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Fundamentals of Business

Chapter 3:

Ethics and Social Responsibility

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Chapter 3

Ethics and Social Responsibility Learning Objectives

1) Define business ethics and explain what it means to act ethically

in business.

2) Explain why we study business ethics.

3) Identify ethical issues that you might face in business, such as

insider trading, conflicts of interest, and bribery, and explain

rationalizations for unethical behavior.

4) Identify steps you can take to maintain your honesty and integrity

in a business environment.

5) Define corporate social responsibility and explain how

organizations are responsible to their stakeholders, including

owners, employees, customers, and the community.

6) Discuss how you can identify an ethical organization, and how

organizations can prevent behavior like sexual harassment.

7) Learn how to avoid an ethical lapse, and why you should not

rationalize when making decisions.

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Introduction

“Mommy, Why Do You Have to Go to Jail?”

The one question Betty Vinson would have preferred to avoid is “Mommy, why do you

have to go to jail?” 1 Vinson graduated with an accounting degree from Mississippi State and

married her college sweetheart. After a series of jobs at small banks, she landed a mid-level

accounting job at WorldCom, at the time still a small long-distance provider. Sparked by the

telecom boom, however, WorldCom soon became a darling of Wall Street, and its stock price

soared. Now working for a wildly successful company, Vinson rounded out her life by reading

legal thrillers and watching her daughter play soccer.

Her moment of truth came in mid-2000, when company executives learned that profits

had plummeted. They asked Vinson to make some accounting adjustments to boost income by

$828 million. Vinson knew that the scheme was unethical (at the very least) but she gave in

and made the adjustments. Almost immediately, she felt guilty and told her boss that she was

quitting. When news of her decision came to the attention of CEO Bernard Ebbers and CFO

Scott Sullivan, they hastened to assure Vinson that she’d never be asked to cook any more

books. Sullivan explained it this way: “We have planes in the air. Let’s get the planes landed.

Once they’ve landed, if you still want to leave, then leave. But not while the planes are in the

air.” 2 Besides, she’d done nothing illegal, and if anyone asked, he’d take full responsibility. So

Vinson decided to stay. After all, Sullivan was one of the top CFOs in the country; at age thirty-

seven, he was already making $19 million a year. 3 Who was she to question his judgment?

4

Six months later, Ebbers and Sullivan needed another adjustment—this time for $771

million. This scheme was even more unethical than the first: it entailed forging dates to hide

the adjustment. Pretty soon, Vinson was making adjustments on a quarterly basis—first for

$560 million, then for $743 million, and yet again for $941 million. Eventually, Vinson had

juggled almost $4 billion, and before long, the stress started to get to her: she had trouble

sleeping, lost weight, and withdrew from people at work. She decided to hang on when she got

a promotion and a $30,000 raise.

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By spring 2002, however, it was obvious that adjusting the books was business as usual

at WorldCom. Vinson finally decided that it was time to move on, but, unfortunately, an internal

auditor had already put two and two together and blown the whistle. The Securities and

Exchange Commission charged WorldCom with fraud amounting to $11 billion—the largest in

U.S. history. Seeing herself as a valuable witness, Vinson was eager to tell what she knew.

The government, however, regarded her as more than a mere witness. When she was named

a co-conspirator, she agreed to cooperate fully and pleaded guilty to criminal conspiracy and

securities fraud. But she won’t be the only one doing time: Scott Sullivan will be in jail for five

years, and Bernie Ebbers will be locked up for twenty-five years. Both maintain that they are

innocent. 5

So where did Betty Vinson, mild-mannered midlevel executive and mother, go wrong?

How did she manage to get involved in a scheme that not only bilked investors out of billions

but also cost seventeen thousand people their jobs? 6 Ultimately, of course, we can only guess.

Maybe she couldn’t say no to her bosses; perhaps she believed that they’d take full

responsibility for her accounting “adjustments.” Possibly she was afraid of losing her job or

didn’t fully understand the ramifications of what she was doing. What we do know is that she

disgraced herself and went to jail. 7

The WorldCom situation is not an isolated incident.

Perhaps you have heard of Bernie Madoff, founder of Bernard L.

Madoff Investment Securities and former chairman of the

NASDAQ stock exchange. 8 Madoff is alleged to have run a giant

Ponzi scheme 9 that cheated investors of up to $65 billion. His

wrongdoings won him a spot at the top of Time Magazine’s Top

10 Crooked CEOs. According to the SEC charges, Madoff

convinced investors to give him large sums of money. In return,

he gave them an impressive 8 percent to 12 percent return a year.

But Madoff never really invested their money. Instead, he kept it

for himself. He got funds to pay the first investors their return (or

their money back if they asked for it) by bringing in new investors. Everything was going

smoothly until the fall of 2008, when the stock market plummeted and many of his investors

asked for their money. As he no longer had it, the game was over and he had to admit that the

Figure 3.1: Bernie Madoff’s mug shot

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whole thing was just one big lie. Thousands of investors, including many of his wealthy friends,

not-so-rich retirees who trusted him with their life savings, and charitable foundations, were

financially ruined. Those harmed by Madoff either directly or indirectly were likely pleased

when he was sentenced to jail for one-hundred and fifty years.

What is Business Ethics?

The Idea of Business Ethics

It’s in the best interest of a company to operate ethically. Trustworthy companies are

better at attracting and keeping customers, talented employees, and capital. Those tainted by

questionable ethics suffer from dwindling customer bases, employee turnover, and investor

mistrust.

Let’s begin this section by addressing this question: What can individuals,

organizations, and government agencies do to foster an environment of ethical behavior in

business? First, of course, we need to define the term.

What Is Ethics?

You probably already know what it means to be ethical: to know right from wrong and

to know when you’re practicing one instead of the other. We can say that business ethics is

the application of ethical behavior in a business context. Acting ethically in business means

more than simply obeying applicable laws and regulations: It also means being honest, doing

no harm to others, competing fairly, and declining to put your own interests above those of

your company, its owners, and its workers. If you’re in business you obviously need a strong

sense of what’s right and wrong. You need the personal conviction to do what’s right, even if it

means doing something that’s difficult or personally disadvantageous.

Why Study Ethics?

