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BUSINESS ETHICS
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BUSINESS ETHICS
A Stakeholder and Issues
Management Approach
SIXTH EDITION
Joseph W. Weiss
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Business Ethics
Copyright © 2014 by Joseph W. Weiss
All rights reserved. No part of this publication may be reproduced, distributed, or transmitted in any form or
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Brief Contents
Chapter 1
Business Ethics, the Changing Environment, and Stakeholder Management
Chapter 2
Ethical Principles, Quick Tests, and Decision-Making Guidelines
Chapter 3
Stakeholder and Issues Management Approaches
Chapter 4
The Corporation and External Stakeholders: Corporate Governance: From the Boardroom to
the Marketplace
Chapter 5
Corporate Responsibilities, Consumer Stakeholders, and the Environment
Chapter 6
The Corporation and Internal Stakeholders: Values-Based Moral Leadership, Culture, Strategy,
and Self-Regulation
Chapter 7
Employee Stakeholders and the Corporation
Chapter 8
Business Ethics and Stakeholder Management in the Global Environment
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Contents
Preface
Acknowledgments
Case Authorship
Chapter 1
Business Ethics, the Changing Environment, and Stakeholder Management
1.1 Business Ethics and the Changing Environment
Seeing the “Big Picture”
Point/CounterPoint
Environmental Forces and Stakeholders
Stakeholder Management Approach
1.2 What Is Business Ethics? Why Does It Matter?
What Is Ethics and What Are the Areas of Ethical Theory?
Unethical Business Practices and Employees
Ethics and Compliance Programs
Why Does Ethics Matter in Business?
Working for the Best Companies
1.3 Levels of Business Ethics
Asking Key Questions
Ethical Insight 1.1
1.4 Five Myths about Business Ethics
Myth 1: Ethics Is a Personal, Individual Affair, Not a Public or Debatable Matter
Myth 2: Business and Ethics Do Not Mix
Myth 3: Ethics in Business Is Relative
Myth 4: Good Business Means Good Ethics
Myth 5: Information and Computing Are Amoral
1.5 Why Use Ethical Reasoning in Business?
1.6 Can Business Ethics Be Taught and Trained?
1.7 Plan of the Book
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Chapter Summary
Questions
Exercises
Real-Time Ethical Dilemma
Cases
1. Bernard L. Madoff Investment Securities LLC: Wall Street Trading Firm
2. Cyberbullying: Who’s to Blame and What Can Be Done?
Notes
Chapter 2
Ethical Principles, Quick Tests, and Decision-Making Guidelines
2.1 Ethical Reasoning and Moral Decision Making
Three Criteria in Ethical Reasoning
Moral Responsibility Criteria
2.2 Ethical Principles and Decision Making
Ethical Insight 2.1
Utilitarianism: A Consequentialist (Results-Based) Approach
Universalism: A Deontological (Duty-Based) Approach
Rights: A Moral and Legal Entitlement-Based Approach
Justice: Procedures, Compensation, and Retribution
Virtue Ethics: Character-Based Virtues
The Common Good
Ethical Relativism: A Self-Interest Approach
Immoral, Amoral, and Moral Management
2.3 Four Social Responsibility Roles
2.4 Levels of Ethical Reasoning and Moral Decision Making
Personal Level
Organizational Level
Industry Level
Societal, International, and Global Levels
2.5 Identifying and Addressing Ethical Dilemmas
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Ethical Insight 2.2
Moral Creativity
Ethical Dilemma Problem Solving
12 Questions to Get Started
2.6 Individual Ethical Decision-Making Styles
Communicating and Negotiating across Ethical Styles
2.7 Quick Ethical Tests
2.8 Concluding Comments
Back to Louise Simms . . .
Chapter Summary
Questions
Exercises
Real-Time Ethical Dilemma
Cases
3. Ford’s Pinto Fires: The Retrospective View of Ford’s Field Recall Coordinator
4. Jerome Kerviel: Rogue Trader or Misguided Employee? What Really Happened at the Société Générale?
5. Samuel Waksal at ImClone
Notes
Chapter 3
Stakeholder and Issues Management Approaches
3.1 Stakeholder Theory and the Stakeholder Management Approach Defined
Stakeholders
Stakes
3.2 Why Use a Stakeholder Management Approach for Business Ethics?
Stakeholder Theory: Criticisms and Responses
3.3 How to Execute a Stakeholder Analysis
Taking a Third-Party Objective Observer Perspective
Role of the CEO in Stakeholder Analysis
Summary of Stakeholder Analysis
3.4 Negotiation Methods: Resolving Stakeholder Disputes
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Stakeholder Dispute Resolution Methods
3.5 Stakeholder Management Approach: Using Ethical Principles and Reasoning
3.6 Moral Responsibilities of Cross-Functional Area Professionals
Marketing and Sales Professionals and Managers as Stakeholders
R&D, Engineering Professionals, and Managers as Stakeholders
Accounting and Finance Professionals and Managers as Stakeholders
Public Relations Managers as Stakeholders
Human Resource Managers as Stakeholders
Summary of Managerial Moral Responsibilities
3.7 Issues Management, Integrating a Stakeholder Framework
What Is an Issue?
Ethical Insight 3.1
Other Types of Issues
Stakeholder and Issues Management: “Connecting the Dots”
Moral Dimensions of Stakeholder and Issues Management
Types of Issues Management Frameworks
3.8 Managing Crises
How Executives Have Responded to Crises
Crisis Management Recommendations
Chapter Summary
Questions
Exercises
Real-Time Ethical Dilemma
Cases
6. The BP Deepwater Horizon Explosion and Oil Spill: Crisis and Aftermath
7. Mattel Toy Recalls
8. Genetic Discrimination
Notes
Chapter 4
The Corporation and External Stakeholders: Corporate Governance: From the Boardroom to
the Marketplace
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4.1 Managing Corporate Social Responsibility in the Marketplace
Ethical Insight 4.1
Free-Market Theory and Corporate Social Responsibility
Problems with the Free-Market Theory
Intermediaries: Bridging the Disclosure Gap
Point/CounterPoint
4.2 Managing Corporate Responsibility with External Stakeholders
The Corporation as Social and Economic Stakeholder
The Social Contract: Dead or Desperately Needed?
Balance between Ethical Motivation and Compliance
Covenantal Ethic
The Moral Basis and Social Power of Corporations as Stakeholders
Corporate Philanthropy
Managing Stakeholders Profitably and Responsibly: Reputation Counts
Ethical Insight 4.2
4.3 Managing and Balancing Corporate Governance, Compliance, and Regulation
Ethical Insight 4.3
Best Corporate Board Governance Practices
Sarbanes-Oxley Act
Pros and Cons of Implementing the Sarbanes-Oxley Act
The Federal Sentencing Guidelines for Organizations: Compliance Incentive
4.4 The Role of Law and Regulatory Agencies and Corporate Compliance
Why Regulation?
Laws and U.S. Regulatory Agencies
Laws Protecting Consumers
Laws Protecting the Environment
4.5 Managing External Issues and Crises: Lessons from the Past (Back to the Future?)
Chapter Summary
Questions
Exercises
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Real-Time Ethical Dilemma
Cases
9. Conscious Capitalism: What Is It? Why Do We Need It? Does It Work?
10. Goldman Sachs: Hedging a Bet and Defrauding Investors
11. Google Books
Notes
Chapter 5
Corporate Responsibilities, Consumer Stakeholders, and the Environment
5.1 Corporate Responsibility toward Consumer Stakeholders
Corporate Responsibilities and Consumer Rights
Consumer Protection Agencies and Law
5.2 Corporate Responsibility in Advertising
Ethics and Advertising
The Federal Trade Commission and Advertising
Pros and Cons of Advertising
Ethical Insight 5.1
Advertising and Free Speech
Paternalism, Manipulation, or Free Choice?
5.3 Controversial Issues in Advertising: The Internet, Children, Tobacco, and Alcohol
Advertising and the Internet
The Thin Line between Deceptive Advertising, Spyware, and Spam
Advertising to Children
Protecting Children
Tobacco Advertising
The Tobacco Controversy Continues
Alcohol Advertising
Ethical Insight 5.2
5.4 Managing Product Safety and Liability Responsibly
How Safe Is Safe? The Ethics of Product Safety
Ethical Insight 5.3
Product Liability Doctrines
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Legal and Moral Limits of Product Liability
Product Safety and the Road Ahead
5.5 Corporate Responsibility and the Environment
The Most Significant Environmental Problems
Causes of Environmental Pollution
Enforcement of Environmental Laws
The Ethics of Ecology
Green Marketing, Environmental Justice, and Industrial Ecology
Rights of Future Generations and Right to a Livable Environment
Recommendations to Managers
Chapter Summary
Questions
Exercises
Real-Time Ethical Dilemma
Cases
12. For-Profit Universities: Opportunities, Issues, and Promises
13. Fracking: Drilling for Disaster?
14. Neuromarketing
15. WalMart: Challenges with Gender Discrimination
16. Vioxx, Dodge Ball: Did Merck Try to Avoid the Truth?
Notes
Chapter 6
The Corporation and Internal Stakeholders: Values-Based Moral Leadership, Culture, Strategy,
and Self-Regulation
6.1 Leadership and Stakeholder Management
Defining Purpose, Mission, and Values
Ethical Insight 6.1
Leadership Stakeholder Competencies
Example of Companies Using Stakeholder Relationship Management
Ethical Insight 6.2
Spiritual Values, Practices, and Moral Courage in Leading
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Failure of Ethical Leadership
Ethical Dimensions of Leadership Styles
How Should CEOs as Leaders Be Evaluated and Rewarded?
6.2 Organizational Culture, Compliance, and Stakeholder Management
Organizational Culture Defined
High-Ethics Companies
Weak Cultures
6.3 Leading and Managing Strategy and Structure
Organizational Structure and Ethics
Boundaryless and Networked Organizations
6.4 Leading Internal Stakeholder Values in the Organization
6.5 Corporate Self-Regulation and Ethics Programs: Challenges and Issues
Ethical Insight 6.3
Organizations and Leaders as Moral Agents
Ethics Codes
Codes of Conduct
Problems with Ethics and Conduct Codes
Ombuds and Peer-Review Programs
Is the Organization Ready to Implement a Values-Based Stakeholder Approach? A Readiness Checklist
Chapter Summary
Questions
Exercises
Real-Time Ethical Dilemmas
Cases
17. Kaiser Permanente: A Crisis of Communication, Values, and Systems Failure
18. Social Networking and Social Responsibility
Notes
Chapter 7
Employee Stakeholders and the Corporation
7.1 Employee Stakeholders in the Changing Workforce
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The Aging Workforce
Generational Differences in the Workplace
Steps for Integrating a Multigenerational Workforce
Ethical Insight 7.1
Women in the Workforce
Same-Sex Marriages, Civil Unions, Domestic Partnerships, and Workforce Rights
The Increasing Cultural Mix: Minorities Are Becoming the Majority
Educational Weaknesses and Gaps
Point/CounterPoint
Mainstreaming Disabled Workers
Balancing Work and Life in Families
7.2 The Changing Social Contract between Corporations and Employees
Good Faith Principle Exception
Public Policy Principle Exception
Implied Contract Exception
7.3 Employee and Employer Rights and Responsibilities
Moral Foundation of Employee Rights
The Principle of Balance in the Employee and Employer Social Contract and the Reality of Competitive
Change
Rights from Government Legislation
Employer Responsibilities to Employees
Employee Rights and Responsibilities to Employers
Employee Rights in the Workplace
Other Employee Rights and Obligations to Employers
Ethical Insight 7.2
7.4 Discrimination, Equal Employment Opportunity, and Affirmative Action
Discrimination
Equal Employment Opportunity and the Civil Rights Act
Age and Discrimination in the Workplace
Comparable Worth and Equal Pay
Affirmative Action
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Ethics and Affirmative Action
Reverse Discrimination: Arguments against Affirmative Action
Ethical Insight 7.3
7.5 Sexual Harassment in the Workplace
What Is Sexual Harassment?
Who Is Liable?
Tangible Employment Action and Vicarious Liability
Sexual Harassment and Foreign Firms in the United States
7.6 Whistle-Blowing versus Organizational Loyalty
When Whistle-Blowers Should Not Be Protected
Factors to Consider before Blowing the Whistle
Managerial Steps to Prevent External Whistle-Blowing
Chapter Summary
Questions
Exercises
Real-Time Ethical Dilemma
Cases
19. Preemployment Screening and Facebook: Ethical Considerations
20. Women on Wall Street: Fighting for Equality in a Male-Dominated Industry
Notes
Chapter 8
Business Ethics and Stakeholder Management in the Global Environment
8.1 The Connected Global Economy and Globalization
Ethical Insight 8.1
Globalization and the Forces of Change
8.2 Managing and Working in a “Flat World”: Professional Competencies and Ethical Issues
Shared Leadership in Teams’ Competency
Ethical Insight 8.2
Global Ethical Values and Principles
Know Your Own Cultural and Core Values, Your Organization’s, and Those with Whom You Are Working
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Cross-Cultural Business Ethical Issues Professionals May Experience
8.3 Societal Issues and Globalization: The Dark Side
International Crime and Corruption
Economic Poverty and Child Slave Labor
The Global Digital Divide
Westernization (Americanization) of Cultures
Loss of Nation-State Sovereignty
8.4 Multinational Enterprises as Stakeholders
Power of MNEs
8.5 Triple Bottom Line, Social Entrepreneurship, and Microfinancing
The Triple Bottom Line
Social Entrepreneurs and Social Enterprises
Microfinancing
8.6 MNEs: Stakeholder Values, Guidelines, and Codes for Managing Ethically
Employment Practices and Policies
Consumer Protection
Environmental Protection
Political Payments and Involvement
Basic Human Rights and Fundamental Freedoms
8.7 Cross-Cultural Ethical Decision Making and Negotiation Methods
External Corporate Monitoring Groups
Individual Stakeholder Methods for Ethical Decision Making
Four Typical Styles of International Ethical Decision Making
Hypernorms, Local Norms, and Creative Ethical Navigation
Chapter Summary
Questions
Exercises
Real-Time Ethical Dilemmas
Cases
21. Google in China: Still “Doing No Evil”?
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22. Sweatshops: Not Only a Global Issue
23. The U.S. Industrial Food System
Notes
Index
About the Author
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Preface
The sixth edition of Business Ethics: A Stakeholder and Issues Management Approach continues the mission of
providing a practical, easy-to-read, engaging and contemporary text with detailed real-time contemporary and
classic cases for students. This text updates the previous edition, adding fourteen new cases in addition to
other new features discussed below.
We continue our quest to assist colleagues and students in understanding the changing environment from
combined stakeholder and issues management approaches, based on the theory and practice that firms depend
on stakeholders as well as stockholders for their survival and success. Acting morally while doing business is
no longer a joking or even questionable topic of discussion. With the near shutdowns of the U.S. government,
the subprime lending crisis, global climate changes, the fading middle class in America and other countries,
China’s continuing economic expansion, and India’s inroads into the global economy, the stakes for the global
economy are not trivial. Ethical behaviors are required, not optional, for this and future generations. Learning
to think and reason ethically is the first step.
Business ethics is concerned with doing what is right over what is wrong, while acting in helpful over
harmful ways, and with seeking the common good as well as our own welfare. This text addresses this
foundational way of thinking by asking why does the modern corporation exist in the first place? What is its
raison d’être? How does it treat its stakeholders? Business ethics engages these essential questions, and it is
also about the purpose, values, and transactions of and between individuals, groups, and companies and their
global alliances. Stakeholder theory and management, in particular, are what concern nonfinancial as well as
the financial aspects of business behavior, policies, and actions. A stakeholder view of the firm complements
the stockholder view and includes all parties and participants who have an interest—a stake—in the
environment and society in which business operates.
Students and professionals need straightforward frameworks to thoughtfully and objectively analyze and
then sort through complex issues in order to make decisions that matter—ethically, economically, socially,
legally, and spiritually. The United States and indeed the whole world are different after the 9/11 attacks.
Terrorism is a threat to everyone, everywhere, as the Boston bombings showed. Also threatening are the
ongoing corporate scandals, the consequences of the Arab Spring, security issues worldwide, immigration
problems, the inequalities in income distribution and wealth, the decay of the middle classes—all of these
affect graduating students and those who wish to attend a university or college but cannot afford to. Business
ethics affects our professional and personal relationships, careers, and lives, and this text attempts to identify
and help analyze many of these issues and opportunities for change, using relevant ethical frameworks and
reasoning.
The New Revised Sixth Edition: Why and How This Text Is Different
This edition builds on previous success factors to provide:
1. A competent, contemporary text grounded in factual and detailed research, while being easy to read and
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applying concepts and methods to real-time business-related situations.
2. Interesting and contemporary news stories, exercises, and examples.
3. In-depth, real-time customized cases (twenty-three in this edition) specifically designed for this book.
4. Ethical dilemmas experienced by real individuals, not hypothetical stories.
5. A detailed chapter on both stakeholder and issues management methods, with step-by-step explanations,
not summarized or theoretical abstractions.
6. A straightforward business and managerial perspective supported by the latest research—not only a
philosophical approach.
7. One of the most comprehensive texts on the topics of workforce and workplace demographics,
generational trends, and issues relating to ethical issues.
8. Comprehensive coverage of the Sarbanes-Oxley Act, federal sentencing guidelines, and codes of conduct.
9. Personal, professional, organizational, and global perspectives, and information and strategies for
addressing ethical dilemmas.
10. A decision-maker role for students in exercises and examples.
This edition adds features that enhance your ethical understanding and interest in contemporary issues in
the business world. It also aligns even more closely with international Association to Advance Collegiate
Schools of Business (AACSB) requirements to help students, managers, and leaders achieve in their respective
fields. Additions and changes include:
• A Point/CounterPoint exercise has been added to several chapters to challenge students’ thinking and
arguments on contemporary issues. Topics include “too big to fail” (TBTF) institutions; advertising
on the Boston bomber; student loan debt; and file sharing and other forms of online sharing.
• Twenty-three cases, of which fourteen are new and three updated, dealing with national and
international issues.
• Updated national ethics survey data is included throughout the text.
• New perspectives on generational differences and ethical workplace issues have been added.
• Each chapter has new and updated lead-off cases and scenarios to attract students’ attention.
• Updated data on global and international issues.
• Updated research and business press findings and stories have been added to each chapter to explain
concepts and perspectives.
• Chapter 1 includes a section on personal ethics with Covey’s maturity continuum and cases on
cyberbullying and Madoff’s Ponzi scheme.
• Chapter 2 now covers more material on personal ethics and has a section explaining the foundations
of ethics with cases on Jerome Kerviel, rogue trader, Sam Waksal (ImClone), and the Ford Pinto.
• Chapter 3 is now the stakeholder and issues management chapter with a section explaining
stakeholder theory in more depth with a lead-in case on the BP oil spill and aftermath in the Gulf of
Mexico. Cases include genetic discrimination and the Mattel toy recalls.
• Chapter 4 has updated research throughout with new Ethical Insight inserts and cases on conscious
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capitalism, Goldman Sachs, and Google Books.
• Chapter 5 includes cases on fracking, for-profit education, neuromarketing, and gender
discrimination.
• Chapter 6 includes new cases on Kaiser Permanente, and social networking and social responsibility.
• Chapter 7 remains a leader in the field on depth and coverage of current trends on generational
differences, gender, and population changes. Cases include Facebook and Preemployment, and
women on Wall Street.
• Chapter 8 features new research on skills and ethical capacities in international/global management
and leadership. The “dark side” of globalization is updated with research on ethical issues in
developing and underdeveloped countries. Cases include sweatshops and the U.S. industrial food
system.
An Action Approach
The sixth edition puts the students in the decision-maker role when identifying and addressing ethical
dilemmas with thought-provoking cases and discussion questions that ask, “What would you do if you had to
decide a course of action?” Readers are encouraged to articulate and share their decision-making rationales
and strategies. Readers will also learn how to examine changing ethical issues and business problems with a
critical eye. We take a close look at the business reporting of the online editions of the Wall Street Journal, 60
Minutes, the New York Times, Businessweek, the Economist, and other sources.
Stakeholder and Issues Management Analysis
Stakeholder analysis is one of the most comprehensive approaches for identifying issues, groups, strategies,
and outcomes. In the sixth edition, these methods are presented in an updated and more integrative Chapter
3. This chapter offers a useful starting point for mapping the who, what, when, where, why, and how of
ethical problems relating to organizations and their stakeholders. Issues and crisis management frameworks
are explained and integrated into approaches that complement the stakeholder analysis. Quick tests and
negotiation techniques are presented in Chapters 2 and 8.
• A new instructor’s manual and PowerPoints.
• Streamlined case teaching notes.
• Suggested videos and web sites for each chapter.
Objectives and Advantages of This Textbook
• To use an action-oriented stakeholder and issues management approach for understanding the ethical
dimensions of business, organizational, and professional complex issues, crises, and events that are
happening now.
• To introduce and motivate students about the relevance of ethical concepts, principles, and examples
through actual moral dilemmas that are occurring in their own lives, as well as with known national
and international people, companies, and groups.
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• To present a simple, straightforward way of using stakeholder and issues management methods with
ethical reasoning in the marketplace and in workplace relationships.
• To engage and expand readers’ awareness of ethical and unethical practices in business at the
individual, group, organizational, and multinational levels through real-time—not hypothetical—
ethical dilemmas, stories, and cases.
• To instill self-confidence and competence in the readers’ ability to think and act according to moral
principles. The classroom becomes a lab for real-life decisions.
Structure of the Book
• Chapter 1 defines business ethics and familiarizes the reader with examples of ethics in business
practices, levels of ethical analysis, and what can be expected from a course in business ethics. A
Point/CounterPoint exercise engages students immediately.
• Chapter 2 has exchanged positions in the text with the former Chapter 3. This chapter engages
students in a discussion of ethics at the personal, professional, organizational, and international levels.
The foundations of ethical principles are presented in context with contemporary ethical decision-
making approaches. Individual styles of moral decision making are also discussed in this section.
Although the approach here is a micro-level one, these principles can be used to examine and explain
corporate strategies and actions as well. (Executives, managers, employees, coalitions, government
officials, and other external stakeholder groups are treated as individuals.)
• Chapter 3 introduces action-oriented methods for studying social responsibility relationships at the
individual employee, group, and organizational levels. These methods provide and encourage the
incorporation of ethical principles and concepts from the entire book.
• Chapter 4 presents ethical issues and problems that firms face with external consumers, government,
and environmental groups. How moral can and should corporations be and act in commercial
dealings? Do corporations have a conscience? Classic and recent crises resulting from corporate and
environmental problems are covered.
• Chapter 5 explains ethical problems that consumers face in the marketplace: product safety and
liability, advertising, privacy, and the Internet. The following questions are addressed: How free is
“free speech”? How much are you willing to pay for safety? Who owns the environment? Who
regulates the regulators in an open society?
• Chapter 6 presents the corporation as internal stakeholder and discusses ethical leadership, strategy,
structure, alliances, culture, and systems as dominant themes regarding how to lead, manage, and be a
responsible follower in organizations today.
• Chapter 7 focuses on the individual employee stakeholder and examines the most recent, new and
changing workforce/workplace trends, moral issues, and dilemmas employees and managers face and
must respond to in order to survive and compete in national and global economies. This chapter has
been described as a “must-read” for every human resource professional.
• Chapter 8 begins by asking students if they are ready for professional international assignments.
Ethical and leadership competencies of new entrants into the global workforce are introduced, before
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moving the discussion to global and multinational enterprises (MNEs) and ethical issues between
MNEs, host countries, and other groups. Issues resulting from globalization are presented along with
stakeholders who monitor corporate responsibility internationally. Negotiation techniques for
professionals responsibly doing business abroad are presented.
Cases
Twenty-three cases are included in this edition, fourteen of which are new and three thoroughly updated.
Chapter 1
1. Bernard L. Madoff Investment Securities LLC: Wall Street Trading Firm
2. Cyberbullying: Who’s to Blame and What Can Be Done?
Chapter 2
3. Ford’s Pinto Fires: The Retrospective View of Ford’s Field Recall Coordinator
4. Jerome Kerviel: Rogue Trader or Misguided Employee? What Really Happened at the Société Générale?
5. Samuel Waksal at ImClone
Chapter 3
6. The BP Deepwater Horizon Explosion and Oil Spill: Crisis and Aftermath
7. Mattel Toy Recalls
8. Genetic Discrimination
Chapter 4
9. Conscious Capitalism: What Is It? Why Do We Need It? Does It Work?
10. Goldman Sachs: Hedging a Bet and Defrauding Investors
11. Google Books
Chapter 5
12. For-Profit Universities: Opportunities, Issues, and Promises
13. Fracking: Drilling for Disaster?
14. Neuromarketing
15. WalMart: Challenges with Gender Discrimination
16. Vioxx, Dodge Ball: Did Merck Try to Avoid the Truth?
Chapter 6
17. Kaiser Permanente: A Crisis of Communication, Values, and Systems Failure
18. Social Networking and Social Responsibility
25

Chapter 7
19. Preemployment Screening and Facebook: Ethical Considerations
20. Women on Wall Street: Fighting for Equality in a Male-Dominated Industry
Chapter 8
21. Google in China: Still “Doing No Evil”?
22. Sweatshops: Not Only a Global Issue
23. The U.S. Industrial Food System
26

Acknowledgments
This book continues the practice that has endured over the last several years that I have been teaching business
ethics to MBA students and executives. My consulting work also informs this edition in numerous ways. I
would like to thank all my students for their questions, challenges, and class contributions, which have
stimulated the research and presentations in this text. I also thank all the professional staff at Berrett-Koehler
who helped make this edition possible and the faculty and staff at Bentley University who contributed
resources and motivation for this edition. I am grateful to Michael Hoffman and his staff at Bentley
University’s Center for Business Ethics, whose shared resources and friendship also helped with this edition.
I also recognize and extend thanks to those whose reviews of previous editions were very helpful, and
whose comments on this edition were instructive as well: Anna Pakman, Ohio Dominican University; Buck
Buchanan, Defiance College; Francine Guice, Indiana University-Purdue University Fort Wayne; Lois
Smith, University of Wisconsin; Ross Mecham, Virginia Polytechnic Institute and State University; Christina
Stamper, Western Michigan University.
Special thanks go to Laura Gray, Lu Bai, and Matt Zamorski, former and current graduate students at
Bentley University, without whose help this edition would not have been possible.
Joseph W. Weiss
Bentley University
27

Case Authorship
Editing help was provided by Laura Gray, Lu Bai, and Matt Zamorski.
Case 1 Bernard L. Madoff Investment Securities LLC: Wall Street Trading Firm
Alba Skurti, Bentley University, under the direction of Professor Joseph W. Weiss, Bentley University.
Case 2 Cyberbullying: Who’s to Blame and What Can Be Done?
Roseleen Dello Russo and Lauren Westling, Bentley University, under the direction of Professor Joseph W.
Weiss, Bentley University.
Case 3 Ford’s Pinto Fires: The Retrospective View of Ford’s Field Recall Coordinator
Dennis A. Gioia, Professor of Organizational Behavior, Smeal College of Business, Pennsylvania State
University, provided the personal reflections in this case. Michael K. McCuddy, Valparaiso University,
provided background information and discussion questions.
Case 4 Jerome Kerviel: Rogue Trader or Misguided Employee? What Really Happened at the Société
Générale?
Steve D’Aquila, Bentley University, under the direction of Professor Joseph W. Weiss, Bentley University.
Case 5 Samuel Waksal at ImClone
Amy Vensku, MBA Bentley student under the direction of Professor Joseph W. Weiss, and edited and
adapted for this text by Michael K. McCuddy, Valparaiso University and Matt Zamorski, Bentley University.
Case 6 The BP Deepwater Horizon Explosion and Oil Spill: Crisis and Aftermath
Jill Stonehouse and Bianlbahen Patel, Bentley University, under the direction of Professor Joseph W. Weiss,
Bentley University.
Case 7 Mattel Toy Recalls
Mike Ladd, Bentley University, under the direction of Professor Joseph W. Weiss, Bentley University.
Case 8 Genetic Discrimination
Jaclyn Publicover, Bentley University, under the direction of Professor Joseph W. Weiss, Bentley University.
Case 9 Conscious Capitalism: What Is It? Why Do We Need It? Does It Work?
John Warden, Bentley University, edited by Professor Joseph W. Weiss.
28

Case 10 Goldman Sachs: Hedging a Bet and Defrauding Investors
Dean Koutris and Jess Sheynman, Bentley University, under the direction of Professor Joseph W. Weiss,
Bentley University.
Case 11 Google Books
Steve D’Aquila, Bentley University, under the direction of Professor Joseph W. Weiss, Bentley University.
Case 12 For-Profit Universities: Opportunities, Issues, and Promises
Alicia Cabrera and Nate Pullen, Bentley University, under the direction of Professor Joseph W. Weiss,
Bentley University.
Case 13 Fracking: Drilling for Disaster?
Lauren Casas and Ned Coffee, MBA Bentley students, under the direction of Professor Joseph W. Weiss,
Bentley University, with editorial revisions made by Laura Gray, Matt Zamorski, and Lu Bai.
Case 14 Neuromarketing
Eddy Fitzgerald and Jennifer Johnson, Bentley University, under the direction of Professor Joseph W. Weiss,
Bentley University.
Case 15 WalMart: Challenges with Gender Discrimination
Michael K. McCuddy, the Louis S. and Mary L. Morgal Chair of Christian Business Ethics and Professor of
Management, College of Business Administration, Valparaiso University.
Case 16 Vioxx, Dodge Ball: Did Merck Try to Avoid the Truth?
Sean Downey, Bentley University, under the direction of Professor Joseph W. Weiss, Bentley University.
Case 17 Kaiser Permanente: A Crisis of Communication, Values, and Systems Failure
Sarah O’Neill, Bentley University, under the direction of Professor Joseph W. Weiss, Bentley University.
Case 18 Social Networking and Social Responsibility
Adam Schilke, Kimberly Benevides, and Eden Kyne, Bentley University, under the direction of Professor
Joseph W. Weiss, Bentley University.
Case 19 Preemployment Screening and Facebook: Ethical Considerations
Carl Forziati, Bentley University, under the direction of Professor Joseph W. Weiss, Bentley University.
Case 20 Women on Wall Street: Fighting for Equality in a Male-Dominated Industry
Monica Meunier, under the direction of Professor Joseph W. Weiss, and adapted and edited for this text by
29

Michael K. McCuddy, Valparaiso University.
Case 21 Google in China: Still “Doing No Evil”?
Professor Joseph W. Weiss, Bentley University, edited by Lu Bai.
Case 22 Sweatshops: Not Only a Global Issue
Michael K. McCuddy, the Louis S. and Mary L. Morgal Chair of Christian Business Ethics and Professor of
Management, College of Business Administration, Valparaiso University.
Case 23 The U.S. Industrial Food System
Brenda Pasquarello, Bentley University, under the direction of Professor Joseph W. Weiss, Bentley
University.
30

1
BUSINESS ETHICS, THE CHANGING ENVIRONMENT,
AND STAKEHOLDER MANAGEMENT
1.1 Business Ethics and the Changing Environment
Point/CounterPoint
1.2 What Is Business Ethics? Why Does It Matter?
1.3 Levels of Business Ethics
Ethical Insight 1.1
1.4 Five Myths about Business Ethics
1.5 Why Use Ethical Reasoning in Business?
1.6 Can Business Ethics Be Taught and Trained?
1.7 Plan of the Book
Chapter Summary
Questions
Exercises
Real-Time Ethical Dilemma
Cases
1. Bernard L. Madoff Investment Securities LLC: Wall Street Trading Firm
2. Cyberbullying: Who’s to Blame and What Can Be Done?
Notes
OPENING CASE
Blogger: “Hi. i download music and movies, limewire and torrent. is it illegal for me to download or is it just illegal for the person uploading
it. does anyone know someone who was caught and got into trouble for it, what happened them. Personally I dont see a difference between
downloading a song or taping it on a cassette from a radio!!”1
The Recording Industry Association of America (RIAA), on behalf of its member companies and copyright
owners, has sued more than 30,000 people for unlawful downloading. RIAA detectives log on to peer-to-peer
networks where they easily identify illegal activity since users’ shared folders are visible to all. The majority of
these cases have been settled out of court for $1,000—$3,000, but fines per music track can go up to $150,000
under the Copyright Act.
The nation’s first file-sharing defendant to challenge an RIAA lawsuit, Jammie Thomas-Rasset, reached
the end of the appeals process to overturn a jury-determined $222,000 fine in 2013. She was ordered to pay
31

this amount, which she argued was unconstitutionally excessive, for downloading and sharing 24 copyrighted
songs using the now-defunct file-sharing service Kazaa. The Supreme Court has not yet heard a file-sharing
case, having also declined without comment to review the only other appeal following Thomas-Rasset’s. (In
that case, the Court let stand a federal jury-imposed fine of $675,000 against Joel Tenenbaum for
downloading and sharing 30 songs.) “As I’ve said from the beginning, I do not have now, nor do I anticipate
in the future, having $220,000 to pay this,” Thomas-Rasset said. “If they do decide to try and collect, I will
file for bankruptcy as I have no other option.”2
Students often use university networks to illegally distribute copyrighted sound recordings on unauthorized
peer-to-peer services. The RIAA has issued subpoenas to universities nationwide, including networks in
Connecticut, Georgia, Kansas, Michigan, Minnesota, New Jersey, Pennsylvania, Rhode Island, Texas,
Virginia, and Washington. Most universities give up students’ identities only after offering an opportunity to
stop the subpoena with their own funds. As in earlier rounds of lawsuits, the RIAA is utilizing the “John Doe”
litigation process, which is used to sue defendants whose names are not known.
RIAA president Cary Sherman has discussed the ongoing effort to reach out to the university community
with proactive solutions to the problem of illegal file-sharing on college campuses: “It remains as important as
ever that we continue to work with the university community in a way that is respectful of the law as well as
university values. That is one of our top priorities, and we believe our constructive outreach has been
enormously productive so far. Along with offering students legitimate music services, campus-wide
educational and technological initiatives are playing a critical role. But there is also a complementary need for
enforcement by copyright owners against the serious offenders—to remind people that this activity is illegal.”
He added: “Illegally downloading music from the Internet costs everyone—the musicians not getting
compensated for their craft, the owners and employees of the thousands of record stores that have been forced
to close, legitimate online music services building their businesses, and consumers who play by the rules and
purchase their music legally.”
On the other hand, once the well-funded RIAA initiates a lawsuit, many defendants are pressured to settle
out of court in order to avoid oppressive legal expenses. Others simply can’t take the risk of large fines that
juries have shown themselves willing to impose.
New technologies and the trend toward digital consumption have made intellectual property both more
critical to businesses’ bottom lines and more difficult to protect. No company, big or small, is immune to the
intellectual property protection challenge. Illegal downloads of music are not the only concern. A new wave of
lawsuits is being filed against individuals who illegally download movies through sites like Napster and
BitTorrent. In 2011, the U.S. Copyright Group initiated “the largest illegal downloading case in US history”
at the time, suing over 23,000 file sharers who illegally downloaded Sylvester Stallone’s movie The
Expendables. This case was expanded to include the 25,000 users who also downloaded Voltage Pictures’ The
Hurt Locker, which increased the total number of defendants to approximately 50,000, all of whom used peer-
to-peer downloading through BitTorrent. The lawsuits were filed based on the illegal downloads made from
an Internet Protocol (IP) address. The use of an IP address as identifier presents ethical issues—for example,
should a parent be responsible for a child downloading a movie through the family’s IP address? What about a
landlord who supplied Internet to a tenant?
32

Digital books are also now in play. In 2012, a lawsuit was filed in China against technology giant Apple for
sales of illegal book downloads through its App Store. Nine Chinese authors are demanding payment of $1.88
million for unauthorized versions of their books that were submitted to the App Store and sold to consumers
for a profit. Again, the individual IP addresses are the primary way of determining who performed the illegal
download. Telecom providers and their customers face privacy concerns, as companies are being asked for the
names of customers associated with IP addresses identified with certain downloads.
Privacy activists argue that an IP address (which identifies the subscriber but not the person operating the
computer) is private, protected information that can be shown during criminal but not civil investigations.
Fred von Lohmann, senior staff attorney with the Electronic Frontier Foundation, has suggested on his
organization’s blog that “courts are not prepared to simply award default judgments worth tens of thousands
of dollars against individuals based on a piece of paper backed by no evidence.”3
1.1 Business Ethics and the Changing Environment
The Internet is changing everything: the way we communicate, relate, read, shop, bank, study, listen to music,
get news and “TV,” and participate in politics. Of course the last “third billion” of people in undeveloped
countries are not participating on broadband as is the rest of the world,4 but they predictably will, first
through mobile phones. Businesses and governments operate in and are disrupted by changing technological,
legal, economic, social, and political environments with competing stakeholders and power claims, as many
Middle Eastern countries in particular are experiencing. Also, as this chapter’s opening case shows, there is
more than one side to every complex issue and debate involving businesses, consumers, families, other
institutions, and professionals. When stakeholders and companies cannot agree or negotiate competing claims
among themselves, the issues generally go to the courts.
The RIAA, in the opening case, does not wish to alienate too many college students because they are also
the music industry’s best customers. At the same time, the association believes it must protect those groups it
represents. Not all stakeholders in this controversy agree on goals and strategies. For example, not all music
artists oppose students downloading or even sharing some of their copyrighted songs. Offering free access to
some songs is a good advertising tactic. On the other hand, shouldn’t those songwriters and recording
companies who spend their time and money creating, marketing, distributing, and selling their intellectual
property protect that property? Is file sharing, without limits or boundaries, stealing other people’s property? If
not, what is this practice to be called? If file sharing continues in some form, and ends up helping sales for
many artists, will it become legitimate? Should it? Is this just the new way business models are being changed
by 15–26 year olds? While the debate continues, individuals (15 year olds and younger in many cases) who
still illegally share files have rights as private citizens under the law, and recording companies have rights of
property protection. Who is right and who is wrong, especially when two rights collide? Who stands to lose
and who to gain? Who gets hurt by these transactions? Which group’s ethical positions are most defensible?
Stakeholders are individuals, companies, groups, and even governments and their subsystems that cause and
respond to external issues, opportunities, and threats. Corporate scandals, globalization, deregulation,
mergers, technology, and global terrorism have accelerated the rate of change and brought about a climate of
uncertainty in which stakeholders must make business and moral decisions. Issues concerning questionable
33

ethical and illegal business practices confront everyone, as the following examples illustrate:
• The subprime lending crisis in 2008 involved stakeholders as varied as consumers, banks, mortgage
companies, real estate firms, and homeowners. Many companies that sold mortgages to unqualified buyers
lied about low-risk, high-return products. Wall Street companies, while thriving, are also settling lawsuits
stemming from the 2008 crisis. In 2013, “Hundreds of thousands of subprime borrowers are still struggling.
Subprime securities still pose a significant legal risk to the firms that packaged them, and they use up capital
that could be deployed elsewhere in the economy.”5 In 2011, Bank of America announced that it would
“take a whopping $20 billion hit to put the fallout from the subprime bust behind it and satisfy claims from
angry investors.”6 The ethics and decisions precipitating the crisis contributed to tilting the U.S. economy
toward recession, with long-lasting effects.
• The corporate scandals in the 1990s through 2001 at Enron, Adelphia, Halliburton, MCI WorldCom,
Tyco, Arthur Andersen, Global Crossing, Dynegy, Qwest, Merrill Lynch, and other firms that once jarred
shareholder and public confidence in Wall Street and corporate governance may now seem like ancient
history to those with short-term memories. Enron’s bankruptcy with assets of $63.4 billion defies
imagination, but WorldCom’s bankruptcy set the record for the largest corporate bankruptcy in U.S. history
(Benston, 2003). Only 22% of Americans express a great deal or quite a lot of confidence in big business,
compared to 65% who express confidence in small business.7 Confidence in big business reached its highest
point in 1974 at 34%, and even during the dot-com boom in the late 1990s it hovered at 30%. The lowest
rating of 16% was polled in 2009 after the subprime lending crisis, and although public confidence has
slightly increased, the significant differential in American confidence between big and small business belies a
public mistrust of big business that may not be easily repaired.8
• The debate continues over excessive pay to those chief executive officers (CEOs) who posted poor corporate
performance. Large bonuses paid out during the financial crisis made executive pay a controversial topic, yet
investors did little to solve the issue. “Investors had the opportunity to provide advisory votes on executive
pay at financial firms that received TARP funds in 2009, and they gave thumbs up to pay packages at every
single one of those institutions. This proxy season, with advisory votes now widely available (thanks to the
Dodd-Frank Act), only five companies’ executive compensation packages have received a thumbs down from
shareholders.”9 The Bureau of Labor Statistics noted that while median CEO salaries grew at 27% in 2010,
overall worker pay only increased by 2.1%. “It’s been almost three years since Congress directed the
Securities and Exchange Commission to require public companies to disclose the ratio of their chief
executive officers’ compensation to the median of the rest of their employees’. The agency has yet to produce
a rule.”10 An independent 2013 analysis by Bloomberg showed that “Across the Standard & Poor’s 500
Index of companies, the average multiple of CEO compensation to that of rank-and-file workers is 204, up
20 percent since 2009.”11
• Some critics on the right of the political spectrum argue that companies are becoming overregulated since
the scandals. Others argue there is not sufficient regulation of the largest financial companies. The Sarbanes-
Oxley Act of 2002 is one response to those scandals. This act states that corporate officers will serve prison
time and pay large fines if they are found guilty of fraudulent financial reporting and of deceiving
34

