’s money, only to lose everything. Villehuchet felt personally responsible for the loss of his clients’ money: “He had a true concept of capitalism. . . . He felt responsible and he felt guilty,” said his brother Bertrand de la Villehuchet. Villehuchet’s depression grew to such a point that he committed suicide on December 22, 2008.

Consequences and Aftermath On June 29, 2009, Judge Denny Chin found Madoff guilty on eleven criminal counts and sentenced him to 150 years in prison, the maximum possible sentence allowed at the time. Chin’s severe sentence was influenced by the statements given by Madoff’s victims and the 113 letters received and filed with the federal court: “A substantial sentence may in some small measure help the victims in their healing process,” stated

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Judge Chin. Madoff was also forced to pay a $170-billion legal judgment passed by the government, stating that this amount of money “was handled by his firm since its founding in the 1960s.” David Friehling, the auditor for Madoff’s books, was also arrested on fraud charges. He was initially “released on a $2.5-million bond and had to surrender his passport.” Friehling lost his CPA license in 2010, and his sentencing has since been postponed four times. He faces a sentence of more than 100 years in prison.

Lawyer Irving H. Picard is a bankruptcy trustee in the Madoff scandal. As a court-appointed trustee, Picard has filed numerous lawsuits and has collected $1.2 billion in recovered funds from “banks, personal property, and funds around the world.” It is estimated that from this $1.2 billion, Picard has earned approximately $15 million. More than $116 million has been given to 237 Madoff victims, each receiving up to $500,000. In order to help the victims of the Madoff scandal, Picard started a program called “Hardship Case.” He has also filed a $199 million lawsuit against the Madoff family, including Madoff’s brother, his two sons, and niece, all of whom worked alongside Madoff. An additional lawsuit was filed against Madoff’s wife for $44.8 million, stating that she had transferred large amounts of money from the firm “over a six-year period.” As of now, none of the family members—Madoff’s two sons, brother, niece, and wife—have been found guilty on any of the charges. Madoff’s oldest son, Mark, 46, committed suicide in December 2010. Madoff’s victims took swift action against the negligence of SEC and JPMorgan Chase. U.S. District Court Judge Colleen McMahon threw out most of the $19.9 million charges against JPMorgan in November 2011, however. The New York Mets owners paid a settlement of $162 million in March of 2012 to avoid going to trial to answer the allegations made by Irving Picard.

Hidden Secrets? Despite the accusations of negligence that JPMorgan Chase received from the public, it was one of the biggest-profiting financial firms in the Madoff scandal. As stated earlier in the case, JPMorgan made a profit of $483 million. During 2006, “the bank had started offering investors a way to leverage their bets on the future performance of two hedge funds that invested with Mr. Madoff” and decided to place $250 million of their own money inside these funds. A few months before Madoff’s arrest in 2008, JPMorgan withdrew its $250 million, stating that it had become “concerned about the lack of transparency and its due diligence raised doubts about Madoff’s operations.” It is surprising that the bank was suspicious and apprehensive toward investments with Madoff, but at the same time raised no concerns about the large amount of money being deposited in Madoff’s accounts within the bank. JPMorgan also failed to alert investors to move their money, stating that “The issues did not meet the threshold necessary to permit the bank to restructure the notes. . . . We did not have the right to disclose our concerns.” Regardless of the public statements made by JPMorgan in support of its actions, many lawyers and investors believe that the bank had knowledge of Madoff’s scam but wanted to secure high returns for as long as possible.

Ethical Flaws In a 2011 New York Magazine interview, Madoff stated that he never thought the collapse of his Ponzi scheme would cause the sort of destruction that has befallen his family. He asserted that unidentified banks and hedge funds were somehow “complicit” in his elaborate fraud, an about-face from earlier claims that he was the only person involved. “They had to know,” Mr. Madoff said. “But the attitude was sort of, ‘If you’re

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doing something wrong, we don’t want to know.’” To date, none of the major banks or hedge funds that did business with Mr. Madoff have been accused by federal prosecutors of knowingly investing in his Ponzi scheme. However, in civil lawsuits Picard has asserted that executives at some banks expressed suspicions for years, yet continued to do business with Madoff and steer their clients’ money into his hands.

In some ways, Madoff has not tried to evade blame. He has made a full confession, saying that nothing justifies what he did. And yet, for Madoff, that doesn’t settle the matter. He feels misunderstood. He can’t bear the thought that people think he’s evil. “I’m not the kind of person I’m being portrayed as,” he told New York Magazine.

A main issue in this controversy is the continuous fraudulent operations that Madoff was able to maintain for a decade that created a $65 billion Ponzi scheme and shattered the lives of thousands around the world. For most of the world, Bernie Madoff is a monster: he betrayed thousands of investors, and bankrupted charities and hedge funds. On paper, his Ponzi scheme lost nearly $65 billion; the effects spread across five continents. And he brought down his own family with him, a more intimate kind of betrayal.

Bernard Madoff was the central stakeholder who manipulated and involved his brother, two sons, and niece, all of whom worked inside the Bernard L. Madoff Investment Securities LLC. Other key stakeholders included Madoff’s employees, who had invested their money into an operation they believed was legal and ethical. The financial community were also major players, including financial institutions, investment management firms, charitable organizations, and global banks. The government, specifically the SEC, and the justice department, were also heavily involved. The lawyer Irving Picard was a key player, as was the whistle- blower Harry Markopolos and his team who revealed the nature of the scam early on, even though the SEC and other government regulators did not move on the evidence.

As of October 2013, Federal authorities are working toward mounting a criminal investigation into JPMorgan Chase, believing that the bank may have intentionally neglected Madoff’s Ponzi scheme. Having recently agreed to a $13 billion settlement with the U.S. government to settle charges that the bank overstated the quality of mortgages it was selling to investors in the run-up to the financial crisis, the threat of criminal charges over the Madoff case represents another major threat to the reputation of the nation’s largest bank. The resolution of this scheme is not over.

Questions for Discussion 1. What did Madoff do that was illegal and unethical?

2. Identify some of the main reasons that Madoff was able to start and sustain such an enormous Ponzi scheme for as long as he did?

3. Who were/are the major stakeholders involved and affected by Madoff’s scheme and scandal?

4. Did Madoff have accomplices in starting and sustaining his scheme or was he able to do it alone? Explain.

5. How was he caught?

6. What lessons can be learned from Madoff’s scandal?

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

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Abkowitz, Alyssa. (December 19, 2008). Madoff’s auditor . . . doesn’t audit? CNNMoney.com. http://money.cnn.com/2008/12/17/news/companies/madoff.auditor.fortune/, accessed March 22, 2012.

Berenson, Alex, and Mathew Saltmarsh. (January 1, 2009). Madoff investor’s suicide leaves questions. NYTimes.com. http://www.nytimes.com/2009/01/02/business/02madoff.html, accessed March 23, 2012.

Carozza, Dick. (May/June 2009). Chasing Madoff: An Interview with Happy Markopolos, CFE, CFA. FraudMagazine.com. http://www.fraud-magazine.com/article.aspx?id=313, accessed March 22, 2012.

Chew, Robert. (March 25, 2009). Madoff’s banker: Where was JPMorgan Chase? Time.com. http://www.time.com/time/business/article/0,8599,1887338,00.html, accessed March 22, 2012.

Chew, Robert. (May 30, 2009). Irving Picard at center of post-Madoff storm. Time.com. http://www.time.com/time/business/article/0,8599,1901593,00.html, accessed March 23, 2012.

Creswell, Julie, and Landon Thomas. (January 24, 2009). The talented Mr. Madoff. NYTimes.com. http://www.nytimes.com/2009/01/25/business/25bernie.html?pagewanted=1&_r=1, accessed March 22, 2012.

Dienst, J., and K. Honan. (December 13, 2010). Madoff son found dead in suicide. NBCNewYork.com. http://www.nbcnewyork.com/news/local/Mark-111717634.html, accessed March 23, 2012.

Efrati, Amir, Tom Lauricella, and Dionne Sercey. (December 12, 2008). Top broker accused of $50 billion fraud. WSJ.com. http://online.wsj.com/article/SB122903010173099377.html, accessed March 22, 2012.

Ellis, David. (January 5, 2009). Congress looks for answers in Madoff scandal. CNNMoney.com. http://money.cnn.com/2009/01/05/news/companies/madoff_hearing/index.htm, accessed March 22, 2012.

Elstein, Aaron. (August 26, 2009). Madoff account netted J.P. Morgan $483M. CrainsNewYork.com. http://www.crainsnewyork.com/article/20090826/FREE/908269991, accessed March 22, 2012.

Frank, Robert, and Amir Efrati. (June 30, 2009). “Evil” Madoff gets 150 years in epic fraud. WSJ.com. http://online.wsj.com/article/SB124604151653862301.html, accessed March 23, 2012.

Hedgpeth, Dana, and Megan Greenwell. (February 6, 2009). List brings home impact of Madoff scandal. WashingtonPost.com. http://www.washingtonpost.com/wp- dyn/content/article/2009/02/05/AR2009020501865.html?sid=ST2009020501619, accessed March 22, 2012.

Henriques, Diana B. (January 28, 2009). JPMorgan exited Madoff-linked funds last fall. NYTimes.com. http://www.nytimes.com/2009/01/29/business/29madoff.html?pagewanted=1&_r=1, accessed March 22, 2012.

Henriques, Diana, and Alex Berenson. (December 14, 2008). The 17th floor, where wealth went to vanish. NYTimes.com. http://www.nytimes.com/2008/12/15/business/15madoff.html?pagewanted=1, accessed March 23, 2012.

Lattman, Peter, and Annelena Lobb. (June 30, 2009). Victims’ speeches in court influenced judge’s ruling. WSJ.com. http://online.wsj.com/article/SB124632127336071155.html, accessed March 23, 2012.

Lavan, Rosie. (December 15, 2008). Who is Bernard Madoff? TimesOnline. http://www.thetimes.co.uk/tto/business/industries/banking/article2159812.ece, accessed March 22, 2012.

List of Madoff securities fraud victims grows. (December 18, 2008). Newsinferno.com. http://www.newsinferno.com/legal-news/list-of-madoff-securities-fraud-victims-grows/4361, accessed

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March 22, 2012.

Luhby, Tami. (October 2, 2009). Madoff relatives sued for $199 million. CNNMoney.com. http://money.cnn.com/2009/10/02/news/economy/Madoff_lawsuit_family/, accessed March 23, 2012.

Madoff victims’ lawsuit against JPMorgan Chase tossed. (November 2, 2011). HuffingtonPost.com. http://www.huffingtonpost.com/2011/11/02/madoff-victims-lawsuit-jp-morgan-chase_n_1071117.html, accessed March 23, 2012.

McCool, G., and J. Stempel. (March 19, 2012). NY Mets owners settle Madoff case, -avoid trial. ChicagoTribune.com. http://www.chicagotribune.com/sports/sns-rt-us-madoff-metsbre82i0hi- 20120319,0,2199473.story, accessed March 23, 2012.

Morrissey, Janet. (September 3, 2009). After its Madoff report, can victims sue the SEC? Time.com. http://www.time.com/time/business/article/0,8599,1920323,00.html, accessed March 22, 2012.

Neumeister, Larry. (March 18, 2009). David Friehling, Madoff accountant, released on $2.5 million bail. HuffingtonPost.com. http://www.huffingtonpost.com/2009/03/18/david-friehling-madoff- ac_0_n_176479.html, accessed March 22, 2012.

Pavlo, W. (September 16, 2011). David Friehling, Madoff’s accountant, sentencing postponed . . . again. Forbes.com. http://www.forbes.com/sites/walterpavlo/2011/09/16/david-friehling-madoffs-accountant- sentencing-postponed-again/, accessed March 23, 2012.

Protess, B., and J. Silver-Greenberg. (2013). JPMorgan faces possible penalty in Madoff case. DealbookNYTimes.com. http://dealbook.nytimes.com/2013/10/23/madoff-action-seen-as-possible-for- jpmorgan/?_r=0, accessed January 7, 2014.

Rashbaum, William K., and Diana B. Henriques. (March 18, 2009). Accountant for Madoff is arrested and charged with securities fraud. NYTimes.com. http://www.nytimes.com/2009/03/19/business/19madoff.html?_r=1, accessed March 22, 2012.

Smith, Aaron. (October 14, 2009). Madoff victims sue SEC for “negligence.” CNNMoney.com. http://money.cnn.com/2009/10/14/news/economy/madoff_sec_lawsuit/index.htm, accessed March 23, 2012.

Sundby, Alex. (November 3, 2009). Madoff accountant apologizes to victims. CBSnews.com. http://www.cbsnews.com/stories/2009/11/03/cbsnews_investigates/main5510619.shtml, accessed March 23, 2012.

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Case 2 Cyberbullying: Who’s to Blame and What Can Be Done?

What Is Cyberbullying? Cyberbullying is a unique form of bullying that continues in spite of the dire consequences that can and do occur. Cyberbullying has gained significant media attention and countless incidents of bullying continue to occur. Although many cases are reported in the news, probably as many if not more go unreported. Because of the news attention, the phenomenon generated an antibullying movement in 2010. Bullying has been defined as something that one repeatedly does or says to gain power over another person. Unlike traditional bullying, cyberbullying eliminates the need for physical contact with others in order to make them feel inferior. Cyberbullying is “when a child, preteen or teen is tormented, threatened, harassed, humiliated, embarrassed or otherwise targeted by another child, preteen or teen using the Internet, interactive and digital technologies or

mobile phones.”1 Technology as an avenue for intimidation is a hot-button issue for school systems and parents alike. This is uncharted territory, and legislation does not always provide guidance and structure.

The reality is that bullying makes a significantly negative impact on the lives of today’s youth. Cyberbullying directly impacts self-esteem and can, and has, led to suicide among its adolescent victims. Schools, parents, and peers must identify and intervene in cases of cyber bullying. Increased awareness and education about cyber bullying and its consequences can help create a safer online community. Individuals should be held morally responsible for the consequences of their actions online.

Why Cyberbullying? A young adult’s behavior is primarily motivated by a desire to meet his or her basic need for recognition, attention, and approval. In a survey conducted in 1999, students in over 100 schools were asked the following question: “Is it easier for you to get noticed or get attention in this school by doing something positive or

something negative?” Almost 100% replied “negative.”2 Adolescents turn to cyberbullying to fuel their need for attention and recognition from their peers. It began primarily in chat rooms and instant messaging conversations, but has expanded to include social networking web sites (Facebook and MySpace) and video- sharing web sites (YouTube). Text messaging and anonymous web postings are common methods of cyberbullying. Very recently, cyberbullying has established a presence in portable gaming devices through “virtual worlds” and interactive sites.

Cyberbullying is more attractive than traditional bullying for a variety of reasons. First, technology provides the perpetrator with the option of anonymity. Victims often do not know who is targeting them because the bully is able to hide his or her identity through anonymous web posts or fictitious e-mails. Secondly, bullies are able to expand the scope of their impact because a larger network of individuals may be involved in the cyber-attack. With just a few mouse clicks, an entire community may be a participant in the incident, creating the perception that “everyone” knows about it. Many argue that it is psychologically easier to be a cyberbully than a traditional bully. A cyberbully does not have to physically confront the victim and witness the immediate result of a message. Some cyberbullies might not even recognize the severity of their actions, which take place from a different location. Lastly, the response to cyberbullying has been slow, suggesting to perpetrators that there are little or no consequences for malicious online actions.

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Why Is Cyberbullying a Major Issue? Today’s youth are “wired” and connected to technology 24/7. Statistics suggest that “two-thirds of [American] youth go online every day for school work, to keep in touch with their friends, to play games, to learn about

celebrities, to share their digital creations, or for many other reasons.”3 Given the accessibility of technology, it should be no surprise that individuals are using the Internet, cell phones, and other electronic instruments to bully each other. A 2010 study revealed that “30% of middle school students were victims of at least one of nine forms of cyber bullying two or more times in the past 30 days” and “22% of middle school students

admitted to engaging in at least one of five forms of cyber bullying two or more times in the past 30 days.”4

Females are more likely to choose cyberbullying over traditional bullying. The rationale is that females prefer the nonconfrontational nature of technology.

With such a large percentage of today’s youth affected by cyberbullying, something has to be done. Cyberbullying is damaging to the self-esteem of the victims. Typically beginning around middle school, self- perception begins to dictate a child’s sense of self-worth. Teenagers often feel that they are defined by “their erupting skin and morphing bodies, [and] many seventh-grade students have a hard enough time just walking through the school doors. When dozens of kids vote online, which is not uncommon, about whether a student

is fat or stupid or gay, the impact can be devastating.”5 Victims of cyberbullying typically report feeling angry, frustrated, sad, embarrassed, and scared.

An adolescent’s self-esteem can dramatically decrease during puberty. In one survey, when kids in kindergarten were asked if they like themselves, 95% or more said “yes.” By fourth grade, the percentage of kids who reported liking themselves was down to 60%; by eighth grade the percentage was down to 40%; and by twelfth grade it was down to 5%.

Meet the Victims Phoebe Prince. On January 14, 2010, Phoebe Prince was found dead in her South Hadley, Massachusetts home. Phoebe was 15 years old and a recent immigrant from Ireland attending South Hadley High School. As a freshman in high school, she had a romantic fling with a senior football player, upsetting the other girls at her school. They tormented her relentlessly, calling her a “slut.” They even followed her home one day, throwing things at her from their moving car. Phoebe took her own life when the intimidation became too much. She was found dead by her 12-year-old sister.

Immediately following the death of Phoebe Prince, the girls who bullied her mocked her death on the Internet. It was confirmed that Phoebe had been a victim of both cyberbullying and daily physical abuse. Many students reported to school officials that Phoebe was the victim of harassment via social networking sites like Facebook and text messages. Two students of South Hadley High School were later suspended as a

result. Principal Daniel Smith observed that “the bullying often surrounded arguments about teen dating.”7

Even in her death, a Facebook page created in her memory contained cruel messages posted by bullies.

Megan Meier. Another high-profile case was that of Megan Meier, a 13-year-old girl whose suicide was the result of cyberbullying. In October 2006, Tina and Ron Meier found their daughter’s body in a bedroom closet. Megan had hanged herself. A few weeks earlier, Megan established a relationship with a boy using the social networking site MySpace. Megan and the boy, “Josh Evans”—later discovered to be a fake cover name for another (others) to use as Megan’s cyberbullies, quickly formed an online relationship. The catch, as noted:

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Josh Evans was not a real person. Evans claimed to be a 16-year-old boy who lived in a nearby town but was homeschooled. There were several red flags to suggest that Josh Evans did not exist, but to Megan Meier, an already insecure teenager on medication for depression, the boy seemed very real. The so-called Josh even told Megan that he did not have a phone, restricting him to virtual communication.

Megan’s online relationship with Josh then took a turn for the worse. Megan received a message from Josh on MySpace saying, “I don’t know if I want to be friends with you any longer because I hear you’re not nice to your friends.” A bully was using Josh’s account to send cruel messages. Megan called her mother, describing

electronic bulletins posted about her saying things like “Megan Meier is a slut. Megan Meier is fat.”8 Megan had an existing history of depression, and these messages were a crushing blow to her self-esteem. The stress of the situation was too much for Megan, and she took her own life shortly after these messages were posted.

The person orchestrating Josh Evan’s fictitious account was actually a neighborhood mother. Lori Drew, aged 47 at the time of Megan’s death, was the mother of one of Megan’s former friends. Lori Drew knew that Megan had been prescribed antidepressants but still used the fraudulent identity to torment Megan. Drew’s reasoning was that Megan had been mean to her daughter and needed to be taught a lesson. This highly unusual case went to trial in November 2008, and Drew was found guilty of three misdemeanors. She did not serve any jail time.

The Beverly Vista School. In May of 2008, Evan S. Cohen confronted the Beverly Vista School in Beverly Hills, California, for disciplining his eighth-grade daughter, J. C. Cohen for cyberbullying. J. C. had videoed friends at a café egging another eighth-grade girl. In the video, J. C. and her friends make mean-spirited comments toward the victim, calling her “ugly,” “spoiled,” and a “slut.” When the video surfaced online, the Beverly Vista School suspended J. C. for two days, along with her accomplices.

Mr. Cohen, a lawyer in the music industry, sued the school on behalf of his daughter. “What incensed me,” he said, “was that these people were going to suspend my daughter for something that happened outside of

school.”9 The legal test was whether or not the video had caused the school “substantial” disruption. According to the law, a student can only be suspended when his or her speech interferes “substantially” with the school’s educational mission. The judge ruled in favor of Cohen, and the school district was required to

pay Cohen’s legal expenses amounting to $107,150.80.10 “The Judge also threw in an aside that summarizes the conundrum that is adolescent development, acceptable civility and school authority. The good intentions of the school notwithstanding, he wrote, it cannot discipline a student for speech, simply because young persons are unpredictable or immature, or because, in general, teenagers are emotionally fragile and may often

fight over hurtful comments.”11

No case involving student online speech has yet been brought before the Supreme Court. Lower courts have ruled both ways, sometimes siding with schools disciplining their students and other times siding with the individual perpetrator.

Legislation for Cyberbullying In response to these and other cases, the Federal government has taken steps to prevent and to manage cyberbullying, including the drafting of the Megan Meier Cyberbullying Prevention Act (H.R. 1966). This bill proposes that Chapter 41 of Title 18 of the United States Code (related to extortion and threats) be

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amended to define cyberbullying and related penalties. According to the Act, cyberbullying is not limited to

socialnetworking web sites but also includes e-mail, instant messaging, blogs, web sites, telephones, and text messages. “The bill would amend the federal criminal code to impose criminal penalties on anyone who transmits in interstate or foreign commerce a communication intended to coerce, intimidate, harass, or cause substantial emotional distress to another person, using electronic means to support severe, repeated, and

hostile behavior.”12

The Megan Meier bill was introduced to the House of Representatives on April 2, 2009. It was referred to two subcommittees—the House Judiciary Committee and the House Judiciary Subcommittee on Crime, Terrorism, and Homeland Security. The last action was on September 30, 2009, when subcommittee hearings were held. The bill has not become law. It was a part of a previous session of Congress and must be reintroduced in order to be reconsidered for law.

State governments are also considering laws against cyberbullying. On May 3, 2010, Governor Deval Patrick signed new antibullying legislation that places greater responsibility on schools to intervene in bullying situations. “Bullying, as defined by the bill, encompasses crimes such as stalking and harassment. The anti- bullying legislation specifically holds provisions for anti-bully training, and mandates that all school employees, including teachers, cafeteria staff, janitorial staff, etc., must report and investigate incidents involving bullying. Teachers must also notify all parents of the students involved in the bullying incident. It

also includes an anti-bullying curriculum to be taught in both public and private schools.”13

Although a step in the right direction, the bill does not assign specific penalties to those who do not intervene in instances of bullying. Following the bill’s implementation, bullying continues to be a major issue in Massachusetts schools.

On February 13, 2013, Illinois State Senate representative Ira I. Silverstein introduced the Internet Posting Removal Act—SB 1614. When you read the bill solely through cyberbullying-prevention lenses, it makes sense. But what happens when politicians start using the statute to silence critics? Precise language is a must when it comes to laws; loose lips sink ships and loose language can annihilate freedoms.

The Impact of Facebook and MySpace The growth of social networking web sites such as Facebook and MySpace in the past decade has contributed to the prevalence of cyberbullying. Both socialnetworking giants have experience in dealing with cyberbullying. Facebook and MySpace have accessible help centers that provide postings and suggestions on how users can fight back against cyberbullying.

Facebook gives users the responsibility to manage cyberbullying. On Facebook’s Help Menu, advisory information is available for teens and parents regarding how to handle cyberbullying. Facebook provides a mechanism for users to report abusive behavior by another user. After the abuse is reported, Facebook investigates the behavior. Facebook also gives users the ability to block specific individuals and restrict privacy settings. There are comprehensive instructions on Facebook’s web site to make online safety as user-friendly as possible.

Facebook also encourages users to avoid retaliation, recommending that victims block or report abusers rather than respond via “inbox, wall posting, or Facebook Chat.” A section of Facebook’s Help Center is dedicated to educating parents about ways to protect their teens from cyberbullying. This page emphasizes the

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need for communication among parents and teens regarding expectations and the use of common sense. Though Facebook cannot prevent and monitor every issue of online harassment, the company recognizes that cyberbullying is an issue and is doing what it can to empower users.

MySpace, another socialnetworking leader, recognizes the negative consequences of cyberbullying and has similar content to help its users. MySpace users have the ability to “block” individuals and report instances of harassment. MySpace has a zero tolerance policy for hate speech, harassment, and cyberbullying, and pledges

to do its best to respond to reported situations within 48 hours.14 Parents have the power to delete the contents of their son’s or daughter’s MySpace page. The web site also provides safety tips for teens and parents, including links to more resources and safety videos.

MySpace has developed a team of specialists to assist parents with inquiries regarding their teens’ profiles. The Parent Care Team must be initiated for review by a parent and can perform actions other than simply deleting a teen’s profile. For instance, the Parent Care Team can lock (i.e., fix in place as unchangeable) the age on a teen’s profile and answer any questions that a parent may have about their teen’s MySpace page. This service is available via e-mail and detailed instructions are available.

Although Facebook and MySpace have taken steps to prevent cyberbullying on their respective web sites, these efforts are not enough. Cyberbullying is still a major issue on socialnetworking sites and on other forms of media and communication. To push forward to a solution, questions must be raised about who should be held accountable in instances of cyberbullying.

Conclusion Cyberbullying is a real issue that deserves recognition. We should be educating adolescents about the potentially damaging effects of their actions, responding to incidents, and holding the appropriate people accountable in instances of cyberbullying. All stakeholders in cyberbullying should take this issue very seriously. Cyberbullying can have an incredibly harmful effect on adolescents if nobody intervenes. Teenagers, parents, schools, and the government especially, have a moral responsibility to take action when they come across cyberbullying. From an ethical perspective, we can no longer be bystanders. Take a stand against cyberbullying.

Questions for Discussion 1. Have you or someone you know ever been involved in cyberbullying, as a bully or victim? If so, what are the

feelings and effects associated with cyberbullying in the situations with which you are familiar?

2. What are the issues with cyberbullying? Explain.

3. Who are the stakeholders in cyberbullying cases and what are the stakes for them?

4. Who is ethically responsible for the rise and continuance of cyberbullying?

5. Should socialnetworking sites be censored in an effort to stop cyberbullying? Explain.

6. Is it legal and ethical to censor socialnetworking sites to stop cyberbullying? Explain.

7. What is Congress doing about this situation?

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

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Clabough, Raven. (May 4, 2010). “Anti-Bullying Legislation in Massachusetts.” New American. https://groups.yahoo.com/neo/groups/SepSchool/conversations/messages/26894, accessed April 23, 2014.

Cullen, Kevin. (February 2, 2010). “No Safe Haven for Bullies.” Boston Globe. http://www.boston.com/news/local/massachusetts/articles.

Cullen, Kevin. (January 24, 2010). “The Untouchable Mean Girls.” Boston Globe. http://www.boston.com/news/local/massachusetts/articles/2010/01/24/the_untouchable_mean_girls/, accessed April 3, 2012.

“Facebook Help Center.” Facebook.com. http://www.facebook.com.

Hinduja, Sameer, and Justin W. Patchin. (February 1, 2011). “Cyberbullying Identification, Prevention, and Response.” Cyberbullying Research Center. http://www.cyberbullying.us/cyberbullying_identification_prevention_response.php.

Hinduja, Sameer, and Justin W. Patchin. (February 1, 2011). “Fact Sheet—Cyberbullying and Self Esteem.” Cyberbullying Research Center. http://www.cyberbullying.us/cyberbullying_and_self_esteem.php.

Hoffman, Jan. (January 27, 2010). “Online Bullies Pull Schools into the Fray.” New York Times. http://www.nytimes.com/2010/06/28/style/28bully.html?_r=1&pagewanted=all, accessed April 3, 2012.

“H.R. 1966: Megan Meier Cyberbullying Prevention Act.” (February 2, 2011) Govtrack.us. http://www.govtrack.us/congress/bills/111/hr1996, accessed April 3, 2012.

Kowalski, Robin M. (2008). Cyber Bullying: Bullying in the Digital Age. Malden: Blackwell.

“Mayor Menino Launches Anti-cyber Bullying Hotline.” February 17, 2010. WHDH 7 News, NBC. http://www4.whdh.com/news/articles/local/boston/BO135777/.

McQuade, Samuel C. (2009). Cyber Bullying: Protecting Kids and Adults from Online Bullies. Westport: Praeger Publishers.

“Monitoring Internet Use.” (February 14, 2011). Mass.Gov. http://www.mass.gov.

“MySpace—Help Center.” MySpace. http://www.myspace.com.

“Parents: Cyber Bullying Led to Teen’s Suicide.” November 19, 2007 ABC News. http://abcnews.go.com/GMA/story?id=3882520, accessed February 19, 2014.

Shariff, Shaheen. (2009). Confronting Cyber-Bullying. New York: Cambridge University Press, 2009.

“Social Networking Sites.” (February 14, 2011). Mass. Gov. http://www.mass.gov.

Weinhold, Barry K. (February 2000). “Uncovering the Hidden Causes of Bullying and School Violence.” Counseling and Human Development.

National Crime Prevention Council. “What Is Cyberbully, Exactly?” Stop Cyberbullying. WiredKids, Inc. http://www.stopcyberbullying.org/what_is_cyberbullying_exactly.html, accessed April 3, 2012.

Notes 1. National Crime Prevention Council. “What Is Cyberbullying, Exactly?” Stop Cyberbullying. WiredKids,

Inc. http://www.stopcyberbullying.org/what_is_cyberbullying_exactly.html, accessed April 3, 2012.

2. Weinhold, Barry K. (February 2000). “Uncovering the Hidden Causes of Bullying and School Violence.” Counseling and Human Development.

3. Hinduja, S. and J.W. Patchin. (2010). “Fact Sheet: Cyberbullying and Self-Esteem”. Cyberbullying

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Research Center. http://www.cyberbullying.us/cyberbullying_and_self_esteem.php, accessed April 3, 2012.

4. Ibid.

5. Weinhold, Barry K. (February 2000). “Uncovering the Hidden Causes of Bullying and School Violence.” Counseling and Human Development.

6. Ibid.

7. Cullen, K. (January 24, 2010). “The Untouchable Mean Girls.” Boston Globe. http://www.boston.com/news/local/massachusetts/articles/2010/01/24/the_untouchable_mean_girls/, accessed April 3, 2012.

8. “Parents: Cyber Bullying Led to Teen’s Suicide.” (November 19, 2007). ABC News. http://abcnews.go.com/GMA/story?id=3882520, accessed April 3, 2012.

9. Hoffman, J. (June 27, 2010). “Online Bullies Pull Schools Into the Fray.” New York Times. http://www.nytimes.com/2010/06/28/style/28bully.html?_r=1&pagewanted=all, accessed April 3, 2012.

10. Ibid.

11. Ibid.

12. “H.R. 1966: Megan Meier Cyberbullying Prevention Act”. (February 2, 2011). Govtrack.us. http://www.govtrack.us/congress/bills/111/hr1966, accessed April 3, 2012.

13. Clabough, R. (May 4, 2010). “Anti-Bullying Legislation in Massachusetts”. New American. https://groups.yahoo.com/neo/groups/SepSchool/conversations/messages/26894, accessed April 23, 2014.

14. “MySpace—Help Center”. (2012). MySpace. http://www.myspace.com/help, accessed April 3, 2012.

Notes

1. Illegal downloading? What’s illegal? Yahoo! Answers. http://uk.answers.yahoo.com/question/index? qid=20080229100732AAsCQpt, accessed March 7, 2012.

2. Kravets, David. (March 18, 2013). Supreme court OKs $222K verdict for sharing 24 songs. Wired.com. http://www.wired.com/threatlevel/2013/03/scotus-jammie-thomas-rasset/, accessed August 17, 2013.

3. Kirk, Jeremy. (2008). U.S. judge pokes hole in file-sharing lawsuit. Court ruling could force the music industry to provide more evidence against people accused of illegal file sharing, legal experts say. InfoWorld.com. http://www.infoworld.com/article/08/02/26/US-judge-pokes-hole-in-file-sharing- lawsuit_1.html, accessed March 7, 2012; Recording Industry Association of America. (March 2008). New wave of illegal file sharing lawsuits brought by RIAA. RIAA.com. http://www.riaa.com/newsitem.php? news_year_filter=2004&resultpage=10&id=D119AD49-5C18-2513-AB36-A06ED24EB13D, accessed March 7, 2012; McMillan, G. (May 10, 2011). Are you one of 23,000 defendants in the US’ biggest illegal download lawsuit? Time.com. http://techland.time.com/2011/05/10/are-you-one-of-23000-defendants-in- the-us-biggest-illegal-download-lawsuit/, accessed March 7, 2012; Pepitone, J. (June 10, 2011). 50,000 BitTorrent users sued for alleged illegal downloads. CNNMoney.com. http://money.cnn.com/2011/06/10/technology/bittorrent_lawsuits/index.htm, accessed March 7, 2012; Brian, M. (January 7, 2012). Apple facing $1.88 million lawsuit in China over sales of illegal book downloads.

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The Next Web. http://thenextweb.com/apple/2012/01/07/apple-facing-1-88-million-lawsuit-in-china-over- sales-of-illegal-book-downloads/, accessed March 7, 2012.

4. The Broadband Commission Report (2012).

5. Evis, P. (2013). In one bundle of mortgages, the subprime crisis reverberates. Deal-BookNYTimes.com. http://dealbook.nytimes.com/2013/08/12/in-one-bundle-of-mortgages-the-subprime-crisis-reverberates/? _r=0.

6. Schwartz, N. D. (June 29, 2011). Bank of America settles claims stemming from mortgage crisis. NYTimes.com. http://www.nytimes.com/2011/06/30/business/30mortgage.html?_r=1&pagewanted=all, accessed March 7, 2012.

7. Confidence in institutions. (n.d.) Gallup.com. http://www.gallup.com/poll/1597/confidence- institutions.aspx#3, accessed August 21, 2013.

8. Ibid.

9. Bloxham, E. (April 13, 2011). How can we address excessive CEO pay? CNNMoney.com. http://management.fortune.cnn.com/2011/04/13/how-can-we-address-excessive-ceo-pay/, accessed March 7, 2012.

10. Top CEO pay ratios. (April 30, 2013). Bloomberg.com. http://go.bloomberg.com/multimedia/ceo-pay- ratio/, accessed August 21, 2013.

11. Smith, E. and Kuntz, P. (April 29, 2013). CEO pay 1,795-to-1 multiple of wages skirts U.S. law. Bloomberg.com. http://www.bloomberg.com/news/2013-04-30/ceo-pay-1-795-to-1-multiple-of-workers- skirts-law-as-sec-delays.html, accessed August 21, 2013.

12. Smith, P. (July 18, 2002). Sarbanes bill is “unenforceable.” AccountancyAge.com. http://www.accountancyage.com/News/112993, accessed March 7, 2012.

13. O’Sullivan, K., and Durfree, D. (June 1, 2004). Offshoring by the numbers. CFO Magazine, 20(7), 49– 54. http://www.cfo.com/article.cfm/3014067, accessed August 21, 2013.

14. Ricciuti, M., and Yamamoto, M. (May 5, 2004). Outsourcing: Where to draw the line? CNET News. http://www.zdnet.com/news/outsourcing-where-to-draw-the-line/135880, accessed August 21, 2013.

15. West, N. (May 6, 2012). 5 Ways Robots Are Outsourcing Humans in the Workforce. Activist Post. http://www.activistpost.com/2012/05/5-ways-robots-are-outsourcing-humans-in.html, accessed February 3, 2014.

16. Ibid.

17. Ibid.

18. Friedman, T. (2000). The Lexus and the olive tree, 17, 20, 24. New York: Anchor Books.

19. Ibid., pp. 2, 20.

20. Ibid., p. 28.

21. The Consumer Financial Protection Bureau’s official web site is http://www.consumerfinance.gov/. Also see the bureau’s 2013–2017 strategic plan at http://www.consumerfinance.gov/strategic-plan/.

22. Fieser, J. (2009). Ethics. Internet Encyclopedia of Philosophy, IEP. http://www.iep.utm.edu/ethics/, accessed February 3, 2014.

23. Ibid.

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24. Ibid.

25. Nash, L. (1990). Good intentions aside: A manager’s guide to resolving ethical problems, 5. Boston: Harvard Business School Press.

26. Ethics Resource Center. (2011). 2011 National business ethics survey: Workplace ethics in transition. Ethics.org. http://www.ethics.org/nbes/files/FinalNBES-web.pdf, accessed March 7, 2012.

27. Ibid.

28. Ibid.

29. Ibid.

30. Ibid.

31. Ibid.

32. Ibid.

33. Ibid.

34. Morse, Jennifer Roback. (October 2003). The economic costs of sin. American Enterprise 14(7), 14– 14); Frooman, J. (1997). Socially irresponsible and illegal behavior and shareholder wealth. Business & Society, 36(3), 221–229.

35. Employee fraud, theft cost firms $40 billion yearly. (December 30, 2008). Security-Solutions.com. http://securitysolutions.com/news/fraud-theft-cost/, accessed March 10, 2012; Callahan, D. (2004). The cheating culture: Why more Americans are doing wrong to get ahead. New York: Harcourt.

36. (June 2011). Integrity seen as top leadership trait. E-Scan Newsletter, 37(6), p. 7.

37. Hewitt Associates. (January 3, 2008). 50 best employers in Canada offer flexibility, demonstrate integrity, according to Hewitt Associates. NewsWire.ca. http://www.newswire.ca/en/story/293217/50-best- employers-in-canada-offer-flexibility-demonstrate-integrity-according-to-hewitt-associates, accessed February 3, 2014.

38. Ibid.

39. (n.d.). Fortune: 100 best companies to work for. CNNMoney.com. http://money.cnn.com/magazines/fortune/best-companies/, accessed August 18, 2013.

40. Graves, S., and Waddock, S. (1993). Institutional owners and corporate social performance: Maybe not so myopic after all. Proceedings of the International Association for Business and Society, San Diego; Graves, S., and Waddock, S. (1997). The corporate social performance—financial performance link. Strategic Management Journal, 18, 303–319.

41. Carroll, A. (1993). Business and society: Ethics and stakeholder management, 3rd ed., 110–112. Cincinnati: South-Western.

42. Kalwall Corporation. (n.d.). Malden Mills: Daylight from ashes. Kalwall.com. http://www.kalwall.com/rcntproj/1.htm, accessed March 10, 2012; The mensch of Malden Mills. (July 3, 2003). CBSNews.com. http://www.cbsnews.com/stories/2003/07/03/60minutes/main561656.shtml, accessed January 9, 2014.

43. Conway, K. (2007). Illness and the Limits of Expression. p. 20.

44. Friedman, M. (September 13, 1970). The social responsibility of business is to increase its profits. New York Times Magazine, 33.

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45. Frooman, op. cit.

46. Key, S., and Popkin, S. (1998). Integrating ethics into the strategic management process: Doing well by doing good. Management Decision, 36(5), 331–338. Also see Allinson, R. (1993). Global disasters: Inquiries into management ethics. New York: Prentice Hall; and Arthur, H. (1984). Making business ethics useful. Strategic Management Journal, 5, 319–333.

47. Senge, P. (1990). The fifth discipline: the art and practice of the learning organization. New York: Doubleday. Also see the following sources: In search of the holy performance grail. (April 1996). Training & Development, 26–32; and Covey, S. R. (1989). The seven habits of highly effective people. New York: Simon & Schuster.

48. DeGeorge, R. (1999). Business ethics, 5th ed. Upper Saddle River, NJ: Prentice Hall.

49. Stone, C. D. (1975). Where the law ends. New York: Harper & Row.

50. Buchholz, R. (1989). Fundamental concepts and problems in business ethics. Englewood Cliffs, NJ: Prentice Hall. For more information, see Buchholz, R. A. (1995). Business environment and public policy, 5th ed. Englewood Cliffs, NJ: Prentice Hall.

51. Newton, L. (1986). The internal morality of the corporation. Journal of Business Ethics, 5, 249–258.

52. Hoffman, M., and Moore, J. (1995). Business ethics: Readings and cases in corporate morality, 3rd ed. New York: McGraw-Hill.

53. DeGeorge, R. (2000). Business ethics and the challenge of the information age. Business Ethics Quarterly, 10(1), 63–72.

54. Ibid.

55. Stone, op. cit.

56. Carroll, op. cit.

57. Stead, B., and Miller, J. (1988). Can social awareness be decreased through business school curriculum? Journal of Business Ethics, 7(7), 30.

58. Jones, T. (1989). Ethics education in business: Theoretical considerations. Organizational Behavior Teaching Review, 13(4), 1–18.

59. Hanson, K. O. (September 1987). What good are ethics courses? Across the Board, 10–11.

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2 ETHICAL PRINCIPLES, QUICK TESTS, AND

DECISION-MAKING GUIDELINES

2.1 Ethical Reasoning and Moral Decision Making

2.2 Ethical Principles and Decision Making

Ethical Insight 2.1

2.3 Four Social Responsibility Roles

2.4 Levels of Ethical Reasoning and Moral Decision Making

2.5 Identifying and Addressing Ethical Dilemmas

Ethical Insight 2.2

2.6 Individual Ethical Decision-Making Styles

2.7 Quick Ethical Tests

2.8 Concluding Comments

Chapter Summary

Questions

Exercises

Real-Time Ethical Dilemma

Cases

3. Ford’s Pinto Fires: The Retrospective View of Ford’s Field Recall Coordinator

4. Jerome Kerviel: Rogue Trader or Misguided Employee? What Really Happened at the Société Générale?

5. Samuel Waksal at ImClone

Notes

OPENING CASE

Louise Simms, newly graduated with a Master of Business Administration (MBA) degree, was hired by a firm based in the United States. With minimal training, she was sent to join a company partner to negotiate with a high-ranking Middle Eastern government official. The partner informed Simms that he would introduce her to the government contact and then leave her to “get the job done.” Her assignment was to “do whatever it takes to win the contract: it’s worth millions to us.” The contract would enable Simms’s firm to select and manage technology companies that would install a multimillion-dollar computer system for that government. While in the country, Simms was told by the official that Simms’s firm had “an excellent chance of getting the

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contract” if the official’s nephew, who owned and operated a computer company in that country, could be assured “a good piece of the action.”

On two different occasions, while discussing details, the official attempted unwelcome advances toward Simms. He backed off both times when he observed her subtle negative responses. Simms was told that “the deal” would remain a confidential matter and the official closed by saying, “That’s how we do business here; take it or leave it.” Simms was frustrated about the terms of the deal and about the advances toward her. She called her superior in Chicago and urged him not to accept these conditions because of the questionable arrangements and also because of the disrespect shown toward her, which she said reflected on the company as well. Simms’s supervisor responded, “Take the deal! And don’t let your emotions get involved. You’re in another culture. Go with the flow. Accept the offer and get the contract groundwork started. Use your best judgment on how to handle the details.”

Simms couldn’t sleep that night. She now had doubts about her supervisor’s and the government administrator’s ethics. She felt that she had conflicting priorities. This was her first job and a significant opportunity. At the same time, she had to live with herself.

2.1 Ethical Reasoning and Moral Decision Making The ultimate basis for ethics is clear: Much human behavior has consequences for the welfare of others. We are capable of acting toward others in such a way as to increase or decrease the quality of their lives. We are capable of helping or harming. . . . The proper role of ethical reasoning is to highlight acts of two kinds: those that enhance the well-being of others—that warrant our praise—and those who harm or diminish the well-being of others—and thus warrant our criticism. Developing one’s ethical reasoning abilities is crucial because there is in

human nature a strong tendency toward egotism, prejudice, self-justification, and self-deception.1

Ethical reasoning helps determine and differentiate between right thinking, decisions, and actions and those that are wrong, hurtful and/or harmful—to others and to ourselves. Ethics is based on and motivated by values, beliefs, emotions, and feelings as well as facts. Ethical actions also involve conscientious reasoning of facts based on moral standards and principles. Business ethics refers to applying ethical reasoning and principles to commercial activities that are often profit-oriented.

Three Criteria in Ethical Reasoning The following criteria can be used in ethical reasoning. They help to systematize and structure our

arguments:2

1. Moral reasoning must be logical. Assumptions and premises, both factual and inferred, used to make judgments should be known and made explicit.

2. Factual evidence cited to support a person’s judgment should be accurate, relevant, and complete.

3. Ethical standards used in reasoning should be consistent. When inconsistencies are discovered in a person’s ethical standards in a decision, one or more of the standards must be modified.

Returning to this chapter’s opening case, if Louise Simms were to use these three criteria, she would articulate the assumptions underlying her decision. If she chose to accept the official’s offer, she might reason that she assumed it was not a bribe or that if it were a bribe she would not get caught, and that even if she or her company did get caught, she would be willing to incur any penalty individually, including the loss of her

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job. Moreover, Louise would want to obtain as many facts as she could about the U.S. laws and the Middle Eastern country’s laws on negotiating practices. She would gather information from her employer and check the accuracy of the information against her decision.

She would have to be consistent in her standards. If she chooses to accept the foreign official’s conditions, she must be willing to accept additional contingencies consistent with those conditions. She could not suddenly decide that her actions were “unethical” and then back out midway through helping the official’s nephew obtain part of the contract. She must think through these contingencies before she makes a decision.

Finally, a simple but powerful question can be used throughout your decision-making process: What is my motivation and motive for choosing a course of action? Examining individual motives and separating these from the known motivations of others provides clarity and perspective. Louise, for example, might ask, “Why did I agree to negotiate with the official on his terms? Was it for money? To keep my job? To impress my boss? For adventure?” She also might ask whether her stated motivation from the outset would carry her commitments through the entire contracting process.

Moral Responsibility Criteria A major aim of ethical reasoning is to gain a clear focus on problems to facilitate acting in morally responsible ways. Individuals are morally responsible for the harmful effects of their actions when (1) they knowingly and freely acted or caused the act to happen and knew that the act was morally wrong or hurtful to others and (2) they knowingly and freely failed to act or prevent a harmful act, and they knew it would be morally wrong for a person to

do this.3 Although no universal definition of what constitutes a morally wrong act exists, an act and the consequences of an act can be defined as morally wrong if physical or emotional harm is done to another as a result of the act.

Two conditions that eliminate a person’s moral responsibility for causing injury or harm are ignorance and

inability.4 However, persons who intentionally prevent themselves from knowing that a harmful action will occur are still responsible. Persons who negligently fail to inform themselves about a potentially harmful matter may still be responsible for the resultant action. Of course, some mitigating circumstances can excuse or lessen a person’s moral responsibility in a situation. These include circumstances that show: (1) a low level of or lack of seriousness to cause harm, (2) uncertainty about knowledge of wrongdoing, and (3) the degree to which a harmful injury was caused or averted. As we know from court trials, proving intent for an alleged illegal act is not an easy matter. Legally, a case involving a defendant is generally in jeopardy when there is sufficient physical as well as other evidence demonstrating that a person “knowingly and willingly” showed intent to commit an illegal act. However, the extent to which a person is morally irresponsible can be difficult to determine.

2.2 Ethical Principles and Decision Making

In this section, five fundamental principles used in ethical reasoning that are both classic and timely are discussed to solve dilemmas in everyday life as well as in complex business situations. Observe Figure 2.1 as you read this section. Since we are examining stakeholders in this text, and we all are stakeholders in different situations, we illustrate how the following principles apply to stakeholders using classic principles. The

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principles are: (1) utilitarianism, (2) universalism, (3) rights, (4) justice, and (5) ethical virtue. After reviewing these principles, we show some “quick ethical tests” that can also be used to clarify ethical dilemmas.

Figure 2.1 Summary of Five Ethical Decision-Making Principles with Stakeholder Analysis

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Take the quick ethics assessment in Ethical Insight 2.1. After you have read and reflected on the five principles, return to the assessment and see which of the principles you may consciously or routinely use in your everyday decision making or when deciding complex dilemmas. Which principle would “work” for you?

Ethical Insight 2.1 Are You Ethical?

Answer each question with your first reaction. Circle the number, from 1 to 4, that best represents your beliefs, if 1 represents “Completely agree,” 2 represents “Often agree,” 3 represents “Somewhat disagree,” and 4 represents “Completely disagree.”

1. I consider myself the type of person who does whatever it takes to get the job done, period. 1 2 3 4

2. Ethics should be taught at home and in the family, not in professional or higher education. 1 2 3 4

3. I believe that the “golden rule” is that the person who has the gold rules. 1 2 3 4

4. Rules are for people who don’t really want to make it to the top of a company. 1 2 3 4

5. Acting ethically at home and with friends is not the same as acting ethically on the job. 1 2 3 4

6. I would do what is needed to promote my own career in a company, short of committing a serious crime. 1 2 3 4

7. Cutthroat competition is part of getting ahead in the business world. 12 3 4

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8. Lying is usually necessary to succeed in business. 12 3 4

9. I would hide truthful information about someone or something at work to save my job. 1 2 3 4

10. I consider money to be the most important reason for working at a job or in an organization. 1 2 3 4

Add up all the points. Your Total Score is: ____

Total your scores by adding up the numbers you circled. The lower your score, the more questionable your (business-related) ethical principles. The lowest possible score is 10, which indicates you are highly unethical; the highest score is 40, indicating you are highly ethical; 20 signals “questionable ethics”; 30 indicates you are more ethical than unethical, but caution should be taken about consequences of your behaviors.

Source: © Joseph W. Weiss. No part or the whole of this document should be reprinted or duplicated in any form without the expressed written/typed consent of the author, [email protected].

Utilitarianism: A Consequentialist (Results-Based) Approach Jeremy Bentham (1748–1832) and John Stuart Mill (1806–1873) are acknowledged as founders of the concept of utilitarianism. Although various interpretations of the concept exist, the basic utilitarian view holds that an action is judged as right or good on the basis of its consequences. The ends of an action justify the means taken to reach those ends. As a consequentialist principle, the moral authority that drives utilitarianism is the calculated consequences, or results, of an action, regardless of other principles that determine the means or

motivations for taking the action. Utilitarianism also includes the following tenets:5

1. An action is morally right if it produces the greatest good for the greatest number of people.

2. An action is morally right if the net benefits over costs are greatest for all affected, compared with the net benefits of all other possible choices.

3. An action is morally right if its benefits are greatest for each individual and if these benefits outweigh the costs and benefits of the alternatives.

There are also two types of criteria used in utilitarianism: rule-based and act-based.6, 7 Rule-based utilitarianism argues that general principles are used as criteria for deciding the greatest benefit to be achieved from acting a certain way. The act itself is not the basis used for examining whether the greatest good can be gained. For example, “stealing is not acceptable” could be a principle that rule-based utilitarians would follow to gain the greatest utility from acting a certain way. “Stealing is not acceptable” is not an absolute principle that rule-based utilitarians would follow in every situation. Rule-based utilitarians might choose another principle over “stealing is not acceptable” if the other principle provided a greater good.

Act-based utilitarians, on the other hand, analyze a particular action or behavior to determine whether the greatest utility or good can be achieved. Act-based utilitarians might also choose an action over a principle if the greatest utility could be gained. For example, an employee might reason that illegally removing an untested chemical substance from company storage would save the lives of hundreds of infants in a less advantaged country because that chemical is being used in an infant formula manufactured in that country. The employee could lose his job if caught; still he calculates that stealing the chemical in this situation provides the greatest utility.

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Utilitarian concepts are widely practiced by government policy makers, economists, and business professionals. Utilitarianism is a useful principle for conducting a stakeholder analysis, because it forces decision makers to (1) consider collective as well as particular interests, (2) formulate alternatives based on the greatest good for all parties involved in a decision, and (3) estimate the costs and benefits of alternatives for

the affected groups.8

Louise Simms could use utilitarian principles in her decision making by identifying each of the stakeholders who would be affected by her decision. She would then calculate the costs and benefits of her decision as they affect each group. Finally, she would decide on a course of action based on the greatest good for the greatest number. For example, after identifying all the stakeholders in her decision, including her own interests, Simms might believe that her firm’s capabilities were not competitive and that rejecting the offer would produce the greatest good for the people of the country where the contract would be negotiated, because obtaining bids from the most technically qualified companies would best serve the interests of those receiving the services.

Problems with utilitarianism include the following:

1. No agreement exists about the definition of “good” for all concerned. Is it truth, health, peace, profits,

pleasure, cost reductions, or national security?9

2. No agreement exists about who decides. Who decides what is good for whom? Whose interests are primary in the decisions?

3. The actions are not judged, but rather their consequences. What if some actions are simply wrong? Should decision makers proceed to take those actions based only on their consequences?

4. How are the costs and benefits of nonmonetary stakes, such as health, safety, and public welfare, measured?

Should a monetary value be assigned to nonmarketed benefits and costs?10 What if the actual or even potentially harmful effects of an action cannot be measured in the short term, but the action is believed to have potentially long-term effects, say in 20 or 30 years? Should that action be chosen?

5. Utilitarianism does not consider the individual. It is the collective for whom the greatest good is estimated. Do instances exist when individuals and their interests should be valued in a decision?

6. The principles of justice and rights are ignored in utilitarianism. The principle of justice is concerned with the distribution of good, not the amount of total good in a decision. The principle of rights is concerned with individual entitlements, regardless of the collective calculated benefits.

Even given these problems, the principle of utilitarianism is still valuable under some conditions: when resources are fixed or scarce; when priorities are in conflict; when no clear choice fulfills everyone’s needs; and when large or diverse collectives are involved in a zero-sum decision, that is, when a gain for some corresponds

to a loss for others.11

Utilitarianism and Stakeholder Analysis Because businesses use utilitarian principles when conducting a stakeholder analysis, you, as a decision maker, should:

1. Define how costs and benefits will be measured in selecting one course of action over another—including

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social, economic, and monetary costs and benefits as well as long-term and short-term costs and benefits. On what principle, if any, would you use to base your utilitarian analysis?

2. Define what information you will need to determine the costs and benefits for comparisons.

3. Identify the procedures and policies you will use to explain and justify your cost-benefit analysis.

4. State your assumptions when defining and justifying your analysis and conclusions.

5. Ask yourself what moral obligations you have toward each of your stakeholders after the costs and benefits have been estimated.

Universalism: A Deontological (Duty-Based) Approach Immanuel Kant (1724–1804) is considered one of the leading founders of the principle of universalism. Universalism, which is also called deontological ethics, holds that the ends do not justify the means of an action—the right thing must always be done, even if doing the wrong thing would do the most good for the most people. Universalism, therefore, is also referred to as a non-consequentialist ethic. The term “deontology” is derived from the Greek word deon, or duty. Regardless of consequences, this approach is based on universal

principles, such as justice, rights, fairness, honesty, and respect.12

Kant’s principle of the categorical imperative, unlike utilitarianism, places the moral authority for taking action on an individual’s duty toward other individuals and “humanity.” The categorical imperative consists of two parts. The first part states that a person should choose to act if and only if she or he would be willing to have every person on earth, in that same situation, act exactly that way. This principle is absolute and allows for no qualifications across situations or circumstances. The second part of the categorical imperative states that, in an ethical dilemma, a person should act in a way that respects and treats all others involved as ends as well as means

to an end.13

Kant’s categorical imperative forces decision makers to take into account their duty to act responsibly and respectfully toward all individuals in a situation. Individual human welfare is a primary stake in any decision. Decision makers must also consider formulating their justifications as principles to be applied to everyone.

In Louise Simms’s situation, if she followed deontological principles of universalism, she might ask, “If I accept the official’s offer, could I justify that anyone anywhere would act the same way?” Or, “Since I value my own self-respect and believe my duty is to uphold self-respect for others, I will not accept this assignment because my self-respect has been and may again be violated.”

The major weaknesses of universalism and Kant’s categorical imperative include these criticisms: First, these principles are imprecise and lack practical utility. It is difficult to think of all humanity each time one must make a decision in an ethical dilemma. Second, it is hard to resolve conflicts of interest when using a criterion that states that all individuals must be treated equally. Degrees of differences in stakeholders’ interests and relative power exist. However, Kant would remind us that the human being and his or her humanity must be considered above the stakes, power bases, or consequences of our actions. Still, it is often impractical not to consider other elements in a dilemma. Finally, what if a decision maker’s duties conflict in an ethical dilemma? The categorical imperative does not allow for prioritizing. A primary purpose of the stakeholder analysis is to prioritize conflicting duties. It is, again, difficult to take absolute positions when limited resources and time and conflicting values are factors.

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Universalism and Stakeholder Analysis The logic underlying universalism and the categorical imperative can be helpful for applying a stakeholder analysis. Even though we may not be able to employ Kant’s principles absolutely, we can consider the following as guidelines for using his ethics:

1. Take into account the welfare and risks of all parties when considering policy decisions and outcomes.

2. Identify the needs of individuals involved in a decision, the choices they have, and the information they need to protect their welfare.

3. Identify any manipulation, force, coercion, or deceit that might harm individuals involved in a decision.

4. Recognize the duties of respecting and responding to individuals affected by particular decisions before adopting policies and actions that affect them.

5. Ask if the desired action would be acceptable to the individuals involved. Under what conditions would they accept the decision?

6. Ask if individuals in a similar situation would repeat the designated action or policy as a principle. If not, why not? And would they continue to employ the designated action?

Rights: A Moral and Legal Entitlement-Based Approach

Rights are based on several sources of authority.14 Legal rights are entitlements that are limited to a particular legal system and jurisdiction. In the United States, the Constitution and Declaration of Independence are the basis for citizens’ legal rights, for example the right to life, liberty, and the pursuit of happiness, and the right to freedom of speech. Moral (and human) rights, on the other hand, are universal and based on norms in every society, for example, the right not to be enslaved and the right to work.

Moral and legal rights are linked to individuals, and in some cases, groups, not to societies, as is the case with a utilitarian ethic. Moral rights are also connected with duties, that is, my moral rights imply that others have a duty toward me to not violate those rights, and vice versa. Moral rights also provide the freedom to pursue one’s interests, as long as those interests do not violate others’ rights. Moral rights also allow individuals to justify their actions and seek protection from others in doing so.

There are also special rights and duties, or contractual rights. Contracts provide individuals with mutually binding duties that are based on a legal system with defined transactions and boundaries. Moral rules that apply to contracts include: (1) the contract should not commit the parties to unethical or immoral conduct; (2) both parties should freely and without force enter the contractual agreement; (3) neither individual should misrepresent or misinterpret facts in the contract; and (4) both individuals should have complete knowledge of

the nature of the contract and its terms before they are bound by it.15

Finally, the concept of negative and positive rights defines yet another dimension of ethical principles.16 A negative right refers to the duty others have to not interfere with actions related to a person’s rights. For example, if you have the right to freedom of speech, others—including your employer—have the duty not to interfere with that right. Of course there are circumstances that constrain “free speech,” which we will discuss in Chapter 4. A positive right imposes a duty on others to provide for your needs to achieve your goals, not just protect your right to pursue them. Some of these rights may be part of national, state, or local legislation. For example, you may have the right to equal educational opportunities for your child if you are a parent. This

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implies that you have the right to send your child to a public school that has the same standards as any other

school in your community.

Positive rights were given attention in the twentieth century. National legislation that promoted different groups’ rights and the United Nations’ Universal Declaration of Human Rights served as sources for positive rights. Negative rights were emphasized in the seventeenth and eighteenth centuries and were based on the Bill of Rights in the Declaration of Independence. Currently, American political parties and advocates who are either politically to the “left” or to the “right” debate on whether certain moral rights are “negative” or “positive” and to what extent taxpayers’ dollars and government funds should support these rights. For

example, “conservative” writers like Milton Friedman17 have endorsed government support of negative rights (like protecting property, and enforcing law and order) and argued against public spending on positive rights (like medical assistance, job training, and housing). As you can see, the concept of rights has several sources of moral authority. Understanding and applying the concept of rights to stakeholders in business situations adds another dimension of ethical discovery to your analysis.

Louise Simms might ask what her rights are in her situation. If she believes that her constitutional and moral rights would be violated by accepting the offer, she would consider refusing to negotiate on the foreign official’s terms.

The limitations of the principle of rights include:

1. The justification that individuals are entitled to rights can be used to disguise and manipulate selfish, unjust political claims and interests.

2. Protection of rights can exaggerate certain entitlements in society at the expense of others. Fairness and equity issues may be raised when the rights of an individual or group take precedence over the rights of others. Issues of reverse discrimination, for example, have arisen from this reasoning.

3. The limits of rights come into question. To what extent should practices that may benefit society, but threaten certain rights, be permitted?

Rights and Stakeholder Analysis The principle of rights is particularly useful in stakeholder analysis when conflicting legal or moral rights of individuals occur or when rights may be violated if certain courses of action are pursued. The following are

guidelines for observing this principle:18

1. Identify the individuals whose rights may be violated.

2. Determine the legal and moral bases of these individuals’ rights. Does the decision violate these rights on such bases?

