CHAPTER 1
Ethics and the Law
OVERVIEW
 A brief overview of several theories of ethics and systems
of justice.
 Business ethics defined and discussed in relation to
economic performance.
 A description of notable examples of social responsibility
and irresponsibility on the part of corporations.
 How certain conduct raises ethical as well as legal issues.
 Explanations that an action may be legal yet still
unethical.
 A perspective on the role of the corporation and its
managers in ensuring ethical conduct and the evolving
role of the law in this area.
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DIFFERENT THEORIES
OF ETHICS
 Teleological theory- the ethical good
of an action is to be judged by the
effect of the action on others.
 Deontological theory- focuses on
the motivation and principle behind
an action than on the
consequences.
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TELEOLOGICAL THEORY
Utilitarianism- a major teleological
system of beliefs that operates
under the proposition that the ideal
is to maximize the total benefit for
everyone involved.
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DEONTOLOGICAL
THEORY
 Rawlsian moral theory- aims to maximize the plight
of the worst-off person in society by developing
principles behind a “veil of ignorance.”
 Kantian theory- looks to the form of an action,
rather than the intended result, in examining the
ethical worth.
 Universalizabilty- asks whether one would want
everyone to act in this manner.
 Reversibilty- asks whether one would want such
a rule applied to one’s self.
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COMPARATIVE
JUSTICE CATEGORIES
 Distributive justice- focuses on how the burdens
and benefits of a particular system are
distributed.
 Compensatory justice- aims at compensating
people for the harm done by others.
 Retributive justice- may also be appropriately
applied when someone does harm to another, yet
the focus is more on how to deter the person from
inflicting another harm.
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Historical Perspective
AQUINAS ON LAW
AND ETHICS
• Saint Thomas Aquinas (1225?-1274), a theologian and
philosopher, believed that an unjust law was contrary to
God’s eternal law and could not properly be considered a
law at all.
• Aquinas believed human law must be just to be considered
law. To be just, a human law must be:
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Constant with a reasoned determination of the universal good.
Within the power of individuals to fulfill.
Clearly expressed by legitimate authority.
Approved by custom.
Widely promulgated.
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Case 1.1 Meinhard v. Salmon
FACTS. The Bristol Hotel in New York City was leased to Salmon for
twenty years, 1902-1922. Salmon and Meinhard entered into a joint
venture agreement, with Meinhard as the financial backer. Meinhard
agreed to pay for half the moneys needed to operate the property, in
exchange for 40% of the the net profits for the first five years and 50% for
the years thereafter. In 1922, Elbridge Gerry became the owner of the
property and entered into a 20 year lease agreement with Salmon for the
hotel and the surrounding property. Meinhard demanded to be included
in the lease but was turned down. Meinhard sued.
ISSUE: Did Salmon, as Mienhard’s joint venturer, have a relationship of
trust (or fiduciary duty) to Meinhard that obligated him to give Meinhard
the opportunity to be included in a new lease covering property that was
originally leased by Salmon on behalf of the joint venture? HELD: A
fiduciary is held to ethical standards “stricter than the morals of the
marketplace”. The court awarded one-half the lease to Meinhard.
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SOCIAL RESPONSIBILITY
AND PROFITS
 Nobel Prize winner in economics Milton
Friedman asserts that the only guiding
criterion for the corporation should be
profitability.
 Richard Nunan argues that corporations
are better equipped than the government
to handle certain issues.
 Who do you agree with?
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ECONOMIC PERFORMANCE
AND ETHICS
 One possible solution to the tension
between economic performance and
ethics is to set minimum ethical
standards that all employees must meet.
 Managers must try to demonstrate that
high ethical standards lead to business
success.
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SOCIAL RESPONSIBILITY
Issues of social responsibility arise in
the areas of product safety, the
environment, sweatshops and
underpaid foreign workers, advertising
campaigns, antitrust violations, client
conflicts of interest, managed earnings,
and Internet companies.
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CONSUMERS AND
PRODUCT SAFETY
Socially responsible businesses
place a heavy emphasis on the
safety of their products. Huge costs
have been associated with failure to
meet the public’s perception of what
is safe.
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CONSUMERS AND
PRODUCT SAFETY
 Johnson & Johnson and Tylenol—in 1992 recalled 31 million
bottles of Tylenol after deaths from cyanide poison tampering
were reported.
 Coca-Cola recalled 14 million cases of product in five European
countries after two plants were responsible for the contamination
of the soft drink, although no deaths were reported.
 Copley Pharmaceutical—in 1994 recalled one of their biggest
sellers, albuterol, because of bacterial contamination.
