You are on page 1of 43

Chapter 7

Business Ethics
This chapter:
 Sets forth basic sources of ethical values.
 Discusses how corporations manage ethics and
try to elevate behavior.
Opening Case
 Bernard Ebbers built WorldCom into a global
telecommunications giant.
 Ebbers used use all of his WorldCom stock as collateral for
bank loans.
 In 2000 Ebbers gave the first in a string of instructions to
report false revenues and use accounting tricks to disguise
rising expenses.
 Ebbers testified that he had no knowledge of the fraud, but
five of his subordinates testified against him.
 Ebbers was sentenced to 25 years in prison for securities
fraud, unprecedented for a white-collar crime.
 Some question whether his sentence was fair.

Ebbers is seen now as unethical, a criminal, and deficient as
a leader.
What are Business Ethics?
 Business ethics is the study of good and evil, right and
wrong, and just and unjust actions in business.
 Although all managers face difficult ethical conflicts,
applying clear guidelines resolves the vast majority of
 Ethical traditions that apply to business support truth telling,
honesty, protection of life, respect for rights, fairness, and
obedience to law.
 Eliminating unethical behavior may be difficult, but knowing
the rightness or wrongness of actions is usually easy.
 Some ethical decisions are troublesome because although
basic ethical standards apply, conflicts between them defy
 Some ethical issues are hidden and hard to recognize.
 Some ethical issues are very subtle.
Two Theories of
Business Ethics
 The theory of amorality is that business
should be conducted without reference to
the full range of ethical standards,
restraints, and ideals in society.
 The apex of this view came during the latter
half of the nineteenth century.
 The theory of amorality has far less public
acceptance today, but it lives on quietly.
Two Theories of Business Ethics
 The theory of moral unity is that business
actions are judged by the general ethical
standards in society, not by a special set of
more permissive standards.
 Actions are not moral just because they
make money.
 Ethical conflicts cannot be avoided simply
because they arise in the course of
Major Sources of Ethical Values in
 The great religions converge in the belief that a
divine will reveals the nature of right and wrong
behavior in all areas of life, including business.
 Christian managers often seek guidance in the
 In Islam the Koran is a source of ethical
 In the Jewish tradition, managers can turn to
rabbinic moral commentary in the Talmud and the
books of Moses in the Torah.
 Even after two millennia, there remains
considerable dispute among ethical thinkers about
the nature of right action.
 Greek ethics
 Socrates asserted that virtue and ethical behavior were
associated with wisdom and taught that insight into life
would naturally lead to right conduct.
 Plato carried this doctrine of virtue as knowledge further
by elaborating the theory that absolute justice exists
independently of individuals and that its nature can be
discovered by intellectual effort.
Philosophy (continued)
 Aristotle spelled out virtues of character in the
Nicomachean Ethics and advocated a regimen of
continuous learning to improve ethical behavior.
 Epictetus taught that virtue was found solely
within and should be valued for its own sake,
arguing that this inner virtue was a higher reward
than external riches or worldly success.
 The great Catholic theologians St. Augustine
and St. Thomas Aquinas both believed that
humanity should follow God’s will; correct
behavior in business and in all worldly activity
was necessary to achieve salvation and life after
Philosophy (continued)
 Secular philosophers such as Baruch Spinoza
tried to demonstrate ethical principles with logical
analysis rather than ordain them by reference to
God’s will.
 Immanuel Kant tried to find universal and
objective ethical rules in logic.
 Jeremy Bentham developed the idea of
utilitarianism as a guide to ethics, validating two
dominant ideologies: democracy and industrialism.
 John Locke developed and refined doctrines of
human rights and left an ethical legacy supporting
belief in the inalienable rights of human beings.
The Realist School
of Ethics
 The realists believed that both good and evil were naturally
present in human nature; human behavior would inevitably
reflect this mixture.
 Niccolò Machiavelli argued that important ends justified
expedient means.
 Herbert Spencer supported a harsh ethic that justified
vicious competition among companies because it furthered
 Friedrich Nietzsche said that “nice” ethics were
prescriptions of the timid, designed to fetter the actions of
great men whose irresistible power and will were regarded as
dangerous by ordinary mortals.
Cultural Experience
 Every culture transmits between
generations a set of traditional values,
rules, and standards that define acceptable
 Civilization is a cumulative cultural
experience consisting of three stages:
 Hunting and gathering stage

