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CASE OPENER

Business Ethics

Nike and “Sweatshop Labor”

Nike and other shoe manufacturers can reduce costs by having their shoes made in coun-tries where wages are lower than they are in the United States. Workers in Indonesia and Vietnam are willing to work long hours for significantly less than is demanded by American workers. For example, after a recent wage increase, Indonesian workers in Nike plants made the rough equivalent of 20 cents per hour.

In one sense, what Nike wants to do is just smart business. By reducing labor costs, they can make more profits. In addition, Nike, by employing these workers, is giving them employment opportunities that would otherwise not be available.

Yet this situation is even more complicated than it first appears. In the late 1990s Nike’s profits dropped by as much as 40 percent. Why? According to industry leaders, a major cause was the negative publicity shoe companies received from the production of their shoes in foreign “sweatshops.” Typical of the criticisms was a student letter in the Brown University Daily Herald:

[S]weatshops do not exist to promote economic development. They exist to maximize profitsat the expense of human dignity. What little investments that companies do put into the local economy do not even come close to compensating for what they reap through disgustingly low wages and slave-like working conditions. The bottom line is that it is in the companies’ best interests to keep workers poor and powerless. . . . Ending sweatshop labor will not solve the problem of poverty overnight, but it is an important step in the right direction.

In addition, UNITE, an organization that includes union, church, and college student groups, reports that Nike is rapidly moving its production facilities to China, where in

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CHAPTER 2factory-dormitory complexes, labor is regulated in military fashion. For example, young migrant women who work for Nike in China are allegedly restricted from leaving company grounds or quitting their jobs.

1. What would you do if you were in a position at Nike to decide whether to continue or revise your labor practices in foreign countries?

2. Since 1992, Nike has been implementing a code of conduct that mandates the enforcement of all child labor, fair wage, and health laws in its foreign plants. In doing so, is Nike moving toward improved ethics?

The Wrap-Up at the end of the chapter will answer these questions.

Learning Objectives

After reading this chapter, you will be able to answer the following questions:

1 What are business ethics and the social responsibility of business?

2 How are business law and business ethics related?

3 How can we use the WPH framework for ethical business decisions?

18 Part 1 The Legal Environment of Business

What a business manager in the situation described in the opening scenario should do is not altogether clear. Ethical conversation is less about finding the one and only right thing to do than it is about finding the better thing to do. Whatever you choose to do, some stakeholders will be hurt and others will benefit.

This chapter provides some assistance for thinking systematically about issues of right and wrong in business conduct. Initially, we need to sort through the meaning of key terms like business ethics and social responsibility. Then, because it is helpful to have a useful approach to ethical decision making, we provide a practical method by which future busi-ness managers can think more carefully about the ethical dilemmas they will face during their careers.

Ethics is the study and practice of decisions about what is good, or right. Ethics guides us when we are wondering what we should be doing in a particular situation. Business ethics is the application of ethics to the special problems and opportunities experienced by business-people. For example, as a business manager, you might someday decide what is best for Nike and the various people affected by decisions at Nike. Is the company doing the right thing when it attempts to reduce costs of production by having its shoes assembled in countries where the working conditions are very substandard compared to those in the United States?

Such questions present businesses with ethical choices, each of which has advantages and disadvantages. An ethical dilemma is a problem about what a firm should do for which no clear, right decision is available. Reasonable people can expect to disagree about optimal solutions to ethical dilemmas.

For example, imagine yourself in the position of a business manager at Wells Fargo Bank. You know that providing bank accounts for customers has costs attached to it. You want to cover those costs by charging the customers the cost of their checking accounts. By doing so, you can preserve the bank’s revenue for shareholders and employees of Wells Fargo. So far, the decision seems simple. But an ethical dilemma soon appears.

You learn from recent government reports that 12 million families cannot afford to have bank accounts when they are charged a fee to maintain one. You want to do the right thing in this situation. But what would that be? The study of business ethics can help you resolve this dilemma by suggesting approaches you can use that will show respect for oth-ers while maintaining a healthy business enterprise.

Making these decisions would be much easier if managers could focus only on the impact of decisions on the firm. If, for example, a firm had as its only objective the maxi-mization of profits, the “right thing” to do would be the option that had the largest positive impact on the firm’s profits.

But businesses operate in a community. Communities have expectations for behavior of individuals, groups, and businesses. Different communities have different expectations of businesses. Trying to identify what those expectations are and deciding whether to ful-fill them complicate business ethics. The community often expects firms to do much more for it than just provide a useful good or service at a reasonable price. For example, a com-munity may expect firms to resist paying bribes, even when the payment of such fees is an ordinary cost of doing business in certain global settings.

The social responsibility of business consists of the expectations that the community imposes on firms doing business inside its borders. These expectations must be honored to a certain extent, even when a firm wishes to ignore them, because firms are always subject to the implicit threat that legislation will impose social obligations on them. So, if the com-munity expects businesses to obey certain standards of fairness even when the standards

Business Ethics and Social ResponsibilityBusiness Ethics and Social Responsibility

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interfere with profit maximization, firms that choose to ignore that expectation do so at their peril. See Exhibit 2-1 for a brief look at General Electric’s approach to social responsibility.

Business Law and Business Ethics Before business managers consider the social responsibilities of firms in their commu-nities, they need to gather all the relevant facts. Nike’s decision about where and how to manufacture their shoes depends on a huge array of facts: alternative costs, the legal framework in each relevant country, the social responsibilities of firms in the various juris-dictions, unemployment rates, and levels of literacy among potential workers, just to name a few. But experienced managers know that assembling the facts is just the beginning of a thoughtful business decision. Next, it makes sense to ask, Is it legal to go forward with this decision?

Given the number of corporate accounting scandals that have been revealed in the past few years, many corporations are making a point of assuring their investors that their corporate goals are not focused solely on profit. As investors lost millions of dollars during the collapse of companies such as WorldCom and Enron, some corporations have been placing increased emphasis on promoting themselves not only as profitable but as conscientious and ethical.

For example, the following three statements that compose GE’s Citizenship Framework seek to assure current and potential investors that the company is dedicated to both stock performance and company integrity.

GE’s Citizenship Framework

1. Strong economic performance and stakeholder impact.

2. Rigorous compliance with fundamental accounting and legal requirements.

3. Going beyond compliance by supporting ethical actions.

In linking performance and integrity, the company endeavors to pair high profits and compliance with government ethics regulations, promoting itself as a company worthy of investment that will be honest with shareholders. Whereas in years past companies may have focused solely on their profitability in an attempt to gain new investors, today many business managers realize that corporate honesty has become just as important to those who are seeking to buy stock.

Exhibit 2-1Good Citizenship and Profits

AccountingOne of the core areas of business that is increasingly devoting attention to ethics is accounting. Your account-ing book may have even discussed ethics as a key con-cept of accounting. Ethics is a key concept for accounting because the goal of accounting is to provide useful infor-mation to decision makers. If information is to be useful, it must be trusted; the information can be trusted only when

accountants are ethical. To encourage ethical behavior on the part of accountants, many texts remind future busi-ness leaders of the impact their preparation of financial statements can have. For instance, misleading informa-tion could lead to the wrongful closing of a plant with consequent harm to workers, consumers, and suppliers.

