Transcript Document 7114591

CHAPTER 3
Business
Ethics & Social
Responsibility
Unethical Behavior
• Unethical behavior in business
is not just a recent phenomenon
– In the sixth century, B.C., the
philosopher Anacharsis once said,
“The market is a place set apart where
men may deceive one another.”
Unethical Behavior
– Two centuries later, Diogenes
was spotted carrying around a
lighted lamp, up and down the
city streets, in the middle of
the day. When asked what he
was doing, he replied, that he
was looking for an honest
man.
Business Ethics
• Business Ethics is about:
– Decision-Making
– By People in Business
– According to Moral Principles or
Standards
Decision-Making
• Conflicting duties, loyalties or
interests create moral dilemmas
requiring decisions to be made
Decision-Making
• Ethical decision-making involves the
ability to discern right from wrong along
with the commitment to do what is right.
Decision-Making
• Some factors affecting decision-making
(from Integrity Management, by D. T. LeClair et al, Univ. of
Tampa Press, 1998):
– Issue Intensity
• (i.e. how important does the decision-maker
perceive the issue to be?
• Can be influenced by company/management
emphasis)
– Decision-Maker’s Personal Moral Philosophy
– Decision-Maker’s Stage of Moral Development
– Organizational Culture
Decision-Making
• 8 Steps to Sound, Ethical Decision-Making
– 1. Gather as many relevant & material facts as circumstances
permit.
– 2. Identify the relevant ethical issues (consider alt. viewpoints)
– 3. Identify, weigh & prioritize all the affected parties (i.e.
stakeholders) (see Johnson & Johnson Credo, Taking Sides, p.25)
– 4. Identify your existing commitments/obligations.
– 5. Identify various courses of action (dare to think creatively)
– 6. Identify the possible/probable consequences of same (both
short & long-term)
– 7. Consider the practicality of same.
– 8. Consider the dictates and impacts upon your character &
integrity.
Decision-Making
• Disclosure Test: How comfortable would I
feel if others, whose opinion of me I value,
knew I was making this decision?
Decision-Making
• The higher the level of a decision-maker
– the greater the impact of the decision
– and the wider the range of constituencies that
will be affected by the decision.
By People In Business
• The moral foundation
of the decision-maker
matters
• “He doesn’t have a moral
compass.” Whistleblower
Sherron Watkins describing
Andrew Fastow, former CFO of
Enron. (Watkins gets frank
about days at Enron, Edward
Iwata, USA Today, March 25,
2003, p. 3B.)
By People in Business
• Ultimately, one's own motivation for ethical behavior must be internal
to be effective. External motivation has a limited value -- punishment
and fear is only effective in the short-run. If people believe that they
are above the law, they will continue to act unethically. Organizations
that have a clear vision, and support individual integrity are attractive
places of employment. - Teri D. Egan, Ph.d, Associate Professor, The
Graziadio School of Business at Pepperdine University, Corporate Ethics,
Washington Post Live Online, Friday, Aug. 2, 2002;
Ethics
• Values: guiding constructs or ideas, representing deeply held
generalized behaviors, which are considered by the holder, to be of
great significance.
• Morals: a system or set of beliefs or principles, based on values, which
constitute an individual or group’s perception of human duty, and
therefore which act as an influence or control over their behavior.
Morals are typically concerned with behaviors that have potentially
serious consequences or profound impacts. The word “morals” is
derived from the Latin mores (character, custom or habit)
• Ethics: the study and assessment of morals. The word "ethics" is
derived from the Greek word, ethos (character or custom).
Morality
• “The most important human endeavor is
the striving for morality in our actions. Our
inner balance and even our very existence
depend on it. Only morality in our actions
can give beauty and dignity to life.--Albert
Einstein (in a letter 11/20/50)
Morality
• The historian Arnold Toynbee observed:
"Out of 21 notable civilizations, 19 perished
not by conquest from without but by moral
decay from within."
Absolutism vs. Relativism
– Ethical Absolutism: What is right or wrong is consistent in all
places or circumstances. There are universally valid moral
principles. (“… only by obedience to universal moral norms does
man find full confirmation of his personal uniqueness and the
possibility of authentic moral growth.” - Pope John Paul II, see also
Rom. 12:2; Heb. 13:8)
– Ethical Relativism (also called “Situational Ethics”): What is right
or wrong varies according to the individual/society/culture or
set of circumstances. There are no universally valid moral
principles. (Related Biblical reference "everyone did what was
right in his own eyes" (Deut. 12:8, Judges 17:6; 21:25) (see also Isa.
5:20 & 24, Jer. 2:13, Rom. 1:18-32, 1 Cor. 5:6-7, 2 Cor. 6:14-15, 1 John
1:8)
Absolutism vs. Relativism
• As Cardinal Joseph Ratzinger said, Relativism is
“presented as a position defined positively by the
concepts of tolerance and knowledge through dialogue
and freedom, concepts which would be limited if the
existence of one valid truth for all were affirmed …
affirming that there is a binding and valid truth in history
in the figure of Jesus Christ and the faith of the church is
described as fundamentalism. Such fundamentalism, … is
presented in different ways as the fundamental threat
emerging against the supreme good of modernity: i.e.,
tolerance and freedom.” - Address to Congregation for
the Doctrine of Faith, Guadalajara, Mexico, May 1996
Absolutism vs. Relativism
• “The demise of America’s legal foundations
occur when society rejects laws that are
based on solid, irrevocable, moral, universal,
absolute values, to a society that bases it’s
laws on an arbitrary system of relativism,
situational ethics, materialism, individualism,
hedonism, paganism, or in any secularist
ideology. This secularization of law has
influenced all branches of knowledge – law,
philosophy, business, religion, medicine,
education, science, the arts, and mass
media.” Harold Berman, The Interaction of
Law and Religion 21 (1974).
Absolutism vs. Relativism
• According to a recent poll of college seniors, 73%
agreed with the statement that “What is right or
wrong depends on differences in individual
values and cultural diversity.” Only 25% agreed
with the statement that “There are clear and
uniform standards of right and wrong by which
everyone should be judged."
Problems with Relativism
– Relativism undermines moral criticism of practices of particular
individuals or in particular societies where those practices
conform to their own standards. For instance, it could be used to
permit slavery in a slave society or it could be used to justify
trade and investment with basically evil regimes, e.g. Apartheid
governments.
– But, as Cardinal Ratzinger said, “There are injustices that will
never turn into just things (such as, for example, killing an
innocent person, denying an individual or groups the right to their
dignity or to life corresponding to that dignity) while, on the other
hand, there are just things that can never be unjust.” - Address to
Congregation for the Doctrine of Faith, Guadalajara, Mexico, May
1996
Problems with Relativism
– Relativism allows for oppression of those with
minority views by allowing the majority in any
particular circumstance to define what is morally
right or wrong.
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“In Germany they first came for the Communists,
and I didn't speak up because I wasn't a Communist.
Then they came for the Jews,
and I didn't speak up because I wasn't a Jew.
Then they came for the trade unionists,
and I didn't speak up because I wasn't a trade unionist.
Then they came for the Catholics,
and I didn't speak up because I was a Protestant.
Then they came for me —
and by that time no one was left to speak up.”
– - German anti-Nazi activist, Pastor Martin Niemöller
Problems with Relativism
– Relativists speak in terms that “soften” harsh realities.