Ideally, prison terms, heavy fines, and civil suits would discourage corporate

misconduct, but, unfortunately, many experts suspect that this assumption is a bit optimistic.

Whatever the condition of the ethical environment in the near future, one thing seems clear:

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the next generation entering business—which includes most of you—will find a world much

different than the one that waited for the previous generation. Recent history tells us in no

uncertain terms that today’s business students, many of whom are tomorrow’s business

leaders, need a much sharper understanding of the difference between what is and isn’t

ethically acceptable. As a business student, one of your key tasks is learning how to recognize

and deal with the ethical challenges that will confront you. Asked what he looked for in a new

hire, Warren Buffet, the world’s most successful investor, replied: “I look for three things. The

first is personal integrity, the second is intelligence, and the third is a high energy level.” He

paused and then added: “But if you don’t have the first, the second two don’t matter.” 10

Identifying Ethical Issues and Dilemmas

Ethical issues are the difficult social questions that involve some level of controversy

over what is the right thing to do. Environmental protection is an example of a commonly

discussed ethical issue, because there can be tradeoffs between environmental and economic

factors.

Ethical dilemmas are situations in which it is difficult for an individual to make

decisions either because the right course of action is unclear or carries some potential

negative consequences for the person or people involved.

Make no mistake about it: when you enter the business world, you’ll find yourself in

situations in which you’ll have to choose the appropriate behavior. How, for example, would

you answer questions like the following?

1) Is it OK to accept a pair of sports tickets from a supplier?

2) Can I buy office supplies from my brother-in-law?

3) Is it appropriate to donate company funds to a local charity?

4) If I find out that a friend is about to be fired, can I warn her?

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Obviously, the types of situations are numerous and

varied. Fortunately, we can break them down into a few

basic categories: issues of honesty and integrity, conflicts of

interest and loyalty, bribes versus gifts, and whistle-blowing.

Let’s look a little more closely at each of these categories.

Issues of Honesty and Integrity

Master investor Warren Buffet once told a group of

business students the following: “I cannot tell you that

honesty is the best policy. I can’t tell you that if you behave

with perfect honesty and integrity somebody somewhere

won’t behave the other way and make more money. But

honesty is a good policy. You’ll do fine, you’ll sleep well at

night and you’ll feel good about the example you are setting

for your coworkers and the other people who care about

you.” 11

If you work for a company that settles for its

employees’ merely obeying the law and following a few

internal regulations, you might think about moving on. If

you’re being asked to deceive customers about the quality

or value of your product, you’re in an ethically unhealthy

environment.

Think about this story:

“A chef put two frogs in a pot of warm soup

water. The first frog smelled the onions, recognized

the danger, and immediately jumped out. The

second frog hesitated: The water felt good, and he decided to stay and relax for a

minute. After all, he could always jump out when things got too hot (so to speak).

As the water got hotter, however, the frog adapted to it, hardly noticing the

change. Before long, of course, he was the main ingredient in frog-leg soup.” 12

Figure 3.2: How to maintain honesty and integrity

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So, what’s the moral of the story? Don’t sit around in an ethically toxic environment and

lose your integrity a little at a time; get out before the water gets too hot and your options have

evaporated. Fortunately, a few rules of thumb can guide you.

We’ve summed them up in Figure 3.2 on the previous page.

Conflicts of Interest

Conflicts of interest occur when individuals must choose between taking actions that

promote their personal interests over the interests of others or taking actions that don’t. A

conflict can exist, for example, when an employee’s own interests interfere with, or have the

potential to interfere with, the best interests of the company’s stakeholders (management,

customers, and owners). Let’s say that you work for a company with a contract to cater events

at your college and that your uncle owns a local bakery. Obviously, this situation could create a

conflict of interest (or at least give the appearance of one—which is a problem in itself). When

you’re called on to furnish desserts for a luncheon, you might be tempted to send some

business your uncle’s way even if it’s not in the best interest of your employer. What should

you do? You should disclose the connection to your boss, who can then arrange things so that

your personal interests don’t conflict with the company’s.

The same principle holds that an employee shouldn’t use private information about an

employer for personal financial benefit. Say that you learn from a coworker at your

pharmaceutical company that one of its most profitable drugs will be pulled off the market

because of dangerous side effects. The recall will severely hurt the company’s financial

performance and cause its stock price to plummet. Before the news becomes public, you sell

all the stock you own in the company. What you’ve done is called insider trading – acting on

information that is not available to the general public, either by trading on it or providing it to

others who trade on it. Insider trading is illegal, and you could go to jail for it.

Conflicts of Loyalty

You may one day find yourself in a bind between being loyal either to your employer or

to a friend or family member. Perhaps you just learned that a coworker, a friend of yours, is

about to be downsized out of his job. You also happen to know that he and his wife are getting

ready to make a deposit on a house near the company headquarters. From a work standpoint,

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you know that you shouldn’t divulge the information. From a friendship standpoint, though, you

feel it’s your duty to tell your friend. Wouldn’t he tell you if the situation were reversed? So what

do you do? As tempting as it is to be loyal to your friend, you shouldn’t tell. As an employee,

your primary responsibility is to your employer. You might be able to soften your dilemma by

convincing a manager with the appropriate authority to tell your friend the bad news before he

puts down his deposit.

Bribes versus Gifts

It’s not uncommon in business to give and receive small gifts of appreciation, but when

is a gift unacceptable? When is it really a bribe?

There’s often a fine line between a gift and a bribe. The following information may help

in drawing it, because it raises key issues in determining how a gesture should be interpreted:

the cost of the item, the timing of the gift, the type of gift, and the connection between the giver

and the receiver. If you’re on the receiving end, it’s a good idea to refuse any item that’s overly

generous or given for the purpose of influencing a decision. Because accepting even small

gifts may violate company rules, always check on company policy.

