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CHAPTER 3. Business Ethics & Social Responsibility. Unethical Behavior. Unethical behavior in business is not just a recent phenomenon In the sixth century, B.C., the philosopher Anacharsis once said, “The market is a place set apart where men may deceive one another.”. Unethical Behavior.

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Business Ethics & Social Responsibility

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Unethical Behavior

  • Unethical behavior in business is not just a recent phenomenon

    • In the sixth century, B.C., the philosopher Anacharsis once said, “The market is a place set apart where men may deceive one another.”

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Unethical Behavior

  • Two centuries later, Diogenes was spotted carrying around a lighted lamp, up and down the city streets, in the middle of the day. When asked what he was doing, he replied, that he was looking for an honest man.

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Business Ethics

  • Business Ethics is about:

    • Decision-Making

    • By People in Business

    • According to Moral Principles or Standards

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  • Conflicting duties, loyalties or interests create moral dilemmas requiring decisions to be made

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  • Ethical decision-making involves the ability to discern right from wrong along with the commitment to do what is right.

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  • Some factors affecting decision-making (from Integrity Management, by D. T. LeClairet al, Univ. ofTampa Press, 1998):

    • Issue Intensity

      • (i.e. how important does the decision-maker perceive the issue to be?

      • Can be influenced by company/management emphasis)

    • Decision-Maker’s Personal Moral Philosophy

    • Decision-Maker’s Stage of Moral Development

    • Organizational Culture

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  • 8 Steps to Sound, Ethical Decision-Making

    • 1. Gather as many relevant & material facts as circumstances permit.

    • 2. Identify the relevant ethical issues (consider alt. viewpoints)

    • 3. Identify, weigh & prioritize all the affected parties (i.e. stakeholders) (see Johnson & Johnson Credo, Taking Sides, p.25)

    • 4. Identify your existing commitments/obligations.

    • 5. Identify various courses of action (dare to think creatively)

    • 6. Identify the possible/probable consequences of same (both short & long-term)

    • 7. Consider the practicality of same.

    • 8. Consider the dictates and impacts upon your character & integrity.

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  • Disclosure Test: How comfortable would I feel if others, whose opinion of me I value, knew I was making this decision?

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  • The higher the level of a decision-maker

    • the greater the impact of the decision

    • and the wider the range of constituencies that will be affected by the decision.

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By People In Business

  • The moral foundation of the decision-maker matters

  • “He doesn’t have a moral compass.” Whistleblower Sherron Watkins describing Andrew Fastow, former CFO of Enron. (Watkins gets frank about days at Enron, Edward Iwata, USA Today, March 25, 2003, p. 3B.)

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By People in Business

  • Ultimately, one's own motivation for ethical behavior must be internal to be effective. External motivation has a limited value -- punishment and fear is only effective in the short-run. If people believe that they are above the law, they will continue to act unethically. Organizations that have a clear vision, and support individual integrity are attractive places of employment. - Teri D. Egan, Ph.d, Associate Professor, The Graziadio School of Business at Pepperdine University, Corporate Ethics, Washington Post Live Online, Friday, Aug. 2, 2002;

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  • Values: guiding constructs or ideas, representing deeply held generalized behaviors, which are considered by the holder, to be of great significance.

  • Morals: a system or set of beliefs or principles, based on values, which constitute an individual or group’s perception of human duty, and therefore which act as an influence or control over their behavior. Morals are typically concerned with behaviors that have potentially serious consequences or profound impacts. The word “morals” is derived from the Latin mores (character, custom or habit)

  • Ethics: the study and assessment of morals. The word "ethics" is derived from the Greek word, ethos (character or custom).

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  • “The most important human endeavor is the striving for morality in our actions. Our inner balance and even our very existence depend on it. Only morality in our actions can give beauty and dignity to life.--Albert Einstein (in a letter 11/20/50)

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  • The historian Arnold Toynbee observed: "Out of 21 notable civilizations, 19 perished not by conquest from without but by moral decay from within."

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Absolutism vs. Relativism

  • Ethical Absolutism: What is right or wrong is consistent in all places or circumstances. There are universally valid moral principles. (“… only by obedience to universal moral norms does man find full confirmation of his personal uniqueness and the possibility of authentic moral growth.” - Pope John Paul II, see also Rom. 12:2; Heb. 13:8)

  • Ethical Relativism (also called “Situational Ethics”): What is right or wrong varies according to the individual/society/culture or set of circumstances. There are no universally valid moral principles. (Related Biblical reference "everyone did what was right in his own eyes" (Deut. 12:8, Judges 17:6; 21:25) (see also Isa. 5:20 & 24, Jer. 2:13, Rom. 1:18-32, 1 Cor. 5:6-7, 2 Cor. 6:14-15, 1 John 1:8)

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Absolutism vs. Relativism

  • As Cardinal Joseph Ratzinger said, Relativism is “presented as a position defined positively by the concepts of tolerance and knowledge through dialogue and freedom, concepts which would be limited if the existence of one valid truth for all were affirmed … affirming that there is a binding and valid truth in history in the figure of Jesus Christ and the faith of the church is described as fundamentalism. Such fundamentalism, … is presented in different ways as the fundamental threat emerging against the supreme good of modernity: i.e., tolerance and freedom.” - Address to Congregation for the Doctrine of Faith, Guadalajara, Mexico, May 1996

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Absolutism vs. Relativism

  • “The demise of America’s legal foundations occur when society rejects laws that are based on solid, irrevocable, moral, universal, absolute values, to a society that bases it’s laws on an arbitrary system of relativism, situational ethics, materialism, individualism, hedonism, paganism, or in any secularist ideology. This secularization of law has influenced all branches of knowledge – law, philosophy, business, religion, medicine, education, science, the arts, and mass media.” Harold Berman, The Interaction of Law and Religion 21 (1974).

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Absolutism vs. Relativism

  • According to a recent poll of college seniors, 73% agreed with the statement that “What is right or wrong depends on differences in individual values and cultural diversity.” Only 25% agreed with the statement that “There are clear and uniform standards of right and wrong by which everyone should be judged."

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Problems with Relativism

  • Relativism undermines moral criticism of practices of particular individuals or in particular societies where those practices conform to their own standards. For instance, it could be used to permit slavery in a slave society or it could be used to justify trade and investment with basically evil regimes, e.g. Apartheid governments.

  • But, as Cardinal Ratzinger said, “There are injustices that will never turn into just things (such as, for example, killing an innocent person, denying an individual or groups the right to their dignity or to life corresponding to that dignity) while, on the other hand, there are just things that can never be unjust.” - Address to Congregation for the Doctrine of Faith, Guadalajara, Mexico, May 1996

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Problems with Relativism

  • Relativism allows for oppression of those with minority views by allowing the majority in any particular circumstance to define what is morally right or wrong.

    • “In Germany they first came for the Communists,

    • and I didn't speak up because I wasn't a Communist.

    • Then they came for the Jews,

    • and I didn't speak up because I wasn't a Jew.

    • Then they came for the trade unionists,

    • and I didn't speak up because I wasn't a trade unionist.

    • Then they came for the Catholics,

    • and I didn't speak up because I was a Protestant.

    • Then they came for me —

    • and by that time no one was left to speak up.”

      • - German anti-Nazi activist, Pastor Martin Niemöller

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Problems with Relativism

  • Relativists speak in terms that “soften” harsh realities.

