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Copyright

James Fieser

Introduction to Business Ethics, Second Edition

Editor in Chief, AVP: Steve Wainwright

Sponsoring Editor: Christina Ganim

Development Editor: Shannon LeMay-Finn and Dan Moneypenny

Assistant Editor: Teresa Bdzil

Editorial Assistant: Julie Mashburn

Production Editor: Catherine Morris

Media Editor: Laura Scott

Cover Design: Ryan Fleetwood

Printing Services: Bordeaux

Production Services: Lachina

Permission Editor: Karen Ehrmann

Cover Image: (top left) DigitalVision/Thinkstock; (top right) Stock Connection/Superstock; (bottom left) iStock/Thinkstock; (bottom right) iStock/Thinkstock

ISBN-13: 978-1-62178-252-0 Copyright © 2015 Bridgepoint Education, Inc. All rights reserved.

GRANT OF PERMISSION TO PRINT: The copyright owner of this material hereby grants the holder of this publication the right to print these materials for personal use. The holder of this material may print the materials herein for personal use only. Any print, reprint, reproduction or distribution of these materials for commercial use without the express written consent of the copyright owner constitutes a violation of the U.S. Copyright Act, 17 U.S.C. §§ 101-810, as amended.

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About the Author

Dr. James Fieser is a professor of philosophy at the University of Tennessee at Martin. He received his B.A. from Berea College and his M.A. and Ph.D. in philosophy from Purdue University. He is author, co-author, or editor of ten textbooks, including Ethics: Discovering Right and Wrong (8/e 2016), Business Ethics (2/e 2016), Philosophy: A Historical Survey with Essential Readings (9/e 2014), Scriptures of the World’s Religions (5/e 2014), A Historical Introduction to Philosophy (2003), and Moral Philosophy through the Ages (2001). He has edited and annotated the ten-volume Early Responses to Hume (2/e 2005) and the dive-volume Scottish Common Sense Philosophy (2000). He is the founder and general editor of the Internet Encyclopedia of Philosophy web site (www.iep.utm.edu (http://www.iep.utm.edu) ). His personal website can be accessed at www.utm.edu/staff/jNieser (http://www.utm.edu/staff/jNieser) .

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Acknowledgments

The author would like to express his gratitude to Alexander Moseley, who helped author much of the original material in the dirst edition of this book. Special thanks are also due to Christina Ganim, Executive Editor; Shannon LeMay-Finn and Dan Moneypenny, development editors; Teresa Bdzil, assistant editor; Julie Mashburn, editorial assistant; Catherine Morris, production editor; Laura Scott, media editor; and the rest of the gifted editorial staff at Bridgepoint for their expertise and good nature throughout the production of this new edition.

The author and publisher would also like to thank the following reviewers, as well as other anonymous reviewers, for their valuable feedback and insight about this edition:

Jeffrey Bowe, Catawba College William Brown, Marist College Kenneth Clapp, Catawba College Edward Fubara, Campbell University Lindsey Gibson, Hawaii Pacidic University Marcus Goncalves, Nichols College

Justin Harrison, Ashford University Kimberly Horton, Ashford University Suzanne Humphrey, Ashford University Michael Papazian, Berry College Melodie Toby, Kean University

Roger Ward, Georgetown College Gloria Zúñiga y Postigo, Ashford University

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Preface

Businesses are among the most important institutions that we have. They make our lives easier with products that we could never construct on our own. They give us jobs that help dedine who we are as people. And, more generally, they push society forward through cultural advancement.

However, there is a sinister side to the business world, where a company may do anything in its power, moral or immoral, to beat the competition and make prodits. The insatiable drive for money fuels society’s progress yet, at the same time, oppresses workers, misleads consumers, destroys the environment, and cannibalizes the very economy that gives it life. By ignoring its good, we fail to give credit to the driving force that pulled humans out of the Stone Age. But by ignoring its bad, we unleash a conscienceless predator upon society. This is a real-life drama that we all witness and participate in as workers, consumers, and entrepreneurs. The task of business ethics is to understand that drama and suggest ways to maximize the good and minimize the bad.

Discussions of business ethics are exceptionally varied. Some approaches are theoretical and explore the nature of ethical obligation, human greed, and the limits of economic freedom. Other business ethics inquiries are more concrete and attempt to itemize and describe the numerous types of questionable business practices that have outraged society. These include deceptive advertising, price dixing, and unsafe working conditions, just to name a few. In many ways, the heart of business ethics involves identifying and describing the most common unethical practices. By knowing concretely what these various areas of concern are, we may be more alert to abuses when we enter into those territories on the job.

Still other discussions of business ethics emphasize specidic cases in which businesses have notoriously gone astray, such as the Union Carbide chemical plant explosion in India, the Exxon Valdez oil spill in Alaska, and the Enron dinancial collapse. We learn by example, and when we see dramatic instances of corporate moral failure, the stories stick with us.

Finally, there are business ethics discussions that offer practical advice for avoiding unethical business decisions. For example, we might learn that apathy toward society promotes governmental intervention, or that heavy pressure from top management to meet performance goals sets a climate for illegal action. The practice of drawing a moral conclusion at the close of a business ethics discussion is itself a skill that everyone in business can and should learn. Here is an area of corporate abuse: What can we learn from it to help us avoid going down that path?

This book adopts all of these approaches. The dirst three chapters are more theoretical, establishing a broad framework of ethical and social concepts. Specidically, they deal with ethical principles, capitalism, and the corporation. The three next chapters focus on business issues that affect people individually: specidically, as consumers, as minorities who might face discrimination, and as workers. From here, the scope broadens to include internal practices of dinance, including accounting and investing. The scope then widens further with chapters on multinationals, the environment, and investments.

Throughout this book, the discussions redlect an appreciation of the free market system: what it has done to advance both the personal lives of people and civilization as a whole. At the same time, it exposes how unethical business practices can transform a benedicial social institution into one that can potentially cause great harm and human suffering. As ethical people, we must respect the rights and dignity of those around us, and this is the fundamental moral lesson that children learn from their parents from the start. As ethical business people, we must continue that lesson regarding how we treat consumers, coworkers, and society at large. That, ultimately, is what it takes for a business to be ethical.

To be sure, many business ethics issues covered in this book are hotly debated, such as the nature of capitalism, corporate personhood, and worker’s rights. However, these debates teach us that some of our most important social and economic values may not be as dirmly established as we might think, and we must show respect toward those on the opposite side of the issue. We cannot be good business colleagues—or good citizens for that matter—if we are contentious on value issues where reasonable people may disagree.

This newly revised second edition substantially updates each of the book’s ten chapters. As with most textbook revisions, the inclusion of new material in this edition required the deletion of a comparable amount of previously existing material. Among the most noticeable changes in this edition are the following:

Each chapter now includes a lengthy case study on an important topic.

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Most of Chapter 6, “Employees,” has been rewritten. Dozens of older business ethics examples have been updated or replaced with newer ones. Additional “What Would You Do” features have been added throughout the book. New photos and digures have been included.

In addition to these, minor changes have been made throughout for claridication and ease of reading.

Textbook Overview and Features

An Introduction to Business Ethics, Second Edition includes a number of features to help students understand key concepts and think critically about the material:

Business ethics case studies that provide an in-depth look at real-world scenarios appear at the end of each chapter. Videos and critical thinking questions that further illustrate important concepts are embedded throughout the eBook.

“What Would You Do?” features present example situations and critical thinking questions that encourage readers to further consider the role of ethical decision making in business. Interactive resources include situational examples that give readers an opportunity to redlect upon ethical dilemmas and consider possible options.

Learning objectives at the beginning of each chapter identify what the reader should be able to do after completing each chapter. They provide a guide for important elements of each chapter and serve as a teaching tool for the instructor. Chapter summaries provide a brief review of the primary concepts in each chapter. Discussion questions at the end of each chapter provide thought-provoking questions relevant to the reading. Key terms appear in bold in each chapter and are also listed at the end of the chapter and in the glossary.

Accessible Anywhere. Anytime.

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To download the Constellation iPhone or iPad app, go to the App Store on your device, search for "Constellation for Ashford University," and download the free application. You may log in to the application with the same username and password used to access Constellation on the web.

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Android Tablet and Phone

To download the Constellation Android app, go to the Google Play Store on your Android Device, search for "Constellation for Ashford University," and download the free application. You may log in to the Android application with the same username and password used to access Constellation on the web.

NOTE: You will need a tablet or phone running Android version 2.3 (Gingerbread) or higher.

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1 Ethical Principles and Business Decisions

Learning Objectives

After reading this chapter, you should be able to:

Describe moral objectivism, moral relativism, and divine command theory.

Wavebreak Media/Thinkstock

Explain the theories of moral psychology, including psychological egoism, psychological altruism, and the relation between gender and morality.

Explain how virtue theory, duty theory, and utilitarianism provide standards of morality.

Describe the relation between morality and government in social contract theory, human rights theory, and the four principles of governmental coercion.

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Introduction

National surveys are routinely conducted to reveal public attitudes about various professions; some jobs have higher moral reputations than others. One poll asked people to rate the honesty and ethical standards of people in different dields. The results of the survey are shown in Figure 1.1.

It is important to understand that these survey results only report people’s perceptions of professional ethical behavior and are not evaluations of actual professional behavior. But business is an area where perception is often everything, and businesspeople in advertising and public relations certainly know this. Figure 1.1 shows a clear pattern: The highest- ranking professions involve helping people, and nurses, who are at the very top, are clear examples. Among the lowest- ranking occupations are those associated with the business world: bankers, business executives, advertisers, and, near the very bottom, car salespeople.

What is it that makes us have such low opinions of the moral integrity of the business world? Part of it may be that, in contrast with nurses, businesses have the reputation of caring only for themselves and not for others. Part of it may also be that the competitive nature of business pushes even the most decent of people to put prodits above responsibility to the public. Businesses, of course, respond to these negative perceptions in creative ways. For example, Costco, Walgreens, Kroger, and other retailers now provide inexpensive dlu shots to customers. This performs a genuine social service and at the same time bolsters their ethical reputation by reinforcing their link with health care.

Figure 1.1: Perceptions of ethical professions, 2014

Numbers indicate the percentage of those surveyed who ranked the respective vocations very high in terms of honesty and ethical standards. Of the 805 adults surveyed, 80% rate nurses highest.

Source: Based on RifIkin, R. (2014). Americans rate nurses highest on honesty, ethical standards. Gallup. Retrieved from

http://www.gallup.com/poll/180260/americans-rate-nurses-highest-honesty-ethical-standards.aspx (http://www.gallup.com/poll/180260/americans-rate-nurses-highest-honesty-ethical-standards.aspx)

The concept of business ethics is by no means new; in fact, some of the earliest written documents in human civilization wrestle with these issues. The Mesopotamian Code of Hammurabi, from almost 4,000 years ago, had this to say about the responsibility of building contractors:

If a builder builds a house for someone, even though he has not yet completed it, if then the walls seem toppling, the builder must make the walls solid from his own means. . . . If a shipbuilder builds a boat for someone, and

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does not make it tight, if during that same year that boat is sent away and leaks, the shipbuilder shall take the boat apart and put it together tight at his own expense. (King, n.d., sections 233 and 235)

This book is devoted to understanding the ethical challenges that businesses face and what can be done to meet those challenges. In this chapter, we will explore several basic and time-tested principles of morality. Ethical theory is a complex dield of study, and, within the limited space of this chapter, we can only introduce some of the main principles, illustrating them with examples from the dield of business.

Some of history’s greatest minds have redlected on the nature of morality and devised theories of where morality comes from and how moral principles should guide our conduct. As we examine these theories, several will be associated with famous digures like Plato, Aristotle, Kant, and Mill. Although these thinkers may have provided the classic expressions of these concepts, in many cases they did not invent them, nor did they single-handedly integrate them into notions of morality. We dind these principles important today because each redlects a way that we naturally think about moral issues. This chapter provides not just a lesson in the history of ethics but an examination of the features that we currently believe are relevant to ethical behavior.

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1.1 Where Moral Values Come From

A good dedinition of ethics is that it is an organized analysis of values relating to human conduct, with respect to an action’s rightness and wrongness. Ethics is not the same as etiquette, which merely involves customary codes of polite behavior, such as how we greet people and how we seat guests at a table. The issue in ethics is not what is polite, but what is obligatory. Ethics is closely related to morality, and although some ethicists make subtle distinctions between the two, they are more often used interchangeably, as will be done throughout this book.

One of the most basic ethical issues involves understanding where our moral values come from. Consider the moral mandates that we should not kill or steal, which most of us adopt. If I asked you where you got those values, you’d likely answer that they were passed on to you from your parents, friends, teachers, and religious institutions. Indeed, we are all products of our surroundings: If you hunt, you probably do so because your parents do; if you like country music, that may also be because of your parents. However, when it comes to understanding why we have values like “we should not kill or steal,” we need to examine not just our immediate social indluences but also ask where society itself got those principles. Are these universal and unchanging truths that are somehow embedded in the fabric of the universe, or are they changeable guidelines that we humans have created ourselves to suit our needs of the moment?

The question of where our moral values come from often involves two issues: The dirst is a debate between objectivism and relativism, and the second concerns the relation between morality and religion. Let’s look at each of these.

Moral Objectivism and Moral Relativism

Some years ago, the Lockheed Corporation was caught offering a quarter of a billion dollars in bribes overseas. A major U.S. defense contractor, Lockheed had fallen on economic hard times. The U.S. government commissioned the company to design a hybrid aircraft, but after one crashed, the government canceled orders. Because of this and other mishaps, Lockheed believed that the solution to its dinancial woes was to expand its aircraft sales into foreign countries. In order to get military aircraft contracts with foreign governments, it made a series of payoffs to middlemen who had political indluence in West Germany, Japan, Saudi Arabia, and several other countries. The company was eventually caught and punished with a heavy dine, and its chairman and president were forced to resign.

A consequence of this event was the creation of the U.S. Foreign Corrupt Practices Act, which includes an anti-bribery provision that involves stiff dines and prison terms for offenders. The message of the law is that, when in Rome, you should not do as the Romans do. There are overarching standards of ethical conduct that businesses are expected to follow, regardless of where they are in the world and what the local business practices are there.

When Lockheed engaged in systematic bribery, did it violate a universal standard of morality that is binding on all human societies, or did it just violate a standard of morality that is merely our personal preference in the United States? On the one side of this question is the theory of moral objectivism, which, in its classic form, has three key components:

1. Morality is objective: Moral standards are not created by human beings nor by human societies. According to many objectivists, they exist in a higher spirit realm that is completely apart from the physical world around us.

2. Moral standards are unchanging: Moral standards are eternal and do not change throughout time or from location to location. No matter where you are in the world or at what point in history, the same principles apply.

3. Moral standards are universal: There is a uniform set of moral standards that is the same for all people, regardless of human differences such as race, gender, wealth, and social standing.

The classic champion of the moral objectivist view is the ancient Greek philosopher Plato (424 BCE–347 BCE), who argued that moral truths exist in a higher level of reality that is spiritual in nature. According to Plato, the universe as a whole is two-tiered. There is the lower physical level that consists of rocks, trees, human bodies, and every other material object that we see around us. All of this is constantly changing, either decaying or morphing into something else. Within this level of the universe, nothing is permanent.

On the other hand, Plato argued, there is a higher level of the universe, which is nonphysical and is the home of eternal truths. He called this the realm of the forms, which are perfect patterns or blueprints for all things. Mathematical principles are good examples. They are completely unchanging and in no way dependent for their existence on the

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changing physical world. Even if the entire physical universe were destroyed and another emerged, the principles of mathematics would remain the same, unchanged.

According to Plato, moral principles are just like mathematical principles in that respect, and they also exist in the higher realm of the forms. Just as the principle that 1 + 1 = 2 exists permanently in this realm, so too do moral principles of goodness, justice, charity, and many others. The greatest appeal of Plato’s theory is that it gives us a sense of moral stability. When someone is murdered, we often believe that an absolute and unchanging moral principle has been violated that goes well beyond the shifting preferences of our particular human community.

On the other side of this issue is the theory of moral relativism, which has three contrasting key features:

1. Morality is not objective: Moral standards are purely human inventions, created by either individual people or human societies.

2. Moral standards are not unchanging: Moral standards change throughout time and from society to society.

3. Moral standards are not universal: Moral standards do not necessarily apply universally to all people, and their

application depends on human preference.

Defenders of moral relativism are typically skeptical about the existence of any higher realm of absolute truth, such as Plato’s realm of the forms. Although notions of eternal moral truths are appealing, the fact is, says the moral relativist, we do not have any direct experience of such higher realms’ existence. What we know for sure is the physical world around us, which contains societies of human beings that are always changing. The moral values that we see throughout these societies are ones that are created by human preference and change throughout history and with geographical location. Simply put, morality is a human creation, not an eternal truth.

Wavebreak Media/Thinkstock

Is stealing something, like a drug, as this nurse is demonstrating, always wrong? Would your answer change if you knew the person stealing the drug needed it for her cancer treatment? What if she were stealing it for her child?

Which is right—moral objectivism or moral relativism? Some philosophical questions are not likely to be answered any time soon, and this is one of them. However, we can take inspiration from both sides of the debate. With the Lockheed bribery incident, the position of the U.S. government was that there is a standard of integrity in business that applies worldwide, not just within U.S. borders. This is a concession to moral objectivism. On the other hand, some business practices are culturally dependent and rest on deeply held moral or religious convictions. In Japan, new businesses typically have an opening ceremony in which a Shinto priest blesses the company building. U.S. companies operating in Japan often follow this practice, and this is a concession to moral relativism.

Religion and Morality

An organization called the Center for Christian Business Ethics Today offers a Christian approach to ethical issues in business. According to the organization, God is the ultimate source of moral values: “God’s standards as set forth in God’s Word, the Bible, transcend while incorporating both the law and ethics” (Center for Christian Business Ethics Today, n.d.). This view is by no means unique, and is in fact part of a long history of efforts to ground morality in some aspect of religion. According to the classic view of religious ethics, true morality does not emerge from human thought processes or human society alone. It begins with God establishing moral truths, instilling moral convictions within human nature, and reinforcing those moral truths through scripture. Religious believers who follow God’s path will be motivated to follow God’s established moral truths, perhaps more so than non-believers who view ethics as a purely human invention. This classic view of religious ethics raises two questions:

1. Is God the creator of moral values?

2. Do religious believers have better access to moral truth than non-believers?

Regarding the dirst question—whether God creates moral values—a position called divine command theory answers

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yes: Moral standards are created by God’s will. In essence, God creates them from nothing, not even basing them on any prior standard of reason or logic. God pronounces them into existence through a pure act of will. There are two challenges that divine command theory faces:

1. It presumes in the dirst place that God exists, and that is an assumption that non-believers would reject from the start. Many religious believers themselves would hold that belief in God is a matter of personal faith, not absolute proof, and so we must be cautious about the kinds of activities that we ascribe to God, such as creating absolute moral truths.

2. The moral standards that God creates would be arbitrary if they were made purely as an act of the will without relying on any prior objective standard of reason. What would prevent God from willfully creating a random set of moral values, which might include principles like “lying is okay” or “stealing is okay”? God could also willfully change his mind about which moral principles he commands. Maybe he could mandate that stealing is wrong on Monday, Wednesday, and Friday, but that stealing is okay during the rest of the week.

Many ethicists throughout history—even ones who were devout religious believers—have rejected divine command theory for this reason. To avoid arbitrariness, it seems that morality would need to be grounded in some stable, rational standard, such as with Plato’s view of absolute moral truths. That is, God would merely endorse these absolute moral truths because they seem rationally compelling to him; he does not literally create them from nothing. If morality, then, is really grounded in preexisting objective truths, then we humans can discover them on our own and do not need to depend on God for our moral knowledge.

Again, the second question raised by the classic view of religious ethics is whether believers have better access to moral truth than non-believers. The answer to this throughout much of history was yes: Religion is an essential motivation for moral conduct. To behave properly, people need to believe that a divine being is watching them and will punish them in the afterlife for immoral conduct. The French moral philosopher Voltaire (1694–1778) famously stated that if God did not exist, it would be necessary to invent him, precisely because moral behavior depends so much on belief in divine judgment (Voltaire, 1770). In more recent times, this position has fallen out of favor, and there is wider acceptance of the view that believers are not necessarily more moral than non-believers.

One reason for this change in attitude is that our society as a whole has become much more secularized than Voltaire’s was, and, from our experience, non-believers do not appear to be particularly bad citizens. Also, it appears that believers fall into the same moral traps as everyone else.

The upshot is that both components of classic religious ethics are difdicult to establish: It is not clear that God creates moral values, assuming that God exists, and it is not clear that believers have a special advantage in following moral rules. It is undeniable that, for many believers, religion is an important source of moral inspiration, and that fact should not be minimized. Undoubtedly, this is true for the above-mentioned members of the Center for Christian Business Ethics Today.

At the same time, however, there are plenty of nonreligious motivations to do the right thing, such as a fear of going to jail, a desire to be accepted by one’s family and friends, or a sense of personal integrity. In the business world there are additional motivations to be moral, such as the desire to avoid lawsuits, costly dines, or tarnishing the company name.

What Would You Do?

One of the consequences of religious ethics in the workplace is the shaping of company policy in ways that sometimes clash with secular social norms. Retail arts and crafts supply chain Hobby Lobby is a case in point. The company, based in Oklahoma City, opposed on religious grounds a Federal government requirement to provide emergency contraception as part of its employee healthcare benedits. Defending his company’s position, company founder and CEO David Green stated; “We’re Christians, and we run our business on Christian principles . . . Being Christians, we don’t pay for drugs that might cause abortions” (Green, 2012). The case went to the Supreme Court, which, in a landmark decision, ruled in favor of the company on the grounds that the Federal law posed a substantial burden on the company’s exercise of religion (Burwell v. Hobby Lobby Stores, Inc., 2014).

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1. Suppose that you were a Supreme Court Justice deciding this case. One factor in the case involved balancing Hobby Lobby’s religious interests against society’s larger interest in allowing women access to emergency contraception. How would this affect your decision as a Supreme Court Justice?

2. One of the issues in this case was whether corporations are entitled to religious freedom in the ways that individuals are. How would this affect your decision as a Supreme Court Justice?

3. In this case, the Supreme Court recognized that its decision in favor of Hobby Lobby could lead to “a host of claims made by litigants seeking a religious exemption” on other religion-related issues. How would that affect your decision as a Supreme Court Justice?

4. Suppose that you are a female cashier at Hobby Lobby and did not share David Green’s religious convictions on the issue of emergency contraception. Would you protest, or quit, or just live with it? Be sure to provide a rationale for your answer.

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1.2 Ethics and Psychology

An important set of ethical issues involves our psychological makeup as human beings. There is no doubt that our personal expectations, desires, and thought processes have an impact on what motivates us to behave morally. Thus, the question of “where does morality come from?” might be at least partially answered by looking at human psychology. In this section, we will look at two central issues of moral psychology: One focuses on our psychological inclination to be seldish, and the other on how gender shapes our moral outlook.

Egoism and Altruism

When Hurricane Sandy pounded the U.S. East Coast, the home improvement company Lowe’s teamed up with the Red Cross to deliver dinancial assistance and disaster relief to stricken areas. Lowe’s CEO stated “Our thoughts are with all the families who have been impacted by this historic storm, and we’re focused on working closely with our partners in the days and months ahead to deliver funding, supplies and volunteer support to the hardest-hit areas. . . . We’re proud to stand by the Red Cross as they continue to respond to the needs of local communities” (Business Wire, 2012).

Some years earlier Lowe’s provided similar disaster relief to areas impacted by Hurricane Katrina. Why does it do this? Is it purely from a sense of goodwill towards those in need, or does the company expect to get some benedit out of it, such as free publicity? We can ask this same kind of question about our conduct as individuals: Are we capable of acting solely for the benedit of others, or do we always act in ways that ultimately benedit ourselves? There are two competing theories that address this question:

Psychological egoism: Human conduct is seldishly motivated and we cannot perform actions from any other motive. Psychological altruism: Human beings are at least occasionally capable of acting seldlessly.

Both of these theories are “psychological” in the sense that they are making claims about what internally motivates human behavior.

Diane Bondareff/ASSOCIATED PRESS

PNizer Consumer Healthcare employees work to rebuild homes damaged by Hurricane Sandy as part of the company's Advil Relief in Action campaign. Do companies act charitably out of a sense of goodwill towards those in need, or do they expect to get some other beneNit out of it?

Psychological egoism maintains that all of our actions, without exception, are motivated by some seldish drive. Even when I am doing something, like donating to charity, that appears to be purely for the benedit of someone else, there are hidden seldish motives at work within me and I am only acting to benedit myself. Maybe through my charitable action I secretly hope that I will receive a Citizen of the Year award; perhaps I desire to hear the recipient of my charity thank me with gushing words of appreciation so that I can feel good about myself.

The English philosopher Thomas Hobbes (1588–1679) argued that all acts of charity could be reduced to our private desire to exercise control over other people’s lives. For Hobbes (1650/1811), I am the one who decides whether a poor person will have enough food to eat today, and I am on a private power trip if I help that person out. A psychological egoist would look at Lowe’s with similar suspicion: The company’s public acts of charity are great public relations tools that associate their name and products with social responsibility. Through press releases and advertisements, Lowe’s spreads the news of its charitable work far and wide.

The rival theory of psychological altruism concedes that much of our human conduct is indeed motivated by seldish desire. But, according to the altruist, there is more going on with us psychologically than just that. We have the capacity to break free of the grip that seldishness has on us and at least occasionally act purely for the betterment of other people. Perhaps we have an instinct of human kindness that exhibits itself when we see people who are truly in need. Our hearts go out to them and we want to help, regardless of whether there is any benedit to ourselves. Maybe some of that is behind Lowe’s

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charitable programs. Its corporate ofdicers and managers are personally moved by tragedies such as Hurricane Sandy and recognize that Lowe’s has unique resources to help. The public relations benedit it gains from those acts is secondary, and the spark that ignites its charitable response is genuine concern.

Like the dispute between objectivism and relativism, this debate between psychological egoism and altruism will not be resolved any time soon. But even if psychological egoists are correct that all of our actions are seldishly motivated, the fact remains that human beings do perform acts of charity, and, morally speaking, it is good for us to do so. Other people still benedit from my charitable actions even if I am motivated by a personal power trip, as Hobbes suggests, and that still counts as moral. In some ways, the theory of psychological egoism is liberating because it does not require us to have purely seldless motives behind all of our actions. Rather, we can admit that our actions are guided by self-interest, yet at the same time direct our self-interest in ways that also benedit others. In the business arena, what matters is that Lowe’s engages in charitable projects, regardless of whether its main motivation is to bolster its corporate image.

Gender and Morality

An area of great interest in the business world today is how having top-level female leaders affects company prodits and management style. One study suggests that the largest U.S. companies led by women perform three times better than those run by men. An explanation offered by the researcher conducting this study is that women have to work harder than men to become CEOs, and thus represent the cream of the crop (Wechsler, 2015).

Another study suggests that businesses led by women place a higher value on social responsibility than do those led by men. According to the study, “women are taking the lead in showing that prodit and social responsibility can go hand-in-hand” (Renaud, 2011). Women tend to look for a balance between prodits and non-economic goals such as environmental sustainability, charity, and community involvement. Is this study dlawed? That is, do businessmen and businesswomen really have differing attitudes about the role of ethics within their companies?

Underlying this question is the issue of whether men and women generally speaking have different ways of thinking about morality. The long-standing assumption about morality has been that there is only one way of thinking about it, regardless of gender. There are moral rules that guide our conduct; we all need to learn those rules and follow them in our behavior. It is much like any other task that we perform: If I am playing a sport, performing on a musical instrument, or operating a circular saw, there are clear rules for how I should proceed. Regardless of whether I am male or female, if I do not follow those rules, I will not be good at the task. So too with morality: Men and women alike need to understand the rules of ethics and follow them in order to be morally good people.

However, in recent years, this one-size-dits-all assumption about morality has been called into question based on a reexamination of the different psychological tendencies of men and women. Consider the types of college majors that attract men and women, respectively. Some are very male dominated, such as mathematics, physics, and engineering. Others are dominated by women, such as psychology, social work, nursing, and education. Perhaps this suggests that men have a thought process that emphasizes rules and are thus attracted to those disciplines that emphasize them. Women, by contrast, place greater value on nurturing and caring for others and are thus attracted to those disciplines. It is hotly debated whether this or other possible gender differences are the result of biological instinct or social conditioning, and no resolution may come on these issues any time soon. But it still remains a valid question whether male and female thinking, as it currently stands, is split between these two tendencies. Thus, it may well be that these gender differences are operating on our conceptions of morality: For men, morality mainly involves following rules, and for women, it mainly involves caring for others.

A recent theory called care ethics, developed by psychologist Carol Gilligan, advances this view, maintaining that women see morality as the need to care for people who are in situations of vulnerability and dependency. For Gilligan, the ethics of care is about connecting with others and being responsive in relationships rather than deducting moral rules with

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Are female CEOs like PepsiCo's IndraNooyimorepredisposedto integrate social concern with proNit-driven business goals?

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mathematical-type reasoning. Advocates of this view are not suggesting that we should leave the task of caring and nurturing to women, while letting men adhere to their rule-following inclinations. Rather, the task of moral care falls upon all of us.

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1.3 Moral Standards

So far we have looked at where morality may come from and how it may be shaped by human psychology. Although these theories are important for telling us about the nature of morality, they do not necessarily tell us how we should behave and what the moral standards are that we should follow.

We turn next to that issue and explore three approaches to moral standards: virtue theory, duty theory, and utilitarianism.

Virtues

One of the strangest business stories in recent years is that of Bernard Madoff, who scammed investors out of $65 billion in a Ponzi scheme. He started out as a small-time investment manager, but by courting wealthy investors from around the globe, he eventually built his roster of clients up to 4,800. Offering a steady return of about 10% per year, he covered these payouts with money coming in from new investors. However, when his clients rushed to withdraw $7 billion during a major stock-market decline, he could not cover those expenses and he confessed to the fraud.

The humiliation for Madoff’s whole family was so great that he and his wife attempted suicide, and shortly afterward their son did kill himself. When we look at Madoff as a human being, we see that his immoral business conduct was a consequence of his dlawed character. His desire for money, power, and a lavish lifestyle became so excessive that it created a trap for him from which he could not break free. He had what moral philosophers call vices: bad habits of character that result in a serious moral failing. He was unjust, deceitful, intemperate, overambitious, and immodest. What Madoff lacked were virtues—the opposite of vices—which are good habits of character that result in morally proper behavior. He did not have the virtues of justice, truthfulness, temperance, restraint, and modesty.

Virtue theory is the view that morality is grounded in the virtuous character traits that people acquire. The ancient Greek philosopher Aristotle (384 BCE–322 BCE) developed the most indluential analysis of virtues, which even today is considered the standard view of the subject. It all begins with our natural urges.

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These shoes, once owned by Bernie Madoff, were put up for auction by U.S. Marshals along with many of his other belongings to help repay the victims of his crimes.

For example, we all have natural desires for pleasure, and we automatically gravitate towards pleasurable activities such as entertainment, romance, eating, and even social drinking. With each of these pleasurable activities, though, there are three distinct habits that we can develop. On the one hand, we might eat too much, drink too much, and become addicted to all sorts of pleasurable activities. This is the vice of overindulgence. At the opposite extreme, we might reject every form of pleasure that comes our way, and live like monks locked in their monastery cells. This is the vice of insensibility, insofar as we have become desensitized to the happiness that pleasures can bring us.

There is, though, a third habitual response to pleasure that stands midway between these two extremes: We can enjoy a wide range of pleasures in moderate amounts, and this is the virtue of temperance. In Madoff’s case, we can say that he was driven by the desire for wealth, habitually overindulged in the acquisition of it, and completely lacked the virtue of temperance.

According to Aristotle, most virtues and vices match this scheme:

There is a natural urge (such as the desire for pleasure), there is a vice of excess (such as overindulgence), there is a vice of dediciency (such as insensibility), and there is a virtue at the middle position between the two

Virture Ethics

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extremes (such as temperance).

Take the virtue of courage, which is driven by our natural fear of danger. If we take courage to excess, we develop the vice of rashness, where we lose all fear of danger and rush into hazardous situations that might kill us. If we are dedicient in courage, we become timid and develop the vice of cowardliness. The virtuous middle ground of courage is one in which we respect the dangers before us but, when the circumstances are right, we rise above our fears.

A large part of our childhood involves cultivating virtuous habits and avoiding vicious ones, and during our formative years our parents bear much of the responsibility to shape us in virtuous directions. As I become older, though, the responsibility becomes mine alone, and I must think carefully about exactly where that virtuous middle ground is. How much habitual eating can I do before I become overindulgent? How much can I habitually hide from danger before I become a coward? Finding that perfect middle ground, Aristotle says, is not easy, but it is something that the moral person must digure out nonetheless. Madoff did not even come close. His desires for wealth, power, and fame were so all-consuming that the virtue of temperance became out of reach for him.

Duties

A small computer software company named Plurk accused the software giant Microsoft® of computer code theft. The product in question was blogging software that Microsoft developed for its market in China and which it hoped would catch hold in that country the way Facebook has in the United States. Around 80% of the computer code for Microsoft’s product was lifted directly from blogging software created by Plurk. Microsoft apologized for the episode and said that the fault rested with an outside company it had hired to develop the blogging software. It was that outside company that copied Plurk’s computer code (Nystedt, 2009). The irony is that Microsoft zealously guards against software piracy and code theft of its own products, but here it did that very thing, even if only indirectly. In this situation, there was no moral gray area: Theft is wrong, the evidence for code theft was incontestable, and Microsoft had no choice but to immediately admit to it and apologize.

This Microsoft case highlights the fact that there are at least some principles of morality that we all clearly recognize and endorse. One moral theory in particular emphasizes the obvious and intuitive nature of moral principles. Duty theory is the position that moral standards are grounded in instinctive rational obligations—or duties—that we have. It is also called deontological theory, from the Greek word for duty. The idea behind duty theory is that we are all born with basic moral principles or guidelines embedded in us, and we use these to judge the morality of people’s actions.

There are two approaches to duty theory. First, some moral theorists hold that we have a long catalog of instinctive obligations. The list of the Ten Commandments is a classic example. Among those listed are obligations not to kill, steal, bear false witness, or covet your neighbor’s things. These are all basic moral principles that

Critical Thinking Questions

According to the video, virtues are habits of good behavior that we acquire through practice, just as we develop other skills. Pick a skill, such as playing an instrument or a sport, explain the technique for learning it, and discuss how a similar technique could be used for acquiring the virtue of charity.

Aristotle argues that, when acquiring virtues, we should aim at the mean—or middle ground of a behavior—rather than an extreme of excess or dediciency. Describe how the virtue of courage falls at a mean between extremes.

Proper virtues involve displaying them at the right times, on the right occasions and towards the right people. Describe what this would involve with the virtue of courage.

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Immanuel Kant (1724–1804) developed the categorical imperative, which is a moral principle that we should treat each person as an end, and never merely as a means to an end.

cultures around the world have endorsed from the earliest times. If you are thinking about stealing computer code, these principles tell you that it would be wrong to do so. With enough principles like these, we will have some standard for judging a wide range of human actions. Many moral philosophers have developed and expanded the list of our intuitive duties beyond the Ten Commandments to include a few dozen of them.

The second approach is that there is a single instinctive principle of duty that we all should follow; the Golden Rule is the best example of this. That is, I should do to others what I would want them to do to me. If I am thinking about stealing someone’s computer code, I should consider whether I would want someone to steal my code. So too with good actions: When considering whether I should donate to charity, I should consider how I would feel if I were a needy person dependent on the charity of others. Like those in the Ten Commandments, the Golden Rule is a time-honored moral principle that we dind in cultural traditions around the world, dating back thousands of years.

In more recent times, one of the most indluential theories of duty is that developed by the German philosopher Immanuel Kant (1724–1804). Inspired by the Golden Rule, Kant offered a single principle of moral duty, which he called the “categorical

imperative”— a term which simply means “absolute command” (1785/1996). Kant offers four versions of the categorical imperative, but the most straightforward one is this: Treat people as an end, and never merely as a means to an end. His point was that we should treat all people as beings that have value in and of themselves, and not treat anyone as a mere instrument for our own advantage.

There are two parts to his point. The dirst involves treating people as ends that have value in and of themselves. We value many things in life, such as our cars, our homes, and a good job. Most of the things we value, though, have only instrumental value—that is, value as a means for achieving something else. Our cars are instruments of transportation. Our homes are instruments of shelter. Our jobs are instruments of obtaining money.

Other times, though, we appreciate things because they have intrinsic value: We value them for the special qualities that they have in and of themselves, and not because of any instrumental value that they have. The experience of human happiness has intrinsic value, and so too do experiences of beauty and friendship. The dirst part of the categorical imperative, then, says that we should treat all people as beings with intrinsic value and regard them as highly as we would our own happiness. If I steal someone’s computer code, I am not respecting the owner the way I value my own happiness. The second part of the categorical imperative is that we should not treat people as things that have mere instrumental value. People are not tools or objects that we should manipulate for our own gratidication. If I steal someone’s computer code, I am using the owner for my own gain.

Like the Golden Rule, the categorical imperative provides a litmus test for determining whether any action is right or wrong. It not only detects immoral actions such as lying and stealing, but it also tells us when actions are moral. When I donate to charity, for example, I am thinking of the value of the needy people who will benedit from my contribution; I am not merely thinking of any benedit that I may receive through my charity.

In the business world, there are occasionally times when an action is so obviously wrong that there is no point in defending it. That was true of Microsoft and also of Madoff, who immediately admitted to his crime once his company became insolvent. In cases like these, duty theory is at its best.

In other cases, though, morality is a little blurry. Napster is a good example. A decade before BitTorrent, Napster was the dirst widely used peer-to-peer dile-sharing program, and it enabled users to easily pirate MP3 music diles, directly violating the copyrights of record companies. While this at dirst appears to be a clear case of a software product that intentionally enabled users to steal, many people within the music industry itself defended Napster. Record companies had become stuck in their old ways of selling records and CDs and had not developed a good mechanism for consumers to purchase MP3 diles at a reasonable price. Napster entered the music market as a rogue competitor and forced record companies to be more responsive to the needs of their consumers. As a consequence, Napster helped jumpstart legal methods of

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purchasing MP3 diles on websites such as iTunes and Amazon.com; in that way, it provided a new and innovative business model for the music industry. Duty theory may not be well suited for making moral pronouncements in complex cases like Napster’s; other moral theories discussed in this chapter may need to be drawn upon. However, duty theory is sufdicient to make moral pronouncements against illegally dile-sharing music and movies on BitTorrent. Mechanisms are now in place to purchase these digital products legally, and obtaining them on BitTorrent is blatant theft.

Utilitarianism

CVS Health recently stopped the lucrative business of selling cigarettes in its 7,600 U.S. stores. The reason, it said, is that it “is simply the right thing to do for the good of our customers and our company. The sale of tobacco products is inconsistent with our purpose—helping people on their path to better health” (CVS Health, 2014). Tobacco use is certainly unhealthy, and the Center for Disease Control says that it is responsible for nearly half a million deaths in the United States per year (Centers for Disease Control and Prevention, 2014). But with regards to CVS’s decision, is there more going on than simply doing the right thing?

All businesses make decisions based on a cost-beneNit analysis: They research both the costs and the benedits of a particular decision, then determine whether the costs outweigh the benedits or vice versa. We do not know the condidential details of CVS’s cost-benedit analysis of its tobacco decision, but the public relations advantages are clear, and if other pharmacy companies feel pressure to do the same thing, this would level the playing dield for CVS. Ultimately, CVS is gambling that the long-term economic advantages of its decision will outweigh the short-term losses.

Cost-benedit analysis is the distinguishing feature of the moral theory of utilitarianism: An action is morally right if the consequences of that action are more favorable than unfavorable to everyone. When determining the morality of any given action, we should list all of the good and bad consequences that would result, determine which side is weightier, and judge the action to be right if the good outweighs the bad.

There are three components to this theory. First, it emphasizes consequences. One of the founders of classical utilitarianism was the British philosopher Jeremy Bentham (1748–1832), who argued that by focusing on consequences of actions we make our moral judgments more scientidic (1789/1907). To ground morality in the will of God requires that we have a special ability to know God’s thoughts. To ground morality in conscience or instinctive duties requires that we have special mental faculties and know how to use them properly. None of this is precise, and it all relies too much on hunches. According to Bentham, a more scientidic approach to morality would look only at the facts that everyone can plainly see, and consequences of actions are those facts. If I steal a car, there are very clear consequences: I gain a vehicle, but I cause dinancial harm and distress to the victim and put myself at risk of a long stay in prison. We all can see these consequences and assess their weights. Bentham held that we can even give numerical values to the various consequences and mathematically calculate whether the good outweighs the bad, a practice that we now call the utilitarian calculus. Not all utilitarians go this far, but it does highlight the central role that publicly observed consequences play in the utilitarian conception of morality.

The second component of utilitarianism is that it focuses on the consequences of happiness and unhappiness. While businesses assess costs and benedits in terms of dinancial gains and losses, utilitarianism focuses instead on how our actions affect human happiness. Some utilitarians, like Bentham, emphasize pleasure and pain; others emphasize goodness and badness; and still others emphasize overall benedit and disbenedit. What they have in common, though, is that moral conduct is in some way linked with human happiness and immoral conduct with unhappiness.

The third component of utilitarianism is that we need to assess the benedicial consequences of actions as everyone is affected. If I am thinking about stealing a car, I need to consider the consequences of my conduct for myself, my family, the

Jeremy Bentham (1748–1832) developed the moral principle that we now call the utilitarian calculus, which determines morality by numerically tallying the degree of pleasure and pain that arises from our actions.

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victim, the victim’s family, and anyone else who might be affected by my action. This is redlected in utilitarianism’s famous motto that we should seek the greatest good for the greatest number of people. Utilitarianism does not necessarily aim to benedit the majority of people, but rather to maximize the overall amount of happiness resulting from a decision. For example, abolishing racial segregation in the U.S. South may have been unpleasant for the White majority as a whole, but that was counter-balanced by a much greater degree of unhappiness that segregation created for the Black minority as a whole.

There is an important down side to utilitarianism, though, which its critics frequently point out. What if, for example, retaining racial segregation had created more total happiness for the White majority than the total unhappiness for the Black minority? Retaining segregation, then, would have been morally justidiable on utilitarian grounds. More generally, the problem is that sometimes a recognizably evil course of action will produce the greatest amount of happiness. Utilitarians have proposed different strategies for working around this problem, but the problem is nevertheless a lingering one. This does not mean that utilitarianism should be discarded as a moral guideline, and, in fact, utilitarian thinking is so embedded in human moral reasoning that it would be impossible to do so. What it does mean is that utilitarian decisions should sometimes be supplemented with other moral standards, such as duties or virtues.

Because businesspeople are so familiar with dinancial cost-benedit analysis, utilitarianism is a natural way to make moral assessments for business decisions. If CVS’s decision to stop selling tobacco allows it to better position itself and its stakeholders in the healthcare industry, then its move will be justidied on utilitarian grounds. If, on the other hand, the company and its stakeholders reap no future benedits but only incur disbenedits from the decision, then it was not justidied. CVS clearly believed that it was worth the gamble, and only time will tell.

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1.4 Morality and Government

In this dinal section, we will examine some moral theories that pertain to governments and the laws that they create. From the start, it is important to look at the boundaries that separate morality and laws. What they have in common is that they both command us to behave in certain ways, and often their edicts are the same. It is immoral to steal, and it is also illegal. It is immoral to assault someone, and it is also illegal.

However, there are many instances where morality and legality do not overlap. Adultery, for example, is immoral, but in the United States it is not illegal in most states. So, too, with cheating on school exams: It’s wrong, but you will not go to jail for it. Similarly, there are some actions that are illegal but not immoral. Driving 36 miles per hour in a 35-mph zone is illegal but not necessarily immoral. Some instances of mercy killing may be morally justidiable, even though they are currently illegal. The lesson here is that morality is often consistent with legislation and may even be an important source of inspiration for the law, but it is not the last word on their relationship.

In business ethics, it is sometimes important to consider issues of morality and legality separately. Perhaps we will dind some immoral actions in business that are not illegal but should be. We may dind some morally permissible actions that are illegal, but should be made legal.

The three main issues that we will focus on are social contract theory, human rights theory, and theories of governmental coercion. The driving questions here are: What is the origin of governmental authority? What is the main purpose that governments serve? What are the limits to the laws that governments can create?

The Social Contract

Business by its very nature is competitive; one company tries to draw customers away from rival companies, perhaps to the point of putting the rivals out of business. Sometimes efforts to succeed can go too far and involve intentionally sabotaging the competition by stealing trade secrets, publishing misleading attack ads, or even vandalizing property. For example, an owner of a pizza restaurant in Philadelphia was charged with releasing mice into two competing pizzerias. The owner went into the bathroom of one competitor and placed a bag of mice in the drop ceiling. He then crossed the street, entered a second one, and placed another bag of mice into a garbage can. When caught and arrested, he claimed that he was just getting even for his competition doing the same thing to him (Kim, 2011).

Even though competition in business is at times surprisingly vicious, there are still requirements for civil behavior and limits on how far one can go to defeat the competition. Without those requirements, business competition would descend into gang warfare and ultimately destroy the economic playing dield that is required for businesses to even exist.

This is the rationale behind social contract theory: We agree to set aside our hostilities toward each other in exchange for the peace that a civilized society offers. The champion of this view is Thomas Hobbes, who, as we saw earlier, defended the theory of psychological egoism. Hobbes began by having us think about what the world would be like if there were no governments and laws to keep society peaceful. In his words, what would the state of nature be like, with every person seeking to survive in competition with everyone else, without the protection of the government? His answer was that it would be a condition of war between each

Social Contract Theory

Critical Thinking Questions

According to the video, through the social contract we consensually form a government to protect us from each other. What do we gain through this consent, and what must we give up to achieve that gain?

According to an expert in the video, one of the questions that social contract theory

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person, and two factors make this so:

1. First, life’s necessities are scarce, and it is a constant struggle for us to adequately supply our basic needs, such as food, clothing, and shelter.

2. Second, we are not by nature generous, and we will not be inclined to share what we have with others.

As a psychological egoist, Hobbes held that we will always be interested in our own personal interests and that we are not capable of acting toward others with true altruism. If we were capable of acting seldlessly, then we would peacefully divide up the scarce resources that we all need. If I found an apple, and then saw that you were hungry, I would naturally be inclined to split the apple with you. However, according to Hobbes, we are not naturally seldless and, instead, our natural inclination towards seldishness prevents us from doing this. The result, then, is that the state of nature is really a state of war, which he vividly describes here in a famous passage:

In such condition there is no place for industry, because the fruit thereof is uncertain, and consequently, no culture of the earth, no navigation, nor use of the commodities that may be imported by sea, no commodious building, no instruments of moving and removing such things as require much force, no knowledge of the face of the earth, no account of time, no arts, no letters, no society, and which is worst of all, continual fear and danger of violent death, and the life of man, solitary, poor, nasty, brutish, and short. (Hobbes, 1651/1994)

Within the state of nature, there is no point in my even trying to grow a garden, build a home, or furnish it: Someone would just come along and take it from me by force.

How, then, do we escape from the horrible conditions of the state of nature? The answer for Hobbes was the social contract, which has three steps:

1. First, I must recognize that seeking peace is the best way for me to preserve my life. I will always be seldish, and that will never change. However, I must see that I can better my own situation by seeking peace with my competition.

2. Second, I must negotiate a peace settlement with you: I will set aside my hostilities toward you if you set aside your hostilities toward me. If we mutually agree to be civil to each other, then we will both have the hope of living better lives.

3. Third, we must establish a governmental authority that will punish us if we break our agreement. Talk is cheap, and I can verbally agree to a peace treaty with you but then attack you when your guard is down. And you can do exactly the same thing to me. But if we create a policing power to watch over us, then I will be strongly motivated to hold to my agreement with you, and so will you.

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Thomas Hobbes (1588–1679) was a British philosopher who developed the concept of the social contract, famously claiming that in the state of nature the life of a human is “solitary, poor, nasty, brutish, and short” (1651/1994).

In the business world, it is essentially a social contract agreement that keeps us from sabotaging our competitors. Just like the restaurant owner who put mice in his competitor’s restaurants, our natural seldish inclination might be to destroy our competition by any means necessary, but doing so would lead to a savage state of war in which we would all be losers. The best business strategy, then, is a negotiated peace settlement where all businesses play by a set of rules. To keep us from cheating, there are governing bodies, such as governments and professional business associations, that can punish us

seeks to answer is why we should obey the state, such as when it demands that we pay taxes. How might social contract theory answer this?

The second question that social contract theory attempts to answer, according to the expert, concerns the limits of political obligation. That is, are there situations in which we may resist the government through either passive resistance or outright rebellion? How might social contract theory answer this question?

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when we break the rules. Business is still motivated by self-interest, but it is now constrained to be civil.

Human Rights

The U.S. Civil War was in many ways the result of a business ethics dispute. The earliest Spanish settlers of North America brought African slaves with them to help cultivate the land and build towns, and slavery quickly became integral to business activities throughout the colonies. By the time of the American Revolution, slavery in the North had declined, partly because of a manufacturing economy in which it cost more to own and maintain slaves than the slaves could economically produce. However, in the agricultural economy of the South, slave labor was still considered cost effective. As the antislavery movement took hold, Southern slaveholders asked who would compensate them for their dinancial investment in their slaves if the slaves were to be freed. There were no clear answers to this question, and so the slaveholders saw abolitionism as a direct threat to their economic rights. They saw the North as posturing to take away what they considered their human property and thereby undermine their capacity to compete in the agricultural marketplace.

We now see slavery as one of the worst chapters in American history, regardless of the economic arguments of the slaveholders. And even today, we are horridied to hear of slavery-like conditions around the world, where laborers are sometimes kidnapped or otherwise coerced into working in sweatshops or on farms with grueling hours, horrible conditions, and meager pay. We see these as rights violations that can never be morally justidied by any economic benedit to the business owner.

The central idea here is that of a right, which is a justidied claim against another person’s behavior. For example, I can rightfully claim that you cannot steal from me, torture me, enslave me, or kill me. I am making a claim about what you can and cannot do. When asserting our various rights, it is important to distinguish between two types:

Legal rights are those created by governments. The government, for example, has established laws that grant me the right to drive when I reach a certain age, or carry certain types of weapons, or visit publicly owned parks. Human rights—also called natural rights—are not created by governments but are rights all people around the world have, regardless of the country in which they live. The rights against slavery and torture are commonly listed among these.

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John Locke (1632–1704) was a British philosopher who developed the concept of natural rights and the right of citizens to overthrow governments that fail to protect their rights.

There are three distinct features of human rights:

They are natural in the sense that we are born with them. They are not given to us by the government or any other human institution but are part of our identity by our merely being born as human beings. They are universal in that all humans worldwide possess them. No matter who you are or where you live, you have human rights.

They are equal in the sense that we all have the same list of fundamental human rights, and no one has more or fewer than another person.

The English philosopher John Locke (1632–1704) dirst developed the concept of human rights, arguing that by nature everyone has the basic rights to life, health, liberty, and possessions. God gives us these when we are born, and we retain them throughout life, so long as we do not violate the rights of others. For Locke, the right to acquire possessions was the source of our economic freedom and the ability to conduct business transactions. Once I rightfully acquire possessions, I can keep them or sell them as I see dit. However, just as Hobbes warned, the world is a nasty place, and many out there will want to violate my rights and take what I have. According to Locke, we establish governments specidically for the purpose of protecting our fundamental rights: We sub-contract to the government the job of keeping the peace. If the government adequately performs its task of protecting our rights, then we all benedit. If the government fails in that task, however, we have a right to overthrow the government and replace it with a better one that can more adequately do its job.

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Thomas Jefferson, when penning the Declaration of Independence (1776), latched onto this exact part of Locke’s theory:

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty, and the pursuit of Happiness. That, to secure these rights, Governments are instituted among Men, deriving their just Powers from the consent of the governed. That, whenever any form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government.

Through Jefferson, the concept of human rights has become embedded into the American mindset, and it has inspired countries around the world to similarly acknowledge human rights.

But the concept of human rights took its modern form through a document called the Universal Declaration of Human Rights, which was adopted by the United Nations General Assembly in 1948. The Universal Declaration reiterates the same core set of human rights as Locke and Jefferson outlined: “Everyone has the right to life, liberty and security of person” (1948, Article 3). However, the document moves beyond these very general rights by listing a range of specidic ones, such as these pertaining to businesses:

1. Everyone has the right to work, to free choice of employment, to just and favourable conditions of work and to protection against unemployment.

2. Everyone, without any discrimination, has the right to equal pay for equal work.

3. Everyone who works has the right to just and favourable remuneration ensuring for himself and his family an

existence worthy of human dignity, and supplemented, if necessary, by other means of social protection.

4. Everyone has the right to form and to join trade unions for the protection of his interests.

5. Everyone has the right to rest and leisure, including reasonable limitation of working hours and periodic holidays

with pay. (Universal Declaration of Human Rights, 1948, Articles 23–24)

Although not all of the human rights listed in the Universal Declaration have yet become a reality around the world, it is nevertheless the standard toward which all countries within the United Nations have pledged to work.

What Would You Do?

Say you are a midlevel supervisor at a sportswear company that specializes in athletic footwear. You have just found out that some of your manufacturing facilities in Bangladesh hire child workers as young as age 10. They work 14 hours a day, 7 days a week, and receive wages as low as 20 cents an hour. You know that this is a clear human rights violation.

1. Would you discuss your moral concerns with your superiors in the company? Why or why not?

2. Suppose you did discuss your concerns with them and their response was essentially that this was

standard practice in Asian countries and that what your company was doing was no different from any other company with textile facilities in those countries. Also, they noted, if your company set higher standards, it would not be able to compete in the marketplace. Would this explanation satisfy you? Why or why not?

3. Suppose that the response of your superiors was that they acknowledged the problem and were working on it, but that it would take several years before this practice could be eliminated. Would this explanation satisfy you? Why or why not?

4. Suppose that your company stated in its advertising and packaging that no child labor was used in manufacturing its products. You knew, however, that this was not true. Would you bring this to the attention of a government agency? Why or why not?

Principles of Governmental Coercion

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To effectively compete in the marketplace, businesses are continually pushing the boundaries of tasteful advertising. Presenting shocking and even offensive images in advertisements will attract attention and may generate sales. A quick online image search for “offensive advertisement” will reveal a range of troubling ads that are sexually explicit, demeaning to women or minority groups, or offensive to religious groups. A case in point is an advertisement by the Italian clothing company Benetton that contained an altered image of the Catholic pope romantically kissing a Muslim imam. In keeping with the company’s theme of multiculturalism, a spokesperson said that “the meaning of this campaign is exclusively to combat the culture of hatred in all its forms” (Rocca, 2011). When the Vatican threatened to sue, Benetton removed the ad.

While ads like Benetton’s may be offensive to some people, they nevertheless may be perfectly legal. That raises the question of how bad an action needs to be before the government steps in and makes it illegal. All governments are coercive in the sense that they force us to conform to laws under threat of punishment. PepsiCo would not burn down Coca-Cola®’s company headquarters, even if it wanted to, because of how the government would punish it. But governments cannot randomly single out some actions as criminal and allow others to be legal. There are reasons why some actions are prohibited and others are not. There are four common justidications of governmental coercion: the harm principle, the offense principle, the principle of legal paternalism, and the principle of legal moralism.

The dirst is the harm principle: Governments may restrict our conduct when it harms other people. What counts as “harm,” though, is a critical question, and for the government to step in and outlaw harmful actions, the injury must be serious, not trivial. For example, the New York City Board of Health proposed a regulation to legally limit the size of sugary soft drinks available for sale in that city to combat rising adolescent obesity. Indeed, almost all fast-food products are harmful in comparison to organic, whole food alternatives. However, serving unhealthy food is far less serious than serving food tainted with salmonella, which causes severe illness and even death. Thus, the government cannot reasonably outlaw fast food, whereas it justidiably can outlaw salmonella-tainted food. In the sugary soft drink case, the New York court of appeals ruled that the proposed regulation exceeded the scope of New York City’s authority.

Second is the offense principle: Governments may keep us from offending others. We cannot walk naked through the streets, be publicly intoxicated, or shout obscenities in playgrounds. As with the harm principle, the offense principle also looks at the degree to which a particular action is objectionable: Is it outrageously offensive or merely a nuisance? Benetton’s ad touches on this very issue. It was certainly offensive to specidic groups of Catholics and Muslims, but whether it was deeply offensive to society at large is another matter. Benetton’s ad was legal, which means that in our present cultural climate, it was not offensive enough to be illegal.

Third is the principle of legal paternalism: Governments may keep me from harming myself. The term “paternalism” comes from the Latin word for father, which implies that the government is overseeing my conduct in the way that parents try to protect their children. This is a sister concept to the harm principle. While the harm principle focuses on the harm our actions cause to other people, legal paternalism looks at the harm that we cause ourselves through our actions and maintains that the government can restrict such conduct. When the government mandates that I wear a seat belt when driving, the concern is principally with protecting me from my own careless conduct. But does the government have any business in doing this? Yet again, the question is one of degree. I can hurt myself by participating in a dangerous sport such as cliff diving or by working in a dangerous occupation such as tree trimming. But most of us feel that these risks do not go far enough to justify governmental interference. However, with our stupidest and most dangerous actions, such as playing Russian roulette with a handgun, we may want the government to protect us from ourselves and make the action illegal.

Finally, there is legal moralism: Governments may restrict conduct that is especially sinful or immoral. Prime examples of this are laws against blasphemy and some sex acts. The question here is not whether a type of conduct is harmful to others, publicly offensive, or harmful to oneself. It is a matter of whether an act, even when done privately, crosses some moral boundary that justidies the government’s stepping in. Of all the principles of governmental coercion, legal moralism is probably the weakest. One reason is that many moral and religious standards vary widely, and by outlawing an action solely on moral or religious grounds, the government may be unfairly adopting the standards of one cultural group and applying them to everyone.

Although legal moralism may be the weakest of the four principles, some of the others may also be seriously questionable. The British philosopher John Stuart Mill argued that, in fact, only one principle of governmental coercion is justidiable —namely, the harm principle. The government has no right to restrict our conduct on the other three grounds. In Mill’s

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words:

The only purpose for which power can be rightfully exercised over any member of a civilized community, against his will, is to prevent harm to others. His own good, either physical or moral, is not a sufdicient warrant. (Mill, 1859/1999)

The reason, according to Mill, is that a wide sphere of personal liberty is essential for a happy society, and that includes the possibility of offending others, harming ourselves, or crossing some traditional moral boundary. Do we want to decide for ourselves what makes us happy, or do we want the government to do so? From Mill’s perspective, I am a better judge of my own happiness than the government ever could be, and society on the whole will be a happier place when we are each allowed that freedom.

All of these principles of governmental coercion apply to businesses just as they do to individual people. For instance, although Benetton’s ad was offensive to some groups, the offense was not serious or widespread enough to justify its being illegal. But with many ad campaigns, merely being legal may not be good enough. Public opinion can be as coercive as any government-imposed restriction. If Microsoft, PepsiCo, or any other Fortune 500 company published an ad with the pope kissing a Muslim, the backlash would likely be dinancially crippling. Catholics and Muslims worldwide might boycott their products. Benetton is a much smaller company, with a specialized market niche and a history of using shocking ads to get consumers’ attention. Not so with Microsoft and PepsiCo, which have much broader customer bases worldwide. For them, consumer coercion is as powerful as governmental coercion.

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Conclusion

In this chapter, we have looked at a wide spectrum of classic moral theories and showed how they apply to an equally broad spectrum of business ethics issues. These are moral theories that, a thousand years from now, will be just as important as they are today; in a sense, they dedine the moral thought process for humans. The philosophers who proposed these various theories were not always in agreement with each other; in fact, they rejected many rival moral theories. Bentham believed that all moral and social issues should be decided solely using the utilitarian principle, not through theories about religion, virtue, duty, social contracts, or human rights. Similarly, Kant believed that the categorical imperative was the single moral litmus test.

Exclusive claims like these in philosophy are much like efforts at brand loyalty in the business world. Walmart would like us to shop at only its stores. Coca-Cola would like us to drink only its beverages. ExxonMobil would like us to buy only its gas. However, in the real world, our purchasing habits are more diverse, and we are drawn to a range of different stores and products.

So too with moral theories: In the real world, when we redlect on moral issues, some theories will be more relevant or illuminating than others. Bentham’s utilitarianism may be helpful with some types of moral evaluations, but not with others. The same is true for the other theories that we have examined. We are trapped in a morally complex world that demands that we make moral choices. One way or another we will do that, and drawing on all of the various moral theories can help make the job easier.

In the following chapters of this book, all of the issues covered can be analyzed using these classic moral theories. As an author, though, I have not forced that approach. Issues such as price dixing, corporate punishment, consumer advocacy, insider trading, and others are challenging enough in their own right, without the added intricacies of a utilitarian or duty-theory analysis. Nevertheless, classic moral theories are always lurking in the background of most of these discussions. Does a particular government regulation serve the greatest good for the greatest number of people? Do afdirmative action policies violate the rights of majority groups? Do we have special moral duties to protect the environment? A full evaluation of business ethics issues may greatly benedit from the contributions of classic moral theories.

To be sure, many business ethics issues covered in this book are heavily debated, such as the nature of capitalism, corporate personhood, and workers’ rights. However, these debates teach us that some of our most important social and economic values may not be as dirmly established as we might think, and we must show respect toward those on the opposite side of the issue. We cannot be good business colleagues—or good citizens, for that matter—if we are contentious on value issues where reasonable people may disagree.

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Summary & Resources

Chapter Summary

We began this chapter looking at theories that explain where morality comes from and the debate between moral objectivism and moral relativism. Moral objectivists claim that moral standards are not created by human beings, are unchanging, and are universal. Moral relativists hold the opposite view: Moral standards are created by human beings, change from society to society, and are not universal. Also relevant to the question of where morality comes from is the connection between religion and ethics. Divine command theory is the position that moral standards are created by God’s will, but we saw some challenges to this view. Religious ethical theories also commonly hold that religious believers have a special moral ability; we looked at challenges to this view as well.

We next looked at ways in which our human psychological makeup might affect how we view morality. One issue concerns our ability to act seldlessly. Psychological egoists hold that human conduct is seldishly motivated and we cannot perform actions from any other motive. By contrast, psychological altruists hold that people are at least occasionally capable of acting seldlessly. Also of relevance is how gender shapes our conceptions of morality. Care ethics is the theory that women see morality as the need to care for people who are in situations of vulnerability and dependency.

One of the central concerns of ethical theory is to present and explain the moral standards that guide our behavior. One such approach is virtue theory, which is the view that morality is grounded in the virtuous character traits that people acquire. According to Aristotle, virtues are good mental habits that regulate our urges and stand at a mean between vices of dediciency and vices of excess. Another approach is duty theory, which holds that moral standards are grounded in instinctive obligations. Some duty theories propose a list of obligations, such as the Ten Commandments, and others propose a single principle, such as the Golden Rule. Kant offered a single principle that he called the categorical imperative, which states that we should treat people as an end and never as a means to an end. A third approach is the theory of utilitarianism, which holds that an action is morally right if the consequences of that action are more favorable than unfavorable to everyone. Bentham developed the idea of the utilitarian calculus, whereby numerical values could be assigned to the positive and negative consequences of actions.

The dinal component of this chapter explored the relationship between morality and government. One major theory how this relationship works is social contract theory. Hobbes described a warring state of nature generated by human seldishness and scarcity of necessities. The solution is the social contract, which holds that we agree to set aside our hostilities toward each other in exchange for the peace that a civilized society offers. A second important theory on the relationship between morality and government is the concept of human rights. These are rights that are not created by government but are held equally by all people around the world, regardless of the country in which they live. The theory was developed by Locke, who held that by nature, everyone has the basic rights to life, health, liberty, and possessions. People establish governments for the purpose of protecting those fundamental rights, and governments can be overthrown when they fail to perform that task. A third theory on the relation between morality and government involves four principles of governmental coercion. They are the harm principle, whereby governments may restrict our conduct when it harms other people; the offense principle, which restricts our behavior that offends others; legal paternalism, which restricts an individual’s actions that harm him- or herself; and legal moralism, which restricts especially sinful or immoral conduct. Mill argued that only the harm principle is justidied, and the other three are not.

Discussion Questions

1. There are several theories about where moral values come from, including moral objectivism, moral relativism, and divine command theory. Which, if any, of these theories works best when understanding the moral obligations of businesses? Why do you think this is so?

2. Assume that the theory of psychological egoism is true: All human actions are seldishly motivated. Is there a way that the decision-making process within a large corporation can overcome this fact of human seldishness? Could the corporation, for example, establish a charity program that was designed only to benedit the needy, with no public relations benedit to the company at all?

3. According to virtue theory, to be morally good people we should develop virtuous habits such as courage, temperance, wisdom, and justice. Can there be such a thing as a “virtuous corporation”? If so, what are the

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virtuous habits that it would need to have?

4. According to duty theory, there are fundamental principles of moral obligation that we all know instinctively, such

as “do not kill or steal.” Are there any fundamental principles of business ethics that everyone in business

automatically knows they should follow?

5. According to Kant’s theory of the categorical imperative, we should treat people as an end, and never merely as a

means to an end. Think of an example in business that violates this principle and explain how it does that.

6. Consider the issue of child labor mentioned in the “What Would You Do?” feature box. Use a utilitarian analysis to

determine whether use of such labor would be morally permissible for your company.

7. The U.N. Universal Declaration of Human Rights (1946) lists several rights that pertain to businesses (see that list

in this chapter). Would you agree that all of those are genuine human rights? Explain.

8. There are four principles of governmental coercion that explain why the government is justidied in restricting our actions. It is clear how the harm principle applies directly to businesses: Businesses should not engage in conduct

that causes serious harm to others, such as by manufacturing unsafe products, dumping toxic waste, or creating unsafe working conditions for employees. Explain how the other three principles of governmental coercion might apply to business conduct.

Key Terms

care ethics

The theory that women see morality as the need to care for people who are in situations of vulnerability and dependency.

categorical imperative

The moral principle proposed by Immanuel Kant that we should treat people as an end, and never merely as a means to an end.

cost-beneNit analysis

The economic modeling of a project to check whether the benedits outweigh the costs.

divine command theory

The view that moral standards are created by God’s will.

duty theory

The view that moral standards are grounded in instinctive obligations (duties).

ethics

An organized analysis of values relating to human conduct, with respect to an action’s rightness and wrongness.

Foreign Corrupt Practices Act

A U.S. Federal law regulating the operation of U.S. companies in foreign countries, which includes an anti-bribery provision.

harm principle

The view that governments may restrict our conduct when it harms other people.

human rights

Rights that are not created by government, but held by all people around the world regardless of the country in which they live.

legal moralism

The view that governments may restrict conduct that is especially sinful or immoral.

legal paternalism

The view that governments can restrict the conduct of an individual who harms him- or herself.

legal rights

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Rights that are created by governments.

moral objectivism

The theory that moral standards are not created by human beings, are unchanging, and are universal.

moral relativism

The theory that moral standards are created by human beings, change from society to society, and are not universal.

offense principle

The view that governments may keep us from offending others.

psychological altruism

The theory that human beings are at least occasionally capable of acting seldlessly.

psychological egoism

The theory that human conduct is seldishly motivated and we cannot perform actions from any other motive.

right

A justidied claim against another person’s behavior.

social contract theory

The moral and political theory that, to preserve our individual lives, we agree to set aside our hostilities towards each other in exchange for the peace that a civilized society offers.

utilitarianism

The theory that an action is morally right if the consequences of that action are more favorable than unfavorable to everyone.

virtue theory

The view that morality is grounded in the virtuous character traits that people acquire.

virtues

Good habits of character that result in morally proper behavior.

Business Ethics Case Study 1.1: The Business of Teaching Business Ethics

Business leaders, politicians, and journalists express concern over regularly occurring ethical scandals in business. What can be done, they ask, to end this seemingly endless cycle? Frequently they point the dinger at business schools for failing to teach future entrepreneurs even the basic elements of ethical business conduct. The place where students learn their business skills should also be the place where they learn ethics, they argue. Universities with business programs invariably agree with this judgment and for years have been integrating business ethics into their curriculum. Furthermore, for accreditation purposes, they must do this. The premier accrediting agency of business degree programs around the world is the Association to Advance Collegiate Schools of Business —better known as the AACSB. Its accreditation standards clearly mandate the inclusion of a strong ethical component in business degree programs:

The school must encourage and support ethical behavior by students, faculty, administrators, and professional staff. [Curriculum content must include] ethical understanding and reasoning (able to identify ethical issues and address the issues in a socially responsible manner).

[Curriculum content must include] social responsibility, including sustainability, and ethical behavior and approaches to management.

In addition, once students make their way through business programs, there is a special oath that several dozen

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decision-making frameworks by confronting difdicult, nuanced cases where values play a role.”

Third, critics say, instilling a sense of moral responsibility in business is really all about moral leadership. According to the AACSB, research shows that most working adults are at a low level of moral development, in which they simply conform to the rules of the majority. What they need is a strong moral leader to show them how to behave properly. Thus, business programs should be training their students to be ethical leaders who will be “the greatest motivating force behind ethical conduct in business organizations.”

There are other suggested ways for universities to improve their approaches to business ethics. Perhaps universities should tighten up admissions policies for business programs by weeding out arrogant applicants. The University of California at Berkeley’s business school gives priority to applicants who have “condidence without attitude.”

Perhaps universities should create alumni networks that will enable business people to consult with their college study group friends on tough moral issues. According to a group of Yale University business professors, “Alumni often mention that the hardest decisions they make occur when job demands condlict with their values. And, importantly, that they are isolated when making them.”

Many of these new approaches to business ethics draw on research in cognitive psychology and behavioral economics. Rather than just guessing at the best way of teaching business ethics, maybe social science can tell us. The question for us is whether these methods actually succeed better than the old standard method. Here is a pessimistic answer: No classroom simulation of ethical decision making can duplicate actual on-the-job ethical experience. Real ethical situations have a level of complexity that classroom training can never approach.

For all we know, the most effective method of teaching business ethics is for a professor to simply yell non-stop for the entire semester: “Don’t break the law or be a seldish jerk!” While that might drive students a little crazy, it would certainly leave a lasting impression.

In the absence of doing that, here is a more optimistic answer: Try everything, including ethical theories, case studies, ethical decision-making frameworks, and tightened admissions policies. As the examples throughout this book show, the stakes are high, lives depend upon it, and perhaps even civilization itself is at stake.

Discussion Questions

1. Which, if any, of the above methods of teaching business ethics do you think would be most effective, and why?

2. Discuss which of the above methods of teaching business ethics is used at your school. Do you believe your school teaches ethics effectively? Why or why not?

3. Think of a moral virtue that you have (such as not cheating on exams) and redlect on how you developed that virtue over the years. How might that type of moral development shed light on the best way of teaching business ethics?

4. The discussion here focused on the responsibility of universities to teach business ethics. How much blame is it fair to place on universities for the ethical failings of businesses? What should businesses themselves be doing about it?

Sources: AACSB International (2004), Association to Advance Collegiate Schools of Business (2013), Canales, Massey, & Wrzesniewski (2010), Gloeckler (2012), Korn (2013), MBA Oath (n.d.), Wishnoff (2012).

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2 Capitalism

Learning Objectives

After reading this chapter, you should be able to:

Francisco Diez Photography/Moment/Getty Images

Describe the main features of capitalism and socialism. Explain the three main aspects of Adam Smith’s account of capitalism. Explain the three main aspects of Karl Marx’s account of socialism. Assess the main criticisms of capitalism and socialism. Explain how various anticompetitive practices undermine capitalism. Describe the reasons and mechanisms for government regulation of the marketplace. Explain government bailouts and crony capitalism.

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Introduction

Some years ago, protestors took to the streets in Bolivia, South America’s economically poorest country. The reason? The Bolivian government had leased the water rights of several regions in the drought-stricken nation to private companies. One was the U.S. engineering company Bechtel, which agreed to expand and bring efdiciency to the water resources of those regions. This meant that all of the area’s water resources fell within its domain, even the gathering of rainwater. Shortly after Bechtel took control, water prices in one city tripled, sparking major protests. The government declared martial law and police were called in, killing at least six protesters and injuring over 170 others. The Bolivian government subsequently canceled the water contract with Bechtel.

Bechtel was not an inherently evil corporation that intentionally entered Bolivia to extract money from a poverty-stricken population. In their defense, company executives said that the price increases were initiated by the local government, not by them. Bechtel had experience managing water resources and was simply there to do a job. Further, the decision to privatize Bolivia’s water in the dirst place was forced by the World Bank: If Bolivia did not privatize water, it would be cut off from water development loans. Nevertheless, Bechtel’s involvement in the privatization of water became a symbol for capitalism’s having gone too far. Once water was privatized, the Bolivians could not even collect rainwater for their own drinking without dirst obtaining a permit. Bolivia’s situation, while dramatic, is not an isolated case, and water privatization in the world’s poorest countries continues to be a multibillion-dollar industry. Even within the United States, a lawsuit against Nestle challenged that company’s right to privatize water from an aquifer in Michigan where natural resources—including ground water—are part of the public trust.

The privatization of water appears to be a situation of forcing private market solutions upon what are ultimately public-sector problems. Water access, it seems, is a public right, and when water becomes scarce, the task of managing those resources should fall to the government, whose primary task is to protect the public good.

At the heart of many issues in business ethics, like the privatization of water, is the economic system under which businesses themselves operate. Generally speaking, the two competing economic systems are capitalism and socialism. The one looks to the free market, the other to government control. In this chapter, we will look at the tension between these two ideologies and the ethical implications of adopting one of these systems over the other. We will consider their essential features and the specidic theories of their two most famous defenders, Adam Smith and Karl Marx. We will then examine anticompetitive business practices that undermine the free market, and the role of the government in keeping the market competitive. Finally, we will look at practices by the government itself that threaten free market capitalism.

Julie Plasencia/ASSOCIATED PRESS

A Bolivian man demonstrates against the privatization of water and subsequent water rate hikes in his region. He holds a sign that says, “What is ours is ours and it cannot be taken away.”

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2.1 Capitalism and Socialism DeNined

There are no ofdicial dedinitions of either capitalism or socialism upon which everyone agrees. One reason for this is that these theories are so multifaceted and all encompassing that they resist being distilled into a single formula. Another reason is that the concepts are at the center of an intense ideological battle, which often makes it difdicult to avoid personal bias even with simple formulations of the concepts. Nevertheless, there are recurring themes within each of these notions that can provide a starting point for discussion. Our discussion will begin with extreme versions of these ideologies, and later we will consider more moderate versions that combine elements of the two.

Capitalism

As an economic theory, capitalism maintains that

personal self-interest, not community interest, motivates business activity; the major sources of society’s economic production should be privately owned, not governmentally owned; and economic planning should be decentralized through market competition, not centralized through government policy.

To clarify, the dirst point maintains that the engine that drives all business activity is the desire for personal gain. This does not necessarily commit the capitalist to the radical theory of psychological egoism, which, as we discussed in Chapter 1, states that all human actions are motivated by self-interest and that humans are psychologically incapable of performing purely altruistic actions. However, it does imply that, within the arena of business activity, all players do what they do in hopes of dinancial gain. Whether it is the venture capitalist, the private entrepreneur, the corporate executive, or the worker, the prospect of making money is the carrot that motivates.

In economics, this idea is expressed in the concept of the proNit motive: The ultimate purpose of a commercial enterprise is to earn a prodit. That is the reason that businesses exist. According to this view, it is a psychological fact that self-interest motivates economic activity, and from an ethical perspective, that is the way it should be. Throughout history, the dlourishing of civilizations has gone hand in hand with vigorous economic activity—craftsmanship, industry, and trade with neighboring countries. Whatever gains societies make through economic development are owed at least in part to this kind of self-interest.

