Ethics and the Conduct of Business Eighth Edition John R. Boatright Loyola University Chicago Jeffery D. Smith Seattle University Bibhu Prasan Patra Xavier Institute of Management, Bhubaneswar @ PearsonChapter 1 Ethics in the World of Business <4) Learning Objectives 1.4. Identify ethical issues created by diverse business situations and relationships and the level of decision making required to address them 4.2. Recognize the role of ethics in the conduct of business, with respect to economic principles and the law Case: Merck and the Marketing of Vioxx ‘On September 30, 2004, Merck & Co. announced the withdrawal of Vox, its highly profitable pain reliever for arthritis sufferers, from the market.’ This announcement ‘came only seven days after company researchers found in a clinica tral that subjects who used Vioxx more than 18 months had a substantially higher incidence of heart attacks. Merck chairman and CEO Raymond V. Gimartin described the action as “the responsible thing to do." He ‘explained, “i's uit inte the principles ofthe company to think in this fashion, That's why the management team ‘came to such an easy conclusion’ In the lausults that followed, however, damaging documents emerged cast- ing doubt on Merck's claim that it had acted responsibly by taking appropriate precautions in the development and marketing ofthe drug, Development of Vioxx For decades, Merck's stellar reputation rested n the com- ppany's emphasis on sciance-cfiven research and develop ment. Merck employed some of the word's most talented and best-paid researchers and led other pharmaceutical 4.3. Distinguish between ethical management and the management of ethics, and each of the three main roles of a manager 14 Analyze how ethical business conduct is challenged by decision making on individual and organizational levels finmsin the pubication of scientific artes andthe dscov- ery of new medicines forthe teatment of serous cond tions that lacked satisfactory therapies. For seven consecutive yeas in the 19805, Merck was ranked by For tune magazine as America's most respected company Merck received widespread accolades in particular forthe decision, made in 1978, to proceed with research on a drug for preventing river bindess (onchocerciasis), which is a debiitting parasite infection that afficts many in ‘Aca, eventhough the tug was unikely to pay for tse. Eventualy, Merck decided to give away the drug, called Mectzan for as long as necessary ata costo ens of mi ons of dolar per year. This Kind of principled decision making was inpied by the words of George W. Merck, tho son ofthe company’ founder: "We try never to forget that medicine forthe people. isnt forte profits. The pro is flow, andif we have remembered tha, they have never faied to appece. The better we have rernenibered i the larger they have been” Viowx isan example of Merck's innovative research Developed as a treatment or the pain of airs, the chug acts as an antvifamamant by suppressing an en zyme responsible for artis pein. Other drugs In the class of nonstercidal at-infammetory drugs (NSAIDS) inhibit the production of two enzymes COX and COK-2 i2 Chapter 1 However, COX is important for protecting the stomach lining, ano ules and stomach bleeding ae potential side effect of these drug. The dtnctvo boneft of Vi- cox over other NSAID pain reves, such as ibuprofen (Adil) and naproxen (Aleve), i that infibits the pro- duction of oly the COX-2 enzyme, and not COX. At ter approval by the Food and Drug Administration (FDA) in May 1985, Viox quickly became & popular bost seller, More than 20 mion people took Viowx between 1999 and 2004, and atthe time ofthe witha, th 2 milion users, Merck was earning $25 blion analy ot 11 percent of the companys ttl revenues fom the sale ofthe drug. Competitive Environment The success of Vix came a cial time fr Merc. Not only were the patents on several profitable drugs due to expire, opening the way fr generic competion, but aso the competitive environment ofthe ente pharmaceut- ‘al industry was undergoing rapid change. Competition from generic drugs increased dramatially due to fed- tal lagisiation and also due to the rise of large, power ful managed care organizations, which sought to cut the Cost of drug treatments through the use of formuiaries ° that restricted the drugs doctors could prescribe. The evelopment of new drugs was increasingly siting to small entrepreneurial esearch companies focused on specific technologies, which reduced the competitive advantage of the traditional large pharmaceutical fms. Merck's competitors responded to changes in the com- pattve environment by acquiring small companies, developing new product that duplicated ones already 6 the market (so-called “me-too" drugs), entering the generics merket, seeking extensions of patents after making only slight improvements, and engaging in ‘aggressive marketing, including the use of controversial sect-to-consumer (OTO) advertising, The first four strategies—grouth by acquiston, the development of “me-too" crugs, the production of ‘generics, and making improvements merely to extend patents—confcted with Merck's culture end values However, undor the previous © guided Merck through the development of Mectizan for river blindness), the company greatly increased its emphasis on marketing. This ierease in emphasis was ‘considered necessary given the short time avaliable to sala drug before the patent expired. In particular, evie dence was needed not only to prove a product's sefoty and effectiveness in orgerto gain FDA approval but also to persuade physicians to prescribe it instead of the ‘competitors’ medications. Since much of the informa tion that could persuade doctors was part of a drug's label, marketers needed to be involved in the develop- ment of 2 product from the earliest research stages in ‘ord to prepare a persuasive label, The label could be improved further by conducting tests, which were not scientifically necessary but which generated cfniclly proven resuits that could be useful in persuading physi- cians. Under Gilmartin, the company's formally stated strategy became: “Turning cutting-edge science into ‘novel medicines that are true advances in patient care with proven clinical outcomes.” Decision to Withdraw In announcing the withérawal of Vioxx, Gilmartin described the evidence of increased risk of heart attacks 2s “unexpected.” Inthe fist lawsuits against Merck that came to trial, evidence was presented to show that ‘company scientists had considered the potential heert problems with Vioxx as early as 1997. The fist hint of ‘rouble came in that year as Merck scientists noticed that Vioxx appeared to suppress the production of a substance in the body that acted naturally to reduce the incidence of heart attacks. Although the significance of this discovery was recognized, no follow-up investiga tions were undertaken, More significant evidence that Vioxx might contrib- Ute to heart attacks was produced by a study concluded in 2000 that was designed to compare the gastrintesti- ral etfects of Vioxx and naproxen in order to improve the label of the Merck product by proving that Viowx was {ess harmful to the stomach lining. Although the study, called VIGOR (for Vioxx Gastrointestinal Outcomes esearc, showed that Vioxx users had heart attacks at a ale four to five times that of the naproxen group, researchers were uncertain whether the difference was due to an adverse effect of Viowx in causing heart attacks oF a beneficial etfect of naproxen in preventing them. ‘The heart attacks in the trial occurred mainly inthe Viowx subjects who were already at greatest risk of heart attacks, and all subjects were probed from taking aspirin (hich fs known to prevent heart attacks} in order to gain reliable results from the study since aspirin affects the stomach. When the results of the VIGOR ‘study were published in the November 2000 issue of the prestigious New England Journal of Meoicine, the ben ficial eects of naproxen were emphasized in a way that implied that Vioxx was safe for people without therisk factors for hear attacks, After initially resisting pres- sure by the FDA to include a warning on the Vioxx label, ‘Merck finally agreed in April 2002 to add the evidence of fan increased incidence of heart attacks. However, the language on the label emphasized, again, the uncer- tainty of the cause and recommended that people t risk of heart attacks continue to use an anti-inflammant for protection, In the meantime, Merck continued its aggressive rmarkeling campaign. Between 1999 and 2004, Merck ‘spent more than $500 milion on DTC television and print advertising. This expenditure was intended to keep pace with the heayy spending by Plizer for its competing COK2 Inhibiter Celebrex. Merck also maintained a 3,000-person sales force to meet with doctors for face- {o-face conversations about Vioxx. To support this effort, Merck developed materials that provided salespeople with responses to questions from skeptical physicians * One document, called an “obstacle handling quide,” advised that questions about the risk of heart attacks be answered with the evasive explanations that Vioxx Ethics in the World of Business 3 “would not be expected to demonstrate reductions” in heart attacks and was “not a substitute for asprin.” ‘Another document tiled "Dodge Ball Vioxx” concluded With four pages that were blank except for the word “DODGEN" in capital letters on each page. Company documents also describe an effort to “neutralize” skepti- cal doctors by enlisting ther support or atleast defusing their opposition by offer of research support or engage- ‘ments as consultants. The timeline below outlines key events inthe devel- ‘opment, approval, and marketing of Vioxx and the out- ‘come for Merck The History of Vioxx ‘The Food and Drug Administration (FDA) has @ rut phase approval process to evaluate the testing, safety, and labeling ofall new prescription drugs to be sold in the United States. The FDA also monitors the “post-mar- keting” safety of approved drugs, to ensure that the public is informed of any new heath risks that are revealed by widespread use and addtional studies. Timeline December 1994 ‘Merck seeks FDA approval to begin Vioxx clinical trials (on human subjects), based on the success of animal testing 197 ‘Merck scientists discover the first signs that Vioxx may cause cardiovascular problems. November 1998, Merck applies for FDA approval to market Vioxx for the treatment of acute pain, dysmenorrhea (menstrual cramps), and osteoarthritis, The application includes the results of about 60 studies, none of which points to potential cardiovascular risks. January 1999 Merck begins the Vioxx Gastrointestinal Outcomes Research study (VIGOR) to determine whether Viowt is safer for the digestive system than naproxen, an older painkiller. This later becomes a key selling point for the drug. May 1999 After a six-month review, the FDA approves Vioxx for the three uses Merck specified in its application, October 1999 - December 1999 ‘The data and safety monitoring board for Merck's VIGOR study meets several times to discuss its findings. Although Vioxx appears to increase the risk of heart problems in test subjects, the board votes to continue the study and keep marketing Vioxx to the public. November 2000 Merck's VIGOR study is published in the New England Journal of Medicine, bbut Merck does not include all observed instances of heart attacks and downplays the cardiovascular risk.4 Chapter 1 2001 The FDA publishes the full VIGOR study results and additional studies conducted by independent parties also indicate that there is a real risk of cardiovascular problems. In September, the FDA warns Merck that the Vioxx marketing campaign and label do not adequately represent ils health risks April 2002 Merck changes the drug’s label to better reflect the dangers and neces- sary precautions for prescribing doctors and users, based on the VIGOR study. The FDA also approves Vioxx for an additional use: the treatment of rheumatoid arthritis. September 2004 Merck's APPROVe (Adenomatous Polyp Prevention on Vioxx) study con- clusively shows that Vioos increases the risk of heart attacks and strokes after 18 months of treatment. Merck then voluntarily stops the sae af Viows January 2005 A British medical journal publishes a study that estimates Vioxx caused ‘heart attacks in 88,000-140,000 Americans and fatal heart attacks in 38,000. Study author David Graham is an FDA scientist who also affirmed the correlation between Vionx and heart attacks in his earlier testimony to Congress. November 2007 After facing multiple lawsuits, Merck agrees to pay $4.85 billion to settle about 47,000 personal injury claims from former Vioxx users December 2011 Merck pleads guilty to promoting Vioxx asa treatment for rheumatoid ar- {hritis before it received FDA approval for this use in 2002. The company agrees to pay a fine of $628 million in the civil settlement. April 2012, AUS district court orders Merck to pay an additional $322 million as 3 criminal penalty for its misleading promotion and marketing of Viowx. ‘Acitional sources “Sequence of Event with VIOXX, Since Opening of IND,” US. FDA Advisory Committees Brieing, 9 Ape 2005; Snigdha Prakash and Vikki Valentine, “Timeline: The Rise and Fall of View,” National Public Radio, 10 Noventber 2007 “US. Pharmaceutical Company Merck Sharp & Done Sentenced in Connection with Unlawful Promotion of Vows,” US, Department of Justice Press Release, 19 April 2012, Criticisms and Defenses The study that conclusively established that Vioxx Increased the risk af heart attacks was called APPROVE (Adenomatous Polyp Prevention on Vox), which, accord ing to critics, had only a marketing and not a legitimate scientific purpose.® Although the company could have delayed the withdrawal uni ordored to do so by the FDA, ‘Merck acted voluntarily. Gimarti said that the compen “was really putting patient safety fis."® However, one. ‘rc replied, “If Merck were truly ating In the interest of the public, of course, they should have done more studies (0n Vioxx's safety when doubts about it rst surfaced” ‘Another critic observed that such studies could have been ‘conducted for a fraction of the cost of the $500 milion spent on advertising.