Remember the objectives of the course
Identify key dimensions of ethical reasoning
Identify a number of typical major ethical dilemmas.
Identify the factors and forces affecting or leading to a particular ethical dilemma.
economic,
legal,
political,
other environmental
Apply appropriate theories and models to assess divergent perspectives of a particular ethical dilemma
Demonstrate a basic understanding of the
Stakeholder theories of ethics,
Relativist theories of ethics,
Consequentialist theories of ethics,
Utilitarian theories of ethics,
Deontological theories of ethics,
Universalist theories of ethics,
rights theories of ethics
justice theories of ethics.
Develop and justify recommended solutions to a particular ethical dilemma.
Apply theories of ethics to particular situations
Generate a number of actions for a particular circumstance using the previously identified theories
of ethics.
Choose and defend a particular course of action using previously identified theories



Lecture One:
Ethical Theory and Business Practice
 Objectives
 Foundation in ethical theory for subsequent chapters
 Presentation of:
 Definitions of some important terms
 morality
 ethical theory.
 prudence.
 law.
 Justifications for trying to find a good ethical theory to guide decision making for
individuals and groups
 Distinguish
 Topics for Chapter 1
 Description/Justification for Morality
 Approaches to the Study of Morality
 Relativism as a candidate principle
 Teleology
 Egoism
 Utilitarian Theories
 Deontology
 Kantian Ethics
 Common Morality Theories
 Rights Theories
 Virtue Ethics
 Feminist Theories and the Ethics of Care
 Causistry
 Which ethical principles should we use?
 Each approach has strengths and weaknesses
 Need to look at situation and apply best analysis/judgment
 Difficulties with Finding Ultimate Solutions to Moral Problems
 Morality (Definition)
 Morality v. Ethical Theory
 Morality v. Prudence
 Law v. Morality
 Statutory law v. case law
 Conflicts between morality and law
 Morality and ethics begin where the law is unclear or not defined.
 Rule of Conscience
 Moral justification must be based on a source external to conscience itself.
 Approaches to the Study of Morality
 Descriptive approach
 Conceptual approach
 Prescriptive approach
 Relativism
 Relativism of judgments
 Relativism of standards
 Methods for Easing Moral Disagreements
 Obtaining objective information
 Definitional clarity
 Example-counterexample
 Analysis of arguments and positions
 Teleology
 Definition
 Two Teleological Philosophies
 Egoism:
 Utilitarianism:
 Egoism
 Psychological Egoism
 Ethical Egoism
 Thomas Hobbes –
 Adam Smith
 Utilitarianism
 Definition
 History
 Application/Process
 Principles
 Least Misery Principle
 Problems with Utilitarianism
 Act vs. Rule Utilitarianism
 Problems with Utilitarianism
 Deontology
 Definition
 History
 Application/Process
 Principles
 Two forms:
 Derived from religious morality
 Non-religious form (Immanuel Kant), in the tradition of Aristotle, derived from
human “reason”
 Kantian Ethics
 categorical imperative:
 “I ought never to act except in such a way that I can also will that my maxim should
be become a universal law.”
 second formulation of the categorical imperative:
 “Act in such a way that you always treat humanity … never simply as a
means, but always at the same time as an end.”
 The principle is categorical because it admits of no exceptions and is absolutely
binding, and
 The principle is imperative because it gives instruction on how one must act.
 Moral irrelevancy of consequences
 Requirements for an action to be moral,
 1. It has to be universal – something that is moral for one person has to be
moral for everyone, for ex: dishonesty cannot be justified as a valid moral
principle
 2. Respect for rational beings – people should be treated with dignity; and
not as means to ends
 3. Autonomy – action has to respect people’s freedom to choose; people
are to treat each other fairly and equally
 Universality – it counters the natural temptation to make exceptions for ourselves
or to apply double standards
 Also provides hypothetical answers underlying the common question “What if
everyone did that?”
 Strong foundation for rights theories
 Weaknesses
 Problems:
 Speciesism
 Is universalisation workable?
 Common Morality Theories
 Common Morality Theories
 Definition
 deal with the difficulties created by the use of categorical principles
 Types of obligations
 Prima facie obligations
 Situation specific obligation to act unless blocked or outweighed by
equal or greater obligation
 Actual obligations
 Determined by weighing of all prima facie obligations
 Rights Theories
 Definiton
 Principles
 Human rights are held independent of membership in a state or other social organization.
 Human rights evolved from the notion of natural rights.
 Natural rights are rights that belong to all persons purely by virtue of their being
human.
 Actions by individuals and collectives are justified only if they protect human rights
 Rights Theories
 Positive rights impose obligations on people to provide other people with goods or services.
 Negative rights pertain to the obligations on the part of other people to refrain from
interfering with our freedom of action.
 Obligations created by rules restrict in a way that rights do not, and the important issue is
securing liberty
 Problems with Rights theories
 A primary problem with this theory is that there is no hierarchy for right’s claims:
 “How does someone determine which right takes precedence or has more
value over other rights?”
 Another problem is proliferation of rights claims
 Virtue Ethics
 Defintion of Virtue
 Typical virtuous traits in the business arena.
 traits are acquired and developed throughout our life experiences.
 Feminist Theories and the Ethics of Care
 Defintion
 T wo feminist presuppositions:
 The subordination of women is as wrong as it is common.
 The experiences of women are worthy of respect and should be taken seriously.
 Ethics of Care
 Principles
 Argument against the theory
 Analysis of Cases
 The case method in law
 The case method in business
 Reasons for the casuistical method for case analysis in ethics
 Social Justice...
 distributive justice
 procedural justice
 interactional justice
Lecture Two
 The Purpose of the Corporation
 Shareholders vs. Stakeholders
 Profit vs. Duty
 Principles of Stakeholder Management
 Differing views on the social responsibility of a corporation:
 Friedman versus Freeman
 Approaches to Stakeholder Management
 Principles of Stakeholder Management
 Three levels of relations between Firm, Stakeholders and Government
 History of the Conflict
 Adam Smith
 Roots of Laissez Faire Capitalism
 Karl Marx
 Roots of Obligations to Non-owners
 Stewardship
 Does a business have stewardship responsibilities?
