Business Ethics: Decision Making for Personal Integrity and Social Responsibility [2 ed.] 0078137136, 9780078137136

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BusinessE thics Decision Making for Personal Integrity and Social Responsibility

Business Ethics Decision Making for Personal Integrity and Social Responsibility

Second Edition

Laura P. Hartman DePaulU niversity

Joe DesJardins College of St. Benedict/St. John’s University

B RESPONSIBILITY, SECOND EDITION

AND SOCIAL

Published by McGraw-Hill, a business unit of The McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York, NY 10020. Cop y The McGraw-Hill Companies, Inc. All rights reserved. Previous lication may be reproduced or distributed in any form or by any means, or stored in a database or retriev The McGraw-Hill Companies, Inc., including, but not limited to, in an ork or other electronic storage or transmission, or broadcast for distance learning. y not be available to customers outside the United States. .

ISBN: 978-0-07-813713-6 MHID: 0-07-813713-6 -in-Chief: Brent Gordon V lishing Services: Kimberly Meriwether David Publisher: Paul Ducham Managing Developmental Editor: Laura Hurst Spell Editorial Coordinator: Jonathan Thornton Associate Marketing Manager: Jaime Halteman Project Manager: Erin Melloy Buyer: Kara Kudronowicz Design Coordinator: Brenda A. Rolwes Cov Studio Montage, St. Louis, Missouri Senior Photo Research Coordinator: Jeremy Cheshareck Cover Images: gestage Media (John Foxx); Fork in the Road: © Chase J Imag York: © Image Source; Intersecting Railroad Tracks: © Steve Crise/Corbis; Fork in Desert Road: © Stockbyte/PunchStock; Commuting: © Ingram Publishing/SuperStock Media Project Manager: Balaji Sundararaman Compositor: ords Private Limited Typeface: 10/12 T Printer: R.R. Donnelley All credits appearing on page or at the end of the book are considered to be an extension of the cop ess Cataloging-in-Publication Data Business ethics : decision making for personal integrity and social responsibility/ by Laura P. Hartman and Joseph DesJardins.—2nd ed. p. cm. Includes bibliographical references and index. ISBN 978-0-07-813713-6 (alk. paper) 1. Business ethics. I. DesJardins, Joseph R. II. Title. HF5387.H3743 2010 174'.4—dc22 2010011965 .mhhe.com

To Rachel and Emma. —Laura Hartman

To Michael and Matthew. —Joe DesJardins

Aboutthe A uthors Laura P. Hartman Laura P. Har tman is Vincent de P aul Professor of Business Ethics and Le gal Studies in DePaul University’s College of Commerce, serves as Special Assistant to the President with a focus on DeP aul’s Haiti Initiati ve and is also Research Director of DeP aul’s Institute for Business and Professional Ethics. Har tman represents DePaul Univ Zafen.org, a microf nance organization seeking to economic development in Haiti to benef t Haitians living in po verty. In her w ork in the pri vate sector, she manages e xternal par tnerships for Zynga.org, the social initiati ve component of Zynga Game Network. She has been an in rance), HEC (France) the Université Paul Cezanne Aix Marseille III, among other European uni versities, and previously held the Grainger Chair in Business Ethics at the Uni versity of Wisconsin–Madison. Her other books include Rising a bove Sw eatshops: Innovative Mana gement Approaches to Global La bor Challeng es, Emplo yment Law for Business, P erspectives in Business Ethics, and The Legal Environment of Business: Ethical and Pub lic Policy Contexts. Hartman graduated from Tufts Univ ved her la w de gree from the Uni versity of Chicago La w School.

Joe DesJardins

College of St. Benedict/St. John’s Univer Joe DesJardins is Associate Provost and Academic Dean, as well as Professor in the Depar versity in Minnesota. His other books include: An Intr oduction to Business Ethics, Environmental Ethics: An Intr oduction to En vironmental Philosophy, Environmental Ethics: Concepts, Policy & (McGraw Hill, 2000); Contempor Issues in Business Ethics, (co-editor with John McCall) , and Business, Ethics, and onment: Ima le Future. ecutive xtensively in the areas of business ethics, en . He received his B.A. from Southern Connecticut State University, and his M.A. and Ph.D. from the University of Notre Dame. He pre viously taught for twelve years at Villanova Univ .

vi

Preface We began writing the f rst edition of this te xtbook in 2006, soon after a w ave of nancial world. Headlines made the companies involv WorldCom, Tyco, Adelphia, Health-South, Global Crossing, Arthur Andersen, ImClone, .P. Morgan, Mer rill Lynch, Morgan Stanley, Citigroup Salomon Smith Barney, and even the New York Stock Exchange itself. At the time, we suggested that, in light of such signif cant cases of f nancial fraud, mismanagement, criminality and deceit, the relevance of business ethics could no longer be questioned. Sadly, the v same issues are as much alive today as they were several years ago. Consider the rash of problems associated with the f nancial meltdown in 2008–09 and the prob lems f aced b y such companies as AIG, Countr nancier Ber again, we have witnessed f nancial and ethical malfeasance of historic propor tions and the inability of mark et mechanisms, inter nal governance structures, or gov gulation to prevent it. As w e ref ect upon the ethical cor ruption and f nancial f ailures of the past decade, the importance of ethics is all too apparent. The questions today are less about whether ethics should be a par gy and b y necessity the business school curriculum, than about which v business decisions and how ethics should be integrated within business and business education. This textbook provides a comprehensive yet accessible introduction to the ethiamiliar with ethics will f nd that they are as unprepared for careers in business as who are unfamiliar with accounting and f nance. It is f air to sa y prepared, even within traditional disciplines such as accounting, f nance, human resource management, marketing, cientl wledgeab cally within and across those f elds. While other solid introductory textbooks are available, several signif cant features make this book distinctive. We emphasize a oach to ethics and we provide strong pedagogical support throughout the entire book. In addition, w e bring both of these strengths to the hich the y are already often familiar, thus approaching them through subjects that ha ve already gener ated their interest.

New to the Second Edition Our goal for the second edition remains the same as for the f rst: to pro vide “a comprehensi ve y et accessib le introduction to the ethical issues arising in business.” We hav vii

viii Preface

on both personal and polic y-level perspectives on ethics. We continue to provide pedagogical support throughout the te xt. The most noticeab le changes involve a thorough updating of distinct items such as Reality Checks, Decision Points, and readings to ref ect new cases, examples, and data. Among these changes:

• • • •

wenty-f ve new end-of-chapter readings, av o new readings for each chapter; Ne national and global perspectives; New cases to serve as Chapter Opening Decision Points; New readings on Stakeholder theory; Extremely timely and e xpanded textual coverage of such topics as cor porate culture, leadership and gender v , stak , the 2009 Genetic Information Non-Discrimination Act, sweatshops, living wages, green-washing, corporate governance, and the agency problem;

Finally, we have made numerous small editorial changes in each chapter to mak e the text more readab grate theory and practice, and to improve end-of-chapter questions to better suppor t assessment of student learning, group projects, and classroom discussion.

Why a Decision-Making Model? Ethics is all about making decisions: What should w e do? Ho w should w e act? ve? e to create? Who should w te , we hope to accomplish se veral impor tant goals. First, an emphasis on decision making a voids the nagging challenge of relativism without succumbing to do gmatic preaching. Our decision-making model es and to build a case in suppor t of their o le precisel are the result of a rational decision-making process. In this way active learners by taking responsibility for their points of view. A decision-making emphasis also offers the promise of lifelong lessons. Long ve for gotten the specif c content of this course, the reasoning eloped here will continue to inf eryday personal and professional lives. The purpose of the text is to encourage readers to e xplore their own values and then to apply a logical process to reach a well-reasoned conclusion regarding an appropriate course of action. ant no matter the circumstances, profession involv beyond the course within which it is taught. The signif cance of the decision-making model also mak es this te ently compatible with diverse and global perspectives in a way that could not be

Preface

ix

achieved by a discussion that focused onl y on specif c ethical v alues and principles. This inclusivity allows the model greater power of application across borders, subjects, and even time, than a value-based orientation would allow. Finally, the decision-making model introduced here is easil y transfer red into other conte y scholars now realize that business ethics should be integrated across the entire range of business disciplines. The strength y busields. This is not a te ve on the bookshelves. This is one that they will need to consult for each of their courses and , one w ould hope, for each of the issues they might also f en ell.

PedagogicalSuppor t Business ethics creates distinct challenges for both students and teachers. One would naturally assume that business ethics requires f amiliarity with the concepts and cate gories of tw o diverse f elds, business and ethics. F or many busie any other class in their experience. Faculty trained in business disciplines are challenged to master ethics; and those trained in ethics are equall y challenged to master business concepts. This challenge will be increasing as more and more business school f aculty are asked to teach ethics as part of the recognition of the critical importance and consequent integration of ethics in the business school cur riculum. This evolution demands a te xtbook that pro vides strong pedago gical suppor t for both student lear ners and teachers. As if the challenge of teaching f eld is not enough, accrediting agencies are increasingl nning will be required at both the pro gram and individual instructor level. This text offers a range of pedago gical elements to suppor t both students and teachers. Each chapter is introduced with aDecision Point, issues that will be introduced and examined in the chapter. The Decision Point provides a topic through w hich to be issues to follow, and it also includes a set of questions that demonstrate how to explore each decision using the ethical decision-making model proposed early in the book. A follo offering the oppor ect on the opening case as a means to summarize and ref ect upon the chapter. Decision Points are also sprinkled throughout each chapter as a way to help ref ne students’ critical thinking skills. Each chapter begins with a specif c list of Chapter Objectives, w e as ning goals as well as the organizational framework of the chapter, and concludes with a list of Key Terms . Key Terms here they f rst appear, then included with comprehensive def y.

x

Preface

Also integrated within each chapter are Reality Checks, which highlight reallife situations of business applications. They are examples of ho processes are applied in a timel y vide another application of the text material and keep students aware of issues and questions they will need to grapple with in this course. The end-of-chapter material contains Discussion and Project Questions that go bey ther research and application. The end-of-chapter Readings present a variety of provocative takes on the issues just w perspectives, the in engaging in business activity. TheOnline Learning Center for this book, www.mhhe usethics2e, has two por tals: instr uctors can do wnload the IM, Video Files and Notes, Weblinks to related research sites, PPT f les, and Sample Syllabi. Students can access the Glossary pages, Web view Quizzes. By stri that is accessible to them, providing them with a framework within which to respond to even the most combreadth of perspectiv ensure their voices will be heard in the business environment they are entering or have entered. Articulate, persuasive students with integrity and conviction will be e is to provide students with the tools they will require to ensure their action is effective, valuable, and sustainable.

Acknowledgments A te that is occurring within a f eld. As in any text that is based in part on the work of others, we are deeply indebted to the w ho are doing this research. We are especially g ho graciously granted us personal permission to reprint their materials in this text: g

ord

a Radin Washbourne Patricia Werhane

v generosity. In addition, we wish to express our deepest gratitude to the reviewers and others w ed to mak nitel ve: oley, ge of New Jersey Ashe,

ge t,

one, ge d,

ne, din-Baylor

ans, ge ho helped this book come into existence: Brent Gordon, esident & Editor-in-Chief

ger y,

st Spell, velopmental Editor Thornton, dinator aman, ger

ger udronowicz, wes, dinator

xi

BriefC ontents Preface

vii

1

Ethics and Business

2

Ethical Decision Making: Personal and Professional Contexts 45

3

Philosophical Ethics and Business 95

4

The Cor Implications

1

Ethical Decision Making: Technology and Privacy in the Workplace 333

8

Ethics and Marketing

9

Business and Environmental Sustainability 479

10

143

Corporate Social Responsibility

6

Ethical Decision Making: Employer Responsibilities and Employee Rights 249

203

403

Ethical Decision Making: Corporate Gover Finance 527

Glossary

5

xii

7

591

599

Table of Contents About the Authors

Chapter 3

vi

95

vii

Opening Decision Point: Executive Compensation: Needed Incentives, Justly Deserved, or Just Distasteful? 96 Introduction: Ethical Theories and Traditions 97 Utilitarianism: Making Decisions Based on Ethical Consequences 100

Chapter 1 1 Opening Decision Point: The Meaning of “Good” 2 Introduction: Making the Case for Business Ethics 3 11 Business Ethics as Personal Integ Responsibility 13 w 19 26

Utilitarianism and Business

102 104

Deontology: An Ethics of Rights and Duties 107 Human Rights and Duties 110 gal Rights 114 115

Readings 30 1-1 Value Shift 30 1-2 An Ethical Hero or a Failed Businessman? The Malden Mills Case Revisited 36 Write about Africa 42

Vir on Integrity and Character 116 A Decision-Making Model for Business Ethics Revisited 121 Readings

Chapter 2 Professional Contexts

Personal and 45

Opening Decision Point: What Would You Do? 46 Introduction 47 47 Wrong: y Do “Good” People Engage in “Bad” Acts? 59 Ethical Decision Making in Managerial Roles 63 Readings 67 2-1 The Parable of the Sadhu 67 ging for Stakeholders 73 eholder 86 2-4 eople Do Bad Things at Work: Rote Behavior, Distr and Moral Exclusion vior on the Job 91

124

3-1 Business and Human Rights: A Not-So-New Framework for Corpor 125 3-2 The Caux Principles for Responsible Business 130 3-3 Ethical Dimensions of Decision-Making in the Developing World: The Case of Bribery in Mauritius 132 3-4 It Seems Right in Theory but Does It Work in Practice? 137

Chapter 4 The Corporate Culture—Impact and Implications 143 Opening Decision Point: Creating an Ethics Program 144 What IsCorporate Culture? 145 149 V 152 porate Culture 154 xiii

xiv

Table of Contents

Effective Leadership and Ethical, Effective Leadership 158 Building a Values-Based Corporate Culture 159

Readings

Mission Statements, Credos, Codes of Conduct, and Statements of Values 159 162 Culture Integration: Ethics Hotlines, Ombudspersons, and Reporting 163 Assessing and Monitoring the Corporate Culture: Audits 167

Mandating and Enforcing Culture: The Federal Sentencing Guidelines for Organizations 169 Readings 180 4-1 Leadership in a Values-Based Organization : The Sears Lectureship in Business Ethics at Bentley College—Thursday, February 7, 2002 181 4-2 lowing Today: acing Business Leadership 185 4-3 Assessment and Plan for Organizational Culture Change at NASA 191 4-4 Does the Company Get It?—20 Questions to Ask Regarding Compliance, Ethics, and Risk Management 193

Chapter 5 ate Social Responsibility

203

Opening Decision Point: Social Entrepreneurship: Banking on Poverty 204 Introduction 206

Business: A Reason Debate Featuring Milton Friedman, Whole Foods’ John Mackey, and Cypress Semiconductor’s T. J. Rodgers 231 ay to Be Good? 239 5-3 The Big Interview: J artz—“Consumer Trust That’s Good for the Sole”: Timberland’s Jeff Swartz Explains y Brands Must Start Engaging Consumers on Social Issues to Rebuild Trust Lost during the Financial Crisis 245

Chapter 6 Ethical Decision Making: Employer Responsibilities and Employee 249 Opening Decision Point: Abercrombie & Fitch: Image Consciousness? 25 0 Introduction 251 Ethical Issues in the Workplace: The Current Environment 252 arameters of the Employment Relationship 254 Due Process and Just Cause 254 259 262 Acceptable Risk 264 ket Controlled 266 vernment-Regulated Ethics 268

Global Applications: The Global Workforce and Global Challenges 270 The Case of Child Labor

207

Discrimination 276 279 Action 283

Example of a Social Web Model: Stakeholder 214

216

The Implications of Sustaina Model of CSR 217

Exploring Enlightened Self-Interest: Does “Good Ethics” Mean “Good Business”?

275

Rights and Responsibilities in Conf ict: Discrimination, Diversity, and Aff rmative Action 276

212 SocialWeb Model of CSR 213

Integrative Model of CSR

230

5-1

grative

219

Readings

296

6-1 Employment-at-Will, Employee Rights, and Future Directions for Employment 296 essions of a Sweatshop Inspector 307

Table of Contents

6-3 Sweatshops, Choice, and Exploitation 312 6-4 king the Roots: Shiraishi Garments Company and an Evolving Thicket of Business Ethics in China 326

Chapter 7 Technology and Privacy in the Workplace 333 Opening Decision Point: “Reasonable” Use of Company Technology 334 335 vacy 337 Def ning Privacy

337

al Sources of a Right to Privacy 342

Value of Privacy to the Ethical Implications of Technology 345 Information and Privacy

349

Monitoring Employees through Drug Testing

Other Forms of Monitoring

354

356

Business Reasons to Limit Monitoring 358

358

Regulation of Off-Work Acts 361 acy Rights since September 11, 2001

364

Readings 376 7-1 Drug Testing and the Right to Privacy: Arguing the Ethics of Workplace Drug Testing 376 7-2 Medical Ethics for the Newest Practitioners: Health Web Sites—Pow Online Health 382 7-3 Bridging the Digital Gap in Emerging Economies 390 7-4 The Ethical Use of Technology in Business 397

Chapter 8 keting

403

Opening Decision Point: Marketing Pharmaceuticals 404 Introduction 406 eting: A Framework

Contractual Standards for Product Saf 413 ds for Product Safety 415 oduct Lia 421 oduct Lia 421

Responsibility for Products: Advertising and Sales 423 Advertising 425 Autonomy Vulnerable Populations 431 436 eting 439

Readings

346

Managing Employ

Responsibility for Products: Safety and Liability 412

Product 439 Price 440 Promotion 442 Placement 445

338 339

408

xv

449

8-1 The Friendship of Buzz, Blog and Swag 449 8-2 First Analysis of Online Food Advertising Targeting Children 457 amid 460 A. Karnani 474

Chapter 9 Business and Environmental Sustaina 479 Opening Decision Point: When is Building Design and Construction an Ethical Issue? 480 Introduction 481 Business Ethics and Environmental Values 484 Business’ Environmental Responsibility: The Market Approach 488 Business’ Environmental Responsibility: The Re Approach 490 Business’ Environmental Responsibilities: Approach 493 The “Business Case” for a Sustainable Economy 497 Principles for aSustainable Business 498

426

xvi

Table of Contents

Readings

502

9-1 The Next Industrial Revolution 503 9-2 An Argument for Manag 510 9-3 Beyond Corpor Social Innovation and Sustainable Development as Drivers of Business Growth 518

Chapter 10 Corporate Governance, Accounting, and Finance 527 Opening Decision Point: Is Steve Jobs’ Health Status a Private Matter? 528 Professional Duties and Conf icts of Interest 531 y Act of 2002 536 nal Control Environment 539 Going beyond the Law: Being an Ethical Board Member 541 Legal Duties of Board Members , There Is Ethics

541 542

Conf icts of Interest in Accounting and the Financial Markets 544 ve Compensation 547 InsiderTrading 553 Readings

561

10-1 Thoughts on Reform: On the First Anniv of the Collapse of Lehman Brothers 561 10-2 Islamic Banking and Finance: Moral Beliefs and Business Practices at Work 565 10-3 “Best” Corporate Governance Practices Are Unethical and Less Competitive 576 10-4 How Much Compensation Can CEOs Permissibly Accept? 583

Glossary

591

Index 599

Chapter

1 Ethics and Business Good people do not need laws to tell them to act justly, while bad people will f nd a way around the laws. Plato cult to get a [person] to understand something when his [or her] salary depends upon . . . not understanding it.

xplanation, cause or rationale of business behavior and business decisions, but rather the test of their validity. ker wf ake in an avalanche ever feels responsible. e

1

Opening Decision Point1 The Meaning of “Good”

2

ChapterO bjectives After reading this chapter, you will be able to: 1. 2.

Explain the nature of business ethics as an academic discipline.

3.

Distinguish the ethics of personal integrity from the ethics of social responsibility.

4.

Distinguish ethical norms and values from other business-related norms and values.

5.

Distinguish legal responsibilities from ethical responsibilities.

6.

Explain why ethical responsibilities go beyond legal compliance.

7.

Describe ethical decision making as a form of practical reasoning.

Introduction: Making the Case for Business Ethics Even though years have passed and other scandals have occur e still refer to v s business ethics news; since that time ethics and v alues have seldom strayed from the front pages of the press. e are referring to gover Illinois governor Rod Blagojevich’s alleged attempt to auction President Obama’s senate seat to the highest bidder or to the federal bailout follo wing the mor tgage ve been involved with legal and ethical wrongdoing is, sadl y, incredibly long. Ref ect for a moment on the businesses that ha ve 3

4

Chapter 1

Ethics and Business

been involved in scandals or, at least, in f aw Halliburton, AIG, WorldCom, Tyco, Adelphia, Cendant, Sunbeam, Waste Management, HealthSouth, Global Crossing, Ar Andersen, Er nst & Young, ynch, Morgan Stanley Mae, Countrywide Financial Cor p., Citigroup Salomon Smith Bar ney, Marsh & McLennan, Credit Suisse First Boston, and even the New York Stock Exchange itself. Indi viduals implicated in ethical scandals include K Lay, y Skilling, Andrew Fastow, Dennis Kozlowski, Bill McGuire, Bob Nardelli, John J. y, Martha Stewart, Samuel Waksal, Richard Grasso, and yond these w wn scandals, consumer boycotts based on allegations of unethical conduct or alliances have targeted such w wn f rms as Nik e, McDonald’s, Car , Home Depot, Chiquita Brands Inter national, Fisher-Price, Gap, Shell Oil, Exxon-Mobile, Le t, and W making. Simpl y put, the scandals and r uin e xperienced b and every one of the indi viduals just mentioned w ere brought about b y ethical failures. If w e do, indeed , ref viduals, perhaps they should remind us of the often-repeated Santa yana admonition, “Those w ho cannot remember the past are condemned to repeat it. ”3 This te xt pro vides a decision-making model that, w viduals to understand these failures and to av that decision-making model, this chapter ref ects on the intersection of ethics and business. Ethical decision making in business is not at all limited to the type of major corporate decisions with dramatic social consequences listed abo ve. At some point, every worker, and cer tainly everyone in a management role, will be f aced with an issue that will require ethical decision making. Not ev covered by economic, legal, or company rules and regulations. More often than not, responsible decision making must rely on the personal values and principles of the indi viduals involved. Individuals will have to decide for themselv es what type of person they want to be. At other times, of course, decisions will in volve signif cant general polic y issues that af fect entire or ganizations, as happened in all the w wn corporate scandals. The managerial role especiall y in volves decision making that estab lishes or ganizational precedents and has or ganizational and social organizational—are ref ected in the title of this book: Business Ethics: Decision making for Personal Inte . As recently as the mid-1990s, ar ticles in such major publications as The Wall Street Journal, the d Business Re view, and U.S. News and World Report questioned the le gitimacy and v alue of teaching classes in business ethics. F ew disciplines f ace the type of sk y confronted courses in business ethics. Many students believed that “business ethics” was an oxymoron. Many also vie wed ethics as a mixture of sentimentality and personal opinion

Chapter 1

Ethics and Business

5

that would interfere with the eff cient of business. After all, who is to identify right and wrong, if no law is who will “punish” the “wrongdoers?” Ho wever, this approach has left business e xecutives as one of the lowest ranked professions in ter ms of trust and honesty, according to a 2008 Gallup poll.4 Leaders realize that the y can no longer af ford this approach in contemporar y business. The direct costs of unethical business practice are more visib le today than perhaps the y ha ve e ver been before. As discussed abo ve, the f rst decade of the ne y-publicized cor porate scandals, the effects of which did not escape people of any social or income class. Moreover, we saw the economy begin a downward spiral into one of the lar gest f ven signif cantly by questionable sub-prime risky mortgage-backed securities in the markets. These lending and trading efforts yond levels that the market could bear. The inevitable correction caused real estate values in most markets to decline sharply, domestic credit markets to and the federal government to intervene with a rescue package. If the k ey (or not so k ey) decision mak ers w ho contributed to the bubb le bursting had acted dif ferently, could these unfor ve been avoided? Well, suff ce it to sa y that it is a bit of a vicious circle. Economic bump in obser ved workplace misconduct during times of economic challenges. In tur n, misconduct based on fraud alone causes an estimated 7 percent loss of annual re venues, equivalent to more than $1 trillion of the 2008 g ross domestic product in the United States (or $70,000 for e very $1 million of re venue). These ethical f ailures are responsib le for over half of all quality costs or 5–15 percent of all operating costs (and can be the single largest quality cost item in many f rms).5 Personal retirement accounts lik e 401k’s, institutional in vestments lik e pension funds, federal, state, and municipal retirement funds, and major insurance companies are heavily invested in stocks and bonds, as well as pooled securities of e very size, shape, and order . As a result, these costs of W failures on Main Street f amilies and businesses become lar ger and more noticeable by the day. The questions toda y are less about why or should ethics be a par t of business; they are about which values and principles should guide business decisions and how ethics should be inte grated within business. (A persuasi ve case for why this shift has occur red can be found in the reading “V alue Shift,” by Lynn Sharp P amiliar with the basic concepts and cate f nd themselv ho are unf amiliar with accounting and f nance. Indeed, it is f air to say that students will not ven within f elds such as accounting, f nance, human resource management, marketing, and management, unless they are familiar with the ethical issues that arise within those specif c f elds. (See Figure 1.1, to which we will refer again in later chapters.)

eeling the Heat,” in

Global Fraud Report (2007/2008).

eyed 892 executives worldwide and found the following results. Note that the two areas of greatest “heat” or concern are andinformation theft, loss or attack. We will be examining these issues and the means by which to respond to these challenges throughout the text (see chapter 7 .)

FIGURE 1.1 In 2007, global consulting f rm Kroll and The Economist tog

Chapter 1

1 OBJECTIVE

Ethics and Business

7

To understand the origins of this from whether ethics or values should play a role in business decisions to the almost frantic search for how most effectively (and quickly!) to do it, consider the range of people who were harmed b ver $1 billion in share v alue. Thousands of emplo y benef ts. Consumers in Califor nia suffered from energy shortages and blackouts that were caused b s manipulation of the market. Hundreds of businesses that worked with Enron as suppliers suf fered economic loss with the loss of a lar s accounting f Ar Andersen, w ent out of business as a direct result. as also hur t b y the loss of a major emplo y actor. Families of emplo yees, investors, and suppliers were also t. Many of the individuals directly involved have since suffered criminal and civil punishment, up to and including prison sentences for some. Indeed, it is hard to imagine an yone who was even loosely aff liated with Enron who was not harmed as a result of the ethical f ailings there. Multiply that harm by the dozens of other companies implicated in similar scandals to get a better idea of w hy ethics is no longer dismissed as ir relevant. The consequences of unethical beha many people to be ignored. This description of the consequences of the Enron collapse demonstrates cant impact that business decisions can ha ve on a v ery wide range of ves ties. For better or for worse, the decisions that a business mak es will affect many more people than just the decision mak er. As w e will discuss throughout this text, in order to sustain the f rm, ethically responsible business decision making must move be yond a nar row concer n with stockholders to consider the impact that decisions will ha ve on a wide range of stakeholders. In a general sense, a business stakeholder will be an yone w ho af fects or is af fected b y decisions made within the f orse. Failure to consider these additional stakeholders will hav ers, specif cally, and on the f rm’s long-ter hole. This perspective is articulated vely by Whole Foods et’s “Declaration of Interdependence.” Satisfying all of our stakeholders and achieving our standards is our goal. One of the most important responsibilities of oods Market’s leadership make sure the interests, desires and needs of our various stakeholders are kept in balance. We recognize that this is a dynamic process. It requires participation and y all of our stakeholders. It requires listening compassionately, y and acting with integrity. y conf icts must be mediated and win-win solutions found. Creating and nur eholders is y. (Emphasis added.)6

oods has maintained this priority str ver a period of 10 y ears, during which it has perfor med better f nancially for its shareholders than any of

8

Chapter 1

Ethics and Business

Reality Check

Why Be Ethical? Because the Law Requires It

Today, business executives have many reasons to be concerned with the ethical standards of their organizations. Perhaps the most straightforward reason is that the law requires it, often as a minimum. In 2002, the U.S. Congress passed the Sarbanes-Oxley Act to address the wave of corporate and accounting scandals. Section 406 of that law, “Code of Ethics for Senior Financial Offi cers,” requires that corporations have a Code of Ethics “applicable to its principal financial offi cer and comptroller or principal accounting officer, or persons performing similar functions.” The Code must include standards that promote:

of interest between personal and professional relationships. 2.

, accurate, timely, and understandable disclosure in the periodic reports required to be filed by the issuer.

3. Compliance with applicable governmental rules and regulations. * throughout each chapter in the text. Slightly different from Decision Points, these boxed additions offer practical applications of the concepts discussed during that chapter segment or examples of the ways in which the concepts are implemented in “real” business decision making.

1. Honest and ethical conduct, including the ethical handling of actual or apparent confl

its top f ve competitors, returning 400 percent from 2002 to 2007, at a time when y 13 percent, and over 900 percent in the past ten years.7 The Reality Check, “Wh describes some legal requirements that ha ve been created since the Enron f asco. Beyond these specif c legal obligations, or decisions in m ays. Unethical behavior not onl y creates le gal risks for a business, it creates f nancial and marketing risks as well. Managing these risks requires managers and executives to remain vigilant about their company’s ethics. It is now clearer than ever that a company can lose in the mark etplace, go out of business, and its emplo yees go to jail if no one is pa ying attention to the ethical standards of the f rm. Moreover, given the declining average life expectancy of f rms,8 maintaining an ethical advantage becomes a vital distinction between successful and unsuccessful f rms. A f rm’s ethical reputation can pro vide a competitive edge in the marketplace with customers, suppliers, and emplo yees. On the positi ve side, managing ethicall cant di and eff ciency. Trust, loyalty e are just some of the or ganizational benef ts that are more lik ely to f ourish within ethicall y stable and credib le or ganizations (see the Reality Check, “Wh y Be Good?” ). Research demonstrates that 94 percent of w orkers consider a f rm’s ethics critically impor tant in their choice of emplo yers. In f act, 82 percent of emplo yees say that the y would prefer a position at lo wer pay in a f rm with ethical business practices compared to a higher paying job at a company with questionable ethics. Further, one-third of U.S. workers have walked off of a job on the basis of their ethics. 9 Alternatively, the consumer bo ycotts of such well-known f rms

Chapter 1

Reality Check

Ethics and Business

Why Be Good?

The Institute for Business, Technology and Ethics suggests the following “Nine Good Reasons” to run a business ethically:

5. Supplier/partnert rust

1. Litigation/indictmentavoi dance

8. Personalp ride

2. Regulatoryf reedom

9. Iti st her ightt hingt od o

3. Publicaccep tance

Source: Institute for Business, Technology and Ethics, Ethix, no. 22 (March/April 2002), p. 11.

4. Investorconfiden ce

9

6. Customerl oyalty 7. Employeep erformance

as Nik e, McDonald’s, Home Depot, F isher-Price and Wal-Mart, mentioned previously, give even the most skeptical business leader reason to pa y attention to ethics. For business students, the need to study ethics should be as clear as the need to study the other subf elds of business education. As discussed abo ve, without this backg y will be unprepared for a career in contemporary business. But e ven for students w ho do not anticipate a career in business management or business administration, f amiliarity with business ethics is just as crucial. After all, it was not only the managers at Enron who suffered because of their ethical lapses. Our li ves as employees, as consumers, and as fore, everyone has good reasons for being concer ned with the ethics of those decision makers. Moreover, as leaders and as emerging leaders, we need to explore how to manage the ethical beha vior of others so that w e can impact their decisions and encourage them to mak e ethical, or more ethical, decisions. Cer tainly, unethical behavior continues to per meate or ganizations toda y at all le vels; and business decision makers—at all levels—must be equipped with the tools, the wledge, vior and to respond to it summaril y. Just imagine the impact in ter ms of role modeling of this single statement b y Prince ved secret and personal “commissions” of appro ximately $240 million each for the past ten y ears een the British government and Saudi arms manuf , BAE Systems: [T]he way I answer the corruption charges is this. In the last 30 years, . . . we have ogram that was approximately, close to $400 billion worth. You could not have done all of that for less than, let’s say, $350 billion. Now, if you tell me that building this w $400 billion, that we had misused or g ll tell you, ‘Yes.’ But I’ll take that any time.

10 Chapter 1

Ethics and Business

But more important, who are you to tell me this? I mean, I see e the scandals here, or in England, or in Europe. what? We did not invent corruption. This happened since Adam and Eve. I mean, Adam and Eve were in heaven and the y had to go down to earth. So I mean this is- this is human nature. But we are not as bad as you think!10

In that case, British Prime Minister Tony Blair had originall y allow investigation to be dropped. He offered the following statement, in an effort to explain his reasons for the decision. “This in vestigation, if it had gone ahead , would have involved the most serious alle gations in in vestigations being made into the Saudi ro yal family. My job is to gi ve advice as to w hether that is a sensible thing in circumstances w here I don’ t believe the in vestigation incidentally would have led an ywhere e xcept to the complete wreckage of a vital strate gic act that we would have lost thousands, thousands of British jobs.”11 Some obser vers ma y look to the choices made in late 2008 and 2009 b y American Inter national Group (AIG), the w orld’s lar gest insurer , as another example of poor role modeling. One can easily see the impact of those decisions on reputation. In September , 2008, AIG w uptcy. There w ets may hav er a f v .S. gov bailed out AIG to the tune of $152.2 billion (funded b y U.S. tax dollars) in order to keep the company af oat, since AIG arguably was “too big to fail.” While that consequence alone was unfor tainly was not unethical. However, in decisions that damaged the reputations of man y in volv other charges, one month after AIG received the f rst round of bailout mone y, its executives headed to Califor nia for a weeklong retreat at an e xtremely luxurious hotel, with the compan y covering the nearl y half a million dollar tab with the bailout mone y. Six months later , these same e xecutives re warded themselv es with bonuses totaling over $100 million. Although then-President Obama (some say belatedl y) derided the e xecutives for their le gally-awarded bonuses, man y of the bonuses w ere paid ne v y had been promised through employee contracts before AIG had received any bailout money for the pur poses of “retaining talent.”12 en prepared a bill that would impose a 90 percent tax on the bonuses paid to executives by AIG and other companies that w vernment of more than $5 million. Instead, the House passed The Grayson-Himes Pay for Performance Act in ecutive compensation provisions of the Emergency Economic Stabilization le and e xcessiv ”13 This bill w le and e xcessive” compensation at companies recei . Treasur Timothy ould have the power to def ne what constitutes reasonable compensation and to review how companies give their bonuses.

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Ethics and Business

11

The case for business ethics is clear and persuasive. Business must take ethics hat does this mean? What is “ethics,” and what is the objective of a class in business ethics?

Business Ethics as Ethical Decision Making

2 OBJECTIVE

As the title of this book suggests, our approach to business ethics will emphasize ethical decision making. No book can magically create ethically responsible people or change behavior in any direct way. But can and practice responsible and accountab le ways of thinking and deliberating. We assume that decisions that follo will be more responsible and ethical. In other words, responsible decision making and deliberation will result in more responsible behavior. So what is the point of a business ethics course? On one “ethics” y; we might e xpect knowledge about this history to be among the primar y goals of a class in ethics. Thus, in an ethics course, students might be e xpected to lear n about the g reat ethicists of histor y such as t Mill, and Immanuel Kant. As in many other courses, this approach to ethics w ould focus on the informational content of the class. Yet, according to some observers, ethical theories and the history of ethics is beside the point. These stakeholders, including some businesses looking to hire college graduates, business students and even some teachers themselves, expect an ethics class to address ethical behavior, not just infor mation and kno wledge about ethics. After all, w hat good is an ethics class if it does not help pre vent future Enrons? F or our pur poses, ethics refers not onl y to an academic disci, how human beings should pr operly live their lives. An ethics course will not change y our choices of w hat to think about. A caution about inf uencing behavior within a classroom is appropriate here. Part of the hesitation about teaching ethics in volves the potential for abuse; expecting teachers to inf uence beha vior could be vie wed as per mission for teachers to impose their own views on To the contrary, many believe that wn views. t of this concer n is that the line betw een motivating students row one. There are man y w ays to inf uence someone’s behavior ying, and intimidation. Some of the executives involved in the worst of the recent corporate scandals were ver ate the people who worked for them. Presumably, none of these approaches belong in a colle ge classroom, and certainly not in an ethical classroom.

12 Chapter 1

Ethics and Business

But not all forms of inf uencing behavior raise such concerns. There is a major dif ference betw een manipulating someone and persuading someone, between threatening (unethical) and reasoning (more likely ethical). This textbook resolv es the tension betw een knowledge and beha vior b y emphasizing ethical judgment, ethical deliberation, and ethical decision making. In line with the hat we repeatedly do,” we agree with those w ho believe that an ethics class should stri ve to produce more ethical behavior v cally and ethicall y legitimate way to achie ve this objecti ve is through careful and reasoned decision making. Our fundamental assumption is that a process of rational decision making, a process that involves careful thought and deliberation, can and will result in beha vior that is more reasonab le, accountable, and ethical. Perhaps this vie w is not sur prising after all. Consider an y course within a business school curriculum. Few would dispute that a management course aims to create better managers. We would judge as a failure any f nance or accounting course that denied a connection betw een the course material and f nancial or accounting practice. Ev ery course in a business school assumes a connection between w . Classes in management, accounting, f nance, and mark eting all aim to inf uence students’ beha vior. We assume that the kno wledge and reasoning skills learned in the classroom will lead to better decision making and , therefore, better behavior within a business conte xt. A business ethics class follo ws this same approach. tell ers and to proclaim what students ought to think and ho w they ought to li ve, still fe wer wledge and behavior. Our role should not be to preach ethical do gma to a passi ve audience, but instead to ve learners and to engage them in an active process of thinking, questioning, and deliberating. Taking Socrates as our model, philosophical ethics rejects the view that passive obedience to or the simple acceptance of customary norms is an adequate ethical perspecti ve. Teaching ethics must, in this view think for themselves. It is this autonom y of thought that encouraged us to include the reading by Bin yavanga Wainaina, “Ho w to Write about Africa.” Wainaina’s ar ticle ay in w hich w e normally discuss developing countries, as w fer direction as to ho w we should discuss these subjects. No where in this reading are y ou going to f nd the “right” ans wer. The ar ticle instead accentuates the stereotypes or , at least, generalizations that we commonly use and leaves it to the reader to create a more ethical alternative. The decision-making model that will be presented in the ne xt chapter will offer guidance on the process of ethical analysis, deliberation, and reasoning that should pro vide some assistance in this type of independent and accountable decision making.

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Ethics and Business

13

Business Ethics as Personal Integrity and Social Responsibility

3 OBJECTIVE

Another element of our en vironment that impacts our ethical decision making and behavior involves the inf uence of social circumstances. vidual may have carefull be motivated to act accordingl y. But the cor porate or social conte xt surrounding the individual may create serious bar riers to such beha vior. As individuals, we need to recognize that our social en reatly inf uence the range of options that are open to us and can signif cantly inf uence our beha vior. People who are quite decent can, under the wrong circumstances, engage in unethical behavior while less ethically-motivated individuals can, in the right circumstances, do the “right thing. ” Business leaders, therefore, ha ve a responsibility for the business en vironment that the y create; w e shall later refer to this en ” The environment can, therefore, strongly encourage or discourage ethical behavior. Ethical business leadership is precisely this skill: to create the circumstances within w hich good people are ab le to do vented from doing bad. vides an e xample. Sherron Watkins, an Enron vice ring within the company; and she took some small steps to address the prob lems within the Enron en hen it became clear that her boss might use her concerns against her, she backed off. The same circumstances were involved in connection with some of the Arthur Andersen auditors. viduals raised concerns about Enron’s accounting practices, their supervisors pointed out that the $100 million annual revenues generated by the Enron account provided good reason to back of f. The “Sherron Watkins” Decision Point exemplif es the wnfall. At its most basic level, ethics is concerned with how we act and how we live our li ves. Ethics in volves w hat is perhaps the most monumental question an y human being can ask: How should w e live? Ethics is, in this sense, practical, having to do with how we act, choose, behave, and do things. Philosophers often emphasize that ethics is normative, which means that it deals with our reasoning about how we should act. Social sciences, such as psychology and sociology, also examine human decision making and actions; but these sciences are descriptive rather than nor mative. When w e sa y that the y are descripti ve, w e refer to the fact that the y provide an account of ho w and w hy people do act the w ay the y do—they describe; as a normative discipline, ethics seeks an account of how and why people should act a certain way, rather than how they do How should we live? two ways. “We” can mean each one of us indi vidually, or it might mean all of us collectively. In the f rst sense, this is a question about ho w I should li ve my life, how I should act, what I should do, and what kind of person I should be. This meaning of ethics is based on our v ned by our moral systems; therefore, it is sometimes referred to as morality. It is the aspect of ethics

Decision Point

14

SherronW atkins

that we refer to by the phrase “personal integrity.” There will be many times within a business setting w here an indi vidual will need to step back and ask: should I do? How should I act? If morals refer to the underlying values on which our decisions are based , ethics refers to the applications of those morals to the decisions themselv es. So, an indi vidual could have a moral v alue of hon, which, w expense report. W n to this distinction in just a moment. In the second sense, “Ho w should we live?” refers to how we live together in . This is a question about ho as corporations, ought to be str w we ought to li ve together. This area is sometimes refer red to as social ethics and it raises questions of justice, public policy, law, ci losophy w business institutions hether the y have a responsibility to the g reater society (corporate social responsibility or CSR), and about making decisions that will impact many people other than the individual decision maker. This aspect of business ethics asks us to e from an individual perspective. We refer to this broader social aspect of ethics as decision making for social responsibility. In essence, managerial decision making will al ways in volve both of these aspects of ethics. Each decision that a business manager makes involves not only a personal decision, but also a decision on behalf of, and in the name of, an organization that exists within a particular social, legal, and political environment. Thus, our book’s title mak es reference to both aspects of business ethics. Within a business setting, individuals will constantly be asked to make decisions affecting both their o g 15

Decision Point

Management and Ethics

Expressed in ter ms of ho w we should li ve, the major reason to study ethics becomes clear. Whether we explicitly examine these questions, each and e very one of us answers them every day through our beha viors in the course of li ving our lives. Whatever decisions business managers mak e, the y will ha ve tak en a stand on ethical issues, at least implicitl y. The actions each one of us tak es and the li ves w e lead gi ve v ery practical and una voidable ans wers to fundamental ethical questions. We therefore make a very real choice as to w hether we answer them deliberately or unconsciousl y. Philosophical ethics merel y asks us to step veryday decisions to examine and evaluate them. Thus, Socrates gave the philosophical answer to why you should study ethics over 2000 years ago: “The unexamined life is not worth living.” T aced within business, conDecision Point, “Lo Aaron F ees in the Meantime.” This case could just as well be examined in a management, human resources, or organizational behavior class as in an ethics class. The more social-scientif c approach common in management or business administration classes would examye actors that led to one decision rather than another or by asking wh ay that he did. A second approach to Malden Mills, from the perspective of ethics, steps back from the f hat should the manager do, what rights and responsibilities are in volved? What advice ought Feuerstein’s tax accountant or What good stein being fair orthy? This normative approach to business is at the center of business ethics. Ethical decision making in volves the basic categories, concepts, of ethics: shoulds, oughts, rights and responsibilities, goodness, fairness, justice , virtue, kindness, lo orthiness, and . For a much more detailed e xamination of Aaron Feuerstein’s decision sur rounding Malden Mills, consider P enelope Washbourne’s reading, “An Ethical Hero or a Failed Businessman? The Malden Mills Case Revisited” 16

Decision Point Loyalty after a Crisis: Should Aaron Feuerstein Rebuild and Pay His Employees in the Meantime?

17

18 Chapter 1

Ethics and Business

4 OBJECTIVE

To say that ethics is a normative discipline is to say that it deals with norms: vior lish mining what we should do, ho w we should act, what type of person w e should be. ay of e xpressing this point is to say that norms appeal to cer tain values that would be promoted or attained b y ay v alues. To say that ethics is a ve discipline is not to say that all normative disciplines involv After all, business management ve, are they not? for business managers that presuppose a set of business v alues? One could add accounting and auditing to this list, as w ell as economics, f nance, politics, and the law. Each of these disciplines appeals to a set of values to establish the norms of appropriate behavior within each f eld. These e xamples suggest that there are man y dif ferent types of nor ms and values. Retur ning to our distinction betw een values and ethics, w e can think of values as the underlying beliefs that cause us to act or to decide one w ay rather than another. Thus, the v alue that I place on an education leads me to make the decision y video games. I belie ve that education is more worthy, or valuable, than playing games. I make the decision to spend my money on groceries rather than on a vacation because I value food more than relaxation. A compan y’s core v alues, for e xample, are those beliefs and principles that provide the ultimate guide to its decision making. Understood in this w ay, man y dif ferent types of v alues can be reco gnized: f nancial, religious, legal, historical, nutritional, political, scientif c, and aesthetic. Individuals can have their own personal v tantly, institutions also have values. T y of sa has a set of identif able values that establish the expectations for w within that f rm. These norms guide employees, implicitly more often than not, to behave in ways that the f rm values and f nds worthy. One important implication of this guidance, of course, is that an individual’s or a corporation’s set of values may lead to either ethical or unethical result. The cor example, seems to hav elope of legality as far as possible in order to get a way with as much as possib le in pursuit of as much money as possible. Values? Yes. Ethical values? No. One way to distinguish these v arious types of v alues is in ter ms of the ends they serve. Financial values serve monetary ends; religious values serv ends; aesthetic values serve the end of beauty; le gal values serve law, order, and justice, and so forth. Different types of values are distinguished by the various ends served by those acts and choices. How are ethical values to be distinguished alues? ve? Values, in general, were earlier described as those beliefs that incline us to act or choose in one w ay rather than another . Consider again the har to the ethical f ailures at Enron. Thousands of innocent people w ere hur t by the decisions made b y some indi viduals seeking their o wn f nancial and e gotistical aggrandizement. This example reveals two important elements of ethical values.

Chapter 1

Ethics and Business

19

First, ethical values serve the ends of human w ell-being. Acts and decisions that seek to promote human w elfare are acts and decisions based on ethical v alues. Controversy ma hen we try to def ne human well-being; but we can start with some general observations. Happiness certainly is a part of it, as are respect, , integrity, and meaning. Freedom and autonomy surely seem to be necessary elements of human well-being, as are companionship and health. the well-being promoted by ethical values is not a personal and self sh well-being. y individuals seeking to promote their o wn well-being. Ethics requires that the promotion of human well-being be done impar tially. From the perspecti ve of ethics, no one person’ s welfare is more worthy than any other’s. Ethical acts and choices should be acceptable and reasonab le from all rele vant points of vie w. Thus, we can of fer an initial characterization of ethics and ethical values. Ethical values are those beliefs and principles that impartially promote human well-being.

Ethics and the Law 5 OBJECTIVE

Any discussion of norms and standards of proper behavior would be incomplete without considering the law. Deciding what one should do in business often requires ref ection on what the law requires, expects, or permits. The law provides an impor tant guide to ethical decision making, and this te xt will integrate le gal nor ms and ethical nor ms are not identical, nor do the y always ag ree. Some ethical requirements, such as treating one’s employees with respect, are not le gally required, though they may be ethically warranted. Conversely, some actions that ma y be le gally per such as f ring an employee for no reason, would fail many ethical standards. y accepted vie w, perhaps more common prior to the scandals of recent years than after by obe ying the la w. F rom this perspecti ve, an ethicall y responsib le business decision is merel y one that complies with the la w; there is no responsibility to do an ything fur ther. Indi vidual businesses ma y decide to go be yond the le gal minimum, such as when a business supports the local arts, but these choices are voluntary. centers on this approach, contending that ethics requires obedience to the la w; anything bey y and charity, something praiseworthy and allow Over the last decade, man y cor porations ha ve estab lished ethics pro grams and have hired ethics off cers who are charged with managing ethics programs. Ethics off cers do a great deal of good and ve work; but it is fair to say that much of their work focuses on compliance issues. Of course, the environment varies considerably company to compan y and industr y (see Reality Check, “Bribe P ayers Inde x”). The Sarbanes-Oxle y Act created a dramatic and v ast new layer of le gal compliance issues. But is compliance with the law all that is required to behave ethically? Though we will address this issue

20 Chapter 1

Ethics and Business

in greater detail in chapter 5, let us brief y explore at this point several persuasive reasons why legal compliance is insuff cient, in order to move ard to our discussion of ethics as perhaps a more ef fective guidepost for decision making. See also Reality Check, “Ethics: Essential to Gov ” 1. Holding that obedience to the la w is suff ll one’s ethical duties be gs the question of whether the law, itself, is ethical. Dramatic e , many and apar theid in South s y run counter to the la w. On a more practical le vel, this e signif . F y accountab le to their stakeholders for those decisions. F rom the perspective of ethics, a business does not forgo its ethical responsibilities based on obedience to the law. 2. Societies that v alue indi vidual freedom will be reluctant to le gally require more than just an ethical minimum. Such liberal societies will seek le gally to prohibit the most serious ethical harms; although they will not legally require acts of charity , common decenc y, and personal inte grity that ma constitute the social f v w can be an eff cient mechanism to prevent serious harms; but it is not v ery effective at promoting “goods.” Even if it were, the cost in human freedom of le gally requiring such things as personal integrity would be extremely high. ould a society be like if it legally required parents to love their children, or even had a law that prohibited lying under all circumstances? 3. On a more practical le vel, telling business that its ethical responsibilities end with obedience to the la w is just in viting more legal regulation. Consider the diff culty of tr ying to create la ws to co ver each and e very possible business challenge; the task would require such specif city that the number of regulated areas w le. Additionally, it was the failure of personal ethics among such companies as Enron andWorldCom, after all, that led to the creation of the Sarbanes-Oxley Act and many other legal reforms. If business restricts its ethical responsibilities to obedience to the la w, it should not be sur nd a new wave of gov gulations that require what were y voluntary actions. 4. The law cannot possib ly anticipate e v w dilemma that businesses might face; so, often, there ma y not be a re gulation for the par ticular dilemma that confronts a business leader . F or e xample, w hen w orkplace e-mail w as in its infancy, la ws re garding w yo employee or the employer) were not yet in place. As a result, one had no choice but to rely on the ethical decision-making processes of those in po wer to respect yee privacy while also adequatel the w tions of workplace monitoring). le to rely on ethics since the law might not yet—or might never—provide a solution.

Chapter 1

RealityC heck

Ethics and Business

21

Bribe Payers Index

Transparency International 2008 Bribe Payers Index (BPI) The Business Sector Corruption Scorecard In which business sectors do companies have the highest propensity to bribe government officials? Sector 0.1 ▲ worst

Score

Public works contracts & construction

5.2

Real estate & property development

5.7

Oil & gas

5.9 6.0

best ▼ 10.0 The

Mining

6.0

Pharmaceutical & medical care

6.2

Utilities

6.3

Civilian aerospace

6.4

Power generation & transmission

6.4

Forestry

6.5

Telecommunications & equipment

6.6

T

6.6

Arms and defence

6.7

Hotels, Restaurant & Leisure

6.7

Agriculture

6.9

Light manufacturing

6.9

Information technology (computers & software)

7.0

Fisheries

7.1

Banking & finance

7.1

was carried out on Transparency International’s behalf by Gallup International

NOTES: The countries and territories included in the index are leading international or regional exporting nations, whose combined global exports of goods and services and outflows of foreign direct investment represented 75 percent 15 . Australia, Brazil, India and South Africa were included due to their position as major regional trading powers.

The 2008 BPI is derived from a survey of senior business executives in 26 countries: Argentina, Brazil, Chile, Czech Republic, Egypt, France, Germany, Ghana, Hungary, India, Indonesia, Japan, Malaysia, Mexico, Morocco, Nigeria, Pakistan, Philippines, Poland, Russian Federation, Senegal, Singapore, South Africa, South Korea, United Kingdom and the United States. These countries were selected on the basis of their trade and Foreign Direct Investment (FDI) (continued)

22 Chapter 1

Ethics and Business

flows, using data from United Nations Conference on AD). The combined ows of foreign direct investment of the 26 countries The2008 Bribe Payers Index is based on responses to a survey of senior business executives, the 2008 Bribe Payers Survey, designed and commissioned by Transparency International. The Bribe Payers Survey covered a wide range of questions about the nature, scope and impact of bribery and corruption. Highlights from the survey can be found in an accompanying report to the release of the 2008 BPI: Transparency International Bribe Payers Index 2008: Overview Report: .transparency.org/ policy_research/surveys_indices/bpi The Bribe Payers Survey was carried out on Transparency International’s behalf by Gallup International between 5 August and 29 October 2008. Gallup International was responsible for the overall implementation of the survey and the data quality control process. It relied on a network of partner institutes to carry out the survey locally. Bribe . For the sectoral rankings on public sector bribery and on state capture, respondents were asked their views on up to five sectors with which they had business relationships. As with the BPI, these sectoral rankings therefore draw on the informed perceptions of senior business executives. various governmental agencies, international

foundations and corporations. Ernst & Young, the Federal Ministry of Economic Cooperation and Development in Germany and the Norwegian Agency for Development Cooperation (NORAD) provided financial support for the Bribe Payers Survey and the 2008 BPI. In addition, since s corruption measurement instruments have been supported by Ernst & Young. TI does not endorse a company’s policies by accepting its financial support, and does not involve any of its supporters in the management of its projects. For details s sources of funding, please see http://www.transparency.org/ support_us A detailed analysis of the methodologies used to develop the BPI can be found in ency International 2008 Bribe Payers Index: http://www.transparency.org/ policy_research/surveys_indices/bpi ment (UNCTAD) “Handbook of Statistics 2008”. http://www.unctad.org/Templates/Page.asp?intIt emID⫽1890&lang⫽1 This survey company was selected by TI through a competitive public tendering process. United Nations Conference on Trade and Development (UNCTAD) “Handbook of Statistics 2008”. http://www.unctad.org/Templates/Page.asp?intIt emID⫽1890&lang⫽1 Posted12/ 11/2008.R eprintedw ithp ermission.

5. Finally standing of law. To say that all a business needs to do is obe y the law suggests that laws are clear-cut, unambiguous rules that can be easily applied. This rule model of law is very common; but it is not quite accurate. If the law was clear and unambiguous, there would not be much of a role for la ers and courts. 6 OBJECTIVE

Consider one la w that has had a signif cant impact on business decision making: the Americans with Disabilities Act (ADA). This law requires employers to mak e reasonab yees with disabilities. But w hat counts as a disability and w hat would be considered a “reasonab dation? Over the y ears, claims have been made that rele vant disabilities include , depression, dysle xia, ar thritis, hearing loss, high b lood pressure, f acial

Chapter 1

Reality Check

Ethics and Business

23

Ethics: Essential to Governance

In 2003, Deloitte polled 5,000 directors of the top 4,000 publicly-traded companies and reported that 98 percent believed that an ethics and compliance program was an essential part of corporate governance. Over 80 percent had developed formal codes of ethics beyond those required by Sarbanes-Oxley, and over 90 percent included statements concerning the company’s obligations to employees, shareholders, suppliers, customers, and the community at large in their corporate code of ethics. Clearly, ethics has gone mainstream. Further, corporate leaders have come to recognize that their responsibilities are much wider than previously thought. In practice, if not yet in theory, corporate America has adopted the stakeholder model of corporate social responsibility. Contemporary business now takes seriously its ethical responsibilities to a variety of stakeholders other than its shareholders. That being said, does the authoring and distribution of a formal code of ethics directly translate into improvements in ethical decision making and corporate culture? In this same survey, fewer than 75 percent of responding companies which have a formal code said they formally checked adherence and fewer than 68 percent provided training on employee responsibilities contained in their code of ethics. Corporate leaders have obviously come to recognize that their responsibilities are much wider than previously thought. Quantifying the benefit of the resulting ethically-driven initiatives and driving continuous improvement represents the next step. Further, a survey published in 2008 by Deloitte presents a curious detail. Notwithstanding the evident attention paid to ethics stateside by these organizations, less than one-third of fi are increasing internal controls to abate violations in connection with foreign corruption charges. The Foreign Corrupt Practices Act makes it a federal

criminal offense for any company or individual doing business in the United States to offer, pay, or authorize a bribe to a foreign government offi cial to gain some form of business advantage. “As more U.S. companies seek to expand into developing foreign markets—many of which have spotty reputations for corruption—the need for effective anti-corruption programs and controls to prevent and detect potential violations is critical,” warns Ed Rial, leader of Deloitte’s FCPA Consulting practice. Rial recommends the following practices to prevent and detect FCPA violations: • Find out where payments are going. Payments are typically routed through third parties or “front” organizations created by the funds’ ultimater ecipients. • Be wary of acquisition or partnership targets that do not have effective anti-corruption compliance programs. Even if the target is not subject to the FCPA, anti-corruption programs are staples of good corporate governance and a strong ethical culture. • Do not rely on off-the-shelf FCPA products alone. Multi-national companies may benefi t from a tailored system to identify areas of risk and monitor them through consistent testing of controls and procedures. • Do not assume that some industries are safer than others. While the defense and energy industries have a higher perceived risk of corruption, cases have been brought against companies in all sectors. Sources: Of Companies Are Increasing Internal Controls To Prevent FCPA Violations,” Press Release (Apr. 17, 2008) http:// www.deloitte.com/dtt/press_release/0,1014,sid%253D 2281%2526cid%253D202074,00.html; “Business Ethics and Compliance in the Sarbanes-Oxley Era,” A Survey by Deloitte and Magazine, July 2003 ( .deloitte.com/dtt/cda/doc/content/ ethicsCompliance_f.pdf).

24 Chapter 1

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scars, and the fear of heights. vered under the AD verity of the illness and the effect it has on the emplo yee’s ability to w ork, among others. Imagine that y ou yee asks you to reasonably accommodate his aller gy. How would you decide w hether allergies constitute a ADA? In f act, the le gal ans wer remains ambiguous. The law offers general r ules that f concern business are based on past cases that estab lish legal precedents. Each precedent applies general r ules to the specif c circumstances of an indi vidual case. In most business situations, asking “Is this le gal?” is reall y asking “Are these circumstances similar enough to past cases that the conclusions reached in those cases will also appl y here?” Since there will al ways be some dif ferences between cases, the question will al ways remain some what open. Thus, there is no unambiguous answer for the conscientious business manager who wishes only to obe y the la w. There are fe w situations w here a decision mak er can simpl y f nd the applicab le r ule, appl y it to the situation, and deduce an answer from it. W e th remembering that man y of the people in volved in the w ave of recent cor porate scandals were la ers. In the case, for example, corporate attorneys and accountants w as legal. Especially in civil law (as opposed to criminal law), where much of the law is established by a the law. Further, in civil law there is a real sense that one has not done an illegal unless and until a decides that one has violated a law. This means that if no one f les a lawsuit to challenge an action it is perceived as legal. If moral behavior were simply following rules, we could program a computer to be moral.

As some theories of corporate social responsibility suggest, if a corporate ts within the la w, a competent manager will go to her cor porate attor neys and tax accountants to ask what the la w allows. A responsible attor ney or accountant will advise ho w far she can reasonab ly go before it w ould obviously be ille gal. In this situation, the question is whether a manager has a r to “push the envelope” of legality in pursuit of prof ts. Most of the cases of cor porate scandal mentioned at the star t of this chapter involved attorneys and accountants who advised their clients or bosses that w hat they were doing could be defended in cour t. The off-book partnerships that were at the hear t of the collapse of Enron and Arthur Andersen were designed with the advice of attorneys who thought that, if they had at least a

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reasonab t. In the business environment, this strategy falls within the pur view of organizational risk assessment, def ned as “a process . . . to identify potential e vents that may af , and manage risk to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives.”16 Accordingly, the decision to “push the envelope” becomes a balance of risk assessment, cost-benef t analysis, and ethics—what is the corporation willing to do, willing to risk? Using this model, decision mak ers might include in their assessment before taking action: • the likelihood of being challenged in court • the likelihood of losing the case • the likelihood of settling for f nancial damages • a comparison of those costs • the f nancial benef ts of taking the action • the ethical implication of the options available After action is tak en, the responsibility of decision mak ers is not relie v of course. The Conference Board suggests that the ongoing assessment and review process might have a greater focus on the f nal element—the ethical implications—because it could involve: • independent monitoring of whistleblowing or help-line information systems; • issuing risk assessment reports; • vities; and • modifying programs based on experience.17 Because the la w is ambiguous, since in man y cases it simpl y is not clear what the la w requires, there is little cer tainty with re gard to man y of the abo ve factors. their ethical judgments. To suggest otherwise simpl y presents a f alse picture of corporate reality. Thus, even those business people w y obeying the law will be confronted on a re gular basis b questions: What should I do? How should I live? As suggested pre viously, w hether w e step back and e xplicitly ask these questions, each of us implicitl y ans wers them e v e mak e a decision about ho w to act. Responsib le decision making requires that w e do step back and ref ect upon them, and then consciousl y choose the v alues b y w hich w e make decisions. No doubt, this is a daunting task, even for e leaders. Fortunately, we are not alone in meeting this challenge. The histor y of e awaiting each of us in the w orld of business, w e will re view some of the major traditions in ethics. Chapter 3 pro vides an introductor y sur vey of se veral major ethical traditions that hav

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Ethics as Practical Reason 7 OBJECTIVE

In a pre vious section, ethics w as described as practical and normative, having to do with our actions, choices, decisions, and reasoning about how we should act. Ethics is therefore a vital element of practical reasoning— reasoningabout what we should do—and is distinguished from theoretical reasoning, which is reasoning about w hat w e should believe. This book’s perspecti ve on ethical decision making is squarely within this understanding of ethics’ role as a par t of practical reason. oint, “Lo a Crisis.” On the surf ace it pro vides a clear , if e xtreme, example of a business leader who was willing to make signif cant f nancial sacrif ces for the well-being of his employ . Aaron Feuerstein could have made many other decisions that would have been f nancially benef cial, although at a great costs to employees and the surrounding towns. To many people, he w ue hero. Yet, the case e ventually became more comple x. One impor tant f act is that vately owned. Had F y-traded corporation, his responsibilities would have been signif cantly different. Because of this f act, some obser vers describe F euerstein’s decisions as a simple case of personal , but not a helpful model for other corporate executives. As it was, Malden Mills w as unable to reco ver f nancially from the losses associated with both the f re and F euerstein’s decisions and e ventuall uptcy. Critics claim that this fact demonstrates the real costs of such generosity. Theoretical reason is the pursuit of tr uth, w hich is the highest standard for what we should believe. According to this tradition, science is the great arbiter of vides the methods and procedures for determining what is true. Thus, the scientif c method can be thought of as the ans wer to the fundamental questions of theoretical reason: e believe? So the question arises, is there a comparable methodolo hat we should do and how we should act? The simple ans wer is that there is no single methodolo gy that can in e very vide one clear and unequi vocal ans wer to that question. But there are guidelines that can pro vide direction and criteria for decisions that are more or less reasonable and responsible. W philosophical ethics can be thought of in just this w ay. Over thousands of y ears w human beings should li ve, philosophers have developed and ref ned a variety of approaches to these ethical questions. and defend v arious nor ms, standards, v alues, and principles that contribute to responsible ethical decision making. Ethical theories are patter ns of thinking, or methodologies, to help us decide what to do. The following chapter will introduce a model for making ethically responsible decisions. This can be considered as a model of practical reasoning in the sense that, if you w hat to do, you

Opening Decision Point Revisited The Meaning of “Good”

would cer tainly be making a reasonab le decision. In addition, the ethical traditions and theories that we describe in Chapter 3 will help f esh out and elaborate upon this decision procedure. Other approaches are possib le, and this approach will not guarantee one single and absolute ans wer to e very decision. But this is a helpful be ginning in the de velopment of responsib le, reasonab le, and ethical decision making. 27

28

Questions, Projects, and Exercises

29

Key Terms

End Notes

30

Readings

alue Shift,” by Lynn Sharp Paine, p. 30 Reading 1-2: “An Ethical Hero or a Failed Businessman? The Malden Mills Case Revisited ”, by Penelope Washbourne, p. 36 w to Write about Africa,” by Binyavanga Wainaina, p. 42

Reading 1-1

ValueS hift Lynn Sharp Paine Business has changed dramaticall y in the past few decades. Advances in technolo gy, increasing globalization, heightened competition, shifting demographics—these ha ve all been documented and written about e xtensively. Far less notice has

been given to another, more subtle, change—one that is just as remarkab le as these more visib le developments. What I ha ve in mind is the attention being paid to v alues in man y companies today.

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When I be gan doing research and teaching epticism about this subject w as per vasive. Many people, in business and in academia, sa w it as either tri vial or altogether ir relevant. Some sa w it as a jok e. A few were even hostile. The whole enter prise, said critics, was misguided and based on a naïv e view of the business w y had learned in their college economics courses that the mark et is amoral. Back then, accepted wisdom held that “business ethics” was a contradiction in ter ms. People joked that an MB A course on this topic w ould be the shortest course in the cur riculum. At that time, bookstores offered up volumes with titles lik e The Complete Book of Wall Str eet Ethics consisting entirely of b lank pages. The most generous vie w was that business ethics had something to do with corporate philanthropy, a topic that might interest executives after their companies became fnancially successful. But e ven then, it w as onl y a frill—an indulgence for the wealthy or eccentric. Today, attitudes are dif ferent. Though f ar from universally embraced—witness the scandals of wed as an important corporate concern. pose? What do w e belie ve in? What principles should guide our beha vior? What do w e owe one another and the people w e deal with—our emplo yees, our customers, our in vestors, our communities? Such classic questions of ethics are being tak en seriously in many companies around the w not just b y older e xecutives in lar ge, estab lished f rms. Managers of recentl y pri vatized f rms in transitional economies, and e ven some f ar-sighted high-technology entrepreneurs, are also asking these questions. science,” has been def ned in man y w ays—“the science of values,” “the of norms,” “the science of right conduct, ” “the science of ob ligation,” “the general inquiry into what is good.” In all these y onto management’s agenda. In f act, a succession of def nitions hav row

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focus on norms of right and wrong has evolved into a much broader interest in or ganizational v alues y, w e hear that v alues, f ar from being irrelev actor in today’s business world. The g rowing interest in v alues has manifested itself in a v ays. In recent y ears, man y managers ha ve launched ethics pro grams, v alues initiativ grams in their companies. Some ha ve created cor porate ethics off ces or board-le vel ethics committees. Some have set up special task forces to address issues such as conf icts of interest, cor or electronic data privacy. Others hav tional programs to heighten ethical a wareness and help emplo yees inte grate ethical considerations into their decision processes. Man y ha ve de voted time to def ning or re vising their compan y’s business principles, cor porate v alues, or codes of conduct. Still others ha ve car ried out systematic eys to prof le their company’s values and chart their evolution over time. A sur vey of U .S. employees conducted in late 1999 and earl y 2000 found that ethics guidelines and training were widespread. About 79 percent of the respondents said their company had a set of written ethics guidelines, and 55 percent said their company of from 33 percent in 1994. Among those emplo yed by organizations with more than 500 members, the as 68 percent. Another study—this one of 124 companies in 22 countries—found that cor porate boards w ere becoming more acti ve in setting their companies’ ethical standards. More than three-quar ters (78 percent) were involved in 1999, compared to 41 percent in 1991 and 21 percent in 1987. Yet another study found that more than 80 percent of the Forbes 500 companies that had adopted v alues statements, codes of conduct, or cor porate credos had created or re vised these documents in the 1990s. During this in the Ethics Off cer Association, the professional or ganization of cor porate ethics off cers, g re y. At

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the be up from 12 at its founding 10 years earlier. In 2002, the association’s roster included ethics off cers from more than half the Fortune 100. More companies ha ve also under taken ef forts to strengthen their reputations or become more responsive to the needs and interests of their various constituencies. es seems endless. Among the most prominent ha ve been initiati ves on diversity , customer ser vice, health and safety, the en vironment, legal compliance, professionalism, cor eholder engagement, reputation management, cor , ork–family balance, sexual harassment, pri vacy , cor porate citizenship, cause-related mark eting, supplier conduct, involvement, and human rights. A fe w companies ha ve e ven be licly on their perfor mance in some of these areas. For a sampling of these initiati ves, see . To aid in these ef forts, man y companies have turned to consultants and advisors, whose numbers have increased accordingly. A few years ago, BusinessWeek repor ted that ethics consulting had become a billion-dollar business. Though perhaps some what e xaggerated, the estimate covered onl y a fe w se gments of the industr y, mainly misconduct prevention and investigation, and did not include cor porate culture and v alues consulting or consulting focused in areas such as di versity, the en vironment, or reputation management. Nor did it include the pub lic relations and crisis management consultants w ho are increasingl y called on to help companies handle v alues-revealing crises and contro versies such as product recalls, scandals, labor disputes, and en vironmental disasters. Thirty or 40 years ago, such consultants w ere a rare breed , and man all. Today, dozens of f rms—perhaps hundreds, if we count law f rms and the numerous consultants specializing in specif c issue areas—offer companies expertise in handling these matters. Guidance from nonprof ts is also widely available.

What’sG oingO n? on?” Why the upsurge of interest in ethics and v alues? Why have companies become more attenti ve to their stakeholders and more concerned about the norms that guide their own behavior? In the course of my teaching, research, and consulting over the past o decades, I have interacted with executives and managers from many parts of the world. In discussing these questions with them, I have learned that their motivating concerns are varied: • An Argentine e xecutive sees ethics as inte gral to transforming his company into a “world-class organization.” •

Thai executives wants to protect their company’s reputation for inte g responsibility from erosion in the face of intensif ed competition.

• A U.S. executive believes that high ethical standance. • An Indian softw are compan y e xecutive sees his compan y’s ethical stance as impor tant for building customer tr and retaining the best emplo y are professionals. • A Chinese e xecutive belie ves that estab lishing alue system and ser ving society are key components in building a global brand. • The e xecutives of a U .S. compan y see their ts as essential to building a decentralized or the world. • Two Nigerian entrepreneurs want their company to become a “role model” for Nigerian society. • A Swiss e xecutive belie ves the mark et will increasingly demand “social compatibility.” • An Italian e xecutive w ants to mak e sure his company sta ys clear of the scandals that ha ve embroiled others.

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READING FIGURE 1.1

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Transition

(APPLYING TO ALL ACTIVITIES AND FUNCTIONS) (APPLYING TO PARTICULAR ISSUES OR CONSTITUENCIES)

FOCUSED

COMPREHENSIVE

A SAMPLER Internally Oriented:

Ethics programs Compliance programs Mission and values initiatives Business principles initiatives Business practices initiatives Culture-building initiatives Cross-cultural management programs Crisis prevention and readiness

Externally Oriented:

Reputation management programs Corporate identity initiatives Corporate brand-building initiatives Stakeholder engagement activities Societal alignment initiatives

Employee Oriented:

Diversity initiatives Sexual harassment programs Work–family initiatives Workplace environment initiatives

Customer Oriented: Product safety initiatives Cause-related marketing Supplier Oriented:

Supplier conduct initiatives

Investor Oriented:

Corporate governance initiatives

Community Oriented:

Environmental initiatives Corporate citizenship initiatives Community involvement initiatives Strategic philanthropy

Issue Oriented:

Electronic privacy Human rights initiatives Anticorruption programes Biotechnology issues

• A U.S. executive believes that a focus on ethics and v alues is necessar y to allo w his compan y hile pursuing ve f nancial goals. • A U.S. e xecutive ans wers succinctl y and pragmatically, “60 Minutes. ”

These responses suggest that the turn to values is not a simple phenomenon. Individual executives have their own particular reasons for tackling this diff cult and sprawling subject. Even within a single compan y, the reasons often dif fer and tend to change o ver time. A compan y ma y launch an

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ethics initiative in the after math of a scandal for purposes of damage control or as par t of a le gal settlement. Later on, w hen the initiati ve is no

and environment and see that good ethics leads to a better company.” Siam Cement, one of the f rst Thai companies to publish a code of conduct, put its core v alues may emerge. into writing in 1987 so the y “would be more than This w as the patter just words in the air ,” as one e xecutive explains. Martin Marietta (now Lockheed Martin), which in In 1994, shor tly after the compan y w as named the mid-1980s became one of the f rst U.S. com- Asia’s “most ethical” in a sur vey conducted b y panies to estab lish w hat w ould later come to be Asian Business magazine, Chumpol called for a called an “ethics pro gram.” At the time, the entire thorough review of the published code. The newly defense industr y w as f acing harsh criticism for appointed CEO w anted to mak e sure that the practices collectively refer , waste, document remained an accurate statement of the and abuse,” and Congress was considering new company’s philosoph y and also to better under legislation to curb these e xcesses. The immediate stand whether the espoused values were a help or catalyst for Mar tin Marietta’s pro gram, ho wever, hindrance in the more competitive en vironment was the threat of being bar v of the 1990s. In 1995, the compan y reissued the contracting because of improper billing practices in code in a more elaborate for m but with its core one of its subsidiaries. principles intact. The re view had re vealed that According to Tom Y president while adhering to the code did in some cases put in 1992, the ethics pro gram be gan as damage the company at a competitive disadvantage, it was control. “When w e w ent into this pro gram,” he on balance a plus. F or example, it helped attract e e didn’ t anticipate the changes it yees and also positioned would bring about. . . . Back then, people w ould the compan y, w hose lar gest shareholder w as the have said, ‘Do y ou really need an ethics pro gram Thai monarchy’s investment arm, as a leader in to be ethical?’ Ethics w as something personal, the country. and you either had it or y ou didn’t. Now that’s all A v ery dif ferent e volution in thinking is changed. People recognize the value.” By 1992, the reported b y Azim Premji, chair man of Wipro ethics effort was no longer legall Ltd., one of India’ s leading e xporters of softw are program w as continued nonetheless. Ho wever, b y services and, at the height of the softw are boom then it had ceased to be a damage control measure in 2000, the countr y’s lar gest company in ter ms and was justif ed in ter ms of its business benef ts: of mark et capitalization. Wipro’s reputation for problem a voidance, cost containment, impro ved high ethical standards ref ects a le gacy that be gan constituenc ork life, and with Premji’s f ather, M.H. Hasham Premji, w ho increased competitiveness. founded the compan y in 1945 to mak e v egetable A similar e v ted b y oil. The elder Premji’s value system was based on Chumpol NaLamlieng, CEO of Thailand’s Siam little more than personal con viction—his sense Cement Group. Although Siam Cement’ s empha- of the right w ay to do things. Cer tainly it did not sis on ethics originated in a business philosophy rather than as a pro gram of damage control, and benef ts. In f act, his son noted , “It made no commercial sense at the time.” oid lawsuits When his f ather died in 1966, Azim Premji left and trouble with the pub lic, not something y ou Stanford University w raduate considered a w ay of business and self-conduct. ” to assume responsibility for the then-family-owned Today, he sa ys, “We understand cor porate culture enterprise.

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business, Premji found himself repeatedl y having to e xplain w hy the compan y w as so insistent on honesty when it w as patently contrary to f nancial interest. Ov er time, ho wever, he be gan to realize that the core values emphasized by his father actuall . They imposed a y’s activities while also helping it attract quality emplo yees, minimize transaction costs, and build a good reputation in the mark In 1998, as part of an effort to position Wipro as a leading supplier of softw are ser van intensive self-examination and mark et research exercise. The result w as a reaff rmation and rear ticulation of the core v alues and an ef fort to link them more closel y with the compan y’ the marketplace. Managers’ ning to v ref ect their compan y’s stage of de velopment. Executives of lar ge, w ell-established companies typically talk about protecting their compan y’s reputation or its whereas entrepreneurs are understandably more likely to talk about building a reputation or establishing a brand. For skeptics who wonder w hether a str uggling star t-up can af ford to wor alues, Scott Cook, the founder of are mak wer. In his view s culture with the right values is “the most powerful thing you can do.” “Ultimately,” sa more impor tant to the success or f ailure of y our company than y ou are. ou establish will guide and teach all y our people in all their decisions.” In addition to company size and developmental stage, societal f actors ha ve also pla yed a role in some managers’ turn to values. For example, executives in the United States are more lik ely than those w ho operate principall y in emer ging mark ets to cite reasons related to the la w or the media. This is not sur prising, considering the strength of these tw o institutions in American society and their relati ve w y emerging-markets countries. Since man y ethical

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standards are upheld and reinforced through the legal system, the een ethics and law is a natural one for U .S. executives. In other cases, e xecutives of fer reasons that mir ror highprof le issues f acing their industries or countries at a gi ven time—issues such as labor shor tages, demographic change, cor ruption, en vironmental problems, and unemployment. Antonio Mosquera, for example, launched a values initiative at Merck Sharp & Dohme Argentina as par t of a general improvement program he set in motion after being named managing director in 1995. Mosquera wever, that promoting cor porate ethics w as a par ticular priority for him because corruption w as a signif cant issue in the broader society. Despite the many ways executives explain their interest in values, we can see in their comments several recur ring themes. Seen broadl y, their • Reasons relating to risk management • Reasons relating to organizational functioning • Reasons relating to market positioning • Reasons relating to civic positioning Af what less salient but ne vertheless quite impor tant for reasons w e will come back to later , has to do with the idea simpl y of “a better way.” For some, the rationale lies not in some further benef t or consequence the y are seeking to bring about but rather in the inherent w orth of the behavior they are tr ying to encourage. In other words, the value of the behavior resides principally in the behavior itself. For these executives, it is just better trustworthy, inno vative, f air, responsib le, or good citizens. No fur ther e xplanation is necessar y an y ther explanation is required to justify hy more mone y is better than less. Source: From Value Shift, by Lynn Sharp Paine, Copyright © 2004, The McGraw-Hill Companies. Reproduced by permission of the publisher.

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Reading 1-2

An Ethical Hero or a Failed Businessman? Case Revisited Penelope Washbourne

Introduction Ethics in Boston in 1997 the guest speak er w as Aaron Feuerstein, the acclaimed CEO of Malden Mills, w ho brought tears to the e yes of sk eptical academics with his tales of the mill f re in 1995 and his generous actions to wards his emplo yees. I had written a case about him during the winter of 1996 meeting. After the meeting, I w as given a guided tour of the gleaming rebuilt f wrence, Mass., and w as duly impressed b y the state of the art manuf gy used to mak e that cozy f eece, Polartec, w ycled plastic. Aaron Feuerstein’s star continued to shine in the business press, and e ven in 2004, as a hero who paid his emplo yees for a number of months after the f re destroyed their jobs. As man y noted then and no w, here w as a true man of vir world of massi ve la yoffs such as those at AT&T and Sunbeam, and when compared with colossal failures in leadership in many huge corporations. er the years, with video clips from the national media, in m y business ethics courses and was subsequently told b the case had made a po w them. Maybe it w as the pictures of those desperatel y anxious mill workers with their tears and g responding to Feuerstein’s announcement after the f re that he was going to continue to pa y his workers for another month. “You’re a saint” said one. Or maybe it was Feuerstein’s own tears that m The case touched a deep ner ve: here w as a ers above

the bottom line. My goal in writing and teaching about this case w as to demonstrate that it is better to teach business ethics with e xamples of ethical leadership than to continue to focus on, as most of our case books do, the multiple f ailures in moral leadership in cor porate life. Ev en for merly exemplary companies can fall under an ethical cloud. Subsequently, though I read that Malden Mills had gone since the tenth year anniversary of the f re was in 2005, I decided to tak e another look at w hat the ef fect had been on the local community of Aaron F euerstein’s actions after the f re. My reading of the e vents that ha ve taken place since the f re raises an impor for teaching this tale of ethical vir tue. been the math? It would be nice to say that the gleaming new mill sav and that Aaron Feuerstein is still in char ge of his grandfather’s f rm, well loved b y his w orkers and local politicians for preser ving the one remaining industry in an area of high unemployment. It would be nice to sa y that not onl y is vir its own rew warded by the world. For Aaron Feuerstein and his f amily f rm, unfortunately this is not the case. The actual stor in real life. To describe it brief y: Aaron bor rowed mone y to rebuild the mill, be yond the mone y he w ould f nally recei ve from the insurance compan y. He built a lar ge f , counting on the e xpansion of his Polartec f eece lines and the continuation of his brand of fabrics. His debt was more than his f y business proved a failure and he decided to get out of it, cheap competition and an unseasonably warm winter cut into his Polartec sales and he had to declare

Chapter 1

uptcy in 2001. The f rm remained under banky protection until 2003, but Aaron lost control of the company and GE Capital, the main creditor with 16.6 percent, became its lar gest shareholder, with a dominant inf uence on the ne w board. In July 2004 the board hired a ne w executive. A new manufacturing operation has been opened in China. Jobs in Lawrence and nearby New Hampshire have declined. In the meantime, Aaron and his son Daniel with a g roup of inv keep jobs in the local communities, attempted to buy back the f rm. ere rejected. How indeed will I teach this case no w? Were Aaron’s actions after the f re vir to the local community blind him to the economic realities of the at the time and cause him to o v hole compan y in jeopardy? From a utilitarian perspective, did he do the right thing? as the long-ter m effect of I decided that I had to get close to the source and setts, and I w as able to inter view Aaron Feuerstein in his home in Boston. wed Aaron in November 2004, he said he felt he had failed.

Lawrence,Mas sachusetts In fall 2004, the main impression of Lawrence as a amiliar with depressed mill to as decay. The massive empty mill buildings along the Mer rimack Ri ver have forlor n signs for “Space Available,” as if the next high-tech boom w as going to transfor m this now vir ving business . businesses, e ven the Goodwill center w as shuttered. The one remaining open f acility was a large Headstart center with its brightl y colored plastic play structures. The impression w as that this must be a city that is heavily with federal grant monies for low income families. Though lar ge trash receptacles ready for collection lined the nar row residential streets the da y

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I w as there, the y did not contain the abandoned sof The local community newspaper, printed in Spanish and English, spok problem. The mayor w ver the shops in the main streets, to attract business downtown. Among the nail salons and the fe w ethnic food estab alone, remained a viable concern, Malden Mills Inc. Located next to the wn, one of the poorest neighborhoods, the mill is the only sizable employer in Lawrence, Massachusetts. Five hundred of its employees live in a f ve mile radius of the mill and many walk to work. It would be fair to say that the economic well-being of Lawrence and its nearb w Hamphire, depressed as the y are, is intimatel the well-being of the one remaining manufacturing facility paying union wages at an average rate in 2004 of $12.50 an hour , with benef ts. The unemplo a half to three times the state a verage for the last 20 years , betw een 10 and 15 percent since 1983. The academic standings of the local schools are the lowest in the state. My trip to La wrence ans wered m y question: Why did Aaron Feuerstein feel and still feel toda y such a f erce lo yalty and sense of ob ligation to wrence and its neighboring towns? What did it mean to those communities that he decided to rebuild the mill and committed to pay his emplo yees for se veral months after the f re? As he told me, the tears of the w orkers after the f re were not tears of gratitude towards him, but recognition that without the mill there w as nothing left for them, their future, or their community.

The 72,000 People of Lawrence and Their History This city calls itself the “city of immig

rants.” It

have lived in La wrence. It w as founded as a mill town in 1842 to estab lish woolen and cotton mills and to e xploit the ne w technology of w ater power

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along the s wift-f owing ri vers. The lar ge labor pool required for the f actories w as impor consisted lar gely of w omen and immig rants, w ho lived in dor mitories and boarding houses. At its een 1890 and 1915, there w ere 90,000 residents in Lawrence. Lawrence was the site of the famous “Bread and Roses” strike in 1912 w hen after nine w eeks of a strike for better conditions during a harsh winter , the company bosses brought the state militia out to attempt to force the 30,000 strikers into submission and pre vent them from shipping their children out to relati ves and sympathetic f amilies in other communities. Thus, over the y ears, La workers’ rights and for the right to or ganize unions. No w earlier generations of Scots and Irish and European immig rants ha ve been been replaced by Puerto Ricans and f rst-generation immigrants America. Their mill jobs allo w them ve languages, a rare option in high-pa ying emplo yment w here wledge of English is often a necessity. Though most of La wrence’s jobs ha ve disappeared as the mills fnally closed after World War II, Aaron Feuerstein’s commitment to continuing his rant, unionized to wn is unique. It stems from a reco gnition of the v alue of his o wn f amily’s histor y and his g randfather’s legacy. As a Hungarian Jewish immigrant in New Y , his grandfather sold dr y goods and e v y mo ved to Massagan the f amily f rm in 1907. Aaron remembers his roots and the histor y of earlier generations of immig rant labor w ho for med the economic engine that brought succeeding generations to a better w ay of life. His antipath y to shipping jobs South and to of fshoring manuf at the expense of domestic workers comes from a orked hard to build a future for their f amilies in this country. Though Aaron had indeed laid workers due to business conditions, nevertheless he believes we

owe these workers in this community an to perform on the job, for themselves and the community. obligation that has been car ried through three generations of Feuersteins towards their union workers and their communities in Massachusetts and Ne w Hampshire. Aaron spok e proudly of ne ver having had a strike over the years and of having tough but fair negotiations with the unions during his tenure in the company. wing of Aaron’s commitment to k eep jobs , the union leadership had hoped that the F euersteins w ts to re . Since the advent of the new company management, the union threatened a strik e last f all in No vember 2004, but f nally settled on a new contract. Aaron had resur rected himself once before when he w upt in the 1980s. His technological inno vations captured a ne w mark et in f Polartec for gar ments for outdoor enthusiasts. His work cult time. Once again he believed he could resurrect his company from the ashes. Could he do it again? Aaron’s sense of failure, at this point in his life (he w as 80 in 2005), pater nalistic though it ma y y have to do with failing to live up to the legacy of the f amily f rm that had been handed to him, failing the ver ailing to protect them from the cost-cutting strategies in which wages are just an expense.

The Business Strategy and Hope for Lawrence When f eece was invented it f in the market for garments that did not become wet with moisture and perspiration, as cotton did , but were wickable, allowing the person to sta y warm. Aaron’s strategy was to pursue research and de velopment and create high-end, high-quality products that could be reco gnized as a brand: “P olartec.” Since its f rst in vention the number of dif ferent

Chapter 1

weights, colors, and features has e ven designs for children’s ear. Aaron believed that Malden Mills could stay ahead of increasing competition of offshore manuf cation” of the industry by sta vation curve. Fleece was soon ever here, not just in high-qualets for climbers and winter spor ts enthusiasts, but in re gular ar ticles of clothing for adults and children, as well as b ets and throws. After the f re, e ven though one of his main customers, Lands’ End , initiall y sho wed suppor t and featured the story of the mill’s f re and Aaron’s actions to wards his emplo yees in its spring 1996 catalogue, Aaron ev y lost major customers, including Lands’ End, which sought other suppliers. Along with the inter ruption in suppl y, appar ently the Polartec brand did not ha ve the power in the general mark et, except in specialized high-end products, to withstand the f ood of cheaper goods coming from Asia. After the f re another of his product lines, jacquard upholstery velvet, proved to be unsuccessful were unwilling to pa y the premium for a branded fabric and in 1998, Aaron got out of that business. It represented about 50 percent of the compan y’s business at the time of the f re, and its production lines were hard hit by the f re and took longer to resume operation than the polarf eece lines. One business strategy implemented after the f re by one of the compan y’s former executives, Cesar Aguilar, w ho spent an uncomfor table weekend in w e training, is beginning to pay off for the company and for the community, ho wever. Malden Mills is suppl ying warm winter clothing to the troops in Afghanistan and Iraq as w ell as conducting research into ne w lightweight electronic high-tech f abrics that soldiers can w ear ne xt to their skin and that can monitor their vital signs and be of assistance in determining injuries. vation is a nextto-skin fabric that would prevent the growth of bacteria and odor for soldiers w ho are out in the f eld. The U v tec

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39

garments for 2005, a por tion of w hich goes to the garment manuf acturer. That f gure includes $1.5 million for research. y of hope for the company. Not only must all products made for the U.S. Armed Services be made in the United States, vations in ne w products designed for use can be developed into commercial applications in the In addition, according to a compan y spok esman the militar y business is not seasonal, w hich makes it easier to balance the workload. The militar y contract cur rently represents about 20 percent of Malden Mills’ business.

WhatW entW rong? vent such as the f

re, one’s w this

from personal e xperience, ha the Oakland Hills f re in 1991 w here almost 3,000 homes w ere destro yed and 24 people ultimatel y died. I think m y interest in this case cer tainly was inf uenced by having had this common experience. re, “post-traumatic distress” is an impor tant factor. Aaron even witnessed his f actory burning do math of the f re, the shock et major decisions that ha ve a long-ter m impact must be made immediately. Relations with f amily and friends are In Aaron’s case, he had a huge sense of responsibility for the injured w orkers, se veral of whom were badl and for those who risked their lives to save parts of the buildings that w ere not so hea vily engulfed. In addition, the f re happened just before Christmas. members of his o wn f amily w ho w orked in the company, opposed it, Feuerstein generously offered to pay his idled w orkers for the follo wing month, even though he w as not required to do so. He said he did not do it for the pub , but because he was f rmly convinced it was the right thing to do. But in hindsight, was it the right thing to do? Feuerstein renewed his pledge to his 1,500 employ As the ne ws

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Ethics and Business

spread of his actions he recei ved about $1 million in donations, from small to lar ge checks from all around the country. By the end of a month some of his operations w ere up and r unning again as the y y the f re to other locations. Some of the manuf acilities for Polartec had been spared. Was F euerstein’s generosity to his emplo yees a costl y decision that ultimatel y put his compan y in jeopardy? It cost about $15 million. One vie w is that b y itself it ma y not ha ve been a foolhardy decision, gi ven the g rowing business he w as in. Sales of Polartec had been growing by 50 percent anually at the time of the f re. w that if his business w as going to ha ve a chance to he was going to have to rely heavily on his workers to put in an extraordinar t to get him After three months the remaining workers who were still out of work were supported by unemplo had been donated. The outpouring of suppor t, both f nancial and in the pub lic arena, sur prised Feuerstein. He w as a pri vate man, an o wner of a small f amily f rm, little known outside of Ne w England, and no w all of a sudden he was in front of the cameras, making statements about the state of American business. He w as in vited to sit behind Hillar y Clinton at President Clinton’s State of the Union Address in January 1996. The names of Malden Mills and Aaron Feuerstein were in all the press and created a f ood of goodwill for the company. He was lauded not onl y for pa ying his w orkers after the f re, but for his immediate commitment to rebuild the factory in the same location. As he said so frequently in interviews after the f re, he and his father had not moved the operation to the South as many other mills did in search of cheaper labor in the 1950s and 1960s, so w hy w ould he abandon Lawrence now? He continues to believe that highly skilled labor can produce the best quality products, w n can dif ferentiate a compan y from its competition, and that there is still a place for manufacturing in this countr y. This commitment

earned him enor mous political suppor local politicians, the go vernor, Senators K ennedy and Kerry, and New Hampshire representatives.

The Decision to Rebuild At issue seems to be not the f act of rebuilding in La hich Aaron Feuerstein proceeded on this project. Aaron knew that he w y insured.” What w, w hat no claimant after a loss ws, is w hat the actual pa yout amount will be. He w w that for many months of negotiations with the insurer . At the point of a claim, ns from one of being, as it w ere, “in good hands” to one that is adv The insurer tries to k eep the settlement as lo w as possib le and the claimant w ants to replace the buildings that bur ned. The insurer AGI w as a tough ne gotiator, settling w ell after the ne wly rebuilt f actory had been completed in 1997. The f nal insurance settlement w as about $300 million, covering onl y 75 percent of the $400 million in rebuilding costs that F euerstein had bor rowed to put his factory in operation. Was Aaron’ aftermath of the f re one of an emotion-dri ven “survival instinct”? The f rm’s famous clock tower had been sa ved during the f re. How could Aaron not see that as a symbol of the f rm’s commitment to rise from the ashes? Was the idea of renting or reno vating f acilities, or scaling do wn the size, never seriousl y considered? Was the promise of all that cash that would allow him to replace aging equipment with brand ne w machines, to build a new state of the ar t f acility to deal with the o verw computerized methodolo gies, a license to spend more than he should? Even within the conte xt of rebuilding it w as clear that Aaron thought big and w anted the best. There w as dispute among the members of the board and with his o wn son about the scale of the rebuilding. The insurance cov

Chapter 1

that the buildings had to be rebuilt at all or require a minimal square footage, but Aaron opted for the best. He replaced almost all of the space that had been lost, anticipating that his P ould continue to grow, ev advising him to scale back the square footage. He later admitted that ma ybe his building plans had been overly e xtravagant, e ven to the point of buying new equipment, w hereas before the f re he w ould have bought used. he had leased space for some of his operations in wns, but no w it w as he w ho was to have e ned down. What was Aaron’s failure? Did he fail to anticipate the great gap betw een his rebuilding costs and his f nal insurance settlement? Did he fail to anticipate that in spite of g reat attention and support on one le vel from all the media, months of interruption of his suppl y would enable his competitors to gain an edge and win customers? Was his attention so focused on reco very from the f re and its after math, the insurance claims, and the la wsuits against the compan y from injured employees, that he failed to see the business risks? Was he impr udent or unluck y that a w arm winter depressed f eece sales just at the time his upholstery line was f oundering? Was Aaron Feuerstein trying to singlehandedly buck the inexorable pressure on the costs of manuf acturing and prices that eventually led the ne uptcy to a partnership with a mill in China? In 2004 this outsourced production w as at about 10 percent of production, but that f gure is lik ely to rise due to the e xpiration of the te xtile tarif fs with China in January 2005.

TheLe gacy Under the special ar uptcy settlement, Aaron and his sons had an oppor to bid on the f rm for another y ear, but their bids were rejected b y the cur rent o roup of f nancial in vestors, along with the Impor t-Export Bank, w hich had guaranteed a loan, had plans to develop the e xcess mill space into mix ed income

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housing units and retain jobs in the local area. Though Aaron at 79 had sur gery on his hear t in July 2004, his deter mination to re gain control over the compan y remained undimmed. He feared it w y and the original vision of in vesting in inno vative products that require a highly skilled workforce would be lost. He did not w ant to r un the mill as CEO, but he w rect the le gacy of the family f r pro , well-paying jobs to the people of Massachusetts and New Hampshire. If it w ere dependent solel y on the force of his personality , it w ould ha ve happened. Aaron is an obstinate man. The local politicians w ere supporting him, hoping that he could be gi ven the chance to preserve the jobs in the local area. Since Aaron f family fr es that he has. But as a nalist at the Boston Globe assures him, “You have won, Aaron, no matter w hat happens!” His ethical legacy is independent of whether or not his family regains control of Malden Mills. y have f the mill in Lawrence and gave the community hope amilies. The ne w o rently repeat their commitment to the community, though the y state that more jobs will probably be of What Aaron did was indeed an example of virtue ethics since it w as in his character to be concerned for his emplo yees. Examples of his prior support for them, such as gi ving asssistance to help buy a house or send a child to colle ge, were recounted by workers after the f re. However, what Aaron did in pa ying his w orkers after the f re was s “Ethic of Care,” shaped b y the impor tance of preser ving relationships. faced with the decision of what he could do for his w orkers he ask ed himself the question, not what w hat was the most loving thing to do? This act has called leaders to consider again the emplo yment relationship between an enterprise and its workers, not as being

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exclusively an economic one, but also a personal and communal one. Aaron Feuerstein’s acts, which put his w orkers’ needs abo ve his o wn economic self-interest, w ere g rounded in his religious convictions as an or thodox Je w. He belie ves he has a responsibility to them as individuals and to the common good. He had the unique chance to sho w that rather than pursuing the course of the moral minimum, he chose the moral maximum. As he said to me, “ udg‘I have been the CEO of a compan After your basic needs ar e met, w hat is the point of all that , if not to do some g ood? . . . on Judgment Day what do you amount to?” In the retail outlet at Malden Mills among the

Aaron F y an employee. The other w as a w all hanging embroidered b y Aaron for his support of them. What is his legacy? He is clearly loved. Aaron is a unique businessman: He li ves modestl y thumbed Bib o volumes of Shakespeare’s comedies and tragedies. He reads them frequently. Shakespeare’s best tragic heroes, their defeat at the hands of f ate is not the end. The truth of their life lives on. Source: Copyright © Penelope Washbourne. Used by permission of the author.

that caught m y attention. One w as a por trait of

Reading 1-3

How to Write about Africa Binyavanga Wainaina Always use the w ord ‘ Africa’ or ‘Safari’ in y our title. Subtitles ma y include the words ‘Zanzibar’, ‘Masai’, ‘Zulu’, ‘Zambezi’, ‘Congo’, ‘Nile’, ‘Big’, ‘Sk y’, ‘Shado w’, ‘Dr um’, ‘Sun’ or ‘Bygone’. Also useful are w ords such as ‘Guerrillas’, ‘Timeless’, ‘Primordial’ and ‘T ribal’. Note that ‘P eople’ means Africans w ho are not black, while ‘The People’ means black Africans. Never have a picture of a w ell-adjusted on the cover of your book, or in it, unless that African has won the Nobel Prize. An AK-47, prominent ribs, naked breasts: use these. If y ou must include an African, make sure you get one in Masai or Zulu or Dogon dress. In y our te xt, treat Africa as if it w ere one country. It is hot and dusty with rolling g rasslands are starving. Or it is hot and steamy with very short people who eat primates. Don’t get bogged do

with precise descriptions. Africa is big: f countries, 900 million people w ho are too busy starving and dying and w arring and emig rating to read y our book. The continent is full of deser ts, jungles, highlands, sa vannahs and man y other things, but your reader doesn’t care about all that, so k eep y our descriptions romantic and e vocative and unparticular. Make sure y ou show how ve music and rh other humans eat. Do not mention rice and beef and w ey-brain is an African’s cuisine of choice, along with goat, snak e, worms and g rubs and all manner of game meat. Make sure you show that you are able to eat such food without f inching, and describe ho w y ou lear n to enjo y it—because you care. Taboo subjects: ordinar y domestic scenes, lo ve between Africans (unless a death is in volved),

Chapter 1

references to African writers or mention of school-going children w ho are not suf fering from ya ws or Ebola fe ver or female genital mutilation. sotto v oice, in conspirac I-expected-somuch tone. Establish earl impeccable, and mention near the be ginning how much you love Africa, how you fell in love with the place and can’t live without her. Africa is the onl y continent you can lo ve—take advantage of this. If y ust yourself into her w gin forests. If y ou are a w oman, treat who wears a bush jack sunset. Africa is to be pitied , worshipped or dominated. Whichever angle y ou take, be sure to lea ve our inter vention and your important book, Your African characters ma y include nak ed warriors, loyal servants, diviners and seers, ancient wise men li ving in her mitic splendour. Or cor rupt politicians, inept pol ygamous tra vel-guides, and ou have slept with. The Loyal Servant always behaves lik e a se ven-year-old and needs a f rm hand; he is scared of snak es, good with children, and al ways in volving y ou in his comple x The Ancient Wise Man al ways comes from a noble tribe (not the money-grubbing has rheum y e yes and is close to the Ear th. The Modern at man who steals and works in the visa off ce, refusing to gi ve work permits to qualif ed Westerners who really care about Africa. He is an enem y of de velopment, always using his gov e it diff cult for pragmatic and good-hearted expats to set up NGOs or Le gal Conservation Areas. Or he is an Oxford-educated ned serial-killing politician in a Savile Row suit. He is a cannibal w ho likes Cristal champagne, and his mother is a rich witch-doctor who really runs the country. Among y ou must always include The Star ving African, w ho w camp nearly nak olence of the W ef elids and

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pot bellies, and her breasts are f at and empty. She must look utterly helpless. She can have no past, no history; such diversions r Moans are good. She must ne ver sa y an about herself in the dialo xcept to speak of her (unspeakable) suf warm and motherly woman who has a rolling laugh and who is concerned for your well-being. Just call her Mama. Her children are all delinquent. These characters should buzz around y our main hero, making him look good. Your hero can teach them, bathe them, feed them; he carries lots of babies and has seen Death. Your hero is y ou (if repor tage), or national celebrity/aristocrat who now cares for animals (if f ction). Bad Western characters ma y include children of Tory cabinet ministers, Afrikaners, emplo yees of the W When talking about e xploitation by foreigners mention the Chinese and Indian traders. Blame the West for Africa’ do not be too specif c. Broad brushstrok Avoid having the African characters laugh, or str uggle to educate their kids, or just make do in mundane circumstances. Have them illuminate something about Europe or America in Africa. African characters xotic, lar ger than life—but gue, no conf icts or resolutions in their stories, no depth or quirks to confuse the cause. Describe, in detail, nak ed breasts (y oung, old , conservativ y kind of genitals. , naked dead bodies. And especially naked dead bodies. Remember, an y w ork y ou submit in w hich people look f lthy and miserab le will be refer red to as the ‘real ou want that on y our dust jack et. Do not feel queasy about this: y ou are tr ying to help West. The biggest taboo in writing about w dead or hite people. Animals, on the other hand as w ell rounded, comple x characters. They speak (or grunt while tossing their manes proudly) and

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have names, ambitions and desires. They also have family values: see how lions teac h their c hildren? Elephants are caring, and are good feminists or dignif er, ever say anything ne gative about an elephant or a gorilla. Elephants ma y attack people’ s proper ty, destro y their crops, and e ven kill them. Always tak e the side of the elephant. Big cats ha ve pub lic-school accents. Hy enas are f air game and ha ve v aguely Middle Eastern accents. Any short Africans who live in the jungle or deser t may be por trayed with good humour (unless they are in conf ict with an elephant or chimpanzee or gorilla, in w hich case they are pure evil). vists and aid w orkers, conservationists are Africa’s most impor tant people. Do not offend them. You need them to invite you to their 30,000-acre game ranch or ‘conser vation area’, and this is the only way you will get to interview the celebrity activist. Often a book cover with a heroic-looking conservationist on it works magic for sales. Anybody w hite, tanned and w earing ho once had a pet antelope or a f arm is a conservationist, one w Africa’s rich

heritage. When interviewing him or her, do not ask ho y hav money the y mak e of f their game. Ne ver ask ho w much they pay their employees. Readers will be put off if you don’t mention the light in Africa. And sunsets, the a must. It is al ways big and red. There is always a . Wide empty spaces and game are critical— Africa is the Land of Wide Empty Spaces. When writing about the plight of f ora and f auna, mak e sure you mention that Africa is overpopulated. When your main character is in a deser t or jungle living with indigenous peoples (an ybody shor t) it is oka y to mention that Africa has been se verely depopulated by Aids and War (use caps). You’ll also need a nightclub called Tropicana, where mercenaries, e vil nouv eau riche Africans rillas and expats hang out. Always end y our book with Nelson Mandela saying something about rainbo ws or renaissances. Because you care. Source: Reprinted with permission of the author, from Granta, V. 92 (Winter 2005), p. 1.

Chapter

2 EthicalD ecision Making: Personal and Professional Contexts This above all: to thine o Thou canst not then be false to any man.

w, as the night the day,

To be nothing but yourself, in a world which is doing its best to make you everybody else, means to f ght the hardest battle which any human being can f ght, and never to stop f ghting.

P row beyond personal responsibility. The more people lear y accountable for their lives, the more freedom each of us can enjoy and the more fulf lling all of our lives will be.

Remember always that you not only have the right to be an individual, you have an obligation to be one.

Do not believe in an y because you have heard it. Do not believe in an y because it is spoken and rumored by many. Do not believe 45

Opening Decision Point

What Would You Do?

in anything simply because it is found written in your religious books. Do not believe in anything merel our teachers and elders. Do not believe in traditions because they have been handed down for many generations. But after observation and analysis, when you f nd that anything agrees with reason and is conducive to the good and benef t of one and all, then accept it and live up to it. Buddha 46

Chapter 2

ersonal and Professional Contexts 47

ChapterO bjectives After reading this chapter, you will be able to: 1.

Describe a process for ethically responsible decision making.

2.

Apply this model to ethical decision points.

3.

Explain the reasons why “good” people might engage in unethical behavior.

4.

Explore the impact of managerial roles on the nature of our decision making.

Introduction m of practical reasoning, a process for decision making in business. Putting ethics into practice requires not simpl y decision making, but accountable decision making. Chapter 1 also suggested that, even if a person does not consciousl a decision, her or his o wn actions will in volve making a choice and taking a stand. If y ou f nd a lost iP ou cannot a void making an ethical decision, whether by act or omission. Whatever y ou will have made a choice that will be e valuated in ethical ter ms and have ethical implications. The previous chapter pro vided a general conte xt for thinking about business , we be el by e xamining ethical decision making as it occurs in e veryday life and within business contexts. We will examine various elements involved in individual decision making and apply those concepts to the decisions individuals make every day in business. This chapter also e xamines various ways in w hich ethical decision making can go wrong, as well as the ways in which effective business leaders can model the most effective ethical decision making.

A Decision-Making Process for Ethics

1 OBJECTIVE

Let us consider an initial sk etch of an ethical decision-making process. How would you decide what to do in the iPod case? First, you might wonder how the iPod ended up under the desk. Was it lost? P erhaps someone intentionall y discarded the iP od. Would that f act make a signif cant difference in the ethical judgment that you would make? Or, suppose the person who discovered the iPod y saw it f s backpack. Would that mak in your judgment about that person? The f rst step in making decisions that are ethically responsible is to determine the facts of the situation. Making an honest ef fort to understand the situation, to distinguish facts from mere opinion, is essential. Perceptual differences sur rounding ho w indi viduals e xperience and understand situations can e xplain man y ethical disag reements. Kno wing the f acts and

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carefully re viewing the circumstances can go a long way towards resolving disagreements at an earl y stage. F or e xample, disag reements about Aaron Feuerstein’s responsibilities at Malden Mills, discussed in a Decision P oint in chapter 1, might depend on the f acts about local unemplo yment rates. One person might think that his decision does not pose a signif cant ethical question because that person perceives that the employees involved could always get other jobs. Someone else might hold the opposite vie w because they have a perception of high unemployment rates, which will mean that few employees will, in fact, be able to f nd other jobs. What facts w making a decision? Suppose y ou already owned an iPod. Would that make a difference? Suppose y w who sat at the desk in the previous class. Imagine that, in fact, the iPod had been in a place not easil y seen and y ou had obser ved it there o ver the course of se veral days. Suppose the iP od did not w ork and, instead of being discovered under neath a seat, y ou found it in a w astebasket. How would y our decision change as an y of these f acts changed? Can y which w hat looks lik e an ethical disag ns out to be a disag reement over the f acts? Considering another technolo gy-based area of challenge, w ould a situation that involved sharing copyrighted music f les over email be an ethical disagreement or a disagreement over the facts? Given the general impor tance of deter mining the f acts, there is a role for science (and theoretical reason) in an y study of ethics. An ethical judgment made in light of a diligent determination of the facts is a more reasonable ethical judgment that one made without re gard for the f acts. A person w ho acts in a way that is based upon a careful consideration of the facts has acted in a more ethicall y responsib le w ay than a person w ho acts without deliberation. The sciences, and perhaps especially the social sciences, can help us deter mine the f acts sur rounding our decisions. F or a business e xample, consider what facts might be relevant for making a decision regarding child labor. Consider how the social sciences of anthropology and economics, for example, might help us understand the f acts surrounding employing children in the w orkplace within a foreign countr y. Applying this strate gy to a business operation would encourage business decision makers to seek out perhaps alternative or somewhat less traditional methods of gathering f acts to ensure that she or he has compiled all of the necessar y data in processing the most ethical decision. A second step in responsib le ethical decision making requires the ability to recognize a decision or issue as an ethical decision or ethical issue. It is easy y by a f ailure to reco gnize that there is an ethical component to some decisions. the ethical issues involved is the next step in making responsible decisions. Certainly, the f rst and second steps might arise in re verse order, depending on the circumstances. At times, y ou have a selection of f acts that gi ve rise to a par wever, just as lik ely, there may also be times when you are presented with an issue from the star t, say,

Chapter 2 Ethical Decision Making: Personal and Professional Contexts 49

when a colleague asks you for guidance with a challenging ethical predicament. The issue identif cation, therefore, becomes the f rst step, while fact gathering is a necessary step number two. In the iP y discovered a lost item and k ept it. He denies that this is e ven an ethical issue at all because, after all, he did not steal the iP od. ference between stealing and f nding a lost item? Similarl y, in man y business situations, w hat appears to be an ethical issue for one person will be percei ved as a simple f nancial decision by others. How does one deter mine that a question raises an ethical issue at all? business decision become an ethical F e need to recognize that “business” or “economic” decisions and ethical decisions are not mutually exclusive. Just because a decision is made on economic g rounds does not mean that it does not in volve ethical consider ations, as well. Being sensitive to ethical issues is a vital characteristic that needs to be cultivated in ethically responsible people. Beyond sensitivity, we also need to ask ho olved—what are the implications for stakeholders? Consider ho w ethics and economics intersect in connection with e xecutive compensation, for example. In the beginning of 2009, a number of pub licly held corporations opted to per mit shareholders to of fer advisory votes on the amount of executive compensation. Though Cong ress considered mandating this shareholder involvement,1 r tive action by implementing non-binding shareholder guidance on its own. In the face of senior e xecutives walking awa porate disasters with so-called golden parachutes, Intel did not w ant to mak ws with more of the same. Imagine how its choice played out, after other f rms, such as Merrill L took as much as an $8.4 billion write-do wn of securities back ed b mortgages w hile ensuring a comfor table landing for its outgoing CEO , Stan O’Neal, who went home happ y with a $250 million bonus. As you may recall, chapter 1 described ethical v alues as concer ned with the impartial promotion of human w ell-being. To the de gree that a decision af fects the w ell-being—the happiness, health, dignity, integrity, freedom, respect—of the people in volv is a decision with ethical implications. Shall w e also consider then the en vironThere are often ethical implications for these entities, as well. In the end , it is almost impossib le to conceive of a decision w e might make that does not have at least some impact on the well-being of another. Accordingly, one could suggest that practicall y all of our decisions ha ve ethical implications. In business conte xts, it can be easy to become so in volved in the f nancial aspects of decisions that one loses sight of the ethical aspects. P erhaps the Merrill Lynch board did not realize ho w the abo ve CEO bonus might appear under troubling circumstances at the time it created the compensation package. Some writers ha ve called this inability to reco gnize ethical issues normative myopia, or shor tsightedness about v alues.2 Nor mative myopia does not occur

50 Chapter 2

Ethical Decision Making: Personal and Professional Contexts

Reality Check

Is There an Ethics of Writing Papers?

Perhaps the most common ethical issue that students and teachers confront involves plagiarism. In fact, 36 percent of high school students in a 2008 survey of almost 30,000 students in the United States said that they used the internet to plagiarize an assignment.4 From the academic perspective, there is no more serious offense than plagiarizing the work of others. Yet, many students seem honestly surprised to learn that what they believed was research is interpreted as unethical behavior by their teachers.5 Many students rely on Internet sources while writing their school papers. It is very easy to “cut and paste” sections of an online source into one’s own writing assignment. On one particular Web site, users can post a question with which they are struggling and identify the amount they are to pay for an answer. then write up a custom lesson that answers the questions posted in order to receive payment. The Web site claims it does not help the student cheat; instead, it is simply offering an online tutoring service. It contends that

THE GLOBAL PERSPECTIVE

Web site’s academic honesty policy in order to use the Web site’s services. No doubt, some of this is intentional cheating, such as when a student downloads or purchases an entire paper or answer from a “tutor” or other Internet source. But, in many cases, students seem honestly perplexed that their teacher treats an unattributed “cut and paste” passage as cheating. Few teachers have escaped situations in which they have had to explain to a student why this practice is unethical. Such cases are not rare. People often make bad ethical decisions because they fail to understand that there is an ethical issue involved. Typically, they have not thought through the implications of their decision and have not stepped back from their situation to refl ect on their choice and to consider their decision from other points of view. Often, they are simply too involved in the immediate situation to think about such things. We can think of such condition as “normative myopia” or “inattentional blindness.”

• Across the 19 countries included in the poll, 55 percent of respondents said cheating in business deals was more common than 10 years ago, while only 7 percent said it was less common.

A 2008 survey commissioned by the Wall Street Journal of almost 20,000 people from 19 countries predictably found that the acceptability of business practices depends in part of local culture.6 However, the study also found that, there is a growing concern about cheating in general—in many areas of our personal and professional lives. The increase is blamed, in part, on enhanced competition and greater inequalities. It is also laid at the feet of those who choose not to report these unethical or inappropriate practices to those who might be able to stop them; the study pointed to more opportunities to cheat without suffering the consequences.

Points of note:7 • When it comes to cheating, in business deals, on taxes, or on the playing fi eld, people often point a fi . European survey respondents (10 per selves (40 pe

• -

• The Swedish (19 percent) and Dutch (12 percent) respondents who admitted to cheating on their taxes showed a remarkable level of honesty about their dishonest ways. • Forty-eight percent of respondents around the world said cheating on taxes was more common today than 10 years ago, while 10 percent of respondents said it was less common.

Chapter 2 Ethical Decision Making: Personal and Professional Contexts 51

Reality Check

Bounded Ethicality

Bounded ethicality is exacerbated by the demands of executive life, which causes an overreliance on intuition rather than on intentionaldel iberation. Max Bazerman, “Why We Aren’t as Ethical as We ThinkW eA re”

Whichm eanst hat: • More time for ion ⫽ less likely to engage in inappropriate behavior (intentional deliberation) • No time for ion ⫽ we do things we might regret! (overreliance on intuition) Source: .

only in business. (See the Reality Check, “Is There an Ethics of Writing Papers?”) Bazerman and Chugh similarl y w inattentional blindness, which they suggest results from focusing f ailures.3 If we happen to focus—or if w e are told specifcally to pa y attention to a par ticular element of a decision or e vent—we are likely to miss all of the sur rounding details, no matter ho w obvious. These focusing failures then result in a moment w here we ask ourselv es, “How could I have missed that?” You may recall speaking on a cell phone w hile driving and perhaps missing a highwa y mistake. The prob lem is that w hen w ail to focus, Bazerman and Chugh warn that we may fail to see key information that will lead us to success or pre vent unethical beha vior; we may fail to use the infor mation because w w it is rele vant; or w e may be a ware, but w e might f ail to contribute it to the g roup. Any of these breakdo wns can ha ve disastrous or dangerous consequences. (See Reality Check, “Bounded Ethicality.”) Bazer y w hich ethical issues might change blindness. This omission occurs w hen decision makers fail to notice g radual changes o ver time. They offer the e xample of the Arthur Andersen auditors who did not notice how low had fallen in of its unethical decisions. One of the means b y which to protect against these decision risks is to ensure that decision mak processes. The researchers repor t that g roup input— any other input—is almost alwa e factor since individuals collectively can possess and utilize more information than any single person. The third step in volved in ethical decision making involves one of its more critical elements. W by a decision, the people often called stakeholder s. “Stakeholders,” in this general sense, include all of the g roups and/or indi viduals af fected b y a decision, policy or operation of a f rm or indi vidual. (See F .) Examining issues from a v ves other than one’ s own, and other than w hat local conventions suggest, helps mak e one’s decisions more reasonab le, accountable,

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FIGURE 2.1 Stakeholder Map Werhane

and responsible. y row and personal point of vie w vir y guarantees that w e will not full y understand the Making decisions from a narrow and personal point of view likewise ensures that we are liable to make a decision that does not give due consideration to other persons and perspectives. xercise for considering the ef fects of a decision on others is to shift one’s role. Rather than being in the position of the person who discovers the iP hat would you think of this case if y ou were the person who lost it? How does that impact your thinking? What would your judgment be if you were the who was asked for advice? A long tradition in philosophical ethics argues that a k ey test of ethical le gitimacy is w hether a decision w ould be acceptab le w of all par ties in volved. If y ou could accept a decision as legitimate, no matter w hose point of vie w you take, that decision is lik ely to be fair, impartial, and ethical. If y wledge that you would not accept the legitimacy of keeping the iPod if you were the person who lost it rather than the person who found it, then that is a strong indication that the decision to keep it is not a fair or ethical one. As an example, global mining and extraction company BHP Billiton conducts a comprehensive stakeholder exploration process and then posts the results of this analysis on the Inter net in order to demonstrate a commitment to transparenc y to its stakeholders.8 It def nes its k ey stakeholders as “people w ho are adv ersely

Chapter 2 Ethical Decision Making: Personal and Professional Contexts 53

Reality Check

With Friends like These . . .

Is Aaron Feuerstein a model for every business leader? Unfortunately, the Malden Mills case did not have a completely happy ending. Initially, all went well. Malden Mills was able to rebuild its factory and reopen sections within a year. Employees came back to work and the community seemed to recover. But Malden Mills could not fully recover. Insurance covered only three-fourths of the $400 million cost of rebuilding and by 2001 Malden Mills filed for bankruptcy protection. During the summer of 2004, Malden Mills emerged from bankruptcy; but, its board of directors was now controlled by its creditors, led by GE Commercial Finance Division.

The new board replaced Aaron Feuerstein as CEO and board chairman, although he retained the right to buy back the controlling interest if he could raise sufficient financing. In October 2004, the board rejected Feuerstein’s offer to buy back the company. In response to the company’s contract offer that included cuts in health care benefi representing the remaining 1,000 workers at Malden Mills voted to authorize a strike in December 2004, the first in company history.

or positively impacted by our operations, those w ho have an interest in w hat we do, or those who have an inf uence on what we do”; and then it requires all of its locations to identify their key stakeholders and to consider their expectations and concerns for all operational acti vities across the life c ycle of operations. “Sites are also required to specif cally consider any minority groups (such as indigenous groups) and an y social and cultural f actors that ma y be critical to stak eholder engagement.”9 In an ef fort to describe in detail its engagement process, a por tion of spreadsheet that outlines BHP Billiton’ s thought process is included in Exhibit 2.1. Both the readings, “Managing for Stakeholders” by R. Edward Freeman and “What Stak eholder Theory Is Not” b y Robert Phillips, et al., elaborate on stakeholder theor y with additional e xamples, benef ts, and some cautions to its analysis. Consider Aaron F euerstein’s decisions on the night of his f actory f re, as described in the Decision P oint in chapter 1. In his position, some people might think f re w The f nancial wner and his family was seriously threatened by the f re; but a decision that considered onl y the o wner’s point of vie w would not be a responsib le decision. The f re also had a g reat impact on the li ves of emplo yees, thousands of w hom w ere about to lose their onl y source of income. In addition, the f re would hav harmed b le to an y fur ther economic do wnturn. Customers w ve ery stakeholder ere undeserved. ault; yet, all

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ersonal and Professional Contexts

stood to suffer serious harms. The Reality Check, “With Friends like These . . . ,” explores later implications. The fact that many decisions will involve the interests of multiple stak eholders also helps us to understand a major challenge to ethical decision making. The very f v decisions often in volve dilemmas. Each alter native will impose costs on some stakeholders and benef ts to others. Making a decision that benef ts one g eholders will be denied benef ts. Once w e ha ve e xamined the f acts, identif ed the ethical issues in volv and identif ed the stakeholders, we need to consider the available alternatives. Creativity in identifying options—also called “moral imagination” —is one element that distinguishes good people who make ethically responsible decisions from good people w ho do not. 10 It is impor tant not onl y to consider the ob vious options with re gard to a par ticular dilemma, but also the much more subtle ones that might not be e vident at f rst blush. viewing the Malden Mills circumstances, ask yourself how many people would have even thought about paying employees while the f actory was being rebuilt. Aaron Feuerstein utilized moral imagination in doing so.

EXHIBIT 2.1 BHP Billiton’s Stakeholder Relationships

eholders2008.pdf

mission.

Chapter 2 Ethical Decision Making: Personal and Professional Contexts 55

Consider

vering a lost iP od. One person

owner are slim and that, if she does not keep it, the next person to discover it will make that decision. Another person might be ab natives beyond those choices. F or e n early for the ne xt class to see who is sitting at the desk, or she could f nd out who teaches the previous class wner. Moral imagination might be something as simple as checking in a lost and found depar tment. How would ent out of their way to return lost items rather than keeping them for their own use? The ne xt step in the decision-making process is to compare and w eigh the alternatives— create a mental spreadsheet that e valuates the impact of each alternative y ou have de vised on each stak eholder y ou def ned. Perhaps the most helpful w ay to accomplish this task is to tr y to place oneself in the other person’s position, as discussed abo ve. Understanding a situation from another’s point of view, making an effort to “walk a mile in their shoes,” contributes signif cantly to responsib le ethical decision making. Weighing the alternatives will involve predicting the likely, the foreseeable, and the possible consequences to all the relevant stakeholders. A critical element of this evaluation will be the consideration of w ays to mitigate, minimize, or compensate for any possible har mful consequences or to increase and promote benef cial consequences. Ethicists sometimes ask the decision mak er to consider w hether he w ould feel proud or ashamed if The Wall Street Journal (or whatever is your relevant daily newspaper) printed this decision as a front page ar ticle, or w hether he could explain it to a 10-y ear-old child so the child thinks it is the right decision, or whether it will stand the test of time. Note that, in the iPod case, the student was described as looking around to see if an yone else noticed his discovery. Would your behavior change if other people knew about it? The point of this e xercise is to reco gnize that a full y responsib le and ethical decision should be e xplainable, defensible and justif able to the entire range of stak eholders in volved. Typically, it is the ir responsible decisions that w e wish to keep hidden. (See Reality Check, “The Ultimate Reco gnition of Impact on Stakeholders.” ) But consequences or justif cations are not the only means for comparing alternatives. Some alter natives might concer n matters of principles, rights or duties that override consequences. Aaron Feuerstein believed that the long-ter m loyalty of his emplo y Within business settings, indi viduals ma y often ha ve specif c duties associated with their position. A purchasing manager for a lar associated with her role that directs her to a void conf icts of interest in dealing with suppliers. Are duties associated with company codes of conduct, business roles, or legal duties involved? Perhaps guidance is available in

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Reality Check

The Ultimate Recognition of Impact on Stakeholders

Excerpt from transcript of Bernard Madoff’s statement to the court during his sentencing, as provided by the court (June 29, 2009):11 Your Honor, for many years up until my arrest on December 11, 2008, I operated a Ponzi scheme through the investment advisory side of my rst opportunity to publicly speak about my crimes, for which I am so deeply sorry and ashamed. As I engaged in my fraud, I knew what I was doing was wrong, indeed criminal. When I began the Ponzi scheme I believed it would end shortly and I would be able to extricate myself and my clients from the scheme. However, this proved difficult, and ultimately impossible, and as the years went

by I realized that my arrest and this day would inevitably come. I am painfully aware that I have deeply hurt many, many people, including the members of my family, my closest friends, business associates and the thousands of clients who gave me their money. I cannot adequately express how sorry I am for what I have done. I am here today to accept responsibility for my crimes by pleading guilty and, with this plea allocution, explain the fraud . . . Source: Associated Press, http://www.google.com/ hostednews/ap/article/ ALeqM5hT

specif c circumstances from these sources or others (see Guidance?” ) One additional factor in comparing and weighing alternatives requires consideration of the ef fects of a decision on one’ s own integrity, vir . Understanding one’s o y a role in decision making. By all accounts, Aaron Feuerstein w in many ways, could not have acted differently than he did. A responsible person will ask: of person would make this decision? kind of habits would I be de veloping by deciding in one w ay rather than another? What type of corporate culture am I creating and encouraging? Ho w would I, or my family, ho decides in this way? Is this a decision that I am willing to defend in public?” Such questions truly go to the heart of ethical business leadership. An honest person might not e ven think about retaining the iP od; keeping it for oneself is simply not an option for such a person. Once you have explored the abo ve variables, it is time to make a decision. However To be accountable in our decision making, it is not suff cient to deliberate o ver this process, onl y to later thro w up our hands once the decision is made: “It’ s out of m y hands no w!” Instead, we have the ability as humans to lear n from our e xperiences. That ability creates a responsibility to then e valuate the implications of our decisions, to monitor and learn fr om the outcomes, and to modify our actions accordingl y w hen

Chapter 2 Ethical Decision Making: Personal and Professional Contexts 57

Reality Check

Seeking Guidance?

Each time you are honest and conduct yourself with honesty, a success force will drive you toward greater success. Each time you lie, even with a little white lie, there are strong forces pushing you toward failure. Joseph Sugarman I believe that every right implies a responsibility; every opportunity, an obligation; every possession, a duty. John D. RockefellerJ r. Men of integrity, by their existence, rekindle the belief that as a people we can live above the level of moral squalor. We need that belief; a cynical community is a corrupt community.

There is nothing noble about being superior to some other man. The true nobility is in being superior to your previous self. Hindu Proverb I hope that my achievements in life shall be these— that I will have fought for what was right and fair, that I will have risked for that which mattered, and that I will have given help to those who were for what I’ve done and who I’ve been. C. Hoppe

JohnW . Gardner

2 OBJECTIVE

faced with similar challenges in the future. The Decision Point, “Applying the Decision-Making Model,” gives us a chance to put this decision-making process into practice. The reading b y Bo wen McCo y, “P arable of the Sadhu, ” demonstrates this deliberative process. McCoy reviews his decision making after the fact and evaluates the implications of his decision, reco gnizing the responsibility that each participant had for the outcome. While the top of a mountain might seem quite a distance from the comfor t within which you might be reading this te xt, McCoy suggests that the time to f rst consider w hat we might do, w hen and w here to take a stand, is not really the top of that mountain but right here in this comfor t zone. The group may have overlooked creative options, not spent the time necessary to consider all stak eholders, or f ailed in other w ays. Instead, it is much more effective to ha ve the time and space in w hich to consider these questions now, before w e are faced with them, than w hen they become ur gent and w e ” not the best environment for our high quality decision making. e describe in the ne xt chapter will help us f esh out and elaborate upon this decision process. Other approaches to ethically responsib le decision making are possib le; and this approach will not guarantee one single and absolute ans wer to e v ful be ginning in the de velopment of responsib le and ethical decision making. (See F

Decision Point

58

Applying the DecisionMaking Model

Chapter 2

FIGURE 2.2 An Ethical DecisionMaking Process

ersonal and Professional Contexts 59

Determine the facts • Identify the ethical issues involved • Identify stakeholders and consider the situation from their point of view • Consider the available alternatives—also called “moral imagination” • alternatives, based on: • Consequences • Duties, rights, principles • Implications for personal integrity and character • Make a decision • Monitor and learn from the outcomes

When Ethical Decision Making Goes Wrong: Why Do “Good” People Engage in “Bad” Acts?

3 OBJECTIVE

To say that each individual has the capability to follow a similar decision-making process or possesses the capacity to make autonomous decisions is not to say that every individual always does so. There are many ways in which responsible decision making can go wrong and man y w ays in w hich people f ail to act in accordance with the ethical judgments the y make. Sometimes, of course, people can simply choose to do something unethical. We should not underestimate the vior. But, at other times, well-intentioned people fail to make ethical choices. What factors deter mine w hich companies or indi viduals engage in ethical beha vior and which do not? y do people w e consider to be “good” do “bad” things? This does not mean that these unethical decisions or acts are e xcusable, but that the indi viduals w ho engage in the unethical beha vior ma y ha ve done so for a variety of reasons. ling blocks to responsible decision making and beha vior. (See reading b y Dennis Mober g, “When Good People Do Bad Things at Work.”) ling blocks to responsib le action are co gnitive or intellectual. As the model of ethical decision making outlined abo ve suggests, a cer tain type of ignorance can account for bad ethical choices. Sometimes that ignorance can be almost willful and intentional. After you discover a lost iP ou might rationalize to y ourself that no one will e v w, no one is reall y going to be hur t, an owner who is so careless deser ves to lose the iP od. You might tr y to justify the decision by telling yourself that you are only doing what anyone else would do in this circumstance. You might even choose not about it and y to put any guilty feelings out of your mind. Another cognitive barrier is that we sometimes only consider limited alternatives. When f o clear alternative resolutions,

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we often consider onl y those tw o clear paths, missing the f act that other alternatives might be possible. Upon discovering a lost iP you might conclude that if y ou do not tak e it, someone else will. Because the original o wner will ou benef t from the loss than if someone else benef ts. Responsible decision making w ould require that w e discipline ourselves to explore additional methods of resolution. We also generall le with simplif ed decision rules. Having a simple rule to follow can be reassuring to many decision makers. For example, assume you are a business manager w ho needs to ter minate a worker in order to cut costs. Of course, y our f rst thought ma y be to unco ver alter native means b y which to cut costs instead of f ring someone, but assume for the moment that cutting the workforce is the only viable possibility. It may be easiest and most comfortable to terminate the last person y ou hired, explaining, “I can’t help it; it must be done, last rst out, I have no choice. . . .” Or, in the iPod case, “f nders keepers, losers w ve r ule to follo w. Using a simple not “mak en if it may not be the best possible decision. W native that satisf es minimum decision criteria, wn as “satisf cing.” We select the option that suff ces, the one that people can liv that needs to mak e a decision. They spend hours ar riving at a result and f nally reach agreement. At that point it is unlik ely that someone will stand up and sa y, “Whoa, wait a minute, let’s spend another couple of hours and f better answer!” The very fact that a decision was reached by consensus can convince everyone involved that is must be the most reasonable decision. Other stumbling b gnitive than they are a question of motivation and willpower. As author John Grisham e xplained in his book Rainmaker, “Every (la er), at least once in every case, feels himself crossing a line he doesn’ t really mean to cross. It just happens. ” Sometimes it is simpl y easier to do the wrong thing. After all, who w le of f nding the lost and found off ce and walking across campus to retur n the iPod? Consider how you would answer the questions asked in the Reality Check, “The Ethics of Cheating.” Unfor y, we do not always draw the lines for appropriate behavior in adv en when we do, the a . As Grisham sugeasier, and the next easier still. One day, you f nd y ver your ethical line than you thought you would ever be. People also sometimes mak e decisions they later regret because they lack the courage ways easy to mak e the right decision; y ou might lose income, y our job, or other v aluable components of y our life. Sher ron Watkins was only one of many employees who explained their reluctance to push their by reference to the culture of intimidation and fear that characterized upper management at Enron. Courage is also necessar y when

Chapter 2 Ethical Decision Making: Personal and Professional Contexts 61

Reality Check

The Ethics of Cheating

A 2008 survey of more than 29,000 American high school students revealed that 30 percent had stolen from a store in the previous year, 64 percent had cheated on a test and, as mentioned earlier in the chapter, 36 percent said they plagiarized using the Web. Perhaps even more shocking are the following responses: 93 percent of these youth reported that they were “satisfied” with their personal ethics, and 77 percent said that “when it comes to doing what is right, I am better than most people I know.”12 As appalling—or disturbing—as those statistics might be, students fare worse when they are categorized by academic discipline. Research has demonstrated that business undergraduate students are the most likely to have cheated on a test, when compared with prelaw students and the general population.13 In response to a statement

claiming that not cheating is the best way to get ahead in the long run, business students claimed, “You snooze, you lose.”14 Does this mean that, perhaps, there is a failure in ethics in the business arena because the people who go into business already cheat? Or is it that business students are aware that the business arena demands this type of unethical conduct so they prepare themselves for it from the start? Competitiveness might blur the border between ethical and unethical. Either way, as our parents have told us, simply because an environment is replete with a certain type of behavior does not mean that we must follow suit, nor does it relieve us of our responsibility for actions in that environment (thus the common parental question, “If Janie jumps off a bridge, are you going to follow?”).

responding to signif cant peer pressure. Though we might have believed that we could leave this behind in high school or colle ge, unfor y, we are subject to it throughout our lives. We tend to give in to peer pressure in our professional en both because we want to “f t in” and to achieve success in our organizations, and also because our actual thinking is inf uenced by our peers. We feel as if our disag reement means that w e might be wrong. Accordingly, we either change our minds to f t our environments, or we simply listen only for the e w wa y change on their own. Of course, the usual suspects for explaining unethical conduct are still very ery day. amounts of cor porate e xecutive compensation, lack of o versight of cor porate executive decisions, signif cant distance een decision makers and those they impact, f nancial challenges, and a set of ethical v alues that has not y et caught up to technological advances—all of these factors can create an environment rife with ethical challenges and unethical decisions. We can benef t from unethical cant as a salar y package of $180 million. Temptation is often all around us and an y person can succumb to it. The questions that are most diff cult to answer are often er in def ning who we are. Giv Value of Values.” Making ethicall y responsib le decisions throughout one’ s life is perhaps the most serious challenge w e all f ace. The easiest thing to do w ould be to remain

Decision Point

The Value of Values

passive and simply conform to social and cultural e xpectations, to “go with the f ow.” But such passivity is exactly the sort of unexamined life that Socrates claimed w as not w orth li ving. To li v e must step back and ref ect on our decisions, assuming the responsibility of autonomous beings. Before lea th ref succumb to temptations and w ho may not even deliberate in the f ace of an ethical dilemma. In the follo wing chapter, we will describe an ethical tradition that emphasizes ethical character and vir or many people, f nding a lost iP od would not raise much of a dilemma at all. Man y people would not have to deliberate about w Many people ha ve developed a cer tain type of character , a set of ethical habits, . For every Richard Grasso, there are man y business e xecutives who could, but do no t, take exorbithemselves. For example, Colleen Brown, the CEO of F ischer Communications, took a v oluntary pay cut of ten percent in 2008 in order to help the compan y survive during its diff cult economic times. 15 Similarly, when CEO Jim Ow ens realized that Cater pillar customers w ere e xperiencing a “continued deterioration of conditions,” he cut executive pay in 2009 by f fty percent, reduced senior management base salaries and implemented a hiring freeze in order to ensure Caterpiller’s .16 Developing such habits, inclinations, and character is an impor tant aspect of li ving an ethical life. (See Reality Check earlier in the chapter, “Bounded Ethicality.”) 62

Chapter 2 Ethical Decision Making: Personal and Professional Contexts 63

Ethical Decision Making in Managerial Roles

4 OBJECTIVE

At se veral points already in this te xt w e ha v wledged that indi vidual y inf uenced b Social circumstances can mak e it easier or more diff cult to act in accordance with one’s own judgment. Within business, an or ganization’s context sometimes makes it diff cult for e ven the best-intentioned person to act ethicall y, or it can make it diff cult for a dishonest person to act unethicall y. Responsibility for the circumstances that can encourage ethical beha vior and can discourage unethical behavior f alls predominantl y to the business management and e xecutive team. Chapter 4 will examine this issue in more detail as w e introduce the concepts of cor gin to explore this topic here. elops from the point of view of an individual who f ersonal integrity lies at the hear t of such indi vidual decision making: What kind of person am I or do I aspire to be? What are my values? What do I stand for? Ev ery individual also f lls a variety of social roles, and these roles car ry with them a range of expectations, responsibilities, and duties. Within a business setting, indi viduals must consider the ethical implications of both personal and professional decision making. Some of our roles are social: friend, son or daughter, spouse, citizen, neighbor , teacher, student-body president. Among the major roles and responsibilities that we will examine in this text are those associated with specif c professions: attor neys, accountants, auditors, ysts, and others. Decision making in these conte xts raises broader questions of social responsibilities and social justice. Consider how different roles might impact y our judgment about the disco very of the iPod. Your judgment about the iPod might differ greatly if you w that your friend had lost it, or if y ou were a teacher in the class, or if y ou were a member of the campus judicial board. Our judgment about Richard Grasso might change when we learn that his professional responsibility included oversight of a re gulatory body that go verned the v ery companies that w ere paying his salary. In a business conte xt, indi viduals f ll roles of emplo yees, managers, senior executives, and board members. Managers, e xecutives, and board members ha ve ganizational context in which all employees make decisions. They, therefore, hav ganizational arrangements that encourage ethical behavior and discourage unethical behavior. The following three chapters de velop these topics. Chapter 3 will pro vide an ov w of how some major ethical traditions might offer guidance both to individual decision mak ers and to those w ho create and shape social or ganizations. Chapter 4 will examine topics of corporate culture, ethical organizations, and ethical leadership. Chapter 5 e xamines cor , the ends towards which ethical organizations and ethical leaders should aim.

Opening Decision Point Revisited What Would You Do?

Questions, Projects, and Exercises

64

65

66

KeyT erms

End Notes

67

Readings

Reading 2-1: “The Parable of the Sadhu,” by Bowen H. McCoy, p. 67 Reading 2-2: “Managing for Stakeholders,” by R. Edward Freeman, p. 73 Reading 2-3: “What Stakeholder Theory Is Not,” by Robert Phillips, Ed Freeman, and Andrew Wicks, p. 86 Reading 2-4: “When Good People Do Bad Things at Work: Rote Behavior, Distractions, and Moral Exclusion Stymie Ethical Behavior on the Job,” by Dennis Moberg, p. 91

Reading 2-1

The Parable of the Sadhu Bowen H. McCoy Last y ear, as the f rst par ticipant in the ne w sixmonth sabbatical pro gram that Mor gan Stanle y has I enjoyed a rare oppor to collect my thoughts as w ell as do some tra veling. I spent the f rst three months in Nepal, w alking 600 miles through 200 villages in the Himala yas and climbing some 120,000 v ertical feet. My sole Western companion on the trip w as an anthropolo gist who ns of the villages that we passed through. During the Nepal hik e, something occur red that has had a po werful impact on m y thinking about cor porate ethics. Although some might argue that the e xperience has no rele vance to business, it was a situation in w hich a basic ethical dilemma suddenly intruded into the li ves of a group of individuals. How the group responded holds a lesson for all or ganizations, no matter how def ned.

TheSadhu The Nepal experience was more rugged than I had o or three weeks and cov veled. My friend Stephen, the anthropologist, and I w a the trip when we reached the high point, an 18,000foot pass over a crest that w e’d have to tra verse to reach the village of Muklinath, an ancient hol y place for pilgrims. Six y ears earlier , I had suf fered pulmonar y edema, an acute for 16,500 feet in the vicinity of Everest base camp, so we were understandably concer ned about w hat would happen at 18,000 feet. Moreover, the Himalayas were having their wettest spring in 20 y ears, hip-deep powder and ice had already dri ven us off one ridge. If w e f ailed to cross the pass, I feared

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that the last half of our once-in-a-lifetime trip w The night before we would try the pass, we camped in a hut at 14,500 feet. In the photos tak en at that camp, my face appears wan. The last village we’d passed through w o-day w alk below us, and I was tired. noon, four backpack ers from Ne w Zealand joined us, and w e spent most of the night a wake, anticipating the climb . Below, we could see the f res of tw o other par ties, which o Swiss couples and a Japanese hiking club. To get over the steep part of the climb before the sun melted the steps cut in the ice, w e departed at 3:30 A.M. The New Zealanders left f rst, followed by Stephen and m yself, our por ters and Sher pas, and then the Swiss. The Japanese lingered in their camp. The sky was clear, and w e were conf dent that no spring storm would erupt that day to close the pass. At 15,500 feet, it looked to me as if Stephen were shuff ing and staggering a bit, w hich are symptoms of (The initial stage As the condition w orsens, a climber ma y encounter diff cult breathing, disorientation, aphasia, and paral ysis.) I felt strong—m y adrenaline w as f owing—but I w as very concerned about my ultimate ability to get across. A couple of our por ters were also suf fering from the height, and P asang, our Sherpa sirdar (leader), was worried. ybreak, w hile w e rested at 15,500 feet, one of the Ne w Zealanders, w ho had gone wn to ward us with a body slung across his shoulders. He dumped the almost nak a sadhu, at my feet. He had found the pilgrim lying on the ice, shi vering and suf fering from h ypothermia. I cradled the sadhu’ s head and laid him out on the rocks. The Ne w Zealander w as ang . He wanted to get across the pass before the bright sun melted the snow. He said, “Look, I’ve done what I can. You have porters and Sher pa guides. You care for him. We’ ent back up the mountain to join his friends.

I took a carotid pulse and found that the sadhu was still ali ve. We f gured he had probab ly visited the holy shrines at Muklinath and w as on his way home. It was fruitless to question why he had chosen this desperatel y high route instead of the safe, hea vily tra veled cara van route through the Kali Gandaki gor ge. Or w hy he w as shoeless and almost nak w long he had been l ying in the pass. The answers weren’t going to solv e our problem. Stephen and the four Swiss be f their outer clothing and opening their packs. The sadhu was soon clothed from head to foot. He w as not ab le to w alk, but he w as v ery much ali ve. I looked do wn the mountain and spotted the Japanese climbers, marching up with a horse. Without a g reat deal of thought, I told Stephen and Pasang that I w as concerned about withstanding the heights to come and w anted to get over the v ho had gone ahead. On the steep par t of the ascent w here, if the ice steps had given way, I would have slid down about 3,000 feet, I felt v ertigo. I stopped for a breather , allowing the Swiss to catch up with me. I inquired about the sadhu and Stephen. They said that the sadhu w as f ne and that Stephen w as just behind Stephen ar rived at the summit an hour after I did. Still e xhilarated b y victor y, I ran do wn the slope to cong him. He was suffering from alking 15 steps, then stopping, walking 15 steps, then stopping. Pasang accompanied him all the w ay up. Stephen glared at me and said: “Ho w do y ou feel about contributing to the death of a fellow man?” “Is the sadhu dead?” I inquired. “No,” replied Stephen, “but he surely will be!” After I had gone, followed not long after by the Swiss, Stephen had remained with the sadhu. v ed to use their horse to transport the sadhu down to the hut. They had refused. He had then ask ed Pasang to ha ve a g roup of our por ters car ry the

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sadhu. Pasang had resisted the idea, saying that the porters would have to e xert all their ener gy to get themselves over the pass. He belie ved they could the slope, and get across safel y before the sno w melted. P asang had pressed Stephen not to dela y any longer. The Sher pas had car ried the sadhu do wn to a rock in the sun at about 15,000 feet and pointed out the hut another 500 feet belo w. The Japanese had given him food and drink. When they had last seen him, he w as listlessl wing rocks at the Japanese par s dog, which had frightened him. W w if the sadhu lived or died. For man y of the follo wing da ys and e venings, Stephen and I discussed and debated our beha vior toward the sadhu. Stephen is a committed Quak er with deep moral vision. He said , “I feel that w hat happened with the sadhu is a good e xample of the breakdo een the indi vidual ethic and the cor porate ethic. No one person w as willing to was willing to do his bit just so long as it was not too inconvenient. When it got to be a bother, everyone just passed the buck to someone else and took off. Jesus w as rele vant to a more indi vidualistic stage of society, but how do we interpret his teaching today in a w orld f lled with lar ge, impersonal organizations and groups?” I defended the lar ger group, saying, “Look, w e all cared. We all ga ve aid and comfor t. Ev eryone did his bit. The New Zealander car ried him do wn below the snow line. I took his pulse and suggested w ypothermia. You and the Swiss gave him clothing and got him warmed up. The Japanese ga ve him food and w ater. The Sher pas car wn to the sun and pointed out the easy trail to ward the hut. He w as well enough to throw rocks at a dog. What more could we do?” “You have just described the typical aff uent Westerner’s response to a prob lem. wing money—in this case, food and s weaters—at it, but ted. “What would satisfy you?” I said. “Here we are, a group of New Zealanders, Swiss,

Japanese who have nev the ape xperiences of ves. Some years the pass is so bad no one gets over it. ed pilg rim who chooses the wrong trail ha ve to disr upt our lives? Even the Sher pas had no interest in risking the trip to help him bey ” Stephen calml y rebutted , “I w onder w hat the Sherpas would have done if the sadhu had been a well-dressed Nepali, or w hat the Japanese w ould have done if the sadhu had been a w ell-dressed Asian, or w hat you would have done, Buzz, if the sadhu had been a well-dressed Western woman?” “Where, in your opinion,” I ask “is the limit We had our o wn w ell-being to w orry about. Our Sher pa guides were unwilling to jeopardize us or the por ters for the sadhu. No one else on the mountain w yond certain selfimposed limits.” Stephen said, “As individual Christians or people with a Wester e can fulf ll our obligations in such a situation only if one, the sadhu dies in our care; o, the sadhu demonstrates to us that he can under take the two-day walk down to the village; or three, w e carr o days do wn to the village and persuade someone there to care for him.” “Leaving the sadhu in the sun with food and clothing—where he demonstrated hand-e ye coor dination b wing a rock at a dog—comes close to fulf ” I answered. “And it wouldn’t hav village w the Sher pas, so the third condition is impractical. Are y ou reall y sa ying that, no matter w hat the implications, we should, at the drop of a hat, ha ve changed our entire plan?”

TheI ndividualve rsus the Group Ethic Despite my arguments, I felt and continue to feel alk a classic moral dilemma without full

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through the consequences. My e xcuses for m y actions include a high adrenaline f ow, a superor common factors in corporate situations, especially Real moral dilemmas are ambiguous, and man y of us hik e right through them, una ware that the y exist. y after the fact, someone makes it up. Often, w hen the full impor t of what we have done (or not done) hits us, w e dig into a defensi ve position from w hich it is v ery diff cult to emerge. In rare circumstances, w e ma y contemplate w hat we hav Had we mountaineers been free of stress caused by the ef fort and the high altitude, w e might ha ve y. Yet isn’t stress the real test of personal and cor porate values? The instant decisions that e xecutives mak e under pressure reveal the most about personal and cor porate character. Among the man y questions that occur to me when I ponder m y experience with the sadhu are: What are the practical limits of moral imagination and vision? Is there a collecti v ethic that differs from the ethics of the indi vidual? At w hat le vel of ef fort or commitment can one discharge one’s ethical responsibilities? Not every ethical dilemma has a right solution. Reasonable people often disag w xt, however process for dealing with dilemmas. Our e xperience with the sadhu of fers an inter esting parallel to business situations. An immediate response was mandatory. Failure to act was a decision in itself. Up on the mountain w e could not resign and submit our résumés to a headhunter. In contrast to philosoph y, business involves action and implementation—getting things done. Managers must come up with answers based on what they see and what they allow to inf uence their decisionmaking processes. On the mountain, none of us but Stephen realized the tr ue dimensions of the e were facing.

One of our problems w e had no process for de veloping a consensus. We had no The diff culties of dealing with the sadhu were so complex that no one person could handle them. Because the group did not have a set of preconditions that could guide its action to an acceptable resolution, we reacted instinctively as indi viduals. group added a fur ther layer of complexity. We had no leader with w hom we could all identify and in whose purpose we believed. Only Stephen was willing to tak e charge, but he could not gain adequate suppor roup to care for the sadhu. Some or ganizations do ha ve v alues that transcend the personal v alues of their managers. Such values, w hich go be yond prof , are usuall y revealed w ple throughout the or ganization generall y accept its v alues, w hich, because the y are not presented y be somewhat ambiguous. The stories people tell, rather than printed materials, transmit the or ganization’s conceptions of what is proper behavior. F levels to a v ariety of cor porations and or ganizations. It is amazing ho w quickly an outsider can sense the tone and style of an or ganization and , with that, the de gree of tolerated openness and freedom to Organizations that do not ha ve a heritage of y accepted , shared v alues tend to become vidual bailing out for himself or herself. In the g reat tak eover battles we have witnessed during past years, w the w agons around them and fought it out, w hile other companies sa w e xecutives—supported b y golden Because cor porations and their members are interdependent, for the corporation to be strong the members need to share a preconcei ved notion of correct behavior, a “business ethic, as a positiv As an in vestment bank er, I am continuall y warned b y w ell-meaning la ers, clients, and

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associates to be w ary of conf icts of interest. Yet if I w ere to r un a way from e very diff cult tion, I wouldn’ ve investment banker. I have to feel my way through conf icts. An effective manager can’ confront risk. To feel “safe” in doing that, managers need the guidelines of an ag reed-upon process and set of values within the organization. After my three months in Nepal, I spent three months as an e xecutive-in-residence at both the Stanford Business School and the Uni versity of California at Berk eley’s Center for Ethics and Social Policy of the Graduate Theological Union. Those six months awa y job gave me time to assimilate 20 y ears of business e xperience. My thoughts tur ned often to the meaning of the leadership role in an y lar ge or the seminar y thought of themselv es as antibusiness. But when I questioned them, they agreed that the usted all lar ge or ganizations, including the church. They perceived all lar ge organizations as impersonal and opposed to indi vidual v alues and needs. Yet w w of or ganizations in which people’ s v alues and beliefs are respected and their expressions encouraged. What makes the result, manage more effectively? The w ord ethics tur ns of f man y and confuses more. Yet the notions of shared v alues and an agreed-upon process for dealing with adv change—what man y people mean w hen the y talk about cor t of the ethical issue. P eople who are in touch with their own core beliefs and the beliefs of others and who are sustained b y them can be more comfor table living on the cutting edge. At times, taking a tough line or a decisive stand in a muddle of ambiguity is the only ethical thing to do. If a manager is indecisive about a prob lem and spends time tr ying to f gure out the “good” thing to do, the enter prise may be lost. Business ethics, then, has to do with the authenticity and integ To be ethical is to follow the business as w of the cor poration, its o wners, its emplo yees, and

its customers. Those w ve the cor porate vision are not authentic businesspeople and , therefore, are not ethical in the business sense. At this stage of m y own business e xperience, I have a strong interest in or ganizational beha vior. Sociologists are k eenl hat the y call corporate stories, le gends, and heroes as a w ay organizations ha v alue systems. Corporations such as ve even hired consultants to perfor m an audit of their cor inter alue system. Effective managers, therefore, are action-oriented people who resolve conf ict, are tolerant of ambiguity, stress, and change, and ha ve a strong sense of purpose for themselves and their organizations. If all this is tr ue, I wonder about the role of the professional manager w ho mo ves from compan y to company. How can he or she quickl y absorb the values and culture of different organizations? Or is there, indeed, an ar t of management that is totall y le? Assuming that such fungible managers do exist, is it proper for them to manipulate the values of others? would have happened had Stephen and I carried the sadhu for tw o days back to the village and become involved with the villagers in his care? In four trips to Nepal, m y most interesting e xpered in 1975 w hen I lived in a Sher pa ve da ys w hile reco vThe high point of Stephen’s trip w as an in vitation to par ticipate in a family funeral ceremony in Manang. Neither expethe Himalayas. Why were we so reluctant to try the lower path, the ambiguous trail? P erhaps because we did not ha ve a leader w ho could re veal the greater purpose of the trip to us. Why didn’t Stephen, with his moral vision, opt to tak e the sadhu under his personal care? The answer is partly because Stephen was hard-stressed physically himself and par tly because, without some suppor t system that encompassed our in voluntar was beyond his indi

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corporate value systems as a positi ve response to pessimism such as Stephen’ s about the decline of the role of the indi vidual in lar ge or ganizations. Individuals w personal values pro rate culture. A cor porate tradition that encourages freedom of inquir y, suppor ts personal v alues, and reinforces a focused sense of direction can fulf ll the need to combine individuality with the prosperroup. Without such cor porate support, the individual is lost. That is the lesson of the sadhu. In a comple x cor vidual requires and es the suppor t of the g roup. When people f nd such support in their organizations, they don’t w how to act. If such support is forthcoming, a person has a stake in the success of the group and can add much to the process of establishing and maintaining a cor porate culture. Management’s challenge is to be sensiti ve to individual needs, to shape them, and to direct and focus them for the benef t of the group as a whole. For each of us the sadhu li ves. Should w e stop what we are doing and comfor t him; or should w e keep trudging up toward the high pass? Should I pause to help the derelict I pass on the street each night as I walk by the Yale Club en route to Grand Central Station? Am I his brother? e consider our selves to be ethical persons? Perhaps it is to change the values of the g roup so that it can, with all its resources, take the other road.

When Do We Take a Stand? I wrote about my experiences purposely to present an ambiguous situation. I ne ver found out if the sadhu lived or died. I can though, that the sadhu lives on in his stor y. He li ves in the ethics classes I teach each y ear at business schools and churches. He li ves in the classrooms of numerous business schools, where professors have taught the case to tens of thousands of students. He li ves in several casebooks on ethics and on an educational

video. And he li ves in or ganizations such as the American Red Cross and AT&T, w hich use his story in their ethics training. As I ref ect on the sadhu no w, 15 y fact, I f rst have to wonder, y happened on that Himalayan slope? rst wrote about as I could remember, but I shaped it to the needs of a good classroom discussion. ears of reading my stor y, vie discuss it, I’m not sure I m w what actually occur y! I’ve also heard a wide v ariety of responses to the stor y. The sadhu, for e xample, ma y not ha ve wanted our help at all—he ma y have been intentionally bringing on his own death as a way to holiness. Why had he tak en the dangerous w ay o ver the pass instead of the cara van route through the gorge? Hindu businesspeople ha ve told me that in trying to assist the sadhu, w e were being typicall y arrogant Wester alues on the world. I’ve learned that each year along the pass, a few ho hired them. A few years ago, a French group even left one of their o a young French woman, to die there. The diff cult pass seems to demonstrate a perverse version of Gresham’s law of currency: The bad practices of previous tra velers ha v ven out the v alues that new travelers might ha ve followed if the y were at home. Perhaps that helps to e xplain why our por ters behaved as they did and why it was so diff cult for Stephen or an yone else to estab lish a dif ferent approach on the spot. Our Sher pa sirdar, Pasang, was focused on his and sound. (His livelihood and status in the Sherpa We were weak, our party was split, the por ters were well on their way to the top with all our gear and food, and a storm would have separated us ir revocabl our logistical base. The f act was, we had no plan for dealing with the contingenc y of the sadhu. There w as nothing

Chapter 2 Ethical Decision Making: Personal and Professional Contexts 73

we could do to unite our multicultural group in the little time we had. An ethical dilemma had come upon us une xpectedly, an element of drama that may explain why the s story has continued to I am often ask ed for help in teaching the stor y. I usuall y advise k eeping the details as ambiguous as possible. A true ethical dilemma requires a decision between two hard choices. In the case of the sadhu, w e had to decide ho w much to sacrif ce ourselves to take care of a stranger. And given e had to make a group decision, not an individual one. If a lar person because of m y decision on the mountain, the instructor may not have given the case its due. The same is tr lem with the choices we made. Any class’s response depends on its setting, whether it’s a business school, a church, or a cor poration. I’ve found that y likely to see the issue as black-and-white, whereas older ones tend to see shades of g ray. Some have seen a conf ict betw een the dif ferent ethical approaches that w e followed at the time. Stephen felt he had to do e verything he could to sa ve the sadhu’s life, in accordance with his Christian ethic of compassion. I had a utilitarian response: Do

the greatest good for the greatest number. Give a burst of aid to minimize the sadhu’s exposure, then continue on our way. The basic question of the case remains, When do we take a stand? When do w e allow a “sadhu” to intrude into our daily lives? Fe the time or ef fort to tak e care of e v son we encounter. How much must we give of ourselves? And how do w e prepare our or ganizations and institutions so the y will respond appropriatel y in a crisis? How do we inf uence them if we do not agree with their points of view? We quit our jobs over every ethical dilemma, but if we continually ignore our sense of values, who do we become? ed at a recent conference on ethics, “Which ditch are we er is a bit different. How we act in response to that question def nes better than an ho we are, just as, in a collective sense, our acts def ne our institutions. In effect, the sadhu is al ways there, ready to remind us of the tensions betw wn goals and the claims of strangers. Source: Review. “The Parable of the Sadhu,” and “When Do We Take a Stand?” both by Bowen H. McCoy, May–June, ved.

