Chapter One:

Ethics and
Business

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 Chapter Objectives
After reading this chapter, you will be able to:
1. Explain three levels at which ethical decisions get made in business.
2. Explain the nature of business ethics as an academic discipline.
3. Describe ethical decision making as a form of practical reasoning.
4. Distinguish the ethics of personal integrity from the ethics of social
responsibility.
5. Distinguish ethical norms and values from other business-related norms
and values.
6. Explain why ethics is important in the business environment.
7. Explain why ethical responsibilities go beyond legal compliance.

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 Ethics and Business 1

It takes 20 years to build a reputation and five minutes to ruin it.

If you think about that you’ll do things differently.
Warren Buffett

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 Business Ethics 1

At its most basic level, ethics is concerned with how we should

act and how we should live our lives.
Business ethics examines responsibilities we owe to ourselves
and to each other.
• How should I act within business?
• How should a business act?
• What responsibilities do I have as a businessperson?
• What responsibilities does a business have to employees, to customers,
and to society?

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 Business Ethics 2

For business students, ethics is an important field of study.

Business ethics is a process of decision making.
• Business must take ethics into account and integrate ethics into its
organizational structure.

Scandals are brought about by ethical failures and unethical

decisions.
• This text provides a decision-making model that can help analyze avoid
future ethical failures.

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 Levels of Ethical Decision Making
Business ethics involves making decisions at the individual, at
the organizational, and at a broader social and governmental
level.
• As individuals, each person interacts with businesses as customers, as
employees, and as citizens of the countries in which they operate.
• Organizational culture and corporate leadership have important roles to
play in decision making.
• Individual businesses' and industries' decisions are influenced by social,
economic, and political environments.

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 Goals of Business Ethics
• Developing the knowledge base and skills needed to identify
ethical issues.
• Understanding how and why people behave unethically.
• Deciding how one should act, what one should do, and the
type of person one should be as an individual.
• Creating ethical organizations.
• Thinking through the social, economic, and political policies
that we should support as citizens.

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 Ethics and Business 2

Never go into business purely to make money. If that’s your

motive, you are better off doing nothing.
Richard Branson

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 Business Ethics as Ethical Decision Making
• Ethical decision making and deliberation will result in more
responsible behavior.
• One perspective believes that ethics is no more than personal opinion
and feelings.
• One perspective is that ethics can offer clear, absolute, and
unambiguous truths.

• The authors’ approach finds a middle ground. The

fundamental assumption is that a process of rational decision
making can and will result in behavior that is more
reasonable, accountable, and ethical.
• Teaching ethics must challenge students to think for
themselves.

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 Business Ethics as a Type of Reasoning
• Practical reasoning involves reasoning about what one ought
to do.
• Ethics is a part of practical reason
• Practical reasoning focuses on what we should do, and how we
should act and behave.

• Theoretical reasoning is aimed at establishing truth and what

one should believe.
• According to most western philosophers, humans are rational and
should believe only that which is reasonable, and act only in ways
that are reasonable.
• Theoretical reasoning is the pursuit of truth, the highest standard for
what we should believe.

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 How Should “We” Live? 1

If defining “we" individually: Ethics is based on our value

structures:
• Defined by our moral systems;
• and, sometimes referred to as morality.
• Sometimes referred to as "personal integrity.“
• Morality is distinguished from questions of social justice, which addresses
issues of how communities and social organizations should be structured.

If morals refer to the underlying values on which decisions are

based, ethics refers to the application of those morals to the
decisions themselves.

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 How Should “We” Live? 2

If defining "We" collectively: Refers to how we live together in a

community.
• This area is sometimes referred to as social ethics.
• Here, we judge companies from a social perspective; for their corporate
social responsibility.
• Managerial decisions involve the following aspects of ethics:
• Personal integrity.
• Social responsibilities.
• Legal and political environments.

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 Ethics as Practical Reason
Ethics is a vital element of practical reasoning—reasoning about
what we should do.
• Distinguished from theoretical reasoning, which is reasoning about what
we should believe.
• Theoretical reason is the pursuit of truth.

There is no single methodology for ethics that works in all

situations, but guidelines provide direction and criteria for
decisions.
• Ethical theories explain and defend various norms, standards, values, and
principles used in ethical decision making.
• The next chapter introduces a model for making ethically responsible
decisions.

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 Business Ethics as Personal Integrity and Social Responsibility 1

Ethics involves asking an important question—how should we

live?
• Philosophers emphasize that ethics are normative, dealing with our
reasoning about how we should act.
• Social sciences also examine human decision making and actions.
• But these sciences are descriptive rather than normative.
• They provide an account of how and why people do act the way they do –
they describe.
• As a normative discipline, ethics seeks an account of how and why people
should act a certain way, rather than how they do act.

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 Business Ethics as Personal Integrity and Social Responsibility 2

Distinguishing ethics from other practical decisions faced within

business involves two approaches.
• Social-scientific approach: Examines the situation and the decision by
exploring the factors that led to one decision rather than another or by
asking why the manager acted in the way that they did.
• Normative approach steps back from the facts to ask:
• What should I do?
• What rights and responsibilities are involved?
• What good will come from this situation?
• Am I being fair, just, virtuous, kind, loyal, trustworthy?

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 Business Ethics as Personal Integrity and Social Responsibility 3

Ethics is a normative discipline as it deals with norms.

• Norms: Those standards of appropriate and proper (or "normal")
behavior.
• Norms establish the guidelines or standards for determining what we
should do, how we should act, and what type of person we should be.
• Normative disciplines presuppose some underlying values.
Those beliefs that incline us to act or choose one course of
action rather than another are values.
• Ethical values serve well-being in impartial rather than personal or selfish
ways.

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 Distinction Between Values and Ethics
Values are the underlying beliefs that cause us to act or to
decide one way rather than another.
• Many different types of values can be recognized.
• Individuals have their own personal values and institutions also have
values—shown in the company’s culture.
• An individual’s or a corporation’s set of values may lead to either ethical or
unethical results.

• One way to distinguish values is in terms of the ends or goals they serve.

Ethical values serve the ends of human well-being.

• Those properties of life that contribute to human well-being and a life
well lived.

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 Making the Case for Business Ethics
Separation thesis: Ordinary ethical standards should be kept
separate from, and not be used to judge, business decisions
because business has its own standards of good and bad.
• Remains common in business circles.
• Holds that business ought to be governed by some ethics and some
values.
• Psychological egoism implies that all human actions are selfish and
motivated by self-interest.

Decision makers should consider the impact of decisions on a

wide range of stakeholders.
• A business stakeholder is anyone who affects or is affected by decisions
made within the firm, for better or worse.

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 Ethics and the Law 1

Deciding what one should do in business does require

consideration of what the law requires, expects, or permits.
Legal norms and ethical norms are not identical.
Is compliance with the law enough to behave ethically?
• Is the law itself ethical?
• The law may prevent harm, but does it promote "good"?
• Only complying with the law may lead to more regulation.
• Laws may not be in place for new situations.
• Laws may be ambiguous.

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 Ethics and the Law 2

Ethical considerations demonstrate that business cannot avoid

making ethical judgments, even if it is fully committed to
obeying the law.
Many corporations establish ethics programs and hire ethics
officers who are responsible for managing corporate ethics
programs.
Laws offer general rules clarified by legal precedent.
• There is no unambiguous answer for those wishing only to obey the law.

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 Ethics and the Law 3

Risk assessment is a process to identify potential events that

may affect the entity, and manage risk to be within its risk
appetite.
• To provide reasonable assurance regarding the achievement of entity
objectives.
• When the risks involve potential harms and benefits to a variety of
stakeholders, it is a judgment that involves ethics as well.
• Business must take ethics into account and integrate ethics into its
organizational structure.
• But what is ethics?

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 Ethics and Business 3

No snowflake in an avalanche ever feels responsible.

Voltaire 1694 to 1778

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 End of Main Content

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 Chapter Two:
Ethical Decision
Making: Personal
and Professional
Contexts

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 Chapter Objectives
After reading this chapter, you will be able to:
1. Describe a process for ethically responsible decision making.
2. Apply this model to ethical decision points.
3. Explain the reasons why "good" people might engage in unethical
behavior.
4. Explore the impact of managerial roles on the nature of our decision
making.

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 Ethical Decision Making 1

To make a good decision, you actually need to think about its

contours and consequences.
Stacey Abrams

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 An Ethical Decision-Making Process 1

An ethical decision-making process:

• Requires a persuasive and rational justification for a decision.

Compare and weigh the alternatives, based on:

• Consequences (for all stakeholders).
• Facts, alternatives, duties, rights, ethical principles.
• Implications for personal integrity and character.

Make a decision.
Monitor and learn from the outcomes.

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 An Ethical Decision-Making Process 2

• Determine the facts.

• Identify the ethical issues involved.
• Identify stakeholders and consider the situation from their
point of view.
• Consider the available alternatives—also called using moral
imagination.

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 A Decision-Making Process for Ethics 1

An initial sketch of an ethical decision-making process.

• The first step is to determine the facts of the situation.
• Perceptual differences surrounding how individuals experience and
understand situations can explain many ethical disagreements in a situation.
• An ethical judgment made in light of a diligent determination of the facts is a
more reasonable ethical judgment than one made without regard for the
facts.

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 A Decision-Making Process for Ethics 2

• A second step requires the ability to recognize an ethical decision or an

ethical issue—then identify the ethical issues involved.
• The first and second steps may arise in a reverse order in some circumstances.
• Economic decisions and ethical decisions are not mutually exclusive.
• An ethical decision should be made based on how it would affect the well-
being of all the people involved.
• Some call the inability to recognize ethical issues as normative myopia, or
shortsightedness about values.
• Others warn of inattentional blindness, which is a result of focusing on too
narrow a range of questions.
• When we focus on the wrong thing, or fail to focus, we may fail to see key
information that will lead us to success or prevent unethical behavior.

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 A Decision-Making Process for Ethics 3

Third step is to identify and to consider all of the people affected

by a decision, the people often called stakeholders.
• Many perspectives and interests at stake means that ethical decisions
often involve conflicts and dilemmas.

The fourth step is to consider the available alternatives.

• When facing an ethical decision, moral imagination is the ability to
envision various alternative choices, consequences, resolutions, benefits,
and harms.

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 Figure 2.3: Stakeholder Map

The third step involved in ethical decision making

requires decision makes to identify and to consider all of
the people affected by a decision, the people often called
stakeholders.
Access the text alternative for slide image.

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 A Decision-Making Process for Ethics 4

The fifth step in the decision-making process is to compare and

weigh the alternatives on each stakeholder you defined.
• The point of this exercise is to recognize that a responsible and ethical
decision should be explainable, defensible, and justifiable to all
stakeholders involved.
• Some alternatives might concern principles, rights, or duties that override
consequences.
• Decision making requires consideration of the effects of a decision on
one’s own integrity, virtue, and character.

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 A Decision-Making Process for Ethics 5

Once the variables are explored, the sixth step is to make a

decision.
• Making a decision in business usually means formulating a plan and
carrying it out.

The final step is to evaluate the implications of the decisions, to

monitor and learn from the outcomes, and to modify actions
accordingly when faced with future similar challenges.

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 Ethical Decision Making 2

Most decisions are not binary, and there are usually better
answers waiting to be found if you do the analysis and involve
the right people.
Jamie Dimon

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 When Ethical Decision Making Fails 1

Some stumbling blocks to responsible decision making are

intellectual or cognitive.
• Ignorance.
• Considering only limited alternatives.
• Finding comfort in simplified decision rules.
• Selecting the alternative that satisfies the minimum decision criteria, also
known as satisficing.

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 When Ethical Decision Making Fails 2

Other stumbling blocks to decision making are more a question

of motivation and willpower.
• Sometimes it is easier to do the wrong thing.
• Sometimes people make decisions that they regret later because they lack
the courage to do otherwise at the time.
• Courage is also needed when responding to peer pressure.
Making ethically responsible decisions throughout life is perhaps the most
serious challenge we all face.

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 Ethical Decision Making 3

Most discussions of decision making assume that only senior

executives make decisions or that only senior executives’
decisions matter. This is a dangerous mistake.
Peter Drucker

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 Ethical Decision Making in Managerial Roles
Within a business setting, individuals must consider the ethical
implications of both personal and professional decision making.
Some of our roles are social and some roles are institutional.
• Social roles are friend, son or daughter, spouse, citizen, neighbor.
• Institutional roles are employees, managers, employees, parents, children,
professor, and president of a student club.

Managers, executives, and board members have the ability to

create and shape the organizational context in which all
employees make decisions.
• They have a responsibility to encourage ethical behavior and discourage
unethical behavior.

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 End of Main Content

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Chapter Three:
Philosophical
Ethics and
Business

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 Chapter Objectives 1

After reading this chapter, you will be able to:

1. Explain the ethical framework of utilitarianism.
2. Describe how utilitarian thinking underlies economic and business
decision making.
3. Explain how the free market is thought to serve the utilitarian goal of
maximizing the overall good.
4. Explain some challenges to utilitarian decision making.
5. Explain the principle-based, or rights-based, framework of ethics.

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 Chapter Objectives 2

6. Explain the concept of human rights and how they are relevant to
business.
7. Distinguish moral rights from legal rights.
8. Explain several challenges to principle-based ethics.
9. Describe and explain virtue-based framework for thinking about ethical
character.

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 Philosophical Ethics and Business 1

The unexamined life is not worth living.

Socrates

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 Ethical Frameworks 1

An ethical framework is nothing more than an attempt to

provide a systematic answer to the fundamental ethical
question.
• How should human beings live their lives?
• Ethics can be understood as the practice of examining these decisions and
thinking about answers to the question: Why?
• Ethics attempts to answer the question of how we should live, but it also
gives reasons to support the answers.

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 Ethical Frameworks 2

Anyone can offer prescriptions for what you should do and how
you should act, but a philosophical and reasoned ethics must
answer the "why?" question as well.
• "Why" matters because without offering reasons, one is giving an opinion.
• "Why" matters because superficial agreement can mask underlying
disagreement.
• Many people and cultures attempt to answer “why” in religious terms, but
religions differ from culture to culture.
• Philosophical ethics provides justifications applicable to all people
regardless of their religious starting points.

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 Ethical Frameworks 3

Ethics is not comprised of a single principle or framework.

Ethical frameworks that have proven influential in the
development of business ethics and that have a practical
relevance in evaluating ethical issues in modern business.
• Utilitarianism is an ethical tradition that directs us to decide based on
overall consequences of our acts.
• The principle-based framework directs us to act on the basis of moral
principles such as respecting human rights.
• Virtue ethics tells us to consider the moral character of individuals and
how various character traits can contribute to, or obstruct, a happy and
meaningful human life.

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 Philosophical Ethics and Business 2

It’s better to hang out with people better than you. Pick out
associates whose behavior is better than yours and you’ll drift in
that direction.
Warren Buffett

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 Utilitarianism: Ethical Consequences 1

Utilitarianism’s fundamental insight is that outcomes matter, and

so we should decide what to do by considering the
consequences of our actions.
• In that sense, utilitarianism has been called a consequentialist approach
to ethics and social policy.
• We should act in ways that produce better consequences than the
alternatives.
• What is meant by better consequences?
• Better consequences are those that promote human well-being: the
happiness, health, dignity, integrity, freedom, and respect of all the
people affected.

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 Utilitarianism: Ethical Consequences 2

Utilitarianism is commonly identified with the rule of producing

"the greatest good for the greatest number."
• As a social philosophy, utilitarianism opposes policies that aim to benefit
only a small social, economic, or political minority.

Utilitarians tend to be very pragmatic thinkers, and no act is ever

absolutely right or wrong in all cases in every situation.
• Utilitarian reasoning usually acknowledges some support for competing
available alternatives.

