Corruption in International Business: Case Studies from Italy, Brazil, and China

The assignment content discusses the impact of corruption on foreign business practices and economies. In China, government officials' choices lead to undervaluation of government assets, resulting in a loss of over $50 billion during economic growth. The article also highlights Italy and Brazil as examples of long-term corruption, with Italy experiencing widespread corruption that led to cabinet resignations and hundreds of business executives being indicted, while Brazil's corruption has created a climate of murder and espionage, deterring foreign firms from doing business there. The article also explores the impact of celebrity endorsements on their reputation and contracts, discussing cases such as Lance Armstrong, Michael Phelps, and Tiger Woods, who lost endorsement deals due to scandals or controversies. The summary will provide an overview of these topics in a paragraph.

The chapter’s opening “Consider...” teaches us that often we look at what compa- nies and
business executives say and do and the fact that the companies are doing well, and assume that
they must all have high ethical standards. The quotes are ironic because these individuals
and/or their companies then crossed the ethical lines they touted as standards.
We look at these individuals’ behaviors and wonder why they thought they could get away with
their poor ethical choices, or why they believed they were immune from the laws and our
ethical standards. We like to think of ourselves as so different from those who cross ethical
and/or legal lines. But all of them were col- lege graduates, nearly all with business degrees. All
of them were respected by their friends and were active in community projects and institutions.
These individuals were “good” people, but they lost sight of personal ethics, business ethics,
and the importance of ethics in success. Before they committed their business crimes, the
worst that could have been said about many white-collar criminals who are serving 6-month to
25-year prison sentences is that they had parking and speeding tickets. Keeping ethics with us,
in life and in business, can help us avoid the kinds of mis- takes that so many bright and capable
businesspeople have made. But, we wonder, what are ethics? How do we know when we have
them? How do we keep them when we face pressures, whether on an important exam or in
meeting the quarterly numbers or our sales quota at work? This chapter answers these
questions.
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-1 What Is Ethics?
When we learn that the Government Services Administration (GSA) held a meeting at a Las
Vegas hotel at a cost of nearly $1 million to taxpayers, we label that conduct “unethical.” When
we read that Jonah Lehrer, a young and rising star writer at the New Yorker fabricated quotes
from Bob Dylan, we use the term unethi- cal. When we learn that Beyoncé may have lip-synced
“The Star-Spangled Banner” at the 2013 presidential inauguration, we feel that we have been
duped.
2-1a “IT’SJUSTNOTRIGHT!”
We read about these types of situations in the newspaper each day. From politics to journalism
to business to our favorite sports and Hollywood icons, references to ethics run through the
stories. But we also face ethical dilemmas ourselves. Two students purchase tickets at a theater
to see Lincoln, and when they emerge from the theater they realize they are in an open area
with access to other theat- ers. If they wanted to, they could slip into Zero Dark Thirty or
another movie without paying for another ticket. “Who’s to know?” they might think. “Holly-
wood makes too much money anyway.” “It doesn’t really hurt anyone.” These thoughts are
similar to those that may have run through the minds of the GSA administrators, the young
writer, and the singer who did not analyze the risk factors in their conduct. Although we may
believe we are different from business executives and others involved in scandals, we all face
ethical dilemmas each day. Do I tell the clerk that he gave me too much change? Do I tell the
lender on my loan application that my salary was just cut 25 percent? Do I go back to pay for
the laundry detergent that slipped through on the bottom of my cart? Do I do what my boss
says when he tells me to write a fake review online for our com- pany’s services? Do I tell a
potential buyer of my car about the hairline crack in the engine block? Do I tell my clients that I
am selling off the investments I am trying to get them to buy?
The fact pattern changes slightly. The parties’ names and the subject matter vary, but the
ethical issues are the same. Some conduct is more harmful, such as those situations in which a
criminal statute is violated. Still, regardless of the law, we look at the conduct of government
employees, the writer, the students in the theater, the company employee writing reviews, and
the seller of the car, and we conclude, “It’s just not right!” We probably agree that they all
behaved unethically. We may not be able to zero in on what bothers us about their conduct,
but we know an ethics violation, or an ethical breach, when we see one.
2-1b NORMATIVESTANDARDS:HOWWEBEHAVETOKEEPORDER
But what do we mean when we say that someone has acted unethically? Ethical standards are
not the standards of the law. In fact, they are a higher standard. Sometimes referred to as
normative standards in philosophy, ethical standards are the generally accepted rules of
conduct that govern society. Ethical rules are both standards and expectations for behavior,
and we have developed them for nearly all aspects of life. For example, no statute in any state
makes it a crime for someone to cut in line in order to save the waiting time involved by going
to the end of the line.2 But we all view those who “take cuts in line” with disdain. We sneer at
those cars that sneak along the side of the road to get around a line
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of traffic as we sit and wait our turn. We resent those who tromp up to the cash register in
front of us, ignoring the fact that we were there first and that our time is valuable too.
2-1c LINE-CUTTINGANDETHICS
If you have ever resented a line-cutter, you understand ethics and have applied ethical
standards in life. Waiting your turn in line is a societal expectation. “Wait- ing your turn” is not
an ordinance, a statute, or even a federal regulation. “Waiting your turn” is an age-old principle
developed because it was fair to proceed with first in time, first to be served. “Waiting your
turn” exists because large groups wait for the same road, theater tickets, or fast food at noon in
a busy downtown area. We recognize that lines ensure order and that waiting your turn is the
just way to allocate the limited space and time allotted for the traffic, the tickets, or the food.
“Waiting your turn” is an expected but unwritten behavior that plays a criti- cal role in an
orderly society.
So it is with ethics. Ethics consists of those unwritten rules we have developed for our
interactions with each other. These unwritten rules govern us when we share resources or
honor contracts. “Waiting your turn” is a higher standard than the laws passed to maintain
order. Those laws apply when individuals use physi- cal force or threats to push to the front of
the line. Assault, battery, and threats are forms of criminal conduct for which the offenders can
be prosecuted. But the law does not apply to the stealthy line-cutter who simply sneaks to the
front, perhaps using a friend and a conversation as a decoy. No laws are broken, but the
notions of fairness and justice are offended by one individual putting him- or herself above
others and taking advantage of others’ time and position.
Because line-cutters violate the basic procedures and unwritten rules for line formation and
order, they commit an ethical breach. We don’t put line-cutters in jail, but we do refer to them
as unethical. Other examples of unethical behavior also carry no legal penalty. A married
person who commits adultery does not com- mit the type of crime that lands you in jail, but
does create a breach of trust with his or her spouse. We do label their conduct with adjectives
such as unfaithful, and even use a lay term to describe adultery: cheating.
Speaking of cheating, looking at someone else’s paper during an exam is not a criminal
violation. If you cheat on a test, your professor may sanction you and your college may impose
penalties, but the county attorney will not pros- ecute you for cheating. Your conduct is
unethical because you did not earn your standing and grade under the same set of rules applied
to the other students. Just like the line-cutter, your conduct is not fair to those who spent their
time studying. Your cheating is unjust because you are getting ahead using someone else’s
work.
These examples of cutting in line, committing adultery, and cheating on exams bring certain
common adjectives to our minds: “That’s not fair!” “That was dishonest!” “That was unjust!”
You have just defined ethics for yourself. Ethics is more than common, or normative, standards
of behavior. Ethics is honesty, fairness, and justice. The principles of ethics, when honored,
ensure that the playing field is level, and that we earn our achievements by using our own work
and ideas. Being ethical means being honest and fair in our interactions with each other ,
whether personally or in business
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For the
Re: A State of the Union Manager’s Desk on Academic Ethics
Ethics is not so difficult to understand, but it is difficult to practice. Data are available on the
ethics of everyone from school-age children to graduate school students. In 1992, the
Josephson Institute found that 61 percent of high school students reported that they had
cheated at least once during a school year. By 2008, that num- ber had risen slightly to 64
percent, but then fell to 49 percent in 2012.3 According to the Center for Academic Integrity,
about 75 percent of college students confess that they have cheated in some way in college.4
The rate for graduate students is 50 percent. They describe tak- ing notes and answers into
exams, copying others’ work,
Consider...
downloading and buying term papers from the Internet, and not contributing to team projects
but still receiving credit for them. Graduate students at Columbia Univer- sity extended the
time clock for an online exam. Harvard Business School candidates tapped into the school’s
admission database. Thirty-four students at Duke’s Fuqua Business School faced discipline for
collaborating on a take-home exam. Several New York high school students faced criminal
charges related to a cheating conspiracy on SAT exams. One student took the exam for 20
students, who paid him an average of $2,500 for his efforts at scholastic identity deception.
Why do we worry about ethics in school? What is the point of teaching young people to be
honest? Why do we impose penalties for cheating? How does cheating affect those who do not
cheat? What are some of the long-term consequences if those who cheat are permitted to pass
courses, graduate with honors, and pursue careers in their fields? What happens when the 75
percent of those who admit cheating in college reaches 100 percent?
2-2 What Is Business Ethics?
Many have referred to “business ethics” as an oxymoron. The little jibe suggests that it is
impossible to be in business and be ethical. Some see the pursuit of profit as being at odds with
ethics. However, the term business ethics is actually a complex one with many layers of
meaning. The first layer consists of basic values (covered in the following section) such as being
honest, keeping promises, and not taking things that do not belong to you. Another layer
consists of notions of fairness (also covered in the next section) such as how we treat others,
including customers and employees who report to us. Still a third layer consists of issues related
to how a business interacts with the community, the environment, and its neighbors.
The three layers of business ethics bring back into the purely quantitative mod- els of business
the elements of a fair playing field. Business ethics involve the study of fairness and ethical
standards amidst the pressure of earning a profit and providing returns to shareholders and
others who have invested in the business.
A business faces the special problem of having to develop ethical standards for a group of
people who work together toward the common goal of profit for the firm. Individuals in the
group have personal ethical standards, but too often employees find that the ethical standards
imposed by managers at the top of a company result in possible harm to those at the bottom or
to others outside the
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Ethical Issues
Gerry Roscoe was the “Outstanding Graduating Senior” for the class of 2013 at State University.
By tradition, the graduate chosen for this honor speaks at the commence- ment ceremonies for
the university. Gerry was scheduled to give the student commencement address and had a job
awaiting him on Wall Street at one of the nation’s largest investment banking firms.
Jill Swain and Eric Bourdeaux were also graduating seniors who knew Gerry. Jill and Eric knew
that, at least twice, Gerry had taken exams for others. One was a final exam during their
sophomore year. The class was an economics course with 500 students. The exam was held in a
large lecture hall and proctored by graduate students. ID was not required, and Gerry took the
exam twice, once for his section and at another time for a friend who was having trouble with
the course. Without a B on the mid-term, Gerry’s friend would have failed the course and lost
his scholarship. The second instance involved a final exam in finance. Finance 300 had been
taught in sections of 50 students, but a common final
was given with, again, 500 students in the room. The exam was proctored by one finance
professor and graduate students. Gerry had taken Finance 300 one year before his girlfriend,
Anissa Foulger, had, and she struggled through the course. She needed a B on the final exam in
order to pass the course. If she did not pass, she jeopardized her transfer to a college in New
York upon Gerry’s graduation and employment there. Jill and Eric saw Gerry enter the common
final for Finance 300, and he explained that he was taking the final for Anissa: “You understand.
Everything is off if she doesn’t make it through. She doesn’t need this stuff. She is going into
advertising. I can take it for her and she’ll get her B.”
If you were Jill or Eric, what would you have done at the time of the exams? What would you do
now that Gerry has been given this “Outstanding Graduating Senior” honor? Does his
dishonesty really hurt anyone? Wasn’t Gerry just being noble by taking the exam for his friend?
For his girlfriend? Is it any of your business? How is anyone harmed by what Gerry did?
firm. An employee may feel compelled to resolve the conflict between loyalty to an employer
and the performance of an illegal or unethical act ordered by that employer by simply following
the employer’s direction. In other words, in devel- oping standards of business ethics, an
employee has personal economic interests in continuing employment that may compromise
personal ethical standards. Busi- nesses face the additional challenges of developing business
standards that are consistent with individual standards and helping employees understand that
their personal standards of honesty and fairness need not be different at work. To accomplish
this meshing, business managers should understand the various sources of ethical standards.
2-2a ETHICALSTANDARDS:POSITIVELAWANDETHICS
Ethical standards can be derived from different sources, and ethicists often debate the origins
of these standards. One theory is that our ethical standards are the same as actual or positive
law, and that our ethical decisions are made simply upon the basis of whether an activity is
legal. Positive law, or codified law, estab- lishes the standard for ethical behavior. But
compliance with positive law is not always ethical. For example, one of the most frequently
asked questions about the 2008 financial crisis is, “How come no one has been convicted of any
crimes?” The federal government has brought three cases against fund managers and analysts
in an attempt to attain convictions. However, in all three cases, the juries returned acquittals in
the cases. In the third case, the jury sent the judge a note along with
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its acquittal that read, “This verdict should not deter the S.E.C. from continuing to investigate
the financial industry, review current regulations and modify exist- ing regulations as
necessary.” The jury found that there was not criminal conduct because violation of the law,
but they called the conduct “appalling.” The three acquittals illustrate that ethical and legal
standards are not the same. Conduct may be legal, but not ethical.
2-2b ETHICALSTANDARDS:NATURALLAWANDETHICS
Others believe that our ethical standards are derived from a higher source and that they are
universal. Often labeled natural law, this school of ethical thought supports the notion that
some standards do not exist because of law (and, indeed, may exist despite laws). For example,
as discussed in Chapter 1, at one time the United States permitted slavery. Even though the
positive law allowed the activity and the standard of positive law considered slave ownership
ethical, natural law dictated that the deprivation of others’ rights was unethical
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ETHICALSTANDARDS:MORALRELATIVISMANDETHICS
Moral relativism (also called situational ethics) establishes ethical standards accord- ing to the
situation in which the dilemma is faced. Violation of the law, for example, is permitted if you
are stealing to provide food for your starving family. Under moral relativism, adultery is justified
when you are caught in an unhappy marriage, as is the business situation in which you engage
in lying to avoid offending a coworker or a customer. Bribery is illegal in the United States, and
most companies even have firm policies against accepting gifts, because doing so may create
conflicts of interest; but some companies still use a relativist approach and argue that being
competitive in international markets is different. They adhere to a philosophy of “When in
Rome, do as the Romans do,” following the standards and customs in a given country even
though those same behaviors in the United States would be unacceptable and even illegal.
2-2d ETHICALSTANDARDS:RELIGIONANDETHICS
A final source of moral standards is religious beliefs or divine revelation. The source of
standards can be the Bible, the Koran, or any inspired book or writing that is the cornerstone of
a religion or faith and believed to have resulted from divine revelation.
2-3 What Are the Categories of Ethical Dilemmas?
Regardless of the root or source of a company’s or individual’s ethical standards, certain
categories of conduct involve ethical issues. The following 12 categories were developed and
listed in Exchange, the magazine of the Brigham Young University School of Business.
2-3a TAKINGTHINGSTHATDON’TBELONGTOYOU
Everything from the unauthorized use of the Pitney-Bowes postage meter at your office for
mailing personal letters to exaggerations on travel expenses to the down- loading of music from
the Internet without authorization to not working your required hours at your job but accepting
full pay as if you had belongs in this category of ethical violations. A CFO (chief financial officer)
of a large electric util- ity reported that, after taking a cab from LaGuardia International Airport
to his midtown Manhattan hotel, he asked for a receipt. The cab driver handed him a full book
of blank receipts and drove away. Apparently, the problem of accurately reporting travel
expenses involves more than just employees.
2-3b SAYINGTHINGSYOUKNOWARENOTTRUE
A salesperson who tells a potential customer that a product carries a “money-back guarantee”
when the salesperson knows that only an exchange is possible has said something that is not
true, committed an ethical breach and possibly a violation of the law, and misled the customer.
If a car dealer assures a customer that a car has not been in an accident and it has, an ethical
breach has occurred. If a homeowner tells a buyer that a home has not had any water damage
when, in fact, the base- ment had been flooded, this false statement is an ethical breach too.
2-3c GIVINGORALLOWINGFALSEIMPRESSIONS
An urban legend that has circulated among marketing departments around the country is the
story of an infomercial that offered two CDs with the hits of the 1980s on them. The infomercial
emphasized over and over again, “All songs by
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original artists.” Even the CDs carried the line, “All songs by original artists.” When purchasers
read the label with a closer eye and listened to the CDs, they discovered that all the songs were
performed by one group, a group called “The Original Artists.” While technically true, the
advertising left a false impression with customers who assumed they would be buying songs as
performed by the recording artists who made the songs popular.
2-3d BUYINGINFLUENCEORENGAGINGINCONFLICTOFINTEREST
A company awards a construction contract to a firm owned by the father of the state attorney
general while the state attorney general’s office is investigating that company. A county official
who has the responsibility for selecting the contractor who will build the county’s new baseball
stadium travels around the country at the contractor’s expense to view existing stadium sites.
The county official should see as many sites and samples of work as there are bidders on the
new stadium, but when the contractors pay, there is an ethical issue. A physician researcher
whose work concludes that a company’s product is meritorious needs to disclose the consulting
fees he receives from that company.
All of these examples illustrate conflicts of interest. Those involved in situa- tions such as these
often protest, “But I would never allow that to influence me.” That they have to insist they are
not or would not be influenced is evidence of the conflict. Whether the conflict can or will
influence those it touches is not the issue, for neither party can prove conclusively that a quid
pro quo was not intended. The possibility exists, and it creates suspicion.
Ethical Issues
The temptation is remarkable. The run is long. The body screams, “No more!” So, it happened
again in the New York City Marathon for 2008. Cheating on this form of a physical final
examination became international news when, in 1979, Boston Marathon runner and winner
Rosie Ruiz combined her running with a hitch on the train to earn first place. She repeated the
ploy in the 1980 Boston Marathon, when her creative approach was discovered.
The New York Road Runners Club, the sponsors and managers of the New York City Marathon,
disclosed multiple subway riders in their 2008 race on the eve of the 2009 Marathon with the
hope of encouraging the 42,000 runners to go the distance, the real distance. For 2008, there
were 71 runners disqualified from the race, 46 of them for taking the subway in order to go the
distance. The club discovers these free-riders when it investigates what it believes to be
extraordinary times for runners who have not been able or should not have
been able to achieve their recorded times. In at least two situations, the runners who took the
subway also took first place in their age categories and deprived the real winners of their
Tiffany trophies as well as the thrill of quaffing the elixir of victory on the day of the marathon.
The real winners in these age categories from 2008 were not notified of their victories until July
2009 because of the time the investigations take.
A spokesperson from the Road Runners Club said that the greatest temptation in the race
comes when the runners enter Manhattan via the Queensboro Bridge. That entry to the city is
close to Central Park and the finish line, but the race first takes a turn there for another 10
miles into Harlem and the Bronx. Most cheaters sim- ply skip those boroughs and head right
into Central Park and the finish line.
Are there any laws that govern this situation with the runners? Discuss the ethical issues of the
runners. Is anyone really hurt if runners cheat?
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Dr. Drew Pinsky, the host of a cable health show, recommended GlaxoSmithKline’s antidepres- sant
Wellbutrin to physicians and patients but did not disclose that he received $275,000 from Glaxo-
SmithKline for “services related to Wellbutrin.” Dr. Drew, as he is known on television, participated in
town hall meetings, published writings, and hosted multimedia activities that touted the benefits of
Wellbutrin. When asked about his failure to disclose the payments, Dr. Drew said that all of his
commentary and writing were consistent with his clinical experience and that, “how does a doctor
choose one specific antidepressant medication for a certain patient from the many excellent medica-
tions available? The vast majority of doctors attending my lectures stated that they felt I answered this
question and did so in an unbiased and scientifically sound manner.” Is there a conflict of interest? Did
Dr. Drew manage the conflict correctly? Is there any significance to Dr. Drew’s statement that doctors
felt that he answered their questions in a scientific and unbiased manner?
(Jeanne Whalen, “ ‘Dr. Drew’ Was Paid by Glaxo,” Wall Street Journal, July 5 2012, B3.) Steps for
Analyzing Ethical Dilemmas and Case Studies in Business
1. Make sure you have a grasp of all the available facts. 2. List any information you would like to
have but don’t and what assumptions you would have to
make, if any, in resolving the dilemma.
3. Take each person involved in the dilemma and list the concerns they face or might have. Be sure
to consider the impact on those not specifically mentioned in the case. For example, product safety
issues don’t involve just engineers’ careers and company profits; shareholders, customers, custom- ers’
families, and even communities supported by the business are affected by a business decision on what
to do about a product and its safety issue.
4. Develop a list of resolutions for the problem. Apply the various models for reaching this
resolution. As you apply the various models to the dilemma, you may find additional insights for
questions 1, 2, and 3. If the breach has already occurred, consider the possible remedies and develop
systemic changes so that such breaches do not occur in the future.
5. Evaluate the resolutions for costs, legalities, and impact.Try to determine how each of the
parties will react to and be affected by each of the resolutions you have proposed.
6. Make a recommendation for the actions that should be taken. Some Help for You on the Dr.
Drew Case
THINK: To help in your analysis, consider the following list of the parties affected by this dilemma.
␣␣ GlaxoSmithKline—the company’s credibility is affected by Dr. Drew’s conduct, recommendations,
and disclosures.
␣␣ The doctors who listened to Dr. Drew’s recommendations without knowing about his compensation.
␣␣ The patients who asked for or used the drug Wellbutrin without knowing about Dr. Drew’s conflict.
␣␣ Other drug manufacturers whose drugs may have been more appropriate or worthy of
recommendation but were not mentioned because of Dr. Drew’s loyalty to Wellbutrin and
GlaxoSmithKline.
APPLY: To further assist you in your analysis, consider the following categories:
␣␣ Conflict of interest: Dr. Drew had an obligation to disclose his financial interest in promoting the
drug.Those who listened to his analysis, read his recommendations, or used the drug deserved to know
before they made their decision that he did have a financial interest
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␣␣ Giving or allowing false impressions: Dr. Drew gave the impression of being a detached clinician who
had prescribed the drug and had patients who benefited, but he did not disclose that he was paid by
GlaxoSmithKline for his work in recommending the drug.
ANSWER: Because the conduct has already occurred, your role becomes one of recommen- dation. You
need to provide a recommendation that affords protection to all the parties listed as affected by the
conduct. For example, to protect the credibility of the pharmaceuticals, the companies and their experts
need to develop a policy on accepting compensation, as well as one for disclosures of these programs of
compensation. These policies may require not only disclosure but also prohibitions on certain types of
conduct (such as doctors receiving stock ownership in the pharmaceutical companies) if the conflict
seems too difficult to overcome. Two approaches can be taken in regard to a conflict of interest: (1)
don’t do it, or (2) disclose the conflict to those affected. Sometimes disclosure is insufficient and one
party must not engage in the conduct. Regulators may force these new standards on physicians and
pharma- ceutical firms.
2-3e HIDINGORDIVULGINGINFORMATION
Taking your firm’s product development or trade secrets to a new place of employ- ment constitutes an
ethical violation: divulging proprietary information. Failing to disclose the results of medical studies that
indicate that your firm’s new drug has significant side effects is an ethical violation: hiding information
that the product could be harmful to purchasers.
2-3f TAKINGUNFAIRADVANTAGE
New credit card regulations went into effect in 2010 and 2012 because so many businesses took unfair
advantage of customers on payment due dates, late fees, and increases in interest rates. Not all of the
charges were spelled out clearly in the credit card terms prior to the regulatory changes. These new
credit disclosure requirements and other truth-in-lending provisions all resulted because businesses
took unfair advantage of consumers who could not easily follow the jargon of long and complex
agreements.
Consider...
Eagle Gate College hired an admission consultant from Stevens-Henager College named Janna Miller.
Ms. Miller hired others from Stevens-Henager to join her at Eagle Gate. Those who came along to join
Ms. Miller also brought along lists of potential students for recruiting purposes. Those lists of potential
students are very valuable to for-profit colleges because of the need for new students. In addition, the
information left behind at Steven-Henager was altered so that the data base of potential recruits could
not be reached due to incorrect phone numbers and/ or e-mails. Stevens-Henager could not contact the
potential students from their own data base.
Are there ethical issues in this situation? Or is this just competition? [Stevens-Henager College v Eagle
Gate College, 248 P.3d 1025 (Utah 2011)
OMMITTINGACTSOFPERSONALDECADENCE
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While many argue about the ethical notion of an employee’s right to privacy, it has become increasingly
clear that personal conduct outside the job can influ- ence performance and company reputation.
During 2012, a number of CEOs and the former head of the CIA, General David Petraeus, had to resign
their positions because of affairs with employees or extramarital affairs. The CEOs’ personal conduct
created tension within their companies and resulted in loss of respect from the employees. For General
Petraeus, his role as the chief executive for the organization protecting national security was in jeopardy
because the affair with a younger woman left him vulnerable to threat and also meant he was not
complying with the agency standards that applied to all employees. Personal conduct by those who are
in leadership positions affects organizational reputa- tion, morale, and credibility.
2-3h PERPETRATINGINTERPERSONALABUSE
A manager sexually harasses an employee. Another manager is verbally abusive to an employee. Still
another manager subjects employees to humiliating correc- tion in the presence of customers. In some
cases, laws protect employees. But at the heart of this category is unfair treatment.
2-3i PERMITTINGORGANIZATIONALABUSE
Many multinational firms, such as Walmart, Ikea, Apple, and Nike, have faced issues of organizational
abuse. The unfair treatment of workers in international operations appears in the form of child labor,
demeaning wages, excessive work- ing hours, and factory safety standards. Even though a business
cannot change the culture of another country, it can perpetuate—or alleviate—abuse through its
operations there.
2-3j VIOLATINGRULES
Many rules, particularly those in large organizations that tend toward bureau- cracy from a need to
maintain internal controls or follow lines of authority, seem burdensome to employees trying to serve
customers and other employees. How- ever, those rules do serve a purpose and should be followed so
that harms are avoided. For example, Yale University senior Michele Dufault was killed in a lab accident
when her hair was caught in a lathe in the machinery lab. The phys- ics and astronomy major did not
follow the simple safety rule of tying your hair back before beginning work with the heavy equipment.
She was also working in the lab at 2:30 a.m., a time when there were no people near the lab and she
violated a basic safety standard of not working alone around the large machines. Sometimes these rules
seem superfluous and we feel that we have more expertise and experience and need not follow them.
However, there is an ethical issue here in that as a student she had agreed to follow the safety rules of
the lab and the university. Not following those rules was a breach of that promise. As a result of Ms.
Default’s accident, Yale and other colleges and universities have revamped their rules, enforcement, and
training to encourage compliance.
2-3k CONDONINGUNETHICALACTIONS
In this breach of ethics, the wrong results from the failure to report the wrong. What if you witnessed a
fellow employee embezzling company funds by forging
37