Reading 2-2

Managingfor Stake holders1 R. Edward Freeman

I.I ntroduction The purpose of this essay is to outline an emerging view of business that w e shall call “managing for stakeholders”.2 This vie ver the past thir ears from a g roup of scholars in a di verse set of disciplines, from f nance to philosophy.3 The ecutiv y do and should create v alue

for customers, suppliers, employ and f nanciers (or shareholders). e need to pa w these relationships are managed and ho w value gets created for these stakeholders. We this idea with the dominant model of business acti vity; namely, that businesses are to be managed solel y for the benef t of shareholders. Any other benef created are incidental.4

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Simple ideas create comple x questions, and w e proceed as follows. In the next section we examine wh deepl ble. It is resistant to change, not consistent with the law, and for the most par t, simply ignores matters of ethics. Each of these f aws is f atal in business world of the 21st Century. We then proceed to def ne the basic ideas of of the problems of the dominant model. In par ticular we pa w using ‘stakeholder’ as a basic unit of anal ysis mak es it more diff cult to We ar mar xecutive is to create as much v alue for stak eholders as possib le, and that no stakeholder interest is viab le in isolation of the other stak eholders. We sk etch three primar y ar guments ethical theory for adopting “managing for stakeholders.” W “pragmatist ar e see managing for stak eholders as a ne w narrative about busiyw y create value for each other . Capitalism is on this vie w a system of social cooperation and collaboration, rather than primarily a system of competition.

II. The Dominant Story: Managerial Capitalism with Shareholders at the Center y as one of the most impor tant innovations in human histor y. Yet the changes that we are no w e xperiencing call for its rein vention. Before w e suggest w hat this re vision, “managing for stak eholders” or “stak eholder capitalism, ” is, f rst we need to understand how the dominant story came to be told. Somew ere quite simple and “doing business” consisted of buying raw materials from suppliers, con verting it to products, and selling it to customers. F or the most part owner-entrepreneurs founded such simple

businesses and w orked at the business along with members of their f amilies. The de velopment of new production processes, such as the assemb ly line, meant that jobs could be specialized and more w wer became readil y available. These and other social and political forces combined to require lar ger amounts of capital, w ell be yond the scope of most indi vidual o wner-manageremployees. Additionally, “workers” or non-f amily members began to dominate the f rm and were the xception. Ownership of the business became more disers, and other institutions. Indeed, the management of the f the f agers of the business had to simultaneousl y satisfy the owners, the employees and their unions, suppliers and customers. This system of or ganization of

or more recently, shareholder capitalism.5 As businesses g rew, managers de veloped a means of control via the di visionalized f rm. Led by Alfred Sloan at General Motors, the di visionalized f rm with a central headquarters was widely adapted.6 The dominant model for managerial authority w as the militar y and ci vil ser vice bureaucracy. By creating rational str processes, the orderly progress of business g rowth could be well-managed. y, stability , and predictability all e volved to gether, in the United States and Europe, to for m the most po w . The rise of bureaucrac that the economist Joseph Schumpeter predicted that it would wipe out the creati ve force of capitalism, stif ing innovation in its ve for . has put “shareholders” at the center of the f rm as the most impor tant g roup for managers to w orry about. This mindset has dealt with the increasing

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complexity of the business world by focusing more intensely on “shareholders” and “creating value for shareholders.” It has become common wisdom to “increase shareholder value”, and many companies have instituted comple x incenti ve compensation plans aimed at aligning the interests of executives with the interests of shareholders. These incentive plans are often tied to the price of a compan y’s stock w y many factors not the least of w hich is the e xpectations of Wall Street analysts about ear nings per share each quar ter. Meeting Wall Street tar gets, and for ming a stab le and predictable base of quar ter over quar ter increases in earnings per share has become the standard for measuring company performance. Indeed all of the recent scandals at Enron, Worldcom, Tyco, Anderson and others are in par t due to e xecutives trying to increase shareholder v alue, sometimes in opposition to accounting r ules and la w. Unfor tunately, the w orld has changed so that the and predictability required b y the shareholder approach can no longer be assured.

The Dominant Model Is Resistant to Change The Managerial View of business with shareholdy resistant to change. It puts shareholders’ interests o ver and abo ve the interests of customers, suppliers, emplo yees, and others, as if these interests must conf ict with each other. It understands a business as an essentiall y hierarchical or ganization f astened to gether with authority to act in the shareholders’ interests. Executives often speak in the language of hierarch y as “working for shareholders”, “shareholders are the boss”, and “y ou have to do w hat the shareholders want”. On this inter pretation, change should occur only w y, and as long as e xecutives can produce a series of incrementally better f According to this view the only change that counts tomers are unhappy, if accounting r ules have been if product is if environmental disaster looms, e ven if competitive forces

threaten, the only interesting questions are whether and how these forces for change affect shareholder value, measured b y the price of the stock e very day. Unfortunately in today’s world there is just too much uncer tainty and comple xity to rel y on such a single criterion. Business in the 21st Centur y is global and multi-f alue may not that dynamism. Or, if it does, as the theor y suggests it must e v y, it will be too late for executives to do anything about it. The y work for ho the long r un on Wall Street, but managers ha ve to act with an ey ell, to anticipate change to and take advantage of the dynamism of business.7

The Dominant Model Is Not Consistent with the Law In actual f act the clarity of putting shareholders’ interests f rst, abo ve that of customers, suppliers, employ ies in the f ace of the reality the la w. The law has e volved to put constraints on the kinds of tradeoffs that can be made. In f act the la w of cor porations gives a less clear ans wer to the question of in w hose interest and for w hose benef t the cor poration should be gov The la w has e volved o ver the y ears to give de facto than fect, required that the and employees be taken into consideration. For instance, the doctrine of “pri vity of contract,” as ar ticulated in Winterbottom v. Wright in 1842, has been eroded b y recent de velopments in products liability la w. Greenman v . Yuba P ower gives the manuf acturer strict liability for damage caused b y its products, e ven though the seller has e xercised all possib le care in the preparation and sale of the product and the consumer has not bought the product from nor entered into an y contractual ar rangement with the manuf acturer. Caveat emptor has been replaced in large part, with caveat The Consumer Product Safety er to enact product recalls, essentially leading to an increase in the number of

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voluntary product recalls b y companies seeking to mitigate legal damage aw required to provide information to customers about a product’s ingredients, whether or not the customers w ant and are willing to pa y for this infor mation. Thus, companies must tak e the interests of customers into account, by law. A similar stor y can be told about the e volution of the la w forcing management to tak e the inter ests of employees into account. The National Labor Relations Act gave employ and to bargain in good f aith. It set up the National Labor Relations Board to enforce these rights with management. The Equal Pay Act of 1963 and Title VII of the Civil Rights Act of 1964 constrain manthese ha ve been follo wed with the Age Discrimination in Emplo yment Act of 1967, and recent extensions af fecting people with disabilities. The emer ve case la w arising from labor -management disputes and the historic settling of discrimination claims with large employers ha ve caused the emer gence of a body of management practice that is consistent with the legal guarantee of the rights of employees. The la w has also e volv y and protect the interests of local communities. The Clean Air Act and Clean Water Act, and v arious amendments to these classic pieces of le gislation, ha ve constrained management from “spoiling the commons”. In an historic case, Marsh v. Alabama, the Supreme Court ruled that a compan y-owned town was subject to the pro visions of the U.S. Constitution, thereby guaranteeing the rights of local citizens and negating the “property rights” of the f . Current issues center around protecting local businesses, forcing companies to pa y the health care costs of their emplo yees, increases in minimum wages, en fects of business de velopment on the li ves of local comThese issues f ll the local political landscapes and executives and their companies must take account of them. Some ma y ar gue that the constraints of the law, at least in the U .S., have become increasingl y

irrelevant in a w orld w here business is global in nature. Ho wever, globalization simpl y mak es this argument stronger. The laws that are rele vant to business ha ve e volved dif ferently around the w y ha ve e volved nonetheless to tak e into account the interests of g roups other than just shareholders. Each state in India has a different set of re gulations that af fect ho w a compan y can do olved to give business some proper ty rights but it is f ar from e xclusive. ws around “civil society” and the role of “emplo yees” are much more complex than even U.S. law. “Laissez faire capitalism” is simply a m The idea that business is about “maximizing v alue for stockholders re gardless of the consequences to others” is one that has outli v The dominant model simply does not describe how business operates. Another way to see this is that if executives always hav holder value” with exceptions of law, or even good practice, then the dominant stor y isn’t very useful anymore. There are just too man y exceptions. The dominant stor y could be sa ved b y ar guing that it describes a nor mative vie w about ho w business should operate, despite how actual businesses have evolved.8 So we need to look more closely at some of the conceptual and nor mative problems that the dominant model raises.

The Dominant Model Is Not Consistent with Basic Ethics Previously we have ar that most theories of business rel “ethical” decisions.9 This is seen most clearl y in the popular jok y we might suggest that we def ne:

The Separation Fallacy v e, “x is a business decision” have no ethical content or any implicit w. ve that sentences like “x is an ethical decision, the best thing e no content or implicit w about v

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This fallac about business, as w ell as in other areas in society . o implications of rejecting the Separation Fallacy. The f rst is that almost an y business decision has some ethical content. To see that this y ask whether the following questions mak y any business decision.

The Open Question Argument 1. If this decision is made for w hom is v alue yed? 2. ted by this decision? 3. Whose rights are enabled and whose values are realized by this decision (and whose are not)? 4. What kind of person will I (w e) become if w e make this decision? Since these questions are al ways open for most business decisions, it is reasonab le to gi ve up the Separation F allacy, w hich w ould ha ve us belie ve that these questions aren’ t rele vant for making business decisions, or that the y could ne ver be answered. We need a theor y about business that gument” above. One such ans wer would be “Onl y value to shareholders counts”, but such an ans wer w ould hav well as business. Milton F riedman, unlike most of his expositors, may y give such a morally rich ans wer the executive is to mak e prof ts subject to la w and ethical custom. Depending on ho w “law and ethical custom” is inter ey difference with the stakeholder approach may well be that w e disagree about ho w the w orld works. In order to create value w e belie v grating business and ethics within a comple x set of stakeholder relationships rather than treating ethics ts. In shor t we e might call:

The Integration Thesis Most business decisions or sentences about business have some ethical content, or implicit ethical view. Most ethical decisions or sentences about

ethics have some business content or implicit vie w about business.10 One of the most pressing challenges f acing business scholars is to tell compelling nar ratives that have the Integration Thesis at its hear t. This is essentially the task that a g roup of scholars, “business ethicists” and “stak eholder theorists”, ha ve be ver the last 30 years. We need to go back to the very basics of ethics. Ethics is about the r ules, principles, consequences, matters of character , etc. that w e use to li ve together. These ideas gi ve us a set of open questions that w e are constantl y searching for better w ays to ans wer in reasonab le complete ways.11 One might def ne “ethics” as a conversation about how we can reason together and solve our reco where our interests are joined and need de velopment, so that w e can all f ourish without resor ting to coercion and violence. Some ma y disag ree with such a def nition, and we do not intend to pri vilege def nitions, but reason and talk to gether to tr world for all of us. correct then w e need to star t o ver b y re-conceptualizing the v er e use to understand ho w business operates. We want to suggest that something like the following principle is implicit in most reasonably comprehensive views about ethics.

The Responsibility Principle12 y do, fects of their actions on others. Clearl patible with the Separation F allacy. If business is separated from ethics, there is no question of moral joke is that ‘business ethics’ is an oxymoron. More clearly still, without something like the Responsibility Principle it is diff cult to see ho w ethics gets off the g round. “Responsibility” ma y well be a diff cult and multi-f aceted idea. There are surely man ays to understand it. But, if we are not willing to accept the responsibility for our o

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actions (as limited as that ma y be due to complicated issues of causality and the lik e), then ethics, understood as how we reason together so we can all f ourish, is likely an exercise in bad faith. If we want to give up the separation f allacy and adopt the inte gration thesis, if the open question argument mak es sense, and if something lik e the y, then w e need a new model for business. w story must be able to explain how value creation at once deals of all of the ef fects of business action on others. Such a model exists, and has been developing over the last 30 y ears b y management researchers and ethics scholars, and there are many businesses who have adopted this “stak eholder frame work” for their businesses.

READING FIGURE 2.1

III. Managing for Stakeholders The basic idea of “managing for stak eholders” is quite simple. Business can be understood as a set of relationships among g roups which have a stak e in the activities that make up the business. Business is about how customers, suppliers, emplo yees, f nanmunities and managers interact and create value. To w these relationships w ork. xecutive’s or entrepreneur’ s job is to manage and shape these relationships, hence the title, “managing for stakeholders”. Reading f gure 2.1 depicts the idea of “managing for stak eholders” in a v “wheel and spoke” diagram.13 However, it is important to note that the stak eholder idea is perfectly

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general. Cor porations are not the center of the universe, and there are man y possib One might put customers in the center to signal that a compan y puts customers as the k ey prior . Another might put employees in the center and link them to customers and shareholders. We prefer the generic diag ram because it suggests, pictorially, that “managing for stak eholders” is a theor y about management and business; hence, managers and companies in the center. But, there is no larger metaphysical claim here.

Stakeholders and Stakes Owners or f nanciers (a better ter m) clearly have a f nancial stak bonds, and so on, and the y e xpect some kind of f nancial retur es of f nanciers will dif fer b wner, prefer ences for mone y, moral preferences, and so on, as well as by type of f rm. The shareholders of Google may well w ns as w ell as be suppor tive of Google’s ar ticulated pur pose of “Do No Evil”. To the extent that it mak es sense to talk about the f nanciers “owning the f rm”, they have a concomitant ty. Employees ha ve their jobs and usuall y their livelihood at stak e; the y often ha ve specialized skills for which there is usually no perfectly elastic market. In retur n for their labor , they expect security, wages, benef ork. Often, employees are e xpected to par ticipate in the deciyees are management or senior e xecutives w e see them as shouldering a g reat deal of responsibility employees are sometimes f nanciers as w ell, since many companies ha ve stock o wnership plans, and loyal employees who believe in the of their oluntarily in vest. One w ay to think about the emplo yee relationship is in ter ms of contracts. Customers and suppliers e xchange resources for the products and ser vices of the f rm and in retur n recei ve the benef ts of the products As with f nanciers and employees, the customer and supplier relationships are enmeshed

in ethics. Companies mak e promises to customers via their adver don’t deliver on these promises then management has a responsibility the is also important to ha ve suppliers w ho are committed to making a company better. If suppliers f nd a , faster, and cheaper w ay of making critical par ts or services, then both supplier and compan y can win. but e ven so, there is a moral element of fairness and transparency to the supplier relationship. Finally rants the f rm the right to build f n, it benef ts from the tax base and economic and social contributions of the f ve a real impact elcomy create v alue for its other stak n for the provision of local ser vices, companies are e xpected to be good citizens, as is an y individual person. It should not expose the to le hazards in whatev , and operate in a transparent manner as f ar as possib ve perfect knowledge, but when management discovers some danger or r w competition, it is e xpected to infor any negativ ar as possible. y must consist of f nanciers, customers, suppliers, emplo yees, and it is possible to about other stakeholders as well. We can def ways. F e could def ne the term fairly narrowly to the idea that any business, large alue for “those g roups without w hose suppor t, the business w ould cease to be viab le”. Reading f 2.1 depicts this view. Almost ev at some le vel with relationships among f nanciers, customers, suppliers, emplo y We might call these g y” or “def nitional”. However, it should be noted that as a business ticular stak eholder is more impor . In a ne t

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up, sometimes there are no suppliers, and paying lots o key customers, as well as to the v There is also a some what broader def nition that roup or indi vidual can xecutives must take that g w to create value. Or, a stakeholder is any group or indiy the realization of an or ganization’s pur pose. At a minimum some g eholders and w e Reading f gure 2.1 There are other def nitions that ha ve emer ged ears, some based on risks and rew the debate over f ue def nition” of ‘stakeholder’ is not likely to end. We prefer a more pragmatist approach of being clear of the pur pose of using an y of the proposed def nitions. Business is a f ascinating f . There are v ery few principles and def nitions that apply to all businesses all over the world. Fur there are man a if you like, man avors of “managing for stakeholders”. W trying to def ne one model of business, either based on the shareholder or stak eholder view that works for all businesses e verywhere. We see much v alue to be gained in examining how the stakes work in the v ecutive.

IV. The Responsibility of the Executive in Managing for Stakeholders Executives play a special role in the acti business enter prise. On the one hand , the y ha ve a stak e lik e e very other emplo yee in ter ms of an yment contract. stake is link ed to the stak es of f nanciers, customers, suppliers, communities, and other emplo yees. In addition, executives are expected to look the health of the o verall enter prise, to k eep the

varied stak es mo ving in roughl y the same direction, and to keep them in balance.14 No stakeholder stands alone in the process of v alue creation. The stakes of each stakeholder group are multi-f and inherentl . How could a bondholder reco gnize an ns without management paying attention to the stak es of customers or emplo yees? Ho w could customers get the y need without employees and suppliers? How could employees have a decent place to liv ers see the dominant prob lem of “managing for stakeholders” as ho w to solv e the priority prob lem, or “which stakeholders are more impor tant,” or “how do we mak eholders”. We see this as a secondary issue. First and foremost, w e need to see stak eholder interests as joint, as inherentl y tied to gether. Seeing stakeholder interests as “joint” rather than opposed is diff cult. It is not al ways easy to f nd a way to accommodate all stak eholder interests. It is easier to trade of f one v ersus another. Why not delay spending on ne w products for customers in order to k eep ear nings a bit higher? Why not cut employee medical benef ts in order to in vest in a new inventory control system? Managing for stakeholders suggests that e xecutives y to the questions. How can we invest in new products and create higher ear nings? How can w e be sure our emplo yees are health y and happy and are ab le to w ork creatively so that w ts of ne w infor mation technology such as inventory control systems? In a recent book ref ecting on his experience as CEO of Medtronic, Bill George summarized the managing for stakeholders mindset:15 Serving all y eholders is the best way to produce long term results and create a growing; prosperous company . . . Let me be very clear about this: there is no conf een serving all your stakeholders and providing excellent returns le to have one without the other. However, serving all these stakeholder groups requires discipline,

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The primar y responsibility of the e xecutive is to create as much value as possible for stakeholders.16 eholder interests conf ict, the executive must f nd a way to rethink the problems so that these interests can go to gether, so that e ven more v alue can be created for each. If tradeoffs ha ve to be made, as often happens in the real w then the executive must f gure out how to make the tradeoffs, and immediately begin improving the tradeof fs for all sides. Managing for stakeholders is about creating as much v alue as possible for stakeholders, without resorting to tradeoffs. We believe that this task is more easil y accomplished w hen a business has a sense of pur pose. Furthermore, there are few limits on the kinds of purpose that can dri ve a business. Wal-Mart may stand for “e veryday lo w price”. Merck can stand for “alle viating human suf fering”. The point is that if an entrepreneur or an e xecutive can f nd a purpose that speaks to the hearts and minds of key stakeholders, it is more lik ely that there will be Purpose is comple x and inspirational. The Grameen Bank w ants to eliminate po verty. Fannie Mae w ants to mak e housing af fordable to every income le vel in society . Tastings (a local restaurant) wants to bring the taste of really good food and wine to lots of people in the community. all of these organizations have to generate prof ts, or else they cannot pursue their pur poses. Capitalism w orks because w e can pursue our purpose with others. When w e coalesce around a big idea, or a joint pur pose e volves from our day to da y acti vities with each other , then g reat things can happen. To create value for stakeholders, e xecutives must understand that business is full y situated in the realm of humanity . Businesses are human institutions populated b y real live comple x human beings. Stak eholders ha ve names and faces and children. They are not mere placeholders for social roles. As such, matters of ethics are routine when one takes a managing for stakeholders approach. Of course this should go without saying, but a par t of the dominant stor y

about business is that business people are only in it for their o wn nar rowly def ned self interest. One main assumption of the managerial vie w with shareholders at the center is that shareholders onl y care about retur ns, and therefore their agents, managers, should only care about returns. However, this does not f t either our e xperiences , “The only assets I manage go up and do wn the ele vators everyday”. Most human beings are complicated. Most of us do what we do because we are self-interested and interested in others. Business w orks in par t because of our ur ge to create things with others and for others. Working on a team, or creating a new product or deli very mechanism that mak es customers li ves better or happier or more pleasurable all can be contributing f actors to w hy we go to work each day. And, this is not to deny the economic incentive of getting a pay check. The assumption of nar row self-interest is e xtremely limiting, and can be self-reinforcing—people can be gin to act in a nar row self-interested w ay if they believe that is what is expected of them, as some of the scandals such as Enron, have shown. We need to be open to a more comple x psychology—one an y parent f nds f amiliar as the y ha ve shepherded the g rowth and de velopment of their children.

V. Some Arguments for Managing forStake holders Once y ou sa y stak eholders are persons then the ideas of ethics are automaticall y applicab le. However y ou inter pret the idea of “stak eholders”, you must pay attention to the effects of your actions on others. e the Responsibility Principle suggests that this is acornerstone of any adequate ethical theor y. There are at least three main ar guments for adopting a managing for stak eholders approach. Philosophers will see these as connected to the three main approaches to ethical theory that have developed historically. We

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shall brief y set forth sketches of these arguments, and then suggest that there is a more po w fourth argument.17

The Argument from Consequences ve ar reason that the dominant model of managing for shareholders is a good idea is that it leads to the best consequences for all. Typically these ar invoke Adam Smith’s idea of the invisible whereby each business actor pursues her o wn self The prob lem with this ar gument is that w e no w w with moder that the argument only works under v conditions that seldom describe the real w orld. And ,w w that if the economic conditions get very close to those needed to produce the g reatest reatest good y result. Managing for stak eholders ma y actuall y produce better consequences for all stak eholders because it recognizes that stakeholder interests are joint. If one stakeholder pursues its interests at the expense of all the others, then the others will either withdraw their suppor t, or look to create another network of stak eholder value creation. This is not to sa y that there are not times w hen one stak eholder will benef t at the e xpense of others, but if this happens continuously over time, then in a relatively free society, stakeholders will either: (1) exit to for m a ne w stak eholder netw ork that satisf es their needs; (2) use the political process to constrain the of fending stakeholder; or, (3) in vent some other form of acti lar needs.18 Alternatively, if w e think about stak eholders engaged in a series of bar gains among themselves, then we would expect that as individual stakeholders recognized their joint interests, and made good decisions based on these interests, better consequences w ould result, than if the y each nar rowly pursued their individual self interests.19 Now it may be objected that such an approach ignores “social consequences” or “consequences

to society”, and hence, that w e need a concept of “corporate social responsibility” to mitigate these effects. This objection is a v estigial limb of the dominant model. Since the onl y ef fects, on that view, w ere economic ef fects, then w e need to think about “social consequences” or “cor porate social responsibility”. Ho wever, if stak eholder relationships are understood to be full y embedded in morality , then there is no need for an idea lik e cor porate social responsibility . We can replace it stakeholder responsibility” which is a dominant feature of managing for stakeholders.

The Argument from Rights The dominant stor y gi ves proper ty rights in the corporation e xclusively to shareholders, and the natural question arises about the rights of other stakeholders who are af fected. One w ay to under question of rights, seriousl y. If y ou belie ve that rights mak ther that if one person has a right to X then all persons ha ve a right to X, using a stak eholder approach. F or instance, w hile shareholders may well have property rights, these rights are not absolute, and should not be seen as such. Shareholders ma y not use their proper ty to abridge the rights of others. F or instance, shareholders and their agents, managers, ma y not use corporate proper others. One wa holders is that it assumes that stakeholders have some rights. Now it is notoriously diff cult to parse the idea of “rights”. But, if e xecutives tak e managing for stak eholders seriousl y, the y will automatically think about w hat is o wed to customers, suppliers, employees, f nanciers and communities, in virtue of their stake, and in vir tue of their basic humanity.

The Argument from Character One of the strongest ar for stak eholders is that it asks e

xecutives and

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entrepreneurs to consider the question of w hat kind of compan y the y w ant to create and build. The answer to this question will be in lar ge part an issue of character. Aspiration matters. The business virtues of eff ciency, f airness, respect, inte grity, keeping commitments, and others are all critical in being successful at creating value for stakeholders. y about the dominant model and its sole reliance on a narrow economic logic. If we frame the central question of management as “how do we create value for shareholders” then the only virtue that emerges is one of loyalty to the interests of shareholders. Ho wever if we frame the and sustain the creation of v alue for stak eholders” or “how do we get stakeholder interests all going in the same direction, y of the other vir are relevant. Taking a stakeholder approach helps people decide ho w companies can to their well-being and kinds of lives they want to lead. By making ethics e xplicit and building it into the basic w ay w business, we avoid a situation of bad f aith and self deception.

The Pragmatist’s Argument The previous three ar guments point out impor tant reasons for adopting a ne w stor y about business. Pragmatists want to kno w how we can li ve better, how w e can create both ourselv es and our communities in way where values such as freedom and solidarity are present in our e v y lives to the maximal extent. While it is sometimes to think about consequences, rights, and character in isolation, in reality our li ves are richer if w e can have a conversation about how to live together better. dating to philosophers such as William James and wey. More recentl y philosopher Richard Rorty has expressed the pragmatist ideal:20 beings will come to enjoy more money, more free time, and greater social equality, and also that

they will develop more empathy, more ability to put themselves in the shoes of others. We hope that human beings will behave more decently toward one another as their standard of living improves.

By building into the v ery conceptual frame work w , consequences, decenc y, shared pur pose, and pa ying attention to all of the ef fects of how we create v alue for each other , we can mak e in a way that sustains us. For the pragmatist, business (and capitalism) has e volved as a social practice; and impor tant one that w e use to create v alue and trade with each other. On this view, f rst and foremost, business is about collaboration. Of course, in a free society, stak eholders are free to for m competing networks. But, the fuel for capitalism is our desire to create something of v alue, and to create it for ourselves and others. The spirit of capitalism is the spirit of individual achievement together with the spirit of accomplishing g reat tasks in collaboration with others. Managing for stak eholders mak es this plain so that w e can get about the business of creating better selv es and better communities.

End Notes 1.

elopment time. The ideas here have been reworked from: R. Edw ard F reeman, Strategic Management: A Stakeholder Appr oach [Boston: reeman, “A Stakeholder Theory of the Moder n Corporation, in T. Beauchamp and N. Bowie (eds.) Ethical [Englewood cliffs: Prentice Hall, 7th edition, 2005], also in earlier editions coauthored with William Ev an; Andrew Wicks, R. Edw ard Freeman, Patricia Werhane, and Kirsten Mar tin, Business Ethics: A Managerial Appr oach, [Englewood Cliffs: Prentice Hall, forthcoming in 2008];

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ard F reeman, Jef frey Har rison, w Wicks, Managing f or Stakeholders, [Ne w Ha ven: Yale Uni versity Press, forthcoming in 2007]. I am grateful to editors and coauthors for per mission to re work these ideas here. 2. It has been called a v “stakeholder management”, “stakeholder capitalism”, “a stak eholder theor y of the moder n cor “managing for stak eholders” will become clearer as w e proceed. Man y others ha ve worked on these ideas, and should not be held accountable for the rather idiosyncratic vie w outlined here. 3. F y of the idea see R. Edw ard Freeman, “The De velopment of Stak eholder Approach,” in K. Great Minds in Management, Oxford: Oxford Uni v 2005. doesn’t manage “for” these benef ts (and harms). difference between managerial and shareholder capitalism is lar ge. However, the existence of agenc y theor y lets us treat the two identically for our purposes here. Both agree on the vie w that the moder n f rm is characterized b y the separation of decision making and residual risk bearing. The resulting agenc y prob lem is the subject of a v ast literature. Chandler’s brilliant book, and Str Boston: MIT Press, 1970. chronicles the rise of the di visionalized cor poration. F or a not so f attering account of General Motors during the same time period see Peter Drucker’s classic work, The Concept of the Corporation. New York: Transaction Publishers, Reprint Edition, 1993. 7. Executives can tak comfort in the nosum that in the long r un things w ork out and

the most eff cient companies sur vive. Some market theorists suggest that f nance acts lik e “uni v ev le management decision, w hether or not, actual managers are a ware of it. P erhaps the real difference between the dominant model and the “managing for stak eholders” model proposed here is that the y are simpl y “about” different things. The dominant model is about the strict and nar row economic lo gic of markets, and the “managing for stak eholders” model is about ho w human beings create value for each other. the f avor of the response of f nance theorists sounds like this. The world would be f if, despite all of the imperfections, executives tried to maximize shareholder value. It is diff cult to see ho w an y rational being could accept such a vie w in the f ace of the recent scandals, w here it could be ar that the w orst of fenders w ere the most ideologically pure, and the result w alue (see Breaking the Short Term Cyc le, Charlottesville, VA: Business Roundtab porate Ethics/CFA Center for F inancial Mark et Integrity, 2006). Perhaps we have a version of s idea that happiness is not a result of tr y and maximize utility. Collins and P orras ha ve suggested that e ven if e xecutives w ant to maximize shareholder value, the y should focus on pur pose instead, not lead to maximum value (see J. Collins and J. P orras, Built T o Last, Ne w York: Har per Collins, 2002). 9. See R. Edw ard F reeman, “The P olitics of Stakeholder Theor ” Business Ethics Quarterly, 10. The second par t of the inte gration thesis is left for another occasion. Philosophers w ho

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read this essay may note the radical depar from standard accounts of political philosophy. Suppose w e be gan the inquir y into political philosoph y with the question of “ho w is v alue creation and trade sustainab le o ver time” and suppose that the traditional be ginning question, “how is the state justif ed” was a subsidiary one. We might discover or create some v ery dif ferent ans wers from the standard accounts of most political theor y. See R. Edward Freeman and Rober t Phillips, “Stak eholder Theory: A Liber tarian Defense”, Busiy, Vol. 12, No. 3, 2002, pp. 11. Here w e roughl y follo w the lo gic of John Rawls in Political Liber alism, (New York: Columbia University Press, 1995). 12. There are man y statements of this principle. Our ar gument is that w hatever the particular conception of responsibility there is some underl e our willingness or our need ves to others. Note the answer that the dominant view of business must gi ve to questions about . “Ex ecutives are responsib le only for the ef fects of their actions on shareholders, or only in so far as their actions create or destroy shareholder value.” 13. The spirit of this diag ram is from R. Phillips, Stakeholder ganizational Ethics (San F rancisco: Ber ret-Koehler Publishers, 2003). 14. In earlier versions of this essay in this volume w y duty to be extended to “f duciary duty to stakeholders”. We believe that such a mo ve be defended without doing damage to the notion of “f duciary.” The idea of having a eholders George, Authentic Leadership, San F rancisco: Jossey Bass, Inc., 2004.

ersonal and Professional Contexts 85

16.

e given by the dominant model: Create as much v alue as possible for shareholders. 17. Some philosophers have argued that the stak eholder approach is in need of a “normative justif cation.” T meaning, we take it as a call to of managing for stak . e eschew v ve vs. instrumental” distinction that so many business thinkers (and stakeholder theorists) ha ve adopted. Managing for stakeholders is inherently a narrative or story that is at once: descriptive of how some businesses do act; aspirational and normative about how the y could and should act; instrumental in ter ms of w hat means lead to w hat ends; and managerial in that it must be coher y guide executive action. S. V “Stakeholder Value Equilibration and the Entrepreneurial Process,” Ethics and Entrepreneurship, The Ruff n Series, 3: 45–57, 2002; S. R. Velamuri, “Entrepreneurship, Altruism, and the Good Ethics and Entr epreneurship, The Ruff n Series, 3: 125–143, 2002; and , T. Har ting, S. Har meling, and S. Venkataraman, “Innovative Stak eholder Relations: When “Ethics pays” (and t)” Business Ethics Quarterly, 16: 43–68, 2006. there are and tions that economists w s dilemma” but these are not the paradigmatic cases, or if the y are, w e seem to solv e them routinely, as Russell Hardin has suggested Chicago: University of Chicago Press, 1998. Mendieta (ed.) Take Care of F reedom and Truth Will Take Car ws with Richar (Stanford: Stanford Uni versity Press, 2006) p. 68.

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Reading 2-3

What Stakeholder Theory Is Not Robert Phillips, Ed Freeman, and Andrew Wicks At its cur rent stage of theoretical de velopment, stakeholder theor y ma y be under mined from at least tw misinterpretations. Some ha ve sought to critique the theor y based upon their o wn stylized conception of the theor y and its implications. Though not always without some te vidence for such characterizations, w e ar gue that man y of these distortions represent stra w-person v ersions of the theory. At the least, the critical misinter pretations do not represent the strongest, most defensible variation of stakeholder theory.

CriticalD istortions Stakeholder Theory Is an Excuse for Managerial Opportunism The shareholder w ealth maximization imperati ve is frequently motivated by so-called agenc y problems: hazards arising from the separation of risk wn as ownership and control, respecti vely). The concer n is that without this moral imperative, managers would es at the e xpense of the or ganization and the recipients of its residual cash fows, the shareholders . . . Rather than morall y superior , therefore, stak eholder theor y is actuall y immoral inasmuch as it ignores this agenc y relationship or so goes the argument.1 wever, the result of the o ver-extended metaphor of agenc y theor y in economics. If managers are agents or f duciaries at all, it is to the organization and not to the shareowners. Clark (1995) writes: To an experienced corporate la er who has studied primary legal materials, the assertion that corporate managers are agents of investors,

w odd or loose. The lawyer would make the following points. (1) corporate off cers like the president and treasurer are agents of the corporation itself; (2) the board of directors is the ultimate decision-making body of the corporation (and in a sense is the group most appropriately identif ed with ‘the corporation’); (3) directors are not agents of the corporation but are sui generis; (4) neither off cers nor directors are agents of the cers and directors are ‘f duciaries’ with respect to the corporation and its stockholders.

The cor poration is not coe xtensive with the y enter wn property (including its own stock2 or that of other cor porations). It has standing in a cour t of law. Limited liability assures that shareowners are not, in general, personall y liab le for the debts of the organization (cf., Sollar, 2001). T is not merel y a shor thand way of sa ying that the y are agents for the shareholders. The corporation is meaningfully distinct. 3 The same goes for other limited liability entities such limited liability par tnerships to the e xtent that it is the par tnership that has le themselves and the par tners enjo personal responsibility for the actions and debts of the organization. Some ha ve suggested that stak eholder theor y provides unscr upulous managers with a ready excuse to act in their o wn self-interest thus resur recting the agenc y prob lem that the shareholder wealth maximization imperati ve w as designed to overcome. Opportunistic managers can more easily act in their o wn self-interest b y claiming that the action actually benef ts some stakeholder group

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or other. (Jensen 2000, Marcoux 2000, Ster nberg 2000). “ All but the most e gregious self-ser ving managerial behavior will doubtless ser ve the interest of some stak ork against the interests of others” (Marcoux 2000: 97) and by appealing to the interests of those who benef t, the manager is ab le to justify the self-ser ving behavior. Hence, stak eholder theor y “ef fectively ys business accountability . . . because a business that is accountab y accountab g 2000: 510). Thef that no small measure of managerial oppor has red in the name of shareholder wealth and WorldCom, one need onl y consider the no w dethroned king of shareholder wealth Al Dunlap for 4 an Dunlap grossly mismanaged at least o companies to his own signif cant f nancial gain. And every move he made was in the name of shareholder wealth. Dunlap agreed to pay $15 million to settle a lawsuit brought by the shareholders of Sunbeam Coproration.5 There reason to believe that stakeholder theory will provide any more or less justif cation for the oppor . eholder theory is a v ersion is a problem, but it is no more a prob lem for stakeholder theor y than the alter natives. Indeed , there may be some reason to belie ve stakeholder theor y is more resistant to managerial self-dealing. In their discussion of “stak eholder-agency” theor y Hill and Jones (1992) ar interest in organizational growth (citing remuneration, po wer, vating this interest) y not onl y to the interest of stockholders, but also contrar y to the interests of stak eholders. The viously, the claims of dif ferent groups may conf ever, on a more general level, each g roup can be seen as ha ving a stak e in the continued e xistence of the f rm.” (1992: 145). Stakeholder , therefore, does not advocate the ser o masters. Rather, managers ser ve the interest of one master—the organization.

Stakeholder Theory Cannot Provide a Specific Objective Function for the Corporation Another critique concerns the “radical -determinism” of stakeholder theory. That is, “in rejecting the maximization of long ter m owner value as the pur pose of business, and requiring business instead simpl y to ‘balance’ the interests of all stak eholders, stak eholder theor y discards the objective basis for e valuating business action” (Sternberg 2000: 51) and the theor y f ails to be “illuminatingly action-guiding” (Marcoux 2000). In one sense, this critique is accurate. Stak eholder theory does fail to provide an algorithm for day-to-day managerial decision-making.This is due to the lev taking place. Stak eholder theor y provides method by w hich stak eholder ob ligations are deri ved and an admonition that managers must account for the interests of these stak eholders when making decisions. It is impossib le to sa y a priori w hat these interests will be and ho w the y may be accounted for due to the m yriad w ays that an or ganization might be arranged. Hence, it is impossible for such c action in the abstract. However, this is another e xample of an e vil genie criticism. The same critique ma y be le veled at the conventional shareholder-centered view. That is, the managerial dictate to maximize shareholder wealth stands mute w , Ho w? This le w ays to do so. 6 minacy and the of a one right w ay to mange is the reason for the business judgment r ule discussed abo ve and the cour eil. Ostensible critics of stak eholder theor y, including Jensen and Ster nberg, eagerl y embrace an ariation of stak eholder management as a means to “maximize the total mark et value of the f m o wner v alue,” respectively. In his critique of stak eholder theor y, Jensen concedes that, “value maximizing says noth-

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(2000: 49), though “Maximizing the total mark et value of the f r alues of the equity, debt and an y other contingent claims outstanding on the f rm—is one objecti v that will resolve the tradeoff problem among multi” (Jensen 2000: 42). Perhaps taking the organization’s objective function to be the maximization of total mark et value (or prof ts or w ealth) does mak e ex post measurement of success more deter minate than optimizing the well-being of multiple stakeholders.” Distributing the v w superior in light of the f act of hounded rationality and the limits on human co gnitive capacity. There is no reason to belie ve, however, that stak eholder management w ould be an y easier or the theor y more deter minate e x ante w hen under taken for umental rather than nor mative reasons. Moreover, e very e x post decision pro vides the ex ante circumstances for the ne xt set of decisions. Ev en considering value maximization as a scorek eeping device (Jensen 2002) is problematic when the score for the cur rent game deter mines ho w subsequent games are played and coached. , Albert Einstein is quotes as advising, “Make things as simple as possible-but no simpler .” The theor y and practice of management cer tainly can be simplif ed— consider bookstore shelv es packed with books on how to manage in a minute. Simplicity, however, is not the lone criterion of usefulness. There is no reason to believe that stakeholder management would be any easier or the theory more determinate when undertaken for instrumental rather than normative reasons. The belief that maximizing “the total mark et value of the f rm” or “long-ter m owner v alue” is interests ma y itself pro ve dangerous due to w hat we ma y ter m the delusion of deter minacy. That is, under conditions of uncer bounded rationality, managers ma y be led to belie ve that the standard objective function dictates action in a

way that is more specif c than stak eholder theory. It does not—and the belief that it does gi ves managers an sense of conf dence in their decisions. Managerial wisdom and judgment are replaced with a f alse sense of mathematical precision . . .

Stakeholder Management Means That All Stakeholders Must Be Treated Equally y asser ted that stak eholder theor y implies that all stak irrespective of the f act that some ob viously contribute more than others to the or ganization (Gioia g 2000: cf. Jones and Wicks 1999b). Prescriptions for equality have been inferred from discussions of “balancing” stak eholder interests and are in direct conf ict with the reward systems (e.g. Nadler and Tushman 1997). Marcoux is among those w ho mak e this criticism in his anal ysis of the concept of balance in stakeholder theor y. He be gins b y outlining three potential inter stakeholder account. Egalitarianism—Distribution based on something like Rawls’ wls 1971).7 Equalitarianism—Equal share for all stakeholders Pareto-Consequentialism—making at least one better without diminishing anyone

Marcoux’s ar guments against these three candidates are lar gely sound. Ho wever, he misses one of the more ob vious—and indeed strongest— interpretations of balance among organizational stakeholders: meritocracy.8 On the most defensible conception of stak eholder theor y, benef ts are distributed based on relati ve contribution to the or ganization. This inter pretation is suggested in a quotation from the Sloan Colloquy. They write, “Cor porations should attempt to distribute the benef ts of their acti vities as equitab ly as possible among stak eholders, in light of their r espective contributions, costs, and risks. ”9 Inasmuch as this quote was used early in the paper to ex

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eholder theory, it is surprising that Marcoux f ails to appeal to it in his won interpretations of balance. Similarly, Sternberg argues that “in maintaining that all stak eholders are of equal impor tance to a business and that business ought to be ans werable equally to them all, stak eholder theor y confounds business with go ver ” (2000: 50). She cites no author, however, who ar of or managerial answerability. This is, again, suggesti ve of a stra w-person ar gument. A meritocratic inter pretation of stak eholder balance overcomes the objection that a stak eholder-based f rm using either the e galitarian or equalitarian interpretation would be unab any other manner of f nancing. Cer tainly equity f nancing is centrall y impor tant to or ganizations viders of this capital w ould gar ner a substantial por tion of the economic benef ts of the f rm as well as receive a great deal of managanizational decision-making. On the conception of stak eholder theory proffered here, shareholders w ould get a f air return on their investment without managerial concer n that is exclusive of other g roups to w hom an ob ligation is due.10 Still less does the stakeholder theory is a theory of or gy and ethics and NOT a theory of the whole political economy. This meritocratic hierarchy isn’t the only criterion by which stakeholders may be ar ranged. Phillips (2001) has suggested that stak eholders ma y usefull ve and derivative stakeholders. Nor mative stak eholders are those to whom the or ganization has a direct moral ob ligation to attend to their w ell-being. They provide the answer to seminal stak eholder quer y. F or w hose benef t ought the f rm he managed. Typically normative stak eholders are those most frequentl y cited in stak eholder discussions such as f nanciers, emplo yees, customers, suppliers and local communities. Alternatively, deri vative stak eholders are those groups or indi viduals w ho can either har m or ganization, but to whom the organization has no direct moral obligation as stakeholder.11

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This latter group might include such groups as competitors, acti vists, ter rorists, and the media. 12 The or ganization is not managed for the benef t of deri vative stak eholders, but to the e xtent that they ma y inf uence the or ganization or its nor mative stak eholders, managers are ob liged to account for them in their decision-making. F ar from strict equality, therefore, there are a number of more con vincing ways that stak eholder theor y may distinguish between and among constituenc y groups . . .

FriendlyMis interpretations Comprehensive Moral Doctrine In his discussion of the idea of an o verlapping consensus, Ra wls (1993) distinguishes betw een his own theor y and w hat he ter ms comprehensive moral doctrines. A comprehensive moral doctrine is one that is able to cover the entirety of the moral universe without reference to an y other theor y. All moral questions can be ans wered from within a comprehensi ve moral doctrine. Ra wls claims that not only does his conception not depend on a y for is foundation, but that it is consistent with a “reasonable pluralism” of such doctrines. One need not con vert from her prefer red doctrine in order to accept justice as f airness. All reasonable moral doctrines already accept it from within their own conception. Moreover, not only stakeholder theory not a comprehensi ve moral doctrine, but it is y et another step remo ved e ven from Ra wls’s o wn theory. Stak eholder theor y is a theor y of or ganizational ethics. As described by Phillips and Mar golis (1999), theories of or ganizational ethics are distinct from moral and political theories due to the difference in the subject matter of the v arious disciplines. Contrary to the assumptions of political theory; organizations are, to use Ra wls (1993) terms, voluntary associations rather than a par t of the basic str . Fur ther, interaction

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within and among organizations create moral obligations over and above those duties that arise due simply to one’s status as a human being or citizen of a nation. Stakeholder theor y is not intended to pro vide an ans wer to all moral questions. Stak eholderbased ob ligations do not e ven tak e precedence in all moral questions in an or ganizational conte xt. V y group b ganizations and the g ratuitous destruction of the natural environment are morally wrong, but such judgments rel y on conited (Orts and Strudler 2002; Phillips and Reichar t 2000). Stakeholder theor y shares this delimitation maximization—at least as elaborated by Friedman (1971). F riedman’s defense of shareholder wealth maximization is a moral one based on the property rights of shareholders. Note worthy for our pur poses, Friedman’ condition that shareholder wealth maximization must tak e place within the constraints of la w and . el of analysis operative in F riedman’s system. So too is the case with stakeholder theory.

Conclusion eholder theory b y addressing a number of stra w-person objections posed b y critics of the theor y as w ell is a few friendly overextensions and distortions averred b y stak eholder theor y adv ocates. We do not presume to dictate the research agenda of other scholars. Ho wever, w e belie ve that it is impor tant to a void talking past the man y intelligent and eholder theor y as well as a void “preaching to the choir’ by offering extensions that will only convince one who already advocates some v ersion of the theor y. By clear ing a way some of the most common misconceptions of stakeholder theory, we suggest that we are wer and the limitations of thisapproach.

End Notes 1. Even should our arguments about agency and stakeholder theor y pro ve uncon vincing, w e are not the f rst to address the issue; previous Jones (1995), and the ar ticles in Ho wie and Freeman (1992). 2. We might test the proposition that shareholders won the corporation through a thought experiment: Who would o it bought back all of its own stock? ts (1997) t J. Dunlap, Mean Business, w York: Simon & Schuster). John A. Byrne. Chainsow (New Y ormer Sunbeam Chief Exec Shareholder Lawsuit for $15M. Down Jones Newswire. January 14, 2002. 6. There are also multiple means of measurement (e.g., accounting prof ts, f rm value, dividends, long and shor t ter m market value for shares). Thanks to an anonymous reviewer for pointing out this out. wls’s Principle says that social ranged such that na y must redound to the benef 8. Paul Glezen has also suggested “balance” may be insightfully interpreted in the sense meant when discussing balance in wine. We do not pursue this inter pretation, but merel y point it out as an interesting variation. Stakeholder Colloquy, 1999, “Clarkson ” The Sloan Stak eholder Colloquy was a broad and impor tant ef fort to promote and or ganize research on issues sur rounding stakeholder theory. ly, when prof ts are discussed among the visionar y companies of Collins and P orras (1994), it is not in ter ms of maximization, but “reasonable” (Cord). ‘fair’ (Johnson vs. Johnson), “adequate” (Motorola), and “attractive” (Mar

Chapter 2

11. The or ganization ma y ha ve other duties or obligations to non-stak eholders, such as the duty to not cause har m to, lie to, or steal from them. These duties exist prior to and separate from stakeholder obligations and are not considered w hen estab lishing stak eholder status. See Phillips 1997. 12. These lists of eholders are onl y for the pur pose of generic e xample. Which specifc g roups are w hat sor t of stak eholder,

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or indeed which are stak This can only be determined b y reference to actual organizations in actual relationships with other groups.

References Note: References have been removed from publication . mhhe.com/busethics2e.

Reading 2-4

When Good People Do Bad Things at Work: Rote Behavior, Distractions, and Moral Exc

ob

Dennis J. Moberg The ne ws is full of the e xploits of cor porate villains. We read about how off cials at Lincoln Savings and Loan bilk ed thousands out of their customers’ retirement nest e ggs. There are stories of the lies Bro wn and Williamson Tobacco executives told about the addicti v and the company’s subsequent campaign to destroy whistle-blower Jef frey Wigant. Also in the ne ws are the top managers at Time Warner who looked the other w ay rather than for sale of rap music with l yrics that adv ocated violence directed at w omen and the police. Such acts are hard to forgive. Scoundrels such as these seem either incredibly weak or dangerously f awed. Y bad people. In fact, a signif cant number of unethical acts in business are the lik ely result of foib les and failings rather than self shness and g reed. Put tently do bad things. For those of us concer ned about ethical actions and not just good intentions, the prob lem is clear . W actors that k eep people from doing their best and eliminate them whenever we can.

ProblemN o.1:Sc ripts One factor is something psycholo gists call scripts. This term refers to the procedures that e xperience tells us to use in specif When w val of a new g e probably use scripts. Unlike other for ms of e xperience, scripts are stored in memor y in a mechanical or rote f ashion. When w y familiar situation, rather than activel e reserve our mental ener ve as though we are cruising on automatic pilot. In a classic psycholo gical e xperiment, people approached someone at an off ce machine making copies and ask y I please make just one copy because . . . ” The person at the machine generall y complied with this request, but the reall y interesting f nding w as that the lik elihood of compliance was totall y independent of the reasons stated. In fact, superf uous reasons such as “because I need to make a cop y” w sons such as “because m y boss told me she needed these right a way.” Apparently, w e ha ve all e xperie don’t give the

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reasons our attention, not to mention our careful consideration. One ethical lapse clearl le to scripts was Ford Motor Co.’s failure to recall the Pinto in the 1970s. The Pinto w as an automobile with an undetected design f aw that made the gas tank burst into f ames on impact, resulting in the death and disf gurement of scores of victims. Dennis Gioia, the F ord recall coordinator at the time, re viewed hundreds of accident repor ts to detect w hether a design f aw was implicated. Later f prob

ve suggested a signif cant ere essentially y others that I was dealing with (and dismissing) all the time. . . . I w of decision automatically every day. I had trained m didn’t f t the relev

Situations lik e this occur frequentl y in the w ork world. Repetitive jobs requiring vigilance to prevent ethical lapses can be found in quality control, customer service, and manuf In this respect, consider what happened when a nurse with a script that called for literal obedience to a doctor’ ear drops in a patient’s right ear as “place in Rear.” Good people can inadvertently do very bad things. Scripts may also be at work when we come face to face with those w ho are suf where we observe the pain of those in need, scripts permit us to steel ourselv es against feelings of empathy. Most of us ha ve been approached b y the xposed to hor rif c images on the television news, and asked for donations on According to research at the University of Kansas, scripts allo w people to a v for the suf fering of others in situations w hen providing help appears costly. In work contexts, this might e xplain w hy businesspeople do not al ways y to documented cases of human suf fering. indifference may actually not be calculated at all.

Whenever there is repetition, there are likely to be scripts. Accordingly, the best w ay to eliminate the potential of scripts to result in unethical behavior is to k eep people out of highl y repetitive situations. Technology can and has been used to eliminate highl y routine tasks, but job rotation is also an option. For example, the Daily Oklahoman ne This helps keep the editors mentally sharp. ou’ hen you come to a particular job. Like last night I did inside [design], and it was a long and tor large paper something thoroughl y dif ferent tonight, so I don’ t feel lik ” Daily Oklahoman has improved because those who switch roles are e their colleagues tak e to the job . “Every editor has viously, about w hat’s a big error and what’ ,” he said. Although the original intent of the role s witching was to distribute stress more evenly is probably less prone to ethical lapses.

Problem No. 2: Distractions Scripts are co gnitive shor tcuts that tak e the place A similar human tendenc y is our mindless treatment of distractions. for a moment about the last time y ve to a very important meeting. Once there, w ere y ou ab le to recall any details of your journey? Most of us cannot, w hich demonstrates that w olving task, we don’t deal well with distractions. This inattention to w hat is happening on the peripher le with our spouses and signif cant others, and it can also result in ethical lapses. In one very telling experiment, di were told that they had to deliver a from prepared notes in a classroom across campus. Half the students were told they had to hur ry to be

Chapter 2 Ethical Decision Making: Personal and Professional Contexts 93

on time, and the other half were told they had more than ample time. On the w ay y an actor), w ho sat slumped ay, coughing and g roaning. Shockingly, onl y 16 of the 40 di stopped to help, most of them roup that had ample time. To those in a hur , the man was a distraction, a threat to their focus on giving a lec-

in production, the chances are that the distance may be g reat enough for us to be morall y indifferent to w hat happens to them. Similarl y, if w e use stereotypic terms like bean counter or sneer w hen we say management, then it is clear that people in these categories don’ Not sur prisingly, one w ay to e xpand the scope of justice is to promote direct contact with individuals w ho ha ve been morall y e xcluded. One compan to discuss the parable of “The Good Samaritan.” wa rm. In the Mindlessness about distractions at w ork is most , pronounced when employees, with limited means of and his closest advisers e xpressed concern that his e, are encouraged to be focused and managers and emplo yees lacked an understanding ven. The best way to combat this tendenc y is for of the end users of Eisai’s products. senior managers to model the vir tue of temperance. Hearing this, Naito decided to shift the focus of attention from the customers of his compaf cult to convince employees to be open to problems ny’s macists—to their customers—patients and their f amilies. Eisai manor acilitates w ork–family yee involvement in the may move e that should not of ganization. This was be seen as mere onto the center stage of a re volutionary idea for this compan y of 4,500 consciousness. employ ees needed a more vivid reason to care deeply about their work. “It’s not enough to tell emplo yees that if the y Problem No. 3: Moral Exclusion do something, the compan y will g row this much A f nal problem that brings out the w orst in good or their salar y will increase this much. That’s just people is the v ery human tendenc y to morall y not enough incentive,” says Naito. “You have to e vidu- show them ho w what the als or groups are perceived as outside the boundary to society, or e xactly ho w it will help a patient. ” in w hich moral v alues and considerations of f air- Accordingly, Naito decided to send 100 managers ness apply. The most striking e xample occurs dur - to a seven-da ing warfare when the citizens of a countr y readily training and four days of medical care observation. perceive their enemies in demonic ter ms. Yet, this These managers were then sent to diverse tendency to discount the moral standing of others regions throughout Japan, w here they had to deal results in us discounting all kinds of people, some with different people, many of whom w ork cal condition. They met patients with both physical Greater awareness and extensive training have and emotional problems; some of the patients they reduced some of the exclusion women and people of color ha ve historically experienced. More w ork This pilot program grew to include more than needs to be done in this area, as w ell as in other en equally insidious forms of exclusion. support personnel had to leave their benches and One way such exclusion shows up is in our use desks and meet re y with pharmacists and of pronouns. If we are in mark eting and they are hospital people.

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ce was a way to activate human relationships,” says Naito. Another way was to institute hotlines, which have generated product ideas. As a consequence, many new Eisai drugs were including some that have promise in dealing with Alzheimer’s disease. Clearly, moral inclusion was stimulated at Eisai, at least insof ar as the end users of its products are concerned.

FailingtoB other Jesuit scholar James F . K eenan reminds us that “sinners in the Ne w T wn not for what they did, but for w hat they failed to do—for

failing to bother .” We are all prone to this f ailure, but not necessaril y because w Repetition, distractions, and our natural tendenc y to e xclude those unf amiliar to us cloud our best We o we it to ourselv es to resist these per nicious inf uences, and we ow munities to help them to do the same. Source: Issues in Ethics 10, no. 2 (Fall 1999), Markkula Center for Applied Ethics, (http://www .scu.edu/ethics/publications/iie/v10n2/peopleatwork .html). Reprinted by permission of the author. All rights reserved.

Chapter

3 PhilosophicalE thics and Business

95

Opening Decision Point Executive Compensation: Needed Incentives, Justly Deserved, or Just Distasteful?

96

ChapterO bjectives After reading this chapter, you will be able to: 1. 2.

Describe how utilitarian thinking underlies economic and business decision making.

3.

Explain how the free market is thought to serve the utilitarian goal of maximizing the overall good.

4.

Explain some challenges to utilitarian decision making.

5.

Explain principle-based, or deontological ethical theories.

6.

Explain the concept of human rights and how they are relevant to business.

7.

Distinguish moral rights from legal rights.

8.

Explain several challenges to deontological ethics.

9.

.

Introduction:E thicalT heoriesandT raditions Consider the reasons that you or others of payment of large bonuses to AIG executives. Upon ref ection, these reasons f all into three general cate gories. Some reasons appeal to the consequences of pa ying the bonuses: they either will, or will not, provide incentives for producing good work and benef tain principles: one should not break a contractual promise, e ven if it has unpopular results; one should ne ver benef t from serious har ms that ha ve been caused b y one’s o wn personal c haracter: accepting bonuses 97

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is g reedy aying the bonuses that w ere due in the f ace of pub lic criticism was courageous and had to be done as a matter of integ . As it out, the major traditions of ethical theory that we shall rely on in this text are represented by these three categories. This should be no sury ref ays to think and reason about ho w we should li ve, what we should do. Ethics of consequences, ethics of principles, and ethics of personal character are the traditions that will be introduced in this chapter. Chapters 1 and 2 introduced ethics as a for m of practical reasoning in support of decision making about ho w we should li ve our li ves. Ethics in volves what is perhaps the most signif cant question an y human being can ask: Ho w should I live my life? But, of course, this question is not ne w; every major philosophical, y has g rappled with it. In light of this, it w ould be impr udent to ignore these traditions as w e begin to examine ethical issues in business. Nevertheless, many that discussions of ethical and philethical “theories” often seems to be tootheoretical ance to business. ,w of ethical theories, one that will shed some light on the practical and pragmatic lems faced by business people. (For an examination of the pragmatic application, see the reading b y Nor man Bowie at the end of this chapter Work in Practice?”) er to the fundamental ethical question: How should human beings live their lives? In many ways, this is a simple question that w e ask, at least implicitl y, ev y. What am I going to do today, and why? Ethics can be understood as the practice of e wers to that question: y? Ethical theories attempt to ans wer the question of ho w w e should li ve, but they also gi ve reasons to suppor t their ans wers. Ethics seeks to pro vide a rational justif cation for why we should act and decide in a par ticular prescribed way. Anyone can offer prescriptions for what you should do and how you should act, but a philosophical Many people and cultures across the w orld would ans wer this “w hy” question in religious ter ms and base their nor mative judgments on religious foundations. “You ought to li ve your life in a cer tain wa ” The biggest practical problem with this approach, of course, is that people dif fer widely about their religious beliefs. If ethics is based on religion, and if dif ferent ve widely divergent religious beliefs, then it w ould seem that ethics cannot escape the predicament of relati vism. (See the Decision P Say What Is Right or Wrong” for more on ethical relativism.) Unlike religious ethics w hich explains human w ell-being in religious ter ms, philosophical ethics pro vides justif cations that must be applicab le to all people regardless of their religious star ting points. The justif cations of philosophical ethics connect the “oughts” and “shoulds” of ethics to an underl ying account of

Decision Point

Who Is to Say What Is Right or Wrong? Ethical relativism

human well-being. Thus, for e xample, “you should contribute to disaster relief because it will reduce human suf cation for an ethical judgment, w hereas “y ou should contribute to disaster relief because God commands it, or because it will bring y ou heavenly rewards” are religious rather than philosophical justif cations. (For a discussion on the application of 99

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relati , see the reading “Ethical Dimensions of Decision-Making in the De veloping World: The Case of Briber y Geetanee Napal at the end of this chapter.) Finally, ethical theories are not comprised of one single principle or framework. Ethical theories e volved over time and ha ve been ref ned and de veloped by many different thinkers. The insights of an ethical theor y prove to be lasting because the xperience. To emphasize this f act, this chapter will refer to these theories more commonl y as ethical “traditions.” e proven inf uential in the dev e a ver aluUtilitarianism is an ethical tradition erall consequences of our acts. Deontological ethics direct us to act on the basis of moral principles such as respecting human Virtue ethics directs us to consider the moral character of individuals and how v uct, a happ y and meaningThe Caux Round Table (CRT) Principles for Responsible Business, included at the end of this chapter, provide an interesting blend of utilitarian, deontological, and vir

Utilitarianism: Making Decisions Based on Ethical Consequences 1 OBJECTIVE

The f rst ethical tradition that w e shall e xamine, utilitarianism, has its roots in eighteenth and nineteenth centur y social and political philosoph y, but its core idea is just as rele vant in the tw enty-f y. Utilitarianism’s fundamental insight is that we should decide what to do by considering the consequences of our actions. In this sense, has been called a consequentialist approach to ethics and social policy: we should act in ways that produce better consequences than the alternatives we are considering. Much more needs to be . The f rst, and most obvious, question is: y “better consequences”? The most co gent answer to this question can be gi ven in ter ms of the ethical values in the previous chapters. “Better consequences” are those that promote human w ell-being: the happiness, health, dignity , inte g , freedom, respect of all the people af fected. If these elements are basic human v alues, then an action which promotes more of them than the alter native action does is more reasonab w. A decision that promotes the g reatest amount of these v alues for the g reatest number of people is the most reasonab le decision from an ethical point of view. y identif ed with the principle of “maximize the overall good” or est number.” y the decisions. Decisions that accomplish this goal are the right decisions to make ethically; those that do not are ethically wrong.

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The emphasis on the o verall good, and upon producing the g reatest good for the g reatest number, make utilitarianism a social philosoph y that opposes policies that aim to benef t only a small social, economic, or political minority . In this way, utilitarianism provides strong suppor t for democratic institutions and policies. Gover xist for the well-being of all, not to further the interests of the monarch, the nobility , or some small g roup of the elite. Likewise, the econom xist to provide the highest standard of li ving for the g reatest number of people, not to create w ealth for a few. As another business-related e xample, consider the case of child labor , discussed in fur ould advise us to consider all the lik ely consequences of a practice of emplo ying young children in factories. Obviously physical and psycholo gical har ms, they are denied oppor tunities for education, their low pay is not enough to escape a life of po verty, and so for th. Many of the human values previously described are diminished b y child labor. But these consequences must be compared to the consequences of alter native decisions. if children in poor re gions are denied f actory jobs? These children w ould still be denied oppor y are in worse pover y have less mone y for food and f amily support. In many cases, the only alternatives for obtaining any income available to young children w orkforce might include crime, dr ugs, or ther, we should consider not onl y the consequences to the children themselves, but to the entire society. Child labor can have benef cial results for bringing foreign in vestment and mone y into a poor countr y. In the opinion of some observers, allowing children to work for a day under sweatshop conditions produces better overall consequences than the available alternatives. Thus, one might ar gue on utilitarian g rounds that such labor practices are ethically permissible because they produce better overall consequences than the alternatives. This e xample highlights se veral impor tant aspects of utilitarian reasoning. Because utilitarians decide on the basis of consequences, and because the consequences of our actions will depend on the specif c facts of each situation, utilitarians tend to be v er ers. No act is e ver absolutely right or wrong in all cases in e ver ways depend on the consequences. F or example, lying is neither right nor wrong in itself, according to utilitarians. There might be situations in w hich lying will produce g reater overall good than telling the truth. In such a situation, it would be ethically justif ed to tell a lie. Also, utilitarian reasoning usually supplies some support for competing available alter natives, e.g., ban child labor as har mful to the o verall good or allo w verall good. Deciding on the ethical legitimacy of alternative decisions requires that w e make judgments about the lik ely consequences of our actions. How do we do this? Within the utilitarian tradition, there n to social science for help in making such predictions. After all, social science studies the causes and consequences of indi vidual

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Reality Check

Is Utilitarianism Egoistic?

While the imperative to maximize pleasure or happiness sounds selfish and egoistic, utilitarianism differs from egoism in important ways. Egoism is also a consequentialist theory, but it focuses on the happiness of the individual. In other words, instead of determining the “greatest good for the greatest number,” egoism seeks “the greatest good for me!” Utilitarianism judges actions by their consequences for the general and overall good. Consistent with the utilitarian commitment to democratic

equality, however, the general good must take into consideration the well-being of each and every individual affected by the action. In this way utilitarianism serves the ultimate goal of ethics: the impartial promotion of human well-being. It is impartial because it considers the consequences for everyone, not just for the individual. People who act happiness of their company are not utilitarians, they are egoists.

and social actions. the social consequences of our decisions? Consider the f elds to which one might turn in order to deter mine the lik ely consequences of child labor . Economics, gy, political science, sociology, public policy, psychology, and medical and health sciences are some of the f elds that could help deter mine the lik ely In general, the utilitarian position is that happiness is the ultimate good , the only thing that is and can be v alued for its o wn sake. Happiness is the best and most reasonab to claim that is good and happiness is bad?) The goal of ethics, both individually and as a matter of pub lic policy, should be to maximize the o verall happiness. (See Reality Check, “Is Utilitarianism Egoistic?”)

Utilitarianism and Business 2 OBJECTIVE

3 OBJECTIVE

We previousl vance for business ethics. In f s greatest contribution to philosophical thought has come its inf uence in economics. With roots in Adam Smith, the ethics which underlie much of tw y economics—essentially what w et—is decidedly utilitarian. In this w ay continues to have a ver Utilitarianism answ e do?—by reference to a r ule: maximize the o verall good. But another question ered: How do we achieve this goal? What is the best means for attaining the utilitarian goal of maximizing the o verall good? Two answers prove especially relevant in business and business ethics. One mov okes the tradition of Adam Smith and claims that free and competitive markets are the best means for utilitarian goals. This version would promote policies that deregulate priv , protect property rights, allow for free e xchanges, and encourage competition. In

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Utilitarian Experts in Practice

Consider how the Federal Reserve Board sets interest rates. There is an established goal, a public policy “good,” that the Federal Reserve takes to be the greatest good for the country. (This goal is something like the highest sustainable rate of economic growth compatible with minimal infl ation.) The Fed examines the relevant economic data and makes a judgment about the present and future state of the economy. If economic activity seems to be slowing down, the Fed might decide

to lower interest rates as a means for stimulating growing too fast and the inflation rate is increasing, they might choose to raise interest rates. Lowering or raising interest rates, in and of itself, is neither good nor bad; the rightness of the act depends on the consequences. The role of public servants is to use their expertise to judge the likely consequences and make the decision that is most likely to produce the best result.

y self-interested individuals will result, as if lead by “an invisible hand” in Adam Smith’s terms, to the maximum satisf action of individual happiness. In classic free market economics, economic activity aims to satisfy consumer demand. P eople are made happ y—human w elfare or w ell-being increases— when they get what they desire. Overall human happiness is increased therefore when the overall satisfaction of consumer demand increases. The law of supply and demand tells us that economies should , and healthy economies do, produce (supply) those goods and ser vices that consumers most w ant (demand). Since scarcity and competition prevent everyone from getting all that they want, the tion of w ants (happiness). F ree mark ets accomplish this goal most eff ciently, according to defenders, b y allowing individuals to decide for themselv es what they most want and then bargain for these goods in a free and competiti ve marketplace. This process will, o ver time and under the right conditions, guarantee the optimal satisf action of wants, which this tradition equates with maximizing overall happiness. Given this utilitarian goal, cur rent free mark et economics advises us that the most eff ucture our economy according to the principles of free market capitalism. This requires that business managers, in turn, should seek to maximize prof ts. This idea is central to one common perspective on corporate social responsibility. By pursuing prof ts, business ensures alue them and thereby ensures that resources will pro vide optimal satisf action. Thus, competiti ve mark ets are seen as the most eff cient means to the utilitarian end of maximizing happiness. A second inf uential version of utilitarian polic y turns to polic y experts who can predict the outcome of various policies and carry out policies that will attain utilitarian ends. Because utilitarian reasoning deter mines w hat to do on the basis of consequences, reasonab le judgments must tak e into account the lik ely

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consequences of our actions. But predicting consequences of human action can ved b vation. Experts in predicting such consequences, usually trained in the social sciences such as economics, political science, and public policy, are familiar with the specif cs of how society works and the hich polic erall good. (See Reality Check, “Utilitarian Experts in Practice.”) This approach to pub lic policy underlies one theor y of the entire administrative and bureaucratic side of government and organizations. From this view, the legislative body (from Cong lishes the pub lic goals that w e assume will maximize o verall happiness. ve side v yors) e xecutes (administers) policies to fulf ll these goals. The people w w how the social and political system w orks and use this kno wledge to car ry out the mandate of the le The government is f lled with such people, typicall y trained in such f elds as economics, law, social science, public policy, and political science. This utilitarian approach, for e xample, would be sympathetic with go vernment regulation of business on the g rounds that such re activities do contribute to the overall good. een these tw o versions of utilitarian polic y, what we might call the “administrati ve” and the “mark et” versions of utilitarianism, character ize man y disputes in business ethics. One clear e xample concer ns re gulation of unsafe or risk y products. (Similar disputes in volve work , environmental protection, re gulation of adv ertising, and almost e very other example of government re y experts who then establish standards that business is required to meet. Government regulators (for example, the Consumer Products Safety Commission) are then char in the marketplace. (See Decision Point, “Should Financial Markets Face Greater Government Regulation? ”) The other side ar gues that the best judges of acceptab consumers themselves. A free and competiti ve consumer market will insure that people will get the le vel of safety that the y want. Individuals calculate for themselves what risks they wish to take and w y are willing to make in order to attain safety. Consumers willing to take risks likely will pay less for their products than consumers w ho demand safer and less risk y products. The v ery basic economic concept of eff ciency can be understood as a placeholder for the utilitarian goal of maximum overall happiness. Thus, market-based solutions will prove best at optimally satisfying these various and competing interests and will thereby serve the overall good.

Challenges to Utilitarian Ethics 4 OBJECTIVE

While the utilitarian tradition contributes much to responsib le ethical decision making, it is not without prob lems. A re view of some general challenges to utilitarianism can guide us in e v making.

Decision Point Should Financial Markets Face Greater Government Regulation?

A f rst set of prob lems concer ns the need for utilitarian reasoning to count, measure, compare, and quantify consequences. If advises that we make decisions b y comparing the consequences of alter native actions, then we must ha ve a method for making such comparisons. In practice, ho wever, some comparisons and measurements are very diff cult. For example, in principle, utilitarianism tells us that the interests of all stak eholders w y a decision ought to be included in calculating the 105

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consequences of a decision. But there simpl y is no consensus among utilitarians on how to measure and deter mine the overall good. Many business ethics issues highlight how diff cult this could be. Consider the consequences of using nonrenewable energy sources and burning fossil fuels for energy. Imagine trying to calculate the consequences of a decision to in v uction of a nuclear power plant whose wastes remain toxic for tens of thousands of y ears. Consider how diff y vide hundreds of billions of dollars to bailout companies that are “too big to fail.” A second challenge goes directl y to the core of utilitarianism. The essence of mined b es the means. But this seems to deny one of the earliest ethical principles that many of have learned: the end does not alwa This challenge can be e xplained in ter ms of ethical principles. When we say that the ends do not justify the means w hat we are saying is that there are cer tain decisions we should mak e or cer tain rules we should follow no matter w hat the consequences. Put another way, we have certain duties or responsibilities that we ought to obey even when doing so does not produce a net increase in overall happiness. Examples of such duties are those required b y such principles as justice, loyalty, and respect, as well as the responsibilities which f ow from our roles as a Several e xamples can be used to e xplain w hy this is a serious criticism of utilitarian reasoning. Since utilitarianism focuses on the o verall consequences, utilitarianism seems willing to sacrif ce the good of indi viduals for the g reater overall good. So, for e n out that the overall happiness would be increased if children were held as slave labor. Utilitarians would object to child labor, not as a matter of principle, but onl y if and to the de g from the o verall good. If it tur ns out that sla very and child labor increases the net o verall happiness, utilitarianism w ould ha ve to suppor t these practices. In the judgment of man y people, such a decision w ould violate fundamental ethical principles of justice, equality, and respect. The ethical tradition that w e will tur n to in the ne xt section ar gues that individuals possess certain basic rights that should not be violated even if doing so would increase the ov viduals from being sacrif ced for the greater overall happiness. Thus, for example, it en if it contributes to the overall social good because it violates the rights of young children. A similar example cites those principles that arise from commitments that w e all make and the duties that f ow from them. For example, as a parent we love our children and have certain duties to them. V would require individuals to sacrif ce their own integrity for the common good. y a lar promises are e xactly the commitments that one ought to honor , even if the conn out to be unf avorable. The defense of bonuses to AIG executives

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The duties that one tak es on as par t of a professional role function in a similar way. Arthur Andersen’ e violated their professional duties simply to produce g reater overall benef cial consequences. La ers hav not to help their clients f nd ways to violate the la w, even if the y are of fered a high salary to do so. Teachers should not violate their professional duties by failing students w hom they do not lik e. Aaron Feuerstein might claim that despite bad overall consequences, he had to remain lo yal to his emplo yees as a matter of principle. We will consider similar themes professional commitments and duties when later chapters examine the role of professional responsibilities within Nevertheless, utilitarian ethics does contribute to responsib le decision making in several important ways. First, and most obviously, we are reminded of the signif cance of consequences. Responsible decision making requires that we consider the consequences of our acts. But, the shortcomings of utilitarian reasoning must also be k ept in mind. It is diff w everyone who will be af fected by our decisions and how they are impacted. Utilitarian reasoning demands rigorous work to calculate all the benef cial and har P y cal concerns. Consequences are only a part of the ethical landscape. Responsible ethical decision making also in volves matters of duties, principles, and personal integ . We turn to such factors in the following sections.

Deontology: An Ethics of Rights and Duties 5 OBJECTIVE

Making decisions based upon the consequences cer tainly should be a par t of responsible ethical decisions making. But this approach must be supplemented with the reco gnition that some decisions should be a matter of principle, not consequences. In other words, the ends do not always justify the means. But how do w w what principles we should follow and how do we decide when a prinump benef cial consequences? Principle-based, or “deontological” ethical theories, work out the details of such questions. The language of “deontolo gy” and “deontolo gical ethics” is v ery abstract and is lik ely to strik e many students as so much academic gobb ledygook. But the idea behind this approach is commonsensical. Ethical principles can simpl y be thought of as a type of r ule, and this approach to ethics tells us that there are some that we ought to follow even if doing so prevents good consequences from happening or e v ciples (e.g., “obey the law,” “keep your promises,” “uphold your contracts”) create duties that bind us to act or decide in cer tain ways. For example, there is an ethical r ule prohibiting sla ve labor, e ven if this practice w ould have benef cial economic consequences for society. e follow? Le viously that we ought to follow. We have a duty to pay our taxes, even if the money might

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be more eff ciently spent on our children’s college education. We ought to stop at a red light, ev sooner. I ought not to steal m y neighbor’s property, even if he will ne ver miss it and I will gain many benef ts form it. Decision making within a business context will involve man ven when the le. Other r ules are deri ved from v arious institutions in w hich we par ticipate, or from v e f ll. As a teacher s , ev er kno and their f nal grade will not be affected. In my role as teacher and university faculty member, I have tak whenever it is con venient for me to do so. As the referee in a spor ting event, I hav ules fairly, even when it would be easier not to do your friends), f amily-members (do y giarize), church member (contribute to the church’s upkeep), citizens (vote), and good neighbors (do not operate your lawn mower before 8 A.M.). There will be v ery many occasions in w hich such role-based duties arise in business. As an employee, one tak es on a cer tain role that creates duties. Ev ery business will hav yees are expected to follow. Sometimes these r ules are e xplicitly states in a code of conduct, other times in emplo yee handbooks, still others are simply stated by managers. (See Reality Check, “Ethical Principles and the United Nations Global Compact.”) Likewise, as a business manager, there are many rules one ought to follow in respect to stockholders, employees, suppliers, and other stakeholders. Perhaps the most dramatic example of role-based duties concer ns the work of professionals within business. Lawyers, accountants, auditors, f nancial analysts, ers have important roles to pla Many of these roles, often described as “gatek eeper functions,” insure the inte ggal, or f nancial system. Chapter 2 orkplace and this theme will be developed further in chapter 10. The Enron and thur Andersen case pro xample for under standing professional duties. xamining Enron’ s f nancial repor ts, the auditors at Arthur w that diligent application of strict auditing standards required one decision, but that the consequences of this diligent application would be har to Arthur Andersen’s business interests. A fair analysis of this aspect of the Enron–Ar thur Andersen scandal w ould point out that Andersen’s auditors failed their ethical duties precisely because they did not follow the rules governing their professional responsibilities and allowed benef cial consequences to override their professional principles. (See Reality Check, “Ethical Rules as a Check on Misguided Consequences.”) So f ar we have mentioned le gal r ules, organizational r ules, role-based r ules, and professional r ules. W ules as par t of a social ag reehich functions to or ganize and ease relations een

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Ethical Principles and the United Nations Global Compact

Ethical principles and duties can often be found in corporate and professional codes of conduct. One example of such a code that has had worldwide impact is the U.N. Global Compact’s code. The United Nations launched the U.N. Global Compact in 2000 as a means to encourage businesses throughout the world to commit to ethical business practices. Businesses joining the Global Compact

Principle 5: the effective abolition of child labour; and

principles in the areas of human rights, labor, the environment, and anti-corruption. The United Nations describes its principles as follows:

Principle 8: undertake initiatives to promote greater environmental responsibility; and

The Global Compact asks companies to embrace,support and enact, within their sphere of influence, a set of core values in the areas of human rights, labour standards, the environment, and anti-corruption:

Human Rights Principle 1: Businesses should support and

Principle 2: make sure that they are not complicit in human rights abuses.

Labour Standards Principle 3: Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining; Principle 4: the elimination of all forms of forced and compulsory labour;

Principle 6: the elimination of discrimination in respect of employment and occupation.

Environment Principle 7: Businesses should support a precautionary approach to environmental

Principle 9: encourage the development and diffusion of environmentally friendly technologies.

Anti-Corruption Principle 10: Businesses should work against corruption in all its forms, including extortion and bribery.

Since its founding in 2000, over 5,200 businesses and committed to these principles. Included in this list are such well-known U.S. firms as Accenture, Alcoa, Campbell Soup, Coca-Cola, Deloitte Touche, Ford Motor Co., Gap, General Mills, HewlettPackard, Intel, JC Penny, KPMG, Levi Strauss, Merck, Microsoft, PepsiCo, Starbucks, Sun Microsystems, Dow Chemical, and Timberland. Source: United National Global Compact, “The Ten Principles,”h ttp://unglobalcompact.org/AboutTheGC/ TheTenPrinciples/index.html

individuals. No g ere free at all times to decide for themselves what to do and how to act. By def nition, any cooperative acti requires cooperation, i.e., requires rules that each member follows. In the view of man must bind us in ay than the w ay we are bound b y contracts or b y professional duties. You should not be able to “quit” ethical duties and walk away from them in quite the way that one can dissolv e a contract or w alk away from professional duties b y philosophers, ethical duties should be “categorical” imperatives rather than h ypothetical. Hypothetical duties would be like professional code of conduct that binds y ou only if you are a member of the profession. Cate gorical duties do not contain this “if ” clause.

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Reality Check

Ethical Rules as a Check on Misguided Consequences

The Enron and Arthur Anderson case demonstrates one of the major vulnerabilities of the consequentialist approach. Utilitarians would rightfully point out that Andersen’s auditors did not make decisions according to strict utilitarian ethical principles. The auditors the consequences, but only those to their own firm and their own well-being. Had they truly calculated the overall consequences of their decisions, as utilitarianism requires, Andersen’s auditors may very

they thought only about the $100 million of business influence to override their principles. But, this shows the difficulty in calculating consequences. Because it is so difficult to know all of the consequences of our actions, it will always be tempting to consider only the consequences to ourselves and our associates. To to more solely individualistic, egoistic (and nonethical) consequences, deontological ethics advises

I should or must (an imperative) obe (a categorical).

ule no matter what

Human Rights and Duties 6 OBJECTIVE

Are there any sions we should mak

, decihat the consequences? The foremost advocate y German philosopher Immanuel Kant, ar gued that, at bottom, there is essentiall y one fundamental moral duty , one categorical imperativ vidual human being. A more simple way to say this is to say that every individual human being has a human right to be treated with respect. xpressed in several ways. One version directs us to act according to those r ules that could be universally agreed to by all people. (This is the f rst form of the famous “Kantian categorical imperative.”) Another, less abstract version, requires us to treat each person as an end in themselves and never onl words, our fundamental duty is to treat people as subjects capab le of living their own lives and not as mere objects that e xist for our pur poses. To use the f amiliar subject/object cate gories from g rammar, humans are subjects because the y make decisions and perform actions rather than being objects that are acted upon. Humans have their o wn ends and pur poses and therefore should not be treated simply as a means to the ends of others. Since ever wards others, each of us to expect that others will treat us as an end and ne ver as a means onl y, and to be wn autonomously this right applies equally to each and every individual.

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Such human rights, or moral rights, ha ve play velopment of moder n democratic political systems. The U.S. Declaration of Independence speaks of “inalienab le rights” that cannot be tak en away by gov Following World War II, the United Nations created the U .N.’s Declaration of Human Rights as a means for holding all go v of ethics. The reading “Business and Human Rights: A Not-So-New Framework for Cor porate Responsibility” b y Christine Bader and John Mor rison, w hich follows this chapter , examines how the United Nations’ Declaration of Human Rights might also pro vide a frame work for understanding business’ social responsibilities. To return to an earlier example, this deontological or Kantian tradition in ethics w children with respect. We violate the rights of children w hen we treat them as mere means to the ends of production and economic growth. We are treating them merel y have not rationally and freely chosen their own ends. We are simply using them as tools or objects. Thus, even if child labor produced benef cial consequences, it w ould be ethicall y wrong because it In this way, the concept of a human or moral right is central to the principlebased ethical tradition. not do w hatever w viduals ays that w ould violate their dignity and that w them as mere objects or means. Rights impl y that some acts and some decisions are ” Accordingly, our moral duty (the “categorical imperativ lish limits on the decisions and authority of others. Consider how rights function relative to the utilitarian goal of maximizing the overall good. Suppose that you owned a local business and your local government decided that y our proper ty would mak e a g reat location for a city park. Imagine that y ou are the onl y person w ho disagrees. On utilitarian g rounds, it might seem that your land would best ser ve the overall good by being used for a park. However, your proper vent the community from taking y our land (at e the public. A similar issue happens with the music and video downloads and f le sharing. Some would ar grounds that the g reatest happiness w ould be promoted b y allowing unlimited free f le-sharing of music and video f les. Clearly, more people would get more of what they want and happiness would be optimized under such a scheme. But the owners of these f les, those individuals and companies w ho have property rights over them, would claim that their rights should not be violated simply to produce greater overall consequences. F or another e xample about conf icting rights, see the Decision Point, “Eminent Domain for the Public Good.” In summar y, we can sa y that human rights are meant to of fer protection of cer ce of these interests merely to provide a net increase in the overall happiness. The standard account of human rights offered through the W

Decision Point

Eminent Domain for the Public Good

to some theor

The Kantian tradition claims that our ed from our nature as free and rational beings. Humans do not act only out of instinct and conditioning; they make free choices about ho w they live their lives, about their o v autonomy, or “self-rule.” From these origins, we can see ho o related rights have emerged as damental within philosophical ethics. If autonom y, or self-rule, is a e our o wn choices deserves special protection as a basic right. But, since all humans possess this The rights” that are more fundamental and persistent than the legal rights created by gov Reality Check, “ Are Fundamental Human Rights Universally Accepted?”) Christine Bader has served as the Advisor to the U.N. Special Representative of the Secretary-General for business and human rights, and John Morrison has 112

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Are Fundamental Human Rights Universally Accepted?

In 1948, the United Nations adopted a Universal Declaration of Human Rights. Since that time, this Declaration has been translated into more than 300 languages and dialects. The Declaration contains thirty articles outlining basic human rights. In part, the declaration includes the following:

Recognition of the inherent dignity and of the equal and inalienable rights of all members of the human family is the foundation of freedom, justice and peace in the world. Article 1. All human beings are born free and equal in dignity and rights. They are endowed with reason and conscience and should act towards one another in a spirit of brotherhood. Article 2. Everyone is entitled to all the rights and freedoms set forth in this Declaration, without distinction of any kind, such as race, colour, sex, language, religion, political or other opinion, national or social origin, property, birth or other status. Article 3. Everyone has the right to life, liberty and security of person. Article 4. No one shall be held in slavery or servitude; slavery and the slave trade shall be prohibited in all their forms. Article 5. No one shall be subjected to torture or to cruel, inhuman or degrading treatment or punishment. Article 9. No one shall be subjected to arbitrary arrest, detention or exile. Article 10. hearing by an independent and impartial

the determination of his rights and obligations and of any criminal charge against him. Article 18. Everyone has the right to freedom of thought, conscience and religion; this right includes freedom to change his religion or belief, and freedom, either alone or in community with others and in public or private, to manifest his religion or belief in teaching, practice, worship and observance. Article 19. Everyone has the right to freedom of opinion and expression; this right includes freedom to hold opinions without interference and to seek, receive and impart information and ideas through any media and regardless of frontiers. Article 23. (1) Everyone has the right to work, to free choice of employment, to just and favourable conditions of work and to protection against unemployment. (2) Everyone, without any discrimination, has the right to equal pay for equal work. (3) Everyone who works has the right to just and favourable remuneration ensuring for himself and his family an existence worthy of human dignity, and supplemented, if necessary, by other means of social protection. (4) Everyone has the right to form and to join trade unions for the protection of his interests. Article 25. (1) Everyone has the right to a standard of living adequate for the health and well-being of himself and of his family, including food, clothing, housing and medical care and necessary social services, and the right to security in the event of unemployment, sickness, disability, widowhood, old age or other lack of livelihood in circumstances beyond his control. Article 26. (1) Everyone has the right to education.

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been the Ex ecutive Director of the Institute for Human Rights and Business. Together, the y ha ve drafted a discussion, included at the end of this chapter that adv ying framework for business’ role in society, no matter w hat region or sector. Since there remains a gap in go vernance between w hat businesses are per mitted to do according to the la ws of the countries in w hich the y operate and “per mitted” to do according to a recognition of the fundamental rights discussed above, Bader and Mor rison e xplain the U .N. Special Representati ve’s frame work for multinational cor porations of “Protect, Respect, and Remedy .” Consider the realistic corporate application of the rights protected under the U .N.’s Declaration of Human Rights (see Reality Check, “ Are Fundamental Human Rights Universally Accepted?”) under that framework (see the reading at the end of the chapter).

Moral Rights and Legal Rights 7 OBJECTIVE

een moral rights a nd l egal rights. To illustrate this distinction, let us tak e employee rights as an e xample. Three senses of emplo y irst, there are those legal rights g ranted to emplo yees on the basis of le gislation or judicial r ulings. Thus, employees have a right to a minimum w age, equal oppor , to bargain collectively as par xual harassment, and so for th. yee rights might refer to those goods that employees are entitled to on the basis of contractual ag reements with employers. In this sense, a par ticular employee might hav c health care package, a cer tain number of paid holidays, pension funds, and the lik e. Finally, employee rights might refer to those moral entitlements to w hich employees have a claim independentl y of any par ticular le actors. Such rights w ould originate with the respect owed to them as human beings. To e xpand on this understanding, consider ho w le interact. In general, both par ties to an emplo yment ag reement bargain over the conditions of work. Employers offer certain wages, benef ts, and working conditions and in retur n seek worker productivity. Employees offer skills and abilities and seek wages and benef ts in return. Thus, employment rights emerge from contractual promises. However y exempt from such negotiation. An employ e a willingness to submit to se xual harassment or acceptance of a w age below the minimum estab lished b y law a par t of the employment agreement. In ef fect, legal rights e xempt certain interests from the emplo gal rights set the basic le gal framework in w hich business operates. They are estab lished b y the le gal system in w hich business t of the price of doing business. Consider your own perspecti ve on this question in the Decision P oint: “Do Emplo yees Ha ve Moral Rights?” ers and employees. Unlik e the minimum wage, moral rights are established

Decision Point Do Employees Have Moral Rights?

and justif ed by moral, rather than legal, considerations. Moral rights establish the basic moral framework for legal environment itself, and more specif cally for any contracts that are ne gotiated within business. Thus, as described in the ernments and laws are created in order to secure more natural moral rights. The rights outlined above in the excerpt from the United Nations f rights.

Challenges to an Ethics of Rights and Duties 8 OBJECTIVE

So what rights do w e have and w hat does that mean for the duties of others? In the U .S. Declaration of Independence, Thomas Jef ferson claimed that w e have “inalienable rights” to life, liberty, and the pursuit of happiness. Jefferson was inf uenced by the British philosopher John Locke, who spoke of rights” to life, health, liber ty, and possessions. The U.N. Universal Declaration of Human Rights (see the reality check) lists more than 26 human rights that are universal. Acknowledging this di versity of rights mak es it easy to understand the tw o biggest challenges to this ethical tradition. There appears to be much disag reement about what rights trul ven the multiplicity of cases where rights seemingly conf ict. Take, for example, a possible right to health care. During debates o ver health care reform in the U.S. Congress in 2009, many claimed that humans have a right to health care. Other societies w ould seem to ag ree in that man y countries have vide citizens with at least minimal health care. The U.N. Declaration w ould seem to ag ree, claiming that humans ha ve a right “to a standard of living adequate for the health and well-being” and that this right includes medical care. But man y disag ree and point out that such a right would carry signif cant costs for others. If every human has a right to health care, 115

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w vide it and at what costs? Does this mean that doctors and nurses can be required to provide free medical care? Does this right entail a to the best treatment possible? To electiv geries? To wellness care or nursing homes? To cosmetic surgery? Critics charge that unless there is a specif to provide the goods identif ed as “rights, ” talk of rights amounts to little more than a wish list of things that people w ant. ed as “rights” often are nothing more than good things that most people desire. But, if e very human trul in Article 25 of the U.N. Declaration, who has the duty to provide them? More rele vant to business is the Declaration’ s Article 23 that e veryone has a “right to w ork and free choice of emplo yment.” What would this mean to a y that an emplo yee’s human rights are violated if they are laid-of f during a recession? vide jobs to e very yed person? This same Article refers to a “right to just and f avourable remuneration.” But what is a just wage and who gets to decide? The f rst major challenge to an ethics based on rights is that there is no agreement about the scope and range of such rights.Which good things qualify as rights, and which are merely things that people want? Critics charge that there is no way to answer this. Yet, unless there is some clear w a o, the list of rights will onl y g row to unreasonab le lengths and the cor responding duties will unreasonably burden everyone. A second challenge also points to practical prob lems in appl ying a theor y With a long list of human rights, all of w hich e need a practical guide to decide what to do w hen rights come into conf ict. For example, how would we decide between one indi vidual’s right to medical care and the ph ysician’s right to just remuneration of her work? Suppose the person needing medical care could not afford to pay a just fee for the care? Perhaps the most impor tant such conf when an employer’s rights to proper come into conf ict with an employee’s alleged rights to w ork, just w ages, and health care. While the U .N. Declaration does not mention a right to proper y philosophers in the W tradition agree with John Locke and include it among our rights. Granting economic rights to emplo yee w ould seem to create numerous conf icts with the proper yers. Critics point out that the ethical tradition of rights and duties has been unab le to pro vide a persuasi ve and systematic account for how such conf icts are to be resolved.

Virtue Ethics: Making Decisions Based on Integrity and Character 9 OBJECTIVE

For the most par t, utilitarian and deontolo gical approaches to ethics focus on rules that w e might follo w in deciding w hat we should do, both as indi viduals and as citizens. These approaches concei ve of practical reason in ter ms of

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Virtues in Practice

The language of virtues and vices may seem old-fashioned or quaint for modern readers, but this was a dominant perspective on ethics in the western world for centuries. If you develop a list of adjectives that describe a person’s character, you that the language of virtues and vices is not as outdated as it may seem. The ancient Greeks identified four primary virtues: courage, moderation, wisdom, and justice. Early Christians described the three cardinal virtues of faith, hope, and charity. Boys Scouts pledge to be trustworthy, loyal, helpful, friendly, courteous, kind, , brave, clean, and reverent.

According to ancient and medieval philosophers, the virtues represented a balanced mean, the “golden mean,” between two extremes, both of which would be considered vices. Thus, for example, a brave person finds the balance between too little courage, which is cowardice, and too much courage, which would be reckless and foolhardy. The virtues are those character traits or habits that would produce a good, happy, and meaningful life. Practicing such virtues and habits and acting in accord with one’s own character is to live a life of integrity.

deciding how to act and what to do. Chapter 1 pointed out, however, that ethics also in volves questions about the type of person one should become. Virtue ethics is a tradition within philosophical ethics that seeks a full and detailed ould constitute a good and Vir ving integ , being honest, forthright and tr ving modest wants, and being tolerant are some of the characteristics of a good and meaningful human life. (F or additional qualities, see the Reality Check, “Virtues in Practice.”) One can see ethics at play in ev y situations:w s behavior as being out of character or describe someone as being a person of inte g . Perhaps the best place to see the ethics of vir tue is in the goal of e very good parent w ho hopes to raise happ y and decent children. To understand ho w vir fers from utilitarian and deontolo gical approaches, consider the problem of egoism. As mentioned previously, egoism is a view which holds that people act onl y out of a self-interest. Man y economists, for e viduals always act out of self-interest; indeed , many The biggest challenge posed b y egoism and, according to some, the biggest chaluism, or betw een motivation that is “self-regarding” and motivation that is “other-regarding.” Ethics requires us, at least at times, to act for the w ell-being of others. Yet, some w ould claim that this is not possible. Humans only act from self-interested motives. An ethics of vir hat a person should do, to a focus on who that person is. This shift requires not only a different view of ethics but, at least as important, a view of ourselves. Implicit in this

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Is Selfishness a Virtue?

Does ethics demand that we sacrifi ce our own interests for others? If so, is this reasonable? Is it even possible? The tension between ethics and self-interest has been central to philosophical ethics since at least the time of Socrates and Plato. Ethical responsibilities certainly seem to require that we sometimes restrict our own actions out of consideration for the interest of other people. Yet, some thinkers have concluded that such a requirement is unreasonable and unrealistic. It is unreasonable because it would be too much to ask people to act against their own selfinterest; and it would be unrealistic because, in fact, it is simply part of human nature to be selfish. yn Rand argued that selfishness is a virtue. Rand denied that altruism, acting for the interests of others, was an ethical virtue. Altruism too easily makes people predisposed to sacrifi basic interests. Instead, she argued that ethically responsible people stand up for their own interests and should be motivated by a concern with their shness is a virtue; people who act out of a concern for their lling and happy human lives. This philosophical starting point has led many thinkers, including Rand herself, to adopt a political and social philosophy of libertarianism. This is the

view that the fundamental right of individuals is the right to liberty, understood as the right to be free from interference by others. Libertarianism also provides philosophical support for free market capitalism and is often the ethical view implicit in the thinking of people in business. Free markets are the economic system that best serve the libertarian goal of protecting individual rights of liberty. But even Rand recognized that selfi this philosophical sense was not the same as what is commonly understood as selfi sh behavior. Simply doing whatever one wants not necessarily work for one’s own self-interest. The behavior of the stereotypical selfish and self-centered person who is antagonistic to others is not likely to lead to a happy, secure, and meaningful life. Rand recognized that self-interest, properly understood, may sometimes demand that we restrict and regulate our own desires. Further, since the virtue of selfi applies equally to all people, our own self-interest is limited by the equal rights of others. Thus, Rand’s version of libertarianism is not as extreme as it might first appear. No ethical tradition expects people to live a life of total self-sacrifice and self-denial. But even those who might be described as ethical egoists concede that rational self-interest does create ethical limits to our own actions and that narrowly selfish people are unethical.

distinction is the recognition that our identity as indi t by our w A person’s character—those disposialues, and beliefs that popularl y might be called a “personality”—is not some feature that remains independent of that person’ s identity. Character is not lik e a suit of clothes that y ou step into and out of at will. Rather, the self is identical to a person’ s most fundamental and enduring alues, and beliefs. Note ho cation in ethics. If, as seems y people, an ethical justif cation of some act requires that it be tied to self-interest, we should not be sur prised to f nd that this justif cation often f ails. versies often in volve a conf ict betw een self-interest and ethical values. ve up a lot of money? For a personality that does not already include a disposition to be modest,

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the only avenue open for justif cation would involve showing how the disposition es some other interest of that person. Why should an e xecutive turn down a multi-million dollar bonus? The only way to ans wer this question appears to be to show how it would be in his self-interest to do so. But, this is at times unlikely. (See shness a Vir On the other hand , for the person already characterized b y modest and unaffected desires, the question of justifying smaller salaries is less rele vant. If I am the type of person w ho had moderate and restrained desires for mone y, then e of a lar ge bonus. F or many people, the “self ” of self-interest is a caring, modest, unaf uistic self. For these people, there simply is no conf een self uism. The de gree to w hich w e are capab le of acting for the w ell-being of others therefore seems to depend on a variety of factors such as our desires, our beliefs, our dispositions, and our values; in short, it depends on our character or the type of person w e are. If people are caring, empathetic, charitab le, and sympathetic, then the challenge of self decision making. Vir ethics emphasizes the more ve side of our character. Vir ethics recognizes that our moti vations—our interests, wants, desires—are not the sor ts of things that each one of us chooses ane w each mor act in and from character y ingrained and conditioned within us. Given that our character plays such a deciding role in our beha vior, and gi ven the realization that our character can been shaped by factors that are controllable (by conscious individual decisions, by how we are by the social institutions in which we live, work, and learn), virtue which undermine a meaningful, worthw Virtue ethics can offer us a more fully textured understanding of life within business. Rather than simply describing people as good or bad, right or wrong, an ethics of vir or e xample, w e might describe Aaron Feurestein as heroic and courageous. He is a man of inte grity, who sympathizes with employees and cares about their well-being. Other executives might be described as g reedy or r uthless, proud or competiti ve. Faced with a diff cult dilemma, we might ask what a person with integrity would do? What an honest person w ould say? Do I ha ve the courage of m y convictions? In other words, you might consider someone you believe to be virtuous and ask yourself w hat that person w ould do in this situation. What would a vir tuous person do? Besides connecting the vir vir ethics also reminds us to e xamine ho med and conditioned. By the time w e are adults, much of our character is for med b y such factors as our parents, schools, church, friends, and society . But pow y our o wn places of emplo yment and our particular social roles within them (e.g., manager , professional, and trainee) have a profound inf uence on shaping our character. Consider an accounting f rm

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Can Virtue Be Taught?

Plato’s famous dialogue the Meno opens with the title character asking Socrates this basic question: Can virtue be taught? If ethics involves developing the right sort of character traits and habits, as the virtue theorist holds, then the acquisition of those traits becomes a fundamental question for ethics. Can we teach people to be honest, trustworthy, loyal, courteous, moderate, respectful, and compassionate? Meno initially cast the question in terms of two alternatives: either virtue is taught or it is acquired naturally. In modern terms, this is the question of nurture or nature, environment or genetics. Socrates’ answer is more complicated. Virtue cannot simply be taught by others, nor is it acquired automatically through nature. Each individual has the natural potential to become virtuous, and learning from one’s surroundings is a part of this process. But, ultimately, virtues must be developed by each individual through a complex process of personal refl and observation, as well as social reinforcement and

conditioning. Virtues are habits, and acquiring any habit is a subtle and complex process. Parents confront this question every day. I know my children will lead happier and more meaningful lives if they are honest, respectful, cheerful, moderate and not greedy, envious, gloomy, arrogant, or selfish. Yet simply telling my children to be honest and to avoid greed is insufficient; nor can I remain passive and assume that these traits will develop naturally. term process that develops over time. Business institutions also have come to recognize that character formation is both difficult and unavoidable. Employees come to business with certain character traits and habits, and these can get shaped and reinforced in the workplace. Hire a person with the wrong character traits, and there will be trouble ahead. Designing a workplace, creating a corporate culture, to reinforce virtues and discourage vice is one of the greatest challenges for an ethical business.

that hires a group of trainees fully expecting that fewer than half will be retained and where only a very . vironment encourages motivations and behavior very different from a f wer people but gives them all a g reater chance at long-term success. A company that nd it creates a different sales force than one that understands sales more as customer ser vice. Virtue ethics reminds us to look to the actual practices w e f nd in the business w orld and ask w hat types of people are being created b y these practices. Man y individual moral dilemmas that arise een e seek to be and the type of person business expects us to be. (See Reality Check, “Can Virtue Be Taught?”) Consider an e xample described b y someone w ho is conducting empirical studies of the v alues found within mark eting f rms and adv ertising agencies. This person repor ted that, on se veral occasions, adv ertising agents told her that they would never allow their own children to watch the very television shows and advertisements that their o wn f rms w ere producing. By their o wn admission, the ads for such sho ws aim to manipulate children into buying, or getting their parents to buy , products that had little or no real v alue. In some cases, the ads ertisers themselves admitted, as their “dir ty

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little secret,” that they were intended to target the teenage market. Further, their own research evidenced the success of their ads in increasing sales. Independent of the ethical questions we might ask about advertising aimed at children, a vir tue ethics approach w ould look at the type of person w ho is so ab le to disassociate oneself and one’ s own values from one’ s work, and the social and practices that encourage it. kind of person is willing to subject others’ children to marketing practices that they are unwilling to accept for their o wn children? Such a person seems to lack e ven the most elementar y form of personal inte grity. children in ways that they willingly admit are indecent? one become w

A Decision-Making Model for Business Ethics Revisited This chapter provided a detailed introductory survey of ethical theory. While some they have a very practical aim. Understanding the philosophical basis of ethics will enable you to become more aw le to reco gnize the impact of your decisions, and more lik ely to mak med and more reasonable decisions. In addition, the theories allow us to better and more ar ticulately explain why we hav such as “w v ve, an alternate explanation such as “we should engage in this f than harmed if we do so” could be tremendously effective and convincing. ou why you support or oppose a specif c proposal, your response now has comprehensive suble and inf uential. These ethical theories and also provide important ways in which to dev theories, after all, pro vide systematic and sophisticated w ays to think and reason about ethical questions. We no decision-making model, one in w hich ethical theories are inte grated into an e xplicit decision procedure. The decision-making process introduced here aims, abo ve all else, to help you make ethically responsible business decisions. To summarize, we review that decision-making process in more detail belo w. (See the follo check, “Nash’s 12 Questions” for an alternative decision-making model.) Gather all of the relevant facts. It is critical at this stage that we do not unintentionally bias our later decision by gathering only those facts in support of one particular outcome. volved. What is the ethical issue? Often w e do not e ven notice the ethical dilemma. Avoid ve myopia. stakeholders. Who will be affected by this decision? are their relationships, their priorities to me, and w hat is their po wer over my decision

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Reality Check

Nash’s 12 Questions

There is nothing magical about the decision-making model that we introduce here. This is simply one way to frame the many factors involved in responsible decision making. There are other models that can work just as well. One such model, proposed by philosopher Laura Nash, suggests asking oneself 12 questions prior to reaching a decision in an ethical dilemma: 1. Have you defined the problem accurately? 2. How would you defi ne the problem if you stood on the other side of the fence? 3. How did the situation occur in the first place? 4. Who was involved in the situation in the fi place? 5. What is your intention in making this decision?

6. How does this intention compare with likely results? 7. Who could your decision or action injure? 8. Can you engage the affected parties in a discussion of the problem before you make your decision? 9. Are you confi dent that your decision will be as valid over a long period as it seems now? 10. Could you disclose without qualms your decision or action to your boss, your CEO, the board of directors, your family, or society as a whole? 11. What is the symbolic potential of your action if understood? 12. Under what conditions would you allow exceptions to your stand?1

or results? e in the outcome? Do not limit y y only to those stakeholders to whom you believe you ow arises as a result of the impact. F or instance, y ou might not necessaril y f rst consider your competitors as stakeholders; however, once you understand the impact of y y arise vailable alternatives. Exercise “moral imagination.” Are there creative ways to resolv e conf icts? Explore not onl y the ob vious choices, but also those that are less ob vious and that require some creati v moral imagination to create. how a decision affects stakeholders. Take the point of view of other people involved. How is each stak eholder affected by my decision? Compare and weigh the alternatives: ethical theories and traditions can help here. i. benef cial and har i. What does the law say? ii. Are there professional duties involved? ligatory? . Ho grity and character i. ii. What are my own principles and purposes? ve with public disclosure of this decision?

Opening Decision Point Revisited Executive Compensation

6. Guidance. Can y ou discuss the case with rele vant others; can y ou gather additional opinions or perspecti ves? Are their any guidelines, codes, or other exter Have you built in mechanisms for assessment of y our decision and possible modif cations? Are they necessary? Make sure that you learn ou may f nd it necessar y to mak e changes to your current situation.

Questions, Projects, and Exercises

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End Note

Readings

Reading 3-1: “Business and Human Rights: A Not-So-New Framework for Corporate Responsibility,” by Christine Bader and John 125 Reading 3-2: “The Caux Principles for Responsible Business,” Caux Round Table, p. 130

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Reading 3-3: “Ethical Dimensions of Decision-Making in the Developing World: The Case of Bribery in Mauritus,” by Geetanee Napal, p. 132 Reading 3-4: Theory but Does It Work in Practice,” by Norman E. Bowie, p. 137

Reading 3-1

Business and Human Rights: A Not-So-New Fr

ork for

Corpor Christine Bader and John Morrison late business is a relatively recent phenomenon, one that at f ve. The national human rights system is based on the Uni versal Declaration of Human Rights hich w as ag reed to in 1948 b y the world’s gover World War II. The UDHR says nothing about companies; 1 nor do the Inter national Covenants that follo wed to pro vide more detail on what the UDHR intended. For business to embrace human rights w most f amously ar ticulated b y Milton F that “there is one and onl y one social responsibility of business: to use its resources and engage in acti ts so long as it sta ys within the r ules of the game, w hich is to say, engages in open and free competition without deception or fraud.”2 However, human rights are a compelling propo. m used to capany form of corporate engagement on social issues—is increasingly popular, it is culturally relative: ond w area decides for itself. Human rights, ho wever, as embodied in the UDHR, is the single statement of societal v alues for all people of the w irrespective of nationality . A global set of

principles is of g reat utility for companies that e for legitimacy in the global marketplace. This article recounts the recent histor y of business and human rights, with par ticular attention to o initiativ business and human rights and the Business Leaders Initiative on Human Rights (BLIHR). It asser ts that human rights pro vide the right frame work for considering business’s role in society , no matter what region or sector. In the 1990s, apparel and footw ear companies (notably, Nik Kathie Lee came under f re for having their products made in f in the developing world where workers w , subject le w cally abused. At the same time, companies in the oil, gas, and mining sectors w ere accused of suppor ting y the governments of the countries in which they were operating. Ken Saro-Wiwa w as a Nigerian acti vist e x leading protests against the en vironmental damage that Shell’s operations allegedly caused in his counvers belie ve that Shell could ha ve prevented the e xecution by arguing that Saro-Wiwa w A few years later, BP y British P was accused gue, violent element of the Colombian militar y that w as per petrating abuses in the name of protecting company facilities.

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and some of their peers came to gether with human roups and other interested par ties to develop ve industries. Some of these eholder initiatives, most notably the Fair Labor Association and the V xist toda w members.3 In the f rst decade of the ne w centur y, human In 2003 a number of banks, under f ing projects with adv erse human rights impacts, launched the Equator Principles, a set of social and en reed to adhere to for certain kinds of loans.4 In 2004, Yahoo! complied with a request from the Chinese go v ver infor mation about one of its users, jour nalist Shi Tao—which enabled authorities to f nd and jail him. In 2006, Google launched Google.cn, its search engine supported b to censor search results. Those companies followed y enter ing into multi-stak eholder discussions on a code of conduct, resulting in the estab lishment of the ork Initiative in 2008.5 Vir y all businesses can impact human rights. These impacts can of course be positive: The jobs tion of a g reat range of rights, including the right to work, right to an adequate standard of living and right to o wn proper . As people achie ve g reater y are poised to demand and achieve greater fulf llment of other rights, such as the right to education and the right to participate in ver But as the aforementioned examples show, business can also infringe on human rights. So w hat should company responsibilities be with respect to human rights? There have been attempts to saddle companies with all of the same responsibilities as go vernments. This is not appropriate: Go ver held accountable by their for example y executives answ

likely to be f ar removed from the people w ho their business is affecting. available for victims of cor porate-related abuse? They can tr y to sue the compan y—that is, if the y can af ford a la er, if there is a cour t that will accept both the case and the compan y as being in its jurisdiction. Or the embarrass the company into beha y— but that’s rarel v y-General, Kof Annan often expressed belief in the po wer of business to be a force for good. He estab Global Compact, an initiati ve in w hich companies commit to implementing ten principles upholding that business has a role to pla y in the achie vement velopment Goals, eight ambitious targets for reducing global poverty by 2015.6 In 2005, Ruggie to be Special Representative of the Secretary-General for business and human rights. Ruggie w as char hat had become quite a polarized debate: Some campaigning organizations wanted an inter cor w and most gov ere largely disengaged. f rst task w problem he w as meant to address: What human rights abuses ha v ed to cor porations: in w hat industries, in w hat countries, and w hat rights have been at stake? What hav bodies, the di hose job it is to inter ventions, said about corporations? What jurisprudence is there about business and human rights? themselves recognize and ho w, through their o wn policies and practices? What is the cause of this rapid growth in alleged corporate-related abuses?7 Over the past fe w decades, companies ha ve globalized w hile go vernments are conf ned b y state borders. A computer hardware company with head.S. could be impor South to make equipment assembled in east Asia that will be shipped to European consumers who call helpdesks in south Asia. One product—and

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y , or the manuf unions, it is lik ely that no one will be penalized. U.S. courts would consider the mine and assembly operations distinct le gal entities, subject onl y to local courts; the South might be reluctant to pursue char ges for fear of tainting its ve place for foreign in vestment; and some gov . een global companies and national le gal systems leads to go vernance gaps that enable human rights abuses to take place. s research and repor ts from others showed that the w orst cases of cor porate-related human rights harm occur disproportionately in low income countries; in countries that often had just emerged from or still were in conf ict; and in counhere the r ule of law was weak and levels of cor here governance was likely to be the weakest. Eventually it became clear to Ruggie, through extensive global consultations and research, that what w as needed w as an o verarching frame work for business and human based on some damental principles that e v one ag and within which principles and specif c guidance ther developed. Ruggie presented that framew 2008, with the title of “Protect, Respect, Remedy”. The f rst pillar of the frame work, “Protect”, emphasizes the duty of go vernments to protect against human rights abuses by third parties, including business. Inter national law clearly states that go vernments ha ve a duty to protect people within their ter ritory or jurisdiction against human rights abuses b y non-State actors, including b y business. States must tak e all necessar y steps to protect against such abuse, including pre venting, investigating, and punishing the abuse, and provide access to redress when abuses occur. The second pillar of the frame work, “Respect”, aff rms the cor porate responsibility to respect human rights: in other w ords, not to infringe on through ongoing human rights due diligence. The vention:

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It is reco gnized by organizations like the Inter national Labor Organization, the Organization of Economic Cooperation and De velopment, and the w orld’s lar gest emplo yer g roups such as the International Chamber of Commerce and the International Organisation of Employers.8 Companies increasingl y reco gnize their responsibility to wn public statements and by joining initiatives such as the Global Compact. The third pillar of the frame work, “Remedy”, underscores the need for more ef fective access to with the best intentions b y gover nies, disputes over cor are likely to occur , and as mentioned earlier , people rently have few good options. In addition, ef fective g rievance mechanisms can not only help solv e issues w hen the provide feedback to a compan y that sho ws where it might need to change practices—and most impory, catch problems before they escalate to abuses. The Human Rights Council unanimousl y work, making it the f rst substanti ve polic y statement on business and human rights by a body, and e xtended Ruggie’ s mandate so that he can develop more specif c within each pillar. But one group of leading multinational companies had already be gun e xploring w hat the Following the 2002 World Summit on Sustainable Dev g, a small g roup of people including Anita and Gordon Roddick, cofounders of The Body Shop Inter national plc, the cosmetics compan wn for its acti vist stances against animal testing and for f air trade, realized that there w as no equi valent to the Business Leaders Initiati ve on Climate Change for social issues. In Ma y 2003, the Business Leaders Initiative on Human Rights (BLIHR) 9 w as founded b y seven companies: ABB, Barclays, MTV Europe, vartis Foundation for Sustainable Development, Novo Nordisk and The Body Shop International. Mary Robinson, for mer President of Rights, became BLIHR’s Honorary Chair.10

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During 2004, He wlett-Packard Compan y, StatoilHydro and Gap Inc. joined the initiati ve. In 2006, Alcan Inc., AREVA, Ericsson and General Electric joined; and in August 2007, The CocaCola Company brought the total number of BLIHR companies to thirteen. BLIHR’s primar y pur pose w as to f nd practical ways of implementing the Uni versal Declaration of Human Rights and to inspire other businesses to do the same. With that two-pronged mission, BLIHR’s work evolv streams: a toolbox of practical materials to aid the inte g business; and a soapbox, by which BLIHR members would promote g reater awareness of human rights with other companies in their respecti ve industries and beyond. During its f rst three y ears, BLIHR w orked to understand how human rights can be applied in specif c companies, and w hat sorts of tools and infor mation might be needed to do so. In 2006, BLIHR produced a guide for inte grating human rights into business, based on standard business management systems, in par tnership with the Global Compact Central to this guide and the BLIHR toolbo x is a matrix enabling business to map their existing policy and practice against the Uni versal Declaration of Human Rights and associated covenants. BLIHR’s work is part of a f urry of acti in recent years by a wide v ganizations that have developed materials and programs to improve business’s impact on human rights. These initiatives generally fall into one of three categories: . 1 Principles: A number of organizations have developed general principles, sometimes for a particular industry or topic, meant to enable companies to state their commitment to human el as a f rst step. Exam-

2.

le Investment.11 Procedures: Some initiati ves have gone to the next le vel of g ranularity b y de veloping more specif c tools to help companies manage This includes guidance on

3.

assessing human rights impacts, for example s Human Rights and Business Project.12 Monitoring and Repor ting: Some or ganizations have focused on assessing and repor ting on these processes once they’re in place. Most prominent in this area has been the Global Reporting Initiative.13

BLIHR companies tested man y of these tools and par ticipated in man y related initiati ves, and in can result in better management of risk to their business and the people their business af fects; more informed decision-making; and stronger relationships with stakeholders. BLIHR concluded in 2009 as it w as never meant to be a per manent initiative, but as one of its founding members put it, a “strong angelize for business and human y. Some skeptics of the business and human rights movement claim that it is solely a Western phenomenon. Ho wever, there are se veral indications that countries outside of North America and Europe are viewing business through a human rights lens: • South s post-apartheid explicitly holds companies accountab le for vil, political, economic, rights enya, Malawi, Zambia, Uganda and Ghana are increasingl y tur ning their attention to business, and companies in are being over whether they are exacerbating conf ict there. • In India, a g rowing number of domesticall yowned companies e xpanding abroad are increasingly engaged in human rights as the y seek to f nd a more objecti ve framework for applying traditional Indian v alues in other The Global Business Initiati ve on Human Rights14 s legacy) and Partners In Change co-hosted a meeting of 40 Indian companies in New Delhi in November

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2009 where human rights w as seen as a k ey facet of operating internationally. • The Chinese government passed new laws in 2007 strengthening labor rights, and has been outspoken in promoting CSR with its companies. The Shenzen Stock Exchange encourages companies to release social responsibility repor ts along with their annualreports.15 community ha ve a v ested interest in universalism. Companies that operate globall inconsistency of la ws, standards, and enforcement across The e that companies respect human rights is a uni versal nor m, espoused by citizens all o ver the w orld. nancial crisis that began in 2008 demonstrated that universal frameworks are necessar y—and that human rights l ed. work is one step to wards strengthening global go vernance. e of work b ernments, as the BLIHR companies began to demonstrate. It is impor tant not to o verstate success to date: Only a fe w hundred companies—of the hundreds of thousands of multinationals, ne ver mind small to medium-sized enter prises—have human rights policies. Few management education programs indeed fe w cor porations proacti vely seek human rights expertise—until disaster strikes. However, it is clear that human rights are an enduring frame work with po w ver the world. The next few years will see continued application of work, and hopefully continuous improvement in our understanding and management of business’s impacts on society.

EndN otes 1. The UDHR does, ho wever, call on “all or gans le, w hich is often

inter

Philosophical Ethics and Business 129

ever, this is

riedman, M., “The Social Responsibility of Business is to Increase its Prof ts,” The Ne w Yor gazine (September 13, 1970). .3 See Fair Labor Association, .org/ and Business Leaders F , “V v 10, 2009).

g/ (accessed No vember

Principles, principles.com/ ember 10, 2009). 5.Global Network Initiative (2008), orkinitiative.org/ (accessed November 10, 2009). United Nations Global Compact, http:// .unglobalcompact.or and UnitedNations velopment Goals, g/millenniumgoals/ (accessed November 10, 2009). 7. All materials related to John Ruggie’s mandate are archived at the Business & Human Rights Resource Centre w eb por tal, http://www .business-humanrights.org/ (accessed November 7, 2009). 8. See, e.g., “Joint initial vie ws of the Inter national Or ganisation of Emplo yers (IOE), the and the Business and Industry mittee to the OECD (BIAC) to the Eighth Session of the Human Rights Council on theThird report of the Special Representativ Secretary-General on Business and Human Rights” ( May 2008), humanrights.org/SpecialRepPortal/Home/ ReportstoUNHumanRightsCouncil/2008 (accessed November 7, 2009). 9. .blihr.org Leaders Initiative on Human Rights, .org/ (accessed November 10, 2009). for Responsible Investment, http:// .unpri.org/ ember 10, 2009).

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for Human (accessed November 10, 2009). .globalreporting.or ber 10, 2009). 14.

Initiative, (accessed Novem-

15. For this and other e xamples, see Ruggie’s Cor porate La w project, described a t g/ SpecialRepPortal/Home/Materialsbytopic/ Corporatelaw/CorporateLawTools (accessed November 7, 2009).

.global-business-initiative.org.

Reading 3-2

The Caux Principles for Responsible Business1 The Caux Round Table (March 2009)

Introduction

TheC RTP rinciples

The Caux Round Table (CR T) Principles for Responsible Business set for th ethical nor ms for acceptable businesses behavior. T dence sustain free mark ets and ethical business practices pro vide the basis for such tr ust and conf dence. But lapses in business integ , whether among the few or the many, compromise such tr business to serve humanity’s needs. Events like the 2009 global f nancial crisis ha ve highlighted the necessity of sound ethical practices across the business w orld. Such f ailures of go v ance and ethics be tolerated as they y the positive contributions of responsible business to higher standards of li ving and the empow orld. The self-interested pursuit of prof t, with no concern for other stak eholders, will ultimatel y lead to business f ailure and , at times, to counterproductive re gulation. Consequentl y, business leaders must al ways asser t ethical leadership so as to protect the foundations of sustainab le prosperity. It is equall y clear that if capitalism is to be ity therefore needs a moral compass in addition to its practical reliance on measures of prof t and loss.

The Caux Round Table’s approach to responsible business consists of seven core principles as detailed below. The principles recognize that while laws and market forces are necessary, they are insuff cient guides for responsible business conduct. tions for responsible business and for a f y, namely: responsible stew anand the respect and protection of human . The principles also ha ve a risk management agement. And they balance the interests of business and mutual prosperity for all. The CR T Principles for Responsib le Business are suppor ted by more detailed Stak eholder Management Guidelines co vering each k ey dimension of business success: customers, emplo yees, shareholders, suppliers, competitors, and communities.

Principle 1–Respect Stakeholders Beyond Shareholders • A responsib

wledges its duty to ealth and employment it creates and the products and services it provides to consumers.

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Philosophical Ethics and Business 131

• A responsible business maintains its economic health and viability not just for shareholders, but of fairness and equality. also for other stakeholders. • A responsible business, ever here it operates, • A responsible business respects the interests of, respects all applicab and acts with honesty and f airness towards, its laws, regulations and conventions, while trading customers, emplo yees, suppliers, competitors, fairly and competitively. .

Principle 2–Contribute to Economic, Social and Environmental Development • A responsib le business reco gnizes that business cannot sustainab ly prosper in societies that are f ailing or lacking in economic de velopment. • A responsib the economic, social and en velopment of the communities in w hich it oper ates, in order to sustain its essential ‘operating’ capital—f nancial, social, environmental, and all forms of goodwill. • A responsib effective and pr udent use of resources, free and fair competition, and inno vation in technolo gy and business practices.

Principle 3–Respect the Letter and the Spirit of the Law

Principle 5–Support Responsible Globalisation

• A responsib le business, as a par ticipant in the global mark ts open and fair multilateral trade. • A responsib le business suppor ts refor m of domestic r ules and re here the y unreasonably hinder global commerce.

Principle 6–Respect the Environment • A responsible business protects and, where possible, impro ves the en vironment, and a voids wasteful use of resources. • A responsib comply with best en practices consistent with meeting the needs of toda generations.

Principle 7–Avoid Illicit Activities

• A responsib le business reco gnizes that some business beha viors, although le gal, can ne vertheless ha ve adv erse consequences for stak eholders. • A responsible business therefore adheres to the spirit and intent behind the la w, as w ell as the letter of the la w, w hich requires conduct that goes beyond minimum legal obligations. • A r esponsible b usiness a lways o perates w ith candor , and keeps its promises.

• A responsible business does not participate in, or condone, cor practices, bribery, money laundering, or other illicit activities. • A responsib le business does not par ticipate in or facilitate transactions linked to or suppor ting terrorist activities, dr cking or any other illicit activity. • A responsib le business acti vely suppor ts the reduction and prevention of all such ille gal and illicit activities.

EndN ote and Conventions • A responsib and traditions in the communities in w

hich it

1. The Caux Round Table, http://www .cauxroundtable.org/index.cfm?&menuid⫽ 8 (March 2009).

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Reading 3-3

Ethical Dimensions of Decision-Making in the Developing World: The Case of Bribery in Mauritius Geetanee Napal

Introduction The developing world faces the problem of cor uption. T vides an easy way out and is vie wed as acceptable (Select raud and Cor ruption, 2001), as disinevitable practice, with a feeling of resignation. This paper is based on e veloping nation, the objective of which was to determine how

governance, cor ruptible indi viduals and authoritarian re gimes (Se gal, 1999). Various authors wledge the presence of cor ruption in all types of society , in both de veloped and de veloping countries including F rance, Ital y, Belgium, The Netherlands, America, Russia, Japan, Hong Kong, Singapore, Mala ysia, China, India, K orea (Brown and Clok e, 2006; Leisinger , 1999; Mat-

CorruptioninB usiness

et al. 1998; Rabe, 1999; Scanlan, 2004; Toye and Moore, 1998). In certain contexts corruption is culturall tional offering of gifts or bribes to off cials. Corruption can tak e the for m of abuse of authority and manipulation of resources. In some places, such acts tak political leaders and business executives. There is the perception that r uling par ties hold monopoly power and there is no political will to f ght corruption in developing nations. Amongst the factors that account for corruption are low wages, abuse of po wer and prob lems caused b y colonialism. Where cor ruption prevails resources are misallocated, authorities are under mined and both pub lic and pri vate sector de velopment tend to suffer. Common for ms of cor ruption include bribery and e xtortion. Extor tion can tak e the for m of either gifts or f avours as a condition to the execution of public duty or the abuse of public funds for one’s own benef t. Bribery is the act of accepting gifts or f avours of ve being to induce the person to gi ve special consideration to the interests of the donor . Some cultures condone

Corr countries around the globe. A cor rupt setting is referred to as a system characterised b y f awed

ties. Briber y involves “the pa yment or remuneration of an agent of some or ganisation to do things that are inconsistent with the pur pose of his or

on decision veloping nation and draw general conclusions for the developing world. In designing the sur vey, emphasis w as laid on ethical issues lik ely to be encountered in the eloping nation that is, direct cor m of briber y. F or anal purposes, a multi-dimensional ethics scale w as duty factors on the ethical perceptions of business people. Respondents w ere asked to rate the action likely to be adopted in specif c hypothetical ethical mative philosophy scales developed by Reidenbach and Robin (1988) and consisting of three major dimensions that is, a moral equity dimension, a contractualism dimension and a relativism dimension (Kujala, 2001). The paper star ts with a discussion of the relevant literature, follo wed by a brief description of the research en verview of the survey f ndings.

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her position or off ce. Good examples of such act include paying a judge to be par tial to y our case, paying a policeman to fore go giving you a speeding tick y’s services” (Adams and Maine, 1998: 49). The concept of briber y has for long dominated the w orld of business. Briber y is a for m of cor ruption and ey issue that business e xecutives often face in the context of global ethics. To some cultures ho wever, gi ving presents and g ratif cations to go vernment off cers is an indispensab le courtesy and a nor mal w ay of doing business. As such, briber y is not al ways considered as an offence.

Cross-CulturalI ssues Unethical practices and cor ruption in business predominate in v arious sectors of de veloping economies. These act as bar riers to de velopment and limit the potential to of fer an acceptab le quality of life to the people of these countries. Corruption tak es the form of bribes and illegal payments in the conte xt of trade, aid and in vestment f ows between countries. It can entail preferential access to trading oppor tunities, favouritism in the processing of in vestment proposals and kickbacks derived from the abuse of inter national procurement procedures with serious economic repercussions. In India for example, cor en such a wide dimension that it has become an industr y; ‘lik lic demand’ upt exist in various sectors of the Indian economy, including the education sector . The admission to uni v represents a good e xample: w hile eighty percent admission to the ter on merit, the remaining twenty percent is off cially reserved for citizens w ho ha ve represented the state. On the job market, young and ambitious candidates offer money and get appointed. It is common habit for politicians and inf uential people to place their friends or relations in adv ertised jobs and get ‘rewarded’ for such practices.

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Similarly in China, people ha v

aith in . In an opinion poll, 64.3 percent of respondents held that an honest person w ould always be at a disadv antage. In 1995, President Jiang Zemin’s anti-corruption campaign targeted ‘the ver xperienced numerous major cor hich gave the Chinese population the impression, that some of the gov ere under the inf uence of “an all-po w racketeers” (V an K emenade, 1998, p. 20). China was in close competition with Indonesia for the f rst place as the most cor r y in Asia (T ransparency Inter national Cor ruption Index 1995, Ger many). On a scale of one to ten, ten cor responding to high levels of cor China’s score exceeded eight. In some cases, individuals got pro(Van Kemenade, 1998). developing world in general. In cor wed as par

xample,

vernment off cials to negotiate for bribes prior to awarding licences or elopment grity Systems, Transparenc t, Zambia, 2003). In some African states, in vestigations on cor are viewed as harassment of the people. Employees of institutions lik e the P olice Service, the Judiciar y, the Re venue ts Off ce expect bribes to do their work and to overlook regulations or to inf uence a judgement in favour of the donor of the bribe. As a result, the quality of ser vice rendered is lo wered and citizens lose conf dence in national The major causes of corruption include wide discretionary powers v ested in pub lic off cials, poor conditions of ser vice in the pub lic ser vice, weak systems of inter in the public sector, weak enforcement of anti-corwith an indi vidualistic culture that f avours lo to one’s friends and f amily members and unethical political leadership.

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Is It Right to Bribe?

overcoming institutional rigidities that stand in the way of progress?

Donaldson and Werhane (1996) question the practice of briber y: “Is it morall y right to pa y a bribe to gain business?” If specif c norms permit bribery in a par ticular countr y, then the practice of bribery is culturall y or traditionall y acceptable in that country. It is a f act that in some conte xts, the laws of relativism condone briber y (De Geor ge, 1999). Sometimes personal v alues tend to supersede corporate v alues w hen one is in volved in ethical Webb, 1995). Bribery is subject to v arying inter pretations worldwide. Bribe pa yers ma y defend themselv es by associating their actions with utilitarian principles, namely that “the good outw eighs the bad” (De George, 1999: 73). If one were to base oneself on deontology to question the ‘ethics’ behind bribery e y itself. Deontology focuses on one’s duty or ob ligation to e xplore the motives behind par ves. Bribery is a common of business as there is a perception that it has a positive impact through the ‘grease effect’, i.e. bribing a bureaucrat as a means to b ypass red tape and act as an incentive to mak e civil ser vants more producti ve (Leff, 1964). A similar argument w ard recently b y Blackbur n et al. (2006) namely that corruption could be g rowth-enhancing if it helps circumvent heavy and unnecessar y regulations in the bureaucratic process. Laczniak and Mur phy (1993) focus on situations w here the pa yment of bribes may be of direct benef t to businesses, in the conte This gives bribepayers access to prof table contracts over competitors. There is e vidence that lar ge bribes are paid in order to get access to foreign contracts or to avail of tax incenti ves. Ho wever, some authors are of the opinion that the use of bribes as speedmoney in a bureaucratic setting is self-defeating (Kauffman and Wei, 2000). In f act, there is little evidence of positive effects of corruption in countries with red tape (Ades and di Tella, 1997). Can one justify having recourse to bribes as a means to

dures remains a dangerous practice (Rossbacher , 2006). all, the costs associated with corve to be bor ne by the State. Cor ruption alters the composition of go vernment expenditure thereby hindering producti ve acti vities and ne gatively impacting on economic and social de velopment (Tanzi and Da voodi, 1998; Mauro, 1998; Gupta et al, 2001). The results of empirical studies show that corruption reduces the effectiveness of ther w eakens political support for and within donor countries (Brautigam, 1992; Har White, 1996). Even cor y sums of mone y changing asive syndrome of problems that keeps developing nations poor (Galtung, 1997; Hancock, 1989; Khan, 1996). Unethical conduct usually star ts in a mild for m but spreads quite f ast, e v y leading to systemic cor ruption (Leisinger , 1999). Often, nothing is done to stop this unhealth y patter n of beha progressivel In the long r un, it gets more diff cult to eliminate this of cor As this trend is corruption impairs the rule of law and weakens the foundation on w hich economic g ro thereby undermining development. Cor market. The stability of a cor rupt regime only consolidates and intensif es cor Any government w ho becomes the all y of cor ould only conver uctive and destructive force inimical to economic g rowth and development. In some places, cor rupt f nancial or economic practices of e xtensive dimension are y accepted (T anzi, 1998; Alatas, 1999; ty, 1997). Business enter prises themselves with some highl y honourab le e xceptions, often consider cor rupt practices to be par t of the normal business process (Rossbacher, 2006). Many de v cor red to as the abuse of tr ust in the ate gain. On the one hand

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there are cor ruptible individuals and on the other , there are sociall y po werless people w ho, b y their condition, are tempted to ‘seek oppor by ha This explains the uption can take the for m of abuse of authority , manipulation of resources, both in the pub vate sectors (Ribouet, 2007; Thanay, 2007). In addition to instances of petty cor ruption, lar ge-scale cor ruption prevails in specif c sectors. Off cials involved in de v privatisation of state-o wned enter prises, amongst other acti vities are often in volved in g rand cor ruption. People are more lik ely to be punished for cor while no sanction is imposed on the socially pow found guilty of grand corruption. It is a fact that corruption is associated on the one hand with go vernment and politics and on the other, with business and the w ay businesses and states interact. The following sections give an overview of the research setting, methodology and the sur vey conducted amongst employees of the service sector namel y from consultanc y businesses, the f nancial ser vices sector and the hospitality industry. The h participants refer to clear cases of cor different degrees of ethical consequence.

ResearchSe tting veloping island nation in the Indian Ocean, independent in its go v Originally claimed b 100 years of F rench r ule, followed b y of British r ule. Relati ve to land area, it is one of the most densel th—has a population of more than 1.2 million people—and erse populations on the globe, with residents of Indian, Chinese, European and African descent in the countr y. Ov er the decades, man ve emer ged including Franco-Mauritian, and Creole subcultures.

Philosophical Ethics and Business 135

According to the latest household budget sur vey, the a verage annual income in this nation is 122,000 rupees, equivalent to less than $4,100 US or £2,800 per year. Consequently, there is a tendency to associate cor ruption with lo w income although recent cor ruption scandals pro ved the contrary. The evidence shows that high-level offcials seek f nancial security through illicit transactions and this is conf rmed by the f ndings of the Select Committee on F raud and Corruption, 2001. Anti-corruption strategies formulated by the previous regime, upon winning the 2000 elections, included the introduction of anti-cor gislation and the creation of a totally independent and empowered institution to f ght cor of these initiati ves ho wever, Mauritius has been unable to control cor ruption. The cur rent re gime, in their electoral campaign that preceded the general elections of 2005, strongl y emphasized their intention to combat cor has been no concrete action. It is quite common for political people to focus on ho w endanger ing cor ruption is, but the y only do so as Opposition members. Ef forts to de velop the econom y have sometimes been obstr ucted b y piecemeal approaches that have jeopardized national integrity through an increase in corrupt practices associated with a lack of transparenc y and accountability . The countr y has a histor y of cor recently f aced a number of high-prof le cases of cor lic and pri vate sectors. Mauritius has consistentl een 4.1 and 5.0 out of 10 on the Cor erceptions Index of Transparency Inter national from 1998 to 2007 (on a scale of 0–10, 0 being most cor rupt and 10 being cleanest). Yet, ev vernment denies the validity of the Cor ruption Perceptions Index, stating that it is based on perceptions and therefore does not ref ect reality. What seem to predominate in Mauritius are ms related to the indi vidualistic avours loyalty to one’s close relations and unethical political leadership. The w pressure groups, inclusive of the media in developing nations means that business people do not feel

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compelled to observe or respect standards of ethics as is the case in f rst-w prevalence of cor

ho decides to bribe the best judges to gi ve him a ‘f air’ There is an alle viour against an indi vidual w ho cor rupts the judiciar y to a void punishment. Methodology his name, he w xception to the Scenarios representing acts of briber y w ere pre- basic rule that condemns crime. If par ticipants persented to the sample population. Respondents were ceive the accused person as they may conasked to rate the action lik ely to be adopted, using en the nor mative philosoph y scales de veloped b y . The moral issue here is the Reidenbach and Robin (1988). Based on a content act of bribing the judiciary. Respondents view bribanalysis of f ve theories of ethics namel y, justice, vel as widely practised and accepted. deontology, relati vism, utilitarianism and e goism The notion of y was associated with an eight-item multidimensional ethics scale ( fair, impl just, moral, accepta y, cultural accept- the judiciary is a powerful predictor of whether peoa , traditional accepta , violates an unspo- ple would evaluate such a choice as ‘ethical’. ken promise and violates an unwritten contract ) Scenario 3 presents another instance of briber y. was developed. These eight items w ere condensed It involves the evasion of payment of a municipal, contrac- ity licence. In man y countries, such act is considvism dimensions (Kujala, 2001). ered as a criminal offence leading to heavy f nes and imprisonment. On the other hand ho wever, some people may regard the practice of briber y as Summary of Survey Findings justif ab v The scenarios constituting the survey can be the for aste of money’. olves cor The results indicate that the acceptability on a small scale w hile Scenario 3 presents a more of of fering briber y to e vade the pa yment of a serious issue w here the objecti ve is to e vade the licence is a po werful predictor of w hether people pa Scenario 2 would consider such act as right. carries even more signif cant ethical consequences as a con victed indi vidual uses his po wer to bribe of America, participants gave priority to duty conthe judiciary to rule in his favour. cepts as they evaluated the ethicality of the scenarPetty corruption in the form of a speed-up gra- ios. In the present study, the relativistic scales were e the for m of either gifts or f av rated as more signif as a condition to the execution of public duty. In ism scales as respondents evaluated each scenario. Scenario 1, the bribe pa yer offers a speed-up g ra- Participants w ere all from the business sector , to local authorities to get a building permit or which could e xplain the association of moral f acto empower the authorities and hasten procedures. tors with relativistic ones. Had we sampled a popuPar distinction between moral (fair, wing a ‘Business Ethics’ just, acceptable to family) and dimensions y acceptable, traditionally acceptable), might hav ticipants fer, consid- might ha ve clearl y distinguished betw een notions . Results show that the cul- of morality and culture, rather than a strong reliance on cultural factors. One could also g werful predictor of w hether or not expect greater reliance on duty f actors in e xplainpeople would rate such act as ethical. ing ethical perceptions.

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Conclusion The results gi ve e that e f rm that moral evaluations are specif

actor

valuation of an ethical prob lem, this theor y does not hold v o of the sceticipants made a clear een the moral and relativistic scales. This is probab ly because the h ypothetical volv ment of briber y or tax e vasion. The consequences y are more serious that is, the y car rom the f 2, we conclude that although y an unethical practice, in that par ticular case it has been y. vey f ndings relate closel laws of relativism y in some conte xts (De George, 1999; Donaldson and W

Philosophical Ethics and Business 137

One of the most signif cant f ndings of this tance of the relati vistic f actor in explaining ethical judgments. This result has ne ver emerged in earlier applications of the R & R scale in the United States of America. Although universal r vasion, briber y, crime and unethical conduct in general, our results gi ve e vidence that de v pret universal ferently. This conf rms that the model of ethical decision making in a de veloping nation is veloped world. vey results emphasise vistic dimension on ethical thinking in a de v y, ref ecting the state of emer ging economies with an indi vidualistic culture.

Reference Note: Notes and references removed for publication .mhhe.com/busethics2e.

Reading 3-4

It Seems Right in Theory but Does It Work inP ractice?1 Norman E. Bowie It is not uncommon for business people, including business executives, to f nd the conclusions of an ethical theory as it applies to a case in business to be persuasive, but nonetheless not accept the conclusions because to do so w ould be impractical from a business point of vie w. Thus it might be right in theor y but it is not practical in business. There are three g reat traditions in ethical theor y, the vir tue theor y of Aristotle, the duty theor y of Immanuel Kant, and the utilitarianism of Jerem y Bentham and John Stuar t Mill. In recent times these traditions ha ve been supplemented b y other theories such as feminist ethics. It seems to me

that if ethical theory is to serve as a foundation for business ethics, it must be the case that these traditional theories are not only persuasive as theories but also can be applied practicall ness practice. In this essa y, I will try to show how the fundamental principles of Kant’s ethical theory are both theoretically persuasive and practical in a business context. Before proceeding it is impor tant to note that the question I am addressing is not strictly an ethical question. After all under our star ting assumption business people have already agreed that as a matter of ethical theory, they are persuaded by the

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answ ves to the case at hand. They just don’ t think that doing w hat the ethical theory requires is possib le in a business conte xt. ant is for an answer that is both ethically justif ed and pr udent from a business perspecti ve. F or Kant sho wing that something is ethicall y required is suff cient since morality al ways trumps prudence. Although Kantians may accept the moral ans wer as def nitive for action, business people will not. If acting morally undermines my business, why should I be moral? That is the question that a business person is like to ask. Framing the issue as ethics vs. business is an e reeman calls “the separation thesis.” By the separation thesis he means the thesis that ethical concer ns and business concer o separate realms. F reeman argues that business and ethics are al ways inter twined in business activity. A manager should strive to make business decisions that are both ethicall y sound and sound in business terms. In what follows I will show how Kant’s theory enables managers to make decisions that are sound from both an ethical and a business point of view.

Business Decisions Should Not Be Self Defeating Kant’s fundamental moral principle is the categorical imperati ve. Kant’ s moral imperati ve is cate gorical because it al ways holds—there are no “ifs, and, or buts.” The classic statement of the categorical imperative is “One must al ways act on that maxim that one can will to be a universal law.” What does Kant mean here? An illustration regarding stealing should help. Why is stealing e ven when one is in diff cult f nancial circumstances wrong? Suppose one is in diff cult f nancial circumstances and is tempted to steal? If one should decide to steal w hat is the principle (maxim) for such an action? It must be that “it is morall y permissible for me to steal w hen I am in f nancial diff culty.” Kant no w requires that on the basis of rational consistenc y we must mak e my maxim

“it is ok for me to steal w hen I am in f nancial diffculty” into a uni versal principle, “it is morall y permissible for an y person in f nancial diff to steal.” After all what applies in one case must apply in all similar cases. Ho wever, the uni versal maxim that would stealing is self-defeating. An important point of a system of proper ty rights is that it assumes that proper ty rights are morall y protected e ven if others might need the proper more. T undermine the very system of property rights—the very proper in order to be a thief. If this seems too abstract consider the r ule of lining up. Suppose one is in a hur ry and w onders if it w ould be morall y per missible to cut in line? The maxim for that action w ould be “it is morall y permissible to cut in line w hen one is in a hur ry.” However, the uni versal v ersion of that maxim is that “It is morall y permissible for anyone to cut in line when he or she is in a ry.” But that maxim is self-defeating. If anyone could cut in line w hen he or she was in a hur ry, the very notion of lining up would mak e no sense. A similar ar gument shows that lying or the breaking of contracts is wrong. Kant’s reasoning sho ws w h wrong. A free rider benef ts w hen others follo w the r veryone behaved as the free rider (if the free riding maxim were made univ because you would no longer hav versal free riding on a r ule mak es the r ule nugator y. Put it another w ay, the free rider is not making a contribution to the institution that relies on the contributions of those par a contribution the free rider ag reed to mak e when he or she par w if a maxim per ere uni v ould be undermined. Kant’s reasoning here is highl y practical in business. nomic system in Russia, one of the tasks Russia had was to estab lish a stock mark et. However, the companies that were listed on the stock market did not give out accurate f

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words these companies w ere not transparent and there was no re y apparatus in place to make them transparent. But a stock market can only exist if there is a reasonab le amount of transparency regarding the f nancials of the listed companies. Thus the initial attempts at a stock mark et fell short; the stock mark et in Russia onl y came into existence when a number of companies w ere able to establish themselves as tr uth tellers about their f nancial condition. Poland had a similar diff culty in establishing a The f rst attempt to estabailed because people did not pay back their loans. If enough people f ail to pa y y in business. Kant’ ines the string of f nancial scandals in the United of 2007–2008. The categorical imperative shows why breaking a promise is wrong. If a maxim that permitted promise breaking w ere made uni versal, then promises would have no point. A promise breaker can only succeed if most people k eep their promises. If anyone could break his or her promise whenever it w as con venient, then no one w ould make promises. The breaking of contracts is also wrong for the same reason. Financial market work best when there is maximum transparency. The greater the amount of knowledge, the easier it is to assign risk. Increasing transparenc y mak es mark ets more eff cient. Thus par ticipants in the f nancial markets suppor t rules that increase transparenc y. What contributed to the Enron debacle w as the f act that of f balance sheet entities w ere created that hid Enron’ s risks. Once the risks came to light, Enron collapsed very quickl y. Something similar happened in the subprime mor tgage crisis. Mor tgages with v arying degrees of risk w ere bundled to gether in w ays that made in v cult to deter mine the underlying v alue of the assets behind the mor tgages. Once the housing mark ned and prices be gan to fall, investors began to worry about the risk but were unab le to deter mine w hat their risks w ere. red with

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the f rm Bear It was widely that Lehman Brothers and even Mer ynch might go under. Only action by the Federal Reserve provided suff cient capital to pre vent a f nancial collapse. Nonetheless f billions of dollars. Financial markets require transparency. Uni versalizing actions that under mine transparency undermine f nancial markets. nancial markets freeze up articipants in mark ets are morally required to support transparency. Both academics and practitioners concer ned with cor porate strategy have discovered the role of cant element of competiti ve advantage. Let us def usting relationship as one where those in the relationship will not tak e undue advantage of oppor relationships built on tr ust pro vide competiti ve adv o basic w ays. F irst, within a f rm, e the f cient. For example, when there is tr ust between employers and emplo yees, there is less monitoring, some behavior may not need to be monitored at all and there is less need for detailed information. The relaeen an emplo yer and an emplo yee can be y a monitored relationship. As a result teamw ork is more easily achie ved. All of this creates a competiti ve advantage for those companies that pursue enlightAnother w a ve advantage of trust relationships is to look at a common management prob lem. With a commission system, sales people are gi ven incentives to sell as much of a product as the y can without re gard to to manufacture the product in a timely . If a manager w ants to build a cooperati ve relation between sales and manuf acturing, then he or she y about the use of commissions as a way to reward sales. Yet another illustration is provided b American business to separate the design process from manuf Thus engineers create prototypes that are then given to manuf However,

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since there was no communication between design and manuf vitably there are “bugs” that need to be w orked out. Working out the bugs is an unnecessar greatly mitigated or e ven a voided if engineering and manuf orked to gether through both the design and the manuf acturing stage. The Japanese auto manufacturers this early and the eff ciencies that resulted helped Japan seize extensive market share at the expense of American acturers. It may seem that these ar y consequentialist. The so. Consider the follo wing ar ws the power of Kant’s cate ve here. 1. A business that fails to be competitive will go out of business. 2. A person or g roup of persons w ho start a business and invest in it, do not want it to go out of business. 3. Building relationships of tr ust are necessar y if the business is to be competitive. 4. elop these tr ust relationships in volve the business people in self-defeating actions. The actors both want the business to sur vive and b y consciously failing to take the actions necessary for it t o survive, t hey s how t hat th ey d o n ot w ant it to sur viv y self-defeating behavior. Thus Kant’s cate gorical imperati ve sho ws that trusting relationships are required on both utilitar ian grounds and on Kantian grounds as well.

Business Decisions Should Not Violate the Humanity of a Person Kant’s ethical theor y in volves more than a for mal test that ethical decisions should not be selfdefeating. ees simply as a cost and thus as interchangeab le with capital and machinery gave business a competitive advantage. Using an ar gument similar to the one

I used for tr usting relationships I could sho w that But, according to Kant, treating employees in that way would be immoral. Kant has a second for mulation of the categorical imperative which says, “Act so that y ou treat humanity, whether in y our own person or in that of another, always as an end and never as a means merely.” To act in accord with this for mulation of the categorical imperative, one must treat persons with respect. Why? Because persons have a dignity that Kant said was beyond price. That is why Kant w yers to treat employees as if the y were simpl y on a par with capital or machiner y—as if the y w ere mere f actors of production. Kant argued that onl y human beings w ere free and that as a result of being free, the y could act rationally by which Kant meant that could act according to laws of their own making. As free and rational creatures, the y could also be held responsible for their actions. Since persons can be held responsible, they can be held subject to moral la w. It is the fact that persons are free, rational, responsible beings capab le of acting morall y that gi ves y Kant belie ved that each of us reco gnizes that we have dignity that is entitled to respect. Indeed , failure to respect a person can easily result in the disrespected person acting angrily or e ven violentl y against those w ho show disrespect. Since each of us feels entitled to respect and is justif ed in this feeling, then as a matter of logic each of us must respect those w ho are lik e us, namel y w e must respect other persons. Since the obligation of respect is a matter of consistenc y, the f rst and second formulations of the categorical imperativ ed. The ob ligation to respect persons has direct application to business and business ethics. Management actions that coerce people or decei ve them do not treat emplo yees with respect. Coer cion is a direct denial of autonom y and deception also robs a person of his or her freedom since alternatives that w ould be a vailable to a person

Chapter 3

are kept off the tab le. The cour ts have recognized that coercion is a serious violation of ethics. In the classic case of Henningsen vs. Bloomf eld Motors the court voided standardized w arranties that limited liability in the light of injur y from defecti ve automobiles. The court said, “The warranty before us is a standardized form designed for mass use. It is imposed on the automobile consumer . He tak es it or lea ves it. No bar gaining is engaged in with respect to it.” The cour t must ha ve reasoned that the tak e it or leave it alter native is analo gous to the demand of the ar med robber , “y our mone y or y our life. ” Although there is a choice here, it is a coerced choice. Certain business practices suppor t respecting the humanity of a person. Open book management is a technique that in ef ns e veryone in the business into a chief f nance off cer (CFO). Under this technique all emplo yees receive all the numbers that are rele vant to the business. In this way the y understand the business and are better able to act for the longer term success of the business. Open book management has a number of devotees and is increasingl y adopted. Open book management in conjunction with other enlightened management practices empo wers employees and empo werment is one w ay of sho wing that the emplo yee is respected. Another w ay to sho w respect for emplo yees is to pro vide them with meaningful w ork. Empo werment is one of the ork. A complete ork is beyond the scope of this essay, but suff ce it to say, if employees believed their w ork was meaningful, ubiquitous. There would not be as many references to TGIF or to Monday as blue Monday or Wednesday as hump da y (half w ay to TGIF). Empowered employees w ho believe the y are making a contribution to the pub ork are highly moti vated and contribute mightil y to the success of the business enter prise. What is right in ethical theor business practice.

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Business Should Be Seen as a Moral as well as an Economic Community If employees deserve a kind of respect that capital and machinery does not, then w hat should a business look lik e from the point of vie w of a Kantian? Kant’s third for mulation of the cate imperative helps us understand w hat such a business should look lik e. Kant sa ys that w e should act as if we were a member of an ideal kingdom of ends in w hich we were both subject and so vereign at the same time. Substitute “moral organization” for “ideal kingdom of ends. ” How should such an or W organization are to be morall y justif y would have to be r ules that e v one in the organization subject and sov Kant’s ideas here are a moral challenge to hier archical theories of management—a challenge to a management philosophy that says to the employee, “Yours is not to question w hy, but simpl y do or die.” Kant’s moral theory is also a challenge to the per vasiv yment at will—a doctrine which says that y ou can be f red for an y reason, good, bad, or morall y unjustif able reason. For Kant unjustif able actions cannot be moral actions. What Kant’ s third for mulation requires is that emplo yees have a sa y in the or ganization’s The w ork of psycholo gists has shown that Kant’s moral demands are sound . Some of the pioneering work here has been done b gyris one of the most consistent critics of hierarchical management. Employees who are given a say are more highly motivated employees and highl y motivated employees contribute to the bottom line of the business. Also teamwork and cooperation, which are so highly valued in toda y’s organization, require that members of the organization have voice in how the or es. the perspecti ve of an ideal kingdom of ends will

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not treat the or ganization as a mere instr ument for their own personal use. If the indi viduals in an organization vie w it purel y instr umentally, these individuals are predisposed to beha ve in ways that harm or ganizational inte grity. The insight of the contemporary Kantian John Ra wls that or ganizais useful here. Or ganizations are not mere instr uments for achie ving indi vidual goals. To de velop this notion of a social union, Ra wls contrasts tw o views of ho w human society is held to gether: In the pri vate vie w human beings for m social instiould be adv antageous to do so; in the social vie w human beings for y share f nal ends and v vities as intrinsically good. In a social union, cooperation is a key element of success because each individual in a social union knows that he cannot achieve his interests within the group by himself. The cooperavides stability to the organization, enables it to endure, and enab les individuals both to realize their potential and to see the qualities of others that lead to or ganizational success. Rawls’s notion of a social union has much in common with Kant’s ideal kingdom of ends. This analysis can be applied directly to the issue of e xcessive e xecutive compensation and to the endless chain of cor porate scandals from 2001 to ve reacted to the recent w ave of cor porate scandals by saying that executives are overly greedy: a character f aw.

But w hy ha ve some e xecutives become g reedy? The e xplanation is in the distinction betw een viewing an or ganization as merel y an instr ument s individual needs and seeing an organization as a social union. If the or ganization seen as a cooperative enterprise of all those in the organization, it should come as no surprise that the executives of such an or ganization feel entitled to the re wards. Psycholo gical theorists ha ve sho wn that people tend to tak e credit when things go well and blame bad luck or circumstances be yond one’s control w hen things go badl y. Thus a CEO tak es all the credit w hen an or ganization perfor ms well but b lames the general econom y or other f actors when things go poorl y. This human tendenc y is predictable when e xecutives look at or ganizations instrumentally.

Conclusion This essa y pro vides a brief tour through Kantian ethical theor y and sho ws ho w it is both theoretically sound and practical. At least with Kantian ethics there need be no di vergence between good theory and sound practice.

EndN ote 1. Business Ethics: A Kantian Perspective, Blackwell Publishers 1999.

Chapter

4 The Corporate Culture—Impact and Implications Our plans miscarry because they have no aim. what harbor he [or she] is making for, no wind is the right wind.

w

Seneca There is nothing more diff cult to carry out, nor more doubtful of success, nor more dangerous to handle, than to initiate a new order of things.

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Opening Decision Point

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Creating an Ethics Program

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The Corporate Culture—Impact and Implications 145

ChapterO bjectives After reading this chapter, you will be able to: 1.

Define corporate culture.

2. 3. values-based culture. 4.

Discuss the role of corporate leadership in establishing the culture.

5. 6. corporate culture. 7.

Explain how various reporting mechanisms such as ethics hotlines and ombudsmen can help integrate ethics within a firm.

8.

Discuss the role of assessing, monitoring, and auditing the culture and ethics program.

9.

Explain how culture can be enforced via governmental regulation.

What Is Corporate Culture? This chapter e xamines the w ays in w hich cor porations dev hich individuals are encouraged and suppor ted in making ethicall y responsible decisions. The decision-making model of ethics that w e hav viduals for the decisions they make in business. These decisions impact one’s own personal integ ve consequences for many stakeholders with whom business organizations interact. But, personal decision making does not e xist in a v acuum. Decision making within a f rm is inf shaped in some cases, virtually determined by the corporate of the f rm. Indi making the “right” or “wrong” decision (according to their o wn values) by the expectations, values, and of the organization in which they live and work. e velopment, inf uence, and management of a corporate as well as the role of business leadving cultures that support ethical behavior. Even in this age of decentralized cor porations and other institutions, there ganizations. This is especially true in small local fr ue of major global cor porations such as Goo gle or BP. Despite the f act that cor porations have many locations, with di verse employee groups and management styles, an indi vidual working for a lar ge global f rm in working for the same f rm halfway around the world. This is not to say that their working en holly different in many regards; the corporate wever, survives the distance and differences.