– "Intelligent, educated, religious people embrace illogical
absurdities that set aside not only God's truth, but also our
responsibility for the well-being of others. When words are
warped and twisted perversely, they're eventually emptied of
their true meaning. When you shine the light of common sense
on deceptive language couched in medical, philosophical or
intellectual terms, the logic evaporates. Moral choices require
that we use language to describe reality.” - Jean Staker Garton,
Author/Lecturer, Co-Founder of Lutherans for Life
Problems with Relativism
– Relativists never need bother to examine why
something is moral or immoral, they merely
accept/tolerate alternative determinations, so
that none are held to account
– “Over the years I have found that those who call
themselves atheists actually have a strong sense of the
absolute truth they know exists. They just don’t want to
acknowledge that it’s true - because if they did, they
would have to change the way they live. They flee on
moral grounds; refusing to submit themselves, they
exchange the truth for a lie.” - Chuck Colson -Being the
Body, 2003.
Problems with Relativism
• Commenting on the idea that legal reforms can
compel corporate morality, Michael Prowse, in
the Financial Times, stated that "The underlying
problem is that we are living in times that might
aptly be called 'post-ethical.'" People are now
"emotivists," who relativize moral judgments and
"obey the law, help others and respect customs
and mores only if they calculate that this will
benefit them personally in some way. ... The root
problem is a loss of belief in objective ethical
standards.”
Problems with Relativism
• Jesus said in John 8:31-32, “If you continue
in my word, then are you my disciples
indeed; And you shall know the truth, and
the truth shall make you free.” It would
seem follow then that, people cannot
experience ultimate and true freedom
unless and until they come to terms with
ultimate, absolute truth inherent in and
revealed by God.
Absolutism vs. Relativism
• Most ethicists reject the theory of ethical
relativism. Some claim that while the moral
practices of societies may differ, the
fundamental moral principles underlying
these practices do not. -Markkula Center for
Applied Ethics
Values
• “To ensure that employees can and will act
with integrity … organizations need a strong
and consistent set of values that dictate
appropriate individual actions.” - Conclusion
of study conducted by Professor Pratima Bansal,
cited in” Rebuilding trust, The integral role of
leadership in fostering values, honesty and
vision,”by Carol Stephenson in the Ivey Business
Journal, Jan/Feb. 2004, Vol. 68, Issue 3.
Values
• Navigating the complexities of a situation ... requires a
reliable compass. We can plot that "north" by determining
clearly our own core values. We have to identify - and
articulate - what we believe is important to us and to our
companies. Our core values drive our behaviors, and our
behaviors tell the world who we are and what we stand for.
...Identifying and adhering to a core-values compass point
provides a standard that will make decisions easier,
consistent and justified.” - Parkinson, J. Robert, Thinking clearly,
remembering values key to making the call, Milwaukee Journal
Sentinel, March 22, 2004.
Values
• “Without commonly shared and widely
entrenched moral values and obligations,
neither the law, nor democratic
government, nor even the market economy
will function properly.”-- Vaclav Havel
("Politics, morality, and Civility" Summer
Meditations)
Values
• What are the core values that are
fundamental to the success of any
individual or organization?
Values
• Honesty, respect, responsibility, fairness,
compassion, perseverance and courage.
Values - Universal Rule?
• The “Golden Rule” , i.e. to “do unto others as you would
have them do unto you” is an example of a value common
to many cultures/religions (Mahabharata 5:1517, Hinduism,
Talmud, Shabbat 31a & Leviticus 19:18, Judaism, Matthew 7:12,
Christianity, Udana-Varga 5:18, Buddhism, Analects 15:23,
Confucianism, Number 13 of Imam "Al-Nawawi's Forty Hadiths.", Islam)
• Note: Several Corporations have directly incorporated
some form of this rule in their codes of ethics including
Coachman, Mary Kay, Progressive, Merrill Lynch and USAA
Corporate Culture
• Both individuals and organizations hold “values”
– A corporation is said to manifest its “values” in its “corporate culture”
• Corporate culture is loosely defined as the attitudes, behaviors and
personalities that make up a company and that shape its behavior and
reputation, or as Elizabeth Kiss of the Kenan Institute for Ethics puts it,
corporate culture is “how we perceive, think, feel and do things around here.”
• Most employees take their cues from the company culture and behave
accordingly.
• A business derives its character from the character of the
people who conduct the business. - Ricky W. Griffin, Management.
Boston: Houghton Mifflin Company (2002)
Corporate Culture
• "Moral behavior is concerned primarily with the
interpersonal dimension of our behavior: how we treat
one another individually and in groups — and,
increasingly, other species and the environment." The key
here is that morality brings us into contact with others
and asks us to consider the quality of that contact. •
Quote from The Leadership Compass, John Wilcox and Susan Ebbs, as quoted in
Everyday Ethics, by Thomas Shanks, S.J., Markkula Center for Applied Ethics.
Corporate Culture
• "The first step in the
evolution of ethics is a
sense of solidarity
with other human
beings." — Albert
Schweitzer, early 20th-century
German Nobel Peace Prizewinning mission doctor and
theologian
Corporate Culture
• The Pressure to Conform
– We are all a kind of Chameleon, taking our hue
- the hue of our moral character, from those
who are about us. - John Locke (1632 - 1704)
Corporate Culture
• The Pressure to Conform
– Some years ago, a social scientist named Solomon Asch wanted
to see how people dealt with social pressure so he designed an
experiment to measure the results. He came up with a simple test
that showed a series of lines on a board in front of the room, with
one of the lines matching another in being the same length. The
others were either much shorter or much longer. A person was
brought into the room, along with others in a group, which
unbeknown to the subject, were helpers to the professor. The
whole group was asked to match the two lines that were the same
length together. The helpers intentionally gave the wrong answer
and it was found that in almost 75% of the time, the subjects would
go along with the wrong answer, knowing full well it was wrong,
but not wanting to stand out. - “Opinion and Social Pressure”,
Scientific American, Nov. 1955, 31-35.
Corporate Culture
• The Pressure to Conform
– “Culture shapes behavior. There are plenty of perfectly decent
people who go astray because they're in a culture that creates an
environment in which they can't get their jobs done unless they
engage in unethical activities.” - Harvard Business School
professor and business ethicist Barbara Toffler, former partner at
Arthur Andersen. Toffler left Andersen in 1999, well before the
Enron and Global Crossing scandals destroyed the company. Her
book, Final Accounting: Ambition, Greed, and the Fall of Arthur
Andersen (Random House/Broadway Books, 2003), describes the
process of ethical erosion in grim detail. – Postcards from an
Ethical Wasteland, CIO, June 1, 2003
Corporate Culture
• In Moral Man and Immoral Society, Reinhold Niebuhr
proposed that individual persons are always more moral
functioning alone than when they function in a social
group. - Institutional Ethics: An Oxymoron, By Joe E. Trull, Editor,
Christian Ethics Today, Journal of Christian Ethics, Issue 035 Volume 7
No 4 August 2001 .
• Do you agree with this?
Corporate Culture
• Rarely do the character flaws of a lone actor fully
explain corporate misconduct. More typically,
unethical business practice involves the tacit, if
not explicit, cooperation of others and reflects
the values, attitudes, beliefs, language, and
behavioral patterns that define an organization’s
operating culture. - Lynn Sharp Paine, Harvard
Business School
Corporate Culture
• “A strong corporate culture founded on ethical principles
and sound values is a vital driving force behind strategic
success.” - Thompson & Strickland
• One company stressed its commitment to RICE : respect,
integrity, communication, and excellence. The words have
been on T-shirts, paperweights, and on signs. The firm
printed a 61-page booklet with its code of ethics and every
employee had to sign a certificate of compliance. That
company was Enron!