  • "Intelligent, educated, religious people embrace illogical absurdities that set aside not only God's truth, but also our responsibility for the well-being of others. When words are warped and twisted perversely, they're eventually emptied of their true meaning. When you shine the light of common sense on deceptive language couched in medical, philosophical or intellectual terms, the logic evaporates. Moral choices require that we use language to describe reality.” - Jean Staker Garton, Author/Lecturer, Co-Founder of Lutherans for Life

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Problems with Relativism

  • Relativists never need bother to examine why something is moral or immoral, they merely accept/tolerate alternative determinations, so that none are held to account

  • “Over the years I have found that those who call themselves atheists actually have a strong sense of the absolute truth they know exists. They just don’t want to acknowledge that it’s true - because if they did, they would have to change the way they live. They flee on moral grounds; refusing to submit themselves, they exchange the truth for a lie.” - Chuck Colson -Being the Body, 2003.

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Problems with Relativism

  • Commenting on the idea that legal reforms can compel corporate morality, Michael Prowse, in the Financial Times, stated that "The underlying problem is that we are living in times that might aptly be called 'post-ethical.'" People are now "emotivists," who relativize moral judgments and "obey the law, help others and respect customs and mores only if they calculate that this will benefit them personally in some way. ... The root problem is a loss of belief in objective ethical standards.”

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Problems with Relativism

  • Jesus said in John 8:31-32, “If you continue in my word, then are you my disciples indeed; And you shall know the truth, and the truth shall make you free.” It would seem follow then that, people cannot experience ultimate and true freedom unless and until they come to terms with ultimate, absolute truth inherent in and revealed by God.

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Absolutism vs. Relativism

  • Most ethicists reject the theory of ethical relativism. Some claim that while the moral practices of societies may differ, the fundamental moral principles underlying these practices do not. -Markkula Center for Applied Ethics

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  • “To ensure that employees can and will act with integrity … organizations need a strong and consistent set of values that dictate appropriate individual actions.” - Conclusion of study conducted by Professor Pratima Bansal, cited in” Rebuilding trust, The integral role of leadership in fostering values, honesty and vision,”by Carol Stephenson in the Ivey Business Journal, Jan/Feb. 2004, Vol. 68, Issue 3.

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  • Navigating the complexities of a situation ... requires areliable compass. We can plot that "north" by determining clearly our own core values. We have to identify - and articulate - what we believe is important to us and to our companies. Our core values drive our behaviors, and our behaviors tell the world who we are and what we stand for. ...Identifying and adhering to a core-values compass point provides a standard that will make decisions easier, consistent and justified.” - Parkinson, J. Robert, Thinking clearly, remembering values key to making the call, Milwaukee Journal Sentinel, March 22, 2004.

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  • “Without commonly shared and widely entrenched moral values and obligations, neither the law, nor democratic government, nor even the market economy will function properly.”-- Vaclav Havel ("Politics, morality, and Civility" Summer Meditations)

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  • What are the core values that are fundamental to the success of any individual or organization?

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  • Honesty, respect, responsibility, fairness, compassion, perseverance and courage.

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Values - Universal Rule?

  • The “Golden Rule” , i.e. to “do unto others as you would have them do unto you” is an example of a value common to many cultures/religions (Mahabharata 5:1517, Hinduism, Talmud, Shabbat 31a & Leviticus 19:18, Judaism, Matthew 7:12, Christianity, Udana-Varga 5:18, Buddhism, Analects 15:23, Confucianism, Number 13 of Imam "Al-Nawawi's Forty Hadiths.", Islam)

  • Note: Several Corporations have directly incorporated some form of this rule in their codes of ethics including Coachman, Mary Kay, Progressive, Merrill Lynch and USAA

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Corporate Culture

  • Both individuals and organizations hold “values”

    • A corporation is said to manifest its “values” in its “corporate culture”

      • Corporate culture is loosely defined as the attitudes, behaviors and personalities that make up a company and that shape its behavior and reputation, or as Elizabeth Kiss of the Kenan Institute for Ethics puts it, corporate culture is “how we perceive, think, feel and do things around here.”

      • Most employees take their cues from the company culture and behave accordingly.

  • A business derives its character from the character of the people who conduct the business. - Ricky W. Griffin, Management. Boston: Houghton Mifflin Company (2002)

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Corporate Culture

  • "Moral behavior is concerned primarily with the interpersonal dimension of our behavior: how we treat one another individually and in groups — and, increasingly, other species and the environment." The key here is that morality brings us into contact with others and asks us to consider the quality of that contact. -

  • Quote from The Leadership Compass, John Wilcox and Susan Ebbs, as quoted in Everyday Ethics, by Thomas Shanks, S.J., Markkula Center for Applied Ethics.

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Corporate Culture

  • "The first step in the evolution of ethics is a sense of solidarity with other human beings." — Albert Schweitzer, early 20th-century German Nobel Peace Prize-winning mission doctor and theologian

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Corporate Culture

  • The Pressure to Conform

    • We are all a kind of Chameleon, taking our hue - the hue of our moral character, from those who are about us. - John Locke (1632 - 1704)

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Corporate Culture

  • The Pressure to Conform

    • Some years ago, a social scientist named Solomon Asch wanted to see how people dealt with social pressure so he designed an experiment to measure the results. He came up with a simple test that showed a series of lines on a board in front of the room, with one of the lines matching another in being the same length. The others were either much shorter or much longer. A person was brought into the room, along with others in a group, which unbeknown to the subject, were helpers to the professor. The whole group was asked to match the two lines that were the same length together. The helpers intentionally gave the wrong answer and it was found that in almost 75% of the time, the subjects would go along with the wrong answer, knowing full well it was wrong, but not wanting to stand out. - “Opinion and Social Pressure”, Scientific American, Nov. 1955, 31-35.

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Corporate Culture

  • The Pressure to Conform

    • “Culture shapes behavior. There are plenty of perfectly decent people who go astray because they're in a culture that creates an environment in which they can't get their jobs done unless they engage in unethical activities.” - Harvard Business School professor and business ethicist Barbara Toffler, former partner at Arthur Andersen. Toffler left Andersen in 1999, well before the Enron and Global Crossing scandals destroyed the company. Her book, Final Accounting: Ambition, Greed, and the Fall of Arthur Andersen (Random House/Broadway Books, 2003), describes the process of ethical erosion in grim detail. – Postcards from an Ethical Wasteland, CIO, June 1, 2003

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Corporate Culture

  • In Moral Man and Immoral Society, Reinhold Niebuhr proposed that individual persons are always more moral functioning alone than when they function in a social group. - Institutional Ethics: An Oxymoron, By Joe E. Trull, Editor, Christian Ethics Today, Journal of Christian Ethics, Issue 035 Volume 7 No 4 August 2001 .

  • Do you agree with this?

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Corporate Culture

  • Rarely do the character flaws of a lone actor fully explain corporate misconduct. More typically, unethical business practice involves the tacit, if not explicit, cooperation of others and reflects the values, attitudes, beliefs, language, and behavioral patterns that define an organization’s operating culture. - Lynn Sharp Paine, Harvard Business School

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Corporate Culture

  • “A strong corporate culture founded on ethical principles and sound values is a vital driving force behind strategic success.” - Thompson & Strickland

  • One company stressed its commitment to RICE : respect, integrity, communication, and excellence. The words have been on T-shirts, paperweights, and on signs. The firm printed a 61-page booklet with its code of ethics and every employee had to sign a certificate of compliance. That company was Enron!