One popular, although less precise, way of expressing this notion is the idea that greed is good: In life in general and in the business world in particular, the human drive of self-interest directs our energy and creativity. The term greed is not the most dlattering way of depicting the idea of the prodit motive; since the Middle Ages, greed has been listed as one of the seven deadly sins. However, by designating greed as morally “good,” the implication is that this aspect of human nature can be redirected to motivate business activity in a prodicient and positive way. In the words of the character Gordon Gekko in the movie Wall Street (who is based partly on the controversial dinancier Michael Milken), “Greed, for lack of a better word, is good. Greed is right. Greed works. Greed claridies, cuts through, and captures the essence of the evolutionary spirit” (Pressman & Stone, 1987).

The second tenet of capitalism is that the major sources of society’s economic production should be privately owned, not governmentally owned. This includes land, raw materials, factories, retail stores, transportation services, communication networks, and any other major component of a country’s economy. According to capitalists, all of these things function better when owned and operated by private individuals or organizations than when owned by the government. Part of the reason for this is efdiciency: If you own your own business, you will be personally motivated to do everything in your power to succeed. You will be responsive to the needs and demands of consumers; if you are not, you risk going out of business. With government ownership, that element of personal interest is stripped away.

Another justidication for private ownership is the very notion of the moral right to private property: The businesses that we create are part of our personal property, and we are entitled to keep them. While the political concept of the natural right to property is only about three centuries old, the human sense of entitlement to personal property is much older and part of human nature itself. At the purely animalistic level, it is a manifestation of territoriality, in the same way that birds

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own their nests and beavers own their dams. The Italian philosopher Niccolò Machiavelli vividly encapsulated the zeal we have for private property: A political ruler “must keep his hands off the property of others, because people more quickly forget the death of their father than the loss of their inheritance” (1532/1988). According to capitalists, a government seizing a citizen’s private property commits one of the greatest moral violations.

The third point of capitalism, that economic planning should be decentralized through market competition, is the basic idea of free market economics. That is, businesses should be governed by the laws of supply and demand, not restrained by government interference. The idea of competition in a free market is sometimes compared with the evolutionary notion of survival of the Nittest. In the evolutionary concept, species with the best adaptations, such as long claws, win out over rival species that are less well adapted, such as those with shorter claws. The losers die out and the winners live to compete against future rivals. In business, companies are best adapted to a competitive marketplace when they can offer a higher quality product for a cheaper price. Companies that are nimble and can quickly seize new market opportunities are the ones that will survive; the losers will go out of business. In the process, products improve, consumers are happier, jobs are created, and wealth is generated.

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The Wall Street bull sculpture is for many a symbol of our country’s relationship to capitalism.

Contrast that with a situation where governments control or severely restrict business production and the ability to compete against rivals. Prices remain dixed, quality stagnates, and responsiveness to consumer demands is low. According to capitalists, governments should simply stay out of the marketplace—as indicated by the adopted French expression laissez faire, “leave it alone.”

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Socialism

We turn now to the concept of socialism, which holds the opposite of the three tenets of capitalism mentioned previously. That is,

community interest, not personal self-interest, should motivate business activity; the major sources of society’s economic production should be governmentally owned, not privately owned; and economic planning should be centralized through government policy, not decentralized through market competition.

Regarding the dirst point, socialists do not deny the place that self-interest holds in human motivation. We are clearly self-interested creatures at many levels, and some of that self-interest may be unavoidable. However, we are not at our best when our actions are dominated by self-interested inclinations and we behave more like animals. Within human nature there is another drive—a community-oriented one—that better redlects our true human character. Virtually every political philosopher for the past 2,500 years has acknowledged the social character of human nature: We cannot survive on our own, and we require a community of diverse members to meet our survival needs. We are not lone survivalists, fending for ourselves in the untamed wild; in fact, the human species was never like that. For the vast majority of our 500,000-year existence as a species, we lived in tribes as hunter-gatherers. These were small groups, typically extended

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families, and most tribal activity focused on the survival of the community. The concept of “every man for himself” did not make much sense in that context. It was only with the emergence of city life 12,000 years ago, during the agricultural revolution, that the opportunity even arose for an economic system that could be driven by personal interest.

That chapter of human history has not been a pretty one. Land and other resources have been plundered, workers have been exploited and enslaved. According to socialists, these and other morally heinous acts are the regular consequence of an economic system dominated by self-interest. Socialism, by contrast, involves shaping an economic system in a way that is more consistent with our community interests.

The second tenet of socialism is that the major sources of society’s economic production should be governmentally owned, not privately owned. Private ownership of the economic base leads to the accumulation of wealth in the hands of a few powerful owners and the degeneration of society into a system of those who have and those who have not. The socialist writer Pierre-Joseph Proudhon made the famous statement that “property is theft,” by which he meant that business owners steal prodits from the workers. Workers are the ones who essentially create the wealth, but they are coerced into a working situation where they reap almost none of the rewards. To that extent, it is much like slavery. Today this concern is often expressed in the concept of the wealthiest 1%—that is, the tiny percentage of people who hold a disproportionately high share of the world’s wealth.

Further, with regard to private ownership, socialists believe that owners have too much control over how they manage their property and that they can act in ways that harm society as a whole. Owners can wipe out natural resources, such as timber and even water. They can take the best land for themselves, leaving nothing of value to the masses of the poor. They can sell off the nation’s food supply to foreign markets if that becomes proditable. All of these ethical abuses of property cease when the property is owned and managed by a government that sees its mission as the betterment of society as a whole, including all of the social classes it contains.

The third tenet of socialism is that economic planning should be centralized through government policy, not decentralized through market competition. Consider again the “survival of the dittest” metaphor of market competition. What capitalists emphasize is the lower prices and higher quality of goods that result from competition. What they sweep under the carpet, according to socialists, are the more negative aspects of survival of the dittest. For every winner there is a loser, and when a company goes under, it is the army of unemployed workers who suffer the most. These workers often have no dinancial safety net in the way that wealthy business owners do, and they often need to uproot their families and relocate in hopes of dinding other employment. Further, when competition is stiff, there is pressure for a business to survive at all costs; owners will continually dind creative ways to cheat, either in direct violation of laws or with unethical tactics that stay just one step ahead of lawmakers. All of these ethical problems are eliminated when a government itself plans the economy in response to consumer needs. Rather than have businesses claw each other to death as they dight to dominate every new consumer market, the government addresses those needs in an orderly way that causes the least amount of social upheaval.

Again, these descriptions of capitalism and socialism express recurring themes in these ideologies, and different proponents will have their own points of emphasis. Two economists are associated with the opposing systems of capitalism and socialism, namely Adam Smith (1723–1790) and Karl Marx (1818–1883). No capitalist or socialist accepts as truth every point that these thinkers made. But their writings are still held in almost scriptural reverence, and long after the words of contemporary defenders of those rival ideologies are forgotten, the writings of Smith and Marx will remain as blueprints for the economic systems that they forged. We will look at highlights of their respective views next, particularly ones that are as relevant today as they were in the two men’s lifetimes.

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2.2 Adam Smith’s Capitalism

The Scottish philosopher Adam Smith was a professor of moral philosophy at the University of Glasgow and the author of two important works in ethics and economics: The Theory of Moral Sentiments (1759) and An Inquiry Into the Nature and Causes of the Wealth of Nations (1776). Although Smith’s theory of capitalism is detailed, there are three concepts central to it:

1. The economy is driven by self-interested desire for luxury goods;

2. economic balance is achieved through a self-regulating invisible hand; and

3. the government’s role in a nation’s economic system should be limited.

Let’s look at each of these concepts.

Self-Interested Desire for Luxury Goods

Self-interest, according to Smith, is a fundamental driving force of human conduct. Although Smith did not go so far as to say that every human action arises from self-interested motives, he believed that self-interest is the foundation of an important segment of our public actions. It drives each person to take “proper care of his health, his life, or his fortune,” which are among the most important moral duties that we owe to ourselves (Smith, 1759/1982, 4.2.3). It is also the fundamental motive that determines how we acquire from others what we need for our survival and success. I cannot survive on my own, and my most basic needs for food can only be met through the cooperation of others. To get you to help me, though, I cannot rely on your kindness. Rather, I must dind some way for you to personally benedit before you will consider assisting me. Smith wrote:

Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good ofdices which we stand in need of. It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. (1776/1981, 1.2)

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According to Adam Smith, the desire for luxury drives the economy.

It will always come down to the old adage that I will scratch your back if you scratch mine. Just as self-interest drives me to acquire life’s necessities, it also motivates me to acquire luxuries, improve my position in society, and climb the ladder of dinancial success. According to Smith, a poor person envies the easy and comfortable lifestyles of the rich, wants that for him- or herself, and works diligently and with great difdiculty to acquire it. The person devotes years to education, acquires a marketable skill, and struggles to build up a client base, often working for people he or she hates. Throughout life, the person is driven by the self-interested belief that achieving an opulent life with wealth and disposable luxury goods will bring happiness. The fact is that it will not necessarily make the person happier, and in the end the person will probably be more miserable for all those efforts: “Through the whole of his life he pursues the idea of a certain artidicial and elegant repose which he may never arrive at, for which he sacridices a

real tranquility that is at all times in his power” (Smith, 1759/1982, 4.1).

Smith’s point is that we naturally desire luxury items that appear to be a means of happiness, and thus we block out the thoughts of toil and misery that go along with acquiring and maintaining those things. If it looks like it will make our lives happier, we will want it and pursue it, even if on balance that effort will make us unhappier. It is this desire for luxury that drives the economy, and the irony is that it is grounded in a natural deception. Smith wrote:

It is this deception which rouses and keeps in continual motion the industry of mankind. It is this which dirst prompted them to cultivate the ground, to build houses, to found cities and commonwealths, and to invent and improve all the sciences and arts, which ennoble and embellish human life; which have entirely changed the

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whole face of the globe. (1759/1982, 4.1)

In sum, according to Smith, self-interest motivates our desire for both necessities and luxuries, and we get what we desire only by appealing to the self-interest of others. The self-interested desire for luxuries is what drives the whole economy.

The Invisible Hand

The second component of Smith’s theory is perhaps what he is most famous for—namely, the idea that by pursuing our self-interest, we indirectly promote the good of society as if directed by an invisible hand. There is a natural tendency toward self-regulation in economic systems, which creates economic balance within society. Smith used the expression “invisible hand” only twice in his economic writings, emphasizing a different point each time. First he described how the wealth of the rich will be automatically distributed to poor workers. As we accumulate our wealth, there is still only a limited amount that any one person can consume, and the remainder of that wealth will ultimately make its way to workers who make our wealth and lifestyle possible. He wrote:

[The rich] consume little more than the poor, and in spite of their natural seldishness and rapacity . . . they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of the species. When providence divided the earth among a few lordly masters, it neither forgot nor abandoned those who seemed to have been left out in the partition. These last too enjoy their share of all that it produces. (Smith, 1759/1982, 4.1)

According to this view, to support their luxurious lifestyles, the rich need a network of workers to produce goods and provide services. This occurs when, for example, a rich farmer employs laborers to grow crops and maintain the property. It also occurs when the farmer buys luxury goods, thereby giving work to carpenters, clothiers, artists, and book publishers who might live a hundred miles away or more. This automatic spreading of wealth throughout society is an important moral good.

Smith’s other description of the invisible hand involves international trade; he supported what we now call free trade, namely the concept that trade across national boundaries should take place without interference from the respective governments. In Smith’s day, as now, individual countries typically tried to acquire more wealth than rival countries. The formula for doing this is to increase one’s exports while, at the same time, decreasing one’s imports. Governments have used a range of protectionist policies to achieve these goals, such as placing taxes and caps on imported items. Smith rejected these protectionist policies and argued that if we just allow businesses to follow their own self-interest, their country’s economy as a whole will improve. I, as a businessperson, know that my company will perform better when the economy of the whole country thrives. I will thus be naturally inclined to support the domestic economy, even when my principal aim is to increase my own business. Smith wrote:

The Invisible Hand

The Invisible Hand From Title: 60-Second Adventures in Economics Video Clip C...

© Infobase. All Rights Reserved. Length: 01:11

Critical Thinking Questions

According to the video, Adam Smith maintained that governments should leave people alone to buy and sell freely among themselves. If self-interested traders are left alone to compete with each other, markets will be guided by positive outcomes as if by an invisible hand. Explain this concept with the example of two vendors selling bread at different prices.

Friedrich Hayek argued that the hands off approach

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By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. (1776/1981, 1.2)

Although these are the only two instances where Smith used the expression “invisible hand,” in this quote he indicated that “in many other cases” the concept of the invisible hand applies, and a larger moral and social benedit is achieved when we pursue our own interests.

Limited Role of Government

The third component of Smith’s theory is that, although the presence of government is sometimes necessary in the economic development of a society, its role should be limited and, when possible, it should allow private industries to assume tasks. Governments often take on the kind of activities that private industries and organizations do. They own and operate post ofdices, energy services, water utilities, transportation networks, educational institutions, and even religious establishments. Smith argued that there are three fundamental duties of governments, and that beyond those, private industries are better suited to take on tasks. The dirst governmental duty is defense, the use of military force to protect society from violence and attack from rival countries. The more advanced the society is, the more expensive its weaponry will be, and there is no avoiding those costs to the public. The government’s second duty is to run a judicial system that protects “every member of the society from the injustice or oppression of every other member of it” (Smith, 1776/1981, 5.1.2). The costs of running a judicial system, Smith argued, can to a large extent be defrayed through court fees.

Even among the most extreme critics of big government, there is little dispute about the government’s fundamental role in defending the country and operating a judicial system. However, according to Smith, there is yet a third area of legitimate government involvement, and that involves public works and institutions that are of great benedit to society but too unproditable to be taken on through private industry. These, according to Smith, fall into three categories:

1. There are public works and institutions that are necessary for businesses to operate effectively, including the creation of roadways, bridges, harbors, and other parts of the transportation infrastructure. Smith also mentioned post ofdices and foreign embassies as institutions that are essential for commerce. Much of the cost of these commerce-based projects can be covered through tolls and user fees, without placing a burden on general public funds.

2. There are government programs devoted to public education. The government has a strong interest in educating “inferior ranks of people,” who, Smith said, seem to be “mutilated and deformed in a still more essential part of the character of human nature” (1776/1981, 5.1.3). Through education, people will be less prone to superstition, and therefore to public disorder. Also, when properly educated, the masses are “less apt to be misled into any wanton or unnecessary opposition to the measures of government” (Smith, 1776/1981, 5.1.3). Costs of public education, Smith argued, can be paid for through student fees or educational endowments.

3. There are public institutions that are responsible for religious instruction. The United Kingdom, in Smith’s day as now, had a dominant state-funded religion, namely the Church of England. Smith’s view on the public funding of religion was rather radical. The worst part about religion, he argued, is that it perpetuates fanaticism, superstition, and civil unrest. State-supported religions are particularly bad at this, he argued, and the United Kingdom’s state-run church was responsible for the deaths of thousands through religious persecutions. According to Smith, religion would be more moderate if churches were run privately in a competitive free market,

to the economy works better than any centralized economic planning by the government since it allows for quicker changes to special economic conditions. If Hayek is right, what role would be left for the government to play regarding the economy? According to the video, economies can take a long time to reach their equilibrium, and may even stall along the way through mass unemployment, which makes governments intervene in the economy. In periods of economic crisis, such as recessions and depressions, should the government step in and regulate the economy, or just stay with free market principles and let the economy sort itself out over time?

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where each church would of necessity learn to be tolerant of its rivals. Although state religions should be abolished, according to Smith, the government should create programs to reduce religious superstition even further. For example, the educated class could be required to study science, which, he said, “is the great antidote to the poison of enthusiasm and superstition.” The government should also publicly fund “painting, poetry, music, dancing” and other forms of art that Smith believed help remove the gloominess of religious fanaticism (Smith, 1776/1981, 5.1.3).

All three of these roles of government, according to Smith, aim at enhancing the well-being of society in ways that private industries are incapable of doing by themselves.

What Would You Do?

You are a congressional representative. Up for debate is whether several popular government programs should continue to be funded through tax dollars or instead be privatized and run as for-prodit businesses. The central issues are the social importance of these programs, the question of whether they could be economically viable if privatized, and your responsibility to your constituents.

1. Would you privatize the interstate highway system and have motorists pay for its use through tolls? Why or why not?

2. Would you privatize NASA, and essentially make space exploration a for-prodit venture? Why or why not?

3. Would you privatize all K–12 school systems, thereby permitting them to be for-prodit companies? Why or

why not?

4. Would you privatize Social Security, thereby making Social Security retirement benedits vulnerable to poor

investment decisions and market volatility? Why or why not?

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2.3 Karl Marx’s Socialism

Born in Germany, Karl Marx was trained as a philosopher, but he is best remembered as a political activist and champion of the theory of communism, a radical form of socialism that aims to abolish all social classes, private property, and even government. Although Marx was a prolidic writer, his two most famous works are The Communist Manifesto (1848), a document calling for workers to launch a revolution, and Capital (1867–1894), which critiques the capitalist economic system. Like Smith’s theory, Marx’s is detailed, but there are three main features of it that we will examine:

1. In a capitalist system, workers are alienated from their labor;

2. in capitalism, there is a class struggle between the working class and the business owners; and

3. workers must improve their situation by revolting against capitalist forces in society.

Alienated Labor

Like Smith, Marx believed that egoism is a strong motivating force for people’s conduct and that people are naturally driven to seek their own benedit in economic matters. However, Marx argued, our egoistic tendencies are a distortion of a more inner and essential part of human nature that is community oriented. Through our community nature, our choices and actions are connected with others around us, not in condlict with others. But according to Marx, capitalist societies and economic systems have embraced the egoistic part of human nature, and this egoism is evident in the so-called natural rights that countries like the United States and France have embraced.

Xie Zhengyi/Imaginechine/ASSOCIATED PRESS

According to Karl Marx, factory work involving small, repetitive tasks alienates workers from their labor by preventing them from identifying with the Ninished product.

Marx argued that when our entire social and economic systems are directed toward egoistic needs, then we as individual people become fractured and alienated from our inner community nature. This is most evident in how the vast majority of workers are forced into job environments in which they become mere tools for the egoistic benedit of the owners.

Consider a typical factory job. I need money to survive, and in my area my only employment opportunity requires me to labor in a textile factory, performing specidic tasks on a textile loom all day, all for the dinancial benedit of the owner. Although I get paid, I have no choice in what I do, no personal stake or say in what happens to the products that I make, and, most importantly, no opportunity to connect my labor to the community in a meaningful way. Further, the tasks I perform are broken down into a series of smaller, repetitive tasks that give me no satisfaction as a craftsman, and I end up hating the objects that I produce. This is Marx’s notion of alienated labor: I become alienated from my true inner nature when I am forced to give my labor away to

the factory owner and do not participate in the total creation of the object.

In Marx’s day, the situation was worsened by the dreadful working conditions in which laborers had no rights or legal recourse for on-the-job injury or death. Workers had nothing left to sell to survive but their own labor, and, among the poorer classes, the labor of their children. Marx argued that this is much like prostitution: Out of dinancial desperation, the prostitute sells off a critical part of her identity that she would otherwise reserve for the intimate bonding with her spouse. In a more perfect economic environment, I would not be coerced into prostituting my labor for a measly paycheck. I would be more in control of what I produce and how I use my labor to bond with the larger community.

For Marx, here is what happens when our labor is not alienated and, instead, our job routines are in accord with our true community nature. Suppose that I have a cottage industry in which I design and manufacture shirts within my house.

1. First, when I produce a shirt through my labor, I impose my creative identity on the world. Who I am as a person in some sense becomes transformed into the physical world, and I can take pleasure in seeing the physical expression of my creative personality with my own two eyes.

2. Second, when you need a shirt and buy it from me, I can take pleasure in the fact that I have satisdied a specidic

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human need that you have.

3. Third, I become the social mediator between you and your human need, and because of that you acknowledge my

role in completing a necessary part of your identity.

4. Finally, the shirt that you now wear becomes part of your identity. Through the creative expression of my life,

then, “I would have directly created your expression of your life” (Marx, 1844).

The end result is that through my creative expression, I connect with my community. In Marx’s words, “in my individual activity I would have directly conIirmed and realized my true nature, my human nature, my communal nature” (1844). The dinancial exchange between you and me will still be part of the transaction, and I will still need your money in order to survive. However, the dinancial component will be more of a secondary issue, and the primary issues of our transaction will be self-expression and community bonding. This removes the alienation of labor and places economic transactions on a higher moral level.

Even today we see this community bonding with craftspeople who have a love for their trade and enjoy sharing their goods with others. But this unalienated approach to labor is very difdicult to achieve in modern capitalist and industrial work environments. Businesses do what they can to get their workers to identify with their products and the benedit that they bring to society. The more hierarchical terms employee and supervisor have commonly been replaced with the more group-oriented terms team member and team leader. In a sense, this acknowledges Marx’s assessment of worker psychology: We do not want to feel like prostitutes in our jobs, and we want some creative input. The critical issue, though, is whether the reality of one’s job can live up to the managerial jargon of “team membership,” which Marx would undoubtedly say it cannot do.

Class Struggle

According to Marx, within the typical capitalist system, then, workers are coerced into prostituting their labor, they are alienated from their true communal nature, and, as a result, they are very unhappy. This leads to the next major component of Marx’s theory: class struggle. Throughout history, societies have evolved through condlicts between the social classes of those who do the work and those who are in charge and benedit from that work. The class condlicts that occurred throughout history were not simple ones involving bad worker attitudes; rather, they often resulted in great social upheavals and revolutions. Marx wrote:

The history of all hitherto existing societies is the history of class struggles. Freeman and slave, patrician and plebeian, lord and serf, guild-master and journeyman, in a word, oppressor and oppressed, stood in constant opposition to one another, carried on an uninterrupted, now hidden, now open dight, a dight that each time ended, either in a revolutionary re-constitution of society at large, or in the common ruin of the contending classes. (1848/1967)

For Marx, the class struggles throughout history revealed a very noticeable pattern between oppressors and the oppressed workers. In Roman times, there was a major class struggle between masters and slaves. Tensions grew, which included slave rebellions, and in time, that system of slavery was replaced by a slightly different social hierarchy in the Middle Ages, between nobles and serfs. That tension was eventually replaced during the Renaissance with the emergence of the middle class. But the oppression still continued, as the middle class gained dinancial strength and formed a capitalist economic system that continued to oppress workers.

Marx witnessed dirsthand the 19th-century industrial revolution, which radically transformed the manufacturing of coal, iron, textile, and glass. This was the dirst time that non-aristocrat business owners controlled major industries, and to that extent, it was a social triumph. However, this new class of business people who owned the means of production within society—the bourgeoisie, as Marx called them—were as oppressive to workers as previous members of the ruling class had been. Working conditions were ghastly, pay was minuscule, and workers had next to no political representation.

Charles Dickens’s novels, such as Hard Times, give us a glimpse of the oppressive working conditions during the 19th century that Marx was reacting against. In many ways, the economic realities of the industrial revolution made working conditions even worse for workers than they had been in previous eras. Manufacturing facilities became larger and, through division of labor, work tasks became more tedious:

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Owing to the extensive use of machinery and to division of labor, the work of the proletarians has lost all individual character, and consequently, all charm for the workman. He becomes an appendage of the machine, and it is only the most simple, most monotonous, and most easily acquired skill, that is required of him. Hence, the cost of production of a workman is restricted, almost entirely, to the means of subsistence that he requires for his maintenance, and for the propagation of his race. (Marx, 1848/1967)

Workers must sell themselves for the performance of these tedious tasks and become one more commodity in the economic system. Like articles of commerce, they are “exposed to all the risks of competition, to all the dluctuations of the market” (Marx, 1848/1967). The situation for workers gets progressively worse as their value in the market decreases.

Revolution

Marx argued that the time for change had come, and in the next phase of social progress, workers would once more rise up against their oppressors. But this time it would be different. In previous phases of social history, changes in hierarchy did not end oppression: The bosses changed, but the exploitation of workers remained the same. With this next phase, the workers would overthrow the ruling class, seize control of the economy, and destroy the institution of private property, which has always been the principal source of exploitation.

For Marx, the long-term goal of the revolution was communism, which, as indicated before, involves the creation of a society without private property, class division, or government. To achieve that ultimate goal, however, Marx argued that after the revolution, society must go through a transitional phase of socialism where the government takes control of major economic resources within society and enacts policies to reduce class distinctions between the rich and poor. Marx recognized that the ruling class would be horridied at the idea of revolutionaries abolishing private property, but, he continued, in existing capitalist societies, “private property is already done away with for nine-tenths of the population” (1848/1967). The abolition reforms of existing governmental policies, because governments are so embedded with the interests of the ruling class. Only a full-scale revolution will make it possible—one country at a time. This, Marx believed, is inevitable.

Once the working class has control, Marx argued, the process of abolishing private property will differ somewhat from country to country, but the more advanced countries will follow a common path. That is, a transitional system of socialism will be put in place, which, step by step, will dismantle the social framework of capitalism and replace it with a more community-oriented set of policies. Figure 2.1 shows, in Marx’s words (1848/1967), the steps that he envisioned; these are now commonly referred to as the Ten Planks of Communism.

Figure 2.1: The ten planks of communism

These are the steps that Marx believed were necessary to transform a society into a communist one.

This 1950 poster, which was displayed in Moscow, urged citizens to vote for candidates such as Josef Stalin. The poster reads, “A human being has the right to study, rest, and work.”

of private property cannot come about through

Associated Press

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Source: Marx, K. (1848/1967). The communist manifesto. New York, NY: Pantheon.

The socialist revolution, as Marx envisioned it, constitutes a thorough moral transformation of society that eliminates the alienation and oppression of workers and makes social benedits available to all people equally. For Marx, when the residue of capitalism has been thoroughly scrubbed away, society will enter an era of true communism. All class distinctions will disappear, since there will no longer be a class of workers that is distinct from a class of owners. Without private property, economic condlict will also disappear, at which point the government’s role in social organization will become unnecessary and the government will eventually die out.

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2.4 Assessment of Capitalism and Socialism

The theories of capitalism and socialism have both been hotly debated since they were dirst forged; we will look at some of the standard criticisms of each. As complex as both theories are, we cannot expect simple criticisms to decisively refute either of them. Further, over time, defenders of both theories have attempted to address problems posed by critics and revise their theories accordingly. Those revised theories are often even more resilient to standard attacks. Nevertheless, general criticisms do reveal potential weak links in the theories.

Criticisms of Capitalism

The fundamental criticism of capitalism is that competitive markets have a built-in bias toward private interests rather than public ones. There are several manifestations of this bias:

Capitalism leads to dramatic economic inequality and introduces class divisions between the rich and poor, which is precisely what was of concern to Marx. It is a system in which the worker’s labor is a commodity to be bought and sold, which often leads to dreadful working conditions. It is true that many companies today realize the value of people and have spent considerable effort and research to create job satisfaction. Nevertheless, job satisfaction remains low among workers in unskilled and semiskilled jobs, such as laborers, packagers, food preparers, cashiers, stockers, and servers (Smith, 2007). And many workers in foreign countries who manufacture products sold in the United States are in situations not much different from those of laborers in Marx’s day.

It fosters environmental destruction and has no built-in incentive for environmental stewardship. It tends to be politically undemocratic by enabling large businesses to use their enormous wealth to lobby the government against consumer interests in favor of their own dinancial well-being. It cannot be trusted to shape national policy in the interests of the public, as witnessed by the elimination of public transportation systems throughout the United States and the movement of manufacturing facilities overseas. It creates antisocial motivations in both buyers and sellers. Buyers take advantage of return policies and are quick to sue companies for even honest mistakes. Sellers mislead buyers about the quality of their products and services. Buyer and seller become more like adversaries in the market, rather than partners.

There are countless examples of how capitalism is inherently in tension with moral responsibility to the public, and most of the problems and famous examples covered in this book arise from that tension. In a sense, the entire study of business ethics is a testament to the fundamental problems of capitalism.

Criticisms of Socialism

Turning next to socialism, we dind three main criticisms. First, we cannot restrain our motivations of personal self-interest in the manner that socialists advise. Although socialists agree that it is impossible to fully eradicate human self-interest, they recommend subduing it to the point that our community-oriented motivations guide how we develop society’s institutions and economic structure. But even that might be asking too much. Personal self-interest drives us to devote time and energy to better our situation, and without some substantial personal reward, we might not be willing to devote that kind of effort to the greater social good. Personal ambition has been at the forefront of technological innovation and personal progress, and socialists have not adequately explained how we can transfer that drive to public interests.

A second and related criticism of socialism concerns the difdiculty in signidicantly scaling back on private property, as more extreme socialists advise. Like human self-interest, property ownership is deeply ingrained in human nature—even monks, who take vows of poverty and live their entire lives in communal monasteries, still own their own toothbrushes. In a sense, socialists attempt to impose a prehistoric model of communal society on modern economy. According to socialists, just as primitive tribes held their major resources in common, so too should we in modern society hold ours in

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common. But according to critics, the dit does not work very well in the modern setting. We have moved beyond our hunter-gatherer roots, and through the complex demands of urbanization, we have reinvented ourselves and found a new way to dlourish based on harnessing our private desires for wealth and property. The tie that binds together tribal societies is daily contact with each other; the life and activity of one tribe member immediately overlaps with those of others, like a large family. But modern society is too large to be like a real family; it is a mere abstract concept that does not allow for the same bonding experience that is possible in small tribal groups. As the size of society grows, so too does our impulse toward private property.

Finally, socialist policies of centralized planning are ineffective ways of structuring the economy, as the former Soviet Union’s failed efforts with centralized planning teach us. Banking, industrial production, and distribution of goods and services were organized and carried out based on a master plan devised by the Soviet government. The principal problem with such centralization is inefdiciency: It creates unpredictable dediciencies and surpluses. As hard as the Soviet government tried to predict how much bread or toilet paper its citizens needed on a daily or weekly basis, there would nevertheless be great dediciencies in some cities on some days and great surpluses in others. Bread lines were a common occurrence; people would stand outside a bread store all night to buy as much bread as permitted the next morning before supplies ran out.

Moderate Versions

These are just some of the standard arguments against both socialism and capitalism, and again, defenders of each of these ideologies certainly have rebuttals. But when assessing the respective merits of both ideologies, it is important to recognize that there are both extreme and moderate versions of each, which fall along a spectrum from the most extreme capitalism to the most extreme socialism. Very few theorists espouse the most extreme versions, and in the real world, very few if any countries have ever implemented their economies in such extreme ways. Adam Smith himself recognized the need for the government’s involvement in the national economy to provide, for instance, armies, roads, and schools and to undertake certain commercial ventures. Marx himself acknowledged that during the transitional period of socialism, there still would be some private ownership of the country’s economic base.

More moderate versions of capitalism and socialism each aim to allow at least some market-based economy while at the same time providing a social safety net to citizens. One such position on the capitalist side of the spectrum is welfare capitalism, a term that originally referred to social-welfare services provided by employers in the early 20th century, such as paid vacations, medical benedits, and pensions. More recently it has come to refer to economic systems that are capitalistic but have social programs that the government runs, such as national health care and government-run child care.

On the socialist side there is market socialism. This term originally referred to worker-owned cooperative enterprises that operate within free-market systems but are set up in ways that prevent worker exploitation. Today it refers to economic systems that are socialist in terms of government ownership and control of major economic enterprises, but at the same time incorporate some capitalist policies, such as relying on supply and demand in the market to set prices.

Just as there are a variety of theoretical models of both capitalism and socialism, in the real world there are a variety of capitalist and socialist systems throughout the world. While it is difdicult to precisely identify where any country stands on the spectrum between capitalism and socialism, one indicator is a 2014 Pew Research Center survey of nearly 50,000 people in 44 countries throughout the world on how strongly they prefer a free market economy. Figure 2.2 presents a partial list of the responses, with those higher up being more free market than those lower down.

There is a benedit to a variety of economic approaches among countries, in that each functions like a laboratory experiment in economic policy that others throughout the world can observe and learn from. What are the failures and successes of these countries, and how might this knowledge help us improve our system?

Figure 2.2: Support for the free market

Copyright Bettmann/Corbis/ASSOCIATED PRESS

Bread lines such as this one were a common occurrence in the former Soviet Union because of the inefNiciency caused by its centralized economy.

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Percentage of people who responded “disagree” or “agree” to the following statement, by country: “Most people are better off in a free market economy, even though some people are rich and some are poor.”

Source: Adapted from Pew Research Center. (2014). Emerging and developing economies much more optimistic than rich countries about the future.

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2.5 Anticompetitive Practices

Economists classify the economic system of the United States as a type of welfare capitalism, similar to those of Australia and the United Kingdom. For countries like the United States that are committed to capitalism as an economic system, efforts are needed to keep the marketplace competitive and fair and to prevent the free market itself from being destroyed. Let’s look at some of the most notorious anticompetitive business practices that must be guarded against.

Monopolies and Oligopolies

A natural outcome of competition in the marketplace is the emergence of monopolies, where a single company controls all or nearly all of the market for a given type of product or service. Suppose that a new market opens up for a self-driving automobile, and 10 companies manufacture the product. In the normal course of competition, some companies will go under for having inferior technology or poor marketing. Other companies will merge, and in time, only one may be left standing. This scenario has played out again and again in the last few centuries, with notable examples from the past including Western Union, Standard Oil, U.S. Steel, and AT&T® controlling the telegraph, petroleum, steel, and telephone markets, respectively. In more recent years, we have seen movement toward monopolies with De Beers® and the diamond trade, Microsoft and computer operating systems, and Monsanto and the commercial seed market.

What, though, is so bad about monopolies? If a company wins fairly in its battle for market share, does it not deserve its position of dominance? Critics argue that monopolies destroy the very competitive markets that dirst created them, and in the process they eliminate the two key benedits of a capitalist economic system. That is, competition is no longer present to drive down prices and improve quality. For example, when AT&T dominated the telephone industry, prices were comparatively higher than they were after the company was forced to break up, and consumers had fewer options than after the breakup. Imagine what using the phone would be like today if AT&T were the only game in town. The almost indinite variety of cellphone apps that we have come to rely on would likely be only futuristic dreams.

But the companies accused of holding monopolies tell a different story. In the 2001 court case against Microsoft, for example, the software company argued that its dominance in the market had enhanced rather than harmed the innovation process throughout the entire software industry. Consumers, it argued, had also benedited from the low price of its operating system, its free applications, and the impact Microsoft had had on accelerating computer-software innovation more generally. It would be difdicult to demonstrate that all monopolies will lead to a decrease in innovation and higher prices;

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however, there is a realistic fear that at least some monopolies will do so, and that is enough to make a monopoly a potentially anticompetitive practice.

Similar to a monopoly is an oligopoly, where the market is dominated by a small number of businesses that collectively exert control over that market’s supply and prices. The petroleum, telecommunication, automobile, and soft-drink industries in the United States are clear examples, but with other products, oligopolies are more concealed. There are, for example, dozens of national brands of laundry detergents on the market, but the vast majority is produced by only three companies. As with monopolies, the question remains whether the dominance of an oligopoly in a given market will of necessity harm innovation and result in higher prices.

Two mechanisms that can lead to both monopolies and oligopolies are mergers and acquisitions. A merger is when two companies of roughly the same size agree to combine as equals to form a new company. An example is the 2014 merger of AT&T and DirectTV, the country’s second-largest wireless and pay-TV companies. An acquisition, by contrast, is when a larger company buys a smaller company, which is then swallowed up and loses its identity within the larger one. Nothing is inherently anti-competitive about mergers and acquisitions, and they are in fact a normal part of business transactions. But when these mechanisms are used repeatedly within a given market and produce monopolies and oligopolies, they may create a potentially anticompetitive situation.

Price Fixing, Bid Rigging, and Price Gouging

Whereas monopolies and oligopolies are only potentially anticompetitive, other business practices are anticompetitive by their nature and are both unethical and illegal. One such practice is price Nixing, where business competitors conspire to set their prices at a dixed point. In usual cases, the businesses set their product prices high; without cheaper alternatives available, consumers are forced to buy at the high price. Price dixing often occurs in markets that are dominated by oligopolies, where the small number of competitors makes it easier to enter into price-dixing agreements. A recent example of a price-dixing conspiracy occurred among around a dozen manufacturers of LCD screens for computers and televisions (Boyette, 2012). From 1999 to 2006, it is alleged that senior-level executives from these companies—which included Samsung, Sharp, Toshiba, LG, and Hitachi—secretly met, exchanged information, and agreed on the prices at which each company would sell its products. In all, the companies sold around $70 billion in price-dixed panels worldwide, which were then purchased by many of the top-name electronics companies and used as components in their computers and televisions. The artidicially indlated prices of these products were then passed on to consumers. In a class action lawsuit, the LCD manufacturers agreed in 2012 to a $1.1 billion dinancial settlement with the electronics companies, the largest settlement of its kind in U.S. history.

A variation on price dixing is bid rigging, where competing businesses agree that one of them will place a bid on a contract at a predetermined price. Often this is done in rotation, where the conspiring businesses take turns offering the lowest bid, thereby ensuring that they each win bids. A notable case involved several dozen electrical equipment companies, including General Electric and Westinghouse, which engaged in a bid-rigging conspiracy during the 1950s for products such as power transformers and generators (Hartley, 1993). Every four weeks, the companies would rotate who would place the lowest bid, ensuring that each would have a turn. What gave them away was that many of the high bids were identical to each other, which would not likely occur by accident. In one case, 12 of the bids quoted the same delivery price, despite the fact that driving distances from the respective factories varied greatly. In total, 29 companies were found guilty in this “Great Conspiracy,” as it was called, and 30 executives received jail sentences. In addition to criminal dines, customers brought over 2,000 lawsuits against the companies, resulting in hundreds of millions of dollars in damages.

A recent example of bid rigging is a conspiracy among 11 real estate investors who purchased property at foreclosure auctions in California (U.S. Department of Justice, 2014). The investors negotiated payoffs to each other for agreeing not to compete, so that the properties would sell at a lower price than they would otherwise. As of 2014, 47 participants pleaded guilty to criminal charges brought against them by the Department of Justice; they face a possibility of 10 years in prison and a $1 million dine for each act.

A dinal type of unfair competitive practice is price gouging, which occurs when a business sells a product for a price that is much higher than is considered reasonable or fair or sustainable in a truly competitive environment. Price gouging often occurs when there are too few competitors in a given market, which would otherwise drive prices down. The pharmaceutical industry is notorious for this, and two factors make it particularly so:

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Drug patents grant a temporary monopoly. When a company produces a new drug, it is granted a legal monopoly on the sale and manufacture of it for approximately 10 years. In many cases—with breakthrough drugs—there is no competition whatsoever. The purpose of drug patents is to encourage innovation by dinancially rewarding companies that invest in the research and development of new drugs. But the patent itself creates a temporary monopoly until the formula is released into the public domain, when competitors can make generic versions of it. Demand for a product does not change according to the price. With normal products, price and demand are directly connected. If I charge $100 for a can of cola, the demand for my product will be very low. But if I charge 5 cents per can, demand will be high. Economists call this relation elasticity. But with pharmaceuticals, the relation between price and demand is inelastic: If I need a drug to stay alive, price is no consideration. Whether it costs 5 cents a pill or $100 a pill, I will pay for it if I can.

Jeff Chiu/ASSOCIATED IMAGES

Recently, the transportation company Uber has been criticized for price gouging by charging customers higher rates during peak hours.

Here is one classic example of price gouging in the pharmaceutical industry. When the AIDS epidemic emerged in the mid-1980s, the dirst available treatment was the antiretroviral drug AZT, which came with an initial price tag of $7,000 a year. After intense pressure by HIV-advocacy groups, that price was eventually lowered to $3,000. The manufacturer justidied the original cost on a couple grounds. First, it was initially approved for a comparatively small market of 50,000 patients who were seriously ill with AIDS—although it was later approved for anyone who tested HIV positive. Second, since AZT was not a cure and would only delay death by about 1 year, the market was literally short lived (Hartley, 1993).

Price gouging does not just exist within the pharmaceutical industry, of course. Recently, the transportation company Uber has been heavily criticized for its “surge pricing” strategies that can sometimes charge customers up to seven times a normal fare during peak hours of demand. Customers complain that the company takes advantage of

users when they need the service the most, such as during holidays and bad weather. In fact, the company was even accused of jacking up prices during a recent hostage crisis in Australia, charging customers a premium to leave the dinancial district where the crisis was taking place. Uber’s response to one customer’s complaint was that, during peak demand times, “without Surge Pricing, there would be no car available at all” (Lowrey, 2014).

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2.6 Regulating the Free Market

To preserve a truly competitive state within the free market, the government must sometimes step in to prevent anticompetitive practices and unfairness. The free market is not so much a natural state of affairs for business transactions but is instead more like a game where participants agree to follow established rules and the government stands by like an umpire to assure that the process runs smoothly. To that extent, a pure capitalist system does not seem possible; any functioning free market will involve government intervention of at least some sort.

Reasons for Government Regulation

In the face of the many problems inherent in capitalist economic systems, the solution of choice is government regulation—that is, rules and policies are imposed by the government on various aspects of commerce within a country. The underlying justidication is that responsibility in the business world comes about only through legislating it. Here is a simple example: Some dinancial investments, such as stocks, are regulated by the U.S. Securities and Exchange Commission (SEC), whereas other investments, such as collectible stamps, are not. A respected stamp dealer was recently called out for making exaggerated claims about his stamp investment plan. One dinancial analyst explained:

Reading the marketing material made me shiver. It highlights how careful investors have to be when buying unregulated products—like stamps and other collectables [sic]. If I tried to sell investments like this to my customers I’d be shut down by the regulator . . . [The stamp dealer] uses every trick in the book to make people part with their money. There is no attempt to explain the risks involved, or detail potential downsides, like early exit charges. (Ian Lowes, quoted in Simon, 2011)

In this quotation, the dinancial analyst indicates how important investment regulation is for the protection of consumers. Investment markets without such regulation create opportunities for investment businesses to act irresponsibly and unethically.

There are three fundamental justidications for governmental regulation within capitalist economic systems:

1. First, regulation aims to protect consumers, workers, minorities, the environment, and any other interest or group of people that could be exploited in a competitive marketplace. The example of stamp investments shows how great the temptation is for dinancial-investment businesses to misrepresent their products, and, thus, how great the need for rules of transparency and for enforcement of those rules.

2. A second justidication is to assure that business markets remain competitive by guarding against monopolies and prohibiting anticompetitive practices such as price dixing.

3. There is a third and more controversial justidication of government regulation, which is to help redistribute the wealth of society. As the gap between the rich and poor grows, society risks becoming stratidied into two classes. At least some efforts at governmental regulations attempt to address this. Minimum wage is a case in point, and the need for government involvement here is demonstrated every few years when Congress debates minimum-wage increases. In 1938, the year of its inception in the United States, the Federal minimum wage was set at 25 cents per hour, and it has been increased around 30 times since then. The longest period without an increase was 10 years, between 1997 and 2007, and during that time the prices of consumer goods rose considerably through indlation. Each time the issue was before Congress—and 2007 was no exception—business groups lobbied against an increase for the simple reason that increasing wages harms the bottom line. Like the minimum-wage regulation, government regulations that require health-care insurance for workers, worker’s compensation, and Social Security all aim at preventing an impoverished underclass.

Mechanisms for Government Regulation

There are two approaches to government regulation, one direct and the other indirect. Direct governmental regulation occurs when specidic regulatory policies are established by an actual branch or agency of the government, such as Congress or the SEC. The indirect variety involves government-mandated self-regulation: In lieu of direct government involvement, the government mandates that a private self-regulatory organization set policies in a given market and the government then defers to that organization. For example, within the dinancial market, the Financial Industry Regulatory

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Authority is the private self-regulatory organization that operates in concert with the SEC to assure that the securities industry operates fairly and honestly. Although it is not itself a government agency, it nevertheless operates under the oversight of the SEC.

Antitrust Acts

Two laws are particularly important for setting the parameters of the free market in the United States. One is the Sherman Antitrust Act of 1890, the dirst Federal law to outlaw price dixing and restrict monopolies. In the language of the statute, “Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony” (Sherman Antitrust Act of 1890, Section 2). The aim of the law is to punish not businesses that become monopolies through fair competition, but only those that do so through anticompetitive misconduct. Monopolies themselves are not illegal, but the abuse of a dominant position is.

The second law is the Clayton Antitrust Act of 1914, which restricts specidic types of business practices that might potentially lead to anticompetitiveness, such as mergers and acquisitions that aim to create monopolistic power. Both of these laws laid the groundwork for antitrust policies in the United States that continue to the present day.

An example of the application of these two antitrust laws is the 2013 merger between American Airlines and U.S. Airways into what would be the largest airline company in the United States. The U.S. Department of Justice and the Attorneys General of several states sued to block the merger on the grounds that it would reduce competition and increase prices. A settlement was reached allowing the companies to merge under the condition that they sell off 138 takeoff and landing slots in various airports, thus allowing more competition.

The Federal Trade Commission (FTC)

The government agency that is directly responsible for combating anticompetitive business practices is the Federal Trade Commission (FTC), founded in 1914. The initial purpose of the FTC was to prevent unfair methods of competition in commerce that led to monopolies and oligopolies—which at the time were called trusts. Since that time, Congress has given the agency greater authority to police anticompetitive practices. To this end, the FTC performs three central tasks:

reviewing mergers and acquisitions and challenging those that would likely lead to higher prices, fewer choices, or less innovation; seeking out and challenging anticompetitive conduct in the marketplace, including monopolization and agreements between competitors; and

promoting competition in industries where consumer impact is high, such as health care, real estate, oil and gas, technology, and consumer goods (U.S. Federal Trade Commission, n.d.).

Regarding the dirst point, the FTC does not scrutinize all mergers but only those that risk undermining market competition. The FTC has the authority to bring civil cases against offending businesses, and when the situation is bad enough, they work with the Department of Justice to bring criminal charges against offending businesses.

What Would You Do?

You are the chair of the Federal Trade Commission, and you are reviewing a possible merger between Subway and McDonalds, the two largest fast-food restaurant chains in the United States. At issue is whether the merger would create an anticompetitive environment in that industry.

1. Would you block the merger? Why or why not?

2. Suppose these two companies were also seeking to merge with Starbucks, Pizza Hut, and Burger King, the

next three largest fast-food restaurant chains. Would you block that merger? Why or why not?

3. Suppose the 25 largest fast-food chains wanted to merge. Would you block that? Why or why not?

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2.7 Government Intrusions Into Capitalism

Anti-competitive practices such as monopolies and price dixing are threats to capitalism that businesses themselves create, and governmental regulation is an important tool for preventing these problems from getting out of hand. However, governments themselves pose their own intrusions into capitalism. Socialism, in its extreme forms, aims specidically at eliminating market competition and instead centralizing the country’s economy. But even capitalist-friendly governments such as the United States’ can go beyond mere regulation by setting policies that strike at the heart of the capitalist economic system. We will look at two of these: government bailouts and crony capitalism.

Government Bailouts

In 2008, the United States experienced a dinancial crisis that triggered a recession that, according to many economists, was the worst since the Great Depression in the 1930s. The immediate cause was the burst of the real estate housing bubble: home prices had been artidicially indlated through reckless accounting practices, then prices quickly declined as owners defaulted on their mortgages. When banks and other mortgage holders could not sustain the losses, they verged on collapse, which caused a negative ripple effect across the whole economy. In an effort to save the economy from complete ruin, the U.S. government came to the assistance of nearly 1,000 companies in what is commonly called a bailout—a government practice of giving dinancial support to a company that has serious dinancial problems. In this case, the dinancial support totaled $659.1 billion. The breakdown of the bailout money received by these companies is shown in Figure 2.3.

Figure 2.3: U.S. government bailout money

Percentage of bailout money given by the U.S. government as of January 2015.

Source: Based on Kiel, P., and Nguyen, D. (2015). The state of the bailout. Pro Publica.

The majority of the payouts were investment loans that the receiving companies needed to give back, while the minority were subsidies that they could keep. However, note that since 2008, the government has actually received a net prodit of $53.1 billion from the bailout through money returned, dividends, interest, and other proceeds. Thus, with this particular

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bailout, the issue is not so much one of taxpayers giving free money to irresponsible businesses. Rather, it is a question of whether the government had any right to rescue companies that failed because of their own ineptitude or negligence. Competition is at the core of capitalism, and these are companies that competed improperly, created fatal consequences for themselves, and, some would argue, deserved to be replaced by other companies that did not make those kinds of mistakes.

By bailing out these companies, did the U.S. government abandon its commitment to a free market economy and capitalism? Here are two possible justidications for the government’s involvement:

1. First, we might concede that the government temporarily set aside its commitment to capitalism and adopted a more socialistic solution. The entire economy was at risk, it needed saving, and, as happened during the Great Depression, adopting some aspects of socialism was necessary for recovery. If the diehard capitalists are unhappy with that, some would argue, they only have themselves to blame for not proactively addressing the problem in a capitalist-friendly way.

2. A second justidication for the government’s role is that it used a capitalist-like solution to cure the problem. It did not nationalize those failing companies and, in most cases, did not give them free money. Rather, it temporarily played the role of a capitalist investment company, and did so of necessity since more loan money was needed than private investment companies could afford to dinance. In good capitalist fashion, it made the loans with the same oversight requirements that banks would impose, and made a prodit on its investment. And, when all the loans are all paid in full, the government’s dinancial role in the crisis will be over.

This second justidication is at least as plausible as the dirst, but the fact remains that, by seriously intervening in the survival of these companies, the government rededined its “hands off” commitment to capitalism.

Crony Capitalism

Do you like auto racing? If so, there is good news: Congress likes it, too, and recently gave $78 million in tax write-offs to NASCAR. According to one racetrack executive, “This allows us to compete with football, baseball and basketball, whose facilities are often dinanced with state and local tax money” (Pear & Pilon, 2013). In fact, recent legislation gave a total of $67.9 billion dollars in tax breaks to not just NASCAR but to a variety of industries, including rum manufacturers, asparagus growers, and Hollywood producers.

In all fairness, many of these breaks have reasonable justidications, such as tax credits for construction of renewable energy projects such as wind turbines. The larger problem here, however, is that of crony capitalism, sometimes called corporate welfare, where businesses receive special economic benedits from the government such as tax breaks, grants, economic development subsidies, or contracts. On face value, crony capitalism is contrary to genuine capitalism, where businesses earn income by competing with each other in the marketplace; special gifts from the government give some companies or entire business sectors an unfair advantage. Added to this, there is the problem that the companies that receive the benedits are often the most politically well connected and have a stronger lobby than their rivals. The government thus plays favorites, which is inherently unfair. Yet another concern is that the bulk of the subsidies is going to the largest corporations. A study by Subsidy Tracker titled “Subsidizing the Corporate One Percent” (Mattera, 2014) shows that over the past 40 years, 75% of subsidy dollars have gone to only 965 large corporations, the highest paid recipients being Boeing, Alcoa, Intel, General Motors, and Ford Motor Company.

Again, some special government subsidies may have perfectly reasonable justidications. It may be cheaper for the government to issue a subsidy to a business than deal with the dinancial costs of unemployment if the business goes under. Some subsidies may also help businesses deal with expensive government regulations. For example, government- created environmental regulations are sometimes dinancially crippling for specidic industries, and government subsidies can be an efdicient way of compensating businesses for that dinancial burden. Nevertheless, the tax breaks and subsidies of crony capitalism, like government bailouts, subtly rededine the boundaries of free market capitalism and, at minimum, require a compelling justidication.

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Conclusion

Winston Churchill famously said, “Democracy is the worst form of government, except for all the others.” This may apply equally to capitalism: Capitalism is the worst economic system, except for all the others. Undoubtedly, capitalism has advanced society in remarkable ways, and the long history of capitalism in the United States has made for the world’s strongest national economy. But these successes do not mean that capitalism is without serious problems. We have seen that an unregulated marketplace will lead to anticompetitive practices that can destroy all that is good about capitalism. With the prodit motive as strong as it is, it is unrealistic to think that businesses will regulate themselves out of a sense of duty to society at large. For lack of any better regulatory mechanism, the government must assume that responsibility.

This often places businesses and the government in an adversarial relationship, where businesses lobby against virtually every proposed regulation and, what is more, for the repeal of important regulations that are in place. If businesses achieved everything they wanted with their antiregulatory lobbying efforts, unfair and anticompetitive business practices could reach epidemic proportions. Although the regulatory relationship between business and government is imperfect, it is an important safeguard for capitalism’s health. In our opening example, we saw that Bolivia’s experiment with privatizing water led to massive protests. Marx warned that it could get much worse: Workers might launch a full-scale revolution in reaction to being systematically exploited by capitalist business owners. This worst-case scenario has played out in dozens of countries within the last century, and the stakes are too high to risk that happening in the United States and other welfare capitalist countries. This may well be a situation in which doing the ethical thing in business requires the acceptance of government involvement.

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Summary & Resources

Chapter Summary

We began this chapter looking at three key features of capitalism and socialism, respectively. For capitalism they are (1) that personal self-interest, not community interest, motivates economic development; (2) that the major sources of society’s economic production should be privately owned, not governmentally owned; and (3) that economic planning should be decentralized through market competition, not centralized through government policy.

By contrast, the three main features of socialism are (1) that community interest, not personal self-interest, should motivate economic development; (2) that the major sources of society’s economic production should be governmentally owned, not privately owned; and (3) that economic planning should be centralized through government policy, not decentralized through market competition.

The most famous advocate of capitalism is Adam Smith, who argued for three main points: (1) Self-interest drives the economy. To get what I need to survive, I cannot rely on your kindness but must dind some way for you to personally benedit before you will consider assisting me; (2) By pursuing our self-interest, we indirectly promote the good of society as if directed by an invisible hand; (3) The presence of government is sometimes necessary for society’s economic development, but its role should be limited. Among the government’s main responsibilities are national defense, the judicial system, and public works that benedit society but are too unproditable for private industries to take on themselves, such as roads, public education, science, and the arts.

The leading critic of capitalism and defender of socialism is Karl Marx, who held three principal positions: (1) Capitalist systems put workers in a position where they become separated from their true inner nature when forced to give their labor away to a factory owner; (2) History involves a succession of class struggles between those who do the work and those who own the business or industry; (3) The current class struggle between wealthy business owners and exploited workers will end in a revolution that will ultimately put an end to all private property, social classes, and government itself.

The leading criticism of capitalism is that it creates a bias toward private interests rather than public ones. Socialism, by contrast, is faulted for underestimating the importance of personal self-interest, private property, and free-market economic planning. Moderate versions of both capitalism and socialism attempt to strike a middle ground and thereby avoid the problems associated with the more extreme versions of each. Within free-market economies, some business practices are potentially hazardous to capitalism and must be monitored—namely, monopolies, oligopolies, mergers, and acquisitions. Other anticompetitive business practices are so damaging to capitalism that they are illegal; examples include price dixing, bid rigging, and price gouging.

To keep markets competitive, the government can help control business activity by either directly regulating it through laws and policies or requiring that a private self-regulatory organization establish policies within a given market. The government itself, however, may engage in practices that chip away at capitalism, such as government bailouts and crony capitalism.

Discussion Questions

1. Adam Smith argued that self-interest is a critical element in a society’s economic development. Karl Marx, by contrast, argued that society functions better when each of us is more community oriented. Explain each of their views on this issue, and discuss when self-interest in businesses goes too far and becomes a hazard to society.

2. Adam Smith is known for his view of the “invisible hand,” the idea that by pursuing our self-interest, we indirectly promote the good of society. Smith himself provided two examples of this but said that the invisible hand is also evident in “many other cases.” Explain Smith’s two examples, and speculate about other situations in which the concept of the invisible hand may be valid.

3. Smith held that, even within a capitalist economic system, the government plays a critical role in supporting or running important public projects that are too unproditable to be taken on by private industry. Among these are roads, public education, science, and the arts. In the United States, the government indeed funds these projects,

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and many more. What are some of these other projects, and would they, or the projects that Smith himself

mentioned, be best left to private industry?

4. Marx argued that, in capitalist economic systems, workers become alienated from their labor in the sense that

they are forced to give their labor away to the factory owner, with no personal stake in the products they make and no meaningful connection to the community. What are ways in which business owners today try to reduce this sense of alienated labor among their employees? Do those methods work?

5. Marx was convinced that worker exploitation would inevitably lead to revolution: It happened in the past with slave and peasant revolts, and it is just a question of time before it happens with workers in capitalist societies. Even in the United States, there are regular protests against unequal wealth distribution; the recent Occupy movement is just one example. How bad would it have to get in the United States before peaceful protests would turn into full-scale revolution?

6. Monopolies and oligopolies are potentially harmful to free-market capitalism, and for that reason the government sometimes breaks companies up or regulates them in some signidicant way. Think of an example of a monopoly or oligopoly—such as Microsoft, Monsanto, or Coca-Cola and PepsiCo—and discuss the benedits and harms of their dominance over their specidic market.

Key Terms

acquisition

When a larger company buys a smaller company, which is then swallowed up and loses its identity within the larger one.

alienated labor

Labor that a worker is forced to give to a factory owner in a way that does not allow the worker to participate in the total creation of the object.

bailout

A government practice of giving dinancial support to a company that has serious dinancial problems.

bid rigging

When competing businesses agree that one of them will place a bid on a contract at a predetermined price.

bourgeoisie

Karl Marx’s term for business people who owned the means of production within society and oppressed their workers.

capitalism

The economic theory that maintains that (1) personal self-interest, not community interest, motivates economic development, (2) the major sources of society’s economic production should be privately owned, not governmentally owned, and (3) economic planning should be decentralized through market competition, not centralized through government policy.

class struggle

The socialist view that through- out history, societies have evolved through condlicts between the social classes of those who do the work and those who are in charge and benedit from that work.

Clayton Antitrust Act of 1914

U.S. Federal law that restricts specidic types of business practices that might potentially lead to anticompetitiveness, such as mergers and acquisitions that aim to create monopolistic power.

communism

A radical form of socialism that aims to abolish all social classes, private property, and government.

crony capitalism

A government practice by which businesses receive special economic benedits from a government such as tax breaks, grants, economic development subsidies, or contracts.

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direct governmental regulation

When specidic regulatory policies are established by an actual branch or agency of the government, such as Congress or the SEC.

Federal Trade Commission (FTC)

U.S. Federal agency established in 1914 to prevent businesses “from using unfair methods of competition in commerce” and to “protect consumers against unfair, deceptive, or fraudulent practices.”

free market economics

The view that businesses should be governed by the laws of supply and demand, not restrained by government interference.

free trade

The concept that trade across national boundaries should take place without interference from the respective governments.

government-mandated self-regulation

When, in lieu of direct government involvement, the government mandates that a private self-regulatory organization set policies in a given market and defers to that organization.

government regulation

Rules and policies imposed by the government on various aspects of commerce within a country.

greed is good

The view that, in the business world, the human drive of self-interest directs our energy and creativity.

invisible hand

The view proposed by Adam Smith that, by pursuing our self-interest, we indirectly promote the good of society as if directed by an invisible hand.

laissez faire

French term; literally “leave it alone,” expressing the free market idea that governments should stay out of the marketplace.

market socialism

Socialist economic systems where governments own and control major economic enterprises yet incorporate some capitalist policies, such as relying on supply and demand in the market to set prices.

merger

When two companies of roughly the same size agree to combine as equals to form a new company.

monopoly

Control by a single company of all or nearly all of the market for a given type of product or service.

oligopoly

Market domination by a small number of businesses that collectively exert control over that market’s supply and prices.

price Nixing

When business competitors conspire to set their prices at a dixed point.

price gouging

When a business sells a product for a price that is much higher than is considered reasonable or fair or sustainable in a truly competitive environment.

proNit motive

The view that the ultimate purpose of a commercial enterprise is to earn a prodit.

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Securities and Exchange Commission (SEC)

The Securities and Exchange Commission was set up in 1934 to oversee and regulate the securities and exchange indus- try in the aftermath of the Great Wall Street Crash of 1929.

Sherman Antitrust Act of 1890

First U.S. Federal law to outlaw price dixing and restrict monopolies.

socialism

The economic theory that (1) community interest, not personal self-interest, should motivate economic development, (2) the major sources of society’s economic production should be governmentally owned, not privately owned, and (3) economic planning should be centralized through government policy, not decentralized through market competition.

survival of the Nittest

The evolutionary notion that species with the best adaptations will win out over rival species that are less well adapted.

Ten Planks of Communism

Karl Marx’s set of 10 policies to transition into socialism.

welfare capitalism

Social programs in market economies that the government runs, such as national health care and government-run child care.

Business Ethics Case Study 2.1: Is Eminent Domain Anti-Capitalist?

Charles Birnbaum owns a three-story brick building one block from the ocean in Atlantic City, New Jersey. The building has been in his family for 45 years. However, it might not be for much longer: New Jersey’s Casino Reinvestment Development Authority wants the property condemned and claimed through eminent domain—a legal mechanism by which governments can take possession of private property for public use. The plan is for a mixed-use development project to reinvigorate tourism and the state’s slumping casino industry, but there are currently no precise designs for how Birnbaum’s property will be used in that development.

Property taken through eminent domain typically is used to build highways, schools, public parks, railroads, or other necessary utilities. Governments may either retain the acquired land themselves or may assign it to a private company, but in either case the acquisition of the land must be for public use as stipulated by the Fifth Amendment to the Constitution: “nor shall private property be taken for public use, without just compensation.” In Birnbaum’s case, his property would be used for economic development, and most likely assigned by the state to a private developer.

There is nothing inherently anti-capitalistic about eminent domain. It simply involves a condlict between two competing interests—private ownership vs. public interest—and these are situations where public interest wins out. Private property is an important value in society, but it is not the only value, and it is unreasonable for capitalists to expect that property interests will trump every other social value in all situations. In fact, companies themselves use eminent domain as a means of forcibly acquiring land from other private owners. For example, the energy company TransCanada relied on eminent domain agreements with several U.S. states to acquire land for constructing the Keystone oil pipeline from Canada to the U.S. Gulf of Mexico.

The anti-capitalist controversy surrounding eminent domain focuses on situations in which (1) land is acquired for purposes of economic development, (2) it is assigned to a private company, and (3) the public use of the acquired land is debatable. The anti-capitalist situation is worsened if the city hopes to benedit from the economic development through increased taxes. In essence, the city is forcing people off their private land so that private developers can build new and more expensive structures, which will in turn bring in more tax revenue for the city.

This set of circumstances is sometimes called Kelo-style eminent domain abuse, named after the landmark

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Supreme Court case Kelo v. City of New London (2005). In this court case, the city of New London, Connecticut, used eminent domain to condemn and level several blocks of houses for a comprehensive redevelopment plan that included a waterfront conference hotel, a U.S. Coast Guard Museum, a pedestrian river-walk, restaurants, retail stores, and 80 new residences. The hub of the rejuvenation was a proposed $300 million research facility, which the planners hoped would draw new business to the area and also create more tax revenue for the city. Susette Kelo and eight other homeowners opposed the acquisition of their property on the grounds that the economic development plan did not constitute “public use.” The case went to the Supreme Court, which ultimately ruled against the homeowners and held that the economic redevelopment plan did qualify as public use. The Court reasoned that the concept of “public use” has a history of being interpreted more broadly as “public purpose,” and New London’s economic development plan “unquestionably serves a public purpose.”

The Supreme Court’s decision immediately sparked controversy. Forty-four states subsequently changed their laws to either prohibit or at least narrow the situations in which eminent domain can be used for economic development. As for the City of New London, the developer eventually abandoned the project after failed efforts to gain dinancing, Pdizer closed its New London facility, and the development area is now an empty lot.

Charles Birnbaum, in Atlantic City, took his case to court but lost. The judge stated that the New Jersey government provided “more than adequate assurances that the property will be used for the public purpose of promoting tourism and assisting the ailing gaming industry.”

But eminent domain is so unpopular that cases of it result in public outcry, and the more Kelo-style it is, the more media attention it receives. Sometimes opposition is so great that the government in question backs down, even if courts rule in their favor. That is what happened with artist James Dupree when the city of Philadelphia attempted to acquire his art studio through eminent domain. It was in a high-poverty area with no nearby grocery stores, and the city sought to have one built on the site of Dupree’s studio. Support for Dupree grew among several organizations, including the Institute for Justice and the American Civil Liberties Union, and the city eventually gave up.

Discussion Questions

1. In the four cases described above (Birnbaum, TransCanada, Kelo, and Dupree), compare the new uses that governments proposed for the acquired land and discuss whether any of these uses justify obtaining those properties through eminent domain.

2. In the Kelo decision, a critical issue involved the links between “public use,” “public purpose,” and “economic development.” Discuss the connection between those three concepts and whether the links are strong enough to justify eminent domain for economic development.

3. List dive uses of eminent domain that you think are justidiable, and dive that are not. Then discuss the main characteristics of each list that separate them from each other.

4. Are eminent domain cases like Kelo’s a serious threat to capitalism, as many critics would have us believe, or are such critics overreacting? Explain.

Sources: O’Neill (2014), Kelo v. City of New London (2005), CRDA v. Birnbaum ORDER (2014), Sibilla (2014).

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3 Corporations

Learning Objectives

After reading this chapter, you should be able to:

Explain the nature and main features of corporations. Discuss the principal ways of punishing corporations. Assess the merits of various efforts to create an ethical corporate culture. Discuss the main threats to ethical corporate culture and how to combat them.

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Introduction

When you think of the word “corporation,” you most likely think of a concept that is relatively young. But corporations have actually existed for around 2,000 years. By medieval times, corporations had already been used for establishing churches, universities, and monasteries. They were also used for creating trade guilds, which were associations of craftspeople, somewhat like modern-day trade unions.

By the 15th century, corporations had become an important tool for funding colonial ventures as well. Establishing colonies in distant lands was a vastly expensive undertaking, but through the mechanism of incorporation, the investment costs could be covered by a number of people, not just a single investor. Thus, in 1606, the King of England granted a corporate charter to the Virginia Company to establish settlements along the Atlantic coast in North America, and investors held stock in that company. Unfortunately, its dirst settlement, Jamestown, was a disaster, with all but 61 of its dirst 500 settlers dying from disease and starvation. Thus, after 18 years of struggle, the king revoked the Virginia Company’s corporate charter and took governmental control of its colonies.

Many early colonial corporate ventures like the Virginia Company were afdiliated with governments and were intended to establish territorial monopolies for imports and exports. But with the movement toward free-market economics in the late 18th century, newer corporations became less afdiliated with guilds and governments and more with private businesses. This is the model of the corporation that we have today.

Whether large or small, conducting business today typically means running a corporation—so much so that the terms business and corporation are almost synonymous. In this chapter, we will look at the dedining characteristics of a corporation, methods of punishing those that break the law, the ethical character of corporate culture, and threats to ethical corporate culture.

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3.1 The Nature of Corporations

The dirst issue to consider is the nature of the corporation itself. In this section, we discuss corporate structure, the four main features that dedine a corporation, shell corporations, and whether corporations can have moral responsibility in the way that people do.

Corporate Structure

Although the focus of this chapter is on corporations, a corporation is just one of dive business structures recognized by the U.S. Internal Revenue Service, as shown in Table 3.1. Corporations are dedined as legally recognized independent entities owned by shareholders. What separates corporations from other forms of business is that in corporations, the corporation itself, not its shareholders, holds legal liability for the company. This means that should the corporation go bankrupt or be sued, for example, the individual shareholders are not responsible for the corporation’s losses beyond the extent of their own personal investment. Note that many of the issues we discuss in this chapter apply not just to corporations but to other forms of business as well.

Table 3.1: Business structures recognized by the U.S. Internal Revenue Service

The basic structure of a corporation consists of three main levels of authority:

1. Shareholders (stockholders) own the corporation by obtaining shares of stock in it.

2. The shareholders, in turn, elect a board of directors to manage the corporation.

3. The board then designates ofNicers to operate the business, with the chief executive ofdicer (CEO) at the top and

various levels of managers beneath.

The board and ofdicers of a corporation have a Niduciary duty to the shareholders: They are under a legal obligation to manage the company in a way that protects the shareholders’ investment. Thus, the shareholders’ drive to make a prodit on an investment transfers down through the whole corporate hierarchy. In his book The Corporation, legal scholar Joel Bakan argued that corporations are so driven by self-interest and dinancial greed that they dit the personality prodile of a psychopathic individual. He wrote:

The corporation’s legally dedined mandate is to pursue, relentlessly and without exception, its own self-interest, regardless of the often harmful consequences it might cause to others. As a result, . . . the corporation is a pathological institution, a dangerous possessor of the great power it wields over people and societies. (Bakan, 2005, p. 1)

Undoubtedly, some corporations are as pathologically dangerous as Bakan maintained; the Enron Corporation is a poster child for that. Enron was a major energy company with natural gas pipelines stretching across the country, and ultimately became the largest energy trader in the world. At its peak it was seventh on the list of Fortune 500 companies, and for 6 years running, it was hailed as America’s most innovative company by Fortune magazine. However, under the leadership of CEO Kenneth L. Lay, the company borrowed too much money for its projects and fraudulently hid billions of dollars of

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debt from its investors, all the while fooling everyone into thinking that it was a robust business. In California, it secretly restricted the supply of natural gas, which created blackouts and caused an 800% increase in natural gas prices. When Enron executives became aware that the company was about to collapse, they sold their personal shares of company stock while encouraging investors to buy more. News of Enron’s problems soon became public, its stock prices fell to a fraction of their original value, and its subsequent bankruptcy became the largest up to that point in U.S. history. But although Enron may have brought corporate corruption to a new level, it is not clear that the nature of the corporation itself forces companies to systematically engage in unethical behavior.

Four Features of Corporations

There are four main features of a corporation:

1. creation by statute,

2. perpetual existence,

3. recognition as legal persons, and

4. limited liability.

All of these features have important implications. Let us look at each one in more detail.

Creation by Statute

The dirst feature of a corporation is its creation by statute. Corporations come into existence through the creation of a legal document called a charter, which in the United States is granted by an individual state. The person seeking the corporation draws up a charter and submits it to a state commission for approval.

The fact that corporations come into existence through government action suggests that their very character and range of freedoms are shaped by what the government thinks is best, and that has changed over time. An early landmark U.S. Supreme Court case, Dartmouth College v. Woodward (1819), was responsible for giving greater independence to corporations outside of government control. The issue in that case had to do with Dartmouth College’s right to appoint its own presidents and trustees, independent of indluence by the state of New Hampshire. Dartmouth was granted a corporate charter prior to the American Revolution, when New Hampshire was a British colony. After U.S. independence, the New Hampshire legislature attempted to take administrative control of the college and appoint its president and trustees. The college challenged the state, and the Supreme Court sided with Dartmouth, allowing it to continue as a private institution.

Perpetual Existence

Visions of America/Superstock

The U.S. Supreme Court case, Dartmouth College v. Woodward (1819), gave corporations greater independence from government control.

Second, corporations have perpetual existence, which means that, unlike mortal human beings, they can continue indedinitely and thus independently of the temporary lives of their managers and shareholders. Some corporations may be created to exist for only a limited period of time, but most are granted perpetual existence. The oldest currently existing corporation is the Stora Kopparberg Mining Company in Sweden, which obtained its charter in 1347.

In Dartmouth College v. Woodward, the Supreme Court argued that the fundamental justidication for creating a corporation is perpetual existence—a kind of legal immortality—which prevents the “intricacies, the hazardous and endless necessity of perpetual conveyances for the purpose of transmitting it from hand to hand” (1819). The point is that a corporation has a life independent of the people who formed it, and can continue to exist perpetually even as the various members of the corporation come and go. Note that although their existence is perpetual, corporations may be dissolved at the direction of the state, a court, or the shareholders themselves.

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Recognition as Legal Persons

Third, corporations are legal persons in the sense that they are nonhuman entities regarded by law as having the status of a person. They have what is called legal standing, which means that they can sue others and be sued by others, own property, and make contracts with others. It is legal personhood that also makes corporations legally accountable for wrongdoing, and thus capable of being punished for crimes. Without legal personhood, corporations could not be legally punished for wrongdoing any more than an unruly mob could be punished as a collective entity, beyond the actions of the individuals within that mob. Thus, corporations can be criminally convicted of fraud, manslaughter, and even human rights violations.

In the words of one Supreme Court justice, the corporation is “capable of being treated as a citizen of [the state which created it] as much as a natural person” (Louisville, Cincinnati & Charleston R. Co. v. Letson, 1844). Determining exactly how corporations can lay claim to their rights as persons and citizens is an ongoing challenge. A controversial Supreme Court case, Citizens United v. Federal Election Commission (2009), established that corporations’ rights to free speech entitled them to spend unlimited amounts of money in campaign contributions. In essence, it said that for corporations, money is speech.

The question this raises is whether there is an essential difference between corporate persons and natural persons that prevents them from having exactly the same rights in a meaningful way. Corporations cannot marry, vote, or hold public ofdice in the way that natural persons can. And for critics of the court’s decision, money simply is not the same thing as speech, especially considering the vast wealth of corporations and the corrupting indluence that money has in political campaigns. The harshest critics argue further that the very idea of corporate personhood is a horrible mistake, and corporations simply are not people.

Limited Liability

The fourth attribute of corporations is limited liability, which, as we discussed earlier, means that a stockholder cannot lose more than the amount that he or she invested. In normal circumstances, the corporation as a legal entity, not the shareholders themselves, is liable for payment of debts. In the event that the corporation fails, the shareholders can lose their investments, but they are not responsible for paying any remaining debts that the corporation owes to its creditors. The purpose of limited liability is that it encourages investment: People are more likely to invest in something when they know that their risk is limited.

In unusual circumstances, however, shareholders may become liable for corporate debts if the corporation is used to commit fraud on people that it deals with, such as creditors. This may also occur if the shareholder runs the business as though the corporation did not exist, for example, by not holding meetings or not keeping corporate records. In these cases, to use a legal expression, the “corporate veil” is pierced, and the owners behind that veil are exposed.

Shell Corporations

One particularly odd issue surrounding the incorporation process involves what are called shell corporations—that is, corporations that exist on paper but have no active business operations or signidicant assets. Often these are used for legitimate purposes. For example, sometimes one company might set up a series of shell corporations and then sell them off the shelf to someone else as a way of simplifying the process of creating a corporation. The new owner can then change the corporate name and ofdicers at any time.

Gerald Herbert/Associated Press

Stockholders in companies like BP, which was involved in the recent Gulf oil spill, are not liable for payment of debts of the corporations they invest in.

However, shell companies can be abused. Enron made heavy use of shell companies: By transferring its accumulating debt to them, the company was able to hide its dinancial failures from investors and the public, thus creating the illusion that it was a healthy and vibrant company. More often, though, shell companies are created for purposes of tax avoidance. For

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example, a company based in California might conduct its international business through a shell company that is incorporated in a tax-haven country like Belize. The principal corporation in California can then avoid reporting the shell company’s income to the U.S. government, and thereby avoid paying taxes on that income.

This practice is technically legal, and it is one that U.S. lawmakers hate but have difdiculty combating. In fact, even within the United States, some states have themselves become tax havens because of their lax incorporation laws, and shell companies are dlourishing there. For example, a small house in Cheyenne, Wyoming, is the ofdicial address of 2,000 shell companies (NPR Staff, 2011). All of these examples show how the laws that enable the creation of corporations can be manipulated for a wide range of potentially unethical business practices. In the worst cases, a shell corporation is created solely as a vehicle for wrongdoing and has no further redeeming value whatsoever as a business entity.

Moral Agency of Corporations

The status of corporations as legal persons makes them legally responsible for misdeeds, such as bribery, discrimination, unsafe working conditions, and false advertising. They can be charged with crimes and face penalties. However, it is common to hear people attack a company for being immoral, and the implication is that the business is morally responsible for its misconduct, not just legally responsible. That is, businesses are not merely legal persons but are also moral persons, or moral agents, who are morally responsible for their actions.