® An editera in the New York Times ‘declared that “companies must jump atthe fist hint of isk ‘anc! warn patients and doctors of any dangers as clearly ‘and quicly as possible, They should not be stonewalling regulators, soft-pedaling risk to doctors or promoting «rugs ta milions of people who don't need them. A 179- Page report commissioned by the Merck board concluded, by contrast, that executives and researchers acted with integrity in addressing incomplete and conflicting evidence ‘and that “their conclusions were reached in good faith and ete reasonable under the circumstances.""’ The report closed withthe observation thatthe quick response after the APPROVe study “is not consistent with the view that Merck's corporate culture put profits over patient saety"™Points to Consider... The Viow crisis was an unusually difficult and damag- ing experience for Merck, which has both a history of responsible conduct and a commitment to the highest standards of ethics. Although Merck's culture is built on strong values, these were not enough to prevent a series of decisions that, right or wrong, seriously dam- aged the company’s carefully built reputation. Merck. ‘executives appear tohave considered carefully the pos- sible health risk posed by Vioxx, and yet the push for profits may have led them to conclude too easily that Vioxx was not the cause of the heart attacks suffered by test subjects and that further studies were not neces- sary, The increased role of marketing, including heavy consumer advertising, ina traditionally science-driven culture was probably a factor in whatever mistakes ‘were made, as was the change in strategy to seek evi- dence of the products’ superiority as part of a market- ing campaign to influence physicians. However, Merck's strategy could not have avoided some adjust- ment given the changed competitive environment that was created by forces outside the company's control All business organizations face the daunting chal: lenge of adhering to the highest standards of ethics while, at the same time, remaining competitive and providing the products and services that the public demands. The task of managers in these organizations {s to make sound business decisions that enable a com- pany to achieve its mission. Some ofthese decisions involve complex ethical issues that may not be readily apparent, and success in making sound business deci- sions may depend on understanding these ethical issues and resolving them effectively. Ethical issues are considered by managers in the ordinary course of their work, but they are also matters that are discussed in the pages of the business press, debated in the halls of Con- gress, and scrutinized by the courts. This public con- ‘cemarises because ethical issues in business are closely tied to important matters of public policy and to the legislative, administrative, and judicial processes of government. These ethical issues are often only part of a complex set of challenges facing the whole of society. DNase 5 Decisions by Multiple Patios ‘After Vow: was taken ofthe market, Congress bagan Investigating the efzcteness and integrity ofthe FOR drug ‘approval process slong with Merck's own actions. What ar the Ethics in the World of Business 5 costs and benefits of approving new drug forsale as quickly as possible? Why might the FDA be reluctant to acknowledge problem with, or recall 3 dug that it had previously approved? 1.1: Introduction 1.1.1: Necessity of Business Ethics The debacle of Enron, World Com, Tyco, Adelphia, Rite Aid, HealthSouth, Arthur Andersen, Bamest and Young, J.P. Morgan, Merrill Lynch, Morgan Stanley, Xerox, Boeing, Lehman Brothers, and Satyam Com- puters, in the first decade of the twenty-first century and Merck's’ Vioxx issue, Volkswagen emission cheat- ing, and a few other scandals inthe second decade of the twenty-first century, clearly describe the shocking episodes of corporate misconduct. The insatiable greed and lust for power not only ruined these organizations but also wounded the society at large. These high pro- file scandals have led to many ethical and legal viola- tions. These scandals did irreparable damages to customers, creditors, employees, competitors, and the shareholders (particularly the small investors). Before this, the two major security scams by Harshad Mehta and Ketan Parekh in the Indian stock market, and the major brokerage houses, such as, Smith Bamey and Merrill Lynch in the United States have betrayed small investors with inflated stock recommendations. The fraud and financial iregularities performed by large corporations clearly give an idea about the indifferent altitude of the promoters towards the small investors and several thousands of its own employees. These are clear evidences of the indifferent attitude of the CEOs towards the small investors. The root cause ofthe entire isis isthe ethical breakdown of firms, With the growing number of corporate seandals ‘coming into light, business schools all over the world are becoming conscious of the fact that traditional value-free management education is to be blamed for the disgrace. Even the public of the entire world has recognized that corporate misconduct and criminality {s caused due to the lack of training in business ethics. Many National Accreditation Boards have acknowl- edged that the amoral culture of business schools is ‘one ofthe key factors leading to this disastrous conse- quence. The personal values which students imbibed from their families get stifled by the value-free educa- tion they get in business schools. In fact, business6 Chapter 1 schools kill their potential of becoming ethical leaders Koehn Daryl, in his presidential address to Society of Business Ethics said, “Business schools instill wrong values or ignore issues critical to developing integ- rity." Business schools contribute a lotto the break- down in ethical decision making, Many corporate crooks are business-school gradu ates, For example, Jeffry Skilling, the CEO of Enron, an MBA from Harvard; Andrew Fastow, the CFO of Enon, an MBA from Northwestern; Keneth Lay, former Enron chair, graduated from Oklahoma State University; and Ramalinga Raju, the CEO of Satyam Computers an MBA fom Ohio University in 1975, He was also an alumnus of Harvard Business School with a business degree. After taking the usual value-ree course work in economics, finance, marketing, and behavioral skills, they tend to develop an amoral myopic vision and fail to understand the significance of ethics that ensures stability and sustainability to both the business and the society. . 