Chapter 7

1
Chapter 7 8(3) Cases

• Justin Taylor
• King W. Lee
• Nadine Caffaro

2
Chapter 7 Business Ethics
3
Chapter 7 Overview

• Sources of ethical standards in business
• Ethical behavior in companies
• Methods of managing that promote sound ethical
  decisions

4
What are Business Ethics?

• Business Ethics study of good and evil, right
  and wrong, just and unjust actions in business
• Based on ethical traditions
• Honesty, protection of life, truth telling,
  respect for rights, fairness, obedience to law

5
Ethical Decisions Clear or Unclear?

• Lockheed Aircraft Corp
• Large campaign contributions to Japanese
  Officials
• Intent was to influence Japanese Government to
  buy planes
• Saved American workers jobs
• Violated U.S. business customs
• Clear or Unclear?

6
Ethical Decisions Clear or Unclear?

• A. H. Robins Co.
• Market Dalkon Shield intrauterine device to
  general practitioners
• Competition sold devices only to obstetricians
  gynocolgists
• Robins gained huge market share
• Health problems arose, general practitioners slow
  to take action
• Clear or Unclear?

7
Ethical Decisions Clear or Unclear?

• Managers commitment to worker
• Informs worker that replacement equipment will be
  ordered from this years budget
• At year end, equipment still not ordered
• There just wasnt enough money left to do it.
• Why was the commitment not kept?
• Clear or unclear?

8
Two Theories of Business Ethics

• Theory of Amorality
• Theory of Moral Unity

9
Theory of Amorality

• Business should be conducted without reference to
  the full range of societys ethical ideals.
• Managers act selfishly because the market
  mechanism turns their actions into benefits for
  stakeholders and society.
• Justify unethical decisions at workplace, but
  would consider that same decision unethical in
  personal life
• Reduces guilt

10
Theory of Moral Unity

• One basic ethical standard exists behavior and
  business decisions acted on basis of same
  principles
• Business actions are judged by the ethical
  standards of society
• Popular among todays managers

11
Can Ethical Responsibility be Excused?

• YES!
• Aristotle Ethics involves making a choice
• Factors for excusing unethical behavior
• Ignorance
• Incapacity
• Unrealistic high cost
• No power to Influence an outcome
• No alternative exists
• External forces

12
Sources of Ethical Values in Business

• Religion
• Philosophy
• Cultural experience
• Law

13
Religion - Ethical Values in Business

• Despite doctrinal differences, religions agree on
  ideas that form foundation of ethics in society
• Promise-keeping, honesty, fairness, charity
• Golden Rule universal notion among religions
• Parables stories
• Christianity Bible
• Jewish Talmud Torah

14
Philosophy - Ethical Values in Business

• Source of many notions about what is considered
  right and wrong in business
• Greek Roman philosophers
• Christian theology
• Enlightenment
• Idealist philosophers
• Utilitarianism
• Realist school of ethics

15
Cultural Experience - Ethical Values in Business

• Culture fosters set of traditional values, rules,
  standards
• Stages of Civilization
• 1. Hunting gathering stage
• 2. Agricultural stage
• 3. Industrial stage

16
Law - Ethical Values in Business

• Formalized through regulations, statutes, court
  rulings
• 1991 - U.S. Sentencing Commission
• Released guidelines for sentencing companies
• 3 Sanctions for illegal actions
• Fines
• Damages
• Prosecution

17
Types of Sanctions for Illegal Action

• Fines intended to punish, deter future
  lawbreaking
• 2. Damages payments for harm as a result of
  corporate actions
• Compensatory damages payments awarded to
  redress concrete losses suffered by injured
  parties
• Punitive damages payments greater than a
  wronged partys actual losses, awarded to deter
  similar action and punish a corporation
• 3. Prosecution of Managers

18
Business Ethics in Other Countries

• Environmental factors shape ethical values
• History
• Culture
• Philosophy
• Stage of Economic Development
• Underdeveloped vs. developed countries
• Government involvement
• Viewpoints about Ethical Variation
• Ethical universalism
• Ethical relativism

19
Factors that Influence Managerial Ethics

• Leadership
• Strategy and Performance
• Corporate Culture
• Individual Characteristics

20
Factors that Influence Managerial Ethics

• Leadership
• Most significant influence on ethical standards
  in a company
• Strategy Performance
• Create strong competitive strategies to meet
  financial goals without compromising ethics
• Pressure in downtimes
• Reward and compensation

21
Factors that Influence Managerial Ethics

• 3. Corporate Culture
• Set of values, norms, rituals, and behaviors that
  characterize a company
• Lowered ethical climates in corporations
• Inability to raise and discuss ethical issues
  between managers
• 4. Individual Characteristics
• Behavior motivated by mix of internal disposition
  and situational incentives

22
How Corporations Manage Ethics

• Ethics Programs
• Application of management techniques designed to
  instill values ethical behavior
• Two types of Programs
• Compliance Orientation focus on laws
• Values Orientation focus on values
• Established as a result of scandal
• Caremark Case

23
7 Common Corporate Ethical Methods

• Establish corporate code of conduct that is
  reasonably capable of reducing criminal acts.
• Example GEs Code of Conduct
• Obey the applicable laws regulations governing
  our business conduct worldwide.
• Be honest fair, trustworthy in all your GE
  activities relationships.
• Strive to create a safe workplace and to protect
  the environment.