 Towards the financial assets of customers and employees
 Towards the natural world
 Two responses to stewardship:
 reformist approach - strengthen regulatory and supervisory systems
 radical approach - abuse of trust arises from market power, so increase
power of competition
 Adam Smith
 1776 Wealth of Nations.
 Individual efforts aggregated for the general benefit by the ‘Invisible Hand' of
individuals acting and choosing in own self-interest
 Society gains when everyone pursues self-interest
 Governments: refrain from regulating business activity.
 Laissez-faire encourages free trade and wealth generation.
 Also wrote on the division of labor
 We do not value the division of labor as we once did
 Much of division of labor today is handled through machines
 Intellectual roots for reasoning by Friedman
 Milton Friedman
 One of the most effective advocates of economic freedoms and free enterprise
in the tradition of Smith
 Also an advocate of limited government
 His theory asserts a corporation's primary and perhaps sole purpose is to
maximize profits for the stockholder.
 Two main supporting arguments:
 Stockholders are the owners of the corporation, and hence corporate
profits belong to them.
 Corporate executives are the stockholder's agents and must
operate in the interests of their principle (stockholders).
 This does not allow donations to charity by the corporation
(corporate executives) because the income belongs to the
stockholders, not the corporate executives.
 Individual proprietors are different in that if they choose to spend
the income generated by their business they are spending their
own money, not the money of other people.
 Stockholders are entitled to their profits as a result of a contract among
the corporate stakeholders.
 A stakeholder in this context refers to employees, managers,
customers, suppliers, the local community, and the stockholders.
 Each stakeholder group has a contractual relationship with the
firm, since they receive the remuneration they freely agreed to in
a pre-established agreement (contract).
 Position is that shareholders can act in charitable ways with portion of profits
distributed to them
 Choices of worthy social causes can be made by shareholders themselves
 Karl Marx
 Wrote Capital in the 19th century
 Wrote on the alienation of the worker
 Assumption is that appropriation of excess value harms workers
 Argues that capitalism alienates owners as well
 Purely selfish interests result in extensive social ills
 Demanded worker ownership of assets to give workers control over their own
welfare
 Today’s worker is much less alienated than the 19th Century worker
 Work is more interesting today
 More workers are owners through investments
 Modern managerial capitalism
 Corporation instituted as a means of distributing risk
 Name comes from Latin corpore (body), thus incorporate means to “make a
body” or to create an artificial person as a legal entity
 This “person” has some legal advantages over a flesh and blood person,
but the advantages can lead to social ill
 Externality
 Monopoly power
 Moral hazard
 Managers become de facto agents, who sell their time and decision
making skills for the benefit of the owner/shareholders
 Different than in times past (Smith) where owner and manager were one
 R. Edward Freeman
 His theory views that both the stockholders and stakeholders have a right to
demand certain actions from management because all have a vested stake in the
corporation.
 Stakeholder Theory
 Stakeholders are those with claims on the firm
 Not a residual claim of ownership
 In Kantian tradition, Freeman argues that managers ought not to treat
stakeholders as a means to the end of creating good only for the shareholders
 Recently, laws have emerged to further the interests of non-shareholder
claimants
 Labor
 Community at large
 Purchasers
 Stakeholder Theory
 Two types of stakeholder:
 Narrow definition - A stakeholder includes those groups who are vital to
the survival and success of the organization.
 Wide definition - A stakeholder includes any group or individual who can
affect or are affected by the corporation.
 Stakeholder Roles
 Owners
 Employees
 Suppliers
 Customers.
 Local community
 Managers must look after the health of the corporation and carefully balance the
conflicting claims of all stakeholders.
 Problems with Friedman
 Dominant Model not consistent with the law
 Strict Liability  Customers
 Equal Pay Act  Employees
 Equal Rights Act  Employees
 Clean Air Act  Community
 Clean Water Act  Community
 Dominant model not consistent with basic ethics
 Separation Fallacy
 Open question argument
 If decision  for whom is value destroyed
 Who is harmed/benefited
 Whose rights are (are not)enabled whose value is (is not) realized
 What kind of person will I be if I make this decision
 General equilibrium model underlying Friedman conclusions is only true under
some very specific conditions
 Principles of Freeman
 Stakeholder interests are joint
 Primary principle is about creating as much value as possible for shareholders
 The Normative Core
 Each stakeholder theory has a normative core that is comprised of a set of
sentences like:
 Corporations ought to be governed…
 Managers ought to act to…
 Doctrine of Fair Contracts – Corporations ought to be governed in accordance
with the six principles
 The Principle of Entry and Exit
 The Principle of Governance
 The Principle of Externalities
 The Principle of Contracting Costs
 The Agency Principle
 The Principle of Limited Immortality
 Corporation law reform principles
 The Stakeholder Enabling Principle
 The Principle of Director Responsibility
 The Principle of Stakeholder Recourse
 John R. Boatright
 Shareholders As Owners
 Equity Argument – Managers do not appear to have a special fiduciary
responsibility to shareholders because the shareholders already have
built-in protections that other stakeholders do not possess.
 Shareholders are sufficiently protected by the right they have to
elect the board of directors, vote on shareholder resolutions, etc.
 Two arguments about stakeholder theory
 Fails to appreciate the extent to which dominant model serves the
interest of all stakeholders
 Assumes that the task of assuring that all stakeholder interests are served
is the task of management
 All stakeholder groups should benefit from the activities of management
 Contracts
 No express contract between management and the stockholders exists
 Possible implied contract between management and the stockholders
 Agency
 Consent to the relation
 The power to act on another’s behalf
 The element of control
 Managers are not agents
 Managers cannot give consent to be agents
 Officers and directors have no power to act on behalf of shareholders
 Managers are not under the control of shareholders
 Managers don’t need to be especially dutiful to shareholders
 The duties of managers ought to be determined by public policy, and they need
not bear any special duties to shareholders
 Legal Perspectives on Corporate Purpose
 Michigan Supreme Court ruling in the Dodge v. Ford Motor Co.
 The court ruled that the benefits of higher salaries for Ford workers and the
benefits of lower auto prices to consumers must not take priority over
stockholder interests.