Source: J. J. Larson, K. D. Wild, and B. Chiappetta, Principles of Financial Accounting, 17th ed. (New York: McGraw-Hill, 2005), pp. 8–9.

connecting to the core


The legality of the decision is the minimal standard that must be met. But the existence of that minimum standard is essential for the development of business ethics. To make this point, let’s take a look at the growing practice of bribery in the absence of such legal stan-dards. In some countries businesses must pay bribes to receive legitimate supplies. Though the businessperson may be morally opposed to paying the bribes, the supplies are neces-sary to stay in business and there may be no other means of obtaining them.

Thus, foreign companies face an ethical dilemma: They must decide whether to pay bribes or find alternative sources of supplies. For instance, when McDonald’s opened its doors in Moscow, it made arrangements to receive its supplies from foreign providers. These arrangements ensured that the franchise did not have to engage in questionable business practices.

Look at Case 2-1 as an exercise in comparing what is legal with what is ethical. Busi-ness law affects ethics because it provides a floor for managerial ethics. At a minimum, ethics requires a presumption in favor of obedience to law. As you review the Kipps case,consider the relationship between law and ethics.

CASE 2-1REXFORD KIPPS ET AL. V. JAMES CAILLER ET AL.

U.S. COURT OF APPEALS, FIFTH CIRCUIT, 1999 197 F.3D 765

Several universities actively recruited Kyle Kipps, a talented football player in southern Louisiana, in 1996 and 1997. Kyle’s father, Rexford Kipps, was an assis-tant football coach at the University of Southwestern Louisiana (USL) for eleven years. In March 1996, Nelson Stokley, USL’s head football coach, told Rexford Kipps that Kyle was to attend either USL or a college or university outside of Louisiana. When Kyle noti-fied Stokley that he had orally committed to play at Louisiana State University (LSU) on a football schol-arship, Stokley told Rexford Kipps to forbid his son to play football for LSU. Rexford Kipps argued that he could not and would not force his son to refuse to play for LSU. Consequently, Stokley terminated Kipps’s employment with LSU. Both Nelson Schexnayder, Jr., USL Director of Athletics, and Ray Authement, President of USL, approved Kipps’s termination. The President of the Board of Trustees, James Caillier, also approved Kipps’s termination.

Rexford Kipps brought constitutional and state law claims against defendants Caillier, Schexnayder, Authement, and Stokley. These defendants filed for sum-mary judgment, arguing that the at-will employment status of Kipps precluded any wrongful termination

action. Furthermore, they claimed that they were enti-tled to qualified immunity and Kipps’s termination was justified because Kyle’s choice would affect USL’s abil-ity to recruit athletes. The district court granted Stokley, Schexnayder and Authement’s motion for summary judg-ment on qualified immunity grounds. Kipps appealed to the U. S. Court of Appeals, 5th District.

JUDGE PARKER: Public officials acting within the scope of their official duties are shielded from civil liability by the qualified immunity doctrine. Government officials are entitled to qualified immunity “insofar as their conduct does not violate clearly established statu-tory or constitutional rights of which a reasonable person would have known.”

In order to establish that the defendants are not entitled to qualified immunity, plaintiffs must satisfy a three-part test. First, “[a] court evaluating a claim of qualified immunity must first determine whether the plaintiff has alleged the deprivation of a constitutional right at all.” Second, the court must “determine whether that right was clearly established at the time of the alleged violation.” Finally, the court “must determine whether the record shows that the violation occurred, or

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at least gives rise to a genuine issue of material fact as to whether the defendant actually engaged in the conduct that violated the clearly-established right.” If it is deter-mined that the official’s conduct was unconstitutional, then the court must decide whether the conduct was nonetheless “objectively reasonable.”

Assuming arguendo that defendants violated Kipps’s clearly established constitutional liberty inter-est in familial association, the resolution of this issue turns on whether the defendants’ actions were “objec-tively reasonable.” Because we find that defendants’ actions were objectively reasonable, we affirm the district court’s dismissal of Kipps’s 1983 claim on the basis of qualified immunity.

Even if defendants violated Kipps’s clearly estab-lished constitutional right, they are still entitled to

qualified immunity if their actions were objectively reasonable. . . . The record indicates that Kipps was fired because his son chose to play football for a Louisiana school other than USL. Notwithstanding the defendants’ subjective motivation and belief as to the lawfulness of their conduct, we find the defendants’ motivation for terminating Kipps was objectively reasonable. Defendants’ motivation, according to the record in this case, was to mitigate the damage that Kyle’s attendance at LSU as opposed to USL would have on alumni relations and recruiting efforts.

The summary judgment record of this appeal con-tains no facts upon which we could find that defen-dants’ actions were objectively unreasonable.

AFFIRMED.

CRITICAL THINKING

What reasons did the judge offer to support his decision that Kipps’s termination was legal? Which facts in the case are most important in your mind when evaluating the reasoning?

Identify various meanings of the phrase “objectively reasonable.” Which meaning do you think the court is using? Is it clear? How does this affect the validity of the argument given by Judge Parker?

ETHICAL DECISION MAKING

The Kipps case provides a snapshot of the complexity of the link between ethics and the law. Do you believe that some view of what it means to do the right thing is responsible for the legal decision in this case?

As the Kipps case demonstrates, business managers must sometimes decide whether to hire and fire particular employees. Their decisions will be guided by legal rules that have both ethical foundations and implications for needed legal reform.

In addition, the definition of business ethics refers to standards of business conduct. Itdoes not result in a set of correct decisions. Business ethics can improve business decisions by serving as a reminder not to choose the first business option that comes to mind or the one that enriches us in the short run. But business ethics can never produce a list of correct business decisions that all ethical businesses will make.

Well-managed firms try to provide ethical leadership by establishing codes of ethics for the firm. For example, Exhibit 2-2 addresses the attempt by General Motors, a major automobile maker, to make a statement about the importance of business ethics to its firm. Notice, however, that this corporate code can never do more than provide guidance. The complications associated with managerial decisions do not permit any ethical guide to provide definitive lists of right and wrong decisions.

[CONTINUED]


During the past several years, ethics violations have been uncovered in the accounting practices of a number of large companies. Enron and WorldCom were two of the perpetrators in these scandals. Both companies failed to report or record billions of dollars in profit losses, which resulted in stockholders believing that the companies were in a much better financial state than actually existed.

Enron’s tangled web involved the company’s creating multiple subsidiaries and related companies. These businesses were often treated as companies independent of Enron and not shown on the accounting books. Enron used the subsidiaries to conceal debts and losses in a very complex fraud scheme. When the company went bankrupt, employees who had based their retirement plans around Enron stock lost almost everything. Additionally, Enron auditor Arthur Andersen was found guilty of shredding documents about Enron’s audits.

In June 2002, shortly after the Enron bankruptcy was announced, WorldCom revealed that it also had engaged in unethical accounting practices. WorldCom’s violations included counting profits twice and concealing billions of dollars in expenses when making reports to the SEC. The company thereby made itself appear profitable when it was actually losing money. In total, WorldCom had more than $7 billion in misreported debt.

These two cases, among others, left investors understandably concerned about the truthfulness of individuals who were in charge of operating large corporations. Those in charge of these companies had been awarded million-dollar bonuses while completely disregarding stockholders and employees, who lost millions of dollars when the companies collapsed.

The revelations of Enron and WorldCom suggested quite blatantly that the business world could not be allowed to regulate itself ethically. Their downfall in part led to many federal regulations designed to promote truthfulness and ethical practices among business managers. In this new business environment, there is a much greater degree of government oversight to ensure that companies maintain high standards of ethical behavior. Companies are required to make their accounting records far more transparent, to satisfy not only the federal government but their understandably wary investors.