3. Determine to what extent the action has moral justification from utilitarian or other principles if individual rights may be violated. National crises and emergencies may warrant overriding individual rights for the public good.

Justice: Procedures, Compensation, and Retribution The principle of justice deals with fairness and equality. Here, the moral authority that decides what is right and wrong concerns the fair distribution of opportunities, as well as hardships, to all. The principle of justice

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also pertains to punishment for wrong done to the undeserving. John Rawls, a contemporary philosopher,

offers two principles of fairness that are widely recognized as representative of the principle of justice:19

1. Each person has an equal right to the most extensive basic liberties that are compatible with similar liberties for others.

2. Social and economic inequalities are arranged so that they are both (a) reasonably expected to be to everyone’s advantage and (b) attached to positions and offices open to all.

The first principle states that all individuals should be treated equally. The second principle states that justice is served when all persons have equal opportunities and advantages (through their positions and offices) to society’s opportunities and burdens. Equal opportunity or access to opportunity does not guarantee equal distribution of wealth. Society’s disadvantaged may not be justly treated, some critics claim, when only equal opportunity is offered. The principle of justice also addresses the unfair distribution of wealth and the infliction of harm.

Richard DeGeorge identifies four types of justice:20

1. Compensatory justice concerns compensating someone for a past harm or injustice. For example, affirmative action programs, discussed in Chapter 7, are justified, in part, as compensation for decades of injustice that minorities have suffered.

2. Retributive justice means serving punishment to someone who has inflicted harm on another. A criterion for applying this justice principle is: “Does the punishment fit the crime?”

3. Distributive justice refers to the fair distribution of benefits and burdens. Have certain stakeholders received an unfair share of costs accompanying a policy or action? Have others unfairly profited from a policy?

4. Procedural justice designates fair decision practices, procedures, and agreements among parties. This criterion asks, “Have the rules and processes that govern the distribution of rewards, punishments, benefits, and costs been fair?”

These four types of justice are part of the larger principle of justice. How they are formulated and applied varies with societies and governmental systems.

Following the principle of justice, Louise Simms might ask whether accepting the government official’s offer would provide a fair distribution of goods and services to the recipients of the new technological system. Also, are the conditions demanded by the government administrator fair for all parties concerned? If Simms determined that justice would not be served by enabling her company to be awarded the contract without a fair bidding process, she might well recommend that her firm reject the offer.

The obvious practical problems of using the principle of justice include the following: Outside the jurisdiction of the state and its judicial systems, where ethical dilemmas are solved by procedure and law, who decides who is right and who is wrong? Who has the moral authority to punish whom? Can opportunities and burdens be fairly distributed to all when it is not in the interest of those in power to do so?

Even with these shortcomings, the principle of justice adds an essential contribution to the other ethical principles discussed so far. Beyond the utilitarian calculation of moral responsibility based on consequences, beyond the universalist absolute duty to treat everyone as a means and not an end, and beyond the principle of

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rights, which values unquestionable claims, the principle of justice forces us to ask how fairly benefits and costs are distributed, regardless of power, position, or wealth.

Rights, Power, and “Transforming Justice” Justice, rights, and power are really intertwined. Rights plus power equals “transforming justice.” T. McMahon states, “While natural rights are the basis for justice, rights cannot be realized nor justice become

operative without power.”21 Judges and juries exercise power when two opposing parties, both of whom are “right,” seek justice from the courts.

Power generally is defined and exercised through inheritance, authority, contracts, competition, manipulation, and force. Power exercised through manipulation cannot be used to obtain justice legitimately. The two steps in exercising “transforming justice” are:

1. Be aware of your rights and power. McMahon states, “It is important to determine what rights and how much legitimate power are necessary to exercise these rights without trampling on other rights. For example, an employer might have the right and the power to fire an insolent employee, but she or he might not have

enough to challenge union regulations.”22

2. Establish legitimate power as a means for obtaining and establishing rights. According to McMahon, “If the legitimacy of transforming justice cannot be established, its exercise may then be reduced to spurious

power plays to get what someone wants, rather than a means of fulfilling rights.”23

3. This interrelationship of rights, justice, and power is particularly helpful in studying stakeholder management relationships. Since stakeholders exercise power to implement their interests, the concept of “rights plus power equals transforming justice” adds value in determining justice (procedural, compensatory, and retributive). The question of justice in complex, competitive situations becomes not only “Whose rights are more right?” but also “By what means and to what end was power exercised?”

Justice and Stakeholder Analysis In a stakeholder analysis, the principle of justice can be applied by asking the following questions:

1. How equitable will the distribution of benefits and costs, pleasure and pain, and reward and punishment be among stakeholders if you pursue a particular course of action? Would all stakeholders’ self-respect be acknowledged?

2. How clearly have the procedures for distributing the costs and benefits of a course of action or policy been defined and communicated? How fair are these procedures to all affected?

3. What provisions can be made to compensate those who will be unfairly affected by the costs of the decision? What provisions can we make to redistribute benefits among those who have been unfairly or overly compensated by the decision?

Virtue Ethics: Character-Based Virtues Plato and Aristotle are recognized as founders of virtue ethics, which also has roots in ancient Chinese and Greek philosophy. Virtue ethics emphasizes moral character in contrast to moral rules (deontology) or

consequences of actions (consequentialism).24

Virtue ethics is grounded in “character traits,” that is, “a disposition which is well entrenched in its

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possessor, something that, as we say ‘goes all the way down’, unlike a habit such as being a tea-drinker—but the disposition in question, far from being a single track disposition to do honest actions, or even honest actions for certain reasons, is multi-track. It is concerned with many other actions as well, with emotions and emotional reactions, choices, values, desires, perceptions, attitudes, interests, expectations and sensibilities. To possess a virtue is to be a certain sort of person with a certain complex mindset. (Hence the extreme

recklessness of attributing a virtue on the basis of a single action.)”25

The concepts of virtue ethics derived from ancient Greek philosophy are the following: virtue, practical wisdom, and eudaemonia (or happiness, flourishing, and well-being). Virtue ethics focuses on the type of person we ought to be, not on specific actions that should be taken. It is grounded in good character, motives, and core values. Virtue ethics argue that the possessor of good character is and acts moral, feels good, is happy, and flourishes. Practical wisdom, however, is often required to be virtuous. Adults can be culpable in their intentions and actions by being “thoughtless, insensitive, reckless, impulsive, shortsighted, and by assuming that what suits them will suit everyone instead of taking a more objective viewpoint. They are also, importantly, culpable if their understanding of what is beneficial and harmful is mistaken. It is part of practical wisdom to know how to secure real benefits effectively; those who have practical wisdom will not make the mistake of concealing the hurtful truth from the person who really needs to know it in the belief that

they are benefiting him.”26

Critiques of virtue ethics include the following major arguments:

First, virtue ethics fails to adequately address dilemmas which arise in applied ethics, such as abortion. For, virtue theory is not designed to offer precise guidelines of obligation. Second, virtue theory cannot correctly assess the occasional tragic actions of virtuous people. . . . Since virtue theory focuses on the general notion of a good person, it has little to say about particular tragic acts. Third, some acts are so intolerable, such as murder, that we must devise a special list of offenses which are prohibited. Virtue theory does not provide such a list. Fourth, character traits change, and unless we stay in practice, we risk losing our proficiency in these areas. This suggests a need for a more character-free way of assessing our conduct. Finally, there is the problem of moral backsliding. Since virtue theory emphasizes long-term characteristics, this runs the risk of overlooking particular lies, or acts of selfishness, on the grounds that such acts are temporary

aberrations.27

These same criticisms also apply to other ethical principles and schools of thought.

Virtue Ethics and Stakeholder Analysis Virtue ethics adds an important dimension to rules and consequentialist ethics by contributing a different perspective for understanding and executing stakeholder management. Examining the motives and character of stakeholders can be helpful in discovering underlying motivations of strategies, actions, and outcomes in complex business and corporate transactions. With regard to corporate scandals, virtue ethics can explain some of the motives of several corporate officers’ actions that center on greed, extravagant habits, irrational thinking, and egotistical character traits.

Virtue ethics also adds a practical perspective. Beauchamp and Childress state, “A practical consequence of this view is that the education of, for example medical doctors, should include the cultivation of virtues such as compassion, discernment, trustworthiness, integrity, conscientiousness as well as benevolence (desire to help)

and nonmalevolence (desire to avoid harm).”28 These authors also note that “persons of ‘good character’ can certainly formulate ‘bad policy’ or make a ‘poor choice’—we need to evaluate those policies and choices according to moral principles.”

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The Common Good Plato and Aristotle are believed to be the authors of the common good concept. The ethicist John Rawls has developed and redefined the notion of the common good as “certain general conditions that are . . . equally to

everyone’s advantage.”29 The common good has also been defined as “the sum of those conditions of social life which allow social groups and their individual members relatively thorough and ready access to their own

fulfillment.”30 The common good includes the broader interdependent institutions, social systems, environments, and services and goods. Examples of the common good include the health care system, legislative and judicial systems, political, economic, and legal systems, and the physical environment. These systems exist at the local, regional, national, and global levels. Individuals, groups, and populations are

dependent on these interlocking systems.31 The common good must be created and maintained in societies. Cooperative and collaborative effort is required. “The common good is a good to which all members of society have access, and from whose enjoyment no one can be easily excluded. All persons, for example, enjoy the benefits of clean air or an unpolluted environment, or any of our society’s other common goods. In fact,

something counts as a common good only to the extent that it is a good to which all have access.”32

The ethic of the common good suggests that decision makers take into consideration the intent as well as the effects of their actions and decisions on the broader society and the common good of the many. There are four major constraining factors and arguments on the notion of the common good: (1) A unitary notion of the common good is not viable in a pluralistic society. The common good means different things to different people. (2) Relatedly, in an individualistic society, people are rewarded to provide and succeed by themselves. The logic of the common good runs counter in many instances to this individualist cultural orientation. (3) “Free riders” abuse the provision of the common good by taking advantage of the benefits, while not contributing to the upkeep of common goods. A critical mass of free riders can and does destroy common goods, such as parts of the environment. (4) Finally, helping create and sustain common goods means unequal sharing of burdens and sacrifices by some groups, since not all groups will exert such efforts. Expecting some groups to support the common good while others will not is unjust, and perhaps impractical. Given these obstacles, the ethic of the common good calls us to share in a common vision of a society that benefits and is beneficial for all members, while respecting individual differences. Using this ethic in our decision making also calls us to take goals and actions that include others besides ourselves and our own interest into account. Such a logic is not just partly altruistic, but, in many circumstances, practical. We thrive when we breathe clean air, drink clean water, and can trust that the food we eat is not contaminated. This logic may also apply to business decisions that involve our customers and employees, as well as our neighbors, family members, and ourselves as members of a society as well as an organization. By using this principle, Louise would consider what good would be gained from actions taken not only for the professionals involved in her company and the client’s, but also for the host society. She would have to evaluate ethical principles that serve the common good and benefits of the people in that country.

Ethical Relativism: A Self-Interest Approach Ethical relativism holds that no universal standards or rules can be used to guide or evaluate the morality of an act. This view argues that people set their own moral standards for judging their actions. Only the individual’s

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self-interest and values are relevant for judging his or her behavior. This form of relativism is also referred to

as naive relativism. Individuals, professionals, and organizations using this approach can consider finding out what the industry

and/or professional standard or norm is with regard to an issue. Another suggestion would be to inflict no

undue harm with a course of action taken.33

If Louise Simms were to adopt the principle of ethical relativism for her decision making, she might choose to accept the government official’s offer to promote her own standing in his firm. She might reason that her self-interest would be served best by making any deal that would push her career ahead. But Simms could also use ethical relativism to justify her rejection of the offer. She might say that any possible form of such a questionable negotiation is against her beliefs. The point behind this principle is that individual standards are the basis of moral authority.

The logic of ethical relativism also extends to cultures. Cultural relativism argues that “when in Rome, do as the Romans do.” What is morally right for one society or culture may be wrong for another. Moral standards vary from one culture to another. Cultural relativists would argue that firms and business professionals doing business in a country are obliged to follow that country’s laws and moral codes. A criterion that relativists would use to justify their actions would be: “Are my beliefs, moral standards, and customs satisfied with this action or outcome?”

The benefit of ethical and cultural relativism is that they recognize the distinction between individual and social values and customs. These views take seriously the different belief systems of individuals and societies. Social norms and mores are seen in a cultural context.

However, relativism can lead to several problems. (It can be argued that this perspective is actually not

ethical.) First, these views imply an underlying laziness.34 Individuals who justify their morality only from their personal beliefs, without taking into consideration other ethical principles, may use the logic of relativism as an excuse for not having or developing moral standards. Second, this view contradicts everyday experience. Moral reasoning is developed from conversation, interaction, and argument. What I believe or perceive as “facts” in a situation may or may not be accurate. How can I validate or disprove my ethical reasoning if I do not communicate, share, and remain open to changing my own standards?

Ethical relativism can create absolutists—individuals who claim their moral standards are right regardless of whether others view the standards as right or wrong. For example, what if my beliefs conflict with yours? Whose relativism is right then? Who decides and on what grounds? In practice, ethical relativism does not effectively or efficiently solve complicated conflicts that involve many parties because these situations require tolerating doubts and permitting our observations and beliefs to be informed.

Cultural relativism embodies the same problems as ethical relativism. Although the values and moral customs of all cultures should be observed and respected, especially because business professionals are increasingly operating across national boundaries, we must not be blindly absolute or divorce ourselves from rigorous moral reasoning or laws aimed at protecting individual rights and justice. For example, R. Edward Freeman and Daniel Gilbert Jr. ask, “Must American managers in Saudi Arabia treat women as the Saudis treat them? Should Saudis in the U.S. treat women as they do in Saudi Arabia? Must American managers in South Africa [during the apartheid years] treat blacks as white South Africans treat them? Must white South

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Africans treat blacks in the United States as U.S. managers treat them? Must Saudis in the United States treat

women as U.S. managers treat them?”35 They continue, “It makes sense to question whether the norms of the

Nazi society were in fact morally correct.”36 Using rigorous ethical reasoning to solve moral dilemmas is important across cultures.

However, this does not suggest that flexibility, sensitivity, and awareness of individual and cultural moral differences are not necessary. It does mean that upholding principles of rights, justice, and freedom in some situations may conflict with the other person’s or culture’s belief system. Depending on the actions taken and decisions made based on a person’s moral standards, a price may be paid for maintaining them. Often, negotiation agreements and understanding can be reached without overt conflict when different ethical principles or cultural standards clash.

Finally, it could be argued that cultural relativism does provide an argument against cultural imperialism. Why should American laws, customs, and values that are embedded in a U.S. firm’s policies be enforced in another country that has differing laws and values regarding the activities in question?

Ethical Relativism and Stakeholder Analysis When considering the perspectives of relativism in a stakeholder analysis, ask the following questions:

1. What are the major moral beliefs and principles at issue for each stakeholder affected by this decision?

2. What are my moral beliefs and principles in this decision?

3. To what extent will my ethical principles clash if a particular course of action is taken? Why?

4. How can conflicting moral beliefs be avoided or resolved in seeking a desirable outcome?

5. What is the industry standard and norm with regard to this issue(s)?

A now classic case of the example of ethical relativism is Samuel Waksal, who resigned as chief executive officer (CEO) of ImClone (a manufacturer of drugs for cancer and other treatment therapies) on May 22, 2002. He was later arrested and indicted for bank fraud, securities fraud, and perjury. He pleaded guilty to all of the counts in the indictment. (He also implicated his daughter and father in his insider-trading schemes.) In addition, he pleaded guilty to tax evasion for not paying New York state sales tax on pieces of art that he had purchased. He was sentenced to 87 months in prison and was ordered to pay a $3 million fine and $1.2 million in restitution to the New York State Sales Tax Commission. He began serving his prison sentence on July 23, 2003. Martha Stewart, an ImClone stockholder, was sentenced to five months in prison and five months of house arrest for using insider trading knowledge to sell shares of ImClone stock. She was also ordered to pay $30,000 in fines and court fees. Her broker, Peter Bacanovic, was given the same sentence, but

a lower fine of $4,000. Bacanovic’s assistant, Douglas Faneuil, was spared prison time and fined $2,000.37

When asked in an interview how he got into this “mess,” Waksal said, “It certainly wasn’t because I thought about it carefully ahead of time. I think I was arrogant enough at the time to believe that I could cut corners,

not care about details that were going on, and not think about consequences.”38

Immoral, Amoral, and Moral Management In addition to the classic ethical principles, three broad, straight moral orientations that can be applied to individuals, groups, and organizations are: immorality, amorality, and morality.

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Immoral management of employees, stakeholders, and constituencies signifies a minimally ethical or unethical approach, such as laying off employees without fair notice or compensation, offering upper-level management undeserved salary increases and perks, and giving “golden parachutes” (attractive payments or settlement contracts to selected employees) when a change in company control is negotiated. (Such payments are often made at the expense of shareholders’ dividends without their knowledge or consent.) Managing immorally means intentionally going against the ethical principles of justice and fair and equitable treatment of other stakeholders.

Amoral management happens when owners, supervisors, and managers treat shareholders, outside stakeholders, and employees without concern or care for the consequences of their actions. No willful wrong may be intended, but neither is thought given to moral behavior or outcomes. Minimal action is taken while setting policies that are solely profit-oriented, production-centered, or short-term. Employees and other stakeholders are viewed as instruments for executing the economic interests of the firm. Strategies, control systems, leadership style, and interactions in such organizations also reflect an amoral, minimalist approach toward stakeholders. Nevertheless, the harmful consequences of amoral actions are real for the persons affected.

Moral management places value on fair treatment of shareholders, employees, customers, and other stakeholders. Ethics codes are established, communicated, and included in training; employee rights are built into visible policies that are enforced; and employees and other stakeholders are treated with respect and trust. The firm’s corporate strategy, control and incentive systems, leadership style, and interactions reflect a morally managed organization. Moral management is the preferred mode of acting toward stakeholders, since respect and fairness are considered in decisions.

It is helpful to consider these three orientations while observing managers, owners, employees, and coworkers. Have you seen amoral policies, procedures, and decisions in organizations? The next section summarizes four social responsibility roles that business executives view as moral for decision makers. The model presented complements the five ethical principles by providing a broad framework for describing ethical orientations toward business decisions. You can also use the following framework to characterize your own moral and responsible roles, those of your boss and colleagues, and even those of contemporary international figures in government or business.

2.3 Four Social Responsibility Roles

What social obligations do businesses and their executives have toward their stockholders and society? The traditional view that the responsibility of corporate owners and managers is to serve only, or primarily, their stockholders’ interests has been challenged and modified—but not abandoned—since the turn of this century. The debate continues about whether the roles of businesses and managers include serving social stakeholders along with economic stockholders. Because of changing demographic and educational characteristics of the workplace and the advent of laws, policies, and procedures that recognize greater awareness of employee and other stakeholders’ rights, distinctions have been made about the responsibility of the business to its employees and to the larger society.

Four ethical interpretations of the social roles and modes of decision making are discussed and illustrated

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in Figure 2.2. The four social responsibility modes reflect business roles toward stockholders and a wider

audience of stakeholders.39

Notice the two distinct social responsibility orientations of businesses and managers toward society: the stockholder model (the primary responsibility of the corporation to its economic stockholders) and the stakeholder model (the responsibility of the corporation to its social stakeholders outside the corporation). The two sets of motives underlying these two orientations are “self-interest” and “moral duty.”

The stockholder self-interest (cell 1 in Figure 2.2) and moral duty (cell 3) orientations are discussed first, followed by the stakeholder self-interest (cell 2) and moral duty (cell 4) orientations. The two stockholder orientations are productivism and philanthropy.

Figure 2.2 Four Social Responsibility Modes and Roles

Source: Buono, Anthony F., and Nicholas, Lawrence. (1990). Stockholder and stakeholder interpretations of business’ social role. In Michael Hoffman and Jennifer Moore (eds.), Business ethics: Readings and cases in corporate morality, 2nd ed., 172. New York: McGraw-Hill. Reproduced with the permission of Anthony F. Buono.

Productivists (who hold a free-market ethic) view the corporation’s social responsibility in terms of rational self-interest and the direct fulfillment of stockholder interests. The free market values the basis of rewards and punishments in the organization. This ethic drives internal and external vision, mission, values, policies, and decisions—including salaries, promotion, and demotions. Productivists believe the major—and, some would say, only—mission of business is to obtain profit. The free market is the best guarantee of moral corporate conduct in this view. Supply-side economists as productivists, for example, argue that the private sector is the vehicle for social improvement. Tax reduction and economic incentives that boost private industry are policies that productivists advocate as socially responsible. Former President George W. Bush’s initial response to the subprime lending crisis exemplifies a productivist approach; as BBC News reported, Bush’s efforts included “reform tax laws to help troubled borrowers refinance their loans, but the President added that it was not the

government’s job to bail out speculators.”40 President Bush eased that position as the U.S. and global economies approached a near collapse. U.S. presidents must make policy decisions that balance all these responsibility modes, while being very concerned about stakeholders, many of whom are the public citizenry.

Although all the ethical principles discussed earlier could be used by organizational leaders within each of these responsibility modes, productivists might find themselves advocating the use of negative rights to promote policies that protect shareholders’ interests over positive rights that would cost taxpayers and use government resources to assist those more economically dependent on government services—who, productivists would argue, add an economic burden to the free-market system.

A free-market-based ethic is widely used by owners and managers who must make tough workplace

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decisions, such as: (1) How many and which people are to be laid off because of a market downturn and significantly lower profits? (2) What constitutes fair notice and compensation to employees who are to be terminated from employment? (3) How can employees be disciplined fairly in situations in which people’s rights have been violated? A company is entitled to private property rights and responsibilities to shareholders. Robert Nozick, a libertarian philosopher, is an advocate of a market-based ethic. He makes a case for a market-based principle of justice and entitlement in his classic book Anarchy, State, and Utopia. Opponents of the market-based ethic argue that the rights of less advantaged people also count; that property rights are not absolute in all situations; that there are times when the state can be justified in protecting the rights of others in disputes against property owners; and that the distribution of justice depends on the conditions of a

situation—if war, illegal entry, fraud, or theft occur, some form of redistribution of wealth can be justified.41

Philanthropists, who also have a stockholder view of the corporation, hold that social responsibility is justified in terms of a moral duty toward helping less advantaged members of society through organized, tax- deductible charity and stewardship. Proponents of this view believe that the primary social role of the corporation is still to obtain profits. However, moral duty drives their motives instead of self-interest (the productivist view). Advocates of this view are stewards and believe that those who have wealth ought to share it with disadvantaged people. As stockholder stewards, philanthropists share profits primarily through their tax-deductible activities. Warren Buffett gave 85% of his wealth, estimated over $44 billion, to philanthropic causes, including the Bill & Melinda Gates Foundation. The remainder will be given to foundations operated

by his children.42

Philanthropists might argue from principles of utilitarianism, duty, and universalism to justify their giving. Corporate philanthropy, generally speaking, is based primarily on the profit motive. Corporate philanthropists’ sense of stewardship is contingent on their available and calculated use of wealth to help the less economically advantaged.

Progressivism and ethical idealism are the two social responsibility modes in the stakeholder model, the other dominant orientation. Progressivists believe corporate behavior is motivated by self-interest, but they also hold that corporations should take a broader view of responsibility toward social change. The Pope might be considered an ethical idealist. Enlightened self-interest is a value that also characterizes progressivists. The renowned theologian Reinhold Niebuhr is a modern example of a progressivist who argued for the involvement of the church in politics to bring about reasoned, orderly reform. He also worked with unions and other groups to improve workers’ job conditions and wages. Progressivists support policies such as affirmative action, environmental protection, employee stock option programs (ESOPs), and energy conservation. Did ice cream makers Ben Cohen and Jerry Greenfield, for example, follow a progressivist philosophy for their formerly independent company?

Finally, ethical idealists believe that social responsibility is justified when corporate behavior directly supports stakeholder interests. Ethical idealists, such as Ralph Nader earlier in his career, hold that, to be fully responsible, corporate activity should help transform businesses into institutions where workers can realize their full potential. Employee ownership, cooperatives, and community-based and owned service industries are examples of the type of corporate transformation that ethical idealists advocate. The boundaries between business and society are fluid for ethical idealists. Corporate profits are to be shared for humanitarian purposes

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—to help bring about a more humane society.

Of course, as noted previously, a spectrum of beliefs exists for each of these four modes. For example, ethical idealists profess different visions regarding the obligations of business to society. Progressivists and ethical idealists generally tend to base their moral authority on legal and moral rights, justice, and universalism. Organizational leaders and professionals are obviously concerned with the operational solvency and even profitability (especially for-profit firms) of their companies. Still, they tend to believe that stakeholder interests and welfare are necessary parts of the economic system’s effectiveness and success.

Which orientation best characterizes your current beliefs of business responsibility toward society: productivism, philanthropy, progressivism, or ethical idealism? Keep in mind the ethical decision frameworks presented above and also your ethical assessment scores, as we turn to the different levels of ethical decision making.

2.4 Levels of Ethical Reasoning and Moral Decision Making

Understanding the nature of an ethical dilemma, the source and whom it is affecting are important steps toward responding. In this section, three levels or dimensions of ethical dilemmas are described in order to guard against “short-sightedness” when experiencing or analyzing an ethical dilemma.

Many ethical issues and dilemmas result from pressures that are experienced at four levels: (1) the personal level, (2) the company or organizational level, (3) the industry level, and (4) the societal, international, and global levels.

Personal Level As the opening case of this chapter illustrates, a person experiences pressures from conflicting demands or circumstances that require a decision. Ethical dilemmas at this level can occur as a result of workplace pressures or from personal circumstances or motivations not related to work. Pressures on Louise stem from a supervisor’s assignment, the consequences of which could affect others in the organization and possibly in the host culture. Is Louise being lied to? Is she being pressured to risk her integrity and even job or career by accepting this assignment? Note that what begins as an individual or personal dilemma can escalate into organizational and other levels, as is possible with Louise if the issues are not resolved.

Ethical dilemmas that do not start at the personal level can and do involve and affect individuals along the way. The personal focus on ethical decision making also involves a broader inquiry with regard to how do individual personalities, traits, maturity, and styles affect such decisions. For example, narcissism and cynicism are individual differences that influence self-perceptions and perceptions of others. Antes, et al. (2007) showed that these two traits in particular had a negative effect on aspects of ethical decision making, whereas

basic personality characteristics, such as conscientiousness and agreeableness, did not have the same effect.43 It sounds like common sense, but studies confirm—and sometimes dispute—what we think we already know. Similarly, Skarlicki, et al. (1999) also found that negative affectivity and agreeableness matter, in that these

personality traits moderate the relationship between fairness perceptions and retaliation in the workplace.44

McFerran, et al. (2010) found that moral personality and the centrality of moral identity were associated with a more principled (versus expedient) ethical ideology. That is, moral personality characteristics affect

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organizational citizenship behavior and the propensity to morally disengage.45 Ethical personality traits discussed here—agreeableness, conscientiousness, and a principled approach, as contrasted with negativity, narcissism, and cynicism—are associated with ethical activities in the workplace. These studies confirm that the principle of virtue ethics matters in organizational settings.

Moral maturity also matters. Kohlberg’s three levels of moral development (which encompass six stages) provide a guide for observing our own and a person’s level of moral maturity in everyday life and organizational settings. Whether, and to what extent, ethical education and training contribute to moral development in later years is not known. Most individuals in Kohlberg’s 20-year study (limited to males) reached the fourth and fifth stages by adulthood. Only a few attained the sixth stage.

Level 1: Preconventional Level (Self-Orientation)

• Stage 1: Punishment avoidance: avoiding punishment by not breaking rules. The person has little awareness of others’ needs.

• Stage 2: Reward seeking: acting to receive rewards for oneself. The person has awareness of others’ needs but not of right and wrong as abstract concepts.

Level 2: Conventional Level (Others Orientation)

• Stage 3: Good person: acting “right” to be a “good person” and to be accepted by family and friends, not to fulfill any moral ideal.

• Stage 4: Law and order: acting “right” to comply with law and order and norms in societal institutions.

Level 3: Postconventional, Autonomous, or Principles Level (Universal, Humankind Orientation)

• Stage 5: Social contract: acting “right” to reach consensus by due process and agreement. The person is aware of relativity of values and tolerates differing views.

• Stage 6: Universal ethical principles: acting “right” according to universal, abstract principles of justice and rights. The person reasons and uses conscience and moral rules to guide actions.

Interestingly, one study of 219 corporate managers working in different companies found that managers typically reason at moral stage 3 or 4, which, the author notes, is “similar to most adults in the Western, urban

societies or other business managers.”46 Managers in large- to medium-sized firms reasoned at lower moral stages than managers who were self-employed or who worked at small firms. Reasons offered for this difference in moral reasoning include that larger firms have more complex bureaucracies and layers of structure, more standard policies and procedures, and exert more rule-based control over employees. Employees tend to get isolated from other parts of the organization and feel less involved in the central decision-making process. On the other hand, self-employed professionals and managers in smaller firms tend to interact with people throughout the firm and with external stakeholders. Involvement with and vulnerability to other stakeholders may cause these managers to adhere to social laws more closely and to reason at stage 4.

The same study also found that managers reasoned at a higher level when responding to a moral dilemma

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in which the main character was not a corporate employee. It could be that managers reason at a higher level when moral problems are not associated with the corporation. The author suggests that the influence of the corporation tends to restrict the manager to lower moral reasoning stages. Or it could be that the nature of the moral dilemma may affect the way managers reason (i.e., some dilemmas may be appropriately addressed with stage 3 or 4 reasoning, other dilemmas may require stage 5 logic).

Stephen Covey’s “Moral Continuum” offers a developmental model for progressing from a basic state of dependence, to independence, and then interdependence using the “7 habits of highly effective people,” which can be learned and practiced. The seven habits are: 1. Be Proactive, 2. Begin with the End in Mind, 3. Put First Things First, 4. Think Win–Win, 5. Seek First to Understand, Then to be Understood, 6. Synergize, and 7. Sharpen the Saw.

Breaking out of Dependency to Become Independent Breaking out of dependency (less morally mature) to become more interdependent (highest level of moral maturity) is a process that involves the heart, mind, and body. According to Covey’s Moral Continuum, once the first three habits are developed, a person builds character and a “Private Victory” is achieved. Developing and following the three habits signals a “Public Victory” on this moral journey. The first habit, “Be Proactive,” embodies “the “Principle of Personal Vision,” or taking control and being responsible for one’s own life while acting with integrity. This means a person also begins to see how others see him/her, keeping commitments,

and deciding to be oneself by developing a plan.47 The second habit, “Begin with the End in Mind,” embodies “the Principle of Personal Leadership,” and involves a person’s envisioning where she/he wishes to go in their life, answering what being successful means, and addressing what is really important. During this process, a person “re-scripts” their internalized messages and develops their own vision and goals, which entails them seeing the “big picture” around them and developing a “Personal Mission Statement,” grounded in principles that matter most to them. The third habit, “Put First Things First,” embodies the principle of “Personal Management,” which involves implementing concrete plans only after a person believes that she or he will succeed. This habit helps a person refuse distractions and be able to delegate tasks to others to help the person reach their goals. Once these first three habits are achieved, a “Private Victory” from dependence has been accomplished.

From Independence to Interdependence “Think Win—Win,” the fourth habit, is based on the “Principle of Interpersonal Leadership,” which involves building relationships through cooperation. A sense of integrity and maturity, and an abundance mentality are developed with this habit. The fifth habit, “Seek First to Understand, Then to be Understood” embodies the principle of “Emphatic Communication, which involves communicating as an emphatic listener. Nonjudgmental listening builds goodwill in relationships. The sixth habit, “Synergize,” embodies the “Principle of Creative Cooperation,” and builds on the previous habits to form relationships that increase the work of two people beyond each individual’s maximum efficiency. Synergy makes 1 + 1 = 3, that is, the results of two individuals working together is to equal the output of three or more individuals working independently. Flexibility, openness, and goodwill are part of this habit. Finally, the seventh habit, “Sharpen the Saw,” which embodies the “Principle of Balanced Renewal” is based on the need for continuous self- renewal that requires physical, mental, and emotional effort to achieve life balance. Moral maturity is an

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ongoing process, not a destination. With regard to this chapter’s opening case and Louise’s dilemma, the logic of the Moral Continuum,

briefly summarized here, offers an opportunity of reflection for her to consider her personal values, mission, and character in deciding what course of action to follow or not to follow. Ethical decision making in serious dilemmas, or even those that may at first seem trivial, generally involves one’s whole self.

Organizational Level Firms that engage in questionable practices and activities face possible dilemmas with their stakeholders and/or stockholders. Studies show that when corporate values are dominated by financial profits, employees’ ethical standards are diminished in their workplace decisions, as compared to corporations that value and

reward integrity and good business practices.48 For example, JPM-organ Chase’s controversial CEO Jamie Dimon was recently found responsible for a host of mismanaged acts in 2012 that resulted in the following losses of that bank: a $6 billion trading fiasco named the London Whale; “a $4.3 billion settlement with federal and state prosecutors over mortgage abuses; a $297 million settlement with the Securities and Exchange Commission (SEC) over charges of lying to investors about the quality of mortgage-backed bonds; a $45 million settlement with the Department of justice over charges of veterans’ loan fraud; a cease-and- desist order for failures to comply with federal anti-money laundering laws; an ongoing federal investigation of LIBOR-rigging; a temporary ban on energy trading for failing to disclose information in a market manipulation investigation by the Federal Energy Regulatory Commission; accusations of manipulating silver

prices.”49 Dimon’s public statement over the London Whale loss was “Life goes on.” JPMorgan’s board of directors’ response to Dimon’s leadership while these questionable losses occurred was to halve his bonus to $10.5 million dollars. Dimon’s leadership example brought public and regulatory attention to the type of ethical values and culture being practiced at JPMorgan, especially in the wake of the corporate scandals and crises experienced in the banking industry.

Or take the example of Dukes v. WalMart. “The largest sexual discrimination lawsuit in U.S. history was brought against WalMart when a federal appeals court approved class-action status for seven women who

claim the retailer was biased in pay and promotions.”50 Plaintiffs in that case estimated that 1.5 million women who had worked for WalMart in the U.S. stores since 1998 were eligible to join that suit. WalMart’s reputation and image will not be easily repaired from this and other lawsuits that have recently been brought against the largest retailer. Going forward, WalMart’s officers must decide whether or not this type of possible discrimination is worth the legal, social, and media fallout for the company and its stakeholders.

Industry Level Company officers, managers, and professionals working within and/or across industries may contribute to, and be influenced and affected by, specific business practices in an industry. A recent example of unethical and illegal industry-wide business practices is the 2007–2009 subprime mortgage lending crisis, in which some of the largest banks in the United States and other countries bundled asset-backed securities with real estate, including individuals’ home mortgages, as collateral and then sold these to Wall Street investors. Such financial products were highly popular and promised huge returns, but they were bogus, and the result was a near global financial meltdown.

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In this chapter’s opening case, Louise can inquire about the business practice in which she is being pressured to engage (i.e., contract negotiations in a foreign country). She can explore whether or not such practices are legal in her company and industry. Even if she finds that such practices are used but are questionable ethically and legally, she will need to decide whether or not she wishes to assume personal liability and consequences of taking such actions.

Societal, International, and Global Levels Industry, organizational, professional, and personal ethics may clash at the societal, global, and international levels. For example, although tipping and paying money to government and other business officials in some countries may meet local customary practices, such offerings may also be illegal bribes in other countries (like the United States and Europe). Chapter 8 addresses these types of issues.

In this chapter’s opening case, Louise is walking a tightrope in her decision. She needs to consult the Foreign Corrupt Practices Act (discussed in Chapter 8) to determine whether or not her superiors are asking her personally and professionally—as a representative of her firm—to act illegally. She might also seek advice from someone in her company or in the country regarding cultural norms and business practices.

2.5 Identifying and Addressing Ethical Dilemmas

An ethical dilemma is a problem or issue that confronts a person, group, or organization and that requires a decision or choice among competing claims and interests, all of which may be unethical (i.e., against all parties’ principles). Decision choices presented by an ethical dilemma usually involve solutions that do not satisfy all stakeholders. In some situations, there may be a resolution to an ethical dilemma that is the “right” thing to do, although none of the stakeholders’ material interests are benefited. Ethical dilemmas that involve many stakeholders require a reasoning process that clearly states the dilemma objectively, and then proceeds to articulate the issues and different solution alternatives.

Although ethical reasoning has been defined, in part, by acting on “principled thinking,” it is also true that moral creativity, negotiating skills, and knowing your own values also help solve tough “real world” situations. Should Louise Simms move to close the lucrative deal or not? Is the official offering her a bribe? What other personal, as well as professional, obligations would she be committing herself to if she accepted? Is the official’s request legal? Is it ethical? Is this a setup? If so, who is setting her up? Would Louise be held individually responsible if something went wrong? Who is going to protect her if legal complications arise? How is she supposed to negotiate such a deal? What message is she sending about herself as well as her company? What if she is asked to return and work with these people if the contract is signed? What does Louise stand to win and lose if she does or does not accept the official’s offer?

So, what should Louise do to act morally responsible in this situation? Is she acting only on behalf of her company or also from her own integrity and beliefs? These are the kinds of questions and issues this chapter raises. No easy answers may exist, but understanding the ethical principles discussed at the outset, sharing ethical dilemmas and outcomes, discussing ethical experiences in depth, and using role plays to analyze situations can help you identify, think, and feel through the issues that underlie ethical dilemmas.

The Louise Simms scenario may be complicated by the international context. This is a good starting point

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for a chapter on ethics, because business transactions now increasingly involve international players and different “rules of engagement.” Chapter 8, on the global environment and stakeholder issues peculiar to multinational corporations, offers additional guidelines for solving dilemmas in international contexts. Deciding what is right and wrong in an international context also involves understanding laws and customs, and the level of economic, social, and technological development of the nation or region involved. For example, do European and U.S. standards of doing business in other countries involve certain biases? Would these biases result in consequences that are beneficial or harmful to those in the local culture? On the other hand, we should not easily accept stereotypical descriptions of how to do business by means of what may be considered “local customs.” The remainder of this chapter has additional information and ethical assessments and insights on identifying and resolving the moral dimensions of dilemmas in the workplace and in organizational and personal roles and relationships.

Ethical Insight 2.2 Your Ethical Dilemma

Complete the following steps:

Step 1: Describe an ethical dilemma that you recently experienced. Be detailed: What was the situation? Who did it involve? Why? What happened? What did you do? What did you not do? Describe your reasoning process in taking or not taking action. What did others do to you? What was the result?

Step 2: Read the descriptions of relativism, utilitarianism, universalism, rights, justice, and moral decision making in this chapter. Explain which principle best describes your reasoning and your action(s) in the dilemma you presented in Step 1.

Step 3: Were you conscious that you were reasoning and acting on these (or other) ethical principles before, during, and after your ethical dilemma? Explain.

Step 4: After reading this chapter, would you have acted any differently in your dilemma than you did? Explain.

Moral Creativity Moral creativity or imagination relates to the need for and skill of recognizing the complexity of some ethical dilemmas that involve interlocking, conflicting interests, and relationships from the point of view of the person, group, and/or organization facing a decision to be made. Creativity is required to gain perspective among the different stakeholders and their interests to sort out and evaluate harmful effects among different

alternative actions.51 What begins as a business-as-usual decision can evolve into a dilemma or even a

“defining moment” in one’s life.52 According to Joseph Badaracco at Harvard University,

An ethical decision typically involves choosing between two options: one we know to be right and another we know to be wrong. A defining moment, however, challenges us in a deeper way by asking us to choose between two or more ideals in which we deeply believe. Such challenges rarely have a “correct” response. Rather, they are situations created by circumstance that ask us to step forward and, in the words of the American philosopher John Dewey, “form, reveal, and test” ourselves. We form our character when we commit to irreversible courses

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of action that shape our personal and professional identities. We reveal something new about us to ourselves and others because defining moments uncover something that had been hidden or crystallize something that had been only partially known. And we test ourselves

because we discover whether we will live up to our personal ideals or only pay them lip service.53

Badaracco offers three key questions with creative probes for individuals, work group managers, and company executives to address before acting in a “defining moment.” For individuals, the key question is “Who am I?” This question requires individuals to:

1. Identify their feelings and intuitions that are emphasized in the situation.

2. Identify their deepest values in conflict brought up by the situation.

3. Identify the best course of action to understand the right thing to do.54

Work group managers can ask, “Who are we?” They can also address these three dimensions of the team and situation:

1. What strong views and understanding of the situation do others have?

2. Which position or view would most likely win over others?

3. Can I coordinate a process that will reveal the values I care about in this organization?

Company executives can ask, “Who is the company?” Three questions they can consider are:

1. Have I strengthened my position and the organization to the best of my ability?

2. Have I considered my organization’s role vis-à-vis society and shareholders boldly and creatively?

3. How can I transform my vision into action, combining creativity, courage, and shrewdness?

CEOs and professionals could ask the three sets of questions to help articulate a morally creative response to ethical dilemmas and “defining moments.” What might have happened differently had Bernard Madoff, who executed an unprecedented Ponzi scheme fraud that lasted over decades and defrauded customers of $20 billion, sat down, looked in the mirror, and reflected on these questions? Or what could have happened to Enron’s Jeffrey Skilling and Ken Lay, or Tyco’s Dennis Kozlowski, or Gary Winnick at Global Crossing?

Ethical Dilemma Problem Solving A range of decision-making resources can help you evaluate moral possibilities and insights when resolving ethical dilemmas. Change begins with having an awareness that can help build confidence by perceiving dilemmas before they are played out and assists you in negotiating solutions with a moral dimension.

12 Questions to Get Started A first step in addressing ethical dilemmas is to identify the problem. This is particularly necessary for a stakeholder approach, because the problems depend on who the stakeholders are and what their stakes entail. Before specific ethical principles are discussed, let’s begin by considering important decision criteria for ethical reasoning. How would you apply the criteria to Louise Simms’s situation?

Twelve questions, developed by Laura Nash,55 to ask yourself during the decision-making period are:

1. Have you defined the problem accurately?

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2. How would you define the problem if you stood on the other side of the fence?

3. How did the situation occur?

4. To whom and to what do you give your loyalty as a person and as a member of the corporation?

5. What is your intention in making this decision?

6. How does this intention compare with the probable results?

7. Who could your decision injure?

8. Can you discuss the problem with the affected parties before you make your decision?

9. Are you confident that your decision will be valid over a long period?

10. Could you disclose, without qualm, your decision?

11. What is the symbolic potential of your action if understood? If misunderstood?

12. Under what conditions would you allow exceptions?

The above questions can help individuals openly discuss the responsibilities necessary to solve ethical problems. Sharing these questions can facilitate group discussions, build consensus around shared points, serve as an information source, uncover ethical inconsistencies in a company’s values, help a CEO see how senior managers think, and increase the nature and range of choices. The discussion process is cathartic.

To return briefly to the opening case, if Louise Simms considered the first question, she might, for example, define the problem she faces from different perspectives (as discussed in Chapter 1). At the organizational level, her firm stands to win a sizable contract if she accepts the government official’s conditions. Yet her firm’s reputation could be jeopardized in the United States if this deal turned out to be a scandal. At the societal level, the issues are complicated. In this Middle Eastern country, this type of bargaining might be acceptable. In the United States, however, Louise could have problems with the Foreign Corrupt Practices Act. At the individual level, she must decide if her conscience can tolerate the actions and consequences this deal involves. As a woman, she may be at risk because advances were made toward her. Her self-esteem and integrity have also been damaged. She must consider the costs and benefits that she will incur from her company if she decides to accept or reject this assignment. As you can see, these questions can help Louise clarify her goal of making a decision and determine the price she is willing to pay for that decision.

2.6 Individual Ethical Decision-Making Styles

Individual ethical decision-making styles may also be based on what Stanley Krolick defined as (1)

individualism, (2) altruism, (3) pragmatism, and (4) idealism.56 These four styles are summarized here to complement the social responsibility modes, ethical principles, and moral maturity stages discussed above. Caution must be used when considering any of these schemes to avoid stereotyping. These categories are guides—not prescriptions—for further reflection, discussion, and study.

Individualists are driven by natural reason, personal survival, and preservation. The self is the source and justification of all actions and decisions. Individualists believe that “If I don’t take care of my own needs, I will

never be able to address the concerns of others.”57 The moral authority of individualists is their own reasoning process, based on self-interest. Individualism is related to the principle of naive ethical relativism and to productivism.

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Altruists are concerned primarily with other people. Altruists relinquish their own personal security for the good of others. They would, as an extreme, like to ensure the future of the human race. The altruist’s moral authority and motivation is to produce the greatest good for the largest number of people. Unlike utilitarians, altruists would not diligently calculate and measure costs and benefits. Providing benefits is their major concern. Altruists justify their actions by upholding the integrity of the community. They enter relationships from a desire to contribute to the common good and to humankind. Altruists are akin to universalists and philanthropists.

Pragmatists are concerned primarily with the situation at hand, not with the self or the other. The pragmatist’s bases for moral authority and motivation are the perceived needs of the moment and the potential consequences of a decision in a specific context. The needs of the moment dictate the importance of self- interest, concern for others, rules, and values. Facts and situational information are justifications for the pragmatist’s actions. Pragmatists may abandon significant principles and values to produce certain results. They are closest philosophically to utilitarians. Although this style may seem the most objective and appealing, the shifting ethics of pragmatism make this orientation (and the person who espouses it) difficult and unpredictable in a business environment.

Idealists are driven by principles and rules. Reason, relationships, or the desired consequences of an action do not substitute for the idealist’s adherence to principles. Duties are absolute. Idealists’ moral authority and motivation are commitment to principles and consistency. Values and rules of conduct are the justification that idealists use to explain their actions. Seen as people with high moral standards, idealists can also be rigid and inflexible. Krolick states, “This absolute adherence to principles may blind the idealist to the potential

consequences of a decision for oneself, others, or the situation.”58 This style is related to the social responsibility mode of ethical idealism and to the principle of universalism.

Which of the four styles best characterizes your ethical orientation? The orientation of your colleagues? Your supervisor or boss?

Communicating and Negotiating across Ethical Styles When working or communicating with an ethical style, you also must observe the other person’s ethical style. According to Krolick, the first step is to “concede that the other person’s values and priorities have their own validity in their own terms and try to keep those values in mind to facilitate the process of reaching an

agreement.”59 The following guidelines can help when communicating, negotiating, or working with one of the four ethical styles:

• Individualist: Point out the benefits to the other person’s self-interest.

• Altruist: Focus on the benefits for the various constituencies involved.

• Pragmatist: Emphasize the facts and potential consequences of an action.

• Idealist: Concentrate on the principles or duties at stake.

Learning to recognize and communicate with people who have other ethical styles and being flexible in accommodating their ethical styles, without sacrificing your own, are important skills for working effectively with others.

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2.7 Quick Ethical Tests

In addition to knowing the ethical principles, social responsibility modes, and ethical styles presented in this chapter, businesspeople can take short “ethical tests” before making decisions. Many of these rules reflect the principles discussed in this chapter. These “checkpoints,” if observed, could change the actions you would automatically take in ethical dilemmas.

The Center for Business Ethics at Bentley University has articulated six simple questions for the “practical philosopher.” Before making a decision or acting, ask the following:

1. Is it right?

2. Is it fair?

3. Who gets hurt?

4. Would you be comfortable if the details of your decision were reported on the front page of your local newspaper?

5. What would you tell your child to do?

6. How does it smell? (How does it feel?)

Other quick ethical tests, some of which are classic, include:

• The Golden Rule: “Do unto others as you would have them do unto you.” This includes not knowingly doing harm to others.

• The Intuition Ethic: We know apart from reason what is right. We have a moral sense about what is right and wrong. We should follow our “gut feeling” about what is right.

• The Means-Ends Ethic: We may choose unscrupulous but efficient means to reach an end if the ends are really worthwhile and significant. Be sure the ends are not the means.

• The Test of Common Sense: “Does the action I am getting ready to take really make sense?” Think before acting.

• The Test of One’s Best Self: “Is this action or decision I’m getting ready to take compatible with my concept of myself at my best?”

• The Test of Ventilation: Do not isolate yourself with your dilemma. Get others’ feedback before acting or deciding.

• The Test of the Purified Idea: “Am I thinking this action or decision is right just because someone with

authority or knowledge says it is right?” You may still be held responsible for taking the action.60

Use these principles and guidelines for examining the motivations of stakeholders’ strategies, policies, and actions. Why do stakeholders act and talk as they do? What principles drive these actions?

2.8 Concluding Comments

A definition of ethics and business ethics has been offered along with four types of ethical reasoning to provide a basis for making ethical decisions. Individual stakeholders have a wide range of ethical principles, orientations, and “quick tests” to draw on before solving an ethical dilemma. Moral maturity also affects an

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individual’s ethical reasoning and actions. Kohlberg’s stages of moral development and Covey’s Moral

Continuum are concepts that provide a diagnostic and suggested developmental insights into ethical decision making.

Using moral reflection and creativity is also important when deciding between two “right” or “wrong” choices. Reflecting on one’s core values combined with a sense of moral courage and shrewdness are also a recommended part of this decision-making process. When there are multiple stakeholders in a dilemma, the moral dimension of the stakeholder approach can be helpful by identifying the “ground rules” or “implicit morality” of institutional members. As R. Edward Freeman and Daniel Gilbert Jr. state:

Think of the implicit morality of an institution as the rules that must be followed if the institution is to be a good one. The rules are often implicit, because the explicit rules of an institution may be the reason that the institution functions badly. Another way to think of the implicit morality of an institution is as the internal logic of the institution. Once this internal logic is clearly understood, we can evaluate its

required behaviors against external standards.61

Back to Louise Simms₀ Let’s return to the opening case in which Louise Simms is trying to decide what to do. Put yourself in Louise’s situation. Identify your ethical decision-making style. Are you primarily an idealist, pragmatist, altruist, or individualist? What are some of your blind spots? Consider the three questions regarding a “defining moment” at the beginning of the chapter: Who am I? Who are we? Who is the company? What courses of action are available after reviewing your responses to these questions? Then, describe the ethical principles you usually follow in your life: utilitarianism, rights, justice, universalism, ethical virtue, ethical relativism, and the common good ethic. Which of those principles do you aspire to use to act more ethically and morally mature and responsible? What is your moral responsibility to yourself, your family and friends, your colleagues and work team, and to the company? How will you feel about yourself after you make the decision? Now make Louise’s decision and share your decision with your classmates and consider their responses. Do you think you made the right decision?

Chapter Summary

Complex ethical dilemmas in business situations involve making tough choices between conflicting interests. This chapter began with classic ethical principles that are used to guide dilemmas and decisions at the individual, group, and organizational levels. Moral maturity and the Covey’s Moral Continuum were discussed to consider how to approach personal level dilemmas. Questions were presented for addressing dilemmas and “defining moments” creatively, boldly, and shrewdly, as well as 12 questions and three decision criteria that can assist individuals in determining the most suitable course of action.

Individuals can gain a clear perspective of their own motivations and actions by distinguishing them from those of others. This perspective can be useful for guiding your own decision-making process. Understanding the criteria in this chapter can enable you to reason more critically when examining other stakeholders’ ethical reasoning.

A primary goal of ethical reasoning is to help individuals act in morally responsible ways. Ignorance and bias are two conditions that cloud moral awareness. Five principles of ethical reasoning were presented to expose you to methods of ethical decision making. Each principle was discussed in terms of the utility and

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drawbacks characteristic of it. Guidelines for thinking through and applying each principle in a stakeholder analysis were also provided. These principles are not mechanical recipes for selecting a course of action. They are filters or screens to use for clarifying dilemmas.

Three ethical orientations—immoral, amoral, and moral—can be used to evaluate ethics. Immoral and moral motives are more discernible than amoral ones. Amoral orientations include lack of concern for others’ interests and well-being. Although no intentional harm or motive may be observed, harmful consequences from ignorance or neglect reflect amoral styles of operating.

Four social responsibility roles or business modes were discussed: productivism and philanthropy (influenced by stockholder concerns) and progressivism and ethical idealism (driven by stockholder concerns but also influenced by external stakeholders). Individuals also have ethical decision-making styles. Four different (but not exclusive) styles are individualism, altruism, pragmatism, and idealism. Another person’s ethical decision-making style must be understood when engaging in communication and negotiation. These styles are a starting point for identifying predominant decision-making characteristics.

The final section of this chapter offered quick “ethical tests” that can be used to provide insight into your decision-making process and actions.

Questions

1. Do you believe ethical dilemmas can be prevented and solved morally without the use of principles? Explain. Offer an example from a dilemma you recently experienced or currently are experiencing. Characterize the logic you used in thinking through or having made a decision. Compare the logic you used to principles and quick tests in this chapter. What similarities and differences did you discover? Can you include any of the principles and ethical reasoning in this chapter in dilemmas you may or expect to face? Explain.

2. Why are creativity and moral imagination oftentimes necessary in preventing and resolving ethical dilemmas and “defining moments” of conflict in one’s workplace? Offer an example of an ethically questionable situation in which you had to creatively improvise to “do the right thing.”

3. What is a first step for addressing ethical dilemmas? What parts of this chapter would and could you use to complement or change your own decision-making methods?

4. How can the discussion on personal level ethical decision making considering moral maturity and the moral continuum assist you in addressing dilemmas in your life and work?

5. What single question is the most powerful for solving ethical dilemmas?

6. What are two conditions that eliminate a person’s moral responsibility?

7. Return to the case you selected in question 4 above. Briefly explain which of the chapter’s five fundamental principles of ethical reasoning the leaders and/or major stakeholders you identified used and did not use in the case. Which ethical principle(s) would you recommend that they should have used? Why?

8. What are some of the problems characteristic of cultural relativism? Offer an example in the news of a company that has acted unethically according to the perspective of cultural relativism.

9. Why is utilitarianism useful for conducting a stakeholder analysis? What are some of the problems with

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using this principle? Give an example of when you used utilitarianism to justify an ethically questionable action.

10. Briefly explain the categorical imperative. What does it force you, as a decision maker, to do when choosing an action in a moral dilemma?

11. Explain the difference between the principles of rights and justice. What are some of the strengths and weaknesses of each principle?

12. Which of the four social responsibility modes most accurately characterizes your college/university and place of work? Explain. Do your ethics and moral values agree with these organizations? Explain.

13. Briefly explain your ethical decision-making style as presented in the chapter.

14. How would you describe your level of moral maturity using Kohlberg’s stages?

15. What insights did you gain from Covey’s Moral Continuum with regard to your ethical decision-making activities? What are some connections between Covey’s and Kohlberg’s concepts and ethics?

16. Explain what ethical logic and actions people generally take to persuade you to do something that is ethically questionable. Refer to the ethical decision styles in the chapter.

17. Which of the ethical “quick tests” do you prefer? Why?

Exercises

1. Describe a serious ethical dilemma you have experienced. Use the 12 questions developed by Laura Nash to offer a resolution to the problem, even if your resolution is different from the original experience. Did you initially use any of the questions? Would any of these questions have helped you? How? What would you have done differently? Why?

2. Identify an instance when you thought ignorance absolved a person or group from moral responsibility. Then identify an example of a person or group failing to become fully informed about a moral situation. Under what conditions do you think individuals are morally responsible for their actions? Why?

3. With which of the four social responsibility business modes in the chapter do you most identify? Why? Name a company that reflects this orientation. Would you want to work for this company? Would you want to be part of the management team? Explain.

4. Select a corporate leader in the news who acted legally but immorally and one who acted illegally but morally. Explain the differences of the actions and behaviors in each of the two examples. What lessons do you take from your examples?

5. Select two organizations in the same industry that you are familiar with or that are in the media or online news, such as McDonald’s and Burger King, Toyota and General Motors, Virgin Airlines and American Airlines. Research some of the latest news items and activities about each company and its officers over the same time period. Now, using ethical principles and quick tests from this chapter, compare and contrast each. Evaluate how “ethical” each is compared to the other.

Real-Time Ethical Dilemma

I was employed as a certified public accountant (CPA) for a regional accounting firm that specialized in audits

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of financial institutions and had many local clients. My responsibilities included supervising staff, collecting evidence to support financial statement assertions, and compiling work papers for managers and partners to review. During the audit of a publicly traded bank, I discovered that senior bank executives were under investigation by the Federal Deposit Insurance Corporation (FDIC) for removing funds from the bank. They were also believed to be using bank funds to pay corporate credit card bills for gas and spouses’ expenses. The last allegation noted that the executives were issuing loans to relatives without proper collateral.

After reviewing the work papers, I found two checks made payable to one executive of the bank that were selected during a cash count from two tellers. There was no indication based on our sampling that expenses were being paid for spouses. My audit manager and the chief financial officer (CFO) of my firm were aware of these problems.

After the fieldwork for the audit was completed, I was called into the CEO’s office. The CEO and the chief operating officer (COO) stated that the FDIC examiners wanted to interview the audit manager, two staff accountants, and me. The CEO then asked the following question: “If you were asked by the FDIC about a check or checks made payable to bank executives, how would you answer?” I told them that I would answer the FDIC examiners by stating that, during our audit, we made copies of two checks made payable to an executive of the bank for $8,000 each.

The COO stated that during his review of the audit work papers he had not found any copies of checks made payable to executives. He also stated that a better response to the question regarding the checks would be, “I was not aware of reviewing any checks specifically made payable to the executive in question.” The COO then said that the examiners would be in the following day to speak with the audit staff. I was dismissed from the meeting.

Neither the CEO nor the COO asked me if the suggested “better” response was the response I would give, and I did not volunteer the information. During the interview, the FDIC investigators never asked me whether I knew about the checks. Should I have volunteered this information?

Questions 1. What would you have done? Volunteered the information or stayed silent? Explain your decision.

2. Was anything unethical going on in this case? Explain.

3. Describe the “ethics” of the officers of the firm in this case.

4. What, if anything, should the officers have done, and why?

5. What lessons, if any, can you take from this case, as an employee working under company officials who have more power than you do?

Cases

Case 3 Ford’s Pinto Fires: The Retrospective View of Ford’s Field Recall Coordinator

Brief Overview of the Ford Pinto Fires Determined to compete with fuel-efficient Volkswagen and Japanese imports, the Ford Motor Company introduced the subcompact Pinto in the 1971 model year. Lee Iacocca, Ford’s president at the time, insisted

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that the Pinto weigh no more than 2,000 pounds and cost no more than $2,000. Even with these restrictions,

the Pinto met federal safety standards, although some people have argued that strict adherence to the restrictions led Ford engineers to compromise safety. Some 2 million units were sold during the 10-year life of the Pinto.

The Pinto’s major design flaw—a fuel tank prone to rupturing with moderate-speed rear-end collisions— surfaced not too long after the Pinto’s entrance to the market. In April 1974, the Center for Auto Safety petitioned the National Highway Traffic Safety Administration (NHTSA) to recall Ford Pintos due to the fuel tank design defect. The Center for Auto Safety’s petition was based on reports from attorneys of three deaths and four serious injuries in moderate-speed rear-end collisions involving Pintos. The NHTSA did not act on this petition until 1977.

As a result of tests performed for the NHTSA, as well as the extraordinary amount of publicity generated by the problem, Ford agreed, on June 9, 1978, to recall 1.5 million 1971–1976 Ford Pintos and 30,000 1975– 1976 Mercury Bobcat sedan and hatchback models for modifications to the fuel tank. Recall notices were mailed to the affected Pinto and Bobcat owners in September 1978. Repair parts were to be delivered to all dealers by September 15, 1978.

Unfortunately, the recall was initiated too late for six people. Between June 9 and September 15, 1978, six people died in Pinto fires after a rear impact. Three of these people were teenage girls killed in Indiana in August 1978 when their 1973 Pinto burst into flames after being rear-ended by a van. The fiery deaths of the Indiana teenagers led to criminal prosecution of the Ford Motor Company on charges of reckless homicide, marking the first time that an American corporation was prosecuted on criminal charges. In the trial, which commenced on January 15, 1980, “Indiana state prosecutors alleged that Ford knew Pinto gasoline tanks were prone to catch fire during rear-end collisions but failed to warn the public or fix the problem out of concern for profits.” On March 13, 1980, a jury found Ford innocent of the charges. Production of the Pinto was discontinued in the fall of 1980.

Enter Ford’s Field Recall Coordinator Dennis A. Gioia, currently a professor in the Department of Management and Organization at Pennsylvania State University, was the field recall coordinator at Ford Motor Company as the Pinto fuel tank defect began unfolding. Gioia’s responsibilities included the operational coordination of all the current recall campaigns, tracking incoming information to identify developing problems, and reviewing field reports of alleged component failures that led to accidents. Gioia left Ford in 1975. Subsequently, “reports of Pinto fires escalated, attracting increasing media attention.” The remainder of this case, written in Gioia’s own words in the early 1990s, is his personal reflection on lessons learned from his experiences involving the Pinto fuel tank problem.