JCPenney’s “Statement of Business Ethics,” for instance, states that employees can’t

accept any cash gifts or any noncash gifts except those that have a value below $50 and that

are generally used by the giver for promotional purposes. Employees can attend paid-for

business functions, but other forms of entertainment, such as sports events and golf outings,

can be accepted only if it’s practical for the Penney’s employee to reciprocate. Trips of several

days can’t be accepted under any circumstances. 13

Whistle-Blowing

As we’ve seen, the misdeeds of Betty Vinson and her accomplices at WorldCom didn’t

go undetected. They caught the eye of Cynthia Cooper, the company’s director of internal

auditing. Cooper, of course, could have looked the other way, but instead she summoned up

the courage to be a whistle-blower—an individual who exposes illegal or unethical behavior in

an organization. Like Vinson, Cooper had majored in accounting at Mississippi State and was

a hard-working, dedicated employee. Unlike Vinson, however, she refused to be bullied by her

boss, CFO Scott Sullivan. In fact, she had tried to tell not only Sullivan but also auditors from

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the Arthur Andersen accounting firm that there was a problem with WorldCom’s books. The

auditors dismissed her warnings, and when Sullivan angrily told her to drop the matter, she

started cleaning out her office. But she didn’t relent. She and her team worked late each night,

conducting an extensive, secret investigation. Two months later, Cooper had evidence to take

to Sullivan, who told her once again to back off. Again, however, she stood up to him, and

though she regretted the consequences for her WorldCom coworkers, she reported the

scheme to the company’s board of directors. Within days, Sullivan was fired and the largest

accounting fraud in history became public. 14

As a result of Cooper’s actions, executives came clean about the company’s financial

situation. The conspiracy of fraud was brought to an end, and though public disclosure of

WorldCom’s problems resulted in massive stock-price declines and employee layoffs, investor

and employee losses would have been greater without Cooper’s intervention. Even though

Cooper did the right thing, and landed on the cover of Time magazine for it, the experience

wasn’t exactly gratifying.

A lot of people applauded her action, but many coworkers shunned her; some even

blamed her for the company’s troubles. 15

Whistle-blowing is sometimes career suicide. A survey of two hundred whistle-blowers

conducted by the National Whistleblower Center found that half were fired for blowing the

whistle. 16

Even those who keep their jobs can experience repercussions. As long as they stay,

some will treat them (as one whistle-blower put it) “like skunks at a picnic”; if they leave, they

may be blackballed in the industry. 17

On a positive note, new Federal laws have been passed

which are intended to protect whistle-blowers.

For her own part, Cynthia Cooper doesn’t regret what she did. As she told a group of

students at Mississippi State: “Strive to be persons of honor and integrity. Do not allow yourself

to be pressured. Do what you know is right even if there may be a price to be paid.” 18

If your

company tells employees to do whatever it takes, push the envelope, look the other way, and

“be sure that we make our numbers,” you have three choices: go along with the policy, try to

change things, or leave. If your personal integrity is part of the equation, you’re probably down

to the last two choices. 19

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Corporate Social Responsibility

Corporate social responsibility refers to the approach that an organization takes in

balancing its responsibilities toward different stakeholders when making legal, economic,

ethical, and social decisions. Remember that we previously defined stakeholders as those

with a legitimate interest in the success or failure of the business and the policies it adopts.

The term social responsibility refers to the approach that an organization takes in balancing its

responsibilities toward their various stakeholders.

What motivates companies to be “socially responsible”? We hope it’s because they

want to do the right thing, and for many companies, “doing the right thing” is a key motivator.

The fact is, it’s often hard to figure out what the “right thing” is: what’s “right” for one group of

stakeholders isn’t necessarily just as “right” for another. One thing, however, is certain:

companies today are held to higher standards than ever before. Consumers and other groups

consider not only the quality and price of a company’s products but also its character. If too

many groups see a company as a poor corporate citizen, it will have a harder time attracting

qualified employees, finding investors, and selling its products. Good corporate citizens, by

contrast, are more successful in all these areas.

Figure 3.3 presents a model of corporate responsibility based on a company’s

relationships with its stakeholders. In this model, the focus is on managers—not owners—as

the principals involved in these relationships. Owners are the stakeholders who invest risk

capital in the firm in expectation of a financial return. Other stakeholders include employees,

suppliers, and the communities in which the firm does business. Proponents of this model

hold that customers, who provide the firm with revenue, have a special claim on managers’

attention. The arrows indicate the two-way nature of corporation-stakeholder relationships: All

stakeholders have some claim on the firm’s resources and returns, and management’s job is to

make decisions that balance these claims. 20

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Let’s look at some of the ways in which companies can be “socially responsible” in

considering the claims of various stakeholders.

Owners

Owners invest money in companies. In return, the people who run a company have a

responsibility to increase the value of owners’ investments through profitable operations.

Managers also have a responsibility to provide owners (as well as other stakeholders having

financial interests, such as creditors and suppliers) with accurate, reliable information about

the performance of the business. Clearly, this is one of the areas in which WorldCom

managers fell down on the job. Upper-level management purposely deceived shareholders by

presenting them with fraudulent financial statements

Figure 3.3: Management’s relationships with stakeholders

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Managers

Managers have what is known as a fiduciary responsibility to owners: they’re

responsible for safeguarding the company’s assets and handling its funds in a trustworthy

manner. Yet managers experience what is called the agency problem; a situation in which their

best interests do not align with those of the owners who employ them. To enforce managers’

fiduciary responsibilities for a firm’s financial statements and accounting records, the

Sarbanes-Oxley Act of 2002 requires CEOs and CFOs to attest to their accuracy. The law also

imposes penalties on corporate officers, auditors, board members, and any others who commit

fraud. You’ll learn more about this law in your accounting and business law courses.

Employees

Companies are responsible for providing employees with safe, healthy places to

work—as well as environments that are free from sexual harassment and all types of

discrimination. They should also offer appropriate wages and benefits. In the following

sections, we’ll take a closer look at these areas of corporate responsibility.

Wages and Benefits

At the very least, employers must obey laws governing minimum wage and overtime

pay. A minimum wage is set by the federal government, though states can set their own rates

as long as they are higher. The current federal rate, for example, is $7.25, while the rate in

many states is far higher. 21

By law, employers must also provide certain benefits—social

security (retirement funds), unemployment insurance (protects against loss of income in case

of job loss), and workers’ compensation (covers lost wages and medical costs in case of on-

the-job injury). Most large companies pay most of their workers more than minimum wage and

offer broader benefits, including medical, dental, and vision care, as well as savings programs,

in order to compete for talent.