Exhibit 2-3Enron, WorldCom, and Shifts in Business Regulation

GENERAL MOTORS’ CODE OF BUSINESS CONDUCT

The foundation for all conduct by GM and its employees is one of our core values: Integrity. Integrity is essential to achieving our vision of becoming the world leader in transportation products and services, earning the enthusiasm of our customers, working together as a team, innovating, and continuously improving. We call this Winning With Integrity.

These Guidelines are designed to help GM and its employees understand and meet fundamental obligations that are vital to our success. Some of those obligations are legal duties. They are established by the laws, regulations, and court rulings applicable to our business. Other obligations result from policies GM establishes to make sure our actions align with our core values and cultural priorities. Compliance with both types of obligation—our legal duties and our internal policies—is vital to our goal of winning with integrity.

Employees who violate these guidelines may be subject to disciplinary action which, in the judgment of management, is appropriate to the nature of the violation and which may include termination of employment. Employees may also be subject to civil and criminal penalties if the law has been violated.

Exhibit 2-2Ethical Business Practices

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At the same time that business ethics guides decisions within firms, ethics helps guide the law. Law and business ethics serve as an interactive system—informing and assessing each other. For example, our ethical inclination to encourage trust, dependability, and effi-ciency in market exchanges shapes many of our business laws. See Exhibit 2-3 for instance. The principles of contract law, for instance, facilitate market exchanges and trade because the parties to an exchange can count on the enforceability of agreements. Legal rules that govern the exchange have been shaped in large part by our sense of commercial ethics.

Of course, different ethical understandings prevail in different countries. Thus, ethi-cal conceptions shape business law and business relationships uniquely in each country. Increasingly, business leaders require sensitivity to the differences in legal guidelines in the various countries in which they operate. These differences are based on somewhat dif-ferent understandings of ethical behavior among businesspeople in diverse countries.

As we mentioned above, business ethics does not yield one “correct” decision. So how are business managers to chart their way through the ethical decision-making process? One source of assistance consists of the general theories and schools of thought about eth-ics. Each ethical system provides a method for resolving ethical dilemmas by examining duties, consequences, virtues, justice, and so on. A detailed look at each of these ethical systems can be found in Appendix A-2.

In the interest of providing future business managers with a practical approach to busi-ness ethics that they can use, we suggest a three-step process: the WPH approach. Thisapproach offers future business managers some ethical guidelines, or practical steps, that provide a dependable stimulus to ethical reasoning in a business context. Appendix A-2 provides the theoretical basis for the WPH approach used in this book.

The WPH Framework for Business Ethics

A useful set of ethical guidelines requires recognition that managerial decisions must meet the following primary criteria:

The decisions affect particular groups of stakeholders in the operations of the firm. The pertinent question is thus, Whom would this decision affect?

•

global context

Contractual Relationships and Ethics in JapanIn the United States, business contracts are extensive and lengthy. They stipulate action for nearly every pos-sible situation that may arise between parties. Lawyers direct the process of creating and agreeing to a contract. Most American businesspersons would not think of drawing up a contract without legal assistance.

In Japan, however, the idea of involving lawyers in contractual relationships is quite upsetting. The Japa-nese are disturbed that American contracts discuss what would happen if one party in the contract cheated, lied, or wished to terminate. Such discussion is seen as a sign of distrust between the parties. Japanese contracts are

based on trust. Often the relationship is finalized ver-bally rather than by a signature. These verbal agree-ments are called yakusoku.

Because contracts are founded on mutual trust between parties, the contents are open and flexible in comparison to the painstakingly rigid American con-tracts. This structure allows Japanese businesspersons to deal with problematic issues between the parties as they arise. The Japanese also prefer to solve contract problems through arbitration or compromise rather than through litigation. Executives will go to great lengths to avoid involving lawyers and the court system with their business. Japanese contractual relationships are shaped by the dominant sense of ethics in Japanese culture.

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• The decisions are made in pursuit of a particular purpose.Business decisions are instruments toward an ethical end.

• The decisions must meet the standards of action-oriented business behavior. Managers need a doable set of guide-lines for how to make ethical decisions.

The remainder of this chapter explains and illustrates this framework. See Exhibit 2-4 for a summary of the key WPH elements.

WHO ARE THE RELEVANT STAKEHOLDERS? The stakeholders of a firm are the many groups of people affected by the firm’s decisions. Any given managerial deci-sion affects, in varying degrees, the following stakeholders:

1. Owners or shareholders.

2. Employees.

3. Customers.

4. Management.

5. The general community where the firm operates.

6. Future generations.

1. W—WHO (Stakeholders):

Consumers

Owners or investors

Management

Employees

Community

Future generations

2. P—PURPOSE (Values):

Freedom

Security

Justice

Efficiency

3. H—HOW (Guidelines):

Public disclosure

Universalization

Golden Rule

Exhibit 2-4 The WPH Process of Ethical Decision Making

global context

Business Ethics and Italian TaxesWhen Italian corporations file their tax returns, the tax authorities assume that the corporations are underes-timating their profits by 30 to 70 percent. Although this assumption has proved to be true, the Italian Rev-enue Service does not press charges. In fact, purposely understating profits is the accepted practice within Italy.

Knowing the faulty nature of the tax return, the Revenue Service sends an “invitation to discuss” about six months after a corporation has filed. The parties agree on a meeting date. At the meeting the corpora-tion’s executives do not attend. Instead, they send a commercialista whose “function exists for the primary purpose of negotiating corporation tax payments.”

Several rounds of bargaining take place between the commercialista and the tax authorities. On the basis of the corporation’s taxes the previous year and the estimation

of the current return, the two parties agree on a payment that is usually much higher than the original estimation but is still less than face value.

This negotiating process, while it may seem foreign to Americans, is a common business practice in Italy. In the early 1980s an American banker learned the dif-ficult lesson that, for a firm doing business in a for-eign country, local custom has a significant impact on ethical practice. The banker refused, on ethical grounds, to underestimate profits on the tax return. The Italian Revenue Service suggested several times that he hire a commercialista and resubmit his tax return.

The American banker refused all such suggestions. Finally, the Revenue Service sent the American a notice that demanded payments 15 times larger than what he owed. The banker immediately arranged an appointment to express his outrage. When he arrived at the meeting, the Italian tax authorities were pleased to see him and said, “Now we can begin our negotiations.”

Chapter 2 Business Ethics 25

Exhibit 2-5 gives a portrait of Nortel Networks’ commitments to its primary stakeholders and demonstrates that Nortel is aware of the people involved in its various decisions.

When you consider the relevant stakeholders, try to go beyond the obvious. In the Case Nugget, Maria’s encounter with her company’s vice president clearly highlights cer-tain common interests of management and its employees. However, a useful exercise for all of us is to force ourselves to think more broadly about additional stakeholders who may be affected just as much in the long run. Then we will be less likely to make decisions that have unintended negative ethical impacts.

Maria’s ethical dilemma is complex. Many of the issues in the dilemma pertain to her career and the welfare of her firm. But consider the many stakeholders whose interests were not introduced into the conversation. When we overlook important, relevant stake-holders, we are ignoring a significant component of ethical reasoning.

Consider the negative impact that results when a firm fails to show adequate respect for a major stakeholder. On December 3, 1984, a horrible catastrophe occurred at a chemi-cal plant in Bhopal, India. The plant was a subsidiary of Union Carbide. Damage to some equipment resulted in the emission of a deadly gas, methyl isocyanate, into the atmosphere. The emission of the gas caused injuries to more than 200,000 workers and other people in the neighborhood of the chemical plant. Several thousand people died.