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FIGURE 4.1

1 OBJECTIVE

e mean by corporate culture? Ev ganization has a culture fashioned by a shared pattern of beliefs, expectations, and meanings that inf uence and viors of the members of that or ganization. While culho are members of the or ganization, it is also shaped b y the people w ganization (See F .) Consider ho w your own company, organization or school, dor , or from , or frater nity/sorority? en but still inf uential standards and e w would you be ou had chosen a dif par ganization? (See ”) Businesses also have unspoken yet inf uential standards and expectations. IBM was once f a very male culture) w are and technologies companies ha v mality and pla Some companies have a straight nine-to-f ve w yees to w ork long hours and on w eekends. A person w ho joins the second type of f rm with a “nine-to-f ve attitude,” intending to lea v es f ve, might not “f t” and is likely not to last long. The same might hold true for a f rm’s values. If you join a f rm with a culture that suppor ts other values than those with which you are comfortable, there will be values conf orse. No culture, in business or elsewhere, is static. Cultures change; but modifying ving any impact on it at all—is a bit lik e moving an iceberg. The iceberg is al ways moving and if y ou ignore it the iceber g will continue to f oat with whatev way at the moment. One person cannot alter its course alone; but strong leaders—sometimes from within, but often at the top— can have a signif A strong business leader can cer tainly have a signif cant impact on a cor A f rm’ alue, offering it direction and stability during challenging times or it can pre vent a f r creative and timely ways. For example, some point to Toyota’s embodied in “the 14 principles of the Toyota Way”—as the basis for its high quality and consistent customer satisfaction.2 Others suggest that the “Toyoto Way” prevented

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Reality Check

The Corporate Culture—Impact and Implications 147

Built to Last

Built to Last: Successful Habits of Visionary Companies, researched dozens of very successful companies looking for common practices that might explain their success. These companies not only outperformed their competitors in fi terms; they have outperformed their competition financially over the long term. On average, the companies Collins and Porras studied were more than 100 years old. Among their key fi the fact that the truly exceptional and sustainable companies all placed great emphasis on a set of core values. These core values are described as the “essential and enduring tenets” that help to defi the company and are “not to be compromised for financial gain or short-term expediency.”3 core values that were articulated and promoted by the founders and CEOs of such companies as IBM, Johnson & Johnson, Hewlett-Packard, Procter & Gamble, Wal-Mart, Merck, Motorola, Sony, Walt Disney, General Electric, and Philip Morris. Some companies made “a commitment to customers” their core value, while others focused on employees, their products, innovation, or even risk-taking. The common theme was that core values and a clear corporate purpose, which together are described as the organization’s core ideology, were essential elements of sustainable and fi companies. Discussing a corporation’s “culture” is a way of saying that a corporation has a set of identifi values. All of the companies that Collins and Porras described are known for having strong corporate cultures and a clear set of values. In more recent research, Harvard professors Jim Heskett and

Earl Sasser, along with coauthor Joe Wheeler, strongly support the conclusions reached by Collins and Porras. In their 2008 book, The Ownership Quotient, they connect strong, adaptive cultures to the valuable corporate outcomes of innovation, productivity, and a sense of ownership among employees and customers. By analyzing traits that the authors found common to these organizations, we can learn much about what sustains them. 1. Leadership is critical in codifying and maintaining an organizational purpose, values, and vision. Leaders must set the example by living the elements of culture. 2. Like anything worthwhile, culture is something in which you invest. 3. Employees at all levels in an organization notice and validate the elements of culture. 4. Organizations with clearly codifi ed cultures enjoy labor cost advantages. 5. Organizations with clearly codifi ed and enforced cultures enjoy great employee and customer loyalty. 6. An operating strategy based on a strong, effective culture is selective of prospective customers. 7. The result of these cultural elements is ”the best serving the best.” 8. This self-reinforcing source of operating leverage must be managed carefully to make sure that it does not result in the development of dogmatic cults with little capacity for change. 9. Organizations with strong and adaptive cultures foster effective succession in the leadership ranks. 10. Cultures can sour.4

the compan vehicles in a responsible, s ve, and transparent way. “Since Toyota’s founding w e hav acturing high-quality products and Our business practices and activities based on this core principle created

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Reality Check

Walk This Way: The Toyota Way

The 14 Principles of the Toyota Way constitute Toyota’s system of continuous improvement in production and management. 1. Base your management decisions on a longterm philosophy, even at the expense of shortterm financial goals. 2. Create a continuous process flow to bring problems to the surface. 3. 4. Level out the workload (heijunka). (Work like the tortoise, not the hare.) 5. Build a culture of stopping to fi x problems, to get quality right the first time. 6. Standardized tasks and processes are the foundation for continuous improvement and employee empowerment. 7. Use visual control so no problems are hidden. 8. Use only reliable, thoroughly tested technology that serves your people and processes.

9. Grow leaders who thoroughly understand the work, live the philosophy, and teach it to others. 10. Develop exceptional people and teams who follow your company’s philosophy. 11. Respect your extended network of partners and suppliers by challenging them and helping them improve. 12. Go and see for yourself to thoroughly understand the situation ( ). 13. Make decisions slowly by consensus, thoroughly considering all options; implement decisions rapidly (nemawashi). 14. Become a learning organization through relentless reflection (hansei) and continuous improvement . Source: Liker, J., “An Executive Summary of the Culture Behind TPS” (Oct. 29, 2003) http://www.si.umich.edu/ ICOS/Liker04.pdf.

values, beliefs and business methods that o ver the y ears have become a source of competitive advantage. These are the managerial v alues and business methwn collecti vely as the Toyota Way,” e xplains Fujio Cho, thenPresident, Toyota (from the Toyota Way The stability that a corporate culture provides can be a benef t at one time can be a barrier to success at another. Review the 14 Principles of the Toyota Way in the accompanying Reality Check, “Walk This Way: The Toyota Way” and ref ect on which might hav hich might hav veness, secrecy, and denial. Def ning the specif c culture within an or ganization is not an easy task since it is par tially based on each par ticipant’s perception of the culture. In f act, perception may actually impact the culture in a circular way—a exists, we perceiv e respond to the culture on the basis of y impact others’ e eral of the elements that are easiest to perceive, such as and behaviors, are only a small fraction of the elements that comprise the culture. In addition, culture is present in and can be determined by exploring any of the following, among others: • • • •

Tempo of work The organization’s approach to humor Methods of problem solving The competitive en

Chapter 4

FIGURE 4.2 © Nancy Mar MO of the artist.

The Corporate Culture—Impact and Implications 149

CULTURE ? WHAT CULTURE ?

mission

WATER ? WHAT WATER

• Incentives • Individual autonomy • Hierarchical str Even with this list of cultural elements, it can be diffcult for individuals in a f rm to identify the specif y work. That phenomenon is best illustrated by the cartoon in Figure 4.2 much a part of the environment that participants do not even notice its existence. Consider the culture y ou experience within y our family. Often, it is onl y when you f rst move away from your family (when y ge, for example), that you can e ven recognize that y our family has its o As you delve our family’s relationships, choices, preferences, communication styles, even gift-giving practices, you will notice that each f amil

Culture and Ethics

2

How, exactly cally, what role does cor y in business ethics? We can ans wer these questions by ref ecting on several topics introduced previously. In chapter 1, w e considered the la w’s limitations in ensuring ethical compliance. For example, U.S. law requires business to mak e reasonable accommoda-

OBJECTIVE

whether a business should mak e a reasonab le accommodation for an employee with allergies, depression, dysle In where the law provides an incomplete answer for ethical decision making, the business culture is likel Ethical businesses must f nd ways to encourage, to shape, and to allo w ethically responsible decisions.

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Each of the f actors in the decision-making model w e introduced in chapter 2, from f discouraged b which the decision is made. ould be one in which employees are empowered and expected to act in ethically responsible ways, even when the law does not require it. Later in this chapter , we will e xamine types of cultures and v arious ways in w hich a cor viors and discourage others, consider as an e o organizational approaches to the relief efforts follo ricane Katrina in September 2005. On one hand , the F ederal Emer gency Management Agency (FEMA) w as charged with overall responsibility for the government’s response to the hurricane. as created in 1979 w hen se veral gov f re prevention, to insurance, to ci vil defense, were merged into one larger agency. . as a bureaucratic, hierarchical organization. Established rules and procedures w ere to be follo wed w decisions. Many decisions required approv . At one point, emergency personnel were delay ys because ules required that they f rst attend mandator venting sexual harassment in the workplace—unquestionably important, of course, but perhaps they could have tak emergency situation. Despite y v helmed FEMA’ not f t and the no longer FEMA’s y seemed b T y, were not moved into the area for months the because those not yet given approval. Decisions were made and later retracted. Days the w w vention center ned of these v y from a repor ter’s question. y, no one had told the FEMA lem; therefore, he could not mak e a decision, and thousands of people went without help. ganization seemed unable to mov decision mak wer-level managers lack es. yzed according to the theories from chapter 3, the culture lack ed ethical justif cation as w ve, it cer tainly was not volved around the consequences of its decision-making process. reat weight on the impact of its process on its stak eby the tragedy, was not giv . Given this omission, one might look at w hether some o verarching univ as protected b y the hierarchical decision-making process enforced during the time follo wing the hurricane. Surely, FEMA w w; but those who might hav ould have pointed instead to the “higher” values of health and human dignity.

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The Corporate Culture—Impact and Implications 151

In comparison, the United States Coast Guard is an or ganization with similar director Brown was ev y remov Guard admiral. The Coast Guard has a reputation for being a less bureaucratic organization. The unoff cial motto is to “rescue f rst, and get per mission later,” ref ecting a f ar more utilitarian perspecti ve to its mission. The Coast Guard empowers frontline indi viduals to solv e problems without w aiting for superiors to make decisions or to gi ve directions. Imagine ho w the same person w orking in either of these organizations would approach a decision—and who that person might perceive to be her or his primar y stakeholders—and you will ha ve some idea of the importance of or It is f air to sa o v ery similar organizations with similar missions, r ules, and le gal re y have signif cantl ref ect the culture of each. xpectations, and habits encouraged and reinforced in the two agencies ref ect the dif The notion of e xpectations and habits is link ed closely to a topic raised in our The cultivation of habits, including the cultiv reatly shaped b in which one lives. of a rational, deliberative process in w hich a person consciously deliberates about and w v that our decisions and our actions are v deliberate than that. We are as likely to act out of habit and based on character as w erations. So the question of where we get our habits and character is all-important. Part of the ans wer surely is that w e can choose to de velop some habits rather y education and y culture. This education takes place in every social environment, ranging from our f takes place in the w orkplace, w here indi viduals quickl y lear n beha viors that are appropriate and e xpected through those w hich get re warded and promoted. Intentionally or not, business institutions provide an environment in which habits are formed and vir The effect of this workplace on decision making cannot be overemphasized. The Ethics Resource Center repor wide ethics culture is the single factor with the greatest impact on misconduct.”5 Since strong cultures ha ve been sho wn to dramaticall y decrease misconduct, increase the lik ees who ve.6 It is not diff cult to see, therefore, that an ethical culture can ha ve a direct and practical impact on the bottom line. Research suppor ts this impact; w hen looking at stock perfor mance from 1998 to 2006, the 100 companies on Fortune’s Best Places to Work list have outperformed the Standard & P oor’s 500 by more than eight percentage points. 7 If attended to and suppor ve as a deter rent to stak e bottom line sustainability

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FIGURE 4.3 Source: Adapted from Rushworth Kidder Global Ethics, “Overcoming Ethical Nonchalance in the Boardroom,” Ethics Newsline 7,

If Ignored . . . Additional Costly Examples (During One Two-Week Period) Lucent Technologies: – Settled a class-action suit for misleading investors ($517 million) and was then fined for obstructing the probe ($25 million). Pfizer: –

Found guilty of aggressively marketing one of its drugs to doctors for use in unapproved ways ($430 million).

Citigroup: –

Liable for loan abuses to low-income and high-risk borrowers ($70 million), one week after it settled a class-action suit for biasing its brokerage advice in urging investors to buy WorldCom stock ($2.65 billion).

NEC: –

Fined for fraud under its contract to provide Internet access to the nation's poor schools ($20.7 million).

could instead reinforce a perception that “an ” and “any way to a better bottom line is acceptable, ying long-term sustainability. See, also, how the devastating impact is not limited to a single industr is demonstrated b y F ethical corporate cultures rests on business leaders. In fact, Ralph Larsen sets the leadership example by aff r personal responsibility.” Collins and P orras’ book Built to Last: Successful Ha bits of V panies e xplains the po wer of a cor porate culture to shape the indi viduals w ho work within it. While it ma y be tr ue that indi viduals can shape an or ganization, and perhaps charismatic leaders can do this especiall y well, it is equall ue, if not more so, that organizations shape individuals. Imagine spending a 20-, 30-, or even 40-year career in the same or ganization. The person you become, your attitudes, values, e cantly determined b ganization in which you work.

Compliance and Value-Based Cultures 3 OBJECTIVE

f rms were classif ed as compliance-based cultures (the traditional approach) while others were considered to be integ values-based cultures. These latter cultures are percei ved to be more f exible and f ar-sighted cor porate environments. The distinction betw een compliance-based and values-based also be used more generall

See Table 4.1

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The Corporate Culture—Impact and Implications 153

TABLE 4.1 The Ev grams into Values-Based Programs aul Lindo Race, “Beyond Traditional Audit T ”J Accountancy Online (July 2002), .aicpa.or JOF w

for an analysis of the dif ture and the more progressiv

een the traditional, compliance-based culve evolved.

the rules as the primary responsibility of ethics. empower legal counsel and audit off ces to mandate and to monitor compliance with the la A values-based culture is one that reinforces a par ticular set of values rather than a par ticular set of rules. Cer tainly, these f rms may have codes of conduct; but those codes are predicated on a s tatement of values and it is presumed that the code includes mere e xamples of the v alues’ application. Inte grating these v alues into the f rm’ decision-making process that uses the v alues as underl employee decisions rather than as hard-and-fast rules. The argument in f avor of a v is onl ules with which workers are expected to comply. A f rm can onl y have a cer tain number of r ules and the r ules can ne ver y appl y to e very concei vab A v alues-based culture recognizes that w here a r ule does not appl y the f y on the personal integrity of its w orkforce when decisions need to be made. (See “Compliance versus Values.” ) This is not to say that values-based organizations do not include a compliance structure. In fact, an Ethics Resource Center study found that “strict compliance and audit pro grams are often springboards for implementing more comprehensive prog ically do not diminish. Rather a focus on ethical v alues adds important priorities and incentives.”8 gram may include meeting legal and regulatory requirements, minimizing risks of litigation and indictment, and impr oving accounta s. The goals of a mo re e volved and inclusive ethics pro gram may entail a broader and more e xpansive application

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Reality Check

Compliance versus Values

The master said, govern the people by chastisements, and they will flee from you, and lose all self-respect. Govern them by moral force, keep their self-respect and come to you of their

The Analects of Confucius

to the f rm, including maintaining brand and reputation, recruiting and retaining desirable employees, helping to unify a f s global operations, creating a better working en yees, and doing the right thing in addition to doing things right. You should notice the more comprehensive implications of the latter list for the f rm, its sustainability, and its long-term bottom line. If a f rm w orientation to its ethics pro gram, the next question is ho w to integrate ethics into the compliance en fectively prev and to create a “culture” of ethics. That question is addressed in the next section.

Ethical Leadership and Corporate Culture If the goal of cor vate values, expectations, beliefs, and patterns of behavior that best and most ef fectively support ethical decision making, it becomes the primary responsibility of corporate leadership to steward this effor eholders throughout the organization are guided to a large extent by the “tone at the top.” This is not at all to relie ve leaders throughout an or ganization from their responsibilities as role models, but instead to suggest position that the executive leader pla successful independent of the other; there must be a consistent tone throughout the f rm. For an ar ticulate and forceful statement of ho w to set this tone and maintain it, see the reading “Leadership in a Values-Based Organization:

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The Eliot Spitzer Mirror Test for Leaders

Do not do anything that would require you to have to issue this statement to the press: From those to whom much is given, much is expected. I have been given much: the love of my family, the faith and trust of the people of New York and the chance to lead this state.

I am deeply sorry that I did not live up to what was expected of me. , apologizing to the citizens of the State of New Y 9 “Mr

in Business Ethics at Bentle y Colle y, February 7, 2002” b y Ralph Larsen, past Chair xplains, “Being bound together around the values . . . around our credo . . . being bound together around values is lik ” Merck’s CEO, Raymond Gilmar ther elaborates, “In thought, w y’s leaders must clearl y both adv ocate and model ethical behavior.”10 If a leader is perceived to be shirking her or his duties, misusing corporate assets, misrepresenting the f rm’s capabilities, or engaging in other inappropriate beha vior, stakeholders receive the message that this type of behavior is not onl y acceptable, but perhaps e xpected and cer tainly the w ay to t from the test articulated in the Reality Check, “The Eliot Spitzer Mirror Test for Leaders.” y placing her or his o wn ethical behavior above any other consideration, stak w that role model and to emu-

4 OBJECTIVE

tent with their organization’s and their o alues. If the courage, they are sending the message that this is the way to succeed in this culture. They also expect others to say no to them. Clearly, one of a leader’ sibilities, therefore, is to be a role model by setting a good example, by keeping y maintaining their own standards, and b others in doing so. ” Beyond personal behavior, leadership sets the tone through other mechanisms such as the dedication of resources. Ethical business leaders not onl y talk about ethics and act ethicall y on a personal le vel, but the y also allocate cor porate resources to support and to promote ethical behavior. There is a long-standing credo of management: “budgeting is all about v alues.” More common v ersions are “put your money where your mouth is” and “walk the talk.” For e xample, w hen ethics officers w ere f rst introduced to the cor porate structure in the earl y 1990s, the e xtent to which they were supported f nancially indicated their relevance and inf uence within the or ganization. Ethics was not a priority if the general counsel served as the ethics off cer in her “spare time,” and no additional resources w ere allocated to that acti vity. Ehtics holds a dif ferent position in the f r vidual is hired into an exclusive position as ethics off cer and is gi ven a staf f and a budget to suppor t the w ork required.

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The Impact of Ethical Leadership

Leadership support for ethical behavior has a significantly higher impact on favorable ethics-related outcomes than does any training method.11

Similarly, if a f r

ers through the

suppliers, and other contractors, then trains all of these stakeholders with regard to these e xpectations, and refers to the code and this process on a re gular basis, these efforts demonstrate how seriously the f es the code. A 2008 study by demonstrated that 86 percent of the Fortune Global 200 have a business code of ethics, with the number of codes represented b y that group doubling over the past 10 y ears.12 reasons for this increase w as to create a shared compan ay in w as e perceived as a peopleoriented leader, as w ell as the impor tance of leaders engaging in visible ethical action. Beyond people-orientation, traits that w tivity, listening and openness, in addition to the more traditionall y considered traits of integ , honesty inally, being perceived as having a broad ethical awareness, showing concern for multiple stak eholders (a responsibility to stakeholders, rather than for them, as Ralph Larsen emphasizes), and using ethical decision processes are also impor tant.13 Those perceived as ethical leaders do many of the things “traditional leaders” do (e.g., reinforce the conduct they are looking for , create standards for beha vior, and so on), but the y do that within the conte xt of an ethics agenda. P eople perceive that the ethical leader’ s goal is not simply job performance, but performance that is consistent with a set of ethical v alues and principles. F inally, ethical leaders demonstrate caring for people (employees and external stakeholders) in the process.

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Perception of Leadership Qualities men demonstrated strength over women was decisiveness. Some might contend that even this result is the consequence of a purportedly female style of decision making that is more collaborative and consensus-oriented, arguably an effective leadership style.

The Pew Research Center conducted a survey of 2,250 adults in the United States and asked them more true for men or women.14 As you can see, women bested the men in fi ve of eight categories, and tied them in two others. The only trait where

Leadership Traits: Women Rule!

20 14 28 44 34 5 28 11

Source: http://pewsocialtrends.org/pubs/708/gender-leadership

However, as mentioned above, all of these and behaviors must be visible. If an executive is “quietly ethical” within the conf nes of the top management team, but more distant employ w about her or his ethical stance, they are not lik ely to be percei ved as an ethical leader . Traits and beha viors must be socially visible and understood in order to be noticed and inf uence perceptions.15 Tak Leadership Qualities.” People notice when an executive walks the talk and acts on concerns for the common good hole, and long-ter m business prospects. Executives are e xpected to be focused on the f shor y when they focus on these broader and longer ns.

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Effective Leadership and Ethical, Effective Leadership

5 OBJECTIVE

As w e ha ve discussed , being percei ved as a leader pla ys an impor tant role in a leader’ m an ethical cor porate culture. K ey executives have the capability of transforming a business for better or for w cant impact on ethical decision making within the f rm, leaders ha ve the responsibility for shaping that en vironment so that ethical decision making can f ourish. But what is the difference between the effective leader and the ethical, ve leader? This distinction is clearl y critical since there are man y effective leaders; are they all ethical? What do w e mean b y an “ethical” leader? Since leaders guide, w v ly, eff ciently v follow er ve leader is an ethical leader. In the corporate context, Enron executives Ken Lay and y Skilling were successful, effective business leaders. They were able to transfor m Enron from a small oil and gas pipeline compan y into one of the lar gest corporations in the world. By many accounts, they were inspirational, imaginative, and creative leaders who could motivate their staff to attain very high levels of success. They were also unethical leaders. Ho w, then, can w e distinguish betw een effective leaders and ethical leaders? One key difference lies with the means used to moti vate others and achie ve one’ ve leaders might be able to achiev intimidation, harassment, and coercion. Skilling w as said to be a v ery diff cult person to work for. One can also lead using more amenab le interpersonal means such as modeling ethical behavior, persuasion, or using the impact of one’s institutional role. Some of the discussions in the literature on leadership suggest that ethical y by the methods used in leading. Promoters of certain styles of leadership suggest that their style is a superior style of leadership. Consequently, they tend to identify a method of leading with “tr ue” leadership in an ethical sense. xample, Robert Greenleaf ’s “Servant Leadership” suggests that the best leaders are indi viduals w ho lead by the e xample of ser ving others, in a non-hierarchical style. Other discussions similarly suggest that “transfor mative” or “transactional” leaders emplo y methods that empo wer subordinates to tak e the initiati ve and to solv e prob lems for themselves, and that this constitutes the best in ethical leadership. Certainly, ethicall an ethical leader. Creating a in which employees are empowered and expected to make ethically responsib ethical business leader. But, while some means may be ethically more appropriate than others (e.g., persuasion rather than coercion), it is not the method alone that establishes a leader as ethical. The other element of ethical leadership involves the end or objective towards which the leader leads. Recalling our discussion of ethical

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theor means in the deontolo gical theory of universalism or the focus on ends or results in teleological utilitarianism. Ethical leadership seems to embody both elements. If we judge a leader solel y b reatest good for the greatest number—we ma mistreatment of workers that was necessary to achie ve that end. Alternatively, if w e look onl y to the w orking conditions protected by universalism, we ma y account for a f ailure to produce a marketable product or one suff cient to reap a prof working conditions provided in a sustainable manner. Similarly, in the business conte xt, producti vity, eff ciency, and prof tability are minimal goals in order to be sustainable. A business executive who leads a fr uptcy is unlikel v . An executive w ms a business into a producti ve, eff cient, and prof table business, to the contrar y, lik el . One who succeeds in a manner that respects subordinates and/or empowers them to become creati ve and successful in themselv es is, at least at f rst glance, both an effective and ethical leader . But is prof tability and eff ciency accomplished through ethical means alone enough to make a business leader an ethical leader? Imagine a business leader w ho empo wers her or his subordinates, respects their autonomy by consulting and listening, but w ho leads a business that publishes child por nography or pollutes the en eapons to radical organizations. Would the method of such a leader? Beyond the goal of prof tability, other socially responsible goals might be necessary before w y ethical. Chapter 5 will pick up on this theme as we examine corporate social responsibility.

Building a Values-Based Corporate Culture Recall the iceber g e xample w e discussed earlier; w e e ving an iceberg. Each individual in an organization has an impact on the cor porate culture, although no one indi vidual can build or change the culture alone. Culture deri ves gration, assessment, and monitoring.

Mission Statements, Credos, Codes of Conduct, and Statements of Values One of the key manifestations of ethical leadership is the ar ticulation of values for the organization. Of course, this articulation may evolv ve process of values identif cation; it need not simply mimic the particular values of one chief executive. However rm is guided by some set of or ganizing principles that can guide emplo yees in their decisionmaking processes. But do codes mak e a dif “Do Codes Mak ” which seeks to respond to that question by explorse rst f s to have a code.16

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Do Codes Make a Difference?

As a result of its quick and effective handling of its 1986, Johnson & Johnson has often been viewed as one of the most admired fi had sales of $61.9 billion in 2009, representing its 77th year of consecutive sales increases. It has had 26 consecutive years of earnings increases and 47 consecutive years of dividend increases. Its market value in April 2010 was more than $179 billion, up rm that lives according to its strong values and a culture that supports those values can not only survive but sustain a profi t over the long term.17 CEO Ralph Larsen credits these successes directly to the J&J Credo: “it’s the glue that holds our decentralized company together . . . For us, the credo is our expression of managing the multiple bottom lines of products, people, planet and profits. It’s the way we conceptualize our total impact on society.”18

The Johnson & Johnson Credo and History At Johnson & Johnson there is no mission statement that hangs on the wall. Instead, for more than 60 years, a simple, one-page document—Our Credo—has guided our customers, our employees, the community and our stockholders. Our worldwide Family of Companies shares this value system in 36 c, Eastern Europe, Europe, Latin America, Middle East and North America.

Our Credo History19 General Robert Wood Johnson, who guided Johnson & Johnson from a small, familyowned business to a worldwide enterprise, had a very perceptive view of a corporation’s responsibilities beyond the manufacturing and marketing of products. Y REALITY, he urged his fellow industrialists to embrace what he termed “a new industrial

philosophy.” Johnson defined this as the corporation’s responsibility to customers, employees, the community and stockholders. But it was not until eight years later, in 1943, that Johnson wrote and first published the Johnson & Johnson Credo, a one-page document outlining these responsibilities in greater detail. Johnson saw to it that the Credo was embraced by his company, and he urged his management to apply it as part of their everyday business philosophy. The Credo, seen by business leaders and the media as being farsighted, received wide public attention and acclaim. Putting customers first and stockholders last was a refreshing approach to the management of a business. But it should be noted that Johnson was a practical minded businessman. He believed that by putting the customer fi served, and it was. The Corporation has drawn heavily on the strength of the Credo for guidance through the years, and at no time was this more evident than during the TYLENOL® crises of 1982 and 1986, when the McNeil Consumer & Specialty Pharmaceuticals product was adulterated with cyanide and used as a murder weapon. With Johnson & Johnson’s good name and reputation at stake, company managers and employees made countless decisions that were inspired by the philosophy embodied in the Credo. The company’s reputation was preserved and the TYLENOL® acetaminophen business was regained. Today the Credo lives on in Johnson & Johnson stronger than ever. Company employees now participate in a periodic survey and evaluation of just how well the company performs its Credo responsibilities. These assessments are then fed back to the senior management, and where there are shortcomings, corrective action is promptly taken.

(continued)

Chapter 4

Over the years, some of the language of the Credo has been updated and new areas recognize the environment and the balance between work and family have been added. But the spirit of the document remains the same today as when it was first written. When Robert Wood Johnson wrote and then institutionalized the Credo within Johnson & Johnson, he never suggested that it guaranteed perfection. But its principles have become a constant goal, as well as a source of inspiration, for all who are part of the Johnson & Johnson Family of Companies. More than 60 years after it was first introduced, the Credo continues to guide the destiny of the world’s largest and most diversified health care company.

Our Credo We believe our first responsibility is to the doctors, nurses and patients, to mothers and services. In meeting their needs everything we do must be of high quality. We must constantly strive to reduce our costs in order to maintain reasonable prices. Customers’ orders must be serviced promptly and accurately. Our suppliers and distributors must have an opportunity to make a fair profit. We are responsible to our employees, the men and women who work with us throughout the world. Everyone must be considered as an

6 OBJECTIVE

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individual. We must respect their dignity and recognize their merit. They must have a sense of security in their jobs. Compensation must be fair and adequate, and working conditions clean, orderly and safe. We must be mindful of ways to help our employees fulfill their family responsibilities. Employees must feel free to make suggestions and complaints. There must be equal opportunity for employment, development and advancement for those qualified. We must provide competent management, and their actions must be just and ethical. We are responsible to the communities in which we live and work and to the world community as well. We must be good citizens— support good works and charities and bear our fair share of taxes. We must encourage civic improvements and better health and education. We must maintain in good order the property we are privileged to use, protecting the environment and natural resources. Our final responsibility is to our stockholders. Business must make a sound profit. We must experiment with new ideas. Research must be carried on, innovative programs developed and mistakes paid for. New equipment must be purchased, new facilities provided and new products launched. Reserves must be created to provide for adverse times. When we operate according to these principles, the stockholders should realize a fair return.20

Before impacting the culture through a code of conduct or statement of values, a f rm must f rst determine its mission so that decision mak ers have direction when deter y value is prof t—at any cost. Consequentl y, without additional guidance from the top, a f rm is sending a clear message that a w orker should do w hatever it tak es to reap prof ts. A code of conduct, therefore, ma y more specif cally delineate this foundation both for inter nal stak eholders, such as emplo yees, and for external stakeholders, such as customers. In so doing, the code has the potential to both enhance cor porate reputation and to pro vide concrete guidance for inter nal decision making, thus creating a built-in risk management system.

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The vision can be inspiring—indeed it should be inspiring. For instance, when David Packard passed away, Bill He , comar as the company is concer w wn as ‘the HP Way.’”21 Similarly, Jim Collins, author of Built to Last and Good to Great, e we did not f nd ‘maximizing shareholder w ealth’ or ‘prof t maximization’ as the dominant dri y objecti v y of most of the visionary companies. They hav es, of which money is only one—and not necessarily the y one.”22 By establishing (especiall hich a company is built, cor vely laying down the law with regard to the basis and objectiv decisions. In f act, the mission statement or credo ser ves as an ar ticulation of the fundamental principles at the hear t of the 23 or From a universalist perspective, while many decisions might be made with the end in mind none should ever breach the ying mission as an ultimate dictate.

Developing the Mission and Code The 1990s brought a proliferation of cor porate codes of conduct and mission statements as part of the corporate response to the Federal Sentencing Guidelines for Organizations (see later in this chapter), and a 2002 sur vey found that 75 percent of these mention the w ord ethics.24 The success of these codes depends in large par t on the process b y w hich the y are concei ved and written, as w ell as their implementation. As with the constr uction of a personal code or mission, it is critical to f rst ask yourself what you stand for or what the company stands for. Why does the f rm e xist? poses? How will it implement these objectives? Once y ou make these deter minations, how will y ou share them and encourage a commitment to them among your and subordinates? (See le 4.2 .) The second step in the de velopment of guiding principles for the f rm is the articulation of a clear vision re garding the f rm’s direction. Why have a code? Bobby Kipp, PricewaterhouseCoopers’ global ethics leader, explains: “We felt it was important for all our clients, our people and other stakeholders to understand exactly what w The code doesn’t change the basic nature of the business we undertake, but instead it articulates the way we strive to conduct ourselves. The code shows how we apply our values to our daily business practices.”25 The third step in this process is to identify clear steps as to how this cultural shift will occur . You have a code, but y y “print, post and pray,” as Ethics Resource Center past-President Stuar t Gilman has refer red to Enron’s experience. Do y ou just post a sign on the w all that sa ys, “Let’s make more money!” Of course not. You need to have processes and procedures in place that suppor t and then sustain that vision. Put in a dif ferent way, “a w orld-class code is no guarantee of w orld-class conduct,” cautions four other scholars in a d Business Review article on benchmarking codes. “A code is only a tool,

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TABLE 4.2 Ethics Code Guidelines Source: Ethics Resource Center uction and .ethics. or le_code_outline. of Ethics Resource Center.

and like any tool, it can be used well or poorly—or left on the shelf to be admired ”27 Finally, to ha ve an ef fectiv must be a belief throughout the organization that this is actually possible and achievable. If conf icts remain that will prevent certain components from being realized, or if k ey leadership is not on board , no one will ha ve faith in the changes articulated. See Table 4.2 for Ethics Resource Center guidelines on writing an effective ethics code. It should be noted that, while many organizations have individual codes of conduct, industries and/or professions might also pub lish codes of conduct that apply to f or people who do business in those arenas. While to some codes is prerequisite to par ticipation in a profession, such as the le gal community’s Code of Professional Responsibility , many codes are produced b y professional associations and are v or example, certif ed pub, the direct mark , and some facve codes.28 One might presume that implementation would be effective in all areas based on the industr y-wide approach; however, research shows that it is only successful if there is an e y cooperative approach, uniform, verif able performance indicators, a credib le verif cation system, elements 29

Culture Integration: Ethics Hotlines, Ombudspersons, and Reporting 7 OBJECTIVE

Recalling Gilman’s warning not to “print, post and pra y,” many business f rms must ha ve mechanisms in place that allo w emplo y ard with questions, concer ns, and infor mation about unethical beha vior. Inte grating an rm and providing means for enforcement is vitall y critical both to the success of an eholders. Integration can take a number of different forms, depending both on the organizational culture and the ultimate goals of the process. One of the most deter minative elements of inte gration is communication because without it there is no clarity of pur pose, priorities, or process.

Decision Point

Short Term versus Long Term

porated into the f rm’s vocabulary, habits, and attitudes to become an essential element in the corporate life, decision making, and deter mination of success. In the end , the Ethics & P olicy Integration Centre contends that communication patter ns describe the or ganization far better than organization charts! The Decision Point, “Short Term versus Long Term” challenges you to create some of those inte grative mechanisms, while the Reality Check, “Examples of Culture Inte gration” demonstrates ho w two f rms have imaginatively responded to this very challenge. To e xplore the ef fectiveness of a cor poration’s inte gration process, consider whether incentives are in the right place to encourage ethical decision making and whether ethical behavior is evaluated during a worker’s performance review. It is diff cult to rew y f ling an expense repor tin Chairman’s Award shows, incentives such as appropriate honors and positi ve appraisals are possib le. Are employees comfortable raising questions relating to unethical beha vior? Are multiple and v ees believ free from retaliation? What can be done to ensure that employees who violate the company code are disciplined appropriately, even if they are good performers? How does communication about ethical matters occur? The f is that repor ting ethically suspect beha vior is a diff cult thing to do. Childhood memories of “tattletales” or “snitches, ” along with a general social prohibition against infor ming on others, create bar riers to repor ting unethical beha vior. 164

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Examples of Culture Integration

• Lockheed Martin offers its Chairman’s Award, which is bestowed on the employee who most m festival that encourages workers—on their own time and without financial assistance—to create short videos on ethics at the firm.

• DuPont strives to reinforce the message in a slightly different way. The fi publicize compliance transgressions (omitting the names to protect privacy) and the results of discipline. Though this “tell all” method might have its lawyers quaking in their seats, DuPont believes that, without it, workers have no idea what behavior is acceptable or unacceptable.

More ominously, individuals often pay a real cost w hen they repor behavior (such as retaliation), especiall y if w orkplace superiors are in volved in the report of wrongdoing. Whistleblowing is one of the classic issues in business ethics. lowing involves the disclosure of unethical or ille gal activities to someone w ho is in a position to take action to prevent or punish the wrongdoing. Whistleblowing can expose and end unethical activities. But it can also seem disloyal; it can harm the xact signif cant costs on the whistleblower. Whistleblowing can occur inter nally, as w hen Sher ron Watkins repor ted her concerns to Ken Lay regarding Enron (see chapter 1). It can occur e xternally, as when Jeffrey Wigand trayed in the movie The Insider 60 Minutes about Bro wn & Williamson’s acti vities in not onl wingly misleading the public about the har of cigarettes, but also in using additives that increased the potential for har m. Whistleblowing can also occur externally when employ et engineer Roger Boisjoly reported the activities of his employer Morton Thiokol, along with NASA, prior to the launch of the space shuttle Challenger. Because whistleblowing to e xternal groups, such as the press and the legal authorities, can be so har histleblower and to the f rm itself, internal mechanisms for repor ting wrongdoing are preferab le for all concer ned. But the internal mechanisms must be ef fective, must allow conf dentiality, if not anon , and must stri ve to protect the rights of the accused par . In addition to or as par t of ethics and compliance off cers’ responsibilities, man y f rms have created ethics ombudsman and inter nal or e xternal ethics hotlines. These mechanisms allow employ follow-up and enforcement. these responses might seem evident, reasonable, and commonplace, many organizations do not ha ve them in place for a v ariety of reasons. In addition, even w hen the y are in place, people w ho obser v ganization opt not to repor t the threat or possib le wrongdoing. Consider the Columbia , which is reviewed by the Columbia Accident Investigation

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Board in the reading, “Assessment and Plan for Organizational Culture Change at NASA.” On Feb. 1, 2003, the Columbia space shuttle lost a piece of its insulating foam w th’s atmosphere. The damage resulted in the death of se v ASA’s most serious tragedies. The foam had dislodged during the original launch, w s wings, which caused the accident a fe w weeks later on re-entr y. ue e xtent of the damage. No one ,” so to speak. caused major accidents in the past, senior managers downplayed the threat. Was this an operations f ailure, a f ailure in judgment, pressure from abo ve to complete the shuttle mission, the cavalier, cowbo ASA to keep movard at any cost? Columbia’s engineers w orked in a data-dri ven culture. No one made a mo ve without data to suppor t it; unless there w as data to pro ve that the vehicle w rent “prov gy, they could not xtra cost of scheduling a moon walk to investigate. ailure in a whistleblowing system? Some analysts n of behavior . . . a prime example of an ambiguous threat—a signal that ma y or may not por harm.”30 of the or ganization clear, w Therefore, while massiv v hen a w vent’s potential for causing a compan y harm is unclear. In these cases, managers tend to acti vely ”31 which f rms might actively curtail these negative inf uences. For instance, leaders should model eryganization can see that reporting is the highest cov xplain the process of decision making that led to their conclusion. y are so seldom used, there is no habit for med at all), practicing aluable exercise. Running drills or rehearsals of challenging e vents will allow for much g reater comfor t and generate a le vel of e xpectation among work ws suff cient time for ref ection in order to reach responsible decisions is most likely to encourage consideration of appropriate implications. F inally, the most ef fective way to ensure clarity and thereby ensure a successful repor ting scheme is to consistentl y and continuousl ganization’s values and e xpectations to all stakeholders, and to reinforce these v alues through the f rm’s compensation and reward str lowing Today: Critical Issues F acing Business Leadership” by Wim Vandek ve to learn of the various approaches to the issue taken by dif Beyond the question of cultural dif ferences in repor ting sensiti vities and processes, a f rm must consider the bare lo gistical questions in global

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implementation of its code of conduct and ram. How will the code and accompanying program align with local standards of practice, laws, and customs? Will there be just one v ersion of the code for w orld operations, or multiple versions for each local base of operations, and not simply in the local language but modif ed in order to be sensitive to these local standards and customs? Ho w ‘deep’ will y our code reach into y our suppl y chain? The codes of some f rms apply only to their emplo yee base w hile others appl y to all vendors, suppliers, and other contracting par ties. Must you consult with (or even seek appro val from) labor representati ves, unions and/or w orks councils prior to implementing the code or program in any of the countries in which you operate? Finally, be aware that the standard ackno wledgement form that many employees are asked to sign upon receipt of a code of conduct in the United States ma ven the unequal bargaining positions of the par ties. While you might opt to dispense with that requirement, how will you serve the pur pose of demonstrating acceptance and understanding?

Assessing and Monitoring the Corporate Culture: Audits 8 OBJECTIVE

Unfor y, if one does not measure something, people often percei ve a decline in its importance. The same result occurs with regard to culture. If we cult to encourage others throughout the or ganization to pa y attention to it. The contrar y is tr ue, howev w organizations to uncover rm, thus ser ving as a vital element in risk assessment and pre vention. By engaging in an ongoing assessment, or ganizations are better ab le to spot these areas before other stakeholders (both internal and external) spot them. Beyond unco v fective monitoring process ma y include other signif cantly positive objectives. These may include an e valuation of appropriate resource allocation, w hether the pro gram is k eeping pace with organizational g rowth, w hether all of the pro gram’s positi ve results are being accurately measured and repor hether the f rm’ adequately rewarding ethical behavior, and whether the “tone at the top” is being vely. v ou detect a potentially damaging or ethically challenged corporate referred to as a “to xic” culture? The f rst clear sign w ould be a lack of an y generally accepted fundamental v alues for the or ganization, as discussed abo ve. In addition, war tion. How does the f rm treat its customers, suppliers, clients, and w orkers? The management of its inter nal and e xternal relationships is critical e vidence of its values. How does the f rm manage its f nances? Of course, a f rm can be in a state of f nancial disaster without engaging in e ven one unethical act (and vice v ersa); hich it manages and communicates its f nancial en is telling.

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Reality Check

Warning Signs!

warning signs of an icts of interest, ineffective controls, imbalance of power, inappropriate 1. An inability to generate positive cash fl despite positive earnings and growth. 2. Unusual pressure to achieve accounting-based financial objectives. 3. Compensation tied closely or only to fi results. 4. Debt covenants that have been violated (or are close to being so). 5. Increased liabilities with no apparent source of funding. 6. Off-balance sheet transactions. 7. Complex or creative structures. 8. Ratios/trends that buck expectations or industry trends. 9. Large returns or revenue credits after the close of the period. 10. A 11. A history of unreliable accounting estimates. 12. Numerous related-party transactions. 13. purposes. In addition, PwC suggests organizational warning signals:

the

following

1. An unusually complex organizational structure; numerous entities with unclear purpose. 2. Insuffi tions, especially positions that manage risks.

3. Rapid growth or downsizing that places stress on organizational resources. 4. Resignations of management or board members for reasons other than retirement, health, or conflict of interest. 5. A member of the board or senior management who was possibly involved in or aware of financial manipulation that resulted in restatement is still connected with the organization. 6. An understaffed finance/accounting staff. 7. Undersized or understaffed internal audit department. 8. No audit committee or ineffective committee. 9. Management conveys a lifestyle beyond their financial means. 10. The scope of internal audit seems too narrow. 11. Failure to address weaknesses in controls or process. On the other hand, the Institute for Business, Technology and Ethics cites the following eight traits of a healthy organization culture: 1. Openness and humility from top to bottom of the organization. 2. An environment of accountability and personal responsibility. 3. Freedom from risk taking within appropriate limits. 4. A fierce commitment to “doing it right.” 5. A willingness to tolerate and learn from mistakes. 6. Unquestioned integrity and consistency. 7. A pursuit of collaboration, integration, and holistic thinking. 8. Courage and persistence in the face of difficulty.

Consulting f r y which to measure the impact of effor The f rst is to deter mine whether employee perception of the or working conditions has changed. Surveys of employee job satisf action in general or about specif y retur n

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interesting data, though sometimes employees will tell the f rm what they believe the organization wishes to hear. Alternatively, leaders may opt for an audit b y an independent or ganization in order to deter mine the emplo yee perception or to assess the f rm’s vulnerabilities or risks. The e le to provide information relating to benchmarking data in connection with the f rm’s code, training program, or other education or inte gration components, as well as or hotline is also noteworthy in terms of and responses. As with any element of the working environment, any feedback or yees, whether at the beginning of employment, throughout or subsequent to emplo yment, should be gathered and anal yzed for valuable input regarding the culture.32 Information is available ev here—take a look at the “Warning Signs!” Reality Check . For an e xtensive set of recommended questions to guide a strate gic monitoring audit, see the reading, “Does the Company Get It—20 Questions to Ask Regarding Compliance, Ethics, and Risk Management” by OCEG at the end of the chapter.

Mandating and Enforcing Culture: The Federal Sentencing Guidelines for Organizations 9 OBJECTIVE

When inter nal mechanisms for creating ethical cor porate cultures pro ve inadequate, the business community can e xpect governmental re gulation to f ll the void. The United States Sentencing Commission (USSC), an independent agency in the United States Judiciary, was created in 1984 to regulate sentencing policy in the federal cour t system. Prior to that time, dif ferences in sentencing, arbitrar mous issues before Congress. By using the USSC to mandate sentencing procedures and make recomof sentencing in federal cour t procedures, bringing some of these challenges and variations under control. Beginning in 1987, the USSC prescribed mandator y Federal Sentencing Guidelines for Organizations that appl y to indi vidual and or ganizational defendants in the federal system, bringing some amount of unifor airness to the system. (See Figure 4.4 .) These prescriptions, based on the se verity of the of fense, assign most federal crimes to one of 43 “of fense le vels.” Each offender also is placed into a criminal histor y cate gory based upon the e xtent and recenc y of past misconduct. The cour t then inputs this infor mation into a sentencing grid and determines the s sentence guideline range (ranges are either in six-month inter vals or 25 percent of the sentence, w hichever is greater), and is subject to adjustments. In its October 2004 decision in U.S. v. Booker, however, the Supreme Cour t separated the “mandator y” element of the guidelines from their advisor y role, holding that their mandator Amendment right to a jury Accordingly

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FIGURE 4.4 Sources of Culture

Review: Culture Derives from Leadership, Integration, and Assessment/Monitoring 1. Leadership (and maintenance) of the control environment Through high-level commitment and management responsibility, leaders set the standard and the tone 2. Control activities, information, and communication Statements, policies, operating procedures, communications and training ration into business practices 3. Review, assessment, ongoing monitoring Monitoring, evaluation, historical accountability

to consider guideline ranges. The court is also per mitted to indi vidually tailor a y concer ns. You can imagine that this modif cation from mandator y to “required to consider” has not come without a bit of y follo w cases. But f guring out what to do with all the cases that ha ve been sentenced under the old guidelines is the closest thing to chaos y ou can describe,” says law professor Douglas Berman.33 The relev lar place is that the USSC stri ved to use the guidelines to create both a le gal and an ethical cor porate environment. This effort was suppor ted by the SarbanesOxley Act, which subsequently directed the USSC to consider and to review its guidelines for fraud relating to securities and accounting, as well as to obstruction of justice, and specif cally ask ed for se vere and agg ressive deter rents in sentencing recommendations. Fur ther, the Sarbanes-Oxley Act required public companies to establish a code of conduct for top executives and, if they did not have one, to explain why it did not exist. Several stock exchanges followed suit and also required codes of business conduct and ethics from its pub licly held companies. In recognition of the signif cant impact of cor sion making, the USSC updated the guidelines in 2004 to include references not only to compliance programs but also to “ethics and compliance” pro grams ther, required that or ganizations promote “an or ganizational culture that encourages ethical conduct and commitment to compliance with the la w.” The revision also includes a requirement that or ganizations assess areas of risk for ethics and compliance, and periodicall y measure the ef fectiveness of their programs. In addition, the criteria for an ef fective pro gram, w hich used to be outlined just in the guidelines’ commentary, are now found in a separate specif c guideline. porations to create or maintain effective ethics and compliance pro grams. Those companies that can demonstrate that

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they have these programs, but f nd themselves in court as a result of a bad apple or two, either will not be penalized or the recommended penalty will be reduced r e effective ethics and compliance systems will be sentenced to an additional term of probation and ordered to develop a program during that time (called an “agg ravated” penalty). The USSC notes that organizations shall “exercise due diligence to prevent and detect criminal conduct; and otherwise promote an or ganizational culture that encourages ethical conduct and a commitment to compliance with the la w.” The guidelines identify those specif c acts of an or ganization that can serve as due diligence in pre venting crime and the minimal requirements for an ef fective compliance and ethics pro gram. These include the follo wing actions:34 ds and Pr ocedures. The or ganization shall estab lish standards and procedures to prevent and detect criminal conduct. 2.

d and other Ex ecutives; Adequate Resources and Authority. (A) The or ganization’ wledgeable about the compliance and ethics program and shall exercise reasonable oversight with respect to veness. (B) High-level personnel must be assigned to ha ve responsibility for the program and must then ensure its effectiveness. (C) Specif c individual(s) within the organization shall be delegated day-to-day operational responsibility for the pro gram and shall repor t periodically to these high-lev veness of the compliance and ethics program. They shall also be gi ven adequate resources, appropriate author , and direct access to the governing authority. eclusion from Authority: Prior Misconduct. The organization shall avoid placing people in charge of the program who have previously engaged in illegal acti ve compliance and ethics program. unication and T raining. The or ganization shall communicate its standards and procedures to all members of the or ganization through training or other means appropriate to such indi viduals’ respecti ve roles and responsibilities.

5. Monitoring, Evaluation, Repor ting Processes. The or ganization shall tak e reasonable steps: (A) to ensure that the or ganization’s compliance and ethics pro gram is follow (B) to evaluate periodically the effectiveness of the organization’s compliance and ethics program; and

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Reality Check

The Global Culture for Corporations: Compliance and Ethics Issues to Consider

GUIDANCE FROM ETHISPHERE: Brazil 1. CORRUPTION According to a business survey conducted in 2005 by PriceWaterhouseCoopers, 70 percent of fi at least 3 percent of revenues on bribes. Most of these bribes are to expedite procedures, special treatment, or access to traditional transactions. DEAL WITH IT Given recent history

business people have become sensitive to corruption and how it impacts Brazil’ and investment opportunities. Federal agents are ness behavior. Y understanding when you make the case for compliance. Transparency in any business relationship or activity, however, such as accounting practices

3. GÉRSON’S LAW In the 1970s, Gérson, a famous soccer player, appeared in a cigarette advertising campaign saying, “Take advantage of every situation to get ahead.” Sometimes called Gérson’s law, this mentality is used from time to time to justify unethical behavior. While in decline, the attitude persists in certain regions, especially outside of international business centers. DEAL WITH IT Ethics and compliance training will increase your employee’s understanding of what is appropriate behavior as well as the risks that unethical action poses for company. With agents outside your company, it is important to evaluate a potential partner’s commitment to ethical practice prior to formalizing a relationship.

Jordan

established by the Internal Revenue Service and 2. DIRTY MONEY In 2000, a report by CPI accused more than 800 Brazilians, including politicians and infl business fi of drug traffi cking. Poor record keeping and accounting practices can cover illegal activities such as drug traffi records can also facilitate tax evasion and other misuse of resources. DEAL WITH IT Do not engage in business transactions with individuals that have roles in unidentifi ed businesses, government or public offices. Keep all records as clear and organized as possible and keep an electronic or hard copy of any relevant monetary transactions. Also, keep updated records of employees and suppliers and request copies of official identification whenever you formalize any type of working relationship. There are certified credit check services, like nancial and tax due diligence of business partners.

1. PRICE HAGGLING about the wide price ranges that exist in the formal and informal economies. Haggling and bargaining are techniques often necessary in Jordanian business settings, something which can create discomfort or foster distrust among those unaccustomed to the practice. DEAL WITH IT This specifi c practice is embed-

ded in the cultural traditions of the nation. Although there is no single simple solution for it, formal processes such as tenders and foreign aid contract requirements can force competitors to be more transparent in terms of costs and prices. It can also be helpful to recognize that the bargaining process is an opportunity to understand the business style of your potential partners and to establish mutually understood relationships with them. 2. WOMEN IN PROFESSIONS The role of women in Jordanian society has been evolving at a slow pace and some social preconceptions can inhibit the work of women managers. In addition, lack of equal opportunity employment laws and some specific norms, like those that prohibit nighttime (continued)

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employment, can be constraining for female workers. DEAL WITH IT The Jordan Constitution presents

men and women as equal and this should be used as the basis for employment opportunities. Equal access to education is broadening the professions that are practiced by women. When confronting conservative attitudes to female employment you should advise the participants that Jordan’s policies consider this discrimination. 3. RELIGIOUS DISCRIMINATION According to the constitution Islam is the state religion. Christianity is also recognized as a religion and therefore its practice is allowed. However, the Government does not recognize the Druze or Baha’i faiths as religions, but nonetheless allows the practice of these faiths. Baha’is have been known to face both offi and social discrimination, such as prohibitions from registering schools or places of worship. DEAL WITH IT Although some religions and churches might not be recognized, there is usually a tolerant attitude toward them. In order to avoid discrimination issues at work, it is best not to encourage any religious practice (such as praying hours) and ensure the respect of workers individual preferences.

The Corporate Culture—Impact and Implications 173

by a firm. Measures should be taken to see that hiring practices are not only nondiscriminatory, but transparent and well documented so as to protect your organization from potential liability. 2. BRIBERY South Africa as the sixth country in the world most likely to bribe. More and more, South African companies not only see bribery as an accepted practice when conducting business in the region, but a necessary component for success. DEAL WITH IT Companies should be proactive

in trying to mitigate the risks presented. Objectively research the South African market and where your company is likely to encounter bribery issues—the more you understand this issue, the better you can prepare employees to avoid it. A robust compliance program with a focus on corruption is more likely to win leniency from regulators in the event of malfeasance. Finally, insist on conducting periodic audits—this extends to potential partners, subcontractors and agents. Although this won’t be common practice for your local counterparts, and you may encounter some resistance, it’s a vital step to ensure that your organization isn’t committing—knowingly or unknowingly—Foreign Corrupt Practices Act violations that could cost millions. 3. CORRUPTION The factor that has contrib-

South Africa 1. WORKPLACE INEQUALITY AND DISCRIMINATION A notable difference between the South African and U.S. workplaces is the inherent imbalance of the workforce, particularly at the management and executive level. Concerns for discriminatory practices are unique in this developing country in that there are not only issues with discrimination based on gender, race and religion, but other measures such as age, sexual orientation, HIV/AIDS status and disability.

Africa? Corruption and illegal practices that go unchecked, unregulated and unpunished. This happens for many reasons, mostly having to do with inadequate control policies and legislation and insufficient resources to form a unified effort against corruption. It’s a commonly held belief in South Africa that corruption efforts have taken a back seat to other pressing issues like poverty, HIV/AIDS, inequalities and high unemployment.

DEAL WITH IT Be sure that your company’s

DEAL WITH IT Companies engaging in business

Code of Conduct and HR policies account for the unique obstacles when hiring in SA—each should contain detailed and frank discussions of the equal opportunities for employment offered

in South Africa will, for the time being, have to be proactive in not only ensuring that they have vigorous internal control policies in place that define and outline penalties for corruption in addition to (continued)

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providing adequate reporting mechanisms, but also to conduct due diligence when selecting and auditing partners and vendors. Source: F. Arreola and G. Unruh, “Global Compliance: Brazil,” Ethisphere (September 20, 2008), http:// . Arreola and

G. Unruh, “Global Compliance: Jordan,” (May 13, 2009), http://ethisphere.com/global-compliance-jordan/; E. (March 25, 2008), http://ethisphere.com/global-compliancesouth-africa/. Reprinted with permission from Ethisphere. http://www.ethisphere.com.

(C) to have and publicize a system, which ma for anon ymity or conf dentiality, w hereby the or ganization’s emplo yees and agents ma y repor t or seek guidance re garding potential or actual criminal conduct without fear of retaliation. 6. Incentive and Disciplinary Structur es. The or ganization’s compliance and ethics pro gram shall be promoted and enforced consistentl y throughout the organization through (A) ves to perform in accordance with the compliance and ethics program; and (B) y measures for engaging in criminal conduct and for failing to take reasonable steps to prevent or detect criminal conduct. cation Mechanisms. After criminal conduct has been ganization shall tak y ing making any necessary modif cations to the or ganization’s compliance and ethics program. In connection with item number one on the list, imagine the challenges faced by companies seeking to ensure compliance in a v throughout the world. The porations: Compliance and Ethics Issues to Consider ,” e xplores some of those obstacles with re These three were chosen simply to provide a window into the array of issues for which companies need to be prepared today. o, mandates that the organization’s gov y, a board of directors) has the duty to act pr udently, to be kno wledgeable about the content and operation of the compliance and ethics pro gram, and must under go ongoing and consistent training. The content could include instr uction surrounding the nature of board f duciary duties, personal liability, stock exchange regulations, insider trading, conf dentiality ty, and business secrets. ho was responsible for research regarding the frequency of board training, found it note w y that “accounting literac y” was not mentioned by executives among issues that should be included. Its research did reveal, however, that more than two-thirds of boards spend two hours or less per year on 35

Decision Point

Legal Pressure to Violate Confidentiality

Though these steps are lik ely to lead to an ef fective program, “[such a program] is more than checking of f the items on a list. This concept of ‘due diligence’ is a restless standard , as f exible as changing e vents ref ected in the da y’s headlines and as creati ve as the minds of potential wrongdoers. ”36 For instance, the guidelines require an in vestigation in response to a repor t of wrongdoing; but they also seem to require more than that. A f rm must learn from its mistakes and tak e steps to pre vent recur rences such as follo w-up investigation and program enhancements. The USSC also mandates consideration of the size of the or y of the organization; mitigating factors such as self-repor ting of violations, cooperation with authorities, and acceptance of responsibility; and aggravating f actors such as its in volvement in or tolerance of criminal acti vity, a violation of a prior order, or its obstruction of justice. These standards are to be judged against applicable industr y standards; ho wever, this requires that each f rm against comparable companies. Consider the challenges in volved in de veloping an airtight system and process in the Decision Point, “Legal Pressure to Violate Conf dentiality.”

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Opening Decision Point Revisited Creating an Ethics Program

176

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Questions, Projects, and Exercises

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KeyT erms

EndN otes

179

180

Readings

Values-Based Org The Sears Lectureship in Business Ethics at Bentley Colleg sday, F 2002,” by Ralph S. Larsen, Former Chairman of the Board and Chief Ex ve Off cer, Johnson & Johnson, p. 181 Reading 4-2: “Whistleblowing Today: Critical issues Facing Business Leadership,” by Wim Vandekerckhov p. 185 Reading 4-3: “Assessment and Plan for Organizational Culture Change at NASA, ”by The Columbia vestigation Board, p. 191 Reading 4-4: “Does the Company Get It?—20 Questions to Ask Regarding Compliance, Ethics, ement,” by OCEG, p. 193

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Reading 4-1

Leadership in a Values-Based Organization: The Sears Lectureship in Business Ethics at Bentley College—Thursday, F Ralph S. Larsen, Former Chairman of the Board and Chief Executive Off cer, ou for that kind introduction. I am v ery pleased to be here representing the more than ho work so hard each da y, not only building our business, but doing it in the right way. I’m honored to be a par and so, the f rst reason I’m here is because y ou asked. The second reason is that the older I get, the more I lik e hanging around with people y ounger than I am, people on the threshold of their careers. You keep us young and nimble. You have a way of distilling and challenging our thought processes. You remind us of what it’s all about. Last y ear I spok e with a y oung lady w ho w as serving as a fello w in our cor porate communications depar tment. This is a pro gram we have with the Rutgers School of Communications. These master’ ork for us as inter ns for one or o y ears as the y complete their pro gram. I w as y her stor y, and I w anted to share it with you today. Well, somehow our compan y made an impression on this young girl in India, thousands and thousands of miles a way from the headquar ters where she ultimatel y w orked. to us she brought with her the e xpectation that we w ould be as community-oriented v tion that she would f nd an environment where she could express her values and feel encouraged to do the right thing. Now, I share Sandh ya’s story with y ou because s just ter rif c that a y oung person can be touched and moti vated b y our compan y’s v alues.

s e ven more encouraging that this motivation meant that she sought out a job with us. You, too, might ha ve some preconceptions about the kinds of or ganizations you want to join, and if you do end up someplace with a strong set of core values, I can give you a glimpse of what to expect once you get there. Obviously, I can speak onl y from m y personal experience which is almost e xclusively in Johnson & Johnson. As chair man and CEO for the past 13 y ears, I ha ve had the best job in cor porate America—of that I am sure. The reason is that leading a compan y lik e Johnson & Johnson, with a strong foundation built on v alues and a heritage based on ethical principles, is v ery special. There are certain boundaries in place: things y ou simply don’t do, well-accepted management practices that just won’t work, changes that just won’ y won’t give wa new ideas. **** In his reno wned book, The Fifth Discipline, Peter certain theories of le verage within a system. In this case, how do you get something really big, like an oil tank er ship, to change course? Well, you mo ve the r udder, of course. But the r udder itself is so big that there’ s w ater pressure k eeping it where it is. So, there is this v ery small piece (a r udder for the r udder if y ou will) called a trim tab that compresses the w ater around the r udder. That action makes it easier for the rudder to move through the water. Easier, therefore, for the r udder to change the direction of the ship. You don’t see

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the tab. You probably never even w it was there, but it mak es an incredib le difference to the navigation of the ship. Being bound together around the values . . . around our credo . . . being bound to gether around values is lik e the trim tab for leadership at Johnson & Johnson. What I mean is that because it is a deep point of le verage, it mak es a huge dif ference. It’s the point of le verage that mak es leadership not onl y possib le but also meaningful and enjoyable. Johnson & Johnson’s strong values have been instrumental in our charting a course that has proved successful, and for that I am ver • Sales last year were $33 billion, almost triple what they were a decade ago, representing our 69th consecutive year of sales increases. • We’ve had 17 consecuti ve years of double-digit earnings increases. • And we’v e years of dividend increases. • And our shareowners have done very well. The market v y mately $38 billion ten years ago. s the glue that holds our decentralized compan y to gether. It’ s called our credo, and it is a 60 y ear-old decepti vely simple one-page document. Our credo g rew out of General Rober t Wood Johnson’s (the patriarch of our company) v et ver ment philosoph y. In essence, it sa ys that our f rst ve them air prices. Our second yees, to treat them with dignity and respect and pay them fairly. Our hich we operate, to be good cor porate citizens and protect the en And then, it says that our f nal ve them a fair return. In the f nal anal ysis, the Credo is built on the notion that if y lling the f rst three responsibilities, then the shareholder

will come out all right. That is e xactly w hat has happened over all these y ears, and that is w hat we continue to strive for today. **** Clearly, as the chief e xecutive off cer, I am ultimately accountable for ever both good and bad. But more than an ything else, I am responsible for the tone at the top.T and decent company with good and decent people. I work hard at setting the right tone. I spend a tremendous amount of time de veloping and selecting credo-based leaders and ensuring that w e have the proper systems and controls in place. out our f amily of companies, I must rel y on all of our compan y leaders and their teams to do the right thing and work with me to instill credo values throughout their organizations. They share with me the challenge of being responsible for making sure we operate in accordance with our credo v alues in all that we do. **** Now sound kind of simple. It is not. In a highl y competitive, f nancially driven w y of quarterly ear cies, actually living the credo in a meaningful w ay is a constant challenge. At the end of the da y, our . As y that is v tant. Said another way, our credo isn’t about us being responsib le for something. A school child is responsible for her backpack. An assembly line worker is responsible for placing a ou are responsible to, you are responsible “to a person” or “to a group of people.” And that’s what our credo says . . . we are responsib le to our customers, mothers and fathers, doctors and nurses; responsible to employees; responsible to people in communities. This is an intrinsicall y subjecti ve area precisel y because it’s personal. It’ s about o wing par t of y ourself to others. It’s a serious responsibility.

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I’m no linguist, and so I don’ w where the root of the two uses of a par ticular word in French come together, but I am str uck that the w ord to be physically burdened with lots of luggage, char gé, is the same word used to describe a person who has tak . It’s par t of a title to indicate y ou’re in char ge. The idea is simple; when y ou’re in char ge, y ou are responsib le. And this weighs heavily, particularly when you have to balance the interests of dif ferent people, all people you are responsible to. **** During my tenure at Johnson & Johnson, I’ve spent more time on people issues than an y far. P eople decisions are the ones that k eep me awake at night. Let me give you an example. Several years ago, we made the decision to close approximately 50 small plants around the w orld. It involved la veral thousand people, man y in communities and countries in w hich I knew the people would have a very tough time f nding comparable employment. We had ne ver done an like that before. I w orried about m w amilies w ho w ould lose their jobs. But our operating costs at these small plants were way out of line, and we were becoming less and less competitive. So y le to our employees in those plants, but I was also responsible to the patients w ho needed our products to k eep them affordable. And I was responsible to all of our other employees around the w orld to keep the company healthy and growing. The harsh was that a great many more would be hurt down the road if I f e. In addition to our employees, I was also responsib viduals, retired folks, pension plans, and mutual funds) who owned our stock. The facts were w what had to be done, and we did it y and sensitively as possible. But the decision w as personal. At a deeper level, what became was

The Corporate Culture—Impact and Implications 183

companies had changed the g round r ules fore ver. This new w antee that if y ou came to w ork every day and did your job well, you could count on being emplo yed with us for life. That’s the way it used to be, but that w e could no longer fulf ll. Rather, we had to focus on making people emplo yable for life. And that’s where we put our resources, at lifelong de velopment of skill sets that could be used in man The bright side to all of this is that being responsib I am responsible to you, you are more lik ely to be responsible to me, and that means I have colleagues eople are committed to people, not just to paychecks. There’s a sense that w e are all in it together. In our case, we’re all working to get lifesaving and life-enhancing products to people w ho need them. Improving the quality of life and healing and curing disease is our heritage and mission. Being bound to es us able to achieve incredible heights, not onl y as a g roup, but as individuals. **** We don’ “credo-ize” them. They come to us with good v alues, and then w e tr y to create an en vironment in which those values can be lived out. I don’t it’s just luck, for e xample, that the companies wn to of fer g reat ser vice are also those w ho reach out to communities, w ho are cited as good from a place w here people feel that responsibility to other people is part of their job. it’s not just OK but e xpected that people tak e care of people—expected that leaders tak e care of people. Where values are indeed encouraged and respected. I’m not sa ying that ha ving core v alues guarantees success in e very market condition. That’s too simplistic, and w w that’s not true. Compalems all the odak, or Xerox, and the list goes on. But the point is that the folks at these companies have worked hard to do the right thing o ver

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many years. They continue to make huge efforts in vation to keep up with and even overtake their fast-moving market. But sometimes changing conditions are such that companies hit hard times, a rough patch, and the y will ha ve to sor t it out and char t their course. We study other companies intensely . . . the times in tough industries. We particularly focus on their record of inno vation. y doing that’s ne w and inno vative, and can w e appl y it to our company? The point is w e are willing to lear n from anyone, and we f nd that companies are more than willing to share ideas. vation in a compan y w tain way of doing things based on a set of core values? W rst to admit that our values, w hile touching a place in people’ s hear ts, make them feel more comfor table and safe in a shared sense of pur pose. But there is a difference between feeling secure and being complacent. Many pundits ar gue that to be tr uly innovative you must shak e things up . . . create a sense of urgency. Make people see that the y can’t possibly ys—threaten them, get their attention by scaring them to death. I suppose that’s one way of doing it, but I don’t agree with it. It ma y tak e more time on the front end , but we’ve found that we get incredible results by taking the time to explain the challenges to our people and by working with them and letting them come up with the options and solutions. We tr y to create a sense of safe harbor w here people can e xperiment and innovate and tak e intelligent risks. A climate where it’s OK if y ou f ail. The impor tant thing is that you keep trying, striving to improve. It’s your track record over time that we evaluate you on. ****

Y o ways to get to the top of the mountain. Gear up and climb straight up the f ace, or take a more circuitous route, gaining a little bit of altitude as y ays looping back and for th. There are people bor n to be rock climbers, and I, m I have the good for y that tends to take the longer route. True, we might not be as e xciting to w atch as a rock climber , but w e deliver results day in and day out, year in and year out, decade in and decade out. **** Leaders can make values a priority that gets measured and re warded. We can w ork hard at making sure that the compan y’s values are w ell e w xplicit and visib le in all that w e do, in all of our programs, policies, products. But the most important thing is to set the proper personal example, the tone at the top. Our values need to be visible to people like Sandhya, young people who will become the next generation of leaders. The leaders who will wrestle with increasingl y comple x prob lems in a complicated w orld. A w orld in w hich often there is no clear answ “right” thing to do is. Leaders with good judgment w w ho w to preser ve impor tant v alues and hold fast to them, w wing w ast to change to meet the challenges of a new world. If this all sounds interesting to y ou as y ou pursue y our career, I w ould ur ge y ou to join a company rich in v alues. There are no perfect people, and there are no perfect companies. We all ha ve our w arts. But make sure the company you join has a set of core v alues that you are comfortable with, that you are proud of, and which will bring out the very best in you. ou very much.

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Reading 4-2

WhistleblowingT oday: Critical Issues Facing Business Leadership Wim Vandekerckhove

Introduction lowing is the deliberate, non-ob ligatory act of disclosure, b y an indi vidual with pri vileged access to data or infor mation of an or ganization, about a non-trivial ille or other wrongdoing under the control of that or ganization, to an entity who has the po wer to rectify the wrongdoing. The g rowing number of w histleblowing policies implemented by organizations and enacted b y gov xter of an issue. Whistleblowing policies ma y protect whistleblowers from retaliation under cer tain conditions and these conditions ma y be stipulated in the whistleblowing policy. More precisely, whistleblowing policies specify who can make a protected disclosure (actor), w hat disclosures can be made (subject), and to w hom the disclosure should be made (recipient). lowers against organizational retaliation became an issue in the earl y 1970’s as a protest against the ethos of the ‘or ganization man,’ w hich demanded absolute lo yalty of the employee to the employer. lower activism denounced or ganizational closure and adv ocated that pub lic interest should at all times tak e ver an or ganization’s interest in secrec y. A lot has changed since the early 1970’s. Managers cedures that allow concerns to be raised inside the organization rather than force responsible employees to go outside. And go v y prescribe w histleblowing policies through le gislation. Today, there are whistleblowing laws not only in the US, but also v ery impor tant ones in Australia, the UK, South Africa, New Zealand, Japan, ay. Legal proposals are being discussed in the Netherlands, Canada,

of le ay (see Vandek ve 2006 for a discussion of these). Research into the psycholo gical prof le of whistleblowers and the sociolo gical characteristics of organisations where whistleblowing occurs (see Miceli and Near 1992 and Miethe 1999) has had an lowing advocacy y helped to clarify some misunderstandings about whistleblow y management of protection and internal procedures. Nevertheless, some issues remain unsettled and this ar ticle discusses some of those issues. For e xample, w hile most w histleblowing policies require disclosures to be made in good f aith, it remains troub lesome to defend this requirement. As w histleblowing policies are implemented globally, the question of the extent to which cultural differences are restraining f actors is an impor tant yet unresolv ed issue. Another issue is w hether whistleblowing can be conceived as a duty rather than just a right. F inally, w hilst most inter nal procedures have been set up to recei ve anonymous direction b y prefer ring conf dential disclosures to anonymous ones. The reasons for that distinction are quite con vincing, the responsibilities ho wever are bigger as well.

CurrentI ssues Motive histleblower’s moti ve ought to be tak en into consideration before of fering protection remains an unresolv ed issue. Most policies explicitly mention ‘good intention’ or ‘genuine whistleblower’ as a precondition for protection against retaliation.

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One reason that it is featured might be to counter the standard ar gument against protection, namel y that disg yees abuse whistleblowing procedures b y telling lies about their colleagues or line manager , onl y moti vated by personal gain. Another reason might be the portrayal of whistleblowers in the media as moral heroes. Impor tant, ho wever, is that there is also a do wnside to mentioning moti ve as a condition for protection. Jubb (1999) left moti ve out of his def nition of w histleblowing because moti ves may be mix ery diff cult, if not impossib le, to decipher . Whilst the quality of a w histleblowing procedure or re gulation can be measured b y the clarity and lack of ambiguity of the conditions imposed on the protection, the introduction of a proper moti ve as a condition increases the arbitrariness of the protection. Who is to judge the w histleblower’s moti ve? It mak es raising concer n much more risk y for potential whistleblowers. Moreover, the rele vance of the whistleblower’s motive is not that ob vious, gi ven the f nality of whistleblower protection, namel ther the public interest. Indeed , as the repor t from the OECD work g roup on w histleblowing ar the pur pose of a w histleblowing frame work is to deter corruption rather than to encourage external disclosures, [labour representati ves] were not per suaded that the moti ve or honesty of the w histleblower should be a critical f actor in an y ne w regime’ (OECD 2000, 9). The onl y w histleblowing polic y that e xplicitly taps into personal gain moti vated w histleblowing is the F alse Claims Act in the US, w hich of fers rewards for information. The act establishes that anyone w ernment in relation to fraud also sues for herself. Basically, the idea is that the person or or ganization f ling the la wsuit gets a percentage of the mone y the gov le to reco ver. Although the idea was raised during the parliamentar y discussion in the Netherlands1 and b y the UK Home Off ce,2 the F alse Claims Act pro visions ha ve not been taken over in any whistleblowing regulation so far.

To reward personal gain moti vated whistleblowing seems to be a US idiosyncrasy.

Collectivism vs. Individualism This brings us to a ne xt issue re garding w histleblowing, namely w xplanatory relevance. Here, a distinction een possible dif wards whistleblowing on the one side and histleblowing schemes on the other. Current research (Thomas and Miller 2005; Park et where collecti vidualism are more likely to blow the whistle. However, whether the y actuall wn and also depends on organizational and regulator When we look at w histleblowing schemes and legislation, the stor y is some what different. Intuitively, one would e a g reat deal as to ho w whistleblower protection is advocated. Not onl y do w histleblowing policies affect an or ganization’s autonom y with re gard to the wider society, protecting whistleblowers is also a serious intervention in how people relate to one another within organizations. Therefore, one could argue that cer tain ‘good reasons’ for protecting whistleblowers might w ork in one re gion of the w . Contrar Vandek ve (2006) concludes that the eff ciency v histleblowing schemes regardless of national cultures. It is as if these ar t’ above national cultures. This is no surprise if we acknowledge that describing and designing or ganizations through the concepts of f exibility, decentralization, gov ork and stak eholder, has become a global w ay of doing so. It appears as if this par ganizations has become more pervasiv fercountries w here or ganizations are increasingl y described and problematized in terms of f exibility,

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decentralization, go vernance, netw ork and stak eholder, whistleblowing policies appear as a necesgislation. This is the case in Australia, where the antipathy to wards ‘dobbing’ or betra ying ‘mateship’ has precluded federal w histleblowing le gislation covering the pri vate sector, until HIH, Australia’s second largest general insurer , collapsed in 2001. The HIH collapse could have been av y early warnings from an insider and se veral others to the Australian Pr udential Re gulatory Authority asking to inspect HIH would have been followed up on. All of a sudden, the culture of ‘mateship’ was no longer convincing. Restoring investor tr ust acquired an ur gency that w as ab le to convince beyond the importance of ‘mates’. In September 2002, federal gover issues a policy proposal paper setting out ideas for protecting private sector whistleblowers. In October 2003, a draft bill was released and b Act (Cor porate La w Economic Reform Program) was a f act. The point I am tr tain situations are perceived as necessities and can as such wipe awa guments. In the case of the ‘cultural’ ar e blocked private sector w histleblower protection for ten years, got w ashed a way b y one crisis. And all of a sudden, it is that same Australian private sector which is urging whistleblower protection to be legislated. Another e histleblowing legislation was enacted in June 2004. F with one of the strongest cor w eird. Organizational loyalty in the old sense, the belief that ille tice should be o verlooked or ignored for the sak e corporate culture is ne v wing cracks. Lifetime employment is f ading, workforce reductions are taking place, and a lot of cor porations have stopped of fering lo w-price accommodation to their w orkers. Also the last ten y ears, notions such as ‘accountability’, ‘freedom of infor mation’, ‘governance’, ‘business ethics’ have been taken up

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in the language (Miki 2004). Thus, it is not national that seems most relevant, but rather the extent to w hich the conceptual he gemony of glois important.

Right and Duty lowing le gislation has up till no w onl y recognized the right to b low the w histle. Some exceptions are impor tant, however. Specif c ‘gatekeeper’ v report malpractice. Recently ned gatekeepers as inter mediary parties—accountants, la ers, and bank ers—whose cooperation is necessar y for business or ho b y withholding cooperation are ab le to pre vent signif cant misconduct. Boatright (2007: 620) notes that, although it is clear that an inter mediary has wingly pro vide substantial assistance to a client’ ” it is f ar less clear to w hat extent an inter mediary is obligated to deter mine whether a client is committing some wrong. In other words, gatekeepers should not participate or facilitate wrongdoing; but w hat should the y do to a v And to what cost? Vandek ve (2007) examine the boundaries betw een the right and the duty to blow the w histle. They submit that, if it is correct that inter nal w histleblowing procedures can be ting moral autonomy such procedures theoreticall distinction between right and duty . There then remains no excuse for not raising a concer wing about a malpractice but not speaking up makes one complicit to that malpractice. All this might seem v ery academic humbug to the practitioner, w elopments make this kind of work necessary. For example, the Sarbanes-Oxley on gatek that the majority of the European organizational whistleblowing policies adopted a tone that w as

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at least moderatel y authoritati ve, with codes speaking of a requirement or duty to repor t violations, and emplo yees who ‘must’, ‘should’ or ‘are expected to’ repor t these. More impor tantly, Hassink et al. (2007) found that in 30 percent of the policies review as made clear that failing to

committee shall estab lish procedures for [. . .] the conf dential, anonymous submission by employees [. . .] of concer n re garding questionab le accounting or auditing matters. ’ In Ger many and F rance, labour unions had argued that some whistleblowing schemes set up b y cor porations w ere unla wful. Cour t r ulings conf rmed this, b y stating that or concealing infor mation about one) is a violawhistleblowing schemes w ere not compatib le tion in itself. ” And although F rench and Belgian with the European Directi ve on pri vacy (Directive gov vac ve issued 95/46/EC). Of course this caused a huge dilemma statements that whistleblowing schemes may not for some major European companies. Meanw hile, impose mandatory reporting on employees and there is an advice paper from the Article 29 Workthat therefore, use of the reporting scheme must be ing Par (approved in F y 2006), which lowing policy of the European states that conf dential reporting is to be preferred Commission, implemented after the Cresson crisis, to anon ting. Also, the F rench CNIL maintains a mandatory disclosure procedure.3 (Commission nationale de l’infor matique en des libertés) issued a ‘guideline document’ in NovemAnonymous or Confidential ber 2005, in w hich it f nds the encouragement of A fourth issue is whether whistleblowers should be anonymous repor ting unacceptab le and suggests allow ymous disclosures. It is some- restrictive handling of anon ymous repor ting. This times argued that anonymity is the best protection. position was followed b acy Commission earl y 2006. If the guidelines from these out ha authorities are follo wed up on, then it might v information. In this sense, it should be no sur prise w histleblowing scheme that nearly all commercially operated ‘hotlines’ are elsewhere in the world. anonymous whistleblowing schemes. By def nition, How to Mitigate Ethical Risks anonymous whistleblow the simple f act that w e don’ w w ho it is that in Whistleblowing we should be protecting. Also, anonymous reports are harder to in vestigate because there is no w ay to obtain additional infor mation from the w histle- from the 1990’s on—and that is based on procedural blower. F inally, anon ymous repor ting facilities normativ exibilmight increase the risk of slanderous repor ting. A ork’, ‘cor porate governance’, ‘inte g good alter native to anon ymous repor ting is conf dential repor ting. In such a scheme, the recipient knows the identity of the w histleblower but k eeps about the production process. As a result, inter nal it conf dential from management or other parties. audits, board-disclosure and internal whistleblowing Just recentl y, polic y mak ers in Europe ga ve procedures are increasingl a clear signal that conf dential schemes are to be v preferred to anonymous ones. The provisions of histleblowing arguthe Sarbanes-Oxley Act enacted in the US in 2002 ment has been in the sense that signif cant progress was made on whistleblowing legislation w , worldwide, this refor mulation—internal w histlethese cor porations had to compl y with Section blowing as a cor porate go vernance mechanism— 301 of the Act, which stipulates that ‘Each audit also entails ne Although

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whistleblowing is justif ed within the dominant or mation in this w ay is necessar y in order to guarantee eff ciency vernance— these justif cations entail par ticular modalities of implementation that ethicall y are not unprob lematic. wing: • Over-responsibilisation of the indi vidual employ employee into the guardian of organisational legitimacy, • Fading of the distinction betw een the right and the duty of an emplo yee to repor t suspected wrongdoing, • A shift from w histleblower protection as a means to hold or ganisations accountab le for social responsibilities, to whistleblowing procedures as a mean to hold employees accountable for their performance and engagement. Characteristic for this shift is: absence of unions as recipients in inter nal whistleblowing procedures, restriction of subjects allo wed to repor t on, the omission of e xternal recipients in procedures communicated to employees, restriction of persons who can be reco gnised as w histleblowers to current employees, • Neglect of the necessity to protect inter nal whistleblowers against retaliation as a result of merel y focussing on gathering infor mation. anon cedures.

ve conf dential pro-

What these risks boil down to is that, instead of providing or ganisational suppor t for the moral autonomy of emplo yees, inter nal w histleblowing procedures mak e employees liab le both w hen they raise concer n—for e xample w hen inter nal procedures are so comple x the emplo yee is bound to make mistakes—as well as w hen they remain silent w wing what was going wrong. tant task for managers and polic y mak of w histleblowing policies for the w ell-being of business and society is to be realized. Two areas

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of attention that can help to mitigate these ethical risks are f rst the signif cant distinction betw een gation; and second the importance of independent advice. When making an alle gation, one is convinced that there is wrongdoing. Allegations also include naming someone who is causing the wrongdoing—a colleague, a manager or ‘the’ organisation. Hence someone is being accused. If w histleblowing tak es the for m of an alle gation and someone is being accused , all kinds of defence strategies are unlocked and there is a big chance that the messenger will get shot while the attention shifts from the alleged wrongdoing to the personal ro w which whistleblowing has then become. When whistleblowing takes the for m of an alle blower was mistaken, false accusations have been made and a counter char ge for def amation is likely to follow. It is obvious that no one benef ts from this. In contrast to those circumstances, raising a concer n is ar ticulating a w orry. No proof is needed and no accusation is made. Rather, raising ‘I am not sure but something might be going wrong’. Raising a concer n is much less char ged than making an alle gation. Moreo ver, concer ns allow for a way back as it might be very reasonable for someone to ha ve that par ticular concer n in a given situation. Hence, if organisations could implement their internal whistleblowing policy in such a way that it in vites employees to raise concerns rather than forces them to make allegations, much of the w atchdog atmosphere and e xplosive rows around w histleblowing can be a voided. The diff culty is ho w to do this. Much has to do with building tr ust betw een emplo yees and management. Hence it must be clear that it tak es time for an or ganisation to realise a concer n-raisingand-allegation-avoiding culture. What cer tainly helps this culture come about is clearl y communicating to emplo yees that raising concer n is encouraged b y management and is prefer red to making allegations.

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This brings us to the second area of attention when mitigating ethical risks, namel y the impor tance of independent advice. Consulting a la wyer prior to raising a concer n infor ms a potential whistleblower on his rights and duties. It gi ves them a clear image on w here the y stand. This is completely safe for the or ganisation—unless it intends to retaliate against the w histleblower—as the lawyer is bounded by conf dentiality. It must be clear that getting le gal advice should not be confounded with making a disclosure, or contacting a whistleblower organisation or self-help g roup. It must also be clear that e xternal legal advice augments tr ust because the person gi ving the advice is in no w ay tied to the or ganisation. An e xception to this is Public Concern at Work, a UK charity that is dedicated to of fer free le gal advice to potential whistleblowers. public authorities and policy makers in the UK and emplary work also in the rest of the w orld. Some business or ganisations in the UK explicitly state in their internal whistleblowing policy that emplo yees can get le gal advice from Public Concern at Work. The charity ne vertheless retains its independence because of its reputation built by its role as the forer unner of w histleblowing policy in Europe. No parallel to that organisation exists in any other European countr y. Perhaps in the US, the GAP (Go vernment Accountability Project) comes close, and in South ODAC (Open Democracy Advice Centre) might come close.

TheW histleblowingP aradox Despite all the research into w histleblowing, all the whistleblowing legislation out there, and all the good reasons for organisations to take their whistleblowers seriousl y, inter nal (let alone e xternal) whistleblowing remains a diff cult a nd a t t imes a messy issue. Why? P with the follo wing paradox. The kind of or ganisations that are ab le to implement inter nal w histleblowing procedures in a satisf ay—they y w ork and emplo y ust them—are the

kind of organisations that y speaking do not need them, because the y already ha ve the or ganisational culture in which people do and are encourorganisations that really need internal procedures— because things are going ter ribly wrong and no one dares to speak out—are not capab le of y work, because no one trusts an Hence the diff culty lies in changing an or ganisation that is incapable of making internal whistleblowing procedures work into an or ganisation that does not need them. P erhaps the best w ay to bring about that change is to star t implementing one. Not just out of the blue but with wledge of the lowing, of the good reasons for doing so, while learning from others’ experience in doing so and w y mitigating the ethical risks involved.

End Notes 1. The discussion took place in 2004 in ‘De Tweede Kamer’, w hich is the name for parliament in the Netherlands. During that discussion, Marijnissen from the Socialist Party tabled a list of suggestions from his par ty towards a better and more ef fective f ght against fraud. One of his suggestions w as to of fer w histleblowers, besides protection through labour la w, a substantial re ward. The same w as suggested b y Halsema–from Green Left–who called for a ‘whistleblower fund’ hich whistleblowers could be paid a f nancial re ward if the y come up with hard e vidence on big fraud cases. (see Handelingen Tweede Kamer (2004: 3660-3710 and the notes on pages 3735–37). 2. Also, in 2007, the UK Home Off ce star ted a debate on whether citizens and employees who blow the w histle should be re warded with a percentage of the penalties or damages paid by the wrongdoer. The debate had been initiated in the conte xt of a Home Off ce re view of how the Assets Reco very Agency could meet its tar gets of reco vering £250 million a y ear.

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Public Concern at Work rejected this idea in its response to the Home Off ce consultation (PCAW 2007). 3. Art 22a of the Staff Regulations of Off cials of the European Communities, see OLAF (2005).

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References Note: Notes and references removed for publication .mhhe.com/busethics2e.

Reading 4-3

Assessment and Plan for Organizational Culture Change at NASA The Columbia Accident Investigation Board Editors’ note: F ollowing the accident that destroyed the Space Shuttle Columbia in 2003, the National Aeronautics and Space Administration (NASA) appointed the Columbia Accident Investigation Board (CAIB) to in vestigate the causes of the accident. The loss of Columbia came eighteen y Challenger exploded during tak The CAIB repor t identif ed the or Tank foam.” Follo ASA hired an outside consulting f rm, Beha vioral Science T gy ganization. This reading is tak en from the BST repor t of their investigation. As was the case follo wing the Challenger disaster as NASA as it was to physical or mechanical causes.

ExecutiveSummar y On F y 1, 2003, the Space Shuttle Columbia and its cre w of se ven w n to Ear th. A g xperts w as appointed to comprise the Columbia Accident Investigation Board (CAIB), and this g roup spent six months conducting a thorough in vestigation of the cause of the accident. The CAIB found that NASA’s history and culture contributed as much to the Columbia accident as any technical failure.

As a result of the CAIB and related acti vities, NASA estab lished the objecti ve of completel y transforming its or BST was selected to assist NASA in the development and implementation of a plan for changing the Agency-wide. The scope of this ef velop and deploy an organizational culture change initiative within NASA, with an emphasis on safety climate and culture. The f rst task assigned to BST w as to conduct an assessment of the cur velop an implementation plan, both to be completed within 30 da ys. This repor f ndings and the recommended implementation plan. This assessment concluded that there are man y positive aspects to the N The NASA ects a long le gacy of technical e xcellence, a spirit of teamwork and pride, and a can-do approach to task achiev , culture attributes related to work group at the peer le vel are among the strongest w e have seen. These characteristics are consistent with N ASA’s rating in the 2003 Off ce of Personnel Management Survey at the top of the Best Places to Work in the Federal Government. Despite these positi ve attributes, there are some impor tant needs for impro vement. The present N et fully ref ect the Agency’s espoused core v alues of Safety , People, Excellence, and Inte grity. ects an

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organization in transition, with man y ongoing initiatives and lack of a clear sense at w orking levels of “how it all f ts together.” • Safety is something to which NASA personnel are strongl y committed in concept, but N ASA ive of safety. Open communication is not yet the nor y comfortable raising safety concerns to management. • People organization. ganization. • Excellence hen it comes to technical work, but is not seen b y many NASA as an imperative for other aspects of the organization’ ve functions, and creating an en vironment that encourages •

is generally understood and manifested in people’s w ork. However, there appear to be pockets where the management chain has (possibly unintentionall This is inconsistent with an or uly values integ .

There is an oppor to become an or ganization w hose espoused v y integrated into its culture—an or ganization that “lives the values” by fostering cultural integrity. We ve with that as its theme. The ve should address w xisting leaders to instill beha viors consistent with the Agency’s v hile also estab lishing the foundation for dev ho ref A long-ter ear) plan is identif ed with a specif ed in the f rst f v f ts w culture and climate at N ASA in order to identify focus areas for impro vement. We approached this

task with the belief that there w as much that w as positive about N ASA’ was to build from positi ve aspects of the e xisting

e mean the shared values and beliefs y we do things here.” as the shared norms for the behavior in the organizavated by unstated assumptions. assumptions that gov w we do things within an organization, climate describes the pre vailing inf uences on a par a time. Thus, the is something that is more deepl y embedded and long-ter m, inf uencing organizaClimate, on the other hand, changes faster and more y ref inf uences behavior in that the g roup’s shared norms and beliefs will inf uence what people do. However, leaders’ behavior is an impor tant inf Through the e xamples the y set, the messages they and the consequences they provide, leaders inf ers, as w acceptable and what is valuable to the organization. The CAIB had produced a detailed repor t on the causes of the Columbia accident, and explicitly addressed “or ganizational causes” as the critical contributor. Specif cally, the CAIB identif ed the following or ganizational cause of the Columbia accident: “The or ganizational causes of this accident are rooted in the Space Shuttle Program’s and w val for the Shuttle Program, subsequent years of resource constraints, f of the Shuttle as operational rather than developmental, and lack of an ag reed national ganizational practices ere allo wed to develop, including: reliance on past success as

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as testing to understand why systems were not performing in accordance with requirements/specif cations); or ganizational bar hich pre vented ve of critical tion and stif ed professional of opinion; lack of integrated management across program elements; and the e volution of an infor mal chain of ated outside the organization’s rules. In the Board’s view, NASA’s or

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had as much to do with this accident as the T alues, norms, beliefs, and practices that go v w At the most basic le vel, or employ e as they car ork. It is a pow ganizae ” Source: The full Columbia Accident Investigation Board report is available at http://caib.nasa.gov/.

Reading 4-4

Does the Company Get It?—20 Questions to Ask Regarding Compliance, Ethics, and Risk Management1 OCEG This OCEG questionnaire has been designed as a tool that can be used to deter mine whether a company has an ef fectiv to control and mitigate compliance and ethics related risks. Questions 1 thr ough 3 ad dress or g tional culture to deter mine if a compan y is taking the for mal steps necessar y to address the subject of compliance and ethics—and w hether management, the Board of Directors and the emplo yees really belie ve that compliance and ethics are an integral par t of the compan y’s cor A stak eholder should e valuate w hether the compan y considered all of the enter risks of non-compliance or unethical conduct, has estab lished its o ves, and has its behavioral expectations effectively throughout the organization. Questions 4 and 5 consider scope and strategy of the compliance and ethics pro gram, assessing how thoroughl gration of that process with overall enter The Securities & Exchange Commission e xpects compliance and ethics issues to be considered e ven when fast-paced

decisions must be made. Stak eholders in pub licly hether the compliance and ethics pro gram is suff ciently broad in scope and w this need. Questions 6 thr ough 8 identify the structur e and resources dedicated to the ethics and compliance prog ment to ef fective management of the pro gram. It is the audit committee’ that a str ages both top-do completely. If the proper resources are not funded and in place to pre v becoming a “chok e point, ” the pro gram will be judged a f ailure, and the b lame for inadequatel y addressing enter prise risk will be placed on upper management. Questions 9 through 14 evaluate management of policies and tr aining, ther address program adequacy by looking at the mechanics of the processes in place. These questions e valuate ho w Codes of Conduct and other policies are ed and k ept up to date, and under w hat

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circumstances the y can be w aived or overridden. They also address ho w emplo yees and other stakeholders are trained to understand and appl y established policies and procedures, and how information is communicated to them. Questions 15 thr ough 18 f ocus on inter nal enforcement, assessing w hether the compan y appropriately and consistently deals with violations of established policies and procedures. If individuals are allo wed to ignore, disobe y or e ven mock the objectives and requirements of the compliance and ethics program, stakeholders can conclude that ethical conduct. Questions 19 and 20 assess e valuation and continual improvement efforts in the compliance and ethics program. Without processes to judge program elements and implement necessar y improvements, an e diff culty staying eff cient, effective and up to date. Well-developed routine monitoring and periodic nication of recommended changes, ma y be the best fective management system.

Culture 1. What does y our or g y a bout compliance, ethics, and v alues in its f ormal mission and vision statement? Ask This Question? Review of the formal mission and vision statement gives the in vestor some insight into the or ganization’s compliance and ethics v ments. An investor should look at the scope of this statement to see if the organization addresses some or all of the follo yees, customers, suppliers, shareholders, and the ge. Answers • mission and vision statement. • but there is a general Code of Conduct.

• Mission and vision for compliance and ethics is part of the overall organizational mission and gs • The absence of a formal statement may indicate that management is not taking a necessar y f rst step re garding compliance and ethics management. In addition, this ma y violate SarbanesOxley pro visions and listing requirements (if publicly traded). • A boiler plate or unspecif c mission statement indicates lack of thought, and possib ly comfective compliance and ethics 2. How does y our Board, and manag ement, set the “tone at the top” and comm unicate commission, and vision? Ask This Question? An organization that can ar ticulate the for mal and informal processes that it uses to communicate mission, vision, and v alues exhibits a clear under standing of the need for leadership in compliance and ethics and the benef of Board and management commitment. Answers • Distribute a Code of Conduct. • Email all employees regularly. • Communicate responsibilities in annual/quar terly meeting. • meetings and at presentations by leadership. gs • If top leadership does not periodicall y or continuously communicate the values, mission, and vision (which represent the e xpectations of the organization), employees and other stakeholders may believe the formal statements lack credibility and executive backing. • Passiv ignored b y emplo yees. More acti ve for ms of

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communicating e xpectations (e.g., inclusion of compliance and ethics criteria in perfor mance reviews and compensation str send a clearer message. 3. How do y ou kno w if y our emplo yees and other stak eholders ar e “convinced” that the organization is serious a bout its compliance and ethics responsibilities? Ask This Question? When an or ganization can ans wer this question, indicating that its leadership and management at least tries to measure stak eholder beliefs, it evidences a strong commitment to follo and suppor t for its v alues, mission and vision. In addition, the ans wer to this question will help to measure w hether the communications are understood and w vision and values are embraced by employees. Answers • • • • •

Annual survey. Focus groups or interviews.

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and that it kno the company’s stated “principles.”

Scope/Strategy 4. What is the scope of y our compliance and ethics pr ogram and ho w does it integr ate with your overall business strategy? Ask This Question? If an or ganization understands its domestic risks, but has little understanding of its inter national risks, prob lems ma y arise. Similarl y, the company ma y deal with compliance and ethics risks in functional “Domains” of F inancial Assurance, Employment, Environmental, etc. with little coordination betw een them, and ma y ef fectively ail to address others. Coordination of the compliance and ethics function with larger business strategy and goals is also essential. Answers

views. Exit interviews. Informal conversations. gs

• No effort is made to collect or deter mine employee and other stak eholder perceptions— This may indicate management is passi vely or matively ignorant of the perceptions on the “shop f oor.” It ma y also mean that leadership views its job as done when a mission statement is issued. • Company sa ys it is “too e xpensive” to poll employees—There are inexpensive means of polling emplo yee perceptions. Leadership and management should ha ve some interest in wing if their message is heard and believed. • Company says it doubts the value of poll results y e that its mission and v alues are tak en seriously,

•W

y/ . • We address compliance and ethics issues in each y. • Reactive or proacti ve consideration of business strate elopment or management of comgs • Inability to ar gram— This ma eloped and managed program does not e xist, or that management is unaware of the pro gram’s operations. In either case, severe legal risk exists. • Inability to ar een program and lar ger business strate gy—this ma y indicate low level consideration by management to compliance and ethics functions. 5. How do you assess compliance and ethics ate with enterprise risk management (ERM)?

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Why Ask This Question? process, the more lik ely it is ef fective. In addition, gration with enter prise-wide anal ysis of risk ma y indicate a higher le vel of leadership and manageAnswers

In addition, it is v aluab w if compliance and ethics responsibilities are separated within the entity or combined. If separated , it is vital to lear n how they coordinate. Answers • Full-time chief compliance and ethics off cer/ Part-time chief compliance and ethics off cer. • Chief ethics off cer and separate lo wer le vel

• • We deal with compliance and ethics risks in our compliance depar tment (or le gal off ce). They tell us what we need to do. gs • are considered as par

w legal and ethical risks y indi-

analyze where legal and ethical risks are present. It ma y also indicate that le gal and ethical risk management is not appropriately funded. • y indicate management does not ha ve a comprehensive understanding of risks that may impede the organization from reaching its objectives.

Structure/Resources 6. What position in the organization provides oversight and leader ship in the compliance/ ethics function and w here does this position fall in the organizational chart?

• Repor to the audit committee, etc. gs • Independence is questionab le—Without suff cient independence, the chief compliance and ethics off cer ma viewing the activities of senior executives. • Lack of senior le vel o versight—Federal Sentencing Guidelines indicate that a suff ciently senior le vel e xecutive should pro vide pro gram oversight. • Lack of adequate coordination between “ethics” and “compliance” management. 7. What is the or ganizational structure of y our compliance and ethics management team? Ask This Question? ganizational str for dif ferent or ganizations and the ans wer to this question allows analysis of the appropriateness of str to compliance and ethics.

Ask This Question? It is vital to kno

ww

alls in order to determine the level of inf uence and independence held by the person or people in such management positions. The identif cation of a chief compliance/ ethics off cer, the chain of authority this person (or people) repor ts within, the le vel of access to the hich Board committee has o versight all ser ve as indicators of the strength and v alue

Answers •

Team vs. Shared or “Vir Team where compliance and ethics management responsibilities are par t of other job roles. gs

• Str An in v

ger organization—

es sense gi ven the nature of the organization. For example, a centralized team of

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3 people is probab ly inconsistent with a global conglomerate of 50,000 employees. • A team that relies solel y on part-time managers with other duties may not have adequately dedicated resources 8. How ar e r esources allocated f or compliance and ethics manag ement acti vities, both r outinely and to ad dress signif cant issues that arise? Ask This Question? How an or ganization deter mines to spend mone y and time on compliance and ethics matters is a good indication of the seriousness with w hich it takes these commitments and obligations. Answers • Unif ed budget. •P veral department budgets. • Funds identif analysis indicates ma y arise in a gi ven budget cycle.

The Corporate Culture—Impact and Implications 197

requirements, a comprehensi ve Code of Conduct (or collection of policies) addressing all le gal and regulatory requirements, expectations of employee/ management behavior, ethical business conduct and social responsibility indicates an or ganization which has evaluated its values and decided how to articulate them. Answers • The or ganization should be ab le to fur nish its Code of Conduct and other policies, and identify the audience to whom they are distributed. • The leadership and management should kno w the scope and content of the Code of Conduct

gs • No Code of Conduct—This is such a widel y accepted practice that it should be considered a basic requirement. • Code is “canned”—If the Code of Conduct looks and feels lik e a generic polic y, it ma y indicate that the or ganization has not thoughtfully addressed its unique compliance and ethics risk areas. As well, employees will most lik ely believe it is simple “window dressing” rather than a real guidepost for conduct. • A Code of Conduct that does not adequatel y ly enunciate compan y v alues and expectations for behavior.

gs • No budget or unclear ar ticulation of the budget may indicate the or ganization has seriousl y underfunded compliance and ethics management activities. • Disconnected budget—If the budget is not directed b cer, it may indicate that there is a lack of coordinated strategy. • Short term budget deter minations without long 10. How do y ou distrib ute y our Code of Conduct and conf rm that emplo yees both needs may indicate lack of adequate planning receive and understand the Code and other and analysis. policies?

Policies 9. What does y our Code of Conduct ad dress and who receives it? Ask This Question? SOX and the Exchanges require a Code of Conduct for pub licly traded companies. Be yond these

Ask This Question? This gi ves insight into w hether or not the Code is simpl y a piece of paper that is signed b y each employee and f led for legal purposes—or if some conf rmation of “understanding” is sought; a clear indication of leadership’s seriousness in demanding compliance with the Code and policies.

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• No consideration of changes in or ganizational activities/locales, etc.

Answers • and have employees sign it. •

y each y ear with a multiple choice test.

• training sessions with oppor tunity for questions and discussion. gs • No conf rmation of receipt—This may indicate that, although it exists, the code is not being properly sent to employees. • Weak conf tion to distributing the Code of Conduct, the organization should strive to ensure that the Code is understood by employees and other stakeholders. • Too e xpensive—If an or ganization sa ys that it is cost prohibiti ve to distribute the Code of Conduct to all employees with conf rmation of receipt; it is probably unaware of many low cost and free tools. It also most likely indicates a low lev 11. What is y our process for updating policies/ procedures? Ask This Question? Evidence of an estab lished process for updating policies and procedures indicates a w ell managed component of the compliance and ethics program. gram. Answers • Annual review, quarterly review, etc. • Notif gs • No process or infrequent updates—This ma y indicate that the or ganization is “out of date” with regard to its compliance and ethics risks. • Sole reliance on periodic and non-routine up-

12. Can an y r equirements esta b y the Code of Conduct and other policies be waived or overridden and, if so, what is the pr ocess for doing so? Ask This Question? It is not inappropriate to pro vide for o verride of Code and polic y requirements in cer tain circumstances, but it is important to know when and how they can be waiv and to ensure that a transparent process for doing so in place. Answers • All waivers must be approved by the Board and included in Board minutes. • ver decisions are made on a case-b y-case basis by the Board, or management, or counsel. gs • •

y loose case-by-case process. y/no waivers are disclosed.

Communication and Training 13. How often, and b y w hat methods, does your management communicate the values, mission, and vision of the compliance and ethics pr ogram to emplo yees and other stakeholders? Ask This Question? Having a mission statement is not enough—it is impor vely communicated to emplo yees and stakeholders so that the w the or ganization’s v alues and believe that the organization’s leadership is serious about acting on those values. Answers • Annual meeting for employees. • Annual report for shareholders.

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• ment regarding our Code of Conduct. • Regular and routine reference to the Code of Conduct in all presentations by leadership about the organization’s acti • Regular and routine informal reference to values and mission by all levels of management. gs • Lack of for • mal—While formal communications are impor tant, most research conf rms that emplo yees gain much from infor mal communications from senior executives and managers about compliance and ethics responsibilities. 14. Do y ou pr ovide compr ehensive tr aining and conduct perf ormance e valuations f or each job r ole to ensur e compliance and ethics r esponsibilities ar e under stood and followed, and that necessary skills ar e learned and employed? Ask This Question? ve processes for ensuring employees have and use the infor mation and skills needed to is a critical component of an ef fective pro gram. “Policies” do not necessarily equal “Performance.” Answers • For each role, w e have a compliance and ethics curriculum. • We embed some compliance and ethics training in each of our courses. • We embed compliance and ethics criteria into valuations.

compliance and ethics risks as the apply to each job. As w ell, this ma y be vie wed b y DOJ and the cour ts as a lack of ef fort on the par t of the organization (see Ad Hoc Committee on Federal Sentencing Guidelines for Organizations). • Training onl y upon initial hiring—research shows training must be repeated for adequate learning. As w ell, the F ederal Sentencing Guidelines for Or ganizations appear to head in the direction of increased training (see Ad Hoc ederal Sentencing Guidelines for Organizations). • No consideration of compliant or ethical behavior in perfor mance re views or, e ven worse, positive evaluation or re wards even in the f ace of noncompliant behavior.

IssueManag ement 15. How do employees, agents and other stak eholders r aise issues r egarding compliance and ethics-related matters? Ask This Question? Providing effective avenues to raise issues without effective pro gram. It is impor tant to kno w ho w employees and other stak eholders can raise issues and to conf rm that the y not onl w how to do le in doing so or are even encouraged and rewarded. Answers • Telephone helpline staf fed b y inter nal/external personnel. • Web-based format. • Email program. • In person to supervisor or designated person. gs

gs • • New hire

all new employees ed” into the same ne w hire program, regardless of job role, it ma y indicate that the organization has not clearl y identif ed

The Corporate Culture—Impact and Implications 199

• diate reporting of critical issues. • No possibility of anon • Lack of access for stak eholders w ho are not ees.

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• Lack of consistent call-handling or repor

t of

• Inability to cer tify that stak eholders are a ware of the mechanism—This ma y indicate that the organization is not in compliance with

16. How do you handle compliance and ethics issues that arise and scrutinize the sour ces of compliance failures? Ask This Question? It is not enough that a mechanism e xists to repor t issues—management must ha ve ef fective and consistent methods for managing and resolving issues and the source of recurrent problems. Answers

requirements. Without this potential, employees and other stakeholder may not believe there are “teeth” to the program. • Lack of consistency—If noncompliant or unethical behavior is tolerated, the program has no credibility. 18. What is the pr ocess for determining w hich issues ar e escalated to the Boar d and for inf orming the Boar d w hen issues ar e resolved? Ask This Question? This gi ves insight into the process for escalating and repor ting compliance and ethics issues to the Board—and w y involved in the process and resolution of issues when appropriate.

• e • Consistent process for issues within a particular Domain (employment, f nancial, environmental, etc.), but not for all relevant Domains. • Case by case basis. gs • Lack of consistency. • Lack of independent processing. • Lack of scrutiny of sources of repeat problems. 17. How consistently, and in what way, have you taken action ag ainst violator s of the Code and Program? Ask This Question? This giv put some real “teeth” in the compliance and ethics program by disciplining violators. Answers • Each or ganization should be ab le to pro vide examples of past actions taken. gs • Ter

• •

• •

Answers Quarterl regarding “signif cant” f nancial issues. Annual repor t to the Board re garding “signif cant” issues in all Domains (f nancial, vironmental, etc.). Report to legal counsel, of material risks presented by issues that arise. Board notif cation and in volvement onl y in y related to Board or Senior Management actions. gs

• No escalation criteria. • No follow-up by Board.

Evaluation 19. What ong oing pr ocesses ar e in place to monitor the effectiveness of the compliance and ethics program? Ask This Question? This gi ves insight into w hether the or ganization monitors eff cac g w ue

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is diff cult due to inconsistent approaches, etc. Initiatives such as OCEG should help to solv e this problem. Answers • We perform annual internal audit of compliance and ethics controls. • We perform periodic benchmarking with industry peers. • We retain outside consultants to perfor m external audit of controls in some or all functional areas. • We measure and k eep records of compliance and ethics issues over time for use in improving controls. gs • No process. • Process lacks independence. • component— only widely spaced periodic audits. • Audits onl follow not that they are effective. 20. Does the or ganization eng age an e xternal law f rm or consultant to audit compliance and ethics program elements?

The Corporate Culture—Impact and Implications 201

Why Ask This Question? While some organizations view external audits as a negative policing of employees, there is value in an independent e xternal anal ysis of the ef fectiveness of selected controls and level of compliance with those controls. Exter nal assessors can also bring ne w ideas and tools to the attention of management. Answers • We use our outside counsel. • We use our external auditor/some other auditor. • We use an outside risk management or ethics consultant. gs • Process lacks independence . • Process onl y judges compliance with selected controls and does not e valuate the appropriateness of the controls or their ef fectiveness in achieving compliance and ethical behavior.

End Note 1. Open Compliance and Ethics Group (OCEG), Internal Audit Guide y 2006).

Chapter

5 CorporateSoc ial Responsibility Business has to tak against which those decisions are made.1

By “social responsibility,” we mean the intelligent and objective concern for the welfare of society that restrains individual and corporate behavior from ultimately destructive activities, no matter how immediately prof table, and leads in the direction of positiv ment, variously as the latter may be def ned.2

We are not in business to make maximum prof t for our shareholders. We are e society. Prof t is our reward for doing it well. If business does not serve society ts or even our existence.3 ation You never expect justice from a company, do you? They neither have a soul to lose nor a body to kick. English writer, clergyman

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Opening Decision Point Social Entrepreneurship: Banking on Poverty Social Entrepreneurship,

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205

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ChapterO bjectives After reading this chapter, you will be able to: 1.

Define corporate social responsibility.

2.

Describe and evaluate the economic model of corporate social responsibility.

3.

Distinguish key components of the term responsibility.

4.

Describe and evaluate the philanthropic model of corporate social responsibility.

5.

Describe and evaluate the social web model of corporate social responsibility.

6.

Describe and evaluate the integrative model of corporate social responsibility.

7.

Explain the role of reputation management as motivation behind CSR.

8.

Evaluate the claims that CSR is “good” for business.

Introduction

1 OBJECTIVE

2 OBJECTIVE

how f r llment of this perceived responsibility. In one sense, no one denies that business has some social responsibilities. At a minimum, it is indisputab le that business has a social responsibility to obey the law. Economists might also say that business has a social responsibility to produce the goods and ser vices that society demands. If a f rm fails to meet society’s interests and demands, it will simpl y fail and go out of business. But, beyond these le gal and economic responsibilities, contro versies abound. In general ter ms, we can sa y that the primar y question of CSR is the e xtent to w hich business has social responsibilities that go beyond producing needed goods and ser . ers to this question and it will be natives along this continuum. Most involved in business would accept the general def nition of the corporate social responsibility as refer to the responsibilities that a business has to the in which it operates. From an economic perspective, a business is vices demanded b , by engaging in this acti , the business creates jobs and w ealth that benef t . w has created a for corporations, w volved in these acti vities. Le that businesses could be more eff y for producing goods, services, jobs, and wealth if individuals w ould therefore be encouraged to engage in these activities. This narrow view of CSR, what we shall refer to as the economic model of CSR, holds that business’ ll the economic functions businesses were designed to serve. On this narrow view, the social responsibility of business managers is simply to pursue prof t within the law. Because prof t is an indication that business is eff cientl society demands, prof ell a business f rm is meeting

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society’s expectations. Because corporations are created by society and require a stab ucture in which to conduct business, like all y are expected to obey the legal mandates established by the society. This economic model of CSR denies that business has an y social responsibilities beyond the economic and legal ends for which it was created. Though Adam Smith w as among the f rst to ar ticulate a v ersion of this per spective, Milton F riedman’s classic 1970 ork Times ar ticle, “The Social ts, wn as an ar gument for this economic model of the social responsibility of business. y to popular belief, Friedman does not ignore ethical responsibility in his anal lling their responsibility if they follow their f rm’s self-interest in pursuing prof t. Friedman explains that a corporate executive has a responsibility to conduct business in accordance with [his or her employer’s] desires, which generally will be to make as much money as possible while conforming to the basic r , both those embodied in law and those embodied in ethical custom (emphasis added).

This common view of cor itarian tradition and in neoclassical economics (as discussed in the section on utilitarianism in chapter 3). As agents of business owners, the contention is that managers do have social responsibilities—their primar y responsibility is to pur sue maximum prof ts for shareholders. By pursuing prof ts, a business manager will allocate resources to their most eff ho most value a resource will be willing to pay the most for it; so prof t is the measure of optimal allocation of resources. Ov er time, the pursuit of prof t will continuousl y work towards the optimal satisfaction of consumer demand which, in one interpretation of utilitarianism, is the optimal social good. Debates concerning CSR start with alternatives to the nar row view expressed by F ws, w ves into three general models. v philanthropic model, the social web model, and the ative model of CSR. Recognize that these three models are intended to be general cate gories into which various specif c versions of CSR can be f t; others ma ferently certainly, there will be individual businesses that overlap these categories. Nevertheless, these models provide a helpful way to understand debates sur .

EthicsandSoc ialR esponsibility 3 OBJECTIVE

To help us sor native models of CSR and to better understand the extent of business’ , let us begin with a general discussion of the potential responsibilities of a business and ho w the y can be understood from an ethical perspective.

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The words responsible and r are used in se veral different ways. When we say that a business is responsib le, we might mean that it is reliab le or orthy. Thus, w e might sa y that a business is v le in pro viding good customer ser vice. For example, y to a friend by describing them as a responsible, trustworthy business. A second meaning of responsible involv a cause for an event or action. For example, poor lending practices were responsible (i.e. the cause) for the collapse of man the gas tank w as responsible for f res in the F ord Pinto. A third sense in volves vent or action, creating an obligation to make things right again. To say, for example, that a business is responsible for a polluted ri ver is not onl y to say that the business caused the pollution, but An unavoidable accident w Laws regarding product safety and liability in volve many of these meanings of being responsib le. When a consumer is injured , for e xample, a f rst question to ask is w hether the product w as responsible for the injur y, in the sense of ha vy. For e xample, se veral y ears ago a contro versy de veloped over the dr ug Vioxx, produced b y Merck. Some e vidence suggested that Vioxx was responsible for causing hear low o questions required answers. Was Vioxx the cause of the hear t attacks, and was Merck at fault, i.e. should it be held legally liable, for the heart attacks? is responsible in the sense of being at f ault and therefore being liab le for pa ying for the damages caused b y the product. Both ethics and tor t law involve the question of liability or fault for causing harm. (See Figure 5.1, “Responsible and Responsibility.”) t of CSR. Cor porate social responsibility refers to those actions for w hich a business can be held accountab le. We can think of responsibilities as those things that we ought, or should , do, even if we would rather not. Responsibilities bind ,

FIGURE 5.1 Responsible and Responsibility

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or tain ways. We can be expected to act in order to fulf ll our responsibilities; and we will be held accountable if we do not. Thus, to talk about corporate social responsibility is to be concerned with society’s interests that should restrict or bind business’ behavior. Social responsibility is what a business should or ought to do for the sake of society, even if this comes with an economic cost. Philosophers often distinguish betw ferent types of responsibilities in this sense, on a scale from more to less demanding or binding. F irst, the most demanding responsibility, often called duty or ob ligation in order to indicate that they oblige us in the strictest sense, is the responsibility not to cause harm to others. Thus, a business ought not to sell a product that causes har m to consumers, even if there w ould be a prof t in doing so. A second, less binding, vent harm even in those cases w here one is not the cause. These so-called “good Samaritan” cases are examples of people acting to prevent harm, even though the y have no strict duty or ob ligation to do so. F inally, there might be responsibilities to do good. Volunteering and charitable work are typical examples of responsibilities in this sense. To call an act v olunteer work is precisely to suggest that it is optional; one does not hav a good thing to do. Is ther Let us consider ho w each of types of responsibilities might be seen in business. The strongest sense of responsibility is the duty not to cause harm. Even when not explicitly prohibited by law, ethics would demand that w oidable har to someone and, if that har m could have been avoided by exercising due care or proper planning, then both the la w and ethics w ould say that business should be held liable for violating its responsibilities. In practice, this ethical requirement is the type of responsibility established by the precedents of tort law. When it is discovered that a product causes harm, then business can appropriately be prevented from marketing that product and can be held liable for har ms caused b y it. So, in a classic case such as asbestos, businesses are restricted in marketing products that have been proven to cause cancer and other serious medical harms. Is there a r event harm? But there are also cases in w hich business is not causing har m, but could easil y pre vent har ring. A more inclusiv taken by the phar maceutical f rm Merck with its dr ug Mectizan. Mectizan is a Merck drug that prev ver blindness, a disease pre valent in tropical nations. River b lindness infects betw een 40 and 100 million people annuall y, causing severe rashes, itching, and loss of sight. A single tablet of Mectizan administered once a year can reliev ent the disease from progressing— quite an easy and effective means to prevent a horrendous consequence. y prof tab The once-a-year dosage limits the demand for the drug among those people who require it. Fur ther, the indi viduals most at risk for this disease are among the

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poorest people li ving in the poorest re gions of America, and South America. Ho wever, in 1987, Merck be gan a pro gram that pro vides Mectizan free of char ver blindness and pledges to “give it away free, forever.” Cooperating with the World Health Or , and the W s program has donated more than 1.8 billion doses of Mectizan (by 2007), which have been distributed to 40 million people each y ear since 1987. The program has also resulted in the de velopment of a health care system, necessary to support and administer the program, in some of the poorest regions of the w s Mectizan Donation Pro gram has signif cantly improved the li ves of hundreds of millions of the most vulnerab le people on ear th. Merck’s actions w ere explained by reference to par t of its cor porate identity statement: “W e are in the business of preser ving and improving human life.”5 Clearly Merck w as not at all responsib le for causing ri ver b lindness and , therefore, according to the standard of CSR discussed abo ve, Merck had no social responsibility in this case. But, Merck itself sa w the issue dif ferently. Given the company’s core business purpose and values, its managers concluded that the y their patented drug. Moreover, as we will discuss below, Merck recognized that it was the right thing to do for its business. George Merck, grandson of Merck’s founder, e xplains, “We tr y ne ver to for get that medicine is for the people. It is not for the prof ts. The prof ts follow and, if we have remembered that, the y have never failed to appear. The better we have remembered it, the lar ger they have been.” Is there a r ood? The third, and perhaps the most wideranging, standard of CSR w do good things and to mak porate philanthropy would be the most obvious case in which business takes on a responsibility to do good. Corporate giving programs to suppor t community projects in the ar ts, education xamples. Some cor porations have a charitab le foundation or off ce that deals with such philanthropic pro g “Corporate y: How Much Do Corporations Give?”) Small business owners in e very to wn across America can tell stories of ho w often the y are approached to give donations to support local charitab vities. Many of the debates sur rounding cor volve the question of w hether business reall y has a responsibility to suppor t these v aluable causes. Some people ar gue that, lik e all cases of charity , this is something that deser ves praise and admiration; but it is not something that e very business ought een obligations/duties and responsibilities precisel A responsible person is charitable; but donating to charity is neither an ob ligation nor a duty . Others ar gue that business does have an obligation to suppor t good causes and to “gi ve back” to the community. This sense of responsibility is more akin to a debt of g ratitude gal or contractual ob ligation perhaps, but more than a simple act of charity. Perhaps a clear way to understand

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Corporate Philanthropy: How Much Do Corporations Give?

In 2005, total charitable giving in the United States was estimated to be more than $260 billion. Individ75 percent. Corporate giving totalled $13.8 billion, or 5.3 percent of the total, slightly more than the average 5 percent annual giving rate over the past 40 years. Both this increase in corporate giving and

the 6.4 percent increase in individual contributions have been attributed to strong economic growth as well as responses to global natural disasters. Source: Giving USA, “Charitable Giving Rises 6 Percent to More Than $260 Billion in 2005,” press release . aafrc.org/press_releases/ trustreleases/0606_PR.pdf.

the distinction is to compare it to y our ob ou note to your g randmother for the e xtraordinar weater that she sent y ou for your birthday gift. You might not ha ve a le gal requirement to send the note, but nevertheless y This discussion can help us gain a models of CSR described belo w and in Figure 5.2 , “Models of Corporate Social Responsibility.”

FIGURE 5.2 Models of Corpor

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PhilanthropicMode lofC SR 4 OBJECTIVE

As the name suggests, thephilanthropic model of CSR holds that, like individuals, business is free to contribute to social causes as a matter of philanthropy. From this perspectiv to social causes; but it can be a good thing w hen they do so. Just as indi viduals have no ethical obligation to to charity or to do volunteer work in their , business has no ethical ob ligations to serve wider social goods. But, e all want to encourage, busiays that go be yond the narrow obligations of law and economics. This approach is especially common in small, locally-owned businesses where the owners also play a prominent leadership role within their local community. W y model, there are occasions in w hich charity w ork is done because it brings the f rm good pub lic relations, pro deduction, builds good-will and/or a good reputation within the community . (See the Reality Check, “Putting Your Mone y Where Your Mouth Is?” ) Many corporate sponsorships in the ar events benef t businesses in this way. Peruse the program you receive when entering a local ar t gallery, museum, theater , or school e vent, and y ou will lik ely see a list of local businesses who ser ve as donors or sponsors w ho hav vent. In these cases, business has engaged in suppor ting these activities, and they have received some benef n. Of course, there are also those cases in w hich a business might contribute to a social causes or e vent without seeking an y reputational benef t. Some f rms contribute to anonymously, for example. Some support causes that have little or no business or f nancial pa ving back to their comcauses is not done for potential business benefts, but instead because the business manager or owner decides that it is simply a good and right thing to do. Others rm does business is a stronger or better one if this particular activity exists. You might notice that situations w here a business suppor ts a social cause for the purpose of receiving a business benef n are not much different from the economic vie xercises managerial discretion in judging that the social contribution will ha ve economic benef ts. In these cases, the social contribution is as much an in vestment as it is a contribution. Cer tainly, proponents of the economic model of CSR w ould suppor ve. Thus, there is a g reat deal of overlap between decision makers who engage in the philanthropic model for reputational reasons and those who follow the economic view of business’ social responsibilities. hich business support for a social cause is done simpl ersion only

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Putting Your Money Where Your Mouth Is?

Do you make purchases based on a company’s social contributions? Are you more or less likely to buy something if you know that a company supports causes that are (or are not) important to you? Philantropic CSR suggests that businesses contribute to society in the hopes that this will have benefi conducted by MORI in 2003 found that 84 percent of respondents to its survey said that a company’s level of social responsibility was a “very important” or “fairly important” factor in their decision to purchase a particular product.

Perhaps more important is whether you believe that companies care about what is important to you. In that same research, MORI found that 47 percent of those questioned believed that companies did not listen to the public or respond to public concerns about social and environmental issues. Source: MORI,

s Views of Corporate (London, UK: MORI), www.ipsosmori.com/publications/jld/publics-views-of-corporateresponsibility.pdf, p. 2.

in ter ms of the underl ying motivation. To some, this seems a tri vial difference. In one case, the social good is done as a means to economic ends; in the other , it is done as an end in itself. Yet, this dif ferent motivation is, in the opinion of others, precisely what makes one action ethicall y responsible and the other not. From the perspective of the economic model of CSR, only philanthropy done for reputational reasons and f nancial ends is ethically responsible. Because business managers are the agents of owners, they hav e wners g estment. From the perspective of y done for f y ethical and not truly an act of social responsibility.

SocialW ebMode lo fC SR 5 OBJECTIVE

A variety of perspectives on CSR would fall under what we call the social web model of CSR. They all share in common the vie w that business e xists within a web of social relationships. The social w eb model vie ws business as a citizen of the society in w hich it operates and , like all members of a society , business must conform to the normal ethical duties and obligations that we all face. While ts are among business’ responsibilities, they do not tr ump the other ethical responsibilities that equall y a A. J. Vogl at the end of this chapter for a discussion of the business case for this model.) Philosopher Norman Bowie has defended one v ersion of CSR that w ould fall s duty to obey the law, business has an equally important ethical duty to respect human rights. Respecting human rights is the “moral minimum” that we expect of every person, whether they are acting as individuals or within cor To

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explain this notion of a “moral minimum, ” Bowie appeals to the frame work for distinguishing responsibilities that w as described above and that is deri ved from the deontolo identif es his approach as a “Kantian” theory of business ethics. In simple ter ms, he be gins with the distinction betw een the ethical imperati ves to cause no to prevent harm, and to do good. People have a strong ethical duty to cause no harm, and only a prima facie duty to prevent harm or to do good. The obligation to cause no harm, in Bowie’s view, over ethical considerations. The pursuit of prof t legitimatel . wie accepts the economic view that managers are the agents -owners and thus the y also have a duty (deri ved from the contract between them) to fur Thus, while it is ethicall y good for managers to prevent harm or to do g ood, overrides these concerns. As long as managers compl y with the moral minimum and cause no harm, they have a responsibility to maximize prof ts. Thus, Bowie would ar that business has a social to respect the yw

vacy

cess. Bowie would also ar specif ed in law. But, the over

that managers have to

ven when not -o

v

Example of a Social W Perhaps the most inf uential version of CSR that w ould fall within the social w eb model is stakeholder theory. Stak ev ting some and imposing costs on others. e have mentioned to this point—Malden AIDS drugs in Africa, executive compensation, AIG—and reco gnize that decisions made b y business managers produce f arranging lesson about oppor ery decision involves the imposition of costs, in the sense that ev also involves opportunities foregone, choices given up. Stakeholder theory reco v costs on somewledged. In other words, any theory of xplain and defend ans wers to the questions: for whose benef t and at whose costs should the business be managed? The economic model ar gues that the f rm should be managed for the sole This view is justif ed b f duciar ts that follow from this arrangement. The stak eholder theor y ar gues, on f actual, le gal, economic, and ethical g ho are the stakeholders, w gitimacy of their claims on management, and w hat are the practical implications of this vie w for business managers.

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R. Edward F “Managing for Stak eholders” that is reprinted at the end of chapter 2. F reeman ro eholder.” In a nar row sense, a stakeholder includes anyone who is vital to the sur vival and success of the cor poration. More widel y, a stak eholder could be “an y group or individual who can af y the corporation.” Stakeholder theor y ar gues that the nar row economic model f ails both as an accurate descriptive and as a reasonab le normative account of business management. v ver a y of legal precedent arising from both case law and legislative enactments. ve been tr ue over a centur y ago that management had an o verriding obligation to stockholders, the law now recognizes a wide range of managerial obligations to such stakeholders as consumers, employees, competitors, the en led. Thus, as a matter of law, it is simply false to claim that management can ignore duties to everyone but stockholders. We also need to recognize that these legal precedents did not simply fall from the sky democratic society ts and le porate management must limit their f duciar of v fected by corporate decisions. F nomic model. The wide v ets failures well-established in economics show that, even when managers pursue prof ts, there are no guarantees that the y will serv lic. When markets fail to attain their goals, society has no reason to sanction the primac y of the f duciary ob But perhaps the most impor tant argument in f avor of the stak eholder theor y rests in ethical considerations. The economic model appeals to tw o fundamental ethical norms for its justif cation: utilitarian considerations of social well-being and individual rights. On each of these normative accounts, however, due consideration must be given to all affected parties. Essential to any utilitarian theory is the commitment to balance the interests of all concer ned and to gi ve to each (arguably, equal) consideration. The stakeholder theory simply acknowledges this fact by requiring management to balance the ethical interests of all af fected parties. Sometimes, as the classical model w ould hold, balancing will require manrequires management to consider the consequences of its decisions for the w ellbeing of all affected groups. Stak Likewise, any of moral rights is to the equal rights for all. In its Kantian for mulation, this ethical theor y argues that the o verriding moral imperative is to treat all people as ends and never as means only. Corporate managers w ho f ail to gi ve due consideration to the rights of emplo yees and other roups in the pursuit of prof This, in the Kantian tradition, is unjust. (Of course, ignoring y unjust.)

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Thus, the stak eholder theor y ar gues that on the v ery same g rounds that are used to justify the classical model, a wider “stakeholder” theory of corporate social responsibility is pro ven ethically superior. Freeman argues that “the stakeholder theory does not give primacy to one stakeholder group over another, general, however, management must k eep the relationships among stak eholders in balance.”6 Firms exist in a w eb of relationships with man y stakeholders and these relationships can create a variety of responsibilities. As we have seen in many of the cases and e xamples mentioned pre viously, it ma y not be possib le to satisfy the needs of each and e very stak eholder theory also recognizes that some stak eholders have different power and impact on decisions v ing the f nal decisions. Therefore, social responsibility would require decisions to prioritize competing and conf icting responsibilities.

IntegrativeMode lofC SR 6 OBJECTIVE

Most discussions about CSR are framed in ter ms of a debate: Should business be expected to sacrif ce prof ts for social ends? Much of the CSR literature assumes a een the pursuit of prof t and social responsibility. But, of course, there have always been organizations that n this tension organizations that ts, such as hospitals, NGOs, foundations, professional or ganizations, schools, colle ges, and go vernment agencies, have social goals at the center of their operations. wledge and skills taught in business schools, from management and mark eting to human ant for non-prof t organizations. For this reason alone, students in these v business school curriculum should be familiar with non-prof t business models. But there is a growing recognition that some for-prof t organizations also have t of the strate gic mission of the or ganization. In two areas in par ticular, social entrepreneurship and sustainability , we f nd for-prof t f rms that do not assume a tension een prof t and social responsibility. The oint, is one e xample of wing mov ms that make environmental xamwsing for Social Good.”) Because these f rms bring social goals into the core of their business model, y integrate economic and social goals, we refer to this as the integrative model of CSR. At f rst glance, f rms that adopt the inte grative model raise no particular ethical issues. Ev en advocates of the nar row economic model of CSR such as Milton Friedman, would agree that owners of a f rm are free to make the pursuit of social goals a par t of their business model. They would just disag ree that these social goals should be par t of e business’ mission. (F or a clear

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Browsing for Social Good

The popular Web browser Firefox and e-mail program Thunderbird are products of Mozilla Corporation, a for-profi t subsidiary of Mozilla Foundation, a non-profi t organization. Mozilla Corporation had revenues of more than $75 million in 2007. Mozilla is described on its Web site as follows: What is Mozilla? We’re a global community of thousands who sincerely believe in the power of technology to enrich people’s lives. We’re a public benefit organization dedicated not to making money but to improving the way people everywhere experience the Internet. And we’re an open source software project whose code has been used as a platform for some of the Internet’s most innovative projects. The common thread that runs throughout Mozilla is our belief that, as the most significant social and technological development of our

time, the Internet is a public resource that must ith this in mind, our efforts are ultimately driven by our mission of encouraging choice, innovation and opportunity online. To achieve these goals, we use a highly transparent, extremely collaborative process that brings together thousands of dedicated volunteers around the world with our small staff of employees to coordinate the creation of products like the Firefox Web browser. This process is supported by the Mozilla Corporation, which is a wholly-owned subsidiary of the non-profi In the end, the Mozilla community, organization and technology is all focused on a single goal: making the Internet better for everyone. Source: .mozilla.com/en-US/about/ whatismozilla.html

ar “Rethinking the Social Responsibility of Business” reprinted at the end of this chapter.) Noone is claiming that e very business should adopt the principles of social entrepreneurs and de vote all their acti vities to ser vice of social goals. There are clearly other needs that businesses are designed to address. At best, social entrepreneurs demonstrate that prof t is not incompatib le with doing good, and therefore that one can do good prof tably airness in a Cup grative Model. who would argue that the ethical responsibilities associated with sustainability are relevant to e very business concer n. In some w ays, sustainability of fers a model of CSR that suggests that ethical goals should be at the hear t of every corporate mission. There are reasons to think that sustainability promises to be a concept of gro

The Implications of Sustainability in the Integrative Model of CSR , and specif cally its def nition, will be discussed in greater detail in chapter 9; but as a topic within CSR, sustainability holds that a f rm’s f nancial

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Fairness in a Cup of Coffee: Example of the Integrative Model

The integrative model of CSR is evidenced in a com.equalexchange .com), which is a worker-owned and governed business committed to Fair with coffee, tea, and cocoa farmers. Its “Vision of Fairness to Farmers” explains its model:

• nourish the body and the soul. • A company that would be controlled by the people who did the actual work. • benefit .

A Vision of Fairness to Farmers

Fairness to farmers. A closer connection This was the essence of the vision that the three Equal Exchange founders—Rink Dickinson, Michael Rozyne, and Jonathan Rosenthal—held in their minds and hearts as they stood together

The three, who had met each other as managers at a New England food co-op, were part of a movement to transform the relationship between the public and food producers. At the time, however, these efforts didn’t extend to farmers outside of the U.S. The founders decided to meet once a week— and did so for three years—to discuss how best sold around the world. At the end of this time they had a plan for a new organization called Equal Exchange that would be: • their economic futures.

It was a grand vision—with a somewhat shaky grounding in reality. But Rink, Michael, and Jonathan understood that significant change only happens when you’re open to taking big risks. So they cried “¡Adelante!” (rough translation from the Spanish: “No turning back!”) and took a running leap off the cliff. They left their jobs. They invested their own money. And they turned to their families and friends for start-up funds and let them know there was a good chance they would never see that money again.

and decided to invest. Their checks provided the $100,000 needed to start the new company. With this modest fi and Jonathan headed into the great unknown. At best, the project, which coupled a for-profit business model with a nonprofit mission, was viewed as utopian; at worst it was regarded as foolish. For the first three years Equal Exchange struggled and, like many new ventures, lost money. But the founders hung on and persevered.

• trade issues affecting farmers.

Source:

.equalexchange.coop/story

goals must be balanced against, and perhaps e ven over-ridden by, environmental considerations. Defenders of this approach point out that all economic acti vity exists within a biosphere that suppor ts all life. They argue that the present model of economics, and especiall y the macroeconomic goal of economic g ro already r unning up against the limits of the biosphere’ Fundamental human needs for goods such as clean air, water y the present dominant model of economic activity.

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Will Sustainability Reports Replace the Annual Financial Reports?

Various laws and regulations require corporations to fi le an annual report that provides a comprehensive accounting of a business’ activities in the preceding year. The report is intended to provide shareholders and the public with information about the fi nancial performance of the company in which they have invested. While a variety of information is contained in an annual report, they are primarily fi reports and they will include an auditor’s report and summary of revenues and expenses. Within the last decade, thousands of companies have supplemented this financial annual report with a corporate sustainability report, which provides an overview of the firm’s performance on environmental and social issues. In some cases, sustainability reports are replacing financial reporting by integrating assessment of fi performance into one comprehensive report.

According to the Global Reporting Initiative, a non-profi t organization that was instrumental in creating a widely accepted sustainability reporting framework, Sustainability reporting is a process for publicly disclosing an organization’s economic, environmental, and social performance. Many organizations find that financial reporting alone no longer satisfies the needs of shareholders, customers, communities, and other stakeholders for informa-

mous with citizenship reporting, social reporting, triple-bottom line reporting and other terms that encompass the economic, environmental, and social aspects of an organization’s performance. Source:

.globalreporting.org

F the f nancial bottom line of prof tability, but also against the ecological and social bottoms lines of sustainability. A business or industry that is f nancially prof table, but that uses resources (for example, fossil fuels) at unsustainable rates and that creates wastes (for example, carbon dioxide) at rates that exceeds the earth’s capacity to absorb them, is a business or industr y that is f social responsibility. Importantly, a f rm that is en vironmentally unsustainable is also a f rm that is, in the long-ter m, f nancially unsustainab le. (To lear n more about how f r ity Check: “W ts Replace the inancial Reports?”) The sustainability v ersion of CSR suggests that the long-ter m f nancial wellbeing of every f rm is directly tied to questions of how the f rm both and is vironment. A business model that ignores the bioph ysical and ecological context of its activities is a business model doomed to failure.

Exploring Enlightened Self-Interest: Does “Good Ethics” Mean “Good Business”? 7 OBJECTIVE

In one of the quotations that opened this chapter, the former Chairman of the Dayton-Hudson Cor poration, K yton e xplained that “If business does not serve society ts or even our existence.”

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This logic suggests that CSR not only provides benef ts to society, but it can also benef t an or ganization b y securing its place within a society . Are there other reasons, self-interested and economic, for a business to engage in sociall y responsible activities? Can we make a “business case” for CSR, such as the reputational value we discussed above? (See the interview with Timberland CEO Jeff Swartz reprinted at the end of this chapter for a business person’s response to this question.) Perhaps the most ob vious ans wer is the one w e touched upon earlier with re e on a f rm’s reputation within a community. CSR-related activities can improve prof y enhancing a company’s standing among its stak eholders, including consumers and emplo yees. For e xample, some evidence suggests that emplo yees who are well treated in their w ork environments may prove more loyal, more effective and productive in their work. Liz Bankowshi, director of social missions at Ben & Jer ry’s Homemade Ice Cream Company, claims that 80 to 90 percent of Ben & Jer ry’s employees work there because “they feel the y are par t of a g reater good.”7 The positive impact on the bottom line, therefore, stems not onl y from customer preference but also from employee preference. The problem with a focus on reputation, ho wever, is that social responsibily social marketing. That is, a f rm may use the image of social to garner customer support or employee lo while the facts do not e vidence a tr ue commitment. Paul Hawken, cofounder of Smith & Ha wken gardening stores and an adv ocate of business social responsibility , reminds us that: [y]ou see tobacco companies subsidizing the arts, then later you f nd out that there are internal memos showing that they wanted to specif cally target the minorities in the arts because they want to get minorities to smoke. That’s not socially responsible. It’s using social perception as a way to aggrandize or further one’s own interests exclusively.8

Of course, the gap between perception and reality can work in the opposite direction as w ell. Consider Procter & Gamb le Co., w hich was harshly criticized b y respondents to a surve rms on the basis of their cor porate phiy. Respondents contended that P&G did “absolutel y nothing to help” after the September 11 tragedy in Ne w York City.9 However, in tr uth, P&G provided more than $2.5 million in cash and products, but the y simply did not publicize that contribution. The same held true for Honda Motor Co., which donated cash, all-ter rain vehicles, and generators for use at the World Trade Center site during the same time period. P erhaps una ware of these ef forts, respondents instead believed these companies to lack compassion for their failure to (publicly) America. The practice of attending to the “image” of a f rm is sometimes refer red to as reputation management. y wrong with managing a f ailure to do so might be a poor business decision; but observers could challenge f rms for engaging in CSR acti vities solely for the

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Enron as “Most Admired” m with m with a reputation

Fortune Magazine, ranked no. 25 in 2000

100 Fastest Growing Companies

praises in its 2000 Corporate Responsibility Annual Report. The list drives home the challenges incumbent in any awards mechanism that strives to reward a trait such as “most innovative” or “all-star, most admired” rather than an enduring, measurable element of the corporate environment. On the other hand, awards such as those below can serve as infl decisions, so many executives in fields impacted by these honors would prefer they remain.

As Reported in Enron’s 2000 Corporate Responsibility Annual Report: The Most Innovative Company in America Fortune Magazine for six consecutive years

100 Best Companies to Work for in America Fortune Magazine for three consecutive years, ranked no. 22 in 2000

Fortune Magazine, ranked no. 29 in 2000

The report goes on to say: The principles that guide our behavior are based on our vision and values and include the following: • Respect • Integrity • Communication • Excellence In 2001, we will continue to approach toward corporate our implementation strategy, engagement, and strengthen practices.

develop a systematic responsibility, refi formalize stakeholder our risk management

Source: 2000 Enron Corporate Responsibility Annual Report (2001), pp. 2–3.

of impacting their reputations. The challenge is based on the fact that works! Figure 5.3 shows the elements that Har ris Interactiv uction of a reputation and the resulting benef m creates a good image for itself, it builds a type of tr eholders seem to giv gative about the f rm. Similarly, if a f rm has a negativ gardless of what good the corporation ma be an unethical person with a good reputation or an ethical person with a reputation for injustice. You may f en the choice betw o, companies are far more likely to survive under the f rst conception than under the second. On the issue of reputation management and the impact of a v ariety of stak eholders on a f rm’ ts Replace the Annual Financial Reports?, ’ ” and examine the perspectives of various consumer and advocacy g with w wn businesses at any of the following Web sites: • •

of g ycottameritech.com

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•

espotlight.org • • • •

ed.com almartsurvivor.com

ys, reputation ma and Honda cases mentioned abo ve. Shell Oil has pub licized its ef forts to ward good citizenship in Nigeria; but it has an unfor tunate record in ter ms of the timing of its responsi veness to spills; and its community de velopment projects have created community rifts in areas around oilf elds. Similarl y, British American Tobacco heavily and consistentl y promotes its high health and safety standards; but it receiv ya about ill ation. ou expect to be more pub ely to remain in stakeholders’ consciousness? A larger question involves the possible correlation between prof ts and ethics. Is good ethics also good business? One impor tant justif cation offered for CSR, what is often called enlightened self-interest, presumes that it is, or at least it can be. theorists continue to dispute whether ethical decisions lead to more signif cant prof ts than unethical decisions. While w xamples of unethical decisions leading to high prof ts, there is general ag reement that, in the long run, ethics pa ys of f. Ho wever, it is the measurement of that pa yoff that is the challenge. In Figure 5.3 , Harris Interactive juxtaposes indicators of performance y used in the f nancial en

FIGURE 5.3 The Construction of Corporate Reputation Source: Cop Harris Interactive Research. Reprinted b .harrisinteractive. vices/reputation.asp.

Emotional Products & Appeal

P

Financial Social Workplace Vision & ormance Responsibility Environment Leadership

Six Dimensions of Corporate Reputation

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TABLE 5.1 Multiple Bottom-Line Performance Indicators

Source: Corporate Sustaina

ver Dudok v

y Fennell, and Franceska van Dijk, Buried Treasure: Uncovering the Business Case for , 2001).

provide some guidance in this area. Though executives responsible for organiza-

8 OBJECTIVE

for assessing the elements included on the right side of the char t, those elements are by no means less measurab le. Often, ho wever, the long-term value is not as evident or obvious. Though there are man y justif cations for ethics in business, often the discussion ns to, well, returns—is there a business case for a return on inv ethics? There is evidence that good ethics is good business; yet the dominant is that, if it cannot be it is not important. As a result, efforts have been made to measure the bottom-line impact of ethical decision making. Measurement is critical since the business case is not without its detractors. David Vogel, a political science professor at Berk eley, contends that, while there is a market for f rms with strong CSR missions, it is a niche mark et and one that therefore caters to onl vestors.10 He argues that, contrary to a global shift in the business en CSR instead should be perceived as just one option for a business strate gy that might be appropriate for certain types of f rms under cer tain conditions, such as those with w wn brand names and reputations that are subject to threats b y activists. He warns of the exposure a f fer if it then does not li ve up to its CSR promises.

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The Relativity of Reputations

Note that a reputation is relevant to the variety of a business’ stakeholders—not just to its purchasing consumers. A survey conducted in the United Kingdom found that 33 percent of workers in that country are “very likely” to seek new employment during the next year because of their current employer’s poor record on corporate social responsibility.11 Employers are also more likely to

seek out new hires with a demonstrated awareness of social and environmental responsibility—in fact, a Wall Street Journal survey found that 77 percent of corporate recruiters said it is important in their hiring decisions.12 Moreover, investors are sinking almost $1.3 billion into socially responsible mutual funds, effectively putting their money where their mouths are.13

He also cautions against investing in CSR when consumers are not willing to pay t that investment. Though this perspective is persuasive, a revie counts, most predominantly the ov n on investment to the corporation. Persuasive e veloping Value: The Business Case for Sustainability in Emer ging Markets,” based on a yb , the Ethos Institute, and the Inter national Finance Cor poration. (See Table 5.1). The research found that in emer ging markets cost savings, productivity improvement, revenue growth, and access to markets were the most impor tant business benef ts of sustainability acti vities. Environmental process improv ere the most signif The report concludes that it does pay for businesses in emer ging markets to pursue a wider role in en vironmental and social issues, , revenue growth, and market access as areas of g n for multinational enter In addition, studies ha ve found that there are a number of e xpected—and measurable—outcomes to ethics pro grams in or ganizations. Some people look to the end results of f rms that have placed ethics and social responsibility at the forefront of their activities, while others look to those f rms that have been suce played. (For additional areas “The Relati “So They Say.”) With regard to the for mer wn for its quick and ef fective handling of its e xperience with tainted Tylenol. As than seven decades of consecutive sales increases, two decades of double-digit increases, and four decades of dividend increases. Each of these quantif able measurements can perhaps ser ve as pro xies for success, to some e xtent, or at least would be unlikely to occur in a company permeated by ethical lapses. Moreover, a landmark study by Professors Stephen Erf e and Michael Frantantuono found that f rms that w ed highest in ter ms of their records on a variety of social issues (including charitab programs, environmental performance, advancement of women, and promotion of

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So They Say

Whether at the W the OECD, or at the United Nations, an irrefutable case can be made that a universal acceptance of the rule of law, the outlawing of corrupt practices, respect for workers’ rights, high health and safety standards, sensitivity to the environment, support for education and the protection and nurturing of children are not only justifiable against the criteria of morality and justice. The simple truth is that these are good for business and most business people recognize this.14 Thomas d’ Aquino, CEO of Canada’s Business Council on National Issues

We all pay for poverty and unemployment and illiteracy. If a large percentage of society falls into a disadvantaged class, investors will fi source skilled and alert workers; manufacturers will have a limited market for their products; criminality will scare away foreign investments, and internal basic services and lead to urban blight. Under these conditions, no country can move forward economibusiness sense for corporations to complement

the efforts of government in contributing to social development.15 J. Ayala II

Our findings, both cross-sectional and longitudinal, indicate that there are indeed systematic linkages among community involvement, employee morale, and business performance in business enterprises. To the best of our knowledge, this is the first time that such linkages have been demonstrated empirically. Moreover, the weight of the evidence produced here indicates that community involvement is positively associated with business performance, employee morale is positively associated with business performance, and the interaction of community involvement—external involvement—with employee morale—internal involvement—is even more strongly associated with business performance than is either “involvement” measure alone.16 Report of study by UCLA graduate school of business

1991 involving in-depth, statistical research surveys of over 150 U.S.-based companies to determine whether there is a verifiable connection between a company’ involvement and its business performance

minorities) had greater f ell. Financial performance was better in ter ms of operating income g rowth, sales-to-assets ratios, sales g ro n on equity, earnings-to-asset growth, return on investment, return on assets, 17 and asset g ro The Reality Check, “So They Say,” demonstrates that these perspectives are gaining traction worldwide. Another study b y Mur phy and Verschoor repor ts that the o verall f nancial performance of the 2001 Business Ethics Magazine as signif cantly better than that of the remaining companies in the S&P 500 inde x, based on the 2001 BusinessWeek ranking of total f nancial performance.18 In addition, the researchers found that these same f rms had a signif cantly better reputation among cor porate directors, security anal ysts, and senior e xecutives. The same result w as found in a 2001 Fortune survey of most admired companies. these f ndings and found that, from the perspecti ves of economic v alue added, market v alue added, and the price-ear nings ratio, those companies that had a

Opening Decision Point Revisited

code of conduct outperfor med those that did not o ver a f ve-year period.19 The higher performance translated into signif cantly more economic v alue added, a less v r estment), and 18 percent higher prof t/turnover ratios. The research concluded ves credence to the assertion that “you do business ethically because it pays.” However, the most effective driver for maintaining a high level of integrity throughout the business is because it is seen b yees and other stakeholders to be a core value and therefore the right thing to do . . . [A] sustainable business is one which is well managed and which takes business ethics seriously. Leaders of this type of business do not need any assurance that their approach to the way the tability, because the w it to be true.20

This chapter sought to ans wer the question of w hether there e xists a social v ere proposed. The responsibility may be based in a concept of good corporate citizenship, a social contract, or enlightened self-interest. Notwithstanding its origins, w e then explored the challenge of ho w an inanimate entity lik e a cor poration could 226

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y hav ligation, both in law and ethics. No matter how one answers the several questions posed by this chapter, however, one thing is certain. It is impossible to engage in business today without nies, research demonstrates that almost all companies will confront CSR issues 21 from stak

Questions, Projects, and Exercises •

• •

•

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Readings

A Reason Debate Featuring Milton Friedman, Whole Foods’ John Mackey, and Cypress Semiconductor’s T. J. Rodgers, Reason magazine, October 2005 edition,” p. 231 Reading 5-2: “Does It Pay to Be Good?,” by A. J. Vogl, p. 239 Reading 5-3: “The Big Interview: Jeff Swartz— ‘Consumer Trust That’s Good for the Sole’: Timberland’s Jeff Swartz Explains Why Brands Must Start Engaging Consumers on Social Issues to Rebuild Trust Lost during the Financial Crisis,” by John Russell, p. 245

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Reading 5-1

Rethinking the Social Responsibility of Business: AReason Debate Featuring Milton Friedman, Whole Foods’ John Mackey, and Cypress Semiconductor’s T. J. Rodgers Thirty-f ve years ago, Milton Friedman wrote a famous ar ticle for The Ne w York Times Ma gazine whose title aptl y summed up its main point: “The Social Responsibility of Business Is to Increase Its Prof ts.” ics had no patience for capitalists who claimed that “business is not concerned ‘merely’ with prof t but also with promoting desirab le ‘social’ ends; that business has a ‘social conscience’ and tak es seriousl yment, eliminating discrimination, a voiding pollution and whatever else ma y be the catchw ords of the contemporary crop of reformers.” Friedman, no w a senior research fello w at the Hoov aul Snowden Russell Distinguished Ser nomics at the Uni versity of Chicago, wrote that such people are “preaching pure and unadulter ated socialism. Businessmen who talk this way are unwitting puppets of the intellectual forces that have been under these past decades.” Mackey, the founder and CEO of Whole Foods, is one businessman w ho disag rees with Friedman. hose conversation is peppered with references to Ludwig von Mises and Abraham Maslow, Austrian economics and astrology, Mackey believes Friedman’s view is too nar row a description of his and man y other businesses’ activities. As important, he ar gues that Friedman’s take woefully undersells the humanitarian dimension of capitalism. In the debate that follo ws, Mackey lays out his ness. Friedman responds, as does T.J. Rodgers, the founder and CEO of Cypress Semiconductor and the chief spok esman of w hat might be called the tough love school of laissez f aire. Dubbed “one of

America’s toughest bosses” b y Fortune, Rodgers ar porations add f ar more to society by maximizing “long-term shareholder value” than they do by donating time and money to charity. Reason of a discussion that should be intensel y impor tant to all devotees of free minds and free markets.

Putting Customers Ahead of Investors John Mackey In 1970 Milton Friedman wrote that “there is one and onl use its resources and engage in acti vities designed to increase its prof ts so long as it sta ys within the rules of the game, which is to say, engages in open ” That’s the orthodox view among free market economists: that the onl y social responsibility a la wabiding business has is to maximize prof ts for the shareholders. I strongl y disag ree. I’m a businessman and a free mark et liber tarian, but I belie ve that the enlightened cor poration should tr y to create v alue for all of its constituencies. From an investor’s perspective, the purpose of the business is to maximize prof ts. But that’s not the pur pose for other stak eholders—for customers, employees, suppliers, and the . Each of those groups will def ne the purpose of the business in terms of its own e is valid and legitimate. My argument should not be mistak en for a hostility to prof t. I belie ve I kno w something about creating shareholder value. I co-founded Whole Foods Market 27 years ago, we began with

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$45,000 in capital; we only had $250,000 in sales our f rst y ear. During the last 12 months we had sales of more than $4.6 billion, net prof ts of more than $160 million, and a market capitalization over $8 billion. But w e ha ve not achie v increase in shareholder v alue b y making shareholder value the primar y pur pose of our business. In my mar riage, my wife’s happiness is an end in itself, not merel y a means to m y o wn happiness; love leads me to put m y wife’s happiness f rst, but in doing so I also mak e myself happier. Similarly, f rst, ahead of the in vestors. In the prof t-centered business, customer happiness is merel y a means to an end: maximizing prof ts. In the customer centered business, customer happiness is an end reater interest, passion, and empathy than the prof t-centered business is capable of. Not that w e’re only concer ned with customers. At Whole Foods, we measure our success b y how much value we can create for all six of our most important stakeholders: customers, team members (employees), investors, vendors, communities, and the en There is, of course, no magical for mula to calculate ho w much v alue each stak eholder should receive from the compan y. It is a dynamic pro cess that evolves with the competiti ve mark stakeholder remains satisf ed for long. It is the function of compan y leadership to de velop solutions that continually work for the common good. Many thinking people will readil y accept m y ar ees is good business. But the y might draw the line at belie ving a compan y has an y responsibility to its community and en vironment. To donate time and capital to philanthrop y, the y will ar vestors. After all, the corporation’s assets le gally belong to the in vestors, don’t the y? Management has a f duciary responsibility to maximize shareholder v alue; therefore, an y acti vities that don’t maximize shareholder value are violations of this duty. If y wards other

people, you should ex our own mone y, not with the assets of a cor poration that doesn’t belong to you. This position sounds reasonab le. A compan y’s assets do belong to the in vestors, and its management does ha v responsibly. In my view, the argument is not wrong so much as it is too narrow. First, there can be little doubt that a cer tain amount of cor y is simpl y good business and w orks for the long-ter m benef t of the investors. For example: In addition to the man y thousands of small donations each oods store makes each year, we also hold f ve 5% Days throughout the year. On those days, we donate t organization. While our stores select w orthwhile organithat ha ve lar ge membership lists, w hich are contacted and encouraged to shop our store that da y to support the or ganization. This usually brings hundreds of ne w or lapsed customers into our stores, many of w hom then become re gular shoppers. So a 5% Day not only allows us to support worthwhile causes, but is an e xcellent mark gy that has benef ted Whole Foods investors immensely. That said , I belie ve such pro grams w ould be completely justif able ev its and no P .R. This is because I belie ve the entrepreneurs, not the cur rent investors in a compan y’s stock, hav ne the y ho create a company, who bring all the f actors of production together and coordinate it into viab le busiho set the compan y gy and w ho negotiate the ter ms of trade with all of the v y cooperating stak eholders— including the investors. At oods we “hired” our original investors. They didn’t hire us. We f rst announced that w e w ould donate 5 percent of the compan y’s net prof ts to philanthropy w hen w back in 1985. Our policy has therefore been in place for over 20 years, and it predates our IPO by seven years. All sev ate investors at the

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time we created the polic y voted for it w hen they ed on our board of directors. When we took in v y back in 1989, none of the v rms objected to the polic y. In addition, in almost 14 y ears as a pub licly traded compan y, almost no in vestors have ever raised objections to the polic y. Ho w can oods’ y rent investors if the original owners of the compan y unanimously approved the policy and all subsequent in vestors made their investments after the polic y was in effect and well publicized? The shareholders of a public company own their stock voluntarily. If the y don’t agree with the philosophy of the business, the y can al ways sell their investment, just as the customers and emplo yees can e xit their relationships with the compan y if they don’t like the ter ms of trade. If that is unacceptable to them, the y always have the le gal right to submit a resolution at our annual shareholders meeting to change the compan y’s philanthropic philosophy. A number of our compan y policies have been changed over the y ful shareholder resolutions. Another objection to the oods philosophy is where to draw the line. If donating 5 percent of prof ts is good , w ouldn’t 10 percent be e ven better? y not donate 100 percent of our profits to the better ment of society? But the f act that Whole F doesn’ t have any responsibilities to our investors. It’s a question of f nding the appropriate balance and tr ying to create v alue for all of our stakeholders. Is 5 percent the “right amount” to donate to the community? I don’t think there is a right answer to this question, except that I believe 0 percent is too little. It is an arbitrar y percentage that the co-founders of the compan y decided was a reasonab le amount and w hich w as approved b y the owners of the company at the time we made the decision. Cor porate philanthrop y is a good thing, but it requires the le gitimacy of in vestor approval. In my experience, most investors understand that it can be benef cial to both the corporation and to the larger society.