24

7 Common Corporate Ethical Methods

• Assign responsibility for overseeing the program
  to high-level personnel.
• Board of Directors
• Exercise due care not to delegate substantial
  discretionary authority to persons who are prone
  to engage in criminal behavior.
• 56 conducted new hire background checks
• 17 conducted background checks when employees
  were put into highly sensitive positions

25
7 Common Corporate Ethical Methods

• 4. Take steps to communicate standards and
  procedures to all employees.
• Training
• Facilitated in-house typically short hour long
  sessions
• Video, or web-based
• 5. Take reasonable steps to achieve compliance
  with standards by using monitoring auditing
  systems to detect lawbreaking by having in
  place a reporting system that employees can use
  to report criminal conduct.
• Hotlines, statistical indicators, unusual
  financial transactions

26
7 Common Corporate Ethical Methods

• 6. Consistently enforce standards using
  appropriate disciplinary mechanisms.
• Disciplinary methods
• Counseling, written reprimand, suspension, salary
  reduction
• Performance appraisals
• 7. Immediately after an offense has been
  detected, respond appropriately and take
  reasonable steps to prevent similar offenses.
• Report crimes to law enforcement officials

27
Business Ethics Conclusion

• Ethical values inherent in business, but forces
  in markets corporations affect behavior
• Business ethical dilemmas stem from conflict of
  self-interest and fairness
• Corporations can establish Ethics Programs

28
Dow Corning and Implants
29
Dow Corning and Implants

• Backgrounds
• Pioneered and developed Silicones material for
  consumer products.
• Identified a potential market for the Silicones
  to be used as replacement for breast implants.
• As a company, silicones was approved to be used
  for human breast implant. Decision was made
  based on the following
• Food, Drug, Cosmetic Act o f 1938 DID NOT
  required any clinical testing of any medical
  devices.
• By nature, silicones has anti-foaming properties.
  Added to foods/drink for ingestion

30
Dow Corning and Implants

• Business Decisions
• To re-gain market shares from competitors
  silicones products
• Estimated great market demand 50,000 per year
• Acted under the Survival of the Fittest theory
  Either do something or will be forced out of
  the market.
• Developed (3) new silicones related implants
  Gel-filled, Saline, and Double-lumen.
• No formal testing/clinical data prior to products
  launched
• Ignore internal scientific warning on potential
  risks

31
Dow Corning and Implants Legal Problems

• Legal problems started when a jury award 7.3M
  for punitive damages to breast implant patient.
• This case opened doors to large class action suit
  against Dow Corning on ground that Dow fails to
  properly warn patient of the potential problems.
• Lawsuits drove Dow Corning into Chapter 11
  Bankruptcy.
• Ultimately Dow Corning agreed to settle the class
  action suit as part of Ch.11 Bankruptcy.
• By settling Dow
• admits no wrong doing to the public
• Avoid enormous legal costs
• Remove themselves from any medical business
• Re-focus company resource to other areas.

32
Dow Corning and Implants Medical Research

• Over 10,000 scientific studies were conducted
• found NO direct link between silicones implant
  and any medical abnormalities.
• No statistical significance
• Medical problems found were related to the
  surgical procedures

33
Dow Corning and Implants Conclusion

• Did Dow Corning acted socially responsibly to the
  public?
• Did Dow Corning break any legal laws and the
  social contract?
• If no, then why did they have to paid over 3.8
  Billions in punitive damages?
• What did they do wrong?

