Chapter 2: Ethics and
Business Decision Making
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
© 2013 distributed
Cengage Learning.
All Rights
Reserved.
May
be copied,
or duplicated,
in whole
or in part, except
license
with a certain
product
or service
or not
otherwise
on a scanned,
password-protected
website
for classroom
use. for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Business Ethics
 Ethics is the study of right and wrong
behavior; whether an action is fair,
right or just.
 In business, ethical decisions are the
application of moral and ethical
principles to the marketplace and
workplace.
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
2
Business Ethics
 Why Is Business Ethics Important?
• Directors and Officers owe a complex
set of ethical duties to their
stakeholders (internal and external).
• When these duties conflict, ethical
dilemmas are created.
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
3
Business Ethics
 The Moral Minimum.
• Normally considered as mere
compliance with the law.
 “Gray Areas” in the Law.
• Make it difficult for companies to
navigate and forecast.
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
4
Business Ethics
 Short-Run Profit Maximization.
• Some argue a businesses only goal
should be to maximize profit. But
executives need to distinguish between
short-term and long-term maximization.
• CASE 2.1 UNITED STATES V. SKILLING
(2010). What did Skilling do that was
unethical?
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
5
Business Ethics
 “Gray Areas” in the Law.
• Make it difficult for companies to
navigate and forecast.
• CASE 2.2 MATHEWS V. B AND K FOODS,
INC. (2011). What would you have done if
you were the manager? If you were the
employee?
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
6
Business Ethics
 Importance of Ethical Leadership.
• Attitude of Top Management.
• Behavior of Owners and Managers.
• CASE 2.3 KRASNER V. HSH NORDBANK
AG (2010). Did the plaintiff prove the
incidents and environment of sexual
favoritism were related to his gender?
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
7
Business Ethics
 Creating Ethical Codes of Conduct.
• One of the most effective ways to
promote ethical behavior in an
organization. Ethics Training for
Employees.
• The Sarbanes-Oxley Act and web-based
reporting systems (EthicsPoint).
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
8
Ethical Transgressions by
Financial Institutions
 Corporate Stock Buybacks.
• Rationale: Corporate management
believes stock is undervalued, so
instead of issuing dividends it buys
stock in the market, thus boosting share
value.
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
9
Ethical Transgressions by
Financial Institutions
 Startling Executive Decisions at
American International Group (AIG).
 Executive Bonuses.
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
10
Approaches to Ethical Reasoning
 Duty Based Ethics - derived from
religious and philosophical principles.
• Religious Ethical Standards. 
• Kantian Ethics. 
• The Principle of Rights. 
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
11
Approaches to Ethical Reasoning
 Duty-Based Ethics.
• 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.

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
12
Approaches to Ethical Reasoning
 Duty-Based Ethics.
• Religious Ethical Standards.
• 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.
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
13
Approaches to Ethical Reasoning
 Duty-Based Ethics.
• Religious Ethical Standards.
• 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.
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
14
Approaches to Ethical Reasoning
 Duty-Based Ethics.
• 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. 
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
15
Approaches to Ethical Reasoning
 Duty-Based Ethics.
• Kantian Ethics (cont’d).
• 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.
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
16
Approaches to Ethical Reasoning
 Duty-Based Ethics.
• Principle of Rights.
• Belief that every duty gives rise to a
corresponding right, deeply embedded in
Western culture.
• Ethicality of an action is judged by how
the consequences of the action will affect
the rights of others.
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
17
Approaches to Ethical Reasoning
 Outcome-based Ethics: Utilitarianism.
• Action is ethical based on whether it
produces the greatest good for the
greatest number of people.
• If it affects the majority adversely, it is
morally wrong.
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
18
Approaches to Ethical Reasoning
 Outcome-based Ethics: Utilitarianism.
• Applying the utilitarian theory requires:
• Determination of individuals affected;
• Cost-Benefit analysis, and
• Choice among alternative actions
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
19
Approaches to Ethical Reasoning
 Corporate Social Responsibility.
• Those who manage corporations should be
accountable to society for their actions.
• Stakeholder Approach: corporations have a
duty not only to shareholders but other groups
(stakeholders) affected by corporate actions. 
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
20
Approaches to Ethical Reasoning
 Corporate Social Responsibility
(cont’d).
• Corporate Citizenship: promote goals
that society considers worthwhile and
take positive steps towards solving
problems. 
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
21
Approaches to Ethical Reasoning
 Corporate Social Responsibility
(cont’d).
• Corporate Citizenship.
• A Way of Doing Business. Poll found that
70% of executives polled agreed that
corporate citizenship should be a priority.
• But not all socially responsible activities
benefit a company.
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
22
Approaches to Ethical Reasoning
 Corporate Social Responsibility
(cont’d).
• Corporate Citizenship.
• Employee Recruiting and Retention.
Younger employees look for firms that are
committed to socially responsible goals
and community projects.
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
23
Making Ethical Business Decisions
 George S. May company has
provided six guidelines:
• The law.
• Rules and procedures.
• Values.
• Conscience.
• Promises.
• Heroes (role models).
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
24
Practical Solutions to
Corporate Ethics Questions
 Corporate-Ethics.us has devised a
procedure:
• Inquiry.
• Discussion.
• Decision.
• Justification.
• Evaluation.
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
25
Business Ethics on
a Global Level
 American companies must be trained
in cross-cultural business practices.
 Monitoring of Employment Practices
of Foreign Suppliers.
• Corporate Watch groups can hold
corporations accountable.
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
26
Business Ethics on
a Global Level
 Foreign Corrupt Practices Act.
• Prohibition Against Bribery of Foreign
Officials. But FCPA does not permit
“grease” payments to minor officials.
• Nor does FCPA prohibit payments to
foreign officials which are lawful in that
country.
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
27
Business Ethics on
a Global Level
 Foreign Corrupt Practices Act (cont’d).
• Nor does FCPA prohibit payments to
private companies, unless the US firm
knows the payments will go to an
official. 
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
28
Business Ethics on
a Global Level
 Foreign Corrupt Practices Act (cont’d).
• Bribery by Foreign Companies.
• Accounting Requirements.
• Penalties for Violations: companies up to
$2 million in fines, individuals up to
$100,000, and up to 5 years in prison.
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
29