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Safety and Health

Though it seems obvious that companies should guard workers’ safety and health,

some simply don’t. For over four decades, for example, executives at Johns Manville

suppressed evidence that one of its products, asbestos, was responsible for the deadly lung

disease developed by many of its workers. 22

The company concealed chest X- rays from

stricken workers, and executives decided that it was simply cheaper to pay workers’

compensation claims than to create a safer

work environment. A New Jersey court was

quite blunt in its judgment: Johns Manville, it

held, had made a deliberate, cold-blooded

decision to do nothing to protect at-risk

workers, in blatant disregard of their rights. 23

About four in one hundred thousand

U.S. workers die in workplace “incidents” each

year. The Department of Labor categorizes

deaths caused by conditions like those at

Johns Manville as “exposure to harmful

substances or environments.” How prevalent

is this condition as a cause of workplace

deaths? See Figure 3.4, “Workplace Deaths

by Event or Exposure, 2014”, which breaks down workplace fatalities by cause. Some jobs are

more dangerous than others. For a comparative overview based on workplace deaths by

occupation, see Figure 3.5.

Fortunately for most people, things are far better than they were at Johns Manville.

Procter & Gamble (P&G), for example, considers the safety and health of its employees

paramount and promotes the attitude that “Nothing we do is worth getting hurt for.” With nearly

one hundred thousand employees worldwide, P&G uses a measure of worker safety called

“total incident rate per employee,” which records injuries resulting in loss of consciousness,

time lost from work, medical transfer to another job, motion restriction, or medical treatment

beyond first aid. The company attributes the low rate of such incidents—less than one incident

per hundred employees—to a variety of programs to promote workplace safety. 24

Figure 3.4: Workplace deaths by event or exposure, 2014.

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Figure 3.5: Workplace deaths by occupation, 2014.

Industry % of Total

Workplace Deaths

Construction 19%

Transportation and Warehousing 16%

Agriculture, Forestry, and Fishing 12%

Government 9%

Professional and Business Services 9%

Manufacturing 7%

Retail Trade 6%

Leisure and Hospitality 4%

Mining, Quarrying, and Natural Gas Extraction 4%

Customers

The purpose of any business is to satisfy customers, who reward businesses by buying

their products. Sellers are also responsible—both ethically and legally—for treating customers

fairly. The rights of consumers were first articulated by President John F. Kennedy in 1962

when he submitted to Congress a presidential message devoted to consumer issues. 25

Kennedy identified four consumer rights:

1) The right to safe products. A company should sell no product that it suspects of

being unsafe for buyers. Thus, producers have an obligation to safety-test products

before releasing them for public consumption. The automobile industry, for example,

conducts extensive safety testing before introducing new models (though recalls

remain common).

2) The right to be informed about a product. Sellers should furnish consumers with

the product information that they need to make an in- formed purchase decision.

That’s why pillows have labels identifying the materials used to make them, for

instance.

3) The right to choose what to buy. Consumers have a right to decide which

products to purchase, and sellers should let them know what their options are.

Pharmacists, for example, should tell patients when a prescription can be filled with

a cheaper brand-name or generic drug. Telephone companies should explain

alternative calling plans.

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4) The right to be heard. Companies must tell customers how to contact them with

complaints or concerns. They should also listen and respond.

Companies share the responsibility for the legal and ethical treatment of consumers

with several government agencies: the Federal Trade Commission (FTC), which enforces

consumer-protection laws; the Food and Drug Administration (FDA), which oversees the

labeling of food products; and the Consumer Product Safety Commission, which enforces

laws protecting consumers from the risk of product-related injury.

Communities

For obvious reasons, most communities see getting a new business as an asset and

view losing one—especially a large employer—as a detriment. After all, the economic impact

of business activities on local communities is substantial: They provide jobs, pay taxes, and

support local education, health, and recreation programs. Both big and small businesses

donate funds to community projects, encourage employees to volunteer their time, and donate

equipment and products for a variety of activities. Larger companies can make greater

financial contributions. Let’s start by taking a quick look at the philanthropic activities of a few

U.S. corporations.

Philanthropy

Many large corporations support various charities, an activity called philanthropy.

Some donate a percentage of sales or profits to worthwhile causes. Retailer Target, for

example, donates 5 percent of its profits—about $2 million per week—to schools,

neighborhoods, and local projects across the country; its store-based grants underwrite

programs in early childhood education, the arts, and family-violence prevention. 26

The late

actor Paul Newman donated 100 percent of the profits from “Newman’s Own” foods (salad

dressing, pasta sauce, popcorn, and other products sold in eight countries). His company

continues his legacy of donating all profits and distributing them to thousands of organizations,

including the Hole in the Wall Gang camps for seriously ill children. 27

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Ethical Organizations

How Can You Recognize an Ethical Organization?

One goal of anyone engaged in business should be to foster ethical behavior in the

organizational environment. How do we know when an organization is behaving ethically?

Most lists of ethical organizational activities include the following criteria:

 Treating employees, customers, investors, and the public fairly

 Holding every member personally accountable for his or her action

 Communicating core values and principles to all members

 Demanding and rewarding integrity from all members in all situations28

Employees at companies that consistently make Business Ethics magazine’s list of the

“100 Best Corporate Citizens” regard the items on the previous list as business as usual in the

workplace. Companies at the top of the 2016 list include Microsoft, Hasbro, Ecolab, Bristol-

Myers-Squibb, and Lockheed Martin. 29

By contrast, employees with the following attitudes tend to suspect that their employers

aren’t as ethical as they should be:

 They consistently feel uneasy about the work they do.

 They object to the way they’re treated.

 They’re uncomfortable about the way coworkers are treated.