34
Chapter Eight

• Making Ethical Decisions in Business

35
Realtors in the Wilderness
Black Canyon, CO
36
Principles of Ethical Conduct

• 14 Fundamental Guides or Rules of Behavior
• Some are universal tests of conduct
• Some are ideals
• Some are limited in reach and apply only in
  certain spheres of human relations
• All have strengths and weaknesses

37
The Categorical Imperative

• Developed by Immanuel Kant
• Act only according to that maxim by which you
  can at the same time will that it should become a
  universal law
• Strength This quick test of universability has
  achieved popularity
• Weakness Inflexible, to be applied in every
  specific situation without exception

38
The Conventionalist Ethic

• Popularized by Albert Z. Carr
• Business is analogous to a game, and special,
  lower ethics are permissible
• Managers can hold different ethical obligations
  (personal and business oriented)
• Similar to playing poker, managers are allowed to
  bluff (lie) and to take advantage of all legal
  opportunities and widespread practices

39
The Disclosure Rule

• Managers should ask themselves how it would feel
  to explain their decision to a wider audience
• Others Test What would my manager, supervisor,
  co-workers or family think?
• Press Test If my decision is reported in the
  media (TV, Newspaper) would I be proud of my
  actions?
• Strength - screens out base motives such as
  jealousy and greed
• Weakness doesnt give clear guidance on
  dilemmas with strong arguments for several
  alternatives

40
The Doctrine of the Mean

• Developed by Aristotle (aka the golden mean)
• Right actions are found in the area between
  extreme behaviors (excess and deficiency)
• Find the ethical virtue at its core and seek the
  mean of action. (Boastfull gt Truthfull gt
  Understated)
• Strength To observe the doctrine is simply to
  act conservatively, never to the extreme
• Weakness The moderate course between polar
  extremes is open to interpretation

41
The Ends Mean Ethic

• Often associated with Niccolo Machiavelli
• Worthwhile ends justify inefficient means When
  ends are of overriding importance or virtue,
  unscrupulous means may be employed to reach them
• Weakness In solving ethical problems, means may
  be as (or more) important than ends

42
Golden Rule / Practical Imperative

• Golden Rule - Do unto others as you would have
  them do unto you
• Practical Imperative (Kant) Treat humanity
  always as an end and never as a means only
• Test of Reversibility A manager can comply with
  either by determining if they would trade places
  with the person affected by their decision
• Weakness Peoples ethical values differ,
  primarily a rule for interpersonal relations

43
The Intuition Ethic

• Popularized by G.E. Moore
• Ethic holds that What is good is simply
  Understood - People are endowed with a moral
  sense by which they intuitively know the correct
  solution to an ethical dilemma
• Weaknesses Approach is subjective, no standard
  of validation outside the individual, and tends
  to be unpersuasive

44
The Might Equals Right Ethic

• When faced with an ethical decision, people
  should seize what advantage their strength will
  allow
• Not truly an ethic - can be invalidated by its
  own foundation, physical force
• Weaknesses Not a good approach for civilized
  settings, invites retaliation censure, not
  conductive to long-term advantage

45
The Organization Ethic

• Implies that the wills and needs of individuals
  are subordinate to the welfare of the
  organization
• Strength leads to cooperation and mutual trust
• Weakness creates an opportunity for the
  suppression of free-will and the justification of
  wrong-doing in the name of the organization

46
The Principle of Equal Freedom

• Herbert Spencer (Social Statics - 1850)
• Every man may claim the fullest liberty to
  exercise his faculites compatible with the
  possession of like liberty by every other man.
• A person has the right to freedom of action
  unless that action deprives another of their
  freedom
• Weakness lacks a tie-breaker for situations in
  which two rights conflict

47
The Proportionality Ethic

• Managers are responsible for the consequences
  when they create situations leading to both good
  and evil effects
• However, the principle allows them to risk
  predictable, yet unwanted, harms if
• The good effects outweigh the evil
• The managers intention is to achieve good
  effects
• There is no better alternative

48
The Rights Ethic

• Because individuals have rights, other people
  have a duty to respect those rights (often,
  individual rights are given legal protection)
• For example, a manager should not permit the
  operation of unsafe machinery as all workers have
  the right to a safe workplace (Safety and Health
  Act)
• Weakness - Rights are not absolute and their
  limits may be hard to define (Many professions
  require a certain amount of risk)

49
The Theory of Justice

• Act in such a manner that the bonds of community
  are maintained
• Maintaining the community is important because
  rights are best protected in a well kept society
• John Rawls Veil of Ignorance Inequality only
  for those that are most disadvantaged
• Distributive Justice benefits and burdens of
  corporate life are distributed impartially
• Retributive Justice requires punishment be
  evenhanded and proportionate to transgressions
• Compensatory Justice fair compensation to
  victims

50
The Utilitarian Ethic

• Choices should be made so that the greatest good
  is achieved for the greatest number
• Decision makers should maximize pleasure and
  minimize pain for not only themselves, but
  everyone affected by their decision
• Weaknesses
• The exact definition of the greatest good is
  subjective and as a result, this ethic has led to
  self interest reasoning and the rationalization
  of social ills
• Can lead to the abridgment of individual or
  minority group rights

51
Practical Suggestions for Making Ethical Decisions

• Think about ethics in rational terms such as
  uni-versalizability, reversibility, utility
  proportionality
• Consider tactics such as
• Writing an essay advocating each alternative
• Seek advice from a more experienced person within
  the organization to help reveal the companys
  ethical climate
• Use a pros cons approach for each alternative
• Critical questions approach - Lockheed Martin
• Are my Actions Legal?
• What would I tell my child to do?
• How will I feel about myself afterward?
• Am I being fair and honest?
• How would it look in the newspaper?

