Business LawBus 117 N

Roland Cyr CPCUInstructor

3/9/09

Business Ethics

Enron

Political Curruption

Ethics in BusinessLEARNING OBJECTIVES

What are ethics? What are business ethics?Why are business ethics importantHow can business leaders encourage their

companies to act ethically?What are corporate compliance programs

Business Law-EthicsExactly how to decide these issues is

something each person must do alone, on the basis of his or her own convictions.

(1) What are your ethical criteria? (2) How would you apply those criteria in a

particular situation? (3) How can you best adapt their

standards to the kinds of ethical and social responsibility issues that you will face in the business world?

Business Law - EthicsBusiness EthicsEthics is the study of what constitutes right and wrong

behavior. Ethics focuses on morality and the application of moral principles in everyday life.

A. WHAT ARE BUSINESS ETHICS?Business ethics focuses on what constitutes ethical behavior in

the world of business. Business ethics is not a separate kind of ethics.

 B. WHY IS BUSINESS ETHICS IMPORTANT?An understanding of business ethics is important to the long-

run viability of a business, the well being of its officers and directors, and the welfare of its employees.

Business Law – Learning Obj #1Ethics is the study of what constitutes right or

wrong behavior—the fairness, justness, rightness, or wrongness of an action. Business ethics focuses on what constitutes ethical behavior in the world of business. An understanding of business ethics is important to the long-run viability of a business firm and to the well being of the firm’s officers, managers, and employees. A business firm also owes duties to a variety of “stakeholders” whom the firm’s decisions and activities may affect significantly.

Learning Objective #2How can business leaders encourage their

companies to act ethically? Ethical leadership is important to create and maintain

an ethical workplace. Management can set standards, and apply those standards to themselves and their firm’s employees.

THE IMPORTANCE OF ETHICAL LEADERSHIPManagement must set and apply ethical standards to

which they are committed. Employees will likely follow their example. Ethical conduct can be furthered by not tolerating unethical behavior, setting realistic employee goals, and periodic employee review.

Case 3.2: Exxon ValdezWhat were other penalties assessed against Exxon

and Hazelwood? The federal Government and Alaska filed suits against

Exxon for environmental damage. In this litigation, Exxon agreed to pay $900 million over a period of ten years and up to an additional $100 million for environmental damage not then known. In a criminal prosecution, after years of trials and appeals, Hazelwood was convicted of a single state-law misdemeanor for negligent discharge of oil. The federal government prosecuted Exxon for environmental crimes, including violations of the Clean Water Act, the Refuse Act, and the Migratory Bird Treaty Act. On those charges, fines of $25 million and restitution of $100 million were ordered.

Case 3.2: Exxon ValdezAre there situations in which a business’s conduct would

be more reprehensible than Exxon’s behavior in this case?

The court acknowledged that “there are surely other situations that would be more reprehensible—such as knowingly allowing a relapsed alcoholic to operate a 747 aircraft loaded with passengers.” The U.S. Court of Appeals for the Ninth Circuit had remanded this case to be reconsidered in light of United States Supreme Court decisions in cases involving a sale of a repainted car as new, passing off a product as a competitor’s, and an insurer’s refusal to pay a judgment. “[T]his case,” said the district court, however, “is in an entirely different galaxy than [those other cases]. .  .  . [T]he court finds Exxon’s conduct highly reprehensible.”

Compliance ProgramsA. THE IMPORTANCE OF ETHICAL

LEADERSHIPManagement must set and apply ethical

standards to which they are committed. Employees will likely follow their example. Ethical conduct can be furthered by not tolerating unethical behavior, setting realistic employee goals, and periodic employee review.

Compliance ProgramsB. CREATING ETHICAL CODES OF CONDUCTMost large corporations have codes of conduct that indicate the

firm’s commitment to legal compliance and to the welfare of those who are affected by corporate decisions and practices. Large firms may also emphasize ethics in other ways (for example, with training programs).