 Supreme Court of New Jersey ruling in the A. P. Smith Manufacturing Co. v.
Barlow
 A legal connection between corporate philanthropy and goodwill was
acknowledged.
 Judge Jacobs recognized that "an act that supports the public welfare can
also be in the best interest of the corporation itself.“
 Increased profit maximization may be realized by the corporation in the
long-term for acting in a socially responsible manner.
 Stakeholder management Principles
 Principle 1 - Managers should acknowledge and actively monitor the concerns of
all legitimate stakeholders, and should take their interests appropriately into
account in decision-making and operations.
 Principle 2 - Managers should listen to and openly communicate with
stakeholders about their respective concerns and contributions, and about the
risks that they assume because of their involvement with the corporation.
 Principle 3 - Managers should adopt processes and modes of behavior that are
sensitive to the concerns and capabilities of each stakeholder constituency.
 Principle 4 -Managers should recognize the interdependence of efforts and
rewards among stakeholders, and should attempt to achieve a fair distribution of
the benefits and burdens of corporate activity among them, taking into account
their respective risks and vulnerabilities.
 Principle 5 - Managers should work cooperatively with other entities, both public
and private, to insure that risks and harms arising from corporate activities - are
minimized and, where they cannot be avoided, appropriately compensated.
 Principle 6 - Managers should avoid altogether activities that might jeopardize
inalienable human rights (e.g., the right to life) or give rise to risks which, if
clearly understood, would be patently unacceptable to relevant stakeholders.
 Principle 7 - Managers should
 acknowledge the potential conflicts between
 (a) their own role as corporate stakeholders, and
 (b) their legal and moral responsibilities for the interests of stakeholders,
and
 address such conflicts through open communication, appropriate reporting and
incentive systems and, where necessary, third party review.
 Kenneth E. Goodpaster
 The PASCAL Decision Making Process
 Decision making process followed by managers
 PASCAL Model
 P – Perception (fact gathering)
 A – Analysis of implications for parties
 S – Synthesis of options by priorities
 C – Choice among options
 A – Action from chosen option
 L – Learning from outcomes
 Stakeholder Analysis - A management tool, that includes the perception and analysis
steps of the PASCAL decision-making process, used to assist decision-making where
various stakeholders have competing interests.
 Stakeholder needs must be appropriately balanced.
 Stakeholder Synthesis - A process that builds on stakeholder analysis and includes the
synthesis, choice, and action steps of the PASCAL decision-making process.
 Strategic Stakeholder Synthesis - A concept that asserts stakeholders outside the
stockholder group are factors that can potentially affect the overall goal of optimizing
stockholder wealth and thus deserve consideration for competitive reasons.

Chapter Three
The Ethical Treatment of Employees
 Topics for Chapter 3
 Employment at Will
 Risk information and workplace hazards
 Whistle-blowing
 Werhane and Radin
 Principle of EAW
 IN absence of law or contract, employers have right to hire, promote,
demote or fire whomever and whenever they please
 Prima facie hiring at will
 In US for employees not covered by union agreement, legal statute,
public policy or contract, employers may dismiss employees “for good
cause, for no cause or for causes morally wrong without being guilty of
legal wrong
 Difference between public sectior employees and private sector employees
 Due process
 Means by which an employee can appeal a decision in order to get an
explanation of the action and an opportunity to argue against it
 Reasons for EAW
 Proprietary rights of employers would be violate by elimination of EAW
 EAW treats employee and employer rights equally
 When taking a job, an employee commits to many conditions including loyalty
and at-will conditions
 Extending due-process rights to the workplace interferes with efficiency and
productivity
 Legislation and/or regulation of employment relationships undermine an
overregulated economy
 Proprietary rights of employers would be violated by elimination of EAW
 Difference between persons and labor
 Productivity as property
 However persons can be distinguished between their possessions (a corporation)
but persons cannot be separated from their working
 Also, treating an employee in an at-will fashion is similar to treating that
employee as property
 EAW treats employee and employer rights equally
 Freedom of contract
 EAW limits freedom of contract
 However, freedom of contract violates BOTH employee and employer rights
 An employee commits to many conditions including at-will conditions
 However, the conditions of loyalty, trust and respect, to be valid, should pertain
to both parties
 Equal obligation and mutual restriction
 Extending due-process rights to the workplace interferes with efficiency and
productivity
 Employer must have ability to fire inefficient employees
 Due process is costly and time-consuming
 Workers can give up some basic rights for money
 Workers implicitly agree in exchange for higher wages
 However, this assumes that two previous points are true
 Legislation and/or regulation of employment relationships undermine an overregulated
economy
 However, procedural and substantive due process are consistent with the ability to fire
employees
 Due process in public versus private employees
 Public employees have need to due process because of the political influences on their
jobs
 EAW could undermine public welfare in case of a public employee
 SO, if public employees should have these rights, why wouldn’t private employees have
them as well?
 Richard Epstein
 Public action in favor of protection of employees is increasing
 EAW works to the mutual benefit of employer and employee
 Three dominant standards for evaluation of a doctrine
 Intrinsic fairness
 Effects on utility or wealth
 Distributional consequences
 Intrinsic fairness of EAW
 Freedom to contract as an end in itself
 Desire to determine conditions of employment is as basic as marriage or religion
 We should not limit freedom to engage in any of these without explicit justification
 Limits on freedom of contract already protect a large number of conditions
 Force
 Fraud
 Diminished capacity
 Effects OF EAW on utility or wealth
 Difficult to assume that employees would typically enter into contracts that are not
beneficial to them
 Employee can use contractual rights to control firm, too.
 Real issue is not how to minimize employer abuse, but to how to maximize the gain
from the relationship
 EAW helps firm to bear the risk of inappropriate employee behavior
 Firm use of EAW is controlled by the risk of loss of reputation, this is not as much an
issue for employees
 Employee is given a right to many choices with EAW
 EAW allows employee to sample employment conditions
 EAW is cheap to administer
 Distributional consequences
 Difficult to imagine how changes in EAW can more equitably distribute value
 Diminishing of EAW would have negative consequences on employee shareholders
(pension plans)
 Ruth R. Faden and Tom L. Beauchamp
 Worker right to information
 Be informed about exposure
 Medical records
 Worker right to refuse hazardous work
 Worker right to help determine workplace standards
 Right to know
 What determines “right to know” standard?