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According to Ethical or Moral, Values, Principles or Standards

  • Personal

  • Family

  • Peers

  • Religious

  • Company

  • Community, Regional, National, International

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According to Ethical or Moral, Values, Principles or Standards

  • Home

  • School

  • Church (or other place of worship)

  • Life Experience

  • Work Experience

  • Books

  • News Media

  • Entertainment Media

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According to Ethical or Moral, Values, Principles or Standards

  • The average American, by the age of 65, will have spent the equivalent of 15 years of their life watching television.

  • By contrast, over the same time period, the average weekly church-going American will have spent only 8 months of their life receivingspiritual instruction.

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According to Ethical or Moral, Values, Principles or Standards

  • In the middle of an interview for acceptance to a prestigious Ivy League school back east, the interviewer asked his “sure of himself” candidate, “If no one would ever find out, and no one got hurt, would you lie for $1M?” The young man thought for a moment and said, “If no one found out, and no one was hurt? Sure, I think I would!” The interviewer then asked, “Would you lie for a dime?” The young man shot back, “No way, what kind of man do you think I am?” The interviewer responded, “I have already determined that, I am just trying to determine your price.”

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According to Ethical or Moral, Values, Principles or Standards

  • So fearful were the ancient Chinese of their enemies on the north that they built the Great Wall of China, one of the 7 wonders of the ancient world. It was so high they knew no one could climb over it, & so thick that nothing could break it down. Then they settled back to enjoy their security. But during the first 100 years of the wall’s existence, China was invaded 3 times. Not once did the enemy break down the wall or climb over its top. Each time they bribed a gatekeeper & marched right through the gates. According to the historians, the Chinese were so busy relying upon the walls of stone that they forgot to teach integrity to their children.

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According to Ethical or Moral, Values, Principles or Standards

  • In the 1950s a psychologist, Stanton Samenow, and a psychiatrist, Samuel Yochelson, sharing the conventional wisdom that crime is caused by environment, set out to prove their point. They began a 17-year study involving thousands of hours of clinical testing of 250 inmates here in the District of Columbia. To their astonishment, they discovered that the cause of crime cannot be traced to environment, poverty, or oppression. Instead, crime is the result of individuals making, as they put it, wrong moral choices. In their 1977 work The Criminal Personality, they concluded that the answer to crime is a "conversion of the wrong-doer to a more responsible lifestyle." In 1987, Harvard professors James Q. Wilson and Richard J. Herrnstein came to similar conclusions in their book Crime and Human Nature. They determined that the cause of crime is a lack of proper moral training among young people during the morally formative years, particularly ages 1 to 6.

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According to Ethical or Moral, Values, Principles or Standards

  • 33% of teens would act unethically to get ahead or to make more money if there was no chance of getting caught, according to a new Junior Achievement/Harris Interactive Poll of 624 teens between the ages of 13 and 18. 25% said they were “not sure” and only 42% said they would not. “These results confirm our belief that ethics education must begin in elementary school.” said Barry Salzberg, U.S. Managing Partner of Deloitte & Touche.

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According to Ethical or Moral, Values, Principles or Standards

  • Daniel R. Levine notes that "honesty and integrity have been replaced in many classrooms by a win-at-any-cost attitude that puts grades, expediency and personal gain above all else.

  • "Moral standards have become so eroded that many children can no longer tell right from wrong," says Kevin Ryan, founding director of the Center for the Advancement of Ethics and Character at Boston University.

  • According to Stephen F. Davis, a professor of psychology, "There's no remorse. For students, cheating is a way of lire.”

  • Ryan further comments that "kids have no moral compass other than enlightened self-interest"; Ryan blames the nation's schools for abandoning their traditional role of providing students with moral guidance.- "Cheating in Out Schools: A National Scandal," Daniel R. Devine, Reader's Digest, October 1995, p. 66.), quoted in PERSONAL ETHICS VERSUS PROFESSIONAL ETHICS , Jerry E. White,, Airpower Journal, 08970823, Summer96, Vol. 10, Issue 2

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According to Moral Principles or Standards Standards

  • Does society require a moral code to survive and prosper?

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According to Moral Principles or Standards Standards

  • 17th Century Philosopher Thomas Hobbes postulated that life in an amoral society would be “ poor, nasty, brutish and short”, lacking in industry and commerce, as well as knowledge and arts, and that its people would live in a constant state of fear and insecurity.

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According Moral Principles or Standards Standards

  • “Men qualify for freedom in exact proportion to their disposition to put moral chains on their own appetites. Society cannot exist unless a controlling power is put somewhere on will and appetite, and the less of it there is within, the more of it there must be without.” - Edmund Burke(1774)

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According to Moral Principles or Standards Standards

  • “Without civic morality communities perish; without personal morality their survival has no value.” — Bertrand Russell, 20th-century British mathematician and philosopher

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According to Moral Principles or Standards Standards

  • Martin Luther King, Jr. once noted, " The most dangerous criminal may be the man gifted with reason but with no morals."

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According to Moral Principles or Standards Standards

  • We have grasped the mystery of the atom and rejected the Sermon on the Mount. The world has achieved brilliance without wisdom, power without conscience. Ours is a world of nuclear giants and ethical infants. --General of the Army, Omar Bradley

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According to Moral Principles or Standards Standards

  • There are seven sins in the world: Wealth without work, Pleasure without conscience, Knowledge without character, Commerce without morality, Science without humanity, Worship without sacrifice and politics without principle. - Mahatma Gandhi (1869 - 1948)

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Ethics Standards

  • R. H. Tawney, the British historian, once wrote: ''To argue, in the manner of Machiavelli, that there is one rule for business and another for private life, is to open the door to an orgy of unscrupulousness before which the mind recoils.''

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Ethics Standards

  • Truett Cathy, founder of Chick-fil-A, argues there is no such thing as business ethics - only ethics.

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Ethics Standards

  • Duty-Based v. Outcome-Based Ethics

    • Duty (Deontology)

      • Duty is an act done simply for the sake of what is right.

      • Duty is determined by “revealed truths” and involves universal principles

      • Often religion-based

      • e.g. Kant’s Categorical Imperative

        • "Everyone is obligated to act only in ways that respect the intrinsic value, human dignity and moral rights of all persons."

      • Places High Value on Individual Rights

    • Outcome (Consequentialism)

      • Ethical if best outcome for the majority

      • Involves cost-benefit analysis

      • e.g. Bentham & Mill’s Utilitarianism

        • "Of any two actions, the most ethical one is that which will produce the greatest balance of benefits over harms."

      • De-emphasizes individual rights

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Ethics Standards

  • Strategic v. Real Ethics

    • What is the motivation/purpose for acting ethically?

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Integrity Standards

  • Integrity: from the Latin integritas, meaning wholeness, completeness, or purity. To courageously hold to what one believes is right and true, without compromise. To stand undivided, immovable, consistent in both heart and action, word and deed. Involves the maintenance of virtue and the pursuit of moral excellence. Integrity is demonstrated by not only espousing your values, but by living according to them. Integrity describes both who you are and what you do. People of integrity are conscientious, trustworthy, accountable, committed and consistent. A key to maintaining integrity is “counting the cost” before committing yourself.