shareholders. Implementing this legislation requires companies to create accounting oversight boards,
establish ethics codes, show financial reports in greater detail to investors, and have the CEO and chief
financial officer (CFO) personally sign off on and take responsibility for all financial statements and internal
controls. Implementing these provisions is costly for corporations. Some claim their profits and global
competitiveness are negatively affected and the regulations are “unenforceable.”12
• U.S. firms are outsourcing work to other countries to cut costs and improve profits, work that some argue
could be accomplished in the United States. Estimates of U.S. jobs outsourced range from 104,000 in 2000
to 400,000 in 2004, and to a projected 3.3 million by 2015. “Forrester Research estimated that 3.3 million
U.S. jobs and about $136 billion in wages would be moved to overseas countries such as India, China, and
Russia by 2015. Deloitte Consulting reported that 2 million jobs would move from the United States and
Europe to overseas destinations within the financial services business. Across all industries the emigration of
service jobs can be as high as 4 million.”13 Do U.S. employees who are laid off and displaced need
protection, or is this practice part of another societal business transformation? Is the United States becoming
part of a global supply chain in which outsourcing is “business as usual” in a “flat world,” or is the working
middle class in the United States and elsewhere at risk of predatory industrial practices and ineffective
government polices?14
• Will robots, robotics, and artificial intelligence (AI) applications replace humans in the workplace? This
interesting but disruptive development poses concerns. “The outsourcing of human jobs as a side effect of
globalization has arguably contributed to the current unemployment crisis. However, a growing trend sees
humans done away with altogether, even in the low-wage countries where many American jobs have
landed”.15 What will be the ethical implications of the next wave of AI development, “where full-blown
autonomous self-learning systems take us into the realm of science fiction—delivery systems and self-driving
vehicles alone could change day-to-day life as we know it, not to mention the social implications.”16 AI also
extends into electronic warfare (drones), education (robot assisted or led), and manufacturing (a Taiwanese
company replaced a “human force of 1.2 million people with 1 million robots to make laptops, mobile
devices and other electronics hardware for Apple, Hewlett-Packard, Dell and Sony”).17 One futurist
predicted that as many as 50 million jobs could be lost to machines by 2030, and even 50% of all human jobs
by 2040.
These large macro-level issues underlie many ethical dilemmas that affect business and individual decisions
among stakeholders in organizations, professions, as well as individual lives. Before discussing stakeholder
theory, and the management approach that it is based on, and how these perspectives and methods can help
individuals and companies better understand how to make more socially responsible decisions, we take a brief
look at the broader environmental forces that affect industries, organizations, and individuals.
Seeing the “Big Picture”
Pulitzer Prize-winning journalist Thomas Friedman, continues to track megachanges on a global scale. His
2011 book, That Used to Be Us: How America Fell Behind in the World It Invented and How We Can Come Back,
suggests an agenda for change to meet larger challenges. His books, The World Is Flat 3.0, and The Lexus and
35

the Olive Tree, vividly illustrate a macroenvironmental perspective that provides helpful insights into
stakeholder and issues management mind-sets and approaches.18 Friedman notes, “Like everyone else trying
to adjust to this new globalization system and bring it into focus, I had to retrain myself and develop new
lenses to see it. Today, more than ever, the traditional boundaries between politics, culture, technology,
finance, national security, and ecology are disappearing. You often cannot explain one without referring to the
others, and you cannot explain the whole without reference to them all. I wish I could say I understood all this
when I began my career, but I didn’t. I came to this approach entirely by accident, as successive changes in my
career kept forcing me to add one more lens on top of another, just to survive.”19
After quoting Murray Gell-Mann, the Nobel laureate and former professor of theoretical physics at
Caltech, Friedman continues, “We need a corpus of people who consider that it is important to take a serious
and professional look at the whole system. It has to be a crude look, because you will never master every part
or every interconnection. Unfortunately, in a great many places in our society, including academia and most
bureaucracies, prestige accrues principally to those who study carefully some [narrow] aspect of a problem, a
trade, a technology, or a culture, while discussion of the big picture is relegated to cocktail party conversation.
That is crazy. We have to learn not only to have specialists but also people whose specialty is to spot the
strong interactions and entanglements of the different dimensions, and then take a crude look at the whole.”20
POINT/COUNTERPOINT
File Sharing: Harmful Theft or Sign of the Times?
This exercise provides a more complete case with student interaction.
“I watch some of my favorite shows on hulu.com for free and I buy others on Amazon or iTunes. I pay a fee to use Pandora for ad-free
internet radio, or Spotify for specific music playlists. But like many of my friends, I don’t own a TV, so when there is no other way to access
a show, I will download it from a torrent [file-sharing] site.”
—Interview with a Generation Y “Millennial”
The Recording Industry Association of America (RIAA), on behalf of its member companies and
copyright owners, has sued more than 30,000 people for unlawful downloading. RIAA detectives log on to
peer-to-peer networks where they easily identify illegal activity since users’ shared folders are visible to all. The
majority of these cases have been settled out of court for $1,000—$3,000, but fines per music track can go up
to $150,000 under the Copyright Act.
The nation’s first file-sharing defendant to challenge an RIAA lawsuit, Jammie Thomas-Rasset, in 2013
reached the end of the appeals process to overturn a jury-determined $222,000 fine. She was ordered to pay
this amount, which she argued was unconstitutionally excessive, for downloading and sharing 24 copyrighted
songs using the now-defunct file-sharing service Kazaa. The Supreme Court has not yet heard a file-sharing
case, having also declined without comment to review the only other appeal following Thomas-Rasset’s.
Students often use university networks to illegally distribute copyrighted sound recordings on unauthorized
peer-to-peer services. The RIAA issues subpoenas to universities nationwide, including networks in
Connecticut, Georgia, Kansas, Michigan, Minnesota, New Jersey, Pennsylvania, Rhode Island, Texas,
Virginia, and Washington. Most universities give up students’ identities only after offering an opportunity to
stop the subpoena with their own funds. As in earlier rounds of lawsuits, the RIAA is utilizing the “John Doe”
36

http://hulu.com

litigation process, which is used to sue defendants whose names are not known.
RIAA President Cary Sherman cites the ongoing effort to reach out to the university community with
proactive solutions to the problem of illegal file sharing on college campuses, saying, “It remains as important
as ever that we continue to work with the university community in a way that is respectful of the law as well as
university values. . . . Along with offering students legitimate music services, campus-wide educational and
technological initiatives are playing a critical role. But there is also a complementary need for enforcement by
copyright owners against the serious offenders—to remind people that this activity is illegal and . . . costs
everyone.”
On the other hand, once the well-funded RIAA initiates a lawsuit, many defendants are pressured to settle
out of court in order to avoid oppressive legal expenses. Others simply can’t take the risk of large fines that
juries have shown themselves willing to impose.
New technologies and the trend toward digital consumption have made intellectual property both more
critical to businesses’ bottom line and more difficult to protect. No company, big or small, is immune to the
IP protection challenge. Illegal downloads of music are not the only concern. A new wave of lawsuits is being
filed against individuals who illegally download movies through sites like Napster and BitTorrent.
In 2011, the U.S. Copyright Group initiated “the largest illegal downloading case in U.S. history” at the
time, suing over 23,000 file sharers who illegally downloaded Sylvester Stallone’s movie, The Expendables.
This case was expanded to include the 25,000 users who also downloaded Voltage Pictures’ The Hurt Locker,
which increased the total number of defendants to approximately 50,000 who used peer-to-peer downloading
through BitTorrent. The lawsuits are filed based on the illegal downloads made from an IP address.
Digital books are also now in play. In 2012, a lawsuit was filed in China against technology giant Apple for
sales of illegal book downloads through the App Store. Nine Chinese authors are demanding payment of
$1.88 million for unauthorized versions of their books that were submitted to the App Store and sold to
consumers for a profit. Again, the individual IP addresses are the primary way of determining who performed
the illegal download. Telecom providers and their customers face privacy concerns, as companies are being
asked for the names of customers associated with IP addresses identified with certain downloads.
Privacy activists argue that an IP address (which identifies the subscriber but not the person operating the
computer) is private, protected information that can be shown during criminal but not civil investigations.
Fred von Lohmann, senior staff attorney with the Electronic Frontier Foundation, has suggested on his
organization’s blog that “courts are not prepared to simply award default judgments worth tens of thousands
of dollars against individuals based on a piece of paper backed by no evidence.”
Instructions: (1) Each student team individually adopts either the Point or CounterPoint argument and
justifies their reasons (arguments using this case and other evidence/opinions). (2) Then, either in teams or
designated arrangements, each shares their reasons. (3) The class is debriefed and insights shared.
POINT: File sharing is theft, and endangers the entire structure of incentives that allows the creation of
digital media. Downloading even one song illegally has severe costs for the musicians and the owners and
employees of the companies that produce songs, and legitimate online music services, not to mention
consumers who purchase music legally. Those responsible, even peripherally, for illegal file sharing should be
tracked down by any means possible and held accountable for these costs and damages.
37

COUNTERPOINT: The generation that grew up with the advent of digital media has a well-cultivated
expectation of ease and freedom when it comes to accessing music, television, and books using the Internet.
Companies are willing to capitalize on that ease to boost their profits. It is unethical to use technology and the
legal system to “make examples” of those (possibly innocent bystanders whose IP addresses were used by
others) who are simply showing the flaws and gaps in distribution strategies.
SOURCES
The exercise was authored by Taya Weiss and draws on the following sources:
Brian, M. (January 7, 2012). Apple facing $1.88 million lawsuit in China over sales of illegal book downloads.
http://thenextweb.com/apple/2012/01/07/apple-facing-1-88-million-lawsuit-in-china-over-sales-of-
illegal-book-downloads/, accessed March 7, 2012.
Kravets, David. (March 18, 2013). Supreme Court OKs $222K verdict for sharing 24 songs. Wired.com.
http://www.wired.com/threatlevel/2013/03/scotus-jammie-thomas-rasset/, accessed January 8, 2014.
Kirk, Jeremy. (2008). U.S. judge pokes hole in file-sharing lawsuit. Court ruling could force the music
industry to provide more evidence against people accused of illegal file sharing, legal experts say.
InfoWorld.com. http://www.infoworld.com/article/08/02/26/US-judge-pokes-hole-in-file-sharing-
lawsuit_1.html, accessed March 7, 2012.
McMillan, G. (May 10, 2011). Are you one of 23,000 defendants in the U.S.’ biggest illegal download
lawsuit? Time.com. http://techland.time.com/2011/05/10/are-you-one-of-23000-defendants-in-the-us-
biggest-illegal-download-lawsuit/, accessed March 7, 2012.
Pepitone, J. (June 10, 2011). 50,000 BitTorrent users sued for alleged illegal downloads. CNNMoney.com.
http://money.cnn.com/2011/06/10/technology/bittorrent_lawsuits/index.htm, accessed March 7, 2012.
Recording Industry Association of America. (March 2008). New wave of illegal file sharing lawsuits brought
by RIAA. RIAA.com. http://www.riaa.com/newsitem.php?
news_year_filter=2004&resultpage=10&id=D119AD49-5C18-2513-AB36-A06ED24EB13D, accessed
March 7, 2012.
von Lohmann, F. (February 25, 2008). RIAA File-Sharing Complaint Fails to Support Default Judgment.
Electronic Frontier Foundation. https://www.eff.org/deeplinks/2008/02/riaa-file-sharing-complaint-fails-
support-default-judgment, accessed February 19, 2014.
Environmental Forces and Stakeholders
Organizations and individuals are embedded in and interact with multiple changing local, national, and
international environments, as the above discussion illustrates. These environments are increasingly merging
into a global system of dynamically interrelated interactions among businesses and economies. We must
“think globally before acting locally” in many situations. The macro-level environmental forces shown in
Figure 1.1 affect the performance and operation of industries, organizations, and jobs. This framework can be
used as a starting point to identify trends, issues, opportunities, and ethical problems that affect people and
stakes in different levels. A first step toward understanding stakeholder issues is to gain an understanding of
environmental forces that influence stakes. As we present an overview of these environmental forces here,
38

http://thenextweb.com/apple/2012/01/07/apple-facing-1-88-million-lawsuit-in-china-over-sales-of-illegal-book-downloads/

http://www.wired.com/threatlevel/2013/03/scotus-jammie-thomas-rasset/

http://www.infoworld.com/article/08/02/26/US-judge-pokes-hole-in-file-sharing-lawsuit_1.html

Are You One of 23,000 Defendants in the US’ Biggest Illegal Download Lawsuit?

http://money.cnn.com/2011/06/10/technology/bittorrent_lawsuits/index.htm

http://www.riaa.com/newsitem.php?news_year_filter=2004&resultpage=10&id=D119AD49-5C18-2513-AB36-A06ED24EB13D

https://www.eff.org/deeplinks/2008/02/riaa-file-sharing-complaint-fails-support-default-judgment

think of the effects and pressures each of the forces has on you.
Figure 1.1
Environmental Dimensions Affecting Industries, Organizations, and Jobs
The economic environment continues to evolve into a more global context of trade, markets, and resource
flows. Large and small U.S. companies are expanding businesses and products overseas. Stock and bond
market volatility and in-terdependencies across international regions are unprecedented, including the
European market and the future of the euro, which is challenged by some defaulting economies. The rise of
China and India presents new trade opportunities and business practices, if human rights problems can be
solved in those countries. Do you see your career and next job being affected by this round of globalization?
The technological environment has ushered in the advent of electronic communication, online social
networking, and near-constant connectivity to the Internet, all of which are changing economies, industries,
companies, and jobs. U.S. jobs that are based on routine technologies and rules-oriented procedures are
vulnerable to outsourcing. Online technologies facilitate changing corporate “best practices.” Company supply
chains are also becoming virtually and globally integrated online. Although speed, scope, economy of scale,
and efficiency are transforming transactions through information technology, privacy and surveillance issues
continue to emerge. The boundary between surveillance and convenience also continues to blur. Has the
company or organization for which you work used surveillance to monitor Internet use?
Electronic democracy is changing the way individuals and groups think and act on political issues. Instant
web surveys broadcast over interactive web sites have created a global chat room for political issues. Creation
of online communities in the 2004, 2008, and 2012 presidential campaigns have proved an effective political
strategy for both U.S. parties’ fundraising programs and mobilizing of new voters. Have you used the Internet
39

to participate in a national, local, or regional political process?
The government and legal environments continue to create regulatory laws and procedures to protect
consumers and restrict unfair corporate practices. Since Enron and other corporate scandals, the Sarbanes-
Oxley Act of 2002 and the revised 2004 Federal Sentencing Guidelines were created to audit and constrain
corporate executives from blatant fraudulence on financial statements. The Dodd-Frank Act of 2010
established the Consumer Financial Protection Bureau, whose mission is to protect consumers by carrying out
federal consumer financial laws, educating consumers, and hearing complaints from the public, and more
recently that Bureau has been functioning to help citizens with credit card abuses in particular.21
Several federal agencies are also changing—or ignoring—standards for corporations. The U.S. Food and
Drug Administration (FDA), for example, has sped up the required market approval time for new drugs
sought by patients with life-threatening diseases, but lags behind in taking some unsafe drugs off the market.
Uneven regulation of fraudulent and anticompetitive practices affects competition, shareholders, and
consumers. Executives from Enron and other large U.S. firms involved in scandals have been tried and
sentenced. Should the banks that loaned them funds also be charged with wrongdoing? Should U.S. laws be
enforced more evenly? Who regulates the regulators? The subprime lending crisis raises some of the same
questions. Who can the public trust for advice about mortgages and substantial loans? Who is responsible and
accountable for educating and constraining the public in such transactions in a democratic, capitalist society?
Legal questions and issues affect all of these environmental dimensions and every stakeholder and investor.
How much power should the government have to administer laws to protect citizens and ensure that business
transactions are fair? Also, who protects the consumer in a free-market system? These issues, which are
exemplified in the file-sharing controversy as summarized in this chapter’s opening case, question the nature
and limits of consumer and corporate laws in a free-market economy.
The demographic and social environment continues to change as national boundaries experience the effects of
globalization and the workforce becomes more diverse. Employers and employees are faced with aging and
very young populations; minorities becoming majorities; generational differences; and the effects of
downsizing and outsourcing on morale, productivity, and security. How can companies effectively integrate a
workforce that is increasingly both younger and older, less educated and more educated, technologically
sophisticated and technologically unskilled?
In this book these environmental factors are incorporated into a stakeholder and issues management
approach that also includes an ethical analysis of actors external and internal to organizations. The larger
perspective underlying these analytical approaches is represented by the following question: How can the
common good of all stakeholders in controversial situations be realized?
Stakeholder Management Approach
How do companies, the media, political groups, consumers, employees, competitors, and other groups
respond in socially ethical and responsible ways when they effect and are affected by an issue, dilemma, threat,
or opportunity from the environments just described? The stakeholder theory expands a narrow view of
corporations from a stockholder-only perspective to include the many stakeholders who are also involved in
how corporations envision the future, treat people and the environment, and serve the common good for the
40

many. Implementing this view starts with understanding the ethical imperatives and moral understandings
that corporations that use natural resources and the environment must serve, as well as providing for those
who buy their products and services. This view and accompanying methods are explained in more detail in
Chapters 2 and 3 especially and inform the whole text.
The stakeholder theory begins to address these questions by enabling individuals and groups to articulate
collaborative, win—win strategies based on:
1. Identifying and prioritizing issues, threats, or opportunities.
2. Mapping who the stakeholders are.
3. Identifying their stakes, interests, and power sources.
4. Showing who the members of coalitions are or may become.
5. Showing what each stakeholder’s ethics are (and should be).
6. Developing collaborative strategies and dialogue from a “higher ground” perspective to move plans and
interactions to the desired closure for all parties.
Chapter 3 lays out specific steps and strategies for analyzing stakeholders. Here, our aim is to develop
awareness of the ethical and social responsibilities of different stakeholders. As Figure 1.2 illustrates, there can
be a wide range of stakeholders in any situation. We turn to a general discussion of “business ethics” in the
following section to introduce the subject and motivate you to investigate ethical dimensions of organizational
and professional behavior.
Figure 1.2
Primary vs. Secondary Stakeholder Groups
1.2 What Is Business Ethics? Why Does It Matter?
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Business ethicists ask, “What is right and wrong, good and bad, harmful and beneficial regarding decisions
and actions in organizational transactions?” Ethical reasoning and logic is explained in more detail in Chapter
2, but we note here that approaching problems using a moral frame of reference can influence solution paths
as well as options and outcomes. Since “solutions” to business and organizational problems may have more
than one alternative, and sometimes no right solution may seem available, using principled ethical thinking
provides structured and systematic ways of decision making based on values, not only perceptions that may be
distorted, pressures from others, or the quickest and easiest available options—that may prove more harmful.
What Is Ethics and What Are the Areas of Ethical Theory?
Ethics derives from the Greek word ethos—meaning “character”—and is also known as moral philosophy,
which is a branch of philosophy that involves “systematizing, defending and recommending concepts of right
and wrong conduct.”22 Ethics involves understanding the differences between right and wrong thinking and
actions, and using principled decision making to choose actions that do not hurt others. Although intuition
and creativity are often involved in having to decide between what seems like two “wrong” or less desirable
choices in a dilemma where there are no easy alternatives, using ethical principles to inform our thinking
before acting hastily may reduce the negative consequences of our actions. Classic ethical principles are
presented in more detail in the next chapter, but by way of an introduction, the following three general areas
constitute a framework for understanding ethical theories: metaethics, normative ethics, and descriptive
ethics.23
Metaethics considers where one’s ethical principles “come from, and what they mean.” Do one’s ethical
beliefs come from what society has prescribed? Did our parents, family, religious institutions influence and
shape our ethical beliefs? Are our principles part of our emotions and attitudes? Metaethical perspectives
address these questions and focus on issues of universal truths, the will of God, the role of reason in ethical
judgments, and the meaning of ethical terms themselves.24 More practically, if we are studying a case or
observing an event in the news, we can inquire about what and where a particular CEO’s or professional’s
ethical principles (or lack thereof) are and where in his/her life and work history these beliefs were adopted.
Normative ethics is more practical; this type of ethics involves prescribing and evaluating ethical behaviors—
what should be done in the future. We can inquire about specific moral standards that govern and influence
right from wrong conduct and behaviors. Normative ethics also deals with what habits we need to develop,
what duties and responsibilities we should follow, and the consequences of our behavior and its effects on
others. Again, in a business or organizational context, we observe and address ethical problems and issues with
individuals, teams, leaders and address ways of preventing and/or solving ethical dilemmas and problems.
Descriptive ethics involves the examination of other people’s beliefs and principles. It also relates to
presenting—describing but not interpreting or evaluating—facts, events, and ethical actions in specific
situations and places. In any context—organizational, relationship, or business—our aim here is to
understand, not predict, judge, or solve an ethical or unethical behavior or action.
Learning to think, reason, and act ethically helps us to become aware of and recognize potential ethical
problems. Then we can evaluate values, assumptions, and judgments regarding the problem before we act.
Ultimately, ethical principles alone cannot answer what the late theologian Paul Tillich called “the courage to
42

be” in serious ethical dilemmas or crises. We can also learn from business case studies, role playing, and
discussions on how our actions affect others in different situations. Acting accountably and responsibly is still
a choice.
Laura Nash defined business ethics as “the study of how personal moral norms apply to the activities and
goals of commercial enterprise. It is not a separate moral standard, but the study of how the business context
poses its own unique problems for the moral person who acts as an agent of this system.” Nash stated that
business ethics deals with three basic areas of managerial decision making: (1) choices about what the laws
should be and whether to follow them; (2) choices about economic and social issues outside the domain of
law; and (3) choices about the priority of self-interest over the company’s interests.25
Unethical Business Practices and Employees
The seventh (2011) National Business Ethics Survey (NBES), which obtained 4,800 responses representative
of the entire U.S. workforce,26 reported an ethical environment unlike any we have seen before in America:
“American employees are doing the right thing more than ever before, but in other ways employees’
experiences are worse than in the past.”27 The survey findings are summarized below in terms of the “bad” and
“good” news found in the workforce:
The “Bad” News
• Retaliation is on the rise against employee whistle-blowers, with 22% of employees who reported
misconduct experiencing some form of retaliation.
• More employees (13%) feel pressure to compromise their ethical standards in order to do their jobs.
• The number of companies with weak ethical cultures has grown to near-record highs, now at 42%.
The “Good” News
• The workplace is experiencing the lowest levels of misconduct, with only 45% of employees
witnessing misconduct.
• A record high (65%) of those employees now report misconduct.
• Management is improving its oversight and increasing efforts to raise awareness about ethics—34%
of employees felt more closely watched by management, and 42% of employees recognized increased
ethical awareness efforts.
The authors of the survey note that an ethical downturn is on the horizon. The economic decline and high
unemployment have created a unique ethical environment fueled by other modern factors like social
networking. “Research has revealed a significant ethics divide between those who are active on social networks
and those who are not.”28
Specific Types of Ethical Misconduct Reported
The top five most frequently observed types of misconduct were: misuse of company time (33%), abusive
behavior (21%), lying to employees (20%), company resource abuse (20%), and violating company Internet use
policies (16%). Types of misconduct with the largest increases included: sexual harassment, substance abuse,
insider trading, illegal political contributions, stealing, and environmental violations.29
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Many employees still do not report misconduct that they observe, and fear of retaliation is increasingly
valid. “When all employees are asked whether they could question management without fear of retaliation, 19
percent said it was not safe to do so.” The most common forms of retaliation include: exclusion by
management from decision and work activity (64%), cold shoulder attitudes from other employees (62%),
verbal abuse from management (62%), not given promotions or raises (55%), and cut pay or hours (46%). This
retaliation can lead to instability in the workplace by driving away talented employees. “About seven of 10
employees who experienced retaliation plan to leave their current place of employment within five years.”30
Ethics and Compliance Programs
Ethical components of company culture include: “management’s trustworthiness, whether managers at all
levels talk about ethics and model appropriate behavior, the extent to which employees value and support
ethical conduct, accountability and transparency.” Eleven percent of companies in 2011 had weak ethical
cultures. Companies can reduce ethics risks by investing in a strong ethics and compliance program: “86% of
companies with a well-implemented ethics and compliance program also have a strong ethics culture.”31
The Retaliation Trust/Fear/Reality Disconnect
Of the 65% of employees who reported witnessing misconduct in the 2011 NBES, 22% (or approximately 9
million employees) experienced retaliation. These victims of retaliation are far more likely to report
misconduct to an outside source, rather than to a member of management. This can have many negative
consequences for stakeholders involved.32
Reporting rates are much higher in companies that have well-implemented ethics and compliance
programs; only 6% of employees in companies with strong ethics and compliance programs did not report
observed misconduct.
It is interesting to note the impact of social networking on the ethical environment of a company.
According to the 2011 NBES:
• “Active social networkers report far more negative experiences of workplace ethics. As a group, they are
almost four times more likely to experience pressure to compromise standards and about three times more
likely to experience retaliation for reporting misconduct than co-workers who are less active with social
networking. They also are far more likely to observe misconduct.” Seventy-two percent of active social
networkers surveyed observed misconduct; 42% felt pressure to compromise standards; and 56% experienced
retaliation after reporting misconduct.
• Active social networkers, as discussed in this chapter’s opening case, are also more likely to believe that
questionable behaviors are acceptable. Forty-two percent of active social networkers felt that it was
acceptable to blog or tweet negatively about their company or colleagues; 42% felt that it was acceptable to
buy personal items on a company credit card as long as it was paid back; 51% felt it was acceptable to do less
work as payback for cuts in pay or benefits; 50% felt it was acceptable to keep a copy of confidential work
documents in case you need them in your next job; and 46% felt that it was acceptable to take a copy of work
software home for use on their personal computer. Only about 10% of non-active social networkers felt that
these activities were acceptable.33 Are you an active social networker? Do these results resonate with you?
44

These findings suggest that any useful definition of business ethics must address a range of problems in the
workplace, including relationships among professionals at all levels and among corporate executives and
external groups.
Why Does Ethics Matter in Business?
“Doing the right thing” matters to firms, taxpayers, employees, and other stakeholders, as well as to society.
To companies and employers, acting legally and ethically means saving billions of dollars each year in lawsuits,
settlements, and theft. One study found that the annual business costs of internal fraud range between the
annual gross domestic profit (GDP) of Bulgaria ($50 billion) and that of Taiwan ($400 billion). It has also
been estimated that theft costs companies $600 billion annually, and that 79% of workers admit to or think
about stealing from their employers. Other studies have shown that corporations have paid significant
financial penalties for acting unethically.34 The U.S. Department of Commerce noted that “as many as one-
third of all business failures annually can be attributed to employee theft.” Experts have estimated that
approximately 40% of fraud and theft losses to American businesses are internal.35
Relationships, Reputation, Morale, and Productivity
Costs to businesses also include deterioration of relationships; damage to reputation; declining employee
productivity, creativity, and loyalty; ineffective information flow throughout the organization; and
absenteeism. Companies that have a reputation for unethical and uncaring behavior toward employees also
have a difficult time recruiting and retaining valued professionals.
Integrity, Culture, Communication, and the Common Good
Strong ethical leadership goes hand in hand with strong integrity. Both ethics and integrity have a significant
impact on a company’s operations. “‘History has often shown the importance of ethics in business – even a
single lapse in judgment by one employee can significantly affect a company’s reputation and its bottom line.’
Leaders who show a solid moral compass and set a forthright example for their employees foster a work
environment where integrity becomes a core value.”36 A study of the 50 best companies to work for in Canada
(based on survey responses from over 100,000 Canadian employees at 115 organizations, with input from
1,400 leaders and human resources professionals) found that integrity and ethics matter in the following ways:
there is more flexibility and balance; values have changed; and organizations are valuing new employees more
since the demographics have changed.37 These changes are explained next.
Integrity/Ethics
What is the degree to which coworkers, managers, and senior leaders display integrity and ethical conduct?
Eighty-eight percent of employees at the top 10 best employers agreed or strongly agreed that coworkers
displayed integrity and ethical conduct at all times, whereas only 60% felt that way at the bottom 10
organizations. With respect to managers, the numbers were 90% at the top 10 and 63% at the bottom 10
organizations. A bigger difference existed with regard to whether senior leadership displayed integrity and
ethical conduct at all times, with 89% of employees at the top 10 best employers agreeing or strongly agreeing,
whereas less than half—48%—felt that way at the bottom 10 employers.38
The same study found that “engagement is higher at organizations where employees feel they share the
same values as their employer” and that “sense of ‘common purpose’ can increase employee commitment,
45

especially amongst older workers.” The authors also noted that “a perceived lack of integrity on the part of co-
workers, managers and leaders has, as expected, a detrimental effect on engagement. What was perhaps
unanticipated in the study findings, however, was the really negative opinion of the ethics of senior leadership
at low-engagement organizations.”
Working for the Best Companies
Employees care about ethics because they are attracted to ethically and socially responsible companies. Fortune
magazine regularly publishes the 100 best companies for which to work
(http://money.cnn.com/magazines/fortune/best-companies).39 Although the list continues to change, it is
instructive to observe some of the characteristics of good employers that employees repeatedly cite. The most
frequently mentioned characteristics include profit sharing, bonuses, and monetary awards. However, the list
also contains policies and benefits that balance work and personal life and those that encourage social
responsibility. Consider these policies described by employees:
• When it comes to flextime requests, managers are encouraged to “do what is right and human.”
• There is an employee hotline to report violations of company values.
• Managers will fire clients who don’t respect its security officers.
• Employees donated more than 28,000 hours of volunteer labor last year.
The public and consumers benefit from organizations acting in an ethically and socially responsible
manner. Ethics matters in business because all stakeholders stand to gain when organizations, groups, and
individuals seek to do the right thing, as well as to do things the right way. Ethical companies create investor
loyalty, customer satisfaction, and business performance and profits.40 The following section presents different
levels on which ethical issues can occur.
1.3 Levels of Business Ethics
Because ethical problems are not only an individual or personal matter, it is helpful to see where issues
originate, and how they change. Business leaders and professionals manage a wide range of stakeholders inside
and outside their organizations. Understanding these stakeholders and their concerns will facilitate our
understanding of the complex relationships between participants involved in solving ethical problems.
Ethical and moral issues in business can be examined on at least five levels. Figure 1.3 illustrates these five
levels: individual, organizational, association, societal, and international.41 Aaron Feuerstein’s now classic
story as former CEO of Malden Mills exemplifies how an ethical leader in his seventies turned a disaster into
an opportunity. His actions reflected his person, faith, allegiance to his family and community, and sense of
social responsibility.
On December 11, 1995, Malden Mills in Lawrence, Massachusetts—manufacturer of Polartec and
Polarfleece fabrics and the largest employer in the city—was destroyed by fire. Over 1,400 people were out of
work. Feuerstein stated, “Everything I did after the fire was in keeping with the ethical standards I’ve tried to
maintain my entire life, so it’s surprising we’ve gotten so much attention. Whether I deserve it or not, I guess I
became a symbol of what the average worker would like corporate America to be in a time when the American
46

http://money.cnn.com/magazines/fortune/best-companies

dream has been pretty badly injured.” Feuerstein announced shortly after the fire that the employees would
stay on the payroll while the plant was rebuilt for 60 days. He noted, “I think it was a wise business decision,
but that isn’t why I did it. I did it because it was the right thing to do.”
Figure 1.3
Business Ethics Levels
Source: Carroll, Archie B. (1978). Linking business ethics to behavior in organizations. SAM Advanced Management Journal, 43(3), 7. Reprinted
with permission from Society for Advancement of Management, Texas A&M University, College of Business.
Feuerstein could have taken the $300 million in insurance and retired, or even offshored the entire
operation. Instead, he paid out $25 million to his employees and rebuilt the plant. Feuerstein spent the
insurance funds, borrowed $100 million more, and built a new plant that is both environmentally friendly and
worker-friendly. It is also unionized. Feuerstein was invited to President Clinton’s State of the Union address
and serves as an icon in the business ethics and leadership community, regardless of the fate of Malden Mills
going forward.42
Asking Key Questions
It is helpful to be aware of the ethical levels of a situation and the possible interaction between these levels
when confronting a question that has moral implications. The following questions can be asked when a
problematic decision or action is perceived (before it becomes an ethical dilemma):
Figure 1.4
A Framework for Classifying Ethical Issues and Levels
47

Source: Matthews, John B., Goodpaster, Kenneth E., and Laura L. Nash. (1985). Policies and persons: A casebook in business ethics, 509. New
York: McGraw-Hill. Reproduced with permission from Kenneth E. Goodpaster.
• What are my core values and beliefs?
• What are the core values and beliefs of my organization?
• Whose values, beliefs, and interests may be at risk in this decision? Why?
• Who will be harmed or helped by my decision or by the decision of my organization?
• How will my own and my organization’s core values and beliefs be affected or changed by this
decision?
• How will I and my organization be affected by the decision?
Figure 1.4 offers a graphic to help identify the ethics of the system (i.e., a country or region’s customs,
values, and laws), your organization (i.e., the written formal and informal acceptable norms and ways of doing
business), and your own ethics, values, and standards.
In the following section, popular myths about business ethics are presented to challenge misconceptions
regarding the nature of ethics and business. You may take the “Quick Test of Your Ethical Beliefs” before
reading this section.
Ethical Insight 1.1
Quick Test of Your Ethical Beliefs
Answer each question with your first reaction. Circle the number, from 1 to 4, that best represents your
beliefs, if 1 represents “Completely agree,” 2 represents “Often agree,” 3 represents “Somewhat disagree,” and
4 represents “Completely disagree.”
1. I consider money to be the most important reason for working at a job or in an organization. 1 2 3 4
2. I would hide truthful information about someone or something at work to save my job. 1 2 3 4
3. Lying is usually necessary to succeed in business. 1 2 3 4
4. Cutthroat competition is part of getting ahead in the business world. 1 2 3 4
5. I would do what is needed to promote my own career in a company, short of committing a serious crime.
1 2 3 4
6. Acting ethically at home and with friends is not the same as acting ethically on the job. 1 2 3 4
7. Rules are for people who don’t really want to make it to the top of a company. 1 2 3 4
8. I believe that the “Golden Rule” is that the person who has the gold rules. 1 2 3 4
48

9. Ethics should be taught at home and in the family, not in professional or higher education. 1 2 3 4
10. I consider myself the type of person who does whatever it takes to get a job done, period. 1 2 3 4
Add up all the points. Your Total Score is:_______
Total your scores by adding up the numbers you circled. The lower your score, the more questionable your
ethical principles regarding business activities. The lowest possible score is 10, the highest 40. Be ready to give
reasons for your answers in a class discussion.
1.4 Five Myths about Business Ethics
Not everyone agrees that ethics is a relevant subject for business education or dealings. Some have argued that
“business ethics” is an oxymoron, or a contradiction in terms. Although this book does not advocate a
particular ethical position or belief system, it argues that ethics is relevant to business transactions. However,
certain myths persist about business ethics. The more popular myths are presented in Figure 1.5.
A myth is “a belief given uncritical acceptance by the members of a group, especially in support of existing
or traditional practices and institutions.”43 Myths regarding the relationship between business and ethics do
not represent truth but popular and unexamined notions. Which, if any, of the following myths have you
accepted as unquestioned truth? Which do you reject? Do you know anyone who holds any of these myths as
true?
Myth 1: Ethics Is a Personal, Individual Affair, Not a Public or Debatable Matter
This myth holds that individual ethics is based on personal or religious beliefs, and that one decides what is
right and wrong in the privacy of one’s conscience. This myth is supported in part by Milton Friedman, a
well-known economist, who views “social responsibility,” as an expression of business ethics, to be unsuitable
for business professionals to address seriously or professionally because they are not equipped or trained to do
so.44
Figure 1.5
Five Business Ethics Myths
49

Although it is true that individuals must make moral choices in life, including business affairs, it is also
true that individuals do not operate in a vacuum. Individual ethical choices are most often influenced by
discussions, conversations, and debates, and made in group contexts. Individuals often rely on organizations
and groups for meaning, direction, and purpose. Moreover, individuals are integral parts of organizational
cultures, which have standards to govern what is acceptable. Therefore, to argue that ethics related to business
issues is mainly a matter of personal or individual choice is to underestimate the role organizations play in
shaping and influencing members’ attitudes and behaviors.
Studies indicate that organizations that act in socially irresponsible ways often pay penalties for unethical
behavior.45 In fact, the results of the studies advocate integrating ethics into the strategic management process
because it is both the right and the profitable thing to do. Corporate social performance has been found to
increase financial performance. One study notes that “analysis of corporate failures and disasters strongly
suggests that incorporating ethics in before-profit decision making can improve strategy development and
implementation and ultimately maximize corporate profits.”46 Moreover, the popularity of books, training,
and articles on learning organizations and the habits of highly effective people among Fortune 500 and 1000
companies suggests that organizational leaders and professionals have a need for purposeful, socially
responsible management training and practices.47
Myth 2: Business and Ethics Do Not Mix
This myth holds that business practices are basically amoral (not necessarily immoral) because businesses
operate in a free market. This myth also asserts that management is based on scientific, rather than religious
or ethical, principles.48
Although this myth may have thrived in an earlier industrializing U.S. society and even during the 1960s,
it has eroded over the past two decades. The widespread consequences of computer hacking on individual,
commercial, and government systems that affect the public’s welfare, like identity theft on the Internet
(stealing others’ Social Security numbers and using their bank accounts and credit cards), and kickbacks,
unsafe products, oil spills, toxic dumping, air and water pollution, and improper use of public funds have
contributed to the erosion. The international and national infatuation with a purely scientific understanding of
U.S. business practices, in particular, and of a value-free marketing system, has been undermined by these
events. As one saying goes, “A little experience can inform a lot of theory.”
The ethicist Richard DeGeorge has noted that the belief that business is amoral is a myth because it
ignores the business involvement of all of us. Business is a human activity, not simply a scientific one, and, as
such, can be evaluated from a moral perspective. If everyone in business acted amorally or immorally, as a
pseudoscientific notion of business would suggest, businesses would collapse. Employees would openly steal
from employers; employers would recklessly fire employees at will; contractors would arrogantly violate
obligations; and chaos would prevail. In the United States, business and society often share the same values:
rugged individualism in a free-enterprise system, pragmatism over abstraction, freedom, and independence.
When business practices violate these American values, society and the public are threatened.
Finally, the belief that businesses operate in totally “free markets” is debatable. Although the value or
desirability of the concept of a “free market” is not in question, practices of certain firms in free markets are.
50

