Chapter 1

Ethics in the World of Business

Learning Objectives
1.1 Identify ethical issues created by diverse 1.3 Distinguish between ethical management
business situations and relationships and and the management of ethics, and each of
the level of decision making required to the three main roles of a manager
address them
1.4 Analyze how ethical business conduct is
1.2 Recognize the role of ethics in the conduct challenged by decision making on
of business, with respect to economic individual and organizational levels
principles and the law

Case: Merck and the ing parasite infection that afflicts many in Africa, even though the
drug was unlikely to pay for itself. Eventually, Merck decided to
Marketing of Vioxx give away the drug, called Mectizan, for as long as necessary at
a cost of tens of millions of dollars per year. This kind of princi-
On September 30, 2004, Merck & Co. announced the with- pled decision making was inspired by the words of George W.
drawal of Vioxx, its highly profitable pain reliever for arthritis Merck, the son of the company’s founder: “We try never to forget
sufferers, from the market.1 This announcement came only that medicine is for the people. It is not for the profits. The profits
seven days after company researchers found in a clinical trial follow, and if we have remembered that, they have never failed
that subjects who used Vioxx more than 18 months had a sub- to appear. The better we have remembered it, the larger they
stantially higher incidence of heart attacks. Merck chairman have been.”
and CEO Raymond V. Gilmartin described the action as “the Vioxx is an example of Merck’s innovative research. Devel-
responsible thing to do.” He explained, “It’s built into the prin- oped as a treatment for the pain of arthritis, the drug acts as an
ciples of the company to think in this fashion. That’s why the anti-inflammant by suppressing an enzyme responsible for ar-
management team came to such an easy conclusion.”2 In the thritis pain. Other drugs in the class of nonsteroidal anti-inflam-
lawsuits that followed, however, damaging documents matory drugs (NSAIDs) inhibit the production of two enzymes
emerged casting doubt on Merck’s claim that it had acted COX-1 and COX-2. However, COX-1 is important for protecting
responsibly by taking appropriate precautions in the develop- the stomach lining, and so ulcers and stomach bleeding are
ment and marketing of the drug. potential side effects of these drugs. The distinctive benefit of
Vioxx over other NSAID pain relievers, such as ibuprofen (Advil)
Development of Vioxx and naproxen (Aleve), is that it inhibits the production of only the
For decades, Merck’s stellar reputation rested on the company’s COX-2 enzyme, and not COX-1. After approval by the Food and
emphasis on science-driven research and development. Merck Drug Administration (FDA) in May 1999, Vioxx quickly became
employed some of the world’s most talented and best-paid a popular best seller. More than 20 million people took Vioxx
researchers and led other pharmaceutical firms in the publica- between 1999 and 2004, and at the time of the withdrawal, with
tion of scientific articles and the discovery of new medicines for 2 million users, Merck was earning $2.5 billion annually or 11 per-
the treatment of serious conditions that lacked satisfactory ther- cent of the company’s total revenues from the sale of the drug.
apies. For seven consecutive years in the 1980s, Merck was
ranked by Fortune magazine as America’s most respected com-
Competitive Environment
pany. Merck received widespread accolades in particular for the The success of Vioxx came at a critical time for Merck. Not only
decision, made in 1978, to proceed with research on a drug for were the patents on several profitable drugs due to expire, open-
preventing river blindness (onchocerciasis), which is a debilitat- ing the way for generic competition, but also the competitive
1
2 Chapter 1

environment of the entire pharmaceutical industry was More significant evidence that Vioxx might contribute to
undergoing rapid change. Competition from generic drugs heart attacks was produced by a study concluded in 2000 that
increased dramatically due to federal legislation and also due was designed to compare the gastrointestinal effects of Vioxx and
to the rise of large, powerful managed care organizations, naproxen in order to improve the label of the Merck product by
which sought to cut the cost of drug treatments through the proving that Vioxx was less harmful to the stomach lining. Although
use of formularies that restricted the drugs doctors could the study, called VIGOR (for Vioxx Gastrointestinal Outcomes
prescribe. The development of new drugs was increasingly Research), showed that Vioxx users had heart attacks at a rate
shifting to small entrepreneurial research companies focused four to five times that of the naproxen group, researchers were
on specific technologies, which reduced the competitive uncertain whether the difference was due to an adverse effect of
advantage of the traditional large pharmaceutical firms. Mer- Vioxx in causing heart attacks or a beneficial effect of naproxen in
ck’s competitors responded to changes in the competitive preventing them. The heart attacks in the trial occurred mainly in
environment by acquiring small companies, developing new the Vioxx subjects who were already at greatest risk of heart
products that duplicated ones already on the market (so- attacks, and all subjects were prohibited from taking aspirin (which
called “me-too” drugs), entering the generics market, seek- is known to prevent heart attacks) in order to gain reliable results
ing extensions of patents after making only slight from the study since aspirin affects the stomach. When the results
improvements, and engaging in aggressive marketing, of the VIGOR study were published in the November 2000 issue of
including the use of controversial direct-to-consumer (DTC) the prestigious New England Journal of Medicine, the beneficial
advertising. effects of naproxen were emphasized in a way that implied that
The first four strategies—growth by acquisition, the de- Vioxx was safe for people without the risk factors for heart attacks.
velopment of “me-too” drugs, the production of generics, and After initially resisting pressure by the FDA to include a warning on
making improvements merely to extend patents—conflicted the Vioxx label, Merck finally agreed in April 2002 to add the evi-
with Merck’s culture and values. However, under the previous dence of an increased incidence of heart attacks. However, the
CEO, Roy Vagelos (who guided Merck through the develop- language on the label emphasized, again, the uncertainty of the
ment of Mectizan for river blindness), the company greatly cause and recommended that people at risk of heart attacks con-
increased its emphasis on marketing. This increase in em- tinue to use an anti-inflammant for protection.
phasis was considered necessary given the short time avail- In the meantime, Merck continued its aggressive market-
able to sell a drug before the patent expired. In particular, ing campaign. Between 1999 and 2004, Merck spent more than
evidence was needed not only to prove a product’s safety $500 million on DTC television and print advertising. This
and effectiveness in order to gain FDA approval but also to expenditure was intended to keep pace with the heavy spend-
persuade physicians to prescribe it instead of the competi- ing by Pfizer for its competing COX-2 inhibiter Celebrex. Merck
tors’ medications. Since much of the information that could also maintained a 3,000-person sales force to meet with doc-
persuade doctors was part of a drug’s label, marketers need- tors for face-to-face conversations about Vioxx. To support this
ed to be involved in the development of a product from the effort, Merck developed materials that provided salespeople
earliest research stages in order to prepare a persuasive la- with responses to questions from skeptical physicians.3 One
bel. The label could be improved further by conducting tests, document, called an “obstacle handling guide,” advised that
which were not scientifically necessary but which generated questions about the risk of heart attacks be answered with the
clinically proven results that could be useful in persuading evasive explanations that Vioxx “would not be expected to
physicians. Under Gilmartin, the company’s formally stated demonstrate reductions” in heart attacks and was “not a substi-
strategy became: “Turning cutting-edge science into novel tute for aspirin.” Another document titled “Dodge Ball Vioxx”
medicines that are true advances in patient care with proven concluded with four pages that were blank except for the word
clinical outcomes.” “DODGE!” in capital letters on each page. Company docu-
ments also describe an effort to “neutralize” skeptical doctors
Decision to Withdraw by enlisting their support or at least defusing their opposition by
In announcing the withdrawal of Vioxx, Gilmartin described offers of research support or engagements as consultants.4
the evidence of increased risk of heart attacks as “unex- The timeline below outlines key events in the development,
pected.” In the first lawsuits against Merck that came to trial, approval, and marketing of Vioxx and the outcome for Merck.
evidence was presented to show that company scientists had
considered the potential heart problems with Vioxx as early The History of Vioxx
as 1997. The first hint of trouble came in that year as Merck The Food and Drug Administration (FDA) has a multi-phase
scientists noticed that Vioxx appeared to suppress the pro- approval process to evaluate the testing, safety, and labeling of all
duction of a substance in the body that acted naturally to new prescription drugs to be sold in the United States. The FDA
reduce the incidence of heart attacks. Although the signifi- also monitors the “post-marketing” safety of approved drugs, to
cance of this discovery was recognized, no follow-up investi- ensure that the public is informed of any new health risks that are
gations were undertaken. revealed by widespread use and additional studies.
 Ethics in the World of Business 3

Timeline
December 1994 Merck seeks FDA approval to begin Vioxx clinical trials (on human subjects),
based on the success of animal testing.

1997 Merck scientists discover the first signs that Vioxx may cause cardiovascular
problems.

November 1998 Merck applies for FDA approval to market Vioxx for the treatment of acute pain,
dysmenorrhea (menstrual cramps), and osteoarthritis. The application includes
the results of about 60 studies, none of which points to potential cardiovascular
risks.

January 1999 Merck begins the Vioxx Gastrointestinal Outcomes Research study (VIGOR) to
determine whether Vioxx is safer for the digestive system than naproxen, an older
painkiller. This later becomes a key selling point for the drug.

May 1999 After a six-month review, the FDA approves Vioxx for the three uses Merck speci-
fied in its application.

October 1999 – December 1999 The data and safety monitoring board for Merck’s VIGOR study meets several
times to discuss its findings. Although Vioxx appears to increase the risk of heart
problems in test subjects, the board votes to continue the study and keep market-
ing Vioxx to the public.

November 2000 Merck’s VIGOR study is published in the New England Journal of Medicine, but
Merck does not include all observed instances of heart attacks and downplays the
cardiovascular risks.

2001 The FDA publishes the full VIGOR study results and additional studies conducted
by independent parties also indicate that there is a real risk of cardiovascular
problems. In September, the FDA warns Merck that the Vioxx marketing cam-
paign and label do not adequately represent its health risks.

April 2002 Merck changes the drug’s label to better reflect the dangers and necessary precau-
tions for prescribing doctors and users, based on the VIGOR study. The FDA also
approves Vioxx for an additional use: the treatment of rheumatoid arthritis.

September 2004 Merck’s APPROVe (Adenomatous Polyp Prevention on Vioxx) study conclusively
shows that Vioxx increases the risk of heart attacks and strokes after 18 months of
treatment. Merck then voluntarily stops the sale of Vioxx.