C. CORPORATE COMPLIANCE PROGRAMSComponents of a comprehensive corporate ethical-compliance

program include an ethical code of conduct, an ethics committee, training programs, and internal audits to monitor compliance. These components should be integrated. The Sarbanes-Oxley Act of 2002 requires firms to set up confidential systems for employees to report suspected illegal or unethical financial practices.

Learning Objective #3What are corporate compliance

programs? The components of a comprehensive

corporate compliance program define the program. These components include an ethical code of conduct, an ethics committee, training programs, and internal audits to monitor compliance.

CONFLICTS AND TRADE-OFFSA firm’s duty to its shareholders should be

weighed against duties to others who may have a greater stake in a particular decision. For example, an employer should consider whether it has an ethical duty to loyal, long-term employees not to replace them with workers who will accept lower pay and whether this duty prevails over a duty to improve profitability by restructuring.

Companies That Defy the RulesENRON’S GROWTH AND DEMISE IN A NUTSHELLManagers took advantage of accounting standards to

overestimate future earnings, which resulted in inflated reports of current earnings. To maintain these exaggerations, the company created subsidiaries to which it could shift unreported losses and assets with inflated values. Many of these shifts occurred outside the U.S. to avoid federal income taxes. When questioned, management refused to investigate and reveal financial improprieties.

THE ENRON LEGACYUnethical conduct resulted in the single largest bankruptcy of

a U.S. business firm. This misconduct affected the firm’s managers, employees, suppliers, and shareholders, and the community and society in general.

THE DEBATE CONTINUESAt what point does a corporation have an

ethical duty to act when confronted with evidence that its product may be harmful?

The text phrases this question in the context of later controversies about competitors’ products

Approaches to Ethical ReasoningEthical reasoning is the process by which an individual

examines a situation according to his or her moral convictions or ethical standards. Fundamental ethical reasoning approaches include the following.

DUTY-BASED ETHICS 1. Religious Ethical StandardsReligious standards provide that when an act is prohibited by

religious teachings, it is unethical and should not be undertaken, regardless of the consequences. Religious standards also involve compassion

(“Do unto others as you would have them do unto you”).

Duty-Based Ethics-ReligiousEven though it might be profitable for a firm

to lay off a less productive employee, decision makers would give substantial weight to the potential suffering that the employee’s family might experience if the employee found it difficult to find employment elsewhere.

The Ten Commandments…..

“Do unto others as you would have them do unto you”

Imperative Principle (Kantian)Immanuel Kant – 1700/1800’s Decision made w/out trying to predict

whether action will probably cause greatest balance of good over evil.

Lying can be justified. Most professional codes of ethics have

characteristics of the imperative theory.Kant was unwilling to rely solely upon

decision-makers' inclinations and values for decisions in various circumstances. He strongly preferred rules without exceptions.

Imperative Duty-Based EthicsStrict versions of imperative ethics maintain

that a decision should be made without trying to predict whether an action will probably create the greatest balance of good over evil. Ethics in the imperative sense is a function of moral rules and principles and does not involve any calculation of the consequences. Example: "Lying is wrong."

Example: You will decide not to cheat because if everyone cheated, the examination would be meaningless.

Principle of Rights – Duty-BasedPrinciple that human beings have certain

fund. Rights (life, freedom, pursuit of happiness)

Natural law tradition embraces the concept that certain things (killing) are morally wrong, they are contrary to human nature….

Those who believe in the “rights theory” believe business decisions should be made based on how those decisions affects rights of others…. (bus owners, employees, shareholders/stockholders)

Which “rights” are most important?

Rights – Duty-BasedA dilemma for those who support this theory

is that they may disagree on which rights are most important

Example – Suppose a firm can shut down a plant to avoid dumping pollutants into a river which would hurt thousands of people. Or, the company can stay open and pollute the water saving jobs in the plant…

Which choice would you make?Not all choices are clear cut…..