his signature on a check that was supposed to be voided? Would you report that violation? A winking
tolerance of others’ unethical behavior is in itself unethical. Suppose that as a product designer, you
were aware of a fundamental flaw in your company’s new product—a product predicted to catapult
your firm to record earnings. Would you pursue the problem to the point of halting the distribution of
the product? Would you disclose what you know to the public if you could not get your company to act?
Toyota experienced the cost of employees not passing along information about customer accidents and
complaints when it recalled 8.5 million vehicles, answered class-action suits, and repaired relationships
with government regulators over its alleged failure to disclose important data and issues about its cars’
safety. One former employee of Lehman Brothers, whose sales efforts and structuring of securities
investments “helped lead to the demise of the bank he loved and to an economic unraveling worldwide
confessed, ‘I have blood on my hands.’”5 His remorse comes from his failure to speak up and raise his
concerns about the ethical issues he saw even as he was rewarded for his work.
2-3l BALANCINGETHICALDILEMMAS
In some situations, the answers are neither right nor wrong; rather, the situ- ations present dilemmas to
be resolved. For example, Google has struggled for years with its decision to do business in the People’s
Republic of China because of known human rights violations and censorship by the government there.
Its eventual decision was to remain in China despite the government’s censorship of its search engine
there. Other companies debated whether to do business in South Africa when that country’s
government followed a policy of apartheid. In some respects, the presence of these companies would
help by advancing human rights and, certainly, by improving the standard of living or communications
for at least some international operations workers. On the other hand, their presence could help such
governments sustain themselves by enabling them to point to economic successes despite human rights
violations.
2-4 Resolution of Business Ethical Dilemmas
So far, you know what business ethics is and you have a list of the areas that cover most ethical
dilemmas. But if you were faced with an ethical dilemma, how would you resolve it? The resolution of
ethical dilemmas in business is often difficult, even in firms with codes of ethics and cultures committed
to com- pliance with ethical models for decision making. Managers need guidelines for making ethical
choices. Several prominent scholars in the field of business ethics have developed models for use as
guides in difficult situations. This section cov- ers those models.
2-4a BLANCHARDANDPEALE
The late Dr. Norman Vincent Peale and management expert Kenneth Blanchard offer three questions
that managers should ponder in resolving ethical dilemmas: “Is it legal?” “Is it balanced?” “How does it
make me feel?” If the answer to the first question, “Is it legal?” is no, for business ethics purposes, your
ethical analysis is done. While there is room for conscientious objection to many laws on an ethi- cal
basis, a manager is not given the authority to break the law, and agencies such as the Internal Revenue
Service (IRS) and the Securities Exchange Commission
38

