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Management 515

Business Ethics

The Nature of Ethics

Ethics. The inner-guiding moral principles, values, and beliefs that people or groups use to analyze or interpret a situation and then decide what is the right or wrong way to behave

Business ethics. The right or wrong, the good or bad, the legal or illegal, and the ethical and unethical in a business context.

Ethical dilemma. The quandary people find themselves in when the way they prefer to act contradicts their perception of legal or ethical standards demand

People who manage businesses are expected to act in the interest of the owners of the business; however, the often face many competing forces that attempt to drive, sometimes force, these managers to act in the interest of external forces. These external forces are called stakeholders.

Stakeholders include those who believe they have an interest in how the business operates, employees, managers, suppliers, customers, community elements, the public, the government, and others whom you and I would think have no interest, but they think they have an interest.

Business decision makers continually balance what is best for the business owners, what is best for the other stakeholders, and what is best for the decision maker. Remember that we all, if we are mentally healthy, act in our enlightened self interest.

Dilemmas arise when what is clearly best for you is not best for the business or others.

Definitions

Trust. Willingness of one person or group to have faith or confidence in the goodwill of another person

Reputation. Esteem or high repute that individuals or organizations gain when they behave ethically

Societal ethics. Standards that govern how members of society should deal with one another in matters of fairness, justice, poverty, and the rights of the individual

Organizational ethics. Guiding practices which a firm and its managers view their responsibility to stakeholders. Managers play a crucial role in determining a firm’s ethics

More Definitions

Occupational ethics. Standards that govern how members of a profession, trade, or craft should conduct themselves when performing work-related activities, e.g., medical and legal ethics. Usually codified in a professional code of ethics

Individual ethics. Personal standards and values that determine how people view their responsibilities to other people and groups, how they should act in situations when their own self-interests are involved

Individual ethical standards within a larger organization tend to vary significantly

Group ethical standards tend to regress to a norm

While defining the terms is reasonably simply, our challenge arises in agreeing on what constitutes ethical behavior and what crosses the line.

This is further exacerbated when you involve people from different cultures. For example, in some cultures, women and children are considered property of a man and may be treated as the man determines, to include killing them for bad behavior (or behavior the man perceives as bad). In other cultures, this is not tolerated.

What is Ethical Behavior?

There are no absolute or indisputable set of rules or principles that can be developed to decide if an action is ethical or unethical

Neither laws nor ethics are fixed principles

Common perception is that morals and ethics are synonymous. This may be a too simplistic view

Nonetheless, managers must behave ethically and not risk investor capital by engaging in actions that could hurt the firm’s reputation or place it at risk of litigation

Managers must confront the need to decide what is appropriate and inappropriate as they use a company’s resources to produce goods and services. For example, buying materials from your brother-in-law is clearly best for you and your family, but may not be best for the business.

Ethical and moral beliefs lead to the development of laws and regulations to prevent certain behaviors or encourage people to stay within the limits of acceptable behavior. We mutually agree that murder is wrong, so we have laws to punish murderers. On the other hand, hiring your unqualified nephew (nepotism) instead of another qualified applicant may be morally wrong, but no laws exist to prevent it, except in very limited instances. Some might even argue that nepotism is not so bad. In the cultures of some countries, nepotism is expected. In the United States, we even have laws to punish federal employees of the executive branch for acts of nepotism, although the President and Vice President are exempt from these laws..

These gray areas give rise to the discussion of ethical behavior.

Moral vs. Non-moral Behavior

Its just business! This viewpoint often leads to action that would be considered immoral in another context

Moral standards concern behavior that can have serious consequences on human (even non-human) welfare or health

Moral standards take precedence over other standards

Moral standards are based on some underlying belief system, usually religious. The validity of a moral standard is judged by the arguments, not by decree of some formal body.

If ethical behavior is synonymous with moral behavior, or at least based on moral behavior, then actions taken by agents of a business that violate moral standards cannot be justified by the thinking that “it’s just business.” For example, stealing the intellectual property of another firm may be advantageous, but if you subscribe to the position that, “thou shalt not steal,” then such an action should be condemned. This even includes actions such as plagiarism, which, in essence, is the theft of intellectual property. Note, however, that in some cultures, these forms of theft are acceptable, while stealing a goat can lead to the loss of a hand.

If moral standards are the basis of human interaction, these standards must take precedence of other standards. Some will argue that this is absolutism and all actions should be considered in the context of the moment (relativism). For example armed robbery is bad, but robbery under threat of duress by a government in the form of taxes (legalized theft) is acceptable, if the current circumstances justify it; meaning that the government thinks it can do greater good with your money than you can.

Religions tend to provide believers with a universal view of right and wrong. These beliefs lead to the development of moral and ethical standards. It also explains why these standards vary from culture to culture as the basic tenants may be different.

Managers

Are responsible for using the firm’s resources to achieve organizational goals

Frequently juggle multiple interests

Are human (at least most are) and suffer from human weaknesses (see Principle-Agent Theory)

Unethical managers may focus on maximizing their own wealth, not on building stockholder wealth

Unethical managers can damage a firm to the point of causing the firm’s death

One problem that has existed in many companies is corrupt managers who focus not on building the company’s capital and stockholder’s wealth but on maximizing their own personal capital and wealth. This activity could range from embezzlement (which is illegal) to making otherwise legal decision that do not help the business but help the manager. In many cases, these decisions do not violate existing laws.