Take this next example, which appeared on a blog. A customer signed a contract with a home-security company and was told by the sales agent that it was for the duration of 2 years. At the close of the second year, the customer contacted the company saying that she did not want to renew the contract; the company said that the contract was for 3 years, not 2. The customer waited a year and repeated her request. The company responded that they require a 60-day notice for nonrenewal, and if they do not receive it, the customer is automatically renewed for another 3 years. The customer believed that the business was scamming her and, consequently, maintained that the company acted immorally (Samantha, 2009).

If this were a small, family-operated business, we could easily say that the business was immoral, since the fault would trace directly back to the family owners themselves: It is the owners who acted immorally through their business operations. Suppose, however, that the security company was a national chain with thousands of employees, each of whom was playing only a small and limited role in the operation of the business. Could we still say that this security company as a whole acted immorally in the same way that we commonly say that an individual human acted immorally?

The issue here is that of corporate moral agency, which concerns whether businesses are morally responsible for their actions, similar to how individual people are morally responsible for theirs. There are two main positions on this issue.

Position 1: Corporations Can Be Genuine Moral Agents

The dirst position is that corporations can be genuine moral agents. In the words of Peter French, the leading proponent of this view, “corporations can be full-dledged moral persons and have whatever privileges, rights and duties as are, in the normal course of affairs, accorded to moral persons” (1979). Corporations have what French has called a “corporate internal decision structure”—that is, a procedure for carrying out decisions—and this procedure has all the necessary elements to qualify as a “moral” decision-making process. It has two main components:

It has a responsibility Ilowchart—similar to a corporate organizational chart—that shows the various management levels within the corporation’s hierarchy, and who is responsible for what. The corporation has rules (usually within its bylaws) to determine whether a manager is making a decision on behalf of the corporation itself or merely making a personal decision. For example, if the unscrupulous home-security company described earlier were a large corporation, we would be able to identify which manager in the corporate hierarchy was responsible for the renewal scam, and whether that decision was a personal one or a corporate one.

With French’s model of corporate moral agency, human beings are still the ones making the decisions, but those people are making choices for the corporation, not for themselves. Thus, the intention behind that decision is the intention of the corporation, not of the individual person.

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Position 2: Corporations Cannot Be Moral Agents

The second and opposing position is that corporations cannot be moral agents. According to this view, the immoral actions of a corporation are attributable to the decisions of the individual actors within the corporation, not to the corporation as a whole. The leading proponent of this view, Manuel Velasquez, has argued that “corporate organization lacks the kind of causal powers and intentionality that an entity must possess to be morally responsible for what it does” (2003). According to Velasquez, to speak of a corporation as having intentions is only a metaphor, and nothing in the corporate internal decision-making structure can “transform a metaphorical intention into a real one,” nor can it “create group mental states nor group minds in any literal sense.” Human intentions, he has argued, are mental in character and can only occur within a conscious human mind. To talk about corporate “intentions” in a literal sense would mean that a corporation has a unidied conscious mind, which is absurd, he argues. At best, Velasquez says, a corporation consists only of people with conscious minds who are disconnected from each other. Workers, not the abstract corporate group, are the ones that carry moral responsibility for their on-the-job decisions (Velasquez, 2003).

Issues at Stake

There are two issues at stake in this debate:

Whether corporations can themselves be accused of being “immoral.” If I rob a bank, I can justly be called an immoral person. But if a corporation intentionally defrauds consumers, can it also be called “immoral” in the same way? French says yes; Velasquez says no. Whether workers in corporations should be punished individually for their immoral decisions, beyond the punishment that the corporation receives. French says they should not; Velasquez says they should.

We should emphasize, though, that regardless of whether there is a moral justidication for punishing corporations, from a purely legal standpoint corporations are in fact liable for punishment by the state. They are legal persons and, as such, have legal liability in the way that you and I do.

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3.2 Punishing Corporations

The next issue concerns the types of punishments that governments can impose on corporations, and what society hopes to accomplish through those punishments. The issue of punishment in general is a complex one. Therefore, it will help if we start by looking at the methods and justidications for punishing individual people, and turn to corporations after that.

The ways in which society can punish individuals for crimes are varied. Suppose, for example, that you are caught shoplifting from a local store. A possible punishment would be paying a dine or serving a few weeks of community service. With some crimes, like drunk driving, judges can get creative and make you put an embarrassing sign on your car that says “I’m a convicted drunk driver.” If your crime is even more severe, you might spend years in prison, or even be executed.

There is a wide range of punishments available for criminals in part because there are a variety of objectives society has for punishing them in the dirst place:

There is deterrence, in which an offender is punished to set an example that might discourage others from committing similar crimes. There is incapacitation, in which, by being removed from society, an offender is prevented from committing further similar crimes.

There is rehabilitation, in which, through reform techniques, changes are made to an offender’s future behavior.

There is retribution, in which punishment balances the scales requires that the person be punished accordingly. Finally, there is reparation, in which an offender must repay a

Six Types of Corporate Punishment

Let us now turn to the issue of punishing corporations. An immediate way of approaching the task is to hunt down the people within the corporate hierarchy who are responsible for a crime and punish them individually. This, in fact, occurs regularly. For example, former Enron president Jeff Skilling received a 24-year prison sentence for fraud and insider trading. In 2015, Eric Bloom, former CEO of Sentinel Management, was sentenced to 14 years for defrauding hundreds of investors of $665 million.

However, merely going after the key players within a company is often not enough. In many cases, the causes of corporate misconduct are dispersed so widely within the company that there may be no one individual who intentionally committed an illegal act. Rather, it may only be the accumulated efforts of many blameless individuals that ultimately give rise to a corporate misdeed. More importantly, the status of corporations as legal persons makes a company itself liable to prosecution, in addition to any corrupt corporate executive who might be involved. But although a corporation is considered a legal person, it is not a giant human being. Thus, at least some of the penalties that we impose on individual people would not be appropriate for corporations. We cannot, for example, literally imprison a corporation. There are six basic types of punishment for corporations:

dines, equity dines, corporate incapacitation, the corporate death penalty, corporate shaming, and community service orders.

of justice. An offender committed a crime, and this victim for the injury that the offense caused.

Louis Lanzano/Associated Press

Former WorldCom CEO Bernie Ebbers is seen leaving a New York Federal court. Ebbers is currently serving a 25-year prison sentence based on his involvement in and cover-up of an $11 billion accounting scandal that led the company to Nile for bankruptcy. Time magazine recently named Ebbers one of its “Top 10 Crooked CEOs.”

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We will examine each of these here.

Fines

Perhaps the most common way of punishing a corporation is through a Nine, a payment of money imposed as a penalty for an offense. For example, the pharmaceutical company Johnson & Johnson was dined $2.2 billion for promoting psychiatric drugs for unapproved uses in children, seniors, and disabled patients—one of the largest settlements with a drug manufacturer in U.S. history. Although dines may be the usual way of punishing a corporation, there are several problems associated with this approach:

If the company is large and the dine is small, it will be ineffective in rehabilitating an unethical company. The company may see the dine as just another cost of doing business. This leaves the public with the impression that corporate crime is permissible as long as the company merely pays the going price. If the company is small and the dine is large, the company may not be able to afford to pay it. And if the dine is lowered for that company, the cost will not serve as an effective deterrent for other companies.

Corporate dines can harm innocent people associated with the company. A hefty dine can dinancially harm a company to the point that it must decrease employees’ salaries or even lay employees off. In addition, dines might result in reduced dividends and stock value for shareholders. The company might also pass the costs of the dines on to consumers. A case in point is a sewer company in California that was dined $1.6 million when millions of gallons of raw sewage spilled from its treatment plant. According to the plant manager, one option for covering the dines was to increase fees to consumers. (Staats, 2008)

Equity Fines

Another type of corporate punishment is a variation on the dine. With an equity Nine, the payment is made in shares of the company, not in money. The effect is that the value of the company is diluted in the market, which may serve as a greater deterrent to companies than monetary dines. The key advantage of equity dines is that they avoid forcing dinancially weak companies out of business, and thus protect innocent employees and creditors. This form of corporate punishment is not yet practiced in the United States or any other country, but the Scottish parliament has debated legislation allowing equity dines, and it remains a possible model for corporate punishment.

Corporate Incapacitation

Another form of punishment is corporate incapacitation. For this punishment, a court issues an order to restrain the activities of a corporation in some area of business. The court may temporarily restrict a company’s commercial activity for some line of business, in some geographical area, or with some client. The court may temporarily revoke a company’s operational license, or disqualify the company from obtaining specidic contracts. It may also freeze the company’s prodits. The United States has these kinds of provisions for corporate incapacitation, the aim of which is to stop businesses from engaging in a practice that consistently operates outside the law (Walt & Laufer, 1992).

Corporate Death Penalty

Occasionally, a company commits a crime that is so egregious that, for punishment, it receives what is called a corporate death penalty. The company is forced to go out of business, such as by revocation of its corporate charter. This is what happened with the accounting dirm Arthur Andersen. In 2002 it was convicted of obstruction of justice for shredding documents connected to its auditing of Enron. Because of the conviction—and the fact that convicted felons are not permitted to audit public companies—the company was forced to surrender its CPA license, thus forcing it to close its doors for good. Its conviction was overturned a few years later by the Supreme Court, but not before most of its employees lost their jobs.

The downside to the corporate death penalty is that it harms the vast majority of the workers who are innocent of wrongdoing—thousands of them, in the case of Arthur Andersen. The families of these workers suffer as well. The corporate death penalty can also be misused in political battles. For example, an Arizona law called the “Legal Arizona Workers Act” allows for the revocation of business licenses for companies that are discovered to have knowingly employed illegal immigrants. Although it is reasonable to punish a company when it breaks the law by hiring illegal

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immigrants, critics of the law argue that is excessive to impose upon that company the punishment of corporate death. The issue of illegal immigration is a controversial one that generates extreme opinions, and in this case, the Arizona law has used the corporate death penalty to achieve an ideological goal. Controversial as it is, the Constitutionality of Arizona’s law was nevertheless upheld by the U.S. Supreme Court (Chamber of Commerce v. Whiting, 2011).

Corporate Shaming

Another option for punishment is corporate shaming, in which the government requires a guilty company to make a public announcement that threatens its reputation and social standing. For example, a Massachusetts ferryboat company was required to place an ad in the Boston Herald that stated, “Our company has discharged human waste directly into coastal Massachusetts waters.” The Federal prosecutor in this case argued that the goal was to deter others, but a punishment such as this has the added benedit of satisfying the public “when it doesn’t appear that the company has been punished sufdiciently enough, by simply writing a check” (Tovia, 2010). The problem with corporate shaming is that the humiliation and embarrassment are projected onto innocent workers, not just the guilty ones. Further, the loss of prestige might contribute to the dinancial failure of the corporation and thus adversely affect innocent workers.

Community Service Order

A dinal type of punishment is a community service order, where, similar to community service punishments for individuals, a company must participate in some project that benedits the community in some way. For example, six New York bakeries were convicted of price dixing. As punishment, they were ordered to donate baked goods to charitable organizations for one year (United States v. Danilow Pastry Co., 1983). One advantage to this approach is that, when a large number of unidentidiable people have been harmed by misconduct, community service is a way to distribute some benedit back to the wider community rather than to an individual victim. Also, community service orders do not put companies at risk that are in dinancial difdiculty in the way that dines do, and thus they insulate innocent parties such as creditors and workers. This was one of the motivations for the order in the bakery price-dixing case. Community service punishment is sometimes criticized for being potentially image enhancing: The company might publicize its service activity in a way that increases its reputation as a socially responsible organization. Defenders, however, argue that the fact that the service is done under court order makes it less likely that the company will draw that kind of attention to itself.

What Would You Do?

You are a judge and before you is a case in which an auto dealership with 50 employees has been found guilty of false advertising. The dealership routinely advertises vehicles at low prices, but once customers are on the lot, it sells them at much higher ones. Your concern is that a hefty dine might force the dealership out of business and thus adversely affect the lives of the innocent employees.

1. Would you impose the dine or consider alternative forms of punishment, such as incapacitation, shaming, or a community service order? Be sure to state the rationale for your decision.

2. Suppose the dealership only switched prices for its customers who had above-average incomes. Would that make a difference in your decision? Why or why not?

3. What if dealership only switched prices for its customers who had below-average incomes? Would that make a difference in your decision? Why or why not?

4. What if all of the employees in the dealership knew about the scam, and they all received bonuses based on the higher selling prices? Would that make a difference in your decision? Why or why not?

Federal Sentencing Guidelines

The U.S. government punishes a wide range of corporate offenses. In 1991, it established guidelines for sentences

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imposed by Federal judges, known as the Federal Sentencing Guidelines for Organizations (FSGO). The types of punishments imposed are wide-ranging, and individuals can serve jail terms and pay large dines, the costs of which the corporations themselves are not permitted to cover. The guidelines make use of a point system for determining the severity of an offense as well as increasing levels of dines that correspond to severity. Severity increases when the company has a history of such misconduct, when it obstructs justice during the investigation, and when “an individual within high-level personnel of the organization participated in, condoned, or was willfully ignorant of the offense” (U.S. Sentencing Commission, 2014). The guidelines encourage organizations to create compliance and ethics programs to prevent and detect illegal conduct, recommending that these programs include seven specidic steps that are summarized in Figure 3.1.

Figure 3.1: Seven steps recommended by the U.S. Sentencing Commission for organizations to prevent and detect violations of the law

Organizations that create compliance and ethics programs will receive a reduced punishment if prosecuted for a crime in the future.

Source: Federal Sentencing Guidelines for Organizations (FSGO) Ethics & Compliance Initiative. (2005). Federal sentencing guidelines. Retrieved from http://www.ussc.gov/guidelines-manual/2014/2014-chapter-8#8b21 (http://www.ussc.gov/guidelines-manual/2014/2014-chapter-8#8b21)

Corporations have a special incentive for creating compliance and ethics programs that include these seven steps: If in the future they are ever prosecuted for a crime, they will receive a reduced punishment. In this way, the government aims to build into corporations a procedure that will reduce the likelihood of their engaging in illegal conduct.

Consumer Retaliation

Another mechanism for punishing companies is initiated by the public rather than by the government. Just as the government keeps a watchful eye on businesses, so, too, do consumers. Consumer retaliation is when individual consumers or consumer groups express dissatisfaction with a company through some effort that harms it dinancially. Consumers can write letters of complaint to government agencies, dile civil lawsuits against offending companies, and use every possible form of media, especially the Internet, to bring public attention to issues of corporate misconduct. We will examine many of these efforts in a Chapter 4, but one mechanism for consumer retaliation we can note here. This is the

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consumer boycott, when a group of people act together to abstain from buying from or dealing with a business. The word boycott is derived from a British land agent in Ireland, Charles Boycott, who himself was the target of a systematic boycott when, during a particularly bad growing season, he refused to lower the rent for farmers who leased land from him. The farmers moved off his property to other locations, and he had trouble dinding people who would harvest his dields.

There are two important advantages to consumer boycotts as supplemental ways of punishing companies:

Companies are often directly involved in shaping the laws that apply to their industry, and thus government- sanctioned punishments are not possible when the laws are lax to begin with. Boycotts dill that void by holding companies accountable when governments fail to do so. Even when the government does get involved by making tough laws, it often takes several years before the laws are passed and take effect. In the meantime, the company can continue with its practice. Boycotts—or even the threat of them—can hold companies accountable during this period of legislative limbo while keeping up public support for the proposed legislation.

imageBROKER/Superstock

Adidas stopped using Kangaroo leather in its soccer shoes after a boycott by the animal rights group Viva.

A recent effective use of boycott was the efforts of the animal rights group Viva to get athletic sportswear company Adidas to stop using kangaroo leather in the manufacturing of its soccer shoes. In 1979, Adidas began using kangaroo skin, which has a tensile strength that is 10 times that of cowhide. The shoes were lighter and stronger than alternatives, and Adidas quickly dominated the market. In 1997, Viva launched its “Save the Kangaroo” boycott against Adidas, and its impact was soon felt, with Adidas receiving thousands of emails complaining about its use of kangaroo leather. Viva then began lobbying soccer superstar David Beckham, who had signed a $160 million lifetime endorsement deal with Adidas. After learning details of the controversial slaughter methods of kangaroos, Beckham switched to synthetic shoes in 2006. In 2012, Adidas announced that it cut back on its use of kangaroo leather in its shoes by 98% (Poulter, 2012). While not a complete elimination of kangaroo leather, it is a substantial reduction, and thus serves as a good example of the leverage that a well-organized boycott can have over a company.

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3.3 Ethical Corporate Culture

From what we’ve seen so far, there are several motivations for corporations to abide by the law and avoid immoral behavior. There is the looming threat of criminal punishment, and all the bad publicity that goes along with it. There is the possibility of consumer retaliation, such as consumer boycotts. In this section we will look at mechanisms within the corporate structure itself that create an ethical corporate culture.

Stakeholders and Corporate Social Responsibility

An important concept in the creation of an ethical corporate culture is that of the stakeholder, which is any party who is affected by, or has a stake in, a business practice. This includes employees, suppliers, customers, creditors, competitors, governments, and communities, as well as shareholders. The stakeholder approach to responsible corporate conduct is that businesses should consider all stakeholders’ interests, not just those of the shareholders. By considering the interests of the full range of stakeholders, companies will be less likely to exploit these groups for dinancial gain.

The challenge of the stakeholder theory is to prioritize the interests of the various stakeholders. Every stakeholder wants to carve into the dinancial pie, and there is not enough to go around for everyone. Shareholders seek to maximize their investments, employees want higher wages, governments want more taxes, and environmentalists want to see more eco-friendly policies. The stakeholders and their claims must be prioritized and, at a minimum, categorized into two groups: primary stakeholders and secondary stakeholders. Of necessity, the shareholders will be primary stakeholders—perhaps the only ones—since they are the ones who own the company and ultimately call the shots regarding corporate policy. While shareholders may be willing to give in to reasonable demands of secondary stakeholders, they are still investing in the company to make money, and are certainly not willing to hand it all away.

The stakeholder theory does not come with a built-in formula for prioritizing the competing interests of primary and secondary stakeholders. However, its greatest signidicance may be the growing popularity of the word stakeholder itself and its use throughout the business world today. Through its heavy use, the idea of social responsibility has become an integral part of normal business vocabulary. It is more than a faddish buzzword; the identidication of stakeholders is often part of a company’s strategic planning process.

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Although stakeholder theory is a popular way of articulating the social mission of companies, it is not the only one. Another concept is the triple bottom line (3BL), which is that successful companies must pursue three distinct values:

people, the planet, and prodit.

That is, there should be social benedit to workers and the community, environmental benedit through the implementation of sustainable ecological practices, and economic benedit only after all hidden environmental costs have been factored in.

Yet another similar concept is that of corporate social responsibility (CSR)—also called corporate conscience or corporate citizenship. This generally refers to a corporation’s efforts to take responsibility for its effects on the environment and its impact on social welfare. It typically applies to efforts of companies that go beyond what is required by governmental regulations.

Since 1997, a consulting dirm called the Reputation Institute has specialized in assessing public perceptions of corporate social responsibility among major companies worldwide. Figure 3.2 lists the recent top 10 spots. As you can see, some very recognizable companies hold these positions.

The rankings were based on more than 60,000 interviews, and they only redlect the general public’s perception of the companies, not what those companies’ citizenship policies or actions are. The odds are slim that the people interviewed had any detailed knowledge about the companies’ actual activities. Their perceptions were likely guided by product-name recognition, company advertising, news stories, and personal experience with the product.

Nevertheless, the Reputation Institute maintains that corporate reputation is “an emotional bond that ensures who uses your products, who recommends you” (Reputation Institute, 2015). Therein lies the problem: If the goal is to increase public perception, a company can often achieve this more inexpensively through a sophisticated marketing strategy than through engaging in costly social projects. This is particularly common with claims about environmental

Figure 3.2: Reputation Institute’s top 10 ranked companies for Corporate Social Responsibility

Organizations are ranked based upon public perceptions of their citizenship, governance, and workplace.

What Would You Do?

You are the CEO of a coal company that uses the controversial technique of mountaintop removal. This involves bulldozing away the top of a mountain to get at the coal, then dilling in surrounding valleys with the removed soil. Technically you are not breaking the law, but this method is both environmentally damaging and visually ugly. You could use underground mining, which is less harmful, but it would cut into your prodits.

1. Who are the various stakeholders in this situation?

2. Which ones are primary, and which are secondary?

3. At what point might you dind the prodit loss from underground mining acceptable: a loss of 20%, 10%, 5%?

Explain your answer.

4. Suppose that local residents set up picket lines daily at the entrance to the jobsite, and these are regularly

featured in the news. How might that affect your assessment of how much prodit loss would be acceptable for switching to an underground mining method?

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Source: 2015 Global CSR RepTrak® 100 by Reputation Institute. RepTrak® is a registered trademark of Reputation Institute. Copyright © 2015 Reputation Institute. All rights reserved.

responsibility: Virtually every company attempts to project itself as eco-friendly, regardless of how environmentally harmful its business operations are. The term greenwashing refers to pretended efforts at environmental responsibility and, more broadly, at corporate responsibility. Coca-Cola, for example, has been accused of greenwashing with the introduction and promotion of its “plantbottle,” which it says contains up to 30% plant material. Although the company uses this to project itself as environmentally friendly, there is no evidence that the plantbottle reduces CO2 emissions.

In a sense, the Corporate Social Responsibility Index exacerbates this problem, since it tells companies how successfully they are competing in the battle for public perception. A better index is one that ranks the actual performance of companies in key areas of social responsibility, rather than simply public perceptions of their performance.

Akira Suemori/Associated Press

This group, called the “Greenwash Guerrillas,” took part in a mock cleaning job at the National Portrait Gallery in London. The group was criticizing the gallery for its hosting of the BP Portrait Award ceremony, claiming that doing so helped the oil company “greenwash” its public image.

that will make the real change.

One such effort is an index provided by Corporate Responsibility Magazine. However, this index has a built-in bias because much of its data comes directly from the websites of the companies that it is evaluating, and such corporate websites are at bottom public relations tools that help shape their image. Thus, even this index encourages companies to publically exaggerate or misrepresent their social responsibility.

There is yet a deeper problem with corporate social responsibility in that the very concept of it may be an illusion. Robert Reich argues that corporate social responsibility “is founded on a false notion of how much discretion a modern public corporation has to sacridice prodits for the sake of certain social goods”; this misleads people to think that businesses are doing more for the public good than they actually are (Reich, 2008). The reality, according to Reich, is that the international business environment today is “super-competitive,” and this makes companies resist doing anything that hurts the bottom line. For Reich, the solution to the ethical problems of companies must come from laws enacted through the democratic process that will constrain business conduct. Talk of corporate responsibility makes for good press and reassures the public, but it delays governmental regulation

Although companies may sometimes overstate or fake commitment to social responsibility, consumers take it seriously; one poll indicated that 79% of Americans take corporate social responsibility into account when making purchasing decisions. It was an important factor for 36%. The same study showed that 71% consider corporate social responsibility with investment decisions. And 12% went so far as to say that they would purchase stock in socially responsible companies even if it meant accepting lower dinancial returns (Verschoor, 2001).

Mission Statements and Codes of Ethics

There are concrete ways within the corporate structure to mark out ethical boundaries for employees. The most common ways are through mission statements and codes of ethics.

Mission Statements

A mission statement is a short account of the company’s fundamental purpose, and many companies use them as a way of broadcasting their commitment to ethical standards. Here, for example, is one of PepsiCo’s recent mission statements:

Our mission is to be the world’s premier consumer products company focused on convenient foods and beverages. We seek to produce dinancial rewards to investors as we provide opportunities for growth and enrichment to our employees, our business partners and the communities in which we operate. And in

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everything we do, we strive for honesty, fairness and integrity. (2015)

In the dirst sentence, PepsiCo indicates its main product line and how it sees itself in the world market. The second sentence describes its dinancial success. In the third sentence we see the ethical component: All company conduct aims for honesty, fairness, and integrity. Here is the ethical part of a few company mission statements:

Microsoft: “Microsoft is committed to deepening the trust of customers, partners, governments, and communities. We strive to meet or exceed legal, regulatory, and ethical responsibilities worldwide and to hire and reward employees who share our values, work with integrity, and adhere to our Standards of Business Conduct.” (2015) Starbucks Corporation: “With our partners, our coffee and our customers at our core, we live these values: Creating a culture of warmth and belonging, where everyone is welcome. Acting with courage, challenging the status quo and dinding new ways to grow our company and each other. Being present, connecting with transparency, dignity and respect. Delivering our very best in all we do, holding ourselves accountable for results. We are performance driven, through the lens of humanity.” (2015)

Target Brands, Inc.: “We believe in being an active citizen and good neighbor in our communities. We give our time, talent and business strengths to make our communities strong, healthy and safe. We invest in career development and well-being of our team. And from the start, we’ve given 5 percent of our income, a commitment that does not waver based on the economic climate.” (2015)

Socially progressive companies often have even more aggressive ethical agendas in their mission statements. For example, Just Us Coffee Roasters Co-op’s mission statement includes the slogan “people and the planet before prodits” (n.d.). This suggests that, among the various stakeholders in that business, the shareholders are secondary to society and the environment. Although this is not typical of corporate stakeholder priorities, it does show that corporations do not always need to place prodits above all else. It is a question of how a company dedines its mission.

Codes of Ethics

While mission statements are designed to be short, businesses commonly have more detailed corporate codes of ethics that express principles of conduct within the organization to guide decision making and behavior. Codes of ethics vary in length and detail, but the more meticulous ones typically have dive parts:

1. A letter from the CEO endorsing the code and explaining why it is important. Heads of companies know that they must lead by example and that hopes of creating a moral climate must begin with them. One way to do this is for the CEO to publicly stand behind the company’s ethical code. Here are key passages from four CEO letters of endorsement:

Nike: “This Code of Ethics is vitally important. It contains the rules of the game for Nike, the rules we live by and what we stand for. Please read it. And if you’ve read it before, read it again.” (2011)

General Dynamics: “Please read the Blue Book [on ethics policy] carefully. It reminds each of us of our shared responsibilities to our shareholders, our customers, our business partners, and to each other. It calls on us to do the right thing and to seek guidance if needed.” (2013)

The Coca-Cola Company: “The Code of Business Conduct is our guide to appropriate conduct.

Strengthening Corporate Ethic

Critical Thinking Questions

According to the video, almost 90% of Fortune 500 companies have codes of conduct, and many have policies such as condlict of interest declarations and ombudsman programs. Describe these two types of policies and how they might improve ethics.

According to one expert in the video, the recent growing interest in ethics among companies results from the recognition that good ethics is good business: “Your good name is what gets you business.” Assuming this is true, what are some

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Together with other Company guidelines, such as our Workplace Rights Policy, we have set standards to ensure that we all do the right thing. Keep the Code with you and refer to it often.” (2009)

In each of these cases, the CEO stresses the need for employees to take the company’s ethical code seriously.

2. A general statement of values. The values listed are often varied but may include honesty, quality, integrity, respect for all people, building strong relationships, taking care of employees, giving back to the community, excellence in customer service, strong shareholder returns, wise use of assets, environmental responsibility, respect for human rights, and keeping promises.

3. A statement of commitment towards the company’s different stakeholders. This usually includes employees, customers, suppliers, shareholders, and society at large.

4. Company policies on a range of ethical issues that arise on the job. These include drug and alcohol use, safe working conditions, employee privacy, discrimination, sexual harassment, workplace violence, condlicts of interest, accepting gifts, insider trading, bribery, and price dixing.

5. A discussion on how the code is carried out within the organization, and punishments for code violation. The administrative implementation of the code sometimes is assigned to an ethics ofNicer within the company; this person holds workers accountable to the company’s ethical standards. Punishments for code violations may include letters of warning, counseling, loss of employment, and, in extreme cases, legal charges.

In addition to these dive points, many codes include an intuitive guide for employees to test their decisions, such as the following from Allstate:

Ask yourself the following questions when you face a decision that involves ethics:

Is it legal? Does it comply with this Code and with policies that apply to the situation? How will it affect others—consumers, competitors, shareholders, other employees, agencies, the community, and you? How will it look to others? Innocent actions sometimes can give the appearance of wrongdoing. How would you feel if this decision was made public? Should you ask for advice before acting?

If you are still uncertain, ask your manager or contact another resource listed in this Code. (Allstate, n.d.)

Codes of ethics are not a perfect solution to the problems of immoral business conduct. Many of the principles advanced are too general to be of much guidance, such as the values of honesty, quality, and integrity, which are listed in many such codes. And sometimes they seem to be mere public relations tools to make an unscrupulous company appear to be committed to ethical principles. Before its collapse in 2001, for example, Enron’s published statement of corporate values included the following:

Respect: We treat others as we would like to be treated ourselves. We do not tolerate abusive or disrespectful treatment. Ruthlessness, callousness, and arrogance don’t belong here. Integrity: We work with customers and prospects openly, honestly, and sincerely. When we say we will do

reasons for why unethical behavior still persists among businesses? According to the expert, “Anybody can forgive a mistake, particularly when you’ve tried hard. But what the customer, the employer and the voter won’t forgive is deliberate choice to ignore the social and moral dimension.” Give an example of an unethical business act that would not be forgiven.

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something, we will do it; when we say we cannot or will not do something, then we won’t do it. (Enron, n.d.)

From what we now know of Enron’s activities, the claims of respect and integrity are laughable. There are certainly other companies today that, like Enron, behave shamefully while at the same time making grandiose claims about their ethical standards. Nevertheless, many companies do take their codes seriously, and look to them to safeguard against criminal charges by the government, lawsuits by customers, and bad publicity by the media, all of which can dinancially cripple a company.

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3.4 Threats to Ethical Corporate Culture

We turn dinally to an examination of aspects of corporate culture that can undermine a company’s commitment to moral integrity and social responsibility. We will consider four such factors:

the prodit motive, strategic misrepresentation, groupthink, and organizational schizophrenia.

None of these is immoral in and of itself, and to some degree all of them are even facts of life when running a business. But if left unchecked, they can create moral and legal problems.

The ProNit Motive

Several times so far we have seen that a company’s motive to make prodits can condlict with its sense of social responsibility. Shareholders expect to see a return on their investments, and the corporate ofdicers have a diduciary duty to oblige them, to the point that the ofdicers might neglect the interests of all other stakeholders.

Not only is this a possible outcome, but economist Milton Friedman famously argued that this is exactly how it should be: Businesses should stay away from social responsibility and keep focused on making prodits. He did not advocate that businesses violate the law when pursuing prodits, but only that they avoid taking positive steps toward social causes beyond what the law requires. “Few trends,” he argued, “could so thoroughly undermine the very foundation of our free society as the acceptance by corporate ofdicials of a social responsibility other than to make as much money for their shareholders as possible” (Friedman, 1970, SM17).

According to Friedman, it is contrary to the nature of a well-run corporation to advocate social responsibility, since it amounts to a hidden social tax. That is, it places an extra dinancial cost on consumers for some social benedit that has no direct connection with the product that they are purchasing. Suppose that a corporate executive refrains from increasing the price of a product, to help prevent indlation; spends vast amounts of money on reducing pollution beyond what the law requires, to help improve the environment; or hires an underqualidied unemployed person, to help reduce poverty. “In each of these cases, the corporate executive would be spending someone else’s money for a general social interest” (Friedman, 1970, SM17). It would also mean reduced returns for shareholders, higher prices for customers, or lower wages for employees. This, argues Friedman, makes the socially minded executive an unelected civil servant who, in many cases, will not be properly educated about which actions will indeed promote social benedit. In this way, Friedman believes, it is subversive to a free society. The only responsibility of a business, then, is to increase its prodits, so long as it stays within the bounds of the law by engaging in “open and free competition without deception or fraud” (1970).

Friedman’s argument against corporate social responsibility is a rather extreme one that is hard to defend. Here are just two problems with it:

Business money spent on social causes is unlike a tax in at least one important way. Taxes imposed by governments are mandatory, but no one’s association with a socially responsible corporation is mandatory. Consumers can choose to spend their money elsewhere; workers can choose to be employed elsewhere; shareholders can choose to invest elsewhere. Since these are free associations, it is difdicult to see how such corporate social responsibility is subversive to a free society. On the contrary, it is part of a free society to experiment with company policies, and dind creative ways to attract customers, employees, and investors. Many consumers will be attracted to corporations with strong social agendas, which will increase company prodits. For example, Ben & Jerry’s is a case in point. When the company dirst began manufacturing ice cream, it adopted a unique social mission:

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to operate the company in a way that actively recognizes the central role that business plays in the structure of society by initiating innovative ways to improve the quality of life locally, nationally, and internationally. (Ben & Jerry’s, n.d.)

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Ben Cohen and Jerry GreenNield of Ben & Jerry’s have a social mission that seeks to rid society of injustices. Here they are at the announcement that their ice cream has gone 100% fair trade.

The company professes to have a “progressive, nonpartisan social mission” that aims to eliminate injustices locally and globally, and supports nonviolent ways to achieve peace and justice (Ben & Jerry’s, n.d.). At one point in its history, the company donated an unusually high percentage of its prodits to philanthropic causes—7.5%, as compared with the norm of 1%. In 2001, Ben & Jerry’s was purchased by Unilever, the world’s third largest consumer goods company, and from the start its new parent company said it was “determined to nurture its commitment to community values” (Press Ofdice Unilever London, 2000).

Ben and Jerry’s and its parent company do not see eye to eye on all issues, and a case in point is their respective views on legal requirements for labeling foods made with GMO ingredients. Ben and Jerry’s supports such laws while Unilever is against them. Unilever nevertheless permits Ben and Jerry’s to voice its view, and, in fact, in 2014 Ben and Jerry’s CEO stood publically alongside Vermont’s governor as the governor signed U.S.’s dirst law requiring labeling of foods made with GMO ingredients. (Boyle, 2014)

Strategic Misrepresentation

Another component of corporate culture that can lead to dlawed decisions is strategic misrepresentation, which is the intentional and systematic distortion or misstatement of facts for the purpose of gaining a dinancial advantage. A simple example is with automobile dealers: Suppose that a dealer knows very well what the weaknesses are with the vehicles being sold but intentionally conceals those problems from customers. If the dealer were completely truthful, customers would simply go elsewhere. Businesses routinely exaggerate the value of their products, the quality of their customer service and satisfaction, and their overall dinancial health.

Although strategic misrepresentation is undoubtedly common in business negotiations, some have argued that it is simply part of the nature of doing business, and it cannot be eliminated. Nor should we try to eliminate it. Albert Carr championed this view in an indluential essay titled “Is Business Blufding Ethical?” In some situations, he argued, blufding one’s opponents is a normal part of the game. In poker, for example, a player strategically tries to get opponents to think that his or her hand of cards is either stronger or weaker than it actually is. So, too, in business. In fact, Carr argued, if a businessperson feels obligated to always tell the truth, he or she “is ignoring opportunities permitted under the rules and is at a heavy disadvantage in his [or her] business dealings” (1968).

Most executives are compelled from time to time to be deceptive when negotiating with dealers, labor unions, government ofdicials, and even other departments within their own companies. According to Carr, “Falsehood ceases to be falsehood when it is understood on all sides that the truth is not expected to be spoken” (1968). For example, a criminal does not lie when he or she pleads “not guilty,” even when he or she committed the crime, since this is just a part of the judicial process. In the workplace, similar kinds of acceptable deception can occur from the moment we dill out our job applications and exaggerate our strengths while downplaying our weaknesses. When our bosses ask for our opinion, we often say “yes” when we really believe “no.” There is no place for the Golden Rule in business, and “a good part of the time the businessman is trying to do unto others as he hopes others will not do unto him” (Carr, 1968).

A famous case illustrates Carr’s position. Some years ago, the founder of the computer software company Borland wanted to place an advertisement in Byte magazine to help launch its products. He needed good credit terms with Byte to pay for the ads, but his company was not established enough to qualify for them. He then plotted to trick Byte into believing that Borland was larger than it was and had venture capital dinancing, which it really did not. When the sales representative for Byte visited the new company to inspect it, Borland’s founder had paid actors on hand to look like employees, had ofdice phones ring continuously, and had a pretend advertising plan in plain view for the sales representative to see (Bhide & Stevenson, 1990). Borland got the credit to place the ad, and shortly after, the company became a major player in the software industry. In short, Carr and others have reasoned that deception is part of the rules of the business game. Since we do not morally condemn poker players for attempting to deceive opponents with their poker faces, by analogy we

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should not condemn businesses for doing what is necessary, even when it involves going contrary to our common moral intuitions.

The problem with this line of reasoning is that strategic misrepresentation is acceptable only when the rules are clearly known to everyone involved. Poker players know the rules of the game beforehand, and join the game in full knowledge of those rules. And in many instances the rules are very clear in business. Consumers know that advertisers will remain silent about the drawbacks of their products and exaggerate their qualities. In labor negotiations, businesses and labor unions both bluff about how far they are willing to bend the rules.

However, in other situations, the rules of business require complete honesty, and when businesses strategically misrepresent themselves, they are on the side of wrong and can be held legally responsible for their conduct. For example, to enhance its dinancial image, General Motors claimed in a national advertisement that it had repaid a bailout loan it received from the U.S. government “in full, with interest, dive years ahead of schedule” (Tapscott, 2010). This claim conveyed the impression that GM had paid off all its government loans, and with its own money. In point of fact, however, neither of these statements was true. It paid off its loan with money it had received from a second government bailout loan. Thus, it still owed the government money, and it did not use its own money to pay back the loan. As a consequence, GM was sued for deceptive advertising. This was a case of strategic misrepresentation that violated the rules of the game.

What is fundamentally wrong about Carr’s position is that, just because strategic misrepresentation is a socially accepted practice in some business situations, it is not necessarily acceptable in every case. A businessperson who rushes into strategic misrepresentation could easily make misleading claims that cross the line of legality. It is all a matter of knowing what the rules of the game are—and when they do not allow for misrepresentation.

Groupthink and Organizational Schizophrenia

Within the dield of industrial-organizational psychology, there are a few concepts that describe how decisions are made in group environments and how these can sometimes lead to bad choices. We’ll look at two in this section: groupthink and organizational schizophrenia.

Groupthink

Groupthink refers to the practice of thinking or making decisions as a group in a way that discourages creativity or individual responsibility. Group members become so focused on arriving at a decision as a cohesive unit that they set aside their private ethical concerns. In criminal courts of law, juries by their very nature face this problem. Twelve people are instructed by a judge to reach a unanimous decision, and they must do so to assure the success of the judicial process. To reach a unanimous decision, though, some jury members must give in to the views of the whole; it is only the most stubborn members who resist to the end and thereby create a hung jury.

Moodboard/Thinkstock

Did groupthink contribute to the recent housing collapse and economic crisis in the United States?

The same thing happens within businesses. Suppose, for example, that an appliance company manufactures a new microwave oven, and in research and development there is some indication that the unit might overheat and catch dire. The evidence isn’t conclusive, and it only happens with one test model operating in an extreme situation. Members of the research team have to decide whether the product is ready to move forward into production. Suppose further that there is pressure within the company to bring out new products within specidied time frames. When the research team makes its dinal judgment, the group as a whole, indluenced by that pressure, may decide that the unit falls within the limits of acceptable risk and is thus ready to go. Individually, some of the members might feel that production of the unit should be delayed until more testing can be done. But they agree anyway, since the consensus of the group is to move forward. It is only later, when customers are injured and the product is recalled for being a dire hazard, that the dlawed nature of the

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group’s decision-making process becomes evident.

The groupthink phenomenon is helpful for understanding how it is that many unethical business decisions can be made, whether with regard to product safety, discriminatory hiring practices, or shady bookkeeping. Each member of the group may personally have a high level of moral integrity. But when making tough decisions in a competitive business market, they may set their personal moral convictions aside in favor of a group consensus. Perhaps the group as a whole feels that the action falls into a moral gray area that is within the limits of acceptable risk. Perhaps the group as a whole is more interested in the benedits of the proposed course of action than an impartial analysis of its costs. In any event, members of the group end up making unethical choices that they would not in their private lives.

One analysis of the groupthink phenomenon describes four symptoms of it:

The group feels that it is invulnerable to harm. It is in a position to make an authoritative decision and, perhaps indluenced by a track record of previous successes, it ignores the possible negative consequences of its decision. The group members are unanimous in their beliefs—or at least in the expressed views of each member—and thus have the condidence to move forward with their decision.

If there are dissenters, pressure is put on them to accept the views of the group. Someone in the group functions as a kind of “mind guard” who dilters out information that is inconsistent with the group’s view. (Levy, 2010)

One way to combat the groupthink phenomenon is to watch out for these four symptoms when making group decisions, and, if they do appear, actively seek out unspoken or minority viewpoints.

Organizational Schizophrenia

Another component of industrial-organizational psychology is organizational schizophrenia, in which tension exists between competing goals or values within a corporation. The organization presents mixed messages to its employees about what is important, and the employees are left to work out a course of action on their own. The term schizophrenia is borrowed from the dield of psychology and refers to a psychological disorder in which a person is motivated by contradictory or condlicting principles. The use of the term in industrial-organizational psychology applies more generally to any set of competing agendas in an organization when there is no clear resolution between the two.

Some organizations are by their very nature schizophrenic. For example, pharmaceutical companies have an important social mission to improve people’s health, on the one hand, yet at the same time have an obligation to shareholders to make a prodit. For this reason, pharmaceutical companies are regularly called out in the media for allowing prodits to overtake their social responsibility. For example, in 2011 Pdizer ended its research on antibiotic resistant bacteria, an area that, while of critical concern in world health, is dinancially unproditable. In a more general way, this same tension is present in virtually all businesses: Employees are instructed to behave ethically, yet at the same time their jobs require them to maximize prodits. When the pressure to maximize prodits is too great, it may obscure ethical responsibilities, such as the duty to manufacture microwave ovens that do not catch on dire.

But the two goals of ethics and prodit do not have to be in a schizophrenic relationship. They can be compatible when the boundaries of ethical behavior are clearly indicated to employees. It is much like playing a sport: There is the playing dield where the principal activity occurs (analogous to maximizing prodits) and there are boundaries beyond which players cannot stray (analogous to ethical boundaries). When employees have clear knowledge of where those ethical boundaries are, such as through corporate codes of ethics, they can safely do their part to maximize prodits.

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Conclusion

Corporations have come a long way since the founding of Jamestown by the Virginia Company. In the 400 or so years since that time, they have become independent of governmental afdiliation, have gained the status of legal persons, and have greatly proliferated in number. It is precisely these changes that led Bakan to depict corporations as psychopaths with personality traits of irresponsibility, manipulation, grandiosity, superdiciality, lack of empathy, and the inability to feel remorse. But even Bakan has recognized that a corporation’s psychopathic behavior will ultimately lead to its own destruction, as happened with Enron. Thus, for a corporation to avoid a self-created downfall, at some point it must stop short of Enron-like behavior and take into account the wider interests of its various stakeholders.

We have seen that within corporate culture, there are mechanisms already in place for reinforcing socially responsible behavior, such as through codes of ethics and the seven steps of ethical compliance included in the Federal Sentencing Guidelines for Organizations. There are also warning signs for when companies become ethically at risk. The issue becomes whether a corporation is willing to take seriously these aspects of ethical corporate culture. There will always be companies like Enron, but the goal is to make their occurrences few and far between.

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Summary & Resources

Chapter Summary

We began this chapter looking at the nature of corporations, and their four main features. That is, corporations are created by the states in which they are chartered, they can continue to exist indedinitely, they are regarded by the law as having the status of a person, and shareholders’ liability is limited to the amount of money that they invest. Shell corporations, which exist on paper but have no active business operations, can manipulate the laws that create corporations and exist solely for unethical or illegal purposes, such as tax havens. A critical issue with the nature of corporations is whether they are moral agents, which are morally responsible for their actions beyond the responsibility individual corporate employees have. Peter French argued that they are moral agents, but Manuel Velasquez argued that they are not.

This chapter also explored how corporations are punished. Punishment in general is typically justidied on dive grounds, all of which apply to corporations as well as individual people: deterrence, incapacitation, rehabilitation, retribution, and reparation. Just as there are different forms of punishment for individual people, there are also different ways of punishing corporations. Six of these are monetary dines, equity dines, corporate incapacitation, the corporate death penalty, corporate shaming, and community service orders. The selection of an appropriate corporate punishment often hinges on whether it will harm innocent people, such as employees, customers, and creditors, and also whether the punishment is severe enough to have a real impact on the corporation’s conduct. The U.S. government established the Federal Sentencing Guidelines for Organizations (FSGO), which guide Federal judges in imposing punishments on corporations. These guidelines also recommend steps for corporations to follow to maintain high standards of ethics and thus avoid illegal conduct. In addition to governmentally imposed punishments, consumers can also retaliate against unethical companies through boycotts and civil lawsuits.

The creation of an ethical culture within corporations often focuses on three notions: the stakeholder, the triple bottom line, and corporate social responsibility. Many corporations express their commitment to ethical standards within their mission statements and, in a more detailed way, through a corporate code of ethics.

A common criticism of these public statements is that they can be insincere efforts to make a company appear to be more ethical than it really is. Even in sincere efforts to create an ethical corporate climate, four things can hamper those efforts. First is the prodit motive itself, which can incline companies to minimize their social responsibility in their efforts to increase prodits. Second is strategic misrepresentation, in which a corporation intentionally misstates facts to gain a dinancial advantage. Third is groupthink, which occurs when employees set aside their ethical convictions in the process of building group consensus. Fourth is organizational schizophrenia, which occurs when management sends condlicting messages to employees about the corporation’s ethical priorities.

Discussion Questions

1. The Supreme Court argued that perpetual existence is one of the main benedits of creating corporations. As tragic as death is for natural persons, it nevertheless makes way for younger generations of people to put their mark on the world. Might there be a similar benedit if corporations were required to die after, say, 100 years of existence? What might the disadvantages be if such a policy were enacted?

2. One issue of corporate moral agency involves whether corporations can be accused of being immoral—beyond the immoral conduct of their employees. Peter French and Manuel Velasquez have taken opposing views on this. Explain their views and discuss which of the two you believe is correct.

3. Some codes of ethics include an intuitive guide for employees to assess their decisions. Look at the guide presented from Allstate in the chapter. Are all of the questions that are asked helpful for guiding ethical choices (such as “Is it legal?”)? Are there other questions that you think should be on the list?

4. Milton Friedman argued that businesses’ only responsibility is to make prodits, and they should avoid all efforts at social responsibility. Explain the rationale for his position, and discuss whether you agree.

5. Albert Carr defended strategic misrepresentation as a normal part of the business game. Think of an example in which you believe Carr is correct and another example in which you believe that strategic misrepresentation is wrong.

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Key Terms

board of directors

Group of individuals elected by corporation shareholders to manage the corporation.

community service order

A corporate punishment in which a company must participate in some project that benedits the community in some way.

consumer boycott

When a group of people act together to abstain from buying from or dealing with a business.

consumer retaliation

When individual consumers or consumer groups express dissatisfaction with a company through some effort that harms it dinancially, e.g., boycotts, complaints to government agencies, or civil lawsuits.

corporate codes of ethics

Detailed accounts of the principles of conduct within organizations that guide decision making and behavior.

corporate death penalty

A corporate punishment in which a company is forced to go out of business, such as by the revocation of its corporate charter.

corporate incapacitation

A corporate punishment in which a court issues an order to restrain the activities of a corporation in some area of business.

corporate moral agency

The concept that businesses are morally responsible for their actions, similar to how individual people are morally responsible for theirs.

corporate shaming

A corporate punishment in which the government requires a guilty company to make a public announcement that threatens its reputation and social standing.

corporate social responsibility (CSR)

A corporation’s efforts to take responsibility for its effects on the environment and its impact on social welfare.

corporation

A legally recognized independent entity owned by shareholders in which the corporation, and not the shareholders, holds legal liability.

creation by statute

The legal concept that corporations come into existence through the creation of a legal document called a charter.

deterrence

A justidication of punishment in which an offender is punished to set an example that might discourage others from committing similar crimes.

equity Nine

A corporate punishment in which a dine payment is made in shares of the company, not in money.

ethics ofNicer

An administrator within a company who holds workers accountable to the company’s ethical standards.

Federal Sentencing Guidelines for Organizations (FSGO)

U.S. government guidelines for sentences imposed by Federal judges, which include restitution, remedial orders,

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community service, dines, and jail terms.

Niduciary duty

A legal duty to act solely in another party’s interests.

Nine

A payment of money imposed as a penalty for an offense.

greenwashing

A term referring to pretended efforts at environmental responsibility and, more broadly, at corporate responsibility.

groupthink

The practice of thinking or making decisions as a group in a way that discourages creativity or individual responsibility.

incapacitation

A justidication of punishment in which removing an offender from society prevents the offender from committing similar crimes.

legal person

A nonhuman entity regarded by law as having the status of a person.

legal standing

The legal concept that a person can sue others and be sued by others, own property, and make contracts with others.

limited liability

The legal concept that a stockholder cannot lose more than the amount that he or she invested.

mission statement

A short account of a company’s fundamental purpose, which may include a statement of ethical standards.

ofNicers

Individuals designated by a corporation’s board of directors to operate the business, with the chief executive ofdicer (CEO) at the top and various levels of managers below.

organizational schizophrenia

Tension between competing goals or values within a corporation.

perpetual existence

The legal concept that corporations can continue indedinitely and independently of the temporary lives of their managers and shareholders.

rehabilitation

A justidication of punishment in which, through reform techniques, changes are made to an offender’s future behavior.

reparation

A justidication of punishment in which an offender must repay the victim for the injury that the offense caused.

retribution

A justidication of punishment in which punishment balances the scales of justice; a crime requires a punishment.

shareholders (stockholders)

Those who own a corporation by obtaining shares of stock in it.

shell corporations

Corporations that exist on paper but have no active business operations or signidicant assets.

stakeholder

Any party who is affected by, or who has a stake in, a business practice, including employees, suppliers, customers,

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creditors, competitors, governments, communities, and shareholders.

strategic misrepresentation

The intentional and systematic distortion or misstatement of facts for the purpose of gaining a dinancial advantage.

triple bottom line (3BL)

The view that successful companies must pursue three distinct values: people, the planet, and prodit.

Business Ethics Case Study 3.1: The Chick-dil-A Same-Sex Marriage Controversy

In 2012, Dan Cathy—CEO of fast-food chain Chick-dil-A—ignited a direstorm of protest when he made comments critical of same-sex marriage. In a news story for Baptist Press, he was quoted as saying that his company was “guilty as charged” in its “support of the traditional family,” and in a radio interview he said that “we are inviting God’s judgment on our nation when we shake our dist at him and say, ‘We know better than you as to what constitutes a marriage.’” The company’s founder also started a charitable organization called the WinShape Foundation, which had donated over $5 million to anti-gay groups since 2003.

What followed was a clash over the issue between liberal and conservative politicians, journalists and activists. LGBT advocacy groups organized a boycott of the restaurant chain. Former governor and presidential candidate Mike Huckabee responded by organizing a Chick-dil-A Appreciation Day, where supporters dlooded into restaurant locations creating record-breaking sales. Gay rights activists retaliated by holding a same-sex “Kiss Day,” where gay couples would kiss each other at outlets across the country.

Chick-dil-A is one of many major companies whose owners attempt to integrate their religious beliefs into their business practice. Other such companies include Tyson Foods, which has 115 chaplains on hand to counsel employees and their families. The clothing retailer Forever 21 sells religious-themed T-shirts, while Mary Kay cosmetics pushes the theme that God is their business partner. Interstate Batteries indicates that one of their purposes is to glorify God and that their employees may participate in biblically based opportunities that are woven throughout their work experience, while In-N-Out Burger prints biblical chapter and verse references on its paper containers.

Chick-dil-A’s integration of religion into their corporate culture is at least as unreserved as these. The dirst Chick-dil-A was opened in 1967 by founder Truett Cathy—father of the current CEO—who from the start integrated his Southern Baptist religious convictions into his business model. The company’s corporate purpose is “To glorify God by being a faithful steward of all that is entrusted to us and to have a positive indluence on all who come into contact with Chick-dil-A.” All franchises must be closed on Sundays so that employees can attend church. The franchise owners are carefully selected in a lengthy interview process; they look for operators that share the same Christian values and prefer ones who are involved in church. During the interviews, they ask personal questions about religion and marital status; while these questions are not technically against Federal guidelines, most employers shy away from them to avoid discrimination lawsuits. During training and organizational retreats, employees are expected to join in group prayers. According to a Forbes magazine story titled “The Cult of Chick- dil-A,” a prospective franchise owner who is Muslim stated that he was dired after refusing to participate in one such group prayer to Jesus Christ; he sued the company, and they settled out of court. A third of the franchise owners have participated in Christian relationship-building retreats sponsored by the company.

Considering how boldly the Cathy family infused their Southern Baptist value system into their corporate culture, it is not surprising that their views on family values became a matter of public controversy. But the company backpedaled quickly, and almost immediately issued the following statement: “The Chick-dil-A culture and service tradition in our restaurants is to treat every person with honor, dignity and respect—regardless of their belief, race, creed, sexual orientation or gender. . . . Going forward, our intent is to leave the policy debate over same-sex marriage to the government and political arena.”

The company stopped contributing to organizations that their critics have called anti-gay, and, in a recent

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interview, Dan Cathy said that he regrets making his company a symbol in the same-sex marriage debate and that Chick-dil-A has no place in the culture wars. “Every leader goes through different phases of maturity, growth and development and it helps by (recognizing) the mistakes that you make,” he said. “And you learn from those mistakes. If not, you’re just a fool. I’m thankful that I lived through it and I learned a lot from it.”

There is an important lesson to be learned from the Chick-dil-A controversy. It was not the purely religious component of their corporate culture that got them into trouble. Holding group prayers, glorifying God, and advocating church attendance are not normal corporate practices, but they are understandable in a country where 45% of the population identify themselves as born-again Christians.

We could imagine and appreciate how companies in predominately Buddhist countries might embrace their own religious expressions in a way that parallels Chick-dil-A’s religious commitment. What got Chick-dil-A into trouble, though, was advocating a controversial moral position that, while perhaps common among Southern Baptists today, is not the central message of that denomination’s theology. The lesson is this: Stay on topic and you’ll be dine; stray into divisive secondary issues and you’ll invite trouble.

Discussion Questions

1. Conservative churches often say behaviors such as tobacco use, drinking alcoholic beverages, recreational drug use, premarital sex, and adultery are sinful. Suppose that Dan Cathy said that, as a Christian company, Chick-dil-A was against these behaviors and God’s judgment would be on our nation if we did not stop them. Would this have provoked the same kind of controversy as his comments about same-sex marriage? Explain.

2. Consider the Muslim franchise operator who was dired for refusing to join in a group prayer to Jesus. Presumably, the company knew in advance that he was Muslim and hired him anyway. How could the company have better handled that situation?

3. With all the personal restrictions imposed by the home ofdice, would you personally want to be a Chick-dil-A franchise owner? Explain.

4. Do you believe it is ever appropriate for businesses to require their employees to participate in religious activities? Why or why not?

Sources: Associated Press (2014), The Barna Group (2006), Bhasin & Hicken (2012), Chick-Iil-A (2012), O’Connor (2012), Schmall (2007), “What Dan Cathy Said” (2012).

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4 Consumers

Learning Objectives

After reading this chapter, you should be able to:

Describe the nature and history of consumer advocacy. Outline the principal issues surrounding product safety. Explain forms of deceptive advertising. Describe problems surrounding the targeting of vulnerable groups. Describe different unfair sales tactics.

Jason Alden/Bloomberg/Getty Images

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Introduction

In 2015, the Attorney General of New York State ordered GNC, Target, Walgreens, and Walmart to remove fraudulent herbal supplements from their stores. DNA tests on their supplements revealed that only 21% contained the plants listed on the products’ labels. Walmart’s supplements came in the lowest at only 4%. The Attorney General stated “This investigation makes one thing abundantly clear: the old adage ‘buyer beware’ may be especially true for consumers of herbal supplements”(“A. G. Schneiderman,” 2015).

Indeed, let the buyer beware! This is a general word of warning to consumers that we have all heard in our buying experience. The warning alerts us to the fact that the products we buy may not be quality items as the seller claims, and that the burden may fall on us as consumers to research those products before we purchase them. However, although this warning is good advice, it does not apply to an array of products we routinely buy. This is because in the United States we have laws in place that prevent businesses from taking advantage of consumers, and in fact many businesses zealously guard their reputations as manufacturers or retailers of high-quality items.

Even in bygone eras, consumers had some protection. The ancient Babylonian Code of Hammurabi (mentioned in Chapter 1), from around 1750 BCE, gave this stern warning to building contractors: “If a builder builds a house for some one, and does not construct it properly, and the house which he built falls in and kills its owner, then that builder shall be put to death”(King, n.d., Sect. 229; language adapted). If we go back further in time, to hunter-gatherer days when people lived in small tribes, we can imagine that even then traders would have been under pressure to sell quality goods. Their trading capacity with other tribes might abruptly end if they gained reputations for selling shoddy merchandise, thus isolating the traders and their tribes and putting their very survival at risk.

Thus, whether it is laws or built-in market forces, we have some security that many, if not most, of the products we buy are good ones. Yet despite the reasonable amount of condidence consumers can have in the marketplace, there are still businesses that prey on consumers, unconcerned about the legal consequences or their business reputations. Not knowing when these situations might arise, consumers must indeed be on their guard. In this chapter, we will look at a cluster of issues often associated with consumer interests, namely product safety, deceptive advertising, exploitation of vulnerable groups, and a variety of manipulative sales tactics.

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4.1 Consumer Advocacy

The heart of the consumer-interest issue lies in what is called consumer autonomy: the notion that consumers should be in charge of determining what to purchase after being supplied with relevant information. Businesses should not be permitted to conceal important information about their products or manipulate consumers into purchases. If we choose to buy something that is useless or of poor quality, that is our choice as informed consumers. But we should not be forced into that situation by manipulation and deception from companies. For a consumer to make an informed choice, two critical conditions must be met:

1. the consumer must know how the product performs, and

2. the consumer must know how that performance compares to those of other products.

According to this view, it is not good enough for consumers to get half-truths about a product or be lured into a purchase through advertising hype. What is needed is relevant information, about both a given product and alternatives to that product.

But how do we get deceitful businesses to deal fairly with consumers? The answer is consumer advocacy, which is an organized effort to protect consumers against dangerous products, unfair pricing, deceptive advertising, and manipulative sales practices. Much consumer advocacy stems from governmental agencies that set standards of responsible dealings with consumers and punish offending businesses. Other efforts at consumer advocacy are spawned by concerned individuals or nongovernmental organizations that draw public attention to abuses and pressure change through negative public reaction, lawsuits, and governmental lobbying. Countries throughout the world typically have their own consumer-advocacy organizations, but the movement itself is a relatively recent phenomenon.

History of Consumer Advocacy

In the United States, consumer advocacy began in the early 1900s during what is known as the progressive era, a period of social activism and reform that focused heavily on rooting out fraud and corruption in politics and business. Journalists played a large role at the time—”muckrakers,” as they were called—by drawing attention to wrongdoing of all sorts, such as the predatory business practices of Standard Oil that wiped out its competition. The journalist Upton Sinclair vividly depicted the exploitation of American workers and the unsanitary conditions in the meatpacking industry in his novel The Jungle (1906). His most sensational description was of workers falling into lard tanks, being ground up with animal fat, and ultimately being sold as lard. Public reaction to the book was so strong that the government was pressured into creating legislation to correct the problems in the meat industry. This resulted in the Pure Food and Drug Act of 1906, the stated aim of which was to prevent “the manufacture, sale, or transportation of adulterated or misbranded or poisonous or deleterious foods, drugs, medicines, and liquors” (Federal Food and Drugs Act of 1906, 1906).

Governmental Agencies Established

Within this historical context, two important governmental agencies were set up to protect consumer interests: the FTC

Pure Food and Drug Act

Critical Thinking Questions

The Pure Food and Drug Act of 1906 was the result of consumer advocacy. Even today companies still tout miracle cures and quack remedies that consumer groups complain about. Why does the sale of such products persist in spite of consumer advocacy and governmental regulation? Give an example of consumer advocacy issues today that might be as important as the one that resulted in the Pure Food and Drug Act.

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and the FDA. The Federal Trade Commission (FTC) was established in 1914 to prevent businesses “from using unfair methods of competition in commerce.” The agency’s scope broadened over the years and now includes the Bureau of Consumer Protection, whose aim is to “protect consumers against unfair, deceptive, or fraudulent practices” (Vladeck, n.d.). Figure 4.1 lists the top 10 consumer complaints reported to the FTC in 2013. The FTC’s top 10 list changes slightly from year to year, but for the past decade, identity theft has consistently been at the top.

Figure 4.1: Top 10 consumer complaints reported to the FTC, 2013

The FTC is one of two government agencies that aim to protect consumer interests. Identity theft has been ranked near the top of the list for the past decade.

Source: Federal Trade Commission. (2014). Consumer Sentinel Network data book for January–December 2013 (p. 6). Retrieved from http://www.ftc.gov /system/Niles/documents/reports /consumer-sentinel-network-data-book-january-december- 2013/sentinel-cy2013.pdf (http://www.ftc.gov/system/Niles /documents/reports/consumer-sentinel-network-data-book-january- december-2013/sentinel-cy2013.pdf )

Next, the Food and Drug Administration (FDA) was formed in 1927 for the purpose of carrying out the tasks specidied in the Pure Food and Drug Act of 1906. In addition to these two important governmental agencies, in 1936 the nonprodit organization Consumers Union formed in response to advertising that began dlooding the mass media. As it says in the mission statement of the organization’s Consumer Reports magazine, consumers at that time “lacked a reliable source of information they could depend onto help them distinguish hype from fact and good products from bad ones” (Consumer Reports, n.d.). Since its inception, Consumers Union has conducted quality tests on hundreds of products each year, from breakfast cereals to automobiles, and has published its results in Consumer Reports. A negative review of a given product can devastate that product’s sales, and manufacturers often take the magazine’s assessments seriously.

Responding to Business Conduct

The consumer-advocacy movement continued to grow in the mid-20th century, often in response to outrageous conduct by businesses. Once such case was the manufacture of an antibacterial medicine called Elixir Sulfanilamide, which in 1937 caused the deaths of over 100 people. The raspberry-dlavored product was prepared with a solvent that, unbeknownst to the manufacturers, was poisonous. When the deadly effect of the drug was discovered, government agencies were successful in retrieving most of the distributed supply. The company owner denied responsibility for the tragedy, stating, “My chemists and

I deeply regret the fatal results, but there was no error in the manufacture of the product. We have been supplying a legitimate professional demand and not once could have foreseen the unlooked-for results. I do not feel that there was any responsibility on our part” (S. E. Massengill, quoted in “Elixir Sulfanilamide—Massengill,” 1938, p. 69). The chemist himself, however, committed suicide while awaiting trial. A consequence of this episode was the passage of the Federal Food, Drug, and Cosmetic Act of 1938, which gave the FDA greater power to regulate the testing, labeling, and marketing of drugs.

Consumer Bill of Rights

President John F. Kennedy propelled consumer advocacy further in a landmark speech in 1962 when he articulated four fundamental consumers’ rights, later known as the Consumer Bill of Rights:

1. The right to safety—to be protected against the marketing of goods that are hazardous to health or life.

2. The right to be informed—to be protected against fraudulent, deceitful, or grossly misleading information,

advertising, labeling, or other practices, and to be given the facts necessary to make an informed choice.

3. The right to choose—to be assured, wherever possible, access to a variety of products and services at competitive

prices; and in those industries in which competition is not workable and government regulation is substituted, an

assurance of satisfactory quality and service at fair prices.

4. The right to be heard—to be assured that consumer interests will receive full and sympathetic consideration in

the formulation of government policy, and fair and expeditious treatment in its administrative tribunals (Kennedy, 1962).

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These rights, according to Kennedy, required support through governmental regulations and agencies. Through them, he argued, food, drugs, and automobiles would become safer, dinancial markets would become more secure, and deceptive trade practices would be curtailed.

Consumer Product Safety Commission

In 1972, the Consumer Product Safety Commission (CPSC) was founded for the purpose of protecting the public “against unreasonable risks of injuries and deaths associated with consumer products” (Consumer Product Safety Act of 1972, 1972, Section 2). The CPSC has jurisdiction over about 15,000 types of consumer products, including coffeemakers, toys, lawn mowers, and direworks. The commission sets product-safety standards, oversees product labeling, and orders recalls of unsafe or defective products. It also requires businesses themselves to report any product that “contains a defect which could create a substantial risk of injury to the public or presents an unreasonable risk of serious injury or death” (U.S. Consumer Product Safety Commission, n.d.). The CPSC provides step-by-step guidelines for issuing product recalls and alerting the public to the problem. 2007 saw the biggest number of product recalls up to that date—nearly 500 items—over half of them products from China, many of them toys (Lipton & Barboza, 2007). As a result of the 2007 recall crisis, Congress passed the Consumer Product Safety Improvement Act of 2008, which gave more power and resources to the CPSC.

U.N. Guidelines for Consumer Protection

In 1985, the United Nations enacted a set of Guidelines for Consumer Protection. The 1999 expanded version of the guidelines specidied the following seven fundamental consumer needs that should be met:

1. The protection of consumers from hazards to their health and safety;

2. The promotion and protection of the economic interests of consumers;

3. Access of consumers to adequate information to enable them to make

informed choices according to individual wishes and needs;

4. Consumer education, including education on the environmental, social and

economic impacts of consumer choice;

5. Availability of effective consumer redress;

Manuel Balce Ceneta/Associated Press

The U.S. Public Interest Research Group (PIRG), a consumer group that “stands up to powerful interests whenever they threaten our health and safety, our Ninancial security, or our right to fully participate in our democratic society” issues an annual “Trouble in Toyland” report detailing hazardous toys on the market. Here, a PIRG spokesperson holds a news conference to display some of the dangerous toys—such as those with high lead levels or those that pose choking hazards—found on retailers’ shelves in the country.

6. Freedom to form consumer and other relevant groups or organizations and the opportunity of such organizations to present their views in decision-making processes affecting them;

7. The promotion of sustainable consumption patterns. (United Nations Conference on Trade and Development, 2001, p. 3)

Although these guidelines are not binding on the member nations of the United Nations, they offer a model for how each member nation might implement those ideals within its own government.

Table 4.1 lists the various consumer protections efforts made by governments, often in response to specidic abuses.

Table 4.1: Consumer protections

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Consumer protection

Date created

Purpose

Food and Drug Administration (FDA)

1927

To carry out the tasks specidied in the Pure Food and Drug Act of 1906.

Consumer Union

1936

Consumer Bill of Rights

1962

To help consumers distinguish hype from fact and good products from bad ones.

To articulate four fundamental consumers’ rights.

Consumer Product Safety Commission

1972

To protect the public “against unreasonable risks of injuries and deaths associated with consumer products.”

U.N. Guidelines for Consumer Protection

1985

To articulate and provide guidelines regarding how seven fundamental consumer needs should be met.

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4.2 Product Safety

A major focus of consumer advocacy—whether governmental or nongovernmental—is product safety. Some consumer items are by their nature unavoidably unsafe products, in the sense that if they were made safe they would not be useful for their intended purpose. Lawn mowers, kitchen knives, drain cleaners, nail-polish remover, and direarms are examples; in each of these cases, making them completely safe would make them useless. What is of concern is not whether the product is inherently unsafe, but whether it has a substandard design that makes it less safe than an alternative and more acceptable design. The CPSC lists three hazard levels of products:

Class A hazard: Exists when a risk of death or grievous injury or illness is likely or very likely, or serious injury or illness is very likely.

Class B hazard: Exists when a risk of death or grievous injury or illness is not likely to occur, but is possible, or when serious injury or illness is likely, or moderate injury or illness is very likely.

Class C hazard: Exists when a risk of serious injury or illness is not likely, but is possible, or when moderate injury or illness is not necessarily likely, but is possible. (U.S. Consumer Product Safety Commission, 1999)

The more serious the hazard, the higher the priority for notifying the public and issuing recalls. The CPSC has a “fast track product recall program” designed for companies that can move quickly with a voluntary recall of their product. This eliminates some procedural steps in the recall process, specidically the need for a preliminary determination by the CPSC about whether the product contains a defect that presents a substantial hazard.

Safety and User Reviews

With the rapid increase of online retail stores, buyers have had access to countless user reviews of various products that forewarn them of difdiculties with those items. This body of information is an invaluable resource to consumers today that was unavailable in previous generations. It has thus created a new public forum for individuals to voice their objections to products and business practices. For example, the expression “cheap piece of junk”— and similar wording—appears in over 10,000 user reviews on Amazon.com. The products in question include alarm clocks, money clips, toy magic wands, computer-game controllers, bongo drums, heart-rate monitors, and paper shredders. The expression “dangerous product” is found in several thousand reviews, including those of chairs, toasters, gas cans, lawn mowers, weight-loss drugs, pet chew toys, oven liners, seat-belt adjusters, exercise weights, outlet adapters, and toy mirrors. A common phrase in reviews of computers and other electronic devices is “unreliable product.”

User reviews not only help buyers sort out good products from bad ones, but they allow retailers and manufacturers to monitor them for indications of what the product does right and wrong. Negative reviews are sources of embarrassment for companies, and they forecast dinancial problems as a result of decreased sales, product returns, and perhaps even product recalls and lawsuits.

The government itself has gotten on board with grassroots consumer activism and has created a website —SaferProducts.gov (run by the CPSC)—where consumers can report unsafe products. Businesses also have the opportunity to post responses to complaints. Here is a posted complaint of a malfunctioning refrigerator light bulb, with the manufacturer’s response:

Complaint: “The light bulbs in my refrigerator failed to turn off. The bulb housing melted and sagged, the roof of the refrigerator has bubbled, and the bulb sockets appear scorched. It appears the manufacturer is aware of this problem, but did not notify me.”

Response: “Sears Holdings takes product safety issues very seriously. We investigate each CPSC database incident report. We encourage our customers to provide additional information about incidents to our Customer Care Network, by calling 800-549-4505.” (SaferProducts.gov, 2011b)

Sears’s response is a general statement that they use in many of their comments on this website; other companies use similar stock responses to reported problems. Here is a more serious complaint about a child choking on a toy:

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Complaint: “My four year old son put a small toy in his mouth. The toy went back into his throat and was lodged in his esophagus. Initially, he had trouble breathing. Then, it got lodged down farther. He was transported to the hospital after calling 911.”

Response: “Spin Master Ltd was very concerned to learn of this incident with the Wal-Mart exclusive Action Dragon digure produced for the Train Your Dragon movie. The product is no longer in production as the toys were related to the movie release. When we work on a toy, we diligently assess the designs, and production products, using external, qualidied third party labs. This product was reviewed, tested and assessed for all applicable toy standards and age grade. The product has passed all testing with no issues. The product is marked clearly with a warning for choking hazard due to small parts, and age graded for 5 plus years. Despite passing all safety testing, when we learn of an incident, we take it very seriously and will incorporate the knowledge into our design assessments for future products.” (SaferProducts.gov, 2011a)

Roberto Herrett/age footstock/Superstock

The online forum for product reviews provides an invaluable resource for consumers today.

undiltered.

Safety and Consumer Petitions

Unlike Sears’s response, Spin Master’s comment is particular to the customer’s specidic complaint. In the excerpt quoted here, they express concern over the choking but maintain that their product was safe.

An objection that has been voiced about the SaferProducts.gov website is that it does not dilter out consumer complaints that may be inaccurate. Representative Mike Pompeo even attempted to shut down the site by eliminating its funding, on the grounds that it would harm U.S. businesses. He argued that the website’s managers do not sufdiciently weed out false or inaccurate claims, the presence of which will mislead consumers and damage the reputation of innocent and safety-conscious manufacturers (Pompeo, 2011). On the other side of the debate, however, undiltered customer reviews are so commonplace on the Internet now that there is nothing unique about what the website is doing—other than the fact that it is run by a government agency. Further, the CPSC stated that it would not post reports that have missing or clearly untrue information, so it is not entirely

While user reviews are probably the fastest way for consumers to voice concerns about product safety, another approach is to start a petition against a company. The website Change.org makes this particularly easy, with one click of a button off its homepage. With over 80 million participants, the organization’s motto is “the world’s platform for change,” and it has hundreds of thousands of petitions on political, environmental, educational, human rights, and business issues.

One such petition was started by a 17-year-old girl named Sarah Kavanagh, who asked PepsiCo to remove the food additive BVO from Gatorade. BVO (brominated vegetable oil) has been used in the manufacturing of soft drinks since 1931 as a mechanism for uniformly distributing citrus dlavoring throughout the drink. While once considered safe, it is associated with a neurological illness called “bromism,” and in 1970 the FDA placed it into a category of “interim food additives” that are permitted pending further study for safety. The chemical is also used in some products as a dlame retardant. Kavanagh’s petition, “Don’t put dlame retardant chemicals in sports drinks!” received over 200,000 signatures, and two years later PepsiCo agreed to remove the chemical from all of its drinks. At the same time, Coca-Cola agreed to do the same.

Unsafe Automobiles

One product that qualidies as “unavoidably unsafe” is the automobile, which today accounts for over 30,000 deaths in the United States per year. The automobile is an inherently unsafe product because it is designed to hurl us down the road at such high speeds that, upon collision, the human body cannot withstand impact. The responsibility of auto manufacturers is to seek out ways to make their vehicles safer, even though the risk can never be fully eliminated. That is precisely what

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has occurred in automobile manufacturing over the past half century. The most important of the design changes have been seat belts, crash crumple zones, collapsible steering columns, air bags, stronger roof supports, rollover bars, and antilock brakes.

With these safety improvements, the number of automobile fatalities per year in the United States has been dramatically decreasing—and this is while, at the same time, the number of hours that the population spends on the road each year has been increasing. But automobile manufacturers have often resisted making changes for the simple reason that safety costs money. The changes that have taken place were largely the result of external pressure by legislators, governmental agencies, and consumers.

Ralph Nader and the Chevrolet Corvair

The case that kicked off the safety revolution in automobile manufacturing involved Ralph Nader and the Chevrolet Corvair. In 1960, General Motors introduced the Corvair as a small, sporty, and comparatively low-cost vehicle. But a design dlaw with the car’s suspension caused the rear tire to tuck under in sharp turns and dlip the car.

Nader, a young attorney, published his book Unsafe at Any Speed, which criticized automobile manufacturers for resisting safety improvements to save money. The public attention that Nader drew to this issue helped bring about the National Trafdic and Motor Vehicle Safety Act of 1966 and the subsequent creation of the National Highway Trafdic Safety Administration (NHTSA), whose stated mission is to “save lives, prevent injuries, and reduce economic costs due to road trafdic crashes” (n.d.).

The Ford Pinto

The case that most represents automobile manufacturers’ resistance to safety changes is the Ford Pinto. Introduced in 1970, the Pinto was a compact and comparatively inexpensive car. Preliminary tests of the vehicle showed that it could not withstand a 20-mph rear-end collision without rupturing the gas tank. Ford nevertheless put the car into production and made no changes to its gas-tank design in subsequent years.

The decision was based on a cost-benedit analysis. While the estimated costs of improving the Pinto’s safety were comparatively low, at $11 per vehicle, the total cost would outweigh the benedits: $138 million to dix the problem versus $50 million in injury costs. In what is now called the “Ford Pinto Memo,” the company laid out estimated injury costs. First, the NHTSA had itself calculated that the total cost of a death from an automobile accident was around $200,000 in the year 1972. NHTSA’s analysis is here (Dowie, 1977):

Future productivity losses

Direct: $132,000

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Indirect: Medical costs Hospital:

Other: Property damages:

Insurance administration:

Legal and court expenses:

Employer losses:

Victim’s pain and suffering:

Funeral:

Assets (lost consumption):

Miscellaneous accident costs:

Total cost per fatality:

$41,000

$700

$425 $1,500 $4,700

$3,000

$1,000 $10,000

$900 $5,000

$200

$200,425

The Ford Pinto Memo took this digure of roughly $200,000 and included it in the following cost-benedit analysis, based on an estimated 180 burn deaths and 180 burn injuries per year (Dowie, 1977):

Benedits 180 burn deaths, 180 serious burn injuries, 2,100 burned vehicles Unit cost: $200,000 per death, $67,000 per injury, $700 per vehicle Total Benedit: (180 × $200,000) + (180 × $67,000) + (2,100 × $700) = $49.53 million

Costs Sales: 11 million cars, 1.5 million light trucks Unit cost: $11 per car or truck Total cost: 12.5 million × $11 = $137.5 million (Dowie, 1977)

The upshot is that the company would save $85 million by not dixing the problem and instead paying damages from burning deaths and injuries. However, starting in 1976, the NHTSA required that vehicles pass a 30-mph collision test. Ford redesigned the Pinto’s fuel tank to meet that standard and issued recalls on all previous models. Ford’s costs from the recall and design changes completely eliminated any savings they might have otherwise gained by neglecting the problem for so many years. Further, the Ford Pinto Memo painted the company as a heartless and cynical institution that put a low value on human life and cared more about cutting costs than about preventing its customers’ being burned alive in its poorly designed vehicle. The bad publicity that Ford received from this episode has itself become a lesson in business ethics about insensitivity towards product-safety issues.