 Reasonable person standard
 Serious hazards may require individual disclosure
 Subjective standard
 Idiosyncratic information may require different standard
 Combination
 Right to Risk Information
 Right-to-know balance
 Employer perspective
 Protection of trade secrets important
 Employee perspective
 Need to be informed
 Right to know has little effect without power to change situations
 Right to change situation
 Proposed standards for employee exit from a hazardous situation:
 Good-faith subjective standard – Requires only that the worker honestly believe
that a health hazard exists.
 Reasonable person standard – Requires that the belief be reasonable under the
circumstances that a health hazard exists.
 Objective standard – Requires evidence, usually from an expert, that a threat
exists.
 Managing Workplace Hazards
 TRAINING is important to
 Giving the employees the right information so they can make informed decisions
 Topics should include:
 Education about the workplace hazards present
 Employee rights and how to exercise these rights
 Thomas O. McGarity
 Employer reluctance to inform employees
 Paternalistic concern for the employee’s health and well being.
 Lack of employee education or training to put the risk information to use.
 Informed employees will likely demand higher wages and/or safer working
conditions.
 Worker’s Right-to-Know
 Competing moral and practical considerations
 Autonomy
 Fairness
 Utility/Efficiency
 Innovation
 Paternalism
 Michael Davis
 Standard Theory of Whistle-Blowing
 Problems (paradoxes) in standard theory
 Less paradoxical theory
 Test of new theory
 Standard Theory of Whistle-Blowing
 Justified acts
 Permitted by morality
 Required by morality
 Morally permitted and required for other reasons
 Definition
 Revealing something not known
 Intention to prevent something bad
 To gain information through being trusted
 Doesn’t reveal information for self-benefit
 Reveals what organization doesn’t want revealed
 Disloyalty is morally permitted when
 Organization to which whistleblower belongs will do serious harm
 Whistle-blower has identified a threat of serious and considerable harm,
reported it and concluded that the report would have no effect
 Whistle—blower has exhausted all internal recourse
 Whistle-blower has evidence that would convince a reasonable, impartial
observer
 Whistleblower has reason to believe that revealing the threat will
prevent harm at reasonable cost
 Based on a moral requirement to prevent harm
 Three paradoxes
 Cost of whistle-blowing provides no justification for central cases of whistle
blowing
 Ambiguity in the term “serious and considerable harm”
 Prevention of “harm” instead of “moral wrong” means the conditions meeting
standards of whistle-blowing are narrow
 Complicity theory
 Complicity presupposes wrong, not harm
 Creates a more compelling obligation
 There is a moral obligation to reveal information to the public when
 What you reveal derives from your work in an organization
 You are a voluntary member of that organization
 You believe that the organization has engaged in serious moral
wrongdoing
 You believe that your work for that organization will contribute to the
wrong if you do not reveal the information
 You are justified in beliefs 3 and 4
 Beliefs 3 and 4 are true
 Complicity versus Whistle-blowing
 Condition 1 means revealer not a spy
 Voluntary participant means revealer is not coerced
 Condition 3 means moral wrong, not harm
 Condition 4 does not require prevention, only belief that behavior is wrong
 Condition 5 requires truth revealer to be justified and correct about moral wrong
 Complicity does not require going through channels
 No circumstances of morally permitted, but not required with complicity theory
Lecture Four
 Chapter Five
Marketing and Disclosure of Information
 Overview
 Marketing and Disclosure
 Advertising and Behavior Control
 Information Disclosure in Sales
 Marketing to Vulnerable Audiences
 Types of misconduct
 Withholding of information
 Distortion of information
 Bluffing (misrepresentation)
 Due to information asymmetry (knowledge gap)
 Leads to questions regarding the effects of trust by customer
 Issues of autonomy
 Issues of harm
 Considerations for Determining Misrepresentation
 Sophistication of audience
 Standard practices/expectations
 Intention of informer
 Deceptive Advertising
 An advertisement which is potentially misleading or literally false is deceptive.
 Potentially misleading ads are difficult to evaluate because miscomprehension
may often occur.
 Miscomprehension is a problem for firms because the audience does not
understand the message being delivered.
 The FTC regulates deceptive advertising, but not miscomprehension.
 Tom L. Beauchamp
 Advertising should be persuasive, but should be judged to be morally inappropriate
when it is manipulative
 Three broad categories of influence:
 Coercion - When one party deliberately and successfully uses force or a credible
threat of unwanted, avoidable, and serious harm in order to compel a particular
response from another person.
 Persuasion - A successful appeal to reason in order to convince a person to
accept freely what is advocated. Does not involve use of deception.
 Rational persuasion
 Non-rational persuasion
 Manipulation - The act of getting people to do what is advocated without
resorting to coercion and without appealing to reasoned argument. Involves use
of deception.
 Central issue of manipulation
 How or through what psychological process a person responds to or is affected
by an attempt at influence
 NOT what is done as a result of influence
 BBA - Acceptable versus Unacceptable manipulation
 Continuum of free will
 Persuasion
 Manipulation
 Coercion
 Michael J. Phillips
 No sharp line between acceptable and unacceptable behavior
 Manipulative advertising
 Advertising that tries to favorably alter consumers’ perceptions of a
product by appeals to factors other than physical attributes or functional
performance
 Deceptive advertising
 False or misleading assertions or omissions that cause reasonable
consumers to form erroneous judgments about the nature of a product.
 Associative advertising – Favorably influencing a consumer’s perception of a
product by associating the product with a non-market good (e.g. sex, vigor,
power, status, etc.) that the product ordinarily cannot supply on its own. One
type of deceptive advertising.
 Robert L. Arrington
 Considers whether or not advertising illegitimately interferes with consumer
autonomy via manipulation.
 The author argues that
 generally it does not.
 advertising seldom controls behavior or creates wants that are not
rational or truly those of the consumer
 Puffery
 Exaggerated, fanciful or suggestive claims
 Some argue that the use of puffery constitutes manipulation
 Autonomous Desire
 We act autonomously when we act in a manner consistent with our
second- order desires (which are desires regarding first-order desires).