Hypothetical Case Nugget The Many Stakeholders in a Business Decision

Maria LopezMaria recently became the purchasing manager of a small lawn-mower manufactur-ing firm. She is excited about the opportunity to demonstrate her abilities in this new responsibility. She is very aware that several others in the firm are watching her closely because they do not believe she deserves the purchasing manager position.

Her new job at the firm requires that she interact with several senior manag-ers and leaders. One vice president in particular, Brian O’Malley, is someone she admires because he has earned the respect of the CEO on the basis of his success at making profits for the firm. Again and again, he just seems to know how to discover and take advantage of competitive opportunities that end up paying off royally for the firm.

Maria’s first responsibility is to buy the motors for the assembly line. The motors constitute 30 percent of the total construction cost of the lawn mowers. Consequently, even a small error on Maria’s part would have huge implications for the firm’s profit-ability. The bids from the motor suppliers are required to be secret in order to maxi-mize competition among the suppliers. The bids are due at 5 p.m. today.

At 3 p.m., Maria accidentally sees Brian returning the submitted bids to the locked safe where they are to be stored, according to company policy, until all bids have been submitted at 5 p.m. Then at 4:45 p.m., she notices a postal delivery of a bid from Stein’s Motor Company. Her head buzzes as it hits her that Stein’s president is one of Brian O’Malley’s cousins.

She has no idea what to do. However, she knows she has to decide quickly.


Many factors, including worker error, faulty management decisions, equipment failures, and poor safety standards combined to cause the accident. Union Carbide was accused of not demanding the same rigorous safety standards in India as it had in the United States. Citizens of both India and the United States demanded the corporation be held responsible for its evident neglect of safety. Union Carbide argued that it could not operate the plant if it were required to obey rigid Indian safety standards and that the economic benefits of the plant to India outweighed the risks of not following these standards. After years of litigation in both U.S. and Indian courts, Union Carbide was eventually ordered to monetarily compensate the victims of the accident. Among other factors, Union Carbide’s failure to respect the interests of a major stakeholder resulted in a disaster for the firm and for the community.

After we consider stakeholders, the next step in the WPH framework is to consider the purpose of business decisions. In the next section, we look first at the parties involved, and then we explore the purposes that bring these various parties together in a common effort.

WHAT ARE THE ULTIMATE PURPOSESOF THE DECISION? When we think about the ultimate reason or purpose for why we make decisions in a business firm, we turn to the basic unit of business ethics—values. Values are positive abstractions that capture our sense of what is good or desirable. They are ideas that under-lie conversations about business ethics. We derive our ethics from the interplay of values. Values represent our understanding of the purposes we will fulfill by making particular decisions.

For example, we value honesty. We want to live in communities where the trust that we associate with honesty prevails in our negotiations with one another. Business depends on the maintenance of a high degree of trust. No contract can protect us completely against every possible contingency. So we need some element of trust in one another when we buy and sell.

If we think about the definition of values for a moment, we realize two things immedi-ately. First, there are a huge number of values that pull and push our decisions. Second, to state that a value is important in a particular situation is to start a conversation about what is meant by that particular value.

To help make WPH useful to you as a manager, Exhibit 2-6 outlines an efficient way to apply this second step in the WPH framework. The exhibit identifies four of the most

To Employees•

Nortel Networks commits to treating individuals with respect, following fair and equitable employment practices, and protecting and enhancing employee health and safety.

To Shareholders•

Nortel Networks seeks to provide value to shareholders, while maintaining financial prudence.

To Customers•

Nortel Networks maintains high ethical standards in all its customer relationships, and upholds the Core Value: “We fulfill our commitments and act with integrity.”

To Suppliers•

Nortel Networks is fair in its choice of suppliers and honest in all business interactions with them.

Exhibit 2-5Commitments to Nortel Networks’ Stakeholders


important values influencing business ethics and presents alternative meanings for each. Exhibit 2-6 should not only help clarify the importance of values in your own mind but also enable you to question others who claim to be acting in an ethical fashion.

For instance, a manager might be deciding whether to fire an employee whose perfor-mance is less than impressive. In making this decision, the manager explores alternative visions of key values such as justice and efficiency and then makes choices about which action to take. Values and their alternative meanings are often the foundation for different ethical decisions.

To avoid ambiguity, many companies summarize their values in brief statements. Nor-tel Networks’ statement of core values, shown in Exhibit 2-7 , identifies for Nortel’s stake-holders which positive abstractions guide its business decisions.

HOW DO WE MAKE ETHICAL DECISIONS? Making ethical decisions has always been one of our most confusing and important human challenges. In the process of meeting this challenge, we have discovered a few general, ethical guidelines to assist us. An ethical guideline provides one path to ethical conduct. Notice that all three ethical guidelines below reflect a central principle of business ethics: consideration for stakeholders.

The Golden Rule. The idea that we should interact with other people in a manner con-sistent with the way we would like them to interact with us has deep historical roots. Both Confucius and Aristotle suggested versions of that identical guideline. One scholar has identified six ways the Golden Rule can be interpreted:

1. Do to others as you want them to gratify you.

2. Be considerate of others’ feelings as you want them to be considerate of yours.

3. Treat others as persons of rational dignity like you.

VALUE ALTERNATIVE MEANINGS

Freedom 1. To act without restriction from rules imposed by others.

2. To possess the capacity or resources to act as one wishes.

3. To escape the cares and demands of this world entirely.Security 1. To possess a large enough supply of goods and services to meet

basic needs.

2. To be safe from those wising to interfere with your property rights.

3. To achieve the psychological condition of self-confidence to such an extent that risks are welcome.

Justice 1. To receive the products of your labor.

2. To treat all humans identically, regardless of race, class, gender, age, and sexual preference.

3. To provide resources in proportion to need.

4. To possess anything that someone else is willing to grant you.

Efficiency 1. To maximize the amount of wealth in society.

2. To get the most from a particular output.

3. To minimize costs.

Exhibit 2-6Primary Values and Business Ethics


4. Extend brotherly or sisterly love to others, as you would want them to do to you.

5. Treat others according to moral insight, as you would have others treat you.

6. Do to others as God wants you to do to them.

Regardless of the version of the Golden Rule we use, this guideline urges us to be aware that other people—their rights and needs—matter.

Let’s return to the ethical problem outlined at the beginning of this chapter. Using the Golden Rule as your ethical guideline, how you would you behave? Would you hide the information about where your company’s shoes are manufactured, or would you disclose the information? Put yourself into the consumer’s position. As a consumer, would you want to know that a shoe was manufactured in another country? Are there other stakeholders in the organization whose interests should be the focus of your application of the Golden Rule? The focus on others that is the foundation of the Golden Rule is also clearly reflected in a second ethical guideline: the public disclosure test.

Public disclosure test. Applying what you have learned to the ethical dilemma faced by Nike, suppose you decide to ignore the complaints about working conditions in your plants in foreign countries. Now suppose that your decision to ignore the complaints is printed in the newspaper. How would the public react? How would you feel about the public’s having full knowledge of what you intend to do?

