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Chapter 40 Ethics & Business Decision Making

Chapter 40 Ethics & Business Decision Making

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Chapter 40 Ethics & Business Decision Making

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  1. Chapter 40Ethics & Business Decision Making

  2. §1: Nature of Business Ethics • Ethics is the study of right and wrong behavior in the world of business; the fairness, rightness or justness of a course of conduct. • In business, ethical decisions are the application of moral and ethical principles to the marketplace and workplace.

  3. Defining Business Ethics • Morals are universal guidelines or “revealed” truths. Ethics is a reasoned set of principals of conduct derived from morals. • Ethical Reasoning - the process by which an individual links her moral and ethical convictions to the choice of actions to be taken in a particular situation.

  4. Conflicting Duties • Directors and Officers owe a complex set of ethical duties to the company, shareholders, customers, community, employees, and suppliers. • When these duties conflict, ethical dilemmas are created.

  5. Internet and Ethics • A company’s actions come under quick scrutiny with the power of email and the internet. • When a corporation embarks on a course of business deemed “unethical” by a special interest group, the news will spread around the world in a matter of minutes. • 1 in 9 investors have “socially responsible” investments. Gallup

  6. § 2: Approaches to Ethical Reasoning • Duty Based Ethics - derived from religious and philosophical principles. • Religious Ethical Standards. • Kantian Ethics. • Rights Principles. • Outcome-Based Ethics - seek to ensure a given outcome. • Utilitarianism.

  7. Religious Ethical Standards • The rightness or wrongness of an action is usually judged according to its conformity to an absolute rule that commands a particular form of behavior. • The motive of the actor is irrelevant in judging the rightness or the wrongness of the action. • These rules often involve an element of compassion.

  8. Kantian Ethics • Premised on the belief that general guiding principles for moral behavior can be derived from human nature. • The categorical imperative is a central postulate of Kantian ethics. • The rightness or wrongness of an action is judged by estimating the consequences that would follow if everyone in a society performed the act under consideration.

  9. Rights Principle • This principle derives from the belief that every duty gives rise to a corresponding right. • The belief in fundamental rights is a deeply embedded feature of Western culture. • The ethicality of an action is judged by how the consequences of the action will affect the rights of others.

  10. Utilitarianism • An action is ethical based on whether it produces the greatest good for the greatest number of people upon which it has an effect. • A cost-benefit analysis must be performed to determine the effects of competing alternatives on the persons affected. • The best alternative is the one that produces the greatest good for the greatest number.

  11. §3: Ethical Decision Making • A sound ethical decision-making model will include consideration of: • The legality of the contemplated action. • The ethicality of the contemplated action, as determined by reference to the relevant code of ethics, established ethical priorities, and public opinion.

  12. Corporate Compliance • A number of contexts, within the employer-employee relationship, are fraught with ethical considerations, such as: • Having a system in place to detect, prevent, eliminate, and punish behavior of a harassing nature toward employees. • Avoiding wrongful discharge, either actual or constructive. • Adhering to ethical principles during corporate restructuring and downsizing.

  13. Codes Of Ethics • Adopted by business entities as a way to: • Provide standard guidance to executives and managers. • Take into account the duties owed by the business to its various stakeholders.

  14. Ethical “Gray Areas” • Sometimes whether an action is legal or ethical depends on how a court or administrative agency interprets a statute. What if different courts disagree? • If managers, in good faith, believe they are complying with a statute and later are ruled against, was their action unethical?

  15. §4: Maximum vs. Optimum Profits • Ethical priorities of the executive’s institution will have an effect on whether she chooses maximum profits versus “optimum profits.” • The sacrifice of some profitability resulting from adherence to an institution’s ethical and legal priorities produces what business ethicists refer to as optimum profits.

  16. §5: The Ever-Changing Ethical Landscape • What causes a societies’ ethics to change? • Seventy-five years ago a corporation’s ethical duty was only to its shareholders and maximize profits. Only two questions were asked: Is it legal? Is it profitable? • The globalization of business impacts US companies, suppliers, wages of foreign workers, consumers.

  17. Case 40.1: Varity v. Howe(Conflicting Duties) • FACTS: • Varity Corporation set up a subsidiary, Massey Combines Corporation (MCC), to sell certain low-selling products. • Varity convinced employees to transfer their jobs and retirement benefit plans to MCC • Varity did not tell them it expected MCC to fail, which, within two years, it did. Some retirees stopped receiving benefits. • Employees sued Varity under the Employee Retirement Income Security Act of 1974 (ERISA).

  18. Case 40.1: Varity v. Howe(Conflicting Duties) • HELD: • The U.S. Supreme Court held that under ERISA, a fiduciary is required to “discharge his [or her] duties with respect to a [retirement]plan solely in the interest of the participants and beneficiaries.” • “To participate knowingly and significantly in deceiving a plan’s beneficiaries in order to save the employer money at the beneficiaries’ expense, is not to act “solely in the interest of the participants and beneficiaries.” • The Court stated that “[l]ying is inconsistent with the duty of loyalty owed by all fiduciaries.”

  19. Case 40.2: NY CPA’s v. Eric Louis Assoc.(Ethical Decision-Making) • FACTS: • The NY CPA society has more than 30,000 members. The Society’s service mark is “NYSSCPA”. The Society operates a Web site at the Internet address “” • ELA a small firm engaged in the job placement of accountants and other professionals, began operating a Web site using the address “”, using “NYSSCPA” as a meta tag, hyperlinking to the Society’s site, and framing that site within ELA’s site. The CPA’s asked ELA to stop. ELA asked for $20,000. • CPA’s sued alleging trademark infringment.

  20. Case 40.2: NY CPA’s v. Eric Louis Assoc.(Ethical Decision-Making) • HELD: FOR THE NY CPA’s. • ELA’s conduct was willful and in bad faith because, on learning that it may not have had any rights to the Society’s service mark, ELA did not stop its use of the mark or seek the advice of counsel. • The Society’s March 25th demand put ELA “on notice that ELA’s use of the ‘’ domain name and the ‘NYSSCPA’ meta‑tag was potentially illegal,” but it only attempted to sell the domain name to the Society.

  21. Case 40.3: Blakey v. Continental Airlines(Ethical Decision Making) • FACTS: • Blakey, a female pilot for Continental, complained about pornographic photos and vulgar gender-based comments directed at her in her plane’s cockpit and other work areas by her male co-employees. • Continental pilots published a series of harassing, gender-based, defamatory messages about Blakey on the Forum. • Blakey sued when management did nothing.

  22. Case 40.3: Blakey v. Continental Airlines(Ethical Decision Making) • HELD: FOR BLAKEY. • Remanded the case to determine, among other things, which messages were harassing, whether Continental had notice of those messages, and the severity or pervasiveness of the harassing conduct. • The court compared the on-line forum to an old fashioned cork bulletin board at the employer’s place of business.