Articles in the News _ Wk1

Chapter Seven Ethics, Social Responsibility, and the Business Manager

On December 2, 1984, in Bhopal, India, lethal methylisocyanate (MIC) gas leaked from a chemical plant owned by Union Carbide India Ltd., killing approximately 2,000 people and injuring thousands more, many of whom are still receiving treatment. Union Carbide’s chairman, Warren Anderson, a lawyer, flew to India with a pledge of medical support and interim assistance totaling $7 million. He was arrested and deported from the country. Lawsuits on behalf of the deceased and injured were brought by U.S. law firms as well as by the government of India. Litigation continues in Indian courts.

The price of Union Carbide stock dropped from $48 to $33. In August 1984, GAF Corporation attempted to take over Union Carbide. Union Carbide successfully fought off the takeover attempt in 1985. On May 13, 1986, a federal court judge dismissed the personal injury and wrongful death actions, stating that the complaints should be more properly heard in a court in India. The judge attached certain conditions to the dismissal, one of which was that Union Carbide would have to agree to pay any damages awarded by an Indian court. The trial began in August 1988 in a New Delhi court amidst rumors that a former disgruntled employee had sabotaged Union Carbide’s Bhopal plant, causing the gas leakage. In January 1988, Union Carbide shares traded on the New York Stock Exchange for $49, and the much leaner company was one of the 30 companies making up the composite Dow Jones Industrial Average. It might be helpful to read this case, set out in edited form in  Chapter 8 . For additional and updated facts through 2010, see the comments after  Case 8-3 .

The Bhopal incident in 1984, along with a stream of insider trading cases, as well “bank bailouts” and as a number of white-collar crime cases (highlighted in  Chapter 6 ) have brought a heightened awareness of the need for debate as to whether the business community has a responsibility solely to shareholders or to other stakeholders as well. Such cases force us to ask ourselves, what should be the legal rules that businesses must obey in their daily operations? Additionally, there are ethical questions that force us to consider how we should behave if we are to live in a better world. Business ethics is the study of the moral practices of the firms that play such an important role in shaping that better world.

Below are results of a 2012 survey ranking countries by executives of companies as to the least corrupt or most corrupt.

Least Corrupt	Most Corrupt
New Zealand	Somalia
Denmark	Korea (North)
Finland	Myanmar
Sweden	Afghanistan
Singapore	Uzbekistan
Norway	Turkmenistan
Netherlands	Sudan
Australia	Iraq
Switzerland	Haiti
Canada	Venezuela
Luxembourg	Equatorial Guinea
Hong Kong	Burundi
Iceland	Libya
Germany	Democratic Republic of Congo
Japan	Chad
Austria	Yemen
Barbados	Kyrgyzstan
United Kingdom	Guinea
Belgium	Cambodia
Iceland	Zimbabwe
Bahamas	Paraguay
Chile	Papua Guinea
Qatar	Nepal
United States	Laos
France	Kenya
Santa Lucia
Note: Who do you know who has a friend or relative in any of these countries?
Source: Corruption Perception Index, 2012,  Transparency.org , C2012 Transparency International.

Whenever you wonder whether a business decision requires us to think about ethics, simply ask yourself, will this decision affect the quality of life of other people? If the answer is yes, the decision involves ethics. We think you will agree that business ethics is an extremely important aspect of our environment because almost all business decisions influence the quality of our lives.

This chapter presents material on business ethics in a neutral way. Readers are left to make their own choices about what part ethics should play in business decision making and about whether the business community, the trade groups that represent it, and individual managers should act in a “socially responsible” manner. This chapter includes (1) a broad definition of ethics and social responsibility; (2) some recognized theories of ethical thought and their application to business problems; (3) a discussion of individual, corporate, trade association, and professional ethical codes; and (4) schools of social responsibility as applied to business problems. The chapter ends with a brief discussion of some current trends in the area of ethics and social responsibility, as well as some proposals now being debated, which, if implemented, would change the structure of corporate governance.

Critical Thinking About The Law

Business ethics is perhaps one of the most personal and emotional areas in business decision making. Business ethics can be confusing and complex because a right or wrong answer often does not exist. Because this area is so emotional and controversial, it is extremely important to use your critical thinking skills when responding to questions about business ethics. It would be very easy to make arguments based on your gut reaction to cases such as the Bhopal gas incident. You should, however, carefully use your critical thinking skills to draw an informed conclusion. The following questions can help you begin to understand the complexity surrounding business ethics.

1. As critical thinkers, you have learned that ambiguous words—words that have multiple possible meanings—can cause confusion in the legal environment. Perhaps the best example of ambiguity in the legal environment is the phrase social responsibility. What definitions of responsibility can you generate?

Clue: Consider the Bhopal incident. Do you think Union Carbide would have the same definition of social responsibility as the families of the Indian accident victims?

2. It is common for individuals, businesses, judges, and juries each to use different meanings of the phrase social responsibility. Preferences for certain ethical norms might account for these different meanings. If executives of a company thought that security was extremely important, how might their definition of social responsibility be affected?

Clue: Remember the definitions of security in  Chapter 1 . If Union Carbide valued security, how might the company treat the victims of the Bhopal incident?

3. Your friend discovers that you are taking a class on the legal environment of business. He says, “I’m extremely angry at the cigarette companies. They knew that cigarettes cause cancer. Don’t those companies have a responsibility to protect us?” Because you are trained in critical thinking, you know that his question does not have a simple answer. Keeping your critical thinking skills in mind, how would you intelligently respond to his question?

Clue: Consider the critical thinking questions about ambiguity, ethical norms, and missing information set out in  Chapter 1  of this text.

Definition of Business Ethics and the Social Responsibility of Business

Business Ethics

Ethics  is the study of good and bad behavior.  Business ethics  is a subset of the study of ethics and is defined as the study of what makes up good and bad business conduct. This conduct occurs when the firm acts as an organization, as well as when individual managers make decisions inside the organization. For example, there may be differences between the way Warren Anderson personally looked at the Bhopal tragedy (a failure of the plant to implement company operating standards) and the way the corporation’s board of directors and the chemical industry did (the Indian government allowed people to live too close to the plant). It is important to look at “business” ethics not as a single monolithic system, but from the perspective of individual managers, corporations, and industrywide ethical concerns. Each may view and judge a particular happening in a different way.

ethics

The study of what makes up good and bad conduct, inclusive of related actions and values.

business ethics

The study of what makes up good and bad conduct as related to business activities and values.

How these groups think depends on their ethical norms and on their philosophy or theory of ethics. To help you understand their thinking, we include a discussion of three schools of ethical thought. Individual managers, corporations, or industries may belong to any one of the schools, as each school has its advocates and refinements. In addition, each school attempts to explain why an action is right or wrong and how one knows it to be right or wrong.

The Social Responsibility of Business

The  social responsibility  of business is defined as a concern by business about both its profit-seeking and its non-profit-seeking activities and their intended and unintended impacts on groups and individuals other than management or the owners of a corporation (e.g., consumers, environmentalists, and political groups). Since the late 1960s, an outcry has arisen for businesses to be more socially responsible. This expression of public concern has resulted in part from three factors:

social responsibility

Concern of business entities about profit-seeking and non-profit-seeking activities and their unintended impact on others directly or indirectly involved.

1. The complexity and interdependence of a postindustrial society. No individual or business is an island. If a company builds a chemical plant in Bhopal, India, and its primary purpose is to make profits for its shareholders, can it be held responsible to the public that lives around the plant when there is a gas leak? The public is dependent on the firm’s good conduct, and the firm is dependent on the public and its political representatives to supply labor, an adequate water supply, tax forgiveness, roads, and so on.

2. Political influence that has translated public outcry for socially responsible conduct into government regulation. Whether a malfunction occurs at a nuclear plant at Three Mile Island or a human disaster is caused by a gas leak in Bhopal, India, the political arm of government at all levels sees the solution as more regulation. This attitude pleases the government’s constituents and makes its officials more electable.

