Business Ethics

Concepts & Cases

Manuel G. Velasquez
 Chapter One

Basic Principles: Ethics and Business

 INTRODUCTION
• This chapter presents an introduction to the basic
principles of ethics in general and shows how these
principles are relevant to businesses.
• It begins with a case study of Merck and Company,
discussing how they dealt with the problem of
developing a drug that was potentially life-saving but
which presented them with little, if any, chance of
earning a return on their investment.
 River Blindness
• The drug was Ivermectin, one of their best-selling animal
drugs.
• The potential market for the drug was those suffering
from river blindness an agonizing disease afflicting about
18 million impoverished individuals in Africa and Latin
America.
• The disease is particularly horrendous: worms as long as
two feet curl up in nodules under an infected person's
skin, slowly sending out offspring that cause intense
itching, lesions, blindness, and ultimately death (though
many sufferers actually commit suicide before the final
stage of the disease).
• The need for the drug was clear.
• However, the victims of river blindness are almost
exclusively poor.
• It seemed unlikely that Merck would ever recoup the
estimated $100 million it would cost to develop the
human version (named Mectizan) of the drug.
• Moreover, if there proved to be adverse human side
effects, this might affect sales of the very profitable
animal version that were $300 million of Merck’s $2
billion annual sales.
• Finally, Congress was getting ready to pass the
Drug Regulation Act, which would intensify
competition in the drug industry by allowing
competitors to more quickly copy and market
drugs originally developed by other
companies.
• Question: Was Merck morally obligated to
develop this drug?
 Ethical issues that
managers of modern
business organizations
must face.

MERCK & CO

STAKEHOLDERS
• Their managers felt, ultimately, that they
were.
• They even went so far as to give the drug
away for free.
• This story seems to run counter to the
assumption that, given the choice between
profits and ethics, companies will always
choose the former.
• The choice, however, may not be as clear-cut
as this dichotomy suggests.
• A more basic problem is the fact that the
ethical choice is not always clear.
• Merck, as a forprofit corporation, has
responsibilities to its shareholders to make a
profit.
• Companies that spend all their funds on
unprofitable ventures will find themselves out
of business.
• Ethical behavior is the best long-term business
strategy for a company—a view that has become
increasingly accepted during the last few years.
• Nor does it mean that ethical behavior is always
rewarded or that unethical behavior is always
punished.
• On the contrary, unethical behavior sometimes
pays off, and the good guy sometimes loses.
• To say that ethical behavior is the best long-range
business strategy means merely that, over the long
run and for the most part, ethical behavior can give a
company significant competitive advantages over
companies that are not ethical.
• The example of Merck and Company suggests this
view, and a bit of reflection over how we, as
consumers and employees, respond to companies
that behave unethically supports it.
 Ethics and Morality
• Ethics is the study of morality.
– Morality = The standards that an individual or a group has
about what is right and wrong, or good and evil.
• Example: B.F. Goodrich A7-D Fraud
– Moral Standards = norms about the kinds of actions that
are morally right and wrong, as well as the values placed
on what is morally good or bad.
– Non-Moral Standards: The standards by which we judge
what is good or bad and right or wrong in a non-moral way.
 B.F. Goodrich A7-D Fraud
• Kermit Vandivier was presented with a moral
quandary: he knew that Goodrich was
producing brakes for the U.S. government that
were likely to fail, but was required by his
superiors to report that the brake passed the
necessary tests.
• His choice was to write the false report and go
against his ethical principles, or be fired and
suffer the economic consequences.
• He chose the former, even though his moral
standards were in conflict with his actions.
• Such standards include the norms we have
about the kinds of actions we believe are right
and wrong, such as "always tell the truth."
• As Vandivier shows, we do not always live up
to our standards.
6ix Characteristics of Moral Standards
