Chapter 4:
Ethics and Business
Decision Making
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Introduction
• Businesses should be careful to do more
than comply with the laws.
• Consumers and shareholders are requiring
companies to do what is “ethical” which
sometimes may impose additional duties
required by law.
• Historically, law and ethics were
synonymous-today they may not be.
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§1: Nature of Business Ethics
• Ethics is the study of right and wrong
behavior in the world of business; the
fairness, rightness or justness of a course of
conduct.
• In business, ethical decisions are the
application of moral and ethical principles
to the marketplace and workplace.
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Defining Business Ethics
• Morals are universal guidelines or
“revealed” truths. Ethics is a reasoned set of
principals of conduct derived from morals.
• Ethical Reasoning - the process by which
an individual links her moral and ethical
convictions to the choice of actions to be
taken in a particular situation.
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Conflicting Duties
• Directors and Officers owe a complex set of
ethical duties to the company, shareholders,
customers, community, employees, and
suppliers.
• When these duties conflict, ethical
dilemmas are created.
• Case 4.1: Varity v. Howe (1996).
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Public Opinion and Ethics
• A company’s actions can come under quick
scrutiny with the power of email and the
internet.
• When a corporation embarks on a course of
business deemed “unethical” by a special
interest group, the news will spread around
the world in a matter of minutes.
• 1 in 9 investors have “socially responsible”
investments. Gallup Poll.com.
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§ 2: Approaches to
Ethical Reasoning
• Duty-Based Ethics—derived from religious
and philosophical principles:
– Religious Ethical Standards.
– Kantian Ethics.
– Rights Principles.
• Outcome-Based Ethics (“utilitarianism”)
seeks to ensure the greatest good for the
greatest number.
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Religious Ethical Standards
• The rightness or wrongness of an action is
usually judged according to its conformity
to an absolute rule that commands a
particular form of behavior.
• The motive of the actor is irrelevant in
judging the rightness or the wrongness of
the action.
• These rules often involve an element of
compassion.
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Kantian Ethics
• Premised on the belief that general guiding
principles for moral behavior can be derived
from human nature.
• The categorical imperative is a central
postulate of Kantian ethics.
– The rightness or wrongness of an action is
judged by estimating the consequences that
would follow if everyone in a society
performed the act under consideration.
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Rights Principle
• This principle derives from the belief that
every duty gives rise to a corresponding
right.
• The belief in fundamental rights is a deeply
embedded feature of Western culture.
• The ethicality of an action is judged by how
the consequences of the action will affect
the rights of others.
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Utilitarianism
• An action is ethical based on whether it
produces the greatest good for the greatest
number of people.
• A “cost-benefit” analysis must be performed
to determine the effects of competing
alternatives on the persons affected.
• The best alternative is the one that produces
the greatest good for the greatest number.
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§3: Ethical Decision Making
• A sound ethical decision-making model will
include consideration of:
– More than the “legal minimum.”
– The ethicality of the contemplated action, as
determined by reference to the relevant code of
ethics, established ethical priorities, and public
opinion.
– Case 4.2: NY State Society of CPA’s v Eric
Louis Associates (1999).
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Corporate Compliance
• A number of contexts, within the employeremployee relationship, are fraught with
ethical considerations, such as:
– Having a system in place to detect, prevent,
eliminate, and punish behavior of a harassing
nature toward employees.
– Avoiding wrongful discharge, either actual or
constructive.
– Adhering to ethical principles during corporate
restructuring and downsizing.
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Codes Of Ethics
• Adopted by business entities as a way to:
– Provide standard guidance to executives and
managers.
– Take into account the duties owed by the
business to its various stakeholders.
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Ethical “Gray Areas”
• Sometimes whether an action is legal or
ethical depends on how a court or
administrative agency interprets a statute.
What if different courts disagree?
– Case 40.3: Pavlik v. Lane Ltd. (1998).
• If managers, in good faith, believe they are
complying with a statute and later are ruled
against, was their action unethical?
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§4: Maximum vs.
Optimum Profits
• Ethical priorities of the executive’s
institution will have an effect on whether
she chooses maximum profits versus
“optimum profits.”
• The sacrifice of some profitability resulting
from adherence to an institution’s ethical
and legal priorities produces what business
ethicists refer to as optimum profits.
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§5: The Ever-Changing
Ethical Landscape
• What causes a societies’ ethics to change?
• Seventy-five years ago a corporation’s ethical duty
was only to its shareholders and maximize profits.
Only two questions were asked: is it legal? Is it
profitable?
• The globalization of business impacts US
companies, suppliers, wages of foreign workers and
consumers.
• Foreign Corrupt Practices Act (1977).
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Focus on Ethics
• How can an executive know what is
“ethical” in a particular business decision?
• Obstacles to ethical business behavior.
• Ethics and the Corporate Environment.
• Corporate “Social Responsibility”.
• Does it “pay” to be Ethical today?
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Law on the Web
• Ethics at the Corporate Governance Website.
• Ethics at DePaul University.
• The U.N. Global Compact on Ethics and
Human Rights.
• U.S. Law, Regulations and Agencies (at Lex
Mundi).
• Legal Research Exercises on the Web.
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