ASSOCIATED PRESS

This photo shows a 1973 Ford Pinto after a rear-end crash. In 1976, Ford was forced to redesign

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Recent Automobile Recalls: Toyota and GM

Recalls are now commonplace in the automobile industry—for example, in 2014, Toyota announced 13 of them, which included issues with overhead grips, suspension systems, airbag indlators, and software settings. Some of these were minor issues, but Toyota faced a major problem in 2007 when it began recalling more than 10 million vehicles for unintended acceleration surges that resulted in 7000 complaints. In fact, CBS News (2010) linked the problem with 89 deaths, although the NHTSA has condirmed only four. Many theories were proposed for the accelerations, and public alarm was at a high. The Department of Justice brought criminal charges against Toyota for covering up the issue, and in 2014 reached a settlement, with Toyota admitting to misleading customers about the problem and agreeing to pay a $1.2 billion dine in exchange for the criminal charges being dropped (U.S. Department of Justice, 2014).

Shortly after the 2014 Toyota incident, GM recalled around 25 million of its vehicles because of faulty ignition switches, which had been linked with 13 deaths, 31 crashes, and nondeployment of airbags. GM knew about problems with the switches a decade earlier, and GM’s supplier told congressional investigators that “GM accepted the switches now under recall despite knowing they did not meet the company’s specidications” (Spangler, 2014). GM has since set up a compensation claim program for victims that, with the exception of stipulated compensation for nights stayed in hospitals, has no caps on payments to eligible claimants.

What Would You Do?

You are the CEO of an automobile company. Your research and development department has a safety design that will improve passenger protection in side-impact collisions. If it is implemented in all of your company’s vehicles, an estimated 100 lives will be saved each year. However, the design change will increase the cost of each vehicle by $500, which will put you at a competitive disadvantage and decrease company prodits by 10%.

1. Would you implement the design change on all of your vehicles, only some, or none? Explain your response.

2. Suppose that the change would save 1,000 lives per year. Would that make a difference in your decision? Why or why not?

3. Your marketing department tells you that car buyers are mainly motivated by the appearance, comfort, and performance of a vehicle, and safety is typically a low priority. Would that marketing fact impact your decision? Why or why not?

4. Suppose that your company had a patent on the design change. Would you make it available to your competitors for free, knowing that it would save more lives if you did? Why or why not?

the Pinto's fuel tank to meet new safety standards and issued recalls on all previous year models.

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4.3 Deceptive Advertising

As consumers, we are inundated with advertising messages on TV, radio, billboards, and almost every page of the Internet. Some are overt pleas to buy products. Others are sneaky product placements, such as in movies when a character laces up a pair of name-brand tennis shoes. The hype in these ads is relentless, as each one attempts to compete with others for our attention. We learn to psychologically block out most ads, just so we can get through the day without being immobilized through distraction. We also automatically tone down the exaggerated claims that sound too good to be true, and selectively pick out information from ads that we dind relevant.

At the same time, though, we know that advertisers often go too far in their claims and tell outright lies about their products. Deceptive advertising—also called false and misleading advertising—is advertising that intentionally misleads or confuses consumers. The deception may involve ambiguity, concealment of facts, gross exaggeration, or outright false statements. In each case, though, it contains a substantial falsehood such that consumers would not buy the product if they knew the truth about it. Advertisers are not required to present all the facts about their products to escape the charge of deceptive advertising. In fact, the very nature of advertising involves the use of selective information to get a person to identify and select a given product on the store shelf. Advertising is deceptive, however, if false information is the fundamental cause for a person to select one product over another.

From a moral standpoint, deceptive advertising is wrong for three reasons:

1. It involves a lie, either a direct one through a blatantly false statement or an indirect one through a subtly misleading statement.

2. It is wrong because relevant information is covered up that is essential for making a genuinely rational choice. Suppose I am interested in losing weight and looking at a nutritional supplement called Fat Dissolver. The advertiser knows the kind of information I need to make a rational choice to buy a weight-loss product, but also knows facts about Fat Dissolver that will not meet that standard of information. The advertiser, then, misrepresents the information about the product so that it meets my threshold for making a rational decision. By concealing the true nature of the product, the advertiser is mistreating me as a rational being and essentially swindling me into a purchase I otherwise would not have made.

3. It is wrong because it is a type of unfair competition. Suppose there are dive competing weight-loss products on the market, four of which make truthful claims in their advertisements. Advertisers of Fat Dissolver, however, make their product more appealing by misrepresenting the facts about it. They have beaten the competitors but have done so unfairly through deceit.

Figure 4.2 shows FTC commissioner Roscoe Starek’s list of “Myths and Half-Truths About Deceptive Advertising” as warnings to potentially deceitful advertisers. The underlying theme of these myths is that advertisers should not be lazy in the fact-gathering process. There are scientidically respectable standards for determining what counts as a factual claim about a product, and those are the standards upon which advertisers should rely.

Figure 4.2: Myths and half-truths about deceptive advertising

Deceptive advertising intentionally confuses or misleads consumers. The presence of one or more of the nine items listed here could be a warning sign of a potentially deceitful advertisement.

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Source: Starek, R. B., III. (1996, October). Myths and half-truths about deceptive advertising. Presented at the National Infomercial Marketing Association, Las Vegas, NV. Retrieved from https://www.ftc.gov/public-statements/1996/10 /myths-and-half-truths-about-deceptive-advertising (https://www.ftc.gov/public-statements/1996/10/myths-and-half- truths-about-deceptive-advertising)

Deceptive Food Packaging

Statements about the health benedits of food products are an area where advertisers have been notoriously negligent about backing up their claims with scientidic evidence. In a 2014 class action lawsuit against manufacturers of Red Bull, the company agreed to pay $13 million for unsubstantiated claims that its highly caffeinated beverages improve athletic performance. But one area of the food industry that is especially dilled with exaggerations and false statements is dietary supplements. A good example is Airborne, a dietary supplement of herbs, vitamins, and minerals that is advertised as supporting the immune system. Created by a schoolteacher in 1990, the product is available in several forms. According to the FTC, the company made unsupportable claims that Airborne “can prevent or reduce the risk of colds, sickness, or infection; protect against or help dight germs; reduce the severity or duration of a cold; and protect against colds, sickness, or infection in crowded places such as airplanes, ofdices, or schools” (Federal Trade Commission, 2008). At one point, the company had said that a double-blind, placebo-controlled study was conducted on the product by GNG Pharmaceutical Services. But, according to an ABC News investigation, “GNG is actually a two-man operation started up just to do the Airborne study. There was no clinic, no scientists and no doctors”(2006). Airborne subsequently removed references to the study from its website and packaging and agreed to pay a $30 million settlement for both a private classaction lawsuit and an FTC lawsuit for deceptive advertising.

Even when nutritional claims on food packages are, strictly speaking, true, they can be fundamentally misleading. A mother of a 4-year-old girl diled a classaction lawsuit against the manufacturers of Nutella hazelnut spread for deceptive advertising. She purchased the product based on advertisement claims that it was a healthy and nutritious breakfast food. However, when learning of its high fat and sugar content, she concluded that it was “the next best thing to a candy bar” (Weiss, 2011). Nutella agreed to a $3.5 million settlement.

Nutella is clearly not alone in broadcasting nutritional claims in ads and packaging. Statements such as “high in vitamins” “low in carbohydrates,” and “an excellent source of calcium” create the illusion that a product is, on the whole, healthy, when the selective information presented may be irrelevant to the buyer’s actual health needs. One study of this subject concluded that claims on food packaging should speak directly to the most critical health issues of buyers:

Nutrition rating systems and symbols on the fronts of food packaging would be most useful to shoppers if they highlighted four nutrients of greatest concern—calories, saturated fat, trans fat, and sodium. . . . These food components are routinely overconsumed and associated most strongly with diet-related health problems affecting many Americans, including obesity, heart disease, high blood pressure, Type 2 diabetes, and certain types of cancer. (Institute of Medicine of the National Academies, 2010)

Daniel/dapd/Associated Press

Statements such as “high in vitamins,” “low in carbohydrates,” and “an excellent source of calcium” create the illusion that a product is, on the whole, healthy.

According to this study, major public-health issues could be better addressed if product packaging focused on calories,

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saturated fat, trans fat, and sodium rather than on less important nutritional claims. This would eliminate much of the nutritional hype on food packaging and prominently display the health information that consumers need most.

Deception Versus Puffery

What we have seen so far is that advertising that blatantly makes false claims is both morally wrong and legally prohibited. But what about exaggerated claims like “the best dishwashing liquid of all time,” or “the world’s richest cup of coffee,” or “the number 1 best tasting,” or “the most delicious way to eat healthy”? Although these statements are not, strictly speaking, true, are they misleading?

In the advertising world this is called puffery, and there are two distinct elements to it:

It involves an exaggeration that no reasonable person would take as factual. If I claim that my product is the best and greatest creation on the planet, you should not believe me. You would see it as just my attempt to get your attention. No one believes that the Energizer Bunny literally keeps on going and going. The claim is too vague to be provable. What sort of scientidic test could we devise to prove that a specidic brand of hot dog is “the dinest in the world”? The word Iinest is so vague that we cannot establish a clear criterion to determine whether something does or does not count as the dinest. The term world is also vague. Does it include all nations and cultures on earth? Does it include homemade hot dogs throughout the world, or just mass-produced ones? A claim cannot count as factual when there is no method we can devise to prove or disprove its truth.

This point is illustrated in a case involving American Italian Pasta Company, which placed “America’s favorite pasta” on its packaging of Mueller’s-brand dried pasta. A rival manufacturer, New World Pasta Company, challenged the company, arguing that the phrase constituted false and misleading advertising. The judge ruled that the slogan was not deceptive because“‘America’s Favorite Pasta’ is not a specidic, measurable claim and cannot be reasonably interpreted as an objective fact.” He further explained the distinction between puffery and factual statements:

Puffery and statements of fact are mutually exclusive. If a statement is a specidic, measurable claim or can be reasonably interpreted as being a factual claim, i.e., one capable of veridication, the statement is one of fact. Conversely, if the statement is not specidic and measurable, and cannot be reasonably interpreted as providing a benchmark by which the veracity of the statement can be ascertained, the statement constitutes puffery. (Fraker v. KFC Corp., 2007)

In short, if a claim is puffery, then it cannot be a measurable statement of fact.

Comparative Advertising Versus Puffery

Sometimes exaggerated claims in advertising appear to be mere puffery, but they still contain a factual element that can be tested, such as “Our coffee is even better than Starbucks.” This is an example of comparative advertising, in which a product or service is said to be superior to that of its competitors. In this statement, a direct comparison is being claimed between two products, and this requires factual condirmation. FTC commissioner Roscoe Starek makes this point here:

The FTC does not pursue subjective claims or puffery—claims like “this is the best hairspray in the world.” But if there is an objective component to the claim—such as “more consumers prefer our hairspray to any other” or “our hairspray lasts longer than the most popular brands”—then you need to be sure that the claim is not deceptive and that you have adequate substantiation before you make the claim. (1996, paragraph 4)

This is precisely what happened in a lawsuit against Papa John’s Pizza for use of its slogan “Better ingredients. Better pizza.” Pizza Hut sued, arguing that within the context of Papa John’s overall advertising campaign, the slogan was making a comparison with other companies and thus constituted false advertising. In one of its ads, for example, Papa John’s made the comparative claim that its pizza “won big time” in taste tests over Pizza Hut. Papa John’s responded that its slogan was mere puffery and not a factual statement. However, the judge agreed with Pizza Hut: By directly comparing the ingredients of rival pizza chains in its ads, Papa John’s Pizza had created a context that no longer qualidied as puffery. And within that larger context, Papa John’s could not prove that its fresher ingredients resulted in better-tasting pizza. The

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company was then prohibited from using the word better to describe its pizza.

On appeal, however, Papa John’s was permitted to continue using its slogan because Pizza Hut did not prove that the slogan itself improved Papa John’s sales. But the appeals court did agree with the critical point that the slogan was misleading within the context of its ad campaign. This case illustrates what is known as the puffery legal defense: When charged with false advertising, a company can claim that it was only engaging in puffery. As a legal strategy, it aims to protect advertisers whose speech is not strictly factual. In this case, the strategy did not work for Papa John’s Pizza.

Although comparative advertising is legal in the United States, it is allowable only within the context of laws that prevent harm to the identidied business, prevent false and misleading claims, and prevent unfair competition. However, until recently, comparative advertising was banned or heavily restricted in many other countries, including European ones. The concerns were not only over deception, but over trademark issues, particularly these three:

Comparative advertising involves the use of another’s trademark without permission, and thus is the taking of property of the trademark owner. Comparative advertising, even when truthful, involves an unfair trading on the reputation of the trademark owner. Comparative advertising threatens to dilute a company’s trademark by lessening its uniqueness.

The trademark dilution issue is even of concern in the United States, where many states have anti-dilution laws that are stricter than Federal laws. A comparative advertising example of this is the New York court case Deere & Company v. MTD Products (1994). In one of its television advertisements, MTD included a humorous animation in which an altered version of the John Deere deer is being chased by an MTD tractor and a dog. John Deere diled for a restraining order to stop the MTD commercials on the grounds that they violated New York’s anti-dilution law. MTD responded that its use of the trademark did not “confuse consumers or result in a loss of the trademark’s ability to identify a single manufacturer, or tarnish the trademark’s positive connotations.” The court acknowledged that the animation was humorous, but nevertheless ruled that MTD crossed over the line of New York’s anti-dilution law (Deere & Company v. MTD Products, 1994).

Punishment for Deceptive Advertising

When companies do engage in deceptive advertising, what sorts of punishments might they face, either unofdicially or ofdicially?

UnofSicial Punishment

Unofdicially, consumers themselves can seek vindication in their product reviews when a purchased item does not live up to claims in advertisements. Also, journalists and consumer-advocacy organizations can embarrass companies by bringing public attention to deceptive ads. For example, Consumer Reports, on the last page of each issue, has a segment called “Selling It,” which shows pictures of misleading advertising and labeling, such as:

Large boxes of food that contain only a tiny amount of product. An advertisement for Internet services boldly proclaiming that prices are “guaranteed to never go up,” while tiny dine print in the same ad states “rates increase after two years.” A piece of junk mail from a car company that comes in an envelope that at dirst glance looks like an important letter from the IRS. An advertisement for a car-rental company that prominently displays a picture of an expensive sports car, but the dine print states that the rental company does not currently have that car in its dleet.

All of these examples are for famous name-brand products, and it is humiliating for any of these companies to have their conduct placed on public display like this. While any company’s product is fair game for inclusion Consumer Report’s “Selling It” list, some organizations focus on just a single company. An example of this is the Walgreens Gone Wrong website, run by the consumer advocacy organization “Change to Win” (www.walgreensgonewrong.org (http://www.walgreensgonewrong.org) ). The website states, “The mission of Walgreens Gone Wrong is to make the country’s largest drugstore a better, more trustworthy place to shop and receive health services. . . . But, in our view, Walgreens isn’t living up to its high standards of service and integrity.” Here are some of their concerns:

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Out-of-Stock and Misleading Sale Signs: “Certain promotions were consistently out of stock across markets”; “Unlabeled sale items common in nearly every store.”

Balance Rewards Loyalty Program: “A nationwide poll of more than 2,000 Walgreens shoppers raises questions about how much value customers are getting from the Balance Rewards loyalty program.”

Well Experience: “Violations of patient privacy”; “Inadequate medication security”; “Increased pharmacist distractions”; “Low rates of patient counseling.”

Flu Shots: “Walgreens employees gave inaccurate information about dlu shot coverage in 48 percent of store visits across New York City and Los Angeles.”

OfSicial Punishment and Self-Regulation

There are also more ofdicial ways of punishing deceptive advertisers. For example, one company can sue another that treats it unfairly, just as Pizza Hut did with Papa John’s in its comparative advertising case. Also, individual citizens can dile classaction lawsuits against companies with deceptive ads, such as one against Sketchers for making unsubstantiated claims that their toning shoes would help people lose weight as well as strengthen and tone their buttocks, legs, and abdominal muscles. The company paid $40 million to settle the suit and agreed to stop the advertisements.

An alternative to using the legal system is a mechanism of self-regulated advertising, where the industry monitors and corrects false advertising by itself, without reliance on government agencies and courts. The Advertising Self-Regulatory Council (ASRC) is the primary self-regulatory body for the advertising industry in the United States. It sets policies and procedures for advertisers and seeks to minimize governmental involvement in the advertising business. The rationale behind self-regulation in advertising is that each business is sufdiciently motivated to monitor the false advertising of its competitors. Suppose that you and I manufacture rival brands of hot dogs, and in your ads you make outrageous health claims about yours, such as your hot dogs cure heart disease. To prevent you from unfairly getting a larger share of the hot-dog market, I will want to stop your ads.

Government regulation, ASRC argues, is costly and burdensome, and they offer businesses an arbitration system to resolve disputes with competitors without the involvement of courts. ASRC will also address consumer complaints about misleading claims in national advertisements, such as those about product performance, superiority against competitive products, and technical facts. Armed with these consumer complaints, ASRC itself can approach businesses to correct the problems, without involving the government.

The FTC is the dinal governmental authority on deceptive advertising. It has a long-standing policy of encouraging advertising self-regulation programs such as ASRC’s. As one FTC commissioner stated, “In a rapidly-evolving marketplace, a responsive self-regulatory body may be more nimble than government regulators at addressing changes and correcting problems” (Harbour, 2005,p. 2). However, the FTC believes that self-regulation has not been effective in curbing advertising abuses in some very specidic areas. These include weight-loss claims in advertisements; food advertising to children; alcohol advertising to youth; Internet advertising through spam and spyware; and advertising regarding violent or explicit movies, music, and electronic games. In these cases, the motive for self-regulation is compromised because the products themselves are often morally questionable.

Suppose that you and I sell rival weight-loss drugs that are virtually worthless, and we each make bogus claims about how great our respective products are. I will not complain to the FTC or ASRC about your deceptive advertising, since I am doing the same thing and do not want to ruin things for myself. So, too, with exploitive advertising of unhealthy snack foods and violent video games, as well as the usual products associated with Internet spamming and spyware—namely, dinancial scams and worthless software products. If there is a moral taint to the product itself, the company has already crossed a moral line and will likely lack moral convictions when advertising its products. In these cases, then, competition will not create self-regulation.

Law enforcement through the FTC is the last line of defense against deceptive advertising, and when user reviews, consumer magazines, lawsuits, and self-regulation fail, the FTC must step in. When prosecuting deceptive advertising, the FTC can order the termination of deceptive advertisements; dile civil lawsuits against companies, involving tens of millions of dollars in damages; and, in extreme cases, dile criminal charges through the Department of Justice, which can involve

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prison time for company executives. This is what happened to the infomercial company ITV Direct, which advertised a nutritional product that it falsely claimed could prevent, treat, and cure cancer, heart disease, arthritis, and diabetes. The company was ordered to stop running the ads and to pay upwards of $50 million in restitution, and the company president faced up to three years in prison on criminal charges. In some cases, an investigation by the FTC is sufdicient by itself.

Corrective Advertising

One controversial form of punishment used by the FTC is corrective advertising—requiring companies to publish notices that correct consumers’ mistaken impressions created by deceptive advertisements in the past. There are three objectives of corrective advertising:

eliminating the lingering effects of deceptive advertisements, helping return competition to the condition it was in before the deceptive ads indluenced the market, and taking away from companies the prodits they improperly acquired through their deceptive ads.

The concept behind corrective advertising was dirst suggested in 1968 when the FTC charged the Campbell Soup Company with deceptive advertising. In its television ads, the company placed marbles in a bowl of soup to make it appear meatier. A group of concerned law students who were familiar with the case argued that merely requiring Campbell to remove the ads was not a sufdicient remedy for the offense. They posited that the company needed to go further and correct the false public impression created by the ads. Although the FTC did not require corrective advertising in this case, it accepted the principle behind the idea and has used it on occasion in the decades since.

The FTC specidically considers corrective advertising in cases where consumers are likely to continue to buy a product based on erroneous beliefs. Figure 4.3 presents some of the cases in which corrective advertising has been ordered. In each of these cases, the companies made claims they either did not or could not prove through scientidic testing. Although the FTC only rarely orders corrective advertising as a form of punishment, it has been required enough times to serve as a deterrent for particularly egregious acts of deception.

Figure 4.3: Examples of corrective advertising

Corrective advertising is used to correct mistaken impressions created by deceptive advertisements, especially in cases in which consumers may continue purchasing habits based upon misinformation.

Another recent example pertains to a wristband manufactured by the California-based company Power Balance, which, according to the company, would “optimise the natural dlow of energy around the body, and so improve an athlete’s strength, balance and dlexibility.” In a corrective advertisement mandated by the Australian government, the company announced that “In our advertising we stated that Power Balance wristbands improved your strength, balance and

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dlexibility. We admit that there is no credible scientidic evidence that supports our claims and therefore we engaged in misleading conduct.”

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4.4 Targeting Vulnerable Groups

A normal marketing technique in business is to focus advertisements on customers who are most likely to buy one’s product. This is target marketing—namely breaking the market for one’s product into segments and then focusing marketing activities on one or a few major segments. The segmentation is commonly based on factors such as gender, age, education level, income, geographical location, or lifestyle preferences. This in and of itself is morally unobjectionable and makes good business sense. If you sell sporting goods, you obviously want to focus your advertising on people who have some interest in athletics.

Problems occur, however, when the targeted group has a vulnerability that compromises their consumer autonomy. Vulnerable groups include the elderly, the disabled, and the poor. For these people, mental, physical, or economic conditions may make them easily susceptible to persuasive advertising and motivate them to buy products that can cause them harm. With at least some of these groups, target marketing can be done responsibly, especially when the product meets a genuine need—for example, marketing diber supplements to the elderly.

However, it is the potential harm from products that makes the targeting of vulnerable groups a problem. For example, the elderly are prime targets for dinancial scams such as time-shares and living trusts. The poor are targets for quick credit and rent-to-own dinancial services, which frequently compound their economic problems. Another targeted vulnerable group is children, who are bombarded with manipulative advertising, to which we turn next.

Child Advertising

Child advertising consists of directing an advertisement toward either a young child under age 8 or an older child between ages 8 and 12. With young children, the basic advertising strategy is to dirst create a desire in a child for a particular product, and then have the child coax his or her parents into buying the item. The parents are essentially harassed into buying it, and this violates their autonomy to make informed choices as consumers.

However, even when advertising is directed at older children, who may have allowances and know how to interact with cashiers, the problem remains that their decision-making abilities differ from those of adults. They lack a sense of time and do not understand basic dinances, such as what it means for something to be too expensive.

Further, developmental psychologists often assist advertisers in illuminating how young minds work. For example, advertisers understand that children under 8 like to play dress-up and those 8 or over like to collect things. This enables advertisers to more carefully tailor their pitches to meet the desires of the children and thus exploit their weaknesses.

While several countries around the world have laws that regulate child advertising, the approach in the United States has been one of self-regulation. The principal guidelines have been set by the Children’s Advertising Review Unit (CARU), a branch of ASRC. Their guidelines for child advertising include these:

Advertising should not stimulate children’s unreasonable expectations about product quality or performance. Products and content inappropriate for children should not be advertised directly to them. Advertisers are encouraged to capitalize on the potential of advertising to serve an educational role and indluence positive personal qualities and behaviors in children, e.g., being honest and respectful of others, taking safety precautions, engaging in physical activity.

Although there are many indluences that affect a child’s personal and social development, it remains the prime responsibility of the parents to provide guidance for children. Advertisers should contribute to this parent-child relationship in a constructive manner. (Children’s Advertising Review Unit, 2014, p. 5)

The theme of these guidelines is that advertisers need to recognize that children are impressionable. An irresponsible ad can make children have unreasonable expectations about a product, whereas a responsible one can reinforce virtues and contribute to the parent–child relationship. Within these guidelines, though, there is great latitude, and several instances of child advertising have spawned public discussion.

With young children, there is the controversy over the inclusion of toys with kids’ meals at fast-food restaurants. The toys, critics argue, are extra incentives for children to desire the meals, but the meals themselves are typically high in salt,

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sugar, fat, and calories and contribute to childhood obesity. San Francisco and a neighboring county have taken the bold step of banning kids’-meal toys, and restaurants that violate the ordinance face stiff dines. New York City has proposed a similar law.

A controversy with older children is that of involving direct advertising in public schools. For decades, older school children have been exposed to national-brand products and corporate logos in school newspaper ads and on athletic scoreboards and textbook covers. Added to that now is Channel One News, a 12-minute current-events program for teens that is broadcast to over 5 million students in upper elementary schools, middle schools, and high schools in the United States. The news shows carry 2 minutes of commercials. In all of these cases of advertising in schools, advertisers benedit by having an opportunity to instill brand loyalty in consumers at early ages. The schools benedit from the income or equipment they receive through the ad sponsorship. The larger question, however, is how the students benedit.

Eric Risberg/Associated Press

California’s Santa Clara County has banned free kids’ meal toys in various parts of the

Many of the ads are for food products, such as fast foods, soft drinks, chips, and candy, which, again, touch on the issue of childhood obesity. county. However, McDonald’s locations in San

A documentary dilm on this subject described the recent surge in classroom advertising and its impact on children (Jhally, 2003). One expert in the dilm stated that “children are being described as objects, whose primary purpose is to be manipulated for some benedit to an adult.” Another said that “the values and goals of education are very different than the values and goals of advertising.”

Francisco have been able to skirt the law by charging 10 cents for the toys that come with Happy Meals (Conley, 2001). The company says the money paid for the toys will go toward the Ronald McDonald House charities.

With all of these cases of child advertising, the critical issue is whether the ad seriously undermines the child’s autonomy. In some cases, there may be room for debate. Concerning toys in kids’ meals, some parents in the California case have protested that the ban on kids’-meal toys compromises their autonomy as parents. They prefer to have the opportunity to buy the meals with toys, and in any event, parents always have the option to tell the cashier to leave the toy out.

With direct advertising in public schools, a critical question is whether those ads have an added brainwashing effect on the children, or whether they are simply part of the modern marketing landscape that children have already become used to, and, to at least some degree, already tuneout. If it’s the latter, then cluttering the school with advertisements may be more an issue of aesthetics and interior decorating than one of autonomy. It is unreasonable to ban ads in school simply because they are ugly.

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4.5 Unfair Sales Tactics

Businesses use an array of sales strategies that effectively motivate consumers to buy products—free samples, discount coupons, promotional items, rebates, closeouts. Many of these are perfectly acceptable. Others, though, can be unfair and predatory. We will look at some that are particularly infamous.

Perhaps the most well-known example of an unfair sales tactic is the bait and switch: Customers are attracted into a store to buy an artidicially low-priced product and then are persuaded to buy a more expensive one. This practice is prohibited by the FTC, which states, “No advertisement containing an offer to sell a product should be published when the offer is not a bona dide effort to sell the advertised product” (n.d.).

Bait-and-switch tactics should not be confused with other sales techniques that are acceptable, particularly the use of loss leaders, which are products sold below cost to generate customer trafdic while the company puts no pressure on the customer to buy anything else. As examples, two separate lawsuits were diled against Dell accusing the company of bait-and-switch tactics. According to a 2005 lawsuit in California, Dell allegedly advertised low-priced computers, but when some buyers tried to purchase them at the advertised price, they found that the computers were no longer available for that price. Dell had substituted either a more expensive computer or one of lesser quality. According to the complaint,

Dell baits consumers with advertisements for computers and computer products at rock-bottom prices. Then, when the consumer contacts Dell to purchase a Dell product via the internet or telephone, Dell makes the switch, substituting lesser quality components, increasing the purchase price without notice, canceling orders Dell is unwilling to honor, or steering the unsophisticated consumers to other higher priced computer systems which Dell wants to unload, based on inventory control considerations. (Weber et al. v. Dell, Inc. et al., 2005)

In another case, a 2008 New York lawsuit, Dell’s dinancing operation was accused of luring customers with advertised “no interest” or “no payment” dinancing, while, according to the complaint, the vast majority of consumers, even those with very good credit scores, were denied these deals (People v. Dell, Inc., 2008). In this case, the claim was that the “bait” was the attractive yet unavailable dinancing options, rather than the products, that were advertised.

What Would You Do?

You are a dloor salesperson at a major consumer-electronics store, and you receive commission on your sales. Your company has advertised an inexpensive laptop for $300, and you have plenty in the stockroom, but none on the display shelf. A customer comes in asking for one.

1. Do you get one right away or point out some of the higher-priced ones dirst? Explain your answer.

2. Do you point out all the disadvantages of the inexpensive one, making it seem virtually worthless? Explain

your answer.

3. Suppose that the customer says the computer is really just for checking email from the grandchildren and

playing computer solitaire. You know that the inexpensive one will serve the customer’s needs perfectly. Do you still redirect the customer to more expensive ones with features that will never be used? Why or why not?

4. Your manager advises you that when a customer asks for the inexpensive computer, you should vaguely say, “We don’t have any on display right now.” Although the statement is technically true, it will make the customer think there are none left in the store. Do you follow your manager’s direction? Why or why not?

Another infamous sales tactic is loan packing, which occurs when loans for a product include charges for additional items—or “add-ons”—that are concealed from the consumer. Common examples of this are automobile loans that might be packed with extra charges for loan insurance, extended warranties, window tinting, fabric protection, and rustprooding. The costs for these extra items are added onto the cost of the car and included in the loan without telling the customer.

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Typically, the car dealer dirst quotes the customer an indlated monthly loan payment, and when the customer agrees to that amount, the dealer adds the extra items to the loan contract. All the while, the buyer assumes that the extra items are free bonuses included with the car purchase rather than options that cost extra. California—a leader in consumer protection—passed a law called the Car Buyer’s Bill of Rights that, among other protections, prohibits loan packing. The law includes a requirement for dealers to itemize in the sales contract any add-ons, to let buyers decide whether they want to buy them.

Misuse of Legal Tactics

Bait and switch and loan packing are both inherently unfair sales tactics, and there are laws against them. There are other types of sales techniques, however, that are not wrong in themselves but have led to abuse in the marketplace.

Sales Commissions

One misused sales technique is the sales commission—paying employees an amount of money based on their level of sales. Sometimes the commission supplements dixed wages and salary; other times the commission is the sole dinancial compensation for the employee. In either case, the basic formula for commission compensation is simple: The more the employee sells, the more he or she gets. The rationale is that it motivates employees to perform at their best. This is a legitimate way of compensating sales people, and in the best situations it works out to be a good deal for the employer, salesperson, and customer. At the same time, however, sales commissions can put pressure on salespeople to make sales by deceiving customers, using scare tactics, exaggerating the benedits of the product, and exploiting weaknesses in customers.

This is especially prevalent in areas where consumers are at the mercy of the salespeople for their expertise. A recent dramatic example of commission abuse is the subprime mortgage crisis that contributed to the recession of 2008. Subprime mortgages are real estate loans that go to people with poor credit histories who do not qualify for conventional loans. The lenders—or mortgage originators—work on a sales commission of about 1–2% of the total loan. Because lenders received this commission even if buyers ultimately defaulted on their loans, there was little incentive to turn down applicants. Home prices were heavily indlated at the time, and, tempted by the proportionally larger commissions, many lenders encouraged buyers to accept loans that they could not afford. The buyers, in turn, were offered low introductory rates on their mortgages that would later balloon; buyers were led to believe that their home value would increase and they could redinance their mortgage at a lower rate before the balloon. However, housing prices dropped rather than increased, and there was no low-rate redinancing for the buyers. When the balloon kicked in, homeowners could not afford their higher mortgage payments, and the lenders foreclosed on their homes. Over the next few years, foreclosures nationwide doubled from what they were in 2007. In his book Confessions of a Subprime Lender: An Insider’s Tale of Greed, Fraud, and Ignorance, Richard Bitner describes his experience in the crisis and states “when opportunity comes knocking, greed and ignorance are not far behind” (2008, Chapter 6). He believes that responsible subprime lending “provides value to credit-challenged borrowers” but that “industry greed has put hundreds of thousands of borrowers in jeopardy of losing their homes” (2008, Chapter 1).

Direct-to-Consumer Advertising

Another misused sales tactic is direct-to-consumer advertising, a form of advertising, used principally by pharmaceutical companies, in which patients are targeted rather than healthcare professionals. Some of the leading drugs that have been advertised with this technique are Celebrex (Pdizer), Cymbalta and Cialis (Eli Lilly), Humira (AbbVie), and Gardasil (Merck). Companies began the practice in 1982. The FDA is responsible for overseeing this type of advertising and has a series of conditions that must be met:

The ad must make clear that “only a prescribing healthcare professional can decide whether the product is appropriate for a patient.” It must also present “a fair balance between information about effectiveness and information about risk”; and while it does not need to list all of the drug’s risks, it must present “the product’s most important risk information in consumer-friendly language.” Finally, it must make provisions for consumers to access the full label of the drug through the Internet, by mail, or

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by phone (U.S. Department of Health and Human Services, Food and Drug Administration, 1999).

In spite of these safeguards, direct-to-consumer advertising is controversial. Currently the United States and New Zealand are the only two countries in the world that allow it, and the FDA notes that common concerns include that direct- to-consumer advertising:

may contain false or misleading information does not provide enough information about the risks and negative effects of the advertised drugs may not advance—and may even threaten—the public health encourages overuse of prescription drugs encourages use of the most costly treatments, instead of less expensive treatments that would be just as satisfactory (U.S. Food and Drug Administration, 2015)

A common complaint is that physicians feel pressured by patients into prescribing a drug they might not otherwise have recommended. One study showed that direct-to-consumer advertising does indeed indluence what physicians recommend: A 10% increase in direct-to-consumer advertising for a drug results in a 1% increase in sales within that specidic drug class (Henry J. Kaiser Family Foundation, 2003, p. 1). Another problem is that direct-to-consumer advertising often targets vulnerable groups who have physical problems and are desperate for solutions. One example is advertising drugs for erectile dysfunction, which targets men who are particularly psychologically vulnerable. While often effective, the drugs have an out-of-pocket cost of $15 to $20 a pill, which is especially high for seniors on dixed incomes.

There is also controversy about using direct-to-consumer advertising for drugs that have a high potential for abuse. The policy has been for the pharmaceutical industry itself to voluntarily refrain from this type of advertising. However, in 2001 the U.S. Drug Enforcement Administration (DEA) issued a letter of complaint to a pharmaceutical company for its direct- to-consumer magazine ads of a psychostimulant drug, methylphenidate, which the DEA classidies as a Schedule II controlled substance. In the letter, the DEA stated that direct-to-consumer advertising of controlled substances “is contrary to the spirit of the [Controlled Substances Act] and contrary to the public health and safety” (U.S. Department of Justice, Drug Enforcement Administration, 2001). Such advertising, it argued, is problematic “because of the inability of patients to understand medical information and make a rational, informed choice of medication from an array of drugs making similar claims.” The DEA was further concerned about “the messages conveyed to our youth” through such advertising.

Default Opt-In

Another example of a misused sales tactic is the default opt-in. This is a feature of contracts where the customer is automatically enrolled in some unnecessary and costly secondary service, typically without knowing about it. In the past, banks routinely used default opt-in to enroll customers in credit-card overcharge protection and debit-card overdraft protection services. Suppose, for example, that your credit card has a $1,000 limit, and you are at $998. You go to a restaurant and buy a cup of coffee for $3 with your card. You might expect your card to be rejected, since you are now overcharged by $1. However, your credit-card company would allow the purchase to go through since you have “overcharge protection,” but they would charge you a fee of up to $40. Your $3 cup of coffee has, in essence, cost you $43. You were not asked if you wanted the overcharge protection service; the credit-card contract had you opt in by default.

Why would you ever want such a service that is so costly to you? The explanation that banks and credit-card companies give is that it is a service to consumers that saves them the embarrassment of having their credit cards rejected at the checkout counter. However, the economic truth behind these default opt-in policies on credit and debit cards was that it was a major source of revenue—an estimated $37 billion per year for banks through debit-card overdraft fees. As public outrage against these practices grew, Congress passed laws against them, and since July of 2010, the default enrollment policy has been “opt-out.” Consumers can still get overdraft protection, but they have to request it.

Online Advertising: Behavioral Targeting and Native Advertising

Advertising on the Internet includes traditional forms used in other media, such as the commercials we see on television or advertisements in newspapers and magazines. But the dlexible nature of electronic media allows for a much wider range of advertising possibilities, such as embedded links, pop-ups, and browser redirects. Many of these are annoying,

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but some can be irresponsible and even predatory. Behavioral targeting and native advertising on the Internet are cases in point.

Behavioral targeting, sometimes called “creepy marketing,” uses data collected from the user’s web-browsing history to create personally tailored ads. The advantage for advertisers is they can gain access to consumers who are more likely to by their products. For the consumers, their screens are less cluttered by ads for products that they would never buy. But there are disadvantages, too. Privacy invasion is one problem, especially as we compulsively do web searches for almost everything that comes into our minds. It creates a prodile of not just our buying habits but our inner thoughts.

Another problem is that it makes consumers vulnerable to manipulative marketing or discriminatory pricing. Orbitz found that Mac users spend $20 to $30 more on hotels than PC users, and so it steers Mac users to more expensive options. Amazon and Staples use what is called “price discrimination” to estimate the wealth of customers based on geography or computing devices, and charge different prices. One study showed price steering and discrimination by other retailers, including Home Depot, Sears, JC Penneys, Macy’s, Cheaptickets, Priceline, Expedia, and Travelocity (Hannak, Soeller, Lazer, Mislove, & Wilson, 2014). Users have some control over behavioral targeting by disabling tracking on their personal computers, but doing so is challenging and even prevents access to some websites.

Another marketing practice, called native advertising, presents an advertisement in a form that resembles its surroundings—for instance, an ad on a news website that looks like a news story. The ad is rarely designated with the word “advertisement” but rather uses a less obvious euphemism such as “sponsored content,” “from around the web,” “featured partner,” and “selected by [brand].” What is bad about this practice is not necessarily the content of the ad itself, but the deceit. Studies show that only 41% of readers of general news sites recognize such material is advertising, 50% did not understand the meaning of the word “sponsored,” and two-thirds felt deceived when realizing that an article or video was sponsored by a company (Ray, 2014).

Since the early 1900s, the FTC has been cracking down on deceptive native advertising in other formats, such as door-to-door salespeople posing as pollsters, restaurant review stories in newspapers paid for by the restaurant, mail advertisements appearing like government documents, and infomercials posing as TV news shows. Even in the age of the Internet, the FTC has stipulated that sponsored search results must be clearly differentiated from natural search results. Native advertising within Internet news sources is an area that the FTC is still evaluating.

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Conclusion

At the outset of this chapter, we made note of the famed expression “let the buyer beware” (caveat emptor) and its contemptuous message that consumers always need to be on guard against abusive business practices. There is, however, a counterpart to this expression—namely, “let the seller beware”(caveat venditor). The message here is that businesses need to be on guard against consumer retaliation for abusive practices. Whether for subpar product safety, deceptive advertising, targeting vulnerable groups, or predatory sales tactics, businesses may pay a hefty price.

None of this should come as a surprise to businesses. We’ve seen that the Consumer Product Safety Commission has clear guidelines about dangerous products; the Federal Trade Commission, about deceptive advertising. The Advertising Self-Regulatory Council and its various self-regulatory branches also have clear principles of responsible advertising. Added to those are the ethical codes of professional business associations. The American Marketing Association, for example, has a code of ethics that includes six fundamental ethical values for marketers (see Figure 4.4).

Figure 4.4: Ethical values for marketers from the American Marketing Association

Professional business associations, such as the American Marketing Association, promote ethical values to help businesses meet consumer expectations and be on guard against consumer retaliation for abusive practices.

Source: Adapted from American Marketing Association Publishing. (2014). Statement of ethics. Retrieved from https://archive.ama .org/archive/AboutAMA/Pages/Statement%20of%20Ethics.aspx (https://archive.ama.org /archive/AboutAMA/Pages/Statement%20of %20Ethics.aspx)

We see in this list references to many of the abuses described in this chapter—deceptive advertising, unfair sales tactics, and targeting vulnerable groups. Similar principles are espoused by the Organization for Economic Co-operation and Development (OECD), an international group that advises governments on business issues. A section of their Guidelines for Multinational Enterprises is devoted specidically to serving consumer interests, including recommendations that businesses:

1. Ensure that the goods or services they provide meet all agreed or legally required standards for consumer health and safety, including health warnings and product safety and information labels.

2. As appropriate to the goods or services, provide accurate and clear information regarding their content, safe use, maintenance, storage, and disposal sufdicient to enable consumers to make informed decisions.

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3. Provide transparent and effective procedures that address consumer complaints and contribute to fair and timely resolution of consumer disputes without undue cost or burden.

4. Not make representations or omissions, nor engage in any other practices, that are deceptive, misleading, fraudulent, or unfair.

5. Respect consumer privacy and provide protection for personal data.

6. Co-operate fully and in a transparent manner with public authorities in the prevention or removal of serious

threats to public health and safety deriving from the consumption or use of their products. (Organization for Economic Co-operation and Development, 2008, p. 22)

Added to all of these laws, regulations, and guidelines are codes of ethics and best practices that individual companies devise for themselves. The bottom line: Businesses that engage in abusive consumer practices cannot plead ignorance. If their own consciences will not tell them what is expected of them, countless agencies and organizations have already broadcast loud and clear what consumers expect in a fair marketplace.

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Summary & Resources

Chapter Summary

At the outset of this chapter, we introduced the concept of consumer advocacy, which is an organized effort to protect consumers against dangerous products, unfair pricing, deceptive advertising, and manipulative sales practices. In the United States, consumer advocacy took hold in the dirst decades of the 20th century with the creation of the Pure Food and Drug Act, the Federal Trade Commission, the Food and Drug Administration, and Consumers Union. A major concern for consumers is product safety, which to a large degree is monitored by the Consumer Product Safety Commission (CPSC). The CPSC oversees consumer-product recalls and runs the website SaferProducts.gov, where consumers can lodge complaints. Automobiles, since their inception, along with automobile manufacturers’ resistance to safety improvements that carve into company prodits, have presented safety concerns.

Another area of concern for consumers is deceptive advertising, which intentionally misleads or confuses consumers. Though not, strictly speaking, deceptive, puffery involves exaggerated claims in advertising that no reasonable person would take as factual and that are too vague to be provable. The puffery legal defense is a tactic used by companies when they are charged with false advertising, where they claim to be only engaging in puffery. Unofdicially, companies can be punished for deceptive advertising by consumers, journalists, and consumer-advocacy groups when they bring offenses to public attention. Ofdicially, companies can be punished for deceptive advertising with criminal prosecution, lawsuits, and correction by a self-regulated advertising organization, particularly the Advertising Self-Regulatory Council (ASRC). Corrective advertising is a punishment that requires companies to publish notices that correct consumers’ mistaken impressions created by deceptive advertisements in the past.

Advertising can also run afoul of consumer-protection interests when it targets vulnerable groups, such as the poor and elderly. Child advertising is a sensitive subject; it can manipulate young children into nagging their parents, and it can take advantage of older children’s undeveloped decision-making abilities. Some sales tactics are outright illegal, such as the bait and switch, in which customers are attracted into a store to buy an artidicially low-priced product and then are persuaded to buy a more expensive one. So, too, with loan packing, which involves loans for a product that include hidden charges for additional items. Some legal sales tactics can be abused, such as sales commissions, direct-to-consumer advertising, and default opt-in policies.

Discussion Questions

1. Consumer autonomy is the notion that consumers should be in charge of determining what to purchase after being supplied with relevant information. Consider, though, how much information any of us can truly have with most of our purchases. We do not fully know how the products are made, how long they will last, or whether they have hidden harms. Pick an example, such as a food product or an electronic device, and discuss the kind of information that you would need in order to have a reasonable amount of consumer autonomy.

2. A major political controversy involves the degree to which the government should regulate business activities. The conservative position is that governments should leave businesses to regulate themselves, whereas the liberal position is that government regulation is needed to force businesses to act responsibly. Consider all the laws and government agencies discussed in this chapter that are devoted to protecting consumers from unethical business practices. Is there too much government involvement with consumer advocacy? Explain why or why not.

3. A critical point of distinction between deceptive advertising and mere puffery is whether a claim is a measurable statement of fact. Think of some examples of each; explain why they are or are not measurable statements of fact.

4. Kids’-meal toys at fast-food restaurants are a major marketing draw for families with young children. Santa Clara

County in California banned such toys, suggesting that this is a case of advertisers targeting a vulnerable group.

Do you agree? Explain.

5. Explain the difference between bait-and-switch and loss-leader marketing tactics, using examples of each.

Key Terms

bait and switch

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An illegal sales strategy in which customers are attracted into a store to buy an artidicially low-priced product and then are persuaded to buy a more expensive one.

behavioral targeting

A marketing technique that uses data collected from the user’s web-browsing history to create personally tailored advertisements; sometimes called “creepy marketing.”

child advertising

The marketing strategy of directing an advertisement toward either a young child under age 8 or an older child between ages 8 and 12.

comparative advertising

An advertising strategy in which a product or service is said to be superior to that of its competitors.

consumer advocacy

An organized effort to protect consumers against dangerous products, unfair pricing, deceptive advertising, and manipulative sales practices.

consumer autonomy

The notion that consumers should be in charge of determining what to purchase after being supplied with relevant information.

Consumer Bill of Rights

Four consumer rights articulated in a 1962 speech by President John F. Kennedy: (1) the right to safety, (2) the right to be informed, (3) the right to choose, and (4) the right to be heard.

Consumer Product Safety Commission (CPSC)

U.S. Federal agency founded in 1972 for the purpose of protecting the public “against unreasonable risks of injuries and deaths associated with consumer products.”

Consumers Union

Nonprodit consumer-advocacy organization founded in 1936; publisher of Consumer Reports magazine.

corrective advertising

A punishment that requires companies to publish notices that correct consumers’ mistaken impressions created by deceptive advertisements in the past.

deceptive advertising

Advertising that intentionally misleads or confuses consumers.

default opt-in

A feature of sales contracts where the customer is automatically enrolled in some unnecessary and costly secondary service, typically without knowing about it.

direct-to-consumer advertising

An advertising strategy, used especially by pharmaceutical companies, where patients are targeted rather than health-care professionals.

Food and Drug Administration (FDA)

U.S. Federal agency formed in 1927 for the purpose of carrying out the tasks specidied in the Pure Food and Drug Act of 1906.

Guidelines for Consumer Protection

Guidelines established by the United Nations in 1985, which include seven fundamental consumer needs that require protection.

loan packing

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A sales strategy in which loans for a product include charges for additional items—or “add-ons”—that are concealed from the consumer.

loss leader

A product that is sold below cost to generate customer trafdic, with no pressure put on the customer to buy anything else.

native advertising

A type of advertising that presents an advertisement in a form that resembles its surroundings (e.g., an ad that looks like a story on a news website).

puffery

Exaggerated claims in advertising.

puffery legal defense

A legal strategy in which, when charged with false advertising, a company claims that it was only engaging in puffery.

Pure Food and Drug Act of 1906

U.S. law that aimed to prevent “the manufacture, sale, or transportation of adulterated or misbranded or poisonous or deleterious foods, drugs, medicines, and liquors.”

SaferProducts.gov

Website run by the U.S. Consumer Product Safety Commission on which consumers can report unsafe products.

sales commission

Paying employees an amount of money based on their level of sales.

self-regulated advertising

The practice in which the advertising industry monitors and corrects false advertising by itself, without reliance on government agencies and courts.

target marketing

The marketing strategy of breaking the market for one’s product into segments and then focusing marketing activities on one or a few major segments.

Business Ethics Case Study 4.1: The Limits of User Privacy on Facebook

An experiment conducted by Facebook and two Cornell University researchers showed how emotionally charged Facebook postings can be contagious and trigger similar emotional feelings—or moods—in those who read them. This study focused on the Facebook users’ newsfeeds, which contain their friends’ postings. In the normal course of operation, our user newsfeeds are automatically diltered by Facebook because we would be overwhelmed if every post from our friends where funneled into our newsfeed. The experiment went one step further and, with a random group of around 800,000 Facebook users, a computer algorithm diltered out two types of posts: only those that contained negative emotional words, and, next, only those that contained positive ones. The users could still view those posts, but only by visiting their friends’ walls or timelines.

The experiment then looked to see if the user who read the posts responded more negatively or positively. What counted as a “negative” or “positive” word was determined by a computer program commonly used in psychological studies of emotions. The results were that, dirst, when negative newsfeed posts were diltered out, users’ own posts were less negative, and, second, when positive ones were diltered out, user posts were less positive.

The signidicance of the study, according to the researchers, is that “emotional states can be transferred to others via emotional contagion, leading people to experience the same emotions without their awareness” and that

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television for over a half a century. For Facebook, it was a matter of experimenting with different advertising methods, and these two ultimately lost out over users’ privacy concerns.

Facebook’s motive for doing the mood experiment is interesting because it was pure research with no immediate dinancial benedit. Yet, even here, we can see a potential connection to advertising. If a user raves about a product with the right emotive words, that emotional excitement will be transferred to those who read their posts. It’s then just a matter of leveraging that concept into an advertising program that does not cross the line of user privacy.

Discussion Questions

1. Of the three Facebook controversies, which is the most troubling, and why?

2. Why do you think people care so much about the privacy issues surrounding these three Facebook

controversies?

3. With Facebook’s current business model, there may be an inevitable condlict between user privacy and

company advertising revenue. Is there a viable way around this condlict?

4. Suppose there was an alternative social network website that was as large as Facebook, but (a) charged

$10 a month and (b) had no advertising oradvertising-related privacy issues. Would it be worth the cost to switch to that site?

Sources: Adam, Guillory, & Hancock, (2014), Campbell et al. v. Facebook Inc. (2014), Henn (2013), “Re: Legal Notice” (2013), Schroepfer (2014), Verma (2014).

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5 Discrimination in the Workplace

Learning Objectives

After reading this chapter, you should be able to:

Dedine the various types of discrimination.

iStock/Thinkstock

Explain the notions of afdirmative action, equal opportunity, preferential treatment, individual and group compensation, and reverse discrimination.

Describe the different U.S. afdirmative action laws and procedures and the major Supreme Court decisions that have claridied those laws.

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Introduction

Racial prejudice has been the source of social condlict and personal suffering for as long as there have been human records, and quite possibly for tens of thousands of years before that. Rival ethnic groups wage war upon each other, enslave members of opposing groups, and even try to exterminate them. The concept of racial equality is a comparatively recent one, and it has only been a matter of decades that governments have denounced racial prejudice and made efforts to undo at least some of the damage it has caused.

India is a case in point, with its centuries-old tradition of the caste system, which has splintered the population into a hierarchy of social classes determined by birth. While the higher castes have been the holders of the country’s wealth and power, at the very bottom are the “untouchables” who are so low that, in the past, upper castes avoided coming into any contact with them. Making up 16% of the country’s population, they historically had no meaningful access to education, respectable employment, or political representation. Millions today live on the streets or in garbage dumps, where they forage for scraps of anything that might have some resale value.

While India was a colony, the British government made efforts to elevate the untouchables into mainstream society, one of the dirst efforts at what we now call afdirmative action. After independence in 1947, the government of India continued this policy, even writing into the constitution special protections and opportunities for the untouchables. Among these policies is the reservation of 16% of all government jobs for untouchables, in direct proportion to their number in the population. A high percentage of student positions in universities are also reserved for them.

When we look at India’s situation, it is easy to conclude that the country chose the right remedy: Dramatic injustices call for dramatic corrective measures, without which the untouchables would be forever locked into a cycle of the most unimaginable poverty. It is not just India, however, that has this problem. Many of the world’s countries have minority groups that are economically suffering because of a history of discrimination.

The United States is a case in point. This country has adopted solutions like India’s, though not quite as radical. Businesses, in particular, are on the cutting edge of social reforms that aim to elevate historically disadvantaged minority groups. Sometimes companies proactively embrace these efforts, but in most cases the efforts are backed by government mandates and businesses have no choice but to comply. Discrimination in the workplace is one of the most important ethical and legal issues for businesses. Social conscience urges companies to eliminate discriminatory practices, and the law requires them to do so. In this chapter, we will explore many of the issues connected with discrimination in the workplace.

Although Hari Kishan Pippal is an Indian "untouchable," he has prospered despite the odds. He now owns a hospital, a Honda dealership, and a shoe factory.

Saurabh Das/Associated Press

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5.1 Discrimination

We will begin with a look at the nature of discrimination itself, how it affects businesses and other social institutions, and the evidence for it.

Features of Discrimination

Two types of discrimination are relevant to businesses:

Public accommodations discrimination: In this type of discrimination, a business or some other public access place prejudicially denies services to some customers. Employment discrimination: This type of discrimination refers to prejudicial treatment of people in hiring, promotion, and termination decisions.

Consider this simple case of public accommodations discrimination: A White man and a Black man who are dressed similarly enter a restaurant; the White man is served and the Black man is asked to leave. In essence, the Black man was asked to leave purely because of his race. Here is a simple case of employment discrimination: A man and a woman both apply for the same job; the woman’s qualidications are much stronger, but the employer hires the man instead. Here, the woman was turned down purely because of her gender, not because of her abilities.

Thus, we can say that discrimination is the unjust or prejudicial treatment of people on arbitrary grounds, such as race, gender, or age, which results in denial of opportunity, such as in public accommodations or employment. Key to this dedinition is the idea that the treatment is based on arbitrary grounds. With public accommodations discrimination, a person’s gender or skin color is irrelevant to his or her function as a customer, and it would be arbitrary to deny that person service. With employment discrimination, a person’s gender or skin color is also irrelevant to the person’s job performance, and it would also be arbitrary to deny that person an employment opportunity on that basis.

Of course, it is not always discriminatory to deny opportunities to people because of some unique feature about them. Suppose that a blind person tried to rent a car from Hertz or apply for a job as an air-trafdic controller. In these cases, having eyesight is a necessary requirement for driving a car or being an air-trafdic controller, and there is nothing arbitrary about denying those opportunities to blind people.

However, it can at times be a challenge to determine whether a particular physical feature is needed to do the job. For example, a 240-pound woman from San Francisco was denied work as an aerobics instructor because of her weight. The company in question was Jazzercise, which advertised itself as the world’s leading dance-ditness program, having 5,000 certidied instructors across the country. The company’s stated policy was that their instructors must have a “dit appearance,” and they turned down the woman when seeing her in person. After she complained to the San Francisco Human Rights Commission, the Jazzercise company agreed to drop the “dit appearance” criterion and conceded that “recent studies document that it may be possible for people of varying weights to be dit” (quoted in Ackman, 2002). This case shows that long-standing stereotypes may be grounded in little more than prejudice, and this is precisely what makes discriminatory treatment unfair.

The most commonly acknowledged forms of discrimination today are on the bases of:

race, gender, disability, and age.

Still others include color, creed, political afdiliation, national origin, religion, ancestry, pregnancy, medical condition, mental condition, marital status, sexual orientation, and status as a veteran. The list of discrimination types could be endless: I could discriminate against people who were fans of a rival sports team, or liked a particular type of music, or drove a particular model of car. Whatever differences exist between one human and another can potentially become matters of prejudice and arbitrary treatment.

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Social Institutions and Discrimination

In combating discrimination, there are three principal social institutions that are targeted for change: schools, governments, and businesses.

Eliminating discrimination in schools is important because these institutions provide people with the skills to compete for almost everything else in life. If schools at both the K–12 and college levels systematically discriminated against certain groups, those individuals would forever be at a competitive disadvantage and locked into something like a caste system, which it would be exceedingly difdicult to rise above.

Eliminating discrimination in positions of political power is important because it is the government that shapes social policy regarding the equal treatment of groups. Without proper representation in government, the risk is too great that the interests of White males will prevail over those of other groups.

Finally, eliminating discrimination in the workplace is important because it is the quality of jobs that determines whether an employee becomes rich or poor. When employers systematically discriminate against certain groups, they turn those groups into a socioeconomic underclass from which, again, it is difdicult to break free.

Intentional and Unintentional Discrimination

In the past, discrimination was an integral and acceptable part of doing business; that was a redlection of the prevailing social order. Women and ethnic minorities, it was felt, should be treated differently as customers and belonged only in specidic jobs, typically lower paying ones, and it was just assumed that the better jobs should go to White males. Not so now. The law protects women and minority groups from discrimination, and it is a serious blemish on a business’s moral record to be accused of discriminatory practices. Still, some discrimination continues today in spite of changing laws and social attitudes.

Sometimes businesses engage in intentional discrimination, when the policies or practices of a company are shaped by overt racial prejudices of its managers or executives. For example, in one racially divided town, a family restaurant had a

What Would You Do?

In the court case Swartzentruber v. Gunite Corp. (2000), Sheldon Swartzentruber sued his employer for religious discrimination. Swartzentruber was a member of the Church of the American Knights of the Ku Klux Klan and had a tattoo on his forearm of a hooded digure standing in front of a burning cross, one of the sacred symbols of his church. Fellow workers complained that they found the tattoo offensive and threatening. His supervisor asked him to keep it covered, which he did inconsistently, but after several reminders from his boss, Swartzentruber sued for harassment.

1. If you were Swartzentruber’s supervisor, would you have made him cover the tattoo, let him expose it, or dire him? Explain your answers.

2. If you were an African American worker at the company, would you have complained about Swartzentruber’s tattoo, quit your job, or just tried to ignore it? Explain your answers.

3. The court maintained that the alleged harassment “occurred because of his self-identidication as a member of the KKK, not because of his religious beliefs.” Is that relevant to whether Swartzentruber was discriminated against? Why or why not?

4. The court concluded that “A company demand that he cover a tattoo that, to many people, symbolizes racism and hate and company monitoring to ensure compliance is not harassment and does not contribute to an environment that could reasonably be viewed as hostile.” Do you agree with the court? Why or why not?

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policy of placing a small letter B on the backs of application forms dilled out by Black applicants. They would then overlook these applications when selecting candidates to interview. The business managers were knowingly and intentionally discriminating against Black applicants.

Other times, however, businesses engage in unintentional discrimination, when their policies or practices uncritically redlect prejudicial stereotypes. A famous public accommodations example of this was when President Bill Clinton’s 21 secret service agents went to a Denny’s restaurant for breakfast; while the White agents received their meals, those for six Black agents arrived only after repeated requests an hour later, just as the group was leaving. A spokesperson for Denny’s stated that “It’s a service issue, not a discriminatory issue,” which he said resulted from the quantity of orders and the kitchen backlog. The incident sparked a $54-million class action lawsuit against Denny’s that revealed a pattern of discriminatory activity in many of the restaurant’s locations.

The Jazzercise example from before appears to be a case of unintentional employment discrimination in that the company wrongly assumed that only people within a certain weight range were athletically dit. In addition to those about weight, policies about height, beards, tattoos, and body piercings can also have a discriminatory effect. Unintentional discrimination of this sort is sometimes referred to as a “facially neutral employment practice,” which is dedined by anti-discrimination law as a practice “that does not appear to be discriminatory on its face; rather it is one that is discriminatory in its application or effect” (The Free Dictionary, n.d.). For example, a company can establish a dress code, but it cannot have a discriminatory impact, either on its face or as an effect.

Some of our personal biases are hidden from us, and, to help reveal them, a research project called Project Implicit has several free online tests that users can take to uncover their implicit associations about race, gender, weight, sexuality, religion, disability, and age. According to Project Implicit, “Much of perception, thinking, and action occurs outside of conscious awareness or conscious control. Because of that, judgment and action can be unintentionally indluenced by factors that we do not recognize, and may not value.” By becoming aware of these unconscious factors, businesses might better achieve “organizational innovation and change” (Project Implicit, 2011).

Evidence of Public Accommodations Discrimination

When looking for evidence of discrimination within the business world, there are two types:

Direct evidence of discrimination is overt written or oral statements by employers that display their discriminatory intention. A sign on a restaurant door that says “No Blacks” would be an example of this in regards to public accommodation discrimination. However, dinding direct evidence is often difdicult because employers rarely make explicit discriminatory statements such as “our policy is to not serve Black people” either in writing or verbally. It is more likely that there will be indirect evidence of discrimination, in which the behavior of the company implies discriminatory conduct. An example would be the Denny’s case of serving White agents before Black ones.

Everett Collection/Superstock

For 100 years after the Civil War, Jim Crow laws enforced segregation in public areas

Before the Civil Rights Act of 1964, direct and indirect evidence abounded: Conduct an Internet image search for “Whites only” and “no colored” and you will get numerous old photographs of discriminatory signs on restaurants, hotels, restrooms, water fountains, and so on. But what about now: Hasn’t public accommodations discrimination been eliminated? Unfortunately, it is alive and well in business. Attorneys specialize in it throughout the country, state governments have ofdices devoted to it, and complaints are plentiful.

Immediately after the terrorist attacks on September 11, 2001, many businesses overtly discriminated against Middle Eastern customers. For example, on the afternoon of the attacks, a hotel in Des Moines, Iowa, revoked its previous offer to host the annual convention of the Midwest Federation of American Syrian-Lebanese Clubs, and repeatedly refused to reconsider its decision in the subsequent weeks. In another case, the manager of a nightclub told a Sikh customer to

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with “Whites only” and “Coloreds only” signs. remove his turban or leave the club, while that same Sikh customer had been permitted to wear it at the club prior to September 11. A survey of around 1,000 Arabs and Muslims by the New York City Commission on Human Rights indicated that 69% of the

respondents experienced discrimination after the attacks, one-quarter of which was related to public accommodations.

But even in less politically charged climates, clear cases of public accommodations discrimination still occur. In 2008, a case was settled against a nightclub in Virginia Beach, Virginia, that imposed a dress code that targeted hairstyles common among African Americans, such as dreadlocks, cornrows, and braids, and did so as a pretext for denying African Americans admission. A government spokesperson commented, “It is unfortunate that in today’s society, African Americans and other individuals still must endure discrimination and segregation in public gathering places such as restaurants and nightclubs” (U.S. Department of Justice, 2008).

In another example, in 2012 the U.S. Department of Justice settled a case against a swim club in Huntingdon, Pennsylvania, which had contracted with a day camp to have weekly 90-minute use of the club’s pool for the camp’s students. On the dirst day, 56 campers, predominately Black, used the pool; some club members complained on the basis of race. The next day the club enacted a policy barring all summer camps from using the pool, which prevented this day camp from returning (U.S. Department of Justice, 2012).

In 2014, a case was settled against a restaurant owner in Boston, Massachusetts, who on several occasions refused to admit African American, Hispanic, and Cape Verdean patrons. One staff member allegedly told these patrons that they could not enter the bar because they did not “know the owner” and that the bar did not want any “trouble” or “problems” (Attorney General of Massachusetts, 2014). The owner agreed to a $100,000 settlement.

When complaints of accommodations discrimination are brought to the Department of Justice, the agency sometimes uses “testers” to condirm the allegations, which they explain here:

Fair housing testing consists of individuals posing as prospective home seekers (i.e., testers) simulating housing transactions with a housing provider. Responses from the housing provider to the testers are compared for differences. An inference of discrimination can be made when there is a substantial difference in the treatment of the testers by the housing provider when the only material difference between the testers is a protected basis (e.g., disability). A “Protected Tester” is one who exhibits the protected characteristic being tested. A “Control Tester” lacks the protected characteristic. (United States v. Westminster Asset Corp., 2014)

In 2013 the Department of Justice settled a case in which a property manager in Edina, Minnesota, discriminated against a prospective renter from Somalia. The testing evidence indicated that the manager “showed white testers apartments when they walked in while she told Somali testers they had to make an appointment to see an apartment the next day. She also failed to tell Somali testers about certain apartments becoming available that she mentioned to white testers” (U.S. Department of Justice, 2013).

Similarly, in 2014, the Department of Justice settled a case against an apartment complex landlord in North Ridgeville, Ohio, who routinely quoted higher rental and application fee rates to African Americans and refused to show them vacant units. “The department sent African-American and white testers posing as prospective renters to the complex and the African- American testers were quoted higher rents and application fees than the white testers. African- American testers were also told that they could not view a unit at that time, while similarly situated white testers were shown units” (U.S. Department of Justice, U.S. Attorney’s Ofdice, Northern District of Ohio, 2014). The landlord agreed to pay $30,000 to resolve the complaint. A Department of Justice spokesperson said, “It is simply unacceptable for a landlord to make

Creating a Gender Balance at Procter & Gamble

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renting an apartment more difdicult and more expensive because of a person’s race.”

Evidence of Employment Discrimination

The employment process within business is usually a private one, in which discussions and decisions about prospective candidates are not open to the public. As a result, direct evidence of employment discrimination is hard to come by, and evidence has to be gathered by more indirect means. One strategy for presenting indirect evidence of employment discrimination in court is called the burden-shifting formula, where the burden rests on the employer to show that its behavior was not discriminatory (McDonnell Douglas Corp v. Green, 1973). The formula has three steps:

1. The employee makes an initial case that she was treated differently, such as that she was overlooked for promotion because she was female.

2. The employer gives a nondiscriminatory explanation for its conduct, such as that the woman lacked seniority and thus was not qualidied for promotion.

3. The employee refutes this explanation as a mere pretext for discrimination, such as by showing that less experienced males in the company had gotten promotions.

The evidence here is still indirect—there is no explicit statement from the company to the effect of “we did not promote you because you are a woman.” However, through the undermining of the company’s nondiscriminatory explanation, it seems more reasonable that the company’s differential treatment was discriminatory in nature.

There is another type of indirect evidence that suggests the ongoing discriminatory treatment of minorities within society as a whole—namely, income inequality, which involves the extent to which income is distributed in an uneven manner among a population. Some income-inequality studies focus on race and gender disparities, and much of those data in the United States come from the Census Bureau. The statistics show that race and gender income differences have decreased since 1953, but a sizeable income gap still remains, as Figure 5.1 reveals. Note that the statistics themselves show only that major income disparities exist—to use this as evidence for discrimination, a person must further show that these differences cannot be reasonably explained by nondiscriminatory factors.

Figure 5.1: The U.S. income gap, 2013

Income inequalities may reNlect race and gender disparities. Race and gender discrepancies have decreased since the 1950s, but there is still a large income gap.

What P&G Learned about Mixed Marketing Teams From Title: The Problem: Women at the Top

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Critical Thinking Questions

According to the video, skilled female employees regularly left Procter & Gamble for other employment that allowed for better work-life balance, such as dlex-time. Should companies accommodate the desire of female workers for more dlex-time, particularly when this is not as much of a concern for male workers?

Procter & Gamble found that gender-balanced teams worked 5% better, since in those teams company leadership more closely represented the consumers they were serving. What, for example, might be the liability of having a male-dominated laundry team, or a female-dominated cosmetics team?

Procter & Gamble required staff training on how to appreciate the differences between masculine and feminine styles of behavior. From your own work experience, are there some important male-female differences in behavioral styles that affect the work environment?

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Source: U.S. Census Bureau. (2013). Historical income tables. Table P-36. Retrieved from www.census.gov/hhes /www/income/data /historical/people/ (http://www.census.gov/hhes/www/income/data/historical/people/)

There are a few nondiscriminatory reasons used to explain the income inequality between genders. For example, it is often suggested that women gravitate toward careers that pay lower than those of men, such as education, counseling, and nursing. It is also argued that many women place less value on jobs with long work hours that pay more, and place more value on a dlexible schedule that allows for family commitments and perhaps pays less. These explanations are controversial, and perhaps even grounded in stereotypes. However, they suggest that women’s own choices may be a cause of gender income disparities and, if so, the income-inequality argument for discrimination falls apart.

With racial income inequality, there is also a possible nondiscriminatory explanation: Black and Hispanic people have less access to education, which in turn makes them less competitive for lucrative jobs. Thus, their lower pay may be not the result of employment discrimination, but instead an unfortunate consequence of their sociological background. The educational obstacle is less of a barrier for White women, who dirst surpassed White men in college enrollment in 1991; since then, the gap has continued to widen, as Figure 5.2 shows.

Figure 5.2: Share of recent high school completers enrolled in college the following October

Between 1994 and 2012, the number of female high school completers who enrolled in college the following fall increased from 63% to 71%.

Pay gaps that begin at the initial acquisition of jobs often continue with promotions within the company. This sometimes is associated with a phenomenon called the glass ceiling, where women and minority workers hit a level beyond which they cannot advance, while their White male counterparts continue to progress. For example, Outback Steakhouse recently settled a $19 million class action lawsuit by female employees who maintained that they “hit a glass ceiling and could not get promoted to the higher-level prodit-sharing management positions in the restaurants” (Equal Employment Opportunity Commission, 2009). One analysis of the glass ceiling looked at the percentage of women vs. men in the top 1% of earnings. According to the author, gathering data on this in the United States is difdicult because tax records of married couples redlect joint income, not each spouse’s individual income. However, some parallel might be drawn from countries that do record individual income of couples. In Canada, for example, the proportion of women in the top 1% rose from 11% in 1982 to 21% in 2010 (Atkinson, Casarico, & Voitchovsky, 2014).

But this concept of the glass ceiling is also controversial, and with

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Source: Pew Research Center “Women’s College Enrollment Gains leave Men Behind,” March 6, 2014, www.pewresearch.org/fact- tank/2014/03/06/womens-college-enrollment-gains-leave- men-behind/ (http://www.pewresearch.org/fact-tank/2014/03/06 /womens-college-enrollment-gains-leave-men-behind/)

gender-based glass ceilings the argument has been put forward that many obstacles to women’s promotion result from personal choices similar to those discussed above, such as the desire for part-time working arrangements. As one analyst stated, “the only ceiling that exists in corporate America is gender-neutral—it prevents those who choose to devote more time to their personal lives from advancing at the same rate as those who devote more uninterrupted time to the workplace” (Women in Management, 2002).

In short, income-inequality statistics and the phenomenon of the glass ceiling demonstrate that serious pay gaps exist. Those, in and of themselves, do not constitute compelling indirect evidence of systematic employment discrimination. However, it still may be important to attempt to eliminate the pay gap

even if it cannot be demonstrated to result from current discriminatory employment practices. The pay gap that exists still has historical roots in past discrimination, and that alone may justify remedying the inequality.

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5.2 Employment Discrimination and AfNirmative Action

There is no doubt that employment discrimination has taken place in the past and continues today. The question, then, becomes one of dinding the best means of combating it. The gentlest public policy for uprooting discrimination in organizations is equal opportunity, which is simply the policy of treating employees without discrimination. It involves neutral, nondiscriminatory hiring practices. The hope is that, through the simple removal of discriminatory barriers, historically disadvantaged groups may dinally be able to compete head-to-head with White males and thereby eventually remove all racial and gender economic disparities.

A much more aggressive mechanism for combating discrimination is afNirmative action, which is a policy of improving the opportunities of those within historically disadvantaged groups through positive measures beyond neutral, nondiscriminatory action. We will next look at key features of afdirmative action policies and at arguments for and against them.

Features of AfNirmative Action

The principal aim of afdirmative action policies in the workplace is to increase the representation of women and minority groups in areas of business from which they have been historically excluded. Some of these positive measures include

active recruiting of minority workers, elimination of biases in job criteria, minority training programs for senior positions, and active promotion of minority workers to senior positions.

The aim of afdirmative action is sometimes described as equal results, meaning achieving proportional minority representation in a work or economic environment where minorities are presently underrepresented. For example, if 2% of the White male population is wealthy, then 2% of the population of women and minorities should be wealthy. In this sense, afdirmative action seeks to achieve an outcome in which women and minorities are proportionally represented in positions of wealth and power. Afdirmative action policies are typically seen as temporary measures to dix problems that exist right now; when equality is achieved, they will no longer be necessary.

Preferential Treatment

The most controversial component of afdirmative action is preferential treatment, that is, special consideration given in hiring and promotion situations to people from historically disadvantaged groups. Suppose, for example, that a White man and a Black man are applying for the same job, and, although their credentials are similar, the White man has more educational experience. Thus, on paper, the White man is the stronger candidate. Because the Black man is a member of a historically underrepresented group, preferential treatment policies would make him the preferred candidate over the White man.

Sometimes preferential treatment involves a quota system, where a certain number of jobs are set aside for members of minority groups in direct proportion to their numbers in the community. The notions of afdirmative action and preferential treatment are often used interchangeably, but they are not identical: Preferential treatment is just one type of afdirmative action policy, and is not necessarily the central component. As one governmental agency stated, “Afdirmative action is not preferential treatment. Nor does it mean that unqualidied persons should be hired or promoted over other people. What afdirmative action does mean is that positive steps must be taken to provide equal employment opportunity” (Ofdice of Federal Contract Compliance Programs, 1993). Nevertheless, preferential treatment has become the focal point for debates about afdirmative action policies.

Compensation for Discrimination

The strategy of afdirmative action programs is group-oriented in the sense that every individual who belongs to a designated group will thereby qualify for some special consideration. To explain, there are two ways that we might compensate minority groups for their historical disadvantages:

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There might be individual compensation, in which each person is compensated based on his or her individual claim. For example, a Black man might argue that he was discriminated against when he was overlooked for a promotion at his job. He could then sue his company and present his case in court; if he succeeded, his company would then compensate him individually. Scenarios like this occur regularly, in fact.

Alternatively, there might be group compensation, in which each individual within a disadvantaged group is compensated based purely on his or her membership in that group. This is the approach that the government takes with afdirmative action policy. It identidies a group that has been historically disadvantaged and addresses the situation by compensating each person within that group.

The benedit of group compensation is that it avoids the impossible task of examining the claims of each person individually within that group. For example, with group compensation, a Black woman would not have to show how she had been personally disadvantaged through the legacy of slavery, Jim Crow laws, and racial prejudice. Those facts have already been established for her minority group as a whole, so she would not have to make her case individually.

There are downsides to group compensation, however, which is the source of some of the controversy with afdirmative action policies:

Some individual members of a minority group may be less deserving of compensation than other individual members but receive the benedit anyway. Take, for example, a Black man who was raised in an afdluent family and has not personally experienced discrimination. He would still be entitled to the same special consideration as a Black man who has personally and regularly experienced social and economic discrimination. Some members of majority groups may be as deserving of special consideration as members of a minority group are, yet they will not qualify to receive it. Take, for example, a White man whose family has been caught up in a cycle of poverty for generations and who experiences the same socioeconomic disadvantages as a poor Black man. Because he is not a member of the Black minority group, he does not qualify for compensation.

From the government’s standpoint, however, the strengths of group compensation outweigh its weaknesses, so this is the approach that afdirmative action policies take.

Arguments for AfNirmative Action

Among the many arguments offered in defense of afdirmative action policies, here are three common ones.

Helps Create Fairness

The dirst and most important one is that afdirmative action is a matter of fairness because it lessens the competitive disadvantage of minorities, which results from past unjust social treatment. It creates a more equal playing dield for employment and promotion, since White males still have many advantages. The rationale behind afdirmative action was given in a famous speech by President Lyndon Johnson in 1965:

Melanie Maxwell/The Ann Arbor News/Associated Press

In this photo, students supporting afNirmative action at the University of Michigan organize a protest that ultimately shut down a meeting of the school’s Board of Regents.