1.1.2: End of the Myth The perception of business as “jungle,” “a dog-eatdog world,” “market force is everything,” “profit is every- thing,” “business is amoral” (that is, business has nothing to do with ethics), and “business and ethics are incongruous” is a myth. In fact, business consti- tutes a very important part of the sociely. Busines something which provides goods and services that society needs. It is not separate from the society ot imposed upon the society, rather, it is an integral part ofthe society and its activities ‘As an integral part ofthe society, business organi zations have certain duties, responsibilities, and obli- gations towards the society, which provides them with an opportunity to conduct business, The executives and employees of the corporations who carry out busi- ness activities must actin a responsible way so that a reasonable balance is maintained between doing well in business and giving better goods and services to the society, and generally value its reputation, ‘The scandals, scams, irregularities, and violations committed by the organizations are highly perplexing for the society. Society is straightaway reacting to any such deviant business practices. Investors are now publicly challenging the irregularities that occur at any level (board or managerial level) of business operations, Of course, it is necessary to make profit or get return on investment in order to take the business for- ‘ward, but itis not sufficient for flourishing in business. thas been observed that many profit-making organi- zations vanished from the market not because of mat- ket failure, but because they failed to address certain, ‘macro and micro level issues, such as dealing with employees, customers, suppliers, community, natural environment, free and openness in transactions (trans- parency), integrity, and responsiveness to complaint and criticism (accountability). Business organizations, in order to be stable and sustainable, have to take into account the above-mentioned factors. Belatedly, business schools are realizing that man- agerial decision making requires a strong training in ethics and value. Thus, more and more business schools are now integrating business ethics as a com- pulsory course into their curriculum, In order to prevent the risk associated with moral failure, students need to develop a clear perception of the ethical issues. The main aim of the course isto sen- sitize the students to different ethical issues entailed in contemporary business. Ethics education immensely helps students resolve moral dilemmas they face in their personal and professional lives. In order to recognize and resolve the ethical prob Jems, conceptual knowledge of moral theories with relevant case studies is introduced to augment stu- dents’ understanding of ethical problems. Business schools all over the world are trying their best o prepare their students to face the various moral problems involved in business and find ethical analy- sis less wearisome in their workplaces. There isa con- scious effort to motivate students to act ethically and rationally in business decision making as well as other areas of life OF course, the objective uf the ethics education is neither character building nor providing any specific solution to wipe out unethical business behavior. Rather, the primary purpose of ethics education is to prepare the students to prevent unethical activities ‘that affect business (both, in macro and micro level). Acting ethically “pays,” and it protects the interest of the society and one’s company. Fulfilling self-interest and interest of the community is complementary to cach other. There is therefore, every reason to act ethi- cally. Business ethics course is devoted to explore the ethical truth in the professions through critical and logical analysis, Conceptuat clarity of some basic‘moral conduct concepts, such as- right, wrong, good, bad, just, unjust, obligation, responsibilty, duty, vir- tue, vice, and lucid exposition of moral theories- pro- vides them the support to take effective decision ‘Thus, business ethics course acts asa practical tool (like other functional ares) to help the students to take up responsibility by using sound moral judgment, ere- ate value (for stakeholders), which are morally rich, put together “doing right things” and “doing right things for business,” and meet the situation of scandal and fraud with moral courage. The students realize thatthe old excuse- “the business of business is busi- rss,” is no more a sound principle for doing business, 1.1.3: Understanding Moral Problems Besides this, social audit managers also encounter moral problems while taking decisions. Most of them. wrongly believe that they know how to choose between right and wrong, good and bad, just and unjust, and recognize duties and obligations. They think ethics is something that we learn at our early childhood, that is, a the kindergarten stage. But on many occasions, they find it difficult to decide between two conflicting but equally important duties. Manag- ers often find it difficult to decide right from right and between less and more wrong. In the absence of a proper ethical orientation and a theoretical backing, it ‘becomes very difficult for them to resolve these issues. In many cases, they take decisions which are imma- ture, self-indulgent, and hasty In many cases, business provides an arena where managers are weaned from their consciences, They learn to function by the “oper- ational code.” Thus, in organizational life many man- agers experience various forms of uncertainty, duality, and moral ambiguity. This is because the managers are not exposed to critical thinking, Thus, teaching ethical theories at MBA level exposes them to critical think- ing, They will be able to reflect on what one is doing and can his/her action in principle be applied as a rule for some other actions like that. Kohlberg (see chpt.2) calls this the universal ethi- cal principle stage. At this stage, the individual thor- oughly examines the rational ground on which his/ her action is based. He or she has a detailed under- standing of his or her moral capacities or “virtues” through the internalization of the moral standards prevalent in their communities. Itaiso reveals how one Ethics in the World of Business 7 ‘becomes increasingly sophisticated and critical in their understanding of the moral standards. Hence, there is a need to expose MBAs to clear logical and philosophical thinking. Business ethics, as a branch of applied ethies, acts as.a useful tool to guide managers in resolving the dilemmas and give a philosophical backbone to explain their actions. Ethical theories such as scientific theories explain human actions and endow managers with the skill to justify their actions and understand actions of others in a better way. 1.14: Role of Business Schools Jeffrey Garten, the Dean of Yale School of Manage- ment, suggests that business school education requires, careful re-examination. He contended that broad social dimensions of business operations, such as environ- mental protection, globalization, displacement and rehabilitation, and public policy and management integrity need better coverage and integration into the existing business school curricula. Business school education effectively addresses the factors required for success at the firm level but does not deal with questions of what society requires, fom its business leaders. MBA education, mainly preoccupied with finan- cial imperatives, puts emphasis on shareholders’ value. But Aspen Institute Survey of 2,700 MBA stu- dents at 13 major business schools, including Whar- ton, Darden Berkeley, and Colombia, indicated that if they were fo face an