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Integrity Standards

  • “Psychologists have found integrity to be essential to an individual's sense of identity and self-worth, enabling the successful navigation of change and challenge. Links between integrity and the ability to gain and maintain the trust of others have often been noted. Many purveyors of practical advice, including Cicero and Benjamin Franklin, have counseled that integrity is the cornerstone of worldly success. According to Franklin, "no Qualities [are] so likely to make a poor Man's Fortune as those of Probity & Integrity" (quoted in Beebe, 1992, p. 8)” - from Blackwell’s Encyclopedic Dictionary of Business Ethics.

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Integrity Standards

  • In Living a Life That Matters Rabbi Harold Kushner describes the kind of people who are able to overcome the negativity in their lives as shalem, people who are “whole, united within themselves, their internal conflicts ended.” Because of this, he says, they are “persons of integrity.” Integrity, says Kushner, is a quality just as essential to human well-being as is the pursuit of peace and justice.

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Integrity Standards

  • The Bible/Talmud says that:

    • The man of integrity walks securely, but he who takes crooked paths will be found out. (Prov. 10:9)

    • The integrity of the upright guides them, but the unfaithful are destroyed by their duplicity. (Prov. 11:3)

    • Integrity brings peace (i.e. a clear conscience) and marks the perfect man (Hebrew Word: Tam = Man of Integrity) (Ps. 37:37, 1 Kings 9:4)

    • The just [man] walketh in his integrity: his children [are] blessed after him. (Prov. 20:7)

    • A good name is better than precious ointment. (Ecc. 7:1)

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Integrity Standards

  • Some Biblical Examples of Integrity:

    • Joseph, Gen. 39:1-12

    • Jacob/Israel (Gen 32:29) known as a “simple man” (tam, Gen 25:27) that is to say, that “his mouth was like his heart.”

    • Job (Book of Job, see in particular description of Job at 2:3, 27:5)

    • Daniel, Shadrach, Meshach & Abednego (Daniel Chapters 3 & 6)

    • David (Ps. 7:8)

    • Solomon (1 Kings. 9:4)

  • Contrast: Ananias & Sapphira, Acts 5:1-11 and Acts 20:16-36

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Integrity Standards

  • Consistency - the absence of contradictions - has sometimes been called the hallmark of ethics. - Markkula Center for Applied Ethics

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Integrity Standards

  • Plato once said “I would rather that the whole world should be at odds with me, and oppose me, than that I myself should be at odds with myself and contradict myself.”

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Integrity Standards

  • "In matters of style, swim with the current; in matters of principle, stand like a rock.” - Thomas Jefferson

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Integrity - Example Standards

  • Cleveland Stroud had coached the Blue Collar Bulldogs for 18 years before his basketball team made it to the championship. Stroud recalls that “it was a perfect night” when they won. “A night you dream of”. He was carried around the gym on the shoulders of his triumphant players and their proud parents. But the excitement was short lived. Two months after the championship, during a routine grade check, Stroud discovered that one player was academically ineligible. The player in question had only played 45 seconds in the regional qualifying tournament. Stroud says, “I thought it was all ruined. I went through a phase where I was really depressed.” He struggled with what to do next. Yet, his commitment to integrity led him to the right decision. “Winning is the most important thing for any coach,” he said. “But your principals have to be higher that your goals.” He reported the error to the league and the Bulldogs forfeited their trophy. When the team lamented their loss in the locker room, he told them, “You’ve got to do what is honest, what is right, and what the rules say. People forget the scores of basketball games, but they don’t ever forget what your made of.”

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Integrity Standards

  • Kenneth Blanchard, the co-author of The Power of Ethical Management, puts it: “There is no right way to do a wrong thing.” Blanchard says that if you have to cheat to win you should think twice about the business you’re in.

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Integrity Standards

  • “The most important persuasion tool you have in your entire arsenal is integrity.” - Sales Guru Zig Ziglar

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Integrity Standards

  • According to Michael Useem, Director of the Center for Leadership and Change Management, Warren Buffett's “influence derives from his moral stature and integrity. In the aftermath of scandals that have rocked U.S. companies in the past few years, it is difficult to overemphasize the importance of ethics as a factor in leadership.” -Leadership and Change: Becoming the Best: What You Can Learn from the 25 Most Influential Leaders of Our Times , Knowledge @ Wharton Newsletter, Jan.28-Feb.4, 2004

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Character Standards

  • Character: The notable/conspicuous/ distinguishing moral/ethical traits or characteristics of a person that give evidence of their essential nature and which ultimately shape their reputation.

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Character Standards

  • Our an omen of our destiny, and the more integrity we have and keep, the simpler and nobler that destiny is likely to be. - George Santayana (1863 - 1952), "The German Mind: A Philosophical Diagnosis"

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Character Standards

  • President Harry Truman used to say: "Fame is a vapor, popularity an accident, riches take wings, those who cheer today may curse tomorrow, only one thing endures -- character.”

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Character Standards

  • Evangelist Charles Spurgeon wrote, "A good character is the best tombstone. Those who loved you, and were helped by you, will remember you when forget-me-nots are withered. Carve your name on hearts, and not on marble.”

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Character Standards

  • "What you are stands over you... and thunders so that I cannot hear what you say to the contrary.” - Ralph Waldo Emerson

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Character Standards

  • "Character is destiny." - Heraclitus, Greek Philosopher

  • "Within the character of the citizen lies the welfare of the nation" - Cicero, RomanPhilosopher

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Character Standards

  • In his book The Death of Character, James Hunter, a noted sociologist from the University of Virginia, concludes that while Americans are innately as capable of developing character as they ever were in the past, there are now few cultural or institutional guidelines in our society that call for its cultivation or maintenance. The reason, he suggests, is because there is no consensus of moral authority.

  • Do you agree with this?

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Character Standards

  • Compartmentalization: Many people believe that what individuals do in their private lives is their own business as long as it does not adversely impact the performance of their duties to the organization and they are able to “deliver the goods” professionally. Under this way of thinking even serious moral failures may be excused. Some refer to this kind of thinking as “compartmentalization.” (e.g. Bill Clinton/Monica Lewinsky situation)

  • Do you agree with this?

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Character Standards

  • Character vs. Reputation: It has been said that an individual’s character can be illustrated by a barrel of apples. The apples seen on top by all represent one’s reputation, and the apples that lie hidden underneath are his character.

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Reputation Standards

  • Eli Lily introduced a drug, fialuridine, intended to treat hepatitis B. However, 15 patients who submitted to trials of the drug suffered liver toxicity and 6 died. Rather than follow the company’s long-standing “no comment” policy, the new Chairman and CEO, Randall Tobias openly acknowledged the failure. His view was that communication stands at the top of the list in the elements of good leadership. In addition, he believed that if a company leaves a communications void, others will fill it with misinformation. (Put the Moose on the Table:Lessons in Leadership from a CEO’s Journey Through Business and Life, Randall and Todd Tobias, Indiana University Press)

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Reputation Standards

  • A railroad executive burst into Arthur Andersen’s office one day in 1914, demanding that the firm’s founder approve the railroad’s books. Accountants had discovered that the railroad was inflating its profits by failing to properly record expenses. Andersen refused, saying that there wasn’t enough money in the city of Chicago to make him approve the fraudulent accounting. Andersen’s independence cost him the client, but it gained him something far more valuable, a reputation for integrity that gave investors confidence in Arthur Andersen audits, a reputation that helped the firm become one of the top 5 accounting firms in the U.S. After nearly 90 years in business, Andersen imploded in 2002 after acknowledging that its auditors had shredded documents relating to its audits of Enron.