Utilitarian position is that happiness is the ultimate good, the

only thing that is and can be valued for its own sake.

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 Utilitarianism and Business
The free market is decidedly utilitarian.
• So, utilitarianism has a strong impact on business and business ethics.

How to achieve the goal of maximizing the overall good?

• Two answers prove especially relevant in business and business ethics.
• Some utilitarians agree with Adam Smith, claiming that free and competitive
markets are the best means for attaining the goal.
• Policy experts in predicting human action are familiar with the specifics of how
society works, and they therefore are in a position to determine which policy
will maximize the overall good.
• The dispute between the "market" and the "administrative" versions of
utilitarianism characterize many disputes in business ethics.
• Egoism is also a consequentialist theory, but it focuses exclusively on the
happiness of the individual making the decision.

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 Challenges to Utilitarian Ethics 1

Problems concern the need to count, measure, compare, and

quantify consequences.
Utilitarians determine both ethical and unethical acts by their
consequences—so the end justifies the means.
• This seems to deny one of the earliest ethical principles that the end does
not always justify the means.
• We have certain duties or responsibilities that we ought to obey even
when doing so does not produce a net increase in overall happiness.

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 Challenges to Utilitarian Ethics 2

Utilitarian reasons contributes to ethical decision by requiring

that we consider the consequences of our actions.
• Important to remember that utilitarian reasoning does not exhaust the
range of ethical concerns.
• Responsible ethical decision making also involves duties, principles, and
personal integrity.
Principles are those ethical rules that put what we value into action.

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 An Ethics of Principles and Rights 1

Some decisions should be a matter of principle, not

consequences—the ends do not always justify the means.
• Which principles should be followed?
• When does a principle outweigh producing good consequences?

The ethical framework that will prove crucial for business ethics
begins with the insight that we should make some ethical
decisions as a matter of principle rather than consequences.
• Principles create ethical duties that bind us to act or decide in certain
ways.
• One approach to ethics that emphasizes duties, obligations, and principles
is referred to as deontology.

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 An Ethics of Principles and Rights 2

What principles or rules should guide our decisions?

• Legal rules.
• Organizational rules.
• Role-based rules.
• Professional rules.

Ethical duties should be categorical imperatives rather than

hypothetical.
• A categorical imperative is an overriding principle of ethics.

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 An Ethics of Principles and Rights 3

Hypothetical duties.
• Could include a professional code of conduct that binds you only if you in
that profession.

Categorical duties.
• Do not contain an "if" clause.
• I should or must obey a fundament ethical rule no matter what.

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 Human Rights and Duties 1

Are there any fundamental or "categorical" duties?

• Immanuel Kant believed we all have a duty to treat each person as an end
in themselves and never only as means to our own ends.
• Persons must never be treated as mere tools.

The U.S. Declaration of Independence speaks of "inalienable

rights" that cannot be taken away by government.
Human, or moral rights is central to principle-based ethics.
• The inherent dignity of each individual means that we cannot do whatever
we choose to another person.

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 Human Rights and Duties 2

Human rights protect individual dignity.

Rights imply that some acts and some decisions are "off-limits."
• Our moral duty is to respect the human rights of others.

Humans are said to have a fundamental human right of

autonomy, or "self-rule."

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 Human Rights and Social Justice 1

Two rights emerged as fundamental components of social

justice—liberty and equality.
• More fundamental and persistent than legal rights created by
governments and communities.
• They are particularly fundamental to theories of social justice upon which
democratic societies and capitalist economies have been built.
• Crucial to an understanding of business ethics.

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 Human Rights and Social Justice 2

Libertarian Egalitarian
Here, individual liberty is the • Here, equality is the central
central element of justice. element of justice.
• A just society is one in which • Socialist egalitarian theories
individuals are free from argue for equal distribution
government intrusion as long as
they are not harming others.
of basic goods and services.

Ethical business pursues profit • Other theories argue that

within the law. equal opportunity is crucial.
• Unethical businesses would • Supports greater
include fraud, deception, and governmental responsibility
anticompetitive behavior. in the economy to
guarantee equality of
opportunity outcomes.
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 Human Rights and Legal Rights 1

What is the difference between human rights and legal rights?

• Using employee rights as an example, there are three kinds of employee
rights common in business.
• First, there are those legal rights granted to employees on the basis of
legislation or judicial rulings.
• Minimum wage and equal opportunity are some examples.
• Second, employees have rights to those goods that they are entitled to on the
basis of contractual agreements with the employer.
• Health care, pension, and paid holidays are examples.
• Finally, employees have rights grounded in moral entitlements to which
employees have a claim independently of any particular legal or contractual
factors.
• Examples include the right not to be bullied, right not to be lied to, and
the right not to be sexually harassed.

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 Human Rights and Legal Rights 2

Legal rights place certain issues outside the realm of the

employment contract.
• Such legal rights set the basic legal framework within which business
operates.

Human rights lie outside the bargaining that occurs between

employers and employees.

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 Challenges to an Ethics of Rights and Duties
There are two big challenges to understanding diversity of rights.
• There is disagreement about what rights truly are basic human rights.
• It is unclear how to apply this approach to practical situations, especially
in cases where rights appear to conflict.

Critics charge that unless there is a specific person or institution

that has a duty to provide the goods identified as “rights,” talk of
rights amounts to little more than a wish list of things that
people want.

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 Philosophical Ethics and Business

The reason I’ve been able to be so financially successful is my

focus has never, ever for one minute been money.
Oprah Winfrey

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 Virtue Ethics: Integrity and Character 1

Virtues are those character traits that would constitute parts of a

good and meaningful human life.
• The best place to see the ethics of virtue is in the goal of every good
parent who hopes to raise happy and decent children.

To understand how virtue ethics differs from utilitarian and

principle-based frameworks, consider egoism.
• There is a gap between self-interest and altruism.
• Ethics requires us to act for the well-being of others at times, something
egoism claims is not possible.

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 Virtue Ethics: Integrity and Character 2

An ethics of virtue shifts the focus from questions of what a

person should do, to a focus on who that person is.
• A person’s character is not independent of that person’s identity.
• Character: Those dispositions, relationships, attitudes, values, and beliefs that
popularly might be called a "personality."

• This shift changes the nature of justification in ethics.

Ethical controversies often involve a conflict between self-

interest and ethical values.
How much we act for the well-being of others depends on our
character.

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 Virtue Ethics: Integrity and Character 3

Virtue ethics recognizes that human beings act according to who

they are, according to their character.
• Given that character plays a key role in our behavior and given that our
character can be shaped by controllable factors, virtue ethics seeks to
understand how those traits are formed and which traits are conducive to
and which ones undermine a meaningful, worthwhile, and satisfying life.

Virtue ethics offer us a more fully textured understanding of life

within business.
Virtue ethics reminds us to examine how character traits are
formed and conditioned.
• Many individual moral dilemmas arise when tension between who we
seek to be and the type of person business expects us to be.

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 Virtue Ethics: Integrity and Character 4

Virtue ethics should lead us to ask questions about the choices

we make and how those choices affect our character.
• First, note that each decision you make has a subtle but meaningful
impact on subsequent decisions.
• This suggests a reciprocal relationship between character and action.
• Our character affects how we act, but how we act ends up affecting our
character.

• The second way in which our choices affect character is through the
people we choose to associate with and the organizations we choose to
become part of.
• This has important implications for the companies we choose to work for.
• The organizational culture that we become part of will inevitably change who
we are, so choose carefully.

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 Decision-Making Model for Business Ethics Revisited 1

This chapter introduced three historically and philosophically

ethical frameworks.
Understanding the philosophical basis of ethics enables you to:
• Become more aware of ethical issues.
• Better able to recognize the significance of your decisions.
• More likely to make better informed and more reasonable decisions.
• Articulately explain yourself when asked about a decision.

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 Decision-Making Model for Business Ethics Revisited 2

Ethical theories also provide ways to develop the decision-

making model introduced in chapter 2.
• These theories provide systematic and sophisticated ways to think and
reason about ethical questions.
• The decision-making model now has ethical theories integrated into an
explicit decision procedure.

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 Decision-Making Process Revisited 1

• Determine the facts.

• Identify the ethical issues involved.
• Identify stakeholders.
• Consider the available alternatives.

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 Decision-Making Process Revisited 2

Compare and weigh the alternatives.

• Consequences.
• Duties, rights, and principles.
• Implications for personal integrity and character.

Make a decision.
Monitor and learn.

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 End of Main Content

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 Chapter Four:
The Corporate
Culture—Impact
and Implications

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 Chapter Objectives 1

After reading this chapter, you will be able to:

1. Define corporate culture.
2. Explain how corporate culture impacts ethical decision making.
3. Discuss the differences between a compliance-based culture and a
values-based culture.
4. Discuss the role of corporate leadership in establishing the culture.
5. Explain the difference between effective leaders and ethical leaders.

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 Chapter Objectives 2

6. Discuss the role of mission statements and codes in creating an ethical

corporate culture.
7. Explain how various reporting mechanisms such as ethics hotlines and
ombudspersons can help integrate ethics within a firm.
8. Discuss the role of assessing, monitoring, and auditing the culture and
ethics program.
9. Explain how culture can be enforced via governmental regulation.

3
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 Ethics and Corporate Culture 1

Culture eats strategy for breakfast.

Peter Drucker

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 What is Corporate Culture? 1

The ethical decision-making model emphasizes the individual

responsibility for the decisions made.
• But personal decision making does not exist in a vacuum.

Decision making within a firm is influenced, limited, shaped, and,

sometimes, determined by the corporate culture of the firm.
• This chapter explores some of the major issues surrounding the
development, influence, and management of a corporate culture.
• It also explores the role of business leaders in creating, enhancing, and
preserving cultures that support ethical behavior.

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 What is Corporate Culture? 2

Even in this age of decentralized corporations, there remains a

sense of culture in organizations.
• This is especially true in small local firms, but just as true of major global
corporations.

Culture: A shared pattern of beliefs, expectations, and meanings

that influences and guides the thinking and behaviors of the
members of a particular group.

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 Figure 4.1

While culture shapes the people who are members of the

organization, it is also shaped by the people who make up
that organization.
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 What is Corporate Culture? 3

Just as there are national cultures, businesses also have

unspoken, yet influential standards and expectations.
• An organization’s culture refers to communal expectations, norms, beliefs,
and values that guide behavior within the organization.
• If you join a firm with a culture that supports values, you are
uncomfortable with—there will be conflicts.
• No culture is static—cultures change; but modifying culture is a bit like
moving an iceberg.
• The iceberg is always moving, and if ignored, the iceberg will continue to float
along on the current.
• Strong leaders—from within or at the top—can have a significant impact on a
culture.

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 What is Corporate Culture? 4

A firm's culture can be its sustaining value:

• Offering direction and stability during challenging times.
• Can prevent a firm from responding to challenges in creative and timely
ways.

The stability a culture provides can be a benefit at one time and

a barrier to success at another time.
Some corporate cultures are defined from the top-down, others
are developed by the employees themselves.

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 What is Corporate Culture? 5

Defining the specific culture within an organization is not an easy

task because it is partially based on each employee’s perception
of the culture.
• Perception may actually impact the culture in a circular way.
• In addition, culture is present in and can be determined by exploring:
• Tempo of work.
• The organization’s approach to humor.
• Methods of problem solving.
• The competitive environment.
• Incentives.
• Individual autonomy.
• Hierarchical structure.

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 Figure 4.2

Even with this

list of cultural
elements, it can
be difficult for
individuals in a
firm to identify
the specific
characteristics
of the culture
within which
they work. Used by permission of Nancy Margulies

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 Ethics and Corporate Culture 2

If you are lucky enough to be someone’s employer, then you

have a moral obligation to make sure people do look forward to
coming to work in the morning.
John Mackey, CEO and co-founder, Whole Foods Market

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 Culture and Ethics 1

How does the notion of culture connect with ethics?

What role does corporate culture play in business ethics?
• The separation thesis asserts that ordinary ethical standards should be
separate from business decisions. If a business obeys the law, it is acting
ethically.

In situations where the law provides an incomplete answer for

ethical decision making, the business culture is likely to be the
determining factor in the decision.
• Ethical businesses must find ways to encourage, to shape, and to allow
ethically responsible decisions.

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 Culture and Ethics 2

The cultivation of habits, including ethical virtue, is greatly

shaped by the culture in which one lives.
• Where we get our habits and character is all-important.

We can choose to develop some habits.

• Habits are shaped by education and training—by culture.
• Intentionally or not, businesses provide an environment in which habits
are formed and virtues, or vices, are created.

The effect of workplace culture on decision making cannot be

overemphasized.

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 Culture and Ethics 3

If attended to, a strong ethical culture can deter stakeholder

damage and improve bottom-line sustainability.
• If ignored, the culture could destroy long-term sustainability in both
financial performance and employee retention.

Responsibility for creating and sustaining ethical corporate

cultures rests on business leaders.
• While true that individuals can shape an organization, it is equally true
that organizations shape individuals.
• The person you become, your attitudes, values, expectations, mindset, and
habits, will be significantly determined by the culture of the organization in
which you work.

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 Compliance and Values-Based Cultures 1

Compliance-based culture emphasizes adherence to rules as the

primary responsibility of ethics.
A compliance culture is only as strong and precise as the rules.
• When rules don’t apply, a values-based culture relies on the personal
integrity of its workforce.

Values-based cultures: A corporate culture in which conformity

to a statement of values and principles rather than simple
obedience to laws and regulations is the prevailing model for
ethical behavior
• A values-based culture reinforces a set of values rather than rules.

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 Table 4.1: The Evolution of Compliance Programs into Values-Based Programs

Traditional Progressive (Effective Practices)

Audit focus Business focus
Transaction-based Process-based
Financial account focus Customer focus
Compliance objective Risk identification, process improvement
objective
Policies and procedures focus Risk management focus
Multiyear audit coverage Continual risk-reassessment coverage
Policy adherence Change facilitator
Budgeted cost center Accountability for performance improvement
results
Career auditors Opportunities for other management
positions
Methodology: Focus on policies, Methodology: Focus on goals, strategies, and risk
transactions, and compliance management processes

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 Compliance and Values-Based Cultures 2

Compliance-oriented goals may include meeting legal and

regulatory requirements, minimizing risks of litigation and
indictment, and improving accountability mechanisms.
The goals of a more evolved and inclusive ethics program may
entail:
• Maintaining brand and reputation.
• Recruiting and retaining desirable workers.
• Unifying a firm’s global operation.
• Creating a better working environment.
• Doing the right thing as well as doing things right.

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 Ethics and Corporate Culture 3

I came to see, in my time at IBM, that culture isn’t just one

aspect of the game, it is the game. In the end, an organization is
nothing more than the collective capacity of its people to create
value.
Louis Gerstner, past chairman and CEO, IBM

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 Ethical Leadership and Corporate Culture 1

Corporate leadership has a primary responsibility to steward

corporate culture.
• Stakeholders are guided by the "tone at the top"; there must be a
consistent tone throughout the firm.

One 2013 study found that senior leaders are more likely than
lower-level employees to break the rules and 60 percent of
reported misconduct is attributed to managers.
• If leadership acts unethically, stakeholders receive the message this type
of behavior is acceptable.
• Alternatively, if a leader acts ethically above any other consideration,
stakeholders are guided by that role model.

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 Ethical Leadership and Corporate Culture 2

Beyond personal behavior, leadership sets the tone through

other mechanisms.
• "Budgeting is all about value" is a long-standing management credo.
• When ethics officers were first introduced in the early 1990s, the extent of the
financial support they received indicated their relevance and influence.
• Creating a shared company culture is a key responsibility of its leaders, if they
wish to prioritize ethics in their respective companies .
• Leaders should be perceived as people-oriented, as well as engaging in visible
ethical action.
• Executives who are "quietly ethical" within the top management team, are
not perceived as ethical leaders by the distant employees.