At issue are the unjust methods of accumulation and noncompetitive uses of wealth and power in the
formation of monopolies and oligopolies (i.e., small numbers of firms dominating the rules and transactions of
certain markets). The dominance of AT&T before its breakup is an example of how one powerful
conglomerate could control the market. Microsoft and WalMart are examples. The U.S. market environment
can be characterized best as a “mixed economy” based on free-market mechanisms, but not limited to or
explained only by them. Mixed economies rely on some governmental policies and laws for control of
deficiencies and inequalities. For example, protective laws are still required, such as those governing minimum
wage, antitrust situations, layoffs from plant closings, and instances of labor exploitation. In such mixed
economies in which injustices thrive, ethics is a lively topic.
Myth 3: Ethics in Business Is Relative
In this myth, no right or wrong way of believing or acting exists. Right and wrong are in the eyes of the
beholder.
The claim that ethics is not based solely on absolutes has some truth to it. However, to argue that all ethics
is relative contradicts everyday experience. For example, the view that because a person or society believes
something to be right makes it right is problematic when examined. Many societies believed in and practiced
slavery; however, in contemporary individuals’ experiences, slavery is morally wrong. When individuals and
firms do business in societies that promote slavery, does that mean that the individuals and firms must also
condone and practice slavery? The simple logic of relativism, which is discussed in Chapter 2, gets
complicated when seen in daily experience. The question that can be asked regarding this myth is: Relative to
whom or what? And why? The logic of this ethic, which answers that question with “Relative to me, myself,
and my interests” as a maxim, does not promote community. Also, if ethical relativism were carried to its
logical extreme, no one could disagree with anyone about moral issues because each person’s values would be
true for him or her. Ultimately, this logic would state that no right or wrong exists apart from an individual’s
or society’s principles. How could interactions be completed if ethical relativism was carried to its limit?
Moreover, the U.S. government, in its vigorous pursuit of Microsoft, certainly has not practiced a relativist
style of ethics.
Myth 4: Good Business Means Good Ethics
This myth can translate to “Executives and firms that maintain a good corporate image, practice fair and
equitable dealings with customers and employees, and earn profits by legitimate, legal means are de facto
ethical.” Such firms, therefore, would not have to be concerned explicitly with ethics in the workplace. Just do
a hard, fair day’s work, and that has its own moral goodness and rewards.49
The faulty reasoning underlying this logic obscures the fact that ethics does not always provide solutions to
technical business problems. Moreover, as Buchholz argued, no correlation exists between “goodness” and
material success.50
It also argued that “excellent” companies and corporate cultures have created concern for people in the
workplace that exceeds the profit motive. In these cases, excellence seems to be related more to customer
service, to maintenance of meaningful public and employee relationships, and to corporate integrity than to
profit motive.51
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The point is that ethics is not something added to business operations; ethics is a necessary part of
operations. A more accurate, logical statement from business experience would suggest that “good ethics
means good business.” This is more in line with observations from successful companies that are ethical first
and also profitable.
Finally, the following questions need to be asked: What happens, then, if what should be ethically done is
not the best thing for business? What happens when good ethics is not good business? The ethical thing to do
may not always be in the best interests of the firm. We should promote business ethics, not because good
ethics is good business, but because we are morally required to adopt the moral point of view in all our
dealings with other people—and business is no exception. In business, as in all other human endeavors, we
must be prepared to pay the costs of ethical behavior. The costs may sometimes seem high, but that is the risk
we take in valuing and preserving our integrity.52
Myth 5: Information and Computing Are Amoral
This myth holds that information and computing are neither moral nor immoral—they are amoral. They are
in a “gray zone,” a questionable area regarding ethics. Information and computing have positive dimensions,
such as empowerment and enlightenment through the ubiquitous exposure to information, increased
efficiency, and quick access to online global communities. It is also true that information and computing have
a dark side: information about individuals can be used as “a form of control, power, and manipulation.”53
The point here is to beware the dark side: the misuse of information, social media, and computing. Ethical
implications are present but veiled. Truth, accuracy, and privacy must be protected and guarded: “Falsehood,
inaccuracy, lying, deception, disinformation, misleading information are all vices and enemies of the
Information Age, for they undermine it. Fraud, misrepresentation, and falsehood are inimical to all of
them.”54
Logical problems occur in all five of the above myths. In many instances, the myths hold simplistic and
even unrealistic notions about ethics in business dealings. In the following sections, the discussion about the
nature of business ethics continues by exploring two questions:
• Why use ethical reasoning in business?
• What is the nature of ethical reasoning?
1.5 Why Use Ethical Reasoning in Business?
Ethical reasoning is required in business for at least three reasons. First, many times laws do not cover all
aspects or “gray areas” of a problem.55 How could tobacco companies have been protected by the law for
decades until the settlement in 1997, when the industry agreed to pay $368.5 billion for the first 25 years and
then $15 billion a year indefinitely to compensate states for the costs of health care for tobacco-related
illnesses? What gray areas in federal and state laws (or the enforcement of those laws) prevailed for decades?
What sources of power or help can people turn to in these situations for truthful information, protection, and
compensation when laws are not enough?
Second, free-market and regulated-market mechanisms do not effectively inform owners and managers
how to respond to complex issues that have farreaching ethical consequences. Enron’s former CEO Jeffrey
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Skilling believed that his new business model of Enron as an energy trading company was the next big
breakthrough in a free-market economy. The idea was innovative and creative; the executive’s implementation
of the idea was illegal. Perhaps Skilling should have followed Enron’s ethics code; it was one of the best
available.
A third argument holds that ethical reasoning is necessary because complex moral problems require “an
intuitive or learned understanding and concern for fairness, justice, [and] due process to people, groups, and
communities.”56 Company policies are limited in scope in covering human, environmental, and social costs of
doing business. Judges have to use intuition and a kind of learn-as-you-go approach in many of their cases. In
Microsoft’s previous alleged monopoly case, for example, there were no clear precedents in the software
industry—or with a company of Microsoft’s size and global scope—to offer clear legal direction. Ethics plays a
role in business because laws are many times insufficient to guide action.
1.6 Can Business Ethics Be Taught and Trained?
Because laws and legal enforcement are not always sufficient to help guide or solve complex human problems
relating to business situations, some questions arise: Can ethics help? If so, how? And can business ethics be
taught? This ongoing debate has no final answer, and studies continue to address the issue. One study, for
example, that surveyed 125 graduate and undergraduate students in a business ethics course at the beginning
of a semester showed that students did not reorder their priorities on the importance of 10 social issues at the
end of the semester, but they did change the degree of importance they placed on the majority of the issues
surveyed.57 What, if any, value can be gained from teaching ethical principles and training people to use them
in business?
This discussion begins with what business ethics courses cannot or should not, in my judgment, do. Ethics
courses should not advocate a set of rules from a single perspective or offer only one best solution to a specific
ethical problem. Given the complex circumstances of many situations, more desirable and less desirable
courses of action may exist. Decisions depend on facts, inferences, and rigorous, ethical reasoning. Neither
should ethics courses or training sessions promise superior or absolute ways of thinking and behaving in
situations. Informed and conscientious ethical analysis is not the only way to reason through moral problems.
Ethics courses and training can do the following:
• Provide people with rationales, ideas, and vocabulary to help them participate effectively in ethical
decision-making processes
• Help people “make sense” of their environments by abstracting and selecting ethical priorities
• Provide intellectual insights to argue with advocates of economic fundamentalism and those who
violate ethical standards
• Enable employees to act as alarm systems for company practices that do not meet society’s ethical
standards
• Enhance conscientiousness and sensitivity to moral issues, and commitment to finding moral
solutions
• Enhance moral reflectiveness and strengthen moral courage
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• Increase people’s ability to become morally autonomous, ethical dissenters, and the conscience of a
group
• Improve the moral climate of firms by providing ethical concepts and tools for creating ethical codes
and social audits58
Other scholars argue that ethical training can add value to the moral environment of a firm and to
relationships in the workplace in the following ways:
• Finding a match between an employee’s and employer’s values
• Managing the push-back point, where an employee’s values are tested by peers, employees, and
supervisors
• Handling an unethical directive from a boss
• Coping with a performance system that encourages cutting ethical corners59
Teaching business ethics and training people to use them does not promise to provide answers to complex
moral dilemmas. However, thoughtful and resourceful business ethics educators can facilitate the development
of awareness of what is ethical, help individuals and groups realize that their ethical tolerance and decision-
making styles decrease unethical blind spots, and enhance discussion of moral problems openly in the
workplace.
1.7 Plan of the Book
This book focuses on applying a stakeholder management approach—based on stakeholder theory—that is
integrated with issues management approaches, along with your own critical reasoning to situations that
involve groups and individuals who often have competing interpretations of a problem or opportunity. We are
all stakeholders in many situations, whether with our friends, network of colleagues, or in organizational and
work settings. Because stakeholders are people, they generally act on beliefs, values, and financially motivated
strategies. For this reason, ethics- and values-based thinking is an important part of a stakeholder and issues
management approach. It is important to understand why stakeholders act and how they make decisions. The
stakeholder and issues management approach aims at having all parties reach win—win outcomes through
communication and collaborative efforts. Unfortunately, this does not always happen. If we do not have a
systematic approach to understanding what happens in complex stakeholder relationships, we cannot learn
from past mistakes or plan for more collaborative, socially responsible future outcomes. A schematic of the
book’s organization is presented in Figure 1.6.
Chapter 2 provides a foundation of ethical principles, quick tests, and scenarios for evaluating motivations
for certain decisions and actions. A stakeholder management approach involves knowing and managing
stakeholders’ ethics, including your own. Chapter 3 provides a systematic approach for structuring and
evaluating stakeholder issues, strategies, and options at the outset. Step-by-step methods for collaborating and
for forming and evaluating strategies are identified. Chapter 4 then examines an organization’s corporate
governance and compliance before Chapter 5 looks at how organizations manage external and business issues
stakeholders. Chapter 6 looks at internal stakeholders, strategy, culture, and self-regulation in corporations
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and discusses rights and obligations of employees and employers as stakeholders. Chapter 7 analyzes current
trends affecting employees in corporations and Chapter 8, the final chapter, examines globalization and views
nations as stakeholders to examine how multinational corporations operate in host countries and different
systems of capitalism.
Figure 1.6
Plan of the Book
Chapter Summary
Businesses and governments operate in numerous environments, including technological, legal, social,
economic, and political dimensions. Understanding the effects of these environmental forces on industries and
organizations is a first step in identifying stakeholders and the issues that different groups must manage in
order to survive and compete. This book explores and illustrates how stakeholders can manage issues and
trends in their changing environments in socially responsible, principled ways. Thinking and acting ethically is
not a mechanical process; it is also very personal. It is important as a professional in an organization, to
integrate personal with professional experiences and values.
Business ethics deals with what is “right” and “wrong” in organizational decisions, behavior, and policies.
Business ethics provides principles and guidelines that assist people in making informed choices that balance
economic interests and social responsibilities. Being able to think of other stakeholders’ interests can better
inform the moral dimension of your own decisions. This is one aim of using a stakeholder management
approach.
Seeing the “big picture” of how ethical issues begin and transform requires imagination and some “maps.”
Because business ethics apply to several levels, this chapter has presented these levels to illustrate the
complexity of ethical decision making in business transactions. When you can “connect the dots” among these
dimensions, more options for solving problems morally are opened.
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The stakeholder management approach also provides a means for mapping complicated relationships
between the focal and other stakeholders, a means of identifying the strategies of each stakeholder, and a
means for assessing the moral responsibility of all the constituencies.
Five common myths about business ethics have been discussed. Each myth has been illustrated and refuted.
You are invited to identify and question your own myths about business ethics. Ethical reasoning in business
is explained with steps to guide decision making. Here are three reasons why ethical reasoning is necessary in
business: (1) laws are often insufficient and do not cover all aspects or “gray areas” of a problem; (2) free-
market and regulated-market mechanisms do not effectively inform owners and managers on how to respond
to complex crises that have farreaching ethical consequences; and (3) complex moral problems require an
understanding and concern for fairness, justice, and due process. Ethical reasoning helps individuals sort
through conflicting opinions and information in order to solve moral dilemmas.
Ethical education and training can be useful for developing a broad awareness of the motivations, values,
and consequences of our decisions. Business ethics does not, however, provide superior or universally correct
solutions to morally complex dilemmas. Principles and guidelines are provided that can enhance—with case
analysis, role playing, and group discussion—a person’s insight and self-confidence in resolving moral
dilemmas that often have two right (or wrong) solutions.
Questions
1. Refer to Figure 1.1 to identify three specific environmental influences that the organization for which you
work (or the institution in which you study) must address to survive and be competitive. Explain how
these influences, pressures, and opportunities affect you, and ask yourself how ethically do you accomplish
your work and goals.
2. What are the three major ethical issues you face now in your work or student life? What is “ethical” about
these issues?
3. Identify some benefits of using a stakeholder approach in ethical decision making. How would using a
stakeholder management approach help you plan and/or solve an ethical issue in your working life?
Explain.
4. What is a myth? Which, if any, of the five business myths discussed in this chapter do you not accept as a
myth (i.e., that you believe is true)? Explain.
5. Identify one myth you had/have about business ethics. Where did it originate? Why is it a “myth”? What
led you to abandon this myth, or do you still believe in it? Explain.
6. Identify three reasons presented in this chapter for using ethical reasoning in business situations. Which
of these reasons do you find the most valid? The least valid? Explain.
7. Is the law sufficient to help managers and employees solve ethical dilemmas? Explain and offer an
example from your own experiences or from a contemporary event.
8. What are some important distinctive characteristics of ethical problems? What distinguishes an ethical
from a legal problem?
9. What (if any) specific attitudes, values, beliefs, or behaviors of yours do you think could be changed from
an ethics course? Explain.
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10. Identify and describe a specific belief or behavior of yours that you feel could be changed through taking a
course in ethics.
Exercises
1. Invent and state your own definition of “business ethics.” Do you believe that ethics is an important factor
in business transactions today? If you were the CEO of a corporation, how would you communicate your
perspective on the importance of ethics to your employees, customers, and other stakeholder groups?
2. Conduct your own small survey of two people regarding their opinions on the importance of unethical
practices in businesses today. Do your interviewees give more importance to economic performance or
socially irresponsible behavior? Or do they think other factors are more important? Summarize your results.
3. You are giving a speech at an important community business association meeting. You are asked to give a
presentation called “An Introduction to Business Ethics” for the members. Give an outline of your speech.
4. Explain how a major trend in the environment has affected your profession, job, or skills—as a professional
or student. Be specific. Are any ethical consequences involved, and has this trend affected you?
5. Review Kohlberg’s levels and stages of moral development. After careful consideration, briefly explain
which stage, predominantly or characteristically, defines your ethical level of development. Explain. Has
this stage influenced a recent decision you have made or action you have taken? Explain.
6. You are applying to a prestigious organization for an important, highly visible position. The application
requires you to describe an ethical dilemma in your history and how you handled it. Describe the dilemma
and your ethical position.
Real-Time Ethical Dilemma
You are a staff associate at a major public accounting firm and graduated from college two years ago. You are
working on an audit for a small, nonprofit religious publishing firm. After performing tests on the royalty
payables system, you discover that for the past five years, the royalty payable system has miscalculated the
royalties it owes to authors of their publications. The firm owes almost $100,000 in past due royalties. All of
the contracts with each author are negotiated differently. However, each author’s royalty percentage will
increase at different milestones in books sold (i.e., 2% up to 10,000 and 3% thereafter). The software package
did not calculate the increases, and none of the authors ever received their increase in royalty payments. At
first you can’t believe that none of the authors ever realized they were owed their money. You double check
your calculations and then present your findings to the senior auditor on the job. Much to your surprise, his
suggestion is to pass over this finding. He suggests that you sample a few additional royalty contracts and
document that you expanded your testing and found nothing wrong. The firm’s audit approach is well
documented in this area and is firmly based on statistical sampling. Because you had found multiple errors in
the small number of royalty contracts tested, the firm’s approach suggested testing 100% of the contracts. This
would mean (1) going over the budgeted time/expense estimated to the client; (2) possibly providing a
negative audit finding; and (3) confirming that the person who audited the section in the years past may not
have performed procedures correctly.
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Based on the prior year’s work papers, the senior auditor on the job performed the testing phase in all of
these years just before his promotion. For some reason, you get the impression that the senior auditor is
frustrated with you. The relationship seems strained. He is very intense, constantly checking the staff’s
progress in the hope of coming in even a half-hour under budget for a designated test/audit area. There’s a lot
of pressure, and you don’t know what to do. This person is responsible for writing your review for your
personnel file and bonus or promotion review. He is a very popular employee who is “on the fast track” to
partnership.
You don’t know whether to tell the truth and risk a poor performance review and jeopardize your future
with this company, or to tell the truth, hopefully be exonerated, and be able to live with yourself by “doing the
right thing” and facing consequences with a clean conscience.
Questions
1. What would you do as the staff associate in this situation? Why? What are the risks of telling the truth for
you? What are the benefits? Explain.
2. What is the “right” thing to do in this situation? What is the “smart” thing to do for your job and career?
What is the difference, if there is one, between the “right” and “smart” thing to do in this situation?
Explain.
3. Explain what you would say to the senior auditor, your boss, in this situation if you decided to tell the truth
as you know it.
Cases
Case 1
Bernard L. Madoff Investment Securities LLC: Wall Street Trading Firm
Bernard L. Madoff Investment Securities LLC was founded in the 1960s as a small investment firm on Wall
Street. With $5,000 in savings from summer jobs and at the age of 22, Madoff launched the firm that in the
1980s would later rank with some of the most prestigious and powerful firms on Wall Street. Madoff began as
a single stock trader before starting a family-operated business that included his brother, nephew, niece, and
his two sons. Each held a position that was quite valuable within the company.
Madoff had also created “an investment-advisory business that managed money for high-net-worth
individuals, hedge funds and other institutions.” He made profitable and consistent returns by repaying early
investors from the money received from new investors. Instead of running an actual hedge fund, Madoff held
this investment operation inside his firm on the seventeenth floor of the building where only two dozen staff
members were permitted to enter the secured area. No employee dared question the security and
confidentiality of the “hedge fund” floor due to the prestige and power that Madoff held. The $65 billion
investment fund was later discovered to be fraudulent, involving one of the largest Ponzi schemes in history
and shattering the lives of thousands of individuals, institutions, organizations, and stakeholders worldwide.
The Man with All the Power
Bernard Madoff’s charisma and amiable personality were important traits that helped him gain power in the
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financial community and become one of the largest key players on Wall Street. He became a notable
authoritative figure by securing important roles on boards and commissions, helping him bypass securities
regulations. One of the roles included serving as the chairman of the board and directors of the NASDAQ
stock exchange during the early 1990s. Madoff was knowledgeable and smart enough to understand that the
more involved he became with regulators, the more “you could shape regulations.” He used his reputation as a
respected trader and perceived “honest” businessman to take advantage of investors and manipulate them
fraudulently. Investors were hoodwinked into believing that it was a privilege to take part in Madoff’s elite
investments, since Madoff never accepted many clients and used exclusively selective recruiting in order to
keep this part of his business a secret.
Madoff was even able to keep his employees quiet, telling them not to speak to the media regarding any of
the business activities. While several understood something was not right, they ignored suspicions due to
Madoff’s perceived clean record and aura: “He appeared to believe in family, loyalty, and honesty. … Never in
your wildest imagination would you think he was a fraudster.”
Dr. Meloy, author of the textbook The Psychopathic Mind, states that “typically people with psychopathic
personalities don’t fear getting caught. . . . They tend to be very narcissistic with a strong sense of
entitlement.” This led many analysts of criminal behavior to observe similar traits between Madoff and serial
killers like Ted Bundy. Analysts discovered several factors motivating Madoff toward a Ponzi scheme: “A
desire to accumulate vast wealth, a need to dominate others, and a need to prove that he was smarter than
everyone else.” Whatever the motivating factors were, Madoff’s behavior was still criminal and affected a large
pool of stakeholders.
Early Suspicions Arise
Despite the unrealistic returns and questionable nature of Madoff’s business operations, investors continued to
invest money. In 2000, a whistle-blower from a competing firm—Harry Markopolos, CFE, CFA—
discovered Madoff’s Ponzi scheme. Markopolos and his small team developed and presented an eight-page
document that provided evidence and red flags of the fraud to the Securities and Exchange Commission
(SEC)’s Boston Regional Office in May 2000. Despite the SEC’s lack of response, Markopolos resubmitted
the documents again in 2001, 2005, 2007 and 2008. His findings were not taken seriously: “My team and I
tried our best to get the Securities and Exchange Commission (SEC) to investigate and shut down the
Madoff Ponzi scheme with repeated and credible warnings.” Because Madoff was well respected and powerful
on Wall Street, few suspected his fraudulent actions. The status and wealth that Madoff had created gave him
the means to manipulate the SEC and regulators alike.
Negligence on All Sides
The negligence and gaps in governmental regulation make it very difficult to point to only one guilty party in
the Madoff scandal. The SEC played a crucial role by allowing Madoff’s operations to carry out for as long as
they did. For over 10 years, the SEC received numerous warnings that Madoff’s steady returns were anything
but ordinary and nearly impossible. The SEC and the Financial Industry Regulatory Authority, “a non-
government agency that oversees all securities firms,” were known to have investigated Madoff’s firm over
eight times but brought no charges of criminal activity. Despite the red flags and mathematical proof that
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Markopolos presented, SEC staff allowed Madoff’s operations to continue unchallenged. Spencer Bachus, a
politician and a Republican member of the U.S. House of Representatives, stated that “What we may have in
the Madoff case is not necessarily a lack of enforcement and oversight tools, but a failure to use them.”
Unfortunately, there could be another side to the story. David Kotz, currently the SEC’s inspector general,
planned an ongoing internal investigation to understand the reasoning behind the negligence and to
determine if any conflict of interest between SEC staff and the Madoff family could have been part of the
problem. Arthur Levitt Jr., who was part of the SEC and a chairman from 1993 to 2001, had close
connections with Madoff himself. He would rely on Madoff’s advice about the functioning of the market,
although Levitt denies all accusations. In September 2009, it was officially stated that no evidence was found
relating to any conflict of interest: “The OIG [Office of Inspector General] investigation did not find
evidence that any SEC personnel who worked on an SEC examination or investigation of Bernard L. Madoff
Investment Securities LLC had any financial or other inappropriate connection with Bernard Madoff or the
Madoff family that influenced the conduct of their examination or investigatory work.”
Unfortunately, the SEC is not the only party to blame. JPMorgan Chase has also been criticized for its
actions regarding the Madoff scandal. Instead of investing client’s money in securities, as Madoff had
promised to do, he deposited the funds in a Chase bank account. In 2008, federal court documents show that
“the account had mushroomed to $5.5 billion. . . . This translates to $483 million in after-tax profits for the
bank holding the Madoff funds.” As one of Chase’s largest customers, Madoff’s account should have been
monitored closely. Internal bank compliance systems should have detected such red flags. Unfortunately,
Madoff was savvy enough to move millions of dollars between his U.S. and London operations, making it
seem like he was actively investing clients’ money. The massive account balances of investors should not have
been difficult to overlook. Don Jackson, director of the SecureWorks Counter Threat Unit Intelligence
Services, noted that “The only way to stop this kind of fraud is for the bank to know its clients better and to
report things that might be suspicious. It really comes down to human control.” This was an area of weakness
for JPMorgan Chase at the time.
Where Were the Auditors?
For Madoff to successfully perpetrate such a large scam spanning more than a decade, he needed the help of
auditors to certify the financial statements of Bernard L. Madoff Investment Securities. The company’s
auditing services were provided by a three-person accounting firm, Friehling & Horowitz, formerly run by
David Friehling. For over 15 years, Friehling confirmed to the American Institute of Certified Public
Accountants (AICPA) that his firm did not conduct any type of audit work. Because of this confirmation,
Friehling did not have to “enroll in the AICPA’s peer review program, in which experienced auditors assess
each firm’s audit quality every year . . . to maintain their licenses to practice.” Friehling & Horowitz had in
fact been auditing the books of Madoff for over 17 years, providing a clean bill of health each year from 1991
through 2008. Authorities state that if Friehling provided integrity in his findings, the scandal would not have
continued for as long as it did: “Mr. Friehling’s deception helped foster the illusion that Mr. Madoff
legitimately invested his client’s money,” stated U.S. Attorney Lev Dassin. In addition to receiving total fees
of $186,000 annually from the auditing services provided to Madoff, Friehling also had accounts in Madoff’s
firm totaling more than $14 million and had withdrawn over $5.5 million since the year 2000. Friehling
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deceived investors and regulators by providing unauthorized audit work and verifying fraudulent financial
statements. Given the size of the accounting firm, a red flag should have been raised. Madoff’s operations
were too large in size and complexity for the resources of a three-person accounting firm.
Revealing the Fraud
As the U.S. economy entered the 2008 recession period, investors began to panic and withdraw their money
from Madoff’s accounts, totaling more than $7 billion. Madoff was unable to cover the redemptions and
struggled “to obtain the liquidity necessary to meet those obligations.” He confessed to his sons that the
business he was running was a scam. On December 11, 2008, Bernard Madoff was arrested by federal agents
—one day after his sons reported his confession to the authorities.
Global Crisis
The Ponzi scheme that Madoff ran for more than a decade affected the lives of thousands of individuals,
institutions, organizations, and stakeholders worldwide. A 162-page list was submitted to the U.S.
Bankruptcy Court in Manhattan detailing the affected parties. The lengthy list consisted of some of the
wealthiest investors and well-known names around the region: “They reportedly include Philadelphia Eagles
owner Norman Braman, New York Mets owner Fred Wilpon and J. Ezra Merkin, the chairman of GMAC
Financial Services.” Talk show host Larry King and actor John Malkovich were on the list, among others.
Many investment-management firms, such as Tremont Capital Management and Fair-field Greenwich
Advisors, had invested large amounts in Madoff’s funds and were hit the hardest financially. Major global
banks, “including Royal Bank of Scotland, France’s largest bank, BNP Paribas, Britain’s HSBC Holdings
PLC and Spain’s Santander” were also known to have lost millions. Charitable foundations, such as the
Lautenberg foundation; and financial institutions, including Bank of America Corp., Citigroup, and
JPMorgan Chase were all stakeholders in the Madoff scandal. Ordinary individuals also invested much of
their life savings into what they believed was a “once in a lifetime opportunity.” William Woessner, a retiree
from the State Department’s Foreign Service, agreed that the investors “were made to feel that it was a big
favor to be let in if you didn’t have a lot of money. It was an exclusive club to belong to.” It has been reported
that individual losses were between $40,000 to over $1 million in total. There were 3,500 investors from New
York and more than 1,700 from Florida.
The repercussions of Madoff’s Ponzi scheme have been emotional as well as financial. A French aristocrat
and professional investor living within the suburbs of New York, Rene-Thierry Magon de la Villehuchet, had
invested almost $1.4 billion in Madoff’s accounts. He had invested both his and his client’s money, only to
lose everything. Villehuchet felt personally responsible for the loss of his clients’ money: “He had a true
concept of capitalism. . . . He felt responsible and he felt guilty,” said his brother Bertrand de la Villehuchet.
Villehuchet’s depression grew to such a point that he committed suicide on December 22, 2008.
Consequences and Aftermath
On June 29, 2009, Judge Denny Chin found Madoff guilty on eleven criminal counts and sentenced him to
150 years in prison, the maximum possible sentence allowed at the time. Chin’s severe sentence was
influenced by the statements given by Madoff’s victims and the 113 letters received and filed with the federal
court: “A substantial sentence may in some small measure help the victims in their healing process,” stated
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Judge Chin. Madoff was also forced to pay a $170-billion legal judgment passed by the government, stating
that this amount of money “was handled by his firm since its founding in the 1960s.” David Friehling, the
auditor for Madoff’s books, was also arrested on fraud charges. He was initially “released on a $2.5-million
bond and had to surrender his passport.” Friehling lost his CPA license in 2010, and his sentencing has since
been postponed four times. He faces a sentence of more than 100 years in prison.
Lawyer Irving H. Picard is a bankruptcy trustee in the Madoff scandal. As a court-appointed trustee,
Picard has filed numerous lawsuits and has collected $1.2 billion in recovered funds from “banks, personal
property, and funds around the world.” It is estimated that from this $1.2 billion, Picard has earned
approximately $15 million. More than $116 million has been given to 237 Madoff victims, each receiving up
to $500,000. In order to help the victims of the Madoff scandal, Picard started a program called “Hardship
Case.” He has also filed a $199 million lawsuit against the Madoff family, including Madoff’s brother, his two
sons, and niece, all of whom worked alongside Madoff. An additional lawsuit was filed against Madoff’s wife
for $44.8 million, stating that she had transferred large amounts of money from the firm “over a six-year
period.” As of now, none of the family members—Madoff’s two sons, brother, niece, and wife—have been
found guilty on any of the charges. Madoff’s oldest son, Mark, 46, committed suicide in December 2010.
Madoff’s victims took swift action against the negligence of SEC and JPMorgan Chase. U.S. District Court
Judge Colleen McMahon threw out most of the $19.9 million charges against JPMorgan in November 2011,
however. The New York Mets owners paid a settlement of $162 million in March of 2012 to avoid going to
trial to answer the allegations made by Irving Picard.
Hidden Secrets?
Despite the accusations of negligence that JPMorgan Chase received from the public, it was one of the
biggest-profiting financial firms in the Madoff scandal. As stated earlier in the case, JPMorgan made a profit
of $483 million. During 2006, “the bank had started offering investors a way to leverage their bets on the
future performance of two hedge funds that invested with Mr. Madoff” and decided to place $250 million of
their own money inside these funds. A few months before Madoff’s arrest in 2008, JPMorgan withdrew its
$250 million, stating that it had become “concerned about the lack of transparency and its due diligence raised
doubts about Madoff’s operations.” It is surprising that the bank was suspicious and apprehensive toward
investments with Madoff, but at the same time raised no concerns about the large amount of money being
deposited in Madoff’s accounts within the bank. JPMorgan also failed to alert investors to move their money,
stating that “The issues did not meet the threshold necessary to permit the bank to restructure the notes. . . .
We did not have the right to disclose our concerns.” Regardless of the public statements made by JPMorgan
in support of its actions, many lawyers and investors believe that the bank had knowledge of Madoff’s scam
but wanted to secure high returns for as long as possible.
Ethical Flaws
In a 2011 New York Magazine interview, Madoff stated that he never thought the collapse of his Ponzi
scheme would cause the sort of destruction that has befallen his family. He asserted that unidentified banks
and hedge funds were somehow “complicit” in his elaborate fraud, an about-face from earlier claims that he
was the only person involved. “They had to know,” Mr. Madoff said. “But the attitude was sort of, ‘If you’re
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doing something wrong, we don’t want to know.’” To date, none of the major banks or hedge funds that did
business with Mr. Madoff have been accused by federal prosecutors of knowingly investing in his Ponzi
scheme. However, in civil lawsuits Picard has asserted that executives at some banks expressed suspicions for
years, yet continued to do business with Madoff and steer their clients’ money into his hands.
In some ways, Madoff has not tried to evade blame. He has made a full confession, saying that nothing
justifies what he did. And yet, for Madoff, that doesn’t settle the matter. He feels misunderstood. He can’t
bear the thought that people think he’s evil. “I’m not the kind of person I’m being portrayed as,” he told New
York Magazine.
A main issue in this controversy is the continuous fraudulent operations that Madoff was able to maintain
for a decade that created a $65 billion Ponzi scheme and shattered the lives of thousands around the world.
For most of the world, Bernie Madoff is a monster: he betrayed thousands of investors, and bankrupted
charities and hedge funds. On paper, his Ponzi scheme lost nearly $65 billion; the effects spread across five
continents. And he brought down his own family with him, a more intimate kind of betrayal.
Bernard Madoff was the central stakeholder who manipulated and involved his brother, two sons, and
niece, all of whom worked inside the Bernard L. Madoff Investment Securities LLC. Other key stakeholders
included Madoff’s employees, who had invested their money into an operation they believed was legal and
ethical. The financial community were also major players, including financial institutions, investment
management firms, charitable organizations, and global banks. The government, specifically the SEC, and the
justice department, were also heavily involved. The lawyer Irving Picard was a key player, as was the whistle-
blower Harry Markopolos and his team who revealed the nature of the scam early on, even though the SEC
and other government regulators did not move on the evidence.
As of October 2013, Federal authorities are working toward mounting a criminal investigation into
JPMorgan Chase, believing that the bank may have intentionally neglected Madoff’s Ponzi scheme. Having
recently agreed to a $13 billion settlement with the U.S. government to settle charges that the bank overstated
the quality of mortgages it was selling to investors in the run-up to the financial crisis, the threat of criminal
charges over the Madoff case represents another major threat to the reputation of the nation’s largest bank.
The resolution of this scheme is not over.
Questions for Discussion
1. What did Madoff do that was illegal and unethical?
2. Identify some of the main reasons that Madoff was able to start and sustain such an enormous Ponzi
scheme for as long as he did?
3. Who were/are the major stakeholders involved and affected by Madoff’s scheme and scandal?
4. Did Madoff have accomplices in starting and sustaining his scheme or was he able to do it alone? Explain.
5. How was he caught?
6. What lessons can be learned from Madoff’s scandal?
Sources
This case was developed from material contained in the following sources:
63

Abkowitz, Alyssa. (December 19, 2008). Madoff’s auditor . . . doesn’t audit? CNNMoney.com.
http://money.cnn.com/2008/12/17/news/companies/madoff.auditor.fortune/, accessed March 22, 2012.
Berenson, Alex, and Mathew Saltmarsh. (January 1, 2009). Madoff investor’s suicide leaves questions.
NYTimes.com. http://www.nytimes.com/2009/01/02/business/02madoff.html, accessed March 23, 2012.
Carozza, Dick. (May/June 2009). Chasing Madoff: An Interview with Happy Markopolos, CFE, CFA.
FraudMagazine.com. http://www.fraud-magazine.com/article.aspx?id=313, accessed March 22, 2012.
Chew, Robert. (March 25, 2009). Madoff’s banker: Where was JPMorgan Chase? Time.com.
http://www.time.com/time/business/article/0,8599,1887338,00.html, accessed March 22, 2012.
Chew, Robert. (May 30, 2009). Irving Picard at center of post-Madoff storm. Time.com.
http://www.time.com/time/business/article/0,8599,1901593,00.html, accessed March 23, 2012.
Creswell, Julie, and Landon Thomas. (January 24, 2009). The talented Mr. Madoff. NYTimes.com.
http://www.nytimes.com/2009/01/25/business/25bernie.html?pagewanted=1&_r=1, accessed March 22,
2012.
Dienst, J., and K. Honan. (December 13, 2010). Madoff son found dead in suicide. NBCNewYork.com.
http://www.nbcnewyork.com/news/local/Mark-111717634.html, accessed March 23, 2012.
Efrati, Amir, Tom Lauricella, and Dionne Sercey. (December 12, 2008). Top broker accused of $50 billion
fraud. WSJ.com. http://online.wsj.com/article/SB122903010173099377.html, accessed March 22, 2012.
Ellis, David. (January 5, 2009). Congress looks for answers in Madoff scandal. CNNMoney.com.
http://money.cnn.com/2009/01/05/news/companies/madoff_hearing/index.htm, accessed March 22, 2012.
Elstein, Aaron. (August 26, 2009). Madoff account netted J.P. Morgan $483M. CrainsNewYork.com.
http://www.crainsnewyork.com/article/20090826/FREE/908269991, accessed March 22, 2012.
Frank, Robert, and Amir Efrati. (June 30, 2009). “Evil” Madoff gets 150 years in epic fraud. WSJ.com.
http://online.wsj.com/article/SB124604151653862301.html, accessed March 23, 2012.
Hedgpeth, Dana, and Megan Greenwell. (February 6, 2009). List brings home impact of Madoff scandal.
WashingtonPost.com. http://www.washingtonpost.com/wp-
dyn/content/article/2009/02/05/AR2009020501865.html?sid=ST2009020501619, accessed March 22,
2012.
Henriques, Diana B. (January 28, 2009). JPMorgan exited Madoff-linked funds last fall. NYTimes.com.
http://www.nytimes.com/2009/01/29/business/29madoff.html?pagewanted=1&_r=1, accessed March 22,
2012.
Henriques, Diana, and Alex Berenson. (December 14, 2008). The 17th floor, where wealth went to vanish.
NYTimes.com. http://www.nytimes.com/2008/12/15/business/15madoff.html?pagewanted=1, accessed
March 23, 2012.
Lattman, Peter, and Annelena Lobb. (June 30, 2009). Victims’ speeches in court influenced judge’s ruling.
WSJ.com. http://online.wsj.com/article/SB124632127336071155.html, accessed March 23, 2012.
Lavan, Rosie. (December 15, 2008). Who is Bernard Madoff? TimesOnline.
http://www.thetimes.co.uk/tto/business/industries/banking/article2159812.ece, accessed March 22, 2012.
List of Madoff securities fraud victims grows. (December 18, 2008). Newsinferno.com.
http://www.newsinferno.com/legal-news/list-of-madoff-securities-fraud-victims-grows/4361, accessed
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http://money.cnn.com/2008/12/17/news/companies/madoff.auditor.fortune/

http://www.nytimes.com/2009/01/02/business/02madoff.html

http://www.fraud-magazine.com/article.aspx?id=313

http://www.time.com/time/business/article/0,8599,1887338,00.html

http://www.time.com/time/business/article/0,8599,1901593,00.html

http://www.nytimes.com/2009/01/25/business/25bernie.html?pagewanted=1&_r=1

http://www.nbcnewyork.com/news/local/Mark-111717634.html

http://online.wsj.com/article/SB122903010173099377.html

http://money.cnn.com/2009/01/05/news/companies/madoff_hearing/index.htm

http://www.crainsnewyork.com/article/20090826/FREE/908269991

http://online.wsj.com/article/SB124604151653862301.html

http://www.washingtonpost.com/wp-dyn/content/article/2009/02/05/AR2009020501865.html?sid=ST2009020501619

http://www.nytimes.com/2009/01/29/business/29madoff.html?pagewanted=1&_r=1

http://www.nytimes.com/2008/12/15/business/15madoff.html?pagewanted=1

http://online.wsj.com/article/SB124632127336071155.html

http://www.thetimes.co.uk/tto/business/industries/banking/article2159812.ece

http://www.newsinferno.com/legal-news/list-of-madoff-securities-fraud-victims-grows/4361

March 22, 2012.
Luhby, Tami. (October 2, 2009). Madoff relatives sued for $199 million. CNNMoney.com.
http://money.cnn.com/2009/10/02/news/economy/Madoff_lawsuit_family/, accessed March 23, 2012.
Madoff victims’ lawsuit against JPMorgan Chase tossed. (November 2, 2011). HuffingtonPost.com.
http://www.huffingtonpost.com/2011/11/02/madoff-victims-lawsuit-jp-morgan-chase_n_1071117.html,
accessed March 23, 2012.
McCool, G., and J. Stempel. (March 19, 2012). NY Mets owners settle Madoff case, -avoid trial.
ChicagoTribune.com. http://www.chicagotribune.com/sports/sns-rt-us-madoff-metsbre82i0hi-
20120319,0,2199473.story, accessed March 23, 2012.
Morrissey, Janet. (September 3, 2009). After its Madoff report, can victims sue the SEC? Time.com.
http://www.time.com/time/business/article/0,8599,1920323,00.html, accessed March 22, 2012.
Neumeister, Larry. (March 18, 2009). David Friehling, Madoff accountant, released on $2.5 million bail.
HuffingtonPost.com. http://www.huffingtonpost.com/2009/03/18/david-friehling-madoff-
ac_0_n_176479.html, accessed March 22, 2012.
Pavlo, W. (September 16, 2011). David Friehling, Madoff’s accountant, sentencing postponed . . . again.
Forbes.com. http://www.forbes.com/sites/walterpavlo/2011/09/16/david-friehling-madoffs-accountant-
sentencing-postponed-again/, accessed March 23, 2012.
Protess, B., and J. Silver-Greenberg. (2013). JPMorgan faces possible penalty in Madoff case.
DealbookNYTimes.com. http://dealbook.nytimes.com/2013/10/23/madoff-action-seen-as-possible-for-
jpmorgan/?_r=0, accessed January 7, 2014.
Rashbaum, William K., and Diana B. Henriques. (March 18, 2009). Accountant for Madoff is arrested and
charged with securities fraud. NYTimes.com.
http://www.nytimes.com/2009/03/19/business/19madoff.html?_r=1, accessed March 22, 2012.
Smith, Aaron. (October 14, 2009). Madoff victims sue SEC for “negligence.” CNNMoney.com.
http://money.cnn.com/2009/10/14/news/economy/madoff_sec_lawsuit/index.htm, accessed March 23,
2012.
Sundby, Alex. (November 3, 2009). Madoff accountant apologizes to victims. CBSnews.com.
http://www.cbsnews.com/stories/2009/11/03/cbsnews_investigates/main5510619.shtml, accessed March
23, 2012.
65

http://money.cnn.com/2009/10/02/news/economy/Madoff_lawsuit_family/

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http://www.chicagotribune.com/sports/sns-rt-us-madoff-metsbre82i0hi-20120319,0,2199473.story

http://www.time.com/time/business/article/0,8599,1920323,00.html

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http://www.cbsnews.com/stories/2009/11/03/cbsnews_investigates/main5510619.shtml

