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CHAPTER 5
BUSINESS ETHICS
ANSWER TO CRITICAL THINKING QUESTION
IN THE FEATURE
DIGITAL UPDATE—CRITICAL THINKING
From an ethical point of view, is there any difference between managers calling
CASE 5.1—CRITICAL THINKING
ETHICAL
Are Salvatore’s actions likely to affect his business’s ability to profit in the long run?
Discuss. Any successful business has a plan to attain certain goals in the short run and in the
long run. In many, if not most situations, the overriding objective is profit maximization. In
attempting to maximize profits, however, businesspersons need to distinguish between short-
and long-run profit maximization. In the short run, a business may increase its profits by
engaging in misconduct. In the long run, however, because of civil suits, criminal charges,
settlements, judgments, and bad publicity, such unethical conduct will cause profits to suffer.
Overemphasizing short-term profit is the most common cause of ethical problems in business.
2 UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS
In the facts of this case, Salvatore opted for short-run profits by engineering wrongful
transfers and expenditures of Scott’s money. Due to the judgment of compensatory and punitive
damages against Salvatore, and the subsequently likely bad publicity, the profits of his business
will be sorely affected going forward.
LEGAL ENVIRONMENT
Did Carmela Carpanzano meet the minimum acceptable standard for ethical business
CASE 5.2—CRITICAL THINKING
WHAT IF THE FACTS WERE DIFFERENT?
Suppose that Case Western had tolerated Al-Dabagh’s conduct and awarded him a
CASE 5.3—LEGAL REASONING QUESTIONS
1A. Using duty-based ethical principles, what facts or circumstances in this case
would lead Moseley to disclose Herzog’s behavior? Using the duty-based principles,
Moseley would have been led to report the behavior because it was not fair. Fairness would be
an example of a fundamental right or a religious teaching. In addition, the categorical imperative
would lead Moseley to feel that if no one reported this sort of behavior, then only relatives of the
CHAPTER 5: BUSINESS ETHICS 3
rich who own the companies would get promoted or hired. If everyone reported the behavior,
then the behavior would stop and the hiring and promotion processes would become fairer.
2A. Using outcome-based ethical principles, what issues would Moseley have to
analyze in making the decision to report Herzog’s behavior? What would be the risks to
Moseley? The benefits? The things which Moseley would have to consider would be culture
of the company. He would have to evaluate whether the policies at issue (nepotism, posting of
positions) are taken seriously by the company or if they are ignored by company culture
regularly. Moseley would have to analyze the chances of the company taking action compared
to the risk of retribution. The risks to Moseley are that the company would not investigate or
would find no wrongdoing and that he would suffer adverse employment actions. He also would
risk potential ostracism by colleagues for being a whistleblower. The potential benefits would be
that Herzog may have to stop the behavior or may be forced to leave the company leaving a
better environment.
3A. Under the Business Pragmatism™ steps, what alternatives might Moseley have
had in this situation? In the second step of the Business Process PragmatismTM process,
Moseley should list his alternatives. One alternative is to ignore the behavior. Another is to
report the behavior on the ethics survey. A third alternative would be to meet with someone in
the Human Resources department (if there is one), share the information without using names,
and try to get some feedback or advice on how to proceed given the corporate policies and
culture. A fourth alternative would be to do an anonymous report.
ANSWERS TO QUESTIONS IN THE REVIEWING FEATURE
AT THE END OF THE CHAPTER
1A. Principle of rights
If one of the fundamental rights is the right to be treated fairly and to be able to invest one’s
money with full understanding of the risks, then it would be unethical for Smithson to sell these
viaticals without full disclosure that some may be subject to cancellation.
2A. Categorical imperative
The categorical imperative asks the decision maker to assess the results of the action as if
everyone in a similar situation made the same decision. If all insurance companies participated
in the viatical industry and did not disclose the risk of cancellation, then investors would become
leery of investing in the products and the market would disappear. The people for whom the
sale of these policies is necessary to sustain a respectable life as it ends would not be able to
get the cash to help them die with dignity. This would make the world a worse place and
therefore the actions are not ethical.
4 UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS
3A. Utilitarianism
Utilitarianism asks the decision maker to perform a cost/benefit analysis of the alternatives.
Smithson should evaluate the risks or chances of an investor buying a void policy compared to
the benefits gained from purchasing legitimate policies. The cost/benefit analysis also should
include whether he sells individual policies to individual investors or whether he sells a share of
a bundle of policies. If he does the former, the risks to the individual investor are greater than if
the latter. If the latter, the benefit of the legitimate policies may offset any loss from cancelled
policies.