The impact of ethical leadership is significant.

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 Effective Leadership and Ethical, Effective Leadership 1

How do the effective leader and the ethical, effective leader

differ?
• Not every effective leader is an ethical leader.
• One key difference is the means used to motivate others and achieve
one's goals.
• Some of the discussions on leadership suggest that ethical leadership
is determined by the methods used in leading
• Transformative or transactional leaders employ methods that empower
subordinates to take the initiative and to solve problems for themselves.

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 Effective Leadership and Ethical, Effective Leadership 2

Ethically appropriate methods of leadership are central to

becoming an ethical leader.
• The other element involves the end or objective toward which the leader
leads.
• In the business context, productivity, efficiency, and profitability are minimal
goals for sustainability.

Beyond the goal of profitability, other socially responsible goals

might be necessary before making a conclusion that a leader is
fully ethical.

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 Building a Values-Based Corporate Culture 1

Culture is built and maintained through leadership, integration,

assessment, and monitoring.
• One of the key manifestations of ethical leadership is the communication
of values for the organization.
• But do codes make a difference?

• Before impacting the culture through a code of conduct or statement of

values, a firm must determine its mission.
• The code has the potential to both enhance reputation and provide guidance
for internal decision making.

• This creates a built-in risk management system.

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 Building a Values-Based Corporate Culture 2

• The mission should be inspiring.

• Establishing the core tenets (especially through a participatory
process), lays down the law for all future decisions.
• The mission statement or corporate credo articulates the
fundamental principles that should guide all decisions,
without abridgment.
• From a universalist perspective, many decisions might be
made with the end in mind, but none should ever breach the
underlying mission as an ultimate dictate.

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 Developing the Mission and Code 1

Critical to ask what the company stands for.

• Why does the firm exist? What are its purposes?

Development of guiding principles through articulation of a clear

vision.
Identify clear steps as to how a cultural shift will occur between
the stakeholders and organizations.

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 Developing the Mission and Code 2

To have an effective code that will impact culture there must be

a belief that this culture is possible and achievable.
While businesses have codes of conduct, industries and/or
professions might also publish codes of conduct.
• These codes of conduct apply to firms or people who do business in those
arenas.

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 Ethics Code Guidelines
The Ethics Resource Center provides the following guidelines for
writing an ethics code:
• Be clear about the objectives the code is intended to accomplish.
• Get support and ideas for the code from all levels of the organization.
• Be aware of the latest developments in the laws and regulations that
affect your industry.
• Write as simply and clearly as possible. Avoid legal jargon and empty
generalities.
• Respond to real-life questions and situations.
• Provide resources for further information and guidance.
• In all its forms, make it user-friendly because ultimately a code fails if it is
not used.

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 Cultural Integration 1

Integration can take different forms, depending both on the

organizational culture and the ultimate goals of the process.
One of the most decisive elements of integration is
communication.
• Communication of culture must be incorporated into the firm’s
vocabulary, habits, and attitudes to become an essential element in the
corporate life, decision making, and determination of success.

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 Cultural Integration 2

Effective integration processes should have incentives in the

right place to encourage ethical decision making and checked
whether it is evaluated during a worker’s performance review.
How does communication about ethical matters occur?
• Reporting ethically suspect behavior is a difficult thing to do.
• Nobody likes a "tattletale" and those who report may be retaliated
against.

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 Cultural Integration 3

Whistle-blowing.
• A practice in which an individual within an organization reports
organizational wrongdoing to the public or to others in position of
authority.
• It is a classic issue in business ethics.
• It can have extremely negative connotations, depending on the culture
and environment where it occurs.
• Vocabulary has an impact, and a change of language could inspire workers
to feel a sense of empowerment from their contribution to the corporate
culture.
• It occurs internally and externally.
• Reporting to external groups can be harmful.
• Internal mechanisms for reporting wrongdoing are preferable.

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 Cultural Integration 4

Internal reporting mechanisms must be effective.

• They must allow confidentiality, if not anonymity.
• They must strive to protect the rights of the accused party.

Company norms and culture can encourage internal reporting.

Many firms have created ethics’ ombudspersons and internal or
external reporting helplines.
One challenge with reporting systems is they do not make the
values of the organization clear.
• What is or is not accepted within the company’s culture.

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 Cultural Integration 5

Firms ensure a successful reporting scheme by ensure the

following methods are followed:
• Leaders should model the act of reporting wrongdoing.
• Leaders can explain the decision-making process that led to their
conclusion.
• Crisis management teams are often unsuccessful, but running drills or
rehearsals of challenging events is a valuable exercise that can be
followed.
• Allow sufficient time for reflection in order to reach responsible decisions
might encourage consideration of appropriate implications.
• Consistently and continuously communicate values and expectations to all
stakeholders.

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 Assessing and Monitoring the Corporate Culture 1

Monitoring and an ongoing ethics audit allows the discovery of

silent vulnerabilities which could pose later challenges.
Effective monitoring system may include significantly positive
objectives.
• How to better allocate resources.
• Determine whether a program is keeping pace with organizational growth.
• Whether all of the program’s positive results are being accurately
measured and reported and the firm’s compensation structure is
adequately rewarding ethical behavior.
• Whether the “tone at the top” is being shared effectively.

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 Assessing and Monitoring the Corporate Culture 2

How do you detect a "toxic" culture?

• A clear sign is a lack of values for the organization.
• Warning signs can occur in the various component areas of the
organization.
• If the manner in which a firm manages and communicates its financial
environment is disastrous.

How to measure the impact of efforts to change a culture?

• Determine if employee perceptions have changed.
• External audits provide information, as does hotline data.
• Any employee feedback should be gathered and analyzed for input
regarding the culture.

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 Mandating and Enforcing Culture 1

The United States Sentencing Commission (USSC), an

independent agency in the U.S. judiciary, regulates sentencing
policy in the federal court system.
• The USSC prescribed mandatory Federal Sentencing Guidelines for
Organizations (FSGO) that apply to individual and organizational
defendants in the federal system.
• Listed 43 "offense levels" based on the severity of the offense.
• Strived to use the guidelines to create both a legal and an ethical corporate
environment.
• Each offender is categorized based on the extent and recency of past
misconduct.
• The court inputs this information into a sentencing grid and determines the
offender’s sentence guideline range.
• The USSC strived to use the guidelines to create both a legal and an ethical
corporate environment.
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 Mandating and Enforcing Culture 2

The USSC updated the guidelines in 2004 to include ethics and

compliance programs.
• Required organizations to promote “an organizational culture that
encourages ethical conduct and commitment to compliance with the law.
• Includes a requirement that organizations assess areas of risk for ethics
and compliance, and periodically measure the effectiveness of their
programs.
• Criteria for an effective program was now supposed to be found in a
separate specific guideline.

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 Mandating and Enforcing Culture 3

The guidelines encourage corporations to create or maintain

effective ethics and compliance programs.
The USSC notes that organizations shall "exercise due diligence
to prevent and detect criminal conduct."
• And promote an organizational culture that encourages ethical conduct
and a commitment to compliance with the law.

The guidelines identify specific acts of an organization that can

serve as due diligence in preventing crime and the minimal
requirements for an effective compliance and ethics program.

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 Sources of Culture
Leadership (and maintenance) of the control environment.
• Through high-level commitment and management responsibility, leaders
set the standard and the tone.

Control activities, information, and communication.

• Statements, policies, operating procedures, communications and training.
• Constant/consistent integration into business practices.

Review, assessment, ongoing monitoring.

• Monitoring, evaluation, historical accountability.

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 Specific Acts of An Organization That Can Serve As Due Diligence

USSC minimal requirements.

• Standards and procedures. • Communication and training.
• Responsibility of board and other • Monitoring, evaluation, and
executives; adequate resources reporting processes.
and authority.
• Incentive and disciplinary
• Board oversight is required. structures.
• High-level personnel must be • Should be enforced
assigned. consistently.
• Specific individuals shall report • Response and modification
periodically to the high-level mechanisms.
personnel.

• Preclusion from authority: prior

misconduct.

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 Mandating and Enforcing Culture 4

In 2010, the USSC lowered the penalties for compliance

violations if the organization met the following four criteria:
• Those responsible for the programs must have direct reporting obligations
to the governing authority.
• The program detected the offense before outside discovery.
• The offense was promptly reported to governmental authorities.
• No person responsible for the program condoned the offense.

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 End of Main Content

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Chapter Five:
Corporate
Social
Responsibility

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 Chapter Objectives
After reading this chapter, you will be able to:
1. Define corporate social responsibility.
2. Distinguish key components of the term responsibility.
3. Describe and evaluate the economic model of corporate social
responsibility.
4. Describe and evaluate the stakeholder model of corporate social
responsibility.
5. Describe and evaluate the integrative model of corporate social
responsibility.
6. Explain the role of reputation management as motivation behind CSR.
7. Evaluate the claims that CSR is "good" for business.

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 Introduction: Corporate Social Responsibility
• This chapter addresses corporate social responsibility (CSR)
and how firms opt to meet this perceived responsibility.
• Businesses have a social responsibility to obey the law.
• Economically, businesses have a social responsibility to
produce the goods and services society demands.
• There are ambiguities involved in each of the three terms
corporate, social, and responsibilities.
• The primary question of CSR is the extent to which businesses
and the managers who run them have ethical responsibilities
beyond producing goods and services within the law.

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 Ethics and Social Responsibility 1

The words responsible and responsibility are used in several

different ways.
• One meaning attributes something as a cause for an event or action.
• In a second sense, to be responsible does carry ethical connotations.
• When a business is responsible to someone or for something, it indicates what
a business ethically ought or should do.
• Product safety and liability laws involve these meanings of being responsible.

• Corporate social responsibility refers to the ethical expectations that

society has for business.
• Ethical responsibilities are those things that we ought, or should, do, even if
sometimes we would rather not.

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 Ethics and Social Responsibility 2

Philosophers often distinguish three different levels of ethical

responsibilities on a scale from less to more obligatory.
• Do good.
• Volunteering.
• Charitable work.

• Prevent harm.
• Good Samaritan.
• Use renewable energy

• Do not cause harm to others.

• A duty or an obligation.
• Enforced by law and results in legal punishment.

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 Ethics and Social Responsibility 3

The strongest sense of responsibility is not to cause harm.

• Even when not explicitly prohibited by law, ethics demands we not cause
avoidable harm.
• Overrides business’s pursuit of profit.

Is there a responsibility to prevent harm?

• A more inclusive understanding of corporate social responsibility would
hold that business has a responsibility to prevent harm.

Is there a responsibility to do good?

• Most wide-ranging, standard of CSR holds that business has a social
responsibility to do good things and to make society a better place.
• Is philanthropy something that every business ought to do?

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 Ethics and Social Responsibility 4

• There are competing understandings of corporate social

responsibility and management’s role in fulfilling these
responsibilities.
• The narrow economic model of CSR directs managers to
maximize profit and shareholder wealth within legal limits.
• The stakeholder model assets that neither a business nor the
employees are exempt from ordinary ethical responsibilities.
• The integrative model of CSR says that part of the managerial
responsibility to shareholders is to serve the social good.

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 Figure 5.1: Models of Corporate Social Responsibility

Access the text alternative for slide image.

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 Corporate Social Responsibility 1

Corporations are people.

Mitt Romney

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 Economic Model of CSR 1

The general definition of the term corporate social responsibility

(CSR) is the ethical responsibilities that a business has to the
society in which it operates.
From an economic perspective, a business is an institution.
• By doing this, the business is creating jobs and wealth that provide further
social benefits.

The law created a form of business called a corporation, which

promotes these economic ends by limiting the liability of
individuals for the risks involved in these activities.

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 Economic Model of CSR 2

The economic model of CSR holds that businesses’ sole social

responsibility is to fulfill the economic functions they were
designed to serve.
• Managers are employees, or agents, of stakeholders and must work to
further stakeholder’s interests, primarily by maximizing profits.
• Many observers identify this perspective as the dominant model of CSR
and refer to it as managerial capitalism.

Places shareholders at the center of the corporation.

• Managers have a fiduciary duty to pursue profit within the law.

Corporations are expected to obey legal mandates.

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 Economic Model of CSR 3

Business has no social responsibilities beyond the economic and

legal ends for which it was created.
Economist Milton Friedman suggests that managers fulfill their
ethical responsibility by increasing shareholder wealth and
pursuing profit.
• This common view of corporate social responsibility has its roots in the
utilitarian tradition and in neoclassical economics.

Within this dominant economic model, there is room to pursue

social responsibilities.

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 Economic Model of CSR 4

Business has no obligation, but is free to contribute to social

causes as a matter of philanthropy.
• It builds goodwill and/or a good reputation, provides tax deduction, and
builds goodwill or a good reputation within the community.
• Some support causes that have little or no business or financial payoff as a
matter of giving back to their communities.

The economic model in which business support for a social cause

is done simply because it is the right thing to do differs from the
reputational version only in terms of the underlying motivation.

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 Stakeholder Model of CSR 1

The stakeholder model of CSR holds that businesses exist within

a web of social and ethical relationships and create value for a
range of stakeholders.
Philosopher Norman Bowie argues that business has an ethical
duty to respect human rights.
• It is the "moral minimum" that we can expect of every person.
• The obligation to cause no harm overrides other ethical considerations.
• If managers comply with the moral minimum, they should maximize
profits.

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 Stakeholder Model of CSR 2

Stakeholder theory
• Recognizes that every business decision affects a wide variety of people,
benefiting some and imposing costs on others.
• The stakeholder model simply acknowledges this principle and points out that
other ethical duties have an equal claim on managerial decision making.

• Acknowledges this fact by requiring management to balance the ethical

interests of all affected parties
• It asks managers to consider the consequences of its decisions.
• Social responsibility requires decisions to prioritize competing and
conflicting responsibilities.
• Because stakeholder theory recognizes that some stakeholders have different
power and impact on decisions than others.

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 Corporate Social Responsibility 2

Corporate social responsibility is measured in terms of

businesses improving conditions for their employees,
shareholders, communities, and environment. But moral
responsibility goes further, reflecting the need for corporations
to address fundamental ethical issues such as inclusion, dignity,
and equality.
Klaus Schwab, Chairman of the World Economic Forum

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 Integrative Model of CSR
Should business be expected to sacrifice profits for social ends?
• There are organizations that pursue social ends as the very core of their
mission, such as nonprofits.
• Some for-profit organizations have social goals as a central part of the
strategic mission.
• Because these firms integrate economic and social goals, they are using
the integrative model of CSR.
• There are no claims that every business should adopt the principles of
benefit corporations.
• Benefit corporations show profit is not incompatible with doing good, and
therefore that one can do good profitably.
• Others argue sustainability is relevant to every business concern.

©McGraw-Hill Education 17
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 The Implications of Sustainability
As a topic within CSR, sustainability means a firm’s financial goals
must be balanced against, and may be overridden by,
environmental considerations.
Defenders say all economic activity exists in a biosphere that
supports all life.
• The present model of economics, and especially the macroeconomic goal
of economic growth is running up against the limits of the biosphere's
capacity to sustain life.
• Success must be judged by the financial bottom line, as well as the
ecological and social bottom lines.
• A corporate sustainability report provides stakeholders with financial and
other information regarding a firm’s economic, environmental, and social
performance.

