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B USINESS ETHICS
Ethical Decision Making and Cases
8TH EDITION

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B USINESS ETHICS
Ethical Decision Making and Cases
8TH EDITION

O. C. Ferrell
University of New Mexico

John Fraedrich
Southern Illinois UniversityCarbondale

Linda Ferrell
University of New Mexico

Australia Brazil Japan Korea Mexico Singapore Spain United Kingdom United States

Business Ethics: Ethical Decision
Making & Cases, 8th Edition
O.C. Ferrell, John Fraedrich and
Linda Ferrell
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Printed in the United States of America
1 2 3 4 5 6 7 13 12 11 10 09

To Anita and Robert Chandler.
O.C. Ferrell
To Brett Pierce Nafziger.
Linda Ferrell
To my parents, Bernice and Gerhard and my grandchildren
Emma, Matthew, and Hyrum.
John Fraedrich

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BRIEF CONTENTS

PART : Ethical Issues and
the Institutionalization of
Business Ethics 55
. Emerging Business Ethics Issues 56
. The Institutionalization of
Business Ethics 90
PART : The Decision
Making Process 125
. Ethical Decision Making and
Ethical Leadership 126
. Individual Factors: Moral
Philosophies and Values 148
. Organizational Factors:
The Role of Ethical Culture
and Relationships 178
PART : Implementing Business
Ethics in a Global Economy 213
. Developing an Effective
Ethics Program 214
. Implementing and Auditing
Ethics Programs 240
. Globalization of Ethical
Decision Making 270

PART : Cases 300
. Monsanto Attempts to Balance
Stakeholder Interests 302
. Wal-Mart: The Future Is Sustainability 314
. The American Red Cross 327
. Countrywide Financial: The Subprime Meltdown
. Arthur Andersen: Questionable
Accounting Practices 348
. Coping with Financial and Ethical Risks at
American International Group (AIG) 357
. Starbucks Mission: Social Responsibility
and Brand Strength 367
. The Fraud of the Century: The Case
of Bernard Madoff 375
. NIKE: Managing Ethical
MisstepsSweatshops to Leadership
in Employment Practices 386
. Banking Industry Meltdown: The Ethical
and Financial Risks of Derivatives 397
. The Coca-Cola Company Struggles
with Ethical Crises 407
. Enron: Questionable Accounting Leads to Collapse
. BP (Beyond Petroleum) Focuses on Sustainability
. Tyco International: Leadership Crisis 440
. Mattel Responds to Ethical Challenges 448
. PETCO Develops Successful Stakeholder
Relationships 458
. Home Depot Implements Stakeholder Orientation
. New Belgium Brewing: Ethical and
Environmental Responsibility 476
Notes

486
vii



Index

501

338

419
431

466

© Valerie Loiseleux

PART : An Overview of
Business Ethics 1
. The Importance of
Business Ethics 2
. Stakeholder Relationships,
Social Responsibility, and
Corporate Governance 28

CONTENTS

Part 1: An Overview of
Business Ethics 1

Chapter 2: Stakeholder Relationships,
Social Responsibility, and Corporate
Governance 28

Chapter 1: The Importance of
Business Ethics 2

Chapter Objectives, 29 Chapter Outline, 29
An Ethical Dilemma 29

Chapter Objectives, 3 Chapter Outline, 3

Stakeholders Define Ethical Issues In Business 31

An Ethical Dilemma 3

Identifying Stakeholders, 33 A Stakeholder
Orientation, 34

Business Ethics Defined 7
Why Study Business Ethics? 8

Social Responsibility And The Importance Of A
Stakeholder Orientation 37

A Crisis in Business Ethics, 8 The Reasons for
Studying Business Ethics, 10

Social Responsibility And Ethics 38

The Development Of Business Ethics 11

Corporate Governance Provides Formalized
Responsibility To Stakeholders 41

Before 1960: Ethics in Business, 11 The 1960s:
The Rise of Social Issues in Business, 12 The
1970s: Business Ethics as an Emerging Field, 13
The 1980s: Consolidation, 13 The 1990s:
Institutionalization of Business Ethics, 14 The
Twenty-First Century: A New Focus on Business
Ethics, 15