 Rational Desire and Choice
 a) Based on knowledge of relevant information
 Control or manipulation
 Free Choice (Acting Freely)
 a) We act freely when we do things for a reason
 Manipulation
 Intention
 C intends P to act in a certain way A
 Causality
 C’s intention is causally effective in bring about A
 Guaranteed Control of Outcome
 C intends to ensure that all of the necessary conditions of A are
satisfied
 Persuasive Advertising
 Persuasive advertising typically does not undermine autonomy
 Such persons act freely (on reasons)
 Such persons act on reasons they take to be good ones
 Such persons act on their second-order desires
 Such persons are not manipulated
 David M. Holley
 Obligations to disclose information on the part of a salesperson
 Opposed to professions where service providers are obligated beyond their
economic interests
 Salesperson’s role is as an advocate, thus the salesperson has an obligation to
present a favorable story
 Five levels of disclosure:
 Minimal Information: Buyer is solely responsible
 Modified Minimal Information: Disclose only what is necessary to avoid
risk of injury
 Fairness Rule: Safety information plus unavailable information
 Mutual Benefit Rule: Safety information plus information needed for a
“reasonable judgment”
 Maximal Information Rule: all relevant information
 Defending the Mutual Benefit Rule
 Mutual Benefit Rule allows the salesperson to meet his or her ethical obligations
 Allows all parties to protect their obligations
 Eliminates need to determine specific types of customers
 Might be an exception where buyer indicates he/she is uninformed
 Vulnerability
 Exception in the case of vulnerable customers
 Also, salesperson can be vulnerable as well
 George G. Brenkert
 Some consumers lack “market competency” and such vulnerable individuals should not
be targeted by marketers in ways that take advantage of their vulnerability
 Three objectives
 Explore the notion of vulnerability
 Design of marketing campaigns to protect vulnerabilities in some customers
 Marketing programs which violate the previous directive or morally unjustified
 Vulnerability as a four place relation
 Person (P) is vulnerable to another (moral or causal) agent (A) with respect to
harm (H) in a particular context (C)
 Distinct from susceptible
 Distinct from disadvantaged (but may be overlapping)
 Not generalized
 Vulnerable individuals
 Operate with conditions or incapacities that impede their ability as normal
market participants
 Physical vulnerabilities
 Cognitive vulnerabilities
 Less able to protect their interests
 Possess these vulnerabilities due to factors beyond their control
 Often unaware of their vulnerabilities
 Vulnerabilities render them susceptible to harm
 Advertising to Children
 Telemarketing Fraud
 Negligent Consumer Behavior
 Negligent behavior is composed of actions and inactions that may negatively
affect the long-term quality of life of individuals and society.
 This type of behavior can occur in two different contexts:
 Product Misuse
 Consumption of Hazardous Products
 Criteria for Determining Market Competency
 The knowledge that one should shop around
 Ability to determine differences in quality and the best price
 Knowledge of legal rights
 Knowledge of the products and their characteristics
 Appropriate resource
 Morally justified market relations
 Competition is free
 Participants do so voluntarily
 Competition is open
 Deception or fraud are not used
 Morally justified market relations
 require that all participants be capable of exhibiting market competency.
 a) Individuals who are simply lazy should not count as vulnerable.
 Not morally acceptable to market goods to especially vulnerable people with the
intention of taking advantage of their vulnerability
 Vulnerabilities
 Four types
 Physically vulnerable
 Cognitively vulnerable
 Motivationally vulnerable
 Socially vulnerable
 Due to factors beyond their control
 Render them susceptible to harm
 Implications
 Does NOT mean don’t market to vulnerable
 When condition is temporary, wait
 May not use a campaign that exploits special vulnerabilities
 May not rely on vulnerable to bring pressure to bear on non-vulnerable
 May not depend on others to prevent vulnerability from causing harm

 Irving A. Backman v. Polaroid Corporation
 Investors sued Polaroid for failing to disclose unfavorable information about
their Polarvision product.
 The court sided with Polaroid
 Sanfield, Inc. v. Finlay Fine Jewelry Corp.
 A local jewelry company (Sanfield) sued a national chain (Fine) for deceptive
marketing practices.
 The practice in question concerns pretending to offer large discounts on jewelry.
 Coca-Cola Company v. Tropicana Products, Inc.
 Coke (maker of Minute Made orange juice) sued Tropicana for misleading
television commercials.
 The court sided with Coke.
 Kasky v. Nike, Inc.
 Nike was accused of lying about its labor practices.
 Nike argued that all statements about labor practices were protected political
speech.
 The court disagreed and argued that the speech was unprotected commercial
speech for which Nike is accountable.
Lecture Five
 Chapter Six
Ethical Issues in Finance and Accounting
 Issues
 Need for reliable institutions to support economic exchange
 Information
 Transactions execution
 Freedom from deception
 Specific problems
 Malfeasance
 Information manipulation
 Information asymmetry
 Distinguishing between individual and organizational responsibility
 Robert E. Frederick and W. Michael Hoffman
 Defense of the idea that high risk investors should be required by law to engage the
services of an expert before they can invest in the securities market.