ethical conflict due to disagree- ‘ment with the extent of corporate values and policies, they would leave their companies rather than fight for change. One wonders if such managerial capitulation is the sort of business leadership that an MBA eduuca- “tion ought to instill. MBA programs are partially responsible for ethical failure because they give nar- row, short-sighted, specific target-oriented financial training to their students. Such training, restricted to economic utilitarianism with cost-benefit analysis, ori- ents students not to think beyond the bottom line. The root problem of decaying business ethics lies in what business schools are currently teaching. The sort of competitive strategy frameworks taught as part ofthe MBA curriculum impart values that ae in oppo- sition to good business ethics. The accrediting standards pay little attention to ethics teaching. Some universities and institutes where8 Chapter ethics is taught do not have trained teachers. The gen- eral misconception, again, is that anyone can teach ethics regardless of training Given the value-free economics on business school cultures, many professors have a hostile attitude towards ethics. This sends the message that ethics does, not matter, which translates into denying their social responsibilities as future business leaders. 1.1.5: Business Ethics is Vital for Leadership Business schools only teach their students the opera- tional aspect (narrow, short-term goal) of business. They constantly ignore the adaptive aspect (long-term stability and sustainability) of the organization. Lack of in-depth analysis leads business schools to impart bbusiness education which only satisies the opera- tional aspect of business. In this framework, profit and growth direction supersedes other values. Issues related to individual, community, and societal well- being, and respect for the intrinsic worth of stakehold- rs, nature, and future generations are often ignored, Business ethics is critically important for leader- ship. Without it, the effectiveness and efficiency of the ‘economic system are literally at isk. Ethics education instills reflections that puts emphasis on cultivating others and drives out the narrow ego-driven needs, The future managers (leaders) discover themselves and dearly understand the underlying principles that govern their actions behaviors. Like other theories of science and mathematics particularly, application of ethical theories helps managers to provide better rea- son and justification of their actions. Ethics training equips the leaders to deal with ethical issues effec- tively in the workplace Witber!? has developed an integral perspective to develop ethical managers. An integral approach to business education, according to him, requires proper understanding of the system, He says integration of (1) | (the individual), we (the group), and it (the organiza- tion; (2) individuat (self), culture, and world; (3) the truth (satya), the good (shivam), and the beautiful (sunderm); and (4) art, moral, and science would trans- form the managers to visionary leaders. The following corporate leaders have demonstrated holistic approach to business. They have demonstrated that business and community are two sides of the same coin, Henry Ford, Edward Cadbury, .R.D. Tata, H.P. Parekh, Narayan Murthy, Azim Premji never gave emphasis to thenarrow financial gain and transformed their organ- izations into great human institutions. Henry Ford, a self-made entrepreneur, contended that the purpose of business was to make things (in his case cars), which Were of real service to the community. The very basic purpose of business gets defeated when business’ thrusts the product on the people and thinks that peo- ple will buy what we have to sell. This is crime! Edward Cadbury, a very successful business leader, condemns the low standard of the life of the ‘workers, He emphasized physical decency and com- fort ofthe laborer. All the distinctive human qualities, such as hopefulness, freedom, self-respect, and social ambitions, are national assets. Employers who do not pay proper wages to their employees are parasites on the present and future of the nation." [..D. Tata became the fourth chairman of the Tata group in 1938, at the age of 34. He created a history by his contribu- tion to business and society. For him, “tobe a leader is to lead human beings with affection.” His cove inter est, was in the benefit of people, a philosophy with which he guided the destiny of the largest business house. | R.D’s values contradict Milton Friedman’s dictum that responsibility of managers is only to pro- duce money forthe shareholders. His greatness lis in maintaining two goals in sight-the goal of business and the broader goal of the society Narayan Murthy, the chief mentor of Infosys, holds that the essence of leadership lies in having a value system that creates the environment for self esteem and belief in fundamental values such as hon- sty, integrity, and trust-worthiness for long-term benefits of the stakeholders. A survey conducted in 2002 among business schools, including three colleges of Indian Institute of Management, applauded Murthy as the India's most admired business leader. Majority of the respondents (MBA students) admire hit for his ethics. The survey was carried out by a Bengaluru- ‘based communication Consultancy -Brand-comm.'4 ‘Azim Premji, the chairman of Wipro Ltd, one of the leading software service exporters uf India, has a reputation for holding high ethical standards. His father, MH. Hasham Premji, started the company in 1945 to make vegetable oil. The elder Premii’s value system was based on his sense of right way to do things, which was certainly not based on careful ealeu- lation of business cost-benefit analysis, Azim Premji hhas maintained the legacy of his father and insists onhonesty even when it is contrary to financial interest. His regards for the core values enhanced the compa ny’s reputation in the market place. HLT, Parekh, when first envisioned Housing Development Financial Corporation Limited (HDEC), thought that the company would be guided by profes- sional integrity. Parekh’s standing advice to HDFC employees was to make decisions they would stand by forever and to do nothing they would find ernbarrass- ing if it became public. Because of its guiding princ- ples-integrity transparency, sharing, customer service, civic responsibility, and genuineness of purpose HDFC is now regarded as India’s best-managed com- panies, These businessmen cared for the stakeholders. ‘They thought further than profit. For them their own perception and genuineness of purpose (that is, pro- viding goods and services) was the guiding force. ‘They are the true philosophers oftheir own kind, They pursue their goals with hope and trust So, the basic purpose of teaching business ethics is not to moralize, rather to analyze the basic purpose of doing business that is the forgotten fac that corpora- tions are created by society to fulfill society's need. The principal purpose of business is not to make profit. Profit isthe engine that takes the business forward, but itis not