(SEC) are not known for helping companies ease their consciences through refus- als to pay taxes or file
required securities disclosures and reports. The Hewlett- Packard board hired private investigators to
determine the source of leaks about its board meetings, activities, and decisions. The investigators hired
(actually a subcontractor of a contractor) used a technique known as “pretexting” in the trade. They
posed as others in order to obtain access to phone records of directors and reporters to determine who
was calling who, an activity prohibited by a Cali- fornia statute.6 Eventually, the investigators as well as
some within the company, including HP’s ethics officer, were charged with violations. These managers
failed to stop when the answer to the question of legality was “no.”
Answering the second question, “Is it balanced?” requires a manager to step back and view a problem
from other perspectives—those of other parties, own- ers, shareholders, or the community. For
example, an M&M/Mars cacao buyer was able to secure a low price on cacao for his company because
of pending gov- ernment takeovers and political disruption. M&M/Mars officers decided to pay more for
the cacao than the negotiated figure. Their reason was that someday their company would not have the
upper hand, and then they would want to be treated fairly when the price became the seller’s choice.
Answering “How does it make me feel?” requires a manager to do a self- examination of the comfort
level of a decision. Some decisions, though they may be legal and may appear balanced, can still make a
manager or employee uncomfortable. For example, Gil Meche, a pitcher for the Kansas City Royals, was
entitled to $12 million in compensation for his final contract year with the royals. However, his shoulder
and arm had significant pain from years of pitch- ing and he opted not to have surgery for repairs. Under
the terms of his contract, all he had to do was report for spring training and the season and go through
the motions of rehabilitation. Mr. Meche retired because he said, “When I signed my contract, my main
goal was to earn it. Once I started to realize I wasn’t earn- ing my money, I felt bad. I was making a crazy
amount of money for not even pitching. Honestly, I didn’t feel I deserved it. I did not want to have those
feel- ings again.”7 Known as the element of conscience, this test for ethics requires businesspeople to
find the source of their discomfort in a particular dilemma or proposed decision.
2-4b THEFRONT-PAGE-OF-THE-NEWSPAPERTEST
One simple ethical model requires only that a decision maker envision how a reporter would describe a
decision on the front page of a local or national newspa- per. When Salomon Brothers illegally cornered
the U.S. government’s bond mar- ket, the BusinessWeek headline read, “How Bad Will It Get?” Nearly
two years later, a follow-up story on Salomon’s crisis strategy was headlined “The Bomb Shelter That
Salomon Built.” During the aftermath of the bond market scandal, the interim chairman of Salomon,
Warren Buffett, told employees, “Contemplating any business act, an employee should ask himself
whether he would be willing to see it immediately described by an informed and critical reporter on the
front page of his local paper, there to be read by his spouse, children, and friends. At Salomon we simply
want no part of any activities that pass legal tests but that we, as citizens, would find offensive.”8
There are other examples, such as that involving the Government Services Administration (GSA) when it
held a retreat for employees in Las Vegas, “GSA Head Resigns Over Las Vegas Boondoggle.”9 This
headline is one for employees to
39

consider if they are contemplating a day off for obtaining and playing a new video game: “Calling in Sick
to Heed ‘Call of Duty.’”10 And “Chief’s DUI Arrest Roils the FAA (Federal Aviation Administration),” tells
all leaders that they need to exercise caution and discretion in their personal lives.11
When Wall Street firms were reporting multibillion-dollar losses due to their highly leveraged portfolios
of risky instruments, the headline on the cover of For- tune magazine read, “What Were They Smoking?”
(November 26, 2007). The head- line test helps us to put our decisions into a longer-term perspective.
2-4c LAURANASHANDPERSPECTIVE
Business ethicist Laura Nash has developed a series of questions that business managers should ask
themselves as they evaluate their ethical dilemmas. One of the questions is, “How would I view the issue
if I stood on the other side of the fence?” For example, in 1993, federal guidelines required meat to be
cooked to 140 degrees Fahrenheit. At that time, however, the state of Washington proposed imposing a
higher temperature requirement of 155 degrees. Burger King cooked its hamburgers to 160 degrees and
Wendy’s, Hardee’s, and Taco Bell cooked their meat to 165 degrees.
Health and food industry experts supported a minimum cooking temperature of 155 degrees to be
certain E. coli bacteria are eliminated. Jack-in-the-Box followed the legal minimum of 140 degrees.
Would you want that information as a con- sumer? Given the trend toward higher temperatures and the
pending regulation, would you want your meat cooked to a higher temperature? Although the cooking
temperature was legal, an ethical issue arises in continuing to follow only the law when health experts
are concerned about the adequacy of the law. Jack-in-the-Box did, in fact, experience an E. coli
outbreak: one child died and 300 other customers became ill.12
Other questions in the Nash model include, “Am I able to discuss my decision with my family, friends,
and those closest to me?” “What am I trying to accom- plish with my decision?” “Will I feel as
comfortable about my decision over time as I do today?” The Nash model forces managers to seek
additional perspectives as decisions are evaluated and implemented. For example, when the late
William Aramony served as the CEO of United Way, he enjoyed such perks as an annual salary of close to
$400,000, flights on the Concorde, and limousine service. Even though these benefits were about the
same as those of other CEOs managing com- parable assets, it would still be difficult to justify such
benefits to a donor who earns $22,000 a year and has pledged 5 percent of it to United Way.
2-4d THEWALLSTREETJOURNALMODEL
The Wall Street Journal model for resolution of ethical dilemmas consists of compli- ance, contribution,
and consequences. Like the Blanchard–Peale model, any pro- posed conduct must first be in compliance
with the law. The next step requires an evaluation of a decision’s contributions to the shareholders, the
employees, the community, and the customers. For example, furniture manufacturer Herman Miller, in
a decision that was prescient in relation to the sustainability initiatives of 2010, decided both to invest in
equipment that would exceed the requirements for compliance with the 1990 Clean Air Act and to
refrain from using rain for- est woods in producing its signature Eames chair. The decision was costly to
the shareholders at first, but ultimately they, the community, and customers enjoyed the benefits.
40

Finally, managers are asked to envision the consequences of a decision, such as whether headlines that
are unfavorable to the firm may result. The initial conse- quence of Miller’s decisions was a reduction in
profits because of the costs of the changes. However, the long-term consequences were the respect of
environmental regulators, a responsive public committed to rain forest preservation, and Miller’s long-
standing recognition as one of America’s top 20 corporate citizens.
2-4e OTHERMODELS
Of course, much simpler models for making ethical business decisions are avail- able. One stems from
Immanuel Kant’s categorical imperative, loosely similar to the Golden Rule: “Do unto others as you
would have them do unto you.” Treating others or others’ money as we would want to be treated is a
powerful evaluation technique in ethical dilemmas. (See Exhibit 2.5 and p. 63 for more discussion.)
2-5 Why We Fail to Reach Good Decisions in Ethical Dilemmas
Very often, we look at the harmful conduct of corporate executives and wonder, “Where were their
minds, and what were they thinking when they decided to engage in such bad behavior?” Often those
involved did not walk through the steps in resolving ethical dilemmas discussed earlier. But they
probably also slipped into rationalizations rather than analysis. The following sections provide a list and
summary of each of the frequent statements of rationalization that we use to avoid facing ethical
dilemmas (see Exhibit 2.1).
2-5a “EVERYBODYELSEDOESIT”
When former Tour de France winner (now stripped of those titles) Lance Armstrong admitted that he
had used performance-enhancing drugs throughout his career he said, “Doping was organized and
everywhere in the peloton. In my mind, the choice was ‘do it or go home.’ For me that was not a
choice.”13 “Everybody else does it” is a rationalization, but it is not an analysis of the ethical issues
involved in conduct.
2-5b “IFWEDON’TDOIT,SOMEONEELSEWILL”
The rationalization of competition is one that finds us reasoning that if someone is going to do it and
make money, it might as well be us. For example, a friend asks if
EXHIBIT 2.1 The Language of Rationalization
“Everybody else does it.” “If we don’t do it, someone else will.” “That’s the way it has always been
done.” “We’ll wait until the lawyers tell us it’s wrong.” “It doesn’t really hurt anyone.” “The system is
unfair.” “I was just following orders.” “You think this is bad, you should have seen . . .” “It’s a gray area.”
41

he can pay you for the use of your subway pass, a pass that says it is nontransfer- able. You could easily
say, “If I don’t do it, he will just get someone else to do it, so I might as well benefit.” The fact that
others may engage in unethical conduct does not require you to join them. Think through the
consequences if we relied on this notion that they are going to do it anyway, so we might as well
participate. There is an impact on the sale of tokens, the ability to trust pass-holders, and the overall
revenues of the transportation system if everyone participates in such a sharing program.
2-5c “THAT’STHEWAYITHASALWAYSBEENDONE”
Corporate or business history and business practices are not always sound. The fact that for years
nothing has changed in a firm may indicate the need for change and an atmosphere that invites possible
ethical violations. For example, when the New Orleans Saints bounty program was uncovered by the
NFL, a program under which some players were able to double their salaries by taking out certain
players or inflicting physical injuries on players in exchange for cash bonuses, the players all said that
they came into the culture that had always done this kind of thing. They also said that they knew it was a
mistake, but because it was accepted behav- ior in their organizations, they did it anyway.
2-5d “WE’LLWAITUNTILTHELAWYERSTELLUSIT’SWRONG”
Lawyers are trained to provide only the parameters of the law. In many situations, they offer an opinion
that is correct in that it does not violate the law. Whether the conduct they have judged as legal is also
ethical is a different question. Allowing law and lawyers to control a firm’s destiny ignores the
opportunity to make wise and ethical choices. For example, the SEC has given very little guidance to
compa- nies and lawyers about when they need to disclose health issues of their CEOs. So, when Steve
Jobs had his liver transplant and when he was experiencing significant health issues in the years
following the transplant, Apple made no disclosures other than that Mr. Jobs was taking a leave of
absence and when he would return. None- theless, Apple’s stock dropped as a result of the
nondisclosures because speculation ran rampant. Apple met its legal disclosure requirements, but
withholding mate- rial information resulted in losses to the shareholders. Apple’s response to those who
raised questions about Apple’s candor was that it had followed the advice of legal counsel. (See Chapter
19 for more information on required disclosures.)
2-5e “ITDOESN’TREALLYHURTANYONE”
When we are the sole rubbernecker on the freeway, traffic remains unaffected. But if everyone
rubbernecks, we have a traffic jam. If all of us made poor ethical choices, we would cause significant
harm. A man interviewed after he was arrested for defrauding insurance companies through staged
auto accidents remarked, “It didn’t really hurt anyone. Insurance companies can afford it.” The second
part of his statement is accurate. The insurance companies can afford it—but not without cost to
someone else. Such fraud harms all of us because we must pay higher premiums to allow insurers to
absorb the costs of investigating and paying for fraudulent claims.
2-5f “THESYSTEMISUNFAIR”
Often touted by students as a justification for cheating on exams, this rationali- zation eases our
consciences by telling us we are cheating only to make up for
42

deficiencies in the system; yet just one person cheating can send ripples through an entire system. The
credibility of grades and the institution come into question as students obtain grades through means
beyond the system’s standards. In coun- tries in which corruption is a way of life and government
employees award con- tracts and rights to do business on the basis of payments rather than on the
merits of a given company or its proposal, the bribery only results in greater unfairness within and
greater costs to those countries. Many economists have noted that a country’s businesses and economy
will not progress without some fundamental assurance of trust that comes through a belief that there is
a level playing field where the quality of products and services matter.
2-5g “IWASJUSTFOLLOWINGORDERS”
In many criminal trials and disputes over responsibility and liability, managers disclaim their
responsibility by stating, “I was just following orders.” Sometimes, individuals should not follow the
directions of supervisors because they have been asked to do something illegal or immoral. Judges who
preside over the criminal trials of war criminals often remind defendants that an order is not necessarily
legal, ethical, or moral. Values require us to question or depart from orders when others will be harmed
or wronged. In the days prior to the financial collapse of MF Global, employees were asked to transfer
funds from clients’ accounts in order to cover hedging losses, something that is prohibited by law.
During the investiga- tion, the employees said that they did what they were ordered to do. However, the
result was significant losses for their customers. When the allegations of prisoner abuse in Iraq emerged,
along with photos, one of the first defenses raised by law- yers for the soldiers being court-martialed for
their role in the abuses was, “I was just following orders.” Sometimes following orders is not the ethical
thing to do.
2-5h “YOUTHINKTHISISBAD,YOUSHOULDHAVESEEN...”
This rationalization finds employees looking back at earlier times and reminding others that the
company’s safety policies or accounting practices used to be much worse. At one company, when some
employees objected to backdating contracts to slip the earnings into the quarter, some employees
reassured them by saying, “At least we’re not using the 35-day month we used to use to meet targets.”
2-5i “IT’SAGRAYAREA”
The gray area is a comfort level for us when we are in the midst of an ethical dilemma. Once we enter
the gray area, we have a fine line that crosses into illegal- ity and also an opportunity to explore an issue
beyond bare legal requirements. An attorney for former HP general counsel Ann Baskins says that Ms.
Baskins now realizes that she should have focused on questioning whether the pretexting was ethical,
not just on whether it was legal. “She regrets that she did not do so.”14 Kevin Hunsaker, a deputy
general counsel and chief ethics officer, asked internal HP security employees about the legality of the
pretexting operations, and one responded, “I think it’s on the edge, but above board.” Hunsaker
responded with what have become the infamous words in the investigation, “I shouldn’t have asked.”
On the edge and in a gray area often lands us in legal difficulty and con- troversy. Even though many of
the charges were dismissed or reduced, five indi- viduals, including Mr. Hunsaker, were charged with
criminal misconduct in the HP pretexting case and the company paid a $14 million fine to settle the
charges.
43