 High risk
 Subject to significant harm because of choices
 Unsophisticated
 Boatwright
 Examines several theories of motivation and deterrence in corporate
responsibility
 Concludes that liability is more effective as a deterrent when it is primarily
placed on shareholders and the corporation as a whole
 Sarbanes-Oxley Act –
Section 302
 CEO and CFO personally certify review of reports submitted to the SEC
 To the officers’ knowledge reports are complete and accurate
 Reports fairly represent the financial situation of the company
 Effective internal controls have been established and evaluated
 Any deficiencies in the control system and any fraud involving management or
those involved in the control system have been disclosed to the auditors and the
audit committee of the board
 Sarbanes-Oxley Act – Section 304: The Forfeiture Provision
 In the event the corporation is forced to restate its earnings due to misconduct
with regard to financial reporting requirements, the CEO and the CFO shall
return to the company
 any bonus or incentive compensation
 any profits from the sale of securities in the 12-month period following the
issuance or filing of the report that contains the misreported earnings
 Sarbanes-Oxley Act – Section 404
 Management must assume responsibility for establishing and maintaining an
adequate system of internal control
 Management must assess the effectiveness of this system annually
 Title IX: The White-Collar Crime Penalty Enhancement Act of 2002 (WCCPEA)
 Increases the fines and sentences of a number of offenses, including fraud and
conspiracy
 Instructs the U.S. Sentencing Commission to revise the Federal Sentencing
Guidelines to reflect these changes and also contains penalties for violating the
certification provision
 Responsibility for wrongdoing
 Being answerable or accountable for a failure to perform some moral or legal
obligation deserving of punishment
 Problems of responsibility within modern corporations
 Fragmentation of decision making and action and diffusion of knowledge makes
it difficult to place responsibility
 Because corporate officers are agents of the shareholders, it is difficult to
determine whether that individual or the corporation as a whole should be held
responsible
 Individuals  generally held responsible for wrongdoing or facilitating the
commission of a crime
 Less serious cases  legal principle of respondeat superior has been applied,
where the principal is responsible for the actions of the agent
 Legal treatment of individual responsibility
 Three objectives
 To deter actions that cause harm to the public
 To secure compensation for wrongful harms (tort law)
 To seek appropriate punishment for criminal conduct by means of fines
and imprisonment
 Agency Theory, Transaction Cost Perspective
 The main objective of both government and market regulation is deterrence
 Four arguments for corporate liability
 Managerial resources problem
 Diversification problem
 Responsibility shifting problem
 Superiority of financial controls to internal controls
 Agency Theory, Transaction Cost Perspective – Argument 1
 Managers do not have the resources to pay fines that are substantial enough to
have a deterrent affect
 Optimal Penalty Theory
 Any fine capable of deterring must exceed a person’s expected return
divided by the probability of successful prosecution
 If this amount exceeds a person’s total assets, then the deterrent value of
any fine is significantly reduced
 Since corporations are more likely to have sufficient resources to pay
these fines it is better to hold the corporation liable and have the
corporation police for misconduct
 Agency Theory, Transaction Cost Perspective - Argument 2
 Managers are not diversified
 If managers are held liable, they would demand higher compensation in the form
of higher pay, indemnification, insurance, or some combination
 This will increase cost to the shareholders
 Since shareholders are diversified they can carry this risk at a lower cost than
managers
 Agency Theory, Transaction Cost Perspective – Argument 3
 The more responsibility that is shifted from shareholders to managers, the less
incentive shareholders have to carefully select and monitor managers
 Agency Theory, Transaction Cost Perspective – Argument 4
 The separation of ownership and control within corporations
 Often financial controls create stronger pressures on lower level employees than
internal sanctions for wrongdoing
 So, managers may often be less effective at policing employees than
shareholders who are in control of financial controls.
 Behavioral Law and Economics Approach
 Managers are not always rational decision makers
 Managers may not be aware that conduct is unethical or illegal
 Managers may be misled
 Managers may underestimate the likelihood of detection or the severity of
consequences
 Managers are vulnerable to bias
 Managers utilize heuristics
 Only threats to shareholders are sufficient to bring about corporate cultural
changes
 Issue of Responsibility in Aiding and Abetting
 Should gatekeeper institutions such as accounting firms be held liable for actions
brought against a corporation for which they have failed to fulfill their
gatekeeper responsibilities?
 Corporations are more likely to have borne the benefits of their impropriety and
will have less motivation to settle than the firm.
 This means that corporations may have leverage with which to coerce the firm in
question
 Firms often do not have control over the uses a corporation puts their services
to.
 For them to bear liability for actions out of their control is unfair.
 Since the activities of monitors and gatekeepers is often unclear and it is often
difficult to determine what constitutes aiding and abetting liability deterrence is
not particularly effective.
 Incentives that increase independence and provide oversight are often more
effective strategies.
 Robert W. McGee
 Examines the primary arguments for and against insider trading
 Concludes that there is not sufficient reason to believe that insider trading does
in fact cause harm,
 Concludes there is significant reason to believe that it may in fact be beneficial
 What is wrong with insider trading?
 Inside information is the information held by the board of directors, auditors,
and managers of a corporation
 Information is available to them solely due to their role inside the organization.
 Distinct from other kinds of specialized knowledge (such as that of doctors or
accountants) in that their knowledge is inherently public, even if most of us do
not possess it
 Is it ethical to profit from asymmetric information?
 Two camps –
 The utilitarian approach – if the winners exceed the losers or if the result
is a positive-sum game then profiting from such information is ethical.
 The process approach – if the process is ethical then profiting from such
information is ethical regardless of whether it is a positive-sum game.
 Fraud
 “intentional deception to cause a person to give up property or some lawful
right”
 Insider trading does not seem to fit the definition of fraud
 an inside trader has no duty to inform potential sellers or buyers of his
information
 Who does insider trading harm?
 Sellers who sell their stock to an inside trader would have sold to another
individual if he had not purchased it. In fact they may have received a better
price.
 If employers are harmed by insider trading they should sue the employee, not
utilize the government.
 What are the benefits of insider trading?
 Insider trading serves as a means of communicating market information which
makes markets more efficient.
 An acquirer in a takeover attempt may benefit when arbitragers accumulate
shares with the intention of selling them shortly, which may increase the
chances of a takeover’s success.
 Sellers who sell to the arbitragers may benefit from a higher price (since they
would have been selling anyway).
 Insider trading has a tendency to increase stock prices which is the goal of most
corporate management.
 Who is harmed by prohibitions on insider trading?
 The market operates less efficiently
 Hostile takeovers will be more difficult and since they generally tend to benefit
by hostile takeovers, shareholders lose out.
 Laws incur compliance and escape costs (i.e. legal and accounting fees).
 Taxpayers are adversely affected due to increased policing expenses.
 Further, since the risk-to-benefit ratios are so high, policing will never be
particularly effective.
 Leveling the Playing Field
 “The market should be fair to all participants, meaning that the asymmetry of
information should be minimized.”
 Ricardo’s theory of comparative advantage – penalizing those who are better at
something or subsidizing those who are worse at something results in inefficient
outcomes and is unfair to some groups.
 Reduces efficiency and violates rights.
