Chapter 4: Ethics and Business Decision Making

1. Chapter 4:Ethics and Business Decision Making

2. 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.

3. §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.

4. 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.

5. 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).

6. 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.

7. § 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.

8. 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.

9. 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.

10. 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.

11. 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.

12. §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).

13. Corporate Compliance • A number of contexts, within the employer-employee 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.

14. 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.

15. 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?

16. §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.

17. §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).

18. 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?

19. 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.