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That doesn’t answ y we give money to the community stakeholder. For that, you et economics, Adam Smith. The Wealth of Nations was a tremendous achievement, but economists would be well ser ved to read Smith’ s other g reat book, The al Sentiments. There he explains that human nature isn’ t just about self-interest. It also includes sympathy, empathy, friendship, lo ve, and al. As motives for human behavior, these are at least as impor tant as selfinterest. For many people, the When we are small children w e are e gocentric, concerned onl y about our o wn needs and desires. As we mature, most people g row beyond this e gobegin to care about others—their f love can expand even ther: to loving people from dif ferent races, religions, and y to unlimited love for all people and ev This is our potential as human beings, to tak e joy in the f ourishing of people e v here. Whole F oods gi ves mone e care about them and feel a responsibility to help them f ourish as well as possible. The business model that Whole F oods has one that more consciously works for the common good instead of depending solely on the “invisible hand” to generate positive results for . The “brand” of capitalism is in ter rible shape throughout the w porations are widely seen as self sh, greedy, and uncaring. This is both unfor , and could be changed if businesses and economists widely adopted the business model that I have outlined here. To extend our love and care be yond our nar row self-interest is antithetical to neither our human nature nor our f nancial success. Rather , it leads to the fur llment of both. y do w e not encourage this in our theories of business and economics? Why do w e restrict our theories to such a pessimistic and crabb y vie

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Making Philanthropy out of Obscenity Milton Friedman wn interest [an individual] frequently promotes that of the society more effectually than when he really intends to promote it. I have nev wn much good done by those w lic good. The Wealth of Nations The dif ferences betw ey and me re for the most par f the camouf Moreover, his compan y, Whole F oods Mark et, behaves in accordance with the principles I spelled out in my 1970 New York Times Magazine ticle. With respect to his compan y, it could hardly be ell in a highly competitive y. Had it de voted an y signif cant fraction of its resources to e xercising a social responsibilould be out of business by now or would have been taken over. Here is how Mackey himself describes his f rm’s activities: 1. “The most successful businesses put the customer f rst, instead of the in vestors” (w hich clearly means that this is the w ay to put the investors f rst). 2. “There can be little doubt that a cer tain amount of cor y is simpl y good business and works for the long-ter m benef t of the investors.” Compare this to what I wrote in 1970: “Of course, in practice the doctrine of social y a cloak for actions that are justif ed on other g rounds rather than a reason for those actions. “To illustrate, it may well be in the long r er in a small ving its gov

“In each of these . . . cases, there is a strong temptation to rationalize these actions as an e xercise of ‘social responsibility.’ In the present climate of opinion, with its widespread a version to ‘capitalism,’ ‘prof ts,’ the ‘soulless cor poration’ and so on, this is one w ay for a cor poration to generate goodwill as a b y-product of e xpenditures that are entirely justif ed in its own self-interest. “It would be inconsistent of me to call on cor porate executiv ypocritical window-dressing because it har ms the foundations of a free society. That would be to call on them to ex and the attitudes of the public make it in their selfinterest to cloak their actions in this w ay, I cannot summon much indignation to denounce them.” I believe Mackey’s f y is a good thing” is f atly wrong. Consider the decision by the founders of Whole Foods to donate 5 percent of net prof ts to philanthrop y. They w ere clearl y within their rights in doing so. They were spending their own money, using 5 percent of one par t of their w ealth to estab lish, thanks to cor porate tax pro visions, the equi valent of a 501c(3) charitab le foundation, though with no mission statement, no separate b y-laws, and no provision for deciding on the benef ciaries. But what reason is there to suppose that the stream of prof t distributed in this w ay would do more good for society than in vesting that stream of prof t in the enter prise itself or pa ying it out as di vidends and letting the stockholders dispose of it? The practice makes sense only because of our obscene tax laws, whereby a can make a larger gift for a gi ven after -tax cost if the cor poration mak he makes the gift directly. That is a good reason for eliminating the corporate tax or for eliminating the deductibilof corporate , but it is not a justif cation for corporate charity. Whole Foods Market’s contribution to society— and as a customer I can testify that it is an impor tant one—is to enhance the pleasure of shopping for food. Whole Foods has no special competence in deciding ho

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Any funds de voted to the latter w ould surel y have y had been devoted to impro ther the former. Finally, I shall tr y to explain why my statement that “the social responsibility of business [is] to increase its prof ts” and Mack ey’s statement that “the enlightened cor poration should tr y to create value for all of its constituencies” are equivalent. Note f rst that I refer to social , not f nancial, or accounting, or le gal. It is social precisely to allo hich Mackey refers. Maximizing prof ts is an end from the pri vate point of vie w; it is a means from the social point of vie w. A system based on pri vate ets is a sophisticated means of enabling people to cooperate in their economic activities without compulsion; it enab les separated kno its most v alued use, and is combined with other resources in the most eff cient way. Of course, this is abstract and idealized. The world is not ideal. There are all sor ts of deviations from the perfect market—many, if not most, I suspect, due to government interventions. But with all its defects, the current largely free-market, privateorld seems to me v astly preferable to a world in which a large fraction of resources is used and distributed b y 501c(3)s and their cor porate counterparts.

PutP rofits First T. J. Rodgers ey’s ar ticle attacking cor porate prof t maximization could not ha v y “a free market liber tarian,” as claimed. Indeed , if the examples he cites had not identif ed him as the author, one could easil ten by Ralph Nader . A more accurate title for his article is “How Business and Prof t Making Fit into My Overarching Philosophy of ” Mackey spouts nonsense about how his company estors, not vice versa. If Foods ever falls on persistent hard times—perhaps

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when the Luddites are no longer ab le to hold back the genetic food re volution using junk science and fear—he will quickly f nd out w as his investors f re him. Mackey does mak e one point that is consistent with, but not supportive of, free market capitalism. He ws that shareholders own his stock voluntarily. If the y don’t like the policies of his compan y, they can always vote to change those policies with a shareholder resolution or simpl y sell the stock their objectives. Thus, he infor ms his shareholders of his objecti ves and lets them mak e a choice on which stock to buy. So far, so good. It is also simply good business for a company to cater to its customers, train and retain its emplo yees, build long-term positive relationships with its suppliers, and become a good citizen in its community, including perfor ming some philanthropic acti . When Milton F riedman sa ys a compan y should sta y “within the r ules of the game” and operate “without deception or fraud ,” he means it properly in order to maximize long-term shareholder v every last nick el on the bottom line every quarter, regardless of the long-term consequences. My company, Cypress Semiconductor, has won the trophy for the Second Harvest Food Bank competition for the most food donated per emplo yee in Silicon Valley for the last 13 consecuti ve years (1 million pounds of food in 2004). The contest creates competition among our di visions, leading to emplo yee in volvement, compan y food dri ves, inter food donations, and so for th. It is a big emplo yee morale builder , a w ay to attract ne w emplo yees, good P.R. for the company, and a signif cant benef t to the community—all of w hich makes Cypress a better place to work and invest in. Mackey’s own proud e xample of Whole Foods’ community involvement programs also made a prof t. But Mack ey’s subordination of his profession as a businessman to altr uistic ideals sho ws up as he attempts to negate the empirically demonstrated

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social benef t of “self-interest” b y def ning it narrowly as “increasing short-term prof ts.” Why is it that w hen oods gives mone y to a w orthy cause, it serves a high moral objective, while a compan y that pro n to small investors—who simply put their mone y into their own retirement funds or a children’s college fund— is somehow self sh? It’s the philosophy that is objectionable here, not the specif c actions. If Mackey wants to r un a hybrid business/charity whose mission is full y disclosed to his shareholders— and if those shareholder -owners w ant to suppor t that mission—so be it. But I balk at the proposition that a company’s “stakeholders” (a term often used by collecti vists to justify unreasonab le demands) should be allo wed to control the proper ty of the shareholders. It seems Mack ey’s philosoph y is more accuratel y described b rom surrender money and assets); “to each according to his needs” (the charities, social interest groups, and en hat the y w ant). That’s not free market capitalism. Then there is the arrogant proposition that if other corporations would simply emulate the higher corporate life for m def ned b y Whole F oods, the world would be better of f. ey says corporations are vie wed as “self sh, g reedy, and uncaring. et capitalism to be a high calling, e ven without the infusion of altruism practiced by Whole Foods. If one goes be yond the sensationalistic jour nalism sur rounding the Enron-lik e debacles, one discovers that only about 10 to 20 public corporations have been justif ably accused of serious wrongdoing. That’s about 0.1 percent of America’s 17,500 public companies. s the f ailure rate of the publications that demean business? (Consider the ork Times scandal in volving manuf actured stories.) What’s the percentage of U.S. presidents who have been forced or almost forced from offce? (It’s 10 times higher than the f ailure rate of cor porations.) What percentage of our cong ressmen has spent time in jail? The f act is that despite some well-publicized failures, most corporations are

with the highest ethical standards—and the pub lic ws it. Pub by routinely ranking businessmen abov and politicians in esteem. I am proud of w hat the semiconductor industr y does—relentlessl tor from $3 in 1960 to three-millionths of a dollar today. Mack ey would be k eeping his business records with hordes of accountants on paper ledgers if our industr y didn’t e xist. He w ould have to charge his poorest customers more for their pay his v alued employees less, and cut his philanthropy programs if the semiconductor industry had not focused so relentlessl y on increasing its profits, cutting his costs in the process. Of course, if the U y had been less cost-competitive due to its o wn philanthrop y, the food industr y simpl y w ould ha ve bought cheaper computers made from Japanese and K orean silicon chips (w hich happened an ay). La y the nonunion semiconductor industry were ally good news to Whole Foods’ unionized grocery store clerks. as Mackey’ when unemployed semiconductor w orkers needed it? Of course, that rhetorical question is foolish, since he did e xactly the right thing b y r uthlessly reducing his recordkeeping costs so as to maximize his prof ts. I am proud to be a free mark et capitalist. And I resent the f act that Mack ey’s philosophy demeans me as an e ve refused on moral g rounds to embrace the philosophies of collecti ve caused so much , however tempting the sales pitch for them sounds.

Profit Is the Means, Not End John Mackey Let me be gin my response to Milton F riedman by noting that he is one of m y personal heroes. His contributions to economic thought and the f ght for freedom are without parallel, and it is an honor to have him critique my article.

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Friedman sa ys “the dif ferences betw een John Mackey and me re of business are for the most par t rhetorical.” But are we essentially in ag reement? I don’ t think so. W y different ways. Friedman is thinking only in terms of maximizing prof ts for the in vestors. If putting customers f rst helps maximize prof ts for the in vestors, then it is acceptable. If some corporate philanthropy creates goodwill and helps a compan y “cloak” its self-interested goals of maximizing prof ts, then it is acceptab le (although F riedman also belie ves it is “h ypocritical”). In contrast to F riedman, I do not believe maximizing prof ts for the in vestors is the onl y acceptab le justif cation for all cor porate actions. The investors are not the onl y people who matter. Cor porations can e xist for pur poses other than simply maximizing prof ts. As for w y particular business is, I made an impor tant argument that Friedman doesn’t address: “I believ preneurs, not the cur rent investors in a compan y’s stock, have the right and responsibility to def ne the purpose of the company.” Foods Market was not created solely to maximize prof ts for its investors, but to create v alue for all of its stak eholders. I belie ve there are thousands of other businesses similar to oods (Medtronic, REI, and Starbucks, for e xample) that w ere created b y entrepreneurs with goals be yond maximizing prof ts, and that these goals are neither “h ypocritical” nor “cloaking devices” but are intrinsic to the pur pose of the business. I will concede that man y other businesses, such as T Semiconductor, have been created b hose sole pur pose for the business is to maximize prof ts for their in v ve an y social responsibility besides maximizing prof ts if it follo ws the la ws of society? No, it doesn’ t. Rodgers apparentl y created it solel y to maximize prof ts, and therefore all of F riedman’s ar pletely valid. Business social responsibility should

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not be coerced; it is a voluntary decision that the entrepreneurial leadership of e very company must make on its o wn. F prof t making is intrinsicall y v aluable for society , but I believe he is mistaken that all businesses have only this purpose. While Friedman believes that taking care of customers, employ y are means to the end of increasing in vestor prof ts, I take the e xact opposite vie w: Making high prof ts lling Whole Foods’ core business mission. We w ant to impro ve the health and w ell-being of e veryone on the planet through higher and we can’t ll this mission unless we are highly prof table. High prof ts are necessar our growth across the United States and the w orld. Just as people cannot live without eating, so a busive without prof ts. But most people don’t live to eat, and neither must businesses li ve just to make prof ts. Tow ys his statement that “the social responsibility of business [is] to increase its prof ts” and m y statement that “the enlightened cor poration should tr y to create value for all of its constituencies” are “equivalent.” He ar ts is a pri vate end achiev society based on private property and free markets. If our tw o statements are equi valent, if w e reall y mean the same thing, then I w which statement has the superior “marketing power.” Mine does. Both capitalism and cor porations are misundered around the w orld because of statements lik e F riedman’s on social y the enemies , selfish, and uncaring. It is right up there with William Vanderbilt’s “the pub mer G.M. Chair man Charlie Wilson’s declaration that “what’s good for the countr y is good for General Motors, and vice v ersa.” If w e are tr uly interested in spreading capitalism throughout the w orld (I certainly am), we need to do a better job marketing it. I belie ve if economists and businesspeople

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consistently communicated and acted on m y message that “the enlightened cor poration should try to create v ” we would see most of the resistance to capitalism disappear. Friedman also that Whole Foods makes an impor simply maximizing prof ts for our investors, which ” This is why we put “satisfying and delighting our customers” as a core value whenever we talk about the pur pose of our business. y don’ t F riedman and other economists consistentl y teach this idea? y don’t they talk more about all the v aluable contributions that business mak es in creating value for its customers, for its employees, and for its communities? y talk only about maximizing prof ts for the investors? Doing so harms the brand of capitalism. As for Whole F oods’ philanthrop y, w ho does have “special competence” in this area? Does the gov viduals? Liber tarians gener ally w ould ag ree that most bureaucratic go vernment solutions to social prob than good and that go vernment help is seldom the answer. Neither do indi viduals ha ve an y special . By F s logic, individuals shouldn’t donate any money to help others but should instead keep all their money invested in businesses, where it will create more social value. The tr uth is that there is no w ay to calculate whether money invested in business or money invested in helping to solv e social prob lems will create more value. Businesses exist within real communities and ha ve real ef fects, both good and bad , on those communities. Lik e indi viduals living in communities, businesses mak e valuable social contributions b y providing goods and services and employment. But just as individuals can feel a responsibility to pro vide some philany live, so too can a business. The responsibility of business to ward the community is not inf nite, but neither is it zero. Each enlightened business must f nd the proper balance betw een all of its

constituencies: customers, employees, investors, suppliers, and communities. While I respect Milton F riedman’s thoughtful response, I do not feel the same w ay about T. J . Rodgers’ critique. It is ob vious to me that Rodgers didn’ y read m y ar deeply about my ar intelligent response. Instead he launches v arious ad hominem attacks on me, m y company customers. losophy is similar to those of Ralph Nader and Karl Whole Foods Market and our customers are a bunch of Luddites engaging in junk science and fear mongering; and our unionized g rocery clerks don’t care about la yoffs of w orkers in Rodgers’ o y. For the record: I don’ t ag ree with the philosoWhole Foods Market doesn’t engage in science or fear mongering, and neither do 99 percent of our customers or vendors; and of Whole Foods’ 36,000 emplo yees, exactly zero of them belong to unions, and w e are in fact sorry about lay y. When Rodgers isn’ t engaging in ad hominem attacks, he seems to be ar guing against a leftist, socialist, and collecti vist perspective that ma y exist in his o wn mind but does not appear in m y article. Contrar y to Rodgers’ claim, Whole Foods is r ybrid business/charity” but an enormously prof table business that has created tremendous shareholder value. Of all the food retailers in the Fortune 500 (including Wal-Mart), w e ha ve the highest profits as a percentage of sales, as w ell as the highest n on in vested capital, sales per square foot, same-store sales, and growth rate. We are currently doubling in size e very three and a half y ears. The bottom line is that Whole Foods stakeholder business philosophy works and has produced tremendous value for all of our stakeholders, including our investors. uggled to be prof table for many years now, and their balance sheet sho ws ne gative retained ear nings of over $408 million. This means that in its entire

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23-year histor y, Cypress has lost f ar more mone y for its investors than it has made. Instead of calling my business philosophy Marxist, perhaps it is time wn. Rodgers says with passion, “I am proud of w hat the semiconductor industr y does—relentlessly cuteemillionths of a dollar toda y.” Rodgers is entitled to be proud. What a w accomplishment this is, our lives better. Then why not consistently communicate this message as the pur pose of his business, instead of talking all the time about maximizing prof ts and shareholder v alue? Like medicine, la w, and education, business has noble to provide goods and ser vices that impro ve its customers’ lives, to pro ork for employees, to create w ealth and prosperity for its inv Businesses such as Whole Foods have multiple stakeholders and therefore ha ve multiple responsibilities. But the fact that we have responsibilities to stakeholders besides in vestors does not gi ve those other stakeholders any “property rights” in the

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company, contrary to Rodgers’ fears. The investors still own the business, are entitled to the residual prof ts, and can f re the management if the y wish. y to heal t mean her patients are entitled to recei ve a share of the prof Rodgers probab ly will ne ver ag ree with m y business philosophy, but it doesn’t really matter. The ideas I’m ar ticulating result in a more robust business model than the prof t-maximization model that it competes against, because the y encourage and tap into more po w vations than selfinterest alone. These ideas will triumph o ver time, not b y persuading intellectuals and economists through ar y winning the competiti ve test of the mark etplace. Someda y businesses lik e Whole Foods, which adhere to a stakeholder model of deeper business purpose, will dominate the economic landscape. Wait and see. Source: Copyright © Reason magazine, .reason.com/0510/fe.mf.rethinking.shtml, October 2005. Reprinted by permission.

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Does It Pay to Be Good? A. J. Vogl Yes, say adv e their time has come—f nally. Corporate citizenship: For believers, the w ords speak of the da wning of a ne w era of capitalism, when business, go vernment, and citizen g roups join forces for the g reater good, to jointl y tackle such problems as water shortages and air pollution, to do something about the 1.2 billion people who live on less than a dollar a day. Corporate citizenship: F or critics of toda y’s capitalism, the words smack of hypocrisy, big business’s c in high places, intended to mollify those

who sa y cor porations ha ve too much po wer and that the y wield it shamelessl y. Critics char ge that of globalization, a pub lic-relations smok e screen, capitalism’s last-ditch attempt to preser ve itself by co-opting its opposition. Corporate citizenship: F or man y, it remains a diffuse concept, but generall y it speaks to companies v oluntaril one that takes into account social, economic, and environmental considerations as w ell as f nancial results. Though some associate corporate citizenship with charity and philanthrop y, the concept

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goes ther—it embraces a corporate conscience abov ond prof ts and markets. David Vidal, w at The Conference Board, comments, “Citizenship is not, as some critics char ge, windo w dressing for the cor poration. It deals with primar y business relationships that are par t of a compan y’ gic vision, and a good business case can be made for corporate citizenship.” Whether y ou are a critic or belie ver, ho wever, there is no question that cor porate citizenship—a term that embraces corporate social fostered by idealists on the fringe. It has entered the mainstream.

No Good Deed Goes Unpunished As necessar y as cor porate citizenship ma y be, it still faces challenges from both inside and outside the off ce. Perhaps the most disheartening of these hurdles is that the most prominent cor porate citizens rarely receive rewards commensurate with their prominence. As Hilton and Giles Gibbons, co-authors of the pro-CSR Good Business: Your World Needs You, point out, “Curiousl y, the companies whose hearts are most visib ly f xed to their pinstriped slee ves tend to be the ones that attract enomous attacks from antibusiness critics. ” Is this because critics feel that devious agendas lie behind the enlightened policies? Noreena Her tz, a British critic of cor porate citizenship, wonders whether Microsoft, by putting computers in schools today, will determine how children learn tomorrow. Is it that cor porations haven’t gotten their stories across properly, or that they have—and are still being vilif ed? The experience of McDonald’s in this arena is revealing. In 2002, the f ast-food chain pub lished its f rst report, composed of forts in four cate gories: , en The efforts that went into that repor t were rewarded in some courts of public opinion: In 2000 and 2001 Financial Times aterhouseCoopers surveys

of media and NGOs, McDonald’ s placed 14th among the w orld’s most respected companies for en At the same time, fe w cor porations ha ve been attacked as savagely as McDonald’s for its “citizenship.” It has been por trayed as an omni vo, treats its emplo yees badly, and despoils the environment. McDonald’s goes to great lengths to ans wer these charges in its socialresponsibility repor t—which w as itself widel y e Nik e, it can’ t help looking defensive. It will tak e a g reat deal more than a report of its good w orks to diminish the Golden Arches as a symbol of “capitalist imperialism” in the eyes of anti-globalists or to stanch the vitriol on such websites as Mcspotlight. There’s no question that the bar is set e xceedingly high in the arena of corporate social involvement. Philip Mor $100 million a year, most conspicuously in a series of TV commercials, on measures to discourage underage smoking—and still critics charge that the Philip Mor ris campaign is a c ynical PR stunt that y encourages kids to smok e. The compan y has been accused of having “a profound conf ict of vercome.” Another tobacco compan y, B AT, the w orld’s second-largest, put some members of the socialresponsibility estab lishment in an uncomfor table position w hen, last Jul y, it became the industr y’s f rst compan y to pub report. Few knew w hat to think upon reading the tobacco company’s blunt rhetoric—“[T]here is no such thing as a ‘safe’ cigarette . . . We openly state that, put simply, smoking is a cause of cer tain serious diseases” and the 18 pages devoted to the risks of smoking. BAT even had its repor t audited by an independent verif er. All this wasn’t nearly enough roups, of course—the y continue to view the company with deep suspicion. Would anyone hav When accused of being o verly suspicious, critics point to one company that, over the last six years, won numerous awards for its environmental,

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human rights, anti-cor y, and climate-change policies; a compan y prominent on “most admired” and “best companies to w ork for” lists; a compan y that issued a repor t on the good deeds that supported its claim to be a top corporate citizen. That company w No one would argue that Enron is typical, yet its debacle has tainted other companies. It also raises a diff cult question about CSR: between ho w a compan y is managed— corporate gov porate citizenship? Ste ve Hilton, speaking from London, says that the is not reall y understood in the United Kingdom: “P vernance, executive-compensation, and accounting-fraud issues in the United States and operational issues that come under the heading of cor porate citizenship. I w ould argue they’re all part of the same thing.” So w ould Transparency Inter national’s F rank Vogl, co-founder of the anti-cor NGO. He believes that CSR has been under mined because porate conduct issues. “Foreign public trust in Cor porate America has been diminished ,” he said , “and there is scant evidence that U .S. business leaders reco gnize the global impact of the U.S. scandals.” Vogl sa issue than either the en .S. businesspeople see as a f ment ma

rights. y”

into w h Transparency Inter Payers Inde x. To me, cor porate citizenship means you don’ cials. That’s the w orst kind of h .”

Will They Be Good in Bad Times? The specter of h ypocrisy raises its head in another quarter as well: Do employees of companies claiming to be good cor porate citizens see their employer’s citizenship activities as a diversion or cover-up

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to charges of bad leadership and poor management practices? Certainly, if recent sur ve employees. In a recent Mercer Human Resource Consulting study, only a third of the 2,600 w orkeyed ag management in my organization to always communicate honestly.” And a Walker Information survey of emplo yees found that onl y 49 percent belie ve their senior leaders to be “people of high personal integ . ed by employees merely as puffery to mak e top management look good , it will not get under an organization’s cultural skin. Even if there is a genuine management commitment, cor porations ha ve other ob ligations that may tak e precedence, be gging the question: Will corporations be good citizens in bad times as w ell as good? The experience of Ford Motor Co. brings the question to ear th. In August, F ord issued its third annual cor porate-citizenship report. Previous reports had drawn plaudits from environmentalists, but this one, coming at a time w hen the automaker faced f nancial diff culties, w as attack ed b y the same en vironmentalists for f ailing to set agg ressive goals for reducing g or improving gas mileage. Sier ra Club’s executive director called it “a giant step in the wrong direction for Ford Motor Co., for American consumers, and for the environment.” other companies to take their own “giant steps” backward. w has it that w hen times get tough and cuts ha ve to be made, cer tain budgets are at the top of the list for cutbacks— advertising for one, pub lic relations for another . For companies in w hich cor porate citizenship is seen as an extension of public relations, of “image building” or “reputation management,” it may suffer this fate. Which is as it should be, sa y some critics. As The Wall Street Journal William Ford on its editorial page: “W e also hope Mr . Ford has learned from his mistak e of ceding the moral and nesses needn’t apologize for making products that

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other Americans want to buy. Their f rst obligation is to their shareholders and emplo yees and that means above all making an honest prof t.”

Does the “Business Case” Really Have a Case? But hold on: case for cor porate citizenship—that it contributes to making “an honest prof t”? Unfor tunately, it’s diff cult to quantify in cost-benef t terms what that contribution is. Not something to be concer ned about, sa ys Simon Zadek, CEO of AccountAbil, a London-based institute that has estab lished CSR v erif cation standards. “It is a f act that the vast majority of da y-to-day business decisions are taken without any explicit cost-benef t analysis,” he says, pointing to emplo yee training as an e xample of a corporate expenditure that is diff cult to quantify in cost-benef t ter ms. What he doesn’ t mention is that, w hen business is suf fering, training is usually among the e xpenditures to be cut back or eliminated. Ultimately, Zadek concedes that, in strictl y quantif able terms, one cannot mak e a cost-benef t case for corporate citizenship. “Although the question ‘Does cor porate citizenship pa y?’ cally right, it is misleading in practice, ” he sa ys. “Rephrasing the core question as ‘In w hat w ays does cor ving the core business strategy?’ is far preferable.” To some hardheaded cor s reasoning may seem disingenuous, but even the hardheads can’ t be dismissi ve—at least pub licly. Moreover, the y would probab l wledge that corporate citizenship, in concept and practice, has come too far to be ignored. y w ell become w hat Ste ve actor,” a condition of doing business. Hilton’s f rm, Good Business, consults with f r leaders are coming to realize CSR’s potential to go bey a genuine business tool,” he says. “That’s been the

rhetoric all along, but the reality has been that it’ s been a slightl y mar ginal issue. With fe w e xceptions, it’s been seen as an add-on, without being incorporated into core business decision making.” This is Zadek’ s point w hen he ar gues the case for w hat he calls “third-generation cor porate citizenship.” The f rst generation is def ned by cause-related marketing and shor t-term reputation management. The second occurs w hen social and en vironmental objectives become a core par t of long-term business strategy; as an example, he points to automakers competing in the arena of emission controls. The third generation is based on collective action, w here cor porations join with competitors, NGOs, and government “to change the underl ying of the game to ensure that business delivers adequate social and environmental results.” level pla ying f eld. “In CSR, ” sa ys AccountAbile Peirce, “companies that are leaders might suffer a penalty if there’s a big gap betw een themselves and laggards in the f y’d like everybody ticking along at at least a basic le vel.” In other w ords, a sociall y responsib le compan y does not want to be penalized f nancially for being socially responsib y that if CSR indeed provides the competitive advantage that its proponents insist it does, then it is the laggards that should suf fer the se verest f nancial penalty. To convince doubters, efforts are being made to schematically quantify cor porate social responsi. In a recent d Business Review article titled “The Virtue Matrix: Calculating the Retur n on Cor porate Responsibility ,” Ro ger L. Mar tin makes a point of treating cor porate responsibility as a product or service like any other. ersity of Toronto’s Rotman School of Management, his matrix can help companies sor t out such questions as whether a citizenship initiative will erode a company’s competitive position. Even if Mar tin’s formula seems overly clinical, it supports the trend toward closer analysis of what

Chapter 5

social responsibility means and w hat it brings to corporations practicing it. But anal ysis will tak e you onl y so f ar. “[I]t is impossib le to pro ve the direction of the f ow of causality,” writes Chad Holliday, chairman and CEO of DuPont and co-author of Walking the Talk: The Business Case f or Sustainable De velopment. “Does a compan y become prof table and thus enjo y the luxur y of being ab le to wor vironmental and social issues or does the pursuit of sustainability mak e a company more prof table?” But for large public companies, the question of whether it tr uly pays to be good will be ask ed less and less; for them, it will be necessar y to be good, if only to av That means that cor , itself nothing less than a g ro y today, will become “normalized” into cor Yes, there will be an ef vel the pla ying f , expect citizenship proponents to attempt to raise the f eld to a higher le vel by making cor porate go vernance itself the issue. “Unless w e mak e basic str ” sa ys Marjorie Kelly, the editor of Business Ethics magazine and a frequent critic of CSR, “it’ ll be nothing but window dressing. The corporate scandals have given a real-w orld demonstration that business without ethics collapses, and that has gi ven us an e ay we do business.”

InvestorsA reLis tening For companies in sectors not considered exemplars of corporate citizenship—munitions, por nography, gambling, and tobacco (yes); liquor ly); and oil (ma ybe)—there’s good ne ws: The mar ket hasn’t penalized them for their supposed lack of citizenship. F or companies at the opposite end of the spectr um, there’s also good ne ws: Investors haven’t penalized them for their e xpenditures on social causes. On balance, the better ne ws is for the sociall y responsible companies, w ho ha ve long labored estor automatically

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pays a price for in vesting in a sociall y responsible compan being a compan y or fund that doesn’ t perfor m as well as its peers that don’ t f y the sociall y responsible banner. Investors appear to be listening. According to F inancial Research Cor p., in vestors added $1.29 billion of ne w mone y into sociall y responsib f rst half of 2002, compared to $847.1 million added during all of 2001. Ov er the year ending July 31, the av including stock, bond as down 13 percent, while comparable socially responsib ere down 19 percent. But advocates point out that dif ferent indices—par ticularly the Domini Social Index, a capitalization-weighted market inde x of 400 common stocks screened according to social and en criteria, and the Citizen’ s Inde x, a mark et-weighted por tfolio of common stocks representing o wnership in 300 of the most sociall y responsible U.S. companies— have outperformed the S&P 500 o ver the last one, three, and f ve years. sib ningstar) comprises onl ocates expect this percentage to climb to 10 percent b y 2012, says Barbara umsiek, chief executive of the Bethesda, Md.–based Calver fund comple x specializing in sociall y responsib le investing. And others’ tallies are f ar higher: The nonprof t Social In vestment F than $2 trillion in total assets under management in portfolios screened for socially concerned investors, including sociall separate accounts managed for sociall y conscious vidual investors. Plus, recent corporate scandals may have raised many investors’ consciousness: In the f rst half of 2002, socially responsible mutual funds sa w their assets increase b y 3 percent, w hile con ventional diversif People may have decided that if their investments were going to lose mone y, it might as well be for a good cause.

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Attacked from All Sides While man y sk eptics criticize the w ays in w hich cor , some tak ther by asking if the concept should exist at all. ould object to the idea of a compan yond the tradie a larger view of the reason for its e xistence? You ma y be sur prised: There are many critics, and the various and sometimes unpredictable directions. First is a g roup that sa ys cor porate social responsibility is f awed at its hear t because it’ s The right thing, the y belie ve, is doing the right thing because it is right, as a matter of principle—not because it advances the f rm’s business interests. The rejoinder, of course, is that if a larger social or environmental good is met, w e should not quibb le about motivation. As corporate-governance activist Robert A. G. Monks points out: “You can get backvestors onl y if y ou talk a commercial idiom.” Next is a group of dissimilar critics who believe zenship, companies are doing things that are none of their business. Paradoxically, these critics come The right feels that the business of business should be business: As Michael Pro wse argues in the Financial Times, the role of the cor poration “is to provide indi responsible. Rather than tr ying to pla y the role of social worker, senior executiv on their obligations. We should not expect benevolence of them, but w e should demand probity: the socially responsible chief executive is the one w t without lying, cheating, robbing or defrauding anyone.” The left, on the other hand , feels that cor porations are usur ping the po wers of go ver y itself. Noreena Her tz, the British academic and broadcaster who wrote The Silent Takeover: Global Capitalism and the Death of Democracy, is not only

dubious about business taking over responsibilities that she feels properl y belong to go vernment— she is skeptical about business’s ability to handle them: “[M]anagers of multinationals operating in the third world are often ov helmed by the social problems they encounter, and understandably f nd it diff w which causes to prioritize . . . Their contributions can be or diverted ” And w decides to pull out, if go vernment has allowed private industry to tak e over its role? Worse still, she wor y responsible corporation could use its position “to e xact a stream of IOUs and quid pro quos, to demand e ver more f avorable ter ms and concessions from host governments.” citizenship as a diversionary ploy to placate a public porate practices. They will concede that Enron, WorldCom, and Tyco are egregious exceptions, but are other companies exemplars of probity? Hardl y. Can companies be considered good corporate citizens when they move their headto Bermuda to avoid taxes (and their CEOs in the process)? Can companies lik e General Beecham, and Chiquita Brands Inter national claim the moral high g round w hen the y ha ve cut emplo yee benef ts in connection with mergers and spin-offs? And what of such companies as Wyeth, Wal-Mart, McKesson, and Mer rill L y, ask the critics, be considered high-minded citizens w hen the top e xecutives accumulate pots of mone y in their defer red-compensation accounts? This ma y be why PR eminence g rise John Budd sa ys, “For at least the ne tainly would not counsel an y CEO to magicall y appear publicly as an enlightened champion of social responsibility. The circumstances mak e it automatic that it would be perceived as spinning.” Last, there is a g roup of critics that sa ys that simply doing more good than w e’re doing no w is v ven Piersanti, president

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of Ber rett-Koehler Pub lishers, is in the thick of this intellectual contretemps. Last f all, his f rm pub o books that took di vergent views on the issue. The f rst, Walking the Talk, w as written by Swiss industrialist Stephan Schmidhein y, along with two colleagues at the World Business Council for Sustainable Development, Chad Holliday of DuPont and Philip Watts of Ro advances a view that major changes are needed in our business w ” says Piersanti, “but that these changes can best be achieved by reforms within our e xisting economic str tions, and systems.” The second book, Alternatives to Economic Globalization: A Better World Is Possible, presents

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“an activist view that existing economic structures are insuff cient and that ne w str uctures, institutions, and systems are needed in the world.” It’ el of cor porate citizenship will continue to be raised ters. But with socialcation initiati ves in place and likely gov re do the there’s oices will become more isolated. Source: Across the Board, y 2003): pp. 16–23. Copyright © 2003 by Across the Board. Reprinted with permission of the publisher, currently published as The Conference Board Review.

Reading 5-3

The Big Interview: Jeff Swartz—“Consumer Trust That’s Good for the Sole”: land’s Jeff Swartz1 Explains Why Brands Must Start Engaging Consumers on Social Issues to Rebuild Trust Lost during the Financial Crisis John Russell2 Good leaders, as a general r ule, don’t do fear . So it is refreshing to f nd business chiefs willing to admit that the f nancial crisis has them spook ed. Rather than spreading panic, it sho ws the y are in touch with the rest of us. Jeff Swartz, president and chief executive of T ho speaks openly about the har m the f nancial crisis could do to brands. Ref ecting on the anti-capitalist G20 summit protests in London, in April, he sa ys: “It scares the daylights out of people within Timberland.” But although Sw artz admits that he is w orried by public anger at the f nancial crisis, he sees the global do pany he has been at or near the top of for almost 20 years. He feels the crisis gives brands with a social consumers.

To do so brands will ha ve to overcome the massive social f allout caused b y the economic crisis, Swartz says. “The social f yed at best and y places.” He argues that the “vibrations in the system” r un much deeper than consumers deciding to shop less. “It’s more profound than that. P s safe? ” The challenge for brands today is to f nd a message that is rele vant for consumers w ho, as Sw artz puts it, are “shak ” Swartz is hoping Timberland can tap into the reserves of social capital it has amassed with consumers over many years to prosper in the current crisis. The company has a strong record of leader ship in responsible business, from ethical sourcing to transparent repor ting on its social and en vironmental perfor mance. It no w repor ts quar terly on non-f nancial matters, for example.

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Timberland is reminding customers of this good reputation with a ne w adv ertising campaign, r unning in Europe, w hich Sw .” Featuring pictures of a Timberland boot, the ads are headlined: “W e build things that last. Ma ybe w ” Sw artz says he “s weated o v hether to approve the ads, w hich mock the f nance sector. But he gave them the go-ahead because they speak to consumers’ demand for brands they can trust.

saying: “We are for prof t. Leave us alone and don’t break our windows.” This is a reference to the w ay demonstrators attack ed bank branches during the G20 protests. Consumers want more than this from brands, he believes.

EngagingC ustomers

Swartz reckons brave brands that step up to engage customers on social and en vironmental issues will be rewarded. He sa ys: “Consumers are star ting to value brands as social institutions. ” Sw CampaignB rand ing early indications of this, but he stresses that he But it will take more than clever advertising to win is yet to see concrete proof of consumers w anting ov tz says he wants to regard brands in the same w ay they do NGOs, T for example. identify with b y campaigning on impor tant social Swartz says he sa ear when and environmental issues. Timberland e acebook, the social “We hav olv ” he says. “For examorking site. The compan y set up a F acebook ple we are for capping carbon emissions, but not group where users could pledge to plant a for trading them. Timberland has never had a place n, Timberland pledged to plant a real in that conversation. We’ve sat on the side.” one. Swartz says Timberland decided to get involved By the end of the year, Timberland had one milin advocacy because its o wn actions did not seem lion pledges for vir y that the to make a big enough effort to address global chal- brand w lenges such as climate change. So Timberland posted what it thought was a tactful Swartz believes governments have a key role to message on Facebook explaining that it was falling pla behind on its side of the deal. The admission got a carbon economy. For example, Timberland’s major terrible response. Swartz explains: “We had people solar project at its Ontario distribution centre in in Zimbabwe calling us cor porate scumbags—and California—one of the 50 lar gest solar projects in that was one of the nice ones.” the world—could not have happened without state After a day of conference calls to work out how subsidies, he says. to appease its critics, Sw artz did a li ve Web chat But brands are understandab ly ner vous about to explain to F acebook users Timberland’s side of getting in volved in pub lic polic y campaigns, the stor y. He sa ys the lesson of this episode w as: Sw says. “You get into this game and you get “Brands must be transparent in a w ay that we have your head shot of f,” he warns. He notes the e xam- never been transparent before.” ple of Microsoft w hen it back ed a ga y rights bill T y does not come easy to in Seattle in 2005, only to withdraw its support for brands, Swartz believes. “We are lear ning how to the measure after coming under pressure from local get nak church leaders. The company ended up pleasing no able fashion, which is not a f rst instinct for a brand one, achieving only a PR disaster for itself. like ours,” he says. No w onder man y brands prefer simpl y not to For e xample, T ears get involved. Swartz says brands in ef fect end up carried “nutrition labels” on products that show

Chapter 5

in e xplicit detail the en vironmental impact of a product and the child-labour record of the factory that made it. Swartz sa ys customers w ant this infor mation, but they also want to be able to compare Timberland with other brands on social and en vironmenTimberland has of fered its label as an example for other brands to use and is w orking Association to get such a label adopted. Progress has been slow to date, says Sw As Sw Timberland take on their greatest

for a responsible clothing business—managing ethiy chain. After 20 y ears of hard w ork, Swartz says Timberland is “almost at the point w here w e ha ve achiev ” This does Timberland supplier f actories—“there are al ways problems”—but that its process for dealing with them is running itself and working well, he says. An ef fective ethical suppl y chain pro gramme involves a partnership between the factory o wners, f actory w orkers and local NGOs, Swartz sa ys. The goal is to ensure w orkers go from being “factors in production” to “partners in production.” rights front, Swartz also has ambitious goals to cut the en Timberland shoes, which he notes “are toxic, by def nition.” His ambition: “We need to mak e products that endure and last fore ver.” Sw artz’s goal for Timberland is to “build something that is built so well and styled so pow y that it will last.” A second g reen goal is to create products that are completely recyclable and biodegradable. Timberland is not there y et, although Swartz hints that they can be easily taken apart and recycled. Timberland is already using rec ycled materials to mak e its shoes and clothes. In March it

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, a compan y that can con vert used car tyres back into useab le . Timberland is launching tw o ne w shoes with soles made from the rec .

RenewedV igour Swartz says that in a recession brands will be more vironmental stewardship. He says that he is pressing design and number of par ts used to mak e a shoe without compromising its perfor mance. This saves money and resources. He e xplains: “ At hear t, responsib le business does not mean being more e xpensive. You are not responsible in order to save cost, but saving cost is a consequence.” The recession, Sw artz sa ys, will not compromise a brand’ forts. He sa ys the f nancial mess is a perfect oppor to make sure the y are gi ving customers w hat they really want. That means focusing on good products that are built to last, and rebuilding consumer conf dence in brands, he says. Swartz is relishing the challenge. “The crisis ” he sa ys, comparing the process of re-evaluating Timberland’s products to going for a workout on a “crisp autumn mor ning.” He sa ys: “I’m v ery conf dent that w e are getting in shape like we haven’t been in shape for 10 years.”

EndN otes 1. About Jef f Sw artz: Jef f Sw artz is g randson of Timberland founder Nathan Swartz and son of current Timberland chair man, Sidne y Sw artz. The youngest Swartz joined Timberland in 1986 as head of inter national sales, aged 26. He became chief operating off cer in 1991. He mov rent role of president and chief executive off cer in 1998. 2. =6452

Chapter

6 EthicalD ecision Making: Employer Responsibilities and Employee Rights We can invest all the money on Wall Street in new technologies, but we can’t realize the benef ts of improved productivity until companies rediscover the value of human loyalty. r

k

ector, Bain & Co.

There are now more slaves on the planet than at any time in human history. T abolition will elude us until we admit the massive scope of the problem, attack it in all its forms, and empower slaves to help free themselves. Skinner ,“A World Enslaved”1

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Abercrombie & Fitch: Image Consciousness?

ChapterO bjectives After reading this chapter, you will be able to: 1. Discuss the two distinct perspectives on the ethics of workplace relationships. 2. Explain the concept of due process in the workplace. 3. Defi 4.

W) and its ethical rationale. W environment.

5. 6. Discuss whether it is possible to downsize in an ethical manner. 7. Explain the difference between intrinsic and instrumental value in terms of health and safety. 8. Describe the “acceptable risk” approach to health and safety in the workplace. 9. Describe the nature of an employer’s responsibility with regard to employee responsibility. 10. Explain the basic arguments for and against regulation of the global labor environment. 11. Describe the argument for a market-based resolution to workplace discrimination. 12. Define diversity as it applies to the workplace. 13. Explain the benefits and challenges of diversity for the workplace. 14. Define action may be legally permissible. 15.

rmative rmative action programs.

Introduction Ethics in the emplo yment conte xt is perhaps the most uni versal topic in business ethics since nearl y e very person will ha ve the e xperience of being employed. While le gislators and the cour ts ha ve addressed man y aspects of the working environment, countless ethical issues remain that these regulatory 251

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and judicial bodies have left unresolved. The law provides guidance for thinking about ethical issues in the workplace, but such issues go well beyond legal considerations. This chapter explores those areas of ethical decision making in the w orkplace where the la w remains relati vely f uid and w here ans wers are not easil y found by simply calling the compan er. Issues may also arise w here the law does seem clear but, for one reason or another , it is insuff cient to protect the inter ests of all stakeholders. We will examine various ethical challenges that f ace the employee, whether that emplo yee is a w orker on an assemb ly line, the manager of a restaurant, or the CEO of a lar ge cor poration, and the nature of emplo yer responsibilities. vidual perspectives may change, similar conf icts and stakeholders present themselv As y ou e xamine each issue raised in this chapter , consider ho w y ou might employ the ethical decision-making process w e have discussed to reach the best possible conclusion for the stakeholders involved. Severe time constraints, limited infor mation, and pressure usuall y accompan y these challenging business decisions. Though using the ethical decision-making process ma y seem cumbersome at the outset, once the process becomes embedded in the professional landfectiveness and eff ciency in resolving these issues will become apparent. In fact, utilizing an ethical decision-making process will avoid later hurdles, thus removing barriers to progress and momentum. Let us consider the issues that e orkplace en veness of the ethical decision-making process.

Ethical Issues in the Workplace: The Current Environment We all ha ve decisions to mak e about ho w we will treat others in the w orkplace and how w ment is about our relationships with others and with our or ganizations. Research demonstrates that companies that place emplo yees at the core of their strate gies produce higher long-ter y peers—more than double!2 The same holds tr ue for interpersonal relationships. truths, less than half of U.S. workers feel a strong personal attachment to their organization or believe that the organization deserves their loyalty. Only one in four work uly loyal to their place of w ork. When asked about the g reatest inf uence on their commitment, w orkers responded that the most impor tant factor is f airness at work, followed by care and concer n for employees—all key vironment. These inf uences play out in practical ways for businesses since research sho orkers encounter ethical lapses in the w orkplace, with over one-third of these lapses happening at least once per week.3 The challenge is compounded by the fact that many employees opt not to repor t these lapses based on a lack of conf dence in how management would handle the information.4

Chapter 6

Reality Check

Ethical Decision Making: Employer Responsibilities and Employee Rights

Protecting Employee Rights through Unions

In 1960, about one-third of the American workforce was represented by unions. Today, that fi about 11 percent. Collective bargaining, established to protect the interests of workers, has led to some disappointments. Not surprisingly, federal and state regulations governing work practices have

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exploded as union membership has declined. The variety of protections is prodigious: antidiscrimination laws, wage and hour laws, worker safety laws, unemployment compensation, workers’ compensation, and social security, to name a few.

These obser vations call attention to the f act that there are tw o very distinct, and sometimes competing, perspecti ves on the ethics of w orkplace relationships. On one hand , employers might decide to treat emplo yees well as a means to produce g reater workplace har mony and producti vity. (This consequentialist approach could be reminiscent of the utilitarian ethics discussed in chapter 3 if a question about moral motivation and instrumentalist, self-interested reasons for doing good that is similar to our discussion of cor porate social responsibility in chapter 5.) While no one is claiming that employees have some uni versal right to a “happy” workplace,5 a comprehensi ve review of research b y Jeffrey Pfeffer ve f r which involve treating employ ays.6 As an e xample of these concer ns, consider the role of emotion in the w orkplace. Though it is a relatively new area of research, studies suggest that manage a signif ers, and this impact can greatl vity and loyalty, as w ness, care, Ashkanasy and Catherine Daus suggest that managers should pay attention to the emotional impact of v arious jobs within their w orkplace and model a positive emotional environment.7 Rew ers, as can the composition of teams or the power relationships within a workplace. employees see that a f rm values their emotions, as well as exhibits values such as honesty, respect, and trust, they feel less pressure, more valued as employees, and more satisf ed with their or ganizations. Since repor ting to external stakeholders has become such a k ey issue in recent scandals, one might also w ed employ On the other hand , of course, emplo yers might treat emplo yees w ell out of a Kantian sense of duty and rights, re gardless of the either utilitarian or selfinterested producti vity consequences. This deontolo gical approach emphasizes ees well simply because “it is the right thing to do.” Defenders of employ gue that rights should y utilitarian

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and f nancial calculations. the law, professional codes of conduct, cor porate codes of conduct, or such moral principles as fair s leadership. (See the Reality Check, “Protecting Employee Rights through Unions.”)

Defining the Parameters of the Employment Relationship The following section will explore the legal and ethical boundaries that will help us def ne the employment relationship based on some of the principles discussed above. “Employment,” per se, y nature vidual agrees to work for another indi vidual. This arrangement raises issues of po wer, obligation, responsibility, fair treatment, and e xpectations. In many circumstances, the livelihoods of both par ties rely on each other’s contributions to the relationship. Though legal requirements might e to protect some interests, they can only go so far and cover so many bases. We will begin by looking to the ethics underl ying the concepts of due process and fairness that help determine what is or is not acceptable beha We will discov employers might be able to remain true to these principles, even when specif cally challenged by vexing circumstances such as a reduction in force. The relationship is fur ther def ned b y the application of these principles to w orking conditions , both in domestic operations and abroad. Note that the issues in the follo wing sections are predominantl an ethical perspecti ve by their justif cation. In other w ords, people of goodwill would be likely to agree that an employee has a right to a safe and health y workplace. Disagreements do remain in discussions sur rounding the implementation, interpretation, or extent of that right. In contrast, the second section of this chapter e xplores se veral issues that are not percei v gal or ethical point of vie w. Reasonab le minds ma y dif fer not onl y as to w hether the means to achie ve the ends are justif ed but w hether the ends themselv es are just, fair, or ethical. An example of this latter issue would be aff rmative action, a thorny matter for courts, managers, and philosophers alike.

Due Process and Just Cause 2 OBJECTIVE

Employment security—getting and k eeping a job—is perhaps the most signif cant aspect of w yee’s ethical perspective. Fundamental questions of justice arise because employees are subject to considerable harms from a ve much pow . But should employers’ rights and ability to hire, f ees therefore ent injustices? y other means by which to protect against unethical behavior or unjust results? Philosophically, the right of due process is the right to be protected against the arbitrary use of authority . In le gal contexts, due process refers to the proceer citizens.

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255

Rioting to Support Due Process in France

As discussed in this chapter, a number of states maintain employment at will for employees. However, this is not the case in some other countries. In France, for instance, French labor laws protect all employees from arbitrary dismissal; employees ed as long as they maintain a good work m is economically viable. During the spring of 2006, protests and riots broke out across France in reaction to a proposed change in these laws. During one weekend alone, hundreds of thousands of protesters clashed with police in cities throughout France. Ironically, the proposed change in law was itself a response to riots the previous year

when unemployed young people, many of them immigrants living in poor neighborhoods, protested the lack of jobs. The French government sought to loosen job protection as a means of encouraging business to hire more young workers. The change would have exempted workers under the age of 25 from the legal job protections during their fi years of employment. What was intended only as a minor change in a law that, from the U.S. perspective, was already quite radical in protecting worker rights, resulted in massive riots. As a result of these protests, the French government withdrew its proposal.

Few dispute that the state, through its police and cour ish citizens. hich we all can live, w ercised only in cer tain w ays and under cer these conditions. Similarly, due process in the w wledges an employer’s authority over employees. Employers can tell employees what to do, and when, and how to do it. They can exercise such control because they retain the ability to discipline or f re an emplo yee w ho does not compl . Because of the immense value that w s job is a pow vation to comply. However, basic f due process—demands that this power be used justly. It is the def nition of basic f view, for instance, the conf icting versions of fairness perceptions in France in 2006 in the Reality Check, “Rioting to Support Due Process in France.” y, there is evidence to suggest that this ackno employers over employees, or simpl y managers o ver subordinates, is not al ways ex er w w that an o-thirds of employees have suffered some form of “bullying” in the workplace, def ned as “the repeated, yee . . . b y one or more employees.”8 The mistreatment need not be ph ysicall might simply involve a boss who is constantly yelling dictates at workers, or a coworker who spreads rumors about another in order to sabotage his position. These behaviors lead not onl y to emotional abuse but a complete loss of per sonal dignity, intimidation, and fear . Moreo ver, others in the w orkplace suf fer

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vicariously with these same sensations; e yer has signif orkers’ compensation claims based on stress and other emotional stimuli, and there are increased costs related to potential litigation arising from claims of abusi ve w There is also the indirect impact on employee morale, and certainly the negative effects that occur when one would prefer not to be at the workplace: turnover, absenteeism, poor customer relationships, and acts of sabotage. The issue of w orkplace bull ying is one that w e hear about more and more, especially in economies based on strong ser vice sectors. There hav less newspaper ar ticles, business jour nals, academic jour nals, conferences, and even television news programs devoted to the subject in recent y ears.9 It is more predominant in the ser vice sector because that w ork relies signif cantly on interpersonal relationships and interaction. “F requent, ongoing personal interaction between w orkers often becomes a basic element of a job, especiall y in w ork ar een super visors and subordinates. The more people interact, the more likely it is that personalities will clash,” sa xpert, David Yamada.10 Add to those interactions the personal threats that people sense from pressures during a do n in the economy, and one can only imagine the boiling points that might ensure. Y slump that found that the en xplosions of brutality both from innate bullies w ve on their mistreatment of others and from o verburdened bosses who might never have behaved that wa ”11 Ironically, w hile basic f airness ma y demand that emplo yer po wer be used justly, the la w has not al ways clearl y suppor ted this mandate of justice. Much employment law within the United States instead e volved in a conte xt of a le gal doctrine known as employment at will (EAW). Employment at will holds that, in the absence of a par gal obligation that specif es the length or conditions of emplo yment, all emplo yees are emplo yed “at will. ” This means that, unless an ag reement specif yers are free to f re an emplo yee at an y time and for an y reason. In the w ords of an earl y court decision, “all may dismiss their employee at will, be the y many or few, for good cause, for no cause, or e ven for cause morall y wrong.”12 In the same manner , an EAW worker may opt to leave a job at an y time for any reason, without offering an theoretically The ethical rationale for EAW, both historically and among contemporary defenders, has both utilitarian and deontolo gical elements. EAW was thought to be an impor tant management tool. Total discretion over employment gives managers the ability to mak e eff cient decisions that should contribute to the g reater overall good. It w as thought that the manager w ould be in the best position to w what was best for the f rm and that the la w should not interfere with those decisions. Another basis for EA W was the rights of pri vate proper ty owners to control their proper y controlling who works for them. Both le gal and ethical anal yses of these claims, ho wever, demonstrate that there are good reasons to limit EA W. Even if EAW proved to be an ef fective management tool (though the reading b y Tara Radin and P atricia Werhane,

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TABLE 6.1 Exceptions to the Doctrine of Employment at Will

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“Employment-at-Will, Employ Employment,” tends to erode this view), justice demands that such tools not be used to harm other people. Further, even if private rights grant managers over employees, the right of pri vate property itself is limited b duties. Also, though the freedom to terminate the relationship is theoretically mutual, the employer is often responsible for the employee’s liv hile the ely to be tr ue; the differential creates an unbalanced power relaeen the two parties. Considerations such as these ha ve led man y courts and le gislatures to create exceptions to the EAW rule (see Table 6.1 ). Civil rights laws, for e xample, prohibit f ring someone on the basis of membership in cer tain prohibited classes, such as race, se x, disability round. Labor laws prevent employers from f ring someone for union activities. When the employer is the gover limitations on gover authority are extended into the workplace to protect employees. A crucial element to recognize with these exceptions, however, is the fact that EAW has priority unless the emplo yee can prove that her or his case f alls under one of the exceptions. That is, EAW is the default position on which courts will rely until and unless an e xception can be demonstrated. The burden of proof lies with the dismissed employee to sho y or illegally f red. Due process and just cause, w t of internal corporate polic gislation, would rev ers to sho yee. Due process issues arise in other employment contexts as well. Employees are constantly super vised and e valuated in the w orkplace, and such benef ts as salary, work conditions, and promotions can also be used to moti vate or sanction employees. Thus, being treated f airly in the w orkplace also in volves fairness in such things as promotions, salar y, benef ts, and so for th. Because such decisions

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Reality Check

Employing “Employees”

upon the determination of whether someone is nition of “employee” becomes critical. The employment relationship brings with it a plethora of benefits and responsibilities, which means that either party might be in a position to argue in its favor, or against. However is the worker who is arguing for employee status. to determine a worker’s status as an employee or, to the contrary, an “independent ,” e.g. one methods, and who is not under the other’s control include the common-law test of agency, which focuses (IRS) 20-factor analysis, and the economic realities

Under the common-law agency test, a persuasive indicator of independent contractor status is the ability to control the manner in which the work is performed. Under the common-law agency approach, the employer need not actually control the work, but must merely have the right to control the work for a worker to be classifi ed an employee. In the case of Estrada v. the California Court of Appeals evaluated whether Federal Express ground package drivers were employees entitled to reimbursement for work-related expenses. The court applied the common law test and found that they were, in fact, employees. You might be able to begin to understand the magnitude of a decision such as this one when you learn that the fallout was an order by the Internal Revenue Service that Federal Express pay $319 million in back taxes based on

the misclassifi Estrada case only applied to workers over the course of one single year. The second test is the IRS 20-factor analysis, a list of 20 factors to which the IRS looks to determine whether someone is an employee or an independent contractor. The IRS compiled this list from the results of judgments of the courts relating to this issue. Finally, under the economic realities test, courts consider whether the worker is economically dependent on the business or, as a matter of economic fact, is in business for him- or herself. Some employers hire individuals as employees rather than independent contractors as a matter of principle. Phyllis Apelbaum, CEO of Arrow Messenger Service in Chicago, explains that her guiding philosophy in terms of her workers is to “hire hard working, friendly messengers; compensate them fairly including benefits and treat them as your greatest asset!” Her employees make a strong contribution to the culture and values of the firm. When Apelbaum considered using independent contractors instead of employees about 15 years ago, she explained, “I wouldn’t be able to sleep at night and thought, it’ll never work. Well, it has worked for 15 years for other companies. Because of that ethical decision, we have not grown to be the biggest in the city. We’ve grown nicely, no question about it. But we battle everyday that company that has independent contractors. Because, if you have employees, you’ve got about a 28 percent bottom number there. So, if , and he charges you a dollar, I’m going to have to charge you $1.28. I’m always fighting that. The ethical decision to go in that direction meant that we had to work harder at our vision to provide better service. Otherwise, why There would be no reason for it.”13

are typicall y made on the basis of perfor mance appraisals, due process rights should also extend to this aspect of the workplace. Table 6.2 shows one model for making legally sound performance appraisals. The ethical questions that remain in this EA W en vironment, therefore, are whether this atmosphere is one that is most f air and just for all stak eholders,

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whether it leads to the most ef fective emplo yment outcomes, and w hether it satisfactorily guards the rights and interests of both emplo yers and emplo yees. Relevant inquiries in reaching a conclusion on these matters will include those that comprise our decision-making framework. Consider the key facts relevant to issues of due process and f airness. volved in y our decision and implementation? Who are the stak eholders involved in y our decision? What alternatives are available to you? Might there be a w ay to safe guard the rights of the stak eholders involved while also protecting the interests of the decision makers? If y ou are, for instance, stri ving to ser ve the autonom y of the employer, could you perhaps ser ve the due process interests of the emplo yee by offering additional notice of termination or more information about alternatives? Recall that due process is the right to be protected against the arbitr use of authority. It is y our role as decision mak er to ensure protection against those arbitrary decisions. Employers should be fair in their implementation of judgments and just in their implementation of process in order to ser ve the abo ve principles. Once y ou have conducted a detailed in ventory of y our personal fundamental values surrounding this vital question in the employment context, compare your conclusions with those reached b y Radin and Werhane in the reading, “Employment-at-Will, Employ ” Is their proposal for a new model of employment, based on employees as professionals, realistic and possible?

Downsizing ers is the challenge not onl y of a single ter mination but letting man y employees go when a f rm makes a decision to “downsize.” Terminating workers—whether one or one hundred—is not necessarily an unethical decision. However, the decives may be available to an organization in f nancial diff culty. In addition, since a host of ne gative consequences

TABLE 6.2 Procedural Recommendations for Legally and Ethically Sound Performance Appraisals Source: S.B. Malos, “Current Le Appraisal,” in J.W. Smither (ed.), Perf State-of-the-Art Methods for Performance Management Francisco: Jossey-Bass, 1998), permission of the author.

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may result, these alter natives ma y pose a more ef fective option from the perspective of all stakeholders involved. For example, Leadership IQ, a leadership e ers who remained in o ver 300 companies that engaged in la y both producti offs.14 Plus, almost ving work ere less likely to recommend their f rm as a good place to work. Large numbers also responded that customer service declined and more errors w ganizations. Accordingly, the question of w hether to resor t to widespread ter minations based on f nancial exigenc vailable does not always lead to a clear answer ys in which an organization can act more ethically in the process of downsizing? How or def ne limitations in a downsizing environment? In a speech to the Ethics Off cers Association, John Challenger suggested that we should consider the following factors in ex ing, notice, impact (on those w ho will go and those w ho will sta y), and stak eholder perceptions.15 We can mak e better choices, Challenger ar gues. In f act, our decision-making model of fers signif cant guidance in a situation such as a downsizing. First, the decision re garding do y a representati ve group so that all stak eholder interests can be considered and to ear n the tr ust of those who will be impacted. The facts should be collected and issues should be determined. Since emplo yees should be k ept aware of business conditions, the need for a do wnsizing effort should not come as a g reat sur prise. However, the question of notice is debatable. It can be argued that a f rm should give notice of an intent to downsize as soon as the need is deter ho will be impacted kno w who will be let go as soon as that list is de vised. The Leadership IQ sur vey discussed above found that producti ere more than two-thirds less likel when managers e , approachability, and candor .16 On the other umors that are sure to develop between the announcement of do y outweigh the benef ts gained in early notif cation. In addition, allowing a worker to remain in a position for a period of time once she or he has been notif ed of impending termination might not be the best option. Workers may interpret early notice as an effort to get the most out of them before depar fort to allow them time to come to g These costs and benef ts must be w eighed in an and certainly considered in managing and interacting with emplo yees following a lay y visib le to their staf f, approachab le even when they don’t have an new to say, and candid about the state of things in order to build their trust and credibility. If your company has to conduct a layoff, it is imperative that you train your managers how to both manage that process and deal with the highl y debilitating after ou will w aste an y

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potential cost savings from the la yoff on lost producti vity, quality prob lems and service breakdowns,” says Mark Murphy, Chairman of Leadership IQ.17 Once the stakeholders are identif it will be vital to enumerate any and all possib each option on each group of stakeholders. (See the Reality Check, “Is It Really ‘Inevitable?’ ” for a discussion of options.) rm decides to do with any other termination, it is critical to lessen the impact as much as possible and to allo y there is some other reason for the decision, having a security guard follow terminated employ v ve all, during a time w hen relationships might be strained , it is critical to be honest From a legal perspective, the decision about whom to include in a downsizing effort must be carefully planned. If the f rm’s decision is based on some criterion that seems to be neutral on its face, such as seniority, but the plan results in a different impact on one group than another, the decision may be suspect. For example, assume the f rm does mak e ter mination decisions based on longe vity with the organization. Also assume that those workers who are most senior are almost entirely male since w omen only entered this industr y in recent y ears. If the f rm mov ard with this process, the majority of those f red will be w omen and the majority of those remaining will be men. In this case, the t may violate Title VII’s prohibition against discrimination based on gender because the ter mination policy has a more signif cant—and negative—impact on women. To avoid this result, f rms should re view both the f airness of their decisionmaking process and the consequence of that process on those ter minated and the resulting composition of the w orkforce. One of the most ef fective philosophical theories to emplo y in downsizing decisions is John Ra wls’s theory of justice presented in chapter 3. Under his formulation, you would consider what decision you would make—whether to downsize or how to downsize—if y w what role you would be playing following the decision. In other words, you might be the cor porate executive with the secure position; y ou might be a ter minated employee with y ears of seniority w ho was close to retirement; or y ou might be a worker who survives the ter mination slips. If y w which role you would be playing, Ra y to reach a decision that is relatively fairest to all impacted. Consider what f in one way or another based on this formulation. P off is the f act that there are people w ho will be impacted b y the decisions in volv countless stakeholders. In the reading at the end of chapter 4 b y Ralph Larsen, past Chair man and CEO xplains the angst he e xperienced when he made a decision to close appro ximately 50 small plants around the world. I was responsib yees in those plants, but I was also responsible to the patients who needed our products to keep them affordable. And I was responsible to all of our other employees around the world to keep the company healthy and

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Is It Really “Inevitable?”

As inevitable as downsizing may seem during downturns in the economy, some fi survived decade after decade without any layoffs. How do they do it? While many fi quite creative during the economic crisis that began during the second half of 2008, other fi have maintained these innovations for years. For instance, Hypertherm Inc., a manufacturer of metal-cutting equipment, has gone for its entire 40-year history without ever laying off a permanent employee. When the 2008 economic crisis hit, it opted instead to eliminate overtime, cut temporary staff, and delay a facility expansion, citing an ongoing “social contract” with its employees as the root of its strategy.18 Another company, Nucor, has not laid off a worker for a period of 20 years. However, it maintains a three-day workweek with an average wage of $8 per hour. When large contracts come in, the company expands to a seven-day workweek and $22 per hour

wage. Other firms have entered into agreements with their workers under which the firm promises not to terminate workers for reasons of the economy as long as the workers agree to lower wages or decreased hours during tough periods. For instance, in December 1998, Volkswagen in Brazil was suffering under the collapse of that country’s economy and the resulting 25 percent downturn in the Brazilian car market. It avoided terminations at its 20,000-worker plant by moving to a four-day work week. Other options to stave off terminations can include the obvious decision to freeze hiring, to offer attractive voluntary retirement packages that provide an overall fi t to the fi reduce hours for all rather than fewer positions, to lower salaries, or to reduce or delay giving raises. Finally, some employers have chosen to cut benefits for which they would normally pay, such as bonuses, employer contributions to retirement plans, training, or education allocations.

growing. The harsh reality was that a great many more would be hurt do road if I failed to act and we became less and less competitive. In addition to our employees, I was also responsible to the tens of thousands of stockholders (individuals, retired folks, pension plans, and mutual funds) who owned our stock. The facts were clear w what had to be done, and we did it as thoughtfully and sensitively as possible. But the decision w was personal.19

Health and Safety The pre vious sections addressed ethics in the creation or ter mination of the employment relationship. The follo wing discussion e xplores one par ticular responsibility within that relationship—the emplo yer’s role in protecting the employees’ health and safety while at work. Within the United States and throughout many other countries with de veloped economies, there is a wide consensus that employees hav orkplace. In some other regions, employees lack ev such as in working en are often ter med “sweatshops” (discussed later in this chapter). Ev en within the United States, this issue becomes quite ye er’s responsibility for w cant disagreement concerning the best policies to protect worker health and safety.

Decision Point

Measuring Our Worth

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Like w for attaining other v aluable ends and as ends in themselv es. ver else w e desire out of life, being health y and safe mak es it much more lik ely that we will be capable of attaining our ends. In this sense, health and safety have a v alue deriv act that we use them to attain other things of v alue. Insurance therefore seeks to compensate w orkers for injuries they incur by paying the employees for the wages they lost as a result of being unable to work. Y They have intrinsic value in addition to their instr umental value. To understand this distinction, consider how one might respond to the question of how much her or his life is worth. The life of one who dies in a workplace accident has instrumental value that can be measured , in par t, by the lost w ages that w ould have been ear ned had that person li ved. But these lost w ages do not measure the intrinsic value of the life, something that f nancial compensation simpl y cannot replace. The Decision Point, “Measuring Our Worth,” explores the measurement of intrinsic value. What is the v alue of health and w hat does it mean to be health y? workplace safe? y” is tak en to mean a state of f awless physical and psychological well-being, ar ly no one is perfectly healthy. If “safe” means completel tainly no w orkplace is perfectl y safe. If health and safety are inter preted as ideals that are impossib le to realize, then it w le to claim that emplo yees hav y and safe workplace.

Health and Safety as Acceptable Risk 8 OBJECTIVE

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Employers cannot be responsible for providing an ideally safe and healthy workplace. Instead, discussions in ethics about emplo yee health and safety will tend to focus on the relative risks workers face and the level of acceptable workplace risk. In this discussion, “risks” can be def ned as the probability of har m, and we determine “relative risks” by comparing the probabilities of har m involved in various activities. Therefore, scientists who compile and measure data can deter mine both risks and relati ve risks (see Figure 6.1 ). It is an easy step from these calculations to certain conclusions about acceptable risks. If it can be determined

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m involved in a specif c work activity is equal to or less than the probability of har m of some more common acti , then w e can conclude that this activity faces an “acceptable level of risk.” From this perspective, a wor e if the risks are acceptable. Imagine if w e generalize this conclusion and deter mine all w orkplace health and safety standards in this manner. Such an approach would place the responsibility for w y on management. A business would hire safety engineers and other experts to determine the risks within their w orkplace. These experts would know the risk le vels that are accepted throughout the society. These might in volve the risks in volv ving a car , eating high-f at gging, and so for th. Comparing these to the risks f aced in the workplace, safety exper tive risks of work. If the workplace w y than other common activities, ve fulf a healthy and safe workplace. However, such an approach to w orkplace health and safety issues has se veral problems. First, this approach treats emplo y y by ignoring their input as stak eholders. Such pater nalistic decision making ef fectively treats employees lik in the decision-making process. Second, in making this decision, we assume that f against competing v yee might have to a safe and healthy working environment. valency between w hen there are actuall y signif cant differences between them. Unlike many daily risks, the risks faced in the workplace may not be freely chosen, nor are the risks faced in the workplace within the conof workers. Fourth, it disregards the utilitarian concern for the consequences of an unsafe w orking environment on the social f abric, the resulting product or ser , as well as other lar y workplace.

FIGURE 6.1 Calculating Acceptable Lev

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TABLE 6.3 Challenges to the Acceptab Approach to Health and Safety

Perhaps most important, unlike some dail y undertakes, the risks faced at work could be controlled b y others, particularly by others who might stand to benef t by not reducing the risks. F or instance, making the w orkers. Relative to the risks one might face by smoking, for example, w seem as . But, in the former case, the smoker chooses to take the risk and could take steps to minimize or eliminate them b y her- or himself. In the latter case, the mill w orker cannot a v ants to k eep a job. Often someone else can minimize or eliminate these risks; but this other party also has a f nancial incentive not to do so. In one case, smoking, the decision maker freely chooses to take the risk, wing that she or he can control it. In the other case, the w orker’ The challenges involved in the acceptable risk approach to workplace health and safety are summarized in Table 6.3. Surely we need another approach.

Health and Safety as Market Controlled Perhaps w e can lea v et. Defenders of the free mark et and the classical model of cor porate social responsibility w ould favor individual bar een employers and employees as the approach to w . On this account, employees w the risks they are willing to face by bargaining with employers. Employees would balance their preferences for risk against their demand for wages and decide how much risk they are willing to take for various wages. Those who demand higher safety standards and healthier conditions presumab ly w ould ha v lower wages; those willing to take higher risks presumably would demand higher wages. In a competitive and free labor market, such individual bargaining would result in the optimal distribution of safety and income. Of course, the mark et approach can also support compensation to injured workers when it can be shown that employers were responsible for causing the har ms. So an emplo yer who fails to install f re-f ghting equipment in the w orkplace can be held liab le for bur ns an employee suffers during a workplace f re. an incentive for employers to maintain a reasonab ly safe and healthy workplace. The Decision P hether it is therefore ethical for a compan y to outsource its most dangerous jobs to countries where the labor force is willing to accept low wages for unsafe conditions.

Decision Point

9 OBJECTIVE

Should Dangerous Jobs Be Exported?

This free market approach has a number of serious problems. First, labor markets are not perfectl y competitive and free. Emplo yees do not ha ve the kinds of free choices that the free mark et theor y w ould require in order to attain optimal satisf actions—though enlightened self-interest w ould be a v aluable theor y to introduce and apply in this en yees always hav ailab le. For e jobs are often also the lo west-paying jobs, and people with the fe west employment choices hold them. Indi viduals are forced to accept the jobs because the y have no choice but to accept; the y are not actuall y “balancing their preferences for risk against their demand for w ages” because they do not ha ve options. Secy er, possess the cient markets require. If emplo y w the risks in volved in a job, the y will not be in a position to ef fectively protect their rights or ensure the most ethical consequences. This is a particular concern when we recognize that many workvious. An employee may understand the dangers of heavy machinery or a b nace; but few employees can know the toxicity or exposure levels of w Such market failures can have deadly consequences when they involve workplace health and safety issues. Of course, market defenders argue that, over time: 267

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markets will compensate for such f ailures, emplo yers will f nd it diff cult to orkers to dangerous jobs, and emplo yees will lear n about the risks of every workplace. But this raises w hat we have previously described as the “f rst generation” problem. The means b y which the mark et gathers infor mation is b y observing the har ms done to the f rst generation e xposed to imperfect mark et transactions. Thus, workers learn that e xposure to lead is dangerous w hen some female workers exposed to lead suffer miscarriages or when others hav who are bor n with serious bir th defects. We lear n that w orkplace e xposure to hen workers subsequentl disease. In effect, markets sacrif ce the f rst generation in order to gain infor mation about safety and health risks. These questions of pub lic polic y, questions fect human lives, would never even be asked by an individual facing the choice of working at a risky job. To the degree that these are important questions that ought to be ask vidual bargaining will fail as an ethical public policy approach to w orker health and safety . Table 6.4 summarizes the challenges inherent in the free market approach to health and safety.

Health and Safety—Government-Regulated Ethics In response to such concer ns, go vernment re gulation of w orkplace health and safety appears more appropriate from an ethical perspecti ve. Mandator y government standards address most of the prob lems raised against mark et strate gies. Standards can be set according to the best a vailable scientif wledge and thus overcome market f cient information. Standards prevent employees from having to face the fundamentally coercive choice between job . Standards also address the f rst generation problem by focusing on prevention rather than compensation after the f act. Finally tall polic ets. lished the Occupational Safety and Health Administration (OSHA) and charged it with establishing workplace health and safety standards. Since that time, the major debates concer ning workplace health ve focused on how such public standards ought to be set. The dominant question has concerned the appropriateness of using cost- benef t analysis to set health and safety standards. When OSHA w as f rst estab ere aimed at achie ving the safest feasible standards. of een health and economics; but it is prejudiced in f avor of health and safety b y placing the burden of proof on industr y to sho w that high standards are not economicall y feasible. Health and safety standards are not required , no TABLE 6.4 Challenges with the Free Market Approach to Health and Safety

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Do Health and Safety Programs Cost Too Much?

Health Administration suggests just the opposite: Safety and health programs add value and reduce costs. Even average companies can reduce injuries 20 to 40 percent by establishing safety and health programs. Several studies have estimated that safety and health programs save $4 to $6 for every et, only about 30 percent of U.S. work sites have established these programs. These savings result from a decrease in employee injuries

decreased medical costs, reduced absenteeism, lower turnover, higher productivity, and increased morale. Source: Charles N. Jeffress, former assistant secretary for occupational safety and health, U.S. Department of Labor, “Future Directions for OSHA,” speech delivered to National Safety Congress, New Orleans, October 19, 1999 (http:// www.osha.gov/pls/oshaweb/owadisp.show_document?p table=SPEECHES&p_id=244).

matter the cost; but an industr y is required to meet the highest standards attainable within technological and economic reason. Some charge that this approach does not go far enough and y f ces employ . From that perspectiv ees should be closed. But the more inf y and gov ve ar cost-benef t analysis in establishing such standards. From this perspective, even if a y and economically feasible, it w le and unfair if the benef eigh the costs. gue that OSHA should aim to achieve the optimal, rather than highest feasible, lev . Using cost-benef t analysis to set standards, in ef ns us to the goals of the mark vidual bargaining approach. Like that market approach, this use of cost-benef t analysis faces serious ethical challenges. We should note, however, that rejecting cost-benef t analysis in setting standards is not the same as rejecting cost-ef fectiv gies in implementing those standards. A commitment to cost-ef fectiveness would require that, once the standards are set, w e adopt the least e xpensive and most eff cient means available for achieving those standards. Cost-benef t analysis, in contrast, uses economic criteria in setting the standards in the f rst place. It is cost-benef t, not cost-effectiveness, analysis that is ethically problematic. of cost-benef t analysis in setting w orkplace health and safety stanork , another individual preference, to be traded of f against competing commodities. It treats health and safety merely as an instrumental value and denies its intrinsic value. Cost-benef t analysis requires that an economic v alue be placed on one’ s life and bodily integrity. Typically, this would follow the model used by the insurance industr y (w here it is used in wrongful death settlements, for e xample) in which one’s life is v alued in ter ms of one’s ear ning potential. P erhaps the most offensive aspect of this approach is the f act that since, in feasibility anal ysis,

Decision Point

How Much is Enough?

try, a shift to cost-benef t anal ysis entails trading of prof t margin. (See the Reality Check, “Do Health and Safety Programs Cost Too Much?”, as well as the Decision P oint, “How Much is Enough?” for an application of cost-benef t analysis.) The policies that ha ve emerged by consensus within the United States seem to be most defensib le. Employees have a le gitimate ethical claim on mandator y health and safety standards within the w orkplace. To say that emplo yees have a right to w y should not be e xpected to make trade-offs betw ages. Further, recognizing that most mandator y standards reduce rather than eliminate risks, employees should also hav orkplace risks. If the risks have been reduced to the lowest feasible level and employees are fully aware of them, then a society that respects its citizens as autonomous decision mak .

Global Applications: The Global Workforce and Global Challenges As you consider the issues of due process, f airness, and health and safety raised thus far in the chapter , note that the la w discussed here applies to w orkers who are emplo yed in the United States. Workers outside of the United States ma y 270

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be subject to some U .S. laws if the y work for an American-based organization, orkers in other countries are often protected by ev countries in the European Union, for example, have strong laws protecting workers’ rights to due process and par ticipation. But in man y other cases, especiall y in cer tain de veloping countries, w orkers f nd themselv es subject to conditions that U.S.-based workers would f nd appalling. While those of us who work in the

10 OBJECTIVE

and health, workers in certain Southeast Asian countries, for instance, are simply arguing for at-will bathroom breaks. The response to this stark contrast is not a simple one. Though few people, if any, would ar e, economists and others do not ag ree about a solution. Some contend that the e xploitation of cheap labor allo ws developing countries to e xpand export activities and to improve their economies. This economic growth brings more jobs, which will cause the labor market to tighten, w n will force companies to improve conditions in order to attract w orkers (see Figure 6.2 ). In f act, several commentators ar gue that encouraging g reater global production will create additional oppor xpansion domesticall y, providing a positi ve impact on more stakeholders.21 Though it is an unpopular sentiment with the general consuming public, many economists argue that the maintenance of sweatshops is therefore supported by economic theory ven the term sweatshop remains open to debate. (See the f w Zwolinski, “Sweatshops, Choice, and Exploitation.”) The reading b y Zwolinski, “Sweatshops, Choice, and Exploitation, ” explores v y of sweatshops and responds to the question of w hether a worker under these condioluntarily” at all. He concludes that a work y is able to give consent; therefore, there is a strong moral reason for third parties such as consumers and host and home country governments to refrain from acting in ways which are likely to deprive sweatshop workers of their jobs, and both the policies traditionally promoted by anti-sweatshop activists (e.g. increasing the legal regulation of sweatshops, legally prohibiting the sale of sweatshop-produced goods, or subjecting such goods to economic boycott), and some more recent proposals by anti-sweatshop academics (i.e. v gulation via industry-wide standards or universal moral rounds.22

On the other hand, opponents to this perspecti ve argue that allowing this process to tak e its course will not necessaril y lead to the anticipated result, just as voluntarily improving legal compliance, wages, and working conditions will not inevitably lead to the ne gativ et advocates threaten. The reading b y T. A. F eatshop Inspector ,” of fers a perspective somewhat in opposition to Zwolinski’s. Consider the sign mentioned early in the article, observed in large characters on a factory’s wall, “If you don’t

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FIGURE 6.2 The Case Sweatshops D. tman, “Worker Rights and Low W w to Avoid Sweatshops,” Human Rights Quarterly, vol. 28, no. 3 (August 2006), pp. 676–700. y permission of Human Rights Quarterly its publisher University Press.

work hard today w.” Frank might tak linski’s claim of worker consent to conditions where few alternatives exist. From a unique point of view, Frank shares the experience of inspecting serving as an independent monitor of overseas suppliers to multinational retailers. One of Frank’s key clues to whether a client “cared” about working conditions w are what motivate both parties to behave: the supplier wants to preserve the relationship, and the customer wants to preserve its reputation.” The case, “Attacking the Roots: Shiraishi Gar ments Compan y and an Ev olving Thicket of Business Ethics in China,” by Bin Jiang and Patrick J. Murphy explores this very question. In that case, Shiraishi Garments Company is a Japanese f rm that sources its suppl nection with working conditions. The CEO senses that he must resolv e conf icts between his personal values and professional responsibilities. However, he learns that the de velopment of more meaningful suppl y chain relationships might just pose some more effective—and ethical—solutions. As we examine ethical issues in the w orkplace, a helpful e xercise is to consider the global dimension of an ethicall y responsible workplace. Certainly it is

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arguable that some minimum standards might apply and multinationals may have some core ethical obligations to employees. But how do w hat those might be? Should the best employment practices in the United States set the standard for the global econom y? That would mean concluding that the standards of one particular countr not necessarily the optimal conclusion. ve ar gued that Kantian uni v govern the employment relationship and that the ethical ob ligation of respect for yment interactions. “To fully respect a person, one must actively treat his or her humanity as an end, and not merely as a means to an end. This means that it is imper missib e disposable tools.”23 Though different ethical theories ma y yield conf icting responses, it is ar guable that a fundamental moral minimum set of standards e teed to work velopment, or availability of resources. Philosophers wie contend that ell-being of employ mining the development of their rational and moral capacities . . . [R]especting work ws, refrain from the use of coercion, provide decent working conditions, and provide wages above the overall pov eek.”24 Others contend the list should also the right to equal pa y for equal w organize and to bargain collectivel gotiations.25 def ning a “li ving w age” is prob lematic. In a w orld that cannot seem to agree on the number of people living in pover ,26 f guring out how much is suff cient to of fer a subsistence quality of life represents hurdles. A number of companies ha ve implemented li ving w age policies in their global operations. For example, the Swedish pharmaceutical company Novartis reports that it pa ys 100 percent of its global w orkforce a li ving wage.27 Another company, adidasSalomon, ensures that its contract w orkers are paid a “f air wage,” one that will both meet the needs of w orkers and pro vide for discretionar y spending; adidas uses a wage-setting mechanism with the following objectives: • Is transparent and has direct input b y the workers, ideally through negotiation or collective bargaining, or through alternative legal means, such as a workers council or welfare committee; • Benchmarks basic pay at a level that is higher than the local minimum wage; • Acknowledges and rewards workers for productivity gains; • Includes and tak es into account data on general cost of li ving and w orkers’ needs; • Is part of a broader and much improved human resource management system; • gally mandated benef here practicable, • Promotes and supports the development of worker cooperatives.28

Decision Point

What to Do about Child Labor

Non-wage benef ts are an impor tant and ne glected aspect of the debate o ver global sweatshops. In many instances such benef ts can provide an advantage to both the w orker and the emplo yer. For e actory that pro vides free health checkups and basic health care ser vices to work actory clinic will typically have a healthier and more producti ve work force than f actories that lack such benef ts. Levi Strauss & Compan y provides medical ser vices to employees, their families, and members of the surrounding The company currently offers medical, dental, and optometry clinics. Beginning in 1999, the compan y’s factories also sponsored v accination, nutrition, and mental health campaigns. Since public healthcare in the locations where the Levi Strauss factories are located is generall y poor, par ticularly in smaller cities and remote rural areas, companies pla y a vital role in pro viding additional assistance. Le vi Strauss is not the only company to provide a medical clinic, but one of the few to xplore areas of implementation and integration.29 International nongovernmental organizations have also attempted to step into this fray to suggest v hich possible signatory countries or organizations could commit. F or instance, the Inter national Labour Off ce has promulgated its Tripartite Declaration of Principles Concer ning Multinational Enter and Social Policy, which offers guidelines for emplo training, conditions of work and life, and industrial relations. The “Tripartite” part of the title refers to the critical cooperation necessar y from go ver yers’ and workers’ organizations, and the multinational enterprises involved. As mentioned above, the discussion of legal and ethical e xpectations and boundaries in this chapter is based on the la w in the United States. Ho wever, awareness of the limitations of this anal ysis and sensiti 274

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global implementation are critical in toda y’s multinational business operations. We will re visit the quandar y of v arying ethical standards as applied to di verse economic and social environments in the next section with regard to the issue of child labor.

The Case of Child Labor One of the key issues facing business in today’s globalized economy is the potential for or legal conf icts in connection with worldwide labor management. . Let us consider, for e xample, the case of child labor. As we be gin to understand the circumstances f acing children w orldwide, we can see that a simple prohibition might not of fer us the best possib le solution. But w hat options exist? (For a general inquiry, please see the Decision P .”) According to Inter national Labour Or ganization estimates, 250 million chilbetween 5 and 17 years old currently work in developing countries, almost 30 “Moreover, some 8.4 million children [a]re engaged in so-called ‘unconditional’ worst for ms of child labor , which include forced and bonded labor, the use of in armed conf ict, traff cking in children and commercial se xual exploitation.”31 Because work takes children out of er be literate.32 Substandard working conditions hav yees will be physically smaller than those w ho did not w ork as children e ven into adulthood. 33 By the time child laborers become adults, most will ir revocably be sick or defor unlikely to live beyond f ears old.34 Of course, employers in many economically dev y use yone recall the eight in “Jon & Kate + 8?”); so one should carefull y review the social and economic str within which the labor exists. While the easy answer may be to rid all factories of all workers under 18 y er for the children or the f amilies involved. Prospects for w veloping countries indeed appear bleak. Children may begin work as young as three years old. They not only may w y ma e in unhealthy conditions. The labor oppor tunities that e xist almost al ways require children to w ork full time, thereb y precluding them from obtaining an education. 35 However, if children are not working, their options are not as optimistic as those of children in developed economies. Sophisticated education systems or pub lic schools are not always available. Often children w ho do not work in the manuf acturing industry are forced to w ork in less hospitab le “under ground” professions, such as dr ug dealing or prostitution, simply to earn their own food each day.36 Moreover, ev ves are available in some environments, recommending removal of the child from the w orkplace completely ignores the f nancial impact of the child leaving his or her job. The income the youth worker generates may, at the ver family.

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RightsandR esponsibilitiesi nC onflict: Discrimination, Diversity, and Affirmative Action In preceding sections, we explored the ethical environment of several elements of the employment relationship. As explained earlier, the ethical issues discussed in the f rst section of this chapter are, for the most par t, settled. Though our discussion addressed par ticular areas of outstanding contention, the underl ying rights have been established. In the following section, we consider several matters that scholars, jurists, and corporate leaders continue to debate. The focus is on those subtle areas where the law may not yet be completely where it remains open to diverse inter have been forced to render judgment in these areas, their decisions might not be unanimous or might reverse a strong lower court opinion representing a contrar y perspective. From a Kantian, deontological perspective, agreement on the rights implied by the following issues and on their appropriate prioritization is not yet universal. F le minds engaged in these ethical issues do not al ways ag ree on w hich resolution might lead to wards the greatest common good , or e ven what that good should ultimatel y be. Distributive justice does not pro vide a clear -cut solution as each camp can often mak e an ar gument for f pose here is to ar ticulate and appl y the ethical decision-making process to the challenges presented , provide a cross section of the ar ocates involved make, and e xplore the insights that ethical theory might supply.

Discrimination The courts have carefull gal precedent in the decades since Title VII of the United States Civil Rights Act was passed in 1964 and created the prohibited classes of discrimination. Though several specif c areas of delicate and subtle quandaries remain, many of the original legal and ethical debates have been ers arguably clear guidance on appropriate behavior in the workplace. For instance, while the advent of sexual harassment as a basis for a legal complaint was new to the cour y, seldom does a ne w recruit begin employment at a lar ge company today without standard sexual harassment training. as f rst raised in U.S. workplaces, employees were at a loss about what was or was not acceptable. Today the 37 Equal Emplo as well as a host of other sources, provides explicit guides and resources detailing appropriate beha vior as w ees and employers. As we have stated throughout this te xt, though, the la w can onl y go so f ar. pose to explore in detail the law relating to workplace discrimination, suff ce it to say that the law allows employers to make decisions on any basis other than those prohibited b veral

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Who Needs Ethics? Can the Market “Fix” Discrimination?

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statutes (such as age, religion, race, disability, gender, national origin, and color). Some commentators w ould contend that this broad mandate allo ws employers enormous autonomy in their emplo yment decisions w hile many employers still bemoan any regulation of their workplaces. W ees with re gard to discrimination, the e xtent of protected classes, and the more specif c subtopics such as div and aff rmative action that we will examine shortly. Even in the United States, the concept of discrimination remains one of the most intensely debated issues today. Employers continue to advocate for their rights to manage the workplace and to be permitted to hire, retain, and terminate employees without external inf yees fear unfair treatment and a loss of power based on reasons completely outside their control. Judge Richard Posner argues in the Decision P oint, “Who Needs Ethics? Can the Mar ket “Fix” Discrimination?” how the market might be able to relieve employees of some of these fears— . ” then identif es the current application of that theory. Without diminishing the impact of overt acts of discrimination or their continuation in the w orkplace, covert for y prevalent though the or instance, University of Chicago scholars Marianne Ber simply on the basis of one’s name.39 In order to determine the extent of discrimination in the labor market on the basis of the racial sound of a name, these researchers answered help-wanted ads in Boston and Chicago ne wspapers by submitting résuxactl The number of callbacks for each résumé dif fered signif cantly. Names that were traditionally associated with Caucasians (such as Jill, Allison, Neil, and Brad) dre w 50 percent more callbacks than did those traditionally associated with African cans (such as Aisha, Ebon y, Tremayne, and Lero y). Ev en w hen the researchers ho American received no more callbacks than the original résumé. The onl ers in African Discrimination not onl y persists in the United States with re gard to race, but . Women often f ace challenges that are distinct from those faced by men. For instance, women and men are both subject to gender stereotyping, but suf fer from different expectations in that re gard. A woman who is agg ressive in the w orkplace is often considered a bull y, while a man is deemed to be doing what he needs to do to get ahead. In f act, a corporate coaching program exists for w omen who are considered to be “bullies” called “Bull y Broads.” The program is designed to help women understand how their conception of what it takes to get ahead (often learned through interactions with men) might cause co-w orkers to vie w them ne gatively. Its goal is to boost producti vcult to produce if others do not w ant to w ork with y ou.” Can you imagine a similar pro gram for men? Probab ly not. Aggressive men are viewed in positive terms: going after w hat they want, not letting an ything get in

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When in Rome . . .

You run an architecture fi hired to design a large project in Saudi Arabia and your top designer is preparing for the trip to gather information. However, when she applied for her visa, she learned that it would not be approved for this work visa because she was a young, single woman. In fact, you have heard an unconfirmed rumor that visas have also been summarily denied by the Saudi government for openly homosexual employees, Jews, disabled employees, and all employees over the age of 50. You could probably ed professional given those possible prohibitions, but you would be intentionally and unjustly discriminating against your choice specialist for the contract, someone who is arguably more qualifi ed. You speak with the client and, unfortunately, there is nothing the client can do to help you. It is simply the government practice in Saudi Arabia; but what about the impact of your decision in the United States? Sending an alternate would surely violate your designer’s rights fair treatment. Would it not? Based on circumstances such as these, Congress amended Title VII by the Civil Rights Act of 1991

to include a foreign laws exception. Specifi , the exception permits a U.S. employer to make decisions that would otherwise be discriminatory if it does so in order to avoid violating the laws of a foreign country where a U.S. employee works.40 The exception applies to Title VII, the Americans with Disabilities Act and the Age Discrimination in Employment Act, thus covering discrimination based on race, national origin, color, religion, pregnancy, gender, age and disability. Therefore, for instance, requiring a pilot to convert to Islam as a condition of employment, though a clear violation of Title VII in the United States, would be permitted in Saudi Arabia since the local law provides that nonMuslim employees caught fl be beheaded.41 To the contrary, a mere preference for males over females in certain positions is not sufficient to warrant the practice. Where does that leave you your decision about your top architect? Under U.S. law would be permitted to send an alternate, thus intentionally, and legally, discriminating against appropriate for the contract. In order to do business in this country, what additional options might you have?

their way, and so on. (See the Decision Point, “Gender versus Race,” for another perspective on coaching.) e coaching program f omen’s behavior might have been learned or whether it should be all right for women to engage in behavior similar to that of their male counterparts.42

Diversity

12 OBJECTIVE

The Bully Broads idea that “it is diff ork with y ant ev .S. workforce today is signif cantl er before and all data suggest that this will continue. Efforts towards eliminating discrimination in employment over the past 30 y ears are par tially responsible for this change. But a changing population is also a major factor in the increasingly diverse workplace. Diversity refers to the presence of differing languages, ethnicities, races, aff nity orientations, genders, religious sects, abilities, social classes, ages, and national origins of the indi viduals in a f rm. Ninety percent of emplo yees in

Decision Point

Gender versus Race

U.S. businesses belie ve they work in a di verse workplace.44 This is not sur prising since the pool of eligib le and interested workers is becoming more and more diverse as well. By 2010, only 20 percent of the workforce is comprised of white men under 45.45 As one might expect, the management composition at f rms with diversity programs is signif cantly more di verse than those at f rms that do not have such programs, and 79 percent of senior managers at those f rms say that cultivating a more diverse workforce is part of the organization’s overall business gy. A few European countries have out-paced the United States in ter ms of diversity efforts and, in particular While the average representation of women on European boards is onl ay 280

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Diversity = $$?

A groundbreaking study by Catalyst in 2004 evidenced a strong link between gender diversity in top management teams and corporate fi performance. The study’s authors contend that the link is based on the fact that employers who pay attention to diversity have a larger and more capable applicant pool from whom to choose the best workers. These organizations are also better positioned to respond more effectively to a diverse consumer population. In addition, these fi evidence better decision making, production and other critical success factors. • The group of companies with the highest representation of women on their top management

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281

teams experienced better fi performance than the group of companies with the lowest women’s representation. • In four out of the fi ve industries analyzed, the group of companies with the highest women’s representation on their top management teams experienced a higher total return to shareholders than the group of companies with the lowest women’s representation. Source: Catalyst, Inc., “The Bottom Line: Connecting Corporate Performance and Gender Diversity” (2004), http://www.catalyst.org/publication/82/the-bottom-lineconnecting-corporate-performance-and-gender-diversity.

(32 percent), Sweden (24 percent), and Finland (19 percent) are well above that average.46 ay’s leadership is a federal law that required companies to f ll 40 percent of cor porate board seats with w omen by 2008, a tar get that was met ahead of its date. Failure to comply would result in a complete shutdown of operations. 47 A study b y Catalyst of the situation of women on boards in the United States shows, to the contrary, that it will take women se s to reach parity with men in the board rooms of Fortune 500 companies at the current rate of change.48 Firms have begun to tak e greater and g reater notice as Catalyst’s r better than those with very few, outperfor tile by 53 percent.49 The positive impact on the overall gy is not insignif cant, as the v ther details Catalyst’s research f ndings. has brought benef ts to the workplace, but diversity efforts have also created new conf icts. Recall the def nition of div above: Div refers to the presence of dif nity orientations, genders, religious sects, abilities, social classes, ages, and national origins of the individuals in a f rm. When a f rm brings together individuals with these (or other) differences—often exposing these indi viduals to such dif ferences for the f rst time—areas of tension and anxiety may emerge. In addition, the organization is likely to ask its emplo yees to work together toward common goals, on teams, in supervisory or subordinate roles, and in po wer relationships, all requests that might lead to conf icts or tension even without additional stressors such as cultural challenges. Div y increase several areas of values tension. ferences are new or strong, and where negativ viously ruled interacroups, sensiti .

Decision Point

Diversity Mentoring Programs

Another concer n involves inte grating diverse viewpoints with a pree xisting corporate culture. There seems nothing inappropriate about seeking to ensure that workers will support the particular values of a f rm, but it might be diff cult to do this while also encouraging diversity. Diversity, which might be the source of positive gains for the organization, might also be the source of fundamental differences in v alues that must be balanced. Some scholars suggest that job applicants be screened with regard to their values, but how can employers do so? Hiring is not an area to be taken lightly, but most f rms go with a “gut” instinct about whether or not a job applicant will “f t in.” In the same way that you might apply the “can y ou sleep at night” test to an ethical dilemma after considering all the implications of a decision, y ou might tr ust an employment choice to the same test. It is not discriminator hom you simply have a “bad feeling,” unless that bad feeling is based on their dif ference in race 282

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or gender. On the other it is vital to be wary of prejudgments based solely on differences in inter pretations of culturall y based standards. While variance in fundamental standards might justify a sense of a “bad f t” between a potential employer and emplo yee, divergence in culturall y based standards such as attire, hair styles, or manner of speaking might instead be treated dif ferently. Efforts at understanding multiculturalism, such as ackno wledging and promoting diversity through celebration and appreciation of various in the workplace, can ser ve both to educate and to encourage the benef ts link ed to diversity efforts. On the other hand, the cost of ignoring di v y in ter ms of losses of productivity, creativity . Texaco experienced w crisis” in 1996 w hen the compan y was required to pa racial discrimination lawsuit. The settlement was based on taped conversations of executiv yees, hundreds of w hom were being paid belo w the vel. rm often reaches its depths before it emerges anew, and Texaco’s subsequent numbers tell a much dif ferent stor y. In 2002, minority hires accounted for 46 percent of all new employees, including some key senior executives, and more than 20 percent of promotions, and 34 percent of new hires were women. Texaco pledged to spend at least $1 million with minority and w omen contractors within f ve years of the settlement and, of course, diversity training is now ers, with management compensation tied to the attainment of success in implementing ne w initiati ves. (See the Decision P oint, “Di versity Mentoring Pro grams,” for additional infor mation about Che vron Texaco programs.)

Affirmative Action Throughout this chapter , w e ha ve discussed the means b y w hich to protect employer interests and employee rights. With regard to the latter, we have focused on employee rights to f air treatment and due process in the w orkplace. A question arises, ho wever, w hen we consider balancing those rights with competing employee rights, as ma y occur in the case of affirmative action. The question regarding aff rmative action is not necessarily whether a person has a right to fair yment but instead w hether one has a right to the job in the f rst place. Does one person deser ve a position more than another person? For instance, ef forts to encourage g reater diversity may also be seen as a for m of reverse discrimination: discrimination against those traditionall y considered to be in po wer or the majority , such as w hite men. A business that intentionall represented group might be seen as discriminating against white males, for example. The arguments on both sides of this issue have a tendency towards emotional persuasion. Imagine y ou are hiring a social w orker to ser ve an o v helmingly rently f acing issues, among others, of

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teen pregnancy. Not only might you argue that you want to hire someone who is African American; you might also w ant a female social w orker who might be better ab le to speak with the teenage w . On the other ou is a 40-year-old white male with a master’s deg extraordinarily valuable program. He has y ears of e xperience in the f eld and in fact has an adopted American daughter himself. He claims he can handle the job. In fact, he claims he deserves the job deserves it? Does he ha ve a right to the job? ou still want the younger American woman y w is ne xt on y our inter view list. What is the fairest decision? Fair to whom? Fairest to the young women of your community, to the applicants you are interviewing, or to other stakeholders? How should you decide? What will be the consequences of your decision? Diversity issues raise other less apparent prob lems. For example, consider a report by the U .S. Commission on Ci vil Rights that addresses the unique predicament of Asian Americans. The repor t documents widespread discrimination against Asian Americans, who have long been seen as having escaped the ace other cultures. cal Asian stereotype of being hardworking, intelligent, and successful is actually a detriment to Asian Americans. This stereotype results in the prob lems of overlooking poor Asians and pre v Asian Americans from becoming more successful. It also places undue pressure on y oung Asian Americans to succeed in school, and it discredits other minorities b y arguing that “if Asian Americans can succeed, so can other minorities.”50 In an ar ticle highlighting the report, Fortune y that the commission is “being dri ven crazy b y the f act that Asian Americans have been succeeding essentially without the benef t of aff rmative action. The ultimate problem is not that they may mak rights bureaucracy look ir relevant.”51 Some theorists ar gue that formal aff rmative action measures ha ve often ser ved to create a g reater divide rather than to draw people closer. Let us tak e a closer look at aff rmative action to e xplore the ethical issues it raises. The term aff rmative action refers to a polic y or a pro gram that tries to respond to instances of past discrimination b y implementing proactive measures to ensure equal oppor y. It ma y tak e the for m of intentional inclusion of pre viously e xcluded g roups in emplo yment, education, or other environments. of aff rmative action policies in both business and universities has been controversial for decades. (For the latest facts and f “Aff rmative Action Facts” and “The ”) In its f rst discussion of aff rmative action in emplo yment, the U.S. Supreme Cour t found that employers could intentionally include minorities (and thereby exclude others) in order to redress past wrongs. Ho wever, the holding w as not without restrictions, which hav y , and we must turn to values systems to provide direction, which w y.

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Affirmative Action Facts

• According to the U.S. Census, 23 percent of the workforce is minority, up from 10.7 percent in 1964. • In 2003, white women’s median weekly earnings were 76 percent those of white men. Black women’s earnings were 66 percent of the earnings of white men, and Latina women’s earnings were 55 percent of white men’s earnings. • Black women with bachelor’s degrees make only $1,545 more per year than white males who have only completed high school. • In an important longitudinal study of black and white women ages 34 to 44, only one-fi gap between their wages could be explained by education and experience. The study found that while women are segregated into lower-paying jobs, the impact is greater on black women than white women. • Research indicates that as the percentage of females and the percentage of minorities in a job increases, average pay falls, even when all other factors are held steady. • Black men with professional degrees receive 79 percent of the salary paid to white men with the same degrees and comparable jobs. Black women earn 60 percent. • A study conducted by the U.S. Department of Labor found that women and minorities have made more progress breaking through the glass

ceiling at smaller companies. Women comprise 25 percent of the managers and corporate offi cers in smaller establishments, while minorities represent 10 percent. But among Fortune 500 companies, women held 18 percent of the managerial jobs, with minorities holding 7 percent. • The federal Glass Ceiling Commission found that white women made up close to half the workforce, but held only 5 percent of the senior level jobs in corporations. Blacks and other minorities account for less than 3 percent of top jobs (vice president and above). • Cecelia Conrad, associate professor of economics at Barnard College in New York, examined whether affirmative action plans had hurt worker productivity. She found “no evidence that there has been any decline in productivity due to affirmative action.” She also found no evidence of improved productivity due to affirmative action. • A study of Standard & Poor’s 500 companies found fi minorities reported stock market records nearly 2.5 times better than comparable companies that took no action. Source: D. Bennett-Alexander and L. Hartman, Employment Law for Business,5 th Ridge, IL 2005), p. 186. Copyright © 2006 by The McGrawHill Companies, Inc. Reprinted by permission of the publisher.

Aff rmative action arises in the w orkplace in three w ays. The f rst w ay is through legal requirements. Much of the la w relating to aff rmative action onl y applies only to about 20 percent of the w orkforce; however, those employees of with 50 or more employees are subject to Executive Order 11246, which requires aff rmative action efforts to ensure equal oppor . Secwhere Executive Order 11246 does not apply, courts may require “judicial aff rmative action” in order to remedy a f nding of past discrimination. A third form of aff rmative action involves voluntary aff rmative action plans, which are plans that emplo yers under take in order to o vercome bar riers to equal oppor nity. vity,

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The White Male as Endangered Species?

Some white males may feel that they are under siege by the forces of affi action and multiculturalism. Still, Newsweek argues that being a white man remains a very comfortable role in contemporary America: But is the white male truly an endangered species, or is he just being a jerk? It’s still a statistical piece of cake being a white man, at least in comparison

15 OBJECTIVE

with being anything else. White males make up just 39.2 percent of the population, yet they account for 82.5 percent of the Forbes 400 (folks worth at least $265 million), 77 percent of Congress, 92 percent of state governors, 70 percent of tenured college faculty, almost 90 percent of daily-newspaper editors, and 77 percent of TV news directors.

or the elimination of discrimination that might be caused b y hiring criteria that exclude a par ticular g roup. A demonstrated under representation of a par ticular group or a f nding of past discrimination is required to justify aff rmative action efforts under either of these latter two options. After a number of le gal opinions, employers are left with some basic guidelines for creating these pro grams and policies. Consider ho w the following legal constraints to an aff ve action pro gram are in line with deontological and teleological frameworks that also support ethical decision making: aff rmative action ef forts or polic y ma y infringe upon yees’ rights or create an absolute bar to their advancement. aff rmative action ef fort or polic y ma y not set aside an y positions for women or minorities and ma 3. It should unsettle no legitimate, f rmly rooted expectation of employees. 4. It should be only temporary in that it is for the purpose of attaining, not maintaining, a balanced workforce. 5. It should represent a minimal intrusion into the legitimate, settled expectations of other employees. aff rmative action contend that the ts do more harm than rmative action creates ill will and poor morale among w orkforces. They ar is inappropriately placed because those w ho “pay” for the wrongs are unf airly burdened and should not bear the responsibility for the acts of others. Not onl y white males make this claim. Ward Connerly, an African American regent of the Univ nia, discussed aff rmative action during a 60 Minutes interview and stated, “Black Americans are not hobb led by chains an y longer. We’re free to compete. We’re capable of competing. It is an absolute insult to suggest that we can’t.” f rst r uling on this issue in more than a decade, the Supreme Cour t addressed aff rmativ verse discrimination”

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in 2003. While this par ticular case in volved uni versity admissions, American business was a stakeholder in the case as well. The University of Michigan La w School relied on an admissions polic y that took into account the ability of each applicant to contribute to the school’ As part of this criterion, the school considered the applicant’ s race, on the assumption that a div ould contribute to the goals of the la w school and that a as required to accomplish that goal. Thus, T tests, undergraduate college grades, letters of recommendation, and other traditional f actors were primarily used to g rant admission, an applicant’s race was also a factor. Two white females who were denied admission brought the lawsuit, arguing that admission of minority students with lo wer grades and test scores violated their rights to equal treatment. General Motors Cor poration f led an amicus curiae t”) brief in support of the law school’s admission policy. By doing so, GM w ent out of its way at g reat expense to identify itself as a business stak eholder and argue publicly in suppor t of aff rmative action. In its brief, GM claimed that the need to ensure a raciall y div as a compelling reason to support aff v American business and, in some measure, of the American economy depends on it. ” In its own business e xperience, “only a w ell educated, diverse workforce, comprising people w ho ha ve lear ned to w ork producti vely and creati vely with indi viduals rounds, can maintain America’s competiti veness in the increasingl y di verse and interconnected world economy.” Prohibiting aff ve action likely “would reduce racial s businesses can dra o wn ef forts to achieve and obtain the manifold benef ts of div vels of their work forces.”52 The court seemed to agree. [D]iminishing the force of such stereotypes is both a crucial part of the Law School’s mission, and one that it cannot accomplish with only tok rowing up in a particular region or having particular professional experiences is likel vidual’s views, so too is one’s own, unique e , like our own, in which race unfor The Law School has deter its experience and expertise, that a “critical mass” of underrepresented minorities is necessar ther its compelling interest in securing the educational benef ts of a diverse student body.53

Do y ou belie ve that a di v school to accomplish its educational mission? Should the la w prohibit, allow, or require aff rmative action programs? Would General Motors be ethicall y correct in adopting a similar aff rmative action hiring polic y? Can y which an emplo yee’s race or ethnic backg round would be a qualif cation—or a disqualifcation—for employment?

Opening Decision Point Revisited Abercrombie & Fitch: Image Consciousness?

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ill, Employee Rights, and Future Directions for Employment,” by Tara J. Radin and Patricia H. Werhane 296 Reading 6-2: “Confessions of a Sweatshop Inspector,” by T. A. Frank, p. 307 Choice, and Exploitation,” by Matt Zwolinski , p. 312 Reading 6-4: “Attacking the Roots: Shiraishi Garments Company and an Evolving Thicket of Business Ethics in China,” by B. Jiang and P. J. Murphy 326

Reading 6-1

Employment-at-Will,E mployeeR ights,andFutur e Directions for Employment Tara J. Radin and Patricia H. Werhane Private employment in the United States has traditionally been gov by “employment-at-will” (EAW), which provides for minimal re emplo er or the employee to terminate their employment relationship at an y time for vir y an y reason or for no reason at all. At least 55 percent of all employ ate sector of the workforce in the United States toda y are “at-will” employees. During recent y ears, the principle and practice of emplo yment-at-will ha ve been under attack. gress has been made in eroding the practice, the principle still go verns the philosophical assumptions underl ying emplo yment practices in the United States, and , indeed, EAW has been promulgated as one of the ways to address economic ills in other countries. In w hat follows, we will brief y re view the major critiques of EA W. Given the f ailure of these ar guments to erode the under pinnings of EAW, we shall suggest ne w avenues for approaching employment issues to achieve the desirable end of employee dignity and respect.

CritiquesofE AW ve been le vied against EAW on numer ous fronts for generations. While it remains the default r ule for the American w orkplace, a v ariety of ar ve been made that emplo yees should not be treated “at will.” Most of these arguments f o broad cate gories: those that relate to rights and those that relate to fairness.

Rights Talk The f rst set of ar guments critiquing the principle of EAW is grounded on a commonl moral rights, that is, the claim that human beings have moral claims to a set of basic rights vis-à-vis their being human. This set of ar guments mak es three points. F irst, principles go verning emplo yment practices that interfere with commonl y (including legitimate whistleblowing), privacy, due ould therefore appear to be questionab le principles and pracve. Second, justif able

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rights claims are generalizable. It thus follows that, if emplo yers and managers ha ve cer tain rights, say yees should also have equal claims to those rights. if proper y guaranteed , it w ould appear to follo w that emplo yees should have some rights to their w ork contributions, just as managers, as representatives of companies, have rights to exercise property claims. There are at least three countervailing ar against these conclusions, ho wever. In the United States, constitutional guarantees appl y to interacbut they do not e ate sector or to the home, except in cases of e gregious acts. Claims to employ y , employment ag reements are contractual ag reements betw een consenting adults. Unless a person is forced to w ork or to perform a par ticular task, EA W thus protects liber rights in allowing a person freel y to enter into and leave contracts of his or her o wn choosing. proper and companies and their managers should be free to hire and f re as they see f t. Indeed McMahon, a defender of emplo yee rights, argues that although, as proper ty o wners or agents for companies, emplo yers and managers ha ve rights to hire and f re “at will, ” this does not pro vide them with moral justif cation for ignoring other employee rights claims, including, for e xample, rights to participate in corporate decision making.

Fairness A second set of ar guments against EA W stems from f ns re garding emplo at-will ag reements and practices. EA W has, on numerous occasions, seemingl y translated into a license for emplo yers and emplo yees to treat one another amorally, if not immorally. “‘Why are you f ring me, Mr. Ford?’ asked Lee Iacocca, president of F , looking at Iacocca, said: ‘I just don’t like you!’” While EAW demands

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ostensibly equal treatment of both emplo yers and employ y fair to either. A requirement of “equal” treatment, therefore, is not suff cient. Good employment practices , w hile, at the same time, allowing for different, though comparable, treatment where relev xist. For example, while it would not necessarily represent a good, or yment practice to demand equal pay for all emplo yees and managers, a good practice would be to demand equal pa y for emplo yees in similar positions doing similar tasks, and comparable pa ant differences, such as in e xperience, position, tenure at the company, and special skills. Except under conditions of very low unemployment, employers ordinarily stand in a position of power relative to prospective employees, and most employees, at an y level, are replaceab le with others. At a minimum, though, emplo yees deser ve to be gi ven reasons for emplo yment decisions that involve them. Unjustif ed dismissals are not appropriate in light of employees’ considerable investment of time and ef fort. Emplo yees are human beings, with dignity and emotional attachments, not feeling-less robots. This is not to say that inadequate emplo yees should not be replaced with better perfor mers. but emplo yees at least deser ve to f nd out the reasons underl ying emplo yment changes. And if emplo yees are to tak e char ge of their careers, they should receive good reasons for emplo mation. From a management point of view as well, employees should be given good sions, or it appears that management decisions are arbitrary, and this sor t of beha vior is not in k eeppossible to defend EA W on the basis of freedom of in practice, EAW supports inconsistent, even irrational, management behavior by permitting arbitrar y, not w employees—behavior that is not considered a best management practice. Since arbitrar y accounting, mark eting, and in vestment practices are not

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y human resource practices should be considered equally questionable. We ha ve therefore concluded that due process procedures should be instituted as mandator y procedures in e v orkplace. On the other side, employers suffer when employees simply walk off Werhane therefore has argued that employees and employers hav ould entail reciprocal ob ring or quitting and to give justif able reasons for these actions. Interestingly, due process procedures ha ve become mandator y guarantees for emplo yees in the public sectors of the econom y, on the federal, state, and local levels, but not in the pri vate sector. Again, on the basis of the f airness of equal treatment for all workers, this appears to be unf air. The inapplicability of constitutional guarantees in the private sector of the economy nev vails in employment. This is not to suggest that there are no relevant differences between employment in the pub ate sector of signif cant variations, including, but not limited to, salar y dif ferentials. Considering the de gree of similarity between public and private work, though, it only makes sense that due process be afforded to employees in both sectors.

Erosion of EAW: Law and Public Policy Despite these and other ar guments, there is e viis ali ve and w ell: people are still losing jobs for seemingly arbitrar y reasons. Rather than attacking the principle directl y, le gislatures and cour ts have created w ays to reduce the impact of the practice through nar rowly car ved-out e xceptions, and Cong ress has chosen to control the scope of EAW through limiting le gislation. A wave of federal le gislation has also had a signif cant impact on private employment, beginning with the passage of Title VII of the Ci vil Rights Act of 1964, which ees on the basis of “race, color , religion, se x, or national

origin.” It has been follo wed by the Age Discrimination in Emplo yment Act, the Pre gnancy DisAct, and the employment provisions of the Americans with Disabilities Act. Together, such le ress’s reco gnition that there are limits to EA W, and that the def ault rule cannot, and should not, be used as a license to disre Even greater limiting power lies in the hands of state and local legislatures. Many have sidestepped EAW to reco gnize employee rights, such as in the area of privacy, b ing from workplace discrimination to dr ug testing. A few states, such as Colorado, Nor th Dakota, and Nevada, ha ve enacted statutes bar yers from f ring employ ork activity. In 1987, Montana became the f rst state to pass a comprehensiv W in f avor of “just cause” terminations.1 Contrar y to EA W, the “just cause” standard requires that the reasons offered in termination decisions be defensible.2 Montana currently stands alone in demanding “just cause” dismissals. Although it is too earl w whether one state’s move in this direction signals a trend toward the increasing state challenges to EA W, there is currently no evidence that this is the case. Courts have also begun to step in and car ve out exceptions to EAW as a default rule. Many employers and employees have opted to alter the employreements. Since e vidence of such ag reements is not al ways lodged in an e xplicit ar rangement, cour ts often f nd it necessar y to delve further in order to deter mine the reasonable assurances and expectations of emplo yers and emplo yees. F or e xample, some courts ha ve held that an emplo yment contract exists, even where it exists only as a result of assumed behavior, through a so-called “implied-inf Pugh v. See’s Candies, Inc., an employee was f ears of ser vice without explanation. Although no contract existed that specif ed the duration of employment, the court determined that the implied cor porate polic y w as not to dischar ge employees without good reasons. The court in Pugh mined:

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[T]here were facts in evidence from which the jury could determine the existence of such an s emplo receiv y direct criticism of his work, the assurances he was given, and the employer’ wledged policies.

Where an emplo yer’s beha vior and/or policies encourage an emplo yee’s reliance upon emplo yment, the emplo y yee without a good reason. In some states, it can be considered a breach of contract to f re a long-ter m employee without suff cient cause, under nor mal economic conditions, even w hen the implied contract is onl y a v erbal one. In Califor nia, for e recent implied contract cases ha ve been decided in favor of the emplo yee. Reliance upon emplo yee manuals has also been deter mined to gi ve rise to reasonable employment expectations. In Woolley v. Hoffmann-La Roche, Inc., the court held that comy bound by the statements in their employment manuals. In Woolley, the employment manual implicitl y pro vided that emplo yees would not be terminated without good cause: It is the policy of Hoffmann-La Roche to retain to the extent consistent with company requirements, the services of all employees who perform their duties eff cientl vely.

The cour t thus held that an emplo yee at Hoffmann-La Roche could not be dismissed without good cause and due process. Woolley is but one of many decisions that demonstrate that employers are accountable to employees for what is contained in employment manuals, as if the manual is par t of an implicit employment contract. Courts also ha v wn to override EAW in order to respond to or deter tor tuous behavior. Out of this has arisen the “pub lic polic y” e xception to EA W. The cour t has car ved out the “public polic y” e here employers attempt to pre vent their emplo yees from exercising fundamental liber ties, such as the rights to v ote, to ser ve on a jur y, and to recei ve

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state minimum wages. In Frampton v. Central Indiana Gas Compan y, the cour t found in f avor of an employee w ho w as dischar ged for attempting to collect worker compensation: If employers are permitted to penalize employees for f ling w s compensation claims, a most lic polic mined. The fear of discharge would hav on the ex yees will not f le claims for justly deserved compensation . . . [and] the employer is effectively relieved of his obligation . . . Since the Act embraces such y, strict employ ence is required.

Such decisions clearl y demonstrate the cour t’s unwillingness to stand b y without doing an as employers attempt to interfere with fundamental liberties. The public policy exception is also used in order to discourage or behavior on the par t of emplo y here employees are ask ed to break a la w or to violate state public policies. In Petermann v. International Brotherhood of Teamsters, the cour t confronted a ee refused to perjure himself to keep his job. The court held that compelling an employee to commit perjur y “would encourage criminal conduct . . . and . . . ser ve to contaminate the honest administration of pub lic affairs.” Then, in Palmateer v. International Harvester Corpor ation, the cour t reinstated an emplo yee w ho w as f red for repor ting theft at his plant on the g rounds Whistleblower protection is also pro vided as a . In Pierce v. Ortho Pharmaceutical Corporation, the cour t reinstated a ph ysician who was f red from a compan approval to test a cer tain drug on human subjects. The court held that safety clearly lies in the interest of public welfare, and that employees are not to be f . Similarly, in Bowman v. State Bank of Keysville, a Virginia court asser condone retaliBowman, eeshareholders of a voted for a merger at request

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s off cers. After the vote was counted, the emplo yee-shareholders subsequentl their votes and contended that their v ote had been coerced. They alle ged that the bank off cers had warned them that they would lose their jobs if the y did not vote in favor of the merger. They were then f red. The cour t in Bowman found in f avor of the employee-shareholders. According to the Bowman court, “Virginia has not deviated from the common law doctrine of employment-at-will . . . And we do not alter the traditional r ule today. Nonetheless, the ” In this way, the Bowman court W is subject to limitations and exceptions. Even where the EAW doctrine still e,” it does so within def nite restrictive legal and policy constraints.

RethinkingE mployment Relationships Without attacking or circumventing EAW, it is possible to discer n signs of a changing mindset about employment, a mindset that v alues the competiti ve advantage of the contributions of good employees and managers. The extensive work of scholars, such as Jeffrey Pfeffer, illustrates this change. Pfef fer, a management professor at Stanford , has ar gued in a series of books and ar ticles that a “people f rst” gy can ser ve as an economic adv antage for companies. In other words, it is not just for the benef t of employees, but also for the benef t of f rm employers, yees with respect. To provide e vidence for his point, Pfef number of Nor th American and inter national comed to fair labor practices when employees and managers are consideholders for the long-term viability of their companies. According to Pfef fer, the most ve sustained long-term economic prof tability and g ro work y to engage in employment practices that include selecti v yment security, werment

and self-managed teams, training, open information, and f yees. From an or ganizational perspecti ve, contrar y to some points of vie w, it is a mistak e to sor t out employees, customers, products, ser vices, shareholders, and so on, as if each represented an autonomous set of concer ns. For example, a f rm cannot do business without people, products, f nance and ets, and a strategy. In times of economic exigency therefore, generally not to the adv antage of a company merely to lop of f employees (even if the y are the “lo w hanging [most easil y disposab uit”), y about their emplo yees as people, and recognizing those people’s con butions to the long-ter m sur vival and success of the company. In uncer tain times, no compan y w ould simply quit doing accounting, and it w ould be to its peril to quit marketing its products and ser vices. Similarly, to get rid of too man y employees would not e a company’s long-term viability v well. Similarly, Rosebeth Moss Kanter ar gues that it is in the f s interest to tak e care of emplo yees. Kanter contends that it is both desirable and obligave their employees what she calls “emplo that are transferab tions in that compan y or elsewhere so that emplo yees are adaptab le in a w orld of technolo gical and economic change. Today, w hile some companies engage in la yoffs to change emplo yee skills, man y old workers, giving them ne w skills. Kanter w ould argue, with Pfef fer, that it is v aluable, in ter ms of both economics and respect for w orkers, to ha ve a w skilled and employab ould be desirable assets in a number of employment settings, both within a particular compan Linking Pfef fer’s and Kanter’ s f ndings with a notion of emplo yee rights mak es it possib le to re-envision the mindset of employment to consider each job applicant, emplo yee, manager , or CEO as a unique individual. In addition, it prompts us to begin to rethink employment, not in terms of

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employees as merel y economic v alue added , but in terms of employees as individuals —unique and particularized individuals.

A “Citizen” Metaphor One w ay of de veloping an indi vidualized analysis of emplo yment is through a citizen metaphor . “Citizenship” is a designation that links people to rights and duties relati ve to their membership in a lar , such as a political community . There is a g rowing body of literature addressing this notion of “cor porate citizenship. ” According to Waddock, Good corporate citizens live up to clear constructive visions and core values. They treat well the entire range of stakeholders who risk capital in, have an interest in, or are linked to the f rm y and secondary impacts through developing respectful, mutually benef cial operating practices and by working to maximize vironment.

Replacing the vie w that cor porations are, or should be, sociall y responsible, the cor porate citizenship model ar gues that a f rm’s membership in comple accords them, lik e individuals, rights and responsibilities comparab le to those accorded to individuals through national citizenship. The belief is that, if cor porations are to enjo y operational privileges, they must then honor as w ell their responsihich the y belong. The model of cor porate citizenship is used both to describe cor porate relationships with e xternal stakeholders, such as customers, communities, gov vironment, and to address corporate responsibilities to internal stakeholders, such as managers and employees. The citizen metaphor can be applied to managerial-employee relationships as w ell. This process of por traying employees as citizens is not complicated; it requires, simpl y orkers like adults. ” Treating people as adults translates their rele vant le gal and moral rights and duties.

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ect the coe help delineate ho w people can best interact with the fe west conf icts. This space does not ha ve to also refer to the conte xt of a f rm. Within the f rm conte another in such a w ay that the y ine vitably tak e orking to gether for the benef t of the f rm. At the same time, the metaphor of citizenship requires that each “citizen” has equal rights, and requires that all citizens be treated with respect and dignity. According to such a model, employees thus serve as participants in, and members of, a f r . As applied to emplo yment, a citizenship model would take into account producti mance, and it w terms of long-time emplo yment. This w ould not entail keeping every employee hired, or even guaranteeing lifetime emplo yment. It w wever, at a minimum, require due process for all employment changes, employability training, protection of fundamental rights such as free speech and privacy, and the provision of adequate infor mation to employees about their and the of the company. The emplo ould require employees to ser ve as good cor porate citizens in the broad sense of being ab le to contribute in a number of areas in the econom y, and, if Pfeffer’s data is cor rect, such measures add economic value to shareholders as w ell. At the same time producti , loyalty, and good perfor mance would be e xpected from all emplo yees just as the y are expected from citizens in a community. In sum, if a company’s core values w ve the assumption that each emplo yee is a cor porate citizen analo gous to a national citizen with similar rights and duties, then the w ay we w about employment would change.

Employees and Systems ay of looking at business that to the citizenship model in challenging traditional

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views of employment. According to systems thinking, employment is a phenomenon embedded in a complex set of inter een employees and managers or emplo yers, betw een w orkers employment and public policy. It involves customer relationships, human resource policies, and , gi ven pensions plans, often employee/owner relationships with management. Employees are just one of man y stakeholders w ho af fect, and are af fected b y, the companies in w hich they work. Moreover, compamerce, are embedded within a comple laws, re gulations, re gulatory agencies, pub lic policy, media interaction, and pub lic opinion. system—employment—is part of a global economy of exchange, o Employees, as “pla yers” in these o verlapping sets of systems, are at the same time indi viduals, members of a compan y, and f actors embroiled in a system of commerce. Their interests are impor tant, but the y are not the onl y interests that must be tak en into account. Lik e the phenomenon of employment, emplo yee rights and responsibilities are embedded in a complex social system of rights and responsibilities. Employee rights claims, thus, are not merely individual manifesto claims to certain privileges, but also entail reciprocal respect for others’ rights and responsibilities. If employment relationships are embedded in a gically managers and employees to attack emplo yment issues systemicall a fact-f nding perspectiv social perspective, and from the perspecti ve of the individuals in volv yees and managers. Conceptualizing emplo yment systemically ma y help both emplo yees and managers to reconsider their impor tance in the underl ying system of which they are a contributing par t. This sort of anal ysis will neither eliminate nor replace the principle of EAW, but it does represent another step in the process of reconceptualizing employment. s conclusion, that emplo yees are critical to corporate success, is grounded in a systems

approach, which views employees, as well as products, ser vices, and customers, as par t of the strategic adv antage of the compan y. By anal yzing cor good employees, a company will fail, just as it will fail without customers, and f ail if it does not think strategically about its products and services. yment and emplo yees, it is tempting to become preoccupied with managerial/employer responsibilities to emplo yees, as if emplo yees w ere merel y pa wns in the system. It is, though, impor tant to note that a systems approach does not preclude indi vidual autonomy. No individual in a free commercial society is def ned completely by the set of systems in which he or she par ticipates. Interestingl y, a systematic approach actuall y looks be yond protection of emplo y yee responsibilities as w ell—to themselv es as w ell as to the f rm. orkforce, each of us has claims to certain rights, such as free choice, free

information, and rights to a safe w orkplace. As a ery worker, employee, or manager, in every sector of the economy, has responsibilities as w ell—responsibilities not merely to employers, but to him- or herself and she is able and sees f t. In other w employees are, or should be, responsible for their o ves and careers, and the y need to tak e the steps necessar y to research and e xplore mobility options. yment systemically as responsibilities to others within that system can help employees tak e charge of their o wn working lives, professions, and careers. The view of employment as a system is consistent with the notion of cor porate citizenship. The yment gi ves rise to emplo yee rights and duties that animate the employment system. In other words, the rights employees enjoy, and the duties they must bear, are

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those that ensure the continued e xistence of the system. Similarly izenship, employee rights and duties include those that contribute to the f rm. Employees have rights to engage in behavior that allows for their development within the system, or f rm, and have duties to enable others to develop as well.

A Professional Model for Employees Despite developments in eroding EA w and public policy, changing mindsets re garding the v work of Pfef fer, Kanter, and others demonstrating the w yment practices for longcitizen model w e propose, the principle of EA W continues to underlie American management yee v about emplo vate sectors of the economy. This is most clearl y demonstrated b y irst, there has been a consistent demise of unions and unionism in this country from about 33 percent of all w orkers to barel y 10 percent today. This demise not only ref ects the philosophy of cor porations, but it is also the result of a series of pub lic polic y initiati ves. In addition, it ref ers, even low-wage workers w 3 who are nev employability and despite an almost full emplo yment economy, la yoffs still dominate the w ays in which cor yees and employment w tegic direction. In 1999 alone, more than a million workers were laid of f.4 y, given low unemployment, most of these people found ne w jobs; but this often required relocation and , sometimes, even in this economy, taking less desirable jobs for lower wages. This is particularly true for unskilled workers. s high unemployment and Japan’s recent economic

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diff culties is that these countries ha ve massi ve le to engage in f exible emplo yment practices. We are thus e xporting our EA W mindset, sometimes as a panacea for economic diff culties that are not always traceab le to o veremployment. It is impor y about the practices we export, par ticularly considering their questionab le success here. description of the comple yment in adv not internalized in emplo y—at least not in the United States. The citizen metaphor requires an expansion of notions of trust and solidarity within f r the workforce, the ease with w hich companies can la y y that this metaphor will be uni versally adapted. Given these seemingl y contradictor y conclusions, then, namel y, the persistence of the principle of EAW, the argument that employees have rights and that employees and managers have moral responsibilities to each other, the economic value added of employees to f rms, and the questionable adaptability of the citizen metaphor , w e are challenged to tr yment proactivel yee perspective—that of the employee as a professional. The popular literature is replete with laments that the “good old days” of alleged employee–employer lifetime employment contracts, compan y pater nalism, and lifetime benef tion. So, too, are the expectations of loyalty, total commitment, company-f rst sacrif ces, and perhaps, even, obedience and tr ust. Whether or not there ever were “good old da ys,” such laments could be used to change thinking in a positi ve way, in that they indicate we have alternatives—the way that we view w ay. This realization should prompt emplo yees and managers to ho they are—to manage their own careers within the free enter prise system and to rejoice in the demise of pater nalism such that the y no longer

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can even imagine that a person is dependent upon, or co-dependent upon, a par ticular employer, training pro gram, or authority . It demands changes in what we have called else where the “boss” mental xploited b vision es from that of “just an employee” to that of an independent w orker or manager with commitments to self-development. While all of this might seem f ticularl of thinking dates back at least tw As trial Revolution provided the oppor orkers to become independent of landholder serfdom and free from those to w hom they had been pre viously apprenticed. This occurred because, by providing workers opportunities to choose and change jobs and to be paid for their producti vity, people were ab le to trade their labor without chatteling themselves. This sense of economic independence was ne ver full y realized because, in f act, circumstances often pre vent most of us from achie ving Smith’s ideal “w here ev as perfectl both to choose w hat occupation he thought proper , .” volution, one of the g reat debates about labor w as the status of ersus “w age labor .” F ree labor w as “labor car ried out under conditions lik ely to cultivate the qualities of character that suits citizens to self-gover ” These conditions included being economically independent, and indeed Thomas Jefownership and farming. Wage earning was thought by some to be equivalent to sla very since it “denied [w orkers] economic and political independence essential to republican citizenship.” Even the authors of Rerum Novarum (1892), the f rst P apal social enc yclical, ar age labor should be paid enough to enable each work wner and thus gain some degree of independence. A question remains: Ho w y, is a person to de velop this sor t of independence ork, w hen the vast majority of us w ork for others? A new model

of employment is required, and this model requires developing dif ferent mindsets about w ork and working that dra w from Smith’ s and Jef ferson’s ideas, and, at the same time, tak e into account the fact that most of us are, and will be, employees. The model is that of emplo yees as professionals. “Profession” refers to “an y group of individuals with par ticular skills w ho work from a shared wledge base.” A professional is a person w ho has trained skills in cer tain areas that position that person as emplo yable in his or her area of e xpertise. A professional is identif ed with, and has a ork, and ersatile. It is the w ork and its achievements that are important, even more important, for some professionals, than its monetar y reward. Additionally, most professionals belong to independent associations that have their own codes of professional ethics and standards for e xpertise and certif cation or licensure. The responsibilities of a professional are f rst to his or her e xpertise, second to his or her profession and the code of that profession, and only third to his or her employer. This is not a model of the “loyal ant,” but, rather , of a person w ho manages him- or herself with employable and retrainable that he v y be in the employment of others. This is a person who xcellence in whatever emplo ations he or she encounters, but is not wedded to one employer or one particular job. Further, in some professions, such as la w and health care, professionals are encouraged—if not required—to par ticipate in work solel t. eloped as people with specialized skills ha ve built f rms around those skills. While the model has developed within a par ticular context, it is one that easily could, and should , be emulated else where. The growth of dot.com f fers an e xcellent example because through these v entures people ha ve been able to focus on their talents, even as employees have mov , because employees are v alued for their skills rather than

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their lo . Dot.com f rms are not models for all employment since the y are often nar rowly tailored to particularized products and services, but they do stand as potential models for a number of companies or divisions within companies. There are other opportunities for professionalism as w ell, particularly with re gard to contingent workers. For the past 20 y ears we have witnessed w in contingent w orkers—workers w ho w ork par tinsurance, pensions, or other benef ts. Contingent workers include self-employ workers, contract w orkers and consultants, and home-bound w orkers. These w orkers range from dishwashers to professionals and managers. Man y have chosen this sor t of employment arrangement. Some of these people ha ve benef ts independently y thus appreciate the exibility and higher salaries as compared to their full-time counterparts. The problem is that man y others resent their “contingenc y.” There are man y, w W es as “peripheral” to the organization, particularly those w ho are par t-time, contract, shor le” workers. These w orkers are independent contractors— “free labor”—e ven though man y of them do not revel in that. They are disposab le, and some are involuntarily contingent w orkers, subject to a number of injustices: (1) the in voluntary nature of the emplo age system (a) with unequal compensation, and (b) w here man y, economically, and sociall y treated as, and feel themselv es omen and minorities account for a g reater percentage of contingent workers than w hite males, e ven taking into account skills, those w mommy-track employment, and those w ho cannot antaged. The further decline in union membership and the shift in the composition of the w orkforce indicate that, by the y ear 2005, nearl y 20 percent of new hires will be w hite males. This appears to suggest that

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we will see increased exploitation of new labor and greater utilization of contingent workers. There is yet another dimension to what might already be considered a gloom y picture. Given the psychological pressures and perception of second y, in voluntary contingent w orkers in companies tend to be less lo yal, less producti ve, and e xhibit lower morale—all of w hich hur ts the long-term producti ell-being of the company for which they work. At the same time, contingent workers are not as time workers. Contingent workers are less likely to ugs on the job, complain, snooze, schmooze, or engage in time-consuming off ce or work f oor politics. Moreover, without the shado by w ork r ules or traditions. They are, therefore, more f exible. As the number of contingent workers increases, those who choose this path, as well as those who are in voluntarily forced into it, should be ab le to develop a sense of independence, engendered by redef ning themselves in relation to their work. This could translate into a rise of professionalism. Because contingent work ed to par y to w ork and to the profession. In addition, it could lead to the for mation of new professional associations—associations, not necessarily industr y- or position-specif c, which develop guidelines for skills, licensing, and conduct, for m emplo yment contracts, de velop codes of conduct, and protect members, just as the legal, medical, academic, and , to some e xtent, the engineering professions do toda y. These professions, then, could gain le verage with emplo yers, just as unions have done in the past, with le verage translated into equal pay for equal work and professionally provided benef ts and pensions. But what about unskilled lo w-wage workers? As vocative book, Nickel and Dimed, one of the suffered by allegedly “unskilled” work is that their skills are not as such. Vir y all work entails

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by this sort of work are not respected by many of us. age work is that the w orkers tend not to be respected or , even by their employers. Professionalism of these workers might alle ment and also help to raise their wages.5 gnizes that of fering incentives to lo w-wage workers to tak e control of their lives and their careers is not easy . Unskilled workers, like many managers today, would have to es as independent contractors le skills that are transferab le to a number of job rather than as mere wage ear ners. By taking their w ork and productivity contributions seriousl y, w orkers with such mindsets w ould create economic v alue added for fr th. There is little in our backg as free laborers rather than w age ear ners. But if George Washington could tak e scr roups of far teen independent colonies each with its o wn culture and customs, and transfor m that motle y cre w into the Re volutionary Army that e ventually defeated the British, and if union or ganizers in the late Nineteenth and early Tw ganize w age e, then a re volution of the mental model of emplo yment, from w age ear ners to free professionals, is not impossible.

Conclusion W y that has thri ved on indi vidualism in our political democrac y. Although we have made progress in dispelling the pub lic/private division, it will undoubtedly continue to inf uence the protection We have f ably will continue to f ail, to adapt ne w metaphors that challenge that indi vidualism, such as a systems approach or a citizen metaphor for employment. This is not where the story ends, though. While EAW remains the def ault r ule for emplo yment in most of the United States, ne w models are emer ging that encourage and moti vate both emplo yers

and emplo yees to rise abo ve the def ault r ule in order to create a more satisfying workplace, which, at the same time, can boast higher performance. ers and employees lies in variations of models such as the professional model. Interestingl y, the professional model ser v een the individualism that cripples other models and the f air employment principles espoused b y all of these models. The professional model is a for m of, and reinforcement for, individualism. It will be interesting to see ho w that indi vidualism plays out in the workplace. The model of the worker, the employee, the manager , and the e xecutive as professionals, both independent and par t of a political econom y. W every sector of the econom y, with global demands on management skills, and with the loss of union model that would circumvent EAW and take us f ttingly into a ne Ironically, recent e vents sur rounding the hor rif c destr uction of the twin to wers of the World Trade Center on September 11, 2001, underscore the v alues that underlie the orkplace, which are about professionals, not robots engaged in routine tasks. Although ter to attack capitalism, the y were only able to break apar values. As Howard Lutnick, CEO of Cantor F itzven in the w ake of disaster, his people w ork. They felt a need to be part of something, and that something was work. And Lutnick, like many of the surviving business executives w uggling to f nd ways to help support the survivors and the families of those lost—not because the y ha ve to, but because they want to do something to assist those who were part of their workplaces. The time has thus come to look past w hat our default rule says, in order to pa y attention to w hat es sense to w aste words ar guing against EA W. The reality is that, regardless of what the default rule says, there are

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values embedded in the American workplace that elevate it abo ve that def ault and point to inher ent respect for both emplo yers and emplo yees. It is impor tant for us no w to accept EAW for w hat it is—a mere def ault—and to mo v ard b y emphasizing models, such as that of professionalism, that help sho w w here the desirab le v alues already exist, and to moti vate more employers and employees to adopt similar practices. The f rms that not only survive, but succeed, in the decades to come are going to be those that adopt such models. Source: 13, no. 2. ISSN 1052-150X, pp. 113–130. Reprinted by permission.

EndN otes 1. In 1991, the Commissioners on Uniform State Laws passed the Model Emplo yment Termination Act, w hich of fers a frame work for “just-cause” regimes. State legislatures have looked toward this Act as a model, but no state has yet adopted it.

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2.“Just cause” advocates differ as to whether or not the y def ne the standard as demanding merely “f air and honest” reasons or “good” reasons. 3. For example, less than 40 percent of all chicken act that they are exposed to pecking and chicken feather dust all da y and w ork under v ery dangerous and stressful conditions. to “Extended Mass Layoffs in the Second Quar ter of 2000, ” USDL 00–266. released September 20, 2000, http://stats.bls .gov/newsrels.htm. 1,099,267 people were separated from their jobs for more than 30 da ys in 1999, and 971,612 people f led initial claims for unemployment insurance during a consecutive f ve-w of 2000, there w ere 227,114 separations, and 162,726 initial claimants. Ehrenreich points out, most people cannot live on a minimum-w age salar y so that those working at minimum w age usuall y ha ve tw o jobs or a supporting family.

Reading 6-2

ConfessionsofaSw eatshopI nspector T. A. Frank1 Presidential candidates are calling for tougher labor standards in trade ag reements. But can such standards be enforced? Here’s what I lear ned from my old job. y bad factory in China. It produced outdoor tab les, parasols, and gazebos, and the place w as a mess. Work f oors were so cro barely mak area, w here metals w ere being chemicall , workers squatted at the edge of steaming pools as if contemplating a sudden, f nal swim. The dor miere f lthy: the hall ways w

ves—and the onl y way for any ll a bucket with cold water here work y suppress their complaints for fear of getting f employees at this factory couldn’ e w y,” said one middle-aged woman with undisguised anger. We could only guess how hard—the place kept no time cards. Painted in large characters on the f alls was a slo gan: “If you don’t work hard toda y, look hard for w ork tomorrow.” Inspirational, in a way. I was there because, six y ears ago, I had a job at a Los Angeles f eld

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of “compliance consulting, ” or “cor porate social ” It’ s a ser vice that emerged in the mid-1990s after the press star ted to repor t on bad f actories around the w orld and companies g rew concer ned about protecting their reputations. With an increase of protectionist sentiment in the United States, companies that relied on cheap labor abroad w le to negative pub . The Taking Heat Over China” in the Los Ang this March.) Today, labor standards are once again in the news. Barack Obama and Hillar y Clinton ha ve criticized trade deals such as N AFTA as unf air to American w orkers, and the ne trade agreements should include strict labor standwith Peru as an e xample of ho ard. I hope he’s right, but let’ s remember that N AFTA was also hailed, in its da y, for including labor prove proved hard to enforce. P eru attempts to remedy some of the problems of N AFTA, but w e’re still adv ancing slowly in the dark. In the meantime, as go vernments contemplate such matters on a theoretical le vel, w hat’s happening on the g round is mostly in the hands of the private sector. Companies police themselves, often using hired outside help. That w of my company. Visit the Web site of almost an y large American retailer or apparel manuf acturer and you’re likely to see a section de voted to “ethiram.” (Those are terms for making sure that your suppliers aren’t using factories that will land you on the front page of the ork Times.) Read on and y ou’ll often see that the compan y boasts of ha ving a code of conduct that its suppliers must follo w—a code of labor standards b y which the f actories in question y measured and monitored. Are they to be belie ved? Well, yes and no. Pri vate monitoring, if done properl y, can do a lot of good. But it’ s A simplif ed story of Nike may be the best w ay to introduce the origins of the type of w ork I w as

in. In the 1960s, Nik e (before it w as named Nik e) based its business on the premise that the company would not manuf ould only design and market them. The physical goods would be produced b y independent contractors in countries such as Japan or Taiwan, where labor w as, at e would be off ces, not factories. The idea was innovative and hugely profitable, and countless companies producing e verything from s weaters to to ys to e xercise equipment have since adopted it. It is now standard. The problem that arose for Nike and many other companies, ho wever, w as that the media, star ting in the 1990s, be gan to r un stories on ter rible labor conditions in f actories in Asia. When consumers started to get ang ry, Nik e and man y other companies w ere nonplussed. We’re just buying these shoes, they said—it’s not our business ho w Mr. X . And the ple, I lear ned that m y dr y cleaner w as paying his employees less than minimum w age, I might feel bad about it, but I doubt I’ d spend hours v etting alternative dry cleaners for labor compliance. I’ ve got too much else to w or ing my shir ts. But such musings hardl y mak e for a g reat press release, and Nik e’s case included elve-yearold Americans playing with soccer balls se wn b y twelve-year-old P akistanis, that sor t of thing. The company’s stock v In this same period , the U .S. Depar tment of Labor, led b y Robert Reich, be gan cracking do wn on sweatshops within the United States and pub licizing the names of f rms who were their customto of fer their ser vices as independent, for -prof t monitors of f actory labor conditions. We w ould act as earl y-warning systems against shady suppliers who mistreated their w orkers. Based on the reports we pro to sever their relations with a given supplier or to pressure them to improve. Business at my old company is still going strong. In Los Angeles, w here small gar ment shops of, say, thir ty employees were the main focus, w e

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usually work day. Outside the countr y, where the f actories were often quite large (several thousand employees) and made an ys to gym equipment, w e worked alone or in pairs and did one or tw o a day. The procedures w ere similar , but the inspections were more thorough abroad. tour the work f violations (the gazebo f actory, for instance, had no secondar y e xits, no guarding on machines, no f rst aid supplies, no e ye protection—the list k ept going), the other might re view per mits, employee f les, and payroll records to see what shortcomings were apparent on paper alone. Then we would be wing employees in private, usually tw n from them what our e yes wouldn’t tell us. Did the f acscate personal documents, such as idencommon in the Gulf States, w here foreign labor ers from places like Bangladesh could f nd themselves effectively enslaved. But bosses sometimes conf scated national identif cation documents in China, too.) Were employ e the compound? Ho w many hours a w eek did the y really w ork—regardless of w hat the time cards might say? Unfortunately, we missed stuf f. All inspections do. And sometimes it w as embar rassing. At one follow-up inspection of a f actory in Bangk ok at which I’d noted some serious but common w age violations, the auditors w ho follo wed me found pregnant emplo yees hiding on the roof and Bur ork y low wages. , sometimes I w as the one who uncovered what others had missed. A lot of it had to do with luck. Was the right document visible on the work f oor? Did we choose the right employ ere willing to conf de in outsiders? If w e w ere w orking through a translator, was his manner of speaking to people soothing? The major challenge of inspections w as simply staying ahead of the f actories we monitored. False time cards and pa yroll records, w hole da ys spent

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coaching emplo yees on ho w to lie during inter views, and even renaming certain f buildings in order to create a smaller P otemkin village— all of these w ere techniques used b y contractors to tr y to fool us. We were able to detect some of them. A collection of crisp time cards that sho wed every emplo yee ar riving within seconds of the next was easy to spot as ha ving been punched b y a single worker standing alone at the time clock. An employee whose recollection of hours w orked differed markedly from her time sheet w as another eeping. But others w ere es special attention for its cr ude effectiveness. The following composite dialogue, in which ev wer is a lie, is typical of the sort of thing we endured: Me: How many days a week do you work? Employee: Five. Me: vertime? Employee: Almost never. We get time and a half in pay for overtime. Me: How much do you make per hour? Employee: I don’t know. Me: How much did you get for your most recent pay period? Employee: I can’t remember. Me: Rough idea? Employee: I can’t remember. Me: How do y glue? Employee: It’s no problem. We have masks. [Note: This was often true—harmful cotton masks that concentrated the fumes.] Me: How much do you get paid for Sunday work? Employee: We don’t work on Sundays. Me: Do you have any sort of worker representative here? Employee: ? Me: Someone who represents the workers and talks to your bosses? Employee: ?

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Me: What sort of accidents happen here—you w, people bumping themselves, or cutting themselves? Employee: No accidents. Such e xchanges, needless to sa y, rarel y produced killer testimony. Sometimes we could work around uncooperati ve inter viewees, or w e could le over their own answers. However, just talking to emplo yees w as no guarantee of anything, no matter ho w gifted an inter rogator you were. Because any inspection misses something, there were f actories that managed to embar rass e veryone. In 2000, BusinessWeek pub lished an e xpose about a f Enterprise Handbag Factory, which made bags for Wal-Mart. Titled “Inside a Chinese Sw eatshop: ‘A Life of F ines and Beating, ’” the ar ticle described a nightmarish place in w hich nine hundred w orkers were locked in a w alled compound all da y, and gularly punched and hit workers for talking back to managers or e ven for w alking too f ast.” The repor ting, b y De xter Rober ts and Aaron Ber nstein, w as superb . Unfor tunately, that reporting led to the door of m y compan y, w hich had been among the auditors monitoring the f actory for Wal-Mart. y had found excessive overtime work and insuff cient pay, inspectors had missed the captive workers and physical abuse. To be sure, the Chun Si Enter prise Handbag Factory episode w as a debacle. (I ha ve no inside account of the stor y, since it took place se veral years before m y ar rival.) I suspect, ho wever, that the f ault la y with Wal-Mart as much as with the s a broader point y itself is meaningless. It onl y works w hen the compan y that’s commissioning it has a sincere interest in improving the situation. In the case of Chun Si, inspectors visited f ve times, according to BusinessWeek, and k ept f nding trouble. Now, anyone in the business kno ws that when inspections unco ver safety violations or w age underpayment more than once or twice—let alone f ve times—it’ s a sign that bigger prob lems are

lurking beneath. Companies rarely get bamboozled about this sort of thing unless they want to. And many prefer to be bamboozled, because it’s cheaper. e to boast of ha ving an ethical sourcing pro gram, such pro grams make it harder to hire the lo west bidder. Because man y companies still w est bidder, “ethical sourcing” often becomes a game. The simplest way to pla y it is b y placing an order with a cheap supplier and ending the relationship once the goods have been delivered. In the meantime, inspectors get sent to e valuate the f actory—perhaps se veral times, since they keep f nding problems—until the client, seeing no impro vement in the labor conditions, se vers the bond and mo ves on to the ne xt lo y suspect supplier. For the half-assed compan y there are also halfassed monitoring f rms. These specialize in per y brief, understaffed inspections as they can f t in a day in order to maximize their own prof ts. That gives their clients plausib le deniabillems undiscovered are prob lems av and an le can be blamed on the compliance monitors. It is a cozy understanding betw een client, monitoring company, and supplier that manages to benef t everyone but the workers. While private monitoring can be misused , however, when it’ tive change. I’ve seen it. ea genuine effort, the results can be impressi ve: safe factories that pay legal wages. That sounds modest, but it’ y hard to achieve in any country. Just visit a garment shop in Los Angeles. At m y compan y, I quickl y f gured out w hich clients cared. The f rst test w as whether they conducted “pre-sourcing”—inspections of labor conditions before placing an order instead of after .

the temptation of hiring the cheapest suppliers. to break the r ules, so they usually fail the preliminary inspection.) The second test w as whether the compan pliers. Long-term commitments are w hat motivate

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both par ties to beha ve: the supplier w ants to preserve the relationship, and the customer w ants to preserve its reputation. The third test was whether the compan y requested unannounced inspections as opposed to ones that w ere arranged in advance. The adv antages of this are self-e vident. And the f nal test w as whether the compan y made inspection results public. This was almost never done. Who, then, w ere the good actors of the trade? There are a number of them, actuall y, but here I’ ll just point out tw o that often sur prise people. The f last summer by a recall of toys that were found to have lead paint on them. ver the chemical fa among us monitors for ear its suppliers to improve their labor practices. It also owned and operated a fe w f actories in China—a country with dreadful f actories—that were e xemplary. These f acilities w ere re gularly inspected by independent monitors, and an yone w ho w ants w w hat the y’ve found there can visit Mattel’s Web site: the repor ts are pub lic. The second unexpected company is Nike, which long ago took its bad press to hear t and remade itself into a role model of ho w to car ry out thoughtful labor monitoring. Nike has become such a leader in the f eld that its Web site may be the single best resource for those trying to understand the diff cult business of international labor standards. Not only does Nike prescreen factories, it also discloses the name and address of e very f actory it uses and mak es public much of its monitoring. But let’s not be conf ned to praise. You may get the sense that I’m not Wal-Mart’s biggest fan. You’d be right. I betra y no conf dence here, since WalMart wasn’ as at my company. Never supplier factories. That’s because any given f usually has more than one customer , and during an audit w e would always ask the bosses to name their other customers. Wal-Mart was often one of them. And its suppliers w ere among the w orst I sa , and poorl y paid e ven b y local (usuall y Chinese) measures. I noticed that

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Wal-Mart claimed to require f actories to maintain decent labor standards—but why did it seem to nd them among the lowest bidders? Now w about good and bad actors mostl y because I saw them directly. But ordinary consumers searching on compan y Web sites—W almart .com, Nik e.com, etc.—can f nd out almost e verything the For instance, just no w I lear ned from Wal-Mart’s latest repor t on sourcing that onl y 26 percent of its audits are unannounced. By contrast, of the inspections Target conducts, 100 percent are unannounced. That’s a re vealing dif ference. And companies that do w hat Nik e does—prescreen, build long-term relationships, disclose producers—make a point of emphasizing that f act, and are relativel t are more guarded. (When in doubt, doubt.) As for those w ho feel especiall y about sweatshops, I they’re doing a valuable thing. Even w hen the y tak e actions that are sometimes of e when its competitors are the bigger prob lem—the effect is still, overall, good: it scares businesses into taking compliance more seriousl y. Boycotts, protests, letters to Cong ress, saber -rattling la ers, media exposes—they do ha ve an impact. And just imagine if members of Congress or the executive branch made an ef fort to praise or shame companies for their records with foreign suppliers and to encourage transparent monitoring in the pri vate sector. I suspect it would do more for international trade agreements could do in years. I don’ t pretend that e v brings about is for the best. An example: Mattel’s factories in China are superb, but w orkers there often earn less than their peers in shadier f actories because their emplo yers conf ne them to shor ter workweeks to avoid paying overtime. Another: You may rightly hate the idea of child labor , but f a fourteen-year-old in Indonesia from a factory job because she is four teen does nothing but depri ve her of income she is understandably desperate to

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keep. (She’ ll f nd w orse w ork else where, most likely, or simply go hung .) A third: Small village f in a humane and basically sensible way, and I didn’t enjoy their owners about the of American-style time cards and f fteen-minute breaks. But labor standards an here have a tendency to create such prob lems. They’re enacted in the hope that the good outweighs the bad. One f nal thought: If you’re like me, part of you feels that P eru’s labor standards are basicall y Peru’s business. It’s our job to w orry about standards here at home. But that sort of thinking doesn’t work well in an era of globalization. We are, lik e it or not, profoundl y af fected b y the labor standards of our trading par tners. If their standards are low, they exert a do wnward pressure on our o wn. That’s why monitoring and enforcement ha ve such y. We don’t expect developing nations to match us in what their workers earn.

(A few dollars a day is a for tune in many nations.) But when a Chinese factory saves money by making its employees breathe hazardous fumes by doing so, closes do wn a U .S. f actory that spends money on proper v entilation and masks, that’ s wrong. It’s wrong by any measure. And that’s what we can do something about if w e try. It’s the challenge we face as the walls come down, the dolls, y, orkers here is tied to that of workers who are oceans away. Source: .washingtonmonthly.com/ features/2008/0804.frank.html

EndN ote 1. T. A. F an editor at the Washington Monthly, is an Irvine Fellow at the New America Foundation.