 United States, Petitioner v. James Herman O’Haga
 In 1988 O’Hagan purchased 2,500 options to purchase Pillsbury stock
 Used information he gathered while working as local counsel representing Grand
Met
 Based on a potential tender offer for Pillsbury Company common stock
 When offer was made public the stock rose $21 and O’Hagan sold his
outstanding shares
 The court concluded that O’Hagan was in violation of the SEC laws governing
insider trading

 Chapter Eight
Ethical Issues Regarding the Natural Environment
 Tom L. Beauchamp, Norman E. Bowie and Denis Arnold
 Approaches to environmental decision making
 Utilitarian
 Is there more good than harm?
 Who is affected?
 Long run as well as short run
 Deontological
 Is there a violation of rights?
 Minimize harm while maximizing positive effects and respecting the
rights of those involved
 Positive as well as negative effects
 Richard T. DeGeorge
 Decisions by uninformed public versus decisions by biased technicians
 Environmental harm
 Responsibility for environmental protection
 Government
 Public
 Businesses
 Richard T. DeGeorge
 Approaches to handle pollution ethically:
 Those who produce the harm should reimburse those harmed for the harm
done.
 Allowing a firm to pollute, but the firm must attempt to eliminate the pollution
or clean it up before it damages anyone.
 Prevent pollution at the source.
 R. Edward Freeman, Jessica Pierce, and Richard Dodd
 Can a business act ethically and protect the environment, yet still make a profit?
 Wagering our children's future
 Environmental Gridlock
 Disagreement on science
 Disagreement on public policy
 Disagreement on underlying values
 Shades of Green
 Light Green Principle – Creating and sustaining a competitive advantage by
ensuring your company is in compliance with the law. (Also Legal Green)
 Market Green Principle – Creating and sustaining a competitive advantage by
paying attention to the environmental preferences of customers.
 Stakeholder Green Principle – Creating and sustaining a competitive advantage
by responding to the environmental preferences of stakeholders.
 Dark Green Principle – Creating and sustaining value in a way that sustains and
cares for the earth
 This principle commits a company to being a leader in making
environmental principles a fundamental basis for doing business.
 Norman E. Bowie
 Friedman like view
 Companies have no special obligations to protect the environment above what is
required by law
 Obey statues
 Avoid negligence
 Two important qualifications:
 businesses should not lobby against the wishes of the people
 businesses should help educate consumers about the environment
 Economic Argument
 Citizens determine environmental laws.
 Consumers typically reject green products as too expensive or too much trouble
to use.
 Businesses cannot be expected to oppose such consumer preferences.
 Therefore, businesses have no special obligations to protect the natural
environment above the law.
 First Qualification
 Businesses should not oppose environmental legislation.
 Business escapes special obligations because it is willing to respond to
consumer preferences.
 Consumers often cannot express their preferences in the market.
 The political arena is the only other viable forum in which consumers
express their preferences.
 Business lobbying interferes with the expression of these preferences.
 Since point 4 is inconsistent with point 1, business should not intervene
in the political process.
 Second Qualification
 Business has a special obligation to educate consumers about
environmentally responsible choices.
 Business has no problem leading consumer preferences.
 Business has expertise about environmental matters.
 Business would benefit from doing so if appropriate legislation were the
result.
 Denis G. Arnold and Keith Bustos
 Responds to Bowie
 Provides factual background regarding global climate change
 Five main lines of argument
 Argument 1
 Many nations in which MNCs conduct business lack democratic
institutions, so those citizens have little recourse. The preferences of U.S.
citizens impact non-U.S. citizens, yet the preferences regarding harm to
non-U.S. citizens remain unaccounted for.
 Argument 2
 It is unreasonable to think consumers have an accurate understanding of
the causes of global warming. Consumer preferences can often be
modified via marketing.
 Argument 3
 Consumer preferences are not always satisfied by businesses (e.g., hybrid
mini-vans).
 a) Consumers often have no choice, such as in energy consumption
 b) Consumers who prefer to purchase energy from sustainable sources
often have no options.
 Argument 4
 Harm to others:
 a) Preferences typically entail a claim on resources.
 b) Preference satisfaction of U.S. consumers makes use of a per-capita
disproportionate level of atmospheric resources, so the harm caused to
non-U.S. citizens will be disproportionate to their use of atmospheric
resources.
 c) Harm to future generations is not considered.
 Argument 5
 Fairness: It is unfair to require others to pay for the costs of benefits one
has secured for oneself without their un-coerced consent.
 a) The transportation and electricity generation sectors should be held
accountable for their GHG emissions to date.
 Conclusions
 Target goals for reduced emissions in the transportation and energy sectors
corresponding to past emissions
 Appeals to standards of fairness
 Appropriate tax incentives for CO2 emissions reductions
 Significant penalties for failing to meet CO2 emissions targets
 Joseph DesJardins
 Opposes Bowie’s argument and argues that we can do more.
 Defends the position that businesses have an ethical obligation to engage in
sustainable development
 Provides an economic defense of sustainable development
 Major choice point
 Assume that there are no biophysical limits to economic growth.
 Deny the world’s poor a prosperous lifestyle.
 Pursue sustainable economic activity.
 Sustainable Development
 Economic activity that aims to meet the needs of the present without
compromising the ability of future generations to meet their own needs.
 Distinguished from mere economic growth, which seeks simply to increase the
gross amounts of goods and services.
 Types of Sustainable Development
 Biomimicry: Waste from production cycle is recycled in a closed loop.
 Services rather than production (e.g., Interface Corporation).
 Natural Capital: Harvest the ecological “interest” not the “capital.”
 Case for sustainable development
 Eliminating waste.
 Reducing operating expenses.
 Avoiding legal liability.
 United States, Petitioner v. Bestfoods et al.
 Deals with the issue of whether or not a parent corporation may be held liable
for the polluting activities of subsidiaries
 Dourt determined that the extent of liability depends on the level of active
control by the corporation
 Christine Todd Whitman, Administer of EPA, et al., Petitioners, v. American Trucking
Associations, Inc., et al.
 Concerns the question of whether or not the government must take into account
the costs to business of implementing new environmental protection policies.
 The court ruled that the government does not need to take into account such
costs.
