Objectives

CHAPTER 4

What is business ethics?
– Examples of ethical dilemmas

What are some of the approaches of dealing
Business Ethics and with ethics?
Ethical Decision – Utilitarianism
Making – Universalism
– Rights

Why should companies be concerned with
ethics?

Which theories should be used?

What is business ethics? Some Surveys

Ethics – study of what is good and evil, right
and wrong, and just and unjust

Business ethics - study of what is good and
evil, right and wrong, and just and unjust in
business
– Principles and standards that guide behavior

Discussions of business ethics frequently
emphasize unclear situations

However, applying clear guidelines resolves
the majority of them

International Survey of more than 300
companies worldwide – top ethical issues
– Employee conflict of interest 91%,
– Inappropriate gifts 91%,
– Sexual Harassment 91%,
– Unauthorized Payments 85%

Wall Street J survey of 1400 working women
– Managers lying, expense-account abuses, office
nepotism, taking credit for other’s work

Surveys - Incidence of unethical behaviors

in areas (from a Wall Street Journal survey): Common examples

– Government: 66% – Finance 33%
Individual values and the company

– Sales 51% – Medicine 21% – Receiving or offering kickbacks
– Law 40% – Banking 18% – Stealing from the company
– Media 38% – Manufacturing – Padding expense accounts to obtain
reimbursements for questionable business
14% expenses
– Divulging confidential information or trade secrets
– Using company property and materials for
personal use
– Conflict of interest

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Individual Rights and the Company Business Operations

Firing an employee for whistle-blowing
Financial and cash management procedures

Employee screening and privacy
Conflicts between codes and practices

Sexual Harassment
Practices in foreign countries

Affirmative action
Payments to foreign officials

Employee rights
Workplace safety

Employment at will
Environmental issues etc

Corporate due process

Determinants of Business Ethics Language of Ethical Lapse

Individual factors
Everybody else does it

Organizational factors/relationships – Not a valid choice – specially if law is being broken
– Organizational culture
If we don’t do it, someone else will
– Ethical climate
That’s the way it has always been done

Opportunity/environment
We’ll wait until the lawyers tell us it’s wrong
– What encourages or discourages unethical – What’s legal may not be ethical
behavior?

It doesn’t really hurt anyone

The system is unfair

Individual determinants Other determinants

Religion
Moral philosophy

– Many religions converge in the area of ethics – Kohlberg’s stages of development
– Belief that the divine reveals the nature of right and
Cultural differences
wrong in all areas of life

Ethical philosophies
– Ex: Reciprocity, promise keeping, fairness, charity
and responsibility to others – all found in Buddhism,
Confucianism, Hinduism, Islam and Christianity

Bible is source of ethics for Christian managers

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Common approaches to Business
Ethics

Utilitarianism – basic premise is that an action
is judged as right or wrong depending on the
consequences of the action

Universalism – the means justify the ends of an
action, not the consequences

Rights – based on entitlements and
unquestionable claims
Essential Features

Utilitarianism is committed to the maximization
of the good and minimization of harm and evil

Society ought to produce the greatest balance
of positive value or minimum balance of
negative value for all affected
– Ex: Cost and benefit analysis
– Risk assessment
– Management by objectives

Efficiency is key
Problems with Utilitarianism

Not always possible to calculate utility or to analyze
massive amounts of information – consider the case of
oil rigs in Alaska

Ignores distribution of good – is it uniformly distributed
or favors specific groups?

No common definition of what is ‘good’?

Assumes that all can be measured in a common
numerical scale
Utilitarianism

Moral worth of an action is determined solely
by its consequences

What makes an action right or wrong is the
good or evil that is produced by the act

Action is right if it produces the best possible
balance of good consequences over bad
consequences for all parties affected

It involves the consideration of alternatives and
how they affect all parties concerned
Utilitarianism

Involves the following steps
– 1. Determining the alternative actions that are
available in any specific decision situation
– 2. Estimating the costs and benefits that a given
action would produce for parties affected by the
action
– 2. Choosing the alternative that produces the
greatest sum of utility or least amount of disutility
Major issues with utilitarianism

Action that produces the greatest balance of
value for the greatest number of people
– What about the minority?
– Ex: What if society decides that it is in the best
interest of the public to deny health insurance to
those testing positive for AIDS?
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Shadow Pricing- Assigning value to non-
economic goods

What is the value of a limb? Of a hand? Of a
life? Of Peace and Quietness?
– Analysts use the shadow pricing technique
– They compare prices of houses near airports,
highways to less noisy neighborhoods – and they
can infer the value people place on peace
– To estimate the value of a hand, consider the
amount of extra pay that is needed to get workers to
accept risky jobs
– Middle-income Americans value their lives between
$3million to $5million
How does it work?

For an action to be moral,
– 1. It has to be universal – something that is moral
for one person has to be moral for everyone, for ex:
dishonesty cannot be justified as a valid moral
principle
– 2. Respect for rational beings – people should be
treated with dignity; and not as means to ends
– 3. Autonomy – action has to respect people’s
freedom to choose; people are to treat each other
fairly and equally
Weaknesses

Does not lend itself to precise method for
decision making

Difficult to think of all humanity each time a
decision has to be made

Places greater emphasis on the welfare of
every person, but does not really draw a line

Hard to resolve conflicts when criteria has to
treat everyone equally – decisions typically
involve conflicts of interests
Kantian Ethics

Consequences are regarded as morally
irrelevant

What matters is respect for the human
being

People must NOT be treated exclusively
as a means to an end
Application of Kantian Ethics

Universality – it counters the natural temptation
to make exceptions for ourselves or to apply
double standards

Also provides hypothetical answers underlying
the common question “What if everyone did
that?”

Provides a strong foundation for rights
Scenario

You are the CEO of a company contemplating
closing a plant in a city in Ohio. Your options
are
– Close the plant and relocate/fire employees
– Keep the plant and continue operations

Questions
– Using utilitarianism, discuss how you reach a
decision and which decision?
– Using Kantian ethics, discuss rationale and which
decision makes sense?
– What are some problems with either approach?
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Why be concerned with ethics?

Laws are insufficient and do not cover all
aspects or gray areas of a problem

Free-market and regulated-market
mechanisms do not effectively inform owners
and managers about how to respond to
complex crises
Baucus & Baucus (2000)

Singled out 67 companies out of the Fortune 500 that
had at least one illegal act – ex: antitrust, product
liabilities, discrimination

Performance of the convicted firms were compared to
unconvicted firms (five year after the fraud was
committed)

Convicted firms experienced significantly lower return
on sales (three year lag)

Multiple convictions are more disastrous

Unethical activities can affect long term performance
Conclusion

Nature of ethical problems
– Ethical standards change over time
– Human reasoning is imperfect
– Ethical standards and principles are not always
adequate to resolve conflicts

Which theory should be used?
– Each approach has strengths and weaknesses
– Need to look at situation and apply best
analysis/judgment
The cost of unethical business practices?

Consider Food Lion and labor violations or E.F.
Hutton and its fraudulent activities or Enron or
WorldCom or Martha Stewart

In all cases, companies had to pay fines or are
suffering bad publicity

But do unethical behaviors hurt organizations
financially?
The nature of ethical decisions –
Complex and Difficult

Managers confront facts and values when
making decisions

Good and evil are not always clear-cut – ex:
genetic products

Knowledge of consequences are limited

Existence of multiple constituencies – conflicts
of interest

Multiple constituencies can also use ethical
arguments to justify their position