UNDERSTANDING

BUSINESS ETHICS
first e d i t i o n

Peter A. Stanwick
Auburn University

Sarah D. Stanwick
Auburn University

PEARSON

Prentice
Hall Pearson Education International
Contents
Preface xx
About the Authors xxvi

CHAPTERS

The Foundation of Ethical Thought 1

Introduction 2
The Foundation of Ethical Theory 4
Types of Ethical Examinations 4
Teleological Frameworks 4
Ethical Egoism 4
Utilitarianism 5
Sidgusick's Dualism 6
Deontological Frameworks 6
Existentialism 6
Contractarianism 7
Kant's Ethics 7
Mixed Frameworks 8'
Intuitionism and Love 8
Global Business Standards Codex 8
Fiduciary Principle 9
Property Principle 9
Reliability Principle 9
Transparency Principle 10
Dignity Principle 10
Fairness Principle 11
Citizenship Principle 11
Responsiveness Principle 12
Questions for Thought 12
Contemporary Issues in Business Ethics 13
History of Business Ethics 15
The Role of Integrity 16
vi! Contents

Specific Behaviors of High Integrity 17

Possess Humility 17
Maintain Concern for the Greater Good 11
Be Truthful 11
Fulfill Commitments 11
Strive for Fairness 17
Take Responsibility 18
Have Respectfor the Individual 18
Celebrate the Good Fortune of Others 18
Develop Others 18
Reproach Unjust Acts 18
Be Forgiving 18
Extend Self for Others 18
How People Develop Ethical Behavior 18
The Ethical Cycle 19
Moral Problem Statement 19
Problem Analysis 19
Options for Action 20
Ethical Judgment 20
Reflection 20
Using Ethical Decisions to Build Character 20
Ethical Managers Are Able to Make Their Own Rules 21
Is Everyone Unethical? 22
Implicit Prejudice 22
In-Group Favoritism 22
Claiming Credit for Others' Actions 23
Conflicts of Interest 23
Knowing "Right" from "Wrong" 24
Rationalizing Unethical Behaviors 25
Transparency 25
Effect 25
Fairness 25
Monitoring Reputations 27
Striving for Ethical Behavior 28
Internal and External Current Ethical Issues 29
Questions for Thought 31
 Contents vii

Stakeholders and Corporate Social Responsibility 32

What Is a Stakeholder? 34
Management's Response to Stakeholders 35
Moral Management and Stakeholders 35
Which Stakeholders Are More "Important"? 37
The Role of Stakeholder Communications 39
Employees as Stakeholders 40
Is Discrimination Based on Image Legal? 45
Suppliers as Stakeholders 47
The Ethics of Outsourcing 41
Customers as Stakeholders 49
The Manufacturing Process 49
Sales and Quotes 49
Distribution 50
Customer Service 50
Government as a Stakeholder 50
Local Community and Society as Stakeholders 50
The Role of Corporate Social Responsibility 50
Components of Corporate Social Responsibility 51
Identification of Relevant Social Issues 52
A Firm's Strategic Response to Social Issues 53
The Role of Human Rights 56 .
Questionsfor Thought 51

Corporate Governance and Corporate Compliance 58

Ethics and Corporate Governance 60
Board of Directors 60
Typical Decisions Made by the Board of Directors 62
Types of Board of Directors Committees 62
Executive Committee 62
Nominating Committee 62
Corporate Governance 62
Compensation Committee 63
Succession Committee 63
Audit Committee 63
Finance Committee 63
viii Contents

The Role of the Board of Directors 63

Passive Board 64
Certifying Board 64
Engaged Board 64
Intervening Board 64
Operating Board 64
Ethics and the Structure of the Board of Directors 65
The Benefits of a Strong Board of Directors 65
Role of CEO Compensation 65
CEO Compensation and Ethical Reputation 66
Ethical Viewpoints Explaining CEO Compensation 66
Components of the Sarbanes-Oxley Act 67
History of the Sarbanes-Oxley Act 69
Public Company Accounting Oversight Board 69
Section 404—Internal Controls 69
The Cost of Compliance with the Sarbanes-Oxley Act 71
The Cadbury and Combined Code 73
Ethics and Corporate Compliance 73
The U.S. Federal Sentencing Guidelines for
Organizations 75
The Challenge of Compliance 75
Corporate Compliance Systems and Global Corruption 76
The Cost of Corruption 11
The U.S. Foreign Corrupt Practices Act 78
Corporate Governance and Stakeholders 79
Questions for Thought 80