Views of Corporate Governance, 43 The Role of
Boards of Directors, 44
Implementing A Stakeholder Perspective 47
Step 1: Assessing the Corporate Culture, 47
Step 2: Identifying Stakeholder Groups, 47
Step 3: Identifying Stakeholder Issues, 48
Step 4: Assessing Organizational Commitment
to Social Responsibility, 48 Step 5: Identifying
Resources and Determining Urgency, 49
Step 6: Gaining Stakeholder Feedback, 49

Developing An Organizational And Global Ethical
Culture 16
The Benefits Of Business Ethics 17
Ethics Contribute to Employee Commitment, 18
Ethics Contribute to Investor Loyalty, 19 Ethics
Contribute to Customer Satisfaction, 20 Ethics
Contribute to Profits, 21

Summary

Important Terms For Review, 51 Resolving Ethical
Business Challenges, 51 Check your EQ, 53

Our Framework For Studying Business Ethics 22
Daryl Benson

Summary

49

24

Important Terms For Review, 26 Resolving Ethical
Business Challenges, 26 Check Your EQ, 27

viii

Contents

ix

Part 2: Ethical Issues and
the Institutionalization of
Business Ethics 55
Chapter 3: Emerging Business Ethics
Issues 56

Laws That Encourage Ethical Conduct 112
Federal Sentencing Guidelines For
Organizations 113
Highly Appropriate Core Practices 116
Philanthropic Contributions, 117 Strategic
Philanthropy, 118

Chapter Objectives, 57 Chapter Outline, 57

SUMMARY

An Ethical Dilemma 57

Important terms for review, 120 resolving ethical
business challenges, 120 Check your EQ, 123

Recognizing An Ethical Issue 60

119

Honesty, 62 Fairness, 63 Integrity, 63
Ethical Issues And Dilemmas In Business 64
Abusive or Intimidating Behavior, 64 Lying, 67
Conflicts of Interest, 68 Bribery, 68 Corporate
Intelligence, 69 Discrimination, 70 Sexual
Harassment, 72 Environmental Issues, 74
Fraud, 76 Consumer Fraud, 79 Financial
Misconduct, 80 Insider Trading, 81 Intellectual
Property Rights, 81 Privacy Issues, 82
The Challenge Of Determining An Ethical Issue In
Business 84
Summary

85

Important terms for review, 86 Resolving Ethical
Business Challenges, 87 Check your EQ, 89

Chapter 4: The Institutionalization of
Business Ethics 90

Part 3: The Decision Making
Process 125
Chapter 5: Ethical Decision Making
and Ethical Leadership 126
Chapter Objectives, 127 Chapter Outline, 127
An Ethical Dilemma 127

A Framework for Ethical Decision Making in
Business 128
Ethical Issue Intensity, 129 Individual Factors, 130
Organizational Factors, 132 Opportunity, 133
Business Ethics Evaluations and Intentions, 135
Using the Ethical Decision Making Framework to
Improve Ethical Decisions 136
The Role of Leadership in a Corporate Culture 137

Chapter Objectives, 91 Chapter Outline, 91

Leadership Styles Influence Ethical Decisions 138

An Ethical Dilemma 91

Habits of Strong Ethical Leaders 140

Managing Ethical Risk Through Mandated And
Voluntary Programs 93
Mandated Requirements For Legal Compliance 95
Laws Regulating Competition, 97 Laws
Protecting Consumers, 98 Laws Promoting
Equity and Safety, 101 Laws Protecting the
Environment, 102
Gatekeepers and Stakeholders 105
Accountants, 106 Risk Assessment, 106
The SarbanesOxley Act 107
Public Company Accounting Oversight Board, 109
Conflicts of Interest: Auditor and Analyst
Independence, 110 Enhanced Financial
Disclosures, 110 Whistle-Blower Protection, 110
Corporate and Criminal Fraud
Accountability, 111 Cost of Compliance, 111

Ethical Leaders Have Strong Personal Character, 141
Ethical Leaders Have a Passion to Do Right, 141
Ethical Leaders Are Proactive, 141 Ethical Leaders
Consider Stakeholders Interests, 142 Ethical
Leaders Are Role Models for the Organizations
Values, 142 Ethical Leaders Are Transparent
and Actively Involved in Organizational Decision
Making, 143 Ethical Leaders Are Competent
Managers Who Take a Holistic View of the Firms
Ethical Culture, 143
Summary

144

Important Terms for Review, 145 Resolving Ethical
Business Challenges, 145 Check your EQ, 147

x

Contents

Chapter 6: Individual Factors: Moral
Philosophies and Values 148
Chapter Objectives, 149 Chapter Outline, 149
An Ethical Dilemma 149