January 2005 A British medical journal publishes a study that estimates Vioxx caused heart at-
tacks in 88,000–140,000 Americans and fatal heart attacks in 38,000. Study author
David Graham is an FDA scientist who also affirmed the correlation between
Vioxx and heart attacks in his earlier testimony to Congress.

November 2007 After facing multiple lawsuits, Merck agrees to pay $4.85 billion to settle about
47,000 personal injury claims from former Vioxx users.

December 2011 Merck pleads guilty to promoting Vioxx as a treatment for rheumatoid arthritis
before it received FDA approval for this use in 2002. The company agrees to pay a
fine of $628 million in the civil settlement.

April 2012 A U.S. district court orders Merck to pay an additional $322 million as a criminal
penalty for its misleading promotion and marketing of Vioxx.

Additional sources: “Sequence of Events with VIOXX, Since Opening of IND,” U.S. FDA Advisory Committees Briefing, 9 April 2005;
Snigdha Prakash and Vikki Valentine, “Timeline: The Rise and Fall of Vioxx,” National Public Radio, 10 November 2007; “U.S. Pharma-
ceutical Company Merck Sharp & Dohme Sentenced in Connection with Unlawful Promotion of Vioxx,” U.S. Department of Justice Press
Release, 19 April 2012.
4 Chapter 1

Criticisms and Defenses An editorial in the New York Times declared that “companies
The study that conclusively established that Vioxx increased the must jump at the first hint of risk and warn patients and doctors
risk of heart attacks was called APPROVe (Adenomatous Polyp of any dangers as clearly and quickly as possible. They should
Prevention on Vioxx), which, according to critics, had only a not be stonewalling regulators, soft-pedaling risk to doctors or
marketing and not a legitimate scientific purpose.5 Although the promoting drugs to millions of people who don’t need them.”9 A
company could have delayed the withdrawal until ordered to do 179-page report commissioned by the Merck board concluded,
so by the FDA, Merck acted voluntarily. Gilmartin said that the by contrast, that executives and researchers acted with integrity
6 in addressing incomplete and conflicting evidence and that
company “was really putting patient safety first.” However, one
critic replied, “If Merck were truly acting in the interest of the “their conclusions were reached in good faith and were reason-
public, of course, they should have done more studies on able under the circumstances.”10 The report closed with the
Vioxx’s safety when doubts about it first surfaced.”7 Another observation that the quick response after the APPROVe study
critic observed that such studies could have been conducted for “is not consistent with the view that Merck’s corporate culture
a fraction of the cost of the $500 million spent on advertising.8 put profits over patient safety.”11

Points to Consider… These ethical issues are often only part of a complex set of
challenges facing the whole of society.
The Vioxx crisis was an unusually difficult and damaging
experience for Merck, which has both a history of responsi- WRITING PROMPT
ble conduct and a commitment to the highest standards of Decisions by Multiple Parties
ethics. Although Merck’s culture is built on strong values, After Vioxx was taken off the market, Congress began investigating
these were not enough to prevent a series of decisions that, the effectiveness and integrity of the FDA’s drug approval process
right or wrong, seriously damaged the company’s care- along with Merck’s own actions. What are the costs and benefits of
approving new drugs for sale as quickly as possible? Why might the
fully built reputation. Merck executives appear to have FDA be reluctant to acknowledge a problem with, or recall, a drug
considered carefully the possible health risk posed by that it had previously approved?
Vioxx, and yet the push for profits may have led them to
The response entered here will appear in the
conclude too easily that Vioxx was not the cause of the performance dashboard and can be viewed by
heart attacks suffered by test subjects and that further stud- your instructor.
ies were not necessary. The increased role of marketing,
including heavy consumer advertising, in a traditionally Submit
science-driven culture was probably a factor in whatever
mistakes were made, as was the change in strategy to seek
evidence of the products’ superiority as part of a market- 1.1: Business Decision
ing campaign to influence physicians. However, Merck’s
strategy could not have avoided some adjustment given
Making
the changed competitive environment that was created by 1.1 Identify ethical issues created by diverse business
forces outside the company’s control. situations and relationships and the level of
All business organizations face the daunting challenge decision making required to address them
of adhering to the highest standards of ethics while, at the
Although ethical issues in business are very diverse, the
same time, remaining competitive and providing the prod-
following examples provide a useful starting point.
ucts and services that the public demands. The task of
managers in these organizations is to make sound business 1. The Sales Rep
decisions that enable a company to achieve its mission. A sales representative for a struggling computer sup-
Some of these decisions involve complex ethical issues that ply firm has a chance to close a multimillion-dollar
may not be readily apparent, and success in making sound deal for an office system to be installed over a two-year
business decisions may depend on understanding these period. The machines for the first delivery are in the
ethical issues and resolving them effectively. Ethical issues company’s warehouse, but the remainder would have
are considered by managers in the ordinary course of their to be ordered from the manufacturer. Because the man-
work, but they are also matters that are discussed in the ufacturer is having difficulty meeting the heavy
pages of the business press, debated in the halls of Con- demand for the popular model, the sales representa-
gress, and scrutinized by the courts. This public concern tive is not sure that subsequent deliveries can be made
arises because ethical issues in business are closely tied to on time. Any delay in converting to the new system
important matters of public policy and to the legislative, would be costly to the customer; however, the blame
administrative, and judicial processes of government. could be placed on the manufacturer.
 Ethics in the World of Business 5

Ethical Issue: Should the sales representative close These four examples give some idea of the ethical
the deal without advising the customer of the deliv- issues that arise at all levels of business. The individuals in
ery problem? these cases are faced with questions about ethics in their
2. The Research Director relations with customers, employees, and members of the
The director of research in a large aerospace firm larger society. Frequently, the ethically correct course of
recently promoted a woman to head an engineering action is clear, and people in business act accordingly.
team charged with designing a critical component for Exceptions occur, however, when there is uncertainty
a new plane. She was tapped for the job because of her about ethical obligations in particular situations or when
superior knowledge of the engineering aspects of the considerations of ethics come into conflict with the practi-
project, but the men under her direction have been cal demands of business. The sales representative might
expressing resentment at working for a woman by sub- not be sure, for example, about the extent to which he is
tly sabotaging the work of the team. The director obligated to provide information about possible delays in
believes that it is unfair to deprive the woman of delivery. And the director of research, although convinced
advancement merely because of the prejudice of her that discrimination is wrong, might still feel that he has no
male colleagues, but quick completion of the designs choice but to remove the woman as head of the team in
and the building of a prototype are vital to the success order to get the job done.
of the company.
Ethical Issue: Should the director remove the woman WRITING PROMPT
as head of the engineering team? Judgment Calls on the Job

3. The Marketing Director Describe a situation where you needed to make a decision in which
the “right” choice had negative consequences for others or yourself
The vice president of marketing for a major brewing personally. Explain your decision and the reasoning for it.
company is aware that college students account for a
The response entered here will appear in the
large proportion of beer sales and that people in this
performance dashboard and can be viewed by
age group form lifelong loyalties to particular brands your instructor.
of beer. The executive is personally uncomfortable
with the tasteless gimmicks used by her competitors in Submit
the industry to encourage drinking on campuses,
including beach parties and beer-drinking contests.
She worries about the company’s contribution to
underage drinking and alcohol abuse among college 1.1.1: Nature of Business
students. In deciding on an ethical course of action, we can rely to
some extent on the rules of right conduct that we employ
Ethical Issue: Should the marketing director follow
the competition’s troubling practices? in everyday life. Deception is wrong, for example, whether
we deceive a friend or a customer. And corporations no
4. The CEO less than persons have an obligation not to discriminate or
The CEO of a midsize producer of a popular line of cause harm. However, business activity also has some fea-
kitchen appliances is approached about merging with tures that limit the applicability of our ordinary ethical
a larger company. The terms offered by the suitor are views. In business settings, we encounter situations that
very advantageous to the CEO, who would receive a are significantly different from those of everyday life, and
large severance package. The shareholders of the firm business roles place their own obligations on us. For exam-
would also benefit because the offer for their stock is ple, CEOs, by virtue of their position, have responsibilities
substantially above the current market price. The CEO to several different constituencies, and they face ethical
learns, however, that plans call for closing a plant that challenges in finding the proper balance among these pos-
is the major employer in a small town. The firm has sibly conflicting responsibilities.
always taken its social responsibility seriously, but the One distinguishing feature of business is its economic
CEO is now unsure of how to balance the welfare of character. In the world of business, we interact with each
the employees who would be thrown out of work and other not as family members, friends, or neighbors, but as
the community where the plant is located against the buyers and sellers, employers and employees, and the like.
interests of the shareholders. He is also not sure how Trading, for example, is often accompanied by hard bar-
much to take his own interests into account. gaining, in which both sides conceal their full hand and
Ethical Issue: Should the CEO support a merger that perhaps engage in some bluffing. And a skilled salesper-
harms the community but benefits the shareholders son is well versed in the art of arousing a customer’s atten-
and himself? tion (sometimes by a bit of puffery) to clinch the sale. Still,
6 Chapter 1