52
Practical Decisions Contd

• Sort out ethical priorities in advance
• i.e, know that you value integrity over making a
  sale
• Be publically committed on ethical issues
• Public commitment encourages follow through /
  assimilation
• Set an example
• Ethical managers create an ethically responsible
  climate
• Thoughts must be translated into action, and
  ethical deeds often require courage
• Know that acting ethically can lead to personal
  sacrifice
• Cultivate sympathy and charity towards others
• Well intetioned people may differ on ethical
  decisions

53
Why Ethical Decisions are Difficult

• Managers confront a distinction between facts and
  values when making an ethical decsion
• Good Evil sometimes exist simultaneously, in
  tandem and interlocked
• Knowledge of consequences is limited
• The existance of multipe stakeholders exposes
  managers to conflicting ethical claims
• The ethical stand of a corporation is often based
  on entirely different premisis from that of
  critics
• Some ethical standards are variable, they may
  change with time and place
• Even well intentioned managers can be mistaken in
  their judgment or motivation
• The effects of science and technology present
  managers with new, unsettled ethical problems

54
HCA Healthcare Company
55
Health Care System Background/Situation

• Cost of health care was on the rise
• Medicare and Medicaid were initiated to cover
  non-working citizens to slow down medical
  costs.
• Introduced the Billing Codes to further slow down
  medical cost
• Great intention.
• System was too complicated and have too many
  down falls.
• Private sector created HMO to offset/slow down
  medical costs

56
Health Care System Market Opportunity

• Richard Scott started Columbia/HCA
• Saw an opportunity in providing network of
  medical services to patients.
• Bought under-performing hospitals across the
  country.
• Implement cost cutting strategies to all the
  hospitals
• Ran the networks of hospitals like a
  corporation
• Implement short term profit goal
• Introduced revenue generating metrics to all
  employee
• Provide sales incentive goal
• Focus more on revenue than health care
• Over-bill the Medicare System.

57
Health Care System Actions

• HCA was under intense federal investigation for
  Medicare billing fraud
• Federal jury indicted (3) Executives for
  submitting false cost reports and claims
• Over 35 HCA facilities were under federal
  investigations
• HCAs stock price dropped over 12.
• HCAs public image was compromise
• Richard Scott was asked to resign

58
Health Care System Results

• New Era of HCA was born - under a new CEO (Thomas
  Frist Jr.)
• Started to change/improve HCA image company
  mission statement/Vision
• Focus on providing health care rather than profit
• Paid fines and admit no wrong doing
• The damage has been done by intense federal
  investigations.
• HCA is remembered as a scandal corporation
  despite many positive achievements

59
Health Care System Conclusion

• Was HCA a market driven corporation or were they
  simply mismanaged?
• Should Health Care be managed like a market
  driven corporation? Or should it be managed by
  the Federal government (Socialism)?

60
Beech Nut Corporation
61
Beech-Nut Corporation - Problem

• Produce and distribute 100 pure fruit juice baby
  products.
• Financial decision to switch supplier of the
  apple juice concentrate 20 Price Reduction.
• Concentrates are replicated with less expensive
  substitutes
• The adulteration of the concentrate violates
  Beech-Nut labeling of 100 Fruit Juice
• Problem was ignored by upper management.
• Continue to produce and distribute fake apple
  concentrated juice.

62
Beech-Nut Corporation - Actions

• External investigation found manufacturer of
  adulterated apple juice concentrate guilty.
• Investigation also found Beech-Nut was the
  biggest user for the bogus apple juice
  concentrate.
• Beech-Nut refused to cooperate with the
  investigation and acted irresponsibly by not
  recalling products.
• Beech-Nut destroyed evidence to avoid prosecution
• Beech-Nut continues to ship products while under
  investigation.

63
Beech-Nut Corporation - Result

• FDA found sufficient evidence to indict
  executives of Beech-Nut on fraud and criminal
  misconduct.
• Beech-Nut pleaded guilty and was fined 2
  Million.
• Beech-Nut branding was tarnished and destroy the
  public reputation
• Stock price drop by over 20.
• Clearly the company was more concern with the
  bottom line - PROFIT.

64
Beech-Nut Corporation - Conclusion

• There were no evidence indicating adverse effect
  in human ingesting adulterated AJ concentrate,
  should Beech-Nut have changed their product to
  apple flavored drink to avoid prosecution?