Why Revisit Decisions from the Early 1970s? I take this case very personally, even though my name seldom comes up in its many recountings. I was one of those “faceless bureaucrats” who is often portrayed as making decisions without accountability and then walking away from them—even decisions with life-and-death implications. That characterization is, of course, far too stark and superficial. I certainly don’t consider myself faceless, and I have always chafed at the

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label of bureaucrat as applied to me, even though I have found myself unfairly applying it to others. Furthermore, I have been unable to walk away from my decisions in this case. They have a tendency to haunt —especially when they have had such public airings as those involved in the Pinto fires debacle have had.

But why revisit 20-year-old decisions, and why take them so personally? Here’s why: because I was in a position to do something about a serious problem . . . and didn’t. That simple observation gives me pause for personal reflection and also makes me think about the many difficulties people face in trying to be ethical decision makers in organizations. It also helps me to keep in mind the features of modern business and organizational life that would influence someone like me (me of all people, who purposely set out to be an ethical decision maker!) to overlook basic moral issues in arriving at decisions that, when viewed retrospectively, look absurdly easy to make. But they are not easy to make, and that is perhaps the most important lesson of all.

The Personal Aspect I would like to reflect on my own experience mainly to emphasize the personal dimensions involved in ethical decision making. Although I recognize that there are strong organizational influences at work as well, I would like to keep the critical lens focused for a moment on me (and you) as individuals. I believe that there are insights and lessons from my experience that can help you think about your own likely involvement in issues with ethical overtones.

First, however, a little personal background. In the late 1960s and early 1970s, I was an engineering/MBA student; I also was an “activist,” engaged in protests of social injustice and the social irresponsibility of business, among other things. I held some pretty strong values, and I thought they would stand up to virtually any challenge and enable me to “do the right thing” when I took a career job. I suspect that most of you feel that you also have developed a strongly held value system that will enable you to resist organizational inducements to do something unethical. Perhaps. Unfortunately, the challenges do not often come in overt forms that shout the need for resistance or ethical righteousness. They are much more subtle than that, and thus doubly difficult to deal with because they do not make it easy to see that a situation you are confronting might actually involve an ethical dilemma.

After school, I got the job of my dreams with Ford and, predictably enough, ended up on the fast track to promotion. That fast track enabled me to progress quickly into positions of some notable responsibility. Within two years I became Ford’s field recall coordinator, with first-level responsibility for tracking field safety problems. It was the most intense, information-overloaded job you can imagine, frequently dealing with some of the most serious problems in the company. Disasters were a phone call away, and action was the hallmark of the office where I worked. We all knew we were engaged in serious business, and we all took the job seriously. There were no irresponsible bureaucratic ogres there, contrary to popular portrayal.

In this context, I first encountered the neophyte Pinto fires problem—in the form of infrequent reports of cars erupting into horrendous fireballs in very low-speed crashes and the shuddering personal experience of inspecting a car that had burned, killing its trapped occupants. Over the space of a year, I had two distinct opportunities to initiate recall activities concerning the fuel tank problems, but on both occasions, I voted not to recall, despite my activist history and advocacy of business social responsibility.

The key question is how, after two short years, could I have engaged in a decision process that appeared to

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violate my own strong values—a decision process whose subsequent manifestations continue to be cited by many observers as a supposedly definitive study of corporate unethical behavior? I tend to discount the obvious accusations: that my values weren’t really strongly held; that I had turned my back on my values in the interest of loyalty to Ford; that I was somehow intimidated into making decisions in the best interest of the company; that despite my principled statements, I had not actually achieved a high stage of moral development; and so on. Instead, I believe a more plausible explanation for my own actions looks to the foibles of normal human information processing.

I would argue that the complexity and intensity of the recall coordinator’s job required that I develop cognitive strategies for simplifying the overwhelming amount of information I had to deal with. The best way to do that is to structure the information into cognitive “schemas,” or more specifically “script schemas,” that guide understanding and action when facing common or repetitive situations. Scripts offer marvelous cognitive shortcuts because they allow you to act virtually unconsciously and automatically, and thus permit you to handle complicated situations without being paralyzed by needing to think consciously about every little thing. Such scripts enabled me to discern the characteristic hallmarks of problem cases likely to result in recall and to execute a complicated series of steps required to initiate a recall.

All of us structure information all of the time; we could hardly get through the workday without doing so. But there is a penalty to be paid for this wonderful cognitive efficiency: we do not give sufficient attention to important information that requires special treatment because the general information pattern has surface appearances that indicate that automatic processing will suffice. That, I think, is what happened to me. The beginning stages of the Pinto case looked for all the world like a normal sort of problem. Lurking beneath the cognitive veneer, however, was a nasty set of circumstances waiting to conspire into a dangerous situation. Despite the awful nature of the accidents, the Pinto problem did not fit an existing script; the accidents were relatively rare by recall standards, and the accidents were not initially traceable to a specific component failure. Even when a failure mode suggesting a design flaw was identified, the cars did not perform significantly worse in crash tests than competitor vehicles. One might easily argue that I should have been jolted out of my script by the unusual nature of the accidents (very low speed, otherwise unharmed passengers trapped in a horrific fire), but those facts did not penetrate a script cued for other features. (It also is difficult to convey to the lay person that bad accidents are not a particularly unusual feature of the recall coordinator’s information field. Accident severity is not necessarily a recall cue; frequently repeated patterns and identifiable causes are.)

The Corporate Milieu In addition to the personalized scripting of information processing, there is another important influence on the decisions that led to the Pinto fires mess: the fact that decisions are made by individuals working within a corporate context. It has escaped almost no one’s notice that the decisions made by corporate employees tend to be in the best interest of the corporation, even by people who mean to do better. Why? Because the socialization process and the overriding influence of organizational culture provide a strong, if generally subtle, context for defining appropriate ways of seeing and understanding. Because organizational culture can be viewed as a collection of scripts, scripted information processing relates even to organizational-level considerations. Scripts are context bound; they are not free-floating general cognitive structures that apply universally. They are tailored to specific contexts. And there are few more potent contexts than organizational

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settings. There is no question that my perspective changed after joining Ford. In retrospect, I would be very

surprised if it hadn’t. In my former incarnation as a social activist, I had internalized values for doing what was right—as I understood righteousness in grand terms, but I had not internalized a script for applying my values in a pragmatic business context. Ford and the recall coordinator role provided a powerful context for developing scripts—scripts that were inevitably and undeniably oriented toward ways of making sense that were influenced by the corporate and industry culture.

I wanted to do a good job, and I wanted to do what was right. Those are not mutually exclusive desires, but the corporate context affects their synthesis. I came to accept the idea that it was not feasible to fix everything that someone might construe as a problem. I therefore shifted to a value of wanting to do the greatest good for the greatest number (an ethical value tempered by the practical constraints of an economic enterprise). Doing the greatest good for the greatest number meant working with intensity and responsibility on those problems that would spare the most people from injury. It also meant developing scripts that responded to typical problems, not odd patterns like those presented by the Pinto.

Another way of noting how the organizational context so strongly affects individuals is to recognize that one’s personal identity becomes heavily influenced by corporate identity. As a student, my identity centered on being a “good person” (with a certain dose of moral righteousness associated with it). As recall coordinator, my identity shifted to a more corporate definition. This is an extraordinarily important point, especially for students who have not yet held a permanent job role, and I would like to emphasize it. Before assuming your career role, identity derives mainly from social relationships. Upon putting on the mantle of a profession or a responsible position, identity begins to align with your role. And information processing perspective follows from the identity.

I remember accepting the portrayal of the auto industry and Ford as “under attack” from many quarters (oil crises, burgeoning government regulation, inflation, litigious customers, etc.). As we know, groups under assault develop into more cohesive communities that emphasize commonalities and shared identities. I was by then an insider in the industry and the company, sharing some of their beleaguered perceptions that there were significant forces arrayed against us and that the well-being of the company might be threatened.

What happened to the original perception that Ford was a socially irresponsible giant that needed a comeuppance? Well, it looks different from the inside. Over time, a responsible value for action against corporate dominance became tempered by another reasonable value that corporations serve social needs and are not automatically the villains of society. I saw a need for balance among multiple values, and as a result, my identity shifted in degrees toward a more corporate identity.

The Torch Passes to You So, given my experiences, what would I recommend to you, as a budding organizational decision maker? I have some strong opinions. First, develop your ethical base now! Too many people do not give serious attention to assessing and articulating their own values. People simply do not know what they stand for because they haven’t thought about it seriously. Even the ethical scenarios presented in classes or executive programs are treated as interesting little games without apparent implications for deciding how you intend to think or act. These exercises should be used to develop a principled, personal code that you will try to live by.

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Consciously decide your values. If you don’t decide your values now, you are easy prey for others who will gladly decide them for you or influence you implicitly to accept theirs.

Second, recognize that everyone, including you, is an unwitting victim of his or her cognitive structuring. Many people are surprised and fascinated to learn that they use schemas and scripts to understand and act in the organizational world. The idea that we automatically process so much information so much of the time intrigues us. Indeed, we would all turn into blithering idiots if we did not structure information and expectations, but that very structuring hides information that might be important—information that could require you to confront your values. We get lulled into thinking that automatic information processing is great stuff that obviates the necessity for trying to resolve so many frustrating decisional dilemmas.

Actually, I think too much ethical training focuses on supplying standards for contemplating dilemmas. The far greater problem, as I see it, is recognizing that a dilemma exists in the first place. The insidious problem of people not being aware that they are dealing with a situation that might have ethical overtones is another consequence of schema usage. I would venture that scripted routines seldom include ethical dimensions. Is a person behaving unethically if the situation is not even construed as having ethical implications? People are not necessarily stupid, ill-intentioned, or Machiavellian, but they are often unaware. They do indeed spend much of their time cruising on automatic, but the true hallmark of human information processing is the ability to switch from automatic to controlled information processing. What we really need to do is to encourage people to recognize cues that build a “Now Think!” step into their scripts—waving red flags at yourself, so to speak—even though you are engaged in essentially automatic cognition and action.

Third, because scripts are context bound and organizations are potent contexts, be aware of how strongly, yet how subtly, your job role and your organizational culture affect the ways you interpret and make sense of information (and thus affect the ways you develop the scripts that will guide you in unguarded moments). Organizational culture has a much greater effect on individual cognition than you would ever suspect.

Last, be prepared to face critical responsibility at a relatively young age, as I did. You need to know what your values are and you need to know how you think so that you can know how to make a good decision. Before you can do that, you need to articulate and affirm your values now, before you enter the fray. I wasn’t really ready. Are you?

Questions for Discussion 1. The Ford Pinto met federal safety standards, yet it had a design flaw that resulted in serious injuries and

deaths. Is simply meeting safety standards a sufficient product design goal of ethical companies?

2. Gioia uses the notion of script schemas to help explain why he voted to not initiate a recall of the Ford Pinto. In your opinion, is this a justifiable explanation?

3. How can organizational context influence the decisions made by organizational members?

4. If you had been in Gioia’s position, what would you have done? Why?

5. Describe the four key decision-making lessons that Gioia identifies for neophyte decision makers. Discuss how you expect or intend to use these four lessons in your own career.

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

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Ford Pinto fuel-fed fires. (n.d.). The Center for Auto Safety. http://www.autosafety.org/article.php? scid=145&did=522, accessed January 20, 2005.

Ford Pinto reckless homicide trial. HistoryChannel.com. http://www.historychannel.com/speeches/archive/speech_465.html, accessed January 20, 2005.

Gioia, D. A. (May 1992). Pinto fires and personal ethics: A script analysis of missed opportunities. Journal of Business Ethics, 11(5–6), 379–390.

Case 4 Jerome Kerviel: Rogue Trader or Misguided Employee? What Really Happened at the Société Générale?

Société Générale: A French Bank Globally Recognized The French banking company Société Générale (“SocGen” or “the Company”) was founded on May 4, 1864, and at the time of writing is headed by co-CEOs Philippe Citerne and Daniel Bouton. The bank has grown to serve 19.2 million individual customers in 76 countries. It employs 103,000 workers from 114 different nationalities. SocGen operates in three major businesses: retail banking and financial services, global investment management and services, and corporate and investment banking. The core values at the Company are professionalism, team spirit, and innovation.

In 2006, SocGen ranked 67 on Fortune’s 2006 Global 500 and had managed to build a $72 billion position in European stock index futures. The year before, the Company ranked 152 on Fortune’s list. In addition to top-line growth, SocGen also posted a more important improvement in overall profitability, at $5.5 billion, up 42% from the prior year. It was the 14th largest company among the banking institutions on the list.

The Beginning of the Story Things were about to change for SocGen. Recent turmoil in 2006 revolved around the collapsing housing market and a mortgage industry that witnessed loan defaults in record numbers. Several banks engaged in purchasing high-risk mortgage loans, but the overall economic recession, primarily in the United States but also felt globally, constrained this bank’s financial status. SocGen saw its stock price cut almost in half throughout the year, but this was not the only potential pitfall for this once robust Company. It was the actions of one rogue trader, Jerome Kerviel, that could have brought about the ultimate downfall of SocGen.

Who Is Jerome Kerviel and What Happened at the Bank? On January 24, 2008, Jerome Kerviel found himself in the international media spotlight, but not as he would have hoped. On this day, SocGen announced to the world that it had discovered a $7.14 billion trading fraud caused by a single trader, Kerviel. Additionally, a nearly $3 billion loss was posted due to the loss in investments in the U.S. subprime mortgage industry. The second largest bank in France had its shares halted to avoid a complete market collapse on the price of the stock.

From his modest roots to the upscale Paris suburb where he resided, friends and family never expected that this unmarried 31 year old could be capable of such a scandal. With a relatively modest salary ($145,700), Kerviel did not profit from his trading scheme. He had been an employee at SocGen since 2000. He began in a monitoring support role, and oversaw the futures traders for five years. He was then promoted to the futures

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trading desk. He traded European futures by betting on the future performance of these funds. Kerviel saw his trading profits increase throughout 2007 as he bet that the markets would fall during this time. By the end of the year, he needed to mask his significant gains, so he created fictional losing positions to erode his gains. These included the purchasing of 140,000 DAX futures (the German stock index: a blue chip stock market index that includes the 30 major German companies trading on the Frankfurt Stock Exchange). By mid- January, Kerviel had lost over $3 billion. He was hedging more than $73.3 billion, an amount far in excess of the trading limits created by SocGen for a single trader. This amount even exceeded SocGen’s overall market cap of $52.6 billion.

Despite five levels of increased security to prevent traders from assuming positions greater than a predetermined amount, and a group compliance division in charge of monitoring trader activity, Kerviel was able to bypass internal controls for over two years.

Kerviel’s motive was not to steal from the bank, but to have his significant trading gains catapult his career, and to cash in on a significant bonus given to traders who exhibit the type of profitability he created for the Company. Red flags were triggered, but e-mails to his superiors on his trading activity were ignored due to his overall profitability for the Company. Kerviel admitted his wrongdoing, but stated that SocGen was partially responsible for not monitoring his activities correctly and by having rewarded his behavior with a proposed bonus of $440,000. Kerviel stated that his actions were similar to those of other traders; he was just being labeled as the scapegoat in this investigation.

Company Reaction Once the fraud was detected in mid-January 2008, SocGen immediately reported it to France’s central bank, Bank of France. Over the next three trading days, SocGen employees began to unload all of Kerviel’s positions into the marketplace. The Company attempted to complete this significant sale of securities in a manner that would not disrupt the normal market movement. The ripple effect of this action may have created additional pressure on the already falling world markets. Some analysts speculated that this action may even have influenced the U.S. Federal Reserve rate cut. SocGen management denied that action after it discovered that the trading fraud had a meaningful impact on the world marketplace. Co-CEO Bouton stated that the three- day sell-off was in accordance with guidelines, and that the liquidation of a position at any one time could not be more than 10% of the given market.

After Kerviel admitted his guilt, his employment was terminated along with that of his supervisors. Bouton submitted a formal resignation, along with second-in-command Phillipe Citerne; however, both were rejected by the board of directors. Employees at the Company staged demonstrations where they showed their support for Bouton.

The bank has stated that since the activity was brought to light, there has been a tightening on the internal controls, so that actions such as Kerviel’s are no longer possible for a trader. On January 25, 2008, SocGen took out a full-page newspaper article apologizing to its customers for the scandal. On January 30, the board announced the formation of an independent committee to investigate the current monitoring practices and determine what measures could be put in place to prevent it from happening again. The committee would enlist the services of the auditing company PricewaterhouseCoopers. The Company also announced that it needed an influx of capital to stay afloat, and began looking to outside help to raise $8.02 billion in new

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capital.

Government Reaction On January 26, 2008, Kerviel was taken into police custody for questioning regarding his trading activity at SocGen. Three complaints were issued to police, one by SocGen and two others by small shareholders.

This event was the focus at the World Economic Forum in Davos, Switzerland, which brought to light questions on how risk is managed within organizations. French finance minister Christine Lagarde was assigned the task of investigating the events and compiling a report on the failure of internal controls at SocGen. The report was then publicized in an effort to prevent similar fraudulent trading events from occurring in the future. A timeline of the events leading up to the trading losses was created in an effort to better understand the events that transpired. In the report, Lagarde stated that there should be an increase in penalties for banks that violate the commission’s set rules. The then president of France, Nicolas Sarkozy, stated that the events at SocGen did not affect the “solidity and reliability of France’s financial system.” He wanted the board of directors to take action against senior management, including Bouton.

On January 28, 2008, Kerviel was charged with unauthorized computer activity and breach of trust. Plans to charge Kerviel with fraud and misrepresentation were also announced, which could carry a maximum prison time of seven years and fines of $1.1 million. At the time of writing, the fraud charge had not been accepted by the courts; however, prosecutors were seeking to appeal this to a higher court.

The government sought to prevent a hostile takeover of SocGen during this period. However, the European Union was in disagreement with the French government and stated that all bidders should be treated equally: “The same rules apply as in other takeover situations under free movement of capital rules. Potential bidders are to be treated in an undiscriminatory manner.” The current standout bidder is the largest bank in France, BNP Paribas. Many competitors are contemplating making an offer for the distressed Company—to purchase a portion or all of the bank’s assets.

Why It Happened Kerviel was able to evade detection because of his experience monitoring the traders in his early years at SocGen. Falsifying bank records and computer fraud were part of the intricate scheme that he created. Kerviel knew when he would be monitored by the bank and avoided any activity during those periods. He created a fictitious company and falsified trading records to keep his activity under wraps. Kerviel also used other employees’ computer access codes and falsified trading documents.

Related Companies with Similar Troubles In 1995, Barings, a British bank that had been in existence for more than 230 years, collapsed as the results of the actions of one futures trader, Nick Leeson. Leeson lost more than $1.38 billion when trading futures in the Asian markets.

In 1991, London-based Bank of Credit and Commerce International (BCCI) went bankrupt as the result of illegal trading activity and insider trading, losing over $10 billion.

During the late 1980s and early 1990s, Yasuo Hamanaka, a Japanese copper futures trader, cost his employer, Sumitomo Copper, $2.6 billion.

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Is There More to the Story? A director of SocGen, Robert Day, sold $126.1 million in shares on January 9, 2008, two weeks before the trading fraud was disclosed. He also sold $14.1 million the next day for two charitable trusts he chaired. Trading also occurred on January 18. The total trading activity amounted to $206 million. It was reported that Day traded during the timeframe where it was acceptable for a board member to trade shares of stock. Accusations of insider trading have been denied.

The Financial Times in London has reported that SocGen may have known about the trading activities back in November, when the Eurex derivatives exchange questioned Kerviel’s trading positions and alerted the Company. This then calls into question the lack of oversight by the Company, and what responsibility SocGen has to its shareholders for this oversight. Kerviel accuses his supervisors of turning a blind eye to his activities because he was earning the Company a significant amount of money. He states that his profits should have raised concerns because they far exceeded the parameters of the transactions he was allowed to engage in.

Corporate Controls at SocGen It has been stated that there were not enough safeguards in place to protect the bank from Kerviel’s activities. The following describes the existing safeguards and focuses on the public ethical programs that SocGen had in place.

At SocGen, the board of directors and three corporate governance committees that were established in 1995 are in charge of creating and policing the Company through its internal rules and regulations. The Company engages in risk management by constantly reviewing its risk exposure in the variety of areas in which it operates. Due to the sensitivity of many of its banking projects, corporate governance remains at the forefront of the bank’s activities. The three committees include the audit committee (in charge of review of the Company’s draft financial statements prior to submission to the board of directors), the compensation committee (in charge of determining executive compensation packages), and the nomination committee (appoints new board members and executive officers).

The board of directors is responsible for the Company’s overall strategy and the adherence to its defined set of internal rules. The risk assessment divisions operate autonomously from the other operating units. Reporting directly to general management, this group consists of 2,000 employees who constantly monitor the activities of the other business units, making sure they are in compliance with the internal rules established by the board of directors. Monthly meetings are held to review strategic initiatives and all new products must first receive the approval of the risk team before implementation may take place.

Internal audit groups have been put in place with the following assignments:

• Detect, measure, and manage the risks incurred.

• Guarantee the reliability, integrity, and availability of financial and management data.

• Verify the quality of the information and communications systems.

All staff members are under constant day-to-day supervision to ensure their compliance with the regulations in place.

The Compliance Department was established in 1997 and is currently responsible for monitoring all

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banking activities so that the actions of all employees are in the best interest of the Company. A charter is in place that extends beyond local law and attempts to cover the high ethical standards set by the Company. Three key principles of the group are to work only with well-known customers, always assess the economic legitimacy of the action, and have the ability to justify any stance taken.

The trading room had eight compliance staff members in 2006, with the goal of increasing this number in 2007. Anti-money laundering practices have also been in the spotlight during the last few years. In all, the group has increased overall training for 2006 to 50,000 hours, up from 24,000 in 2005. The total number of employees trained is 18,000 individuals.

The role of information technology (IT) has also increased in order to support the corporate governance initiative. GILT (Group Insider List Tool) monitors potential conflicts of interest and insider-trading activity within the Company, and MUST (Monitoring of Unusual and Suspicious Transactions) is used to detect insider trading and market manipulation. The Company also has standards in place to prevent corruption on the part of Company employees and government officials.

A Code of Conduct has been in place since March 2005, with the goal of being a reference tool for employees that highlights the principles that the Company wants its employees to uphold. The Code was created as the result of the changes in the current business environment, since employees and society alike have set a higher standard for an individual Company’s corporate responsibilities. Like many other companies that have a Code of Conduct, SocGen felt that establishing this Code was an essential part of operating in the current business environment.

The SocGen China Group has established strict controls in an effort to prevent internal private information and confidential customer data from leaking to the outside marketplace. Separation is a key component in this, whereby an effort is made to eliminate the chance of conflicts of interest on sensitive projects. There is restricted access to IT programs, and any potential conflict of interest must first be approved and signed off by the Compliance Department.

Compliance structures were put in place beginning in March 2005 as a result of a change in law by the French Banking and Financial Regulation Committee (Regulation No. 97–02). The secretary-general of SocGen heads the Group Compliance Committee. Through monthly meetings, members of the group identify any potential risks on the part of the Company, develop ways to prevent future risks in new products, and engage in employee training in an effort to strengthen the idea of corporate compliance within the company culture.

Stakeholders and Their Roles The main stakeholder in this case is Jerome Kerviel. His actions were the primary driver behind the significant losses incurred by SocGen. However, although Kerviel may have been the focal stakeholder, there are several other primary stakeholders. Kerviel’s direct supervisors were responsible for managing his actions. Senior management and the board of directors were responsible for implementing and enforcing guidelines. Employees of the Company are stakeholders since other traders’ actions may have influenced Kerviel’s decisions, and the Kerviel case may have jeopardized their own careers within the Company. The final primary stakeholders were the Company’s shareholders, who were negatively impacted by the huge trading losses at SocGen brought about by Kerviel.

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Secondary stakeholders include the government, who pushed the board of directors for Bouton’s resignation, and the court systems prosecuting Kerviel and other individuals indicted on counts of insider trading. There are competitors, including BNP Paribas, who may try to take advantage of this opportunity to purchase a portion of SocGen’s operations at a devalued price. Finally, there is the public at large, whose confidence was yet again shaken by another scandal within a financial institution.

Potential coalitions involved in the events leading up to the trading scandal include traders and their managers who may have ignored rules and regulations enacted by the governing committee at SocGen. Current coalitions may include shareholders who want to be reimbursed for the management oversight. Shareholder suits may also be brought against those identified as potentially engaging in insider trading. Finally, competition may be forming a coalition to section off the different business units of SocGen to complete a proposed buyout offer.

From the CEO’s perspective, Kerviel might be seen as directly violating the rules put in place by the governing committee. Kerviel’s managers also did not fully adhere to the established policies. The board of directors and the CEO were instrumental in the creation of the guidelines. The board rejected Bouton’s letter of resignation and many employees have been very supportive of him, stating that he was the person who could guide the Company through this trying time.

Each stakeholder in this case had varying degrees of power. Kerviel had the power to operate with limited supervision (although this was due to his manipulation of the system) and to have a significant impact on the overall bottom line at SocGen. The supervisors of the traders had a degree of power only over the traders, provided they were not blindsided by the traders’ fraudulent activities. The board of directors was responsible for providing strategic guidance for the Company, electing a CEO, and establishing rules and regulations for the Company and its employees. The shareholders of SocGen stock had the power to vote on issues, since they are each individual owners of the Company. The government had the power to influence how companies conducted business. The competitors impact the strategies a Company must undertake in order to stay ahead of its competition.

Three Primary Stakeholders and Their Obligations Kerviel had a legal obligation not to engage in fraudulent behavior; this is evidenced by the fact that he was indicted in the French court system. His economic incentive was to make the most money possible for SocGen while minimizing risk. He was successful for two years, but as he failed to minimize overall risk, his behavior eventually caught up with him. He had an ethical responsibility to management and his colleagues. He could be viewed as both a threat to the Company and a cooperative influence, depending on how management controlled the situation.

Kerviel’s supervisors did not have as significant a legal obligation as Kerviel with regard to his specific responsibilities and actions. However, if they had been aware of his actions and did not act, then they can be seen as enabling him to commit illegal acts. They had an economic incentive to uphold the standards that senior management has put in place, since that is part of their job responsibility. Ethically, they had a responsibility to senior management, their colleagues, and their direct reports. It was the responsibility of senior management to work with the supervisors, and it was up to senior management to work with the supervisors to see that rules and regulations were upheld.

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The board of directors has an obligation to make sure that the employees of the Company act in accordance with the laws of the country they reside in. The board has an economic responsibility to the shareholders of stock in the Company. Ethically, the board must create rules of conduct and ethical standards and practice a rule by example. The board is a supportive, low-potential-threat stakeholder that will probably cooperate with the CEO in this case.

Where Is He Now? “A lower court in France convicted Kerviel in October 2010 of forgery, breach of trust and unauthorized computer use for covering up bets worth nearly 50 billion euros in 2007 and 2008. By the time his trades were discovered and made public, he had amassed losses of almost 5 billion euros on those bets”, reported the Associated Press. He lost the subsequent appeal, the Paris Appeals Court upholding Kerviel’s sentence in its entirety in 2012. He is currently serving a three-year prison sentence.

Questions for Discussion 1. Is Kerviel the only guilty one in this case with regard to his actions? Also, does the punishment fit the crime

in this case? Explain both of your answers.

2. Should other individuals and the bank be held legally responsible and liable for Kerviel’s actions? Why or why not? Explain.

3. Describe what you believe to have been Kerviel’s personal and professional ethics. Use the terms from this chapter as well as your own reasoning.

4. Compare your personal and professional ethics to Kerviel’s.

5. Explain how a stakeholder and issues analysis can help you understand this case.

6. What are the lessons students in accounting, business, and organizational studies fields can take away from this case?

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

Accused billion-dollar rogue trader charged, freed. (January 28, 2008). CNN.com. http://edition.cnn.com/2008/WORLD/europe/01/28/rogue.trader/index.html? eref=edition_world&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+rss%2Fedition_world+ (RSS%3A+World), accessed February 3, 2014.

BNP Paribas weighs bid for Société Générale. (January 31, 2008). News A-Z. http://newsaz.blogspot.com/2008/01/bnp-paribas-weighs-bid-for-societe.html, accessed February 3, 2014.

Fortune Global 500. (February 5, 2008). CNN.com. http://money.cnn.com/magazines/fortune/global500/2006/snapshots/1235.html, accessed January 7, 2014.

Ganle, E. (October 24, 2012). Rogue French Trader Jerome Kerviel’s 3-Year Sentence, $7 Billion Fine Upheld. Daily Finance.com. http://www.dailyfinance.com/2012/10/24/rogue-french-trader-jerome- kerviels-3-year-sentence-7-billion/, accessed February 17, 2014.

Gumbel, P. (January 25, 2008). Financiers never say “sorry.” CNN.com. http://money.cnn.com/2008/01/25/magazines/fortune/gumbel_davossorry.fortune/index.htm, accessed

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January 7, 2014.

Gumbel, P. (February 1, 2008). 4 things I learned from Société Générale. CNN.com. http://money.cnn.com/2008/02/01/news/international/socgen_whatilearned.fortune/index.htm, accessed January 7, 2014.

Judges charge France’s “rogue trader.” (January 28, 2008). CNN.com. http://money.cnn.com/2008/01/28/news/international/france_fraud.ap/index.htm, accessed January 7, 2014.

Police raid flat of rogue trader Jerome Kerviel (January 2008). The Telegraph. http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/2783273/Police-raid-flat-of-rogue- trader-Jerome-Kerviel.html, accessed February 3, 2014.

Prosecutor seeks fraud charge for rogue trader. (January 29, 2008). CNN.com. http://money.cnn.com/2008/01/29/news/international/rogue_trader/index.htm, accessed February 3, 2014.

Rogue French trader Jerome Kerviel’s 3-year sentence, $7 billion fine upheld. (October 24, 2012). DailyFinance.com. http://www.dailyfinance.com/2012/10/24/rogue-french-trader-jerome-kerviels-3-year- sentence-7-billion/, accessed January 7, 2014.

Rogue Société Générale trader accused of hacking computer systems. (January 28, 2008). ComputerWeekly.com. http://www.computerweekly.com/news/2240084755/Rogue-Societe-Generale-trader-accused-of-hacking- computer-systems, accessed February 3, 2014.

Rogue Trader at Société Générale Gets 3 Years. (October 5, 2010). New York Times. http://www.nytimes.com/2010/10/06/business/global/06bank.html?pagewanted=all, accessed February 3, 2014.

“Rogue trader” faces preliminary charges. (January 28, 2008). CNN.com. http://edition.cnn.com/2008/BUSINESS/01/28/soeciete.generale/index.html#cnnSTCText, accessed January 7, 2014.

SocGen board rejects CEO resignation. (January 30, 2008). CNN.com. http://money.cnn.com/2008/01/30/news/international/socgen/index.htm, accessed January 7, 2014.

Société Générale CEOs keep jobs. (January 30, 2008). CNN.com http://edition.cnn.com/2008/WORLD/europe/01/30/french.bank/, accessed February 3, 2014.

Société Générale cites lax management in $7B fraud. ABCNews.com. http://abcnews.go.com/Business/story? id=4924887, accessed February 3, 2014.

Société Générale web site: http://www.societegenerale.com.

Société Générale ranks No. 67 on Fortune’s 2006 Global 500. (September 26, 2006). CNN.com. http://money.cnn.com/2006/09/21/news/companies/societe_generale.fortune/index.htm, accessed January 7, 2014.

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Case 5 Samuel Waksal at ImClone

Seeking Approval for Erbitux For several years, ImClone, a biotechnology company, was a darling of Wall Street. Its stock price rose from less than $1 per share in 1994 to $72 a share in November 2001. “The whole time it was producing nothing for sale. It did generate some revenue through licensing agreements with other drug companies-signs that the pharmaceutical industry did think ImClone was on to something.” ImClone focused on developing a cancer treatment drug called Erbitux. Erbitux is intended to make cancer treatment more effective by “targeting a protein called epidermal growth factor receptor (EGFR), which exists on the surface of cancer cells and plays a role in their proliferation.”

In its 10-K Annual Report for the fiscal year ending December 31, 2001, ImClone described Erbitux as the company’s “lead product candidate” and indicated that Erbitux had been shown in early stage clinical trials to cause tumor reduction in certain cases. ImClone had planned to market the drug in the United States and Canada with its development partner, Bristol-Myers Squibb. On September 19, 2001, ImClone announced that Bristol-Myers Squibb had paid $2 billion for the marketing rights to Erbitux and would codevelop and copromote Erbitux with ImClone.

ImClone was one of at least five pharmaceutical companies with EGFR drugs in mid- to late-stage testing. The winners at commercialization of a new drug class-such as EGFR-are the “companies that beat their rivals to market, since doctors tend to embrace the initial entries.” Under this pressure, ImClone took a testing shortcut, using what is known as a single-armed study-one which is conducted without a control group. ImClone’s use of the single-armed study failed to meet the U.S. Food and Drug Administration’s (FDA) rigorous criteria for using the methodology.

Samuel Waksal, ImClone’s cofounder and CEO at the time, was directly involved in coordinating and publicizing ImClone’s efforts to develop Erbitux and to obtain FDA approval for it. On June 28, 2001, ImClone began the process of submitting a rolling application-called a Biologics License Application (BLA)- seeking FDA approval for Erbitux. On October 31, 2001, ImClone submitted to the FDA the final substantial portion of its BLA. The FDA had a 60-day period within which a decision had to be made concerning whether to accept the BLA for filing. The FDA had three options: (1) accept ImClone’s BLA for filing; (2) accept the BLA for filing, but simultaneously issue a disciplinary review letter notifying ImClone that the BLA still had serious deficiencies that would need to be corrected before the BLA could be approved; or (3) refuse to approve the drug by issuing a Refusal to File letter (RTF). When the FDA issues a RTF, the applicant must file a new BLA to start the process over.

Samuel Waksal’s Reaction to the Impending Refusal to File On December 25, 2001, Bristol-Myers Squibb learned from a source at the FDA that the FDA would issue a RTF letter on December 28, 2001. On the evening of December 26, 2001, Waksal learned of the FDA’s decision and attempted to sell 79,797 shares of ImClone stock that were held in his brokerage account with Merrill Lynch. He initially told his agent to transfer the shares to his daughter’s account. The following morning he instructed his agent to sell the shares. When Waksal’s agent called Merrill Lynch in order to sell

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the shares, the agent was told that the shares were restricted and could not be sold without the approval of

ImClone’s legal counsel. When Merrill Lynch refused to conduct the transaction, Waksal ordered his agent to transfer the shares to Bank of America and then sell them. Bank of America also refused to conduct the transaction, and the shares were never sold.

On December 26, 2001, Waksal contacted his father, Jack Waksal, informing him of the impending RTF. The next morning, Jack Waksal placed an order to sell 110,000 shares of ImClone stock. Jack Waksal also called Prudential Securities and placed an order to sell 1,336 shares of ImClone stock from the account of his daughter, Patti Waksal. On December 28, Jack Waksal sold another 25,000 shares of ImClone stock. When questioned by the staff of the Securities and Exchange Commission (SEC), Jack Waksal provided false and misleading explanations for these trades.

On the morning of December 27, 2001, before the stock market opened, Samuel Waksal had a telephone conversation with his daughter, Aliza. At that time, Waksal was Aliza’s only means of support, and he had control of her bank and brokerage accounts. During their conversation, he directed her to sell all of her ImClone shares. Immediately after talking to her father, Aliza placed an order at 9 a.m. to sell 39,472 shares of ImClone stock. By selling her shares at that moment in time, she avoided $630,295 in trading losses.

On December 28, 2001, Waksal purchased 210 ImClone put option contracts, buying them through an account at Discount Bank and Trust AG in Switzerland. He sold all 210 put option contracts on January 4, 2002, which resulted in a profit of $130,130. Waksal also failed to file a statement disclosing a change of ownership of his ImClone securities as required by Section 16(a) of the Exchange Act and Rule 16a-3.

According to the SEC, Waksal violated several sections of the Securities Act when he attempted to sell his own ImClone Stock, when he illegally tipped his father about the FDA decision, when he caused Aliza to sell her shares of ImClone stock, and when he purchased ImClone put option contracts.

The Outcome for Samuel Waksal and ImClone Waksal resigned as ImClone’s CEO on May 21, 2002, and on June 12 was arrested for securities fraud and perjury. Two months later he was indicted for bank fraud, securities fraud, and perjury. On October 15, 2002, Waksal pleaded guilty to all of the counts in the indictment, except those counts based on allegations that he passed material, nonpublic information to his father. On March 3, 2003, he also pleaded guilty to tax evasion charges for failing to pay New York State sales tax on pieces of art he had purchased. On June 10, 2003, Waksal was sentenced to 87 months in prison and was ordered to pay a $3 million fine and $1.2 million in restitution to the New York State Sales Tax Commission. Waksal began serving his prison sentence on July 23, 2003.

Despite Waksal’s actions, ImClone appears to have survived the scandal. Under the leadership of Daniel Lynch, ImClone’s former chief financial officer and its current CEO, the company has staged a remarkable turnaround. Most of ImClone’s 440 employees stayed with the company and helped Lynch revive it. Lynch says the employees stayed for one overpowering reason-they believed in Erbitux. As for himself, Lynch asserted that “What motivated me to get up in the morning was knowing that if I could get this drug approved, it would improve the lives of patients with cancer.” Based on a clinical trial by Merck KGaA, ImClone’s European marketing partner, the FDA, on February 12, 2004, “approved Erbitux for treating patients with advanced colon cancer that has spread to other parts of the body.” Thus, Erbitux became

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ImClone’s first commercial product.

Where Are They Now? Waksal is currently making a comeback in the biotech industry. Since the scandal, ImClone has since been sold to Eli Lilly for a price of $6.5 billion in 2008. The next year, Waksal was caught up in the Martha Stewart Insider Trading scandal as well, and has since served jail time. Waksal’s new company, Kadmon Corp., is his new biopharmaceutical firm; he plans to open a sister company in China on the Hong Kong Exchange.

Questions for Discussion 1. What might motivate an individual or a company to short-cut drug testing that is crucial for FDA

approval?

2. Why did Samuel Waksal react as he did pursuant to learning that the FDA would not approve Erbitux?

3. Why were Samuel Waksal’s actions unethical?

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

Ackman, D. (October 11, 2002). A child’s guide to ImClone. Forbes.com. http://www.forbes.com/2002/10/11/1011topnews.html, accessed January 12, 2005.

FDA approves ImClone’s Erbitux: Drug at center of insider-trading scandal involving Waksal, Stewart. (February 12, 2004). MSNBC.com. http://msnbc.msn.com/ID/4251347, accessed January 12, 2005.

Herper, M. (May 23, 2002). ImClone CEO leaves, problems remain. Forbes.com. http://www.forbes.com/2002/05/23/0523imclone.html, accessed January 12, 2005.

Herper, M. (June 10, 2003). Samuel Waksal sentenced. Forbes.com. http://www.forbes.com/2003/06/10/cx_mh_0610waksal.html, accessed January 12, 2005.

Securities and Exchange Commission (SEC). SEC v. Samuel D. Waksal. Wayne M. Carlin (WC-2114), Attorney for the SEC. Case 02 Civ. 4407 (NRB). http://www.sec.gov/litigation/complaints/comp18026.htm, accessed January 12, 2005.

SEC. SEC v. Samuel D. Waksal, Jack Waksal and Patti Waksal. Barry W. Rashover (BR-6413), Attorney for the SEC. Case 02 Civ. 4407 (NRB). http://www.sec.gov/litigation/complaints/comp18408.htm, accessed January 12, 2005.

Shook, D. (February 14, 2002). Lessons from ImClone’s trial—and error. Business Week Online. http://www.businessweek.com, accessed January 12, 2005.

Tirrell, Meg. (September 3, 2013). ImClone’s Waksal back in Biotech with plans for spinouts. Bloomberg.com. http://www.bloomberg.com/news/2013-09-03/imclone-s-waksal-back-in-biotech-with-plans-for- spinouts.html, accessed October 27, 2013.

Tischler, L. (September 2004). The trials of ImClone. Fast Company. http://pf.fastcompany.com/magazine/86/imclone.html, accessed January 12, 2005.

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Notes

1. Linda Elder, L., and Paul, R. (2011). Ethical reasoning essential to education. CriticalThinking.org. http://www.criticalthinking.org/pages/ethical-reasoning-essential-to-education/1036.

2. Velasquez, M. G. (1998). Business ethics: Concepts and cases, 4th ed. Englewood Cliffs, NJ: Prentice Hall.

3. Ibid.

4. Ibid.

5. Mill, J. S. (1957). Utilitarianism. Indianapolis: Bobbs-Merrill; Carroll, A. (1993). Business and society: Ethics and stakeholder management, 2nd ed. Cincinnati: South-Western; Velasquez, M. G. (1992). Business ethics: Concepts and cases, 3rd ed. Englewood Cliffs, NJ: Prentice Hall.

6. Brandt, R. (1959). Ethical theory. Englewood Cliffs, NJ: Prentice Hall, 253–254.

7. Smart, J., and Williams, B. (1973). Utilitarianism: For and against, 4. Cambridge: Cambridge University Press.

8. Delong, J. V., et al. (March/April 1981). Defending cost-benefit analysis: Replies to Steven Kelman. AEI Journal on Government and Society, 39–43.

9. Hoffman, W. M., and Moore, J. (1990). Business ethics: Readings and cases in corporate morality, 2nd ed. New York: McGraw-Hill.

10. Kelman, S. (January/February 1981). Cost-benefit analysis: An ethical critique. AEI Journal on Government and Society, 33–40.

11. Freeman, R. E., and Gilbert Jr., D. (1988). Corporate strategy and the search for ethics. Upper Saddle River, New Jersey: Prentice Hall.

12. Kant, I. (1964). Groundwork of the metaphysics of morals. Translated by H. Paton. New York: Harper & Row.

13. Feldman, F. (1978). Introductory ethics. Englewood Cliffs, NJ: Prentice Hall, 119–128.

14. Tuck, R. (1979). Natural rights theories: Their origin and development. New York: Cambridge University Press; Stoljar, S. (1984). An analysis of rights. New York: St. Martin’s Press; Shue, H. (1981). Basic rights. Princeton, NJ: Princeton University Press; McCloskey, H. (1965). Rights. Philosophical Quarterly, 15, 115–127; Wasserstrom, R. (October 29, 1964). Rights, human rights, and racial discrimination. Journal of Philosophy, 61, 628–641; Singer, P. (1978). Rights and the market. In Arthur, J., and Shaw, W. eds., Justice and economic distribution, 207–221. Englewood Cliffs, NJ: Prentice Hall; Hart, H. (April 1955). Are there any natural rights? Philosophical Review, 64, 185; Velasquez, M. G. (2002). Business ethics, 5th ed. Upper Saddle River, NJ: Prentice Hall.

15. Garrett, T. (1986). Business ethics, 2nd ed., 88–91. Englewood Cliffs, NJ: Prentice Hall.

16. Feinberg, J. (1973). Social philosophy. Englewood Cliffs, NJ: Prentice Hall.

17. Friedman, M. (1962). Capitalism and freedom. Chicago, IL: University of Chicago Press, 22–36.

18. Ibid.

19. Rawls, J. (1971). A theory of justice. Cambridge, MA: Harvard University Press.

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20. DeGeorge, R. T. (1990). Business ethics, 3rd ed. New York: Macmillan.

21. McMahon, T. (1999). Transforming justice: A conceptualization. Business Ethics Quarterly, 9(4), 593– 602.

22. Ibid., 600.

23. Ibid.

24. Hursthouse, R., and Zalta, E. N. (eds.) (July 18, 2003). Virtue ethics. Stanford Encyclopedia of Philosophy. http://plato.stanford.edu/archives/fall2003/entries/ethics-virtue/, accessed March 15, 2012.

25. Ibid.

26. Ibid.

27. Virtue theory (n.d.). The Internet Encyclopedia of Philosophy. http://www.iep.utm.edu/virtue/, accessed March 18, 2012. This quote is taken from the section “Loudon’s Critique,” based on Louden, R. (1984). On some vices of virtue ethics. American Philosophical Quarterly, 21, 227–236.

28. Beauchamp, T. L., and Childress, J. F. (2002). Principles of biomedical ethics, 5th ed. Oxford, England: Oxford University Press.

29. Rawls, op. cit.

30. Velasquez, M. G., Andre, C., Shanks, T., S. J., and Meyer, M. J. The common good. Markkula Center, Santa Clara University. http://www.scu.edu/ethics/practicing/decision/commongood.html, accessed March 18, 2012; see the same authors on this topic in Issues in Ethics, 5(2), (Spring 1992).

31. Ibid.

32. Ibid.

33. Beauchamp, T. L., and Childress, J. F. (1994). Principles of biomedical ethics, 4th ed. New York: Oxford University Press.

34. Steiner, G. A., and Steiner, J. F. (2000). Business, government, and society: A managerial perspective, 9th ed. Boston: McGraw-Hill.

35. Freeman and Gilbert, op. cit., 36.

36. Ibid.

37. Based on the ImClone research of Amy Venskus, master’s student at Bentley College, Waltham, MA, 2004.

38. Leung, Rebecca. (June 27, 2004). Sam Waskal: I was arrogant. CBSNews.com. http://www.cbsnews.com/stories/2003/10/02/60minutes/main576328.shtml, accessed March 18, 2012.

39. Buono, A. F., and Nichols, L. T. (1990). Stockholder and stakeholder interpretations of business’ social role. In Hoffman, W. M., and Moore, J. M. Business ethics: Readings and cases in corporate morality, 2nd ed. New York: McGraw-Hill.

40. Bush moves to ease lending crisis. (August 31, 2007). BBCNews.co.uk. http://news.bbc.co.uk/2/hi/business/6971746.stm, accessed March 18, 2012.

41. Davis, L. (1976). Comments on Nozick’s entitlement theory. Journal of Philosophy, 73, 839–842.

42. Barton, N., et al. (June 25, 2006). Warren Buffett gives major share of fortune to Gates Foundation. Philanthropy.com. http://philanthropy.com/blogs/philanthropytoday/warren-buffett-gives-major-share-of-

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fortune-to-gates-foundation/11909, accessed March 18, 2012.

43. Antes, A. L., et al. Personality and ethical decision-making in research: The role of perception of self and others. (December 2007). Journal of Empirical Research on Human Research Ethics, 2(4), 15–34.

44. Skarlicki, P., Folger, R., and Tesluk, P. (1999). Personality as a moderator in the relationship between fairness and retaliation. Academy of Management Journal, 42(1), 100–108.

45. McFerran, B., Aquino, K., and Duffy, M. (January 2010). How personality and moral identity relate to individuals’ ethical ideology. Business Ethics Quarterly, 20(1), 35–56.

46. Kohlberg, L. (1969). State and sequence: The cognitive developmental approach to socialization. In Gosline, D. A. (ed.) Handbook of socialization theory and research. Chicago: Rand McNally; Jones, T. (1991). Ethical decision making by individuals in organizations: An issue-contingent model. Academy of Management Review, 16(2), 366–395.

47. Covey, S. (1989). The 7 habits of highly effective people. New York: Free Press.

48. Kelton, Erika. (January 25, 2013). JPMorgan and Jamie Dimon need an extreme makeover. Forbes.com. http://www.forbes.com/sites/erikakelton/2013/01/25/jpmorgan-and-jamie-dimon-need-an-extreme- makeover/, accessed January 6, 2014; “Libor stands for London interbank offered rate. The interest rate at which banks offer to lend funds (wholesale money) to one another in the international interbank market.” Financial Times lexicon. http://lexicon.ft.com/Term?term=LIBOR.

49. Kelton, Erika. (January 25, 2013). JPMorgan and Jamie Dimon need an extreme makeover. Forbes.com. http://www.forbes.com/sites/erikakelton/2013/01/25/jpmorgan-and-jamie-dimon-need-an-extreme- makeover/, accessed January 6, 2014; “Libor stands for London interbank offered rate. The interest rate at which banks offer to lend funds (wholesale money) to one another in the international interbank market.” Financial Times lexicon. http://lexicon.ft.com/Term?term=LIBOR.

50. (February 6, 2007). WalMart to appeal discrimination suit status. CNN.com. http://money.cnn.com/2007/02/06/news/companies/walmart/index.htm, accessed March 15, 2012; Case profile: WalMart lawsuit (re: gender discrimination in USA). (April 14, 2008). Business & Human Rights Resource Center, http://www.business- humanrights.org/Categories/Lawlawsuits/Lawsuitsregulatoryaction/LawsuitsSelectedcases/WalMartlawsuitregenderdiscriminationinUSA accessed March 15, 2012.

51. Werhane, P. (1999). Moral imagination and management decision-making. New York: Oxford University Press.

52. Badaracco Jr., J. (1998). A guide to defining moments, the discipline of building character. Harvard Business Review, 76(2), 114.

53. Ibid., 114–115.

54. Ibid., 114–121.

55. Nash, L. (November/December 1981). Ethics without the sermon. Harvard Business Review, 59(6), 88.

56. Krolick, S. (1987). Ethical decision-making style: Survey and interpretive notes. Beverly, MA: Addison- Wesley.

57. Ibid.

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58. Krolick, 18.

59. Ibid., 20.

60. Steiner and Steiner, op. cit.; Freeman and Gilbert, op. cit.; Mill, op. cit.; Carroll, op. cit.; Velasquez (1992), op. cit. based on Steiner and Steiner, and Carroll.

61. Freeman and Gilbert, op. cit.

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3 STAKEHOLDER AND ISSUES MANAGEMENT

APPROACHES

3.1 Stakeholder Theory and the Stakeholder Management Approach Defined

3.2 Why Use a Stakeholder Management Approach for Business Ethics?

3.3 How to Execute a Stakeholder Analysis

3.4 Negotiation Methods: Resolving Stakeholder Disputes

3.5 Stakeholder Management Approach: Using Ethical Principles and Reasoning

3.6 Moral Responsibilities of Cross-Functional Area Professionals

3.7 Issues Management, Integrating a Stakeholder Framework

Ethical Insight 3.1

3.8 Managing Crises

Chapter Summary

Questions

Exercises

Real-Time Ethical Dilemma

Cases

6. The BP Deepwater Horizon Explosion and Oil Spill: Crisis and Aftermath

7. Mattel Toy Recalls

8. Genetic Discrimination

Notes

OPENING CASE

The oil company BP (formerly British Petroleum) leased/licensed the Deepwater Horizon oil rig, operated by Transocean and contracted by Halliburton, that exploded in flames in the Gulf of Mexico on the night of

April 20, 2010.1, 2 The result was 11 deaths, 17 injured, and hundreds of miles of beaches soiled. A “blowout

preventer” (specialized valve) designed to prevent crude oil releases failed to activate.3

The factual events leading up to the BP blowout unearth a highly complex network of stakeholders, stakes, and circumstances, which though preventable, together culminated in the worst environmental disaster recorded in U.S. history. In March 2008, the U.S. Occupational Safety and Health Administration (OSHA) recorded on public record that BP had one of the worst safety records in its industry. After the explosion when

the Deepwater Horizon sank, “a sea-floor oil gusher flowed for 87 days, until it was capped on 15 July 2010.”4

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The total oil spill was estimated at 210 million U.S. gallons. With all-out efforts by BP and a host of other organizations and crews, by September 2010, the entire well had been sealed, but the legal and ethical issues and stakeholder disputes had only begun. In 2013, over 2.7 million pounds of “oiled material” had been removed from the Louisiana coast and tar balls were reported daily on Alabama and Florida beaches.

Different phases of the trials are ongoing.5 BP has already admitted guilt in 2012 to 14 criminal charges that included manslaughter and “negligence in misreading important tests before the explosion.” The company agreed to pay $4.5 billion in fines and penalties. “Four current or former employees also face criminal charges. The company has spent more than $42 billion on cleaning up the environment and compensating victims. People and businesses continue to file claims for damages, and there is no cap to the

damages.”6

The Justice Department and Judge Barbier are overseeing and managing a latter part of the trial between the plaintiffs (Transocean, Halliburton, the states of Louisiana and Alabama, and private plaintiffs) and BP (with its partner, Anadarko Petroleum). The main issue at this point in the case that the plaintiffs must prove is whether or not a total 4.2 million barrels of oil was discharged as a result of the oil rig exploding into the sea 87 days after the explosion. That amount of oil is the equivalent of nearly one-quarter of all the oil consumed in the United States in one day. Plaintiffs allege that BP’s failure of preparation caused the crisis and aftermath of oil flow. BP is defending whether or not it was prepared for a blowout and if its response was

adequate once the oil started leaking.7

Stakeholders in this crisis number in the thousands. In the federal government alone there are the Departments of Energy, Interior, Justice, members of Congress, and even President Obama—who met with BP executives in June 2010 and persuaded them “to create a $20 billion fund to compensate residents and

businesses for losses resulting from the spill.”8 Obama also announced plans to empower the Minerals Management Service to oversee offshore drilling. Other key stakeholders include BP employees and their families, BP’s partners, and the plaintiffs.

BP agreed to a settlement involving literally thousands of individuals affected by the spill in 2012 totaling

$7.8 billion—the amount which BP would have to pay was not capped, however.9 Over 200,000 individuals and businesses were paid $6.1 billion through the Gulf Coast Claims Facility. Add to this number the state governments and agencies affected by the spill, the lawyers on both sides of the case, insurance companies, auditors, and competitors, all of whom are also stakeholders. In addition, the response and aftermath cleanup “involved thousands of boats, tens of thousands of workers, and millions of feet of containment boom.”

BP’s then chief executive officer (CEO) Tony Hayward defended BP against accusations that the company was not prepared and that it cut corners on the design of the well, and then attempted to escape responsibility for the consequences. He was replaced by Robert Dudley, BP’s managing director after the blowout, when Hayward was criticized for minimizing the scale of the spill, and for making such remarks as, “There’s no one who wants this thing over more than I do. I’d like my life back”—which particularly offended members of the workers’ families who died in the explosion. His presence at a yacht race in June after the spill reportedly

contributed to a sense of insensitivity.10

This crisis will be studied and analyzed for years to come. The human, political, economic, environmental, and social costs were enormous. “Tens of thousands of families have been affected by the spill, whether they

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work in the fishing industry, tourism, or oil. The area of the spill supplies 40% of seafood in the U.S., and the leaked oil put fishermen, crabbers and oystermen out of work. Some of these workers were hired to help

contain the spill and clean the beaches; others filed for unemployment benefits.”11 To date, BP as a “supermajor” in its industry has moved from the highest earnings per barrel to the lowest, falling behind Shell,

Exxon, and Chevron Corp.12 Nevertheless, according to CEO Dudley, the company has increased its investment “in exploration and projects annual capital spending over the next several years to be $24 billion to $27 billion—at least 25% higher than 2011 levels as the company pours cash into projects in Angola,

Azerbaijan, Indonesia and elsewhere.”13

3.1 Stakeholder Theory and the Stakeholder Management Approach Defined

The BP Deepwater Horizon oil spill is a complex crisis not limited to the financial, economic, and corporate interests involved. Since numerous people, businesses, and the environment were affected, and 11 workers lost their lives, an analysis that also encompasses ethical and moral considerations is required.

Stakeholder theory is best described by R. Edward Freeman—its modern founder. “My thesis is that I can revitalize the concept of managerial capitalism by replacing the notion that managers have a duty to stockholders with the concept that managers bear a fiduciary relationship to stakeholders. Stakeholders are those groups who have a stake in or claim on the firm. Specifically I include suppliers, customers, employees, stockholders, and the local community, as well as management in its role as agent for these groups. . . . Each of these stakeholder groups has a right not to be treated as a means to some end, and therefore must

participate in determining the future direction of the firm in which they have a stake.”14 Freeman and his collaborators state that it is “a mistake to see stakeholder theory as a specific theory with a single purpose. Researchers would do well to see stakeholder theory as a set of shared ideas that can serve a range of purposes

within different disciplines and address different questions.”15

The stakeholder management approach is based on a related instrumental theory that argues “a subset of ethical principles (trust, trustworthiness, and cooperativeness) can result in significant competitive

advantage.”16 This approach, then, enables researchers and practitioners to use analytical concepts and methods for identifying, mapping, and evaluating corporate strategy with stakeholders. We refer to the use of this instrumental approach in stakeholder theory as “stakeholder analysis.”

The stakeholder management approach, including frameworks for analyzing and evaluating a corporation’s relationships (present and potential) with external groups, aims ideally at reaching “win—win” collaborative outcomes. Here, “win—win” means making moral decisions that benefit the common good of all constituencies within the constraints of justice, fairness, and economic interests. Unfortunately, this does not always happen. There are usually winners and losers in complex situations where there is a perceived zero-sum game (i.e., a situation in which there are limited resources, and what is gained by one person is necessarily lost by the other).

Scholars and consultants, however, have used the stakeholder management approach as a means for

planning and implementing collaborative relationships to achieve win—win outcomes among stakeholders.17

Structured dialogue facilitated by consultants is a major focus in these collaborative communications. The aim

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in using the stakeholder approach as communication strategy is to change perceptions and “rules of engagement” to create win—win outcomes.

A stakeholder management approach does not have to result from a crisis, as so many examples from ethics literature and the news provide. It can also be used as a planning method to anticipate and facilitate business decisions, events, and policy outcomes. A stakeholder analysis is not only limited to publicly traded for-profit enterprises, but also applies to non-profit organizations: “Stakeholder theorists clearly indicate that their

theory is intended to more than merely for-profit corporations.”18

A stakeholder management approach also begins, as indicated in Chapter 1, by asking what external forces in the general environment are affecting an organization. This context can often provide clues to responses by stakeholders to opportunities, crises, and extraordinary events. Corporate scandals revealed after the Enron crisis that there were several factors in the general environment that were at play in addition to certain corporate executives’ greed. For example, the dotcom technology bubble leading up to the year 2000 created a financial environment where investment funds followed innovative ideas in exorbitant and exuberant ways. Investment banks loaned large amounts to Enron and other companies without due diligence. Stock analysts lied and encouraged deceptive investing from the public. Boards of directors abandoned their fiscal responsibilities, as did large accounting firms like Arthur Andersen, which is no longer in existence. The general legal and enforcement environment during the 1990s appeared indifferent to monitoring corporate activities and protecting shareholders. A similar general environment with low-to-nonexistent government regulation followed, culminating in the 2008 subprime lending crisis that sent the global economy reeling. Next we define the term “stakeholder.”

Stakeholders A stakeholder is “any individual or group who can affect or is affected by the actions, decisions, policies,

practices, or goals of the organization.”19 We begin by identifying the focal stakeholder. This is the company or group that is the focus or central constituency of an analysis.

The primary stakeholders of a firm include its owners, customers, employees, and suppliers. Also of primary importance to a firm’s survival are its stockholders and board of directors. The CEO and other top-level executives can be stakeholders, but in the stakeholder analysis they are generally considered actors and representatives of the firm. In this chapter’s opening case, BP’s CEO and top-level team are focal stakeholders. Coalitional focal stakeholders that may also be connected to BP primary stakeholders include owners, customers, employees, and, in this case, Chinese vendors and suppliers.

Secondary stakeholders include all other interested groups, such as the media, consumers, lobbyists, courts, governments, competitors, the public, and society. Halliburton and Transocean were considered as “secondary stakeholders” by then CEO and other officers; after the spill, these collaborators became plaintiffs. Control and quality of products and services can be diminished and/or lost with outsourced and licensing relationships if proper monitoring and management is absent. One final report on this case suggested that the real root of the problem was BP’s own laissez-faire approach to safety, even though spokespersons from BP denied this

allegation.20

Stakes

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A stake is any interest, share, or claim that a group or individual has in the outcome of a corporation’s policies, procedures, or actions toward others. Stakes may be based on any type of interest. The stakes of stakeholders are not always obvious. The economic viability of competing firms can be at stake when one firm threatens entry into a market. The physical environment, employees’ lives, and the health and welfare of communities can be at stake when corporations like BP either relax or do not have in place proper equipment, safety standards, and emergency plans for crises.

Stakes also can be present, past, or future oriented. For example, stakeholders may seek compensation for a firm’s past actions, as occurred when lawyers argued that certain airlines owed their clients monetary compensation after having threatened their emotional stability when pilots announced an impending disaster (engine failure) that, subsequently, did not occur. Stakeholders may seek future claims; that is, they may seek injunctions against firms that announce plans to drill oil or build nuclear plants in designated areas or to market or bundle certain products in noncompetitive ways.

3.2 Why Use a Stakeholder Management Approach for Business Ethics?

The stakeholder management approach is a response to the growth and complexity of contemporary corporations and the need to understand how they operate with their stakeholders and stockholders. Stakeholder theory argues that corporations should treat all their constituencies fairly and that doing so can

enable the companies to perform better in the marketplace.21 “If organizations want to be effective, they will pay attention to all and only those relationships that can affect or be affected by the achievement of the

organization’s purposes.”22 Although stakeholder theory includes a fiduciary dimension by nature of its intent, as Freeman was quoted as saying above, we apply this theory in ways that use ethical principles such as justice, utilitarianism, rights, and universalism to individual stakeholders and their interactions with each other and corporations.

