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OVERVIEW OF CHAPTER This chapter examines the nature of the obligations and responsibilities of managers and the companies they work for toward the people and society who are affected by their actions. First, the nature of ethics and the source of ethical problems are discussed. Next, the major groups of people, or stakeholders, who are affected by the decisions that companies make, are examined. Then, four rules or guidelines that managers can use to decide if a specific business decision is ethical or unethical are studied. Finally, the sources of managerial ethics and reasons why it is important for a company to behave in a socially responsible manner are discussed. LEARNING OBJECTIVES 1. Understand the relationship between ethics and the law. 2. Appreciate why it is important to behave ethically. 3. Differentiate between the claims of different stockholder groups that are affected by managers and their companies actions. 4. Describe four rules that can be used to help companies and their managers act in ethical ways. 5. Identify the four main sources of managerial ethics. 6. Distinguish between the four main approaches toward social responsibility that a company can take. A MANAGERS CHALLENGE: DIGITAL PIRACY, ETHICS, AND NAPSTER Today almost all written text, music, movies, and software are recorded in digital form and can be easily copied electronically. Because so many people now make copies of music instead of buying it, the music industry has lost over $10 billion in sales revenues and therefore desires to stop this practice. For this reason, the music industry officials decided to pursue Napster. Their efforts to obtain a legal injunction against Napster to shut it down were successful, since Napster was violating copyright laws. However, many other Internet sites still exist on which music and other digital media can be downloaded for free. Why do so many people continue downloading free music if it is illegal? The obvious answer is self-interest. Is such behavior unethical? Many believe that this is a victimless crime, and since no one is harmed, it is all right. However, this argument is fallacious. By weakening the rights of artists to reap the benefits of their creative product, persons are also weakening their rights to their own property.
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LECTURE OUTLINE I. THE NATURE OF ETHICS An ethical dilemma is the quandary in which people find themselves when they have to decide if they should act in a way that might help another person or group and that is the right thing to do, even though it might go against their own self-interest. An ethical dilemma may also arise when a person has to decide between two courses of action, knowing that whichever they choose will result in harm to one person or group while possibly benefiting another. The dilemma here is to decide between the lesser of two evils. Ethics are in the inner-guiding moral principles, values, and beliefs that people use to analyze or interpret a situation and then decide what is the appropriate way to behave. Ethics also dictate inappropriate behavior and how a person should behave to avoid doing harm to another person. The essential problem in dealing with ethical issues, and thus solving moral dilemmas, is that there are no absolute or indisputable rules or principles that can be developed to decide if an action is ethical or unethical. Put simply, people and groups vary in their opinions of what is ethical and unethical, based upon personal self-interest, attitudes, beliefs, and values.
Ethics and the Law Many different kinds of laws exist to govern business, along with specification of the sanction or punishment that will follow if those laws are broken. Once a law is passed, a decision about what is the appropriate behavior is taken from the personally determined ethical realm to the ethical realm determined by society. Laws and ethics are not fixed principles. Ethical beliefs change over time, and as they do, laws also change to reflect the changing ethical beliefs of a society. Do unto others as you would have them do unto you is a commonly used ethical or moral rule that continues to be useful.
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Changing Ethics Over Time There are many classes of behavior, such as murder, theft, and rape that people find totally unacceptable and should remain illegal. However, there are other actions and behaviors whose ethical nature is open to dispute. Examples include gun possession or use of tobacco. As ethical beliefs change over time, some may question if certain laws banning specific actions or behaviors are still appropriate today. An example is marijuana use. People in many states are currently lobbying for a relaxation of the law against the use of marijuana for medical purposes and in June 2004, the Supreme Court agreed to hear the case on this subject. In the early 2000s, many scandals plagued major companies such as Enron, WorldCom, and Tyco. Managers at these companies used illegal means to defraud investors. In other cases, managers took advantages of loopholes in the law to divert company funds into their own pockets. In many cases, behavior that is legal is not necessarily ethical. Often, laws are later passed to close the loopholes that allowed unethical people, such as Fastow at Enron and Ebbers at WorldCom, from taking advantage of stockholders to pursue their own self-interest. STAKEHOLDERS AND ETHICS
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When the law does not specify how companies should behave, their managers must decide what is right and ethical. People and groups affected by the way a company and its managers behave are called stakeholders. Stockholders Stockholders have a claim on a company because when they buy its stock, they become its owners. Stockholders are interested in the way a company operates because they want to maximize their return on investment. Stockholders also want to ensure that managers are behaving ethically by not engaging in actions that could hurt the companys reputation. The Enron tragedy was brought about by a handful of greedy managers who abused their positions of trust.