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Reputation Standards

  • Warren Buffett, CEO of Berkshire Hathaway, warns his executives once a year not to do anything that year they would be ashamed to read about in their local newspaper. “You can lose a reputation that took 37 years to build in 37 seconds. And it might take more than 37 years to build it back.”

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Reputation Standards

  • “The purest treasure mortal times can afford is a spotless reputation” - William Shakespeare

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Virtue Standards

  • Virtue:The quality of doing what is right and avoiding what is wrong.

    • "Virtue develops from a habitual commitment to pursue the good.” - Ronald F. Thiemann, a professor of religion and society at Harvard Divinity School

    • Wisdom is know what to do next; virtue is doing it. - David Starr Jordan (1851 - 1931), American naturalist

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3 Theories of Social Responsibility Standards

  • Classical Theory

  • Stakeholder Theory

  • Corporate Social Responsibility Theory (CSR)

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Classical Theory Standards

  • Definition: The role of business is to maximize profits within the law (see Milton Friedman, "The Social Responsibility of Business Is to Increase Its Profits.", New York Times Magazine, 1970)

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Classical Theory Standards

  • Put another way, by Harvard Professor Theodore Levitt, “In the end business has only two responsibilities - to obey the elementary canons of face-to-face civility (honesty, good faith, and so on) and to seek material gain.” - “The Dangers of Social Responsibility”, Harvard Business Review 36 (Sept.-Oct., 1958)

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Classical Theory Standards

  • Serve the interests of the shareholders

  • Social obligations limited to “ordinary moral expectations”.

  • Views obligations to non-shareholders as a constraint

  • Trusts in Adam Smith’s “Invisible Hand” (The Wealth of Nations) - The assumption that society benefits most when individuals are allowed to define and pursue their own self-interests, with minimal interference from governments or other authorities.

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Classical Theory - Contra Standards

  • Problems with: Market Failures (e.g. Pacific Lumber a successful, balanced enterprise ruined by a corporate takeover)

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Classical Theory - Contra Standards

  • When the 1990’s Tech Stock Bubble “burst” it sent layoffs soaring, 401(k) assets tanking. According to the Center on Budget and Policy Priorities, between 1997 and 1999 the bottom 20% of earners saw their income decline, while the richest 1% saw their income more than double. The invisible hand is a bit partial in the way it dispenses favors. (Marjorie Kelly, The Divine Right of Capital)

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Classical Theory -Contra Standards

  • “In fact, the purpose of a business firm is not simply to make a profit, but is to be found in its very existence as a community of persons who in various ways are endeavoring to satisfy their basic needs, and who form a particular group at the service of the whole of society. Profit is a regulator of the life of a business, but it is not the only one; other human and moral factors must also be considered which, in the long term, are at least equally important for the life of a business.” - Pope John Paul, Centesimus annus, May 1, 1991

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Stakeholder Theory Standards

  • Definition: The primary consideration in business decision-making is preserving/promoting the rights of stakeholders

  • Takes into consideration the moral principle of mutual respect.

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Stakeholder Theory Standards

  • Goal: to maintain the benefits of the free market while minimizing the potential ethical problems created by capitalism (Phillips, Wharton School)

  • Primary difference from Classical Theory: elevation of nonshareholding interests to the level of shareholder interests in formulating business strategy and policy.

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Stakeholder Theory Standards

  • Stakeholder: an individual or group, inside or outside the organization, who has a meaningful stake in its performance.

  • Who are the stakeholders of a business?

  • Narrow view vs. Wide View

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Stakeholder Theory Standards

  • Some Possible Stakeholders of a Business:

    • Customers

    • Department/Employees

    • Owners/Shareholders

    • Creditors

    • Suppliers

    • Distributors

    • Competitors

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Stakeholder Theory Standards

  • Some Additional Possible Stakeholders:

    • Local Community

    • National Citizens

    • Global Inhabitants

    • Non-Human Life

    • the Environment

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Stakeholder Theory Standards

  • Corporate citizenship: the extent to which a business meets its responsibilities, to its various stakeholders, or to society at large.

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Stakeholder Theory Standards

  • Problems with wider view?

    • Discourages Investment - Undermines/Dilutes shareholder property rights

    • Interest Group Politics - Leads to waste and inefficiency

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Corporate Social Responsibility Theory Standards

  • Definition: A voluntary assumption of responsibilities, beyond the legal and economic, that take into account moral/ethical/socially desirable goals and outcomes.

  • Concept originated in the 1950’s and began to gain a significant following in the 1960”s.

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Corporate Social Responsibility Theory Standards

  • Possible Examples

  • Merck: moved to develop Mectizan, a drug that would treat river blindness, a disease that primarily affected the poor. Merck knew that it would cost millions to develop and that they would most likely not realize a direct profit from the effort. But this resulted in a public relations windfall!

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Corporate Social Responsibility Theory Standards

  • Merck’s project was followed by:

  • Pfizer: initiated a project to eliminate the eye disease trachoma.

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Corporate Social Responsibility Theory Standards

  • SmithKline Beecham (Now Glaxo SmithKline): developed a drug to eliminate lymphatic filariasis.

  • GlaxoSmithKline has also announced that it intends to launch a new drug to tackle a virulent form of Malaria in sub-Saharan Africa. The company announced that Lapdap will be made available at a cost of $0.29 per adult and half that amount for children, and will treat plasmodium falciparum malaria, the most life-threatening malaria parasite, which kills between one and two million people every year.

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Corporate Social Responsibility Theory Standards

  • Proctor & Gamble: developed a special nutrient product to address malnutrition.

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Corporate Social Responsibility Theory Standards

  • BP: gave solar powered refrigerators to doctors in Zambia to store malaria vaccines.

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Corporate Social Responsibility Theory Standards

  • UPS: was a key actor in delivering humanitarian aid to Kosovo.

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Corporate Social Responsibility Theory Standards

  • Intel: provides education in science & math in countries where it has plants.

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Corporate Social Responsibility Theory Standards

  • Citigroup: has provided significant funds to microcredit ventures.

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Corporate Social Responsibility Theory Standards

  • Also manifest in Philanthropy/Charitable endeavors (e.g. McDonald’s Ronald McDonald Houses, Mark Kay’s program to combat breast cancer, Becton Dickinson & Co./UNICEF partnership to conquer neo-natal tetanus and the Bill Gates Foundation war on Tuberculosis, and Gulf Power’s support of a wildlife sanctuary)

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Corporate Social Responsibility Theory Standards

  • Progressive benefits for employees (e.g.Xerox’s and Eastman Kodak’s programs to encourage employee participate in community service projects and SAS Institute’s in house child care, etc.)