This chapter applies the stakeholder management approach not only in its theoretical form, but also as a practical method to analyze how companies deal with their stakeholders. We therefore use the term “stakeholder analysis” (which is part of stakeholder management) to identify strategies, actions, and policy results of firms in their management of employees, competitors, the media, courts, and stockholders. Later in the chapter, we introduce “issues management” as another set of methods for identifying and managing stakeholders. We present issues management and stakeholder theory as complementary theories that use similar methods, as we show later. Starting with a major issue or opportunity that a company faces is a helpful way to begin a stakeholder analysis.

A more familiar way of understanding corporations is the stockholder approach, which focuses on financial and economic relationships. By contrast, a stakeholder management approach is a normative and instrumental

approach that studies actors’ interests, stakes, and actions.23 The stakeholder management approach takes into account nonmarket forces that affect organizations and individuals, such as moral, political, legal, and technological interests, as well as economic factors.

Underlying the stakeholder management approach is the ethical imperative that mandates that businesses in their fiduciary relationships to their stockholders: (1) act in the best interests of and for the benefit of their customers, employees, suppliers, and stockholders; and (2) respect and fulfill these stakeholders’ rights. One

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study concluded that “multiple objectives—including both economic and social considerations—can be and, in fact, are simultaneously and successfully pursued within large and complex organizations that collectively

account for a major part of all economic activity within our society.”24

Stakeholder Theory: Criticisms and Responses The dominant criticism of stakeholder theory by some scholars is that corporations should serve only

stockholders since they own the coporation.25 It is important to observe criticisms of stakeholder theory and responses to them in order to understand the purpose of and benefits provided by stakeholder theory. The following criticisms have been offered by scholars: stakeholder theory (1) negates and weakens fiduciary duties that managers owe to stockholders, (2) weakens the influence and power of stakeholder groups, (3) weakens

the firm, and (4) changes the long-term character of the capitalist system.26 Ethically, these arguments are based on property and implied contract rights, and on fiduciary duties and responsibilities of managers to stockholders.

Critics claim that some stakeholder groups’ power can be weakened by stakeholder theory by treating all stakeholders equally—as stakeholder theory suggests. For example, labor unions can be avoided, hurt, or even eliminated. Corporations can also be weakened in their pursuit of profit if they attempt to serve all stakeholders’ interests. The corporation cannot be all things to all stakeholders and protect stockholders’ fiduciary interest. Finally, critics who claim that stakeholder theory changes the long-term character of capitalism argue that: (1) corporations have no responsibility by law other than to their stockholders, since the market disciplines corporations anyway; and (2) stakeholder theory permits some managers to “game” corporations by arguing that they are protecting some stakeholder interests, even if interests of others are harmed. Some more leftist thinkers also criticize advocates of stakeholder theory as being naive and utopian. These critics claim that well-intentioned “do-gooders” ignore or mask the reality of capital labor relationships through simplistic notions in stakeholder theory such as “participation,” “empowerment,” and “realizing

human potential.”27

Despite these criticisms, stakeholder theory continues to be popular and widely used. As noted earlier in this chapter, societies and economies involve market and nonmarket interests of diverse stakeholders as well as stockholders. To understand and effect responsible corporate strategies, methods that include different players and environmental factors—not just stockholders or financial interests—are required. We also live in a post- Enron world. Some officers in corporations can engage in illegal and unethical practices with investors’ funds and assets. Stakeholder theory addresses these realities. The following points also respond to some of the above criticisms. First, stakeholder theory does offer advantages; for example, Heugens and Van Riel (2002) present evidence showing that stakeholder theory may result in both organizational learning and societal

legitimacy. Secondly, Key’s (1999) stakeholder theory of the firm,28 summarized by Mitchell, Agle, and

Wood (1997),29 states: “stakeholder theory must account for power and urgency as well as legitimacy, no matter how distasteful or unsettling the results. Managers must know about groups in their environment that hold power and intend to impose their will upon the firm. Power and urgency must be attended to if managers are to serve the legal and moral interests of legitimate stakeholders.”

The ethical dimension of stakeholder theory is based on the view that profit maximization is constrained by

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justice, and that regard for individual rights should be extended to all constituencies that have a stake in a business, and that organizations are not only “economic” in nature, but can also act in socially responsible ways. To this end, companies should act in socially responsible ways, not only because it’s the “right thing to

do,” but also to ensure their legitimacy.30

3.3 How to Execute a Stakeholder Analysis

Stakeholder analysis is a pragmatic way of identifying and understanding multiple (often competing) claims of many constituencies. As part of a general stakeholder approach, stakeholder analysis is a method to help understand the relationships between an organization and the groups with which it must interact. Each situation is different and therefore requires a map to guide strategy for an organization dealing with groups, some of whom may not be supportive of issues, such as outsourcing jobs. The aim here is to familiarize you with the framework so that you can apply it in the classroom and to news events that appear in the press and in other media. Even though you may not be an executive or manager, the framework can enable you to see the “big picture” of complex corporate dealings, and apply ethical reasoning and principles when analyzing strategies used by managers and different stakeholders.

Taking a Third-Party Objective Observer Perspective In the following discussion, you are asked to assume the role of a CEO of a company to execute a stakeholder analysis. However, it is recommended that you take the role of “third-party objective observer” when doing a stakeholder analysis. Why? In this role, you will need to suspend your belief and value judgments in order to understand the strategies, motives, and actions of the different stakeholders. You may not agree with the focal organization or CEO whom you are studying. Therefore, the point is to be able to see all sides of an issue and then objectively evaluate the claims, actions, and outcomes of all the parties. Being more objective helps determine who acted responsibly, who won and who lost, and at what costs.

Part of the learning process in this exercise is to see your own blind spots, values, beliefs, and passions toward certain issues and stakeholders. Doing an in-depth stakeholder analysis with a group enables others to see and comment on your reasoning. For the next section, however, take the role of a CEO so you can get an idea of what it feels like to be in charge of directing an organization-wide analysis.

Role of the CEO in Stakeholder Analysis Assume for this exercise that you are the CEO, working with your top managers, in a firm that has just been involved in a major controversy of international proportions. The media, some consumer groups, and several major customers have called you. You want to get a handle on the situation without reverting to unnecessary “firefighting” management methods. A couple of your trusted staff members have advised you to adopt a planning approach quickly while responding to immediate concerns and to understand the “who, what, where, when, and why” of the situation before jumping to “how” questions. Your senior strategic planner suggests you lead and participate in a stakeholder analysis. What is the next step?

The stakeholder analysis is a series of steps aimed at the following tasks:31

1. Map stakeholder relationships.

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2. Map stakeholder coalitions.

3. Assess the nature of each stakeholder’s responsibilities.

4. Assess the nature of each stakeholder’s power.

5. Construct a framework of stakeholder moral responsibilities and interests.

6. Develop specific strategies and tactics.

7. Monitor shifting coalitions.

Each step is described in the following sections. Let’s explore each one and then apply them in our continuing scenario example.

Step 1: Map Stakeholder Relationships In 1984, R. Edward Freeman offered questions that help begin the analysis of identifying major stakeholders (Figure 3.1). The first five questions in the figure offer a quick jump-start to the analysis. Questions 6 through 9 may be used in later steps, when you assess the nature of each stakeholder’s interest and priorities.

Let’s continue our example with you as CEO. While brainstorming about questions 1 through 5 with employees you have selected who are the most knowledgeable, current, and close to the sources of the issues at hand, you may want to draw a stakeholder map and fill in the blanks. Note that your stakeholder analysis is only as valid and reliable as the sources and processes you use to obtain your information. As a CEO in this hypothetical scenario, which is controversial, incomplete, and in which questionable issues arise, you may wish to go outside your immediate planning group to obtain additional information and perspective. You should therefore identify and complete the stakeholder map (Figure 3.2), inserting each relevant stakeholder involved in the particular issue you are studying.

Figure 3.1 Sample Questions for Stakeholder Review

1. Who are our stakeholders currently?

2. Who are our potential stakeholders?

3. How does each stakeholder affect us?

4. How do we affect each stakeholder?

5. For each division and business, who are the stakeholders?

6. What assumptions does our current strategy make about each important stakeholder (at each level)?

7. What are the current “environmental variables” that affect us and our stakeholders (initiation, GNP, prime rate, confidence in business [from polls], corporate identity, media image, and so on)?

8. How do we measure each of these variables and their impact on us and our stakeholders?

9. How do we keep score with our stakeholders?

Source: Freeman, R. Edward. (1984). Strategic management: A stakeholder approach, 242. Boston: Pitman. Reproduced with permission of the author.

Figure 3.2 Stakeholder Map of a Large Organization

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Source: Freeman, R. Edward. (1984). Strategic management: A Stakeholder approach, 25. Boston: Pitman. Reproduced with permission of the author.

For example, if you were examining the BP spill—and you were not the CEO of that company—you would place BP and the then CEO Tony Hayward—later replaced by Robert Dudley—in the center (or focal) stakeholder box, then continue identifying the other groups involved: Halliburton, Transocean, employees who were victims and those immediately endangered by the spill, shareholders (members of the lawsuit), affected community victims (families), affected community businesses, the U.S. government (the Departments of Justice and the Interior), the U.S. Congress, President Obama, suppliers and distributors, competitors, among others. In completing a stakeholder map, include real groups, individuals, and organizations—issues are not part of the formal stakeholder map.

Note that in Figure 3.2 the reciprocal arrows represent enacted major strategies and tactics between each stakeholder and the focal stakeholder.

Step 2: Map Stakeholder Coalitions After you identify and make a map of the stakeholders who are involved with your firm in the incident you are addressing, the next step is to determine and map any coalitions that have formed. Coalitions among stakeholders form around stakes that they have—or seek to have—in common. Interest groups and lobbyists sometimes join forces against a common “enemy.” Competitors also may join forces if they see an advantage in numbers. Mapping actual and potential coalitions around issues can help you, as the CEO, anticipate and design strategic responses toward these groups before or after they form.

Step 3: Assess the Nature of Each Stakeholder’s Responsibilities Next you need to identify the nature of each stakeholder’s interests and responsibilities in a particular situation. Since each stakeholder has a stake, interest, or claim in the process and outcomes of the situation, opportunity, controversy, or crisis, it is important to assess the nature of the focal organization’s responsibilities toward each stakeholder group. As Figure 3.3, which is based on Archie Carroll’s work on the Pyramid of Corporate Social Responsibility and the Moral Management of Organizational Stakeholders, illustrates, addressing the legal, economic, ethical, and voluntary nature of a company’s responsibility toward

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owners, customers, employees, community groups, the public, government, and victims brings a moral awareness to the CEO of the focal company. For example, in 2014 the pharmacy chain CVS banned the sale of tobacco products from its 7,600 stores, a decision made with the expressed intent of helping create a smoke-free generation. With regard to Figure 3.3, this voluntary decision may affect CVS’s short-term profits, but it takes an ethical stand that influences all its stakeholders and stockholders. This step is not limited to the CEO; other stakeholders would benefit from using it. With regard to the BP situation, had the CEO and his core team completed this exercise and acted responsibly, he may not have lost his job.

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Figure 3.3 Nature of Focal Organization’s Ethical Responsibilities

For example, BP’s CEO may see the firm’s economic responsibility to the owners (as stakeholders) as “preventing as many costly lawsuits as possible.” Legally, the CEO may want to protect the owners and the executive team from liability and damage; this would entail proactively negotiating disputes outside the courts, if possible, in a way that is equitable to all. Ethically, the CEO may keep the company’s stockholders and owners up to date regarding his or her ethical thinking and strategies to show responsibility toward all stakeholders. At stake is the firm’s reputation as well as its profitability. In the case of BP and other crises, the CEO’s job and future career with the company can be at risk. Missteps in communicating with the media and visible stakeholders, and showing insensitivity to victims or the situation can cause an executive to lose his/her job during a crisis, as was the case at BP.

Step 4: Assess the Nature of Each Stakeholder’s Power This part of the analysis asks, “What’s in it for each stakeholder? Who stands to win, lose, or draw over certain stakes?” Eight types of power that different stakeholders exert and which you can use in your analysis include (1) voting power (the ability of stakeholders to exert control through strength in numbers), (2) political power (the ability to influence decision-making processes and agendas of public and private organizations and institutions), (3) economic power (the ability to influence by control over resources—monetary and physical), (4) technological power (the ability to influence innovations and decisions through uses of technology), (5) legal power (the ability to influence laws, policies, and procedures), (6) environmental power (the ability to impact nature), (7) cultural power (the ability to influence values, norms, and habits of people and organizations), and (8) power over individuals and groups (the ability to influence particular, targeted persons and groups through

different forms of persuasion).32 The BP example suggests that shareholders, members of Congress, and individual constituents have voting power over BP’s policies, and officers’ jobs and responsibilities. The

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president of the United States, government regulatory agencies, consumers, stock market analysts, and investors all exert economic power over BP in this situation. The U.S. government, regulatory agencies, and interest groups also exert political power over BP’s operating and manufacturing policies, processes, and products.

Note that power and influence are exerted in two-way relations: BP toward its stakeholders, and each stakeholder toward BP on a given issue. For example, owners and stockholders can vote on the firm’s decisions regarding a particular issue or opportunity, such as BP’s future drilling plans. On the other hand, federal, state, and local governments can exercise their political power by voting on BP’s legal obligations toward consumers. New legislation may emerge with regard to the regulation of BP’s outsourcing and quality- control methods. In return, consumers can exercise their economic power by boycotting BP’s products or buying from other companies. What other sources of stakeholder power exist in this case?

Step 5: Construct a Framework of Stakeholder Moral Responsibilities and Interests After you map stakeholder relationships and assess the nature of each stakeholder’s interest and power, the next step is to identify the moral obligations your company has to each stakeholder.

Chapter 2 explained the ethical principles and guidelines that can assist in this type of decision making. For purposes of completing this matrix, ethical decision making of company representatives can refer to the following ethical principles: utilitarianism (weighing costs and benefits; “ends justifying means”); universalism (showing respect and concern for human beings—“means count as much as ends”); rights (recognizing individual liberties and privileges under laws and constitutions); justice (observing the distribution of burdens and benefits of all concerned). Voluntarily (i.e., acting freely and from one’s own accord), the CEO may advise shareholders to show responsibility by publicly announcing their plans for resolving the issue of the firm’s “next steps.” This can also be done in more open and conscientious marketing activities as well as in a consciously responsible distribution of products.

This part of the analysis lays the foundation for developing specific strategies toward each stakeholder you have identified. Notice that developing strategies first preempts and may omit putting “first things first,” in this case this means meeting your moral responsibilities to those affected in the situation, and not protecting or promoting profit first and at any costs. Although there is a fiduciary responsibility toward your stockholders, you may discover that you can lose your company (bankruptcy) and its assets, including your job, if you do not also attend to powerful noneconomic interests—customers, victims and their families’ lives in crisis situations, communities’ needs, the media’s attacks, and legitimacy with the general public and government.

Step 6: Develop Specific Strategies and Tactics Using the results from the preceding steps, you can now proceed to outline the specific strategies and tactics you wish to use with each stakeholder. If you are a CEO using this framework, you can use Figure 3.4 along with the previous frameworks in this section to help articulate strategies to employ with different

stakeholders.33

The typology of organizational stakeholders in Figure 3.4 shows two dimensions: potential for threat and potential for cooperation. Note that stakeholders can move among the quadrants, changing positions as situations and stakes change. Generally, officers of a firm in controversial situations, or situations that offer

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significant opportunities for an organization, try to influence and move stakeholders toward type 1, the Supportive stakeholder with a low potential for threat and high potential for cooperation. Here the strategy of the focal company is to involve the supportive stakeholder. Think of both internal and external stakeholders who might be supportive and who should be involved in the focal organization’s strategy.

In contrast, type 3, the Nonsupportive stakeholder, who shows a high potential for threat and a low potential for cooperation, represents an undesirable stance from the perspective of the influencer. The suggested strategy in this situation calls for the focal organization to defend its interests and reduce dependence on that stakeholder.

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Figure 3.4 Diagnostic Typology of Organizational Stakeholders

Source: Savage, G. T., Nix, T. H., Whitehead, C. J., and Blair, J. D. (1991). Strategies for assessing and managing organizational stakeholders. Academy of Management Executive, 5, 65. © 1991 Academy of Management. Reproduced with permission of Academy of Management in the format Textbook via Copyright Clearance Center.

A type 4 stakeholder is a Mixed Blessing, with a high potential for both threat and cooperation. This stakeholder calls for a collaborative strategy. In this situation, the stakeholder could become a Supportive or Nonsupportive type. A collaborative strategy aims to move the stakeholder to the focal company’s interests.

Finally, type 2 is the Marginal stakeholder. This stakeholder has a low potential for both threat and cooperation. Such stakeholders may not be interested in the issues of concern. The recommended strategy in this situation is to monitor the stakeholder, to “wait and see” and minimize expenditure of resources, until the stakeholder moves to a Mixed Blessing, Supportive, or Nonsupportive position.

With regard to this chapter’s opening case, had you been the BP CEO at that time, along with your staff after the explosion, you would have decided what strategy to pursue with regard to addressing the crisis. The nature of that strategy would have determined who would be the supporters and non-supporters of BP’s decisions. If you had chosen to deny and avoid responsibility for the explosion, or to blame the companies who were outsourced and running those projects, you may have found that your supporters would have been fewer and you may have realized that an avoidance, denial, and/or blame strategy would have pushed more stakeholders to the Nonsupportive space in Figure 3.5. Nonsupportive stakeholders would be those who sought but did not find support and truthfulness from BP’s officers with regard to owning responsibility, offering apologies, and then providing immediate help. Therefore, families of victims of the explosion—who appeared in the media, disgruntled and shocked employees from the rig who survived the explosion, community inhabitants in the vicinity of the oil spill, and others would be Nonsupportive. Who else would you add to those in opposition to BP at the time of the crisis, shortly afterward, and even a year, two or three down the road? By systematically completing this exercise through brainstorming with others who would be truthful with you, you, as a CEO in a crisis, can—before you react—create a broader, more objective and socially responsible picture of and response to the situation. At stake in such cases as the BP spill is the

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company’s survival and reputation.

Figure 3.5 presents an example of the typology in Figure 3.4, using the BP oil spill case as an example. It is important to insert specific names of groups and individuals when doing an actual analysis. Indicate other stakeholders who might be or were influenced by BP’s decision to outsource and recall products. Using your “third-party objective observer” perspective, you can determine the movement among stakeholder positions using the arrows in the figure: Who influenced whom, by what means, and how over time? As you look at Figure 3.5, ask yourself: Do I agree with this figure as it is completed? Who is likely to move from Supportive to Nonsupportive? Or from a Mixed Blessing position to a Nonsupportive or Supportive one? Why? How? Support your logic and defend your position.

Figure 3.5 Diagnostic Typology of Stakeholders for BP Corporation

From the point of view of the focal stakeholder, if you were CEO, you would develop specific strategies and keep the following points in mind:

1. Your goal is to create a socially responsible, win—win set of outcomes, if possible. However, this may mean economic costs to your firm if, in fact, members of your firm are responsible to certain groups for harm caused as a consequence of your actions.

2. Ask: “What is our business? Who are our customers? What are our responsibilities to the stakeholders, to the public, and to the firm?” Keep your values, mission, and responsibilities in mind as you move forward.

3. Consider probable consequences of your actions. For whom? At what costs? Over what period? Ask: “What does a win—win situation look like for us?”

4. Keep in mind that the means you use can be important as the ends you seek; that is, how you approach and

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treat each stakeholder can be as important as what you do.

Specific strategies now can be articulated and assigned to corporate staff for review and implementation. Remember, social responsibility is a key variable; it is as important as the economic and political factors of a decision because social responsibility is linked to costs and benefits in other areas. At this point, you can ask to what extent your strategies are just and fair and consider the welfare of the stakeholders affected by your decision.

Executives use a range of strategies, especially in long-term crisis situations, to respond to external threats and stakeholders. Their strategies often are short-sighted and begin as a defensive move. When observing and using a stakeholder analysis, question why executives respond to their stakeholders as they do. Following the questions and methods in this chapter systematically will help you understand why key stakeholders respond as they do.

Step 7: Monitor Shifting Coalitions Because time and events can change the stakes and stakeholders, and their strategies, you need to monitor the evolution of the issues and actions of the stakeholders using Figure 3.4. Tracking external trends and events and the resultant stakeholder strategies can help a CEO and his or her team act and react accordingly. This is a dynamic process that occurs over time and is affected by strategies and actions that you, as CEO, and your team direct with each stakeholder group as events occur. Your decisions are influenced by how effective certain stakeholders respond (or counteract) you and your team’s strategies and actions. As CEO, you would typically follow a utilitarian ethic of weighing costs and benefits of all your strategies and actions toward each major stakeholder group, keeping your company’s best interests in mind. However, neglecting the public, common good of all your stakeholders also affects your bottom line. If you followed a universalistic ethic in the BP case, you might attempt to address concern and apologies to those who were harmed and condolences to the families of those who died in the explosion and aftermath of the disaster. You would have taken immediate action by offering factual information regarding what happened and why and what the company intended to do to resolve the crisis. Ethics is—should be—an integral part of every corporation’s and organization’s goals, objectives, strategies, and actions that affect other people. A question in the stakeholder analysis offered here is: What ethical principle(s)—if any—did the CEO of BP follow, and why, given the pressures from different stakeholders?

Summary of Stakeholder Analysis You have now completed a basic stakeholder analysis and should be able to proceed with strategy implementation in more realistic, thoughtful, interactive, and responsible ways. The stakeholder approach should involve other decision makers inside and outside the focal organization.

Stakeholder analysis provides a rational, systematic basis for understanding issues and the “ethics in action” involved in complex relationships between an organization, its leaders, and constituents. It helps decision makers structure strategic planning sessions and decide how to meet the moral obligations of all stakeholders. The extent to which the resultant strategies and outcomes are moral and effective for a firm and its stakeholders depends on many factors, including the values of the firm’s leaders, the stakeholders’ power, the legitimacy of the actions, the use of available resources, and the exigencies of the changing environment.

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3.4 Negotiation Methods: Resolving Stakeholder Disputes

Disputes are part of stakeholder relationships. Most disputes are handled in the context of mutual trusting

relationships between stakeholders; others move into the legal and regulatory system.34 Disputes occur between different stakeholder levels: for example, between professionals within an organization, consumers and companies, business to business (B2B), governments and businesses, and among coalitions and businesses. It is estimated that Fortune 500 senior human resource (HR) executives are involved in legal disputes 20% of their working time. Also, managers generally spend 30% of their time handling conflicts. The hidden cost of managing conflicts between and among professionals in organizations can result in absenteeism, turnover,

legal costs, and loss of productivity.35 U.S. retail e-commerce sales in the fourth quarter of 2011 were $51.4 billion, up 15.5% from 2010. With that volume, there will be business disputes. A study by the American Arbitration Association surveying 100 senior executives of Fortune 1000 companies found that:

1. Two out of three executives were concerned about B2B e-commerce disputes with major suppliers and 50% of surveyed executives noted that this type of dispute would significantly impact their business.

2. More than 50% noted that the shift to e-commerce will create new and/or different types of stakeholder disputes, with 64% of surveyed executives reporting their companies did not yet have a plan in place to deal with these disputes.

3. 70% agreed that specific guidelines are needed in order to manage e-commerce disputes, and one in four

executives noted that their company did nothing to prevent e-commerce disputes.36

Stakeholder conflict and dispute resolution methods are clearly necessary.

Stakeholder Dispute Resolution Methods Dispute resolution is an expertise also known as alternative dispute resolution (ADR). Dispute resolution techniques cover a variety of methods intended to help potential litigants resolve conflicts. The methods can be viewed on a continuum ranging from face-to-face negotiation to litigation, as Figure 3.6 illustrates. Advocates of alternative resolution methods argue that litigation need not be the standard for evaluating other

dispute techniques.37

Figure 3.6 The ADR Continuum

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Source: Erickson, S. and Johnson, M. (January 27, 2012). ADR techniques and procedures flowing through porous boundaries: Flooding the ADR landscape and confusing the public. http://www.mediate.com/pdf/ADR%20Techniques%20and%20Procedures%20Flowing%20Through%20Porous%20Boundaries- %20Flooding%20the%20ADR%20Landscape%20and%20Confusing%20the%20Public%20(Revised,%20January%2027,%202012).pdf, accessed February 11, 2014.

Figure 3.6 illustrates the degree to which disputing parties give up control of the process and outcome to a neutral third party. The left side of the continuum is based on consensual, informal dispute resolution methods. Negotiating, facilitation, and some mediation are methods where the parties maintain control over the conflict resolution process. Moving to the right side of the spectrum (adjudicative), disputing parties give up control to third-party arbitrators and then litigators (courts, tribunals, and binding arbitration). For example, with regard to outsourcing issues discussed earlier in the chapter, most companies have the authority to make outsourcing decisions. However, with regard to outsourced government contractors, for example, control over who and what types of contracts will be used is more complicated. For example, when the effort to start rebuilding Iraq after the invasions were over, Congress debated the use of external contractors for those projects. Halliburton received several exclusive outsourced contracts toward that effort. Congress used the National Defense Authorization Act for Fiscal Year 2005 to enable civil service employees in the Departments of Defense and Homeland Security, the Internal Revenue Service, and the Pentagon to control the use of external contractors. It was reported recently that “Between 2003 and 2008, Congress estimated that the United States had spent $100 billion on contractors in Iraq, or one dollar out of every five spent on the Iraq War at the time. Today, assuming a conservative estimate of $800 billion spent on the war, at least $160 billion has likely ended up in the coffers of private contractors.” Lawsuits are still pending in some

cases.38

The stakeholder management approach involves the full range of dispute resolution techniques, although ideally more integrative and relational rather than distributive or power-based methods would be attempted first. (Power-based approaches are based on authoritarian and competition-based methods where the more powerful group or individual “wins” and the opposing group “loses.” This approach can cause other disputes to

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arise.) Integrative approaches are characterized as follows:

• Problems are seen as having more potential solutions than are immediately obvious.

• Resources are seen as expandable; the goal is to “expand the pie” before dividing it.

• Parties attempting to create more potential solutions and processes are thus said to be “value creating.”

• Parties attempt to accommodate as many interests of each of the parties as possible.

• The so-called win—win or “all gain” approach.39

Distributive approaches have the following characteristics:

• Problems are seen as zero sum.

• Resources are imagined as fixed: “divide the pie.”

• They are “value claiming” rather than “value creating.”

• They involve haggling or “splitting the difference.”40

Relational approaches (which consider power, interests, rights, and ethics) include and are based on:

• Relationship building.

• Narrative, deliberative, and other “dialogical” (i.e., dialogue-based) approaches to negotiation and mediation.

• Restorative justice and reconciliation (i.e., approaches that respect the dignity of every person, build understanding, and provide opportunities for victims to obtain restoration and for offenders to take responsibility for their actions).

• Other transformative approaches to peacebuilding.41

The process of principled negotiation from Roger Fisher and William Ury’s book, Getting to Yes, continues to be used for almost any type of dispute. Their four principles are:

1. Separate the people from the problem.

2. Focus on interests rather than positions.

3. Generate a variety of options before settling on an agreement.

4. Insist that the agreement be based on objective criteria.42

Adjudicative, legislative, restorative justice, reparation, and rights-based approaches are necessary when rights, property, or other legitimate claims have been violated and harm results. Leaders and professionals practicing a stakeholder management approach incorporate and gain proficiency in using a wide range of

conflict and alternative dispute resolution methods.43

3.5 Stakeholder Management Approach: Using Ethical Principles and Reasoning

Applying ethical principles and reasoning in a stakeholder approach involves asking: What is equitable, just,

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fair, and good for those who affect and are affected by business decisions? Who are the weaker stakeholders in terms of power and influence? Who can, who will, and who should help weaker stakeholders make their voices heard and encourage their participation in the decision process? This approach also requires the principal stakeholders to define and fulfill their ethical obligations to the affected constituencies.

Chapter 2 specifically deals with the ethical principals and reasoning used in a stakeholder approach. That chapter presents several ethical frameworks and principles, including the following: (1) the common good principle, (2) rights, (3) justice, (4) utilitarianism, (5) relativism, and (6) universalism, all of which can be applied to individual, group, and organizational belief systems, policies, and motives. You may also refer to Chapters 2 and 3 when using ethical principles (or the lack of such) to describe actual individuals’ and groups’ observed moral policies, motives, and outcomes in cases that you are studying or creating from your experience or research.

3.6 Moral Responsibilities of Cross-Functional Area Professionals

One goal of a stakeholder analysis is to encourage and prepare organizational managers to articulate their own moral responsibilities, as well as the responsibilities of their company and their profession, toward their different constituencies. Stakeholder analysis focuses the enterprise’s attention and moral decision-making process on external events. The stakeholder management approach also applies internally, especially to individual managers in traditional functional areas. These managers can be seen as conduits through which other external stakeholders are influenced.

Because our concern is managing moral responsibility in organizational stakeholder relationships, this section briefly outlines some of the responsibilities of selected functional area managers. With the Internet, the transparency of all organizational actors and internal stakeholders increases the risk and stakes of unethical practices. Chat rooms, message boards, and breaking-news sites provide instant platforms for exposing both rumor and accurate news about companies. (In the tobacco controversy, it was an antismoking researcher and advocate who first posted inside information from a whistle-blower on the Internet. This action was the first step toward opening the tobacco companies’ internal documents to public scrutiny and the resulting lawsuits.)

Figure 3.7 illustrates a manager’s stakeholders. The particular functional area you are interested in can be kept in mind while you read the descriptions discussed next. Note that steps 1 through 7 presented in the stakeholder analysis can also be used for this level of analysis.

Functional and expert areas include marketing, research and development (R&D), manufacturing, public relations (PR), human resource management, and accounting and finance. The basic moral dimensions of each of these are discussed below. Even though functional areas are often blurred in some emerging network organizational structures and self-designed teams, many of the responsibilities of these managerial areas remain intact. Understanding these managerial roles from a stakeholder perspective helps to clarify the pressures and moral responsibilities of these job positions. Refer to the section on ethical principles and quick ethical tests for professionals in Chapter 2.

Marketing and Sales Professionals and Managers as Stakeholders Sales professionals and managers are continuously engaged—electronically and/or face-to-face—with

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customers, suppliers, and vendors. Sales professionals are also evaluated by quotas and quantitative expectations on a weekly, monthly, and quarterly basis. The stress and pressure to meet expectations is always present. Sales professionals must continually balance their personal ethics and their professional pressures. The dilemma often becomes: “Who do I represent? What weight do my beliefs and ethics have when measured against my department’s and company’s performance measures for me?” Another key question for sales professionals particularly is: “Where is the line between unethical and ethical practices for me?” Also, because customers are an integral part of business, these professionals must create and maintain customer interest and loyalty. They must be concerned with consumer safety and welfare, while increasing revenue and obtaining new accounts. Many marketing and sales professionals also are responsible for determining and managing the firm’s advertising and the truthfulness (and legality) of the data and information they issue to the public about products and services. They must interact with many of the other functional areas and with advertising agencies, customers, and consumer groups. Moral dilemmas can arise for marketing managers who may be asked to promote unsafe products or to implement advertising campaigns that are untrue or not in the consumer’s best interests.

Figure 3.7 A Manager’s Stakeholders

Note: The letters K, L, M, and N are hypothetical designations in place of real department names. Dotted lines refer to hypothetical linkages.

Source: Freeman, R. Edward. (1984). Strategic management: A stakeholder approach, 218. Boston: Pitman. Reproduced with permission of the author.

Several equity traders, particularly at Enron during and after the corporate scandals, were involved in lying to customers about “dogs”—stocks they knew were underperforming. Part of their motive was to keep certain stocks popular and in a “buy” mode, so their own sales performance would be valued higher, giving them better bonuses.

A major moral dilemma for marketing managers is having to choose between a profitable decision and a socially responsible one. Stakeholder analysis helps marketing managers in these morally questionable

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situations by identifying stakeholders and understanding the effects and consequences of profits and services on them. Balancing company profitability with human rights and interests is a moral responsibility of marketers. Companies that have no ethics code or socially responsible policies—as well as those that do have these, but do not enforce them—increase the personal pressure, pain, and liability of individual professionals. Such tensions can lead to unethical and illegal activities.

R&D, Engineering Professionals, and Managers as Stakeholders R&D managers and engineers are responsible for the safety and reliability of product design. Faulty products can mean public outcry, which can result in unwanted media exposure and possibly (perhaps justifiably) lawsuits. R&D managers must work and communicate effectively and conscientiously with professionals in manufacturing, marketing, and information systems, and with senior managers, contractors, and government representatives, to name a few of their stakeholders. This chapter’s opening case illustrates that a company’s operating parts, design, and quality control can involve more care and concern for safety and monitoring to ensure proper functioning of operations than BP’s company officers probably envisioned before that crisis erupted. Technical issues can quickly escalate to political, cultural, legislative, and judicial levels; ethical issues that may begin as professional ethical codes of engineers can, if a product crisis occurs, transform into legal concerns about international human and consumer rights and justice.

As studies and reports on the Space Shuttle Challenger disaster that occurred on January 28, 1986, further illustrate, care and attention to the safe functioning of technical parts and processes of any system can mean the difference between life and death. Challenger tore apart 73 seconds after lift-off from Cape Canaveral, Florida. Engineers and managers at the National Aeronautics and Space Administration (NASA) and the cooperating company, Thiokol, had different priorities, perceptions, and technical judgments regarding the “go, no-go” decision of that space launch. A follow-up study found that “The commission not only found fault with a failed sealant ring but also with the officials at the National Aeronautics and Space Administration (NASA) who allowed the shuttle launch to take place despite concerns voiced by NASA

engineers regarding the safety of the launch.”44 Lack of individual responsibility and the poor critical judgment of NASA administrators contributed to the miscommunication and resulting disaster.

Moral dilemmas can arise for R&D engineers whose technical judgments and risk assessments conflict with administrative managers seeking profit and time-to-market deadlines. R&D managers also can benefit from doing a stakeholder analysis, before disasters like the Challenger occur. The discussion of the levels of business ethics in Chapter 1 also provides professionals with a way of examining their individual ethics and moral responsibilities.

Accounting and Finance Professionals and Managers as Stakeholders Accounting and finance professionals are responsible for the welfare of clients and safeguard their financial interests. Financial planners, brokers, accountants, mutual fund managers, bankers, valuation specialists, and insurance agents have the responsibility of ensuring reliable and accurate transactions and reporting of other

people’s money and assets.45 Many of these professions are part of regulated industries; however, the recent corporate scandals at Enron, Tyco, Arthur Andersen, and other large firms showed that company culture, individual and team judgment, greed, and lack of integrity contributed to executives’ “cooking the books.”

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Financial fraud, stealing, and gambling away employees’ pensions, and shareholders’ investments were part of the illegal activities officers of these firms directed and led. Although the Sarbanes-Oxley Act, the Revised Sentencing Guidelines, and stricter company ethics and reporting codes (see Chapter 4) have helped prevent illegal activity in these professions, problems remain.

Factors in these professions that trigger unethical activities include: (1) pressures from senior officers and supervisors to “maximize profits,” sometimes at any cost; (2) lack of integrity (truthfulness, conscience) of leaders, supervisors, and employees; (3) corporate cultures that devalue clients, investors, and employees; (4) requests from clients to change financial statements and tax returns and commit tax fraud; (5) conflict of interest and lack of auditor independence between client and auditing firm; and (6) blurring professional and personal roles and responsibilities between client and professional. These issues are in part related to societal, structural problems. For example, the U.S. financial system emphasizes and rewards short-term, quarterly earnings that help create many of the pressures and poor practices listed above. Chapters 4 and 5 deal with these topics in more detail.

Public Relations Managers as Stakeholders PR managers must constantly interact with outside groups and corporate executives, especially in an age when communications media, external relations, and public scrutiny play such vital roles. PR managers are responsible for transmitting, receiving, and interpreting information about employees, products, services, and the company. A firm’s public credibility, image, and reputation depend on how PR professionals manage stakeholders because PR personnel must often negotiate the boundaries between corporate loyalty and credibility with external groups. These groups often use different criteria than corporate executives do for measuring success and responsibility, especially during crises. Moral dilemmas can arise when PR managers must defend company actions that have possible or known harmful effects on the public or stakeholders. A stakeholder analysis can prepare PR managers and inform them about the situation, the stakes, and the strategies they must address.

Human Resource Managers as Stakeholders Human resource managers (HRMs) are on the front line of helping other managers recruit, hire, fire, promote, evaluate, reward, discipline, transfer, and counsel employees. They negotiate union settlements and assist the government with enforcing Equal Employment Opportunity Commission (EEOC) standards. HRMs must translate employee rights and laws into practice. They also research, write, and maintain company policies on employee affairs. They face constant ethical pressures and uncertainties over issues about invasion of privacy and violations of employees’ rights. Stakeholders of HRMs include employees, other managers and bosses, unions, community groups, government officials, lobbyists, and competitors.

Moral dilemmas can arise for these managers when affirmative action policies are threatened in favor of corporate decisions to hide biases or protect profits. HRMs also straddle the fine line between the individual rights of employees and corporate self-interests, especially when reductions in force (RIFs) and other hiring or firing decisions are involved. As industries restructure, merge, downsize, outsource, and expand internationally, HRMs’ work becomes even more complicated.

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Summary of Managerial Moral Responsibilities Expert and functional area managers are confronted with balancing operational profit goals with corporate moral obligations toward stakeholders. These pressures are considered “part of the job.” Unfortunately, clear corporate directions for resolving dilemmas that involve conflicts between individuals’ rights and corporate economic interests generally are not available. Using a stakeholder analysis is “like walking in the shoes of another professional”: you get a sense of his or her pressures. Using a stakeholder analysis is a step toward clarifying the issues involved in resolving ethical dilemmas. Chapter 2 presented moral decision-making principles that can help individuals think through these issues and take responsible action.

3.7 Issues Management, Integrating a Stakeholder Framework

Issues management methods complement the stakeholder management approach. It may be helpful to begin by identifying and analyzing major issues before doing a stakeholder analysis. Many reputable large companies use issues managers and methods for identifying, tracking, and responding to trends that offer potential

opportunities as well as threats to companies.46 Before discussing ways of integrating stakeholder management (and analysis) with issues management, issues management is defined.

What Is an Issue? An issue is a problem, contention, or argument that concerns both an organization and one or more of its stakeholders and/or stockholders. Teresa Yancey Crane, founder of the Issue Management Council, explains the relationship between an issue and issue management the following way: “Think of an issue as a gap between your actions and stakeholder expectations. Second, think of issue management as the process used to

close that gap.”47 The gap can be closed in a number of ways, using several strategies. A primary method is using an accommodating policy. Providing public education, community dialogue, and changing expectations through communication are some accommodating strategies used in issues management. Solving complicated issues may sometimes require radical actions, like replacing members from the board of directors and the

senior management team.48

Issues management is also a formal process used to anticipate and take appropriate action to respond to emerging trends, concerns, or issues that can affect an organization and its stakeholders. “Issues management is a . . . genuine and ethical long-term commitment by the organization to a two-way, inclusive standard of corporate responsibility toward stakeholders. Issues management involves connectivity with, rather than control of, others. Issues managers help identify and close gaps between expectation, performance, communication, and accountability. Issues management blends ‘many faces’ within the entity into ‘one voice.’ Like the issues themselves, the process is multi-faceted and is enhanced by the strategic facilitation and

integration of diverse viewpoints and skills.”49

Many national and international business-related controversies develop around the exposure of a single issue that evolves into more serious and costly issues. Enron’s problems in the beginning surfaced as an issue of overstated revenue. After months of investigation, members of the highest executive team were found to have been involved in deception, fraud, and theft. Ford had the Bridgestone/Firestone Explorer tire crisis in 2001 with what appeared to be faulty tires (see Ethical Insight 3.1). The issue escalated to questions about the

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design of the Ford vehicle itself, then to questions about many international deaths and accidents over a number of years. The CEO of Ford eventually lost his job.

Ethical Insight 3.1 Classic Crisis Management Case

• Crisis management experts criticized Bridgestone/Firestone for minimizing their tires’ problems during the week of August 11, 2000. The experts gave the company mixed reviews on its handling of the recall of 6.5 million tires that were responsible for 174 deaths and more than 300 incidents involving tires that allegedly shredded on the highway in 1999. The tire maker’s spokespersons claimed the poor tread on the tires was caused by underinflation, improper maintenance, and poor road conditions.

• Mark Braverman, principal of CMG Associates, a crisis management firm in Newton, Massachusetts, noted that the company blamed the victim and that Bridgestone/Firestone lacked a visible leader for its crisis management effort. “The CEO should be out there, not executive vice presidents.”

• Steven Fink, another crisis management expert, noted that “After they [Bridgestone/Firestone] announced the recall, they were not prepared to deal with it. They were telling consumers they will have to wait up to a year to get tires. And things like busy telephone call lines and overloaded web sites—these are things that can be anticipated. That’s basic crisis management.”

• Stephen Greyser, professor of marketing and communications at Harvard Business School, stated, “It’s about what they didn’t do up to now. The fact that [Bridgestone/Firestone] is just stepping up to bat tells me they’ve never really had the consumer as the principal focus of their thinking.”

• Defending the way Bridgestone/Firestone handled the crisis was Dennis Gioia, professor of organizational behavior at Smeal College of Business Administration at Pennsylvania State University: “With hindsight, you can always accuse a company of being too slow, given the history of automotive recalls. Sometimes you can’t take hasty action or you would be acting on every hint there’s a problem. It can create hysteria.”

Question for Discussion Who do you agree or disagree with among these crisis management consultants? Explain.

Source: Consultants split on Bridgestone’s crisis management. (August 11, 2000). Wall Street Journal, A6.

Other Types of Issues There are other types of issues arising from the external environment that involve different companies and industries. For example, the issue of obesity has become prominent in the United States. Once considered a personal lifestyle problem, obesity is now seen as a public health disease, and its treatment can be paid for by one’s health insurance. This issue involves insurance companies, the corporations who employ individuals facing this problem, employment attorneys, families of those individuals affected, and taxpayers, to name a

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few. Another issue that affects numerous stakeholders is drivers who drink. U.S. mothers who have lost their

children to this growing phenomenon have discovered that this issue is not a set of isolated events, but widespread. Mothers Against Drunk Driving (MADD) was founded in the 1980s by Candy Lightner, whose 13-year-old daughter Cari was killed by a drunken hit-and-run driver as she walked down a suburban street in California. The impact broke almost every bone in her body and fractured her skull, and she died at the scene of the accident. “I promised myself on the day of Cari’s death that I would fight to make this needless

homicide count for something positive in the years ahead,” her mother later wrote.50

Programs like 60 Minutes, Dateline, and Frontline introduce breaking news that focuses on events, crises, and innovative practices that are being faced and addressed. Stakeholder and issues management frameworks can be used to understand the evolution of these issues in order to responsibly manage or change their effects.

Stakeholder and Issues Management: “Connecting the Dots” Issues and stakeholder management are used interchangeably by scholars and corporate practitioners, as the two following quotes illustrate:

For many societal predicaments, stakeholders and issues represent two complementary sides of the same coin.51

Stakeholders tend to organize around “hot” issues, and issues are typically associated with certain vocal stakeholder groups. Issues management scholars can therefore explore how issues management requires stakeholder prioritization, and how stakeholder management gets facilitated when managers have deep knowledge of stakeholders’ issue agendas. Earlier research also suggests that whether or not stakeholders decide to get involved with certain issues has a profound influence on issue evolution, and as does the timing and extent of their

involvement.52

Applying stakeholder and issues management approaches should not be mechanical. Moral creativity and objectivity help, as discussed in Chapter 1. A general first step is to ask: “What is the issue, opportunity, or precipitating event that an organization is facing or has experienced? How did the issue emerge?” Generally there are several issues that are discovered. The process begins by analyzing and then framing which issues are the most urgent and have (or may have) the greatest impact on the organization. At this point, you can begin to ask who was involved in starting or addressing the issue. This triggers the beginning of a stakeholder analysis and the steps discussed earlier in the chapter. Depending on how the issue evolved into other issues— or whether there was a crisis at the beginning, middle, or end of the issue evolution—you will know which issues management framework from the following section is most relevant for the analysis of the situation.

Actually, stakeholder analysis questions help “connect the dots” in understanding and closing the gaps of issues management. Stakeholder questions help discover “who did what to whom to influence which results, and at what costs and outcomes.” A major purpose in analyzing and effectively managing issues and stakeholders is to create environments that enable high-performing people to achieve productive and ethical results.

Moral Dimensions of Stakeholder and Issues Management Some studies argue that moral reasoning is “issue-dependent” and that “people generally behave better when

the moral issue is important.”53 Questions regarding issue recognition include: To what extent do people actually recognize moral issues? Is it by the magnitude of the potential consequences or the actual consequences of the issue? Is it by the social consensus regarding how important the issue is? Is it by how

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likely it is that the effects of the issue will be felt or how quickly the issue will occur?54 Ethical reasoning and behavior are an important part of managing stakeholders and issues because ethics is the energy that motivates people to respond to issues. When ethical motives are absent from leaders’ and professionals’ thinking and feeling, activities can occur that cost all stakeholders. Teaching you to detect and prevent unethical and illegal actions by using these methods is an aim of this section.

Companies face issues every day. Some issues lead to serious consequences—defective products, financial fraud, fatal side effects of drugs, oil spills, the loss of millions of lives to the effects of tobacco, violence from use of firearms, or the theft of pensions from ordinary employees who worked a lifetime to accrue them. Other issues evolve in a way that leads to spectacular outcomes: the invention and commercialization of the Internet, information technology that provides wireless access to anyone at any time in any place, and the capability to network customers, businesses, suppliers, and vendors. Learning to identify and change issues for the good of the organization and for the common and public good is another goal of the stakeholder management approach.

Types of Issues Management Frameworks This section presents two general issues frameworks for mapping and managing issues before and after they evolve or erupt into crises. These frameworks can be used with the stakeholder management approach. Using a stakeholder analysis (which is part of the general stakeholder management approach) explains the “who, what, where, why, and what happened” that affects an issue. After you have read the first two issues management approaches shown in Figures 3.8 and 3.9, you will see that either or both can be used to identify and analyze a major issue (crisis or potential opportunity) for an organization, as is explained below.

Figure 3.8 illustrates a straightforward framework that organizations can use for anticipating and thinking through issues to prevent a crisis. This is a somewhat generic model that has evolved within the issues management field. Identifying, tracking, and developing responses to issues are the thrusts of the process. More recently, companies like General Electric, Patagonia, Costco, and others use issues frameworks with the intent of acting in socially responsible ways, not only to protect their own companies and businesses from environmental and economic “threats,” but also to protect the environment and extend their reputations for “doing the right thing.”

The steps in Figure 3.8, then, can also be used to plan and manage issues that may have already affected an organization. Senior officers and staff would probably use this framework in their strategizing and “what if” scenarios. If you are analyzing a case such as the BP rig explosion and oil spill, you can use this framework to show what steps the organization could have taken to prevent such disasters, and the steps actually taken to manage the issues under investigation. You can also use a stakeholder analysis at any point in this model.

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Figure 3.8 Six-Step Issues Management Process

Source: Based on Coates, J., Jarratt, V., and Heinz, L. (1986). Issues management. Mt. Airy, MI: Lomond Publications, 19–20.

Figure 3.9 is more specific and focuses on the evolution of an issue from inception to resolution. This framework, which is not organization-specific like Figure 3.8, is more likely to be used by analysts, managers, and scholars studying issues that have warning signs which, if attention is given to them, can prevent escalating problems. In many cases, a stakeholder analysis can show why strategies and actions of particular stakeholders short-circuited the issue’s evolution through all the stages in this figure.

First Approach: Six-Step Issues Management Process The first method, as noted, is the most straightforward and most appropriate for companies or groups scanning the environment for issues that can impact their businesses and internal environments. A third-party observer could also use this approach to describe how a company acted in retrospect or could act in the future.

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Figure 3.9 Seven-Phase Issue-Development Process

Source: Adapted on Marx, T. (1986). Integrating public affairs and strategic planning. California Management Review, Fall, 29(1), 145.

However, this model would not be suitable for examining how an issue evolved over time, or for analyzing

precrisis signs or symptoms of an event. The process involves the following steps, illustrated in Figure 3.8.55

1. Environmental scanning and issues identification.

2. Issues analysis.

3. Issues ranking and prioritizing.

4. Issues resolution and strategizing.

5. Issues response and implementation.

6. Issues evaluation and monitoring.

These steps are part of a firm’s corporate planning process. In the strategic issues management process, a firm uses a selected team to work on emerging trends as they relate to the industry and company. As Heath noted, “The objective of issues management is to make a smart, proactive, and even more respected organization. This sort of organization is one that understands and responds to its stakeseekers and

stakeholders.”56

This framework is a basic approach for proactively mapping, strategizing, and responding to issues that affect an organization. With regard to this chapter’s opening case, if you, as an objective third-party observer, were analyzing BP’s situation, what issues can you identify that might affect the company? As you identify each issue (step 1), you might begin to analyze any organizational and/or environmental issue that offered clues about the condition of the rig. Then you could examine the issues and their impact on the organization and other stakeholders before and after the explosion (step 2). The remaining steps would involve analyzing how BP handled the crisis (steps 3–6).

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This six-step process also enables you to advise upper-level managers and directors in the company regarding precautions to take to avoid the illegal and unethical consequences of an issue. This model sharpens your ability to see the effects of issues on organizations from conception to response and monitoring.

Second Approach: Seven-Phase Issue Development Process Issues are believed and have been observed to follow a developmental life cycle. Views differ on the stages, phases, and time involved in such a life cycle. Thomas Marx’s reasoning fits with the seven-phase evolution of a public’s “felt need” or outcry through that need or demand’s becoming a law. The entire cycle has been estimated at taking eight years, as illustrated in Figure 3.9—with the use of the Internet, social media, and

mobile devices, this time span will likely be shortened.57

1. A felt need arises (from emerging events, advocacy groups, books, movies).

2. Media coverage is developed (television segments, such as on 60 Minutes, 20/20, FOX News, CNN, and breaking news on the Internet from the Wall Street Journal, New York Times, and other news and blogging sources).

3. Interest group development gains momentum and grows.

4. Policies are adopted by leading political jurisdictions (cities, states, counties).

5. The federal government gives attention to the issue (hearings and studies).

6. Issues and policies evolve into legislation and regulation.

7. Issues and policies enter litigation.

BP’s CEO and top-level team could have used this framework to anticipate and perhaps prevent the explosion; and if not prevent the explosion, they could have responded to the public in a more timely and concerned way. With the Internet, it no longer takes seven years for this model to move from phase one to the last (litigation) phase. Once local and federal legislators learn about a volatile news-breaking public issue, especially if the media has exposed it, company representatives may respond sooner.

“While the accident could have been prevented, BP might have avoided its intense and deserved public

flogging if only it had respected the best practices for managing a crisis.”58 Bryant and Hunter go on to explore who is to blame for the spill:

BP has for many years publicly claimed to be laser focused on safety. But inside the company, it was clearly focused on cost cutting, at the expense of safety. Furthermore, regulators and environmental groups have not been fooled by BP’s public statements, though they have allowed the company to continue to operate as usual. Who then is to blame for the spill? Is it BP, which has been driving cost cutting hard and succeeding? Or its contractors, who have had to operate to meet BP’s specifications and who, in order to meet budget, changed operating procedures? Is it government regulators, who have been well aware of BP’s violations, but have allowed it not to pay its fines and to continue to operate? Is it the public, users of oil, whose insatiable demands for petrochemical products has led to the overuse of a limited natural resource that, it could be claimed, forced firms like BP to take on ever more risky operations to meet demand (note that figures suggest that the operations in the Gulf account for nearly 20 percent of the United States’ domestic oil production)? Or, is it investors, demanding ever higher returns on their investment over shorter periods of time, driving BP executives to squeeze efficiencies from

operations that were designed to be effective—not efficient, in order to maximize earnings per share?59

Stakeholder management methods can be used with this issue management approach in order to identify those groups and individuals who moved an issue from one phase to another and who helped change the nature of an issue. Usually different stakeholder groups redefine issues as these constituencies compete with

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one another, using different sources of power, as discussed earlier.

This seven-phase framework is also useful in identifying and following public issues that do not necessarily originate with corporations, and could be applied to such issues as drunk-driving, obesity, global warming, and even to natural disasters such as Hurricane Sandy in 2012, Katrina in 2005, or the 2004 Indian Ocean earthquake and tsunami. Issues frameworks and stakeholder analysis can help identify the effectiveness of public and private organizations in detecting and responding to events that result in crises. Sometimes the aftermath of a catastrophic event can result in a larger crisis than the precipitating event itself.

Marx illustrated his model with the origins of the automobile safety belt issue.60 The four stages of this case, according to Marx, were reflected by the following events:

1. Social awareness: Ralph Nader’s now-classic book, Unsafe at Any Speed, published in 1965, created a social expectation regarding the safe manufacturing of automobiles. The Chevrolet Corvair, later pulled off the market, was the focus of Nader’s astute legal and public advocacy work in exposing manufacturing defects.

2. Political awareness: The National Traffic and Motor Vehicle Safety Act and the resulting safety hearings in 1966 moved this expectation into the political arena.

3. Legislative engagement: In 1966, the Motor Vehicle Safety Act was passed, and four states began requiring the use of seat belts in 1984.

4. Litigation: Social control was established in 1967, when all cars were required to have seat belts. Driver fines and penalties, recalls of products, and litigation concerning defective equipment further reinforced the control stage.

Nader’s pioneering consumer advocacy and legal work with regard to U.S. automobile manufacturing set an enduring precedent for watchdog congressional and voluntary advocacy groups that initiated laws that are still in effect.

Many other books have served as catalysts to mobilize the U.S. public and ultimately influence Congress to pass legislation. A brief list includes, for example, Thomas Paine’s Common Sense (1776), which rallied the public against the British monarchy and is believed to have been the single most powerful influence that mobilized widespread support for the Revolutionary War—over 100,000 copies were sold in the first few months of its publication. Mary Wollstonecraft’s A Vindication of the Rights of Women (1792) was the first literary statement promoting women’s rights and led to the movement that gave women the right to vote in America. Upton Sinclair’s novel The Jungle (1906) shocked the nation by exposing the wretched conditions of Chicago’s meatpacking industry and the impoverished lives of immigrants who worked there. The book influenced legislation on employment laws and safety standards related to meatpacking and the food industry in general. Silent Spring (1962) by Rachel Carson brought to the attention of millions the loss of endangered

species and the environment and pressured some of the first legislation in these areas.61 Refer to Chapter 5 to see later books on food and diets that also have made an impact on national policy.

Take any industry or scan the news, then select an issue and see if you can predict and/or observe the possible path the issue may take through these different stages. This issue evolution process provides a window into the emergence and evolution of public policies and laws in U.S. society. Issues are not static or predetermined commodities. Stakeholder interests and actions move or impede an issue’s development. To

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understand how an issue develops, or is unable to develop, is to understand how power works in a political

system in which market and nonmarket forces pressure the ethics and values of stockholders and stakeholders.

3.8 Managing Crises On January 15, 2009, US Airways Flight 1549 took off from LaGuardia Airport in New York City bound for Charlotte/Douglas International Airport, North Carolina, with the ultimate destination of Seattle-Tacoma International Airport in Washington. During its initial climb, the plane hit a flock of Canadian Geese. Despite losing engine power, Captain Chesley Burnett “Sully” Sullenberger III and his crew safely landed the plane on the Hudson River off midtown Manhattan. That landing is now known as the “Miracle on the Hudson.” The crew was later awarded the Master’s Medal of the Guild of Air Pilots and Air Navigators, which stated “This emergency ditching and evacuation, with the loss of no lives, is a heroic and unique

aviation achievement.” It was later described as “the most successful ditching in aviation history.”62

Captain Sullenberger’s crisis leadership style was focused, technically and intuitively accurate and creative, calm, sympathetic, positive, and transparent. Consequently, his leadership during a time of intense crisis is celebrated as heroic, although he personally does not feel comfortable with that term. Captain Sullenberger’s

actions that day now serve as an exemplary role model of crisis leadership.63

Crisis management methods evolved from the study of how corporations and leaders responded (and should have responded) to crises. Using crisis management methods with stakeholder management methods is essential for understanding and possibly preventing future fiascos because crises continue to occur in a number of areas: product/service crises (e.g., JetBlue’s 2007 weather-related mishap); consumer products (the classic crisis with Ford’s use of faulty Bridgestone/Firestone tires), financial systems (Enron and the recent subprime lending crisis), and government/private contractor projects (Boston’s 2006 Big Dig tunnel partial ceiling collapse and the 1986 Challenger disaster). Captain Sullenberger’s response to the crisis he faced in the scenario discussed above is a success story. Unfortunately, most corporate leaders have not responded so courageously.

Steven Fink states that a crisis is a “turning point for better or worse,” a “decisive moment” or “crucial time,” or “a situation that has reached a critical phase.” He goes on to say that crisis management “is the art of

removing much of the risk and uncertainty to allow you to achieve more control over your destiny.”64 Crises, from a corporation’s point of view, can deteriorate if the situation escalates in intensity, comes under closer governmental scrutiny, interferes with normal operations, jeopardizes the positive image of the company or its officers, or damages a firm’s bottom line. A turn for the worse also could occur if any of the firm’s stakeholders were seriously harmed or if the environment was damaged. The following two approaches describe ways that organizations can respond to crises. You may turn to Chapter 4 to review some of the classic corporate crises, in addition to the more contemporary BP rig explosion and oil spill, that have occurred over the past few decades. Having such examples as the Exxon Valdez, the Ford Pinto disaster, and other crises in mind would be informative as you read how to examine and respond to a crisis from a stakeholder management perspective.

The model in Figure 3.10 shows a crisis consisting of four stages: (1) prodromal (precrisis), (2) acute, (3) chronic, and (4) conflict resolution. Judgment and observation are required to manage these stages. This

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approach differs from the second one in that a precrisis stage is included.65

The prodromal stage is the warning stage. If this stage is not recognized or does not actually occur, the second stage (acute crisis) can rush in, requiring damage control. Clues in the prodromal stage must be carefully observed. For example, BP blamed Transocean and Halliburton for the explosion; these companies blamed BP for taking a laissez-faire or lax approach to safety and equipment that required upgrading. What happens in the prodromal stage when these types of attitudes and values clash within and between companies and work groups? Was there a warning sign or symptom that employees and managers at BP and/or the licensed companies saw that a crisis was possible? If so, why do you think these warning signs were not taken more seriously?

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Figure 3.10 Four Crisis-Management Stages

Fink, S. (1986). Crisis management: Planning for the inevitable. New York: American Management Association, 26.

In the second stage, acute crisis, damage has been done. The point here is to control as much of the damage as possible. This is often the shortest of the stages. In the BP crisis, the explosion took the crew on the rig by surprise. Should they have been more suspecting that a crisis or problem like this could occur?

The third stage, chronic crisis, is the clean-up phase. This is a period of recovery, self-analysis, self-doubt, and healing. Congressional investigations, audits, and interviews occur during this stage, which can linger indefinitely, according to Fink. A survey of Fortune 500 CEOs reported that companies that did not have a crisis management plan stayed in this stage two and a half times longer than those who did. Did BP’s leaders’ actions during the chronic stage of the crisis change from the way they reacted during the first stage? Why or why not?

The final stage, crisis resolution, is the crisis management goal. The key questions here are: What can and should an organization’s leaders do to speed up this phase and resolve a crisis once and for all? Has BP learned from the disaster? Are new safety issues and requirements in effect at present?

How Executives Have Responded to Crises Not all CEOs and organizational leaders respond the same to crises. JetBlue’s founder and CEO, David Neeleman (who is still revered in the company), resigned as CEO and issued a customer “Bill of Rights” after one of the worst crisis in the airline’s history during the winter of 2007, when “nine airplanes full of angry

passengers sat for six hours or more on the tarmac at John F. Kennedy International Airport in New York,”66

costing the airline $30 million. A classic crisis management model developed by Archie Carroll suggests a different type of CEO response mode in its five phases of corporate social response to crises related to product

crises.67 This model illustrates how corporations have, and many continue to, actually responded to serious crises. The phases, illustrated in Figure 3.11, are (1) Reaction, (2) Defense, (3) Insight, (4) Accommodation, and (5) Agency. For a full description of the BP crisis, a more thorough case appears at the end of this chapter and can be used to apply the crisis management methods presented here. Did the then BP CEO react first and then respond? If so, why do you think many CEOs go into a “reaction” mode at the first realization of a crisis?