Ethics and the Environment 81

The Tragedy of the Commons 83
Natural Environment as a Stakeholder 83
Natural Environment as a Competitive Advantage 84
Strategy 1: Ecoefficiency 85
Strategy 2: Beyond Compliance Leadership 85
Strategy 3: Ecobranding 86
Strategy 4: Environmental Cost Leadership 86
Voluntary Environmental Compliance 87
The Cost ofNoncompliance 87
 Contents ix

What Does It Mean to Be Green? 88

Examples of Environmental Commitments 88
Employees as Environmental Stakeholders 89
NGOs as Environmental Stakeholders 90
Greenpeace 90
Siemi Club 90
Environmental Defense Fund 91
Friends of the Earth 91
Communicating the Firm's Environmental Commitment to
Its Stakeholders 91
Government Regulations 92
Voluntary Partnerships with the EPA 93
Environmental Accounting Issues 94
Environmental Justice 94
Environmental Sustainability 95
The Triple Bottom Line 96
Equator Principles 96
Ethics and Climate Change 97
What Is the Greenhouse Gas Effect? 91
Kyoto Treaty 98
Two Inconvenient Truths 99
Climate Change as a Strategic Option 99
Questions for Thought 100

Health-Care Ethics 101

The Role of Medical Ethics 102
Biomedical Ethics 103
What Questions Should Be Asked Pertaining to
Bioethics? 104
The Doctor-Patient Relationship 105
Health-Care Codes of Ethics 106
Health Insurance Portability and Accountability Act 110
Pharmaceutical Issues 112
TheRiseofE-Drugs 113
Stakeholders and the Health-Care System 114
Questions for Thought 115
x ; Contents

Ethics and Information Technology 116

Why Are Information Technology Ethical Issues
Important? 117
Four Schools of Ethical Thought 119
Phenomenology vs. Positivism 119
Rules vs. Consequences 119
Individuals vs. Collectivities 119
Management Issues and Policy Areas for Information
Technology 121
Management Issues 121
Policy Areas that Can Address Information Technology
Management Issues 122
The Next Step: Critical Analysis 123
Privacy of Employees 124
Types of Computer Moni toring 125
Telephone Monitoring 127
Privacy of Customers 127
The Challenge of Technology 131
The Role of Government Regulations 133
Technology-Based Fraud 134
Internet Attacks 137
The USA PATRIOT Act 138
Questions for Thought 139

Strategic Planning and Corporate Culture 140

Ethics and Strategic Planning .141
Is There a Link between Strategic Planning and an
Ethical Culture? 142
A Manager's Ability to Develop Trust, Commitment, and
Effort 143
The Role of Power and Influence in Ethical Decisions 144
Influence 145
A Machiavellianism Approach to Decision
Making 145
How to Control Power and Influence 145
The Curse of Unethical Cultures 146
The Responsibility of Managers 146
 Contents xi

How to Address Ethical Decision Making from a Global

Perspective 148
How to Address Ethical Crisis and Disaster Recovery 149
Ethical Leadership: A Link between Strategic Planning and
Corporate Culture 150
Traits 150
Behaviors 151
Decision Making 151
Moral Manager 151
Unethical Leader 152
Ethical Leader 152
Hypocritical Leader 152
Inconsistent Leader 152
Corporate Culture 153
How Managers Can Change a Corporate Culture 154
How to Change Ethical Values 154
Evaluation of Corporate Culture 156
Questions for Thought 158

Ethics and Financial Reporting 159

The Role of Creative Accounting 161
Ethical Philosophies and Accounting Issues 161
The Role of Financial Reporting 161
The Objectives of Financial Reporting 163
Where Were the Auditors? 163
Auditor-Firm Conflicts of Interest 164
Shareholder-Management Conflicts of Interest 165
Self-Interest-Professional Standards Conflicts of
Interest 165
Steps of an Audit 165
Example of a Clean Audit Report 166
Current Trends in Auditing 167
Responsibilities of Management 168
Responsibilities ofAuditors 169
Responsibilities of Audit Committees 110
AICPA Code of Professional Conduct 170
Role of Government Regulations 171
Gramm-Leach-Bliley Act 173
xii Contents