According to Ethical or Moral,
Values, Principles or Standards
• Whose Values?
According to Ethical or Moral,
Values, Principles or Standards
–
–
–
–
–
–
Personal
Family
Peers
Religious
Company
Community, Regional, National, International
According to Ethical or Moral,
Values, Principles or Standards
• Learned Where?
According to Ethical or Moral,
Values, Principles or Standards
–
–
–
–
–
–
–
–
Home
School
Church (or other place of worship)
Life Experience
Work Experience
Books
News Media
Entertainment Media
According to Ethical or Moral,
Values, Principles or Standards
• The average American, by the age of 65, will have spent the equivalent
of 15 years of their life watching television.
• By contrast, over the same time period, the average weekly churchgoing American will have spent only 8 months of their life receiving
spiritual instruction.
According to Ethical or Moral,
Values, Principles or Standards
• In the middle of an interview for acceptance to a prestigious Ivy
League school back east, the interviewer asked his “sure of himself”
candidate, “If no one would ever find out, and no one got hurt, would
you lie for $1M?” The young man thought for a moment and said, “If no
one found out, and no one was hurt? Sure, I think I would!” The
interviewer then asked, “Would you lie for a dime?” The young man
shot back, “No way, what kind of man do you think I am?” The
interviewer responded, “I have already determined that, I am just
trying to determine your price.”
According to Ethical or Moral,
Values, Principles or Standards
•
So fearful were the ancient Chinese of their enemies on the north that they
built the Great Wall of China, one of the 7 wonders of the ancient world. It was
so high they knew no one could climb over it, & so thick that nothing could
break it down. Then they settled back to enjoy their security. But during the
first 100 years of the wall’s existence, China was invaded 3 times. Not once did
the enemy break down the wall or climb over its top. Each time they bribed a
gatekeeper & marched right through the gates. According to the historians,
the Chinese were so busy relying upon the walls of stone that they forgot to
teach integrity to their children.
According to Ethical or Moral,
Values, Principles or Standards
•
In the 1950s a psychologist, Stanton Samenow, and a psychiatrist, Samuel
Yochelson, sharing the conventional wisdom that crime is caused by
environment, set out to prove their point. They began a 17-year study involving
thousands of hours of clinical testing of 250 inmates here in the District of
Columbia. To their astonishment, they discovered that the cause of crime
cannot be traced to environment, poverty, or oppression. Instead, crime is the
result of individuals making, as they put it, wrong moral choices. In their 1977
work The Criminal Personality, they concluded that the answer to crime is a
"conversion of the wrong-doer to a more responsible lifestyle." In 1987,
Harvard professors James Q. Wilson and Richard J. Herrnstein came to similar
conclusions in their book Crime and Human Nature. They determined that the
cause of crime is a lack of proper moral training among young people during
the morally formative years, particularly ages 1 to 6.
According to Ethical or Moral,
Values, Principles or Standards
• 33% of teens would act unethically to get ahead or to
make more money if there was no chance of getting
caught, according to a new Junior Achievement/Harris
Interactive Poll of 624 teens between the ages of 13 and
18. 25% said they were “not sure” and only 42% said they
would not. “These results confirm our belief that ethics
education must begin in elementary school.” said Barry
Salzberg, U.S. Managing Partner of Deloitte & Touche.
According to Ethical or Moral,
Values, Principles or
Standards
•
Daniel R. Levine notes that "honesty and integrity have been replaced in many
classrooms by a win-at-any-cost attitude that puts grades, expediency and
personal gain above all else.
•
"Moral standards have become so eroded that many children can no longer
tell right from wrong," says Kevin Ryan, founding director of the Center for the
Advancement of Ethics and Character at Boston University.
•
According to Stephen F. Davis, a professor of psychology, "There's no remorse.
For students, cheating is a way of lire.”
•
Ryan further comments that "kids have no moral compass other than
enlightened self-interest"; Ryan blames the nation's schools for abandoning
their traditional role of providing students with moral guidance.- "Cheating in
Out Schools: A National Scandal," Daniel R. Devine, Reader's Digest, October 1995, p.
66.), quoted in PERSONAL ETHICS VERSUS PROFESSIONAL ETHICS , Jerry E. White,, Airpower
Journal, 08970823, Summer96, Vol. 10, Issue 2
According to Moral Principles
or Standards
• Does society require a moral code to
survive and prosper?
According to Moral Principles or
Standards
– 17th Century Philosopher
Thomas Hobbes postulated
that life in an amoral society
would be “ poor, nasty, brutish
and short”, lacking in industry
and commerce, as well as
knowledge and arts, and that
its people would live in a
constant state of fear and
insecurity.
According Moral Principles or
Standards
• “Men qualify for freedom in
exact proportion to their
disposition to put moral chains
on their own appetites. Society
cannot exist unless a
controlling power is put
somewhere on will and
appetite, and the less of it there
is within, the more of it there
must be without.” - Edmund
Burke(1774)
According to Moral Principles or
Standards
– “Without civic morality
communities perish;
without personal
morality their survival
has no value.” —
Bertrand Russell, 20thcentury British
mathematician and
philosopher
According to Moral Principles or
Standards
– Martin Luther King, Jr. once
noted, " The most dangerous
criminal may be the man
gifted with reason but with no
morals."
According to Moral Principles or
Standards
• We have grasped the mystery
of the atom and rejected the
Sermon on the Mount. The
world has achieved brilliance
without wisdom, power without
conscience. Ours is a world of
nuclear giants and ethical
infants. --General of the Army,
Omar Bradley
According to Moral Principles or
Standards
• There are seven sins in the
world: Wealth without work,
Pleasure without conscience,
Knowledge without character,
Commerce without morality,
Science without humanity,
Worship without sacrifice and
politics without principle. Mahatma Gandhi (1869 - 1948)
Ethics
• R. H. Tawney, the British
historian, once wrote: ''To
argue, in the manner of
Machiavelli, that there is one
rule for business and another
for private life, is to open the
door to an orgy of
unscrupulousness before
which the mind recoils.''
Ethics
• Truett Cathy, founder of Chickfil-A, argues there is no such
thing as business ethics - only
ethics.
Ethics
• Duty-Based v. Outcome-Based Ethics
– Duty (Deontology)
• Duty is an act done simply for the sake of what is right.
• Duty is determined by “revealed truths” and involves universal
principles
• Often religion-based
• e.g. Kant’s Categorical Imperative
– "Everyone is obligated to act only in ways that respect the
intrinsic value, human dignity and moral rights of all persons."
• Places High Value on Individual Rights
– Outcome (Consequentialism)
• Ethical if best outcome for the majority
• Involves cost-benefit analysis
• e.g. Bentham & Mill’s Utilitarianism
– "Of any two actions, the most ethical one is that which will
produce the greatest balance of benefits over harms."
• De-emphasizes individual rights
Ethics
• Strategic v. Real Ethics
– What is the motivation/purpose for acting ethically?