there is an “ethics of trading” that prohibits the use of false 1.1.2: Levels of Decision Making
or deceptive claims and tricks such as “bait-and-switch”
Decision making in business occurs on three distinct levels:
advertising.
Employment is also recognized as a special relation- the level of the individual
ship, with its own standards of right and wrong. Employ- the level of the organization
ers are generally entitled to hire and promote whomever
the level of the business system
they wish and to lay off or terminate workers without
regard for the impact on the people affected. (This right is Situations that confront individuals in the workplace
being increasingly challenged, however, by those who and require them to make a decision about their own
hold that employers ought to fire only for cause and to response are on the level of individual decision making.
follow rules of due process in termination decisions.) An employee with an unreasonably demanding boss, for
Employees also have some protections, such as a right not example, or with a boss who is discovered padding his
to be discriminated against or to be exposed to workplace expense account faces the question: “What do I do?”
hazards. There are many controversies about the employ- Whether to live with the difficult boss or to blow the whis-
ment relationship, such as the rights of employers and tle on the padding is a question to be answered by the indi-
employees with regard to privacy and freedom of speech, vidual and acted on accordingly.
for example. Many ethical problems occur at the level of the organ-
The ethics of business, then, is at least in part the ethics ization in the sense that the individual decision maker is
of economic or market activity, such as the conduct of buy- acting on behalf of the organization in bringing about
ers and sellers in a market and of employers and employ- some organizational change. Sexual harassment, for
ees in the workplace. So we need to ask, what are the example, is an individual matter for the person suffering
ethical rules or standards that ought to govern these kinds the abuse, but a manager in an office where sexual harass-
of activities? And how do these rules and standards differ ment is happening must take steps not only to rectify the
from those that apply in other spheres of life? situation but also to ensure that it does not occur again.
A second distinguishing feature of business is that it The decision in this case may be a disciplinary action,
typically takes place in organizations. An organization, which involves a manager acting within his or her organi-
according to organizational theory, is a hierarchical system zational role. The manager may also institute training to
of functionally defined positions designed to achieve some prevent sexual harassment and possibly develop a sexual
goal or a set of goals. Consequently, the members of a busi- harassment policy, which not only prohibits certain
ness organization, in assuming a particular position, take behavior but also creates procedures for handling com-
on new obligations to pursue the goals of a firm. Because plaints. Responding to harassment as a manager, as
business involves economic transactions and relationships opposed to dealing with harassment as a victim, involves
that take place in markets and also in organizations, it decisions on the organizational level rather than the indi-
raises ethical issues for which the ethics of everyday life vidual level. The question here is, “What do we as an
has not prepared us. Although the familiar ethical rules organization do?”
about honesty, fairness, promise keeping, and the like are Problems that result from accepted business practices
applicable to business, it is necessary in many cases to or from features of the economic system cannot be effec-
rethink how they apply in business situations. This is not tively addressed by any single organization, much less a
to say that the ethics of business is different from ethics in lone individual. Sales practices within an industry, for
everyday life, but only that business is a different context, example, are difficult for one company to change single-
and it presents us with new situations that require us to handedly because the company is constrained by competi-
think through the ethical issues. tion with possibly less-ethical competitors. The most
effective solution is likely to be an industry-wide code of
WRITING PROMPT ethics, agreed to by all. Similarly, the lower pay for women
work results from structural features of the labor market,
A Business Mindset
which no one company or even industry can alter. A single
What do people usually mean when they defend a business decision
by saying, “Business is business”? By what standards should busi- employer cannot adopt a policy of comparable worth, for
ness decisions be evaluated, and how do these compare to the example, because the problem of lower pay for women is
standards in your personal life? systemic, and consequently any substantial change must
The response entered here will appear in the be on the level of the system. Systemic problems are best
performance dashboard and can be viewed by solved by some form of regulation or economic reform. On
your instructor.
the systemic level, the relevant question is, “What do we as
a society do?”
Submit Use Table 1.1 to review these concepts.
 Ethics in the World of Business 7

primarily to provide goods and services, as well as jobs,

Table 1.1 Levels of Decision Making in Business and their success depends on operating efficiently and com-
Review the type of problem that should be resolved at each level of petitively. In a capitalist system, firms operate in an open
decision making and the relevant question for each. Then hide the market by providing goods and services that customers
cells in the table to quiz your understanding of these situations.
want and by doing so at a low price. This is possible only
Relevant
Level Type of Problem Question when the desired goods and services are produced by mul-
The Individual The problem confronts an individual and What do I
tiple firms competing to attract customers. Thus, profit is
requires that person to make a decision do? not the end or purpose of business, as is commonly asserted,
about his or her own response. but is merely the return on the investment in a business that
The The problem requires that the individ- What do we is possible only when the business is competitive. Business
Organization ual decision maker act on behalf of the as an organi-
organization to resolve the situation zation do? has often been described as a game, in which the aim is to
and possibly bring about some organi- make as much profit as possible while staying within the
zational change.
rules of the game, which are set mainly by government
The Business The problem results from accepted What do we
System business practices or from features of as a society through laws and regulations.13 On the view of business as
the economic system which cannot be do? a game, profit is a measure and the reward of success, but it
effectively addressed by any single
individual or organization.
cannot be gained without also aiming to be competitive.
Moreover, it is necessary, in pursuing profits, to observe cer-
Identification of the appropriate level for a decision is tain ethical standards, as well as laws and regulation, as a
important because an ethical problem may have no solution means to the end of profit making.
on the level at which it is approached. The beer marketer Both economics and law are critical to business deci-
described earlier may have little choice but to follow the sion making, but the view that they are the only relevant
competition in using tasteless gimmicks because the prob- considerations and that ethics does not apply is plainly
lem has no real solution on the individual or organizational false. Even hard-fought games like football have a code of
level. An effective response requires that she place the prob- sportsmanship in addition to a rule book, and business,
lem on the systemic level and seek a solution appropriate to too, is governed by more than the legal rules. In addition, a
that level. Richard T. DeGeorge has described such a move competitive business system, in which everyone pursues
as “ethical displacement,” which consists of addressing a his or her self-interest, depends for its existence on ethical
problem on a level other than the one on which the problem behavior and is itself justified on ethical grounds. How-
appears.12 The fact that some problems can be solved only ever, the relationships of business ethics to economics and
by displacing them to a higher level is a source of great dis- the law are very complicated and not easily summarized.
tress for individuals in difficult situations because they still The following discussion is intended to clarify these rela-
must find some less-than-perfect response on a lower level. tionships.

WRITING PROMPT
The Authority to Decide 1.2.1: Ethics and Economics
An angry customer is speaking on the phone with a customer ser- According to economic theory, firms in a free market uti-
vice representative. The customer demands a full refund for the lize scarce resources or factors of production (labor, raw
defective item she purchased online, although it is past the 30-day
period allowed for returns. Describe a possible solution that could be materials, and capital) in order to produce an output
offered at each level of decision making, and explain which level is (goods and services). The demand for this output is deter-
required to resolve the problem to the customer’s satisfaction. mined by the preferences of individual consumers who
The response entered here will appear in the select from among the available goods and services so as to
performance dashboard and can be viewed by maximize the satisfaction of their preferences, which is
your instructor. called “utility.” Firms also seek to maximize their prefer-
ences or utility by increasing their output up to the point
Submit where the amount received from the sale of goods and ser-
vices equals the amount spent for labor, raw materials, and
1.2: Ethics, Economics, capital—that is, where marginal revenues equal marginal
costs. Under fully competitive conditions, the result is eco-
and Law nomic efficiency, which means the production of the maxi-
mum output for the least amount of input.
1.2 Recognize the role of ethics in the conduct of business, Economics thus provides an explanatory account of
with respect to economic principles and the law the choices of economic actors, whether they be individu-
Businesses are economic organizations that operate within als or firms. By this account, the sole reason for any choice
a framework of law and regulation. They are organized is to maximize utility. However, ethics considers many
8 Chapter 1

other kinds of reasons, including rights and justice and arise when these conditions for the operation of a free
other noneconomic values. To make a choice on the basis market are not satisfied.
of ethics—that is, to use ethical reasons in making a deci-
CONDITIONS FOR FREE MARKETS A common view is
sion—appears at first glance to be incompatible with eco-
that ensuring the conditions for free markets and correct-
nomic choice. To make decisions on economic grounds
ing for their absence are jobs for government. It is govern-
and on ethical grounds is to employ two different kinds of
ment’s role, in other words, to create the rules of the game
reasoning. This apparent incompatibility dissolves on
that allow managers to make decisions solely on economic
closer inspection. If the economists’ account of economic
grounds. However, the task of maintaining the market-
reasoning is intended to be merely an explanation, then it
place cannot be handled by government alone, and the fail-
tells us how we do reason in making economic choices but
ure of government to do its job may create an obligation for
not how we ought to reason. Economics as a science need
business to help. Although government does enact and
do no more than offer explanations, but economists gen-
enforce laws against theft and fraud, including such spe-
erally hold that economic reasoning is also justified. That
cialized forms as the theft of trade secrets and fraud in
is, economic actors ought to make utility-maximizing
securities transactions, there are many gray areas in which
choices, which is an ethical, and not merely an economic,
self-regulation and restraint should be exercised in order to
judgment.
preserve a well-functioning marketplace.
An example of a gray area in law is the “hardball” tac-
JUSTIFICATION OF MARKET SYSTEM The argument
tics employed by Toys “R” Us.15
for this position, that economic actors ought to make util-
ity-maximizing choices, is the classical defense of the mar- Case: Toys “R” Us
ket system. In The Wealth of Nations, Adam Smith, the Toys “R” Us employees allegedly bought inventory off the
“father” of modern economics, justified the pursuit of self- shelves of a competitor, Child World, during a promotion in
interest in exchange on the grounds that by making trades which customers received $25 gift certificates for buying
for our own advantage, we promote the interests of others. merchandise worth $100. The employees of Toys “R” Us
The justification for a free-market capitalist system is, in were accused of selecting products that Child World sold
part, that by pursuing profit, business firms promote the close to cost, such as diapers, baby food, and infant for-
welfare of the whole society. Commentators on Adam mula. These items could be resold by Toys “R” Us at a profit
Smith have observed that this argument assumes a well- because the purchase price at Child World was barely above
ordered civil society with a high level of honesty and trust what a wholesaler would charge, and then Toys “R” Us could
and an abundance of other moral virtues. Smith’s argu- redeem the certificates for additional free merchandise,
ment would not apply well to a chaotic society marked by which could be resold at an even higher profit. Child World
pervasive corruption and mistrust. Furthermore, in his claimed that its competitor bought up to $1.5 million worth of
defense of the free market in The Wealth of Nations, Smith merchandise in this undercover manner and received as
was speaking about exchange, whereas economics also much as $375,000 worth of gift certificates.
includes production and distribution.14 The distribution of Hardball tactics like those allegedly employed by Toys
goods, for example, is heavily influenced by different ini- “R” Us are apparently legal, although Child World stated
tial endowments, access to natural resources, and the that the promotion excluded dealers, wholesalers, and
vagaries of fortune, among other factors. Whether the vast retailers. Executives at Toys “R” Us did not deny the accu-
disparities in wealth in the world are justified is a question sation and contended that the practice is common in the
of distribution, not exchange, and is not addressed by industry. Child World may have left itself open to such a
Smith’s argument. hardball tactic by slashing prices and offering the certifi-
Moreover, certain conditions must be satisfied in cates in an effort to increase market share against its larger
order for business activity to benefit the society. These rival. Still, many companies would consider such deliberate
include the observance of minimal moral restraints to sabotage of a competitor to be an unacceptable business
prevent theft, fraud, and the like. Markets must be fully practice that is incompatible with the market system—
competitive, with easy entry and exit, and everyone must especially when it is their competitors who play hard ball.
possess all relevant information. In addition, all costs of
production should be reflected in the prices that firms FAIRNESS IN FREE MARKETS Recent work in econom-
and consumers pay. For example, unintended conse- ics has revealed the influence of ethics on people’s eco-
quences of business activity, such as job-related accidents, nomic behavior. Economists have shown how a reputation
injuries from defective products, and pollution, are costs for honesty and trustworthiness, for example, attracts cus-
of production that are often not covered or internalized tomers and potential business partners, thus creating eco-
by the manufacturer but passed to others as spillover nomic opportunities that would not be available otherwise.
effects or externalities. Many business ethics problems Similarly, people and firms with an unsavory reputation
 Ethics in the World of Business 9