Risk of Manipulation of Financial Statements 174

Major Components of a Firm's Financial Statements 175
Accounting Shenanigans or Tricks of the Trade 176
Questions for Thought 118
10 Establishing a Code of Ethics and Ethical
Guidelines 179
Role of a Code of Ethics 180
Code of Ethics and Stakeholders 181
Benefits of a Code of Ethics 182
Content of a Code of Ethics 183
The Role of Total Responsibility Management and a Code of
Ethics 184
Inspiration Process 184
Integration: Changes in Strategies and Management
Practices 185
Innovation: Focusing on Assessment, Improvement, and
Learning Systems 186
Steps for an Effective Code of Ethics 186
Value of a Code of Ethics 189
How to Make a Code of Ethics More Effective 190
Examples of Codes of Ethics 190
Role of Government Regulations 192
Global Code of Ethics 194
Caux Round Table Principles 194
Organization of Economic Co-operation and Development
Guidelines for Multinational Enterprises 194
United Nations Global Impact 194
Questions for Thought 196
11 Evaluating Corporate Ethics 197
Why Firms Need Ethics Training Programs • 198
The Size of the Firm 198
The Cost of Fraud 199
Where in the World Does Fraud Occur? 199
Every Industry Is Rep-esented 200
The Types of Fraud 200
Who Commits the Fraud? 201
How Are They Caught? 201
What to Do with the Fraudsters? 201
 Contents xiii

Establishing an Ethics Training Program 202

Ethics Training Programs as Pan of a
Control System 202
Establishing a Global Ethics Training Program 204
Morally Sensitive Cultural Education 204
Provide Education on International Human Rights—Not
Only on Foreign Law Compliance 204
Try to Get Beyond "Rule Formalism" 204
Presenting a Rational Dialogue for Important
International Issues When There Is Dissent 205
Global Cultural Dimensions and Ethics Training
Programs 205
Individualism vs. Collectivism 205
High-Context vs. Low-Context Communication 206
High Uncertainty vs. Low Uncertainty Avoidance 206
Masculinity vs. Femininity 206
High vs. Low Power Distance 206
Benefits of an Ethics Training Program 207
Enforcement and the Ethics Training Program 207
Sending the Right Message to the Employees 208
Corporate Ethics Officers 209
Ethical Auditing 210
Components of the Ethical Audit 211
Whistle-Blowing 212
Hotlines 214
Government Regulations and Whistle-Blowing 216
Evaluation of Ethics and Stakeholders 220
Questions for Thought 221

Cases
1 Adelphia: What's Wrong with This Picture? 222
Background of the Rigas Family 222
The Trouble at Adelphia 223
The Adelphia Piggy Bank 224
The Manipulation of the Financial Statements 225
The Decline of the Rigas Empire 225
Questions for Thought 221
xiv Contents

2 Ahold: Is That The Dutch Translation of Enron? 228

The Strategies and Objectives of Ahold 228
The Accounting and Corporate Governance
Problems at Ahold 229
The Unraveling of Ahold 229
The Recovery and Penitence of Ahold 231
Questions for Thought 233
3 Blue Bayou 234
The Checkered Past of Bayou 234
Trouble on the Bayou 235
Questions for Thought 231
4 Boeing: How Low Can They Fly? 238
The Start of the Ethics Problems at Boeing 238
Ethical Challenges at Boeing: Round Two 240
The Condit Era at Boeing 241
The Rise and Fall of Harry Stonecipher 242
Questions for Thought 245
5 Bre-X: All That Glitters Isn't Gold 246
From a Penny Stock . . . 246
. . . To a Gold Mine 247
Fool's Gold 248
Red Flags 249
The Death of a Dream 251
Questions for Thought , 252
6 Conrad Black and HoUinger International:
All the News That's Fit to Sell 253
The Birth of a Lord 253
Who Is the Board Directing? 255
The Downfall of a Lord 256
The Allegations Continue to Develop 257
The Report 257
Changes at HoUinger International 259
The Beginning of the End 265
Questions for Thought 264
 Contents xv