Integrity
• Integrity: from the Latin integritas, meaning wholeness,
completeness, or purity. To courageously hold to what one
believes is right and true, without compromise. To stand
undivided, immovable, consistent in both heart and
action, word and deed. Involves the maintenance of virtue
and the pursuit of moral excellence. Integrity is
demonstrated by not only espousing your values, but by
living according to them. Integrity describes both who
you are and what you do. People of integrity are
conscientious, trustworthy, accountable, committed and
consistent. A key to maintaining integrity is “counting the
cost” before committing yourself.
Integrity
• “Psychologists have found integrity to be essential to an individual's
sense of identity and self-worth, enabling the successful navigation
of change and challenge. Links between integrity and the ability to
gain and maintain the trust of others have often been noted. Many
purveyors of practical advice, including Cicero and Benjamin
Franklin, have counseled that integrity is the cornerstone of worldly
success. According to Franklin, "no Qualities [are] so likely to make a
poor Man's Fortune as those of Probity & Integrity" (quoted in Beebe,
1992, p. 8)” - from Blackwell’s Encyclopedic Dictionary of Business Ethics.
Integrity
•
In Living a Life That Matters Rabbi
Harold Kushner describes the kind
of people who are able to
overcome the negativity in their
lives as shalem, people who are
“whole, united within themselves,
their internal conflicts ended.”
Because of this, he says, they are
“persons of integrity.” Integrity,
says Kushner, is a quality just as
essential to human well-being as
is the pursuit of peace and justice.
Integrity
• The Bible/Talmud says that:
– The man of integrity walks securely, but he who takes crooked
paths will be found out. (Prov. 10:9)
– The integrity of the upright guides them, but the unfaithful are
destroyed by their duplicity. (Prov. 11:3)
– Integrity brings peace (i.e. a clear conscience) and marks the
perfect man (Hebrew Word: Tam = Man of Integrity) (Ps. 37:37, 1
Kings 9:4)
– The just [man] walketh in his integrity: his children [are] blessed
after him. (Prov. 20:7)
– A good name is better than precious ointment. (Ecc. 7:1)
Integrity
• Some Biblical Examples of Integrity:
– Joseph, Gen. 39:1-12
– Jacob/Israel (Gen 32:29) known as a “simple man” (tam, Gen
25:27) that is to say, that “his mouth was like his heart.”
– Job (Book of Job, see in particular description of Job at 2:3, 27:5)
– Daniel, Shadrach, Meshach & Abednego (Daniel Chapters 3 & 6)
– David (Ps. 7:8)
– Solomon (1 Kings. 9:4)
• Contrast: Ananias & Sapphira, Acts 5:1-11 and Acts 20:16-36
Integrity
• Consistency - the absence of contradictions - has
sometimes been called the hallmark of ethics. Markkula Center for Applied Ethics
Integrity
• Plato once said “I
would rather that the
whole world should be
at odds with me, and
oppose me, than that I
myself should be at
odds with myself and
contradict myself.”
Integrity
• "In matters of style,
swim with the current;
in matters of
principle, stand like a
rock.” - Thomas
Jefferson
Integrity - Example
•
Cleveland Stroud had coached the Blue Collar Bulldogs for 18 years before his
basketball team made it to the championship. Stroud recalls that “it was a perfect
night” when they won. “A night you dream of”. He was carried around the gym on the
shoulders of his triumphant players and their proud parents. But the excitement was
short lived. Two months after the championship, during a routine grade check, Stroud
discovered that one player was academically ineligible. The player in question had
only played 45 seconds in the regional qualifying tournament. Stroud says, “I thought it
was all ruined. I went through a phase where I was really depressed.” He struggled with
what to do next. Yet, his commitment to integrity led him to the right decision. “Winning
is the most important thing for any coach,” he said. “But your principals have to be
higher that your goals.” He reported the error to the league and the Bulldogs forfeited
their trophy. When the team lamented their loss in the locker room, he told them,
“You’ve got to do what is honest, what is right, and what the rules say. People forget the
scores of basketball games, but they don’t ever forget what your made of.”
Integrity
• Kenneth Blanchard, the coauthor of The Power of Ethical
Management, puts it: “There is
no right way to do a wrong
thing.” Blanchard says that if
you have to cheat to win you
should think twice about the
business you’re in.
Integrity
• “The most important
persuasion tool you
have in your entire
arsenal is integrity.” Sales Guru Zig Ziglar
Integrity
•
According to Michael Useem,
Director of the Center for
Leadership and Change
Management, Warren Buffett's
“influence derives from his moral
stature and integrity. In the
aftermath of scandals that have
rocked U.S. companies in the past
few years, it is difficult to
overemphasize the importance of
ethics as a factor in leadership.” Leadership and Change: Becoming the
Best: What You Can Learn from the 25
Most Influential Leaders of Our Times ,
Knowledge @ Wharton Newsletter,
Jan.28-Feb.4, 2004
Character
• Character: The notable/conspicuous/
distinguishing moral/ethical traits or
characteristics of a person that give
evidence of their essential nature and
which ultimately shape their reputation.
Character
• Our character...is an omen
of our destiny, and the
more integrity we have
and keep, the simpler and
nobler that destiny is
likely to be. - George
Santayana (1863 - 1952),
"The German Mind: A
Philosophical Diagnosis"
Character
• President Harry Truman used to
say: "Fame is a vapor,
popularity an accident, riches
take wings, those who cheer
today may curse tomorrow,
only one thing endures -character.”
Character
• Evangelist Charles Spurgeon
wrote, "A good character is the
best tombstone. Those who
loved you, and were helped by
you, will remember you when
forget-me-nots are withered.
Carve your name on hearts, and
not on marble.”
Character
• "What you are stands over
you... and thunders so that
I cannot hear what you
say to the contrary.” Ralph Waldo Emerson
Character
• "Character is destiny." - Heraclitus, Greek
Philosopher
• "Within the character of the citizen lies the
welfare of the nation" - Cicero, Roman
Philosopher
Character
• In his book The Death of Character, James Hunter, a noted
sociologist from the University of Virginia, concludes that
while Americans are innately as capable of developing
character as they ever were in the past, there are now few
cultural or institutional guidelines in our society that call
for its cultivation or maintenance. The reason, he
suggests, is because there is no consensus of moral
authority.
• Do you agree with this?
Character
• Compartmentalization: Many people believe that what
individuals do in their private lives is their own business
as long as it does not adversely impact the performance
of their duties to the organization and they are able to
“deliver the goods” professionally. Under this way of
thinking even serious moral failures may be excused.
Some refer to this kind of thinking as
“compartmentalization.” (e.g. Bill Clinton/Monica
Lewinsky situation)
• Do you agree with this?
Character
• Character vs. Reputation: It has been said
that an individual’s character can be
illustrated by a barrel of apples. The apples
seen on top by all represent one’s
reputation, and the apples that lie hidden
underneath are his character.
Reputation
• Eli Lily introduced a drug, fialuridine, intended to treat hepatitis B.
However, 15 patients who submitted to trials of the drug suffered liver
toxicity and 6 died. Rather than follow the company’s long-standing
“no comment” policy, the new Chairman and CEO, Randall Tobias
openly acknowledged the failure. His view was that communication
stands at the top of the list in the elements of good leadership. In
addition, he believed that if a company leaves a communications
void, others will fill it with misinformation. (Put the Moose on the
Table:Lessons in Leadership from a CEO’s Journey Through Business
and Life, Randall and Todd Tobias, Indiana University Press)
Reputation
• A railroad executive burst into Arthur Andersen’s office one day in
1914, demanding that the firm’s founder approve the railroad’s books.
