Chapter 7
Business
Ethics
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Bernard Ebbers
o Bernard Ebbers built WorldCom into a global
telecommunications giant
o Ebbers used use all of his WorldCom stock as
collateral for bank loans
o In 2000 Ebbers gave the first in a string of
instructions to report false revenues and use
accounting tricks to disguise rising expenses
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Bernard Ebbers
o Ebbers testified that he had no knowledge of the
fraud, but five of his subordinates testified against
him
o Ebbers was sentenced to 25 years in prison for
securities fraud, unprecedented for a white-collar
crime
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What are Business Ethics?
o Ethics: The study of good and evil, right and wrong,
and just and unjust
o Business ethics: The study of good and evil, right
and wrong, and just and unjust actions in business
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What are Business Ethics?
o All managers face difficult ethical conflicts
o Applying clear guidelines resolves the majority of
them
o Ethical traditions that apply to business support truth
telling, honesty, protection of life, respect for rights,
fairness, and obedience to law
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What are Business Ethics?
o Eliminating unethical behavior may be difficult, but
knowing the rightness or wrongness of actions is easy
o Some ethical decisions are troublesome because
although basic ethical standards apply, conflicts
between them defy resolution
o Some ethical issues are hidden and hard to recognize
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Two Theories of Business Ethics
o Theory of amorality: The belief that business should
be conducted without reference to the full range of
ethical standards, restraints, and ideals in society
o Theory of moral unity: Business actions are judged
by the general ethical standards o society, not by a
special set of more permissive standards
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Figure 7.1 - Major Sources of Ethical
Values in Business
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Religion
o The great religions converge in the belief that a divine
will reveals the nature of right and wrong behavior in
all areas of life, including business
o Christian managers often seek guidance in the Bible
o In Islam the Koran is a source of ethical inspiration
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Philosophy
o Even after two millennia, there remains considerable
dispute among ethical thinkers about the nature of
right action
o The great Catholic theologians St. Augustine and St.
Thomas Aquinas both believed that humanity should
follow God’s will
o Correct behavior in business and in all worldly activity
was necessary to achieve salvation and life after death
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Philosophy
o Immanuel Kant tried to find universal and objective
ethical rules in logic
o Jeremy Bentham developed the idea of utilitarianism
as a guide to ethics, validating two dominant
ideologies: democracy and industrialism
o John Locke developed and refined doctrines of
human rights and left an ethical legacy supporting
belief in the inalienable rights of human beings
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The Realist School of Ethics
o The realists believed that both good and evil were
naturally present in human nature
o Human behavior would inevitably reflect this mixture
o Niccolò Machiavelli argued that important ends
justified expedient means
o Herbert Spencer supported a harsh ethic that justified
vicious competition among companies because it
furthered evolution
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The Realist School of Ethics
o Friedrich Nietzsche said that “nice” ethics were
prescriptions of the timid, designed to fetter the
actions of great men whose irresistible power and will
were regarded as dangerous by ordinary mortals
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Cultural Experience
o Every culture transmits between generations a set of
traditional values, rules, and standards that define
acceptable behavior
o Civilization is a cumulative cultural experience
consisting of three stages:
o Hunting and gathering stage
o Agricultural stage
o Industrial stage
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Ethical Variation in Cultures
o Ethical values differ among nations as historical
experiences have interacted with philosophies and
religions to create diverging cultural values and laws
o Ethical universalism: The theory that because
human nature is everywhere the same, basic ethical
rules are applicable in all cultures
o There is some room for variation in the way these rules
are followed
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Ethical Variation in Cultures
o Ethical relativism: The theory that ethical values are
created by cultural experience
o Different cultures may create different values and there
is no universal standard by which to judge which
values are superior
o Because of globalization, corporations struggle with
the question of how to apply conduct codes across
cultures
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Law
o Laws codify, or formalize, ethical expectations
o Corporations and their managers face a range of
mechanisms set up to:
o Deter illegal acts
o Punish offenses
o Rehabilitate offenders
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Damages
o In civil cases courts may assess damages, or
payments for harm done to others by a corporation
o Compensatory damages: Payments awarded to
redress actual, concrete losses suffered by injured
parties
o Punitive damages: Payments in excess of a wronged
party’s actual losses to deter similar actions and punish
a corporation that has exhibited reprehensible conduct
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Criminal Prosecution of Managers and
Corporations
o Managers may be prosecuted for criminal actions
undertaken in the course of their employment
o Corporations are criminally liable for corrupt actions
or omissions of managers if those actions are
intended to benefit the corporation
o Criminal prosecution of corporations and their
executives is exceptionally difficult
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Criminal Prosecution of Managers and
Corporations
White-collar crime
A nonviolent economic offense of cheating and deception
done in the course employment for personal or corporate
gain
Deferred prosecution
agreement
An agreement between a prosecutor and a corporation to
delay prosecution while the company takes remedial
actions
Nonprosecution
agreement
An agreement in which U.S. attorneys decline prosecution
of a corporation that has taken appropriate steps to report
a crime, cooperate, and compensate victims
Monitor
A person hired by a corporation to oversee fulfillment of
conditions in an agreement to avoid criminal indictment
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Sentencing and Fines
o In 1991 the U.S. Sentencing Commission released
guidelines for sentencing both managers and
corporations
o Managers can go to prison, be fined, put on
probation, given community service, make restitution,
or be banned from working in their occupations
o Corporations cannot be imprisoned, but they can be
fined and their actions restricted
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Figure 7.2 - Four Internal Forces Shaping
Corporate Ethics
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Leadership
o The example of company leaders is perhaps the
strongest influence on integrity
o A common failing is for managers to show by their
actions that ethical duties can be compromised
o If the leader does something, an opportunistic
employee can rationalize his or her entitlement to do
it also
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Strategies and Policies
o A critical function of managers is to create strong
competitive strategies that enable the company to
meet financial goals without encouraging ethical
compromise
o Unrealistic performance goals can pressure those who
must make them work
o Reward and compensation systems can expose
employees to ethical compromises
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Corporate Culture
o Corporate culture: A set of values, norms, rituals,
formal rules, and physical artifacts that exists in a
company
o Three levels of corporate culture:
o Artifacts
o Espoused values
o Tacit underlying values
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Individual Characteristics
o Personality traits may be more important, but are less
studied in the literature of ethics
o The only personality trait extensively studied and
correlated with unethical behavior is
Machiavellianism
o The tendency of an individual to use self-centered,
immoral, manipulative behavior in a group
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How Corporations Manage Ethics
o
o
o
o
o
o
o
Establish standards and procedures
Create high-level oversight
Screen out criminals
Communicate standards to all employees
Monitor and set up a hotline
Enforce standards, discipline violators
Assess areas of risk, modify the program
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How Corporations Manage Ethics
Ethics and compliance program
A system of structures, policies, procedures, and
controls used by corporations to promote ethical
behavior and ensure compliance with laws and
regulations
Compliance approach
An ethics and compliance program that
emphasizes following rules in laws, regulations,
and policy.
Ethics approach
An ethics and compliance program that teaches
employees to make decisions based on ethical
values
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Concluding Observations
o Ethics is the study of good and evil
o The most important single factor in good corporate
ethics is the example of leaders, who shape strategies
and cultures
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