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Managers Managers are a vital stakeholder group because they are responsible for using a companys financial capital and human resources to increase its performance and thus, its stock price. Because they invest their human capital to improve a companys performance, they have the right to expect a good return or a reward. Managers are frequently in the position of having to juggle the interests of various stakeholder groups, including themselves. Such decisions are often very difficult and challenge managers to uphold ethical values. For example, layoffs may help to cut costs, thereby benefiting shareholders, but at the expense of employees. Managers must be motivated and given incentives to work hard in the interests of the stockholders. At the same time, their behavior must be scrutinized to ensure they do not behave illegally or unethically or pursue goals that threaten the best interests of the stockholders. To prevent corrupt managers from behaving in a way that maximizes their personal wealth instead of stockholders wealth, the SEC is reworking many of its regulations. Its goal is to make much of the unethical behavior that occurred in the early 2000s illegal. Many experts argue that the rewards given to top managers, especially CEOs and COOs, have grown out of control. For example, in 1982 a typical CEO earned about 18 times as much as a worker. In 2002, that figure had risen to 2600 to 1. Some argue that the growing disparity between the rewards given to CEOs and those given to others is unethical and should be regulated. Others argue that because CEOs managers play an important role in building a companys wealth, they deserve a significant share of its profits.
The Manager as a Person: Walt Disneys New Board of Directors In the last few years, the performance of The Walt Disney Company has fallen precipitously and many were wondering if Michael Eisner was still the right person for the job. In recent years, he has been criticized for his lack of a succession plan, his autocratic, hands-on leadership style, and for creating a captive board of directors that has been unwilling to question his business decisions, some of which have been major mistakes. In spite of his companys poor performance, Eisner is still paid vast sums of money. In 2003, the company began reorganizing its board. The board will now have more freedom to assess Eisners performance. Under pressure from the board, Eisner has also chosen a successor.
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Employees Employees expect to receive rewards consistent with their performance. A company can act ethically towards its employees by creating a structure inside of the company that fairly and ethically rewards them.
Suppliers and Distributors Most companies operate within a network of suppliers and distributors. Suppliers expect to be paid fairly and promptly for their inputs. Distributors expect to receive quality products at agreed upon prices. While many of the important issues governing relationships with suppliers and distributors are determined by the terms of a legal contract, other issues are dependent upon business ethics. For example, companies must take an ethical position on the way they obtain and manufacture the products they sell.
Customers Customers are often regarded as the most critical stakeholder group since a company cannot survive without them. Managers work very hard to create loyal customers, attract new ones, and improve the products that they sell to customers over time. Many laws exist that protect customers from companies that attempt to sell shoddy or dangerous products. Examples include laws allowing customers to sue a company whose products cause injury or harm due to defective parts and laws that force companies to clearly disclose interest rates charged.
Community, Society, and Nation The effects of the decisions made by companies and their managers permeate all aspects of the communities, societies, and nations in which they operate. Community refers to physical locations in which companies are located. A community provides a company with the physical and social infrastructure that allows it to operate, its utilities and labor force, the homes in which its managers and employees live, schools, colleges, and hospitals which service their needs, and so on. Through the salaries, wages, and taxes it pays, a company contributes to the economy of the town or region in which it resides and often determines whether it prospers or declines. Similarly, companies impact the prosperity of a society and a nation, and to the extent that a company is involved in global trade, it impacts the prosperity of the global economy.