are punished in the market. People are also motivated in not believe that scarcity is an acceptable reason for raising
their market behavior by considerations of fairness. This is prices (despite what economists teach about supply and
illustrated by the “ultimatum bargaining game,” in which demand),18 and so Home Depot and its suppliers, which
two people are given a certain amount of money (say $10) are there for the long haul, have more to lose than gain by
on the condition that one person proposes how the money taking advantage of a natural disaster. Evidence also indi-
is to be divided (e.g., $5 to each) and the second person cates that people in a natural disaster feel that everyone
accepts or rejects the proposed division. The first person ought to make some sacrifice, so that profit seeking by a
can make only one proposal, and if the proposal is rejected few is perceived as shirking a fair share of the burden.19
by the second person, the money is taken away and each Although Home Depot’s actions can be lauded as a dis-
person receives nothing. Economic theory suggests that play of good ethics, the company also made a shrewd
the second person would accept any proposal, no matter business decision.
how small the share, if the alternative is no money at all.
Finally, when economics is used in practice to support
Hence, the first person could offer to share as little as $1 or
matters of public policy, it must be guided by noneco-
less. But many people who play the game will refuse a pro-
nomic values. Economic analysis can be applied to the
posal in which they receive a share that is considered too
market for cocaine as easily as to the soybean market, but
small and hence unfair.16 They would rather have nothing
it cannot tell us whether we should allow both markets.
than be treated unfairly.
That is a decision for public policy makers on the basis of
Another example of the importance of fairness in busi-
other considerations. A tax system, for example, depends
ness is the action taken by Home Depot in response to a
on sound economic analysis, but the U.S. tax code attempts
devastating hurricane.
to achieve many aims simultaneously and to be accepted
Case: Home Depot as fair. In drafting a new tax code, a demonstration that a
particular system is the most efficient from a purely eco-
When weather forecasters predicted that Hurricane Andrew
nomic perspective would not necessarily be persuasive to
would strike the Miami area with full force, customers rushed
a legislator who may also be concerned about considera-
to stock up on plywood and other building materials.17 That
tions of fairness.
weekend the 19 Home Depot stores in southern Florida sold
more 4-foot-by-8-foot sheets of exterior plywood than they WRITING PROMPT
usually sell in two weeks. On August 24, 1992, the hurricane
Toys “R” Us and Home Depot
struck, destroying or damaging more than 75,000 homes,
Consider the actions of Toys “R” Us and Home Depot and contrast
and in the wake of the devastation, individual price gougers their demonstrated views of what is “fair” in business. How might
were able to sell basics like water and food as well as build- the considerations of fairness in either case contribute to a well-
ing materials at wildly inflated prices. But not Home Depot. functioning marketplace?
The chain’s stores initially kept prices on plywood at pre-hur- The response entered here will appear in the
ricane levels, and when wholesale prices rose on average 28 performance dashboard and can be viewed by
percent, the company announced that it would sell plywood, your instructor.
roofing materials, and plastic sheeting at cost and take no
profit on the sales. It did limit quantities, however, to prevent Submit
price gougers from reselling the goods at higher prices. In
addition, Home Depot successfully negotiated with its sup- 1.2.2: Ethics and Law
pliers of plywood to roll back prices to pre-hurricane levels.
Business activity takes place within an extensive framework
Although prices increased early in anticipation of Hurricane
of law, and some people hold that law is the only set of rules
Andrew, Home Depot was still able, with the cooperation of
that applies to business activity. Law, not ethics, these peo-
suppliers, to sell half-inch plywood sheets for $10.15 after
ple believe, is the only relevant guide. The reasons that lead
the hurricane, compared with a price of $8.65 before, thereby
people to hold this view are varied, but two predominate.20
limiting the increase to less than 18 percent.
Home Depot executives explained their decision as an TWO SCHOOLS OF THOUGHT One school of thought is
act of good ethics by not profiting from human misery. that law and ethics govern two different realms. Law pre-
However, economists explain the behavior of companies vails in public life, whereas ethics is a private matter. The
like Home Depot and its suppliers by the fact that consid- law is a clearly defined set of enforceable rules that applies
erations of fairness force firms to limit profit-seeking behav- to everyone, whereas ethics is a matter of personal opinion
ior. Consumers remember price gouging and other that reflects how we choose to lead our own lives. Conse-
practices that they consider unfair and will punish the quently, it would be a mistake to apply ethical rules in busi-
wrongdoers by ceasing to do business with them or even ness, just as it would be a mistake to apply the rules of poker
by engaging in boycotts. One study found that people do to tennis. A variant of this position is that the law represents
10 Chapter 1

a minimal level of expected conduct that everyone should First, the law is inappropriate for regulating certain
observe. Ethics, on the other hand, is a higher, optional level. aspects of business activity. Not everything that is
It is “nice” to be ethical, but our conduct has to be legal. immoral is illegal. Some ethical issues in business concern
Both versions of this school of thought are mistaken. interpersonal relations at work or relations between com-
Although ethics does guide us in our private lives, it is also petitors, which would be difficult to regulate by law. Tak-
applicable to matters in the public realm. We can identify ing credit for someone else’s work, making unreasonable
business practices as ethical or unethical, as, for example, demands on subordinates, and unjustly reprimanding an
when we say that discrimination or consumer fraud is wrong. employee are all ethically objectionable practices, but they
Moral judgments are also made about economic systems. are best left outside the law. Some hardball tactics against
Thus, most people believe that capitalism is morally justified, competitors may also be legal but ethically objectionable.
although it has many critics who raise moral objections. Whether the effort of Toys “R” Us to sabotage a promotion
The other school of thought is that the law embodies by its competitor is acceptable behavior (as discussed in
the ethics of business. There are ethical rules that apply to the “Conditions for Free Markets” section) is open to dis-
business, according to this position, and they have been pute, but not every legal competitive maneuver is ethical.
enacted by legislators into laws, which are enforceable by Generally, legislatures and the courts are reluctant to inter-
judges in a court. As a form of social control, law has many vene in ordinary business decisions unless significant
advantages over ethics. Law provides more precise and rights or interests are at stake. They rightly feel that outsid-
detailed rules than ethics, and the courts not only enforce ers should not second-guess the business judgment of peo-
these rules with state power but also are available to inter- ple closer to a problem and impose broad rules for
pret them when the wording is unclear. A common set of problems that require a more flexible approach. Compa-
rules known to all also provides a level playing field. Imag- nies also prefer to handle many problems without outside
ine the chaos if competing teams each decided for them- interference. Still, just because it is not illegal to do certain
selves what the rules of a game ought to be. For these things does not mean that they are morally okay.
reasons, some people hold that it is morally sufficient in Second, the law is often slow to develop in new areas
business merely to observe the law. Their motto is, “If it’s of concern. Christopher D. Stone points out that the law is
legal, then it’s morally okay.”21 primarily reactive, responding to problems that people in
In countries with well-developed legal systems, the the business world can anticipate and deal with long before
law is a relatively complete guide for business conduct. In they come to public attention.22 The legislative and judicial
the United States, much of what is unethical is also illegal. processes themselves take a long time, and meanwhile
However, many other countries of the world have unde- much damage can be done. This is true not only for newly
veloped legal systems so that ethics, not law, provides the emergent problems but also for long-recognized problems
main source of guidance. The relative lack of international where the law has lagged behind public awareness. For
law leaves ethics as an important guide for global business. example, sexual harassment was not recognized as a legal
Moreover, no legal system can embrace the whole of moral- wrong by the courts until 1977, and it took successive court
ity. Ethics is needed not only to address situations not cov- decisions over two more decades for the legal prohibition
ered by law but also to guide the creation of new law. The on sexual harassment to fully develop. At the present time,
1964 Civil Rights Act, for example, was passed by Congress legal protections for employees who blow the whistle and
in response to the recognition that discrimination, which those who are unjustly dismissed are just beginning to
was legally practiced at the time, is morally wrong. develop. Employers should not wait until they are forced
by law to act on such matters of growing concern.
WHY LAW IS NOT ENOUGH Despite their differences, Third, the law itself often employs moral concepts
these two schools of thought have the same practical impli- that are not precisely defined. As a result, it is impossible
cation: Managers need to consider only the law in making in some instances to understand the law without consider-
decisions. This implication is not only false but also highly ing matters of morality. The requirement of good faith, for
dangerous. Regardless of the view that a practicing man- example, is ubiquitous in law. The National Labor Rela-
ager takes on the relationship of law and ethics, reliance on tions Act requires employers and the representatives of
the law alone is a prescription for disaster, as many indi- employees to bargain “in good faith.” One defense against
viduals and firms have discovered. Approval from a com- a charge of price discrimination is that a lower price was
pany’s legal department does not always assure a successful offered in a good-faith attempt to meet the price of a com-
legal resolution, and companies have prevailed in court petitor. Yet the notion of good faith is not precisely defined
only to suffer adverse consequences in the marketplace. As in either instance. Abiding by the law, therefore, requires
a practical matter, then, managers need to consider both the decision makers to have an understanding of this key
ethical and legal aspects of a situation in making a decision moral concept. Other imprecisely defined legal concepts
for many reasons, including the following. are “fair dealing,” “best effort,” and “due care.”
 Ethics in the World of Business 11