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 Corporate Social Responsibility 3

Stakeholder capitalism is not about politics. It is not a social or

ideological agenda. It is not ‘woke’. It is capitalism, driven by
mutually beneficial relationships between you and the
employees, customers, suppliers, and communities your
company relies on to prosper. This is the power of capitalism.
Our conviction at BlackRock is that companies perform better
when they are deliberate about their role in society and act in
the interests of their employees, customers, communities, and
their shareholders.
Larry Fink, CEO BlackRock Capital

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 Exploring Enlightened Self-Interest
Other reasons besides self-interest and economics for a business
to engage in socially responsible activities.
• CSR can impact a firm’s reputation within a community.
• The problem with a focus on reputation is that social responsibility then can
become merely social marketing.
• The practice of attending to the "image" of a firm is referred to as reputation
management; failure to do so might be a poor business decision.
• Companies may be challenged for engaging in CSR activities solely for the
purpose of affecting their reputations.

• Reputation management is the practice of caring for the “image” of a

firm.
• It can be well-respected for its products and services, financial performance,
as a good place to work, and as a good corporate citizen.
• If a firm develops a bad reputation, it can create significant barriers to
business success.
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 Exploring Enlightened Self-Interest 1

Is good ethics also good business?

• Enlightened self-interest presumes it is, or at least can be.
• Theorists continue to dispute whether ethical decisions lead to more
significant profits than unethical decisions.
• There is a general agreement that ethics pays off in the long run, but how to
measure that payoff is the challenge.
• Often the measurement of a good reputation occurs in the long-term, but
performance is measured in the short-term.

Is there a business case for return on investment from ethics?

• Evidence says yes, but the dominant thinking is that, if it cannot be
measured, it is not important.

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 Exploring Enlightened Self-Interest 2

Measurement is critical as there are detractors.

• Political science professor David Vogel contends that firms with strong CSR
missions serve a niche market of consumers and investors.
• Argues that contrary to a global shift in the business environment, CSR instead
should be perceived as just one option

Research concludes that it does pay for businesses in emerging

markets to pursue a wider role in environmental and social
issues.
• Studies find there are a number of expected—and measurable—outcomes
to ethics programs in organizations.

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 End of Main Content

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Chapter Six: Ethical
Decision Making:
Employer
Responsibilities and
Employee Rights

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 Chapter Objectives 1

After reading this chapter, you will be able to:

1. Distinguish between the two distinct perspectives of the ethics of
workplace relationships.
2. Explain the concept of due process in the workplace.
3. Define employment at will (EAW) and its ethical rationale.
4. Describe how to downsize in an ethical manner.
5. Explain the difference between intrinsic and instrumental value in terms
of health and safety.

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 Chapter Objectives 2

6. Illustrate an employer’s responsibility with regard to employee health

and safety and why the market is not effective at managing this
responsibility.
7. Explain the basic arguments for and against regulation of the global labor
environment.
8. Describe the argument for a market-based resolution to workplace
discrimination.
9. Define diversity as it applies to the workplace, as well as its benefits and
challenges.
10. Explain affirmative action and describe the three ways in which
affirmative action may be legally permissible.

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 Ethical Decision Making

Hire character. Train skill.

Peter Schutz

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 Introduction 1

Ethics in the employment context is a universal topic.

The law provides guidance for thinking about ethical issues in
the workplace, but these issues go well beyond legal
considerations.
This chapter explores areas of ethical decision making in the
workplace remains relatively fluid and where answers are not
easily found by simply calling the company lawyer.

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 Introduction 2

Various ethical challenges facing the nature of employer

responsibilities and the employee are addressed in this chapter.
• As each issue is examined, try to employ the ethical decision-making
process to reach the best possible conclusion for the stakeholders.
• Shifting between being an employee and being a manager allows you to
shift perspectives and reach the best possible conclusion for all
stakeholders.

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 Ethical Issues in the Workplace: The Current Environment 1

• Ethics at work and in human resource management is about

relationships with others and with the company.
• Companies who place employees at the core of their
strategies long-term returns to shareholders than their
industry peers – more than double.

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 Ethical Issues in the Workplace: The Current Environment 2

50% of U.S. workers feel strong loyalty to their employer.

• Important factor for them was to feel valued by elements such as benefits
and opportunities for professional growth.

78% of those workers who experienced unethical or uncivil

behavior at work report that their commitment to the
organization declined.
• 66% said their performance declined.

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 Ethical Issues in the Workplace: The Current Environment 3

Treat employees well for a return.

• The return is greater workplace harmony, productivity, and innovation.
• Focus on end results and consequences.

Treat employees well out of a sense of duty.

• This approach emphasizes the rights and duties of all employees.
• And treating them well simply because it is "the right thing to do."

• A sense of duty might stem from the law, professional codes of conduct,
corporate codes of conduct, or moral principles.

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 Defining the Employment Relationship
• Ethical issues are bound to rise once a relationship is formed
between an employer and an employee.
• In addition to legal parameters, there are ethical parameters
for what makes a contract valid.
• Both parties understood the terms of the contract.
• Both parties receive benefits agreed to.

• This represents the concept of “informed consent.”

• How free and voluntary is the decision o accept and keep a job offer?

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 Due Process and Just Cause 1

Should employers’ rights and ability to hire, fire, or discipline

employees be restricted to prevent injustices?
Philosophically, the right of due process is the right to be
protected against the arbitrary use of authority.
• Due process acknowledges an employer’s authority over employees
• Basic fairness—implemented through due process—demands that this
power be used justly.
• However, workplace bullying and other emotional abuse is a problem,
especially in the service sector.
• This behavior directly and indirectly impacts employees.

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 Due Process and Just Cause 2

While basic fairness demands employers use power justly, the

law does not always clearly support this mandate of justice.
Most U.S. employment law evolved in a context of a legal
doctrine knows as employment at will (EAW).
• EAW holds that, in the absence of a particular contractual or other legal
obligation that specifies the length or conditions of employment, all
employees are employed "at will."
• Employers may fire employees at any time, for any reason.
• Employees are also free to leave an employer at any time and for any reason.
• So the freedom is theoretically mutual.

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 Due Process and Just Cause 3

The ethical rationale for EAW is that it is an important

management tool, which gives managers the ability to make
efficient decisions that should contribute to the greater overall
good.
• Even if EAW were an effective management too, justice demands such
tools not be used to harm other people.
• The right of private property is limited by other rights and duties.
• While the freedom to terminate employment is theoretically mutual,
there is an unbalanced power relationship between the two parties.

The courts and legislature has created exceptions to EAW.

• Civil rights laws, labor laws, and constitutional limitations on government
authority are extended into the workplace to protect employees.

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 Exceptions to the Doctrine of Employment at Will 1

States vary in terms of their recognition of the following

exceptions to the doctrine of employment at will. Some states
recognize one or more exceptions, while others might recognize
none at all. In addition, the definition of these exceptions may
vary from state to state.
• Bad faith, malicious, or retaliatory termination in violation of public policy.
• Termination in breach of the implied covenant of good faith and fair
dealing.
• Termination in breach of some other implied contract term, such as those
that might be created by employee handbook provisions (in certain
jurisdictions).

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 Exceptions to the Doctrine of Employment at Will 2

• Termination in violation of the doctrine of promissory estoppel (where the

employee reasonably relied on an employer’s promise, to the employee’s
detriment).
• Other exceptions as determined by statutes (such as the Worker
Adjustment and Retraining Notification Act [WARN] or the Family and
Medical Leave Act [FMLA]).

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 Defining Employment
• There are several different tests that state and federal courts
use in order to determine whether a worker is an employee or
an “independent contractor.”
• The common-law agency test measures an independent contractors
ability to control the manner in which the work is performed.
• The IRS 20-factor analysis uses various factors to determine whether
someone is an employee or an independent contractor.
• Under the economic realities test, courts consider whether the
worker is economically dependent on the business.

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 Due Process and Just Cause 4

EAW is the default position for courts until and unless an

exception can be demonstrated.
• The burden of proof lies with the dismissed employee to show that she or
he was unjustly or illegally fired.
• Due process and just cause would reverse this burden of proof onto the
employer.
• Just cause: A standard for terminations or discipline that requires the
employer to have sufficient and fair cause before reaching a decision against
an employee.

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 Due Process and Just Cause 5

Due process issues arise in other employment contexts.

• Fair treatment includes areas such as promotions, salary, and benefits.
• As these decisions are made on the basis of performance appraisals, due
process rights should extend to this aspect of the workplace.

The ethical questions remain, such as whether EAW is fair and

just for all stakeholders.
Due process is the right to be protected against the arbitrary use
of authority.
• Decision makers must guard against those arbitrary decisions.
• Decisions should be made in light of reasons that can be ethically
defended.

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 Downsizing and Lay-Offs 1

The reduction of human resources at an organization through

terminations, retirements, corporate divestments, or other
means.
The decision itself raises ethical issues because there might be
alternatives available to an organization in financial difficulty.
• Consider the impact of each alternative from the stakeholders'
perspective.

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 Downsizing and Lay-Offs 2

Negative outcomes include:

• Poor recommendations of the firm by former employees.
• A decline in customer service by surviving employees.
• An increase in errors or dangerous behavior by employees.
• Bad attitudes from remaining workers.
• Negative perception of a firm’s commitment to CSR by stakeholders.

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 Downsizing and Lay-Offs 3

Ethics must be central to the design and management of layoff

policies.
• The decision for downsizing should be made by a representative group to
consider all stakeholder interests and earn the trust of those who will be
impacted.
• The facts should be collected, and issues should be determined.
• Notice of an intent to downsize should given as soon as the downsizing is
going to happen.
• Costs and benefits must be weighed in any communication decision.
• Identify stakeholders and define the impact of downsizing on each.

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 Downsizing and Lay-Offs 4

From a legal perspective, the decision about whom to include in

a downsizing effort must be carefully planned.
Firms should review both the fairness of their decision-making
process and the consequence of that process on those
terminated, and the resulting composition of the workforce.
• Downsizing impacts countless stakeholders.

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 Health and Safety 1

Employees have a fundamental right to a safe and healthy

workplace.
• However, in some workplaces in our world, employees lack even the most
basic health and safety protections; these work environments have been
called sweatshops.

The extent of employer responsibility is in dispute, and there is

disagreement about the best policies to protect health and
safety.
• Health and safety have intrinsic value because they help us achieve our
objectives.

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 Health and Safety 2

Like work, health and safety are "goods" that are valued as a
means for attaining an end and also as ends in themselves.
• Health and safety have intrinsic value in addition to instrumental value.
• If a person dies in a workplace accident, their lost wages would be the
instrumental value.

• The intrinsic value of their life is irreplaceable by financial means.

If "safe" means completely free from risk, certainly no workplace

is perfectly safe.
• If health and safety are interpreted as ideals, impossible to realize, then it
would be unreasonable to claim that employees have a right to a healthy
and safe workplace.

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 Figure 6.1: Calculating Acceptable Level of Risk

From this perspective, a workplace is safe if the

risks are acceptable.

Access the text alternative for slide image.

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 Challenges to the Acceptable Risk Approach to Health and Safety

• Treats employees disrespectfully by ignoring their input as

stakeholders.
• Ignores the fundamental deontological right an employee
might have to a safe and healthy working environment.
• Assumes an equivalency between workplace risks and other
types of risks when there are significant differences between
them.
• Improperly places incentives because the risks faced at work
could be controlled by others who might stand to benefit by
not reducing them.

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 Health and Safety as Market Controlled
Defenders of the free market and the classical model of
corporate social responsibility would favor individual bargaining
as the approach to workplace health and safety.
• Workers demanding higher safety standards and healthier conditions
would settle for lower wages.
• Workers willing to take higher risks would demand higher wages.

In a competitive and free labor market, individual bargaining

would result in the optimal distribution of safety and income.
• The market approach can support compensation to injured workers when
it can be shown that employers were responsible for the harm.
• The threat of compensation acts as an incentive for employers to maintain
a reasonably safe and health workplace.

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 Challenges with the Free-Market Approach to Health and Safety

• Labor markets are not perfectly competitive and free.

• Employees seldom, if ever, possess the kind of perfect
information markets require.
• We ignore important questions of social justice and public
policy if we approach questions solely from the point of view
of an individual.

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 Health and Safety as Government-Regulated Ethics 1

Mandatory government standards:

• Can be set with the best available scientific knowledge and thus
overcoming market failures from lesser information.
• Prevent employees from choosing between job and safety.
• Focus on prevention rather than compensation.
• Are a social approach addressing public policy questions ignored by
markets.

Occupational Safety and Health Administration (OSHA): Agency

of the federal government that publishes and enforces safety
and health regulations for U.S. businesses.

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 Health and Safety as Government-Regulated Ethics 2

OSHA regulations were aimed at achieving the safest feasible

standards, allowing tradeoffs between health and economics.
Critics in both industry and government argue that OSHA should
use cost-benefits analysis when setting standards.
• This approach would lead back to the goals of the market-based approach
of individual bargaining, along with its ethical challenges.
• Note however, that rejecting cost-benefit analysis in setting standards is
not the same as cost-effective strategies in implementing those standards.
• Cost-benefit analysis uses economic criteria in setting standards and is
therefore ethically problematic.

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 Health and Safety as Government-Regulated Ethics 3

The policies that have emerged by consensus within the United

States seem to be most defensible.
• Employees have a legitimate ethical claim on mandatory health and safety
standards within the workplace.
• Employees should have the right to be informed about workplace risks.

The policy that has emerged by consensus in the U.S. is if risks

have been reduced to the lowest feasible level and employees
are fully aware of them, then the duty is done.

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 The Global Workforce and Global Challenges 1

Workers outside the United States may be subject to some U.S.

laws if they work for an American-based organization, though
enforcement is scattered.
In certain developing countries, workers find themselves subject
to conditions that U.S.-based workers would find intolerable.
• Some commentators believe that encouraging greater global production
will create additional opportunities for expansion domestically, providing a
positive impact on more stakeholders.
• Many economists argue that the maintenance of sweatshops is therefore
supported by economic theory.
• Sweatshop: All workplaces with conditions that are below standards in
more developed countries.

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 The Global Workforce and Global Challenges 2

It is helpful to consider the global dimension of an ethically

responsible workplace.
• Some minimum standards might apply, and multinationals may have some
core ethical obligations to employees.

Scholars suggest the Kantian universal principles should govern

the employment relationship and that the ethical obligation of
respect for persons should guide the employment interactions.
• A fundamental moral minimum set of standards exists that should be
guaranteed to workers in all countries notwithstanding culture, stage of
economic development, or availability of resources.

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 The Global Workforce and Global Challenges 3

Setting a living wage is problematic because there is no exact

number that one can agree on regarding the count of people
who live in poverty.
• Almost 100 companies have joined the Ethical Trade Initiative (ETI), an
alliance of corporations, trade unions, and voluntary organizations
dedicated to improving the conditions of workers.

Nonwage benefits can provide an advantage to both the worker

and the employer (for example, health checkups and basic
health services).
International nongovernmental organizations suggest voluntary
standards to which possible signatory countries or organizations
could commit.

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 The Case of Child Labor 1

Child labor: Exploitative work that involves some harm to a child

who is not of an age to justify their presence in the workplace.
• The International Labour Office (ILO) explains that there are 152 million
children classified as child laborers.

High levels of child labor are associated with low literacy levels,
and high morbidity associated with HIV/AIDS, non-HIV infectious
diseases, and malaria.
• Risk of passing on poverty and child labor to the next generation
increases.

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 The Case of Child Labor 2

We should carefully review the social and economic structure

within which child labor exists.
• Children:
• May begin work as young as 3 years old.
• May work in unhealthy conditions and live in unhealthy conditions.
• Are mostly required to work full-time, precluding them from education.
• Are forced to work in less-hospitable "underground" professions, if they are
not working in the manufacturing industry.

Legalizing child labor may lower the number of children who

work.

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 Discrimination 1

The law allows employers to • A global disagreement

make decisions on any basis remains on employee rights
other than those prohibited by with regard to discrimination.
the:
• Employers continue to
• Constitution advocate for their rights to
• Precedent manage the workplace and
• Several statutes
retain control of employees.