3. Philosophical differences about what the obligations of business should be. Neoclassical economic theory would argue that the sole purpose of business is to make a profit for its investing shareholders, who in turn reinvest, creating expanded or new businesses that employ more people, thus creating a higher standard of living.

Different people hold different theories of social responsibility. Some argue for a managerial or coping approach; that is, “throw money” at the problem when it occurs, such as the Bhopal disaster, and it will go away. Others subscribe to a more encompassing theory of social responsibility, holding that business, like any other institution in our society (e.g., unions, churches), has a social responsibility not only to shareholders (or members or congregations) but also to diverse groups, such as consumers and political, ethnic, racial-group, and gender-oriented organizations. These and other schools of social responsibility are discussed later in this chapter.

The following case offers several possible theories of social responsibility as applied to a controversial factual situation.

 Case 7-1 In re Exxon Valdez

U.S. District Court, District of Alaska 296 F. Supp. 2d 107 (2004)

On Good Friday, March 24, 1989, the oil tanker Exxon Valdez was run aground on Bligh Reef in Prince William Sound, Alaska. On March 24, 1989, Joseph Hazelwood was in command of the Exxon Valdez. Defendant Exxon Shipping [Company] owned the Exxon Valdez. Exxon employed Captain Hazelwood, and kept him employed knowing that he had an alcohol problem. The captain had supposedly been rehabilitated, but Exxon knew better before March 24, 1989. Hazelwood had sought treatment for alcohol abuse in 1985 but had “fallen off the wagon” by the spring of 1986. Yet, Exxon continued to allow Hazelwood to command a supertanker carrying a hazardous cargo. Because Exxon did nothing despite its knowledge that Hazelwood was once again drinking, Captain Hazelwood was the person in charge of a vessel as long as three football fields and carrying 53 million gallons of crude oil. The best available estimate of the crude oil lost from the Exxon Valdez into Prince William Sound is about 11 million gallons. Commercial fisheries throughout this area were totally disrupted, with entire fisheries being closed for the 1989 season. Subsistence fishing by residents of Prince William Sound and Lower Cook Inlet villages was also disrupted. Shore-based businesses dependent upon the fishing industry were also disrupted as were the resources of cities such as Cordova. Exxon undertook a massive cleanup effort. Approximately $2.1 billion was ultimately spent in efforts to remove the spilled crude oil from the waters and beaches of Prince William Sound, Lower Cook Inlet, and Kodiak Island. Also, Exxon undertook a voluntary claims program, ultimately paying out $303 million, principally to fishermen whose livelihood was disrupted. [Lawsuits] (involving thousands of plaintiffs) were ultimately consolidated into this case.

The jury awarded a breathtaking $5 billion in punitive damages against Exxon. Exxon appealed the amount of punitive damages [to the U.S. Court of Appeals for the Ninth Circuit]. [T]he Ninth Circuit Court of Appeals in this case reiterated [that] the guideposts for use in determining whether punitive damages are grossly excessive [include] the reprehensibility of the defendant’s conduct. The court of appeals remanded the case [and] unequivocally told this court that “[t]he $5 billion punitive damages award is too high” and “[i]t must be reduced.”

Justice Holland

[T]he reprehensibility of the defendant’s conduct is the most important indicium [indication] of the reasonableness of a punitive damages award. In determining whether a defendant’s conduct is reprehensible, the court considers whether “The harm caused was physical as opposed to economic; the tortious conduct evinced an indifference to or a reckless disregard of the health or safety of others; the target of the conduct had financial vulnerability; the conduct involved repeated actions or was an isolated incident; and the harm was the result of intentional malice, trickery, or deceit, or mere accident.”

The reprehensibility of a party’s conduct, like truth and beauty, is subjective. One’s view of the quality of an actor’s conduct is the result of complex value judgments. The evaluation of a victim will vary considerably from that of a person not affected by an incident. Courts employ disinterested, unaffected lay jurors in the first instance to appraise the reprehensibility of a defendant’s conduct. Here, the jury heard about what Exxon knew, and what its officers did and what they failed to do. Knowing what Exxon knew and did through its officers, the jury concluded that Exxon’s conduct was highly reprehensible.

Punitive damages should reflect the enormity of the defendant’s offense. Exxon’s conduct did not simply cause economic harm to the plaintiffs. Exxon’s decision to leave Captain Hazelwood in command of the Exxon Valdez demonstrated reckless disregard for a broad range of legitimate Alaska concerns: the livelihood, health, and safety of the residents of Prince William Sound, the crew of the Exxon Valdez, and others. Exxon’s conduct targeted some financially vulnerable individuals, namely subsistence fishermen. Plaintiffs’ harm was not the result of an isolated incident but was the result of Exxon’s repeated decisions, over a period of approximately three years, to allow Captain Hazelwood to remain in command despite Exxon’s knowledge that he was drinking and driving again. Exxon’s bad conduct as to Captain Hazelwood and his operating of the Exxon Valdez was intentionally malicious.

Exxon’s conduct was many degrees of magnitude more egregious [flagrant] [than defendant’s conduct in other cases]. For approximately three years, Exxon management, with knowledge that Captain Hazelwood had fallen off the wagon, willfully permitted him to operate a fully loaded crude oil tanker in and out of Prince William Sound—a body of water which Exxon knew to be highly valuable for its fisheries resources. Exxon’s argument that its conduct in permitting a relapsed alcoholic to operate an oil tanker should be characterized as less reprehensible than [in other cases] suggests that Exxon, even today, has not come to grips with the opprobrium [disgracefulness] which society rightly attaches to drunk driving. Based on the foregoing, the court finds Exxon’s conduct highly reprehensible.

[T]he court reduces the punitive damages award to $4.5 billion as the means of resolving the conflict between its conclusion and the directions of the court of appeals.

[T]here is no just reason to delay entry of a final judgment in this case. The Court’s judgment as to the $4.5 billion punitive damages award is deemed final. *

*  In re Exxon Valdez, U.S. District Court, District of Alaska 296 F. Supp. 2d 107 (2004).

Comment:

In February 2008, the U.S. Supreme Court heard oral arguments on appeals from the U.S. Court of Appeals (D.C. Circuit), which had affirmed the U.S. District Court. The United States Supreme Court affirmed the lower courts (S. Ct. 2008).

Theories of Ethical Thought

Consequential Theories

Ethicists, businesspeople, and workers who adhere to a consequential theory of ethics judge acts as ethically good or bad based on whether the acts have achieved their desired results. The actions of a business or any other societal unit are looked at as right or wrong only in terms of whether the results can be rationalized ( Table 7-1 ).

This theory is best exemplified by the utilitarian school of thought, which is divided into two subschools: act utilitarianism and rule utilitarianism. In general, adherents of this school judge all conduct of individuals or businesses on whether that conduct brings net happiness or pleasure to a society. They judge an act ethically correct after adding up the risks (unhappiness) and the benefits (happiness) to society and obtaining a net outcome. For example, if it is necessary for a company to pay a bribe to a foreign official in order to get

Table 7-1 Theories of Ethical Thought

Consequential theories	Acts are judged good or bad based on whether the acts have achieved their desired results. Acts of the business community or any other social unit (e.g., government, school, fraternity, and sorority). Act and rule utilitarianisms are two subschools.
Deontological theories	Actions can be judged good or bad based on rules and principles that are applied universally.
Humanist theories	Actions are evaluated as good or bad depending on whether they contribute to improving inherent human capacities such as intelligence, wisdom, and self-restraint.

Linking Law and Business Business Ethics

Managers often attempt to encourage ethical practices in the workplace. A significant reason for managers’ concern with ethics is to portray their organizations in a favorable light to consumers, investors, and employees. As a means of creating an ethical workplace, there are several methods that managers should implement that you may recall from your management class:

1. Create a code of ethics, which is a formal statement that acts as a guide for making decisions and actions within an organization. Distribution and continual improvement of the code of ethics are also important steps.

2. Establish a workplace or office for the sole purpose of overseeing organizational practices to determine if actions are ethical.