• Involve significant injuries or benefits
• Not established by authority figures
• Felt to be universal
• Should be preferred to other values including
self-interest
• Based on impartial considerations
• Associated with special emotions and
vocabulary.
• Ethics is the study of moral standards—the process
of examining the moral standards of a person or
society to determine whether these standards are
reasonable or unreasonable in order to apply them
to concrete situations and issues.
• The ultimate aim of ethics is to develop a body of
moral standards that we feel are reasonable to
hold—standards that we have thought about
carefully and have decided are justified standards for
us to accept and apply to the choices that fill our
lives.
• A normative study is an investigation that attempts
to reach normative conclusions—that is, conclusions
about what things are good or bad or about what
actions are right or wrong.
• In short, a normative study aims to discover what
ought to be.
• A descriptive study is one that does not try to reach
any conclusions about what things are truly good or
bad or right or wrong.
• Instead, a descriptive study attempts to describe or
explain the world without reaching any conclusions
about whether the world is as it ought to be.
 Ethics itself, on the
other hand, being
normative, attempts
to determine
whether or not
standards are
correct.
 What is Business Ethics?
• Broadly, ethics is the discipline that examines
one’s moral standards or the moral standards
of a society to evaluate their reasonableness
and their implications for one’s life.
• Business ethics is a specialized study of moral
right and wrong that concentrates on moral
standards as they apply to business
institutions, organizations, and behavior.
 Types of Ethical Issues
• Systemic—ethical questions about the social,
political, legal, or economic systems within
which companies operate.
• Corporate—ethical questions about a
particular corporation and its policies, culture,
climate, impact, or actions.
• Individual—ethical questions about a
particular individual’s decisions, behavior, or
character.
 Can ethical qualities be attributed to
corporations?
• View #1: corporations, like people, act intentionally
and have moral rights, and obligations, and are morally
responsible.
• View #2: it makes no sense to attribute ethical qualities
to corporations since they are not like people but more
like machines; only humans can have ethical qualities.
• View #3: humans carry out the corporation’s actions so
they are morally responsible for what they do and
ethical qualities apply in a primary sense to them;
corporations have ethical qualities only in a derivative
sense.
• In 2002, for example, the Justice Department
charged the accounting firm of Arthur Andersen for
obstruction of justice.
• Arthur Andersen was caught shredding documents
showing how they helped Enron hide its debt
through the use of several accounting tricks.
• Critics afterward claimed that the Justice
Department should have charged the individual
employees of Arthur Andersen, not the company,
because "Companies don't commit crimes, people
do."
Arguments Against Business Ethics
• In a free market economy, the pursuit of profit
will ensure maximum social benefit so
business ethics is not needed.
• A manager’s most important obligation is
loyalty to the company regardless of ethics.
• So long as companies obey the law they will
do all that ethics requires.
Arguments Supporting Business Ethics
• Ethics applies to all human activities.
• Business cannot survive without ethics.
• Ethics is consistent with profit seeking.
• Customers, employees, and people in general
care about ethics.
• Studies suggest ethics does not detract from
profits and seems to contribute to profits.
 Corporate Social Responsibility
• Corporate social responsibility refers to a
corporation’s responsibilities or obligations
toward society.
• Business ethics is both a part of corporate
social responsibility and part of the
justification for corporate social responsibility.
• Shareholder vs. Stakeholder Theory
 New Issues in Business Ethics
• Advances in technology often create new
issues for business ethics.
– Currently, advances in information technology are
creating new issues in business ethics.
• Increasing connections between the economic
and social systems of different nations, known
as “globalization”, has also created new issues
in business ethics.
 GLOBALIZATION
Multinational Corporations