the destination of business. As Charles Handy raises the question, “Profit is the principal yardstick, buta yardstick for what? And how can a yardstick be a purpose? It is like saying that you play cricket to get ‘good batting average. You need a good average to keep playing and get into the first team. We need to clean up our logic.” Incase of business education also, we need to clean up our logic. What is the basic purpose of business education? Is it to teach students only the specialized, quantitative-oriented courses that meet the narrow economic gain on how to make profit? But prot is only a means to some end; itis not an end in itselé So, MBA ‘education must prepare students to recognize the right end and think beyond the bottom line, The short- sightedness and stubbornness that dominate the business school education, constantly hamper both, the individual and social development. A good business school develops not only the skill, butalso the virtue of its students. A proper exposition of individual value, ‘organizational value, and value of business community (as an integral part of the society) in business curricula, will inculcate a better broader understanding of business management among the MBA students Ethics inthe Word of Business 9 This book elucidates the ethical issues that arise for managers and, others~ stakeholders, investors, employees, consumers, suppliers, creditors, natural environment, and other members of the society. Cor- porate activities affect us all, and so, the conduct of business is a matter of concern for everyone with a stake inthe conduct of business. The ethical issues we willbe examining are those considered by manager the ordinary course of their work, but there are also ‘matters that are discussed in the pages of the business press, debated in the halls of Parliament, and scruti- nized by the courts. This is because, ethical issues in business ae closely tied te important matters of public policy and to the legislative and judicial processes of government. They are often, part of the complex set of challenges faced by the whole of society 1.2: Business Decision Making 4.4 Identify ethical issues created by diverse business situations and relationships and the level of decision making required to address them Although ethical issues in business are very diverse, the following examples provide a useful starting point. 1. The Sales Rep A sales representative for a struggling computer supply firm has a chance to close a multimillion dollar deal for an office system to be installed over a two-year period, The machines forthe first deliv- ery are in the company’s warehouse, but the remainder would have to be ordered from the manufacturer. Because the manufacturer is having difficulty meeting the heavy demand for the popu lar model, the sales representative is not sure that subsequent deliveries can be made on time. Any delay in converting to the new system would be costly to the customer; however, the blame could be placed on the manufacturer. Ethical Issue: Should the sales representative close the deal without advising the customer of the delivery problem? 2. The Research Director The director of research in a large aerospace firm recenily promoted a woman to head an engineering10 Chapter 1 team charged with designing a critical component for a new plane. She was tapped for the job because of her superior knowledge of the engineering aspects ofthe project, but the men under her direc- tion have been expressing resentment at working for a woman by subtly sabotaging the work ofthe team, The director believes that it is unfair to deprive the woman of advancement merely because of the prejudice of her male colleagues, but quick completion ofthe designs and the building ofa pro- {otype are vital to the success ofthe company. Ethical Issue: Should the director remove the ‘woman as head of the engineering team? 3. The Marketing Director The vice president of marketing for a major brew- ing company is aware that college students account fora large proportion of beer sales and that people in this age group form lifelong loyalties to particu- lar brands of beer: The executive is personally ‘uncomfortable with the tasteless gimmicks used by her competitors in the industry toencourage drink ing on campuses, including beach parties and beer- drinking contests, She worriesabout the company’s contribution to underage drinking and alcchol abuse among college students Ethical Issue: Should the marketing director fol low the competition’ troubling practices? 4. The CEO ‘The CEO of a midsize producer ofa popular line of kitchen appliances is approached about merging with a larger company. The terms offered by the suitor are very advantageous to the CEO, who would receive a large severance package. The shareholders of the firm would also benefit because the offer for their stock is substantially above the current market price. The CEO leams, however, that plans call for closing a plant that isthe major employer in a small town, The firm has always taken its social responsibility seriously, but the CEO 4s now unsure of how to balance the welfare of the employees who would be thrown out of work and the community where the plant i located against the interests of the shareholders. He is also not sure hhow much to take his own interests into account. Ethical Issue: Should the CEO support a merger that harms the community but benefits the shareholders and himself? ‘These four examples give some idea of the ethical ‘sues that arise at all levels of business. The individu- al in these cases are faced with questions about ethics in their relations with customers, employees, and members ofthe larger society. Frequently, the ethically Correct course of action is clear, and people in business act accordingly. Exceptions occur, however, when there is uncertainty about ethical obligations in par- ticular situations or when considerations of ethics come into conflict with the practical demands of busi- ness. The sales representative might not be sure, for example, about the extent to which he is obligated to Provide information about possfble delays in delivery ‘And the director of research, although convinced that discrimination is wrong, might still fel that he has no choice but to remove the woman as head ofthe team in order to get the job done. eae ‘Judgment Calls on the Job Describe a situation where you needed to make @ decision in hich the “right” choice hed negative consequences for thers or yourself personally. Explain your decision and the ‘edsoning fort. 1.2.1: Nature of Business In deciding on an ethical course of action, we can rely to some extent on the rules of right conduct that we employ in everyday life. Deception is wrong, for exam- ple, whether we deceive a friend or a customer, And corporations no less than persons have an obligation not to discriminate or cause harm. However, business activity also has some features that limit the applica- bility of our ordinary ethical views. In business sct- tings, we encounter situations that are significantly different from those of everyday life, and business roles place their own