Equal opportunity is essential, but not enough, not enough. Men and women of all races are born with the same range of abilities. But ability is not just the product of birth. Ability is stretched or stunted by the family that you live with and the neighborhoods you live in—by the school you go to and the poverty or the richness of your surroundings. It is the product of a hundred unseen forces playing upon the little infant, the child, and dinally the man. (para. 16)

Johnson’s point was that people’s abilities are often shaped by social factors beyond their control, particularly education and family environment. A member of a racial minority who is born into such a disadvantaged situation will not be able to effectively compete for higher level jobs; it is only through afdirmative steps that society can help elevate him or her to those positions. President Bill Clinton similarly stated that “the purpose of afdirmative action is to give our nation a way to dinally address the systemic exclusion of individuals of talent on the basis of their gender or race from opportunities to

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develop, perform, achieve and contribute” (1995, p. 1108). His point was that social practices of systematic exclusion have had a long-term negative impact on minority groups that cannot immediately be erased by merely ending discriminatory behavior.

Helps Reduce Poverty

A second argument for afdirmative action is that it helps reduce poverty. Completely apart from issues of fairness, afdirmative action has an important social benedit, since high poverty rates adversely affect society as a whole and not just the poor themselves. Poverty contributes to crime, reduces the educational level of the workforce, and strains the country’s welfare system. Minority discrimination and poverty are correlated, and thus by providing job opportunities to members of those minority groups, poverty within those groups is lessened. This not only reduces poverty for the recipients of afdirmative action, but it helps break the cycle of poverty that these recipients would otherwise pass on to their children.

Helps Reduce Racism

A third argument is that afdirmative action helps reduce racism. Much of the bigotry expressed toward minorities owes to low socioeconomic status, a culture of poverty, and harmful stereotypes that inevitably result from this. Through getting better jobs, the socioeconomic status of members of minority groups is improved, and the traditional stereotypes do not apply. These workers thus become positive role models that others within that minority group may be inspired to follow. They also become positive models that others in society can look toward when upgrading their own attitudes about minorities.

Arguments Against AfNirmative Action

There are three main arguments against afdirmative action, each of which focuses on the controversial component of preferential treatment.

Creates Reverse Discrimination

The dirst of these is that preferential treatment is unfair and amounts to reverse discrimination, in which a more qualidied candidate from the majority group is unfairly denied an opportunity in preference to a less qualidied candidate from a minority group. According to this view, afdirmative action policies work so hard to protect minority groups that they often penalize a member of the majority group, usually a White male. Thus, all discrimination on the basis of race and sex is inherently unfair and unequal—and that also applies to preferential treatment. The rights that White males have to not be discriminated against are as valid as those of any member of a minority group.

The point is that even if we concede that preferential-treatment programs aim to help historically disadvantaged groups, such good intentions alone do not make the policies just. Imagine that, in our efforts to redress the past harms from discrimination, we redistributed half of the wealth of all White males among minorities. One day I have $10,000 in my bank account and the next day I have $5,000, with the missing half going into the bank accounts of members of disadvantaged minorities. Even if this had a proven benedit to the members of the minority groups, most of us would judge an effort like this to be grossly unfair to White males. While preferential treatment is not as extreme as this, it has the same kind of built-in unfairness. Another way that this unfairness is expressed is that preferential treatment essentially takes the view that two wrongs make a right. Some Whites in the past discriminated against some minority groups, even enslaving their members, and that was undoubtedly wrong. In the present, descendants of those members of minority groups, through preferential-treatment programs, have been given opportunities over better-qualidied Whites who had nothing to do with that past discrimination. But, it is argued, these two wrongs do not make preferential treatment right.

Creates Social Tension and Negative Attitudes About Minorities

A second argument against preferential treatment is that it creates social tension and negative attitudes about minorities who benedit from these programs. If an employer has one job opening and hires a

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minority applicant to dill it, there may be 50 angry White male applicants, each of whom blames that minority applicant for taking the job away from him. Other critics have gone further and argued that preferential-treatment programs have created an atmosphere in which White males are openly vilidied and can do little to stop it. As one opponent of these programs stated, “We have institutionalized a counter-white-male bias. We have created a new group who are being discriminated against. . . . [This group has] no access to legal recourse or power. We have institutionalized discrimination against one group. When does it end?” (Lynch, 1989, p. 181). Rather than creating equality and removing social tension, preferential treatment has resulted in a new inequality where there is a hierarchy of the oppressed. Blacks are the primary recipients of preferential treatment, followed by women, then Native Americans, then Hispanics, then Asians, then individuals with disabilities, and this continues until we dinally reach White males at the bottom of the scale. Thus, according to critics, what started out as a policy to reduce social tensions has ended up creating new tensions.

Stew Milne/Associated Press

Roger Williams University student Adam Noska (center) is awarded a “whites only” scholarship from College Republicans president Jason Mattera (left). The award was intended to draw attention to the issue of afNirmative action. However, just days after receiving the award and amid a whirl of controversy at the school, Noska announced he regretted taking the scholarship and was donating the money to charity.

A vivid example of this a student named Adam Noska who won a $250 “whites-only” scholarship that was set up as a prank by members of the College Republicans at Roger Williams University. Paralleling racial minority scholarships, candidates for the scholarship had to write an essay—in this case a 100-word essay—on “why you are proud of your white heritage” and “what being white means to you.” Candidates also had to include a photo to “condirm whiteness.” The irony was that the student who devised the scholarship was Hispanic and the recipient of a minority scholarship himself. Liberal students at the University protested, the issue attracted national attention, the state Republican Party criticized it for having racist overtones, and the University’s president said that he had redouble his efforts to make the campus an open environment. Noska ultimately donated the money to a local charity and stated, “What I was not prepared for was the overwhelming number of people who told me that I had disappointed them or that they expected more out of me” (Associated Press, 2004).

Exceeds SufSicient Nondiscrimination Without Preferential Treatment

A third argument is that nondiscrimination without preferential treatment is sufdicient for achieving social equality. This argument states that society has come a long way since the days of overt racism and sexism, and the laws that we currently have in place are all that we need to elevate the economic status of women and minorities. Government ofdicials continually promise that preferential treatment is only a temporary measure that in time will no longer be necessary, but, critics claim, that time seems to never come. Critics thus contend that programs of preferential treatment are no longer necessary, and now is the time for dismantling them.

What Would You Do?

You are a White employee and are on a list to be considered for a training program that would lead to career advancement and a pay increase. You dind out that you were not accepted, but some minority candidates with less seniority and experience than you were.

1. Would you accept the decision? Why or why not?

2. Would you complain to the person in charge and ask for your candidacy to be reevaluated? Why or why

not?

3. Would you attempt to negotiate an agreement that you will accept the decision in this case, but that you

expect to be accepted into the program the next time? Why or why not?

4. Suppose that you tried to negotiate an agreement for the next time the program was offered, but the

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company did not cooperate. Would you get a lawyer and threaten to sue? Why or why not?

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5.3 U.S. Anti-Discrimination Laws

Each country has its own history of both discriminatory practices and laws to combat them; we have already discussed part of the situation in India. In this section, we will look at U.S. anti-discrimination laws and the impact they have on businesses. The legal issues surrounding afdirmative action policies in the United States are not always the most enjoyable things to explore. There are subtle conceptual distinctions and complex regulations, and emotions run high. However, this is precisely where nondiscrimination in the workplace is put into practice. From a practical standpoint, being ethical in non-discriminatory business practices ultimately means following government regulations. All employees in medium to large companies need to be familiar with key aspects of these laws; for many managers, mastery of non-discrimination policies will be a key part of their job.

The Civil Rights Act of 1964

The story of Federal anti-discrimination laws begins with the Civil Rights Movement of the late 1950s and the Civil Rights Act of 1964. This legislation was devised to put an end to a century of racial segregation and discrimination. It was hotly contested in Congress; one Southern senator stated, “We will resist to the bitter end any measure or any movement which would have a tendency to bring about social equality and intermingling and amalgamation of the races in our states” (quoted in Spartacus Educational, 2014). Fortunately, that senator was outvoted. The Act addresses issues of discrimination in voting and segregation in public facilities and schools, but two portions are especially relevant to businesses. Title II of the act prohibits discrimination and segregation in places of public accommodation, such as hotels, restaurants, gas stations theaters, and stadiums. The critical portion of it is this:

All persons shall be entitled to the full and equal enjoyment of the goods, services, facilities, and privileges, advantages, and accommodations of any place of public accommodation, as dedined in this section, without discrimination or segregation on the ground of race, color, religion, or national origin. (Civil Rights Act of 1964, 1965, Section 201)

Employment discrimination is addressed in Title VII, the critical portion of which is this:

It shall be an unlawful employment practice for an employer—

(1) to fail or refuse to hire or to discharge any individual, or otherwise to discriminate against any individual with respect to his compensation, terms, conditions, or privileges of employment, because of such individual’s race, color, religion, sex, or national origin; or

(2) to limit, segregate, or classify his employees in any way which would deprive or tend to deprive any individual of employment opportunities or otherwise adversely affect his status as an employee, because of such individual’s race, color, religion, sex, or national origin. (Civil Rights Act of 1964, 1965, Section 703)

Title VII allows for some exemptions where discrimination can be permitted, but these must involve bona Nide occupational qualiNications, that is, qualidications that relate to an essential job duty and are “reasonably necessary to the normal operation of that particular business or enterprise” (Civil Rights Act of 1964, 1965, Section 703, 3e). An example of this would be disqualifying a blind applicant for an air-trafdic controller job, as mentioned earlier. Similarly, a theater company could disqualify a male actor who applied for a female role in a play, or an Episcopal church could disqualify an ordained Baptist preacher for a ministerial position.

In both Title II and Title VII we see reference to the concept of protected classes, which are the specidic groups that are protected from discrimination by law. The groups mentioned above are those of an individual’s race, color, religion, sex, and national origin.

Copyright Bettmann/Corbis/AP Images

Rosa Parks sits at the front of a Montgomery,

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AfNirmative Action: Two Laws, Two Governmental Agencies Alabama, bus. In 1955, Parks was arrested for refusing to vacate her seat on a

Afdirmative action policies in the United States are founded on two Montgomery bus for a White passenger. distinct laws: Title VII of the Civil Rights Act of 1964 (just discussed) and Presidential Executive Order Number 11246 in 1965. The term afIirmative action made its way into law through an earlier executive order by President Kennedy in 1961 requiring any business seeking a Federal government contract to engage in afdirmative action. The order stated, “The contractor will not discriminate against any employee or applicant for employment because of race, creed, color, or national origin. The contractor will take afdirmative action to ensure that applicants are employed, and that employees are treated during employment, without regard to their race, creed, color, or national origin” (Executive Order No. 10925, 1961). But Kennedy’s conception of afdirmative action was mild, and meant essentially that contractors needed to exhibit an active concern to eliminate discrimination. Four years later, this order was revised and strengthened by President Johnson and also included gender (Executive Order No. 11246, 1965).

It was in 1968 that the government dirst required target dates for evaluating a contractor’s afdirmative action program. The regulation stated, “The contractor’s program shall provide in detail for specidic steps to guarantee equal employment opportunity keyed to the problems and needs of minority groups, including, when there are dediciencies, the development of specidic goals and timetables for the prompt achievement of full and equal employment opportunity” (“Afdirmative Action Law and Legal Dedinition,” n.d.). This is the basis of the more aggressive notion of afdirmative action that includes preferential treatment. In theory, the executive orders for contractors do not require every company in the United States to adopt aggressive afdirmative action policies. However, since government contracts are such an important source of revenue throughout the business world, the executive orders had the practical effect of mandating this uniformly, especially for medium to large corporations.

Enforcing Title VII and Executive Order No. 11246

The task of enforcing Title VII of the Civil Rights Act was assigned to the Equal Employment Opportunity Commission (EEOC), which sets policies for dealing with discrimination complaints, holds hearings on specidic complaints, and has the authority to dile discrimination suits against employers. The commission’s single mission is “the elimination of illegal discrimination from the workplace” (Equal Employment Opportunity Commission, n.d.).

While the EEOC oversees compliance with Title VII, the afdirmative action Executive Order for government contractors is under the domain of the OfNice of Federal Contract Compliance Programs (OFCCP)—a branch of the Department of Labor. The OFCCP enforces afdirmative action compliance in several ways. It offers technical assistance to Federal contractors and subcontractors to help them understand the regulatory requirements and review process. It conducts compliance evaluations and complaint investigations of Federal contractors’ personnel policies and procedures. The ultimate punishment by the OFCCP for violations is the loss of a company’s Federal contracts, and companies may have to pay lost wages to victims of discrimination. Each year, the OFCCP issues an “Opportunity Award” to a contractor who implements outstanding afdirmative action programs; recipients have included Raytheon, Texas A&M University, and Dell.

Equal Employment Opporunity Commission

The Equal Employment Opportunity Commission From Title: A Question of Fairness: The Affirmative Action...

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Critical Thinking Questions

The EEOC spokesperson states that subtle forms of discrimination will never go away until the outrageous forms of it stop. Give examples of what might be subtle and outrageous forms of discrimination.

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The laws and regulations that are jointly enforced by the EEOC and OFCCP are called equal employment opportunity (EEO) laws. From a business’s perspective, EEO laws mandated by the EEOC and OFCCP go hand in hand: While the one agency oversees Title VII, and the other government contracts, medium to large businesses typically need to comply with both. It is beyond the scope of this chapter to give a detailed account of the EEO laws, but there are a few important concepts relating to these laws that are central to compliance for businesses and to the debates surrounding them. One of them is the concept of a protected class, described above. Since the Civil Rights Act of 1964, the list of legally protected groups regarding employment discrimination has grown, and now the list includes (1) race, (2) color, (3) religion, (4) sex, (5) national origin, (6) age—people over 40, (7) disability, and (8) genetic information.

Technically speaking, every U.S. citizen belongs to some protected class, if only by virtue of being either a man or a woman and having genetic information. However, the EEO laws aim specidically at protecting women and minority groups because of the history of discrimination against them. A minority is a subgroup of a population that differs in race, religion, or national origin from the dominant group. The EEOC designates a minority as being one of four groups: (1) American Indians or Alaskan Natives, (2) Asians or Pacidic Islanders, (3) Blacks, or (4) Hispanics. The EEOC does not technically classify women as a minority. However, women are considered as having “minority status” as far as the law is concerned, because they have experienced the same kind of systematic employment discrimination as the various minorities.

Compliance Guidelines and Plans

The government does not simply trust that employers will embrace nondiscrimination and afdirmative action practices. Rather, employers must follow complex protocols, and compliance places high demands on their personnel resources. Many consulting companies specialize in afdirmative action compliance; one advertises that it can dind “unique solutions to the ever-changing EEO and Afdirmative Action compliance landscape” (Pinnacle, 2015).

Government Protocols

There are two main government protocols that most medium to large businesses must follow for proper compliance. The dirst is the Uniform Guidelines on Employee Selection Procedures (UGESP), which are guidelines that require employers to carefully inspect the processes they use to hire, promote, or terminate employees, and ensure that those processes are fair and nondiscriminatory. If a company’s current practices produce a dediciency of women or minority employees, the company must conduct a validity study to show that the imbalance was not discriminatory (“Uniform Guidelines,” 2010).

Chip Somodevilla/Getty Images

When a Muslim woman was denied employment at Abercrombie & Fitch for wearing a head scarf, the EEOC successfully sued the company in a case that went to the Supreme Court. Supporters from the Council on American-Islamic Relations protest outside the Supreme Court building in 2015.

The UGESP aims at weeding out discriminatory hiring and promotion practices. However, a second government protocol, known as an afNirmative action plan (AAP), focuses more aggressively on assuring that employers implement afdirmative action in their employment practices. In some cases, afdirmative action plans are mandatory; in others, they are voluntary. The OFCCP requires contractors with 50 or more employees and government contracts of $50,000 to develop these plans. However, the EEOC advises all private-sector companies to devise voluntary afdirmative action plans as a way of addressing dediciencies in their hiring and promotion procedures, especially as might be revealed by the Uniform Guidelines on Employee Selection Procedures.

According to the video, it would be national origin discrimination to deny a person a job because of his or her accent. Might there be a job where speaking without an accent would be a bona dide occupational qualidication? Explain.

Pre-employment attitude tests are a common way of screening out prospective employees with traits like dishonesty, negativity, and unsupportiveness. What is discriminatory about the attitude test described near the end of the video?

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Putting the Plan Into Practice

It is not enough for businesses to merely create an afdirmative action plan; they must also make a good-faith effort to put the plan into practice. According to the OFCCP, “good faith efforts may include expanded efforts in outreach, recruitment, training and other activities to increase the pool of qualidied minorities and females” (2002). The government recognizes the controversial nature of preferential-treatment policies and potential accusations of reverse discrimination. Accordingly, the OFCCP has stated that “the actual selection decision [for hiring or promotion] is to be made on a nondiscriminatory basis” (2002). The EEOC has stated further that “a voluntary afdirmative action plan cannot unnecessarily trammel the rights of non-targeted groups, usually non-minorities or men” (1997).

Supreme Court Cases on AfNirmative Action

Since the 1970s, the U.S. Supreme Court has heard a series of cases on afdirmative action policies, and those rulings have established that some policies are legally permitted under the U.S. Constitution while others are not. The court’s decisions, though, are made on a case-by-case basis, and do not always establish clear and uniform policies. One reason is that the makeup of the Supreme Court continually changes, with some justices being more sympathetic to afdirmative action than others. Another reason is that the court cases themselves signidicantly differ in their details, even when on the surface they seem to be about the same issue. We will look at some of the famous Supreme Court cases that have wrestled with the nuances of afdirmative action practices of businesses, universities, and government ofdices. We will consider them chronologically.

Regents of the University of California vs. Bakke (1978)

The dirst important case, Regents of the University of California vs. Bakke (1978), involved a White man named Allan Bakke who twice applied to the school of medicine at the University of California, Davis, but was rejected both times, while less qualidied minority applicants were admitted as part of a racial quota system that reserved 16 places for minorities. The court ruled that universities could take race into account when admitting students, but it was unconstitutional for them to use rigid racial quotas to increase minorities as the University of California had done.

The university was required to admit Bakke. While the legal case ended there, the ruling has been continually debated by legal scholars and in the media. A case in point is the following comparison between the medical careers of Bakke and Patrick Chavis, one of the 16 minority candidates against whom Bakke was originally competing:

Bakke . . . ended up with a part-time anesthesiology practice in Rochester, Minnesota. Dr. Patrick Chavis, the African-American who allegedly “took Bakke’s place” in medical school, has a huge OB/GYN practice providing primary care to poor women in predominantly minority Compton. Bakke’s scores were higher, but who made the most of his medical school education? From whom did California taxpayers benedit more? (Rice & Hayden, 1995)

United Steelworkers of America v. Weber (1979)

In another case, United Steelworkers of America v. Weber (1979), Brian Weber, a young White laboratory assistant at the Kaiser Aluminum and Chemical Corporation, applied for a special training program that would have resulted in a promotion. The company made an agreement with the United Steelworkers of America labor union that for every one White person accepted into such training programs, one Black person would also be accepted. The company had many more Whites than Blacks, and thus accepted some Black employees into the program ahead of White employees with more seniority. When Weber was not accepted into the program, he sued on the grounds that the decision violated Title VII of the Civil Rights Act. The court ruled against Weber and in favor of his company.

Afdirmative action plans were acceptable, according to the court, when they aimed to correct a statistical imbalance but did not involve quotas. Thus, Kaiser did nothing wrong, since the one-for-one system was not, strictly speaking, based on quotas. The court’s decision was controversial, and one dissenting justice stated the company’s preferential treatment of Blacks clearly violated the wording of Title VII, which prohibits discrimination for employment opportunities on the basis of race. The justice continued that, by siding with the Kaiser company against Weber, the court’s majority decision was reminiscent of “escape artists such as Houdini” insofar is it eluded the clear language of the law in Title VII and wrongly concluded that employers are “permitted to consider race in making employment decisions” (United Steelworkers of

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America v. Weber, dissenting opn. of J. Rehnquist, 222). Grutter v. Bollinger (2003)

Another important case regarding afdirmative action in universities is Grutter v. Bollinger (2003). Barbara Grutter, a White woman with strong academic credentials, was rejected from the University of Michigan’s law school. She sued on the grounds that the school had used race as a predominant factor, thus giving applicants belonging to certain minority groups a signidicantly greater chance of admission than students with similar credentials from disfavored racial groups. The court ruled in favor of the law school, indicating that the Constitution “does not prohibit the Law School’s narrowly tailored use of race in admissions decisions to further a compelling interest in obtaining the educational benedits that dlow from a diverse student body” (Grutter v. Bollinger, 343). The court claridied, though, that preferential-treatment policies cannot go on indedinitely:

Race-conscious admissions policies must be limited in time. This requirement redlects that racial classidications, however compelling their goals, are potentially so dangerous that they may be employed no more broadly than the interest demands. Enshrining a permanent justidication for racial preferences would offend this fundamental equal protection principle. (Grutter v. Bollinger, 342)

The point is that even though preferential-treatment programs serve an important social purpose, they are potentially damaging and can only be used as temporary measures. The Court explicitly stated, “We expect that 25 years from now the use of racial preferences will no longer be necessary” (Grutter v. Bollinger, 343).

Wal-Mart Stores, Inc. v. Dukes et al. (2011)

All of the Supreme Court cases we have discussed so far specidically involve questions about preferential-treatment policies and whether they violate the rights of Whites. While the rulings differ in many respects, a consistent pattern emerges regarding the permissibility of quota systems in afdirmative action programs. Generally speaking, the court considers quotas discriminatory against Whites; however, the government can rightfully order companies to meet gender and minority quotas when they have repeatedly engaged in discriminatory practices.

A dinal Supreme Court case on afdirmative action is not about reverse discrimination against Whites but instead about the ability of women and minority employees to sue their employers for discriminatory practices. The 2011 case, Wal-Mart Stores, Inc. v. Dukes et al., was the largest gender-discrimination case to that point in history. Betty Dukes, a 54-year-old Walmart employee, sued the company for sex discrimination when she was denied training that would have led to a promotion. Her suit, though, was a class action lawsuit on behalf of 1.5 million female employees who, like herself, she claimed, were also denied promotion within the company because of their gender-discriminatory employment practices.

Walmart argued that the class action lawsuit was unjustidied, because the 1.5 million female employees had different jobs with different supervisors at 3,400 different stores nationwide, and did not have enough in common to be combined together into a single suit. The Supreme Court agreed with Walmart and threw out the case.

What this means is that it may be more difdicult for victims of systematic discrimination to bring class action lawsuits against their employers; they may only be able to bring suits on an individual basis. That makes a major difference in the deterrence effect that potential lawsuits could have on businesses. A class action suit like Dukes’, if successful, could have cost Walmart billions of dollars. By contrast, the damages of a lawsuit by a single individual might only be in the thousands of dollars.

Betty Dukes stands outside the Supreme Court building with supporters at a rally one year after her unsuccessful class action lawsuit against Walmart for gender discrimination.

Karen Bleier/AFP/Getty Images

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Conclusion

We opened this chapter looking at afdirmative action in India. In his book AfIirmative Action in India and the United States, economist Thomas Sowell (2004, p. 49) argued that India’s efforts at boosting the social level of untouchables have been a failure: “It is hard to escape the conclusion that afdirmative action in India has produced minimal benedits to those most in need and maximum resentments and hostility toward them on the part of others.” According to Sowell, while untouchables have had special positions open to them in universities, businesses, and governments, comparatively few have been able to acquire the skills to move into those positions. For a teenager whose life experience has been salvaging scrap metal from a garbage dump, it makes little difference if law schools have special spots available to students who are untouchables. The odds are slim that such a teenager will succeed in even getting a high-school diploma.

Sowell’s assessment of afdirmative action programs throughout the world was the same, and he argued that people in the United States can learn by observing patterns of failures elsewhere. One such pattern is that every country claims that its problem with discrimination against minorities is unique, which justidies its policies of preferential treatment. Further, Sowell wrote, in all of these countries “considerable effort has been made to depict such policies as ‘temporary,’ even when in fact these preferences turn out not only to persist but to grow” (2004, p. 2). The reason, he explained, is that politicians would be blamed for saying no to them, whereas it is much easier to just say yes (Robinson & Sowell, 2004). Perhaps most importantly, Sowell argued that there often are not adequate statistical data to show the progress of groups that have been given preferential treatment. Even when such data do exist, it is difdicult “to determine how much of that progress was due to preferential policies, rather than to other factors at work at the same time” (Sowell, 2004, p. 19). Nevertheless, Sowell argued, countries push on with their afdirmative action programs in the absence of any good data that it works.

Preferential treatment policies are controversial in the United States and everywhere else in the world where they have been put into practice. Public support might be stronger for these programs if it could be shown with some certainty that they are indeed successful in improving the conditions of historically disadvantaged groups and that they will not continue indedinitely. The problem, though, is that discrimination and its devastating effects on minorities are the consequence of hundreds, and sometimes thousands, of years of prejudicial tradition. It is unrealistic to expect that such a historically rooted problem can be solved with just a few decades of policy changes, and it is understandable that “temporary” policies of preferential treatment have become ongoing features of social policy.

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Summary & Resources

Chapter Summary

We began this chapter looking at different types of discrimination, the main two types being public accommodations discrimination and employment discrimination. Some discrimination is intentional, some unintentional. Evidence of discrimination can be direct or indirect. One indirect type of evidence for discrimination is income inequality and another is the phenomenon of the glass ceiling.

Next we looked at afdirmative action, the most controversial type preferential treatment, which involves special consideration given to people from historically disadvantaged groups in hiring and promotion situations. This often involves a quota system. Compensating victims of discrimination can be done individually or as a group; governmental afdirmative action policies rest on group compensation. The concept of afdirmative action is a controversial one, and we looked at arguments both for and against it.

From a practical standpoint, nondiscriminatory behavior in the workplace essentially means following afdirmative action laws that are mandated by the government. The two main afdirmative action laws are (1) the Civil Rights Act, which grants equal access to public accommodations (Title II) and equal opportunity for employment (Title VII), and (2) the presidential executive order requiring government contractors to take afdirmative action measures. The Equal Employment Opportunity Commission (EEOC) oversees compliance with Title VII, and the Ofdice of Federal Contract Compliance Programs (OFCCP) oversees compliance with the executive order. These two agencies stipulate two procedures for compliance. The dirst is laid out in the Uniform Guidelines on Employee Selection Procedures (UGESP), and the second involves the creation of an afdirmative action plan (AAP).

Problems routinely arise within the business world with attempts to follow afdirmative action laws. Several major Supreme Court rulings have claridied when a business’s afdirmative action decision crosses the line and becomes unconstitutional. The Supreme Court’s general view is that quota systems are discriminatory against White males, but companies can still be ordered to use quotas when they have repeatedly engaged in discriminatory practices.

Discussion Questions

1. Consider the Jazzercize example at the beginning of this chapter and discuss whether the company was discriminating against the instructor.

2. Unintentional discrimination occurs when a company’s policies uncritically redlect prejudicial stereotypes yet do not involve overt racial prejudices of its managers or executives. Think of examples, either real or imaginary, in which a company might be engaged in unintentional discrimination.

3. Examine the statistical data presented earlier that indicate income inequality throughout the United States. Then discuss how much of that inequality can be attributed to discrimination rather than to nondiscriminatory factors.

4. Preferential treatment is just one component of afdirmative action, but it is the component that has caused the most controversy. Suppose that the government banned all preferential-treatment programs throughout the country. Would this make the remaining elements of afdirmative action ineffective? That is, is afdirmative action essentially meaningless without preferential treatment?

5. Governmental afdirmative action policies rely on a system of group compensation, rather than individual compensation. Examine the different advantages and disadvantages of the group-compensation approach as listed in the chapter, and discuss whether the government did the right thing by adopting the group- compensation approach.

6. Consider the three arguments in favor of afdirmative action discussed in the chapter. Indicate which is the weakest and which is the strongest, and discuss why.

7. Consider the three arguments against afdirmative action discussed in the chapter. Indicate which is the weakest and which is the strongest, and discuss why.

Key Terms

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afNirmative action

The policy of improving the opportunities of those within historically disadvantaged groups through positive measures beyond neutral, nondiscriminatory action.

afNirmative action plan (AAP)

U.S. Federal requirement for assuring that employers implement afdirmative action in their employment practices.

bona Nide occupational qualiNications

Qualidications that relate to an essential job duty and are reasonably necessary for the normal operation of that particular business or enterprise.

burden-shifting formula

The legal strategy for a minority employee where the burden rests on the employer to show that its behavior was not discriminatory.

direct evidence of discrimination

Overt written or oral statements by employers that display their discriminatory intention.

discrimination

The unjust or prejudicial treatment of people on arbitrary grounds, such as race, gender, or age, which results in denial of opportunity, such as public accommodations or employment.

employment discrimination

The prejudicial treatment of people in hiring, promotion, and termination decisions.

Equal Employment Opportunity Commission (EEOC)

U.S. Federal agency responsible for enforcing Title VII of the Civil Rights Act by setting policies for dealing with discrimination complaints, holding hearings on specidic complaints, and diling discrimination suits against employers.

equal employment opportunity (EEO) laws

The laws and regulations that are jointly enforced by the EEOC and OFCCP.

equal opportunity

The policy of treating employees without discrimination.

equal results

An afdirmative action concept of achieving proportional minority representation in a work or economic environment where minorities are presently underrepresented.

glass ceiling

A discrimination situation in which women and minority workers hit a level beyond which they cannot advance, while their White male counterparts continue to progress.

group compensation

An antidiscrimination policy in which each individual within a disadvantaged group is compensated based purely on his or her membership in that group.

income inequality

Indirect evidence of discrimination based on an analysis of the extent to which income is distributed in an uneven manner among a population.

indirect evidence of discrimination

Behavior of a company that implies discriminatory conduct.

individual compensation

An antidiscrimination policy in which each person is compensated based on his or her individual claim.

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intentional discrimination

Discrimination in which the policies of a company are shaped by overt racial prejudices of its managers or executives.

minority

A subgroup of a population that differs in race, religion, or national origin from the dominant group.

OfNice of Federal Contract Compliance Programs (OFCCP)

U.S. Federal agency (a branch of the Department of Labor) responsible for implementing the afdirmative action executive order regarding government contractors.

preferential treatment

Special consideration given to people from historically disadvantaged groups in hiring and promotion situations.

protected classes

Specidic groups that are protected from discrimination by law.

public accommodations discrimination

A business or some other public access place prejudicially denies services to some customers.

quota system

An afdirmative action concept where a certain number of jobs are set aside for members of minority groups in direct proportion to their numbers in the community.

reverse discrimination

An aspect of preferential treatment in which a more qualidied candidate from the majority group is unfairly denied an opportunity in preference to a less qualidied candidate from a minority group.

Uniform Guidelines on Employee Selection Procedures (UGESP)

U.S. Federal guidelines that require employers to carefully inspect the processes they use to hire, promote, or terminate employees, and assure that those processes are fair and nondiscriminatory.

unintentional discrimination

Discrimination in which a company’s policies uncritically redlect prejudicial stereotypes.

Business Ethics Case Study 5.1: Religious Freedom and Public Accommodations Discrimination—Condlict Between Two Laws

The First Amendment to the Constitution establishes freedom of religious expression: “Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof”; Title II of the Civil Rights act prohibits businesses from discriminating against customers:

All persons shall be entitled to the full and equal enjoyment of the goods, services, facilities, privileges, advantages, and accommodations of any place of public accommodation, as dedined in this section, without discrimination or segregation on the ground of race, color, religion, or national origin. (Civil Rights Act of 1964, 1965)

As dirm as these two laws are, they come in condlict with each other when a business owner refuses to accommodate a customer on the basis of the owner’s deeply held religious convictions. One example of this is with pharmacies that refuse to sell contraception to customers. This was the situation in three Walgreens stores in Alabama and Georgia where pharmacists cited religious convictions as the reason for not dispensing the Plan B contraception to male customers for their female partners, even though such purchases were legal.

Similar condlicts arise when businesses refuse to provide services to homosexuals based on religious objections. In one case, the owner of a cake shop in Colorado turned away a customer who wanted a cake for a same-sex

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recognized that requiring integration was not about violating religious liberty; it was about ensuring fairness. It is no different today” (2015).

Discussion Questions

1. Judge Bosson stated that tolerance and non-discrimination is the price of citizenship in the multi-cultural environment of the United States. Is he right? Explain your answer.

2. Religious freedom is just one of many values in the United States. Is it right to pass laws that elevate that value above other ones, particularly anti-discrimination values? Why or why not?

3. Some businesses involve creative efforts, such as artists, musicians, and speechwriters, and they typically have freedom to accept or reject commissions as they wish to suit their artistic expression. Does this rationale justify cake makers, dlorists, or photographers turning away same-sex couples? Why or why not?

4. In the Washington case of Arlene’s Flowers, that business was run solely by the owner. Elane Photography was a husband-and-wife operation. Does being the sole owner and operator of a business justify it in turning away same-sex couples? Why or why not?

5. The ACLU argues that using religion to discriminate against same-sex couples in public accommodations today is similar to using religion to discriminate against racial integration in the 1960s. Are these cases similar? Explain your answer.

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6 Employees

Learning Objectives

After reading this chapter, you should be able to:

Understand integrity issues involved in the hiring process. Discuss the relationship between minimum wage and a living wage. Examine the problems of employee working conditions. Discuss various concerns regarding employee privacy. Examine the challenges of whistleblowing.

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Introduction

In 1911, the Triangle Shirtwaist Factory caught dire, killing 146 workers, one of the deadliest industrial disasters in U.S. history. The dire started in a container of fabric scraps, perhaps ignited by a lit cigarette, and quickly spread. As was common at the time, each day the owners locked the factory doors and stairwells to keep employees from stealing merchandise or taking unauthorized breaks. The workers were therefore trapped when the dire started, and the few who made it to the factory’s single rickety dire escape fell to their deaths as it collapsed beneath their weight. After the tragedy, New York’s state legislature authorized a commission to study the conditions of factories throughout the state, and, on the basis of their report, the state passed 60 laws pertaining to job safety, building cleanliness, and working hours. These reform efforts were monumental for the time and indluenced laws throughout the country, which are foundational to many of our current expectations of employee working conditions.

Job environments for employees today in the United States are indinitely better than in 1911, but there are still many areas of ethical concern. As businesses seek to maximize prodit, there remains the risk of doing so at the expense of employee interests. They may not be as callous as locking all exit doors, which was a quick dix to the problem of employee theft in earlier times, but serious problems still arise. In this chapter, we explore some of the more notable areas of concern for employees. We will begin with the integrity of the hiring process, then move to questions of fair wages, workplace safety, worker privacy, and whistleblowing protection.

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6.1 Hiring

An employee’s experience with a company begins with the hiring process. As employers seek to dind the best candidate for a position, the two most important moral and legal obligations they have are non-discrimination and due diligence. Chapter 5 covered employment discrimination—that is, the prejudicial treatment of people in hiring, promotion, and termination decisions—and laws that aim to combat this. Due diligence in hiring involves an employer thoroughly researching a job candidate before hiring him or her. Without exercising due diligence, an employer may inadvertently hire someone completely unsuited for the job or, worse, someone who is a dangerous psychopath. Failure to exercise due diligence may result in negligent hiring—that is, when an employer knew or should have known about an employee’s untrustworthy character upon dirst hiring him or her. In addition, sometimes due diligence can run off track. In this section, we will consider the ethical and legal problems that can arise in the hiring process with regard to criminal background checks, credit checks, social media access, and interviews.

Criminal Background Checks

One step in the due diligence process is consideration of the candidate’s application and résumé. However, around half of all job applicants commit some form of résumé fraud. Figure 6.1 lists the most common lies found on résumés.

Because employers cannot trust the information provided by applicants, due diligence requires fact checking to see that the material contained on applications is accurate, and also that relevant information has not been left out. Many third-party companies specialize in verifying the contents of résumés and conducting background checks, and large corporations often rely on these specialized companies. Criminal background checks are one type of pre-employment background check that companies can perform. In fact, such checks are conducted by around two-thirds of organizations in the United States. Companies conduct criminal background checks to both decrease the legal risks of negligent hiring and to better ensure a safe work environment for their employees.

What happens if a criminal background check reveals something about a potential employee that may risk his or her employment chances? Over half of all organizations permit potential employees to explain the details of their criminal background checks before the organization makes a dinal hiring decision. However, workers with even minor criminal histories often face challenges in hiring and promotion situations. This especially affects Black and Hispanic groups, who are convicted of crimes more often than Whites; this, in turn, raises issues of hiring discrimination.

Figure 6.1: Top 10 résumé lies

Fact checking is part of the interview process. Employers should verify the accuracy of information presented in an applicant’s résumé.

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Source: Adapted from Resume Fraud: The Top 10 Lies, by Christopher T. Marquet, CEO, Marquet International Ltd. and Lisa J.B. Peterson. Copyright (2005) Marquet International. Retrieved from http://www.marquetinternational.com /pdf/Resume%20Fraud-Top%20Ten%20Lies.pdf (http://www.marquetinternational.com/pdf/Resume%20Fraud- Top%20Ten%20Lies.pdf )

For example, a class action lawsuit was diled against the Washington Metropolitan Area Transit Authority for recent changes to its criminal background screening policies on the grounds that they discriminate against Black workers. According to the lawsuit, the new policy “goes far beyond any legitimate public safety concerns, to permanently stigmatize and bar from employment well-qualidied individuals, a disproportionate number of whom are African-Americans.” The policy would disqualify workers for positions if they were convicted of two misdemeanor drug possession offenses in the past dive years, or a crime of violence at any point in their past. The policy directly affects the hiring of new employees, but it also applies to current employees who could be dired for their past criminal histories, even if they revealed them at the time of their employment (Rogers, 2014).

Credit Checks

Another form of background screening for some organizations is a credit check. In fact, almost half of all employers in the United States run credit checks on applicants and consider such checks another relevant source of information on a candidate’s credentials. Why do employers run credit checks? The following are just a few of the arguments employers put forth for why they believe such checks are helpful in making hiring decisions:

Applicants who are dinancially responsible will also be responsible on the job. Applicants who are struggling with debt will focus more on their dinancial problems than their job responsibilities. Personal credit history is directly relevant for jobs in banking, accounting, and other dinancial areas.

At the same time, however, critics of applicant credit checking argue the following:

Studies show that there is little or no connection between credit rating and successful job performance. Errors in credit reports are common and often difdicult to correct. It traps applicants into a cycle of unemployment. It has a discriminatory impact on minorities.

It is unfair because a perfect credit score can be quickly ruined by family medical issues, divorce, or job layoffs.

Because of these problems, several states have laws limiting the use of credit checks, and congressional bills have been proposed that would prohibit employers from requiring credit checks for job applicants and prevent employers from rejecting applicants based on poor credit rating. According to Senator Elizabeth Warren, author of one of the bills, “It makes no sense to make it harder for people to get jobs because of a system of credit reporting that has no correlation with job performance and that can be riddled with inaccuracies” (Warren, 2013).

Companies that do use credit reports for hiring must follow precise guidelines as laid out in the Fair Credit Reporting Act (FCRA), and businesses are sometimes brought to court for violating them. One such guideline is that, if the person is not hired because of bad credit, the company is obligated to send them the report. The transportation company Uber was sued by a former driver after it dired him and failed to notify him of problems with his credit report (Mohamed v. Uber, 2014). The craft store chain Michaels was sued for failing to inform applicants that their credit report might be obtained during the hiring process, as required by FCRA (Castro v. Michaels, 2015). Similar lawsuits were brought against Whole Foods, Dollar General, and Publix Super Markets for violating technical points in FCRA.

The moral of this story is that job seekers should check their credit reports for negative items and correct them when possible, and employers should stay current with credit reporting laws such as FCRA.

Social Media Information and Job Application Screening

Social media sites are playing a larger role in the hiring process; the most commonly consulted ones are Facebook, Twitter,

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and LinkedIn. Surveys show that 77% of employers use social media for recruiting candidates (Segal, 2014), and, while survey results vary, up to 90% use it for screening applicants (Macleod, 2011). A few years ago, there was a movement among employers to ask job candidates for their Facebook passwords to more closely scrutinize their personalities. However, this practice has since been banned in about a dozen states, and Congress is considering nationwide laws on the issue (Noguchi, 2014).

A recent survey shows that around half of the companies who use social media reject applicants based on undlattering information that they uncover about them, such as the items listed in Figure 6.2. At the same time, however, 33% of these employers said that they were more likely to hire an applicant because of favorable impressions they get from social media sites about the candidate’s personality, qualidications, professional image, range of interests, communication skills, creativity, and awards (CareerBuilder, 2014).

When employers dirst began using social media to screen applicants, they were accused of snooping in the candidate’s private affairs and making decisions about them based on irrelevant information. Now that this practice is commonplace, social media is considered a helpful hiring tool, and, as the survey results in Figure 6.2 show, employers are mainly looking for information that is relevant to job performance. Nevertheless, employers should be careful with social media because dinding information about a candidate’s race, gender, age, or other protected characteristics puts the company at risk of discrimination litigation. The advice for job candidates is simple: Be careful about what you post.

Figure 6.2: Social media information that leads to rejected employment applications

Social media can play a role in the job seeking and hiring processes. Candidates should use good judgment when posting information, and employers should be mindful to evaluate only information relevant to job performance.

Source: Adapted from CareerBuilder. (2014, June 26). Number of employers passing on applicants due to social media posts continues to rise, according to new CareerBuilder survey. Retrieved from www.careerbuilder.com/share/aboutus /pressreleasesdetail.aspx?sd=6/26/2014&siteid=cbpr&sc_cmp1=cb_pr829_&id=pr829&ed=12/31/2014 (http://www.careerbuilder.com/share/aboutus/pressreleasesdetail.aspx?sd=6/26/2014&siteid=cbpr&sc_cmp1=cb_pr829_&

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id=pr829&ed=12/31/2014)

What Would You Do?

Martin Gaskell, an astronomy professor at the University of Nebraska, applied for a job at the University of Kentucky to head its new observatory, which included public outreach and education. During the pre-employment screening process, members of the search committee found information on the Internet suggesting that Gaskell was religiously conservative, possibly creationist, and had posted notes on the compatibility between the Bible and modern astronomy. At his interview, he was asked to clarify his views on the relation between religion and science. When Gaskell did not get the job, he diled a religious discrimination suit against the university; he later settled out of court for $125,000.

1. If you were on the search committee, would you have used the Internet to research suspicions about condlicts between Gaskell’s religious beliefs and the job responsibilities? Why or why not?

2. Suppose that the case went to court and you were the judge. Would you have considered it discriminatory or appropriate to the job to investigate Gaskell’s religious views either online or in the interview? Explain your answer.

3. Suppose that Gaskell’s religious views were relevant to the job duties. If you were on the job search committee, would you have played it safe and not investigated those issues? Why or why not?

4. If you were on the job search committee, would you have privately discussed the religious issue among committee members and then rejected his application before even offering him an interview? Why or why not?

Interviews

The most visible part of the hiring process is the interview, and, like pre-employment screening, it presents many opportunities for ethical and legal missteps. Two interview methodologies are used in employment hiring: structured and unstructured. Structured interviews involve carefully written questions that are directly connected with measurable skills. In addition:

All candidates are asked the same questions in the same order. All candidates are evaluated using a common rating scale. Interviewers are in agreement on acceptable answers.

Unstructured interviews, by contrast, are a more spontaneous interview environment in which questions are not prearranged. These types of interviews have the following features:

Candidates may be asked different questions. A standardized rating scale is not required. Interviewers do not need to agree on acceptable answers.

Unstructured job interviews suffer from three key problems. First, unstructured interviews are not very effective in predicting job performance. One study (Lawyer Metrics, n.d.) suggested that they were only half as effective as structured interviews. Another study (Dana, Dawes, & Peterson, 2012) concluded that an employer could more accurately predict performance with no interview at all as compared to unstructured interviews.

A second problem is with interviewer bias. Biases easily and imperceptibly indluence interviewers, and common ones are the applicant’s physical attractiveness, gender, race, and similarity to the interviewer. Interviewers are wrongly indluenced by common stereotypes, dirst impressions, and comparisons with previously interviewed candidates (contrast effect). They allow one strong or weak point of the candidate to overshadow everything else (halo/horn effect). Studies regularly

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reveal an almost endless variety of possible negative biases, such as ethnic-sounding names, non-heterosexual orientation, motherhood, obesity, shortness, baldness, long hair, tattoos, body piercing, soft voice, and high-pitched laughter. Structured interviews are more effective at suppressing these biases.

The third problem with unstructured interviews is that, with the smallest mistake in wording, employers risk violating employment discrimination laws and therefore becoming subject to discrimination lawsuits. The Internet abounds with lists of “illegal” interview questions. These include overt ones, such as “What religion do you practice?” and more subtle ones, such as “Do you belong to a club or social organization?” Many of these questions pry into information about protected classes—that is, specidic groups that are protected from discrimination by law. Structured interviews are much less vulnerable to this hazard because they are carefully crafted and interviewers stick to the script.

Despite these dlaws, the majority of job interviews in the United States today are still unstructured. While the methodology for structured interviews has been around for decades, organizations are reluctant to adopt that approach. This may be, as some have speculated, because of a false sense of condidence in the interviewer’s intuitive ability to dind the right person for a job. Whatever the reason, the integrity of most interview processes today is questionable.

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6.2 Wages and BeneNits

People typically do not seek employment for their personal amusement but rather do so to earn a paycheck. The higher the paycheck, the more it is worth their while to submit to the demands of an employer. But what determines reasonable compensation for an employee’s efforts? In this section, we will look at issues surrounding market wage, minimum wage, and a living wage.

Market Wage

The starting point for any discussion of establishing wage standards is the market wage, which is the lowest wage that an employer can offer to attract an employee. Imagine that a group of unskilled laborers are standing on a street corner where employers routinely show up in mini-vans to offer a day of work. One drives up and shouts out “$2 an hour!” No one gets in, so the employer drives on. Another one shows up and says “$10 an hour!” and the van is mobbed. A third shows up and says “$7 an hour” and about half of the remaining crowd shows an interest. In each case, the laborers are thinking about how badly they need the money and whether the offer is worth their effort. In this scenario, $7 an hour would be the market wage—the amount at which the employer could get the workers that he needed for the least amount of money.

However, just because you are willing to get into one of those vans does not necessarily mean that the wage is sufdicient to meet your needs. There are three other wage considerations:

Kris Tripplaar/Sipa USA/Associated Press

Many people believe that minimum wage should be increased above its current level to the point at which it provides a living wage.

Subsistence wage: a wage that is sufdicient to provide only the bare necessities of life. Living wage: a wage that is sufdicient to meet basic needs beyond mere subsistence. Opulence wage: a wage that supports a luxury lifestyle beyond basic needs.

Thus, a market wage in and of itself will not guarantee you a subsistence wage, a living wage, or an opulence wage. Sometimes the market wage for a highly skilled job will in fact result in opulence, such as with physicians’ incomes. Even with unskilled workers, this is possible: In medieval times, the plague reduced the unskilled workforce to the point that labor costs temporarily skyrocketed. But in normal situations, market wages are near a subsistence level for many unskilled jobs—and also for some skilled ones, as starving artists will testify.

At this stage in the discussion, the issue shifts from an economic one to an ethical and political one. Do we want to live in a society where a responsible and intelligent worker in an unskilled job gets only a subsistence income? For hundreds of years, advocates of minimum wage have answered “no” to this question and argued that governments or labor unions must step in to set higher wage standards. A minimum wage, then, is the lowest wage permitted by law or by a special agreement, such as with a labor union.

Minimum Wage and a Living Wage

In the United States and most countries around the world, the question is not whether there should be a minimum wage, but how high should it be on the scale between subsistence and opulence. The debate resurfaces every few years when governments consider minimum wage increases to keep pace with indlation. Lawmakers who seek to keep it unchanged commonly offer these economic and moral justidications:

A Higher Minimum Wage in Seattle

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Increasing it will raise unemployment because some businesses will be forced to hire fewer employees. Increasing it undermines a critical economic balance between supply and demand. Increasing it causes price indlation because businesses will increase prices to compensate for higher wages.

Increasing it discourages further education of the poor.

By contrast, lawmakers who seek to increase minimum wage give these reasons:

It increases the standard of living and keeps people out of poverty. It ensures that low-income workers are not underpaid because of their gender or race. It encourages people to work rather than get money by illegal means, such as stealing or drug dealing.

By giving workers more money, it stimulates spending and thereby puts more money into the economy.

Many advocates of minimum wage increases contend that, not only should wages keep pace with indlation, they should be raised to the level of a living wage. Activists routinely protest in front of giant chain stores like Walmart to generate media attention about how difdicult it is for their employees to get by on their incomes.

But how much is a “living wage” today? This differs from country to country and city to city. To test what a living wage is any U.S. city, MIT has an online Living Wage Calculator (2015). Based on MIT’s tool, a living wage in Springdield, Missouri (one of the country’s cheapest cities, according to Kiplinger magazine, 2013) is $9.30 per hour for a single person, and $29.42 per hour for a family of four with a single earner.

Clearly, this is above the current $7.25 minimum wage set by the U.S. Federal government. The United States dirst established a nationwide minimum wage with the U.S. Wages and the Fair Labor Standards Act (FLSA) in 1938; this set not only a minimum wage (initially at 25 cents) but also the 40-hour work week, time-and-a-half for overtime, and youth employment standards. At its current $7.25, the United States does better than most countries worldwide but is signidicantly lower than the top contenders, as Figure 6.3 indicates.

Figure 6.3: High minimum wages (per hour) in selected countries

The minimum wage amount can vary by country and, as in the United States, can vary within a single country.

WE THE ECONOMY: The Value of Work—Why Is Minimum Wa...

© Infobase. All Rights Reserved. Length: 08:05

Critical Thinking Questions

According to economist Alan Krueger, President Ronald Reagan vetoed minimum wage increases from 1981–1990, which froze it at $3.35 an hour. Because of indlation, the value of minimum wage decreased by 20% over this time, and today, even with subsequent increases, minimum wage has still not recovered its pre-1981 value. Might there be an economic justidication for this long-term devaluing of minimum wage? Explain.

According to some of the Seattle business owners in the video, what would the negative consequences be of a $15 minimum wage? What are some of the arguments in the video in favor of a $15 minimum wage?

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Source: Wikipedia, List of Minimum Wages by Country

To address the dediciencies of the Federal minimum wage, state and local governments sometimes create their own. As of 2015, 29 states have minimum wages above the Federal one, with Washington the highest, at $9.47. The cities with the highest minimum wages are Seattle at $15 and San Francisco at $12.25. Debates about minimum wage and a living wage will undoubtedly continue, but the message for low-income employees is that it is social conscience more than economics that determines how much they will earn beyond a market wage.

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6.3 Workplace Safety

In 2013, 4,485 workplace deaths took place (Occupational Safety & Health Administration, n.d.b). Although this number is discouragingly high, it is down 25% over the past decade. Figure 6.4 shows the main causes of such occupational fatalities, with the largest percentage being from transportation accidents.

Figure 6.4: Occupational deaths in the United States, 2012–2013

Accidents happen, but the goal of worker safety is to minimize the risks as much as possible.

Source: U.S. Bureau of Labor Statistics. (2014, September 11). Economic news release: Table 1. Fatal occupational injuries by event or exposure, 2012–2013. Retrieved from http://www.bls.gov/news.release/cfoi.t01.htm (http://www.bls.gov/news.release/cfoi.t01.htm)

For the same year, around 3 million nonfatal workplace injuries and illnesses were reported, which is roughly 3.3 cases per 100 workers (U.S. Bureau of Labor Statistics, 2014b). It would be impossible to create a work environment that is free of all employee risk of injury or death. Equipment sometimes breaks, and malfunctions cannot always be foreseen. Human beings commit murder in every conceivable setting, and work environments are no exception. The goal of worker safety is to minimize these risks as much as possible, even if their complete elimination is unrealistic. In this section, we will look at the Federal agency that oversees workplace safety and how companies can develop effective safety cultures.

OSHA

In the United States, the governmental body responsible for monitoring workplace safety is the Occupational Safety and Health Administration (OSHA), a branch of the Department of Labor. Formed in 1971, OSHA sets workplace safety standards across many industries, conducts unannounced inspections, imposes dines on negligent companies, and requires companies to report injuries. Its website (https://www.osha.gov) contains a scrolling banner describing recent fatalities, such as these:

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Two workers struck and killed by buoy that fell from crane. Worker redinishing bathtub died from exposure to methylene chloride. Worker died from carbon monoxide asphyxiation.

Worker fatally engulfed in grain storage bin. Worker killed in fall from scissor lift.

According to an OSHA administrator, “Making a living shouldn’t have to cost you your life. Workplace fatalities, injuries, and illnesses are preventable. Safe jobs happen because employers make the choice to fuldill their responsibilities and protect their workers” (OSHA, n.d.b). Figure 6.5 shows the top 10 most frequently cited OSHA violations in 2014.

There are levels of violations and punishments that OSHA administers to offenders. At the lower end lie the “other than serious” violations that usually result in a verbal warning from OSHA. At the upper end are the “willful violations” that are intentional and can carry a dine of $5,000 to $70,000 and up to $250,000 if the incident results in a death. In 2015, OSHA dined Ashley Furniture $1.76 million for violations that resulted in over 1,000 injuries during a three-and-a-half-year period at a factory with 4,500 workers. Twelve of these violations were classidied as willful.

OSHA is caught in a political battle. Conservatives, on the one hand, criticize it for setting expensive yet ineffective standards that force small companies out of business. Liberals, on the other hand, criticize it for not performing enough inspections, focusing mainly on large corporations, and setting dines so low that large companies have no incentive to make the needed safety changes. Nevertheless, one study, published in the top journal Science, condirms OSHA’s effectiveness, suggesting that their inspections do prevent workers from on-the-job injury and save employers billions of dollars through reduced workers’ compensation costs (Levine, Toffel, & Johnson, 2012).

A famous OSHA case involved the death of an animal trainer by a killer whale at SeaWorld in Florida. OSHA dined the company $12,000 and set new safety standards for trainers that removed them from the water during shows. Another case involved a lawsuit against AT&T for diring 13 workers who reported on-the-job injuries. OSHA stated, “It is against the law for employers to discipline or suspend employees for reporting injuries. . . . AT&T must understand that by discouraging workers from reporting injuries, it increases the likelihood of more workers being injured in the future” (U.S. Department of Labor, 2014).

Safety Culture

To address on-the-job safety problems, many companies adopt a safety culture—that is, a set of shared attitudes within an organization that emphasizes the high priority of safety. OSHA maintains that, in its experience and in independent research, a company’s adoption of a safety culture has “the single greatest impact on accident reduction of any process” (OSHA, n.d.a).Concern with occupational safety dates back hundreds, if not thousands, of years. What is new is the broadly disseminated message that safety is a non-overridable priority, one that trumps all other business concerns. The U.S. Nuclear Regulatory Commission’s (2011) safety culture policy statement emphasizes precisely this point in the following dedinition, which has become a model for similar policy statements by other organizations:

Nuclear safety culture is the core values and behaviors resulting from a collective commitment by leaders and individuals to emphasize safety over competing goals to ensure protection of people and the environment.

Figure 6.5: OSHA’s 2014 top 10 most frequently cited violations

Some OSHA violations are more serious than others. Employers should make the choice to protect their workers.

Source: Occupational Safety and Health Administration (OSHA). (2014). Top 10 most frequently cited standards for discal 2014. Retrieved from https://www.osha.gov/Top_Ten _Standards.html (https://www.osha.gov/Top_Ten _Standards.html)

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Organizations creating a safety culture face the same challenges as when they introduce any new type of ethical corporate culture, such as honesty, integrity, and transparency. It often starts with top leaders openly endorsing a set of values, discussing it in meetings at every corporate level, and publicizing it throughout the company in memos and brochures. Judy Agnew, a safety culture consultant, suggests seven components to a successful safety culture, listed in Figure 6.6.

Figure 6.6: Seven components to a successful safety culture

Top leaders should openly endorse the values that help create a safety culture in their organizations.

Source: Agnew, J. (2013, January 23). 7 keys for creating a safety culture. © 2015 Aubrey Daniels International, Inc. Atlanta, GA USA. Reprinted with permission. http://aubreydaniels.com/blog/2013/01/23/7-keys-for-creating-a-safety- culture/ (http://aubreydaniels.com/blog/2013/01/23/7-keys-for-creating-a-safety-culture/)

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6.4 Worker Privacy

Worker privacy concerns an employee’s expectations for work environment that is free from unnecessary intrusions into their person, behavior, or information. The issue involves a tension between competing expectations of employers and employees. Employers are paying employees to do specidic tasks and rightfully expect that workers will do them efdiciently and honestly. Employees, on the other hand, are devoting a large portion of their lives to their jobs and rightfully do not want to feel like caged animals during that time. Balancing the respective expectations of employers and employees is a challenge, and in this section we will look at the privacy issues that arise with electronic monitoring, data breach, searches, and drug testing.

Electronic Monitoring

Maintaining employee privacy is becoming a losing battle, due in large part to technological advances that make monitoring inexpensive and effective. The prevailing rule is that if the employer owns an electronic device, it can monitor it as it sees dit. Figure 6.7 shows the wide range of electronic monitoring that businesses can and regularly do engage in. Occasional exceptions to these permitted uses of monitoring have been tested in specidic situations by court cases, and companies may intentionally establish rules that allow for a wider range of privacy, such as that employees will be notidied prior to any phone monitoring. But it is safe for all employees to assume that all of their ofdice activities are being monitored.

Figure 6.7: Permitted employer use of electronic monitoring in the United States

Electronic monitoring is a frequent part of business. Employers and employees should be mindful of which forms are legal and which are not.

Today, over 90% of employers in the United States have policies that allow reasonable personal use of company

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computers, but this does not prevent the company from accessing them. An important Supreme Court case shows the limits of employee privacy with personal electronic communication. The police department in Ontario, California, issued text message pagers to its ofdicers and told them that only “light personal communications” were permitted during work and that inappropriate language on them was not allowed. When some ofdicers routinely went over the permitted character limit, the department requested transcripts of the text messages. These transcripts revealed that one ofdicer, Jeff Quon, had a large number of personal messages, including sexually explicit ones to his girlfriend, and in one month, only 8% of the messages were work-related. Quon and others involved sued the city for invasion of privacy; the case made its way to the Supreme Court, which ultimately sided with the city. The Court concluded that, even if Quon had a reasonable expectation of privacy, “the employer had a legitimate reason for the search, and that the search was not excessively intrusive in light of that justidication” (Ontario v. Quon, 2010).

The Quon case involved the privacy of personal communication on an employer-issued device. The reverse arrangement, a policy sometimes called bring-your-own-device (BYOD), allows employees to use their privately owned computer or cell phone for business purposes. There are benedits to both sides: The employees get to use the device that they are most comfortable with, and the employer benedits by avoiding the cost of both the device and the service plan. But BYOD also raises special privacy issues. Employees worry that their employers may access personal data from their devices, and employers worry that sensitive information on employees’ devices may be breached. To prevent data breaches, employers feel that they have the right to wipe data stored on BYOD devices, but unselective wiping may result in permanent loss of the employee’s personal data. BYOD policies are on the rise in the business world, and the privacy problems associated with traditional employer-issued devices will inevitably be transferred over to BYODs.

Data Breach

Just as technology has broadened the scope of employee monitoring, it has also created vulnerabilities for securing employee personal data. Employees provide their employers with some of the most sensitive data that they have, such as their Social Security numbers, bank account numbers, health information, and family member information. Employees have a reasonable expectation that this information will be kept condidential and stored securely. Prior to electronic data storage, this data would be on paper forms tucked away in diling cabinets where it would be very difdicult for outsiders to access. With electronic data storage, however, one data breach could put at risk the personal information of every employee in a large corporation. Two-thirds of data breaches are internal to companies and result from human and system errors that accidentally make data publicly available; only one-third of data breaches are from external hackers (Symantec, 2013).

Whether internal or external, data breaches pose serious risks to employees’ privacy. An example of an internal breach is a 2014 incident with Mozilla Corporation, makers of the Firefox web browser. During a data sanitization process, the company accidentally exposed a database dump dile that contained the email addresses of around 76,000 members of its Developer Network, along with around 4,000 encrypted passwords. A spokesperson for Mozilla said that the company removed the dump dile as soon as it learned of the issue and sent notices to all who were affected by it.

An example of an external breach is the hacking of Sony Pictures Entertainment by North Korea in response to its production of the comedy dilm The Interview, which depicts a plot to assassinate North Korean leader Kim Jong-un. Accessing Sony’s computer system, the hackers made publically available condidential email messages of employees, over 47,000 Social Security numbers, and employment diles that included salaries and medical information. Several employee class action lawsuits were subsequently diled against Sony. One of them stated that Sony “failed to secure its computer systems, servers and databases despite weaknesses it has known about for years”; during this time, according to the suit, “Sony made a business decision to accept the risk of losses associated with being hacked” (BigClassAction, 2014).

What Would You Do?

Consider the facts in the Sony class action lawsuit described above. 1. Suppose that no identity theft took place or will ever take place as a result of this data breach. If you were a

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Searches

There is an anecdote about a worker at a brickyard who stole two bricks each day by placing them in his lunch box, and after 20 years he had enough bricks to build his own home. Employee theft is a major problem in all businesses, large and small, and Figure 6.8 shows some alarming statistics about its prevalence.

Figure 6.8: Prevalence of employee theft in the United States

All businesses must deal with the possibility of employee theft.

Source: Hollinger, R. C., & Adams, A. (2014, February 20). 2012 national retail security survey dinal report. University of Florida’s Security Research Project. Retrieved from http://users.clas.uNl.edu/rhollin/srp/srp.html (http://users.clas.uNl.edu/rhollin/srp/srp.html)

There are precautions that employers can take to reduce employee theft, such as background checks before hiring, regularly informing employees of zero tolerance for theft, or scheduling surprise audits. But the most overt precaution is to conduct searches of employees’ handbags, desks, lockers, lunch boxes, cars, or any other area where an employee might hide something.

While searches may be effective ways of reducing employee theft, they can be intrusive and demoralizing for employees. They can also be time consuming. In a 2014 class action lawsuit that reached the U.S. Supreme Court, a former employee working at an Amazon warehouse sued his temp agency for the unpaid time spent passing through metal detectors, which

Sony employee, would you participate in the lawsuit anyway? Why or why not?

2. If you were diling the suit, what kind of compensation would you expect the court to award you if you won

the case? Explain your answer.

3. If you were Sony’s CEO, what kind of out-of-court settlement might you offer to make the lawsuit go away?

Explain your answer.

4. Suppose that, upon investigation, it turned out that the security of Sony’s computer system was about the

same as that of any big corporation, and that all companies are vulnerable to some weaknesses. If you were the judge in the case, would this indluence your decision? Why or why not?

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took as long as 25 minutes. The court ruled unanimously against the worker. As stipulated in previous Supreme Court decisions, employers do not have to pay for activities before and after a workday, such as driving to and from work, unless they are “integral and indispensable” to the job. In this case, the court ruled that the searches were not an “integral and indispensable” part of the Amazon worker’s job. A similar class action lawsuit was diled against Apple by former employees who stood in lines for up to a half hour each shift waiting for supervisors to search their bags. The judge dismissed the case based on the Supreme Court ruling in the Amazon case.

Searches may unfortunately be a necessary evil in the work environment, but to reduce condlicts with employees’ legitimate expectations of privacy, employers should avoid or minimize the types of searches that bother employees the most. These include searches that are groundless, random, bodily, against the employee’s will, or in any area of space that an employee would consider private.

Drug and Alcohol Testing

Drug and alcohol abuse among workers can result in costly problems for employers, such as theft, injury, absenteeism, lower productivity, and increases in healthcare and worker’s compensation costs. Drug and alcohol testing in the workplace began in earnest in the 1980s and was met with a wave of lawsuits that questioned its validity and argued that it undermined employees’ rights. Testing is now common in the workplace, with 90% of organizations screening job candidates and 71% screening current employees (Maurer, 2013). Even so, the practice still has its critics. First, there are few rigorous studies that show how effective drug and alcohol screening have been in deterring employee drug use or reducing workplace injury. Second, even if drug screening is now a given, there are still privacy challenges to how the tests are performed.

One problem occurs in forcing a drug test upon someone. A middle school teacher in Las Vegas sued her school district for holding her against her will in a room and forcing her to take what she described as an “invasive” drug test. The night before, she had been arrested for driving under the indluence of alcohol and marijuana; at her job the next day, she was called to the administrator’s ofdice to be given a drug test. When she told the school administrator that she wanted to leave, the administrator blocked the door and told staff to call the police to prevent her from leaving. She tested positive for marijuana and was dired, but through her union’s intervention she was reinstated and over the next 11 months was given eight random drug tests, all of which she passed. In her lawsuit, the teacher claimed that her experience was an invasion of privacy and false imprisonment. The court ultimately dismissed her claims and found that the drug test was supported by reasonable suspicion (Casillas v. Clark County School District et al., 2013). Nevertheless, the teacher’s claim was strong enough to raise serious questions about her treatment.

Selective drug screening also carries the risk of being discriminatory. In one case, a White and a Black man were dighting with each other on the job, and the supervisor broke it up. The supervisor noticed that the Black man had unusual behavior and speech, the company tested him for drugs, and the results came back positive for cocaine. The Black worker later sued the company for discrimination because only he, and not the White man, was required to take the drug test. The court sided with the company and concluded that the supervisor acted with reasonable suspicion of drug use (Berry v. Arcelormittal, 2013). While in this case the court concluded that the drug test was not discriminatory, it nevertheless shows how individualized drug tests risk the accusation of discrimination. Thus, while workplace drug testing is common, it still carries risks of privacy violations and litigation.

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6.5 Whistleblowing

A whistleblower is a person who informs the public or someone in authority about illegal activities or some other misconduct that has occurred within an organization. The term was coined because whistles are used in law enforcement and sports to draw attention to some infraction.

The two most publicized cases of whistleblowing in recent years have been those of Edward Snowden and the WikiLeaks website. Snowden, a computer programmer who worked as a subcontractor for the U.S. National Security Agency (NSA), collected hundreds of thousands of documents about NSA programs spying on Americans and released many of them to journalists. The WikiLeaks website, which publishes classidied information from anonymous sources, made headlines by posting hundreds of thousands of military documents detailing civilian casualties during the Afghanistan and Iraq wars.

Both of these cases involved the leaking of documents to the public that revealed questionable political and military activities by the U.S. and other governments. However, whistleblowing in the business world is just as common as governmental whistleblowing, and, for the company, often just as damaging to its public image. In this section, we will review types of whistleblowing, some guidelines for whistleblowers, and some laws that protect whistleblowers.

Types of Whistleblowing

One case that exhibits many common features of whistleblowing in business involved the British pharmaceutical company GlaxoSmithKline (Thomas & Schmidt, 2012). In 2012, the company agreed to pay a $3 billion fraud settlement for illegally promoting some of its drugs for unapproved uses (so-called off-label marketing). A decade earlier, two Glaxo marketing employees had reported the problem through ofdicial channels within the company. The company retaliated against the employees and continued off-label marketing of the drugs. The employees then brought the situation to the attention of the U.S. Federal government, which brought charges against the company that ended in the settlement.

As seen in the Glaxo case, whistleblowing can be either internal or external. Internal whistleblowing occurs when an employee makes a complaint about a fellow worker or corporate procedure and keeps the complaint within the company. Key to this notion is that the complaint takes place within an organization’s established operational structure and thus relies on the organization to correct the problem.

To deal with such problems, companies sometimes have whistleblower systems or hotlines. These are mechanisms that allow for employees to make complaints within the company structure. Some areas of business, such as accounting, have laws that require

Matt Dunham/Associated Press

Julian Assange, co-founder of the whistleblowing website WikiLeaks, took refuge in Ecuador’s London Embassy in 2012 to avoid being extradited to Sweden to face sexual assault charges. After three years, supporters held a vigil for him outside the Embassy.

Internal and External Channels

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the implementation of whistleblower systems to collect and resolve employee complaints or concerns. These might include telephone hotlines or websites where complaints can be registered anonymously. Some companies encourage internal whistleblowing, partly as an effort to eliminate any misconduct on the part of employees and managers in the company and partly to avoid potential legal and public relations problems and thereby protect their image as transparent and responsible companies in the eyes of the public. There are also companies that specialize in whistleblower systems and sell their services to organizations, advertising that their systems are more effective and have a lower risk of costly retaliation claims.

When companies respond properly to internal whistleblowing, the public typically never learns of the problem. What the public hears about are cases where the companies do not take corrective action. As with the Glaxo case, this may lead to external whistleblowing, where the informant goes outside the organization to seek a remedy. Complaints of misconduct may be brought to the attention of authorities outside the organization, such as governmental oversight ofdices, attorneys, the media, or special interest groups such as watchdog agencies. Here are two examples:

In the mid-1990s, Jeffrey Wigand, a former vice president of the Brown and Williamson tobacco company, appeared on the CBS news show 60 Minutes and stated that his company was “a nicotine-delivery business” and had intentionally manipulated its tobacco blend to increase the amount of nicotine in cigarette smoke. He went on to provide evidence in a case that resulted in a $246 billion settlement with the tobacco industry. This set a precedent for a succession of similar cases, including one in 2014 in which a jury awarded $23 billion to the widow of a deceased chain smoker. Wigand’s case later became the basis for the 1999 dilm The Insider.

In 2013, JPMorganChase reached a $13 billion settlement with the U.S. Department of Justice for its practice of selling bad mortgages to investors, which contributed to the 2008 dinancial meltdown. Key to the agreement was the whistleblower testimony of Alayne Fleischmann, a former diligence manager for the company whose job was to inspect the integrity of potential investments. She initially warned her supervisors that they needed to inform investors of the risks attached to these bad mortgages, but she was silenced by them. After two years, she quit the company; she came forward some time later, providing evidence to Federal prosecutors.

Both of these are rather dramatic situations; for the typical whistleblower, appearing on national television or participating in a billion-dollar lawsuit are not options. In many external whistleblowing situations, the employee simply complains to a government agency that oversees a particular area of business.

Suppose, for example, that a company violated a health or safety regulation by not providing proper protective gear for employees who work with hazardous material. An employee could bring the situation

Going Through the 'Right' Channels From Title: Insider Threats: America’s Surveillance State—...

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Critical Thinking Questions

Critics of Edward Snowden argue that he should have gone through ofdicial channels, rather than leaking government documents to the press. In the video, how do defenders of Snowden respond to this criticism?

According to one interviewee in the video, the whistleblower protection act does not protect people in the intelligence community from retaliation when whistleblowing through ofdicial channels. Assuming this is true, does that justify people in the intelligence community, like Snowden, to go outside ofdicial channels and whistleblow to the press?

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Stephan Savoia/Associated Press

Former tobacco industry executive Jeffrey Wigand provided critical information to the government about the deceptive practices of tobacco companies, which resulted in a landmark settlement. In this 2000 photo, Wigand (right) sits with Rhode Island’s Lieutenant Governor in a hearing to determine how that state would spend its share of the settlement money.

to the attention of OSHA. In the case of violation of environmental regulations, such as improper disposal of hazardous waste, the employee could notify the Environmental Protection Agency (EPA). With violations of securities regulations such as insider trading, the employee could contact the Securities and Exchange Commission (SEC). For example, a vice president of Enron, Sherron Watkins, blew the whistle on her company when she informed the SEC of the irregular accounting activities at her company. The SEC then investigated Enron, which ultimately led to the company’s bankruptcy.

Whistleblowing Guidelines

External whistleblowing can cause considerable harm to a company because of dines, lawsuits, and the tarnishing of its public image. Consequently, employees who blow the whistle are caught in a condlict between loyalty to the company and loyalty to the public and the law. On the one hand, as members of the company, they have a responsibility to look out for the best interest of their employer and avoid causing unnecessary harm. On the other hand, as citizens, they have a responsibility to the public at large to draw attention to especially harmful activities of their company.

The act of going public with a complaint is not one to take lightly, and the argument can be made that in most cases it is not justidiable. Sometimes even well-intentioned whistleblowers get their facts wrong and cause a public spectacle even when the company has not committed an infraction (Tongue & Instone, 2006). Some types of whistleblowing can be unjustidiably confrontational, such as creating a website that boldly states, “My company is dumping toxic waste in your backyard.” Also, some whistleblowing may be the consequence of the employee’s strong ideological convictions, which are disproportionate to the actual harm that a company has done. For example, an employee who is especially sensitive about environmental issues may misconstrue a minor environmental infraction as a major one.

Ultimately, there should be guidelines for when external whistleblowing is appropriate. Of the various suggestions that have been made, here are dive valuable ones offered by political philosopher Richard T. De George (2006):

1. The dirm, through its product or policy, will do serious and considerable harm to the public, whether in the person of the user of its product, an innocent bystander, or the general public.

2. Once an employee identidies a serious threat to the user of a product or to the general public, the person should report it to an immediate superior and make his or her moral concern known.

3. If an employee’s immediate superior does nothing effective about the concern or complaint, the employee should exhaust the internal procedures and possibilities within the dirm. This usually will involve taking the matter up the managerial ladder, and if necessary and possible, to the board of directors.

4. The whistleblower must have, or have access to, documented evidence that would convince a reasonable, impartial observer that one’s view of the situation is correct, and that the company’s product or practice poses a serious and likely danger to the public or to the user of the product.

5. The employee must have good reason to believe that by his or her going public, the necessary changes will be brought about. The chance of being successful must be worth the risk one takes and the danger to which one is exposed.

Whistleblowers such as Jeffrey Wigand are sometimes considered folk heroes for exposing great harm. Other times, however, they are depicted as disloyal snitches or emotionally unbalanced complainers. In either case, through their efforts, whistleblowers put themselves at risk of employer retaliation through layoffs, pay decreases, hour cutbacks, job reassignments, and even termination. Wigand himself maintained that he was harassed and publicly discredited by Brown and Williamson for whistleblowing. Unable to dind a corporate job in the aftermath, he worked for a while as a high school teacher, receiving $30,000 a year, which was one tenth of his former salary. The emotional impact on whistleblowers can therefore be very great. Alayne Fleischmann stated, “You can dind yourself at odds with a company that has almost limitless resources, lawyers, and indluence. If you look at prior whistleblowers, many lose not only their jobs but also their careers” (Burton, 2015).

Whistleblowing Laws

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Just a few decades ago, whistleblowers had little protection from retaliation by employers, but laws have been passed more recently to safeguard them, and employer retaliation has subsequently been on the decline. We will look at three of the more important laws protecting whistleblowers.

The False Claims Act of 1863

The False Claims Act of 1863 aimed to help the government recover money from companies that defrauded governmental programs. It was signed into law during the Civil War as a mechanism for punishing military contractors who intentionally sold the government faulty weapons and supplies. The law was expanded in 1986 to allow citizens to sue on behalf of the government—in essence, to blow the whistle on companies that defraud the government. Most importantly, the law allows for whistleblowers to be rewarded by receiving a percentage of the money recovered (called a qui tam lawsuit). For example, four employees of Eli Lilly received nearly $80 million in their share of the settlement involving the company’s illegal marketing of the drug Zyprexa to children (U.S. Department of Justice, 2009).

The Whistleblower Protection Act of 1989

Next, at the urging of President Jimmy Carter, Congress passed the Whistleblower Protection Act of 1989, the purpose of which was to protect employees in government jobs from whistleblower retaliation. As the act itself stated, it sought to “strengthen and improve protection for the rights of Federal employees, to prevent reprisals, and to help eliminate wrongdoing within the Government” (Whistleblower Protection Act of 1989, §2(b)).