Reading 6-3

Sweatshops, Choice, and Exploitation Matt Zwolinski

1.I ntroduction For the most par t, individuals who work in s weatshops choose to do so. 1 They might not like working in sweatshops, and they might strongly desire that their circumstances w ere such that the y did not have to do so. Ne vertheless, the f act that the y cant. Taken seriously, workers’ consent to the conditions of their labor should lead us to abandon cer tain moral objections to s weatshops, and perhaps e ven to view them as, on net, a good thing. This argument, or something lik e it, is the core of a number of popular and academic defenses of the moral legitimacy of sweatshops. It has been especially inf

to the v oluntar weatshop emplo as e vidence for the claim that Western go vernmade by sweatshops (Anderson, 1996, p. 694), or that labor-rights organizations ought not to seek to change the law in countries which host sweatshops in order to estab lish higher minimum w ages or better w ugman, 1997; Mait1996), or, f nally, that consumer boycotts of sw & Wudunn, 2000). ment above, w str The f rst step is to understand how a worker’s consent can have any moral weight at all. Ho w does choice ha ve the po wer (a ‘moral

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magic,’ as some ha ve called it) to transfor m the moral and legal of certain interactions 1996)? I begin the paper in section two by exploring se veral w ays in w hich choice can be morall y transformative. I distinguish betw een autonom yexercising and preference-e vincing choice, and argue that while the latter has been gi ven the most attention in the mostly consequentialist defenses of sweatshops,2 the former notion of consent, with its deontological under vant as w ell. With this preliminar y w ork accomplished , I then hat I tak e to be the best reconstr uction of the ar gument w hich seeks to base a moral defense of s weatshops on the consent of their workers. In section four, I explain how this argument undermines v by anti-s weatshop acti vists and academics. Sections f ve and six [not included in this excerpt] are devoted to a critical e xamination of this ar gument. I f rst e xamine, in section f ve, w hether the mor ally transfor mative po wer of s weatshop w orkers’ consent is under mined by a lack of v oluntariness, failure of independence, or exploitation. My coning completed this discussion of the moral weight of consent in section f v n to considerations of its moral force in section six. 3 If consent mak es sweatshop labor morally justif able, what does that tell us about ho w businesses, consumers, and go vernments ought to act? ingly, if consent does not make sweatshop labor morally justif able, what does that tell us? My position is that there is a large gulf between concluding that the acti vities of s weatshops are morall y e vil and concluding that sweatshop labor ought to be legally prohibited, bo ited by moral norms. To the extent that sweatshops do evil to their w orkers, they do so in the conte xt of providing their workers with a f nancial benef t, and workers’ eager readiness to consent to the conditions of s weatshop labor sho ws that the y vie w this benef t as considerab le. This f act leads to the ultimate practical conclusion of this paper , which is that there is a strong moral reason for third parties such as consumers and host and home countr y

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gov ays which are lik ely to depri ve s weatshop w orkers of their jobs, and that both the policies traditionall y promoted by anti-sweatshop activists (e.g. increasing the legal re weatshops, legally prohibiting the sale of sweatshop-produced goods, or subjecting such goods to economic boycott), and some more recent proposals by anti-sweatshop academics (i.e. v y self re y-wide standards or universal moral nor ms) are subject to criticism on these grounds.4 ****

2. The Moral Magic of Choice An agent’ s choice, or consent, is transfor mative insof v others stand with respect to w hat the y ma y do” (Kleinig, 2001, p. 300). This transfor mation can affect both the moral and the legal claims and obligations of both the par ties in volv parties.5 Consent to se xual relations, for instance, can render per missible one’ s par tner’ impermissible se xual touching, and render it impermissible for third parties to interfere with the sexual activity to which one has consented. But the moral transfor mation to w hich choice gi ves rise can occur for v o ways in w hich choice can be morall y ve, and ar gue that both are rele vant to the case of sweatshop labor.

a. Autonomy-Exercising Choice One way that choice can be morally transformative is if it is an e xercise of an agent’ s autonomy. Sometimes w e vie w the decisions of others as worthy of our respect because w e belie ve that they ref ect the agent’s will, or because the y stem from desires, goals and projects that are e xpressive the agent’s authentic self. 6 If so, this f act will often provide us with a reason for not interfering with the agent’s action even if we think the consequences of her action will be bad for her, and even if we disagree with the reasoning that underlies her

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decision. I might belie ve m y neighbor’s religious ue f aith, and ultimately detrimental to his f nancial, emotional, and well-being. Nonetheless, I am not entitled to compel m y neighbor to abandon his religion, and this is not merely because the consequences of my interference w ould be w orse for m y neighbor than my doing nothing. Ev en if I could mak e him better off by compelling him to abandon his religion, and even if my coercion would have no other ill effects in the w y neighbor’s autonomy w ould still require me to abstain from such behavior.7 Thus, one w ay that a w orker’s choice to accept the conditions of sweatshop labor can be morally transformative is if it is an e xercise of autonom y. Such a choice can, I will ar gue, be morall y transformative in certain respects even if it is not a fully autonomous one, and e ven if it does not achie ve the full range of moral transfor mations that such y autonomous choice w ould yield. 8 Specif cally, I believe that a worker’s autonomous choice to accept conditions of emplo yment estab lishes a strong claim to freedom from cer tain sor ts of interference by others, even if it f ails to render the employment relationship a morall y praise worthy one. But ho w strong a claim to non-interference does it generate? And against which sorts of interference does it hold? To take the f rst question f that not all autonomous choices generate claims to non-interference. But w hen the subject matter of the choice is of central impor tance to the agent’ s identity or core projects, it is plausib le to suppose to liberty.9 And it is hard to den y that the choices made by potential sweatshop workers are of central importance in just this w ay. Sweatshop workers do not generally choose to work in order to gain some e le income for luxuries, or simpl y to take pleasure in the acti orking. They work to sur vive, or to help their f amily sur vive, or so their children can gain an education and escape the misery of po verty that dro ve them to s weatshops in the f rst place. Choices such as these in volve

projects—one’s own survival, one’s role as a parent people’s li ves. Such choices, w hen made autonomously, deserve respect. But w In the case of religious liber ty, w e think that the autonomous pursuit of religious practice generates a claim against cer tain sor ts of interference with that practice b y others. We might similarl y hold , then, that the autonomous acceptance of sweatshop labor generates a claim against interference in car rying out the ter ms of their ag reement, such as the kind that w ould be in volved most ob viously in an outright le gal prohibition of s weatshop labor. But the idea that autonomous choice generates a claim to noninterference is one w hich stands in need of closer examination. The analo gy of religious practice is instr uctive. Note that e ven in the religious case, not all manifestations of religious practice are protected by a claim to non-interference, and not all kinds of interference, e ven those w hich involve the core aspects of religious practice, are prohibited. A religious belie ver w ho desires to murder a nonbeliever because his religion orders him to do so has no claim to freedom from interference in pur suit of this project. And even the ordinary religious desire to adhere to a certain str no claim to freedom from the kind of interference that we classify as “persuasion.” I cannot force you into abandoning your religious faith, but I can certainl ou out of it. I do not belie ve that the abo ve qualif cations pose a serious diff autonomous choice to accept s weatshop labor is entitled to a claim to non-interference. The reason the religious belie ver’s desire to murder the nonbeliever is not entitled to any such claim is that the acti of another. But those who wor about sweatshop labor are not typicall y w orried that s weatshop workers are violating an yone else’s rights. If an ything, they worry that the rights of the s weatshop worker himself are being violated. But the fact that a worker loses some of his rights is a consequence

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of the autonomy of his choice, not an objection to us to do is to w aive cer tain claims that w e might have had (in the case of w orkers, the claim not to be told what to do by others, or the claim to kinds of freedom of association, for instance). It is because w e think it impor tant to allo w people to waiv y that we f nd autonomy to be such an impor tant value, and why we believe it proper to respect autonomous choices—at least those w hich are lar gely self-re garding—with non-interference. This is not to say that all sorts of interference with a s weatshop worker’s choice are imper missible. To tak e some easy e xamples, it is of course permissible to use persuasion to try to get a sweatshop worker to not accept conditions of emplo yment that y ou vie w as e xploitative. And it is likewise permissible to start an ethically run MNE eatshop for its labor force. There are good reasons, both consequentialist and deontolo w le violations of workers’ autonomy.10 But it would be immoral, I believe, to pre vent contracts for s weatshop labor by le gislative f at.11 To do so w ould be to violate the autonomy of the workers who would have othork in such conditions. And what it is immoral to do directl y, it is also probably immoral to do indirectl y. La ws w hich ha ve the ef fect of pre venting w orkers and s weatshops from freely contracting to gether—such as la ws in the host countr y which raise the price of labor to a prohibitively high rate, or la ws in countries that consume sweatshop labor w hich ban the impor tation of sweatshop-made goods—are thus also morally suspect.12

b. Preference-Evincing Choice Choices are more than a method of e xercising autonomy. Choices also signal infor mation about an agent’s preferences. Signif cantly ue even w hen the choice is made under conditions of less than full autonom y. An agent f aced with the gunman’s threat of “y our money or y our life,”

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for instance, still has a choice to mak e, even if it is only from among a range of options w hich has been illegitimately restricted b y the gunman. And er his wallet, this would tell us that among the tw o options he f aces, to the gunman to losing his life. This might not be morally transfor mative in the same way as a full y autonomous choice w ould be, but surel y it does something to change the moral landscape. Compare the following two cases: Accommodating Kidnapper: A B and locks her in his basement. When mealtime arrives, A asks B which of two foods she would prefer to eat, and gives her whichever she requests. Curmudgeonl A kidnaps B locks her in his basement. rives, A asks B w o foods she would prefer to eat, and gives her whichever one she does not In both v ersions of the stor y, A illegitimately restricts B’s range of options. In neither case is B’s choice of meals full y autonomous. Still, it is a choice, and it seems clear that B’s making it will affect what A ought to do. Disregarding B preferences by giving her the meal that she least prefers is a wrong abo ve and be yond the initial wrong of coercion.13 By choosing one meal over another, she has conveyed information about her preferences to A. And by giving her the meal she least prefers, A is wingl y likely to make her worse off, and this is wrong. 14 B’s choice is thus morall y ve, but in a w ay dif ferent from that described abo v mation occurs as a result of B’s choice pro viding A with information about B’ wing what somebody prefers often changes w hat one ought to do. It might not be wrong for me to ser ve f sh to a guest about w w nothing. But if m y guest tells me that she despises f sh, ser ving it to her an yway w ould be ( ceteris paribus ) extremely disrespectful. By expressing preferences, choices thus transform the moral landscape.

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In the mugging case, the victim’s choice to hand over his wallet might not mak e the mugger’s decision to take it a morall y praiseworthy one, or e ven a morally permissible one. In these respects, therefore, his choice is not morally transformative. But there is another respect in w hich it is. It is transformative in that it renders imper missible cer tain attempts b y other persons to interfere with his activity. A well-meaning busybody w to pre vent the victim from handing o ver his w allet, belie ving that death in such circumstances was surel , w ould be acting wrongly, and w hat mak es the act wrong is that it goes against the victim’ s choice—w hether that choice is fully autonomous or not. In a similar w ay, then, a w orker’s choice to accept sweatshop labor can be morall mative b A worker’s choice to accept sweatshop labor shows native. Sweatshop labor might not be the kind of thing for which she has any intrinsic desire. But when all things are considered—her pover , the wages paid by the sweatshop and that paid by alternative sources of emplo yment, etc.—she prefers working there to an else she might do. And by e transformative. To attempt to directl y remo ve the option of sweatshop labor (or to act in w ays which are lik ely to indirectl y remove that option), w hile knowing that sweatshop labor is the most preferred option of man y work wingly act in a way which is likely to cause workers har given that many potential sweatshop workers seem to express a strong preference for sweatshop labor over the alter natives, acting to remo ve that option 15 is likely to cause them great This is, ceteris paribus, Sweatshop workers’ transformative in two ways—by being exercises of their autonom y, or b y being e xpressions of their preferences.16 Note that while both sorts of choice can be morall y transfor mative, they achieve their respective transfor mations b y calling attention to ver The

proper response to an autonomy-exercising choice is one of respect, and this respect seems to counsel non-interference with the agent’s choice even if we believe the consequences of interfering w ould be superior for the agent. Preferenceevincing choices often gi ve us reason for non-interference as w ell, but only because w e think the consequences of doing so will be better in some respect for the agent. The expression of a choice for one thing o ver another is usuall y good e vidence that y prefers that thing o ver the other , and it is, ceteris paribus, better for one to get what one wants. With this understanding of the morall y transformative po wer of choice in hand , w e are no w ready to n to a closer look to the argument with which this paper began—an argument that seeks to base a moral defense of sweatshops on the consent of the workers.

3.T heA rgument 1. Most s weatshop w orkers choose to accept the conditions of their emplo yment, e ven if their choice is made from among a se verely con17

2. The fact that they choose the conditions of their emplo options is strong e vidence that the y vie w it as their most-preferred option (within that set). 3. The fact that they vie by taking that option away. 4. It is also plausib le that s weatshop w orkers’ choice to accept the conditions of their employment is suff ciently autonomous that taking the option of s weatshop labor a way from them would be a violation of their autonomy. 5. m people or to violate their autonomy. 6. Therefore, all else being equal, it is wrong to take away the option of s weatshop labor from workers who would otherwise choose to engage in it.

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I belie ve this ar es what lies behind man y weatshops. things to note about it. rst is that, unlik e popular defenses, The o dif ferent w ays in w hich w orkers’ choices can serve to estab those w ays that mak e sweatshop labor a ers’ autonomy (1, 4, 5, and 6) and another based in an ob ligaeatshops, then, The is not purel Appeals to consequences are relev The s appeal to the preference-evincing po wer of choice, which cautions us to avoid workers by their revealed preferences. 18 But The Ar has a deontolo ell, which is brought xercising choice. Here, The Ar weatshop workers’ choices, not because that interference w ustrate preference-satisf action, but orkers’ autonomy in The second thing to note about The Argument is that, again unlik e popular defenses, it is clear re mation that s weatshop workers’ choices ef fect. Their choice estab lishes a claim of non-interference against those w ent them from engaging in s weatshop labor , or mak e that labor more diff cult to obtain. That is all that is claimed by The Argument. It does not attempt to sho w that workers’ wed on them b y their emplo yers morally praiseworthy. It does not even attempt to show that their choice renders such treatment morall y permissible.19 nally, it does not estab lish an insuperable claim against interference. The Argument shows that har ming sweatshop workers or violating their autonomy is wrong, but lea ves open the possibilable in certain circumstances. The gument simpl y shifts the burden of proof on to those w ho wish to prohibit sweatshop labor to provide such justif cation.

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The f nal thing to note about The Argument is that its success is e xtremely sensiti ve to a wide range of empirical f acts. The tr uth of premise 1, for instance, hinges on w hether people do in f act choose to w ork in s weatshops, and f ails in cases of genuinely forced labor. The claim that w e harm sweatshop workers’ by removing what they see as ticular f s preferences and their relation to her w ellbeing, and the claim that workers’ choices are autonomous (premise 4) depends on the particular conditions under which the choice to accept s weatshop labor is made. This sensitivity to empirical f acts means that we cannot determine a priori whether The Ar complicated phenomenon, and w hile philosophers have an impor e to the conversation about their moral justif ability, it is onl y a par tial contribution. F or the complete picture, w data from (at least) economists, psycholo gists, and ical data to suppor t my ar here it is available. Since I am not well positioned to evaluate the soundness of such data, ho wever, I will attempt to clearly signal when I appeal to it, and to indicate the way in w hich The Argument’s success is or is not reliant on its veracity.

4.W hatP oliciesD oesT he Argument Oppose? The Argument’s conclusion is that it is wrong to ‘take a way’ the option of s weatshop labor from those w ho w it. But what exactly does it mean to take away the option of sweatshop labor? t of policies is The gument meant to oppose?

a. Bans and Boycotts The most ob vious w ay in w hich the option of sweatshop labor can be ‘tak en away’ is a le gal ban on s weatshops or y, on the sale

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or impor tation of s weatshop-produced goods. The mechanism by which the former of ban removes the option of s weatshop labor is f airly obvious. But bans on the sale or impor tation of sweatshop goods can, if effective and large enough in scale, achie ve the same results. If goods made in sweatshops cannot be sold , then it seems lik ely that s weatshops will stop producing such goods, and those who were employed in their production will be out of w ork.20 Economists and others have therefore criticized such bans as counter productive in the quest to aid the w orking poor .21 As a y antisweatshop scholars writing toda y, but man y activists and politicians persist in their suppor t of such measures.22 The gument condemns them.

b. Legal Regulation Bans on the impor tation or sale of s weatshopproduced goods take sweatshop jobs a wa their w orkers b y making their continued employment no longer economically viable for their employers. The increased le gal re gulation of sweatshops can accomplish the same ef fect for the same reason. Le gal attempts to ameliorate w orking conditions in s weatshops by regulating the use of and pay for overtime, minimum wage laws, or workplace safety, for instance, raise the cost which sweatshops must incur to emplo y their w orkers. hich, in tur n, vel, to move their operations to another countr y where labor is more productive or less heavily regulated.23 Calls for the increased legal regulation of sweatshops are more common among both acti vists and academics alike.24 It is w orth noting, though, that calls for the increased enforcement of e xisting regulations are lik ely to be indistinguishab le in their ef fects. Man y la ws in the de veloping w orld which ostensib ly re gulate s weatshop acti either poorl y enforced or completel y ignored. 25 Sometimes the lack of enforcement is simpl y due to insuff cient resources on the par t of the enforcement agenc y. But sometimes it is a deliberate choice, since go vernment off cials w ant the tax

rev y and worry that increasing the cost of doing business could y away or lea ve. Calls for the enforcement of e xisting re gulations do ha ve the advantage over calls for ne w regulation in that such enforcement will help to promote the r ule of law—a k ey v alue in both economic de velopment and a health y democrac y.26 But in ter ms of their effect on workers’ jobs, they are equally and equally opposed by The Argument.

c. Voluntary Self-Regulation Today, many of the most prominent academic critics of s weatshops focus their ener gy on calls for voluntary self-re weatshops. Their hope is that self-re gulation can cor rect the moral f eatshops while at the same time avoiding the unintended harms caused by the more hea ve. Nothing in The gument is opposed to v oluntary self-re gulation as such. If, as The Argument was specif cally for mulated to allo w, many of the activities of s weatshops are immoral, then the y ought to change, and v gulation will often be the best way to accomplish this change. Furthermore, b y pro viding concrete e xamples of ‘positive deviancy’—cases where multinational enterprises have made changes to impro ve conditions for w orkers in their suppl y chain abo ve and beyond those required b y mark the law—much of the recent scholarship on selfregulation has provided a valuable model for f rms who wish to wish to be gin making changes in the right direction.27 There are, ho wever, tw o signif cant causes for concern o ver the precise w ay in w hich the case for self-re gulation has been made in the recent First, to the extent that ‘voluntary’ selfregulation is to be accomplished b y industry-wide standards, the re gulation is reall y onl y v oluntary for the industr y as a w hole.28 F or an y indi vidual f rm, compliance is essentiall y mandator y. Individual f rms, then, are in much the same position as they would be under legal regulation, insofar as those w ho cannot af ford to compl y with the

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mandated standard w ould be forced to cut costs or alter their production in a w ay that could ne gativel eatshop workers. Additionally, industr y-wide standards ser ve as an impediment to the mark et’s discovery process. By establishing one rms must comply, this sort of approach discourages (and in some cases, prohibits) individual f rms from experimenting with their own standards which might be better suited to the particular context in which they are operating.29 The second and less w ell-recognized prob lem is that b y making the case for self-re gulation in terms of the rights workers have to cer tain for ms of treatment and the obligations ve to ensure such treatment, suppor ters of ‘voluntary’ self-regulation end up putting too strong a demand m they desire, while paying insuff cient attention to w ays of helping workers that fall short of their desired goal. To see this problem more clearly, we can look at the recent w ork of Denis Arnold. The core philosophical ar ers have rights to freedom and wellbeing,30 and argues tain minimum conditions are met in their suppl y chain.31 As an example of the sort of specif c obligation to w hich these general rights to freedom and well-being give rise, Ar in a recent paper that “respect for the rights of work suppliers have an ob ligation to ensure that w orkers do not live under conditions of overall poverty by providing adequate w ages for a 48 hour w ork week to satisfy both basic food needs and basic non-food needs.”32 Now ould be a morally praiseworthy thing for MNEs to ensure that their workers are given this lev this is not what that MNEs have an obligation to provide this level of treatment—one that is g rounded on w orkers’ rights. This is making an e xtremely strong moral claim. Rights are generally thought to be considerations w hich, w hen brought to bear on a

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decision, are supposed to o verride any competing claims.33 Respecting rights is non-optional. But notice that w hile rights as such are nonoptional, the right and cor responding ob ligation that Arnold endorses are conditional in an impor tant way. Workers have a right to cer tain levels of minimum treatment, and MNEs ha ve an ob ligation to provide it, if MNEs involve those workers in their supply chain. But nothing requires MNEs to do so. Workers hav if MNEs contract with s weatshops to employ them. But MNEs are under no ob ligation to outsource labor in this w ay at all. And if the onl y morall y permissible w ay to engage in such outsourcing is to incur hea vy costs b y seeing that w orkers receive the minimum level of wages, safety conditions and so forth demanded by Arnold et al., it is quite possib le that man y MNEs will choose not to do so. Whether the y w ould or not is, of course, an empirical question the resolution of w hich is beyond the scope of this paper .34 But merel y notlogic of Arnold’s position. Ar claiming that: 1. It is morally per missible for MNEs not to outsource their labor to w orkers in the de veloping world at all. 2. It is not morall y per missib source labor to workers in the developing world without meeting the minimum conditions set forth by Arnold’s account of workers’ rights. But empirically, it seems plausible that 3. Sweatshop labor that f alls shor t of meeting the minimum conditions set for th b y nold’s account of workers’ rights can still be a net benef t to w orkers, relati ve to their other possib le sources of employment.35 y, 4.

hich do not outsource their labor to workers in the de veloping world do not benef t those workers at all.36

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It follows that on Arnold’s view, C1) It is morall y per missib benef t w orkers at all b their labor to w orkers in the de veloping world. And C2) It is morally impermissible for MNEs to benef t workers to some extent by outsourcing labor to workers in the developing world without meeting the minimum conditions set forth by Arnold’s account of workers’ rights. This means, parado xically, that according to Arnold’s ar y blameworthy for doing business with a s weatshop that pays less than adequate w ages than for doing no business abroad at all, even if workers in the unethical sweatshop would prefer and freely choose their work ov where in their essay, Arnold and Hartman seem to explicitly embrace this point. They approvingly cite critics (one of whom includes Ar ho argue that “re gardless of the kinds of benef ts that do or do not accrue from the use of sweatshops, it is simpl y morally impermissible to subject individuals to e xtended periods of g rueling and mindnumbing labour in conditions that put their health and w elfare at risk and w hich provide them with inadequate compensation” (210-11). But I do not think w vant the benef orkers under conditions of labor w hich fall short of meeting the minimum standards demanded b y hich falls short of a li ving wage can still help a w orker feed their f amily, educate their children, and generall y make their li ves better than the y would have been without it. This is a morally signif cant benef t, and one our system of moral nor ms should at the v least permit, if not encourage. Thus, w hile The gument does not condemn voluntary self-regulation as such, it does condemn the claim that outsourcing labor to the developing

world is onl y per missible if cer tain minimum standards are met. For we cannot simply assume the developing world if the onl y conditions under which the y ma y per missibly do so are ones in which the costs of outsourced labor are signif cantly higher than they are now.37 And without this assumption, our system of moral nor ms ought not ay which f nold’s standards, for to do so w ould be to depri ve workers of the abily would freely choose to accept, and thereb y frustrate workers’ choices and harm the v e intended to help. Source: Final Version available in vol. 17, no. 4 (October, 2007)

,

EndN otes 1. Def nitions of ‘s weatshop’ v ary. Arnold and Hartman (D. Arnold & Hartman, 2006) def ne a s weatshop as “an y w orkplace in w hich workers are typicall y subject to tw o or more of the follo wing conditions: income for a 48 hour w ork week less than the o verall poverty rate for that countr y; systematic forced overtime; systematic health and safety risks due to negligence or the willful disre gard of employee welfare; coercion; systematic deception that places w orkers at risk; and underpa ” Similarly, the U.S. General Accounting Off ce def nes a s weatshop as a business that “re y violates both w laws” (U.S. General Accounting Off ce, 1988). Both of these def nitions have merit insofar as they detail the specif c kinds of of fenses for which sweatshops are generally criticized. But both are, I think, parasitic on a more fundamental moral judgment—that a s weatshop is a business that is doing something wrong. The sometimes it might tak

o types of of fense

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to qualify as a sweatshop, sometimes fewer or more. But w hen we label something a s weatshop, I believe we are making at least a prima facie it is beha ving in a w ay that it ought not to behave. See (Zwolinski, 2006). The wback of this approach is that it r uns the risk of skir ting the substanti ve debate o ver the morality of sweatshops by def nition. To avoid this, I propose that w e def ne them as industries which violate labor standards (either host gal standards or standards def ned by inter national nor ms) in some of the w ays described above in a w ay w hich mak es their actions prima facie wrong. Lo w w ages and psychological coercion appear to be wrongnition of sweatshop should be open to the possibility that they will be proven not to be so, at least in some cases. F or pur poses of this essa y, I will be interested e xclusively in s weatshops in the developing w w a distinction between sweatshops—w y reco ve-ground businesses, e ven if some of their specif c practices may be illegal or immoral—and the infor mal sector of the economy, w here man y of the same practices which occur in s weatshops may occur, but in which enterprises lack the off cial legal standing that s weatshops ha ve. There are moral debates to be had o v orkers in the infor mal sector, but the debate o ver sw alternative to sweatshop labor, and one which does not share the direct connection to questions re garding the responsibilities of MNEs (multi-national enter prises). I therefore limit my discussion in this paper to s weatshops as an aspect of the formal economy. 2. See, for instance, (D. nold & 2005, pp. 208, 210), w here the authors character ize the laissez-faire defense of s weatshops as based on consequentialist moral considerations alone. Ho wever, w hile the authors are cor rect

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that most of the e weatshops are based on consequentialist moral reasoning, the y incor rect in asser ting that the f of consequentialism at w ork is necessarily A moral valuagarding which how they matter a consequentialist theor

y to maximize

p. 28), for instance. Or , rather than maximizing some agg regate such as preferences or y might weigh the interests of some g roups more heavily than others, as do the v arious for ms of example, (P arf tak w y on consequentialist considerations, the sor t of consequentialism on which it will w will not geted by tman. See section 3. 3. See (W ertheimer, 1996, p. 28) for a thor ough discussion. Brief y, the moral weight of a consideration is the w ay in w hich that consideration alters the goodness or badness of a relationship or state of affairs. The moral force of a consideration, on the other hand , is the wa sons agents have for acting one way or another with respect to it. 4. For a clearer statement of the sor ts of inter ference my argument seeks to criticize, see section 4, and the concluding section of this paper. 5. For more on the transfor mative power of consent, see (Wertheimer, 2003). of autonomy vary greatly. Some hold that the autonom y of a desire,

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belief, or action depends on its relation to other mental states, such as beliefs or higherorder desires. See, for instance, (W atson, 1975) and (F rankfurt, 1988). Such accounts can be refer red to as coherentist since, for them, the autonomy of a particular action or mental state is based upon its coherence with other mental states of the agent. A different approach to autonom y mak es the autonom y of an action or mental state depend upon its origin. F ischer and Ra vizza, for instance, hold that actions are autonomous if the y are the product of a “reasonsresponsive” mechanism (F ischer & Ra vizza, 1998). Another di vision could be dra wn betw een what have been called ‘procedural’ vs. ‘substantive’ accounts of autonomy—the dif ference between the tw o being that the for mer holds that autonom y can be assessed independently of the content of an agent’s beliefs and desires, b y looking at the process b y which those beliefs and desires are for while the latter does not (See, for a discussion of this distinction, (Mackenzie & Stoljar, 2000). For the purposes of this paper, I wish to remain neutral among these competing conceptions of autonom y. I ha ve attempted to base m y ar gument on the general concept of autonomy—that of freedom and self-go vernance in thought and action—and not on an y par ticular (and controversial) conception. Specif cally, the arguments I put forw ard in section 5.a. are intended to sho w that f ailures of autonom y do not under mine the main ar gument of this paper and should hold re gardless of whether one holds a coherentist, originalist, procedural or substantive conception of autonomy. 7. Within limits, of course. If m y neighbor’ s religious practices lead him to be a danger to himself, there ma y come a point w here m y interference with those practices becomes justif ed. The point is not that autonom y is an insuperable barrier to interference, merely that it is a barrier.

8. I will discuss the implications of the non-full y weatshop w orkers’ choices in section 5.a. 9. This is, I take it, much of what underlies many ar or an elaboration of this point, and an argument to the ef fect that there is nothing special about religion per se that entitles the practice of it to el, 2005). 10. On the consequentialist side, there are benef ts et competition and in allo wing indi viduals robust freedom of speech. These benef ts might be said to outweigh the har ms caused b y those w ho lose their jobs due to market pressure, or those who lose business due to public protests. Deontologically, w e might sa y that indi viduals ha ve a right to free speech or to compete f airly in the market place, but they do not have the right to utilize the coerci ve apparatus of the state to legall hich they disapprove. The latter would be a violation of workers’ autonomy, but the former would not. ew anti-sweatshop activists y propose propose various for ms of re gulation (punitive tariffs on sweatshop-made goods, prohibitively expensive re gulation of s weatshops, etc.) that are likely to ha ve the consequence of prohibiting w orkers from entering into y benef weatshop labor . See section 4 of this paper for a more detailed discussion of how the argument of this paper bears on these less (or less-obviously) coercive anti-sweatshop proposals. 12. “Morally suspect,” however, (and just above), should be read in a pro tanto sense. Violating a worker’s autonomy is a wrong, and this means that it is if there . It is possible, however ing sweatshop laborer’s autonomy might be less bad than the wrong any other course of action would impose, or that the benef ts secured b y

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wronging s weatshop laborers might be v ery great. In such cases, violating s weatshop workers’ autonomy is ar ly not the wrong thing to do, but it is still a wrong nevertheless. 13. Unless, that is, B knows something about the conditions of B’s choice that w e don’ w (such as that she really wants a ham and cheese sandwich even if her expressed preference is for a bo wl of soup). An e xpression of choice can f ail to be morall y transfor mative in v arious circumstances, and I will discuss some of those circumstances later in this paper. The point here is that the presence of coer y, is not b y itself suff cient to render a choice morally-nontransformative. 14. Unless, again, there is more to the stor y than I ha ve indicated here. Ha ving one’ s prefer always bad for a person. And knowingly acting in a w ay likely to make someone w orse of f is not al ways wrong. But they are usually, or at least very often, so. This is enough for the purposes of my argument. 15. See, for instance, the quote from Doris Hajewski in section 5.b. 16. o cate xclusive. autonomy-ex e vice-versa, but it need not be. 17. Many philosophers, myself f nd this severel able. For the pur poses of this paper , however, I weatshops as a some what isolated moral phenomenon. That is, I am asking w hat we should do about s weatshops, w hile holding most of the other conditions of the world (large in equalities of w ealth among nations, severe po v veloping w growing system of global capitalism) constant. y e seems to me the onl y way to make any progress ait for the resolution of these other problems. Pov ,

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, and economic de velopment all need to be addressed. My paper seeks to tell us w hat w eatshops in the meantime. 18. Note that while this argument relies on considerations that are consequentialist in nature, it does not necessarily rely on a classically utilitarian for mulation of consequentialism. My own view, in f act, is that to the e xtent consequentialist considerations are relevant, they are probably more prioritarian in form than strictly aggregationalist. In other w ords, w e ha ve a duty to promote good consequences, but that duty is especiall y weighty with re gards to the worst-off. This makes the issue of sweatshops especially pressing. Minimum w age laws in a country lik e some of the same unemplo yment ef fects as re gulations on sweatshops in the de veloping world. But the people put out of w ork by regulations in the de veloping world are in a much w orse position both antecedentl y and subsequent to regulation, and so our moral duty to protect signif cant relative to other moral obligations that we might have. 19. The w ays in w hich s weatshops treat their employees might be morall y repugnant and absolutely imper missible. But this is not enough to estab lish that it is morall y per missible for third parties to interfere. 20. This is, of course, an empirical claim. It is at least logically possible that sweatshops will respond to bo ycotts b y ceasing to engage in immoral behavior without negatively affecting employment. My ar gument against bo ycotts proceeds on the assumption, w defend here, that the outcome described in the main body of the paper is a signif cantly likely (though not certain) one. 21. Ian Maitland, for instance, ar nal paper on s w improve on mark et outcomes” with re gard to s weatshop w ages, such as bo ycotts or legal re gulation, can yield “unforeseen tragic

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larly, Powell (Powell, 2006) argues that “many of the means chosen by [anti-sweatshop] activists will not promote the ends of more ethical treatment of workers.” 22. promotes on the main page of its Web site a bill pending in the U.S. Congress (S. 3485 and H.5635) which would ban the impor t, export, or sale of s weatshop goods in the United States Labor 2006). See also in this vein, (Bernstein, 2002), which discusses the launching of the Campaign for the Abolition of Sw eatshops and Child Labor and quotes Geor getown law professor Robert Stumberg as noting that measures against sweatshops being considered include bans on such impor ts, forced disclosure of f actories where imported goods are made, and bans on government purchases of s weatshop goods. ” Finally, see the statement of the or ganization “Scholars Against Sweatshops” (SASL, 2001). This 2001 document signed by over 350 economists and other academics, calls both for the adoption of codes of conduct b y uni versities which w ts of apparel companies with which they could do business, and for stricter le gal and economic re gulations in countries that host sweatshops. In response to those who worry that such restrictive measures might har m the v ery s weatshop workers the y seek to benef t, the authors reassure us “the aim of the anti-s weatshop movement is ob viousl ve unintended consequences such as higher o verall unemployment in developing countries” (page 3, emphasis added). For obvious reasons, this seems to miss the point. these are empirical speculations which, though reasonab ly suppor ted by economic theor y, cannot be defended in this paper. See, ho wever, (Sollars & Englander, 2007, pp. 123–129) for an empiricall ygrounded approach to the unemplo yment

impact of minimum wage increases on sweatshop w orkers. If m y empirical assumptions turn out to be f alse, then the consequentialist case against the legal regulation of sweatshops is signif cantly w eak could still ar gue that the re gulations imper missibly interfere in w orkers’ freedom to enter into what they believe to be mutually benef cial contractual arrangements. 24. See, for instance, the references in footnote 22. Additionally, Har tman et al. claim that “because market transactions cannot be relied upon as a basis of a voiding rights violations, the protection of must come from the imposition of go vernmental controls or an effective realignment of consumer choice criteria,” (Har tman, Sha w, & Ste venson, 2003, p. 214). y claims that w hile man y anti-s weatshop academics have be gun to focus on v oluntary cor porate self-regulation, it w ve to suggest that f rms can be seen as the sole implementers of the core labor standards, so from both a theoretical and practical perspective it is necessary to see corporate efforts as gulatory continuum” involving both legal regulation, industr y-wide standards, and self-re y indi vidual f rms (Murray, 2003, p. 38, emphasis added). 25. See (D . tman, 2006), section IV.A for a discussion of this phenomenon with specif c examples. 26. See, for instance, (D . G. nold & Bo wie, 2003) section III, w hich does not e xplicitly call for governments to increase their enforcement of existing la to ensure that their contractors are compl ying with those laws regardless of enforcement. 27. See, for instance, (D . nold & Har tman, 2003) and (D . tman, & W 2003). 28. ferred b weatshop academics for a

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29.

30.

32. 33. 34.

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v pliance and cost-sharing. See, generall y, (D. W , specif cally, (D. See (Powell, 2006, section i v). His point, as I take it, is based on the logic of incentives rather than an inducti ve sur vey of empirical data. In Hayekian ter y-wide standards ha ve the potential to stif e the mark et’s ability to e as a ‘discovery process,’ f nding new ways wledge to improve human well-being. See (Hayek, 1968). See (D. Ar &W 2003, p. 4) and (D. G. Arnold & Bowie, 2003). . Hartman, & Wokutch, 2003), chapter 4, but see also (D . G. Arnold & Bo wie, 2003), especially sections I and II. (D. nold & Hartman, 2005, p. 211). See (Dworkin, 1997). See, however, (Powell, 2006), especially section iv, for a discussion of the economic pressures and unintended har ms which voluntary codes of conduct can create. The Argument’s objection to voluntary self-regulation is premised on the belief that such re gulation will negatively affect sweatshop employees. However, the criticism of Arnold’s w ork w hich immediately follo ws does not, as it is based instead upon an inter nal tension in Arnold’s account. See section 5.c of this paper for a defense of

y benef cial exploitation. 36. At least not in the shor t term. An anonymous reviewer has suggested that MNEs might, by disengaging from immoral economies, spur positive change in the longer -term, in much the w ay that Western disengagement from South Africa helped bring to an end the system of apar theid. If this w ere tr ue, it w ould constitute an impor tant reason for MNEs to refrain from doing business with immoral

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sweatshops. But 1) it w ould not necessaril y constitute an overriding reason, as one w ould have to balance the shor t ter m har ms caused by disengagement with the long term benef always trump, and 2) this position would probably only be effective if undertaken by a broad coalition of MNEs, and hence the question remains concerning what individual f rms should do now, in the absence of such a coalitional option. Thus while the challenge presented is an important one, it does not detract from the interest of The Argument as prefurther consider in this paper. 37. Sometimes the adv ocates of v oluntary refor m write as though this could be assumed. Bo wie and Ar tention is that it is economically feasible for oluntarily raise w ages in f actories in de veloping economies without causing increases in unemplo may choose to raise w ages w hile maintaining existing emplo yment le vels. Increased labor costs that are not of fset b y g reater productivity ma y be passed on to consumers, or , if necessary, absorbed through inter nal cost cutting measures such as reductions in e xecutive compensation” (D. G. wie, 2003, p. 239). F or a thorough economic critique of this assumption, see (P owell, 2006), especially section iii. As a point of mere lo gic, however, the f ve managed to raise benef ts without (visib ly) reducing employment is hardly a good indicator that emplo yment will not be reduced if all ligation to raise benef ts.

Reference Note: References removed from publication here, but .mhhe.com/ busethics2e

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Reading 6-4

Attacking the Roots: Shiraishi Garments Company and an Evolving Thicket of Business Ethics in China B. Jiang and P. J. Murphy

1.I ntroduction Takashi Shiraishi stared out his off ce window, watching ref ections of a hazy afternoon sun shining on T o Bay. The date was February 9, 2005. Since early the y ear prior, Shiraishi Gar ments Co. (SGC) had begun outsourcing its whole production capacity to China in order to dramaticall y increase its prof t margins. As SGC’s President, Takashi saw the immediate benef t of such outsourcing to his bottom line. But operations w ere v astly dif ferent in China. Some ethical issues had emer ged related to the health and safety of Chinese w orkers. Some red in the manuf acfacilities. These events had long concerned T reasons w ere also becoming business-related. As a consumer products company dealing in clothing and apparel, SGC needed to maintain its positi ve reputation: business success depended on its brand. Takashi w as increasingl y cer tain he w as going to have to mak e a tough strate gic management decision to resolv e the tradeof een ethical business operations and being a highl y prof table multinational company. Japanese f rms had wrestled with pub lic tr ust for several years, especially since the Sno w Brand milk poisoning episode in 2000. That w as w hen over 13,000 consumers became seriously ill. Cheap labor, albeit domestic, w as reported as the reason. Yet, Japanese companies were still moving operations into other countries for more cheap labor , which w as also increasing the le vel of domestic Japanese unemplo yment. Some of these companies were taking steps to demonstrate concer n for international employ to cor porate citizenship. SGC also w orked hard

to impro ve labor conditions in its Chinese supply chain. For instance, w hen local suppliers w ere reluctant to make the f nancial investments for f rst aid training in f actories, SGC paid for the initial sessions. Soon , the Chinese par saw less time lost due to injuries and be gan to embrace f rst aid training. Later , tw o major suppliers also began to use the same f rst aid training and noted the same benef ts. Although the direct costs w ere absorbed by SGC’s bottom line, Takashi undertook additional similar initiatives, such as the production of a f rst aid handbook and posters with infor mation about hazardous substances. But it never seemed to be enough. The entire issue w as like an evolving thicket of conf icting forces. Takashi realized he w as going ha ve to do more the branches.

2.Finding the R oots As T tices. For example, reducing the long working hours and increasing work Chinese operations. But such an initiati ve w ould y SGC’s bottom line. Quite simply, outputs would reduce drastically because less hours were worked per emplo yee. Although focusing on health and safety might help SGC’ s reputation, lower revenues did not mak e business sense, especially in the shor t ter m. But accepting the status quo w as not necessaril y less risk y either: SGC’ s supply chain w as showing cracks due to Chinese labor force dynamics. F or example, he considered the Chinese workers churning out lady’s brassieres for Ginza, the f amous shopping district in Tokyo. Those employees were growing miserable while

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working in f actories w here security guards k ept them behind lock neab Employee turnover rates in tw o of these par ticular suppliers exceeded 100%. It was becoming impossible to recruit enough employees to maintain production. As a result, SGC orders w ere increasingly not being f lled on time. Takashi found it unbelievable that production demands w ere so g reat that a labor shor tage w as emer ging in the w orld’s most populous nation. Another option, suggested b y SGC’s Board of Directors, was to withdraw operations China. SGC could enter other Southeast such as Vietnam and Laos, w here more cheap labor w as a vailable and there w as not a g rowing emphasis on labor conditions. Takashi rejected that option. He w nese ideal of Kyosei, which had been embraced by international bodies such as the Caux Roundtable.1 Just as the K yosei ideal emphasizes economic and social de velopment, Takashi belie ved economic survival was not the tr ue goal of SGC. Rather , he w ves of its customers, shareholders, and emplo yees. In the case of China, therefore, he w anted SGC to conelfare, and education of Chinese people. It w as no w past dusk. The r cargo ships headed out to sea through the Uraga Channel w ere visib le, and the Tokyo Aqua-line bridge was illuminated. Takashi resolved to mak e the right strate gic decision for SGC before the month of March, in just 19 da ys. But he did not know w here to star t. He did not w ant to lose the competitive adv antage of outsourcing to China, SGC to maintain the reputation of a compan y that cared about its emplo yees. This puzzle of ho w to keep making mone y in China w hile emphasizing more ethical business operations was driving him mad. T w he w as not going to solv e this puzzle by looking out the window. He vowed to act as quickl y as possib le. He strode to his desk and picked up the telephone.

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3.SG C’sB ackground Japan has one of the biggest and most sophisticated apparel industries. ashion, the Japanese taste in clothing is among the most particular in the world. For centuries, the most cherished possessions of Japanese women have not been silver, gold or an has always been the lush rich colors and the perfect f t of their kimonos. Much more than other cultures, clothing signif es worldviews, personal tastes, and sensibilities in Japan. Although man y contemporary Japanese live in plain apartments, most have a strong willingness to spend considerable sums of money on fashionab This aspect of the mark et environment underlies SGC’s niche. Takashi Shiraishi estab lished SGC in 1978 after watching a news report on television. The oil crisis was hitting the economn y hard that y ear, leading the Japanese go v licize the “energy suit”. The energy suit was a shortsleeved safari outf save expenses on air conditioning. The idea was a total failure however, because although a few ministers wore energy suits for a w o, nobody would dare to wear one to the off ce. Takashi’s recognized his entrepreneurial oppor tunity w hen the news repor The businessman puts on the darkest suit he owns, a white shirt, sober tie, and that is what he wears in Japan, no matter w outside. The Japanese f ting, as it eliminates the nerve-racking necessity of making choices.

A recent ar t school g raduate, Takashi belie ved such conser vative dressing habits created a real venture oppor tunity: introducing customization into the drab business attire mark et. He belie ved dif tered signif cantly to customers, e ven to those in the same age demo graphic. Thus, the purchasing patterns were diversif ed. He e ventually opened a men’s clothing shop in a T o depar tment store. Even though the small shop of fered products in

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conservative colors such b lue, g ray, bro wn and black, there w ere other options besides drab suits and neckties. Based on skin color , hair style, and other characteristics, Takashi helped customers select colors, accessories, styles, and shapes for tie knots. He became a master at making customers feel special and impor tant. Such personal attention made all the dif ference. Customers absolutely enjoyed that SGC took such interest in their appearance.

4.T heG rowthofSG C As SGC g rew, the clothing designs w ere transferred to se wing subcontractors in the Tokyo suburbs. SGC usuall y ordered smaller quantities with more designs whereas other retailers ordered larger er designs. to f ll orders for other were more interested in SGC. As all the retailers wanted lo wers, business relationships changed frequentl y because of price w ars. Yet, the relation SGC had with its sewing subcontractors remained strong. SGC made detailed repor ts on defects and also ga ve advice about how to improve quality and production. SGC shared customer comments and f ashion forecasts, too, so subcontractors and suppliers could k eep pace with the market. On average, within two weeks of an order customers w ould recei ve customized gar SGC. The clothes ar rived at the customer’ s home, and sometimes deli ver ven sho wed customers how to wear the clothing correctly. Then they would visit the customer ten da ys later to see

READING TABLE 6.1 Shiraishi Garments Company. Financial Highlights (Yen, in Millions) documents

if everything was going w ell. Customers thus felt sense of obligation to SGC, which would always be there should the clothing require service or repair. The customer gy combined with supplier relationship management were successful and good for business. SGC’ s gar ments w ere only 15% higher than ready-made ones, but with SGC consumers were able to choose from more than 10,000 unique style per mutations. The SGC brand quickl y became synon and prestige. During the 1980s, w hen the Japanese economy was booming, SGC w as a medium-sized but prestigious brand. However, b sales for ele ven retail outlets had sk yrocketed to exceed 22 billion yen.

5. SGC Tightens Its Belt As the 1990s pro g and an aging population dramaticall y changed the Japanese apparel industr y. Rather than purchasing completely designed garments, the new generation veral different shops, mixing them freel y to match their f ighty sensitivities. Young shoppers display y to buy clothes at select shops near rail way stations and fashion-specif c commercial districts rather than conventional depar tment stores, w hich were more sophisticated but also more traditional. There was also a ne Perhaps a general disillusionment with the “salar y man” made a more laid-back ve. Simultaneousl y, the Japanese econom y entered its “ten lost y ears” once the real estate and stock mark et bubbles burst in 1990. Japanese

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consumers lowered spending on clothing b y making fe wer purchases and prefer ring lo wer-priced items. As such, from 1991 to 2004 the percentage of household clothing e every single year. The Japanese male clothing market was becoming more f ven. SGC’s customized business attire did not meet this trend w ell. Since the late 1990s SGC had been uggling with shrinking sales and prof t margins, as sho wn in Reading Table 6.1 . At some point, Takashi recognized that he had to cut costs to sur vive. That point, in 2004, was when Takashi took steps to outsource SGC’s sewing operations to Chinese companies.

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READING TABLE 6.2 Hourly Rates for Sewing Laborers in Asian Urban Regions

6.C hineseA lluresandC hallenges In 2004 the w hole business w orld w as already watching the Chinese econom y. The reality of 1.3 billion potential consumers and low labor costs were attracti ve to American, European, and Japanese companies. Shelv es around the w orld w ere stacked with lo y China: the world’s workshop and four th largest economy. Its highest volume products were clothes, toys, and technology appliances (e.g., D VD pla yers). The national minimum wage had increased by 30%. ers come from, more y could f nd jobs near their hometowns. As a result, when exporters near the coast had poor w orking conditions, migrant labors would be less lik ely to go there for w wnst to foreign companies, labor conditions w ere emer ging as an impor tant f actor in the national labor mark et. Once China joined the World Trade Organization (WTO) in 2001, its attractiveness as a manuf acturing center increased ther. The World Bank then estimated that China would account for half of world textile manuf ing by 2010. Takashi had conducted his o wn research in the China as a production solution for his business. Reading Table 6.2 shows Takashi’s 2004 data, which revealed that China w as not the cheapest place to

Source: Cal Safety Compliance Corporation (CSCC)

outsource. Ho wever, Takashi belie ved personally that the criteria for the best place to manuf were not so ard. Right now, the place was China because of low labor costs as well as the foreign direct investments in its textile and apparel manuf , those industries w ere g rowing f ast, and the rising productivity of Chinese high-tech se wing facilities w ything else the w orld had e ver seen. Takashi visited se veral “supply chain cities” and was utterly impressed that e ver to manuf acture gar ments existed in a single location. Man y Chinese v endors w ere located within the suppl y chain cities. F ere located near te xtile mills and other suppliers of v arious components. F rom a business perspecti ve, then considering the f actories, political climate, time, fabric av , human resources, infrastr and speed to the Japanese mark et, Takashi w as sure China was preferable to other Asian countries. He wanted to pla y a role in the positi ve development of China. From a personal perspective, and based on the historical conte xt of Japanese and Chinese culture in southeast Asia, he sa lar oppor interest

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in making contributions to innov ust, and world ical leadership role that might be especiall y appreciate by Chinese manuf

7.C hineseManufac turing Practices Takashi noticed the salar y rate in Chinese coastal areas was four times higher than in China w regions. Man y labors thus had left r ural po ver in the yside for the new factories along the coast. As the 2004 Chinese Ne w Year approached, Takashi was surprised to see that up to 120 million migrant laborers f ays to reunite with f amilies in countr yside. This large mig ration helped k eep w ages lo w. Mig rant laborers w ere a cheap and compliant work force w much foreign direct in vestment and ensured the viability of millions of domestic businesses. However ved through their exploitation. In the Pearl River Delta, for example, one local v endor in SGC’s new supply chain told Takashi, “There are man y girls with good eyes and strong hands. If we run out of workers who will accept our cur rent wages, we will go deeper into the hinterland and recr uit ne w w orkers.” In that vendor’s factory workers were earning basic monthly wages of $37 and w orked 16 hours per day, seven days per week. These realities troubled Takashi. Low wages and poor labor conditions w ere the dark side of cheap labor costs. Domestic China policy had not y et addressed them ef fectively as of 2004. Takashi saw that state-owned enterprises, although not productive or prof table, treated workers fairly well. ate sector companies w ere e xploiting mig rant labor , mostl y young females. At the very root of the problem was the failure of local gov He recounted in his jour nal, “The local authority’s vestment, and labor law enforcement is a selling point w hen trying to attract foreign inw ard in vestment. But the

big prob exible in interpreting the law and have scarce resources.” er low pay, over lems and child labor in Chinese supply chains. NGO criticisms could lead to s reputation. Thus, to operate in China, SGC had to f ace the prob lem of labor conditions. Other risks associated with poor lems, lo w productivity, and high emplo y nover. Takashi operating in China. Reputation, as poor labor conditions created ne gative pub value. ere impor tant and yee ver (due to poor labor conditions). Foreign companies with factories in China were less e xposed to those risks than companies outsourcing production. Control w as limited w hen outsourcing. Companies actual f actories in China had implemented occupational health and safety programs. They paid basic w ages above the le gal minimum. Their social security payments and working hours complied with re gulations. Some provided extra benef ts, such as housing subsidies and holidays. These factories required a minimum volume of business and had to rein vest continually to update their technology. The overhead costs of an outsourced vendor, on the other were spread over a couple hundred clients. Takashi thought it would take years for a ne w f actory to achie ve the best practices, platfor ms, and intellectual proper on par with a third party. So he decided to use Chinese suppliers instead of estab lishing an SGC f actory in China.

8.P otentialSupplie rsinC hina Supplier 1. Located on the outskir ts of the city of W ed 1,500 laborers. Its number of o vertime hours were problematic, as 78% of emplo yees worked at least 132 hours of o vertime per month. Most w orkers ar rived at this f actory unskilled. Because the y

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were often paid piecemeal, and never for overtime, there w as no incenti ve for the f actory to cutback hours. Workers built skills on the job . The f did not pa rying hidden costs of low producti vity and quality and f actory o verhead. Although the factory incurred warnings and f nes, supplier 1 did not provide any sort of bonus to emplo yees at all. A r ule book issued to w orkers instructed them on every aspect of f actory life. The harsh penalty system included f nes for an y violation of the r ules, including (a) ar riving late, (b) talking during work, (c) leaving the workplace, or (d) spitting. Super visors and middle managers spoke rudely and shouted at workers when production goals were not met. Employees w ere despondent about the long hours and low pay. The f nes and poor quality food e Workers repor ted that there w ere fe w w ays to communicate at all with managers. Most had no desire to do so. Relaeen w orkers and super visors w ere yees frequentl y suspected super visors of not accuratel y recording the number of pieces the y produced and of e xtending w orking It seemed health and safety management w as good. Accidents w ere recorded b y the medical rst aid room in each production unit. Takashi still had f youts, bad lighting, and poor v entilation. Problems also included inappropriate storage and handling of to xic chemicals, improper protection equipment for w orkers, and the lack of chemical safety training. Supplier 1 had headaches managing its o wn suppliers. Lo w quality and late deli very of ra w materials dela yed production and squeezed the window of time for jobs and orders. They under took used purchasing from multiple-source, buying from a list of potential suppliers to a void getting locked into a sole source. Supplier 2. in Guangdong pro vince, emplo ying around 400

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workers, sewed garments for SGC and a fe w other foreign retailers. The managers described relations with foreign as table in terms of tight lead times, late sample appro val, and last minute changes to product specif cations. All these prob deliver orders, which were sometimes not f lled. It also led poor communication between merchandisers, f Insuffcient communication about changes to product specif cation led to more re working and , therefore, overtime. The re working time a veraged 7% during production and 10% after f nal inspecy diff working could reach le vels of more than 50%. As the piece rate compensation system did not cover reworking, a signif time was not only utterly unproductive, it was also unpaid. Very few workers knew there w as a le gal minimum wage. But all w ere aware they were not compensated for overtime and believed their wages were unf air. Two-way communication betw een workers and management w as poor , so changes in pay or hours w ere not understood and on occasion resented by workers. There were few effective orkers to raise concer ns with management, and managers usuall y did not respond to worker concerns or suggestions. Although the factory levied f nes for 18 different kinds of offences, workers did not recei ve an y training. Supplier 2 Takaishi saw there were inadequate escape routes and locked or blocked emergency exits. Systems for tracking and improving producti ere poor or none xistent. There was no for control system and no records of re working rates during the production process. The piecemeal workers were given daily productivity tar gets and supervisors made dail y estimates of ho w man y pieces each w orker made. Those records w ere not kept for more than a few days. Supplier 2 estimated that 70% of its f plies necessar y for production w ere deli vered at least one week late. Work ver at supplier 2 w as e xtremely high, 140%. Most w orkers

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ertime hours and management had no apparent concern for their well-being.

9.A uditing Factory auditing b y the go v as not the best tool for tackling the prob lem of Chinese labor standards in supply chains but, at the time, it was the onl y way. Independent auditing is a critical f actor that a compan y can use to maintain its reputation and achieve ethical behavior. But auditing alone, especially if superf cal, is not enough to drive positi ve change. It w as easy to audit f nancial conditions, but diff cult to audit a supplier for social conditions related to labor , and the en diff cult. F or instance, Takaishi noted one audit checklist item, w hich stated , “The supplier has a f re alarm.” Further questions not considered were, “does it w ork?” “Do w ork w w hat it is?” “Do workers have the right or the will to use it?” “Would they know what to do in an emer gency?” “Can everyone in the factory hear it?” A b lack-and-white audit approach could not solve these kinds prob lems. Ev en if shor t timeve to pass an audit were g lem w as still poor labor conditions. P ost-audit follo w-up from the auditors was poor and resulted in few improvements actually being implemented. Audits e ven could dri ve dishonesty , lack of vide the “right” ans wer or f ace penalties. Chinese factory managers w ere becoming skillful f aking records and coaching w orkers to gi ve acceptab le responses during inter views. wards concealment was a barrier to improving labor conditions because it w asted time and mone y without making any change in the workplace.

ork sive hours demanded of them, the y were willing to work more than the lo w limits set b y Chinese la w to increase their pa y. The w that if a f actory reduced hours to legal limits as a result of an audit, t to increase productivity, wages would decrease dramatically.

10.A ttackingthe R oots The sun was low and darkness was now descending over the T o Bay’s man-made islands. Takashi walked back to the windo w. His mind w as clearer now ent on compliance-focused audits, had made little progress in tackling poor labor conditions in SGC’s Chinese operations. The da ys of s weatshop labor might be numbered because the business en vironment was changing in China. Workers had mobile fast. Inter national purchasers could no longer rel y on prof y exploiting Chinese workers. Takashi thought he needed to focus more on continuous impro vement and capacity building activity. But a ne w approach to f nding a sustainable solution was needed. If such an approach w as impossible, he w as prepared to seriousl y consider getting out of China.

EndN ote 1. The Caux Round Table Principles w ere de veloped in 1994 b y business leaders interested in ethical and responsib le cor porate behavior as a foundation for business w orldwide. See .cauxroundtable.org

Chapter

7 EthicalD ecision Making: Technology and Privacy in the Workplace We must adjust to changing times and still hold to unchanging principles. .S. President

Carter

You say you want a revolution? Well, y

w, we all want to change the world.

Lennonand Things do not change; we change.

The CIO “has got this massively more complex job with fewer dollars, less disposable resources to meet that challenge and deliver on expectations to the business. . . . Technology has become the core fabric of how a company operates.” Vice Pr

are,

ackard1

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Opening Decision Point

“Reasonable” Use of Company Technology

ChapterO bjectives After reading this chapter, you should be able to:

334

1.

Explain and distinguish the two definitions of privacy.

2.

Describe the ethical sources of privacy as a fundamental value.

3.

Identify the three legal sources of privacy protection.

4.

Discuss the concept of a “reasonable expectation of privacy.”

5.

Discuss recent development in connection with employee monitoring.

6.

Explain the risks involved in a failure to understand the implications of technology and its use.

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7. Identify additional ethical challenges posed by technology use. 8. 9. Enumerate the reasons why employers choose to monitor employees’ work. 10. Discuss the ethics of monitoring as it applies to drug testing. 11. Discuss the ethics of monitoring as it applies to polygraphs, genetic testing, 12. Explain why monitoring might also pose some costs for the employer and for the employee. 13. Discuss the elements of a monitoring program that might balance the interests of the employee and the employer. 14. Explain the interests of an employer in regulating an employee’s activities outside of work. 15. Discuss the implications of September 11, 2001, on privacy rights.

Introduction In his best-selling book, The World is Flat, Thomas Friedman describes the hastening pace of globalization and ho w signif cantly the business, economic, and political landscape has changed in just the f rst decade of the tw y. Friedman employs the image of a “f at world” to convey the idea that neither distance, time, geography cial bar and trade. In f act, nine of the ten forces that F riedman identif es as creating this f at w gies. Even W part to the information revolution that began in the years leading up to the f all of the wall. y not the f rst time we have f acy (see y is global, or that a technological rev y responsib y logical revolution has brought with it as many challenges as opportunities. Many employee and consumer privacy. As you may recall from Figure 1.1 in chapter 1, information threat, loss, or attack is one of the g reatest concer ns of e xecutives worldwide.2 In fact, in 2007–2008, between 24 and 31 percent of companies suffered information attack in most of their areas. This chapter will review some of the key ethical issues of technolo gy and pri vacy, with a par ticular focus on privacy in the workplace. Privacy issues in the workplace raise ethical issues involving individual rights as w ell as those in volving utilitarian consequences. Workplace pri vacy issues evoke an inherent conf hat some ma the employer to protect its interests and the similarl y grounded right of the emplo yee to be free from wrongful intrusions into her or his personal airs. This conf ict can arise in the workplace

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Reality Check

Condemned to Repeat

In a 2008 article, Prof. Ariana Levinson cautions: 118 years ago Warren & Brandeis proclaimed that technological change necessitated new protections for the right to privacy. Today, new protections for the right to privacy are called for once again because, in the American workplace, technological change

continues unabated and little privacy is afforded employees from employer monitoring using the technology. Source: A.R. Levinson, “Industrial Justice: Privacy Protection for the Employed,” Cornell Journal of Law and 18, no. 3 (2009) (posted SSRN September 17, 2008), http://ssrn.com/abstract⫽1269512.

en gulation of personal activities or personal choices, or through various forms of monitoring. Some forms of monitoring, such as drug testing, may occur after a job offer has been made but even before the individual begins w gins to work, veillance of e-mail. Similarly, contrasting utilitarian ar fered on the ethics of monitoring employees. The employer can ar y way to manage the workplace effectively and eff ciently is to maintain knowledge about and control over all that takes place within it. The employee can simultaneously contend that she or he will be most producti ve in a suppor tive environment based on tr ust, respect, and autonom y. In an y case, the question of balance remains—w hose rights should prevail or which consequences take precedent? This chapter will e xamine technology and its impact on these issues. We will explore the origins of the right to pri vacy as well as the le gal and ethical limitations on that right. We will also e xplore the means b y which employers monitor performance and the ethical issues that arise in connection with these potential technological invasions to privacy. W ogy and pri vacy to the balance of rights and responsibilities betw een employers and employees. Because of the e y breadth of the technolo gy’s reach, this chapter could not possibly address all issues under its umbrella. We have therefore sought to limit our co v gy and pri vacy in the wor and related arenas. For instance, the intersection between ethics, intellectual property, the law, and technology open far too many doors for the sur vey anticipated by this text and will therefore not be e xamined within this o verview. Similarly, though a phone compan y’s decision w hether to compl y with the go vn over phone records cer tainly raises issues of both technolo vacy, it is not necessaril y related to issues of emplo yment, so w e will not be e xamining that decision. Ho wever, readers should be a ware of these issues and seek to apply the lessons of this chapter to wider issues of privacy and technology in business.

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The Right to Privacy Privacy is a sur prisingly v alue in contemporar y society . With the tremendous increase in computer technolo gy in recent decades, calls for greater protection of privacy rights have increased. Yet there is widespread xtent, and v vacy. Some Western xample, do not acknowledge a legal right to privacy as recognized within the United States, w hile others such as Ne w Zealand and Australia seem far more sophisticated in their centralized and consistent approaches to personal privacy issues. Ev en within the United States, there is signif cant disagreement about privacy. The U.S. Constitution, for e xample, makes no mention of a right to privacy and the major Supreme Cour t decisions that ha ve relied on a fundamental right to privacy, Griswold v. Connecticut and Roe v. Wade, remain highly versial.

Defining Privacy 1 OBJECTIVE

Tw vacy can be found in the le gal and philosophical literature on this topic: privacy as a right to be “left alone” vacy as the right to control information about oneself. It is valuab o senses of privacy. Certain decisions that w e make about ho w we live our li ves, as w ell as the control of personal infor mation, play a cr ucial role in def ning our o wn personal identity. Privacy is important because it serves to establish the boundary een individuals and thereby serves to def ne one’s individuality. The right to xtremel mine the kind of person we are and the person we become. To the degree that we value the inherent dignity of each individual and the right of each person to be treated with respect, we must reco gnize that cer tain personal decisions and infor mation are y the exclusive domain of the individual. Many people believ nized as a moral It would be diff cult for employees, for example, to claim that the in the workplace. This has led some people to vacy as involving the control of personal infor mation. From this perspecti ve, the clearest case of an in vasion of privacy occurs w w personal infor mation about us, as when a stranger reads your e-mail or eavesdrops on a personal conversation. Yet, the claim that a right of privac might also be too broad. Surel y, there are many occasions when others, par ticularly within an employment context, can legitimately kno ven quite personal information about us. Philosopher Geor ert has ar mational sense of privacy in volves a relationship betw o par ties, A and B , and personal information X about A. Privacy is violated onl y w w X, and no relationship e een A and B that w wing X. Thus,

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whether my privacy is violated or not by a disclosure of personal information depends on m y relationship with the person or persons w ho come to kno w that information. My relationship with my mortgage company, for example, would y’s having access to m y credit rating, w hile my relationship ould not justify their accessing that infor mation. Limiting access of personal information to only those with whom one has a personal relationship is one impor tant way to preser ve one’s own personal inte grity and individuality. It is perhaps that choice of limitation or control that is the source of one’ s sense of privacy. As explained by legal scholar, Jennifer Moore, “maintaining a zone of privacy gives you a de g ver your role, relationship, and identity , which you would not ha ve if e v one were aware of all a vailable infor mation about you. The choice is par t of what makes it possible to be intimate with y friend and to be professional with your employer.”3

Ethical Sources of a Right to Privacy 2 OBJECTIVE

The right to pri vacy is founded in the indi vidual’ versal right to autonomy, in our right to mak e decisions about our personal e xistence without restriction. This right is restricted b prevents us from infringing on someone else’s right to her or his personal autonomy. Philosopher P atricia Werhane describes this boundar y as a “reciprocal obligation”; that is, for an individual to expect respect for her or his personal autonomy, that indi vidual has a reciprocal ob ligation to respect the autonom y of others.4 Applied to the workplace, Werhane’s concept of reciprocal ob ligation implies that, while an emplo yee has an ob ligation to respect the goals and proper ty of the employer, the emplo yer has a reciprocal ob ligation to respect the rights of the employee as w ell, including the emplo yee’s right to pri vacy. In other w ork, Werhane has asserted that a bill of rights for the workplace would therefore include both the right of the emplo yee to pri vacy and conf dentiality, and the right of emplo yers to pri vacy in ter ms of conf of trade secrets and so on. This contention is supported throughout traditional philosophical literature. Kant links the moral worth of individuals to “the supreme v alue of their rational capacities for nor mative self-determination” and considers pri vacy a cate gorical moral imperative.5 Ethicists Thomas Donaldson and Thomas Dunfee have developed an approach to ethical analysis that seeks to dif een those v mental across culture and theor y hypernorms and those values that are determined within moral free space and that are not h ms. Donaldson and Dunfee propose that we look to the conver sophical beliefs around cer tain core principles as a clue to the identif cation of h ms. Donaldson and Dunfee include as e xamples of h ypernor dom of speech, the right to personal freedom, the right to ph ysical movement, and infor med consent. Indi vacy is at the core of man y of these basic minimal rights and is, in f act, a necessar y prerequisite to man y of them. Indeed,

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a key f nding of one survey of privacy in 50 countries around the world found the following: Privac gnized in all major international treaties and agreements on human rights. Nearly ever y in the world recognizes privac xplicitly or implicitly. Most recentl c rights to access and control one’s personal information.6

Accordingly, the v alue of pri vacy to ci reat as the v alue of the various hypernorms to civilized existence. Ultimately, the failure to protect privacy may lead to an inability to protect personal freedom and autonomy. It is impor tant to note here, in par ticular, that this discussion of pri vacy foundations might be considered b y some to be par ticularly Nor th American-based in its grounding in the protection of liberty and autonomy. These analysts would ould be based in a ground of the protection .7 sion which is outside of our scope, though not of our interest), there remains little argument of the vital nature of privacy as means by which to other critical ypernorms. Finally, legal analysis of privacy using property rights perspective yields vidual’s life and all non-procreative derivatives of her or his life. Deri vatives may include thoughts and ideas, as w ell as personal information. The concept of property rights involves a determination of who maintains control over tangibles and intangibles, including, therefore, personal infor mation. Proper ty rights relating to personal infor mation thus def ne actions that indi viduals can tak e in relation to other indi viduals regarding their vidual has a right tion, someone else has a commensurate duty to observe that right. Why do w e assume that an indi vidual has the unfettered and e xclusive right to her or his personal infor mation? Private property rights depend upon the existence and enforcement of a set of r ules that def ne who has a right to under take which activities on their o wn initiative and ho ns from those acti vities will be allocated. In other words, whether an individual has the exclusive right to her or his personal infor mation depends upon the e xistence and enforcement of a set of r ules giving the individual that right. Do these r ules exist in our society, le act, as we will discuss below, the le ague. Many legal theorists contend that additional or clearer r ules regarding proper ty rights in personal infor mation would lead to an impro ved and more predictab le market for this infor mation, thus ending the arbitrar y and unf air intr usions that may exist today as a result of market failures.

Legal Sources of a Right to Privacy Each emplo y vate thoughts, pri vate communications, and a pri vate life. These remain as dear to the emplo yee the moment after the employee steps into the w orkplace or s witches on an assigned computer as the

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3 OBJECTIVE

moment before. Yet, if the employee needs the job, perhaps to pa y the rent, feed her children, maintain a living geographically near to her elderly parents, or even to maintain her status in the community , or her sense of self, then the American employee must, to a large extent, give up her privacy.8 As with others areas of lightning-quick adv ances, the law has not y et caught up with the technology involved in employee privacy. Many recent advances, thus much recent case la w, and therefore much of our discussion in this chapter , will focus on employee monitoring, which we will cover in detail shortly. As a result, this is one area w here simpl y obe ying the la w ma y f all f ar shor t of responsible management practice. w might be clear with re gard to tapping a worker’s telephone, it is less clear in connection with monitoring a worker’s e-mail or text messages on a handheld device. Privacy can be le gally protected in three w ays: by the constitution (federal or state), b statutes, and b y the common law. Common la w refers to the body of la w comprised of the decisions handed do wn b y cour ts, rather than specif ed in any particular statutes or regulations. s Fourth Amendment protection ab v y the pub lic sector w orkplace because the Constitution applies only to state action. Therefore, unless the employer is the government or other representati v y will not apply. Statutes also offer if any, protection from workplace intrusions. The Electronic Communications Privacy Act of 1986 (ECPA) prohibits the “interception” or unauthorized access of stored communications. Ho wever, courts hav messages that hav y reached compan y computers. Therefore, the impact of the EPCA is to punish electronic monitoring onl y b y third par ties and not by employers. Moreover, the ECPA allows interception w here consent has been granted. Therefore, a f rm that secures employee consent to monitoring at the A liability. The Reality Check, “Pri vacy and Technology,” provides e en Some states rel . Other states pro acy rights, including Alabama, Arizona, Florida, Hawaii, Illinois, Louisiana, Montana, South Carolina, and Washington. However, in all states except California, application of this provision to private sector or tain, or not included at all. The “invasion of pri vacy” claim with w hich most people are f amiliar is one that de veloped through case la w called intrusion into seclusion. This legal violation occurs w hen someone intentionall y intr udes on the pri vate af fairs of another when the intr usion would be “highl y offensive to a reasonab le person.” As we begin to live more closely with technology ws, we begin to accept more and more intr usions in our li ves as reasonab le; as pri vacy inv y begin to be closer to w hat is nor mal and expected. It may no longer be reasonab le to be offended b usions into one’s

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Reality Check

Privacy and Technology

In an Arizona case, a husband and wife who worked as nurses were fired from a hospital after hospital officials learned that they ran a pornographic Web site when not at work. The couple explained that they engaged in this endeavor in order to save more money for their children’s college education. “We thought we could just do this and it really shouldn’t be a big deal,” said the husband.9 Though their dismissal attracted the attention of the American

4 OBJECTIVE

Civil Liberties Union for what it considered was at-will gone awry, the nurses had no recourse. In another case, a police officer was docked three days pay when his wife posted nude pictures of herself on the Internet as a surprise to her husband. The pay suspension was justified by the department in that case since police officers could arguably be held to a higher standard of conduct than average citizens.

private life that used to be considered unacceptab le. It is impor tant to be a ware that, while Georgia was the f rst jurisdiction whose courts recognized a common law—or court-created—right to privacy, two states, North Dakota and Wyoming, do not recognize any privacy claims generally accepted by the courts.10 While no case of emplo yer monitoring has y et reached the U .S. Supreme Court, employer actions ha ve received lower cour t attention. As early as 1990, Epson America survived a lawsuit f led by a terminated employee who had complained about Epson’s practice of reading all emplo yee e-mail. 11 In that case, the court distinguished the practice of intercepting ing and reading e-mail transmissions once the y had been sent. Ho wever, relying on court precedent for protection is a double-edged sword. An employee-plaintiff in one federal action w on a case against his emplo yer where the emplo yer had monitored the worker’s telephone for a period of 24 hours in order to deter mine whether the w orker w y. The cour t held that the compan y had gone too f ar and had insuff cient evidence to support its claims. 12 In another action, Northern Telecom settled a claim brought b y employees who were allegedly secretly monitored over a 13-year period. In this case, Telecom agreed to pay $50,000 to individual plaintiffs and $125,000 for attorneys’ fees.13 Most recent cour t decisions with re gard to monitoring specif cally seem to depend on whether the worker had notice that the monitoring might occur. Since the basis for f nding an inv vacy is often the employee’s legitimate and reasonable e xpectation of pri vacy, if an emplo yee has actual notice, then there truly is no real e vacy. This conclusion w K-Mart v. Trotti, where the cour t held that search of an emplo yee’s company-owned locker was unla invasion since the employee used his own lock. However, in a later landmark case, Smyth v. , Smyth sued after his manager read his e-mail, even though Pillsbur y had a polic y saying that e-mails w ould not be read. The , “we do not f nd a reasonable expectation of privacy in the contents of e-mail communications voluntarily made by an employee to his supervisor over the company e-mail system, any assurances that such communications w gement” (emphasis added). The

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end result of Smyth, en when a f rm promises not to monitor. Evidence of the impact of this decision is the fact that only one state, y ers when they are being monitored. Courts ha ve often suppor ted reasonab le monitoring of emplo yees in open areas as a method of pre v yee theft. F or e xample, in Sacr f’s Ass’n v amento,14 a public employer placed a silent video camera in the ceiling overlooking the release off ce countertop in response to theft of inmate money. The California Court of Appeals deter mined that the county had engaged in reasonab le monitoring because employee privacy expectations were diminished in the jail setting. 15 See Table 7.1 for an o verview of ho w the cour ts have tended to treat the le gality of monitoring from a general perspective.

Global Applications This somewhat unpredictable regime of privac atic to maintain w hen one considers the implications of the European Union’s Directive on Personal Data Protection.16 The directive strives to har monize all the v arious means of protecting personal data Union, where each country originally maintained myriad standards for information gathering and protection. In addition, the directi ve also prohibits E.U . f rms TABLE 7.1 Legal Status of Employee Monitoring

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New Job Discovered!

Evidently, the ethical and legal challenges that the issues addressed in this chapter pose are perceived as tremendously complicated and also vital to employers worldwide. As of 2004, there were more than 2,000 “CPOs” (chief privacy offi businesses around the world, more than 10 times the estimate three years ago.

Source: , “CPOs on the Rise?” Computerworld, March 15, 2004, .computerworld.com/ securitytopics/security/story/0,10801,91166,00.html,q uoting Alan F. Westin, president of the nonprofit Privacy & American Business.

from ring personal infor mation to a non-E.U y unless that countr y maintains “adequate protections” of its o wn; in other w ords, protections equi valent to those the directive guarantees in E.U. countries.17 Because the United States would not qualify as ha ving adequate protection, the U .S. Depar merce negotiated a Safe Harbor exception for f r vel of protection of infor mation.18 If a f satisf es these requirements, the directi ve allo . If not, both f Table 7.2.) Given the nature of the legal uncertainty or instability concerning these challenging areas of information gathering, perhaps the only source of an answer is ethics. Yet, “the de velopment of our moral systems has not been ab le to k eep pace with technological and medical de velopments, leaving us prey individually and societally to a host of dangers.”19 As a court put it in regard to the legitimacy of police use of infrared thermal detection devices aimed at an individual’s home without a warrant or notif cation, As technology races with ev ve expectations of privacy may be unconsciously altered . . . our legal rights to privacy should ref ect y mirror the current state of the commercial technology industry.20

TABLE 7.2 The Safe Harbor Exception

Decision Point Inquiring Employers Want to Know

Perhaps the more personalized response of Nor thrup Gr poration’s cer, F Daly, sums it up “Can this characteristic of speed drive us and ha ve a ne gative effect upon ho w we treat other people? You can’t rush love or a souff é.”21 What are the implications of this def nition or understanding of pri vacy for businesses and for business ethics anal ysis? (For one implication, please see the w Job Discovered!”) In general, one would argue that personal infor een the business that individual. For e hav

vacy, we would yer and employee. The mine the appropriate bound-

een employers and employ y priv Decision Point, “Inquiring Employers W w,” to consider information reasonably related to the job.) If we adopt something like a model of employment, where the conditions and terms of emplo med consent of both parties, then employee consent would become one major condition on what information employers can collect. We might summarize our abo ve e xamination b y sa ying that emplo yee privacy is violated w henever (a) emplo yers infringe upon personal decisions that 344

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are not relevant to the emplo yment contract (w hether the contract is implied or explicit); or (b) personal infor mation that is not rele vant to that contract is col, or used without the infor med consent of the emplo yee. Fur ther, since consent plays a pivotal role in this understanding, the burden of proof rests with the employer to estab lish the rele vancy of personal decisions and infor mation at issue.

Linking the Value of Privacy to the Ethical Implications of Technology The advent of new gy challenges privacy in ways that we could never before imagine. F or e xample, consider the implications of ne w technolo gy on employee and employer expectations regarding the use of time; the distinction between work use and personal use of technolo gy; the protection of proprietar y information, perfor mance measurement, and pri vac issues related to the digital divide. Technology allows for in-home off ces, raising extraordinar , and privac (there are now almost 34 million U.S. telecommuters22). Because each of us is capab , technology not only provides benef ts but also allows employers to ask more of each employee. ce war economy: More and more, boundaries are dissolving between leisure and working time, the place of work and place of residence, learning and working . . . Wherever categories such as working time, working location, performance at work and jobs become blur ce of agreements, norms, rules, laws, organizational for all of which hav uence on our behavioral patterns and systems of values than we are aware.23

New technology, however, does not necessaril y impact our v alue judgments but instead simply pro Sor vertheless. Consider the impact of yer’s decision to share personal employee infor mation or customer infor mation with la w enforcement. Pri vate f rms may be more willing—or less willing—toda vate infor mation than they would have been previously. Fir xperience, and often f nd themselves ill prepared for the unanticipated challenges stemming from new technology. Consider the lesson one f rm w problems with e-mail use and abuse might e xtend beyond the red an employee, he be f ooded his former employer’ f rm’s security depar tment was unable to b lock. Intel took the for mer employee

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to court and was successful in blocking any further e-mails on the basis of a legal theory called “trespass to chattels” (a “chattel” refers to an item of personal property as opposed to a piece of real proper en after the for mer employee appealed, claiming that blocking his e-mails violated free speech principles, a California appellate court disagreed and held in favor of Intel. Do we need “ne y”? Perhaps not, since the same values one held under pre vious circumstances should, if the y are tr ue and justif meate and relate to later circumstances. 24 However, the perspecti ve one brings to each experience is impacted b w technology and other advances. As economist Antonio Argandona cautions, there has been a change in values “that may be caused by the opportunities created by the technology.”25 On the other hand, he points to the possibility that new technology may also do much including development of depressed regions, increased citizenship participation, defense of human rights, and other potential gains.

Information and Privacy A business needs to be ab le to anticipate the perceptions of its stak eholders in order to be ab le to mak e the most ef fective decisions for its long-ter m sustainability. Ne gical adv ancements are often diff cult for the pub lic to understand and therefore ripe for challenge. How do y gle, the Inter net-based search engine, is the deontolo gical imperative: “don’ t be e vil.” Its founders describe that imperati ve b ving to “def ne precisely what it means to be a force for good—al ways do the right, ethical thing. Ultimately, ‘don’t do evil’ seems the easiest wa ”26 For instance, Google does not allo w gun ads, w hich admittedly upset the gun lobby, so one might expect that Google would be especially sensitive to stakeholder concerns as it de velops ne gy. Google believed it was providing a value to society when it created an e-mail system called “Gmail. ” Yet, critics char ge that Gmail violates Google’s own principles. This free e-mail system provides 7.5 gigab yone in the world—200 times more storage than wever, there was one catch: Google scans user e-mail in order to tar get adv The company e “When people f t. The ads correlate to the message you’re reading at the time. We’re not keeping your e-mail and mining it or an like that. . . You should whoever is handling your e-mail”27 That trust is truly the cr w technolo , isn’t it? When consumers rely on provided by a e-mail to the business will respect their privacy. Most average e-mail users do not understand gy behind the process. One would like to believe that those responsible for the technology are, themselves, accountable to the user. That would be the ideal. However, the Electronic Pri vacy Infor mation Center , a consumer adv ocacy group, considered Google’s marketing plan to be equivalent to a telephone

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operator who listens in on con versations and then pitches adv ertisements where relev o fundamental elements of pri vacy: the er, since the scanning and targeting of advertisements takes place without the user’s wledge or consent, it violates the ethical foundations of autonomy in the user’s right to mak e decisions about her or his “personal e xistence.” Finally, if one’s personal infor mation is respected as proper ty, Goo gle uses indi vidual proper Google responded that it w as not doing an ything more than other e-mail ser vices (which also include adv ertisements) except that its adv ertising was more relevant to the user’s interests. In fact, Google’s research showed that people actually followed many of those advertisements and ultimatel s an example of the way we try to do good. It’ e using it. Ev rst, it’ aluable service,” says Google founder Larry Page.28 T , however, by failing to fully comprehend and plan for its stakeholders’ ram, Google not only breached ethical boundaries but also suf fered public backlash. It did not anticipate concer ns over privacy or the controversy the pro gram would engender. Critics ar gued that Goo gle should have consulted with stakeholders, determined the best way to balance their interests, and then considered these interests as the y introduced the new program, all of w hich might ha ve precluded the ne gative impact on its reputation. The lesson lear ven reasonable justif cation (which remains arguable in this case), people are simpl le with an involuntary loss of control o ver these personal decisions. Goo gle failed to consider the perspectives of its stak fundamental values its decision implied. Consider the discomfor t evidenced in the Decision Point, “T gy Dilemmas.” Economist Antonio Argandona contends that, if ne w technology is dependent on and has as its substance infor mation and data, signif cant moral requirements should be imposed on that infor mation. He suggests the follo wing as necessar y elements: • Truthfulness and accur acy: The person pro viding the infor mation must ensure that it is tr le degree. • Respect f or pri vacy: The person recei ving or accumulating infor mation must take into account the ethical limits of indi viduals’ (and or ganizations’) privacy. This would include issues relating to company secrets, espionage, and • Respect f or pr oper , including netw , sabotage, theft of infor mation and impersonation, are enhanced and must therefore be protected. • Accountability: Technology allo ws for g reater anonymity and distance, requiring a concur rent increased e xigency for personal responsibility and accountability.29

Decision Point

Technology Dilemmas

Imagine how f rms ma elopment, manuf eting, and ser vice related to ne w production or other cor porate activities. What ethical issues does Argandona’s proposal raise, and how will stakeholders be impacted if f rms respond positively to this call? Let us tak e a look at another e xample in w hich consumers w ere surprised to learn about a business acti vity that some acti vists considered a violation of privacy. Reason magazine decided to include a customized cover on its June 2004 s neighborhood with the indi vidual’s home circled.30 Of course, a magazine will ha ve its recipients’ home addresses, er article on the power and impor tance of databases, illustrating a “w w w here y ou li ve” mental. The ar een the possible invasions of privacy information that database management affords and the realistic benef ts the technology could bring, such as instant credit, customized adv ertisements, and per Reason’s editor-in-chief, asks, “what if you received a magazine that only had stories and ads that you were interested in and pertained to you? That would be a magazine e veryone would want to read.” Is he right? P erhaps. The ethical question is w hat we are willing to, or w hat we can be forced to, gi ve up of our personal infor mation, privacy, and autonomy in order to get it. 348

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We have focused mainly on problems that affect the developed world; but let us not forget the less developed world. For millions of individuals and communities, access to computers, infor mation technolo gy something they can tak e for g ranted and this creates a literal digital di vide. In y reports on the ethical issues f make telecommunications available on a global basis and to overcome the digital inequality that is belied b y the ter m “global telephon y.” Perhaps we should be more dubious of a f rm which claims to be global. More lik ely, f rms using the term global intend to sa y “everywhere developed” rather than the implicit and unlimited “ev here” that the ter gorically claims.

Managing Employees through Monitoring 5 OBJECTIVE

One of the most pre valent for ms of infor mation gathering in the w orkplace, in particular, is monitoring employees’ work, and technology has afforded employers enormous abilities to do so effectively at very low costs. If an employer has a rule about the use of technolo gy, how can it ensure that employees are following that rule? For instance, according to a 2009 survey, more than half (54 percent) of f rms in the United States hav orkers from accessing social networking sites w hile at w ork, including F acebook, MySpace, and Twitter.31 But, unless your supervisor is looking over your shoulder, it would be diff cult to check on your access or personal use of technology without some advanced form of online monitoring. The American Management Association has conducted sur veys of mid- to large-sized U.S. f ver the past few years that show an increasing trend with regard to emplo yee e-mail monitoring. While its 2003 sur vey repor ted that 52 percent of f r 2001, its 2005 survey reported that 55 percent engaged in monitoring (see Figure 7.1 ). The 2005 sur vey also found that 42 percent of these f rms have a policy that covers its employees’ instant message use.32 An astonishing 41 percent of large companies (those with 20,000 or more w ork ve people on 33 Much of this monitoring is on an occasional basis rather than by regular routine. The most pre valent subject of monitoring is Internet use monitoring (76 percent) follo wed b y e-mail monitoring (55 percent) and videotaping (10 percent).34 Of f rms that monitor orkers that they do so. Notably, 14 percent of f rms do not their workers of e-mail monitoring and 20 percent do not tell them that the y are monitoring content of Web sites garding the number of w orkers subject to surveillance are diff cult to measure. One estimate contends that the e-mail or Internet use of 14 million U .S. workers is under constant sur veillance each da y, increasing to 27 million workers around the globe.35

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FIGURE 7.1 Monitoring Practices of Major U.S. Corporations Adapted by the authors

2005 electronic monitoring and ey (2005).

6 OBJECTIVE

More than 80 percent of mid- to lar ge-sized f ve Inter e disciplined employ ve terminated an employee for a violation). The leading violations include access to pornography, online chat forums, gaming, investing, or shopping at work.36 y mation are not readily visible. When w ogy, we might not understand the ethical implications of our decisions. occurs, we are not able to protect our o vely because we may not understand the impact on our autonomy, the of our our reciprocal obligations, or even what might be best for our personal e xistence. For example, do y ou always consider all the people w ho might see the e-mails y ou send? Can your employer read your e-mail? Y f rst response might be “no, my boss doesn’t have my secret password.” However, experts tell us that any system is le. Employers have wn to randomly read e-mails to ensure that the system is being used for business pur there is a company policy that systems must only be used for business purposes, or that the employees are given notice that their e-mail will be read? How do y ou know that y ard your disparaging remarks about a colleague directl y to that colleague? It can be done with the touch of a key. Are different issues raised b y that concer n from those that arose with a traeople could always send or show your letter to someone. When we mistakenly believe that no one is watching, we may engage in activities that we w or instance, y ou may believe that hitting the “delete” key actuall ays

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er ed by your supervisor or have a negative impact in a lawsuit. These ethical issues ma y be compounded b y the f wledge gap e een people w ho do understand the technolo gy and others w ho are unable to protect themselves precisely because they do not understand. You might not expect to be f red for sending out an e-mail—but if you thought about it a bit, you might hav wn what to expect. Technology allows for access to infor mation that w as never before possib le. Under pre vious circumstances, one could usuall y tell if someone had steamed open a letter over a teapot. Today, you usually cannot discover if someone reads the e-mail you sent yesterday to your best friend. Access can take place unintentionally, as w ell. In doing a routine backg visor may unintentionally uncover infor mation of an e xtremely personal nature that ma y bear absolutely no relevance to one’s work performance. As you will see from the reading, “Medical Ethics for the Newest Practitioners: Health Web Sites—Power and Responsibility in Online Health” by Joshua Newman, the consequences that surround the entering, maintaining, and accessing of personal health data are complex and present potentially huge risks on ethical and legal grounds. Newman w such an arbitrary disclosure occurs: because the information, though previously unavailable or too burdensome to uncover, is now freely available and much more easily accessible from a variety of sources. Moreover here on this planet, we are seldom out of the boundaries of our w orkplace. For instance, just because you are going to y our sister’s wedding does not mean that y our superviou. This raises a tough question: Should your supervisor try to reach y total accessibility creates new expectations, and therefore conf icts. How long is reasonab le to wait before responding to an e-mail? If someone does not hear from y ou within 24 hours of sending an e-mail, is it unreasonab le for them to resend it? Continuous accessibility blurs the lines betw een our personal and professional li ves. (See Reality Check, “Is Privacy Perception a Factor of Age?”) Another challenge posed by the new technology accessible in the workplace is the f acelessness that results from its use. If w e have to f ace someone as w e make our decisions, we are more likely to care about the impact of that decision on that person. Con versely, when w w someone because w e do not have to see that person in order to do our business, w e often do not tak e into account the impact of our decisions on him or her . It is merel y a name at the other end of an e-mail cor respondence, rather than another human being’ s name. When one puts something in writing, w e assume that people mean what they say, and we hold them to it as a precise rendering of their intent.To the contrary, w ersation, and treat it as such, lobbing notes back and forth, much as we would in a conversation, and permitting the idiosyncrasies that we would allow when speaking. E-mail, in contrast, arose in the personal context as a form of spontaneous, casual, off-the-cuff communication. We do not think in adv ance and often write quickl y without re-reading

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Is Privacy Perception a Factor of Age?

We discussed the defi beginning of this chapter. However, as we have continued through the chapter, you might have thought to yourself that some of the actions that others perceive to be invasive would not seem invasive at all to you. On the other hand, those actions that a court might hold to be reasonable behaviors by an employer might seem completely unreasonable to you, if you were the employee involved. Is the concept of privacy objective, universally defi ned, or instead is it based on a subjective perception? Researchers Larry Ponemon and Philip Gordon conducted a national survey in the United States (admittedly, a limitation) that sought to articulate the way in which age affects one’s perception of workplace privacy, specifi in connection with technology.37 Consider the following key findings and whether you find your own perceptions aligned with those of your appropriate age group (youngeraged workers (YA) ⫽ an employed worker between 18 and 30 years, older-aged workers (OA) ⫽ an employed worker who is older than 50 years). • E-mail: Only 38 percent of either group felt that employer monitoring of e-mail that is sent over a work system would be a privacy violation. When the question was changed to ask about online e-mail accounts (such as Gmail or Hotmail),

the percentages did not increase significantly (52 percent of YAs and 42 percent of OAs felt that it would be a violation). • iPod: Contrary to e-mail, YAs perceive that their iPods are “almost as an extension of their bodies.” Accordingly, 85 percent responded that a ban on iPods in the workplace would constitute a privacy violation. It is interesting to note that this number is higher than the number of YAs who felt that unannounced random searches of their iPod would violate their privacy (77 percent). OAs did not feel the same connection to their electronic instruments, with only 68 percent responding that a ban would be a privacy violation and 57 percent finding a random search offensive. • Images: Only 24 percent of YAs thought that it was inappropriate for their employer to use their photograph without their consent, but 41 percent of OAs had the same concern. Ponemon and Gordon believe that this may be due to YAs comfort with the ease of online image distribution. • GPS: YAs were concerned about their employers using GPS location-tracking devices to monitor activities away from the employers’ place of business (59 percent), but not to the same extent for OAs, 84 percent of whom expressed concern!38

before sending. We send things in writing no w that we might only have chatted about before. Given the ease and informality of electronic communications, we also often “say” (write, e-mail, and the like) things to each other that we would never say to someone’s face, precisely because we do not have to consider the impact of what we are saying. We are more careless with our communications because the y are easier to conduct—just hit a button and they are sent. To address some of the ethical issues computers present, the Computer Ethics Institute has created “The T ” w hich include these imperati ves: “Thou shalt not snoop around in other people’ s computer f les; ram you are writing or the system you are designing; and Thou shalt always use a computer in

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TABLE 7.3 Public Access to Personal Information

9 OBJECTIVE

ways that insure consideration and respect for y our fellow humans.” Of course, such guidelines ha ve no enforcement mechanism and are little more than suggestions. To see the types of additional infor mation available through other Web services, see le 7.3. y do f r gy usage? A f rm chooses to monitor its emplo yees and collect the infor mation discussed above for numerous reasons. Employers need to manage their workplaces to place w ork rmativ orkplace benef ts. Monitoring also allows the manager to ensure ef fective, producti ve perfor mance b y pre venting the loss of producti gy use. Research e vidences a rise in personal use of technology, with 86 percent of employees admitting sending or recei ving personal e-mails at w ork and 55.1 percent admitting to ha ving received politically incorrect or offensive e-mails at work. Among employers, 62 percent of f rms f nd employees accessing sex sites the workday.39 In fact, 10 percent of emplo yees spend more than half the w orkday on e-mail or 40

Beyond the management of its human resources, monitoring of fers an employer a method by which to protect its others resources. Employers use monitoring to protect proprietar y infor mation and to guard against theft, to protect their inv (67 percent of f rms have been ordered to produce employee e-mail by a court or re y body).41 In the American Management Association’s 2005 sur vey, emplo yer respondents reported that the y engaged in monitoring as a result of their concer ns for legal liability. Gi ven the cour ts’ focus in man y cases on emplo yer response to claims of se , among other complaints, f rms believe they need a way to uncover these inappropriate activities. One-fourth of the lar gest f rms repor ted f ring employees for inappropriate e-mail. 42 (See the for a quantif cation regarding “inappropriate” e-mails.) Without monitoring, ho w w ould the y kno w w hat occurs? Moreo ver, as cour ts maintain the standard in man y cases of w hether the emplo y w or should hav wn” of wrongdoing, the state-of-the-ar t def nition of “should

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Reality Check

Immoral Mail?

because of e-mail activity were accessing sites containing pornography or other inappropriate subject materials.43 A different survey in the United Kingdom behave “immorally” in e-mail; 38 percent have used e-mail in the pursuit of political gain within their company, at the expense of others; and 30 percent admit to having sent racist, pornographic, sexist, or Oddly enough, in one case however, the CFO of Mesa Airlines defended himself with pornography where he was accused of deleting company infor-

mation to an ongoing lawsuit from three computers. Instead, he claimed, he was simply trying to delete fi he thought might embarrass him. Funny how our concepts of the “lesser evil” shift, depending on the nature of the harm done. Sources: Institute for Global Ethics, “U.K. Survey Finds Many Workers Are Misusing E-mail,” Newsline 5, no. 10 (March 11, 2002); Ethisphere, “Mesa Airlines CFO Scrambled to Erase Porn” (September 27, 2007), http:// ethisphereblog.com/mesa-airlines-cfo-scrambled-toSeptember 28, 2007).

hav wn” becomes all the more vital. If most f rms use monitoring technology to uncover this wrongdoing, the def nition of “ should have known” will begin to include an expectation of monitoring.

Monitoring Employees through Drug Testing 10 OBJECTIVE

hich emplo yers ha ve had a longer histor y of monitoring employees. The employ gument in f avor of dr ug or other substance testing based on the law. Since the employer is often responsible for le gal violations its emplo yees committed in the course of their job, the employer’ er ev vironment increases. On the other hand , employees may argue that their dr ug usage is onl y relevant if it impacts their job perfor mance. Until it does, the emplo yer should have no basis for testing. Consider the possibilities of incor rect presumptions in connection with dr ug testing. For instance, in Drug Abuse in the Wor An Employer’s Guide f or Prevention, Mark de Ber nardo suggests that possessing cr udely wrapped cigarettes, razor b lades, or e y dressing inappropriately for the season ma y be w ug use. 44 On e a great deal of imagination to come up with other, ve possibilities. Y er may decide to test based on these “signs. Does a person hav the risks of that presumption outweigh the individual’s rights in reater precautions? In a study examining the of college students to drug testing programs, researchers found that “vir y all aspects of drug testing programs are strongly accepted by some indi y rejected by others.” Not sur prisingly,

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the only variable that the researchers found indicati v as whether the student had e v ugs in the past. ver used drugs, she or he was more likely to f nd drug testing programs acceptable.45 In general, the following factors contribute to greater acceptance and approval by workers: programs that use a task force made up of emplo yees and their super visors, a completel y random pro gram, ef fectiv programs that offer treatment other than ter mination for f rst-time offenders, and programs with no distinction between supervisory and other workers. In the seminal le gal case on the issue, . Railway Labor Executives’ Ass’n,46 the Court addressed the question of whether certain forms of drug and alcohol testing violate the F th Amendment. In Skinner, the defendant justif ed testing railway workers based on safety concerns “to prevent accidents and casualties in railroad operations that result from impair ment of employees by alcohol ugs.” t held that “[t]he Gov s interest in regulating the conduct of railroad emplo y , like its super vision of probationers ver ce, school, or prison, likewise presents ‘special needs’ beyond normal la arrant and probable-cause requirements.” It w er the traveling pub ees themselves “plainly justif es prohibiting covered employ , or while subject to being called for duty.” The issue then for the Cour t was whether, absent a w arrant or individualized suspicion, the means b y which the defendant monitored compliance with this prohibition justif ed the privacy usion. In reviewing the justif cation, the Court focused on the f act that permission to dispense with w arrants is strongest w here “the burden of obtaining a w arrant is lik ely to fr ustrate the governmental purpose behind the search,” and recognized that “alcohol and other samples tak hen a triggering e vent occur red must be obtained as soon as possib le.” In addition, the Court noted that the railway workers’ expectations of privacy in this industry are diminished gi ven its high scr utin . The court therefore concluded that the rail way’s compelling interests outw eighed privacy concerns since the proposed testing “is not an undue infringement on the justifable expectations of privacy of covered employees.” Where public safety is at risk, there is ar guably a compelling pub lic interest ciently persuasive to eigh any one individual’ vac However, what about jobs in w hich pub able to test all employees and job applicants? Is the proposed benef t to the employer suff ciently valuable in your perspectiv eigh the employee’s interest in autonomy and privac v deontological principles tak e consider a distributi ve justice perspective and the f airest result—does distributi ve justice appl y under these circumstances?

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Several major retail emplo yers, including Home Depot, Ik ea, and Wal-Mart, have comprehensive drug-testing policies for both job applicants and employees. Man ug-free” w orkplace polic y as a mark eting strategy. With just a few exceptions, such policies are le States. The question is, “ Are the y ethicall y appropriate?” The Decision P oint, “Limits on P ” explores these issues.

OtherFor msofMonitor ing

11 OBJECTIVE

Employers are limited in their collection of infor mation through other v arious forms of testing, such as pol ygraphs or medical tests. Employers are constrained by a business necessity and relatedness standard or , in the case of pol ygraphs, by a requirement of reasonab le suspicion. With re gard to medical infor mation specif cally, employers’ decisions are not onl y governed by the Americans with Disabilities Act but also restricted b y the Health Insurance Portability and Accountability Act (HIPAA). HIPAA stipulates that emplo y “protected health infor mation” in making emplo consent. Protected health infor mation includes all medical records or other y identif able health information. In recent y ears pol ygraph and dr ug testing, ph ysical and electronic sur veillance, third-par ty backg round checks, and psycholo gical testing ha ve all been used as means to gain infor mation about emplo yees. More recentl y, electronic monitoring and veillance are increasingly being used in the workplace. Where might this practice de v vide new questions about privacy is genetic testing. Genetic testing and screening, of both employees and consumers, is another ne gy that will of fer businesses a wealth of infor mation about potential emplo yees and customers. The Genetic Information Non-Discrimination A) became ef fective in November 2009 and prohibits discriminator y treatment in employment based on genetic infor A presents interesting questions since it def nes “genetic infor mation” in a more broad sense than one might imagine. Under GINA, your genetic information is not merely information about you, but also your family’s medical history, including any disease or disorder, or genetic test results of a f amily member. The term “family member” includes y our dependents and relati ves all the w ay to the fourth deg y careful in terms of how they gather and manage employee genetic information as they are subject to similar conditions to the Americans with Disabilities Act. A does pro vide for e xceptions. F or instance, an emplo yer can collect genetic information in order to compl y with the Family Medical Leave Act or to monitor the biolo xic substances in the workplace. The employer may also gather publicly available genetic information, from public sources such as newspapers. Finally A contains a strict conf dentiality provision,

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an employer may release genetic infor mation about an emplo yee under cer tain specif c circumstances: 1. To the employee or member upon request; 2. To an occupational or other health researcher; 3. In response to a court order; o a government off cial investigating compliance with this tion is relevant to the investigation; 5. ee’ cation provisions of the Family and Medical Leave Act of 1993 or such requirements under state family and medical leave laws; or o a public health agency.49

Business Reasons to Limit Monitoring 12 OBJECTIVE

Notwithstanding these persuasive justif cations for monitoring in the w orkplace, employee advocates suggest limitations on monitoring for se veral reasons. First, there is a concer n that monitoring ma y create a suspicious and hostile w orkplace. By reducing the level of worker autonomy and respect, as well as workers’ right to control their en vironment, the emplo yer has ne glected to consider the key stakeholder critical to business success in man y ways—the worker. Another lem. Monitoring may ar ly constrain effective perfor vely impacting performance and having the potential to cause ph ysical disorders such as car pal tunnel syndrome.50 more depression, extreme anxiety, severe fatigue or e lems than unmonitored workers. Stress might also result from a situation w here workers do not have the oppor view and correct misinformation in the data collected. These elements will lead not onl y to an unhapp y, disg runtled worker who perhaps will seek alter native emplo yment but also to lo wer producti vity and performance that will lead to higher costs and fe wer returns to the employer. Finally, employ vasion of pri vacy that violates their fundamental human right to privacy.

Balancing Interests Therefore, w here should the line be dra wn betw een emplo yer and emplo yee rights? Most of us w ould ag ree that installing video cameras in the w of the workplace in order to prevent theft may be going a bit too far wing where to draw the line before that might be more diff cult. gy exists to allow for privacy invasions, should the employer have the right to use it? Consider w hether monitoring could be made ethical or humane. One suggestion is to gi ve due notice to emplo yees that the y will be monitored , plus the oppor v or instance, if an employer chooses to monitor random phone calls of its customer ser vice representatives, it could notify the workers that certain calls may be monitored and these calls would

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be signif ed by a “beep” on the line the monitoring. In addition, if workers make a personal call, the y may use a non-monitored phone to a v invasion of privacy. However, such an approach may not solve all the about monitoring. Suppose you are the employer and you want to make sure your service representatives handle calls in a patient, tolerant, and af fable manner. By telling the worker which calls y ou are monitoring, y our employees may be sure to be on their best behavior during those calls. This of employer monitoring is termed the “Hawthorne Effect”: Workers are found to be more producti ve based on the psychological stimulus of being singled out, w hich makes them feel more impor y kno better worker. Random, anonymous monitoring may better resolve your concerns (but not those of the worker). Perhaps the most ef fective means to achie ve monitoring objecti ves w hile remaining sensitive to the concer ns of emplo yees is to stri ve towards a balance that respects indi vidual dignity w hile also holding indi viduals accountab le for their par ticular roles in the or ganization. Ann Svendsen, director of the Center for Innov een high-tr ust stak eholder relationships and business value creation. Sv erativ een a company and its stak eholders, creates g wledge sharing, lower transaction costs, lo wer tur nover rates and or . In the bigger picture, social capital appears to minimize shareholder risk, promote innovation, reputation and deepen brand loyalty.”51 A monitoring pro gram de veloped according to the mission of the or ganization (for e xample, with inte g accountable to the impacted emplo yees, approaches that balance. Consider the following parameters for a monitoring polic y that endea vors to accomplish the goals described above: • No monitoring in private areas (e.g., restrooms). • Monitoring limited to within the workplace. • Employees should have access to information gathered through monitoring. • No secret monitoring—advance notice required. • Monitoring should only result in attaining some business interest. • Employer may only collect job-related information. • Agreement regarding disclosure of information gained through monitoring. • Prohibition of discrimination by employers based on off-work activities. The above parameters allo w the emplo yer to ef fectively and ethicall y supervise the work employees do, to protect against misuse of resources, and to ha ve an appropriate mechanism b y w hich to e valuate each w orker’s perfor mance, thus respecting the le gitimate business interest of the emplo yer. They are also supported by global organizations such as the Inter national Labour Organization (ILO) (see le 7.4).

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TABLE 7.4 ILO Principles for Protecting Workers’ Personal Data

Philosopher William Parent conceives the right to pri vacy more appropriately yer’s actions. He suggests the follo wing six questions to deter mine whether those actions are justif able or have the potential for an invasion of privacy or liber 1. For what pur wledge sought? 2. Is this purpose a legitimate and important one? 3. Is the knowledge sought through in vasion of privacy relevant to its justifying purpose? 4. Is invasion of pri vacy the onl y or the least of fensive means of obtaining the knowledge? 5. ve been placed on the pri vacyinv 6. Ho wledge be protected once it has been acquired?52 Both of these sets of guidelines may also respect the personal autonomy of the individual worker by providing for personal space within the w orking environment, by providing notice of w here that “personal” space ends, and b y allowing ard achievement of a personal

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and professional development objective. The reading, “The Ethical Use of Technology in Business” b y Tony Mordini w alks us through the ethical decisionmaking process according to these balancing scenarios in order to demonstrate how they might be applied. The following section, Regulation of Off-Work Acts, will provide some guidance regarding how far the employer is permitted to go in directing the acti vities of its workers while they are not at work.

Regulation of Off-Work Acts 14 OBJECTIVE

The regulation of an emplo yee’s activities when she or he is a way from w ork is an interesting issue, par ticularly in at-will en wever, as discussed , even employers of at-will emplo yees must comply with a v ees. For instance, New York’ yment decisions or actions based on four cate gories of of f-duty acti gal recreational acti vities, gal products, political activities, and membership in a union. Across the nation, there are other less broad protections for of f-work acts. A number of states have enacted protections about the consumption or use of le gal products off the job, such as cigarettes. 53 These statutes originated from the nar rower protection for w orkers w ho smok ed of f-duty. Cur rently, abstention from smoking cannot be a condition of employment in at least 29 states and the District of Columbia (and those states pro vide anti-retaliation pro visions for emplo yers who violate the prohibition). In fact, instead of simpl lawful products outside of w ther by specif cally prohibiting an employ ork. On the other hand , emplo yers are not prohibited from making emplo yment decisions on the basis of weight, as long as they are not in violation of the American with Disabilities Act (ADA) when they do so. The issue depends on whether the employee’s weight is evidence of or results from a disability. If so, the employer must explore whether the worker is otherwise qualif ed for the position. Under the ADA, the indi ed” if she or he can perform the essential functions of the position with or without reasonab le accommodations. If the individual cannot perfor employer is not subject to liability for reaching an adv erse employment decision. However, employers should be cautious since the ADA also protects workers who are not disab led but w ho are perceived as being disab a category into which someone might fall based on his or her weight. La xist in just under half of the states. Ho wever, though workers might be protected based on marital status, they are not necessaril y protected against adv erse action based on the identity of the per son the y mar ried. F or instance, some companies might have an anti-nepotism policy under which an employer refuses to hire or terminates a worker on the basis of the spouse’ s working at the same f rm, or a

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conf ict-of-interest policy under w a worker whose spouse works at a competing f rm. Since about 40 percent of w orkers have dated an off and attitudes on w orkplace dating ha ve an especiall y strong potential impact. 54 Though only about 18 percent of workplaces have policies addressing workplace en fewer (9 percent) prohibit it,55 York decision reaff rmed the employer’s right to ter minate a worker on the basis of romantic in volvement. In McCavitt v. Swiss Reinsurance America Corp.,56 yee’s as not a “recreational acti ,” within the meaning of a Ne w York statute that prohibited emplo yment discrimination for engaging in such recreational activities. The employee argued cer had no repercussions whatever for the professional responsibilities or accomplishments of either, and his emplo yer, Swiss Re, had no written anti-frater nization or anti-nepotism policy, he was passed over for promotion and then dischar ged from employment largely because of his dating. The court, however, agreed with the employer that termination was permitted since dating was not a recreational activity, and therefore not protected from discrimination. While concer ns about w orkplace dating used to sur round issues of se xual harassment, the y are more lik ely to in volve apprehensions about claims of retaliation after a relationship is o ver. However, contrar t’s holding in McCavitt, not e veryone ag rees that the most effective response to the disco very of an illicit relationship is ter mination of the individual in power. Consider the Decision Point, “To Date or Not to Date.” political involvement, though states v ary on the type and e xtent of protection. F inally, y be unla ule treats one protected group differently than another. For instance, if an emplo yer imposes a yote in Native e place during off-work hours, the rule may be suspect and may subject the employer to . Similarly, the r ule may be unla ferent impact on a protected group than on other groups. w decisions, ho wever, pro vide for emplo yer defenses for those r ules that (a) are reasonab ly and rationall y related to the employment activities of a par ticular employee, (b) constitute a “bona f de occupational requirement,” meaning a that is reasonably related to that particular position, or (c) are necessary to avoid a conf ict of interest or the appearance of conf ict of interest. yee online communications while the employee is off work is relevant to the issues of technolo gy monitoring discussed earlier in this chapter; this question emerges as an astonishingly challenging area of conf een employers and emplo yees, and one without much legal guidance, demanding sensiti ve ethical decision making. F or instance, consider the question of personal b logs. Though b logs might initiall y seem an ork hours regarding their emplo hen

Decision Point

To Date or Not to Date

placed on the Web and then allowed to have the exponential impact experienced by some blogs. Since it is estimated that blog readership is in the millions,58 corporate reputations are at stake and legal consequences can be severe; 26 percent of f rms in 2007 w y the exposure of sensitiv the Internet or e-mail. 59 In one situation, a Goo gle employee compared the f r m’s s, and it did not fare too well. He also blogged about how the company’s provision of free food was merely an incentive to work through the . The employee was subsequently terminated. According to ABC News (U.S.), 26 percent of emplo yers access Facebook and other social networking sites during their pre-employment information gathering processes.60 Since toda y’s y outh be gin accessing and posting to these sites long before the y might anticipate e ver being in front of a potential employer, ho w f ar back in the past do w e reall y wish to hold our prospective employees responsible? There is a potential here for a responsibility much deeper than that e ven imposed b y the la w. F or some, this might seem quite reasonable w hile, for others, it is f ar be yond reason. Is it ethicall y justif ed? From an employee’s perspective, they should probably beware. A 2009 poll by 363

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Deloitte reported that 30 percent of f rms use social networking as part of their business strate gy; so it is clearl y on their radar .61 However, the same sur vey found that 27 percent of w orkers do not consider the ethical consequences of comments or videos posted online, and almost 40 percent do not e ven think about what their employer, prospective employer, clients, or co-workers might say about their online postings.62 In addition, w hile emplo yers are le gally pre v w, is it ethical for hen the candidate voluntarily discloses it with no connection with w ork? For instance, in various individuals’ prof les on Facebook, there is posted, “Nothing is more impor tant to me than the values I have from being a Seventh Day Adventist.” Another person explains that he kicked a drug habit, got out of rehab, and is getting on with his life.63 The prospective employer could never access this the interview so is gathering it in this method an y more appropriate? laws on this matter var y (there are far greater limitations on the collection of personal infor mation in Australia, for instance, than in the United States64), what ethical v versal value govern an employer’s judgment, or should the employer’s behavior also vary from country to country, if it is a global operation? The yment Relationship Begins Pre-employment,” provides an overview of the intersection of the discussions of the prior tw o sections in its evaluation of privacy, testing, and off-work acts. While our analysis to this point has addressed the re gulation of beha yment, perhaps it is impor tant to consider y our choices before emplo yment and the impact the y will have on an emplo yer’s later decisions about hiring y ou. Alternatively, from the employer’s perspectiv le to test prospective employees or why it might be effective to refrain from testing in the hiring process.

Privacy Rights since September 11, 2001 15 OBJECTIVE

The events of September 11, 2001, have had a major impact on privacy within the United States and on the employment environment in particular. The federal govcations to its patchw privacy protections since the ter ror attacks of September 11, 2001. In par ticular, proposals for the e xpansion of sur veillance and infor mation gathering authority were submitted and, to the chag rin of some ci vil rights attor neys and advocates, many were enacted. The most pub lic and pub licized of these modif cations w as the adoption and implementation of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001. The USA P A T Act e xpanded states’ rights with regard to Inter net sur v , including w orkplace sur veillance, and amended the Communications Privacy Act. The act also grants access to

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Reality Check

The Employment Relationship Begins Pre-employment

T Society has traditionally treated the employment relationship as beginning and ending with the start and end dates of the employment appointment. In fact, the relationship begins prior to hiring and ends, often, only with death.

PRE-EMPLOYMENT PRACTICES The importance of the pre-employment relationship is commonly overlooked. In spite of this, preemployees (i.e., job candidates) today have few if any legally recognized rights. This is becoming increasingly problematic because of widespread advances in technology and the virtual lack of respect afforded the personal privacy of job-seekers. A number of companies have recently emerged and are taking advantage of new informationgathering technologies by offering these services to employers in the process of hiring new employees. These companies contract with organizations (and individuals) to gather personal information about potential new hires. They gather any information that is requested about job candidates—from credit histories to their driving records. collecting data on people prior to their employment is nothing new, the methods used today lack the transparency of the past and skew the away from the employee. Further, employers do not always ask permission or even inform job candidates that they are doing background checks and are often c information that has influenced their hiring decisions. Firms support this sort of information gathering on the basis that it enables them to make better

hiring firms. For one reason, the accuracy of third-

complete. Background checks can result in inaccurate or downright erroneous candidate profiles.

might be distorted without their knowledge; instead

From the perspective of job applicants, the practice of pre-employment information gathering is particularly insidious. Job candidates are not always given notice that they are being scrutinized and that the material being is highly personal. In addition, job candidates are generally not offered the opportunity to provide any sort of rebuttal to the reports generated by informationgathering agencies. This is especially problematic in situations where candidates are rejected on the basis of background checks.

IMPACT OF PRE-EMPLOYMENT PRACTICES To see how this testing can have a negative impact on the hiring process; take the example of Maria, a fi in marketing for a regional department store. She is asked to take a pre-screening drug test and, through this and the personal information she provides as part of a general background check, the potential employer gains access to Maria’s credit report. This report reveals that she has a judgment pending against her. Fearing that Maria is an employment risk, the company decides not to hire her. While the credit report’s data might be accurate, it does not tell the complete story about Maria. It does not indicate, for example, that Maria was the victim of identity fraud. In addition, the report might be inaccurate without her knowledge. While Maria should be aware of the credit information in her report, she has not looked at it in some time and the collecting agency has included some incorrect information. The fact that Maria has an unpaid debt does not provide information inherently relevant to the particular job for which she has applied. The employer considering Maria’s application might rationalize that the background check is necessary to assess her general suitability. Many employers consider this a legitimate purpose and argue that there is a relationship between a candidate’s responsibility in handling client affairs and her manner of dealing with personal fi (continued)

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Although such an argument is not without merit, the result seems somewhat excessive. Consider, for example, the relevance of the driving record of a candidate for a bus driver position: it would seem almost counterintuitive not to inquire into that sort of information. There are meaningful differences, however, between this situation and that of Maria. Where work is of a particularly sensitive nature or where the level of the open position is high within a company, background checks directly related to performance might be appropriate when linked to a legitimate business purpose. In addition, the type of company or potential liability for the company could also warrant specifi c checks. In Maria’s situation, none of these circumstances are present.

ARGUMENTS AGAINST EXCESSIVE PRE-EMPLOYMENT TESTING testing, particularly when used indiscriminately. Excessive pre-employment testing can be attacked on moral grounds. First, it undermines the dignity of the as a mere factor of production. It effectively enables employers to treat people as a means to achieving profi it creates a climate of suspicion that undermines trust . Finally, it affects the character of the companies and secretive and manipulative through such information gathering and candidates, in turn, do what they unfavorable to their acceptance or advancement. This sort of behavior is to the detriment of the character of both employers and potential employees. In addition to these sorts of ethical considerations, there are strong business arguments against excessive use of pre-employment testing. Unfettered collection of personal information disregards property interests associated with that personal information. Hiring practices involving background checks ignore a person’s ownership of information about himor herself. It also erodes the privacy expectations a person has in his or her personal information. Moreover, it creates a bad first impression for potential employees and detracts from general During bad economic times, this might not

matter, but when times are good and employment rates are high, potential job candidates are likely to seek out opportunities with employers who do not utilize such intrusive methods. In addition, current employees—those who stay by necessity or an employer who does not trust them or respect individual privacy. In other words, the practice used tenor of the overall employment relationship, and this can prove demoralizing to employees and result in an underlying tone of distrust.

RESPONSIBLE USE OF PERSONAL INFORMATION The availability of abundant information to employers does not mean that they have to use all of it. Ideally, personal information should remain personal and, at the very least, the individual should have the ability to determine who gains access to his or her personal information and to know when someone obtains that information. It is important here to keep in mind that the availability of access is not the same as the moral right to access information or to use that information in a hiring decision. As employers consider how to use the information they gather, they should consider “legitimate busia legitimate business purpose (defi , and so able direct correlation between that information and the job candidate, it would then seem appropriate for personal information to be solicited. At the same time and as Maria’s situation checks can be performed and used against them, they need to make sure that the credit bureaus have accurate information. In addition, individuals need to be prepared to respond to anomalies that might exist in their personal information. It is no longer an issue

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sensitive data with only a court order rather than a judicial w enhances ci

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imposes or

een gov reatest level of protection. Title II of the act provides for the following enhanced surveillance procedures that have a signif vacy and ma er’s effort to maintain employee privacy: • ing to terrorism and to computer fraud and abuse offenses. • Provides roving surveillance authority under the Foreign Intelligence Surveillance Act of 1978 (FISA) to track indi viduals. (FISA in vestigations are not subject to F ourth Amendment standards but are instead go verned by the requirement that the search serve “a signif cant purpose.”) • Allo oice-mail messages pursuant to w arrants (i.e., without the previously required wiretap order). • Broadens the types of records that la w enforcement may obtain, pursuant to a vice providers. • Permits emergenc y providers to protect life and limb. • Provides nationwide service of search warrants for electronic evidence. These pro visions allo w the go vernment to monitor an yone on the Inter net simply by contending that the infor mation is “rele vant” to an ongoing criminal investigation. In addition, the act includes pro visions designed to combat money laundering activity or the funding of ter rorist or criminal activity through corporate acti All f w repor t suspicious activities in f nancial transactions and k eep records of foreign national emplo yees, while also complying with the anti-discrimination laws discussed this text. Though some of its sur veillance and infor mation sharing provisions were set to expire (or “sunset”) in 2005, President Geor ge W in March 2006, w hich made per manent or e xtended many of these authorities. In addition, the USA P ATRIOT Act w as not the onl y le gislative response. By September 2002, the Off ce of Management and Budget had recorded 58 ne w regulations responding to ter rorism65 and both federal and state agencies ha ve passed a number of ne w pieces of le gislation. Not everyone is comfor table with these ne A T Act’s newly permitted investigatory provisions, some librarians no w warn computer users in their libraries that their computer use could be monitored b y law enforcement agencies. The Washington Post reports that some librarians are e v vacy by destroying records of sites visited , books check ed out, and lo gs of computer use.66 The American Civil Liberties Union reports that a number of communities have passed resolutions against the USA PA T Act.67 While the P atriot Act has implications for all citizens, it also has direct implications for business since it relies on emplo yers for infor mation gathering,

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among other requests. Emplo yers have three choices in ter ms of their response to a go vernmental request for infor mation. They may opt to v oluntarily cooperate with law enforcement by providing conf dential employee or customer infor mation upon request and as par t of an ongoing in vestigation. They may instead choose to cooperate b y asking for per mission to seek emplo yee authorization to release the requested infor mation. Or, f nally, they may request to recei ve a subpoena, search warrant, or FISA order from the federal agenc y before disclosing an employee’s conf dential information.70

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Key Terms

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Readings

Reading 7-1: “Drug Testing and the Right to Privacy: Arguing the Ethics of Workplace Drug Testing,” by Michael Cranford, p. 376 Reading 7-2: “Medical Ethics for the Newest Practitioners: Health Web Sites—Pow ” by Joshua Newman, p. 382 Reading 7-3: “Bridging the Digital Gap in Emerging Economies,” by Geetanee Napal, p. 390 Reading 7-4: “The Ethical Use of Technology in Business,” by Tony Mordini, p. 397

Reading 7-1

Drug Testing and the Right to Privacy: Arguing the Ethics of Workplace Drug Testing Michael Cranford In other work, author Cranford argues that drug testing is ethicall y justif ied within the terms of the emplo yment a greement, and ther efore does not amount to a violation of an employee’s right to privacy . In the f ollowing artic le, w hich is an excerpt fr om a long er piece , “The Ethics of Privacy,” he expands the contention to inc lude an obligation to test in certain employment contexts.

Drug Testing and the Obligation to Prevent Harm The argument over the ethical justif testing tak hen we consider testing, not as an emplo yer’s right under the ter ms of an emplo y which an employer may prevent harms committed

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by employees w le dangers to the safety and health and of persons outside the w orkplace. At issue are two related ar y provide adequate justif cation for workplace drug testing. The f rst argument assumes that an employer has a general obligation to prevent harm. This obligation requires an employer to utilize reasonable means to prevent or mitigate potential har orkplace activities. To the extent that dr ug testing is such a reasonab le means, the employer is obligated to test for employee abuse. A primar y assumption in this ar gument is that employees who are dr That alcohol and dr cant work-related harms is reasonably estab however. For example, the National Transportation y a Conrail engineer was a major contributing factor to the Conrail-Amtrak collision in Januar y 1987, w hich killed 16 people and injured 170. by the F ederal Railroad determined that betw een 1969 and 1979 48 major train accidents, 37 deaths, and 80 injuries could be directl ug abuse. een 1975 and 1983 at least 45 signif cant train accidents, resulting in 34 fatalities, 66 injuries and over $28 million in property damage, could be directly linked to the errors of alcohol- and dr ug-impaired emplo yees. Without the benef t of regular post-accident testing, these f ly amount to less than half of the total dr ug- or alcohol-related accidents during that period. ers have not only an obligation to prevent harm, but a responsibility for har ms committed b y their emplo yees. This responsibility justif es an employer in obtaining information pertaining to employee drug abuse if b yer can the argument that has drawn the greatest attention

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and criticism, though my analysis is ultimately grounded on the corporation’s ob ligation to prevent harm. Unlike the ar gument based on perfor mance of ug testing as a means to pre vent har m does not entail a de valuation of human beings b y considering them as means to purely economic ends. Rather rms the essential v jugating technique and economic eff cacy to human ell-being. The f act that pre venting y also be in a compan y’s best economic t anal datory dr ug testing pro gram.1 Dr ug testing and employee assistance pro grams themselv es place signif cant f nancial burdens on cor porations that cannot always be rationalized as offsetting accident y might have been paid out.

Responsibility to Drug Test and Questions of Justification gument porations are responsib le for har ms committed b y emplo yees w hile under the inf uence of dr ugs, they are entitled to test for ” She invokes Kant’s “ought implies can” principle, which states that if a person is obligated to do X then the y must ha ve the capacity to do X (i.e., the assigning cor porations a responsibility for har ms caused by employees who abuse dr ugs, it follo ws that the y must ha ve the capacity to pre vent these harms. Specif cally, they must have the freedom to test for drug use. Moore then explores the meaning le” for harms committed by employees to determine if act, warranted. f rst point is that, w hatever is meant by “responsible,” it cannot mean legally responsible. Legally respondeat superior makes a cor poration vicariously liable for an emplo yee’s action, regardless of whether or not the corporation was at f ault. Le , in this case, does

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not impl y a capacity to ha ve pre vented har m. Moore concludes that holding cor porations legally liable for har ms committed b y emplo yees w ho testing is not inconsistent. Moore seems to think that just because le gal liability applies when a corporation cannot prevent harm, a cor poration should not attempt to pre vent harm to the g reatest degree possible, either on the basis of an obligation to benef cence or, in the v . Certainly a corporation can be held liab le when it is not at f ault, but nothing follows from this with re gard to its ob ligation to pub lic safety w hen it is at f ault. To the degree that a cor poration can be at f ault, it should be allowed the ability to pre vent harms. Legal liability does imply a justif cation for drug testing. Moore then addresses cor porate responsibility as a moral ob ligation to pre vent har m caused b y employees who abuse The argument goes as follows:

w that the ob ligation to pre vent har m cannot justify just any action. In none of her examples, however, does she actuall acy. For example, her f rst case is of a hostess who is responsible for a drunken guest leaving her par . Moore argues that she is perhaps allowed to take the guest’s car keys away from her,

Moore claims that this conclusion (6) does not follow, since it is not clear that the ob ligation to prevent harm justif

the bathroom. Moore is rel ying on the diff culty in discer een these actions to ar testing is not ob viously justif ed simply because it prevents harm. While testing impair ment b y a batter y of e yehand coordination and ref ex e xercises might detect the most seriousl y impaired emplo yees at the precise moment of testing, it would not detect employees w ho remained sober onl time frame immediatel y preceding such tests. Such testing is also indeterminate, as anyone can vouch w y passed a f eld sobriety test w hile le gally into xicated. Ev en if some degree of impairment w yer is left with no means b y w hich she ma y evaluate the signif cance of the emplo yee’s f ailure to pass the test. The difference between an employee who is impaired due to lack of sleep and an employee who is under the inf uence of an illegal substance is morally signif cant.2 Finally, testing impair ment f ails to detect habitual users of dr ugs w ho, w hile not noticeab ly impaired at the precise moment of testing, nonetheless ma Consequently, testing for impair ment is not “just more effective in all ways” than drug testing. Drug testing is not directed at identifying impair ment, which (as I ha ve pointed out) is rather diff cult to y any means, but at (1) identifying employees who abuse dr ugs, and (2) deter ring

Of course this does not necessarily mean that drug testing is unjustif ed. But it does mean that before we can determine whether it is justif ed, we must ask what is permissible for one person or group of persons to do to another to prev for which they are responsible.

place. Toward these ends, testing is the most effective and direct means currently available. In response to Moore, I ag ree that dr ug testing is neither necessar y nor suff ding the w orkplace of dr ug abuse. Consequentl y,

1. If cor porations ha ve ob ligations, the y must be capab “ought implies can.” 2. Corporations have an obligation to prevent harm from occurring in the course of conducting their business. 3. Drug use by employees is likel 4. Corporations must be able to take steps to eliminate (or at least reduce) drug use by employees. 5. Drug testing is an ef fective w ay to eliminate/ reduce employee drug use. 6. for drugs.

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she is cor rect in stating that the conclusion to the present argument (6) does not follow. But this is only if w e allo w her to def ne w hat it means for drug testing to be an “ef fective” way to eliminate or reduce emplo y ug abuse (5). If b y “ef fective” w e understand that dr ug testing pre vents or eliminates harms that would not, in its absence, be prevented or eliminated b then it follows that corporations must be permitted to test for drugs. Corporations must be permitted to undertake any reasonable measures for preventing workplace harms when no equall y effectual measures are available. I will refer to all such measures as measures of last resort. In this understanding of “effective,” the conclusion (6) does follow. But in this case, ho wever, our conclusion (6) is not strong enough. Refer ar yer has a general obligation to prevent harm, and that this obligation requires an employer to utilize reasonable means to prevent or mitigate potential har orkplace acti vities. But if dr ug testing is necessar y in that process as a measure of last resort, then it not only follows that corporations must be per mitted to test for dr ugs, but that corporations are ob ligated to do so. It is for this reason that a cor poration is responsib le to tak e on the “Protector of Har ms” role in its relationship with an emplo yee e ven w hen such a role is not inherent in the employment contract.

The Kew Gardens Principle and the Obligation to Prevent Harm There are two elements in my analysis to this point which I ha ve offered without an y accompanying substantiation. The f rst is the claim that an employer has a general obligation to prevent harm. ure of last resor t, as I ha ve def ned it. It is onl y if these assertions are reasonable that it would follow that corporations are obligated to test for drugs. In defense of both these points I w ould like to introduce four criteria w hich to gether indicate a

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moral ob

This combination verning diff cult cases of assessing moral responsibility has elsew “Kew Gardens Principle.” A cor poration’s responsibility to test for drugs, or tak e an y other appropriate measures to reduce the occur rence of har tion of the e xtent of the har ms w hich ma y result. In cases w here the other three f actors are constant, increased need indicates increased responsibility. In reference to his engineering company, Le wis Maltb y states that “a single Drexelbrook employee working under the inf uence of dr occurred in Bhopal. signif vent such harms. 2.Pro

. Pro wareness. We hold a

person b lameworth hat she can to prevent it. “When we become aware of a wrongdoing or a social injur y, we tak e on ob ligations that w e did not ha ve w hile ignorant. ” Greater here one would expect a heightened awareness of need as a consequence of ci , duties to one’s family, and so on. In other w ords, we would hold a family member more blamew y than a stranger for not being aware of a person’s critical plight. Proximity becomes impor tant in the case of workplace dr ork of social relationships in volved in a dail y, cooperative setting, combined with the social and legal perception that an emplo yer is responsible for the acti vities of her emplo yees, entail a high degree of expectation that the employer not only will lear n of a potential har m caused b y buse, but should delegates its employees to act on its behalf and , in f act, acts onl yees. This integral and intimate relationship w hereby the employees act on behalf of the corporation obliware of potential dangers w

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While a v ariety of measures can and ha ve been used that locate and address the prob lem of workplace dr ug abuse (such as direct obser vation of emplo yees, hidden cameras, mandatory educational programs in dealing with dr ug abuse, and basic de xterity/ref exivity/judgment testing), none of these pro grams has the same certainty of screening out drug abusers as does drug testing. Direct obser vation and de xterity tests can be beaten (and are, routinel y). While education is an ef fective counterpreventative, it does not screen out users w ho are resistant to receiving help—the individuals most lik ely to place others at risk. On the other hand , it can be ar ug testing also is f alsif able. If given adv ug users can y can procure a sample of “clean” urine another individual and substitute it for their own. At most, these e xamples argue against re gularly scheduled testings—not against random, These e xamples also ov ies from individual to individual and from use ho are the most likel ould probably be unable to abstain from use long enough e ven to pass an announced test. And while drug testing is not unfalsif able, it is more diff cult to falsify than other options for testing. Consequentl y, w ument for the detection of drug abuse, dr ug testing has an ef fectiveness and specif city that remain unparalleled. Since drug testing is the most ef fective technology currently available to make the employer aware of potential dangers b y locating habitual users, and without w hich many such users will likely not be identif ug testing is obligatory as a measure of last resor t. Since no one other than the emplo yer is more a ware of the potential for an employ orkrelated harms, a signif cant moral responsibility to prevent such harms follows. employer has a reasonab le cer tainty that an

Workplace

employee (or all emplo yees) does not abuse Thus, dr ug testing is not onl y essential to the employer’s obligation to come to know of potential har ms, but it reduces a cor poration’s moral responsibility for har ms committed b y actor. 3.Capa . Ev one has pro ximity, that person cannot be held morally responsib to meet the need. As I have discussed at length, not just an y action of fered to pre vent a har m is y reasonable. What is reasonable is that action which is least ve or harmful, most eff cient and specif c, and with the highest ving its goals (thus, my principles for w le means w pri vate infor mation). Dr ug testing, in combination with a counseling and rehabilitation pro gram that relie ves emplo yees of hazardous duty, meets these criteria. In most cases, as will be noted below, no other agent has ming this combination of actions.

sible the less likely it is that someone else will pre vent the har m in question. While it is often diff cult to assess w hether one alone has wledge of a potential har m, to the de gree one else has the pro vening, signif In the case of har ms caused by drug abuse, it is rarely the case that an agenc y outside the workplace will possess the means to either assess the potential for har m (thus need and proximity) or be able to prev being realized (b y possessing the capacity to locate and remove employees w from hazardous duty). beyond the emplo yer w hich can ef fectively prevent har ms, the emplo yer becomes the agent of last resor t. When there is no method of identifying dr ug abusers more ef fective than drug testing, it becomes a method of last

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resort in the process ofpreventing drug-related harms in the w orkplace. Consequentl y, the criterion of last resor t, in connection with the other three features of the K ew Gardens Principle, assign a cor poration a high de gree of moral responsibility to prevent drug-related harms, and obligate it to make use of reasonable methods for identifying such har ms, particularly when more effective methods are unavailable. The actual de gree of responsibility tur ns on the level of need (criterion #1), ho wever. To the degree that har ms are improbab le or of little consequence to human life and safety , a cor poration’s obligation to prevent such harms is diminished. Dr ug testing is not justif ed under this ar gument if the condition it is testing for y real danger . The diff when the ef fects of impair ment remain h ypothetical. For example, one might ar gue that the condition of increased need exists in the case of railroad engineers who control the v elocity and breaking of high-speed locomotives. Similarly, a condition of increased need e xists in the case of f actory workers who operate hea vy machinery in a cro wded work setting. It is less clear , though, that a condition of increased need arises among clerks at the same who could potentially create disaster through an er ror in paper work that goes unnoticed b y f eld operatives. Nor is it clear that a condition of increased need arises in the case of the janitorial staf f at a factory, who might perhaps leave a bit too much water on the f oor if the y were impaired w hile mopping a hallway. Of these examples, the f rst is improbable, and the last is insignif cant (or at least, not signif cant enough to justify drug testing the entire janitorial staf While many cases can be cited that are prob lems in risk assessment, it is critical to note that nothing follows with re gard to the ob ligation to prevent harms in cases that are not prob lematic. In such cases (like the two listed f rst), corporations can and should use reasonab le means to pre vent drug related harms.

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ConclusionsandP olicy Recommendations It is the position adopted in this paper that (1) a ug test its emplo yees to y m according to the ter ms of the employment contract, and ees for and alcohol abuse when a condition of impair ment w ould place the safety and health of other human beings at risk. The f rst of these two justif cations, I ha ve ar es human beings under a measure of eff ciency, treating them as means to a purel y economic end (i.e., the cor poration’s prof ug testing does not, in the large majority of cases, benef t the emplo yee’s best interests, and is therefore directed at ef fecting extrinsic goods onl y (as opposed to respecting the employee’ cism f cation, however, since the ultimate end of dr ug testing is the preser vation of human life as an intrinsic good. In this case, a y entitled to use to xicological testing, but is ob ligated to do so, to the de gree that ent dr ally present. Source: Adapted by permission of the author from his publication, “The Ethics of Privacy: Drug T orkplace” by Cranford, Michael, Ph.D., University of Southern CaliforT 3291792.

EndN otes 1. Though it might ha v ug testing pro gram that w as onl y enacted for cer tain projects that were assessed as cost-prohibitive on the basis of potential har ms. Consequently, drug testing will only be justif gument if it is ef fected uniforml y without regard for such assessments. 2. xplained b y w ay of an e yee dances all night for several nights in a row, and therefore shows up for work impaired due to lack of sleep.

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een this individual and someone w ve and increasingly signif cant (and ultimatel y selfve) condition, w hereas the for mer is at worst compulsi v ely to ven the best of us dancers e v y f nd ourselv es nodding There is also the le using illicit substances, not to mention dri ving

Workplace

under the inf those laws is ethicall y signif cant, whereas dancy legal.

References Note: Notes and references removed for publication . mhhe.com/busethics2e.

Reading 7-2

Medical Ethics for the Newest Practitioners: HealthWeb Sites— Pow Joshua Newman Over the past se veral years, Web sites ha ve grown to provide the kinds of online health ser vices that consumers e xpect in man y other f elds. Social networks bring people to gether around health and disease. Many sites ser v medical care, and f nding physicians and hospitals. And direct-to-consumer sites enab of laborator y tests, medications, and e ven some for Anyone with an Inter net connection now enjoys unprecedented access to the most up-to-date and sophisticated medical infor mation, as well as the means to communicate to a billion people. This has all happened in a relatively short period of time, with virtually no institutional, governmental, or professional regulation. Medicine, on the other hand , has g rown slowly, and has de veloped a system of ethics. It has been y b y the guild-lik e professionalism of ph ysicians and ci vil bodies, after ha ving made, and lear ned from, ter le and costl y mistakes. The Inter net puts health pro vision in the hands of an yone w ho can bro wse to or set up a Web site. Ne w risks and responsibilities must be considered in order to maintain the high standards so important to health and prevent harm.

In business and commerce, the phrase caveat emptor the buy er be w hen confronting used cars, homes, or electronics. Although warrantees and other consumer protections attempt upulous sellers or shoddy products, sometimes things go wrong. es are higher . In contrast to caveat emptor, the operati v in medicine, w hich goes back to Hippocrates, has been primum non nocer e, “f rst do no har m.” y have a greater standard to meet. Rather than simpl y sell their products, the y must tak e into consideration the health and well-being of their customers, much the same way that a physician does. gy has unique ethical pressures and risks compared to other online activities. Appropriate and lifesa ving advice to one person can be deadl y to another . P ersonal health information may expose g and address enduring aff ictions and conditions. Mistakes in care can cause permanent damage. The goal of this paper is to elucidate some of the ethical issues that arise with online health

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technology by looking at f ve general themes that appear in online health: pri vacy safe guarding, information inte grity, the threat to the doctor patient relationship, the psycholo gical risks of providing patients with medical infor mation, and disparities of access. Ethical questions, lik e the prob lems that ha ve grown out of the Inter net, tend to esche w easy and def nite ans wers. Cate gorical restriction of online health infor mation or comprehensi ve off cial o versight is impractical. The obstacles and costs of building online sites are lo w enough, and the unlik elihood of re gulation mak e these issues rather in need of self-re gulation on the par t of the W professionals. This paper presents some of the potential risks of online health acti vity so that consumers will enter into online health domains with greater awareness ersity. veyors of online health ser vices will better appreciate their po wer and appropriately safe cause harm. Though few business o to gain the degree of ethical awareness learned by physicians in the face-to-f nerable patients, y they can approach this ideal. For a long time, people ha ve spok en about the importance of physicians gaining technological prof ciency. P erhaps an equall y impor tant de velopment will be for online health ser vices to gain ethical profciency. In this v ein, one of the more impor tant general themes that r as consumers g row in understanding, diagnosing, and treating their o maladies, and purveyors of online health information technology grow in their ability to deli ver online health infor mation tools, both will increasingl y supplant ph ysicians and other health professionals who used to be the stewards of such domains. Consequentl y, the de gree to which every agent in the health care landscape their pow they will achieve.

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Privacy All that may come to my knowledge in the exercise of my profession or in daily commerce with men, w keep secret and will never reveal. Mr. Red suf fers fr om depr ession and has lar gely ares up and he has a hard time working and taking care of himself ork f or people with depr ession and f nds that the support from f ellow suf ferers is benef cial. It makes him feel a part of a , and though the online interaction is limited, it allo ws him to participate and engage other people in w ays he f nds helpful. . Red signed up to the Web site he used his personal e-mail addr ess, but no w f ards all e-mail through his business address. In a routine audit, his emplo yer sees that Mr . Red is r eceiving e-mails fr om the mood disor der Web site . When staff ng decisions f knowing that depr essed patients sometimes have more missed days of w ork, and make lar ger draws on the employee insurance pool, they decide not to . Red. Man vacy issues related to personal health infor mation as the most impor tant ethical issue with health infor mation technolo gy. Despite state and federal re to safe several dramatic and widely reported failures to provacy of indi viduals have sensitized peomation may be released. Noteworthy e Veterans that contained tens of millions of people’ health information can come

health data, and a number of other wa

s pri vate vate av of

billing

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systems to voice-mail messages. Ironically the value of personal health infor freel le. Yet to mak le enables misuse and breaches of conf dentially. The nature of personal health infor mation thus mak y. Unintentional release of information can jeopardize employment, insurance, and other relationships. It can cause real harm, as well as upsetting feelings of having our exposed and privacy violated. Additionally, if people do not feel that their data will be y may not a vail themselves of health infor gy and its accompanying benef ts. As a business issue, those or ganizations that fail to adequatel y protect this infor mation will suf vice ma y f ail to be utilized amid a lack of conf dence. The theoretical prob privacy ha ve no easy solution. The nature of the problem is such that it is diff cult for data to be simultaneously protected and a vailable. Either anted access, and sometimes both. And so w e must manage risks as the The f rst level of protection comes from pri vacy policies and adherence to rele vant la ws. Yet this modicum of protection should be onl y the be ginning. Web sites that host private health data have an ethical obligation to follow the highest standards of data stewardship. This holds tr ue whether the sites have to follow laws such as HIPAA, or even if they do not formally provide care, in which case they do not cur rently ha ve an y special health infor mation laws to follo w. Social netw orks that enab le people to share infor mation do w ell to w for unintended consequences of hosting private information. Sites that collect infor mation of value to advertisers should state clearl y their policies of releasing information to mark eters and adv ertisers, and should generally favor privacy and be clear and obvious when they deviate from the standard. In these w ays, b y honoring intimate details of people’s health, and vigilantly working to avoid the

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damage that can result from violations of pri vacy, Web sites can continue to pro vide and inno vate in ways that can help produce and restore health.

IntegrityofI nformation possession. Mr. Brown has high c holesterol. He takes a medication f or it because r esearch sho ws conc lusively that lo wering c holesterol le vels can decr ease the diovascular disease. He sees online that a pr ominent pharmaceutical compan y has come out with a ne w pr oduct to tr eat high c holesterol. Mr. Brown is conscientious so he does a sear ch on the medication and f nds that ther e are a number of Web sites and b logs that write favor ably a bout the benef ts of the new medication. Despite the fact that it costs mor e than his curr ent tr eatment, the positive mentions of the medication by a number of sites, fr om people w ho have a similar situation as his o wn, convince him to c hange medications. Mr. Brown does not realize that the pharmaceutical company has given gifts to the hosts of the blog and shared advice on ho w to appear pr ominently in sear ch r esults. The inf ormation he has f ound may have been biased by the conf ict of interest, yet Mr. Brown has no w w. Problems of infor mation inte g le in different wa y, they arise y and provenance of information is diff cult to discer n. yone can set up a sophisticated Web site w hose impressiv

w icts of interest can cor mation. False infor rev

w

xistent on b logs and man y health-related Web sites. Additionally v published work, Inter net infor mation can go out of date and y rent. The subsequent

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ts ma y nev Web sites that may nev mation. People may act on this incorrect data. Creators and managers of online health technologies, because the y pro vide this infor mation, need to reco panies their work. They should use common techmation, health and They should use and provide references to infor mation sources, especiall y primar y here possible. They should provide dates of the most recent information updates when they present medical infor mation. And the y should adopt a system of inventory and scheduled reviews that regularly examine for outdated and potentially harmful infor mation. Fur thermore, e ven b loggers and other infor mal Web sites that pub lish infor mation that could be used in the diagnosis and ict of w to attain a higher standard of information content and presentation to better serve their users. All of this ma y seem a bit e xcessive to the many w ho can estab lish a Web presence full of medical infor mation. After all, it tak es about f ve minutes to set up a b log to discuss health or medicine and appear on the Internet with some author. The rationale behind implementing the abo ve safe Web sites ha v wer. Internet, bad information can be shared swiftly and impact the lives of people who do not have the abil. For y, not e very Web site needs to adopt the preceding standards for the mark et of health information technology to benef t from an ethos of greater credibility. If a critical mass of Web sites updating, and conf ict of interest disclosure, their increased credibility will be apparent and superior to those Web sites that do not. As a consequence, consumers of health infor mation technolo gy will have a g reater sensiti vity to credib le infor mation. And those sites that adhere to these standards will

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show more clearl y w here the quality resides and through their success, elevate the standard.

Doctor-PatientR elationship The art of medicine consists in amusing the patient while nature cures the disease. Voltaire Ms. oes to the doctor because she has a cough. Cough is one of the most common come off ce. Dr. Gray has f minutes to complete the dia gnosis and tr eatment plan f or Ms. White. They have kno wn eac h other for year s and Ms. White is g enerally health y. So Dr. Gray comes to the conclusion, using a heuristic in his head that Ms. fering from a virus that is, in fact, the cause of most of the coughs he will see that day . This time, however, he is wr ong. Ms. as c in some mold and no ection. Dr. Gray makes a misdia gnosis partiall y because he does not expend the time or attention to ask some questions and ponder the dif ferential dia gnosis. Ms. oes home, and looks up her symptoms on the Internet. She sees that one of the questions on the Web site asks her if she has been c leaning or working in a dark or location. It tells her that she could have asper gillosis, an inf ection of the aspergillus fungus. She is furious and f eels letdown by her doctor. Consequently she vows not to go back to see him. Because of this, she delays an important study, screening exam, or follow-up that impacts her health and well-being. With the ubiquity of sophisticated and accurate health infor mation on the Inter net, man y patients can access usable, helpful resources for learning about their health. In this case, the importance of presenting medical infor mation in the conte xt of physician failure is clear. It can benef t the patient. The ethical perspecti ve on this issue, ho wever, is in this paper. the other situations related in this paper are clearl y negative, one ma y ar gue for the benef ts

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of highlighting failure in an under performing physician and in the appropriateness of straining the ysician. Maybe one of the goals of health infor mation Web sites should be to shock the health care industr y where then does the ethical issue lie? Despite the benef wledge, and the rarely have the freedom to mig rate to another provider so easil y, much less to one of higher qual. They just cannot see an yone, an y due to comple x and sometimes limiting polic y arrangements. Simpl ysician can be challenging. Fur thermore, ph ysicians are important actors in the system and should have the oppor ve. Dropping an underperforming physician adds no value to the system. P wledge of medical diagnosis and treatment has the po wer to signif cantly stress the doctor-patient relationship and cause accompan ying harm. This relationship has been the touchstone of medical care for millennia. Many people see the qualitative aspects of this relationship as primar y to the provision of excellent care. It provides for the signif cantly high propor tion of doctor’s visits for non-medical issues, enables the trust necessary for mo ard with diff cult treatments and workups, and promotes a caring and therapeutic relationship that can have genuine benef t. The a vailability of mation can erode this relationship. The Internet has brought unprecedented volume wledge to an yone with an Inter net connection. Gone are the da ys when a patient must plainti vely await the pronouncements of their ph ysician with onl y a diff cult-to-procure second opinion as remedy. Now anyone can browse online and f nd a number of diagnostic tools that can help hone in on the lik ely diagnoses. Some of these tools are e xcellent. They enab le patients to enter a lar numerous diagnoses. They can do it at their convenience and for as long as the y like. And almost all of these tools are free.

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In contrast, most primar y care ph ysicians have about 15 minutes to e xamine, diagnose, and treat a patient. The enormous volume of medical information that a primar y care ph ysician needs to w v astly sur passes w hat an y single indi vidual y physicians learn a g reat deal and nevertheless manage in this diff cult by lear ning repeated pathw ays for diagnosis and therapy of conditions. They sometimes le w presents, uncommon symptoms o verlay a common disease, or ne wledge changes the way a disease should be treated. From here comes a signif cant problem. Physicians do mak e mistakes, and to patients w ho have placed unwarranted belief in their supremacy, such mistakes can r uin relationships and tak e patients away from some of the benef ts that e ven their f awed physicians can offer. Of course no one should e xcuse physicians who commit er rors, or practice with e gregious gaps in wledge. If the infor mation e xists, a moder n health care system should absolutely deliver the best possib ever this is a diff cult ysicians. The potential remedies to address this tion call on patients, ph ysicians, and their sources of infor mation. In general, humility and an honest appraisal of limits and the complexity of the tasks are of prime v A reev sole and highest agents in health care needs to yield to a perspective of physicians as members of teams, wledge. Patients must be members of these teams, as viders, who need to facilitate understanding of both medical infor mation and the roles of all. As the providers of this information, ver infor mation, the y can help refashion expectations and relationships. Finding and double-checking information should not be seen as an e xercise in “gotcha, ” and rather should be seen as more of a necessar y component in f erse consequences from

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single points of f ailure. We all need to rethink our views of physicians in this milieu. refashioning w e can enlist ph ysicians w here the y may have been we can provide increased sophistication of understanding in patients who ma e can, in the process, engineer a more robust system of care where health and outcomes trump egos. Online providers of health tools ha ve a role to play in all of this b y helping to f acilitate this ne w relationship. By giving patients new wa about ho w the y manage their health and sharing oppor ticipate, health Web sites can ucting not onl y about health, but about some of the w ays of str ucturing care relationships. Because some pro viders are reticent and unfamiliar with these new and popular modes of patient in volvement with their own health, online health providers have an opportunity and a duty to address a gap they have a role in enabling.

AnxietyandP sychology of Patients If you can remedy y reason to worry. If there is no remedy, there is no reason to worry. Ms. Blue wakes one weekend morning with a stomach discomfort. She feels as if she has not dig ested her f ood w ell, and it seems w orse than the other similar feelings she’s had. It is true that she had a large dinner last night, and that she’s under stress, but it f eels w orse than it should. So she g oes to the Internet and looks up her symptoms. she puts in her symptoms, she f nds that one of the top diagnoses is o varian cancer. She spends the next several hours researching ovarian cancer, its diagnostic symptoms, epidemiolo ate, and treatment options. Convinced she has o varian cancer, she goes to see her ph ysician f rst thing on Monday morning certain she has o varian cancer.

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ultrasound. ysician inf orms her that because of her ne gative famil , her lo w risk prof le, and the a bsence of other symptoms a screening assay may be inappr opriate, she g ets angry, partiall y as an expr from her presumed diagnosis. W patients increasingl

e it upon themselv

es to wn illnesses. Overall this is a positive development on the health care landscape. P atients have the best access to their o wn symptoms, and the g reatest inv in their o Y Problems arise w hen the subtlety of symptoms or lack of medical e xperience gi ve rise to the wrong diagnosis and its accompan ying effects. Physicians with a g reat deal of training and access to signif cant reference resources frequentl y make wrong diagnoses. Patients, it can be do so even more often. When people without adequate wledge allo w their fears and other issues to away with themselves, outside of an established care relationship with a health professional, avoidab With the availability and incentive to practice do-it-yourself or testing can cause lasting harm. Online health infor mation resources ha ve a complicity in this prob eyors of online health infor mation e xpose people to the abo ve risks. Almost all of them w lish aler cations against responsibility for misuse or from negative consequences of the infor mation. y, the ob vious remedy, keeping information secret, is not a viab le option. In general the availability of information is a positive de velopment, and allo ws patients to be more aware and active in their own health and care. No easy solutions e xist. Lik e pre vious e xamples, a system of for thrightness and clarity of the ailable to patients. Yet this is only one facet of the solution. Because online health resources enab le a ne w very outside of the

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view of professionals, other str ll the void and pro vide protection, especiall y gi ven the environment into which information is delivered. Our population, much less our ph ysicians and the larger health system, are not prepared for this g We have paltr y systems of pub lic health infor mation, and de vote vir tually no training to health professionals or health system w orkers who may be ab le ve way. The problem is worse when we consider that a lar cisely because the practitioner. Thus they are even more le to misdiagnosis and its accompanying perils. One innovative solution w ould be a collaborative netw patient g roups, and health professionals to come together on a system of educational inter ventions that could provide people with tools to better a vail themselves of the medical information and avoid pitfalls. We have, for a long time, provided public health solutions in the for m of medicines, v accines, and disease-specif c infor mation. No w that w w to health, we should enable people to better deri ve health information from online sources in productive ways. We should teach people about symptoms and terminologies. We should educate our populasophistication and prof ciency, to w that not all tests should be used as screening, for e xample. We already provide sophisticated information, images, en therapies directly to consumers. P erhaps w e should f nd w ays to con vey experience and wisdom as well.

HealthandHe alth Care Disparities The good we secure for ourselves is precarious and uncertain until it is secured for all of us and incorporated into our common life.

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Jane Addams Mr. and Mrs. Green live off of a f xed income very close to the po . They have a couple of medical conditions f or w hich the y need c hronic medication. Unfortunately some of their conditions need to be tr eated with name-br and medications. If the y had an Internet connection, they could f nd out a bout cost savings pr ograms f or der these medications fr om less expensive pharmacies?. But because they do not have access, the y end up paying double what they would have to pay and it le percentag le income each month. With an online connection, they could also f nd out a bout free clinics, health fairs, and other opportunities to g et access. But y, those who most need the benef ts that online health services have to of fer, ar e the least able to learn about and avail themselves of the opportunities. er socioeconomic status ha ve w orse access to care. They tend to visit ph ysicians less, and w hen they do, they tend to receive worse care, less aggressive treatment, and less preventive screening. They sufer life expectancy. Consequently, those w ho seek to impro ve health, share a moral consideration to impro ve access to care for those who are disadvantaged. Disparities in access to care present an inter esting irony in the conte xt of health infor mation technology. Lo wer socioeconomic g roups ha ve the most to gain from increasingl y online deli very, yet they tend be least likely to avail themselves of it. Ph ysician density is f ar lo wer in poorer neighborhoods. Hospitals are less common, and ancillary services rarely locate in those places where their potential income is less. This, combined with the historicall y reduced quality of care for these people mak es online health information technolo gy especiall y v aluable. In practice, however, poorer people ha ve less comfort with technolo gy, less Inter net access, and fewer computers. They have lower levels of selfeff cacy, and reduced sophistication, education,

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and language skills necessar y to benef t from online health offerings. Online health of gaps in care can be readil y imagined. Man y of these innovations would provide the types of routine care and protocols that could be automated and deli vered online. F or those w ho ha ve poor access to physicians, many health ser vices tions could be automated. F or communities w here greater are sought, one could imagine call centers or other organized methods of deliv . Online health businesses can address these o ways. First they should be aware that underprivileged g roups have lower access to care and should provide those sorts of health care needs suited to these populations. They should pro vide tools that promote pre ventive screening, healthier supports, and chronic disease care so direly in need b y members of these g roups. Secondl y, online health pro viders should consider this lo wer socioeconomic demo graphic w hen f ashioning the technology, in order to increase the attracti veness and uptake of online tools to those populations so frequentl Web sites that address health and disease should have offerings in Spanish as w ell as English. There should be visual tools that present multi-ethnic images, icons, and e xamples. Mar ket tests should incor porate those of minority groups and pro vide for their needs. In the same ways as w e should not discriminate in pro viding care, our electronic systems should appeal to the broadest range of patients. Rather than being driven by the fact that some users are more valuable than others to advertisers, online health sites should act from the vie w that all people deser ve ogy can offer. As health care moves increasingly to Internetbased modalities, w e will ha ve to f nd w ays to affect the imbalance in access to infor mation technolo We will also, ironicall y, have to address e xacerbations in disparities caused by the remedies themselves.

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Conclusion The different f went through a maturation process over the millennia. They began as ideas, w y found a mature place in practice. Phar macology, surgery, radiolo gy, and no w infor mation technology have all had to grapple with the potential problems caused b y their use. Infor mation technology of medicine, and some areas w hich are distinct. What is similar is that the health infor mation tools have genuine utility . They can infor m, guide, and enab ve health care. Conversely they can cause har m in the areas we saw above, in privacy, integrity of infor mation, damage to the doctor in patients, and in disparities in health and access. mation technolo y online health infor mation technolo gy, is the dif their professional codes. Comple x, detailed medical infor mation is no w available to the la y public who never before had access, and the mechanisms of dif fusion of this infor mation are coming from those who never before were able to produce, much less deliver health information. So now more than ever, anyone can give diet do the same with vir tually an y condition. Amazingly, some amateurs are able to produce excellent materials that rival in quality and accessibility, f y cases, sur passes them. Unfor tunately, no mechanism currently exists to ensure that these indi viduals maintain the highest ethical e. When looking at health infor mation technology generally, and online health information ogy specif cally, we must remain humble and admit that we are at a v y stage. Goo gle has been around for less than 10 y ears. Most other sources and tools of online information technology have not even been around that long.

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We are cur rently discov w to accomplish the delivery of excellent and useful tools at the same time as w ying to f nd how to do it in the most responsible ways. Considering the ethics at ev step will be an important ingredient in growing strong and ef fective health infor mation tools. The

stakes are high. have an even g health than the medicines, sur geries, and laborator y studies that cur rently dominate health care. such, they will ha v standards of ethics of their medical forebears.