OUTCOME-BASED ETHICSUtilitarian principle, John Stuart Mill –

1700/1800’s“Thou shalt act so as to generate the greatest

good for the greatest number… “ The end justifies the means – My son was sick and

I took the money to pay for his medical careOffenders will calculate potential gains and losses

before they decide to disobey the lawUltimate criterion for an ethical decision is the

balance of good consequences (pleasure and avoidance of pain) over evil consequences (displeasure and pain) produced by an action

Utilitarian Principle - Outcome(1) a determination of which individuals will

be affected by the action in question; (2) a cost-benefit analysis—an assessment of

the negative and positive effects of alternative actions on these individuals; and

(3) a choice among alternative actions that will produce maximum societal utility (the greatest positive benefits for the greatest number of individuals).

Utilitarian ApproachIn contrast to duty-based ethics,

Utilitarianism is “outcome” oriented….Focuses on the consequences of an action,

not on the nature of the action or on any set of preestablished moral values or religious beliefs.

Action is morally correct when the people it affects, it produces the greatest amount of good for the greatest number….. (Stimulus Bill)

When the action affects the majority adversely, it is morally wrong….

Utilitarianism – Draw BacksObjective calculated approach to problems

tend to reduce the welfare of human beings to plus and minus signs on a cost-benefit worksheet and to “justify” human cost that many find unacceptable

The U.S. Sentencing Commission proposals are based almost totally on this idea, mandating that monetary penalties be calculated at a level that will induce companies to conclude that breaking the law is not fiscally appealing. (Positive or Negative)

Learning Objective #4How do duty-based ethical standards

differ from outcome-based ethical standards?

Duty-based ethical standards are derived from religious precepts or philosophical principles. Outcome-based ethics focus on the consequences of an action, not on the nature of the action or on a set of pre-established moral values or religious beliefs.

Business Ethics on a Global LevelThere are important ethical differences among, and

within, nations. Some countries, for example, largely reject any role for women professionals, which may cause difficulties for American women conducting business transactions in those countries.

Concerns include the rights and the treatment of foreign workers who make goods imported and sold in the United States by U.S. firms. Should a U.S firm refuse to deal with certain suppliers or make arrangements to monitor their workplaces to make sure that the workers are not being mistreated?

ConclusionEthical standards are subjective. They are

derived from personal religious beliefs or philosophical assumptions concerning the nature of goodness, fairness, rightness, or justice. Each of us decides what we believe in and how to act on those beliefs.

How well do you sleep at night?

ConclusionEthics are created by moral values. Whether to

obey the law is itself an ethical question. Some individuals may choose to ignore the law if their ethical principles conflict with it.

If there is a conflict between a law and an ethic, should an individual disobey the law, or should an individual obey the law even if he or she thinks it would be unethical to do so? Is there a higher law than what society provides in a particular place at a particular time?

ConclusionImagine you own a company at which there is an

opening at a beginning level. There are two applicants—one, your personal friend and the other, a member of the opposite sex (or of a minority). The latter individual is more qualified for the job than your friend. Suppose that in spite of whatever profit the most qualified person might generate, you would rather have your friend on the job. In this hypothetical, hiring the friend would violate the law against discrimination.

Would you hire the friend in violation of the law?

ConclusionSuppose that as business person you will have an

opportunity to make more money by meeting with competitors and fixing prices, conduct which is illegal. For this hypothetical, the authorities will not discover that the prices have been fixed. In fact, the price rise could be small—pennies per item—but the increases in net profit could be considerable.

Is price-fixing fair? Ethical? Does it make any difference what the extra profit is used for? (GAS)

If YOU need the money, would price-fixing be wrong? Would YOUR answers be different if there was no chance that YOU would be caught? Why?

CYBERLAWShould ethical standards be adapted to

deal with the new forms of social disruption made possible by the Internet (for example, data theft, hacking, virus implanting, and invasion of privacy)?

What new ethical standards, if any, are needed to resolve problems online?