Ethical Business Responsibility Assignment - Honda Auction Case
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MGMT3080-Ch7.pdf
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
Chapter 7 Business Ethics
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Bernard Ebbers
o Bernard Ebbers built WorldCom into a global telecommunications giant
o Ebbers used use all of his WorldCom stock as collateral for bank loans
o In 2000 Ebbers gave the first in a string of instructions to report false revenues and use accounting tricks to disguise rising expenses
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Bernard Ebbers
o Ebbers testified that he had no knowledge of the fraud, but five of his subordinates testified against him
o Ebbers was sentenced to 25 years in prison for securities fraud, unprecedented for a white-collar crime
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Bernard Ebbers
o Criminal sentences are intended to punish individuals and deter future crime o Was it fair retribution for his actions? o Was its length necessary to deter more
accounting fraud?
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Bernard Ebbers
o Ebbers is exposed now as unethical, a criminal, and deficient as a leader o To discuss the sources of ethical values in
business, including truth telling o To discuss prosecution of corporate crime o To look at factors shaping ethical climates in
organizations and discuss the managerial tools leaders can use to elevate behavior
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What are Business Ethics?
o Ethics: The study of good and evil, right and wrong, and just and unjust
o Business ethics: The study of good and evil, right and wrong, and just and unjust actions in business
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What are Business Ethics?
o All managers face difficult ethical conflicts o Applying clear guidelines resolves the majority of
them o Ethical traditions that apply to business support
truth telling, honesty, protection of life, respect for rights, fairness, and obedience to law
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What are Business Ethics?
o Eliminating unethical behavior may be difficult, but knowing the rightness or wrongness of actions is easy
o Some ethical decisions are troublesome because although basic ethical standards apply, conflicts between them defy resolution. Ex: Lockhell Aircraft Corp. bribes to politicians in Japan
o Some ethical issues are hidden and hard to recognize. Ex: Robins’ intrauterine device
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Two Theories of Business Ethics
o Theory of amorality: The belief that business should be conducted without reference to the full range of ethical standards, restraints, and ideals in society o Business and personal ethics existed in separate
compartments o Theory of moral unity: Business actions are
judged by the general ethical standards in society, not by a special set of more permissive standards ex: James Cash Penny
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Major Sources of Ethical Values in Business
o Four great repositories of ethical values influence managers o Religion, Philosophy, Culture, and Law
o A common theme, the idea of reciprocity, or mutual help, is found in each of these value systems o reciprocity – a form of social behavior in which
people behave supportively in the expectation that this behavior will be given in return
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Figure 7.1 - Major Sources of Ethical Values in Business
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Religion
o The great religions converge in the belief that a divine will reveals the nature of right and wrong behavior in all areas of life, including business o Bible – many of its ethical teachings require
interpretation before they can be applied to problems in the modern workplace
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Philosophy
o Even after two millennia, there remains considerable dispute among ethical thinkers about the nature of right action o Plato – absolute justice exists independently of
individuals and that its nature can be discovered by intellectual effort
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Philosophy
o The great Catholic theologians St. Augustine and St. Thomas Aquinas both believed that humanity should follow God’s will o Christianity was the source of many ethical
teachings, including specific rules such as the Ten Commandments
o Enlightenment – secular philosophers such as Baruch Spinoza tried to demonstrate ethical principles with logical analysis rather than ordain them by reference to God’s will
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Philosophy
o Jeremy Bentham o developed the idea of utilitarianism as a guide to
ethics, validating two dominant ideologies: democracy and industrialism
o An ethical action was the one among all alternatives that brought pleasure to the largest number of persons and pain to the fewest
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Philosophy
o John Locke developed and refined doctrines of human rights and left an ethical legacy supporting belief in the inalienable rights of human beings
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The Realist School of Ethics
o The realists believed that both good and evil were naturally present in human nature o Human behavior would inevitably reflect this
mixture o Niccolò Machiavelli argued that important ends
justified expedient means o Herbert Spencer supported a harsh ethic that
justified vicious competition among companies because it furthered evolution
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The Realist School of Ethics
o Friedrich Nietzsche said that “nice” ethics were prescriptions of the timid, designed to fetter the actions of great men whose irresistible power and will were regarded as dangerous by ordinary mortals o Master morality – great men made their own
ethical rules according to their convenience and without respect the general good of average people
o Slave morality – intended to shackle the great men
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Cultural Experience
o Every culture transmits between generations a set of traditional values, rules, and standards that define acceptable behavior
o In each stage, economic and social arrangements have dictated a distinct moral code
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Cultural Experience
o Civilization is a cumulative cultural experience consisting of three stages: o Hunting and gathering stage o Agricultural stage o Industrial stage
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Ethical Variation in Cultures
o Ethical values differ among nations as historical experiences have interacted with philosophies and religions to create diverging cultural values and laws
o Ethical universalism: The theory that because human nature is everywhere the same, basic ethical rules are applicable in all cultures o There is some room for variation in the way these
rules are followed ex: achieved basic justice by leaving room for emphasizing individual rights
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Ethical Variation in Cultures
o Ethical relativism: The theory that ethical values are created by cultural experience o Different cultures may create different values and
there is no universal standard by which to judge which values are superior
o Because of globalization, corporations struggle with the question of how to apply conduct codes across cultures o Google is not in China
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Ethical Variation in Cultures
o The ethical ideals of all cultures converge to basic sameness o Thomas Donaldson and Thomas Dunfee see a
deep social contract underlying all human societies
o Hypernorms – Master ethical principles that underlie all other ethical principles. All variations of ethical principle must conform to them o Moral free space – inconsistent norms are
permitted if they do not violate any hypernorms
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Law
o Laws codify, or formalize, ethical expectations o Corporations and their managers face a range of
mechanisms set up to: o Deter illegal acts o Punish offenses o Rehabilitate offenders
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Damages
o In civil cases courts may assess damages, or payments for harm done to others by a corporation o Compensatory damages: Payments awarded to
redress actual, concrete losses suffered by injured parties
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Damages
o Punitive damages: Payments in excess of a wronged party’s actual losses to deter similar actions and punish a corporation that has exhibited reprehensible conduct o Browning-Ferris case
o Is it fair to impose such a penalty based on a defendant’s status as a large corporation?