 They question the appropriateness of management directives and policies.30

Sexual Harassment

Sexual harassment occurs when an employee makes “unwelcome sexual advances,

requests for sexual favors, and other verbal or physical conduct of a sexual nature” to another

employee. It’s also considered sexual harassment when “submission to or rejection of this

conduct explicitly or implicitly affects an individual’s employment, unreasonably interferes with

an individual’s work performance or creates an intimidating, hostile or offensive work

environment.” 31

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To prevent sexual harassment—or at least minimize its likelihood—a company should

adopt a formal anti-harassment policy describing prohibited conduct, asserting its objections

to the behavior, and detailing penalties for violating the policy. 32

Employers also have an

obligation to investigate harassment complaints. Failure to enforce anti-harassment policies

can be very costly. In 1998, for example, Mitsubishi paid $34 million to more than three

hundred fifty female employees of its Normal, Illinois, plant to settle a sexual harassment case

supported by the Equal Employment Opportunity Commission. The EEOC reprimanded the

company for permitting an atmosphere of verbal and physical abuse against women, charging

that female workers had been subjected to various forms of harassment, ranging from

exposure to obscene graffiti and vulgar jokes to fondling and groping. 33

Workforce Diversity

In addition to complying with equal employment opportunity laws, many companies

make special efforts to recruit employees who are underrepresented in the workforce

according to sex, race, or some other characteristic. In helping to build more diverse

workforces, such initiatives contribute to competitive advantage for two reasons:

1) People from diverse backgrounds bring new talents and fresh perspectives to an

organization, typically enhancing creativity in the development of new products.

2) By more accurately reflecting the demographics of the marketplace, a diverse

workforce improves a company’s ability to serve an ethnically diverse population.

The Individual Approach to Ethics

Betty Vinson didn’t start out at WorldCom with the intention of going to jail. She

undoubtedly knew what the right behavior was, but the bottom line is that she didn’t do it. How

can you make sure that you do the right thing in the business world? How should you respond

to the kinds of challenges that you’ll be facing? Because your actions in the business world will

be strongly influenced by your moral character, let’s begin by assessing your current moral

condition. Which of the following best applies to you (select one)?

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1) I’m always ethical.

2) I’m mostly ethical.

3) I’m somewhat ethical.

4) I’m seldom ethical.

5) I’m never ethical.

Now that you’ve placed yourself in one of these categories, here are some general

observations. Few people put themselves below the second category. Most of us are ethical

most of the time, and most people assign themselves to category number two— “I’m mostly

ethical.” Why don’t more people claim that they’re always ethical?

Apparently, most people realize that being ethical all the time takes a great deal of

moral energy. If you placed yourself in category number two, ask yourself this question: How

can I change my behavior so that I can move up a notch? The answer to this question may be

simple. Just ask yourself an easier question: How would I like to be treated in a given

situation? 34

Unfortunately, practicing this philosophy might be easier in your personal life than in the

business world. Ethical challenges arise in business because companies, especially large

ones, have multiple stakeholders who sometimes make competing demands. Making

decisions that affect multiple stakeholders isn’t easy even for seasoned managers; and for new

entrants to the business world, the task can be extremely daunting. You can, however, get a

head start in learning how to make ethical decisions by looking at two types of challenges that

you’ll encounter in the business world: ethical dilemmas and ethical decisions.

Addressing Ethical Dilemmas

An ethical dilemma is a morally problematic situation: you must choose between two or

more acceptable but often opposing alternatives that are important to different groups. Experts

often frame this type of situation as a “right-versus-right” decision. It’s the sort of decision that

Johnson & Johnson (known as J&J) CEO James Burke had to make in 1982. 35

On September

30, twelve-year-old Mary Kellerman of Chicago died after her parents gave her Extra-Strength

Tylenol. That same morning, twenty-seven-year-old Adam Janus, also of Chicago, died after

taking Tylenol for minor chest pain. That night, when family members came to console his

parents, Adam’s brother and his wife took Tylenol from the same bottle and died within forty-

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eight hours. Over the next two weeks, four more people in Chicago died after taking Tylenol.

The actual connection between Tylenol and the series of deaths wasn’t made until an off-duty

fireman realized from news reports that every victim had taken Tylenol. As consumers

panicked, J&J pulled Tylenol off Chicago-area retail shelves. Researchers discovered Tylenol

capsules containing large amounts of deadly cyanide. Because the poisoned bottles came

from batches originating at different J&J plants, investigators determined that the tampering

had occurred after the product had been shipped. 36

So J&J wasn’t at fault. But CEO Burke was still faced with an extremely serious

dilemma: Was it possible to respond to the tampering cases without destroying the reputation

of a highly profitable brand?

Burke had two options:

1) He could recall only the lots of Extra-Strength Tylenol that were found to be tainted with

cyanide. In 1991, Perrier executives recalled only tainted product when they discovered

that cases of their bottled water had been poisoned with benzine. This option favored

J&J financially but possibly put more people at risk.

2) Burke could order a nationwide recall—of all bottles of Extra-Strength Tylenol. This

option would reverse the priority of the stakeholders, putting the safety of the public

above stakeholders’ financial interests.

Burke opted to recall all 31 million bottles of Extra-Strength Tylenol on the market. The

cost to J&J was $100 million, but public reaction was quite positive. Less than six weeks after

the crisis began, Tylenol capsules were reintroduced in new tamper-resistant bottles, and by

responding quickly and appropriately, J&J was eventually able to restore the Tylenol brand to

its previous market position. When Burke was applauded for moral courage, he replied that

he’d simply adhered to the long-standing J&J credo that put the interests of customers above

those of other stakeholders. His only regret was that the perpetrator was never caught. 37

If you’re wondering what your thought process should be if you’re confronted with an

ethical dilemma, you might wish to remember the mental steps listed here—which happen to

be the steps that James Burke took in addressing the Tylenol crisis:

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1) Define the problem: How to respond to the

tampering case without destroying the reputation of

the Tylenol brand.

2) Identify feasible options: (1) Recall only the lots of Tylenol that were found to be

tainted or (2) order a nationwide recall of all bottles of Extra-Strength Tylenol.

3) Assess the effect of each option on

stakeholders: Option 1 (recalling only the tainted

lots of Tylenol) is cheaper but puts more people at

risk. Option 2 (recalling all bottles of Extra-Strength

Tylenol) puts the safety of the public above

stakeholders’ financial interests.

4) Establish criteria for determining the most

appropriate action: Adhere to the J&J credo,

which puts the interests of customers above those

of other stakeholders.