The No FEAR Act of 2002

A dinal whistleblower protection law is the NotiNication and Federal Employee Antidiscrimination and Retaliation Act of 2002, more commonly known as the No FEAR Act, which aimed to discourage supervisors in government agencies from engaging in discrimination and retaliation. The act was sparked by the case of Marsha Coleman-Adebayo, an employee of the EPA, who alerted the agency that a specidic U.S. company was engaged in an environmental violation. When the EPA did not take action, she reported the violation to external organizations. When she was later denied promotion, she diled suit. The EPA was found guilty of civil rights violations and ordered to compensate her with $600,000. In an effort to reduce the occurrence of similar lawsuits against the government, the No FEAR Act was introduced, which required Federal employers like the EPA to regularly notify employees of their rights and remedies regarding discrimination and whistleblower retaliation. The notidication must include the following language relating to whistleblowing:

A Federal employee with authority to take, direct others to take, recommend or approve any personnel action must not use that authority to take or fail to Press take, or threaten to take or fail to take, a personnel action against an employee Former prosecutor for the U.S. or applicant because of disclosure of information by that individual that is reasonably believed to evidence violations of law, rule or regulation; gross mismanagement; gross waste of funds; an abuse of authority; or a substantial department for interrogating an and specidic danger to public health or safety. (Ofdice of Personnel Management, n.d.)

Deadlines for retaliation complaints range from a few days to several years, depending on the type of retaliation and the governing Federal or state laws. Thus, whistleblowers who wish to complain of retaliation need to be alert to these varying timetables. One resolution for retaliation is a “make whole” remedy, whereby the employee is returned to the position and status that he or she held prior to the complaint.

Roland Popp/picture-alliance/dpa/Associated

Justice Department Jesselyn Radack blew the whistle on her

American terrorism suspect without the suspect’s attorney present.

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What Would You Do?

Whistleblower lawsuits for Medicare fraud are frequent occurrences. In one case, a nurse for Amedisys, a Louisiana-based home healthcare company, complained to her bosses that the company pressured its healthcare workers to exaggerate patient illnesses to get higher Medicare payment rates. They dired her, and with her help, the Justice Department diled a lawsuit accusing the company of overcharging government over a two-year period, which eventually led to a settlement with the company.

1. If you were the nurse, would you have complained to your bosses, knowing the risk of getting dired? Why or why not?

2. If you were one of the bosses, would you try to change company policy, try to buy the nurse off with a promotion, or dire her? Explain your answer.

3. Suppose that you were the nurse and your attorney told you that the success of a lawsuit against the company was minimal, it would make it difdicult for you to work as a nurse again, and it would probably take a decade before a dinal court decision was made. Would you still go through with the lawsuit? Why or why not?

4. The company settled for $150 million, and the nurse’s share was $15 million. Knowing this, if you were a nurse working for a similar company, would you actively seek out Medicare abuse in hopes of winning a multi-million dollar lawsuit? Why or why not?

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Conclusion

The treatment of employees has come a long way since the Triangle Fire of 1911, but the tension still exists between the company’s interest in making money and the employee’s interest in a decent working environment. Businesses snoop into the personal lives of potential employees, pay unskilled workers as close to market wage as possible, skimp on workplace safety, monitor every movement of an employee, and retaliate against whistleblowers. But employees are no angels either. They lie on their résumés, steal from their employers, cheat on their time cards, put themselves and their co-workers at risk for injuries, and often sue their companies over the tiniest of mistakes.

With so much self-interest and distrust piled up on opposing sides, it is a wonder that the employer–employee arrangement works at all. But strangely it does, due largely to an understanding of the limits to what each side will tolerate in the other’s conduct. Determining those limits involves trial and error—something like an on-the-job social experiment—that often becomes a matter for courts to decide. Further, there is no reason to think that this social experiment will dind dinality. Working environments are constantly changing because of technological advances, economic upswings and downswings, and evolving social conscience. Consequently, new employer–employee tensions will always emerge.

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Summary & Resources

Chapter Summary

In this chapter, we looked at key ethical concerns in business that specidically relate to employees’ interests. In the hiring process, criminal background checks and credit checks might be discriminatory and irrelevant to particular job descriptions. Social media access is common but puts employers at risk for discrimination lawsuits. Interviews are the most successful predictors of future job performance when they are structured, but most interviews today are unstructured.

On the issue of employee wages, the default price for employee pay is the market wage, which is the lowest wage that an employer can offer to attract an employee. Minimum wage has the effect of pushing employee pay higher, but often not high enough to constitute a living wage that is sufdicient to meet basic needs beyond mere subsistence.

On the issue of workplace safety, the Occupational Safety and Health Administration (OSHA) sets workplace safety standards, but it has been criticized for setting dines too low and focusing mainly on large companies. An effective way of improving worker safety is for companies to establish a safety culture—that is, a set of shared attitudes within an organization that emphasize the high priority of safety.

Employee privacy is limited by employer security efforts, including electronic monitoring, searches, and drug and alcohol testing. Companies risk employee lawsuits when conducting these indiscriminately. Company data breaches also compromise employee privacy and risk employee lawsuits.

Finally, we looked at the issue of whistleblowing, some guidelines for whistleblowers, and laws that protect whistleblowers from employer retaliation.

Discussion Questions

1. Criminal background checks, credit checks, and social media access are common tools today in pre-employment screening. Does employer use of these tools go too far? Should it be banned? Why or why not?

2. Some social scientists argue that there is a major difference in effectiveness between structured and unstructured interviews, and unstructured ones are next to worthless. In what kind of scenario might an unstructured interview be better than a structured one? Why do you think this is so?

3. Do you think the minimum wage should be raised to the level of a living wage in your area? Why or why not?

4. Some analysts argue that the idea of a special “safety culture” is unnecessary because all people and all businesses

already have a focus on safety. What matters, according to these analysts, is whether a business’s current safety efforts work, not whether there is a culture developed around it. Discuss the merits of this criticism, how OSHA would respond to it, and which side of the issue seems most correct.

5. Electronic monitoring, searches, and drug tests are common ways that employers try to keep employees efdicient and honest. Do you think any of these mechanisms are unjustidiable? Why or why not? What other alternatives might employers have?

6. Even though there are laws that protect whistleblowers from employer retaliation, some whistleblowers say that they are harassed or marginalized by their employers anyway. Do whistleblowing laws need strengthening or are they sufdicient to protect employees from retaliation?

Key Terms

credit check

Inquiry into a person’s dinancial information by an organization, often for employment purposes.

criminal background check

Inquiry into a person’s criminal records by an organization, often for employment purposes.

due diligence in hiring

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An employer thoroughly researching a job candidate before hiring him or her.

external whistleblowing

When an employee makes a complaint to an external authority such as the police, the SEC, or another Federal agency.

False Claims Act of 1863

U.S. Federal law to assist the government in retrieving monies from people and corporations who are defrauding it.

internal whistleblowing

When an employee makes a complaint about a fellow worker or corporate procedure and keeps the complaint within the company.

living wage

A wage that is sufdicient to meet basic needs beyond mere subsistence.

market wage

The lowest wage that an employer can offer to attract an employee.

minimum wage

The lowest wage permitted by law or by a special agreement, such as with a labor union.

negligent hiring

When an employer knew or should have known about an employee’s untrustworthy character upon dirst hiring him or her.

NotiNication and Federal Employee Antidiscrimination and Retaliation Act of 2002 (No FEAR Act)

U.S. Federal law designed to stop Federal supervisors from threatening or retaliating against Federal employees who blow the whistle.

Occupational Safety and Health Administration (OSHA)

A branch of the Department of Labor formed in 1971 to set workplace safety standards across many industries, conduct unannounced inspections, impose dines on negligent companies, and require companies to report injuries.

opulence wage

A wage that supports a luxury lifestyle beyond mere basic needs.

safety culture

A set of shared attitudes within an organization that emphasizes the high priority of safety.

structured interview

An interview method in which carefully written questions are directly connected with measureable skills and are the same for all interviewees.

subsistence wage

A wage that is sufdicient to provide only the bare necessities of life.

unstructured interview

An interview method in which questions are not prearranged and not necessarily the same for each interviewee.

whistleblower

A person who informs the public or someone in authority about illegal activities or some other misconduct that has occurred within an organization.

Whistleblower Protection Act of 1989

U.S. Federal law to protect Federal employees who blow the whistle on fraudulent or unsafe practices in Federal agencies.

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whistleblower systems or hotlines

Systems within a corporation that allow whistleblowers to make ofdicial and sometimes anonymous complaints.

worker privacy

An employee’s expectations for a work environment that is free from unnecessary intrusions into their person, behavior, or information.

Business Ethics Case Study 6.1: Walmart’s Battle Against Unionization

Walmart is regularly in the news for business ethics abuses, such as predatory pricing, sweatshop conditions of its suppliers, its impact on the environment, tax dodging, and deceptive advertising. The principal reason is its sheer size. With more than 5,000 U.S. stores and 1.3 million employees, it is the country’s top retailer, top revenue earner, and top private employer. Because of its exceptionally high public prodile, even the smallest ethical infraction is bound to draw widespread attention, and Walmart knows it.

But one area in which the company has been consistently and unapologetically vocal is in its opposition to unions, which is as ingrained in its image as the company’s Great Value brand knockoffs and yellow spark logo. By resisting unionization, Walmart has been able to keep its labor costs among the lowest in the retail industry. Founder Sam Walton held this conviction since the early days of Walmart, and in 1970 he blocked unionization efforts in two Missouri locations.

In place of collective bargaining, the company implemented two plans in the early 1970s. The dirst was its prodit sharing program, in which the company contributed 4% of employees’ pay for retirement—a practice that was eventually replaced in 2010 with a matching 401k retirement program. The second was its “Open Door” policy that allows individual employees to bring an issue to any member of management, on up to the CEO, without fear of retaliation.

These two programs, however, have done little to stop unionization efforts by the United Food and Commercial Workers International Union (UFCW). The UFCW’s stated aim is to “improve wages, benedits, and conditions” in the retail and grocery industry, which in turn, it says, requires making changes at the country’s number one retail store. Common complaints by Walmart workers are low wages, denial of overtime pay, infrequent breaks, and inadequate healthcare coverage. So far the UFCW has been unable to unionize any Walmart store in the United States—a task that requires getting at least 50% of workers at a given store to sign cards stating that they wish to be represented by the union.

U.S. laws about unionization are strict: It is against the law for companies to intimidate or threaten employees who want to unionize, and it is also against the law for unions to intimidate or threaten employees into unionizing. Part of Walmart’s success at avoiding unionization owes to the anti-union training that it gives its managers, as seen in these points from a management training document leaked to the press:

Walmart employees “can speak for and represent themselves without having to pay someone to do that for them.” Walmart managers have a responsibility to “report union activity to the [Walmart] Labor Relations Hotline immediately.”

“We simply don’t feel third party representation is right for Walmart.” Walmart managers are advised against threatening, interrogating, or spying on employees regarding possible unionization, but managers can share anti-union facts, opinions, and experiences. Possible opinions that managers can express include “For a Walmart associate, I think unions are a waste of money. You can speak for yourself.”

Another reason for Walmart’s success at thwarting unionization is that the company comes down hard on stores that move in that direction. At one point, three Walmart stores in Canada unionized with the UFCW, but Walmart subsequently closed one of the locations, and eventually the workers at the other two voted to decertify their union

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representation. In the United States, Walmart has been accused of diring 19 workers after they participated in pro-union protests on Black Friday. In other incidents, a judge ruled that two California stores threatened to dire workers for their unionization efforts. Most recently, Walmart has been accused of closing down another California store for its unionization efforts under the pretext of plumbing problems. According to a legal complaint, “In order to mask this, Walmart has closed 4 other stores making the same ‘plumbing’ claim. . . . This unprecedented ‘closure’ to dix ‘plumbing’ is part of Walmart’s overall national strategy to punish Associates who stand up and speak out for better working conditions.”

Ironically, Walmart has accepted unionization at its stores in over a dozen foreign countries, including Argentina, Brazil, China, Mexico, South Africa, and the United Kingdom. A Walmart spokesperson stated, “We recognize those rights. In that market, that’s what the associates want, and that’s the prevailing practice.”

With its failure to unionize Walmart in the United States, the UFCW has created a website called “Making Changes at Walmart” that highlights Walmart’s dediciencies as an employer, and it also sponsors a non-union workers’ group called the Organization United for Respect at Walmart—or “OUR Walmart”—that takes some of the tasks of an ofdicial union. While “OUR Walmart” cannot negotiate contracts, it can organize discussions and protests among workers. Walmart portrays all of the UFCW’s efforts as motivated by dinancial gain, since unionization of all U.S. Walmart stores would bring in $500 million a year in union dues. The UFCW, of course, makes the same accusation of dinancial greed against Walmart for its resistance to unionization.

Beneath the mutual accusations of greed, there is a genuine dispute between competing values. The best reasons for unionization are these:

Unionizing Walmart is dinancially benedicial for Walmart workers and families. Unionizing Walmart will set higher standards for working conditions throughout the retail industry. Unionization of all retail stores, including Walmart, will help reduce the continually growing income gap between the wealthy and poor in the United States.

The best reasons against unionization are these:

Increased wages will result in increased prices for consumers. In many stores, Walmart wages are equal to or better than similar retailers. Walmart’s wage structure and its overtly anti-union position are legal, and discontent workers are free to seek employment elsewhere.

Walmart has made some signidicant changes in 2015 in employee wages and benedits, such as increasing workers’ pay to $10 per hour or more. But some questions still remain: Were these changes done to thwart unionization? Are they too little too late? Do the changes mean a union is not necessary?

Discussion Questions

1. Between Walmart and the UFCW, who has the stronger case regarding unionization, and why?

2. Walmart acknowledges the rights of workers to unionize in other countries where unionization is the

prevailing practice. Could a case be made that unionization is the prevailing practice in the United States?

3. Whether you are against unions or not, is Walmart either morally or legally justidied in closing stores that

are moving toward unionization?

4. Under U.S. law, companies can be dined or sued for intimidating workers who seek to unionize. At the same

time, it can be more costly for a company if its stores do unionize. Might it be dinancially worth the legal penalties to stop unionization efforts before they take hold? Discuss justidications one way or the other.

Sources: OccupyWallStreet (2014), "National Labor Relations Board Charge," (2015), Mui (2001).

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7 Financial Ethics

Learning Objectives

After reading this chapter, you should be able to:

Describe the common dilemmas that accountants and dinancial ofdicers face. Understand some of the ways companies cheat on dinancial reports. Describe the various regulations concerning dinancial practice.

Consider how commercial condlicts of interest may arise in preparing accounts and dinancial reports, and examine whether such condlicts are best dealt with by the government or the marketplace.

Assess the advantages and disadvantages of insider trading. Explain the problem of rogue trading.

Spencer Platt/Getty Images News/Thinkstock

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Introduction

In recent years, a steady stream of major dinancial scandals have rocked the business world. At one point not so long ago, Enron was one of the world’s largest utility companies in the United States. Within a year, a massive accounting fraud was uncovered, leading to its bankruptcy. Meanwhile, the U.S. communications company WorldCom was found to have been covering a $3.8 billion fraud, indlating its asset values to make it look dinancially healthier than it really was. More recently, the American businessman Bernard Madoff defrauded some 4,800 clients—including many charities—of $65 billion.

Accountants are trained professionals who are accredited and licensed to provide services concerning the accounts, audits, and reporting of corporations’ dinances. Many are members of professional organizations, such as the American Institute of Certidied Public Accountants, that have ethical principles or codes of professional conduct that members pledge to adhere to. Like medical professionals, they are expected to live up to a professional reputation that has developed over many decades. But intense business competition can increase pressure on accountants, auditors, and CEOs in ways that can affect their professional judgment and lead to accounting fraud. Such fraud is costly—in fact, it is estimated to cost the U.S. economy over $300 billion annually.

In the wake of such notable fraud cases, the dinancial profession has been under intense media, regulatory, and internal scrutiny to ensure that dinancial professionals follow the law and professional codes of ethics. It has even become popular for MBA graduates to swear an oath to uphold ethical conduct in order to give the dinancial professions credibility similar to that of health services (MBA Oath, n.d.). Yet, so-called white-collar crime continues. It includes various types of dinancial fraud, such as embezzlement, insider trading, rogue trading, tax evasion, money laundering, and more.

This chapter reviews the ethical temptations that sway accountants and other dinancial ofdicials away from their legal and professional responsibilities.

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7.1 Responsibilities and Temptations for Accountants

Almost everything that is important to the operation of a company is redlected in its dinancial digures. Its income and expenses, prodit and loss, and overall dinancial health are revealed through numbers, and it is the accountant’s job to develop accounting systems that clearly and accurately redlect the monetary life of a company. In this section, we will see that accounting is not always an exact science, and there are opportunities to present numbers in different ways depending on a company’s needs, sometimes misrepresenting that organization’s actual dinancial state.

Soft Numbers and Fiduciary Trust

Business is run on numbers. The collection, measurement, recording, and communication of dinancial information are the foundation of accounting; these numbers in turn help owners and investors make dinancial decisions regarding setting up, expanding, contracting, buying, and selling businesses.

Kyodo/Associated Press

Toshiba Corp's CEO Hisao Tanaka (shown here, second from left, bowing in apology at a press conference) recently resigned after an accounting fraud scandal was discovered at the Japanese company. Toshiba also responded to the scandal by cutting the pay of its chairman, president, and 15 of its top executives.

We would normally assume that numbers are objective values and that dinancial professionals would have no trouble in assigning agreed-upon values. For example, turnover and the quantity of sales are objectively measurable, and there is typically little argument about them. However, dinancial numbers are not always objective; there is a great deal of subjectivity involved in producing them. Financial professionals must place values on assets such as property, for example, as well as offer predictions about future sales and prodits. Here is the great dilemma dinancial professionals face: If they report only what they can know without question, there will be very little to report. However, when they place values on things they do not know with certainty, they can exaggerate or underplay the company’s value. Such soft numbers—quantities that are uncertain or difdicult to measure—have enormous repercussions on the company’s dinancial health.

For example, consider a company that owns property for which it paid $1.5 million in 2010. The property is an asset that could be sold if the company had to pay a debt. However, property values have fallen in

the area since 2010, and the accountant knows that the company would not get $1.5 million for the property should the company sell it today. What value should the accountant put down for the property in the company’s dinancial reports? One accountant may suggest $1.2 million, another $1 million. If the company wanted to take out a loan, the higher value would be more benedicial to the company, but if it wanted to reduce its taxable assets, the lower digure would be more benedicial. There is no right answer here because the true value can only be determined by a sale in which the seller and buyer reach an agreement in an open market.

Generally, accountants agree to be conservative when determining values, but what conservative means to one accountant may be very different from what it means to another. Thus, as you can see, accountants can miscommunicate the reality of a company’s dinancial health through their use of such soft numbers.

Adding to the problem, many managers are not dinancially minded, which means that dinancial irregularities and accounting problems can all be easily missed (Ittelson, 2009, p. 3). Indeed, if managers are illiterate in the terminology and principles of dinance and accounting, it is difdicult for them to judge what is happening from an accounting standpoint, never mind whether the company is acting ethically. Honest mistakes may be made and insidious fraud may develop swiftly without decision-makers even knowing.

Not surprisingly, there is therefore a critical element of Niduciary trust that employers, employees, shareholders, and other stakeholders must have in the dinancial profession and, reciprocally, a diduciary duty that the dinancial profession has to act solely in the interests of these stakeholders. Fiduciary trust implies having faith that accountants, auditors, and dinancial ofdicers will not lie, cheat, steal, or intentionally misrepresent the company’s dinancial health. It is this role of trust that the accounting profession is eager to stress. But the problem is that accounting, and hence dinancial reporting,

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cannot always be precise, and history abounds with professionals who violated this trust from trivial to egregious levels.

What Would You Do?

You are in charge of a company with annual sales of $5 million. You have an opportunity to secure new loans from banks that could propel your company’s sales into the $10 million bracket. Deep down you feel that the company is reaching a plateau in sales, and you are concerned that the future will not be as rosy. Competition is increasing in the industry, and there has been an increase in staff turnover. The new loans could indeed work miracles, and if the sales do not actually take place, you could sell the company with its new dinancing and leave the problem to someone else. Either way, your own reputation would be intact.

1. Given this information, what would you do? Explain your answer.

2. Should you discuss your worries that the company has seen its peak or keep them to yourself until the

funding is secured? Explain your answer.

3. Do you think that honesty always pays? Why or why not?

Impartiality and Due Diligence

Fiduciary duty is an important part of the accountant’s general responsibility. Another equally important responsibility required in the dinancial professions is that of impartial oversight. When a dinancial professional acts impartially, he or she addresses a business situation without regard for his or her own self-interest. For example, a dinancial professional dealing with a company’s daily, monthly, and annual reports must be removed from any self-interest in assessing those monetary dlows. Impartiality therefore involves creating dinancial reports that redlect the true dinancial status of the company, regardless of any effect those reports might have on oneself and others. In addition, dinancial professionals must engage in due diligence—checking all the key dinancial facts carefully rather than assuming that they are correct.

However, demands of the corporate world can undermine professional values such as impartiality and due diligence. When there is pressure to land a deal or to secure a line of funding, for example, self-interest may overwhelm professional codes of conduct, leading to unethical behavior. This could be as simple as a dinancial manager taking higher levels of risk, knowing that he or she will be on to a new job before the possible negative effects can occur. In addition, due diligence could continue to the point that a decision is never made. The judgment of how much research is necessary to substantiate dinancial records is, by its very nature, subjective.

Short-Term Deception for a Long-Term BeneNit

Accounting frequently involves soft numbers, and accountants have the responsibilities of diduciary trust and impartiality to make sure that digures are as honest and accurate as possible. Nevertheless, temptations naturally arise within businesses to manipulate dinancial data for their special needs—and sometimes for their very survival. An outright deception about a company’s dinancial reality is typically unethical and even illegal. But are there situations in which some types of accounting fraud can in fact be justidied? Some argue that if such deception benedits a great number of people in the long run, it can be an excusable short-term strategy. There are two strong incentives to exploit short-term deception:

If a manager moves from company to company, any irregularities he generates to improve his position or department can be hidden for the short term. By the time they are uncovered, the manager may be long gone. The manager may sincerely believe that indlating revenues now will be sustained by a rise in the market and higher future cash dlows.

The dirst is the immorality of the criminal who tries to get away with fraud and move on before he or she is caught. It is the kind of fraud that credit card thieves perpetrate by moving from state to state. The second is ethically harder to pinpoint,

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and indeed, expecting future cash dlows is what business depends on.

For example, say an auto dealer takes on a dozen new cars in the belief that she will be able to sell them in the next month, earning income before she has to pay off the supplier. The market has been good, and she believes that her revenues will continue to increase. This is an integral element of business planning, but markets can suddenly turn and leave the trader high and dry. It turns out that this dealer is suddenly left with a large outstanding debt and no cash dlow to cover her expenses. She has to adapt—perhaps by borrowing for the short term, dropping the prices of the cars on her lot, or advertising aggressively to attract customers—or face bankruptcy.

In the ever-changing marketplace, businesses have to make many assumptions about what will happen as well as about what is happening. The auto dealer’s intention to make future monies can be understood. If she sincerely believed that higher revenues would occur, then she cannot be wholly condemned for acquiring greater stock. She can be chastised for naïvely assuming that the future will be like the past and for not researching her market better, but that is something all investors can be guilty of.

If she worked alone, we can say that the fault was hers and the pain of struggling to adapt was hers alone, too. But if she employed several people and had made promises to other suppliers, her action has broader effects. When a company employing thousands gets its future expectations wrong, a lot of people can suffer. Some will say that that is the nature of business; others will demand that businesses be more conservative about their behavior because risky ventures harm people.

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7.2 Questionable Accounting Techniques

We’ve discussed the general challenges that soft numbers present to accounts, their responsibilities of diduciary trust and impartiality, and, dinally, the temptations of short-term deception. We turn next to a more specidic examination of the types of fraud in which accountants sometimes engage.

Accounting Fraud

Because an element of the dinancial industry involves using subjective dinancial values, there is always an incentive to use values that serve particular people. Here we will look at the nature and possible solutions of the most common problem, namely accounting fraud, sometimes euphemistically called “cooking the books.” Accounting fraud involves knowingly falsifying a company’s dinancial statements in an overtly illegal way. The following are some such fraudulent practices:

Accelerating revenues is when a company brings forward future receipts as if they were earned today. Delaying expenses is when a company books its current expenses in the future. Other income or expense is a term used when a company hides excess incomes or expenses. Pension plans may be used by companies to dedlate or indlate their dinancial position: If a company runs a pension plan and the fund is doing well, it can reduce payments into the plan to make its costs look better than they are. Off-balance-sheet items are used when a corporation wishes to hide in other corporations liabilities and expenses that it does not want reported.

Accounting fraud is not the same as creative accounting, which is the use of legal loopholes in dinancial regulation to present digures in a misleadingly favorable light. Creative accounting follows the letter rather than the spirit of laws and is technically legal. But accounting fraud violates both the letter and the spirit of the law. Is creative accounting good, bad, or morally neutral? One could argue that it’s the responsibility of a good accountant to look for all legal ways to reduce tax liability, so perhaps this form of “creativity” can be a virtue. But creative accounting risks crossing the moral line when its goal is to reduce transparency and ultimately mislead investors or other interested parties to make business decisions that they would not otherwise.

The world of accounting fraud is complex, but it often comes down to the simple ideas of falsifying income (e.g., by selling a product to yourself), lowering expenses incurred (and thereby making prodits look higher than they are), hiding losses (by calling them prodits), or exchanging assets across the company. As with other crimes, there is often a belief that the ofdicers will not be caught, that the lie is an intermediate one until things improve, or that it is worth it for the ofdicer’s personal gain or indeed for the benedit of the company and its stakeholders.

But things do not always turn out the way people expect. To act honestly from the beginning makes more sense than to act in the hope that the discrepancies, lies, and fraud will be ignored once great results occur. When there is an intention to deceive, it does not matter what results are expected: The problem lies in the intention to do wrong.

In the following two examples, we look at the frauds committed by Computer Associates and Enron. The dirst company survived; the second did not.

Example of Accounting Fraud: Computer Associates

As the CEO of the U.S. software company Computer Associates (now CA Technologies), Sanjay Kumar found out what happens when a manager uses fraudulent dinancial practices to deceive others. In 1999 and 2000, Kumar indlated the company’s sales digures by drawing on present quarterly sales digures and posting them as if they had occurred in the past (a technique known as the “35-day month”). In essence, he recorded sales that happened after a quarter ended into the previous quarter to make the prior quarter appear more proditable. Once an investigation began, Kumar bribed a witness. He was subsequently found guilty of fraud and obstruction of justice and was given a 12-year prison sentence. Computer Associates also had to pay shareholders $225 million for the losses they incurred based on the deception. The short-term gain of appearing to have stronger sales digures was quickly wiped out by Kumar’s act (de la Merced, 2006). Computer Associates survived, though it rebranded itself as CA Technologies and sought to move on from Kumar’s misconduct.

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Example of Accounting Fraud: Enron

The story of Enron is a complex one. The company grew quickly and fraudulently—it became the seventh largest U.S. company in 15 years, employing 21,000 staff and operating in 40 countries. Following the deregulation of energy markets in the 1990s, Enron extended its business into different dields. For an economist, deregulation means the removal of legal barriers that inhibit competition, but for Enron it meant the freedom to deceive investors and employees about how it was performing dinancially. Losses were not properly revealed, earnings were misrepresented, and executives embezzled funds and announced an energy crisis that did not occur. The company was heading toward bankruptcy when, in 2001, whistleblower Sherron Watkins penned an anonymous note to CEO Ken Lay warning that the company would “implode in a wave of accounting scandals” (quoted in Carozza, 2007). Lay apparently sat on the information while the company headed toward bankruptcy. The previous CEO, Jeff Skilling—who had left earlier in the year—sold his Enron stock before the price began to fall. Skilling was indicted on several counts, including insider trading and securities fraud. Lay was later convicted of conspiracy to commit securities fraud, which led to the downfall of the company.

Enron’s auditing company, Arthur Andersen, also acted as its consultancy dirm, which blurred the lines of independent assessment, allowing problems to be overlooked. Independence is a core value of auditing, meaning that those who are reviewing the records of the company should not be indluenced in any way to adjust numbers either up or down. However, Andersen was being compensated for advice on how to improperly indlate prodits through the creation of the complex business structures, while also being paid to provide independent audits. The two processes were in condlict and pushed Andersen to make decisions based on huge consulting fee revenues—if Andersen reported in the audit what the true results meant, it could have lost the consulting fee revenue.

Even though Arthur Andersen was eventually acquitted of wrongdoing by the Supreme Court in 2005, the damage was done. After initially being found guilty of obstructing justice, the company quit operating as a dirm and its employees left to work with the other major accountancies. The net result is that all accounting dirms had to cease doing both consulting and audit work for the same clients. A dirm could do one or the other but not both because a company cannot be expected to be objective in its analysis of work done by itself. The fundamental tenet of independence does not exist in that two-sided revenue model.

Tax Avoidance: Transfer Pricing Manipulation

One major motive for accounting deception is tax avoidance—a legal strategy using certain accounting methods to minimize tax payments. A more extreme version of this is tax evasion, when an individual or a corporation actively hides or lies about its revenues in violation of tax laws. The most common accounting tool to facilitate tax avoidance among multinationals is transfer pricing manipulation (or transfer mispricing): shifting prodits to a company division in a tax haven to avoid higher tax in a developed country.

Transfer pricing by itself is merely an established price for a product that one company sells to another company; is not illegal, and in fact is a normal multinational business practice. Suppose, for example, that Jungle Fruit U.S.A. buys bananas from Jungle Fruit Mexico at a set price of 15¢ per pound, which they then distribute to supermarkets at 25¢ a pound. Further, suppose that the transaction takes place under an international rule called the arm’s length principle: the set exchange price in transfer pricing should be the same regardless of whether the two companies were part of the same corporate structure or unrelated to each other. That is, Jungle Fruit Mexico would also sell similar bananas at 15¢ per pound to Chiquita, Dole, or anyone else. There is no tax avoidance here and everything is legal.

With transfer pricing manipulation, though, suppose that Mexico’s tax rate is lower than the U.S. rate. Jungle Fruit Mexico sells bananas at a high prodit to Jungle Fruit U.S.A. for 20¢ per pound, but sells the similar ones to Chiquita for the original

Michael Stravato/Associated Press

In this 2004 photo, former Enron CEO Ken Lay is led into court. Lay was convicted of conspiracy to commit securities fraud and died before being sentenced for his crimes.

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15¢ per pound. Jungle Fruit U.S.A. still distributes the bananas to supermarkets at 25¢ a pound, but now at a lower prodit. In this case, there is tax avoidance because more taxable prodit stays within the Mexican branch (and less goes to the U.S. branch) than would otherwise take place under an arm’s length transaction.

In a variant form of transfer price manipulation, suppose that Big Pharma U.S.A. sells a powdered form of its leading drug at a low prodit to its Bermuda branch for $1,000 a kilogram to simply put it into pill form. The Bermuda branch then sells the pills at a high prodit to a European branch for $10,000 a kilogram, which in turn distributes the pills to pharmacies for $15,000 a kilogram. The bulk of the prodits, then, stay in Bermuda.

Estimates are that over $1 trillion of corporate prodits in the United States are held by overseas branches, much through transfer pricing manipulation. If transfer pricing manipulation is illegal, why is it so rampant? The key problem is that the “arm’s length” principle is a pure diction with companies that would never sell their products to rivals—in our case, Jungle Fruit Mexico would never sell to Chiquita. Thus, there is no meaningful baseline for an arm’s length set price, and there is great dlexibility in how a company can set a product’s transfer price with a branch company. Occasionally, though, companies do get caught. In 2010, Astra Zeneca, the world’s seventh-largest drug company, agreed to pay $1.1 billion in back taxes relating to a 15-year transfer pricing scheme that withheld prodits from its U.S. branch for products that the European branch sold in the United States.

But such settlements are rare. Legislators debate ways to stop transfer pricing manipulation and return—or “repatriate” —offshore prodits to the United States. In turn, multinationals are reluctant to repatriate those prodits without being offered tax breaks.

Accounting fraud and transfer pricing manipulation are all about deception. In the next section, we will look at the role that the government can play in combating this.

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7.3 Government Regulation in Accounting

The government’s role in preventing accounting fraud can be a touchy issue. First there is the question of whether the government should be involved at all, and, even if it should, there is a second issue of the types of governmental regulation that are needed.

To Regulate or Not: Berle and Means Versus Manne

Commentators differ on whether the marketplace can look after its own problems or whether government intervention is necessary. Two opposing positions on corporate corruption have been offered, on the one hand, by the business ethicists Adolf Berle and Gardiner Means and, on the other, by their opponent Henry Manne. Berle and Means favor government regulation on the grounds that temptations of self-interest are too great to trust that companies will do the right thing on their own. Manne favors leaving companies alone, as any mistakes they make will be punished sufdiciently in the marketplace through customers’ leaving or other companies’ buying them out. Let’s look at each of these viewpoints in a bit more detail.

Berle and Means: We Need Regulation

Ethicists Adolf Berle and Gardiner Means held a cynical point of view that business managers are playing a game to defraud customers and other stakeholders as well as they can. In the absence of good checks and balances, they believed, dinancial managers cannot be trusted to act ethically in how they present themselves and their dinancial books. Berle and Means (1932) offered three reasons for this:

The people who run corporations seek to exploit the workers as well as they can to keep costs low, which helps to raise prodits. They try to reap as much prodit for themselves from the company as possible in large bonuses and dividends. Their accountants and auditors also get caught up in self-serving behavior and are likely to turn a blind eye to improper procedures.

The resulting corrupt corporate culture snares everybody in condlict, as each tries to look after his or her own dinancial interests. Managers are looking for higher salaries, and accountants are looking for renewed auditing and reporting contracts. There is also the problem that corporate culture is generated from the top. If the executives are acting outside their professional ethics, the ethical tone of the corporation may then be tainted. Junior ofdicers may thus think that cheating or covering up mistakes is acceptable. As each section of the business pursues its own interests, it can produce a sick corporate culture that will eventually undermined it.

For Berle and Means, if business cannot be trusted to regulate itself, and if the dinancial profession regularly loses the trust people have in it because dinancial professionals are constantly seeking their own self-interest, then there is a duty for the government to regulate and to control accounting procedures to ensure transparency and universal auditing principles and rules.

Manne: The Marketplace Can Decide

An alternative position was developed by the free-market supporter Henry Manne (2009a). For Manne, businesses cannot hide falsehoods for long without being found out. When self-interested behavior turns to deceiving the public, any chance of proditing from the deception is eventually lost. Manne argued that investors have a vested interest in scrupulously examining the dinancial statements and cash dlows of corporations in which they hold or wish to hold investments. Thus, any fraud or strange accounting procedures are likely—or even bound—to be discovered. He offered two reasons for this (Manne, 2009b):

1. Fraudulent reporting is costly to businesses and shareholders, and those guilty of fraud run the risk of long-term lawsuits from aggrieved investors and even the dissolution of the company.

2. If managers act against the interests of shareholders, they are likely to drive the share price down. As the share price falls, the self-serving managers have opened their company up for a takeover or merger.

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Manne argued that the threat of being bought out is ever present in the marketplace, so external regulation beyond normal litigation against criminally fraudulent managers is unnecessary. Although directors can face a personal incentive to camoudlage problems or exaggerate incomes, there is also an incentive on the part of investors and shareholders to have the numbers veridied as independently as possible. And if CEOs and chief dinancial ofdicers (CFOs) try to deceive, they may lose not only their reputations, but also their business.

Advocates of small government will undoubtedly dind Manne’s approach more appealing than that of Berle and Means. The fact remains, however, that legislators in the United States and around the world have determined that accounting regulation, to which we turn next, is needed to keep companies honest.

U.S. Accounting and Reporting History

In response to the stock market crash of 1929, the Federal government introduced a series of reforms to the dinancial, banking, and accounting industries. Since then, the government has tried to calm the excesses of capitalism through regulations, while the accounting profession has produced its own board to oversee professional standards.

Early Reforms

The Securities Exchange Act of 1934 set up the Securities and Exchange Commission (SEC) under the chairmanship of U.S. businessman Joseph Kennedy. The SEC was charged with creating standards to govern accountancy and corporate reporting. It preferred, however, to delegate the task of actually creating accounting standards to the private sector, as long as that sector showed its trustworthiness in its procedures.

In response to mounting concerns, the Financial Accounting Standards Board (FASB) was set up in 1971 by the profession to produce stricter professional standards and codes of conduct. The board’s mission has been to keep full government regulation off the profession and to set independent standards by which accounting and reporting are governed in the United States. These standards are known as generally accepted accounting principles (GAAP).

SOX

Accounting scandals continued after the creation of GAAP, such as those in Enron and WorldCom, and these encouraged Congress to introduce more regulation, such as the Sarbanes–Oxley Act of 2002 (SOX). The act was designed to reduce the ability of companies to amend their digures to make them look more appealing to investors, and thus protect investors from fraudulent claims in corporate dinancial statements. Considered the most far-reaching accounting laws in recent times, SOX requires that companies disclose any relevant existing dinancial obligations that are not included on a company’s dinancial balance-sheet—often called “off balance-sheet dinancing.” Also, corporate statements must be reviewed for accuracy by corporate management and veridied by an independent thirdparty. SOX also contains important elements that reinforce auditor independence: Auditors cannot both audit and consult, audit committee members must be rotated, and various committees from boards of directors must have external directors.

Some have argued that the act provides greater transparency in reporting and permits investors to compare different companies on similar grounds (Henry, 2007). Others have complained that the extra rules and procedures hamper American companies in international competition and that the “check-box” mentality of the act has actually distracted businesses from the very ethical principles it was supposed to foster (De Coster, 2002). In fact, in a survey of company directors, over half thought the act should be repealed (Evans, 2006).

The SEC and SOX aim primarily at combating accountant fraud in its various forms. Next we will look at some other key areas of condlict and ethical problems that

Associated Press – J. Scott Applewhite

During his tenure, President George Bush signed the Sarbanes–Oxley Act, a law changing accounting practices and establishing tough penalties for violators.

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arise in the dinance profession.

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7.4 Commercial ConNlicts of Interest

A conNlict of interest occurs when an agent who must act impartially or loyally to successfully complete a job has a competing dinancial or other reason not to do so. The agent in this case may be a director, an employee, or a manager who works for one corporation, for example, but has dinancial ties to a competing organization. Or it can be a person in a position of authority who has condlicting responsibilities. Additionally, there is also the consideration of who is responsible for acknowledging and resolving the condlict. Should the responsibility fall on the shoulders of corporations or consumers? That is, should professionals disclose their condlicting interests in the services they offer, or should consumers be expected to work that out?

The condlict of interest is the simplest problem that dinance ofdicers and accountants face. It is not always apparent, however, when a condlict arises, so this section outlines some of the key points to consider.

The Buyer-Beware Principle

Hero Images Inc./Hero Images/Superstock

Seeking Ninancial advice is one example of a scenario in which it’s not easy to tell if the advisor is truly impartial.

A simple example of a condlict of interest is a salesperson encouraging a customer to buy a service. Obviously, the salesperson gains from the sale. Generally, people would not consider such an obvious self-motivated move as an ethical problem. The job of a salesperson, after all, is to sell, and the customer knows this. But when advice on a product is given that appears impartial but is in fact underpinned by a self-serving desire to sell the product, then there can be a condlict of interest if the seller does not express this commercial interest. In the world of business, the principle of “buyer beware”—also known by the adopted Latin expression caveat emptor—is said to rule, and most of the population would be presumed to understand that people who are trying to sell you a product have a dinancial interest in doing so.

But consider another, more complicated, scenario. When stock markets are doing well, advice is often given freely—by TV pundits, for example—on what stock and investments to buy. Such pundits are not giving impartial advice, for they are generally selling brokerage

services, so there is a condlict of interest that is easily spotted. For example, news commentator Glenn Beck regularly advised his viewers to invest in gold to protect against a declining economy. At the same time, however, one of Beck’s regular sponsors was the gold retail company Goldline International. When stock prices fall and the pundits’ expectations fail, customers may then feel aggrieved and want some form of compensation. Lawyers then replace the stockbrokers, explaining how they can help clients sue the brokers. In turn, the lawyers are seeking to sell a service and attract clients. For instance, in the boom of 2000, CNBC had representatives on from the investment companies Merrill Lynch and Morgan Stanley to give advice on stocks. Following the crash, such experts were replaced by lawyers such as Jacob Zamansky, advising on suing the stockbrokers (Sheehan, 2002). Ultimately, the stock advisers and the lawyers were both selling services.

Caveat emptor becomes more intricate here. It is not always obvious whether people giving dinancial advice are, in fact, speaking impartially. Many advisers are connected to the products that they sell; in addition, a lawyer selling legal services is similar to the clothes retailer advising on clothes. However, the connection is not always obvious. To help with this, there is the principle of disclosure, which says that an adviser should explain personal or dinancial interest in the products. This is not required in a transaction as simple as purchasing a pair of jeans from the owner of a store, but it becomes increasingly important with more complex products.

Complex Products

So what if the product offered is complex, such as a mortgage, an insurance policy, or some shares or their derivatives? Accountants and dinancial advisers offer

ConNlicts of Interest

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complex services that are often difdicult or even impossible for the general public to understand. That is the reason there are licensing bodies guiding professionals on their codes of conduct, to help them avoid condlicts of interest and to act impartially (Brooks, 2001). Indeed, since the 1990s, accountants have increasingly been taught ethics in their courses. They have been encouraged to recognize when an ethical dilemma is occurring and then to consider and evaluate alternatives and propose a solution (Stuart, 2004).

Ethics teaches us that impartiality is generally good. In educating people, professionals should be advising as if from a third-party perspective rather than from the perspective of their own interests, simplifying the procedures or contract where appropriate and at least explaining what they have to gain from the service. Expert advice is naturally useful, but even if accountants are trained in ethical analysis, how can customers know if they are getting sound, impartial advice?

In recognizing that true impartiality is difdicult, some companies have developed options that converge on impartiality. For instance, many websites assist people in gaining knowledge about different products and service providers and in cutting through the jargon that often attends complex services. Consider the stock market: Nowadays, some online stock brokerages prefer to offer their clients a range of opinions, drawing on the recommendations of many analysts (averaging a buy or sell recommendation, for instance). They may sell a higher quality report to subscribers that redlects their own research into the market.

If the complexity of a deal is still bafdling, then expert advice can be bought, just as a lawyer’s expertise can be purchased in, for example, creating a will, and the parties’ advice can be compared. Critics could complain that such advice would not come free, and that is true. But then is free advice—freely given by neighbors and friends without any formal training—any good?

Professionally, advisers should disclose any interest they have in providing advice, since that is the honorable, impartial, and honest thing to do for potential clients. Impartiality involves separating advice from any potential for commercial gain, whereas disclosure is admitting that there is a commercial interest in what is being offered, such as mortgage or debt advice.

Conflicts of Interest From Title: Ethics in Corporate America: A Crisis of Credi...

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Critical Thinking Questions

Financial analysts provide guidance to investors by assessing the performance of stocks, bonds, and other types of investments. According to the video, why did a large portion of young dinancial analysts fail to perform unbiased research on the investments that they were recommending?

Jack Hidary founded a company that would provide unbiased dinancial analysis. In the video, he explains that this service would be paid for by investors and fund managers, not by the companies that he was recommending. How would that eliminate condlict of interests?

Financial analyst Tom Brown was dired by a major investment bank for refusing to endorse questionable investments. During severance negotiations, the investment bank offered him $500,000 to keep silent about the reason he was dired. What does this imply about the analysis practices of that investment bank?

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Should Customers Do Their Homework?

But there is another angle that needs to be considered: Are customers always at fault when they fail to do their homework? A free-market proponent would say yes, the buyer should be aware and people should be responsible for their own decisions. After all, only they can learn from their own mistakes, and if they chose to avoid studying a deal or employing an expert, that is their own fault.

However, it can also be recognized that people can be swayed by their emotions and can be easily talked into decisions that they would not enter into in a more rational frame of mind. Consider a medical company offering a treatment to cure cancer. Most people would jump at the chance of saving a loved one’s life, yet they may end up paying thousands in bills for the treatment without being told of alternative, cheaper treatments. Or consider an insurance company offering to protect a family from dinancial disaster but not explaining the small print that certain issues are not covered. Few people read the small print, and few would assume that they need legal advice on insurance. Unfortunately, the complexity of legislation, regulations, and the tax code often means that companies have to write complex contracts that only specialists can interpret. There is no easy way to make things simpler.

One solution to the problem, though, is educating customers. Professionals have a duty to explain matters clearly to their clients and to point out potential problems with a contract. Failure to do so is a lapse in professional conduct. Customers

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can always ask what the jargon means, and they do have a responsibility to read through contracts or employ legal counsel for large dinancial commitments. How many people actually read their apartment lease or the paperwork on their car loan? People may avoid reading the small print or shun professional advice as being expensive, but the costs are generally worth it in the long run: Accountants often say that their fee should cover the taxes that you would have paid if you were doing your own returns.

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7.5 Insider Trading

Another white-collar dinancial crime that hits the headlines and attracts media attention is insider trading. Insider trading occurs when someone has information that the rest of the public does not have and then acts on that information to deal in stocks to make a personal gain or avoid a forthcoming loss. Insider trading became well known in the 1980s, with criminal charges being diled against businessmen like Michael Milken and Ivan Boesky, and later in the 2000s against corporate ofdicials from Enron. It has remained in the public eye with famous cases against media magnate Martha Stewart in 2004 and against former hedge fund manager Raj Rajaratnam, who in 2011, was sentenced to 11 years in prison for conspiracy and securities fraud. In this section, we will briedly look at the laws governing insider trading, review famous insider trading cases, and consider whether insider trading is actually a force for good.

Examples of Insider Trading

The SEC introduced laws against insider trading in 1934 on the basis that insiders had a diduciary duty to shareholders. Under the laws, an insider is any company ofdicer or director, and any shareholder owning more than 10% of the company. The insider is therefore liable if he or she acts to prodit from the inside. Examples include acting on advance knowledge of something that would highly benedit the company’s share price, foreknowledge of a dividend cut, and unanticipated expenses.

In 1980, following a Supreme Court ruling, the SEC promoted the principle that insiders should not trade on private information on the grounds that their action is a form of fraud, because insiders have a diduciary duty (a contractual loyalty) to people buying or selling stock in the company. In other words, they must not trade while the information remains private (Dalley, 1998). Let’s look at three examples of insider trading.

Vincent Chiarella

Jin Lee/Associated Press

Galleon Group founder Raj Rajaratnam is shown here leaving court after being found guilty of conspiracy and securities fraud. He was sentenced to 11 years in prison.

Vincent Chiarella worked in a printing company and was involved in producing the printed copies of sensitive dinancial deals. From the information he saw—information that was not yet in the public domain—he was able to work out the identities of corporations involved in takeover bids. He therefore bought shares in the companies before the takeover bids were made public, earning $30,000 from his trades.

The SEC attempted to prosecute him in 1980 for insider trading, but the Supreme Court supported Chiarella, arguing that he had no diduciary duty to any shareholders, nor was he an insider. He had nonpublic information, but that did not necessitate any disclosure (Chiarella v. United States, 1980). From the case, the diduciary duty of insiders was highlighted.

Ivan Boesky

The U.S. stock trader Ivan Boesky was the dirst big dish that the SEC caught for insider trading. Boesky was a trader who dealt based on inside information to become one of Wall Street’s most successful dealers. His reputation for dealing with inside information was known before the SEC moved in. They made a deal with him to continue in his position as long as he informed on others. Eventually he was arrested for his crimes, and he pointed a dinger at Michael Milken.

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Milken was a prominent whiz-kid investor who had helped dinance many well-known U.S. corporations, such as Barnes and Noble, CNN, and Time Warner. His innovative techniques earned him millions, but they also attracted the watchful eyes of the SEC. Although Milken was never indicted on insider trading, he spent 22 months in prison for various securities frauds and accounting irregularities. Since leaving prison, Milken has sought to rehabilitate his reputation and put his energies and funds into curing prostate cancer, which he suffered from in 1993.

Martha Stewart

Businesswoman Martha Stewart was prosecuted in a high-prodile case for selling stock in 2001 based on insider information. Prosecutors argued that a friend told Stewart that his company, ImClone, had had its cancer drug rejected by the Food and Drug Administration. Stewart’s stockbroker, Peter Bacanovic, subsequently sold approximately 4,000 ImClone shares for Stewart, avoiding $45,673 in losses from the stock’s decline the following day (U.S. Securities and Exchange Commission, 2003). In 2004, Stewart was convicted of lying to investigators looking into the case. She was subsequently imprisoned for dive months and was forced to pay approximately $195,000 in dines and penalties to the SEC. She was also barred from serving as a director of any public company for dive years. Nonetheless, since leaving prison, Stewart has seen her company, Martha Stewart Living Omnimedia, grow well under her editorial direction.

Stewart’s case is interesting. She did not gain from her insider information; she avoided a loss. It is clear to see how gaining money through insider trading is a breach of trust or is simply unfair. But is it just as bad to do so to avoid a loss? Probably. Whether you are buying or dumping shares, there is always another party who is affected. If you buy through insider trading, you are knowingly taking away that low buying opportunity from another investor who is playing by the rules. If you sell through insider trading, you have knowingly created a larger market for the bad stock, which at some point someone will purchase before the bad news goes public. In either case, another buyer is cheated.

Should insider trading be prohibited though? Free-market supporters believe that it should be legal to trade information, while opponents claim that using privileged information is unfair and enriches some people while others lose out. We will compare those two positions next.

Arguments for Insider Trading

Free market defenders argue that insiders are doing the public a favor and they should be supported and encouraged. Indeed, the free market economist Milton Friedman proclaimed that you cannot have enough insider trading, on the grounds that insider trading is the very nature of the investment world. If the SEC could ever shut down the insiders, the fear is that an important source of so much dinance and investment information would go with it (Murphy, 2011). According to some, insider trading improves market efdiciency by rapidly communicating market information to other investors.

From this view, insider trading laws are barriers to trade that should be repealed. In effect, the SEC’s interventions and threats upset the free dlow of information that permits traders to get a better idea of where the hot deals are. The laws also provide the government with too many powers in trying to regulate dealers. It is far better to permit insider trading and to reward those who dig up useful information, which is inevitably shared quickly once they start buying or selling stock. That is, the market will produce “insider watchers” who trail the stock purchases of the known insiders, just as celebrity gossip columnists may trade tidbits with each other.

Instead of laws, companies should look to their own contractual agreements with employees not to disclose or to benedit

Bebeto Matthews/Associated Press

Martha Stewart, shown leaving a Federal court, was convicted of lying to investigators. She was imprisoned for Nive months and forced to pay $195,000 in Nines and penalties to the SEC.

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personally from information generated in their employment. Such nondisclosure contracts are quite common in the security and computer industries, for instance, where clients’ private information and companies’ proprietary knowledge are vital. In such instances, selling or exploiting private data or technical information breaches contractual obligations and the ethical principle of loyalty and trust.

What Would You Do?

You hear from an insider that a company in which you hold stock is about to be dined millions of dollars by regulators for breaching the country’s environmental rules. The stock is bound to fall, and you could sell now and buy the stock back cheaper in a few weeks.

1. Should you knowingly accept the loss or do you think that anyone with that information should try to protect their own interests? Explain your answer.

2. Would your decision change if you were told privately that stock you were about to purchase (rather than that which you already own) was due for a fall? Why or why not?

3. Can you be guilty of not buying stock today, given that information, or should you proceed with your original intent, buy the stock, and suffer a fall in values? Explain your answer.

Arguments Against Insider Trading

The common argument against insider trading is that it is immoral on the grounds of fairness (Dalley, 1998). Insider trading is like giving a sprinter on the starting blocks a head start. It is not fair that an individual who is privy to some information may prodit from knowing something that the rest of the public does not.

Second, acting on inside information is a breach of trust, even when there are no contractual agreements on nondisclosure. Even though the party acting on the information may not be legally an insider, someone in the company had to have passed the information along. That agent’s action is unethical, for it breaches professional trust and honesty.

Third, there is evidence that clamping down on insider trading removes some volatility from the stock market, which in turn raises the appeal to proper investors to place their money into the markets (Padilla & Gardiner, 2009).

For many, it remains an issue of fairness, plain and simple. However, when looked at closely, insider trading cases can be very complex. Much of the debate that is generated by politicians and lawyers tends to be overly simplistic and ignores economic research on the advantages to insider trading.

Legal Theory of Misappropriation

U.S. law also prohibits insider trading under the legal theory of misappropriation, which lower Federal courts have tended to use since the 1980s and which the Supreme Court adopted in the case of United States v. O’Hagan in 1997. James O’Hagan, a partner in a law dirm, used private information concerning one of his dirm’s clients, Grand Metropolitan, which was considering an acquisition of Pillsbury. Hagan proceeded to purchase stock options without telling his dirm; he prodited to the tune of $4.3 million. The court ruled that any security trader who fails to disclose personal prodits gained from such exclusive information is acting deceptively by abusing the source of information. In effect, the court ruled that O’Hagan misappropriated information (United States v. O’Hagan, 1997). Misappropriation can also occur when a journalist discovers private information concerning the company and then acts on, or passes on, that information for commercial gain, a principle that echoes the contract of nondisclosure. However, the O’Hagan case has not completely standardized the issue of insider dealing, as what constitutes misappropriation remains a complex issue.

The problem is that proditing on the information is not always a certainty. Any investment carries with it a risk that the

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information used may not turn out to be so proditable after all—the market may discount the new information as it reaches the public’s ears. Alternatively, if the information is proditable, others may get wind of the private channels of information used and follow the leads, as gossip magazines follow the lives of celebrities. In other words, if someone is making it rich quickly, others will dig around to dind out how he or she is doing it. Indeed, any ofdicers or managers of a company holding more than 10% of its shares must disclose their purchases of the company’s stock to the SEC on Form 4, and their activities can attract investors’ interest. After all, if a director, who has a much better knowledge of the company and its prospects than does a stock analyst in a different state, starts buying the company’s shares, most would believe that the action indicates some good news in the pipeline. But it is not always about buying stock.

Nonetheless, in the meantime the courts continue to work out the relationship of the SEC’s rules on insider trading to create a standard dedinition. As one legal scholar summed it up, “In so doing, they take their places in the ranks of jurists through the centuries who have wrestled with the question: ‘When is it unlawful to buy or sell a thing when you know something the other party doesn’t?’” (Dalley, 1998).

Insider trading is a slippery eel that lawyers will continue to wrangle over, but rogue trading is a more obvious form of fraud. When a rogue trader is discovered, the losses can be in the millions and companies can fall spectacularly. We look at this next.

What Would You Do?

You hear from a good friend news of a tragedy, about to be announced in the morning, involving the listed company that he works for. A gold mine in Peru that was securing several tons of valuable metal collapsed, killing several people. The mine itself will be closed for a year at least, and compensation claims may end up shutting down the facility completely. You have a chance of making a lot of money on the information by selling the stock and buying derivative options, which make money as the stock price comes down. The information is being held from the public until next of kin are informed.

1. Should you act on the information or would you deem it immoral to earn money on the deaths of the miners? Explain your answer.

2. If you chose to sell, on what grounds would you justify your action?

3. Would your decision change if the disaster involved the deaths of hundreds of people? Why or why not?

4. Is there any kind of information that you believe people should not make money from? Explain your

answer.

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7.6 Rogue Trading

Rogue trading occurs when a trader within a company engages in speculative and reckless trading without company authorization, typically for personal gain. Similar to an inside trader, a rogue trader works within a company, usually in an investment company or division. However, rather than proditing from using private information held by the company to buy shares and their derivatives, rogue traders abuse the freedom they possess to prodit from the company’s resources that they have been entrusted with. In an investment company, for example, an employee may be provided with a trading account and be given a job to enhance the company’s prodits. However, the rogue trader gets carried away and begins dealing secretly, seeking to cover up mistakes and losses by manipulating deals. The diduciary trust that exists between the company and the employee is then broken.

Rogue trading is exceedingly costly, and companies have a strong incentive to ensure that their employees do not overstep their bounds. For instance, line managers may check traders’ deals and returns and regularly audit the company’s balance book. However, rogue traders can run up massive debts. For example, in 2011, a trader for the Swiss bank UBS was arrested for losing $2.3 billion in rogue trading over several years. The trader served three years in prison, and UBS was dined $47.6 million. In 2014, the investment company Morgan Stanley was dined $4 million when, in a single instance, one of its traders invested $1 billion of a client’s money on a gamble that did not pay off. The trader hoped that Apple’s stock would increase after its quarterly earnings announcement, and he invested his client’s money just a few hours prior to the announcement. But when Apple’s stock declined instead, his client lost more than $5 million, which forced the client to close its 60-person business. In addition to Morgan Stanley’s dine, the trader himself was sentenced to 30 months in prison.

Nick Leeson: Bringing Down Barings Bank

One of the most famous rogue traders was the Englishman Nick Leeson, whose actions brought down an old, well-established investment company, Barings Bank, in 1995. Barings was founded in 1792, helped dinance the Louisiana Purchase from France in 1803, and rose to prominence with the British establishment. Queen Elizabeth was banking with Barings when Leeson effectively bankrupted the company.

Seen as an innovative whiz kid, Leeson was entrusted

Rogue Trading at Societe Generale Bank

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by the bank’s managers in London to deal in Japanese futures. Futures are contracts to buy and sell stock or commodities now for a future delivery date. Their prices can dluctuate wildly as traders take positions on whether they believe prices of the stocks or commodities will rise or will fall. In his newly created position as head trader in Singapore, Leeson came across an obscure Barings account named “error account 88888,” into which a previous employee had shifted losses of 20,000 pounds. Rather than report it, Leeson began to use the account to channel the losses that he was incurring from his trading.

His job was to turn over contracts in a very short term, a simple task that would net very little money per trade, even on large contracts. But he reasoned that he could net more if the contract were held for a longer period and the market rose at the same time. Leeson held onto his contracts in the hope that the prices would rise, but the market turned against him, and the Kobe earthquake of January 1995 sealed his fate. He had bet on the Nikkei index rising; it fell (Ball, Chapman, & Cross, 1999).

As head of his trading team in Singapore, Leeson also had a condlict of interest, since he was in charge of auditing his own position—the managers did not want to incur higher expenses in splitting his position. When he made losses, he was able to report them as prodits; as he commented about his supervisors, “people at the London end of Barings were all so know-all that nobody dared ask a stupid question in case they looked silly in front of everyone else” (Leeson, 1996, p. 38). That is, his supervisors failed morally. They preferred to maintain the appearance of professional integrity and banking solidity than to inquire too closely into the daily routines of the company. The losses eventually totaled $1.4 billion—more than the company’s assets and reserves. Barings diled for bankruptcy.

Leeson’s account is instructive. While he was doing well, he was given more trust. But that was not

Mike Clarke/AFP/Getty Images

balanced by the removal of the condlict of interest he had as head of his department or by the addition of other auditors. His supervisors failed to hire an auditor for his department, and they preferred not to look stupid by asking relevant questions. The dlexibility and trust Leeson initially possessed turned into a greed for beating the market.

What Can Be Done?

Are Leeson and other rogue traders to blame, though? Part of the problem lies with management. As one commentator has put it: “What makes a rogue trader? The real answer is—a terrible accounting system, reporting system, and lack of internal control. It is actually a

French Bank: Biggest Trading Loss From Title: Going Rogue: Big Banks, Murky Finance, and Rec...

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Critical Thinking Questions

Jerome Kerviel was an investment trader for a French multinational bank. In 2008 he lost $4.9 billion of the bank’s investments through risky trading and by creating phantom deals to hide losses. Suppose that Kerviel’s conduct resulted in a multibillion dollar gain for his bank, rather than a loss. Would this alter the ethics of his risky trading? Kerviel claimed that risky trading was widespread within the bank and that responsibility rested with the bank itself for creating a climate that encouraged misconduct. The bank, however, claimed that Kerviel acted alone as a rogue trader. What ethical difference does it make whether Kerviel was acting alone or as part of a corporate culture?

Banks pay bonuses to their traders based on the success of their investments. According to one spokesperson in the video, the highest bonus paid by a bank to one of its traders was $200 million. Do high bonuses like this encourage overly risky trading?

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In 1995, Nick Leeson admitted to charges of management problem” (Hutchinson, 2011). Corporate culture, for such forgery and cheating and was sentenced to critics, creates the environment in which rogue traders can gamble six and a half years in prison. Interest in his beyond their ofdicial responsibility (Davis, 2011). Employees may feel story led to a book deal and a movie starring powerless to stop their rogue gambling when management and Ewan McGregor. reporting are lax, which emphasizes the need for clarity of purpose

and checks and balances in a corporation to ensure that each employee knows the line managers and avenues of complaint or concern.

On the other hand, it can be argued that rogue trading is relatively rare, and the cost of imposing on employees a system of rules and reporting procedures may be the loss of their trust. In dinancial reporting, accountancy, auditing, and so on, professionals expect to hold the trust of their employers: Their education and professionalism imply a status that should be respected. Accordingly, although there are a few who will abuse their trust—just as there are doctors and lawyers who will do so—dinancial professionals should be allowed to retain the freedom to act as they choose.

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Conclusion

Part of the problem concerning the ethics of the dinance world is the technical difdiculties in understanding whether an unethical action is in fact taking place and, if so, whether it is deeply problematic enough to warrant government or legislative intervention. Companies can legally use creative accounting to shift funds around, to ensure that their tax burden is minimized as well as to increase their funding for asset acquisition, but they morally and legally should not be writing in funds and assets that are not there. While there may be a gray area between creative and fraudulent accounting, dinancial ofdicers retain a duty to be conservative with estimations of value. There are enough ways of making money legally, rather than illegally, and those who do step into illegal procedures fall afoul of the law and potential shareholders and investors.

Professionals can be given freedom and responsibility, but that does not mean that they should go unsupervised and without independent auditing of their positions and accounts. Nick Leeson broke Barings Bank because the bank did not want to pay for supervision. Just as with government, it is vital to ensure that there are checks and balances against personal greed and incompetence, and that always comes at a cost.

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Summary & Resources

Chapter Summary

In this chapter we saw that white-collar crime as it relates to dinancial and accounting practices can be highly expensive. Financial reporting, we noted, is not an objective science, for values allotted to corporate assets are ultimately subjective. This means that dinancial ofdicers often act in a hazy area in which undervaluing or overvaluing a company’s assets and liabilities can have moral as well as market implications. A temptation is always present to represent a company in a good light to secure funding or to advance its interests and prodits for a host of reasons.

Financial ofdicers, auditors, and accountants should act conservatively in their evaluations and should note dinancial discrepancies; however, sometimes the temptation or the commands from managers can override professional values and legal considerations, as when companies use transfer pricing to enhance their turnover. While it seems reasonable for dinancial ofdicers to shift funds into countries with lower taxes, this chapter considers whether their actions are ethical. By avoiding tax payments in host countries, they are depriving those countries of sometimes critical funds to help them develop.

The morality of the law in dinancial and related cases is often confusing, too. There is the ongoing debate on the morality of insider trading, for instance, with proponents claiming that insiders help information dlow and opponents arguing that insiders act unfairly.

Finally, we reviewed the problem of rogue traders who break the trust that managers place in them, and who can run up huge debts. While rogue traders are rare, there is a clash between assuming professionalism with appropriate freedom of action and scrutinizing their every move.

Discussion Questions

1. Henry Manne believed that companies cannot become too incompetent or corrupt, as eventually their share price would fall and they could be taken over by another dirm that would get rid of incompetent management. Adolf Berle and Gardiner Means believed that company managers have an incentive to feather their own nests and to undermine shareholder wealth. Using examples, which theory do you think best dits American companies?

2. Financial reporting is a complex procedure that can affect company status and investment opportunities. When a company overstates the value of its assets, it has the potential to tap into new funding or to acquire other businesses. To what extent do you think dinancial ofdicers should encourage a rosier view of the company, compared to a pessimistic view?

3. Insider trading is based on the concept of unequal access to information or knowledge. It creates a situation where the other party is making a decision without all the facts. Is insider trading any different from selling a used car that you know has a bad transmission without telling the buyer about it? Discuss the similarities and differences.

4. Rogue trading occurs when an employee takes advantage of dinancial powers entrusted to him or her. Compare a couple of examples of rogue traders, evaluating whether the blame lies with the corporate culture or with the gambling of the trader. In your evaluation, also consider whether traders’ freedom to act should be limited and, if so, whether such limitations would be an insult to their professionalism.

5. White-collar crime costs the American economy around $300 billion annually. For some, the violation of diduciary professional trust is a heinous crime that warrants strong penalties in order to make an example of people who would break the trust of corporations and the public. Should the professional status of such criminals attract harsher sentencing, compared to sentences for other crimes, such as robbery and violent assault?

Key Terms

accounting fraud

Falsifying a company’s dinancial statements in an overtly illegal way.

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arm’s length principle

An international law stipulating that the set exchange price in transfer pricing should be the same regardless of whether the two companies were part of the same corporate structure or unrelated with each other.

caveat emptor

Latin expression meaning “buyer beware,” expressing the theory that consumers are responsible for researching their purchases in advance and for understanding that sellers have a dinancial interest in selling.

conNlict of interest

When a person has two or more condlicting loyalties that can compromise the person’s impartiality in working for a business or preparing a report.

creative accounting

The use of loopholes in dinancial regulation to present digures in a misleadingly favorable light.

due diligence in accounting

Checking all the key dinancial facts carefully rather than assuming that they are correct.

Niduciary trust

The trust that nonprofessionals have in the dinance and accounting profession that members of that profession will act properly.

Financial Accounting Standards Board (FASB)

An independent board set up by the dinancial industry to promote standards.

generally accepted accounting principles (GAAP)

The standards formed by the dinance industry on accounting and dinancial reporting.

impartial oversight

The ethical mindset of addressing a business situation without any self-interest involved.

insider

According to the SEC, any company ofdicer or director, and any shareholder owning more than 10% of the company’s stock.

insider trading

This occurs when an insider, as dedined by the SEC, trades on information that has not yet been made public. Insider dealing is illegal, although ethicists debate whether it should remain illegal.

rogue trading

Occurs when a trader within a company engages in speculative and reckless trading without company authorization, typically for personal gain.

Sarbanes–Oxley Act of 2002

U.S. Federal law to encourage greater transparency in corporate dinancial reporting.

Securities Exchange Act of 1934

U.S. Federal law that set up the SEC to oversee the dinancial markets.

soft numbers

Numbers that are uncertain or difdicult to measure.

tax avoidance

The legal use of accounting practices to reduce a tax burden.

tax evasion

The illegal hiding of money earned to reduce a tax burden.

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transfer pricing manipulation

Shifting prodits to a company division in a tax haven to avoid higher tax in a developed country.

Business Ethics Case Study 7.1: Lehman Brothers and the Limits of Moral Hazard

If your parents would bail you out of jail every time you got in trouble, you might behave more recklessly than you would otherwise. If your cell phone warranty gave you free damage replacement, you might be more careless with your phone than you normally are. The notion of moral hazard is that there is a lack of incentive to guard against risk when one is protected from the consequences. This was a critical cause of the dinancial crisis of 2008, the worst economic calamity in the United States since the Great Depression. Put simply, banks did not care if they lost money because they could rely on the government to bail them out. Most banks survived the crisis and escaped punishment for their irresponsible behavior. Not so with Lehman Brothers: The government held it accountable and allowed it to go into bankruptcy without intervening. Its bankruptcy is the event that triggered the global economic collapse.

Lehman Brothers began in the mid-19th century as a dry goods store, expanding into cotton, then into commodities brokering. The company remained under the leadership of Lehman family heirs for a century, then, beginning in the 1970s, it went through a series of mergers. It dinally was spun off as an independent company from 1994 until its bankruptcy, with Richard Fuld as its CEO. Fuld was aggressive and confrontational; during a social event after the 2008 crisis, he introduced himself to other guests as the most hated man in America.

Lehman’s role in the dinancial collapse is complex, and there are four layers to the story. First, there were loan originators who gave high interest loans—that is, subprime loans—to borrowers with poor credit histories due to unemployment, divorce, bankruptcy, inadequate documentation, and similar dinancial obstacles. The loans often came with artidicially low introductory rates for the dirst two or three years, then ballooned. Twenty-dive mortgage lenders were responsible for around 72% of the high interest loans during this period. They were mostly non-bank mortgage retail companies that were exempt from Federal regulations, and many preyed on dinancially vulnerable homebuyers.

Second, the original mortgage lenders sold around 12 million sub-prime mortgages to larger investment banks, which in turn bundled them together into securities to sell as investment shares. The mortgages were packaged in different ways, but the principle type was mortgage-backed securities (MBS).

Third, these securities were then blessed by the three major credit rating agencies with artidicially high AAA ratings. Typical investors would purchase these shares from investment banks under the false impression that they were low risk, just as they might buy shares of Walmart or Microsoft stock, which are comparatively safe.

Fourth, many buyers of these shares would also purchase investment insurance to protect against loss. Simplidied, here is a list of the main players in these four layers:

Top 25 mortgage lenders who originated the sub-prime loans: Countrywide, Ameriquest, New Century, First Franklin, Longbeach, and 20 more Top 5 investment banks who bundled the loans into securities: Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers, Bear Stearns

Top 3 credit rating agencies that gave these securities high ratings: Moody’s Investors Service, Standard & Poor’s, Fitch Ratings Top insurer of these securities: American International Group (AIG)

All of these companies knew that the original loans were high risk and that this risk carried through each of the subsequent layers. When the crisis hit, the pieces fell like dominos. First, homeowners predictably defaulted on their sub-prime mortgage loans, which led to foreclosures. As with the Great Depression, investors rushed to cash in their shares of the securities, and Bear Stearns was the dirst investment bank to go. Its cash reserves rapidly dwindled to the point that it could not meet the demand, and, to keep from going bankrupt, it asked the Federal

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government for help. U.S. Secretary of the Treasury Henry Paulson agreed, but at a very high cost because of the moral hazard the company brought on itself: With government funding, Bear Stearns would be sold to another company at a bargain basement price and later liquidated. Shortly after, Lehman Brothers faced the same problem, and Lehman assumed that Paulson would arrange a similar kind of government-funded corporate buyout for it. But Paulson refused, again, on the grounds of moral hazard. It was bad enough that the government intervened with Bear Stearns, but he vowed to not do it again, and the banks would take responsibility for their recklessness.

Lehman Brothers indeed declared bankruptcy, but, unbeknown to Paulson, it was so interconnected with the entire dinancial community that the stock market immediately plummeted. The credit market froze because investment and commercial banks in the United States and around the world could no longer trust each other’s solvency. AIG, which insured investors against Lehman’s bankruptcy, faced billions of dollars in insurance claims that it now could not pay. As the nation’s largest insurer, AIG’s bankruptcy would have more disastrous effects than even Lehman’s. Recognizing that AIG was “too big to fail,” Paulson dinally set moral hazard aside and gave it an $85 billion bailout loan in exchange for the government taking control of 80% of the company. Rather than wait around for other major dinancial institutions to collapse and bring on a worldwide depression, in October 2008 Paulson secured bailout money from Congress for the country’s nine largest banks. The U.S. stock market continued to decline over the next year, and, after bottoming out, it slowly rose to its pre-crisis level in 2013.

After Lehman Brothers’ bankruptcy, a government investigation revealed that the company hid $50 billion of its debts and made them look like sales instead. Thus, not only were its investments reckless, but it engaged in large-scale accounting fraud to hide its debt. The government chose not to pursue criminal prosecution of Lehman’s executives, fearing it could not adequately make its case. In 2015, Fuld gave his dirst public talk since the dinancial collapse, during which he cast blame for Lehman’s failure on factors outside his company and denied that he or his company did anything wrong.

Discussion Questions

1. Was Paulson morally justidied to set aside moral hazard considerations and bail out the banks?

2. If Paulson had provided a government bailout for Lehman Brothers as it later did for other banks, the

dinancial collapse may have been averted or at least minimized. As Secretary of the Treasury, should he have known about the interconnection of the companies that was part of the rapid deterioration of the markets? Explain.

3. The dinancial institutions that received bailout money from the government are paying it back with interest, which may result in a prodit for the government. Does this fact help justify the government’s heavy involvement in the crisis, and is it even appropriate for the government to prodit from an investment like this?

4. Since the dinancial crisis, the U.S. government has set in place a regulation that allows for the systematic liquidation of failing banks, rather than having them bailed out by the government. Is threat of liquidation sufdicient for banks to avoid the short-term benedits of reckless investment?

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8 International Business and Multinationals

Learning Objectives

After reading this chapter, you should be able to:

iStock Editorial/Thinkstock

Discuss the major unethical temptations for multinationals, including engaging in bribery, compromising on safety and environmental standards in countries with more lax regulations, and avoiding taxes.

Examine labor issues related to multinationals, including child labor, sweatshops, and illegal immigrant workers.

Have an understanding of intellectual property and technological transfer issues as they relate to multinational enterprises and doing business around the world.

Analyze the reasons why international trade can cause ethical issues for companies and individuals.

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Introduction

Foxconn is a large Taiwanese manufacturing business that Apple contracts with to make iPhones and iPads in China. In recent years, it has drawn worldwide attention after poor working conditions led 14 employees to commit suicide by jumping from factory windows to their deaths, with around 150 more workers threatening mass suicide (Moore, 2012). Foxconn is the single-largest private employer in mainland China, with 12 factories—the largest essentially its own city of over 200,000 workers, with dormitories, stores, banks, and even its own television station. It is at this particular factory that the suicides occurred, and the factory responded by installing netting outside of windows on the higher dloors to prevent further tragedies. Workers’ complaints have been about safety, long work hours, limited break time, unrealistically high quotas, and low wages that barely cover the costs of living in the factory dormitories.

After the suicides, one inspector said that the problem was not so much one of the intensity of the work, as is typical in Chinese garment factories, but rather one of monotony and alienation. Many of the Foxconn workers are young, from rural areas, and away from their families for the dirst time with no emotional support (Poeter, 2012). Apple promised to make things better and require Foxconn to comply with a 60-hour workweek standard. But once this standard took effect, some Foxconn workers protested that their weekly pay was now too low to live on.

The Foxconn story vividly illustrates the complexities of multinationals working with foreign companies and people. When companies cross borders, they must deal with foreign laws and politics, but also with customs and expectations concerning how to act and what is proper and improper in business arrangements. This can cause misunderstandings and create clashes of values between the trading partners, since what is considered right and proper in one society is not necessarily so in another. In Chapter 1 we encountered the theory of moral relativism, in which moral values are held to be different in different cultures. When companies engage in international trade, they certainly encounter examples of laws and cultural behavior that can differ radically from those at home. A tension can then emerge when there are clashes of values; U.S. businesses working abroad may have to decide between respecting and abiding by local customs and going by their own ethical culture. As a company conducts business in multiple countries, it could have several different sets of laws and customs, making for very complex transactions and relationships between subsidiaries in two non-U.S. countries.

In this chapter, we will examine international trade and the general ethical issues that it creates, especially how it relates to the behavior of U.S. multinational companies. In particular, we examine the problems of bribery, safety, environmental damage, tax avoidance, child labor, sweatshops, and the complex issues of intellectual property and technological transfers between nations.

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8.1 Major Unethical Temptations for Multinationals

When trade stretches beyond the national border, international trade begins. At its simplest, international trade involves importing and exporting. When companies go beyond their national borders to set up factories, warehouses, ofdices, and shops, they are referred to as multinational corporations or multinationals. World trade has increased massively, with merchant shipping alone rising from 8 billion to 32 billion tons in the past four decades (International Chamber of Shipping, 2015). The growth of trade across borders, and its cultural impact, is called globalization. Ethical arguments related to globalization would require another book, so in this chapter we will examine the main issues that critics bring up concerning multinational corporations.

The international business environment is characterized by many different nations with different rules, taxes, and customs, as well as opportunities to trade with and enrich both corporations and local peoples. But there are many issues that affect the ability of multinationals to work ethically. Sometimes, the problem is not the company’s lack of trying but practices that are widespread and that persist despite attempts to change people’s thinking and outlook. In this section, we will look at some major ethical problems that affect multinationals. First we will consider the problem of overseas bribery.