Reading 7-3

Bridging the Digital Gap in Emerging Economies Geetanee Napal

Abstract uction of an information society could be the k ey to economic development and moder nization, access to ne w technologies requires high income and reasonab le education le vels. Where the pro vision of technological infrastr vernments of developing economies dra w a distinction betw een inhabitants of villages have no interest in ogy and do not need access to infor mation and communication technolo gy. This perception can be challenged, however, as discussed in this paper. Gover est in technolo is to to the development of depressed regions and promote global citizenship and human rights w orldwide. Ha ving said this, de veloping economies are at a disadv antage as compared with f rst-world nations in the f eld of technology. How do de veloped economies e xpect the less developed w the global econom y? As the priorities of business evolve on the global market, the challenges posed by maintaining standards of business ethics in least developed countries requires g ro already the less de veloped w le to ethical issues based on economic exigency. If poor economies were to face ethical issues arising from technological advances which is likely to be the

case as they interact on the global scene, notions of ethics need to be strengthened and people educated in order to o vercome the prob wledge gy di een rich and poor.

Introduction The reco gnition of digital di vide as a signif cant problem has led se veral scholars, polic y mak ers and the public at large to realise the “potential of the Inter net to impro ve everyday life for those on the mar ve g reater social equity and empo werment” (Mehra et al., 2004: 782). While technology revolutionises the the risks that accompan y such rapid e volution— cyber crimes; hacking; c yber scams and frauds; Internet def are pirac y; cop yright infringement—should not be overlooked. Ideall es in a positi ve manner such as enhancing standards of living as a result of consistent economic g rowth that deri v vestment. However, do the above statements not solely ref ect the impact on de veloped economies? Is there not a contro versial issue if w e consider the contrar y impact on less de veloped countries (LDCs) w here wer amongst a minortable to invest in the development of information and communication technology (ICT) for their populations?

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If the above statements are restricted to economies that have the means to invest in ICT infrastr where do the LDCs f t in? The tendency in LDCs and beyond is to assume that the poor do not need access to technolo gy, hence the slo w development pattern that characterises rural areas. The objectiv areness as to the ethical issues lik ely to af fect the developing world as a result of this digital di vide. The discussion starts with a def nition of the digital divide and a brief outline of the basic f actors likely , social status or age. This is follo wed by an o v w of the issues that are bound to impact on LDCs as a result of the digital di vide. These issues include access to ICT and use of power in LDCs; cor rupt practices in the for m of y, favouritism and nepotism; of proper information gathering through sp ying. F ollowing this e xploration, we address the question of w hether ‘new ethics’ is needed to handle ethical issues associated gical evolutions. Lastly, we refer to the example of India w ve been made to bridge the digital gap b y pro viding traditional village gathering places with Inter net-connected computers.

TheD igitalD ivide ‘Digital di vide’ is a ter m that refers to the gap between those populations w ho ha ve re gular, effective access to digital and infor mation technology and those without equi valent access. The digital di vide could be the outcome of v arious factors worldwide. If gender it depends on whether the female population has access to education. Results of a broad sur vey of 15 Western European countries demonstrate that—“females, manual workers, elderly and the less educated have less Inter net access than males, professionals, the young and the well educated” (Cheung, 2004: 63). If there are discriminatory practices against minorof people’ udice and are being denied the chance to education

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and access to ICT, are basic human rights not being violated? If such is the situation in Western economies, w e can onl y imagine ho w w orse of f LDCs are. As it is, they already face constraints w hen it ICT resources in general. In addition to IT infrastr tation infrastr lems in some emerging economies. xperience rapid economic g ro by po ver , conf ict, cor ruption, f amine, illness and illiterac y (Werhane et al., 2008). Har t (2007) refers to an elite g roup of e xecutives, employees and shareholders as the sole benef ciaries of the wealth created by multinational enterprises. As the world population grows, a considerable percenteloping countries like India and China li ve in utter po verty (cited in Werhane et al., 2008). The same patter n characterises most e xt, the political class denies the e xistence of po ver in the country although many families have similar living conditions to those as described b y Werhane et al. (2008). Such f marginal in the Mauritian society. As a response to the diff cult conditions f acing them, these people have dev olve’ in their o wn subculture, w hich is characterized b y feelings of marginality, inferiority, pessimism, and even f atalism. Morall y and f nancially, the y feel dependent on others for their survival. They feel e e no interest to compete on the job mark et. Sadl y enough, these are the people w ho bestow upon the political class the privilege of power and who get brainwashed by the political class at times of elections. Can something be done to get these people out of poverty? A whole educational process needs to take place; but, then again, someho w this mar ginalized sector of society must be helped to develop a sense of their selv es so that the y may resist the lure of power from above.1 How do we expect less wealthy nations to k eep gical advances taking place globally?

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education are more likely to be equipped with information and communication technolo gies at home and/or at w ork. Similarl y, education is The digital divide is bound to have more ve limited means closely cor related to income, w hich ob viously facilitates the purchase of ICTs and inclusion in both home and w ork settings. However, when their business income levels are tak en into account, those with higher educational achie vements may benef t of problem of the digital di vide may be the outcome of higher rates of access. It is equall y impor tant to note that illiterac y constitutes a major prob lem an imbalance of dif online charges, insuff cientl f, imperfect in many LDCs. A lack of education contributes to the digital di vide in the less de veloped world ork legation and infor mation resource shor ealthy nations as it does betw een the r ural and urban areas of some de veloping nations. Could w e not rationmay ha ve diff The lack of purchas- ally say that it is the priority of responsib le govwer or low population densities in less f av - ernments to under take the initiati ve to impro ve education in disadvantaged regions if their objecable re tive is to build an information society and bridge v orks. the digital gap? Inevitably income constitutes a prob lem for these people. Ev en if the prob lem of infrastr uc- is only legitimate as political campaigns al ways emphasise such priorities, in an attempt to buy ture for connecti ed in suburbs, high le computers still have to votes. Other f actors inf uencing the de velopment be f aced. Sometimes, mark et forces push Inter net of ICT are the strength of the telecommunicaService Providers to “sh y away from in vesting in tions industr y and access to Inter net connection these regions that show little promise of short-term in emer ging economies. It is understood that prof ts” (Wilhelm, 2004: 133-134). Wilhelm’s f ndincome is a k ey f actor at deter mining w hether ings imply that preference is given to more favouror not people w ould have access to infor mation able areas, more than lik ely urban settings to the technology. Do governments of emerging econodetriment of rural ones in LDCs. However, is it fair mies inv ns on a pub lic ser vice in such a ture? Do the y draw a distinction betw een urban wa and r ural areas? Do go vernments discriminate unfavourable/disadvantaged regions? Ethical questions that are bound to arise in LDCs against rural regions when investing in ICT? Is include issues relating to access to ICT infrastr uc- there a balance in telecommunication de velopwer; ment betw een r ural and urban areas in LDCs? cor m of briber y, f avourit- What about re gions that are at a geo graphical ism and nepotism; infringement of proper ty rights; disadvantage? If pub lic e ere manipulated and infor ying. ven a wa rowth-promoting areas and essential services like education and ICTs, could Access to ICT Infrastructure public funds be di verted to w here bribes are easy to collect? The culture of cor vails and Education in de veloping nations di v lic goods from Education le vels are lik ely to inf uence PC and ever reaching the poor . In addition, the latter are Internet access: those with higher le vels of victimized as the y are e xpected to pa y bribes for

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public ser vices the y are entitled to free-of-char ge (Werhane et al., 2008). There are even instances where the authorities hold back their ser vices because they have no guarantee of economic pa yAlready there is e vidence of a concentration of pub lic spending in lo w-productivity projects such as lar ge-scale constr uction to the detriment of value-enhancing investments like improvements ucture and ICTs (Blackburn et al., 2006).

Distribution, Use of Power and Corruption Would the abuse of discretionar

y po wer and

ital di vide? Man y LDCs ha ve an indi vidualistic here one’s immediate ob ligation goes to one’s relations, w hich ma y o verride one’s notion y basic ethics concepts. This ine vitably gi ves rise to cor rupt practices in the form of favouritism and nepotism. favouritism and nepotism where access to facilities like ICT is concerned? It is a wellknown fact that democracy in emerging economies tends to encourage the abuse of power to suit one’s vested interests. This is because emerging democracies ma y not ha ve ef fective systems of checks and balances, w hich tends to gi ve w ay to g reater political access coupled with g reater f e with the way public funds, are dispensed (Mohtadi and Roe, 2001). Referring to the lik ely abuse of discretionar y power on the par t of the political class, if citizens who are at an adv antage use their position to a vail of access to ICTs w hile the disadv antaged lag ould this not gi v ther inequity with regard to education and IT competencies? ho do not have the right network to channel their request for such f acilities? Is there any scope for them? What about illicit pa yments effected to gain access to ICT or to secure Again, w ealthy citizens willing to pay bribes would be at an advantage whereas less wealthy ones would be penalised.

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InfringementofI ntellectual Property Rights/Theft of Property Intellectual property may be tangible or intangible. Intangible proper ty can be f ar more v aluable and diff cult to protect than tangib le assets. It is hard to put a v alue on intangib le assets lik e the ability to innovate; codif wledge about products and processes; employee assets in the for m of talented people and human capital. While being highl y precious to the or ganisation, these assets are also le to infringement and theft (Hagan and Moon, 2006). Besides, are intangib le for ms of property lik are, product for mulation, for mulae, inventions or processing techniques reco gnised as such? What restrictions can and should be ital infor mation? What e xactl transgression? e the for m of insider tradtrading takes place w hen one uses pri vileged information as one’s o A common form of theft is the y infor ther another f s ends. Such infor mation is nor mally accessed and prog

InformationG athering through Spying Other factors to consider include the le vel of education of the population and income levels. If people in LDCs feel that the y are not at par with their business partners on the global market, they could engage in unethical competiti ve beha viour in an attempt to match the perfor mance of their ri vals. nage through questionable practices in the normal business settings in European conte xt. However, if this were to appl y to LDCs, it could tak e an e ven more dramatic turn. gate a process of intelligence gathering through

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spying b y ha ving recourse to suspicious means? y deliberately f out the le gal and ethiying conventional infor mation gathering or mark et research? What if sp ying and information gathering contra vene the pri vacy and conf dentiality of competitors and/or other stak eholders in the process? As briber y represents a normal way of doing business in LDCs, what if as a result of dif ferences that e xist between r ural and urban settings, bribes are of fered to induce competitors’ emplo yees to access conf dential information and trade secrets? If all these issues are tak nesses are at risk. In order to protect themselv es and to retain their goodwill, the y ma y ha ve to invest in resources to preser ve trade secrets, patents, copyrights, trademarks and intellectual proper le proper ty like softw are, product for mulation, processing techniques to name but a fe w. The de velopment of ne w technolo gies will k eep encouraging ethical debates on what exactl proper (Crane and Matten, 2004; Ghillyer, 2008).

be caused by the digital divide. The next part of our address these issues.

Do We Need New Ethics to Accompany Growing Technological Developments? So f ar, increasing replication of digital infor

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intellectual proper ve accompanied on-going developments in ICTs (Crane and Matten, 2004). As concepts like computer ethics and digital divide continue to grow in importance globally, questions arise as to w hether business ethics, as it applies to issues sur gy, should be re-visited (Ghillyer, 2008; Hagan and Moon, 2006; Hartman and Desjardins, 2008; Suresh andRaghavan, 2005). Bearing in mind the characteristics of LDCs,

notions of ethics need to be reinforced to cope with such changing tendencies as well as to handle basic ethical issues associated with their indi vidualistic culture. Unless a culture of ethics is more effectively there is potential for harmful business practices leading to serious losses and long-term economic decline. Ghillyer (2008) la ys emphasis on the ten commandments of computer ethics and raises the question as to whether some new code should be adopted for the global . The fact is that Non Governmental Global Compact and the Or ganisation for Economic Cooperation and De velopment Guidelines for Multinational Enter prises, ethical misconduct pre vails in inter national business. Ghillyer (2008) proposes a global code of conduct as the solution to moral issues encountered in the context of globalisation. Does the prob lem not lie with the inter pretation of concepts of ethics and codes of ethics that is, with enforcement? all ethics codes e xist worldwide but are subject to varying inter pretation, as are uni versal principles. As the y binding, codes of ethics tend to be re garded as optional w hile business people have a tendency to underestimate their importance. While business partners fulf l their responsibility towards their stak eholders, it is the duty of every responsible government to lead b y example and breed a culture of ethics at national le vel. It is equally their responsibility to bridge the digital gap, foster cor porate social responsibility and sustain ef forts to wards the con vergence of ethics b y providing the necessar y infrastr ucture at national level and this includes putting in place appropriate telecommunication devices. There is evidence that political people in LDCs often w elcome corporate investors under ‘f exible’ terms in the name of ecowth. estment in ICTs and pub wards subquality products? If this w ere the case, would governments not be deliberatel y inf icting economic and human rights abuses on their people in the name of gro All this considered ethics is there and should not onl y be re garded as an academic

Chapter 7 Ethical Decision Making: Technolo

discipline. While there is no need for ne w ethics, both private and public sectors should ref ect on y fulf l their duty towards their stakeholders. Technolo learning support beyond the classroom, something that LDCs ha ve been unab le to do until recentl y. “The v net can serve for the indi vidual user mak es it ‘unprecedentedl y malleable’ to the user’s cur (Bar view, there is a perception that the building of an ey to economic development and modernization (Dey, 2005), implying that this would naturall verty. New technolo y bring advantages like contrib-

other positive things (Argandona, 2003; Richter and Mar, 2004). However bit of a controversial issue there. Does a poor economy have the means of investing in and developing gy in a w ay that would enable it to compete with a f rst-world nation? If competing on the global mark et, can an LDC compare with a developed one? Are people in LDCs educated and suff ciently well versed in ICTs? The answer could be no, hence the conclusion reached b y Har tman and Desjardins (2008), namel y that, in economies or contexts where people do not understand technological improvement, they may not be as vely positioned to benef This implies that they are also not as adequately prepared to handle the challenges associated with hi-tech advancement. In the circumstances, should stakeholders—the gov state-owned enterprises, business entities, research versities—not be to bridge the digital divide at national level?

Bridgingthe G ap T ucture could be de veloped and sustained in a consistent manner with proper strate gover

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developing nations not pursue refor m as par t of their national policy to promote their econom y on the global market through science and gy? Should the y not encourage industrialisation b y virtue of IT de velopment and e xplore means ther de veloping infor mation technolo gy to accommodate their o wn needs on economic, social and political fronts? Does the f act that the domestic telecommunication mark et is g radually opening up to foreign in vestors and competitors vestment in the telecommunication arena in LDCs? Countries that are members of inter national bodies lik e the World Trade Or ganisation are at an adv antage. Such aff liation acts as an e xternal drive force for them to persevere at pursuing and sustaining refor m in the f eld of telecommunications and technolo gy. Technological reform should be the priority of all economies involved in global operations, irrespective of ho w de veloped the y are. India pro vides a good example of technolo gical pro gress in the conte here access to ICT enabled farmers to vely and prof tably. The e xample of the e-Choupal in India illustrates the potential that technolo gy can bring to rural communities and LDCs in general. The e-Choupal demonstrated pro gress achie ved in the f eld of technology in Indian suburbs. The e-Choupal eloped by the Indian conglomerate ITC, w hereby f armers are pro vided with a computer and Inter net connection in their traditional village gathering place, w hich gi ves them access to man y dif ferent mandis (government mandated marketplaces). Traditionally, farmers went to a single mandi and sold their product through inef fective and often dishonest ph ysical mark er and Mitra, 2005). F armers had no control o ver the price of their products as they are b y and lar ge poor and illiterate. Moreover, commission agents abused of their po wer to the detriment of f armers w ho had v ery limited access to information and education on farming techniques. The introduction of the e-Choupal helped r ural farmers benef t from easier access to information, better social standing, wider choice

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and mastery over their li ves (Prahalad 2005, cited in Kelley et al., 2007). The e-Choupal has enab led the re-engineering of the old-f ashioned e xport suppl y chain b y giving these people access to digital technolo gy in r ural f arm villages. The e-Choupal is founded on kno wledge deri ved from a combination of technology, sociolo gy and the incenti ves of the various players involved. This relatively new concept pro vides f armers with ef fective methods of price discovery, honest trading and information sharing and is of potential benef t to all stak eholders. The f ndings of Upton and Fuller (2003) ref ect the vie ws of f armers of pub lic mark etplaces w ere introduced to e-Choupal by the ITC, the y were restricted to selling their produce at lo w prices in the local mandi, through the inter mediary of middlemen who did not necessaril y respect their rights. The ITC trained farmers to enable them to manage the Internet kiosk. There is now a of e-farmers with access to daily prices of a v and abroad. Access to technolo mers obtain the best price for their produce. They also ha ve access to infor mation on w eather forecasts, latest f ar amongst other things. e-Choupal has not onl y changed the quality of Indian f armers’ lives, but it med their entire outlook. The strategic intent of the ITC is to de velop the e-Choupal as a signif cant tw o-way multidimensional distribuacilitating the transpor t of goods and services out of and into rural India. The ITC is transforming the w ay f way rural markets operate by progressively linking the digital infrastr ucture to a ph ork of rural business hubs and ag ro-extension ser vices The example of the e-Choupal that the poor can operate more eff ciently if the y have access technolo gy, unlik they do not need or are not interested in ogy (Kelley et al., 2007). The common pur pose of such initiativ ural communities to the

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Internet, give them access to timel y price informawledge to producers and allow these producers to e xecute trades and transactions. The idea is to e-empo wer the people, eliminate inter upulous trading and consequently transform the global ag ply chain.

Conclusion As more and more nations with dif ferent cultural and historical e xperiences interact in the global economy, the potential for misunderstandings based on dif ferent expectations and poor communication is magnif ed. As f rms either choose to or are forced to compete inter nationally, ethical questions ine vitably arise. tion problems in the developing world and in these conditions, the people ha ve y et to be prepared to tion, bulk transpor t, e-commerce, computerization and robotics. Problems f aced by LDCs include lo w income, lo y le vels, language, dispar wledge dissemination and limitations of telecommunications industr y amongst other w The w ay po wer is distributed tends to exempt policy makers from public accountability hence encouraging unethical practices, dri ving talented people a way from producti ve acti vities, thereby negatively impacting on g rowth (Mohtadi and Roe, 2001). Sur vival in this rapidl y evolving global economy requires the acquisition of more relevant competencies like high-lev in culti vating or ganisational alliances, par tnerships and syner gy across frontiers. Refer ring to ogies in a global era, contemporar y ethicists raise the question as to w hether ‘new ethics’ is needed but the v erdict is that ethics as a concept remains unchanged. It is the inter pretation gi ven to the concept and its application in the conte xt of business and governance that would mak er abuse contribute to widen y lo w

Chapter 7 Ethical Decision Making: Technology and Privacy in the Wor

standard of li ving, scarcity of goods, unhealth y competition and sp ying through the most unscr upulous means, ef forts should be directed to ward productiv vide. The Indian model gives evidence of the po wer of infor mation technology to generate the potential to bring about armers while reducing unfair practices by middlemen to bridge the digital divide. Provided there is a will to in vest in technolo gical infrastr ucture, k ey stak eholders could under take to successfull y bridge the digital divide which would enable LDCs to interact on the global market and minimise the lik elihood of ethical issues, as discussed above. In addition, w e hav encourage those li ving in po verty to lear n about and to acquire ICT skills. While the introduction of computers equipped with Inter net facilities has improved the lives of f armers in India, there is no guarantee that this approach w ould bear the same

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results in the rural areas, such as Mauritius. Referring to the poor section of the Mauritian population, there ma y not be a readiness to adapt to this new life style, no matter ho w benef cial it ma y be to them in the long ter m. These people ma y have y feel quite comfor table follo , ev olves dependenc . It is that society’s responsibility to help to relieve it.

EndN ote 1. These and later references to the Mauritian context result fromthe author’

References Note: Notes and references removed for publication .mhhe.com/busethics2e.

Reading 7-4

The Ethical Use of Technology in Business Tony Mordini

Abstract nology for a range of functions. The potential for communication, data management and business processes are endless but so too are the potential misuses of the technolo gy. This poses prob lems which often require some ethical perspecti ves to be considered. In monitoring e-mail, phone and human traff c ho w much are w e encroaching on yees with technological tools such as lap top computers and cell phones what controls can we legitimately exercise on ho w the y use them? In capturing data from staff and clients what safeguards need to be put in place to ensure information is not misused? There

may not be a simple model that f ts all conte xts but the f eld of Applied Ethics provides research, frameworks and educational instr uments that can help to maximize the ethical use of technology in business and help to articulate the issues, identify what is e xpected in par ticular conte xts and propose appropriate ways to engender compliance.

Introduction T gy is embedded in all aspects of our lives to the extent that we would f nd it diff cult to conduct many of our da y to da y activities without it. The business en Technolo ys including: commu-

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analysis and storage; monitoring of business performance; electronic commerce; and surveillance. The de velopments in infor gy (ICT) ha ve also resulted in the een individuals’ private and public lives becoming signif cantly b red. The cell phone means that people are contactab le at almost an y time, an y w means faster response rates which can place pressure on indi approach in decision-making and like cell phones be ab here and at an y time; W orking can create distractions for indi viduals in the w orkplace and sur veillance of w ork sites, Inter c and phone usage pro vide rich data for emplo yers but also present a privacy risk if data is misused.

isn’t begins with the notions of identifcation and Specif cally ascertaining what an individual’s duties are in a par how they are expected to perform those duties and how the resources are e xpected to be deplo yed in executing those duties need to be ar ticulated in the f rst instance. Subsequently, the employee needs to

ally doing what the w they ought to do. Her foundational elements pro vide a basis for employer and emplo yee to clearl y communicate what is e xpected. Ostensibly employers (often and preferably in consultation with rele vant stakeholders) need to w ork out and subsequentl y ar ticulate what the job entails and ho w the y e xpect it to be carried out and what the w Employ and how these are to be applied. The issue of comEthical Issues with Respect to the pliance becomes diff cult Jackson notes w hen the are not followed equitably. employees Use of Technology see different levels of application (for example, the The potential misuse of technology in the business VP has certain benef ts that others don’t have), they environment is a real risk and presents man y chal- will at best accept appl y the “r ules” begrudgingly ays to “compensate lenges for those leading and managing w ork sites and at worst f themselves” (p.11). and well as their employees. Technology is an inteHow do emplo yers w ork out ho w best to mangral business tool with the potential and capabilities age the gy and w hat frame works can the y to support a range of business functions and create use to ensure cur gies are value. However, technology also has the potential approached appropriatel y? How can the y foster an to invade individuals’ personal li v ethical in w Obviously each from their work, cost businesses signif cantly if the technology resources are not deplo yed ef fectively context needs to be examined on its own merits and and requires sound risk management to ensure but from w hat has been e xamined in earlier chapdata is not misappropriated. Some economic proworks that y ou can jections are explored in a case follows. ters you hav apply as long as you consider the elements in each These issues also represent some signif cant ethical y. questions for both emplo yers and emplo yees. The problem is that often the issues associated with the there is a “moral danger in applied ethics” (p.726). use of technology in business environments are not Similar to the attack that Socrates made on the Sophveyors of recognized as having potential risks nor that ethical ists. The Sophists w frameworks need to be applied in relation to its use. in the f y BC”. Haldane raises a cautiony to believe that some mechanical Looking at Issues Ethically formula can be simpl y applied to all moral issues. Jennifer Jackson (1996) proposes that the difHaldane ar y” and f culties in ascer taining w hat is ethical and w hat

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Thus we will proceed with a de gree of caution and practicality but at the same time with a de gree of conf work has potential for positive personal, professional and business outcomes.

LookingatB usiness Issues Ethically Case 1—Who Owns the Technology? Miranda Rusden is a student liaison off cer in the admissions off ce of a lar ge uni versity. Her main task is to to online and phone enquiries and relieve the receptionist w hen she needs to be a way from her post. She has w orked in this job for four years and although not o verly challenged b y the role is not interested in promotion. It suits her family and personal commitments because it is a “nine to f ve” job and it has fe w demands out of nor mal w thermore, during semester breaks her da In the quiet times she will often use the time to catch up on personal e-mails, surf the Web lookorking sites. The university has policies in place on the use ed the acti to herself as har mless. Fur thermore, she feels that if she has done all that she has been ask ed to do or is able to ans wer any enquiries as the y come in b y phone, f e use y any initiati ve to do additional tasks that it w ould erly challenged. If she is at her computer and appears to be hard at work people will leave her alone. A recent audit of Inter net usage has re vealed that a number of uni v work time to access online shopping and social networking. Miranda’s manager vision is amazed at the amount of time Miranda has spent on the Inter net engaged in personal activities over the past month. She prepares to call her into a meeting and according to uni versity polic y, ser ve her with a for mal

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written w arning and advise her that a subsequent offence could result in a termination of her employment. She f nds herself in a diff cult situation as she gets on really w ws that it is strictly a business matter and hopes that Miranda will see it that way.

EthicalA nalysis The issues of w ork time and w ork equipment are critical f actors in assessing and addressing a case like this. Individuals are often entrusted to do a job and act in good f aith. Fur thermore, the emplo yer provides the “tools” to do the job and e xpects the employee to use these tools appropriatel y, and as they are intended to be used. What Miranda did is common practice and many organizations would f nd similar e vidence if they were to audit the Internet use of their employees. Ho wever, w hat w ould be e ven more telling would be if the audit w as to also pro vide the costs of the lost producti vity. Imagine for e xample, that Miranda is one of 3,000 staf f and that 10% (300 staf gy and the audit re veals that the y spend appro ximately 1 hour a da y on the Inter net in pri vate acti vities. That amounts to 5 hours of a 40 hour w ork week, thus 1/8 th of the individual’s time is not being used productively. If the average salary for an employee in this sector is $50,000, 300 emplo yees cost $15 million in salaries alone and a loss of producti of even 1 hour a da y equates to $1,875,000 or the equiv f.

Timefor T hinking Individuals in organizations do not often consider ve, nor do they often do the math as per the pre vious example to see the impact of such beha vior when it is magnifed several times over. Examples such as these can be a simple w ay for teams to w ork constructively to eradicate losses in producti vity but also provide a means of engaging in dialo gue that examines behavior from an ethical perspective.

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Case 2—Private Lives in the Public Arena Chat rooms and W orking such edIn and F viduals from all w alks of life and with a m yriad of inter orks ma y ha ve positi ve business suggests that managed w orking and Web-based tools such as wikis and b logs can be ned to an employer’s advantage. If used well these tools allow participants to forge relationships with people they might never have f y couldn’t have done before ork analysis1 allows individuals to better understand their own orks, as it also allows organizations to better understand the r wer of the orks that form them (2008, p.38).

However, as Moore, rightly points out, Social Networking Analysis will not identify many of the qualitative aspects of Web-based interactions. F or example, how often is the approach a hindrance as opposed to a “helping hand”? factor is that once connected to others in the pub lic domain the lines betw een public and private become blurred. Blogging on a political site may mak e it clear w hat an indi vidual’s political leanings are. Participating in wikis means that an y text a person writes in this space can be edited b y Web-based social networks may expose individuals to a variety of ace interactions there are a number of visual and audio cues w hich are hard to pick up through chat rooms and e-mail communication. Nor do individuals have control over information which is in the public domain. Consider the case of Jonathan, a y oung f nance graduate working for an in v y many of the senior managers as a y oung guy w ho will “go places”. Jonathan is reasonab ly circumspect about his personal life. When at w ork he is focused on the job. He steers clear of personal chit chat. Lik e

many y oung ga y men he uses social netw orking sites to k eep abreast of e vents, contact mates and make new friends. One night, one of the senior staf f, Mitch Hendricks is at home surf ng the City of Chicago Web site looking up some infor mation on upcoming events. He notices some advertising for Chicago’s Gay Pride Week with a photo graph of a g roup of gay men and a h yperlink to the g roup’s Web site. Jonathan is amongst the g roup of men in the photograph. Although it is not a w ork related matter , he is concerned of the possible career implications this could ha ve for Jonathan. Man y of the senior men in the f rm are quite conservative family men. He doesn’ w Jonathan that well but hopes that meeting over a coffee will help to map out a strategy should a situation arise that could put Jonathan in a diff cult place. Mitch sends Jonathan an e-mail that night and fortunately Jonathan is online. He responds to the message almost immediatel at 10:00 am the ne xt day of it and assumes it is some routine assignment he is being asked to work on. Mitch is uncomfor table y tak usion into his personal life. Mitch has grown up in a conser vative Baptist family and except for his college years has not been exposed to a wide cross-section of the community . He is also a little anxious w hat others may deduce from their meeting. Fortunately, for Mitch the meeting the ne xt day although there should not be any problem with how he chooses to live his personal life, the f rm and the sector he works in has some ver ative people and he ma y need to e xercise careful judgment in how he balances his personal and professional lives and consider carefull y how he might respond if a diff cult situation was to arise. For Mitch, the meeting also ga ve him a understanding of ho w challenging things ha ve been for Jonathan as he has come to terms with his lems it poses in the professional arena.

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EthicalA nalysis—Finding a Practical, Balanced and Responsible Position Firms are rarely adequately prepared to respond to such issues. It is impossible to have one clear statement that covers all possible contingencies. Conventions such as freedom of association, of speech, freedom of expression are constitutional rights. However, in practice, they can polarize people and create real tensions in the workplace or the community. Individuals’ value systems particularly come into pla y responsibility, se Workplaces need to be safe (in the broadest sense of the word—physically, emotionally, psychologically etc.). Rules need to be in place to ensure that indi viduals are not mar ginalized. Individuals however, need to be reminded that w hat is in the public arena, means exactly that, is pub lic and people can vie w material, mak e a range of assumptions based on what they view, can y that we never intended it to be used. gies associated with social networking sites and other Web-based g roup acti vities can have positive outcomes providing networks and a means of accessing people but the y can also expose individuals and their workplaces to various risks. However, f rms may need to consider policies that clearly ar ticulate their position. F or e xample, y need to consider disclaimers that enable them to clearl y demarcate the boundaries between the indi vidual’s personal associations and their professional responsibilities. Notwithstanding this, in a number of professional areas such as teaching individuals may need to be reminded that their pub lic and personal acti vity may impact adversely upon their professional life and that the y ma y by their employer if there appear to be any conf icts of interest or perceptions . Individuals may also need to be reminded that in public domain, Web-based contexts they may be

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providing people w ho they don’ w with more personal infor mation than the y realize and that once it is in the pub lic domain, it will be impossib have access to it.

Case 3—Is Surveillance Always Legitimate? Many f rms have closed circuit tele vision (CCTV) safer working environment. For example, if issues arise in a customer ser vice setting, the emplo yee can use digital evidence to defend claims that the y may have acted inappropriately. However ing of movements on a site need to be stored safel y and appropriatel y. Or ganizations need to also consider a number of related factors including: how long images will be stored , where they will be stored, in what format and who has the right to view them. Consider the follo wing scenario. Mur ray is a been appointed to a small re gional centre to manage their store. This is his f rst management job and w e w ants to impress. He is v ery ambitious bigger role back on the East Coast w here he has ws that head off ce is very keen to see producti eff ciencies and he is v ery keen to deli ver them. Discussions with senior staf f at the store ha ve provided anecdotal e vidence that a number of staf f are not reall y pulling their w eight and wasting time in certain areas of the business. He decides to use CCTV evidence as a mechanism to pro ho are not performing as well as he believes they should be. Soon he arrived at his new store he called y monitoring his building and asked if they could meet in a down town coffee shop. On the da y they met he stressed that he did not w ant others to f nd out about the meeting and that any evidence had to be handed to him directly.

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EthicalA nalysis The follo wing w eek w as deter mined as the w eek that a specif c monitoring would take place. The loading bay and stores area w as picked as the area utiny. The e vidence was gathered and handed to Mur ray. He anal yzed vided some telling evidence. His initial thought was to call the team of staff in. It was evident that there were some real ineff ciencies and time w asting. Mur ray could use a hard hitting approach challenging the ethical behavior of employees and use it to censure w however, that this g roup was heavily unionized. Ev en if he could justify his actions, legitimacy of his actions would be questioned.

TakingA ction—AC onsidered Way Forward He planned therefore, to use the sur veillance data to map out a w ork plan and then tak e the g roup hich he justif ed on the basis of the times that goods were delivered across the da y, and clearly outlining tasks that could be done in quiet times when there was no stock to unload or process he w as ab le to use the

Wor

Used and managed appropriatel y it pro vides individuals and f r e better use of their time, netw ork, research, anal yze work f ows, store infor mation and impro ve eff ciencies. However, technolo gy ma y not al ways v alue add. T gy also increases risk for indi viduals and f rms. P yber w orld remo ves many bar mation in the pub lic domain can injure the reputation of a f rm or individual, misused or misappropriated data or infor mation can create signif cant prob lems for people. Workplaces need to re y review how the y manage this aspect of their workplace. It is diff cult because of the rate at which technolo veloping to have an all embracing policy in place. Policies need to hav el of f e wed regularly and need to ha ve a le vel of f exibility to deal with current, emer Above all, work places need to be ethical w ork places and indi viduals need to be encouraged to work in a manner that is compliant and based on an understanding of what is considered appropriate workplace practice, w hat are appropriate w ays to gy the y are using in the workplace and ho w the y can minimize the risks gy in their da y to day lives especially in their personal activities if it could potentially marginalize them or injure their reputation or eff cacy in the workplace.

He was able to use inferences such as: “I assume that in between arriving it might get a bit boring in EndN ote e us a bit of time to do some 1. ork Analysis (SN A) is an instr uother tidying up and sor t out stock that needs to be ment that has been used in Sociolo gy since the en. . . . I ha ve 1930s to map relationships and collaborations provided a check list of w hat w ying een people. These maps help to illustrate to achieve on a dail y and w eekly basis . . . ”. There orks that e xist in or ganizations and was some initial disquiet but Mur ray w as cor rect highlight areas w wledge f ow is poor or in his comments that the g roup w as not sho wing ve. much initiative in the quiet times and that some clear direction would improve work output.

SomeC oncludingR emarks e see the potential and the possib le pit f alls of the technolo .

References Note: Notes and references removed for publication . mhhe.com/busethics2e.

Chapter

8 Ethics and Marketing Reality is how we felt and saw events, not events as they appeared objectively, because we are not objective.

A magazine is simply a device to induce people to read advertising. Collins I am the world’s worst salesman; therefore, I must make it easy for people to buy. . .

worth (1852–1919)

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ChapterO bjectives After reading this chapter, you will be able to: 1.

Apply an ethical framework to marketing issues.

2.

Describe the three key concerns of ethical analysis of marketing issues.

3.

Describe three interpretations of responsibility and apply them to the topic of product safety.

4.

Explain contractual standards for establishing business’s responsibilities for safe products.

5.

Articulate the tort standards for establishing business’s responsibilities for safe products.

6.

Analyze the ethical arguments for and against strict product liability.

7.

Discuss how to evaluate both ethical and unethical means by which to infl

8.

Explain the ethical justifi

9.

uence on consumer autonomy.

10.

Distinguish ethical from unethical target marketing, using marketing to vulnerable populations as an example.

11.

Discuss business’s responsibilities for the activities of its supply chain.

12.

Explain how marketing can contribute towards a more sustainable business model.

Introduction Some belie ve that the v ery pur pose of business is found within the mark eting function. The description of business’ s pur pose of fered b y mark eting scholar Theodore Levitt is a case in point. Levitt suggested that: The purpose of a business is to create and keep a customer. To do that you have to produce and deliv ant and value at prices and under conditions that are reasonably attractive relativ y others. . . . It was not so long ago that a lot of companies assumed something quite different about the purpose of business. They said quite simpl pose is to make money. But that is as vacuous as to say that the purpose of life is to eat. ts can be made in lots of 406

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devious and transient ways. F airs, a statement of purpose should provide guidance to the management of their affairs. To say that the and hold customers forces f guring out what people really want and value, and then catering to those wants and values. It provides specif c 1

Similarly, the American Marketing Association def nes marketing in a way that also suggests that it is at the hear t of business acti vity, “an or ganizational function and a set of processes for creating, communicating, and deli vering value to customers and for managing customer relationships in ways that benef t the organization and its stakeholders.”2 The concept of an exchange between a seller and a buyer is central to the market economy and is the core idea behind marketing. Marketing involves all aspects of creating a product or service and bringing it to market where an exchange can take place. Mark eting ethics therefore e xamines the responsibilities associated with bringing a product to the mark et, promoting it to buy ers, and e xchanging it with them. But this simple model of a seller bringing a product to the marketplace, and the ethics implicit within it, gets complicated fairly quickly. Even before a product is created , a producer might f rst consider w ho, if anyone, is interested in purchasing it. The product might then be redesigned or changed in light of w hat is learned about potential buy et research. Once the product is ready for mark et, the producer must decide on a price that y acceptable. At f rst glance, the minimal asking price should be the production cost plus some reasonable prof t. But the producer might also consider w ho the buy ers are and w hat the y can af w price might inf uence w the price might af fect distributors and retailers, and w hat competitors are charging before settling on a price. The producer might also consider advertising the product to attract ne w potential purchasers and of fer incentives to promote the product among buyers. The producer might also consider the lost production that results from the et and therefore consider hiring someone else, a salesperson, or delegating someone, a “retailer ,” to handle the actual e xchange itself. Producers might be more concer ned with cash f ow than prof t and therefore be willing to ask a price that is belo w production costs. They might consider where and under what conditions the product is sold , and the y might decide that the best chance The producer might also consider issues of v ay to insure prof t onl certain sales targets are met. The producer might also consider ho w such factors as price, con venience, reliability, and ser vice might contribute to sustaining an inally producer might conduct market research to gather information and use that information in production, pricing, promotion, and placement decisions. All of the f cess are elements of mark eting. w, why, and under w hat conditions is something produced? What price is acceptab le, reasonab le, f air? How can the product be promoted to support, enhance, and maintain sales? Where, when, and

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under what conditions should the product be placed in the mark These four general categories—product, price , promotion, placement —are sometimes referred to as the “Four Ps” of marketing. Each of the F our Ps also raises impor tant ethical questions. bilities do producers ha v Who is responsible for har ms caused by a product? Are there some products that should not be produced , or does consumer demand decide all production questions? Is the consumer’ y the onl y ethical constraint on f air pricing? Should the ability to pay be a f e the same price, or can producers discriminate in f avor of, or against, some consumers? fects will price ha ve on competitors? On retailers? ve or misleading ads ethical? tions? Is the information gathered in market research the property of the business that conducts the research? privacy protections should be for marketing data? Is it ethical to tar get vulnerable populations such as children or the elderly? What responsibilities does a producer ha ve when marketing in foreign countries? What responsibilities do producers ha ve to retailers? To competitors? To suppliers?

Ethical Issues in Marketing: A Framework 1 OBJECTIVE

We can tak e the simple model of a single e xchange betw een tw o indi viduals as a useful w ay to introduce an ethical frame work for mark eting ethics (see Table 8.1). As in previous chapters, this framework will assist the decision maker in ar riving at an ethical decision; but it will not point to the “cor rect” decision ve framework. In other w right answ work identif es rights, responsibilities, duties and obligations, causes and consequences. Once these parameters are clarif ed, the decision mak er uses the frame work to ef fectively analyze the scenario and arrive at the decision that best ref ects her or his personal and professional v alue structure. gether and freely agree to an exchange is prima facie ethically legitimate. The deontolo described in chapter 3 would see it as upholding respect for indi viduals by treatThis tradition presumes that each individual will abide by fundamental principles. The utilitarian ethical tradition would take the two parties’ agreement as evidence that both are better off than they were prior to the exchange and thus conclude that overall happiness has been increased by any exchange freely entered into. This assessment is onl y prima facie because, like all agreements, certain conditions must be met before we can conclude that autonomy has in fact been respected and mutual benef t has been achie ved. Thus, for e xample, we would need to estab lish that the ag reement resulted from an infor med and v oluntary consent, and that there w as no fraud , deception, or coercion in volved. When

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TABLE 8.1 Ethical Issues in Marketing: A Framework

2 OBJECTIVE

these conditions are violated , autonomy is not respected t is ven when such conditions are met, other v alues may override the freedom of indi y benef cial purposes. Thus, for e reeable ends is overridden by society’s concern to maintain law and order. eep three concer ns in mind as w e approach any ethical issue in marketing: • The Kantian ethical tradition w ould ask to w hat de gree the par ticipants are respected as free and autonomous agents rather than treated simpl y as means to the end of making a sale. • transaction pro y apparent benef ts. • Every ethical tradition would also wonder what other values might be at stake in the transaction. gree to which individuals freely participate in an exchange; the benef ts and costs of each exchange; other values that are affected by the exchange.

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It is not al ways easy to deter mine if someone is being treated with respect in mark As a f rst appro ximation we might suggest tw o conditions. First, the person must freely consent to the transaction. But how free is “free”? Surel y transactions completed under the threat of force are not v oluntary and therefore are unethical. But there are man y de grees of v For example, the more consumers need a product, the less free they are to choose and therefore the more protection the y deserve within the mark the use of the Windows operating system by the ov puter users. How v Windows? Do most people even make a decision to use Windows? Or, consider the anxiety and stress that man y consumers experience during a car purchase. When an automobile dealer exploits that anxiety to sell e xtended war y voluntary decision. More dramatic cases of price gouging, price-f xing, and monopolistic pricing clearl y raise the issue of freedom in mark eting. When an insurance compan y is “too big to f ail,” one must question if its consumers have any real bargaining power in the marketplace. Practices aimed at vulnerable populations such as children and the elderl y also raise questions of v oluntariness. Thus, an adequate anal ysis of mark eting ethics challenges us to be sensitive to the man y ways in which consumer choice y voluntary. (To explore what it means to engage in “v oluntary” purchasing decisions, see the Reality Check, “Impulse Buying.”) A second condition for respect requires that the consent be not only voluntary, but also informed. Informed consent has received a great deal of attention in the medical ethics literature because patients are at a distinct disadvantage when dealing with health care professionals. Similar disadv antages can occur in mark eting situations. Outright deception and fraud clearl y violate this condition and are unethical. A consumer’s consent to purchase a product is not informed if that consumer is being misled or decei ved about the product. But there can also be many more nuanced cases of deception and misleading marketing practices. The comple xity of man y consumer products and ser vices can mean that consumers may not understand full y what they are purchasing. Consider , as an example, all that would be involved for a consumer to determine which tank as most safe for subcompact cars, or w hich tire design is least lik ely to cause b low-outs. Consider also the man y people w ho have very weak mathying to decide on the economic benef ts of whole-life versus term insurance, or a 48-month auto lease v ersus a f ve-year purchase loan at 2.9 percent f nancing. In general, w hile some businesses claim that an “infor med consumer is our best customer ,” many others reco gnize that an uninfor med consumer can be an easy tar get for quick prof ts.3 Serious ethical questions should be raised w henever mark eting practices either den y consumers full information or rely on the f act that they lack relevant information or understanding. ts obtained through market exchanges. Economics textbooks commonly assume that consumers benef t,

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Reality Check

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Impulse Buying

Though the cartoon pokes fun at the ability of marketing professionals to “make” us buy certain items, not everyone exercises similar levels of effective judgment necessary to protect themselves from poor decisions about credit and debt, good and bad spending choices. Young spenders in particular may not yet be sufficiently experienced— with shopping, spending or responding to sophisticated marketing campaigns—to adequately protect themselves against strategies designed to encourage impulse buying. Sales pitches that hype the latest and trendiest items, those that must be purchased today and worn tonight, are difficult to resist for some purchasers, who buy in haste and perhaps regret it later. Marketing campaigns are also chastised for creating needs where the purchaser may originally have only not reversible, but because they are often so hastily made that the purchaser fails to notice that the product is imperfect or does not match a personal style, they are perhaps most in need of later returns. In the same way that a hungry person is more likely to buy groceries on impulse than one who has just had her or his meal, we are better off engaging in our purchasing efforts when we are

capable of evaluating our options with a clear head (and a full stomach!).

Source: Copyright © cartoonstock.com. Reprinted with permission.

almost by def nition, whenever they make an e xchange in the mark etplace. But this assumption won’t bear up under close y. Many purchases do not result in actual benef t. For e eting techniques used to promote such consumer beha vior, cannot be justif ed b sumer interests. (See the Reality Check on impulse buying.) The ever-increasing number of indi uptcies suggests that consumers cannot purchase hapvide evidence that suggests that g reater consumption can lead to unhappiness, a condition called b y some “aff uenza.”4 So, if e measure of the benef ts of market exchanges, one must al ways ask about the ends of mark eting. attained by successfully mark ays are indi ted from the product? Both par ties to the mark eting e xchange are also not benef ted in situations in which one par ty is injured b ther the

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utilitarian goal of maximizing o verall happiness. It w ould also be the case that consumers are not benef ted if the desires that they seek in the market are somehow contrived or manipulated by the seller. The third set of factors that must be considered in any ethical analysis of marketing are v alues other than those ser ved by the e xchange itself. Such primar y social values as fair can be jeopardized by some marketing practices. For e fers lower mortgage rates in aff uent neighborhoods than it does in inner -city neighborhoods might be involved only in deals that are y benef cial since they do not, in f act, sell mor . But such contracts would violate important social norms of equal treatment and fairness. There may be a v ery strong mark et for such things as cer tain body par ts of endangered species. There is also, unfor tunately, a mark et for children. But just because someone w ants to buy something and someone else is willing to sell it does not mean that the transaction is ethicall y le gitimate. An adequate ethical analysis of mark eting must ask w ho else might be af fected by the transaction. How, if at all, are the interests of these others represented? What social goods are y marketing this product? One must also ask w hat the tr ue costs of production are. An adequate ethical anal ysis of mark eting must consider e xternalities, those costs that are not integrated within the exchange between buyer and seller. Externalities show that even if both par ties to the e xchange receiv ts from the e xchange, other par ties external to the e xchange might be adv ersely affected. One thinks of the environmental or health impact of marketing products such as SUVs, pesticides, and tobacco as examples in which a simple model of individual consumer exchange would ignore signif cant social costs. With these general issues in mind, we can no w tur n to a closer e xamination of se veral major aspects of marketing ethics.

Responsibility for Products: Safety and Liability 3 OBJECTIVE

The general cate gory of business’ responsibility for the products and ser vices it sells includes a wide range of topics. Few issues have received as much scrutiny in la w, politics, and ethics as has the responsibility of business for the harms caused by its products. Business has an ethical responsibility to design, manufacture, and promote its products in w ays that a void causing har m to consumers. responthat w ere introduced in the discussion of cor porate social responsibility in chapter 5. Recall that, in one sense, to be responsib le is to be identif ed as the cause of something. (See the Reality Check, “The ‘Cause’ of Obesity ,” w hich discusses the possib .) Thus, we might sa y that Hur ricane Katrina w as responsible for millions of dollars in property damages in Ne w Orleans. In another sense, responsibility in volves

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accountability. When we ask who will be responsible for the damages caused by Katrina, w y for the damages. A third sense of responsibil, connected to but different from the sense of , involves assigning fault or liability for something. The hur ricane e xample demonstrates ho w these three meanings can be disas responsible for (caused) the damage, but cannot be held responsible (accountable for pa ying for the damages), nor can it be f aulted for it. Yet, many think that those w ho designed, built, or managed the levees in New Orleans were at fault and should be made to pay because their negligence caused much of the har m. In xample, a careless driver would be identif ed as the cause of the accident and held accountab le because he was at fault. Both la w and ethics rel work w hen e valuating cases in which business products or ser vices cause har m in the mark etplace. The focus for much of the discussion of business’ assigning liability (f ault) for har ms caused b y unsafe products. The le gal docversial exactly because it holds a business accountable for paying damages w hether or not it w as at f ault. In a strict liabilw careful the business is in its product or ser vice, if har m results from use, the business is liable. We will consider the case of liability in more detail in the following section. For the present, let us examine the various standards for holding business liable for its products.

Contractual Standards for Product Safety 4 OBJECTIVE

It is f air to sa y that the standard of caveat emptor (let the buyer beware) is in the backg round to man y discussions of product safety . The caveat emptor approach understands mark eting on a simple model of a contractual e xchange between a buyer and seller. This perspective assumes that every purchase involves the informed consent of the buyer and therefore it is assumed to be ethically legitimate. Buyers have the responsibility to look out for their o wn interests and protect their own safety when buying a product. F rom this perspective, business has only the responsibility to provide a good or service at an agreed-upon price. y duties w e have are those that we have freely tak promises are the basis of ethical duties. The implication of this within the business sphere is that unless a seller e xplicitly warrants a product as safe, unless, in other w ers are liable for any harm they suffer. But ev xchange would place ethical constraints on the seller. Sellers hav ve buyers, for example. Consumers who were injured by a product that w as deceptively or fraudulently marketed would have legal recourse to recover damages from the seller. Even in the earl y y ears of product safety la w, cour ts reco

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Reality Check

The “Cause” of Obesity?

Scholar Regina Lawrence explored where we actually place the responsibility for obesity in our society.5 Her research sought to determine who is “blamed and burdened in the public debate” surrounding obesity and divided the options between individuals and systemic or environmental causes. Individual causes would limit the causes of the problem to particular individuals, such as eating too much or a lack of exercise, while environmental causes would broaden the focus to government, business, and larger social forces, such as marketing campaigns, a lack of safe places to exercise, or unhealthy food choices in school cafeterias. To answer the question of where we place responsibility for obesity, reviewed the content of New Y of the paper) and editorials that mentioned obesity over a select period of years. She found that, in 1990, the articles analyzed most often discussed obesity as caused by the individuals themselves (86 percent compared to 14 percent discussing environmental issues as a cause). However, by 2003, only 54 percent discussed individuals as potential causal factors, while 46 percent discussed environmental issues with possible causal links. In other words, our assessment of “fault” for obesity has shifted from a discussion of individual fault to a discussion of responsibility that includes a variety of possible factors. W from solely those who are obese to a broader view that also includes business, the government and other external forces. Tara Radin and Martin Calkins explore a similar question in the article “Stakeholders Influence Sales: Soda Companies Stop Selling in Schools,” which ): The largest soft drink companies in the United States recently announced that they will stop selling regular soft drinks in school vending machines and cafeterias. By 2008, Coca-Cola, PepsiCo, and Cadbury Schweppes will replace the high-calorie sodas they have been selling with bottled water, natural fruit juice, and diet soda. Specifically targeted are carbonated beverages containing more

than 100 calories per serving. While parents and health advocates are thrilled with the success of their concerted efforts, this decision is nothing short of shocking to teenagers around the country. The decision was motivated in large part by increasing concerns about childhood obesity. It is somewhat myopic, in that it selectively addresses a

Ironically, this decision runs counter to many past predatory marketing practices. Vulnerable groups, such as children, have traditionally been easy targets for many types of companies. Even though alcohol cannot be sold legally to individuals under the age of 21, it has been claimed time and again that beer manufacturers have featured teenage female models in order to appeal to the young adult market. In the 1970s and 1980s, cigarette companies allegedly focused aggressive marketing campaigns on low-income black males. They initially sold cigarettes with high levels of nicotine to increase their addictiveness, and then gradually reduced the nicotine levels to keep the young men buying more and more cigarettes. At the same time, this decision calls into question underlying assumptions about freedom of choice. By exerting excessive pressure on soft drink manufactures with threats of litigation, interest groups have removed choice from children and young adults. Is this a positive step? By removing the temptation, are not we in fact depriving children and young adults of a valuable learning experience? Would it not be preferable for us to teach them moderation and resistance to temptation? The reality is that this is not expected to affect the short run—considering that the affected sales have accounted for only about 1 percent of total industry revenues. From a business perspective, however, it is somewhat alarming to see the (continued)

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extent of stakeholder control over companies. In this situation, parents and health advocates have effectively put an end to a distribution channel for a popular product. Interestingly, it has been labeled a “voluntary” change. This is a shift from customers exercising infl uence by choosing the products to support through their individual purchases, to interest groups and other stakeholders infl access to products. What does this mean for companies? Perhaps this is a signal that, to remain competitive, companies in the twenty-first century are going to have to pay

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closer attention to the concerns of stakeholders, and they are going to have to cast a wider net around which stakeholders they consider relevant. We are seeing this in the health arena—not just with sodas, but also with the struggles of Krispy Kreme, for example. Other markets, too, are likely to be vulnerable. At the same time, however, this also reinforces the value of ethics and social responsibility, since vigilant businesspeople and entrepreneurs are likely to identify more growth niches providing products

the law refers to as the implied warranty of merchantability, holds that in selling a product a business implicitly offers assurances that the product is reasonably suitable for its purpose. Even without a v the la wf Reality Check, “The ‘Cause’ of Obesity,” for a discussion of that responsibility.) The ethics implicit within the contract approach assumes that consumers adequately understand products w ell enough that the y can reasonab ly be e xpected to protect themselv es. But consumers don’ t al ways understand products full y and they are not al ways free to choose not to purchase some things. In ef fect, the implied war ducers b y allowing consumers to assume that products w ere safe for ordinar y use. By bringing goods and services to the market, producers were implicitly promising that their products w ere safe under nor mal use. The ethical basis for this decision is the assumption that consumers w ould not give their consent to a purchase if the e that they w y it when used in a normal way. Of course, if la w will hold business liab le for implicit promises, a pr udent business will seek to limit its liability b y e xplicitly disowning an y promise or warranty. Thus, man ucts are sold “as is”), or of fer an expressed and limited war will replace the product but of ts will not allow a business to completely disclaim the implied war .

Tort Standards for Product Safety 5 OBJECTIVE

The use of an implied w ar ed one set of problems with the contract law approach to product liability . Consumers w ould not need comple order to protect themselv es from all possib le har ms that products might cause. But a second problem remains. If we hold business liable for only those promises

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Reality Check

Responsibility beyond Direct Contracts

During the summer of 2007, the U.S. government issued a product safety recall for millions of children’s similar safety concerns with Chinese products, including toothpaste, dog food, and automobile tires. In the case of Chinese toys, safety concerns focused on the use of lead-based paints and small magnets embedded in toys that could be swallowed by children. Of particular concern was the fact that many of the toys were sold by Mattel, the largest U.S. toymaker and a company with an excellent record of safety and a long history of social responsibility, and sold through such major retailers as Target and Wal-Mart. This issue demonstrates the difficulty of tracing responsibility back from a consumer who is injured back through the long supply chain to the party that caused or was at fault for causing

the harm. For those companies unlike Mattel who neither own nor operate factories in foreign countries, the links between the consumer and the liable party are significantly more ambiguous. Unlike many toy manufactures, Mattel actually owned and operated factories in China, which

that go into their manufacture. In this particular case, it appeared that one of Mattel’s manufacturing plants violated policy; either paint was purchased from an uncertified vendor that did not conform to Mattel’s standards, or a vendor certified as meeting Mattel’s standards violated its own agreements by supplying lead-based paint for use on the toys. The Consumers Union, a U.S. based consumer advocacy group, estimated that China accounted for

made during the mark et e ther separated from the manufacturer by layers of suppliers and retailers, there may be no relationship at all betw een the consumer w ho gets har med and the ultimate manufacturer or designer who was at fault. (See the Reality Check, “Responsibility beyond Direct Contracts ” and the Decision P oint, “When Has a Compan y’s Action Caused Injuries to Its Customers?” for a discussion of the concept of causation or “at fault.”) Negligence, wn as tor ts, provides a second avenue for consumers to hold producers responsib le for their products. The distinction betw w and tort law also calls attention to tw o different ways to understand ethical duties. Under a contract model, the only duties that a person owes are those that have been explicitly promised to another party. Otherwise, that person owes nothing to anyone. The ethical perspective that underlies tort law holds that we all owe other people certain general duties, even if we have not explicitly and voluntarily assumed them. Specif cally, I owe other people a general duty not to put them at unnecesvoidable risk. Thus, although I ha ve never explicitly promised anyone v y, I have an ethical duty not to dri ve recklessly down the street. Negligence is a central component of tor t law. As the w ord suggests, ne gligence involv cally neglecting one’ ercise reasonab

Decision Point

When Has a Company’s Action Caused Injuries to Its Customers?

surrounding manuf responsibility for products can be understood as the attempt to specify what constitutes negligence in their design, production, and sale. xactly, do producers owe to consumers? le answers to this question as f alling along a continuum. On one e wer: Producers o we onl y those things promised to consumers in the sales ag reement. At the other e xtreme is something closer to strict liability: Producers owe compensation to consumers for any harm caused b een these e xtremes is a range of answers that v ary with dif ferent inter pretations of ne gligence. We have already suggested why the strict contract approach is incomplete. In the ne xt section we shall examine the pros and cons of strict product liability . The remainder of this section will examine the important concept of negligence. Negligence can be characterized as a failure to exercise reasonable care or ordinary vigilance that results in an injur y to another. In many ways, negligence simply codif es tw reasonably oblige someone to do w hat the m others.” People have done an ethical wrong w hen they cause har m to others in ways that they can reasonably be expected to have avoided. Negligence includes acts of both commission and omission. One can be negligent by doing something 417

Decision Point

Liability for Spilt Coffee? A Double Latté!

that one ought not (e.g., speeding in a school zone) or by failing to do something that one ought to have done (e.g., neglecting to inspect a product before sending it to market). Negligence involves the ability to foresee the consequences of our acts and failing to tak e steps to a void the lik ely harmful consequences (see the Decision Point, “Liability for Spilt Coffee?A Double Latté!”). 418

Decision Point Foreseeing and Designing for Product Misuse: Can a Manufacturer Be Held Liable When a Product Is Misused?

The standards of foreseeability , ho wever, raise interesting challenges. One standard would hold people liable only for those harms they y foresaw occurring Thus, for example, they would be acting negligently if (as w as alleged in the f amous Ford Pinto case), on the basis of engineering tests, the ould puncture and explode during crashes at speeds belo w 30 miles per hour , yet still brought the car to market. all

ms are lik ely to result from his acts and proceeds nonetheves harsh punishment. Such a case seems more akin to recklessness, or even intentional harm, than negligence. But this standard would also impl gligent, since one escapes liability b y not actuall one’s acts. “I never thought about that” would be an adequate defense if w e used 419

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this standard of ne gligence. Yet this surel y is par t of w hat we are after with the concept of ne gligence. We want to encourage people to be thoughtful and hold them liable when they are not. See the Decision Point “Foreseeing and Designing for Product Misuse: Can a Manuf Be Held Liable a Product Is Misused?” to consider how you might respond. A preferable standard would require people to avoid harms that, even if they haven’ y thought about, the y should ha ve thought about had the y been reasonable. For example, in the Decision Point, “Liability for Spilt Coffee?” presumably McDonald’s did not actually anticipate that customers would be severely burned b ed cof e-through windo y drive away from the window, they could have foreseen the likelihood of spills. Moreover, the fact that McDonald’s had recei ved over 700 prior bur n claims in volving coffee over a 10-y ear period suggests that a reasonab le person w ould have concluded that this was a dangerous practice. This “reasonable person” standard is the one gal cases and seems to better capture the ethical goals of the very concept of ne gligence. People are e xpected to act reasonab ly and are held liable when they are not. In addition, w elihood of harm, such as in this case, the reasonable person expectation is increased. The Decision Point, “Foreseeing and Designing for Product Misuse.” But even the reasonab le person standard can be inter preted in v arious ways. e expect people will act in ways that would be normal or average. A “reasonable” person does w hat we could e xpect the ordinar y, average person to do. There are prob lems using this standard for both consumer and producer behavior. It ma v e might hope. The a verage person doesn’ t al ways read, or understand , w arning labels, for example. The ordinary and average person may thoughtlessly place a cup of very hot coffee between her le gs as she dri ves out of a parking lot and into traff c. The average person standard w hen applied to consumers risks e xempting many When applied to producers, the average person standard sets the bar too lo w. We can expect more from a person who designs, manuf vigilance. Reasons such as these can lead us to inter pret the reasonable person standard vely than descriptively. In this sense, a “reasonable” person assumes a standard of ref ective, and judicious decision making. The problem with this, of course, is that w e might be asking more of a verage consumers than they are capab le of gi ving. P articularly if w e think that the disadv antaged and le deserve greater protection from har m, we might conclude that this is too a standard to be applied to consumer behavior. On the other given the f act that producers do ha ve more e xpertise than the a verage person, this stronger standard seems more appropriate when applied to producers than to consumers.

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Strict Product Liability 6 OBJECTIVE

The ne gligence standard of tor t law focuses on the sense of responsibility that involves liability or fault. As such, it asks what the business or person involved had foreseen or should have foreseen. But there are also cases in w hich consumers can be injured b y a product in w hich no ne gligence was involved. In such cases w here no one w as at f ault, the question of accountability remains. Who should pay for damages when consumers are injured by products and no one is at fault? The legal doctrine of strict product liability holds manuf able in such cases. One classic strict product liability case in volv gen hor mone dieth ved for use in the prevention of miscar riages and w as widely prescribed for prob lem pregnancies until the early 1970s. ed riages. However, in the earl y 1970s a connection w as discovered between the use of DES during pre gnancy and certain forms of vaginal cancer in the female children of women who used ug. These cancers did not typicall y appear until more than a decade after the drug was used. In 1972 the FDA prohibited all marketing of the drug for use during pregnancy. For the e of another manufacturer, see the Decision Point that follows.

Ethical Debates on Product Liability 6 OBJECTIVE

It is fair to say that the business community is a strong critic of much of the legal . Liability standards, and the liability insurance costs in w hich the y ha ve resulted , ha ve imposed signif cant costs on contemporar y business. In particular, these critics single out the strict product liability standard as especially unfair to business because it holds business responsib le for har ms that were not the result of business negligence. In f , including juries w ho decide in favor of injured consumers, often repl y with two major claims. F irst, by holding business strictly liable for any harm their products cause, creates a strong incentive for business to produce safer goods and services. Second, gi ven that someone has to be accountab le for the costs of injuries, holding business liab le allocates the costs to the par ty best able to bear the f nancial burden. Each rationale is open to serious objections. F Holding someone le for harm can provide an incentive only if they could hav m was foreseeable and the failure to act was negligent. Surely this is a reasonable justif cation for the tort standard of ne gligence and the har ms caused by such products as asbestos w ere not foreseeable. Thus, holding business liab le for these harms cannot provide an incentiv Decision Point “Who Should Pay for Asbestos-Caused Illness and Deaths?”

Decision Point

Who Should Pay for Asbestos-Caused Illness and Deaths?

The second rationale also suffers a serious defect. This argument amounts to the claim that business is best able to pay for damages. Yet, as the asbestos case in the Decision Point indicates, many businesses hav upted by product liability claims. If it is unfair to hold business accountable for harms caused by their products, it is equally (if not more) unf air to hold injured consumers accountab le. Neither par is at fault, yet someone must pay for the injuries. A third option would be to have government, and therefore all taxpayers, accountable for paying the costs of injuries caused by defective products. But this, too, seems unfair. 422

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A third ar gument for holding business accountab le might be more per suasive. Accountability, after all, focuses on those situations w here no one is at f ault, y et someone has to pa y. This might be another w ay of sa ying that accountability is not a matter of ethical principle in that no one deser ves to pay for damages. But perhaps accountability is best understood as a matter of utilitarian eff ciency rather than principle. When business is held accountab le, entually fall on those consumers who buy the product through higher costs, especiall y higher insurance costs to business. This amounts to the claim that exter costs of a product should be paid for b y those w ho use the product. Products that impose a cost on society through injuries will end up costing more to those who purchase them. Companies that cannot af ford to remain in business when the full costs of their products are tak en into account perhaps ought not to remain in business.

Responsibility for Products: Advertising and Sales 7 OBJECTIVE

, the general area of advertising ethics has received signif cant legal and philosophical attention within business ethics. The goal of all marketing is the sale, the e v xchange between seller and buy er. A major element of mark eting is sales promotion, the attempt to inf uence the buy er to complete a purchase. (See the Decision Point, “Automobile Advertising.”) Target marketing and mark o important elements of product placehich audience is most likely to buy, and which audience is mostly likely to be inf uenced by product promotion. There are, of course, ethicall y good and bad w ays for inf uencing others. le ways to inf uence another are persuading, askuence would include threats, coercion, deception, manipulation, and l ying. Unfor y, all too often sales and advertising practices employ deceptive or manipulati ve means of inf uence, or are aimed at audiences that are susceptib le to manipulation or deception. P erhaps the most infamous and maligned of all marketing f elds is automotive sales, especially in used car mark ets. The concept of manipulation, and its subset of deception, is central to the ethical issues e xplored in this chapter and can help organize the following sections. To manipulate something is to guide or direct its behavior. Manipulation need not involve total control, and in f act it more lik ely suggests a process of subtle direction or management. Manipulating people implies w orking behind the scenes, guiding their behavior without their e xplicit consent or conscious under standing. In this way ms of rational inf uence. own reasoned judgment to direct their beha vior. Instead, I seek to b ypass their autonom hen the person manipulated believes she acted of her own accord).

Decision Point

Automobile Advertising

One of the w ays in w hich we can manipulate someone is through deception, one form of w hich is an outright lie. I need not decei ve you to manipulate y ou, although I would be happy if you falsely believed that you were not being manipulated. We can manipulate someone without deception, as w hen I get m y sons to mow the la wn by making them feel guilty about not car family responsibilities. Or I might manipulate m diligently by hinting that there may be a quiz during the ne xt class. These examples raise a v ery crucial point because the y suggest that the more I kno w about your psychology—your motivations, interests, desires, beliefs, dispositions, and vior. Guilt, pity, a desire to please, anxiety, fear, lo motiv ve tools for manipulating their behavior. We can see ho w this is rele vant to marketing ethics. Critics char ge that many marketing practices manipulate consumers. Clearl y, man y adv ertisements are deceptive, and some are outright lies. We can also see ho w marketing research plays into this. The more one lear ns about customer psycholo gy, the better ab le le one will also be to manipulate their behavior. Critics charge that some marketing practices target populations that are particularly susceptible to manipulation and deception. 424

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Ethical Issues in Advertising 8 OBJECTIVE

The general ethical defense of advertising ref ects both utilitarian and Kantian ethical standards. Advertising pro vides infor mation for mark et e xchanges and therefore contributes to mark et eff ciency and to o verall happiness. Advertising information also contributes to the infor mation necessar y for autonomous individuals to make informed choices. But note that each of these rationales assumes that the infor The deontological tradition in ethics w ould hav manipulation. y own ends, as an object to be used rather than as an autonomous person in his or her own right. Manipulation is a clear e xample of disrespect for persons since it bypasses their o wn rational decision making. Because the e vil rests with the intention to use another as a means, e ven unsuccessful manipulations are guilty of this ethical wrong. As we might e ould offer a more conditional critique of manipulation, depending on the consequences. y can be cases of paternalistic manipulation, in which someone is manipulated for their own good. But even in such cases, unforeseen harms can occur. Manipulation tends to erode bonds of een persons. It can erode one’s self-conf dence and hinder the de velopment of responsib le choice among those manipulated. In genther the manipulator’s own ends at the expense of the manipulated ould be inclined to think that manipulation lessens overall happiness. A general practice of manipulation, as would charge occurs in many sales practices, can under mine the v tices (e.g., sales) that it is thought to promote as the reputation of sales is lo wered. The example of used car sales, once again, is a good example of such a situation. A particularly egregious form of manipulation occurs w le people are targeted for abuse. Cigarette adv ertising aimed at children is one e xample that has receiv ears. Marketing practices targeted at elderly populations for such goods and ser vices as insurance (par ticularly Medicare supe been subjected to similar criticisms. (See the inners and Losers.”) We can suggest the follo eting practices that seek to discover which consumers might already and independentl y be predisposed to purchasing a product are ethically legitimate. So, for example, an automobile deals mark its car is a colle een the ages of 25 and 30 who enjoys outdoors activities and ear ns more than $30,000. Sending tar geted direct mail pieces to ev one within an area w y le gitimate marketing practice. Mark can be easil y inf uenced and manipulated , on the other hand , are not. Sales and marketing that appeal to fear, , or other non-rational motivations are ethically improper. For example, an automobile dealer w

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Reality Check

Winners and Losers

in 2005 for a billboard marketing campaign in downgo from Washington Street to Easy Street—Play the Illinois State Lottery.” A boycott of the lottery was organized, claiming that the lottery took advantage of the poor of the inner city. The claim is that the lottery draws a disproportionate amount of its revenues from the poor by preying on unrealistic hopes. To the contrary, argues Edward J. Stanek, the president of the North American Association of State and Provincial Lotteries: Big jackpot games are equalizers. Those who were not fortunate in the drawing of genes and inheritance can venture a chance equal to everyone else to benefit financially. . . . Lotteries don’t discriminate among their customers. . . . If there is something inherently wrong with allowing less prosperous people the choice to buy a ticket, then the protectionists should seek legislation to prohibit low-income citizens from taking a chance. Why haven’t they? Because

the folly of their self-righteous protectionism would be exposed. . . . For a lottery to take “advantage” of the poor would imply that the poor have a “disadvantage.” Obviously they have less money, which means that lotteries can benefit them more relative to helping those of greater means. The only way that the poor can be at a disadvantage is if they don’t have the same mental capacity to make $1 decisions as those who are wealthier. It follows that those who make such claims are assuming that the poor have a diminished intellectual capacity. But economic status is not a measure of intelligence. Saying that the poor are taken advantage of in this context is an insult to the intelligence of those who play lottery games.

With which side do you agree? Source: E. Stanek, “Take the High Road and Keep the Upper Hand: A Critique of Lottery Critics,” speech to North American Association of State and Provincial .nmlottery.com/

widowed woman is anxious about the purchase and who uses this to sell extended w and the lik

as a way

”) Mark customers. But not all psycholo gical categories are alike. Some are more co gnitive and rational than others. Targeting the considered and rational desires of consumers is one thing; tar geting their fears, anxiety, and whims is another. See the w Challenges to Old Problems: From Redlining to E-Lining” y marketing techniques, see the reading by Pudner included at the end of this chapter.)

Marketing Ethics and Consumer Autonomy 9 OBJECTIVE

Defenders of adv ertising ar gue that despite cases of decepti ve practices, o verall advertising contributes much to the economy. The majority of advertisements provide infor mation to consumers, infor mation that contributes to an eff cient

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New Challenges to Old Problems: From Redlining to E-Lining

by Tara J. Radin, Martin Calkins, and Carolyn Predmore Today, more than a decade since the Internet became widely and publicly available, we still lack consensus about the degree of ownership and acceptable limits of data gathering and use. In fact, Richard De George’s 1999 remark is arguably more valid now than previously: “The U.S. is schizophrenic about information privacy, wanting it in theory and giving it away in practice.”6 Such schizophrenia is problematic in itself, but it has been exacerbated by the questionable applications of data collection that have occurred. E-lining (electronic redlining) represents one glaring example of how data gathering crosses moral boundaries. Redlining is the practice of denying or increasing the cost of services to residents of certain geographic locations. In the United States, it has been deemed illegal when the criteria involve race, religion, or ethnic origin. The term came to prominence with the discussions that led to the Housing Act of 1934, which established the Federal Housing Authority, which later became the Department of Housing and Urban Development. It occurs when financial institutions (banks, brokerages, and insurance companies) literally draw red lines on maps to distinguish between creditworthy and financially risky neighborhoods. Although illegal, redlining has not died out completely. It reemerged recently when MCI removed international long distance service via calling cards from pay phones in poorer communities in the suburbs of Los Angeles. It reappeared also in retail sales when Victoria’ its catalog prices along customer demographics (specifi , ethnicity). In this case, two sisters living in different parts of town discovered price differences when discussing items from seemingly identical catalogs. As the two compared prices on the phone, they found that the cost of some items varied by as much as 25 percent. A subsequent and more thorough investigation revealed that Victoria’s Secret had been engaging in an extensive practice

of price variation according to gender, age, and income. In the end, although Victoria’s Secret was vindicated in the court of law, it lost in the court of public opinion. Finally, it resurfaced when Kozmo.com, an online provider of one-hour delivery services, used zip codes to refuse to deliver merchandise to customers in predominantly black neighborhoods. In all of these cases, companies (to different degrees) “exclude(d) classes of individuals from full participation in the marketplace and the public sphere.” E-lining differs from these more traditional forms of redlining by not drawing a red line on a map, but by using information that Internet users unwittingly leave behind as they surf Web sites. E-liners use “spyware” programs embedded in Web pages to collect information surreptitiously and with little or no outside oversight. They are able to “spy on” surfers in this way without much challenge because, at present, there are few limits on what companies can do with the information they gather. In recent years companies have used customer information to direct customers to particular products or services. In this way, they have used information in much the same way high-end clothing stores use a Rolodex of customer phone numbers to alert customers about newly arrived items that match or complement prior purchases. At other times, businesses have not acted so benevolently. They have used the data they collected in a discriminatory way to direct customers to particular products or services that fi t a profi Amazon has received signifi criticism for its use of historical purchase information to tailor Web offerings to repeat customers. Amazon allegedly used data profi In September 2000, Amazon customers determined that they were charged different prices for the same CDs. Although Amazon claimed that the price differentiation was part of a randomized test, the result was price discrimination that appeared to be based on demographics. This sort of discrimination and deprivation of fi (continued)

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is exactly what the rules against redlining are intended to prevent. The absence of comparable rules against e-lining is not, as some fi like to argue, an indication that this sort of behavior is acceptable in e-commerce, but, rather, is a refl legal infrastructure to catch up with e-commerce. Our current legal infrastructure, particularly in the United States, which is aimed almost exclusively toward brick-and-mortar enterprises, does not account for the tremendous amount of information available through e-commerce or for the numerous ways in which e-merchants are able to exploit customers through misuse of that information. The unfortunate reality is that there is not a clear distinction between acceptable and unacceptable forms of information gathering, use, and market segmentation, and e-commerce provides a cloak that insulates from detection many fi in inappropriate behavior.

There are few if any obstacles to firms engaging the fi lived and do not appear to have a significant impact to attract an increasing number of customers. In the exist regarding the acceptable limits of information gathering via the Internet. Instead, businesses are shaping the expectations of Web users and society in marketers through their irresponsible behavior. They are sending the message: “Internet user beware!” to Internet surfers and potential e-customers. As long

of potential electronic abuses. Source: Adapted by the authors with permission from work copyrighted © by T Carolyn Predmore. All rights reserved by the authors.

ets. These defenders ar gue that o ver time, mark et forces will w eed out decepti ve ads and practices. They point out that the most ve counter to a decepti ve ad is a competitor’ s ad calling attention to the deception. Beyond this question of w hat adv ertising does for people, a second impor tant ethical question asks what advertising, specif cally, and marketing in general, does to people. P eople may well benef t from business’ mark eting of its products. People lear n about products the y may need or w ant, they get infor mation that helps them mak e responsible choices, the y even sometimes are enter tained. But marketing also helps shape culture and the indi viduals who develop and are ould say dramaticall y so. Mark eting can have direct and indirect inf uence on the v ery persons w e become. Ho w it does that, and the kind of people we become as a result, is of fundamental ethical impor eting can have such inf uThe initial proposal in this debate w as of fered b y economist John K enneth Galbraith in his 1958 book, The Aff uent . Galbraith claimed that adv ertising and mark eting were creating the v ery consumer demand that production then aimed to satisfy . Dubbed the “dependence ef fect,” this assertion held that consumer demand depended upon what producers had to sell. This fact had three major and unwelcome implications. First, b y creating w ants, adv ertising w as standing the “la w” of suppl y and demand on its head. Rather than suppl , demand

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Advertising Spending

T was estimated by one marketing group to exceed $275 billion. Worldwide, advertising was a $560 billion industry.7 In terms of direct marketing, alone, companies spent more than $160 billion in the United States,

which, measured against total U.S. sales, generated an estimated $1.85 trillion in increased sales in 2005, or 7 percent of the $26 trillion in total sales in the U.S. economy, and accounted for 10.3 percent of total U.S. GDP in that year.8

tur y. Second, advertising and mark eting tend to create ir vial consumer wants and this distor ts the entire economy. The “aff uent” society of consumer products and creature comfor ts is in man y ways w veloped economies because resources devoted to contriv v lic goods and consumer needs. Taxpayers deny school districts small tax increases to pro hile parents drop their children of f at school in accinations and minimal health gery to k eep its youthful appearance. Finally, by creating consumer w ants, adv marketing practices violate consumer autonomy. Consumers who consider themselves free because they are able to purchase what they want are not in fact free if those wants are created by marketing. In short, consumers are being manipulated by advertising. Ethically, the cr ucial point is the asser tion that advertising violates consumer autonomy. The law of suppl y and demand is re v y of the aff uent society is contriv y if consumer autonomy can be vioy advertising’ advertising violate consumer autonom y and, if it can, does this occur? Consider the annual investment in this ef fort (see the Reality Check , “Advertising Spending.”). Given this investment, what does advertising do to people and to An initial thesis in this debate claims that adv ertising controls consumer behavior. Autonomy involves making reasoned and v claim that adv ertising violates autonom y might mean that adv ertising controls consumer choice. Psycholo gical behaviorists and critics of sub liminal advertising, for example, would claim that advertising can control consumer behavior in this way is false. For example, some studies show that more than half of all new products introduced in the market fail, a fact that should not be tr ue if consumer behavior could be controlled by marketing. Consumers certainly don’t seem controlled by advertising in any obvious sense of that word. But consumer autonomy might be violated in a more subtle way. Rather than controlling beha vior, perhaps adv ants and desires on the

Decision Point Advertising for Erectile Dysfunction

basis of w hich consumers act. The focus here becomes the concept of autonomous desires rather than autonomous behavior. This is much closer to the original assertion b y Galbraith and other critics of adv ertising. Consumer autonom y is violated by advertising’ xercise to understand ho w desires might be non-autonomous is to y reasons people buy the things they buy and consume the things they do, and w hy, in general, people go shopping. After cer tain basic needs are met, there is a real question of why people consume the way they do. People buy things for man y reasons, including the desire to appear f ashionable, for status, to feel good , because e veryone else is buying something, and so for th. The 430

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these much mark eting has inf and issues are raised in theDecision Point, “Adv

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w These questions ”

Marketing to Vulnerable Populations 10 OBJECTIVE

Consider tw o e xamples of tar get mark eting. In one case, based on mark et research supplied by the manuf cal customer is a single w oman, between 30 and 40 y income o ver $30,000, and she enjo ys outdoor spor ts and recreation. Kno wing this infor mation, the dealer tar gets advertising and direct mail to this audience. Ads depict attracti ve and acti ve young people using their product and enjo ying outdoor activities. A second targeted campaign is aimed at selling an emergency call device to elderl y widows who live alone. This marketing campaign depicts an elderly w ay crying out “I’ve fallen and can’t get up!” These ads are placed in media that elderl y women are likely to see or hear . Are these marketing campaigns on an equal ethical footing? The f rst mark gy appeals to the considered judgments w hich consumers, presumably, have settled on o ver the course of their li ves. People with similar backg rounds tend to ha ve similar beliefs, desires, and v make similar judgments about consumer purchases. Target mark eting in this and values. On the other hand , there does seem to be something ethicall y offensive about the second case. This campaign aims to sell the product b y exploiting the real fear and anxiety that many older people experience. This marketing strategy tries to manipulate people by appealing to non-rational factors such as fear or ard informative ads. Is there an ything to the claim that elderly women living alone are more “vulnerable” than younger w eters? In general, do marketers hav le? Are elderl y people li ving alone par ticularl le? The ans wer to this depends on w hat w e mean b y par ticularly vulnerab le. In one sense, a person le as a consumer b y being unab le in some w ay to par ticipate as a fully infor med and v oluntary par ticipant in the mark et e xchange. Valid mark et exchanges mak e se veral assumptions about the par ticipants: They understand what they are doing, the y have considered their choice, the y are free to decide, and so for th. e can call consumer vulner ability occurs w hen a person has an impaired to make an informed consent to the market exchange. le consumer lacks the intellectual capacities, psycholo gical ability, or e informed and considered consumer judgments. Children would be the paradigmatic e . (See the Decision Point, “Targeting Vulnerable People?”) The harm to which such people are susceptib le is the har m of not satisfying one’ s money. Elderly people living alone are not necessarily vulnerable in this sense.

Decision Point

Targeting Vulnerable People?

hich the har m is other than the f nancial harm of an unsatisfactory market exchange. Elderly people living alone are susceptible to injuries from f gencies, from expensive health care bills, from loneliness. Alcoholics are susceptib le to alcohol abuse, the poor are susceptib uptcy, single women walking alone at night are le to se xual assault, accident victims are susceptib le to high medical e What we can call general vulnera occurs when someone is susceptible to some specif c physical, psychological, or f From this w e can see that there can be tw o types of mark eting that tar gets le populations. Some marketing practices might target those consumers who are likely to be uninfor med and vulnerable as consumers. Marketing aimed at children, for e xample, aims to sell products to customers w ho are unab le to make thoughtful and infor med consumer decisions. Other mark eting practices might tar le in the general sense as w hen, for example, an insurance company markets f ood protection insurance to homeowners living in a ri ver’s f oodplain. Are either, or both, types of tar geting ethically legitimate? As an initial judgment, we must say that marketing that is targeted at those individuals w le as consumers is unethical. This is a case of taking advantage of someone’ s own advantage. 432

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Clearly a por tion of mark eting and sales tar gets people w le as consumers. Just as clearly such practices are wrong. One way that this issue pla ys out involves groups w le in both le as a consumer because they le in some more general sense. y elderly have with respect to injuries and illness might cause them to mak e consumer choices based on fear or guilt.A famil ving ov ed one might make choices in purchasing funeral ser vices based on guilt or sor row, rather than on a considered judgment. A person with a medical condition or dislead to uninformed consumer choices. resident who is poor, uneduyed is unlikely to weigh the full consequences of the choice of alcoholic beverage. A number of marketing campaigns seem to f t this model. The most abhorrent (and stereotypical) example is the ambulance-chasing y seeking a client wsuit. while e y to mak choice about legal representation. Marketing campaigns that target the elderly for such products as supplemental medical insurance, life insurance, emer gency call devices, funeral services, and insurance often play on the fears, anxiety, and guilt that man y elderl y people e xperience. (See Decision Points, “Targeting Vulnerable People?” and “Marketing in Schools” to consider e xamples of marketing to specif c populations.) But just as people can be made vulnerable as consumers because they are vulnerab to other harms because the le as consumers. Perhaps this strategy is the most abhor rent case of unethical mark eting. Certain products—tobacco and alcohol are the most ob vious examples—can make an individual vulnerable to a wide range of health risks. Mark target people w le as consumers seem ethically repugnant. This explains the particular pub oung people. Companies that mark et alcoholic be verages in poor inner -city neighborhoods must tak eting malt be verages, fortif -city residents must wledge that man y autonomous consumers. Man the y are alcoholics. (For an examination of online mark eting that tar amily Foundation included at the end of this chapter.) nal form of marketing to a vulnerable population involves potentially all of us as consumer targets. We are each vulnerable when we are not aware that we are subject to a marketing campaign. This type of campaign is called stealth or undercover marketing and refers to those situations w here we are subject to directed commercial acti wledge. Certainly we are subjected to numerous communications on a re gular basis without pa ying much attention,

Decision Point

Marketing in Schools

such as the billboards at w hich we might glance side ways as we speed past on a highway. That is not underco ver marketing. Instead, undercover marketing is an intentional effort to hide the ue marketing element of the interaction. For example, Sony Ericsson Mobile Communications hired 60 actors to pose as tourists in New York City’s Empire State Building. The actors w ere supposed to pretend they were tourists and ask passersb y if they w son mobile phone cameras w ere to operate. The actors praised the phones and said how much they loved them, and the passersby left having had a good experience with the new product, unaware they were just involved in a product test! With the advent of blogs, stealth marketing has hit the Internet, as well. Internet users reading a product re vie w if the indi vidual posting the re view is a user , the product’ s manuf acturer, or e ven a competitor posting a ne gative re view just to s way consumers a way from the product. “Buzz marketing,” w here people are paid to create a “buzz” around a ne w product by using it or discussing it in w ays that create media or other attention, also creates the potential for unspok en conf icts of interest. See the 434

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Ethics and Marketing 435

Word-of-Mouth Marketing

Stealth and buzz marketing should not be confused with “word-of-mouth marketing,” which refers to those efforts by companies to generate personal recommendations by users. The Word of Mouth Marketing Association (WOMMA, www.womma .org) produced a Code of Ethics in 2005 which sought to distinguish word-of-mouth marketing from stealth and buzz marketing, both of which had received a great deal of press at that time. The WOMMA explained that “this is a first step in the complicated process of building an industry based on consumer respect and fundamental ethical principles.” The essence of the WOMMA Code comes down to the Honesty ROI:

2. We uphold the Honesty ROI: Honesty of Relationship, Opinion, and Identity.

• Honesty of Relationship: You say who you’re speaking for • Honesty of Opinion: You say what you believe • Honesty of Identity: You never obscure your identity

2. Honest, genuine opinion is our medium.

THE WOMMA CODE OF ETHICS: SUMMARY

3. We respect the rules of the venue. 4. We manage relationships with minors responsibly. 5. We promote honest downstream communications. 6. We protect privacy and permission.

THE WOMMA CODE OF ETHICS: FUNDAMENTAL PRINCIPLES 1. Happy, interested people will say good things about you. 3. We start, support, and simplify the sharing. 4. Word of mouth cannot be faked. 5. Word of mouth marketing empowers the consumer. Source: .womma.org. Reprinted by permission of Word of Mouth Marketing Association.

1. Consumer protection and respect are paramount.

“Word-of-Mouth Marketing” for the distinction betw een buzz mark eting and word-of-mouth marketing practices. F or an e xtensive e xploration of these marketing techniques and the implications of technolo gy on the ethics involv see the reading by Pudner included at the end of this chapter. Marketing experts consider stealth marketing extraordinaril ve because the consumer’s guard is do wn; she is not questioning the message as she might challenge a traditional adv ertising campaign. Consumers do not seek out the sv often tend to the much more than they would ust an advertisement or other marketing material. y in volve the use of a product and the honest response to that use, ar guably there is no deception. Ho wever, w here the wever ter med—involves sub version and deception to encourage a product’ eting campaign, it is challenging to ar gue that the practice remains ethical. F rom a universalist perspective, there is a violation of tr hich yal so the consumer ma y no longer tr ust the

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company itself. In addition, the consumer is no longer being treated as an end in itself but instr umentally only as a means to the manuf s end. Fur ther, if stealth mark eting becomes the uni versal practice, the erosion of tr ust could become so signif cant that our commercial interactions would disintegrate under ould then be necessary. Utilitarian anal ust the company’ y also lose f aith in the compan y as a w hole and will choose to purchase products and services elsewhere. Neither the company nor the consumer benef ts from this result, and a product or service that might be the most effective or eff cient solution may cease production because of a f eting campaign.

SupplyC hainR esponsibility 11 OBJECTIVE

In creating a product, promoting it, and bringing it to the mark et, the marketing olves a wide range of relationships with other commercial entities. In recent decades, the ethical spotlight has focused on the responsibility that a f rm has for the acti vities of these other entities, what we shall refer to as suppl . Few businesses ha ve received as much attention in this regard as Nike. Nike is the world’s largest athletic shoe and apparel maker. In 1999, Nike held over 30 percent of the w orld’s market share for athletic footwear, and along with market. Nik e be gan business in 1964 as Blue Ribbon Spor ts, an impor ter and marketer of low-priced Japanese sport shoes. As sales the company began to design its o wn line of shoes and subcontract the manuf shoes to Japanese f ventually changing its name to Nik e. Nike’s Web site described its business philosoph y decades later in the follo wing w ords: “Our business model in 1964 is essentiall y the same as our model toda y: We grow by investing our money in design, de velopment, marketing and sales and then contract with other companies to manuf ” In the late 1990s, as discussed in chapter 6, Nik e w as subjected to intense international criticism for the working conditions in the factories where its products were manuf Critics charged that Nike relied on child labor and sweatshops in producing their shoes. They charged that workers in these f were paid a day, were subjected to cruel, unhealthy, and working conditions, w ere prohibited from any union or collective bargaining activities. Nike initially seemed to ignore the critics and def ect any criticism b y denyvior of its suppliers. If local manuf their workers poorly, that was beyond Nike’ . At one point, Nik e’s vice president for Asia claimed that Nik w the f rst thing about manufacturing. We are marketers and designers.” Nike soon learned that the public was not persuaded by this response.

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Ordinarily, we do not hold a person responsib le for the actions of someone else. ve that each person is responsible for her or his own actions. But this is not always the case. There is a legal parallel to the idea that a business should be held responsib le for the actions of its suppliers. The doctrine of respondent superior, Latin for “let the master answer, er) responsible for the actions of ee) w or her duties to the principal.9 Thus, in the standard example, an employer can be held liable for damages caused by an accident involving an employee driving the company car on company business. The justif cation for doing w air is that the agent is acting on the principal’ s behalf, at the principal’s direction, and that the principal has direct inf uence over the agent’ s actions. Thus, if someone is doing something for y ou, at y our direction, and under y our inf uence, then y ou must tak rationale for business’ two of these conditions: Suppliers often act at the direction of business, and business often exercises signif cant inf uence over the actions of its suppliers. However, in the multinational apparel and footw y, historically the corporate brands accepted responsibility onl y for their o wn or ganizations and specif cally did not regard themselves as accountable for the labor abuses of their contractors (see Figure 8.1). This conception changed as multinationals and others became more aware of working conditions in these factories and the lack of legal protections for w orkers. Today, multinationals customaril y accept this responsibility and use their le verage to encourage suppliers to ha ve positi ve working environments for w orkers. The ne vels f ar deeper throughout the entire supply chain system, as is depicted in Figure 8.2. Each element of w hat should strik e you as a tremendousl y complicated set of inter relationships is based on the potential to infuence or exercise leverage throughout the system. The question, however, relates back to our earlier discussion of responsi. How far down—or across—the supply chain should responsibility tra vel? Should a f rm like Nike truly be responsib le for the entire footw ear and apparel system? If not, where would you draw the line as a consumer, or where would you

FIGURE 8.1

. nold and L. Har view 108, no. 4 (2003).

eatshops,”

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FIGURE 8.2 Evolved Concept of Responsibility

. nold and L. Har view 108, no. 4 (2003).

eatshops,”

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draw the line if y ou were the cor porate responsibility vice president for Nik e? fectively protect the rights of those in volved w hile creating the most appropriate incenti ves to achieve prof table, ethical results? In today’s increasingly complicated, globalized multinational systems, stak eholders have yet to resolve this challenging dilemma.

SustainableMar keting 12 OBJECTIVE

as introduced in chapter 5 as an approach to Cor porate Social Responsibility that is gaining inf uence in all areas of business. Sustainable, or green marketing, is one aspect of this approach that already has changed ho w many f rms do business. The four characteristics of mark eting introduced earlier ay to str le, green marketing.

Product The most signif cant progress towards sustainability will depend upon the sustainability of products themselves. Discovering what the consumer “really w ants,” and developing products to meet those w ants, have always been among the primary mark tions within ecolo gical constraints can be understood simpl y as a ref nement of eting objective. Consider, for example, the business dif ferences between marketing the physical pieces of computer hardware and marketing computing services. Should Dell or HP be in the business of selling computer components, or are the y selling the service to provide consumers with up-to-date computer hardw are, data storage? Chapter 9 will e xamine the distinction betw een products and ser vice in the real needs of consumers so that a business can develop the long-term relationships with consumers that will insure both f nancial and ecolo . Another aspect of mark eting in volves the design and creation of products. William McDonough (see his essa y included in chapter 9) has often described environmental regulation as a design prob lem; a product or production process that pollutes and wastes resources is a poorly designed product or process. Re y result w hen business has a poorl y-designed product or process. Marketing departments therefore should also be involved in the design of products, f nding wa y design of each product. Finally, mark eting professionals ha ve an oppor uence the packaging of products. Ov er-packaging and the use of petroleum-based plastics are packaging issues already under en vironmental scr utiny. Imagine the mark eting oppor tunities if a major soft-drink bottler such as Cok e or P ned to corn-based biodegradable plastics for their bottles. Imagine w hat the mark eting department of major mail-order companies such as Land’ s End or L. L. Bean . Imagine the marketing

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oppor y such as Procter & Gamble moving towards recycled cardboard for its packaging. These three areas come to gether clearly within the conte xt of e xtended proe-back legislation in which a f rm is held responsible to take back and recycle all the products it introduces into the marketplace. These regulatory developments, now taking hold especiall y in Europe, will be seen as bar t by some f rms. But more creati ve f rms will see oppor here for generating entire ne w mark ets. Take-back le gislation pro incentives for re-designing products in ways that make it easier to reuse and recycle. Marketing services rather than products, of course, will be the most eff cient means for accomplishing this objective.

Price A second aspect of mark ronmental costs of resources, the “natural capital” on w hich most f rms rely, and points out that en vironmental costs are seldom f actored into the price of most products. Marketing professionals should play a role in setting prices that ref ect a product’ gical cost. Atf rst glance, this might seem a peculiar area in w hich to expect business to move. Internalizing environmental externalities sounds lik e a polite w ay of sugould seem, at best, ver gulation, rather than voluntary action, is more likely to move business in this direction. Without government mandates across the board for an industry, inter put a company at a comparative disadvantage. On the other hand ay that more sustainable products are priced competiti vely with other products is a more reasonab le strate gy for sustainable marketing. Ordinarily, w and objective process. One star ts with the costs of producing a product, adds a reasonable rate of return, and the result is asking price. Ultimately, the price is whatever buy wever, this simple model misses some impor tant complexities. To understand some of the comple xities of price, and the role of marketing in this, consider the example of hybrid automobiles. Like any new product, a h ybrid automobile required in vestments in research, eting long before it could be brought to mark et. For such a complex product as a hybrid automobile, these investments were substantial, well into the hundred of millions of dollars for each automak er w ho produces a h ybrid. Setting a price for this product in volves a complicated process of projecting sales, mark ets, and a product’ s life-c ycle. In one sense, the v ery f rst h ybrid cost millions of dollars to manuf ell be yond an af fordable and mark etable price. Businesses nor mally tak e a loss on a ne w product until such time as economies of scale kick in to lo wer costs and mark et share de velops suff ciently to produce a re venue stream that can be gin to pay down the initial investment and generate prof ts. Mark eting professionals w ho are a ware of ve much to contribute in establishing prices that protect sustainab m cost-benef t analyses.

Decision Point

Marketing to the Base of the Pyramid

441

Consider also ho uf s rebates, cash-back incenti ves to consumers, bonuses to sales staf f, and the use of loss leaders in retailing. Ob viously price is often manipulated for many mark Short-ter ed in pricing decisions b y appeal to long-ter m considerations. This seems a perfect f t for sustainable marketing goals. Perhaps nowhere is price a more cr ucial element of mark eting than it is in mark t margins and eff cient distribution systems within lar ge mark ets, as demonstrated so clearl y b y lar ge retailers like Wal-Mart, can prove to be a highl y successful business model. An ethically praiseworthy goal would be to e xport this mark ve the cause of global sustainability . The Decision P oint, “Mark eting to the Base of the Pyramid,” explains the mechanics of this process, and the reading b y Pramarketing analysis. In a subsequent reading, Prahalad responds to his colleague, Professor A. Karnini, who challenges the process, since the concept of a mark et among those living in pover versally accepted.

Promotion tising of products. Marketing also has a responsibility to help shape consumer demand , encouraging Without question, 442

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Reality Check

Ethics and Marketing 443

Terra Choice’s Seven Sins of Greenwashing

SIN OF THE HIDDEN TRADE-OFF

SIN OF WORSHIPING FALSE LABELS

A claim suggesting that a product is ‘green’ based on a narrow set of attributes without attention to other important environmental issues. Paper, for example, is not

A product that, through either words or images, gives the impression of third-party endorsement where no such endorsement exists; fake labels, in other words.

making process, such as greenhouse gas emissions, or chlorine use in bleaching may be equally important.

SIN OF IRRELEVANCE

SIN OF NO PROOF An environmental claim that cannot be substantiated by easily accessible supporting information or by a reliable third-party certifi are facial tissues or toilet tissue products that claim various percentages of post-consumer recycled content without providing evidence.

SIN OF VAGUENESS A claim that is so poorly defi ned or broad that its real meaning is likely to be misunderstood by the consumer uranium, mercury, and formaldehyde are all necessarily ‘green’.

An environmental claim that may be truthful but is unimportant or unhelpful for consumers seeking environmentally preferable products. ‘CFC-free’ is a common example, since it is a frequent claim despite the fact that CFCs are banned by law.

SIN OF LESSER OF TWO EVILS A claim that may be true within the product category, but that risks distracting the consumer from the greater environmental impacts of the category as a whole. Organic cigarettes could be an example of this Sin, as might the fuel-efficient sportutility vehicle.

SIN OF FIBBING Environmental claims that are simply false. The most common examples were products falsely claiming to be Energy Star certified or registered.

marketing has already sho wn how pow demand. Marketing has played a major role in creating various social meanings for shopping and buying. Sustainab le marketing can help create the social meanings and consumer e xpectations suppor tive of sustainab le goals. verlooked aspect of adv ing and marketers have a as educators. Helping consumers the value of sustainable products, helping them become sustainab le consumers, is an impor tant role for sustainab le marketing. For e “Terra Choice’s Seven Sins of Greenw t in consumer education. y one aspect of product promotion will in volve the “g reen labelling.” Just as ing arning labels ha ve become nor mal and standardized , en y well create a pub lic demand for en and sustainable labelling. But, past has shown a tendency for some f xploit green labelling initiatives and mislead consumers. “Greenwashing” is the practice of promoting a product b y misleading consumers about the environmentally benef cial aspects of the product. Labelling products with such as “environmentally y,” “natural,” “eco,” “energy eff cient”

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Examples of Greenwashing?

Opening Decision Point Revisited Marketing Pharmaceuticals

“biodegradable” and the lik ronmental benef ts. Take a look at the Decision P oint, “Examples of Greenw ashing?” to see if you can distinguish the green washing claims from the sincere ones.

Placement The f nal aspect of mark eting in volves the channels of distribution that mo ve a product from producer to consumer . Professor P atrick Murphy suggests two 445

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11 directions in w hich mark eting can de velop sustainab As y eting channels in volve such things as transpor tation, distribution, inventory, and the like. Recent advances in marketing have emphasized just in time inventory control, lar tation schemes. Murphy foresees new sustainability options being added to this model which emphasize fuel eff ciency and alter nativ gies used in transportation, more localized and eff cient distribution channels, and a g reater cient distribution ve the underserved base of the pyramid consumers as well. Consider, as an e xample, how the pub lishing industr y has e volved its channels of distribution. Originall y, books, magazines, catalo gues, or ne wspapers were printed in one location and then distributed via tr uck, rail, or air across the country y such companies as USA Today and the Wall Street Journal, send electronic v ersions of the content to localized printers who publish and distribute the f nal product locall y. Text book pub lishers do a similar thing when they allow users to select specif c content and create a custom published book for each use. As subscriptions to hard-copy publications decline, many ne wspapers, magazines, and catalo gues are taking this a step fur ther b y moving towards on-line publishing. Murph ariable in mark eting that promises signif wards. “Rev growing marketing practice of taking back one’ s products after their useful life. The life-c e-back” models described in chapter 9 will likely fall to marketing departments. The same department that is responsible for sending a product out into the mark xpect the responsibility for f nding ways to take back that product to dispose, recycle, or reuse it.12

Questions, Projects, and Exercises

447

448

Key Terms

End Notes

449

Readings

Blog and Swag,” by Kalynne Pudner, p. 449 Analysis of Online Food Advertising Targeting Children,” by the Kaiser Family Foundation, p. 457 Reading 8-3: “Fortune at the Bottom of the Pyramid,” by Prahalad and Hart, p. 460 A. Karnani ”, by C.K. Prahalad, p. 474

Reading 8-1

The Friendship of Buzz, Blog and Swag Kalynne Hackney Pudner Word-of-mouth (WOM) is arguably the biggest trend in adv ertising since the tele vision commer cial. This is not because it is a no vel for m of disseminating product infor mation (it is rather the oldest), but because the Inter net has magnif ed its reach beyond the most optimistic mark eter’s imaginings. Where WOM was once restricted by the logistics of pro les “word e xplosion,” the simultaneous, potentiall y global transmission of a single message to dozens, hundreds, or ev through e-mail, postings, or links; search engines multiply the ef fect e xponentially.1 Unsurprisingly, the mark eting industr y is eager to har ness this explosive power. What, precisely, is WOM? The Word of Mouth Marketing Association (W OMMA), the selfappointed industry standard and watchdog, def nes

it as “the act of consumers pro viding infor mation to other consumers;” w ord of mouth mark eting, then, consists of “gi ving people a reason to talk about y our products and ser vices, and making it easier for that conversation to take place.”2 Fundamentally, WOM is a marketing strategy that utilizes pre-existing relationships betw een someone w ho will adv ocate the mark eter’s product (the “adv ocate”) and the mark eter’s targeted consumers (the “target”). Authentic WOM unhitches the mark eting message from control of the mark eter, w hich allo ws the message to reach targets who may have thrown up a bar rier between themselves and the mark eter (what one commentator calls a “no-mark eting zone”); but w hich also remov the marketer’s direct control. 3 It might be e xpected that this combination of features places the targeted

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, par ticularly to w or this reason, WOMMA has under taken to set and infor mally enforce ethical standards for the practice of WOM. While it also addresses the engagement of minors and respect for v enue r ules, WOMMA’s ethics initiative focuses on transparenc y, or w hat it calls “Honesty ROI.” It urges WOM marketers and their advocates to be honest and open re garding their Relationship; it ur ges adv ocates to e xpress onl y honest and open Opinions; and it ur ges advocates to be honest and open in disclosing their . ve appeal of disclosure is understandable. The ethical red f ags were f ying high w hen “Wal-Marting Across America” w as e xposed as the f ake b log (“f og”) of a professional jour nalist couple under paid contract by Edelman, Wal-Mart’s public relations f rm. Ev en w orse, a second b log called “Paid Critics,” which bashed public off cials and others w ho oppose Wal-Mart’s expansion and operating practices, was exposed as a f og authored b yees.4 The original f og’s Web address, almart.com, now bears the Wal-Mart lo go and a message reading, “Please check back soon for a ne w site brought to you by Wal-Mart. For now, please visit Wal-Mart Facts.” WOMMA’s Code of Conduct w ould ha ve required the Wal-Mar y disclose their relationship with Edelman, and Edelman’ s relationship with Wal-Mart, as w ell as the “P aid Critics” blog authors’ identity as Edelman employees. Here, transparenc y w ould ha ve benef ted readers, the WOM industr y and—in light of the scathingly negative publicity backlash—Wal-Mart and Edelman. WOMMA’s disclosure requirement e xtends beyond b logging and f ogging to other for ms of word-of-mouth promotion. person-to-person WOM. The Edelman emplo yees w es as such before recommending the ten-cent spiral notebooks at W s Back to School e vaganza. This is vel vant, but it could be off-putting, a superf uous and affected claim.

The ve oddness may be ascribed to the presupposition that the target either is already aware of the advocate’ , or has reaocate’s assessment independently of an tant observation. But it isn’t suff tion of awkwardness, because the disclosure w ould be similarl y awkward w here there is no such presupposition about the adv ocate-target relationship. Ditto for the casual acquaintance who ges others to try this tea or that hand cream. To render alreadypresumed motivation explicit is to render it dubious, it seems, and thereb ve WOM. parency is not panacea to the ethical tensions of WOM, but rather serves a particular that varies in importance relative to the particular conte y is a subsidiary, and potentially def ecting, aspect of the real cr ux of the ethical issue: the pre-e xisting relationship on which WOM seeks to capitalize. If I am cor rect, then WOMMA’s calls for adv ocate transparency are well-intentioned but misdirected. The relationship that must be made transparent to the target is not that betw een the advocate and the marketer, but betw een the adv self, the target. This hypothesis can be supported by comparing the pre-existing relationships utilized by three difWOM: buzz, blog and swag.

Buzz Departing slightl WOMMA’s usage, the term “buzz” refers here to traditional w ord-ofeen par ticular individuals, regardless of catalyst (advertising, product experience, mark eter direction), and re gardless of medium (face-to-face, telephone, print or electronic). The essential feature of buzz is that the preexisting relationship betw een adv ocate and tar get is deter een par ticular and identif ed individuals. True buzz (as opposed to the spontaneous product refer y

Chapter 8

accompanied b y product seeding, def ned by WOMMA as “placing the right product into the right hands at the right time, providing information or samples to inf uential individuals.” Advocates are given free samples of the marketer’s product, to use personally and sometimes to distribute to tar get consumers as w ell. BzzAgent ( .bzzagent .com), which bills itself as the leading WOM media network, directs its adv ocates, or “agents, ” to disclose to targets that they are recei in exchange for their advocacy. Note that the v yW will enhance the adv ocate’s credibility actuall y seems to damage it. The act of disclosure redirects the tar get’s attention from the product, and to the advocacy message itself. Does m y friend feel an implicit ob

Ethics and Marketing 451

Swag

in the hope that the y may be induced to use their regular media platfor ms to disseminate a positi ve product message. In some cases, s wag is of considerable monetary value, even extravagant.6 The obvious concern is that the media message not appear to be “purchased,” and thus presumab ly biased. Still, there is a practical ar gument in f avor of s wag: how are products supposed to be re viewed unless the reviewer is given no-cost access to the product?7 Swag distribution is not limited to product seeding, however, and mark eters have strong incenti ve to pursue positive media coverage by whatever means the y can de vise. It’s almost an adv ertising truism that ne gative news can do more har m than the most e xpensive, e xpansive adv ertising campaign can do good. In f act, the do wnward pull of negative media coverage is so pronounced that subsequent advertising has been shown to be w even if it is an e xplicit counter to the co verage.8 Conversely, positive publicity followed by a surge of traditional adv ertising elicits a stronger , more positiv ertising alone.9 Because consumers discount positive publicity w paid adv eters covet w hat politicians term “earned media,” and swag has proven itself a viable option for generating it. Of course, the value of ear ned media is impar ted by the perception of ve, un-self-interested repor ting, and this perception is precisel y w hat is compromised when the media is motivated by a sense of obligation to repa y the benef t of s wag recei v or b wag. So w hile a media review of the Kindle is valuable to consumers only if the writer has personal experience with a Kindle, it is considerably less valuable if the writer also has personal experience of, sa y, the P aris Air Show at Amazon’s expense. ag W serv

I want to jump no w to the opposite end of the relawag.” Swag refers in its central cases to free product and other items gi ven by mark

Even if stating the obvious (“I was given a free cup of shaved ice to taste before writing this re view”), the disclosure does not cloud the adv ocate-target relationship in the same way it does in buzz. y?

such promotion w ould be unethical. But disclosing the receipt of free product doesn’t f x the problem. In addition to raising suspicion of insincer , buzz transparenc y raises that of h yperbole; research has estab lished that self-generated adv ertisements sho w a mark ed tendenc y to e xaggerate the positive experience of product use, and that this tendency is recognized and severely discounted by its audience.5 Even if the disclosure itself is ne gative (“I’m not getting an ything for this”), the v ery fact that the adv ocate feels the disclosure is necessary casts aspersion on the reliability of the testimony. Instead, the disclosure raises the question whether product mention is par t of an adv ertising strategy unless e xplicitl the questions stop with product-oriented messages; the target may be led to w onder about the sincer vation of other communication b y the advocate, and indeed, about the basis of their relationship itself.

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I w ould suggest this is because transparenc y is a natural feature of the relationship itself. As in the case of buzz, s wag utilizes a pre-e xisting relationship between the adv e buzz, this relationship is non-par ticular, generally unidentif visible. Unlik e buzz, the advocate-tar ag consists essentially of one-w ay dissemination of messages to an indeterminate audience; also unlik e buzz, these The target’s assumption that the adv ocate’s messages are unbive, and un-self-interested is necessar y for the relationship to work. Transparency is a condition of this assumption.

Blog Occupying a v ast, v gated and e ver-evolving relational middle g round betw een buzz and s wag is “blog,” in which a par ticular individual or g roup of indi viduals (named or pseudon ymous) uses the Inter ticular, generally unidentif ed and qualif edly invisible . Although blogs have been around since the mid-90s, they have bur geoned in popularity primaril y since 2005, due in lar ge par y sites designed to host them. The Pew Inter net and American Life Project reports that as of 2006, eight percent of Inter net users, approximately 12 million American adults, k ept a b log; thir ty-nine percent, or 57 million, read them re gularly.10 Although the statistics will cer tainly ha ve g rown fur ther b y the time this paper is pub ratio of blog consumption to production will remain constant in the vicinity of 80/20. 11 Marketers who wish to utilize the b logger-audience relationship for WOM are advised to identify b loggers who are passionate about their product or product type, and therefore likely to about the product in strong and positive ter ms, rather than to aim for broader but shallower message dissemination.12 One of the more extensive studies on blog activho engage in it f nds that blogs “ma y, a daily pulpit, a

collaborative space, a political soapbo x, a collecorld.”13 It follows from this range of pur pose that the character of blog messages and blogger-audience relationship is an , and the implications of this v ariation for b log WOM are enor mous. o generalizations about b logger-audience relationships can be made: f rst, the y are usuall y deriv gger-audience relationships; and second , they are independentl y def ned by the audience. The o v helming v olume of b log content on the World Wide Web tends to limit the reader’ s exposure to blo sound. y-grouped lists of blogs can be cumbersome as well as vague, and the prospect of bro wsing for new, relevant and engaging blogs can be daunting.14 Thus most blog visits are generated b y links from other Web sites, especially other b logs. Blo grolls and link ed comone blog to another , creating jaggedl y overlapping vir of bloggers and their regular, shared readers. The vir enon can also be overtl hen a blogger log with e uctions to “go here”; and commentators who do so ordinarily credit the referring blog in their feedback. As I ha ve ar gued else where, the relationship between b logger and audience, in the absence ther relationship unmediated b y electronic communication, is indeter minate, lea ving the audience to interpret it as she chooses in order to contextualize both incoming and outgoing messages.15 This ma y tip the b logger-audience relationship to ward buzz, as it seems to do in the case of “mommy bloggers,” or it may tip it toward swag, as in (for e xample) the b logs of repor ter 16 Jef Relationship inter pretation online is also subject to radical re vision, from personal to impersonal, or vice versa.17 Just as advocate-target relationships v the blog univ ocate transparency. The target is imaginatively construct-

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ing the adv ocate’ y f lling in gaps between adv ocate disclosures (both related and unrelated to the marketer and its product), and then crafting a relationship with this constr ucted per sonality; therefore, the meaning and impor tance of

teachers and students, athletes and couch potatoes have instrumental value. Yet the y unethical, as long as each par ty respects the autonomy of the other , instead of using her as a mere, subhuman, non-autonomous means.

solely b Where the advocate-target relationship in b log may be buzz-lik e, transparency is likely to be ve; where swag-like, it is likely to be an asset. But since the relationship is inter y re erally discontinued b y the tar y’s likely effect is ultimatel le.

insurance policy for the target’s autonomy, then its v WOM relationships, swag is the most impersonal and car ries the greatest potential for both adv ocate and tar get to use each other as mere means. But it is also car ries the least potential for alter native relational rew so the target v e autonomous decisions about the adv ocate’s message abo ve any personal connection with the adv ocate. The smar t advocate values the tar get’s autonomy as w ell: the target can just as easil y choose not to recei ve the advocate’s pub licly disseminated messages, and w s audience w anes, so does the media personality. Buzz is v ery dif ferent. The adv ocate-target relationship is personal, par ticular and identif ed, and as such, mitigates against using each other as mere means. Autonomy is generall y respected as an inte gral component of the v alued other’ s y as an ethical insurance polic need where it ma y rightfully be assumed no need exists. Moreover that none e xists, and to inser t it w ould change the character of the relationship. What kind of relationship is this, w here transparency as a guarantee of autonomy introduces a conceptual third w heel? In aw

TheE thicsofT ransparency cal impor tance of transparenc y is not intrinsic to WOM as a mark eting strategy, but to the relationships that W y employs. As these vary according to WOM type, so does the impor tance of transparency. The most intuiti vely unethical cases of WOM are those in w hich the tar get is deliberatel y and actively decei v Wal-Mart f ogs. Passive deception (“don’t ask, don’t tell”) is mar ginally better, but still prob lematic. And the ethical prob lem is a straightforw ard one: deception undermines the autonom y of the moral agent at w ve WOM, whether acti ve or passi ve, lea ves the tar get with incomplete or er roneous infor mation on w hich to base his choice; he is therefore not in a position to make his purchase decision autonomously. Transparency, then, protects tar get autonom y: in Kantian terms, it helps pre vent the advocate from using the tar get as a mere means instead of as an end-in-himself. All marketing, and indeed much of life, involves using other persons as means: emplo yees are means to prof t for o wners, teachers are means to lear ning for students, professional athletes are means to the vicarious thrills of victor y and agonies of defeat for inacti ve spectators. We say that een employees and owners,

FriendshipandSe lf-Disclosure Friendship is a diff

cult concept to pin do

wn,

v “family resemb lance” approach. Still, philosophiAristotle to Kant and be yond concurs on cer ly esteem, w ell.18 These features themselv es presume identif ed particularity:

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esteem is esteem for someone in par ticular, mutuality is betw een par ticular persons. Note the neat correspondence with our obser vations of buzz, blog and swag; central cases of buzz occur between log relationships that are inter preted by the audience as vir tual friendships lend themselves to buzz gies, while those that are interpreted as pub lic media lend themselv es to s wag strategies. y instr umental relationships of W sophical sense? Yes, as long as the instr umentality is subordinate to, and constrained b y the necessary features of, friendship properl y understood. The philosophical tradition makes a def nite (if not altogether clear) distinction betw een w hat Neera Badhw friendships, That is, the y lie within the parameters of esteem, w s account, ell as end friendship esteems (i.e., values) the friend as a particular individual, wishes the friend w ell for his o wn particular sake, and enjoys the reciprocation of that particular individual; it is “instr umental” onl y in the sense that tangential or accidental to the friend and is moti vated primarily b y each friend’ s independentl y def ned goals.”19 In an “end friendship,” by contrast, it is a connection with the other’ s own “self ” (with all the histor y, plans, projects, vir tues, etc. that this entails) that is one’s end. J.M. Cooper’ s w ell-known reading of Aristotle’s classif cation of pleasure-friendship, utility-friendship and vir tue-friendship cor roborates this vie w. The char ge that friendship can consist of mutual use for pleasure or other self-seeking adv antage misconstr ues Aristotle, according to Cooper; pleasure, utility and vir tue distinguish friendships not by function, but rather by the character and original source of the relationship’s bond.20 It is the friendship itself, and not the friend , that pro vides the occasion for pleasure, utility or vir tue. The friend is al ways valued and wished w ell for his o wn sak e, and ne ver as

a mere means. “[I]f one is someone’ s friend one wants that person to prosper, achieve his goals, be happy ay in which he wishes these things for himself, w hatever else one may want as w ver explains one’s having this desire.”21 Applying this anal ysis to the pre-e xisting per sonal relationship of buzz, for e xample, it w ould be consistent with morall y sound friendship for the advocate to want to benef t herself by connecting her friend with a mark eter’s product (w hatever form this benef t might take) and at the same time w ant her friend to benef t from the product. Her relationship with the mark eter is a means of benef ting her friend at the same time as it is a means of benef ting herself. But both benef ts are subordinate to, and constrained b y, the necessar y een herself and the target, even if this subordination and constraint is not made explicit. Indeed, to make the subordinate and constrained activity explicit is to draw it larger than the relationship to which it is subordinate and by w We might sa y that friendship, lik e politics and sausage-making, is best e xperienced without poking about behind the scenes. As Christine K orsgaard notes of the goodness of the other; but it need not require full transparenc y of the other’ s state of mind. 22 Kant, w y ways parallel to Aristotle’s, also acknowledges that “men are not transparent to each other ,” that not every end, reason or intention of one friend can or need be revealed to the other.23 Kant concurs with Aristotle, also, that authentic friendship can have varied bases, such as need, taste, or moral attitude. 24 The duties of friendship are complementar y lo ve and respect, w here lo ve is a practical decision instead of an emotional response (since the emotions, not being subject to the will, are outside the reach of Kant’ s concept of morality and therefore duty). The positive demands of lo ve, to pursue the friend’ s good, and negative demands of respect, to refrain from acting in such a way that compromises the friend’s

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autonomy, act in tension of simultaneous attraction and repulsion, keeping persons at the morally appropriate distance.25 Kant explicitl te y. In the Lectures on Ethics, rev , ev ho is, after all, onl y human and subject to changing y someday become an enem y. In his later Metaphysical Principles of Virtue, he extols the lov ust of moral friendship w hich allay this fear, thus enab ”26 The v m of friendship seems dence of tw o persons to disclose their most secret thoughts—w hat Kant calls intercourse of mind with mind.” But to elation of one’ contravene this respect. In this case, too, friendship itself sets the boundaries of self-disclosure.

Conclusion The ethical rough edges that transparenc y is intended to smooth are more clearly visible through ocate’s relationship with the mark eter ought to be disclosed to the tar get depends on the adv ocate’s relationship with the tar get. Transparency may be either a help or a hindrance to the adv ocate’s pre-e xisting relationship with the tar get. If the adv ocate-target relationship is instrumentally valuable to the advocate’s WOM intentions, rather than the WOM intentions being merel y incidental to the relationship—then transparency will help the tar get to reco gnize that . Instr umentally v aluable relationships, remember, do not necessaril treating the other as a mere means; the y entail an intention to use the relationship itself as a means. This is not necessaril y bad. A gi ven relationship may w ell be a means—to prof t, to free product, to social advancement; but also to l-

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sensiti . It is onl y when the other par under the illusion that the relationship is intrinsicall y v aluable, or instr umental to a t of end , that the ethical red f ags are one’s ethical f advocate and tar get ma y or ma y not in volve the marketer/advocate relationship. does, advocate transparency will impro v hen not, not.

between adv ocate and tar get and their respecti ve perceptions of the relationship. In its highest for m, friendship will entail a shared understanding of ends and reasons, of intellectual and moral principles. Not every friendship need adopt this highest form as its goal, but Kant’ s complementar of love and respect ur ge ev ward a At the other end of the spectr um, the one-w ay, one-size-f ts-all media transmission of s wag is ordinarily recognized as such b y both par ties, and while advocate transparency can be v aluable, it is very often unnecessary. The danger of mismatched perception is g reatest in b log, w here the relationship between blogger and reader is inherently indeterminate and requires reader construction. In summar y, there is no doubt that WOM is appropriately subjected to ethical anal ysis and can benef t from clearl y ar ticulated ethical standards. WOMMA’s ts in this regard are laudable. But the get. The ethics of utilizing pre-existing relationships in marketing strategy must f rst direct attention to the pre-e xisting relationships themselves, and examine the place of marketing activities within their context.

EndN otes 1. Andrea Wojnicki, “Word-of-Mouth and Wordof-Web: T alking About Products, T alking About Me,” Advances in Consumer Resear ch 33 (2006): 575.

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2. t :// w.wo a.org/wom101/ 3. Mike Hofman, “Lies, Damn Lies and Word of Mouth,” in Business Ethics Annual Edition 07/08, edited b y John Richardson (Dubuque: McGraw Hill, 2008), 162–165. 4. C Money.com, “ PR F irm Admits I t’s Behind Wal-Mart Blogs,” .com/2006/10/20/news/companies/walmart_ blogs/index.htm. See also Angelo F “Transparency under Attack,” Communication World 24 (2007): 9–11. 5. Terence Shimp, Stac y W randescu, “Self-Generated Adv ertisements: Testimonials and the Perils of Consumer Exaggeration,” Journal of Advertising Research 47 (2007): 459f. 6. Weddle, D avi “ Swagland” ( Business Ethics Annual Edition 07/08: 178–183). 7. Joshua Trupin, “Bring On the Sw ag,” MSDN Magazine, March 2007, 8. “Thunder-stealing,” proacti ve admission of the negative news item and of a planned remedy , is the e xception to this y-May Meijer and Jan Kleinnijenhuis, “Ne ws and Advertisements: Ho w Ne gative Ne ws Ma y Re verse Advertising Ef fects,” Journal of Advertising Research 47 (December, 2007): 516. 9. Marsha Loda and Barbara Carrick Coleman, “Sequence Matters: A More Ef fective Way to Use Advertising and Pub licity,” Journal of Advertising Resear ch 45 (December , 2005): 370. 10 . Amanda Lenhart and Susannah Fox, “Bloggers: A Por s New Storytellers,” Report of the P American Life Project Pew Foundation), 7/19/2006, .pewinternet.org/pdfs/ PIP%20Bloggers%20Report%20July%20 19%202006.pdf . .See also Clay , Her (New York: Penguin, 2008).

12. Cate Rie gner, “Word of Mouth on the Web: The Impact of Web 2.0 on Consumer Purchase Decisions,” Journal of Advertising Resear ch 47 (December, 2007): 447. . Kuang, et. al., “‘Bloggers”’ Motiv viors: A Model, ” Journal of Advertising Research 47 (December, 2007): 473. 14. One site that has addressed the problem of sifting through ov helming amounts of content in search of worthwhile blo leUpon leupon.com ),which allows users to identify cate gories of interest, under w hich ed blogs and other pages recommended by users with similar interests. 15. “MySpace Friends and the Kingdom of Ends,” Philosoph Yearbook 2007: 273–281. I also f nd fascinating the phenomenon whereby members of the same b log community are moti vated to meet in person, def ning and concretizing their relationships (see for example coverage of “BlogHer 2008,” a conference of momm y bloggers held in San Francisco in Jul y of that y ear, at .blogher.com/blogher_conference/conf/2/ general/1 ). 16 . Jarvis’ blog is found at (note the “disclosures” link, following “about me”); the CHE b log is at ws/. The tone of the comments on these b logs is shar ply different than those on either of Meehan’s. 17 . See also Anna Lund Jepson, “Information Search in Vir Use of Of Journal of Marketing Communication 12 (2006): 248. 18 . A. Lynch, Philosophy and F riendship (Edinburgh: Edinburgh University Press, 2005), 21. 19 . Neera Badhwar, “Friendship: A Philosophical Reader” (Ithaca: Cor nell Univ 1993), 3. Emphasis in original. 20. John Cooper, “ ms of Friendship,” Re ysics 30 (1977): 633.

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21. “Aristotle on the Forms of Friendship”: 622 (fn 7); 626f. 22 . Christine K Creating the Kingdom of Ends (Cambridge: Cambridge Uni v Press, 1996), 190. 23. ” quoted in Pakaluk, 216. 24 . Immanuel Kant, “Lectures on Ethics,” in Michael P akaluk, Other Selves: Philosopher s on Friendship (Indianapolis: Hackett Publishing, 1991), 214. Here , Kant describes friendship of taste as “pseudo-friendship.”

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25. See H.J. Paton, “Kant on F riendship,” in Badhwar, 139–141. 26 . Andrea Veltman, “ and Kant on SelfDisclosure in F riendship,” Journal of Value 38 (2004), 231f.

References Note: References removed for publication here, but busethics2e.

Reading 8-2

First Analysis of Online Food Advertising Targeting Children The Kaiser Family Foundation1 Food Compan y Web sites F eature Advergames, Viral Marketing, TV ads, and Incentives f or Product Purchases . Washington, D.C.—Concerned about the high .S., policymakers in Congress, the Federal Trade Commission, e explored a v actors, including the mark eting and adv ertising of food products to children. One area where policymakers have expressed interest, but ha ve also noted a lack of publicly available data, is in the realm of online food marketing to children. In order to help f ll this gap, the Kaiser F amily Foundation today released the f rst comprehensive analysis of the nature and tising to children, to help infor ers, advocates, and industry. The repor t, It’s Child’ s Play: Advergaming and the Online Mar keting of F ood to Childr en, found that more than eight out of ten (85%) of the top food brands that tar get children through TV advertising also use branded Web sites to mark et to children online. Unlik e traditional TV adv ertising, these cor porate-sponsored Web sites of fer

extensive oppor tunities for visitors to spend an unlimited amount of time interacting with specif c food brands in more personal and detailed w ays. For instance, the study documents the broad use of “advergames” (online games in w hich a company’s product or brand characters are featured , found on 73% of the Web sites) and viral marketing (encouraging children to contact their peers about a specif c product or brand , found on 64% of sites). In addition, a v ariety of other adv ertising and mark eting tactics are emplo yed on these sites, including s weepstakes and promotions (65%), memberships (25%), on-demand access to TV ads (53%), and incenti ves for product pur chase (38%). “Online adv ertising’s reach isn’ t as broad as that of tele vision, but it’ s much deeper ,” said V Rideout, vice president and director of Kaiser’s Program for the Study of Enter tainment Media and Health, w ho o versaw the research. “Without good infor mation about w hat this ne w world of adv ertising really looks lik e, there can’t be ef fective o versight or polic ymaking, w hether by the industr y or b y go vernment,” she noted. The adv ertising industr y has announced that it

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is developing more detailed v oluntary guidelines for online mark eting to children, e xpected to be released shortly. The study included detailed anal ysis of 77 Web Web pages. Based on data from Nielsen NetRatings, these sites received more than 12.2 million visits from children ages 2-11 in the 2nd quarter of 2005. About three-quar ters (73%) of the Web sites in the study included adv ergames, ranging from one to more than 60 games per site. In total, the sites in the study contained 546 games one or more food brands, such as the Chips Ahoy Soccer Shootout, Chuck E. Cheese’ s Tic Tac Toe, the M&M’s Trivia Game, and the Pop-Tart Slalom. For example, on Kellogg’s FunKtown children can “race against time w hile collecting delicious K ellogg’s cereal,” and at the Charms site they can pla y Luck y’s Magic Adventure and “lear n the po wers of all eight char ms” found in Luck y Charms cereal. To encourage additional time spent at the Web site, many of the games promote repeat pla vels of play (45%), or suggest other games the visitor might enjo y (22%). Almost two-thirds (64%) of sites in the study use viral marketing, in which children are encouraged to send e-mails to their friends about a product, or in s Web site. For example, at juicyfruit.com users were encouraged to “Send a friend this fr uitylicious site!” and told that if the y “send this site to 5 friends” they would get a code that could then be used to access additional features on the site. Other sites encourage y oung users to in vite friends to help them “redecorate” their online “rooms,” challenge them to pla y an adv ergame on the site, or send them an “e-card” featuring the compan y’s brand or spokescharacters. For example, on Keebler’s Hollow Tree Web site, children are in vited to send a friend some “Elf n Magic” in a birthday or seasonal greeting. The repor t w as released toda y at a for um in Washington, D y

leaders, government health off cials, and consumer advocates. The study was conducted for Kaiser b y Elizabeth Moore, associate professor of mark eting at the Univ A Web cast of the session is available. The following are additional k ey f ndings from the survey:

TelevisionA dvertisingO nline • Half (53%) of all sites in the study ha ve televiailab logg’s FunKtown site, children can ear n stamps by viewing in the “theater.” On the ms and F rootloops sites, serialized “webisodes” un veil animated stories featuring brand characters and products. On Skittles.com, users are told they can watch the ads “over and over right no w” instead of ha ving to w ait for them to appear on TV.

NutritionI nformation • tion such as that found on a product label, and such as “good source of vitamins and minerals.” • Twenty-seven percent of all sites ha ve infor mation about eating a health y diet, such as the number of ser uits and vegetables that . For e gg’s site included such features as “nuts about nutrition” and “decipher the secrets of the Food Pyramid.”

Incentivefor P roductP urchases • Almost four in ten sites (38%) ha ve incentives for the user to purchase food so the y can collect brand points or stamps that the y can then exchange for premiums (such as gaining access to new games or purchasing brand-related clothing). F or e xample, children are encouraged to purchase specially-marked packages of Bubb le

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Tape gum and then enter the codes online to get free Nintendo game tips.

Memberships,R egistration, and Marketing Research • One in four (25%) sites of fer a “membership” oppor . Children who sign up on W ely informed about new brands, exclusive offers, and ne w tele vision commercials a vailable for viewing. Thirteen percent require parental per mission, while 12% do not. • Thirteen percent of sites include polls or quizzes, some of which were used to ask visitors their opinions on products or brand-related items. F or e xample, on cuatmcdonalds.com, visitors are ask ed to v ote for “the dollar menu item you crave the most” and for “y avorite McDonald’s IM icon character.”

Extendingthe O nline Experience Offline •

W fered at least one “e xtra” brand-related option for children, such as screensa vers or w allpaper for a child’s computer, printable coloring pages, branded CD covers, or brand logos or characters that can “live” on the child’s computer desktop.

EducationalI nformation • Thirty-f ve percent of sites of educational content, ranging from historical f y, spor ts or geo y. • dubbed “advercation,” a combination of adv eracter to present educational topics, or co vering topics such as the histor y of ho w chocolate is made on hersheys.com.

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WebSite P rotections for Children • ed some infor mation explicitly labeled for par ents, such as w hat type of infor mation is to be gal disclaimers (88%), a “contact us” link (87%), statements about the use of “cookies” (81%), and statements of compliance with the Children’s Online Pri vacy Protection Act (COPPA) (74%), or adherence to Children’ s Advertising Review Unit’s (CARU) guidelines (46%). • On all Web sites w here personal data w as requested (be yond a f rst name, screen name or e-mail address for one-time use), mechanisms were in place to that children age 12 and under did not submit any information without parental permission. • Although CARU’s guidelines state that “adv ertising content should be clearl y identif ed as such” on product-driven Web sites, only 18% of the Web sites studied included an y kind of “ad break” or other notice to children that the content on the site included advertising.

Sweepstakes&P romotions • Tw e promotions in w some w ay. They include s weepstakes (such as the chance to win a Nintendo Game Cube system on bubbletape.com or a trip to Nickelodeon studios on pfgoldf sh.com), or the chance to get

Methods The study was designed b amily F oundation in collaboration with Elizabeth Moore, Ph.D., associate professor of mark eting at the Univ of Notre Dame. Professor Moore and her colleagues collected and analyzed the data,

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and she authored the report to the Foundation on the f ndings. All Web sites were accessed and content w November 2005. ve Media Repor ts, researchers identif ed the top food brands adv ertised to children on TV, and then searched for cor porate or brand Web sites for those food products. Any child-oriented brand that w as in the top 80% of television advertising spending in its product category was included in the study . A total of 96 brands were identif ed through this process. Web sites for these brands w ere included in the study if the y had content for children age 12 and under. In most cases, these w ere sites w hose primary audience w as children; in some cases, the primary audience appeared to be either teens or all ages, with content or separate sections lik ely to appeal to children. Onl y Web sites sponsored b y a food manuf acturer and dealing with the branded

products identif ed through the process described above w ere included; food ads on sites such as nick.com or neopets.com were not included. A total of 77 unique Web sites w ere identif ed ery page of these Web sites was re viewed and coded b y tw o trained coders (more than 4,000 unique Web pages in total), and more than 400 adv ergames w ere pla yed. Screenshots were captured for all pages on each Web site.

EndN ote 1. The Kaiser F amily F oundation is a non-prof t, private operating foundation dedicated to providing infor mation and anal ysis on health care issues to polic ymakers, the media, the health lic. The Foundation is not associated with Kaiser Perma-

Reading 8-3

Fortune at the Bottom of the Pyramid C.K. Prahalad and Stuart L. Hart With the end of the Cold War, the Soviet Union and its allies, as w ell as China, India, and Latin America, opened their closed mark ets to foreign inv ashion. Although this signif has offered vast new growth oppor to be realized. First, the prospect of millions of “middle-class” consumers in developing countries, clamouring for products from MNCs, w as wildly oversold. To mak orse, the Asian and Latin American f nancial crises have greatly diminished the attractiveness of emer ging mark ets. As a consequence, man orldwide slo wed in vestments and be ward str

markets. This retreat could become even more pronounced in the w ake of the ter rorist attacks in the United States last September. emer ging market strategies over the past decade does not , which is in reality much larger than previously thought. The real source of mark et promise is not the w ealthy few in the de veloping w ven the emer ging middle-income consumers: It is the billions of aspiring poor who are joining the market economy for the f rst time. tion strate w lens of inclusi ve capitalism. For companies with the resources and orld

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economic p the prospective rewards include growth, prof ts, and incalculab ve the moder needs are an ideal testing g round for de veloping en y sustainab gies and products for the entire world. Further estment at “the bottom of the pyramid” means billions of people out of poverty and desperation, a verting the social deca y, political chaos, terrorism, and environmental meltdown that is cer tain to continue if the gap betw een Doing business with the world’s 4 billion poors population— will require radical inno vations in technology and business models. It will require MNCs to reevaluate price–perfor mance relationships for products and services. It will demand a new level of capital eff ciency and new ways of measuring f nancial success. Companies will be forced to transfor m their understanding of scale, from a “bigger is better” ideal to an ideal of highl y distributed small-scale operations mar ried to w orld-scale capabilities. In shor t, the poorest populations raise a prodigious ne w managerial challenge for the w orld’s wealthiest companies: selling to the poor and helping them improve their lives by producing and y sensitive, en y sustainab le, and economically prof table ways.

READING EXHIBIT 8.1 The World Economic Pyramid Source: U.N. World Development Reports

Annual Per Capita Income*

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FourC onsumerT iers At the v orld economic pyramid are 75 to 100 million aff uent Tier 1 consumers from around the w orld. (See Reading exhibit 8.1 .) This is a cosmopolitan g roup composed of middle- and upper-income people in de veloped countries and the fe w rich elites from the de veloping world. In the middle of the p Tiers 2 and 3, are poor customers in developed nations and the rising middle classes in de veloping countries, the tar gets of MNCs’ past emerging-market strategies. Now consider the 4 billion people in Tier 4, at the bottom of the p yramid. Their annual per capita income—based on purchasing power parity in U.S. dollars—is less than $1,500, the minimum considell over a billion people—roughly one-sixth of humanity— per capita income is less than $1 per day. Even more signif een rich and poor is g rowing. According to the United Nations, the richest 20 percent in the w orld accounted for about 70 percent of total income in 1960. In 2000, that f gure reached 85 percent. Over the same the fraction of income to the poorest 20 percent in the w orld fell from 2.3 percent to 1.1 percent. This e xtreme inequity of w ealth distribution reinforces the vie w that the poor cannot participate in the global mark et econom y, e ven though the tion. In f act, given its v ast size, Tier 4 represents

Tiers

Population in Millions

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a et. According to World Bank projections, the population at the bottom of the pyramid could swell to more than 6 billion people over the next 40 years, because the bulk of the world’s population growth occurs there. The perception that the bottom of the p yramid is not a viable market also fails to tak gro y among the poorest of the poor , w hich b y some estimates in developing countries. Most Tier 4 people li ve in wns, and they usually do not hold le gal title or deed to their assets (e.g., dwellings, f They have conv tions. The quality and of products and ices available in Tier 4 is generall y low. much like an iceber g with onl w, this massi ve se along with its massi ve mark et oppor remained largely invisib . For y, the Tier 4 mark et is wide open for technological innovation. Among the many possibilities for inno v gging to products that don’t repeat the envies of de veloped countries o ver the last 50 y ears. Today’ volved in an era of abundant natural resources and thus tended to make products and ser vices that were resourceintensive and e xcessively polluting. The United States’ 270 million people—onl y about 4 percent of the world’s population— consume more than 25 percent of the planet’s energy resources. To re-creveloping countries would be disastrous. We have seen ho Tier 4 can disrupt the way of life and safety of the rich in Tier 1—poverty breeds discontent and e xtremism. Although complete income is an ideologielopment to bring people out of poverty and give them the health of the global econom y and the continued success of Wester

TheI nvisibleO pportunity Among the top 200 in the w the overwhelming are based in developed .S. cor porations dominate, with 82; Japanese f rms, with 41, are second , according to a list compiled in December 2000 by the Washington, D.C.–based Institute for P olicy Studies. So it is not sur views of business are conditioned by their wledge of and f with Tier 1 consumers. Perception of mark et oppor tion of the way many managers are socialized to ytical tools the automaticall yramid because they judge the market based on income or selections of products and ser vices appropriate for developed countries. To appreciate the mark et potential of Tier 4, ms with a set of core assumptions and practices that inf uence their view of de veloping countries. We ha ve identif ed the following as widel y shared or thodoxies that must be reexamined: • Assumption #1 sumers because with our current cost str w tably compete for that market. • Assumption #2 ford and hav developed markets. • veloped markets appreciate and will pay for new technology. The poor can use the previous generation of technology. • Assumption #4 - The bottom of the p yramid is not impor tant to the long-ter m viability of our business. We can lea ve Tier 4 to go vernments and nonprof ts. • Assumption #5 - Managers are not e xcited b y business challenges that have a humanitarian dimension. • Assumption #6 - Intellectual e xcitement is in developed mark ets. It is hard to f nd talented managers who want to work at the bottom of the pyramid.

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READING EXHIBIT 8.2 Innovation and MNC Implications in Tier 4 Drivers of Innovation

Implications for MNCs

Each of these key assumptions obscures the value person w ho f nds a $20 bill on the side w v e ould already ha ve pick ed it up! Lik yramid def es conventional managerial logic, but that doesn’t mean it isn’t a large and unexplored ter y for prof table gro v vation and

READING EXHIBIT 8.3

Tier 4. (See Reading exhibit 8.2 gnize that this mark et poses a major ne w challenge: ho w to combine lo w , and prof . Fur exploit these new w the y go to market. ut by no means all) areas where an entirely new perspective is required to create prof table mark Tier 4.

Price Performance

Views of Quality

Sustainability

Profitability

New Strategies for the Bottom of the Pyramid

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Tier4P ioneers Hindustan Lever Ltd. (HLL), a subsidiary of Great Britain’s Unilever PLC and widel y considered the best managed compan y in India, has been a pioets at the bottom of the p or more than 50 y ears, HLL has ed India’s small elite w ho could af ford to buy rm, Nirma Ltd., be gan of fering deter gent products for poor consumers, mostl y in r ural areas. In f act, Nir ma created a new business system that included a ne w product for mulation, low-cost manuf acturing process, wide distribution netw ork, special packaging for daily purchasing, and value pricing. ashion, initiall y dismissed Nir ma’s strategy. However, as Nir ma g rew rapidly, HLL could see its local competitor w as winning in a market it had disregarded. Ultimately, HLL sa 1995, the compan for this mark et, drasticall business model. HLL’s new detergent, called Wheel, was formulated to substantiall in the product, responding to the fact that the poor often wash their clothes in ri vers and other pub lic water systems. HLL decentralized the production, marketing, and distribution of the product to le verage the abundant labor pool in r ural India, quickly small outlets where people at the bottom of the

READING EXHIBIT 8.4 Nirma vs. HLL in India’s Detergent Market (1999) Source: Presentation b y, senior vice president, Unilever, at the Academy of 1999

pyramid shop. HLL also changed the cost str ucture of its deter gent business so it could introduce Wheel at a low price point. Today, Nirma and HLL are close competitors in the detergent market, with 38 percent market share each, according to IndiaInfoline.com, a business intelligence and mark et research ser vice. Unile ver’s own analysis of Nir ma and HLL’s competition in the deter gent business re veals even more about the prof of the pyramid. (See Reading exhibit 8.4.) Contrary to popular assumptions, the poor can be a v ery prof table mark et—especially if MNCs change their business models. Specif cally, Tier 4 is not a mark et that allo suit of high mar gins; instead, prof ts are dri ven by volume and capital eff ciency. Mar gins are lik ely to be lo w (b y cur rent nor ms), but unit sales can be extremely high. Managers w ho focus on g ross margins will miss the oppor the pyramid; managers who innovate and focus on economic prof t will be rewarded. gest branded detergent mak ers in the w orld. Meanw hile, HLL, stimulated b y its emer gent ri val and its changed business model, re gistered a 20 percent g rowth in re venues per y ear and a 25 percent g rowth in prof ts per y ear between 1995 and 2000. Ov er the same period , HLL’s mark et capitalzation g rew to $12 billion—a g rowth rate of 40 percent per y ear. HLL’s parent company, Unilever, also has benef ted from its subsidiar y’s experience in India. Unile ver

Nirma

HLL (wheel)

HLL (High-End Products)

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transported HLL’s business principles (not the product or the brand) to create a ne w detergent market among the poor in Brazil, where the Ala brand has been a big success. More impor tant, Unilever has adopted the bottom of the p yramid as a cor porate strategic priority. As the Unilever example makes clear, the star tTier 4 involves bringing together the best of technology and a global resource base to address local mark et conditions. Cheap and lo w quality products are not the goal. The potential of Tier 4 cannot be realized without an entrepreneurial orientation: The real strategic challenge for managers is to visualize an active market where only abject po v xists today. It tak es tremendous imagination and creati et infrastr ucture out of a completely unorganized sector. Serving Tier 4 markets is not the same as serving existing markets or more eff ciently. Managers

READING EXHIBIT 8.5 The Commercial Infrastructure at the Bottom of the Pyramid

f rst must de velop a

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commercial

ier 4. Createstment, much lik e the more f amiliar investments in plants, processes, products, and R&D. Further, contrar y to more con ventional in vestgies, no f rm can do this alone. Multiple pla yers must be in volv local go vernmental authorities, nongo vernmental or nancial institutions, and other companies. Four elements— creating buying po wer, shaping aspirations, improving access, and tailoring local solutions— are the keys to a thriving Tier 4 market. (See Reading exhibit 8.5.) Each of these four elements demands vation in technolo , business models, and management processes. And business leaders must be willing to experiment, collaborate, empower locals, and create new sources of competitive advantage and wealth.

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CreatingB uyingP ower According to the Inter national Labor Or ganization’s World Employment Report 2001, nearly a billion people—roughly one-third of the world’s work force—are either underemployed or have such lowpaying jobs that the y cannot suppor t themselv es or their f amilies. Helping the w orld’s poor ele vate themselves above this desperation line is a business oppor ell and do good. T tively, tw o inter ventions are cr ucial—providing access to credit, and increasing the ear ning potential of the poor . A few f arsighted companies ha ve already be laze this trail with star tlingly positive results. Commercial credit historicall y has been unavailable to the v ery poor. Ev en if those li ving in pover ing system. As P eruvian economist Her nando de Soto demonstrates in his pathbreaking w ork, The y Capitalism Triumphs in the West and F here Else , commercial et econom y. Access to credit in the U .S. has allowed people of modest means to systematicall y build their equity and mak e major purchases, such as houses, cars, and education. The v ast majority of the poor in de veloping countries operate in the “infor mal” or e xtralegal economy olved in securing le gal title for their assets or incor poration of their microenter prises is prohibiti ve. De veloping countries ha ve tried go vernmental subsidies to free the poor from the c ycle of po verty, with little success. Ev en if the poor w ere ab le to benef t from government support to start small businesses, their dependence on credit from local mone ylenders charging usurious rates mak es it impossib le to succeed. Local mone ylenders in Mumbai, India, charge interest rates of up to 20 percent per da y. This means that a v egetable v endor w ho bor rows Rs.100 ($2.08) in the morning must Rs.120 ($2.50) in the evening.

Extending credit to the poor so the y can elevate themselv how I.M. Singer & Company, founded in 1851, provided credit as a way for millions of women to purchase sewing machines. V w of those w omen could ha ve af forded the steep $100 price tag, but most could afford a payment of $5 per month. The same lo gic applies on a much lar ger scale in Tier 4. Consider the e xperience of the Grameen Bank Ltd. in Bangladesh, one of the f rst in the w ted just over 20 years ago by Muhammad Yunus, then a professor in the Economics Department at Chittagong Uni v , Bangladesh, Grameen Bank pioneered a lending ser vice for the poor that has inspired thousands of microlenders, serving 25 million clients worldwide, in developing countries and w ealthy nations, including the United States and Great Britain. s pro gram is designed to addresses the prob lems of e xtending credit to lowest-income customers—lack of collateral, high fv who, as the traditional breadwinners and entrepreneurs in communities, are better credit risks than men. Candidates for loans must ha ve their proposals thoroughl y e valuated and suppor ted b y f ve nonf amily members of the community . The s sales and ser vice people visit the villages frequently w the w omen w ho ha ve loans and the projects in w hich they are supposed to in vest. In this w ay, lending due diligence is ork West. With 1,170 branches, Grameen today provides microcredit ser vices in more than 40,000 villages, more than half the total number in Bangladesh. ed a 95 percent repayment rate, higher than any other bank in the Indian subcontinent. However, the popularity of its services has also spawned more local competitors, which has cut into its portfolio and its prof ts over the past few years.

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n is not easy to assess. Historicall y as an entirely manual, f eld-based operation, a str ucture that undercut its eff ciency. Today, such as Grameen Telecom (a pro vider of village phone ser vice) and Grameen Shakti (a de veloper of renewable energy sources) are helping Grameen Bank build a technology infrastr its processes. velops its online business model, prof tability should increase dramatically, highlighting the impor tance of infor mation technology in the acceleration of the microcredit revolution. Perhaps the most pertinent measure of Grameen Bank’s success is the global e tional interest in microlending it has stimulated Africa, where 73 percent of the population ear ns less than R5,000 ($460) per month, according to a 2001 World Bank study, vices for lo w-income customers e and fastgrowing mass markets. In 1994, Standard Bank of South Africa Ltd., Africa’s leading consumer bank, launched a lo w-cost, v olume-driv business, called AutoBank E, to g row revenue by pro vices to the poor . Through and 98 w has the largest presence in South Africa’s to wnships and other underser viced areas of an As of April 2001, Standard ser ved nearl y 3 million low-income customers and is adding roughly 60,000 customers per month, according to South s Standard does not require a minimum income of customers opening an although the y must ha ve some re gular income. People w ho ha ve ne ver used a bank can open an are issued an ATM card and sho wn how to use it by staff who speak a v ariety of African dialects. A small f at fee is charged for each ATM transaction. An interest-bearing “sa vings purse” is attached to e very account to encourage poor customers to

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save. Interest rates on deposits are lo w, but superior to keeping cash in a jar. The also reported that Standard is considering a loan program for low-income clients. Computerization of microlending ser vices not only mak es the o verall operation more eff cient, but also mak es it possib le to reach man y more people—lending money to individuals with no collateral and no for mal address. Since there is lo wer overhead and little ork, s costs are 30 to 40 percent lo wer than those at traditional branches. At the 1999 Microcredit Summit, the United Nations, in conjunction with several major such as Citigroup Inc. and Monsanto Company, set a goal of making basic credit a vailable to the 100 million poorest f amilies in the w orld b y the y ear 2005. Unfor tunately, the success of this under taking has been slo wed b y high transaction costs, a ural areas. T elopment of microlending, F rench bank er Jacques the founding president of the European for Reconstruction and Development and a for mer chief aide of F rench President F rançois Mitterand during the 1980s, has created PlaNet F inance. Its Web site, .planetf nance.org of microcredit groups worldwide into a network to wer costs. Ultimately, the de velopment of an automated solution for tracking and processing the millions of small loans associated with microlending should be possib can be reduced enough, the y can then be bundled together and sold in the secondar y market to multinational f e Citigroup. This would greatly expand the capital available for microlending beyond the current pool from donors and gov root over the past decade in poor urban neighbor hoods. F or e xample, the ShoreBank Cor poration, y South Shore has

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the prof cago’ led South Side. Project Enter prise, a Grameen-like program based in New York City, is aimed at minority entrepreneurs. Several multinational banks are be ginning to offer microbanking ser vices in de veloping counroup, for instance, is e xperimenting in with as little as a $25 on deposit. Initial results are very positive.

ShapingA spirations Sustainable product innovations initiated in Tier 4, and promoted through consumer education, will not only positively inf uence the choices of people at the bottom of the p y ultimatel y reshape the w ay Tier 1 live. Indeed, in 20 y ears, we may look back to see that Tier 4 pro vided the earl y market pull for disruptive gies that replaced unsustainable technologies in de veloped countries and adv anced the fortunes of MNCs with foresight. For e xample, Unile ver’s HLL subsidiar y has tackled the lack of practical, ine xpensive, lo wenergy-consuming refrigeration in India. HLL’s laboratories developed a radicall y different approach to refrigeration that allo ws ice cream to be transported across the countr ated trucks. The system allows quantum reductions es dangerous and polluting . As a bonus, the new system is cheaper to build and use. , water, refrigeration, and man y other essential services are all opportunities in developing countries. A U.S.-based NGO, the Solar Electric Light Fund (SELF), has creatively adapted technology and applied microcredit f nancing to bring electrical ser vice to people in remote villages in Asia who otherwise w erosene, candles, w cation system is based on small-scale on-site po wer generation using rene wable resources. A re volving loan fund gi ves villagers the f nancial means

es, also creating jobs. Since its founding in 1990, SELF has launched projects in China, India, Sri Lanka, Nepal, Vietnam, Indonesia, Brazil, Uganda, Tanzania, South Africa, and the Solomon Islands. The success of SELF and other NGOs focused on small-scale distributed ener gy solutions has be Western companies such as the U.S.’s Plug Power Inc. (fuel cells) and Hone They see the logic in moving into a wide-open market in Tier 4 rather than tr ying to force their technolo y into applications for the de veloped markets, where incumbents and institutions stand in their w ay. With several billion potential customers around the w v vations should be well w

ImprovingA ccess Because Tier 4 communities are often ph ysically and economically isolated, better distribution systems and communication links are essential to development of the bottom of the p yramid. Few of the large emerging market countries have distribution systems that reach more than half of the population. (Hence the continued dependence of the poorest consumers on local products and ser vices and moneylenders.) As a consequence, fe have designed their distribution systems to cater to the needs of poor rural customers. Creative local companies, however, lead the way v Ar y new delivsystem for blue jeans. the world’s f fthlargest denim manufacturer, found Indian domestic denim sales limited. At $40 to $60 a pair , the jeans were not af fordable to the masses, and the e xisty a fe w towns and villages. So Tuf ” jeans—a ready-to-mak e kit of jeans components (denim, zipper, rivets, and a patch) priced at about $6. Kits w sands of local tailors, many in small towns and villages, whose self-interest motivated them to

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mark vely. Ruf & T the largest-selling jeans in India, easil y sur passing Levi’s and other brands from the U y a role in distributing the products of Tier 4 enter prises in Tier 1 mark ets, giving bottom-of-the-p rst links to international mark le through partnerships to lev edge bases to produce more sustainab le, and in some cases superior , products for consumption b y Tier 1 customers. Anita Roddick, CEO of s “trade not aid” pro gram of sourcing local ra w material and products from indigenous people. More recentl y, the Starbucks Cor poration, in cooperation with Conser vation Inter national, has pioneered a pro gram to source cof fee directl y from f armers in the Chiapas re gion of Me xico. These f arms g row coffee beans or ganically, using shade, which preserves songbird habitat. Starbucks markets the product to U .S. consumers as a highquality, premium coffee; the Mexican f ef t economicall rangement, which eliminates inter model. This direct relationship also impro ves the local farmers’ wledge of the Tier 1 market and its customer expectations. Information pover y be the single biggest roadblock to sustainab le de velopment. More than half of has yet to make a single phone call. However, where telephones and Inter net connections do e xist, for the f rst time in histor y, it is possib et uniting the w orld’s rich and poor in the quest for truly sustainable economic development. The process could transform the “digital divide” into a “digital dividend.” Ten years ago, Sam Pitroda, cur rently chairman and CEO of London-based Worldtel Ltd., a company created b y a telecommunications union to fund telecom de velopment in emer ging mark ets, came to India with the idea of “r ural telephones.” His original concept was to have a

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telephone, operated b ya woman) who charged a fee for the use of the telephone and k ing the telephone. Today, from most par ts of India, it is possib le to call an yone in the w orld. Other entrepreneurs ha ve introduced f ax ser vices, and some are e xperimenting with lo w-cost e-mail and Internet access. ve y altered the way villages and how the y and the world. With the emer gence of global broadband connections, oppor mation-based business in Tier 4 will e xpand signif cantly. New ventures such as CorDECT in India and Celnicos America are de veloping infor mation technolo gy and business models suited to the par ticular requirements of the bottom of the pyramid. Through shared-access models (e.g., Inter net kiosks), wireless infrastr ucture, and focused technolo gy de velopment, companies are dramatically reducing the cost of being For example, v vity typically costs companies $850 to $2,800 per line in the developed world; CorDECT has reduced this cost to less than $400 per line, with a goal of $100 per line, which would bring telecommunications within y every eloping world. Reco elopment oppor , He wlett-Packard Compan y has articulated a vision of “w orld e-inclusion,” with a focus on providing technology, products, and servs poor. As part of this strate gy, HP has entered into a v enture with the MIT Media Lab and the F oundation for Sustainable De velopment of Costa Rica—led b y igueres Olsen—to develop and implement “telecenters” for villages in remote areas. These digital town centers provide modern infor gy equipment with a high-speed Inter net connection at a price that is affordable, through credit v ehicles, at the village level. Bringing such technolo gy to villages in Tier 4 makes possible a number of applications, including

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tele-education, telemedicine, agriculxtension ser vices, and en all of which help to spur economic dev ets. This project, named Lincos, is e xpected to spread from today’ Caribbean to Asia,

TailoringLoc alSolutions As we enter the ne , the combined sales of the world’ y 30 percent of total w orld g ross domestic product. Yet these same cor porations emplo y less than 1 percent of the world’s labor force. Of the w orld’s 100 lar gest economies, 51 are economies inter nal to cor porations. Yet scores of Third World countries have suffered absolute economic stagnation or decline. ve in the 21st centur y, they must broaden their economic base and share it more widely. They must play a more acti ve role in narrowing the gap between rich and poor. This cannot be achie ved if these companies produce onl y so-called global products for consumption primar ily b y Tier 1 consumers. They must nur ture local mark verage local solutions, and generate w ealth at the lo west le vels on the p mid. Producing in, rather than e xtracting w ealth from, these countries will be the guiding principle. T anced technology with deep local insights. Consider packaging. Consumers in Tier 1 countries have the disposable income and the space to buy in bulk (e.g., 10-pound bo xes of deter gent from super stores lik e Sam’ y. They use their spending mone y to “inventory convenience.” Tier 4 consumers, strapped for cash and with limited li ving space, shop e v y, but not for much. They can’t afford to stock up on household items or be highl y selective about w hat they buy; the e packaging. But consumers with small means also ha ve the benef t of experimentation. Unburdened by large quantities of product, they can s witch brands e very time the y buy . Already

in India, 30 percent of personal care products and other consumables, such as shampoo, tea, and cold medicines, are sold in single-ser ve packages. Most are priced at Rs. 1 (about 1¢). W vation in packaging, ho wever mountain of solid waste. Dow Chemical Company and Cargill Inc. are experimenting with an organic plastic that w ould be totall y biode gradable. Such packaging clearly has adv antages in Tier 4, but it could also revolutionize markets at all four tiers of the world pyramid. F ry local capabilities and mark wledge with global best practices. But whether an initiative involves an Tier 4 or an entrepreneur from Tier 4, the de velopment principles remain the same: New business models must not disrupt the cultures and lifestyles of local people. An effective combia replication of the Western system. The de velopment of India’ s milk industr y has many lessons for MNCs. mation began around 1946, w ative, located in the state of Gujarat, set up its o processing plant under the leadership of Verghese Kurien and created the brand Amul, today one of the most reco . Unlike the lar y f arms of the West, in India, milk originates in man y small villages. Villagers may own only two to three buf faloes or cows each and bring their milk twice a da y to the village collection center. They are paid ev day for the milk the y deliver, based on f at content and volume. Refrigerated vans transport the milk to central processing plants, w here it is pasteur urban centers. The entire v y managed , from the village-based milk production to the w cooperative provides such ser vices to the f armers as veterinary care and cattle feed. The cooperative also manages the distribution of pasteurized milk, milk powder , cheese, bab y food, and other products. The uniqueness of the Amul cooperative

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is its blending of decentralized origination with the eff ciencies of a moder n processing and distribuucture. As a result, previously marginal village f armers are ear ning steady incomes and being transformed into active market participants. Tw ears ago, milk w as in shor t supply in India. Today, India is the w orld’s largest producer of milk. According to India’s National Devely’s dairy cooperative network no w claims 10.7 million indi vidual f member–owners, cov el societies, includes 170 milk producer unions, and oper increased 4.7 percent per y ear since 1974. The per capita availability of milk in India has grown from 107 grams to 213 grams per day in 20 years.