A fourth argument, closely related to the preceding

one, is that the law itself is often unsettled, so that whether
1.3: Ethics and
some course of action is legal must be decided by the
courts. And in making a decision, the courts are often
Management
guided by moral considerations. Many people have thought 1.3 Distinguish between ethical management and the
that their actions, although perhaps immoral, were still management of ethics, and each of the three main
legal, only to discover otherwise. The courts often refuse to roles of a manager
interpret the law literally when doing so gives legal sanc- Most managers think of themselves as ethical persons, but
tion to blatant immorality. Judges have some leeway or dis- some still question whether ethics is relevant to their role
cretion in making decisions. In exercising this discretion, as a manager. It is important for people in business to be
judges are not necessarily substituting morality for law but ethical, they might say, but being ethical in business is no
rather expressing a morality that is embodied in the law. different than being ethical in private life. The implication
Where there is doubt about what the law is, morality is a is that a manager need only be an ethical person. There is
good predictor of how the courts will decide. no need, in other words, to have specialized knowledge or
Fifth, a pragmatic argument is that the law is a rather skills in ethics.
inefficient instrument, and an exclusive reliance on law Nothing could be further from the truth. Although
alone invites legislation and litigation where they are not there is no separate ethics of business, situations arise in
necessary. Many landmark enactments, such as the Civil business that are not easily addressed by ordinary ethical
Rights Act of 1964, the National Environment Policy Act of rules. We have already observed that the obligation to tell
1969, the Occupational Safety and Health Act of 1970, and the truth is difficult to apply to the dilemma faced by the
the Consumer Protection Act of 1972, were passed by sales rep. In addition, the manager of a sales force might
Congress in response to public outrage over the well- face the task of determining the rules of acceptable sales
documented failure of American businesses to act responsi- practices for the whole organization and ensuring that the
bly. Although business leaders lament the explosion of rules are followed. More broadly, high-level managers
product liability suits by consumers injured by defective have a responsibility for creating and maintaining an ethi-
products, for example, consumers are left with little choice cal corporate climate that protects the organization against
but to use the legal system when manufacturers themselves unethical and illegal conduct by its members. Furthermore,
hide behind “If it’s legal, it’s morally okay.” Adopting this a well-defined value system serves to guide organizations
motto, then, is often shortsighted, and businesses may often in uncertain situations and to gain acceptance of painful
advance their self-interest more effectively by engaging in but necessary change.
greater self-regulation that observes ethical standards.
Use Table 1.2 to review these points and consider their
1.3.1: Ethical Management
implications for business decisions.
and Management of Ethics
A useful distinction can be made between ethical manage-
Table 1.2 Acting Ethically and Legally
ment and the management of ethics. Business ethics is often
Why should managers consider the ethical—and not merely the conceived as acting ethically as a manager by doing the
legal—aspects of a situation when making decisions? Review the
arguments in favor of considering both ethics and law in business right thing. This is ethical management. Acting ethically is
and the corresponding implication of each argument. Then hide the important for both individual success and organizational
cells to quiz yourself. effectiveness. Ethical misconduct has ended more than a
Argument Implication few promising careers, and some business firms have been
1. The law cannot regulate all Not everything that is legal is moral. severely harmed and even destroyed by the actions of a few
aspects of business activity. Not everything that is immoral is illegal.
individuals. Major scandals in the news attract our atten-
2. The law is often slow to develop Businesses should not wait to “do the
in new areas of concern. right thing” until forced to act by law.
tion, but people in business face less momentous ethical
3. The law often employs moral To abide by the law, business leaders
dilemmas in the ordinary course of their work. These dilem-
concepts that are not pre- need to understand key moral con- mas sometimes result from misconduct by others, as when
cisely defined. cepts well enough to use their own a subordinate is ordered to commit an unethical or illegal
judgment when making decisions.
act, but they are also inherent in typical business situations.
4. The law itself is unsettled on The courts are often guided by moral
whether some course of considerations in making a decision. The management of ethics is acting effectively in situa-
action is legal. Where there is doubt about what the tions that have an ethical aspect. These situations occur in
law is, morality is a good predictor.
both the internal and external environments of a business
5. An exclusive reliance on law Self-regulation and observing ethical
alone and failure to act standards can prevent unnecessary firm. Internally, organizations bind members together
responsibly can result in legis- lawsuits and new laws that may inter- through myriad rules, procedures, policies, and values that
lation and litigation. fere with business.
must be carefully managed. Some of these, such as a policy
12 Chapter 1

on conflict of interest or the values expressed by a compa- 1.3.2: Ethics and the
ny’s mission statement, explicitly involve ethics. Effective
organizational functioning also depends on gaining the
Manager’s Role
acceptance of the rules, policies, and other guides, and this Every person in business occupies a role. A role is a struc-
acceptance requires a perception of fairness and commit- tured set of relationships with accompanying rights and
ment. For example, an organization that does not “walk obligations. Thus, to be a purchasing agent or a personnel
the talk” when it professes to value diversity is unlikely to director or an internal auditor is to occupy a role. In occu-
gain the full cooperation of its employees. With respect to pying a role, a person assumes certain rights that are not
the external environment, corporations must successfully held by everyone as well as certain role-specific obliga-
manage the demands for ethical conduct from groups con- tions. Thus, a purchasing agent is empowered to make
cerned with racial justice, human rights, the environment, purchases on behalf of an organization and has a responsi-
and other matters. bility to make purchasing decisions that are best for the
In order to practice both ethical management and the organization. To be a “good” purchasing agent is to do the
management of ethics, it is necessary for managers to pos- job of a purchasing agent well.
sess some specialized knowledge. Many ethical issues have The obligations of a particular role are sometimes
a factual background that must be understood. In dealing added to those of ordinary morality. That is, a person who
with a whistle-blower or developing a whistle-blowing occupies a role generally assumes obligations over and
policy, for example, the managers of a company should be above those of everyday life. Sometimes, however, role
aware of the motivation of whistle-blowers, the measures obligations come into conflict with our other obligations.
that other companies have found effective, and, not least, In selecting people for promotion, a personnel director, for
the relevant law. In addition, many ethical issues involve example, is obligated to set aside any considerations of
competing theoretical perspectives that need to be under- friendship and to be wholly impartial. A person in this
stood by a manager. Whether it is ethical to use confiden- position may also be forced to terminate an employee for
tial information about a competitor or personal information the good of the organization, without regard for the impact
about an employee depends on theories about intellectual on the employee’s life. A personnel director may even be
property rights and the right to privacy that are debated by required to implement a decision that he or she believes to
philosophers and legal theorists. Although a manager need be morally wrong, such as terminating an employee for
not be equipped to participate in these debates, some inadequate cause. In such situations, the obligations of a
familiarity with the theoretical considerations is helpful in role appear to be in conflict with the obligations of ordi-
dealing with practical situations. nary morality.
To make sound ethical decisions and to implement Various justifications have been offered for role obliga-
them in a corporate environment are skills that come with tions. One justification is simply that people in certain
experience and training. Some managers make mistakes positions have responsibilities to many different groups
because they fail to see the ethical dimensions of a situa- and hence must consider a wide range of interests. The
tion. Other managers are unable to give proper weight to decisions of a personnel director have an impact on every-
competing ethical factors or to see other people’s perspec- one connected with a business organization, and so deny-
tives. Thus, a manager may settle a controversial question ing a promotion to a friend or terminating an employee
to his or her satisfaction, only to discover that others still may be the right thing to do, all things considered. A more
disagree. Moral imagination is often needed to arrive at sophisticated justification is that roles are created in order
creative solutions to problems. Finally, the resolution of a to serve society better as a whole. A well-designed system
problem usually involves persuading others of the right- of roles, with accompanying rights and obligations, ena-
ness of a position, and so the ability to explain one’s rea- bles a society to achieve more and thereby benefits every-
soning is a valuable skill. one. A system of roles thus constitutes a kind of division of
The need for specialized knowledge and skills is espe- labor. As in Adam Smith’s pin factory, in which workers
cially acute when business is conducted abroad.23 In who perform specific operations can be more productive
global business, there is a lack of consensus on acceptable than individuals working alone, so, too, a business organi-
standards of conduct, and practices that work well at home zation with a multiplicity of roles can be more productive
may fare badly elsewhere. This is especially true in less- and better serve society.
developed countries with lower standards and weak insti- We cannot understand the role obligations of manag-
tutions. How should a manager proceed, for example, in a ers without knowing more about their specific role. Man-
country with exploitive labor conditions, lax environmen- agers serve at all levels of an organization—top, middle,
tal regulations, and pervasive corruption? Even the most and lower—and fulfill a variety of roles. Usually, these are
ethical manager must rethink his or her beliefs about how defined by a job description, such as the role of a purchas-
business ought to be conducted in other parts of the world. ing agent or a personnel director. Uncertainty arises mainly
 Ethics in the World of Business 13

when we ask about the role of top managers,

Figure 1.1 Roles of a Manager
that is, high-level corporate executives who
make key decisions about policy and strategy. Economic Actors Company Leaders Community Leaders
The higher one goes in a business organiza-
Every manager is Top managers are Some top managers
tion, the more roles one occupies. Many of the expected to base entrusted with wield enormous power
ethical dilemmas for top managers are due to decisions primarily on managing enormous both inside and outside
economic factors so the assets to meet the their organizations. Like
conflicts between three main roles. organization can be expectations of multiple elected officials, they
competitive and parties. are expected to
1. Managers as Economic Actors. profitable. This requires They also must demonstrate corporate
One inescapable requirement of the manager’s the ability to solve • build and maintain a leadership that serves
ethical problems that company’s culture, the interests of society
role is to make sound economic or business de- arise in the course of • develop a shared as a whole.
cisions that enable a firm to succeed in a com- everyday business. purpose and strategic
vision, and
petitive market. As economic actors, managers
• meet challenges to
are expected to consider primarily economic create a strong,
factors in making decisions, and the main meas- enduring organization.
ure of success is profitability. This is the goal of
managers who serve as economic actors even if they oper- Many of the ethical dilemmas facing managers involve
ate a sole proprietorship, a partnership, or any other kind of not merely a conflict between one’s personal morality and
business enterprise. However, as previously noted, ethical the morality of a role but also a conflict between the moral
issues are intertwined with business considerations in deci- demands of different roles. For example, a manager may
sion making, and the soundness of business decisions often have to balance fairness to employees or a benefit to the
depends on the recognition of these ethical issues and their community against an obligation to act in the best interest
appropriate resolution. of the company. Or a CEO may find that he or she cannot
easily serve both as a company leader and as a community
2. Managers as Company Leaders.
leader when a decision must be made about a merger that
As leaders of business organizations, managers are en- would close a local plant. Some of the hardest dilemmas in
trusted with enormous assets and given a charge to manage business ethics result from such role conflicts.
these assets prudently. Employees, suppliers, customers, in-
vestors, and other so-called stakeholders have a stake in the
WRITING PROMPT
success of a firm, and managers are expected to meet all of
Ethical Standards for Different Managers
their legitimate expectations and to balance any conflicting
Explain the ethical responsibility of a CEO of a large multinational
interests. Corporations are also human communities in which
corporation and that of a proprietor of a small business. What differ-
individuals find not only the means to support themselves ences, if any, in ethical standards do these leaders face?
but also personal satisfaction and meaning. Top managers,
The response entered here will appear in the
in particular, serve these roles by building and maintaining a performance dashboard and can be viewed by
company’s culture, developing a shared purpose and stra- your instructor.
tegic vision, and, most importantly, meeting challenges and
creating a strong, enduring organization. Submit