3. Conduct training programs to encourage ethical practices in the organization.

4. Minimize situations in which unethical behavior is common and create conditions in which people are likely to behave ethically. Two practices that often result in unethical behavior are to give unusually high rewards for good performance and uncommonly harsh punishments for poor performance. By eliminating these two causal factors of unethical behavior, managers are more likely to create conditions in which employees choose to behave ethically within the organization. Therefore, a manager’s hope to represent the organization in a respectable manner may be achieved through the institution and implementation of these methods.

Source: S. Certo, Modern Management (Upper Saddle River, NJ: Prentice Hall, 2000), 66–69.

several billion dollars’ worth of airplane contracts, utilitarians would argue, in general, that the payment is ethically correct because it will provide net happiness to society; that is, it will bring jobs and spending to the community where the airplane company is located. If the bribe is not paid, the contracts, jobs, and spending will go to a company somewhere else.

Act utilitarians determine if an action is right or wrong on the basis of whether that individual act (the payment of a bribe) alone brings net happiness to society, as opposed to whether other alternatives (e.g., not paying the bribe or allowing others to pay the bribe) would bring more or less net happiness. Rule utilitarians argue that an act (the payment of the bribe) is ethically right if the performance of similar acts by all similar agents (other contractors) would produce the best results in society or has done so in the past. Rule utilitarians take the position that whatever applicable rule has been established by political representatives must be followed and should serve as a standard in the evaluation of similar acts. If payment of bribes has been determined by the society to bring net happiness, and a rule allowing bribes exists, then rule utilitarians would allow the bribe. In contrast, the Foreign Corrupt Practices Act of 1977, as amended in 1988, which forbids paying bribes to foreign government officials to get business that would not have been obtained without such a payment, is an example of a standard that rule utilitarians would argue must be followed but that would lead to a different result. Hence, the act utilitarians might get the airplane plant, but the rule utilitarians, if they were following the Foreign Corrupt Practices Act, would not.

We must note that both act and rule utilitarians focus on the consequences of an act and not on the question of verifying whether an act is ethically good or bad. 1  Either one of these theories can be used by individuals or businesses to justify their actions. 2  Act utilitarians use the principle of utility (adding up the costs and benefits of an act to arrive at net happiness) to focus on an individual action at one point in time. Rule utilitarians believe that one should not consider the consequences of a single act in determining net happiness, but instead should focus on a general rule that exemplifies net happiness for the whole society.  Case 7-1  illustrates a rule-utilitarian view of jurisprudence.

1  W. Lacroix, Principles for Ethics in Business (rev. ed.), 6 (Washington, DC: University Press, 1979).

2  B. Brennan, “Amending the Foreign Corrupt Practices Act of 1977: Clarifying or Gutting a Law,” Journal of Legislation 2 (1984), for an examination of the rule and act utilitarian schools of thought within the context of the proposed amendment of the 1977 Foreign Corrupt Practices Act.

Deontological Theories

Deontology is derived from the Greek word deon, meaning “duty.” For advocates of deontology, rules and principles determine whether actions are ethically good or bad. The consequences of individual actions are not considered. The golden rule, “Do unto others as you would have them do unto you,” is the hallmark of this theory.

Absolute deontology claims that actions can be judged ethically good or bad on the basis of absolute moral principles arrived at by human reason regardless of the consequences of an action, that is, regardless of whether there is net happiness. 3  Immanuel Kant (1724–1804) provided an example of an absolute moral principle in his widely studied “categorical imperative.” He stated that a person ought to engage only in acts that he or she could see becoming a universal standard. For example, if a U.S. company bribes a foreign official to obtain a contract to build airplanes, then U.S. society and business should be willing to accept the principle that foreign multinationals will be morally free to bribe U.S. government officials to obtain defense contracts. Of course, the reverse will be true if nonbribery statutes are adopted worldwide. Kant, as part of his statement of the categorical imperative, assumed that everyone is a rational being having free will, and he warned that one ought to “treat others as having intrinsic values in themselves, and not merely as a means to achieve one’s end.” 4  For deontologists such as Kant, ethical reasoning means adopting universal principles that are applied to everyone equally. Segregation of one ethnic or racial group is unethical because it denies the intrinsic value of each human being and thus violates a general universal principle.

3  Lacroix, supra note 1, at 13.

4  R. Wolff, ed., Foundations of the Metaphysics of Moral Thought and Critical Essays 44 (Bobbs-Merrill, 1964).

Humanist Theories

A third school of thought, the humanist school, evaluates actions as ethically good or bad depending on what they contribute to improving inherent human capacities such as intelligence, wisdom, and self-restraint. Many natural law theorists (examined in  Chapter 2 ) believe that humans would arrive by reason alone at standards of conduct that ultimately derive from a divine being or another ultimate source such as nature. For example, if a U.S. business participates in bribing a foreign official, it is not doing an act that improves inherent human capacities such as intelligence and wisdom; thus, the act is not ethical. In a situation that demanded choice, as well as the use of the intelligence and restraint that would prevent a violation of law (the Foreign Corrupt Practices Act of 1977), the particular business would have failed ethically as well as legally.

Applying the Law to the Facts . . .

Jordan is the CEO of a paper manufacturing company. Jordan’s business advisors inform him that there is a cigarette corporation he could take over and he would then be able to increase his profits. Jordan rejects the idea, saying that manufacturing cigarettes would bring suffering to the public. What theory of ethical thought is guiding Jordan’s actions?

Codes of Ethics

Individual Codes of Ethics

When examining business ethics, one must recognize that the corporations, partnerships, and other entities that make up the business community are a composite of individuals. If the readers of this book are asked where they obtained their ethical values, they might respond that their values come from parents, church, peers, teachers, brothers and sisters, or the environment. In any event, corporations and the culture of a corporation are greatly influenced by what ethical values individuals bring to them. Often, business managers are faced with a conflict between their individual ethical values and those of the corporation. For example, a father of three young children, who is divorced and their sole support, is asked by his supervisor to “slightly change” figures that will make the results of animal tests of a new drug look more favorable when reported to the Food and Drug Administration. His supervisor hints that if he fails to do so, he may be looking for another job. The individual is faced with a conflict in ethical values: individual values of honesty and humaneness toward potential users of the drug versus business values of profits, efficiency, loyalty to the corporation, and the need for a job. Which values should determine his actions?

Individual Ethical Codes versus Groupthink

On January 28, 1986, just 74 seconds into its launch, the space shuttle Challenger exploded, killing the first schoolteacher in space, Christa McAuliffe, and six other astronauts on board. A presidential commission set up to investigate the disaster found that faulty O-rings in the booster rockets were to blame. Two engineers testified before the commission that they had opposed the launch but were overruled by their immediate supervisor and other officials of the Thiokol Corporation that manufactured the booster rockets. The two engineers continued to warn of problems with the O-rings until the day before the launch. After the launch, one engineer was assigned to “special projects” for the firm. Another took leave and founded a consulting firm. The second schoolteacher in space, Barbara Morgan, was a backup to McAuliffe. She returned to teaching for 22 years after the Challenger incident until August 8, 2007, when she and six other astronauts were sent (successfully) to the International Space Station on the shuttle Endeavor. a

a W. Leary, “Teacher Astronaut to Fly Decade after Challenger,” New York Times, August 7, 2007, p. 11.

On September 11, 2001, two planes flew into the Twin Towers of the World Trade Center in New York City, one plane flew into the Pentagon in Washington, DC, and another flew into a field near Pittsburgh, Pennsylvania. Approximately 3,000 people were killed by terrorists flying the planes. Again, a presidential commission was set up. In 2004, the commission reported that the failure of intermediate-level employees to be heard within intelligence agencies, as well as the inability of agencies such as the Central Intelligence Agency (CIA), Defense Intelligence Agency (DIA), and National Security Agency (NSA) to bring early warning information forward to the decision makers (in the White House), was in part responsible for the events that took place. The CIA director resigned and other officials at some agencies retired. A new structure was set up for intelligence gathering in 2004, which allows a single individual to be responsible for intelligence provided to the president of the United States.