5) Select the best option based on the established

criteria: In 1982, Option 2 was selected, and a

nationwide recall of all bottles of Extra-Strength

Tylenol was conducted.

Making Ethical Decisions

In contrast to the “right-versus-right” problem posed by

an ethical dilemma, an ethical decision entails a “right-

versus-wrong” decision—one in which there is clearly a right

(ethical) choice and a wrong (unethical or illegal) choice.

When you make a decision that’s unmistakably unethical or

illegal, you’ve committed an ethical lapse. If you’re presented

with this type of choice, asking yourself the questions in

Figure 3.6 “How to Avoid an Ethical Lapse” will increase your

odds of making an ethical decision.

Figure 3.6: How to avoid an ethical lapse: questions to ask

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To test the validity of this approach, let’s take a point-by-point look at

Betty Vinson’s decisions:

1) Her actions were clearly illegal.

2) They were unfair to the workers who lost their jobs and to the investors who suffered

financial losses (and also to her family, who shared her public embarrassment).

3) She definitely felt badly about what she’d done.

4) She was embarrassed to tell other people what she had done.

5) Reports of her actions appeared in her local newspaper (and just about every other

newspaper in the country).

So Vinson could have answered “yes” to all five of our test questions. To simplify

matters, remember the following rule of thumb: If you answer yes to any one of these five

questions, odds are that you’re about to do something you shouldn’t.

Revisiting Johnson & Johnson

As discussed earlier, Johnson & Johnson received tremendous praise for the actions

taken by its CEO, James Burke, in response to the 1982 Tylenol catastrophe. However, things

change. To learn how a company can destroy its good reputation, let’s fast forward to 2008

and revisit J&J and its credo, which states, “We believe our first responsibility is to the doctors,

nurses and patients, to mothers and fathers and all others who use our products and services.

In meeting their needs everything we do must be of high quality.” 38

How could a company

whose employees believed so strongly in its credo find itself under criminal and congressional

investigation for a series of recalls due to defective products? 39

In a three-year period, the

company recalled twenty-four products, including Children’s, Infants’ and Adults’ Tylenol,

Motrin, and Benadryl; 40

1-Day Acuvue TruEye contact lenses sold outside the U.S.; 41

and hip

replacements. 42

Unlike the Tylenol recall, no one had died from the defective products, but customers

were certainly upset to find they had purchased over-the-counter medicines for themselves

and their children that were potentially contaminated with dark particles or tiny specks of

metal; 43

contact lenses that contained a type of acid that caused stinging or pain when inserted

in the eye; 44

and defective hip implants that required patients to undergo a second hip

replacement. 45

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Who bears the responsibility for these image-damaging blunders? Two individuals who

were at least partially responsible were William Weldon, CEO, and Colleen Goggins,

Worldwide Chairman of J&J’s Consumer Group. Weldon has been criticized for being largely

invisible and publicly absent during the recalls. 46

Additionally, he admitted that he did not

understand the consumer division where many of the quality control problems originated. 47

Goggins was in charge of the factories that produced many of the recalled products. She was

heavily criticized by fellow employees for her excessive cost-cutting measures and her

propensity to replace experienced scientists with new hires. 48

In addition, she was implicated in

scheme to avoid publically disclosing another J&J recall of a defective product.

After learning that J&J had released packets of Motrin that did not dissolve correctly, the

company hired contractors to go into convenience stores and secretly buy up every pack of

Motrin on the shelves. The instructions given to the contractors were the following: “You should

simply ‘act’ like a regular customer while making these purchases. THERE MUST BE NO

MENTION OF THIS BEING A RECALL OF THE PRODUCT!” 49

In May 2010, when Goggins

appeared before a congressional committee investigating the “phantom recall,” she testified

that she was not aware of the behavior of the contractors 50

and that she had “no knowledge of

instructions to contractors involved in the phantom recall to not tell store employees what they

were doing.” In her September 2010 testimony to the House Committee on Oversight and

Government Reform, she acknowledged that the company in fact wrote those very

instructions.

Refusing to Rationalize

Despite all the good arguments in favor of doing the right thing, why do many

reasonable people act unethically (at least at times)? Why do good people make bad choices?

According to one study, there are four common rationalizations (excuses) for justifying

misconduct: 51

1) My behavior isn’t really illegal or immoral. Rationalizers try to convince

themselves that an action is OK if it isn’t downright illegal or blatantly immoral. They

tend to operate in a gray area where there’s no clear evidence that the action is

wrong.

78 Download this book for free at: Chapter 3 http://hdl.handle.net/10919/70961

2) My action is in everyone’s best interests. Some rationalizers tell themselves: “I

know I lied to make the deal, but it’ll bring in a lot of business and pay a lot of bills.”

They convince themselves that they’re expected to act in a certain way. 52

3) No one will find out what I’ve done. Here, the self-questioning comes down to “If I

didn’t get caught, did I really do it?” The answer is yes. There’s a simple way to

avoid succumbing to this rationalization: Always act as if you’re being watched.

4) The company will condone my action and protect me. This justification rests on

a fallacy. Betty Vinson may honestly have believed that her actions were for the

good of the company and that her boss would, therefore, accept full responsibility

(as he promised). When she goes to jail, however, she’ll go on her own.

Here’s another rule of thumb: If you find yourself having to

rationalize a decision, it’s probably a bad one.

What to Do When the Light Turns Yellow

Like our five questions, some ethical problems are fairly

straightforward. Others, unfortunately, are more complicated, but

it will help to think of our five-question test as a set of signals that

will warn you that you’re facing a particularly tough decision— that

you should think carefully about it and perhaps consult someone

else. The situation is like approaching a traffic light. Red and

green lights are easy; you know what they mean and exactly what

to do. Yellow lights are trickier. Before you decide which pedal to

hit, try posing our five questions. If you get a single yes, you’ll

almost surely be better off hitting the brake. 53

Figure 3.7

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Key Take-Aways

1) Business ethics is the application of ethical behavior in a business

context. Ethical (trustworthy) companies are better able to attract and

keep customers, talented employees, and capital.

2) Acting ethically in business means more than just obeying laws and

regulations. It also means being honest, doing no harm to others,

competing fairly, and declining to put your own interests above those

of your employer and coworkers.