Accountants had discovered that the railroad was inflating its profits
by failing to properly record expenses. Andersen refused, saying that
there wasn’t enough money in the city of Chicago to make him
approve the fraudulent accounting. Andersen’s independence cost
him the client, but it gained him something far more valuable, a
reputation for integrity that gave investors confidence in Arthur
Andersen audits, a reputation that helped the firm become one of the
top 5 accounting firms in the U.S. After nearly 90 years in business,
Andersen imploded in 2002 after acknowledging that its auditors had
shredded documents relating to its audits of Enron.
Reputation
• Warren Buffett, CEO of
Berkshire Hathaway,
warns his executives
once a year not to do
anything that year they
would be ashamed to read
about in their local
newspaper. “You can lose
a reputation that took 37
years to build in 37
seconds. And it might take
more than 37 years to
build it back.”
Reputation
• “The purest treasure mortal times can
afford is a spotless reputation” - William
Shakespeare
Virtue
• Virtue:The quality of doing what is right and
avoiding what is wrong.
– "Virtue develops from a habitual commitment to
pursue the good.” - Ronald F. Thiemann, a professor of
religion and society at Harvard Divinity School
– Wisdom is know what to do next; virtue is doing it. David Starr Jordan (1851 - 1931), American naturalist
3 Theories of Social
Responsibility
• Classical Theory
• Stakeholder Theory
• Corporate Social Responsibility Theory
(CSR)
Classical Theory
• Definition: The role of
business is to
maximize profits
within the law (see
Milton Friedman, "The
Social Responsibility
of Business Is to
Increase Its Profits.",
New York Times
Magazine, 1970)
Classical Theory
• Put another way, by Harvard Professor Theodore Levitt, “In
the end business has only two responsibilities - to obey
the elementary canons of face-to-face civility (honesty,
good faith, and so on) and to seek material gain.” - “The
Dangers of Social Responsibility”, Harvard Business
Review 36 (Sept.-Oct., 1958)
Classical Theory
• Serve the interests of the shareholders
• Social obligations limited to “ordinary moral
expectations”.
• Views obligations to non-shareholders as a constraint
• Trusts in Adam Smith’s “Invisible Hand” (The Wealth of
Nations) - The assumption that society benefits most
when individuals are allowed to define and pursue their
own self-interests, with minimal interference from
governments or other authorities.
Classical Theory - Contra
• Problems with: Market
Failures (e.g. Pacific
Lumber a successful,
balanced enterprise
ruined by a corporate
takeover)
Classical Theory - Contra
• When the 1990’s Tech Stock
Bubble “burst” it sent layoffs
soaring, 401(k) assets tanking.
According to the Center on
Budget and Policy Priorities,
between 1997 and 1999 the
bottom 20% of earners saw
their income decline, while the
richest 1% saw their income
more than double. The invisible
hand is a bit partial in the way
it dispenses favors. (Marjorie
Kelly, The Divine Right of
Capital)
Classical Theory -Contra
•
“In fact, the purpose of a business
firm is not simply to make a profit,
but is to be found in its very
existence as a community of
persons who in various ways are
endeavoring to satisfy their basic
needs, and who form a particular
group at the service of the whole of
society. Profit is a regulator of the
life of a business, but it is not the
only one; other human and moral
factors must also be considered
which, in the long term, are at least
equally important for the life of a
business.” - Pope John Paul,
Centesimus annus, May 1, 1991
Stakeholder Theory
• Definition: The primary consideration in
business decision-making is
preserving/promoting the rights of
stakeholders
• Takes into consideration the moral
principle of mutual respect.
Stakeholder Theory
• Goal: to maintain the benefits of the free
market while minimizing the potential
ethical problems created by capitalism
(Phillips, Wharton School)
• Primary difference from Classical Theory:
elevation of nonshareholding interests to
the level of shareholder interests in
formulating business strategy and policy.
Stakeholder Theory
• Stakeholder: an individual or group, inside
or outside the organization, who has a
meaningful stake in its performance.
• Who are the stakeholders of a business?
• Narrow view vs. Wide View
Stakeholder Theory
• Some Possible Stakeholders of a Business:
–
–
–
–
–
–
–
Customers
Department/Employees
Owners/Shareholders
Creditors
Suppliers
Distributors
Competitors
Stakeholder Theory
• Some Additional Possible Stakeholders:
–
–
–
–
–
Local Community
National Citizens
Global Inhabitants
Non-Human Life
the Environment
Stakeholder Theory
• Corporate citizenship: the extent to which a
business meets its responsibilities, to its
various stakeholders, or to society at large.
Stakeholder Theory
• Problems with wider view?
– Discourages Investment - Undermines/Dilutes
shareholder property rights
– Interest Group Politics - Leads to waste and
inefficiency
Corporate Social
Responsibility Theory
• Definition: A voluntary assumption of
responsibilities, beyond the legal and
economic, that take into account
moral/ethical/socially desirable goals and
outcomes.
• Concept originated in the 1950’s and began
to gain a significant following in the 1960”s.
Corporate Social Responsibility
Theory
• Possible Examples
• Merck: moved to develop
Mectizan, a drug that would
treat river blindness, a disease
that primarily affected the poor.
Merck knew that it would cost
millions to develop and that
they would most likely not
realize a direct profit from the
effort. But this resulted in a
public relations windfall!
Corporate Social Responsibility
Theory
• Merck’s project
was followed by:
• Pfizer: initiated a
project to
eliminate the eye
disease trachoma.
Corporate Social Responsibility
Theory
•
•
SmithKline Beecham (Now Glaxo
SmithKline): developed a drug to
eliminate lymphatic filariasis.
GlaxoSmithKline has also
announced that it intends to
launch a new drug to tackle a
virulent form of Malaria in subSaharan Africa. The company
announced that Lapdap will be
made available at a cost of $0.29
per adult and half that amount for
children, and will treat
plasmodium falciparum malaria,
the most life-threatening malaria
parasite, which kills between one
and two million people every year.
Corporate Social Responsibility
Theory
• Proctor & Gamble:
developed a
special nutrient
product to address
malnutrition.
Corporate Social Responsibility
Theory
• BP: gave solar
powered
refrigerators to
doctors in Zambia
to store malaria
vaccines.
Corporate Social Responsibility
Theory
• UPS: was a key
actor in delivering
humanitarian aid to
Kosovo.
Corporate Social Responsibility
Theory
• Intel: provides
education in
science & math in
countries where it
has plants.
Corporate Social Responsibility
Theory
• Citigroup: has
provided
significant funds to
microcredit
ventures.
Corporate Social
Responsibility Theory
• Also manifest in Philanthropy/Charitable
endeavors (e.g. McDonald’s Ronald McDonald
Houses, Mark Kay’s program to combat breast
cancer, Becton Dickinson & Co./UNICEF
partnership to conquer neo-natal tetanus and the
Bill Gates Foundation war on Tuberculosis, and
Gulf Power’s support of a wildlife sanctuary)
Corporate Social
Responsibility Theory
• Progressive benefits for employees (e.g.Xerox’s
and Eastman Kodak’s programs to encourage
employee participate in community service
projects and SAS Institute’s in house child care,
etc.)