These factual situations are very different, but when reading the testimony presented to the presidential commissions, it appears that, in both cases, there were conflicts between individual ethical values and groupthink. Groupthink, as used here, is defined as a form of thinking that people engage in when they are involved in a cohesive in-group, striving for unanimity, which overrules a realistic appraisal of alternative courses of action. Groupthink refers to “a deterioration of mental efficiency, reality testing, and moral efficiency that results from in-group pressures.” b  For the engineers in the Challenger case and the middle-level managers of the intelligence agencies, the question always will remain: Were they part of a groupthink process that altered the outcome? Are there important factual differences in these cases: private-sector employment (Thiokol) as opposed to public-sector intelligence agencies? The rise of the groupthink process is currently popular. It is taught in colleges of business and in other academic sectors. For years, however, solitude had been associated with creativity. Great thinkers of our times (Moses, Buddha, writers of great books) have generally worked by themselves. A very quiet man named Steve Wozniak needed extra quietude to design the first calculators while working at Hewlett-Packard. HP made it easy for Wozniak to collaborate with his colleagues over coffee and donuts between 10 a.m. and 2 p.m. in a separate and easily accessible room. Mr. Wozniak later helped start Apple. The “New Groupthink Process” combines quietude of thinking and people engaged in a cohesive group striving for unanimity.

b Excerpt from Victims of Groupthink by Irving L. Janis. Published by Houghton Mifflin Harcourt, © 1972.

Groupthink, however, may be necessary in our society. Without it, how would we organize our corporations, the military, and government agencies? If we allowed everyone to think independently, would anyone follow orders in the military or build rocket boosters in industry? Also, people often do not think like whistleblowers (see discussion of the Sarbanes-Oxley Act later in this chapter and in  Chapter 23 ) for fear of losing their status and their jobs, which are often necessary to support egos and families.

Before answering any of the questions posed here, return to  Chapter 1  and review the eight steps in critical thinking outlined there.

Corporate Codes of Ethics

The total of individual employees’ ethical values influences corporate conduct, especially in a corporation’s early years. The activities during these years, in turn, form the basis of what constitutes a corporate culture or an environment for doing business. In a free-market society, values of productivity, efficiency, and profits become part of the culture of all companies. Some companies seek to generate productivity by cooperation between workers and management; others motivate through intense production goals that may bring about high labor turnover. Some companies have marketed their product through emphasis on quality and service; others emphasize beating the competition through lower prices. 5  Over time, these production and marketing emphases have evolved into what is called a corporate culture, often memorialized in corporate codes.

5  C. Power and D. Vogel, Ethics in the Education of Business Managers 6 (Hastings Center, 1980).

Since the mid-1960s, approximately 90 percent of all major corporations have adopted codes of conduct. In general, the codes apply to upper- and middle-level managers. They are usually implemented by a chief executive officer or a designated agent. They tend to establish sanctions for deviant behavior, ranging from personal reprimands that are placed in the employee’s file, to dismissal. Some formal codes allow for due process hearings within the corporation, in which an employee accused of a violation is given a chance to defend himself or herself. With many employees bringing wrongful dismissal actions in courts of law, formal internal procedures are increasingly evolving to implement due process requirements. A study of corporate codes reveals that the actions most typically forbidden are:6

6  K. Chatov, “What Corporate Ethics Statements Say,” California Management Review 22: 206 (1980).

· Paying bribes to foreign government officials

· Fixing prices

· Giving gifts to customers or accepting gifts from suppliers

· Using insider information

· Revealing trade secrets

Corporate Ethics

Internal Housecleaning Following several financial scandals involving companies such as Enron, Martha Stewart Living, Inc., ImClone Systems, WorldCom, Inc. (now MCI), and Tyco International (see  Chapter 6  for analysis of some of these), Congress passed the Sarbanes-Oxley Act in 2002. This act required publicly traded companies to set up confidential internal systems by April 2003 so that employees and others could have a method of reporting possible illegal or unethical auditing and accounting practices, as well as other problems such as sexual harassment.

Web reporting systems such as Ethicspoint allow employees of companies to click an icon on their computers and be linked anonymously to the reporting services. Employees may report alleged unethical or illegal activity. The reporting system then alerts a management person or the audit committee of the board of directors to any possible problem. Other systems use a special hot-line phone number (800 or 900). No system is perfect, but the key factor is that Sarbanes-Oxley has given legal impetus to “cleaning house” internally.

Whistleblowing protection under Section 806 of Sarbanes-Oxley 7  prohibits any publicly traded company from “discharging, demoting, suspending, threatening or otherwise discriminating against an employee who provides information to the government or assists in a government investigation regarding conduct that an employee believes may be a violation of the securities laws.” As noted in  Chapter 23 , penalties are both civil and criminal in nature.

7  H.R. 3782, signed into law by President George W. Bush on July 30, 2002, effective on August 29, 2002. Pub. L. No. 109–204; 15 U.S.C. § 78d (I)–(3), codified in Exchange Act § 4. See  Chapter 23  for a full discussion.

Industry Codes of Ethics

In addition to corporate ethical codes, industry codes exist, such as those of the National Association of Broadcasters or the National Association of Used Car Dealers. In most cases, these codes are rather general and contain either affirmative inspirational guidelines or a list of “shall-nots.” A hybrid model including “dos and don’ts” generally addresses itself to subjects such as:8

8  See R. Jacobs, “Vehicles for Self-Regulation Codes of Conduct, Credentialing and Standards,” in Self-Regulation, Conference Proceedings (Washington, DC: Ethics Resource).

· Honest and fair dealings with customers

· Acceptable levels of safety, efficacy, and cleanliness

· Nondeceptive advertising

· Maintenance of experienced and trained personnel, competent performance of services, and furnishing of quality products

Most trade associations were formed for the purpose of lobbying Congress, the executive branch, and the regulatory agencies, in addition to influencing elections through their political action committees (PACs). They have not generally been effective in monitoring violations of their own ethical codes. In light of the reasons for their existence and the fact that membership dues support their work, it is not likely that they will be very effective disciplinarians.

Some effective self-regulating mechanisms, however, do exist in industries. In  Chapter 23 , readers will see that self-regulating organizations (SROs) such as the National Association of Securities Dealers and the New York Stock Exchange have used the authority delegated to them by the Securities and Exchange Commission (SEC) in an extremely efficient manner. In addition, the Council of Better Business Bureaus, through its National Advertising Division (NAD), has provided empirical evidence that self-regulation can be effective. The NAD seeks to monitor and expose false advertising through its local bureaus and has done an effective job, receiving commendations from a leading consumer advocate, Ralph Nader. 9

9  See R. Tankersley, “Advertising: Regulation, Deregulation and Self-Regulation,” in Self-Regulation, Conference Proceedings, supra note 7, at 45.

Professional Codes of Ethics

Within a corporation, managers often interact with individual employees who are subject to “professional” codes of conduct that may supersede corporate or industrywide codes in terms of what activities they can participate in and still remain licensed professionals. For example, under the Model Code of Professional Responsibility, a lawyer must reveal the intention of his or her client to commit a crime and the information necessary to prevent the crime. 10  When a lawyer, a member of the law department of Airplane Corporation X, learns that his company deliberately intends to bribe a high-level foreign official in order to obtain an airplane contract, he may be forced, under the Model Code, to disclose this intention, because the planned bribe is a violation of the Foreign Corrupt Practices Act of 1977, as amended, an act that has criminal penalties. Failure to disclose could lead to suspension or disbarment by the lawyer’s state bar. Management must be sensitive to this and to the several professional codes that exist (discussed later in this chapter).