Caused serious dilemmas for

Multinational corporations multinational managers.
are companies that have Forcing the managers to deal with
manufacturing, marketing, host countries whose laws,
service, and administrative government practices, levels of
operations in many different development and cultural
understanding are sometimes
nations.
much different than those from
which the multinational’s
Benefits managers are familiar.
Laws being different in foreign
countries,

Harms
 Resolving Cross-Cultural Ethical
Differences
• Moral Relativism = the theory that there are no
ethical standards that are absolutely true and
that apply or should be applied to the companies
and people of all societies.
• Objections to Moral Relativism:
– Some moral standards are found in all societies;
– Moral differences do not logically imply relativism;
– Relativism has incoherent consequences;
– Relativism privileges whatever moral standards are
widely accepted in a society.
 Resolving Cross-Cultural Ethical
Differences
• According to the Integrative Social Contracts
Theory (ISCT), there are two kinds of moral
standards:
– Hypernorms: those moral standards that should
be applied to people in all societies.
– Microsocial norms: those norms that differ from
one community to another and that should be
applied to people only if their community accepts
those particular norms.
 MORAL DEVELOPMENT
• We sometimes assume that a person's values are
formed during childhood and do not change.
• In fact, a great deal of psychological research, as well
as one's own personal experience, demonstrates that
as people mature, they change their values in very
deep and profound ways.
• Just as people's physical, emotional, and cognitive
abilities develop as they age, so also their ability to
deal with moral issues develops as they move
through their lives.
 Kohlberg’s Three Levels of Moral
Development
• First Level: Pre-conventional Stages
– Stage One: punishment and obedience orientation
– Stage Two: instrumental and relative orientation
• Second Level: Conventional Stages
– Stage One: interpersonal concordance orientation
– Stage Two: law and order orientation
• Third Level: Post-conventional Stages
– Stage One: social contract orientation
– Stage Two: universal principles orientation
 Moral Reasoning
• The reasoning process by which human
behaviors, institutions, or policies are judged
to be in accordance with or in violation of
moral standards.
• Moral reasoning is the process of
applying our moral principles to the
knowledge we have about a
situation, and making a decision
about what ought to be done in that
situation.
• Moral reasoning involves:
• The moral standards by which we evaluate
things
• Information about what is being evaluated
• A moral judgment about what is being
evaluated.
Four Steps Leading to Ethical Behavior
James Rest
• Step One: Recognizing a situation is an ethical
situation.
– Requires framing it as one that requires ethical
reasoning
– Situation is likely to be seen as ethical when:
• involves serious harm that is concentrated, likely, proximate,
imminent, and potentially violates our moral standards
– Obstacles to recognizing a situation:
• Euphemistic labeling, justifying our actions, advantageous
comparisons, displacement of responsibility, diffusion of
responsibility, distorting the harm, and dehumanization, and
attribution of blame.
 6ix forms of moral disengagement:
• Euphemistic Labeling - Use euphemisms to change or veil the
way we see a situation we have encountered. If we use the word
“down sizing” instead of “firing” we frame it as a business issue,
rather than an ethical issue and change how we see it.
• Rationalizing our actions – Tell ourselves that the harm we
intend is justified because we are pursuing a worthy cause. So,
we need not look at our actions through an ethical framework.
• Diminishing Comparisons – Comparing the situation in the
context of other larger evils, we diminish the magnitude of our
own wrongdoing and make the harms that we inflict appear
minor or inconsequential and avoid looking at it through an
ethical frame.
• Displacement of Responsibility – By claiming that whoever
told us to do the harm was primarily responsible for the harm,
we mentally remove ourselves from the chain of actors
responsible for the harm.
– Doing this, we do not have to apply an ethical frame to my
actions since “I wasn’t really involved in injuring the
customer.”
• Diffusion of Responsibility – If I see myself as playing only a
small role in a large group that is responsible for the harm; I
can obscure my involvement in the activities that harm
someone.
– Then I can say it was really the team that did the harm and
I only had a small role in the situation.
• Disregarding or distorting the harm – When we deny,
disregard, or distort the harm that our actions produced, then
we do not have to frame our actions as needing ethical
scrutiny, and we discredit the evidence.
• Dehumanizing the Victim – If we can think of the victims we
injure as not real or not fully human beings with human
feelings and concerns, we can avoid seeing that we are
harming real people, we don’t have to think of our actions
through an ethical frame.
• Redirecting Blame – We can blame what we have done on our
adversary or on the circumstances so that we see ourselves as
an innocent victim which is provoked by others or
circumstances.
Four Steps Leading to Ethical Behavior
• Step Two: Judging the ethical course of action.
– Requires moral reasoning that applies our moral
standards to the information we have about a
situation.
– Requires realizing that information about a
situation may be distorted by biased theories
about the world, about others, and about oneself.
Four Steps Leading to Ethical Behavior
• Step Three: Deciding to do the ethical course
of action.
– Deciding to do what is ethical can be influenced
by:
• The culture of an organization—people’s decisions to
do what is ethical are greatly influenced by their
surroundings.
• Moral seduction—organizations can also generate a
form of “moral seduction” that can exert subtle
pressures that can gradually lead an ethical person into
decisions to do what he or she knows is wrong.
Four Steps Leading to Ethical Behavior
• Step Four: Carrying out the ethical decision.

– Factors that influence whether a person carries

out their ethical decision include:
• One’s strength or weakness of will

• One’s belief about the locus of control of one’s actions

6ix criteria to decide whether to frame a situation as an
ethical situation that calls for ethical reasoning

1. Does the situation involve the infliction of serious harm on

one or more people?
2. Is the harm concentrated on its victims so that each victim
will, or already has, sustained a significant amount of harm”
3. Is it likely that the harm will occur (or has actually occurred?
4. Are the victims proximate, i.e., close or near to us?
5. Will the harm occur fairly soon (or has it already occurred)?
6. Is there a possibility that the infliction of the harm possibly
violate the moral standards we or most people accept?
 Moral Responsibility
• Three Components of Moral Responsibility
– Person caused or helped cause the injury, or failed
to prevent it when he or she could and should
have (causality).
– Person did so knowing what he or she was doing
(knowledge).
– Person did so of his or her own free will
(freedom).
 Factors that Mitigate Moral
Responsibility
• Minimal contribution
– In general, the less one’s actual actions contribute to the
outcome of an act, the less one is morally responsible for that
outcome.
• Uncertainty
– A person may be fairly convinced that doing something is wrong
yet may still be doubtful about some important facts, or may
have doubts about the moral standards involved, or doubts
about how seriously wrong the action is.
• Difficulty
– A person may find it difficult to avoid a certain course of action
because he or she is subjected to threats or duress of some sort
or because avoiding that course of action will impose heavy
costs on the person.
If ethics are poor at the top, that
behavior is copied down through
the organization
Robert Noyce, inventor of the silicon
chip