We tend to care about what others think about us as ethical agents. Stop for a mo-ment and think of corporations that failed to apply the public disclosure test and generated negative reactions as a result. For example, Dr. Hugh Davis, a professor at Johns Hopkins University, invented the Dalkon Shield birth control device. In the late 1960s and early

NORTEL NETWORKS’ CORE VALUES

1. We create superior value for our customers.

2. We work to provide shareholder value.

3. Our people are our strength.

4. We share one vision. We are one team.

5. We have only one standard—excellence.

6. We embrace change and reward innovation.

7. We fulfill our commitments and act with integrity.

New ways of organizing people and work within the corporation are giving each of us more decision-making responsibility. Given the complexity and constantly changing nature of our work and our world, no book of hard-and-fast rules—however long and detailed—could ever adequately cover all the dilemmas people face. In this context, every Nortel Networks’ employee is asked to take leadership in ethical decision making.

In most situations, our personal values and honesty will guide us to the right decision. But in our capacity as employees and representatives of Nortel Networks, we must also always consider how our actions affect the integrity and credibility of the corporation as a whole. Our business ethics must reflect the standard of conduct outlined in this document—a standard grounded in the corporation’s values and governing Nortel Networks’ relationships with all stakeholders.

Exhibit 2-7Core Values: A Guide to Ethical Business Practice


1970s, Dr. Davis was considered a rising star in the field of women’s health and family planning. By the mid-1980s, Dr. Davis was known as a dishonest man. A. H. Robins, the company that sold the Dalkon Shield, was bankrupt.

What caused the change in public opinion? Many women became infertile because of the device, and a few women died. The public learned that Dr. Davis—the man who was performing the apparently objective medical studies of the Dalkon Shield’s safety—had a financial interest in the Dalkon Shield. Because of Dr. Davis’s failure to disclose this inter-est, the birth control device was not tested appropriately, and many women were harmed as a result.

Dr. Davis is likely to have behaved differently if he had realized that the public would eventually know of his financial interest in the Dalkon Shield. Presumably, he would have made sure that he took actions to protect his reputation and ensure the safety of women who used the Dalkon Shield.

Another way to think of the public disclosure test is to view it as a ray of sunlight that makes our actions visible, rather than obscured. As Exhibit 2-8 suggests, the issue of trans-parency of behavior is often seen as a method of improving ethical behavior. The public disclosure test is sometimes called the “television test,” for it requires us to imagine that our actions are being broadcast on national television. The premise behind the public dis-closure test is that ethics is hard work, labor that we might resist if we did not have frequent reminders that we live in a community. As a member of a community, our self-concept is tied, at least in part, to how that community perceives us.

Universalization test. A third general guideline shares with the other two a focus on the “other”—the stakeholders whom our actions affect. Before we act, the universalization test asks us to consider what the world would be like were our decision copied by everyone else. Applying the universalization test causes us to wonder aloud: “Is what I am about to

THE SARBANES-OXLEY ACT

The Corporate and Criminal Fraud Accountability Act, also known as the Sarbanes-Oxley Act, was signed by President Bush in 2002 in the wake of several corporate accounting scandals. The act is intended to promote high ethical standards among business managers and employees through a series of stringent requirements and controls that regulate several different facets of corporate operation.

Among other things, the act created the Public Company Accounting Oversight Board. This board is responsible for ensuring that auditors and public accounting firms compile accurate and truthful financial reports for the companies they audit. The act also requires that companies devise a system that allows employees to report suspicions of unethical behavior within the company. The act also protects these whistle-blowers from being fired or from retaliation by their employer for reporting a possible problem within the company.

Additionally, the chief executive officer (CEO) or chief financial officer (CFO) must personally vouch that the company’s financial statements are correct, meet all SEC requirements for disclosure, and represent company finances accurately. The act provides for very harsh penalties in the case of violations. If the CEO or CFO knows that the company’s financial reports are incorrect but claims they are truthful, or if he or she destroys or changes financial documents, the imposed fine can run into the millions of dollars.

Exhibit 2-8A Mandate for Ethical Behavior

30

do the kind of action that, were others to follow my example, makes the world a better place for me and those I love?”

In summary, business managers can apply the WPH approach to most ethical dilem-mas. The WPH framework provides a practical process suited to the frequently complex ethical dilemmas that business managers must address quickly in today’s society.

Nike

Nike, as well as other firms, affects the lives of many stakeholders in many countries. Nike’s owners, workers, and customers are perhaps the most obvious stakeholders in deci-sions Nike makes about its production, marketing, and human relations policies. But the scope of Nike’s activities is much broader than is suggested by that list of stakeholders. The company’s activities also influence the lives of future generations, competing local busi-nesses, and international relations among diverse trading partners. All of Nike’s decisions have ethical implications.

What those decisions are can be guided by an appreciation of the conflicting values that lie under the surface when we make decisions that affect others. The WPH system of ethical decision making stimulates Nike and similar companies to ask questions about their behavior that highlight their possible effects on the community.

All of us would probably agree that Nike has a responsibility to try to be a sustainable business enterprise. Toward that end, profits are essential. But labor practices that cut costs may not be an effective way to make long-run profits because the multiple Nike stakehold-ers disagree about the benefits of such practices. Some argue that more humane labor and environmental policies would better support the firm’s long-range goals of being a com-petitive and successful business firm.

CASE OPENER WRAP-UPCASE OPENER WRAP-UP

e-commerce AND THE LAW

Computer Use and EthicsThe use of computers to store and transfer important business information has resulted in a new set of ethi-cal concerns. How private is the computer screen? Are companies allowed to collect information about their customers? Who owns the information customers give to e-businesses? E-commerce law is gradually adjusting to such questions. But as the beginning of this chapter pointed out, knowing the law is just the first step in dis-covering ethical business decisions.

One case that considered questions related to e-commerce and privacy involved Toysmart.com and its privacy policy. In 2000, the Federal Trade Commission (FTC) filed a complaint against Toysmart.com, charg-ing the online retailer with selling customer lists despite

earlier privacy statements that its customers’ personal data would never be shared with a third party. The cus-tomer lists were included as assets to be sold as part of the company’s bankruptcy proceedings. The FTC issued a settlement with Toysmart.com allowing the lists to be sold as long as (1) the sale occurred before July 2001, (2) the lists would be sold to a family-oriented company, and (3) the buyer would agree to abide by the original Toysmart.com privacy policy. After the FTC imposed these restrictions, the end result was that customers’ personal information was not sold.

The Toysmart.com case makes it clear that, for both ethical and legal reasons, companies that adopt a privacy policy need to think that policy through before announcing it to customers.


Summary

Business Ethics and Social Responsibility

Business ethics is the application of ethics to the special problems and opportunities experienced by businesspeople.The social responsibility of business consists of the expectations that the community imposes on firms doing business with its citizens.

Business Law and Business Ethics

Business ethics builds on business law. The law both affects and is affected by evolving ethical patterns. But business law provides only a floor for business ethics, telling business leaders the minimally acceptable course of action.

The WPH Framework for Business Ethics

Who are the relevant stakeholders? This question determines which interests (consumers, employees, managers, owners) are being pushed and prodded.What are the ultimate purposes of the decision? This question determines which values (freedom, efficiency, security, and justice) are being upheld by the decision.How do we make ethical decisions? This question leads us to apply general ethical guidelines:

Golden Rule: Do unto others as you would have them do unto you.•

Public disclosure test: If the public knew about this decision, how would you decide?•

Universalization test: What would the world be like were our decision copied by every-one else.

•

Are the Costs Associated with the Sarbanes-Oxley Act Reason for Reform?

No YesCorporate and accounting scandals, such as Enron, were the reason the Sarbanes-Oxley Act of 2002 was drafted. The act promotes honesty and accountabil-ity in financial reporting, thus bringing increased security to investors. For example, corporations must now ensure the segregation of all duties related to accounting procedures.