Bribery

When we consider moral dilemmas that multinationals face, what often comes to mind is the pressure on companies to bribe government ofdicials in certain developing countries. We may dedine bribery as a situation in which a person, such as a government ofdicial, agrees to be paid to act as dictated by an interested party rather than doing what is required in his or her ofdicial employment capacity. In our example, the bribed government ofdicial privately benedits from the deal, which may include cash, tickets, dine art, luxury evenings out, or job positions for family members.

Although bribery of government ofdicials also takes place in the United States, it is far more rare and severely punished than it is in many developing countries. In fact, in some countries, the culture of bribery is a normal practice. Bribery is particularly widespread in civil engineering projects, which can be worth billions. Several large companies have recently been dined for bribery, including IBM, British Aerospace, Halliburton, and Siemens. The U.S. Securities and Exchange Commission (SEC) even maintains a web page that lists cases of offending companies. In 2015, for example, Goodyear was dined $16 million for paying $4.5 million in bribes to acquire tire sales in Kenya and Angola.

It is important to differentiate bribery from extortion, in which an ofdicial requires payment to perform his or her otherwise normal duties. For example, a member of a city’s zoning board might extort a company by insisting on being paid in order to approve a building project that meets zoning standards anyway.

It is also important to differentiate bribery from gift giving, which includes neither implicit nor explicit agreements, even if the giver intends the gift as an inducement. Gift giving in foreign countries is often part of routine business ceremony, the purpose of which is to smooth over difdiculties in negotiations. As such, an ofdicial may accept a gift innocently, and sometimes genuine friendships are formed that involve such exchanging of gifts. However, to avoid wrongdoing, receivers of gifts must remain impartial when conducting their ofdicial duties. In some occupations, such as law enforcement, established codes often forbid giving or receiving gifts because doing so may put at risk necessary impartiality.

Behar Anthony/Sipa/Associated Press

Pictured here is Attorney General Loretta Lynch, head of the U.S. Justice Department, which in 2015 prosecuted ofNicials in the world of soccer for bribery and corruption.

Similarly, it is important to distinguish bribery from grease payments—payments made to ofdicials to accelerate a decision which would otherwise be made. Grease payments are legal because they are not an inducement to act outside of one’s authority or counter to one’s role as is the case in bribery. A grease payment only expedites a process.

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Although few businesspeople publicly defend the bribing of ofdicials in developing countries, many within multinational organizations condone bribery based on two main considerations:

1. There are strictly dinancial considerations. Payoffs can prevent delays that might otherwise throw a company into dinancial ruin. In a truly capitalistic environment, we need an even playing dield, and if foreign businesses engage in bribery and U.S. dirms do not, then U.S. dirms will be at a competitive disadvantage and will ultimately lose to foreign businesses.

2. There are practical considerations owing to what appears to be the universal nature of bribery in developing countries. Often foreign government ofdicials are so corrupt that it is virtually impossible to do business without playing by the unspoken rules.

However, both the dinancial and practical arguments redlect a naïve view of doing business overseas. Bribery is in fact outlawed in every country around the world and, although it is more common in some foreign countries than in the United States, many law enforcement ofdicials in those countries do take bribery violations seriously and punish offenders. The U.S. government also takes overseas bribery seriously. Under U.S. law, the Foreign Corrupt Practices Act (FCPA) of 1977 establishes that, if caught engaging in bribery, a company may be subject to a $2 million dine for each knowing violation, and individuals may be subject to $100,000 in dines and dive years in prison. The law was the result of rampant bribery in the defense industry, notably by Lockheed Martin.

In addition to criminal penalties, the SEC, which enforces the FCPA, may also negotiate a non-prosecution agreement with companies that cooperate with SEC investigations regarding bribery, such as in cases where the company fully cooperates with the government. In such non-prosecution agreements, companies pay a lesser monetary amount as a punitive civil penalty but also need to pay back (or “disgorge”) any prodits they have obtained through their illegal actions.

What Would You Do?

In 2011, the SEC negotiated its dirst non-prosecution agreement for bribery. The company was Ralph Lauren, and the issue involved its subsidiary in Argentina, which, over a four-year period, bribed customs ofdicials to allow its products to enter that country without the required paperwork or inspection. The parent company discovered the illegal activity while attempting to bolster its anti-corruption mechanisms in Argentina. It immediately reported the problem to the SEC, which rewarded the company for its cooperation by not criminally prosecuting it. As part of the agreement, Ralph Lauren paid back $700,000 in illegally gained prodits and interest, plus paid the SEC an $882,000 punitive penalty (U.S. Securities and Exchange Commission, 2013).

1. Suppose that you were the CEO of Ralph Lauren when the Argentine bribery scandal was discovered. Not knowing in advance how the SEC would respond, would you have voluntarily revealed the bribery to them or stayed quiet in hopes that the SEC would never dind out? Explain your answer.

2. If you were the SEC commissioner in charge of the case, would you have pursued criminal prosecution of Ralph Lauren, which might have yielded a $10 million dine, or rewarded the company for its cooperation with the non-prosecution agreement and its signidicantly lower $882,000 punitive penalty? Explain your response.

3. In view of Ralph Lauren’s cooperation, was it necessary for the SEC to impose either the $700,000 payback or the $882,000 punitive penalty? Why or why not?

Critics contend that the penalties imposed by the SEC are so severe that they restrict ordinary well-intentioned business activity because businesspeople fear engaging in a gray area of gift giving that is actually legal. The fact remains, however, that the U.S. government seeks to make the legal penalties of international bribery outweigh the possible business benedits.

Any form of corruption distorts trade, holds back economic growth, creates unnecessary inefdiciencies in commercial

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transactions, runs contrary to the rule of law, and generates an atmosphere of distrust and injustice in which the whimsical decisions of ofdicers can have indluential effects on people’s lives (Klitgaard, Maclean-Abaroa, & Lindsey Parris, 2000, p. 4; Mauro, 1997). But how can we reduce such corruption? Some argue that education is the key. One economist found that, as the amount spent on education rises, the extent of corruption falls (Mauro, 1997). Usually we turn to governments to educate people, but multinational companies are also in a position to encourage investment in education, both through government channels and through investing in educating their own employees abroad. Those who focus on the social impact of companies argue that this is a duty that multinationals should take up; the longer-term effects of helping to educate, train, and coach employees, rather than leaving them at a low skill level, could outweigh the initial costs. Governments in turn must reduce discretionary powers that encourage ofdicials to accept bribes. As is true within companies, more checks and balances and independent auditing would reduce the temptation faced by ofdicials in powerful positions to gain from company contact.

Lax Safety and Environmental Laws

Bribery is just one way in which multinationals may be tempted to follow questionable business practices in their host countries. Another area concerns safety and environmental regulations, which tend to be more lax in developing nations. High safety and environmental standards are expensive to set in place and follow, and when such laws are lax, businesses often see opportunities to cut costs. Perhaps the most dramatic example of engaging in lax safety standards was when a Union Carbide-owned pesticide factory in Bhopal, India, exploded in 1984, sending a plume of toxic gas into the heavily populated surrounding area. An astonishing 3,787 people were killed, and over half a million injured. It was found that the factory lacked safety features that a similar Union Carbide plant had in Germany, and several of the safety systems the factory did have were shut off because of improper maintenance.

A.M. Ahad/Associated Press

In 2013, a garment factory in Bangladesh collapsed, killing 1,129 people, with many missing. In the photo here, women at the former factory site hold pictures of missing relatives.

More recently, in 2013, a garment manufacturing facility in Savar, Bangladesh, collapsed, killing 1,129 people and injuring 2,515. The principal cause of the collapse was that the building was improperly constructed to sustain the demands of large-scale manufacturing. The facility contained several separate companies, some of which produced merchandise for recognizable retailers such as Walmart and Benetton. Walmart denied authorizing production of its products in the factory, but Walmart products were found in the building’s rubble, and documents showed that several production lines in the facility were devoted to making Walmart apparel. Two years before the disaster, a meeting took place in Bangladesh among government ofdicials and retailers to discuss safety issues in garment factories. According to the minutes of the meeting, a Walmart representative stated that such improvements in 4,500 factories would in most cases be extensive and costly, and that “It is not dinancially feasible for the brands to make such investments.”

Many U.S. corporations have skirted the issue of worker safety by not

directly employing people under adverse conditions. The Savar factory was not owned by Walmart, yet Walmart was aware of the conditions. This is some indication that companies use contracted facilities to maintain a legal distance from the employees, a sort of plausible deniability that they knew about the working conditions and therefore could control. Nevertheless, employee safety should be a universal concern with minimum standards even when local regulations do not exist. The Savar tragedy has brought attention to this need; Walmart has asserted in response its ongoing commitment to worker safety in Bangladesh and that it would increase its

transparency in its supply chain.

Pursuit of prodits also motivates multinationals to take advantage of lax environmental regulations in developing countries. This is redlected in what has been called the pollution haven effect—that is, the view that the industries that are most prone to pollution will set up or relocate to regions with the fewest environmental regulations. The rationale is that stricter pollution regulations pose added costs to industries—such as costly emissions technology and cleanup—and industries are motivated to avoid these costs when possible. Past efforts to condirm that industries in fact relocate to

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pollution havens have been inconclusive, due largely to the difdiculties in measuring the stringency of different environmental regulations. Recycling is a vivid example of this. Partly because ofthe recycling regulations of the U.S. Environmental Protection Agency, large numbers of U.S. automobile batteries are shipped to Mexico for cruder and more environmentally damaging recycling methods, and electronic component recycling is done in East Africa and Asia. With both automobile battery and toxic e-waste, improper recycling releases heavy metals into the environment and food chain, which in turn can cause cardiovascular disease and neurological disorders. Laws have been proposed in the U.S. Congress that would combat this problem by preventing the exportation of toxic e-waste, thereby requiring that it be disposed of domestically in a more environmentally responsible way.

Tax Avoidance

Another issue that concerns critics of multinational companies is who owns the prodits these businesses create, and therefore who should tax them. Currently, U.S. tax policy creates an incentive for multinational enterprises to keep their cash abroad rather than return it to the United States. So-called repatriated income, which is money brought back to the United States from foreign subsidiaries, is taxed at 35%. This is one of the highest corporate tax rates in the world.

Not surprisingly, companies like Microsoft, Google, and Hewlett-Packard therefore keep much of their cash abroad, sometimes using it to expand further into other countries or letting it earn interest in foreign banks (Kocieniewski, 2011). A study done of 288 Fortune 500 companies indicated that 111 of them paid no Federal income tax for at least one year during the time span of 2008–2012. In the current economic climate, in which the U.S. government faces enormous debt problems, this poses two key questions:

1. Should U.S. corporations be forced to bring back money earned abroad, or should they be free to use their money as they see dit?

2. Do companies owe any allegiance to the government or people of their homeland, or should they be free to dly any “dlag of convenience” and allocate funds according to the cheapest tax zone?

The ethics of the issue relate to the duties that a homegrown corporation owes to its home nation, especially companies that grew because of the political or economic climate created by U.S. governments of the past.

Consider General Electric (GE), which in 2010 reported worldwide prodits of $14.2 billion, with $5.1 billion coming from the United States—but had a U.S. Federal income tax bill of $0 through creative accounting procedures, such as holding prodits in its overseas subsidiaries (Kocieniewski, 2011). The details are complex, and GE did pay other taxes pertaining to employees and permits. But GE’s $0 income tax bill shows the power that large corporations have to evade normal tax responsibilities, and the government’s inability to do much about it. Supporters of multinationals, however, argue that corporate dinancial ofdicers are merely doing their job in minimizing external costs (taxes, in this case) so they can put money back into those who support the company with their funds—which can include the pension policies and mutual funds of many ordinary Americans.

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8.2 Labor Issues

Another set of issues with multinationals involves treatment of workers—in particular, the problems of child labor, foreign sweatshops, and illegalim migrant workers. We turn to those next.

Child Labor

One of the most emotional issues that international trade evokes is the use of children in production. It is estimated that globally, over 250 million children between the ages of 5 and 14 are engaged in some form of work. Some of this work may be considered educationally and culturally benedicial, but some involves dangerous and hazardous conditions, such as working with chemicals or machinery. Critics have estimated that 215 million of these children are working illegally, according to national laws (“Child Labour Guide,” 2011). The use of child labor can occur directly, within a multinational’s own factories, or indirectly, through the supply chains the company uses.

A Historical Perspective

Most countries have prohibitions on child labor, but enforcing these laws can be problematic. India and China, for example, have large rural areas where traditional working patterns involve children from an early age. In India, children can be sold into bonded labor, which is a type of slavery, while parents pay off a debt. Even if the children themselves are attracted to working because of the money, they can end up working in hazardous conditions, such as in coalmines or garbage dumps (Magnier, 2011).

The United States has a tradition of child labor too. In colonial times, children as young as 8 could be bound to a master to work until the age of 21 in exchange for food, shelter, and clothing. Laws were slowly passed to raise the working age, and charitable organizations supported child-welfare reforms and pushed for bans on what was considered to be child slavery and exploitation. This culminated in provisions under the Fair Labor Standards Act of 1938. Later, the Supreme Court held that the government had the authority to regulate the actions and treatment of children.

Protecting Children

The relevant question as it relates to multinationals is whether a child should be considered on an equal basis with an adult or whether childhood is a different category of personhood that generates unique responsibilities to children and rights that adults do not possess. Should a child be protected from becoming an adult too early, or should children have rights of access to the adult world, including employment?

Many philosophers, such as John Stuart Mill and John Dewey, have argued that children deserve protection from the demands and expectations of the adult world and that they should be protected legally for their own good. But at what age should society consider a person to be a child?

Consider the age of consent, when a young person is legally permitted to engage in sexual activity—a boundary that can be said to separate childhood from adulthood. In Canada and the United Kingdom, it is 16, whereas in the United States it ranges from 16 to 18, depending on the state. In other countries, such as Italy, it is 14, and in Spain it is as low as 13. Some states and countries add that if one of the parties is in a position of trust, such as a doctor or a teacher, the minimum age rises to between 16 and 19. The age of consent encourages us to consider what a child is and, if we place a boundary on childhood, how children should be protected.

The nature of the protection is sometimes confusing and contradictory, however. Up until 1967, children were seen as legally inferior to adults. The landmark U.S. Supreme Court case In re Gault changed that. In that case, the Supreme Court established that juveniles should have the same constitutional rights to due process in courts as adults (Gold, 2008, p. 10). In effect, this protected children from being treated as nonpersons until they passed into legal adulthood.

In Defense of Children’s Right to Work

From an alternative perspective, why can’t a child compete with adults in the workplace? For critics of child-labor laws, the restrictions amount to a deprivation of rights to earn a living, gain an education in a working environment, and

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compete on an equal level with adults for money.

This may seem a justidication for exploitation of children. Children do not know the repercussions of adult work or the complexity of running a house and paying the bills. They should not have to engage in such worries, and their time is better spent learning in school and playing. Yet, as one critic has noted, society wants children to be free to consume but forbidden to produce:

Let’s say you want your computer dixed or your software explained. You can shell out big bucks to the Geek Squad, or you can ask—but you can’t hire—a typical teenager, or even a preteen. Their experience with computers and the online world is vastly superior to that of most people over the age of 30. From the point of view of online technology, it is the young who rule. And yet they are professionally powerless: they are forbidden by law from earning wages from their expertise. (Tucker, 2008)

Kyodo/AssociatedPress

Girls pretend they are beauticians in the pretend cosmetics store at the KidZidania theme park in Tokyo. At the park, children can hold “jobs” for which they are paid.

From this perspective, the law against child labor seems strange. Why not let children earn money for the skills they can offer? Employers in turn complain that young people coming out of high school or college do not have the skills needed to succeed in the workplace, a lack that would be reduced if young people had free access to the employment market from an earlier age.

There certainly seems to be a demand for work-related activities. Consider KidZania, which is an employment-related role-playing theme park for children that is currently expanding its franchise globally. The company states that it provides “children and their parents a safe, unique, and very realistic educational environment that allows kids between the ages of four to twelve to do what comes naturally to them: role-playing by mimicking traditionally adult activities. As in the real world, children perform ‘jobs’ and are either paid for their work (as a direman, doctor, police ofdicer, journalist, shopkeeper, etc.) or pay to shop or to be entertained” (KidZania, n.d.). Originally set up in Mexico, KidZania is now a multinational corporation (Rathbone, 2011).

KidZania is just an amusement park, and a critically acclaimed one at that. While there is a clear difference between role-playing and actual work, it suggests that maybe some types of genuine work activities can be fashioned for children in a way that is fun, educational, and lucrative. The ban on child labor prevents experimenting with business ventures that responsibly take into account a child’s abilities and interests. At minimum, it might not be any more oppressive to the child than attending school, and it might even have benedits similar to apprenticeship in a trade guild.

For the sake of argument, let’s grant that in a perfect world there may be responsible work arrangements for children, such as we currently have with child actors. But considering how especially vulnerable children are to exploitation, it is not worth the risk of placing children in work environments where prodits are the dominating motive. Chapter 6 on employees covers a range of situations in which workers can be exploited, marginalized, or put at risk. And these are adult workers, who at least in theory have the opportunity and legal standing to challenge job-related mistreatment. Not only do we need to shield children from the mistreatment that adult workers experience, we should not even go down a path that would make children targets of even more types of mistreatment.

Won’t Child Labor Just Disappear?

From a different perspective, what is important to consider is whether a developing nation naturally reduces the number of children in work as it becomes richer. This is what happened across the West: As the economy grew, it became more complex, and that complexity added value to staying in school and getting a deeper and longer education. That is, the richer a country gets and the more opportunities that a family has to increase its income or decrease its dependency on a local factory or farm for work, the less of an incentive there is for children to work. Their education becomes a greater priority (Cigno, 2005, p. 101). According to that argument, it would be better for U.S. corporations to work with foreign

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companies that use child labor, on the grounds that as the economies of those companies’ countries improve, eventually there will be no economic need for children to work.

The problem with this argument is that it absolves the multinational and its managers from acting as role models or from trying to encourage alternative and less dangerous work for children. Since poverty is synonymous with child labor, if a company pays higher wages, it can have a benedicial effect in raising local living standards and hence reducing the need for children to be employed. Governments, companies, and charities could also help set up schools to attract young people so they canlearn more and enhance their employment skills. More opportunities generally mean an increased incentive to learn, which in turn often implies an extension of childhood. In developed countries, childhood can be extended into a person’s 20s as that person continues his or her studies into college or university. Wealth may bring greater incentives to educate, but critics remind us that waiting for an economy to grow does not alleviate real and serious problems with child labor today.

Sweatshops

An extension of concerns over child labor are the ethical problems that arise in employing adults in sweatshops, which the U.S. Department of Labor dedines as companies or employers violating more than one Federal labor law. Even if they act within the law, sweatshops can have conditions that are hazardous or standards that are below decent for a healthy and safe workplace. They may be crowded with employees working without adequate breaks or under abusive managers. Sweatshops are pervasive in poorer countries, but they also exist in the United States, particularly in the restaurant, clothing, and meat-processing industries.

A Historical Note

The term sweatshop was coined in the mid-19th century from sweater, an employer who was a middleman contracting work out for manufacturers. Typically, the sweater employed people desperate to work under any conditions and for minimal pay. Turnover of workers could be high, which meant that there was no incentive for the sweater to improve conditions or pay. Where there were thriving markets, disgruntled employees could move onto better conditions and bere placed by other desperate workers.

Although the hardship and cruelty of a sweatshop are often described, for one cultural historian “the sweatshop is as American as apple pie[,] . . . synonymous with the Singer sewing machine, the hard-driving clothing dloor subcontractor, the ingenious immigrant good with the needle, the piecework system” (Hapke, 2004, p. 1–3).

The BeneSits of Sweatshops

Are there any benedits to sweatshops? Some argue that sweatshop scan offer stepping-stones to shelter and work experience that poor people or new immigrants need, or that they arenecessary for a poor country while it develops and gains enough money to invest in its safety standards (Maitland, 1997). If workers have the right to leave a sweatshop, some argue, it does not seem right that sweatshops should be summarily condemned and dismissed. Indeed, they ask, what is the alternative for poor people seeking to better their conditions? For early Americans migrating to the cities, sweatshops offered higher wages and relatively better conditions than the alternatives. And if consumer pressure encourages a U.S. company to shut down a sweatshop in Indonesia, for instance, the result is that the workers are now unemployed rather than employed. Would the workers prefer to have no job rather thanan uncomfortable job? In many cases, the

Vietnam's Nike Factory

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alternative to sweatshops is agricultural work, where conditions may be much worse than those of a factory laborer.

As long as the workers are free to leave, according to supporters of sweatshops, there is no problem, and any intervention to close sweatshops can create more suffering than it prevents. From this perspective, the sweatshop is a relative evil and one that is soon competed out of existence as workers are provided more opportunities for work. As one South African commentator has noted, the problem for the unemployed in South Africa is not ethical policies but the lack of businesses (“Companies Aren’t Charities,” 2010). When the number of businesses increases, more people gain work, and the wealth that is created begins to trickle down to the poorer members of society.

The Case Against Sweatshops

For critics, however, the sweatshop is synonymous with exploitation, and the Savar garment factory tragedy in is a case in point. Treatment of sweatshop workers within U.S. borders is often just as bad. Some years ago, the Immigration and Naturalization Service raided an illegal sweatshop in El Monte, near Los Angeles. It was run by a family of Thai contractors who kept 72 workers, mainly women, in barracks behind barbed wire and worked them 12 to 18 hours a day. The case was the dirst in which a Federal court held clothing retailers and manufacturers liable for the actions of the labor contractor (Watanabe, 2008).

However, the El Monte sweatshop in effect was an issue of slavery. While the working conditions in U.S. garment factories have been slowly improving, those in farming can still be oppressive, especially for migrant workers. The 2014 documentary dilm Food Chains describes conditions where workers are overworked, cheated of wages, sexually assaulted, beaten, and also enslaved.

When foreign subsidiaries use sweatshops, rather than excusing the dire local conditions, a U.S. corporation has a duty to offer improved standards and wages. In a sense, when in Rome, do not do as the Romans do, but rather do unto others as you would have them do unto you. In other words, the relative differences between two countries should not matter. The U.S. corporation should employ people on a similar basis abroad as at home, whether those workers are employed directly or through a contract with their employer.

Illegal Immigrant Workers

Another concern for multinationals is whether a company should hire illegal immigrants. Political and economic disturbances around the world push increasing numbers of people over international borders. In 2011, an estimated 47 million people in the world were refugees. Many are only temporarily so and return home as soon as it is viable. Others end up in refugee camps for years, while some seek work in host countries, both legally and illegally. Up to 4% of the U.S. population is considered to be in the country illegally, constituting 5.4% of the workforce (Passel & Cohn, 2009). Of an estimated 154 million people in the civilian workforce, that would mean 8 million are working illegally in the United States.

Vietnam's Nike Factory From Title: Globalization Is Good

© Infobase. All Rights Reserved. Length: 06:29

Critical Thinking Questions

According to the video, a common defense of sweatshops is that they are a necessary stage in any country’s industrialization. How might sweatshops bring about industrialization? What are some of the myths about sweatshops in developing countries, and how do those myths compare with the Nike factory in Vietnam as depicted in the video? The video maintains that anti-globalization protests against Nike are not justidied. Do you agree? Explain.

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Chris Pizzello/Associated Press

It was in this building in El Monte, California, that 72 workers were kept prisoner and forced to work 12 to 18 hours a day. The case was the Nirst in which a Federal court held clothing retailers and manufacturers, including Montgomery Ward, liable for the actions of the labor contractor.

Politically, immigration is a controversial topic in the United States; authorities are trying to clamp down on illegal workers. For many, illegal immigrants are by dedinition working illegally and should be returned to their home countries.

For critics of immigration laws, however, the right to engage in any contract with anyone forms the bedrock of freedom. Indeed, up until 1875, the United States welcomed “the world’s poor, huddled masses” to give them the chance to realize their potential in a relatively free land. The principle of a free society is to provide protection and free migration to any person seeking a new life. Two people are free to engage in any contract they wish, and, say immigration law critics, political obstacles such as a required license to work in a country should not exist. A company offers work in return for the services that the workers provide. The transaction is voluntary and victimless. By working, people are contributing to the national economy rather than draining it through taking government benedits. The workers are also investing in their lives, and income tends to be a positive indluence—as is employment itself, by keeping people from falling into criminality whenthey cannot dind work. Newer immigrants can also learn English while working and thereby become more American than if they

avoided or had no chance of dinding any work. Legal immigrants contribute an estimated $37 billion to the U.S. gross domestic product; if there are 8 million illegal workers in the country, that means they could contribute billions to that total (Drum Major Institute, n.d.). It is also estimated that illegal immigrants contribute $12 billion in Social Security payments each year using fake identidication cards, totaling around $100 billion over the past decade. They will not be able to access those benedits.

But the counterarguments are just as strong. By turning a blind eye to illegal workers, governments might tempt companies that are engaged in law breaking to break more laws. There is a deeply felt sense of injustice when citizens are overlooked in favor of illegal immigrants. Illegal immigrants increase the supply of labor to an area and thereby depress wages and opportunities for citizens. Although the immigrants may contribute to Social Security funding, the resulting market for fake identidication and Social Security numbers generates income for those who regularly engage in black market activity. That is, there is a transfer of funds and jobs from law-abiding people to criminals and illegal immigrants.

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8.3 Technology Issues

Another set of issues that multinationals face concerns technology—specidically, intellectual property theft and technology transfer—which we will consider next.

Intellectual Property Theft

One of the most recent challenges facing businesses operating in a global environment is that their technology or patents are stolen and replicated in other countries. Other companies then reproduce the product at a much lower price and thereby undermine the original company’s prodits and innovation. Intellectual property (IP) theft is not the same as employees’ or customers’ stealing physical goods from shops or ofdices. Rather, it is the appropriation of intangible but legally protected information termed intellectual property (IP), including

copyrights to written, audio, or video materials; trademarks, such as a name, logo, slogan, or package design; trade secrets; and patents that cover inventions.

The Internet has opened up opportunities for IP theft to global as well as national predators. IP theft has been estimated to cost U.S. dirms over $300 billion a year (The Commission on the Theft of American Intellectual Property, 2013).

The Federal government has a series of laws against IP theft, and in 2010 it introduced a controversial Combating Online Infringement and Counterfeits Act. The Act was designed to modernize IP regulation and to follow the path of the United Kingdom and France, which had recently introduced similar updates. It would have given the U.S. Department of Justice the global power to target piracy websites, illegal downloading websites, copyright infringers, and importers of counterfeit goods. However, an online protest campaign drew much attention to the Act, and congressional action on the issue has since been postponed. Many citizens felt the Act was unnecessary because they were benediting from free music and software. One of the largest violators was the dile-sharing website Limewire.com. A four-year court battle between Limewire and the music industry resulted in a Federal court order against Limewire, forcing it to cease its operation based on the clear violation of copyright law that cost the recording industry hundreds of millions of dollars.

Despite the estimated economic cost of IP theft, many oppose the enforcement of IP laws. The American Civil Liberties Union, the Center for Democracy and Technology, Human Rights Watch, and other organizations are concerned that moves to censure rogue websites will also act to hamper freedom of speech. This would, for example, affect the social websites that helped the Arab Spring movement of 2010–2012 or the funding of WikiLeaks and other whistleblower websites (Timm, 2011).

The larger question here is whether it is morally wrong to use other people’s intellectual property. On dirst thought, the misappropriation of another’s work does seem immoral. However, some economists have argued that enforcement of IP laws actually hampers economic growth and the sharing of knowledge that is important if we are to help millions around the world escape poverty. The freedom that the Internet brings permits oppressed people to dind a voice, allows people of varying lifestyles to engage in communication (rather than violence), and is a colossal portal for the outpouring of human knowledge. If governments try to crack down on IP theft, they could ruin the Internet and the freedom it brings, and they could also hinder human innovation. Further, some cultures do not recognize individual or corporate proprietary rights in the same manner as the West does. For instance, in China, innovations are for sharing rather than protecting by legal barriers. Unsurprisingly, we dind the greatest IP “theft” in China.

Technological Transfers

On the international market, one fear is that innovation and new products generated in the United States will be transferred across national boundaries without legal protection for the investors and shareholders; hence, the calls by various governments for more global action on IP protection. This is known as technological transfer. There is also the concern that exporting some forms of technology may be detrimental or even dangerous for other, particularly poorer, countries, or may backdire on the United States and cost the country dearly in economic or military terms. For example:

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Military hardware such as the XM25 grenade launcher could revolutionize infantry combat, and the U.S. Army would not want it to fall into enemy hands. Sometimes a new technology can be pushed into a developing country too quickly and generate more problems than the benedits it brings. For example, nuclear technology can provide energy to be used in electricity production, but the industry requires a specialized maintenance and research industry behind it to ensure that it is run safely. Without such supporting industries in place, and without a depth of knowledge and expertise in the society to make choices about nuclear energy, the technology and its use remain potentially dangerous. Transferring technology over to other countries enables those countries to compete against U.S. companies and thereby threaten jobs.

There are two main rebuttals to these fears:

1. Once we step outside the military-political arena, technological transfers can be generally seen as a helpful way of empowering poorer countries to become richer. Technology increases the productivity of workers in all dields of work, which in turn increases production. As a country becomes richer through technology, it can engage more in world trade and become less dependent on other countries in times of famine or other hardships. So a refusal to share or to export technology abroad in effect keeps the world’s poor in poverty.

2. Concerns over IP or technological transfers are mere protectionist policies and the nationalist ethic behind them: that American jobs are more important than other countries’ jobs, but also that U.S. consumers should expect to pay more for supporting their country and its unions rather than import cheaper goods from abroad. The fallacies in such a line of argument are apparent. Protectionists are typically keen to ensure that their self-interest is catered to but not the interests of the majority of their fellow citizens or those of other countries. Self-regard is a powerful motive, but it is not always an ethical one.

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8.4 Ethically Evaluating Multinational Business Activities

In view of the wide range of ethical issues that multinationals face, we turn next to a more general ethical evaluation of multinational business activities.

Respect for Local Cultures

It is easy for ethical thinking and action to get lost in the business world, especially when business crosses borders and cultures. A general concern is the extent to which countries in the West should be interfering with the norms and values of other countries, especially those of less developed nations whose economic vulnerability may deserve a softer, more respectful approach. This applies especially to nations whose cultural identities are perceived to be untainted by Western culture. Corporations going in to set up factories or ofdices in such countries could have a massive impact on how the culture evolves, which could cause unintended disturbances and violate local traditions. It is a common complaint of critics of multinational corporations that multinationals do not know the extent to which they are affecting local cultures or, if they do, that they possess an arrogance of assuming they are in the right, which to many is offensive.

In many respects, the problem is now an old one. Ever since Columbus encountered the indigenous population in 1492, Western values have been adopted by or imposed on other peoples. Indeed, Columbus’s dirst thoughts were of Christianizing and conquering the people: “I could conquer the whole of them with difty men, and govern them as I pleased” (Columbus, 1492). In other words, we have power and they do not, so we are right in imposing our values and our systems on these people.

Hasan Jamali/Associated Press

Two worlds meeting: women dressed in traditional niqabs in Saudi Arabia shopping at a very American corporation.

Columbus’s sentiment characterizes much of the following 500 years of commercial expansion and globalization. Western countries have imposed their will on weaker and less technologically advanced countries, often through military force. The locals encountered by companies and government ofdicers have been assumed to be “backward” on religious and moral grounds and hence in need of “correcting.”

When working abroad, sensitivity has to be encouraged. Some companies have very strong policies on how their U.S. teams should deal with local people; others are more lax and leave it up to the managers involved. A brief encounter with a foreign delegation may not cause many problems, as everyone involved will be on their best behavior, and lapses in etiquette will be understood. But when people stay longer and begin to relax in each other’s company, problems can arise. One commentator on international business etiquette has noted that the American habits of sprawling in chairs or wearing sunglasses

inside may be disconcerting to English people but positively unnerving to Germans; and that while a manager would not send a hard-drinking representative to a Saudi Arabian meeting, that same manager might not be aware that asking after the health of any of the women in the household would be offensive (Lewis, 2006, p. 82). Many U.S. companies learn to adapt to local conditions quietly and under the radar of media attention. McDonald’s, for example, has adapted its menu choices for different palates around the world to ensure acceptance of its products; most companies tend to just get on with the job.

But sometimes respect for a foreign culture can go too far. For example, a U.S. company may be trying to do business in a culture that is predominantly sexist in the workplace, and to advance competent women over men may cause offense. Here, American values of diversity and sensitivity to gender issues may encounter obstinate refusal and skepticism. One commentator noted that for many years, U.S. companies avoided employing Black workers in overseas posts, in case doing so would offend local people. Thus, some Western values, such as gender and racial equality, are—and should be—viewed as non-negotiable, regardless of the potential offence they may cause in host countries. Similarly, Nike was forced to respond to Western criticism of its use of sweatshop suppliers in the 1990s: Local factories were content with driving employees in harsh working conditions, but Western consumers were not. As one business academic has noted: “I truly

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believe Western dirms have played a signidicant role in raising standards in [the developing world by demonstrating] how we think, how we do things and how we treat our people” (C. Robertson, as quoted in Insan, 2010).

What Would You Do?

You are a manager for a multinational corporation that has started up business in another country. The resource base is excellent and the local workforce is relatively cheap and willing to work and learn. However, you discover that sexism prevails in the culture. Women are overlooked for promotion by local managers and are underpaid and overworked in comparison to their male counterparts. You are concerned that if your company attempts to alter the local presumptions regarding gender, it may offend the local population, cause commercial and employment problems, and possibly create more trouble for the women who are already disadvantaged. If your company does nothing, it goes against core American values of respect and equality.

1. If you were the manager, would you advance certain women anyway? Why or why not?

2. Do you think it is better to defer to local sensibilities? And would it make a difference if local women were

requesting equal pay or advancement opportunities (compared to situations in which they were silent

about the issues or against them)? Explain.

3. Would you encourage bringing in more American female staff members to show the local managers that

they can work just as well? And, if you are an American female employee, would you relocate there for the

good of your company’s business? Why or why not?

4. If you decided to push for change in the local culture, how long do you believe it would take for local

custom to be signidicantly changed?

Pros and Cons of Multinational Businesses

It is at the junction between global business aims, local customs and laws, and American values that many of the ethical issues affecting international trade—and, in particular, multinationals—arise. For some people, multinationals bring a harmonization to the world: You can purchase compatible Hewlett-Packard printer cartridges anywhere. Likewise, your cell phone can usually adapt to other countries’ signals quickly, and you can rent a car from Budget in just about any country. Such standardization of products and services helps markets and smooths trade by creating similarities.

Supporters also claim that multinational corporations are the main causes of economic growth and prosperity for the world’s poor. Such companies bring in new technologies and job opportunities and training for local managers. When a U.S. company opens up a new factory in Indonesia, say, the locals can benedit from more employment opportunities and usually higher wages—sometimes up to 40% more (Hijzen & Swaim, 2008).

In turn, without global commerce and multinational enterprises, Americans would miss out on a great deal of opportunities in emerging markets such as India, China, and Brazil. Global trade is mutually benedicial, and to turn our backs on it would take the United States and the world back to the protectionist era of the 1930s, which saw a collapse in world trade volumes and a rise in international aggression that eventually broke out in World War II.

But for critics, multinational corporations and their global agendas are exploiters of cheap foreign labor who deplete other countries’ resources and take the prodits back to the United States. They give little to their host countries but violate local traditions and cultures by imposing American standards and expectations on commercial life. Moreover, the multinational corporation is a powerful, rich, and independent beast that will look after its own interests and tread on domestic and international governments and people to raise its turnover. People point to the Deepwater Horizon oil spill and BP’s laxity with regulations or to the Bhopal disaster and Union Carbide’s evasion of safety standards in a foreign land. Some see all multinational corporations as forces to be controlled and highly regulated, or else they willoppress people with poor wages and bad working conditions and undermine union attempts to secure a better life for members. From all the examples that we have considered in this chapter, there are many recurring questionable practices of

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multinationals (Weissman, 2008):

Improper political indluence on foreign governments. Pushing for the deregulation of local markets so that they may enter them and undercut local businesses. Pursuit of prodit over social use, such as when multinationals do not have regard for other stakeholders whom they may be affecting and when they concentrate solely on increasing prodits and dividends for shareholders atthe cost of local people. Externalized costs. Multinationals can be particularly guilty of ignoring their trade and production’s impact on the environment and local cultures; they can ultimately cut production entirely and leave the host country reeling from any disasters that they have created.

Debate nonetheless rages on about the benedits and problems that multinational corporations create. Indeed, as we have discussed throughout this book, acting ethically within the United States is complicated, and when a U.S. company begins to operate abroad, the ethical intensity increases. A few decades ago, multinationals could operate around the world in relative privacy from national enforcers. But today, the spread of electronic commerce and correspondence means that multinational operations are never far from scrutiny by governments or consumer activist groups. Today, their products, advertisements, safety standards, wages, and employment are all accessible for critics to analyze, which can affect local sales.

Despite having a strict set of ethical guidelines on standards and behavior going back to 1992, Nike still managed to fall afoul of consumer activists, who waged an indluential war against the company’s use of substandard factories. In 2004, Nike employed 80 corporate social responsibility and compliance ofdicers, and its factories were inspected weekly, yet even the company admitted that standards in 80% of its factories had failed to improve (Hijzen & Swaim, 2008). Victoria’s Secret was also caught using child labor on its organic cotton farms in Burkina Faso (Carpenter, 2011). Perhaps being a perfect ethical multinational is beyond the reach of companies because local conditions are to some extent beyond their control. If our politicians and military have been unable to bring about long-term cultural change and reduction of social oppression in these countries after repeated attempts, what makes us think that a company could succeed? But it is certainly better to try to change obviously unethical situations and to act as a role model for local companies.

Creating a Global Business Ethic

To relieve the potential for ethical condlict, the philosopher Richard De George (1993) created a list of principles regarding operating businesses abroad:

1. Do no intentional harm to the host country.

2. Produce more good than bad for the host country.

3. Contribute to the host country’s development.

4. Respect the human rights of employees.

5. Pay the host country’s taxes.

6. Respect and work with the local culture.

7. Co-operate with reform in the host country, such as in land and tax reforms.

De George’s principles are useful guides for international businesses, but as we have seen, the reality and complexity of doing business abroad are much more difdicult to navigate than the principles imply. Nonetheless, there are moves to form a global business ethic that all companies should subscribe to.

Georgios Kefalas/Keystone/Associated Press

Monsanto and Syngenta are leading multinational agricultural biotechnology companies. Some praise them for their innovations in genetically modiNied seeds that aim to address food crises. Others criticize them for forcing expensive, legally patented seeds on farmers in developing countries.

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The work of De George and others has helped form the ethical framework of doing work abroad. One of the early executives to pick up the mantle was Geoffrey Chandler, whose actions in 1976 as the CEO of the multinational petroleum company Shell ultimately helped change the moral thinking of multinationals: “To suggest that doing right needs to be justidied by its economic reward is amoral, a self-indlicted wound hugely damaging to corporate reputation,” he commented. “Doing right because it is right needs to be the foundation of business” (as quoted in Davison, 2011). Today there are many business people who try to emulate the moral stance of Chandler and others, who believe in setting an example within the companies they run and also for the people they deal with.

Indeed, one New York institute, Ethisphere, attempts to monitor ethical performance around the world and to score companies on their actions. According to the institute, acting ethically also translates into proditability. Ethisphere’s (2015) criteria are in line with what ethicists look for in corporate behavior, including

ethics and compliance program; corporate citizenship and responsibility; culture of ethics; governance; leadership, innovation, and reputation.

In 2015, 132 honorees representing over 50 countries were selected from among around 600 nominees. Included among U.S. companies are Colgate-Palmolive, Ford Motor Company, Gap, General Electric, Google, Hershey, Levi Strauss, Marriott, Microsoft, PepsiCo, Starbucks, Visa, and Xerox. Ethisphere’s objective is quite clear: When a company seeks to run itself ethically, respecting stakeholders and contributing to public welfare and corporate transparency, it should be publicly applauded. Further, what Ethisphere calls the world’s most ethical companies are said to outperform the S&P 500 index in the United States (“World’s Biggest Public Companies,” 2015).

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Conclusion

The world is moving increasingly toward greater commercial integration as multinationals spread in both numbers and jurisdictions. Because of the Internet and the growth of social networking websites, consumer activists also can keep a better eye on world news and what multinationals are up to. The power of boycotting or of raising awareness of ethical issues and corporate disasters is such now that companies will dind it very difdicult to hide their problems. Ethisphere and other organizations are actively working on a global ethics standard that companies can subscribe to and in turn be judged by, and companies are listening. Many now employ specialists who work internally to make sure that managers are not bribing local ofdicials, employing sweatshops or child labor in the supply chain, or otherwise undermining the corporate image.

In business, image and reputation mean a lot, so when a company is tarnished by a disaster anywhere around the world, it must work hard to rehabilitate its name. Ethical analysis is helping: More managers have become aware of the risks of acting unethically and of the heightened scrutiny they now face.

Large international dirms have an incentive to tighten their standards, as Nike is trying to do, and they can act as role models for smaller companies in other countries (Baker, n.d.). Nonetheless, businesses work in a legal and moral framework, and while they can help form the moral framework, they cannot affect the legal framework aswell. Some of the problems that we have discussed in this chapter—such as child labor, IP theft, illegal immigrant workers, and especially bribery—redlect national government failings. Companies will have a great incentive to bribe ofdicials if governments have discretionary powers. Once the regulatory framework is impenetrable and state dealings more transparent, corruption in its various forms should dwindle.

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Summary & Resources

Chapter Summary

In this chapter, we discussed issues relating to doing business around the world: bribery, safety, environmental damage, and tax avoidance. Governments are acting together to clamp down on such corrupt practices, but such practices are not likely to disappear until governments change the way that they do business. Another set of problems is when corporations engage in practices that Americans dind immoral or even illegal back home, such as the use of child labor. Sweatshops are a more complex case: As long as people are free to leave them, the ethical problem is diminished, although it does not look good for a company to be seen driving workers hard in poor conditions for low pay. So too with the issue of employing illegal immigrants: For some people, their illegal status is sufdicient for them to be arrested and sent back home, but many recognize that illegal immigrants contribute to the U.S. economy and, strangely enough, to Social Security funds.

A grave problem for lawyers is intellectual property (IP) theft. Some argue that IP theft results from the way Americans and Europeans view intellectual property and that other cultures do not see IP as capable of being stolen—it is merely recycled. Finally, we looked at the issue of technological transfer, which can be highly sensitive in the military industry, and we considered whether it is wrong to halt such transfers, since many of them improve living standards in poorer countries.

We also reviewed how ethics deals with international trade and multinational companies. The initial problem was whether companies should abide by local customs or by a global standard of corporate behavior. If companies subscribe to an overarching ethical agenda, they run the risk of being arrogant—entering foreign nations with American ways of doing things and expecting the local people to change their behavior accordingly. But business is ultimately about adaptation, and while some companies try to uphold noble ethical standards, others bend to local rules and customs.

Discussion Questions

1. Bribery and corruption have gone on in the business world for centuries and remain a staple of doing business not only in transitional and poor countries, but also in well-developed economies. Should companies have a strict rule on bribing and gift giving to public ofdicials and members of other large corporations, or should they accept that sometimes the only way to get business is to offer “incentives”?

2. Environmental standards differ across nations. Poorer countries tend to have weaker regulations that are less well enforced than richer nations. If there is a chance of improving prodits by setting up in a country with laxer restrictions, do American companies have a duty not to set up production there? Why or why not?

3. Child labor is endemic to the poorer countries of the world, and for many children it is seen as way of keeping their families out of poverty. Critics point out that if the governments were to invest more in educating children, the children could be more productive and create more wealth for their nations when they grew older. In the meantime, multinational enterprises often secure suppliers who use children. In your opinion, what is the best way to reduce child labor for multinational corporations?

4. Intellectual property involves a range of products and services that are sold around the world. But some cultures do not recognize IP as being anything special, so when people download a movie from an illegal website, they may not feel that they are stealing. Does IP law have any ethical basis, or is it just an attempt to secure monopoly earnings by large corporations?

5. International trade brings with it international customs and different ways of living and doing business. There are many books on how to do business in different parts of the world, but should U.S. companies and their agents feel obliged to support local customs, regardless of how they condlict with home values? Why or why not?

Key Terms

bribery

A situation in which a person, such as a government ofdicial, agrees to be paid to act as dictated by an interested party, rather than doing what is required by his or her ofdicial employment duties.

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extortion

When an ofdicial requires payment to perform his or her otherwise normal duties.

gift giving

Presenting property to an ofdicial, which includes neither implicit nor explicit agreements, even if the giver intends the gift as an inducement.

globalization

The expansion of international trade; the term also implies a movement towards a global culture and, by implication, ethics.

grease payment

A payment made to an ofdicial to accelerate a decision which would otherwise be made.

intellectual property (IP)

Intangible assets protected by law, such as copyrights, trademarks, packaging designs, trade secrets, and patents for inventions.

intellectual property (IP) theft

The illegal misappropriation of intellectual property that has been secured by a company or individual.

multinational corporation

A corporation that has production centers and ofdices in more than one country.

non-prosecution agreement

An agreement between the SEC and a company that has broken the law such that the company may pay a lesser monetary amount as a punitive civil penalty but also need to pay back (or “disgorge”) any prodits they have obtained through their illegal actions.

pollution haven effect

The view that the industries that are most prone to pollution will set up or relocate to regions with the fewest environmental regulations.

protectionist policies

Government policies that restrict international trade with the aim of protecting domestic businesses from foreign competition. Such policies often involve import tariffs and domestic subsidies.

repatriated income

Money earned by an American multinational that is transferred back to the United States; it is subject to corporate tax.

sweatshops

Factories whose workplace standards on health, safety, and pay fall below a legal minimum, or whose standards are below what is commonly acceptable in a community.

technological transfer

Selling or distributing technology from one country to another; often concerned with the transfer of sensitive commercial or military technology.

Business Ethics Case Study 8.1: The Cost of Doing Business in China

Since China opened up to foreign investors in the late 1970s, countless multinational companies have moved into the country of 1.4 billion people in hopes of tapping into its vast dinancial resources. From the start, however, doing business in China meant facing a culture of bribery and corruption among low-level Chinese ofdicials who are the gatekeepers of lucrative contracts. This is the legal setting that businesses must navigate in China, and it is a case in

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China is a difdicult market for foreign companies, and some are deciding that it is not worth the aggravation to stay. A case in point is Actavis, one of the largest generic drug companies, which sold off its Chinese subsidiary in 2014 because, according to its company’s CEO, China is not a business-friendly environment. In the aftermath of the Glaxo case, pharmaceutical companies fear governmental investigation where, they believe, the motivation is less about justice than about forcing prices down, as happened with Glaxo.

Discussion Questions

1. Glaxo got caught bribing, but many other companies did not. In China’s environment, where bribery seems essential for survival, is it better to engage in bribery or to follow the law regardless of the potential dinancial loss?

2. Questions have been raised about whether China’s prosecution of Glaxo was motivated more by justice or by wanting Glaxo to reduce its prices. What, if anything, is so bad about the latter motivation if, in the end, the briber gets punished?

3. According to the American Chamber of Commerce, China has a bias against foreign companies and uses its laws to restrict their growth. Assuming this is true, would it be reasonable for the U.S. government to take similar actions against Chinese companies?

4. China’s state-owned enterprises make up a substantial part of that country’s economy—perhaps as much as 30%. Critics charge that this provides an extra incentive for China to use its laws to discriminate against foreign businesses. Might this discrimination justify a foreign company doing whatever it can to survive in China, including breaking the law?

Sources: Bradsher & Buckley (2014), Charney & Qazi (2015), U.S. Chamber of Commerce (2014).

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Learning Objectives

After reading this chapter, you should be able to:

Describe different ethical perspectives concerning environmental issues. Describe the ethical issues surrounding corporate pollution. Describe the environmentalist critique of corporations engaging in habitat destruction. Summarize ethical concerns related to resource depletion. Describe the ethical issues related to global warming/climate change.

Explain the condlict between environmental values and commercial freedom and the various ways governments and businesses try to resolve that condlict.

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Introduction

In 2010, the Deepwater Horizon oil platform off the coast of Louisiana exploded, killing 11 people, unleashing 200 million gallons of oil into the sea, and affecting over 300 miles of Louisiana coastline and its wildlife habitats. BP, which owned the rig, agreed to pay $42 billion in cleanup, dines, and compensation. And in 2011, the Fukushima nuclear reactors went into meltdown in the hours following a tsunami that hit the Japanese coastline. Although no one was directly killed from the radiation, 300,000 people from the area were evacuated, and 1,600 died as a result of the relocation. The reactors bled radioactive waste into the seas and air, and some of the radioactive substances have been detected as far as the west coast of the United States.

These are dramatic examples of environmental disasters that receive much publicity. Less publicized are situations in which the environmental effects of our actions are not visible and may be hundreds or even thousands of miles away. Consider taking a shower and using regular soap. Many personal products have a range of chemicals in them that are washed down the drains, into the sewers, and out into the rivers to the sea. Along the way, some of these have cumulative effects on plants and animals and on the quality of water. Consumers do not usually think about the impact their shampoo may be having on aquatic animals living several hundred miles away, and following self-interested behavior, they have no incentive to change.

Whether the environmental damage is obvious or hidden, environmental responsibility is now a central concern for businesses. Indeed, perhaps the greatest challenge that humanity faces today is how we should interact with the environment. Figure 9.1 lists 15 environmental issues that are frequently discussed in the news and are of widespread concern, according to national surveys. In this chapter, we will examine just some of the key environmental problems that affect businesses: pollution, habitat destruction, resource depletion and sustainability, and global warming.

Figure 9.1: Common environmental concerns

Both large- and small-scale impacts are elements of environmental responsibility that businesses today should address.

Over the last several decades, industries have made dramatic environmental improvements. Air pollution has been cut by at least one half. The timber industry now focuses on replanting to help assure the availability of future supplies. Business Ethics Case Study 9.1 at the end of this chapter discusses the environmental improvements that the carpet company Interface has made. In spite of such great strides, the challenges of maintaining the environment are great and ever increasing. Population will grow by 2 billion people by 2050; as people in developing and emerging countries acquire more money, they will want more consumer goods. These two factors alone will put pressure on businesses to work even harder to protect the environment. We will begin with a look at the main concerns of environmentalism.

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9.1 Environmentalism

Campaigners across the environmentalist spectrum have raised important points that are having an increasing impact on how we live and do business at home and around the world. In this section, we will look at their major concerns and the criticisms they have encountered in describing our relationships with nature and with economic growth and our impact on the planet.

Economic Growth and Environmental Damage

In considering the environment, we need to think about our relationship with economic growth. Growth can bring prosperity, but it can also create environmental problems.

The technological advances that have accumulated following the industrial revolution have enabled us to increase our population and produce more energy and products than ever before. In the aftermath of World War II, there was a rush to employ the enormous breadth of technology that had been advanced by science. Chemical companies proliferated, and governments invested in nuclear power. Big projects such as dams, extended harbors, airports, and highway systems were seen as symbols of postwar prosperity and as necessary for economic growth. Indeed, economic growth became the guiding principle that governments primarily focused on. Growth, it was argued, would enrich the world’s poor and lift millions out of poverty.

Chuck Keeler/The Image Bank/Getty Images

A crop sprayer is spraying a pesticide, which can have secondary effects on the land and other animals and Nlora. Critics are concerned that such spraying is reducing the honeybee population and building up toxins in the water supplies.

However, in the rush to economic growth, several key factors were overlooked or ignored, the most prominent one being the effect on the world’s habitats and environments. As resources were depleted, indigenous peoples were displaced and lost their homes and natural habitats. Chemicals used in production were wantonly discarded into the air or into rivers, lakes, and seas, leading to negative local and global effects. Swaths of forests were cut down, destroying animals’habitats and landing many species on endangered lists. Fossil fuels contributed to global warming, and pharmaceutical pollution of the waters was evident in the dispersal of medicines in a variety of dlora and fauna. Air pollution caused an estimated 200,000 deaths annually in the United States (VOA News, 2013).

Consider the farming industry. As do any business owners, farmers want to increase their yields and prodits; along came agrochemical companies, offering them efdicient means to rid their crops of pests and diseases. The results were immediate and visible: Yields rose as farmers sprayed the land and crops in their war on the environmental threats to their livelihood.

However, scientists now know that fertilizers and other agrochemicals sprayed onto agricultural land seep into the waterways, causing oxygen starvation for dish and other animals. The application of chemicals began to take its toll on other species but also on humanity, as health effects from the chemicals were noted. Ethical questions began to arise about the priorities of corporations, governments, and end users alike.

Varieties of Environmentalist Positions

Against the backdrop of environmental damage caused by businesses, the environmental movement emerged. Environmentalism is a social and political movement that works toward protecting the natural environment from destruction or pollution. Early indluences on environmentalism were the 19th-century writers Ralph Waldo Emerson, Henry David Thoreau, and John Muir, who emphasized the importance of returning to nature and preserving wilderness areas. The movement took its modern form in the 1970s, inspired in part by several books whose titles are telling: Rachel Carson’s Silent Spring (1962); Paul R. Ehrlich’s The Population Bomb (1968); Donnella Meadows’ The Limits to Growth (1972); and E. F. Schumacher’s Small Is Beautiful (1973). All of these books are still in print and have had an enormous

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impact on reading generations since. Indeed, Carson’s work led to the banning of the pesticide DDT and to the creation of the Environmental Protection Agency (EPA). Organizations defending the environment have also proliferated, including the Sierra Club, Greenpeace, Earth First!, and the Earth Liberation Front, with some of these being more radical than others.

The main ethical position of the environmental movement can be encapsulated in the following points:

Current economic growth is not environmentally sustainable, and we are undermining our own habitat and health. Resources are being depleted at worrying rates and population growth is out of control. People and companies are arrogant in assuming that we cantame nature for our purposes and for our own short-term gains.

We have responsibilities toward other species and must acknowledge that some animals might possess rights similar to those of humans. The Earth and its vast range of habitats and living creatures deserve respect and protection from humanity’s greed for resources.

Virtually everyone acknowledges that people have at least some moral responsibility to protect the environment. What is up for debate, however, is the extent of that responsibility and how much personal sacridice we should make on behalf of environmental protection. There are two primary theories about the source and scope of our environmental responsibilities.

Environmental anthropocentrism is the view that our sole moral responsibility is to human beings, and all obligations that we owe to the environment are only indirect, based entirely on how treatment of the environment impacts humans. For example, polluting a river is wrong only because it would be harmful to human health and ruin the economic or recreational use that we might get from the river.

Biocentrism is the view that we have a direct responsibility to the environment itself for its own sake, not merely because of the impact that treatment of the environment has on humans. Polluting a river, for example, is wrong because it is directly harmful to the environment itself.

Environmental anthropocentrism is a bare minimum moral conviction that draws on the obvious point that human life is affected by its environment. Biocentrism, however, goes beyond this and maintains that not all value rests on human interests. The environment itself deserves moral consideration, because of the special value individual organisms have, especially higher animals, and because of unique components of the environment, such as species, habitats, and complex ecosystems.

Often, these two approaches to environmental responsibility line up with each other: Dumping toxic waste into a river is both harmful to humans and also damaging to unique components of the environment. A business example of this compatibility between anthropocentrism and biocentrism is a $1.1 million investment by the Dr. Pepper Snapple Group to protect a 6 million acre nature conservancy, which will improve water supply and quality in dive Texas watersheds. A spokesperson for the conservancy said, “If there’s not fresh water, there’s no business—it’s just that simple” (Plushnick- Masti, 2012).

Other times, however, the two approaches do not lead to the same result. A case in point is the controversy surrounding the Arctic National Wildlife Refuge, a 30,000 square mile region of northern Alaska owned by the U.S. government. The area is so remote and inhospitable that there are no roads leading into it and it has no tourism value. Oil companies are interested in accessing the oil reserves within the refuge, but doing so would have a damaging effect on the environment, which, among other features, contains a calving ground for the porcupine caribou. Anthropocentrists argue that the human benedits of drilling outweigh the liabilities to humans, so the government should permit drilling. Biocentrists, on the other hand, argue that the liabilities to the environment of drilling outweigh the human benedits, so the government should ban drilling.

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Free Market Response to Environmentalism

In reaction to environmentalists, free market economists argue that environmentalism attacks our fundamental right to live and pursue happiness. “The environmentalists,” George Reisman wrote, “view man as evil, because, in the pursuit of his well-being, man systematically destroys the wildlife, jungles, and rock formations that the environmentalists hold to be intrinsically valuable” (Reisman, 1990, p. 82). Reisman thinks that environmentalist proposals are contrary to human needs and desires. In turn, capitalist enterprises should involve no restrictions except those created by private property arrangements.

Indeed, some of the environmental laws can cause unintended negative effects and confusion. For instance, in 1993, homeowners in Riverside, California, were told not to clear-cut the overgrown brush around their homes in order to protect the kangaroo rats living there. However, when a wilddire broke out, that brush burned swiftly; the dire destroyed many homes as well as the rats (Burgess, 2003, p. 64). In 2011, oil companies were dined $6.8 million for not mixing a certain biofuel into their gasoline and diesel fuels, but the required compound did not even exist (Wald, 2012). For some critics, it is individuals and small businesses who bear the brunt of a growing environmentalist crusade against common sense and fair practice (Wollstein, 1999).

In the next sections, we will look at specidic issues of environmental concern and how environmentalists and businesses respond to them. We begin with a look at pollution.

What Would You Do?

Consider the facts of the Arctic Refuge drilling controversy described above.

1. If you were the CEO of an oil company, would you lobby the government for access to the Refuge, in spite of the public controversy surrounding it? Why or why not?

2. Suppose that you were the U.S. president running for re-election. Oil lobbyists want you to give them access to the Refuge, but environmental lobbyists don’t, and no matter which side you pick, you risk alienating a large group of voters. Which side would you go with and why?

3. Suppose that you are an ordinary citizen and the president just granted oil companies access to the Refuge. Would this affect your decision about whether to re-elect the president? Why or why not?

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Wade Payne/Associated Press

A home that was destroyed by coal slurry containing toxic sludge that broke through a containing wall owned by the Tennessee Valley Authority in Roane County, Tennessee. The clean-up cost was estimated at $1 billion and will take at least six years.

9.2 Pollution

In 1979, a nuclear power plant on Three Mile Island in Pennsylvania had a partial meltdown of its reactor core, causing the release of 13 million curies of radioactive gases into the neighborhood. In 1989, the Exxon Valdez struck a reef and released over 10 million gallons of crude oil into Prince William Sound. In 2003, the Missouri-based multinational company Monsanto was dined $700 billion for dumping millions of pounds of polychlorinated biphenyl (PCBs) into open-pit landdills. In 2008, 80 acres of coal slurry containing a billion gallons of toxic sludge broke through a containing wall owned by the Tennessee Valley Authority in Roane County, Tennessee, onto 300 acres of land, destroying homes and contaminating the area with arsenic, mercury, and lead.

Further, according to environmental campaigners, 40% of the United States’ rivers and 46% of its lakes are too polluted for swimming. The Mississippi River drains 1.5 million tons of nitrogen products into the Gulf of Mexico, creating a “dead zone” the size of New Jersey each summer. Annually, a quarter of American beaches are closed because of water pollution. Factories emit 3 million tons of toxic chemicals into the environment.

Each American produces over 3,200 pounds of hazardous waste annually. Together, the American population produces 10 times more toxic chemicals than the agricultural industry and uses 30 billion foam cups and 1.8 billion disposable diapers each year, which can take 500 years to decompose in landdills. Some 80% of American streams are polluted from pharmaceutical products, which in turn contaminate drinking water (“11 Facts About Pollution,” n.d.; “Our Pollution,” n.d.; U.S. Geological Survey, 2002). The North Pacidic Ocean is home to the Great Pacidic Garbage Patch, which is an area about the size of the continental United States where plastic particles, chemical sludge, and other garbage have become trapped by ocean currents. According to the U.S. Environmental Protection Agency, the main source of the garbage is improper waste disposal.

When we talk of pollution, the statistics are grim. Of course, nobody is for pollution: the problem is how pollution should be dealt with. For some, the solution lies with the free market and the proper recognition and defense of property rights. For others, the solution lies with governments and regulations.

Emissions Trading

One scheme that has proved popular with governments and companies is the creation of a market in emissions rights, which seeks to embrace both market and regulatory solutions. A government body sets a national limit on a certain emission and then shares out the rights to emit that pollution across various companies. Those rights to pollute may then be traded, with companies selling rights to pollute to those who pollute more and need the extra licenses. The tradable licenses cover a variety of emissions and pollutants and are generally called cap-and-trade rights.

Emissions Regulations

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The Clean Air Act Amendments of 1990 capped emissions of sulfur dioxide, which is an air pollutant from combustible fuel such as from automobiles, and reduced overall output by 50% between 1980 and 2007. The Cross-State Air Pollution Rule, enacted by the EPA in 2011, was a further move to reduce interstate pollution and health effects on Americans by targeting power plant emissions and other dine particle emissions (U.S. Environmental Protection Agency, n.d.). While there is no national law, individual states have created programs to cap and trade emissions in a variety of pollutants.

Nick Ut/Associated Press

Because of the smog that affects many of its cities, California has sought to impose strict regulations on pollution output.

Internationally, governments have set up trading schemes in carbon pollution, permitting countries to purchase the right to pollute the world from others who do not produce as much pollution. The scheme was designed to ensure a more level playing dield between nation-states but also to encourage nations to begin reducing global carbon emissions as a whole. London, England, has become the prominent trading market for carbon emissions.

Problems With Emissions Trading

Emissions trading has its critics. Cap-and-trade programs still permit the Earth to be polluted and hence let corporations avoid responsibility: They can continue to harm the planet and its people by buying the right to do so, which critics see as unethical. Arguing from an absolutist position, critics claim that all pollution is an act of aggression against innocent people and that there should be zero toleration. People’s health and the quality of the environment are more important than company prodits.

Some have argued for a carbon tax as a simpler and more direct method; others argue for a complete ban on hazardous industrial byproducts. A carbon tax would be a simple tax on all carbon-based gas emissions, such as on carbon monoxide and carbon dioxide from cars and factories. (California, Maryland, and Colorado have implemented carbon taxes.)

For free market economists, the issue is whether there is indeed a provable case against polluters. If a plaintiff can substantiate that a corporation or individual does in effect cause harm, then that corporation or individual can be rightly sued, but there must be evidence of a crime taking place (Rothbard, 1982). So for the free market thinker, the problem lies in seeing the evidence of harm done. If there is no objective evidence of harm being caused, companies can continue to release their pollutants. If there is evidence, the companies should rightly be sued.

However, environmentalists reject this theory, because they believe that the evidence is accumulating slowly and from so many different angles that it is difdicult to pinpoint a certain company that is causing this pollution. Consider the death of a person who smoked, drank copious alcohol, ate unhealthy foods, never exercised or got out in the fresh air, was clinically depressed, and eventually died relatively young: What was the cause of death? A coroner may justly reply, “All of the above.”

Thus, trading in the right to pollute causes controversy. Environmentalists point out that it removes

Environmental Policies in British Columbia

Carbon Tax From Title: The World of Politics and the World of Science...

© Infobase. All Rights Reserved. Length: 02:06

Critical Thinking Questions

The spokesperson in the video states that “every economist out there will say that if you want to deal with this global warming problem you have to get ahold of emissions, internalize the externalities, pay the true cost of your behavior, that is, put a price on that behavior." What is his point?

According to the spokesperson, there are two ways of covering carbon emissions costs. First, the company itself should set the price of its product to

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responsibility for halting pollution, and even free market economists would admit that companies are being given a right to pollute when they are causing great harms.

include the true cost of carbon emissions. Second, the cost could be set externally through a carbon tax. Explain these two approaches and indicate which, if either, is better. As described by the spokesperson, what are some of the carbon taxes introduced in British Columbia?

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9.3 Habitat Destruction

Corporations are often guilty of massive habitat destruction. The lists are commonly catalogued in environmentalist publications, but even prominent business magazines list the ever-expanding disasters:

Three quarters of the world’s genetic material in plants may have been lost, and water tables are plummeting (“No Easy Fix,” 2011). The world’s coastlines are suffering from an increase in slime due to over dishing and habitat destruction (“The Rise of Slime,” 2009).

Some 20,000 species may be lost each year (Bird, 2011). In the last four decades, over 232,000 square miles of the Amazon rain forest was cut down (Haluzan, 2010).

The Environmentalist Critique

The destruction of the rain forests and the “dead zone” in the Gulf of Mexico are potent reminders that all is not well on the planet. The biologist E. O. Wilson wrote of the “mindless horsemen of the apocalypse” who were over harvesting and bringing foreign species, disease, and habitat alteration to the environment (1992, p. 253). For environmentalists there are several reasons why companies destroy habitats:

People are self-interested and shortsighted, and so too are companies that act to maximize this year’s prodits. Companies are not interested in the long-term effects of their actions, so they deplete sources and destroy habitats indiscriminately. Companies do not care for people’s property rights compared to the money they can earn, so land is cleared of people who happen to be in the way.

Animal activists within the movement say the same with regard to species: Companies do not care to consider the effects of their actions on local species. Population growth adds pressures on habitats as urbanization spreads outward and the demand for food and meat grows.

End users are also to blame: Few consumers consider where their products come from and the potential environmental impacts they have.

For environmentalists, the shortsightedness of corporations and consumers needs balancing by activism to remind people of their responsibilities of care toward the planet and its people and animals. Similarly, because animals are speechless and cannot understand why their lives are being disrupted, it is also up to activists to raise concerns and to try to stop habitat destruction.

Efrem Lukatsky/Associated Press

Activists from Greenpeace use a variety of means to bring attention to different environmental causes.

There are arguments about how this may be best brought about. Some demand that governments impose stricter controls on companies’ actions, where as others are skeptical of using political processes and prefer instead to aim at educating people, especially the young, to change their lifestyles. If people are taught about the crises affecting the many habitats in the United States and around the world, politicians and companies will then have to listen to consumers’ demands and expectations that they act responsibly.

Others, like the activists from Greenpeace, prefer direct action that draws media. In 2008, activists locked logging equipment and used a plow to carve “CLIMATE CRIME” in the grass next to a deforestation project in New Zealand. In 2009, they scaled Mount Rushmore to draw attention to global warming. In 2011, they gate-crashed a climate summit in Denmark and stormed several French nuclear power

stations in a nonviolent attempt to show how vulnerable the stations were. As a protest against Arctic offshore drilling, in 2015 they boarded a drill rig as it was being transported across the Pacidic Ocean.

Such activism attracts media attention, but the activists also run the risk of imprisonment and dines, so Greenpeace trains

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its activists to use nonviolent action to help reduce government attempts to punish them. More extreme groups push the boundaries, and various acts of Congress now prohibit doing malicious damage to property and harm to people in the name of environmental or animal rights. For example, some deforestation activists sabotage the equipment of logging companies, or nail metal spikes into trees that will snap the chainsaw’s blade if hit. These actions are not only illegal, but the Federal government designates them as acts of eco-terrorism, which bring on further punishments.

Can environmental activism—even when moderate—be justidied? Many environmentalists see an imbalance of politics and justice in favor of corporations, and their intention is to redress the disparity so the voices of millions of concerned but politically powerless people can be heard. The big companies raise millions from stock markets, have massive advertising budgets, and easily attract newspaper headlines; environmentalists, by contrast, do not have the resources to continually put their message out around the world. Against corporations’ huge budgets, environmentalists who wish to raise consciousness concerning habitat destruction sometimes use inexpensive methods that gain high leverage.

The Regulatory Response

Governmental regulations aim to address the full range of environmental problems caused by businesses. For example, in response to problems of habitat destruction, regulators accept that companies seek to maximize prodits, so they believe that by adjusting incentives in the right direction, the mass destruction of habitats can be avoided. For instance, to avoid deforestation, timber companies can be forced to plant new trees for every one they cut. Or the license fees allowing companies to exploit habitats could be used to set up more national parks.

Regulators must strike a balance between ensuring that habitats are managed well and providing local jobs. When regulators get the balance wrong, they can upset of lot of people dependent on the timber or quarrying industries; if the companies exploit too much, that in turn upsets environmentalists. Let’s look at the effects of Federal legislation on the timber industry.

The Organic Act of 1897

The Federal government owns almost 30% of the land area in the United States, and there are many competing pressures on its use from vocal environmentalists and equally vocal company and union lobbyists seeking to protect jobs. The Organic Act of 1897, signed by President McKinley, was the dirst law designed to administer and protect the government’s forestry reserves and to balance between industrial needs, conservation, and public access. However, in 1922, the Izaak Walton League, a conservation group, claimed that the act was not protecting the timberlands at all and that clear-cutting was being used to switch land use over to sheep grazing. It took 51 years for the group to successfully sue the government for permitting clear-cutting, and this in turn encouraged a new look at habitat conservation.

The National Forest Management Act of 1976

The Organic Act had failed to secure a balance, so it was replaced by the National Forest Management Act of 1976, which provided guidelines on where, when, and how trees could be harvested. For Senator Hubert Humphrey, the new act redlected a shift in philosophy:

The days have ended when the forest may be viewed only as trees and trees viewed only as timber. The soil and the water, the grasses and the shrubs, the dish and the wildlife, and the beauty of the forest must become integral parts of the resource manager’s thinking and actions. (as quoted in “National Forest Management Act (NFMA),” n.d.)

The act stressed the importance of the wider habitat and permitted logging only when the soil, slopes, and water dlows would not be permanently damaged. In turn, the act sought to avoid the short-term thinking that had led to clear-cutting under the Organic Act and instead to create a program of multiple and sustainable use that would last. However, pressure from timber companies has, according to environmentalists, led to a watering down of the act, which leaves the problem that corporations will increase pressure to permit exploitation.

As noted before, the goal for regulators is to maintain a balance between these competing needs. Yet for critics, it is an impossible task. The problem for some critics lies with the presumption of government ownership. If the government

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owns land, there will inevitably be condlict over use, and habitats will be either overexploited or under exploited, leaving all stakeholders unhappy.

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9.4 Resource Depletion and Sustainability

As the population of the world continues to grow, there are concerns not just for the habitats that are destroyed by humanity’s encroachment but also for the resources that we are exploiting. Similar principles to those discussed before, regarding habitat destruction, can guide our thinking here: If resources are held by governments, there is an incentive on the part of companies to exploit and remove as much as they can while it is available. In addition, there is the difference between depleting a renewable source such as timber and a nonrenewable resource such as oil that generates much concern.

For many decades, the notion of peak oil has haunted discussions of the oil industry. The argument is as follows: As the population expands, humanity’s use of oil increases. But the amount of oil in the ground is essentially dixed, and so as we consume more of it, we must be exhausting its stock. Eventually, there will come a point when we are using more oil than we are discovering or pumping to the surface. This is peak oil. After that, the price of oil will rise, causing economic disaster for the entire global economy, since so many products, from industrial chemicals and transportation to clothing, are dependent on oil.

The United States began oil production in 1859 and hit a peak of 10 million barrels a day in 1970; after some decline in subsequent decades, it continues around that level today. Nevertheless, 30% to 40% of U.S. oil is now imported, and as global oil production hits its peak and then begins to dwindle, the United States may dind itself struggling to maintain its oil-dependent economy: “We are in for an epochal period of contraction and strife around the world” (Kunstler, 2005).

In response to the threats of peak oil, governments and industries seek alternative energy sources through advancing technologies that will have fewer detrimental side effects. As the resource is depleted, its price will begin to rise, which in turn will encourage people to cut back on their consumption as well to purchase automobiles and engines that use oil more effectively. There is also the added incentive for companies to expand into other sources of energy production.

Larry MacDougal/Associated Press

Dependence on oil results in high amounts of pollution and risks creating global economic collapse once peak oil is reached and oil availability begins to decline.

What Would You Do?

As the CEO of a medium-size company, you are concerned with the impact of the company’s production on the broader environment. Your factory uses several hundred thousand dollars of electricity annually, and you have

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permit rights to release waste into the local river. Your predecessors have not had to worry about energy costs, and the attitude of the company toward pollution has always been one of “out of sight, out of mind.” If you engage in greener production, prodits may fall and shareholders may lose dividends. If the share price falls, you know that, in the current environment, you would be making the company and all of its employees vulnerable to a potential aggressive takeover.

1. Should you go green and invest in relatively more expensive lighting and photovoltaic panels on the roof? Why or why not?

2. Should you keep the company dinancially secure from predatory takeovers and maintain an environmentally “dirtier” corporation? Why or why not?

3. Do you consider your position to be determined by the interests of the shareholders alone—and your maxim therefore to look after dinancial affairs only—or do you see yourself as someone with a vision of a better world, one that would attract alternative investors and green consumers?

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9.5 Global Warming/Climate Change

One of the most potent concerns to emerge in the past 20 years is the effect of human activity on global temperatures. Since the 1980s, scientists have been worried about the effects that industrial and chemical production are having on the planet generally, rather than on a particular coastline, river, or landscape. First, there were concerns that dluoride compounds were affecting the ozone layer, as a hole in the ozone over Antarctica was opening up. This led to an international agreement to reduce and ban certain dluoride compounds. Then came concerns that our carbon emissions were having a global effect on world temperatures and, accordingly, on climate and sea levels. The two terms associated with this issue are global warming and climate change, which are commonly used interchangeably for the view that world temperatures are rising—although climate change used more accurately is a term that indicates that human actions are causing long-term, signidicant shifts in global weather systems, with effects as yet not fully known and much wider-ranging than a temperature increase.

Global warming is a contentious topic within society at large, and is even more so in the business community because of intense pressure to reduce carbon emissions, which can be very costly for companies. Because of these potential costs, businesses have every right to expect that social policies about global warming will be grounded in fact and not in fear or speculation. In our short discussion here, it is impossible to responsibly evaluate the scientidic evidence for global warming. However, it is sufdicient to note the current political reality: In the United States and throughout the world there are multiple laws aimed at reducing carbon emissions, and the scope of these laws is likely to increase rather than decrease in the near future.

Governments and businesses, political parties, lobby groups, and citizens have all offered opinions and recommendations to avoid global warming and climate change. The secretary general of the United Nations, Ban Ki-moon, stressed to businesses, “As business leaders, you must make it clear to your [political] leaders that doing the right thing for the climate is also the smart thing for global competitiveness and long-term prosperity” (as quoted in Wirth, 2009). For two decades the United Nations has held annual climate change conferences, including the 1997 landmark conference in Kyoto, Japan, which established the Kyoto Protocol to assess international progress in addressing climate change. But international treaties do not always meet expectations. Although 191 nations have ratidied the Kyoto protocol, the United States, while a signatory to the intentions of the conventions that led to the protocol, has yet to ratify the agreement. Following a recent U.N. conference, one commentator noted that business leaders were simply waiting to see what their respective governments would do (J. A., 2011). That is, corporations would act in response to what their national governments enacted rather than based on the idealism set out in an international treaty.

Environmentalist and Free Market Responses

While the public debate about what corporations should do about global warming continues, environmentalists remind us of the explicit effects of pollution: Habitats are being destroyed, and in the long run, we are harming ourselves. Therefore, they add, if we are heating up our planet, we have a duty to stop. Businesses are in a position to take a leading role in avoiding adding anything that could cause climate change or global warming. On the other hand, some free market advocates insist there should be noncontroversial evidence that some people and corporations are actually causing harm before they are punished or cajoled into changing their behavior through dines, taxes, and regulations. Criminal law is underpinned by the principle of a crime having been committed before someone can be blamed and charged. If there is no evidence, companies and people cannot be blamed.

Yet if corporations are more adaptable than governments, perhaps they can lead the way by taking ethical stands on global warming. When we think of Steve Jobs, the late CEO of Apple, we think of a man who could innovate and challenge our expectations in the computer industry. Body Shop founder Anita Roddick shifted thinking on cosmetics, and Ray Kroc of McDonald’s did so with regard to burgers. If these business people could shift our thinking on consumer products, then business can take up the mantle to become the proper vanguard for shifting our thinking on the environment.