3. Managers as Community Leaders.

Top managers of companies exert enormous power both in-
side and outside their organizations. Although they are not 1.4: Ethics in
elected in a democratic process, they nevertheless have
many attributes of government officials, such as the power
Organizations
to make decisions that profoundly impact society. The CEO 1.4 Analyze how ethical business conduct is
or chairman of a large corporation also serves as an ambas- challenged by decision making on individual and
sador, representing the company in its relations with its myr- organizational levels
iad constituencies. In any political system, such great power
The manager who seeks to act ethically and to ensure the
must be legitimized by showing how it serves some generally
ethical conduct of others—to achieve “ethical manage-
accepted societal goals, and managerial power is no excep-
ment” and “the management of ethics,” respectively—
tion. So, top managers are expected to demonstrate corpo-
must have the ability not only to understand ethical issues
rate leadership that serves the interests of society as a whole.
and resolve them effectively, but also to appreciate the
Use Figure 1.1 to review the multiple roles a manager challenges of ethical decision making and ethical conduct
may hold in an organization. in an organizational setting. The fact that much business
14 Chapter 1

activity takes place in organizations has profound conse- signals.26 Often there is strong pressure to follow orders and
quences for the manager’s role responsibilities for several get the job done. Barbara Toffler, who wrote a book about the
reasons. last days of Arthur Andersen, relates the tale of an under-
graduate who interned at a major accounting firm where he
First, much decision making in business is a collabora-
was ordered to make an accounting entry that appeared to be
tive endeavor in which each individual may play only
irregular. When he told his superior, “This doesn’t look right
a small role. Many organizational decisions get made
to me. Why am I doing it?” the reply was, “You’re doing it
without any one person coming to a decision or being
because I told you to do it.”27 Employees who are told “Just
responsible for it.
do it!” without more explicit instructions and without ade-
Second, this collaborative decision-making process is
quate resources may perceive these words as an implicit
subject to dynamic forces that may not be recognized
order to do whatever it takes to get a job done. Employees
or understood by any of the participants. As a result,
are also urged to be “team players” and go along with what-
decisions get made that have consequences no one
ever is being done. Senior managers, in giving orders, often
intended or expected.
prefer not to give detailed guidance, in part to avoid opera-
Third, many organizational acts are not the result of tional responsibility (“Just do it, and don’t tell me how you
any one person’s actions but are collective actions that got it done”). They also sometimes lack an appreciation of
result from a multiplicity of individual actions. Many the operational difficulties of a job and thus leave to subordi-
corporate acts are thus “deeds without doers.”24 nates the task of solving problems their own ways.
Fourth, organizations themselves create an environ- Second, individuals are prone to rationalization and
ment that may lead otherwise ethical people to engage can often effectively persuade themselves that a course of
in unethical conduct. Organizational life, according to action is morally right or, at least, is not wrong under the
sociologist Robert Jackall, poses a series of “moral circumstances. Saul Gellerman, in the article “Why ‘Good’
mazes” that people must navigate at their own peril.25 Managers Make Bad Ethical Choices,” identifies four dan-
Consequently, the typical case of wrongdoing in gerous rationalizations.28
organizations involves missteps that are due more to
A belief that the activity is within reasonable ethical
inadequate thought than to deliberate malice, where
and legal limits—that is, that it is not “really” illegal or
people get “lost” in a moral maze.
immoral.
The following two sections discuss the findings, A belief that the activity is in the individual’s or the
mainly of psychologists and sociologists, about how ethi- corporation’s best interest—that the individual would
cal mistakes result from flaws in individual decision mak- somehow be expected to undertake the activity.
ing and from organizational forces.
A belief that the activity is “safe” because it will never
be found out or publicized; the classic crime-and-pun-
1.4.1: Individual Decision Making ishment issue of discovery.
Wrongdoing is often attributed to the proverbial “bad A belief that because the activity helps the company,
apple,” the individual who knows that an action is wrong the company will condone it and even protect the per-
but deliberately does it anyway. Such persons can be con- son who engages in it.
demned for having a bad character, and the lesson for oth-
What are some other rationalizations?
ers is to develop a good character. This common
misunderstanding is misleading both as an analysis of the Examples
causes of bad conduct and as a prescription for ensuring A particularly common rationalization in business is “every-
good conduct. Of course, there are bad apples, and they body’s doing it.” This retort may even justify some actions
should not be hired or, if hired, should be let go once their when refraining would put a company at a competitive disad-
rottenness is known. This “bad apples” explanation is not vantage (when competitors engage in deceptive advertising,
very convincing, however, when wrongdoing is commit- for example) or when business cannot be conducted without
ted by people we would identify as good employees or so acting (e.g., engaging in foreign bribery).29 Other rationali-
managers. Moreover, when misconduct is widespread in zations include:
an organization, as is often the case in major scandals, it is
“No real harm is done” or “No harm no foul”
not plausible to believe that dozens if not hundreds of peo-
ple are all “bad apples.” Some other explanations are “I deserve this” or “They owe this to me” (sometimes
needed, and fortunately psychologists and sociologists used to justify pilfering)
have offered many. “It’s for a good cause” (the ends justify the means)
First, many individuals work in environments in “If I don’t do this, someone else will” (restraint is futile;
which they lack strong guidance and receive conflicting the consequences will happen anyway)
 Ethics in the World of Business 15

Sociologists who have studied crime, including the In the anchoring and adjustment heuristic, people tend
kind of white-collar crime that occurs in business, have to form an initial choice (“anchor”) early in the decision-
described a process of rationalization they call “neutraliza- making process and then adjust the choice in response
tion” that enables lawbreakers to deny the criminality of to additional information (“adjustment”). Thus, the final
their behavior.30 Among the techniques of neutralization are decision is heavily influenced by the initial choice, espe-
the following claims: cially given that people often fail to make adequate
adjustments.
one is not really responsible (“I was out of my mind”)
no real harm was done (“No one will miss that amount of Psychologists have also noted that biases and heuris-
money”) tics prevent us from foreseeing disasters that we should
the victim deserved the harm (“I was only paying him have seen coming33 and lead us to overlook the unethical
back”) conduct of others. 34 Instances of defective products,
accounting fraud, and industrial accidents have been
one’s accusers are being unfair (“I’m being singled out
closely studied to reveal the psychological factors that
for blame”)
explain how such bad decisions could have been made by
one was following some higher duty or loyalty (“I had to
decent, diligent, and competent individuals.
protect my friends”)
These biases and heuristics were developed long ago
All the rationalizations detailed here show the immense in the process of evolution to enable human beings to
capacity of people to engage in self-deception. decide and act quickly, especially in dangerous situations
with too much information to process fully. Generally, they
Third, psychologists have identified a number of fea-
have served the human race well in pre-historic times but
tures of human decision making that produce errors of
can lead to mistakes in the modern world. Some of the
judgment.31 Two of these researchers contend that “unethi-
blame for faulty decision making belongs to evolution.
cal business practices may stem not from the traditionally
assumed trade-off between ethics and profits or from a cal-
lous disregard of other people’s interest or welfare, but from
1.4.2: Organizational Decision
psychological tendencies that foster poor decision making, Making
both from an ethical and a rational perspective.”32 Some of When a company produces a defective product (for exam-
these “psychological tendencies” are biases that shift our ple, Merck’s Vioxx or Toyota’s accelerator mechanism) or
decisions in one direction or another, while others are heuris- collapses from massive accounting fraud (as did Enron and
tics or rule-of-thumb methods that we employ in reasoning. WorldCom) or experiences a major industrial accident
(such as the Bhopal disaster), the fault generally lies with a
What are some examples? series of decisions that can be understood only by examin-
Examples ing organizational factors. With the benefit of hindsight,
Among the biases and heuristics discovered by psycholo- some mistaken decisions can often be found, but some-
gists are the following: times all of the decisions involved seemed reasonable at
the time. In such cases, the causes of major scandals and
People weigh losses more heavily than gains and thus disasters must be sought in the decision-making processes.
take greater risks to avoid losing something they have Decision making in organizations is marked by four
than to gain something that they do not have (loss aver- features that contribute to mistakes, big and small.
sion bias).
First, major decisions are not made all at once with all
People pay more attention to information that confirms
their consequences and ramifications understood;
existing attitudes and beliefs instead of focusing on
rather, they are made over time in a series of small steps,
information that poses challenges to their attitudes and
no one of which may raise any particular concerns.
beliefs (confirmation bias).
People tend to persist in a course of action already Second, as they are made over time, these multiple
underway, even in the face of information that should decisions develop a commitment to a course of action
lead them to reconsider their initial decision (commit- that is usually difficult to stop.
ment or sunk cost bias). Once a project is underway, there may be considerable
People are often overconfident about their own pros- sunk costs that cannot be recovered, and anyone who pro-
pects for success and about the predictability and the poses a halt to a project bears a burden of proof to justify it,
controllability of outcomes, and they make poor judg- whereas little justification is needed to proceed with a pro-
ments about risk, overestimating some risks and dis- ject underway. Stopping a project also means that mistakes
counting others, often ignoring low-probability events were made, which it may be difficult for managers to admit
and favoring certain over uncertain outcomes. since someone must bear the blame. With commitment to a
16 Chapter 1