Case 2
Cyberbullying: Who’s to Blame and What Can Be Done?
What Is Cyberbullying?
Cyberbullying is a unique form of bullying that continues in spite of the dire consequences that can and do
occur. Cyberbullying has gained significant media attention and countless incidents of bullying continue to
occur. Although many cases are reported in the news, probably as many if not more go unreported. Because of
the news attention, the phenomenon generated an antibullying movement in 2010. Bullying has been defined
as something that one repeatedly does or says to gain power over another person. Unlike traditional bullying,
cyberbullying eliminates the need for physical contact with others in order to make them feel inferior.
Cyberbullying is “when a child, preteen or teen is tormented, threatened, harassed, humiliated, embarrassed or
otherwise targeted by another child, preteen or teen using the Internet, interactive and digital technologies or
mobile phones.”1 Technology as an avenue for intimidation is a hot-button issue for school systems and
parents alike. This is uncharted territory, and legislation does not always provide guidance and structure.
The reality is that bullying makes a significantly negative impact on the lives of today’s youth.
Cyberbullying directly impacts self-esteem and can, and has, led to suicide among its adolescent victims.
Schools, parents, and peers must identify and intervene in cases of cyber bullying. Increased awareness and
education about cyber bullying and its consequences can help create a safer online community. Individuals
should be held morally responsible for the consequences of their actions online.
Why Cyberbullying?
A young adult’s behavior is primarily motivated by a desire to meet his or her basic need for recognition,
attention, and approval. In a survey conducted in 1999, students in over 100 schools were asked the following
question: “Is it easier for you to get noticed or get attention in this school by doing something positive or
something negative?” Almost 100% replied “negative.”2 Adolescents turn to cyberbullying to fuel their need
for attention and recognition from their peers. It began primarily in chat rooms and instant messaging
conversations, but has expanded to include social networking web sites (Facebook and MySpace) and video-
sharing web sites (YouTube). Text messaging and anonymous web postings are common methods of
cyberbullying. Very recently, cyberbullying has established a presence in portable gaming devices through
“virtual worlds” and interactive sites.
Cyberbullying is more attractive than traditional bullying for a variety of reasons. First, technology provides
the perpetrator with the option of anonymity. Victims often do not know who is targeting them because the
bully is able to hide his or her identity through anonymous web posts or fictitious e-mails. Secondly, bullies
are able to expand the scope of their impact because a larger network of individuals may be involved in the
cyber-attack. With just a few mouse clicks, an entire community may be a participant in the incident, creating
the perception that “everyone” knows about it. Many argue that it is psychologically easier to be a cyberbully
than a traditional bully. A cyberbully does not have to physically confront the victim and witness the
immediate result of a message. Some cyberbullies might not even recognize the severity of their actions, which
take place from a different location. Lastly, the response to cyberbullying has been slow, suggesting to
perpetrators that there are little or no consequences for malicious online actions.
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Why Is Cyberbullying a Major Issue?
Today’s youth are “wired” and connected to technology 24/7. Statistics suggest that “two-thirds of [American]
youth go online every day for school work, to keep in touch with their friends, to play games, to learn about
celebrities, to share their digital creations, or for many other reasons.”3 Given the accessibility of technology, it
should be no surprise that individuals are using the Internet, cell phones, and other electronic instruments to
bully each other. A 2010 study revealed that “30% of middle school students were victims of at least one of
nine forms of cyber bullying two or more times in the past 30 days” and “22% of middle school students
admitted to engaging in at least one of five forms of cyber bullying two or more times in the past 30 days.”4
Females are more likely to choose cyberbullying over traditional bullying. The rationale is that females prefer
the nonconfrontational nature of technology.
With such a large percentage of today’s youth affected by cyberbullying, something has to be done.
Cyberbullying is damaging to the self-esteem of the victims. Typically beginning around middle school, self-
perception begins to dictate a child’s sense of self-worth. Teenagers often feel that they are defined by “their
erupting skin and morphing bodies, [and] many seventh-grade students have a hard enough time just walking
through the school doors. When dozens of kids vote online, which is not uncommon, about whether a student
is fat or stupid or gay, the impact can be devastating.”5 Victims of cyberbullying typically report feeling angry,
frustrated, sad, embarrassed, and scared.
An adolescent’s self-esteem can dramatically decrease during puberty. In one survey, when kids in
kindergarten were asked if they like themselves, 95% or more said “yes.” By fourth grade, the percentage of
kids who reported liking themselves was down to 60%; by eighth grade the percentage was down to 40%; and
by twelfth grade it was down to 5%.
Meet the Victims
Phoebe Prince. On January 14, 2010, Phoebe Prince was found dead in her South Hadley, Massachusetts
home. Phoebe was 15 years old and a recent immigrant from Ireland attending South Hadley High School.
As a freshman in high school, she had a romantic fling with a senior football player, upsetting the other girls
at her school. They tormented her relentlessly, calling her a “slut.” They even followed her home one day,
throwing things at her from their moving car. Phoebe took her own life when the intimidation became too
much. She was found dead by her 12-year-old sister.
Immediately following the death of Phoebe Prince, the girls who bullied her mocked her death on the
Internet. It was confirmed that Phoebe had been a victim of both cyberbullying and daily physical abuse.
Many students reported to school officials that Phoebe was the victim of harassment via social networking
sites like Facebook and text messages. Two students of South Hadley High School were later suspended as a
result. Principal Daniel Smith observed that “the bullying often surrounded arguments about teen dating.”7
Even in her death, a Facebook page created in her memory contained cruel messages posted by bullies.
Megan Meier. Another high-profile case was that of Megan Meier, a 13-year-old girl whose suicide was the
result of cyberbullying. In October 2006, Tina and Ron Meier found their daughter’s body in a bedroom
closet. Megan had hanged herself. A few weeks earlier, Megan established a relationship with a boy using the
social networking site MySpace. Megan and the boy, “Josh Evans”—later discovered to be a fake cover name
for another (others) to use as Megan’s cyberbullies, quickly formed an online relationship. The catch, as noted:
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Josh Evans was not a real person. Evans claimed to be a 16-year-old boy who lived in a nearby town but was
homeschooled. There were several red flags to suggest that Josh Evans did not exist, but to Megan Meier, an
already insecure teenager on medication for depression, the boy seemed very real. The so-called Josh even told
Megan that he did not have a phone, restricting him to virtual communication.
Megan’s online relationship with Josh then took a turn for the worse. Megan received a message from Josh
on MySpace saying, “I don’t know if I want to be friends with you any longer because I hear you’re not nice to
your friends.” A bully was using Josh’s account to send cruel messages. Megan called her mother, describing
electronic bulletins posted about her saying things like “Megan Meier is a slut. Megan Meier is fat.”8 Megan
had an existing history of depression, and these messages were a crushing blow to her self-esteem. The stress
of the situation was too much for Megan, and she took her own life shortly after these messages were posted.
The person orchestrating Josh Evan’s fictitious account was actually a neighborhood mother. Lori Drew,
aged 47 at the time of Megan’s death, was the mother of one of Megan’s former friends. Lori Drew knew that
Megan had been prescribed antidepressants but still used the fraudulent identity to torment Megan. Drew’s
reasoning was that Megan had been mean to her daughter and needed to be taught a lesson. This highly
unusual case went to trial in November 2008, and Drew was found guilty of three misdemeanors. She did not
serve any jail time.
The Beverly Vista School. In May of 2008, Evan S. Cohen confronted the Beverly Vista School in Beverly
Hills, California, for disciplining his eighth-grade daughter, J. C. Cohen for cyberbullying. J. C. had videoed
friends at a café egging another eighth-grade girl. In the video, J. C. and her friends make mean-spirited
comments toward the victim, calling her “ugly,” “spoiled,” and a “slut.” When the video surfaced online, the
Beverly Vista School suspended J. C. for two days, along with her accomplices.
Mr. Cohen, a lawyer in the music industry, sued the school on behalf of his daughter. “What incensed me,”
he said, “was that these people were going to suspend my daughter for something that happened outside of
school.”9 The legal test was whether or not the video had caused the school “substantial” disruption.
According to the law, a student can only be suspended when his or her speech interferes “substantially” with
the school’s educational mission. The judge ruled in favor of Cohen, and the school district was required to
pay Cohen’s legal expenses amounting to $107,150.80.10 “The Judge also threw in an aside that summarizes
the conundrum that is adolescent development, acceptable civility and school authority. The good intentions
of the school notwithstanding, he wrote, it cannot discipline a student for speech, simply because young
persons are unpredictable or immature, or because, in general, teenagers are emotionally fragile and may often
fight over hurtful comments.”11
No case involving student online speech has yet been brought before the Supreme Court. Lower courts
have ruled both ways, sometimes siding with schools disciplining their students and other times siding with
the individual perpetrator.
Legislation for Cyberbullying
In response to these and other cases, the Federal government has taken steps to prevent and to manage
cyberbullying, including the drafting of the Megan Meier Cyberbullying Prevention Act (H.R. 1966). This
bill proposes that Chapter 41 of Title 18 of the United States Code (related to extortion and threats) be
68

amended to define cyberbullying and related penalties. According to the Act, cyberbullying is not limited to
socialnetworking web sites but also includes e-mail, instant messaging, blogs, web sites, telephones, and text
messages. “The bill would amend the federal criminal code to impose criminal penalties on anyone who
transmits in interstate or foreign commerce a communication intended to coerce, intimidate, harass, or cause
substantial emotional distress to another person, using electronic means to support severe, repeated, and
hostile behavior.”12
The Megan Meier bill was introduced to the House of Representatives on April 2, 2009. It was referred to
two subcommittees—the House Judiciary Committee and the House Judiciary Subcommittee on Crime,
Terrorism, and Homeland Security. The last action was on September 30, 2009, when subcommittee hearings
were held. The bill has not become law. It was a part of a previous session of Congress and must be
reintroduced in order to be reconsidered for law.
State governments are also considering laws against cyberbullying. On May 3, 2010, Governor Deval
Patrick signed new antibullying legislation that places greater responsibility on schools to intervene in bullying
situations. “Bullying, as defined by the bill, encompasses crimes such as stalking and harassment. The anti-
bullying legislation specifically holds provisions for anti-bully training, and mandates that all school
employees, including teachers, cafeteria staff, janitorial staff, etc., must report and investigate incidents
involving bullying. Teachers must also notify all parents of the students involved in the bullying incident. It
also includes an anti-bullying curriculum to be taught in both public and private schools.”13
Although a step in the right direction, the bill does not assign specific penalties to those who do not
intervene in instances of bullying. Following the bill’s implementation, bullying continues to be a major issue
in Massachusetts schools.
On February 13, 2013, Illinois State Senate representative Ira I. Silverstein introduced the Internet Posting
Removal Act—SB 1614. When you read the bill solely through cyberbullying-prevention lenses, it makes
sense. But what happens when politicians start using the statute to silence critics? Precise language is a must
when it comes to laws; loose lips sink ships and loose language can annihilate freedoms.
The Impact of Facebook and MySpace
The growth of social networking web sites such as Facebook and MySpace in the past decade has contributed
to the prevalence of cyberbullying. Both socialnetworking giants have experience in dealing with
cyberbullying. Facebook and MySpace have accessible help centers that provide postings and suggestions on
how users can fight back against cyberbullying.
Facebook gives users the responsibility to manage cyberbullying. On Facebook’s Help Menu, advisory
information is available for teens and parents regarding how to handle cyberbullying. Facebook provides a
mechanism for users to report abusive behavior by another user. After the abuse is reported, Facebook
investigates the behavior. Facebook also gives users the ability to block specific individuals and restrict privacy
settings. There are comprehensive instructions on Facebook’s web site to make online safety as user-friendly
as possible.
Facebook also encourages users to avoid retaliation, recommending that victims block or report abusers
rather than respond via “inbox, wall posting, or Facebook Chat.” A section of Facebook’s Help Center is
dedicated to educating parents about ways to protect their teens from cyberbullying. This page emphasizes the
69

need for communication among parents and teens regarding expectations and the use of common sense.
Though Facebook cannot prevent and monitor every issue of online harassment, the company recognizes that
cyberbullying is an issue and is doing what it can to empower users.
MySpace, another socialnetworking leader, recognizes the negative consequences of cyberbullying and has
similar content to help its users. MySpace users have the ability to “block” individuals and report instances of
harassment. MySpace has a zero tolerance policy for hate speech, harassment, and cyberbullying, and pledges
to do its best to respond to reported situations within 48 hours.14 Parents have the power to delete the
contents of their son’s or daughter’s MySpace page. The web site also provides safety tips for teens and
parents, including links to more resources and safety videos.
MySpace has developed a team of specialists to assist parents with inquiries regarding their teens’ profiles.
The Parent Care Team must be initiated for review by a parent and can perform actions other than simply
deleting a teen’s profile. For instance, the Parent Care Team can lock (i.e., fix in place as unchangeable) the
age on a teen’s profile and answer any questions that a parent may have about their teen’s MySpace page. This
service is available via e-mail and detailed instructions are available.
Although Facebook and MySpace have taken steps to prevent cyberbullying on their respective web sites,
these efforts are not enough. Cyberbullying is still a major issue on socialnetworking sites and on other forms
of media and communication. To push forward to a solution, questions must be raised about who should be
held accountable in instances of cyberbullying.
Conclusion
Cyberbullying is a real issue that deserves recognition. We should be educating adolescents about the
potentially damaging effects of their actions, responding to incidents, and holding the appropriate people
accountable in instances of cyberbullying. All stakeholders in cyberbullying should take this issue very
seriously. Cyberbullying can have an incredibly harmful effect on adolescents if nobody intervenes. Teenagers,
parents, schools, and the government especially, have a moral responsibility to take action when they come
across cyberbullying. From an ethical perspective, we can no longer be bystanders. Take a stand against
cyberbullying.
Questions for Discussion
1. Have you or someone you know ever been involved in cyberbullying, as a bully or victim? If so, what are the
feelings and effects associated with cyberbullying in the situations with which you are familiar?
2. What are the issues with cyberbullying? Explain.
3. Who are the stakeholders in cyberbullying cases and what are the stakes for them?
4. Who is ethically responsible for the rise and continuance of cyberbullying?
5. Should socialnetworking sites be censored in an effort to stop cyberbullying? Explain.
6. Is it legal and ethical to censor socialnetworking sites to stop cyberbullying? Explain.
7. What is Congress doing about this situation?
Sources
This case was developed from material contained in the following sources:
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Clabough, Raven. (May 4, 2010). “Anti-Bullying Legislation in Massachusetts.” New American.
https://groups.yahoo.com/neo/groups/SepSchool/conversations/messages/26894, accessed April 23, 2014.
Cullen, Kevin. (February 2, 2010). “No Safe Haven for Bullies.” Boston Globe.
http://www.boston.com/news/local/massachusetts/articles.
Cullen, Kevin. (January 24, 2010). “The Untouchable Mean Girls.” Boston Globe.
http://www.boston.com/news/local/massachusetts/articles/2010/01/24/the_untouchable_mean_girls/,
accessed April 3, 2012.
“Facebook Help Center.” Facebook.com. http://www.facebook.com.
Hinduja, Sameer, and Justin W. Patchin. (February 1, 2011). “Cyberbullying Identification, Prevention, and
Response.” Cyberbullying Research Center.
http://www.cyberbullying.us/cyberbullying_identification_prevention_response.php.
Hinduja, Sameer, and Justin W. Patchin. (February 1, 2011). “Fact Sheet—Cyberbullying and Self Esteem.”
Cyberbullying Research Center. http://www.cyberbullying.us/cyberbullying_and_self_esteem.php.
Hoffman, Jan. (January 27, 2010). “Online Bullies Pull Schools into the Fray.” New York Times.
http://www.nytimes.com/2010/06/28/style/28bully.html?_r=1&pagewanted=all, accessed April 3, 2012.
“H.R. 1966: Megan Meier Cyberbullying Prevention Act.” (February 2, 2011) Govtrack.us.
http://www.govtrack.us/congress/bills/111/hr1996, accessed April 3, 2012.
Kowalski, Robin M. (2008). Cyber Bullying: Bullying in the Digital Age. Malden: Blackwell.
“Mayor Menino Launches Anti-cyber Bullying Hotline.” February 17, 2010. WHDH 7 News, NBC.
http://www4.whdh.com/news/articles/local/boston/BO135777/.
McQuade, Samuel C. (2009). Cyber Bullying: Protecting Kids and Adults from Online Bullies. Westport:
Praeger Publishers.
“Monitoring Internet Use.” (February 14, 2011). Mass.Gov. http://www.mass.gov.
“MySpace—Help Center.” MySpace. http://www.myspace.com.
“Parents: Cyber Bullying Led to Teen’s Suicide.” November 19, 2007 ABC News.
http://abcnews.go.com/GMA/story?id=3882520, accessed February 19, 2014.
Shariff, Shaheen. (2009). Confronting Cyber-Bullying. New York: Cambridge University Press, 2009.
“Social Networking Sites.” (February 14, 2011). Mass. Gov. http://www.mass.gov.
Weinhold, Barry K. (February 2000). “Uncovering the Hidden Causes of Bullying and School Violence.”
Counseling and Human Development.
National Crime Prevention Council. “What Is Cyberbully, Exactly?” Stop Cyberbullying. WiredKids, Inc.
http://www.stopcyberbullying.org/what_is_cyberbullying_exactly.html, accessed April 3, 2012.
Notes
1. National Crime Prevention Council. “What Is Cyberbullying, Exactly?” Stop Cyberbullying. WiredKids,
Inc. http://www.stopcyberbullying.org/what_is_cyberbullying_exactly.html, accessed April 3, 2012.
2. Weinhold, Barry K. (February 2000). “Uncovering the Hidden Causes of Bullying and School Violence.”
Counseling and Human Development.
3. Hinduja, S. and J.W. Patchin. (2010). “Fact Sheet: Cyberbullying and Self-Esteem”. Cyberbullying
71

https://groups.yahoo.com/neo/groups/SepSchool/conversations/messages/26894

http://www.boston.com/news/local/massachusetts/articles

http://www.boston.com/news/local/massachusetts/articles/2010/01/24/the_untouchable_mean_girls/

http://www.facebook.com

http://www.cyberbullying.us/cyberbullying_identification_prevention_response.php

http://www.cyberbullying.us/cyberbullying_and_self_esteem.php

http://www.nytimes.com/2010/06/28/style/28bully.html?_r=1&pagewanted=all

http://www.govtrack.us/congress/bills/111/hr1996

http://www4.whdh.com/news/articles/local/boston/BO135777/

http://www.mass.gov

http://www.myspace.com

http://abcnews.go.com/GMA/story?id=3882520

http://www.mass.gov

http://www.stopcyberbullying.org/what_is_cyberbullying_exactly.html

http://www.stopcyberbullying.org/what_is_cyberbullying_exactly.html

Research Center. http://www.cyberbullying.us/cyberbullying_and_self_esteem.php, accessed April 3,
2012.
4. Ibid.
5. Weinhold, Barry K. (February 2000). “Uncovering the Hidden Causes of Bullying and School Violence.”
Counseling and Human Development.
6. Ibid.
7. Cullen, K. (January 24, 2010). “The Untouchable Mean Girls.” Boston Globe.
http://www.boston.com/news/local/massachusetts/articles/2010/01/24/the_untouchable_mean_girls/,
accessed April 3, 2012.
8. “Parents: Cyber Bullying Led to Teen’s Suicide.” (November 19, 2007). ABC News.
http://abcnews.go.com/GMA/story?id=3882520, accessed April 3, 2012.
9. Hoffman, J. (June 27, 2010). “Online Bullies Pull Schools Into the Fray.” New York Times.
http://www.nytimes.com/2010/06/28/style/28bully.html?_r=1&pagewanted=all, accessed April 3, 2012.
10. Ibid.
11. Ibid.
12. “H.R. 1966: Megan Meier Cyberbullying Prevention Act”. (February 2, 2011). Govtrack.us.
http://www.govtrack.us/congress/bills/111/hr1966, accessed April 3, 2012.
13. Clabough, R. (May 4, 2010). “Anti-Bullying Legislation in Massachusetts”. New American.
https://groups.yahoo.com/neo/groups/SepSchool/conversations/messages/26894, accessed April 23, 2014.
14. “MySpace—Help Center”. (2012). MySpace. http://www.myspace.com/help, accessed April 3, 2012.
Notes
1. Illegal downloading? What’s illegal? Yahoo! Answers. http://uk.answers.yahoo.com/question/index?
qid=20080229100732AAsCQpt, accessed March 7, 2012.
2. Kravets, David. (March 18, 2013). Supreme court OKs $222K verdict for sharing 24 songs. Wired.com.
http://www.wired.com/threatlevel/2013/03/scotus-jammie-thomas-rasset/, accessed August 17, 2013.
3. Kirk, Jeremy. (2008). U.S. judge pokes hole in file-sharing lawsuit. Court ruling could force the music
industry to provide more evidence against people accused of illegal file sharing, legal experts say.
InfoWorld.com. http://www.infoworld.com/article/08/02/26/US-judge-pokes-hole-in-file-sharing-
lawsuit_1.html, accessed March 7, 2012; Recording Industry Association of America. (March 2008). New
wave of illegal file sharing lawsuits brought by RIAA. RIAA.com. http://www.riaa.com/newsitem.php?
news_year_filter=2004&resultpage=10&id=D119AD49-5C18-2513-AB36-A06ED24EB13D, accessed
March 7, 2012; McMillan, G. (May 10, 2011). Are you one of 23,000 defendants in the US’ biggest illegal
download lawsuit? Time.com. http://techland.time.com/2011/05/10/are-you-one-of-23000-defendants-in-
the-us-biggest-illegal-download-lawsuit/, accessed March 7, 2012; Pepitone, J. (June 10, 2011). 50,000
BitTorrent users sued for alleged illegal downloads. CNNMoney.com.
http://money.cnn.com/2011/06/10/technology/bittorrent_lawsuits/index.htm, accessed March 7, 2012;
Brian, M. (January 7, 2012). Apple facing $1.88 million lawsuit in China over sales of illegal book downloads.
72

http://www.cyberbullying.us/cyberbullying_and_self_esteem.php

http://www.boston.com/news/local/massachusetts/articles/2010/01/24/the_untouchable_mean_girls/

http://abcnews.go.com/GMA/story?id=3882520

http://www.nytimes.com/2010/06/28/style/28bully.html?_r=1&pagewanted=all

http://www.govtrack.us/congress/bills/111/hr1966

https://groups.yahoo.com/neo/groups/SepSchool/conversations/messages/26894

http://www.myspace.com/help

http://uk.answers.yahoo.com/question/index?qid=20080229100732AAsCQpt

http://www.wired.com/threatlevel/2013/03/scotus-jammie-thomas-rasset/

http://www.infoworld.com/article/08/02/26/US-judge-pokes-hole-in-file-sharing-lawsuit_1.html

http://www.riaa.com/newsitem.php?news_year_filter=2004&resultpage=10&id=D119AD49-5C18-2513-AB36-A06ED24EB13D

Are You One of 23,000 Defendants in the US’ Biggest Illegal Download Lawsuit?

http://money.cnn.com/2011/06/10/technology/bittorrent_lawsuits/index.htm

The Next Web. http://thenextweb.com/apple/2012/01/07/apple-facing-1-88-million-lawsuit-in-china-over-
sales-of-illegal-book-downloads/, accessed March 7, 2012.
4. The Broadband Commission Report (2012).
5. Evis, P. (2013). In one bundle of mortgages, the subprime crisis reverberates. Deal-BookNYTimes.com.

_r=0.
6. Schwartz, N. D. (June 29, 2011). Bank of America settles claims stemming from mortgage crisis.
NYTimes.com. http://www.nytimes.com/2011/06/30/business/30mortgage.html?_r=1&pagewanted=all,
accessed March 7, 2012.
7. Confidence in institutions. (n.d.) Gallup.com. http://www.gallup.com/poll/1597/confidence-
institutions.aspx#3, accessed August 21, 2013.
8. Ibid.
9. Bloxham, E. (April 13, 2011). How can we address excessive CEO pay? CNNMoney.com.
http://management.fortune.cnn.com/2011/04/13/how-can-we-address-excessive-ceo-pay/, accessed March 7,
2012.
10. Top CEO pay ratios. (April 30, 2013). Bloomberg.com. http://go.bloomberg.com/multimedia/ceo-pay-
ratio/, accessed August 21, 2013.
11. Smith, E. and Kuntz, P. (April 29, 2013). CEO pay 1,795-to-1 multiple of wages skirts U.S. law.
Bloomberg.com. http://www.bloomberg.com/news/2013-04-30/ceo-pay-1-795-to-1-multiple-of-workers-
skirts-law-as-sec-delays.html, accessed August 21, 2013.
12. Smith, P. (July 18, 2002). Sarbanes bill is “unenforceable.” AccountancyAge.com.
http://www.accountancyage.com/News/112993, accessed March 7, 2012.
13. O’Sullivan, K., and Durfree, D. (June 1, 2004). Offshoring by the numbers. CFO Magazine, 20(7), 49–
54. http://www.cfo.com/article.cfm/3014067, accessed August 21, 2013.
14. Ricciuti, M., and Yamamoto, M. (May 5, 2004). Outsourcing: Where to draw the line? CNET News.
http://www.zdnet.com/news/outsourcing-where-to-draw-the-line/135880, accessed August 21, 2013.
15. West, N. (May 6, 2012). 5 Ways Robots Are Outsourcing Humans in the Workforce. Activist Post.
http://www.activistpost.com/2012/05/5-ways-robots-are-outsourcing-humans-in.html, accessed February 3,
2014.
16. Ibid.
17. Ibid.
18. Friedman, T. (2000). The Lexus and the olive tree, 17, 20, 24. New York: Anchor Books.
19. Ibid., pp. 2, 20.
20. Ibid., p. 28.
21. The Consumer Financial Protection Bureau’s official web site is http://www.consumerfinance.gov/.
Also see the bureau’s 2013–2017 strategic plan at http://www.consumerfinance.gov/strategic-plan/.
22. Fieser, J. (2009). Ethics. Internet Encyclopedia of Philosophy, IEP. http://www.iep.utm.edu/ethics/,
accessed February 3, 2014.
23. Ibid.
73

http://thenextweb.com/apple/2012/01/07/apple-facing-1-88-million-lawsuit-in-china-over-sales-of-illegal-book-downloads/

http://www.nytimes.com/2011/06/30/business/30mortgage.html?_r=1&pagewanted=all

http://www.gallup.com/poll/1597/confidence-institutions.aspx#3

http://management.fortune.cnn.com/2011/04/13/how-can-we-address-excessive-ceo-pay/

http://go.bloomberg.com/multimedia/ceo-pay-ratio/

http://www.bloomberg.com/news/2013-04-30/ceo-pay-1-795-to-1-multiple-of-workers-skirts-law-as-sec-delays.html

News

http://www.cfo.com/article.cfm/3014067

http://www.zdnet.com/news/outsourcing-where-to-draw-the-line/135880

http://www.activistpost.com/2012/05/5-ways-robots-are-outsourcing-humans-in.html

http://www.consumerfinance.gov/

http://www.consumerfinance.gov/strategic-plan/

http://www.iep.utm.edu/ethics/

24. Ibid.
25. Nash, L. (1990). Good intentions aside: A manager’s guide to resolving ethical problems, 5. Boston: Harvard
Business School Press.
26. Ethics Resource Center. (2011). 2011 National business ethics survey: Workplace ethics in transition.
Ethics.org. http://www.ethics.org/nbes/files/FinalNBES-web , accessed March 7, 2012.
27. Ibid.
28. Ibid.
29. Ibid.
30. Ibid.
31. Ibid.
32. Ibid.
33. Ibid.
34. Morse, Jennifer Roback. (October 2003). The economic costs of sin. American Enterprise 14(7), 14–
14); Frooman, J. (1997). Socially irresponsible and illegal behavior and shareholder wealth. Business & Society,
36(3), 221–229.
35. Employee fraud, theft cost firms $40 billion yearly. (December 30, 2008). Security-Solutions.com.
http://securitysolutions.com/news/fraud-theft-cost/, accessed March 10, 2012; Callahan, D. (2004). The
cheating culture: Why more Americans are doing wrong to get ahead. New York: Harcourt.
36. (June 2011). Integrity seen as top leadership trait. E-Scan Newsletter, 37(6), p. 7.
37. Hewitt Associates. (January 3, 2008). 50 best employers in Canada offer flexibility, demonstrate
integrity, according to Hewitt Associates. NewsWire.ca. http://www.newswire.ca/en/story/293217/50-best-
employers-in-canada-offer-flexibility-demonstrate-integrity-according-to-hewitt-associates, accessed
February 3, 2014.
38. Ibid.
39. (n.d.). Fortune: 100 best companies to work for. CNNMoney.com.
http://money.cnn.com/magazines/fortune/best-companies/, accessed August 18, 2013.
40. Graves, S., and Waddock, S. (1993). Institutional owners and corporate social performance: Maybe not
so myopic after all. Proceedings of the International Association for Business and Society, San Diego; Graves, S.,
and Waddock, S. (1997). The corporate social performance—financial performance link. Strategic
Management Journal, 18, 303–319.
41. Carroll, A. (1993). Business and society: Ethics and stakeholder management, 3rd ed., 110–112.
Cincinnati: South-Western.
42. Kalwall Corporation. (n.d.). Malden Mills: Daylight from ashes. Kalwall.com.
http://www.kalwall.com/rcntproj/1.htm, accessed March 10, 2012; The mensch of Malden Mills. (July 3,
2003). CBSNews.com. http://www.cbsnews.com/stories/2003/07/03/60minutes/main561656.shtml, accessed
January 9, 2014.
43. Conway, K. (2007). Illness and the Limits of Expression. p. 20.
44. Friedman, M. (September 13, 1970). The social responsibility of business is to increase its profits. New
York Times Magazine, 33.
74

http://www.ethics.org/nbes/files/FinalNBES-web

http://securitysolutions.com/news/fraud-theft-cost/

http://www.newswire.ca/en/story/293217/50-best-employers-in-canada-offer-flexibility-demonstrate-integrity-according-to-hewitt-associates

http://money.cnn.com/magazines/fortune/best-companies/

http://www.kalwall.com/rcntproj/1.htm

http://www.cbsnews.com/stories/2003/07/03/60minutes/main561656.shtml

45. Frooman, op. cit.
46. Key, S., and Popkin, S. (1998). Integrating ethics into the strategic management process: Doing well
by doing good. Management Decision, 36(5), 331–338. Also see Allinson, R. (1993). Global disasters: Inquiries
into management ethics. New York: Prentice Hall; and Arthur, H. (1984). Making business ethics useful.
Strategic Management Journal, 5, 319–333.
47. Senge, P. (1990). The fifth discipline: the art and practice of the learning organization. New York:
Doubleday. Also see the following sources: In search of the holy performance grail. (April 1996). Training &
Development, 26–32; and Covey, S. R. (1989). The seven habits of highly effective people. New York: Simon &
Schuster.
48. DeGeorge, R. (1999). Business ethics, 5th ed. Upper Saddle River, NJ: Prentice Hall.
49. Stone, C. D. (1975). Where the law ends. New York: Harper & Row.
50. Buchholz, R. (1989). Fundamental concepts and problems in business ethics. Englewood Cliffs, NJ:
Prentice Hall. For more information, see Buchholz, R. A. (1995). Business environment and public policy, 5th
ed. Englewood Cliffs, NJ: Prentice Hall.
51. Newton, L. (1986). The internal morality of the corporation. Journal of Business Ethics, 5, 249–258.
52. Hoffman, M., and Moore, J. (1995). Business ethics: Readings and cases in corporate morality, 3rd ed.
New York: McGraw-Hill.
53. DeGeorge, R. (2000). Business ethics and the challenge of the information age. Business Ethics
Quarterly, 10(1), 63–72.
54. Ibid.
55. Stone, op. cit.
56. Carroll, op. cit.
57. Stead, B., and Miller, J. (1988). Can social awareness be decreased through business school
curriculum? Journal of Business Ethics, 7(7), 30.
58. Jones, T. (1989). Ethics education in business: Theoretical considerations. Organizational Behavior
Teaching Review, 13(4), 1–18.
59. Hanson, K. O. (September 1987). What good are ethics courses? Across the Board, 10–11.
75

2
ETHICAL PRINCIPLES, QUICK TESTS, AND
DECISION-MAKING GUIDELINES
2.1 Ethical Reasoning and Moral Decision Making
2.2 Ethical Principles and Decision Making
Ethical Insight 2.1
2.3 Four Social Responsibility Roles
2.4 Levels of Ethical Reasoning and Moral Decision Making
2.5 Identifying and Addressing Ethical Dilemmas
Ethical Insight 2.2
2.6 Individual Ethical Decision-Making Styles
2.7 Quick Ethical Tests
2.8 Concluding Comments
Chapter Summary
Questions
Exercises
Real-Time Ethical Dilemma
Cases
3. Ford’s Pinto Fires: The Retrospective View of Ford’s Field Recall Coordinator
4. Jerome Kerviel: Rogue Trader or Misguided Employee? What Really Happened at the Société
Générale?
5. Samuel Waksal at ImClone
Notes
OPENING CASE
Louise Simms, newly graduated with a Master of Business Administration (MBA) degree, was hired by a firm
based in the United States. With minimal training, she was sent to join a company partner to negotiate with a
high-ranking Middle Eastern government official. The partner informed Simms that he would introduce her
to the government contact and then leave her to “get the job done.” Her assignment was to “do whatever it
takes to win the contract: it’s worth millions to us.” The contract would enable Simms’s firm to select and
manage technology companies that would install a multimillion-dollar computer system for that government.
While in the country, Simms was told by the official that Simms’s firm had “an excellent chance of getting the
76

contract” if the official’s nephew, who owned and operated a computer company in that country, could be
assured “a good piece of the action.”
On two different occasions, while discussing details, the official attempted unwelcome advances toward
Simms. He backed off both times when he observed her subtle negative responses. Simms was told that “the
deal” would remain a confidential matter and the official closed by saying, “That’s how we do business here;
take it or leave it.” Simms was frustrated about the terms of the deal and about the advances toward her. She
called her superior in Chicago and urged him not to accept these conditions because of the questionable
arrangements and also because of the disrespect shown toward her, which she said reflected on the company
as well. Simms’s supervisor responded, “Take the deal! And don’t let your emotions get involved. You’re in
another culture. Go with the flow. Accept the offer and get the contract groundwork started. Use your best
judgment on how to handle the details.”
Simms couldn’t sleep that night. She now had doubts about her supervisor’s and the government
administrator’s ethics. She felt that she had conflicting priorities. This was her first job and a significant
opportunity. At the same time, she had to live with herself.
2.1 Ethical Reasoning and Moral Decision Making
The ultimate basis for ethics is clear: Much human behavior has consequences for the welfare of others. We are capable of acting toward
others in such a way as to increase or decrease the quality of their lives. We are capable of helping or harming. . . . The proper role of ethical
reasoning is to highlight acts of two kinds: those that enhance the well-being of others—that warrant our praise—and those who harm or
diminish the well-being of others—and thus warrant our criticism. Developing one’s ethical reasoning abilities is crucial because there is in
human nature a strong tendency toward egotism, prejudice, self-justification, and self-deception.1
Ethical reasoning helps determine and differentiate between right thinking, decisions, and actions and those
that are wrong, hurtful and/or harmful—to others and to ourselves. Ethics is based on and motivated by
values, beliefs, emotions, and feelings as well as facts. Ethical actions also involve conscientious reasoning of
facts based on moral standards and principles. Business ethics refers to applying ethical reasoning and principles
to commercial activities that are often profit-oriented.
Three Criteria in Ethical Reasoning
The following criteria can be used in ethical reasoning. They help to systematize and structure our
arguments:2
1. Moral reasoning must be logical. Assumptions and premises, both factual and inferred, used to make
judgments should be known and made explicit.
2. Factual evidence cited to support a person’s judgment should be accurate, relevant, and complete.
3. Ethical standards used in reasoning should be consistent. When inconsistencies are discovered in a person’s
ethical standards in a decision, one or more of the standards must be modified.
Returning to this chapter’s opening case, if Louise Simms were to use these three criteria, she would
articulate the assumptions underlying her decision. If she chose to accept the official’s offer, she might reason
that she assumed it was not a bribe or that if it were a bribe she would not get caught, and that even if she or
her company did get caught, she would be willing to incur any penalty individually, including the loss of her
77

job. Moreover, Louise would want to obtain as many facts as she could about the U.S. laws and the Middle
Eastern country’s laws on negotiating practices. She would gather information from her employer and check
the accuracy of the information against her decision.
She would have to be consistent in her standards. If she chooses to accept the foreign official’s conditions,
she must be willing to accept additional contingencies consistent with those conditions. She could not
suddenly decide that her actions were “unethical” and then back out midway through helping the official’s
nephew obtain part of the contract. She must think through these contingencies before she makes a decision.
Finally, a simple but powerful question can be used throughout your decision-making process: What is my
motivation and motive for choosing a course of action? Examining individual motives and separating these
from the known motivations of others provides clarity and perspective. Louise, for example, might ask, “Why
did I agree to negotiate with the official on his terms? Was it for money? To keep my job? To impress my
boss? For adventure?” She also might ask whether her stated motivation from the outset would carry her
commitments through the entire contracting process.
Moral Responsibility Criteria
A major aim of ethical reasoning is to gain a clear focus on problems to facilitate acting in morally responsible
ways. Individuals are morally responsible for the harmful effects of their actions when (1) they knowingly and
freely acted or caused the act to happen and knew that the act was morally wrong or hurtful to others and (2) they
knowingly and freely failed to act or prevent a harmful act, and they knew it would be morally wrong for a person to
do this.3 Although no universal definition of what constitutes a morally wrong act exists, an act and the
consequences of an act can be defined as morally wrong if physical or emotional harm is done to another as a
result of the act.
Two conditions that eliminate a person’s moral responsibility for causing injury or harm are ignorance and
inability.4 However, persons who intentionally prevent themselves from knowing that a harmful action will
occur are still responsible. Persons who negligently fail to inform themselves about a potentially harmful
matter may still be responsible for the resultant action. Of course, some mitigating circumstances can excuse
or lessen a person’s moral responsibility in a situation. These include circumstances that show: (1) a low level
of or lack of seriousness to cause harm, (2) uncertainty about knowledge of wrongdoing, and (3) the degree to
which a harmful injury was caused or averted. As we know from court trials, proving intent for an alleged
illegal act is not an easy matter. Legally, a case involving a defendant is generally in jeopardy when there is
sufficient physical as well as other evidence demonstrating that a person “knowingly and willingly” showed
intent to commit an illegal act. However, the extent to which a person is morally irresponsible can be difficult
to determine.
2.2 Ethical Principles and Decision Making
In this section, five fundamental principles used in ethical reasoning that are both classic and timely are
discussed to solve dilemmas in everyday life as well as in complex business situations. Observe Figure 2.1 as
you read this section. Since we are examining stakeholders in this text, and we all are stakeholders in different
situations, we illustrate how the following principles apply to stakeholders using classic principles. The
78

principles are: (1) utilitarianism, (2) universalism, (3) rights, (4) justice, and (5) ethical virtue. After reviewing
these principles, we show some “quick ethical tests” that can also be used to clarify ethical dilemmas.
Figure 2.1
Summary of Five Ethical Decision-Making Principles with Stakeholder Analysis
79

Take the quick ethics assessment in Ethical Insight 2.1. After you have read and reflected on the five
principles, return to the assessment and see which of the principles you may consciously or routinely use in
your everyday decision making or when deciding complex dilemmas. Which principle would “work” for you?
Ethical Insight 2.1
Are You Ethical?
Answer each question with your first reaction. Circle the number, from 1 to 4, that best represents your
beliefs, if 1 represents “Completely agree,” 2 represents “Often agree,” 3 represents “Somewhat disagree,” and
4 represents “Completely disagree.”
1. I consider myself the type of person who does whatever it takes to get the job done, period. 1 2 3 4
2. Ethics should be taught at home and in the family, not in professional or higher education. 1 2 3 4
3. I believe that the “golden rule” is that the person who has the gold rules. 1 2 3 4
4. Rules are for people who don’t really want to make it to the top of a company. 1 2 3 4
5. Acting ethically at home and with friends is not the same as acting ethically on the job. 1 2 3 4
6. I would do what is needed to promote my own career in a company, short of committing a serious crime.
1 2 3 4
7. Cutthroat competition is part of getting ahead in the business world. 12 3 4
80

8. Lying is usually necessary to succeed in business. 12 3 4
9. I would hide truthful information about someone or something at work to save my job. 1 2 3 4
10. I consider money to be the most important reason for working at a job or in an organization. 1 2 3 4
Add up all the points. Your Total Score is: ____
Total your scores by adding up the numbers you circled. The lower your score, the more questionable your
(business-related) ethical principles. The lowest possible score is 10, which indicates you are highly unethical;
the highest score is 40, indicating you are highly ethical; 20 signals “questionable ethics”; 30 indicates you are
more ethical than unethical, but caution should be taken about consequences of your behaviors.
Source: © Joseph W. Weiss. No part or the whole of this document should be reprinted or duplicated in any
form without the expressed written/typed consent of the author, jweiss@bentley.edu.
Utilitarianism: A Consequentialist (Results-Based) Approach
Jeremy Bentham (1748–1832) and John Stuart Mill (1806–1873) are acknowledged as founders of the
concept of utilitarianism. Although various interpretations of the concept exist, the basic utilitarian view holds
that an action is judged as right or good on the basis of its consequences. The ends of an action justify the
means taken to reach those ends. As a consequentialist principle, the moral authority that drives utilitarianism is
the calculated consequences, or results, of an action, regardless of other principles that determine the means or
motivations for taking the action. Utilitarianism also includes the following tenets:5
1. An action is morally right if it produces the greatest good for the greatest number of people.
2. An action is morally right if the net benefits over costs are greatest for all affected, compared with the net
benefits of all other possible choices.
3. An action is morally right if its benefits are greatest for each individual and if these benefits outweigh the
costs and benefits of the alternatives.
There are also two types of criteria used in utilitarianism: rule-based and act-based.6, 7 Rule-based
utilitarianism argues that general principles are used as criteria for deciding the greatest benefit to be achieved
from acting a certain way. The act itself is not the basis used for examining whether the greatest good can be
gained. For example, “stealing is not acceptable” could be a principle that rule-based utilitarians would follow
to gain the greatest utility from acting a certain way. “Stealing is not acceptable” is not an absolute principle
that rule-based utilitarians would follow in every situation. Rule-based utilitarians might choose another
principle over “stealing is not acceptable” if the other principle provided a greater good.
Act-based utilitarians, on the other hand, analyze a particular action or behavior to determine whether the
greatest utility or good can be achieved. Act-based utilitarians might also choose an action over a principle if
the greatest utility could be gained. For example, an employee might reason that illegally removing an
untested chemical substance from company storage would save the lives of hundreds of infants in a less
advantaged country because that chemical is being used in an infant formula manufactured in that country.
The employee could lose his job if caught; still he calculates that stealing the chemical in this situation
provides the greatest utility.
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mailto:jweiss@bentley.edu