• Public education (e.g. Norwich Union Insurance of
Ireland’s free first-aid courses)
Corporate Social Responsibility
Theory
• “Man … ought to regard himself,
not as something separated
and detached, but as a citizen
of the world, a member of the
vast commonwealth of nature …
to the interest of this great
community, he ought at all
times to be willing that his own
little interest should be
sacrificed.” - Adam Smith
Corporate Social Responsibility
Theory
•
“But what is most important is that
management realize that it must
consider the impact of every
business policy and business
action upon society. It has to
consider whether the action is
likely to promote the public good,
to advance the basic beliefs of our
society, to contribute to its
stability, strength, and harmony” Peter Drucker
Corporate Social Responsibility
• Social Contract Theory: Business does not exist in a vacuum. It
involves a series of interdependent, intertwined, symbiotic
relationships and coexists with many other institutions in society,
including the family, the church, and the political, criminal justice,
and educational systems. Each of these institutions contributes
toward making capitalism possible: The court system enforces
contracts; the political system provides monetary stability; and the
educational system trains future employees and prepares them for
the workforce. Therefore, the firm is obligated to "give something
back" to those that make its success possible. Business exists only
because society allows it and therefore it must satisfy the demands
of society. This creates an implicit social contract (see “Changing the
Social Contract: A Role for Business”, by Melvin Anshen, Columbia
Journal of World Business 5 (Nov.-Dec. 1070)
Corporate Social Responsibility
Theory
• There is also the legal maxim of Salus
populi est superma lex - regard for the
public welfare is the highest law - R.H.
Kersley, Broom’s Legal Maxims.
Corporate Social
Responsibility Theory
• In the words of General Robert Wood Johnson,
founder of Johnson and Johnson: “The day has
passed when business was a private matter, if it
even really was. In a business society, every act
of business has social consequences and may
arouse public interest. Every time business hires,
builds, sells or buys, it is acting for the people as
well as for itself, and it must be prepared to
accept full responsibility”
Corporate Social
Responsibility Theory
• Sol M. Linowitz, Chairman of the Board of Xerox
declared: “To realize its full promise in the world
of tomorrow, American business and industry...
will have to make social goals as central to its
decisions as economic goals; and leadership in
our corporations will increasingly recognize this
responsibility and accept it.” - Quoted in Bernard D.
Nossiter’s The Mythmakers: An Essay on Power and
Wealth, 1964, p.100.
Corporate Social
Responsibility Theory
• Intentionality: acknowledges that investors have
a right to a "reasonable return" but adds new
corporate responsibilities, such as to "create
new wealth" and "new jobs," guarantee "upward
mobility, fairly reward "hard work and talent,"
promote "progress in the arts and useful
sciences" and "diversify the interests of the
public.” (Michael Novak, AEI)
Corporate Social
Responsibility Theory
• Intentionality also adds "external
responsibilities" including promoting
"community" and "dignity," and "protecting
the moral ecology of freedom," all of which
are crucial to the health of civil society.
Business is a moral calling as opposed to
being merely a profession.
Corporate Social
Responsibility Theory
• Problems with Intentionality?
– Considered admirable in concept but
problematic in practice.
– Character demonstrated by actions, not by
intentions, is the arguably a more reliable
measure of corporate ethics (Jennings/Entine)
Corporate Social
Responsibility Theory
• Problems with CSR in general?
– Dilutes the Business Purpose
– Viewed as fundamentally antagonistic to the
Capitalist Enterprise
– Often influenced by simplistic political and
social agendas
Corporate Social
Responsibility Theory
• The search for guilt-free affluence has helped to
transform "green" business into a mass-market
phenomenon.
• Patagonia, a designer and distributor of outdoor
clothing and gear, has long prided itself on being
green. For nearly two decades, it has given 10% of
pre-tax profits or 1% of sales, whichever is larger,
to environmental causes.
Corporate Social
Responsibility Theory
• “Rain Forest Chic” - Socially responsible image as
a marketing tool, source of free, positive publicity
(e.g. The Body Shop, both customers and
franchisees attracted by progressive reputation)
Corporate Social Responsibility
Theory
• Anita Roddick/Body
Shop
– Supports various
social causes (e.g.Save the Whales)
– But may have stolen
store concept and
unfairly deals with
franchisees?
Corporate Social Responsibility
Theory
• Ben & Jerry’s – Fight global warming with
Ice Cream
– Annual one world one heart
festival
– Pint for a pint with
International Red Cross
– Rainforest Crunch
Fiasco/Mistreatment of
Employees/Sale to Unilever
(4/12/2000)
3 Theories of Social
Responsibility
• If you were trying to decide which type of
company to invest in, which would you
choose and why? (Classical, Stakeholder,
CSR)
Is Ethical Behavior Good for
Business?
• "The successful entrepreneur
must know how to glide over
every moral restraint with
almost childlike regard...[and
have], besides other positive
qualities, no scruples
whatsoever, and [be] ready to
kill off thousands of victims -without a murmur.” - John D.
Rockefeller.
Is Ethical Behavior Good for Business?
• Some Costs of Ethical Misconduct
– Public/Interest Group/NGO
disgrace/scandal/ostracism/repudiation/protests
– Litigation/Prosecution
– Decreased Employee
Morale/Loyalty/Commitment/Performance/Productivit
y
– Loss of Business/Profits
– Loss of Customer/Supplier/Partner,
Trust/Goodwill/Loyalty
Is Ethical Behavior Good for Business?
• Some Additional Costs of Ethical Misconduct
– Loss of Social/Reputation Capital/Goodwill (i.e. the
willingness of stakeholders to overlook failings)
– Shaken public confidence in company and in capital
markets
– Layoffs
– Loss of Investments/Pensions
– Increased Government Scrutiny/Regulation
– Environmental/Health Damage
Is Ethical Behavior Good for Business?
• Impact on the Bottom Line
– Ethical Behavior Enhances profitability - Most
academic studies support the conclusion that
ethical behavior and profitability go hand in
hand
Is Ethical Behavior Good for Business?
• A 1999 DePaul University study of 300 large firms found
that companies that make an explicit commitment to
follow an ethics code provided more than twice the value
to shareholders than companies that didn't. And it gets
better: According to Management Review, published by
the American Management Association, "For the 47
companies expressing a more extensive or more explicit
commitment to ethics, the market value added difference
was larger--an average of $10.6 billion, or almost three
times the MVA of companies" without similar
commitments.
Is Ethical Behavior Good for Business?
•
“Two professors at the Harvard Business School did a study of 207 major
companies over an 11-year period. They used all sorts of measuring devices
and came up with a ranking by corporate cultures. What they measured were
things that are sometimes called the soft side of business-morale, rewards
for creativity, emphasis on ethics, how well managers listen to their
employees, and so on. In my business we call them more or less spirited
workplaces. We could also call them companies with a high or low level of
integrity. They then put these companies up against the hard side, the bottom
line, on three measures: 1] gains in operating earnings, 2] return on
investment, and 3] increase in stock prices. Terry Deal, who coined the term
corporate culture, took a second look at those numbers, ran the same
numbers again, and came up with an analysis of the top 20 companies vs. the
bottom 20. Here's what he found. The top 20--the companies with integrity-the spirited workplaces--averaged 571% higher earnings than the dispirited
workplaces. The top 20% averaged a 417% higher return on investment. The
top 20% enjoyed an increase in stock prices of 363% in the same period. One
of American's most successful CEO's was right when he said, "the soft side is
the hard side.” - Restoring Integrity To Business , By: Thompson, William David, Vital Speeches
of the Day, 0042742X, 10/15/2002, Vol. 69, Issue 1.