course of action also comes a psychological tendency to the information available to them. Thus, a researcher test-
interpret evidence in ways that support one’s beliefs and ing a drug for its efficacy in treating a certain condition
interests. This factor probably goes far toward explaining may assume that other researchers have already proven its
why, in the development of Vioxx, Merck executives misin- safety, so safety is not that researcher’s responsibility. And
terpreted the results of the VIGOR study and concluded the salespeople who pitch the drug to doctors assume that
that they were due to the heart-protection benefit of nap- the researchers have done their job to test its safety and
roxen and not to any harmful effect from Vioxx. efficacy; that is not their responsibility. In the end, when a
The third and fourth factors are the most important: drug is recalled, it may be that no one is responsible since
namely, no one has failed in discharging his or her responsibility. It
is often said that “the buck stops at the top,” that the CEO
the diffusion of information and
or some other senior executive has a responsibility to
the fragmentation of responsibility that occurs in
ensure, in this example, that a drug is safe, but that person
organizational decision making.35
is hostage to a host of decisions made by others that he or
The information that would show that a product has a she cannot fully assess. In such cases, only the organization
defect, for example, may exist within an organization in an as a whole can be blamed or held responsible, and the only
unassembled form in which different facts are known to remedy to prevent a recurrence is to improve the decision-
different individuals. However, unless this information is making process within the organization.
assembled and made known to at least one person, there
may be no reason for anyone in the organization to con- WRITING PROMPT
clude that a product is defective. Furthermore, when infor- Organizational Decisions
mation is distributed in organizations on a need-to-know Describe an instance when a group of which you were a member
basis, each decision maker may have sufficient information made a mistake or poor decision. List which factor(s) of organiza-
tional decision making contributed to this mistake.
for the decisions that that person makes but lack the neces-
sary information for recognizing a defect. The response entered here will appear in the
With diffusion of information comes fragmentation of performance dashboard and can be viewed by
your instructor.
responsibility. Each decision in a series may be made by
different individuals or groups, all of whom are discharg-
ing their specific responsibility and doing so well, based on Submit

Conclusion: Ethics in the World of Business

Business ethics, as presented in this course, is concerned organizations is also the result of flaws in individual and
with identifying and understanding the ethical issues that organizational decision making that can be corrected only
arise in business and with developing the knowledge and by changes in decision-making processes. Although this
skills needed by a practicing manager to address these course deals mainly with the treatment of ethical issues in
issues and to make sound business decisions—that is, deci- business, practicing managers must also address the larger
sions that are sound from both an ethical and a business challenge of preventing misconduct within organizations.
perspective. Ethical issues are an inevitable element of
business decision making and are deeply intertwined with
managerial practice and economic activity generally. In
fact, the success of individual managers, business organi-
End-of-Chapter Case
zations, and, indeed, the whole economic system depends Studies
upon ethical decisions and practices.
This chapter concludes with four case studies.
Both economics and law are important guides for busi-
Unethical decisions can end promising business careers
ness decision making, but, as this chapter has shown, they
with alarming speed and finality. Each of the following four case
are not complete. Nor can business ethics be understood studies involves a seemingly “good” person who makes a bad
merely as the treatment of ethical issues from a philosophi- business decision without giving the situation adequate ethical
cal perspective. As the work of psychologists and sociolo- consideration. In “A Sticky Situation,” a young sales representa-
gists on organizational misconduct shows, it is not enough tive makes a series of seemingly inconsequential half-true state-
merely to determine a right course of action. Misconduct in ments that lead him, in the end, to seriously mislead an important
 Ethics in the World of Business 17

client. In the other three cases, top executives (a president and “That’s great news,” Jack shot back. “Now take this sample
two CEOs) lose their jobs for serious lapses of ethical judgment and give me your proposal by Monday. Oh, and by the
in covering up the adulteration and misbranding of a product way, I hope your proposal looks good, because I would
(Beech-Nut Apple Juice), violating government bidding require- really feel confident if this important project were in the
ments (Bath Iron Works), and falsifying a résumé (Yahoo).
hands of your production people!”
Kent gave the sample to Marty Klein, who is responsi-
ble for coordinating the costs and price quotes for new
opportunities. Marty took one look at the sample and said
Case: A Sticky Situation emphatically, “We’ll have to farm this one out.” Kent’s
Kent Graham is still on the telephone, receiving the good heart sank down to his shoes. He knew that Jack would
news that he has just secured his largest order as an account want to work with Dura-Stick only if the labels were pro-
manager for Dura-Stick Label Products.36 His joy is tinged duced at Dura-Stick’s facility. Yet, he still allowed Marty to
with uncertainty, however. put the numbers together for the proposal. Kent presented
Dura-Stick is a leader in label converting for the dura- the proposal to Jack at Spray-On. “Gee, Kent, these prices
ble-products marketplace. Label converting consists of are pretty high, about 20 percent higher than your competi-
converting log rolls of various substrates (paper, polyester, tion. That’s pretty hard to swallow.”
vinyl) into die-cut, printed labels. The company specializes Kent knew that the price would be high because it
in high-performance labels for the automotive, lawn and included the cost of another company producing the labels
garden, and appliance industries. Dura-Stick has a well- plus Dura-Stick’s usual profit margin, but he countered
deserved reputation for quality, technical knowledge, and cheerily, “You know the quality that we provide and how
service that enables the company to command a premium important this project is to your company. Isn’t it worth the
price for its products in a very competitive market. extra 20 percent for the peace of mind that you will have?”
Kent Graham has been with Dura-Stick for two years. “Let me think about it,” Jack replied.
Because he came to the company with 10 years of experience The next day, Kent got a phone call from Jack.
in the label industry, he was able to negotiate a very good “Congratulations, Kent, Dura-Stick has been awarded
salary and compensation plan, but his accomplishments the business. It was a tough sell to my people, but I con-
since joining Dura-Stick have been mediocre at best. Kent vinced them that the extra money would be well spent
fears that his time with Dura-Stick might be limited unless because of the excellent production department that you
he starts closing some big accounts. Furthermore, with a have. If it wasn’t for the fact that Tim Davis will personally
wife and two children to support, losing his job would be oversee production, you guys probably would not have
disastrous. Kent was on a mission to land a big account. gotten this business.”
Kent called on Jack Olson at Spray-On Inc., a manufac- Kent had to bite his tongue. He knew that Tim would
turer of industrial spraying systems for the automotive not be involved because the labels would be produced in
painting industry. Dura-Stick has been providing Spray- Kansas City by Labeltec, which would then send the finished
On with various warning and instructional labels for about labels to Dura-Stick for shipment to Spray-On’s facility. Kent
20 years. Jack has been very pleased with Dura-Stick’s per- also knew that Jack would be completely satisfied with the
formance, especially the quality of its manufacturing quality of the labels. Besides, this order was crucial to his job
department under the direction of Tim Davis. After giving security, not to mention the well-being of his company.
Kent another excellent vendor evaluation report, Jack While Jack continued to explain Spray-On’s decision,
began to describe a new project at Spray-On, a paint sprayer Kent pondered how he should close this conversation.
for household consumer use that needs a seven-color label
with very precise graphics. This label is different from the SHARED WRITING: A STICKY SITUATION
industrial two-color labels that Dura-Stick currently sup-
Decide if Kent’s statements were within accepted business prac-
plies to Spray-On.
tice. Was Kent telling the truth or lying to his client?
Jack explained that this was the biggest project that Review and comment on at least two classmates’ responses,
Spray-On has undertaken in recent years and that it would including one that opposes your own.
generate a very large order for some label company. Jack
then asked Kent, “Does Dura-Stick produce these multi- A minimum number of characters is required
to post and earn points. After posting, your
color, consumer-type labels?” Kent thought for a moment. response can be viewed by your class and
He knew that a “yes” would give him a better shot at the instructor, and you can participate in the
business, and Dura-Stick might be able to handle the job, class discussion.
even though the company’s experience to date was only
with two-color labels. Almost without thinking, he replied, Post 0 characters | 140 minimum
“Sure we can handle it, Jack, that’s right up our alley!”
18 Chapter 1

with having to destroy approximately 20,000 cases.” Beech-

Case: Beech-Nut’s Bogus Nut continued to sell bogus apple juice until March 1983.