Utilitarian concepts are widely practiced by government policy makers, economists, and business
professionals. Utilitarianism is a useful principle for conducting a stakeholder analysis, because it forces
decision makers to (1) consider collective as well as particular interests, (2) formulate alternatives based on the
greatest good for all parties involved in a decision, and (3) estimate the costs and benefits of alternatives for
the affected groups.8
Louise Simms could use utilitarian principles in her decision making by identifying each of the
stakeholders who would be affected by her decision. She would then calculate the costs and benefits of her
decision as they affect each group. Finally, she would decide on a course of action based on the greatest good
for the greatest number. For example, after identifying all the stakeholders in her decision, including her own
interests, Simms might believe that her firm’s capabilities were not competitive and that rejecting the offer
would produce the greatest good for the people of the country where the contract would be negotiated,
because obtaining bids from the most technically qualified companies would best serve the interests of those
receiving the services.
Problems with utilitarianism include the following:
1. No agreement exists about the definition of “good” for all concerned. Is it truth, health, peace, profits,
pleasure, cost reductions, or national security?9
2. No agreement exists about who decides. Who decides what is good for whom? Whose interests are primary
in the decisions?
3. The actions are not judged, but rather their consequences. What if some actions are simply wrong? Should
decision makers proceed to take those actions based only on their consequences?
4. How are the costs and benefits of nonmonetary stakes, such as health, safety, and public welfare, measured?
Should a monetary value be assigned to nonmarketed benefits and costs?10 What if the actual or even
potentially harmful effects of an action cannot be measured in the short term, but the action is believed to
have potentially long-term effects, say in 20 or 30 years? Should that action be chosen?
5. Utilitarianism does not consider the individual. It is the collective for whom the greatest good is estimated.
Do instances exist when individuals and their interests should be valued in a decision?
6. The principles of justice and rights are ignored in utilitarianism. The principle of justice is concerned with
the distribution of good, not the amount of total good in a decision. The principle of rights is concerned
with individual entitlements, regardless of the collective calculated benefits.
Even given these problems, the principle of utilitarianism is still valuable under some conditions: when
resources are fixed or scarce; when priorities are in conflict; when no clear choice fulfills everyone’s needs; and
when large or diverse collectives are involved in a zero-sum decision, that is, when a gain for some corresponds
to a loss for others.11
Utilitarianism and Stakeholder Analysis
Because businesses use utilitarian principles when conducting a stakeholder analysis, you, as a decision maker,
should:
1. Define how costs and benefits will be measured in selecting one course of action over another—including
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social, economic, and monetary costs and benefits as well as long-term and short-term costs and benefits.
On what principle, if any, would you use to base your utilitarian analysis?
2. Define what information you will need to determine the costs and benefits for comparisons.
3. Identify the procedures and policies you will use to explain and justify your cost-benefit analysis.
4. State your assumptions when defining and justifying your analysis and conclusions.
5. Ask yourself what moral obligations you have toward each of your stakeholders after the costs and benefits
have been estimated.
Universalism: A Deontological (Duty-Based) Approach
Immanuel Kant (1724–1804) is considered one of the leading founders of the principle of universalism.
Universalism, which is also called deontological ethics, holds that the ends do not justify the means of an
action—the right thing must always be done, even if doing the wrong thing would do the most good for the
most people. Universalism, therefore, is also referred to as a non-consequentialist ethic. The term “deontology”
is derived from the Greek word deon, or duty. Regardless of consequences, this approach is based on universal
principles, such as justice, rights, fairness, honesty, and respect.12
Kant’s principle of the categorical imperative, unlike utilitarianism, places the moral authority for taking
action on an individual’s duty toward other individuals and “humanity.” The categorical imperative consists of
two parts. The first part states that a person should choose to act if and only if she or he would be willing to have
every person on earth, in that same situation, act exactly that way. This principle is absolute and allows for no
qualifications across situations or circumstances. The second part of the categorical imperative states that, in
an ethical dilemma, a person should act in a way that respects and treats all others involved as ends as well as means
to an end.13
Kant’s categorical imperative forces decision makers to take into account their duty to act responsibly and
respectfully toward all individuals in a situation. Individual human welfare is a primary stake in any decision.
Decision makers must also consider formulating their justifications as principles to be applied to everyone.
In Louise Simms’s situation, if she followed deontological principles of universalism, she might ask, “If I
accept the official’s offer, could I justify that anyone anywhere would act the same way?” Or, “Since I value my
own self-respect and believe my duty is to uphold self-respect for others, I will not accept this assignment
because my self-respect has been and may again be violated.”
The major weaknesses of universalism and Kant’s categorical imperative include these criticisms: First,
these principles are imprecise and lack practical utility. It is difficult to think of all humanity each time one
must make a decision in an ethical dilemma. Second, it is hard to resolve conflicts of interest when using a
criterion that states that all individuals must be treated equally. Degrees of differences in stakeholders’
interests and relative power exist. However, Kant would remind us that the human being and his or her
humanity must be considered above the stakes, power bases, or consequences of our actions. Still, it is often
impractical not to consider other elements in a dilemma. Finally, what if a decision maker’s duties conflict in
an ethical dilemma? The categorical imperative does not allow for prioritizing. A primary purpose of the
stakeholder analysis is to prioritize conflicting duties. It is, again, difficult to take absolute positions when
limited resources and time and conflicting values are factors.
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Universalism and Stakeholder Analysis
The logic underlying universalism and the categorical imperative can be helpful for applying a stakeholder
analysis. Even though we may not be able to employ Kant’s principles absolutely, we can consider the
following as guidelines for using his ethics:
1. Take into account the welfare and risks of all parties when considering policy decisions and outcomes.
2. Identify the needs of individuals involved in a decision, the choices they have, and the information they
need to protect their welfare.
3. Identify any manipulation, force, coercion, or deceit that might harm individuals involved in a decision.
4. Recognize the duties of respecting and responding to individuals affected by particular decisions before
adopting policies and actions that affect them.
5. Ask if the desired action would be acceptable to the individuals involved. Under what conditions would
they accept the decision?
6. Ask if individuals in a similar situation would repeat the designated action or policy as a principle. If not,
why not? And would they continue to employ the designated action?
Rights: A Moral and Legal Entitlement-Based Approach
Rights are based on several sources of authority.14 Legal rights are entitlements that are limited to a particular
legal system and jurisdiction. In the United States, the Constitution and Declaration of Independence are the
basis for citizens’ legal rights, for example the right to life, liberty, and the pursuit of happiness, and the right
to freedom of speech. Moral (and human) rights, on the other hand, are universal and based on norms in every
society, for example, the right not to be enslaved and the right to work.
Moral and legal rights are linked to individuals, and in some cases, groups, not to societies, as is the case
with a utilitarian ethic. Moral rights are also connected with duties, that is, my moral rights imply that others
have a duty toward me to not violate those rights, and vice versa. Moral rights also provide the freedom to
pursue one’s interests, as long as those interests do not violate others’ rights. Moral rights also allow
individuals to justify their actions and seek protection from others in doing so.
There are also special rights and duties, or contractual rights. Contracts provide individuals with mutually
binding duties that are based on a legal system with defined transactions and boundaries. Moral rules that
apply to contracts include: (1) the contract should not commit the parties to unethical or immoral conduct; (2)
both parties should freely and without force enter the contractual agreement; (3) neither individual should
misrepresent or misinterpret facts in the contract; and (4) both individuals should have complete knowledge of
the nature of the contract and its terms before they are bound by it.15
Finally, the concept of negative and positive rights defines yet another dimension of ethical principles.16 A
negative right refers to the duty others have to not interfere with actions related to a person’s rights. For
example, if you have the right to freedom of speech, others—including your employer—have the duty not to
interfere with that right. Of course there are circumstances that constrain “free speech,” which we will discuss
in Chapter 4. A positive right imposes a duty on others to provide for your needs to achieve your goals, not just
protect your right to pursue them. Some of these rights may be part of national, state, or local legislation. For
example, you may have the right to equal educational opportunities for your child if you are a parent. This
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implies that you have the right to send your child to a public school that has the same standards as any other
school in your community.
Positive rights were given attention in the twentieth century. National legislation that promoted different
groups’ rights and the United Nations’ Universal Declaration of Human Rights served as sources for positive
rights. Negative rights were emphasized in the seventeenth and eighteenth centuries and were based on the
Bill of Rights in the Declaration of Independence. Currently, American political parties and advocates who
are either politically to the “left” or to the “right” debate on whether certain moral rights are “negative” or
“positive” and to what extent taxpayers’ dollars and government funds should support these rights. For
example, “conservative” writers like Milton Friedman17 have endorsed government support of negative rights
(like protecting property, and enforcing law and order) and argued against public spending on positive rights
(like medical assistance, job training, and housing). As you can see, the concept of rights has several sources of
moral authority. Understanding and applying the concept of rights to stakeholders in business situations adds
another dimension of ethical discovery to your analysis.
Louise Simms might ask what her rights are in her situation. If she believes that her constitutional and
moral rights would be violated by accepting the offer, she would consider refusing to negotiate on the foreign
official’s terms.
The limitations of the principle of rights include:
1. The justification that individuals are entitled to rights can be used to disguise and manipulate selfish, unjust
political claims and interests.
2. Protection of rights can exaggerate certain entitlements in society at the expense of others. Fairness and
equity issues may be raised when the rights of an individual or group take precedence over the rights of
others. Issues of reverse discrimination, for example, have arisen from this reasoning.
3. The limits of rights come into question. To what extent should practices that may benefit society, but
threaten certain rights, be permitted?
Rights and Stakeholder Analysis
The principle of rights is particularly useful in stakeholder analysis when conflicting legal or moral rights of
individuals occur or when rights may be violated if certain courses of action are pursued. The following are
guidelines for observing this principle:18
1. Identify the individuals whose rights may be violated.
2. Determine the legal and moral bases of these individuals’ rights. Does the decision violate these rights on
such bases?
3. Determine to what extent the action has moral justification from utilitarian or other principles if individual
rights may be violated. National crises and emergencies may warrant overriding individual rights for the
public good.
Justice: Procedures, Compensation, and Retribution
The principle of justice deals with fairness and equality. Here, the moral authority that decides what is right
and wrong concerns the fair distribution of opportunities, as well as hardships, to all. The principle of justice
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also pertains to punishment for wrong done to the undeserving. John Rawls, a contemporary philosopher,
offers two principles of fairness that are widely recognized as representative of the principle of justice:19
1. Each person has an equal right to the most extensive basic liberties that are compatible with similar liberties
for others.
2. Social and economic inequalities are arranged so that they are both (a) reasonably expected to be to
everyone’s advantage and (b) attached to positions and offices open to all.
The first principle states that all individuals should be treated equally. The second principle states that
justice is served when all persons have equal opportunities and advantages (through their positions and offices)
to society’s opportunities and burdens. Equal opportunity or access to opportunity does not guarantee equal
distribution of wealth. Society’s disadvantaged may not be justly treated, some critics claim, when only equal
opportunity is offered. The principle of justice also addresses the unfair distribution of wealth and the
infliction of harm.
Richard DeGeorge identifies four types of justice:20
1. Compensatory justice concerns compensating someone for a past harm or injustice. For example, affirmative
action programs, discussed in Chapter 7, are justified, in part, as compensation for decades of injustice that
minorities have suffered.
2. Retributive justice means serving punishment to someone who has inflicted harm on another. A criterion for
applying this justice principle is: “Does the punishment fit the crime?”
3. Distributive justice refers to the fair distribution of benefits and burdens. Have certain stakeholders received
an unfair share of costs accompanying a policy or action? Have others unfairly profited from a policy?
4. Procedural justice designates fair decision practices, procedures, and agreements among parties. This
criterion asks, “Have the rules and processes that govern the distribution of rewards, punishments, benefits,
and costs been fair?”
These four types of justice are part of the larger principle of justice. How they are formulated and applied
varies with societies and governmental systems.
Following the principle of justice, Louise Simms might ask whether accepting the government official’s
offer would provide a fair distribution of goods and services to the recipients of the new technological system.
Also, are the conditions demanded by the government administrator fair for all parties concerned? If Simms
determined that justice would not be served by enabling her company to be awarded the contract without a
fair bidding process, she might well recommend that her firm reject the offer.
The obvious practical problems of using the principle of justice include the following: Outside the
jurisdiction of the state and its judicial systems, where ethical dilemmas are solved by procedure and law, who
decides who is right and who is wrong? Who has the moral authority to punish whom? Can opportunities and
burdens be fairly distributed to all when it is not in the interest of those in power to do so?
Even with these shortcomings, the principle of justice adds an essential contribution to the other ethical
principles discussed so far. Beyond the utilitarian calculation of moral responsibility based on consequences,
beyond the universalist absolute duty to treat everyone as a means and not an end, and beyond the principle of
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rights, which values unquestionable claims, the principle of justice forces us to ask how fairly benefits and
costs are distributed, regardless of power, position, or wealth.
Rights, Power, and “Transforming Justice”
Justice, rights, and power are really intertwined. Rights plus power equals “transforming justice.” T.
McMahon states, “While natural rights are the basis for justice, rights cannot be realized nor justice become
operative without power.”21 Judges and juries exercise power when two opposing parties, both of whom are
“right,” seek justice from the courts.
Power generally is defined and exercised through inheritance, authority, contracts, competition,
manipulation, and force. Power exercised through manipulation cannot be used to obtain justice legitimately.
The two steps in exercising “transforming justice” are:
1. Be aware of your rights and power. McMahon states, “It is important to determine what rights and how
much legitimate power are necessary to exercise these rights without trampling on other rights. For example,
an employer might have the right and the power to fire an insolent employee, but she or he might not have
enough to challenge union regulations.”22
2. Establish legitimate power as a means for obtaining and establishing rights. According to McMahon, “If
the legitimacy of transforming justice cannot be established, its exercise may then be reduced to spurious
power plays to get what someone wants, rather than a means of fulfilling rights.”23
3. This interrelationship of rights, justice, and power is particularly helpful in studying stakeholder
management relationships. Since stakeholders exercise power to implement their interests, the concept of
“rights plus power equals transforming justice” adds value in determining justice (procedural, compensatory,
and retributive). The question of justice in complex, competitive situations becomes not only “Whose rights
are more right?” but also “By what means and to what end was power exercised?”
Justice and Stakeholder Analysis
In a stakeholder analysis, the principle of justice can be applied by asking the following questions:
1. How equitable will the distribution of benefits and costs, pleasure and pain, and reward and punishment
be among stakeholders if you pursue a particular course of action? Would all stakeholders’ self-respect be
acknowledged?
2. How clearly have the procedures for distributing the costs and benefits of a course of action or policy
been defined and communicated? How fair are these procedures to all affected?
3. What provisions can be made to compensate those who will be unfairly affected by the costs of the
decision? What provisions can we make to redistribute benefits among those who have been unfairly or overly
compensated by the decision?
Virtue Ethics: Character-Based Virtues
Plato and Aristotle are recognized as founders of virtue ethics, which also has roots in ancient Chinese and
Greek philosophy. Virtue ethics emphasizes moral character in contrast to moral rules (deontology) or
consequences of actions (consequentialism).24
Virtue ethics is grounded in “character traits,” that is, “a disposition which is well entrenched in its
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possessor, something that, as we say ‘goes all the way down’, unlike a habit such as being a tea-drinker—but
the disposition in question, far from being a single track disposition to do honest actions, or even honest
actions for certain reasons, is multi-track. It is concerned with many other actions as well, with emotions and
emotional reactions, choices, values, desires, perceptions, attitudes, interests, expectations and sensibilities. To
possess a virtue is to be a certain sort of person with a certain complex mindset. (Hence the extreme
recklessness of attributing a virtue on the basis of a single action.)”25
The concepts of virtue ethics derived from ancient Greek philosophy are the following: virtue, practical
wisdom, and eudaemonia (or happiness, flourishing, and well-being). Virtue ethics focuses on the type of
person we ought to be, not on specific actions that should be taken. It is grounded in good character, motives,
and core values. Virtue ethics argue that the possessor of good character is and acts moral, feels good, is
happy, and flourishes. Practical wisdom, however, is often required to be virtuous. Adults can be culpable in
their intentions and actions by being “thoughtless, insensitive, reckless, impulsive, shortsighted, and by
assuming that what suits them will suit everyone instead of taking a more objective viewpoint. They are also,
importantly, culpable if their understanding of what is beneficial and harmful is mistaken. It is part of
practical wisdom to know how to secure real benefits effectively; those who have practical wisdom will not
make the mistake of concealing the hurtful truth from the person who really needs to know it in the belief that
they are benefiting him.”26
Critiques of virtue ethics include the following major arguments:
First, virtue ethics fails to adequately address dilemmas which arise in applied ethics, such as abortion. For, virtue theory is not designed to
offer precise guidelines of obligation. Second, virtue theory cannot correctly assess the occasional tragic actions of virtuous people. . . . Since
virtue theory focuses on the general notion of a good person, it has little to say about particular tragic acts. Third, some acts are so
intolerable, such as murder, that we must devise a special list of offenses which are prohibited. Virtue theory does not provide such a list.
Fourth, character traits change, and unless we stay in practice, we risk losing our proficiency in these areas. This suggests a need for a more
character-free way of assessing our conduct. Finally, there is the problem of moral backsliding. Since virtue theory emphasizes long-term
characteristics, this runs the risk of overlooking particular lies, or acts of selfishness, on the grounds that such acts are temporary
aberrations.27
These same criticisms also apply to other ethical principles and schools of thought.
Virtue Ethics and Stakeholder Analysis
Virtue ethics adds an important dimension to rules and consequentialist ethics by contributing a different
perspective for understanding and executing stakeholder management. Examining the motives and character
of stakeholders can be helpful in discovering underlying motivations of strategies, actions, and outcomes in
complex business and corporate transactions. With regard to corporate scandals, virtue ethics can explain some
of the motives of several corporate officers’ actions that center on greed, extravagant habits, irrational
thinking, and egotistical character traits.
Virtue ethics also adds a practical perspective. Beauchamp and Childress state, “A practical consequence of
this view is that the education of, for example medical doctors, should include the cultivation of virtues such as
compassion, discernment, trustworthiness, integrity, conscientiousness as well as benevolence (desire to help)
and nonmalevolence (desire to avoid harm).”28 These authors also note that “persons of ‘good character’ can
certainly formulate ‘bad policy’ or make a ‘poor choice’—we need to evaluate those policies and choices
according to moral principles.”
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The Common Good
Plato and Aristotle are believed to be the authors of the common good concept. The ethicist John Rawls has
developed and redefined the notion of the common good as “certain general conditions that are . . . equally to
everyone’s advantage.”29 The common good has also been defined as “the sum of those conditions of social life
which allow social groups and their individual members relatively thorough and ready access to their own
fulfillment.”30 The common good includes the broader interdependent institutions, social systems,
environments, and services and goods. Examples of the common good include the health care system,
legislative and judicial systems, political, economic, and legal systems, and the physical environment. These
systems exist at the local, regional, national, and global levels. Individuals, groups, and populations are
dependent on these interlocking systems.31 The common good must be created and maintained in societies.
Cooperative and collaborative effort is required. “The common good is a good to which all members of society
have access, and from whose enjoyment no one can be easily excluded. All persons, for example, enjoy the
benefits of clean air or an unpolluted environment, or any of our society’s other common goods. In fact,
something counts as a common good only to the extent that it is a good to which all have access.”32
The ethic of the common good suggests that decision makers take into consideration the intent as well as
the effects of their actions and decisions on the broader society and the common good of the many. There are
four major constraining factors and arguments on the notion of the common good: (1) A unitary notion of the
common good is not viable in a pluralistic society. The common good means different things to different
people. (2) Relatedly, in an individualistic society, people are rewarded to provide and succeed by themselves.
The logic of the common good runs counter in many instances to this individualist cultural orientation. (3)
“Free riders” abuse the provision of the common good by taking advantage of the benefits, while not
contributing to the upkeep of common goods. A critical mass of free riders can and does destroy common
goods, such as parts of the environment. (4) Finally, helping create and sustain common goods means unequal
sharing of burdens and sacrifices by some groups, since not all groups will exert such efforts. Expecting some
groups to support the common good while others will not is unjust, and perhaps impractical. Given these
obstacles, the ethic of the common good calls us to share in a common vision of a society that benefits and is
beneficial for all members, while respecting individual differences. Using this ethic in our decision making also
calls us to take goals and actions that include others besides ourselves and our own interest into account. Such
a logic is not just partly altruistic, but, in many circumstances, practical. We thrive when we breathe clean air,
drink clean water, and can trust that the food we eat is not contaminated. This logic may also apply to
business decisions that involve our customers and employees, as well as our neighbors, family members, and
ourselves as members of a society as well as an organization. By using this principle, Louise would consider
what good would be gained from actions taken not only for the professionals involved in her company and the
client’s, but also for the host society. She would have to evaluate ethical principles that serve the common
good and benefits of the people in that country.
Ethical Relativism: A Self-Interest Approach
Ethical relativism holds that no universal standards or rules can be used to guide or evaluate the morality of an
act. This view argues that people set their own moral standards for judging their actions. Only the individual’s
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self-interest and values are relevant for judging his or her behavior. This form of relativism is also referred to
as naive relativism.
Individuals, professionals, and organizations using this approach can consider finding out what the industry
and/or professional standard or norm is with regard to an issue. Another suggestion would be to inflict no
undue harm with a course of action taken.33
If Louise Simms were to adopt the principle of ethical relativism for her decision making, she might
choose to accept the government official’s offer to promote her own standing in his firm. She might reason
that her self-interest would be served best by making any deal that would push her career ahead. But Simms
could also use ethical relativism to justify her rejection of the offer. She might say that any possible form of
such a questionable negotiation is against her beliefs. The point behind this principle is that individual
standards are the basis of moral authority.
The logic of ethical relativism also extends to cultures. Cultural relativism argues that “when in Rome, do as
the Romans do.” What is morally right for one society or culture may be wrong for another. Moral standards
vary from one culture to another. Cultural relativists would argue that firms and business professionals doing
business in a country are obliged to follow that country’s laws and moral codes. A criterion that relativists
would use to justify their actions would be: “Are my beliefs, moral standards, and customs satisfied with this
action or outcome?”
The benefit of ethical and cultural relativism is that they recognize the distinction between individual and
social values and customs. These views take seriously the different belief systems of individuals and societies.
Social norms and mores are seen in a cultural context.
However, relativism can lead to several problems. (It can be argued that this perspective is actually not
ethical.) First, these views imply an underlying laziness.34 Individuals who justify their morality only from
their personal beliefs, without taking into consideration other ethical principles, may use the logic of
relativism as an excuse for not having or developing moral standards. Second, this view contradicts everyday
experience. Moral reasoning is developed from conversation, interaction, and argument. What I believe or
perceive as “facts” in a situation may or may not be accurate. How can I validate or disprove my ethical
reasoning if I do not communicate, share, and remain open to changing my own standards?
Ethical relativism can create absolutists—individuals who claim their moral standards are right regardless
of whether others view the standards as right or wrong. For example, what if my beliefs conflict with yours?
Whose relativism is right then? Who decides and on what grounds? In practice, ethical relativism does not
effectively or efficiently solve complicated conflicts that involve many parties because these situations require
tolerating doubts and permitting our observations and beliefs to be informed.
Cultural relativism embodies the same problems as ethical relativism. Although the values and moral
customs of all cultures should be observed and respected, especially because business professionals are
increasingly operating across national boundaries, we must not be blindly absolute or divorce ourselves from
rigorous moral reasoning or laws aimed at protecting individual rights and justice. For example, R. Edward
Freeman and Daniel Gilbert Jr. ask, “Must American managers in Saudi Arabia treat women as the Saudis
treat them? Should Saudis in the U.S. treat women as they do in Saudi Arabia? Must American managers in
South Africa [during the apartheid years] treat blacks as white South Africans treat them? Must white South
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Africans treat blacks in the United States as U.S. managers treat them? Must Saudis in the United States treat
women as U.S. managers treat them?”35 They continue, “It makes sense to question whether the norms of the
Nazi society were in fact morally correct.”36 Using rigorous ethical reasoning to solve moral dilemmas is
important across cultures.
However, this does not suggest that flexibility, sensitivity, and awareness of individual and cultural moral
differences are not necessary. It does mean that upholding principles of rights, justice, and freedom in some
situations may conflict with the other person’s or culture’s belief system. Depending on the actions taken and
decisions made based on a person’s moral standards, a price may be paid for maintaining them. Often,
negotiation agreements and understanding can be reached without overt conflict when different ethical
principles or cultural standards clash.
Finally, it could be argued that cultural relativism does provide an argument against cultural imperialism.
Why should American laws, customs, and values that are embedded in a U.S. firm’s policies be enforced in
another country that has differing laws and values regarding the activities in question?
Ethical Relativism and Stakeholder Analysis
When considering the perspectives of relativism in a stakeholder analysis, ask the following questions:
1. What are the major moral beliefs and principles at issue for each stakeholder affected by this decision?
2. What are my moral beliefs and principles in this decision?
3. To what extent will my ethical principles clash if a particular course of action is taken? Why?
4. How can conflicting moral beliefs be avoided or resolved in seeking a desirable outcome?
5. What is the industry standard and norm with regard to this issue(s)?
A now classic case of the example of ethical relativism is Samuel Waksal, who resigned as chief executive
officer (CEO) of ImClone (a manufacturer of drugs for cancer and other treatment therapies) on May 22,
2002. He was later arrested and indicted for bank fraud, securities fraud, and perjury. He pleaded guilty to all
of the counts in the indictment. (He also implicated his daughter and father in his insider-trading schemes.)
In addition, he pleaded guilty to tax evasion for not paying New York state sales tax on pieces of art that he
had purchased. He was sentenced to 87 months in prison and was ordered to pay a $3 million fine and $1.2
million in restitution to the New York State Sales Tax Commission. He began serving his prison sentence on
July 23, 2003. Martha Stewart, an ImClone stockholder, was sentenced to five months in prison and five
months of house arrest for using insider trading knowledge to sell shares of ImClone stock. She was also
ordered to pay $30,000 in fines and court fees. Her broker, Peter Bacanovic, was given the same sentence, but
a lower fine of $4,000. Bacanovic’s assistant, Douglas Faneuil, was spared prison time and fined $2,000.37
When asked in an interview how he got into this “mess,” Waksal said, “It certainly wasn’t because I thought
about it carefully ahead of time. I think I was arrogant enough at the time to believe that I could cut corners,
not care about details that were going on, and not think about consequences.”38
Immoral, Amoral, and Moral Management
In addition to the classic ethical principles, three broad, straight moral orientations that can be applied to
individuals, groups, and organizations are: immorality, amorality, and morality.
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Immoral management of employees, stakeholders, and constituencies signifies a minimally ethical or
unethical approach, such as laying off employees without fair notice or compensation, offering upper-level
management undeserved salary increases and perks, and giving “golden parachutes” (attractive payments or
settlement contracts to selected employees) when a change in company control is negotiated. (Such payments
are often made at the expense of shareholders’ dividends without their knowledge or consent.) Managing
immorally means intentionally going against the ethical principles of justice and fair and equitable treatment
of other stakeholders.
Amoral management happens when owners, supervisors, and managers treat shareholders, outside
stakeholders, and employees without concern or care for the consequences of their actions. No willful wrong
may be intended, but neither is thought given to moral behavior or outcomes. Minimal action is taken while
setting policies that are solely profit-oriented, production-centered, or short-term. Employees and other
stakeholders are viewed as instruments for executing the economic interests of the firm. Strategies, control
systems, leadership style, and interactions in such organizations also reflect an amoral, minimalist approach
toward stakeholders. Nevertheless, the harmful consequences of amoral actions are real for the persons
affected.
Moral management places value on fair treatment of shareholders, employees, customers, and other
stakeholders. Ethics codes are established, communicated, and included in training; employee rights are built
into visible policies that are enforced; and employees and other stakeholders are treated with respect and trust.
The firm’s corporate strategy, control and incentive systems, leadership style, and interactions reflect a morally
managed organization. Moral management is the preferred mode of acting toward stakeholders, since respect
and fairness are considered in decisions.
It is helpful to consider these three orientations while observing managers, owners, employees, and
coworkers. Have you seen amoral policies, procedures, and decisions in organizations? The next section
summarizes four social responsibility roles that business executives view as moral for decision makers. The
model presented complements the five ethical principles by providing a broad framework for describing ethical
orientations toward business decisions. You can also use the following framework to characterize your own
moral and responsible roles, those of your boss and colleagues, and even those of contemporary international
figures in government or business.
2.3 Four Social Responsibility Roles
What social obligations do businesses and their executives have toward their stockholders and society? The
traditional view that the responsibility of corporate owners and managers is to serve only, or primarily, their
stockholders’ interests has been challenged and modified—but not abandoned—since the turn of this century.
The debate continues about whether the roles of businesses and managers include serving social stakeholders
along with economic stockholders. Because of changing demographic and educational characteristics of the
workplace and the advent of laws, policies, and procedures that recognize greater awareness of employee and
other stakeholders’ rights, distinctions have been made about the responsibility of the business to its
employees and to the larger society.
Four ethical interpretations of the social roles and modes of decision making are discussed and illustrated
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in Figure 2.2. The four social responsibility modes reflect business roles toward stockholders and a wider
audience of stakeholders.39
Notice the two distinct social responsibility orientations of businesses and managers toward society: the
stockholder model (the primary responsibility of the corporation to its economic stockholders) and the
stakeholder model (the responsibility of the corporation to its social stakeholders outside the corporation). The
two sets of motives underlying these two orientations are “self-interest” and “moral duty.”
The stockholder self-interest (cell 1 in Figure 2.2) and moral duty (cell 3) orientations are discussed first,
followed by the stakeholder self-interest (cell 2) and moral duty (cell 4) orientations. The two stockholder
orientations are productivism and philanthropy.
Figure 2.2
Four Social Responsibility Modes and Roles
Source: Buono, Anthony F., and Nicholas, Lawrence. (1990). Stockholder and stakeholder interpretations of business’ social role. In Michael
Hoffman and Jennifer Moore (eds.), Business ethics: Readings and cases in corporate morality, 2nd ed., 172. New York: McGraw-Hill. Reproduced
with the permission of Anthony F. Buono.
Productivists (who hold a free-market ethic) view the corporation’s social responsibility in terms of rational
self-interest and the direct fulfillment of stockholder interests. The free market values the basis of rewards and
punishments in the organization. This ethic drives internal and external vision, mission, values, policies, and
decisions—including salaries, promotion, and demotions. Productivists believe the major—and, some would
say, only—mission of business is to obtain profit. The free market is the best guarantee of moral corporate
conduct in this view. Supply-side economists as productivists, for example, argue that the private sector is the
vehicle for social improvement. Tax reduction and economic incentives that boost private industry are policies
that productivists advocate as socially responsible. Former President George W. Bush’s initial response to the
subprime lending crisis exemplifies a productivist approach; as BBC News reported, Bush’s efforts included
“reform tax laws to help troubled borrowers refinance their loans, but the President added that it was not the
government’s job to bail out speculators.”40 President Bush eased that position as the U.S. and global
economies approached a near collapse. U.S. presidents must make policy decisions that balance all these
responsibility modes, while being very concerned about stakeholders, many of whom are the public citizenry.
Although all the ethical principles discussed earlier could be used by organizational leaders within each of
these responsibility modes, productivists might find themselves advocating the use of negative rights to
promote policies that protect shareholders’ interests over positive rights that would cost taxpayers and use
government resources to assist those more economically dependent on government services—who,
productivists would argue, add an economic burden to the free-market system.
A free-market-based ethic is widely used by owners and managers who must make tough workplace
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decisions, such as: (1) How many and which people are to be laid off because of a market downturn and
significantly lower profits? (2) What constitutes fair notice and compensation to employees who are to be
terminated from employment? (3) How can employees be disciplined fairly in situations in which people’s
rights have been violated? A company is entitled to private property rights and responsibilities to shareholders.
Robert Nozick, a libertarian philosopher, is an advocate of a market-based ethic. He makes a case for a
market-based principle of justice and entitlement in his classic book Anarchy, State, and Utopia. Opponents of
the market-based ethic argue that the rights of less advantaged people also count; that property rights are not
absolute in all situations; that there are times when the state can be justified in protecting the rights of others
in disputes against property owners; and that the distribution of justice depends on the conditions of a
situation—if war, illegal entry, fraud, or theft occur, some form of redistribution of wealth can be justified.41
Philanthropists, who also have a stockholder view of the corporation, hold that social responsibility is
justified in terms of a moral duty toward helping less advantaged members of society through organized, tax-
deductible charity and stewardship. Proponents of this view believe that the primary social role of the
corporation is still to obtain profits. However, moral duty drives their motives instead of self-interest (the
productivist view). Advocates of this view are stewards and believe that those who have wealth ought to share
it with disadvantaged people. As stockholder stewards, philanthropists share profits primarily through their
tax-deductible activities. Warren Buffett gave 85% of his wealth, estimated over $44 billion, to philanthropic
causes, including the Bill & Melinda Gates Foundation. The remainder will be given to foundations operated
by his children.42
Philanthropists might argue from principles of utilitarianism, duty, and universalism to justify their giving.
Corporate philanthropy, generally speaking, is based primarily on the profit motive. Corporate
philanthropists’ sense of stewardship is contingent on their available and calculated use of wealth to help the
less economically advantaged.
Progressivism and ethical idealism are the two social responsibility modes in the stakeholder model, the other
dominant orientation. Progressivists believe corporate behavior is motivated by self-interest, but they also hold
that corporations should take a broader view of responsibility toward social change. The Pope might be
considered an ethical idealist. Enlightened self-interest is a value that also characterizes progressivists. The
renowned theologian Reinhold Niebuhr is a modern example of a progressivist who argued for the
involvement of the church in politics to bring about reasoned, orderly reform. He also worked with unions
and other groups to improve workers’ job conditions and wages. Progressivists support policies such as
affirmative action, environmental protection, employee stock option programs (ESOPs), and energy
conservation. Did ice cream makers Ben Cohen and Jerry Greenfield, for example, follow a progressivist
philosophy for their formerly independent company?
Finally, ethical idealists believe that social responsibility is justified when corporate behavior directly
supports stakeholder interests. Ethical idealists, such as Ralph Nader earlier in his career, hold that, to be fully
responsible, corporate activity should help transform businesses into institutions where workers can realize
their full potential. Employee ownership, cooperatives, and community-based and owned service industries
are examples of the type of corporate transformation that ethical idealists advocate. The boundaries between
business and society are fluid for ethical idealists. Corporate profits are to be shared for humanitarian purposes
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—to help bring about a more humane society.
Of course, as noted previously, a spectrum of beliefs exists for each of these four modes. For example,
ethical idealists profess different visions regarding the obligations of business to society. Progressivists and
ethical idealists generally tend to base their moral authority on legal and moral rights, justice, and
universalism. Organizational leaders and professionals are obviously concerned with the operational solvency
and even profitability (especially for-profit firms) of their companies. Still, they tend to believe that
stakeholder interests and welfare are necessary parts of the economic system’s effectiveness and success.
Which orientation best characterizes your current beliefs of business responsibility toward society:
productivism, philanthropy, progressivism, or ethical idealism? Keep in mind the ethical decision frameworks
presented above and also your ethical assessment scores, as we turn to the different levels of ethical decision
making.
2.4 Levels of Ethical Reasoning and Moral Decision Making
Understanding the nature of an ethical dilemma, the source and whom it is affecting are important steps
toward responding. In this section, three levels or dimensions of ethical dilemmas are described in order to
guard against “short-sightedness” when experiencing or analyzing an ethical dilemma.
Many ethical issues and dilemmas result from pressures that are experienced at four levels: (1) the personal
level, (2) the company or organizational level, (3) the industry level, and (4) the societal, international, and
global levels.
Personal Level
As the opening case of this chapter illustrates, a person experiences pressures from conflicting demands or
circumstances that require a decision. Ethical dilemmas at this level can occur as a result of workplace
pressures or from personal circumstances or motivations not related to work. Pressures on Louise stem from a
supervisor’s assignment, the consequences of which could affect others in the organization and possibly in the
host culture. Is Louise being lied to? Is she being pressured to risk her integrity and even job or career by
accepting this assignment? Note that what begins as an individual or personal dilemma can escalate into
organizational and other levels, as is possible with Louise if the issues are not resolved.
Ethical dilemmas that do not start at the personal level can and do involve and affect individuals along the
way. The personal focus on ethical decision making also involves a broader inquiry with regard to how do
individual personalities, traits, maturity, and styles affect such decisions. For example, narcissism and cynicism
are individual differences that influence self-perceptions and perceptions of others. Antes, et al. (2007)
showed that these two traits in particular had a negative effect on aspects of ethical decision making, whereas
basic personality characteristics, such as conscientiousness and agreeableness, did not have the same effect.43 It
sounds like common sense, but studies confirm—and sometimes dispute—what we think we already know.
Similarly, Skarlicki, et al. (1999) also found that negative affectivity and agreeableness matter, in that these
personality traits moderate the relationship between fairness perceptions and retaliation in the workplace.44
McFerran, et al. (2010) found that moral personality and the centrality of moral identity were associated with
a more principled (versus expedient) ethical ideology. That is, moral personality characteristics affect
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organizational citizenship behavior and the propensity to morally disengage.45 Ethical personality traits
discussed here—agreeableness, conscientiousness, and a principled approach, as contrasted with negativity,
narcissism, and cynicism—are associated with ethical activities in the workplace. These studies confirm that
the principle of virtue ethics matters in organizational settings.
Moral maturity also matters. Kohlberg’s three levels of moral development (which encompass six stages)
provide a guide for observing our own and a person’s level of moral maturity in everyday life and
organizational settings. Whether, and to what extent, ethical education and training contribute to moral
development in later years is not known. Most individuals in Kohlberg’s 20-year study (limited to males)
reached the fourth and fifth stages by adulthood. Only a few attained the sixth stage.
Level 1: Preconventional Level (Self-Orientation)
• Stage 1: Punishment avoidance: avoiding punishment by not breaking rules. The person has little
awareness of others’ needs.
• Stage 2: Reward seeking: acting to receive rewards for oneself. The person has awareness of others’
needs but not of right and wrong as abstract concepts.
Level 2: Conventional Level (Others Orientation)
• Stage 3: Good person: acting “right” to be a “good person” and to be accepted by family and friends,
not to fulfill any moral ideal.
• Stage 4: Law and order: acting “right” to comply with law and order and norms in societal
institutions.
Level 3: Postconventional, Autonomous, or Principles Level (Universal, Humankind Orientation)
• Stage 5: Social contract: acting “right” to reach consensus by due process and agreement. The person
is aware of relativity of values and tolerates differing views.
• Stage 6: Universal ethical principles: acting “right” according to universal, abstract principles of justice
and rights. The person reasons and uses conscience and moral rules to guide actions.
Interestingly, one study of 219 corporate managers working in different companies found that managers
typically reason at moral stage 3 or 4, which, the author notes, is “similar to most adults in the Western, urban
societies or other business managers.”46 Managers in large- to medium-sized firms reasoned at lower moral
stages than managers who were self-employed or who worked at small firms. Reasons offered for this
difference in moral reasoning include that larger firms have more complex bureaucracies and layers of
structure, more standard policies and procedures, and exert more rule-based control over employees.
Employees tend to get isolated from other parts of the organization and feel less involved in the central
decision-making process. On the other hand, self-employed professionals and managers in smaller firms tend
to interact with people throughout the firm and with external stakeholders. Involvement with and
vulnerability to other stakeholders may cause these managers to adhere to social laws more closely and to
reason at stage 4.
The same study also found that managers reasoned at a higher level when responding to a moral dilemma
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in which the main character was not a corporate employee. It could be that managers reason at a higher level
when moral problems are not associated with the corporation. The author suggests that the influence of the
corporation tends to restrict the manager to lower moral reasoning stages. Or it could be that the nature of the
moral dilemma may affect the way managers reason (i.e., some dilemmas may be appropriately addressed with
stage 3 or 4 reasoning, other dilemmas may require stage 5 logic).
Stephen Covey’s “Moral Continuum” offers a developmental model for progressing from a basic state of
dependence, to independence, and then interdependence using the “7 habits of highly effective people,” which
can be learned and practiced. The seven habits are: 1. Be Proactive, 2. Begin with the End in Mind, 3. Put
First Things First, 4. Think Win–Win, 5. Seek First to Understand, Then to be Understood, 6. Synergize,
and 7. Sharpen the Saw.
Breaking out of Dependency to Become Independent
Breaking out of dependency (less morally mature) to become more interdependent (highest level of moral
maturity) is a process that involves the heart, mind, and body. According to Covey’s Moral Continuum, once
the first three habits are developed, a person builds character and a “Private Victory” is achieved. Developing
and following the three habits signals a “Public Victory” on this moral journey. The first habit, “Be Proactive,”
embodies “the “Principle of Personal Vision,” or taking control and being responsible for one’s own life while
acting with integrity. This means a person also begins to see how others see him/her, keeping commitments,
and deciding to be oneself by developing a plan.47 The second habit, “Begin with the End in Mind,”
embodies “the Principle of Personal Leadership,” and involves a person’s envisioning where she/he wishes to
go in their life, answering what being successful means, and addressing what is really important. During this
process, a person “re-scripts” their internalized messages and develops their own vision and goals, which
entails them seeing the “big picture” around them and developing a “Personal Mission Statement,” grounded
in principles that matter most to them. The third habit, “Put First Things First,” embodies the principle of
“Personal Management,” which involves implementing concrete plans only after a person believes that she or
he will succeed. This habit helps a person refuse distractions and be able to delegate tasks to others to help the
person reach their goals. Once these first three habits are achieved, a “Private Victory” from dependence has
been accomplished.
From Independence to Interdependence
“Think Win—Win,” the fourth habit, is based on the “Principle of Interpersonal Leadership,” which involves
building relationships through cooperation. A sense of integrity and maturity, and an abundance mentality are
developed with this habit. The fifth habit, “Seek First to Understand, Then to be Understood” embodies the
principle of “Emphatic Communication, which involves communicating as an emphatic listener.
Nonjudgmental listening builds goodwill in relationships. The sixth habit, “Synergize,” embodies the
“Principle of Creative Cooperation,” and builds on the previous habits to form relationships that increase the
work of two people beyond each individual’s maximum efficiency. Synergy makes 1 + 1 = 3, that is, the results
of two individuals working together is to equal the output of three or more individuals working
independently. Flexibility, openness, and goodwill are part of this habit. Finally, the seventh habit, “Sharpen
the Saw,” which embodies the “Principle of Balanced Renewal” is based on the need for continuous self-
renewal that requires physical, mental, and emotional effort to achieve life balance. Moral maturity is an
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ongoing process, not a destination.
With regard to this chapter’s opening case and Louise’s dilemma, the logic of the Moral Continuum,
briefly summarized here, offers an opportunity of reflection for her to consider her personal values, mission,
and character in deciding what course of action to follow or not to follow. Ethical decision making in serious
dilemmas, or even those that may at first seem trivial, generally involves one’s whole self.
Organizational Level
Firms that engage in questionable practices and activities face possible dilemmas with their stakeholders
and/or stockholders. Studies show that when corporate values are dominated by financial profits, employees’
ethical standards are diminished in their workplace decisions, as compared to corporations that value and
reward integrity and good business practices.48 For example, JPM-organ Chase’s controversial CEO Jamie
Dimon was recently found responsible for a host of mismanaged acts in 2012 that resulted in the following
losses of that bank: a $6 billion trading fiasco named the London Whale; “a $4.3 billion settlement with
federal and state prosecutors over mortgage abuses; a $297 million settlement with the Securities and
Exchange Commission (SEC) over charges of lying to investors about the quality of mortgage-backed bonds;
a $45 million settlement with the Department of justice over charges of veterans’ loan fraud; a cease-and-
desist order for failures to comply with federal anti-money laundering laws; an ongoing federal investigation
of LIBOR-rigging; a temporary ban on energy trading for failing to disclose information in a market
manipulation investigation by the Federal Energy Regulatory Commission; accusations of manipulating silver
prices.”49 Dimon’s public statement over the London Whale loss was “Life goes on.” JPMorgan’s board of
directors’ response to Dimon’s leadership while these questionable losses occurred was to halve his bonus to
$10.5 million dollars. Dimon’s leadership example brought public and regulatory attention to the type of
ethical values and culture being practiced at JPMorgan, especially in the wake of the corporate scandals and
crises experienced in the banking industry.
Or take the example of Dukes v. WalMart. “The largest sexual discrimination lawsuit in U.S. history was
brought against WalMart when a federal appeals court approved class-action status for seven women who
claim the retailer was biased in pay and promotions.”50 Plaintiffs in that case estimated that 1.5 million
women who had worked for WalMart in the U.S. stores since 1998 were eligible to join that suit. WalMart’s
reputation and image will not be easily repaired from this and other lawsuits that have recently been brought
against the largest retailer. Going forward, WalMart’s officers must decide whether or not this type of possible
discrimination is worth the legal, social, and media fallout for the company and its stakeholders.
Industry Level
Company officers, managers, and professionals working within and/or across industries may contribute to,
and be influenced and affected by, specific business practices in an industry. A recent example of unethical and
illegal industry-wide business practices is the 2007–2009 subprime mortgage lending crisis, in which some of
the largest banks in the United States and other countries bundled asset-backed securities with real estate,
including individuals’ home mortgages, as collateral and then sold these to Wall Street investors. Such
financial products were highly popular and promised huge returns, but they were bogus, and the result was a
near global financial meltdown.
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In this chapter’s opening case, Louise can inquire about the business practice in which she is being
pressured to engage (i.e., contract negotiations in a foreign country). She can explore whether or not such
practices are legal in her company and industry. Even if she finds that such practices are used but are
questionable ethically and legally, she will need to decide whether or not she wishes to assume personal
liability and consequences of taking such actions.
Societal, International, and Global Levels
Industry, organizational, professional, and personal ethics may clash at the societal, global, and international
levels. For example, although tipping and paying money to government and other business officials in some
countries may meet local customary practices, such offerings may also be illegal bribes in other countries (like
the United States and Europe). Chapter 8 addresses these types of issues.
In this chapter’s opening case, Louise is walking a tightrope in her decision. She needs to consult the
Foreign Corrupt Practices Act (discussed in Chapter 8) to determine whether or not her superiors are asking
her personally and professionally—as a representative of her firm—to act illegally. She might also seek advice
from someone in her company or in the country regarding cultural norms and business practices.
2.5 Identifying and Addressing Ethical Dilemmas
An ethical dilemma is a problem or issue that confronts a person, group, or organization and that requires a
decision or choice among competing claims and interests, all of which may be unethical (i.e., against all
parties’ principles). Decision choices presented by an ethical dilemma usually involve solutions that do not
satisfy all stakeholders. In some situations, there may be a resolution to an ethical dilemma that is the “right”
thing to do, although none of the stakeholders’ material interests are benefited. Ethical dilemmas that involve
many stakeholders require a reasoning process that clearly states the dilemma objectively, and then proceeds to
articulate the issues and different solution alternatives.
Although ethical reasoning has been defined, in part, by acting on “principled thinking,” it is also true that
moral creativity, negotiating skills, and knowing your own values also help solve tough “real world” situations.
Should Louise Simms move to close the lucrative deal or not? Is the official offering her a bribe? What other
personal, as well as professional, obligations would she be committing herself to if she accepted? Is the
official’s request legal? Is it ethical? Is this a setup? If so, who is setting her up? Would Louise be held
individually responsible if something went wrong? Who is going to protect her if legal complications arise?
How is she supposed to negotiate such a deal? What message is she sending about herself as well as her
company? What if she is asked to return and work with these people if the contract is signed? What does
Louise stand to win and lose if she does or does not accept the official’s offer?
So, what should Louise do to act morally responsible in this situation? Is she acting only on behalf of her
company or also from her own integrity and beliefs? These are the kinds of questions and issues this chapter
raises. No easy answers may exist, but understanding the ethical principles discussed at the outset, sharing
ethical dilemmas and outcomes, discussing ethical experiences in depth, and using role plays to analyze
situations can help you identify, think, and feel through the issues that underlie ethical dilemmas.
The Louise Simms scenario may be complicated by the international context. This is a good starting point
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for a chapter on ethics, because business transactions now increasingly involve international players and
different “rules of engagement.” Chapter 8, on the global environment and stakeholder issues peculiar to
multinational corporations, offers additional guidelines for solving dilemmas in international contexts.
Deciding what is right and wrong in an international context also involves understanding laws and customs,
and the level of economic, social, and technological development of the nation or region involved. For
example, do European and U.S. standards of doing business in other countries involve certain biases? Would
these biases result in consequences that are beneficial or harmful to those in the local culture? On the other
hand, we should not easily accept stereotypical descriptions of how to do business by means of what may be
considered “local customs.” The remainder of this chapter has additional information and ethical assessments
and insights on identifying and resolving the moral dimensions of dilemmas in the workplace and in
organizational and personal roles and relationships.
Ethical Insight 2.2
Your Ethical Dilemma
Complete the following steps:
Step 1: Describe an ethical dilemma that you recently experienced. Be detailed: What was the situation? Who
did it involve? Why? What happened? What did you do? What did you not do? Describe your reasoning
process in taking or not taking action. What did others do to you? What was the result?
Step 2: Read the descriptions of relativism, utilitarianism, universalism, rights, justice, and moral decision
making in this chapter. Explain which principle best describes your reasoning and your action(s) in the
dilemma you presented in Step 1.
Step 3: Were you conscious that you were reasoning and acting on these (or other) ethical principles before,
during, and after your ethical dilemma? Explain.
Step 4: After reading this chapter, would you have acted any differently in your dilemma than you did?
Explain.
Moral Creativity
Moral creativity or imagination relates to the need for and skill of recognizing the complexity of some ethical
dilemmas that involve interlocking, conflicting interests, and relationships from the point of view of the
person, group, and/or organization facing a decision to be made. Creativity is required to gain perspective
among the different stakeholders and their interests to sort out and evaluate harmful effects among different
alternative actions.51 What begins as a business-as-usual decision can evolve into a dilemma or even a
“defining moment” in one’s life.52 According to Joseph Badaracco at Harvard University,
An ethical decision typically involves choosing between two options: one we know to be right and another we know to be wrong. A defining
moment, however, challenges us in a deeper way by asking us to choose between two or more ideals in which we deeply believe. Such
challenges rarely have a “correct” response. Rather, they are situations created by circumstance that ask us to step forward and, in the words
of the American philosopher John Dewey, “form, reveal, and test” ourselves. We form our character when we commit to irreversible courses
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of action that shape our personal and professional identities. We reveal something new about us to ourselves and others because defining