  • Public education (e.g. Norwich Union Insurance of Ireland’s free first-aid courses)

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Corporate Social Responsibility Theory Standards

  • “Man … ought to regard himself, not as something separated and detached, but as a citizen of the world, a member of the vast commonwealth of nature … to the interest of this great community, he ought at all times to be willing that his own little interest should be sacrificed.” - Adam Smith

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Corporate Social Responsibility Theory Standards

  • “But what is most important is that management realize that it must consider the impact of every business policy and business action upon society. It has to consider whether the action is likely to promote the public good, to advance the basic beliefs of our society, to contribute to its stability, strength, and harmony” - Peter Drucker

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Corporate Social Responsibility Standards

  • Social Contract Theory: Business does not exist in a vacuum. It involves a series of interdependent, intertwined, symbiotic relationships and coexists with many other institutions in society, including the family, the church, and the political, criminal justice, and educational systems. Each of these institutions contributes toward making capitalism possible: The court system enforces contracts; the political system provides monetary stability; and the educational system trains future employees and prepares them for the workforce. Therefore, the firm is obligated to "give something back" to those that make its success possible. Business exists only because society allows it and therefore it must satisfy the demands of society. This creates an implicit social contract (see “Changing the Social Contract: A Role for Business”, by Melvin Anshen, Columbia Journal of World Business 5 (Nov.-Dec. 1070)

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Corporate Social Responsibility Theory Standards

  • There is also the legal maxim of Salus populi est superma lex - regard for the public welfare is the highest law - R.H. Kersley, Broom’s Legal Maxims.

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Corporate Social Responsibility Theory Standards

  • In the words of General Robert Wood Johnson, founder of Johnson and Johnson: “The day has passed when business was a private matter, if it even really was. In a business society, every act of business has social consequences and may arouse public interest. Every time business hires, builds, sells or buys, it is acting for the people as well as for itself, and it must be prepared to accept full responsibility”

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Corporate Social Responsibility Theory Standards

  • Sol M. Linowitz, Chairman of the Board of Xerox declared: “To realize its full promise in the world of tomorrow, American business and industry... will have to make social goals as central to its decisions as economic goals; and leadership in our corporations will increasingly recognize this responsibility and accept it.” - Quoted in Bernard D. Nossiter’s The Mythmakers: An Essay on Power andWealth, 1964, p.100.

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Corporate Social Responsibility Theory Standards

  • Intentionality: acknowledges that investors have a right to a "reasonable return" but adds new corporate responsibilities, such as to "create new wealth" and "new jobs," guarantee "upward mobility, fairly reward "hard work and talent," promote "progress in the arts and useful sciences" and "diversify the interests of the public.” (Michael Novak, AEI)

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Corporate Social Responsibility Theory Standards

  • Intentionality also adds "external responsibilities" including promoting "community" and "dignity," and "protecting the moral ecology of freedom," all of which are crucial to the health of civil society. Business is a moral calling as opposed to being merely a profession.

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Corporate Social Responsibility Theory Standards

  • Problems with Intentionality?

    • Considered admirable in concept but problematic in practice.

    • Character demonstrated by actions, not by intentions, is the arguably a more reliable measure of corporate ethics (Jennings/Entine)

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Corporate Social Responsibility Theory Standards

  • Problems with CSR in general?

    • Dilutes the Business Purpose

    • Viewed as fundamentally antagonistic to the Capitalist Enterprise

    • Often influenced by simplistic political and social agendas

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Corporate Social Responsibility Theory Standards

  • The search for guilt-free affluence has helped to transform "green" business into a mass-market phenomenon.

  • Patagonia, a designer and distributor of outdoor clothing and gear, has long prided itself on being green. For nearly two decades, it has given 10% of pre-tax profits or 1% of sales, whichever is larger, to environmental causes.

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Corporate Social Responsibility Theory Standards

  • “Rain Forest Chic” - Socially responsible image as a marketing tool, source of free, positive publicity (e.g. The Body Shop, both customers and franchisees attracted by progressive reputation)

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Corporate Social Responsibility Theory Standards

  • Anita Roddick/Body Shop

    • Supports various social causes (e.g.-Save the Whales)

    • But may have stolen store concept and unfairly deals with franchisees?

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Corporate Social Responsibility Theory Standards

  • Ben & Jerry’s -

    • Fight global warming with Ice Cream

    • Annual one world one heart festival

    • Pint for a pint with International Red Cross

    • Rainforest Crunch Fiasco/Mistreatment of Employees/Sale to Unilever (4/12/2000)

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3 Theories of Social Responsibility Standards

  • If you were trying to decide which type of company to invest in, which would you choose and why? (Classical, Stakeholder, CSR)

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Is Ethical Behavior Good for Business? Standards

  • "The successful entrepreneur must know how to glide over every moral restraint with almost childlike regard...[and have], besides other positive qualities, no scruples whatsoever, and [be] ready to kill off thousands of victims -- without a murmur.” - John D. Rockefeller.

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Is Ethical Behavior Good for Business? Standards

  • Some Costs of Ethical Misconduct

    • Public/Interest Group/NGO disgrace/scandal/ostracism/repudiation/protests

    • Litigation/Prosecution

    • Decreased Employee Morale/Loyalty/Commitment/Performance/Productivity

    • Loss of Business/Profits

    • Loss of Customer/Supplier/Partner, Trust/Goodwill/Loyalty

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Is Ethical Behavior Good for Business? Standards

  • Some Additional Costs of Ethical Misconduct

    • Loss of Social/Reputation Capital/Goodwill (i.e. the willingness of stakeholders to overlook failings)

    • Shaken public confidence in company and in capital markets

    • Layoffs

    • Loss of Investments/Pensions

    • Increased Government Scrutiny/Regulation

    • Environmental/Health Damage

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Is Ethical Behavior Good for Business? Standards

  • Impact on the Bottom Line

    • Ethical Behavior Enhances profitability - Most academic studies support the conclusion that ethical behavior and profitability go hand in hand

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Is Ethical Behavior Good for Business? Standards

  • A 1999 DePaul University study of 300 large firms found that companies that make an explicit commitment to follow an ethics code provided more than twice the value to shareholders than companies that didn't. And it gets better: According to Management Review, published by the American Management Association, "For the 47 companies expressing a more extensive or more explicit commitment to ethics, the market value added difference was larger--an average of $10.6 billion, or almost three times the MVA of companies" without similar commitments.

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Is Ethical Behavior Good for Business? Standards

  • “Two professors at the Harvard Business School did a study of 207 major companies over an 11-year period. They used all sorts of measuring devices and came up with a ranking by corporate cultures. What they measured were things that are sometimes called the soft side of business-morale, rewards for creativity, emphasis on ethics, how well managers listen to their employees, and so on. In my business we call them more or less spirited workplaces. We could also call them companies with a high or low level of integrity. They then put these companies up against the hard side, the bottom line, on three measures: 1] gains in operating earnings, 2] return on investment, and 3] increase in stock prices. Terry Deal, who coined the term corporate culture, took a second look at those numbers, ran the same numbers again, and came up with an analysis of the top 20 companies vs. the bottom 20. Here's what he found. The top 20--the companies with integrity--the spirited workplaces--averaged 571% higher earnings than the dispirited workplaces. The top 20% averaged a 417% higher return on investment. The top 20% enjoyed an increase in stock prices of 363% in the same period. One of American's most successful CEO's was right when he said, "the soft side is the hard side.” - Restoring Integrity To Business , By: Thompson, William David, Vital Speeches of the Day, 0042742X, 10/15/2002, Vol. 69, Issue 1.