Although critics assert that the financial bur-den associated with the act is reason for reform, the compliance costs about which they speak are begin-ning to fall as individuals become familiar with the new systems. In addition, the Dow Jones Industrial Average is rising as a result of increased investor confidence. This confidence is the direct result of the requirement that corporations disclose informa-tion and allow for investigations by the Public Com-pany Accounting Oversight Board.

Corporations need incentives to remain or go public. The Sarbanes-Oxley Act of 2002 is not an incentive. Although there may have been ample motivation for the development of an act that addresses accounting scandals, the costs associated with Sarbanes-Oxley are much too high. Simply purchasing and learning to use the materials needed for compliance with the act would cost approximately $3.5 million.

Those who argue that the act should not be reformed often focus on the idea that every corpora-tion is now being held to the same standards. However, as a result of the substantial economic costs associated with implementation of the guidelines, smaller busi-nesses that would like to go public are forced to remain private to avoid the costs. Among small businesses that are already public, many are not able to gather the resources necessary to comply with the act.

Sarbanes-Oxley Act of 2002

Point / Counterpoint


Since the passing of the Sarbanes-Oxley Act, there have not been any known major accounting scandals. Without public disclosure, corporations would have little incentive to engage in rigorous evaluation of their own accounting practices. By forcing the corporations to disclose information, they are being held to higher ethical standards than they were previously.

In addition to the costs associated with the act, cor-porations are now monitored by commissions that are appointed rather than elected. These commissions lack the accountability that is necessary to make decisions about how to regulate, tax, and punish companies and individuals that may violate the provisions of the act. Thus, the act as it is currently written does not provide an equal opportunity to all corporations and businesses.

1. How do business ethics and business law interact with each other? Is one highly ethi-cal and the other less ethical?

2. If business ethics does not offer guidance about what is always the right thing to do, is one behavior as good as the next?

3. How does the WPH approach to ethics approach an ethical problem? 4. Jarold Daniel Friedman worked as a temporary computer contractor for a pharmaceu-

tical warehouse. The warehouse offered him a permanent position, but the warehouse required him to get a mumps vaccine, grown in chicken embryos, as a condition of his permanent employment. Friedman, a vegan, believed that the vaccination would violate his religious beliefs and declined to be vaccinated. As a result, the warehouse withdrew its offer of employment. Friedman claimed that the warehouse discrimi-nated against him on the basis of religion. Do you agree with Friedman? Do employ-ers have a duty to respect the beliefs of their employees? If so, what happens when that duty conflicts with employers’ duty to provide a safe and healthy work environ-ment? [ Friedman v. Southern California Permanente Medical Group, 102 Cal. App. 4th 39 (2002).]

5. John Bigan owned a strip-mining operation in which he dug trenches to remove coal deposits. One of these trenches was nearly 20 feet deep and contained water about 10 feet deep. Bigan installed a pump in the trench to remove the water and asked Joseph Yania, the owner of another strip-mining operation, to help him start the pump. Bigan urged and taunted Yania, who could not swim, to jump from the edge of the trench into the water, where Bigan was working on the pump. Yania jumped and drowned. Yania’s widow sued Bigan, alleging that he failed to rescue her husband. Do you think Bigan should have rescued Yania? Do you think the law should require that Bigan rescue Yania? Why or why not? What values are you employing in your argument? [Yania v. Bigan, 397 Pa. 316 (1959).]

6. Jennifer Erickson sued her employer, Bartell Drug Company, contending that its decision not to cover prescription contraceptives under its employee prescription drug plan constituted sex discrimination. Bartell argued that its decision was not sex dis-crimination because contraceptives were preventive, were voluntary, and did not treat an illness. With whom do you agree? Why? What values did you use to reach your conclusion? [ Erickson v. Bartell Drug Co., 141 F. Supp. 2d 1266 (2001).]

7. Entertainment Network, Inc. (ENI), a business that provided news, entertainment, and information via the Internet, sued government officials who prohibited the company

Questions & Problems


from filming the execution of Oklahoma City bomber Timothy McVeigh and selling the footage of the execution online. The government officials argued that a Justice Department regulation prohibiting audio and visual recording devices at federal executions applied in the case at hand. ENI, however, argued that the regulation violated the company’s First Amendment right to free speech. How do you think the court should have ruled in this case? Do you think ENI might have altered its decision to broadcast the execution if it had applied the Golden Rule? [ Entm’t Network, Inc. v. Lappin, 134 F. Supp. 2d 1002 (2001).]

8. Heather Reider, a student at McNeese State University, was purchasing a ticket for a university baseball game at the ballpark ticket booth when a foul ball struck her in the eye, shattering her eye socket and causing permanent blindness in her right eye. Reider sued the university, claiming that because the ticket booth was not adequately protected from foul balls, the ballpark had an unreasonable defect that created the risk of substantial harm to patrons. Who do you think won the suit? What ethical issues does this case raise? [ Reider v. State of Louisiana, 897 So. 2d 893 (2005).]

9. Javier Galindo, the husband of Richard Clark’s housekeeper, was sitting in his car, parked in the driveway of Clark’s house, waiting to pick up his wife. While he was waiting, a leaning 80-foot tree located on an adjacent property fell on Galindo’s car and killed him. Galindo’s wife sued Clark, alleging that Clark was liable for failing to notify Galindo about the danger posed by the leaning tree. Do you think that Clark had a legal responsibility to tell Galindo about the tree? Do you think Clark had an ethical responsibility to tell Galindo about the tree? Why might the answer to these questions be different? [ Galindo v. Town of Clarkstown, 2 N.Y. 3d 633 (2004).]

10. The decedent in the case became very sick and sent a messenger to his longtime fam-ily physician, Dr. Eddingfield. The messenger told Eddingfield about the decedent’s dangerous illness, told him that no other doctor could be reached in time to save the decedent, and paid Eddingfield up front for medical services for the decedent. Eddingfield refused to tender his services to the decedent without reason. When the decedent died, the administrator of his estate brought suit against Eddingfield, contending that Eddingfield wrongfully refused to enter into an employment contract with the decedent. How do you think the court should have ruled in this case? Does a doctor have a legal or ethical responsibility to help individuals against his or her will? [Hurley v. Eddingfield, 156 Ind. 416 (1901).]

11. Aileen Morris was an employee at a Kauszer’s convenience store. Convenience Man-agement Services, Inc. (CMSI), own Krauszer’s. While working at the store, Aileen, a mother of nine children, was shot to death by a robber. The store was located in a dan-gerous area and had a history of robberies and criminal attacks. Despite the dangerous location, the store did not have an alarm, a security camera, or an immediate connec-tion to the police. According to the plaintiffs, the absence of these security precautions created a dangerous environment. CMSI argued that it had no duty to protect Morris because the robbery and shooting were unforeseeable. How far do you think a com-pany should go to protect employees? Do you think that CMSI was responsible for the shooting? Why or why not? [ Morris v. Krauszer’s Food Stores, 693 A.2d 510 (1997).]