In many respects, companies are leading the way. Forbes magazine presents a list of America’s greenest companies, where we dind Intel at the top of the 2011 list for having shifted electricity consumption to renewable sources by 75% (Dolan, 2011). In Austin, Texas, Austin Energy has a program for volunteers to have their home thermostats remotely controlled by the power company: If there is a surge in energy consumption because of a heat wave, the company has the ability to

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alter air-conditioning units. Similarly, some power companies are deploying smart meters designed to educate consumers about electricity use around the home as well as to let the power companies know of local power cuts (Patterson, 2010).

Alternative Energy Sources

One of the biggest areas of commercial activity has been the search for alternative and renewable energy sources. Companies have responded to concerns of peak oil but also government and consumer pressure to dind alternatives. One of those has been nuclear energy.

Following World War II, the trend was to encourage investment into nuclear energy as well as to continue mining for coal and drilling for oil and gas. By the 1960s, nuclear reactors were seen as offering a clean and efdicient method for keeping up with growing demand for electricity. But attitudes about nuclear power dramatically shifted when, in 1979, the Three Mile Island nuclear plant in Pennsylvania suffered a meltdown in one reactor that led to 40,000 gallons of radioactive coolant being poured into the river surrounding the island. Concerns over nuclear power have only escalated with subsequent disasters. In 1986, the Soviet plant at Chernobyl went into meltdown, as did three of the Fukushima Daiichi plant’s reactors in Japan following the dreadful tsunami in 2011. Indeed, there is a catalogue of 33 serious nuclear disasters around the world (Rogers, 2011).

Tellingly, the free market itself has serious worries about the safety of nuclear power: “Utilities considering building nuclear power stations discovered their investments could not be insured. [Lloyd’s] of London, known for taking risks on just about anything, would not write a policy protecting a nuclear power plant” (Keisling, 2011). If insurance companies do not wish to underwrite a venture, the message is clear: The risks are too high. When private insurance companies refused to underwrite Three Mile Island, even before the disaster happened, the U.S. government stepped in to subsidize the insurance bill with taxpayers’ money. This was, in effect, an admission that the industry could not go it alone and that a hazard had to be subsidized. This is analogous to subsidizing a commodity such as tobacco, which generates health costs for others as well as for the consumer. The nuclear industry is still being heavily subsidized by taxpayers around the world. In fact, in 2010, direct subsidies to nuclear power amounted to over $3 billion (“Energy Subsidies and External Costs,” n.d.).

For critics of nuclear power, the nuclear industry can be seen as too much too soon or, more pessimistically, as an uncontrollable human and environmental disaster for the present and future. It is inherently unsafe, and the nuclear industry itself is too tied up with local ofdicials, who turn a blind eye to safety issues. But there are also those who believe that lessons from such disasters have been learned and that nuclear power is a viable option. It has the potential to produce most of the nation’s electricity, and the technology and safety have improved in the wake of problems. Ultimately, in spite of the environmental risks, nuclear power may be here to stay as one of several energy alternatives to fossil fuels.

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9.6 Environmental Restrictions Versus Economic Freedom

Although the United States was founded on the principle of human freedom, successive U.S. governments have instituted laws prohibiting commercial exploitation of various landscapes that they deemed intrinsically worth protecting.

U.S. Laws and Private Trusts Restricting Access

In 1832, President Andrew Jackson encouraged the passing of the dirst congressional laws on areas of natural beauty deserving Federal protection. The dirst area protected was the Hot Springs Reservation (now National Park) in Arkansas. This was followed by Lincoln’s securing of the Yosemite Valley and the Mariposa Grove. In 1872, Yellowstone National Park was formed by Ulysses S. Grant to secure its protection. In 1916, Woodrow Wilson formed the National Park Service to oversee the management of the national parks and other natural and historical areas, which now number more than 400 and cover 84 million acres of land (National Park Service, 2015). Yosemite, Yellowstone, the Grand Canyon, and many other sites also became UNESCO World Heritage sites following an international ratidication of their special status to humanity as a whole. The United States played a leading role in developing World Heritage sites following a White House conference in Washington, DC, in 1965, and its proposals were eventually ratidied in 1972 by the general conference of UNESCO (“The World Heritage Convention,” n.d.).

Normally, we consider safeguarding key areas of outstanding beauty to be a role of government, but private owners also create legal trusts to protect the landscapes they love. There are currently over 37 million acres that have been voluntarily protected in the United States (Land Trust Alliance, 2015). Critics complain that governments tend not to manage property well and that the national parks should be turned over to private trusts. The argument is less with the impact of a potential industrialization of the parks than with the efdiciency of their management (Lora, 2007).

Private individuals, lobbyists, and governments show their concern with protecting the environment from industry, but does this run counter to the economic freedom of present or future generations to enjoy a cash dlow from beautiful areas?

The Problem of the Beautiful Valley

Consider a valley with a dlowing river and ancient woodland surrounding it, inhabited by a wide variety of dlora and fauna; the views are breathtaking and the air is fresh. The river is swimmable and has a broad range of dish; fruit grows well in the autumn, and the valley protects its inhabitants from the ravages of winter. It is an idyllic place to settle.

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A pristine landscape untainted by human interference: Is it better left alone or should it be developed so more people can have access to its resources?

From the environmentalist position, the pristine nature of the valley gives it a primary objective value that trumps all other human interests: It should be left as is, with only a few people being able to appreciate the rural paradise. From an alternative, commercial perspective, the land offers excellent possibilities for a tourist resort or a rural retreat for families or retired folk. If power and roads were brought to the area, the valley could provide hundreds of jobs and transform a zero-economic-value area into a multimillion-dollar complex of businesses and supporting industries. Where there is nothing but wilderness, the business investor sees the potential to serve other people through job creation and the building of accommodation and recreational units. It may be acknowledged that the environment suffers, but the benedits brought forward are for people. And corporations are in the business of serving people, not squirrels and dish. But should there be any restrictions on what they can do? And who should formulate those restrictions, and on what grounds?

The two opposing visions of exploiting the landscape and leaving it alone can merge into green business projects. These attempt to develop pristine wilderness for human enjoyment while not losing any of the ecological breadth and natural beauty found there. Imagine off-grid wooden cabins where environmentalists come to study and research the area and

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families come to get away from the urban sprawl, enjoy fresh air, and get closer to nature. If a middle path is attempted, sometimes well-meaning people fall afoul of laws that restrict environmentally friendly development. After all, corporations have to respond to the legal framework that they operate in.

Sometimes, however, the legal framework is not as objective and impartial to human and environmental interests as it may appear. Much legislation is the product of lobbying and of politicians’ trying to garner votes rather than stick to principles. Such actions may or may not redlect the values that the general population would support or that would redlect the environment’s needs. In the great emotional debate that sometimes affects environmental issues, governments and corporations haggle over what is known as a cost-benedit analysis of actions.

What Would You Do?

Imagine that you inherit an idyllic valley from a distant family member and you set eyes on it for the dirst time. Several thoughts rush through your mind. As a business venture, it could generate a healthy income from renting cabins around the water’s edge and selling hunting rights. However, it could instead be left alone for you to pass on to the next family member, and in your lifetime, you and your family could enjoy peaceful evenings by the campdire.

1. What do you envision—a thriving business venture or a valley to keep as it is? Why?

2. Would your mind change if a geologist informed you of rare minerals that had been detected along the

shore? Why or why not?

3. Do people have rights over such landscapes or, as some thinkers hold, do such landscapes have rights over

us? Explain your answer.

4. Suppose that you could turn the valley into a designated nature preserve that would generate signidicant

tax savings and allow educational research, but you would lose control of what could be done on the property even though you still owned it. Would that be an attractive option?

Cost-BeneNit Analysis of Environmental Responsibility

As the size of the Federal government, and thereby its jurisdiction, expanded following the New Deal of the 1930s, the justidication for government projects took on a more scientidic, or economic, approach. Rather than just proceed with a dlood control project, a dam, a power station, or a road through the woods, for example, government agencies were told to check whether the benedits outweighed the costs. After World War II, there was a global pressure on governments to ensure that they were acting efdiciently and spending taxpayers’ money wisely on large infrastructure projects such as dams and roads (Organization for Economic Cooperation and Development, 2006). Agencies and the economists they employed had found a fruitful ground to proceed with seemingly scientidic studies that would be used to explain the balance of merits to taxpayers. Cost-benedit analysis became increasingly popular with agencies and later with lobbying groups and corporations, who would come up with opposing numbers to justify their own positions.

However, in the past few decades, cost-benedit analysis has come under increasing criticism on philosophical and methodological grounds (Adler & Posner, 1999). For supporters, cost-benedit analysis has many advantages over simply plowing ahead with a project regardless of the effects on human and environmental welfare. The social benedits must be seen to outweigh the social costs across society. The analyst proceeds by adding up the willingness of people to pay for the benedits that come from the project, or their willingness to be compensated for any negative impacts. The benedits are then discounted over time, as present benedits are held to have a higher value than future benedits. In the adding up of values, society is held to be the sum of individuals, and each individual’s dinancial status should be accounted for. But rather than assuming that each person counts for one, cost-benedit studies typically assume that lower income or disadvantaged people should gain more than the rich when infrastructure projects are planned. This means that a short-term project can have a greater benedicial dlow than a long-term project, and one that brings more jobs to a disadvantaged area has a higher worth than one that brings jobs to an already booming area.

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Criticism of cost-benedit analysis comes from several areas:

The methodology can be questioned. The studies assume that poor people will enjoy higher benedits than the rich when projects create jobs, for instance. This is not necessarily the case as (a) an outsider cannot judge what is valuable to other people and (b) the jobs that are created may be geared mainly towards the rich. The weightings provided by the analysis can be criticized. People are generally given more weight than animals and ecological systems in-themselves, which is a debatable assignment of value.

Most importantly, the entire enterprise can be rejected on the grounds that the values imposed on companies and people are basically made up.

Social and Private Costs

In a market, the price redlects the private valuation that both the buyer and the seller place on the good or service. But what the market price does not redlect is the social value, or the social costs incurred in the production or consumption of the good or service. These social costs provide a rationale for intervention and hence for the imposition of taxes and regulations on trade. The distinction arises between the costs as assessed by the accountants of the dirm and the costs that are incurred by other stakeholders and by the environment but are not accounted for by the producers.

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For instance, a timber company cuts down trees that are then used by the paper industry. The products in turn are used by book producers and read by consumers. At each stage of production, a certain prodit is made, and the consumers exhibit their valuation of the books produced by either buying them or not.

But now consider the same scenario from an environmentalist viewpoint. The cutting of timber removes the natural habitat of several species that, in turn, have an effect on other species through the food chain. This produces an irreversible alteration that affects the ecological health of the environment. The trees become more susceptible to disease and the diseases spread, leaving the timberland weaker. At this point, the companies may react and alter their production methods because their dinancial health is also being threatened. But perhaps the company is only interested in reaping prodits from the landscape once and it possesses no incentive to alter its methods.

The private costs of a logging company often do not include the total environmental costs, such as the impact of logging roads in forests, the decrease in biodiversity, and the increase in atmospheric carbon dioxide. These hidden environmental costs are frequently described as negative externalities. Externalities are consequences of an economic activity that are experienced by unrelated third parties and not redlected in the market price of goods or services. Logging companies thus create negative environmental externalities—that is, environmental costs—that are passed on to outsiders, such as the public and governments.

The argument is then proposed that instead of the company charging the market price for the timber, a surcharge should be added to redlect the extra costs borne by the environment and people affected by the logging industry. This surcharge, typically a tax, forces the corporation to include the externalities in its own accounting; this can, depending on consumers’ responses, reduce the overall prodits of the trade and discourage timber companies from proceeding carelessly. However, if consumers’ demand is unaffected by the higher after-tax price, then the company’s prodits can indeed expand, which may be contrary to what the environmentalists expected. That, in turn, may encourage further logging.

Between the corporations and environmentalists, government ofdicials consider the nature and extent of the externalities. Each side may come up with wildly differing results, and the government ofdicial may then have to choose between the different reports. Imagine the pros and cons of building an airport in a small rural town and the impact that such an imposing project would have on the surrounding environment. The ofdicial may then try for a compromise to appease both sides as well as the local residents. At its best, this is what politics is about: dinding a working solution between different interest groups.

Despite decades of environmental laws and cost-benedit studies, pollution and habitat destruction continue, and in the wake of the Deepwater Horizon oil spill and the nuclear pollution pouring out of the Fukushima Daiichi nuclear power plant, the evidence of our impact on the world is growing.

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Conclusion

Environmental responsibility is a complex matter with competing values and priorities; it is now a permanent part of our moral, political, and economic landscape that cannot be ignored. It may take decades or even centuries to address the most troubling environmental problems, and, along the way, businesses will be at the forefront working towards solutions. Environmentalists remind us that the duty to care for the Earth is as important as the duty to respect one another. Cost-benedit analysis can tell us which approaches to environmental sustainability are economically realistic and which are not practical, at least for the time being. Governmental regulations can establish a level playing dield for business competition by mandating environmental policies that all industries must follow. Hopefully, with the cooperation of all key players, we can avoid the worst environmental calamities for ourselves and future generations.

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Summary & Resources

Chapter Summary

We began this chapter looking at different types of environmental concerns, the most serious of which may put the world community at great risk. Much environmental damage comes from the activities of business and heavy industry, and environmentalists argue that such practices need to change. The heart of the ethical issue rests on two different ways of looking at environmental responsibility: environmental anthropocentrism says that such responsibility is only indirect and derived from the responsibility to humans, and biocentrism says that such responsibility stems from a direct duty to the environment for its own sake. In either case, there is at least some agreement that the problem of environmental damage is genuine and needs to be addressed.

This chapter looked more closely at the issues of pollution, habitat destruction, resource depletion, and global warming. There are not only competing solutions to these problems by environmentalists and free market advocates, but regulations imposed by the government that often mediate between the more extreme ideologies. A common technique for making decisions in business is the cost-benedit analysis; one challenge with applying this methodology to environmental issues involves taking into account not just the private costs to businesses, but also the social costs—or negative externalities—that the government and society might incur.

Discussion Questions

1. Our thinking about the world around us has an effect on how we relate to and behave towards it. We are increasingly aware that many of our industrial and chemical processes have an impact on the world we live in. To what extent does learning about the environment have an effect on your personal choices and the purchases you make from businesses?

2. A power station is planned in your area and you have been requested to submit a primary cost-benedit analysis of the potential economic and environmental impact that the station could have. Prepare a list of pros and cons and a preliminary judgment on whether the project should go ahead.

3. The Federal government manages millions of acres of forest land across the country, but there are increasing pressures on the agencies to permit varying levels of commercial access to the timber, other resources, and water dlows. Should the government have an absolute prohibition on commercial access or should there be a working compromise with companies?

4. Free market supporters believe that many pollution and habitat issues could be resolved if the lands in question were turned over to private individuals and companies who would have an incentive to look after them better and even to help add value to them. Do you think that all environmental problems could be solved if the land, rivers, and coastline were privately held, or do you think there would be other problems to contend with?

5. When we dlick a switch on a device, we consume electricity, and often it is difdicult to know what the source of that energy is: nuclear, wind, solar, coal, water, or oil. Do you think electricity companies have a duty to inform customers how their electricity is produced, and would you be interested if they did?

Key Terms

biocentrism

The view that we have a direct responsibility towards the environment itself for its own sake and not merely because of the impact that treatment of the environment has on humans.

cap and trade

The term describing the right of companies to pollute up to a maximum and then trade any unused rights on the market.

carbon tax

A tax on any carbon-emitting factory or product, such as cars.

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climate change

The theory that human actions are causing a wide array of long-term changes to global weather systems.

emissions rights

The legal ownership, which companies can trade with other companies, of the right to pollute up to a maximum.

environmental anthropocentrism

The view that our sole moral responsibility is to human beings, and all obligations that we owe to the environment are only indirect, based entirely on how treatment of the environment impacts humans.

environmentalism

A social and political movement to protect the natural environment from destruction or pollution.

externalities

Consequences of an economic activity that are experienced by unrelated third parties and not redlected in the market price of goods or services

global warming

The view that pollution of the air is causing the Earth’s average temperature to rise.

Kyoto Protocol

An international declaration that sought to reduce carbon emissions around the world and reduce the threat of global warming.

peak oil

The notion that there will come a time when humanity has exacted a maximum amount of oil from the ground, after which oil supplies will deplete quickly.

Business Ethics Case Study 9.1: Interface Carpet and Environmental Sustainability

If we think about environmental responsibility in the business world, a commercial carpet company would not likely come to mind. Carpets are made mostly from petroleum products, manufacturing them requires massive amounts of energy, and they routinely need replacing, which means dumping the old ones into landdills. But, defying expectations, Interface Inc., the world’s largest manufacturer of modular carpets, has a radically progressive approach toward environmental sustainability that is redlected in every part of its operations. Credit goes to the company’s founder and long-time CEO Ray Anderson. He began his company in 1973 with the pioneering idea of modular carpet tile—carpet that is patched together on the dloor from squares of a few feet, rather than the normal broadloom variety that is laid down from long carpet rolls. His original design for carpet tiles was no more environmentally friendly than traditional broadloom carpeting, and Anderson states that for 21 years he gave no thought to the environment other than that it was the source of the raw materials that he needed in the manufacturing process.

But, pressured by customers who wanted to know his company’s environmental position, in 1994 he sought guidance from Paul Hawken’s book The Ecology of Commerce. In that work, Hawken relentlessly attacks industry and the entire economic system for destroying the environment. Within nature, everything is recycled, but industrial production is the opposite: it is linear in that it takes from nature, consumes non-renewable energy resources, and creates enormous waste and pollution. For Hawken, change will only occur when businesses follow an ecologic economic system that mimics the natural process of recycling. However, he argues, the changes that businesses go through must still honor market principles. Hawken writes,

No “plan” to reverse environmental degradation can be enacted if it requires a wholesale change in the dynamics of the market. We have to work with who we are—which includes our strong instinct to shop the market and buy products of comparable quality at the lowest price. We can’t just ask people to pay

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10

Investments

Learning Objectives

After reading this chapter, you should be able to:

Describe various ethical investments. Describe which investments are criticized by ethicists.

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Explain the basic ethics of saving and investing and outline the problems involved in corporate investments.

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Introduction

Ethically minded investors throughout the centuries have been concerned about where their money is invested and from where they make their returns. John Wesley (1703–1791), the founder of Methodism, argued that Christians should not invest in anything that could harm people, such as the slave trade. Later, religiously motivated campaigns also targeted alcohol, tobacco, and drug companies. There have been several notable campaigns in the 20th century:

In the 1930s, the Nazis waged a racist campaign against German Jewish businesses. In retaliation, Jews around the world boycotted German products. In the 1960s, Martin Luther King Jr. instigated a campaign against the Montgomery City Lines bus company for its treatment of Black riders. In the 1970s and 1980s, antiapartheid groups encouraged boycotting of companies involved in trade with South Africa. Since the 1980s, consumer activists have led boycotts against Nestlé for its aggressive marketing of infant formula in developing countries and the use of bonded and child labor in some of its cocoa plantations.

In each of these cases, there is a choice:

1. We can invest in goods and services that redlect our ethical considerations, or

2. We can simply aim for high rates of return with our investments and ignore ethics.

In letting ethics indluence their choices, investors hope to send a moral message to the market. Consumers today are more aware of commercial scandals, unethical marketing, and misleading advertising than ever before (Bibb, 2010, pp. 158–159). We can now search the Internet for product reviews from customers and professional groups and make better decisions about our purchases and investments. With just a little research, anyone can make ethics a factor in investment decisions.

At dirst, the idea of ethical investments was met with a good deal of skepticism about how well they would perform dinancially. However, ethical investments have done reasonably well on average, holding their own against traditional investments. This chapter will explain types of ethical investments and how ethics factors into even the most basic investment decisions.

In this photo, a Philippine worker encourages boycotting Nestle products, including a variety of milk substitutes.

Pat Roque/AP

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10.1 Ethical Investing

Investing is a thoroughly capitalist enterprise, since capitalism involves investing in a given business to improve its productivity. An investor channels his or her money into what will hopefully be a productive enterprise: a business, a real estate investment, stocks and commodities, or valuable items such as dine art or gold. A proditable investment either earns the investor immediate income, such as through dividend payments, or goes up in price.

In this section, we begin by looking at various types of ethical investing. The need for ethical investments emerged from a broader movement to encourage corporations to become more ethical and to satisfy investors’ consciences that they were putting their money into good practices. There are several terms used to describe ethical investments, which we discuss here.

Features of Ethical Investing

Ethical investing involves using an ethical model to screen companies to invest in. The model may be indluenced by religious considerations, such as supporting one’s denomination, or by political considerations, such as supporting liberal or conservative causes. Ethical investing commonly involves avoiding stocks related to armaments, tobacco, the sex industry, and alcohol, as well as incorporating stocks in ethical companies such as alternative energy companies. Ethical investing also draws on the more particular ethical convictions that the individual investor has, such as not investing in mining stocks or agrochemical companies.

A benedit of ethical investing is that the investment can truly redlect the beliefs of the investor. For instance, an investment manager may avoid putting money into governments that do not respect human rights or into companies that habitually pollute. Ethical investing has the potential for elevating moral priorities within the business world. Businesses are more likely to be ethical if they attract investors who are seeking ethically minded corporations; in turn, ethically minded investors can have an indluence on corporate culture and ethics.

Martin Rickett/EMPPL PA Wire/Associated Press

Sinful stocks, such as tobacco companies, are easy to avoid for ethical reasons, but not all morally questionable business practices are so clear.

A major challenge for ethical investing involves the issue of relativism: An ethical investment to one person may be an unethical investment to another. Recall that moral relativism implies that one person’s notion of good can differ from another’s. For example, a religious-minded investor may encourage making certain investments that a secular- minded investor would not touch. Ethicists want to create some common moral standards that we all accept, such as one that says it is wrong to invest in companies that have poor safety records or whose products cause ill health. But the ethical status of some business activities is not entirely clear. Take genetically modidied foods, for example, which are widely criticized for potentially harmful effects on human health and the environment. The two sides in this dispute may agree to disagree, but the average investor may be confused as to the right course of action.

Another major challenge in ethical investing involves difdiculties in

detecting morally questionable practices of businesses that might be hidden from public view. An ethical investor may easily avoid so-called sinful stocks, such as tobacco companies, whose very products are morally questionable. But many activities in the business world are less open to public scrutiny. For instance, an otherwise good company may move revenues into low-tax countries and hence avoid paying high rates of tax in host countries. This might alienate potential investors, but if they do not have access to that information then this will

not affect their investment decisions.

Sustainable Investing

A popular type of ethical investing today is sustainable investing, which occurs when investments are made to encourage socially responsible businesses to engage in environmentally sustainable projects. Investors might, for

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example, fund efforts to support local organic farming or help a business shift away from nonrenewable fossil fuels. Too often, venture capital investing in new and worthwhile projects can be withdrawn before the business has truly established itself. Sustainable investing seeks to remove that obstacle. Loans for sustainable investing typically bypass venture capital investing and instead go through cooperatives, credit unions, social banks, and microdinance institutions that have a more long-term commitment and missions that serve local communities.

Common criticisms of sustainable investing are that such projects may not produce great returns, and they can verge on being acts of charity. Second, it is not always apparent how long the investment is required. For instance, when investing in forestry development, the return from timber can be several decades out.

Community-Development Financing

Community-development Ninancing (CDF) invests where traditional banks and investing organizations fail to reach. The businesses or individuals may be in deprived areas, whose social and economic statistics do not encourage large dirms to invest there. CDF provides loans to people who would not otherwise have the correct credit score and people with business plans but no experience. The sources of CDF can be charities or governments, and their investments tend not to be for prodit. The great benedit of CDF is that the loans reach out into are as and people that would not otherwise get loans. For many ethically minded investors, this can be seen as an act of justice and of empowering poor people or areas.

CDF investment or dinancing does not always generate good returns for investors. The recipients are considered too “high risk” for conventional loans, and some are likely to prove poor managers of investment funds. Nonetheless, there are elements of CDF that can be proditable. Consider the individuals who would not otherwise get a regular bank loan, but whose sincerity and dinancial abilities do translate into a good investment in a start-up business. Averaging out the good with the bad is done in any investment portfolio, but CDF invokes the ethical motto that everybody deserves a chance to do better in life, and many recipients would otherwise remain poor.

Impact Investing

Impact investing is a recent strategy that uses investment dinance to make a positive impact across communities and environments, yet at the same time may seek a respectable return on those investments, depending on the situation. Impact investors are pro-business and support the role of market forces in the economy, so they certainly seek to maximize their returns. However, they wish to balance their returns by having a dedinable impact on social or environmental issues. Supporters argue that impact investors are optimistic about the role that business and investment can have, rather than relying on governments to lend to ethically minded people or projects. They believe that markets and businesses can be vehicles for good when they are blended with ethical values (Bugg-Levine & Emerson, 2011, line 472).

In many respects, impact investing redlects the general thrust of other forms of ethical investing, but with the added element that the investors are generally pro-market rather than skeptical of market forces and corporations. However, because of this pro-market interest, impact investors face regulatory hurdles and skepticism from other ethically minded investors. This is because impact investors would prefer to loan money to poor people struggling to make a go of a business than simply give them money. Impact investing also falls between dedinitions. Investors believe that they are acting charitably by extending funds where regular banks would not invest, but governments dind it difdicult to accord them charity or nonprodit status, even if in some cases the investors do not intend to make a prodit. If they borrow money on the market, rather than just raise it in a charity drive, this causes further confusion. As proponents complain, the regulatory system has yet to catch up with this dynamic form of ethical investing.

Socially Responsible Investing Funds and Green Funds

In the past decade, a special type of ethical investing has become popular that involves seeking out a group of ethical companies and compiling shares of their stock into investment funds. Socially responsible investing (SRI) funds, as they are called, are stock funds that invest in companies attempting to do good to more than just their shareholders. SRI funds tend to invest in companies that seek to help stakeholders gain a voice in company activities, are transparent and uphold

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good working conditions, and maintain good environmental standards and safe products. Broadly speaking, SRI fund managers screen their investments to

avoid some and include other companies that redlect their particular ethical model, invest in companies that invoke and encourage shareholder advocacy, and invest in communities and local nonprodit ventures.

SRI funds have grown to make up $6.57 trillion of the $17 trillion invested in mutual funds in the United States, supported by individuals as well as corporations, pension funds, nonprodit groups, and religious institutions with wealth to invest (Investment Company Institute, 2014; US SIF: The Forum for Sustainable and Responsible Investment, 2014). SRI funds typically do not invest in companies that make weapons, pollute the environment, test on animals, or use child labor. But they do try to invest in businesses that make a positive impact on the world, such as those creating green technologies and community- development schemes.

The rise of SRI funds coincided with the rise of what are called green funds, which aim to attract environmentally conscious investors. At dirst, green and SRI funds were generally lumped together, but as consumer groups and activists sorted through what their money was buying, investment companies became more specidic. Just because some investors held a very aggressive environmental position, this did not mean that the available SRI funds redlected their particular environmental preference (Harvey, 2008). Green funds, though, are tailored specidically to those preferences.

Ethical investment managers tend to begin by diltering out companies that do not match the fund’s ethical criteria. This is called negative Niltering. They may dilter out negatives such as companies connected with alcohol, gambling, the military, pornography, human rights abuses, health and safety problems, animal testing, genetically modidied foods, intensive farming, nuclear power, pesticides, and exploitation of people and resources in developing nations. Then the fund managers may use positive Niltering to gather other companies into the funds, companies that they know are socially responsible or green in their credentials. The managers may rank investments by community involvement, environmental improvement and management, equal opportunity, and positive environmental and human rights procedures (“Ethical Preferences Questionnaire,” n.d.).

A major challenge that ethical investment managers face is keeping current with the convictions of their investors. Ethical controversies are ever-shifting and based on recent events, media exposure, and even popular culture. Prior to Al Gore’s 2006 documentary “An Inconvenient Truth,” the issue of global warming would not likely have even registered on the radar of an ethically minded investor. One study showed that only 20% of ethical funds survey their investors about their ethical preferences. In the absence of such direct feedback, ethical funds have typically focused on the exclusion of “sin” stocks, such as alcohol and gambling, and have not paid enough attention to issues that are often of greater concern to investors, such as global warming and child labor.

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What Would You Do?

You would like to invest in a fund or a stock. A basic fund could gain 6% annually, whereas a fund aligned with your ethical concerns could gain 5% annually. If you invest $10,000, that’s the difference between $500 and $600, or the fund’s doubling in 11 years versus 14 years. A $100 difference a year may not seem much, but a 3-year difference in how quickly the fund doubles may be more unattractive.

1. As an investor, is it important for you to grow your wealth as quickly as possible, or are you comfortable giving up some of the potential returns in favor of a conscientious investment? Explain your response.

2. Based on a $100 difference in returns over the course of a year, would you invest in the ethical fund? Why or why not?

3. If the difference in returns were $1,000 a year, would your answer remain the same? Why or why not?

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10.2 Potentially Unethical Investments

In this section, we look at the kinds of companies that are of particular concern for ethical investors—both individual investors and fund managers. These include those relating to the environment, genetically modidied foods, pharmaceutical products, and military weapons. Many of the ethical criticisms of these companies are documented in alternative media sources earlier than in mainstream journalism, and sometimes the facts behind their objections are contested. Nevertheless, what matters most in SR investing are investors’ ethical perceptions of companies, and the ethical claims made by alternative media sources often have a strong indluence on public attitudes.

Environmentally Damaging Products

In recent years, public concern for the environment has focused on the notion of a “carbon footprint” to examine how much carbon production our individual and national lives generate. In 1990, U.S. greenhouse gas emissions were 6,100 metric tons; this number climbed to 7,400 by 2007, and dropped to 6,700 by 2013 (U.S. Environmental Protection Agency, 2015).

For investors who are conscious of the potential effects of carbon emissions on climate change or global warming, the corporate producers of carbon dioxide emissions are chief among the companies to be avoided.

But an issue arises here as to what constitutes environmentally destructive products. On face value, oil companies would rate low with ethical investments for being a primary source of greenhouse gas emissions. However, the stocks of some oil companies are sometimes included in ethical and green funds because their research and drilling procedures pass many environmental tests. Consider BP, which was implicated in the Deepwater Horizon oil spill in the Gulf of Mexico in 2010. For many, the company (which is listed on the New York Stock Exchange) would certainly be one to avoid. Yet Mark Robertson, an ethical funds adviser, has said that BP actually passes many ethical tests for its openness (as quoted in Pennells, 2010).

BP has also captured attention for investing millions in green technologies, which is favored by green investors, but it has been found guilty of other spills and invests heavily in lobbying American politicians, contributing over $2 million to Republicans and Democrats alike in the years 2004 to 2010 (Opensecrets, n.d.). This can put off ethically minded investors who do not wish their money to fall into political games. Some ethical funds prefer to avoid investing in the oil businessor industrial chemicals altogether, while others prefer a more pragmatic stance on companies like BP that are simultaneously striving to invest in future fuels.

Genetically ModiNied Foods

For many environmentally conscious investors, channeling money into renewable energy is an ethical investment, and one that also generates a good return.

Other environmentally questionable products that ethical and green-minded investors may wish to avoid include genetically modiNied (GM) foods. Critics believe that GM foods should be avoided for the environmental and health effects they might cause.

A case in point for many ethical investors is the multinational company Monsanto, which is one of the three largest GM seed producers in the world and spends millions on lobbying the Federal government (Associated Press, 2011). Part of Monsanto’s bad ethical reputation stems from its patented seeds that can only

Fuse/Thinkstock

GM Foods in America

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propagate once, thereby preventing the age-old farming practice of using seeds from this year’s harvest to plant next year’s crops. Another reason is that Monsanto patents its GM seeds and takes legal action against farmers caught growing its product without paying its licensing fee (Anderson, 2014).

Environmentalists such as the international group Greenpeace see GM food crops as a disaster threatening biodiversity and human health. Their stance is that science is useful for expanding our knowledge, but that does not mean it should be used in commercially motivated genetic experiments. In effect, corporations should not be deploying GM food because it quickly contaminates other crops around it and is in effect a form of pollution, whose results are not understood or even controllable (Greenpeace, 2015). For environmentalists, the intention of companies like Monsanto is to make money rather than to improve the health and well-being of the environment, and the results are at best unknown, and at worst harmful.

For defenders of investing in companies that produce GM foods, those companies could secure humanity’s food supply by producing weed- and pest-resistant crops. Not only might the investment reap great prodits

as the seeds are sold and propagated around the world, but humanitarian disasters would be avoided and people living on the margin of famine and death would be saved. GM crops require less use of pesticides and act to reduce greenhouse emissions (Bright Hub, 2011). What could be a better ethical investment? Critics reply that the evidence is not forthcoming (J. Smith, 2011):

In India, GM cotton has cost two states over $80 billion because of inconsistent crop performance. Shepherds have lost 25% of their herds grazing on GM crops. Cotton-gin workers have had to resort to antihistamines to go to work. Mice eating GM corn had fewer and smaller babies, and half of the babies died within three weeks. Cross-contamination with non-GM food crops could last decades.

There are no human clinical trials of the effects of GM foods. Since the introduction of GM foods in 1996, American health has been affected with increases in reported food allergies, chronic illnesses, and reproductive and digestive disorders.

GM-food corporations are thus targeted for exclusion by ethical investors on the grounds that their products cause more harm than good—or simply that we do not know what the long-term consequences of using GM seeds will be. For many, that is sufdicient to avoid investing in those companies.

Pharmaceutical Products

Initially, it would seem strange to raise moral questions about pharmaceutical companies because, for many of us, our very lives depend upon their products. But just as environmentalists see oil companies as being in collusion with politicians, covering up scandals, and hiding the true cost of burning fossil fuels, natural health advocates similarly complain of the pharmaceutical industry’s power, indluence, and unethical activities. For one, pharmaceutical companies are under increasing criticism for the effects that their drugs have, both on people and on the environment (Desai, 2007). In fact, research has shown that more than 100,000 deaths are caused by drug reactions each year in the United States (Null, 2010). This implies that an investment in pharmaceuticals could cause more suffering than an investment in an armaments company. Drug companies are also frequently caught deceiving the public; they paid $3.1 billion through the

GM Foods in America From Title: Transforming Food: A Global Look at Genetic Mo...

© Infobase. All Rights Reserved. Length: 03:02

Critical Thinking Questions

What are some of the reasons mentioned in the video for why genetically modidied foods are safe? Why does the spokesperson in the video avoid genetically modidied foods?

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U.S. Justice Department for fraud and false claims in 2010 (Harris & Wilson, 2010).

Defenders of pharmaceutical companies argue that the intention behind investing in drugs is that they will be used to help people. A right intention holds a good claim for many ethicists—as long as the investor intended to do the right thing, and the right thing is something that people would agree on as being right, then the investor cannot be in the wrong. But the response from other ethicists is simple: The road to hell is paved with good intentions. That is, it is not sufdicient for people to merely claim that they were trying to do the right thing; they actually need to do the right thing, and the right thing involves not just possessing a good intent but also generating benedits through the action.

Defenders of pharmaceutical companies also insist that drugs save the lives of thousands of people each day around the world, and for the most part that is true. To relieve suffering and to help save lives is noble. But, according to critics, the same argument could be made for the oil industry: Their noble aim is to help transport people from place to place efdiciently, but the side effect is pollution. The presence of a good does not necessarily cancel out the presence of an evil.

Critics of pharmaceutical companies also see the size and stature of the corporations as a threat to health and security: Indeed, some speak of the military-industrial-pharmaceutical complex that works to secure huge contracts from the government, including experimental drugs in the military and unethical experiments on children and minority citizens in the United States and abroad (Veracity, 2006). For example:

Jacklyn Hoerger was employed to treat HIV-positive children in a New York children’s home. She was not informed that the children were being given a secret and experimental drug. She was also told that if the children showed any serious health effects, this was because of their HIV infection. Moreover, if she or any other caregiver tried to take the children off the drugs, social work authorities threatened, the children would be taken away. This case, along with others, has caused international concern at the way pharmaceutical companies use children and minority citizens for experimentation. In 2005 the American Chemical Society (funded by pharmaceutical companies) proposed recording and measuring the short-term effects on children of inhaling, ingesting, and absorbing household chemicals—by recruiting parents and children from a poor, predominantly Black neighborhood in Duval County, Florida, for the study. Consumer activist groups protested until the experiment was dropped (“EPA & Chemical Industry,” n.d.).

iStock/Thinkstock

What’s in a pill? Some ethical investors avoid putting money into pharmaceutical companies that they believe regularly ignore ethical standards by selling products that have not been thoroughly tested, by not being explicit concerning the potential side-effects that products may cause, or by experimenting on vulnerable sections of the population.

Pharmaceutical companies’ intention is also to make money, and not necessarily to pursue science and health: This sometimes comes as a shock to scientists who work for the medical and pharmaceutical industries. One pharmaceutical sales representative turned health activist and recipient of a human rights award commented that she felt used and that her participation in the company she had worked for had been put toward harming people: “I had been used in the game, I literally was the one at the front lines, harming people—unintentionally—but I was responsible, and I carry a burden for that now.” The sales representative became a whistleblower in the industry, saying that she believed she had a moral obligation to educate others on the use of harmful pharmaceutical drugs (Luisa, 2011).

Medical and pharmaceutical-research institutions and journals have been criticized for not being scientidic, including recently by the prestigious BMJ, and for instead focusing on expanding prodits regardless of side effects in the population. The published literature has often overestimated drug efdicacy and not given enough information to clients to consider the risks (Chan, 2012). Evidence from whistleblowers at the large pharmaceutical companies has given health activists a reason to shun investing in pharmaceutical companies:

A Federal court awarded whistleblower James Marchese $1.6 million for advising Federal prosecutors that Cell Therapeutics was engaged in illegally promoting unapproved uses of the cancer drug Trisenox (Meier, 2007).

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The multinational pharmaceutical company GlaxoSmithKline was dined $750 million for knowingly selling tainted drugs. Whistleblower Cheryl Eckard had been dired after warning the company of problems with its plant in Puerto Rico, but still the company went on to sell the drugs (Harris & Wilson, 2010).

Other ethical issues arise for those who oppose abortion out of conscience and religious beliefs and would prefer not to invest in pharmaceutical companies that are linked to contraceptive pills and abortion drugs or that use aborted fetal tissue to produce vaccines (Catholic News Agency, 2009; McGovern, n.d.). Similarly, campaigners for alternative medicine have noted the connections between the pharmaceutical industry and legal attempts to outlaw a variety of complementary health products, ranging from vitamin supplements and herbs to raw milk (Adams, 2011).

Some pharmaceutical products do wonders: Painkillers and antibiotics have certainly made pain and disease more containable. But pharmaceutical companies’ quest to make money sometimes overrides their good intentions.

Military Weapons

The American armaments trade is enormous: In 2011, U.S. companies exported $66 billion worth of weaponry and associated military materials—78% of the world’s total (Hsu, 2012). The ethical problem with investing in armaments is that we have to consider not just the production of arms themselves, but also their use.

If a company produces weapons for defense of one’s home, only those who wish to avoid any type of weapon and violence will have an ethical problem with investing. Guns can also be used for other purposes, such as hunting and pest control. However, production of weaponry designed solely for the military often raises more ethical concerns.

Military arms can either be used for defense of the nation or be exported to other countries to earn prodits for American companies and create jobs. The American arms industry employs lobby groups such as the Aerospace Industries Association to advocate for fewer restrictions on their weapons’ buyers around the world. American companies want more of that market and complain that Federal licensing procedures are complex and need streamlining.

But this runs contrary to a general government policy not to sell certain kinds of military hardware abroad, or at least to control carefully who is buying what. In recent years, the U.S. government has tried to impose laws against companies aiding foreign nations at war or companies seeking to sell U.S. military technology without license. For example:

In 2007, ITT was dined $100 million for transferring night-vision goggles and technical data to Singapore (Ahlers, 2007). In 2012, United Technologies was dined $75 million for covering up the illegal sale of military software to China, which it used in development of an attack helicopter (Linebaugh, 2012).

Critics point out that even with the Foreign Assistance Act of 1961 and the Arms Export Control Act, which ban the sale of arms to countries that are at war or guilty of human rights violations, Congress has permitted the sale of weapons to many countries engaged in active condlict. This means that Congress has failed to generate an ethical framework for businesses to operate in. Nonetheless, businesses can, and do, make decisions independently of politicians and have the power to make the right choices about whom to sell to.

There is a chance that military hardware produced by corporations may be sold abroad for other countries to use for criminal purposes. This causes a problem in that the end use is contrary to national interests, which should trump any interest that particular individuals or companies have in investing in illicit arms dealing. Not surprisingly, many ethical funds altogether avoid investing in armament producers. But if it can be guaranteed that the end use is solely for the protection of the United States, then this might satisfy a concerned investor. If, on the other hand, the arms are to be sold abroad or to countries whose record on human rights is suspect, then many more ethical investors will justly have qualms.

Consider: Is it right to invest in armament production in the knowledge that the weapons could be used by tyrannical regimes around the world, or even against American troops in a future war? The latter is harder to predict, but the former can be examined on how the country has recently behaved towards its citizens or how it acts in war. If the country has no intention against the United States, corporations should be still concerned about the end use of ammunition, missiles, tanks, and jet dighters. Consider the staggering amount of bloodshed that has resulted from the export of American

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military weapons:

In the 1990s, the United States aided and supplied the Rwandan Patriotic Army, which, according to the Washington Post, later used the weapons in the horrendous genocide that took place in 1994 (Duke, 1998). In 2011, American companies were accused of selling arms to countries seeking to suppress democracy across the Middle East. Critics noted that arms sales were going to be used to put down dissenters, perhaps people dighting for democracy (“Obama Administration Approved,” n.d.).

Weapons manufacturers are interested in expanding turnover and increasing prodits like any other company, but the end product is used to create injuries, suffering, and death in places around the world. This is what investors may dind objectionable. In the aftermath of the attacks of September 11, 2001, President Bush permitted the sale and transfer of military technologies to countries who were up until then banned from buying from the United States. As long as a country pledged to dight terrorism globally, it could purchase arms. Since then, human rights violations in those countries have worsened (Stohl, 2008). Investors may have made good money from the corporations selling the arms, but their investments have helped to cause suffering and bloodshed around the world. Because of the intimate connection between military products and human suffering, ethical fund managers usually avoid armament producers.

A tank is used to threaten protestors in Egypt during the Arab uprisings in early 2011. The Egyptian army had been sold many Western military products over the past decade, and the people demanding political change feared that they would be used to repress a revolt.

Khalil Hamra/Associated Press

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10.3 Investing Versus Saving or Spending

Throughout this chapter we have examined the nature of ethical investing and the types of companies that ethical investors avoid. In this dinal section, we will look at the nature of investment more generally, and whether we have special social obligations to spend our money rather than invest it.

The Economic Harm of Hoarding

Suppose that you take all the money that you have and put it into a safe-deposit box. You neither spend it nor invest it; it simply sits there untouched. This is the action of hoarding money—that is, keeping money out of circulation. Hoarding money is traditionally seen as harmful to the community, since it restricts the dlow of income and spending, which are necessary for keeping the economy going (Clark, 2009). Indeed, President Hoover lambasted hoarders in 1932: “The battlefront today is against the hoarding of currency, which began about 10 months ago, and with its growing intensity became a national danger” (as quoted in G. F. Smith, 2009). The hoarder is thus condemned for acting unethically by not sharing his or her wealth and by helping to prolong recessions and mass unemployment.

Let us grant that hoarding money does hurt the national economy, just as Hoover argued. Does this mean that people have a social obligation to not hoard their money? Not necessarily. People hold onto their money for a variety of reasons, the biggest of which is uncertainty. If people believe that the nation will soon be at war, they will tend to stash cash away. Entering a recession, people tend to hoard because they fear they may lose their jobs and need avoid luxury expenses such as vacations or new technologies. To some, hoarding cash can even be considered a virtuous action of being prudent and safe with money and making sure that there is cash ready in case of hard times (Levin, 2000; G. F. Smith, 2009).

The choice to withhold money from circulation may be seen asa personal one, not a social one. Viewed this way, it belongs to the sphere of personal ethics, like friendship, and respect must be given to other people’s decisions to save their money. To demand that consumers spend their money in troublesome times is, according to this view, comparable to asking them to sacridice their goals and prudence to make the economy look better for politicians.

The same is true of companies. When demand falls for their products, there is only so much money available that can be used to stimulate purchases through means such as advertising before the pot runs out. When troubled times are upon companies, it can be wiser to increase cash holdings, in order to protect present employees and maintain dinancial health, than to deplete them. Thus, even if hoarding money does hurt the economy, there may be good reasons for an individual or company to hoard money anyway.

Does Investment Harm Recession Recovery?

The anti-hoarding argument is often adapted into an anti-investing argument. According to this view, investing money is almost like hoarding money, and what we really need to do help the national economy is to spend our money, not invest it. Barely a week goes by without an economist arguing that spending money will help the nation recover from recession. Thanks to spending, retail outlets will demand more supplies from wholesalers, who will in turn demand more from manufacturers. If people increase their consumption, this argument goes, they will be doing everyone a favor by encouraging an expansion of trade and hence employment. Rather than save money to invest, people should be encouraged to spend their money. In turn, companies should spend what prodits they earn to expand their factories, hire more people, and advertise their products widely. This will create jobs and help economic growth or help the nation recover from a recession. Thus, investing takes money and productivity out of the economy, and what we need instead is for people to buy products.

There are two main problems with this argument. First, each of us has a personal responsibility to look after our own accounts and to save and invest wisely. If people spend all they earn, they are not acting prudently by putting some aside for the unexpected. And if they do not invest, they are relying on earning an income for the rest of their lives rather than having a pension or other retirement fund. Indeed, to spend money at the malls in the hope of getting an economy out of a recession would be dinancial suicide for many people who live on the margin of debt.

The second problem is with the very idea of spending for immediate gratidication. Part of being a responsible person is

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refraining from enjoying immediate pleasures in favor of putting something aside for the future. We face this challenge every day: The cake is tempting, but what about our health? The new car is attractive, but what about the payments we will have to make if we buy it? Ethicists have long discussed the arguments for and against living a pleasure-seeking life. Most have argued that a critical element of living a civilized existence is that we learn to contain our immediate instincts in favor of cultivating patience, prudence, and foresight. We should give thought to the future when our incomes may fall and our needs may increase; we should learn habits of abstention, self-control, and wisdom.

The same is true of companies. In business, money can be spent before it is even earned, a problem that causes many businesses to fail. Similarly, prodits can be squandered on impressive buildings, private jets, and dive-star hotels: Money is used up to help the current management team look good rather than put aside to invest for tomorrow’s needs. When appearances are more important than growing the corporation, trouble is usually brewing.

Thus, even if it is true that spending money will help the country recover from a recession, that is only one consideration. This must be balanced against personal economic stability and the need to resist a purely pleasure-seeking lifestyle.

What Would You Do?

Imagine that your neighbor works for a troubled local car plant and that the recession is threatening her job. You know that if you purchase one of the local company’s cars, it may help save your friend’s job. However, you could also choose to invest your money in something that would bring you and your family a higher return.

1. Would you buy the car or invest your money elsewhere? Explain your response.

2. One of the companies you could choose to invest in is a competing auto company. Would you invest in a

competitor’s company? Why or why not?

3. Would you tell your friend of your decision? Why or why not?

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Conclusion

Ethical investing involves idealistic thinking. Business ethics requires thinking above the dollars and cents and making policy changes for the better on such issues as employment, environmental effects, and corporate culture. Ethical and environmental idealism can of course be expensive, as it may cost a company or an individual more to live a greener lifestyle, for instance. For investments, it may mean giving up a potentially higher return from corporations that are less ethical or less green.

Nonetheless, there is evidence that the demand for ethical investments has grown enormously, and their returns are holding up well: The cost of being ethical may not be painful. Some ethical investments do not match other funds’ returns; still, the fact that they exist and have grown also attracts attention from fund managers, investors, company leaders, and the media. In turn, as investments are channeled into ethical ventures, they can start to earn similar returns.

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Summary & Resources

Chapter Summary

This dinal chapter brought together the various ethical strands of this book and summarized a few of them in the problem of investing. We noted that there are several kinds of ethical investing; They range from supporting communities or individuals who would not get traditional bank loans to investing in a manner that can have an ethical impact on life and the world.

The chapter outlined some of the issues involved in several of the key industries that ethical investment managers may avoid: environmentally harmful products, genetically modidied foods, drugs, and arms. In each example, debate rages over the balance to be made between making a return on the investment and investing in products and services that will not cause intentional harm to people or the environment.

Regarding the ethics of saving or investing one’s money: Some economists claim that saving too much money is acting unethically. Others believe that saving is the leverage people and societies need to progress and to gain wealth.

Discussion Questions

1. The English village of Todmorden has turned over unused land to planting vegetables and herbs, which anyone can then take for free (Incredible Edible Todmorden, 2015). In giving up time, energy, and money to buy the plants and seeds, the people provide for the town’s needs. As one of the writers on the website Incredible Edible Todmorden wrote, “The ethos is not about me me me. It is about us us us, thru the shared medium of food and towards a sustainable, survivable future” (Nick, 2009). The proponents believe that if we move from the self-seeking individualism of the marketplace, we will create a more harmonious and environmentally friendly life. In thinking about investing, should we consider not just our own immediate and future needs, but also those of our community? Of our nation? Of our planet?

2. After years of hard work and study that has paid off well, do you believe that you have a duty to engage in impact investing or setting up community-development dinancing to help the neighborhood that you came from?

3. Reviewing the investments in your portfolio, you realize that the carbon footprint connected to your investments is relatively large, but your oil company stock also pays for the family vacation each year. The company’s website says that it uses a high proportion of its prodits to invest in green and renewable fuels of the future. Do you keep the stock or sell?

4. A friend is excited about a new stock opportunity with a medical company whose products could sell well around the world; having reviewed some of the examples in this chapter, you are no longer certain about the benedits that companies say will emerge from their products, and you are concerned that the company’s history includes using animals and vulnerable people in experiments. Do you ignore the company’s past and research the current product, digging around for alternative ethical viewpoints, or do you accept the possibility of earning a simple prodit?

5. A local American weapons company whose stock you invest in employs thousands of people in the neighborhood, but you become aware that its products are being used against civilians dighting for human rights in other countries. Should you sell your investment?

Key Terms

community-development Ninancing (CDF)

Ethical investments in community projects using nonprodit status or charitable funds to encourage growth and development in rundown communities.

ethical investing

Investing according to an ethical model or the particular ethics of an individual investor.

genetically modiNied (GM) foods

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Seeds that have been genetically altered to remove a weakness or to improve a strength in a crop.

green funds

A pool of investment funds designated for environmental projects rather than just ethical funds.

hoarding money

The act of stashing money away rather than investing in something productive.

impact investing

A pro-market, ethical approach to investments designed to have a good impact on the world.

negative Niltering

Taking certain companies or industries out of a portfolio of ethical investments.

positive Niltering

Adding certain companies or industries into a portfolio of ethical investments.

socially responsible investing (SRI)

A general term that describes the intention to invest in ethical investments.

sustainable investing

An ethical investment vehicle that intends to maintain investments in worthwhile community or environmental projects over a period of time rather than pull out capital on short notice.

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with pornography or by having policies that undermine the “Sacrament of Marriage.” This includes the elimination of hotels that provide pornography in their rooms. To distinguish its funds from more liberal SRI funds, Ave Maria designates theirs as “morally responsible investments” (MRI). The dive-year average for Ave Maria’s highest- performing fund (AVEGX) is 15.73% and its lowest (AVEMX) is 10.6% (Morningstar, 2015a).

A mutual fund company that targets evangelical Christians of all denominations is The Timothy Plan. This fund dilters out companies associated with abortion, pornography, LGBT values, anti-family entertainment, alcohol, tobacco, and gambling. Its highest-performing fund (TAAGX) has a 15.24% dive-year average. For Muslims, there is Amana Income (AMANX), with a dive-year average of 11.56% (Morningstar, 2015a), which negatively dilters companies involved in alcohol, pork, gambling, pornography, and tobacco.

With all of these funds diltering out morally tainted companies, the question naturally arises: How would a fund perform that focused just on these excluded companies? The Barrier Fund (VICEX) does just that and it has delivered a dive-year return of 15.13%, slightly higher than most SRI and religious funds (Morningstar, 2015a). The Barrier Fund was founded in 2001 under the name “Vice Fund.” Then, as now, it concentrates on what are often called “sin stocks”—companies connected with tobacco, alcohol, gaming, and weapons/defense. These areas, according to the fund managers, have potential for high returns because they do not face new competition, their marketplace is global, and there is a consistent demand for their products, regardless of economic condition.

Dan S. Ahrens, one of the fund’s early managers, discusses this strategy in his book Investing in Vice (2004), and he argues that even during bad economic times, certain habits do not change. Targeting sin stocks indeed paid off in the fund’s early years when it performed almost two times better than the S&P. Hoping to spark interest with this investment concept, its early prospectus openly acknowledged that it favors products or services that are often considered socially irresponsible. But after about 2009, the gap between the fund and the S&P narrowed, and in 2014 it changed its name from the Vice Fund to the Barrier Fund. The new name emphasizes its general investment strategy and avoids alienating potential investors with its earlier controversial fund name.

While the Barrier Fund is currently the only mutual fund to invest solely in sin stocks, two others mix a sizeable amount of these stocks within their portfolios. They are the Fidelity Select Consumer Staples Fund (FDFAX), with a recent dive-year return of 13.76%, and Rydex Leisure Fund (RYLIX) with a return of 18.61% (Morningstar, 2015a). Like the Barrier Fund, these two funds have more delicate wording in their names, where “staples” suggests consistent consumer purchase, and “leisure” suggests innocent fun.

Discussion Questions

1. The goal of most mutual funds is to meet or exceed the returns of a stock index like the S&P. Most SRI and religious funds lag a little behind the indexes. Are your personal convictions strong enough to invest in them anyway, rather than going with a safer bet like the Vanguard 500 Index Fund?

2. Suppose that you have no strong opposition to sin stocks. Would you nevertheless consider investing in the Timothy Plan fund that currently outperforms sin stock funds?

3. Suppose that you oppose sin stocks. Would you nevertheless consider investing in the Barrier Fund if it consistently outperformed the S&P like it did in its early years?

4. If you had a choice, would you work for one of the saint or sinner mutual funds? Explain why or why not.

Sources: Ahrens (2004), Morningstar (2015a), Morningstar (2015b), US SIF: The Forum for Sustainable and Responsible Investment (2015).

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Glossary

accounting fraud Falsifying a company’s dinancial statements in an overtly illegal way. acquisition When a larger company buys a smaller company, which is then swallowed up and loses its identity within the

larger one.

afNirmative action The policy of improving the opportunities of those within historically disadvantaged groups through positive measures beyond neutral, nondiscriminatory action.

afNirmative action plan (AAP) U.S. Federal requirement for assuring that employers implement afdirmative action in their employment practices.

alienated labor Labor that a worker is forced to give to a factory owner in a way that does not allow the worker to participate in the total creation of the object.

arm’s length principle An international law stipulating that the set exchange price in transfer pricing should be the same regardless of whether the two companies were part of the same corporate structure or unrelated with each other.

bailout A government practice of giving dinancial support to a company that has serious dinancial problems. bait and switch An illegal sales strategy in which customers are attracted into a store to buy an artidicially low-priced

product and then are persuaded to buy a more expensive one.

behavioral targeting A marketing technique that uses data collected from the user’s web-browsing history to create personally tailored advertisements; sometimes called “creepy marketing.”

bid rigging When competing businesses agree that one of them will place a bid on a contract at a predetermined price. biocentrism The view that we have a direct responsibility towards the environment itself for its own sake and not merely

because of the impact that treatment of the environment has on humans. board of directors Group of individuals elected by corporation shareholders to manage the corporation.

bona Nide occupational qualiNications Qualidications that relate to an essential job duty and are reasonably necessary for the normal operation of that particular business or enterprise.

bourgeoisie Karl Marx’s term for business people who owned the means of production within society and oppressed their workers.

bribery A situation in which a person, such as a government ofdicial, agrees to be paid to act as dictated by an interested party, rather than doing what is required by his or her ofdicial employment duties.

burden-shifting formula The legal strategy for a minority employee where the burden rests on the employer to show that its behavior was not discriminatory.

cap and trade The term describing the right of companies to pollute up to a maximum and then trade any unused rights on the market.

capitalism The economic theory that maintains that (1) personal self-interest, not community interest, motivates economic development, (2) the major sources of society’s economic production should be privately owned, not governmentally owned, and (3) economic planning should be decentralized through market competition, not centralized through government policy.

carbon tax A tax on any carbon-emitting factory or product, such as cars.

care ethics The theory that women see morality as the need to care for people who are in situations of vulnerability and dependency.

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categorical imperative The moral principle proposed by Immanuel Kant that we should treat people as an end, and never merely as a means to an end.

caveat emptor Latin expression meaning “buyer beware,” expressing the theory that consumers are responsible for researching their purchases in advance and for understanding that sellers have a dinancial interest in selling.

child advertising The marketing strategy of directing an advertisement toward either a young child under age 8 or an older child between ages 8 and 12.

class struggle The socialist view that through- out history, societies have evolved through condlicts between the social classes of those who do the work and those who are in charge and benedit from that work.

Clayton Antitrust Act of 1914 U.S. Federal law that restricts specidic types of business practices that might potentially lead to anticompetitiveness, such as mergers and acquisitions that aim to create monopolistic power.

climate change The theory that human actions are causing a wide array of long-term changes to global weather systems.

communism A radical form of socialism that aims to abolish all social classes, private property, and government.

community-development Ninancing (CDF) Ethical investments in community projects using nonprodit status or charitable funds to encourage growth and development in rundown communities.

community service order A corporate punishment in which a company must participate in some project that benedits the community in some way.

comparative advertising An advertising strategy in which a product or service is said to be superior to that of its competitors.

conNlict of interest When a person has two or more condlicting loyalties that can compromise the person’s impartiality in working for a business or preparing a report.

consumer advocacy An organized effort to protect consumers against dangerous products, unfair pricing, deceptive advertising, and manipulative sales practices.

consumer autonomy The notion that consumers should be in charge of determining what to purchase after being supplied with relevant information.

Consumer Bill of Rights Four consumer rights articulated in a 1962 speech by President John F. Kennedy: (1) the right to safety, (2) the right to be informed, (3) the right to choose, and (4) the right to be heard.

consumer boycott When a group of people act together to abstain from buying from or dealing with a business. Consumer Product Safety Commission (CPSC) U.S. Federal agency founded in 1972 for the purpose of protecting the

public “against unreasonable risks of injuries and deaths associated with consumer products.”

consumer retaliation When individual consumers or consumer groups express dissatisfaction with a company through some effort that harms it dinancially, e.g., boycotts, complaints to government agencies, or civil lawsuits.

Consumers Union Nonprodit consumer-advocacy organization founded in 1936; publisher of Consumer Reports magazine.

corporate codes of ethics Detailed accounts of the principles of conduct within organizations that guide decision making and behavior.

corporate death penalty A corporate punishment in which a company is forced to go out of business, such as by the revocation of its corporate charter.

corporate incapacitation A corporate punishment in which a court issues an order to restrain the activities of a

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corporation in some area of business.

corporate moral agency The concept that businesses are morally responsible for their actions, similar to how individual people are morally responsible for theirs.

corporate shaming A corporate punishment in which the government requires a guilty company to make a public announcement that threatens its reputation and social standing.

corporate social responsibility (CSR) A corporation’s efforts to take responsibility for its effects on the environment and its impact on social welfare.

corporation A legally recognized independent entity owned by shareholders in which the corporation, and not the shareholders, holds legal liability.

corrective advertising A punishment that requires companies to publish notices that correct consumers’ mistaken impressions created by deceptive advertisements in the past.

cost-beneNit analysis The economic modeling of a project to check whether the benedits outweigh the costs. creation by statute The legal concept that corporations come into existence through the creation of a legal document

called a charter.

creative accounting The use of loopholes in dinancial regulation to present digures in a misleadingly favorable light.

credit check Inquiry into a person’s dinancial information by an organization, often for employment purposes.

criminal background check Inquiry into a person’s criminal records by an organization, often for employment purposes.

crony capitalism A government practice by which businesses receive special economic benedits from a government such as tax breaks, grants, economic development subsidies, or contracts.

deceptive advertising Advertising that intentionally misleads or confuses consumers. default opt-in A feature of sales contracts where the customer is automatically enrolled in some unnecessary and costly

secondary service, typically without knowing about it.

deterrence A justidication of punishment in which an offender is punished to set an example that might discourage others from committing similar crimes.

direct evidence of discrimination Overt written or oral statements by employers that display their discriminatory intention.

direct governmental regulation When specidic regulatory policies are established by an actual branch or agency of the government, such as Congress or the SEC.

direct-to-consumer advertising An advertising strategy, used especially by pharmaceutical companies, where patients are targeted rather than health-care professionals.

discrimination The unjust or prejudicial treatment of people on arbitrary grounds, such as race, gender, or age, which results in denial of opportunity, such as public accommodations or employment.

divine command theory The view that moral standards are created by God’s will. due diligence in accounting Checking all the key dinancial facts carefully rather than assuming that they are correct. due diligence in hiring An employer thoroughly researching a job candidate before hiring him or her. duty theory The view that moral standards are grounded in instinctive obligations (duties).

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emissions rights The legal ownership, which companies can trade with other companies, of the right to pollute up to a maximum.

employment discrimination The prejudicial treatment of people in hiring, promotion, and termination decisions. environmental anthropocentrism The view that our sole moral responsibility is to human beings, and all obligations

that we owe to the environment are only indirect, based entirely on how treatment of the environment impacts humans. environmentalism A social and political movement to protect the natural environment from destruction or pollution.

Equal Employment Opportunity Commission (EEOC) U.S. Federal agency responsible for enforcing Title VII of the Civil Rights Act by setting policies for dealing with discrimination complaints, holding hearings on specidic complaints, and diling discrimination suits against employers.

equal employment opportunity (EEO) laws The laws and regulations that are jointly enforced by the EEOC and OFCCP. equal opportunity The policy of treating employees without discrimination.

equal results An afdirmative action concept of achieving proportional minority representation in a work or economic environment where minorities are presently underrepresented.

equity Nine A corporate punishment in which a dine payment is made in shares of the company, not in money.

ethical investing Investing according to an ethical model or the particular ethics of an individual investor.

ethics An organized analysis of values relating to human conduct, with respect to an action’s rightness and wrongness.

ethics ofNicer An administrator within a company who holds workers accountable to the company’s ethical standards.

externalities Consequences of an economic activity that are experienced by unrelated third parties and not redlected in the market price of goods or services

external whistleblowing When an employee makes a complaint to an external authority such as the police, the SEC, or another Federal agency.

extortion When an ofdicial requires payment to perform his or her otherwise normal duties. False Claims Act of 1863 U.S. Federal law to assist the government in retrieving monies from people and corporations

who are defrauding it.

Federal Sentencing Guidelines for Organizations (FSGO) U.S. government guidelines for sentences imposed by Federal judges, which include restitution, remedial orders, community service, dines, and jail terms.

Federal Trade Commission (FTC) U.S. Federal agency established in 1914 to prevent businesses “from using unfair methods of competition in commerce” and to “protect consumers against unfair, deceptive, or fraudulent practices.”

Niduciary duty A legal duty to act solely in another party’s interests. Niduciary trust The trust that nonprofes-sionals have in the dinance and accounting profession that members of that

profession will act properly.

Financial Accounting Standards Board (FASB) An independent board set up by the dinancial industry to promote standards.

Nine A payment of money imposed as a penalty for an offense.

Food and Drug Administration (FDA) U.S. Federal agency formed in 1927 for the purpose of carrying out the tasks specidied in the Pure Food and Drug Act of 1906.

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Foreign Corrupt Practices Act A U.S. Federal law regulating the operation of U.S. companies in foreign countries, which includes an anti-bribery provision.

free market economics The view that businesses should be governed by the laws of supply and demand, not restrained by government interference.

free trade The concept that trade across national boundaries should take place without interference from the respective governments.

generally accepted accounting principles (GAAP) The standards formed by the dinance industry on accounting and dinancial reporting.

genetically modiNied (GM) foods Seeds that have been genetically altered to remove a weakness or to improve a strength in a crop.

gift giving Presenting property to an ofdicial, which includes neither implicit nor explicit agreements, even if the giver intends the gift as an inducement.

glass ceiling A discrimination situation in which women and minority workers hit a level beyond which they cannot advance, while their White male counterparts continue to progress.

globalization The expansion of international trade; the term also implies a movement towards a global culture and, by implication, ethics.

global warming The view that pollution of the air is causing the Earth’s average temperature to rise. government-mandated self-regulationWhen, in lieu of direct government involvement, the government mandates that

a private self-regulatory organization set policies in a given market and defers to that organization.

government regulation Rules and policies imposed by the government on various aspects of commerce within a country.

grease payment A payment made to an ofdicial to accelerate a decision which would otherwise be made.

greed is good The view that, in the business world, the human drive of self-interest directs our energy and creativity.

green funds A pool of investment funds designated for environmental projects rather than just ethical funds.

greenwashing A term referring to pretended efforts at environmental responsibility and, more broadly, at corporate responsibility.

group compensation An antidiscrimination policy in which each individual within a disadvantaged group is compensated based purely on his or her membership in that group.

groupthink The practice of thinking or making decisions as a group in a way that discourages creativity or individual responsibility.

Guidelines for Consumer Protection Guidelines established by the United Nations in 1985, which include seven fundamental consumer needs that require protection.

harm principle The view that governments may restrict our conduct when it harms other people. hoarding money The act of stashing money away rather than investing in something productive.

human rights Rights that are not created by government, but held by all people around the world regardless of the country in which they live.

impact investing A pro-market, ethical approach to investments designed to have a good impact on the world.

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impartial oversight The ethical mindset of addressing a business situation without any self-interest involved. incapacitation A justidication of punishment in which removing an offender from society prevents the offender from

committing similar crimes.

income inequality Indirect evidence of discrimination based on an analysis of the extent to which income is distributed in an uneven manner among a population.

indirect evidence of discrimination Behavior of a company that implies discriminatory conduct. individual compensation An antidiscrimination policy in which each person is compensated based on his or her

individual claim.

insider According to the SEC, any company ofdicer or director, and any shareholder owning more than 10% of the company’s stock.

insider trading This occurs when an insider, as dedined by the SEC, trades on information that has not yet been made public. Insider dealing is illegal, although ethicists debate whether it should remain illegal.

intellectual property (IP) Intangible assets protected by law, such as copyrights, trademarks, packaging designs, trade secrets, and patents for inventions.

intellectual property (IP) theft The illegal misappropriation of intellectual property that has been secured by a company or individual.

intentional discrimination Discrimination in which the policies of a company are shaped by overt racial prejudices of its managers or executives.

internal whistleblowing When an employee makes a complaint about a fellow worker or corporate procedure and keeps the complaint within the company.

invisible hand The view proposed by Adam Smith that, by pursuing our self-interest, we indirectly promote the good of society as if directed by an invisible hand.

Kyoto Protocol An international declaration that sought to reduce carbon emissions around the world and reduce the threat of global warming.

laissez faire French term; literally “leave it alone,” expressing the free market idea that governments should stay out of the marketplace.

legal moralism The view that governments may restrict conduct that is especially sinful or immoral.

legal paternalism The view that governments can restrict the conduct of an individual who harms him- or herself.

legal person A nonhuman entity regarded by law as having the status of a person.

legal rights Rights that are created by governments.

legal standing The legal concept that a person can sue others and be sued by others, own property, and make contracts with others.

limited liability The legal concept that a stockholder cannot lose more than the amount that he or she invested. living wage A wage that is sufdicient to meet basic needs beyond mere subsistence.

loan packing A sales strategy in which loans for a product include charges for additional items—or “add-ons”—that are concealed from the consumer.

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loss leader A product that is sold below cost to generate customer trafdic, with no pressure put on the customer to buy anything else.

market socialism Socialist economic systems where governments own and control major economic enterprises yet incorporate some capitalist policies, such as relying on supply and demand in the market to set prices.

market wage The lowest wage that an employer can offer to attract an employee.

merger When two companies of roughly the same size agree to combine as equals to form a new company.

minimum wage The lowest wage permitted by law or by a special agreement, such as with a labor union.

minority A subgroup of a population that differs in race, religion, or national origin from the dominant group.

mission statement A short account of a company’s fundamental purpose, which may include a statement of ethical standards.

monopoly Control by a single company of all or nearly all of the market for a given type of product or service. moral objectivism The theory that moral standards are not created by human beings, are unchanging, and are universal.

moral relativism The theory that moral standards are created by human beings, change from society to society, and are not universal.

multinational corporation A corporation that has production centers and ofdices in more than one country. negative Niltering Taking certain companies or industries out of a portfolio of ethical investments.

negligent hiring When an employer knew or should have known about an employee’s untrustworthy character upon dirst hiring him or her.

non-prosecution agreement An agreement between the SEC and a company that has broken the law such that the company may pay a lesser monetary amount as a punitive civil penalty but also need to pay back (or “disgorge”) any prodits they have obtained through their illegal actions.

NotiNication and Federal Employee Antidiscrimination and Retaliation Act of 2002 (No FEAR Act) U.S. Federal law designed to stop Federal supervisors from threatening or retaliating against Federal employees who blow the whistle.

Occupational Safety and Health Administration (OSHA) A branch of the Department of Labor formed in 1971 to set workplace safety standards across many industries, conduct unannounced inspections, impose dines on negligent companies, and require companies to report injuries.

offense principle The view that governments may keep us from offending others. OfNice of Federal Contract Compliance Programs (OFCCP) U.S. Federal agency (a branch of the Department of Labor)

responsible for implementing the afdirmative action executive order regarding government contractors.

ofNicers Individuals designated by a corporation’s board of directors to operate the business, with the chief executive ofdicer (CEO) at the top and various levels of managers below.

oligopoly Market domination by a small number of businesses that collectively exert control over that market’s supply and prices.

opulence wage A wage that supports a luxury lifestyle beyond mere basic needs. organizational schizophrenia Tension between competing goals or values within a corporation. peak oil The notion that there will come a time when humanity has exacted a maximum amount of oil from the ground,

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after which oil supplies will deplete quickly.

perpetual existence The legal concept that corporations can continue indedinitely and independently of the temporary lives of their managers and shareholders.

pollution haven effect The view that the industries that are most prone to pollution will set up or relocate to regions with the fewest environmental regulations.

positive Niltering Adding certain companies or industries into a portfolio of ethical investments. preferential treatment Special consideration given to people from historically disadvantaged groups in hiring and

promotion situations. price Nixing When business competitors conspire to set their prices at a dixed point.

price gouging When a business sells a product for a price that is much higher than is considered reasonable or fair or sustainable in a truly competitive environment.

proNit motive The view that the ultimate purpose of a commercial enterprise is to earn a prodit. protected classes Specidic groups that are protected from discrimination by law.

protectionist policies Government policies that restrict international trade with the aim of protecting domestic businesses from foreign competition. Such policies often involve import tariffs and domestic subsidies.

psychological altruism The theory that human beings are at least occasionally capable of acting seldlessly. psychological egoism The theory that human conduct is seldishly motivated and we cannot perform actions from any

other motive.

public accommodations discrimination A business or some other public access place prejudicially denies services to some customers.

quota system An afdirmative action concept where a certain number of jobs are set aside for members of minority groups in direct proportion to their numbers in the community.

rehabilitation A justidication of punishment in which, through reform techniques, changes are made to an offender’s future behavior.

reparation A justidication of punishment in which an offender must repay the victim for the injury that the offense caused.

repatriated income Money earned by an American multinational that is transferred back to the United States; it is subject to corporate tax.

retribution A justidication of punishment in which punishment balances the scales of justice; a crime requires a punishment.

reverse discrimination An aspect of preferential treatment in which a more qualidied candidate from the majority group is unfairly denied an opportunity in preference to a less qualidied candidate from a minority group.

right A justidied claim against another person’s behavior. rogue trading Occurs when a trader within a company engages in speculative and reckless trading without company

authorization, typically for personal gain. safety culture A set of shared attitudes within an organization that emphasizes the high priority of safety.

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Sarbanes–Oxley Act of 2002 U.S. Federal law to encourage greater transparency in corporate dinancial reporting. Securities and Exchange Commission (SEC) The Securities and Exchange Commission was set up in 1934 to oversee

and regulate the securities and exchange industry in the aftermath of the Great Wall Street Crash of 1929. Securities Exchange Act of 1934 U.S. Federal law that set up the SEC to oversee the dinancial markets. shareholders (stockholders) Those who own a corporation by obtaining shares of stock in it. shell corporations Corporations that exist on paper but have no active business operations or signidicant assets. Sherman Antitrust Act of 1890 First U.S. Federal law to outlaw price dixing and restrict monopolies.

social contract theory The moral and political theory that, to preserve our individual lives, we agree to set aside our hostilities towards each other in exchange for the peace that a civilized society offers.

socialism The economic theory that (1) community interest, not personal self-interest, should motivate economic development, (2) the major sources of society’s economic production should be governmentally owned, not privately owned, and (3) economic planning should be centralized through government policy, not decentralized through market competition.

socially responsible investing (SRI) A general term that describes the intention to invest in ethical investments. soft numbers Numbers that are uncertain or difdicult to measure.

stakeholder Any party who is affected by, or who has a stake in, a business practice, including employees, suppliers, customers, creditors, competitors, governments, communities, and shareholders.

strategic misrepresentation The intentional and systematic distortion or misstatement of facts for the purpose of gaining a dinancial advantage.

structured interview An interview method in which carefully written questions are directly connected with measureable skills and are the same for all interviewees.

subsistence wage A wage that is sufdicient to provide only the bare necessities of life. survival of the Nittest The evolutionary notion that species with the best adaptations will win out over rival species that

are less well adapted.

sustainable investing An ethical investment vehicle that intends to maintain investments in worthwhile community or environmental projects over a period of time rather than pull out capital on short notice.

sweatshops Factories whose workplace standards on health, safety, and pay fall below a legal minimum, or whose standards are below what is commonly acceptable in a community.

tax avoidance The legal use of accounting practices to reduce a tax burden. tax evasion The illegal hiding of money earned to reduce a tax burden.

technological transfer Selling or distributing technology from one country to another; often concerned with the transfer of sensitive commercial or military technology.

Ten Planks of Communism Karl Marx’s set of 10 policies to transition into socialism. transfer pricing manipulation Shifting prodits to a company division in a tax haven to avoid higher tax in a developed

country. triple bottom line (3BL) The view that successful companies must pursue three distinct values: people, the planet, and

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prodit.

Uniform Guidelines on Employee Selection Procedures (UGESP) U.S. Federal guidelines that require employers to carefully inspect the processes they use to hire, promote, or terminate employees, and assure that those processes are fair and nondiscriminatory.

unintentional discrimination Discrimination in which a company’s policies uncritically redlect prejudicial stereotypes. unstructured interview An interview method in which questions are not prearranged and not necessarily the same for

each interviewee.

utilitarianism The theory that an action is morally right if the consequences of that action are more favorable than unfavorable to everyone.

virtues Good habits of character that result in morally proper behavior. virtue theory The view that morality is grounded in the virtuous character traits that people acquire.

welfare capitalism Social programs in market economies that the government runs, such as national health care and government-run child care.

whistleblower A person who informs the public or someone in authority about illegal activities or some other misconduct that has occurred within an organization.

Whistleblower Protection Act of 1989 U.S. Federal law to protect Federal employees who blow the whistle on fraudulent or unsafe practices in Federal agencies.

whistleblower systems or hotlines Systems within a corporation that allow whistleblowers to make ofdicial and sometimes anonymous complaints.

worker privacy An employee’s expectations for a work environment that is free from unnecessary intrusions into their person, behavior, or information.

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