 Agricultural stage

 Industrial stage
Ethical Variation
in Cultures
 Ethical values differ among nations as historical experiences
have interacted with philosophies and religions to create
diverging cultural values and laws.
 The school of ethical universalism holds that in terms of
biological and psychological needs, human nature is
everywhere the same.
 The school of ethical relativism holds that although human
biology is everywhere similar, cultural experience creates
widely diverging values, including ethical values.
 Because of globalization, corporations struggle with the
question of how to apply conduct codes across cultures.
 Laws codify, or formalize, ethical
 Corporations and their managers face a
range of mechanisms set up to:
 Deter illegal acts

 Punish offenses

 Rehabilitate offenders
 In civil cases courts may assess damages, or
payments for harm done to others by a
 Compensatory damages are payments

awarded to redress concrete losses suffered by
injured parties.
 Punitive damages are payments in excess of a

wronged party’s actual losses, awarded to deter
similar actions and punish a corporation.
 Since the purpose of punitive damages is to punish
and deter misconduct, they must be large enough
to cause pain, yet they raise many questions about
Criminal Prosecution of
Managers and Corporations
 Managers may be prosecuted for criminal
actions undertaken in the course of their
 Corporations are criminally liable for
corrupt actions or omissions of managers if
those actions are intended to benefit the
 Criminal prosecution of corporations and
their executives is exceptionally difficult.
Sentencing, Fines, and
Other Penalties
 In 1991 the United States Sentencing Commission
released guidelines for sentencing both managers
and corporations.
 Managers can go to prison, be fined, put on
probation, given community service, make
restitution, or be banned from working in their
 Corporations cannot be imprisoned, but they can
be fined and their actions restricted.
 Other methods for penalizing corporate crime exist,
such as having their fines paid to charities.
Factors That Influence
Managerial Ethics
 The example of company leaders is perhaps
the strongest influence on integrity.
 A common failing is for managers to show
by their actions that ethical duties can be
 If the leader does something, an
opportunistic employee can rationalize his
or her entitlement to do it also.
Strategies and Policies
 A critical function of managers is to create
strong competitive strategies that
enable the company to meet financial goals
without encouraging ethical
 Unrealistic performance goals can pressure
those who must make them work.
 Reward and compensation systems can
expose employees to ethical compromises.
Corporate Culture
 Corporate culture refers to any set of
values, norms, rituals, formal rules, and
physical artifacts that exists in a company.
 Three levels of corporate culture:
 Artifacts
 Espoused values
 Tacit underlying values
 Often inconsistencies are observed between
the levels.
How Corporations Manage Ethics
 Establish standards and procedures.
 Create high-level oversight.
 Screen out criminals.
 Communicate standards to employees.
 Monitor and set up an anonymous hotline.
 Enforce standards, discipline violators.
 Assess areas of risk, modify the program.
Concluding Observations

 The business environment is rich in
sources of ethical values. Yet strong forces
in both markets and corporations act to
depress behavior.
 Managers can use a range of methods to
discourage transgression and encourage
high ethics.
 Individuals also have a range of principles
with which to enrich their ethical thinking
and powerful methods with which to make
ethical decisions.
Chapter 8