Apple Juice SHARED WRITING: BEECH-NUT’S BOGUS

APPLE JUICE
When Lars Hoyvald joined Beech-Nut in 1981 as a newly
arrived president, the company was in financial trouble.37 Suppose you were a Beech-Nut customer. Would you feel
In the competitive baby food industry, the company was a wronged by the misbranded product? The lack of a recall? The
dumping overseas? Explain your response.
distant second behind Gerber, with 15 percent of the mar-
Review and comment on at least two classmates’ responses,
ket. After faltering under a succession of owners, Beech-Nut including one that opposes your own.
was bought in 1979 by Nestlé, the Swiss food giant, which
hoped to restore the luster of the brand name. Although he A minimum number of characters is required
to post and earn points. After posting, your
was new to Beech-Nut, Hoyvald had wide experience in the
response can be viewed by your class and
food industry, and his aim, as stated on his résumé, was instructor, and you can participate in the
“aggressively marketing top quality products.” class discussion.
In June 1982, Hoyvald was faced with strong evidence
that Beech-Nut apple juice for babies was made from con- Post 0 characters | 140 minimum
centrate that included no apples. Since 1977, the company
had been purchasing low-cost apple concentrate from a
Bronx-based supplier, Universal Juice Company. The price
alone should have raised questions, and John Lavery, the Case: Ethical Uncertainty
vice president in charge of operations, brushed aside tests at Bath Iron Works
that showed the presence of corn syrup. Two employees On May 17, 1991, a quick decision by CEO William E. Hag-
who investigated Universal’s “blending facility” found gett almost destroyed Bath Iron Works (BIW), the largest
merely a warehouse. Their report was also dismissed by private employer in Maine.38 Founded in 1884, BIW is a
Lavery. A turning point occurred when a private investiga- major shipbuilder for the U.S. Navy with 10,400 employ-
tor working for the Processed Apple Institute discovered ees. As one of two companies with the capability to build
that the Universal plant was producing only sugared water. Aegis naval destroyers worth $250 million each, BIW was
After following a truck to the Beech-Nut facility, the inves- competing fiercely for contracts with its rival, Ingalls Ship-
tigator informed Lavery and other executives of his find- building in Mississippi. At 5:30 that morning, a janitor
ings and invited Beech-Nut to join a suit against Universal. found a 67-page document stamped “Business Sensitive”
Although some executives urged Hoyvald to switch in a conference room that had been used the previous day
suppliers and recall all apple juice on the market, the presi- for a meeting with navy officials. Two vice presidents who
dent was hesitant. Even if the juice was bogus, there was no examined the document realized that it contained a detailed
evidence that it was harmful. It tasted like apple juice, and comparison of BIW’s and Ingalls’s costs for building the
it surely provided some nutrition. Besides, he had prom- Aegis destroyer. They delivered the document to Mr. Hag-
ised his Nestlé superior that he would return a profit of $7 gett at 9:00 a.m. The CEO, who was leaving the office to
million for the year. Switching suppliers would mean pay- deliver a luncheon speech, examined it for 15 minutes
ing about $750,000 more each year for juice and admitting before making a decision. He ordered the two vice presi-
that the company had sold an adulterated product. A recall dents to copy the document, return the original to the con-
would cost about $3.5 million. Asked later why he had not ference room, and meet with him late in the afternoon to
acted more decisively, Hoyvald said, “I could have called discuss how they should handle the situation.
up Switzerland and told them I had just closed the com- During the next few hours, the two executives ana-
pany down. Because that is what would have been the lyzed the information and did some computer modeling
result of it.” based on it. At 2:15 they decided to notify the president of
Fearful that state and federal investigators might seize BIW, Duane D. “Buzz” Fitzgerald, who had a reputation
stocks of Beech-Nut apple juice, Hoyvald launched an for impeccable integrity. Mr. Fitzgerald immediately recog-
aggressive foreign sales campaign. On September 1, the nized that the federal Procurement Integrity Act requires
company unloaded thousands of cases on its distributors defense contractors to certify that they have not been in
in Puerto Rico. Another 23,000 cases were shipped to the unauthorized possession of any proprietary information.
Dominican Republic to be sold at half price. By the time In addition, BIW is a signatory to the Defense Industry Ini-
that state and federal authorities had forced a recall, the tiative on Business Ethics and Conduct (DII), which was
plan was largely complete. In November, Hoyvald reported formed in 1986 in response to revelations by the Packard
to his superior at Nestlé, “The recall has now been com- Commission of irregularities in defense industry contract-
pleted, and due to our many delays, we were only faced ing. The six principles of the DII require not only that
 Ethics in the World of Business 19

signatories adopt a written code of ethics, engage in ethics

training, and provide mechanisms for internal reporting of
possible misconduct, but also that they take responsibility
Case: A Faked Résumé at
for any violation of law. Principle 4 states, “Each company Yahoo
has the obligation to self-govern by monitoring compliance At the beginning of 2012, Scott Thompson took the reins as
with federal procurement laws and adopting procedures the third CEO in five years at the embattled Internet com-
for voluntary disclosure of violations of federal procure- pany Yahoo. An early leader in the field, Yahoo was losing
ment laws and corrective actions taken.” Mr. Fitzgerald its once dominant place to newer rivals, such as Google
ordered that all copies be shredded and all data erased and Facebook. Repeated failed attempts to turn around the
from the computer. Upon his return, Mr. Haggett agreed troubled company had produced great turmoil in the exec-
with the action taken and admitted that he had made an utive ranks and discontent among its large workforce. An
“inappropriate business-ethics decision.” The CEO person- activist hedge fund, Third Point led by investor Daniel
ally delivered the original document to Navy officials on- Loeb, had been using its 5.8 percent stake in Yahoo to agi-
site. However, Mr. Haggett decided not to reveal that copies tate for greater representation on the board in order to
had been made but to admit only that “no copies existed.” change the company’s direction. With an extensive back-
The Navy launched its own investigation and con- ground in digital technology, including a stint as president
cluded that the bidding process had not been compro- at PayPal, an eBay subsidiary, Mr. Thompson brought
mised. An adverse decision could have resulted in strong credentials to the top post at Yahoo.
suspension or debarment as a government contractor, On May 3, Mr. Loeb dropped a bombshell on the Yahoo
which would have jeopardized the survival of the firm board of directors. The official biography of Scott Thomp-
with devastating consequences for its employees and the son in company documents listed an undergraduate degree
surrounding community. As part of the settlement with the from Stonehill College, outside Boston, with majors in
Navy, BIW agreed to establish an ethics program headed accounting and computer science. The only problem with
by an ethics officer, expand ethics training, create a board this claim was that the school did not offer a computer sci-
committee for ensuring compliance, and report to the Navy ence major at the time; Mr. Thompson had apparently
for three years on the implementation of this agreement. obtained only a degree in accounting. Ironically, the hedge
BIW was still competing for contracts to build at least fund had discovered the discrepancy through a simple
two new Aegis destroyers, and many at the company feared Google search.39 The challenge for the board, in responding
that lingering suspicion about the use of a competitor’s to this revelation, was to decide whether the false claim
information would be an impediment. To allay this concern, was an inconsequential innocent mistake that could be eas-
the two vice presidents who first handled the discovery of ily rectified or an indicator of a more serious matter that
the document were asked to leave the company, and Wil- might require swift, decisive action.
liam Haggett resigned as CEO. He later severed all connec- Mr. Thompson might have put the matter to rest with
tions with BIW, thus ending a 28-year career with a company an immediate full admission and a sincere apology. Instead,
where his father had worked as a pipe fitter. He lamented he lashed out at Mr. Loeb for using this discovery as a
that 15 minutes of ethical uncertainty had cost him his job. weapon in his fight with the board, and he began to build
Buzz Fitzgerald became the new CEO and immediately support among board members and fellow executives. He
declared that BIW “must meet the highest ethical standards also blamed the mistake of introducing the false informa-
and avoid even the appearance of impropriety.” tion into his biography on the search firm that had placed
him in the presidency of PayPal, a charge the firm indig-
SHARED WRITING: ETHICAL UNCERTAINTY nantly denied in a statement to the board. Furthermore, a
AT BATH IRON WORKS
radio interview was discovered by the board in which Mr.
Consider an organization that you work for or have worked for in Thompson not only did not correct an interviewer’s mis-
the past, as a part-time employee, club member, volunteer, or taken reference to the computer science major but also
any other capacity. Briefly outline what an ethics program would
added, “That’s really the background I have, and it started
look like for that organization.
Review and comment on at least two classmates’ responses. back in my college days, and I think that’s really the won-
derful part of being an engineer is you think that way.”40
A minimum number of characters is required In making a decision, the board needed to consider the
to post and earn points. After posting, your
well-being of the company. An abrupt change in leadership
response can be viewed by your class and
instructor, and you can participate in the at this time might continue the downward direction of the
class discussion. company’s fortunes and prevent the recovery that Mr.
Thompson had been hired to achieve. The clumsy firing of
Post 0 characters | 140 minimum the previous CEO, Carol Bartz, after a contentious two-year
tenure, had unsettled the company and prevented a smooth
20 Chapter 1

succession. (She was fired in a telephone call while trave- which would deny him stock grants worth $16 million.
ling.) The assault by Third Point reflected the vulnerability During the board’s deliberations, Mr. Thompson revealed
of the company to a takeover by disgruntled investors. that he had undergone surgery several weeks earlier, which
Employees, too, had become disenchanted with Mr. might have impacted his performance, although he did not
Thompson’s leadership because of the layoff of 2,000 work- disclose at that time that it had been for thyroid cancer.
ers (14% of the workforce), which he implemented in an On Sunday, May 13, Mr. Thompson resigned his posi-
effort to turn around the company. Moreover, the false tion, and the board settled the same day with Third Point to
claim of a computer science degree was perhaps perceived allow it three seats on the 12-member board. The new
as a more serious matter by workers in Silicon Valley who chairman declared, “The board is pleased to announce
took great pride in their own technical education. Firing these changes, and the settlement with Third Point, and is
Mr. Thompson might have been popular with investors confident that they will serve the best interests of our share-
and employees with their own interests, even if it were holders and further accelerate the substantial advances the
harmful to the company. company has made operationally and organizationally.”42
The top job at Yahoo certainly required a strong techni-
cal background, and although his experience at PayPal SHARED WRITING: A FAKED RÉSUMÉ AT YAHOO
attested to this expertise, the false claim of a degree in com- In your opinion, what is the strongest argument for Thompson’s
puter science was bound to create uncertainty. Besides resignation? Select one of the alternative endings to Thompson’s
technical competence, however, a high leadership position story below. List the scenario and explain how this controversy
might have played out differently.
requires confidence in a person’s integrity. A statement by
Review your classmates’ responses. Comment on at least
Third Point argued that the false claim “undermines his two additional alternative endings.
credibility as technology expert and reflects poorly on the
Thompson’s falsification was discovered when Yahoo held
character of a CEO who has been tasked with leading a stronger market position and was less vulnerable.
Yahoo at this critical juncture.”41 Although a company Thompson held a management position lower than CEO.
biography might be considered to be a minor matter, the Thompson had assumed responsibility immediately instead
false information had been conveyed while Mr. Thompson of attempting to shift blame.
was president of PayPal and was also contained in Yahoo’s Silicon Valley culture esteemed practical education and self-
filings with regulators, which he, as CEO, was legally taught skills above technical degrees.
required to certify for accuracy.
Mr. Thompson was not the first CEO to falsify a A minimum number of characters is required
to post and earn points. After posting, your
résumé. A head of RadioShack who claimed to be a college response can be viewed by your class and
graduate was discovered in 2006 to have left school after instructor, and you can participate in the
only two semesters; he was fired. Ronald Zarella, the CEO class discussion.
of Bausch & Lomb from 2001 to 2006, claimed to have an
MBA that he never earned; he was kept on the job, although Post 0 characters | 140 minimum
the board rescinded a $1.1 million bonus. An option for the
Yahoo board was to terminate Mr. Thompson “for cause,” Chapter 1 Quiz: Ethics in the World of Business