Figure 3.11 Corporate Social Responses

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Source: Adapted from Carroll, A. (1977). A three-dimensional conceptual model of corporate performance. Academy of Management Review, 4(4), 502.

It is interesting to observe how some executives continue to deny and/or avoid responsibility in crises that become disastrous. Knowledge of these stages certainly would be a first step toward corporate awareness. Let’s look more closely at each stage.

According to this model, the Reaction stage is the first phase when a crisis has occurred. Management lacks complete information and time to analyze the event thoroughly. A reaction made publicly that responds to allegations is required. This stage is important to corporations, because the public, the media, and the stakeholders involved see for the first time who the firm selects as its spokesperson, how the firm responds, and what the message is. Notice that a classic crisis in which the leadership and management of a company responded positively—and did not react either negatively or with denial—to a crisis was the Tylenol case. In 1982, seven people died after taking Tylenol capsules that had been tampered with and laced with cyanide. Tylenol’s market sank from 37% to 7%. James Burke, Johnson & Johnson’s chairman, and a seven-member team focused first on protecting people and customers, then saving the product. Thirty-one million bottles of Tylenol nationally were recalled and all advertising was stopped until the problem was solved. An 800 number was set up and corporate headquarters held several press conferences with a live satellite feed. Two months later, “Tylenol was reintroduced into the market with triple-seal tamper-resistant packaging, [and the company] offered coupons for the products, created a new discounted pricing program, new advertising

campaign and gave more than 2,250 presentations to the medical community.”68 Two management crises experts said that Johnson & Johnson actually increased their credibility after the crisis, and that their response

became the “gold standard” for responding to crises.69

The second stage of the model, Defense, signals that the company is overwhelmed by public attention. The firm’s image is at stake. This stage usually involves the company’s recoiling under media pressure. But this does not always have to be a negative or reactive situation.

The third stage, Insight, is the most agonizing time for the firm in the controversy. The stakes are substantial. The firm’s existence may be questioned. The company must come to grips with the situation under circumstances that have been generated externally. During this stage, the executives realize and confirm from evidence whether their company is at fault in the safety issues of the product in question.

In the fourth stage, Accommodation, the company either acts to remove the product from the market or refutes the charges against product safety. Addressing public pressure and anxiety is the task in this stage.

During the last stage, Agency, the company attempts to understand the causes of the safety issue and develop an education program for the public.

How could the CEO in the BP case have performed differently according to this model of crisis management? Research news and media reports on the Internet on this and other crises. Take special note of how companies respond morally to their stakeholders. Observe the relative amount of attention companies sometimes give to consumers, the media, and government stakeholders. Use the frameworks presented in this

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chapter to help inform your observations and judgments. Develop a timeline as the crisis unfolds. Notice who the company chooses as its spokesperson. Determine how and why the company is assuming or avoiding responsibility.

Crisis Management Recommendations A number of suggestions that corporations can follow to respond more effectively to crises are briefly

summarized here. More in-depth strategies and tactics can be found in several sources.70

• Face the problem: Don’t avoid or minimize it. Tell the truth.

• Take your “lumps” in one big news story rather than in bits and pieces. “No comment” implies guilt.

• Recognize that, in the age of instant news, there is no such thing as a private crisis.

• Stage “war games” to observe how your crisis plan holds up under pressure. Train executives to practice press conferences, and train teams to respond to crises that may affect other functional areas or divisions.

• Use the firm’s philosophy, motto, or mission statement to respond to a crisis. For example, “We believe in our customer. Service is our business.”

• Use the firm’s closeness to customers and end users for early feedback on the crisis and to evaluate your effectiveness in responding to the events.

The following tactical recommendations are also helpful crisis prevention and management techniques:

• Understand your entire business and dependencies.

• Understanding your business provides the basis upon which all subsequent policies and processes are based and, therefore, should not be rushed.

• Carry out a business impact assessment.

• Having identified the mission critical processes, it is important to determine what the impact would be if a crisis happened. This process should assess the quantitative (such as financial and service levels) and the qualitative (such as operational, reputation, legal and regulatory) impacts that might result from a crisis and the minimum level of resource for recovery.

• Complete a 360-degree risk assessment, where managers, their peers and direct reports evaluate each other’s style and performance. This is used to determine the internal and external threats that could cause disruption and their likelihood of occurrence. Utilizing recognized risk techniques, a score can be achieved, such as high-medium-low, 1 to 10, or unacceptable/acceptable risk.

• Develop a feasible, relevant, and attractive response. There are two parts to this stage: developing the detailed response to an incident and the formulation of the business crisis plan that supports that response.

• Plan exercising, maintenance, and auditing. A business crisis plan cannot be considered reliable until it has been tested. Exercising the plan is of considerable importance, as a plan untested becomes a

plan untrusted.71

Finally, issues and crisis management methods and preventive techniques are only effective in corporations

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if:

• Top management is supportive and participates.

• Involvement is cross-departmental.

• The issues management unit fits with the firm’s culture.

• Output, instead of process, is the focus.72

Chapter Summary

Organizations and businesses in the twenty-first century are more complex and networked than in any previous historical period. Because of the numerous transactions of corporations, methods are required to understand an organization’s moral obligations and relationships to its constituencies.

The stakeholder management approach provides an analytical method for determining how various constituencies affect and are affected by business activities. It also provides a means for assessing the power, legitimacy, and moral responsibility of managers’ strategies in terms of how they meet the needs and obligations of stakeholders.

Critics of stakeholder theory argue that corporations should serve only stockholders since they own the corporation. They hold that stakeholder theory: (1) negates and weakens fiduciary duties managers owe to stockholders, (2) weakens the influence and power of stakeholder groups, (3) weakens the firm, and (4) changes the long-term character of the capitalist system. A major response to the critics of stakeholder theory states that societies and economies involve market and nonmarket interests of diverse stakeholders as well as stockholders. To understand and effect responsible corporate strategies, methods that include different players and environmental factors—not just stockholders or financial interests—are required.

A stakeholder analysis is a strategic management tool that allows firms to manage relationships with constituents in any situation. An individual or group is said to have a “stake” in a corporation if it possesses an interest in the outcome of that corporation. A “stakeholder” is defined as an individual or group who can affect or be affected by the actions or policies of the organization.

Recent studies have indicated that profits and stockholder approval may not be the most important driving

forces behind management objectives.73 Job enrichment, concern for employees, and personal well-being are also important objectives. These studies reinforce the importance of the stakeholder management approach as a motivating part of an organization’s social responsibility system.

The implementation of a stakeholder analysis involves a series of steps designed to help a corporation understand the complex factors involved in its obligations toward constituencies.

The moral dimensions of managerial roles also have a stakeholder perspective. The stakeholder approach can assist managers in resolving conflicts over individual rights and corporate objectives. This approach can help managers think through and chart morally responsible decisions in their work.

The use of stakeholder analysis by a third party is a means for understanding social responsibility issues between a firm and its constituencies. Ethical reasoning can also be analyzed relative to the stakeholder management approach.

Preventing and effectively negotiating disputes is a vital part of the work of professionals and leaders. We

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discussed several alternative dispute resolution (ADR) methods in the chapter, emphasizing consensual, relational, and integrative methods that seek win—win approaches. The full range of dispute resolution methods is important to learn because conflict is part of ongoing organizational change.

Issues and crisis management frameworks complement stakeholder analysis as social responsibility methods. Understanding what the central issues are for a company and how the issues evolved over time can help effectively and responsibly manage changes in a company’s direction and operations. Crisis management frameworks help to predict, prevent, and respond to emergencies. Issues and stakeholder management methods used together provide an overall approach to leading and managing organizational change responsibly and ethically.

Questions

1. With regard to this chapter’s opening case, what, if anything, could BP’s CEO have done differently to have prevented and/or avoided the resulting fall-out from the crisis? Explain.

2. Briefly describe a dispute in which you were an important stakeholder. How was the situation resolved (or not resolved)? What methods were used to resolve the situation? Looking back now, what methods could or should have been used to resolve that situation? For example, what would you now recommend happen to effectively resolve it fairly?

3. Which of the types of power (described in this chapter) that stakeholders can use have you effectively used in a conflict or disagreement over a complex issue? Briefly explain the outcome and evaluate your use(s) of power.

4. Which roles and responsibilities in this chapter have you assumed in an organization? What pressures did you experience in that role that presented ethical dilemmas or issues for you? Explain.

5. What reasons would you offer for encouraging leaders and/or managers to use the stakeholder approach? Would these reasons apply to teams?

6. Give a recent example of a corporation that had to publicly manage a crisis. Did the company spokesperson respond effectively to stakeholders regarding the crisis? What should the company have done differently in its handling of the crisis?

7. Describe how you would feel and what actions you would take if you worked in a company and saw a potential crisis emerging at the prodromal or precrisis stage. What would you say, to whom, and why?

8. Using Figure 3.4, identify a complex issue-related controversy or situation in which you, as a stakeholder, were persuaded to move from one position (cell) to another and why-for example, from Nonsupportive to Supportive, or from Mixed Blessing to Marginal. Explain why you moved and what the outcome was.

9. Argue both the pros and cons of stakeholder theory, using some of the arguments in the chapter as well as your own. What is your evaluation of the usefulness of the stakeholder management approach in understanding and analyzing complex issues?

Exercises

1. Describe a situation in which you were a stakeholder. What was the issue? What were the stakes? Who were the other stakeholders? What was the outcome? Did you have a win-win resolution? If not, who won,

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who lost, and why?

2. Recall your personal work history. Who were your manager’s most important stakeholders? What, in general, were your manager’s major stakes in his or her particular position?

3. In your company or organization, or one in which you have worked, what is the industry? The major external environments? Your product or service? Describe the major influences of each environment on your company (for example, on its competitiveness and ability to survive). Evaluate how well your company is managing its environments strategically, operationally, and technologically, as well as in relation to products and public reputation.

4. Choose one type of functional area manager described in the chapter. Describe a dilemma involving this manager, taken from a recent media report. Discuss how a stakeholder analysis could have helped or would help that manager work effectively with stakeholders.

5. Describe a complex issue that is evolving in the news or media. Explain how the issue has evolved into other issues. Which issues management framework would help track the evolution of this issue? Explain.

6. Describe a recent crisis that involved a product. Which phase of the crisis management model do you believe is the most important for all involved stakeholders? Explain.

Real-Time Ethical Dilemma

I worked as a marketing manager in Belgium for a mid-sized engineering company. Total revenues for the company were $120 million. The company had recently gone public and, in two public offerings, had raised more than $60 million. The firm was organized into four distinct strategic business units, based on products. The group that I worked in was responsible for more than $40 million in sales. We had manufacturing plants in four countries.

Our plant in Belgium manufactured a component that was used in several products, which produced $15 million in revenue. However, these products were old technology and were slowly being replaced in the industry. The overhead associated with the plant in Belgium was hurting the company financially, so they decided to sell the facility. The unions in Belgium are very strong and had not approved the final sale agreement. After this sale, the workforce was going to be reduced by half. Those who were laid off were not going to receive full severance pay, which, in Belgium, could take several years, and then workers would receive only 80% of total payment—a drastic change from what is offered in the United States. I was surprised that our executives in the United States had stated that the sale agreement was more than fair—contrary to the union’s position. A strike was imminent; the materials manager was told to stock 10 weeks of product.

My ethical dilemma started after the strike began. Originally, the company thought the strike would not last longer than a couple of days. Instead of causing a panic among our customers, management decided to withhold information on the strike from our customers and sales force. I could understand the delay in telling our customers, but to withhold information from our sales force was, I believed, unconscionable. Inevitably, our inside sales representatives became suspicious when they called the Belgium plant to get the status of an order, and nobody answered. They called me, and I ignored the corporate request and informed them of the strike. When it became obvious that the strike was going to be longer than anticipated, I asked the vice

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presidents of marketing and sales about our strategy for informing the affected customers. They looked at me quizzically and told me to keep things quiet (“don’t open a can of worms”) because the strike should be over soon. In addition, they dictated that Customer Service should not inform customers of the strike and excuses should be developed for late shipments.

The strike lasted longer than 12 weeks. In this time, we managed to shut down a production line at Lucent Technologies (a $5-million customer) with only a couple of days notice and alienated countless other valuable and loyal customers. I did not adhere to the company policy: I informed customers about the strike when they inquired about their order status. I also told Customer Service to direct any customer calls to me when we were going to miss shipments. This absolved them of the responsibility to tell the customer.

We did not take a proactive stance until 11 weeks into the strike, when the vice president of sales sent a letter informing our customers about the strike—too little and much too late to be of any help. The materials manager was fired because he only stocked 10 weeks of product, even though management thought he should have been conservative with his estimates. Halfway through this ordeal, I updated my resume and started a search for a new job. It was clear that management was more concerned about their year-end bonus than doing the right thing for the long-term prospects of the company and its customers.

Questions 1. Do you agree with the writer’s decision to inform customers about the strike? Explain.

2. Did management have the right to withhold this information from customers? Explain.

3. Explain what you would have done, and why, if you had been in the writer’s situation.

4. What should management have done in this case? When? Why?

Cases

Case 6 The BP Deepwater Horizon Explosion and Oil Spill: Crisis and Aftermath

The BP Deepwater Horizon spill is a multifaceted disaster that, despite popular opinion, cannot be explained by any one root cause. The April 20, 2010 oil spill was a point of crisis for oil giant BP, and CEO Tony Hayward faced a significant challenge in responding to this crisis.

The events leading up to the BP blowout unearth a highly complex network of circumstances, which though preventable, together culminated in the worst environmental disaster in American history. Repercussions of the incident are still felt today, and all stakeholders involved have an opportunity to learn about the significance of crisis management.

Events Leading up to the BP Spill In March 2008, the Occupational Safety and Health Administration (OSHA) stated on public record that BP had one of the worst safety records in its industry. This same month, the Minerals Management Service (MMS) gave BP an exclusive right to drill a parcel of Gulf of Mexico floor called Block 252, for a fixed fee of $34 million. Over the coming months, BP boarded a rig to supervise contractors who set out to drill the Macondo well using Transocean rigs.

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On October 2009, Hurricane Ida hit the drilling site, damaging BP’s oil rig and requiring BP to rent a more technologically sophisticated rig, called Deepwater Horizon.

The Point of Crisis On April 9, 2010, BP exerted unreasonable pressure during drilling and fractured the rock in its well. According to the National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling, “BP informed its lease partners Anadarko and MOEX that ‘well integrity and safety’ issues required the rig to stop drilling further.” BP management compared safety to profit-maximization and made the decision to plug the fractures in an effort to maximize profit, rather than cease drilling. The plug worked, but BP knew it was precarious, and that they needed to mitigate this risk by balancing pressure carefully. After the incident, BP wells leader admitted that losing returns “was the No. 1 risk.”

The Warning Signs When BP and Halliburton tested float valves, BP used a decision tree to evaluate the job based on whether there were lost returns on the cement factor, rather than engineering or risk principles and decided the test went well enough to excuse Schlumberger technicians, who were also scheduled to perform cement evaluation tests. That decision, which was based on an effort to save the company time and money, was another example of a decision that could have prevented the oil well blowout that is ironically costing over $20 billion in remediation to date.

BP is documented to have sought Halliburton’s counsel on how it could use cement centralizers to mitigate some of this drilling risk. However, due to low inventory, BP again allegedly compromised on quality and safety by changing Halliburton’s design and using the wrong kind of cement centralizers.

Halliburton conducted a routine cement slurry test which revealed that the foam was unstable, but they did not adequately report or address it. This event was sadly not uncommon among the various subcontractors on the Deepwater Horizon project. There appeared to be a team culture of poor communication driven by an effort to save time, money, and reputation, which ironically resulted in catastrophic loss of the same, at the expense of stakeholders of this project.

The company finished its cement job and began to lock down the Macondo well so it could move a smaller rig into place, but BP had amended Deepwater’s procedures to omit a pressure test (which would have checked the bottomhole cement job), among other things. (Incidentally, on April 12, BP had sent its amendments to the procedure to the MMS, but there is no evidence that they were reviewed.) While this combination of events, which were caused by several actors, was highly uncanny and improbable, given the circumstances of the weak cement job, their occurrence proved to be deadly. The more that the details of the story were unraveled, the more sweeping the participation among parties and stakeholders in the negligence, insufficient funding, and insufficient communication that led to the Deepwater Horizon explosion surfaced.

BP was also discovered to have used a broken pressure gauge during this same time. This too became a critical issue that, if it had been prevented, could have possibly averted the disaster. Still, the root cause of these errors is unclear, as the disaster could have been prevented with tighter risk management protocol, more sufficient inspection, as well as closer attention to fluctuation in gauge readings. Nonetheless, incompetence and risk mitigation planning negligence again appeared to be rife on the job.

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Other important precrisis warnings included the fact that the well was leaking and was in danger of exploding. The site workers were also found to have not adequately read or responded to the confounding results of the pressure test, i.e., they needed to use a different gauge to detect a leak that was later found in the well. This also indicated negligence (and incompetence) on behalf of site workers as they should have checked for this. Drill-pipe pressure increased 250 psi as shown on the monitor, but no one appeared to be checking the monitor. As could be expected from these warnings, the pressure relief valve soon blew. In response to this, the pumps were shut off; but pressure increased and no one seemed trained to know the significance of this issue and appropriate action was not taken. The warning signs were ignored.

Next, mud emerged on rig floor indicating that there was a problem in the well. Six-eight minutes passed before this was addressed, and the spill was not diverted overboard. The lack of response indicated negligence in emergency response training and a disregard for the warning signs that a crisis was coming.

After countless emergency indications, a high enough concentration of natural gas leaked into the air to cause an ignition. This explosion forced five million barrels of oil into the Gulf of Mexico over 87 days; the worst environmental disaster in American history.

The Aftermath—Response to the Crisis During the emergency response, scientists, including Ian MacDonald of Florida State University, alleged that BP withheld the facts around the spill, likely to protect its reputation. Possibly due to this obfuscation, it took 87 days until the well was finally capped on July 15, 2010.

Aside from some controlled burning and microbial digestion, only upon the capping of the well did the remediation of the oil’s damage truly begin. BP set up a $20 billion claims fund, which is still being administered as of March 2012. It is estimated that BP will pay $585 million in pollution violations. The company “has claimed about $40 billion in charges to cover the costs of litigation and cleanup”. New CEO Bob Dudley has a difficult task ahead in continuing remediations. BP has already set aside $3.5 billion to cover expected Clean Water Act fines on the estimated 3.2 million barrels spilled. However, the ripple effect of the spill has had no small impact on the Gulf Area tourism and fishing, which has somehow gone unaccounted for in BP’s legal restoration.

The legal aftermath of the spill is very consequential, as the U.S. Department of Justice (DOJ) filed a civil suit against BP and its business partners. This civil suit is expected to be followed by criminal charges-so much so that BP has already divested some assets.

Legislatively, oil companies are likely to face much more strict safety, environmental, risk management and reporting standards in the future. From the federal government level, President Obama is pushing for the cut of oil subsidies, which could lead to higher oil prices for consumers.

This type of large environmental crisis required swift corrective action and strategic public relations. There are many lessons to be learned from the way BP continues to handle the consequences of the accident and the way it employed crisis management.

Fatal Ethical Flaws The root fatal flaws in this drilling project were not scientific in nature, but rather the tears in the fundamental ethical fabric of the team and its strategic business partners-negligence, poor risk management,

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and possible willful obfuscation of information for the apparent purpose of salvaging reputation, while risking

the safety and well-being of BP’s stakeholders. The first ethical flaw is negligence. While some degree of mistakes is unavoidable due to human error, BP

and its constituent contractors displayed a systematic failure to prevent error, which could be classified as negligence. At the time of this case, several claims had been filed against BP to this extent, but courts have not rendered a decision and BP executives expect the case to last until at least 2014. What made the events surrounding the explosion tragic is that there were many opportunities for BP to make choices that could have prevented the disaster, but team members systematically compromised the safety and stakeholder consideration, when it cut corners to save time and to maximize profits, flying in the face of justice and utilitarianism, as discussed in the following section. This distinction is both ethically significant and economically consequential for businesses as it is embedded in our criminal law system, which penalizes on the basis of negligence.

A subset of this negligence was the failure to report safety risks, which was endemic to the broader BP contracting team, including Halliburton, Transocean, and BP staff. To this point, BP was ironically celebrating Deepwater Horizon’s seven years of safety at the exact moment of the explosion. As this problem was so pervasive, and as the moral burden of a team’s culture lies with its leadership, this implicated BP in this failure.

A third classification of ethical failure recognized by the U.S. legal system is willful misconduct, which implies a conscious and willful choice to endanger others when other options are available. Whether or not this will be found sufficiently compelling in court, this could be seen in several of BP’s decisions, including its decision to drill after fracturing the well and its decision to dismiss Schlumberger before testing the well. At this point in BP’s work, BP made both an ethical and financial miscalculation by actively choosing to compromise many of its stakeholders’ safety, economic livelihood, environment, and personal property to maximize its own profits. This decision was systematic and was not made in isolation, suggesting abuse and grounds for liability on the part of BP and its team members.

Whether or not BP will be indicted for criminal charges, BP and nine of its business associates have faced civil charges from the DOJ in pursuit of remediation of the damages under the Oil Pollution Act and Clean Water Act. In this is an important lesson: companies like BP should consider not just the letter of the law, but the spirit of the law, such as the anti-pollution provisions of the Oil Pollution and Clean Water Acts when guiding ethical decisions. A big part of BP’s damaging ethical tapestry is its failure to consider its stakeholders in driving its corporate strategy. By balancing their focus on short-term profits and considering others in their business, as well as governments, consumers, and the environment, BP’s costly mistakes could also have been averted. This Stakeholder Management Approach identifies corporate strategy by mapping and evaluating the implications of strategy through the lens of stakeholder impact as shown in the following analysis. This approach is built upon “win-win” collaborative outcomes rather than short-term profits by identifying the issue at hand, by assessing the nature of stakeholder interest, by assessing each stakeholder’s power, identifying stakeholder moral responsibilities, and developing the appropriate strategies and tactics. Incidentally, these same outcomes will likely save companies like BP up to billions of dollars in the long run.

Questions for Discussion

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1. Who and what factors were responsible for the Deepwater Horizon Oil Spill?

2. Evaluate BP’s corporate culture from an ethical standpoint. What role did top management have in shaping that culture?

3. What actions could/should BP management have taken in response to the many early warning signs? Did the “in action” of BP demonstrate the company’s ethics? Explain.

4. What responsibility did BP’s partners and oversight agencies like OSHA have in the crisis?

5. How did BP’s corporate strategy affect its ethical decision making?

6. Do companies like BP should have an ethical responsibility to protect the environment? Why or why not?

Sources “BP could reach settlement for Gulf oil spill this week.” The Washington Post.

http://www.washingtonpost.com/business/economy/bp-could-reach-settlement-for-gulf-oil-spill-this- week/2012/02/20/gIQALU52PR_story.html, accessed March 21, 2012.

Gillis, J. (May 19, 2010). Scientists fault lack of studies over gulf oil spill. New York Times. http://www.nytimes.com2010/05/20/science/earth/20noaa.html?th&emc=th&_r=0, accessed April 22, 2014.

Mauer, Richard and Anna M. (May 8, 2010). Gulf Oil Spill: BP Has A Long Record of Legal, Ethical Violations. http://www.mcclatchydc.com/2010/05/08/93779/bp-has-a-long-record-of-legal.html, accessed February 12, 2011.

National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling, Deep Water: The Gulf Oil Disaster and the Future of Offshore Drilling. (January 2011), p. 89.

National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling, Deep Water: The Gulf Oil Disaster and the Future of Offshore Drilling. (January 2011), p. 104.

National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling, Deep Water: The Gulf Oil Disaster and the Future of Offshore Drilling. (January 2011), p. 129.

Office of the Press Secretary, The White House. (June 15, 2010). “Remarks by the President to the Nation on the BP Oil Spill.” http://www.whitehouse.gov/the-press-office/remarks-president-nation-bp-oil-spill, accessed March 21, 2012.

Passwaters, Mark. (December 15, 2010). “DOJ files Deepwater Horizon civil suit.” http://www.snl.com/interactivex/article.aspx?id=12278731&KPLT=2.

Passwaters, Mark. (January 6, 2011). “National commission on BP spill blames cost cutting, mismanagement.” http://www.snl.com/interactivex/article.aspx?id=12178252&KLPT=6&Printable=1.

Passwaters, Mark. (January 6, 2011). “National commission on BP spill blames cost cutting, mismanagement.” http://www.snl.com/interactivex/article.aspx?id=12178252&KLPT=6&Printable=1.

Swint, B. Law and Medicine, “The Legal Aspects of the BP Deep Oil Spill” June 22, 2010. http://lawandmedicine.wordpress.com/2010/06/22/the-legal-aspects-of-the-bp-deep-oil-spill/.

Thomas, Pierre, Lisa A. Johes, Jack Cloherty, and Jason Ryan. “BP’s Dismal Safety Record.” (May 27, 2010). ABC News. http://abcnews.go.com/WN/bps-dismal-safety-record/story?id=10763042.

Yanke, Greg. BP’s Gulf Oil Spill: Where Ethics and Legal Advice Collide. (June 2, 2010).

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http://investmentrethink.blogspot.com/2010/06/bps-gulf-oil-spill-where-ethics-and.html, accessed February 12, 2011.

Zimmerman, Anne. “State Officials Step Up Criticism of BP Oil-Spill Fund.” (February 12, 2011). http://online.wsj.com/article/SB10001424052748704329104576138342199677406.html? KEYWORDS=BP+oil+department+of+justice.

Case 7 Mattel Toy Recalls

On August 2, 2007, NBC’s John Yang reported on the Today show a “global recall” from Fisher Price involving approximately a million toys. Presenting the initial reactions from stunned mothers, the report showed public anxiety over the risk to children’s safety. That recall would be only the first of three major recalls in that month for Mattel, the parent company of Fisher Price. There had been critical steps preceding these recalls and additional actions followed.

This case describes the actions taken by key stakeholders during Mattel’s three major recalls in August 2007, one of which was the largest recall ever initiated by the world’s largest toy company.

Where It Began According to Mattel executives, lead paint was discovered on some of its toys by a European retailer. On July 6, 2007, Mattel halted the production of toys at the manufacturing plant that produced the toys, while the company initiated an investigation. On July 18, Mattel gave a New York Times reporter a tour of the manufacturing facility in Guanyao, China, and its safety lab in Shenzhen, China. Mattel’s position during the investigation was that it was unaware of whether the issue was an isolated problem or if there was a larger- scale impact.

On July 26, Mattel executives received data that confirmed there was a safety risk in 83 of their products. This prompted them to contact retailers who were distributing the affected toys. The communication was made known to the public on August 1, 2007. According to Mattel, the issue was self-identified and the Consumer Product Safety Commission was made aware of the problem. David Allmark, general manager of Fisher Price, a division of Mattel, committed to vigorously investigate and learn from the problem through the following statement: “We are still concluding the investigation, how it happened. But there will be a dramatic investigation on how this happened. We will learn from this.” Allmark also indicated that the recall was accelerated, which gave Fisher Price the opportunity to quarantine approximately two-thirds of the 967,000 toys before they were sold to the public.

On August 8, Mattel identified the vendor responsible for the recalled toys. Mattel’s CEO, Robert Eckert, issued the following statement during an interview regarding the contract manufacturer that produced the toys: “This is a vendor plant with whom we’ve worked for 15 years; this isn’t somebody that just started making toys for us.” In an interview, Eckert stated: “They understand our regulations, they understand our program, and something went wrong. That hurts.” Mattel further communicated that they were unaware of whether the manufacturer had received materials from a certified supplier or if they had substituted materials from a non-certified supplier.

On August 11, 2007, the head of the manufacturing company linked to the Mattel recall of toys containing

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lead-based paint committed suicide. Zhang Shuhong, who led Lee Der Industrial Co., was found dead in his factory in China.

More Bad News On August 14, 2007, Mattel issued two additional recalls related to toys developed by Chinese contract manufacturers. The first action was in response to a second instance of lead paint being discovered in a die cast vehicle model marketed as a character from the movie Cars. This recall affected 436,000 toys, all of which were manufactured by a different company than Lee Der Industrial Co. According to Mattel, the products were manufactured between May and July of 2007 and were discovered as part of a systemic review of its toy manufacturing following the initial finding of lead paint.

The second action was taken to expand the scope of an earlier recall to address 18.2 million magnetic toys that had a “design flaw.” The recall included 63 types of toys that had been manufactured since 2002 and were confirmed by the Consumer Product Safety Commission as having been manufactured in China. This “design flaw” allowed small magnets to come apart from the toy with the risk of being swallowed by children. The first incident likely involved 7-year-old Paige Kostrzewski in July 2005. Kostrzewski had accidentally swallowed two magnets, which then gravitated to each other based on their magnetic pull while inside her intestines. Surgery revealed that the magnets had punctured holes in her intestines, and, according to her mother, “caused everything to just seep into her body.” Luckily, Kostrzewski recovered after a two-week hospital stay and follow-up treatment to address an infection. As a result, in November 2005 Mattel voluntarily recalled 4.4 million of the models, 2.5 million of which were in the United States.

With regard to the August 14 recalls, Nancy A. Nord of the Consumer Product Safety Commission indicated that no recent injuries had been reported for the products being recalled and that the action was “intentionally broad to prevent injuries.” However, previous recalls in November 2005 of the magnetic “design flaw” in Polly Pocket toys did include injuries. Specifically, 19 children have required surgery and one child has died since 2003. According to the New York Times article titled “Mattel Recalls 19 Million Toys Sent from China,” published on August 15, 2007, Mattel executives had stated the previous day that “in the long run [we] are trying to shift more of [our] toy production into factories [we] own and operate—and away from Chinese contractors and sub-contractors.” However, the same article clarified that the cause of the recall was based on a design flaw, and that while the Chinese manufacturers were producing the toys, the design of the product was developed by Mattel—who is ultimately responsible for the specification.

What Took So Long? Following the recalls, public speculation grew as to whether Mattel could have warned the public of these safety risks any earlier. Gerrick Johnson, an analyst with BMO Capital Markets, felt that Mattel could have: “You have to alert the public right away. I think it’s a public relations nightmare more than anything else.” Other analysts believe the company has been proactive and transparent. Sean McGowan, an analyst at Wedbush Morgan Securities Inc. felt Mattel would achieve a “long-term trust” as a result of it “being honest about investigating any other problems.”

According to the Wall Street Journal article titled “Safety Agency, Mattel Clash over Disclosures,” the Consumer Product Safety Commission has a policy that requires manufacturers to report “all claims of

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potentially hazardous product defects within 24 hours, with few exceptions.” In the case of the recall of 18 million magnetic toys, Mattel took months to collect and analyze data and reports before notifying the agency. Companies that produce similar toys as Mattel, with magnetic components, have worked with the Consumer Product Safety Commission since early 2006.

Based on the company’s history, this noncompliance represents a systemic practice. The company has been fined twice for what was described as “knowingly withholding information regarding problems that “created an unreasonable risk of serious injury or death.”

The first incident was related to a failure to report a fire hazard in a timely manner for its Power Wheels motorized toys, which were intended to be ridden by children aged two years or older. According to Ann Brown, chair of the Consumer Products Safety Commission, Mattel knew of the risk to children’s safety, however “did nothing for years.” The penalty for not reporting the hazard to the agency was assessed in 2001 after a recall of 10 million toys in 1998. According to the agency, there were approximately 150 reports of fires in the Power Wheels cars, as well as up to 10 times that number of complaints for overheating and other deficiencies prior to the company issuing the recall. The Consumer Product Safety Commission remained skeptical of Mattel’s handling of the Power Wheels recall, and initiated at least nine different investigations into whether problems had occurred following the recall.

The second fine was issued for a problem that occurred just a year after the Power Wheels penalty. In 2002, Mattel became aware of issues with its Little People Animal Sounds Farm. The complaints claimed that tiny screws used in the farm could become loose and pose the risk of a child accidentally swallowing them. In an investigation conducted by the U.S. government, it was determined that Mattel was made aware of 33 reports of this safety hazard—including one instance of a baby swallowing the screw, which required emergency surgery—before informing the Consumer Product Safety Commission. Mattel reached a settlement of $975,000 yet denied any wrongdoing. A recall of the product was initiated in April 2003.

Mattel is also under scrutiny for the more recent recalls involving the 18 million units of toys containing magnetic components. Between the initial Polly Pocket recall in November 2006 and the expanded recall of August 2007 for the same issue, Mattel received an additional 400 reports of similar magnetic hazards with different toys. It is not currently known how long Mattel waited before notifying the agency of these reports. The Consumer Product Safety Commission is currently investigating Mattel on the timeliness of its reporting practices and has not made that information public. However, when Mattel CEO Robert Eckert was asked in September 2007 of the date of disclosure for the magnetic component recall, he responded that “he couldn’t remember when the company brought the complaints about the magnets to the attention of authorities.”

While there have been specific cases of untimely disclosures from Mattel, there have also been comments issued from Eckert rationalizing Mattel’s untimely practice and justifying its position for waiting extended periods before notifying the agency and the public. Eckert has claimed that the company discloses problems on its own timetable, due to a belief that the regulatory requirements are “unreasonable.” Furthermore, Eckert claimed that Mattel should have the ability to evaluate any reports of safety hazards prior to reporting them to the agency or the public. The Consumer Product Safety Commission disagreed in a statement issued by the agency’s spokesperson, Julie Vallese: “It’s a statute; it’s clear.” In late 2007, the agency initiated a formal investigation into the timeliness of Mattel’s hazardous incidents reporting process to examine its more recent

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disclosures.

The Aftermath Following the lead paint recall on August 1, 2007, Mattel communicated that it would evaluate methods of addressing the problem. CEO Eckert indicated that this would include the possibility of reducing the amount of toys it produces through contract manufacturers. In what appeared to be an attempt at distancing the company from its Chinese contract manufacturers, Eckert issued the following statement: “I, like you, am deeply disturbed and disappointed by recent events. We were let down, and so we let you down.”

Despite comments that deflected a portion of the responsibility, Eckert also made statements following the second cycle of recalls issued on August 14 that attempted to appease consumers and regain their trust. In a full-page advertisement taken out in major newspapers such as the New York Times, USA Today, and the Wall Street Journal, Eckert stated: “Our long record of safety at Mattel is why we’re one of the most trusted names with parents, and I am confident that the actions we are taking now will maintain that trust.”

Following the initial comments issued by Mattel, Chinese manufacturers defended themselves against inferences that U.S. companies did not share the blame. The following statement was issued by China’s General Administration of Quality Supervision, Inspection, and Quarantine: “Chinese original equipment manufacturers were doing the job just as importers requested, and the toys conformed with the U.S. regulations and standards at the time of the production.” Specific to Mattel, the organization stated: “Mattel should improve its product design and supervision over product quality.”

In September 2007, Mattel seemed to agree with the Chinese position, and launched a public relations campaign to issue a formal apology to those in China whose reputations were affected. Mattel’s executive vice president for worldwide operations, Thomas Debrowski, met with the head of Chinese Product Safety, Li Changjiang, to issue the following statement: “Mattel takes full responsibility for these recalls and apologizes personally to you, the Chinese people, and all of our customers who received the toys.” Debrowski went on to specifically identify the design flaw as the root cause of the magnetic-component-based recall: “The vast majority of those products that were recalled were the result of a design flaw in Mattel’s design, not through a manufacturing flaw in China’s manufacturers.”

In addition, the company issued a formal statement which referenced the lead paint recall as well. The statement called the scope of the recall “overly inclusive, including toys that may not have had lead in paint in excess of the U.S. standards.” The statement continued, “The follow-up inspections also confirmed that part of the recalled toys complied with the U.S. standards.”

On September 12, 2007, a congressional hearing was held to attempt to identify what needed to be done to ensure that the types of recalls issued by Mattel do not continue. Congress assigned equal blame to all parties across the board, including Chinese safety standards, Mattel, and the Consumer Product Safety Commission.

Mattel recognized its level of responsibility through a response from Eckert: “We are by no means perfect.” Mattel continued that it would rectify the situation by taking steps such as better oversight of quality controls for its contract manufacturers and instituting its own laboratories for testing of its products.

The Consumer Product Safety Commission has conceded that it is understaffed. From 1974 to 2007, the agency’s employee number has been reduced from 800 to 400. What is even more alarming is that there is only one resource dedicated to the actual testing of toys.

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The Chinese manufacturers were also identified by Congress. Republican senator Sam Brownback of Kansas concluded that “‘Made in China’ has now become a warning label.” Brownback continued: “We’re seeing this in the charts and we’re seeing it in the products and it’s got to stop.”

While the fallout from the 2007 toy recalls will continue for Mattel and all parties involved, the result will likely be stricter policy, stronger internal quality controls, and improved subcontractor oversight, all of which will ultimately benefit consumer safety. Mattel Toys has not had a recall since this debacle.

Stricter Legislation In a response to the Mattel Toys recalls, the Consumer Product Safety Improvement Act of 2008 was passed. According to http://CPSC.gov:

The Consumer Product Safety Improvement Act (CPSIA) of 2008 requires that nearly all children’s products:

a) comply with all applicable children’s product safety rules;

b) are tested for compliance by a CPSC-accepted laboratory;

c) have a written Children’s Product Certificate (issued by the manufacturer or importer) that provides evidence of the product’s compliance; and

d) have permanent tracking information affixed to the product and its packaging.

The CPSIA also requires domestic manufacturers or importers of non-children’s products (cpsc.gov/generaluse) for which a consumer product safety rule, or any similar rule, ban, standard, or regulation under any law enforced by the CPSC is in effect, to issue a “General Certificate of Conformity” (cpsc.gov/gcc). The GCC must be based on a test of each product or a reasonable testing program.

Ironically, however, Mattel Toys received a reprieve on item b in this law. Mattel-owned laboratories have been deemed “firewalled third-party laboratories” and therefore, Mattel Toys can use their own laboratories for testing mandated by this Act.

Questions for Discussion 1. Identify the major stakeholders in the case. Who was responsible for what went wrong and why?

2. What are the ethical issues in the case, and for whom?

3. Do you think cross-cultural dynamics and misunderstandings played a role in the resulting problems in the case? Explain.

4. Was there a prodromal (precrisis) phase in this case? If so, identify this stage and the event(s) that explain it.

5. Which issues management framework would you suggest to best explain this case? Why?

6. Is it ethical that Mattel is partially exempt from the Consumer Product Safety Improvement Act of 2008? What signal and impact would this exemption send to and have on the industry?

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

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Casey, N., and A. Pastor. (September 4, 2007). Safety agency, Mattel clash over disclosures. WSJ.com. http://online.wsj.com/news/articles/SB118886996338816516, accessed February 3, 2014.

Chinese toy factory boss commits suicide over lead paint scandal. (August 13, 2007). http://www.theguardian.com/business/2007/aug/13/china, accessed February 3, 2014.

Consumer Product Safety Improvement Act. (October 26, 2013). CPSC.gov. http://www.cpsc.gov/en/Regulations-Laws--Standards/Statutes/The-Consumer-Product-Safety- Improvement-Act/, accessed January 7, 2014.

D’Innocenzio, A. (August 14, 2007). Mattel defends itself on safety of toys. WashingtonPost.com. http://www.washingtonpost.com/wp-dyn/content/article/2007/08/14/AR2007081401275.html, accessed February 3, 2014.

D’Innocenzio, A., and N. Metzler. (August 2, 2007). Lead paint leads to Fisher Price toy recall. WashingtonPost.com. http://www.washingtonpost.com/wp- dyn/content/article/2007/08/01/AR2007080102320.html, accessed February 3, 2014.

Fisher Price fined for keeping mum on toy risk. (March 1, 2007). CNNMoney.com. http://money.cnn.com/2007/03/01/news/companies/fisher_price/index.htm, accessed February 3, 2014.

Mattel apologizes to China over toy recall, says design flaw responsible for defects. (September 21, 2007). FoxNews.com. http://www.foxnews.com/story/2007/09/21/mattel-apologizes-to-china-over-toy-recall- says-design-flaw-responsible-for/, accessed February 3, 2014.

Mattel CEO admits it could have done a better job. (September 12, 2007). NBCNews.com. http://www.nbcnews.com/id/20738314/#.UsukD_QW2So, accessed January 7, 2014.

Mattel CEO: Rigorous standards after massive toy recall. (November 15, 2007). CNN.com. http://edition.cnn.com/2007/US/08/14/recall/index.html?section=cnn_latest, accessed February 3, 2014.

Mattel issues new massive China toy recall. (August 14, 2007). NBCNews.com. http://www.msnbc.msn.com/id/20254745/, accessed January 7, 2014.

Mattel, primary reason for toy safety laws, gets exempt from it. (October 26, 2013). Consumerist.com. http://consumerist.com/2009/08/28/mattel-primary-reason-for-toy-safety-law-gets-exempted-from-it/, accessed January 7, 2014.

Mom: Girl got sick after swallowing Mattel magnets. (August 15, 2007). CNN.com. http://edition.cnn.com/2007/US/08/14/toy.victim/index.html? eref=rss_latest&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+rss%2Fcnn_latest+ (RSS%3A+Most+Recent), accessed February 3, 2014.

Sass, R. Fisher Price Toys from China Recalled. Yahoo.Voices. http://voices.yahoo.com/fisher-price-toys- china-recalled-475864.html, accessed February 3, 2014.

Story, L. (August 2, 2007). Lead paint prompts Mattel to recall 967,000 toys. NYTimes.com. http://www.nytimes.com/2007/08/02/business/02toy.html, accessed January 7, 2014.

Story, L. (August 15, 2007). Mattel Recalls 19 Million Toys Sent From China. NYTimes.com. http://www.nytimes.com/2007/08/15/business/worldbusiness/15imports.html?pagewanted=all, accessed February 3, 2014.

Story, L., and D. Barbosa. (August 15, 2007). Mattel recalls 19 million toys sent from China. NYTimes.com.

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http://www.nytimes.com/2007/08/15/business/worldbusiness/15imports.html?pagewanted=all, accessed

January 7, 2014.

Case 8 Genetic Discrimination

Genetic discrimination is defined by the Centers for Disease Control and Prevention as “prejudice against those who have or are likely to develop an inherited disorder.” Advances in science make possible the determination of whether specific gene mutations exist, and the ability to discover the likelihood of an individual developing a disorder based on the existence of these mutations. These developments have created situations that concern the public: their privacy and possible employment livelihood. One of the major issues noted by the National Human Genome Research Institute (NHGRI) is the possibility that individuals who have taken this testing, and received positive results, will be turned down for health insurance or employment. This possibility will most probably be at issue depending on the political party and dominant political persuasion in power at both the national and state levels, as well as with the Supreme Court.

Many people with family histories or other factors that determine their susceptibility to certain diseases or disorders will have to make a decision about whether to be tested for the existence of certain genetic sequences or mutations. A major factor in this decision will be how this information will be used and who will be able to access the results. Patients may choose to refuse testing that could save their lives or improve their quality of life because they fear future discrimination. Employers with group insurance plans may want to know whether any of their employees are predisposed to a specific disorder. Insurance providers would also like to have the results of genetic testing to assist in underwriting policies. Both of these scenarios are likely to lead to discrimination against or exclusion of certain individuals for either employment or insurance coverage.

Human Genome Project One of the major catalysts of the advancement of genetic testing and the interpretability of genetic information was the Human Genome Project. The Human Genome Project began in 1990 as a joint effort between the National Institutes of Health and the United States Department of Energy. The project had six goals: (1) to identify all of the approximately 20,000–25,000 genes in human DNA; (2) to determine the sequence of the 3 billion chemical base pairs that make up human DNA; (3) to store this information in databases; (4) to improve tools for data analysis; (5) to transfer related technologies to the private sector; and (6) to address the ethical, legal, and social issues (ELSI) that may arise from the project. In addition to helping meet these goals, accomplishments leading to the project’s completion in 2003 have also contributed to major advances in scientific research and health care, primarily in the areas of medicine and genetic testing. Understanding the genes and sequences associated with common diseases has future implications for the entire human population, and will help to detect and possibly remedy disorders with more precise and targeted treatments.

Business Response Even before the entire human genome had been sequenced and published, and the implications of the discovery had been reviewed to establish guidelines and boundaries, biotechnology companies and others

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conducting scientific research had begun to develop uses for this new way of looking at human conditions and diseases. One question from this new branch of medical technology is who, if anyone, should own gene sequences and who has the rights to one’s genetic information? The issue of patenting gene sequences began long before the map of the human genome was completed and prior to consequences of granting these patents were able to be seriously examined. Companies had already begun to submit applications and receive approval for gene sequences that had some still unknown future use and potential profitability. According to Modern Drug Discovery contributor, Charles W. Schmidt, “[T]hose who seek patents usually want to protect research investments in one of two markets: gene- and protein-based drug development or diagnostic testing that searches for gene sequences linked to a given illness.” Even without strong federal regulations to guide the use and ownership of test data and eliminate the reluctance of people to agree to testing, companies developing genetic tests believed that patenting is necessary to protect an industry that is someday likely to generate millions in profits. Those in opposition to this view have trouble allowing ownership of something that is so personal. The major caveat to granting these patents is that it limits and slows the competition in the industry to find uses for and make advances in an already patented gene sequence. However, if there is no guarantee of exclusive ownership with the outcome of research, companies may choose not to move forward in research. The main issue of a significant business response to scientific advancements in genetic testing and gene sequencing is ensuring that laws and regulations keep up with technology and medical advances to prevent major abuse, ownership, and privacy issues.

Two following cases illustrate the evolution between 2001 and 2013 of EEOC (Equal Employment Opportunity Council) enforcement with regard to the genetic nondiscrimination Title II law.

The Burlington Northern and Santa Fe Railroad Case In February 2001, the Equal Employment Opportunity Commission (EEOC) filed a suit against the Burlington Northern and Santa Fe Railroad for secretly testing some of its employees. The genetic tests conducted had been developed by Athena Diagnostics in Worcester, Massachusetts, to detect a rare neuromuscular disorder, but Burlington Northern had been using them to validate and predict claims of carpal tunnel syndrome made by railroad workers. This incident, and others like it across the United States and Europe over the following years, raised concerns about the access and rights that employers have to their employees’ medical and genetic information. In this case, if Burlington Northern had discovered that employees with carpal tunnel syndrome had a genetic predisposition to the injury, the company could have claimed that the ailment was not job related and therefore denied payment of any medical bills. The EEOC filed its suit referencing the American Disabilities Act’s statement that “it is unlawful to conduct genetic testing with the intent to discriminate in the workplace.” Cases like this alerted lawmakers and activists to the growing concerns of discrimination in the workplace based on genetic information, and upon closer examination of the issue, revealed significant inconsistencies and gaps in the laws currently protecting the rights of employees.

The following lawsuit is the first initiated by the EEOC to effectively enforce GINA (Genetic Information Nondiscrimination Act of 2008). This case and the previous one summarized above (Burlington Northern Santa Fe Railway Company in Fort Worth, Texas, also for carpal tunnel syndrome in April 2001) emphasize the integral relationship between conduct prohibited under GINA and conduct prohibited under the

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Americans with Disabilities Act of 1990 as amended (42 U.S.C. §12101 et seq., Pub. L. 101-336). “GINA Title II prohibits both the acquisition and the use of genetic information in employment contexts.”

Rhonda Jones Rhonda Jones was a temporary memo clerk for Fabricut, Inc. Her temporary employment was running out when she applied for a permanent position with Fabricut. The Company at first offered her the position before violating the GINA Title II law when, as part of its pre-employment medical examination, it allegedly requested Rhonda Jones’ family history with regard to several specific conditions. “GINA defines ‘genetic information’ broadly to include family medical history.” Based on the pre-employment medical examination, Fabricut allegedly “required Jones to obtain additional testing to rule out carpal tunnel syndrome (CTS).” Even though later testing did rule out CTS, because of information she gave the company, Fabricut allegedly withdrew their job offer “on the basis of the pre-employment medical examination and its view that she had CTS.”

“As part of the consent decree settling the case, Fabricut agreed to pay $50,000 in damages. The company also agreed to undertake corrective actions that include posting a non-discrimination notice to employees. GINA requires that employers post a non-discrimination notice, and ‘Equal Employment Opportunity is the Law’ posters are readily available on the EEOC web site. Fabricut also agreed to have its employees responsible for hiring decisions undergo non-discrimination training and further agreed to distribute non- discrimination policies to its employees.”

Government Response to Advances in Genetic Testing and Discrimination As with most human resource issues, companies cannot always be trusted to act in the best interests of their individual employees, especially where privacy rights are concerned. Throughout the past two decades, the United States has drafted and passed several laws addressing the issue of discrimination by employers and private businesses, and protecting employees who speak out against discriminatory behavior. One of the most well-known regulations in this category is the Americans with Disabilities Act of 1990 (ADA), which prohibits discrimination in hiring on the basis of a disability. Similarly, Title VII of the Civil Rights Act of 1974 prohibits employment discrimination on the basis of race, color, religion, sex, and national origin. According to National Institutes of Health Consultant Robert B. Lanman, J.D., who was commissioned in May 2005 by the Secretary’s Advisory Committee on Genetics, Health, and Society to examine the adequacy of current laws protecting against genetic discrimination, these laws have not been updated to specifically relate to genetic discrimination. They offer protection to the extent that a genetic predisposition is common in a specific race or other group protected under the ADA or Civil Rights Act. In his executive summary, Lanman offered the example of Tay-Sachs disease, which is prevalent in persons of Eastern European Jewish ethnicity. Discrimination based on the genetic information of an individual that is unrelated to an individual’s race or ethnicity would not currently fall under the protection of the ADA or Civil Rights Act.

A major section of the pieced-together legislation that is currently protecting citizens from genetic discrimination is the Health Insurance Portability and Accountability Act of 1996 (HIPAA). This act prohibits insurance companies from (1) excluding members because of a preexisting condition that is based solely on the results of genetic testing or family history, (2) imposing eligibility requirements, or (3) restricting

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coverage based on genetic information. HIPAA does not restrict insurance companies from “requesting, purchasing, or otherwise obtaining genetic information about an individual,” and it does not restrict insurance companies from charging higher premiums or including this genetic information in the underwriting process.

The major problem with the state and federal regulations enacted to date is that genetic information is either not mentioned as a basis for discrimination, or it is not defined consistently throughout existing laws. The United States has two primary concerns: protecting the privacy of genetic information, and preventing discrimination based on genetic information—especially by employers and insurance companies. To address this issue, new federal regulation must cover gaps left in existing directives and account for future developments in the industry. The hodgepodge of existing laws combined with the inconsistency of state laws leaves too many loopholes to provide comprehensive protection for the general public.

The Genetic Information Nondiscrimination Act of 2005 On February 17, 2005, the Senate passed S.306, the “Genetic Information Nondiscrimination Act of 2005” with a vote of 98–0. The law was then passed on to the House of Representatives on March 10, 2005, where it was referred to the Subcommittee on Health. No further action has been taken, and the bill has not yet become a law. The proposed bill specifically “prohibits discrimination on the basis of genetic information with respect to health insurance and employment.” In addition, it amends the Employee Retirement Income Security Act of 1974 (ERISA) and the Public Health Service Act (PHSA) to include in their definitions of genetic information, any results of genetic testing and information pertaining to whether or not testing was performed. It would also disallow insurance companies from adjusting premiums based on the results of genetic testing, and prevents them from requiring genetic tests for subscribers or their dependents. The law concludes by covering fines and penalties and calls for a commission to review advances in science and technology and developments in genetic testing six years after the enactment of the law to make recommendations and amendments. This bill in 2005 was considered dead in the House of Representatives but was resubmitted for consideration in 2007.

One possible reason for not yet signing the Genetic Information Nondiscrimination Act is resistance from the Health Insurance Association of America (HIAA), and the claim that additional federal regulation is not needed. Opponents of the bill see sufficient restrictions in the current existing laws, and do not see the necessity of new legislation. However, Lanman’s report, “An Analysis of the Adequacy of Current Law in Protecting Against Genetic Discrimination in Health Insurance and Employment,” points out several shortcomings in the combined efforts to protect individuals from this type of discrimination. More importantly, future advances in bio- and medical technology need to be accounted for—and somewhat are— by this new proposed bill.

The bill’s consequences for employers and health insurance providers are focused around the idea of being informed. Since health insurance costs are rising, and they are likely to continue to rise due to advances in medicine, testing, and the ability to prolong life, employers must be more aware of the costs of hiring additional employees. Health insurance providers also must remain competitive in balancing the cost of providing health care coverage and mitigating the financial risk to themselves. If employers and health insurance providers are not privy to all of the information available concerning the insured parties, premiums will not be fair or balanced.

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While the health insurance companies will probably not come out ahead in this battle, some of their concerns should be taken into consideration if the bill is to be amended before it is passed. For example, one of the members of the Human Genome Project’s Committee for Ethical, Legal, and Social Implications, Nancy L. Fisher, MD, asks if genetic testing and health insurance can coexist. Fisher’s main concern is the definition of terms like “preexisting condition” and “genetic information,” and how new laws will affect not only the health insurance industry, and its ability to survive, but also the financial cost for taxpayers if “society decides that everyone is entitled to comprehensive health care.”

May 21, 2008: The Genetic Information Nondiscrimination Act The Genetic Information Nondiscrimination Act (GINA), referred to as “the first civil rights legislation of the 21st century” was reintroduced to Congress and became a law on May 21, 2008. The law prevents employers and insurers from using genetic data against individuals and employees. The law states that (1) employers cannot deny a person a job because s/he is genetically predisposed to develop a particular disease or condition; (2) insurers cannot use an individual’s genetic profile to deny coverage or raise his/her premiums; and (3) now protected, an individual benefits from medical genetic testing without concern with regard to results being used against him/her. However, the law does not protect third parties from using an individual’s genetic results, including the military. It is also plausible that an individual may still be at risk of being discriminated against with regard to health insurance.

Title II GINA Law now As stated earlier, the two cases presented, 2001 and 2013, illustrate the difference in EEOC’s effectiveness in enforcing the Title II GINA law. Given the history of disputes over genetic testing, ownership and commercialization of genetic tests and research results, and employees at risk and who may or may not have a preexisting genetic condition, at present, this federal law appears to be serving its intended purpose.

Questions for Discussion 1. What is genetic discrimination, and why is it an issue?

2. Who would benefit and who would be at risk if genetic testing and the results of such tests were legal and could be required of employees? Explain.

3. Explain the ethical principle(s) that could be used to (a) argue against genetic testing of employees and (b) argue for genetic testing.

4. Explain your position on the issue of genetic testing by employers.

5. How does the outcome of Rhonda Jones’ case affect employers? Is there now a fair balance between the Title II GINA law and employers? Explain.

Sources This case was written by Jaclyn Publicover and Bentley University, under the direction of Joseph W. Weiss,

for classroom discussion, and not for any type of official or unofficial decision making by personnel or management. Sources cited and used in the case are in the public domain. This case was developed from material contained in the following sources:

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About the Human Genome Project: What is the human genome project? (December 7, 2005). Genomics.energy.gov. http://www.ornl.gov/sci/techresources/Human_Genome/project/about.shtml, accessed August 5, 2006.

Askari, E. (October 3, 2002). Genetic revolution opens door to discrimination by insurance companies. Knight Ridder Tribune Business News. ABI/INFORM Research database, accessed August 5, 2006.

Bates, S. (July 1, 2001). Science friction. HR Magazine, 34–44. ABI/INFORM Research database, accessed July 30, 2006.

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GovTrack.us. www.govtrack.us.

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H.R. 1227: Genetic Information Nondiscrimination Act of 2005 (Introduced in House). Sec. 208. Disparate Impact. The Library of Congress. http://thomas.loc.gov/cgi-bin/query/F? c109:3:./temp/~c109cK3bQY:e89590, accessed August 6, 2006.

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Human genome project information. U.S. Department of Energy. http://www.ornl.gov/sci/techresources/Human_Genome/home.shtml.

Keim, B. (May 21, 2008). Genetic discrimination by insurers, employers becomes a crime. Wired Science. http://blog.wired.com/wiredscience/2008/05/the-genetic-inf.html.

Kipper, S. (July 23, 2002). The Proposed Genetic Discrimination Model Act (letter). Health Insurance Association of America. http://www.ncoil.org/hearings/HIAATestimony.doc, accessed July 29, 2006.

Lanman, J.D., MD (May 2005). An analysis of the adequacy of current law in protecting against genetic discrimination in health insurance and employment. http://www4.od.nih.gov/oba/sacghs/reports/legal_analysis_May2005.pdf, accessed August 5, 2006.

Schmidt, C. W. (May 2001). Cashing in on gene sequences. Modern Drug Discovery, (4)5, 73–74. http://pubs.acs.org/subscribe/journals/mdd/v04/i05/html/05money.html, accessed August 5, 2006.

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Notes

1. Oil spill in the Gulf. (2013). News-Basics.com. http://news-basics.com/2010/oil-spill-in-the-gulf/; Office of the Press Secretary, BP (1996–2013); Deepwater Horizon accident and response (n.d.). BP.com. http://www.bp.com/en/global/corporate/gulf-of-mexico-restoration/deepwater-horizon-accident-and- response.html, accessed January 6, 2014; Remarks by the president to the nation on the BP oil spill. (June 15, 2010). http://www.whitehouse.gov/the-press-office/remarks-president-nation-bp-oil-spill, accessed January 6, 2014.

2. Thomas, Pierre, Johes, Lisa A., Cloherty, Jack, and Ryan, Jason. (May 27, 2010). BP’s dismal safety record. ABC News. http://abcnews.go.com/WN/bps-dismal-safety-record/story?id=10763042, accessed January 6, 2014; Martin, A. (September 14, 2011). BP mostly, but not entirely, to blame for gulf spill— national. Atlantic Wire. http://www.theatlanticwire.com/national/2011/09/bp-mostly-not-entirely-blame- gulf-spill/42470/, accessed January 6, 2014.

3. BP oil spill timeline. (2010). Guardian. http://www.theguardian.com/environment/2010/jun/29/bp- oil-spill-timeline-deepwater-horizon, accessed January 6, 2014; Deepwater Horizon oil spill. (October 22, 2013). Wikipedia. http://en.wikipedia.org/wiki/Deepwater_Horizon_oil_spill#Health_consequences, accessed January 6, 2014.

4. Ibid.

5. Krauss, C. (2013). In BP trial, the amount of oil lost is at issue. New York Times. http://www.nytimes.com/2013/09/30/business/energy-environment/bp-trial-in-2nd-phase-to-set-amount- of-oil-spilled.html?pagewanted=1&_r=0, accessed January 6, 2014.

6. Ibid.

7. Hammer, D. (2013). Oil spill trial: Plaintiffs say BP lied about size of oil spill; BP says response “extraordinary.” Eyewitness News. http://www.wwltv.com/news/BP-225810151.html, accessed January 6, 2014.

8. Oil spill in the Gulf. (2013).

9. Ibid.

10. Ibid.

11. Scheck, J., and Williams, S. (October 24, 2013). BP ramps up drilling after asset sales, legal costs. Wall Street Journal. http://online.wsj.com/news/articles/SB10001424052702304384104579139632100312234, accessed January 6, 2014.

12. Ibid.

13. Ibid.

14. Freeman, R. E., et al. (2010). Stakeholder theory: The state of the art, 39. Cambridge, England: Cambridge University Press.

15. Jones, T. (April 1995). Instrumental stakeholder theory: A synthesis of ethics and economics. Academy of Management Review, 20(2), 404. Also see Freeman, R., et al. (2010). Stakeholder theory: The state of the art, 63. Cambridge, England: Cambridge University Press; and Hasnas, J. (2013). Whither stakeholder theory? A guide for the perplexed revisited. Journal of Business Ethics, 112(1), 47–57.

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16. Ibid.

17. Clarkson, M. (ed.) (1998). The corporation and its stakeholders: Classic and contemporary readings. Toronto: University of Toronto Press.

18. Hasnas, J. (2013). Whither stakeholder theory? A guide for the perplexed revisited. Journal of Business Ethics, 112(1), 47–57.

19. Freeman, R. E. (1984). Strategic management: A stakeholder approach, 25. Boston: Pitman.

20. Koenig, T. and Rustad, M. (April 25, 2012). Reconceptualizing the BP Oil Spill as Parens Patriae Products Liability. Houston Law Review, 291–391. http://www.aals.org/midyear2012/TortsPlenaryHowtoTeachDisasterasPartofTortsCurriculumRustadHouston- LawArticle.pdf, accessed February 6, 2014.

21. Berman, S., Wicks, A., Otha, S., and Jones, T. (1999). Does stakeholder orientation matter? The relationship between stakeholder management models and firm financial performance. Academy of Management Journal, 42, 488–506; Ogden, S., and Watson, R. (1999). Corporate performance and stakeholder management: Balancing shareholder and customer interests in the U.K. privatized water industry. Academy of Management Journal, 42, 526–538.