4A. Decision process
First, Smithson must recognize that there is a problem. He should identify the stakeholders as
the investors, the sellers, his employees and the insurance companies that are at risk of being
defrauded. He should be familiar with laws related to insurance. Second, he should list his
alternatives and determine the goals for the decision. This is where Smithson really must
analyze the mission and goals of his company and brainstorm different actions. In step three,
Smithson selects his proposed decision with consultation and buy-in from the main
stakeholders. Fourth, Smithson should formalize and articulate the reasons for the decision
based on his analysis in prior steps. Finally, Smithson will need to later evaluate whether the
selected course of action met his goals.
ANSWER TO DEBATE THIS QUESTION IN THE REVIEWING FEATURE
AT THE END OF THE CHAPTER
Executives in large corporations are ultimately rewarded if their companies do
well, particularly as evidenced by rising stock prices. Consequently, should we let those
who run corporations decide what level of negative side effects of their goods or
services is “acceptable”? The first problem with this attitude is that executives and managers
(and even directors) may be looking at only short-run profits. They therefore might ignore the
long-run profitability to their company. If a drug that works well against a potential pandemic
causes severe side effects in some people, in the short run, this same drug may save many
lives and reduce human suffering. Thus profits could be great initially, with a consequent rise in
the stock price. In the longer run, though, when the news gets around that some of those who
took the drug suffered severe side effects, future sales of the drug might fall, thus reducing
profits and causing the stock to price to drop.
One now has to ask the question about who is in the best situation to decide the optimum
level of side effects of any drug or good or service sold. (It’s impossible to create drugs with
zero negative side effects.) Any government regulator will want to make sure that there are few,
if any, people who suffer from negative side effects. After all, the government regulator will look
bad if the press reports about those who reacted badly to a drug. Therefore, there is a bias
within any government regulatory apparatus against any good or service that has bad side
effects. More limits on drugs, though, that help millions just because few suffer side effects will
cost those who don’t obtain the drug—perhaps with their lives.
CHAPTER 5: BUSINESS ETHICS 5
ANSWERS TO ISSUE SPOTTERS
AT THE END OF THE CHAPTER
1A. Acme Corporation decides to respond to what it sees as a moral obligation to cor-
rect for past discrimination by adjusting pay differences among its employees. Does this
raise an ethical conflict between Acme’s employees? Between Acme and its employees?
Between Acme and its shareholders? Explain your answers. When a corporation decides to
respond to what it sees as a moral obligation to correct for past discrimination by adjusting pay
differences among its employees, an ethical conflict is raised between the firm and its
employees and between the firm and its shareholders. This dilemma arises directly out of the
effect such a decision has on the firm’s profits. If satisfying this obligation increases profitability,
then the dilemma is easily resolved in favor of “doing the right thing.”
2A. Delta Tools, Inc., markets a product that under some circumstances is capable of
seriously injuring consumers. Does Delta have an ethical duty to remove this product
5–1A. Business ethics
Of course, it was unethical to sell goods that their maker knew were defective and could cause
harm. This is the most reasonable and likely conclusion under any set of standards, even if it
were possible to eventually obtain a negative result with respect to a defect from testing that
repeatedly yielded a positive result. Under the six basic guidelines outlined in the text for making
ethical business decisions, this is certainly true. The first consideration under those guidelines is
whether a contemplated action is legal. It may have been legal to avoid reporting the initial test
results to the Food and Drug Administration, but liability can attach through tort and contract law
principles to the sale of goods that the seller knows or should know are defective. Thus, the
baker’s action in this problem does not pass muster under the first consideration. The second
question is whether an action is consistent with company policies and procedures. The facts do
not indicate what those policies and procedures are for this bakery, but if the steps taken in the
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5–2A. SPOTLIGHT ON PFIZER—Corporate social responsibility
It could be argued that the defendants have an ethical responsibility to society to voluntarily take
steps to reduce the availability of their products to meth makers. This might have become a
more certain obligation once the defendants were aware that their products were used in the
manufacture of meth. Retailers might have been asked to place the products behind the counter
or lock them in display cases and limit sales or require consumers to sign for purchases.
Retailers might have been educated about the suspicious behavior of buyers with illegal intent.
(These measures were imposed as federal regulations in 2005.) The defendants might have
developed alternative medications that did not contain ephedrine or pseudoephedrine.
5–3A. BUSINESS CASE PROBLEM WITH SAMPLE ANSWER—Online privacy
Facebook created a program that makes decisions for users. Using duty-based ethics, many
believe that privacy is an extremely important right that should be fiercely protected.