PuttingI tA llT ogether Creating buying po wer, shaping aspirations, improving access, and tailoring local solutions— the four elements of the commercial infrastr ucture for the bottom of the p yramid are intertwined. vation in one le verages innovation in the othmust w ork to gether with NGOs, local and state gov Yet someone must take the lead to mak e this re volution happen. The question is, Why should it be MNCs? Even if multinational managers are emotionall y vious that large corporations have real adv antages o ver small, local or ganizay never be able to beat the cost or responsiveness of village entrepreneurs. Indeed , empowering local entrepreneurs and enter prises is key to developing Tier 4 markets. Still, there are sev this course: • Resources. Building a comple

x commercial yramid is a resource- and management-intensi ve task. Developing en vironmentally sustainab le products and ser vices requires signif cant research.

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orks are e xpensive to de velop and sustain. Few local entr epreneurs have the mana gerial or technological r esources to cr eate this infrastructure. • Lev wledge from one market to China to Brazil or India—as Avon, Unile ver, Citig roup, and others have demonstrated. Although practices and products ha ve to be customized to ser ve local needs, MNCs, with their wledge base, have an advanta ge that is not easily accessible to local entrepreneurs. • commercial providing access to wledge, managerial imagination, and f nancial resources. W ellintentioned NGOs, communities, local go vernments, entrepreneurs, and even multilateral development agencies will continue to f ounder velopment to the bottom. MNCs are best positioned to unite the range of actors required to develop the Tier 4 market. • Transfer. Not only can MNCs leverage learning from the bottom of the p y also hav vations upmarket all the w ay to Tier 1. As we have seen, Tier 4 is a testing g round for sustainable living. Many of the inno vations for the bottom can be adapted f or use in the r esource- and ener intensive mar orld. It is imperati ve, ho wever, that managers recognize the nature of business leadership required in the Tier 4 arena. Creati vity, imagination, toler ance for ambiguity, stamina, passion, empathy, and courage ma y be as impor tant as anal ytical skill, intelligence, and kno wledge. Leaders need a deep understanding of the complexities and subtleties of sustainable de velopment in the conte xt of Tier 4. Finally, managers must ha ve the inter personal and intercultural skills to w ork with a wide range of organizations and people. ganizational infrastr ucture to address opportunity at the bottom of the

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pyramid. This means building a local base of support, reorienting R&D to focus on the needs of the poor, for ming ne w alliances, increasing emplo yment intensity , and rein venting cost str These f ve or ganizational elements are clearl y interrelated and mutually reinforcing. • Build a local base of suppor t. Empowering the poor threatens the e xisting power str Local opposition can emer ge v ery quickl y, as Cargill Inc. found in its sunf ower-seed business in India. Cargill’s off ces w the local politicians accused the f rm of destroying locall y based seed businesses. But Car gill persisted. gill’s in vestments in f y of f arm inputs, farmers have signif cantly improved their productivity per acre of land. Today, Car gill is seen as the friend of the farmer. Political opposition has v anished. To o vercome comparable prob a local base of political suppor t. As Monsanto and General Electric Compan y can attest, the establishment of a coalition of NGOs, community leaders, and local authorities that can counter entrenched interests is essential. F orming such a coalition can be a v ery slow process. Each player has a dif ve to understand these agendas and create shared aspirations. In China, this prob lem is less onerous: The local bureaucrats are also the local entrepreneurs, so they can easily see the benef ts to their enterprise and their village, to wn, or pro vince. In countries such as India and Brazil, such xist. Signif cant discussion, information sharing, the delineation of benef ts to each constituenc y, and sensiti vity to local debates is necessary. • Conduct R&D focused on the poor. It is necessary to conduct R&D and mark et research focused on the unique requirements of the poor , by region and b y countr y. In India, China, and North Africa, for e xample, research on w ays to pro vide safe w ater for drinking, cooking,

washing, and cleaning is a high priority . Research must also seek to adapt foreign solutions to local needs. F or example, a dail y dosage of vitamins can be added to a wide v ariety of food and be verage products. F or cor porations that ha ve distribution and brand presence throughout the developing w Cola Company, the bottom of the p fers a vast untapped market for such products as water and nutritionals. Finally ciples and potential applications from local practices. In Tier 4, signif cant kno wledge is y from one generation to the next. Being respectful of traditions but willing to anal yze them scientif cally can lead to ne w wledge. The Body Shop’s creative CEO, Ms. Roddick, built a business predicated on under standing the basis for local rituals and practices. For e xample, she obser ved that some African women use slices of pineapple to cleanse their skin. On the surf ace, this practice appears to be a meaningless ritual. However, research showed active ing ay dead skin cells better than chemical for mulavelop research facilities in emerging markets such as China, India, Brazil, Mexico, and Africa, although fe w have made a ates highl y re garded research centers in India, employing more than 400 researchers dedicated to the problems of “India-like markets.” • Form new alliances. ve con ventionally for med alliances solel y to break into ne w markets; now they need to broaden their alliance strategies. By entering into alliances to e xpand in Tier 4 markets, MNCs gain insight into developing countries’ At ity. They may also secure preferred or exclusive access to a market or raw material. We foresee Alliances with local f rms and cooperati ves (such as the Khira District Milk Cooperative); alliances with local and inter national NGOs (lik e Starbucks’s

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alliance with Conser vation International in cofernments (e.g., Merck & Compan y’s recent alliance in Costa Rica to foster rain forest preser vation in e xchange for bioprospecting rights). Gi ven the diff culty and comple ucting business models dependent on relationships with national or central governments (e.g., large infrastr velopment), w e envision more alliances at the local and regional level. To succeed in such alliances, n to work with people who may not have the same agenda or the same educational and economic backg round as the y do. The challenge and pa yoff is how to manage and lear n from di versity—economic, intellec• Increase emplo MNCs accustomed to Tier 1 markets think in terms of capivity. Exactly the opposite logic applies in Tier 4. Gi ven the v ast the production and distribution approach must provide jobs for man y, as in the case of Ruf & Tuf jeans from Arvind Mills: It emplo yed an army of local tailors as stock ers, promoters, distributors, and ser vice providers, even though the cost of the jeans w as 80 percent belo w that of Levi’s. As Arvind demonstrated, MNCs need not employ large numbers of people directly on their pa yroll, but the or ganizational model in Tier 4 must increase employment intensity (and incomes) among the poor and groom them to become new customers. • Reinvent cost structur es. Managers must dramatically reduce cost le vels relati ve to those in Tier 1. To create products and services the poor can af signifcantly—to, sa y, 10 percent of w hat the y are today. But this cannot be achie ved by f nerent approaches to product de velopment, production, and lo gistics. The entire business process must be rethought with a focus on xample, f nancial services need not be distributed only through branch off A.M. to

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5 P.M. Such ser vices can be pro vided at a time and place con venient to the poor consumer— after 8 P.M and at their homes. Cash-dispensing machines can be placed in safe areas—police stations and post off ces. Iris recognition used as vice could substitute for the tedious personal-identif cation number and card for identif cation. Lowering cost structures also forces a debate on w ays to reduce in vestment costs. This will inevitably lead to g reater use of infor mation gy to de velop production and distribution systems. already transfor ming the patter n of communications throughout the de veloping w orld. Add the Inter net, and w e have a w hole new way of communicating and creating economic development in poor, rural areas. Creative use of IT will emerge in these markets as a means to dramatically lower the costs associated with access to products and ser vices, distribution, and credit management.

AC ommonC ause The emergence of the 4 billion people w ho make up the Tier 4 mark et is a g reat oppor gover vil society to join to gether in a common cause. Indeed , w e belie ve that pursuing gies for the bottom of the p yramid dissolves the conf ict betw global capitalism on one hand , and en vironmental and social sustainability on the other. Y Tier 1 consumers are not appropriate forTier 4, and accessing this latter market will require approaches y dif ven in Tiers 2 and 3. Changes in technology, credit, cost, and distribution are critical prerequisites. Only large f rms with global reach ha v gical, managerial, and f nancial resources to dip into the w ell of innovations needed to prof . New commerce in Tier 4 will not be restricted to businesses f lling such basic needs as food ,

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textiles, and housing. The bottom of the p waiting for high-tech businesses such as f nancial ser computers. In f act, for man y emer ging disr uptive technolo oltaics, satellitebased telecommunications, biotechnolo gy, thinf lm microelectronics, and nanotechnolo gy), the bottom of the p yramid may prove to be the most attractive early market. So f ar ganizations ha ve led the way: local f rms such as Amul and Grameen World Resources Institute, SELF, The Rainforest Alliance, The En tal Defense Fund , and Conser vation Inter national, among others; and a fe bucks, Dow, Hewlett- P ver, Citigroup, DuP vartis, and ABB, and global business partnerships such as the World Business Council for Sustainable Business Development. But to date, NGOs and local businesses with far fewer resources than the MNCs have been more innovative and ha ve made more pro gress in developing these markets.

It is tragic that as Western capitalists w e ha ve implicitly assumed that the rich will be served by the sector, while gover and NGOs will protect the poor and the en vironment. This implicit di Managers in MNCs, pub lic polic ymakers, and NGO activists all suffer this historical division of roles. A huge oppor this code—linking the poor and the rich across the world in a seamless mark et or ganized around the concept of sustainable gro velopment. Collectively, w e ha ve onl y be gun to scratch the surface of w hat is the biggest potential mark et oppor y of commerce. Those in the private sector w ho commit their companies to a more inclusive capitalism have the oppor ho are less fortunate. In a v real sense, the fortune at the bottom of the p of our global goals. Note: Notes and references removed for publication .mhhe.com/busethics2e.

Reading 8-4

Response to A. Karnani C.K. Prahalad The document belo w is a memor andum from C.K. Prahalad to his collea gue, Aneel Karnani. It is a response to Pr ofessor Karnani’s c hallenge of the concepts in “ Fortune at the Bottom of the Pyra” written by Professors Prahalad and Hart. July 14, 2006

Subject:

C.K. BOP: Mirage

ou for y For that you have three basic arguments against it.

1. The measurement problem 2. The distinction between consumption and income generation in poverty alleviation 3. The f allacy of an oppor the pyramid

TheB igP icture My thesis is simple. Ov er 80% of the people in the w as a mark et by the or ganized ge domestic companies). This w as and is the “underser ved and the ed et”. This population does not y

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have access to w orld class products or ser vices or to re gional and global mark ets for their ef production. Awareness, access, af av lems. Yes, I look at both consumption and pr oduction. The ITC and EID Parry examples are about production. So is the microf nance e kets and a mark et based eco system is also an integral par t of the ar There is a w hole chapter on “transaction go ” or creating ent conditions for mark ets to f So is a market based ecosystem including SMEs, ves, not w to create products and ser vices for the BOP mark et to be prof table (Chapter 2). , most of the case examples are about personal and f amily producti v. ITC and EID P ar , Ceme na, Soap, Voxiva). This totality represents the ar ment on Pover alleviation. You chose to focus on one aspect of the ar onder why? xamples of production and income generation—ITC—as a solution that you offer, as an alternative, is in the book. So is the need to create ets. So is the need for ne w business models and creati hich you do not cover). The focus of the book is on 5 billion underserved. They are also poor . But it is naïv e to believe that 5 billion represent a monolith (are one segment). Every experiment described in the book does not necessarily have to serve all the segments of the 5 billion underser ved. No single business model can do that. My goal w eak signals and e xperiments that ha ve potential in this general space. Annapurna and the Soap e xamples are about the diff culty of educating the poor on health benef ts as well as how arduous it is to work with multilaterals. Do f rms f ail in their e xperiments? Yes, they do.

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described? Yes. Less than $2,000 per capita, $ 2/ day per person are used in the ar gument. Do 4 billion live belo y aware of the prob ed and the poor . Al at the World Resources Institute has started a large scale effort, with the IFC to reassess the data from v arious sources and to ar rive at y. It is likely to be the most cur rent and the y have used household sur vey data. It should be out in September , 2006. It shows y w e you a preview. The data is as follows: More than $ 21,730 PPP per capita

0.5 billion

3,260–21,730 PPP per capita

2.0 billion

less than $ 3,260 PPP per capita

4.0 billion ($ 2/day)

DataI nconsistencies

Add to this the under ground economy and the verseas. (India recei ved $ 21 billion+ in remittances from o verseas last y ear. Mexico received $ 18 billion). The comple xity of the problem def es precise measurement. (I am glad that as a result of my drawing attention to this “forgotten population” to business more people ha ve started to de vote their attention to understand this space better . You are a good e xample). One w ay to escape this malaise of measurement is to shape this world differentl , in g reater depth, its income characteristics. W w that there is a lar ge population out there—be it 4 or 5 billion underser ved. (The size of this mark et does not depend on its income characteristics alone but how we can create the capacity to consume. More of this later). Shaping the world requires a point of view and some e vidence to show that this is possible. The book is about a point of vie w. I have tried to apply only one set of tests in m y work: Does it change the con versation? Does it sho w the oppor -

I realize the prob lems of def ning po ver income and even e a wide v ariation in the w ay the “underser ved” is

I respect precision. But to def ne pover $1.08 or $1.48 is pseudo precision. So is the ability to compute precisely the total number within those

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income boundaries. In m y work I w as looking for . My goal w as never to measure po verty; much less with g reat precision. There are others w ho do this w ell. My goal is to look for an alter native to the tired and tested methods including go vernment subsidies and pub The broad dimensions of the prob lem and the oppor e a dif ference is about changunderserved and most of them are belo w the radar screen of the or ganized sector. If it is onl y 3.5 billion so be it. It is still a large number and worthy of our attention.

Consumption-Income-Production I am sur prised that y ou f all into the same trap that most do. Consumption can and does increase income. Can Casas Bahia (and such other e xamples of consumption) alle viate po ver nd this a very interesting ar gument. Let us star t with four propositions: a. The poor live in high cost micro-economic sysb. They do not ha v ucts and services (be it water, food credit) c. They are prisoners of local monopolies; including local moneylenders d. They ha ve no recourse to la w. The local landlords can and do enforce their will on the local population. Is the ability of someone at the BOP with v olatile wages to get access to credit (at 20% rather than 300%), improving income? Does a f amily of four having a small refrigerator and eating better food impro ing independent (one blind person means two people without w ages—one w ho cannot see and one who needs to take care of that person). Is releasing at least one person to do w ork—even at minimum

wages—improving the ear ning potential of the family? Is helping poor people to a void diar rhea, helping the family to save on needless costs associated with healthcare, much less, needless death? Is this income? Is this improving the quality of life? Is a voiding mental retardation at an incremental cost, adding to income? The idea of a “po ver penalty” is real. See the repor t from Brookings. In the USA poor f amilies pay for e ver autos, f nance,. . . . . Reducing the po ver is adding to real income. Poverty alleviation is, simply, improving the disposable income for the f amilies—by reducing the costs of ser vices, impro ving its quality , and releasing their time to do work that is productive. I also f nd that you dismiss somewhat easily the cell phone revolution. Did you believe in 1999 that more than 50 % of the cell phones will be sold to the poor in emer ging mark ets including such desper ately poor markets as in Sub Sahran el) or in S Africa (MTN, V India and China. (All cell phone mak and the ne w ones from China are also becoming y had to invent new business models from Grammen Phone to “prepaid cards”. I am continuall y humbled by the in ventiveness of people who want to serve this population. Lesson:Cr ferent fr ket. Cr eating ease disposa ble income (no different from income generation). Crew and prof table markets at the BOP. There are many ways to do this: a. e (Is Aspirin OK if Shampoo is bad?) b. monthly payments (Is kitchen Cabinet OK if TV is bad?) c. pa bad?) d. Ne Shakti Ammas are bad?) e. Low prices (is a water f lter OK if Iodized salt is bad?)

Chapter 8

There is another w ay that consumption leads to income generation. For example, Grammen Phone has 250,000 phone ladies—all entrepreneurs. There are o ver 100,000 telephone booth operators in Africa and the number is g rowing. Bharati estimates that it will need about 500,000 indi vidual entrepreneurs to sell “prepaid cards and charge cell phones” for cell phone users in India alone. w that y air and Lovely” is a bad idea. e in choice. I believe that the “poor” must have choice. You may believe that the “rich and the elite can decide w hat is good for the poor, because they decide for themselves”. (Fair and Lovely does hav and sun b w you do not appro ve of single cigarette sales; ho w about beedis w hich is more le and more deadl y? Should a consumer hav een beedis and cigarettes? We can also ar gue that this population does not need PCs. Should AMD, Negroponte, and Intel stop all their efforts to create an af fordable PC? Should we f x the drainage in Dharavi before we give them access to global connecti vity? I just w ant y ou to see ho w ideolo gy gets so inter approaches. I am explicit about my preferences. So should y decides for the poor”. I emphasized the consumer side because, as I stated clearl y in the book: “W e should commence talking about underser ved consumers and markets. The process must start with respect for the Bottom of the Pyr amid consumers as indi viduals . . . Consumers and consumer We must reco gnize that the con version of the BOP into a mark et is essentiall y a de velopmental activity. . . . New and creative approaches are needed to con vert po verty into an opportunity f or all

Ethics and Marketing 477

concerned. That is the challeng e.” (Emphasis in the original text. Preface, page xiii)

Isthe reaR ealMar ket? Time will tell w hether BOP is a mark et or not. I believe that it is. So do a lot of others (may be foolishl eting. They believe that the total mark et for credit in rural India is Rs.15,000 billion (no w mostly done by moneylenders at 100% may be). The banks have just scratched the surface with Rs. 40 billion. Even if the or ganized sector onl y got to Rs. 10,000 billion and reduced the interest rate from a 100% to 20%, y ou can calculate the income generated for the poor . Consumption of credit, e ven to buy a TV, can create income. Obviously ICICI expects to mak e a prof t. o cor porate initiatives- global and r make money

TheW orldI sM ovingFor ward I believe that the w orld has mo ved on. The InterAmerican Bank (focused on Latin America) just adopted the Bottom of the Pyramid as their focus. They call it the “business to the majority”. Academy of Management calls it “business for the benef t of all”. F or the last y ear I ha ve been talking about “democratizing commerce”. So the debate is not anymore about how many are really poor; it is about how to bring the benef ts of global standards at affordable prices and increase access. This is a longer letter than I usuall y write. Because of the high re gard I ha ve for y ou I ha ve taken the time to gi ve a detailed and diligent response. Hope it helps.

Chapter

9 Businessand Environmental Sustainability A thing is right when it tends to preserve the integrity, stability and beauty of the biotic community. It is wrong w

Growth for the sake of growth is the ideology of the cancer cell.

McDonough Environmental regulation is a signal of design failure. McDonough

479

Opening Decision Point When is Building Design and Construction an Ethical Issue?

LEED certification

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ChapterO bjectives After reading this chapter, you will be able to: 1.

Explain how environmental challenges can create business opportunities.

2.

Describe a range of values that play a role in environmental decision making.

3.

Explain the difference between market-based and regulatory-based environmental policies.

4.

Describe business’ environmental responsibilities that flow from each approach.

5.

Identify the inadequacies of sole reliance on a market-based approach.

6.

Identify the inadequacies of regulatory-based environmental policies.

7.

Define and describe sustainable development and sustainable business.

8.

Highlight the business opportunities associated with a move towards sustainability.

9.

ciency, biomimicry

Introduction There is a tendenc y to belie ve that en vironmental challenges always create a burden on business and that en vironmental and business interests are always in While it certainly can be the case that en vironmental regulation can add y can also pro vide oppor Where one automobile manuf vernment 481

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cienc ge SUVs, another company sees it as an opportunity to market fuel-eff cient hybrids. Many ers believe we have entered the sustainability re volution, an age in w hich y and economically sustainable products and services is creating unlimited business oppor As happened in the industrial revolution, there will be winners and losers in this sustainability re volution and, according to suppor rms and industries that do the most environmental good. As described b y geo grapher Jarad Diamond in his in the best-selling book Collapse, human histor y provides many examples of societies that ha ve r un up against the environmental limits of their lifestyles. But the Industrial Re volution grade reater extent and at a f aster rate than e ver before. e eff cienc energy suppl y continued along almost uncheck ed b y en vironmental re gulation until the latter half of the twentieth . By the start of the enty-f rst y, the earth was e reatest period of species extinction since the end of the dinosaurs 65 million y ears ago. Humans are also threatened b y global vents is largely due to human acti , and specif cally to our present arrangements of moder society. Simply put, the way we have done business over the o has brought us up against the bioph ysical limits of the ear th’s capacity to suppor t all human life, and it has already crossed those limits in the case of countless other forms of, now extinct, life. responsibilities contemporary businesses have regarding the natural environment. For a business leader’s perspective on this question, see the Reality Check, “Do Business Leaders There Is an En vironmental Crisis?” and the reading b y Patrick Cescau at the end of this chapter. It is f air to say that, throughout the histor y of industrial economies, business ed at en

1 OBJECTIVE

dev a is measured in ter ms of economic, ethical, and en vironmental sustainability , often called the Triple Bottom Line approach. The sustainability paradigm sees en t of basic business practice. le business v y f nd that environmental considerations offer creativ mous oppor The end of chapter reading by Patrick Cescau makes this point persuasively. The environmental research and consulting group The Step uses an image of a funnel, with two converging lines, to help business understand the oppor vailable in the age of sustainability . The resources necessary to sustain life are on a do wnward slope. While there is disag reement about the angle of the slope (are w e at the star t with onl ther along with a shar per downward slope?), there is widespread consensus that a vailable resources are in decline. gate w

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Do Business Leaders Think There Is an Environmental Crisis?

In a 1997 speech that attracted worldwide attention, John Browne, chief executive of BP, announced: [T]he time to consider the policy dimensions of climate change is not when the link between greenhouse gases and climate change is concannot be discounted and is taken seriously by the society of which we are part. We in BP have reached that point . . . there is now an effective consensus among the world’s leading scientists and serious and well informed people outside the scientific community that there is a discernible

human influence on the climate, and a link between the concentration of dioxide and the increase in temperature. . . . Those are wide margins of error, and there remain large elements of uncertainty—about cause and effect . . . and even more importantly about the consequences. But it would be unwise and potentially dangerous to ignore the mounting concern. Source: John Browne, group chief executive, British Petroleum (BP America) in a speech at Stanford University, May 19, 1997.

wth and the increasing demand of consumerist ring an environmental catastrophe, man emer ving. Businesses unable to envision that sustainab rowing wall. Innovative and entrepreneurial business will f nd their w a s F . wards sustainability. We are all f amiliar with forecasting, in w hich we examine present data and Backcasting examines w hen we emerge wing w ve businesses then look ards to the present and what must be done to ar ve at that that do not jeopardize human well-being by exceeding the earth’

w

FIGURE 9.1 The Natural Step’s Funnel RESOURCES Through innovation, creativity, and the unlimited potential for change we can open the walls of the funnel.

Life resources are decreasing... ... Demand for resources is increasing. DEMAND mission.

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the resources and absorb the w astes. Businesses that do so will succeed in mo ving . The “busiw. ve set the stage for this transition to an en y sustainable En issues are no longer at the periphery of business decisions, as burdens to be managed if not avoided altogether; nor are they external regulatory constraints in managerial decision making (see the essa y, “T y: An Argument for Managerial Responsibility” b y Tara Radin at the end of this chapter for a developed analysis of this vie w). En y f nancial sustainability for business to sur vive in the tw y. F or reasons of both deontolo gical principles of rights and duties and for the o verall le business is the wav

Business Ethics and Environmental Values 2 OBJECTIVE

Deciding w hat w e should do is the ultimate goal of practical reason and our values are those standards that encourage us to act one w ay rather than another . Given this objective, which values and decisions are supported by a concern with Why should w e act in w ays that protect the natural environment from de gradation? y should business be concer ned with, and value, the natural world? Human self-interest is the most ob vious answer to these questions. En vironmental concer ns are rele vant to business because human beings, both presentl y living humans and generations of humans depend on the natural environment in order to sur vive. Humans need clean w y air to breathe, fer tile soil and oceans to produce food , an ozone la yer to screen out solar radiation, and a biosphere that maintains the delicate balance of climate in which human life can exist. Two aspects of contemporary environmental realities underscore the importance of self-interested reasoning. As documented in Collapse, past human societies hav limits of the local en vironment’ cases, environmental degradation has been localized to a par ticular region and has seldom af y environmental issues ha ve the potential to adv ersely af fect the entire globe and change human life fore ver. Global climate change, species e xtinction, soil erosion and desertif the science of ecology and its understanding of the interrelatedness of ve helped us understand the wide range of human dependence on ecosystems. e might ha ve thought that buried w astes w ere gone fore ver, w e no w understand ho w to xins can seep into g roundwater and contaminate drinking water across g reat time and distances. We now understand how pesticides accumulate throughout the food chain and pose g reatest dangers

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Breast Milk Toxins

Pollutants in the biosphere will tend to accumulate in the fatty tissue of species at the top of the food chain. In mammals, fatty tissue is broken down as a source of energy during lactation. As a result, breast milk is a particularly signifi cant resource for studying toxins that the body has absorbed. The following is a list of synthetic toxins that one study found in human breast milk.

• Nitro musks (used as a fragrance in household products such as detergents and soaps)

• Chlordane (a compound used in pesticides)

• PCBs (no longer manufactured, but persistent toxins that were used for a wide variety of industrial purposes)

• DDT (a pesticide that has been banned in the United States for decades) • Dieldrin, Aldrin, and Endrin (insecticides) • Hexachlorobenzene (a pesticide and an industrial chemical) • Hexachlorocyclohexane (insecticide) • Heptachlor (insecticide)

• Toxaphene (agricultural insecticide) • Dioxins and furans (any of a number of polychlorinated compounds produced as by-products from industry and combustion) • PBDEs (used as fl ame retardants in clothes and other fabrics)

• Solvents (any of a number of chemical compounds used to dissolve or stabilize other complex chemical compounds) • Lead, mercury, cadmium, and other metals (can be especially toxic to the developing brain)

• Mirex (insecticide)

not onl y to top predators such as bald eagles, but to human beings as w ell. (Consider the basic issue of the en vironment’s impact on breast milk, discussed in the Toxins.”) Where once we thought that ocean f sheries were inexhaustib we now understand that a precise environmental balance is necessary to maintain life-supporting systems. y, humans came to reco reasons for protecting the natural en vironment. The conservation movement, the f vironmentalism, advocated a orld. From this perspecti v orld was still v ts (air, water, food), and indirect benef ationists argued against the e y could pro vide an inexhaustible supply of material. They made the case that business had good reasons for conser that paralleled the rationale to conserve f nancial resources. The natural w e capital, had the producti ve m income but onl y. Besides these self-interested reasons to protect human life and health, the natural en le for many other reasons. Often, these other v alues conf umental v alue that comes from orld as a resource. The beauty and g world pro vide g alue. Man y people

Decision Point

Commercialize a Historic Civil War Site?

vie alues. Parts of the natural w orld can hav alue, historical v alue, and such di verse psychological v alues as serenity and e xhilaration. These v alues can clearl y conf ict with the use of the ear th itself as a resource to ph ysically, as opposed to y, sustain those who live on it. Aesthetic and inspirational values often play out in public debates about economic development. The 1970s song “Big Yellow T with the w wn lyric “they paved paradise and put up a parking lot. ” Many critics f neon signs, f es, parking lots. Consider these debates as you review the Decision Point, “Commercialize a Historic Civil War Site?” 486

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487

Treatment of Animals in Agriculture

Some animal farming practices, especially within large-scale industrial factory farms, have been criticized as cruel and heartless. Calves are prevented from exercising and intentionally malnourished so that consumers can enjoy tender and pink veal. Chickens are tightly packed in cages with their beaks cut off to prevent them from pecking each other. Cattle are raised in giant feed lots where they spend their time walking in their own manure. Opponents have organized boycotts against such fast-food chains as McDonald’s and KFC how animals in their supply chain are treated. In response to this criticism, McDonald’s has become an industry leader in creating policies to ensure the humane treatment of animals. As part of this effort, McDonald’s has adopted a set of guiding principles, including the following:

These principles apply to all the countries in which McDonald’s does business. Safety. First and foremost, McDonald’s will provide its customers with safe food products. Food safety is McDonald’s number one priority. Quality. McDonald’s believes treating animals with care and respect is an integral part of an overall quality assurance program that makes good business sense. McDonald’s supports that animals should be free from cruelty, abuse and neglect while embracing the proper treatment of animals and addressing animal welfare issues. Source: McDonald’s Corporation, “2006 Worldwide Corporate Responsibility Report; Products: Responsible .mcdonalds .com/corp/values/purchasing/animalwelfare/guiding_ principles.html.

McDonald’s commitment to animal welfare is global and guided by the following principles.

A f nal set of values that we will consider involv animals and other li ving beings, an en vironmental v alue that has raised some of the most widely pub licized ethical challenges to business. Variously refer red to as the animal rights, animal liberation, or animal w elfare movement, this approach attributes a moral standing to animals. According to man y people, animals, and perhaps all other li ving things, deser ve to be respected and treated with dignity . ould create a wide v ariety of distincti ve ethical responsibilities concerning ho w w e treat animals and w ould ha ve signif cant implications for many businesses. To defend this perspective, some argue that many animals, presumably all animals with a central ner vous system, ha ve the capacity to feel pain. Reminiscent of the tradition described in chapter 3, this view asserts an ethical icting unnecessary pain is taken to be an ethical wrong; therefore, acts that inf ict unnecessar y pain on animals are ethicall y wrong. Raising and slaughtering animals for food , particularly in the way industrial farming enterprises raise poultry, hogs, and would be an obvious case in which business would violate this ethical responsibility , as one side ar gues in the reatment of Animals in Agriculture.” e the cognitive capac-

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tradition described in chapter 3, this vie w asserts that we hav these animals as mere objects and means to our own ends. Again, businesses that use animals for food , enter tainment, or pets w ould violate the ethical rights of these animals.

Business’ Environmental Responsibility: The Market Approach

3 OBJECTIVE

4 OBJECTIVE

While debate continues to sur rounds some en alues, an ov helming consensus exists about the self-interested and pr udential reasons for protectve a right to be protected from undue v this goal. Historicall y, this debate has focused on w hether eff cient mark ets or gover gulation is the most appropriate means for meeting the en virono approaches has signif cant implications for business. From one perspecti ve, if the best approach to en vironmental concer ns is to trust them to eff cient mark ets, then the responsib le business manager simpl y ought to seek prof ts and allo w the mark et to allocate resources eff ciently. By doing this, business f lls its role within a market system, which in turn serves the greater ov vernment regulation is a more adequate approach, then business ought to develop a compliance to ensure that it conforms to those regulatory requirements. A mark et-based approach to resolving en cent of the nar row, economic view of CSR described in chapter 5. Defenders of this market approach contend that en vironmental problems are economic problems that deser ve economic solutions. Fundamentall y, environmental prob lems involve the allocation and distribution of limited resources. Whether we are conwable resources such as gas and oil, or PCBs, 2 eff cient mark vironmental challenges. Consider the implications of this model for pollution and resource conser vation. In his w wn book, People or Penguins: The Case for Optimal Pollution, William Baxter argued that there is an optimal le vel of pollution that w ould best serve society’s interests.1 This optimal level is best attained, according to Baxter, by leaving it to a competitive market. Denying that there is an ve standard for clean air or water (as this vie w w ould den y there is an objecti ve state of perfect health), Baxter begins with a goal of “safe” air and w ater quality, and translates this goal to a matter of balancing risks and benef ts. Society could strive for pure air and water, ould entail would be too high. A more reasonable approach is to aim for air and w ater quality that is safe enough to This balance, the “optimal le vel of pollution” can be achie v ve mark ets. Society activities of individuals, will be willing to pay for pollution reduction as long as the perceived benef ts outweigh the costs.

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5 OBJECTIVE

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489

ation. F market economic perspective, resources are “inf nite.” Julian Simon, for example, has ar wed as material objects but simpl y as any means to our ends. 2 Histor y has sho wn that human ingenuity and incenti ve have always found substitutes for an y shor tages. As the suppl y of an y resources y providing a strong incentive to supply more or provide a less costl y substitute. In economic ter ms, all resources are “fungible.” They can be replaced b nite. asted. A similar case can be made for the preservation of environmentally sensitive areas. Preservation for preser vation’s sake would be w ould use resources ineff ciently. Thus, to retur eld development plan described previously developing the land as a theme park should be done onl y if people are willing to pay more for open space than for a park. Since the Disne y plan w ould have been f nancially v table, leaving it unde veloped would be w asting these le resources. Challenges to this narrow economic view of corporate social responsibility are familiar to both economists and ethicists. A v et failures, many of the best known of which involve en issues, point to the inadequacy of market solutions. One e xample is the e xistence of e xternalities, the te xtbook example of which is environmental pollution. Since the “costs” of such things as air pollution, groundwater contamination and depletion, soil erosion, and nuclear w xter (e.g., people do et e xchanges A second type of market f hen no markets exist to create a price for impor tant social goods. Endangered species, scenic vistas, rare plants and animals, and biodiversity are just some en y are not traded on open markets (or, when they are, the ays that seriousl and mahogany trees are sold on the black market). Public goods such as clean air and ocean f sheries also ha ve no estab lished mark et price. With no estab lished exchange value, the mark e its own goals of eff cientl ail to guarantee that such important public goods are preserved and protected. A third way in which market failures can lead to serious en vironmental harm involves a distinction betw een individual decisions and g roup consequences. We ve policy decisions solely consumer might make regarding the purchase of an SUV and the consequences of that decision on global w arming. The additional CO 2 that would be emitted b y a single SUV is miniscule enough that an individual would likely conclude that her decision will mak e no dif ference. However, if e very consumer made e xactly the same decision, the consequences would be signif cantly different.

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This example that the overall social result of individual calculations might be signif cant increases in pollution and such pollution-related diseases as asthma and aller gies. A number of alter native policies (e.g., restricting sales, increasing taxes on gasoline, treating as cars instead of light tr ucks in calculating Corporate Automotive Fuel Efficiency [CAFE] Standards) that could address pollution and pollution-related disease w ould never be considered if w e relied onl y on mark et solutions. Because these are important ethical questions, and because the y remain unask ed from within mar ket transactions, we must conclude that mark ets are incomplete (at best) in their hat is good and rational for a collection of individuals is not necessarily what is good and rational for a society. Such market f to achieve a sound en vironmental policy. Defenders of a narrow economic view of cor porate social responsibility ha ve responses to these challenges of course. Internalizing external costs and assigning proper wned goods such o responses to mark et failures. But there are good reasons et failures are environmentally inadequate. One important reason is what has been called the f rst-generation problem. Markets can w y the existence of market failures. Only when f Atlantic xample, did w e lear n that free and open competition among the world’s f y for unowned public goods f ailed to prevent the decimawordf sh, Atlantic salmon, and lobster populations. That is, we learn about market failures and thereby prevent har y by sacrif cing the “f rst generation” as a means of gaining this information. When public policy involves irreplaceable public goods such as endangered species, rare wilder ness areas, and public health and safety, such a reactionary strategy is ill advised. (See the Reality Check, “Supply and Demand for Energy.”)

Business’E nvironmentalR esponsibility: The Regulatory Approach 3 OBJECTIVE

A broad consensus emer kets are an inadequate approach to en , gov tal re ere seen as the better w ay to respond to en lems. Much of the most signif cant en gislation in the United States w as enacted during the 1970s. The Clean Air Act of 1970 (amended and rene wed in 1977), Federal Water Pollution Act of 1972 (amended and rene wed as the Clean Water Act of 1977), and the Endangered Species Act of 1973 w ere par t of this y enacted by a Democratic Congress and signed into law by a Republican president. These la islation w y legal avenue open for addressing environmental as tor t la w. Onl y indi viduals w ho could pro ve that the y had been

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491

Supply and Demand for Energy

A recent call from the chairman and CEO of Chevron-Texaco for changes in U.S. energy policy emphasizes the need for partnership between government and business to address the energy market. In a speech delivered in February 2005, David J. O’Reilly claimed that we are now in the midst of what he called a “new energy equation” requiring a broad-based energy policy. The most visible element of this new equation is that relative to demand, oil is no longer in plentiful supply. The time when we could gas is clearly ending. Why is this happening now? . . . Demand from Asia is one fundamental reason for this new age of more volatile and higher prices. The Chinese economy alone is a roaring engine whose thirst for oil grew by more than 15 percent last year and will double its need for imported oil between 2003 and 2010—just seven years. This new Asian demand is reshaping the marketplace. And we’re seeing the center of gravity of global petroleum markets , to China and India. . . . But demand isn’t the only factor at

play. Simply put, the era of easy access to energy is over. In part, this is because we are experiencing the convergence of geological difficulty with geopolitical instability. Although political turmoil and social unrest are less likely to affect long-term supplies, the psychological effect of those factors can clearly have an impact on world oil markets, which are already running at razor-thin margins of capacity. Many of the world’s big production fields are maturing just as demand is increasing. The U.S. Geological one-half of its existing conventional oil base by 2030. Increasingly, future supplies will have to be found in ultradeep water and other remote areas, development projects that will ultimately investment in new infrastructure. Source: David J. O’Reilly, chairman and CEO, ChevronTexaco Corporation, “U.S. Energy Policy: A Declaration of Interdependence” (keynote address, 24th annual CERA Week Conference, Houston, Texas, February 15, 2005). Available on the Chevron-Texaco Web site: http://www.chevrontexaco.com/news/speeches/ 2005/ 2005-02-15_oreilly.asp.

harmed by pollution could raise le gal challenges to air and w ater pollution. That legal approach placed the burden on the person w ho was har med and, at best, offered compensation for the har m onl act. Except for the incenti ve provided by the threat of compensation, U.S. policy did little to prevent the pollution in the f rst place. Absent any proof of negligence, public policy was content to let the market decide environmental policy. Because endangered species themselves had no legal standing, direct harm to plant and animal life was of no legal concern and previous policies did little to prevent harm to plant and animal life. The la ws enacted during the 1970s estab lished standards that ef fectively ho would cause the harm. Gov lished regulatory standards to tr y to pre vent the occur fact. We can think of these laws as establishing minimum standards to ensure air and water quality and species preser vation. Business w as free to pursue its o wn goals as long as it complied with the side constraints these minimum standards established.

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6 OBJECTIVE

The consensus that emer ged w o oppor lish business’ en vironmental responsibilities. As consumers, indi viduals could demand en y friendly products in the mark etplace. As citizens, individuals could suppor t environmental legislation. As long as business responded to the mark et and obe yed the la w, it met its en vironmental responsibilities. If vironmentally suspect products, such as large gas-guzzling SUVs, and those products are allo wed by law, then w xpect business to forgo the f nancial opportunities of marketing such products. Several problems suggest that this approach will pro ve inadequate over the long term. First, it underestimates the inf uence that business can have in establishing the law. viously provide a good e xample of ho w . A reasonab w suggests that the public v y expressed a political goal of improving by improving automobile eff cienc ever, the automobile as ab sented the largest selling, and most prof table, se

.

uence consumer choice. T lls its environmental responsibilhen it responds to the en vironmental demands of consumers is to underestimate the role that business can pla y in shaping public opinion. Advertising is a $200 billion a year industry in the United States alone. It is surel y misleading to claim that business passi vely responds to consumer desires and that consumers are by the messages that business conveys. Assuming that business is not going to stop adv ertising its products or lobb ying gover corporate en e inadequate for protecting Further, if we rely on the law to protect the environment, environmental protection will extend only as f xtends. Yet, most environmental issues, pollution problems especially York State might pass strict re er plants are located downwind in Ohio or e v ther west in the Dak otas or Wyoming, New York y, national re v While hope remains that international agreements might help control global en vironmental problems, the failure of the Kyoto agreement suggests that this might be overly optimistic. Finally, and perhaps most troub ling from an en vironmental standpoint, this regulatory model assumes that economic gro vironmentally and ethically benign. Re lish side constraints on business’ pursuit of prof ts and, as long as the y remain within those constraints, accept as ethicall y le gitimate whatever road to prof What can be lost in these discussions is the v ays to pursue prof ts within the side constraints of law wards prof tability can have very different environmental consequences, as is discussed in the Reality Check, “Cap and Trade—A Mixed Approach?”

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Cap and Trade—A Mixed Approach?

One strategy that combines elements of both market and regulatory approaches is the so-called “cap and trade” model that has been proposed as part of U.S. federal legislation to address carbon emissions. Under the cap and trade model, government sets an overall annual target, or “cap,” on the amount of CO2 emissions nationally. Companies then buy government-issued permits to emit The permits limit the total amount of pollution to the national cap. Individual businesses are free to buy or sell their permits in such a way that an effi cient

company that emits less pollution than its permits less effi . By thus creating a market for pollution credits, government regulation creates an incentive for individual businesses to reduce its own pollution. Government can then slowly reduce the overlap pollution target annually to achieve its public policy goal. Defenders see this approach as a powerful way to use market see it as government issuing a “license to pollute.”

Business’E nvironmentalR esponsibilities: The Sustainability Approach 7 OBJECTIVE

Beginning in the 1980s, a ne w model for en vironmentally responsible business began to take shape, one that combines f nancial oppor with en tal and ethical responsibilities. The concept of sustainable development and sustainable business practice suggests a radically new vision for integrating f nancial and environmental goals, compared to the g rowth model that preceded it (as e xplored in the y Sustainability?” ). These three goals, economic, en , are often refer red to as the three pillars of sustainability. Assessing business acti vity along these three lines is often refer ” elopment can be traced United Nations’ W vironment and Development (WCED), more commonly wn as the Brundtland Commission, named for its chair, Gro The commission was charged with developing recommendations for paths towards economic and social development that would not achieve short-term economic g rowth at the e xpense of long-ter m en vironmental and economic sustainability. The Br fered what has become the standard def nition of sustainab le development. “Sustainable development is development that meets the needs of the present without compromising the ability wn needs.” Economist Her man Dal y has been among the leading think ers w ho ha ve advocated an inno vative approach to economic theor y based on the concept of sustainable development. Daly makes a convincing case for an understanding of economic development that transcends the more common standard of economic growth. Unless w e make signif cant changes in our understanding of economic activity, unless quite literall y we change the w ay we do business, w e will f ail to

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Why Sustainability?

Three factors are most often cited to explain and justify the need for a model of economic development that stresses sustainability rather than growth. First, billions of human beings live in severe poverty and face real challenges associated with the lack of food, water, health care, and shelter on a daily basis. Addressing these challenges will require significant economic activity. Second, world population continues to grow at a disturbing rate, with projections of an increase from 6 billion people in 1998 to 7 billion shortly after 2010 and 8 billion before 2030. Most of this population growth will occur within the world’s poorest regions, thereby only intensifying the fi more economic activity will be needed to address the needs of this growing population. Third, all of this economic activity must rely on the productive capacity of the earth’s biosphere. Unfortunately, there is ample evidence that the type

and amount of economic activity practiced by the world’s economies have already approached if not overshot the earth’s ability to support human life. Given these realities, citizens within developed economies have three available paths. We can believe that developing economies in places such as China, India, and Indonesia cannot, will not, or should not strive for the type of economic prosperity enjoyed in developed economies. Second, we could believe, optimistically, that present models across the globe to an expanding population without degrading the natural environment beyond its limits. Third, we can search for new models of economic and business activity that provide for the needs of the world’s population without further degrading the biosphere. Sustainable development and the connected model of sustainable business choose this third path.

meet some very basic ethical and en vironmental obligations. According to Daly, w w we understand economic activity. We can be gin with the standard understanding of economic acti nomic gro found in almost ev economics textbook. What is sometimes called the “circular f ow model” ( Figure 9.2 ) e xplains the nature of economic transactions in ter ms of a f ow of resources from businesses to households and back again. Business produces goods and ser vices in response to the mar ket demands of households; then ships the goods and ser vices to households in exchange for payments back to business. These payments are in turn sent back to households in the form of wages, salaries, rents, prof ts, and interests. Households receive the payments in exchange for the labor, land, capital, and entrepreneurial skills business uses to produce goods and services. Two aspects of this circular f ow model are w orth noting. F irst, it does not dif actors of production. This model does not e xplain the origin of resources. They are simpl y owned by households from which they, like labor, capital, and entrepreneurial skill, can be sold to business. As economist Julian Simon has ar As economists or consumers, w e are interested in the par ticular services that resources yield, not in the resources themselves.” Those ser vices can be pro vided in man y ways and b different f actors of production. In Simon’ s ter ms, resources can therefore be treated as “inf nite.”

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A second obser vation is that this model treats economic g rowth as both the solution to all social ills and also as boundless. To k eep up with population growth, the econom y must g row. To provide for a higher standard of li ving, the economy must grow. To alleviate pover , hunger, and disease, the economy must grow. w indef nitely is simpl of this model. suggest why this g rowth-based model will be inadequate. According to some estis economy w w by a factor of f v er the next 50 y ears in order to bring the standard of li ving of present populations in the developing world into line with the standard of living in the industrialized world. Yet, within those 50 y ears, the w orld’s population will increase b y more than 3 billion people, most of them bor n in the w orld’s poorest economies. Of course, the only source for all this economic activity is productiv earth itself. Daly ar gues that neoclassical economics, with its emphasis on economic growth as the goal of economic polic y, will ine vitably f ail to meet these chalgnizes that the econom y is but a subsystem within ear th’s biosphere. Economic activity takes place within this biosphere and cannot expand beyond its capacity to sustain life. All the f y originate in the productive capacity of the ear th. In light of this, the entire classical model will prove unstable if resources mo ve through this system at a rate that outpaces the productive capacity of the earth or of the earth’s capacity to absorb the wastes and by-products of this production. Thus, we need to develop an economic system that uses resources only at a rate that can be sustained ov rec themselves. A model of such a system, based on the work of Daly, is presented in . Figure 9.3 differs from Figure 9.2 in several important ways. First, the sustainable model recognizes that the economy exists within a f nite biosphere that encompasses a band around the ear th that is little more than a fe w miles wide. From the f rst law of ther modynamics (the conser vation of matter/ener gy), we recognize that neither matter nor ener gy can tr uly be “created,” it can onl y be transferred from one for m to another. Second, energy is lost at e very stage of economic activity. Consistent with the second law of thermodynamics (entropy increased within a closed system), the amount of usab le energy decreases over time. “Waste energy” is continuously leaving the economic system and thus new low-entropy energy must constantl y f ow into the system. Ultimatel y, the only source for low-entropy energy is the sun. natural resources as an undif ferentiated and une xplained f actor of production emerging from households. Natural resources come from the biosphere and cannot be created e x nihilo. F inally, it reco gnizes that w astes are produced at each stage of economic acti vity and these w astes are dumped back into the biosphere.

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FIGURE 9.2 The Circular Flow Model

The conclusion that should be dra w model is relatively simple. Over the long term, resources and energy cannot be used, nor w rates at which the biosphere cannot replace or absorb them without jeopardizing its ability to sustain (human) life. These are what Daly calls the “biophysical limwth.3 nitely, and it can absorb wastes indef nitely, but only at a certain rate and with a certain type of economic

FIGURE 9.3 A Model of the Economy (or Economic System) as a Subset of the Biosphere (or Ecosystem) SOLAR ENERGY

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Is Everything Sustainable?

“Sustainability” has become a somewhat trendy When we hear talk about “sustainability,” we should always be prepared to ask: What is being sustained? For whom is it being sustained? How is it being sustained? and What should be sustained?” The language of sustainability can be especially attractive to those of us living comfortably in developed economies if it is interpreted to mean

maintaining the status quo over the long term. But, not every industry, nor every fi business practice, nor every consumer product is sustainable. Industrial fishing practices in the North Atlantic have already proven unsustainable, as has or soon will be many agricultural practices such as burning rain forests to increase cropland, tapping underground aquifers for irrigation, and burning fossil fuels to power personal transportation.

activity. This is the goal of sustainab le development. F of economic acti , and thereby creating a sustainab le business practice, is the ultimate environmental responsibility of business.

The “Business Case” for a Sustainable Economy 8 OBJECTIVE

gulatory and compliance model tends to inter

pret en vironmental

ward looking and may present business with g reater oppor ve businesses are already pursuing. Man y obser vers argue that a strong economic and f e towards a sustainab see the er le?”). First, sustaina ategy. nel image suggests, business will need to adopt sustainab le practices to ensure long-term survival. Firms that fail to adapt to the con verging lines of decreasing av wn survival. One can look to the ocean f shing industry as an example. Second, the huge unmet market potential among the world’s developing economies can onl y be met in sustaina ble w ays. Enor mous business oppor exist in ser ving the billions of people w ho need, and are demanding, economic goods and services. The base of the economic pyramid represents the largest and fastest-growing economic mark et in human histor y. Yet, the sheer size of these markets alone mak es it impossib le to meet this demand with the en vironmentally damaging industrial practices of the nineteenth and twentieth centuries. For example, if China w ere to consume oil at the same rate as the United States, it alone would consume more than the entire world’s daily production and w ould more than triple the emission of atmospheric carbon dio xide. It is ob vious that new sustainable technologies and products will be required to meet the Chinese demand.

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Third, signif cant cost savings can be achieved through sustainable practices. Business stands to sa ve signif cant costs in mo ves towards eco-eff ciency. Savings on energy use and materials will reduce not onl y environmental wastes, but spending wastes as well. Minimizing wastes makes sense on f nancial grounds as well as on environmental grounds. Fourth, competitive advanta ges exist f or sustaina ble businesses . F irms that are ahead of the sustainability cur ve will both ha ve an adv antage ser ving environmentally conscious consumers and enjo y a competiti ve adv workers who will tak action in working for progressive f rms. Finally, sustaina ood risk mana gement strategy. Refusing to mo ve towards sustainability of fers man y do wnsides that inno vative f rms will a void. Av vernment re gulation is one ob vious benef t. F irms that tak e the initiative in mo ving towards sustainability will also lik ely be the f rms that set the standards of best practices in the f eld. Thus, when regulation does come, these f rms will likely play a role in deter mining what those regulations ought to be. Avoiding legal liability for unsustainable products is another potential benef t. rms that are no w negligent in f ailing to foresee har ms caused b y their unsustainab le practices. Consumer bo le f rms are also a risk to be avoided. W vious sections b y ref ecting on the ethical decision-making model used throughout this te xt. The f acts suggest that the s biosphere is under stress and that much of this comes from the type of global economic gro ies. The ethical issues that develop from these facts include fairness in allocating human beings, and the values and rights associated with en ation. The stak

a,

in which economic activity can meet the real needs of present generations without wn needs. SustainabilAn Ar Tara Radin at the end of this chapter offers an additional perspecti ve on the vie w that the natural en vironment should be understood as a major business stakeholder.) The next section describes directions in which business might develop towards this sustainable model.

Principles for a Sustainable Business 9 OBJECTIVE

Figure 9.3 pro vides a general model for understanding ho w f rms can e volve towards a sustainab le business model. In the simplest ter ms, resources should not enter into the economic c aster than they are replenished. Ideally, waste should be eliminated or , at a minimum, not produced at a rate f aster than the biosphere can absorb it. F inally, the energy to power the economic system should be rene wable, ultimatel y rel ying on the sun, the onl y energy that is truly renewable.

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The precise implications of sustainability will dif

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fer for specif c f rms and e tow . Firms and industries must become more eff y should model their entire production process on biological processes; and they should emphasize the production of services rather than products. Versions of the f rst principle, sometimes called eco-efficiency, have long been a par t of the en vironmental movement. “Doing more with less” has been an en vironmental guideline for decades. On an indi vidual scale, it is en vironmentally better to ride a bik hybrid-powered bus than in a diesel bus, to ride in a bus than to dri ve a per sonal automobile, and to dri ve a h ybrid car than an SUV . Lik ewise, business f rms can impro ve ener gy and materials eff ciency in such things as lighting, building design, product design, and distribution channels. The LEED building standards described in this chapter’ s opening Decision P oint incor porate many such eco-eff cienc alone, business could readil y achieve at least a fourfold increase in eff ciency and perhaps as much as a tenfold increase. Consider that a fourfold increase, called “Factor-Four” in the sustainability literature, w ould mak e it possib le to achieve double the productivity from one-half the resource use. 4 When applied to the additional costs for buildings associated with LEED standards, for e xample, such a retur n on investment means that companies can quickl y recoup this environmental investment. y understood b y reference to F igure 9.3. Imagine that the w aste lea ving the economic c ycle is being tur ned back into the c ycle as a producti ve resource. “Closed-loop” production seeks to inte grate w hat is presentl y w aste back into production. In an ideal situation, the w aste of one f rm becomes the resource of another , and such synergies can create eco-industrial parks. Just as biolo gical processes such as photosynthesis cycle the “waste” of one activity into the resource of another, this principle is often referred to as biomimicry. The ultimate goal of biomimicr y is to eliminate w aste altogether rather than reducing it. If we truly mimic biological processes, the end result of one process (e.g., leaves and oxygen produced b y reused as the productive resources (e.g., soil and water) of another process gro with only solar energy added. The e volution of business strate gy to wards biomimicr y can be understood along a continuum. The earliest phase has been described as “tak e-make-waste.” Business takes resources, mak es products out of them, and discards w hatever is left over. A second phase envisions business taking responsibility for its products from “cradle to g rave.” Sometimes refer red to as “life-c , this approach has already found its w ay into both industrial and re Cradle-to-grave, or life-c le for the entire life of its products, including the ultimate disposal e ven after the sale. Thus, for example, a cradle-to-grave model would hold a business liable for groundwater contamination caused by its products even years after they had been buried in a landf ll.

Opening Decision Point Revisited Building Design and Values

Cradle-to-cradle responsibility e xtends this idea e ven fur ther and holds that a business should be responsib le for incor porating the end results of its products back into the producti ve c ycle. This responsibility, in tur n, w ould create incentives to redesign products so that they could be recycled eff ciently and easily. The en y McDonough and Braungar t, founded b y architect William McDonough and chemist Michael Braungart, has been a leader ve sustainability. Their book, Cradle to Cradle, ycle of several products, providing case studies of economic and environmental benef ts attainable when business tak ycle of products. Among er manufacturing plant. McDonough and Braung rat provide greater details about their design principles in the reading, “The Ne volution” at the end of this chapter. ond eco-eff ciency and biomimicr y, a third sustainab le business principle involves a in business model products to services. Traditional economic and managerial models interpret consumer demand as the demand for 500

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products—w ers, cars, computers, and so for th. A service-based economy inter prets consumer demand as a demand for ser vices—for clothes cleaning, f oor covering, The book Natural Capitalism provides examples of businesses that have made 5 This change produces incenti ves for product redesigns that create more durable and more easily recyclable products. One well-known innovator in this area is Interf ace Corporation and its CEO , Ray Anderson. Interf peting to leasing f oor-covering ser vices. On the traditional model, car pet is sold to consumers who, once they become dissatisf ed with the color or style or once the car peting becomes w pet in landf lls. There is little incenti ve here to produce long-lasting or easily recyclable carpeting. Once Interface shifted to leasing f oor-covering ser vices, it created incenti ves to produce long-lasting, easily replaceab ace thereby accepts responsibility for the entire life c wnership and is responsible for maintenance, Interface now produces carpeting that can be easil , that is more durable, and that can ev y be remanuf actured. Redesigning car pets and shifting to a ser vice lease has also improved production eff ciencies and reduced material and ener gy costs signif cantly. Consumers benef t by getting w hat they truly desire at lo wer costs and fewer burdens.

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End Notes

Readings

Reading 9-1: “The Next Industrial Revolution,” by William McDonough and Michael Braungart, p. 503 Sustainability Seriously: An Argument for Managerial Responsibility,” by Tara J. Radin, p. 510 por Social Innovation and Sustainable Development as Drivers of Business Growth,” by Patrick Cescau, p. 518

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Reading 9-1

The Next Industrial Revolution William McDonough and Michael Braungart In the spring of 1912 one of the lar gest mo ving objects e ver created b y human beings left Southampton and be gan gliding to ward Ne w York. It w representation of technology, prosperity, luxury, and progress. It weighed 66,000 tons. Its steel hull stretched the length of four city b locks. Each of its steam engines w as the size of a to wnhouse. And it was headed for a disastrous encounter with the natural world. This vessel, of course, was the Titanic —a brute of a ship, seemingly impervious to the details of nature. In the minds of the captain, the cre w, and many of the passengers, nothing could sink it. One might sa y the volution of the nineteenth centur y resembles such a steamship. It is powered by fossil fuels, nuclear reactors, and chemicals. It is pour ing w aste into the w ater and smok e into the sk y. It is attempting to w ork by its o wn rules, contrary to those of the natural w orld. And although it ma y seem invincib aws presage disaster. Yet many people still believe that with a few minor alterations, this infrastr e us safely and prosperousl volution resources seemed ine xhaustib as vie wed as something to be tamed and ci vilized. Recentl y, however, some leading industrialists ha ve be gun to realize that traditional ways of doing things may not be sustainab le o ver the long ter e thought was boundless has limits,” Robert Shapiro, the chair man and chief e xecutive off cer of Monsanto, said in a 1997 inter view, “and w e’re beginning to hit them.” The 1992 Earth Summit in Rio de Janeiro, led b ognized those limits. Approximately 30,000 people from around the w

hundred world leaders and representati ves of 167 countries, gathered in Rio de Janeiro to respond to troub ling symptoms of en Although there w as shar p disappointment after ward that no binding ag reement had been reached at the summit, man y industrial par ticipants touted a particular strategy: eco-eff ciency. The machines y would be ref , f aster, quieter engines. Prosperity w ould remain unobstr ganizational str uctures w ould remain intact. The hope w as that eco-eff ciency w ould transfor m human industr y from a system that tak es, mak es, and w astes into one that inte grates economic, en vironmental, and ethical concerns. Eco-eff ciency is now considered b gy of choice for change. What is eco-eff cienc y, the ter m means “doing more with less”—a precept that has its roots in earl y Ford was adamant about lean and clean operating policies; he saved his compan y money by recycling and reusing materials, reduced the use of natural resources, minimized packaging, and set ne w standards with his timesaving assembly line. F ord wrote in 1926, “You must get the most out of the power, out of the material, and out of the time”—a credo that could hang today on the wall of any eco-eff cient factory. The linkage of eff ciency with sustaining the en vias perhaps most f amously articulated in Our Common Future, the United Nations’ World Commission on Enviand Development. Our Common Futur e war were not intensif ty and ecosystems would be threatened, and existence would become unpleasant and e ven harmful to human health in some cities. “Industries and industrial operations should be encouraged that are more eff cient in terms of resource use, that

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generate less pollution and w aste, that are based on the use of rene wable rather than nonrene wable resources, and that minimize ir reversible adv erse impacts on human health and the en vironment,” the commission stated in its agenda for change. cienc v later, by the Business Council (no w the World Busile Development, a g roup w, Du P ont, Con Agra, and Chevron, w spective to the Ear The council presented its call for change in practical what w ecological awareness rather than on what the en Changing Course, a repor group’s founder y ciency for all companies that aimed to be competitive, le, and successver the long ter y said, “I predict that within a decade it is going to be ne xt to impossib ve without also being ‘eco-eff alue to a good or ser vice w w ” As Schmidhein y predicted , eco-eff ciency has been working its w ay into industr y with e xtraordinary success. The cor porations committing themselves to it continue to increase in number , and son & Johnson. Its famous three R s—reduce,reuse, recycle—are steadil as w ell as the w orkplace. t from eco-eff ciency’s economic benef ts, which can be considerable: 3M, for e xample, has sa ved more than $750 million through pollution-pre vention projects, and other companies, too, claim to be realizing big sa y, reducing resource consumption, ener gy use, emissions, and w astes has implications for the environment as well. hears that Du Pont has cut its emissions of airbor ne cancer-causing chemicals b y almost 75 percent since 1987, one can’t help feeling more secure. This is another benef t of eco-eff ciency: it diminishes guilt and fear. By subscribing to eco-eff ciency,

people and industries can be less “bad” and less y? Eco-effciency is an outw ardl le and certainly w y, it is not a strate gy for success o ver the long ter m, because it does not reach deep enough. It w orks within the same system that caused the prob lem in the f rst place, slowing it down with moral proscriptions and puniti ve demands. It presents little more than an illusion of change. Rel ying on ecoeff ciency to sa ve the en vironment will in f act achieve the opposite—it will let industr y f nish off ever y, persistently, and completely. W arding a reshaping of human industry—what w e and the author P aul Ha wken call the Next Industrial Revolution. Leaders of this movement include man y people in di verse f elds, among them commerce, politics, the humanities, science, engineering, and education. Especiall y notable are the businessman Ra y Anderson; the philanthropist T ga city councilman Da ve Crock ett; the ph ysicist Lovins; the en vironmental-studies professor David W. Orr; the environmentalists Sarah Severn, y, and Susan Lyons; the enviveloper Heidi Holt; the ecological designer John T y Jack Todd. We are focused here on a ne w way of designing industrial production. As an architect and ho have worked gical systems, w e see conf ict betw y and the en vironment as a design problem—a very big design problem. Any of the basic intentions behind the Industrial Revolution were good ones, which most of us would probably like to see carried out today: to bring more goods and ser vices to lar ger numbers of people, to raise standards of living, and to give , among others. But there were crucial omissions. Per diversity and vitality of forests, ri vers, oceans, air, soil, and animals was not part of the agenda. If someone were to present the Industrial Re volution as a retroacti ve design assignment, it might sound like this: Design a system of production that

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• Puts billions of pounds of toxic material into the air, water, and soil every year. • y activity, not legacy. • Requires thousands of comple x re k y. • • Results in gigantic amounts of waste. • Puts v aluable materials in holes all o ver the planet, where they can nev ved. • Erodes the di v gical species and cultural practices. • • •

•

y instead Releases r pounds of toxic material into the air, water, and soil every year. y less vity. Meets or exceeds the stipulations of thousands of complex regulations that aim to k eep people and systems from being poisoned too quickly. Produces fewer dangerous that will re-

• Results in smaller amounts of waste. • Puts r v aluable materials in holes all o ver the planet, where they can never be retrieved. • Standardizes and homo genizes biolo gical species and cultural practices. Plainly put, eco-eff ciency aspires to mak e the old, destr uctive system less so. But its goals, however admirable, are fatally limited. Reduction, reuse, and rec ycling slow down the rates of contamination and depletion but do not is what we call “downcycling,” because it reduces the quality of a material over time. When plastic other than that found in such products as soda and water bottles is rec ed with different plastics to produce a h ybrid of lo wer quality, which is then molded into something amorphous and cheap, such as park benches or speed bumps. The original high-quality material is

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not retriev or incinerators. The w

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ventually ends up in landf lls

creative use of recycled w products can be misguided. F or example, people ma y feel that the y are making an ecologically sound choice by buying and wearing clothing made of f bers from rec ycled plastic botcif call adopting superf cial “en y understanding their effects can be no better than doing nothing. Recycling is more e xpensive for than it needs to be, par tly because traditional recycling tries to force materials into more lifetimes than the y w ere designed for—a complicated and messy con version, and one that itself e xpends ener Very few objects of moder n consumption w If the process is y to save money and materials, y beginning to be recycled or even “upcycled”—a term we use to describe the to systems of materials with improv g . The reduction of potentiall y har mful emissions and w astes is another goal of eco-eff ciency. But current studies are be n that even tin e disastrous effects on biological systems over time. disrupters—industrial chemicals in a v ariety of modern plastics and consumer goods which appear to mimic hor mones and connect with receptors in human beings and other organisms. Theo Colborn, eterson Myers, the authors of Our Stolen Futur e (1996), a g roundbreaking study on cer tain synthetic chemicals and the en t that “astoundingl y small quantities of these hor monally acti ve compounds can wreak all manner of biolo gical havoc, particularly in those exposed in the womb.” w research on particulates— microscopic par ticles released during incineration and combustion processes, such as those in po wer plants and automobiles—shows that they can lodge

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in and damage the lungs, especially in children and the elderl y. A 1995 Har vard study found that as man y as a result of these tin Although regulations for smaller particles are in place, implementation does not have to be ould be not reguinate dangerous emissions altogether—by design.

ApplyingN ature’sC ycles to Industry “Produce more with less, ” “Minimize w aste,” “Reduce,” and similar dictates adv ance the notion of a w hose car is strained by burgeoning populations and exploding production and consumption. Eco-eff ciency tells us the creati

v

ly destroyed b y, or that e xcessive demand for goods and ser vices causes en simplif ishingly productive and creative, even “w is not eff cient but effective. Consider the cher es thousands of blossoms just so that another tree might ger minate, take root, and grow. would notice piles of cherry b The tree’s After f alling to the g n to the soil and become rounding en ery last par ay to the health of a thriving ecosystem. “Waste equals food”—the f rst principle of the Ne volution. The cher xample of nature’s , w hich operates according to c ycles of This cyclical system is powered by the sun and constantl y adapts to local circumstances. W Human industr y, on the other hand , is se verely y, linear ve manuf hich things are created and ev y discarded, usually in an incinerator or a

landf ll. Unlik e the w aste from nature’ s work, the waste from human industry is not “food” at all. In fact, it is often poison. icting systems: a pile of cherry blossoms and a heap of toxic junk in a landf ll. But there is an alter native—one that will allo w e. ve is what we call veness.” Our concept of eco-effectiveness leads to human y that is re generative rather than depleti ve. It involves the design of things that celebrate interdependence with other li ving systems. F rom an ve, it means products that work within cradle-to-cradle life c ycles rather than cradle-to-grave ones.

WasteE qualsFood Ancient nomadic cultures tended to lea ve organic w sur simply want to get rid of waste as quickly as possible. aste are lost when they are disposed of in landf lls, where they materials and chemicals in natural systems strains the environment. x, interdependent natural ecosystems to absorb such foreign do an f by design: many manuf wn under natural conditions. If people are to prosmaterials manufactured b life provide nourishment for something new. Since many of the things people mak ral, they are not safe “food” for biological systems. grade should be designed as technical that continually circulate within closed-loop industrial c o metabolisms to remain healthy, g reat care must be tak en to a void cross-

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upters, persistent to xic v ept

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create an aestheticall y unique f abric that w as also ecologically intelligent—although the client did not quite know at that point what this would mean. w The challenge helped to clarify, both for us and for If the things people mak e are to be safel y the company we were working with, the difference between superf cial responses such as rec ycling lisms, then products can be considered to contain and reduction and the more signif cant changes two kinds of materials: biological nutrients and required by the Next Industrial Revolution. technical nutrients. For e xample, w hen the compan y f rst sought Biological nutrients will be designed to retur n to meet our desire for an en vironmentally safe to the or ganic cycle—to be literall y consumed b y fabric, it presented w hat it thought w as a w holemicroor some option: cotton, which is combined Most packaging (which makes up about 50 percent with PET (pol yethylene terephthalate) f bers by v olume of the solid-w aste stream) should be from rec ycled be verage bottles. Since the procomposed of biolo posed hybrid could be described with two imporcan be tossed onto the ground or the compost heap tant eco-buzzw ” it to biodegrade. There is no need for shampoo botappeared to be environmentally ideal. The materio als were readily available, mark le, ers, and other packaging to last decades (or e ven and cheap. But when the project team looked carehat came inside them. fully at w hat the manifestations of such a h ybrid T might be in the long r un, w e disco vered some into the technical c ycle. Right no w an yone can disturbing f acts. When a person sits in an off ce dump an old tele vision into a trash can. But the chair and shifts around , the f abric beneath him average tele or her abrades; tin y par ticles of it are inhaled or cals, some of w hich are to xic. Others are v aluable swallowed b y the user and other people nearby. nutrients for industr y, which are w asted when the PET w as not designed to be inhaled. Fur thertelevision ends up in a landf ll. The reuse of techni- more, PET w ould pre vent the proposed h ybrid cal nutrients in closed-loop industrial cycles is dis- from going back into the soil safel y, and the cottinct from traditional rec ycling, because it allo ws ton would prevent it from re-entering an industrial materials to retain their quality: high-quality plastic cycle. The hybrid would still add junk to landf lls, computer cases would continually circulate as high- and it might also be dangerous. quality computer cases, instead of being do wnThe team decided to design a f abric so safe that cycled to make soundproof barriers or f owerpots. one could literally eat it. The European textile mill Customers would buy the of such prod- chosen to produce the f abric w as quite “clean” ucts, and when they had f nished with the products, en y, and yet it had an interesting probor simply w er version, the lem: although the mill’s director had been diligent manuf ould take back the old ones, break about reducing le vels of dangerous emissions, them down, and use their complex materials in new gov gulators had recentl y def ned the products. trimmings of his f abric as hazardous w aste. We sought a dif ved from the First Fruits: A Biological Nutrient for the local garden club . frame after the chair’ s useful life and tossed onto A fe w y ears ago w e helped to concei ve and cre- the ground to mingle with sun, w ater, and hung ry ate a compostable fabric—a biological microorganisms, both the f abric and its trimmings nutrient. We were initially asked by Design Tex to w y.

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The team decided on a mixture of safe, pesticide- and materials that went into it are lost to the manuf wool) and began working on perhaps the most diff - of potentially hazardous petrochemicals that must cult aspect: the f nishes, dyes, and other processing be toted to a landf ll. Meanw hile, ra w materials chemicals. If the fabric was to go back into the soil must continually be extracted to make ne safely, it had to be free of mutagens, carcinogens, The typical car pet consists of n ylon embedded hea upters, persistent toxic in f berglass and PVC. substances, and bio-accumulative substances. Sixty uf y downcycle it—sha ve of f some joining of the n vers. the project, and all declined , uncomfor table with The w orld’s lar gest commercial car pet compan y, the idea of e xposing their chemistr y to the kind of Interf y necessary. Finally one European company, ycling. Ciba-Geigy, agreed to join. ants to replace it, the manufacWith that compan y’s help the project team turer simpl y tak considered more than 8,000 chemicals used in the depending on the product, either par t or all of the te y and eliminated 7,962. The fabric— carpet—and retur ns a car pet in the customer’ s in fact, an entire line of fabrics—was created using desired color xture. The car pet comonly 38 chemicals. pan The director of the mill told a sur prising stor y maintains it, pro viding customers with the ere in production. of the carpet. Ev y the carpet will wear out came by to test the eff uent, the like an y other , and the manuf ments were broken. After testing the inf uent as well, its materials at their original le vel of quality or a the ne—the water higher one. coming out of the f as as clean as the w ater The adv going in. The manuf as f l- to man ater. The ne y bypassed and potentially dangerous w aste is generated, as it might still be in eco-eff cient systems, and billions prob of dollars’ w orth of v aluable materials are sa ved In our Next Revolution, regulations and retained by the manuf . They burden y by involving gover Selling Intelligence, Not Poison by interfering with the marketplace. Manuf in countries that are less hindered b y re Currently, chemical companies w arn f armers to and w hose f actories emit more to xic substances, et the companies have an economic advantage: they can produce and benef t w hen more pesticides are sold. In other sell things for less. If a factor words, the companies are unintentionall y invested in w astefulness and e ven in the mishandling of thus compete directly with gulated factories in other countries, that is good news en y, the soil, water, and air. Imagine what would happen ethically, and economically. if a chemical compan y sold intelligence instead of pesticides—that is, if f armers or ag ro-businesses paid pesticide manuf to protect their crops AT echnicalN utrient against loss from pests instead of buying danger Someone w ho has f nished with a traditional car - ous regulated chemicals to use at their o wn discrepet must pay to have it removed. The energy t, tion. It would in be buying crop insurance.

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Farmers w ould be sa ying, “I’ ll pa y y ou to deal with boll w eevils, and y ou do it as intelligentl y as you can.” At the same price per acre, e veryone would still prof t. The pesticide pur veyor w ould be invested in not using pesticide, to a void w astthermore, since the manuf would bear responsibility for the hazardous materials, it would have incentives to come up with lessdangerous ways to get rid of pests. Farmers are not interested in handling dangerous chemicals; the y want to g row crops. Chemical companies do not want to contaminate soil, w ater, and air; the y want to make money. Consider the unintended design le gacy of the average shoe. With each step of y our shoe the sole releases tin y par ticles of potentiall y har mful substances that ma y contaminate and reduce the vitality of the soil. With the ne will wash into the plants and soil along the road , adding another burden to the en Shoes could be redesigned so that the sole w as a biolo gical nutrient. When it brok e do wn under would nourish the biolo gical metabolism instead of poisoning it. Other par ts of the shoe might be designed as technical nutrients, to be retur ned to industrial cycles. Most shoes—in f act, most products of the cur airly primitive in their relationship to the natural w orld. With the scientif rently available, this need not be the case.

RespectD iversityand Use the Sun y has been to achie ve uni versally applicab le solutions. In the f is a good e xample. As a result of the widespread That is, an off ce building can look and w ork the same an ywhere. Materials such as steel, cement, and glass can be transported all over the w ence on a re gion’s par ticular ener gy and material

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f ows. With more ener gy forced into the heating and cooling system, the same building can operate similarly in vastly different settings. volution is “Respect div .” Designs will respect the re place. Wastes and emissions will re generate rather than deplete, and design will be f exible, to allo w for changes in the needs of people and communities. For example, off ce buildings will be con vertib le ll when the market changes. The third principle of the Next Industrial Revolution is “Use solar ener gy.” Human systems no w rely on fossil fuels and petrochemicals, and on incineration processes that often ha ve destr uctive side ef fects. Today e ven the most adv anced building or f actory in the w orld is still a kind of steamship, polluting, contaminating, and depleting the sur rounding en ying on scarce amounts of natural light and fresh air . People are essentially w . Imagine, instead , a building as a kind of tree. It w ould purify air , accrue solar income, produce more ener gy than it consumes, create shade and habitat, enrich soil, and change with the seasons. Oberlin Colle ge is currently w it is designed to make more energy than it needs to astewater.

Equity,E conomy,E cology The Ne volution incor porates positive intentions across a wide spectr um of human vement hav articulating these concer , econom y, and ecology. refers to social justice. Does a design depreciate or enrich people and communities? Shoe companies have been blamed for exposing workers in f actories overseas to chemicals in amounts that exceed safe limits. Eco-eff ciency w ould reduce those amounts to meet certain eff ciency would

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reduce those amounts to meet cer tain standards; veness would not use a potentiall y dangerous chemical in the f rst place. What an advance for it would be if no factory worker an here worked in dangerous or conditions. Economy . Does a product ref ect the needs of producers and consumers for af fordable products? Safe, intelligent designs should be af fordable b y and accessib le to a wide range of customers, and prof table to the compan y that makes them, because commerce is the engine of change. Ecology, of course, refers to en intelligence. Is a material a biolo gical nutrient or s design criteria: Waste equals food , Respect di versity, and Use solar energy? The Next Industrial Revolution can be framed as the following assignment: Design an industrial system for the ne y that •

, water, or soil. • Measures prosperity by how much natural capital w ve ways. • Measures productivity by how many people are y and meaningfully employed.

• Measures progress by how many buildings have no smokestacks or dangerous eff uents. • stop us from killing ourselves too quickly. • tions to maintain vigilance. • gical and culversity and solar income. orld will not evolve past its cur rent state of crisis b y using the ” Man y people belie ve that ne w industrial re volutions are already taking place, with the rise of c ybertechnology, biotechnolo gy, and nanotechnolo gy. It is true that these are pow tools for change. But they are only tools—hypereff cient engines for the steamship of the f rst Industrial Re volution. Similarly, eco-eff ciency is a valuable and laudable tool, and a prelude to w hat should come ne xt. But it, too, f ails to mo ve us be yond the f rst revolution. It is time for designs that are creati ve, abundant, prosperous, and intelligent from the star t. The model for the Next Industrial Revolution may well hav Source: Published in the Atlantic Monthly, October 1998. Reproduced with permission of the authors. See http:// .mcdonough.com.

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Taking Sustainability Seriously:

gument for Managerial

Tara J. Radin

I. Sustainability and Stakeholders Concern for the natural environment has become a pivotal issue for businesses today. Companies have found that legal approaches only go so f ar in helping managers deal with the comple viy have come to rel y more hea vily

on managerial discretion in dealing with it and the laws governing it. Managers, in tur n, increasingly need to be ab le to inter pret and appl y laws appropriately. Moreover, they need to develop discretion because there is no for mula—no single, uni versal rule—that will enable them to deal effectively with their problems. Managers must navigate uncharted

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territory by weighing competing interests to deter mine the best w ay to address comple x business issues inv orld. All this means is that there is less need for regulation and more need for managers to have a clear understanding of ethuence of their businesses on the natural en vironment. It seems then that responsib le or ganization decision making in response to concer ns relating to the natural environment is critical. During the last 20 years, a number of arguments have emer ged in suppor business for the natural en Throughout this period, appeals have been made to both moral and economic considerations. One of the chief convolved the le gitimacy and standing of the natural environment as a stakeholder and the wa ious constituents. While the status of the en vironment as a stak eholder has not been full y resolv a view of the f relationship is helpful in addressing some of the rounding the interaction between human beings and the biosphere. Addressing en vironmental concer ns from a stakeholder perspecti ve demands addressing the so-called “separation thesis, ” or notion that busiThe ter m deriv y R. Edward Freeman published a decade after his seminal book, Stakeholder Management. In the ar ticle he asser ted that one of the problems in business thinking is the vie w that functional areas can be isolated (made separate) from one another eting is thought to be separate from f nance, which is The result is a mindset that vie ws these entities as discrete and decisions made in each domain as isolated from each another. While, in man y instances, an approach that compartmentalizes the functional areas of business seems to enhance the eff ciency of the or ganization, it ne ver More troubling, it can lea ve out alto gether cer tional areas that do not make obvious contributions

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to the bottom line. One of these is ethics. In terms of business and ethics, the separation thesis would ha ve business and ethics as distinct and non-overlapping, with business concer ned with the f nancial bottom line without consideration of ethics, and ethics concer ned with the indi vidual’s void of the contingencies of business. The separation thesis in re gard to business and ethics is mistak en chief y because the f rm’s bottom line is inf uenced by a multitude of inter related decisions and ef fects, most of w hich are embedded with ethical concerns. The same holds true for issues in volving the natural en vironment, w here, again, the ef fects of decisions are multiple, inter concerns. This is particularly relevant as it pertains to the natural environment and concer ns for sustainabil. As businesses rel vironment, deplete its resources, and interact with the biosphere, it becomes increasingly diff cult to separate business concer ns from concer ns relating to the natural en vironment. Man y of the ef fects might not be felt on the f rm’s short-term bottom line, but they nevertheless represent a very real challenge to the f rm’s long-term stability and success.

A. Three Fundamental Questions If the separation thesis is f alse and business and the natural environment are as tightly conjoined as business and ethics, then at least three questions about ho w f r en in their business decision-making arise. Consider the following questions: Question 1: Is it permissible for f rms to contribute resources to environmental efforts? rms considering the environment in their strategic planning, in par ticular in re gard to the en vironment’s inf uence on shor t-term prof tability. It also introduces topics such as the le gitimacy of redirecting funds that w ould otherwise be channeled to ward stockholders or other direct business pur poses, as

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well as the per missibility of investing in research for alternative energy sources, engaging in costly waste reduction procedures, manufacturing lower margin en vironmentally friendl y products, and so forth. While a stockholder approach to this question might simpl y focus on the bottom line, a relational stak eholder approach de void of the separation thesis w ould charge that f rms are morall y responsible for the en vironment as a le gitimate stakeholder. It would claim, moreover, that a f rm has reciprocal relationships with a wide range of stakeholders who care about the en vironment and that these concer ns warrant the f rm’s attention to environmental issues. Question 2: Is it consistent with existing laws for f rms to contribute resources to environmental efforts?

Question 3: Could it be consider or f rms to contribute resources to environmental efforts? This question e xplores the dif een permissibility and obligation. It asks whether or not f rms are ob liged to suppor t or enhance the environment and w hether or not f rms need to support other stak eholders w ho are concer ned about the en Again, f rms ar e morall y and legally responsible to stakeholders at least in par t, on reliance considerations. Because society relies upon the environment and because some natural resources are f nite, it is incumbent upon society to carefully steward ral resources. Since f rms as an aggregate use substantial amounts of resources and because they often have the power, control, and f nances to protect natural resources, the y are ob liged to use their w here the benef t of the societies in w hich the f rms are embedded.

This question asks w hether or not it is le gal for f rms to contribute resources to environmental efforts. In doing so, it dra ws attention to la ws related to cor porate governance that allow for and B. Three Guiding Principles require signif cant managerial discretion. The ans wers to questions such as those abo ve Since companies hire managers in lieu of robots indicate that en vironmental responsibility on the part of f rms is desirab le. These ans wers do not, possess, it is benef cial for the f rm’s bottom line however, specify how it should manifest itself or to for decision-mak ers to be empo wered to respond what degree. to their inherent moral and strategic intuitions. Firms have found that attention to such concer ns Principle 1: Firms are obliged to attend to the is not inconsistent with prof t-generation. To the natural environment. contrary, as numerous examples illustrate, f rms The f ard: F irms are increase their prof tability and place themselv es obligated to pa y attention to the en at a competiti ve adv antage w hen the y tak e such How the y do this is their choice. At a minimum, considerations into account. As George W. Merck they must compl y with e xisting rules, regulations, stated in 1950: “We try never to forget that medi- and industr y requirements. The reasons for this cine is for the people. It is not for the prof ts. The mandate are twofold. prof ts follo w, and if w e ha ve remembered that, First, the pragmatic vie w: It is impor tant for they ha ve ne ver f ailed to appear . The better w e f r eholder concern to maintain have remembered that, the larger they have been.” satisf ed stakeholders with whom they are engaged The same holds tr ue for their concer n for the in relationships. Second , the y ha ve moral duties natural environment: it makes good business sense based on a principle of “do no har m.” Since f rms to suppor t la ws that encourage managerial disare a ware of their potential for causing har m cretion and creati vity in re gard to environmental and because the y typicall y ha ve the resources to responsibility. y are required to do so.

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Principle 2: The nature of a f rm’s obligation is generally discretionary. xtent of a f rm’s obligations bey y discretionary. The manner in which a f rm responds to en ns is therefore v oluntary. En y responsible efforts on the par t of f rms tend to be cate gorized along a spectr um, as displayed in Reading 9.1 , which is both nor mative ve. At a minimum, f rms are morall y obliged to “do no harm” and remain in compliance with the la w. While not specif cally def nite, this position encompasses the sor t of e xploitation that leads to tragedies such as Lo ve Canal. It does not mean that f rms are not per partake in the earth’s resources, but that they should do so moderately and consistent with existing laws. In the indeter minate middle is the notion that some f rms choose to be proacti ve in deciding to prevent har m w hile others are merel y reacti ve. The proacti ve approach considers in vestments in research, w aste management, de velopment of en vironmentally responsib le products, and so forth. A number of companies ha ve engaged in this approach, adopting systemic product and/or process redesigns to mak e positi ve contributions to society and the en vironment. While some companies engage in such undertakings because they consider it their moral ob ligation, others do so for self-interested reasons, f nding that doing so gi ves them a competitive advantage.

READING FIGURE 9.1 Shades of Green

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Principle 3: There are circumstances that create ligations for f rm behavior toward the environment beyond mere compliance. The third principle suggests that there are tions where a f rm’s obligation could be considered mandatory. Such are not the norm, but occur where a particular f y suited for the role. In general, it is unusual for positive obligations to be assigned—particularly to f rms. Firms represent a voluntary contribution to the econom y, that is, investors and o wners are moti vated to par ticipate generally because of the oppor tunity to prof t from cer tain enter prises. It is therefore generall y considered inappropriate to impose cor relative burdens that might detract from in vestment in such enter prises and thereb y interfere with the economy. At the same time, someone must be made responsible when there is har m or potential har m. Economists such as Ronald Coase and Guido Calebresi have argued in f avor of eff ciency. Coase has argued that f rms exist onl ent eff ciency ve cor porate initiati ves will and should arise when they are recognized as more eff v , Calebresi has argued that an effective and eff cient way of dealing or entity w ho or w hich is in best position to discover the prob lem and most cheapl y a void har m.

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In fact, while it can be argued that we are all aware porations are in the best position to avoid the harm since they are the ones on the front line engaging in the most destr uctive behavior. It would thus seem logical and appropriate to impose on cor porations a mandator y ob ligation be yond mere compliance w hen they are specif cally in the best position to avoid the harm. This leads to a set of criteria that can frame those situations in w hich there can be constr ued a mandatory obligation for environmental responsibility. First, there must be a specif c need for change as le har m. Second , there must be proximity through a direct or indirect link. The f rm must be a par ticipant in the problem or a direct benef ciary. . The f rm must hav esses without it becoming o verly cumbersome to the f rm. Fourth and f nally, there e xists some sor t of comparati ve adv antage. The f rm must be par ticularl m. When these four criteria are met, it can be said that a f rm has a specif c obligation to engage in en vironmentally responsible behavior to address har m with re gard to the natural environment.

Cor tion of mandator y duties, par ticularly those that could be constr ued as conf icting with their other obligations—particularly their f duciary duty to shareholders. F or this reason, it is impor tant to emphasize the between and f duciary duty. Although it is possib le to construe f duciary duties narrowly in terms of prof tmaximization, the reality is that there are man y factors that can af fect a f rm’s bottom line—in the long if not short term. Further, shareholders can be held accountable for corporate violations or ne glect. On this basis, Professor Cynthia A. Williams and Professor John M. Conle y ha ve argued that managers are responsib le to consider human rights. In the conte vironment, added to this is the reco gnition that shareholders can be held legally liable for negligence.

Since the 1990s, there has been criminal enforcement of environmental statutes. The inescapable reality is that corporate respon-

ment is a business concern. If for no other reasons, corporations ha v environment. witz warns, “The state of the world is not good, or, since the world will be here long after w e are gone, I should sa y the state Long predicted and feared environmental problems are now cascading upon us. Not a da y goes b y, it seems, without news of catastrophic global w arming or collapsed f sheries or depleted resources or diminished topsoil or lack of fresh w ater or diminished biological div ” While the manner in w hich a cor poration responds to these responsibilities remains v oly, the presence of a duty must be vie wed as mandatory. It can be ar gued that there is a moral duty to the environment. Beyond that, failure to nancial distress for the f r uptcy. If it is the f duciary responsibility of managers to protect the interests (and prof ts) of shareholders, the only way they can do that is to consider ho w it affects and is af fected b vironment because stakeholders affect and are affected by the en s approach to sustainability inf uence shor t- and long-term prof ts, the cor poration f aces expensive tort litigation and shareholders f ace criminal sance responsibly.

D. Stakeholders, Sustainability, and Citizenship In addressing en , the term most commonly used today is sustaina . g lasting ef fect of attention to the natural en vironment and encompasses e verything from the local neighborhood to the planet and the w ell-being of all living things. The emphasis lies on investments

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Sustainability is a process; en vironmental responsibility is about be ginning or par ticipating in this vironmental concer ns. Sustainability is inherentl y connected to stak eticularly the relationship view) in that both build upon e xisting relationships, gies. The key here lies in the notion of “systems thinking,” which has recently taken hold in conprovides both the rationale for w hy cor porations should be pa ying attention to sustainability and how they should go about doing so. Each cor poration is itself embedded in a web of relationship and at the same time part of a “networked economy.” Stak ” Citizenship emphasizes the responsibilities of indi viduals in social (community-based) and political systems. An indi vidual deri ves both rights and responsibilities from his or her aff liation with par ticular communities or social systems. The protection of vironment, as a resource shared b y a social system or social systems, . Individual citizenship has gi ven way to cor porate citizenship. Bor rowing from common under standings of indi vidual citizenship, the notion of cor porate citizenship suggests that business organizations ha ve rights and responsibilities comparable to those of indi viduals. This means that cor porate citizens are e xpected to contribute to the communities in w hich the y operate and to be considerate of their interaction with other community members. By implication, this means that, vironment, corporate citizens should be respectful of them in their use of natural resources and reliance on the en not because of their own feelings toward the en community’s interdependent and respect for the en gressive inter pretations of the law are increasingl y ref ecting consideration of stakeholder interests.

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II.Stake holders,the Environment, and Good Business Decision Making The contribution of stakeholder thinking to developing an approach to en vironmental responsibilw how obligations can be assigned to f rms. Specif cally, f rms have legal duties to some stakeholders in some specif ed circumstances. They have moral responsibilities to stakeholders in general. rms to determine how they will handle these responsibilities, there is evidence that attention to stakeholders can contribute to prof . Specifc examples illustrate ho w environmental n into a competiti ve adv antage. Unpacking assumptions about business, humanity , and the en veals how shifting mental models can open up tremendous new oppor

A. The Bottom of the Pyramid C. K. Prahalad ar get of business has been misplaced. He points out that most businesses focus on providing goods and hereas the poorest socioeconomic g roup holds the k ey to tremendous oppor . In economic the p Reading 9.2 , refers to the distribution of w . According to y untapped resource: If we stop thinking of the poor as victims or as a burden and start recognizing them as resilient and creative entrepreneurs and valueconscious consumers, a whole new world of opportunity will open up. Four billion poor can be the engine of the next round of global trade and prosperity . . . . What is needed is a better approach to help the poor, an approach that involves partnering with them to innovate and achieve sustainable win-win scenarios where the poor are activel the companies providing products and services to them are prof table.

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READING FIGURE 9.2 Economic Pyramid

F at the bottom of the p yramid than of the class of wealthy people at the top. Second , par ticularly e, many of the poorest people hav without huge capital in vestments. vating the standards of the socioeconomic disadv antaged m societal drains into societal contributions. Muhammad Y mendous power of this proposition. In the 1970s, Yunus found the Grameen Bank, a microf nance organization that star ted in Bangladesh. The pur pose of this enter prise is to ele v the impo verished b y making small loans without requiring collateral. The underlying premise is that the poor have skills that are under utilized because of their lack of capital. By capital into poor communities, the Grameen Bank has both ele vated local conditions and prof ted signif cantly. s assets are e rowth—in the three years betw s assets nearly doubled from $391 million to $678 million. The bank boasts 5.58 million bor rowers, 1,735 branches, and a 21.22 percent return on equity.

B. Cradle-to-Cradle William McDonough of fers an alter native perspectiv with an e ye toward prof ts. He adv ocates what he

calls a “cradle-to-cradle” approach. This translates into comprehensi v processes. The result is far-reaching. In with the traditional “cradle-to-g rave” perspecti ve whereby resources are used once and then disocates the use of per petually rec yclable or compostab le materials. According to McDonough, “P ollution is a symbol of design failure.” Small and lar ge companies alik e have adopted McDonough’s approach to sustainab le business. One of his most famous projects in which he was involved w as a site restoration of F ord Motor Co.’s historic Ri ver Rouge Comple x in Michigan. Kodak’s single-use camera is another example of entire lifec ycle of the cameras and , e v recovery, keeps most of the materials traveling in a continuous loop. Cradle-to-cradle design ref ects a reconceptualization of what an externality is. Traditional manufacturing has emphasized cost reduction b y e Waste, for example, has traditionally been e lution. McDonough espouses the e xact opposite: he ar gues that companies should tak e o wnership of their processes and invest in ways to processes so as to minimize waste. Whereas companies fear shor gues that long-ter m prof ts will follo w in addition to positiv ward sustainability.

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C. Restorative Commerce An arguably even more dramatic approach lies in aiming for “restorati ve” commerce. According to Ray Anderson, founder and for mer CEO of Inter face, Inc., a global leader in the design, production, ve means to put back more than w e take, and to do good to the Earth, not just no harm.” This is his long-term goal for Interface. Interface has not al ways been so “g reen.” Although Interface today is recognized as a leader in sustainable business, it was only about a decade ago that gy and transfor m processes. The catal yst for this initiati ve was Paul Hawken’s The Ecolo of Commer ce. Ha wken’s w recognizing his compan y’s destr uctive role to ward the en vironment and he set about reducing his company’ or Anderson, this sor t of approach is not just the morall y right thing to do; it is also good for business. In 2005, Interf ace introduced a production process that enab les the compan y to rec ycle old carpeting. Interf ace considers it a “dream come We can no w mine the landf ll instead of siphoning off more oil. But it’s also good business. Now, w e’re not just willing to tak e back old car pet, we’re eager to tak e it because Cool Blue [the production equipment responsible for the recycling t.” This is Anderson’s le gacy for Interf ace: his company has tur ned a product into a ser vice. ace now leases them; as they wear down, they are replaced and the old tiles are remanuf as part of an endless loop. Waste has been reduced and this has dramatically decreased the company’s reliance on raw materials. The e xperience at Interf ace has been tremendously positi ve. In the f ve y ears betw een 2000 and 2005, Interf ace tripled its use of rec ycled or biobased raw materials and grew its use of renewable ener gy from 6.4 percent to 21.7 percent. At the same time, it cut its waste (sent to a landf ll) by

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50 percent. Net sales are growing and the company is looking healthier and healthier. The experience at Interface underscores the tremendous value—psychically, environmentally, and f nancially—of the greening of business.

D. Bottom Line All of these e xamples ref ect the v alue of sustainable business to the f nancial bottom line of organiThe bottom line for us is that our businesses do not need la ws in order to pro vide for sustainability; the y need good business sense. While laws might have failed businesses, the inherent prob lem is not the la w— it is the reliance of businesses upon la ws and the expectation that le gislation can and should deter mine what responsible decision making entails. Mo le to continue to strive to impro ve the le gal frame work, but there will vir tually always be an ine vitable “lag ef fect.” An alternative is thus to endea vor to inf uence the norms of acceptable and expected business behavior. Fiduciary duties, prescribed b y law, are inter preted according to e xisting nor ms. In af fecting these nor ms, then, the f duciaries of cor porations become responsible for living up to and abiding by current societal standards and expectations. Environmental responsibility is about justice not . As a cor porate citizen that can and does ves of others, the f rm has an obligation to act as a citizen b y acting responsib ly vis-à-vis the en ther, good business decision ts) demands attention to stakeholder concerns about issues such as the environment. It is impor tant to k eep in mind that, w hile corporations are le gal f ction, the indi viduals w ho populate them are very real. While the corporation might not “care” about the en vironment, its stak eholders are dependent upon its sur vival. Sustainability is not just the w a hat will pro Source: Copyright © Tara Radin. Reprinted by permission of the author.

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Beyond Corporate Responsibility: Social Innovation and Sustainable Development as Drivers of Business Growth Patrick Cescau, Group Chief Executive of Unilever It is a long time since I g . I return older but, I hope, a little wiser . Of course when I was here in the early seventies, the subjects I will talk about toda and sustainable development—barely existed. The green mov the province of politics and protest not business. The idea that companies had responsibilities to yond making a fe w charitab le donations did not really start to take shape until a decade later. A lot has changed since then—and I’m not just talking about m y appearance! This agenda is no longer about protest and y, although both still have their place. longer automatic adv y areas, they are partners working together to achiev Today social responsibility and en vironmental sustainability are core business competencies, not fringe acti vities. We have come a long w ay since the earl economics Milton Friedman proudly proclaimed that the only obligation which business had to society was “to make a prof t and pay its taxes”. This change has come about for a v ariety of reasons. Certainly the political context has altered. The laissez f aire economics w hich characterised the Reagan/Thatcher era ha ve been superseded b y a more realistic assessment of w hat the in visible hand of the market can achieve acting alone. Today there is a g rowing reco gnition that the 21st centur y are so comple x and so multi-dimensional that the y can onl y be solv ed if gov NGOs and industr y work together effectively. It is diff cult, for e xample, to imagine a prob lem lik e climate change being addressed without the active participation of Shell, BP and Toyota. Likewise

it is hard to see an issue lik vely tackled without the involvement of the world’s major food companies. Slowl y both gov are accepting that business has a role to play in the development agenda and that w e can be tr usted. But perhaps the biggest catal yst for change has been the increasing a wareness within business itself that man y of the big social and en vironmental challenges of our age, once seen as obstacles to progress, hav vation and business development. I believe that we have come to a point now where this agenda of sustainability and corporate responsibility is not onl y central to business strate er of business growth. I would go fur ther: I believe that how w ell and ho w quickl y businesses respond to this agenda will determine which companies succeed and which will fail in the next few decades. e y: Firstly, economic de velopment. De veloping and emer ging mark ets will be the main source of g rowth for many multinational companies in the y ears to come. Those that mak e a positi ve contribution to economic de velopment and po ver these countries will be better placed to g row than those that do not. I will use the e xample of Unilever’s businesses in Indonesia, Africa and India to illustrate my arguments. Secondly, social inno vation. I will look at ho w heightened consumer concer ns about social justice, pov xpectations that companies should do more to tackle such issues. The brands that see these challenges as opportunities for innovation, rather than risks to

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be mitigated will be the successful brands of the The examples I will use here are o of our global brands—Dove and Ben & Jer s. Thirdly, sustainability. As globalisation acceler ates, and as the limits of the planet’ s resources are ge companies and brands will increasingly be held to account on the sustainability of their business practices. The companies that succeed will be those that reduce their en impacts now, rather than wait until either legislation or public outcry forces them to do so. First some backg round about Unile ver. Unilever is one of the world’s leading consumer goods companies: • We hav sales in over 150. • Our products are present in half the households on the planet. • 160 million times a da y, someone some where will buy a Unilever brand. • Our €40 billion tur nover is spread across 400 Foods and Home & Personal Care brands. Corporate responsibility is deepl y coded into Unilever’s DN A. You can trace its origins to our British and Dutch founders—W illiam Hesk eth Lever, Anton Jurgens and Simon v an den Bergh— all of whom had an innate sense of social responsibility towards their employees and consumers. e hav o endurhich ha ve guided our approach to doing business. The f rst is that the health and prosperity of our business is directl ed to the health e serve. Lever gave substance to this belief b y building a garden village for his workforce at Port Sunlight and by his determination to tackle the appalling standards of hygiene and sanitation in late V did this by the simple mechanism of availab w cost soap. is the simple notion that a successful business is a responsible business. Or if you prefer “doing well

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and doing good”. Central to this is the idea that we can create social benef ts through our brands and through the impact w vities have on society and, very importantly, still make a Our commitment to social and environmental issues has been strengthened over the years b tries. Ov er 40% of Unile ver’s business is no w in these markets. That makes them bigger for us than wing much faster. By Asia, veloped markets of Europe and the USA. Doing business responsibl ed Unilever well. If you look at our share price over the past 25 years and compare it with the S&P 500 you can see that “doing good” and “doing w y exclusive.

The Role of Business in Economic Multinational companies can, and do, play a signif cant role in the development agenda. They stimulate economic g ro national trade and facilitate social pro g development of human capital. But the positive role of business is rarel y talk ed about in the media. If brands are mentioned at all, it tends to be the ones that ha ve not behaved responsibly, rather than those who have. P lem is that companies do not nor mally measure their social, economic and environw, communication without facts is tough. So Unilever has been tr ying to f nd out what impacts its operations have in the developing world. In 2003 w e joined forces with Oxf am—an unlikely bedfello w—to research the question. Together w e embark ed on a project to anal yse the impacts of our business in one of our lar gest markets. The countr y we chose w as Indonesia—a country where I have seen the damaging ef fects of pov rst hand. The repor t w e jointl y produced highlighted a y

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ver creates in Indonesia sta ys in the local econom y. This challenges e that multinationals are mere e ealth, w ho make large prof ts locally that are then immediately remitted to shareholders in London and Ne w York, without benef ting the local economy. Secondly, the report looked at the impact of our upstream supply chain. It found that some 84% of our ra local suppliers thereb y creating not just jobs but technology transfer from other Unile ver factories around the world. Finally, our repor t revealed the e xtent to w hich our operations in Indonesia ha ve a major “multiplier ef fect” on job creation. ver Indonesia itself employs only 5,000 employees, the business suppor valent of 300,000 jobs, more than half of them in the distribution and retail chain. Impressive though these f ercise did also re veal the v ery limited impact w hich our operations had in helping the f armers and shopk themselves out of pover . Nevertheless, the e vidence from Indonesia is that a global compan y lik e Unilever with embedded local operations—w hat w e call a multi-local multinational—can have a v ery positive effect on developing economies. Encouraged by the Indonesian exercise we have Africa. Working with Ethan Kapstein—Professor of Sustainable Dev e are investigatof Unilever’s operations in South Kapstein’ hich will be published later this year, will tak e the w ork that w e did in Indonesia to a higher le vel. He will not onl y measure our ve terms but he will also seek to capture and analyse our “soft’ impacts. By soft I mean such intangibles as: • training and skills transfer; • support for gov

• black empowerment initiatives; and • en In a v ery real sense Ethan is getting a measure of the contribution w hich Unile ver is making to develop a healthy and prosperous South Africa. Let me gi ve y ou some e xamples of ho w Unilever’s presence in the emer ging economies of Asia and Africa is contributing to the de velopment agenda. I shall do this under three headings: • capacity building; • new business models to generate economic activity at the base of the pyramid; and • vation w hich addresses specif

c

CapacityB uilding gon that economists use to describe the creation of the skills, ph ysical lic health and administrati ve frameworks that are so necessar y for de veloping countries to prosper. Capacity can be built at both the macro lev el of individual companies and communities. In Africa, Unilever engages at both levels. A good example of an intervention at the macro level is the work that Unilever is doing to facilitate cross-border trade on the continent. We w ere one of the founder members of the In v Climate Facility, a ne w pub lic pri vate par that aims to address some of the str bottlenecks holding back in vestment in Africa. We have committed €1m to getting this going and are concentrating our ef forts on w orking with gov to their approach to customs and border controls. This is something the y ha ve traditionally approached with a re venue mindset If Africa is to de velop as an economic re gion there need to be fe wer restrictions on crossborder trade. These not only discourage foreign direct investment but also stif e intrare gional trade—an important driver of economic g rowth. In ASEAN,

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for example, 60% of trade is betw een neighbours. In Africa it’s more like 10–15%. An example of building at the micro vel in Action ve w e helped to last year. This is a programme orchestrated by the World Economic Forum and involving The Millennium V ve pioneered by Professor Jef frey Sachs. Our shared aim is to help communities lift themselv es out of pover le income generation. The pilot prog Western Kenya. Agriy livelihood there but the land available for farming is less than half a hectare per household—insuff cient to produce enough food for the average family. As a result 60 to 70% of the population live below the pover Agronomists from Unilever’s Kenyan tea plantations are helping farmers to conv e maize to higher v alue crops—specif cally sunf owers and herbs and spices. The land w as prepared in Januar y and F y. The seeds—w hich w e pro vided—were planted in March. And in September, they will be harvested. We have guaranteed to buy their crop at mark et prices. The sunf ower oil will be used in Blue Band margarine and the herbs in Ro yco—a local brand of bouillon stock cubes. Our aim is for the f armers to make enough mone y in the f rst year to be ab le to feed themselves and to make plus for next year n for help with training and star t-up costs, the f ve ag reed to put 10% of the value of an plus they mak ears into community projects. We are in the embr yonic phase of this project but plan to scale it up from 30 f benef ting some 20,000 people. Again our objectives are clear . We w ant to w ork with others to make Kenya a healthy, prosperous society in which businesses like ours can f ourish.

NewB usinessMode ls Capacity building of this kind is critical for longterm economic de v

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impact, however, is the ability of the private sector to create ne w business models. Some of these are designed to reach do wn to wards w hat C. K. Prahalad has described as “the for tune at the bottom of the pyramid”. An excellent e tiative in India. At the end of the 1990’s Hindustan Unilever realised that if they were to maintain their growth trajectory then they would need to f nd a way of selling their products to the r ural poor. One in eight people on the planet li ves in an Indian village. There are some 650,000 of them. All very isolated. Very few of them ser ved by a retail ork. The solution that w e came up with to reach these consumers w as to tap into e xisting networks of w omen’s self-help g roups w hich had g rown up on the back of micro-credit schemes. F rom these g roups w e recr uited and trained our Shakti entrepreneurs w ho became our local sales representatives. Their role was to go door to door selling our products. Of course it w as not our standard range. We had to re-engineer products in such a way that they were affordable to people on desperatel y low incomes. More often than not this implied small pack formats—mainly sachets—which could be sold at prices as lo o rupees. Shakti is at the intersection betw een social gy. The social benef ts of the scheme are ob vious. It creates economic activity at the very of the pyramid. It gives poor people access to products that address their basic needs for h ves dignity and a sense of empo werment to a lar ge omen. At the same time the business benef ts are huge. Today we have 30,000 Shakti entrepreneurs operating in 100,000 villages ser ving nearl y 100 million consumers. The re venues generated are now close to $100 million per and the margins are v ery similar to those w e achieve through our mainstream distribution channels. Mak e no mistak vity. It is a serious and prof table business proposition.

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Routes to market like Shakti enable Unilever to serve the needs of f rst time consumers. In tur n this giv nutrition and hygiene needs of some of the poorest people on the planet. Products that meet the social needs in the D&E world. Two examples to illustrate this—one from India and one from Africa. The Indian e xample is Lifebuoy soap. Ev ery ten seconds a child dies from diarrhoea some where in the w orld. One third of these deaths are in India. Most are children under f ve. Yet according to the World Bank, something as mundane and simple as washing hands with soap can reduce diarrhoeal diseases by half. Lifebuo decades. In the late 1990’s it launched the largest r ver undertak ya Chetna— which means “Health Awakening” in Piggy backing on the infrastr ucture created b y Shakti, Lifebuoy health education teams visit thousands of schools and communities to teach children about the e washing hands with soap. Marketing activity of this kind is a classic “winwin”. The education pro g le impact on pub lic health. The benef ts for Lifebuo y

iodine consumption. Unile ver Ghana w as ab le to open up a new market.

allo ro y 10% in 2006. The second e from the foods side of our business, is the fortif ca-

SocialI nnovation

absence of certain nutrients in the diet. Iodine def ciency is a case in point. It affects millions of people and can cause mental retardation and brain damage. In Ghana, for e xample, simply adding iodine to our Annapurna salt brand helped to nearl y double iodine consumption to o ver half the population. Here our impact w as amplif ed by partnering with to create and implement a prog of social marketing. Again this was a win-win. y of Health achieved their public health goals of increasing

role which business can play in economic development and pover viation. Unilever’s experience is that business can: • through activities such as the customs project in West Africa and training subsistence f armers in Kenya; • develop ne w business models such as Shakti which allow the creation of prof table economic activity at the v yramid; • use its R&D and marketing skills to tackle public health prob lems in areas lik e nutrition (for tif ed salt in Ghana) and h ygiene (hand w ash education in India). What does business get in retur n? If it is smar t it gets: • access to new markets; • ne vation and gro • new partners; • and ov f dence of the without which sustainable growth is impossible.

By social inno vation I mean f nding ne w products and ser vices that meet not onl y the functional needs of consumers for tasty food or clean clothes but also their wider aspirations as citizens. To some de gree both Lifebuo y soap in India and na salt in Ghana are e xamples of social innovation. But in the developed markets of Europe and the United States the oppor tunities are just as broad. Here we are observing new ns of consumption. They are being dri ven b y the emer gence of w wn as the “conscience consumer”. These are consumers w ho are w orried about social and en vironmental issues and realise

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they can inf y choose to either buy or boycott. For Unilever this trend f ts neatl Vitality mission, w hich is about feeling good , looking good and getting more out of life. Our mark et ant the benef ts of “vitality” products—but not at any price. A growing number, when making their purchasing decision, want to be reassured that the brands the y buy will benef t society and the planet, not har m yw make them feel good and look good but that also do good. This mov fact we believe this trend has all the hallmarks of ushering in a new age of marketing and branding. 40 y ears ago brands w ere all about functional benef ts—whether, for e xample, P ersil w ashed whiter than Ariel. Then adv ertising agencies, inf uenced b y the social sciences lik e psycholo gy and anthropolo gy star ted building in emotional ash with Lux, the soap the stars prefer , and some of Hollywood’s glamour will off on you. No w there’s a ne w dimension—brands with social benef ts that appeal to consumers as citizens. I should explain, for those of y ou who may not be aware, that Dov is to change people’ ws of female beauty. Research shows that 90% of women are not happ y the ay women are por trayed in advertising, fashion and the media. Through the Dove Self-Esteem Fund , Dove is helping w omen, and young women in par ticular, to see through the artif ce that permeates the world of fashion and, in doing so, build their self-esteem and become more conf dent about the way they look. Incidentally it was neither pressure the NGO w orld nor le gislation that dro ve the Do ve team towards the Campaign for Real Beauty. It was consumer insight. Intelligent interpretation of market research highlighted that this issue resonated strongly with women of all ages around the w orld. The team realised that b y championing the cause they w ould not onl y be doing something w orthw

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of their consumers to the brand. Today we are reaping the benef ts of this in rapid rates of g rowth for Dove all around the world. Another Unilever brand with strong campaigning credentials is Ben & Jer ry’s. We acquired the business in 2000 but the values of their eponymous founders, Ben Cohen and Jer ry Greenf remain the v alues of the compan y toda y. One of Ben & Jerry’s k ey concer ns is the en vironment and , in particular, the devastating effect global warming is having on the earth’s polar ice-caps. As Ben Cohen and Jerry Greenf eld like to say: “Listen to two old ice cream guys—if it’ s melted, it’s r uined”. Their Lick Global Warming campaign and the Climate Change College, which they set up in par tnership with WWF, are outstanding e xamples of ho w you can mak e a comple x subject accessib le to people and relevant to their ev y lives. Last week Ben & Jer ry’s announced their intention to become a “climate neutral brand”—the f rst big European food brand to do so. The examples of Ben & Jerry’s with climate change and Do ve with its Campaign for Real Beauty are good illustrations of brands picking up issues of concern to millions of people and starting to take action to raise a wareness and change behaviour. Both brands have the credibility to mak el. Both brands, by championing these causes, will cement the lo yalty of their consumers. Both are classic e xamples of brands that are “doing well by doing good”.

Sustainability For Unilever, sustainability covers not just environmental but also social and economic considerations. This is an area w e have been addressing with systematic rigour since the earl y 1990’s with programmes to impro ve the sustainability of our operations and our supply chain. With ov riculture we have had an active programme of sustainable ag Teams of agronomists have been beav way to learn how to g row crops lik e tomatoes, tea, palm,

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with minimal use of pesticide and fertiliser. But until recentl y this v aluable w ork ne ver aroused the interest of our brand teams. No w they are be ginning to understand that this is an area where there is a con ver een our longstanding expertise in sustainability and consumers’ concerns as citizens. Let me gi ve you an e xample. Many consumers are increasingl y w orried about the w elfare of the people in developing countries who grow and harv y enjoy. This is behind the phenomenal growth of the fair trade movement. Until no w this has lar gely been the preser ve of niche operators. A couple of large companies like . Both ha v airtrade v ersions of their coffees. But these represent just a small fraction of the total volumes they buy. Coffee companies are not the onl y ones tr ying to capitalise on consumer concer ns in this area. Countless brands are jumping on the eco-ethical bandwagon. This is an agenda w here y ou are judged by your actions, not by your press releases. een es as being ethical in one aspect of their business but w ho tolerate bad practice in another will come unstuck. At Unilever we believe this agenda of fers huge potential for inno vation and brand de velopment. But we believe it will only work for us if it is fully integrated into our w ay of doing business. To help us do this, w e ha ve de veloped a diagnostic tool called Brand Imprint. It helps our brands tak e a 360⬚ look at their impacts on society and the en vironment and gain deep insights into the e xternal forces shaping this agenda. A number of our global brands ha ve star ted to use this tool and the f uits of their w ork are star ting to come through. In f act I can toda y ver has decided to commit to le sources and has asked the Rainforest Alliance, the international NGO, to star t auditing the estates from w hich we

buy our tea, including our o wn in Kenya. Unilever is the world’s largest tea company and Lipton is the world’s fav tea brand. We aim to have all Lipton Yellow Label and PG Tips tea bags sold in Western Europe certif ed as sustainable by 2010 and all Lipton tea bags sold globally certif ed by 2015. It is the f rst time a major tea company has committed to introducing sustainab ly produced tea on such a large scale and the f rst time the Rainforest wn for cof fee cer tif cation, will audit tea f arms. I ha ve no doubt this decision will transfor m the global tea industr y, w hich has been suffering for man y years from o ver capacity and f alling prices. The decision has the potential to improve the crops, incomes and li velihoods of nearl wers and pluckers in Africa. Eventually could benef t—nearly all of them in developing countries, and many of them living on or below the poverty line. Again this is a win-win. Our consumers will have the reassurance that the tea the y enjoy is both sustainably g rown and traded f airly. Subsistence f Tea pluckers will be The environment will be better protected. And we expect to sell more tea. ard for business and brands. At one level it is very simple. It’s about: • brands continuing to pro vide consumers the ts they seek; • while at the same time maximising the social benef ts and minimising the en In reality, f nding the sweet spot between meet, the needs of the planet, and the needs of consumers as citizens is complex. But it will be a real differentiator for those who do it well and do it with integ . So, to summarise, there ha ve been six k ey themes to my presentation. • Business can pla y an ef fective role in de velopment and poverty reduction, as demonstrated by our subsidiaries in South Africa, Indonesia and Kenya.

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• New business models such as Shakti can reach the poorest of the poor and at the same time produce rapid rates of g rowth at good le vels of prof tability. • Brands can be agents of positi ve social change. Look at na, Lifebuoy and Do ve. Each in its separate w ay is tackling a social issue— malnutrition, diar rheal disease and w omen’s self-esteem. • . It is a mov change the f ace of business and brands. Companies that g rasp the oppor presents in a genuine and sustainab le way will y. • Business has to become genuinel y sustainable. This is a win-win oppor . Our decision to buy tea from sustainab le sources is good ne ws for f armers, good ne ws for consumers, good news for the en vironment and mak es good • Finally and most importantly there is no dichotomy betw een business doing good and doing well. In fact the two go hand in hand. All of the brands I have talked about are g rowing rapidly. All are prof tab eren’t their social and environmental initiatives would not be sustainable. Both par to benef t.

Conclusion I started this presentation by saying that social le development are no longer fringe acti vities but are central to our business. business, so it should also become core to management education. It must be mo ved to the hear t of the cur riculum. Business schools generall y need to give much more prominence to this subject than they have historically. Some are be But many are being slow to integrate this agenda.

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Doing business in the 21st centur y is a much more subtle and complex process than some MBA courses would lead one to believe. Of course there is a place for the f nancial modelling, the DCF calculations and yield curves. But in the end the big decisions in business are about culture and consumers. It is clear that man y business schools are w aking up to this. A sur vey conducted in 2005 found that 54% of schools required one or porate social responsibility , sustainability, or business and society , up from 34% four y ears earlier. This is pro gress, but not yet enough. The same sur vey, conducted for the Aspen Institute, found that w hile students in the top 30 schools co vered social and en vironmental issues in roughly 25% of their coursework, the f gure for students in the remaining schools w as a disappointing 8%. F er perspective, w ing increased attention to this in our recr uitment policy—and we will continue to do so. Those who come to us with a deep understanding of the area will be at a signif cant advantage. So let me f nish b y of fering members of this forum the follo wing advice: F or those of y ou now our MB A, I w ould sa y this: get to w this agenda. Understand how it can be a v wth. Build it into your professional skill set. The business w orld will v ery soon be di vided into those that reco potential early on and those w ho w oke up to it too late. Make sure y ou are an earl y adopter. For those of you with MBAs who, like me, didn’t cover this subject as par t of y our course, I am sure that y ou are already grappling with these issues in y our various industry sectors. I hope this talk will ha ve stimulated y As was once f amously said: “a company that makes only money is a poor company”. Source: This reading is taken from a speech delivered at the 2007 INDEVOR Alumni Forum in INSEAD, Fontainebleau, France, May 25, 2007.

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10 EthicalD ecision Making: Corporate Governance, Accounting, and Finance Did you ever expect a corporation to have a conscience, when it has no soul to be damned and no body to be kicked? w (1731–1806), Lord Chancellor of England v y as boards of directors have in nearly every major f asco of the last forty or f fty years, it is futile to blame

Earnings can be as pliable as putty when a charlatan heads the compan them. en

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Is Steve Jobs’ Health Status a Private Matter?

ChapterO bjectives After reading this chapter, you will be able to: 1.

Explain the role of accountants and other professionals as “gatekeepers.”

2.

Describe how conflicts of interest can arise for business professionals.

3.

Outline the requirements of the Sarbanes-Oxley Act.

4.

Describe the COSO framework.

5.

Define the “control environment” and the means by which ethics and culture can impact that environment. 529

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6.

Discuss the legal obligations of a member of a board of directors.

7.

Explain the ethical obligations of a member of a board of directors.

8.

Highlight conflicts of interest in financial markets and discuss the ways in which they may be alleviated.

9.

Describe conflicts of interest in governance created by excessive executive compensation.

10.

Define insider trading and evaluate its potential for unethical behavior.

The f rst edition of this te xtbook was written in 2006, soon after a w ave of major corporate scandals had shaken the f nancial world. Recall those companies involved in the ethical scandals during the earl y y WorldCom, Tyco, Adelphia, Cendant, Rite Sunbeam, Waste Management, Health-South, Global Crossing, Arthur Andersen, Er nst & Young, ImClone, .P. Morgan, Merrill Lynch, Morgan Stanley, Citigroup, Salomon Smith Barney, Marsh & McLennan, Credit Suisse F irst Boston, and even the New York Stock Exchange itself. of cor porate governance and responsibility . Signif cant cases of f nancial mismanagement, criminality , and deceit w ere not onl y tolerated , but in some cases w vernance who should hav gal behavior. Sadly, the very same issues are as much alive today as they were several years ago. Consider the rash of prob lems associated with the f nancial meltdo wn in 2007–2008 and the problems faced by such companies as AIG, Lehman Brothers, Mer rill L ynch, Bear Stear ns, and of the f nancier Madoff. Once again, w e ha v nancial and ethical malfeasance of historic propor tions and the inability of inter nal and e xternal gov uctures to prevent it. (An insightful perspective on lessons lear y Lehman Brothers collapse, is of fered b y Caux Round Table Global Ex ecutive Director Stephen Young in an essa y, “Thoughts on Refor m: On the F irst Anniversary of the Collapse of Lehman Brothers” included at the end of this chapter.) At the hear t of the biggest ethical and business f ailures of the past decade were aspects of f nancial and accountings misconduct, ranging from manipulating special pur pose entities to defraud lenders, to cooking the books, to instituting questionab le tax dodges, to allo wing in vestment decisions to w arp the objecti vestment research and advice, to Ponzi schemes, to insider trading, to excessive pay for executives, to dicey inv y credit def ault s waps. Ethics in the go vernance and f nancial arenas has been perhaps the most visible issue in business ethics during the f rst years of the new millennium. Accounting and investment f rms that were once looked upon as the guardians of inte grity in f nancial dealings ha ve now been exposed corrupt violators of the f duciar by their stakeholders. Many analysts contend that this cor vidence of a complete f ailure in corporate governance uctures. As we ref ect on the ethical cor ruption

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and f nancial f asked. What happened to the inter nal gov e prev

rms , why did the boards, audill their professional, legal, and ethical duties? Could better governance and oversight have prevented these ethical disg e rely on inter nal governance controls to provide effective oversight, or are more effective external controls and gov gulation needed?

ProfessionalD utiesandC onflicts of Interest The watershed event that brought the ethics of f enty-f rst centur y was the collapse of Enron Corporation and its accounting f rm Arthur Andersen. William Thomas’ essay “The Rise and F all of Enron” details the steps that led to the do wnfall of those companies, including using comple x special pur pose entities to access capital or hedge risk. The Enron case “has wreak ed more havoc on the accounting industr y than any other case in U.S. history,”1 including the demise of Arthur Andersen. Of course, ethical responsibilities of accountants were not unheard of prior to but the events

1 OBJECTIVE

auditors and the responsibilities of accountants like never before. Accounting is one of se veral professions that ser ve v en a staunch defender of free market economics such as Milton F riedman believes that mark ets can function effectively and eff ciently only when certain rule-based conditions are met. It is universally recognized that mark w and the y must gue that onl y government regulation can ensure that these r ules will be follo wed. Others ar gue that enforcement of these r ules is the responsibility of impor tant inter nal controls that e xist within market-based economic systems. Se veral impor tant business professions, for example, attorneys, auditors, accountants, and f nancial analysts, function in just this way. Just as the game of baseball requires umpires to act with inte grity and fairness, business and economic markets require these professionals to operate in a similar manner by enforcing the r airness of the system. These professions can be thought of as “gatekeepers” or “watchdogs” in that their role is to ensure that those who enter into the marketplace are playing by the rules and conforming to the very conditions that ensure the mark determining ethical duties of professionals. These roles provide a source for rules from which we can deter mine how professionals ought to act. In entering into a profession, we accept responsibilities based on our roles. These professions can also be understood as inter mediaries, acting betw een the various parties in the market, and they are bound to ethical duties in this role

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2 OBJECTIVE

as well. All the participants in the market, especially investors, boards, management, and bankers, rely on these gatekeepers. Auditors verify a company’s f nancial statements so that in vestors’ decisions are free from fraud and deception. Analysts evaluate a company’s f nancial prospects or creditworthiness, so that banks and in vestors can mak e infor med decisions. ys ensure that decisions and transactions confor m to the la w. Indeed, even boards of directors can be understood in this w ay. Boards function as inter mediaries between a company’ xecutives and should guarantee that e xecutives act on interests. The Opening Decision Point to this chapter raises this question: Was the Apple Board acting in the best interests of its stockholders when it withheld, or opted not to release, infor mation about Steve Jobs’ health? The most basic ethical issue f acing professional gatekeepers and intermediaries in business conte xts involves conf icts of interest. A conflict of interest exists where a person holds a position of tr ust that requires that she or he e xercise judgment on behalf of others, but w here her or his personal interests and/or obligations conf ict with those of others. For instance, a knows that you are heading to a f ea market and asks if y ou would keep your eyes open for an y beautiful quilts y ou might see. She asks y ou to purchase one for her if y ou see a “g reat buy.” You are going to the f ea market for the pur pose of buying y our mother a birthday present. Y abulous price, the only one at the mark et. In f act, your mother would adore the quilt. You f nd yourself in a conf ict of interest—y ou to search the f ea market on her behalf. Y ou agreed to accept on behalf of your friend. hen a person’s ethical ob ligations in her or his professional duties clash with personal interests. Thus, for example, in the most egregious case, a f nancial planner w erage f tain investments fails in her or his professional y putting personal f nancial interests ahead of client interest. Such professionals are said to ha ve fiduciary duties—a professional and ethical obligation—to their clients, duties that over wn personal interests. (See the Decision Point, “How to Solve the ‘Agency Problem.’”) Unfortunately, and a wkwardly, man y of these professional inter mediaries are paid b y the businesses o ver which they keep watch, and perhaps are also employed by yet another business. F or example, David Duncan w as the principal accounting professional emplo yed b y Arthur Andersen and assigned to work at Enron. As the Arthur Andersen case so clearly demonstrated, this situation can create real conf icts between a professional’s responsibility and his or her f nancial interests. Certif ed public accountants (CPAs) have a professional responsibility to the public. But they work for clients whose f nancial interests are not always served by full, accurate, and independent disclosure of f nancial information. Even more dangerousl y, they work daily with and are hired b y a management team that itself might ha ve interests that conf ict with the inter ests of the f rm represented b y the board of directors. Thus, real and comple x

Decision Point How to Solve the “Agency Problem”

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FIGURE 10.1 Conf icts of Interest in Public CPA Activity

conf icts can exist betw interest. We will revisit conf icts in the accounting profession later in the chapter. (See Figure 10.1 for an overview of potential conf icts of interest for CPAs). In one sense, the ethical issues regarding such professional responsibilities are clear. Because professional gatekeeper and effective functioning of economic mark ets, they should tr ump other responsibilities to one’ s employer. Da vid Duncan’s professional responsibilities as an auditor should have overridden his role as an Andersen employee in large part because he was hired as an auditor wing one’s duties and fulf lling those duties are tw o separate issues. Consider the conf ict of interest in volved in the Decision Point, “When Does Financial Support Become a Kickback?”

Decision Point

When Does Financial Support Become a Kickback?

Agenc gnize that the gatek y and if w e also reco gnize that self-interest can mak e it diff cult for indi viduals to fulf ll their gatekeeper duties, then society has a responsibility to create institutions icts. For example, as long as auditors are paid by the clients on whom they are supposed to report, there will always be an apparent conf ict of interest between their duties as auditors and their personal f nancial interests. This conf ict is a good reason to mak how public accounting operates. P erhaps boards rather than management ought to hire and work with auditors since the auditors are more lik ely reporting on the 535

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management acti vities rather than those of the board. P erhaps pub lic accounting somehow ought to be paid b y public fees. P erhaps legal protection or sanctions ought to be created to shield professionals from conf icts of interests. These changes would remov icts of interest created by the multiple roles—and therefore multiple responsibilities—of these professionals. From the perspective of social ethics, certain structural changes would be an appropriate response to the accounting scandals of recent years. Possibly the most dev y meltdo f rst decade of this centur y was the resulting deterioration of tr ust that the public has in the market and in corporate America. Decision makers in large investment nancial institutions ignored their f duciary duties to shareholders, employees, and the public in favor of personal gain, a direct conf ict of interest leading not only to e of the largest inv orld. The f vide regulatory checks on such beha vior failed to prevent it from happening. Critics contend that gover y rules alone will not rid society of the problems that led to this tragedy. Instead, they argue, extraordinary executive compensation and conf icts within the accounting and f ve created an en here the watchdogs have little ability to pre vent harm. Executive compensation packages based on stock options create huge incenti ves to artif cially inf ate stock value. (Review the reading on executive compensation in chapter 3 to consider this issue in more detail.) Changes within the accounting industr rms and avid “cross-selling” of ser vices such as consulting and auditing within single f rms ha ve vir tually icts of interest. Answ . Imagine that an executiv ousted if that impact is not signif cantly positive. A large boost in share price— even for the shor t term—serves as an ef fective defense to hostile tak eovers and boosts a f rm’ verage for e xternal e xpansion. In addition, with stock options as a major component of e xecutive compensation str uctures, a higher share price is an e xtremely compelling quest to those in leadership roles. That same executive, however, has a f duciary duty to do w hat is best for the stak eholders in the long ter m, an obligation that is often at odds with that e xecutive’s personal interests. Not the best environment for perfect decision making, or even for basically decent decision making. Consider the options a vailable in the Decision Point, “But Is Regulation the Answer?”

TheSar banes-OxleyA ctof 2002 The string of corporate scandals since the be en its toll on investor conf dence. , evasiveness, and cutting corners go on in the mark ets and in the cor porate environment,

Decision Point

3 OBJECTIVE

But Is Regulation the Answer?

orthy those engaged in f on corporate boards to police themselv es did not seem to be w orking, Congress passed the Public Accounting Reform and Investor Protection Act of 2002, commonl wn as the Sarbanes-Oxley Act, which is enforced b y the Securities and Exchange Commission (SEC). The act applies to o ver 15,000 pub licly held companies in the United States and some foreign issuers. In addition, a number of states have enacted legislation similar to Sarbanes-Oxley that apply to private f rms, and some private for-prof ts and non-prof ts have be es to Sarbanes-Oxley standards e ven though the y are not necessaril y subject to its requirements. Sarbanes-Oxley stri ved to respond to the scandals b y re gulating safe guards ery lapse of judgment, no re gulatory “f x” is perfect. However, the act is intended to provide protection w here oversight did not pre viously exist. Some might ar gue that protection against poor judgment is not possible in the business en but Sarbanes-Oxley seeks instead to pro vide oversight in terms of direct lines of . The following provisions have the most signif cant impact on corporate gov • Section 201: 537

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Reality Check

Global Consistencies: The European Union 8th Directive

The European Union 8th Directive, effective in 2005 (though member states have two years to integrate it into law), covers many of the same issues as but applies these requirements and restrictions to companies traded on European Union exchanges. The directive mandates external quality assurances through audit committee requirements and greater auditing transparency.

The directive also provides for cooperation with the regulators in other countries, closing a gap that previously existed. However, contrary to SarbanesOxley, the directive does not contain a whistleblower protection section, does not require similar reporting to shareholders, and has less detailed requirements compared to Sarbanes-Oxley’s section 404.

• Section 301: Public compan dating majority of independents on any board (and all on audit committee) and total absence of current or prior business relationships. • Section 307: neys (requires lawyers to report concerns of wrongdoing if not addressed). • Section 404: Management assessment of internal controls (requires that management f ear in order to delineate how management has estab lished and maintained ef fective internal controls over f nancial reporting). • Section 406: Codes of ethics for senior f nancial off cers (required). • Section 407: nancial exper y have an expert). Sarbanes-Oxley includes requirements for certif cation of the documents by off cers. When a f rm’s executives and auditors are required to literall y sign off eracity, f y are more likely to personally ensure their truth. One of the most signif f nancial costs on the f rms; and the costs are apparentl y even higher than anticipated. A 2005 survey of f rms with average revenues of $4 billion conducted by Financial Executives International reports that section 404 compliance a veraged $4.36 million, which is 39 percent more than those f rms thought it would cost in 2004. However, the sur vey also repor ted that more than half the f rms believed that section 404 gi ves investors and other stak eholders more conf dence in their f nancial repor ts—a valuable asset, one w ould imagine. The challenge is in the balance of costs and benef ts. “Essentially section 404 is w implementation effort is overkill,” says one CEO.3 In response, one year after its implementation, in Ma y 2005, the Pub lic Compan y Accounting Ov ersight Board (PCAOB) released a statement publicl wledging the high costs and issuing guidance for implementation “in a manner that captures the benef ts of the process without unnecessar y and unsustainab le costs.”4 The PCAOB now

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advocates a more risk-based approach w here the focus of inter nal audit assessmaterial impact. F or a comparison of the application of Sarbanes-Oxle y in the European Union, see the The European Union 8th Directive.”

The Internal Control Environment 4 OBJECTIVE

Sarbanes-Oxley and the European Union 8th Directi ve are external mechanisms that seek to ensure ethical cor porate go vernance, but there are inter nal mechanisms as w ell. One w ay to ensure appropriate controls within the or ganizawork adv ocated b y the Committee of Sponsoring Organizations (COSO). COSO is a v oluntary collaboration designed to improve f nancial repor ting through a combination of controls and go vernance standards called the Inter nal Control—Integrated Framework. It was established in 1985 b y f ve of the major professional accounting and f nance associations, originall nancial repor ting and later to de velop standards for publicly held companies. COSO describes “control” as encompassing “those elements of an organization that, taken together, people in the achievement of the or ganization’s objectives.”5 The elements that comprise the control str amiliar as the cussed in chapter 4. They include: • Control environment vironment sets the tone of an or ganization, inf uencing the control consciousness of its people.” • Risk assessment —risks that ma y hinder the achie vement of cor porate objectives. • Contr • Information and comm unications—directed at suppor ting the control en vironment through fair and tr • Ongoing monitoring —to pro vide assessment capabilities and to unco ver

5 OBJECTIVE

Control environment refers to cultural issues such as inte grity, ethical values, competence, philosophy, operating style. Man y of these ter ms should be reminiscent of issues addressed in chapter 4 during our discussion of cor porate culture. COSO is one of the f rst efforts to address cor porate culture in a quasiregulatory framework in reco gnition of its signif cant impact on the satisf action of organizational objectives. Control en elements (that can better be addressed in an audit) such as the division of authority, reporting structures, roles and responsibilities, the presence of a code of conduct, and a reporting str ved audit, compliance, and governance from a numbers orientation to concer n for the organizational onment

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TABLE 10.1 COSO Def nition of Internal Control Internal control

ganizations, “Key Concepts, Organizations of the Treadway Commission. Reproduced by per

.coso.or ey.htm. Copyright © 1985–2005 b AICP

tor for COSO.

(see Table 10.1 ). The discussion of cor porate culture in chapter 4 reminds us that both inter nal f actors as the COSO controls and e actors such as the Sarbanes-Oxley requirements must be supported b . In f y executiv ance professionals also are becoming more accountab le for f nancial stewardship, resulting in greater transparency, g , and a greater emphasis on t to pre vent misconduct. In f act, all the controls one could implement ha ve little value if there is no unif ed cor t it or mission to guide it. As philosopher Ron Duska noted in the Mitchell F orum on Ethical Leadership in Financial Services, “If you don’t have focus and you don’t w what you’re about, as Aristotle says, you have no limits. You do what you have to do to make a prof t.”6 Management— Integrated Framework, to serve as a framework for management to evaluate and improve their f rms’ prevention, detection, and management of risk. This system expands on the prior frame work in that it intentionall y includes “objecti ve setting” as one of its inter related components, reco and the propensity toward risk are deter mined by the f rm’s overarching mission and objecti ves. Enter prise risk management, therefore, assists an organization or its go verning body in resolving ethical dilemmas based on the f rm’s misTurnbull’s essay, “Why ‘Best’ Corporate Governance Practices Are Unethical and Less Competitive” included at the end of this chapter, offers an innovative analysis of external versus internal mechanisms for ensuring proper board functioning in re gulating ethical behavior.)

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Going beyond the Law: Being an Ethical Board Member y ould seem to suggest a failure on the part of corporate boards, as well as a failure of gov to impose high expectations of accountability on boards of directors. After all, it is the board’s f duciar best interests of the f rm itself. However, in many cases, boards and e xecutives operated well within the law. For instance, it is legal for boards to vote to permit an exception to a f rm’s conf icts of interest policy The Apple Board did not have a legal duty to disclose the specif cs of Steve Jobs’ health. These actions may not necessarily be ethical or in the best interests of stakeholders; but they were legal nonetheless. The la , but is the law enough?

Legal Duties of Board Members 6 OBJECTIVE

The law imposes three clear duties on board members, the duties of care, good faith, and loyalty. The duty of care involves the exercise of reasonable care by a board member to ensure that the corporate executives with whom she or he works carry out their management responsibilities and compl y with the la w in the best interests of the corporation. Directors are permitted to rely on information and opinions only if they are prepared or presented by corporate off cers, employees, ves to be reliable and competent in the matters presented. Board members are also directed to use their ers”: the director is expected to be disinterested and reasonab ly infor y believe the decisions made are in the f rm’s best interest. The bottom line is that a director does not need to be an exper y! Theduty of good faith is one of obedience, which requires board members to be f ganization’s mission. In other w ords, they are not per mitted to act in a w ay that is inconsistent with the central goals of the or ganization. a ve tow ves, and av y other direction. The duty of loyalty requires f aithfulness; a board member must gi ve undivided allegiance when making decisions af fecting the or ganization. This means that conf icts of interest are al ways to be resolv ed in f avor of the cor poration. A board member may never use infor a board member for personal gain, but instead must act in the best interests of the organization. Board member conf icts of interest present issues of signif cant challenges, however, precisely because of the alignment of their personal interests with those of the corporation. Don’t board members usually have some f nancial interest in the future of the f rm, even if it is onl y through their position and reputation as a board member? Consider w hether a board member should o wn stock. If the

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board member does o wn stock, then her or his interests ma y be closely aligned le conf ever, if the board member does not hold stock, perhaps he or she is best positioned to consider the long-term interests of the f rm in lieu of a sometimes enor mous windf all that could occur as the result of a board decision. In the a healthy board balance is usuall y sought. Consider the impact that the composition and training of a board might have on such board decisions as Apple’s failure to disclose information about Steve Jobs’ health. The Federal Sentencing Guidelines (FSG), promulgated by the United States Sentencing Commission and (since a 2005 Supreme Court decision) discretionary in do offer boards some specif cs regarding ways to mitigate ev f nes and sentences in carrying out these duties by paying attention to ethics and compliance. In par ticular, the board must w ork with e xecutives to anal yze the incentives for ethical behavior. It must also be truly wledgeable about the content and operation of the ethics program. “Knowledgeable” would involve y which the pro gram evolv tives, its process and ne xt steps, rather than simpl y the mere contents of a training session. The FSG also suggest that the board exercise “reasonable oversight” with respect to the implementation and ef fectiveness of the ethics/compliance program by ensuring that the pro gram has adequate resources, appropriate le vel of authority, and direct access to the board. In order to ensure satisf action of the FSG and the objecti ves of the ethics and compliance pro gram, the FSG discuss periodic assessment of risk of criminal conduct and of the pro gram’s effectiveness. In order to assess their success, boards should e valuate their training and development materials, their go v ucture and position descriptions, their individual evaluation processes, their methods for bringing individuals onto the board or remo ving them, and all board policies, procedures, and processes, including a code of conduct and conf icts policies.

Beyond the Law, There Is Ethics 7 OBJECTIVE

The law answers only a fe w questions with re gard to boards of directors. Cer tainly Sarbanes-Oxle er several more, but a number of issues remain open to board discretionar y decision making. One question w e would expect the law to ans wer, but that instead remains some what unclear, is w hom the board represents. Who are its primar y stak eholders? By la w, the board of course has a f duciary duty to the owners of the corporation—the However, man y scholars, jurists, and commentators are not comfor table with this limited approach to board responsibility and instead contend that the board is the guardian of the f rm’s social responsibility as w ell. (For one perspecti ve on a board’ s additional, ethical responsibilities, see the Reality Check, “The Basics.” ) Some executives may ask whether the board e ven has the le gal right to question the ethics of its executives and others. If a board is aware of a practice that it deems to be unethical but that is completely within the realm of the law, on what

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Ethical Decision Making: Corporate Governance, Accounting, and Finance

The Basics

Bill George, former chairman and CEO of Medtronic and a recognized expert on governance, contends that there are 10 basic tenets that boards should follow to ensure appropriate and ethical governance: 1.

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There should be publicly available principles of governance for the board created by the independent directors.

2. Independence: Boards should ensure their independence by requiring that the majority of their members be independent. 3. Selection: Board members should be selected based not only on their experience or the role they hold in other fi structures. 4. Selection, number 2: The board’s governance and nominating committees should be staffed by independent directors to ensure the continuity of independence. 5. Executive sessions: The independent directors should meet regularly in executive sessions to preserve the authenticity and credibility of their communications.

6. Committees: The board must have separate audit and fi by board members with extensive expertise in these arenas. 7. Leadership: If the CEO and the chair of the board are one and the same, it is critical that the board select an alternative lead director as a check and balance. 8.

The board should seek external guidance on executive compensation.

9. Board culture: The board should not only have the opportunity but be encouraged to develop a culture including relationships where challenges are welcomed and difference can be embraced. 10. Responsibility: Boards should recognize their responsibility to provide oversight and to control management through appropriate governance processes.7

basis can the board require the e xecutive to cease the practice? The board can prohibit actions to protect the long-ter rm. Notwithstandvely impact stakeholders such as consumers or employees, w n, negatively impact the f rm, which could eventually lead to a f s demise. (And good go vernance can have the opposite effect—see the vernance Mean Good Business?” s f duciar r y prohibiting unethical acts, it is doing just that. As author Malcolm Salter w ar tant lessons form Enron was that “corporate executives can be convicted in a court of law for n of deception that ma y or ma y not be ille gal.” The critical distinction Salter identif es in the Enron jury decision is that “at the end of the da y, we are a principles-based society rather than a r , even though r ules and ”8 in ter ms of cor porate decision making from a teleolo gical, utilitarian perspective, if cor porate e xecutives breach common principles of decenc y and respect for human dignity xact a punishment, nonetheless. Accordingly, a

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Reality Check

Does Good Governance Mean Good Business?

Researchers Roberto Newell and Gregory Wilson examined 188 companies from India, Korea, Malaysia, Mexico, T whether good corporate governance practices resulted in a higher market valuation. They found that companies with better corporate governance

had 10 percent to 12 percent higher price-to-book ratios than those with poor practices, indicating that investors do actually reward efforts in these arenas. Source: Roberto Newell and Gregory Wilson, “A Premium for Good Governance,” , no. 3

board has an ob ligation to hold its e xecutives to this higher standard of ethics rather than simply following the legal rules. Fortune journalists Ram Charan and Julie Schlosser9 suggest that board members have additional responsibilities beyond the law to explore and to investigate the organizations that they represent, and they suggest that an open conversation w, but also what the w. They suggest that board members often ignore e ven the most basic questions such as how the f rm actually makes its money and whether customers and clients truly do pay for products and services. That is rather basic, but the tr uth is that the f nancial f ow can e xplain a lot about w hat moves the f rm. Board members should also be critical in their inquiries about cor porate hat could drag the f rm down and w hat could competitors do to help it along that path? Y w where to make the incision (or e ven just apply a Band-Aid) unless y w where the patient is hur ting. Ensuring that information about vulnerabilities is constantly and consistently transmitted to the executiv ve prevention. Board members need to understand where the company is heading and whether it is realistic that it will get there. This is less likely if it is not living within its means or if it is paying out too much of its sustainable gro ecutives in compensation. Failing in an y of these areas creates pressures on the f rm and on the board to take up the slack, to manage prob lems that do not ha ve to e xist, to be forced to mak e decisions that might not ha ve had to be made if onl y the infor mation systems were working as the y should. It is the board members’ ultimate duty to provide oversight, which is impossible without knowing the answers to the above questions.

Conflicts of Interest in Accounting and the Financial Markets 8 OBJECTIVE

Conf icts of interest, w y situations among both directors and off ecutive suite nancial arena. In f gral issue for all involved in the f . After all, what more can an auditor, an accountant, or an analyst offer than her or his inte grity and tr ustworthiness? There is no real, tangible

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product to sell, nor is there the ability to “try before you buy.” clients fairly and building a reputation for f air dealing may be a f nance professional’s greatest assets. Conf icts—real or perceived—can erode tr exist as a result of v arying interests of stak eholders. As discussed earlier in this chapter, public accountants are accountable to their stak ers and investment communities who rely on their reports—and therefore should always serv rms whom they audit. In that re ould love to be ab tant says because people belie v ere merel tion, they would no longer be believed or considered “independent.” If you w ou might f nd the following def hich any business k f nancial activities by recording its debits and credits and balancing its accounts.” Accounting offers us a system of rules and principles that govern the format and content of f nancial statements. Accounting, b y its v ery nature, is a system of principles applied to present the f nancial position of a business and the results of its operations and cash f ows. It is hoped that adherence to these principles will result in f air and accurate repor ting of this infor mation. Now, would y ou consider an accountant to be a watchdog or a bloodhound? Does an accountant stand guard or instead seek out problematic reporting? The answer to this question may depend on w hether the accountant is emplo yed internally by a f rm or w orks as outside counsel. Linking public accounting acti vities to those conducted b y inv and securities anal ysts creates tremendous conf een one component’ s duty to audit and cer tify infor mation with the other’ vide vestment. Perhaps the leading e xample of the unethical effects of conf icts of interest is manifested in the shocking fact that 10 of the top in vestment f rms in the countr y had to pa y f nes in 2005 for actions that involved conf icts of interest between research and inv ing. Companies that engaged in inv lysts to give high ratings to companies w hose stocks they were issuing, whether those ratings w ere deser ved or not. William H. Donaldson, the chair man of the SEC, spelled out the prob een ASD y $1.5 billion for such breaches. The ethical issues and potential for conf icts surrounding accounting practices go f ar be yond merel y combining ser vices. They ma y include under reporting income, f alsifying documents, allo wing or taking questionab le deductions, illegally evading income tax es, and engaging in fraud. In order to pre vent accounicts, the American Institute of CP As publishes professional r ules. In addition, accounting practices are go verned by generally accepted accounting principles (GAAP) estab lished b y the F inancial Accounting Standards Board that stipulate the methods b y w hich accountants gather and repor t information. However, the Inter national Accounting Standards

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Committee, working with the U .S. SEC, is in the process of creating “con vergence” between the Inter national Financial Repor , 10 It is not an insignif appropriately and effectively, the standards themselv es can be comple x, modifying the standards becomes inf nitely more complicated , small global f rms may realize a greater burden than larger multinationals, and dif wledge bases between countries may pose strong barriers. Accountants are also governed by the American of Certif ed Public Accountants’ (AICPA) Code of Professional Conduct. The code relies on the judgment of accounting professionals in carrying out their duties rather than stipulating specif c rules. But can these standards k eep pace with readil y changing accounting and f nancing activities in newly emerging f rms such as what occurred with the evolution of the dot.coms of a decade or more ago and as occur red in in vestment ears? In comple x cases such as these, it can tak e re gulators, le ts years to catch up with the changing practices in business. In any case, would re y standards be enough? The answers to ethical dilemmas are not always so easily found within the rules and regulations gov industry. Scholar K evin Bahr identif es a number of causes for conf icts in the f nancial markets that may or may not be resolved through simple rule-making: nancial r

een pub lic accounting f rms and their audit

found simply in that f nancial arrangement. fered by pub lic accounting f rms: Since man y public accounting f r f icts in the independence of the f rm’s opinions and incenti ves to generate additional consulting fees. k of independence and expertise of audit committees. e ession: historically self-re versight has been lax, if any. k of shareholder activism: Given the diversity of ownership in the mark et based on indi vidual in vestors, collecti ve ef forts to manage and o versee the board are practically nonexistent. eed ver sus long-term shar eholder w ealth: Executive ve systems for ethical executiv and stock to its 140 senior managers, including at least $67.4 million to for mer ecutive K y when the company f y. Not bad for a company that saw its stock decline $80 in of 2001 to less that $1 when f ling for y.”11 7. Executive compensation schemes: Stock options and their accounting treatment remain an issue for the accounting profession and the in vestment since, though meant to be an incenti ve to management and cer tainly a for m

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of compensation, the xpense on the income statement. They also tend to place the incentiv m growth rather than long-ter . hemes f ysts: In vestment banking anal ysts hav y generate the commissions or fees that ever ays the best possib tion for the client, generating potential conf icts.11 Similarly, scholar Eugene White contends that, in par t based on the abo ve challenges, mark ets are relati vely ineffective and the onl y possib le ans wer is additional re gulation. Though Bahr ar gues that there ma y be means b y w hich to resolve the conf icts, such as due notice and separation of research and auditing activities, White instead maintains that these conf icts cannot in f act be eliminated.12 “Financial f rms ma veal ” There remains no perfect solution; instead the investment community has no choice but to rel y in par t on the ethical decision making of the agent w ho acts within the mark xtent by regulation. Moreover, there is not simpl y just one solution. Karen Hunt Ahmad offers an Islamic perspective on the ethical responsibilities of bank ers and f nancial professionals in her essay, “Islamic Banking and Finance: Moral Beliefs and Business Practices at W w this particular approach might address conf icts differently.

ExecutiveC ompensation Few areas of corporate governance and f nance have received as much public scrutiny in recent y ears as e xecutive compensation. A Fortune cover exclaimed: “Inside the Great CEO P ay Heist,” and the article inside detailed ho w many top corporate e xecutives no w recei ve “gar gantuan pa y packages unlik e an y seen before. Fortune’s headline: “Executive compensation has become highwa ” 13 ecutive compensation is offered by Jeffrey Moriarty in the essay, “How Much Compensation Can CEOs Permissibly Accept?” reprinted at the end of this chapter.) In 1960, the after-tax average pay for corporate chief executive off cers (CEO) was 12 times the a verage pay ear ned by f orkers. By 1974, that f actor had risen to 35 times the a verage, but b y 2000, it had risen to a high of 525 times the average pay received by factory workers! (See Figure 10.2 .) The most recent f gure reports an estimated ratio of 411 times a w orker’s average pay for 2005. Impor tantly, these numbers address onl y the average pay; the dif ferences would be more dramatic if w e compared the top salar y for CEOs and minimumwage work o of the more w ell-publicized cases in recent y ears, Sandy Weill, the CEO of Travelers Insurance, received over $230 million in compensation for 1997 and Michael Eisner of Walt Disney received $589 million in 1998. These numbers continue to rise. In 2005, total direct compensation for CEOs rose

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FIGURE 10.2 Average CEO to Average Worker Pay Ratio, 1990–200514

Source: Cop

air Economy

.faireconomy.org. Reprinted b

by 16 percent to reach a median f gure of $6.05 million, not including pensions, deferred compensation, and other perks.15 Forbes repor ted that the CEOs of 800 major cor porations received an a verage 23 percent pa y raise in 1997 w hile the average U.S. worker received around 3 percent. The median total compensation for these 800 CEOs w as repor ted as $2.3 million. Half of this amount was from such things as life insurance premiums, pension plans and individual retirement accounts, country club memberships, and automobile allowances. Slightly less than half came from stock options. It is relevant to note in F that CEO pay and the S&P 500 Index seem to follo “pa performance. However er pay, have not increased at the same rate as CEO pay. So, though CEOs have seen an increase, the cor porations themselv es—and the w orkers w their successes—have not reaped equivalent benef ts. This lack of balance in the alue has led to the perception of unfairness with regard to executive compensation, as we will discuss below. More recently, compensation packages paid to the top e xecutives of ExxonMobil dre w harsh pub lic criticism amid rising gas prices and soaring prof ts. Exxon-Mobil CEO Lee Ra ymond recei ved total compensation of $28 million, as in Exxon-Mobile stock, in 2004. In 2005, the y ear in which he retired, Raymond received $51 million in salary. The interest alone on this three-year salary w

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FIGURE 10.3 Cumulative Percent Change in Economic Indicators, from 1990 (in 2005 Dollars)14

Source: Copyright © United for a Fair Economy

.faireconomy.org. Reprinted b

at a modest 5 percent rate of retur n, fore v y. Apparently this was not suff cient for Raymond’s needs because he also received an additional retirement package with a combined w orth of $400 million. When he succeeded Ra new CEO Rex Tillerson’s salary increased 33 percent to a total of $13 million including $8.75 million in stock. The combined compensaxecutiv xcess of $500 million. During the same period, Exxon-Mobil also achieved record prof ts, earning more than $25 billion in 2004 and $36 billion in 2005.A few years later, the bonuses of AIG executives came under scrutiny, as you will see in the Reality Check RevisAIG’s Bonuses.” These gaps continue to increase. F or the decade ending in 2000, the U .S. minimum w age increased 36 percent, from $3.80 per hour to $5.15 per hour . $29,943 to $42,680. The a verage annual salar y for a tenured Ne w York City the total compensation for the Citicor

p CEO increased 12,444 percent from y. General Electric CEO Jack Welch’s salary increased 2,496 percent, from $4.8 million to $125 million.

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Reality Check Revisited

AIG’s Bonuses

One strategy to avoid the agency problem and motivate executives to act for the best interests of their company is to connect compensation with performance. In 1998, Forbes magazine reported that there was little correlation between CEO pay and performance. Comparing CEO compensation to stock performance over a five-year period, Forbes described 15 CEOs who earned over $15 million while their company’s stock lagged well behind the market average of 23 percent. One CEO, Robert Elkins of Integrated Health Systems, received over $43 million during this five-year period while his company’s stock valued declined by 36 percent. Another report, based on data for 1996, showed that the top executives of firms that laid off more than 3,000 workers in the previous year received an average 67 percent increase in their total compensation package for the year. In 1996, the average gap between CEO pay and the wages for the lowest-paid worker for the top 12 job-cutting

companies was 178 to 1. Finally, Pfizer’s stock price decreased by more than 40 percent since 2001 when McKinnell became CEO though he has received $79 million in pay during that same period and has a guaranteed pension of $83 million when he retires. But few cases of executive compensation have caused as much cynicism about the connection between pay and performance than the AIG case introduced in chapter 3. After accepting $180 in U.S. federal government bailout money to avoid bankruptcy AIG announced that it was paying $165 million in bonuses to 400 top executives in its financial division, the very unit that was at the heart of the company’ than a year former AIG CEO Martin Sullivan resigned as AIG’s fi As his company was headed towards bankruptcy, Sullivan received a $47 million severance package when he retired.

Skyrocketing executive compensation packages raise numerous ethical ques-

9 OBJECTIVE

of such people from a vir tue ethics perspecti ve. Fundamental questions of distributive justice and fairness arise when these salaries are compared to the pay of average workers or to the billions of human beings who live in abject poverty on a global level. Consider Tyco’s Dennis Kozlowski’s justif cation of his salary in the w Do Salaries Motivate?” But serious ethical challenges are raised against these practices e ven from within the business perspecti ve. The reading, “Ho w Much Compensation Can CEOs P ly Accept?” by Jef the shor tcomings of attempted justif cations for such e xcessive pa y packages. Both Fortune and Forbes magazines ha ve been v ocal critics of e xcessive compensation while remaining staunch defenders of cor porate interests and the free market. Be yond issues of personal morality and economic f airness, ho wever, excessive executive compensation practices also speak to signifcant ethical issues of corporate governance and f nance. in two ways. They provide an incentive for executive performance (a consequentialist justif cation), and the cal justif cation). In terms of ethical theory, they hav hen

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How Do Salaries Motivate?