22. Freeman, R. E. (1999). Divergent stakeholder theory. Academy of Management Review, 24, 233–236.

23. Preston, L., and Sapienza, H. (1990). Stakeholder management and corporate performance. Journal of Behavioral Economics, 19(4), 373. See also Jawahar, M., and Mclaughlin, G. (July 2001). Toward a descriptive stakeholder theory: An organizational life cycle approach. Academy of Management Review, 26(3), 397–414.

24. For a critique of the stakeholder theory, see Reed, D. (1999). Stakeholder management theory: A critical theory perspective. Business Ethics Quarterly, 9(3), 453–483.

25. This section used as a resource, Friedman, A., and Miles, S. (2006). Stakeholders, theory and practice, 119–148. Oxford: Oxford University Press.

26. Marcoux, A. (2000). Business ethics gone wrong. Cato Policy Report, 22(3). Washington, D.C: The Cato Institute; Argenti, J. (1993). Your organization: What is it for? New York: McGraw-Hill; Sternberg, E. (1994). Just business: Business ethics in action. Boston: Little, Brown.

27. Froud, J., Haslam, C., Suckdev, J., and Williams, K. (1996). Stakeholder economy? From utility privatisation to new labour. Capital and Class, 60, 119–134; Friedman and Miles, op. cit.

28. Key, S. (1999). Toward a new theory of the firm: A critique of stakeholder “theory.” Management Decision, 37(4), 319.

29. Mitchell, R. B., Agle, B. R., and Wood, D. (1997). Toward a theory of stakeholder identification and salience: Defining the principle of who and what really counts. Academy of Management Review, 22(4), 853– 886. See also Key, op. cit., p. 2.

30. Bowie, N., and Duska, R. (1991). Business ethics, 2nd ed. Englewood Cliffs, NJ: Prentice Hall; Frederick, W. (1994). From CSR1 to CSR2: The maturing of business and society thought. Business & Society, 3(2), 150–166; Bowen, H. (1953). Social responsibilities of businessmen. New York: Harper.

31. Frederick, W., et al. (1988). Business and society: Corporate strategy, public policy, ethics, 6th ed. New York: McGraw-Hill.

32. Freeman (1984), op. cit.

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33. Savage, G., Nix, T., Whitehead, C., and Blair, J. (1991). Strategies for assessing and managing organizational stakeholders. Academy of Management Executive, 5(2), 61–75.

34. Andriof, J., Waddock, S., Husted, B., Rahman, S. (eds.) (2002). Unfolding stakeholder thinking: Theory, responsibility and engagement. Sheffield, U.K.: Greenleaf Publishing Ltd.

35. Barnes-Slater, C., and Ford, J. Measuring conflict: Both the hidden costs and the benefits of conflict management interventions. LawMemo.com. http://www.lawmemo.com/articles/measuring.htm, accessed March 13, 2012; Lynch, D. (May 1997). “Unresolved conflicts affect the bottom line—effects of conflicts on productivity.” HR Magazine. http://www.findarticles.com/p/articles/mi_m3495/is_n5_v42/ai_19569995, accessed March 13, 2012.

36. U.S. Department of Commerce. (February 16, 2012). Quarterly retail e-commerce sales 4th quarter 2011. U.S. Census Bureau News. http://www.census.gov/retail/mrts/www/data/pdf/ec_current.pdf, accessed March 13, 2012; B2B e-commerce poised for explosion according to American Arbitration Association study; survey of Fortune 1000 uncovers need for e-commerce rules. (May 17, 2001). Business Wire. Available at http://www.thefreelibrary.com/B2B+E- Commerce+Poised+for+Explosion+According+to+American+Arbitration...-a074627151, accessed January 6, 2014.

37. Alternate dispute resolution. (n.d.) NYCourts.gov. http://www.courts.state.ny.us/ip/adr/What_Is_ADR.shtml, accessed March 13, 2012.

38. Barr, S. (June 16, 2004). Congress tackles outsourcing issues at Defense, IRS, Homeland Security. Washington Post, B2. http://www.highbeam.com/doc/1P2-184761.html, accessed March 13, 2012; Wilkie, Christina. (2013). Iraq war contractors fight on against lawsuits, investigations, fines. Huffington Post. http://www.huffingtonpost.com/2013/03/20/iraq-war-contractors_n_2901100.html, accessed January 6, 2014.

39. Morris, C. (May 2002). Definitions in the field of dispute resolution and conflict transformation. Peacemakers Trust. http://www.peacemakers.ca/publications/ADRdefinitions.html, accessed March 13, 2012.

40. Ibid.

41. Ibid.

42. Fisher, R., Ury, W., and Patton, B. (1991). Getting to yes: Negotiating agreement without giving in, 2nd ed., 11. New York: Penguin Books.

43. It is beyond the scope of this chapter to go into further detail on these methods. The following readings are suggested: Bush, R., and Folger, J. (1994). The promise of mediation: Responding to conflict through empowerment and recognition. San Francisco, CA: Jossey-Bass; Cobb, S. (1994); A narrative perspective on mediation: Towards the materialization of the “storytelling” metaphor. In Cobb, S. New directions in mediation: Communication research and perspectives, 48–66, Folger, J. and Jones, T. eds. Thousand Oaks, CA: Sage; Cormick G. et al. (1997). Building consensus for a sustainable future: Putting principles into practice. Ottawa, ON: National Round Table on the Environment and Economy; Fisher et al (1991), op. cit.; Folger, J., and Bush, R. (2001). Designing mediation: Approaches to training and practice within a transformative framework. New York: The Institute for the Study of Conflict Transformation.

44. Chinn, G. (2008). Ethical Issues of the Space Shuttle Challenger Disaster Team 2.

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https://wikispaces.psu.edu/display/STS245/Ethical+Issues+of+the+Space+Shuttle+Challenger+Disaster+Team+2

45. Duska, R. (2005). Ethics in financial services. Adapted from an article by James Clarke in Hartman, L. (ed.) (2005). Perspectives in business ethics, 3rd ed., 631. Boston: McGraw-Hill.

46. Wartick, S., and Heugens, P. (Spring 2003). Guest editorial, future directions of issues management. Corporate Reputation Review, 6(1), 7–18.

47. Clarification of terms. (n.d.). Excerpted from a speech by Teresa Yancey Crane, founder of the Issue Management Council. http://issuemanagement.org/learnmore/clarification-of-terms/, accessed March 13, 2012.

48. Wartick and Heugens, op. cit., p.15.

49. Ibid.

50. Mothers against Drunk Driving. (n.d.) History of MADD. http://www.madd.org/about- us/history/cari-lightner-and-laura-lamb-story.pdf, accessed March 13, 2012; MADD successfully realized its goal by reducing alcohol-related deaths by 20% in 1997; see http://www.activistcash.com/organization_overview.cfm/oid/17.

51. Mahon, J. F, and Heugens, P. Who’s on first—Issues or stakeholder management? (2002). In Windsor, D., and Welcomer, S. (eds.), Proceedings of the Thirteenth Annual Meeting of the International Association for Business and Society. Oronto, ME: International Association for Business and Society.

52. Bigelow, B., Fahey, L., and Mahon, J. (1991). Political strategy and issues evolution: A framework for analysis and action. In Paul, K. (ed.), Contemporary issues in business ethics and politics, 1–26. Lewiston, NY: Edwin Mellen.

53. Jones, T. (1991). Ethical decision making by individuals in organizations: An issue-contingent model. Academy of Management Review, 16(2), 366–395.

54. Ibid.

55. King, W. (1987). Strategic issue management. In King, W., and Cleland, D. (eds.), Strategic planning and management handbook, 256. New York: Van Nostrand Reinhold; Buchholz, R. (1982). Education for public issues management: Key insights from a survey of top practitioners. Public Affairs Review, 3, 65–76; Brown, J. (1979). This business of issues: Coping with the company’s environment. New York: Conference Board. Also see Carroll, A. B. and Bulchholtz, A. (2003). Business and Society: Ethics and Stakeholder Management, 5th ed. Cincinnati: South-Western.

56. Heath, R. (November 2002). Issues management: Its past, present and future. Journal of Public Affairs, 2(4), 209.

57. Marx, T. (1986). Integrating public affairs and strategic planning. California Management Review, 29(1), 141–147; and Power, P. (August 16, 2004). Calm in a crisis. Lawyer. http://www.thelawyer.com/calm- in-a-crisis/111565.article, accessed November 4, 2013.

58. Bryant, M., and Hunter, T. (2010). BP and public issues (mis)management. Ivey Business Journal. http://iveybusinessjournal.com/topics/leadership/bp-and-public-issues-mismanagement#.Unf_n_mTySo, accessed November 4, 2013.

59. Ibid.

60. Ibid. Also see Marx, T. (1986). Integrating public affairs and strategic planning. California

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Management Review, 29(1), 141–147; and Power, P. (August 16, 2004). Calm in a crisis. Lawyer. http://www.thelawyer.com/calm-in-a-crisis/111565.article, accessed November 4, 2013.

61. Listverse. (March 20, 2008). 10 books that changed America. http://listverse.com/2008/03/20/10- books-that-changed-america/.

62. Wald, M., and Baker, A. (January 18, 2009). 1549 to Tower: We’re gonna end up in the Hudson. New York Times, A29; Gittens, H., Dienst, J., and Hogarty, D. (January 15, 2009). Plane crashes into Hudson: Hero pilot saves everyone. NBC New York. http://www.nbcnewyork.com/news/archive/Plane-Crashes-in- Hudson-River.html; Olshan, J., and Livingston, I. (January 17, 2009). Quiet air hero is Captain America. New York Post. US Airways Flight 1549 (n.d.). Wikpedia. http://en.wikipedia.org/wiki/US_Airways_Flight_1549, accessed October 27, 2013.

63. Ibid.

64. See Marx, op. cit.

65. Ibid.

66. Bailey, Jeff. (February 19, 2007). JetBlue’s C.E.O. is “mortified” after fliers are stranded. New York Times. http://www.nytimes.com/2007/02/19/business/19jetblue.html?pagewanted=1&_r=2&ref=todayspaper, accessed March 13, 2012.

67. Matthews, J. B., Goodpaster, K., and Nash, L. (1985). Policies and persons: A casebook in business ethics. New York: McGraw-Hill.

68. Prbookgroup. (April 13, 2009). Case study: Tylenol poisonings. http://crisiscomm.wordpress.com/2009/04/13/case-study-tylenol-poisonings/, accessed November 6, 2013.

69. Ibid.

70. Mitroff, I., Shrivastava, P., and Firdaus, U. (1987). Effective crisis management. Academy of Management Executive, 1(7), 283–292.

71. Power, op. cit.

72. Wartick, S., and Rude, R. (1986). Issues management: Fad or function? California Management Review, 29(1), 124–140.

73. Key, op. cit.

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4 THE CORPORATION AND EXTERNAL

STAKEHOLDERS Corporate Governance: From the Boardroom to the Marketplace

4.1 Managing Corporate Social Responsibility in the Marketplace

Ethical Insight 4.1

Point/CounterPoint

4.2 Managing Corporate Responsibility with External Stakeholders

Ethical Insight 4.2

4.3 Managing and Balancing Corporate Governance, Compliance, and Regulation

Ethical Insight 4.3

4.4 The Role of Law and Regulatory Agencies and Corporate Compliance

4.5 Managing External Issues and Crises: Lessons from the Past (Back to the Future?)

Chapter Summary

Questions

Exercises

Real-Time Ethical Dilemma

Cases

9. Conscious Capitalism: What Is It? Why Do We Need It? Does It Work?

10. Goldman Sachs: Hedging a Bet and Defrauding Investors

11. Google Books

Notes

OPENING CASE

When you read “The TJX Companies, Inc. V.A.L.U.E. Corporate Social Responsibility Report 2013” and see Carol Meyrowitz’s letter, you would never believe the crisis that rocked the company in 2008 ever happened. This case illustrates one difference between companies that learn, change, and grow, and those that do not.

TJX seems to practice its VALUE proposition, “Vendor Social Compliance, Attention to Governance, Leveraging Differences, United With Our Communities and Environmental Initiatives.” Forbes reported in 2013 that the TJX Companies (NYSE: TJX) has taken over the #95 spot from Capital One Financial Corp (NYSE: COF). Although the company, as with several other retailers, could improve its customer satisfaction

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index score, it has recovered from the 2008 crisis recounted here.1

On January 17, 2008, TJX Companies, Inc., a leading retailer in the field of clothing and home fashions that operates stores domestically and internationally, announced that the organization had experienced an

unauthorized intrusion of its computer systems.2 Customer information, including credit card, debit card, and driver’s license numbers, had been compromised. This intrusion had been discovered in December of 2006, and it was thought that data and information as far back as 2003 had been accessed and/or stolen. At the time, approximately 45.6 million credit card numbers had been stolen. In October of 2007, the number rose

to 94 million accounts.3 This is one of the largest credit card thefts or unauthorized intrusions in recent history.

Because of the lax security systems at TJX, the hackers had an open doorway to the company’s entire computer system. In 2005, hackers used a laptop outside of one of TJX’s stores in Minnesota and easily cracked the code to enter into the Wi-Fi network. Once in, the hackers were able to access customer databases at the corporate headquarters in Framingham, Massachusetts. The hackers gained access to millions of credit card and debit card numbers, information on refund transactions, and customer addresses and phone

numbers. The hackers reportedly used the stolen information to purchase over $8 million in merchandise.4

TJX used an outdated WEP (wired equivalent privacy) to secure its networks. In 2001, hackers were able to break the code of WEP, which made TJX highly vulnerable to an intrusion. (Similar data breaches have occurred within the past few years at the firms ChoicePoint and CardSystems Solutions.) In August of 2007, a Ukrainian man, Maksym Yastremskiy, was arrested in Turkey as a potential suspect in the TJX case. According to police officials, Yastremskiy is “one of the world’s important and well-known computer

pirates.”5 He led two other men in the scheme.6

Even though the intrusion was discovered in December of 2006, the company did not publicize it until a month later. Consumers felt that they should have been notified of the breach once it was discovered. However, TJX complied with law enforcement and kept the information confidential until it was told it could notify the public. Retail companies such as TJX that use credit card processing are required to comply with the Payment Card Industry Data Security Standard (PCI DSS). The PCI DSS is a set of requirements with the purpose of maximizing the security of credit and debit card transactions. A majority of firms have not complied with this standard, as was the case with TJX.

A number of stakeholders were involved in this break-in: consumers, who were put at great risk; banks; TJX (its shareholders, management, employees, and other internal parties who did business with and were invested in the firm); the credit card companies; the law enforcement and justice systems; the public; other retail firms; and the media, to name a few. Chief executive officer (CEO) Carol Meyrowitz took an active role in informing the public in statements on the company’s web sites and through the media about the company’s responsibility and obligations to its stakeholders during and after the investigation. TJX also contacted various agencies to help with the investigation. A web site and hotline were established to answer customer questions and concerns.

The intrusion cost TJX approximately $118 million in after-tax cash charges and $21 million in future charges. Although TJX incurred substantial legal, reimbursement, and improvement costs, the company’s pretax sales were not negatively affected. Sales during the second quarter of fiscal year 2008 increased

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compared to second quarter sales from fiscal year 2007.7

At the end of 2007, TJX reached a settlement agreement with six banks and bankers’ associations in

response to a class action lawsuit against the company.8 In the spring of 2008, TJX settled in separate agreements with Visa ($40.9 million with 80% acceptance) and MasterCard International (a maximum of $24 million with 90% minimum acceptance). There was almost full acceptance of the alternative recovery offers by

eligible MasterCard accounts.9 Note that those issuers who accept the agreements and terms “release and indemnify TJX and its acquiring banks on their claims, the claims of their affiliated issuers, and those of their sponsored issuers as MasterCard issuers related to the intrusion. That includes claims in putative class actions

in federal and Massachusetts state courts.”10

Affected customers were reimbursed for costs such as replacing their driver’s licenses and other forms of identification and were offered vouchers at TJX stores and free monitoring of their credit cards for three years.

Customer discontent was reportedly expressed after the intrusion; however, customer loyalty returned,11 as was evidenced in sales numbers.

4.1 Managing Corporate Social Responsibility in the Marketplace

Corporate social responsibility (CSR) involves an organization’s duty and obligation to respond to its

stakeholders’ and the stockholders’ economic, legal, ethical, and philanthropic concerns and issues.12 This definition encompasses both the social concerns of stakeholders and the economic and corporate interests of corporations and their stockholders. Generally, society cannot function without the economic, social, and philanthropic benefits that corporations provide. Leaders in corporations who use a stakeholder approach commit to serving broader goals, in addition to economic and financial interests, of those whom they serve, including the public.

Managing CSR in the marketplace with multiple stakeholder interests is not easy. As discussed in Chapter 2, ethics at the personal and professional levels requires reasoned and principled thinking, as well as creativity and courage. When ethics and social responsibility escalate to the corporate level, where companies must make decisions that affect governments, competitors, communities, stockholders, suppliers, distributors, the public, and customers (who are also consumers), moral issues increase in complexity, as this chapter’s opening case illustrates. For organizational leaders and professionals, the moral locus of authority involves not only individual conscience but also corporate governance and laws, collective values, and consequences that affect millions of people locally, regionally, and globally. Patagonia, for example, is a company that conducts its outdoor apparel business with a 360-degree focus of responsibility. The company takes responsibility for the actions of all members of its supply chain and for impacts on the environment. This attitude is integrated into the culture of the company, its organizational structure (with a new Director of Social/Environmental Responsibility position created in 2010), and its relationship with suppliers. It has developed a “contractor relationship assessment,” a scorecard system that is used to rate the performance of each factory. Patagonia, along with many other companies, now recognizes a broader scope of accountability and the interests of

multiple stakeholders.13

In the opening case, the TJX executives had to deal not only with their own customers, but with banks (in a class action suit), credit card companies, the media, competitors, and a network of suppliers and distributors

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—as well as their own reputation. What may have seemed like a routine technical security problem turned into the largest-known credit card theft/unauthorized intrusion in history. Had the CEO not stepped in and become a responsible spokesperson and decision maker for the company, customers may not have responded in kind.

The basis of CSR in the marketplace begins with a question: What is the philosophical and ethical context in which CSR and ethical decisions are made? For example, not everyone is convinced that businesses should be as concerned about ethics and social responsibility as they are about profits. Many believe that ethics and social responsibility are important, but not as important as a corporation’s performance. This classical debate —and seeming dichotomy—between performance, profitability, and “doing the right thing” continues to surface not only with regard to CSR, but also in political parties and debates over personal and professional ethics. The roots of CSR extend to the topic of what a “free market” is and how corporations should operate in free markets. Stated another way, does the market sufficiently discipline and weed out inefficient “bad apples” and wrongdoers, thereby saving corporations the costs of having to support “soft” ethics programs?

Ethical Insight 4.1 Ethical Issues in the TJX Case

After reading the opening case, answer and be prepared to discuss in class these questions:

1. If you had been assigned to investigate, report, and offer recommendations from this case, how would you respond to this question: Who was to blame for the security breach and why?

2. Which factor, in your judgment, was the most important contributor to TJX’s security breach: the lack of a comprehensive security policy and legal procedures OR issues with the company’s corporate leadership and culture? Explain.

3. What will work best for TJX in this case: discipline from the legal and judicial system OR required changes in the company’s leadership and culture regarding security? Explain.

The type of information security breach experienced by TJX has become almost commonplace for large organizations, particularly with business trends toward electronic data collection and storage and the increasing complexity of technology. Corporations now have an ethical responsibility for preventive, detective, and corrective actions regarding the protection of stakeholder information. The following is a list of the top

ten “massive security breaches” of recent years:14

1. TJX (February 2007). “Thieves had stolen information on possibly tens of millions of credit and debit cards. The company first thought its systems had been compromised for about eight months, but it turned out the vulnerability might have lasted for almost a year longer than that. The incident wound up costing TJX millions of dollars paid to the Federal Trade Commission (FTC), credit card companies, banks, and customers. Eleven hackers were eventually arrested for the break-in. Security breaches have only increased in scope and frequency in recent years, as more businesses store their data in digital files and thieves become increasingly sophisticated in how they gain access to those files.”

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2. CardSystems Solutions (June 2005). “MasterCard announced that up to 40 million credit card holders were at risk of having their data stolen—and 200,000 definitely had. CardSystems Solutions had improperly stored the card data, unencrypted, in order to do research on the transactions.”

3. Heartland Payment Systems (2009). “The company revealed that tens of millions of transactions might have been compromised. The company’s computers were infected with malware.”

4. Bank of New York Mellon (February 2008). This was an instance of “a physical security breach rather than an electronic one, the Bank of New York Mellon simply lost a tape. The company sent 10 unencrypted backup tapes to a storage facility. When the storage firm’s truck arrived at the facility, however, only nine tapes were still on board. The missing tape contained social security numbers and bank account information on 4.5 million customers.”

5. Hannaford Brothers (March 2008). “Hackers had gained access to more than 4.2 million credit card transactions. By the time word got out, more than 1,800 of the credit card numbers had already been used at company stores. The breach resulted in two class action lawsuits on behalf of customers.”

6. HM Revenue and Customs (November 2007). “Two computer discs holding personal information on 25 million British citizens had been lost in the mail. The discs had been sent by courier via the HMRC’s internal mail system.”

7. U.S. Department of Veterans Affairs (2009). The agency sent a troubled hard drive out for repair without first erasing the unencrypted data contained on the disc—personal information for about 76 million veterans.

8. Certegy (2007). An employee of this subsidiary of Fidelity National Information Service “had been stealing customer records and selling them to a data broker. The records included credit card, bank account, and other personal information, and Certegy estimated the breach affected 8.5 million customers. Certegy wound up out nearly $1M in donations and court costs.”

9. Oklahoma Department of Human Services (April 2009). Someone removed a laptop containing unencrypted client records from the office. “They left the laptop in their car, someone broke into the car, and the names, social security number, and other sensitive information on about a million Oklahomans went missing.”

10. Health Net (May 2009). “The Connecticut health care provider reported that an unencrypted portable storage device was missing, containing seven years’ worth of financial and medical information on 1.5 million customers. The Connecticut attorney general promptly filed suit. Health Net settled for $250,000.”

Free-Market Theory and Corporate Social Responsibility Free-market theory holds that the primary aim of business is to make a profit. As far as business obligations toward consumers, this view assumes an equal balance of power, knowledge, and sophistication of choice in the buying and selling of products and services. If businesses deliver what customers want, customers buy. Customers have the freedom and wisdom to select what they want and to reject what they do not want. Faulty or undesirable products should not sell. If businesses do not sell their products or services, it is their own fault. The marketplace is an arena of arbitration. Consumers and corporations are protected and regulated— according to this view—by Adam Smith’s (one of the modern founders of capitalism) notion of the “invisible hand.” What would have happened to TJX customers without regulation?

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Several scholars argue that Adam Smith’s “invisible hand” view is not completely oriented toward stockholders. For example, Eugene Szwajkowski argues that “Smith’s viewpoint is most accurately positioned squarely between those who contend firms should act out of self-interest and those who believe corporations should be do-gooders. This middle ground is actually the stakeholder perspective. That is, stakeholders are in essence the market in all its forms. They determine what is a fair price, what is a successful product, what is an unacceptable strategy, what is intolerable discrimination. The mechanisms for these determinations include

purchase transactions, supplier contracts, government regulation, and public pressure.”15 Szwajkowski continues, “Our own empirical research has clearly shown that employee relations and product quality and

safety are the most significant and reliable predictors of corporate reputation.”16

Economist and free-market advocate Milton Friedman is noted for a philosophical view summarized in the following quote: “The basic mission of business [is] thus to produce goods and services at a profit, and in

doing this, business [is] making its maximum contribution to society and, in fact, being socially responsible.”17

Friedman more recently stated that even with the recent corporate scandals, the market is a more effective way

of controlling and deterring individual wrongdoers than are new laws and regulations.18

Free markets require certain conditions for business activity to help society. These conditions include (1) minimal moral restraints to enable businesses to operate and prevent illegal activities such as theft, fraud, and blackmail; (2) full competitiveness with entry and exit; (3) relevant information needed to transact business available to everyone; and (4) accurate reflection of all production costs in the prices that consumers and firms pay (including the costs of job-related accidents, injuries from unsafe products, and externalities, which are spillover costs that are not paid by manufacturers or companies, but that consumers and taxpayers often pay, e.g., pollution costs). Legal and ethical problems arise when some or all of these conditions are violated, as in this chapter’s opening case.

Problems with the Free-Market Theory Although the free-market theory continues to have its advocates, controversy also exists regarding its assumptions about stakeholders and consumer-business relationships. For example, consider these arguments:

1. Most businesses are not on an equal footing with stakeholders and consumers at large. Large firms spend sizable amounts on research aimed at analyzing, creating, and—some argue—manipulating the demand of certain targeted buyers and groups. Children and other vulnerable groups, for example, are not aware of the effects of advertising on their buying choices.

2. As discussed in Chapter 5, it has been questioned as to whether many firms’ advertising activities truthfully inform consumers about product reliability, possible product dangers, and proper product use. A thin line exists between deceit and artistic exaggeration in advertising.

3. The “invisible hand” is often nonexistent for many stakeholders and, in particular, for consumers in need of protection against questionable, poorly manufactured products that are released to market. One reason a stakeholder view has become a useful approach for determining moral, legal, and economic responsibility is that the issues surrounding product safety, for example, are complex and controversial.

Another important argument against free-market theory is based on what economists refer to as “imperfect

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markets,” that is, markets in which competition “is flawed by the ability of one or more parties to influence

prices.”19

Intermediaries: Bridging the Disclosure Gap Inequality of information available to companies and stakeholders is attributable in part to imperfect markets. Investors, for example, rarely have access to complete information to make investment decisions. They must settle for incomplete and/or inaccurate information. The presence of “intermediaries” can help managers and other designated officers obtain accurate information that might otherwise be willfully withheld and/or manipulated for personal gain or misplaced and lost from neglect.

Two general types of intermediaries are financial and information. Financial intermediaries include venture capitalists, banks, and insurance companies; information intermediaries include auditors, analysts, rating agencies, and the press. These intermediaries obtain information to provide stakeholders with a more complete and accurate financial picture of the company’s position in markets. Intermediaries can prevent leaders and managers of companies from taking unfair advantage of imperfect markets by intentionally failing to disclose information to relevant stockholders and stakeholders. The Lehman Brothers, for example, used what is called a “Repo 105” scheme to falsely increase their balance sheet by billions of dollars, thereby misleading stakeholders in and since 2007. This scheme involved repurchase agreements, in which Lehman Brothers entered into agreements to “sell” and then “buy back” toxic assets from other banks. This secretive process misled investors since the company recorded the agreements as sales and removed the bad assets from the financial statements, thus showing stakeholders incorrect and misleading information about the company’s financial performance. Lehman had more information than its stakeholders and intentionally chose not to

disclose its complete and accurate books.20

Another example of imperfect and skewed market power occurs in Africa, “where a few pharmaceutical companies effectively control the availability of several key drugs. In effect, they are beyond the financial means of millions of Africans or their governments. When a few dominating companies cut the prices of several key ingredients of the AIDS cocktail, they demonstrated this power. But this also revealed a further imperfection in the real market, where only rickety systems, if any, exist to deliver the drugs to patients

requiring sophisticated and continuous follow-up care.”21

Mixed-Market Economies The debate regarding free markets, imperfect markets, and other forms of social organization is interesting but not always helpful in describing how these systems actually work in the marketplace. The free-market

system has been more accurately described by economist Paul Samuelson as a “mixed economy.”22 Mixed economies include a balance between private property systems and the government laws, policies, and regulations that protect consumers and citizens. In mixed economies, ethics becomes part of legal and business debates. Principles of justice, rights, and duty coexist with utilitarian and market principles.

A realistic approach to managing social responsibility in a mixed-market economy is the stakeholder management approach. Instead of separating profit-making from social and ethical goals, corporate leaders can accomplish both, as the following sections show.

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POINT/COUNTERPOINT Too Big to Fail (TBTF)

The “theory” behind “too big to fail” (TBTF) institutions was invoked during the most recent U.S. financial crisis. Governmental assistance to large failing financial institutions, mainly some of the largest banks, was necessary because their failure would have been catastrophic for the U.S. and even global economies. The idea was and is unpopular in part because it justifies subsidizing the Wall Street institutions that played a significant part in that near meltdown. Since banks and these larger financial institutions are returning to their previous practices, the next major meltdown may be closer than previously believed possible.

On the other hand, some progress has been made. The Federal Deposit Insurance Corp. claims it is now prepared to take over the parent companies of large failing lenders, if necessary. Making banks safer for the economy means opening more capital to facilitate investments and loans. Banks have to be able to invest to survive and thrive. The financial health of the four TBTF banks (Bank of America, Citigroup, JPMorgan, Wells Fargo) is central to the U.S. economy as this country faces the continued debate on the debt ceiling and the failed monetary policy that will soon be led by the new Federal Reserve chairperson. The larger a firm’s capital is at any time, the larger the shrinkage in asset values it can suffer before becoming insolvent. It seems obvious that the purpose of helping a large bank and financial institution gain safety and protection from failure is to raise its capital requirements, so it can take any shock to the value of its assets.

But again, TBTF helps large banks at the expense of community banks, which are also essential to our economy, small investors, and individuals. By making failure less common, it creates “moral hazard” (the subsidization of bad behavior) in our financial system. To avoid another 2008 near meltdown, a robust plan to take over a failing financial firm is needed, and market participants need to understand that they have to absorb their own losses—not taxpayers. Investors have to believe that banks are “too big to bail.” On the other hand, shareholders, creditors, and the parent company would have to take the pain—even to the point of going out of business. Shareholders would be out of business, creditors would sustain huge losses, and top executives probably would be fired.

Instructions: (1) Each student individually adopts either the Point or CounterPoint argument below, justifying their reasons (using arguments from this case and other evidence/opinions). (2) Then, either in teams or designated arrangements, each shares their reasons. (3) Class debrief and sharing of insights.

POINT: Let them fail if they bring it on themselves and everybody else. Wall Street titans, risky bankers, and investors who seek only financial gain have forgotten the original mission of banks and financial investment firms: to help small businesses, individual investors, and families needing mortgages to get those funds. This is what growing and sustaining a middle class, a democratic society, and a socially responsible business environment is all about; the U.S. stock market and business system is based on honest yet “competitive enough” strategies and practices.

COUNTERPOINT: Large financial institutions and banks must be supported to compete with global rivals and to protect the U.S. standard of living and way of life. Such institutions are large but require support.

It is naive to believe that small banks and financial institutions can finance multimillion-dollar real estate and other projects that support the economic and social growth that sustains the standard of living of Americans and other global citizens. Enabling banks to grow capital to protect their assets during downtimes

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is one of the only ways to permit them to survive; otherwise, the government and taxpayer dollars will be

needed. The United States is not a socialist or government-run society, rather it is based on free enterprise where there are no artificial ceilings for growth.

SOURCES Guerrera, Francesco. (September 30, 2013). Too big to bail appears to take hold. Blogs. WSJ.com.

http://blogs.wsj.com/moneybeat/2013/09/30/too-big-to-bail-appears-to-take-hold/, accessed January 8, 2014.

Guttentag, Jack M. (October 16, 2013). Is the “too big to fail” problem too big to solve? Part II. HuffingtonPost.com. http://www.huffingtonpost.com/jack-m-guttentag/is-the-too-big-to-fail- problem_b_4101117.html, accessed January 8, 2014.

Heineman, Ben W., Jr. (October 3, 2013). Too big to manage: JP Morgan and the mega banks. HBRBlog Network. http://blogs.hbr.org/2013/10/too-big-to-manage-jp-morgan-and-the-mega-banks/, accessed January 8, 2014.

Shah, Neil. (October 16, 2013). How to deal with “too big to fail.” Blogs.WSJ.com. http://blogs.wsj.com/economics/2013/10/16/how-to-deal-with-too-big-to-fail/, accessed January 8, 2014.

Simon, Ammon. (October 21, 2013). How to fix too big to fail. National Review Online. http://www.nationalreview.com/article/361719/how-fix-too-big-fail-ammon-simon, accessed January 8, 2014.

4.2 Managing Corporate Responsibility with External Stakeholders

The Corporation as Social and Economic Stakeholder The stakeholder management approach views the corporation as a legal entity and also as a collective of individuals and groups. The CEO and top-level managers are hired to maximize profits for the owners and shareholders. The board of directors is responsible for overseeing the direction, strategy, and accountability of the officers and the firm. To accomplish this, corporations must respond to a variety of stakeholders’ needs, rights, and legitimate demands. From this perspective, the corporation has primary obligations to the economic mandates of its owners; however, to survive and succeed, it must also respond to legal, social, political, and environmental claims from stakeholders, as noted earlier. Figure 4.1 illustrates the moral stakes and corporate responsibilities of firms’ obligations toward their different stakeholders.

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Figure 4.1 External Stakeholders, Moral Stakes, and Corporate Responsibilities

Source: Based on Caux Round Table. (March 2009; updated May 2010). Principles for business. CauxRoundTable.org. http://www.cauxroundtable.org/index.cfm?menuid=8, accessed January 10, 2014.

One study has argued that “Using corporate resources for social issues not related to primary stakeholders

may not create value for shareholders.”23 This finding does not suggest that corporations refrain from philanthropic activities; rather, “The emphasis on shareholder value creation today should not be construed as

coming at the expense of the interests of other primary stakeholders.”24

Shareholder value obsession began in 1976, when it was argued that the owners of companies were not

getting full, open, and honest disclosure from professional managers.25 A major problem was and is not with placing the emphasis on “shareholder value,” but on “the use of short-term increases in a firm’s share price as a proxy for it.” “Ironically, shareholders themselves have helped spread this confusion. Along with activist hedge funds, many institutional investors have idolized short-term profits and share-price increases rather than engaging recalcitrant managers in discussions about corporate governance or executive pay. Giving shareholders more power to influence management (especially in America) and encouraging them to use it

should prompt them and the managers they employ to take a longer view.”26

Critics have not identified a realistic alternative measure of success to shareholder value. Critics of the

shareholder model endorse a “stakeholder” model as described and used in this text.27 “For capitalism to thrive, it urgently needs reform in three areas: shifting from a narrow focus on shareholders to a broader community of stakeholders; adopting an owner-based governance model aimed at building companies with

high longevity; and moving from quarterly measures of performance to much longer timeframes.”28

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Corporations are economic and social stakeholders. This is not a contradiction but a leadership awareness and choice that requires balancing economic and moral priorities. In the discussion below, we explore the ethical basis on which the relationships between corporations and their stakeholders are grounded. We then turn to the external compliance and legal dimension of stakeholder management, which is also required for effectively dealing with external constituencies.

The Social Contract: Dead or Desperately Needed? The stakeholder management approach of the corporation is grounded in the concept of a social contract. Developed by early political philosophers, a social contract is a set of rules and assumptions about behavior patterns among the various elements of society. Much of the social contract is embedded in the customs of society. Some of the “contract provisions” result from practices between parties. Like a legal contract, the social contract often involves a quid pro quo (something for something) exchange. Although globalization, massive downsizing, and related corporate practices continue to pressure many employer—employee relationships, the underlying principles of the social contract, like mutual trust and collaboration, remain essential. Reputation of a firm, as well as for leaders, managers and professionals, is still a foundation for business as well as social exchanges, contracts, and practices.

The social contract between a corporation and its stakeholders is often based on implicit as well as explicit agreements. For example, as Figure 4.1 indicates, when corporations and stakeholders base their negotiations and provisions of services and products on moral standards as well as production-oriented metrics, the success of the business and the satisfaction of the stakeholders increase, and the public’s confidence in the businesses also is enhanced. A loss of public confidence can be detrimental to the firm and to its investors. One way to retain and to reinforce public confidence is by acting in an ethical manner, a manner that shows a concern for

the investing public and the customers of the firm.29 The question is not really whether a social contract between a corporation and its stakeholders exists, but what the nature of the contract is and whether all parties are satisfied with it. Are customers satisfied with the products and services and how they are treated by a company’s representatives? Are suppliers, distributors, and vendors all satisfied by the contractual agreements with the corporation? Do members of the communities a company is located in and serves believe the company is a responsible and responsive citizen? Does the company pay its fair share of taxes? Do employees believe they are paid a fair wage, have adequate working conditions, and are being developed?

Balance between Ethical Motivation and Compliance Ethics programs, as part of the social contract, are essential motivators in organizations. Studies suggest that ethics programs matter more than compliance programs on several dimensions of ethics, for example,

awareness of issues, search for advice, reporting violations, decision making, and commitment to the firm.30

Business relationships based on mutual trust and ethical principles combined with regulation result in long-

term economic gains for organizations, shareholders, and stakeholders.31 If corporate leaders and their firms commit illegal acts, taxpayers end up paying these costs. Corporate leaders and their stakeholders, therefore, have an interest in supporting their implicit social contract as well as their legally binding obligations.

There is a balance to be maintained between external regulation and self-regulation based on the public’s trust in corporations. A 2011 Maritz poll found that “approximately 25% of employees report having less trust

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in management than they did last year. Only 10 percent of employees trust management to make the right

decision in times of uncertainty. The percentage increases to 16% among employees 18–24 years of age who only recently entered the workforce and didn’t directly experience many of the management scandals of the past 10 years.” The poll also notes that only “slightly more than one in ten Americans (14%) believes their company’s leaders are ethical and honest. In addition, the poll found that only 12% of employees believe their employer genuinely listens to and cares about its employees, and only seven percent of employees believe

senior management’s actions are completely consistent with their words.”32 This mistrust has translated into a

global call for greater regulation of large companies. A poll of 20 nations found that “solid majorities in every country favored more regulation of large companies to protect the rights of workers, the rights of consumers, and the environment. A majority in 15 of the 20 countries also favored greater government regulation to

protect the rights of investors.”33

Covenantal Ethic The covenantal ethic concept is related to the social contract and is also central to a stakeholder management approach. The covenantal ethic focuses on the importance of relationships—social as well as economic— between businesses, customers, and stakeholders. Relationships and social contracts (or covenants) between

corporate managers and customers embody a “seller must care” attitude, not only “buyer beware.”34 A manager’s understanding of problems is measured not only over the short term, in view of concrete products, specific cost reductions, or even balance sheets (though obviously important to a company’s results), but also

over the long term, in view of the quality of relationships that are created and sustained by business activity.35

It may also be helpful to understand the concept of a covenantal ethic in an organizational context by pointing out how great leaders are able to attract and mobilize followers to a vision and beliefs based on the relationship they develop with those being led. Classic leaders like Franklin Roosevelt, John F. Kennedy, and Martin Luther King Jr. instilled an enduring trust and credibility with their followers. We explain more of these dynamics in Chapter 6; here, the point is that corporate leaders still inspire and motivate followers through their vision, purposive mission, and leading-by-example that result in a type of social contract. Warren Buffet, Bill Gates, and Richard Branson are such examples.

The Moral Basis and Social Power of Corporations as Stakeholders Keith Davis argues that the social responsibility of corporations is based on social power, and that “if a business has the power, then a just relationship demands that business also bear responsibility for its actions in these areas.” He terms this view the “iron law of responsibility” and maintains that “in the long run, those who do not use power in a manner in which society considers responsible will tend to lose it.” Davis discusses five broad guidelines or obligations business professionals should follow to be socially responsible:

1. Businesses have a social role of “trustee for society’s resources.” Since society entrusts businesses with its resources, businesses must wisely serve the interests of all their stakeholders, not just those of owners, consumers, or labor.

2. Business shall operate as a two-way open system with open receipt of inputs from society and open disclosure of its operations to the public.

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3. “Social costs as well as benefits of an activity, product, or service shall be thoroughly calculated and considered in order to decide whether to proceed with it.” Technical and economic criteria must be supplemented with the social effects of business activities, goods, or services before a company proceeds.

4. The social costs of each activity, product, or service shall be priced into it so that the consumer (user) pays for the effects of his consumption on society.

5. Business institutions as citizens have responsibilities for social involvement in areas of their competence

where major social needs exist.36

The above guidelines provide a foundation for creating and reviewing the moral bases of corporate stakeholder relationships. The public is intolerant of corporations that abuse this mutual trust, as recent surveys show. For example, a BusinessWeek/Harris Poll found that “72% of Americans say they believe that business has too much power over American life. Furthermore, 66% of those polled agree that companies care more about making large profits than about selling safe, reliable, quality products. At the same time, pressure

for companies to take on more responsibilities in their communities seems to be rising.”37

The MSN Money Customer Service Hall of Fame includes the 10 companies out of 150 of the country’s largest consumer names most often rated as “excellent” for customer service in MSN Money’s survey. In 2013, they were Amazon.com, Marriott, Hilton, UPS, FedEx, Google, State Farm, Samsung, Trader Joe’s and Lowe’s. Among the ten worst companies for customer service in 2013 were financial institutions and cable and insurance providers: Bank of America (bank), Comcast, Bank of America (credit card), Dish Network, Citigroup (credit card), Wells Fargo (credit card), Wells Fargo (bank), Citibank (bank), AT&T, and Discover Financial Services. Whereas economic, environmental, and other factors affect customer satisfaction with companies and industries—especially those listed in this survey at this time—if an industry or company continues to score low on the index, it should serve as a wakeup call to the stockholders and corporate leaders. Many times some element of poor stakeholder management can also be part of the problem, whether

perceived or experienced.38

Corporate Philanthropy Corporations practice social responsibility in several ways, also known as “external engagements,” which means the efforts a company makes to manage its relationships with stakeholders and groups and institutions in need of assistance. These relationships can and should include a wide variety of activities: not just corporate philanthropy, community programs, and political lobbying, but also aspects of product design, recruiting policy, and project execution. “In practice, however, most companies have relied on three tools for external engagement: a full-time CSR team in the head office, some high-profile (but relatively cheap) initiatives, and

a glossy annual review of progress.”39

Such activities are often measured through the impact of corporate philanthropy by counting the number of individuals who are helped by a particular program. Philanthropy, however, can also reduce business risk, open up new markets, engage employees, build the brand, reduce costs, advance technology, and deliver competitive returns. “Corporate philanthropy is usually defined in contrast to various ‘shared’ or ‘blended’ value approaches to corporate social responsibility (CSR), in which companies seek to do well by doing good.” It is more helpful to view corporate philanthropy as a discovery phase in investment in a social issue. Such

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philanthropic investments can serve as incubators for promising ideas and mechanisms for learning both

community and corporate needs. “Much like R&D, philanthropy allows companies to make thoughtful investments in sectors where the return profile is typically more speculative. Of course, philanthropy is not the only strategy for companies to play meaningful corporate-citizenship roles. Business leaders should use every

tool in their CSR portfolio to help create economic value that can help address relevant societal issues.”40

A corporation’s social responsibility also includes certain types of philanthropic responsibilities, in addition to its economic, legal, and ethical obligations. Corporate philanthropy is an important part of a company’s role as “good citizen” at the global, national, and local levels. The public expects, but does not require, corporations to contribute and “give back” to the communities that support their operations. Procter & Gamble’s reputation has been enhanced by its global contributions. Some of the greatest recent corporate

philanthropists include Warren Buffet, Bill and Melinda Gates, and Mark Zuckerberg.41 Buffett pledged 12,220,852 shares of Berkshire Hathaway class “B” stock, valued at more than $1 billion, to each of his three children’s foundations. The Howard G. Buffett Foundation has contributed funds to agricultural

development, clean-water projects, and programs working to fight poverty.42

Managing Stakeholders Profitably and Responsibly: Reputation Counts Globalization and the shifting centers of financial power and influence, the ongoing diffusion of information technology, and the threat of other Enrons continue to pressure corporate competition, along with increasingly wider shareholder activism. “The result is that many employees, investors, and consumers are seeking assurances that the goods and services they are producing, financing, or purchasing are not damaging

to workers, the environment, or communities by whom and where they are made.”43 There is, consequently, renewed interest in the area of CSR; that is, how a business respects and responds responsibly to its

stakeholders and society as well as to its stockholders.44

Ethical Insight 4.2 Employers’ Agreed on Goals for Colleges and Universities

A recent online survey by Hart Research Associates showed that employers place the greatest degree of importance on the following areas:

• Ethics: “Demonstrate ethical judgment and integrity” (96% important; 76% very important).

• Intercultural Skills: “Comfortable working with colleagues, customers, and/or clients from diverse cultural backgrounds” (96% important, 63% very important).

• Professional Development: “Demonstrate the capacity for professional development and continued new learning” (94% important, 61% very important).

Questions for Discussion 1. Do you agree that college/university education should emphasize ethical judgment and integrity as a

priority in learning? Why or why not?

2. If so, do you believe learning ethical judgment and integrity are as important as the major one chooses as a

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concentration? Explain.

Source: Hart Research Associates. (April 13, 2013). It takes more than a major: Employer priorities for college learning and student success, an online survey among employers conducted on behalf of: the Association of American Colleges and Universities, p. 6 (4th area of online survey out of 11). AACU.org. http://www.aacu.org/leap/documents/2013_EmployerSurvey.pdf, accessed January 8, 2014.

Most executives and professionals are interested in their stakeholders and are law abiding. Reputation remains one of the most powerful assets in determining the extent to which a company manages its stakeholders effectively. There is also evidence that socially responsible corporations have a competitive advantage in the following areas:

1. Reputation.45

2. Successful social investment portfolios.46

3. Ability to attract quality employees.47

The organization Business Ethics ranks the top 100 socially responsible corporations in terms of citizenship. Business Ethics uses its own collected data, including the Domini 400 Social Index (which also tracks, measures, and publishes information on companies that act socially responsible). The Standard & Poor’s 500 plus 150 publicly owned companies are ranked on a scale that measures stakeholder ratings. Harris Interactive, Inc. and Reputation Institute, a New York-based research group, conducted an online nationwide survey of 10,830 people to identify the companies with the best corporate reputations among Americans at the

turn of the millennium.48 The Reputation Quotient (RQ) is a standardized instrument that measures a company’s reputation by examining how the public perceives companies based on 20 positive attributes, including emotional appeal; social responsibility; good citizenship in its dealings with communities, employees, and the environment; the quality, innovation, value, and reliability of its products and services; how well the company is managed; how much the company demonstrates a clear vision and strong leadership; and profitability, prospects, and risk.

The executive director of the Reputation Institute, Anthony Johndrow, noted, “Reputation is much more than an abstract concept; it’s a corporate asset that is a magnet to attract customers, employees, and

investors.”49 Google took top place in the Reputation Institute’s annual Global Pulse U.S. 2011 study, with Apple and The Walt Disney Company following at second and third place. The study measures an “analysis of the world’s 100 top-rated companies based on input from over 55,000 consumers in 15 countries.” The following trends were discovered as a result of this study:

• “58% of people’s willingness to recommend a company is driven by their perception of the company; only 42% depends on perceptions of the company’s products and services.

• Two-thirds of C-suite executives at the 150 largest U.S. companies believe we have already entered the Reputation Economy.

• Among the 150 largest companies in the U.S., 25 percent now coordinate their reputation strategy and enterprise story through the CEO’s office.

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• Companies with excellent reputations are two and a half times more likely to have CEOs setting the

strategy for enterprise positioning than those with weaker reputations.”50

Brands are among companies’ most—if not the most—valued assets because they reflect and are an integral part of their reputations and identities. The top ten most and least reputable brands in America for 2013 are listed in Table 4.1.

Table 4.1 Ten Most- and Least-Reputable Companies in America (2013)

Ten most-reputable brands Ten least-reputable brands

1. Amazon 51. Comcast

2. Apple 52. Wells Fargo

3. Walt Disney 53. JPMorgan Chase

4. Google 54. BP

5. Johnson & Johnson 55. Citigroup

6. Coca-Cola 56. Bank of America

7. Whole Foods Market 57. American Airlines

8. Sony 58. Halliburton

9. Procter & Gamble 59. Goldman Sachs

10. Costco 60. AIG

Source: Ragan’s PR Daily. (February 14, 2013). The 10 most— and the 10 least—reputable brands. PRDaily.com. http://www.prdaily.com/Main/Articles/The_10_mostand_the_10_leastreputable_bran,13835.aspx#, accessed January 9, 2014. Permission

granted; also found in the original source, Harris Interactive. (February 2013). The Harris Poll 2013 RQ® Summary Report, p. 9. For a more

complete description of this ranking, see A Survey of the U.S. General Public Using the Reputation Quotient®. http://www.harrisinteractive.com/vault/2013%20RQ%20Summary%20Report%20FINAL.pdf, accessed February 7, 2014.

The Harris Poll RQ ranks companies’ reputations on six dimensions: social responsibility; vision and leadership; emotional appeal; products and services; financial performance; and workplace environment. The general public rates companies by completing online surveys that are analyzed and used in marketing and policy decisions. You can score your own organization’s reputation in Ethical Insight 4.3, “Rank Your Organization’s Reputation.”

4.3 Managing and Balancing Corporate Governance, Compliance, and Regulation

While leaders and their teams build the reputations of their corporations through high productivity, trust, and good deeds shown toward their stakeholders while satisfying competitive demands of the marketplace, it is

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also true that laws and regulations set standards for acceptable and unacceptable business practices and behaviors. Just as the market is not entirely “free,” neither are all stakeholders and constituencies honest, fair, and just in their motives and business transactions. The corporate scandals exemplified by Enron and others demonstrated that entire corporations can be brought down by top-level executives and their teams. Lessons from the scandals also showed that corporate boards of directors, CEOs, chief financial officers (CFOs), and other top-level administrators require legal constraints, compliance rules, regulation, and the threat and provision of punishment when crimes are committed. Wrongdoers inside and outside corporations must have boundaries set and disciplinary actions applied not only to protect the innocent, but also to enable businesses to exist and succeed. The “rule of law” enables capitalism and democracies to thrive. Research also shows that both “carrot” (motivational, ethical incentives) and “stick” (legal compliance and potential disciplinary action) approaches are necessary to enable workforces and leaders to be productive and law-abiding. Figure 4.2 illustrates a “carrot and stick” balancing approach that effective corporations use in providing both a legal and ethical culture and transactions, internally and with external stakeholders, as shown in Figure 4.2.

Figure 4.2 Corporate Social Responsibility and Stakeholder Management: Balancing the “Carrot” and “Stick” Approaches

Ethical Insight 4.3 Rank Your Organization’s Reputation

Score a company, college, or university at which you worked or studied on the following characteristics. Be objective. Answer each question based on your experience and what you objectively know about the company, college, or university.

1 = very low; 2 = somewhat low; 3 = average; 4 = very good; 5 = excellent

___ Emotional appeal of the organization for me

___ The social responsibility of the organization

___ The organization’s treatment of employees, community, and environment

___ The quality, innovation, value, and reliability of the organization’s products and/or services

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___ The clarity of vision and strength of the organization’s leadership

___ The organization’s profitability, prospects in its market, and handling of risks

___ Total your score

Interpretation: Consider 30 a perfect score, 24 very good, 18 average, 12 low, and 6 very low.

Questions for Discussion 1. How did your company/organization do on the ranking? Explain.

2. Explain your scoring on each item; that is, give the specific reasons that led you to score your company as you did.

3. Suggest specific actions your organization could take to increase its Reputation Quotient.

In this section, we discuss the “stick” approach (legal compliance and regulation) in more detail. With our focus here on the corporation and external stakeholders, we limit our discussion of laws to (1) the Sarbanes- Oxley Act (SOX), and a brief overview of the (2) Federal Sentencing Guidelines for Organizations (FSGO), and then discuss (3) laws regulating competition, consumer protection, employment discrimination/pay/safety, and the environment. Chapter 5 covers legal and social issues related to the corporation and consumer stakeholders, and Chapter 7 addresses employee stakeholders.

Most corporations effectively govern themselves, to a large extent, through their own control systems and stakeholder relationships. A public corporation’s federal and state charter provides the legal basis for its board of directors, stockholders, and officers to govern and operate the company. However, as Enron and other corporate scandals have demonstrated, self-governance cannot be counted on to work well alone. A question often repeated from the scandals is, “Where were the boards of directors when the widespread fraud, deception, and abuse of power occurred?”

A recent Time magazine cover read, “How Wall Street Won: Five Years after the Crash, It Could Happen

All Over Again.”51 The article makes five recommendations for preventing another financial subprime mortgage lending crisis, based on the author’s research and interviews with leading experts from financial and university institutions: 1. Fix the Too-Big-To-Fail Problem, 2. Limit the Leverage (of banks), 3. Expose Weapons of Mass Financial Destruction (“derivatives” trading), 4. Bring Shadow Banking Into the Light, and 5. Reboot the Culture of Finance. In summary, these five recommendations argue that some of the largest banks in the United States need closer self- and government regulation in their lending and investing practices in order to stop certain derivatives and high-risk investing from wrecking the economy again. Steps toward this goal include reinstating the former Fed chairman Paul Volcker’s rule to “separate government-insured commercial lending from risky trading operations.” Reinstating and implementing provisions of the 1933 Glass-Steagall Act, which separates commercial from risky lending practices by banks, along with the Dodd- Frank legislation, would also address this problem.

Other suggestions include limiting the leverage larger banks and mortgage companies have to make risky loans. Leverage means the ability “to borrow more money than they can immediately repay.” Too much leverage gives banks incentives to overinvest more funds than they have to meet their operating obligations. Also, making “shadow banking”—hiding the amount and types of investments made—more transparent

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would expose those financiers who put banks, customers’ money, and the economy at risk. Finally, “rebooting the culture of finance” in the United States is necessary. The United States suffers from the Wall Street- driven “financialization” of the economy. The original purpose and mission of banks is to lend to real people and businesses, not using customers’ and small businesses’ money to bankroll high-risk investing, especially when the larger banks limit access to credit to small banks and individuals. Also, the credit ranking system of banks that pays professionals in that system to rank them must change. This system is self-defeating; the credit ratings do not change banking practices, and large-scale questionable investment banking practices

could lead to further meltdowns of the economy.52

There are a number of other reasons why many of the larger, prominent corporate boards of directors in different industries, not only banking, did not execute their mandated legal and ethical responsibilities during the past financial meltdown and crisis. These include lack of independence, insider roles and relationships, conflicts of interest, overlapping memberships of board members with other boards, decision-by-committees, well-paid members with few responsibilities, and lack of financial expertise and knowledge about how

companies really operate.53 There, however, are improvements being made legislatively and in business and board practices.

Best Corporate Board Governance Practices Most corporate boards act responsibly toward their stakeholders and in the best interests of shareholders. The wake of the large corporate scandals of the early 2000s has led to several best practices for a board of directors.

“The Board of Directors must be committed to its functions, be functional and make informed decisions.”54

This can be achieved through greater objectivity, independence, and oversight by all board members.55

With very few exceptions, governance activists have achieved most of the reforms they have sought to effectuate. According to Spencer Stuart’s 2012 U.S. Board Index, 84% of S&P 500 companies have adopted a majority voting standard, 83% have annually elected boards, and 84% of their directors are independent—to name but a few of the more trendy governance issues in recent years. However, those who make their living in the corporate governance industry will undoubtedly continue to push these proposals at smaller companies, and come up with additional requirements and heightened standards to propose with each new proxy season. By way of example, ISS’s 2013 corporate governance policy updates tighten its board responsiveness policy and recommend that shareholders vote “against” or “withhold” their votes for incumbent directors who fail to act on a shareholder proposal that received the support of a majority of votes cast in the previous year, as compared to ISS’s prior standard, which looked at whether the proposal received a majority of outstanding shares the previous year or the

support of a majority of votes cast in both the last year and one of the two prior years.56

The following section discusses the two laws best known for defining the regulations and best practices for companies and their boards of directors.

Sarbanes-Oxley Act The 2002 Sarbanes-Oxley Act (SOX) was a direct regulatory response by Congress to corporate scandals. (PricewaterhouseCoopers called this law the most important legislation affecting corporate governance,

financial disclosure, and public accounting practice since the 1930s.)57 The “carrot” approach, or corporate self-regulation, did not work for Enron and other firms involved in scandals; Congress realized that a “stick” approach (laws, regulations, disciplinary actions) was also required. A summary of SOX shows that federal provisions were established to provide oversight, accountability, and enforcement of truthful and accurate financial reporting in public firms. Some of the major issues included (1) a lack of an independent public

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company accounting board to oversee audits, (2) conflicts of interest in companies serving as auditors and

management consultants to companies, (3) holding top-level officers (CEOs and CFOs) accountable for financial statements, (4) protecting whistle-blowers, (5) requiring ethics codes for financial officers, and (6) other reforms as the list below shows.

The key aspects of SOX can be summarized as follows:

• Establishes an independent public company accounting board to oversee audits of public companies.

• Requires one member of the audit committee to be an expert in finance.

• Requires full disclosure to stockholders of complex financial transactions.

• Requires CEOs and CFOs to certify in writing the validity of their companies’ financial statements. If they knowingly certify false statements, they can go to prison for 20 years and be fined $5 million.

• Prohibits accounting firms from offering other services, like consulting, while also performing audits. This constitutes a conflict of interest.

• Requires ethics codes for financial officers of companies that are registered with the Securities and Exchange Commission (SEC).

• Provides a 10-year penalty for wire and mail fraud.

• Requires mutual fund professionals to disclose their vote on shareholder proxies, enabling investors to know how their stocks influence decisions.

• Provides whistle-blower protection for individuals who report wrongful activities to authorities.

• Requires attorneys of companies to disclose wrongdoings to senior officers and to the board of directors, if necessary; attorneys should stop working for the companies if senior managers ignore

reports of wrongdoings.58

SOX also defines several reforms aimed at improving problems of boards of directors.

There are other “best practices” guidelines for boards, including:

1. Separating the role of chairman of the board when the CEO is also a board member.

2. Setting tenure rules for board members.

3. Regularly evaluating itself and the CEO’s performance.

4. Prohibiting directors from serving as consultants to the companies which they serve.

5. Compensating directors with both cash and stock.

6. Prohibiting retired CEOs from continuing board membership.

7. Assigning independent directors to the majority of members who meet periodically without the CEO.59

The roles and responsibilities of CEOs and organizational leaders are discussed in Chapter 6.

The July/August 2012 cover story of Financial Executive was titled “Sarbanes-Oxley—A Decade Later” and summarized the impact of SOX:

The act created the Public Company Accounting Oversight Board to police the accounting profession and set auditing standards. It shored up the role of the audit committee, making it independent and responsible for hiring, firing and overseeing external auditors, removing that authority from management.

Under Section 404, companies were required to establish internal controls and procedures for financial reporting. Another section mandated that both the chief executive and chief financial officers personally attest that they have reviewed the auditors’ report and that it

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“does not contain any material with untrue statements or material omission” or anything that could be “considered misleading.”

Sarbanes-Oxley also instituted “clawback” provisions requiring CEOs and CFOs to return ill-gotten gains to their employer. In one notable case, Ian McCarthy, former CEO at Atlanta-based Beazer Homes USA Inc., and former CFO James O’Leary both agreed to return all of their cash bonuses, incentive and equity-based compensation for 2006. McCarthy had to relinquish more than $5.7 million in cash

plus $772,232 in stock sale profits, along with some 120,000 in restricted stock shares; O’Leary returned $1.4 million.60

But Congress has been moving in the opposite direction. Two recent laws—the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and 2013’s Jumpstart Our Business Startups Act (the JOBS Act)—have largely served to weaken SOX. Dodd-Frank exempted public companies with a “public float” below $75 million, thereby removing 42% of public companies, according to figures cited by the Council of

Institutional Investors and Center for Audit Quality in a joint letter last November.61 The letter implored both the chairman and ranking members of the House Financial Services Committee to not further reduce safeguards, to no avail. Similarly, a broad range of investor-protection groups and regulators have expressed alarm that the JOBS Act, signed into law by President Barack Obama in early April, “guts” SOX. Among other things, it exempts newly public “emerging growth companies” from meeting Section 404 obligations for

five years following an initial public offering.62

Pros and Cons of Implementing the Sarbanes-Oxley Act Critics of SOX argue against the implementation and maintenance of the law for the following reasons:

1. It is too costly. One estimate from a survey by Financial Executives International stated that firms with $5 billion in revenue could expect to spend on average $4.7 million implementing the internal controls

required, then $1.5 million annually to maintain compliance.63 An average first-year cost for complying with Section 404 of the Act (i.e., creating reliable internal financial controls and having management and an

independent auditor confirm the reliability) was estimated at $4.36 million.64 Others argue that the costs exceed the benefits, especially for small firms. “Smaller companies that are audited by the Big Four will have to pay higher audit fees even if they are not subject to Sarbanes-Oxley as the additional audit requirements of Sarbanes-Oxley creep into their methodologies. Many private companies and smaller public companies are realizing that the Big Four have designed their audits to serve the Fortune 500 companies and that this model

is slow and expensive.”65

2. It impacts negatively on a firm’s global competitiveness. This argument is also based on the costs of keeping internal operations compliant with the act. Critics argue that other companies around the globe do not have this expense, so why should U.S. public firms?

3. Government costs also increase to regulate the law.

4. CFOs are overburdened and pressured by having to enforce and assume accountability required by the law.

5. Critics claim that implementing SOX requirements throughout an organization is too costly and wasteful for small and mid-sized firms wishing to go public.