 General Motors--In 1999, GM ordered to pay punitive and
compensatory damages to 6 people who were burned when their
1979 Chevrolet Malibu’s fuel tank exploded in a crash.
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COMMUNITIES AND THE
ENVIRONMENT
Closely akin to product safety is
environmental safety. Disregard for
safety has resulted in some
spectacular environmental disasters
that have severely hurt the
surrounding communities.
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COMMUNITIES AND THE
ENVIRONMENT
 Union Carbide and Bhopal
 In Dec. 1984, forty tons of methyl isocyanate gas was
emitted from the plant outside Bhopal, India. At least
200,000 victims from death or illness.
 Shell & Brent Spar & Nigeria
 In 1995, Royal Dutch/Shell oil company planned on
disposing of the Brent Spar oil platform by sinking it in
the North Atlantic. After protests, they agreed to salvage
it inside, incurring twice as much costs. Shell also
refused to help stop the hanging of Ogoni activists, who
protested the unfair compensation by the Nigerian
government for the oil Shell was taking from their land.
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COMMUNITIES AND THE
ENVIRONMENT
Shell and Brent Spar and Nigeria
In March 1997, Shell released a new operating
charter reflecting a commitment to the environment,
health, safety, and human rights.
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EMPLOYEES: SWEATSHOPS,
CHILD LABOR, RESTRUCTURINGS, AND
CONTINGENT WORKERS
 Indentured Servitude in Marianas Islands
 In August 1999, 50,000 sweatshop laborers from the
Mariana Islands demanded $1 Billion from a number of
U.S. corporations, alleging that the companies had
participated in a program of indentured servitude. The
corporations paid $1.25 million to settle the case and
agreed to allow inspections of their factories.
 Child Labor at Wal-Mart
 In 1992, the press revealed that Wal-Mart was selling
products labeled “Made in the U.S.A.” which were
actually made in Bangladesh by child laborers.
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EMPLOYEES
 Leveraged Buyouts
 During the 1980’s, managers and bankers financed
hundreds of leveraged buyouts with junk bonds. A
number of companies declared bankruptcy when they
were unable to repay the debt incurred in their LBOs.
 Contingent Workers
 Many large companies in the 1990s reduced their fulltime work force and hired more part-time, temporary, and
contract workers. These employees received less pay,
benefits, and no pensions. In recent lawsuits against
Microsoft and Time Warner, contingent workers claim
they were unfairly denied benefits.
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CONSUMERS AND ADVERTISING
 Targeted Marketing
 In 1991, G. Heileman Brewing Co. planned to release a new
malt liquor aimed at the African American community. The
malt beverage would have been the strongest malt liquor on
the market. African American activists groups protested and
the product was withdrawn.
 Marketing Tobacco and Beer to Children
 RJR Nabisco (maker of camel cigarettes) was criticized for
using Old Joe Camel, a cartoon character, for advertisement.
In 1997, they agreed to drop the Joe Camel ads.
 In 1999, the FTC surveyed the eight largest alcoholic beverage
companies and found that they advertised their product in
media popular to children.
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CUSTOMERS AND ANTITRUST
 Microsoft and Abuse of Monopoly Power
 In April 2000, a judge ruled that Microsoft Corp. had
illegally maintained and sought to extend its monopoly
in the personal computer operating system markets,
and ordered a breakup of the company.
 Archer Daniels Midland and Price-Fixing
 In 1995, the U.S. Justice Dept. charged Archer Daniels
Midland (ADM), and several of its top executives with
colluding with competitors to coordinate price
increases and to allocate sales of lysine products
among themselves as part of an international pricefixing scheme.
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CLIENTS AND CONFLICTS
OF INTEREST
 Ernst & Young
 In 1998, Ernst & Young agreed to pay $185 million to one
it’s clients, Merry-Go-Round Enterprises. The law firm
Swidler & Berling advised Merry-Go-Round to consult
with turnaround experts Ernst & Young. When a conflict
arose, Swidler & Berling intervened on Merry-go Round’s
behalf. Ernst & Young failed to disclose to the retailer its
business relationship with Swidler & Berling and MerryGo Round’s main landlord, Rouse Company.
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CLIENTS AND CONFLICTS
OF INTEREST
 Management Buyouts
 Management-led buyouts present unique conflicts of
interest. When management is doing the buying, it’s
objective is to buy at the lowest possible price, which
conflicts management’s responsibility to obtain the
highest price for the existing shareholders.
 Morgan Bank
 Sterling Drug was a longtime client of Morgan Bank of
New York. When Hoffman-LaRoche suprisingly took over
Sterling, Morgan bank was not surprised because the
bank was also Hoffman-LaRoche’s financial adviser.