Some say employers have • Employees fear unfair

enormous autonomy in their treatment and a loss of
employment decisions while power.
employers resist any
regulation of their workplaces.

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 Discrimination 2

Covert racial discrimination Covert gender discrimination

Based on one's name. Women often face distinct
• Researchers found that people challenges.
with Chinese-, Indian-, or Pakistani-
Women and men are both
sounding names were 28% less
likely to get an interview than gender stereotyped, but
candidates with precisely the same women suffer from different
qualifications but with English- expectations.
sounding names.
• Success and likability do not go
together for women.

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 Diversity 1

• Refers to the presence of differing cultures, languages,

ethnicities, races, affinity orientations, genders, religious
sects, abilities, social classes, ages, and national origins of the
individuals in a firm.
• When used in connection with the corporate environment, it
often encompasses the values of respect, tolerance, inclusion,
and acceptance.

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 Diversity 2

The U.S. workforce today is • The business case for

significantly more diverse than gender diversity is strong.
ever before.
• Diversity in boards and
Some European countries have management is associated
outpaced the U.S. in diversity, with higher return on
in particular, in connection equity.
with board representation.
• Other countries have federal laws
requiring women sit on the
board.

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 Diversity 3

Aside from the benefits of diversity, it can create conflicts.

• Tension and anxiety may emerge when bringing people together with
diverse differences.
• The nature of the work itself often might cause tension, and additional
challenges such as cultural challenges.

• Another concern involves integrating diverse viewpoints with a preexisting

corporate culture.
• Be wary of prejudgments based solely on differences in interpretations of
culturally based standards.
• Efforts at multiculturalism, such as acknowledging and promoting diversity in
the workplace can serve to both educate and encourage diversity-related
benefits.

• The cost of ignoring diversity is high, in terms of lost productivity, but also
in terms of legal liability.

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 Affirmative Action 1

When balancing employer and • Arguments on both sides

employee rights, a question use emotional persuasion.
arises over affirmative action.
• Discrimination on the basis
• Not a question of the right to a of someone’s membership
fair process but instead whether in a protected class is still
a person has a right to the job in
the first place.
wrongful discrimination.

For example, efforts to • The text now takes a closer

encourage diversity may also look at affirmative action to
be seen as a form of reverse explore the ethical issues it
discrimination. raises.

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 Affirmative Action 2

The term affirmative action refers to a policy or a program that

tries to respond to instances of past discrimination by
implementing proactive measures to ensure equal opportunity
today.
Affirmative action arises in three ways.
• Through legal requirements of Executive Order 11246 to ensure equal
opportunity.
• A court requirement of "judicial affirmative action" to remedy a finding of
past discrimination.
• Voluntary affirmative action plans.

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 Affirmative Action 3

Legal constraints to an affirmative action program that support

an ethical decision-making process.
• Policy may not infringe upon the majority of employees’ rights or create
an absolute bar to their advancement.
• Policy may not set aside any positions for women or minorities and may
not be construed as quotas to be met.
• It may not change legitimate expectation of employees.
• It should be only temporary in that it is for the purpose of attaining, not
maintaining, a balanced workforce.

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 Affirmative Action 4

Opponents contend the efforts do more harm than good, that it

creates ill will and poor morale among the workforce.
• It translates into current punishment for past wrongs.

The Supreme Court addressed affirmative action through a case

of ‘reverse discrimination’ in 2003.
• The case was filed by two white females who said the University of
Michigan Law School admitted minority students with lower LSAT scores
than they had attained.
• GM filed a "friend of the court" brief in support of the school’s admission
policy, and the court agreed.
• Yet, the Supreme Court also upheld a Michigan constitutional amendment
banning affirmative action in admissions to the state’s public universities.

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 End of Main Content

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Chapter Seven: Ethical
Decision Making:
Technology and
Privacy in the
Workplace

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 Chapter Objectives 1

After reading this chapter, you will be able to:

1. Explain and distinguish the two definitions of privacy.
2. Describe the ethical sources of privacy as a fundamental value.
3. Identify the legal sources of privacy protection, including the concept of a
“reasonable expectation of privacy.”
4. Discuss recent developments in connection with employee monitoring.
5. Identify and explain the risks involved in a failure to understand the
implications of technology and its use.
6. Enumerate the reasons why employers choose to monitor employees’
work.

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 Chapter Objectives 2

After reading this chapter, you will be able to:

• Discuss the ethics of monitoring as it applies to drug testing.
• Discuss the ethics of monitoring as it applies to polygraphs, genetic
testing, and other forms of surveillance.
• Explain the interests of an employer in regulating an employee’s activities
outside of work.
• Discuss the implications of world events, like recent immigration policy
changes, on business decisions about privacy.

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 Ethical Decision Making

Email is the electronic equivalent of DNA evidence. If your

workplace gets embroiled in a lawsuit, you can take it to the
bank that your email will be subpoenaed.
Nancy Flynn, Management consultant and author

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 Introduction 1

This chapter reviews some key ethical issues of technology and

privacy, with a focus on privacy in the workplace.
• Conflict arises through the regulation of personal activities or personal
choices, or through various forms of monitoring.

Chapter seven explores the origins of the right to privacy and the
legal and ethical limitations on that right.

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 Introduction 2

• Next comes monitoring employee performance and the

ethical issues from potential technological invasions of
privacy.
• Privacy issues in the workplace raise ethical issues involving
individual rights as well as utilitarian consequences.
• Fundamental right of the employer versus the fundamental rights of
the employee.

• The chapter then connects the issues of technology and

privacy to the balance of rights and responsibilities between
employers and employees.

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 The Right to Privacy
Privacy is a surprisingly vague and disputed value in
contemporary society.
Calls for greater protection of privacy rights increased with the
increased used of computers.
• Privacy rights: The legal and ethical sources of protection for privacy in
personal data.
• There is widespread confusion on the nature, extent, and value of privacy.

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 Defining Privacy
Two general and connected understandings of privacy.
• Privacy is the right to be "left alone" within a personal zone of solitude.
• Privacy is the right to control information about oneself.

Privacy is important as it establishes the boundary between

individuals and defines one’s individuality.
Many people believe the right to be "left alone" is too broad and
not feasible in the workplace.
• Therefore, the control of personal information is a better definition.
• A right of privacy implies control of all personal information.
• Perhaps the choice of limitation or control is one’s sense of privacy.

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 Ethical Sources of a Right to Privacy 1

The right to privacy is founded in the individual’s fundamental

right to autonomy.
• This right is restricted by a boundary of reciprocal obligation.
• Reciprocal obligation: When an individual expects respect for his or her
personal autonomy, he or she has a reciprocal obligation to respect the
autonomy of others.

• In the workplace, reciprocal obligation implies that:

• An employee has an obligation to respect the goals and property of the
employer.
• The employer has a reciprocal obligation to respect the rights of the
employee, including the right to privacy.

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 Ethical Sources of a Right to Privacy 2

There is an approach to ethical analysis that seeks to

differentiate between:
• Those values that are fundamental across culture and theory,
hypernorms.
• Those values that are determined within moral free space and are not
hypernorms.
• Individual privacy is at the core of many of the basic minimal rights or
hypernorms.

The value of privacy to civilized society is as great as the value of

the various hypernorms to civilized existence.
• The failure to protect privacy may lead to an inability to protect personal
freedom and autonomy.

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 Ethical Sources of a Right to Privacy 3

Legal analysis of privacy using property rights perspective yields

additional insight.
• "Property" is an individual’s life and all non-procreative derivatives of her
or his life.
• Property rights means determining who maintains control over tangibles
and intangibles, including personal information.

Why do we assume an individual has unfettered rights to his or

her personal information?
• Private property rights depend on the existence and enforcement of a set
of rules that define who has a right to undertake which activities on their
own initiative and how the returns from those activities will be allocated.

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 Legal Sources of a Right to Privacy 1

Privacy can be legally protected in three ways:

• By the constitution.
• By statutes.
• By the common law.

The Constitution’s Fourth Amendment protection against

unreasonable search and seizure applies to the public-sector
workplace.

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 Legal Sources of a Right to Privacy 2

The Electronic Communications Privacy Act (ECPA) of 1986

prohibits unauthorized access of stored communications.
• ECPA impacts electronic monitoring only by third parties and not by
employers

Some states use statutes but application to private-sector

organizations is limited, uncertain, or not included at all.
Intrusion into seclusion violation occurs when someone
intentionally intrudes on the private affairs of another when the
intrusion would be highly offensive to a reasonable person.

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 Legal Sources of a Right to Privacy 3

Many recent court decisions with regard to monitoring seem to

depend on whether the worker had notice that the monitoring
might occur.
• The basis for finding an invasion of privacy is often the employee’s
legitimate and reasonable expectation of privacy.
• If the employee has actual notice, then there truly is no real expectation of
privacy.
• The company is allowed to monitor even when it promises not to monitor.

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 Legal Sources of a Right to Privacy 4

• Connecticut and Delaware are the only two states that require
employers to notify workers when they are being monitored.
• 2019: Twenty-six states (plus Guam) prohibit employers from
obtaining social media passwords from prospective or current
employees.

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 Table 7.1: Legal Status of Employee Monitoring 1

Methods of Communication Status

Telephone calls Monitoring is permitted in connection with quality
control. Notice to the parties on the call is often
required by state law, though federal law allows
employers to monitor work calls without notice. If
the employer realizes that the call is personal,
monitoring must cease immediately.
Email messages Under most circumstances, employers may
monitor employee emails. Even in situations
where the employer claims that it will not, its
right to monitor has been upheld. However,
where the employee’s reasonable expectation of
privacy is increased (such as a password-protected
account), this may impact the court’s decision.

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 Table 7.1: Legal Status of Employee Monitoring 2

Methods of Communication Status

Voice-mail-system messages Though not yet completely settled, the law here
appears to be similar to the analysis of email
messages.
Internet use Where the employer has provided the equipment
and/or access to the internet, the employer may
track, block, or review internet use.

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 Global Applications 1

Privacy protection is more difficult given the implications of the

European Union’s General Data Protection Regulation (GDPR).
• Provides that personal information cannot be collected or shared by
companies without individuals’ permission.
• Information about who is using the data and for what purpose it is being
collected must be provided in a clear, easily understandable manner.
• Consumers have the right to review the data and correct inaccuracies.
• GDPR includes heavy regulatory powers by imposing heavy fines for those
companies that break these regulations.
• Under the GDPR, the European Union does not allow the transfer of data
on its citizens outside of the country unless the country is deemed to have
adequate data privacy laws.

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 The European Union Privacy Shield 1

Under the EU Privacy Shield:

• When using Europeans’ data, U.S. intelligence services will have to adhere
to the new limits and oversight mechanism.
• The U.S. State Department will have to employ a new watchdog to handle
complaints about intelligence-related matters.
• Companies must self-certify compliance with the Privacy Shield and its
stated principles. Certifications must be renewed annually.

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 The European Union Privacy Shield 2

• Companies must publicly display their privacy policies that show

compliance with EU law.
• Companies will have to resolve complaints within 45 days of being filed.
• Companies will have to update their privacy policies to explain how people
can access these services.
• Companies will face more restrictions on being able to forward Europeans’
personal data to other companies.

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 Global Applications 2

Given the nature of the legal uncertainty or instability

concerning these challenging areas of information gathering,
perhaps the only source of an answer is ethics.
Employee privacy is violated whenever:
• Employers infringe upon personal decisions that are not relevant to
the employment contract – whether the contract is implied or explicit.
• Personal information that is not relevant to that contract is collected,
stored, or used without the informed consent of the employee.

• Further, because consent plays a pivotal role in this

understanding, the burden of proof rests with the employer
to establish the relevancy of personal decisions and
information at issue.

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 Ethical Decision Making 2

Apple is not going to traffic in your personal life. I think it’s an

invasion of privacy. Privacy, to us, is a human right. It’s a civil
liberty.
Tim Cook, Chair, CEO of Apple

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 Linking Privacy to the Ethical Use of Technology
New technology challenges privacy in unimaginable ways.
New implications on use of time.
Blurring the distinction between work use and personal use.
• Can work from home or office, with more than 43% of U.S.
workers telecommuting at least one day per week.
• Firms ill-prepared for unanticipated challenges stemming
from new technology, including work-related Twitter and
Facebook groups.

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 Information and Privacy 1

To make effective decisions, businesses must anticipate the

perceptions of their stakeholders.
• Google’s motto is: "Don’t be evil."
• Yet, Google caused controversy with its Gmail privacy policy.
• Google mines a user's email contents and uses the information for
targeted advertising.
• It argues that users have ‘no reasonable expectation’ of privacy.

• By failing to fully comprehend and plan for its stakeholders’ perceptions of

the programs, Google breached ethical boundaries and also suffered
public backlash.

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 Information and Privacy 2

Moral requirements that need to be imposed on information if

technology is dependent on information.
• Truthfulness and accuracy.
• The person providing the information must be truthful.

• Respect for privacy.

• The receiver of the information must use ethical limits of individuals' privacy.

• Respect for property and safety rights.

• Areas of potential vulnerability, including network security, sabotage, theft,
and impersonation are enhanced and must therefore be protected.

• Accountability.
• Technology allows for anonymity requiring greater personal responsibility and
accountability.

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 Managing Employees Through Monitoring 1

Monitoring employees’ work is one of the most prevalent forms

of information gathering in the workplace.
• Technology affords an effective, low cost monitoring ability.

Survey conducted by the American Academy of Management

found that nearly 80% of large companies gather information
through email monitoring and also internet use monitoring.

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 Managing Employees Through Monitoring 2

Employees have come to expect that their emails are the

property of—or at least subject to search by—their employers.
Internet use monitoring is evolving as social media grows.
• Employers are concerned about employee productivity and whether their
employees may bring too much of their personal lives to the workplace.

Employee monitoring challenges body autonomy by using

biotracking technology and badges that monitor the tone,
gender, and live location of employees.
• These applications can become intrusive for employees.

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 Managing Employees Through Monitoring 3

When managing information, ethical issues may not be obvious.

• When we do not completely understand the technology involved, we
might not understand the ethical implications of our decisions.
• We lose the ability to protect our own information effectively because we may
not understand:
• The impact on our autonomy,
• The control of our information,
• Our reciprocal obligations, or
• What might be best for our personal existence.

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 Managing Employees Through Monitoring 4

Ethical issues are enhanced by the knowledge gap existing

between people who do understand the technology and others
who are unable to protect themselves because they do not
understand.
Technology allows for access to information that was never
before possible.
• It can be done without the recipient's knowledge or even unintentionally.

Technology means we are seldom out of the boundaries of our

workplace.
• Our total accessibility creates new expectations, and therefore conflicts.

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 Managing Employees Through Monitoring 5

Continuous technological accessibility blurs the lines between

personal and professional lives.
• 88% of employees use social media at least once every workday, and 18%
check their sites more than ten times each day.
• Technology results in more faceless contacts.
• Email, texting, and social media posts do not carry the same weight as
'putting it in writing.'
• Given the ease and informality of electronic communication we are more
careless with our communications.

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 Why Do Firms Monitor Technology Usage? 1

Employers need to manage their workplaces to:

• Place workers in appropriate positions.
• To ensure compliance with affirmative action requirements.
• To administer workplace benefits.

Allows managers to ensure effective performance by preventing

lost productivity due to inappropriate technology use if the
employee is aware that he will be monitored.

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 Why Do Firms Monitor Technology Usage? 2

Monitoring offers employers a method to protect its other

resources.
• Protects proprietary information and guards against theft.
• Protects their equipment and bandwidth.
• Protects against legal liability.

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 Managing Employees Through Monitoring
28% of employers have fired workers for using the Internet
during the workday for non-work-related activity.
18% have fired workers because of posts on social media
• Racist, sexist, or inappropriate posts or comments.

