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Chapte

r 7
Business Ethics
This chapter:
 Discusses ethical tools that managers at Arthur Andersen
might have used.
 Sets forth basic sources of ethical values.
 Discusses how corporations manage ethics and try to
elevate behavior.

McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.


The Fall of Arthur Andersen
Opening Case
 Arthur Andersen founded the firm, making its credo,
“Think straight, talk straight.” His commitment to
integrity became known as the “Andersen Way.”
 For years after his death the firm maintained high
standards.
 Consulting services became a huge part of the firm
that eventually broke away after a battle with the
accounting side of the business.
 A new consulting group within Arthur Andersen
emerged; auditors were evaluated on the amount of
additional services they sold to clients.
McGraw-Hill/Irwin 7-3 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
The Fall of Arthur Andersen
Opening Case (continued)
 To cut costs, partners were forced to retire at age 56,
removing a layer of leadership experienced in the
Andersen Way.
 Under pressure, auditors became reluctant to alienate
clients resulting in a series of disgraceful audit
performances.
 At Enron an Arthur Andersen auditor was coerced into
writing an opinion letter stating that certain tax audits
were legitimate, leading to the collapse of both companies.
Arthur Andersen founded a culture of rectitude that warped
because several generations of management allowed the
Andersen Way to be undermined.
McGraw-Hill/Irwin 7-4 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
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 them.
 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 resolution.
 Some ethical issues are hidden and hard to recognize.
 Some ethical issues are very subtle.

McGraw-Hill/Irwin 7-5 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
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 is lives on quietly.

McGraw-Hill/Irwin 7-6 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
Two Theories of Business Ethics
(continued)
 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 business.

McGraw-Hill/Irwin 7-7 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
Aristotle’s Theory of
Responsibility
 More than 2,000 years ago, Aristotle recognized that
ethical behavior is based on voluntary choice.
 Aristotle argued that ignorance and involuntariness
may restrict choice, thereby rendering behavior
involuntary.
 Involuntariness arises when external factors limit or
dictate behavior.
 An action may impose unrealistically high costs
 There may be no power to influence an outcome
 At times no alternative exists
 External forces may compel action

McGraw-Hill/Irwin 7-8 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
Major Sources of Ethical Values in
Business

McGraw-Hill/Irwin 7-9 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
Religion
 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 Bible.
 In Islam the Koran is a source of ethical inspiration.
 In the Jewish tradition, managers can turn to rabbinic
moral commentary in the Talmud and the books of
Moses in the Torah.

McGraw-Hill/Irwin 7-10 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
Philosophy
 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.
McGraw-Hill/Irwin 7-11 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
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 death.

McGraw-Hill/Irwin 7-12 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
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.
McGraw-Hill/Irwin 7-13 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
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 evolution.
 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.
McGraw-Hill/Irwin 7-14 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
Cultural Experience
 Every culture transmits between generations
a set of traditional values, rules, and
standards that define acceptable behavior.
 Hunting and gathering stage
 Agricultural stage
 Industrial stage

McGraw-Hill/Irwin 7-15 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
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.

McGraw-Hill/Irwin 7-16 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
Law
 Laws codify, or formalize, ethical
expectations.
 Corporations and their managers face a range
of mechanisms set up to:
 Deter illegal acts
 Punish offenses
 Rehabilitate offenders

McGraw-Hill/Irwin 7-17 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
Damages
 In civil cases courts may assess damages, or
payments for harm done to others by a corporation.
 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
fairness.
McGraw-Hill/Irwin 7-18 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
Criminal Prosecution of Managers
and Corporations
 Managers may be prosecuted for criminal actions
undertaken in the course of their employment.
 Corporations are criminally liable for corrupt actions
or omissions of managers if those actions are
intended to benefit the corporation.
 Criminal prosecution of corporations and their
executives is exceptionally difficult.

McGraw-Hill/Irwin 7-19 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
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
occupations.
 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.
McGraw-Hill/Irwin 7-20 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
Factors That Influence Managerial
Ethics

McGraw-Hill/Irwin 7-21 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
Leadership
 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 compromised.
 If the leader does something, an opportunistic
employee can rationalize his or her entitlement to do
it also.

McGraw-Hill/Irwin 7-22 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
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
compromise.
 Unrealistic performance goals can pressure those
who must make them work.
 Reward and compensation systems can expose
employees to ethical compromises.

McGraw-Hill/Irwin 7-23 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
Corporate Culture
 Every corporate culture has an ethical dimension
reinforced by daily habit and shared beliefs about
which behaviors are rewarded and which are
penalized.
 A factor that contributes to lowered ethical climates
in corporations is moral muteness.
 The tendency toward moral muteness is probably
present to some degree in every company.

McGraw-Hill/Irwin 7-24 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
How Corporations Manage
Ethics
1. Establish standards and procedures.
2. Create high-level oversight.
3. Screen out criminals.
4. Communicate standards to employees.
5. Monitor and set up an anonymous hotline.
6. Enforce standards, discipline violators.
7. Assess areas of risk, modify the program.

McGraw-Hill/Irwin 7-25 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
Ethics Programs: A Strong
Future
 Ethics programs are a set of interrelated policies and
methods.
 Many companies have one or more of the central
elements of an ethics program, but only a small
number have strong programs.
 Some companies who engaged in criminal behavior
were forced to adopt strong ethics programs as part
of a settlement.
 Even companies with complete ethics and
compliance efforts are subject to scandals.

McGraw-Hill/Irwin 7-26 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
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.

McGraw-Hill/Irwin 7-27 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.