6. SOX reduces the willingness of corporations to take risks.

7. Accrual accounting is seen as being more “expensive” under SOX, as certain expenses like R&D must be expensed when incurred, reducing current earnings. This may make earnings management a more attractive

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and “cheaper” option for management.

8. SOX is sometimes faulted for not preventing the financial crisis and the great recession of 2008–2009,

from which the U.S. economy has yet to recover.66

Paul Volcker and Arthur Levitt, two widely respected experts previously from the SEC and Federal

Reserve respectively, offered the following counterclaims to some of the previous criticisms:67

1. The costs of implementing SOX are minimal compared to the costs of not having it—recall the $8 trillion in stock losses alone during the great “recession” and banking crisis of 2008 and the near collapse of the global economy, not counting the damage done to employee families and effects on the economy at large.

2. “Companies have better internal control environments as a result of Sarbanes-Oxley. This will lead to more accurate information being available to investors who are more confident in making investing decisions. All participants in financial reporting have increased responsibilities and consequences for not living up to

those responsibilities.”68

3. The changes required to implement this law are difficult; however, a recent Corporate Board Member magazine survey found that more than 60% of 153 directors of corporate boards of directors believe the effect of SOX has been positive for their firms, and that more than 70% viewed the law as also positive for their

boards.69

4. The data does not support the argument that this law presents a competitive disadvantage to global firms. The NASDAQ stock exchange added six international listings in the second quarter of 2004. A survey by Broadgate Capital Advisors and the Value Alliance found that only 8% of 143 foreign companies that issue stocks that trade in the United States claimed that SOX would cause them to rethink entering the U.S.

market.70

5. If a company uses SOX as a reason to not go public, the firm should not go public or use investors’ funds. U.S. markets are among the most admired in the world because they are the best regulated.

6. Financial officers who complain about the requirements of SOX may in fact be suffering from the lack of internal controls they had before. In 2003, 57 companies of all sizes said they had material weaknesses in their controls, after their auditors, who were paid to test financial controls, were terminated. These same auditors decreased their testing of internal controls because they faced pressures to cut their fees.

7. Requiring top executives and financial officers to personally sign off on and take personal ownership of the books is an initial deterrent of fraud and improves organizational culture.

8. SOX has resulted in improvements in the accounting industry in the wake of the fall of former accounting giant Arthur Andersen, at the hand of the Public Company Accounting Oversight Board.

9. Ernst & Young’s Les Brorsen sees creation of the PCAOB to police the auditing profession—coupled with corporate governance rules’ putting a public company’s board-level audit committee, rather than company management, in charge of the auditing process—as “the top two fundamental changes” brought about by the act. “It’s fair to say that the largest single impact of Sarbanes-Oxley was to end 100 years of self- regulation,” he says. Related to that, Brorsen adds, “Improved corporate governance is one of the hallmarks of

the legislation.”71

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The costs and benefits of implementing SOX continue to be debated. Still, Volcker and Levitt argue that, “While there are direct money costs involved in compliance, we believe that an investment in good corporate governance, professional integrity, and transparency will pay dividends in the form of investor confidence,

more efficient markets, and more market participation for years to come.”72 Certainly guidelines and specific ways to simplify, decrease unnecessary costs, and streamline implementation of this law must be addressed as companies strive to compete locally, nationally, and especially globally.

The Federal Sentencing Guidelines for Organizations: Compliance Incentive Before the 2002 SOX, the 1991 Federal Sentencing Guidelines for Organizations (FSGO) were passed to help federal judges set and mitigate sentences and fines in companies that had a few “bad apples” who had committed serious crimes. The FSGO were also designed to alleviate sentences on companies that had ethics and compliance programs. Under the FSGO, a corporation (large or small) receives a lighter sentence and/or fine—or perhaps no sentence or probation—if convicted of a federal crime, provided that the firm’s ethics and compliance programs were judged to be “effective.” The FSGO changed the view of corporations as entities that were legally liable and punishable for criminal acts committed within their boundaries to the view of the corporation as a moral agent responsible for the behavior of its employees. As a moral agent, the corporation could be evaluated and judged on how effective the leaders, culture, and ethics training programs were toward

preventing misconduct and crime.73

Companies that acted to prevent unethical and criminal acts would, under the FSGO, be given special consideration by judges when being fined or sentenced. A points system was established to help mitigate the fine and/or sentence if the company displayed the following seven criteria:

1. Established standards and procedures capable of reducing the chances of criminal conduct.

2. Appointed compliance officer(s) to oversee plans.

3. Took due care not to delegate substantial discretionary authority to individuals who are likely to engage in criminal conduct.

4. Established steps to effectively communicate the organization’s standards and procedures to all employees.

5. Took steps to ensure compliance through monitoring and auditing.

6. Employed consistent disciplinary mechanisms.

7. When an offense was detected, took steps to prevent future offenses, including modifying the compliance

plan, if appropriate.74

The FSGO have been revised to reflect the post-Enron corporate environment. The revisions add specificity to the 1991 version, include top-level officers’ accountability, and attempt to increase the effectiveness and integration of a company’s ethics and compliance programs with its culture and operations. Ed Petry, former director of the Ethics Officer Association (EOA), served on the federal committee that

revised the FSGO. Petry summarized some of the prominent revisions as follows:75

• Compliance and ethics programs (C&EP) are now described in a standalone guideline.

• The connection between effective compliance and ethical conduct is stressed.

• Organizations are required to “promote an organizational culture that encourages ethical conduct and

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a commitment to compliance with the law.”

In 2010, the FSGO were revised again. The most notable change promoted the practice of opening a direct line of communication from the chief compliance officer, or those with “operational responsibility for the compliance and ethics program,” directly to the governing body on any concerns involving actual or

potential criminal conduct.76 SOX and the Revised Federal Sentencing Guidelines (RFSGO) serve as constraints and deterrents to immoral and criminal corporate conduct that ultimately affects stakeholders and stockholders.

Table 4.2 shows RFSGO. SOX is an attempt by the U.S. federal government to provide stricter compliance guidelines and disciplinary actions to corporations in the wake of corporate scandals. The RFSGO add incentives to companies to self-regulate while following laws aimed at protecting the interests of shareholders and stakeholders, including the public. In the following section, an overview of the role laws and congressional agencies play in protecting the public, consumers, and other stakeholders is provided.

Table 4.2 Revised Federal Sentencing Guidelines for Organizations (RFSGO) (2004)

1. Exercise due diligence to prevent and detect criminal conduct.

2. Promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law.

3. The organization shall use reasonable efforts not to include within the substantial authority personnel of the organization any individual whom the organization knew, or should have known through the exercise of due diligence, has engaged in illegal activities or other conduct inconsistent with an effective compliance and ethics program.

4. (A) The organization shall take reasonable steps to communicate periodically and in a practical manner its standards and procedures, and other aspects of the compliance and ethics program, to the individuals referred to in subdivision (B) by conducting effective training programs and otherwise disseminating information appropriate to such individuals’ respective roles and responsibilities. (B) The individuals referred to in subdivision (A) are the members of the governing authority, high-level personnel, substantial authority personnel, the organization’s employees, and, as appropriate, the organization’s agents.

5. The organization shall take reasonable steps: (A) to ensure that the organization’s compliance and ethics program is followed, including monitoring and auditing to detect criminal conduct; (B) to evaluate periodically the effectiveness of the organization’s compliance and ethics program; (C) to have and publicize a system, which may include mechanisms that allow for anonymity or confidentiality, whereby the organization’s employees and agents may report or seek guidance regarding potential or actual criminal conduct without fear of retaliation.

6. The organization’s compliance and ethics program shall be promoted and enforced consistently throughout the organization through (A) appropriate incentives to perform in accordance with the

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compliance and ethics program; and (B) appropriate disciplinary measures for engaging in criminal conduct and for failing to take reasonable steps to prevent or detect criminal conduct.

7. After criminal conduct has been detected, the organization shall take reasonable steps to respond appropriately to the criminal conduct and to prevent further similar criminal conduct, including making any necessary modifications to the organization’s compliance and ethics program.

Source: 2004 Federal Sentencing Guidelines, chapter 8, part B: Remedying harm from criminal conduct, and effective compliance and ethics programs excerpted from §8B2.1. Effective Compliance and Ethics Program of the 2004 Federal Sentencing Guidelines. http://www.ussc.gov/Guidelines/2004_guidelines/Manual/gl2004.pdf.

4.4 The Role of Law and Regulatory Agencies and Corporate Compliance

Government at the federal, state, and local levels also regulates corporations through laws, administrative procedures, enforcement agencies, and courts. Regulation by the government is necessary in part because of failures in the free-market system discussed earlier. There are also power imbalances between corporations, individual consumers, and citizens. Individual citizens and groups in society need a higher authority to

represent and protect their interests and the public good.77

The role of laws and the legal regulatory system governing business serves five purposes:

1. Regulate competition.

2. Protect consumers.

3. Promote equity and safety.

4. Protect the natural environment.

5. Ethics and compliance programs to deter and provide for enforcement against misconduct.78

The corporate scandals again exemplified a failure of internal corporate governance and self-regulation by all parties (internal and external to corporations) involved. Individual leaders’ greed, ineffective boards, investment banks, and financial companies and traders all conspired with Enron and other companies in the scandals to commit fraud, theft, and deceit. Corporate scandals cannot be initiated and sustained without the direct or indirect assistance and/or negligence from the SEC, banks, investment traders and managers, media,

Wall Street, federal legislators, and other players.79 The subprime lending crisis also showed how an entire system of stakeholders in the financial, banking, credit and lending system, and government can be involved in a crisis that has been attributed in large part to “predatory lending” practices. As with the corporate scandals, in the subprime crisis one asks, “Where were the federal, state, and local governmental and congressional regulators?” Still, the justice system did serve sentences to executives in the corporate scandals. Starting with Enron and followed by WorldCom, Qwest, Tyco, HealthSouth, and others, more than $7 trillion in stock market losses were accrued. These losses also cost American employees and families more than 30% of their

retirement savings.80 A quick summary will illustrate the aftermath of some of the major scandals.

• Enron Corporation: Former chairman and CEO Ken Lay died before being tried and sentenced. Jeffrey Skilling, a former executive, was fined $45 million and is currently serving a 24-year, 4-month prison

sentence at the Federal Correctional Institution in Waseca, Minnesota.81 On June 21, 2013, Skilling

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succeeded in getting his prison sentence reduced by 10 years as part of a court-ordered reduction. With court

action, victims of Skilling’s crimes will finally receive more than $40 million that he owes them.82 The former CFO, Andrew Fastow, is currently serving a six-year prison sentence at the Federal Detention Center in Oakdale, Louisiana. His wife, former Enron assistant treasurer Lea Fastow, was sentenced to one

year in federal prison and one year of supervised release in a halfway house.83 Since leaving prison in 2011 and resuming life with his wife Lea and two sons in Houston, where Enron was based, Fastow has kept a low profile. He reportedly now works 9-to-5 as a document-review clerk at the law firm that represented

him in civil litigation.84

• WorldCom, Inc.: Former CEO Bernard Ebbers pleaded not guilty to fraud and conspiracy charges for allegedly leading an accounting fraud estimated at more than $11 billion. A 2002 class action civil lawsuit against Ebbers and other defendants resulted in a settlement worth over $6 billion to be distributed to over

830,000 individuals. Ebbers is currently serving 25 years at a federal prison in Louisiana.85 Scott Sullivan, former CFO, pleaded guilty to fraud charges, testified against Ebbers, and received a five-year prison

sentence. Sullivan is currently serving his sentence at the federal prison in Jessup, Georgia.86

• Tyco International Ltd.: Former CEO Dennis Kozlowski and CFO Mark Swartz were accused of stealing $600 million from the company. A New York state judge declared a mistrial in the case because of pressure on a jury member. Kozlowski received a sentence of 8 1/3 to 25 years in prison. Both Kozlowski and Swartz could be eligible for parole after six years, 11 months. Kozlowski is currently serving at least eight years and four months at the Mid-State Correctional Facility in Marcy, New York. Swartz was sentenced to at least

eight years and four months of prison and ordered to pay $72 million in fines and restitution.87 On September 23, 2013, both men left a minimum-security prison in Harlem for steady clerical jobs and

overnights in apartments following their headline-grabbing $134 million corporate fraud convictions.88

• Adelphia Communications Corporation: Founder John Rigas was convicted and sentenced to 12 years. At age 88, Rigas could be a poster child for inmates who might seek early release from prison because of the hazards of advanced aging. His son Timothy received 17 years for conspiracy and bank and securities fraud. Rigas’s

other son Michael was acquitted of conspiracy charges.89

• Credit Suisse First Boston: Frank Quattrone, a former investment banking executive who made millions helping Internet companies go public during the dot-com boom, was convicted of obstruction of justice and sentenced to 18 months. His first trial in 2003 ended in a hung jury. Quattrone now runs Qatalyst Partners, a San Francisco-based investment bank focused on advising technology companies on mergers and acquisitions. The University of Pennsylvania has received a $15 million gift to examine the U.S. criminal justice system from someone who has had some experience with it: Quattrone himself. The justice center

will be housed at the law school of the Ivy League university in Philadelphia.90

• HealthSouth Corporation: Former CEO Richard Scrushy was federally charged with leading a multibillion- dollar scheme that inflated HealthSouth earnings to show the company was meeting Wall Street forecasts. Sixteen former HealthSouth executives were charged as part of a conspiracy to inflate company earnings. Scrushy is the only executive who has not pleaded guilty and is not cooperating with investigators. Scrushy was acquitted in a federal criminal trial related to the alleged $2.7 billion fraud. At a civil trial in Jefferson

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County Circuit Court in 2009, however, Scrushy was found liable for the accounting fraud and ordered to

pay HealthSouth nearly $2.9 billion in damages. In an unrelated case, in 2006 Scrushy and former Alabama governor Don Siegelman were convicted of bribery and honest services fraud. Prosecutors alleged Scrushy bought a seat on a hospital regulatory board by arranging $500,000 in donations to Siegelman’s 1999 campaign to establish a state lottery. Scrushy, who was released from prison in 2012, recently lost the appeal of that conviction to the 11th Circuit Court of Appeals. HealthSouth asserts Scrushy has not paid his debt to the company and its shareholders because he owes them $2.8 billion, not counting the rapidly mounting

daily interest, according to Scrushy’s filing.91

• Martha Stewart, founder of Martha Stewart Living Omnimedia, was convicted of conspiracy, obstruction of justice, and lying about her personal sale of ImClone Systems shares. She was refused a new trial on perjury charges against a government witness. Stewart was sentenced to five months in prison. Her broker, Peter

Bacanovic, was fined $2,000.92

• Samuel D. Waksal, founder and former CEO of ImClone Systems, was sentenced to seven years in prison for securities fraud, perjury, and other crimes he committed with ImClone stock trades to himself, his father, and his daughter at the end of 2001. Waksal founded Kadmon in 2010 as the successor to ImClone, the company that developed the cancer drug Erbitux and was acquired by Indianapolis-based Lilly in 2008. His new company is also working on cancer medicines, and drugs for hepatitis C, inflammatory disorders, and genetic diseases. It’s in the same building, along Manhattan’s East River, as ImClone. Despite the well- known travails, ImClone was able to bring a very successful drug to market and then get itself acquired. By

Wall Street standards, that’s a success.93

• Qwest Communications International, Inc.: Denver federal prosecutors did not win a conviction against four former mid-level executives accused of scheming to deceptively book $34 million in revenue for the company. Grant Graham, former CFO for Qwest’s global business unit; Bryan Treadway, a former assistant controller; Thomas Hall, a former senior vice president; and John Walker, a former vice president, were found not guilty on 11 charges of conspiracy, securities fraud, wire fraud, and making false statements to

auditors. Hall received probation and paid a $5,000 fine.94

• American International Group (AIG): Former vice president Christopher Milton received a four-year sentence in 2009 for his role in a $500 million fraud case. He was convicted of conspiracy, mail fraud, securities fraud,

and making false statements to the SEC.95

• Bernard L. Madoff Investment Securities LLC: In 2009, Bernard Madoff was sentenced to 150 years in prison

for his elaborate and long-running Ponzi scheme. Madoff pled guilty to 11 counts of financial crimes.96

• Fannie Mae: As a result of the Fannie Mae fraud and the subprime mortgage crisis, Leib Pinter, a former executive of Olympia Mortgage Corporation, was sentenced to 97 months in prison on charges of conspiracy to commit wire fraud. He was ordered to pay $43 million in restitution. In December of 2011, the SEC

charged six former top executives of Fannie Mae and Freddie Mac with securities fraud.97

Why Regulation? Although governmental legislation and oversight of corporations is an imperfect system, one can always ask:

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Would you rather live in a system where these laws and controls did not exist? It is also important to note here, as Figure 4.2 shows, that laws are designed to protect and prevent crime and harm, monopolies, and the negative (“externalities”) effects of corporate activities (pollution, toxic waste), and also to promote social and economic growth, development, and the health, care and welfare of consumers and the public. Laws provide a baseline, boundaries, and minimum standards for distinguishing acceptable from unacceptable business practices and behaviors. Values, motivations, beliefs, and incentives to do what is right are also necessary in corporations, as they are in other institutions and society in general. The legal and regulatory system is necessary in society and business to establish ground rules and boundaries for transactions. It is not, however, sufficient alone to accomplish this task. The second observation to keep in mind in this discussion is that even with federal, state, and local laws, governmental regulatory agencies in contemporary capitalist democracies are part of political systems—where lobbyists and interest groups compete for resources, influence, and programs for their own ends. In such systems, the legislative and judicial branches of government are designed to provide arbitration and conflict resolution with law enforcement. The following regulatory agencies serve educational as well as legal purposes for corporations serving consumers in the marketplace.

Laws and U.S. Regulatory Agencies Some of the major laws promoting and prohibiting corporate competition include:

• Sherman Antitrust Act, 1890: Prohibits monopolies, as the case of Microsoft illustrates.

• Clayton Act, 1914: Prohibits price discrimination, exclusivity, activities restricting competition.

• Federal Trade Commission (FTC) Act, 1914: Enforces antitrust laws and activities.

• Consumer Good Pricing Act, 1975: Prohibits price agreements in interstate commerce between manufacturers and resellers.

• Antitrust Improvements Act, 1976: Supports existing antitrust laws and empowers Department of Justice investigative authority.

• FTC Improvements Act, 1980: Empowers the FTC to prohibit unfair industry activities.

• Trademark Counterfeiting Act, 1980: Gives penalties for persons violating counterfeit laws and regulations.

• Digital Millennium Copyright Act, 1998: Protects digital copyrighted material such as music and movies.

Laws Protecting Consumers Consumers require information and protection from products that may be unsafe, unreliable, and even dangerous, as Chapter 5 shows. While tobacco (now also “smokeless” tobacco), alcohol, and more recently cocaine, along with other so-called dangerous products continue to be marketed, consumer laws and regulatory agencies that you may have seen online or read about have a long history:

• Pure Food and Drug Act, 1906: Prohibits adulteration (ruining) and mislabeling on food and drugs in interstate commerce.

• FTC Act, 1914: Creates the FTC to govern trade and competitive practices.

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• Federal Food, Drug, and Cosmetic Act (FDCA), 1938: Amends the Pure Food and Drug Act of 1906 to protect consumers from adulterated and misbranded items and charged the Food and Drug Administration (FDA) with the safety of publically marketed drugs.

• Federal Hazardous Substances Act, 1960: Controls labels on hazardous substances of products used in houses.

• Truth and Lending Act, 1960: Requires full disclosure of credit terms to buyers.

• Consumer Product Safety Act, 1972: Establishes safety standards and regulations of consumer products (created the Consumer Product Safety Commission [CPSC]).

• Fair Credit Billing Act, 1974: Requires accurate, current consumer credit reports.

• Equal Credit Opportunity Act (ECOA), 1974: Prohibits credit discrimination on the basis of race, gender, religion, age, marital status, national origin, or color.

• Fair Debt Collection Practices Act, 1978: Prohibits abusive debt collection practices and allowed consumers to dispute and/or validate debt information.

• Nutrition Labeling and Education Act, 1990: Requires food labels to include standard nutritional facts.

• Telephone Consumer Protection Act, 1991: Issues procedures to avert undesired telephone solicitations.

• Children’s Online Privacy Protection Act, 1998: Requires the FTC to make rules to collect online information from children under 13 years old.

• Gramm-Leach-Bliley Act, 1999: Allows commercial banks, investment banks, insurance companies, and securities firms to consolidate.

• Do Not Call Implementation, 2003: Coordinates the FTC and the Federal Communications Commission (FCC) to provide consistent rules on telemarketing practices.

• Fair and Accurate Credit Transactions Act (FACT), 2003: Requires credit agencies to provide a free annual copy of credit reports and created a national system for identity theft fraud alert.

Laws Protecting the Environment Mercury from China, dust from Africa, smog from Mexico—all of it drifts freely across U.S. borders and contaminates the air millions of Americans breathe, according to recent research from Harvard University, the University of Washington, and many other institutions where scientists are studying air pollution. There are

no boundaries in the sky to stop such pollution, no Border Patrol agents to capture it.98

The environment is seen less as an inexhaustible free source of clean air, water, soil, and food, and more as a valued resource that requires protection—globally, regionally, and locally. As the sample of environmental laws below indicates, the environment constitutes sources of human, food, vegetation, and animal life.

• Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA), 1947: Regulated the use of pesticides and herbicides. The 1996 amendments facilitate registration of pesticides for special (so-called minor) uses, reauthorize collection of fees to support reregistration, and require coordination of

regulations implementing FIFRA and the FDCA.99

• Clean Air Act, 1970: Designates air-quality standards; state implementation plans are, however,

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required for enactment of policies under this Act. In 1990 several progressive and creative new themes were embodied in amendments to the Act, themes necessary for effectively achieving the air-

quality goals and regulatory reform expected from these farreaching amendments.100 This Act:

Encourages the use of market-based principles and other innovative approaches, like performance-based standards and emission banking and trading.

Provides a framework from which alternative clean fuels will be used by setting standards in the fleet and California pilot program that can be met by the most cost-effective combination of fuels and technology.

Promotes the use of clean low-sulfur coal and natural gas, as well as innovative technologies to clean high- sulfur coal through the acid-rain program.

Reduces enough energy waste and creates enough of a market for clean fuels derived from grain and natural gas to cut dependency on oil imports by 1 million barrels/day.

Promotes energy conservation through an acid-rain program that gives utilities flexibility to obtain needed emission reductions through programs that encourage customers to conserve energy.

• National Environmental Act, 1970: Establishes policy goals for federal agencies and enacts the Council on Environmental Quality to monitor policies. Amended in 1986.

• Federal Water Pollution Control Act, 1972: Prevents, reduces, and eliminates water pollution. Amended in 1990.

• Marine Protection, Research, and Sanctuaries Act, 1972: Regulated the dumping of materials into the ocean. Amended in 1992.

• Noise Pollution Act, 1972: Controls noise emission of manufactured products.

• Endangered Species Act, 1973: Provides a conservation program for threatened and endangered plants and animals and their habitats.

• Safe Drinking Water Act, 1974: Protects the quality of drinking water in the United States; sets safety standards for water purity and requires owners and operators of public water to comply with standards.

• Toxic Substances Act, 1976: Requires testing of certain chemical substances; restricts use of certain substances. Amended in 1992.

• Oil Pollution Act, 1990: Established penalties for oil spills and damage.

• Food Quality Protection Act, 1996: Requires a new safety standard that must be applied to all pesticides used on foods (reasonable certainty of no harm).

Other laws regarding the environment, consumers, equity and discrimination are discussed in Chapter 7. Taken together, this sample of laws aimed at protecting stakeholders, the public, and the system in which business is conducted indicates the complexity of transactions, responsibilities, and number of stakeholders with which corporations do business. Business ethics and social responsibility can arguably be seen not as a luxury and/or dichotomy, but as a necessity in providing for and protecting the common good. This point should become even more evident in the concluding section of this chapter, which illustrates classic cases of corporate crises in which stakeholder relationships were not well-managed.

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4.5 Managing External Issues and Crises: Lessons from the Past (Back to the Future?)

Companies have made serious mistakes as the result of poor self-regulation. As several contemporary corporate crises and now-classic environmental and product- and consumer-related crises illustrate, corporations have responded and reacted slowly and many times insensitively to customers and other stakeholders. The Internet may decrease the time executives have to respond to potential and actual crises.

We conclude this chapter by reviewing some of the major crises from the 1970s to the present, since several of these are only now being resolved. These cases also serve to remind corporate leaders and the public that there is a balance between legal regulation and corporate self-regulation. When corporations fail to regulate themselves and to provide just and fair corrective actions to their failures, government assistance is needed.

We noted in Chapter 3 that issues and crisis management should be part of a company’s management strategy and planning process. Failure to effectively anticipate and respond to serious issues that erupt into crises have been as damaging to companies as the crises themselves. Prior to the BP Deepwater Horizon oil rig explosion and spill, the Exxon Valdez oil spill was biggest U.S. environmental disaster. The Manville Corporation’s asbestos crisis is another, almost forgotten disaster, that is also summarized in the feature boxes on the following pages. As the philosopher George Santayana is noted for saying, “Those who do not remember the past are condemned to repeat it.” A sample of other classic crises includes the following:

• In June 2001, Katsuhiko Kawasoe, Mitsubishi Motor Company’s president, apologized for that firm’s 20- year cover-up of consumer safety complaints. (The company also agreed in 1998 to pay $34 million to settle 300 sexual harassment lawsuits filed by women in its Normal, Illinois, plant. This is one of the largest sexual-harassment settlements in U.S. history.)

• By the end of 2001, the American Home Products Corporation paid more than $11.2 billion to settle about 50,000 consumer lawsuits related to the diet-drug combination of fenfluramine and phentermine, commonly known as “fen-phen.” In addition, the company put aside $1 billion to cover future medical checkups for former fen-phen users and $2.35 billion to settle individual suits.

• Between 1971 and 1974, more than 5,000 product liability lawsuits were filed by women who had suffered severe gynecological damage from A. H. Robins Company’s Dalkon Shield, an intrauterine contraceptive device. Although the company never recalled its product, it paid more than $314 million to settle 8,300 lawsuits. It also established a $1.75 billion trust to settle ongoing claims. The firm avoided its responsibility toward its customers by not considering a recall for nine years after the problem was known.

• Procter & Gamble’s Rely tampon was pulled from the market in 1980 after 25 deaths were allegedly associated with toxic shock syndrome caused by tampon use.

• Firestone’s problems first came to light in 1978, when the Center for Auto Safety said it had reports that Firestone’s steel-belted radial TPC 500 tire was responsible for 15 deaths and 12 injuries. In October 1978, after attacking the publicity this product received, Firestone executives recalled 10 million of the 500-series tires. Firestone recently paid $7.5 million in addition to $350,000 to settle the first case in the Bridgestone/Firestone Ford Explorer crisis. Two hundred injury and death lawsuits have been settled since

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the recall, and it is estimated that it will cost $50 million to settle the lawsuits.

• A federal bankruptcy judge approved Dow Corning Corporation’s $4.5 billion reorganization plan, with $3.2 billion to be used to settle claims from recipients of the company’s silicone gel breast implants and the other $1.3 billion to be paid to its commercial creditors. A jury had already awarded $7.3 million to one woman whose implant burst, causing her illness. The company is alleged to have rushed the product to market in 1975 without completing proper safety tests and to have misled plastic surgeons about the potential for silicone to leak out of the surgically implanted devices. More than 600,000 implants were subsequently performed.

Johns Manville Corporation Asbestos Legacy: Still Paying, 2013

“They’ll be following in our footsteps,” said Robert A. Falise, chairman of the Manville Personal Injury Settlement Trust, which was created by the bankruptcy court to ensure a steady source of money to pay claims filed against Johns Manville Corporation (JM) by workers exposed to asbestos in their workplaces. The company will be responding to outstanding claims by asbestos victims and their families for several decades. In fact, “as of the first quarter of 2012, the trust had paid 773,990 claims in the amount of approximately $4.3 billion, and the trust expects to receive more claims.”

In June 2000, the company was sold to Warren Buffett for $1.9 billion in cash and the assumption of $300 million in debt. The asbestos-related trust, created to pay claimants, received $1.5 billion. As of March 2001, the trust had paid more than $2.5 billion to 350,000 beneficiaries. There are still more than a half million claimants and another half million expected to file. Looking back, reviews of JM’s social responsibility management of the complex web of issues surrounding its asbestos production are mixed.

Asbestosis, mesothelioma, and lung cancer—all life-threatening diseases—share a common cause: inhalation of microscopic particles of asbestos over an extended period of time. The link between these diseases and enough inhaled asbestos particles is a medical fact. JM is a multinational mining and forest product manufacturer, and it was a leading commercial producer of asbestos. As of March 1977, 271 asbestos-related damages suits were filed against the firm by workers. The victims claimed the company did not warn them of the life-threatening dangers of asbestos. Since 1968, the company has paid more than $2.5 billion in such claims. And since the 1950s, it has faced hundreds of lawsuits from workers: their estimated value is more than $1 billion. By 1982, JM was facing more than 500 new asbestos lawsuits filed each month. Consequently, in August 1982, the company filed for Chapter 11 bankruptcy in order to reorganize and remain solvent in the face of the lawsuits; the firm was losing more than half the cases that reached trial. The reorganization was approved, and a $2.5 billion trust fund was set up to pay asbestos claimants. Shareholders surrendered half their value in stock, and it was agreed that projected earnings over 25 years would be reduced to support the trust.

JM devised a settlement that gave the Manville Personal Injury Settlement Trust enough cash to continue meeting claims filed by asbestos victims. Under the settlement, the building products division

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stated it would give the trust 20% of Manville’s stock and would pay a special $772 million dividend in exchange for the trust’s releasing its right to receive 20% of Manville’s profits. After the transaction, the trust would own 80% of Manville and have $1.2 billion in cash and marketable securities, plus $2.3 billion in assets. This transaction enabled JM to rectify its balance sheet. Also, it changed its name to Schuller Corporation.

After JM spent several years operating under Chapter 11 of the U.S. Bankruptcy Code, the company emerged with $850 million in cash, 50% of its common stock, a claim on 20% of the company’s consolidated profits, and bonds with a face value of $1.3 billion. The trust is expected to pay 10% of an estimated $18 billion in present and future asbestos claims to 275,000 victims who already have filed claims.

JM’s social responsibility toward its workers, the litigants, the communities it serves, and society has, at best, been uneven. Since 1972, the company has been active and cooperative with the U.S. Department of Labor and the American Federation of Labor and Congress of Industrial Organizations (AFL–CIO) in developing standards to protect asbestos workers. However, Dr. Kenneth Smith—the medical director of one of the firm’s plants in Canada—refused in the 1970s to inform JM workers that they had asbestosis.

There is also the complication and confusion of evolving and changing legislation on asbestos. The U.S. Supreme Court, as stakeholder, has not taken a stand on who is liable in these situations: Are insurance firms liable when workers are initially exposed to asbestos and later develop cancer, or are they liable 20 years later? Also, right-to-know laws are not definitive in state legislatures. Does that leave JM and other corporations liable for the government’s legal indecision?

Of the original 16,500 personal injury plaintiffs, 2,000 have died since the reorganization in 1982. With Warren Buffet’s purchase of the company and the asbestos trust solidified, the management of this issue for the company is over.

Note that companies continue to settle asbestos lawsuits. The Mesothelioma Reporter web site (www.mesotheliomareporter.org) tracks and reports these settlements. For example, a recent settlement was reported for Pfizer subsidiary Quigley Co. and others who were defendants in a trial “that alleged that they caused personal injury by exposure to asbestos. The asbestos sometimes caused mesothelioma.” That web site reported ABC News as stating that “Pfizer will establish a trust for the payment of pending claims as well as any future claims. It will contribute $405 million to the trust over 40 years through a note, and about $100 million in insurance. Pfizer will also forgive a $30 million loan to Quigley.” As with other corporate crises, the aftermath continues.

SOURCES

Gross, D. (April 29, 2001). Recovery lessons from an industrial phoenix. New York Times. http://www.nytimes.com/2001/04/29/business/business-recovery-lessons-from-an-industrial- phoenix.html. Updates can also be found on the following sites: http://www.asbestos.com, http://www.claimsres.com/ and http://www.law360.com/companies/johns-manville-corp.

Johns Mansville (n.d.). Asbestos.com. http://www.asbestos.com/companies/johns-manville.php, accessed

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October 25, 2013.

Pfizer to pay $430 million to settle asbestos claims. (September 3, 2004). Mesothelioma Reporter.

Tejada, C. (1996). Manville settlement gives trust enough cash for asbestos claims. Wall Street Journal.

QUESTIONS FOR DISCUSSION

1. Should asbestos victims’ claims be the liability of Johns Manville or of the decision makers who authorized the work policies and orders?

2. Who was or is to blame for the asbestos-related deaths and injuries in this case?

3. Is the declaration of Chapter 11 bankruptcy and the creation of a trust the best or only solution in this case? Who wins and who loses with this type of settlement? Why?

4. What ethical principle(s) did Johns Manville’s owners and officers use regarding this type of settlement? What principle(s) do you believe they should have used? Explain.

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The Exxon Valdez, Second Worst Oil Spill in U.S. History: Twenty-Five Years Later, Exxon Still Hasn’t Paid for Long-Term Environmental Damages

“A year after the Exxon Valdez ripped open its bottom on Bligh Reef [off the Alaskan coast] and dumped 11 million gallons of crude oil, the nation’s worst oil spill is not over. Like major spills in the past, this unnatural disaster sparked a frenzy of reactions: congressional hearings, state and federal legislative proposals for new preventive measures, dozens of studies, and innumerable lawsuits.” The grounding of the oil tanker on March 24, 1989, spread oil over more than 700 miles. Oil covered 1,300 miles of coastline and killed 250,000 birds, 2,800 sea otters, 300 seals, 250 bald eagles, and billions of salmon and herring eggs, according to the Exxon Valdez Oil Spill Trustee Council, which manages Exxon settlement money. Sounds somewhat like the BP oil disaster, doesn’t it?

Fast forward to 2013, and note the following: “Today, government studies confirm that most of the populations and habitats injured by the spill have not fully recovered, and some are not recovering at all. Despite this, the government’s Reopener claim focuses solely on remediating intertidal oil. Government studies report thousands of gallons of Exxon Valdez oil still in beaches today, that this oil is still ‘nearly as toxic as it was the first few weeks after the spill,’ that ‘the remaining oil will take decades and possibly centuries to disappear entirely,’ and that tests on nearshore animals ‘indicate a continuing exposure to oil.’”

Exxon’s failure to pay the $5 billion in assessed damages is noteworthy. “After 14 years of appeals, in 2008 the U.S. Supreme Court (invoking a peculiar 1818 maritime ruling) reduced the punitive judgment to only $507 million, with the appeals court adding another $470 million in interest. . . . Although Exxon has not paid the claim, the government spill account today has $195 million, much of which can be used to fund beach remediation work, in expectation that this will be reimbursed if and when Exxon finally pays the claim.”

A grand jury indicted Exxon in February 1990. At that time, the firm faced fines totaling more than $600 million if convicted on the felony counts. More than 150 lawsuits and 30,000 damage claims were reportedly filed against Exxon, and most had not been settled by July 1991, when Exxon made a secret agreement with seven Seattle fish processors. Under that arrangement, Exxon agreed to pay $70 million to settle the processors’ oil-spill claims against Exxon. However, in return for the relatively quick settlement of those claims, the processors agreed to return to Exxon most of any punitive damages they might be awarded in later Exxon spill-related cases.

Exxon paid about $300 million in damages claims in the first few years after the spill. However, “lawyers for people who had been harmed called that a mere down payment on losses that averaged more than $200,000 per fisherman from 1990 to 1994.” Twenty-five years after the disaster, “the U.S. Justice Department and State of Alaska say they are still waiting for long overdue scientific studies before collecting a final $92 million claim to implement the recovery plan for unanticipated harm to

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fish, wildlife and habitat.”

The charge that the captain of the Exxon Valdez, Joseph Hazelwood, had a blood-alcohol content above 0.04% was dropped, but he was convicted of negligently discharging oil and ordered to pay $50,000 as restitution to the state of Alaska and to serve 1,000 hours cleaning up the beaches over five years. Exxon executives and stockholders have been embroiled with courts, environmental groups, the media, and public groups over the crisis. Exxon has paid $300 million to date in nonpunitive damages to 10,000 commercial fishermen, business owners, and native Alaskan villages.

In 1996, a grand jury ordered Exxon to pay $5 billion in punitive damages to the victims of the 1989 oil spill. At the time that the fish processors had entered the secret agreement with Exxon, they did not know the Alaskan jury would slap the company with the $5 billion punitive damages award. One of the judges claimed that had the jury known about this secret agreement, it would have charged Exxon even more punitive damages. As of 2001, Exxon had not paid any of these damages. It is also estimated that with Exxon’s reported rate of return on its investments, it makes $800 million every year on the $5 billion it does not pay. (The company would have made back the $5 billion it refused to pay with accrued interest by 2002.) Brian O’Neill, the Minneapolis lawyer who represents 60,000 plaintiffs in the suit against Exxon, stated, “I have had thousands of clients that have gone bankrupt, got divorced, died, or been down on their financial luck” while waiting for the settlement. Looking back on this case, the November 2001 federal appeals court ruling opened the way for a judge to reduce the $5 billion punitive verdict. (However, the 1994 jury award of $287 million to compensate commercial fishermen was not reduced.)

In 2004, the Environmental News Network (ENN) reported that local residents and several government scientists are still at odds as to “whether Exxon Mobil Corporation should be forced to pay an additional civil penalty for the spill. . . . The landmark $900 million civil settlement Exxon signed in 1991 to resolve federal and state environmental claims included a $100 million re-opener clause for damages that ‘could not reasonably have been known’ or anticipated.”

EPILOGUE

On June 25, 2008, the Supreme Court reduced the previously determined $5 billion punitive damages award against ExxonMobil to $507.5 million. Since Justice Samuel A. Alito Jr. owns Exxon stock, he did not participate in the final decision. With regard to whether Exxon should be held accountable for Captain Hazelwood’s irresponsibility in the case, the court split 4-to-4. “The effect of the split was to leave intact the ruling of the lower court, the United States Court of Appeals for the Ninth Circuit, which said Exxon might be held responsible.”

Justice David Souter hinted in his last paragraph on behalf of the 5-to-3 majority that this decision reflected the rule he was announcing for federal maritime cases in the Exxon case, “a rule that generally dictates a maximum 1:1 ratio between a punitive damages award and a jury’s compensatory award.” In effect, by reducing the Exxon Valdez verdict to $500 million, the court set a 1:1 ratio by passing the $507.5 million compensatory damage portion of the jury’s award in this case. Stakeholders were divided on the outcome of the case. It should be recalled that Exxon had previously paid over $2 billion during

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the past 19 years on environmental cleanup and $1.4 billion in fines and compensation to thousands of fishermen and cannery workers.

Exxon chairman and CEO Rex Tillerson recently stated that “We have worked hard over many years to address the impacts of the spill and to prevent such accidents from happening in our company again.” A different reaction came from the hard-hit Alaskan town of Cordova, where fishermen and local businesses suffered bankruptcies and even suicides in the long aftermath of the crises: “The punitive damages claim ‘was about punishing [Exxon] so they wouldn’t do it somewhere else,’ said Sylvia Lange, who owns a hotel and bar frequented by fishermen. ‘We were the mouse that roared, but we got squished.’” As a result of the June 2008 Supreme Court decision, fishermen and others hurt by the disaster will receive about $15,000 instead of $75,000. Note that in 2007, ExxonMobil earned a record $40.6 billion in profits. The company could pay the punitive award with four days profits.

LaRue Tone Hosmer, a noted ethicist, stated, “The most basic lesson in accident prevention that can be drawn from the wreck of the Exxon Valdez is that management is much more than just looking at revenues, costs, and profits. Management requires the imagination to understand the full mixture of potential benefits and harms generated by the operations of the firm, the empathy to consider the full range of legitimate interests represented by the constituencies of the firm, and the courage to act when some of the harms are not certain and many of the constituencies are not powerful. The lack of imagination, empathy, and courage at the most senior levels of the company was the true cause of the wreck of the Exxon Valdez.” Kiley Kroh, deputy editor of the Climate Progress blog, stated that “Critics of the delay say the ongoing struggle to hold Exxon accountable for unanticipated environmental damages in Alaska offers clear lessons to be learned regarding the continuing process of determining BP’s long-term liability for the Deepwater Horizon catastrophe, a spill that was 20 times larger than Exxon Valdez.”

SOURCES

Allen, S. (March 7, 1999). Deep problems 10 years after Exxon Valdez/Worst oil spill in US has lingering effects for Alaska, industries. Wall Street Journal, A1.

Dumanoski, D. (April 2, 1990). One year later—The lessons of Valdez. Boston Globe, 29.

Exxon Valdez fine excessive, court says. (November 8, 2001). USA Today, 6A.

Hosmer, L. (1998). Lessons from the wreck of the Exxon Valdez: The need for imagination, empathy, and courage. Business Ethics Quarterly, 122.

Kroh, K. (2013). 25 years after Exxon Valdez oil spill, company still hasn’t paid for long-term environmental damages. ThinkProgress.org. http://thinkprogress.org/climate/2013/07/15/2301451/, accessed January 8, 2014.

Liptak, A. (June 26, 2008). Damages cut against Exxon in Valdez case. NYTimes.com. http://www.nytimes.com/2008/06/26/washington/26punitive.html?_r=0, accessed January 8, 2014.

McCoy, Charles. (June 13, 1996). Exxon’s secret Valdez deals anger judge. Wall Street Journal, A3.

Parloff, R. (June 25, 2008). Supreme Court slashes $2.5B Exxon Valdez award. Fortune.com. http://legalpad.blogs.fortune.cnn.com/2008/06/25/supreme-court-slashes-25b-exxon-valdez-award/,

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accessed 2008.

Rawkins, R. (February 28, 1990). U.S. indicts Exxon in oil spill. Miami Herald, 5.

Savage, D. (June 26, 2008). Punitive damages against Exxon in oil spill case slashed by 80%. LATimes.com. http://www.latimes.com/news/nationworld/nation/la-na-valdez26- 2008jun26,0,3673626.

Steiner, R. (August 26, 2013). Exxon spill case still unresolved. JuneauEmpire.com. http://juneauempire.com/opinion/2013-08-26/exxon-spill-case-still-unresolved#.UmvoE_mTySo, accessed January 8, 2014. Also see http://www.adn.com/2013/09/16/3078683/compass-exxon- valdez-spill-is.html#storylink=cpy.

QUESTIONS FOR DISCUSSION

1. Who was at fault in this case and why?

2. Should Captain Hazelwood have been convicted of criminal drunkenness in this case? If so, how would that have changed the outcome of the settlement? If not, why?

3. Did Captain Hazelwood settle his “debt” in this case by agreeing to serve 1,000 hours in cleanup time in Alaska? Explain.

4. Describe Exxon’s ethics toward this disaster based on what it had paid over the years up to the June 15, 2008, Supreme Court decision.

5. How much should the 33,000 commercial fishermen, Alaska Native peoples, landowners, businesses, and local governments have been paid as compensation, and why?

6. Respond to Hosmer’s statement. Do you believe this sentiment applies to all responsibilities of senior executives in corporations; that is, do they need to show imagination, empathy, and courage toward all their constituencies? Explain your answer.

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Chapter Summary

Managing corporate social responsibility (CSR) from the corporate board of directors to the marketplace requires commitment, and significant time, effort, and resources from organizations. At stake is a company’s reputation, and even survival. External regulation is also required to help define guidelines and practices for companies to act responsibly toward their stakeholders, communities, and society.

The corporation as social and economic stakeholder was presented from the perspectives of the social contract and covenantal ethic. Corporate social responsibility was also discussed from legal, ethical, philanthropic, and pragmatic viewpoints. Managing and balancing legal compliance with ethical motivation was illustrated by the Sarbanes-Oxley Act and the Revised Federal Sentencing Guidelines for Organizations. A section on legal and regulatory laws and compliance presented the complexity of areas in which corporations must navigate with federal, state, and local agencies before creating and distributing their products and services. A summary of recent corporate scandals was given to demonstrate the need for legal compliance in corporations. Arguments were offered to explain that legal compliance legislation and programs alone are necessary but not sufficient enough to motivate ethical and legal behavior in organizations.

Corporate responsibility toward consumers was presented by explaining these corporate duties: (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.

The free-market theory of Adam Smith was summarized by way of explaining the market context governing the exchange of producers and buyers. Several limits of the free market were offered: that imperfect markets exist; the power between buyers and sellers is not symmetrical; and the line between telling the truth and lying about products is very thin. Economist Paul Samuelson’s “mixed economy” was introduced to offer a more balanced view of free-market theory and of the unrealistic demands often placed on corporations in marketing new products.

An overview of two classic business ethics cases, Johns Manville Corporation and the Exxon Valdez oil spill, were presented to illustrate how legal and regulatory agencies are part of a much broader stakeholder system involving communities and groups in the marketplace. Laws and regulations, as mentioned earlier, are necessary but not sufficient enough forces with which corporate leaders must adhere to in order to act fairly toward their constituencies while being profitable.

Questions

1. Identify a company or organization in the media or with which you are familiar that operates ethically. What are the reasons this company/organization is ethical? (You may refer to the leadership, management, products, or services of the organization.)

2. Do you believe that the Sarbanes-Oxley Act is not needed? Explain or offer a different argument.

3. Are the 2004 Revised Federal Sentencing Guidelines, in your opinion, helpful to organizational leaders and boards of directors in promoting more ethical behavior? Explain. What other actions, policies, or

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procedures would you recommend?

4. Which of the corporate crises summarized at the end of the chapter were you unfamiliar with? Do you believe these crises represent “business as usual” or serious breakdowns in a company’s system? Why?

5. After reading the Johns Manville and Exxon Valdez summaries, identify some ways these crises could have been (1) avoided and (2) managed more responsibly after they occurred.

6. What was your score on the “Rank Your Organization’s Reputation” quiz in Ethical Insight 4.3? After reading previous chapters in this book, how would you describe the “ethics” of your organization, university, or college toward its customers and stakeholders? Explain.

7. Do you believe the covenantal ethic and social contract views are realistic for large organizations like Bank of America, JPMorgan, ExxonMobil, and Citibank, or federal agencies like the FTC and the Department of Defense? Why or why not? Explain.

8. What is the free-market theory of corporate responsibility, and what are some of the problems associated with this view? Compare this view with the social contract and stakeholder perspectives of CSR.

9. If you had to select either the legal/compliance (“stick”) approach or the voluntary/ethical compliance (“carrot”) approach toward running a corporation, which would you choose, and why? What would be likely consequences (positive and negative) of your choice? Explain.

Exercises

1. In this chapter’s opening case, why do you think it took such a large-scale security breach for TJX to start a serious corporate “ethics” program?

2. Outline some steps you would recommend for preventing future corporate scandals like Enron, WorldCom, and the subprime lending crisis based on the contents of this chapter.

3. If you were consulting with a large corporation’s executive team and were asked to talk about how that team could think about a social contract including stakeholder management reasoning, what would you recommend? Write down your advice.

4. You have been invited as a student who has studied business ethics to present a case to a CEO, CFO, and ethics officer of a mid-size firm wanting to be Sarbanes-Oxley compliant. You have been asked to discuss and help them argue the pros and cons of implementing this law. Lay out your approach and arguments, and be ready to tell them what you would recommend they do and why.

5. A large company has invited you to join in a discussion with their legal and human resource officers about integrating ethics into and between their departments. They want your ideas. Use Figure 4.2 and any other ideas from this and previous chapters to outline what you would contribute. Write up a paragraph to share with your class/group.

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 actually help the environment or simply help the company promote its image as a good citizen. Use parts of this chapter to evaluate your answer.

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Real-Time Ethical Dilemma

My job requires that I lie every day I go to work. I work for a private investigation agency called XRT. Most of the work I do involves undercover operations, mobile surveillances, and groundwork searches to determine the whereabouts of manufacturers that produce counterfeit merchandise.

Each assignment I take requires some deception on my part. Recently I have become very conscious of the fact that I frequently have to lie to obtain concrete evidence for a client. I sometimes dig myself so deeply into a lie that I naturally take it to the next level, without ever accomplishing the core purpose of the investigation.

Working for an investigative agency engages me in assignments that vary on a day-to-day basis. I choose to work for XRT because it is not a routine 9-to-5 desk job. But to continue working for the agency means I will constantly be developing new untruthful stories. And the longer I decide to stay at XRT, the more involved the assignments will be. To leave would probably force me into a job photocopying and filing paperwork once I graduate from college.

Recently I was given an assignment which I believed would lead me to entrap a subject to obtain evidence for a client. The subject had filed for disability on workers’ compensation after being hit by a truck. Because the subject refused to partake in any strenuous activity because of the accident, I was instructed to fake a flat tire and videotape the subject changing it for me. Although I did not feel comfortable engaging in this type of act, my supervisors assured me that it was ethical practice and not entrapment. Coworkers and other supervisors assured me that this was a standard “industry practice,” and that we would go out of business if we didn’t “fudge” the facts once in a while. I was told, “Do you think every business does its work and makes profits in a purely ethical way? Get real. I don’t know what they’re teaching you in college, but this is the real world.” It was either do the assignment or find myself on the street—in an economy with no jobs.

Questions 1. What is the dilemma here, or isn’t there one?

2. What would you have done in the writer’s situation? Explain.

3. React to the comment, “Do you think every business does its work and makes profits in a purely ethical way? Get real. I don’t know what they’re teaching you in college, but this is the real world.” Do you agree or disagree? Why?

4. Describe the ethics of this company.

5. Compare and contrast your personal ethics with the company ethics revealed here.

Cases

Case 9 Conscious Capitalism: What Is It? Why Do We Need It? Does It Work?

Introduction Conscious Capitalism: Liberating the Heroic Spirit of Business (2013) is a best-selling book written by John Mackey, CEO of Whole Foods, and Rajendra Sisodia, a management professor at Babson College. A major tenet of the book states, “Conscious capitalism is an evolving paradigm for business that simultaneously

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creates multiple kinds of value and well-being for all stakeholders: financial, intellectual, physical, ecological, social, cultural, emotional, ethical and even spiritual. This new operating system for business is in far greater harmony with the ethos of our times and the essence of our evolving beings.” The four core tenets underlying the business practices of conscious capitalism include “higher purpose and core values, stakeholder integration, conscious leadership and conscious culture and management.” Mackey’s Whole Foods business embodies these principles, as do several other selected companies that the book exemplifies. This case presents the purpose, goal, and need for conscious capitalism that, since the publication of the book, has now become a movement.

Why Conscious Capitalism? Mackey and Sisodia’s book is not the first to initiate a change in the ways businesses should change. In his review of Conscious Capitalism, Alan Murray states that “Capitalist guilt is nearly as old as capitalism itself, but it has seen a resurgence since the financial crises of 2007.” Bill Gates called for a new system of “creative capitalism” in 2008 at a World Economic Forum in Davos, Switzerland. He was upset that pharmaceuticals paid more attention to baldness than curing global diseases like malaria. Michael Porter, a Harvard Business School professor, in 2011 called for “shared-value capitalism,” arguing that business leaders were too occupied by short-term financial profits, more so than “the well-being of customers, the depletion of natural resources, the viability of suppliers, and the concerns of the communities in which they produce and sell.” Mackey and Sisodia continue in this tradition, writing that “With few exceptions, entrepreneurs who start successful businesses don’t do so to maximize profits. Of course they want to make money, but that is not what drives most of them. They are inspired to do something that they believe needs doing. The heroic story of free- enterprise capitalism is one of entrepreneurs using their dreams and passion as fuel to create extraordinary value for customers, team members, suppliers, society, and investors.”

Since the fall of the Berlin Wall in 1989, it has been undisputed in business circles that capitalism and free markets are the best way to promote prosperity and grow economies internationally. Significant progress has been made since the inception of free-enterprise capitalism. Many believe that most of the world’s problems today, such as poverty, education inequality, and problems in undeveloped nations, can be solved through innovations brought about by free markets and free-enterprise capitalism. The poorest nations might be encouraged to embrace the ideas of free-enterprise capitalism to achieve similar successes as the developed countries, such as the United States, Japan, and others.

Free-enterprise capitalism is approximately 200 years old. Below is a partial list of accomplishments during the past two centuries, attributed to free-enterprise capitalism.

• Average income per capita on a global level has increased by over 1,000% since 1800.

• Average life expectancy globally has increased to 68 years, much greater than the historical average of 30 years.

• Two hundred years ago, 85% of the world’s population lived on less than $1 a day in today’s terms. Today that number is 16%.

• In just the last 40 years, undernourished people globally has decreased from 26% to 13%; if the current trend continues, it is estimated hunger will be virtually eliminated in the twenty-first century.

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• Two hundred years ago, the world was almost completely illiterate and today 84% of adults have the ability to read.

• With economic freedom has come political freedom: 53% of people currently live in countries that have democratic governments elected by universal suffrage, compared to zero people 120 years ago.

• Two key factors that have led to the success of free-enterprise capitalism have been entrepreneurship and innovation, combined with freedom and dignity of those transacting business. Both are necessary for capitalism’s continued progress going forward. Entrepreneurs are also to be admired in an economy devoted to free-enterprise capitalism because they are the drivers of innovation that improves our lives, companies’ competitive position, and economies.

Why is Capitalism under Attack? Despite the achievements of free-market capitalism, it is criticized by many around the world. Capitalism has a branding problem, in which its image has been tarnished for various reasons. Entrepreneurs driving capitalism should be admired, yet so many are vilified. Capitalism by many around the world is depicted as a zero-sum game, in which workers are exploited and consumers are cheated by business owners. Critics of capitalism argue that this alleged, intentional process results in greater inequality between the rich and the poor, fragmentation among communities, and environmental degradation, all with the motivation of making a profit. In this portrayal, business owners and entrepreneurs are depicted as being motivated by greed, seeking profit maximization as a way of doing business, since ethical theory claims that people will only pursue their self-interest at the expense of others.

Underlying reasons of capitalism’s branding problem stem, in part, from the corporate scandals that rocked the United States in 2000–2002. Some of the more well-known scandals include Enron, WorldCom, Tyco, and Adelphia Cable, all of which involved executive mischief, causing widespread losses for investors, partners, and communities alike. The latest widespread scandal in the United States—the subprime lending crisis in 2008—led to the longest recession since the Great Depression. This crisis was caused by illegal and unethical actions of large corporations and companies across all levels of the financial sector. Many of the major banks were lending to those who did not qualify, and then securitizing those loans for sale to other banks and consumers. The rating agencies, who were getting paid fees by the major banks, evaluated all of these securitized mortgage products as AAA (risk-free). Consumers during that time were overwhelmed by debt that they could not afford. These actions resulted in a continuing widespread financial crisis that further divided Main Street from Wall Street and society in general from capitalism.

Mackey and Sisodia believe there are several reasons for the attacks on capitalism. First, they argue that there has been an intellectual hijacking of capitalism by economists and critics. These parties have placed capitalism in a narrow, self-serving identity helping to paint capitalism as a profit-maximizing machine. Second, many businesses are operating at a low level of consciousness regarding their purpose and the large impact they have on the world. Third, the industrial era that gave rise to a mechanistic view of business, in which employees were seen as resources of production, embraced the goal of receiving the most output from as little input as possible. And finally, expanding regulations and the size of the government has produced a mutant form of capitalism, dubbed “crony capitalism.”

This biased thinking is prevalent in the consciousness of many today. Wall Street analysts must meet

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quarterly earnings projections for all public companies. Many of these analysts tend to view any stakeholder (other than stockholders) as net drainers of value; that is, if you pay employees more, you will earn less in profits. This is a misunderstanding among many today about business in general, which dates back to the turn of the twentieth century when so-called “robber barons” wielded vast sums of wealth and were not ashamed to flaunt it. For example, Cornelius Vanderbilt was alleged to have said the following when he was warned about violating the law: “Law? Who cares about the law? Hain’t I got the power?”

This dated way of thinking, although seemingly still practiced by some as evidenced in the corporate scandals between 2000 and 2002, shows a low consciousness and moral concern for stakeholders, which can lead to unintended consequences that affect stockholders as well as stakeholders—and, in fact, the entire global economy. This zero-sum concept leads to short-term thinking and can inadvertently support reckless risk-taking among those driven only by short-term profits. If a company seeks only or mainly to maximize profits, it will pressure its entire supply chain to disregard real-time data and constraints. For example, suppliers who are continually dictated to provide product and services to meet unrealistic goals may be rewarded for a few quarters, but in the long-term such suppliers will do one of three things: go out of business; do business elsewhere; or provide products of lower quality, all of which cause havoc to a company’s supply chain. Other consequences, such as disregard for the environment and low employee engagement, have led to the public perception of corporations as greedy, selfish, exploitative, and untrustworthy. Mackey and Sisodia write that “Business is good because it creates value, it is ethical because it is based on voluntary exchange, it is noble because it lifts people out of poverty and creates prosperity.” Capitalism is therefore challenged to become more “conscious” of its heroic nature.

In 2002, a Gallup poll delineated problems with the perceptions of corporations. The poll found that “90% of Americans felt that people running corporations could not be trusted to look after the interests of their employees, and only 18% thought that corporations looked after their shareholders. 43% believed senior executives were only in it for themselves.” The New York Times was also quoted, stating “the majority of the public . . . believes that executives are bent on destroying the environment, cooking the books and lining their own pockets.” One reason for distrust of executives, in addition to the 2000–2002 scandals, is exorbitant executive pay. The Institute of Policy Studies showed that the ratio of CEO to average employee salaries in 1980 was 42 to 1, in 1990 it was 107 to 1, and in 2000 it was 525 to 1. In recent years the ratio has declined to 325 to 1, however the discrepancy is still too large, even outrageous compared to all other professional pay- scale comparisons.

The public image spurred by recent corporate Enron and large banks’ “too big to fail” crises caused by greed and reckless practices have tainted trust of businesses and even capitalism. Chris Meyer and Julia Kirby stated the following in a keynote address at Bentley University (Waltham, MA) on the future of capitalism: “We capitalists are stuck in two deep ruts right now. One of those ruts is an overemphasis on return on equity, as it has become one of the primary (if not the primary) barometer of success for a company.” Meyer and Kirby argue that a fixture on return on equity alone is not an appropriate proxy of the value a company provides, and that by fixating on a single metric, business is committing social suicide. Meyer and Kirby also assert that businesses in general are obsessed with competition, which can be just as harmful as helpful. Competition in free markets has driven innovation in the past, as companies seek out competitive advantages with new

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products and ways to improve the world; but an infatuation with competition, simply for its own sake, will not help drive the innovation needed if people and companies are hindered from being collaborative and inspiring productive change. Former Dupont CEO Charles Holliday has stated that “Dupont’s long history has shown us that no company, however strong and competitive, can go it alone. Involvement in outside organizations and endeavors is a way of learning and leading.”

So, where do we go from here? The CEO of General Electric, Jack Immelt, is quoted in Rajendra Sisodia’s book Firms of Endearment as saying, “To be a great company today, you have to be a good company.” Under conscious capitalism, good businesses make money by creating value for others, not only by maximizing profits. It is essential for free-enterprise capitalism to be grounded in an ethical system based on shared value creation for all stakeholders. To prosper, companies will have to shift mindsets and practices by listening to and learning from today’s customers. This shift represents a change not only in what people want but also in how products should be designed both aesthetically and functionally. For businesses to reach full potential, a new paradigm must be created to move beyond the simplistic models toward a higher purpose and value creation for all parties. Conscious capitalism is one step in that direction.

What Is Conscious Capitalism? Doug Rauch, former CEO of Trader Joe’s and current CEO of Conscious Capitalism, Inc., defines conscious capitalism as “recognition that we are interconnected and interrelated. That business at its core is a story of us.” Jack Canfield, one of my company’s advisory board members, describes the conscious capitalism process as building “sustainable, trusting partnerships with people and the earth, adhering to the core values of respect, integrity, and ethics.”

A distinction must be made, however, between conscious capitalism and corporate social responsibility (CSR)—some believe these are one in the same. CSR is generally defined as a company’s efforts that go beyond what is required by regulators in terms of societal and environmental impacts. To further delineate the distinctions between conscious capitalism and CSR, Edward Freeman, a thought leader on stakeholder relationship management, has stated,

Assume you are CEO and you are asked the following: Your company’s products improve lives. Suppliers want to do business with your company because they benefit from this relationship. Employees really want to work for your company, and are satisfied with their remuneration and professional development. And you’re a good citizen in the communities where you are located; among other things, you pay taxes on the profits you make. You compete hard but fairly. You also make an attractive return on capital for shareholder and other financiers. However, are you socially responsible? (Freeman, 2006, 4)

Freeman notes that CSR, although intended to be beneficial, actually helps to reinforce the “separation thesis” that business and society are two distinct entities. At its worst, the separation thesis can generate a destructive idea of capitalism, in which CSR becomes an add-on to business to help lessen the harsh consequences of doing capitalistic business. This style of thinking fails to recognize the central role business plays in the global improvement in the well-being and prosperity of mankind. CSR is generally seen as beneficial to and contributing positive impacts on societies. However, because of the separation thesis, people may still view capitalism as harmful and interpret CSR as an extension of business—not integral to corporations’ actual functioning.