12. Deborah Vargo-Adams was employed as a distribution clerk for the U.S. Postal Service. Adams was regularly absent from work and had been reprimanded and suspended several times. After receiving a notice of removal, Adams filed a grievance claiming that she suffered from migraine headaches and was frequently unable to go


to work. The Postal Service reinstated Adams under the condition that she provide them with medical documentation of her illness and acceptable evidence for future absences when required. At first, Adams complied with the conditions. During an eight-month period, Adams was absent without leave more than two days, was late to work seven times, and was absent nine days. On each of these occasions she provided notice and excuses for her absences. Seven of her notices were rejected because her supervisor claimed that they lacked the proper documentation. After receiving the rejections, Adams stopped submitting her written excuses, but continued to verbally notify her supervisor that the absences were related to her illness. She continued to have an attendance problem and was terminated in 1995. Do you think the Postal Service should have made a better attempt to accommodate her “serious health condi-tion”? Did the termination constitute a “wrongful discharge”? [ Vargo-Adams v. U.S. Postal Service, 992 F. Supp. 939 (1998).]

13. Grand Central Partnership Social Services Corporation is a not-for-profit organization. The organization provides counseling, referrals, clothing, showers, and mail access for the homeless. Additionally, the organization implemented a program known as Path-ways to Employment (PTE), designed to assist in the development of vocational skills. The program provided workshops covering topics such as interviewing skills and résumé writing. Participants in the PTE program were assigned to five areas: main-tenance, food services, administration, outreach, and recycling. Each of these tasks related to the overall operation and goals of the center. Individuals participating in the PTE program were required to participate 40 hours per week and were paid between $40 and $60 per week. The plaintiffs, predominantly homeless and jobless individu-als, alleged that the wages paid by Grand Central were below minimum wage and therefore unlawful. Grand Central argued that participants in the PTE program were trainees, not employees, and that the participants were learning valuable job readiness skills. Do you think that this is an appropriate distinction? What ethical issues should be considered? [ Archie v. Grand Central Partnership, 997 F. Supp. 504 (1998).]

14. Doctors diagnosed Leo Guilbeault with lung cancer. He had been smoking the same brand, Camel cigarettes, since 1951. Guilbeault filed a complaint against the manufac-turer of Camel cigarettes, R. J. Reynolds Tobacco Co. According to Guilbeault, Reyn-olds failed to adequately warn consumers about the dangers of smoking. Prior to 1970, Camel cigarettes were sold without a warning label. After the Labeling Act of 1966, Reynolds began to put warning labels on packages of cigarettes. Guilbeault believes that Reynolds knew about the adverse health consequences of smoking before 1970 and, therefore, that Reynolds had a duty to warn consumers of these consequences. Do you agree with his argument? Should Reynolds have warned consumers earlier? [Guilbeault v. R. J. Reynolds Tobacco Co., 44 Fed. R. Serv. 3d 124 (1999).]

Looking for more review material? The Online Learning Center at www.mhhe.com/kubasek1e contains this chapter’s “Assignment on the

Internet” and also a list of URLs for more information, entitled “On the Internet.” Find both of them in the

Student Center portion of the OLC, along with quizzes and other helpful materials.

Appendix A-2 Theories of Business Ethics

Ethical Relativism and Situational Ethics

An ethical school of thought that may seem appealing on the surface is ethical relativ-ism. Ethical relativism is a theory of ethics that denies the existence of objective moral standards. Rather, according to ethical relativism, individuals must evaluate actions on the basis of what they feel is best for themselves. Ethical relativism holds that when two indi-viduals disagree over a question about morality, both individuals are correct because no objective standard exists to evaluate their actions. Instead, morality is relative, and thus no one can criticize another’s behavior as immoral. Many people find ethical relativism attrac-tive because it promotes tolerance.

Ethical relativism may appear attractive at first glance, but very few people are willing to accept the logical conclusions of this theory. For example, ethical relativism requires us to see murder as a moral action as long as the murderer believes that the action is best for himself or herself. Once a person accepts the appropriateness of criticizing behavior in some situations, the person has rejected ethical relativism and must develop a more com-plex ethical theory.

Situational ethics is a theory that at first appears similar to ethical relativism but is actually substantially different. Like ethical relativism, situational ethics requires that we evaluate the morality of an action by imagining ourselves in the position of the person fac-ing the ethical dilemma. But unlike ethical relativism, situational ethics allows us to judge other people’s actions. In other words, situational ethics holds that once we put ourselves in another person’s shoes, we can evaluate whether that person’s action was ethical.

While situational ethics provides a useful rule of thumb to use when thinking about the ethical decision-making process, it does not offer specific-enough criteria to be use-ful in many real-world situations. Once we imagine ourselves in the position of a person facing an ethical dilemma, situational ethics does not tell us how to evaluate that person’s actions. An alternative school of ethical thought, however, provides a much more judgmen-tal approach to ethical dilemmas.

Absolutism Absolutism, or ethical fundamentalism, requires that individuals defer to a set of rules to guide them in the ethical decision-making process. Unlike ethical relativism and situ-ational ethics, absolutism holds that whether an action is moral does not depend on the perspective of the person facing the ethical dilemma. Rather, whether an action is moral depends on whether the action conforms to the given set of ethical rules.

Of course, people disagree about which set of rules to follow. Why should we accept and act on any one absolutist set of rules? Absolutism cannot tell us, for example, why we ought to follow the doctrines set forth in the Koran and not Hindu doctrines.

Moreover, the unquestionable nature of the rules in most absolutist repositories seems overly inflexible when applied to different situations. For instance, “Thou shalt not kill” seems to be an absolute rule, but, in practice, killing in self-defense seems to be an accept-able exception to this rule.

35


In contrast to absolutism, consequentialism does not provide a rigid set of rules to fol-low regardless of the situation. Rather, as the word consequentialism suggests, this ethi-cal approach “depends on the consequences.” Consequentialism is a general approach to ethical dilemmas that requires that we inquire about the consequences to relevant people of our making a particular decision.

Utilitarianism is one form of consequentialism that business managers may find use-ful. Like many consequentialist theories of ethics, utilitarianism urges managers to take those actions that provide the greatest pleasure after having subtracted the pain or harm associated with the action in question.

Utilitarianism has two main branches: act utilitarianism and rule utilitarianism. Act utili-tarianism tells business managers to examine all the potential actions in each situation and choose the action that yields the greatest amount of pleasure over pain for all involved. For example, according to act utilitarianism, a business manager who deceives an employee may be acting morally if the act of deception maximizes pleasure over pain for everyone involved.

Rule utilitarians, on the other hand, see great potential for the abuse of act utilitari-anism. Instead of advocating the maximization of pleasure over pain in each individual situation, rule utilitarianism holds that general rules that on balance produce the greatest amount of pleasure for all involved should be established and followed in each situation. Thus, even if the business manager’s decision to deceive an employee maximizes pleasure over pain in a given situation, the act probably would not be consistent with rule utilitarian-ism because deception does not generally produce the greatest satisfaction.

Rule utilitarianism underlies many laws in the United States. For example, labor laws prohibit employers from hiring children to do manufacturing work, even though in some situations the transaction would maximize pleasure over pain.

One form of utilitarianism commonly applied by firms and government is cost-benefit analysis. When a business makes decisions based on cost-benefit analysis, it is comparing the pleasure and pain of its optional choices, as that pleasure and pain are mea-sured in monetary terms.

As we have shown, consequentialism is not altogether helpful because of the extreme difficulty in making the required calculations about consequences. Another issue raises an important additional objection to consequentialist thinking: Where does the important social value of justice fit into consequentialist reasoning? Many business decisions could be beneficial in their consequences for a majority of the population, but is it fair to require that a few be harmed so that the majority can be improved? Consequentialism does not provide definite answers to these questions, but an alternative ethical theory does.