Making Ethical
Decisions in Business

This chapter sets forth a wide
range of principles and methods
for making ethical decisions.
Principles of
Ethical Conduct
 There are dozens, if not hundreds, of
ethical principles in the philosophical and
religious traditions of East and West.
 The following 14 principles are fundamental
guides or rules for behavior.
 These principles distill basic wisdom that
spans 2,000 years of ethical thought.
The Categorical Imperative
 Origination: Immanuel Kant
 Basic premise: Act only according to that
maxim by which you can at the same time
will that it should become a universal law.
 Criticism: Theory is dogmatic and
The Conventionalist Ethic
 Origination: Albert Z. Carr
 Basic premise: Business is like a game
with permissive ethics and any action that
does not violate the law is permitted.
 Criticism: Commerce defines the life
changes of millions and is not a game to be
taken lightly.
The Disclosure Rule
 Origination: Baxter International’s Global
Business Practice Standards
 Basic premise: Test an ethical decision by
asking how you would feel explaining it to a
wider audience such as newspaper readers,
television viewers, or your family.
 Criticism:
 Does not always give clear guidance for ethical
dilemmas in which strong arguments exist for
several alternatives.
 An action that sounds acceptable if disclosed
may not, upon reflection, be the most ethical.
The Doctrine of the Mean
 Origination: Aristotle
 Basic premise: Virtue is achieved through
moderation. Avoid behavior that is
excessive or deficient of a virtue.
 Criticism: The doctrine itself is inexact.
The Ends-Mean Ethic
 Origination: Ancient Roman proverb, but
often associated with Niccolò Machiavelli.
 Basic premise: The end justifies the
 Criticism:
 In solving ethical problems, means may be as
important, or more so, that ends.
 The process of ethical character development
can never be furthered by the use of expedient
The Golden Rule
 Origination: Found in the great religions
and in works of philosophy.
 Basic premise: Do unto others what you
would have them do unto you.
 Criticism:
 People’s ethical values differ, and they may
mistakenly assume that their preferences are
 It is primarily a perfectionist rule for
interpersonal relations.
The Intuition Ethic
 Origination: Defined by G.E. Moore in Principia
 Basic premise: What is good or right is
understood by an inner moral sense based on
character development and felt as intuition.
 Criticism:
 The approach is subjective.

 Self-interest may be confused with ethical

 No standard of validation outside the individual

is used.
 Intuition may fail to give clear answers.
The Might-Equals-Right Ethic
 Origination: Thracymachus
 Basic premise: Justice is the interest of
the stronger.
 Criticism:
 Confusion of ethics with force.

 Invites retaliation and censure, and is not

conducive to long-term advantage.
The Organization Ethic
 Origination: Not credited.
 Basic premise: Be loyal to the
 Criticism: Many employees have such deep
loyalty to an organization that it transcends
The Principle of
Equal Freedom
 Origination: Herbert Spencer
 Basic premise: A person has the right to
freedom of action unless such action
deprives another person of a proper
 Criticism: Lacks a tie breaker for situations
in which two rights conflict.
The Proportionality Ethic
 Origination: Medieval Catholic theology
 Basic premise: A set of rules for making
decisions having both good and evil
 Criticism: These are intricate principles,
requiring consideration of many factors.
The Rights Ethic
 Origination: Western Europe during the
 Basic premise: Each person has
protections and entitlements that others
have a duty to respect.
 Criticism:
 Rights are sometimes stretched into selfish
demands or entitlements.
 Rights are not absolute and their limits may be
hard to define.
The Theory of Justice
 Originator: Contemporary, John Rawls.
 Basic premise: Each person should act
fairly toward others in order to maintain the
bonds of community.
 Criticism: Rawl’s principles are resplendent
in theory and may even inspire some
business decisions, but they are best
applied to an analysis of broad societal
The Utilitarian Ethic
 Origination: Line of English philosophers,
including Jeremy Bentham and John Stuart Mill.
 Basic premise: The greatest good for the greatest
 Criticism:
 In practice it has led to self-interested

 Because decisions are to be made for the

greatest good of all, utilitarian thinking has led
to decisions that permit the abridgement of
individual or minority group rights.
Reasoning with Principles
 The use of ethical principles, as opposed to the
intuitive use of ethical common sense, may
improve reasoning, especially in complex
 Based on the application of utility, rights, and
justice, the manager’s decision in the text example
to remain silent is acceptable.
 Some judgment is required in balancing rights, but
the combined weight of reasoning with all three
principles supports the manger’s decision.
Character Development
 Character development is a source of
ethical behavior separate from the use of
principles reasoning.
 The theory that character development is
the wellspring of ethical behavior can be
called the virtue ethic.
 Aristotle believed that by their nature
ethical decisions require choice, and we
build virtue, or ethical character, by
habitually making the right choices.
Practical Suggestions for Making
Ethical Decisions
 Learn to think about ethics in rational terms
using ideas such as universalizability, reversibility,
utility, proportionality, or others.
 Consider some simple decision-making tactics to
illuminate alternatives.
 Sort out ethical priorities early.
 Be publicly committed on ethical issues.
 Set an example.
 Thoughts may be translated into action, and ethical
deeds often require courage.
 Cultivate sympathy and charity toward others.
Concluding Observations
 There are many paths to ethical behavior.
 Not all managers appreciate the repertoire
of principles and ideas that exist to resolve
the ethical problems of business life.