Ethical Issues
Indy driver Danica Patrick gave an interview to Sports Illustrated writer and radio host Dan Patrick, a
transcript of which follows.
Dan: If you could take a performance-enhancing drug and not get caught, would you do it if it allowed
you to win Indy?
Danica: Well then it’s not cheating, is it? If nobody finds out?
Dan: So you would do it?
Danica: Yeah, it would be like finding a grey area. In motorsports we work in the grey areas a lot. You’re
trying to find where the holes are in the rule book.
After the interview, in an interview with USA Today, Ms. Patrick indicated that she was just joking. The
head of the USADA (U.S. Anti-Doping Agency) called the interview “totally irresponsible,” and added,
“Although joking about the use of dangerous and unhealthy drugs that cheaters use to rob clean
athletes of their dreams is no laughing matter.”
Identify the rationalizations in Ms. Patrick’s state- ments. Why do you think she answered the questions
as she did? Was the joke still an ethical issue?
Sources: Danpatrick.com, http://www.sportsillustrated.cnn.com, accessed June 2, 2009; Eddie Pells, AP
wire story, June 2, 2009.
2-6 Social Responsibility: Another Layer of Business Ethics
So far in this chapter we have covered two layers of business ethics: the basic cat- egories, and notions
of fairness. A third layer of ethics focuses on relationships and conflicts among relationships.
In some ethical dilemmas in business, the interests of the shareholders might be different from the
interests of the employees. Lower wages bring higher profits and returns, at least temporarily, to
shareholders, but is shipping work overseas to countries where the wages are low or work conditions
unhealthy taking unfair advantage? In this third layer of business ethics, we look at the interests of those
who are affected by business decisions, often called the stakeholders of the busi- ness. For example,
suppose the business discovers that its air pollution control equipment is not state-of-the-art technology
and that, although no laws are being violated, more pollution is being released than is necessary. To
correct the prob- lem, its factory must be shut down for a minimum of three months. The pollution will
harm the air and the community, but the shutdown will harm the workers and the shareholders. The
business must consider the needs and interests of all its stakeholders in resolving the ethical dilemma it
faces. Much discussion and disa- greement continue to surround this particular issue. In the following
interview excerpt, economist Milton Friedman offers a different perspective on this ethical dilemma.
Q: Quite apart from emission standards and effluent taxes, shouldn’t corporate officials take action to
stop pollution out of a sense of social responsibility?
Milton Friedman: I wouldn’t buy stock in a company that hired that kind of leadership. A corporate
executive’s responsibility is to make as much money for the shareholders as possible, as long as he
operates within the rules of the game. When an
44

executive decides to take action for reasons of social responsibility, he is taking money from someone
else—from the stockholders, in the form of lower dividends; from the employees, in the form of lower
wages; or from the consumer, in the form of higher prices. The responsibility of a corporate executive is
to fulfill the terms of his contract. If he can’t do that in good conscience, then he should quit his job and
find another way to do good. He has the right to promote what he regards as desirable moral objectives
only with his own money. If, on the other hand, the executives of U.S. Steel undertake to reduce
pollution in Gary for the purpose of making the town attractive to employees and thus lowering labor
costs, then they are doing the stockholders’ bidding. And everyone benefits: The stockholders get higher
dividends; the customer gets cheaper steel; the workers get more in return for their labor. That’s the
beauty of free enterprise.... To the extent that pollution caused by the U.S. Steel plant there is confined
to that city and
the people there are truly concerned about the problem, it’s to the company’s advantage to do
something about it. Why? Because if it doesn’t, workers will prefer to live where there is less pollution,
and U.S. Steel will have to pay them more to live in Gary, Indiana.15
2-6a ETHICALPOSTURESFORSOCIALRESPONSIBILITY
Often, decisions in dilemmas that involve stakeholders depend on the overall attitude of a company and
its perspective on the role of business in society. The ethical perspective of a business often sets the
tone for its operations and employ- ees’ choices. Historically, the philosophical debate over the role of
business in society has evolved into four schools of thought on ethical behavior based on the responses
to two questions: (1) Whose interest should a corporation serve? (2) To whom should a corporation be
responsive in order to best serve that inter- est? These questions have only two answers—“shareholders
only” and “the larger society”—and the combination of those answers defines the school of thought.
The following discussion is summarized in Exhibit 2.2.
Inherence
According to the inherence school of thought, managers answer only to share- holders and act only with
shareholders’ interests in mind. This type of manager would not become involved in any political or
social issues unless it was in the shareholders’ best interests to do so, provided the involvement did not
backfire and cost the firm sales. Milton Friedman’s philosophy, as previously expressed,
EXHIBIT 2.2 Social Responsibility of Corporations
MORAL QUESTION: WHOSE INTEREST SHOULD THE CORPORATION SERVE?
POLICY QUESTION: BEST WAY TO SERVE INTEREST IF THE CORPORATION IS RESPONSIVE TO:
Inherence
Shareholders only
Shareholders only
Enlightened self-interest
Shareholders only
Larger society
Invisible hand
Larger society
Shareholders only
Social responsibility
Larger society
Larger society
Source: Adapted with permission of American Business Law Journal, from Daryl Hatano, “Should
Corporations Exercise Their Freedom of Speech Rights?”
45

is an example of inherence. To understand how a business following the inher- ence school of thought
would behave, consider the issue of a proposed increase in residential property taxes for school funding.
A business that subscribes to the inherence school would support a school tax increase only if the
educational issue affected the company’s performance and only if such a position did not offend those
who opposed the tax increase.
Enlightened Self-Interest
According to this school of thought, the manager is responsible to the sharehold- ers but serves them
best by being responsive to the larger society. Enlightened self-interest is based on the view that, in the
long run, business value is enhanced if business is responsive to the needs of society. In this school,
managers are free to speak out on societal issues without the constraint of offending someone, as in
inherence. Businesses would anticipate social changes and needs and be early advocates for change. For
example, many corporations today have instituted job sharing, child-care facilities, and sick-child care in
response to the changing struc- ture of the American family and workforce. This responsiveness to the
needs of the larger society should also be beneficial to shareholders because it enables the business to
retain a quality workforce.
The Invisible Hand
The invisible hand school of thought is the opposite of enlightened self-interest. According to this
philosophy, business ought to serve the larger society and it does this best when it serves the
shareholders only. Such businesses allow govern- ment to set the standards and boundaries for
appropriate behavior and simply adhere to these governmental constraints as a way of maximizing
benefits to their shareholders. They become involved in issues of social responsibility or in politi- cal
issues only when society lacks sufficient information on an issue to make a decision. Even then, their
involvement is limited to presenting data and does not extend to advocating a particular viewpoint or
position. This school of thought holds that it is best for society to guide itself and that businesses work
best when they serve shareholders within those constraints.
Social Responsibility
In the social responsibility school of thought, the role of business is to serve the larger society by
responding to society’s needs as a first priority. A business fol- lowing this school of thought would
advocate full disclosure of product informa- tion to consumers in its advertising and would encourage
political activism on the part of its managers and employees on all issues, not just those that affect the
corporation. These businesses adhere to the belief that their sense of social respon- sibility contributes
to their long-term success.
2-7 Why Business Ethics?
Now that you have background on the types of ethical issues businesses face, background on social
responsibility, and a framework for analysis of ethical issues, you may still be skeptical: “But why should
a business worry about these things beyond just complying with the law? Why not just maximize under
the system?” Some compelling reasons promote choosing ethical behavior, as discussed in the following
sections.
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-7a PERSONALACCOUNTABILITYANDCOMFORT:BUSINESSETHICS FOR PERSONAL REASONS
Before looking at business data on the value of ethics, it is important to realize that the choices we make
in our business lives must still feel personally comfort- able. And it would be misleading to say that every
ethical business is a profitable business. First, not all ethical people are good managers or possess the
necessary skills for making a business a success; but many competent businesspeople have suffered for
being ethical, and many others seem to survive despite their lack of ethics. Columnist Dave Barry noted
that every time an oil spill occurs, the oil com- panies ready themselves for the higher prices and profits
that come because all that oil is lost at sea. Despite his conviction and jail term related to junk bond
sales in the 1980s, Michael Milken decades later earned a $50 million fee for helping Ted Turner
negotiate a merger with Time Warner.16 Many whistle-blowers, although highly respected, have been
unable to find employment in their industries. If ethi- cal behavior does not guarantee success, then why
have ethics? The answer has to do with personal ethics applied in a business context. One investment
banker who worked on Drexel Burnham’s trading desk during the Michael Milken days of that firm and
who is now chairman of GoldTree Asset Management said, “Just to be able to sit on the desk and see
the calls start at 4:15 in the morning, Boesky and Perelman and Diller and Murdoch ...”17 But Mr.
Wagner said that he took not just the memories of the power of Drexel with him but a powerful lesson
as well: “There’s a difference between being very competitive and can-do, and winning at all costs. All
costs is costly.”
Business ethics is really nothing more than a standard of personal behavior applied to a group of people
working together to make a profit. Some people are ethical because it enables them to sleep better at
night. Some people are ethical because of the fear of getting caught. But being personally ethical is a
justification for business ethics—it is simply the correct thing to do. Bowen McCoy’s “The Par- able of
the Sadhu” focuses on business ethics for personal reasons.
For the Manager’s Desk
Re: The Parable of the Sadhu
[In 1982], as the first participant in the new six-month sabbatical program that Morgan Stanley has
adopted, I enjoyed a rare opportunity to collect my thoughts as well as do some traveling. I spent the
first three months in Nepal, walking 600 miles through 200 villages in the Himalayas and climbing some
120,000 vertical feet. On the trip my sole Western companion was an anthropologist who shed light on
the cultural patterns of the villages we passed through.
During the Nepal hike, something occurred that has had a powerful impact on my thinking about
corporate ethics. Although some might argue that the experience has no relevance to business, it was a
situation in which a
basic ethical dilemma suddenly intruded into the lives of a group of individuals. How the group
responded I think holds a lesson for all organizations no matter how defined.
The Sadhu
The Nepal experience was more rugged and adventure- some than I had anticipated. Most commercial
treks last two or three weeks and cover a quarter of the distance we traveled.
My friend Stephen, the anthropologist, and I were halfway through the 60-day Himalayan part of the
trip when we reached the high point, an 18,000-foot pass over
47