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Rules for Ethical Decision Making Ethical questions are everywhere. Company decisions that favor one group of stakeholders are likely to harm the interests of others. When companies act ethically, their stakeholders support them. Thus ethical companies grow and expand over time and each of its stakeholders benefit. The result of unethical behavior is the loss of reputation and resources, shareholders who sell their shares, skilled managers and employees who leave the company, and customers who turn to competitors. To help managers and employees make ethical decisions, four ethical rules or principles can be used to analyze the affects of their business decisions on stakeholders. They are the utilitarian, moral rights, justice, and practical rules. The utilitarian rule defines an ethical decision as one that produces the greatest good for the greatest number of people. Therefore, managers should compare and contrast alternative courses of action based on the benefits and costs of those alternatives for different stakeholder groups. However, sometimes it is difficult for managers to determine the relative importance of each stakeholder group. The moral rights rule defines an ethical decision as one that best maintains and protects the fundamental rights and privileges of the people affected by it. Therefore, managers should compare and contrast alternative courses of action based on the effect of those alternative on stakeholders rights. However, it can be problematic for a manager to make a decision that will the decision protect the rights of some stakeholders will hurting the rights of others. The justice rule defines an ethical decision as one that distributes benefits and harms among stakeholders in a fair, equitable or impartial way. Therefore, managers should compare and contrast alternative courses of action based on the degree to which the action will promote fair a distribution of outcomes. This model forces managers to create and utilize fair procedures that inflicts equal amount of benefit, discomfort or harm upon all stakeholders, regardless of differences in race, gender, position, authority, power, etc. The practical rule defines an ethical decision as one that a manager has no hesitation communicating to others both inside and outside of the company because they would find it acceptable. A manager can assume a decision is ethical if he or she can answer yes to the following three questions:
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1. Does my decision fall within the accepted values, norms, or standards that typically apply in the organizational environment? 2. Am I willing to see the decision communicated to all stakeholders affect by it, for example, by having it reported in newspapers or on television? 3. Would the people with whom I have a significant personal relationship, such as family members, friends, or even managers in other organizations, approve of the decision? What would be their attitude? Why Should Managers Behave Ethically? The relentless pursuit of self-interest can lead to a collective disaster. When one or more people start to profit from unethical conduct, this encourages others to act in the same way. The pursuit of individual self-interest with no consideration for societal interests leads to disaster for each individual and for the whole society because scarce resources are destroyed. This phenomena is called the tragedy of the commons. Unethical behavior ruins business commerce, and society has a lower standard of living because fewer goods and services are produced. When stakeholders believe that they are dealing with others who are basically moral and honest, trust exists. Over time, trust between stakeholders allows them to work together more efficiently and effectively, thus raising company performance. As people see the positive results of acting in an honest way, ethical behavior becomes a valued social norm. If others copy the behavior of the unethical stakeholder, the rate at which collective resources are misused increases, and eventually there are few resources for producing goods and services. Reputation is the esteem or high repute that individuals or organizations gain when they behave ethically. If a manager misuses resources and if other parties regard that behavior as being at odds with acceptable standards, the managers reputation will suffer. All stakeholders have reputations to lose. ETHICS AND SOCIAL RESPONSIBILITY There are four determinants of differences in ethics between people, employees, companies, and countries: societal ethics, occupational ethics, individual ethics, and organizational ethics.
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Societal Ethics Societal ethics are standards that govern how members of a society deal with each other in matters involving issues such as fairness, justice, poverty, and the rights of the individual. Societal ethics emanate from a societys laws, customs, and practices, and the unwritten values and norms that influence how people interact with each other. People in a particular country may automatically behave ethically because they have internalized certain values, beliefs, and norms that specify how they should behave when confronted with an ethical dilemma. Societal ethics vary among societies. IBM experienced the problem of differences in societal ethics when its Argentinean division was confronted with bribery. Countries also differ widely in their beliefs about the appropriate treatment of employees.
Ethics in Action: Is It Right to Use Child Labor? Is it ethical to employ children in factories, and should U.S. companies buy and sell products made by these children? Opinions about the ethics of child labor vary widely. Former Secretary of Labor Robert Reich believes that the practice is totally reprehensible and should be outlawed on a global level. Another view, championed by The Economist magazine is that, while nobody wants to see children employed in factories citizens of rich countries need to recognize that in poor countries, children are often a familys only breadwinners. The Economist favors regulating the conditions under which children are employed and hopes that over time, as poor countries become richer, the need for child employment will disappear. While most of U.S. retailers who buy their clothing from low-cost suppliers have taken a stance on this issue, many do not check up on them, and abuses continue to occur. Occupational Ethics Occupational ethics are the standards that govern how members of a profession, trade, or craft should conduct themselves when performing work related activities. Doctors and lawyers can be prevented from practicing their professions if they disregard professional ethics and put their own interests first. Within an organization, occupational rules and norms often govern how employees such as lawyers, researchers, and accountants should make decisions to further stakeholder interests. Employees internalize the rules and norms of their occupational group and often follow them automatically.
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Individual Ethics Individual ethics are personal standards and values that determine how people view their responsibilities to other people and groups, and thus how they should act in situations when their own self-interest is at stake. Sources of ones individual ethics include the influence of family, peers, and past experiences. Many decisions or behaviors that one person finds unethical, such as using animals for cosmetics testing, may be acceptable to another person.