obligations on us. For example, (CEOs, by virtue of thei position, have responsibilities to several different constituencies, and they face ethi- a ges in finding the proper balance among these possibly conflicting responsibilities, One distinguishing feature of business is its eco- nomic character, In the world of business, we interact with each other not as family members, friends, or neighbors, but as buyers and sellers, employers and employees, and the like. Trading, for example, is often ‘accompanied by hard bargaining, in which both sidesconceal their full hand and perhaps engage in some bluffing. And a skilled salesperson is well versed in the art of arousing a customer's attention (sometimes by a bit of puffery) to clinch the sale. Sil, there is an “ethics of trading” that prohibits the use of false or deceptive claims and tricks such as “baitand-switch” advertising, Employment is also recognized as a special rela- tionship, with its own standards of right and wrong, Employers are generally entitled to hire and promote whomever they wish and to lay off or terminate ‘workers without regard for the impact on the people affected. (This right is being increasingly challenged, however, by those who hold that employers ought to fire only for cause and to follow rules of due process in termination decisions.) Employees also have some protections, such as a right not to be discriminated against or to be exposed to workplace hazards. There are many controversies about the employment rela- tionship, such as the rights of employers and employ- ees with regard to privacy and freedom of speech, for example. ‘The ethics of business, then, is at last in part the ethics of economic or market activity, such as the con- duct of buyers and sellers in a market and of employ- ers and employees in the workplace. So we need to ask, what are the ethical rules or standards that ought to govern these kinds of activities? And how do these rules and standards differ from those that apply in other spheres of life? A second distinguishing feature of business is that it typically takes place in organizations. An organization, according to organizational theory, is a hierarchical system of functionally defined positions designed to achieve some goal or a se of goals. Conse- quently, the members of a business organization, in assuming a particular position, take on new obligations to pursue the goals of firm. Because business involves ‘economic transactions and relationships that take place in markets and also in organizations it raises ethical issues for which the ethics of everyday life has not pre pared us. Although the familiar ethical rules about honesty, fairness, promise keeping, and the like are applicable to business, it is necessary in many eases to rethink how they apply in business situations. Ths is not to say that the ethies of business is different from ethics in everyday life, bt only that business isa differ ent context, and it presents us with new situations that require us to think through the ethical issues Eiics inthe World of Business 11 Waa eMail Business Mindset ‘What do people usualy mean when they defend a business decision by saying, “Business is business"? By what standards should business decisions be evaluated, and how do these ‘compare to the standards in your perso te? 1.2.2: Levels of Decision Making Decision making in business occurs on three distinct levels: «the level ofthe individual + the level of the organization + the level ofthe business system Situations that confront individuals in the work- place and require them to make a decision about their ‘own response are on the level of individual decision making. An employee with an unteasonably demand- ing boss, for example, or with a boss who is discov- ered padding his expense account faces the question: “What do | do2" Whether to live with the difficult boss or to blow the whistte on the padding is a ques- tion to be answered by the individual and acted on accordingly, Many ethical problems occur at the level of the organization in the sense that the individual decision ‘maker isacting on behalf ofthe organization in bring- ing about some organizational change. Sexual harass- ment, for example, is an individual matter for the person suffering the abuse, but a manager in an office ‘where sexual harassment is happening must take steps not only to rectify the situation but also to censure that it does not occur again. The decision in this case may bea disciplinary action, which involves ‘a manager acting within his or her organizational role, The manager may also institute traning to pre- vent sexual harassment and possibly develop a sex- ual harassment policy, which not only prohibits certain behavior but also ereates procedures for han- dling complaints. Responding to harassment as a manager, as opposed to dealing with harassment as a victim, involves decisions on the organizational level rather than the individual level. The question here is, “What do we as an organization do?” Problems that result from accepted business practices or from features of the economic system cannot be effectively addressed by any single organi- zation, much less a lone individual. Sales practices12 Chaptert within an industry, for example, are difficult for one company to change single-handedly because the ‘company is constrained by competition with possi- bly less-ethical competitors. The most effective solu- tion is likely to be an industry-wide code of ethics, agreed to by all Similarly, the lower pay for women work results from structural features of the labor ‘market, which no one company or even industry ean alter, A single employer cannot adopt a policy of comparable worth, for example, because the problem of lower pay for women is systemic, and conse- quently any substantial change must be on the level of the system. Systemic problems are best solved by some form of regulation or economic reform. On the systemic level, the relevant question is, “What do we 45 a society do?” Use Table 1:1 to review these concepts. Table 1.1 Levels of Decision Making in Business Review the type of problem that shouldbe resolved at each level of decision making ac the relevant question for each, ‘Then hie the cals in the table to quiz your understanding of these situations, Level The hndvidual— The pebiom ooo an Inch nd tenes at person io mako accion abouts ar her own response, weOgarzaton The poblon aires halite Wha do wos invduel decision maker act ~ en crgabation ‘on beha ofthe ogsrzatien todo? ‘esol the stuaton ans possi being about some ‘rgenztoral change. The Buseess The problem ests om Spier accepted busress practices o from features ofthe egoromie, sje wtich cannot be octet odersed by ary single indica or cxgarzaton, Identification of the appropriate level for a deci- sion is important because an ethical problem may have zo solution on the level al which it is approached. the beer marketer described earlier may have little choice but to follow the competition in using tasteless gim- ‘micks because the problem has no real solution on the individual or organizational level. An effective response requires that she place the problem on the systemic level and seek a solution appropriate to that level. Richard T. DeGeorge has described such @ move 48 ethical displacement,” which consists of addressing 4 problem on a level other than the one on which the problem appears.'