7 Enron: Were They the Crookedest

Guys in the Room? 265
The Rise of the Big "E" 265
The Rank and Yank Culture at Enron 267
The Beginning of the End 267
The Role of Mark-to-Market Accounting 268
The Letter 268
The Questions Begin 269
To Chapter 11 and Beyond 271
The Role of the Board of Directors 272
Arthur Andersen 272
The Fall of Enron's Smartest Guys in the Room 275
The Trial Begins 277
Questions for Thought 283
8 Google: Don't Be Evil Unless . . . 284
The Privacy of Gmail 2 84
The Privacy of Individuals 285
Google in China 286
Refusing the Justice Department 287
Scanning Copyrighted Material 288
The Role of Click Fraud 289
Questions for Thought 290
9 HealthSouth: The Rise and Fall of the
Scrushy Empire 291
Questions for Thought 299
10 Herman Miller: Eddie, Get Off That Chair 3 00
Journey Toward Sustainability 301
The Environmental Quality Action Team 301
Design for Environment 302
The Legacy of the Eames Chair 303
Questions for Thought 303
11 Interface: More Than Just a Carpet Company 304
The Road to Sustainability 304
Elimination of Waste 306
 Contents i xvii

How to Address the Concerns 339

The Wonder Drug for Everyone 340
The Data Continues 340
The Withdrawal of Vioxx 341
The Steamrolling Legal Problems 342
Questions for Thought 341

17 Music Industry: Ethical Issues in a Digital Age 348

The Long and Winding Road of Recorded Music 348
The Rise of Napster 349
The Savior of the Music Industry: iTunes 351
The Role of Royalties 352
What Package Are We Breaking? 353
Sony's Ghost in the Machine 3 54
How Much Is that Song on the Radio? 357
Questions for Thought 360

18 Parmalat: Can You Sue Over Spilled Milk? 361

The Growth of Parmalat 361
The Questions Start 361
The Financial Troubles Become Known 362
Bonlat Financing 363
Grant Thornton 363
Epicurum Hedge Fund 3 64
The Downward Spiral 364
The Lawsuits Start 366
Questions for Thought 310

19 Perfect Payday: How Apple Computer and

Others Have Learned to Love Stock Options 371
The Role of Stock Options in Executive Compensation 371
UnitedHealth Group 372
Affiliated Computer Services 377
Brooks Automation 378
Comverse Technology 379
xviii; Contents

Vitesse Semiconductor 382

Apple Computer 383
Questions for Thought 388

20 Tyco: I'm Sure That It's a Really Nice Shower

Curtain 389
The Rise of Dennis Kozlowski 389
The Financial Troubles Begin 389
Paying for Empty Crates 390
The Investigation Expands 391
The Payment of Expenses 392
Happy Birthday, Karen! 393
Mark Swartz, CFO 393
Mark Belnick, Tyco Legal Counsel 394
Tyco's Board of Directors 395
The Wonderful World of Tyco Accounting 396
Key Employee Loan Program 397
Key Employee Relocation Program 398
Tyco Bonus Program 398
PricewaterhouseCoopers, Tyco's External Auditor 399
The Beginning of the End 399
Questions for Thought 402

21 Volkswagen: Herbie Takes Investors for a Ride 403

Bribes and Other Transactions 403
Pleasure Trips 404
A Bid from Porsche 405
Questions for Thought 408

22 Wal-Mart: But We Do Give Them a 10

Percent Employee Discount 409
Off-the-ClockWork 410
Sexual Discrimination 412
Health Benefits 413
The Role of Unions 415
 Contents xix

The Great Union Wall of China 416

Use of Illegal Aliens 417
Child and Other Labor Laws 418
Wal-Mart Responds 419
Questions for Thought 419

23 WorldCom: Can You Hear the Lawsuits Now? 420

From Humble Beginnings 420
Ebbers's Financial Problems 421
Securities and Exchange Commission's Investigation Starts 422
The Board Becomes Involved 422
A New CEO 423
The Role of Cynthia Cooper 424
The Role of Arthur Andersen 426
Roadblocks in the Investigation 427
The Fraud Becomes Public 428
The Bottom of the Downward Spiral 429
The Trial Starts 431
Questions for Thought 431
Endnotes 438
Index 469