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Punitive Damages
o Since the Browning-Ferris decision the Court has spent more than 20 years working to limit punitive awards against corporations, not because it considers them too large, but because it believe they can be unpredictable, arbitrary, and disproportionate to the wrongdoing o BMW of North America, Inc. v. Gore o Exxon Valdes o McDonald’s Hot Coffee Case
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Criminal Prosecution of Managers and Corporations
o Corporate crimes impair lawful competition in markets and harm consumers, investors, and the public
o Respondeat superior – Corporations are liable for the actions of employees who commit a crime in the course of their employment when their act is for the benefit of the company
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Criminal Prosecution of Managers and Corporations
o Prosecutors find it easier to impose penalties on corporations o No need to prove a corporation had a criminal
intent o Corporations are not allowed to invoke the Fifth
Amendment right
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Criminal Prosecution of Managers and Corporations
o For corporations in many industries, criminal prosecution risk catastrophe o A conviction can lead to drop in share price,
higher cost of capital, reputational damage and loss of federal contracts and licenses
o Arthur Andersen o Its auditors failed to deter Enron from stating false
earnings o Imposed a $500,000 criminal fine and put
Andersen on five years’ probation
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Criminal Prosecution of Managers and Corporations
o The government will delay or not prosecute if the corporation takes steps to compensate victims and prevent future wrongdoing o Deferred prosecution agreements (DPAs) o Nonprosecution agreements (NPAs)
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Criminal Prosecution of Managers and Corporations
o Executive defendants do not have to produce information, so pretrial investigation can be lengthy and expensive o Pfizer – a regional sales manager directed
kickbacks to doctors who prescribed its drug o White-collar crimes such as accounting frauds
require prosecutors to educate lay juries about intricate financial transactions that even experienced auditors find hard to follow o Richard Scruchy, former CEO of HealthSouth
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Criminal Prosecution of Managers and Corporations
o Corporations are criminally liable for corrupt actions or omissions of managers if those actions are intended to benefit the corporation
o Criminal prosecution of corporations and their executives is exceptionally difficult o Ex: Enron Task Force
o The prosecutors pressured lower-level mangers into cooperating as witnesses
o Of 46 executives, 20 were convicted but 11 were acquitted and juries deadlocked on 15 others
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Criminal Prosecution of Managers and Corporations
White-‐collar crime A nonviolent economic offense of chea:ng and decep:on done in the course employment for personal or corporate gain
Deferred prosecu:on Agreement (DPAs)
An agreement between a prosecutor and a corpora:on to delay prosecu:on while the company takes remedial ac:ons
Nonprosecu:on Agreement (NPAs)
An agreement in which U.S. aIorneys decline prosecu:on of a corpora:on that has taken appropriate steps to report a crime, cooperate, and compensate vic:ms
Monitor A person hired by a corpora:on to oversee fulfillment of condi:ons in an agreement to avoid criminal indictment
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Sentencing and Fines
o In 1991 the U.S. Sentencing Commission released guidelines for sentencing both managers and corporations
o Managers can go to prison, be fined, put on probation, given community service, make restitution, or be banned from working in their occupations
o Corporations cannot be imprisoned, but they can be fined and their actions restricted
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Figure 7.2 - Four Internal Forces Shaping Corporate Ethics
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Leadership
o The example of company leaders is perhaps the strongest influence on integrity o Exemplary behavior is a powerful toll available to
all managers. o Paul O’Neil – CEO at Alcoa refused to join an
expensive country club o A common failing is for managers to show by
their actions that ethical duties can be compromised
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Leadership
o If the leader does something, an opportunistic employee can rationalize his or her entitlement to do it also o Andrew Fastow – as Enron’s chief financial officer o He created a warren of complex and deceitful
investments that not only contributed nonexistent revenue, but also diverted corporate funds into his and his wife’s pockets
o What inspired Astow to act as he did? o The example set by CEO Ken Lay
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Strategies and Policies
o A critical function of managers is to create strong competitive strategies that enable the company to meet financial goals without encouraging ethical compromise
o Unrealistic performance goals can pressure those who must make them work o Lucent Technologies CEO Richard McGinn –
under intense pressure to meet the revenue goal, the sale force reacted to give credits to customers for future purchases
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Strategies and Policies
o Reward and compensation systems can expose employees to ethical compromises o Laser Vision Institute counselors asked patients
to upgrade to more expensive surgeries to get bounces
o When companies adopt policies that put employees under pressure, they should build in strong ethical rules too.