a crest that we’d have to traverse to reach the village of Mukinath [sic], an ancient holy place for pilgrims.
Six years earlier I had suffered pulmonary edema, an acute form of altitude sickness, at 16,500 feet in the vicinity of Everest
base camp, so we were understand- ably concerned about what would happen at 18,000 feet. Moreover, the Himalayas were
having their wettest spring in 20 years; hip-deep powder and ice had already driven us off one ridge. If we failed to cross the
pass, I feared that the last half of our “once in a lifetime” trip would be ruined.
The night before we would try the pass, we camped at a hut at 14,500 feet. In the photos taken at the camp, my face appears
wan.The last village we’d passed through was a sturdy two-day walk below us, and I was tired.
During the late afternoon, four backpackers from New Zealand joined us, and we spent most of the night awake, anticipating
the climb. Below we could see the fires of two other parties, which turned out to be two Swiss couples and a Japanese hiking
club.
To get over the steep part of the climb before the sun melted the steps cut in the ice, we departed at 3:30 A.M. The New
Zealanders left first, followed by Stephen and myself, our porters and Sherpas, and then the Swiss. The Japanese lingered in
their camp.The sky was clear, and we were confident that no spring storm would erupt that day to close the pass.
At 15,500 feet, it looked to me as if Stephen were shuf- fling and staggering a bit, which are symptoms of altitude sickness. (The
initial stage of altitude sickness brings a head- ache and nausea. As the condition worsens, a climber may encounter difficult
breathing, disorientation, aphasia, and paralysis.) I felt strong, my adrenaline was flowing, but I was very concerned about my
ultimate ability to get across. A couple of our porters were also suffering from the height, and Pasang, our Sherpa sirdar
(leader), was worried.
Just after daybreak, while we rested at 15,500 feet, one of the New Zealanders, who had gone ahead, came staggering down
toward us with a body slung across his shoulders. He dumped the almost naked, barefoot body of an Indian holy man—a sadhu
—at my feet. He had found the pilgrim lying on the ice, shivering and suffering from hypothermia. I cradled the sadhu’s head
and laid him out on the rocks.The New Zealander was angry. He wanted to get across the pass before the bright sun melted the
snow. He said, “Look, I’ve done what I can. You have porters and Sherpa guides.You care for him.We’re going on!” He turned
and went back up the mountain to join his friends.
I took a carotid pulse and found that the sadhu was still alive. We figured he had probably visited the holy shrines at Mukinath
[sic] and was on his way home. It was fruitless to question why he had chosen this desperately high route
instead of the safe, heavily traveled caravan route through the Kali Gandaki gorge. Or why he was almost naked and with no
shoes, or how long he had been lying in the pass. The answers were not going to solve our problem.
Stephen and the four Swiss began stripping off outer clothing and opening their packs. The sadhu was soon clothed from head
to foot. He was not able to walk, but he was very much alive. I looked down the mountain and spot- ted below the Japanese
climbers marching up with a horse.
Without a great deal of thought, I told Stephen and Pasang that I was concerned about withstanding the heights to come and
wanted to get over the pass. I took off after several of our porters who had gone ahead.
On the steep part of the ascent where, if the ice steps had given way, I would have slid down about 3,000 feet, I felt vertigo. I
stopped for a breather, allowing the Swiss to catch up with me. I inquired about the sadhu and Stephen. They said that the
sadhu was fine and that Stephen was just behind. I set off again for the summit.
Stephen arrived at the summit an hour after I did. Still exhilarated by victory, I ran down the snow slope to congratulate him. He
was suffering from altitude sickness, walking fifteen steps, then stopping, walking fifteen steps, then stopping. When I reached
them, Stephen glared at me and said: “How do you feel about contributing to the death of a fellow man?”
I did not fully comprehend what he meant. “Is the sadhu dead?” I inquired. “No,” replied Stephen, “but he surely will be!” After
I had gone, and the Swiss had departed not long
after, Stephen had remained with the sadhu. When the Japanese had arrived, Stephen had asked to use their horse to transport
the sadhu down to the hut.They had refused. He had then asked Pasang to have a group of our porters carry the sadhu. Pasang
had resisted the idea, saying that the porters would have to exert all their energy to get themselves over the pass. He had
thought they could not carry a man down 1,000 feet to the hut, reclimb the slope, and get across safely before the snow
melted. Pasang had pressed Stephen not to delay any longer.
The Sherpas had carried the sadhu down to a rock in the sun at about 15,000 feet and had pointed out the hut another 500 feet
below.The Japanese had given him food and drink. When they had last seen him he was listlessly throwing rocks at the
Japanese party’s dog, which had frightened him.
We do not know if the sadhu lived or died.
For many of the following days and evenings Stephen and I discussed and debated our behavior toward the sadhu. Stephen is a
committed Quaker with deep moral vision. He said, “I feel that what happened with the sadhu is
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a good example of the breakdown between the individual ethic and the corporate ethic. No one person was willing to assume
ultimate responsibility for the sadhu. Each was willing to do his bit just so long as it was not too incon- venient.When it got to
be a bother, everyone just passed the buck to someone else and took off. Jesus was relevant to a more individualist stage of
society, and how do we interpret his teaching today in a world filled with large, impersonal organizations and groups?”
I defended the larger group, saying, “Look, we all cared. We all stopped and gave aid and comfort. Everyone did his bit.The New
Zealander carried him down below the snow line. I took his pulse and suggested we treat him for hypothermia.You and the
Swiss gave him clothing and got him warmed up. The Japanese gave him food and water. The Sherpas carried him down to the
sun and pointed out the easy trail toward the hut. He was well enough to throw rocks at a dog. What more could we do?”
“You have just described the typical affluent West- erner’s response to a problem.Throwing money—in this case food and
sweaters—at it, but not solving the funda- mentals!” Stephen retorted.
“What would satisfy you?” I said.“Here we are, a group of New Zealanders, Swiss, Americans, and Japanese who have never
met before and who are at the apex of one of the most powerful experiences of our lives. Some years the pass is so bad no one
gets over it.What right does an almost naked pilgrim who chooses the wrong trail have to disrupt our lives? Even the Sherpas
had no interest in risk- ing the trip to help him beyond a certain point.”
Stephen calmly rebutted, “I wonder what the Sherpas would have done if the sadhu had been a well-dressed Nepali, or what
the Japanese would have done if the sadhu had been a well-dressed Asian, or what you would of done, Buzz, if the sadhu had
been a well-dressed Western woman?”
“Where, in your opinion,” I asked instead, “is the limit of our responsibility in a situation like this? We had our own well-being
to worry about. Our Sherpa guides were unwilling to jeopardize us or the porters for the sadhu. No one else on the mountain
was willing to commit himself beyond certain self-imposed limits.”
Stephen said, “As individual Christians or people with a Western ethical tradition, we can fulfill our obligations in such a
situation only if (1) the sadhu dies in our care, (2) the sadhu demonstrates to us that he could undertake the two-day walk
down to the village, or (3) we carry the sadhu for two days down to the village and convince someone there to care for him.”
“Leaving the sadhu in the sun with food and cloth- ing, while he demonstrated hand-eye coordination by
throwing a rock at a dog, comes close to fulfilling items one and two,” I answered. “And it wouldn’t have made sense to take
him to the village, where the people appeared to be far less caring than the Sherpas, so the third condition is impractical. Are
you really saying that, no matter what the implications, we should, at the drop of a hat, have changed our entire plan?”
The Individual versus the Group Ethic
Despite my arguments, I felt and continue to feel guilt about the sadhu. I had literally walked through a classic moral dilemma
without fully thinking through the conse- quences. My excuses for my actions include a high adrena- line flow, a superordinate
goal, and a once-in-a-lifetime opportunity—factors in the usual corporate situation, especially when one is under stress.
Real moral dilemmas are ambiguous, and many of us hike right through them, unaware that they exist. When, usually after the
fact, someone makes an issue of them, we tend to resent his or her bringing it up. Often, when the full import of what we have
done (or not done) falls on us, we dig into a defensive position from which it is very difficult to emerge. In rare circumstances
we may contem- plate what we have done from inside a prison.
Had we mountaineers been free of physical and men- tal stress caused by the effort and the high altitude, we might have
treated the sadhu differently. Yet isn’t stress the true test of personal and corporate values? The instant decisions executives
make under pressure reveal the most about personal and corporate character.Among the many questions that occur to me
when pondering my experi- ence are: What are the practical limits of moral imagina- tion and vision? Is there a collective or
institutional ethic beyond the ethics of the individual? At what level of effort or commitment can one discharge one’s ethical
responsibilities?
Not every ethical dilemma has a right solution. Reason- able people often disagree; otherwise there would be no dilemma. In a
business context, however, it is essential that managers agree on a process for dealing with dilemmas.
The sadhu experience offers an interesting parallel to business situations. An immediate response was man- datory. Failure to
act was a decision in itself. Up on the mountain we could not resign and submit our résumé to a headhunter. In contrast to
philosophy, business involves action and implementation—getting things done. Manag- ers must come up with answers to
problems based on what they see and what they allow to influence their decision-making processes. On the mountain, none of
us but Stephen realized the true dimensions of the situation we were facing.
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One of our problems was that as a group we had no process for developing a consensus. We had no sense of pur- pose or plan.
The difficulties of dealing with the sadhu were so complex that no one person could handle it. Because it did not have a set of
preconditions that could guide its action to an acceptable resolution, the group reacted instinc- tively as individuals. The cross-
cultural nature of the group added a further layer of complexity. We had no leader with whom we could identify and in whose
purpose we believed. Only Stephen was willing to take charge, but he could not gain adequate support to care for the sadhu.
Some organizations do have a value system that tran- scends the personal values of the managers. Such values, which go
beyond profitability, are usually revealed when the organization is under stress. People throughout the organization generally
accept its values, which, because they are not presented as a rigid list of commandments, may be somewhat ambiguous. The
stories people tell, rather than printed materials, transmit these conceptions of what is proper behavior.
For twenty years I have been exposed at senior levels to a variety of corporations and organizations. It is amaz- ing how quickly
an outsider can sense the tone and style of an organization and the degree of tolerated openness and freedom to challenge
management.
Organizations that do not have a heritage of mutually accepted, shared values tend to become unhinged dur- ing stress, with
each individual bailing out for himself. In the great takeover battles we have witnessed during past years, companies that had
strong cultures drew the wag- ons around them and fought it out, while other companies saw executives, supported by their
golden parachutes, bail out of the struggles.
Because corporations and their members are interde- pendent, for the corporation to be strong the members need to share a
preconceived notion of what is correct behavior, a “business ethic,” and think of it as a positive force, not a constraint.
As an investment banker I am continually warned by well-meaning lawyers, clients, and associates to be wary of conflicts of
interest. Yet if I were to run away from every difficult situation, I wouldn’t be an effective invest- ment banker. I have to feel my
way through conflicts. An effective manager can’t run from risk either; he or she has to confront and deal with risk. To feel
“safe” in doing this, managers need the guidelines of an agreed-on process and set of values within the organization.
After my three months in Nepal, I spent three months as an executive-in-residence at both Stanford Business School and the
Center for Ethics and Social Policy at the Graduate Theological Union at Berkeley. These six
months away from my job gave me time to assimilate twenty years of business experience. My thoughts turned often to the
meaning of the leadership role in any large organization. Students at the seminary thought of them- selves as antibusiness. But
when I questioned them they agreed they distrusted all large organizations, including the church. They perceived all large
organizations as imper- sonal and opposed to individual values and needs. Yet we all know of organizations where people’s
values and beliefs are respected and their expressions encouraged. What makes the difference? Can we identify the differ- ence
and, as a result, manage more effectively?
The word “ethics” turns off many and confuses more. Yet the notions of shared values and an agreed-on pro- cess for dealing
with adversity and change—what many people mean when they talk about corporate culture— seem to be at the heart of the
ethical issue. People who are in touch with their own core beliefs and the beliefs of others and are sustained by them can be
more comfort- able living on the cutting edge.
At times, taking a tough line or a decisive stand in a muddle of ambiguity is the only ethical thing to do. If a manager is
indecisive and spends time trying to figure out the “good” thing to do, the enterprise may be lost.
Business ethics, then, has to do with authenticity and integrity of the enterprise. To be ethical is to follow the business as well
as the cultural goals of the corporation, its owners, its employees, and its customers.Those who can- not serve the corporate
vision are not authentic business people and, therefore, are not ethical in the business sense.
At this stage of my own business experience I have a strong interest in organizational behavior. Sociologists are keenly studying
what they call corporate stories, legends, and heroes as a way organizations have of transmitting the value system.
Corporations such as Arco have even hired consultants to perform an audit of their corporate culture. In a company, the leader
is the person who under- stands, interprets, and manages the corporate value sys- tem. Effective managers are then action-
oriented people who resolve conflict, are tolerant of ambiguity, stress, and change, and have a strong sense of purpose for
them- selves and their organizations.
If all this is true, I wonder about the role of the pro- fessional manager who moves from company to company. How can he or
she quickly absorb the values and culture of different organizations? Or is there, indeed, an art of management that is totally
transportable? Assuming such fungible managers do exist, is it proper for them to manipulate the values of others?
What would have happened had Stephen and I carried the sadhu for two days back to the village and
50

ecome involved with the villagers in his care? In four trips to Nepal my most interesting experiences occurred in 1975 when I
lived in a Sherpa home in the Khumbu for five days recovering from altitude sickness.The high point of Stephen’s trip was an
invitation to participate in a family funeral ceremony in Manang. Neither experience had to do with climbing the high passes of
the Himalayas. Why were we so reluctant to try the lower path, the ambigu- ous trail? Perhaps because we did not have a
leader who could reveal the greater purpose of the trip to us.
Why didn’t Stephen with his moral vision opt to take the sadhu under his personal care?The answer is because, in part, Stephen
was hard-stressed physically himself, and because, in part, without some support system that involved our involuntary and
episodic community on the mountain, it was beyond his individual capacity to do so.
I see the current interest in corporate culture and cor- porate value systems as a positive response to Stephen’s pessimism
about the decline of the role of the individual in large organizations. Individuals who operate from a thought- ful set of personal
values provide the foundation of a corpo- rate culture. A corporate tradition that encourages freedom of inquiry, supports
personal values, and reinforces a focused sense of direction can fulfill the need for individuality along with the prosperity and
success of the group.Without such corporate support, the individual is lost.
Ethical Issues
In 2006, David Sharp, 34, from Britain, was not handling a climb to Mt. Everest well. He was a victim of oxygen deprivation and
eventually collapsed on the ground. Forty other climbers passed him by and, unable to move, Mr. Sharp froze to death. Those
who passed him by indicated that the conditions are rugged and that climbers know going in that they may have to pay the
ultimate price.
Lincoln Hall, 50, from Australia, was discovered by an American guide after he had spent a night on the freezing mountainside.
The MyHeroProject describes Mr. Hall’s condition as follows, “He was sitting on the trail with his jacket around his waist,
wearing no hat or gloves. The group stopped to investigate and found he was suffering from symptoms of edema, frostbite and
dehydration. He was alone and hallucinating; and generally incoherent in
That is the lesson of the sadhu. In a complex corpo- rate situation, the individual requires and deserves the suppor t of
the group. If people cannot find such suppor t from their organization, they don’t
know how to act. If such support is forthcoming, a person has a stake in the success of the group, and can add much to the
process of establishing and maintaining a corporate culture. It is the management’s challenge to be sensitive to individual
needs, to shape them, and to direct and focus them for the benefit of the group as a whole.
For each of us the sadhu lives. Should we stop what we are doing and comfort him; or should we keep trudg- ing up toward the
high pass? Should I pause to help the derelict I pass on the street each night as I walk by the Yale Club en route to Grand Central
Station? Am I his brother? What is the nature of our responsibility if we consider ourselves to be ethical persons? Perhaps it is
to change the values of the group so that it can, with all its resources, take the other road.
Discussion Question
Consider the closing questions Mr. McCoy poses. How do they apply to you personally and to businesses?
Source: Reprinted by permission of Harvard Business Review. From “The Parable of the Sadhu,” by Bowen H. McCoy, May–June
1997. Copyright © 1997 by Harvard Business School Publishing Corporation; all rights reserved.
his responses to their offers of help. He was without any of the proper equipment for survival in such conditions. Apparently,
Mr. Hall had collapsed the previous day on his way down from the summit.”
Mr. Dan Mazur and his team abandoned their climb and stayed with Mr. Hall until rescuer sherpas could come to help. Mr.
Hall’s team assumed that he was dead and had called his wife the evening before to tell her.
In the years since 1953, 3,000 climbers have made it to the Everest summit, but 200 climbers have died. A climb with a guide
costs about $60,000. What do you think makes the difference in the decision process between those who stop to help and
those who con- tinue their climbs?
Source: Adapted from Alan Cowell, “Adventurers Change. Danger Does Not,” New York Times, June 4, 2006, p. WK5
51