Organizational Ethics Organizational ethics are the guiding practices and beliefs through which a particular company and its managers view their responsibility toward their stakeholders. The individual ethics of a companys founders and top managers are especially important in shaping the organizations code of ethics. Company credos and codes of ethics are designed to deter self-interested, unethical behavior. They demonstrate that companies will not tolerate people who put their personal interests above the interests of other stakeholders and ignore the harm that they inflict. Top managers play a crucial role in determining a companys ethics and should consistently endorse the ethical principles in its corporate credo. It is the board of directors responsibility to decide if a prospective CEO has the maturity, experience, and integrity needed to head a company. A past track record of success is not enough to decide this issue, for a manager might have achieved this success through unethical or illegal means. Therefore, it is important to investigate prospective top managers and examine their credentials. APPROACHES TO SOCIAL RESPONSIBILITY A companys stance on social responsibility describes the way its managers and employees view their duty or obligation to make decisions that protect, enhance, and promote the welfare and well being of stakeholders and society as a whole. Differences in business ethics can lead companies to take very different positions or views on what is their responsibility toward their stakeholders. Companies that try to hide problems show little regard for social responsibility. The way a company
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announces business problems or admits its mistakes provides strong clues about its stance on social responsibility. Four Different Approaches The strength of companies commitment to social responsibility can range from low to high. At the low end of the range is an obstructionist approach, in which companies and their managers choose to behave unethically and illegally. They then do all they can to prevent knowledge of their behavior from reaching other stakeholders and society at large. Many companies that chose an obstructionist approach not only lost their reputation but also eventually went out of business.
Ethics in Action: Apple Juice or Sugar Water? In the early 1980s, Beech-Nut, a maker of baby foods, was on the verge of bankruptcy. To save money, the company entered into an agreement with a low-cost supplier of apple juice. One of Beech-Nuts food scientists realized that the apple juice concentrate they were purchasing from their supplier contained large amounts of sugar, but top management ignored his discovery and continued to sell their product as pure apple juice. Eventually the FDA confronted the company with its wrongdoing and in 1987, the company pleaded guilty to charges that it had deliberately sold an adulterated product. The company was fined over $2 million and its top managers were sentenced to prison terms. A defensive approach indicates at least a commitment to ethical behavior. Defensive managers stay within the law and abide strictly with legal requirements but make no attempt to exercise social responsibility beyond what the law dictates. Thus, they can and do often act unethically. When making ethical decisions, these managers put their own interests first and commonly harm other stakeholders. An accommodative approach is an acknowledgment of the need to support social responsibility. Managers adopting this approach want to make choices that are reasonable in the eyes of society and want to do the right thing when called on to do so. This approach is the one taken by the typical large U.S. company that has the most to lose from unethical or illegal behavior. Generally, the older, and more reputable a company, the more likely are its managers to curb attempts by their subordinates to act unethically. Managers taking a proactive approach actively embrace the need to behave in socially responsible ways. They go out of their way to learn about the needs of various
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stakeholders and are willing to use organizational resources to promote the interests of all stakeholders. Such companies are at the forefront of campaigns for a variety of social causes. Why Be Socially Responsible? Demonstrating social responsibility helps a company build its reputation. The reward for a good reputation is increased trade and improved ability to obtain resources from stakeholders. A second major reason why companies should act socially responsibly is that in a capitalist system companies, along with the government, have to bear the costs of protecting their stakeholders by providing health care, income, paying taxes, etc. So if all companies in a society act socially responsibly, the quality of life as a whole increases. Also, as previously noted, the way companies behave toward their employees determines many of a societys values and norms and the ethics of its citizens. Experts point to countries where organizations are highly socially responsible and as a result crime, poverty, and unemployment rates are relatively low, the literacy rate is relatively high, and socio-cultural values promote harmony between different groups of people.
The Role of Organizational Culture Managers can emphasize the importance of social responsibility by ensuring that ethical norms and values are a central component of the organizations culture. Employees expect those in authority to provide leadership. Therefore, managers should behave as role models of ethical conduct, knowing that subordinates scrutinize their behavior. Organizations can encourage an ethical culture by creating the role of ethics officer, or ethics ombudsman. The ethics ombudsman has organization wide authority. He or she is responsible for communicating ethical standards to all employees, designing systems to monitor employees conformity to those standards, and for teaching all employees how to respond to ethic dilemmas appropriately.
Johnson & Johnsons Ethical Culture Johnson and Johnson is well known for its ethical culture. It has been judged to have the best corporate reputation for two years in a row, based on a survey of over 26,000 consumers. The companys founder emphasized the importance of ethics and responsibility to stakeholders in 1943 when he wrote the companys credo. This credo outlines the companys commitments
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to its different stakeholder groups and continues to guide employees at Johnson and Johnson today. The company demonstrated its ethicality when it decided to stop marketing its baby oil as a tanning aid because of inconclusive evidence suggesting that health problems might result from too much exposure to the sun. That decision cost the company $5 million in lost sales. The companys vice president for recruiting finds that the companys reputation helps them recruit and attract a diverse workforce.
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