Deontology is an alternative theoretical approach to consequentialism. When you see refer-ences to Kantian ethics, the analysis that follows the reference will be a discussion of the most famous of the deontological approaches to business ethics. Unlike a person espousing consequentialism, a person using a deontological approach will not see the relevance of making a list of harms and benefits that result from a particular decision. Instead, deontol-ogy consists of acting on the basis of the recognition that certain actions are right or wrong, regardless of their consequences. For example, a business leader might consider it wrong to terminate a person whose spouse has terminal cancer because a firm has an obligation to support its employees when they are vulnerable, period.

ConsequentialismConsequentialism

DeontologyDeontology


But how are business managers to decide whether an action is right or wrong? The German deontological philosopher Immanuel Kant proposed the categorical imperative to determine whether an action is right. According to the categorical imperative, an action is moral only if it would be consistent for everyone in society to act in the same way. Thus, for example, applying the categorical imperative would lead you to conclude that you should not cheat on a drug test, because if everyone acted in the same way, the drug test would be meaningless.

From the deontological viewpoint, the duties or obligations that we owe one another as humans are much more ethically significant than are measurements of the impacts of business decisions. For example, a person using a deontological theory of ethics may see any business behavior that violates our duty of trust as being wrong. To sell a car that one knows will probably not be usable after four years is, from this perspective, unethical. No set of positive consequences that might flow from the production decision can overcome the certainty of the deontological recognition that the sale is wrong.

The duties that we owe others imply that human beings have fundamental rights based on the dignity of each individual. This principle of rights asserts that whether a business decision is ethical depends on how the decision affects the rights of all involved. This principle is foundational to Western culture: the Declaration of Independence, for example, asserts that everyone has the right to “life, liberty, and the pursuit of happiness.”

But just as consequentialism is incredibly complicated, deontology is difficult to apply because people disagree about what duties we owe to one another and which duties are more important than others when they conflict. For example, imagine the dilemma of a scientist working for a tobacco firm who discovers that cigarettes are carcinogenic. She owes a duty of trust to her employer, but she also has a conflicting duty to the community to do no harm. Where would a business manager find a list of relevant duties under the deontological framework, and why should we accept and act on any particular list?

In addition, as with absolutism, the absolute nature of many deontological lists of duties and rights seems overly rigid when applied to a wide variety of contexts. For instance, saying that we owe a duty to respect human life sounds absolute. In application, however, we might be forced to harm one life to preserve other life. An alternative theory of ethics, called virtue ethics, avoids this rigidity problem by providing us with abstract goals to pursue continually.

Virtue Ethics Virtue ethics is an ethical system in which the development of virtues, or positive char-acter traits such as courage, justice, and truthfulness, is the basis for morality. A morally excellent (and thus good) person develops virtues and distinguishes them from vices, or negative character traits such as cowardice and vanity. This development of virtues occurs through practice. Virtues are the habits of mind that move us toward excellence, the good life, or human flourishing.

As a guide to business ethics, virtue ethics requires that managers act in such a way that they will increase their contributions to the good life. Virtue ethics tells them to fol-low the character traits that, upon introspective reflection, they see as consistent with vir-tue. Identifying the relevant virtues and vices requires reasoning about the kind of human behavior that moves us toward the good, successful, or happy life.

A difficulty with the application of virtue ethics is the lack of agreement about the meaning of “the good life.” Without that agreement, we are not able to agree about what types of behavior are consistent with our achievement of that goal. Even so, virtue ethics


is useful in reminding us that ethics is grounded in a sense of what it means to be virtu-ous—we need some moral beacon to call us toward a more morally excellent condition. An alternative theory of business ethics, the ethics of care, offers a clear conception of what is virtuous.

The ethics of care holds that the right course of action is the option most consistent with the building and maintaining of human relationships. Those who adhere to an ethic of care argue that traditional moral hierarchies ignore an important element of life: relationships. Care for the nurturing of our many relationships serves as a reminder of the importance of responsibility to others.

According to someone who adheres to an ethic of care, when one person cares for another person, the first person is acting morally. When other ethical theories emphasize different moral dimensions as a basis for resolving ethical dilemmas, they rarely consider the harm they might do to relationships; thus, from the perspective of the ethics of care, alternative theories of business ethics often encourage unethical behavior.

Ethics-of-care theorists argue that when one individual, the caregiver, meets the needs of one other person, the cared-for party, the caregiver is actually helping to meet the needs of all the individuals who fall within the cared-for party’s web of care. Thus, by specifically helping one other individual, the caregiver is assisting numerous people.

The strength of this theoretical approach is that it focuses on the basis of ethics in general: the significance of the interests of other people. The urging to care for relation-ships speaks to the fundamental basis of why we are concerned about ethics in the first place. Most of us do not need any encouragement to think about how a decision will affect us personally. But ethical reasoning requires that we weigh the impact of decisions on the larger community.

Let’s examine how these ethical theories are applied in real-world firms. Exhibit A-2.1 is an abridged version of the Johnson & Johnson Credo, or statement of shared corporate values. General Robert Wood Johnson, who guided Johnson & Johnson from a small, family-owned business to a worldwide enterprise, believed the corporation had social responsibilities beyond the manufacturing and marketing of products. In 1943, he wrote and published the Johnson & Johnson Credo, a document outlining those responsibilities. Does the credo depend more on ethical relativism, situational ethics, absolutism, consequentialism, deontology, virtue ethics, or the ethics of care for its ethical vision?

Ethics of CareEthics of Care

THE CREDO

We believe our first responsibility is to the doctors, nurses and patients, to mothers and fathers and all others who use our products and services. In meeting their needs everything we do must be of high quality. We must constantly strive to reduce our costs in order to maintain reasonable prices. Customers’ orders must be serviced promptly and accurately. Our suppliers and distributors must have an opportunity to make a fair profit.

We are responsible to our employees, the men and women who work with us throughout the world. Everyone must be considered as an individual. We must respect their dignity and recognize their merit. They must have a sense of security in their jobs. Compensation must be fair and adequate, and working conditions clean, orderly and safe. We must be mindful of ways to help our employees fulfill their family responsibilities. Employees must feel free to make suggestions and complaints. There must be equal opportunity for employment, development and advancement for those qualified. We must provide competent management, and their actions must be just and ethical.

Exhibit A-2.1 Johnson & Johnson’s Credo


THEORIES OF BUSINESS ETHICS

Ethical approach DescriptionEthical relativism Asserts that morality is relative.

Situational ethics Requires that when we evaluate whether an action is ethical, we imagine ourselves in the position of the person facing an ethical dilemma.

Consequentialism Considers the consequences (i.e., harms and benefits) of making a particular decision.

Deontology Recognizes certain actions as right or wrong regardless of the consequences.

Virtue ethics Encourages individuals to develop virtues (e.g., courage and truthfulness) that guide behavior.

Ethics of care Holds that ethical behavior is determined by actions that care for and maintain human relationships.

At a Glance

We are responsible to the communities in which we live and work and to the world community as well. We must be good citizens—support good works and charities and bear our fair share of taxes. We must encourage civic improvements and better health and education. We must maintain in good order the property we are privileged to use, protecting the environment and natural resources.

Our final responsibility is to our stockholders. Business must make a sound profit. We must experiment with new ideas. Research must be carried on, innovative programs developed and mistakes paid for. New equipment must be purchased, new facilities provided and new products launched. Reserves must be created to provide for adverse times. When we operate according to these principles, the stockholders should realize a fair return.

Used with permission of Johnson & Johnson.

Exhibit A-2.1 Johnson & Johnson’s Credo (continued)

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