® The fact that some problems can be solved only by displacing them to a higher lovel is a source of great distress for individuals in difficult situa- tions because they still must find some less-than-per- fect response on a lower level aT ‘The Authority to Decide ‘a anary customer is speaking on the phone witha customer ‘service representative. The customer demands afl fund for the detective item she purchased onine, although it is past the ‘0-day period allowed for retums. Describe a possible soltion ‘hat coud be offered at each lvel of decision making, and explain whic levels required to resolve the problem to the ‘custom's satisfaction, 1.3: Ethics, Economics, and Law 1.2 Recognize the role of ethics in the conduct of business, with respect to economic principles ‘and the law Businesses are economic organizations that operate within a framework of law and regulation. They are organized primarily to provide goods and services, as, well as jobs, and their success depends on operating efficiently and competitively. In a capitalist system, firms operate in an open market by providing goods and services that customers want and by doing so at a Jow price. This is possible only when the desired goods and services are produced by multiple firms competing, to attract customers. Thus, profits wot the end or pur pose of business asis commonly asserted, but is merely the return on the investment in a business that is pos- sible only when the business is competitive. Business has often been described as a game, in which the aim is tomake as much profit as possible while staying within the rules ofthe game, which are set mainly by govern- rent through laws and regulations.”” On the view of business asa game, profit isa measure and the reward of success, butt cannot be gained without also aiming. to be competitive. Moreover, itis necessary, in pursu- ing profits to observe certain ethical standards, as well as laws and regulation, as a means to the end of profit making.Both economics and law are critical to business decision making, but the view that they are the only relevant considerations and that ethics does not apply 4s plainly false. Even hard-fought games like football have a code of sportsmanship in addition to a rule book, and business, too, is governed by more than the legal rules. In addition, a competitive business system, in which everyone pursues his or her self-interest, depends for its existence on ethical behavior and is itself justified on ethical grounds. However, the rela- tionships of business ethics to economics and the law are very complicated and not easily summarized. The following discussion is intended to clarify these relationships. 13.1: Ethics and Economics According to economic theory, firms in a free market utilize scarce resources of factors of production (labor, raw materials, and capital) in order to produce an out- ppt (goods and services). The demand for this output is determined by the preferences of individual con- sumers who select from among the available goods and services so as to maximize the satisfaction oftheir preferences, which is called “utility.” Fiems also seek to maximize their preferences or utility by increasing their output up to the point where the amount received from the sale of goods and services equals the amount spent for labor, raw materials, and capital—that is, ‘where marginal revenues equal marginal costs. Under fully competitive conditions, the result is economic efficiency, which means the production of the maxi- ‘mum output for the least amount of input. Economics thus provides an explanatory account of the chaices of economic actors, whether they be individuals or firms. By this account, the sole reason for any choice is to maximize utility. However, ethics considers many other kinds of reasons, including, rights and justice and other noneconomic values. To make a choice on the basis of ethics—that is, to use ethical reasons in making a decision—appears at first glance to be incompatible with economic choice. To make decisions on economic grounds and on ethical grounds is to employ two different kinds of reason- ing, This apparent incompatibility dissolves on closer inspection. If the economists’ account of economic reasoning is intended to be merely an explanation, then it tells us how we do reason in making economic choices but not how we ought to reason. Economics as Ethics in the World of Business 13 a science need do no more than offer explanations, but economists generally hold that economic reason- ing is also justified. That is, economic actors ought to make ulility-maximizing choices, which is an ethical, and not merely an economic, judgment. JUSTIFICATION OF MARKET SYSTEM The argu- ‘ment for this position, that economic actors ought to make utility-maximizing choices, is the classical defense ofthe market system. In The Weolth of Nation, ‘Adam Smith, the “father” of modern economics, justi fied the pursuit of self-interest in exchange on the grounds that by making trades for our own advantage, we promote the interests of others. The justification for a free-market capitalist system is, in part, that by pur- suing profit, business firms promote the welfare of the whole society. Commentators on Adam Smith have observed that this argument assumes a well-ordered civil society with a high level of honesty and trust and an abundance of other moral virtues. Smith’s argu- ment would not apply well toa chaotic society marked by pervasive corruption and mistrust. Furthermore, in his defense of the free market in The Wealth of Nations, Smith was speaking about exchange, whereas econom- ics also includes production and distribution. The dis- tribution of goods, for example, is heavily influenced by different initial endowments, access to natural resources, and the vagaries of fortune, among ther factors. Whether the vast disparities in wealth in the ‘world are justified is a question of distribution, not exchange, and isnot addressed by Smith’s argument. Moreover, certain conditions must be satisfied in order for business activity to benefit the society. These include the observance of minimal moral restraints to prevent theft, fraud, and the like. Markets must be fully competitive, with easy entry and exit, and eve- ryone must possess all relevant information. In addi- tion, all costs of production should be reflected in the prices that firms and consumers pay. For example, unintended consequences of business activity, such a8 job-related accidents, injuries from defective prod- ucts, and pollution, are costs of production that are often not covered or internalized by the manufacturer but passed to others as spillover effects or external ties. Many business ethics problems arise when these conditions for the operation of a free market are not satisfied CONDITIONS FOR FREE MARKETS A common view is that ensuring the conditions for free markets