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Copyri ght 2008 by The McGraw-H il l Companies, Inc. All r ights reserved.McGraw-Hill/Irwin

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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 toreport 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 securitiesfraud, 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, applyingclear guidelines resolves the vast majority of them.

Ethical traditions that apply to business support truth telling,

honesty, protection of life, respect for rights, fairness, andobedience to law.

Eliminating unethical behavior may be difficult, but knowingthe rightness or wrongness of actions is usually easy.

Some ethical decisions are troublesome because although

basic ethical standards apply, conflicts between them defyresolution.

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 ofamorality 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 ofmoral 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 thathumanity 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 Spencersupported a harsh ethic that justified

vicious competition among companies because it furthered

evolution.

Friedrich Nietzschesaid that nice ethics were prescriptions

of the timid, designed to fetter the actions of great men whoseirresistible 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 ofethical universalism holds that in terms of

biological and psychological needs, human nature is

everywhere the same.

The school ofethical relativism holds that although human

biology is everywhere similar, cultural experience creates

widely diverging values, including ethical values.

Because of globalization, corporations struggle with thequestion 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 forcorrupt 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 ethicalcompromise.

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