moments uncover something that had been hidden or crystallize something that had been only partially known. And we test ourselves
because we discover whether we will live up to our personal ideals or only pay them lip service.53
Badaracco offers three key questions with creative probes for individuals, work group managers, and
company executives to address before acting in a “defining moment.” For individuals, the key question is
“Who am I?” This question requires individuals to:
1. Identify their feelings and intuitions that are emphasized in the situation.
2. Identify their deepest values in conflict brought up by the situation.
3. Identify the best course of action to understand the right thing to do.54
Work group managers can ask, “Who are we?” They can also address these three dimensions of the team
and situation:
1. What strong views and understanding of the situation do others have?
2. Which position or view would most likely win over others?
3. Can I coordinate a process that will reveal the values I care about in this organization?
Company executives can ask, “Who is the company?” Three questions they can consider are:
1. Have I strengthened my position and the organization to the best of my ability?
2. Have I considered my organization’s role vis-à-vis society and shareholders boldly and creatively?
3. How can I transform my vision into action, combining creativity, courage, and shrewdness?
CEOs and professionals could ask the three sets of questions to help articulate a morally creative response
to ethical dilemmas and “defining moments.” What might have happened differently had Bernard Madoff,
who executed an unprecedented Ponzi scheme fraud that lasted over decades and defrauded customers of $20
billion, sat down, looked in the mirror, and reflected on these questions? Or what could have happened to
Enron’s Jeffrey Skilling and Ken Lay, or Tyco’s Dennis Kozlowski, or Gary Winnick at Global Crossing?
Ethical Dilemma Problem Solving
A range of decision-making resources can help you evaluate moral possibilities and insights when resolving
ethical dilemmas. Change begins with having an awareness that can help build confidence by perceiving
dilemmas before they are played out and assists you in negotiating solutions with a moral dimension.
12 Questions to Get Started
A first step in addressing ethical dilemmas is to identify the problem. This is particularly necessary for a
stakeholder approach, because the problems depend on who the stakeholders are and what their stakes entail.
Before specific ethical principles are discussed, let’s begin by considering important decision criteria for ethical
reasoning. How would you apply the criteria to Louise Simms’s situation?
Twelve questions, developed by Laura Nash,55 to ask yourself during the decision-making period are:
1. Have you defined the problem accurately?
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2. How would you define the problem if you stood on the other side of the fence?
3. How did the situation occur?
4. To whom and to what do you give your loyalty as a person and as a member of the corporation?
5. What is your intention in making this decision?
6. How does this intention compare with the probable results?
7. Who could your decision injure?
8. Can you discuss the problem with the affected parties before you make your decision?
9. Are you confident that your decision will be valid over a long period?
10. Could you disclose, without qualm, your decision?
11. What is the symbolic potential of your action if understood? If misunderstood?
12. Under what conditions would you allow exceptions?
The above questions can help individuals openly discuss the responsibilities necessary to solve ethical
problems. Sharing these questions can facilitate group discussions, build consensus around shared points, serve
as an information source, uncover ethical inconsistencies in a company’s values, help a CEO see how senior
managers think, and increase the nature and range of choices. The discussion process is cathartic.
To return briefly to the opening case, if Louise Simms considered the first question, she might, for
example, define the problem she faces from different perspectives (as discussed in Chapter 1). At the
organizational level, her firm stands to win a sizable contract if she accepts the government official’s
conditions. Yet her firm’s reputation could be jeopardized in the United States if this deal turned out to be a
scandal. At the societal level, the issues are complicated. In this Middle Eastern country, this type of
bargaining might be acceptable. In the United States, however, Louise could have problems with the Foreign
Corrupt Practices Act. At the individual level, she must decide if her conscience can tolerate the actions and
consequences this deal involves. As a woman, she may be at risk because advances were made toward her. Her
self-esteem and integrity have also been damaged. She must consider the costs and benefits that she will incur
from her company if she decides to accept or reject this assignment. As you can see, these questions can help
Louise clarify her goal of making a decision and determine the price she is willing to pay for that decision.
2.6 Individual Ethical Decision-Making Styles
Individual ethical decision-making styles may also be based on what Stanley Krolick defined as (1)
individualism, (2) altruism, (3) pragmatism, and (4) idealism.56 These four styles are summarized here to
complement the social responsibility modes, ethical principles, and moral maturity stages discussed above.
Caution must be used when considering any of these schemes to avoid stereotyping. These categories are
guides—not prescriptions—for further reflection, discussion, and study.
Individualists are driven by natural reason, personal survival, and preservation. The self is the source and
justification of all actions and decisions. Individualists believe that “If I don’t take care of my own needs, I will
never be able to address the concerns of others.”57 The moral authority of individualists is their own reasoning
process, based on self-interest. Individualism is related to the principle of naive ethical relativism and to
productivism.
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Altruists are concerned primarily with other people. Altruists relinquish their own personal security for the
good of others. They would, as an extreme, like to ensure the future of the human race. The altruist’s moral
authority and motivation is to produce the greatest good for the largest number of people. Unlike utilitarians,
altruists would not diligently calculate and measure costs and benefits. Providing benefits is their major
concern. Altruists justify their actions by upholding the integrity of the community. They enter relationships
from a desire to contribute to the common good and to humankind. Altruists are akin to universalists and
philanthropists.
Pragmatists are concerned primarily with the situation at hand, not with the self or the other. The
pragmatist’s bases for moral authority and motivation are the perceived needs of the moment and the potential
consequences of a decision in a specific context. The needs of the moment dictate the importance of self-
interest, concern for others, rules, and values. Facts and situational information are justifications for the
pragmatist’s actions. Pragmatists may abandon significant principles and values to produce certain results.
They are closest philosophically to utilitarians. Although this style may seem the most objective and
appealing, the shifting ethics of pragmatism make this orientation (and the person who espouses it) difficult
and unpredictable in a business environment.
Idealists are driven by principles and rules. Reason, relationships, or the desired consequences of an action
do not substitute for the idealist’s adherence to principles. Duties are absolute. Idealists’ moral authority and
motivation are commitment to principles and consistency. Values and rules of conduct are the justification
that idealists use to explain their actions. Seen as people with high moral standards, idealists can also be rigid
and inflexible. Krolick states, “This absolute adherence to principles may blind the idealist to the potential
consequences of a decision for oneself, others, or the situation.”58 This style is related to the social
responsibility mode of ethical idealism and to the principle of universalism.
Which of the four styles best characterizes your ethical orientation? The orientation of your colleagues?
Your supervisor or boss?
Communicating and Negotiating across Ethical Styles
When working or communicating with an ethical style, you also must observe the other person’s ethical style.
According to Krolick, the first step is to “concede that the other person’s values and priorities have their own
validity in their own terms and try to keep those values in mind to facilitate the process of reaching an
agreement.”59 The following guidelines can help when communicating, negotiating, or working with one of
the four ethical styles:
• Individualist: Point out the benefits to the other person’s self-interest.
• Altruist: Focus on the benefits for the various constituencies involved.
• Pragmatist: Emphasize the facts and potential consequences of an action.
• Idealist: Concentrate on the principles or duties at stake.
Learning to recognize and communicate with people who have other ethical styles and being flexible in
accommodating their ethical styles, without sacrificing your own, are important skills for working effectively
with others.
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2.7 Quick Ethical Tests
In addition to knowing the ethical principles, social responsibility modes, and ethical styles presented in this
chapter, businesspeople can take short “ethical tests” before making decisions. Many of these rules reflect the
principles discussed in this chapter. These “checkpoints,” if observed, could change the actions you would
automatically take in ethical dilemmas.
The Center for Business Ethics at Bentley University has articulated six simple questions for the “practical
philosopher.” Before making a decision or acting, ask the following:
1. Is it right?
2. Is it fair?
3. Who gets hurt?
4. Would you be comfortable if the details of your decision were reported on the front page of your local
newspaper?
5. What would you tell your child to do?
6. How does it smell? (How does it feel?)
Other quick ethical tests, some of which are classic, include:
• The Golden Rule: “Do unto others as you would have them do unto you.” This includes not knowingly
doing harm to others.
• The Intuition Ethic: We know apart from reason what is right. We have a moral sense about what is
right and wrong. We should follow our “gut feeling” about what is right.
• The Means-Ends Ethic: We may choose unscrupulous but efficient means to reach an end if the ends
are really worthwhile and significant. Be sure the ends are not the means.
• The Test of Common Sense: “Does the action I am getting ready to take really make sense?” Think
before acting.
• The Test of One’s Best Self: “Is this action or decision I’m getting ready to take compatible with my
concept of myself at my best?”
• The Test of Ventilation: Do not isolate yourself with your dilemma. Get others’ feedback before acting
or deciding.
• The Test of the Purified Idea: “Am I thinking this action or decision is right just because someone with
authority or knowledge says it is right?” You may still be held responsible for taking the action.60
Use these principles and guidelines for examining the motivations of stakeholders’ strategies, policies, and
actions. Why do stakeholders act and talk as they do? What principles drive these actions?
2.8 Concluding Comments
A definition of ethics and business ethics has been offered along with four types of ethical reasoning to
provide a basis for making ethical decisions. Individual stakeholders have a wide range of ethical principles,
orientations, and “quick tests” to draw on before solving an ethical dilemma. Moral maturity also affects an
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individual’s ethical reasoning and actions. Kohlberg’s stages of moral development and Covey’s Moral
Continuum are concepts that provide a diagnostic and suggested developmental insights into ethical decision
making.
Using moral reflection and creativity is also important when deciding between two “right” or “wrong”
choices. Reflecting on one’s core values combined with a sense of moral courage and shrewdness are also a
recommended part of this decision-making process. When there are multiple stakeholders in a dilemma, the
moral dimension of the stakeholder approach can be helpful by identifying the “ground rules” or “implicit
morality” of institutional members. As R. Edward Freeman and Daniel Gilbert Jr. state:
Think of the implicit morality of an institution as the rules that must be followed if the institution is to be a good one. The rules are often
implicit, because the explicit rules of an institution may be the reason that the institution functions badly. Another way to think of the
implicit morality of an institution is as the internal logic of the institution. Once this internal logic is clearly understood, we can evaluate its
required behaviors against external standards.61
Back to Louise Simms₀
Let’s return to the opening case in which Louise Simms is trying to decide what to do. Put yourself in
Louise’s situation. Identify your ethical decision-making style. Are you primarily an idealist, pragmatist,
altruist, or individualist? What are some of your blind spots? Consider the three questions regarding a
“defining moment” at the beginning of the chapter: Who am I? Who are we? Who is the company? What
courses of action are available after reviewing your responses to these questions? Then, describe the ethical
principles you usually follow in your life: utilitarianism, rights, justice, universalism, ethical virtue, ethical
relativism, and the common good ethic. Which of those principles do you aspire to use to act more ethically
and morally mature and responsible? What is your moral responsibility to yourself, your family and friends,
your colleagues and work team, and to the company? How will you feel about yourself after you make the
decision? Now make Louise’s decision and share your decision with your classmates and consider their
responses. Do you think you made the right decision?
Chapter Summary
Complex ethical dilemmas in business situations involve making tough choices between conflicting interests.
This chapter began with classic ethical principles that are used to guide dilemmas and decisions at the
individual, group, and organizational levels. Moral maturity and the Covey’s Moral Continuum were
discussed to consider how to approach personal level dilemmas. Questions were presented for addressing
dilemmas and “defining moments” creatively, boldly, and shrewdly, as well as 12 questions and three decision
criteria that can assist individuals in determining the most suitable course of action.
Individuals can gain a clear perspective of their own motivations and actions by distinguishing them from
those of others. This perspective can be useful for guiding your own decision-making process. Understanding
the criteria in this chapter can enable you to reason more critically when examining other stakeholders’ ethical
reasoning.
A primary goal of ethical reasoning is to help individuals act in morally responsible ways. Ignorance and
bias are two conditions that cloud moral awareness. Five principles of ethical reasoning were presented to
expose you to methods of ethical decision making. Each principle was discussed in terms of the utility and
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drawbacks characteristic of it. Guidelines for thinking through and applying each principle in a stakeholder
analysis were also provided. These principles are not mechanical recipes for selecting a course of action. They
are filters or screens to use for clarifying dilemmas.
Three ethical orientations—immoral, amoral, and moral—can be used to evaluate ethics. Immoral and
moral motives are more discernible than amoral ones. Amoral orientations include lack of concern for others’
interests and well-being. Although no intentional harm or motive may be observed, harmful consequences
from ignorance or neglect reflect amoral styles of operating.
Four social responsibility roles or business modes were discussed: productivism and philanthropy
(influenced by stockholder concerns) and progressivism and ethical idealism (driven by stockholder concerns
but also influenced by external stakeholders). Individuals also have ethical decision-making styles. Four
different (but not exclusive) styles are individualism, altruism, pragmatism, and idealism. Another person’s
ethical decision-making style must be understood when engaging in communication and negotiation. These
styles are a starting point for identifying predominant decision-making characteristics.
The final section of this chapter offered quick “ethical tests” that can be used to provide insight into your
decision-making process and actions.
Questions
1. Do you believe ethical dilemmas can be prevented and solved morally without the use of principles?
Explain. Offer an example from a dilemma you recently experienced or currently are experiencing.
Characterize the logic you used in thinking through or having made a decision. Compare the logic you
used to principles and quick tests in this chapter. What similarities and differences did you discover? Can
you include any of the principles and ethical reasoning in this chapter in dilemmas you may or expect to
face? Explain.
2. Why are creativity and moral imagination oftentimes necessary in preventing and resolving ethical
dilemmas and “defining moments” of conflict in one’s workplace? Offer an example of an ethically
questionable situation in which you had to creatively improvise to “do the right thing.”
3. What is a first step for addressing ethical dilemmas? What parts of this chapter would and could you use
to complement or change your own decision-making methods?
4. How can the discussion on personal level ethical decision making considering moral maturity and the
moral continuum assist you in addressing dilemmas in your life and work?
5. What single question is the most powerful for solving ethical dilemmas?
6. What are two conditions that eliminate a person’s moral responsibility?
7. Return to the case you selected in question 4 above. Briefly explain which of the chapter’s five
fundamental principles of ethical reasoning the leaders and/or major stakeholders you identified used and
did not use in the case. Which ethical principle(s) would you recommend that they should have used?
Why?
8. What are some of the problems characteristic of cultural relativism? Offer an example in the news of a
company that has acted unethically according to the perspective of cultural relativism.
9. Why is utilitarianism useful for conducting a stakeholder analysis? What are some of the problems with
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using this principle? Give an example of when you used utilitarianism to justify an ethically questionable
action.
10. Briefly explain the categorical imperative. What does it force you, as a decision maker, to do when
choosing an action in a moral dilemma?
11. Explain the difference between the principles of rights and justice. What are some of the strengths and
weaknesses of each principle?
12. Which of the four social responsibility modes most accurately characterizes your college/university and
place of work? Explain. Do your ethics and moral values agree with these organizations? Explain.
13. Briefly explain your ethical decision-making style as presented in the chapter.
14. How would you describe your level of moral maturity using Kohlberg’s stages?
15. What insights did you gain from Covey’s Moral Continuum with regard to your ethical decision-making
activities? What are some connections between Covey’s and Kohlberg’s concepts and ethics?
16. Explain what ethical logic and actions people generally take to persuade you to do something that is
ethically questionable. Refer to the ethical decision styles in the chapter.
17. Which of the ethical “quick tests” do you prefer? Why?
Exercises
1. Describe a serious ethical dilemma you have experienced. Use the 12 questions developed by Laura Nash to
offer a resolution to the problem, even if your resolution is different from the original experience. Did you
initially use any of the questions? Would any of these questions have helped you? How? What would you
have done differently? Why?
2. Identify an instance when you thought ignorance absolved a person or group from moral responsibility.
Then identify an example of a person or group failing to become fully informed about a moral situation.
Under what conditions do you think individuals are morally responsible for their actions? Why?
3. With which of the four social responsibility business modes in the chapter do you most identify? Why?
Name a company that reflects this orientation. Would you want to work for this company? Would you
want to be part of the management team? Explain.
4. Select a corporate leader in the news who acted legally but immorally and one who acted illegally but
morally. Explain the differences of the actions and behaviors in each of the two examples. What lessons do
you take from your examples?
5. Select two organizations in the same industry that you are familiar with or that are in the media or online
news, such as McDonald’s and Burger King, Toyota and General Motors, Virgin Airlines and American
Airlines. Research some of the latest news items and activities about each company and its officers over the
same time period. Now, using ethical principles and quick tests from this chapter, compare and contrast
each. Evaluate how “ethical” each is compared to the other.
Real-Time Ethical Dilemma
I was employed as a certified public accountant (CPA) for a regional accounting firm that specialized in audits
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of financial institutions and had many local clients. My responsibilities included supervising staff, collecting
evidence to support financial statement assertions, and compiling work papers for managers and partners to
review. During the audit of a publicly traded bank, I discovered that senior bank executives were under
investigation by the Federal Deposit Insurance Corporation (FDIC) for removing funds from the bank. They
were also believed to be using bank funds to pay corporate credit card bills for gas and spouses’ expenses. The
last allegation noted that the executives were issuing loans to relatives without proper collateral.
After reviewing the work papers, I found two checks made payable to one executive of the bank that were
selected during a cash count from two tellers. There was no indication based on our sampling that expenses
were being paid for spouses. My audit manager and the chief financial officer (CFO) of my firm were aware of
these problems.
After the fieldwork for the audit was completed, I was called into the CEO’s office. The CEO and the
chief operating officer (COO) stated that the FDIC examiners wanted to interview the audit manager, two
staff accountants, and me. The CEO then asked the following question: “If you were asked by the FDIC
about a check or checks made payable to bank executives, how would you answer?” I told them that I would
answer the FDIC examiners by stating that, during our audit, we made copies of two checks made payable to
an executive of the bank for $8,000 each.
The COO stated that during his review of the audit work papers he had not found any copies of checks
made payable to executives. He also stated that a better response to the question regarding the checks would
be, “I was not aware of reviewing any checks specifically made payable to the executive in question.” The
COO then said that the examiners would be in the following day to speak with the audit staff. I was dismissed
from the meeting.
Neither the CEO nor the COO asked me if the suggested “better” response was the response I would give,
and I did not volunteer the information. During the interview, the FDIC investigators never asked me
whether I knew about the checks. Should I have volunteered this information?
Questions
1. What would you have done? Volunteered the information or stayed silent? Explain your decision.
2. Was anything unethical going on in this case? Explain.
3. Describe the “ethics” of the officers of the firm in this case.
4. What, if anything, should the officers have done, and why?
5. What lessons, if any, can you take from this case, as an employee working under company officials who
have more power than you do?
Cases
Case 3
Ford’s Pinto Fires: The Retrospective View of Ford’s Field Recall Coordinator
Brief Overview of the Ford Pinto Fires
Determined to compete with fuel-efficient Volkswagen and Japanese imports, the Ford Motor Company
introduced the subcompact Pinto in the 1971 model year. Lee Iacocca, Ford’s president at the time, insisted
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that the Pinto weigh no more than 2,000 pounds and cost no more than $2,000. Even with these restrictions,
the Pinto met federal safety standards, although some people have argued that strict adherence to the
restrictions led Ford engineers to compromise safety. Some 2 million units were sold during the 10-year life of
the Pinto.
The Pinto’s major design flaw—a fuel tank prone to rupturing with moderate-speed rear-end collisions—
surfaced not too long after the Pinto’s entrance to the market. In April 1974, the Center for Auto Safety
petitioned the National Highway Traffic Safety Administration (NHTSA) to recall Ford Pintos due to the
fuel tank design defect. The Center for Auto Safety’s petition was based on reports from attorneys of three
deaths and four serious injuries in moderate-speed rear-end collisions involving Pintos. The NHTSA did not
act on this petition until 1977.
As a result of tests performed for the NHTSA, as well as the extraordinary amount of publicity generated
by the problem, Ford agreed, on June 9, 1978, to recall 1.5 million 1971–1976 Ford Pintos and 30,000 1975–
1976 Mercury Bobcat sedan and hatchback models for modifications to the fuel tank. Recall notices were
mailed to the affected Pinto and Bobcat owners in September 1978. Repair parts were to be delivered to all
dealers by September 15, 1978.
Unfortunately, the recall was initiated too late for six people. Between June 9 and September 15, 1978, six
people died in Pinto fires after a rear impact. Three of these people were teenage girls killed in Indiana in
August 1978 when their 1973 Pinto burst into flames after being rear-ended by a van. The fiery deaths of the
Indiana teenagers led to criminal prosecution of the Ford Motor Company on charges of reckless homicide,
marking the first time that an American corporation was prosecuted on criminal charges. In the trial, which
commenced on January 15, 1980, “Indiana state prosecutors alleged that Ford knew Pinto gasoline tanks were
prone to catch fire during rear-end collisions but failed to warn the public or fix the problem out of concern
for profits.” On March 13, 1980, a jury found Ford innocent of the charges. Production of the Pinto was
discontinued in the fall of 1980.
Enter Ford’s Field Recall Coordinator
Dennis A. Gioia, currently a professor in the Department of Management and Organization at Pennsylvania
State University, was the field recall coordinator at Ford Motor Company as the Pinto fuel tank defect began
unfolding. Gioia’s responsibilities included the operational coordination of all the current recall campaigns,
tracking incoming information to identify developing problems, and reviewing field reports of alleged
component failures that led to accidents. Gioia left Ford in 1975. Subsequently, “reports of Pinto fires
escalated, attracting increasing media attention.” The remainder of this case, written in Gioia’s own words in
the early 1990s, is his personal reflection on lessons learned from his experiences involving the Pinto fuel tank
problem.
Why Revisit Decisions from the Early 1970s?
I take this case very personally, even though my name seldom comes up in its many recountings. I was one of
those “faceless bureaucrats” who is often portrayed as making decisions without accountability and then
walking away from them—even decisions with life-and-death implications. That characterization is, of
course, far too stark and superficial. I certainly don’t consider myself faceless, and I have always chafed at the
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label of bureaucrat as applied to me, even though I have found myself unfairly applying it to others.
Furthermore, I have been unable to walk away from my decisions in this case. They have a tendency to haunt
—especially when they have had such public airings as those involved in the Pinto fires debacle have had.
But why revisit 20-year-old decisions, and why take them so personally? Here’s why: because I was in a
position to do something about a serious problem . . . and didn’t. That simple observation gives me pause for
personal reflection and also makes me think about the many difficulties people face in trying to be ethical
decision makers in organizations. It also helps me to keep in mind the features of modern business and
organizational life that would influence someone like me (me of all people, who purposely set out to be an
ethical decision maker!) to overlook basic moral issues in arriving at decisions that, when viewed
retrospectively, look absurdly easy to make. But they are not easy to make, and that is perhaps the most
important lesson of all.
The Personal Aspect
I would like to reflect on my own experience mainly to emphasize the personal dimensions involved in ethical
decision making. Although I recognize that there are strong organizational influences at work as well, I would
like to keep the critical lens focused for a moment on me (and you) as individuals. I believe that there are
insights and lessons from my experience that can help you think about your own likely involvement in issues
with ethical overtones.
First, however, a little personal background. In the late 1960s and early 1970s, I was an engineering/MBA
student; I also was an “activist,” engaged in protests of social injustice and the social irresponsibility of
business, among other things. I held some pretty strong values, and I thought they would stand up to virtually
any challenge and enable me to “do the right thing” when I took a career job. I suspect that most of you feel
that you also have developed a strongly held value system that will enable you to resist organizational
inducements to do something unethical. Perhaps. Unfortunately, the challenges do not often come in overt
forms that shout the need for resistance or ethical righteousness. They are much more subtle than that, and
thus doubly difficult to deal with because they do not make it easy to see that a situation you are confronting
might actually involve an ethical dilemma.
After school, I got the job of my dreams with Ford and, predictably enough, ended up on the fast track to
promotion. That fast track enabled me to progress quickly into positions of some notable responsibility.
Within two years I became Ford’s field recall coordinator, with first-level responsibility for tracking field
safety problems. It was the most intense, information-overloaded job you can imagine, frequently dealing with
some of the most serious problems in the company. Disasters were a phone call away, and action was the
hallmark of the office where I worked. We all knew we were engaged in serious business, and we all took the
job seriously. There were no irresponsible bureaucratic ogres there, contrary to popular portrayal.
In this context, I first encountered the neophyte Pinto fires problem—in the form of infrequent reports of
cars erupting into horrendous fireballs in very low-speed crashes and the shuddering personal experience of
inspecting a car that had burned, killing its trapped occupants. Over the space of a year, I had two distinct
opportunities to initiate recall activities concerning the fuel tank problems, but on both occasions, I voted not
to recall, despite my activist history and advocacy of business social responsibility.
The key question is how, after two short years, could I have engaged in a decision process that appeared to
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violate my own strong values—a decision process whose subsequent manifestations continue to be cited by
many observers as a supposedly definitive study of corporate unethical behavior? I tend to discount the obvious
accusations: that my values weren’t really strongly held; that I had turned my back on my values in the interest
of loyalty to Ford; that I was somehow intimidated into making decisions in the best interest of the company;
that despite my principled statements, I had not actually achieved a high stage of moral development; and so
on. Instead, I believe a more plausible explanation for my own actions looks to the foibles of normal human
information processing.
I would argue that the complexity and intensity of the recall coordinator’s job required that I develop
cognitive strategies for simplifying the overwhelming amount of information I had to deal with. The best way
to do that is to structure the information into cognitive “schemas,” or more specifically “script schemas,” that
guide understanding and action when facing common or repetitive situations. Scripts offer marvelous
cognitive shortcuts because they allow you to act virtually unconsciously and automatically, and thus permit
you to handle complicated situations without being paralyzed by needing to think consciously about every
little thing. Such scripts enabled me to discern the characteristic hallmarks of problem cases likely to result in
recall and to execute a complicated series of steps required to initiate a recall.
All of us structure information all of the time; we could hardly get through the workday without doing so.
But there is a penalty to be paid for this wonderful cognitive efficiency: we do not give sufficient attention to
important information that requires special treatment because the general information pattern has surface
appearances that indicate that automatic processing will suffice. That, I think, is what happened to me. The
beginning stages of the Pinto case looked for all the world like a normal sort of problem. Lurking beneath the
cognitive veneer, however, was a nasty set of circumstances waiting to conspire into a dangerous situation.
Despite the awful nature of the accidents, the Pinto problem did not fit an existing script; the accidents were
relatively rare by recall standards, and the accidents were not initially traceable to a specific component failure.
Even when a failure mode suggesting a design flaw was identified, the cars did not perform significantly worse
in crash tests than competitor vehicles. One might easily argue that I should have been jolted out of my script
by the unusual nature of the accidents (very low speed, otherwise unharmed passengers trapped in a horrific
fire), but those facts did not penetrate a script cued for other features. (It also is difficult to convey to the lay
person that bad accidents are not a particularly unusual feature of the recall coordinator’s information field.
Accident severity is not necessarily a recall cue; frequently repeated patterns and identifiable causes are.)
The Corporate Milieu
In addition to the personalized scripting of information processing, there is another important influence on
the decisions that led to the Pinto fires mess: the fact that decisions are made by individuals working within a
corporate context. It has escaped almost no one’s notice that the decisions made by corporate employees tend
to be in the best interest of the corporation, even by people who mean to do better. Why? Because the
socialization process and the overriding influence of organizational culture provide a strong, if generally subtle,
context for defining appropriate ways of seeing and understanding. Because organizational culture can be
viewed as a collection of scripts, scripted information processing relates even to organizational-level
considerations. Scripts are context bound; they are not free-floating general cognitive structures that apply
universally. They are tailored to specific contexts. And there are few more potent contexts than organizational
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settings.
There is no question that my perspective changed after joining Ford. In retrospect, I would be very
surprised if it hadn’t. In my former incarnation as a social activist, I had internalized values for doing what was
right—as I understood righteousness in grand terms, but I had not internalized a script for applying my values
in a pragmatic business context. Ford and the recall coordinator role provided a powerful context for
developing scripts—scripts that were inevitably and undeniably oriented toward ways of making sense that
were influenced by the corporate and industry culture.
I wanted to do a good job, and I wanted to do what was right. Those are not mutually exclusive desires, but
the corporate context affects their synthesis. I came to accept the idea that it was not feasible to fix everything
that someone might construe as a problem. I therefore shifted to a value of wanting to do the greatest good
for the greatest number (an ethical value tempered by the practical constraints of an economic enterprise).
Doing the greatest good for the greatest number meant working with intensity and responsibility on those
problems that would spare the most people from injury. It also meant developing scripts that responded to
typical problems, not odd patterns like those presented by the Pinto.
Another way of noting how the organizational context so strongly affects individuals is to recognize that
one’s personal identity becomes heavily influenced by corporate identity. As a student, my identity centered on
being a “good person” (with a certain dose of moral righteousness associated with it). As recall coordinator,
my identity shifted to a more corporate definition. This is an extraordinarily important point, especially for
students who have not yet held a permanent job role, and I would like to emphasize it. Before assuming your
career role, identity derives mainly from social relationships. Upon putting on the mantle of a profession or a
responsible position, identity begins to align with your role. And information processing perspective follows
from the identity.
I remember accepting the portrayal of the auto industry and Ford as “under attack” from many quarters (oil
crises, burgeoning government regulation, inflation, litigious customers, etc.). As we know, groups under
assault develop into more cohesive communities that emphasize commonalities and shared identities. I was by
then an insider in the industry and the company, sharing some of their beleaguered perceptions that there
were significant forces arrayed against us and that the well-being of the company might be threatened.
What happened to the original perception that Ford was a socially irresponsible giant that needed a
comeuppance? Well, it looks different from the inside. Over time, a responsible value for action against
corporate dominance became tempered by another reasonable value that corporations serve social needs and
are not automatically the villains of society. I saw a need for balance among multiple values, and as a result, my
identity shifted in degrees toward a more corporate identity.
The Torch Passes to You
So, given my experiences, what would I recommend to you, as a budding organizational decision maker? I
have some strong opinions. First, develop your ethical base now! Too many people do not give serious
attention to assessing and articulating their own values. People simply do not know what they stand for
because they haven’t thought about it seriously. Even the ethical scenarios presented in classes or executive
programs are treated as interesting little games without apparent implications for deciding how you intend to
think or act. These exercises should be used to develop a principled, personal code that you will try to live by.
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Consciously decide your values. If you don’t decide your values now, you are easy prey for others who will
gladly decide them for you or influence you implicitly to accept theirs.
Second, recognize that everyone, including you, is an unwitting victim of his or her cognitive structuring.
Many people are surprised and fascinated to learn that they use schemas and scripts to understand and act in
the organizational world. The idea that we automatically process so much information so much of the time
intrigues us. Indeed, we would all turn into blithering idiots if we did not structure information and
expectations, but that very structuring hides information that might be important—information that could
require you to confront your values. We get lulled into thinking that automatic information processing is great
stuff that obviates the necessity for trying to resolve so many frustrating decisional dilemmas.
Actually, I think too much ethical training focuses on supplying standards for contemplating dilemmas.
The far greater problem, as I see it, is recognizing that a dilemma exists in the first place. The insidious
problem of people not being aware that they are dealing with a situation that might have ethical overtones is
another consequence of schema usage. I would venture that scripted routines seldom include ethical
dimensions. Is a person behaving unethically if the situation is not even construed as having ethical
implications? People are not necessarily stupid, ill-intentioned, or Machiavellian, but they are often unaware.
They do indeed spend much of their time cruising on automatic, but the true hallmark of human information
processing is the ability to switch from automatic to controlled information processing. What we really need
to do is to encourage people to recognize cues that build a “Now Think!” step into their scripts—waving red
flags at yourself, so to speak—even though you are engaged in essentially automatic cognition and action.
Third, because scripts are context bound and organizations are potent contexts, be aware of how strongly,
yet how subtly, your job role and your organizational culture affect the ways you interpret and make sense of
information (and thus affect the ways you develop the scripts that will guide you in unguarded moments).
Organizational culture has a much greater effect on individual cognition than you would ever suspect.
Last, be prepared to face critical responsibility at a relatively young age, as I did. You need to know what
your values are and you need to know how you think so that you can know how to make a good decision.
Before you can do that, you need to articulate and affirm your values now, before you enter the fray. I wasn’t
really ready. Are you?
Questions for Discussion
1. The Ford Pinto met federal safety standards, yet it had a design flaw that resulted in serious injuries and
deaths. Is simply meeting safety standards a sufficient product design goal of ethical companies?
2. Gioia uses the notion of script schemas to help explain why he voted to not initiate a recall of the Ford
Pinto. In your opinion, is this a justifiable explanation?
3. How can organizational context influence the decisions made by organizational members?
4. If you had been in Gioia’s position, what would you have done? Why?
5. Describe the four key decision-making lessons that Gioia identifies for neophyte decision makers. Discuss
how you expect or intend to use these four lessons in your own career.
Sources
This case was developed from material contained in the following sources:
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Ford Pinto fuel-fed fires. (n.d.). The Center for Auto Safety. http://www.autosafety.org/article.php?
scid=145&did=522, accessed January 20, 2005.
Ford Pinto reckless homicide trial. HistoryChannel.com.
http://www.historychannel.com/speeches/archive/speech_465.html, accessed January 20, 2005.
Gioia, D. A. (May 1992). Pinto fires and personal ethics: A script analysis of missed opportunities. Journal of
Business Ethics, 11(5–6), 379–390.
Case 4
Jerome Kerviel: Rogue Trader or Misguided Employee? What Really Happened at the Société
Générale?
Société Générale: A French Bank Globally Recognized
The French banking company Société Générale (“SocGen” or “the Company”) was founded on May 4, 1864,
and at the time of writing is headed by co-CEOs Philippe Citerne and Daniel Bouton. The bank has grown
to serve 19.2 million individual customers in 76 countries. It employs 103,000 workers from 114 different
nationalities. SocGen operates in three major businesses: retail banking and financial services, global
investment management and services, and corporate and investment banking. The core values at the
Company are professionalism, team spirit, and innovation.
In 2006, SocGen ranked 67 on Fortune’s 2006 Global 500 and had managed to build a $72 billion position
in European stock index futures. The year before, the Company ranked 152 on Fortune’s list. In addition to
top-line growth, SocGen also posted a more important improvement in overall profitability, at $5.5 billion, up
42% from the prior year. It was the 14th largest company among the banking institutions on the list.
The Beginning of the Story
Things were about to change for SocGen. Recent turmoil in 2006 revolved around the collapsing housing
market and a mortgage industry that witnessed loan defaults in record numbers. Several banks engaged in
purchasing high-risk mortgage loans, but the overall economic recession, primarily in the United States but
also felt globally, constrained this bank’s financial status. SocGen saw its stock price cut almost in half
throughout the year, but this was not the only potential pitfall for this once robust Company. It was the
actions of one rogue trader, Jerome Kerviel, that could have brought about the ultimate downfall of SocGen.
Who Is Jerome Kerviel and What Happened at the Bank?
On January 24, 2008, Jerome Kerviel found himself in the international media spotlight, but not as he would
have hoped. On this day, SocGen announced to the world that it had discovered a $7.14 billion trading fraud
caused by a single trader, Kerviel. Additionally, a nearly $3 billion loss was posted due to the loss in
investments in the U.S. subprime mortgage industry. The second largest bank in France had its shares halted
to avoid a complete market collapse on the price of the stock.
From his modest roots to the upscale Paris suburb where he resided, friends and family never expected that
this unmarried 31 year old could be capable of such a scandal. With a relatively modest salary ($145,700),
Kerviel did not profit from his trading scheme. He had been an employee at SocGen since 2000. He began in
a monitoring support role, and oversaw the futures traders for five years. He was then promoted to the futures
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trading desk. He traded European futures by betting on the future performance of these funds. Kerviel saw his
trading profits increase throughout 2007 as he bet that the markets would fall during this time. By the end of
the year, he needed to mask his significant gains, so he created fictional losing positions to erode his gains.
These included the purchasing of 140,000 DAX futures (the German stock index: a blue chip stock market
index that includes the 30 major German companies trading on the Frankfurt Stock Exchange). By mid-
January, Kerviel had lost over $3 billion. He was hedging more than $73.3 billion, an amount far in excess of
the trading limits created by SocGen for a single trader. This amount even exceeded SocGen’s overall market
cap of $52.6 billion.
Despite five levels of increased security to prevent traders from assuming positions greater than a
predetermined amount, and a group compliance division in charge of monitoring trader activity, Kerviel was
able to bypass internal controls for over two years.
Kerviel’s motive was not to steal from the bank, but to have his significant trading gains catapult his career,
and to cash in on a significant bonus given to traders who exhibit the type of profitability he created for the
Company. Red flags were triggered, but e-mails to his superiors on his trading activity were ignored due to his
overall profitability for the Company. Kerviel admitted his wrongdoing, but stated that SocGen was partially
responsible for not monitoring his activities correctly and by having rewarded his behavior with a proposed
bonus of $440,000. Kerviel stated that his actions were similar to those of other traders; he was just being
labeled as the scapegoat in this investigation.
Company Reaction
Once the fraud was detected in mid-January 2008, SocGen immediately reported it to France’s central bank,
Bank of France. Over the next three trading days, SocGen employees began to unload all of Kerviel’s positions
into the marketplace. The Company attempted to complete this significant sale of securities in a manner that
would not disrupt the normal market movement. The ripple effect of this action may have created additional
pressure on the already falling world markets. Some analysts speculated that this action may even have
influenced the U.S. Federal Reserve rate cut. SocGen management denied that action after it discovered that
the trading fraud had a meaningful impact on the world marketplace. Co-CEO Bouton stated that the three-
day sell-off was in accordance with guidelines, and that the liquidation of a position at any one time could not
be more than 10% of the given market.
After Kerviel admitted his guilt, his employment was terminated along with that of his supervisors. Bouton
submitted a formal resignation, along with second-in-command Phillipe Citerne; however, both were rejected
by the board of directors. Employees at the Company staged demonstrations where they showed their support
for Bouton.
The bank has stated that since the activity was brought to light, there has been a tightening on the internal
controls, so that actions such as Kerviel’s are no longer possible for a trader. On January 25, 2008, SocGen
took out a full-page newspaper article apologizing to its customers for the scandal. On January 30, the board
announced the formation of an independent committee to investigate the current monitoring practices and
determine what measures could be put in place to prevent it from happening again. The committee would
enlist the services of the auditing company PricewaterhouseCoopers. The Company also announced that it
needed an influx of capital to stay afloat, and began looking to outside help to raise $8.02 billion in new
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capital.
Government Reaction
On January 26, 2008, Kerviel was taken into police custody for questioning regarding his trading activity at
SocGen. Three complaints were issued to police, one by SocGen and two others by small shareholders.
This event was the focus at the World Economic Forum in Davos, Switzerland, which brought to light
questions on how risk is managed within organizations. French finance minister Christine Lagarde was
assigned the task of investigating the events and compiling a report on the failure of internal controls at
SocGen. The report was then publicized in an effort to prevent similar fraudulent trading events from
occurring in the future. A timeline of the events leading up to the trading losses was created in an effort to
better understand the events that transpired. In the report, Lagarde stated that there should be an increase in
penalties for banks that violate the commission’s set rules. The then president of France, Nicolas Sarkozy,
stated that the events at SocGen did not affect the “solidity and reliability of France’s financial system.” He
wanted the board of directors to take action against senior management, including Bouton.
On January 28, 2008, Kerviel was charged with unauthorized computer activity and breach of trust. Plans
to charge Kerviel with fraud and misrepresentation were also announced, which could carry a maximum
prison time of seven years and fines of $1.1 million. At the time of writing, the fraud charge had not been
accepted by the courts; however, prosecutors were seeking to appeal this to a higher court.
The government sought to prevent a hostile takeover of SocGen during this period. However, the
European Union was in disagreement with the French government and stated that all bidders should be
treated equally: “The same rules apply as in other takeover situations under free movement of capital rules.
Potential bidders are to be treated in an undiscriminatory manner.” The current standout bidder is the largest
bank in France, BNP Paribas. Many competitors are contemplating making an offer for the distressed
Company—to purchase a portion or all of the bank’s assets.
Why It Happened
Kerviel was able to evade detection because of his experience monitoring the traders in his early years at
SocGen. Falsifying bank records and computer fraud were part of the intricate scheme that he created. Kerviel
knew when he would be monitored by the bank and avoided any activity during those periods. He created a
fictitious company and falsified trading records to keep his activity under wraps. Kerviel also used other
employees’ computer access codes and falsified trading documents.
Related Companies with Similar Troubles
In 1995, Barings, a British bank that had been in existence for more than 230 years, collapsed as the results of
the actions of one futures trader, Nick Leeson. Leeson lost more than $1.38 billion when trading futures in
the Asian markets.
In 1991, London-based Bank of Credit and Commerce International (BCCI) went bankrupt as the result
of illegal trading activity and insider trading, losing over $10 billion.
During the late 1980s and early 1990s, Yasuo Hamanaka, a Japanese copper futures trader, cost his
employer, Sumitomo Copper, $2.6 billion.
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Is There More to the Story?
A director of SocGen, Robert Day, sold $126.1 million in shares on January 9, 2008, two weeks before the
trading fraud was disclosed. He also sold $14.1 million the next day for two charitable trusts he chaired.
Trading also occurred on January 18. The total trading activity amounted to $206 million. It was reported that
Day traded during the timeframe where it was acceptable for a board member to trade shares of stock.
Accusations of insider trading have been denied.
The Financial Times in London has reported that SocGen may have known about the trading activities
back in November, when the Eurex derivatives exchange questioned Kerviel’s trading positions and alerted the
Company. This then calls into question the lack of oversight by the Company, and what responsibility
SocGen has to its shareholders for this oversight. Kerviel accuses his supervisors of turning a blind eye to his
activities because he was earning the Company a significant amount of money. He states that his profits
should have raised concerns because they far exceeded the parameters of the transactions he was allowed to
engage in.
Corporate Controls at SocGen
It has been stated that there were not enough safeguards in place to protect the bank from Kerviel’s activities.
The following describes the existing safeguards and focuses on the public ethical programs that SocGen had
in place.
At SocGen, the board of directors and three corporate governance committees that were established in
1995 are in charge of creating and policing the Company through its internal rules and regulations. The
Company engages in risk management by constantly reviewing its risk exposure in the variety of areas in
which it operates. Due to the sensitivity of many of its banking projects, corporate governance remains at the
forefront of the bank’s activities. The three committees include the audit committee (in charge of review of
the Company’s draft financial statements prior to submission to the board of directors), the compensation
committee (in charge of determining executive compensation packages), and the nomination committee
(appoints new board members and executive officers).
The board of directors is responsible for the Company’s overall strategy and the adherence to its defined set
of internal rules. The risk assessment divisions operate autonomously from the other operating units.
Reporting directly to general management, this group consists of 2,000 employees who constantly monitor the
activities of the other business units, making sure they are in compliance with the internal rules established by
the board of directors. Monthly meetings are held to review strategic initiatives and all new products must
first receive the approval of the risk team before implementation may take place.
Internal audit groups have been put in place with the following assignments:
• Detect, measure, and manage the risks incurred.
• Guarantee the reliability, integrity, and availability of financial and management data.
• Verify the quality of the information and communications systems.
All staff members are under constant day-to-day supervision to ensure their compliance with the regulations
in place.
The Compliance Department was established in 1997 and is currently responsible for monitoring all
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banking activities so that the actions of all employees are in the best interest of the Company. A charter is in
place that extends beyond local law and attempts to cover the high ethical standards set by the Company.
Three key principles of the group are to work only with well-known customers, always assess the economic
legitimacy of the action, and have the ability to justify any stance taken.
The trading room had eight compliance staff members in 2006, with the goal of increasing this number in
2007. Anti-money laundering practices have also been in the spotlight during the last few years. In all, the
group has increased overall training for 2006 to 50,000 hours, up from 24,000 in 2005. The total number of
employees trained is 18,000 individuals.
The role of information technology (IT) has also increased in order to support the corporate governance
initiative. GILT (Group Insider List Tool) monitors potential conflicts of interest and insider-trading activity
within the Company, and MUST (Monitoring of Unusual and Suspicious Transactions) is used to detect
insider trading and market manipulation. The Company also has standards in place to prevent corruption on
the part of Company employees and government officials.
A Code of Conduct has been in place since March 2005, with the goal of being a reference tool for
employees that highlights the principles that the Company wants its employees to uphold. The Code was
created as the result of the changes in the current business environment, since employees and society alike
have set a higher standard for an individual Company’s corporate responsibilities. Like many other companies
that have a Code of Conduct, SocGen felt that establishing this Code was an essential part of operating in the
current business environment.
The SocGen China Group has established strict controls in an effort to prevent internal private
information and confidential customer data from leaking to the outside marketplace. Separation is a key
component in this, whereby an effort is made to eliminate the chance of conflicts of interest on sensitive
projects. There is restricted access to IT programs, and any potential conflict of interest must first be approved
and signed off by the Compliance Department.
Compliance structures were put in place beginning in March 2005 as a result of a change in law by the
French Banking and Financial Regulation Committee (Regulation No. 97–02). The secretary-general of
SocGen heads the Group Compliance Committee. Through monthly meetings, members of the group
identify any potential risks on the part of the Company, develop ways to prevent future risks in new products,
and engage in employee training in an effort to strengthen the idea of corporate compliance within the
company culture.
Stakeholders and Their Roles
The main stakeholder in this case is Jerome Kerviel. His actions were the primary driver behind the significant
losses incurred by SocGen. However, although Kerviel may have been the focal stakeholder, there are several
other primary stakeholders. Kerviel’s direct supervisors were responsible for managing his actions. Senior
management and the board of directors were responsible for implementing and enforcing guidelines.
Employees of the Company are stakeholders since other traders’ actions may have influenced Kerviel’s
decisions, and the Kerviel case may have jeopardized their own careers within the Company. The final
primary stakeholders were the Company’s shareholders, who were negatively impacted by the huge trading
losses at SocGen brought about by Kerviel.
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Secondary stakeholders include the government, who pushed the board of directors for Bouton’s
resignation, and the court systems prosecuting Kerviel and other individuals indicted on counts of insider
trading. There are competitors, including BNP Paribas, who may try to take advantage of this opportunity to
purchase a portion of SocGen’s operations at a devalued price. Finally, there is the public at large, whose
confidence was yet again shaken by another scandal within a financial institution.
Potential coalitions involved in the events leading up to the trading scandal include traders and their
managers who may have ignored rules and regulations enacted by the governing committee at SocGen.
Current coalitions may include shareholders who want to be reimbursed for the management oversight.
Shareholder suits may also be brought against those identified as potentially engaging in insider trading.
Finally, competition may be forming a coalition to section off the different business units of SocGen to
complete a proposed buyout offer.
From the CEO’s perspective, Kerviel might be seen as directly violating the rules put in place by the
governing committee. Kerviel’s managers also did not fully adhere to the established policies. The board of
directors and the CEO were instrumental in the creation of the guidelines. The board rejected Bouton’s letter
of resignation and many employees have been very supportive of him, stating that he was the person who
could guide the Company through this trying time.
Each stakeholder in this case had varying degrees of power. Kerviel had the power to operate with limited
supervision (although this was due to his manipulation of the system) and to have a significant impact on the
overall bottom line at SocGen. The supervisors of the traders had a degree of power only over the traders,
provided they were not blindsided by the traders’ fraudulent activities. The board of directors was responsible
for providing strategic guidance for the Company, electing a CEO, and establishing rules and regulations for
the Company and its employees. The shareholders of SocGen stock had the power to vote on issues, since
they are each individual owners of the Company. The government had the power to influence how companies
conducted business. The competitors impact the strategies a Company must undertake in order to stay ahead
of its competition.
Three Primary Stakeholders and Their Obligations
Kerviel had a legal obligation not to engage in fraudulent behavior; this is evidenced by the fact that he was
indicted in the French court system. His economic incentive was to make the most money possible for
SocGen while minimizing risk. He was successful for two years, but as he failed to minimize overall risk, his
behavior eventually caught up with him. He had an ethical responsibility to management and his colleagues.
He could be viewed as both a threat to the Company and a cooperative influence, depending on how
management controlled the situation.
Kerviel’s supervisors did not have as significant a legal obligation as Kerviel with regard to his specific
responsibilities and actions. However, if they had been aware of his actions and did not act, then they can be
seen as enabling him to commit illegal acts. They had an economic incentive to uphold the standards that
senior management has put in place, since that is part of their job responsibility. Ethically, they had a
responsibility to senior management, their colleagues, and their direct reports. It was the responsibility of
senior management to work with the supervisors, and it was up to senior management to work with the
supervisors to see that rules and regulations were upheld.
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The board of directors has an obligation to make sure that the employees of the Company act in
accordance with the laws of the country they reside in. The board has an economic responsibility to the
shareholders of stock in the Company. Ethically, the board must create rules of conduct and ethical standards
and practice a rule by example. The board is a supportive, low-potential-threat stakeholder that will probably
cooperate with the CEO in this case.
Where Is He Now?
“A lower court in France convicted Kerviel in October 2010 of forgery, breach of trust and unauthorized
computer use for covering up bets worth nearly 50 billion euros in 2007 and 2008. By the time his trades were
discovered and made public, he had amassed losses of almost 5 billion euros on those bets”, reported the
Associated Press. He lost the subsequent appeal, the Paris Appeals Court upholding Kerviel’s sentence in its
entirety in 2012. He is currently serving a three-year prison sentence.
Questions for Discussion
1. Is Kerviel the only guilty one in this case with regard to his actions? Also, does the punishment fit the crime
in this case? Explain both of your answers.
2. Should other individuals and the bank be held legally responsible and liable for Kerviel’s actions? Why or
why not? Explain.
3. Describe what you believe to have been Kerviel’s personal and professional ethics. Use the terms from this
chapter as well as your own reasoning.
4. Compare your personal and professional ethics to Kerviel’s.
5. Explain how a stakeholder and issues analysis can help you understand this case.
6. What are the lessons students in accounting, business, and organizational studies fields can take away from
this case?
Sources
This case was developed from material contained in the following sources:
Accused billion-dollar rogue trader charged, freed. (January 28, 2008). CNN.com.
http://edition.cnn.com/2008/WORLD/europe/01/28/rogue.trader/index.html?
eref=edition_world&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+rss%2Fedition_world+
(RSS%3A+World), accessed February 3, 2014.
BNP Paribas weighs bid for Société Générale. (January 31, 2008). News A-Z.
http://newsaz.blogspot.com/2008/01/bnp-paribas-weighs-bid-for-societe.html, accessed February 3, 2014.
Fortune Global 500. (February 5, 2008). CNN.com.
http://money.cnn.com/magazines/fortune/global500/2006/snapshots/1235.html, accessed January 7, 2014.
Ganle, E. (October 24, 2012). Rogue French Trader Jerome Kerviel’s 3-Year Sentence, $7 Billion Fine
Upheld. Daily Finance.com. http://www.dailyfinance.com/2012/10/24/rogue-french-trader-jerome-
kerviels-3-year-sentence-7-billion/, accessed February 17, 2014.
Gumbel, P. (January 25, 2008). Financiers never say “sorry.” CNN.com.
http://money.cnn.com/2008/01/25/magazines/fortune/gumbel_davossorry.fortune/index.htm, accessed
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http://edition.cnn.com/2008/WORLD/europe/01/28/rogue.trader/index.html?eref=edition_world&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+rss%2Fedition_world+(RSS%3A+World)