10  See Model Code of Professional Responsibility DR 4-401(C) and Formal Op. 314 (1965).

Professionals is an often-overused term, referring to everything from masons to hair stylists to engineers, lawyers, and doctors. When discussing professions or professionals here, we mean a group that has the following characteristics:

· Mandatory university educational training before licensing, as well as continuing education requirements

· Licensing-examination requirements

· A set of written ethical standards that is recognized and continually enforced by the group

· A formal association or group that meets regularly

· An independent commitment to the public interest

· Formal recognition by the public as a professional group

Management must often interact with the professions outlined in the following paragraphs. Each of them has a separate code of conduct. An awareness of this fact may lead to a greater understanding of why each group acts as it does.

Accounting

The American Institute of Certified Public Accountants (AICPA) has promulgated a code of professional ethics and interpretive rules. The Institute of Internal Auditors has set out a code of ethics, as well as a Statement of Responsibilities of Internal Auditors. In addition, the Association of Government Accountants has promulgated a code of ethics.

Disciplinary procedures are set forth for both individuals and firms in the Code of Professional Ethics for Certified Public Accountants (CPAs). Membership in the AICPA is suspended without a hearing if a judgment of conviction is filed with the secretary of the institute as related to the following:11

11  See AICPA Professional Standards, vol. 2, Disciplinary Suspensions and Termination of Membership Hearings, GL 730.01. See AICPA Professional Standards, vol. 2, Disciplinary Suspensions and Termination of Membership Hearings, GL 730.01. See AICPA Professional Standards, vol. 2, Disciplinary Suspensions and Termination of Membership Hearings, GL 730.01. The United States Public Company Accounting Oversight Board was established in 2012 to oversee accounting standards. Public No. 107-204 (Codified as Exchange Act Sec. 4, 15 U.S.C. Sec. 78(d).

· A felony as defined under any state law

· The willful failure to file an income tax return, which the CPA as an individual is required to file

· Filing a fraudulent return on the part of the CPA for his or her own return or that of a client

· Aiding in the preparation of a fraudulent income tax return of a client

The AICPA Division for CPA Firms is responsible for disciplining firms, as opposed to individuals. Through its SEC practice and its private company sections, this division requires member firms to (1) adhere to quality-control standards, (2) submit to peer review of their accounting and audit practices every three years, (3) ensure that all professionals participate in continuing education programs, and (4) maintain minimum amounts of liability insurance.

Accountants’ ethical responsibility is reinforced by the Sarbanes-Oxley Act of 2002, which was passed by Congress following a series of financial scandals (see  Chapters 6  and  23 ). 12  This act mandated the creation of a Public Company Accounting Oversight Board; it also included provisions requiring auditor independence. Under Section 802 of the act, accountants are required to maintain on file working papers relating to an audit or review for five years. A willful violation is subject to a fine, imprisonment for up to 10 years, or both.

12  H.R. 3762, signed into law by President George W. Bush on July 30, 2002, effective August 30, 2002.

Other statutory provisions affecting accountants include Sections 11 and 12(2) of the 1933 Securities Act, as well as Sections 10(b) and 18 of the 1934 Securities Exchange Act. The 1933 act deals with accountant liability for false statements or omission of a material fact in auditing financial statements required for registration of securities. A defense is due diligence and a reasonable belief that the work is complete.

Under Section 10(b) of the 1934 act, accountants are liable for false and misleading statements in reports required by the act (see  Chapter 23 ). Willful violations bring criminal penalties. Additionally, provisions of the Internal Revenue Code provide (felony) criminal penalties for tax preparers who willfully prepare or assist in preparing a false return. 13  Tax preparers who negligently or willfully understate tax liability are also subject to criminal penalties. Furthermore, failure to provide a taxpayer with a copy of his or her return may subject a tax preparer to criminal penalties. 14

13  26 U.S.C. § 7208(2).

14  26 U.S.C. § 7101(a)(36).

Insurance and Finance

 The American Society of Chartered Life Underwriters (ASCLU) adopted a Code of Ethics consisting of eight guides to professional conduct and six rules of professional conduct. The guides are broad in nature, whereas the rules are specific. Enforcement of the Code of Ethics is left primarily to local chapters. Discipline includes reprimand, censure, and dismissal. A local chapter can additionally recommend suspension or revocation to a national board. Very few disciplinary actions have been forthcoming. 15

15  See R. Horn, On Professions, Professionals, and Professional Ethics 74 (Malvern, PA: American Institute for Property and Liability Underwriters, 1978).

In addition, the Society of Chartered Property and Casualty Underwriters (CPCU) has a code of ethics consisting of seven “Specified Unethical Practices,” as well as three “Unspecified Unethical Practices” of a more general nature. Upon receipt of a written and signed complaint, the president of the society appoints a three-member conference panel to hear the case. If a panel finds a member guilty of an unspecified unethical practice, the president directs the member to cease such action. If a member is found guilty of a specified unethical practice, the society’s board of directors may reprimand or censure the violator or suspend or expel her or him from membership in the society.

Law

 The American Bar Association’s Model Rules of Professional Responsibility were submitted to the highest state courts and the District of Columbia for adoption, after the association’s House of Delegates approved them in August 1983 (before then, the states had adopted the Model Code of Professional Responsibility). There are nine Canons of Professional Responsibility. From these are derived Ethical Considerations and Disciplinary Rules. The Model Rules set out a minimal level of conduct that is expected of an attorney. Violation of any of these rules may lead to warnings, reprimands, public censure, suspension, or disbarment by the enforcement agency of the highest state court in which the attorney is admitted to practice. Most state bar disciplinary actions are published in state bar journals and local newspapers, so lawyers and the public in general are aware of attorneys who have been subject to disciplinary action.

The case excerpted here illustrates some legal problems surrounding professional ethical codes when they result in price-fixing.

Schools of Social Responsibility

Early in this chapter, the social responsibility of business was defined as a concern by business about both its profit and its nonprofit activities and their intended and unintended impact on others. As you will see, theories of ethics and schools of social responsibility are not necessarily mutually exclusive. For example, the primary purpose of a steel company is to make a profit for its individual and institutional shareholders. The unintended effects of this company’s actions might be that the surrounding community has polluted waters, and homes are affected by ash that falls from the company’s smokestack. Similarly, in the Union Carbide incident described at the beginning of this chapter, the purpose of Union Carbide India Ltd. was to make a profit for its shareholders. By doing so, it was able to employ people. The unintended effect of this activity was a gas leak that killed approximately 2,000 people and injured many more. The question in both of these cases is: What responsibility, if any, do firms have for the unintended effects of their profit-seeking activity? This section discusses five views of social responsibility that seek to answer that question: profit oriented, managerial, institutional, professional obligation, and regulation ( Table 7-2 ). These schools reflect the ethical values or culture of a corporation. The reader should analyze each, realizing that the answer may not lie in any one.

Profit-Oriented School

The profit-oriented school of social responsibility begins with a market-oriented concept of the firm that most readers were exposed to in their first or second course in economics. Holders of this theory argue that business entities are distinct organizations in our society and that their sole purpose is to increase profits

Table 7-2 Schools of Social Responsibility

Table 7-2 Schools of Social Responsibility

Profit-oriented school	Business entities are distinct organizations in our society whose sole purpose is to increase profits for shareholders.
Managerial school	Advocates of this theory argue that business entities (particularly large ones) have a number of groups that they must deal with. They include not only stockholders but also employees, customers, activist groups, and government regulators, all of whom may make claims on the entities’ resources.
Institutional school	Business entities have a responsibility to act in a manner that benefits all society.
Professional obligation school	Business managers and members of boards of directors must be certified as “professionals” before they assume managerial responsibilities. They must have a responsibility to the public interest beyond making profits. The Sarbanes-Oxley Act (see  Chapters 6  and  23 ) may be leading in that direction.
Regulation school	All business units are accountable to elected officials. See the Sarbanes-Oxley Act in regard to dealing with independent financial audits ( Chapter 23 ).

for shareholders. Businesses are to be judged solely on criteria of economic efficiency and how well they contribute to growth in productivity and technology. Corporate social responsibility is shown by managers who maximize profits for their shareholders, who, in turn, are able to reinvest such profits, providing for increased productivity, new employment opportunities, and increased consumption of goods.