Can People Control Their Own Actions Within a
Corporate Culture? 206
Summary

208

Important terms for review, 209 Resolving Ethical
Business Challenges, 210 Check your EQ, 211

Moral Philosophy Defined 151
Moral Philosophies 152
GoodnessInstrumental and Intrinsic, 154
Teleology, 155 Deontology, 158 Relativist
Perspective, 160 Virtue Ethics, 161 Justice, 163
Applying Moral Philosophy to Ethical Decision
Making 164

Part 4: Implementing
Business Ethics in a Global
Economy 213

Cognitive Moral Development 166

Chapter 8: Developing an Effective
Ethics Program 214

White-Collar Crime 168

Chapter Objectives, 215 Chapter Outline, 215

The Role of Individual Factors in Business
Ethics 172

An Ethical Dilemma 215

Summary

172

Important terms for review, 174 Resolving Ethical
Business Challenges, 175 Check your EQ, 177

Chapter 7: Organizational Factors:
The Role of Ethical Culture and
Relationships 178
Chapter Objectives, 179 Chapter Outline, 179
An Ethical Dilemma 179

Defining Corporate Culture 181
The Role of Corporate Culture in Ethical Decision
Making 183
Ethical Frameworks and Evaluations of
Corporate Culture, 184 Ethics as a Component
of Corporate Culture, 186 Compliance versus
Value-based Ethical Cultures, 188 Differential
Association, 190 Whistle-Blowing, 191
Leaders Influence Corporate Culture 194
Reward Power, 194 Coercive Power, 195
Legitimate Power, 195 Expert Power, 196
Referent Power, 196
Motivating Ethical Behavior 197
Organizational Structure and Business Ethics 198
Group Dimensions of Corporate Structure and
Culture 201
Types of Groups, 201 Group Norms, 204
Variation in Employee Conduct 204

The Responsibility of the Corporation as a Moral
Agent 217
The Need for Organizational Ethics Programs 219
An Effective Ethics Program 221
An Ethics Program Can Help Avoid Legal
Problems, 222 Values versus Compliance
Programs, 224
Codes of Conduct 224
Ethics Officers 227
Ethics Training and Communication 228
Systems to Monitor and Enforce Ethical
Standards 230
Continuous Improvement of the Ethics Program,
232 Common Mistakes in Designing and
Implementing an Ethics Program, 233
Summary

235

Important Terms for Review, 236 resolving ethical
Business Challenges, 237 Check your EQ, 239

Chapter 9: Implementing and
Auditing Ethics Programs 240
Chapter Objectives, 241 Chapter Outline, 241
An Ethical Dilemma 241

The Ethics Audit 243
Benefits of Ethics Auditing 244
Ethical Crisis Management and Recovery, 246
Challenges of Measuring Nonfinancial
Performance, 248 Risks and Requirements in
Ethics Auditing, 251

Contents

xi

The Auditing Process 252
Secure Commitment of Top Managers and Board
of Directors, 253 Establish a Committee to
Oversee the Ethics Audit, 254 Define the Scope
of the Audit Process, 255 Review Organizational
Mission, Values, Goals, and Policies and Define
Ethical Priorities, 255 Collect and Analyze
Relevant Information, 257 Verify the Results, 261
Report the Findings , 262
The Strategic Importance of Ethics Auditing 262
Summary

Case 5: Arthur Andersen: Questionable
Accounting Practices 348
Case 6: Coping with Financial and Ethical Risks
at American International Group (AIG) 357
Case 7: Starbucks Mission: Social Responsibility
and Brand Strength 367
Case 8: The Fraud of the Century: The Case of
Bernard Madoff 375

265

Important Terms for Review, 267 Resolving Ethical
Business Challenges, 267 Check your EQ, 269

Chapter 10: Globalization of Ethical
Decision Making 270

Case 9: NIKE: Managing Ethical
MisstepsSweatshops to Leadership in
Employment Practices 386
Case 10: Banking Industry Meltdown: The
Ethical and Financial Risks of Derivatives 397

Chapter Objectives, 271 Chapter Outline, 271
An Ethical Dilemma 271

Capitalism, Economics, and Business Ethics 273
Common Values, Goals, and Business
Practices 278
Global Business Practices 281
Consumerism, 284 Human Rights, 286 Health
Care, 288 Labor, 288
Sustainable Development 290
International Monetary Fund (IMF) 291
World Trade Organization (WTO) 292
The Multinational Corporation (MNC) 293
Summary