http://newsaz.blogspot.com/2008/01/bnp-paribas-weighs-bid-for-societe.html

http://money.cnn.com/magazines/fortune/global500/2006/snapshots/1235.html

http://www.dailyfinance.com/2012/10/24/rogue-french-trader-jerome-kerviels-3-year-sentence-7-billion/

http://money.cnn.com/2008/01/25/magazines/fortune/gumbel_davossorry.fortune/index.htm

January 7, 2014.
Gumbel, P. (February 1, 2008). 4 things I learned from Société Générale. CNN.com.
http://money.cnn.com/2008/02/01/news/international/socgen_whatilearned.fortune/index.htm, accessed
January 7, 2014.
Judges charge France’s “rogue trader.” (January 28, 2008). CNN.com.
http://money.cnn.com/2008/01/28/news/international/france_fraud.ap/index.htm, accessed January 7,
2014.
Police raid flat of rogue trader Jerome Kerviel (January 2008). The Telegraph.
http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/2783273/Police-raid-flat-of-rogue-
trader-Jerome-Kerviel.html, accessed February 3, 2014.
Prosecutor seeks fraud charge for rogue trader. (January 29, 2008). CNN.com.
http://money.cnn.com/2008/01/29/news/international/rogue_trader/index.htm, accessed February 3, 2014.
Rogue French trader Jerome Kerviel’s 3-year sentence, $7 billion fine upheld. (October 24, 2012).
DailyFinance.com. http://www.dailyfinance.com/2012/10/24/rogue-french-trader-jerome-kerviels-3-year-
sentence-7-billion/, accessed January 7, 2014.
Rogue Société Générale trader accused of hacking computer systems. (January 28, 2008). ComputerWeekly.com.
http://www.computerweekly.com/news/2240084755/Rogue-Societe-Generale-trader-accused-of-hacking-
computer-systems, accessed February 3, 2014.
Rogue Trader at Société Générale Gets 3 Years. (October 5, 2010). New York Times.
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2014.
“Rogue trader” faces preliminary charges. (January 28, 2008). CNN.com.
http://edition.cnn.com/2008/BUSINESS/01/28/soeciete.generale/index.html#cnnSTCText, accessed
January 7, 2014.
SocGen board rejects CEO resignation. (January 30, 2008). CNN.com.
http://money.cnn.com/2008/01/30/news/international/socgen/index.htm, accessed January 7, 2014.
Société Générale CEOs keep jobs. (January 30, 2008). CNN.com
http://edition.cnn.com/2008/WORLD/europe/01/30/french.bank/, accessed February 3, 2014.
Société Générale cites lax management in $7B fraud. ABCNews.com. http://abcnews.go.com/Business/story?
id=4924887, accessed February 3, 2014.
Société Générale web site: http://www.societegenerale.com.
Société Générale ranks No. 67 on Fortune’s 2006 Global 500. (September 26, 2006). CNN.com.
http://money.cnn.com/2006/09/21/news/companies/societe_generale.fortune/index.htm, accessed January
7, 2014.
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http://money.cnn.com/2008/02/01/news/international/socgen_whatilearned.fortune/index.htm

http://money.cnn.com/2008/01/28/news/international/france_fraud.ap/index.htm

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/2783273/Police-raid-flat-of-rogue-trader-Jerome-Kerviel.html

http://money.cnn.com/2008/01/29/news/international/rogue_trader/index.htm

http://www.dailyfinance.com/2012/10/24/rogue-french-trader-jerome-kerviels-3-year-sentence-7-billion/

http://www.computerweekly.com/news/2240084755/Rogue-Societe-Generale-trader-accused-of-hacking-computer-systems

http://www.nytimes.com/2010/10/06/business/global/06bank.html?pagewanted=all

http://edition.cnn.com/2008/BUSINESS/01/28/soeciete.generale/index.html#cnnSTCText

http://money.cnn.com/2008/01/30/news/international/socgen/index.htm

http://edition.cnn.com/2008/WORLD/europe/01/30/french.bank/

http://abcnews.go.com/Business/story?id=4924887

http://www.societegenerale.com

http://money.cnn.com/2006/09/21/news/companies/societe_generale.fortune/index.htm

Case 5
Samuel Waksal at ImClone
Seeking Approval for Erbitux
For several years, ImClone, a biotechnology company, was a darling of Wall Street. Its stock price rose from
less than $1 per share in 1994 to $72 a share in November 2001. “The whole time it was producing nothing
for sale. It did generate some revenue through licensing agreements with other drug companies-signs that the
pharmaceutical industry did think ImClone was on to something.” ImClone focused on developing a cancer
treatment drug called Erbitux. Erbitux is intended to make cancer treatment more effective by “targeting a
protein called epidermal growth factor receptor (EGFR), which exists on the surface of cancer cells and plays
a role in their proliferation.”
In its 10-K Annual Report for the fiscal year ending December 31, 2001, ImClone described Erbitux as
the company’s “lead product candidate” and indicated that Erbitux had been shown in early stage clinical trials
to cause tumor reduction in certain cases. ImClone had planned to market the drug in the United States and
Canada with its development partner, Bristol-Myers Squibb. On September 19, 2001, ImClone announced
that Bristol-Myers Squibb had paid $2 billion for the marketing rights to Erbitux and would codevelop and
copromote Erbitux with ImClone.
ImClone was one of at least five pharmaceutical companies with EGFR drugs in mid- to late-stage testing.
The winners at commercialization of a new drug class-such as EGFR-are the “companies that beat their rivals
to market, since doctors tend to embrace the initial entries.” Under this pressure, ImClone took a testing
shortcut, using what is known as a single-armed study-one which is conducted without a control group.
ImClone’s use of the single-armed study failed to meet the U.S. Food and Drug Administration’s (FDA)
rigorous criteria for using the methodology.
Samuel Waksal, ImClone’s cofounder and CEO at the time, was directly involved in coordinating and
publicizing ImClone’s efforts to develop Erbitux and to obtain FDA approval for it. On June 28, 2001,
ImClone began the process of submitting a rolling application-called a Biologics License Application (BLA)-
seeking FDA approval for Erbitux. On October 31, 2001, ImClone submitted to the FDA the final
substantial portion of its BLA. The FDA had a 60-day period within which a decision had to be made
concerning whether to accept the BLA for filing. The FDA had three options: (1) accept ImClone’s BLA for
filing; (2) accept the BLA for filing, but simultaneously issue a disciplinary review letter notifying ImClone
that the BLA still had serious deficiencies that would need to be corrected before the BLA could be approved;
or (3) refuse to approve the drug by issuing a Refusal to File letter (RTF). When the FDA issues a RTF, the
applicant must file a new BLA to start the process over.
Samuel Waksal’s Reaction to the Impending Refusal to File
On December 25, 2001, Bristol-Myers Squibb learned from a source at the FDA that the FDA would issue a
RTF letter on December 28, 2001. On the evening of December 26, 2001, Waksal learned of the FDA’s
decision and attempted to sell 79,797 shares of ImClone stock that were held in his brokerage account with
Merrill Lynch. He initially told his agent to transfer the shares to his daughter’s account. The following
morning he instructed his agent to sell the shares. When Waksal’s agent called Merrill Lynch in order to sell
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the shares, the agent was told that the shares were restricted and could not be sold without the approval of
ImClone’s legal counsel. When Merrill Lynch refused to conduct the transaction, Waksal ordered his agent to
transfer the shares to Bank of America and then sell them. Bank of America also refused to conduct the
transaction, and the shares were never sold.
On December 26, 2001, Waksal contacted his father, Jack Waksal, informing him of the impending RTF.
The next morning, Jack Waksal placed an order to sell 110,000 shares of ImClone stock. Jack Waksal also
called Prudential Securities and placed an order to sell 1,336 shares of ImClone stock from the account of his
daughter, Patti Waksal. On December 28, Jack Waksal sold another 25,000 shares of ImClone stock. When
questioned by the staff of the Securities and Exchange Commission (SEC), Jack Waksal provided false and
misleading explanations for these trades.
On the morning of December 27, 2001, before the stock market opened, Samuel Waksal had a telephone
conversation with his daughter, Aliza. At that time, Waksal was Aliza’s only means of support, and he had
control of her bank and brokerage accounts. During their conversation, he directed her to sell all of her
ImClone shares. Immediately after talking to her father, Aliza placed an order at 9 a.m. to sell 39,472 shares
of ImClone stock. By selling her shares at that moment in time, she avoided $630,295 in trading losses.
On December 28, 2001, Waksal purchased 210 ImClone put option contracts, buying them through an
account at Discount Bank and Trust AG in Switzerland. He sold all 210 put option contracts on January 4,
2002, which resulted in a profit of $130,130. Waksal also failed to file a statement disclosing a change of
ownership of his ImClone securities as required by Section 16(a) of the Exchange Act and Rule 16a-3.
According to the SEC, Waksal violated several sections of the Securities Act when he attempted to sell his
own ImClone Stock, when he illegally tipped his father about the FDA decision, when he caused Aliza to sell
her shares of ImClone stock, and when he purchased ImClone put option contracts.
The Outcome for Samuel Waksal and ImClone
Waksal resigned as ImClone’s CEO on May 21, 2002, and on June 12 was arrested for securities fraud and
perjury. Two months later he was indicted for bank fraud, securities fraud, and perjury. On October 15, 2002,
Waksal pleaded guilty to all of the counts in the indictment, except those counts based on allegations that he
passed material, nonpublic information to his father. On March 3, 2003, he also pleaded guilty to tax evasion
charges for failing to pay New York State sales tax on pieces of art he had purchased. On June 10, 2003,
Waksal was sentenced to 87 months in prison and was ordered to pay a $3 million fine and $1.2 million in
restitution to the New York State Sales Tax Commission. Waksal began serving his prison sentence on July
23, 2003.
Despite Waksal’s actions, ImClone appears to have survived the scandal. Under the leadership of Daniel
Lynch, ImClone’s former chief financial officer and its current CEO, the company has staged a remarkable
turnaround. Most of ImClone’s 440 employees stayed with the company and helped Lynch revive it. Lynch
says the employees stayed for one overpowering reason-they believed in Erbitux. As for himself, Lynch
asserted that “What motivated me to get up in the morning was knowing that if I could get this drug
approved, it would improve the lives of patients with cancer.” Based on a clinical trial by Merck KGaA,
ImClone’s European marketing partner, the FDA, on February 12, 2004, “approved Erbitux for treating
patients with advanced colon cancer that has spread to other parts of the body.” Thus, Erbitux became
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ImClone’s first commercial product.
Where Are They Now?
Waksal is currently making a comeback in the biotech industry. Since the scandal, ImClone has since been
sold to Eli Lilly for a price of $6.5 billion in 2008. The next year, Waksal was caught up in the Martha
Stewart Insider Trading scandal as well, and has since served jail time. Waksal’s new company, Kadmon
Corp., is his new biopharmaceutical firm; he plans to open a sister company in China on the Hong Kong
Exchange.
Questions for Discussion
1. What might motivate an individual or a company to short-cut drug testing that is crucial for FDA
approval?
2. Why did Samuel Waksal react as he did pursuant to learning that the FDA would not approve Erbitux?
3. Why were Samuel Waksal’s actions unethical?
Sources
This case was developed from material contained in the following sources:
Ackman, D. (October 11, 2002). A child’s guide to ImClone. Forbes.com.
http://www.forbes.com/2002/10/11/1011topnews.html, accessed January 12, 2005.
FDA approves ImClone’s Erbitux: Drug at center of insider-trading scandal involving Waksal, Stewart.
(February 12, 2004). MSNBC.com. http://msnbc.msn.com/ID/4251347, accessed January 12, 2005.
Herper, M. (May 23, 2002). ImClone CEO leaves, problems remain. Forbes.com.
http://www.forbes.com/2002/05/23/0523imclone.html, accessed January 12, 2005.
Herper, M. (June 10, 2003). Samuel Waksal sentenced. Forbes.com.
http://www.forbes.com/2003/06/10/cx_mh_0610waksal.html, accessed January 12, 2005.
Securities and Exchange Commission (SEC). SEC v. Samuel D. Waksal. Wayne M. Carlin (WC-2114),
Attorney for the SEC. Case 02 Civ. 4407 (NRB).
http://www.sec.gov/litigation/complaints/comp18026.htm, accessed January 12, 2005.
SEC. SEC v. Samuel D. Waksal, Jack Waksal and Patti Waksal. Barry W. Rashover (BR-6413), Attorney for
the SEC. Case 02 Civ. 4407 (NRB). http://www.sec.gov/litigation/complaints/comp18408.htm, accessed
January 12, 2005.
Shook, D. (February 14, 2002). Lessons from ImClone’s trial—and error. Business Week Online.
http://www.businessweek.com, accessed January 12, 2005.
Tirrell, Meg. (September 3, 2013). ImClone’s Waksal back in Biotech with plans for spinouts. Bloomberg.com.
http://www.bloomberg.com/news/2013-09-03/imclone-s-waksal-back-in-biotech-with-plans-for-
spinouts.html, accessed October 27, 2013.
Tischler, L. (September 2004). The trials of ImClone. Fast Company.
http://pf.fastcompany.com/magazine/86/imclone.html, accessed January 12, 2005.
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http://www.forbes.com/2002/10/11/1011topnews.html

http://msnbc.msn.com/ID/4251347

http://www.forbes.com/2002/05/23/0523imclone.html

http://www.forbes.com/2003/06/10/cx_mh_0610waksal.html

http://www.sec.gov/litigation/complaints/comp18026.htm

http://www.sec.gov/litigation/complaints/comp18408.htm

http://www.businessweek.com

http://www.bloomberg.com/news/2013-09-03/imclone-s-waksal-back-in-biotech-with-plans-for-spinouts.html

http://pf.fastcompany.com/magazine/86/imclone.html

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Notes
1. Linda Elder, L., and Paul, R. (2011). Ethical reasoning essential to education. CriticalThinking.org.
http://www.criticalthinking.org/pages/ethical-reasoning-essential-to-education/1036.
2. Velasquez, M. G. (1998). Business ethics: Concepts and cases, 4th ed. Englewood Cliffs, NJ: Prentice
Hall.
3. Ibid.
4. Ibid.
5. Mill, J. S. (1957). Utilitarianism. Indianapolis: Bobbs-Merrill; Carroll, A. (1993). Business and society:
Ethics and stakeholder management, 2nd ed. Cincinnati: South-Western; Velasquez, M. G. (1992). Business
ethics: Concepts and cases, 3rd ed. Englewood Cliffs, NJ: Prentice Hall.
6. Brandt, R. (1959). Ethical theory. Englewood Cliffs, NJ: Prentice Hall, 253–254.
7. Smart, J., and Williams, B. (1973). Utilitarianism: For and against, 4. Cambridge: Cambridge
University Press.
8. Delong, J. V., et al. (March/April 1981). Defending cost-benefit analysis: Replies to Steven Kelman.
AEI Journal on Government and Society, 39–43.
9. Hoffman, W. M., and Moore, J. (1990). Business ethics: Readings and cases in corporate morality, 2nd ed.
New York: McGraw-Hill.
10. Kelman, S. (January/February 1981). Cost-benefit analysis: An ethical critique. AEI Journal on
Government and Society, 33–40.
11. Freeman, R. E., and Gilbert Jr., D. (1988). Corporate strategy and the search for ethics. Upper Saddle
River, New Jersey: Prentice Hall.
12. Kant, I. (1964). Groundwork of the metaphysics of morals. Translated by H. Paton. New York: Harper &
Row.
13. Feldman, F. (1978). Introductory ethics. Englewood Cliffs, NJ: Prentice Hall, 119–128.
14. Tuck, R. (1979). Natural rights theories: Their origin and development. New York: Cambridge
University Press; Stoljar, S. (1984). An analysis of rights. New York: St. Martin’s Press; Shue, H. (1981). Basic
rights. Princeton, NJ: Princeton University Press; McCloskey, H. (1965). Rights. Philosophical Quarterly, 15,
115–127; Wasserstrom, R. (October 29, 1964). Rights, human rights, and racial discrimination. Journal of
Philosophy, 61, 628–641; Singer, P. (1978). Rights and the market. In Arthur, J., and Shaw, W. eds., Justice
and economic distribution, 207–221. Englewood Cliffs, NJ: Prentice Hall; Hart, H. (April 1955). Are there any
natural rights? Philosophical Review, 64, 185; Velasquez, M. G. (2002). Business ethics, 5th ed. Upper Saddle
River, NJ: Prentice Hall.
15. Garrett, T. (1986). Business ethics, 2nd ed., 88–91. Englewood Cliffs, NJ: Prentice Hall.
16. Feinberg, J. (1973). Social philosophy. Englewood Cliffs, NJ: Prentice Hall.
17. Friedman, M. (1962). Capitalism and freedom. Chicago, IL: University of Chicago Press, 22–36.
18. Ibid.
19. Rawls, J. (1971). A theory of justice. Cambridge, MA: Harvard University Press.
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20. DeGeorge, R. T. (1990). Business ethics, 3rd ed. New York: Macmillan.
21. McMahon, T. (1999). Transforming justice: A conceptualization. Business Ethics Quarterly, 9(4), 593–
602.
22. Ibid., 600.
23. Ibid.
24. Hursthouse, R., and Zalta, E. N. (eds.) (July 18, 2003). Virtue ethics. Stanford Encyclopedia of
Philosophy. http://plato.stanford.edu/archives/fall2003/entries/ethics-virtue/, accessed March 15, 2012.
25. Ibid.
26. Ibid.
27. Virtue theory (n.d.). The Internet Encyclopedia of Philosophy. http://www.iep.utm.edu/virtue/, accessed
March 18, 2012. This quote is taken from the section “Loudon’s Critique,” based on Louden, R. (1984). On
some vices of virtue ethics. American Philosophical Quarterly, 21, 227–236.
28. Beauchamp, T. L., and Childress, J. F. (2002). Principles of biomedical ethics, 5th ed. Oxford, England:
Oxford University Press.
29. Rawls, op. cit.
30. Velasquez, M. G., Andre, C., Shanks, T., S. J., and Meyer, M. J. The common good. Markkula
Center, Santa Clara University. http://www.scu.edu/ethics/practicing/decision/commongood.html, accessed
March 18, 2012; see the same authors on this topic in Issues in Ethics, 5(2), (Spring 1992).
31. Ibid.
32. Ibid.
33. Beauchamp, T. L., and Childress, J. F. (1994). Principles of biomedical ethics, 4th ed. New York: Oxford
University Press.
34. Steiner, G. A., and Steiner, J. F. (2000). Business, government, and society: A managerial perspective, 9th
ed. Boston: McGraw-Hill.
35. Freeman and Gilbert, op. cit., 36.
36. Ibid.
37. Based on the ImClone research of Amy Venskus, master’s student at Bentley College, Waltham, MA,
2004.
38. Leung, Rebecca. (June 27, 2004). Sam Waskal: I was arrogant. CBSNews.com.
http://www.cbsnews.com/stories/2003/10/02/60minutes/main576328.shtml, accessed March 18, 2012.
39. Buono, A. F., and Nichols, L. T. (1990). Stockholder and stakeholder interpretations of business’
social role. In Hoffman, W. M., and Moore, J. M. Business ethics: Readings and cases in corporate morality, 2nd
ed. New York: McGraw-Hill.
40. Bush moves to ease lending crisis. (August 31, 2007). BBCNews.co.uk.
http://news.bbc.co.uk/2/hi/business/6971746.stm, accessed March 18, 2012.
41. Davis, L. (1976). Comments on Nozick’s entitlement theory. Journal of Philosophy, 73, 839–842.
42. Barton, N., et al. (June 25, 2006). Warren Buffett gives major share of fortune to Gates Foundation.
Philanthropy.com. http://philanthropy.com/blogs/philanthropytoday/warren-buffett-gives-major-share-of-
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http://plato.stanford.edu/archives/fall2003/entries/ethics-virtue/

Virtue Ethics

http://www.scu.edu/ethics/practicing/decision/commongood.html

http://www.cbsnews.com/stories/2003/10/02/60minutes/main576328.shtml

http://news.bbc.co.uk/2/hi/business/6971746.stm

http://philanthropy.com/blogs/philanthropytoday/warren-buffett-gives-major-share-of-fortune-to-gates-foundation/11909

fortune-to-gates-foundation/11909, accessed March 18, 2012.
43. Antes, A. L., et al. Personality and ethical decision-making in research: The role of perception of self
and others. (December 2007). Journal of Empirical Research on Human Research Ethics, 2(4), 15–34.
44. Skarlicki, P., Folger, R., and Tesluk, P. (1999). Personality as a moderator in the relationship between
fairness and retaliation. Academy of Management Journal, 42(1), 100–108.
45. McFerran, B., Aquino, K., and Duffy, M. (January 2010). How personality and moral identity relate to
individuals’ ethical ideology. Business Ethics Quarterly, 20(1), 35–56.
46. Kohlberg, L. (1969). State and sequence: The cognitive developmental approach to socialization. In
Gosline, D. A. (ed.) Handbook of socialization theory and research. Chicago: Rand McNally; Jones, T. (1991).
Ethical decision making by individuals in organizations: An issue-contingent model. Academy of Management
Review, 16(2), 366–395.
47. Covey, S. (1989). The 7 habits of highly effective people. New York: Free Press.
48. Kelton, Erika. (January 25, 2013). JPMorgan and Jamie Dimon need an extreme makeover. Forbes.com.
http://www.forbes.com/sites/erikakelton/2013/01/25/jpmorgan-and-jamie-dimon-need-an-extreme-
makeover/, accessed January 6, 2014; “Libor stands for London interbank offered rate. The interest rate at
which banks offer to lend funds (wholesale money) to one another in the international interbank market.”
Financial Times lexicon. http://lexicon.ft.com/Term?term=LIBOR.
49. Kelton, Erika. (January 25, 2013). JPMorgan and Jamie Dimon need an extreme makeover. Forbes.com.
http://www.forbes.com/sites/erikakelton/2013/01/25/jpmorgan-and-jamie-dimon-need-an-extreme-
makeover/, accessed January 6, 2014; “Libor stands for London interbank offered rate. The interest rate at
which banks offer to lend funds (wholesale money) to one another in the international interbank market.”
Financial Times lexicon. http://lexicon.ft.com/Term?term=LIBOR.
50. (February 6, 2007). WalMart to appeal discrimination suit status. CNN.com.
http://money.cnn.com/2007/02/06/news/companies/walmart/index.htm, accessed March 15, 2012; Case
profile: WalMart lawsuit (re: gender discrimination in USA). (April 14, 2008). Business & Human Rights
Resource Center, http://www.business-
humanrights.org/Categories/Lawlawsuits/Lawsuitsregulatoryaction/LawsuitsSelectedcases/WalMartlawsuitregenderdiscriminationinUSA
accessed March 15, 2012.
51. Werhane, P. (1999). Moral imagination and management decision-making. New York: Oxford
University Press.
52. Badaracco Jr., J. (1998). A guide to defining moments, the discipline of building character. Harvard
Business Review, 76(2), 114.
53. Ibid., 114–115.
54. Ibid., 114–121.
55. Nash, L. (November/December 1981). Ethics without the sermon. Harvard Business Review, 59(6),
88.
56. Krolick, S. (1987). Ethical decision-making style: Survey and interpretive notes. Beverly, MA: Addison-
Wesley.
57. Ibid.
128

http://www.forbes.com/sites/erikakelton/2013/01/25/jpmorgan-and-jamie-dimon-need-an-extreme-makeover/

http://lexicon.ft.com/Term?term=LIBOR

http://www.forbes.com/sites/erikakelton/2013/01/25/jpmorgan-and-jamie-dimon-need-an-extreme-makeover/

http://lexicon.ft.com/Term?term=LIBOR

http://money.cnn.com/2007/02/06/news/companies/walmart/index.htm

http://www.business-humanrights.org/Categories/Lawlawsuits/Lawsuitsregulatoryaction/LawsuitsSelectedcases/WalMartlawsuitregenderdiscriminationinUSA