Is Ethical Behavior Good
for Business?
• An investment of $1,000 ten years ago in each of
ten companies highly regarded for ethical
behavior (G.E., Coca-Cola, Hewlett-Packard,
Microsoft, Intel, Southwest Airlines, Berkshire
Hathaway, Disney, Johnson & Johnson, and Merck)
would have resulted in a return nearly three times
as much as an investment of $10,000 in the
Standard & Poor’s 500 stock index. (Fortune)
Is Ethical Behavior Good for
Business?
•
An exception: In response to
numerous lawsuits, gun
manufacturer, Smith & Wesson's
former CEO Ed Shultz decided to
start including locks on its
handguns in March 2000. Although
the decision was clearly ethical,
customers especially the NRA)
were unhappy with the change.
Sales declined, employees were
laid off, and Shultz resigned. In this
case, the ethical decision did not
have a positive financial impact on
the firm. Nonetheless, despite jobs
lost, lives may have been saved by
the change in product design.
Is Ethical Behavior Good for
Business?
• Reputation Management
• A reputation for integrity
enhances customer
loyalty (e.g. Johnson &
Johnson Tylenol Case)
• Conversely, damage to a
company's reputation can
mean a sharp and often
irreversible loss of
market share.
Is Ethical Behavior Good for
Business?
• Social Capital
– Experts say most
people forgive
mistakes made by
leaders who have both
conviction and a good
heart. - Del Jones,
Leadership lessons
from the Reagan years,
USA Today, June 11,
2004, p.6B.
Is Ethical Behavior Good
for Business?
• Decreases Costs - Though initiating and
ethics program sometimes involves
significant up front costs, it generally helps
to avoid other larger costs later.
Is Ethical Behavior Good
for Business?
• Encourages Investment - A Conference
Board of Canada poll revealed that 77% of
Canadians are most likely to invest in, 81%
to purchase from, and 79% to work for
companies they view as socially
responsible.
Causes of Failures in Business Ethics
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Decreased Authority of Moral Standards
Empty Gestures/Insincerity
Situational Ethics/Moral Relativism/Expansion of Cultural Diversity
Rapid Expansion and Decentralization of Control
Company/Personal Immaturity
Parties Perceived as Enemies or Not Worthy of Ethical Treatment/Moral Exclusion (e.g.
Lying to the IRS, cancer causing pajamas and other defective products dumped on 3rd
world markets, etc.)
Narrow View of Stakeholders
Failing to “Count of Cost” before committing to a particular course (see Luke 14:28-30)
Lack of “Owner” Accountability/Spin
Actual or Perceived Pressures
Fixation on “Results”
Speed/Carelessness
Ethical Illiteracy
Rote Behavior
Distractions
Causes of Failures in Business Ethics
• Focus on Short Term Profits & Wrong
Standards for Hiring
– "If we select people principally for their charisma and
their ability to drive up stock prices in the short term
instead of their character, and we shower them with
inordinate rewards," the author asks, "why should we
be surprised when they turn out to lack integrity?” Bill George, Former CEO Medtronic Corp. - in "Authentic
Leadership: Rediscovering the Secrets to Creating
Lasting Value," Jossey-Bass/Wiley, 2003.
– “The mind of the superior man is conversant with
righteousness; the mind of the mean man is
conversant with gain.” -Confucius
Causes of Failures in
Business Ethics
• Emphasis on the Individual rights
– “Instead of conceiving of society as something established for
the defense of individual rights, fair contracts, and due process of
law, we are invited to see it in terms of the biblical vision. This way
of living, thinking, and acting where autonomy and related rights
take priority has seriously jeopardized the meaning and values of
all institutions in our society.” - Detroit Archbishop Adam J. Maida, in
a speech to Catholic judges including Rehnquist, Scalia, Kennedy, and
O'Connor
Causes of Failures in Business Ethics
• Self-Deception/Choosing Not to Know
– Types
• Tribalism, or the belief that the company is always right
• Legalism, the inability to imagine moral obligations beyond
the law (Note: Kedoshim Tiyu is a requirement of a Jew not to just obey the
letter of the law but to obey the spirit of the law as well. Under Jewish law, it is
entirely possible for a person to be 100% observant or all the law and yet be a
Naval B'rshut HaTorah , that is, a repulsive, disgusting individual. One must go
beyond the law, called Lifnim Mishurat HaDin, and embrace the ethical
imperatives that are within it.
• Moral Gamesmanship, the excusing of unethical practices by
viewing business as "a game" and oneself as "a player”
• Scientism, the elevation of science-including management
science-to a position of unquestioned authority.
•
(see Corporate “moral blindness” not solved by typical ethics, by John Knapp, Emory Report, April 26, 1999, Volume
51, No. 29, http://www.emory.edu/EMORY_REPORT/erarchive/1999/April/erapril.26/4_26_99morals.html)
Causes of Failures in
Business Ethics
• Emotions
– Arrogance
• "When men are most sure and arrogant they are
commonly most mistaken, giving views to passion
without that proper deliberation which alone can
secure them from the grossest absurdities"
– - David Hume quotes (Scottish philosopher, historian,
economist and essayist. 1711-1776)
Causes of Failures in
Business Ethics
• Emotions
–
–
–
–
–
“Blind” Ambition
Desperation
Feeling of Invulnerability
Flirting with the Edge
Greed
Causes of Failures in
Business Ethics
• Is the Capitalist System or the Corporate
Structure inherently Immoral or Amoral?
Capitalism
• Capitalism: An economic system in which
the major part of production and
distribution lies in private hands, operating
under a primarily free market system, for
the primary purpose of earning a profit on
capital invested.
Capitalism
• “Capitalism is the astounding belief that
the most wickedest of men will do the most
wickedest of the things for the greatest
good of everyone.” John Maynard Keyes
Capitalism
• Values that are central to a capitalism
– Freedom of voluntary exchange
– Sanctity of contracts
– Removal of impediments to trade
•
(Source: Ethics and Economic Affairs,by Lewis, Alan; Wärneryd, Karl Erik, Publication:
London ; New York Routledge, 2002)
Capitalism
• “As it presently functions, capitalism
encourages human pathologies -embodying irresponsibility as a central
requirement in its operating routines.” William Greider is national affairs correspondent
for The Nation
Corporations
• Today more than 25% of the world’s
economic activity comes from the 200
largest corporations. - “Top 200 The Rise of
Corporate Global Power”, by Anderson &
Cavanaugh, Institute for Policy Studies, 2000)
• The largest 500 U.S. companies constitute
at least 75% of the U.S. economy.
Corporations
• Many now believe that it is not the church or
state, but the corporation that is:
– “the most important organization in the world”
- The Company: A Short History of a Revolutionary Idea,
by Micklethwait & Woolridge, 2003
– or “the central institution of contemporary
society” - “Corporate Society: Class, Property, and
Contemporary Capitalism, by McDermott, 1991.
– or “society's dominant non-governmental
institution." - Value Shift: Why Companies Must
Merge Social and Financial Imperatives, by Paine, 2003.