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Is Ethical Behavior Good for Business? Standards

  • An investment of $1,000 ten years ago in each of ten companies highly regarded for ethical behavior (G.E., Coca-Cola, Hewlett-Packard, Microsoft, Intel, Southwest Airlines, Berkshire Hathaway, Disney, Johnson & Johnson, and Merck) would have resulted in a return nearly three times as much as an investment of $10,000 in the Standard & Poor’s 500 stock index. (Fortune)

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Is Ethical Behavior Good for Business? Standards

  • An exception: In response to numerous lawsuits, gun manufacturer, Smith & Wesson's former CEO Ed Shultz decided to start including locks on its handguns in March 2000. Although the decision was clearly ethical, customers especially the NRA) were unhappy with the change. Sales declined, employees were laid off, and Shultz resigned. In this case, the ethical decision did not have a positive financial impact on the firm. Nonetheless, despite jobs lost, lives may have been saved by the change in product design.

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Is Ethical Behavior Good for Business? Standards

  • Reputation Management

  • A reputation for integrity enhances customer loyalty (e.g. Johnson & Johnson Tylenol Case)

  • Conversely, damage to a company's reputation can mean a sharp and often irreversible loss of market share.

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Is Ethical Behavior Good for Business? Standards

  • Social Capital

    • Experts say most people forgive mistakes made by leaders who have both conviction and a good heart. - Del Jones, Leadership lessons from the Reagan years, USA Today, June 11, 2004, p.6B.

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Is Ethical Behavior Good for Business? Standards

  • Decreases Costs - Though initiating and ethics program sometimes involves significant up front costs, it generally helps to avoid other larger costs later.

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Is Ethical Behavior Good for Business? Standards

  • Encourages Investment - A Conference Board of Canada poll revealed that 77% of Canadians are most likely to invest in, 81% to purchase from, and 79% to work for companies they view as socially responsible.

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Causes of Failures in Business Ethics Standards

  • Decreased Authority of Moral Standards

  • Empty Gestures/Insincerity

  • Situational Ethics/Moral Relativism/Expansion of Cultural Diversity

  • Rapid Expansion and Decentralization of Control

  • Company/Personal Immaturity

  • Parties Perceived as Enemies or Not Worthy of Ethical Treatment/Moral Exclusion (e.g. Lying to the IRS, cancer causing pajamas and other defective products dumped on 3rd world markets, etc.)

  • Narrow View of Stakeholders

  • Failing to “Count of Cost” before committing to a particular course (see Luke 14:28-30)

  • Lack of “Owner” Accountability/Spin

  • Actual or Perceived Pressures

  • Fixation on “Results”

  • Speed/Carelessness

  • Ethical Illiteracy

  • Rote Behavior

  • Distractions

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Causes of Failures in Business Ethics Standards

  • Focus on Short Term Profits & Wrong Standards for Hiring

    • "If we select people principally for their charisma and their ability to drive up stock prices in the short term instead of their character, and we shower them with inordinate rewards," the author asks, "why should we be surprised when they turn out to lack integrity?” - Bill George, Former CEO Medtronic Corp. - in "Authentic Leadership: Rediscovering the Secrets to Creating Lasting Value," Jossey-Bass/Wiley, 2003.

    • “The mind of the superior man is conversant with righteousness; the mind of the mean man is conversant with gain.” -Confucius

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Causes of Failures in Business Ethics Standards

  • Emphasis on the Individual rights

    • “Instead of conceiving of society as something established for the defense of individual rights, fair contracts, and due process of law, we are invited to see it in terms of the biblical vision. This way of living, thinking, and acting where autonomy and related rights take priority has seriously jeopardized the meaning and values of all institutions in our society.” - Detroit Archbishop Adam J. Maida, in a speech to Catholic judges including Rehnquist, Scalia, Kennedy, and O'Connor

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Causes of Failures in Business Ethics Standards

  • Self-Deception/Choosing Not to Know

    • Types

      • Tribalism, or the belief that the company is always right

      • Legalism, the inability to imagine moral obligations beyond the law (Note: Kedoshim Tiyu is a requirement of a Jew not to just obey the letter of the law but to obey the spirit of the law as well. Under Jewish law, it is entirely possible for a person to be 100% observant or all the law and yet be a Naval B'rshut HaTorah , that is, a repulsive, disgusting individual. One must go beyond the law, called Lifnim Mishurat HaDin, and embrace the ethical imperatives that are within it.

      • Moral Gamesmanship, the excusing of unethical practices by viewing business as "a game" and oneself as "a player”

      • Scientism, the elevation of science-including management science-to a position of unquestioned authority.

  • (see Corporate “moral blindness” not solved by typical ethics, by John Knapp, Emory Report, April 26, 1999, Volume 51, No. 29,

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Causes of Failures in Business Ethics Standards

  • Emotions

    • Arrogance

      • "When men are most sure and arrogant they are commonly most mistaken, giving views to passion without that proper deliberation which alone can secure them from the grossest absurdities"

        • - David Hume quotes (Scottish philosopher, historian, economist and essayist. 1711-1776)

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Causes of Failures in Business Ethics Standards

  • Emotions

    • “Blind” Ambition

    • Desperation

    • Feeling of Invulnerability

    • Flirting with the Edge

    • Greed

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Causes of Failures in Business Ethics Standards

  • Is the Capitalist System or the Corporate Structure inherently Immoral or Amoral?

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Capitalism Standards

  • Capitalism: An economic system in which the major part of production and distribution lies in private hands, operating under a primarily free market system, for the primary purpose of earning a profit on capital invested.

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Capitalism Standards

  • “Capitalism is the astounding belief that the most wickedest of men will do the most wickedest of the things for the greatest good of everyone.” John Maynard Keyes

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Capitalism Standards

  • Values that are central to a capitalism

    • Freedom of voluntary exchange

    • Sanctity of contracts

    • Removal of impediments to trade

  • (Source: Ethics and Economic Affairs,by Lewis, Alan; Wärneryd, Karl Erik, Publication: London ; New York Routledge, 2002)

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Capitalism Standards

  • “As it presently functions, capitalism encourages human pathologies -- embodying irresponsibility as a central requirement in its operating routines.” -William Greider is national affairs correspondent for The Nation

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Corporations Standards

  • Today more than 25% of the world’s economic activity comes from the 200 largest corporations. - “Top 200 The Rise of Corporate Global Power”, by Anderson & Cavanaugh, Institute for Policy Studies, 2000)

  • The largest 500 U.S. companies constitute at least 75% of the U.S. economy.

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Corporations Standards

  • Many now believe that it is not the church or state, but the corporation that is:

    • “the most important organization in the world” - The Company: A Short History of a Revolutionary Idea, by Micklethwait & Woolridge, 2003

    • or “the central institution of contemporary society” - “Corporate Society: Class, Property, and Contemporary Capitalism, by McDermott, 1991.

    • or “society's dominant non-governmental institution." - Value Shift: Why Companies Must Merge Social and Financial Imperatives, by Paine, 2003.

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Corporations Standards

  • These beliefs echo the prediction made by -French Sociologist Emile Durkheim (1858-1917), in his work Suicide, that “following the collapse of the family and the church, the corporation would be the association in the future that would supply the social support that every individual needs to maintain a moral life” . - Cited in “An Essay on the Background of Business Ethics: Ethics, Economics, Law and the Corporation, by Lisa N. Newton & Maureen M. Ford, in Taking Sides.