Importance of Ethics in Business Success and the Costs of Unethical Conduct
As you learn in other disciplines, from economics to management, business is driven by the bottom line.
Profits control whether the firm can obtain loans or gain investors and serve as the sole indicator of the
firm’s success—and, in most cases, its employees’ success, as well. Indeed, business firms can be defined
as groups of people working together to obtain maximum profits. The pursuit of the bottom line,
however, can occasionally distort the perspective of even the most conscien- tious among us. The fear of
losing business and, consequently, losing profits and capital support can persuade people to engage in
conduct that, although not ille- gal, is unethical. But those who pursue only the bottom line fail to
recognize that a successful business is more like a marathon than a sprint, requiring that ethical
dilemmas be resolved with a long-term perspective in mind. Indeed, those firms that adhere to ethical
standards perform better financially over the long run. A 2010 study indicates that if companies are not
ever-vigilant in adhering to ethical standards, they slip into illegal activity and destroy their profitability,
often to the point of bankruptcy.18
The Tylenol tampering incident of 1982 offers one of the most telling exam- ples of the rewards of being
ethical. When Tylenol capsules were discovered to have been tainted with deadly poison, Tylenol’s
manufacturer, McNeil Consumer Products Company, a subsidiary of Johnson & Johnson, followed its
code of ethics, which required it to put the interests of the consumer first. In what many financial
analysts and economists considered to be a disastrous decision and a dreadful mis- take, McNeil recalled
all Tylenol capsules from the market—31 million bottles with a retail value of about $100 million. A new
and safer form of a noncapsule Tylenol caplet was developed, and within a few months Tylenol regained
its majority share of the market. The recall had turned out to be neither a poor decision nor a financial
disaster. Rather, the company’s actions enhanced its reputation and served to cre- ate a bond between
Tylenol and its customers that was based largely on trust and respect for the integrity of the company
and the product. Johnson & Johnson and McNeil enjoyed decades of goodwill and deferential treatment
arising from their recall. The two companies had a near immunity from questions about their prod- ucts
and practices until 2010, when the companies’ conduct differed substantially from the 1982 recall. In
2010, the FDA found metal particles in the company’s liquid Infant’s Tylenol. That can happen in
production, but the key is to stop production, issue a recall, and confess. Instead, however, one officer
resigned and the FDA lev- ied penalties against McNeil over its lack of cooperation, mishandling of
materials, lax documentation, and failure to follow up on customer complaints.19 An April 2010 FDA site
visit to one plant found 20 violations of the agency’s good manu- facturing processes. One violation was
releasing seven batches of cherry-flavored Infants’ Tylenol after the employees had found the metal
from processing pis- tons in the product. Not only did McNeil not issue a recall, it did not even notify the
government about the issue. The result of these decisions has been declining profits, federal monitoring,
and a loss of trust by consumers.
Nestlé provides another example of the consequences for poor ethical choices, consequences that can
span generations. Nestlé has endured many consumer boy- cotts since the early 1970s as a result of its
intense—and what came to be perceived by the public as exploitative and unethical—marketing of
infant formula in then– Third World nations, where the lack of sanitation, refrigeration, and education
led
52

to serious health problems in infants given the formula. In 1989, nearly 20 years after the infant formula
crisis, Nestlé’s new “Good Start” formula was slow in market infiltration and, because of continuing
consumer resistance, did not per- form as well as its quality and innovativeness would have predicted.
Nestlé has never gained the market share or reputation its quality product deserves. As the Nestlé
experience illustrates, a firm’s reputation for ethical behavior is the same as an individual’s reputation: It
takes a long time to gain, but it can be lost instantly as the result of one bad choice.
BP, the oil and natural gas company, was performing well, with operations in 100 countries, 96,000
employees, and nearly 24,000 retail service stations around the world. As the second-largest oil
company in the world and one of the world’s 10 largest corporations, BP had also been a perennial
favorite of NGOs and environmental groups. For example, Business Ethics named BP the world’s most
admired company and one of its top corporate citizens. Green Investors named BP its top company
because of BP’s continuing commitment to investment in alternative energy sources. But BP had issues
percolating as it gained these recognitions. In 2005, an explosion at one of BP’s refineries, located in
Texas City, Texas, resulted in the death of 15 employees and injuries to 170 others. Both an internal
investigation and a government report indicated that the accident would have been avoidable if the
company had not cut maintenance costs at the expense of safety. The accident followed on the heels of
charges that the company’s traders were manipulating the price of propane in the markets by holding
back on supplies.
Also, the company’s oil fields at Prudhoe Bay, Alaska, burst in 2006, result- ing in a 267,000-gallon oil
spill on pristine Alaskan tundra.20 Industry standards require “smart-pigging” (ultrasonic checking) of
pipelines every five years to detect weaknesses or corrosion. At the time of the March 2006 spill, BP
disclosed that it had not done smart-pigging on the Prudhoe Bay line since 1998 and that the pipes had
not been cleaned since 1992. The BP field manager at Prudhoe Bay said, following the spill, “If we had it
to do over again, we would have been pig- ging those lines.”21 The line had to be closed down and,
again, an internal report revealed that the cost-cutting drive at BP affected the decisions in the oil fields.
Following the oil spill, BP’s stock price fell more than 15 percent in three months.
Oil production dropped 75 percent and BP spent $1 billion to fix the Texas refinery. One expert noted at
that time that it would take years for BP to recover financially and even longer to restore its credibility
with the market and regulators. That prescient remark has proved to be even truer after BP’s Deepwater
Horizon well in the Gulf of Mexico sprung a “leak” and began gushing oil in April 2010. The evidence of
compromises on well construction and rig safety was so over- whelming that BP paid a $4 billion fine
following a guilty plea to environmental and safety violations.
As General Motors prepared to release its Chevrolet Malibu for production in 1976, an engineer drafted
a memo about some issues with the placement of the car’s gas tank and the likelihood of its explosion in
the event of a rear-end colli- sion. The memo discussed both the potential liability for such accidents and
the costs of modifying the design. The Malibu went forward without production and design changes. By
1981, the company faced some litigation related to rear-end collisions involving the Malibu and gas tank
explosions. A lawyer working on the cases found the 1976 memo and explained the need to keep the
engineer’s thoughts and analysis from being disclosed. In December 1999, a jury awarded the victims of
a Malibu rear-end collision and explosion more than $107 million
53

compensatory damages and $4.8 billion punitive damages (later reduced to $1.2 billion on appeal) and explained
that its high damage verdict was directly attribut- able to the memo, the knowledge, and the failure to disclose
that information or take corrective action.
The poor ethical choices of the aforementioned firms resulted in tremendous financial setbacks and, in some
cases, destruction. The core values of a firm give it long-standing profitability. “The Tony Bennett Factor” offers
some insight into longevity, profitability, and values.
For the Manager’s Desk
Re: The Tony Bennett Factor
I had blocked out the background noise offered courtesy of MTV and my teenager, but I glanced up and saw Tony
Bennett. My parents raised me on Tony Bennett LPs back in the ’50s. “I Left My Heart in San Francisco” enjoyed
hours of play in Tyrone, Pa. And here he was back, “Tony Bennett Unplugged.” Mr. Bennett has not changed. Yet
his success has spanned generations. Suddenly my work with a col- league, Prof. Louis Grossman, had new
meaning. We had been studying business longevity, trying to determine what makes some businesses survive so
successfully for so long.
Prof. Grossman and I began our study when we spotted a 1982 full-page ad in this newspaper placed by Diamond
Match Co. The ad touted the company’s 100 years of consistent dividend payments.Today’s standards tell us that
100 quarters of dividend payments would be stellar. What kind of company was this? Were there others?
We discovered seven other industrial firms that could boast of making at least an annual dividend payment for a
string of 100 years or more: Scovill, Inc.; Ludlow Corp.; Stanley Works; Singer Co.; Pennwalt, Inc.; Pullman, Inc.; and
Corning Glass Works. Pullman, Ludlow and Stanley had unbroken chains of a century of quarterly dividend pay-
ments as well.
Mr. Bennett and our eight companies have survival in common.These survivors’ tools make management theo- ries
of today seem trite.They had no shifting paradigms. No buzzwords.
Mr. Bennett recognized his strength as a balladeer and stuck with it, through everything from the Beatles to Hootie
and the Blowfish. Although each of our companies recognized the importance of diversification, they all held fast
to a WBAWI—or “what business are we in?”— philosophy. They knew their strengths, developed strong market
presences based on those strengths, and never forgot their roots. Mr. Bennett never performed without
singing “I Wanna Be Around.” Singer never left its sewing machines. Pullman never deserted its train cars. Diamond
held on to its matches.
The firms diversified only when their strengths allowed. Scovill began as a brass button manufacturer and backed
into brass manufacturing because it knew brass. Scovill bought Hamilton Beach because Hamilton Beach was a
major brass purchaser. Scovill understood this customer’s business.
Other companies have forgotten the WBAWI lesson and paid the price. Sears abandoned its catalog, insurance and
real estate businesses and now struggles to find a retail presence. IBM has suffered for not understanding its
business was the workplace, not mainframe computers. Its Lotus takeover shows it may recognize the PC as the
workplace.
All Mr. Bennett needs are a microphone and a pianist to make music. All eight of our companies were low-cost
producers. All eight were cost conscious. Scovill executive vice presidents with worldwide responsibilities shared a
secretary. Spartan company headquarters were the rule for these firms. There were barely six-figure salaries for
executives. By contrast, IBM’s Louis Gerstner hired an executive chef at $120,000 just last month.
Mr. Bennett has used the same musical arranger for nearly 30 years. Our eight companies’ management team
histories are in direct contrast to the executive recruiting practices in vogue today. Scovill, founded during the Jef-
ferson administration in 1803, had only 12 CEOs during its 100-year dividend run.Three of the companies (Singer,
Stanley and Diamond) had CEOs who served for more than 40 years. Seven of the companies never had a CEO
serve for fewer than 10 years.They were not afraid of home-grown management.Their officers and CEOs came up
through the ranks. Management succession is found in all eight companies
54