296

Important Terms for Review, 297 Resolving Ethical
Business Challenges, 297 Check your EQ, 299

Case 11: The Coca-Cola Company Struggles
with Ethical Crises 407
Case 12: Enron: Questionable Accounting
Leads to Collapse 419
Case 13: BP (Beyond Petroleum) Focuses on
Sustainability 431
Case 14: Tyco International: Leadership
Crisis 440
Case 15: Responds to Ethical Challenges

448

Case 16: PETCO Develops Successful
Stakeholder Relationships 458
Case 17: Home Depot Implements Stakeholder
Orientation 466

Part 5: Cases 300

Case 18: New Belgium Brewing: Ethical and
Environmental Responsibility 476

Case 1: Monsanto Attempts to Balance
Stakeholder Interests 302

Notes

486

Index

501

Case 2: Wal-Mart: The Future Is
Sustainability 314
Case 3: The American Red Cross

327

Case 4: Countrywide Financial: The Subprime
Meltdown 338

P R E FAC E

Twenty years ago, the first edition of Business Ethics: Ethical Decision Making and Cases
became the first textbook to use a managerial framework to teach business ethics. The
Eighth Edition builds on this record of success and provides an enhanced teaching package
to help teach the fastest-growing business course in the last two decades. In all higher
education institutions there are three times as many courses in business ethics than there
were in 1990. This dramatic increase has occurred as a result of stakeholder concerns about
ethical conduct and public policy to encourage corporate ethics programs. No longer is
ethics considered merely an independent personal decision; rather, managers are held
responsible both within and outside their company for building an ethical organizational
culture. As the market leader with over 550 institutions using our book, we are working
to keep you, the instructor, up to date on the ever-changing issues and research within
business ethics.
The Eighth Edition continues to change the way business ethics is taught and reflects
the issues, challenges, and opportunities students will face in managing ethics in any
organization. While we base each chapter on ethical frameworks and research from the
academic community, we also include knowledge and best practices from business and
public policy decisions from governments and international entities. This real-world
approach to business ethics helps prepare students to face ethical challenges in business,
and develop an ability to make ethical decisions in our global economy.
The past decade has seen the demise of many corporations, and some industries,
that failed to appropriately incorporate ethics into their decision making processes. In
XII

Pr
Preface

the first few years of the twenty-first century, we saw the failure of Enron, Worldcom,
and many other firms that engaged in deception, fraud, and misconduct. The focus was
on excessive risk-taking. Public policy in the form of the Sarbanes-Oxley Act and Federal
Sentencing Guidelines for Organizations (FSGO) amendments was developed to prevent
future misconduct. Only five years after these events, the financial industry pushed the
global economy into the deepest recession in 80 years. It was discovered that excessive
risk-taking, misconduct, and the failure to address stakeholders interests were again to
blame. These factors contributed to the downfall of many financial institutions, including
Lehman Brothers, Bears Stearns, Countrywide Financial, Merrill Lynch, and Washington
Mutual. Without a government rescue, many large banks would have failed. All these
events increased regulations and laws encouraging organizations to develop programs that
improve ethical conduct and prevent misconduct.
Using a managerial framework, we explain how ethics can be integrated into strategic
business decisions. This framework provides an overview of the concepts, processes,
mandatory, core, and voluntary business practices associated with successful business ethics
programs. Some approaches to business ethics are excellent as exercises in intellectual
reasoning, but they cannot deal with the many actual issues and considerations that
people in business organizations face. Our approach prepares students for the real ethical
issues and dilemmas that they will face in their
business careers.
We have been diligent in this revision to
provide the most relevant examples of how
the lack of business ethics has challenged our
economic viability and entangled countries and
companies around the world. This book remains
the market leader because it addresses the
complex environment of ethical decision making
in organizations and pragmatic, actual business
concerns. Every individual has unique personal
principles and values, and every organization has
its own set of values, rules, and organizational
ethical culture. Business ethics must consider
the organizational culture and interdependent
relationships between the individual and other
significant persons involved in organizational
decision making. Without effective guidance, a
businessperson cannot make ethical decisions
while facing a short-term orientation, feeling
o rganizational pressure to perform well
and seeing rewards based on outcomes in a
challenging competitive environment.
Employees cannot make the best, most
ethical decisions in a vacuum devoid of the
influence of organizational codes, policies, and culture. Most employees and all managers
are responsible not only for their own ethical conduct, but for the conduct of coworkers and
those who they supervise. Therefore, teaching business ethics as an exercise in independent
and group decision making helps to acknowledge key influences upon (un)ethical conduct
of coworkers and managers. Employees must be taught how to recognize and when to

