Chapter 7

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


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Ebbers is seen now as unethical, a criminal, and deficient as
a leader.
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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