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CLIENTS AND CONFLICTS
OF INTEREST
 Morgan Guaranty
 Morgan Guaranty Trust Company was
criticized when it helped one client,
SmithKline Beecham Corp., buy a firm that
another client, Corning Glass Works, had
agreed to purchase.
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INVESTORS
 Managed Earnings
 In an effort to meet securities analysts’ earnings
expectations and thereby avoid the punishing drop in stock
price that usually follows a company’s announcement that
its earnings were below Wall Street’s estimates, a number of
public companies are managing earnings.
 “Silicon.Valley.con”
 The increase of dot.com companies engaged in electronic
commerce are raising ethical concerns. Most importantly,
some question the practice of creating a company for the
sole purpose of making millions in an IPO rather than
building a sustainable enterprise with long-term economic
value.
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POSITIVE ACTION
 Ford
 Plans on selling a hybird gas-and-electric-powered sports
utility vehicle in 2003.
 Conoco
 After the Exxon Valdez oil spill in 1989, Conoco ordered two
new oil tankers with double hulls which can prevent or limit
spills.
 Levi Strauss
 After finding out that children were working for two of their
suppliers in Bangladesh, they agreed to pay the children’s
tuition, purchase their books and clothes, pay their wages
while they attended school, and offered them jobs when
they turned fourteen.
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POSITIVE ACTION
 Merck
 After WWII, Merck & Co. provided medicine to treat
tuberculosis in Japan. They also developed and gave away
a drug that cures river blindness.
 BP Amoco
 Bp instituted measurable objectives to ensure that it was
doing what it could to create a sustainable planet.
 McDonald’s & Packagers
 McDonalds and other users of packaging have made
innovative changes in their products and packaging to
reduce the environmental impact of paper manufacturing
and disposal.
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PROMOTING ETHICAL
BEHAVIOR
 Fair treatment of employees
 Mission statements
 Codes of ethics
 Oversight committees
 Ethics training
 Making it easier to blow the whistle
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THE LAW AND THE
“UNETHICAL”
ROLE OF THE LAW
The law -civil as well as criminal- plays
an important part in promoting ethical
conduct. Ethical behavior often
requires a higher standard than that
prescribed by the law; an action that is
unethical may nonetheless be legal.
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Case 1.2 Riddle v. Arizona
Oncology Services, Inc.
FACTS. Arizona Oncology Services, Inc. (AOS)
employed a radiology technician knowing she had a
history of drug abuse. After finding out she was high
on cocaine while on the job, she was dismissed for the
day. She left the premises and ran into the plaintiff’s
vehicle, seriously injuring him. ISSUE. Does AOS had a
duty to act reasonably to protect third parties from
foreseeable risk of harm? HELD. Plaintiff’s case
dismissed, foreseeability alone does not create a legal
duty to Plaintiff.
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Case 1.3 United States v. Park
FACTS. John Park, CEO of Acme Markets, Inc., was informed of
violations (rat infestation) by his company from the FDA in 1971.
Park was told by his employees that the vice-president was
taking care of the matter. In 1972, the FDA found evidence of the
same violations. ISSUE: Can the CEO of a company be held
vicariously and strictly criminally liable under the Federal Food,
Drug and Cosmetic Act for the introduction of misbranded and
adulterated articles into state commerce? HELD: Yes. CEO held
vicariously and strictly criminally liable for acts of corporation
because CEO had authority to maintain physical integrity of
product.
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EMPLOYER’S LIABILITY FOR
RACIAL DISCRIMINATION BY
EMPLOYEES
 Denny’s Restaurants agreed to pay more
than $54 million to settle two class action
lawsuits filed by African American
customers. It is the largest settlement under
the federal public accommodation laws.
 In 1997, Texaco agreed to pay more than $100
million to African American employees for
racial discrimination in hiring and promotion.
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EMPLOYEE DRUG TESTING
AND E-MAIL MONITORING
 Businesses can make and enforce
rules regarding drug use or
possession in the work place.
 Monitoring employee’s e-mail may
be legal, but the employer should
always advise employees in
advance of its intentions to do so.
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WHITE-COLLAR CRIME
The Federal Corporate Sentencing
Guidelines provide a rating system,
including aggravating and
mitigating factors, to determine the
appropriate sentence for companies
convicted of federal crimes.
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ENSURING ETHICAL
CONDUCT
 Ethical behavior is reinforced when:
 Top management exemplifies the company’s
values and takes a leadership role in programs to
promote ethics.
 The company creates an atmosphere of
openness and trust in which employees feel
comfortable in reporting violations.
 Activities to enhance and reward ethics are part
of every operational level of the company.
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