Perhaps this information demonstrates the importance of continuity and stability. The executives appreciated the
tension between short-term results and long-term perfor- mance, but the short term did not control decision
making. Donald Davis, chairman and CEO of Stanley Works, put it this way: “The tension is always there. One of the
top management’s toughest jobs really is to mediate between the two viewpoints—short-term profit results now
versus investment for future development.”
Mr. Bennett did and does spend time on the road in concert, in direct contact with audiences—no mega-tours, just
constant gigs. And a full century before we heard of customer service, these firms sent their sales forces and vice
presidents alike out on the road to talk directly with customers. They had interesting marketing studies: one- on-
one feedback. Sales calls, follow-ups, replacements, and refunds allowed them to remain in the customers’ minds
and good graces.
One officer said it best: “Anyone can read the monthly financialreports:Whatweneedtodoistointerpretthem so we
can spot trends.We call on customers, on suppliers, we look at the bottom line of course, but we know how that
line reached the bottom.”
Mr. Bennett has never made a bad recording or disappointed during a live performance. Our eight firms
2-8a ETHICSASASTRATEGY
had strong commitments to integrity. Their mantra was: “If there’s integrity, there will be quality and profits.”
Their integrity manifested itself in more than just quality. Frederick T. Stanley, founder of Stanley Works, spoke of
the intricate balance between automation and employees: “Machines are no better than the skill, care, ingenuity
and spirit of the men who operate them.We can achieve perfect harmony when shortening of an operation
provides mutual advan- tages to the workman and the producers.” Ethics before its time. Re-engineering done
correctly in the 1800s. Nothing at the expense of the customer or the employee.
Our firms were no less remarkable than Mr. Bennett and his success with Generation X—his third generational
conquest.The sad part of their stories is what happened following the takeover battles of the ’80s. But that is a
story for another time. For now, it is reassuring to realize that cost-consciousness, focus, customer service, home-
grown management and integrity are keys to longevity. Today’s management fads seem as shallow as Ice T (aka
Ice-T)andMadonna.ThereisasimpleTonyBennettfactor in success that makes today’s fads much easier to debunk
and infinitely easier to question.
Source: “The Tony Bennett Factor,” by Marianne M. Jennings, from The Wall Street Journal, June 26, 1995, p. A12.
Ethical behavior not only increases long-term earnings; it also enables businesses to anticipate and plan for social
needs and cultural changes that require the firm or its product to evolve. One of the benefits of a firm’s ethical
behavior and par- ticipation in community concerns is the goodwill that such involvement fosters. Conversely, the
absence of that goodwill and consequent loss of trust can mean the destruction of the firm.
When methyl isocyanate gas leaked from the Union Carbide plant in Bhopal, India, in 1984, the deadly gas left
more than 2,500 dead and 200,000 injured. Investigations revealed that the plant had experienced problems with
some of the equipment designed to prevent such leaks. Although actual liability issues were hotly debated in court,
many ethical questions were raised regarding the plant and Union Carbide. Was it a wise decision to build the plant
in a country with little expertise in the relevant technology? Did the people in the town know of the potential
dangers of the plant? Why was a city of shacks allowed to be erected so close to the plant?
According to the Indian government, the plant had been operated well within legal and regulatory requirements,
and Union Carbide’s management had been cooperative in installing any additional equipment needed. Should
Union Carbide have done more than was legally required? Did the plant operators need more training for such
emergencies? Finally, the Bhopal incident raises many questions
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about the relationship between U.S. businesses and their operations in develop- ing countries that may not be
prepared to deal with the latest technologies and may not be fully informed about the associated risks. And the
effect on Union Carbide’s market capitalization continued for years following the accident. Union Carbide really
never recovered from the damage to its reputation despite the fact that several reports conclude the accident was
the result of a deliberate act of sabo- tage. Eventually Dow acquired Union Carbide and the curse of the Union
Carbide accident ended as the company was absorbed. Reputations and conduct move markets.
2-8b THEVALUEOFAGOODREPUTATION
A reputation, good or bad, stays with a business or an individual for a long time. Richard Teerlink, the former CEO
of Harley-Davidson, has said, “A reputation, good or bad, is tough to shake.” Once a company makes poor ethical
choices, it carries the baggage of those choices despite successful and sincere efforts to reform. Salt Lake City
struggled to regain its credibility as the trials from the brib- ery allegations surrounding its winning the bid for the
2002 Winter Olympics progressed and companies withdrew sponsorships. Businesses were, at that time, unsure
about the reputations and trustworthiness of those running the Salt Lake City Olympic operations. It took new
leadership and a commitment to high ethi- cal standards from Mitt Romney, who went on to become a two-term
governor of Massachusetts and presidential candidate in 2008 and 2012, to restore confidence in the Salt Lake City
2002 Winter Olympics.
2-8c LEADERSHIP’SROLEINETHICALCHOICES
George Fisher, the former CEO of Motorola and Kodak, has defined leadership as the ability to see around corners.
In other words, a leader sees a problem before it becomes a legal issue or liability and fixes it, thus saving company
time and money. All social, regulatory, and litigation issues progress along a timeline. As the issue is brought to the
public’s attention, either by stories or by the sheer mag- nitude of the problem, the momentum for remedies and
reforms continues until behavior is changed and regulated. Ethical choices afford firms opportunities to take
positions ahead of the curve. Firms can choose to go beyond the law and perhaps avoid regulation that might be
costly or litigation that can be devastating. For example, the issues relating to the problems with asbestos dust in
the lungs of asbestos workers and installers were clear in the 1930s. More studies needed to be done, but there
was sufficient evidence to justify lung protection for workers and the development of alternative forms of
insulation. However, the first litiga- tion relating to asbestos and asbestos workers did not arise until 1968. For that
30-year period, those in the business of producing and selling asbestos insulation products had the opportunity to
take preventive actions. They chose to wait out the cycle. The results were a ban on asbestos and litigation at
levels that forced the largest producer, Johns-Manville (now Manville), into bankruptcy. Leadership choices were
available in the 1930s for offering warnings, providing masks, and developing alternative insulators. Johns-Manville
chose to continue its posture of controlling information releases and studies. The liability issue progressed to a
point of no choice other than bankruptcy and reorganization.
Every business regulation that exists today controls business conduct in an area that was once not subject to
control but, rather, provided an opportunity for businesses to self-regulate by making good value choices.
Problems resulting
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from a lack of candor in payday loans and in the so-called subprime loan mar- ket have surfaced at all levels of our
economy. “We made so much money, you couldn’t believe it. And you didn’t have to do anything. You just had to
show up,”22 was the comment of Kal Elsayed, a former executive at New Century Finan- cial, a mortgage
brokerage firm based in Irvine, California. With his red Ferrari, Mr. Elsayed enjoyed the benefits of the growth in
the subprime mortgage market. However, those risky debtors, whose credit histories spelled trouble, defaulted on
their loans. New Century Financial declared bankruptcy under the weight of its portfolio of $39.4 billion in
subprime loans. “Subprime mortgage lending was easy until the market changed” is the hindsight comment of
mortgage brokers and ana- lysts. And the Wall Street instruments tied to those mortgages carried the defaults
throughout the economy. The mortgage lending market is now greatly controlled and limited by state and federal
regulations. Wall Street firms not under federal controls are nevertheless subject to increased regulation.23
Ethical choices give businesses the freedom to make choices before regulators mandate them. Breaches of ethics
bring about regulation and liability with few opportunities to choose and less flexibility. The notions of choices and
leadership are diagrammed in Exhibit 2.3, which is explained in the following discussion. Every issue progresses
along a cycle that begins with a latency phase, in which the industry is aware of a problem. The use of private
information about consum- ers’ buying patterns was well known in the marketing industry, but few consum- ers
were aware of that use. The awareness stage begins when the popular press reports on an issue and raises
questions. Once the public has knowledge of a prob- lem, it responds by demanding assurance that the problem
either is resolved or is not really an issue—or by calling for reform. The activism stage is one in which members of
the public ask for either voluntary or regulatory reform. If voluntary reform is not forthcoming, those affected may
sue or lobby for reform, or both. For example, a group of parents, police officers, and shareholders protested Time
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Warner’s production of “Cop Killer,” a song by the rap music artist Ice T (a.k.a. Ice-T). The public outcry was strong
both in the press and at Time Warner’s share- holder meeting. Congress was considering holding hearings on
record labels and record content. Time Warner eventually made a choice to voluntarily withdraw the song, later in
the regulatory cycle when public outcry was strong but still in time to avert regulation.
During 2004, the public again became active in demanding changes in the con- tent of entertainment when Janet
Jackson and Justin Timberlake’s performance at the halftime show at the Super Bowl resulted in partial nudity on
prime-time television. In 2007, CBS Radio and MSNBC pulled the Don Imus show because of questionable
comments he made. Entertainment and television executives under- took voluntary controls to prevent
government controls. The televised Academy Awards are now on a five-second delay so that any mishaps can be
edited out before broadcast. Some artists are not permitted to appear on awards shows because of their past
behaviors on similar shows. Voluntary self-control averts government regulation.
Few people realize one aspect of the Tylenol poisonings case (noted earlier in the chapter), which is that the issue
of tamper-proof packaging had been a con- cern in the industry long before the poisonings involving Tylenol
occurred. Those in the industry were concerned that packaging that did not signal unauthorized entry so that a
buyer could spot tampering could open the door to the tragedy that eventually occurred. However, no one in the
industry, despite knowledge of this issue, took steps to create tamper-proof packaging. The law did not require
such a step; additional costs were associated with the packaging and retooling produc- tion; and some were
worried that they would be at a competitive disadvantage if their products were harder to use than those that did
not have the tamper-proof packages. By not solving the problem voluntarily, companies faced unpleasant results:
first, the tragedy of the deaths, and second, additional regulations and costs imposed as the government required
tamper-proof packaging.
2-9 Creation of an Ethical Culture in Business
2-9a THETONEATTHETOPANDANETHICALCULTURE
Employees work under the pressures of meeting quarterly and annual goals and can make poor choices if the
company’s priority with respect to values and eth- ics is not made clear. Employees must see that those who
evaluate and pay them really do care about ethics. Employees are convinced that ethics is important when they
see officers comply with all of the provisions in the company code of eth- ics. They see the right tone at the top
when ethical employees are rewarded and unethical conduct is punished. The tone at the top comes from actions
by officers and executives that show they “walk the talk” about ethics.
2-9b DODD-FRANK,SARBANES-OXLEY,SENTENCING,ANDANETHICAL CULTURE
Following the collapses of Enron, WorldCom, and other companies noted in the chapter’s opening “Consider...,”
Congress passed the most extensive reforms of corporate governance and financial reporting since the enactment
of the 1933 and 1934 securities laws following the 1929 stock market crash. Following the 2008 financial markets
collapse and the bankruptcies of many financial firms, Congress
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dded additional reforms through what is called the Dodd-Frank Act (Wall Street Reform and Consumer Financial
Protection Act; see Chapters 18 and 19 for more information on these two statutes). Although both statutory
reforms impose many requirements on accountants, lawyers, directors, and officers, they also increased criminal
penalties and empowered the Federal Sentencing Com- mission to examine the types of things companies could do
that would improve the ethical culture, thereby reducing the risk of misconduct and earning sentence reductions
for companies that attempt to create an ethical culture but still have an ethical or legal lapse. question
employees in terms of halting activi-
The Federal Sentencing Commission has determined that fac- ties. A number of former prosecutors have
Business Planning Tip
In the past, company ethics officers tended to come from HR and PR. Now, ethics officers at companies have
unprecedented power: They are given full access to speak to all employees, have direct lines to boards and CEOs,
and appear to have an edge in knowing how to
tors such as the following would be helpful in setting the tone of the company:
become ethics officers at companies that have experienced legal or ethical difficulties:
␣␣ Richard C. Breeden, former SEC chairman,
␣␣ A code of ethics ␣␣ Training for employees in the code and in ethics the CEO of Breeden Capital
Management
␣␣ A means for employees to report misconduct anonymously
␣␣ Follow-up on reports employees make on misconduct
␣␣ Action by the board, including follow-up and monitoring, on complaints and reports made by employees
␣␣ Self-reporting and investigation of legal and ethical issues ␣␣ Sanctions and terminations for those within the
company
who violate the law and company rules, including officers
␣␣ A high-ranking officer, with the ability to communicate with the CEO and board, who is responsible for the code
of ethics and ethics training in the company
The guidelines for company practices incorporate the factors most experts agree are critical to setting an ethical
culture in a company.
2-9c REPORTINGLINES:ANANONYMOUSETHICSLINE FOR AN ETHICAL CULTURE
was an outside monitor at KPMG and is now LLC.
␣␣ Eric R. Dinallo, formerly with Eliot Spitzer at the New York attorney general’s office, was chief compliance
officer at Morgan Stanley from 2003 to 2006. Since 2006 he has been general counsel for Willis Group Holdings, an
insurance broker.
␣␣ Beth L. Golden, also formerly with Spitzer’s office, was chief compliance officer at Bear Stearns until its collapse
in 2008 and subse- quent acquisition by JP Morgan.
␣␣ Mari B. Maloney, formerly with the National Association of Securities Dealers (NASD) (now Financial Industry
Regulatory Authority, FINRA) and the Manhattan DA’s office, was chief compliance officer at AIG and is now the
chief compliance officer at Stan- dard & Poor’s.
An anonymous reporting line is a minimum requirement for companies working to achieve and maintain an ethical
culture. The reporting line can be received internally or, in best-practices companies, the report goes out to a
third-party contractor who then keeps track of the issue and its progress toward resolution within the company. In
addition to encouraging employees to discuss issues with their supervisors, anonymous reporting allows
employees to raise issues without the fear and concern that might deter them from reporting to a supervisor.
Under the sentencing guidelines, companies that can show they fostered an atmosphere of education and
discussion in which employees were encouraged to come forward will fare much better in terms of fines and other
punishments if any missteps occur. Many companies have devel- oped ethical news bulletins to offer employees
examples of and guidelines on ethical dilemmas. DuPont delivers an ethics bulletin to employees through its e-mail
system. Blue Cross Blue Shield has given employees Slinky toys for their desks with the hotline reporting number
on them so that as employees think and perhaps use the Slinky to relieve pressure and stress, they will be
reminded to
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A strategic pyramid can help in understanding how to implement an ethical culture. At the base of the pyramid are
the facial trappings of ethics: codes. Even Enron had a 64-page, award-winning code of ethics. Some companies
have progressed beyond annual training seminars to regular ethics scenarios circulated throughout the company
for employees to consider and discuss before the ethics office offers its insights and guidance on the hypothetical
or reality-based scenario that has been presented. Some companies regularly report to employees on number of
ethics questions/reports, the investigations, and the outcomes (within the bounds of privacy constraints). For
example: “The ethics office investigated 323 matters and employee disciplinary action was taken in 175 of those
matters.The form of discipline included terminations, warnings, loss of bonus [and whatever other sanctions were
imposed].” The purpose of this data-based feedback is to let employees know, particularly those who reported
anonymously and
wish to remain anonymous, of the ethics office activity, the results of investigations, and, perhaps most
importantly, the enforcement.
The next layer involves compensation for and rec- ognition of the role of individuals’ moral development and the
differing roles employees play in terms of organi- zational behavior parameters in moving the company toward
ethical behavior and an ethical culture.
The final or top layer, and the area conquered by so few companies, requires leadership at the executive level and
dramatic shifts in both internal and external policies and behaviors of the company. Exploring these top two layers
can provide ethics officers and ethics programs within companies with the next step in the evolution of not just
“best practices in ethics programs,” but in the creation of an ethical culture.
Source: Adapted from Marianne M. Jennings, “Taking Ethics Programs to the Next Level: Why CFOs Are Critical,”
Corporate Finance Review 10, no. 3 (2005), pp. 38–42. Reprinted by permission of Thomson Reuters.
report any problems. The federal government has an ethics encyclopedia online for its employees to use. The
encyclopedia is filled with examples of government employees’ misconduct and the sanctions they received.
2-9d DEVELOPINGANETHICSSTANCE
Both individuals and firms should decide up front what types of conduct they would never engage in and be certain