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 Monitoring Employees Through Drug Testing 1

Employers have had a long history of monitoring by drug testing

than by technology monitoring.
The employer has a strong argument in favor of drug testing
based on the law.
• The employer would be held responsible for legal violations that its
employees commit and hence, their interest in controlling every aspect
increases.
• Employees may argue that their drug usage is relevant only if it impacts their
job performance.

The legalization of marijuana in some places has made for

complicated workplace dilemmas.

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 Monitoring Employees Through Drug Testing 2

Courts in several states have ruled that an employee testing

positive for marijuana may prevail against an employer under
certain circumstances, even if the employer is enforcing drug-
free workplace policies.
• Determining when the use occurred is still the difficult question to answer.

Employers in countries where marijuana is legalized or where

possession is permitted may prohibit its use at work and
employees from being at work while impaired.
• Therefore, employers may test their workers based on warning signs.

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 Monitoring Employees Through Drug Testing 3

Employers might conduct testing on a regular basis based on

characteristics related to the employee's job performance and
workplace behavior.
• These characteristics are offered by the National Council on Alcoholism
and Drug Dependence as “warning signs of drug use.”
• Testing occurs both during employment and also preemployment.
• 63% of companies require job candidates to take a preemployment drug
test.
• Drug testing restricts the job pool and has a negative impact on growth and productivity.

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 Other Forms of Monitoring 1

Employers are limited in their collection of information through

other forms of testing, such as polygraphs or medical tests.
Medical information is protected by the Americans with
Disabilities Act but also by the Health Insurance Portability and
Accountability Act (HIPAA).
• HIPPA stipulates that employers cannot use "protected health
information" without prior consent.

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 Other Forms of Monitoring 2

Polygraphs and drug testing, physical and electronic surveillance,

third-party background checks, and psychological testing have all
been used to gain employee information.
• Use of electronic monitoring and surveillance is increasing.
• Where might this practice head toward in the future?

One area sure to provide new questions on privacy is genetic

testing.
• The Genetic Information Non-Discrimination Act (GINA) 2008 prohibits
discrimination based on genetic information.
• Under GINA, your genetic information is also your family’s medical history.

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 Other Forms of Monitoring 3

GINA does provide for exceptions.

• An employer can collect genetic information to:
• Comply with the Family Medical Leave Act (FMLA).
• Monitor the biological effects of toxins in the workplace.

• If collected, the information may only be released under certain

circumstances.

EEOC issued clarifying guidelines in 2010 that include a “safe

harbor” liability exception for employers that inadvertently
receive genetic information in response to a lawful medical
inquiry.

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 Ethics and Business

The right to be let alone is indeed the beginning of all freedom.

William O. Douglas, Supreme Court Justice

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 Business Reasons to Limit Monitoring
Monitoring may create a suspicious and hostile workplace.
• The employer is neglecting a key stakeholder—the worker.

Monitoring may constrain effective performance since it can:

• Cause increased stress and negatively impact performance.
• Cause injuries such as carpal tunnel syndrome.
• Lead to unhappy, disgruntled workers.

Employees claim that monitoring is an inherent invasion of

privacy that violates their fundamental human right to privacy.

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 Balancing Interests 1

Monitoring can be made more ethical or humane.

• Hawthorne effect: Notifying workers when they are being monitored.
• Even if they are unable to prepare in advance, the employees are able to
ensure that they are on their best behavior during those calls.
• Workers are found to be more productive based on the psychological stimulus
of being singled out.

• Striving toward a balance that respects individual dignity while also

holding individuals accountable for their roles in the organization.
• A monitoring program developed according to the mission, then implemented
in a manner that remains accountable to the impacted employees,
approaches that balance.

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 Parameters for a Monitoring Policy
• No monitoring in private • Monitoring should only
areas (Example: restrooms). result in attaining some
business interest.
• Limit monitoring to within
the workplace. • Employer may only collect
job-related information.
• Employees should have
access to information • There needs to be a
gathered during monitoring. disclosure agreement
regarding the monitoring.
• No secret monitoring –
advance notice required. • No discrimination by
employers based on off-
work activities.

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 Balancing Interests 2

Philosopher William Parent suggests we ask six questions to

determine whether actions are justifiable or have the potential
for an invasion of privacy or liberty.
• For what purpose is the undocumented personal knowledge sought?
• Is this purpose a legitimate and important one?
• Is the knowledge sought through invasion of privacy relevant to its
justifying purpose?
• Is invasion of privacy the only, or the least offensive, means of obtaining
the knowledge?
• What restrictions or procedural restraints have been placed on the
privacy-invading techniques?
• How will the personal knowledge be protected once it has been acquired?

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 Regulation of Off-Work Behaviors 1

Regulation of off-work activities is an interesting issue,

particularly in at-will environments.
Even at-will employers must comply with a variety of state
statutes.
• Most businesses cannot discriminate against smokers but some
companies encourage employees to quit.
• One state and six U.S. cities ban discrimination on the basis of weight.
• Laws protecting against discrimination based on marital status exist in just
under half the states.
• Twenty-one states and the District of Columbia prohibit employment
discrimination on the basis of sexual orientation.
• How to define a disability, or impairment that limits major life activities?

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 Regulation of Off-Work Behaviors 2

Most statutes provide for employer defense for rules that:

• Are reasonably and rationally related to the employment activities of a
particular employee.
• Constitute a "bona fide occupational requirement."
• Meaning a rule that is reasonably related to that particular position.

• Are necessary to avoid a conflict of interest or the appearance of conflict

of interest.

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 Regulation of Off-Work Behaviors 3

The question of monitoring employee online communication

while off work is relevant to technology monitoring.
• Arises without much legal guidance.
• Demands sensitive ethical decision making.

Is it ethical to seek out online information prohibited from a job

interview, such as religion?
• Laws vary from country to country and also from state to state.

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 End of Main Content

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Chapter Eight:
Ethics and
Marketing

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 Chapter Objectives 1

After reading this chapter, you will be able to:

1. Apply an ethical framework to marketing issues.
2. Describe the three key concerns of ethical analysis of marketing issues.
3. Describe two interpretations of "responsibility" and apply them to the
topic of product safety.
4. Explain contractual standards for establishing business’s responsibilities
for safe products.
5. Articulate the tort standards for establishing business’s responsibilities
for safe products.
6. Analyze the ethical arguments for and against strict product liability.
7. Discuss how to evaluate both ethical and unethical means by which to
influence people through advertising.

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 Chapter Objectives 2

After reading this chapter, you will be able to:

8. Explain the ethical justification for advertising.
9. Trace debates about advertising’s influence on customer autonomy.
10. Distinguish ethical from unethical target marketing, using marketing to
vulnerable populations as an example.
11. Discuss business’s responsibilities for the activities of its supply chain.

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 Ethics and Marketing 1

A magazine is simply a device to induce people to read

advertising.
James Collins

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 Introduction 1

Some believe the very purpose of business is found within the

marketing function.
• The American Marketing Association defines marketing in a way that
echoes the stakeholder model of CSR in Chapter 5.
• According to the AMA, marketing is "an organizational function and a set of
processes for creating, communicating, and delivering value to customers and
for managing customer relationships in ways that benefit the organization and
its stakeholders."

An exchange between a seller and a buyer is central to the

market economy and the core idea behind marketing.
• Marketing ethics examines the responsibilities associated with bringing a
product to market, promoting it to buyers, and exchanging it with them.

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 Introduction 3

All these factors are elements of marketing.

• What, how, why, and under what condition is something produced?
• What price is acceptable, reasonable, fair?
• How can the product be promoted to support, enhance, and maintain
sales?
• Where, when, and under what condition should the product be placed in
the marketplace?
• Each of these elements raises important ethical questions.

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 Ethical Issues in Marketing: A Framework 1

Market exchange is prima facie ethically legitimate because it

involves:
• Respect for autonomy.
• Mutual benefit.

This ethical judgment is conditional because:

• The transaction must be truly voluntary.
• Informed consent is needed.
• Benefits might not occur.
• Other values might conflict.

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 Ethical Issues in Marketing: A Framework 2

These four conditions imply the following four questions, each of

which requires considering several factors:
• Is exchange "voluntary"?
• Real alternative choices may not be available.
• Anxiety and stress in some purchasing situations.
• Price-fixing, monopolies, price gouging, etc.
• Targeted and vulnerable consumers.

• Is consent to exchange really “informed”?

• Lack of information.
• Deception.
• Complicated information.

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 Ethical Issues in Marketing: A Framework 3

• Are people truly benefited?

• Impulse buying, "affluenza," consumerism.
• Injuries, unsafe products.
• “Contrived” wants.

• Competing values.
• Justice—example, "redlining" mortgages.
• Market failures (externalities).

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 Marketing: An Ethical Framework 1

A simple situation in which two parties freely agree to an

exchange is prima facie ethically legitimate.
• There must be respect for autonomy and a mutual benefit.
• In order to assess prima facie, conditions must be met.
• The agreement must have resulted from an informed and voluntary consent,
and
• There was no fraud, deception, or coercion involved.

• When these conditions are violated, autonomy is not respected and

mutual benefit is not attained.
• Even when such conditions are met, other values may override the
freedom of individuals to contract for mutually beneficial purposes.
• Freedom of drug dealers to pursue mutually agreeable ends is overridden by
society’s concern to maintain law and order.

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 Marketing: An Ethical Framework 2

Keep three issues in mind when approaching any ethical issue in

marketing.
• These issues are:
• The principle and rights-based ethical tradition would ask to what degree the
participants are respected as free and autonomous agents rather than treated
simply as means to the end of making a sale.
• The utilitarian tradition would want to know the degree to which the
transaction provided actual as opposed to merely apparent benefits.
• Every ethical tradition would also wonder what other values might be at stake
in the transaction.

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 Marketing: An Ethical Framework 3

It is not always easy to determine if someone is being treated

with respect in marketing situations.
• First, the person must freely consent to the transaction.
• The more consumers need a product, the less free they are to choose and the
more protection they deserve within the marketplace.
• Practices aimed at vulnerable populations raise questions of voluntariness.

• Second, consent must be not only voluntary, but also informed.

• The complexity of many consumer products and services can mean that
consumers may not fully understand what they are purchasing.
• Many purchases do not result in actual benefit due to impulse buying or
unsafe products.

• Third, decide if other values are affected.

• Primary social values of fairness, justice, health, and safety are some of the
values that can be jeopardized by some marketing practices.
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 Responsibility for Products: Safety and Liability
In general, business has an ethical responsibility to design,
manufacture, and promote its products in ways that avoid
causing harm to consumers.
• Responsibility may mean the cause of something and in another sense it
involves accountability.

Both law and ethics rely on this when evaluating cases in which
products or services cause harm in the marketplace.
• Contract law, and the ethics implicit in contracts, is one legal approach to
product safety.
• Tort law provides a second legal approach to product safety.
• A third legal doctrine, strict liability, addresses questions of legal and
ethical responsibility for cases in which no one is at fault, but someone has
been harmed.

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 Contractual Standards for Product Safety
Implied warranty of
Caveat emptor approach
merchantability
• Assumes that every • In selling a product, a
purchase involves the business implicitly assures it
informed consent of the is suitable for its purpose.
buyer and, therefore, it is
• This standard shifts the
ethically legitimate.
burden of proof from the
• Business’s only legal and consumer to the producer.
ethical responsibility is to
• Many businesses will issue a
provide a good or service at
disclaimer of liability or
an agreed-upon price.
offer an expressed and
• Places ethical constraints on limited warranty.
the seller not to coerce,
defraud, or deceive buyers.
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 Tort Standards for Product Safety 1

Ethics of contract law would not apply to the majority of

business situations in which consumers do not have a
contractual relation with the business that created or
manufactured the product.
• Negligence, a concept from the area of law known as torts, provides a
second avenue for consumers to hold producers responsible for their
products.
• Negligence: Unintentional failure to exercise reasonable care not to harm
other people.
• Considered to be one step below "reckless disregard" and two steps below
intentional harm.

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 Tort Standards for Product Safety 2

The distinction between contract law and tort law calls attention
to two different ways to understand ethical duties.
• Under a contract model, the only duties a person owes are those explicitly
promised to another party.
• Tort law holds that we all owe other people certain general duties, even if
we have not explicitly and voluntarily assumed them.

Negligence is a central component of tort law.

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 Tort Standards for Product Safety 3

What duties, exactly, do producers owe to consumers?

• The answer falls along a continuum.
• One end of the continuum: Producers owe only those things promised to the
consumer in the sales agreement.
• Strict liability: Producers owe compensation to consumers for any and all
harms caused by their products.

The middle of the continuum holds many interpretations of

negligence.
• Negligence can be a failure to exercise reasonable care or ordinary
vigilance resulting in injury.
• Negligence involves the ability to foresee consequences and failing to
avoid harmful ones.
• The standards of what can be foreseen raises ethical challenges.

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 Tort Standards for Product Safety 4

• One standard would hold people liable only for those harms they actually
foresaw occurring.
• A preferable standard would require people to avoid harms that they should
have thought about.

• "Reasonable person" standard is used most often in legal cases.

• This too can be interpreted in many ways.
• Many factors lead people to interpret the standard as thoughtful, reflective,
and judicious decision making.

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 Strict Product Liability
The negligence standard of tort law focuses on the sense of
responsibility involving someone being at fault.
• But there are cases in which consumers are injured in which no negligence
was involved.
• But the question of accountability remains.
• Who should pay for damages when no one is at fault?

The legal doctrine of strict product liability holds manufacturers

accountable in such cases, as it raises unique ethical questions.

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 Ethics and Marketing 2

If you make customers unhappy in the physical world, they might

each tell 6 friends. If you make customers unhappy on the
Internet, they can each tell 6,000 friends.
Jeff Bezos, Amazon CEO

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 Ethical Debates on Product Liability 1

Within the United States, calls to reform product liability laws

are common—but the criticism is not universal.
• The European Union follows a strict liability standards.

U.S. critics say liability standards and resulting insurance costs

have imposed significant costs on contemporary business.
• Singling out the strict product liability standard as especially unfair.

The rationale used to justify strict product liability is problematic.

• Defenders say by holding business strictly liable, it creates incentive for
business to produce safer goods and services.
• Also, holding business liable allocates the costs to the party best able to
bear the financial burden.

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 Ethical Debates on Product Liability 2

The Incentive Argument The Accountability Argument

This seems to misunderstand This rationale also suffers a
the nature of strict liability. serious defect.
• Holding someone accountable for • This argument claims that
harm provides incentive only if business is best able to pay for
the person could have done damages.
otherwise.
• Yet, many businesses have been
• This means the harm was bankrupted by product liability
foreseeable and failure to act is claims.
negligent.
• Costs are passed down to
• Holding business liable for consumers.
unforeseeable harms does not
provide an incentive to better
protect future consumers.

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 Ethical Debates on Product Liability 3

If neither the company nor the consumer is at fault, who should

pay for the injuries?
• The government is a third option.

Holding business accountable might be a persuasive argument.

• Accountability focuses on those situations where no one is at fault.
• When business is held accountable, the costs for injuries eventually fall on
those consumers who buy the product through higher costs
• This amounts to the claim that external costs should be internalized and that
the full costs of a product should be paid for by those who use the product.

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 Responsibility for Products: Advertising and Sales 1

Advertising is a second area of marketing receiving legal and

philosophical attention within business ethics.
The goal of all marketing is the sale, the eventual exchange
between the seller and buyer.
• A major element of marketing is sales promotion, the attempt to influence
the buyer to complete a purchase.

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 Responsibility for Products: Advertising and Sales 2

There are ethically good and bad ways of influencing others.

• Often, sales and advertising practices employ deceptive or manipulative
means of influence, or aim at susceptible audiences.
• To manipulate something is to guide its behavior.
• Manipulation may be done with or without deception.