Visit Wikipedia and review Principle-Agent Theory: https:// en.wikipedia.org/wiki/Principal%E2%80%93agent_problem

Yes, read it. We will address this theory many times in this course.

Ethical Decision Making Model

Utilitarian Rule

An ethical decision should produce the greatest good for the greatest number of people

Moral Rights Rule

An ethical decision should maintain and protect the fundamental rights and privileges of people

Justice Rule

An ethical decision should distribute benefits and harm among the people in a fair, equitable, and impartial manner

Practical Rule

An ethical decision should be one that causes no hesitation because people outside the organization would consider it acceptable and reasonable

Decision

Here is one model of ethical decision making.

Utilitarian Rule: Decision that produces the greatest good for the greatest number

How do you measure the benefits and harms that will be done to each stakeholder group?

How do you evaluate the rights and importance of each group?

Moral Rights rule: Decision that best maintains and protects the fundamental or inalienable rights and privileges of the people affected by it

Justice rule: Decision that distributes benefits and harms among people and groups in a fair, equitable, or impartial way

Practical rule: Decision that a manager has no hesitation about communicating to people outside the company because the typical person would think it is acceptable

How you make ethical decisions more often is a result of how your were raised, your culture, and your belief system. These models are good to spark discussion, but how people make ethical decision is very, very complex.

Unethical behavior encourages other people to act unethically contributing to a negative culture

Unethical behavior may have negative consequences

The death of the firm

Financial loss to stockholders and stakeholders

Ethical values and norms help organizational members:

Resist self-interested action

Realize they are part of something bigger than themselves

Why Behave Ethically?

From a business perspective, the reputation of the business is a significant factor in the success of the business.

Unethical behavior, even when legal, can lead to the death of the firm. As an example, the accounting practices of the Enron Corporation were inconsistent with generally accepted accounting practices, but were not illegal. The CEO and CFO knew that they were allowing (even encouraging) stockholders to misinterpret the firm’s financial posture. This willful misleading of the stockholders and the public was considered unethical. In the end, the CEO and CFO were convicted of technical crimes, but not for the accounting practices they used.

(Kenneth Lay, Jeffery Skilling, Arthur Anderson) Enron's complex financial statements were confusing to shareholders and analysts. Its complex business model and unethical practices required that the company use accounting practices to misrepresent earnings and modify the balance sheet to indicate favorable performance.

Enron became the first non-financial company to use the mark-to-market method to account for its complex long-term contracts. Mark-to-market accounting requires that once a long-term contract was signed, income is estimated as the present value of net future cash flow. Often, the viability of these contracts and their related costs were difficult to estimate and would not be realized for decades.

On the other extreme we have firms such as Chick-fil-A, a family-owned business with policies based on the owners” Christian values. This has led to a lot of gnashing of teeth by leftists and the media, but the company continues to prosper.

Did These CEOs Act Ethically?

Neutron Jack (Welsh) in the 1980s

Fired 10% of worst performing employees each year

Increased stakeholder wealth by 600% during his tenure

However:

S&P 500 increase by more than 600% over same period

Costco increased stakeholder wealth by 1200%

Stanley O'Neal at Merrill Lynch

Changed culture of firm—family to cutthroat

By the end, lost $10.6B

Left with $160M severance package

CEOs are paid lots of money to make decision that affect many people. Jack Welch, during his tenure as CEO, could rank all employees annually and fire the bottom 10%. Welch claimed this helped to improve the quality of the workforce. Nothing in his action was illegal (the workforce lived in “right to work states” were you can be fired for any reason or for no reason). On the other hand, many believed this practice was unethical as it unnecessarily disrupted the lives of many people.

During his tenure, GE performed no better than the S&P average, but Costco, which has an employment for life policy did twice as well as the S&P. What do you think of Welch’s policy?

During the tenure of Stanley O’Neal at Merrill Lynch, the culture of the firm disintegrated. Read about his time at Merrill Lynch at: https:// en.wikipedia.org/wiki/Stanley_O%27Neal

Eventually, the board fired O’Neal. He left with a $160M severance package. This man destroyed the firm, but left with lots of money. Did the board act ethically?

What About These?

Board of Directors dismiss Mozilla Firefox CEO Brenden Eich for supporting Proposition 8

Companies are withholding information about being hacked from the public

Companies are thoroughly researching social media when considering job candidates

Some companies consider employees salaries as confidential and nondisclosure as a condition of employment

Google firing James Damore over his memo on diversity

On March 24, 2014, Brenden Eich was promoted to CEO of Mozilla Corporation. Shortly after his appointment, gay rights activists demonized Eich on Twitter over a $1,000 political donation he made to a group that supported proposition 8, a California proposition to define marriage as a relationship between a man and a woman. Incidentally, 62% of the votes cast were for the proposition. An activist court later overturned the will of the people.

Two gay application developers called for a boycott of the company, even though others at the Mozilla spoke out in favor of Eich, stating that he had never acted in a discriminatory manner against gay employees. Board members wanted him to stay in the company. However, Eich was pressured to step down as CEO. In his personal blog, Eich posted that "under the present circumstances, I cannot be an effective leader.

Do you think the actions of the board were ethical? Should the board have resisted the pressure for external activists? Who, if anyone, acted unethically?

What are your thoughts about the Google incident. Has it changed your view of Google?