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Corporate Culture
o Corporate culture: A set of values, norms, rituals, formal rules, and physical artifacts that exists in a company
o Over time, attitudes and behaviors that solve problems and bring success are reinforced and become permanent parts of the culture. o Henry Ford – his early philosophy of brutal labor
policies endured so strongly that more than 50 years after his death
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Corporate Culture
o Three levels of corporate culture: o Artifacts – include both physical expressions of
culture and visible behaviors o Physical elements include ways of dressing, office
layouts and symbolic displays o Visible behaviors include patterns of interaction
o Espoused values – formal statements of belief and intention o They state what the organization official stands for
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Corporate Culture
o Tacit underlying values – reside the deep, shared assumptions in the organization’s culture about how things really work
o To explain the inconsistencies between the physical and behavioral artifacts and the espoused policies
o Employee-of-the-month o When the contradiction between espoused values
and underlying tacit assumptions grow too wide trouble is not far ahead o The story of Fannie Mae
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Individual Characteristics
o Personality traits may be more important, but are less studied in the literature of ethics
o The only personality trait extensively studied and correlated with unethical behavior is Machiavellianism o The tendency of an individual to use self-
centered, immoral, manipulative behavior in a group
o Philip Zimbardo – dynamic psychological processes ex: Nick Rybergs
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How Corporations Manage Ethics
o Pioneer for management of ethics o James Cash Penny in 1913
o Until 1980s – set up ethics and compliance programs o Military contractors required firms to adopt ethics
codes and train employees to obey laws to avoid billing frauds and cost overruns
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How Corporations Manage Ethics
o Caremark International – a health company was caught giving kickbacks to physicians who referred patients to its clinics. o After being indicted, the company set up a
compliance program, but it was too late to prevent a $250 million fine
o Shareholder sued the director for breach of duty
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How Corporations Manage Ethics
o Sarbanes-Oxley Act o A code of ethics for financial officers o An internal process for reporting illegal behavior o Protection for employees who reveal wrongdoing
o Both the New York and NASDAQ stock exchanges required that listed companies have in place codes of conduct and procedures to enforce them
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How Corporations Manage Ethics
o Ethics and compliance programs may combine two distinct approaches to prevent wrongdoing o Compliance Approach
o teach employees to meet legal and regulatory requirements and emphasizes following rules
o Ethics Approach o teach values
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How Corporations Manage Ethics
o U.S. Sentencing Commission’s Guidelines Manual o Establish standards and procedures to prevent
and detect criminal conduct o Conduct codes typically contains: introductions by
CEOs, ways to report wrongdoing, tips for making ethical decisions, and disciplinary procedures o question-and answer format
o Codes are usually distributed to all employees and many companies ask them to sign an annual form certifying compliance
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How Corporations Manage Ethics
o U.S. Sentencing Commission’s Guidelines Manual o Give oversight of the program to the board of
directors and assign responsibility for it to a high- level executive who, in turn, will assign day-to-day responsibility to a specific manager
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How Corporations Manage Ethics
o U.S. Sentencing Commission’s Guidelines Manual o Exclude individuals with a history of illegal or
unethical conduct from positions of substantial authority o Check for education and job experience on resume
or criminal background check
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How Corporations Manage Ethics
o U.S. Sentencing Commission’s Guidelines Manual o Periodically communicate standards and
procedures to all employees from the lowest up to the board of directors o Training is the key to communicating ethics and
compliance knowledge
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How Corporations Manage Ethics
o U.S. Sentencing Commission’s Guidelines Manual o Monitor the organization for criminal conduct, and
set up a system for reporting of suspicious conduct without fear of retaliation o Hotlines for reporting suspected wrongdoing
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How Corporations Manage Ethics
o U.S. Sentencing Commission’s Guidelines Manual o Enforce standards by providing both incentives to
reward compliance and discipline to deter criminal conduct
o If criminal conduct occurs, modify the program to to prevent repeat offenses. Periodically assess the risks of criminal conduct and try to reduce them
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How Corporations Manage Ethics
o Establish standards and procedures o Create high-level oversight o Screen out criminals o Communicate standards to all employees o Monitor and set up a hotline o Enforce standards, discipline violators o Assess areas of risk, modify the program
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Concluding Observations
o Ethics is the study of good and evil o The most important single factor in good
corporate ethics is the example of leaders, who shape strategies and cultures