• The more one person knows about another person’s psychology, the
better able the first person will be to manipulate the other’s behavior.
• Critics charge that many marketing practices manipulate consumer.

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 Ethical Issues in Advertising 1

The ethical defense of advertising is that it:

• Provides information for market exchanges and therefore contributes to
market efficiency and to overall happiness.
• Provides information necessary for autonomous individuals to make
informed choices.
• Note that each of these rationales provides an ethical justification only if the
information is true and accurate.

The principle-based tradition in ethics would have the strongest

objections to manipulation.
• Utilitarian tradition would state that the goodness or badness of
manipulation would depend on the consequences.

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 Ethical Issues in Advertising 2

The worst form of manipulation occurs when vulnerable people

are targeted for abuse.
Some general guidelines.
• Marketing practices that seek to discover which consumers might already
and independently be predisposed to purchasing a product are ethically
legitimate.
• Marketing practices that seek to identify populations that can be easily
influenced and manipulated, are ethically questionable.
• Sales and marketing that appeal to fear, anxiety, or other irrational
motivations are ethically improper.

• Marketing research seeks to learn something about the psychology of

potential customers.
• Not all psychological categories are alike; some are more cognitive and
rational than others.
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 Marketing Ethics and Consumer Autonomy 1

Defenders of advertising argue that the majority of advertising

provides information to consumers, information that contributes
to an efficient economic markets.
Beyond the question of what advertising does for people, a
second ethical question asks what adverting specifically and
marketing in general does to people.
• Marketing helps shape culture and the individuals who are socialized
within that culture.

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 Marketing Ethics and Consumer Autonomy 2

• Marketing can have direct and indirect influence on the very

persons we become.
• How it does this and the kind of people we become as a result, is of
fundamental ethical importance.
• Critics of such claims either deny that marketing can have such influence or
maintain that marketing is only a mirror of the culture of which it is a part.

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 Marketing Ethics and Consumer Autonomy 3

Galbraith claimed that advertising and marketing created the

very consumer demand that production aimed to satisfy.
• Dubbed the "dependence effect," this assertion held that consumer
demand depended on what producers had to sell; this had three major
and unwelcome implications.
• First, by creating wants, advertising was changing the "law" of supply and
demand on its head – demand turns out to be a function of supply.
• Second, advertising and marketing creates irrational and trivial consumer
wants and distorts the entire economy.
• Finally, by creating consumer wants, advertising and other marketing practices
violate consumer autonomy.
• In short, consumers are being manipulated by advertising.

• Ethically, the crucial point is the assertion that advertising violates

consumer autonomy.

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 Marketing Ethics and Consumer Autonomy 4

But can advertising violate consumer autonomy, and, if it can,

does law of supply and demand be reversed?
• One facet of this debate claims that advertising controls consumer
behavior—evidence suggests that this is false.
• But consumer autonomy might be violated in a subtler way.
• Rather than controlling behavior, perhaps advertising creates the wants and
desires on the basis of which consumers act.
• The focus here becomes the concept of autonomous desires rather than
autonomous behavior.
• Consumer autonomy is violated by advertising’s ability to create non-
autonomous desires.

• After basic needs are met, why do people consume the way they do?
• The ethical question is how much marketing has influenced these
nonnecessity purchases.
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 Ethics and Marketing 3

I am the world’s worst salesman; therefore, I must make it easy

for people to buy.
F. W. Woolworth

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 Marketing to Vulnerable Populations 1

Based on market research, a car retailer learns a typical

customer is a single woman, between 30 and 40 years old.
• She makes an annual income over $50,000 and enjoys the outdoor sports
and recreation.
• The car dealer targets advertising and direct mail to audience that fits this
description.
• Ads depict attractive and active young people using their cars and enjoying
outdoor activities.

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 Marketing to Vulnerable Populations 2

A second targeted campaign sells emergency call devices to

older widows living alone.
• The ad shows an elderly woman crying out "I’ve fallen and can’t get up!"
• This campaign seems ethically offensive as it is exploiting the fear and
anxiety many older people experience.

Do marketers have special responsibility to vulnerable

individuals?

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 Marketing to Vulnerable Populations 3

There is consumer vulnerability which occurs when a person has

an impaired ability to make an informed consent to the market
exchange.
• A vulnerable consumer lacks the intellectual capacities, psychological
ability, experience or maturity to make informed consumer judgments.
• Children are an example of consumer vulnerability.

There is a second sense of vulnerability, called general

vulnerability which occurs when someone is susceptible to some
specific physical, psychological, or financial harm.
• Some marketing practices target uninformed and vulnerable consumers.
• Others target vulnerable populations.

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 Marketing to Vulnerable Populations 4

Some groups are vulnerable in both senses.

• People can become vulnerable as a consumer because they are vulnerable
in some other general sense.
• Marketing campaigns that target elderly individuals for products such as
supplemental medical insurance, life insurance, emergency call devices, et
cetera often play on fears, anxiety, and guilt that the older people experience.

• There are also cases where people become vulnerable to other harms
because they are vulnerable as consumers.
• This strategy is the most abhorrent case of unethical marketing.
• Certain products, tobacco and alcohol, can make an individual vulnerable to a
wide range of health risks.

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 Marketing to Vulnerable Populations 5

One final form of marketing to a vulnerable population is called

stealth or undercover marketing.
• It refers to those situations where we are subject to directed commercial
activity without our knowledge.
• Undercover marketing is an intentional effort to hide the true marketing
element of the interaction.
• Stealth marketing has hit the Internet too, you are never sure who posts
reviews of products online.
• "Buzz marketing" happens when people are paid to create a "buzz" around
a new product by using it and discussing it online.
• Experts consider stealth marketing extraordinarily effective because the
consumer's guard is down.
• These practices would seem unethical on principle and utilitarian grounds.

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 Supply Chain Responsibility 1

There are other relationships beyond the consumer—business

relationship—there is supply chain relationships.
Ordinarily, we do not hold a person responsible for the actions of
someone else—but this is not always the case.
• The doctrine of respondeat superior holds an employer responsible for the actions
of their employees when performing ordinary duties.

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 Supply Chain Responsibility 2

Most of the ethical rationale for business’s responsibility for the

actions of its suppliers stems from two conditions:
• Suppliers often act at the direction of businesses they supply.
• Business often exercises significant influence over the actions of its
suppliers.

The new concept of responsibility travels far deeper throughout

the entire supply chain system.

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 End of Main Content

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Chapter Nine:
Business and
Environmental
Sustainability

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 Chapter Objectives 1

After reading this chapter, you will be able to:

1. Explain how environmental challenges can create business opportunities.
2. Describe a range of values that play a role in environmental decision
making.
3. Explain the difference between market-based and regulatory-based
environmental policies.
4. Describe business’s environmental responsibilities that flow from each
approach.
5. Identify the inadequacies of sole reliance on a market-based approach.
6. Identify the inadequacies of regulatory-based environmental policies.

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 Chapter Objectives 2

After reading this chapter, you will be able to:

7. Define and describe sustainable development and sustainable business.
8. Highlight the business opportunities associated with a move toward
sustainability.
9. Describe the sustainable principles of eco-efficiency, biomimicry, and
service.
10. Explain how marketing can be used both to support and detract from the
goals of sustainable business.

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 Business and Environmental Sustainability 1

We must shift our thinking away from short-term gain toward

long-term investment and sustainability, and always have the
next generations in mind with every decision we make.
Deb Haaland, U.S. Secretary of the Interior

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 Introduction 1

Many observers believe we have entered the sustainability

revolution.
• The race to create environmentally and economically sustainable products
and services is creating unlimited business opportunities.
• The Industrial Revolution brought with it the ability to degrade the natural
environment at a faster rate than ever before.
• By the start of the 21st century, the earth is experiencing a high species
extinction rate, which also threatens humans due to the global climate
change.

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 Introduction 2

The major ethical question of this chapter is what responsibilities

businesses have regarding the natural environment.
• Sustainable business and economic development seeks to create new
ways of doing business in which success is measured in terms of
economic, ethical, and environmental sustainability.
• Often called the triple bottom line approach.
• Also referred to as Environmental, Social, and Governance (ESG).

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 Figure 9.1: The Natural Step’s Funnel

Source: Reprinted with permission.

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 Introduction 3

The Natural Step challenges business to “backcast” a path

toward sustainability.
• Backcasting: The Natural Step challenges business to imagine what a
sustainable future must hold.
• From that vision, creative businesses then look backward to the present and
determine what must be done to arrive at that future.

Sustainable business must use resources and produce wastes at

rates that do not jeopardize human well-being.
• Businesses that do so will succeed in moving through the funnel and
emerging as successful in the age of sustainability.

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 Business Ethics and Environmental Values 1

Earlier chapters talked of ethics in terms of practical reasoning.

Our values are those standards that encourage us to act one way
rather than another.
• Given this objective, which values and decisions are supported by a
concern with the natural environment?
• Why should business with, and value, the natural world?

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 Business Ethics and Environmental Values 2

Human self-interest is the main reason why businesses need to

be concerned with, and value, the natural world.
• Two environmental realities underscore the importance.
• Global climate change, species extinction, soil erosion and nuclear wastes
threaten future generations.
• Science of ecology and its understanding of the interrelatedness of natural
systems show the wide range of human dependence on ecosystems.

• The conservation movement advocated a restrained and prudent

approach to the natural world.

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 Business Ethics and Environmental Values 3

The preservationist approach views the natural environment as

essential and valuable for other reasons.
• These other values often conflict with the direct value that comes from
treating the natural world as a resource.
• The beauty and grandeur of the natural world provides great aesthetic,
spiritual, and inspirational value.
• Many people view the natural world as a manifestation of religious or spiritual
values.
• Parts of the natural world can have symbolic value, historical value, and
psychological values such as serenity and exhilaration.
• The animal rights movement attributes a moral standing to animals.

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 Business and Environmental Sustainability 2

Growth for the sake of growth is the ideology of the cancer cell.
Edward Abbey

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 The Market Approach 1

Debate continues on whether efficient markets or government

regulation is best when meeting the environmental
responsibilities of business.
• Each approach has significant implications for business.
• If the best approach to environmental concerns is to trust them to efficient
markets, then businesses should seek profits and allow the market to allocate
resources efficiently.
• If government regulation is a more adequate approach, then business should
comply to regulatory requirements.

• Defenders of a market approach contend that environmental

issues are economic problems that deserve economic
solutions.

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 The Market Approach 2

William Baxter argued for an optimal level of pollution, which is

best attained by leaving it to a competitive market.
• Society could strive for pure air and water, but the costs that this would
entail would be too high.
• A reasonable approach is to aim for air and water quality that is safe
enough to breathe and drink.

From a market perspective resources are "infinite."

History shows that human ingenuity and incentive have always
found substitutes for any shortages.
• All resources are "fungible" as they can be replaced by substitutes, and
thus, infinite.
• Resources not being used to meet consumer demand are being wasted.

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 The Market Approach 3

A variety of market failures point to the inadequacy of market

solutions.
• One example is the existence of externalities.
• The “costs” of environmental degradation is borne by parties "external" to the
economic exchange , such as future generations.

• A second type of market failure occurs when no markets exist to create a

price for important social goods, such as scenic vistas.
• Markets alone fail to guarantee that such things are preserved and protected.

• A third market failure involves a distinction between individual decisions

and group consequences.
• Important ethical issues may be missed if policy decisions are solely the
outcome of individual decisions.

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 The Market Approach 4

Corporate average fuel economy (CAFE) standards would not

happen in a market approach.
• Established by the U.S. Energy Policy Conservation Act of 1975, CAFE is the
sales-weighted average fuel economy, expressed in miles per gallon (mpg),
of a manufacturer’s fleet of passenger cars or light trucks.

Responses to the challenges faced due to the market approach.

• Internalizing external costs and assigning property rights to unowned
goods are two responses to market failures.
• Markets can prevent harm through information supplied by the existence
of market failures.
• Known as the first-generation problem.

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 Business and Environmental Sustainability 3

Humankind has not woven the web of life. We are but one
thread within it. Whatever we do to the web, we do to ourselves.
All things are bound together . . . all things connect.
Chief Seattle

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 The Regulatory Approach 1

Much of the most significant environmental legislation in the

U.S. was enacted during the 1970s.
• Before these laws, the primary legal avenue open for addressing
environmental concerns was tort law.
• The laws established standards that shifted the burden from those who
harmed to those who were harmed.
• The only incentive that U.S. policy provided was compensation.
• Business was free to pursue its own goals as long as it complied with the side
constraints these minimum standards established.

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 The Regulatory Approach 2

Society had two opportunities to establish business’s

environmental responsibilities.
• As consumers, individuals could demand environmentally friendly
products in the marketplace.
• As citizens, individuals could support environmental legislation.

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 The Regulatory Approach 3

Several problems suggest that the regulatory approach will prove

inadequate over the long term.
• First, it underestimates the influence that business can have in
establishing the law.
• The automobile industry used lobbying influence to exempt light trucks and S
U Vs from CAFE standards.

• Second, this approach also underestimates the ability of business to

influence consumer choice.
• It is misleading to claim that business passively responds to consumer desires
and that consumers are unaffected by the advertising that business conveys.

• Finally, this model assumes that economic growth is environmentally and

ethically benign.
• There are many roads to profit and different roads can have very different
environmental consequences.

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 Business and Environmental Sustainability 4

Environmental regulation is a signal of design failure.

William McDonough

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 The Sustainability Approach 1

The 1980s brought a new model which combined financial

opportunities with environmental and ethical responsibilities.
• Sustainable development.
• Meets present needs without compromising the future generation’s
needs.

• Sustainable business practices.

• A model in which business activities meet the standards of
sustainability.

• Three pillars of sustainability

• Three factors that are used to judge the adequacy of sustainable
development.
• Sustainable development must be economically, environmentally, and
ethically satisfactory.
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 The Sustainability Approach 2

The concept of sustainable development can be traced to the

Brundtland Commission's report in 1987.
• The commission provided the standard definition of sustainable
development.

Economist Herman Daly is among the leading thinkers who has

advocated an innovative approach to economic theory based on
the concept of sustainable development.
• He made a convincing case for an understanding of economic
development that transcends the more common standard of economic
growth.
• According to him, we need a major paradigm shift in how we understand
economic activity.

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 The Sustainability Approach 3

Circular flow model explains the nature of economic transactions

in terms of a flow of resources from businesses to households
and back again.
Two aspects of this circular flow model are:
• It does not explain the origin of resources.
• It treats economic growth as both the solution to all social ills and also as
boundless.

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 Figure 9.2: The Circular Flow Model

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 The Sustainability Approach 4

Daly stated that neoclassical economics will inevitably fail to

meet the challenges of the sustainability approach unless it
recognizes that the economy is but a subsystem within earth’s
biosphere.
• Over the long term, resources and energy cannot be used, nor waste
produced, at rates at which the biosphere cannot replace or absorb them
without jeopardizing its ability to sustain human life.
• This is known as the biophysical limits to growth.
• The biosphere can produce resources indefinitely, and it can absorb wastes
indefinitely, but only at a certain rate and with a certain type of economic
activity.
• The goal of sustainable development is finding that rate and type of
activity, thereby creating a sustainable business practice, which is the
ultimate environmental responsibility of business.

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 Figure 9.3: A Model of the Economy (or Economic System) as a Subset
of the Biosphere (or Ecosystem)

Access the text alternative for slide image.

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 The “Business Case” for a Sustainable Economy
While the regulatory and compliance model, the sustainability
model may present greater opportunities than burdens.
• First, sustainability is a prudent long-term strategy.
• Businesses will need to adopt sustainable practices to ensure long-term
survival.

• Second, the huge unmet market potential among developing economies

can only be met in sustainable ways.
• The base of the economic pyramid represents the largest and fastest growing
economic market in human history.