3) In the business world, you’ll encounter conflicts of interest: situations in

which you’ll have to choose between taking action that promotes your

personal interest and action that favors the interest of others.

4) Corporate social responsibility refers to the approach that an

organization takes in balancing its responsibilities toward different

stakeholders (owners, employees, customers, and the communities in

which they conduct business) when making legal, economic, ethical,

and social decisions.

5) Managers have several responsibilities: to increase the value of

owners’ investments through profitable operations, to provide owners

and other stakeholders with accurate, reliable financial information,

and to safeguard the company’s assets and handle its funds in a

trustworthy manner.

80 Download this book for free at: Chapter 3 http://hdl.handle.net/10919/70961

Key Take-Aways

6) Companies have a responsibility to pay appropriate wages and

benefits, treat all workers fairly, and provide equal opportunities for all

employees. In addition, the must guard workers’ safety and health and

to provide them with a work environment that’s free from sexual

harassment.

7) Consumers have certain legal rights: to use safe products, to be

informed about products, to choose what to buy, and to be heard.

Sellers must comply with these requirements.

8) Businesspeople face two types of ethical challenges: ethical dilemmas

and ethical decisions.

9) An ethical dilemma is a morally problematic situation in which you

must choose competing and often conflicting options which do not

satisfy all stakeholders.

10) An ethical decision is one in which there’s a right (ethical) choice and a

wrong (unethical or downright illegal) choice.

Download this book for free at: Chapter 3 http://hdl.handle.net/10919/70961

Chapter 3 Text References and Image Credits

Image Credits: Chapter 3 Figure 3.1: “Bernie Madoff’s Mug Shot.” U.S. Department of Justice, public domain. Retrieved from: https://en.wikipedia.org/wiki/Bernard_Madoff#/media/File:BernardMadoff.jpg

Figure 3.4: “Workplace deaths by event or exposure, 2014.” Data retrieved from: Bureau of Labor Statistics: http://www.bls.gov/iif/oshwc/cfoi/cfch0013.pdf (p. 3).

Figure 3.5: “Workplace deaths by occupation, 2014.” Data retrieved from: Bureau of Labor Statistics: http://www.bls.gov/iif/oshwc/cfoi/cfch0013.pdf (p. 13).

Figure 3.7: Yellow traffic light. Sir James (2009). “Traffic light modern version Ireland Dublin.” Creative Commons Attribution-Share Alike 3.0 Unported. Retrieved from: https://commons.wikimedia.org/wiki/File:Traffic_light_modern_version_Ireland_Dublin_2_yellow_2009- 09-27.jpg

References: Chapter 3

1 This case is based on Susan Pullman (2003). “How Following Orders Can Harm Your Career.”

The Wall Street Journal. Retrieved from: CFO.com. http://ww2.cfo.com/human-capital- careers/2003/10/how-following-orders-can-harm-your-career/

2 Ibid.

3 Amanda Ripley (2002). “The Night Detective.” Time. Retrieved from:

http://content.time.com/time/magazine/article/0,9171,1003990,00.html 4 Jeff Clabaugh (2005). “WorldCom’s Betty Vinson Gets 5 Months in Jail.” Washington Business

Journal. Retrieved from: http://www.bizjournals.com/washington/stories/2005/08/01/daily51.html 5 Scott Reeves (2005). “Lies, Damned Lies and Scott Sullivan.” Forbes.com. Retrieved from:

http://www.forbes.com/2005/02/17/cx_sr_0217ebbers.html and David A. Andelman (2005). “Scott Sullivan Gets Slap on the Wrist—WorldCom Rate Race.” Forbes. Retrieved from: mindfully.org. http://www.mindfully.org/Industry/2005/Sullivan-WorldCom-Rat12aug05.htm

6 Susan Pullman (2003). “How Following Orders Can Harm Your Career.” The Wall Street

Journal. Retrieved from: CFO.com. http://ww2.cfo.com/human-capital-careers/2003/10/how-following- orders-can-harm-your-career/

7 David Hancock (2002). “World-Class Scandal at WorldCom.” CBSNews.com. Retrieved from:

http://www.cbsnews.com/news/world-class-scandal-at-worldcom 8 Time Magazine (2009). “Top 10 Crooked CEO’s.” Time.com. Retrieved from:

http://content.time.com/time/specials/packages/article/0,28804,1903155_1903156_1903160,00.html

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9 Fred Langan (2008). “The $50-billion BMIS Debacle: How a Ponzi Scheme Works.”

CBCNews. Retrieved from: http://www.cbc.ca/news/business/the-50-billion-bmis-debacle-how-a-ponzi- scheme-works-1.709409

10

Adrian Gostick and Dana Telford (2003). The Integrity Advantage. Salt Lake City: Gibbs Smith. Pp. 3–4.

11

Ibid., p. 103. 12

Ibid., adapted from p. 16. 13

JCPenney Co. (2016). “Statement of Business Ethics for Associates and Officers: The ‘Spirit’ of This Statement.” Retrieved from: http://ir.jcpenney.com/phoenix.zhtml?c=70528&p=irol-govconduct

14

Susan Pulliam and Deborah Solomon (2002). “How Three Unlikely Sleuths Exposed Fraud at WorldCom.” The Wall Street Journal. Retrieved from: http://www.wsj.com/articles/SB1035929943494003751

15

Gostick and Telford, p.13. 16

National Whistleblower Center (2002). “Labor Day Report: The National Status of Whistleblower Protection on Labor Day 2002.” Retrieved from: https://web.archive.org/web/20060130104004/http://www.whistleblowers.org/labordayreport.htm

17

Paula Dwyer, Dan Carney et al. (2002). “Year of the Whistleblower.” BusinessWeek. Retrieved from: http://www.bloomberg.com/news/articles/2002-12-15/year-of-the-whistleblower

18

Scott Waller (2003). “Whistleblower Tells Students to Have Personal Integrity.” The (Jackson, MS) Clarion-Ledger. Retrieved from: http://www.yourlawyer.com/articles/title/whistleblower-tells- students-to-have-personal-integrity

19

Gostick and Telford, pp. 98-99. 20

David P. Baron (2003). Business and Its Environment, 4th ed. Upper Saddle River, NJ: Prentice Hall, pp. 650– 52.