Classical economists, who advocate this position, recognize that there will be unintended effects of such profit-seeking activities (externalities) that affect society and cannot be incorporated into or passed on in the price of output. They would argue that this is the “social cost” of doing business. Such social costs are a collective responsibility of the government. Individual businesses should not be expected to voluntarily incorporate in their product’s price the cost of cleaning up water or air, because this incorporation will distort the market mechanism and the efficient use of resources. Profit-seeking advocates argue that, when government must act in a collective manner, it should act in a way that involves the least interference with the efficiency of the market system, preferably through direct taxation.

In summary, efforts at pollution control, upgrading minority workers, and bringing equality of payment to the workforce are all tasks of the government and not of the private sector, which is incapable of making such choices and is not elected in a democratic society to do so. Its sole responsibility is to seek profits for its shareholders. The following box represents an important set of issues.

“Old Joe Camel” was adopted by R. J. Reynolds (RJR) in 1913 as the symbol for the brand Camel. In late 1990, RJR revived Old Joe with a new look in the form of a cartoon meant to appeal to young smokers.

In December 1991, the Journal of the American Medical Association (JAMA) published three surveys that found the cartoon character Joe Camel reached children very effectively. a  Of children between ages 3 and 6 who were surveyed, 51.1 percent recognized Old Joe Camel as being associated with Camel cigarettes. The 6-year-olds were as familiar with Joe Camel as they were with the Mickey Mouse logo for the Disney Channel.

a K. Deveny, “Joe Camel Ads Reach Children,” Wall Street Journal, December 11, 1991, p. B-1.

An RJR spokeswoman claimed that “just because children can identify our logo doesn’t mean they will use our product.” Since the introduction of Joe Camel, however, Camel’s share of the under-18 market climbed to 33 percent from 5 percent. Among 17- to 24-year-olds, Camel’s market share climbed to 7.9 percent from 4.4 percent.

The Centers for Disease Control reported in March 1992 that smokers between ages 12 and 18 preferred Marlboro, Newport, or Camel cigarettes, the three brands with the most extensive advertising. b

b Id.

Teenagers throughout the country were wearing Joe Camel T-shirts. Brown & Williamson, the producer of Kool cigarettes, began testing a cartoon character for its advertisements, a penguin wearing sunglasses and DayGlo sneakers. Company spokesman Joseph Helewicz stated that the advertisements were geared to smokers between 21 and 35 years old. Helewicz added that cartoon advertisements for adults were not new and cited the Pillsbury Doughboy and the Pink Panther as effective advertising images.

In mid-1992, then–Surgeon General Antonia Novello, along with the American Medical Association, began a campaign called “Dump the Hump” to pressure the tobacco industry to stop advertising campaigns that encourage kids to smoke. In 1993, the FTC staff recommended a ban on the Joe Camel advertisements. In 1994, then–Surgeon General Jocelyn Elders blamed the tobacco industry’s $4 billion in advertisements for increased smoking rates among teens. RJR’s tobacco division chief, James W. Johnston, responded, “I’ll be damned if I’ll pull the ads.” RJR put together a team of lawyers and others it referred to as in-house censors to control Joe’s influence. A campaign to have Joe wear a bandana was nixed, as was one for a punker Joe with pink hair.

In 1994, RJR’s CEO James W. Johnston testified before a congressional panel on the Joe Camel controversy and stated, “We do not market to children and will not,” and added, “We do not survey anyone under the age of 18.”

Internal documents about targeting young people were damaging, though. A 1981 RJR internal memorandum on marketing surveys cautioned research personnel to tally underage smokers as “age 18.” A 1981 Philip Morris internal document indicated that information about smoking habits in children as young as 15 was important, because “today’s teenager is tomorrow’s potential regular customer.” Other Philip Morris documents from the 1980s expressed concern that Marlboro sales would soon decline because teenage smoking rates were falling.

A 1987 marketing survey in France and Canada by RJR before it launched the Joe Camel campaign showed that the cartoon image with its funny and humorous image of Joe Camel attracted attention. One 1987 internal document used the phrase young adult smokers and noted a campaign targeted at the competition’s “male Marlboro smokers ages 13–24.”

A 1997 survey of 534 teens by USA Today revealed the following:

Advertisement	Have Seen Advertisement	Liked Advertisement
Joe Camel	95%	65%
Marlboro Man	94%	44%
Budweiser Frogs	99%	92%

Marlboro was the brand smoked by most teens in the survey. The survey found that 28 percent of teens between ages 13 and 18 smoked—an increase of 4 percent since 1991. In 1987, Camels were the cigarette of choice for 3 percent of teenagers when Joe Camel debuted. By 1993, the figure had climbed to 16 percent.

In early 1990, the Federal Trade Commission (FTC) began an investigation of RJR and its Joe Camel advertisements to determine whether underage smokers were illegally targeted by the 10-year Joe Camel campaign. The FTC had dismissed a complaint in 1994 but did not have the benefits of the newly discovered internal memorandums.

In late 1997, RJR began phasing out Joe Camel. New Camel advertisements featured healthy-looking men and women in their twenties, in clubs and swimming pools, with just a dromedary logo somewhere in the advertisement. RJR also vowed not to feature the Joe Camel character on nontobacco items such as T-shirts. The cost of the abandonment was estimated at $250 million.

In 1996, Philip Morris proposed its own plan to halt youth smoking, which included no vending machine advertisements, no billboard advertisements, no tobacco advertisements in magazines with 25 percent or more youth subscribers, and limits on sponsorships to events (rodeos, motor sports) where 75 percent or more of attendees were adults.

In 1998, combined pressure from Congress, the state attorneys general, and ongoing class action suits produced what came to be known as “the tobacco settlement.” In addition to payment of $206 billion, the tobacco settlement in all of its various forms bars outdoor advertising, the use of human images (Marlboro Man) and cartoon characters (Joe Camel), and vending-machine sales. This portion of the settlement was advocated by those who were concerned about teenagers and their attraction to cigarettes via these advertisements and cigarettes’ availability in machines.

Comment:

Has this litigation and pressure from our elected officials at the state and federal level affected the smoking habits of teenagers today? Explain your answer, referring to  Chapter 1  in this text. What relevant information is missing here?

Managerial School

Advocates of the managerial school of social responsibility argue that businesses, particularly large institutions, have a number of interest groups or constituents both internally and externally that they must deal with regularly, not just stockholders and a board of directors. A business entity has employees, customers, suppliers, consumers, activist groups, government regulators, and others that influence decision making and the ability of the entity to make profits. In effect, modern managers must balance conflicting claims on their time and the company’s resources. Employees want better wages, working conditions, and pensions; suppliers want prompt payment for their goods; and consumers want higher-quality goods at lower prices. These often-conflicting demands lead advocates of a managerial theory of social responsibility to argue that the firm must have the trust of all groups, both internal and external. Thus, it must have clear ethical standards and a sense of social responsibility for its unintended acts in order to maximize profits and to survive in both the short and long runs. A firm that seeks to maximize short-run profits and ignores the claims of groups, whether they be unions, consumer activists, or government regulators, will not be able to survive in the complex environment in which business operates.

Applying the Law to the Facts . . .

Corrine was an executive at a company and was in charge of deciding whether to spend money to open more store locations. The additional locations would bring in more profits. However, Corrine was concerned about affording and protecting the high pay rates for employees, and making sure suppliers would be paid in a timely fashion. What school of responsibility is guiding Corrine’s actions?

If one reviews the Union Carbide India Ltd. incident described earlier, it is clear that the explosion in Bhopal, India, had at least three consequences: (1) It precipitated an attempt by GAF to take over the company. (2) Union Carbide made a successful but costly attempt to fight off this takeover. (3) The value of the stock decreased and, thus, the investors suffered large losses. Advocates of managerial theory would point to the investors’ trust in management’s ability to deal with this disaster as being important to how the market evaluated Union Carbide’s stock. They also would argue that when its Tylenol product was tampered with (poisoned), the management of Johnson & Johnson took decisive action and was thus perceived by investors and customers as being trustworthy. 16  As a result, Johnson & Johnson stock value recovered relatively quickly after the incident.