• Third, significant cost savings can be achieved with sustainable practices.

• Fourth, competitive advantages exist for sustainable businesses.
• Finally, sustainability is a good risk management strategy.
• Avoiding future government regulation and avoiding legal liability are both
potential benefits of sustainable products and practices.
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 Principles for a Sustainable Business 1

Resources should not enter into the economic cycle from the
biosphere at rates faster than they are replenished.
• Ideally, waste should be eliminated, or not produced at a rate faster than
the biosphere can absorb it.
• Finally, the energy to power the economic system should be renewable,
ultimately relying on the sun or wind.

Three general principles that firms and industries should do that

will guide the move toward sustainability.
• Must become more efficient in using natural resources.
• Should model their entire production process on biological processes
• Should emphasize the production of services rather than products.

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 Principles for a Sustainable Business 2

Eco-efficiency: Introduced at the Rio Earth Summit in 1992, the

concept is a way business can contribute to sustainability by
reducing resource usage in its production cycle.
• "Doing more with less" is a long-standing environmental guideline and a
good management practice.
• Firms can improve energy and materials efficiency in such things as
lighting, building design, product design, and distribution channels.
• A “Factor Four” increase in efficiency would achieve double the productivity
from half the resources.

Closed loop production: Seeks to integrate what is presently

waste back into production in much the way that biological
processes turn waste into food.

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 Principles for a Sustainable Business 3

• The ultimate goal of biomimicry is to eliminate waste altogether rather

than reducing it.
• The evolution of biomimicry can be described in two phases:
• Take-make-waste: Business takes resources, makes products out of them, and
discards whatever is left over.
• Cradle to grave: Cradle-to-grave or life-cycle responsibility holds that a
business is responsible for the entire life of its products, including the ultimate
disposal even after the sale.

• A cradle-to-cradle responsibility holds that a business should be

responsible for incorporating the end results of its products back into the
productive cycle.

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 Principles for a Sustainable Business 4

The third sustainable business principle involves a shift from

products to services.
• Service-based economy: Interprets consumer demand as a demand for
services such as clothes cleaning rather than a demand for products such
as washing machines.
• This change produces incentives for product redesigns that create more
durable and more easily recyclable products.
• One well-known innovator in this area, The Interface Corporation, made a
transition from selling carpeting to leasing floor-covering services.

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 Sustainable Marketing
Sustainable, or green, marketing of products is based of their
environmentally friendly nature.
• The four characteristics of marketing—product, price, promotion, and
placement—help in understanding sustainable, green marketing.

Product.
• The most significant progress toward sustainability will depend on the
sustainability of the products themselves.
• Marketing should be involved in identifying the real needs of consumers.

• Another aspect of marketing involves the design and creation of products.

• Marketing departments should be involved in the design of the product.

• Finally, marketing professionals have an opportunity to influence the

packaging of products.

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 Sustainable Marketing: Price
Marketing professionals should play a role in setting prices that
reflect a product’s true ecological cost.
Businesses normally take a loss on a new product until such time
as economies of scale kicks in and lowers costs.
• Sustainable marketers contribute in establishing prices that protect
sustainable products from short-term cost-benefit analyses.

Price is manipulated including promotion to help gain a foothold

in a market.
Price is most crucial when marketing to the base of the economic
pyramid.

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 Sustainable Marketing: Promotion 1

• Marketing has a responsibility to shape consumer demand,

encouraging consumers to demand sustainable products.
• Sustainable marketing can help create the social meanings
and consumer expectations supportive of sustainable goals.

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 Sustainable Marketing: Promotion 2

Consumers learn from advertising and marketers have a

responsibility as educators to help consumers become
sustainable consumers.
Pressure may create a public demand for environmental and
sustainable labeling.
• “Greenwashing” is the practice of promoting a product by misleading
consumers about the environmentally beneficial aspects of the product.

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 Sustainable Marketing: Placement
Professor Patrick Murphy suggest two directions in which
marketing can develop sustainable channels of placement.
• Murphy foresees new options which emphasize:
• Fuel efficiency and alternative fuel technologies.
• More localized and efficient distribution channels.
• A greater reliance on electronic rather than physical distribution.

• Murphy also describes another channel variable in marketing that

promises sustainability rewards—"reverse channels."
• It refers to the practice of taking back one’s products after their useful life.
• The life-cycle responsibility and "take-back" models will likely fall to marketing
departments.

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 End of Main Content

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 Chapter Ten:
Ethical Decision
Making: Trust in
Corporate
Governance,
Accounting, and
Finance

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 Chapter Objectives 1

After reading this chapter, you will be able to:

1. Explain the role of accountants and other professionals as "gatekeepers."
2. Describe how conflicts of interest can arise for business professionals.
3. Outline the requirements of the Sarbanes-Oxley Act.
4. Describe the COSO framework.
5. Define the "control environment" and the means by which ethics and
culture can impact that environment.
6. Discuss the legal obligations of a member of a board of directors.

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 Chapter Objectives 2

7. Explain the ethical obligations of a member of a board of directors.

8. Highlight conflicts of interest in financial markets and discuss the ways in
which they may be alleviated.
9. Describe conflicts of interest in governance created by excessive
executive compensation.
10. Define insider trading and evaluate its potential for unethical behavior.

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 Ethical Decision Making 1

In almost every profession—whether it’s law or journalism,

finance or medicine or academia or running a small
businesspeople rely on confidential communications to do their
jobs. We count on the space of trust that confidentiality
provides. When someone breaches that trust, we are all worse
off for it.
Hillary Clinton

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 Introduction 1

• The scandals of the early 2000s involved fundamental

questions of corporate governance and responsibility.
• There were a rash of problems associated with the financial
meltdown in 2007 to 2008.
• Ethics in the governance and financial arenas is now the most
visible issue in business ethics.
• As something that is essential in most social relationships,
trust is an ethically warranted reliance on another.

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 Introduction 2

Analysts contend that corruption is evidence of a complete

failure in corporate governance structures.
• Corporate governance: The structure by which corporations are managed,
directed, and controlled toward the objectives of fairness, accountability,
and transparency.
• The structures generally will determine the relationship between the
board of directors, the shareholders or owners of the firm, and the firm’s
executives or management.

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 Professional Duties and Conflicts of Interest 1

The collapse of Enron Corporation brought the ethics of finance

to prominence at the start of the 21st century.
Several important categories of business professionals—for
example, lawyers, auditors, accountants, and financial analysts—
function based on the internal controls that exist within market-
based economic system.
Role identities determine ethical duties and provide a source for
rules which determine how professionals ought to act.
• Gatekeepers: Act as "watchdogs" to ensure those in the marketplace play
by the rules and conform to the market functions as it should.

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 Professional Duties and Conflicts of Interest 2

The most basic ethical business issue facing gatekeepers involves

a conflict of interest.
• This exists when a person holds a position of trust that requires that he or
she exercise judgment on behalf of others, but where his or her personal
interest and/or obligations conflict with the proper exercise of that
judgment.

Conflicts can arise when a person’s ethical obligations in their

professional duties clash with personal interests.
• Such professionals are said to have fiduciary duties—a legal duty,
grounded in trust, to act on behalf of or in the interests of another—to
their clients.

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 Figure 10.1: Conflicts of Interest in Public CPA Activity

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 Professional Duties and Conflicts of Interest 3

• Because professional gatekeeper duties are necessary

conditions for the fair and effective functioning of economic
markets, they should trump other responsibilities to one's
employer.
• But knowing one’s duties and fulfilling those duties are two
separate issues.

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 Professional Duties and Conflicts of Interest 4

The gatekeeper function is necessary, but self-interest can make

it difficult to fulfill gatekeeper duties.
• Society has a responsibility to create institutions and structures that will
minimize these conflicts.
• Critics say government regulatory rules alone will not avert financial
crises.
• Extraordinary executive compensation and conflicts of interest within the
accounting and financial industries have created an environment where
watchdogs have little ability to prevent harm.

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 The Sarbanes-Oxley Act of 2002 1

A string of corporate scandals shook investor confidence.

The U.S. Congress passed the Public Accounting Reform and
Investor Protection Act of 2002, commonly known as the
Sarbanes-Oxley Act.
• The act is enforced by the Securities and Exchange Commission (SEC) and
applies to more than 15,000 publicly held companies in the U.S. and some
foreign issuers.
• The European Union 8th Directive covers many of the same issues.
• Some states issues similar legislation that apply to private firms.

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 The Sarbanes-Oxley Act of 2002 2

No regulatory "fix" is perfect.

• The act is intended to provide protection where oversight did not exist.
• Oversight in terms of accountability and responsibility.

The following sections impact corporate governance and boards.

• Section 201.
• Services outside the scope of auditors—no consulting rather than auditing.

• Section 301.
• Public company audit committees, mandating majority of independents on
any board and total absence of current or prior business relationships.

• Section 307.
• Rules of professional responsibility for attorneys.

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 The Sarbanes-Oxley Act of 2002 3

• Section 404.
• Management assessment of internal controls.

• Section 406.
• Required codes of ethics for senior financial officers.

• Section 407.
• Disclosure of audit committee financial expert
• Requires that they actually have an expert.

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 The Internal Control Environment 1

Internal control mechanisms are established internally to comply

with financial reporting laws and regulations.
One way to ensure controls is to utilize a framework advocated
by the Committee of Sponsoring Organizations (COSO).
• COSO: A voluntary group of audit and accounting organizations seeking to
improve reporting through a combination of controls and governance
standards called the Internal Control-Integrated Framework.

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 The Internal Control Environment 2

The elements comprising control structure are:

• Control environment.
• Control environment: Cultural issues such as integrity, ethical values,
competence, philosophy, and operating style.
• Risk assessment.
• Control activities.
• Information and communications.
• Ongoing monitoring.

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 The Internal Control Environment 3

• COSO standards for internal controls moved audit,

compliance, and governance from a numbers orientation to
concern for the organizational environment.
• Both internal factors such as the COSO controls and external
factors such as the Sarbanes-Oxley requirements must be
supported by a culture of accountability.

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 The Internal Control Environment 4

COSO developed a new system, Enterprise Risk Management-

Integrated Framework in 2004.
• Serves as a framework for management to evaluate and improve their
firms’ prevention, detection, and management of risk.
• Expands on the prior framework to include "objective setting."
• Assists an organization in resolving ethical dilemmas based on a firm’s
mission, its culture, and tolerance for risk.

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 Ethical Decision Making 2

Whenever an institution malfunctions as consistently as boards

of directors have in nearly every major fiasco of the last forty or
fifty years, it is futile to blame men. It is the institution that
malfunctions.
Peter Drucker

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 Going Beyond the Law: Ethical Board Members
The corporate failures of recent years would suggest:
• A failure on the part of corporate boards.
• A failure of government to impose high expectations of accountability on
boards of directors.

In many cases, boards and executives operated within the law.

• Some actions may not have been ethical or in the best interests of
stakeholders, but they were legal.

The law offers some guidance on minimum standards for board

member behavior, but is the law enough?

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 Legal Duties of Board Members
U.S. law imposes three clear duties on board members.
• The duty of care is the exercise of reasonable care by ensuring that
executives carry out responsibilities and comply with the law.
• The duty of good faith is one of obedience, requiring faithfulness to the
organization’s mission.
• The duty of loyalty requires faithfulness from board members by giving
undivided allegiance when making decisions affecting the organization.
• Conflicts of interest are always to be resolved in favor of the organization.

The Federal Sentencing Guidelines suggest the board exercise

"reasonable oversight" with respect to the implementation and
effectiveness of the ethics/compliance program.
• The program should have adequate resources, levels of authority, and
direct access to the board.

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 Beyond the Law, There is Ethics 1

Questions that we expect the law to answer but remains unclear.

• Whom does the board represent?
• Who are its primary stakeholders, ethically speaking?
• If the board is aware of an unethical, but legal, practice—on what basis
can the board require the practice to cease?

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 Beyond the Law, There is Ethics 2

Some suggest boards have a responsibility beyond the law to

explore and investigate the organizations that they represent.
• What could drag the firm down and what could competitors do to help it
along that path?

It is the board members’ ultimate duty to provide oversight,

which is impossible without knowing the answers to these
questions.

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 Ethical Decision Making 3

Trust, but verify.

Ronald Reagan

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 Conflicts of Interest in Accounting and the Financial Markets 1

Conflicts of interest extend beyond the board room to the

financial arena—trust and structures that promote it are integral
issues for all involved in the finance industry.
• Real or perceived, conflicts can erode trust and often exist as a result of
varying interests of stakeholders.

Accounting, by its very nature, is a system of principles applied

to present the financial position of a business and the results of
its operations and cash flows.
• It is hoped that adherence to these principles will result in fair and
accurate reporting of this information in a format that can readily be
interpreted by others.
• Whether an accountant is considered a watchdog or a bloodhound
depends on whether they are hired internally or externally.

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 Conflicts of Interest in Accounting and the Financial Markets 2

The American Institute of Certified Public Accountants (AICPA)

publishes professional rules to prevent accountants from being
put into conflicts.
• GAAP, or generally accepted accounting principles, established by the
Financial Accounting Standards Board stipulates methods of gathering and
reporting information.
• Accountants are also governed by the AICPA's Code of Professional
Conduct.

Can these standards keep pace with readily changing accounting

and financing activities in newly emerging firms?

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 Executive Compensation 1

Few areas of corporate governance and finance have received as

much public scrutiny as executive compensation.
• In 1965, the average CEO pay was 20 times as much as the average worker
pay.
• By 2000, CEO pay had risen to 376 times as much as the average worker’s
pay.
• Even after a decline the ratio remained high—in 2020—351 times.

Skyrocketing executive compensation packages raise numerous

ethical questions.
• Greed and avarice are the most apt descriptive terms for the moral
character of such people from a virtue ethics perspective.
• Give rise to fundamental questions of distributive justice and fairness.

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 Executive Compensation 2

• Serious ethical challenges arise against these practices even

from within the business perspective.
• Beyond issues of personal morality and economic fairness,
excessive compensation raises ethical issues of corporate
governance and finance.

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 Executive Compensation 3

In theory, compensation packages serve interests in two ways:

• They provide an incentive for executive performance.
• They serve as rewards for accomplishments.

In practice, reasonable doubts exist for both rationales.

• In many cases there is no correlation between compensation and
performance.
• There is a diminishing rate of return on incentives beyond a certain level.

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 Executive Compensation 4

Another crucial governance issue is the disincentives that

compensation packages and reliance on stock options provide.
• Executives have incentive to focus on short-term stock price rather than
long-term corporate interests.
• A case can be made that stock options may be to blame for the corruption
involving managed earnings.
• Excessive compensation can also involve a variety of conflicts of interests
and cronyism.

Another large concern is the cross-fertilization of boards.

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 Figure 10.2: Duties of the Board and Senior Executives That May Give
Rise to Conflicts of Interest

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 Insider Trading 1

• Trading of securities by those who hold private inside

information that would materially impact the value of the
stock and that allows them to benefit from buying or selling
stock.
• Illegal insider trading occurs then corporate insiders provide
"tips" to family members, friends, or others to buy or sell the
company's stock based on that information.
• "Private Information" includes privileged information that has
not yet been released to the public.
• The Securities and Exchange Commission has treated the
detection and prosecution of insider trading violations as one
of its enforcement priorities.

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 Insider Trading 2

Insider trading may also be based on a claim of unethical

misappropriation of proprietary knowledge.
• Proprietary knowledge refers to the knowledge only those in the firm
should have, knowledge owned by the firm and not to be used by abusing
one’s fiduciary responsibilities to the firm.

Considered patently unfair and unethical as it precludes fair

pricing based on equal access of information.
Is there sufficient deterrent to discourage insider trading in our
markets today?

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 End of Main Content

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