Accordingly, any program that has a default of giving out information is unethical. Facebook
should create the program as an opt-in program. In addition, under the Kantian categorical
5–4A. Business ethics on a global scale
The Foreign Corrupt Practices Act relates to the payments of foreign officials to make
5–5A. Business ethics
Business ethics might have been violated in these circumstances by Mark Ramun, John
Ramun, and the employees and managers of Genesis.
The “tense relationship” between John and Mark at Allied may have been caused or
exacerbated by either or both of them. And instead of confronting whatever it was that made
their relationship “tense,” they may have exacted revenge—John by forcing Mark out of the firm,
or Mark by leaving it, after ten years. Of course, this is speculation.
What is not speculation, however, is that Mark took 15,000 pages of Allied’s documents
on DVDs and CDs (trade secrets) when he left the firm. This act was likely a violation of the law
(theft or misappropriation) and clearly a violation of business ethics. Later, Mark joined Allied’s
8 UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS
5–6A. Business ethics
Ethics is the study of what constitutes right and wrong behavior. It is a branch of philosophy
focusing on morality and the way moral principles are derived and implemented. Ethics has to
do with the fairness, justness, rightness, or wrongness of an action. Those who study ethics
evaluate what duties and responsibilities exist or should exist for its practitioners. The
circumstances set out in this problem underscore the importance of ethics by illustrating the
consequences of engaging in ethical misconduct. Those consequences can extend beyond the
short run.
Clearly, Glass engaged in ethical misconduct. By fabricating material for more than forty
articles for The New Republic magazine and other publications whose reputations are founded
on truth, Glass betrayed the trust of his editors. He further behaved unethically by fabricating
supporting materials to delude The New Republic's fact checkers. And once he was suspected,
he tried to avoid detection. Later, based on these misdeeds and others, the California Supreme
Court refused to admit Glass to the California bar.
5–7A. Business ethics
It seems obvious from the facts stated in this problem that Hratch Ilanjian behaved unethically in
the circumstances. Ethics, of course, involves questions relating to the fairness, justness,
rightness, or wrongness of an action. Business ethics focuses on the decisions that businesses
and businesspersons apply moral and ethical principles to make their decisions and whether
those decisions are right or wrong.
In this problem, from an apartment, Ilanjian defrauded Vicken Setrakian, the president of
Kenset Corp., into believing that Ilanjian was an international businessman who could help
Kenset turn around its business in the Middle East. Ilanjian insisted that Setrakian provide
CHAPTER 5: BUSINESS ETHICS 9
5–8A. Business ethics
Ethical behavior on the part of employees is an important issue—as important as the ethics of
their employers. In any set of employment circumstances, an unethical employee may engage
in wrongful conduct.
In this problem, Priscilla Dickman worked for the University of Connecticut Health Center.
Her employer received complaints that she was getting non-business-related phone calls and
that she was absent from her work area when she should have been present. Based on
materials found on her work computer, the state investigated her for violations of state law. She
was convicted of engaging in “personal business for financial gain on state time utilizing state
5-9A. A QUESTION OF ETHICS—Consumer rights
(a) In this case, the court found that the company did not violate any laws and that the
disclosures were adequate. From an ethical perspective, the question becomes whether the
word “may” on the website gave adequate notice to the potential user or borrower that a charge
would occur. It is settled legally that it up to a contract signer to read all the components of a
contract. In the online environment, it is hard to ever prove that a web page was not edited or
changed from one day to the next. A consumer may read the terms and conditions just before a
round of edits and then agree and seem bound by changes that did not exist at the time they
read them. From a fairness perspective, that would be unethical. At the same time,
presumably the reader could print off a copy of the agreement and keep it filed. Underlying
10 UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS
5–10A. Global business ethics
(a) In Pfizer’s case, it would appear that the potential for short-run profit maximization,
by quickly testing and marketing Trovan, took precedence over any consideration of ethics. This
action alone arguably violates ethical standards, particularly in light of its results.
(b) The principal pro-Pfizer argument might be that the firm did not violate the law.
Whether the test was legal is the question at the heart of the problem. In the actual case on
which this problem is based, the trial court dismissed the suit, but the U.S. Court of Appeals for
the Second Circuit reversed the dismissal, on the ground that the lower court should have
looked more extensively at international law, and remanded the case. Meanwhile, Nigeria and
one of its states filed criminal charges and civil claims against Pfizer, seeking over $9 billion in
damages and restitution—but not as compensation for the children.