xiii
i

xiv
i

Preface

report and address ethical issues in the workplace. Students must also learn how to fit
in the ethical culture of their organization and be responsible for their own decisions
while upholding the ethical standards of the organization. In this edition we help readers
understand that in an organizational environment, their values are weighted differently
from actions taken outside the business world. Profit is one element that distinguishes
business versus nonbusiness decisions.
By focusing on the issues and organizational environments, this book provides
students the opportunity to see the roles and responsibilities they will face in business. The
past decade has reinforced that business ethics is not a fad but a prevailing set of risks
that organizations face on an ongoing basis, and organizations are now demanding better,
more informed employees. Governments, universities, and colleges now understand that
the ethical decision process must be taught.
Our primary goal has always been to enhance the awareness and the ethical decision
making skills that students will need to make business ethics decisions that contribute
to responsible business conduct. By focusing on these concerns and issues of todays
challenging business environment, we demonstrate that the study of business ethics is
imperative to the long-term well-being of not only businesses, but also our economic
system.

PHILOSOPHY OF THIS TEXT
Business ethics in organizations requires principle-based leadership from top management
and purposeful actions that include planning and implementation of standards of
appropriate conduct, as well as openness and
continuous effort to improve the organizations
ethical performance. Although personal values
are important in ethical decision making, they
are just one of the components that guide the
decisions, actions, and policies of organizations.
The burden of ethical behavior relates to the
organizations values and traditions, not just
to the individuals who make the decisions and
carry them out. A firms ability to plan and
implement ethical business standards depends
in part on structuring resources and activities
to achieve ethical objectives in an effective and
efficient manner.
The purpose of this book is to help students
improve their ability to make ethical decisions
in business by providing them with a framework
that they can use to identify, analyze, and resolve
ethical issues in business decision making.
Individual values and ethics are important in this
process. By studying business ethics, students
begin to understand how to cope with conflicts
between their personal values and those of the
organization.

Pr
Preface

xv
xv

Many ethical decisions in business are close calls. It often takes years of experience in
a particular industry to know what is acceptable. We do not, in this book, provide ethical
answers but instead attempt to prepare students to make informed ethical decisions. First,
we do not moralize by indicating what to do in a specific situation. Second, although we
provide an overview of moral philosophies and decision making processes, we do not
prescribe any one philosophy or process as best or most ethical. Third, by itself, this book
will not make students more ethical nor will it tell them how to judge the ethical behavior
of others. Rather, its goal is to help students understand and use their current values and
convictions in making business decisions and to encourage everyone to think about the
effects of their decisions on business and society.
Many people believe that business ethics cannot be taught. Although we do not claim
to teach ethics, we suggest that by studying business ethics a person can improve ethical
decision making by identifying ethical issues and recognizing the approaches available to
resolve them. An organizations reward system can reinforce appropriate behavior and
help shape attitudes and beliefs about important issues. For example, the success of some
campaigns to end racial or gender discrimination in the workplace provides evidence
that attitudes and behavior can be changed with new information, awareness, and shared
values.

CONTENT AND ORGANIZATION
In writing Business Ethics, Eighth Edition, we strived to be as informative, complete,
accessible, and up to date as possible. Instead of focusing on one area of ethics, such as
moral philosophy or social responsibility, we provide balanced coverage of all areas relevant
to the current development and practice of ethical decision making. In short, we have tried
to keep pace with new developments and current thinking in teaching and practices.
The first half of the text consists of ten chapters, which provide a framework to identify,
analyze, and understand how businesspeople make ethical decisions and deal with ethical
issues. Several enhancements have been made to chapter content for this edition. Some of
the most important are listed in the next paragraphs.

Part One, An Overview of Business Ethics, includes two chapters that help provide a
broader context for the study of business ethics. Chapter 1, The Importance of Business
Ethics, has been revised with many new examples and survey results to describe issues
and concerns important to business ethics. Chapter 2, Stakeholder Relationships, Social
Responsibility, and Corporate Governance, has been significantly reorganized and
updated with new examples...

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