McGraw-Hill/Irwin

Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 7

Business Ethics
This chapter: Sets forth basic sources of ethical values. Discusses how corporations manage ethics and try to elevate behavior.

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WorldCom Opening Case

Bernard Ebbers built WorldCom into a global telecommunications giant. Ebbers used use all of his WorldCom stock as collateral for bank loans. In 2000 Ebbers gave the first in a string of instructions to report false revenues and use accounting tricks to disguise rising expenses. Ebbers testified that he had no knowledge of the fraud, but five of his subordinates testified against him. Ebbers was sentenced to 25 years in prison for securities fraud, unprecedented for a white-collar crime. Some question whether his sentence was fair. Ebbers is seen now as unethical, a criminal, and deficient as a leader.
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What are Business Ethics?

Business ethics is the study of good and evil, right and wrong, and just and unjust actions in business. Although all managers face difficult ethical conflicts, applying clear guidelines resolves the vast majority of them. Ethical traditions that apply to business support truth telling, honesty, protection of life, respect for rights, fairness, and obedience to law. Eliminating unethical behavior may be difficult, but knowing the rightness or wrongness of actions is usually easy. Some ethical decisions are troublesome because although basic ethical standards apply, conflicts between them defy resolution. Some ethical issues are hidden and hard to recognize. Some ethical issues are very subtle.

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Two Theories of Business Ethics

The theory of amorality is that business should be conducted without reference to the full range of ethical standards, restraints, and ideals in society. The apex of this view came during the latter half of the nineteenth century. The theory of amorality has far less public acceptance today, but it lives on quietly.

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Two Theories of Business Ethics (continued)

The theory of moral unity is that business actions are judged by the general ethical standards in society, not by a special set of more permissive standards. Actions are not moral just because they make money. Ethical conflicts cannot be avoided simply because they arise in the course of business.

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Major Sources of Ethical Values in Business

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Religion
The great religions converge in the belief that a divine will reveals the nature of right and wrong behavior in all areas of life, including business. Christian managers often seek guidance in the Bible. In Islam the Koran is a source of ethical inspiration. In the Jewish tradition, managers can turn to rabbinic moral commentary in the Talmud and the books of Moses in the Torah.

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Philosophy
Even after two millennia, there remains considerable dispute among ethical thinkers about the nature of right action. Greek ethics
Socrates asserted that virtue and ethical behavior were associated with wisdom and taught that insight into life would naturally lead to right conduct. Plato carried this doctrine of virtue as knowledge further by elaborating the theory that absolute justice exists independently of individuals and that its nature can be discovered by intellectual effort.

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Philosophy (continued)
Aristotle spelled out virtues of character in the Nicomachean Ethics and advocated a regimen of continuous learning to improve ethical behavior. Epictetus taught that virtue was found solely within and should be valued for its own sake, arguing that this inner virtue was a higher reward than external riches or worldly success.

The great Catholic theologians St. Augustine and St. Thomas Aquinas both believed that humanity should follow Gods will; correct behavior in business and in all worldly activity was necessary to achieve salvation and life after death.
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Philosophy (continued)
Secular philosophers such as Baruch Spinoza tried to demonstrate ethical principles with logical analysis rather than ordain them by reference to Gods will. Immanuel Kant tried to find universal and objective ethical rules in logic. Jeremy Bentham developed the idea of utilitarianism as a guide to ethics, validating two dominant ideologies: democracy and industrialism. John Locke developed and refined doctrines of human rights and left an ethical legacy supporting belief in the inalienable rights of human beings.
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The Realist School of Ethics

The realists believed that both good and evil were naturally present in human nature; human behavior would inevitably reflect this mixture. Niccol Machiavelli argued that important ends justified expedient means. Herbert Spencer supported a harsh ethic that justified vicious competition among companies because it furthered evolution. Friedrich Nietzsche said that nice ethics were prescriptions of the timid, designed to fetter the actions of great men whose irresistible power and will were regarded as dangerous by ordinary mortals.

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Cultural Experience
Every culture transmits between generations a set of traditional values, rules, and standards that define acceptable behavior. Civilization is a cumulative cultural experience consisting of three stages:
Hunting and gathering stage Agricultural stage Industrial stage
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Ethical Variation in Cultures

Ethical values differ among nations as historical experiences have interacted with philosophies and religions to create diverging cultural values and laws. The school of ethical universalism holds that in terms of biological and psychological needs, human nature is everywhere the same. The school of ethical relativism holds that although human biology is everywhere similar, cultural experience creates widely diverging values, including ethical values. Because of globalization, corporations struggle with the question of how to apply conduct codes across cultures.

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Law
Laws codify, or formalize, ethical expectations. Corporations and their managers face a range of mechanisms set up to:
Deter illegal acts Punish offenses Rehabilitate offenders

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Damages
In civil cases courts may assess damages, or payments for harm done to others by a corporation. Compensatory damages are payments awarded to redress concrete losses suffered by injured parties. Punitive damages are payments in excess of a wronged partys actual losses, awarded to deter similar actions and punish a corporation. Since the purpose of punitive damages is to punish and deter misconduct, they must be large enough to cause pain, yet they raise many questions about fairness.
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Criminal Prosecution of Managers and Corporations

Managers may be prosecuted for criminal actions undertaken in the course of their employment. Corporations are criminally liable for corrupt actions or omissions of managers if those actions are intended to benefit the corporation. Criminal prosecution of corporations and their executives is exceptionally difficult.

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Sentencing, Fines, and Other Penalties

In 1991 the United States Sentencing Commission released guidelines for sentencing both managers and corporations. Managers can go to prison, be fined, put on probation, given community service, make restitution, or be banned from working in their occupations. Corporations cannot be imprisoned, but they can be fined and their actions restricted. Other methods for penalizing corporate crime exist, such as having their fines paid to charities.
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Factors That Influence Managerial Ethics

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Leadership
The example of company leaders is perhaps the strongest influence on integrity. A common failing is for managers to show by their actions that ethical duties can be compromised. If the leader does something, an opportunistic employee can rationalize his or her entitlement to do it also.
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Strategies and Policies

A critical function of managers is to create strong competitive strategies that enable the company to meet financial goals without encouraging ethical compromise. Unrealistic performance goals can pressure those who must make them work. Reward and compensation systems can expose employees to ethical compromises.

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Corporate Culture
Corporate culture refers to any set of values, norms, rituals, formal rules, and physical artifacts that exists in a company. Three levels of corporate culture: Artifacts Espoused values Tacit underlying values Often inconsistencies are observed between the levels.
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How Corporations Manage Ethics

Establish standards and procedures. Create high-level oversight. Screen out criminals. Communicate standards to employees. Monitor and set up an anonymous hotline. Enforce standards, discipline violators. Assess areas of risk, modify the program.

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