Freeman has therefore developed his own version of CSR (company stakeholder responsibility), which

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breaks down the separation thesis and describes business as an enterprise with moral ramifications, not needing the arm of social responsibility. In this view, capitalism is a system of social cooperation working together to create value that could not be created by individuals. From Freeman’s perspective, the idea of corporate social responsibility is unnecessary and the baseline for conscious capitalism (i.e., a stakeholder approach) is set.

The Four Tenets of Conscious Capitalism The base of conscious capitalism lies in four tenets: higher purpose; stakeholder integration; conscious leadership; and conscious culture and management. To fully understand the tenets, further delineation is necessary. The tenet of higher purpose depicts the powerful and broad impacts business has on the world. These impacts can be much greater when business is based on a higher purpose that goes beyond just generating profits and shareholder value. Purpose is the reason a company exists. Yes, all companies need to make money to survive, but they do not survive to make money. Professions such as lawyers, doctors, teachers, etc., put an emphasis on public good and have purposes beyond self-interest; so should business. When entrepreneurs originally create their companies, the majority create them for a purpose, to fill a need in society. Having a higher purpose helps to create a high degree of engagement among all stakeholders, rallying around a singular idea. This helps catalyze creativity, innovation, and organizational commitment—all benefits of pursuing a higher purpose beyond profits.

The second tenet of conscious capitalism is stakeholder integration. This tenet is rather similar to the Freeman style of management discussed earlier. A stakeholder is considered to be an entity that impacts or is impacted by a business. Stakeholders include employees, suppliers, the environment, investors, and more. Conscious businesses recognize that stakeholders are interdependent and that their business must be organized to provide optimal value creation for all parties. Stakeholders cannot be treated as individuals because business is a world of interconnected parties. Optimizing value creation for all stakeholders enables the whole system to flourish, not just the company at the center. It also helps to create a harmony of interests among the interdependent stakeholders, so that each party knows it is part of a much larger ecosystem.

To achieve a commitment to the stakeholder approach, we revisit Freeman and his version of CSR, in which he states there are four levels of commitment. Level 1 is a basic value proposition, in which a company must ask itself how it makes its stakeholders better off and what the company stands for. Level 2 involves sustained cooperation among stakeholders, in which the principles and values are established to base everyday engagement between the parties. Level 3 deals with understanding broader societal issues. At this level, companies must ask themselves how the basic value proposition staged in Level 1 and the principles of Level 2 either fit or contradict key trends and opinions in society. Level 4 deals with ethical leadership, which falls under the third tenet of conscious capitalism.

The third tenet of conscious capitalism is conscious leadership. Every conscious business needs a conscious leader; it is nearly (if not fully) impossible to have a conscious business without a leader at the helm who shares the values of the firm and its higher purpose. To be a conscious leader, one must be motivated first and foremost by service to the higher purpose of the firm and creating value for all stakeholders. Conscious leaders reject the old model of fear-based command-and-control leadership and accept the “carrot and sticks” model as primary motivational tools. This model seeks to mentor, motivate, and inspire people into accomplishing

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their tasks and seeks to stimulate innovation and creativity over fear. Conscious leaders must also know what

values and principles inform their leadership, their individual sense of purpose, and what they stand for as a leader. With conscious leadership in place, the fourth tenet of conscious capitalism becomes easier to achieve.

The fourth tenet of conscious capitalism is conscious culture and management. In a conscious business, the culture within the firm is a tremendous source of strength and continuity. This type of culture naturally evolves from the firm’s and management’s commitments to higher purpose, stakeholder interdependence, and conscious leadership. A pure focus on the first three tenets of conscious capitalism should ultimately lead to a conscious culture inspired by commitment, innovation, and creativity. Some may ask why culture is so important. A 2005 study by the Economist Intelligence Unit found that 56% of U.S. executives felt that the single greatest obstacle to growth for their firm was corporate culture. Conscious businesses, because of their culture, do not face these obstacles on their path to growth. The key to establishing conscious culture and achieving the fourth tenet is to understand the connection between management and culture.

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Figure 1 Culture and Management Must Connect

Source: Based on a presentation that R. Sisodia gave at the 2012 Conscious Capitalism Conference at Bentley University, Waltham, MA.

For conscious businesses to thrive, a conscious culture is necessary, which entails management promoting a different type of leadership style. The type of management approach to leadership can either magnify or depress the human need to care. Emphasizing a leadership style that connects what people feel and value to how people work promotes achievement beyond the ordinary scope of traditional businesses. The leadership style found in conscious businesses focuses on decentralization, empowerment, and collaboration. This style of management leads to an amplified ability of the firm to continuously innovate and create multiple kinds of value and wealth (not just financial) for all stakeholders as described by the flow chart in Figure 1, which illustrates the interconnectedness required between culture and management in conscious capitalism firms.

Firms of Endearment (FoEs) So what exactly is a FoE? It is a “company that endears itself to stakeholders by bringing the interests of all stakeholder groups into strategic alignment. No stakeholder benefits at the expense of any other stakeholder group and each prospers as the others do.” FoEs embrace a different idea than most companies. When looking at customers, they strive for share of heart, and not share of wallet. The theme with this form of thought is if you earn a share of the customer’s heart, she will gladly offer you a bigger share of her wallet; do the same for an employee and that employee will give back with substantial increases in productivity and overall work quality. FoEs define the conscious capitalism movement and are at the forefront of conscious business practices, leading the business world into its much-needed evolution. FoEs include Amazon, Honda, Southwest, BMW, IDEO, Starbucks, CarMax, IKEA, Timberland, Caterpillar, JetBlue, Toyota, Commerce Bank, Johnson & Johnson, Trader Joe’s, The Container Store, Jordan’s Furniture, UPS, Costco, LL Bean, Wegmans, eBay, New Balance, Whole Foods, Google, Patagonia, Harley-Davidson, and REI.

FoEs have a distinct set of core values that help differentiate them from competitors. Some of the values

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have already been mentioned, such as aligning stakeholder interests. There is a laundry list of values distinct to

FoEs, and it is pertinent to point out a few here. First, employee compensation and benefits are significantly greater than the standard for the company’s category/industry, while executive salaries are modest, leading to a smaller ratio of CEO pay to average pay. FoEs also devote larger amounts of time to employee training than their competitors, part of the reason for lower FoE employee turnover than the industry average. FoEs consider corporate culture to be their greatest asset and therefore their primary source of competitive advantage. They seek to keep it that way by humanizing the company experience for customers and employees alike, by projecting a genuine passion and connecting emotionally.

From a FoE perspective, stakeholders are understood through the acronym SPICE, which stands for society, partners, investors, customers, and employees. Society is part of the local communities in which FoEs are embedded, as well as larger communities in need of resources for societal improvement. FoEs include governments and non-governmental organizations (NGOs) as well. Partners include upstream partners such as suppliers, as well as downstream partners such as retailers, thus representing the broad spectrum of what businesses would consider partners. Investors as a stakeholder include both individual and institutional shareholders, as well as lenders who have helped finance the company. Customers include both individual and organizational (business) customers, but extend beyond the current customer. FoEs view customers past, present, and future with equal affection and seek for share of heart from all. This is a similar viewpoint to how FoEs view employees. Employees past, present, and future are all stakeholders. Families are also included in their consideration of employees as stakeholders. All in all, FoEs have an extremely broad view of stakeholders and take each into equal consideration when planning firm strategy.

The best way to understand a FoE is to understand how one operates. For our purposes we will focus on Whole Foods as an example of a FoE. Mackey defines the values and concepts that have helped Whole Foods establish and maintain its conscious culture, as well as its competitive advantage against other grocers. For Mackey, purpose involves businesses needing to shift from profit maximization to purpose maximization in an effort to resurrect the brand of business. Purpose maximization is a powerful concept in that it drives everything the firm does. It aligns stakeholders by focusing on a purpose, and ironically, it typically results in making more money than ever thought possible (even more than profit maximization). Mackey further delineates Whole Foods’ culture by discussing the concept of decentralization, which involves having 8–10 teams within each store and each team being self-managed. The teams are responsible for the operations of their specific store. They make decisions regarding hiring, product selection, merchandising, compensation, and more. Teams are rewarded through gain-sharing and not individual performance; 92% of Whole Foods stock options are granted to nonexecutives, whereas in a typical corporation, 75% of options will go to the top five executives. The key to this type of decentralization is that it empowers employees to make their own decisions. By allowing the teams to make decisions on their own, empowerment is greatly increased which helps lead to greater loyalty. Mackey claims that without empowerment, decentralization is useless.

Not only does Whole Foods focus on decentralization, but they also focus on authenticity and transparency, both of which foster trust. The current system of information-sharing in business is “need to know,” which depresses trust within an organization. FoEs focus on being transparent with all stakeholders. Whole Foods accomplishes this by sharing all relevant financial information with team members, including

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compensation. Another FoE, The Container Store, is a private company and therefore has no obligation to share its financial information, and yet the store shares all of its financial statements with all of its employees every year. Whole Foods also seeks to promote love and care within its organization. One way of doing so is through “Appreciations.” Every meeting at Whole Foods is ended by one employee voluntarily expressing an appreciation for another employee, thus helping to shift the culture from judgment to love. All of this leads to continuous innovation, which is the key to having a sustainable competitive advantage. Lastly, Whole Foods is committed to collaboration, because innovation without collaboration is far less valuable. Collaboration combined with the other elements listed above is the recipe for success with Whole Foods and many FoEs, making them the truly great firms they are.

Conscious Capitalism: A Different View The theme of this section has been touched upon throughout the case, but it is important for readers to remain focused on how conscious capitalism is an evolution and improvement of the current U.S. system of capitalism. Conscious capitalism opens up a different mindset. The trade-off thinking of the current system creates an “if/then” mindset leading to restricted options for managers. Conscious capitalism creates “both/and” thinking, which allows managers, entrepreneurs, and ambassadors of capitalism to open their mind to seemingly contradictory conditions, such as paying employees higher wages than industry averages and yet having higher profit margins than industry averages. Further, the “if/then” thinking leads to a zero-sum mindset, in which one stakeholder can only benefit at the expense of another and this system is becoming unsustainable for reasons illustrated previously. In order for value to be created by capitalism, each participant must make a profit; that is, each stakeholder must receive back more value than they originally invested. If stakeholders do not receive value from taking part in the system, they will eventually drop out. The exclusive pursuit of profit maximization has done enormous damage to this system and the reputation of capitalism as profit maximization, by definition, means giving as little and getting as much as possible. The conscious capitalism system of shared value creation increases opportunities by an order of magnitude as the mind breaks free of zero-sum, profit-maximization thinking.

The heroic story of free-enterprise capitalism is not one of profit maximization; it is one of entrepreneurs using their passion as fuel to create extraordinary value for customers, team members, suppliers, investors, and society. Business is far greater than just the sum of the individual stakeholders. Business is the interrelationship, interconnection, shared purpose, and shared values that various stakeholders of the business cocreate and coevolve together. FoEs and proponents of conscious capitalism do not view stakeholders as competing claimants on the value pool, but rather as active contributors to it. Overall, conscious capitalism creates a better environment than the current system. Companies motivated by higher purposes create sustained wealth for investors (see Figure 2); improve the lives of customers by satisfying their needs; elevate human satisfaction through fulfilling work; and build the social, cultural, infrastructural, and ecological wealth of society.

Conscious capitalism is, then, a revolution of traditional free-enterprise capitalism that opens up thinking to shared value creation for all stakeholders. Companies that follow this model are given the title “Firm of Endearment” and base their business models off trust, authenticity, innovation and more. These firms tend to pay employees more, work with suppliers to strengthen both firms, and have lower executive pay than most

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businesses today. The brand of business needs rejuvenation and conscious capitalism is at the forefront of revitalizing the natural good that business creates. But does conscious capitalism’s business model provide financial success?

Conscious Companies Presentation of Original Research Critics of conscious capitalism argue that if employees are paid more, suppliers are treated well and paid a fair price, etc., these numbers should ultimately hit the bottom line of the conscious firms, thus affecting their stock price. Research has been done on this subject and provides amazing results. Studies on those firms that Mackey and Sisodia select and label as FoEs found that those companies generally earn higher shareholder returns, have premium price-to-earnings ratios, and earn a premium return on equity, all while incurring no more risk than the overall stock market. Over a 10-year time period, FoEs produced a cumulative return of 1,026%, while the S&P 500 managed only 122%. There was also another series of firms called “Good to Great,” based on the James Collins book by the same title, with most of these firms focused strictly on profits. These firms also outperformed the S&P 500 but dramatically underperformed FoEs with a cumulative return of 331%, as seen in Figure 2. Note the comparison of FoEs’ cumulative 10-year stock market performance (1,026%) with the exemplary company sample in Good to Great (331%), and to the S&P 500 (122%) for that same period.

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Figure 2 10-Year FoE Performance

Source: Sisodia, R., Wolfe, D., and Sheth, J. (2007). Firms of endearment: How world-class companies profit from passion and purpose, 137. Upper Saddle River, NJ: Wharton School Publishing.

Additionally, FoEs had an average price-to-earnings ratio of 26.8, while the S&P 500’s was 18.4 and Good to Great companies’ 16.8. Sisodia and his coauthors examined the average beta of these firms. Beta is the tendency of a security’s returns to respond to swings in the market and is commonly used as a measure of risk. The average beta is that of the market (S&P 500), which is 1. A beta under 1 suggests that a stock, or group of stocks, is less risky than the overall market. Sisodia and his coauthors found that FoEs had an average beta of .92, thus leading to the conclusion that FoEs produce superior returns with less risk than the overall market, the ideal risk-return relationship for investors.

Updated Financial Analysis of FoEs The research presented above was published in 2004 and included 17 public companies. An updated 2012 analysis consisted of 75 public companies split into four different tiers: highly conscious (elite); conscious; nearly conscious; and international. The “highly conscious” tier consists of 10 companies that embrace the four tenets of conscious capitalism. The “conscious” tier has 35 companies that embrace most aspects of conscious capitalism. These firms could improve one or two of the conscious capitalism tenets in order to be considered highly conscious companies. The “nearly conscious” tier consists of 12 firms that had one or two larger issues in their performance and record of conduct, indicating issues they had with at least one important stakeholder group. Finally, the “international” tier consists of 18 companies with headquarters and operations located outside the United States. Represented countries include India, Germany, the United Kingdom, and Canada.

Method of Analysis in Updated Study The analysis used the four tiers noted above, comparing each tier individually to the S&P 500, Dow Jones Industrial Average (DJIA), and the Russell 3000. An analysis was also performed combining the firms in the “conscious” and “highly conscious” tiers, comparing them to the same three indices. The analysis dates back to

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1997, with separate analyses done on the 3-, 5-, 10- and 15-year stock price performance of the selected firms. The study focused on the stock prices and beta of the selected firms, with the objective of duplicating the results found previously using a larger sample size and also showing the effects different levels of consciousness have on the financial performance of a company. Essentially, the hypothesis is that FoEs provide superior returns than the overall market with less risk.

The stock price and dividend data was pulled from Bloomberg terminals and was used to calculate quarterly holding period returns from 12/31/1997 to 12/31/2012. For firms that have been public less than 15 years, they were simply added into the analysis once public stock price data became available. This was done so that not having a stock price (return would be zero) would not drag down the returns for overall index. The quarterly returns were then averaged together to create an index for each tier of firms. The quarterly returns for the index were then compounded to account for reinvesting dividends. The betas were also pulled from Bloomberg for the individual firms using a linear stock price regression from 12/31/1997 to 12/31/2012 and then averaged together to create an index beta for each tier of firms.

Results of the Analysis The results of the financial analysis affirmed the previously published results regarding FoEs, even with the expansion to a larger number of firms including international firms. Figures 3 and 4 illustrate the cumulative and annualized performance of each tier of the firms explained above, in comparison to the S&P 500, DJIA, and Russell 3000. It is interesting to note that the “Elite FoEs” have the best performance of all the firms, with the “Conscious” (second tier) firms lagging the first tier but vastly outperforming the major stock indices. Finally, the “Nearly Conscious” firms still triple the performance of the major indices.

Another interesting observation is that the “Conscious International” firms also vastly outperform the market as a whole, validating that the model works internationally as well as domestically. It is also important to note the differences in returns over the different time periods. In the three-year analysis, while the selected firms still outperform the major indices, they do so by a smaller margin than the 5-, 10-, and 15-year analysis, with the gaps widening the longer the analysis is performed. This further supports the argument that the conscious business model is effective over the long-term performance of a company, both financially and socially.

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Figure 3 Results of Cumulative Performance of Tiered Firms

The paradox of profits holds true as these firms do not pursue profit as their objective for being, as indicated previously, but rather pursue a higher purpose, enabling a more holistic view of what business can be. The argument that these firms cannot succeed financially is simply a fallacy as evidenced by the analysis presented here, as ultimately all financial performance is enveloped in the stock price of a firm.

In the updated beta analysis, there is a slight diversion from the research presented previously. The FoEs analyzed in Firms of Endearment had a beta of .92, while the firms in the updated analysis have betas slightly higher than 1, as shown in Figure 5.

Figure 4 Cumulative Performance Summary Comparing Fund Indices

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Figure 5 Beta of Indices

Although the betas of the firms are higher than the market average of 1, they are only slightly higher, and with their vast outperformance of the market it is fair to say that investors in these firms will tolerate slightly higher volatility. Also, the beta is only one measure of risk, measuring volatility. A long-term investor seeking firms that outperform the market over 3, 5, 10, etc., years is not as concerned with volatility as a Wall Street trader seeking to take advantage of day-to-day price movements. Essentially the point to be made is that these firms carry little to no extra risk in comparison to the overall market and yet vastly outperform the market over the long term.

Conclusion Conscious capitalism’s business model is timely, even long overdue. Businesses should not be solely focused on profits, but should adopt a more holistic approach to doing business. Conscious capitalism integrates all stakeholders, creating a greater pool of wealth for all involved in the ecosystem. Embracing conscious capitalism has proven to bode well for the companies that choose to do so. Conscious firms are healthy, growing businesses able to survive long-term, outperform competitors, and can generate outstanding returns in the stock market. Through the free markets and competition mechanisms of free-enterprise capitalism, it is my belief that firms embracing conscious capitalism will rise further to the top, and more companies will embrace the model as it becomes the only way to compete in the marketplace with shifting dynamics, wants, and needs. Conscious capitalism is the future of business.

Questions for Discussion 1. Why are the reasons conscious capitalism resurfaced an important topic in the press?

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2. What are the basic principles and tenets of Mackey and Sisodia’s book and the conscious capitalism movement that make it different from other related movements and similar topics?

3. What does ethics have to do with conscious capitalism as presented by Mackey and Sisodia?

4. Why is conscious capitalism not just a theory?

5. What do research results from the updated study in the article show?

Sources Collins, J. (2001). Good to Great. New York: Harper Collins.

EdSitement. (n.d.). The Industrial Age in America: Robber Barons and Captains of Industry. http://edsitement.neh.gov/lesson-plan/industrial-age-america-robber-barons-and-captains-industry.

Freeman, E. (2006). Business Roundtable Institute for Corporate Ethics. Business Roundtable Institute for Corporate Ethics. Bridge Papers. Charlottesville, Virginia. Print.

Mackey, J. (2007). Conscious capitalism: Creating a new paradigm for business. WholeFoodsMarket.com. http://www.wholefoodsmarket.com/blog/john-mackeys-blog/conscious-capitalism-creating-new- paradigm-for%C2%A0business, accessed February 27, 2014.

Mackey, J. (2012). Keynote Address: Whole Foods Market’s Conscious Culture. Conscious Capitalism Institute. Bentley University, Waltham, MA, 21. Conscious Cultures: Building a Flourishing Business on Love and Care.

Meyer, C., and J. Kirby. (2012). Keynote Address: Standing on the Sun: The Future of Capitalism. Conscious Capitalism Institute. Bentley University, Waltham, MA. Conscious Cultures: Building a Flourishing Business on Love and Care.

Murray, A. (January 16, 2013). Chicken soup for a Davos soul. WSJ.com. http://online.wsj.com/news/articles/SB10001424127887324235104578243673073627726, accessed January 7, 2014.

Sadar, A. (2013). Book Review: Conscious Capitalism. Washington Times. http://www.washingtontimes.com/news/2013/mar/20/book-review-conscious-capitalism/, accessed March 20, 2013.

Sisodia, R. (2012). Keynote Address: Conscious Cultures: Building a Flourishing Business on Love and Care. Conscious Capitalism Institute. Bentley University, Waltham, MA.

Sisodia, R., and J. Mackey, (2013). Conscious capitalism: Liberating the heroic spirit of business. Cambridge, MA: Harvard Business Press.

Sisodia, R., D. B. Wolfe, and J. Sheth, (2007). Firms of endearment: How world class companies profit from passion and purpose. Upper Saddle River, NJ: Prentice Hall.

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Case 10 Goldman Sachs: Hedging a Bet and Defrauding Investors

Securities Exchange Commission Charges Goldman Sachs On April 16, 2010, the Securities and Exchange Commission (SEC) charged Goldman Sachs & Co. and one of its vice presidents with defrauding investors. During this time, the U.S. economy was in a state of severe recession following the subprime mortgage crisis. Goldman Sachs was charged with defrauding investors by misstating and omitting key facts about a financial product linked to subprime mortgages. The company had sold a financial product to investors created by the hedge fund Paulson & Co., which had bet against the success of the product. This case details the actions leading to the largest-ever settlement paid by a Wall Street firm to the SEC.

The ABACUS 2007-AC1 Product Development of the ABACUS 2007-AC1 product began in 2007. It was a collateralized debt obligation (CDO). CDOs are based on the performance of subprime residential mortgage-backed securities. Paulson & Co., one of the largest and most profitable hedge funds, approached Goldman Sachs and paid the firm to structure a deal in which Paulson & Co. would add the mortgage securities to their portfolio. The hedge fund took a “short position” against the ABACUS product and the mortgage securities, betting on residential mortgages to fail. Placing the securities in a CDO would temporarily hide the true value of the loans and mislead investors; and when the loans went into default, the price of the product would plummet. Those who bet against the CDO stood to make significant profits.

On April 26, 2007, the transaction between Goldman Sachs and Paulson & Co. closed. Paulson & Co. paid Goldman Sachs $15 million to structure and market the ABACUS product. Paulson & Co. is one of the most profitable hedge funds in history, overseeing more than $32 billion in assets. Founded by John Paulson, a Harvard MBA graduate and one of the world’s wealthiest people, the hedge fund had earnings in the tens of billions in each of the most recent fiscal years. The majority of Paulson’s profits came from the collapse of the housing market. He predicted the billion-dollar write-downs of mortgage-backed securities and took advantage of that foresight. Paulson found subprime mortgages with adjustable rates in areas like California, Arizona, Florida, and Nevada—states that had experienced high increases in home prices that were severely inflated and would drop significantly.

Goldman Sachs knew of Paulson & Co.’s strategic approach to the ABACUS 2007-AC1. In marketing the ABACUS product, Goldman Sachs stated that the securities were selected by ACA Management LLC. ACA was a reputable third party with experience in residential mortgage-backed securities. Investors were not informed that Paulson & Co. had also played a significant role in selecting the securities in the portfolio and that Paulson & Co. stood to benefit if the ABACUS securities defaulted. ACA and the other investors, IKB Bank, were still responsible for due diligence regarding the investment. While Paulson & Co. engaged in the selection process of the securities in the ABACUS portfolio, ACA analyzed and approved every security in the deal. ACA had the final authority over the securities included in ABACUS.

The fact that ACA, an objective third party, had the final approval in the selection of the portfolio was important to investors. IKB, a German bank, stated that if it had known of Paulson & Co.’s role in the

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selection of the mortgage-backed securities and their intended short position, it would not have invested in

the product.

Goldman Sachs knew of the potential harmful consequences in selling the ABACUS product but chose to ignore the risks in favor of profits. CDOs were financial products that hedge funds like Paulson & Co. could bet on with very little risk. Goldman Sachs was not the only firm to engage in the practice of creating CDOs. More than $250 billion of these products were sold into the market in the two years leading up to the U.S. financial crisis. Many have speculated that a majority of these CDOs were deliberately designed to fail, similar to the ABACUS.

The Case against Fabrice Tourre The man responsible for ABACUS was Fabrice Tourre. Tourre was a 31-year-old mid-level trader who’d been working at Goldman Sachs since 2001. Tourre foresaw the downfall of highly leveraged securities as early as 2005. He was one of the few who understood the complexity of the securities and saw an opportunity to help Goldman Sachs offset some of its impending losses. Tourre oversaw the ABACUS product from the beginning. He structured the transaction, marketed the product, and spoke directly with investors. With the knowledge that Paulson & Co. had designed ABACUS to fail, Tourre and Goldman Sachs chose not to disclose this information to investors. Tourre also misled the so-called third-party creators of ABACUS, ACA, into believing that Paulson & Co. had contributed approximately $200 million to the equity of ABACUS. Goldman Sachs again did not disclose that Paulson & Co.’s interests were contrary to ACA’s.

Once the SEC lawsuit was filed, Goldman Sachs very quickly distanced itself from Tourre; continually declined to comment on Tourre’s case; and even aided the SEC investigation of his actions. Tourre defended himself vigorously and claimed that he did not intentionally mislead investors. He stated that the marketing materials for ABACUS were incomplete and that additional information may have been needed. Many times, Tourre called himself “the Fabulous Fab.” When asked if he regretted his actions, Tourre’s only response was that he was “sad and humbled about what happened in the market.” Tourre’s actions received respect from Wall Street bankers and traders, who admired the way he foresaw the collapse in the housing market and, in turn, structured a lucrative deal for his client, Paulson & Co. In the banking industry, he was a legend.

The Downfall ABACUS was created in April of 2007. It received a AAA rating from both credit-rating agencies, Moody’s and Standard & Poor’s. These agencies are never informed of the identity of the investors who participated in the deal. Due to the events surrounding the housing market bubble, the credit agencies’ ability to rate securities was called into question.

During 2007, an internal conversation began within Moody’s to determine whether lower ratings should be issued on CDOs and other deals involving mortgage bonds or other assets. It was determined that more evidence was needed to prove any deterioration in the housing market. Other rating firms acted similarly, choosing to ignore the signs of an impending collapse and allowing many ABACUS-like structured deals to enter the market.

By October 2007, 83% of the residential mortgage-backed securities in the ABACUS portfolio had been downgraded, and the remaining 17% were trending negative. By January 2008, 99% of the securities had been

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downgraded. The German Bank, IKB, investors into ABACUS 2007-AC1, allegedly lost more than $1

billion.

In April 2010, the SEC filed complaint charges against Goldman Sachs and Fabrice Tourre for the actions taken in structuring and marketing the ABACUS 2007-AC1. The SEC reported violations of section 17(a) of the Securities Act of 1933; section 10(b) of the Securities Exchange Act of 1934; and Exchange Act Rule 10b-5. The SEC was seeking injunctive relief, disgorgement of profits, prejudgment interest, and financial penalties. The chairman and CEO of Goldman Sachs, Lloyd Blankfein, spoke candidly and proclaimed that the day the suit by the SEC was filed was “one of the worst days in my professional life.”

The Settlement On July 15, 2010, Goldman Sachs entered into a settlement with the SEC, neither acknowledging any wrongdoing nor denying the SEC’s allegations. In a statement made by Goldman Sachs, the only admittance made by the firm was “that the marketing materials for the ABACUS 2007-AC1 transaction contained incomplete information. In particular, it was a mistake for the Goldman marketing materials to state that the reference portfolio was ‘selected by’ ACA Management LLC without disclosing the role of Paulson & Co. Inc. in the portfolio selection process and that Paulson’s economic interests were adverse to CDO investors. Goldman regrets that the marketing materials did not contain that disclosure.”

The timing of the settlement announcement came only hours after the Senate had passed legislation to reform the U.S. financial system. Many saw this as political posturing by the SEC and a message for the rest of the financial industry. Goldman Sachs paid the SEC $550 million to settle the charges. It was the largest settlement ever paid to the SEC by a Wall Street firm. On the day the settlement was announced, Goldman Sachs’ stock price rose over 4%. The settlement agreement ended three months of uncertainty with the firm. Investors saw it as a positive step, noting that top management was kept intact. The $550-million figure was far lower than the anticipated $1-billion estimate predicted by many analysts.

In addition to the monetary settlement, Goldman Sachs was forced to make several internal changes. The firm was required to increase training for employees who deal with mortgage securities and increase oversight in the structuring and marketing of those securities. The settlement resulted in new industry-wide regulation. In its handling of Goldman Sachs, the SEC and its director of enforcement, Robert Khuzami, made it clear that the agency wanted to send a message not only to the firm, but to the entire industry.

Follow-up Fabrice Tourre’s battle, however, did not stop there. As the New York Times stated, “Mr. Tourre was found liable in August [2013] on six counts of civil securities fraud after a three-week jury trial in Lower Manhattan.” He has since filed for a retrial (September 2013) because “there was a lack of evidence to support the jury’s decision on some counts and that evidence was not presented to the jury in other instances.” Tourre is still awaiting a judgment.

Reflections on Goldman Sachs and the ABACUS Product The economic environment is often one of the primary forces behind stakeholder decisions, as in this case. The way in which the economic climate is trending may be a predictor of many business decisions. This was undoubtedly the case in Goldman Sachs’ decision to structure, market, and sell CDOs. Goldman Sachs and

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Fabrice Tourre realized the impending collapse of the housing market and the resulting losses for the firm. Paulson & Co. also understood the economic climate and bet against the mortgage-backed securities that Goldman Sachs sold to investors.

The government and legal environment also made it possible for Goldman Sachs to engage in unethical practices. The lack of transparency in marketing materials for the ABACUS product was not uncommon. Investment banks were not forced to disclose to rating agencies the investors in the product, nor were they required to identify the security selection process. ACA, the objective third party, had the opportunity to review all the securities in the portfolio, as was their legal right, but because of the lack of a legal obligation for Goldman Sachs to disclose certain information, ACA was at a considerable disadvantage when it came time to evaluate many of the underlying assets in the portfolio.

Corporate Crisis Management Phases An interesting aspect of the Goldman Sachs case was the reaction of the firm to the filing of the SEC lawsuit. The corporate social response stages in crisis management frameworks appropriately describe the experiences that characterized Goldman Sachs’ dealing with the lawsuit. During the “reaction” stage—when the crisis first occurred—a firm is unsure of all the facts surrounding the crisis, but must look confident for its stakeholders. Goldman Sachs’ stock plummeted when word of the lawsuit hit Wall Street. CEO Lloyd Blankfein categorically denied any wrongdoing, insisting that the charges were fraudulent. This led to the second stage, “defense,” when a firm’s reputation is at risk and speculation arises as to the future of the firm. In Goldman’s case, analysts were predicting billion-dollar fines and changes at the management level. The “insight” stage soon follows as a firm is forced to consider the fact that they may be at fault. To appease the SEC, Goldman Sachs not only conducted an internal review of the ABACUS product, but also of many similar products. This led to the fourth stage, “accommodation,” when a firm acknowledges wrongdoing, apologizes, and reassures the public of its stability. Goldman Sachs apparently turned trader Fabrice Tourre into a scapegoat, distancing itself from him and claiming that he had control over the ABACUS product. The firm also settled with the SEC for a record sum, but still far short of the predicted estimates. The SEC vowed to implement regulation that would increase transparency in the marketing of complex securities, and Goldman Sachs pledged to increase oversight in the structuring and selling of these securities. Goldman Sachs’ stock is higher at the time of writing than it was previous to the lawsuit.

Questions for Discussion 1. Was Goldman Sachs just taking advantage of a situational opportunity in the marketplace in this case?

Explain and justify your answer.

2. Who, if anyone, was to blame for the illegal actions taken in this case and why or why not?

3. Who paid and at what “price” for the financial/economic and social costs of the transactions and results of transactions here?

4. Do the ends justify the means in this case, as it turns out? Explain and offer evidence.

5. What ethical and social responsibility lessons can you offer from this case and the aftermath? Explain.

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

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Barr, Colin. (April 16, 2010). SEC charges Goldman Sachs with fraud. CNN Money. http://money.cnn.com/2010/04/16/news/companies/sec.goldman.fortune/index.htm, accessed January 7, 2014.

Cook, Nancy. (May 5, 2010). Fabrice Tourre’s new street cred. Newsweek.com. http://www.newsweek.com/2010/05/05/fabrice-tourre-s-new-street-cred.html, accessed January 7, 2014.

Craig, S. (October 1, 2013). Fabrice Tourre seeks a new trial. DealBookNYTimes.com. http://dealbook.nytimes.com/2013/10/01/fabrice-tourre-seeks-a-new-trial/, accessed January 7, 2014.

Fabrice Tourre: “I did not mislead investors.” (April 27, 2010). CBS News.com. http://www.cbsnews.com/stories/2010/04/27/business/main6436951.shtml, accessed January 7, 2014.

Goldfarb, Zachary A. (April 24, 2010). SEC confident on IKB part of Goldman Sachs lawsuit. WashingtonPost.com. http://www.washingtonpost.com/wp- dyn/content/article/2010/04/23/AR2010042305223.html, accessed January 7, 2014.

Goldman, Sachs & Co. (July 15, 2010). Settlement with the SEC. GoldmanSachs.com. http://www2.goldmansachs.com/our-firm/on-the-issues/sec-settlement.html, accessed February 5, 2011.

Goldman Sachs “victory” ushers change for Wall Street. (July 16, 2010). Bloomberg.com. http://www.businessweek.com/news/2010-07-16/goldman-sachs-victory-ushers-change-for-wall- street.html, accessed January 7, 2014.

Goldman settles with S.E.C. for $550 Million. (July 15, 2010). DealBookNYTimes.com. http://dealbook.nytimes.com/2010/07/15/goldman-to-settle-with-s-e-c-for-550-million/, accessed April 23, 2012.

Moyer, L. (April 26, 2010). Blankfein: SEC case filing “one of the worst days in my professional life.” Forbes.com. http://blogs.forbes.com/streettalk/2010/04/26/blankfein-sec-case-filing-one-of-the-worst- days-in-my-professional-life/, accessed January 7, 2014.

Paulson says role in Goldman CDO was “appropriate.” (April, 21 2010). http://www.bloomberg.com/news/2010-04-21/paulson-co-tells-investors-its-role-in-goldman-cdo-was- appropriate-.html, accessed January 7, 2014.

Swanson, Jann. (October 22, 2008). Rating agencies hit for role in financial crisis. Mortgage News Daily. http://www.mortgagenewsdaily.com/10232008_Ratings_Agencies_.asp, accessed January 7, 2014.

U.S. Securities and Exchange Commission (SEC). (April 16, 2010). SEC charges Goldman Sachs with fraud in structuring and marketing of CDO tied to subprime mortgages. SEC.gov. http://www.sec.gov/news/press/2010/2010-59.html, accessed February 4, 2011.

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Case 11 Google Books

In October 2008, a broad class of authors and publishers, the Authors Guild, the Association of American Publishers, and Google announced a settlement agreement that will unlock access to millions of out-of- print books in the U.S. and give authors and publishers new ways to distribute and control access to their works online. If approved by the Court, the settlement will:

• Generate greater exposure for millions of in-copyright, out-of-print books, by enabling students, scholars, and readers to search, preview, and purchase online access to these works;

• Open new opportunities for authors and publishers to sell their copyrighted works and to maintain ongoing control over the ways those books can be displayed;

• Create an independent, not-for-profit Book Rights Registry that will locate and represent rightsholders, making it easier for everyone, including Google’s competitors, to license works;

• Offer a means for U.S. colleges, universities, and other organizations to obtain subscriptions for online access to collections from some of the world’s most renowned libraries;

• Provide free, full-text, online viewing of millions of out-of-print books at designated computers in U.S. public and university libraries; and

• Enable unprecedented access to the written literary record for people who are visually impaired.

The above settlement agreement continues to be controversial even after the revision. The Court denied the request for final settlement approval on March 22, 2011. The case then pinged back onto the desk of judge Denny Chin, who, to consider fair use, will have to look at issues such as the “purpose and character” of the copying.

Google has become synonymous with a new wave of companies seeking to become the leaders in their industries and make an impact on the world through creativity, social responsibility, and ethical behavior. Google began in 1996 as BackRub, a search engine project created by two Stanford Computer Science graduate students, Larry Page and Sergey Brin. Google has since built such strong brand recognition that it is now listed in the Oxford English Dictionary as a verb commonly used in everyday language. The company is known for its mission “to organize the world’s information and make it universally accessible and useful.” Google has created many tools and applications that have revolutionized how people use the Internet and access information. Google is now a leading search engine and major player in the advertising industry, with keyword advertising being the primary source of revenue and market capitalization.

Birth of Google Books In 2003, Google began its development of Google Books, an online index of millions of books that can be previewed or read for free. The Google Print program, which later became Google Book Search (Google Books) began in December 2003 as an “experimental program that indexes excerpts of popular books, blending the content from these works into regular Google search results.” At this point in time, Amazon was already offering a service called “Search Inside the Book,” which provided customers with screenshots of various pages of books, in some cases making the full text of a book available online. Initially, the Google Books project made only very brief excerpts available from search results. These short excerpts usually

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included only author biographies, jacket reviews, the inside jacket, or the book’s introduction. Included along with the brief excerpts were links to purchase the book at Amazon, Barnes and Noble, and Books-A-Million. Booksellers did not have to pay for these links, nor did Google seem to benefit from any purchases resulting from these links. Google worked in partnership with various prominent publishing houses, such as Dell, Knopf, Random House, and Fodor’s on this project and showed interest in “working with rights holders who own or control a ‘substantial’ amount of content for inclusion in the Google Print program.”

In December 2004, the Google Print program partnered with the libraries of Harvard, Stanford, University of Michigan, Oxford, and the New York Public Library and began scanning books. In Google’s announcement of this partnership, cofounder Larry Page explained that “Even before we started Google, we dreamed of making the incredible breadth of information that librarians so lovingly organize searchable online.” This partnership and the digitizing of books was to be integrated with the Google index to make it searchable for users worldwide, “increas[ing] the visibility of in and out of print books . . . mak[ing] it possible to search across library collections including out of print books and titles that weren’t previously available anywhere but on a library shelf . . . and generat[ing] book sales via ‘Buy this Book’ links and advertising.”

Google Scholar In May 2005, Google added “institutional access” to their Google Scholar program (the beta version was launched in October 2004), which allowed students and other researchers to “locate journal articles within their own libraries.” Students and researchers were now provided an opportunity to “discover relevant information so they can build on the work of others and ‘stand on the shoulders of giants.’”

Also in 2005, Google showed its support for writers and produced the first Mountain View book event with Malcolm Gladwell, author of Blink and The Tipping Point. This began the Authors@Google program, which has hosted more than 480 authors in 12 offices across the United States, Europe, and India.

Legal Implications On September 20, 2005, the Author’s Guild, Inc. and certain named individual authors brought a class-action suit against Google for copyright infringement by scanning library books and intending to use the scanned works on the Google web site without prior authorization from the authors/copyright owners. A month later, a group of publishers brought a similar suit, alleging that Google had refused to obtain prior authorization from publishers for its Library Project, relying instead on the doctrine of “fair use.” Google answered the publishers’ complaint in 2005 and an amended class-action complaint in mid-2006, asserting affirmative defenses of the First Amendment of the United States Constitution (free speech) and “one or more of the exceptions to 17 U.S.C. § 106 [the exclusive copyright rights, including reproduction and public display, allegedly infringed] set forth at 17 U.S.C. §§ 107-122 [including “fair use,” archival use and library use].” The “fair use” exception is set forth as follows:

§ 107. Limitations on exclusive rights: Fair use

Notwithstanding the provisions of sections 106 and 106A, the fair use of a copyrighted work, including such use by reproduction in copies or phono-records or by any other means specified by that section, for purposes such as criticism, comment, news reporting, teaching (including multiple copies for classroom use), scholarship, or research, is not an infringement of copyright. In determining whether the use made of a work in any particular case is a fair use the factors to be considered shall include—(1) the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes; (2) the nature of the copyrighted work; (3) the amount

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and substantiality of the portion used in relation to the copyrighted work as a whole; and (4) the effect of the use upon the potential market for or value of the copyrighted work.

The fact that a work is unpublished shall not itself bar a finding of fair use if such finding is made upon consideration of all the above factors.

Because the entire book was scanned, factor (3) weighed against Google, who argued that only portions were made available for a particular search (see next section) and that its use was “transformative”—it didn’t serve the same purpose as the copyrighted work relative to factor (1), and the effect of the search use actually promoted the market for the full copyrighted works, particularly out-of-print or obscure works under factor (4), nothwithstanding Google’s commercial benefit through advertising under factor (1).

In August 2006, 100 libraries on 10 campuses of the University of California joined the Google Books Library Project and Google’s Book Search began to offer free PDF downloads of books in the public domain. Google Books was able to offer its readers the ability to download and read PDF versions of out-of-copyright books. In the announcement of the new partnership, Google noted, “we do not enable downloading of any book currently under copyright. Unless we have the publisher’s permission to show more, we display only small snippets of text—at most, two or three sentences surrounding your search term—to help you determine if you’ve found what you’re looking for.”

Google Patent Search In December 2006, Google released Google Patent Search, which uses the same technology as Google Books Search. Utilizing the United States Patent and Trademark Office (USPTO), Google Patent Search searches patents issued in the United States that are public-domain government information, and images of the entire database of U.S. patents readily available online via the USPTO web site.

The Legal Battle Continues As a public debate over Google’s fair use continued, the Google Books class action went through further proceedings. “In October 2008, Google announced a settlement agreement with a broad class of authors and publishers to make the world’s books even more accessible online. If approved, the agreement will help readers access millions of hard-to-find, out-of-print books; it will provide new opportunities for authors and publishers to sell their works; and it will further the efforts of our library partners to preserve and maintain their collections while making books more accessible for people on their home computers, in their academic institutions, and in public libraries across the U.S.”

The settlement provided a Registry overseeing copyrighted works for which payments would be made by Google for distribution to copyright holders and that works would be automatically included, unless the copyright holders expressly opted out. Since that time, hundreds of letters and formal objections have been filed with the court from authors and publishers who opted out. Many of these also objected to the control Google had over copyrighted works through the operation of the Registry. Although preliminarily approved, a fairness hearing for final approval of the settlement agreement was delayed.

In December 2008, Google expanded Google Book Search to include magazine articles by partnering with different publishers. This partnership gave access to the archives of magazines that were otherwise inaccessible to readers.

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“On November 13, 2009, the parties to the settlement filed an amended agreement with the U.S. District Court for the Southern District of New York. Over the last several months, we have been carefully reviewing the submissions filed with the Court, including that of the Department of Justice. The changes made to the settlement were developed to address many of these concerns, while preserving the core benefits of the agreement.”

The amended agreement created an “Unclaimed Works Fiduciary” to address the interests of those who had not yet claimed their works, and otherwise provided for negotiation of revenue splits. The court preliminarily approved the agreement on November 19, 2009, and a fairness hearing was scheduled for February 18, 2010. The U.S. Department of Justice filed an objection, stating in a press release that “the changes do not fully resolve the United States’ concerns. The . . . amended settlement agreement still confers significant and possibly anticompetitive advantages on Google as a single entity, thereby enabling the company to be the only competitor in the digital marketplace with the rights to distribute and otherwise exploit a vast array of works in multiple formats.”

The Appeal Court ruling is a very strong signal to Judge Denny Chin that fair use does indeed apply. “We believe that the resolution of Google’s fair use defense in the first instance will necessarily inform and perhaps moot our analysis of many class certification issues, including those regarding the commonality of plaintiffs’ injuries, the typicality of their claims, and the predominance of common questions of law or fact,” the ruling reads. As has been noted with regard to the “fair use” policy, “Google has been scanning all sorts of books and publishing them in the popular Google Books service. Books that are out of copyright are available in their entirety while books that are probably protected by copyright laws may be searched but only small snippets of the text are displayed to the user.”

Judge Barrington D. Parker cited the “enormous societal benefit” that would result when someone at home in Muncie, Indiana, accessed books that otherwise would require a trip to a distant library. The judge also referred to the “logic of the thing” as he described how an academic author eager to get a treatise read by other researchers might welcome Google copying the work rather than collecting “a few dollars in damages because Google put it in their database.”

The Authors Guild is seeking $750 in damages for each copyrighted book Google copied, which would cost Google more than $3 billion, Google attorney Seth Waxman said. The Authors Guild argues Google is not making “fair use” of copyrighted material by offering snippets of works. Google has defended its library, saying it is fully compliant with copyright law.

Google as a Stakeholder Google’s mission is altruistic by nature. The company handles its internal organization and employees by using an environment of trust in employees and their work ethic. Google achieves its well-known creative and casual workplace environment through an emphasis on “team achievements and pride in individual accomplishments that contribute to our overall success . . . put[ting] great stock in our employees–energetic, passionate people from diverse backgrounds with creative approaches to work, play and life.” Fostering creativity in their employees has been a key attribute of Google and has truly set them apart from other companies. It has also brought about many innovative projects that Google and the greater world has been beneficiary to. Google makes a great priority of documenting these company ideals that align with their

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mission and references these ideals in all of their projects. The way that Google has chosen to interpret and reinterpret its famous mission has been the center of

much debate, not only in regard to Google Books but also its relationship with China. When Google first announced that it would be entering China, many of its historically largest supporters rallied to protest this expansion, citing that if the company entered China, it would be going against its mission because of the Chinese government’s history of controlling what information citizens were allowed to access. Google chose to interpret its mission more broadly and argued that it was bringing information to a population that deserved search capabilities, notwithstanding some censorship. In recent months, Google has unfortunately struggled in China.

Among the stakeholders in this case are Google’s employees, partners, clients/advertisers, and product developers. The public shareholders—who are interested in higher share prices and possible dividends—may support Google Books and the settlement if it is likely to increase profits, without regard (necessarily) to Google’s stated mission. Other stakeholders (with regard to the Google Books project) are the Authors Guild, their authors, publishers, libraries, schools and universities, their professors, current students, prospective students, alumni, newspapers, magazines, bloggers, independent writers, journalists and researchers, various advocacy groups, various law/research communities (which include the intellectual property community etc.), and Google’s competitors, which include Amazon, Apple, and Microsoft. The other stakeholders that are in the broader reach are the U.S. government, various trade-industry groups, the print industry, international governments, and other farreaching users.

Conclusion Google programs like Google Books, Google Scholar, and Google Patent Search have the potential to serve as an invaluable resource by compiling and indexing research and works from countries across the globe. The compiling process, however, presents several ethical dilemmas—particularly regarding the ownership of works scanned and compiled. This has already been seen through lawsuits like the class-action suit brought by authors, publishers, the Authors Guild, and the Association of American Publishers, which resulted in the October 2008 settlement. The settlement has since fallen through and the class-action lawsuit was restarted by the Authors Guild in December 2011. The Authors Guild is demanding that Google pay authors for works scanned without permission. “Jim Pitkow, who sold a Web-search company to Google in 2001, said ‘Google has probably spent hundreds of millions of dollars scanning books and that has not been legitimized.’” A new survey has shown, however, that authors are benefiting from their works being posted on Google Books and that the site makes works easier to find.

Google is working to address copyright and domain issues in order to make its index available to worldwide Internet searches and finally settle the long-standing battle with the Authors Guild.

Many issues are at stake for these various stakeholders and each of their perspectives could prove to have various impacts and meanings for Google. The most prominent viewpoint that has been at the heart of the debate is that of the authors, writers, and creators of the works that are being scanned and made available on Google Books. As statements on Google Books indicate, these stakeholders are made up of “supportive,” “non-supportive,” and “mixed blessing” stakeholders, as discussed in Chapter 2. Some authors, particularly lesser-known and poorly published ones, welcome the accessibility of their works to the public because of the

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Google indexing and search capabilities—these are like the lesser-known musicians unrepresented by record labels with their marketing power who welcomed file-sharing. Popular authors and publishers—like many popular musicians and the record labels—may find their work pirated in perfect and costless digital copies, directly diminishing the rewards for their efforts. Other stakeholders, including some authors, Google competitors along its lengthy vertical chain, and the U.S. Department of Justice, are concerned about the power Google holds in controlling the Registry established in the settlement and amended settlement.

At the heart of authors’ claims is copyright. In the United States, the Constitution, article I, section 8, clause 8, provides for the power of Congress “To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.” Those who favor a limitation of authors’ rights to restrict dissemination of their works often refer to this constitutional quid pro quo, arguing that copyright should support society’s progress by limited incentives, which are secondary to the greater good. Of course, the same argument that supports Google’s seeking a profit for providing digital means of dissemination of knowledge supports an author’s seeking a profit for providing content to be disseminated.

Congress codified at 17 U.S.C. § 107, set out above, four factors to be assessed in determining a fair use exemption from copyright claims. This means that you can copy small parts for use in other works (such as a paper) as long as this was not for profit or would not affect the market for the copyrighted work. It also allows “transformative uses,” such as the “Hairy Woman” parody of “Pretty Woman” by 2 Live Crew. Also, archiving (digitizing) of your own copies of books—for example, a library photocopying its decaying manuscripts—is specifically provided in law.

In the original Google Books project, university libraries were being archived, availing of the archive exception to copyright. As mentioned above, Google also defended the copyright infringement actions on the basis of the fair use of displaying snippets of a copyrighted work as results for keyword searches, arguing that this was a transformative use.

As mentioned, the early fear was the costless digital dissemination of copyrighted works, as exemplified by the digitization (MP3) and costless copying of music popularized first by Napster file-sharing. In an earlier, analog world, in the Betamax case, the Supreme Court found that damage to the market for copyrighted television programs by videotape recording for “time-shifting” was speculative, so such recording was fair use, which led to the development of the videotape industry. But videotapes could not be copied over and over again without degrading—unlike the perfect copies of digital music.

The debate, however, has now focused on the control of the distribution by Google. The question is control of pricing. In the one prominent digital music distribution scheme that has resulted in steady revenues, Apple’s iTunes, Apple controls distribution by routinely updating its security code and by charging a single rate ($0.99) for a song, popular or unpopular. As expected, musicians (or more often, their recording labels) who are in greater demand complain that their songs should command higher prices (and royalties to them). Interestingly, Amazon followed a similar pricing strategy in its standard $9.99 for Kindle downloads, but is now challenged by Apple, who has attracted publishers by going to $19.99 for iPad downloads. Amazon has been forced to be more flexible in its prices. Is freer flow of information promoted by lower, standard prices for books established by distributors such as Google, Amazon (contesting Google) and Apple

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(contesting Amazon)? Or do the in-demand content providers have the better argument that they should

command higher prices?

The letter of the copyright law of fair use is not clearly determinative. Courts are moved by policy considerations and ethical concepts. Thus, the Betamax case turned in part because Fred Rogers testified at the trial court that he wanted children to be able to watch his program by time-shifting; that is, recording for later viewing.

Google did not go all the way to try its fair-use defense, but settled on a revenue splitting scheme that promises to help lesser-known authors to reap royalties. Whether the better-known authors and their publishers succeed in wresting control may depend on how well they assess the market at double the Amazon price.

In conclusion, Google’s attempt to maintain its altruist mission, “to organize the world’s information and make it universally accessible and useful,” as supported by its need for revenues to support this effort, is aligned with some authors (lesser-known authors in need of exposure) and with its investors (on the revenue side), but it still conflicts with the claims to incentives by better-known authors and their publishers. In addition, Google’s control of the Registry in the settlement is perceived by many (their competitors, the U.S., and international governments) as a threat to competition in the marketplace. While Google settled with some of the “non-supportive” stakeholders, they have yet to satisfy other authors who are still fearful that their work will be undervalued and pirated.

There is a moral tension between the “public good” rationale of the U.S. Constitution incentive to authors and a natural right that authors feel exists regardless of the aforementioned public good. In Europe, many have been rallying to fight the Google Books project, as they believe in authors’ natural rights and “moral rights” to their creations. To maintain the integrity and control of one’s creation is a principle shared by many and is itself thought of as the ultimate public good.

Questions for Discussion 1. In your opinion, should Google be allowed to copy books and post them online without the explicit

knowledge and/or permission of the authors? Why or why not?

2. What control should authors have over the access to their works online?

3. If you were Google, would you have asked for permission prior to posting books or posted them and then asked for forgiveness when necessary? Explain. How does this reflect your personal ethics?

4. Do you think Google’s strong brand recognition and size allows it to get away with more than other companies or individuals? Why or why not?

5. Is the Google Books idea fundamentally wrong? Why or why not? What potential benefits does it have to society?

Sources This case was developed from material contained in the following sources: Amended Settlement Agreement, The Author’s Guild Inc. et al. v. Google, Inc., No. 05 CV 8136 (S.D.N.Y.

November 13, 2009).

Answer and Affirmative Defenses of Defendant Google, Inc. to the First Amended Complaint, The Author’s

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Guild Inc. et al. v. Google, Inc., No. 05 CV 8136 (S.D.N.Y. July 26, 2006).

Answer, Jury Demand, and Affirmative Defenses of Defendant Google, Inc., The McGraw Hill Companies et al. v. Google, Inc., No. 05 CV 8881 (S.D.N.Y. November 8, 2005).

Book Rights Registry. (2011). Google Books settlement. http://www.googlebooksettlement.com/agreement.html, accessed March 28, 2012.

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Notes

1. TJX’s V.A.L.U.E: Corporate social responsibility report 2013 is available at http://www.tjx.com/images/corp_resp/pdf/TJX2013_CSR_online.pdf, accessed January 6, 2014. See also TJX Companies now #95 largest company, surpassing Capital One Financial. (2013). Forbes.com. http://www.forbes.com/sites/dividendchannel/2013/09/18/tjx-compa-nies-now-95-largest-company- surpassing-capital-one-financial/, accessed January 6, 2014.

2. The TJX Companies, Inc. victimized by computer systems intrusion; provides information to help protect customers. (January 17, 2007). Business Wire News Releases. http://finance.boston.com/boston/news/read/911239/the_tjx_companies, accessed February 3, 2014.

3. Visa fines TJX credit card processor. (October 29, 2007). SC Magazine. http://www.scmagazine.com/visa-fines-tjx-credit-card-processor/article/58255/, accessed January 6, 2014.

4. Lemos, R. (March 30, 2007). TJX theft tops 45.6 million card numbers. Security-Focus. http://www.securityfocus.com/news/11455, accessed January 6, 2014.

5. Kerber, R. (August 21, 2007). Suspect named in TJX credit card probe. Boston.com. http://www.boston.com/business/personalfinance/articles/2007/08/21/suspect_named_in_tjx_credit_card_probe/ accessed January 6, 2014.

6. Goodin, D. (May 13, 2008). TJX credit card heist suspect, 2 others, accused of new scam. Register. http://www.theregister.co.uk/2008/05/13/trio_accused_in_carding_scam/, accessed January 6, 2014.

7. The TJX Companies, Inc. reports strong second quarter FY08 operating results; Estimates liability from computer systems intrusion(s). (August 14, 2007). The TJX Companies, Inc. via Business Wire News Releases. http://finance.boston.com/boston/news/read/2899835/the_tjx_companies, accessed February 3, 2014.

8. Bangemen, E. (May 6, 2007). Blame for record-breaking credit card data theft laid at the feet of WEP. Ars Technica. http://arstechnica.com/news.ars/post/20070506-blame-for-record-breaking-credit-card-data- theft-laid-at-the-feet-of-wep.html, accessed January 6, 2014.

9. Lemos, op. cit.

10. News on Archives. (March 26, 2008). TJX Cos. settles with MasterCard. http://www.cuna.org/newsnow/archive/list.php?date=040308#35511, accessed February 3, 2014.

11. Code of ethics for TJX executives. (n.d). http://www.tjx.com/files/pdf/corp_resp/Code%20of%20Ethics%20for%20TJX%20Executives.pdf, accessed February 9, 2012.

12. These definitions are based on Carroll, A. (1979). A three-dimensional conceptual model of corporate social performance. Academy of Management Review, 4(4), 39–48; Davis, K., and R. Blomstrom, (1975). Business and society: Environment and responsibility, 3rd ed., 39. New York: McGraw-Hill; McGuire, J. (1963). Business and society. New York: McGraw-Hill; For the Patagonia illustration, see: http://www.patagonia.com/us/patagonia.go?assetid=37492.

13. HRM’s role in corporate social and environmental sustainability. http://www.shrm.org/about/foundation/products/documents/4-

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16. Szwajkowski, op. cit., 381.

17. Friedman, M. (September 13, 1970). Social responsibility of business is to increase its profits. New York Times Magazine, 122–136.

18. Ibid.

19. Bell, C. (April 3, 2001). Testing reliance on free market. Boston Globe, C4.

20. Palepu, K., and P. Healy, (2008). Business analysis and valuation. Mason, OH: Thomson South- Western. See also Sharp, A. (2010). Lehman Brothers’ ‘Repo 105’ accounting scandal. WealthDaily.com. http://www.wealthdaily.com/articles/lehman-brothers-enron-accounting-gimmicks/2375, accessed October 27, 2013.

21. Ibid.

22. Samuelson, P. (1973). Economics, 9th ed., 345. New York: McGraw-Hill. This discussion is also based on Velasquez, 1998, 166–200. Velasquez, M. G. (1998). Business ethics: Concepts and cases, 4th ed. Englewood Cliffs, NJ: Prentice Hall.

23. Hillman, A., and G. Keim, (2001). Shareholder value, stakeholder management, and social issues: What’s the bottom line? Strategic Management Journal, 22, 125.

24. Ibid., 136.

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26. Ibid.

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35. Ibid., 104.

36. Davis, K., and R. Blomstrom, (1966). Business and its environment. New York: McGraw-Hill.

37. Thomas et al., op. cit., 60. Also see Webb, D. J. (June 22, 2005). The effects of corporate social responsibility and price on consumer responses. Journal of Consumer Affairs. http://www.allbusiness.com/sector-92-public-administration/administration/1183444-1.html, accessed February 9, 2012.

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45. See the current Trends report at the Social Investment Forum’s web site, http://www.socialinvest.org.

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47. Alsop, R. (2001). Corporate reputations are earned with trust, reliability, study shows. Wall Street Journal. http://webreprints.djreprints.com/00000000000000000012710003.html, accessed February 3, 2014.

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49. Alsop, R., op. cit.

50. Reputation Institute, op. cit.

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54. Ibid.; Lipton, M. (December 31, 2012). Some thoughts for boards of directors in 2013. Harvard Law School Forum on Corporate Governance and Financial Regulation. http://blogs.law.harvard.edu/corpgov/2012/12/31/some-thoughts-for-boards-of-directors-in-2013/, accessed August 20, 2013.

55. Ibid.

56. Spencer Stuart. (2012). Spencer Stuart Board Index. http://content.spencerstuart.com/sswebsite/pdf/lib/Spencer-Stuart-US-Board-Index-2012_06Nov2012.pdf, accessed February 28, 2014.

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62. Ibid.

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64. Sarbanes-Oxley act improves investor confidence, but at a cost. (October 2005). CPA Journal. http://www.nysscpa.org/cpajournal/2005/1005/perspectives/p19.htm, accessed January 6, 2014.

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67. Hazels, op. cit.

68. Volcker and Levitt, op. cit.

69. Ibid.

70. Ibid.

71. Ibid.

72. Ibid.

73. United States Sentencing Commission. (January 2003). Increased penalties under the Sarbanes-Oxley Act of 2002. http://www.ussc.gov/Legislative_and_Public_Affairs/Congressional_Testimony_and_Reports/Corporate_Crime_and_Fraud/200301_RtC_Sarbanes_Oxley.pdf accessed January 6, 2014; Lies, M., II. Create a corporate compliance program. George S. May International Company. http://law.georgesmay.com; Hartman, L. (2004). Perspectives in business ethics, 3rd ed. Boston: McGraw-Hill; Ferrell, O., et al. (2005). Business ethics, 6th ed., 172. Boston: Houghton Mifflin Company.

74. Lies, M., II, op. cit.

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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 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

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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.

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

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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 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

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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 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.

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• 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

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.

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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 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.

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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 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

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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 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.

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• 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.

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

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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 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

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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 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

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First Amendment.”

Wu criticizes court decisions protecting commercial speech rights as a return to the 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 watched 39.3 billion online videos during this same period. Video ad views totaled 13.2 billion.

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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, 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:

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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;

• 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

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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 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

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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 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-

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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

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

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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 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.”

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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.

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

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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 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

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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 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

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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 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),

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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. 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 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.

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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. 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

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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

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

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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