21

U.S. Department of Labor (2016). “Minimum Wage Laws in the States.” Retrieved from: https://www.dol.gov/whd/minwage/america.htm

22

Saul W. Gellerman (2003). “Why ‘Good’ Managers Make Bad Ethical Choices.” Harvard Business Review on Corporate Ethics. Boston: Harvard Business School Press. pp. 49–66.

23

Ibid., p. 53. 24

Procter & Gamble (2003). Sustainability Report 2003. Retrieved from: http://us.pg.com/sustainability/at_a_glance/sustainability_reports

25

John F. Kennedy (1962). "Special Message to the Congress on Protecting the Consumer Interest." The American Presidency Project. Retrieved from: http://www.presidency.ucsb.edu/ws/?pid=9108

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26

Target Brands Inc. (2012). “$4 Million Every Week: A Brief History of Target’s Community Giving.” Target.com. Retrieved from: https://corporate.target.com/article/2012/10/4-million-every-week- a-brief-history-of-target-s-c

27

Jennifer Barrett (2003). “A Secret Recipe for Success: Paul Newman and A. E. Hotchner Dish Up Management Tips from Newman’s Own.” Newsweek. Retrieved from: http://www.newsweek.com/secret-recipe-success-133673

28

Alan Axelrod (2004). My First Book of Business Ethics. Philadelphia: Quirk Books. p. 7. 29

Corporate Responsibility Magazine. “100 Best Corporate Citizens for 2016.” Retrieved from: http://www.thecro.com/wp-content/uploads/2016/04/100best_1.pdf

30

Axelrod, p. 7. 31

U.S. Equal Employment Opportunity Commission (2002). “Facts about Sexual Harassment.” Retrieved from: https://www.eeoc.gov/facts/fs-sex.html

32

Joanna Grossman (2002). “Sexual Harassment in the Workplace: Do Employers’ Efforts Truly Prevent Harassment, or Just Prevent Liability.” FindLaw.com. Retrieved from: http://writ.news.findlaw.com/grossman/20020507.html

33

Ibid. 34

John C. Maxwell (2003). There’s No Such Thing as “Business Ethics”: There’s Only One Rule for Making Decisions. New York: Warner Books. pp. 19–21.

35

Tamara Kaplan (1998). “The Tylenol Crisis: How Effective Public Relations Saved Johnson & Johnson.” Aerobiological Engineering, Inc. Retrieved from: http://www.aerobiologicalengineering.com/wxk116/TylenolMurders/crisis.html

36

Ibid. 37

Yaakov Weber (1999). “CEO Saves Company’s Reputation, Products.” New Sunday Times. Retrieved from:https://web.archive.org/web/20030712124829/http:/adtimes.nstp.com.my/jobstory/jun13.htm

38

Johnson and Johnson (2016). “Our Credo.” jnj.com. Retrieved from: http://www.jnj.com/about- jnj/jnj-credo

39

Mina Kimes (2010). “Why J&J’s Headache Won’t Go Away.” Fortune. Retrieved from: http://archive.fortune.com/2010/08/18/news/companies/jnj_drug_recalls.fortune/index.htm

40

McNeil Consumer Healthcare (2011). “Product Recall Information.” Retrieved from: http://web.archive.org/web/20110808021741/http://www.mcneilproductrecall.com

41

Bill Berkrot (2010). “J&J Confirms Widely Expanded Contact Lens Recall.” Reuters. Retrieved from: http://www.reuters.com/article/us-jandj-recall-idUSTRE6B05G620101201

42

Singer, Natasha (2010). “Johnson & Johnson Recalls Hip Implants.” The New York Times.

Chapter 3 Download this book for free at: http://hdl.handle.net/10919/70961

Retrieved from: http://www.nytimes.com/2010/08/27/business/27hip.html

43

Mina Kimes (2010). “Why J&J’s Headache Won’t Go Away.” Fortune. Retrieved from: http://archive.fortune.com/2010/08/18/news/companies/jnj_drug_recalls.fortune/index.htm

44

Jonathan D. Rockoff and Jon Kamp (2010). “J&J Contact Lenses Recalled.” The Wall Street Journal. Retrieved from: http://online.wsj.com/article/SB10001424052748703846604575447430303567108.html

45

Singer, Natasha (2010). “Johnson & Johnson Recalls Hip Implants.” The New York Times. Retrieved from: http://www.nytimes.com/2010/08/27/business/27hip.html

46

Mina Kimes (2010). “Why J&J’s Headache Won’t Go Away.” Fortune. Retrieved from: http://archive.fortune.com/2010/08/18/news/companies/jnj_drug_recalls.fortune/index.htm

47

Matthew Perrone (2011). “J&J CEO Gets 3% Raise, but Bonus Is Cut.” USA Today. Retrieved from: http://usatoday30.usatoday.com/money/industries/health/2011-02-25-jnj_N.htm

48

Mina Kimes (2010). “Why J&J’s Headache Won’t Go Away.” Fortune. Retrieved from: http://archive.fortune.com/2010/08/18/news/companies/jnj_drug_recalls.fortune/index.htm

49

Ibid. 50

Johnson and Johnson (2010). “Testimony of Ms. Colleen A. Goggins, Worldwide Chairman, Consumer Group, Johnson & Johnson, before the Committee on Oversight and Government Reform, U.S. House of Representatives.” Retrieved from: http://www.blogjnj.com/wp- content/uploads/2010/05/Testimony-of-Colleen-A-Goggins2.pdf

51

Saul W. Gellerman (2003). “Why ‘Good’ Managers Make Bad Ethical Choices.” Harvard Business Review on Corporate Ethics. Boston: Harvard Business School Press. p. 59.

52

Adrian Gostick and Dana Telford (2003). The Integrity Advantage. Salt Lake City: Gibbs Smith. p. 12.

53 Online Ethics Center for Engineering and Science (2004). “Advice from the Texas Instruments

Ethics Office: Article Number 280: What do you do when the light turns yellow?” Onlineethics.org. Retrieved from: https://web.archive.org/web/20060517161459/http://onlineethics.org/corp/help.html