16  See M. Krikorian, “Ethical Conduct: An Aid to Management,” address at Albion College, Albion, MI, April 16, 1985.

In the next case, note the conflicting claims of stakeholders.

Institutional School

Advocates of an institutional school of social responsibility for business argue that business entities have a responsibility to act in a manner that benefits all of society, just as churches, unions, courts, universities, and governments have. Whether it is a sole proprietorship, a partnership, or a corporation, a business is a legal entity in our society that must be held responsible for its activities. Proponents of this theory argue that the same civil and criminal sanctions should be applied to business activities that injure the social fabric of a society (e.g., the pollution of water and air) as are applied to acts of individuals and of other institutions. When managers fail to deal adequately with “externalities,” they should be held accountable not only to their boards of directors, but also to government enforcement authorities and individual citizens as well.

 Case 7-2 Cooper Industries v. Leatherman Tool Group, Inc.

United States Supreme Court 121 S. Ct. 1678 (2001)

Leatherman (plaintiff) sued Cooper (defendant) in federal district court for unfair competition. Leatherman Tool Group, Inc., manufactured and sold a multifunctional tool called the PST that improved on the classic Swiss Army knife. Leatherman dominated the market for multifunctional pocket tools.

In 1995, Cooper Industries, Inc., decided to design and sell a competing multifunctional tool under the name “ToolZall.” Cooper introduced the ToolZall in August 1996 at the National Hardware Show in Chicago. At that show, Cooper used photographs in its posters, packaging, and advertising materials that purported to be a ToolZall but were actually of a modified PST. When those materials were prepared, the first of the ToolZalls had not yet been manufactured. A Cooper employee created a ToolZall “mock-up” by grinding the Leatherman trademark off a PST and substituting the unique fastenings that were to be used on the ToolZall. At least one of the photographs was retouched to remove a curved indentation where the Leatherman trademark had been. The photographs were used not only at the trade show, but also in marketing materials and catalogs used by Cooper’s sales force throughout the United States.

The lower court found for Leatherman in the amount of $50,000 in compensatory damages and $4.5 million in punitive damages. Cooper appealed, but the court of appeals affirmed the lower court’s decision, seeing no “abuse of discretion” by the lower court as to punitive damages. Cooper appealed to the U.S. Supreme Court, petitioning for a de novo review of the facts as to the size of the punitive damages.

Justice Stevens

Although compensatory damages and punitive damages are typically awarded at the same time by the same decision maker, they serve distinct purposes. The former are intended to redress the concrete loss that the plaintiff has suffered by reason of the defendant’s wrongful conduct. The latter, which have been described as “quasi-criminal,” operate as private fines intended to punish the defendant and to deter future wrongdoing. A jury’s assessment of the extent of a plaintiff’s injury is essentially a factual determination, whereas its imposition of punitive damages is an expression of its moral condemnation. The question [of] whether a fine is constitutionally excessive calls for the application of a constitutional standard to the facts of a particular case, and in this context de novo review of that question is appropriate. *

*  Cooper Industries v. Leatherman Tool Group, Inc., United States Supreme Court 121 S. Ct. 1678 (2001).

Reversed and remanded based on a de novo standard in favor of Cooper, to determin[e] whether the punitive damage award is excessive.

Professional Obligation School

Advocates of a professional obligation school of social responsibility state that business managers and members of boards of directors should be certified as “professionals” before they are allowed to assume managerial responsibility. In our discussion of professional ethical codes, we defined professionals as persons who are subject to (1) educational entrance requirements and continuing education standards, (2) licensing-examination requirements, (3) codes of conduct that are enforced, (4) a formal association that meets regularly, and (5) an independent commitment to the public interest. Advocates of a professional obligation theory argue that business directors and managers, like doctors and lawyers, have a responsibility to the public beyond merely making profits, and that the public must thus be able to be sure that these people are qualified to hold their positions. They should be licensed by meeting university requirements and passing a state or a national test. They should be subject to a disciplinary code that could involve revocation or suspension of their license to “practice the management of a business” if they are found by state or national boards to have failed to meet their codified responsibilities. Such responsibilities would include accountability for the unintended effects of their profit-making activities (externalities).

Regulation School

A regulation school of social responsibility sees all business units as accountable to elected public officials. Proponents of this theory argue that, because business managers are responsible only to a board of directors that represents shareholders, the corporation cannot be trusted to act in a socially responsible manner. If society is to be protected from the unintended effects of profit-making business activities (e.g., pollution, sex discrimination in the workplace, and injuries to workers), it is necessary for government to be involved.

The degree of government involvement is much debated by advocates of this theory. Some argue in the extreme for a socialist state. Others argue for government representatives on boards of directors, and still others argue that government should set up standards of socially responsible conduct for each industry. The last group advocates an annual process of reporting conduct, both socially responsible and otherwise, similar to the independent financial audits now required by the SEC of all publicly registered firms. The growth of ethics offices within corporations has played a role in dealing with ethical and legal problems. Sometimes these offices are mandated by courts when sentencing takes place in white-collar criminal cases. Often corporations set up such offices as preventive measures.

In Case 7-3 below there exists a relationship between law and ethics as Judge Lolley sets out in his opinion. Referring back to  Chapter 1 , explain the relationship.

 Case 7-3 Johnson Construction Co. v. Shaffer

Court of Appeal of Louisiana, Second Circuit 87 So. 3d 203 (2012)

Atruck owned by Johnson Construction Company needed repairs. John Robert Johnson, Jr., the company’s president, took the truck with its attached 15-ton trailer to Bubba Shaffer, doing business as Shaffer’s Auto and Diesel Repair. The truck was supposedly fixed, and Johnson paid the bill. The truck continued to leak oil and water. Johnson returned the truck to Shaffer, who again claimed to have fixed the problem. Johnson paid the second bill. The problems with the truck continued, however, so Johnson returned the truck and trailer a third time. Shaffer gave a verbal estimate of $1,000 for the repairs, but he ultimately sent an invoice for $5,863.49. Johnson offered to settle for $2,480, the amount of the initial estimate ($1,000) plus the costs of parts and shipping. Shaffer refused the offer and would not return Johnson’s truck or trailer until full payment was made. Shaffer also charged Johnson a storage fee of $50 a day and 18 percent interest on the $5,863.49.

Johnson Construction filed a suit against Shaffer alleging unfair trade practices. The trial court determined that Shaffer had acted deceptively and wrongfully in maintaining possession of the trailer, on which no work had been performed. The trial court awarded Johnson $3,500 in general damages, plus $750 in attorneys’ fees. Shaffer was awarded the initial estimate of $1,000 and appealed.

Judge Lolley

At the outset, we point out that Mr. Johnson maintained he had a verbal agreement with Bubba Shaffer, the owner of Shaffer’s Auto Diesel and Repair, that the repairs to the truck would cost $1,000. Mr. Johnson also testified that he was not informed otherwise.

The existence or nonexistence of a contract is a question of fact, and the finder of fact’s determination may not be set aside unless it is clearly wrong.

At the trial of the matter, the trial court was presented with testimony from Mr. Johnson, Mr. Shaffer, and Michael Louton, a mechanic employed by Shaffer. The trial court did not believe Mr. Johnson was informed of the cost for the additional work.

We cannot say that the trial court was clearly wrong in its determination. The trial court viewed Mr. Shaffer’s testimony on the issue as “disingenuous” and we cannot see where that was an error.

So considering, we see no error in the trial court’s characterization of Shaffer’s actions with the trailer as holding “hostage in an effort to force payment for unauthorized repairs. Shaffer had no legal right to retain possession of the trailer. Thus, the trial court did not err in its determination that Shaffer’s retention of Johnson Construction’s trailer [for four years!] was a deceptive conversion of the trailer.