Lecture Six
 Chapter Nine
Ethical Issues in International Business
 Topics for Chapter 9
 Ethical Principles for Multinationals
 Ethical Relativism
 Alternative Standards of Conduct
 Norms of home country
 Norms of host country
 Profitable choice
 Morally appropriate choice
 Norman Bowie
 General multinational corporation obligations
 Distinctive obligations
 Relativism
 Morality of the marketplace
 When in Rome do as the Romans do?
 Only guide is what is legal and appropriate in that country
 Justification: In some instances, laws and regulations may be stricter (e.g.,
Europe have stricter environmental laws)
 If things are sufficiently different, then it is (maybe) necessary to apply different
standards (e.g., US companies complied with Arab firms not to post women for
fear of losing lucrative contracts)
 Is the adage wholly justified?
 No – because a country permits bribery, unsafe working conditions, and violation of
human rights does not mean that these practices are acceptable
 How can one justify the wages paid by multinationals to less developed countries when
these wages are a fraction of what is paid at home
 Are there some universal standards?
 Yes – most cultures value
 Human dignity, economic well-being, truthfulness, sense of justice and fairness
 A document on global ethics produced by two religious leaders cites two universal
principles
 Every human being must be treated humanely
 What you do not wish to be done to yourself, do not do to others
 DeGeorge – developed 7 principles
 Multinationals (MNCs) should do no harm
 MNCs should produce more good than bad for the host country
 MNCs should contribute by their activities to the host country’s development
 MNCs should respect the right of their employees
 MNCs should pay their fair share of taxes
 To the extent that the local culture does not violate moral norms, MNCs should
respect these norms
 MNCs should cooperate with the local governments in the development and
enforcement of background institutions
 Donaldson – Minimal duties of MNCs
 MNCs have an obligation to respect fundamental international rights
 Negative harm principle – MNCs have an obligation not to add to deprivation or
suffering
 Rational empathy test – put yourself in the shoes of the foreigner
 International standards for behavior
 Agreement already exists
 Standards are necessary for society and exchange
 Business activity presupposes some moral standards anyway
 Are international norms appropriate?
 Standards might destroy culture
 Moral free space is available for difference
 Denis Arnold
 Defends a Kantian view of the human rights obligations of corporations
 Defends Kantian view against criticism
 Criticizes one recent effort by the United Nations to identify the human rights
obligations of corporations
 Human Rights Principle
 Human rights are different from legal rights in that they do not depend upon
state sanction for their legitimacy
 United Nations positions on human rights
 The Universal Declaration of Human Rights (1948) is aimed at states, not
corporations
 Draft Norms on the Responsibilities of Corporations and Other Business
 Enterprises with Respect to Human Rights (2003) is aimed at corporations.
 They are too wide and imprecise
 They fail to distinguish between basic obligations and those
actions that are good to perform but not mandatory.
 Basic rights
 Are inalienable
 Are attributable to persons
 Kantian basis for rights
 Entails negative duties such as avoiding physical force or coercion
 Entails positive obligations like ensuring positive well-being
 Freedom: Individuals should be free to as much freedom as is compatible with a
like freedom for all.
 Human capabilities necessary to function well: life, physical health, freedom of
thought and expression, and the ability to pursue one’s conception of the good.
 The right to physical security and freedom of movement.
 The right to non-discrimination on the basis of arbitrary characteristics
such as race, sex, religion, ethnicity, and sexual orientation.
 The right to freedom of association and collective bargaining.
 The right to fair treatment.
 The right to subsistence
 The right to develop basic human capabilities.
 Universality of rights concepts
 Human rights are not merely a Western concept.
 Even if all Asian nations denied the validity of human rights arguments, this would not
entail that they were correct.
 Patricia H. Werhane
 Argues for caution in extending Western style capitalism abroad
 Provides several examples of where the unreflective extension of Western style
capitalism has led to bad outcomes
 Mental Models
 Mental representations, cognitive frames, or mental pictures that frame and
organize human experience
 Mechanisms whereby humans are able to generate descriptions of system
purpose and form
 Explanations of system functioning and observed system states
 Predictions of future system states.
 Many possible ways to organize economic activity
 Our assumption in the US is that we have extraordinary success, and that others
will be improved if we offer assistance in doing things our way
 American models of free enterprise and property cannot be transferred
uniformly throughout the world without unforseen consequences.
 Analogous to biological transfer from one context to another
 Euclyptus trees
 Dandelion
 Doesn’t mean that it cannot be transferred at all
 We must seek some moral minimums
 to remove human suffering, abject poverty, preventable disease, high
mortality and violence
 We must tread lightly and carefully when we act in alien cultures
 David Hess & Thomas Dunfee
 Describe the harm cause to local communities by corruption,
 Discuss international treaties banning bribery
 Highlight the efforts of Shell to abolish slavery
 OECD Convention on Combating Bribery of Foreign Public Officials
 Ratified by 34 countries
 Makes it illegal to bribe abroad
 Transparency International Reports that only 19% of executives knew about the
convention
 Just 27% reported reduced corruption after the convention
 Foreign Corrupt Practices Act
 U.S. law that went into effect in the U.S. in 1977
 Currently U.S. corporations are the 9th most likely to bribe foreign officials (out
of 21)
 C2 Principles
 Adapted by the Caux Roundtable
 Three themes:
 Policies
 Procedures
 Publication
 Shell’s Anti-Corruption Policies
 Studied best practices at 15 companies
 Put in place a no-bribes policy
 Promulgates and educates within the organization
 Defines bribery
 Terminates and prosecutes employees that pay bribes
 Supreme Court of Texas, Dow Chemical Company and Shell Oil Company v. Domingo
Castro Alfaro et al.
 Concerns the question of whether or not a Texas based corporation can be held
accountable in Texas courts for harmful actions conducted abroad, or whether
this is inconvenient for such corporations and thus should not be allowed
 The majority of the court found that corporations should be held accountable for
overseas activities in Texas courts.
 United States Court of Appeals for the Ninth Circuit, Doe 1 vs. Unocal
 Concerns Unocal’s involvement with forced labor and human rights abuses in
Myanmar (Burma).
 Court found that Unocal could be held liable for complicity with such practices in
U.S. courts