What motivates executives to seek huge compensation packages? Consider this exchange between a New York Times reporter and Dennis Kozlowski, former CEO of Tyco International.

Kozlowski: Yeah, all my meals are paid for, as long as I am around. So, I’m not working for that any longer. But it does make a difference in the charities I ultimately leave monies behind to, and it’s a way of keeping score.16

Reporter: It’s often said that at a certain level it no longer matters how much any of you make, that you would be doing just as good a job for $100 million less, or $20 million less.

they act as incenti ves for e xecutives to produce g reater overall results, and the y y compensate individuals on the basis of what they have earned and deserve. In practice, reasonab le doubts e xist about both of these rationales. F irst, as suggested by Moriarty’s essay, and the Forbes story mentioned pre viously, there is much less correlation between pay and performance than one would expect. At xecutiv wards regardless of business success. Of course, it might be ar gued that in diff cult f nancial times, an e xecutive f aces g reater challenges and therefore perhaps deser ves his salary more than in good times. But the corollar y of this is that in good f nancial times, as w t, the executives have less to do with the success. More to the point of go vernance, there are se veral reasons w hy e xcessive compensation may evidence a failure of corporate boards to fulf ll their f duciary duties. First, as mentioned before, is the f act that in many cases there is no cor relation between executive compensation and perfor mance. Second, there is also little evidence that the types of compensation packages described abov ally needed as incenti ves for perfor mance. The f duciary duty of boards ought to involve approving high enough salaries to pro vide adequate incentive, but not more than what is needed. Surely there is a diminishing rate n on incentives beyond a cer tain level. Does a $40 million annual salar y pro incentive of $20 million, 4 times the incenti ve of $10 million, and 40 times the n of a $1 million salary? ucial governance issue is the disincenti ves that compensation packxecutive compensation is tied to stock price, e xecutives have a strong incenti ve to focus on alue rather than long-ter m corporate interests. One of the f astest wa y yees. This may not always be in the best interests of the fr erse about basing the xecutive on ho y can be in putting people out of work.

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FIGURE 10.4 Duties of the Board and Senior Executives that May Give Rise to Conf icts of Interest

Further y to b inv Two academic studies concluded that there is a strong link betw een high levels of executive compensation and the lik nancial results.17 When huge amounts of compensation depend on quar terly earning reports, there is a strong incentiv ve the money. Excessive e xecutive compensation can also in volve a v ariety of conf icts of interests and cronyism. The board’ ecutives are f airly and not e xcessively paid. They also ha ve a responsibility to e valuate the executive’s perfor mance. However, all too often, the e xecutive being e valuated and paid also ser ves as chair of the board of directors. The board is often comprised of members hand-selected b y the senior e xecutives. In addition, the compensation board members recei ve is deter mined by the chief e xecutive off cer, creating yet another conf ict of interest. (See Figure 10.4.) The cronyism does not end at the boardroom door. One of the larger concerns to have arisen in recent years has been the cross-fer tilization of boards. The conwned a Web site called .the , w hich allo ws searching for een an o given companies. between Coca-Cola and P epsiCo uncovers within seconds the f act that P epsiCo board member Rober t Allen sits on the Bristol-My ers Squibb board alongside Coca-Cola board member James D . Robinson III. Though sitting on a board together does not necessaril y mean P epsi’s board member will gain access to Coke’ ve rise to a question of conf icts.

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olving lesser-kno served on the boards of three companies, with each serving as CEO and chairman of one of the companies, Brocade, Verisign, and Juniper. Unfortunately, the companies were found to have backdated stock options, and each f either Securities and Exchange Commission inquiries or criminal or ci vil legal proceedings. Cron erlapping board members might occur, of course, simpl y because par ticular individuals are in high demand as a result of their e xpertise. However, where the overlap results in a f ailure of oversight and ef fective gover y le gal and ethical responsibility of board members—the implications can be signif cant to all stakeholders involved.

InsiderT rading 10 OBJECTIVE

No discussion of the ethics of cor porate governance and f nance would be complete without consideration of the practice of insider trading by board members, e xecutives, and other insiders. The issue became front page ne ws in the 1980s when f nancier Iv as sent to prison for the crime of insider trading. Though it certainly has not left the business pages in the intervening years, it once again gained iconic status w hen Ken La ere accused of insider trading when they allegedl wing of the inevitable downturn in the stock’s worth, while encouraging others to olving f ers such as Raj Rajaand F vestments employee David K. Donovan Jr., who was convicted in 2009 for giving his own mother inside information on which she then traded. The def nition of insider trading is trading b y shareholders w ho hold pri vate inside infor mation that w ould materially impact the v alue of the stock and that allows them to benef t from buying or selling stock. Ille gal insider trading also occurs when corporate insiders provide “tips” to family members, friends, or others and those par ties buy or sell the compan y’s stock based on that infor mation. “Private information” would include privileged information that has not yet been released to the pub lic. That infor mation is deemed material if it could possib ly have a f nancial impact on a company’s short- or long-term or if it would be impor vestor in making an investment decision. The Securities and Exchange Commission def nes insider infor mation in the following way: “Insider trading” refers generally to buying or selling a security, in breach of a f duciary duty or other relationship of trust and conf dence, while in possession of material, nonpublic information about the security. Insider trading violations may also include “tipping” such information, securities trading by the person “tipped” y those who misappropriate such information. Examples of insider trading cases that have been brought by the Commission are cases against: corporate off cers, directors, and employees w poration’s securities after learning of signif cant, conf dential corporate developments; friends, business

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associates, family members, and other “tippees” of such off cers, directors, and employees, who traded the securities after receiving such information; employees of law, banking, brokerage and printing f rms who were given such information in order to provide services to the corporation whose securities they traded; government employees who learned of such information because of their employment by the gover antage of, conf yers.18

Because insider trading undermines investor conf dence in the fairness and integrity of the securities mark ecution of insider trading violations as one of its enforcement priorities.19 Accordingly, if an e xecutiv ws is going to g reatly decrease in w xcept a few insiders, he takes advantage of those who bought the stock from him without Insider trading ma y also be based on a claim of unethical misappropriation of proprietar wledge only those in the f rm should have, wledge o wned b y the f rm and not to be used b y abusing one’ s f duciary responsibilities to the f rm. The law surrounding insider therefore creates a responsibility to protect conf dential information, proprietary information, and . That responsibility also exists based on the f duciary duty of “insiders” such as e xecutives. Misappropriation of this infor mation under mines the trust necessar rm and is unfair to others who buy the stock. Though one might make the ar trading is not so bad since the inside infor mation will be disco vered shortly and the market will correct itself, this contention does not tak e account of the hur t to those who completed the original transactions in a state of ignorance. Insider trading is considered patentl y unf air and unethical since it precludes f lic infor mation. If mark et par ticipants w that one may have an advantage over another via information that is not available to all pla yers, pure price competition will not be possib le and the faith upon which the market is based will be lost. On the other hand , trading on inside infor mation is not without its ethical defense. If someone has w orked v tain position in a f rm y vir vidual is pri mation, isn’t it just for that person to tak e advantage of the infor mation since she or he has w orked so hard to obtain the position? Is it reall y wrong? Unethical? Consider an issue that might be closer to home. If y our brother has al ways been successful in w hatever he does in the business w has been, so are you trading on inside information? Would you tell others? about off cers in one compan y investing in the stocks of their client companies? No le not something about this that simply feels “wrong”? Consider the ethical issues surrounding access to information in the Decision P w-It-Alls.”

Decision Point

The Know-It-Alls

Some people do seem to ha ve access to more infor mation than others, and their access does not always seem to be fair. Consider how Martha Stewart found herself in jail. Stewart was good friends with Sam Waksal, who was the founder and CEO of a company called ImClone. Waksal had developed a promising new cancer dr ug and had just sold an interest in the dr ers Squibb for $2 billion. Unfor tunately, though e veryone thought the dr ug would soon be approv W Administration had determined that the data were not suff cient to allo ve to the next phase of the process. ws became public, ImClone’s stock price was going to f all signif cantly. On lear ning the ne ws (December 26, 2001), Waksal contacted his daughter and instructed her to sell her shares in ImClone. He then compounded his violations by transferring 79,000 of his shares (worth almost $5 million) to his daughter and asking her to sell those shares, too. Though the Securities and Exchange ould likely uncover these trades, given the decrease in share price, it was not something he seemed to consider w that, when I think about it? Absolutely,” says W at the time? Obviously not. I just acted ir responsibly.”20 Waksal ev y was sentenced to more than se ven years in prison for these actions. How does Mar tha Stewart f The public trial re vealed that Stewart’s broker ordered a for mer Mer rill Lynch & Co. assistant to tell her that Waksal was selling his stock, presumab ly so that she w ould also sell her stock. Stewart subsequently sold almost 4,000 shares on December 27, 2001, one da y after Waksal sold his shares and one day prior to the public statement about the s failed approval. 555

Decision Point

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The Winds of Change

Stewar y a voided prison for se veral y ears, and on No vember 7, 2003, she e to prison. “Ne vertheless she w as convicted on all counts e and sentenced to a f v ve months of home conf nement, and a $30,000 f ne, the minimum the cour t could impose under the F ederal Sentencing Guidelines. During the trial, the pub lic heard the testimon y of Ste wart’ , Mariana Pasternak, who reported that Stewart told her several days after the ImClone sale that she kne w about Waksal’s stock sales and that Ste wart said, “Isn’t it nice to have brokers who tell you those things?” So, to return to the issue with which we began this tale, it appears that some investors do seem to have access to information not necessarily accessible to all individual investors. A similar, but more f ar-ranging situation w as revealed in No vember 2009 when the FBI and U .S. Attorneys announced ar rests stemming from a lar ge insider-trading operation at the hedge fund Galleon Group. The Securities and Exchange Commission accused the billionaire Raj Rajaratnam and dozens of others associated with the Galleon Group of insider trading that resulted in more than $33 million in prof t. They were accused of trading on secret details of cor porate tak eovers and quar terly ear nings leak ed to them b y compan y insiders. Though Stewart, Waksal, Rajaratnam and others involved in these stories were , many believe they were identif ed and later charged because they were in the public eye. If others are not in the public eye and also engage in this beha vior, can the SEC tr uly police all inappropriate transactions? Is there a suff cient deterrent effect to discourage insider trading in our markets today? If not, what else can or should be done? Or , is this simply the nature of mark ets, and those w ho have found access to infor mation should use it to the best of their abilities? this latter might be violated if we allow it? Consider whether we might have learned an xperiences of the past decade, and how we might most effectivel ou review the Decision Point, “The Winds of Change.” 557

Opening Decision Point Revisited Is Steve Jobs’ Health Status a Private Matter?

Questions, Projects, and Exercises

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559

Key Terms

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End Notes

561

Readings

Reading 10-1: “Thoughts on Reform: On the First Anniversary of the Collapse of Lehman Brothers,” by Stephen Young, p. 561 Reading 10-2: Moral Beliefs and Business Practices at Work,” by Karen Hunt Ahmed, p. 565 Reading 10-3: “Why ‘Best’ Corporate Governance Practices Are Unethical and Less Competitive,” by Shann Turnbull, p. 576 Reading 10-4: “How Much Compensation Can CEOs Permissibly Accept?,” by Jeffrey Moriarty p.

Reading 10-1

Thoughts on Reform: On the First Anniver Lehman Brothers Stephen B. Young One y ear ago the g reat Wall Street House of Lehman Brothers f iled for bankr uptcy, setting off the g reat global meltdo wn in f inancial markets. No one w anted to buy Lehman Brothers,

no one w anted to lend it working capital, and neither the United States Treasur cial Services Authority of Great Britain wanted to save it.

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veraged against its capital 44 to 1. It had played the game of moral hazard and lost. It sustained its holdings with shor t ter m borrowings in the commercial paper and o vernight repo lending mark ets. But as the v alue of its collateral—mostly securities and much of this in paper backed b as unab el suff cient to sustain its investments. Months pre viously Bear Stear ns had collapsed for similar reasons and AIG would collapse shor tly

Where are We a Year Later? The US Federal Reserve announced yesterday that “the recession is o v very, especially in employment, will be slow in coming. ms of f nancial services hav similar measures tak en by the G8 or G20 go vernments to pre vent future mark The word from Washington DC is that efforts to reform f nancial ser vices are losing momentum. The New York Times asser ts editoriall y that “the impor tant work of regulatory reform remains undone.” the Obama Administration do not go to the hear t of the matter—bad risk management in using “other people’s money” in a speculative, highly liquid but highly leveraged trading boom. The Obama Administration proposed reforms call for more regulatory supervision by go v vate sector credit decisions. They do not create incenti ves and disincenti ves within trading mark ets to enab le pri vate f rms to become more responsible and ethical. As a result, Gordon Gecko’s mantra of “greed is global capitalism. In his remarks on Wall Street on Monda y, President Obama said “Instead of lear ning the lese are still recovering, the They do so not just at their o s.”

Last year, responding to the meltdo wn in credit markets and the collapse of Wall Street, the Caux Round Table made seven recommendations. Hindsight indicates that our anal ysis was absolutely on target. The disappointment is that little has been

A year ago we said: “Capitalism’s so called immune system of laissezfaire market discipline has failed the test and the underlying causes of this systematic breakdown— greed and narro man of the Caux Round Table and past Chairman of the Bar of England and Wales. “Failures to properl ves and remuneration have been at the heart of the problem”, said Stephen Young, Global Executive Director of the CRT. “Compensation of senior executiv managers was, and still is in most cases, built on narrow self interests and decoupled from long-term wealth creation. Rewards rose with excessive risk taking and have been provided in ways that have largely shielded senior corporate off Young said. “Also at the core of the problem has been a failure of gov ere not suff ciently encased in an en , transparency and ultimate accountabilf nancial re ets”, Young added.

Lord Brennan noted that “despite the need for urgent action to address the underl ying causes, there are inadequate refor ms on the tab le. Business leaders and boards are lar gely silent, and politicians, re at out putting out the f res.” Tw House of Car ds by WilA Colossal F ailure of Common Sense by La G. McDonald and P substantiate the Caux RoundTable of W as needed. ds A Colossal Failure of Common Sense es y

Chapter 10

Another book most deser ving of your consideration is The Myth of the Rational Mar ket by Justin Fox. Fo y the formulas and mathematical proofs of fered b y f nancial market theorists to suppor t belief that mark et pricing always gets it right. What w e lear n from these books is that real risk was not managed at all; it w asn’t taken seriously b y the boards of both Bear Stear ns and Lehman Brothers. It w as all a “house of cards” with no sustainab le foundation and it w as also a failure of “common sense.” ver of this irrationality w as indeed shor t-sighted g reed and personal hubris in CEOs, aided and abetted b y supine boards and cor money-getting. Designers and builders of real houses tak e risk seriously and common sense also puts pr udence and reason in the dri ver’s seat of decision-making. erage 44 to1 in order to fatten annual compensation packages. W millionaires did not get the basics right and w e have all suffered for that. The Caux Round Table’s Seven Point Reform Trust in Business and in the Global Financial System (September 2008): e board directors to consider interests beyond shar eholders, w hich ma y affect the company’s success, by codifying the principle of “enlightened shar eholder v alue” in company law. Proposed reforms: • Require corporate board directors to disclose ture de velopment, perfor mance and sustainability of the company and its business in the •

y, require cor porate boards to disclose annually the material risks and impacts f owing from: • yee issues; • customer •

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• •

socialand

563

issues and concerns.

2. Require minim um standar ds of cor porate governance knowledge and e xpertise for corporate board directors. ms: • ve the skills and expertise to: • responsibly e xecute their duties of tr ust and prof t, given business is not without • oversee the full spectr um of f nancial, governance, social and en vironmental risks to the company; and • ensure business practices meet minimal ethical standards. 3. Require cor porate boar ds to ha ve a dedicated boar d committee r esponsible f or risk oversight across the full spectrum of risks— f nancial, governance, social, environmental. Proposed reforms: • Require the Board Risk Committee ha ve an pendent directors on the committee. • Require boards to dependent assurance repor y on the v y’ ment processes and to disclose the assurance ndings. 4. Regulate e xecutive r emuneration structur es to ensure that they are consistent with prudent risk manag ement, align with long-term wealth cr eation, and do not r eward poor performance. Proposed reforms: • Require cor porate board directors to mak e annual disclosures (and at the time of the appointment of any CEO) detailing: • of interest and embedded in both shor t-term and long-ter m executive performance incentives, including ho w the Board proposes to manage such risks; and

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• the de gree to w hich the remuneration structure aligns e xecutive interests with those of shareholders, including during times of compan y stress and under performance. • ed remuneration to be in the form of common equity escrowed for a minimum period of f ve y ears, re gardless of continued employment. • Prohibit Board members and key executives rowing or hedging against the common equity they hold in the compan y, unless there is full and timel borrowing or hedging. • Cap termination payments at one year’s remuneration unless there is prior shareholder approval of a higher amount. 5. Implement stronger and globally co-ordinated f nancial and banking r egulatory r eforms to prevent systemic risk b uild-up or mar ket manipulation. Proposed reforms: • Harmonise re gulation and co-operation of f nancial super visors/regulators across the G20, including cross-border super vision of globally signif cant f nancial entities, to enhance f nancial system stability and close oppor gulatory arbitrage. • Broaden regulatory coverage to all f nancial entities and transactional acti vities that pose material systemic risk to f nancial stability. • Strengthen capital adequac y of all systemically impor tant f nancial institutions in line with their underlying risk prof les. • Weed out or strictl y re gulate mark et products, beha viours and acti vities that are not consistent with the principles of mark et stability, long ter m v y informed market. nancial markets instruments and investment activities that materially impact on f nancial system sta annua.

• Broaden re gulatory coverage to all f nancial vities that pose material risks to fnancial stability or . • Enable regulators to intervene in and control excessive speculation and risk accumulation in all systemicall y impor tant f nancial mark • participants, including derivative and hedge funds, required to disclose trading and other infor mation necessar y to adequately access market and systemic risk. • Establish fully regulated exchanges for credit derivatives and other systemicall y impor tant • Require re gistration and ensure re gulatory oversight of credit ratings agencies w hose ratings materially impact on f nancial and investment markets. • Review the practice of paid ratings and consider possible refor m to ensure independence of ratings. 7. Reform and adequatel y r esource the IMF and other m ultilateral institutions to ensur e they ar e effecti ve f orces f or economic and social justice globally. •

nanelopment ging and developing economies in dealing with the f ow-on from the global f nancial crisis. • Broaden Financial Forum memits role including via the de velopment of an early warning system for threats to global f nancial stability. • Strengthen measures to oppose and pre vent trade protectionism while renewing initiatives within the World Trade Or ganization tow reement.

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Reading 10-2

Islamic Banking and Finance: Moral Beliefs and Business Practices at Work Karen Hunt Ahmed The religion of Islam has e xisted for 1,400 y ears but Islamic economic theory and its f nancial institutions emerged as an industr y only in the 1970s. Islamic f nancial institutions (IFIs) are designed to help Muslims conduct business inter nationally while simultaneously upholding traditional Islamic values related to trade f nance and cur rency movement. The basis for their e xistence is the Islamic moral prohibition on char ging interest—interest et IFIs conduct billions of dollars of business annually in the world economy and the de facto Islamic transaction is—in most cases—vir y ness practices in the industr and f nance (IBF; Maurer 2005) ha ve e volved to reinforce some of the major tenets of a moral belief system based on Islamic principles. This chapter will discuss specif c practices put into place b y the

time generating prof ts for the institution and its customers. This chapter will contribute to the discussion of best cor porate practices b y introducing some of those practices and discussing ho w those practices contribute to the success of the industry.

Religion and Business Practices Religion is deepl y concer ned with the relationship between individuals and society on ear th and the implications of that relationship on salv ation: therefore, it is cr ucial for humans to understand the place of material sur vival in the cosmolo gical scheme of life. That concern has been inter with questions of what it means to be a person and ho

een religion and economy has arisen at times when a religious community is tr ying to car ve out an identity for itself . Individuals and societies change throughout history; therefore, spiritual and material well being must be constantly renegotiated. As such, it mak es sense that human beings struggle to f nd the appropriate balance betw een material and spiritual matters. These concer ns have car ried o ver into contemporar y discussions of religion and econom y, and have become visib le in the for m of social mo vements based on v arious conceptions of morality . The basic questions and issues are the same as in the past, but the context of globalization (Appadurai 2000, 1996; Sassen 1998; Jameson and Miy oshi 1998; Hannerz 1996; Scholte 2000) has expanded the scope of the meaning of identity and community , especiall y in the context of competing moralities (Shw eder, Minow and Markus 2002; Gupta and F er 1999). In the contemporar y w all ven economic theories—cor porate social , sociall y responsib le in vesting and , it will be ar , Islamic f nance—are e xamples of some approaches to economic behavior are based on moral discourse. Regardless of w hether or not religion is specif cally invoked in the moral discourse, it is clear that discussions about religion and economy are as relevant today as e v sensitive to and religious understandings of the implications of moral belief systems on business practices. Most economic de velopment te xtbooks do not take into consideration the ef fects of moral or religious beliefs on economic beha vior (Kuran 2004).

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From the Enlightenment until the pub lication of Weber’s Protestant Ethic, scholars took it for granted that religion and econom y were unrelated spheres of life. Whereas an emphasis on the compatibility of religion and economy may have waned , some groups in contemporary society are v kinds of conversations about morality and business that occupied the minds of medie val moralists. These conversations may not be based specif cally on religious , but they do call upon an individual’s moral inclinations to curb human g reed and to for about economic activity.

Introduction to Islamic Finance The industr y of Islamic banking and f nance is growing dail y. In 2006, the Islamic De velopment Bank in Saudi estimated that Islamic f nancial institutions manage more than USD$800 billion. There are more than 500 Islamic f nancial orldwide and the w orld’s potential market for Islamic f nance consists of more than one billion Muslims, in addition to non-Muslims, who are welcome to participate in Islamic f nance. Islamic f nance has been compared to an en vifund in that its policies are based on a certain philosophy of life y et its par ticipants also expect to make a prof t on inv y def ne Islamic f nance b y the ways in w hich it objects to con ventional f nancial practices in addition to the ban on riba, w hich is Arabic as interest or usur y. Islamic f nanciers are not allowed to trade in specif c goods , such as pork and alcohol. Islamic f nance prohibits taking risks or gamb ling (El Gamal 2000). Islamic f nancial institutions should adhere to a code of Islamic business ethics and should maintain a Shari’a Standards Board composed of Islamic scholars to maintain the purity of the institution’ s products and conduct (Le wis and Algaoud 2001; Beekum 1997). Ultimatel y, all features of Islamic f nance are designed to uphold theolo gical concepts of

God-consciousness (taw and social justice (adalah) in a business environment.

Framework of an Islamic Economic Theory The frame work of Islamic economic theor y w as developed in pre-P artition India in the early 20 th y b y Islamic scholar Ma wlana Ma wdudi (1903–1979) and e xpounded upon b y one of his ho later moved to P akistan. At the time, Indian Muslims as a group were relatively disadvantaged economicall Hindus. The British Raj had pro vided some economic protections to Muslims, f armers in par ticular, but at the time it w as unclear ho w or if a Hindu-led go v ould pro vide the same protection (K uran 2004). Ma wdudi belie ved that economic activity and technology were to success in the modern w as dedicated to pro viding Muslims in pre-P artition India with economic oppor that allowed them both to function in the moder n w orld and to retain their . He and Ahmad belie ved that it was possible and desirable for Muslims to embrace systems and institutions of moder hile at the same time adhering to the teachings and practices Ahmad and Ansari 1979). One goal of Ma wdudi w as to redef ne Islamic practices to conform to economic changes. Mawdudi’s ideas w ere put into practice in the 1970s in the Arabian Gulf, with the estab Saudi Arabia. At f rst the industr y g rew slo wly. Until v ery recently Islamic f nancing w as onl y sporadicall y available throughout the w y it w as not availab elopments in the gloed technology and fewer restrictions on capital f ows have made world conditions much more amenab le to the possibility of IBF making a meaningful contribution to the refor mation of business practices to bring them more in line with the Islamic belief system. IBF business practices ref ect and reinforce certain

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key concepts of an Islamic moral econom y (Tripp , par ust. F vide evidence of adherence to these beliefs.

Business Practices under Islamic Law The existence of Islamic f nance solves a diff cult problem for the Muslim desiring to participate in inter national f nance w Islamic law, or Shari’a. Islamic la w does not allo w for indi ho lend or bor row mone . Yet in the earl y global economy f nance and other cr dominated by capitalist f nancial practices in w hich The Islamic f nance intends to improve upon global f y maintaining their positive features and cleansing them of negativ Al Saud 2000). Islamic banks stri ve, in the w ords of a prominent Islamic s vision statement, to uphold “deeprooted traditions in the new world” (Dubai Islamic Bank brochure). Islamic f nance professionals claim that an Islamic bank is a con v without its immorality . The frame work used to determine morality is based on Islamic te xt and tradition, yet the framework is, on the surface at least and to the untrained e ye, indistinguishable from the capitalist f Islamic la w is specif c about w permissible trade beha vior. Business practices f all under the set of nor mative relationships betw een human beings ( muamalat) that are ultimatel y gov y the will of Allah, or God (W aines 1995:65). nance and trade are regulated by specif c rulings found either in the Qur’an or in hadith . Discussions of Islamic f nance fall into two categories: moral/ethical and social justice concer ns. The f rst categor wn and involves the prohibition of specif riba and gharar (El Gamal 2000) as w ell as more garding goods for bidden under Islamic la w such as pork, alcohol

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and tobacco. Riba broadly refers to an y goods or services traded in unequal amounts. Muslims cite a w wn hadith to support this concept: er for silver, salt for salt, dates for dates, barley for barley, and wheat for wheat, handto-hand in equal amounts; and any increase is riba. [El Gamal 2000:147]

The concept of may be applied to both monetary and material goods and its prohibition ser ves a major pur pose of k eeping relations among businesspeople equitable. This conception of riba is, of course, a simplif cation and its properties are widel y discussed and debated b y Islamic economists (see, for example, Ahmad 1976; for an alternative economic vie w of riba, see El Gamal 2000). In the area of religious thought Judaism and Christianity, in addition to Islam, ha ve str uggled internall posed by “interest” (Weber 1968). Interest calculation is based on the measurement of time. Foucault (1978) asserts that earl wed time as alue for different people, making the calculation of inter est immoral. The original intention of timetab les, he asser ts, w as a religious in vention designed to s gift of time. The move of instituting schedules ser ved to appropriate the use of time in dail y human life. In addition, Landes emphasizes the impor tance of time to een Protestantism and the for mation of a capitalist subject (Landes 2000). Ho wever, Foucault argues that today time is understood as a material possession to be manipulated and shaped at will. The perception of time as a gift has been ne y the “principle of a theoretically ever-growing use of time” (Foucault 1978:154). Islamic thought designates a similar eh 1999; Waines 1998), which some scholars contend has been lost in the moder n world (Wilson 1997). Although Islamic practice employs scheduled activities (most notab ly pra yers), Islamic f nance intensif es its rejection of the model of interest on

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the basis of its objectif cation of time as a material entity (Wilson 1997: see pages 5–7 for a complete arguments to those we see in Islamic f nance today, see El Gamal 2000) has resolv ed the moral issue of time in a way that advances capitalist enterprise, where Islam seems to critique capitalism w hile at the same time advancing it. Present da y IBF institutions a void the prob lem of interest b t sharing or lease-to-purchase ar rangements. Practicall y without some kind of reference to “interest. ” This diff open a at an Islamic Johara means “je wel” in Johara is also the name omen: the stand alone ladies’ branch (UAE) where the author did f eldwork in 2003. The teller was asked to e xplain exactly how the annual prof t sharing pa orked. y, she responded , “W ell, it’ s basicall y like an interest payment.” Although her reference to “interest” may have in par act that the researcher is American, it was nevertheless hard for her to f nd the words to explain the payment without reference to the better of interest, in w hich she w as fully conversant. This ed in Islamic f nance, and it is not seen to be at odds with the ban on interest.

Community Financial Transactions meates discussions about and within the Islamic f nance community. F rom y w as meant to address community concer ns. stands in contrast to a capitalist understanding of economic acti vity, w hich is built on the assumption that the indi vidual is the locus of economic acti , as Adam Smith so ele gantly noted in Wealth of Nations (1976). Islamic economics subverts the neoclassical economic model b y asser ting that indi viduals are (or should be) dri ven to cooperate for the good of society .

important differ een conventional f nance and Islamic f nance, and one that is mentioned regularly in con versations with Islamic f nanciers. Because the Islamic f nance industry def nes itself with reference to the conventional f , it is v aluab w that dif ference in meaning is instilled into f nancial practices.

ClassicalFinanc ialStr uctures One of the f rst dif ferences one notices betw een conventional f nance and Islamic f nance is the str This business practice is not visible unless one delves into the minutiae of the f nancial details. Yet, when Islamic f nanciers are asked w ference between conventional and Islamic f nance, er is that the transactions are str ferently. In response to the prohibiying riba, great attention is paid to ho w well the cash inf ows and outf ows riba, transactional str idea that the pro vider and n as much as possib le. Therefore, the f rst business practice I will discuss is the practice of str es. There are four classical Islamic f nancing structures used b y the IBF industr y intended to a void riba ness practices. gan reading about Islamic f nance in the earl y 1990s, these w ere the only transactions a vailable to people w ho w anted to participate in Islamic f nance. Present da y Islamic f nance transactions are based on these four basic methods; ho wever, there are no w countless w ays to str law but provides competitive returns in the market. They are based on the notion of par tnerships, and highlight the impor tance of business practices that ork to gether as partners. Although each f nancing str cif cally addresses the concer ns of Islamic f nance, each is also compatib le with con v wledge is acquired to gether

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with one’s fello , rather than autonomously through rote learning. Each kind of transaction will be described below. The f rst tw o str uctures relate to debt f nance. First is a murabaha, or f nance, which nancing (Wilson 1997). This transaction is v mal, and involves a buyer, a seller, goods for trade and a f nancier. or ser vices and ag ree upon a price, all according to la A f nancier n, provides the money for the goods at their cost plus a predeter mined f nancing fee. The f nancier then o wns the goods (but does not tak e possession of them) until the buyer pays for the goods in ilson 1997). This method is a shor t ter m f nancing technique, xcept for the predeter mined fee, looks and operates like capitalist trade f nance. In other w ords, sa y w e r un a lemonade stand. We need to buy pitchers to ser ve lemonade to customers and do not ha ve enough cash to purchase those pitchers. We need f nancing to help us In order to f nance the pitchers on a murabaha basis, a f nancial institution w ould purchase the pitchers from the supplier and immediatel y resell them to

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stipulation is consistent with the requirement of a seller’s responsibility to take care of merchandise before the sale. In our h ypothetical lemonade stand , another way w e can f nance the pitchers is via an ijara. The f ould purchase the pitchers and then lease them to our business. At the end of the lease we would either purchase the n them to the f nancial

The f rst Islamic f encountered in her professional life w as an ijara. The compan y the author w orked for in Dubai f nanced an oil rig, located in Angola. The f nancial compan y actuall y o rig and recei ved monthl y pa yments as lease pa yments on that lease. This situation w as brought to the author’s attention because the cash f ow did not look an y dif ferent from other loans’ cash f ows, yet the funds w ere separate from the compan y’s as only after looking at the original f nancing agreement that the author realized the str as meant to be “Islamic” and the sharing een f nancial company and lessee were built into the f nancial plan. There are two classical forms of equity f nance. ve costs and a prof t margin. Remember that The f rst, a mudaraba, is a par een a there is no prohibition on prof t, just the means b y provider of capital and a pro vider of labor. A capiwhich it is acquired. tal provider may be a bank, indi vidual, or one of A second for m of debt f nancing is a lease many g roups of in vestors (W ilson 1997). Prof t f nance str t ter m ( ijara) and long and loss sharing are in propor tion to the amount term lease purchase contracts ( ijara-wa-iqtina ) of capital inv xcept the par tners are functionall y equi valent to their capitalist may recei ve prof t (al-Misri 1994). Most impor counterparts. Both are nor mally used to f nance tantly, liabilities are limited to the amount of capital machinery or other equipment. As under a mura- invested by each investor (Wilson 1997). baha arrangement, in an ijara the bank purchases of ar rangement is vir y the same as a limited the goods and the buy er pays the bank through a liability company in capitalism, and is compatib le periodic (usually monthly) fee. At the end of the nancing through a stock exchange. lease term the purchaser ma y either purchase the musharaka, item or let the bank dispose of it. The major dif- under which both par ties supply capital (in contrast ference between a capitalist lease and an ijara is to a mudaraba, that, under an ijara, the lessor assumes responsibility for o wning and maintaining the asset, inv The capiwhereas that responsibility falls to the lessee talist equivalent would be a v rm prounder the capitalist tradition (Wilson 1997). This viding capital for smaller v ilson 1997).

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ContemporaryFinanc ial Structures Some contemporar ere designed in response to contemporar y con ventional transactions, but are based specif cally on built in par tnership ar rangements in k eeping with the focus The most noticeable difference between classical and contemporary e look closel y at the murabaha, mudar aba, mushar aka and ijar a methods of f nance, we notice that not one of them requires the e xistence of an institution. Each for m of f nancing is a par rangement that can easily take place betw een any entity with a vailable capital and an y entity in need of capital. In f act, in the Middle Ages, merchant f amilies themselves f e trade f nance in Europe at the same time (Udovitch 1979). For example, a neighbor and you could both y to mak e a lemonade stand , agree that y ou will oversee the dail y operations of the lemonade and that each person would get a share of the prof ts according to the relati ve amounts each of us invested into the project. In this scenario, the neighbor and you have agreed to open a lemonade stand under a musharaka agreement. Y . The transactions discussed belo w require an inter medinancial str That intermediary is an IFI or some kind of special purpose investment vehicle. They are more complicated than the classical f nancial str

Salaam and Istisna The salaam and istisna transactions are both sales contracts used w vailable for deli very at the same moment f nancing is needed. A salaam hen the f nancial institution (on behalf of a buy er) adv ances the purchase price wner. The goods are delivered at a later date to the f nancier, who then delivers them to the buy er. The buy er pa ys the

f nancier the purchase price upon deli very of the goods. Anistisna w xcept that it is used principall y for manuf acturing and construction f nance. The f nancial institution pays the construction compan y as w ork is completed (sa y, on a building project). The constr uction company deliv The f nancier delivers the asset to the customer , w ho then pa ys the purchase price to the f nancier. The dif een salaam and istisna is A salaam is used to f do not y et exist but are almost assured to e xist in the e.g., ag goods (say, soybeans) that need to be g ro growing season. The “production process” mak es no dif ference to w the so ybeans are g rown, merel y that so ybeans of a cer tain quality will be produced. The istisna, on the other hand , is tied to goods that w ould not , lik e a commercial off ce building. The istisna is usuall y tied to a specif c production process, w hich is essential to the f nal the risk str ogel and Hayes 1998; Bahrain Monetary Agency 2002). At f rst glance, there does not seem to be anything par ticularly “moder n” about either of these transactions. After all, it has al ways been necessary to f nance trades or to provide a farmer with f nancing based upon the anticipated production of ag vitch (1979) points out that trade f nance w as al ways prevalent in Muslim societies, just that merchants would provide f nancing instead of f nancial institutions. Vogel and Ha y w attention to the modern nature of the istisna contract: until the volution fe w goods w ere e xchangeable on a commodity basis as most people produced their o wn necessar y goods. There w as little need for manuf nance. It w as onl transfor y the industrial production process that it became necessary to provide long ter m manufacturing f nance (see also

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Appadurai 1986 for an e xtended anal ysis of the history of the and its uses). The istisna is a response to the changing commercial en vironment. It must be noted, also, that the istisna is only valid under the Hanaf le gal tradition (V ogel and Hayes 1998). Hanaf w as the f rst le gal school to be recognized by Muslims, and is therefore the oldest madhhab. Hanaf is generall y considered to be the madhhab most amenable to modernization. It is also the school most closel y associated with the geographical area of South Asia (India, P akistan, and Bangladesh) that gave inspiration to Mawdudi.

Sukuk The tw o most pre valent f nancing str Islamic f nance toda y are the sukuk (bond) and takaful (insurance). The author does not ha ve any f rst hand data on either sukuks or takaful1 f eldwork because the y w ere f rst issued in 2002, when she was in the f eld. They have since become one of the most popular f nancing vehicles: therefore, it will be described brief y. A sukuk is a for m of bond usuall y issued b y a government, or by a corporation in partnership with a go vernment. It is based on a con ventional go vernment bond, and is used for long ter m f nancing. A con ventional go v f nancing b y w hich a go v

investor and (2) repayment of capital at the end of the A bond is essentially an IOU from the gov ment to in vestors. Prof t to the in vestor is based on an interest rate deter mined by a measure of the stability of the gov The more stable the gov le to repa wer the interest rate. Less stable gov y a higher interest rate. For example, if a local go vernment wants to build a across the ri ver, it would sell bonds in order to raise cash to pa y the contractors. Upon completion of the project, the go v ould repay the investors from its own capital account. The cash f ow of a sukuk looks similar to the cash f ow of a conventional bond. The difference,

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as with most Islamic f the underlying assumptions and asset structure. Whereas a con ventional bond is back ed b y the goodwill and stability of the government, a sukuk is backed by tangible assets. In the example of the bridge f nancing, the go vernment might pledge the income stream from some go vernment properties or buildings to the sukuk. In vestor retur n would be deri ved from that income. In the e vent of a government default, investors could theoretically sue the go vernment for the income from its property. Sukuks are “hot” at this time in the Islamic f nance mark et. On the global mark et, issues of billion in 2004 to more than $10 billion in 2005 The largest single sukuk issuance on record to date w as just issued b y Dubai $3.52 billion July 2007, the gov the f rst ever sukuk offered by the government of a non-Muslim country.

Takaful Takaful is Islamic insurance. Insurance is a modern concept and therefore is not found in an y of the classical Islamic te xts. Insurance means that a person or business (the insured) makes periodic payments (insurance premiums) to an insurance provider so that in the e vent of loss (of in ventory, house, car , etc.) the insurance pro vider will compensate the insured par ty for that loss. The concept of insurance is contro versial; ne vertheless, Shari’a scholars ha ve come to reco gnize the impor tance of insurance in the inter national business arena. Takaful is one of the f asted growing areas of Islamic f nance. I did not inter view anyone specif cally about takaful during my f eldwork because the f eld is generall y considered to be some what separate from traditional Islamic f nance. It will be described brief y, ho wever, to illustrate how a conventional method of managing risk can have huge implications for the practice of Islamic f nance.

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What are the prob lems with insurance? F irst, the industr tainty about events beyond its control. Insurance deals with an amount of uncer tainty ( gharar) because the outcome of a vent is uncer tain in the present. In a sense insurance is gambling (maysir), which is forbidden under Islamic law ely that every insured par insurance companies effectively take a gamble that it will make a prof en after it pa ys its insured customers in the e vent of a loss. This is the second objection to insurance (Lewis and Algaoud 2001). Life insurance presents a par ticularly diff cult challenge to the concept of insurance because of the idea that no one can predict the end of life and that to insure the event shows distrust in God’s life plan.2 A third objection to con ventional insurance is that most insurance companies invest their premiums in forbidden riba (interest-bearing) in vestments (V ogel and Ha yes 1998). However, this objection can easil y be overcome by investing in one of the many Islamic institutions available today. Conventional insurance operates on a contract pan

ms of payerage. The word for Islamic insurance, takaful, means and ref ects the worldview built into a takaful ar rangement. In general, a takaful ag reement is a collecti ve enter prise, in which Muslims pool their resources in order to aid each other in the e vent of a loss (Vogel and Hayes 1998). Members make periodic payments into the fund and the compan y inv cally. This investment is made on a mudaraba basis, with the member acting as the f nancier and the takaful company as the mudarib (entrepreneur). This ar rangement also helps to mitigate the element of uncer yments, as the members would expect periodic payments on their capital inv This ar rangement is also consistent with the concept of tawhid (unity), because economic actors are pooling their resources to benef t the group.

Partnerships in Business Practice Just as f nancial str ect an emphasis on partnerships, indi viduals w orking in the industr y view IBF’s business practices as a w ay to emphasize that same concept. The author interviewed ver vate In v Off ce. He states that w hat mak es an IFI distinct from a con v e e more interaction with each other . In addition, the y share the f nancial risk of the transaction. Mohammed: It’s more of a partnership . . . if I am your client my relationship with you is by taking the same risk. y oppor y inv for instance take a decision of making a real-estate investment so in this case the bank and the client take on—sharing the risk. That’s the relationship that I expect from the Islamic bank. Interviewer: Right, so maybe more interaction. Mohammed: More interaction, more involvement, wing the customer and what I have seen from my own experience, once you get into an Islamic bank y w everybody.

Par aspect suppliers and consumers of funds and reinforce the idea of community. Rania, the general manager of a ladies’ branch of a major Islamic bank, states that the par tnership aspect of Islamic banking is as impor tant as the amount of prof t made b y the bank or the customer. She believ pla t system: And then they also have the f e ting you, Islamic banking. It supports y terms of par ou, in terms of management, so that gives you another f exibility and choice so that in case the business fails for some reason, you are not completely left on your own, high and dry, wing what to do. Children aren’t driven out of the house because you ow some money or something like that. We try to help you out in all possible ways to prevent that.

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From the customer’ s perspecti ve, an emphasis on par tnership is a positi ve aspect of Islamic f nance. The author talked to a customer about the par tnership concept: Manoj is a v ery successful owner of multiple businesses in Dubai, including marb le and tile f actories. He had been li ving in Dubai for over thirty years so he had w atched the g ro nance from g round zero. y emphasizes that an yone can par he does. P art of w hat has made him so successful is the fact that he f nds the best deal in the mark et, and he says that, often, Islamic f nance provides the best f nancial deal. In addition to that, he feels that Islamic banks look more at the merits of the project and the customer rather than the interest rate, as the international banks do. The Islamic bank’s prof t is tied more to the project than the w orld interest rate. He feels v ery comfor table with this method of f nancing and stated that he w ould rather have a par Hamad w as the director of the Islamic Banking di vision of the Dubai Inter national F inancial eldwork. He is a UAE national who was educated (undergraduate and g raduate) at a prestigious, sociall y liberal university in the United States. He is v ery philosophical about the state of Islamic f nance in the Gulf re gion. The discussion had dig ressed from the for mal questions and w ere talking about w hat he sees as strengths and w eaknesses of the industry. In addition to what he perceives as a lack of innovation in IBF , he sees the “entanglement of religious beha vior” in business to be a w of the industr y. He sees IBF focuses too much on ork where it should be taking the principles of Islam and applying them on a more fundamental level. Hamad: I think we have to get rid of this model if we want to hav y international Islamic f nance. We have to separate it. I mean, if you create a truly ne y that does things in a certain way that ork. So the contracms change—this is what you do in Islamic

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f nance—so the contractual term changes and reposition what you are to commercial f nance from lenders to investors to partnership (italics added). This is what they do. Islam rejected the usury concept, and consider[ing] that most f nancing is usury ms only change where the f nancial institution turns into more of a partner (italics added).

Hamad’ more innov Islamic f nance.

y is that it needs uly uphold the principles of

building business practices, IBF institutions stri ve to contribute to the welfare of the Muslim commu. For example, Masood of EastWest Bank Corporation (EWBC)—an inter national, conventional vision—views his involvement in IBF as a way to promote the Muslim community’s welfare: Well I always as a Muslim had a passion for this elfare as such . . . and I always had a realization that you can’t have a strong economy unless you hav And to hav And I was involved in Islamic ting Islamic f nancial institutions in either managing their money or doing transactions for them as a banker.

It appears that the discourse of “IBF as commuvice provider” is a theme in the off ces of EWBC: the idea that banking is providing a needed y Masood’s colleague, Peter: I mean there are things that you once used to share with the community—for example the building of your house—the whole village comes together. You help me, tomorrow you want to build your house, I’ll help you. Now we are li v wn job so we pool our resources in f nancial institutions, so instead of me going house to house to ask for help to build my house, [I] borrow money, build my house and then I will repay m is a social function—very important.

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Peter also recognizes a very important fact in the w orld toda y: that institutions ha ve tak en o ver some community functions. If institutions and aid agencies are now providing assistance to the community, then it follows naturally that those tions should share some of the core v alues of the community they intend to help.

The Financial Community and Trust Being par le to tr ust others members of that community . The author spoke with Hesham, who was born in Pakistan but left w hen he w as a small child. He has lived in the Middle East and in the United States, and now runs a conventional f nancial management compan uctures Islamic transactions. At the time of the inter view, he w as relatively ne w to the f eld of Islamic f nance and was going through the process of introducing an Islamic hedge fund. He had some obser vations about the function of the Islamic f nance industry as a bridge betw

ticipation in a mere profession. Rania, who was introduced earlier in the chapter, also conf rms this feeling of tr ust, and feels it especially in the Islamic banking environment: I feel that it’s a very fair system. The only thing is that there are no hidden charges; they are very fair with the customers. I mean I work and w w. And people in general hav aith and caring. I’ve seen the compassion in here which I have not seen in foreign banks.

Just as Mandaville (2004) suggests in his analysis of the histor , that many Islamic f nanciers recall in their imagination the early da f nance. Tony is an accountant w ho has w orked with Islamic f nance in the accounting practice r un by his father and himself. Tony: Islamic banking probably has more because that was probably set as a precedent by the prophet him.

It’ actually . . . the world view of Islam has changed in my opinion because Islam is truly global today. American Muslims will be ver European Muslims will be ver Asian Muslims or Middle Eastern Muslims and so on and so forth because they’re American, European, Middle Eastern, Asian and they have their own perspectives in that sense. I never really thought of it as a—as a truly global (religion)—I never really saw it as that.

Hesham became a w v Islam onl f nance space. In conjunction with that di v

, the ws ust among themselv es. It is poses of looking at the self, nance does provide a mediating inf uence in ho w Islamic pracy in their li ves. Many IBF practitioners see themselv es as par t of a

wer: Right. Tony: Because he’s honest, honorable and he would look after those assets—so Islamic f nancial ly that is the most important principle that they should adopt—that whatever’s ou, you have to look after in the best possible manner .

2005) allows Tony to see IBF as being inculcated with a high lev Yasir, of Ethical In vesting Cor poration, raises y from within the IBF community itself, but as a w ay to promote interaction with the conv Yasir: We actually try to tell them [conventional ers] that “what we do is very, v what you do” but we have a sort of f ltering that we have to superimpose over what it is that they do. So we always try and make them feel, especially

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w you don’ hat you don’ w, we want to avoid confusion. ve come across tend like to create a mystique around the whole y w Islamic industry, to make it inaccessible to their Wester parts. They feel threatened so they say “no no no there’s no way you guys can do it”; “you need the Shari’a [Board] and it’s impossible to talk to them and it’s impossible to reach them and you have understand this and that.” It’ y not so, it’s an accessible market. We’ve y Western institutions that have already set up shop and we take an opposite view. I mean we tell people literally “I do exactly what you do however I have to do it within these guidelines. You have to do it within your guidelines” but amazing similarities.

Yasir sees trust as an important component of .

Shari’a Standards Board Another wa the str Shari’a board appro val for e v transaction. A Shari’a Standards Board (SSB) is composed of Islamic scholars, w ho are f uent in both Islamic commercial la w and inter national f nancial principles. The SSB’s purpose is to insure that Islamic law is being followed accurately in the business practices and f nancial ar rangements of the IFI. A separate f nancial standards board evaluates the eff cacy of f nancial transactions, just as it does in a con v o boards often work together. Islamic scholars must pub licly declare that a can go ahead with that transaction. A company’s SSB does this b y issuing a a (religious declaration). A transaction does not adhere to Islamic law if it is not accompanied b y a a, ram explains: “the a is kind of more e xpected by the retail clients . . . the retail mark et wants to see a a.” The issuance of a a makes the transaction Islamic in a way that is recognizable to members of the , and members that

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transaction will meet their moral criteria for business practices.

Conclusion The industry of Islamic banking and f nance structures its business practices and f nancial actions according to a belief system that counts , par tnerships and tr ust as its highest priorities. Islamic f nanciers reinforce business practices and f nancial str uctures that emphasize ts of sharing both prof ts and losses with fello w humans, rather than a system that focuses attention on prof t only. IBF practitioners align themselves morally with cor porate social y responsib le in vesting movements in the way they expect to receive prof t on investments while at the same time impro ving upon moral imperati ves, such as building community and fostering health y business practices. IFIs take the additional step of monitoring their own activities through a Shari’a Standards Board charged with upholding and monitoring the moral eff cacy of the compan y’s acti vities. Through its f nancial str uctures, business practices and cor porate gov nance provides an example of ho w business practices can be aligned with moral beliefs.

EndN otes 1. The f rst takaful (Islamic insurance) compan y was launched in the U AE in October of 2002 (Khaleej Times ne wspaper ar ticle, October 12, 2002). 2. Vogel and Ha yes (1998) point out that this should not be a concern because insurance protects the li ving from “adv quences” (p. 151) of death and does not mak e any prediction about death itself. Note: Notes and references removed for publication .mhhe.com/busethics2e.

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Reading 10-3

Why “Best” Corporate Governance Practices Are Unethical and Less Competitive Shann Turnbull

1.I ntroduction This reading e xplains w hy Pub licly Traded Cor porations (PTCs) are unethical in the US, UK and other “Anglo” type corporate gover Malaysia, Ne w Zealand , Philippines, Singapore, Thailand and many others. The reading also identif es how the ubiquitous unethical conf icts expose f rms to being less competitive. The ne xt Section outlines ho w the moder n corporation represent a sub-optimal institution for eff ciently and equitab ly allocating resources by mark et forces because the y allo w in vestors to become overpaid. Investment overpayment is ineff cient and so inconsistent with the rationale for a market economy. w investors’ get o verpaid and obscure in vestment ns. It can be argued that the overpayment of investors is unethical. w the constitutions of Anglo (PTCs) provide directors with absolute power to manage their o wn conf icts of interests. This gi ves directors the ability to cor selves and the business and/or har m the interest of stakeholders. It also f acilitates excessive payments to e xecutives and unethical cor porate beha viour. F ers and v enture capitalists introduce checks and balances on the po wer of directors so as to protect the they advance to a company. Such practices raises the question w hy stock e xchanges, re w does not require similar checks and balances to be introduced into the constitutions of PTCs. The concluding Section four describes ho w abuses of power by directors can be remo ved and/ or ethicall y managed b y shareholders introducing

changes in the cor ter as found in some non The concentration of po wer, ironically denies directors of larger f r y of management, intelligence to e valuate and direct management or the business, and (b) effciently and effectively control the business. The reading outlines ho w additional operating and competiti ve advantages can be introduced by cor porate constitutions also pro viding for mal processes for stak eholders to infor m directors on the Strengths, W tunities, Threats (SWOT) of the business and its management independently of management. The reading illustrates w hy so called “best cor porate go vernance practices” are both unethical and less competitive. It also shows that correcting both problems can be achie ved together in a selfreinforcing w ay b y the introduction of “netw ork gov urnbull 2002a).

2. Is Overpaying Investors Unethical as Well as Being Inefficient and Unequitable? The reasons w hy moder n PTCs are not eff cient, equitable or ethical can be traced back to their dev rangement for English So vereigns to raise re venue w hile at the same time privatising the cost of empire building. In medie val times “Bodies cor porate” w ere created by Royal Char ters to g rant English to wns some rights of self-government. The progenitor charter of the “City of London Cor poration” dates from 1067. The charter granted to the British East India Compan y in 1601 pro vided self-go verning

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powers. Its board w as described signif cantly as a “Cour t of Go vernors”. The compan y w as gi ven monopol n for paying a tax hile also paying the cost of gov the colony established by the merchants. Consistent with their role of empire building and governing foreign colonies English cor porate charters obtained their rights in perpetuity. As a reaction to the f ailure of the South Sea Compan y, English la w made it ille gal from 1721 to 1825 for tw viduals to for m an enter prise without a go vernment charter. In continental Europe however, corporations could be established without a Char ter from the So v Instead the y w ere estab law char ter/shareholder ag reement that typicall y limited the life of the enter prise to around 20 to 30 years (Turnbull, 1998). The commercial incenti ve for limited life char ters was that it allowed inv n of their in vestment as w ell as a competiti v n on their investment without the need for the enter prise to be publicly traded. Unlimited life allowed both foreign and local in vestors to get paid for a longer period than that the y required for obtaining the incentive to in vest. The overpayment of in vesplus incentive to invest represents a “surplus prof t”. Sur plus prof ts are not repor ted by accountants nor reco gnised b y economists (T Besides pro viding sur plus prof ts, unlimited life charters allow foreign interests to control local economies as occur red in the US colonies before the American w ar of independence from 1775 to 1782. “Ha wn off English rule, the revolutionaries did not give governors, judges or generals cer and for a limited number of y ears” (Grossman and Adams 2003:6). In addition, cor porate char ters were rescinded if the business created har m. the US Supreme Cour t was ask ed to o ver ok granted in 1769 by King George III, one legislator stated was such an action would accomplish “what

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the whole power of the British Empire, after eight years of b loody conf ict, f ailed to achie ve against athers” (Grossman and Adams 1993: 11). The 20-year char ter of the Second Bank of the United States w as not rene wed in 1836 e ven after it provided bribes to Congressman, journalists and “men of distinction” (Galbraith 1976: 80). Ho wever, later “a handful of 19 th y judges ga ve corporations more rights in proper ty than human beings enjo yed in their persons” (Grossman and Adams 1993: 4) obtaining unlimited life to accumulate w gislators and “rewrote the laws governing their own creation” (Grossman and Adams 1993: 16). Terminating the life of the corporation did not mean that its ph ysical operations w ere also ter minated as illustrated b y the man y pri vately constructed US T npike highw ays transfer red to public ownership. My alter nativ porate ownership over time from the in vestors to the “strate gic stakeholders” that no f rm can exist without like the employees, suppliers and customers (T urnbull 1997, 2000b: 406–8, 2001). The transfer of o wnership rights from in vestors to the strate gic stakeholders of record w ould limit the over payment of investors while also distributing w ealth to man y citizens without the need for taxes and welfare (Turnbull 1975: 98, 2000b: 410). Wealth inequality generates a political mandate for gov elfare pa yments, taxes and so the size and dead w eight cost of government. The o verpayment of in vestors is not repor ted by accountants because the what period of time in vestors rel y on for obtainns to mak e the in vestment attractive. The higher the risk then the shor ter is the in vestment time horizon. Venture Capitalist use time horizons that ma y onl y be a couple of y ears w f rms might use a time horizon of up to ten years. Investors require cer tainty in the foreseeab le Even in mature the foreseeable ears because of: competition, changes in mark ets, technolo gical

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obsolescence, social and political changes. In an y event, the present v alue of e received after ten y ears becomes tri vial when discounted back at a compounded oppor rate (Turnbull 2000b: 409). In addition, accounting prof ts under-report the cash received by investors b ns of the investment created by depreciation or depletion allow n on the investment. If for example an investment w ver a f ve year period, the non cash e xpense introduced to reduce the reported prof t would become 20 percent of the in vestment each year for f ve years. As a result, if accounting doctrines w ere ignored and prof ts were repor ted in ter ms of the cash sur plus produced each y ear another 20 percent w ould be added to the repor vestment1. prof ts are inconsistent with the rationale of a mark et econom y to eff ciently allocate resources. Surplus prof ts not shared with those who are essential for their creation represent an injustice. Sharing surplus prof ts with stakeholders also creates a pub lic good by distributing purchasing power in the econom y to maintain production. Distributing w ealth in this w ays pro vide a more ve polic y initiati ve for politicians than the alternative of increasing tax, welfare payments and cost of gov urnbull 1975: 98). If ethics are deter mined b y w hether justice, rights, the pub lic good or utilitarian outcomes are fur porations that pro vide investors with sur plus prof ts do not meet the test of being ethical. One would then be forced to conclude that the contemporar y system of cor porate capitalism is not ethical. Agendas for mitigating this prob lem that is one of the “seven deadly sins of capitalism” (T Turnbull (2004). Speiser (1989) ar gues that not “sharing a piece of the action” (Speiser 1977) with emplo yees is unethical. This view is consistent with the concept of “Tr y Mahatma Ghandi (1979: 7) w ho said: “Supposing I ha ve come b y a fair amount of wealth—either by way of legacy, or by means of trade and industr w that all that w

to me is the right to an honourab le liv better than that enjo yed by millions of others. The rest of m y w must be used for the welfare of the community.” Another way in w hich PTCs become unethical is from the abuse of po wer. The concentration of power in PTCs creates unconscionab le conf icts of interests for directors. Ironicall y, it also denies directors the ability to carry out their fundamental f duciar To creditab ly achie ve these objecti ves directors require infor mation obtained independentl y of le for directors to rel y only on infor mation provided by management to e valuate either management or the business. These problems are the subject of the following Section.

3. The Corrupting Power of Anglo Corporate Charters This Section considers ho w the prob lem of directors possessing excessive and inappropriate powers is created b Anglo PTCs. All cor porations that possess onl y a single/ unitary board pro vide directors with absolute power to manage their o wn conf icts of interests. Instability is introduced when these conf icts are compounded in f rms by their employees, suppliers and/or customers to e xplain why dehy so fe w such f rms exist in Anglo cultures. However, sustainable employee controlled f rms do e xist in Anglo cultures but these a void untenable conf icts by introducing a separation of powers (Turnbull 2000c: 177–98). In some European jurisdictions the la w requires cor porations to ha ve two or more centres of po wer (Anal ytica 1992). The US incor porated Visa Inter national, lik e the Spanish stak eholder controlled Mondragón Cor poración Cooperativa (MCC) has over a hundred boards. Both have proved to be highly eff cient and competitive. One reason is that multiple boards

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control with also a reduction in infor mation: overxity in decision making (T As noted by Lord Acton (1887) “power tends to corrupt and absolute po wer tends to cor rupt absolutely”. Directors of a unitar y board have absolute power to manage their o wn conf icts of interest to cor rupt both themselv es and the business. F or example the y possess the po wer to control: their own appointment, remuneration, retirement, management of related par of the auditors. All of these po wers provide ways to di vert v position of directors while none are required to add value for shareholders. F or these reasons it mak es ers and Venture Capitalists to pro y can veto any of these activities. Additional “inappropriate po wers” are identif ed b y Monks and Sykes (2002: 9) w hich would be mitigated , inhibited or eliminated w hen a company was subject to an agreement with a V Other inappropriate po wers b y w hich directors can further their own interests but are not required to add v alue for shareholders is the po wer to control meetings of shareholders, count the v otes for director election and employ the auditors for additional work. The le gal pur tory auditor repor ting to shareholders is dif ferent from that for appointing the US regulatory Auditor who repor ts to both the directors and shareholders (Turnbull 2005b: 55). However, the selection, control and remuneration of the Auditor appointed to judge the accounts of the directors is unethical in both jurisdictions for the same reason that it is not ethical for a person being judged in a court of law to select, control and remunerate the Judge (Shapiro, 2004). The inte grity of Auditors and their profession are compromised by being put in the position of judging the accounts of the directors who pay them. Their creditability if then fur ther compromised b y the law requiring them to attest that they are “inde-

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ordinary meaning of the word “independent” they are not (T urnbull 2007). y should the pub lic believe an Audit report when Auditors can legally carr e conduct to state that they are “independent”? Likewise, company directors are forced into an unconscionable conf ict of interest of paying those that judge their results. All directors are accountable for the results published in the f nancial statements w hether or not a director is classif ed as being “independent”. Requiring companies to conpendent directors” does not remo ve the inherent conf ict of interest. It ackno wledges the prob lem but makes its worse by giving false comfort while nal auditor to check on management with that of the e xternal auditor (Turnbull 2005b: 56). According to Clark e (2006), “The w hole pur y under theorized, leading to inconsistent r ules”. He goes on to say that “important elements of the concept of and rationale for independent directors remain curiousl y obscure and une xamined”. This has led Rodrigues (2007) to refer to the “fetishization” of independence. Notwithstanding the unconscionab le conf ict of interest created for both compan y directors and auditors, this unethical practice has been institutionalised into la w by the Sarbanes-Oxle y legislation and enshrined in numerous cor porate codes and so called “best practices” in man y other jurisdictions. In this w ay conf icts of interests and unethical practices ha ve become “best practice” and mandated by law! The Sarbanes-Oxley Act has been described as “Quack Cor porate Governance” (Romano, 2004) and a case study of its f ailure reported by Turnbull (2008). The unethical relationships are a voided in a ho require the shareholders rather than directors. The author or ganised shareholders of a start up f rm to change its constitution

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(T y law was required and this could appl y to man y other jurisdictions. lished with the English compan y’s Act of 1862 adopted such a pro vision and this idea w ard to the UK government in 2004 by the National Association of Pension Funds (AccountingAge 2004). To justify e xcessive remuneration, directors and their acol wever, this objective is not required b y company law and I have never discovered such a requirement written into an y cor porate constitution. Cor porations can be set up as non-prof t organisations or as a charity that give away value. The legal duty of directors in both the US and ther the interest of “the compan y as a w ts can interpret in many ways. As no operating company can exist without suppliers, employees and customers it provides a basis for directors to be concer ned about these stak eholders as w ell as the shareholders. It also pro vides a basis for creditors and bond holders to e xpect that upheld b To allow directors to take into account the interest of stak rate could be amended to give various stakeholders constituencies a v oice. As the operay gic stakeholders it is very much in the interest of shareholders that directors not onl y hear from stak eholders but to become engaged with them to further their This is w hy it mak es good business sense to for mally reco gnise stak eholders and give them a voice in the governance of the business. The for mal in volvement of emplo yees, suppliers, contractors, distributors, agents, customers and host community in the go vernance of a business can provide manifold benef ts as illustrated in stak rms like the MCC for reasons identif ed by Tur This is outlined in the next Section that considers how to

ly manage conf icts of interest that can lead to the abuse of power and unethical behaviour.

4. Power to Manage Does Not Require also the Power to Govern This Section considers how the conf icts of interest of directors can be eliminated , mitigated and/ or managed in a creditab le and ethical manner . It concludes that the la w, regulators, stock-exchange listing r ules, cor porate governance codes and cor responsible in per ing unethical conf icts of interests. conf icts of interest arise because directors obtain not only the power to manage the business but to also manage the process b y which they gov ve the power to cor es and the business that f nanciers make it a condition of adv ancer of directors in such wa add value to the business is not inhibited. For example, loan agreements with ers may require that their approval be obtained for: changes in the auditor, board composition, board remuneration, loans to board members, and major in vestment decisions. V y require additional limitations and may require one or more nominees to attend board meetings and/or become a director. With bankers, these powers become part of the loan agreement and do not nor mally involve the shareholders. Venture Capitalists obtain their powers through an agreement with all shareholders as the y require broader safeguards. The Association of a compan y also represents an ag reement among all shareholders as to how the company is to be governed. A shareholder ag reement can be used to o verride these arrangements that represent the constitution of a corporation. Private corporations normally mak of shares subject to the appro val of the directors. Stock Exchanges require companies that wish to be

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publicl

They may also impose other pro visions so the practice of stock e verned tent of cor question as to w hy Stock Exchanges and Re gulators per mit f rms to become PTCs with directors obtaining the pow es and the business. A par ticular puzzle is w hy Venture Capitalists (VC) who arrange for a f not embed the in vestor protections pro visions of their shareholder ag of their investee corporations. In this way the VC would be ab le to protect their shareholding and that of the public. It is to protect public investors y forbid a VC to dispose of all their shares when a company becomes a PTC. However, to become a PTC, Stock Exchanges require VCs to dissolv e their shareholder ag reements so that no single shareholder has an y special overriding powers. However this removes the ability of a VC to protect either their or the pub lic interest! By embedding in the cor porate constitution the checks and balances of shareholder ag reement no particular shareholder w ould obtain special po wers to allow all investors to obtain superior investor protection. In addition, the compan y could obtain superior operating and competiti ve advantages by gic stakeholders as considered below. One possible answer to the puzzle of w hy VCs expose themselves to the risk of being subjected to the abuse of power of inexperienced and/or unethiy have not considered the option of amending the cor A reason for this is that uni versities do not ha ve courses on ho w to design cor porate constitutions because the y are widel y accepted as a culturall y determined given and not an operating design variable. There are two fundamental design f aws in constitutions of

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unethical po wers of directors and (ii) absence of systematic process for directors to car ry out their fundamental f duciary duty to monitor and direct management and the business for in vestors with information that is independent of those the y are monitoring and directing. Some of the other mostly related reasons why it is not rational to trust Anglo PTCs are: (iii) of a dominant shareholder to unf airly and covertly extract v alue through related par (iv) Ability of directors to unf airly and co vertly extract v alue from the business; (v) Inability of directors to deter mine w hen their tr ust in management might be misplaced; (vi) Inability of an y single director to pre vent inappropriate or unethical behaviour; (vii) xternal auditor to present the accounts in a manner of their choosing; (viii) Ability of directors to control the y become accountable to shareholders by controlling general meetings including the counting of v otes and the e xercise of pro xy votes; (ix) Ability of directors to use inside infor mation to trades shares in the company without the counter par ty being infor med w hether or not the director later make pub complex or ganisation (x) Infor mation overload to These and other ‘Corrupting powers of a unitary board’ are presented in Table 3.6 of Turnbull (2000c: 115). To overcome the f rst two fundamental f aws in Anglo cor porate constitutions and man y of their derivative problems, two amendments are required to introduce: (a) Checks and balances on the po wers of directors and (b) Processes for directors to systematicall ard information from eholders other than the shareholders, independently of management on the SWOT of the management and the business. There are innumerable ways in which corporate size that can f There are v arious approaches by which the power of directors to manage the business can be separated from their power to govern the f r mance. US legal scholar, Dallas (1997) suggested a “Dual

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board and board ombudsperson”. In I introduced a second board described as a “Cor porate Senate” in a star t up compan y to allo w it to ciently. Details are provided in Turnbull (2000a). It was modelled on the “Watchdog Boards” established in the MCC.

A necessar y but insuff cient condition for a director to act independentl y is to ha ve the: (i) the information to act; (ii) the will to act and (iii) the ve voting can provide directors with the will to act to be a w histle blower privately and also secure his re-appointment to the board. With its veto power the Senate can provide by shareholders on a democratic basis of one v ote vately to per shareholder rather than the plutocratic basis prevent her/his colleagues and/or an y dominant of one v ote per share. This ar rangement protected shareholder making unethical decisions. Ho wever, investors b y the Senate ha ving v eto po wers o ver to obtain operational infor mation to act directors any action in w hich any director had a conf ict of also need a systematic process for obtaining infor interest. The executive powers of the Senate w ere mation independently of management. limited to appointing and controlling the auditor Stakeholders can pro vide infor mation for the and controlling shareholder meetings. The Senate directors, independentl y of management on both the SW OT of management and the business. could veto any director conf ict of interest it could To allo w strate gic stak eholders lik e emplo yees, also take on par t of the role of a remuneration or suppliers and customers the will and means to nomination committee. inform directors, advisor y stakeholder forums are While directors were elected on the basis of one required w hich can be estab lished independentl y vote per share, each share obtains as man y votes of management. It is for this reason that the creaas there were vacancies on the board so that v otes tion of Stak eholder Advisor Councils b y stak ecan be accumulated onto an y specif c director(s). holders needs to be embedded in the cor porate This for m of preferential v oting is described as constitution. “cumulative voting” that is mandated in some jurisDifferent stak dictions like the Philippines w here family control- their o wn separate advisor y for ums according to e voting (Bhagat the nature of the business and the operating relaand Brickley 1984) can allo w minority sharehold- tionships. There are compelling reasons for both ers of a PTC, e ven if it is a subsidiar y of another directors and shareholders to appro ve changes in company, the power to elect one or more directors. corporate constitutions to allo w stak eholders to In this w ay one of more directors can be elected organise their o wn advisor y councils lik e Citizen independently of any parent company or dominant Utility Boards established in the US (Givens 1991) investor. or a Keiretsu Council in Japan. Cumulative voting provides the basis for a sinFor Directors, stak eholder councils empo wer gle director to obtain the will to pri vately b low them with infor mation to car ry out their fundathe w histle to the Cor porate Senate on unethical mental f duciar actions. The board still had the power to convene a directing management and the business independer n a veto voting on ently of management. They pro vide directors a a one share per v ote basis but they would not have way to systematicall y challenge the he gemony of the power to control the meeting and there would management information and obtain the other side be an or ganised and pub lic “lo yal opposition” to of management repor ts. It also allo ws directors to their actions. If a major shareholder did o verturn cross check the information provided by managea Senate v eto then mark et forces could come into ment to detect an play by introducing a discount on the value of their are intrinsic in hierarchical systems as anal ysed shares. by Downs (1967). For both the reasons it is in the

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mation of Stakeholder advisor Stakeholder for ums also pro

work

In Time deliver ers on Total Quality Control of goods and services. Research by Hippel (1986) found that most product innovations w y customers rather than the R & D depar ways that Stak e operations and competiti ve adv antages (Turnbull 1997, 2005a). The introduction of watchdog boards and stakeholder councils creates “netw ork go v found in li ving systems (T urnbull 2002a). Jones, Hesterly and Bor gatti (1997) describe ho w competitive pressures in comple x dynamic industries forces f r ork go vernance. The reasons w hy network governance allows ordinar y people to achieve extraordinary results as found in the MCC outlined in Section 3 and as explained by Turnbull (2000c: 239–49).

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Network governance not only creates a division of po wer to remo ve and manage conf icts of interests but also introduces a requisite v ariety of communication channels, control and decision making processes to minimize er rors and improve operations. Network governance as outlined in this reading indicates w hy so called “best cor porate gov competitive.

EndN ote 1. It also means that directors can repor t a prof t when a loss results. Consider a compan y that only owned an uninsured in vestment described above that w as destro yed shor tly after a prof t was reported for its f rst year of operation. The return of the investment would be less than 40. Note: Notes and references removed for publication .mhhe.com/busethics2e.

Reading 10-4

How Much Compensation Can CEOs Permissibly Accept? Moriarty Executive compensation has received a great deal of This is due, in par t, to the lar of pa y e xecutives, especiall y CEOs, recei ve. In 2006, the median total compensation of the top 150 U.S. CEOs w as $10.1 million. This is 314 times the $32,142 ear ned b vate worker in the U.S. that y ear. This paper examines some moral aspects of e xecutive compensation. It is not the f rst to do so, but it engages the w perspective. I focus on the duties executives themselves have with respect to their own f duciary duties place a moral limit on ho w much compensation the

excessive compensation lea ves the benef ciaries of their thus is inconsistent with observing those duties. Like others w xecutive compensation, I am primay interested in chief executive off cer compensation. By ‘executiv However, most of what I say applies, with minor modif cations, to the pay of other top executives.

1. The CEO’s Fiduciary Duty I be gin with the common assumption that e xecutives are f duciaries. What does this mean? Mar coux e xplains, “[t]o act as a f duciary means to

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place the interests of [a] benef ciary ahead of one’s o viously, those of third parties, with respect to the administration of some asset(s) or project(s)” (2003: 3). In the CEO’ s case, the asset or project is the f rm. So, CEOs are required insofar as the y are f duciaries to place one par ty’s interests ahead of their own and others’ when managing the f rm. That is, the y have a f duciary to do so. According to some writers, CEOs are f duciar2003). According to others, the y are f duciaries for all stak eholders (Evan & F reeman, 2005). The moral limit I identify exists if CEOs are f duciaries for anyone who stands to lose w hen CEOs accept excessive compensation. This includes shareholders, stak eholders, and cer tain other par ties. To f x ideas, however, I assume that CEOs are f duciaries for shareholders. I fur ther assume that CEOs are f duciaries in a moral, not merel y legal, sense. To deter mine whether CEOs’ f duciary duties in la w have implications for their pay negotiations with directors, all that is required is to look at the rele vant law. My goal is to deter mine to w hat, if an y, implications CEOs’ moral f ve for their ne gotiations with directors. e f duciary duties in the , I drop this qualif er), what follows about how they should manage their f rms? It is standardl y assumed that shareholders w ant to maximize the monetary value of their investments. Thus, in his classic defense of shareholder theor y, Friedman says that a CEO is ob ligated “to conduct the business in accordance with [his emplo yers’] desires, which generally will be to make as much money as possib le” (2005: 8). Let us assume that shareholder v alue is maximized w hen f rm value, which Jensen def nes as “the mark et values of the , debt, and an y other contingent claims outstanding on the f rm” (2002: 239), is maximized. If so, then executives should manage the f rm so as to maximize its value. Managing the f rm this way has implications for ho w much compensation a CEO can permissibly seek or accept from it.

Compensation produces v alue for the f rm by attracting and retaining talented emplo yees, and motivating them to do their best. But compensation includes the f rm’s perfor mance—the lo wer this cost is, the better . It is widel y believed that directors have a duty to minimize this cost. I claim that CEOs themselves do too. Suppose a compensation package worth $10 million is suff cient to induce a CEO to do his best for the f rm, i.e., to maximize its value, so far as he is ab le. But suppose that the CEO would also do his best if he were paid only $9 million. ger package in favor of the smaller one. Now suppose that, if the CEO w ere paid $8 million, he w ould not do his best, and the f rm would be worse off by more than $1 million. In this case, the CEO is justifed in accepting the $9 million package. In general, the optimum amount of compensation for a CEO is the amount that maximizes f rm value, taking into account the cost of the compensation. Of course, a CEO is unlikely to work, or work hard, for free. 1 She will require some, perhaps e ven a lot, of pa y. And shareholders are willing to pay for talent. Hiring a talented but expensive CEO, and properly motivating her , produces more net v alue for the fr ve one, or failing to properly motivate her. But still what is best for shareholders is that they pay the (talented) CEO no more than is necessar y to attract, retain, and motivate her. The CEO’s f duciary duty prohibLet us call this amount—i.e., the minimum necessary to retain, and motivate the CEO to maximize f alue—her minimum effective compensation, or MEC. ective because vating the CEO, and minimum because no less w ould do. motivated e xclusively by self-interested consideravated by shareholders’ interests. (Later in the paper I e xamine the implications of relaxing this assumption.) F inally, let us def ne “excessive compensation” for a CEO as compensation in excess of her MEC.

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In economic terms, a CEO’s MEC is her “reservation w case, extra pay (e.g., in the for m of perfor mancebased incentives) would motivate her to produce an amount of e xtra revenue for the f rm that e xceeds the amount of the extra compensation. In this case, the CEO’ s MEC includes the minimum amount necessary to produce that e xtra revenue. A CEO’s ve, including w orking for another f rm, or not w orking at all. n will depend on her talents, preferences, and mark et conditions. Note that the CEO’s MEC is not def ned in terms of what she is “worth, enue she adds to the f rm (compared to the ne xt most ef fective availab less than her worth. However, the more revenue the CEO adds to the f rm, the better alter native offers she will have. So her MEC and w orth will tend to converge in a free market. As I ha ve suggested, the CEO’ s f duciary duty entails not only a duty not to seek more than her MEC in ne accept more than her MEC if it is To Richard Grasso, former head of the New York Stock Exchange (NYSE), f amously was awarded a $187 million compensation package. In his defense, Grasso said he ne ver had a “tw o-way dialo with the NYSE’ s directors about his pa y. Assuming that $187 million was more than necessary to attract, retain, and moti vate Grasso, this does not excuse his beha vior. CEOs do not a void blame by simply sta ying out of the pa y setting process, as they would in a standard conf ict-of-interest situation. They are required by their f duciary duty to be proactive about ensuring that the y do not recei ve excessive pay.

2. Objections and Replies I have ar w moral limit on CEO compensation: CEOs should not accept e xcessive

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their f rms. In this section, I defend it against objections. Objection 1. This moral limit is moot: a CEO will never accept excessive compensation, because it will never be offered to her. Directors will mak e y to vate her. Mark et pressures will aid directors in this effort. Response. This objection assumes that directors are highl y pow wledgeable with respect to the CEO. Against this, f rst, many writers ha ve ar gued that pa y ne gotiations betw een CEOs and directors are not car ried out at ar m’slength, and in par ticular, that directors do not aggressively represent shareholders’ interests at the bar gaining tab le (Bebchuk & F ven if the y have the will to achie ve the optimal result, directors are lik ely to be ignorant of what it is. Knowing, as they often do, the a verage compensation of CEOs of comparab le f rms does not tell them the precise minimum ef fective compensation of their particular CEO. Thus, w e have reason to believe that it is possible for executives to receive excessive pay, and hence that it is worth determining whether or not they are morally permitted to. Objection 2. When a CEO ne gotiates her compensation, she is not y et a member of the f rm. The emplo yment ag reement through w hich she becomes a f duciary has not been made. So, she does not y et ha ve a f duciary duty to the f rm’s et forbidden to accept excessive compensation. Response. who are negotiating subsequent compensation packages with their f rms. Nor does it appl y to CEOs negotiating their f rst compensation packages with a f rm who are promoted to the CEO’s position from within the f rm’s top management. Both kinds of CEO are already top managers in their f rms, and so have f duciary duties to their f shareholders. from outside the f y when they are negotiating their f rst compensation packages. Although the number of outsider CEOs has increased in recent

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years, approximately 75% of new CEOs are insiders (Jensen, Mur phy, & Wruck, 2004). In addition, at least half of CEOs engage in subsequent compensation negotiations while in off ce. Thus, the substantial majority of CEO compensation negotiations are Even giv tion f ails.

wever, the objecsome CEOs lack f ducihen they negotiate their compensation packages (e.g., because the y are outsiders), all CEOs ha ve these duties w hen the y receive them. This ef fectively pre vents all CEOs their MECs. Consider an e xample. C, an outsider , is soon to become the CEO of f rm F. C negotiates her compensation package before she star ts working for F. Call this time T1. She be gins to recei ve ork. Call this time T2. Because C is not a member of F at T1, C does not ha ve f s shareholders at T1. However, C will be a member of F at T2, and will have f s shareholders at that time. Thus, at T2, C cannot accept more than her MEC. Given that C will receive the agreed upon compensation at T2, it would be wrong for her to seek more than her MEC at T1. T2, and T2 is later than at T1. This claim is easil y refuted. Suppose a per son who is now 30 will be a parent when she is 31. At 31, she will have a duty to care for her child. But it doesn’t follo her (or an y) child no w, when she is 30. Ne v less, the fact that the 30 year old will have a duty to care for her child at 31 constrains w hat she can do at 30. She cannot at 30 promise a friend to de vote all of her resources and attention when she is 31 to political activism in a distant nation, for she will be ob ws she will be ob for her child at that time. In the same w ay, since C is negotiating at T1 the nature of an event that will occur at e at T2 constrain her actions at T1. Objection 3. CEOs are not required always to act so as to maximall y benef t shareholders. They

are only required to do so w hen they are acting as managers, i.e., managing the f r when they are acting as parents, i.e., raising their children, they need not act so as to maximally benef t shareholders b y, sa y ying to persuade their children to buy their f rms’ products. The same goes for w ers on a softball team or members of a neighborhood w atch. On this objection, when CEOs are negotiating their pay, the y are not acting as managers. Put another way, this is not something they need be with in their role as managers. Here they can act as private citizens: the duciary to shareholders, and so are free to accept excessive compensation. Response. The claim that CEOs are required to maximize shareholder retur n onl y insof ar as they are acting as managers is cor rect. It would be absurd to suppose that they are required to do so in every facet of their li ves. However, the claim that, when they are ne gotiating the ter ms of their compensation, they are to act as private citizens and not as managers, is wrong. Surel y, the question of how much to pay a f rm’s workers is a business decision. Attracting, retaining, and motivating talented workers—while not o verpaying them—is rm’s success. So, the CEO’ s f duciary duty to shareholders to maximize f rm value requires that she concer n herself, at some le vel, with the compensation of the f rm’s employees. But the CEO is an emplo yee too, so it follo ws that she must concern herself, as a mana ger, with her o wn compensation. In e xamining the f rm’s pa determine whether any cuts can be made to boost f rm value, she cannot exclude her own pay from consideration. Much as she might lik of the duty not to accept e xcessive compensation, she is not. Objection 4. A par wed can waive its performance, wholly or in par t. If they do, the party who ow ligated to perou from y ve me wherever I want with respect to, say, driving me to the airport. According to this objection, shareholders— or their representati ves, the directors—have done

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something similar with respect to the CEO’ s f duciary duty. y leaving it in place, the y have w aived it in the conte xt of deter mining the CEO’s pay. They have not done so explicitly, by aiv y have done so implicitly, by employing a ne gotiation to set the CEO’s pay. Employing an adversarial process signals that, in this conte xt, the CEO’s f duties are suspended: directors are safe guarding the f rm’s interests, and the CEO can do as she pleases, including accept excessive compensation. Response. To be clear , the issue is not w hether the CEO and directors (merel y) recognize the application of the CEO’s f duciary duty to the pa y setting process. This duty can appl y e ven if it is not thought to apply. The issue is whether directors have waived its obser vance. The objection claims that they have. In response, it is not clear , f rst, that directors can waive executives’ f duciary duties. Just because one is o w benef ciar er to waiv aive y ve me, though I benef t from y vance of it. If y e have entered into, then I can w aive its perfor mance. ve me wherever I want is that you have promised me to do so, then I can waive your duty. But it is not clear that the CEO’s f duciary to shareholders is contractuall xample, argues that the reason e xecutives owe f duciary duties to shareholders (as opposed to others) is that this is “the most sociall y benef cial system of economic organization” (1994: 401). If he is right, then directors cannot w aive CEOs’ f duciary duties. It does not follow, of course, that the y cannot be w aived simpliciter. one can waive them, it is society as a whole. For the sak e of ar gument, however, let us suppose that directors can w aive CEOs’ f duciary duties. According to the objection, the e vidence that they have done so in the conte CEO’s pay is that the process used to deter mine it is adversarial in nature. This is poor e vidence. At

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present, the CEOs’ duties not to accept more than their MECs is not widel y reco ould be foolish for directors to allo w them a free hand in setting their o wn pa y. Ev en if this duty w ere reco negotiation as a way to protect the f rm. CEOs will be tempted to seek excessive compensation, even if the w they should not. Objection 5. ity, while people are sometimes required to benef t xpense, they are not required to make enormous sacrif ces for them. For example, this morality w ould ha ve us gi ve some—perhaps even a substantial amount—of our w ealth to the poor, but not so much that we end up impoverished ourselves. Prohibiting the CEO from accepting excessive compensation, according to this objection, places too g reat a burden on him—i.e., it is ed b y his f . Response. This is simply implausible. Recall that e xcessive compensation is compensation in excess of the CEO’ s MEC, w n of a xt best option. Since a CEO’ s MEC depends on his par ticular talents and prefer ences, it is diff cult or e ven impossib what any given CEO’s MEC is. But fe w deny that CEOs are (at least percei ved to be) highly talented individuals w ho can command considerab le premiums for their labor . As a result, e very CEO is likely to ha ve at least one other v ery high-paying option for w ork. This means that their MECs will be v ar higher than the compensation of the average worker. Given this, it is implausib le to suppose that prohibiting the CEO accepting excessive compensation is too demanding. To be sure, a CEO w ho refuses to accept more than his MEC might ha v ge sum of mone y. But it doesn’t follow that the burden he is under is heavy, given how high his MEC is likely to be. Objection 6. The prohibition against accepting more than one’s MEC discriminates against steward CEOs, i.e., CEOs w ho are intrinsicall y moti vated by shareholders’ interests (Da vis, Schoor man, & Donaldson, 1997). Because of this moti vation,

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it tak es less compensation, other things equal, to attract, retain, and motivate a steward CEO than an agent CEO, i.e., one who is motivated only by selfinterested considerations (Wasserman, 2006). So it seems that the steward CEO accepts more than his MEC at a lower compensation level than the agent CEO. But intuiti vely, the for mer is more vir tuous than the latter . The prohibition against accepting more than one’ s MEC thus punishes the ste ward CEO for his vir Response. This objection misunderstands the def nition of MEC. I said that a CEO accepts more than his MEC w hen he accepts more pa y than is necessar vate him to maximize f rm value, assuming he is acting on self-interested motives only. This assumption is mative standard. The MEC is def ned relative to the compensation demands of the agent CEO . So, a ste ward CEO who seeks more than he actually needs to be , and moti vated does not accept more than his MEC, if that is not more than w hat he would need if he w ere acting on self-interested motives only. It is ne vertheless tr ue that w hether a CEO accepts more than his MEC is in lar ge par t a per sonal matter . It depends on the CEO’ s par ticular hether he, gi ven his preferences and options, would work just as hard for the f rm for less. irst, one CEO’s MEC may be less than another’s, even when all else, besides their preferences and options, is equal. One CEO’s preference for leisure might be stronger than the other’ cult or impossible to tell “from the outside” w hether a CEO is accepting more than her MEC. The prospects, then, for enforcing a ban on doing so is dim. Some might re gard this as prob lematic for m y argument. It might be if m y claim w ere that there should be a law against accepting more than one’ s MEC, so that violators should be subject to civil or criminal penalties. But my claim is that CEOs have a mor to accept no more than their MECs. The validity of a moral rule does not depend on its enforceability.

3. How Low Should CEOs Go? Objection 6 raises an impor tant issue w hich w e have so f ar brack eted. We ha ve measured the CEO’s MEC b y a par tly objecti ve standard , viz., that of the agent CEO to attract, retain, and moti vate him to maximize f rm value assuming he is acting on self-interested motives only. But, it might be while it is desirable to have some objective standard for measuring the CEO’s MEC, w hy choose this one? Instead of pe ational set of the agent CEO, why not pe ard CEO i.e., the CEO w ho is intrinsicall y moti vated by shareholders’ interests? If w e adopt the ste ward CEO as our standard , the prohibition on dri ving a hard bar gain becomes more burdensome. sically motivated by their f duciary duties, steward CEOs need less mone y to maximize f rm value, other things equal, than agent CEOs (Wasserman, 2006). The more w eight the f duciary duty gets in the CEO’s motivational set—i.e., the more of a steward he is—the less money he needs. At the limit, if w e choose as our standard the maximall y “steward-like” CEO , then it seems the CEO can permissibly accept ver ven no, pay. We see no w why it mak es sense to star t, as w e This minimizes the burden imposed on the CEO by the prohibition against accepting e xcessive pay. If this w stronger one can be. But since the for mer is justif can be. Our question is, ho w much w eight should the CEO gi ve to his f vational set, as compared to self-interested considerations? To what extent should he do w hat is best for shareholders (viz., accept less and less pa y), and to what e xtent can he do w hat is best for himself (viz., accept more and more pa y)? Answ question requires w eighing the force of the CEO’ s f duciary duty against moral considerations on the other side.

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The CEO’s f duciary duty is thought to ha ve considerable w eight. It is appealed to to justify laying of f w orkers and mo ving plants to foreign countries, despite the burdens these actions impose on employ to justify prohibiting CEOs from shirking, hiring unqualif ed friends, and empire-building, despite the burdens these prohibitions impose on CEOs. But if w e tak e seriousl y, as man y do, the idea that morality doesn’ t require people to tak e on enormous burdens in order to do what is right, then ving to accept a job as a CEO on the condition that one accepts ver y on the CEO, but on his family. It is unlikely that the CEO’s f duty requires this level of sacrif ce. Moreover, it is probab le that what is best for the f little compensation. There must be incentives for others, both inside and outside the f rm, to aspire to the CEO’s position. One such incentive is high pay for the CEO. This is y tour nament theor y, according to w hich employees in the f rm work hard to win the “prize” of being CEO y required by her f receive a large amount of compensation. This is not to sa y that in some cases the CEO is justif ed in accepting more than her MEC, but that in some cases her MEC, which she may be required to accept, ma the minimum amount necessar and motivate her. The “effectiveness” of compensation is a its on f rm value. We have y with f o cations of their e xecutive compensation packages, that the of these packages results their ing, retaining, and motivating the very persons who receiv vating others, deter ve amount of pay. Finally, it ma y be good not onl y for indi vidual f hole if CEOs negotiate in their self-interest, at least to an e xtent. If CEO compensation is too low, few people will want to become CEOs. They will seek w ork as, e.g., la wyers or inv hole benef ts

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when talented people occup y these demanding positions (Jensen & Murphy, 1990). One way to make it more likely that they do is for CEOs to be highly paid. And one way to promote this is to encourage self-interested negotiation by CEOs.2 In sum, w hile the CEO’ s f duciar x downw aging self ess ne gotiation over compensation, it is unlikely to tell in f avor of her recei ving v ery little pa y. avor of gotiation and thus higher compensation. Deter mining w here the balance of considerations lies—i.e., ho w selfinterestedl gotiating her pay—is a complex inquiry lying outside the scope of this paper . It will be impor tant in this alues s f duciary duty, and e valuate the extent to w hich they are promoted or thw by self ess negotiation over compensation. ver the outcome, m y more modest conclusions seem safe, viz., that CEOs’ f duciaries duties apply in the pay setting context, and imply (minimally) that they should accept no more than their MECs, assuming that they are acting on self-interested moti ves only. Most people believe only that directors hav not to award CEOs excessive pay; I have argued that CEOs also hav xcessive pay.

EndN otes 1. But, it might be said , shouldn’t she? After all, this w ould be best for shareholders. I e xplore this suggestion below. 2. But if this is the reason for high(er) CEO pa y, one might wonder why its cost should fall entirely on shareholders, as opposed to the general public.

References Note: Notes and references removed for publication .mhhe.com/busethics2e.

Glossary A aff rmative action

A policy or a program that strives

tion of proactive measures to ensure equal oppor . In other words, aff rmative action is the intentional inclusion of previously excluded groups. Aff rmative action efforts can take place in employment environments, education, or other arenas. F

” autonomy e free and deliberate choices. The capacity for autonomous action is what explains the alue of individual human beings.

B backcasting As developed as part of the Natural Step, involves imagining what a sustainable future must hold. From that vision, creative businesses then look backwards to the present and determine what must be done to ar v oduction) integrate what is presently waste back into production in much the way that biological processes turn waste into food. bounded ethicality One’s tendency to consider one’s own actions ethics even though they might condemn those same actions in others, or even in themselves if they w ther ref ection or awareness.

C categorical imperative An imperativ or duty; “categorical” means that it is without exception. Thus a categorical imperative is an overriding principle of ethics. Philosopher Immanual Kant offered several formulations of the categorical imperative: act so as the maxim implicit in your acts could be willed to be a universal law; treat persons as ends and never as means only; treat others as subjects, not objects. approach: “buyer beware” in Latin and this approach suggests that buyer. This perspective assumes that ev involves the informed consent of the buyer and therefore it is assumed to be ethically legitimate.

change blindness A decision-making omission that occurs when decision makers fail to notice gradual changes over time. The sum of relatively set traits, dispositions, and habits of an individual. Along with rational deliberation and choice, a person’s character accounts for how she or he makes decisions and acts. Training and developing character so that it is disposed to act ethically is the goal of virtue ethics. Though the term literally signif es children who work, it has taken on the meaning of exploitative work that involves some harm to a child who is not of an age to justify his or her presence in the workplace. The elements of that def nition—har justif cation to be in the workplace relative to other options—remain open to social and economic debate. s 1997 State of the World’s Children Report explains, “Children’s work needs to be seen as happenve or exploitative work at one end and benef cial work—promoting or enhancing children’s development without interfering with their schooling, recreation and rest—at the other. And between these two poles are vast areas of work that need not negativel s development.” A set of behavioral guidelines and expectations that govern all members of a business f rm. ganizations (COSO) COSO is a voluntar ve f nancial repor and governance standards called the Internal Control– Integrated Framework. It was established in 1985 by f ve of the major professional accounting and f nance associations originall nancial reporting and later developed standards for publicly held companies. It has become one of the most broadly accepted common-law agency test A persuasive indicator of independent contractor status that provides the employer hich the work is performed. Under the common-law agency approach, the employ y control the work, but must merely have the right or ability to control the work for a worker to be classif ed an employee. 591

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compliance-based culture A cor which obedience to laws and re ing model for ethical behavior.

vail-

est ict of interest exists where a person holds a position of trust that requires that she or he exercise judgment on behalf of others, but where ligations conf ict with those others. y calculating the consequences of actions. onment

One of the f ve elements that

cradle-to-cradle responsibility Holds that a business should be responsib of its products back into the productive cycle. xpectations, and meanings that inf behaviors of the members of a particular group.

D deontological ethics Derived from the Greek word for “duty,” deontological ethics stresses the ethical centrality of such things as duties, principles, and obligations. It denies that all ethical judgments can be made in terms of consequences.

an organization, and support people in the achievement of the organization’s objectives. The control environment “sets the tone of an organization, inf uencing the control consciousness of its people.”

As practiced by many social scientists, provides a descriptive and empirical account of those standards that actually guide behavior, as opposed to those standards that should guide behavior. Contrast with w.

ate Automotive Fuel Eff ciency (CAFE) Standards Established by the Energy Policy Conservation Act of 1975, Corporate Average Fuel Economy (CAFE) is the sales-weighted av y, expressed in miles per gallon (mpg), of a manuf s f eet of passenger cars or light Trucks. The U.S. federal gover lishes CAFE standards as a means of increasing fuel eff ciency of automobiles.

Diversity refers to the presence of differing nity orientations, genders, religious sects, abilities, social classes, viduals in a f rm. When used in connection with the corporate environment, it often encompasses the values of respect, tolerance, inclusion, and acceptance.

por

overnance

sity

porate

y which

cor towards the objectives of fairness, accountability, and transparency. The structure generally will determine the een the board of directors, the shareholders or o rm, and the f rm’s executives or management. ate social responsibility that businesses have to the societies within which they operate. In v xts, it may also refer to the voluntary actions that companies undertake to address economic, social, and environmental impacts of its business operations and the concerns of its principal stakeholders. nes CSR as “a concept whereby companies decide voluntaril vironment.” Specif cally, CSR suggests that a business identify its stakeholder g alues within its strategic and operational decision-making process. corporate sustaina eport Provides all stakeholders with f nancial and other information regarding a f s economic, en mance.

divestments, or other means. The right to be protected against the arbitrary use of authority. In legal contexts, due process refers to the procedures that police and courts must follow in ex ver citizens. In the employment context, due process specif es the conditions for basic f yer’s authority over its employees. duties Those obligations that one is bound to perform, regardless of consequences. Duties might be deriv w, or from one’s institutional or professional role. e Involves the exercise of reasonable care by a board member to ensure that the corporate executives with whom she or he works car management responsibilities and comply with the law in the best interests of the corporation. board members to be f ganization’s mission. In other words, they are not permitted to act in

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a way that is inconsistent with the central goals of the organization. Requires faithfulness; a board member must give undivided allegiance when making decisions affecting the organization. This means that conf icts of interest are always to be resolved in favor of the corporation.

E eco-eff ciency

Doing more with less. Introduced at

eff ciency is a way business can contribute to sustainay reducing resource usage in its production cycle. economic model of CSR Limits a f rm’s social responsibility to the minimal economic responsibility of producing goods and service and maximizing prof ts within the law. economic realties test A test by w whether the worker is economically dependent on the business or act, is in business for him- or herself. As a psychological theory, egoism holds that all people act onl vidence strongly suggests that this is a mistaken account of human motivation. , egoism holds that humans ought to act for their own self-interest. Ethical e een one’s perceived best interests and one’s true best interests. unications Privacy Act of 1986 lishes the provisions for access, use, disclosure, interception, and privacy protections relating to electronic communications. odic or random review of e-mail communications of employees or others for a variety of business purposes. W) The legal doctrine that holds that, absent a particular contractual or other legal obligation that specif es the length or conditions of employment, all employees are employed “at will.” Unless an agreement specif yers are free to f re an employee at any time and for any , an EAW worker may opt to leave a job at any time for an ing any notice at all; so the freedom is y mutual. ation Houston, Texas, that

An energy company based in

America’s most innovative company for six consecutive years before it was discovered to have been involved in one of the largest instances of accounting fraud in world history. In 2001, with over 21,000 employees, it f led the lar y in United States history and disclosed a scandal that resulted in the loss of millions of dollars, thousands of jobs, the downfall of Big Five accounting f rm Arthur , at least one suicide, and several trials and convictions, among other consequences. Enron remains in business today as it continues to liquidate its assets. ocess sive and rational justif cation for a decision. Rational justif cations are developed through a logical process of decision making that giv things as facts, alternative perspectives, consequences to all stak vism An important perspective within hich holds that ethical values and judgments are ultimately dependent upon, or relative to, one’ , or personal feelings. Relativism denies that we can make rational or objective ethical judgments. Those properties of life that contribute to human well-being and a life well lived. Ethical values w , integ , freedom, companionship, health. ethics Derived from the Greek word ethos, refers to those values, norms, beliefs, and expectations ve and act. Ethics steps back from such standards for how people ects on the standards by which people ve and act. At its most basic level, ethics is concerned with how we act and how we live our lives. Ethics involves what is perhaps the most monumental question any human being can ask: How live? Following from this original Greek usage, ethics can refer to both the standards by which an individual chooses to live her/his own personal life, and the standards by which individuals liv (see below). As a branch of philosophy, ethics is the discipline that systematically studies questions of how we ought to liv ves. s Individuals within an organization charged with managerial oversight of ethical compliance and enforcement within the organization. European Union’s Directive on Personal Data Protection E.U. legislation seeking to remove potential

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obstacles to cross-border f ows of personal data, to ensure a high level of protection within the European Union, and to harmonize protections across the European continent and with those countries with whom E.U. countries do business. ective Covers many of the same issues as Sarbanes-Oxley but applies these require-

H Health Insurance Portability and Accountability Act (HIPAA) (Pub. L. 104-191) that employers cannot use “protected health information” in making employment decisions without prior medical records or other individually identif able health information.

Union exchanges. The updates to the directive in 2005 clarif ed required duties, independence, and ethics of y auditors and called for public oversight of the accounting profession and exter both audit and f the directive strives to improv een E.U. oversight bodies and pro ve and balanced gulatory cooperation with oversight bodies outside the E.U. regulator U.S. Public Company Accounting Oversight Board).

human rights Those moral rights that individuals have simply in virtue of being a human being. Also called Natural Rights or Moral Rights.

F

inattentional blindness If we happen to focus or are told specif cally to pay attention to a particular element of a decision or event, we are likely to miss all of the surrounding details, no matter how obvious.

Federal Sentencing Guidelines for Organizations (FSGO) Developed by the United States Sentencing Commission and implemented in 1991, originally as ganizational sentencing cases. By connecting punishment to lish legal norms for ethical business behavior. However, since a 2005 Supreme Court decision, the FSG are now considered to be discretionar ics for organizations about ways to mitigate ev f nes and sentences by integrating bona f de ethics and compliance prog ganizations. A le the interests of another. keting tion, and placement. th Amendment protections tion’s Fourth Amendment protection ag ab xtends privacy protections to the public sector w s application to state action.

G gatekeepers Some professions, such as accountant, that act as “watchdogs” in that their role is to ensure that those who enter into the marketplace are playing by the ming to the conditions that ensure the mark

norms V ture and theory.

I implied warranty of merchantability ances by a seller that a product is reasonably suitable for its purpose.

Trading of securities by those who hold priv y impact the value of the stock and that allows them to benef t from buying or selling stock. integrative model of CSR For some business f rms, y integrated with the f rm’s gic plan. ol

y an entity’s

vide reasonable assurance regarding the achievement of objectives in the following categories: veness and eff cienc f nancial reporting, and compliance with applicable laws and re The maintenance and either periodic or random review of the use of the Internet by employees or others based on time spent or content accessed for a v poses. The legal terminology for one of the common law claims of invasion of privacy. hen someone intentionall v airs of another when the ould be “highl ve to a reasonable person.”

595

IRS 20-factor analysis A list of 20 factors to which the IRS looks to determine whether someone is an employee or an independent contractor.

Similar to diversity, refers to the ts the coexistence of multiple cultures, while encouraging each to retain that which is unique or individual about that particular culture. alism

J just cause A standard for terminations or discipline that requires the employer to have suff cient and fair cause before reaching a decision against an employee.

L LEED Certif cation

,w ganizations ought to be

ho st ctured.

Leadership in Energy and Envi-

Building” process by which environmentally sustainable standards are applied to building construction and renovation. LEED provides both the standards and the independent third par erif cation to certify the environmental quality of a building.

M marketing y the American Marketing Association as “an organizational function and a set of processes for creating, communicating, and delivering value to customers and for managing customer relationships in ways that benef t the organization and its stakeholders.” described the goals, values, and institutional aim of an organization.

N negligence Unintentional failure to exercise reasonab gligence is considered to be one step below “reckless disregard” for harm to others and two steps below intentional harm. Ethics as a normative that deals with norms, those standards of appropriate and proper (or “normal”) behavior lish the guidelines or standards for determining what we should do, how we should act, what type of person we should be. Contrast with ve. yopia The tendency to ignore, or the lack of the ability to recognize, ethical issues in decision making. norms Those standards or guidelines that establish appropriate and proper behavior lished by such diverse perspectives as economics, etiquette, or ethics.

ee space That environment where hypernorms or universal rules do not govern or apply to ethical uences govern decisions, as long as they are not in conf ict with hypernorms. In other words, as long as a decision is not in conf ict with a h and reasonable minds ma hat is ethical.

O

acing an ethical vision v ve choices, consequences, resolutions, benef ts, harms.

P

moral rights gal rights, which are given to individuals by law, moral rights are those entitlements that individuals have in virtue of moral Sometimes used to denote the phenomena y the f eld of ethics. xt uses to refer to those aspects of ethics involving personal, individual decision making. “How should I live my life?” en to be the . Morality can be distinguished

Occupational Safety and Health Administration (OSHA) The United States Occupational Safety and Health Administration, an agency of the federal government that pub lations for U.S. businesses.

perceptual differences and philosophers have long recognized that indi ve the world independently of their o work. y and inter o Thus, ethical disagreements can depend as much on a person’ framework as on the f o conceptual schema plays an important role in making ethically responsible decisions. ofessional decision making Individuals within a business setting are often in situations in which they must mak wn

596

The practice of caring for

personal point of view and from the perspective of the specif c role they f y responsible decisions require an individual to recognize that these perspectives can conf ict and that a life of moral integrity must balance the personal values with the professional role-based values and responsibilities.

reputation management the “image” of a f

Any information relating to an identif able person, directly or indirectly y reference to one or more factors specif c to her or his physical, physiolo .

rights from being sacrif ced for the greater overall happiness. According to many philosophers, rights entail obligations: your rights create duties for others either to gative” duties) or to provide you with what is yours by right (“positive” duties).

personal integrity The term ‘integ completeness of a being or thing. Personal integrity, therefore, refers to one’s completeness within themselves, often derived from the consistency or alignment of actions with deeply held beliefs. philanthropic model of CSR holds that business is throp , but has no strict obligation to contribute to social causes. Involves reasoning about what easoning , which is concerned with what one ought to believe. Ethics is a part of practical reason. easoning

mation about oneself. The legal and ethical sources of protection for privacy in personal data. ty rights ning actions that individuals can take in relation to other individuals regarding their personal information. If one individual has a v

R

e se discrimination Decisions made or actions taken against those individuals who are traditionally considered to be in pow , such as white men, or in favor of a historically nondominant group.

risk assessment A process to identify potential events that may af , and manage risk to be within its risk appetite, to provide reasonable assurance regarding the achiev ves.

S Safe Harbor exception Considered “adequate standvacy protection for U.S.-based companies under the European Union’s Data Protection Directive. Accounting Reform and Investor Protection Act of 2002) Implemented on July 30, 2002, and administered by the Securities and Exchange Commission to regulate f nancial reporting and auditing of publicl United States. SOX or SarbOx (popular shorthands for the act) was enacted v tly following and directly in response to the Enron scandals of 2001. One of the greatest areas of consternation and debate that has emerged surrounding SOX involves the high cost of compliance and the challenging burden therefore placed on smaller f rms. Some contend that SOX was the most signif cant change to the corporate landscape to occur in .

reasonable expectation of privacy w claims of invasion of privacy. Where an individual is notif ed that information will be shared vate, there is likely no reasonable expectation of privacy.

y as a demand for services, for example, for clothes cleaning, f oor covering, cool air, transportation, or word processing, rather than as a demand for products such as washing machines, carpeting, air conditioners, cars, and computers.

ocal obligation The concept that, while an employee has an obligation to respect the goals and yer, the employer has a ocal obligation to respect the rights of the employee as well, including the employee’s right to privacy.

eneurship to address social prob eff ciency of mark involv vation, creativity

A movement that seeks

Glossary 597

these skills to address social needs. Social Entrepreneurship differs from the work of non-prof t groups such as NGOs and cor xplicitly aim to be prof table. The area of ethics that is concerned with how we should live together with others and social or involves questions of political, economic, civic, and culell-being.

The view that business exists within web of social relationships. The Social Web model views business as a citizen of e all members of a society, business must conform to the normal range of ethical duties and obligations that all citizens face. stakeholders In a general sense, a stakeholder is anyone who can be affected by decisions made within a business. More specif cally, stakeholders are considered to be those people who are necessar of a business. A model of corporate social responsibility that holds that business managers have ethical responsibilities to a range of stakeholders that goes beyond a narrow view that the primary or only responsibility of managers is to stockholders.

Sustainable or green marketing Sustainable or green marketing is the marketing of products on the basis of their en y-friendl A term that remains subject to debate. Some might suggest that all workplaces with conditions that are below standards in more dev are sweatshops since all humans have a right to equally decent working conditions. (See the discussion in Chapter 6 and D. Arnold and L. Hartman, “Beyond Sweatshops: Positive Deviancy and Global Labor Practices,” A European Re 14, no. 3 (July 2005).) In this text we use the following def nition: any workplace in which work y subject to two or more of the following conditions: systematic forced overtime, systematic health and safety risks that stem from ne gard of employee welfare, coercion, systematic deception that places workers at risk, underpa for a 48-hour workweek less than the overall poverty rate for that country (one w verall pover s basic nonfood needs such as shelter and basic health care).

T theoretical reasoning Involves reasoning that is aimed at establishing truth and therefore at what we ought to believe. Contrast with practical reasoning, which aims at determining what is reasonable for us to do.

Also called undercover marketing. Marketing campaigns that are based on environments or activities where the subject is not aware that she or he is the target of a marketing campaign; those situations where one is subject to directed commercial acti wledge or consent.

s of sustaina actors that are often used to judge the adequacy of sustainable practices. Sustainable development must be (1) economically, (2) environmentally, and (3) ethically satisf .

A legal doctrine that holds an individual or business accountable for damages whether or not it was at fault. In a strict liability case, no matter how careful the business is in its product or service, if harm results from use, the individual or business is liable.

United States Sentencing Commission An independent agency in the United States judiciary created in 1984 to regulate sentencing policy in the federal t system.

usiness practice A model of business practice in which business activities meet the standards . velopment elopment that meets the needs of the present without compromising the wn needs as def ned b

U

America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PA T) Act of 2001 A U.S. statute designed to increase the surveillance and investigative powers of law enforcement agencies in the United States in response to the ter of September 11, 2001. The act has been lauded as a quick response to terrorism (it was introduced less than aw

598

amendments to more than 15 important statutes; it also has been criticized for failing to include suff cient safeguards for civil liberties. utilitarianism An ethical theory that tells us that we can determine the ethical signif cance of any action by looking to the consequences of that act. Utilitarianism is y identif ed with the policy of “maximizing the overall good” or, in a slightly different version, of producing “the greatest good for the greatest number.”

V v alues Those beliefs that incline us to act or to choose in one way rather than another. We can recognize many alues: f nancial, religious, legal, historical, nutritional, political, scientif c, and aesthetic. Ethical values serve the ends of human well-being in impartial, rather than personal or self sh ways.

values-based culture A corporate culture in which conformity to a statement of values and principles rather than simple obedience to laws and regulations is the prevailing model for ethical behavior. An approach to ethics that studies the life, a life worth living. The vir vide answers to the basic ethical question “What kind of person should I be?”

W whistleblowing A practice in which an individual within an organization reports organizational wrongdoing to the public or to others in position of authority. d-of-mouth marketing Efforts by companies to generate personal recommendations by users.

Index A Abercrombie & Fitch, 250, 288 acceptable risks, 264–266 s impact, 351 , 208–209; see also duties; responsibilities , 242 accounting conf icts of interest in, 532–536, vernance, 531–532 Adderall, 432 adidas-Salomon, 273 advercation, 459 advergames, 457, 458 advertising; see also marketing ethics

by pharmaceutical companies, 404 total spending, 429 aff ve action, 283–287 The Aff , 428 aff Age Discrimination in Employment Act, 279 agency problems, 86, 533 of, 437 Aguilar, Cesar, 39 565 AIG, 10, 96, 550 alcoholic beverage marketing, 414, 433 allegations in whistleblowing, 189 Allen, Robert, 552 alliances in low-income markets, 472–473 alternatives, assessing, 54–56 Alternatives to Economic Globalization, 245 altruism, 117–119 Amazon, 427 ambiguity, 166 As, 545, 546 (AIG), 10, 96, 550

Americans with Disabilities Act (ADA) ying, 22–24, 361 foreign laws exception, 279 impact on building costs, 480–481 analysts, 532, 547 Anderson, Ray, 501, 504, 517 of , 126 , 219 anonymous whistleblowers, 188 antidiscrimination laws, 76, 298; see also anti-nepotism policies, 361 Apelbaum, Phyllis, 258 apparel companies, 125; see also sweatshop labor Apple, 528–529, 532, 558 Argandona, Antonio, 346, 347 Argyris, Chris, 141 Aristotle, 454 Ar Arrow Messenger Service, 258 Arthur Andersen, 7, 15, 108, 110, 532 ticles of association, 580 Ar asbestos, 422 , Neal, 253 Ashoka, 204 “Assessment and Plan for Or Change at NASA,” 191–193 association codes of ethics, 163 “Attacking the Roots” (Bin and Murphy), 272, 326–332 Attali, Jacques, 467 cit h vity disorder, 432 ys, 24–25, 190, 532 at-will employment; see employment at will audits of compliance with code of conduct, 200–201 conf icts of interest, 534, 535–536, 546, 579 of ethical behaviors, 167–169 of overseas factories, 332 Sarbanes-Oxley requirements, 538 histleblower protections in, 187 automobile advertising, 424

automobile fuel eff ciency standards, 492 autonomy mark rights of, 112, 338–339 autonomy-exercising choice, 313–315 “av Ayala, J. II, 225 B backcasting, 483 background checks, 365–366 “bad” choices, 59–62, 91–94 Bader, Christine, 112–114, 125 ar, Neera, 454 , Kevin, 546 bailouts, 10, 96, 550 Bangladesh, 204–205; see also y meltdo see f nancial crisis of 2008–2009 owshi, Liz, 220 uptcies, 422 bans on sweatshops, 317–318 Barnes, Barbara, 405 Baxter, William, 488 ns, 562 Behavioral Science Technology (BST), 191–193 Ben & Jerry’s Homemade Ice Cream Company, 220, 523 benef verseas workplaces, 274 Bernstein, Aaron, 310 BerrettKoehler Publishers, 245 Ber “Bey (Cescau), 518–525 BHP Billiton, 52–54 “The Big Interview: Jeff Sw (Russell), 245 “Big Yellow Taxi,” 486 Bin Jiang, 272, 326 Bin Sultan, Bandar, 9–10 biological metabolism, 506–507 biomimicry, 499 biophysical limits to growth, 496 see also environmental Blair, Tony, 10 blogs, 362–363, 434, 450, 452–453, 455 boards of directors for issue handling by, 200 div 280–281 duties and ethical guidelines, 541–544, 580

potential conf icts of interest, 541–542, 552–553, 576, 578–583 responsibility for ethics compliance, 170, 174 suggested qualif cations, 563 Body Shop International, 127, 469, 472 , Ivan, 553 Boisjoly, Roger, 165 bonds, Islamic forms, 571 bonuses, 10, 96, 549–550; see also executive compensation ater, 444 460–474, 515–516 bounded ethicality, 51 Bowie, Norman E., 137, 213–214, 273 Bowman v. State Bank of Keysville, 299–300 boycotts of Illinois lottery, 426 in response to scandals, 4 of sweatshop products, 317–318 threat of, 8–9 BP, 125, 444, 483 Braeck-Letmathe, Peter, 228 brands, 245–247 Braungart, Michael, 500, 503–510 Brazil, ethical challenges to f rms in, 172 breast milk toxins, 485 Brenkert, George, 337 Brennan, Dan, 562 Bribe Payers Index, 21–22 as challenge to global ethics compliance, 172, 173 corporate social responsibility international survey, 21–22 laws prohibiting, 23 Mauritius case, 132–137 “Bridging the Digital Gap in Emerging Economies” Bristol-Myers Squibb, 552 British American Tobacco, 222, 240 British East India Company, 576–577 Brown & Williamson, 165 Brown, Colleen, 62 Brown, Michael, 150 Browne, John, 483 Br Br budgeting, 155, 197

599

600 Index Buf

Warren E., 529

Built to Last (Collins and Porras), 147, 152 Bull Run battlef Bully Broads program, 278 bullying in workplace, 255–256 bureaucracies, 104, 134 Bush, George W., 367 Business Hunger, 521 “Business and Human Rights” (Bader and Mor 125–129 Business Council for Sustainable Development, 504 business ethics 193–201 cor

CEOs; see executive compensation; executive management certif ed public accountants, 532, 545 Cescau, P CFCs, 443, 444 Chairman’s Aw Martin), 165 Challenger Challenger disaster, 165 change blindness, 51 Changing Course, 504

Civil Rights Act of 1964, 76, 276, 298 Civil Rights Act of 1991, 279 Civil War sites, 486 Clean Air Act, 490

character as focus of stakeholder model, 82–83 formation of, 119–121

Coca-Cola, 552 Code of Practice on the Protection of Workers’ Personal Data, 360 codes of conduct accounting, 546

s role,

149–154 environmental v growing interest in, 30–35 importance, 3–11 ned principles, 11–12 legal requirements, 8 as personal and social , 13–19 as practical reasoning, 26–27 Business Ethics Magazine Best Corporate Citizens, 225 Business Leaders Initiative on Human Rights, 127–129 business scandals; see scandals business schools, social responsibility in, 525 y, 61 BusinessWeek, 310 buying power buzz mark BzzAgent, 451 C Calebresi, Guido, 513 Calvert Group, 243 , 523 cap and trade, 493

97–98 impact of decisions on, 56, 62 in vir Charan, Ram, 544 le giving, 210–213

climate, organizational, 192 climate change, 483, 523; see also sustainability Clinton, Hillary, 308 closed circuit television, 401 clothing companies, 125; see also sweatshop labor

Children’s Advertising Review Unit, 459 Children’s Online Privacy Protection Act, 459 China coercion of Inter 126 corruption in, 133 ener labor conditions in, 307, 310, 326–332

193–201 developing, 161, 162–163

193–201 implementing, 162–163 indicators of f to, 156 Sarbanes-Oxley requirements, 8 widespread adoption, 23, 156 Word of Mouth Marketing Association, 435, 450 coercive practices, 140–141 coffee growers, 469 coffee lawsuits, 418 cognitive bar decisions, 59–60 Cohan, William D., 562 Cohen, Ben, 523 Collapse, 482 collectivist cultures, 186 colle Collins, James, 147, 152 A Colossal Failure of Common Sense (McDonald and Robinson), 562 Columbia vestigation

car adv Carney, Hampton, 250 peting, sustainable, 501, 508, 517 cate Caterpillar, 62 “Caux Principles for Responsible Business,” 130–131 Caux Round Table’s Seven Point caveat emptor approach, 413 cell phones, 476, 477 Cemex, 2–3, 27

recalled products from, 416 chlordane in breast milk, 485 Cho, Fujio, 148

Columbia space shuttle disaster, 165–166, 191–193 commission systems, 139

Chumpol NaLamlieng, 34

Organizations (COSO), 539–540 common law, privac in, 340 common-law agency test, 258

Factory, 310 Cialis, 430 Ciba-Geigy, 508 eting, 414, 425, 477 circular f o Citigroup, 468 Citizen’s Index, 243 citizenship model, 301, 515

, 498 competitive markets; see markets compliance, legal, 19–22 compliance consulting, 308 questionnaire, 193–201 152–154 comprehensive moral doctrines, 89

codes of ethics cheating, 50, 61; see also fraud chemicals in breast milk, 485 y trees, 506 Che Texaco, 282, 491 chief executive off cers; see executive compensation; executive management chief privacy off cers, 343 child labor ethical debate, 274, 311–312 Kantian views, 111 utilitarian views, 101, 106 , 414, 457 children, marketing to, 414, 431,

competitive advantage from corporate social responsibility, 242–243 ethical reputation as, 8

198–199 community emphasis of Islamic f

Concerta, 432 “Confessions of a Sweatshop Inspector” (F 271–272, 307–312 conf dentiality, 175, 188 conf icts of interest addressing challenges, 532–536, in boards of directors, 552–553, 576, 578–583 in executive compensation, 552 in f nancial mark Conley, John M., 514 Connerly, W conscience consumers, 522–523, 525 consensus, 70 consent, 312–320, 410 consequences, ethics based on, 55, 97, 100–107; see also conserv et approach, 489 Conserv conservation movement, 485 consultants, 32, 308 y; see autonomy

contingent workers, 305 contracts employment, 114 ethical duties based on, 106–107 product safety social, 108–109 control environment, 539–540 337–338, 339 Cooper, J. M., 454 CorDECT, 469 core values of f rms, 147, 159–169 Corporate Automotive Fuel Eff ciency [CAFE] Standards, 490, 492

Index corporate citizenship, 239–245, 301, 515; see also corporate social responsibility cor building ethics into, 159–169 def ning, 145–149 ethical assessment questions, 194–195 ethical leadership, 154–159 impact of diversity on, 282 mandating and enforcing ethics, 169–175, 176 role in business ethics, 149–154 underlying values, 70–72, 556 corporate ethics programs, 19, 23, 31–35 corporate governance directors’ role, 541–544 duties and conf icts of interest, 531–536 executive compensation issues, 547–553 recent failures, 530–531 role of ethics in, 23 histleblowing, 188–190 Sarbanes-Oxley Act, 536–539 cor y, 210–213, 231–239 corporate scandals; see scandals corporate social responsibility; see also as good business, 219–227 integrative model, 216–219 ov w, 206–207 social web model, 213–216 eholder focus versus, 82 corporations, 206, 576–577 cor Bribe Payers Index, 21–22 Table prohibitions, 131 172, 173 factors leading to, 132 impact on digital divide, 392–393 laws prohibiting, 23 Mauritius case, 132–137 prohibitions, 109 cost-benef t analysis, 269–270, 488 cost str w-income markets, 473 courage, lack of, 60–61 cov , 500, 516 credit av see also microcredit

160–161, 182 Crock ve, 504 cronyism, 552 cross-fertilization of boards, 552–553 see also cor alues, 172–174 impact on views of whistleblowing, 186–187 inf uence on ethics, 50, 133, 134–135 workplace div 279–283 cumulative voting, 582 customer-centered business, 232 , 231, 235, 237, 238–239

deregulation, 105 derivative stakeholders, 89 ve principles, 13 design f aws, 92 design for misuse, 419 grating with manuf desires, non-autonomous, 430–431 detergent marketing, 441, 464–465 dev see less dev “Developing Value: The Business Case for Sustainability in Emerging Markets,” 224 development as duty of businesses, 131 role of multinational f rms, 519–520 sustainable, 493–495

D d’Aquino, Thomas, 225 Daily Oklahoman, 92 Daly, Frank, 344 Daly, Herman, 493–495 damage control, 34 dangerous jobs, 266–267 dating coworkers, 362, 363 Daus, Catherine, 253 Dayton, Kenneth, 219 DDT in breast milk, 485 de Soto, Hernando, 466 debt, pover deception in advertising messages, 423–424 executive liability for, 543–544 relation to executive compensation, 552 in stealth mark 453 consent, 410 see also ethical decision-making processes business ethics as learned principles for, 11–12 corporate culture’s role, 145, 151–152 detailed model, 121–123 volving ethics, 4 Declaration of Human Rights “Declaration of Interdependence” (Whole Foods), 7 Deloitte, 23 delusion of determinacy, 88 democracy, 111 deontology, 107–110 Depar Development, 427

diarrhea, 522 Dickinson, Rink, 218 dieldrin in breast milk, 485 dieth digital divide, 391 , Kant’s principle, 110, 140–141 xins in breast milk, 485 directors; see boards of directors direct-to-consumer advertising, 404, 430 dirty money, 172 disabled employees, 22–24 disclosures, 450–455 y obligations of f rms, 513 verseas, 173 in downsizing, 261 emplo ws prohibiting, 76 ethical challenges, 276–279 ork activities, 361–362 suit against Abercrombie & Fitch, 250, 288 dismissals; see employees Disney’s America, 486 distractions, 92–93 v , 279–283 “Diversity is who we are” campaign, 288 divisionalized f rms, 74 doctor-patient relationship, 385–387 doctors, drug marketing to, 405 “Does It Pay to Be Good?” (Vogl), 239–245 “Does the Company Get It?” Domini Social Index, 243

601

Donaldson, Thomas, 338 Donaldson, William H., 545 Donovan, David K., Jr., 553 Dove soap, 523 downcycling, 505 do Drug Abuse i “Drug Testing and the Right to Privacy” (Cranford), 376–382 ug traff cking, 172 Duncan, Da Dunlap, Al, 87 ont, 165, 504 Duska, Ron, 540 duties; see also f duciary duties rights, 110–114 of boards of directors, 541–542, 580 in corporate gov 531–536 in deontological theory, 107–110 as for , 209 impact on ethical decision making, 55–56 ersus, 106–107 of whistleblowers, 187–188 aith, 541 yalty, 541 E earned media, 451 Ear e-Choupal, 395–396 veness, 506 eco-eff ciency, 499, 503–504, 505, 510 economic crises, 5; see also f economic gro see also development Economic Model of CSR, 206–207 economic realities test, 258 102–104 see also environmental responsibilities; sustainability Edelman, 450 education from advertising, 443, 459 impact of shortcomings on digital divide, 392 gnition of right to, 113 eg egoism, 102, 117

602 Index

Eisai, 93–94 Eisner, Michael, 547 elderl veloped areas, 468 Privacy Act of 1986, 340 Electronic Privacy Information Center, 346 Eli Lilly, 432 t, 550 e-mail development of legal standards, 20 harassment via, 345–346 privacy issues, 340, 341–342, 346–347, 349–354 Emergency Economic Stabilization Act of 2008, 10 emerging economies, 390–397; see also less developed countries emotions, 253 empathy, 92 empire building, 576–577 employee manuals, 299 employees assessment of corporate def ning workers as, 258 effects of monitoring on, 358 y ethics to, 8 incentives for ethical behavior, 164–165 loyalty statistics, 252 trust for their f employer monitoring; see also privacy drug testing, 354–356 employee communications, 340, 341–342, 349–354 medical infor ork activities, 361–364 setting limits, 358–361 employment applications, 344 emplo effects on workplace, 256–259 Kantian challenges, 141 suggested changes, 300–307 employment in low-income markets, 473 emplo see also aff

v

div downsizing, 259–262 due process and just cause in, 254–259 globalization’

262–270 major variables, 252–254 “Employment-at-Will, Employee for Employment” (Radin and Werhane), 296–307 end friendships, 454 Endangered Species Act, 490 endocrine disrupters, 505 endrin in breast milk, 485 ener ener enlightened self-interest, 222 enlightened shareholder value principle, 563 porate Responsibility t, 221, 241 conf icts of interest in, 532 cor leadership in, 158 range of harm from, 7 role of attorneys and 108, 110 as watershed event, 3, 531 enterprise risk management, 195–196 Enterprise Risk Management— Integrated Framework, 540 en en market-based vie regulator stakeholder focus, 510–517 en

see also sustainability Table principles, 131 corporate social responsibility, 218–219

Equal Emplo Commission (EEOC), 276 Equal Exchange, 218 Equal Pay Act of 1963, 76 ,f ersus, 297 Equator Principles, 126 Erf e, Stephen, 224 Estrada v. Federal Express, 258 Ethic of Care, 41 ethical decision-making processes applications, 58 ves, 54–56, 122

detailed model, 121–123 fact f f nal choices, 56–57, 123 identifying ethical issues, 48–51, 121 identifying stakeholders, 51–54, 121–122 managerial roles, 63 negative results from, 59–62 “Ethical Dimensions of DecisionMaking in the Developing World” (Napal), 132–137 “Ethical Hero or a Failed Businessman? The Malden Mills Case Revisited” (Washbour ethical relativism, 98–100 ethical sourcing game, 310 ethical theories deontology, 107–110 overview, 97–100 practical considerations, 137–142 virtue ethics, 116–121 Technology in Business” (Mordini), 397–402 ethical values, 18–19 ethically troubled organizations, 168 ethics def ning, 11, 13 overview of theories, 97–100 as practical reasoning, 26–27 values versus, 18–19 ethics consultants, 32 Ethics Off cer Association, 31–32 ethics off cers, 19, 155, 196–197 s Directive on Personal Data Protection, 342–343 ve, 538 Everson, Mark, 363 e excellence, 192 exclusion, moral, 93–94 executive compensation AIG incident, 96 interests, 75 current debates and ethical 583–589 federal oversight, 123 with government bailout money, 10, 96, 550 le linking to perfor 550, 551 misguided incentives in, 546–547 proposed reforms, 563–564, 583–589

umental view of f rms, 142 shareholder votes on, 49 v executive management duties and conf icts of interest, 531–536 health of, 528–529 impact of gender div f nancial performance, 281 modeling temperance, 93 Executive Order 11246, 285 e e e extinction, 482 Exxon-Mobil, 548, 549 F fabrics, compostable, 507–508 Facebook, 246, 363–364 fact f nding, 47–48 Factor-Four increases, 499 failing to bother, 94 Fair and Lovely, 477 fair trade products, 218, 524 f fair False Claims Act, 186 Family and Medical Leave Act, 356, 358 as, 575 fear, marketing to exploit, 431, 433 standards, 268–269 Federal Emergency Management Agency, 150–151 Federal Express, 258 Federal Housing Authority, 427 F e, 103 Federal Sentencing Guidelines, 542 Federal Sentencing Guidelines for Organizations, 169–175, 176 Federal Water Pollution Act, 490 Feinberg, Kenneth, 123 Feuerstein, Aaron, 17, 26, f duciary duties; see also duties of CEOs, 583–589 of directors, 551 of professionals, 532 F f nancial crisis of 2008–2009 deregulation’s role, 105 lack of transparency in, 139 public anger, 245 underlying problems causing, 530 f nancial markets conf icts of interest in, 544–547 importance of transparency, 139 proposed reforms, 562, 563–564

Index f nancial performance impact of management gender div , 281 impact of safety programs, 269 , 222–226, 242–243 Firefox browser, 217 f ring employees; see terminating employees “First ysis of Online Food Advertising Targeting “f rst generation” problems, 268, 490 F f f eece f food mark 457–460 footwear companies, 125 Forbes magazine, 549, 550 F , 503, 558 F F illiam, 241 Ford Motor Company en Pinto design f aw, 92, 263–264 River Rouge restoration, 516 Foreign Cor Act, 23 Foreign Intelligence Surveillance Act, 367 ws exception, Civil Rights Act, 279

impor y, 138–139 libertarianism’ utilitarian approaches, 102–104 freedom, laws versus, 20 Freeman, R. Edw Friedman, Milton, 77, 125, 207, 518, 531 Friedman, Thomas, 335 “The Friendship of Buzz, Blog and Sw ord-of-mouth mark ts, 274

G , 545–546 Galbraith, John Kenneth, 428 Galleon Group, 553, 557 gatek 534–535 gender differences, 157, 278; see also discrimination General Motors, 287 , 432 generally accepted accounting

good Samaritan cases, 209 Google, 126, 346–347, 363 gover gover ruption; see cor

Hilton, Steve, 242 Hindustan Lev 468, 521

as social entrepreneurship, Grameen Shakti, 467 Grameen Telecom, 467 Grammen Phone, 476, 477 Grayson-Himes Pay for P grease effect, 134 green building certif cation, green mark Green Rubber, 247 Greenf , 523 Greenman v. Yuba Power, 75 greenwashing, 443–445 Guadalajara division, Cemex, 2–3 H

Pyramid” (Prahalad and t), 460–474 Fortune magazine, 547, 550, 558 eting, 408 fourteen principles of Toyota Way, 148 F otections, 340, 355 Fox, Justin, 563 Frampton v. Central Indiana Gas Company, 299 France, labor riots in, 255 F T.A., 271–272, 307, 312 Frantantuono, Michael, 224 fraud; see also whistleblowing dismissal, 299 economic impact, 5 ts to excuse, 9–10 underlying f nancial crises, 530 as violation of informed consent, 410 free labor, 304 free markets classic model, 103 discrimination re y, 277 environmental responsibilities health and safety regulated by, 266–268

see also discrimination; employment at will Holliday Holt, Heidi, 504 Honda Motor Co., 220 Honeywell Inc., 468 House of Cards (Cohan), 562 Housing Act of 1934, 427 “How Much Compensation Can CEOs Permissibly Accept?” (Moriar “How to Africa” (W human rights; see also challenges to concept, 115–116 , 125–129 emplo ethical theories based on, human well-being, 19 Hummer, 444 hybrid automobiles, 440 h ms, 338–339

haggling, 172 Hanaf tradition, 571 handicapped accessibility,

hypothetical duties, 109 Act of 2009 (GIN

happiness, 102, 253 harm

I

v “For

603

George, Bill, 80, 543 Gérson’s law, 172 gharar, 572 gifts from sales reps, 405 Gillespie, Nick, 348 Gilmartin, Ra Glass Ceiling Commission, 285 ork Initiative, 126 Global Reporting Initiative, 219 globalization; see also sweatshop labor Caux Round Tab 131 ethics of technolo

impact on employment relationships, 270–275 impact on implementing f rms’ cultures, 166–167 capitalism, 76 uption under, 23 vac targeting low-income markets, technology’s role, 335 v gal standards, 20 Gmail, 346–347 Good Business, 242 good f

duty to av

Iacocca, Lee, 297 IBM, 146 Ice Mountain water, 444 ignorance, 59 ijara agreements, 569 y Commission, 426 illiteracy, 392 I.M. Singer & Company, 466 image management, 220–222

vent, 209–210, 513–514 t L., 460 Hawken, Paul, 220, 504, 517 Ha see also health care reform, 445 Health Insurance P AA), 356 healthy or hea Heinz, Teresa, 504 Henningsen v. Bloomf eld Motors, 141 heptachlor in breast milk, 485 Heskett, Jim, 147 He He hexachlorobenzene in breast milk, 485 hexachlorocyclohexane in breast milk, 485 high school students, cheating by, 61 HIH collapse, 187

ImClone, 555 ar, 270 implied contracts, 257, 298–299 implied warranties of impulse buying, 409 inattentional b incentives in executive compensation, 550–551 incentives in online marketing, independent contractors, 258, 305 independent directors, 538, 543, 563, 579 India corruption in, 133 Islamic f nance origins in, 566 w-income mark rural hygiene programs, 522 gical progress, 396

604 Index indi indi Indonesia, Unilev 519–520 Industrial Revolution, 304, 482, 503, 504–505 informal economies, 2–3, 462, 466 information integ information technology; see gy informed consent, 410, 431 vices, 343 infrastr v vation, 184, 463, 518–525 insecticides in breast milk, 485 insider trading, 553–557 inspections of overseas factories, 307–312 Technolo and Ethics, 9, 168

inv Investment Climate Facility, 520 investors; see also shareholders as ov as stakeholders, 58 y responsible f rms, 243 invisible hand concept, 82 iodine def ciency, 522 IRS 20-factor analysis, 258 inance” issue identif cation, 48–51 issue management systems, 199–200 istisna contracts, 570–571 “It Seems Right In Theory But Does It Work In Practice?” (Bowie), 137–142 It’s Child’s Play, 457 Italy, cheating in, 50

Kozlo Kozmo.com, 427

prof tab tailored local solutions for,

Kyosei, 327 L labor rights; see also employees; employment relationships emplo 296–297, 302 gains in China, 129 global variations, 270–275 as limitations on at-will emplo gnition, 113, 116 labor standards, 109, 307–312 labor unions, 253, 303 laissez faire capitalism, 74, 76 Lands’ Larsen, Ralph, 155, 181, 261 eting, 441,

insurance, Islamic forms, 571–572 integ integration thesis, 77 integrative model of corporate , 216–219 integ business ethics as, 13–19 impact of decisions on, 56, 62 N Intel, 49, 345–346 riers to ethical decisions, 59–60 interest, Muslim alternatives, 565–575 interest rates, 103 Interface Corporation, 501, 508, 517 inter internal controls, 538, 539–540 internal whistleblowing, 188–189 inter ce, 274 y Fund (IMF), 564 access in low-income markets, 469, 473 impact on word-of-mouth marketing, 449 marketing to children on, monitoring employee use, 342, 349–350, 362–364, 399 plagiarizing via, 50 intrinsic value of a life, 263–264 intrusion into seclusion, 340–341

J

la

Jackson, Jennifer, 398 , 327–329 job applications, 344 Jobs, Steve, 528–529, 532, 558 johara, 568 Johns-Manville, 422 Credo, 160–161 ethical leadership, 155, 181–184 f nancial success, 224 Johnson, Robert W rms in, 172–173 judicial aff rmative action, 285 Jurgens, Anton, 519 just cause, 257, 298

K Kaiser Family Foundation, 457, 460 Kanter, Rosabeth Moss, 300 Kantian ethics, 110–114, 137–142, Kapstein, Ethan, 520 Karnani, Aneel, 474 Katrina (Hurricane), 150–151 Kellogg’s FunKtown, 458 Kelly, Marjorie, 243 Kenya, Unilever programs in, 521 Kew Gardens Principle, 379–381 kickbacks, 535 Kindle, 451 K-Mart v. Trotti, 341 Kodak, 516 Kohlberg, Jerome Jr., 62 K

rmative action, 287 Lawrence, Regina, 414 laws antidiscrimination, 76, 276, 279, 298 business duties to, 131 against cor directors’ duties under, 541–542 en ethical views, 19–25 privacy rights in, 339–342 requiring ethical conduct, 8 shareholder interests versus, 75–76 la Lay, K 546, 553 layoffs, 259–262, 303, 551; see also terminating employees leadership, 154–159 “Leadership in a Values-Based Organization” (Larsen), 155, 181–184 Leadership IQ survey, 260 Lede legal advice on whistleblo 190 legal rights, moral rights versus, less developed countries buying power development,

technolo Lever, William Hesketh, 519 Levi Strauss & Company, 274 Levitra, 430 Le Lewin, Da avoiding with sustainable practices, 498 corporate protections, 206 for harm caused by products, for worker actions, 376, 377 Liddy, Edward M., 96 alue, 263–264 Lifebuoy soap, 522 life-c , 499 limited alternatives, 59–60 Lincos, 470 living wages, 273 Locke, John, 115 Losee, Stephanie, 363 Lo , 504 low-wage workers, 305–306 lo , 252, 541 Lupron Depot, 404, 447 Lutnick, How Lyons, Susan, 504 M Mackey 235–239 madhhabs, 571 Madof Malden Mills case, 17, 26, Maltby, Lewis, 379 management education, 525 managers, mov een cor “Managing for Stakeholders” (Freeman), 73–83 eld National Park, 486 mandis, 395 grating with marital status, 361–362 marketing

v low-tier market potential, 515–516 low-tier mark

marketing ethics advertising, 423–426 consumer autonom in less developed countries,

Index overvie

monitoring; see employer

network governance, 583 New Y

Moore, Elizabeth, 458, supply chain responsibility, , 338, 377–379 vulnerable target groups, markets; see ets Marsh v , 76 Martin Marietta, 34 Martin, Roger L., 242 Marx, Karl, 236, 304 Mattel, 311, 416 Mawdudi, Ma maysir, 572 McCavitt v. Swiss Reinsurance America Corp., 362 McCoy, Bowen, 57, 67 wrence G., 562 McDonald’s, 240, 418, 420, 487 McDonough, William, 439, 500, 503–510, 516 art, 500 MCI, 427 McIntosh, Peggy, 280 , 297 Mectizan, 209–210 “Medical Ethics for the Newest Practitioners” (Newman), 382–390 Meno (Plato), 120 mentoring programs, 282 Merck, George W., 512 Merck, 155, 208, 209–210 Merck Shar Argentina, 35 Merrill Lynch, 49 Mesa Airlines, 354 mesothelioma, 422 microcredit broadening markets with, 441 Grameen Bank example, 205, 226, 516 Microsoft, 246 migrant labor in China, 330 militar Millainathan, Sendhil, 278 velopment Goals, 126 illages Project, 521 minimum decision criteria, 60 fective compensation, 584–588, 589 mirex in breast milk, 485 mission, 161–162 mission statements, 162, 194, 198–199, 232 Moberg, Dennis J., 91 Mondragón Corporación Cooperativa, 578 mone

moral dilemmas, 67–73 moral exclusion, 93–94 moral free space, 338 moral imagination, 54–55 morality, 13–15 Mordini, Tony, 361, 397 Moriarty y, 583 Mor Morton Thiokol, 165 35 Moss, Kate, 228 motivation to avoid conf icts of interest, 533 for business ethics programs, 32–33 lacking to make ethical choices, 60 ersus, 11–12 for whistleblowing, 185–186 mudaraba agreements, 569 see also globalization oppor w-income mark role in economic development, 519–520 murabaha agreements, 569 Murphy, Elizabeth, 225 phy, Mark, 261 Murphy, Patrick J., 272, 326 musharaka agreements, 569 My eterson, 505 , 466 The Myth of the Rational Market (Fox), 563 N NAFTA, 308 Naito, Haruo, 93–94 Napal, Geetanee, 132, 349, 390 Nash, Laura, 122 Nash’s 12 questions, 122 National Aeronautics and Space ASA), 191–193 National Labor Relations Act, 76 Natural Capitalism (Hawken, Lovins, and Lovins), 501 see resources see also environmental ne nepotism, 361, 393 Nestlé S.A., 228

New York Stock Exchange, 58, 585 Newell, Roberto, 544 Newman, Joshua, 351, 382 Newton, Lisa, 556–557 “The Ne volution,” 503–510 Nickel and Dimed, 305 y, 404 Nike, 308, 311, 436 non-wage benef ts, 274 ve myopia, 49, 51 ve principles, 13, 16–18 ve stakeholders, 89 ree Trade Ag AFTA), 308 n Telecom, 341 ay’s div Nov Nucor, 262

ws, 281

mation online, 458 O O’Reilly, David J., 491 Obama, Barack, 308 obedience to law, 19–22 Oberlin College, 509 obesity, 414–415, 457 Occupational Safety and Health 268–270 ork activities, 361–364 oil resources, 491 Olen, Helaine, 363 O’Neal, Stan, 49 online health information, 382–390

605

Owens, Jim, 62 Ownership Quotient (Heskett, Sasser, and Oxfam, 519 P packaging, sustainab 507 P Page, Lar , 347 pain, in animals, 487 Paine, L p, 30 Palmateer v. International ation, 299 Palsgraf, Helen, 417 Palsgraf v. Long Island Railroad, 417 “Parab y), 57, 67–73 Parent, William, 360, 369 Pareto-consequentialism, 88 particulates, 505–506 par nance, 572–574 Paster paternalism, 303–304 Patrimonio Hoy program, 27 PBDEs in breast milk, 485 PCBs in breast milk, 485 peer pressure, 61 penalties, 200, 270 People or P , 488 PepsiCo, 552 performance appraisals, 258, 259 personal and professional decision making, 63; see also ethical decision-making processes personal character; see character personal data protections, 342–343 personal information; see also vacy online publication, 400 privacy of, 337–338, 339, 366 personal integ see integ personal liability, 206; see also

open book management, 141 open question argument, 77 organizational climate, 192; see also cor organizational w ning signals, 168 Orr, David W., 504 Our Common Future, 503–504 Our Stolen Future (Colborn, Dumanoski, and Myers), 505 outsourcing; see also globalization customers, 326–332 dangerous jobs, 266–267 sweatshop ethics, 312–320 sweatshop monitoring, 307–312

pesticides, 485, 508–509 Petermann v. International Brotherhood of Teamsters, 299 , Jef y, 253, 300 Pf zer, 550 Pharmaceutical Research and Manufacturers of America, 405 philanthropic model of corporate , 212–213 philanthropy, 210–213, 231–239 Philip Morris, 240 physician errors, 386–387 physicians, drug marketing to, 405 Pierce v. Ortho Pharmaceutical Corporation, 299 Piersanti, Steven, 244–245 aw, 92, 263–264

606 Index Pitroda, Sam, 469 le, PlaNet Finance, 467 Plug Power Inc., 468 points of view, 52, 53, 55 P tec, 17, 36, 38–39, 40 policies and procedures, 198, 359, 368–369 polls, online, 459 pollution, optimal levels, 488 pollution credits, 493 polyethylene terephthalate (PET), 507 population growth, 494 Porras, Jer , 147, 152 Posner pover

388–389 improving consumption with, er multinational f rms’ role in reducing, 519–520

practical reasoning, 26–27

pri Procter & Gamble, 220 product liability, 75–76 product misuse, 419

, 413, 417, 421 tor product sustainability producti on, 359 professional associations, 163, 304, 305 professional model of emplo professionals, duties of, 108, 531–536 prof t sharing, in Islamic f nance, 568 prof ts benef ts of Whole Foods strategy for, 7–8, 232, 237 CEO pay versus, 548 en pursuit, 492 as ethical obligation, 2 in low-income markets, 463, 464 as only value, 161 relation to corporate social responsibility, 206–207, 222–226 surplus, 577, 578

Rainforest Alliance, 524

potential meanings, 208–209,

yn, 118 Ra Ra Reason magazine, 348 reasonable accommodations, 22–24 reasonable expectation of privacy, 341–342 “reasonab recalls, 75–76 recessions; see also f of 2008–2009 reciprocal obligations, 338 recyclable products, 444 recycled products, 247 recycling, limitations of, 505 Red Cross, 363

with pro harm, 380

regulation as approach to environmental of f nancial markets, 562, 563–564 , 268–270 representation, 253 limitations of, 536, 537 preparing for, 498 role in 2008–2009 f nancial of sweatshops, 318

474, 515–516 Predmore, Carolyn, 427 pre-employment information gathering, 363–364, 365–366 preference-evincing choice, 315–316 Premji, Azim, 34–35 prescription drugs health care reform impact on, 445 mark 430, 432 preservation, 489 price haggling, 172 waterhouseCoopers, 168 prima facie, 408 primary stakeholders, 80 principles, 97, 107–110 privacy; see also employer

Project Enterprise, 468 promise breaking, 139

383–384 overview of potential conf icts, 335–336 gy’s impact, 340–342, 345–349

ork acts, 361–364

promotion, sustainab wnership, 304 prostate cancer drugs, 404 “Protect, Respect, Remedy” framework, 127, 129 pro psychology of consumers, 426 Pub y Accounting Ov Public Concern at Work, 190 public policy employment at will exceptions for, 299 expert management, 103–104 f rms’ involvement in, 246 pub , 446 Pudner, Kal y, 449 Pugh v. See’s Candies, Inc., 298–299

impact of ter of off-work activities, 361–364

re

R race, as admissions criterion, 287 see discrimination Radin, Tara J., 296, 365, 414, 427, 510 railway work 355, 377

relativism, 98–100, 125, 134 religion as autonomous choice, 314 as guide to ethical decisions, 98 Islamic f nance, 565–575 reporting systems, 199–200 reputation, 220–222, 224 Rerum Novarum, 304 research, plagiarism in, 50 research and development, 472 resources; see also en responsibilities; sustainability in circular f ow model, 494 declining supply, 482–484 earl free-market view promoting ethical behavior with use of, 155 from waste, 499 respect for workers’ choices, 316 respondeat superior, 377, 437 “Response to A. Karnani” responsibilities; see also corporate social responsibility; duties in employment relationships, 302

restorativ (F ey, and Rodgers), 231–239 vestment, 223–226 rev rev 286–287 riba, 566, 567 , 457 Ridgley rights; see also labor rights challenges to concept, 115–116 emplo 296–297 human rights–based ethical moral versus le privacy, 337–345 systems of, 302 ersus, 106 of whistleblowers, 187–188 rioting, 255 risk assessment, 25, 264–266, 563 risk management, 498 vior, 8 river blindness, 209–210 River Rouge Complex, 516 Roberts, Dexter, 310 Robinson, James D. III, 552 y, 127 Roddick, Anita, 469, 472 Rodgers, T. J., 231, 235–236, 237, 238–239 roles, 63, 108 Ror Rosenthal, Jonathan, 218 Royal Charters, 576 Ruf & T Ruggie, John, 126, 127 r cation, 468 rural telephones, 469 Russian stock market development, 138–139 S S&P 500 Index, 548 Sabater, J. M., 225 Sachs, Jef y, 521 Sacr Sheriff’s Ass’n v Sacramento, 342 Sadhu parable, 57, 67–73 Safe Harbor exception, 343

Index safety ug testing to maintain, 355, 376–382 N re workplace ethics, 262–270 salaam contracts, 570 Salter, Malcolm, 543 Sarbanes-Oxley Act code of ethics requirement, 8 170 impact on businesses, 19 origins and major provisions, 536–539 whistleblower protections, 188 Saro-Wiwa, Ken, 125 Sasser, Earl, 147 satisf cing, 60 see also Schlosser, Julie, 544 Schmidheiny, Stephan, 245, 504 schools, marketing in, 434 science, 26 scripts, 91–92

Shell Oil, 125, 222 Shi Tao, 126 y, 272, 326–332 Shiraishi, Takashi, 326–332 Shire Pharmaceutical, 432 shoe makers, 125 shoes, sustainable, 509 ShoreBank Corporation, Siam Cement Group, 34 Simon, Julian, 489, 496 simplif single-use cameras, 516 y, 15, 158 . Railway Labor Executives’ Ass’n, 355 slav , 113 Smith, Adam, 233, 304, 568 smoking, 266, 361 Smyth v , 341–342 Snow Brand milk poisoning episode, 326 social ethics, 15 vation, 518–525 social networking sites, 349, 363–364, 400 social responsibility, 13–19, 82, 125; see also corporate social

577 eholders, 80 Securities and Exchange Commission, 553, 557 self-interest, 117–119, 222, 533 self-re weatshops, 318–320 self-rule, 112 , 236 Senge, Peter, 181 sentencing guidelines, 169–175, 176 separation fallacy, 76–78, 511 September 11 tragedy employment values in light of, 306 f responses to, 220 vacy rights, 364–369 service-based economies, 501 seven sins of greenwashing, 443 severance packages, 96 Severn, Sarah, 504 sexual harassment, 276, 353–354 Shakti initiative, 521–522 shareholders; see also investors advisory votes on executive compensation, 49 as main benef rms, stakeholder focus versus, 130–131 voice in policies, 233, 235, 580–582 Shari’a Standards Boards, 575

Business Is to Increase Its Prof ts” (F social roles, 63 social web model of corporate , 213–216 eting, 414–415 soft money, 535 solar energy, 509 solvents in breast milk, 485 Sony Ericsson Mobile Communications, 434 Sophists, 398 South space shuttle accidents, 165–166, 191–193 species extinctions, 482 speed-up g Spitzer, Eliot, 155 sp spying on competitors, 393–394 spyware, 427 stakeholder advisor 582–583 stakeholder theory, 214–216 stakeholders identifying in ethical decision making, 51–54, 121–122 reputation to, 224 investors as, 58 managing for, 73–74, 78–83

607

shareholder focus versus, 130–131, 580–583 , 510–517 widespread acceptance of model, 23 Standard Bank of South Ltd., 467 Stanek, Edward J., 426

“Sweatshops, Choice and Exploitation” (Zwolinski), 271, 312–320 sweepstakes, 459 Swiss Reinsurance, 362

stealth mark stereotypes

takaful, 571–572 take-back legislation, 440, 446 “Taking Sustainability Seriously” (Radin), 510–517 tanda, 3, 27 TAP Pharmaceuticals, 404, 447 Target, 311 target mark le g taxes, cheating on, 50 tea, sustainabl

gender differences, 278 steward CEOs, 587–588 Stew stock markets, 138–139; see also f nancial markets stock options, 536, 546–547, 551–552 stock ownership by directors, 541–542 Strattera, 432 , 413, 417, 421 see f nancial crisis of 2008–2009 success of ethics programs, 176 , 571 Sulliv see also sweatshop labor Supreme Court (U.S.), aff rmative action rulings, 286–287 surplus prof ts, 577, 578 veillance, 367; see also employ as broad corporate social , 217–219 in 499 business principles, 498–501, 510–517 corporate social responsibility in mark as model for environmental ov w rationale for stakeholder focus, 510–517 in Timberland production plants, 247 ts, 219 sustainable business practice, 493 sustainable dev Sv sw Sw f, 245–247 Swasth sweatshop labor benef ethics of choice involving, 312–320 f rst-hand view, 307–312 reactions against, 125

T

gy data gathering ethics, 427–428 in emerging economies, 390–397 employee monitoring practices, 349–354 impact on privacy rights, 340–342, 345–349 mark online health information, 382–390 role in globalization, 335 gy use policies, 368–369 telephone calls, monitoring, 342 w-income markets, 469, 476, 477 tele temperance, 93 T Ethics, 352–353 yees; see also employment at will for downsizing, 259–262 fairness in, 297, 298–300 privacy issues, 357 testing pre-employment, 354–358, 366 w Texaco, 282, 283 theoretical reasoning, 26 The Theory of Moral Sentiments (Smith), 233 ther ws of, 495 Third World; see less developed oung), 561–564 , 493 3M, 504 Thunderbird program, 217 Tillerson, Rex, 549 T Titanic, 503 Title VII, Ci Act, 76, 276, 279, 298

608 Index T T y Jack, 504 tort standards for product safety, 415–420 torture, 113 tournament theory, 589 to to to toy recalls, 416 Toyota, 146–148 T training in ethics, 31, 199 transparency ets, 138–139 in word-of-mouth marketing, 450, 453, 455 Transparency International, 21–22, 241

United Nations World Commission on Environment and Development, 493 United States Green Building Council, 480 United States Sentencing Commission, 169–175, 176 United States v. Booker, 169 university admissions, 287 Univ w School, 287 Univ gh Medical Centers, 405 unskilled workers, 305–306 upcycling, 505 USA PA T , 567 utilitarianism economics based on, 102–104 elements of, 100–102 human rights view versus, 111 views of manipulation, 425

Tripartite Declaration of Principles Concerning Multinational Enterprises and Social Policy, 274 493 conf of employees for their f rms, 241 ve advantage, 139–140

value maximization argument, 87–88, 580, 584, 586 “Value Shift” (P values 70–72, 556 core values of f ethics versus, 18–19 growing interest in, 30–35 impact on ethical decision making, 56, 62 types, 18–19 v

undercover mark unethical choices, 59–62, 91–94 Unilev 519–525 unions, 253, 303 United Nations Global Compact, 109, 126 United Nations Universal 111, 113, 116, 125

wages, 262, 273, 304 Wainaina, Binyavanga, 42 waivers of codes of conduct, 198 Waksal, Sam, 555, 557 W alk y, Holliday, and W Wal-Mart, 310, 311, 442, 450 warranties, 415 Washbourne, Penelope, 36 waste, 498, 499, 506–507 Watkins, Sherron, 13, 14 Watts, Philip, 245 Web sites marketing to children on,

gy’s impact, 346

U

W

V

563–564 role in Islamic f nance,

T-shirt messages, 250, 289 Tur Tylenol crises, 160

Vogl, A. J., 239 Vogl, Frank, 241 voice-mail messages, 342 V wagen, 262 voluntariness, 410 le groups, marketing to,

159–169 van den Bergh, Simon, 519 Vandek ve, Wim, 185 Vanderbilt, William, 237 v 580, 581 Verschoor, Curtis, 225 Viagra, 430 Victoria’s Secret, 427 Vidal, Da Vioxx, 208 viral marketing, 457, 458 vir Visa International, 578 “Vision of F ” 218 V ver), 523 Vogel, Da

medical information, 382–390 monitoring employee use, 349–350, 353–354 w on, 361 Weill, Sandy, 547 Welch, Jack, 549 well-being, 19 Werhane, Patricia H., 296, 338 “What Stakeholder Theory Is Not” (Phillips, Freeman, and W gent, 441 , Joe, 147 “When Good People Do Bad Things at Work” (Moberg), 91–94 whistleblowing, 165, 185–190, 299; see also “Whistleblowing Today” (Vandek ve), 185–190 “White Privilege: Unpacking the Invisib ” 280 oods, 7–8, 231–239 “Why ‘Best’ Corporate Gov Competitive” (T 576–583

W y, 165 W A., 514 willpower, lack of, 60 Wilson, Charlie, 237 Wilson, Gre , 544 Winterbottom v. Wright, 75 Wipro Ltd., 34–35 women on boards of directors, 280–281 dif markets, 172–173 ainst, 278–279 microlending to, 205, 226, 466 Woolley v. Hoffmann-La Roche, Inc., 299 Word of Mouth Marketing Association, 435, 449, 450 word-of-mouth marketing, 435, workplace dating, 362, 363 workplace en see also employees; employment relationships diversity in, 279–283 global variations, 270–275, health and safety issues, 262–270 major variables, 252–254 W World Business Council for Sustainable Development, 504 world economic p The World Is Flat (Friedman), 335 writing, ethics of, 50 Y Yahoo!, 126 Yamada, Da Yosufzai, Shariq, 282 young people, marketing to, 414, 433, 434 Young, Stephen B., 561 Y 466, 516 Z Zadek, Simon, 242 Zwolinski, Matthew, 271, 312