The state appellate court affirmed the judgment of the trial court in favor of Johnson Construction Company for $3,500, plus attorney fees and award of the original $10,000. *

*  Court of Appeal of Louisiana, Second Circuit 87 So.3d 203 (2012).

Affirmed for the Plaintiff.

Global Dimensions of Ethics and Social Responsibility

Code of Conduct for Transnational Corporations

A United Nations effort to prevent misconduct by transnational corporations has been promulgated. Four objectives include:

1. Respect for national sovereignty in countries where such companies operate. Often transnational companies operate in developing nations where governments are less stable and more corrupt, making this goal very difficult to achieve.

2. Adherence to sociocultural values. The code seeks to prevent transnational companies from imposing value systems that are detrimental to those of the host country.

3. Respect for human rights. Companies should not discriminate on the basis of race, color, sex, religion, language, or political or other opinion. In developing nations, achievement of this goal is sometimes very difficult when the host country does discriminate on the basis of some of these factors.

4. Abstention from corrupt practices. Transnational corporations shall refrain from the offering, promising, or giving of any payment, gift, or other advantage to a public official or refrain from performing a duty in accordance with a business transaction.

Corruption is endemic to many developing countries (e.g., Nigeria or the People’s Republic of China) and a way of doing business. The United States has set forth one approach (Foreign Corrupt Practices Act [FCPA]), and the Organization for Economic and Cultural Development another. See  Chapter 23  for a discussion of the Foreign Corrupt Practices Act of 1977, as amended in 1988 and 1998, and the International Securities Enforcement Cooperation Act of 1990 (ISECA).

Comment:

Has the United States been successful in preventing corruption? If not, why not? Has the People’s Republic been successful in its latest attempt to do away with corruption in many phases of its socialist system? Explain.

Explain externalities that may exist when attempting to end corruption.

Summary

We have sought to define ethics and social responsibility within the context of business associations. We examined consequential theories of ethics based on the consequences of the company’s actions. Deontological schools of ethics, in contrast, are based on duties. Humanist theories of ethics evaluate actions as good or bad based on how the actions improved inherent human capacities.

This chapter also examined codes of ethics emanating from businesses and professions. It discussed five schools of social responsibility based on the unintended effects of corporate and human conduct. Finally, global dimensions of ethical and socially responsible conduct are highlighted, through an examination of the United Nations’ Code of Conduct for Transnational Corporations.

Thinking Critically About Relevant Legal Issues

Disbarment of Lawyers and Debarment of Officers and Directors of Corporations

Egil Krogh, Jr., was admitted [to practice] law in the state of Washington on September 20, 1968. On February 4, 1974, he was suspended as a result of his having been convicted of a felony. [Krogh now appeals the disciplinary board’s decision to disbar him.]

The information referred to in the complaint charged that while the respondent was an officer and employee of the United States Government . . . and acting in his official capacity, in conjunction with others who were officials and employees of the United States Government, the defendant unlawfully, willfully and knowingly did combine, conspire, confederate and agree with his co-conspirators to injure, oppress, threaten and intimidate Dr. Lewis J. Fielding . . . in the free exercise and enjoyment of a right and privilege secured to him by the Constitution and laws of the United States, and to conceal such activities. It further charged that the co-conspirators did, without legal process, probable cause, search warrant or other lawful authority, enter the offices of Dr. Fielding in Los Angeles County, California, with the intent to search for, examine and photograph documents and records containing confidential information concerning Daniel Ellsberg, and thereby injure, oppress, threaten and intimidate Dr. Fielding in the free exercise and enjoyment of the right and privilege secured to him by the Fourth Amendment to the Constitution of the United States, to be secure in his person, house, papers and effects against unreasonable searches and seizures. . . . To all of these allegations, the respondent had pleaded guilty.

Both the hearing panel and the disciplinary board found that moral turpitude was an element of the crime of which respondent was convicted. The panel found that he has a spotless record except for the incident involved in these proceedings; that he is outstanding in character and ability; that his reputation is beyond reproach; that he acted, although mistakenly, out of a misguided loyalty to [President Nixon]; that the event was an isolated one, and that in all probability there would be no repetition of any such error on his part. The panel further found that the respondent had accepted responsibility and had made amends to the best of his ability; that he testified fully and candidly and that his attitude in the proceeding was excellent. The panel concluded that in this case which it found to be distinguishable from all other cases, the respondent apparently followed the order of a “somewhat distraught President of the United States” under the guise of national security to stop by all means further security leaks.

Th[e] rule [that attorneys are disbarred automatically when they are found guilty of a felony] still governs the disposition of such disciplinary proceedings in a number of jurisdictions. However, under our disciplinary rules, some flexibility is permitted, and the court retains its discretionary power to determine whether, on the facts of the particular case, the attorney should be disbarred.

We cannot accept the assumption that attorneys . . . can ordinarily be expected to abandon the principles which they have sworn to uphold, when asked to do so by a person who holds a constitutional office. Rather than being overawed by the authority of one who holds such an office . . . the attorney who is employed by such an officer should be the most keenly aware of the Constitution and all of its provisions, the most alert to discourage the abuse of power. In such a position those powers of discernment and reason, which he holds himself out as possessing, perform their most important function. If, when given a position of power himself, he forgets his oath to uphold the Constitution and laws of the land and instead [flouts] the constitutional rights of other citizens and holds himself above the law, can we say to the public that a person so weak in his dedication to constitutional principles is qualified to practice law?

That the reputation and honor of the bar have suffered severe damage as a result is now a matter of common knowledge. We find it difficult to believe that the respondent was not aware, when he authorized the burglary of Dr. Fielding’s office, that if his conduct became known, it would reflect discredit upon his profession.

For the reasons set forth herein, we must conclude that the respondent, in spite of his many commendable qualities and achievements, has shown himself to be unfit to practice law.

The recommendation of the disciplinary board is approved, and the respondent’s name shall be stricken from the roll of attorneys in this state. In answering these questions, refer to  Chapter 1  of this text.

1. What ethical norm is central to the court’s decision in this case?

2. What fact seems especially powerful in shaping the court’s reasoning?

3. What reasons does the court provide for upholding the respondent’s disbarment?

4. Outline the reasons why Egil Krogh, Jr., believed he should not be disbarred by the disciplinary board of the State of California.

Potential Debarment of Officers and Directors

In May of 2015 five of the world’s largest banks pleaded guilty to an array of antitrust and fraud charges in a criminal proceeding. For most people, pleading guilty to these felonies would have landed them in jail for several years, loss of their job, and payment of a huge fine.

The Justice Department and the SEC agreed to $1 billion of fines and a negotiated plea agreement by which a 2012 non-prosecution agreement with one of the banks was torn up. Most of the banks’ pleas were from holding companies.

1. Does the plea agreement meet the justice values set out in  Chapter 1 ? Explain this from the point of view of the five corporations, and secondly, that of the Justice Department and the SEC.

2. Should the directors or officers of the companies be fined personally or go to jail? Remember, in a previous chapter we have learned that a corporation is considered a person at law. Should the officers and directors be debarred (not disbarred) by the SEC and be prevented from serving on boards or as officers of a publicly held corporation that is regulated by the agency forever? Would these steps bring justice to the case or are there externalities that have not been considered? For example, would this proposed punishment to five large companies affect the worldwide role of banks and other financial institutions?

Source: Based on B. Protess, and M. Corkery, “Five Big Banks to Plead Guilty to Felony Charges,” New York Times, May 14, 2015, pp. B-1, B-5.

Assignment On The Internet

This chapter introduces you to three theories of ethical thought and five schools of social responsibility. Explore how the three theories of ethical thought are put into practice. Using the Internet, find the code of ethics for a business or corporation that does business in your city or town. This site provides links to codes of ethics for hundreds of corporations:  www.business-ethics .com .

Applying your critical thinking skills, determine if the chosen code of ethics relies more heavily on one theory of ethical thought than the others. Are there aspects of that business’s code of ethics that you would like to see changed? Why?