that the rules are in writing, that everyone understands the rules, and that the rules will be enforced uniformly.
Individuals
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n vary in their responses to various ethical dilemmas. For example, a woman who had taken $12,000 from her
employer was terminated immediately upon the company’s discovery of the embezzlement. At the company’s
next board meeting, the board members discussed the issue and had varying views. One director felt that taking
something that does not belong to you is wrong and that termina- tion was the appropriate action. Another
director said that his remedy would be determined by whether the money was taken all at once or over a period of
time. Another director said that his remedy would be determined according to why the employee took the money.
Still another director noted that perhaps the employee did not understand that this type of action is wrong. The
directors varied in their views on ethics. One is pragmatic—it is simply wrong. Another applies a relative approach
—why did she take the money? Exhibit 2.4 diagrams the ethical stances of the directors.
Knowing where you stand as a company sends clear signals to employees. Knowing where you stand as an
individual sends clear signals for the behavior of those around you. Taking a position on a set of values helps a
company avoid the either/or conundrum in which tough situations are boiled down to something such as, “Either
we release this product now with its flaws and meet the dead- line and start getting earnings, or we don’t and the
company collapses.” A value- based decision is one that says, “We as a company do not cheat our customers with
poorly designed or manufactured products, and we don’t hurt them with defective ones. Because of that value, we
retool quickly to correct the problem and get the product out there as soon as possible.” With this value-based
decision, the company also makes a good business decision, for it has chosen to avoid the often-destructive costs
of releasing a defective product despite knowledge of that defect. The GM Malibu case discussed earlier
represents the destructive costs of deciding not to take action based on values but, rather, taking action based only
on immediate returns.
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2-9e BEINGCAREFULABOUTPRESSUREANDSIGNALS
Doing the right and ethical thing often gets lost in the pressures employees felt with respect to goals and number
quotas. These types of signals create a pressured environment in which employees fall into ethical lapses that
often lead to illegal behavior. Just the disparity between the amount of time devoted to discussion of results
versus ethics is a signal. For example, most employees will say that they discuss performance goals every day and
then add, “Without fail, we sign off on the ethics policy once each year!” The signal, however unwitting, is that
perfor- mance matters most.
In the subprime mortgage meltdown that affected so many Wall Street invest- ment houses, there were clear
differences between the firms that collapsed and those that survived. Stan O’Neal at Merrill Lynch, a company that
led the pack with over $25 billion in losses and an eventual takeover, was an indefatigable “numbers guy” who
took Merrill Lynch from its position of being a safe, trading house to a leveraged player, and O’Neal expected
employees to produce results. One Merrill Lynch executive noted the pressure, “It got to the point where you
didn’t want to be in the office on Goldman earnings days.” The pressure for goals was so intense that no one really
questioned the numbers and how they were get- ting the results. Employees called operations meetings “staged.”
The result was Merrill Lynch’s demise, even as employees became concerned but were pressured to just keep
going despite the clear consequences.
2-10 Ethical Issues in International Business
The global market presents firms with more complex ethical issues than they would experience if operations were
limited to one country and one culture. Moral standards vary across cultures. In some cases, cultures change and
evolve to allow conduct that was not previously acceptable. For example, tipping hospi- tal employees is common
practice in some countries. In the United States, such behavior could be illegal in the case of government-run
hospitals.
In many executive training seminars for international business, executives are taught to honor customs in other
countries and to “Do as the Romans do.” Employees are often confused by this direction.
A manager for a U.S. title insurer provides a common example. He com- plained that if he tipped employees in the
United States, such as employees at public recording agencies, for their expediting property filings, the manager
would not only be violating the company’s code of ethics but could be charged with violations of the Real Estate
Settlement Procedures Act and state and federal antibribery provisions. Yet that same type of practice is
permitted, recognized, and encouraged in other countries as a cost of doing business. Paying a regula- tory agency
in the United States to expedite a licensing process would be bribery of a public official. Yet many businesses
maintain that they cannot obtain such authorizations to do business in other countries unless such payments are
made. So-called grease or facilitation payments are permitted under the Foreign Cor- rupt Practices Act (see
Chapter 7), but legality does not necessarily make such payments ethical.
An inevitable question arises when custom and culture clash with ethical standards and moral values adopted by a
firm. Should the national culture or the company code of ethics prevail? Typical business responses to the question
of whether cultural norms or company codes of ethics should control decisions
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in international business operations are: Who am I to question the culture of another country? Who am I to
impose U.S. standards on all the other nations of the world? Isn’t legality the equivalent of ethical behavior? The
attitude of busi- nesses is one that permits ethical deviations in the name of cultural sensitivity. Many businesses
fear that the risk of offending those in other countries is far too high to impose U.S. ethical standards on the
conduct of business in other countries.
Part of the misunderstanding about ethics in international business on the part of U.S.-based businesses is that
ethical standards in the United States vary significantly from the ethical standards in other countries. Operating
under this misconception can create a great deal of ethical confusion among employees. Stra- tegically, businesses
and their employees are more comfortable when they oper- ate under uniform standards. What is known as the
“Golden Rule” in the United States actually has existed for some time in other religions and cultures and among
philosophers. Exhibit 2.5 offers a list of how this simple rule is phrased in different writings. The principle is the
same even if the words vary slightly.
The successful operation of commerce depends on the ethical roots of busi- ness. A look at the three major parties
in business explains this point. These parties are the risk-takers, the employees, and the customers. Risk-takers—
those furnish- ing the capital necessary for production—are willing to take risks on the assump- tion that
customers will judge their products as valuable. Employees are willing to offer production input, skills, and ideas in
exchange for wages, rewards, and other incentives. Consumers and customers are willing to purchase products
and services as long as they receive value in exchange for their furnishing, through payment, costs, and profits to
the risk-takers and employees. To the extent that the interdependency of the parties in the system is affected by
factors outside of their perceived roles and control, the intended business system does not function on its
underlying assumptions.
Although the roots of business have been described as primarily economic, this economic system cannot survive
without recognition of some fundamental values. Some of the inherent—indeed, universal—values built into our
capitalis- tic economic system, as described here, are as follows: (1) the consumer is given value in exchange for
the funds expended; (2) employees are rewarded according
A Possible Uniform Standard for Ethical Choices
Categorical imperative: How would you want to be treated? Would you be comfortable with a world with your
standards?
Christian principle:The Golden Rule And as ye would that men should do to you, do ye also to them likewise. (Luke
6:31) Thou shalt love . . . thy neighbor as thyself. (Luke 10:27)
Confucius: What you do not want done to yourself, do not do to others. Aristotle:We should behave to our friends
as we wish our friends to behave to us. Judaism: What you hate, do not do to anyone. Buddhism: Hurt not others
with that which pains thyself. Islam: No one of you is a believer until he loves for his brother what he loves for
himself. Hinduism: Do nothing to thy neighbor which thou wouldst not have him do to thee. Sikhism:Treat others
as you would be treated yourself. Plato: May I do to others as I would that they should do unto me.
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to their contribution to production; and (3) the risk-takers are rewarded for their investment in the form of a
return on that investment. Exhibit 2.6 depicts this rela- tionship. Everyone in the system must be ethical. An
economic system is like a four-legged stool. If corruption seeps into one leg, the economic system is off bal- ance.
In international business, often the government slips into corruption, with bribes controlling which businesses are
permitted to enter the country and who is awarded contracts in that country. In the United States, the wave of
reforms at the federal level since 2008 was the result of perceived corruption in the financial markets that resulted
in a lack of transparency.
To a large extent, all business is based on trust. The tenets for doing business are dissolved as an economy moves
toward a system in which one individual can control the market in order to maximize personal income.
Suppose, for example, that the sale of a firm’s product is determined not by perceived consumer value but, rather,
by access to consumers, which is controlled by government officials. That is, your company’s product cannot be
sold to con- sumers in a particular country unless and until you are licensed within that coun- try. Suppose further
that the licensing procedures are controlled by government officials and that those officials demand personal
payment in exchange for your company’s right to even apply for a business license. Payment size may be arbi-
trarily determined by officials who withhold portions for themselves. The basic values of the system have been
changed. Consumers no longer directly determine the demand.
Beyond just the impact on the basic economic system, ethical breaches involv- ing grease payments introduce an
element beyond a now-recognized component in economic performance: consumer confidence in long-term
economic perfor- mance. Economist Douglas Brown has described the differences between the United States and
other countries in explaining why capitalism works here and not in all nations. His theory is that capitalism
depends on an interdependent
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system of production. For economic growth to proceed, consumers, risk-takers, and employees must all feel
confident about the future, about the concept of a level playing field, and about the absence of corruption. To the
extent that consumers, risk-takers, and employees feel comfortable about a market driven by these basic
assumptions, the investment and commitments necessary for economic growth via capitalism will be made.
Significant monetary costs are incurred by business systems based on factors other than customer value, as
discussed earlier. In devel- oping countries where “speed” or grease payments are required and corrupt gov-
ernment officials are in control, the actual money involved may not be significant in terms of the nation’s culture.
Such activities and payments introduce an element of demoralization and cynicism that thwarts entrepreneurial
activity when these nations most need risk-takers to step forward.
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Bribes and guanxi (gifts) in China given to establish connections with the Chinese government are estimated at 3 to
5 percent of operating costs for com- panies, totaling an estimated $5 billion of China’s foreign investment. But
China incurs costs from the choices government officials make in return for payments. For example, guanxi are
often used to persuade government officials to transfer government assets to foreign investors for substantially
less than their value. Chi- nese government assets have fallen more than $50 billion in value during the same
period of economic growth, primarily because of the large undervaluation by gov- ernment officials in these
transactions with foreign companies. China’s economy was adrift because of this underlying corruption. Economic
progress began with the elimination of graft.
Perhaps Italy and Brazil provide the best examples of the long-term impact of corruption in foreign business
practices. Although the United States, Japan, and Great Britain have had scandals such as the savings and loan
failures, political corruption, and insurance regulation, these forms of misconduct do not indicate corruption that
pervades entire economic systems. The same cannot be said about Italy. Elaborate connections between
government officials, the Mafia, and business executives were unearthed in the 1990s. As a result, half of Italy’s
cabinet resigned at one time, and hundreds of business executives were indicted. It has been esti- mated that the
interconnections of these three groups cost the Italian government $200 billion, as well as compromising the
completion of government projects. Italy is known for its 40-year freeway project. In over 40 years of work, it has
not been able to complete a single highway designed to connect the northern and southern parts of the country.
In Brazil, the level of corruption has led to a climate of murder and espionage. Many foreign firms have elected not
to do business in Brazil because of so much uncertainty and risk—beyond the normal financial risks of international
invest- ment. Why send an executive to a country where officials may use force when soliciting huge bribes?
The Wall Street Journal offered an example of how Brazil’s corruption has damaged the country’s economy despite
growth and opportunity in surround- ing nations. The governor of the northeastern state of Paraiba in Brazil,
Ronaldo Cunha Lima, was angry because his predecessor, Tarcisio Burity, had accused Mr. Lima’s son of corruption.
Mr. Lima shot Mr. Burity twice in the chest while Mr. Burity was having lunch at a restaurant. The speaker of
Brazil’s Senate praised Mr. Lima for his courage in doing the shooting himself as opposed to sending someone else.
Mr. Lima was given a medal by the local city council and granted immunity from prosecution by Paraiba’s state
legislature. No one spoke for the victim, and the lack of support reflected a culture controlled by self-interest that
benefits those in control. Unfortunately, these self-interests pre- clude economic development.
Economists in Brazil document hyperinflation and systemic corruption. A São Paulo businessman observed, “The
fundamental reason we can’t get our act together is we’re an amoral society.” This businessperson probably
understands capitalism. Privatization that has helped the economies of Chile, Argentina, and Mexico cannot take
hold in Brazil because government officials enjoy the benefits of generous wages and returns from the businesses
they control. The result is that workers are unable to earn enough even to clothe their families, 20 percent of the
Brazilian population lives below the poverty line, and crime has reached the level of nightly firefights. Brazil’s
predicament occurred over time, as graft, collusion, and fraud became entrenched in the government-controlled
economy.
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Lance Armstrong, who was stripped of his Tour de France wins and subsequently admitted to using perfor- mance-
enhancing drugs, was once ranked as the 60th most effective product spokesperson in the world. He was right up
there with Brad Pitt. Now, he is ranked 1,410, with rapper Nicki Minaj.
The companies that have not renewed Mr. Arm- strong’s endorsement agreements or have terminated them
include Nike, Radio Shack, Trek Bicycle, Easton-Bell (the makers of the Giro helmets Mr. Armstrong wore in his
races), FRS Energy Foods, Anheuser-Busch, 24 Hour Fitness, and Nissan. Mr. Armstrong earned between $15 and
$17 million per year from the endorsement contracts.
Celebrity endorsement contracts always have some form of a morals clause, a clause that allows the spon- sor to
terminate the contract for a variety of reasons, such as an arrest. However, the clauses generally have additional
grounds for termination, such as conduct by the celebrity that bring negative publicity or boycotts to the company.
The termination rights are basically a judgment call on the part of the company. There is not much wiggle room for
the celebrities. In fact, there is a long history of terminations.
Olympian Michael Phelps lost his endorsement con- tract with Kellogg’s when photos of him smoking a bong pipe
at a campus party showed up on the Internet in 2009. Model Kate Moss lost her endorsement contracts with
Burberry and Chanel when, in 2005, a grainy video- tape emerged that showed her using cocaine. In 2007, Verizon
withdrew its sponsorship of the Gwen Stefani tour when a raunchy video of her opening act, Akon, appeared
online. The video showed Akon engaged in questionable on-stage behavior with a fan under the age of 18. The
video resulted in considerable coverage and outrage from parents and commentators. Uniquely, the Stefani
endorsement contract was terminated for her association with another artist who had displayed questionable
behavior.
Perhaps the best example of discretion in using the morals clauses came when Tiger Woods was in a
car crash near his Florida home and the extent of his marital infidelity came to light. Mr. Woods lost endorse- ment
contracts with Accenture, AT&T, and Gatorade. Gatorade did, however, continue its relationship with the Tiger
Woods Foundation. Nike did not drop its sponsorship and Nike chairman and cofounder Phil Knight explained that
these problems with athletes are just “part of the game” when you sign them. Tag Heuer did not drop Woods
because, as a spokesperson explained, “He’s the best in his domain. We respect his performance in the sport.
Woods’ personal life is not our business.” Tag Heuer did, however, stop running its ads featuring Mr. Woods.
Gillette also stopped running Woods ads but did not terminate the relationship until later. When the charges
leveled by the U.S. Anti-Doping Agency were detailed against Lance Armstrong, Nike originally stood by their man.
However, when the agency released its documentation, Nike called the evidence “insurmountable” that Mr.
Armstrong had participated in doping for more than a decade.
There can also be redemption and new contracts. Michael Vick lost his Nike contract when he entered a guilty plea
and went to prison for charges related to a dog-fighting business. However, Mr. Vick now has most of his
endorsements back. Michael Phelps’ calmer life and additional 2012 Olympic medals rewarded him with restored
contracts.
Mr. Armstrong has resigned as chairman of his Live Strong foundation, and many companies, including Nike, have
agreed to continue their support for this charity that does have Armstrong-branded products that it sells to raise
money.
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