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Corporations Standards

  • Legally speaking, Corporations are:

    • “fictional persons”

      • “lacking body and soul”, corporations cannot be punished - Pope Innocent IV (13th Century)

      • “lacking a soul, corporations cannot commit treason, be outlawed, or excommunicated - Sir Edward Coke, Chief Justice, King’s Bench (17th Century)

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Corporations Standards

  • King George III's Lord Chancellor Baron Thurlow remarked at the end of the 18th Century: "How can you expect a corporation to have a conscience, when it has no soul to be damned and no body to be kicked?"

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Corporations Standards

  • A Corporation is “an artificial being, invisible, intangible, and existing only in the contemplation of law. Being the mere creature of law, it possesses only those properties which the charter of creation confers upon it, either expressly or incidental to its very existence.” - Chief Justice Marshall, Dartmouth v. Woodard (1819)

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Corporations Standards

  • As “artificial persons” corporations cannot have “real” responsibilities. - Nobel Prize Winning Economist Milton Friedman

  • Philosophy Professor Manuel Velasquez argues that only corporate members and not corporations themselves, can be held morally responsible.

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Corporations Standards

  • However, “Although a corporation is not something that can be seen or touched, it does have prescribed rights and legal obligations within the community.” - William H.Shaw, Business Ethics.

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Corporations Standards

  • “The exclusively economic definition of the corporation is a deadly oversimplification , allowing overemphasis on self-interest at the expense of the consideration of others.” - Kenneth Andrews, Professor, Harvard Business School

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Corporations Standards

  • Limited liability is the key feature of the corporate form, encouraging investment.

    • Doesn’t that run directly counter to the value of Responsibility/Accountability?

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Conflicts of Interest Standards

  • Ethics Officers at most major U.S. corporations cite conflicts of interest as their no. 1 ethics issue.

  • Definition: When an individual/agent/organization acts on a personal interest which conflicts with/is likely to conflict with/may conflict with, the legitimate interests of/or a duty owed to another that he is obligated to serve.

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Conflicts of Interest Standards

  • Actual or potential gain not a requirement

  • What’s wrong with the mere appearance of a conflict?

    • It undermines trust

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Conflicts of Interest Standards

  • Types

    • Self-Dealing

    • Accepting Benefits

    • Influence Peddling

      • (e.g. Boeing Co. fired its top financial executive for unethical conduct, saying he negotiated the hiring of a missile defense expert while she worked for the U.S. government and was in a position to influence Boeing contracts - Boeing Fires Two Top Executives, David Carpenter, Chicago Sun-Times, Nov. 25, 2003)

    • Use of another’s property for personal advantage

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Conflicts of Interest Standards

  • Warning Sign: Behavior that is likely to bias or compromise

  • “Trust Test”: would relevant others [my employer, my clients, professional colleagues, or the general public] trust my judgment if they knew I was in this situation.

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Corporate Governance Standards

  • Corporate Governance: formal and informal structures which steer an organization.

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Corporate Governance Standards

  • Do the Board of Directors actually “direct” corporate operations?

    • In reality most essential governance usually happens before the board meets.

    • As far back as 1932, Berle & Means showed that since stock ownership in large corporations is generally very dispersed, actual control of corporation rests with its corporate officers and not its board - The Corporation and Private Property, 1932.

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Corporate Governance Standards

  • “Directors can be out of touch with a company's business and can fall prey to the temptation to simply be polite to a chief executive while Rome is burning. A code of silence develops in the boardroom. By the time someone is willing to speak up, the company is in deep trouble.” - Bill George, Former CEO, Medtronic Corp. in "Authentic Leadership: Rediscovering the Secrets to Creating Lasting Value," Jossey-Bass/Wiley, 2003.

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Corporate Governance Standards

  • The Board of Directors of Worldcom reportedly allowed CEO Bernie Ebbers to rule “practically unchecked”, generally “rubber-stamping” his decisions. Their audits “rarely scratched below the surface” and they approved multibillion dollar mergers and acquisitions “with little discussion.” (Report: Worldcom board passive, Jim Hopkins, USA Today, June 10, 2003, p. 3B)

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Corporate Governance Standards

  • “Directors must ensure that they remain the true stewards of corporate accountability … without undue interference from the CEO or other members of management.” - SEC Chairman William H. Donaldson, speaking at Duke University 3/16/05.

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Corporate Governance Standards

  • Problems in Corporate Governance

    • Chairman often same person as CEO

  • Who chooses the Board of Directors?

    • Typically the Executive Officers by Proxy Elections

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Corporate Governance Standards

  • Who should sit on the Board of Directors?

    • Competence

      • Find truly knowledgeable in the field & in business generally

      • One of the requirements of Sarbanes-Oxley is that a company must have individuals who are certified financial experts on the board.

    • Self-Interest (Good or Bad?)

      • Maintain a certain % of independent directors (If so, What %?)

        • In Britain, the 1992 Cadbury Committee report recommended that boards of directors of public companies include at least 3 outside directors as members and that the CEO and chairman posts be held by different individuals.

    • Pluralism on Board (interest group reps. e.g. Labor, Environmental, Consumer Watchdogs, etc.)?

      • Volkswagen's “Group Works” Council

    • Ethical Orientation?

      • C-bridge, a rapidly emerging leader among Internet-based business solution providers, appointed to Joseph L. Badaracco, Jr., Professor of Business Ethics at the Harvard Business School to its Board.

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Corporate Governance Standards

  • But, on April 14, 2003, the SEC said it would review rules that make it tough for shareholders to nominate directors to corporate boards. SEC Chairman William Donaldson asked staffers to come with recommendations to make it easier for shareholders to run their own candidates. Changes may be adopted in time for the 2004 proxy season.

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Corporate Governance Standards

  • Most state law mandates directors must act in the best interests of the corporation and its shareholders

    • Courts have generally interpreted this to mean maximizing share price.

      • Note that most Americans say that a corporation’s top obligation should be to its employees, its community or the nation. Only 17 % think shareholders deserve first priority. - “Work Week”, Wall Street Journal, May 21, 1996, A1.

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Corporate Governance Standards

  • Ultra vires doctrine: shareholders could sue managers for embarking on projects contrary to the corporate purpose in decline because of the broad interpretation of the Business Judgement Rule which shields some managerial actions from substantive review by courts (especially in Delaware)

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Corporate Governance Standards

  • Should a Chairman of the Board & CEO be the same person?

    • In the UK, the role of chairman of the board and CEO are now generally held by different people, unlike the U.S., where it is estimated that in 70-80% of companies in the Standard and Poor’s 500, one person wears the hats of both CEO and chairman.

    • However, recent studies suggest that companies in which the chairman and CEO positions are held by two different people perform no better than companies in which the roles are combined. In other words, it’s no guarantee against future scandals.

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Corporate Governance Standards

  • Possible ways to improve:

    • More fully independent auditors

    • Prohibit access to government contracts if violate law/ethics

    • Create legal duty to promote the public good

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Corporate Governance Standards

  • Recent NYSE proposals would require, among other things, that:

    • Corporate boards of NYSE-listed companies have a majority of independent directors

    • That listed companies have audit, compensation and nominating committees composed entirely of independent directors

    • That non-management directors meet at executive sessions without management present and that they appoint a lead director to preside at these sessions

    • That shareholders approve all stock option plans (with some exceptions, such as “employment inducement” options).