© 2011 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. 1 Chapter 8: Ethics and Business Decision Making

2 © 2011 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. Learning Objectives What is business ethics and why is it important? How can business leaders encourage their companies to act ethically? How do duty-based ethical standards differ from outcome-based ethical standards? What are six guidelines that an employee can use to evaluate whether his or her actions are ethical? What types of ethical issues might arise in the context of international business transactions?

3 © 2011 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. 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. Business Ethics

4 © 2011 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. 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. Why is Business Ethics Important?

5 © 2011 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. Business Ethics Moral Minimum: minimum standard for ethical business behavior really means bare compliance with the law. “Gray Areas” in the Law: when the law is “silent” on an actions legality. –In addition, courts decide on a case by case basis, looking for “reasonable” acts or “foreseeable” results.

6 © 2011 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. Business Ethics Short-Run Profit Maximization. –Some argue that a corporation’s only goal should be profit maximization. –Corporate executives should distinguish between short-term and long-term profit maximization. Case 8.1 United States v. Skilling Skilling’s conviction was upheld, Court rejected exception to the “honest-services fraud” for keeping the stock prices high.

7 © 2011 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. Attitude of Top Management. –Management must be committed to creating an ethical company. –Management must set realistic goals for production. –Management must deal with unethical issues quickly (Unethical) Behavior of Owners and Managers. Periodic Evaluation. Importance of Ethical Leadership

8 © 2011 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. Creating Ethical Codes of Conduct Codes Must be Well-Written. Companies Should Provide Ethics Training to Employees. Sarbanes-Oxley Act and Web-Based Reporting. –SO requires confidential ethics reporting systems to “raise red flags” about practices.

9 © 2011 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. Ethical Transgressions by Financial Institutions Corporate Stock Buybacks. –Many of the greatest financial institutions have gone bankrupt, taken over by the federal government, or bailed out by U.S. taxpayers. –Buyback: management believes stock value is “below fair value.” Instead of issuing dividends, it buys its own shares on the open market, boosting the price of the stock. –Executives benefit because the value of their stock options goes up.

10 © 2011 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. Ethical Transgressions by Financial Institutions Bonuses. –A Perverse System. –Bonuses and Salaries before the Crisis. –Some Bonuses were paid Early. –Congress Acts to Limit Bonuses in the American Recovery and Reinvestment Tax Act of 2009.

11 © 2011 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. Duty Based Ethics - derived from religious and philosophical principles. –Religious Ethical Standards  –Kantian Ethics  –Rights Principles  Outcome-Based Ethics - seek to ensure a given outcome. –Utilitarianism. Approaches to Ethical Reasoning

12 © 2011 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. 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. Religious Ethical Standards

13 © 2011 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. 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. Kantian Ethics

14 © 2011 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. 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. Principle of Rights

15 © 2011 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. An action is ethical based on whether it produces the greatest good for the greatest number of people upon which it has an effect. 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. Outcome-Based Ethics: Utilitarianism

16 © 2011 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. Corporate Social Responsibility Corporations should be interested in impact on civil rights, environment, consumer protection, employee safety and welfare. –Stakeholder Approach. –Corporate Citizenship. Case 8.2 Fog Cutter Capital Group, Inc. vs. Securities Exchange Commission. SEC’s decision was not arbitrary, capricious, or abuse of discretion. Firm just focused on its CEO and its shareholder profits.

17 © 2011 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. Making Ethical Business Decisions Six Guidelines: –1. The Law. –2. Rules and Procedures. –3. Values. –4. Conscience. –5. Promises. –6. Heroes.

18 © 2011 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. Making Ethical Business Decisions Practical Solutions to Corporate Ethics Questions. –1. Make Inquiry. –2. Broad Discussion with all stakeholders represented. –3. Decision: come to consensus. –4. Justification: does the consensus withstand moral scrutiny? –5. Evaluation: do the solutions satisfy corporate values and shareholders?

19 © 2011 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. American companies must be trained in cross-cultural business practices. Monitoring the Employment Practices of Foreign Suppliers. –Corporate Watch groups can disseminate information instantly around world. Foreign Corrupt Practices Act. –Bribes and Accounting Practices. Business Ethics on A Global Level