Corporations
• These beliefs echo the prediction made by -French
Sociologist Emile Durkheim (1858-1917), in his
work Suicide, that “following the collapse of the
family and the church, the corporation would be
the association in the future that would supply the
social support that every individual needs to
maintain a moral life” . - Cited in “An Essay on the Background
of Business Ethics: Ethics, Economics, Law and the Corporation, by Lisa
N. Newton & Maureen M. Ford, in Taking Sides.
Corporations
• Legally speaking, Corporations are:
– “fictional persons”
• “lacking body and soul”, corporations cannot be
punished - Pope Innocent IV (13th Century)
• “lacking a soul, corporations cannot commit
treason, be outlawed, or excommunicated - Sir
Edward Coke, Chief Justice, King’s Bench (17th
Century)
Corporations
• King George III's Lord
Chancellor Baron Thurlow
remarked at the end of the
18th Century: "How can
you expect a corporation
to have a conscience,
when it has no soul to be
damned and no body to be
kicked?"
Corporations
• A Corporation is “an artificial
being, invisible, intangible, and
existing only in the
contemplation of law. Being the
mere creature of law, it
possesses only those
properties which the charter of
creation confers upon it, either
expressly or incidental to its
very existence.” - Chief Justice
Marshall, Dartmouth v.
Woodard (1819)
Corporations
• As “artificial persons” corporations cannot
have “real” responsibilities. - Nobel Prize
Winning Economist Milton Friedman
• Philosophy Professor Manuel Velasquez
argues that only corporate members and
not corporations themselves, can be held
morally responsible.
Corporations
• However, “Although a corporation is not
something that can be seen or touched, it
does have prescribed rights and legal
obligations within the community.” - William
H. Shaw, Business Ethics.
Corporations
• “The exclusively economic definition of the
corporation is a deadly oversimplification ,
allowing overemphasis on self-interest at
the expense of the consideration of others.”
- Kenneth Andrews, Professor, Harvard
Business School
Corporations
• Limited liability is the key feature of the
corporate form, encouraging investment.
– Doesn’t that run directly counter to the value of
Responsibility/Accountability?
Conflicts of Interest
• Ethics Officers at most major U.S.
corporations cite conflicts of interest as
their no. 1 ethics issue.
• Definition: When an
individual/agent/organization acts on a
personal interest which conflicts with/is
likely to conflict with/may conflict with, the
legitimate interests of/or a duty owed to
another that he is obligated to serve.
Conflicts of Interest
• Actual or potential gain not a requirement
• What’s wrong with the mere appearance of
a conflict?
– It undermines trust
Conflicts of Interest
• Types
– Self-Dealing
– Accepting Benefits
– Influence Peddling
• (e.g. Boeing Co. fired its top financial executive for unethical
conduct, saying he negotiated the hiring of a missile defense
expert while she worked for the U.S. government and was in a
position to influence Boeing contracts - Boeing Fires Two Top
Executives, David Carpenter, Chicago Sun-Times, Nov. 25,
2003)
– Use of another’s property for personal advantage
Conflicts of Interest
• Warning Sign: Behavior that is likely to bias
or compromise
• “Trust Test”: would relevant others [my
employer, my clients, professional
colleagues, or the general public] trust my
judgment if they knew I was in this
situation.
Corporate Governance
• Corporate Governance: formal and informal
structures which steer an organization.
Corporate Governance
• Do the Board of Directors actually “direct”
corporate operations?
– In reality most essential governance usually
happens before the board meets.
– As far back as 1932, Berle & Means showed that
since stock ownership in large corporations is
generally very dispersed, actual control of
corporation rests with its corporate officers
and not its board - The Corporation and Private
Property, 1932.
Corporate Governance
• “Directors can be out of touch with a company's
business and can fall prey to the temptation to
simply be polite to a chief executive while Rome
is burning. A code of silence develops in the
boardroom. By the time someone is willing to
speak up, the company is in deep trouble.” - Bill
George, Former CEO, Medtronic Corp. in "Authentic
Leadership: Rediscovering the Secrets to
Creating Lasting Value," Jossey-Bass/Wiley, 2003.
Corporate Governance
• The Board of Directors of
Worldcom reportedly allowed
CEO Bernie Ebbers to rule
“practically unchecked”,
generally “rubber-stamping”
his decisions. Their audits
“rarely scratched below the
surface” and they approved
multibillion dollar mergers and
acquisitions “with little
discussion.” (Report:
Worldcom board passive, Jim
Hopkins, USA Today, June 10,
2003, p. 3B)
Corporate Governance
• “Directors must ensure
that they remain the true
stewards of corporate
accountability … without
undue interference from
the CEO or other members
of management.” - SEC
Chairman William H.
Donaldson, speaking at
Duke University 3/16/05.
Corporate Governance
• Problems in Corporate Governance
– Chairman often same person as CEO
• Who chooses the Board of Directors?
– Typically the Executive Officers by Proxy
Elections
Corporate Governance
• Who should sit on the Board of Directors?
– Competence
• Find truly knowledgeable in the field & in business generally
• One of the requirements of Sarbanes-Oxley is that a company must
have individuals who are certified financial experts on the board.
– Self-Interest (Good or Bad?)
• Maintain a certain % of independent directors (If so, What %?)
– In Britain, the 1992 Cadbury Committee report recommended that boards
of directors of public companies include at least 3 outside directors as
members and that the CEO and chairman posts be held by different
individuals.
– Pluralism on Board (interest group reps. e.g. Labor, Environmental,
Consumer Watchdogs, etc.)?
• Volkswagen's “Group Works” Council
– Ethical Orientation?
• C-bridge, a rapidly emerging leader among Internet-based business
solution providers, appointed to Joseph L. Badaracco, Jr., Professor of
Business Ethics at the Harvard Business School to its Board.
Corporate Governance
• But, on April 14, 2003, the SEC said it would
review rules that make it tough for
shareholders to nominate directors to
corporate boards. SEC Chairman William
Donaldson asked staffers to come with
recommendations to make it easier for
shareholders to run their own candidates.
Changes may be adopted in time for the
2004 proxy season.
Corporate Governance
• Most state law mandates directors must
act in the best interests of the corporation
and its shareholders
– Courts have generally interpreted this to mean
maximizing share price.
• Note that most Americans say that a corporation’s
top obligation should be to its employees, its
community or the nation. Only 17 % think
shareholders deserve first priority. - “Work Week”,
Wall Street Journal, May 21, 1996, A1.
Corporate Governance
• Ultra vires doctrine: shareholders could
sue managers for embarking on projects
contrary to the corporate purpose in
decline because of the broad
interpretation of the Business Judgement
Rule which shields some managerial
actions from substantive review by courts
(especially in Delaware)
Corporate Governance
• Should a Chairman of the Board & CEO be the same
person?
– In the UK, the role of chairman of the board and CEO are now
generally held by different people, unlike the U.S., where it is
estimated that in 70-80% of companies in the Standard and Poor’s
500, one person wears the hats of both CEO and chairman.
– However, recent studies suggest that companies in which the
chairman and CEO positions are held by two different people
perform no better than companies in which the roles are
combined. In other words, it’s no guarantee against future
scandals.
Corporate Governance
• Possible ways to improve:
– More fully independent auditors
– Prohibit access to government contracts if
violate law/ethics
– Create legal duty to promote the public good
Corporate Governance
• Recent NYSE proposals would require, among other
things, that:
– Corporate boards of NYSE-listed companies have a majority of
independent directors
– That listed companies have audit, compensation and
nominating committees composed entirely of independent
directors
– That non-management directors meet at executive sessions
without management present and that they appoint a lead
director to preside at these sessions
– That shareholders approve all stock option plans (with some
exceptions, such as “employment inducement” options).