58. Krolick, 18.
59. Ibid., 20.
60. Steiner and Steiner, op. cit.; Freeman and Gilbert, op. cit.; Mill, op. cit.; Carroll, op. cit.; Velasquez
(1992), op. cit. based on Steiner and Steiner, and Carroll.
61. Freeman and Gilbert, op. cit.
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3
STAKEHOLDER AND ISSUES MANAGEMENT
APPROACHES
3.1 Stakeholder Theory and the Stakeholder Management Approach Defined
3.2 Why Use a Stakeholder Management Approach for Business Ethics?
3.3 How to Execute a Stakeholder Analysis
3.4 Negotiation Methods: Resolving Stakeholder Disputes
3.5 Stakeholder Management Approach: Using Ethical Principles and Reasoning
3.6 Moral Responsibilities of Cross-Functional Area Professionals
3.7 Issues Management, Integrating a Stakeholder Framework
Ethical Insight 3.1
3.8 Managing Crises
Chapter Summary
Questions
Exercises
Real-Time Ethical Dilemma
Cases
6. The BP Deepwater Horizon Explosion and Oil Spill: Crisis and Aftermath
7. Mattel Toy Recalls
8. Genetic Discrimination
Notes
OPENING CASE
The oil company BP (formerly British Petroleum) leased/licensed the Deepwater Horizon oil rig, operated by
Transocean and contracted by Halliburton, that exploded in flames in the Gulf of Mexico on the night of
April 20, 2010.1, 2 The result was 11 deaths, 17 injured, and hundreds of miles of beaches soiled. A “blowout
preventer” (specialized valve) designed to prevent crude oil releases failed to activate.3
The factual events leading up to the BP blowout unearth a highly complex network of stakeholders, stakes,
and circumstances, which though preventable, together culminated in the worst environmental disaster
recorded in U.S. history. In March 2008, the U.S. Occupational Safety and Health Administration (OSHA)
recorded on public record that BP had one of the worst safety records in its industry. After the explosion when
the Deepwater Horizon sank, “a sea-floor oil gusher flowed for 87 days, until it was capped on 15 July 2010.”4
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The total oil spill was estimated at 210 million U.S. gallons. With all-out efforts by BP and a host of other
organizations and crews, by September 2010, the entire well had been sealed, but the legal and ethical issues
and stakeholder disputes had only begun. In 2013, over 2.7 million pounds of “oiled material” had been
removed from the Louisiana coast and tar balls were reported daily on Alabama and Florida beaches.
Different phases of the trials are ongoing.5 BP has already admitted guilt in 2012 to 14 criminal charges
that included manslaughter and “negligence in misreading important tests before the explosion.” The
company agreed to pay $4.5 billion in fines and penalties. “Four current or former employees also face
criminal charges. The company has spent more than $42 billion on cleaning up the environment and
compensating victims. People and businesses continue to file claims for damages, and there is no cap to the
damages.”6
The Justice Department and Judge Barbier are overseeing and managing a latter part of the trial between
the plaintiffs (Transocean, Halliburton, the states of Louisiana and Alabama, and private plaintiffs) and BP
(with its partner, Anadarko Petroleum). The main issue at this point in the case that the plaintiffs must prove
is whether or not a total 4.2 million barrels of oil was discharged as a result of the oil rig exploding into the sea
87 days after the explosion. That amount of oil is the equivalent of nearly one-quarter of all the oil consumed
in the United States in one day. Plaintiffs allege that BP’s failure of preparation caused the crisis and
aftermath of oil flow. BP is defending whether or not it was prepared for a blowout and if its response was
adequate once the oil started leaking.7
Stakeholders in this crisis number in the thousands. In the federal government alone there are the
Departments of Energy, Interior, Justice, members of Congress, and even President Obama—who met with
BP executives in June 2010 and persuaded them “to create a $20 billion fund to compensate residents and
businesses for losses resulting from the spill.”8 Obama also announced plans to empower the Minerals
Management Service to oversee offshore drilling. Other key stakeholders include BP employees and their
families, BP’s partners, and the plaintiffs.
BP agreed to a settlement involving literally thousands of individuals affected by the spill in 2012 totaling
$7.8 billion—the amount which BP would have to pay was not capped, however.9 Over 200,000 individuals
and businesses were paid $6.1 billion through the Gulf Coast Claims Facility. Add to this number the state
governments and agencies affected by the spill, the lawyers on both sides of the case, insurance companies,
auditors, and competitors, all of whom are also stakeholders. In addition, the response and aftermath cleanup
“involved thousands of boats, tens of thousands of workers, and millions of feet of containment boom.”
BP’s then chief executive officer (CEO) Tony Hayward defended BP against accusations that the company
was not prepared and that it cut corners on the design of the well, and then attempted to escape responsibility
for the consequences. He was replaced by Robert Dudley, BP’s managing director after the blowout, when
Hayward was criticized for minimizing the scale of the spill, and for making such remarks as, “There’s no one
who wants this thing over more than I do. I’d like my life back”—which particularly offended members of the
workers’ families who died in the explosion. His presence at a yacht race in June after the spill reportedly
contributed to a sense of insensitivity.10
This crisis will be studied and analyzed for years to come. The human, political, economic, environmental,
and social costs were enormous. “Tens of thousands of families have been affected by the spill, whether they
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work in the fishing industry, tourism, or oil. The area of the spill supplies 40% of seafood in the U.S., and the
leaked oil put fishermen, crabbers and oystermen out of work. Some of these workers were hired to help
contain the spill and clean the beaches; others filed for unemployment benefits.”11 To date, BP as a
“supermajor” in its industry has moved from the highest earnings per barrel to the lowest, falling behind Shell,
Exxon, and Chevron Corp.12 Nevertheless, according to CEO Dudley, the company has increased its
investment “in exploration and projects annual capital spending over the next several years to be $24 billion to
$27 billion—at least 25% higher than 2011 levels as the company pours cash into projects in Angola,
Azerbaijan, Indonesia and elsewhere.”13
3.1 Stakeholder Theory and the Stakeholder Management Approach
Defined
The BP Deepwater Horizon oil spill is a complex crisis not limited to the financial, economic, and corporate
interests involved. Since numerous people, businesses, and the environment were affected, and 11 workers lost
their lives, an analysis that also encompasses ethical and moral considerations is required.
Stakeholder theory is best described by R. Edward Freeman—its modern founder. “My thesis is that I can
revitalize the concept of managerial capitalism by replacing the notion that managers have a duty to
stockholders with the concept that managers bear a fiduciary relationship to stakeholders. Stakeholders are
those groups who have a stake in or claim on the firm. Specifically I include suppliers, customers, employees,
stockholders, and the local community, as well as management in its role as agent for these groups. . . . Each
of these stakeholder groups has a right not to be treated as a means to some end, and therefore must
participate in determining the future direction of the firm in which they have a stake.”14 Freeman and his
collaborators state that it is “a mistake to see stakeholder theory as a specific theory with a single purpose.
Researchers would do well to see stakeholder theory as a set of shared ideas that can serve a range of purposes
within different disciplines and address different questions.”15
The stakeholder management approach is based on a related instrumental theory that argues “a subset of
ethical principles (trust, trustworthiness, and cooperativeness) can result in significant competitive
advantage.”16 This approach, then, enables researchers and practitioners to use analytical concepts and
methods for identifying, mapping, and evaluating corporate strategy with stakeholders. We refer to the use of
this instrumental approach in stakeholder theory as “stakeholder analysis.”
The stakeholder management approach, including frameworks for analyzing and evaluating a corporation’s
relationships (present and potential) with external groups, aims ideally at reaching “win—win” collaborative
outcomes. Here, “win—win” means making moral decisions that benefit the common good of all
constituencies within the constraints of justice, fairness, and economic interests. Unfortunately, this does not
always happen. There are usually winners and losers in complex situations where there is a perceived zero-sum
game (i.e., a situation in which there are limited resources, and what is gained by one person is necessarily lost
by the other).
Scholars and consultants, however, have used the stakeholder management approach as a means for
planning and implementing collaborative relationships to achieve win—win outcomes among stakeholders.17
Structured dialogue facilitated by consultants is a major focus in these collaborative communications. The aim
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in using the stakeholder approach as communication strategy is to change perceptions and “rules of
engagement” to create win—win outcomes.
A stakeholder management approach does not have to result from a crisis, as so many examples from ethics
literature and the news provide. It can also be used as a planning method to anticipate and facilitate business
decisions, events, and policy outcomes. A stakeholder analysis is not only limited to publicly traded for-profit
enterprises, but also applies to non-profit organizations: “Stakeholder theorists clearly indicate that their
theory is intended to more than merely for-profit corporations.”18
A stakeholder management approach also begins, as indicated in Chapter 1, by asking what external forces
in the general environment are affecting an organization. This context can often provide clues to responses by
stakeholders to opportunities, crises, and extraordinary events. Corporate scandals revealed after the Enron
crisis that there were several factors in the general environment that were at play in addition to certain
corporate executives’ greed. For example, the dotcom technology bubble leading up to the year 2000 created a
financial environment where investment funds followed innovative ideas in exorbitant and exuberant ways.
Investment banks loaned large amounts to Enron and other companies without due diligence. Stock analysts
lied and encouraged deceptive investing from the public. Boards of directors abandoned their fiscal
responsibilities, as did large accounting firms like Arthur Andersen, which is no longer in existence. The
general legal and enforcement environment during the 1990s appeared indifferent to monitoring corporate
activities and protecting shareholders. A similar general environment with low-to-nonexistent government
regulation followed, culminating in the 2008 subprime lending crisis that sent the global economy reeling.
Next we define the term “stakeholder.”
Stakeholders
A stakeholder is “any individual or group who can affect or is affected by the actions, decisions, policies,
practices, or goals of the organization.”19 We begin by identifying the focal stakeholder. This is the company or
group that is the focus or central constituency of an analysis.
The primary stakeholders of a firm include its owners, customers, employees, and suppliers. Also of primary
importance to a firm’s survival are its stockholders and board of directors. The CEO and other top-level
executives can be stakeholders, but in the stakeholder analysis they are generally considered actors and
representatives of the firm. In this chapter’s opening case, BP’s CEO and top-level team are focal
stakeholders. Coalitional focal stakeholders that may also be connected to BP primary stakeholders include
owners, customers, employees, and, in this case, Chinese vendors and suppliers.
Secondary stakeholders include all other interested groups, such as the media, consumers, lobbyists, courts,
governments, competitors, the public, and society. Halliburton and Transocean were considered as “secondary
stakeholders” by then CEO and other officers; after the spill, these collaborators became plaintiffs. Control
and quality of products and services can be diminished and/or lost with outsourced and licensing relationships
if proper monitoring and management is absent. One final report on this case suggested that the real root of
the problem was BP’s own laissez-faire approach to safety, even though spokespersons from BP denied this
allegation.20
Stakes
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A stake is any interest, share, or claim that a group or individual has in the outcome of a corporation’s policies,
procedures, or actions toward others. Stakes may be based on any type of interest. The stakes of stakeholders
are not always obvious. The economic viability of competing firms can be at stake when one firm threatens
entry into a market. The physical environment, employees’ lives, and the health and welfare of communities
can be at stake when corporations like BP either relax or do not have in place proper equipment, safety
standards, and emergency plans for crises.
Stakes also can be present, past, or future oriented. For example, stakeholders may seek compensation for a
firm’s past actions, as occurred when lawyers argued that certain airlines owed their clients monetary
compensation after having threatened their emotional stability when pilots announced an impending disaster
(engine failure) that, subsequently, did not occur. Stakeholders may seek future claims; that is, they may seek
injunctions against firms that announce plans to drill oil or build nuclear plants in designated areas or to
market or bundle certain products in noncompetitive ways.
3.2 Why Use a Stakeholder Management Approach for Business Ethics?
The stakeholder management approach is a response to the growth and complexity of contemporary
corporations and the need to understand how they operate with their stakeholders and stockholders.
Stakeholder theory argues that corporations should treat all their constituencies fairly and that doing so can
enable the companies to perform better in the marketplace.21 “If organizations want to be effective, they will
pay attention to all and only those relationships that can affect or be affected by the achievement of the
organization’s purposes.”22 Although stakeholder theory includes a fiduciary dimension by nature of its intent,
as Freeman was quoted as saying above, we apply this theory in ways that use ethical principles such as justice,
utilitarianism, rights, and universalism to individual stakeholders and their interactions with each other and
corporations.
This chapter applies the stakeholder management approach not only in its theoretical form, but also as a
practical method to analyze how companies deal with their stakeholders. We therefore use the term
“stakeholder analysis” (which is part of stakeholder management) to identify strategies, actions, and policy
results of firms in their management of employees, competitors, the media, courts, and stockholders. Later in
the chapter, we introduce “issues management” as another set of methods for identifying and managing
stakeholders. We present issues management and stakeholder theory as complementary theories that use
similar methods, as we show later. Starting with a major issue or opportunity that a company faces is a helpful
way to begin a stakeholder analysis.
A more familiar way of understanding corporations is the stockholder approach, which focuses on financial
and economic relationships. By contrast, a stakeholder management approach is a normative and instrumental
approach that studies actors’ interests, stakes, and actions.23 The stakeholder management approach takes into
account nonmarket forces that affect organizations and individuals, such as moral, political, legal, and
technological interests, as well as economic factors.
Underlying the stakeholder management approach is the ethical imperative that mandates that businesses
in their fiduciary relationships to their stockholders: (1) act in the best interests of and for the benefit of their
customers, employees, suppliers, and stockholders; and (2) respect and fulfill these stakeholders’ rights. One
134

study concluded that “multiple objectives—including both economic and social considerations—can be and, in
fact, are simultaneously and successfully pursued within large and complex organizations that collectively
account for a major part of all economic activity within our society.”24
Stakeholder Theory: Criticisms and Responses
The dominant criticism of stakeholder theory by some scholars is that corporations should serve only
stockholders since they own the coporation.25 It is important to observe criticisms of stakeholder theory and
responses to them in order to understand the purpose of and benefits provided by stakeholder theory. The
following criticisms have been offered by scholars: stakeholder theory (1) negates and weakens fiduciary duties
that managers owe to stockholders, (2) weakens the influence and power of stakeholder groups, (3) weakens
the firm, and (4) changes the long-term character of the capitalist system.26 Ethically, these arguments are
based on property and implied contract rights, and on fiduciary duties and responsibilities of managers to
stockholders.
Critics claim that some stakeholder groups’ power can be weakened by stakeholder theory by treating all
stakeholders equally—as stakeholder theory suggests. For example, labor unions can be avoided, hurt, or even
eliminated. Corporations can also be weakened in their pursuit of profit if they attempt to serve all
stakeholders’ interests. The corporation cannot be all things to all stakeholders and protect stockholders’
fiduciary interest. Finally, critics who claim that stakeholder theory changes the long-term character of
capitalism argue that: (1) corporations have no responsibility by law other than to their stockholders, since the
market disciplines corporations anyway; and (2) stakeholder theory permits some managers to “game”
corporations by arguing that they are protecting some stakeholder interests, even if interests of others are
harmed. Some more leftist thinkers also criticize advocates of stakeholder theory as being naive and utopian.
These critics claim that well-intentioned “do-gooders” ignore or mask the reality of capital labor relationships
through simplistic notions in stakeholder theory such as “participation,” “empowerment,” and “realizing
human potential.”27
Despite these criticisms, stakeholder theory continues to be popular and widely used. As noted earlier in
this chapter, societies and economies involve market and nonmarket interests of diverse stakeholders as well as
stockholders. To understand and effect responsible corporate strategies, methods that include different players
and environmental factors—not just stockholders or financial interests—are required. We also live in a post-
Enron world. Some officers in corporations can engage in illegal and unethical practices with investors’ funds
and assets. Stakeholder theory addresses these realities. The following points also respond to some of the
above criticisms. First, stakeholder theory does offer advantages; for example, Heugens and Van Riel (2002)
present evidence showing that stakeholder theory may result in both organizational learning and societal
legitimacy. Secondly, Key’s (1999) stakeholder theory of the firm,28 summarized by Mitchell, Agle, and
Wood (1997),29 states: “stakeholder theory must account for power and urgency as well as legitimacy, no
matter how distasteful or unsettling the results. Managers must know about groups in their environment that
hold power and intend to impose their will upon the firm. Power and urgency must be attended to if
managers are to serve the legal and moral interests of legitimate stakeholders.”
The ethical dimension of stakeholder theory is based on the view that profit maximization is constrained by
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justice, and that regard for individual rights should be extended to all constituencies that have a stake in a
business, and that organizations are not only “economic” in nature, but can also act in socially responsible
ways. To this end, companies should act in socially responsible ways, not only because it’s the “right thing to
do,” but also to ensure their legitimacy.30
3.3 How to Execute a Stakeholder Analysis
Stakeholder analysis is a pragmatic way of identifying and understanding multiple (often competing) claims of
many constituencies. As part of a general stakeholder approach, stakeholder analysis is a method to help
understand the relationships between an organization and the groups with which it must interact. Each
situation is different and therefore requires a map to guide strategy for an organization dealing with groups,
some of whom may not be supportive of issues, such as outsourcing jobs. The aim here is to familiarize you
with the framework so that you can apply it in the classroom and to news events that appear in the press and
in other media. Even though you may not be an executive or manager, the framework can enable you to see
the “big picture” of complex corporate dealings, and apply ethical reasoning and principles when analyzing
strategies used by managers and different stakeholders.
Taking a Third-Party Objective Observer Perspective
In the following discussion, you are asked to assume the role of a CEO of a company to execute a stakeholder
analysis. However, it is recommended that you take the role of “third-party objective observer” when doing a
stakeholder analysis. Why? In this role, you will need to suspend your belief and value judgments in order to
understand the strategies, motives, and actions of the different stakeholders. You may not agree with the focal
organization or CEO whom you are studying. Therefore, the point is to be able to see all sides of an issue and
then objectively evaluate the claims, actions, and outcomes of all the parties. Being more objective helps
determine who acted responsibly, who won and who lost, and at what costs.
Part of the learning process in this exercise is to see your own blind spots, values, beliefs, and passions
toward certain issues and stakeholders. Doing an in-depth stakeholder analysis with a group enables others to
see and comment on your reasoning. For the next section, however, take the role of a CEO so you can get an
idea of what it feels like to be in charge of directing an organization-wide analysis.
Role of the CEO in Stakeholder Analysis
Assume for this exercise that you are the CEO, working with your top managers, in a firm that has just been
involved in a major controversy of international proportions. The media, some consumer groups, and several
major customers have called you. You want to get a handle on the situation without reverting to unnecessary
“firefighting” management methods. A couple of your trusted staff members have advised you to adopt a
planning approach quickly while responding to immediate concerns and to understand the “who, what, where,
when, and why” of the situation before jumping to “how” questions. Your senior strategic planner suggests you
lead and participate in a stakeholder analysis. What is the next step?
The stakeholder analysis is a series of steps aimed at the following tasks:31
1. Map stakeholder relationships.
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2. Map stakeholder coalitions.
3. Assess the nature of each stakeholder’s responsibilities.
4. Assess the nature of each stakeholder’s power.
5. Construct a framework of stakeholder moral responsibilities and interests.
6. Develop specific strategies and tactics.
7. Monitor shifting coalitions.
Each step is described in the following sections. Let’s explore each one and then apply them in our continuing
scenario example.
Step 1: Map Stakeholder Relationships
In 1984, R. Edward Freeman offered questions that help begin the analysis of identifying major stakeholders
(Figure 3.1). The first five questions in the figure offer a quick jump-start to the analysis. Questions 6 through
9 may be used in later steps, when you assess the nature of each stakeholder’s interest and priorities.
Let’s continue our example with you as CEO. While brainstorming about questions 1 through 5 with
employees you have selected who are the most knowledgeable, current, and close to the sources of the issues at
hand, you may want to draw a stakeholder map and fill in the blanks. Note that your stakeholder analysis is
only as valid and reliable as the sources and processes you use to obtain your information. As a CEO in this
hypothetical scenario, which is controversial, incomplete, and in which questionable issues arise, you may wish
to go outside your immediate planning group to obtain additional information and perspective. You should
therefore identify and complete the stakeholder map (Figure 3.2), inserting each relevant stakeholder involved
in the particular issue you are studying.
Figure 3.1
Sample Questions for Stakeholder Review
1. Who are our stakeholders currently?
2. Who are our potential stakeholders?
3. How does each stakeholder affect us?
4. How do we affect each stakeholder?
5. For each division and business, who are the stakeholders?
6. What assumptions does our current strategy make about each important stakeholder (at each level)?
7. What are the current “environmental variables” that affect us and our stakeholders (initiation, GNP, prime
rate, confidence in business [from polls], corporate identity, media image, and so on)?
8. How do we measure each of these variables and their impact on us and our stakeholders?
9. How do we keep score with our stakeholders?
Source: Freeman, R. Edward. (1984). Strategic management: A stakeholder approach, 242. Boston: Pitman. Reproduced with permission of the
author.
Figure 3.2
Stakeholder Map of a Large Organization
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Source: Freeman, R. Edward. (1984). Strategic management: A Stakeholder approach, 25. Boston: Pitman. Reproduced with permission of the
author.
For example, if you were examining the BP spill—and you were not the CEO of that company—you
would place BP and the then CEO Tony Hayward—later replaced by Robert Dudley—in the center (or focal)
stakeholder box, then continue identifying the other groups involved: Halliburton, Transocean, employees
who were victims and those immediately endangered by the spill, shareholders (members of the lawsuit),
affected community victims (families), affected community businesses, the U.S. government (the Departments
of Justice and the Interior), the U.S. Congress, President Obama, suppliers and distributors, competitors,
among others. In completing a stakeholder map, include real groups, individuals, and organizations—issues
are not part of the formal stakeholder map.
Note that in Figure 3.2 the reciprocal arrows represent enacted major strategies and tactics between each
stakeholder and the focal stakeholder.
Step 2: Map Stakeholder Coalitions
After you identify and make a map of the stakeholders who are involved with your firm in the incident you are
addressing, the next step is to determine and map any coalitions that have formed. Coalitions among
stakeholders form around stakes that they have—or seek to have—in common. Interest groups and lobbyists
sometimes join forces against a common “enemy.” Competitors also may join forces if they see an advantage
in numbers. Mapping actual and potential coalitions around issues can help you, as the CEO, anticipate and
design strategic responses toward these groups before or after they form.
Step 3: Assess the Nature of Each Stakeholder’s Responsibilities
Next you need to identify the nature of each stakeholder’s interests and responsibilities in a particular
situation. Since each stakeholder has a stake, interest, or claim in the process and outcomes of the situation,
opportunity, controversy, or crisis, it is important to assess the nature of the focal organization’s
responsibilities toward each stakeholder group. As Figure 3.3, which is based on Archie Carroll’s work on the
Pyramid of Corporate Social Responsibility and the Moral Management of Organizational Stakeholders,
illustrates, addressing the legal, economic, ethical, and voluntary nature of a company’s responsibility toward
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owners, customers, employees, community groups, the public, government, and victims brings a moral
awareness to the CEO of the focal company. For example, in 2014 the pharmacy chain CVS banned the sale
of tobacco products from its 7,600 stores, a decision made with the expressed intent of helping create a
smoke-free generation. With regard to Figure 3.3, this voluntary decision may affect CVS’s short-term
profits, but it takes an ethical stand that influences all its stakeholders and stockholders. This step is not
limited to the CEO; other stakeholders would benefit from using it. With regard to the BP situation, had the
CEO and his core team completed this exercise and acted responsibly, he may not have lost his job.
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Figure 3.3
Nature of Focal Organization’s Ethical Responsibilities
For example, BP’s CEO may see the firm’s economic responsibility to the owners (as stakeholders) as
“preventing as many costly lawsuits as possible.” Legally, the CEO may want to protect the owners and the
executive team from liability and damage; this would entail proactively negotiating disputes outside the courts,
if possible, in a way that is equitable to all. Ethically, the CEO may keep the company’s stockholders and
owners up to date regarding his or her ethical thinking and strategies to show responsibility toward all
stakeholders. At stake is the firm’s reputation as well as its profitability. In the case of BP and other crises, the
CEO’s job and future career with the company can be at risk. Missteps in communicating with the media and
visible stakeholders, and showing insensitivity to victims or the situation can cause an executive to lose his/her
job during a crisis, as was the case at BP.
Step 4: Assess the Nature of Each Stakeholder’s Power
This part of the analysis asks, “What’s in it for each stakeholder? Who stands to win, lose, or draw over
certain stakes?” Eight types of power that different stakeholders exert and which you can use in your analysis
include (1) voting power (the ability of stakeholders to exert control through strength in numbers), (2) political
power (the ability to influence decision-making processes and agendas of public and private organizations and
institutions), (3) economic power (the ability to influence by control over resources—monetary and physical),
(4) technological power (the ability to influence innovations and decisions through uses of technology), (5) legal
power (the ability to influence laws, policies, and procedures), (6) environmental power (the ability to impact
nature), (7) cultural power (the ability to influence values, norms, and habits of people and organizations), and
(8) power over individuals and groups (the ability to influence particular, targeted persons and groups through
different forms of persuasion).32 The BP example suggests that shareholders, members of Congress, and
individual constituents have voting power over BP’s policies, and officers’ jobs and responsibilities. The
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president of the United States, government regulatory agencies, consumers, stock market analysts, and
investors all exert economic power over BP in this situation. The U.S. government, regulatory agencies, and
interest groups also exert political power over BP’s operating and manufacturing policies, processes, and
products.
Note that power and influence are exerted in two-way relations: BP toward its stakeholders, and each
stakeholder toward BP on a given issue. For example, owners and stockholders can vote on the firm’s
decisions regarding a particular issue or opportunity, such as BP’s future drilling plans. On the other hand,
federal, state, and local governments can exercise their political power by voting on BP’s legal obligations
toward consumers. New legislation may emerge with regard to the regulation of BP’s outsourcing and quality-
control methods. In return, consumers can exercise their economic power by boycotting BP’s products or
buying from other companies. What other sources of stakeholder power exist in this case?
Step 5: Construct a Framework of Stakeholder Moral Responsibilities and Interests
After you map stakeholder relationships and assess the nature of each stakeholder’s interest and power, the
next step is to identify the moral obligations your company has to each stakeholder.
Chapter 2 explained the ethical principles and guidelines that can assist in this type of decision making.
For purposes of completing this matrix, ethical decision making of company representatives can refer to the
following ethical principles: utilitarianism (weighing costs and benefits; “ends justifying means”); universalism
(showing respect and concern for human beings—“means count as much as ends”); rights (recognizing
individual liberties and privileges under laws and constitutions); justice (observing the distribution of burdens
and benefits of all concerned). Voluntarily (i.e., acting freely and from one’s own accord), the CEO may advise
shareholders to show responsibility by publicly announcing their plans for resolving the issue of the firm’s
“next steps.” This can also be done in more open and conscientious marketing activities as well as in a
consciously responsible distribution of products.
This part of the analysis lays the foundation for developing specific strategies toward each stakeholder you
have identified. Notice that developing strategies first preempts and may omit putting “first things first,” in
this case this means meeting your moral responsibilities to those affected in the situation, and not protecting
or promoting profit first and at any costs. Although there is a fiduciary responsibility toward your
stockholders, you may discover that you can lose your company (bankruptcy) and its assets, including your job,
if you do not also attend to powerful noneconomic interests—customers, victims and their families’ lives in
crisis situations, communities’ needs, the media’s attacks, and legitimacy with the general public and
government.
Step 6: Develop Specific Strategies and Tactics
Using the results from the preceding steps, you can now proceed to outline the specific strategies and tactics
you wish to use with each stakeholder. If you are a CEO using this framework, you can use Figure 3.4 along
with the previous frameworks in this section to help articulate strategies to employ with different
stakeholders.33
The typology of organizational stakeholders in Figure 3.4 shows two dimensions: potential for threat and
potential for cooperation. Note that stakeholders can move among the quadrants, changing positions as
situations and stakes change. Generally, officers of a firm in controversial situations, or situations that offer
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significant opportunities for an organization, try to influence and move stakeholders toward type 1, the
Supportive stakeholder with a low potential for threat and high potential for cooperation. Here the strategy of
the focal company is to involve the supportive stakeholder. Think of both internal and external stakeholders
who might be supportive and who should be involved in the focal organization’s strategy.
In contrast, type 3, the Nonsupportive stakeholder, who shows a high potential for threat and a low
potential for cooperation, represents an undesirable stance from the perspective of the influencer. The
suggested strategy in this situation calls for the focal organization to defend its interests and reduce dependence
on that stakeholder.
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Figure 3.4
Diagnostic Typology of Organizational Stakeholders
Source: Savage, G. T., Nix, T. H., Whitehead, C. J., and Blair, J. D. (1991). Strategies for assessing and managing organizational stakeholders.
Academy of Management Executive, 5, 65. © 1991 Academy of Management. Reproduced with permission of Academy of Management in the
format Textbook via Copyright Clearance Center.
A type 4 stakeholder is a Mixed Blessing, with a high potential for both threat and cooperation. This
stakeholder calls for a collaborative strategy. In this situation, the stakeholder could become a Supportive or
Nonsupportive type. A collaborative strategy aims to move the stakeholder to the focal company’s interests.
Finally, type 2 is the Marginal stakeholder. This stakeholder has a low potential for both threat and
cooperation. Such stakeholders may not be interested in the issues of concern. The recommended strategy in
this situation is to monitor the stakeholder, to “wait and see” and minimize expenditure of resources, until the
stakeholder moves to a Mixed Blessing, Supportive, or Nonsupportive position.
With regard to this chapter’s opening case, had you been the BP CEO at that time, along with your staff
after the explosion, you would have decided what strategy to pursue with regard to addressing the crisis. The
nature of that strategy would have determined who would be the supporters and non-supporters of BP’s
decisions. If you had chosen to deny and avoid responsibility for the explosion, or to blame the companies
who were outsourced and running those projects, you may have found that your supporters would have been
fewer and you may have realized that an avoidance, denial, and/or blame strategy would have pushed more
stakeholders to the Nonsupportive space in Figure 3.5. Nonsupportive stakeholders would be those who
sought but did not find support and truthfulness from BP’s officers with regard to owning responsibility,
offering apologies, and then providing immediate help. Therefore, families of victims of the explosion—who
appeared in the media, disgruntled and shocked employees from the rig who survived the explosion,
community inhabitants in the vicinity of the oil spill, and others would be Nonsupportive. Who else would
you add to those in opposition to BP at the time of the crisis, shortly afterward, and even a year, two or three
down the road? By systematically completing this exercise through brainstorming with others who would be
truthful with you, you, as a CEO in a crisis, can—before you react—create a broader, more objective and
socially responsible picture of and response to the situation. At stake in such cases as the BP spill is the
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company’s survival and reputation.
Figure 3.5 presents an example of the typology in Figure 3.4, using the BP oil spill case as an example. It is
important to insert specific names of groups and individuals when doing an actual analysis. Indicate other
stakeholders who might be or were influenced by BP’s decision to outsource and recall products. Using your
“third-party objective observer” perspective, you can determine the movement among stakeholder positions
using the arrows in the figure: Who influenced whom, by what means, and how over time? As you look at
Figure 3.5, ask yourself: Do I agree with this figure as it is completed? Who is likely to move from Supportive
to Nonsupportive? Or from a Mixed Blessing position to a Nonsupportive or Supportive one? Why? How?
Support your logic and defend your position.
Figure 3.5
Diagnostic Typology of Stakeholders for BP Corporation
From the point of view of the focal stakeholder, if you were CEO, you would develop specific strategies
and keep the following points in mind:
1. Your goal is to create a socially responsible, win—win set of outcomes, if possible. However, this may mean
economic costs to your firm if, in fact, members of your firm are responsible to certain groups for harm
caused as a consequence of your actions.
2. Ask: “What is our business? Who are our customers? What are our responsibilities to the stakeholders, to
the public, and to the firm?” Keep your values, mission, and responsibilities in mind as you move forward.
3. Consider probable consequences of your actions. For whom? At what costs? Over what period? Ask: “What
does a win—win situation look like for us?”
4. Keep in mind that the means you use can be important as the ends you seek; that is, how you approach and
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treat each stakeholder can be as important as what you do.
Specific strategies now can be articulated and assigned to corporate staff for review and implementation.
Remember, social responsibility is a key variable; it is as important as the economic and political factors of a
decision because social responsibility is linked to costs and benefits in other areas. At this point, you can ask to
what extent your strategies are just and fair and consider the welfare of the stakeholders affected by your
decision.
Executives use a range of strategies, especially in long-term crisis situations, to respond to external threats
and stakeholders. Their strategies often are short-sighted and begin as a defensive move. When observing and
using a stakeholder analysis, question why executives respond to their stakeholders as they do. Following the
questions and methods in this chapter systematically will help you understand why key stakeholders respond
as they do.
Step 7: Monitor Shifting Coalitions
Because time and events can change the stakes and stakeholders, and their strategies, you need to monitor the
evolution of the issues and actions of the stakeholders using Figure 3.4. Tracking external trends and events
and the resultant stakeholder strategies can help a CEO and his or her team act and react accordingly. This is
a dynamic process that occurs over time and is affected by strategies and actions that you, as CEO, and your
team direct with each stakeholder group as events occur. Your decisions are influenced by how effective
certain stakeholders respond (or counteract) you and your team’s strategies and actions. As CEO, you would
typically follow a utilitarian ethic of weighing costs and benefits of all your strategies and actions toward each
major stakeholder group, keeping your company’s best interests in mind. However, neglecting the public,
common good of all your stakeholders also affects your bottom line. If you followed a universalistic ethic in
the BP case, you might attempt to address concern and apologies to those who were harmed and condolences
to the families of those who died in the explosion and aftermath of the disaster. You would have taken
immediate action by offering factual information regarding what happened and why and what the company
intended to do to resolve the crisis. Ethics is—should be—an integral part of every corporation’s and
organization’s goals, objectives, strategies, and actions that affect other people. A question in the stakeholder
analysis offered here is: What ethical principle(s)—if any—did the CEO of BP follow, and why, given the
pressures from different stakeholders?
Summary of Stakeholder Analysis
You have now completed a basic stakeholder analysis and should be able to proceed with strategy
implementation in more realistic, thoughtful, interactive, and responsible ways. The stakeholder approach
should involve other decision makers inside and outside the focal organization.
Stakeholder analysis provides a rational, systematic basis for understanding issues and the “ethics in action”
involved in complex relationships between an organization, its leaders, and constituents. It helps decision
makers structure strategic planning sessions and decide how to meet the moral obligations of all stakeholders.
The extent to which the resultant strategies and outcomes are moral and effective for a firm and its
stakeholders depends on many factors, including the values of the firm’s leaders, the stakeholders’ power, the
legitimacy of the actions, the use of available resources, and the exigencies of the changing environment.
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3.4 Negotiation Methods: Resolving Stakeholder Disputes
Disputes are part of stakeholder relationships. Most disputes are handled in the context of mutual trusting
relationships between stakeholders; others move into the legal and regulatory system.34 Disputes occur
between different stakeholder levels: for example, between professionals within an organization, consumers
and companies, business to business (B2B), governments and businesses, and among coalitions and businesses.
It is estimated that Fortune 500 senior human resource (HR) executives are involved in legal disputes 20% of
their working time. Also, managers generally spend 30% of their time handling conflicts. The hidden cost of
managing conflicts between and among professionals in organizations can result in absenteeism, turnover,
legal costs, and loss of productivity.35 U.S. retail e-commerce sales in the fourth quarter of 2011 were $51.4
billion, up 15.5% from 2010. With that volume, there will be business disputes. A study by the American
Arbitration Association surveying 100 senior executives of Fortune 1000 companies found that:
1. Two out of three executives were concerned about B2B e-commerce disputes with major suppliers and
50% of surveyed executives noted that this type of dispute would significantly impact their business.
2. More than 50% noted that the shift to e-commerce will create new and/or different types of stakeholder
disputes, with 64% of surveyed executives reporting their companies did not yet have a plan in place to deal
with these disputes.
3. 70% agreed that specific guidelines are needed in order to manage e-commerce disputes, and one in four
executives noted that their company did nothing to prevent e-commerce disputes.36
Stakeholder conflict and dispute resolution methods are clearly necessary.
Stakeholder Dispute Resolution Methods
Dispute resolution is an expertise also known as alternative dispute resolution (ADR). Dispute resolution
techniques cover a variety of methods intended to help potential litigants resolve conflicts. The methods can
be viewed on a continuum ranging from face-to-face negotiation to litigation, as Figure 3.6 illustrates.
Advocates of alternative resolution methods argue that litigation need not be the standard for evaluating other
dispute techniques.37
Figure 3.6
The ADR Continuum
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Source: Erickson, S. and Johnson, M. (January 27, 2012). ADR techniques and procedures flowing through porous boundaries: Flooding the
ADR landscape and confusing the public.
http://www.mediate.com/pdf/ADR%20Techniques%20and%20Procedures%20Flowing%20Through%20Porous%20Boundaries-
%20Flooding%20the%20ADR%20Landscape%20and%20Confusing%20the%20Public%20(Revised,%20January%2027,%202012) , accessed
February 11, 2014.
Figure 3.6 illustrates the degree to which disputing parties give up control of the process and outcome to a
neutral third party. The left side of the continuum is based on consensual, informal dispute resolution
methods. Negotiating, facilitation, and some mediation are methods where the parties maintain control over
the conflict resolution process. Moving to the right side of the spectrum (adjudicative), disputing parties give
up control to third-party arbitrators and then litigators (courts, tribunals, and binding arbitration). For
example, with regard to outsourcing issues discussed earlier in the chapter, most companies have the authority
to make outsourcing decisions. However, with regard to outsourced government contractors, for example,
control over who and what types of contracts will be used is more complicated. For example, when the effort
to start rebuilding Iraq after the invasions were over, Congress debated the use of external contractors for
those projects. Halliburton received several exclusive outsourced contracts toward that effort. Congress used
the National Defense Authorization Act for Fiscal Year 2005 to enable civil service employees in the
Departments of Defense and Homeland Security, the Internal Revenue Service, and the Pentagon to control
the use of external contractors. It was reported recently that “Between 2003 and 2008, Congress estimated
that the United States had spent $100 billion on contractors in Iraq, or one dollar out of every five spent on
the Iraq War at the time. Today, assuming a conservative estimate of $800 billion spent on the war, at least
$160 billion has likely ended up in the coffers of private contractors.” Lawsuits are still pending in some
cases.38
The stakeholder management approach involves the full range of dispute resolution techniques, although
ideally more integrative and relational rather than distributive or power-based methods would be attempted
first. (Power-based approaches are based on authoritarian and competition-based methods where the more
powerful group or individual “wins” and the opposing group “loses.” This approach can cause other disputes to
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http://www.mediate.com/pdf/ADR%20Techniques%20and%20Procedures%20Flowing%20Through%20Porous%20Boundaries-%20Flooding%20the%20ADR%20Landscape%20and%20Confusing%20the%20Public%20(Revised,%20January%2027,%202012)

arise.) Integrative approaches are characterized as follows:
• Problems are seen as having more potential solutions than are immediately obvious.
• Resources are seen as expandable; the goal is to “expand the pie” before dividing it.
• Parties attempting to create more potential solutions and processes are thus said to be “value
creating.”
• Parties attempt to accommodate as many interests of each of the parties as possible.
• The so-called win—win or “all gain” approach.39
Distributive approaches have the following characteristics:
• Problems are seen as zero sum.
• Resources are imagined as fixed: “divide the pie.”
• They are “value claiming” rather than “value creating.”
• They involve haggling or “splitting the difference.”40
Relational approaches (which consider power, interests, rights, and ethics) include and are based on:
• Relationship building.
• Narrative, deliberative, and other “dialogical” (i.e., dialogue-based) approaches to negotiation and
mediation.
• Restorative justice and reconciliation (i.e., approaches that respect the dignity of every person, build
understanding, and provide opportunities for victims to obtain restoration and for offenders to take
responsibility for their actions).
• Other transformative approaches to peacebuilding.41
The process of principled negotiation from Roger Fisher and William Ury’s book, Getting to Yes, continues
to be used for almost any type of dispute. Their four principles are:
1. Separate the people from the problem.
2. Focus on interests rather than positions.
3. Generate a variety of options before settling on an agreement.
4. Insist that the agreement be based on objective criteria.42
Adjudicative, legislative, restorative justice, reparation, and rights-based approaches are necessary when
rights, property, or other legitimate claims have been violated and harm results. Leaders and professionals
practicing a stakeholder management approach incorporate and gain proficiency in using a wide range of
conflict and alternative dispute resolution methods.43
3.5 Stakeholder Management Approach: Using Ethical Principles and
Reasoning
Applying ethical principles and reasoning in a stakeholder approach involves asking: What is equitable, just,
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fair, and good for those who affect and are affected by business decisions? Who are the weaker stakeholders in
terms of power and influence? Who can, who will, and who should help weaker stakeholders make their
voices heard and encourage their participation in the decision process? This approach also requires the
principal stakeholders to define and fulfill their ethical obligations to the affected constituencies.
Chapter 2 specifically deals with the ethical principals and reasoning used in a stakeholder approach. That
chapter presents several ethical frameworks and principles, including the following: (1) the common good
principle, (2) rights, (3) justice, (4) utilitarianism, (5) relativism, and (6) universalism, all of which can be
applied to individual, group, and organizational belief systems, policies, and motives. You may also refer to
Chapters 2 and 3 when using ethical principles (or the lack of such) to describe actual individuals’ and groups’
observed moral policies, motives, and outcomes in cases that you are studying or creating from your experience
or research.
3.6 Moral Responsibilities of Cross-Functional Area Professionals
One goal of a stakeholder analysis is to encourage and prepare organizational managers to articulate their own
moral responsibilities, as well as the responsibilities of their company and their profession, toward their
different constituencies. Stakeholder analysis focuses the enterprise’s attention and moral decision-making
process on external events. The stakeholder management approach also applies internally, especially to
individual managers in traditional functional areas. These managers can be seen as conduits through which
other external stakeholders are influenced.
Because our concern is managing moral responsibility in organizational stakeholder relationships, this
section briefly outlines some of the responsibilities of selected functional area managers. With the Internet,
the transparency of all organizational actors and internal stakeholders increases the risk and stakes of unethical
practices. Chat rooms, message boards, and breaking-news sites provide instant platforms for exposing both
rumor and accurate news about companies. (In the tobacco controversy, it was an antismoking researcher and
advocate who first posted inside information from a whistle-blower on the Internet. This action was the first
step toward opening the tobacco companies’ internal documents to public scrutiny and the resulting lawsuits.)
Figure 3.7 illustrates a manager’s stakeholders. The particular functional area you are interested in can be
kept in mind while you read the descriptions discussed next. Note that steps 1 through 7 presented in the
stakeholder analysis can also be used for this level of analysis.
Functional and expert areas include marketing, research and development (R&D), manufacturing, public
relations (PR), human resource management, and accounting and finance. The basic moral dimensions of
each of these are discussed below. Even though functional areas are often blurred in some emerging network
organizational structures and self-designed teams, many of the responsibilities of these managerial areas
remain intact. Understanding these managerial roles from a stakeholder perspective helps to clarify the
pressures and moral responsibilities of these job positions. Refer to the section on ethical principles and quick
ethical tests for professionals in Chapter 2.
Marketing and Sales Professionals and Managers as Stakeholders
Sales professionals and managers are continuously engaged—electronically and/or face-to-face—with
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customers, suppliers, and vendors. Sales professionals are also evaluated by quotas and quantitative
expectations on a weekly, monthly, and quarterly basis. The stress and pressure to meet expectations is always
present. Sales professionals must continually balance their personal ethics and their professional pressures.
The dilemma often becomes: “Who do I represent? What weight do my beliefs and ethics have when
measured against my department’s and company’s performance measures for me?” Another key question for
sales professionals particularly is: “Where is the line between unethical and ethical practices for me?” Also,
because customers are an integral part of business, these professionals must create and maintain customer
interest and loyalty. They must be concerned with consumer safety and welfare, while increasing revenue and
obtaining new accounts. Many marketing and sales professionals also are responsible for determining and
managing the firm’s advertising and the truthfulness (and legality) of the data and information they issue to
the public about products and services. They must interact with many of the other functional areas and with
advertising agencies, customers, and consumer groups. Moral dilemmas can arise for marketing managers who
may be asked to promote unsafe products or to implement advertising campaigns that are untrue or not in the
consumer’s best interests.
Figure 3.7
A Manager’s Stakeholders
Note: The letters K, L, M, and N are hypothetical designations in place of real department names. Dotted lines refer to hypothetical linkages.
Source: Freeman, R. Edward. (1984). Strategic management: A stakeholder approach, 218. Boston: Pitman. Reproduced with permission of the
author.
Several equity traders, particularly at Enron during and after the corporate scandals, were involved in lying
to customers about “dogs”—stocks they knew were underperforming. Part of their motive was to keep certain
stocks popular and in a “buy” mode, so their own sales performance would be valued higher, giving them
better bonuses.
A major moral dilemma for marketing managers is having to choose between a profitable decision and a
socially responsible one. Stakeholder analysis helps marketing managers in these morally questionable
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situations by identifying stakeholders and understanding the effects and consequences of profits and services
on them. Balancing company profitability with human rights and interests is a moral responsibility of
marketers. Companies that have no ethics code or socially responsible policies—as well as those that do have
these, but do not enforce them—increase the personal pressure, pain, and liability of individual professionals.
Such tensions can lead to unethical and illegal activities.
R&D, Engineering Professionals, and Managers as Stakeholders
R&D managers and engineers are responsible for the safety and reliability of product design. Faulty products
can mean public outcry, which can result in unwanted media exposure and possibly (perhaps justifiably)
lawsuits. R&D managers must work and communicate effectively and conscientiously with professionals in
manufacturing, marketing, and information systems, and with senior managers, contractors, and government
representatives, to name a few of their stakeholders. This chapter’s opening case illustrates that a company’s
operating parts, design, and quality control can involve more care and concern for safety and monitoring to
ensure proper functioning of operations than BP’s company officers probably envisioned before that crisis
erupted. Technical issues can quickly escalate to political, cultural, legislative, and judicial levels; ethical issues
that may begin as professional ethical codes of engineers can, if a product crisis occurs, transform into legal
concerns about international human and consumer rights and justice.
As studies and reports on the Space Shuttle Challenger disaster that occurred on January 28, 1986, further
illustrate, care and attention to the safe functioning of technical parts and processes of any system can mean
the difference between life and death. Challenger tore apart 73 seconds after lift-off from Cape Canaveral,
Florida. Engineers and managers at the National Aeronautics and Space Administration (NASA) and the
cooperating company, Thiokol, had different priorities, perceptions, and technical judgments regarding the
“go, no-go” decision of that space launch. A follow-up study found that “The commission not only found
fault with a failed sealant ring but also with the officials at the National Aeronautics and Space
Administration (NASA) who allowed the shuttle launch to take place despite concerns voiced by NASA
engineers regarding the safety of the launch.”44 Lack of individual responsibility and the poor critical
judgment of NASA administrators contributed to the miscommunication and resulting disaster.
Moral dilemmas can arise for R&D engineers whose technical judgments and risk assessments conflict
with administrative managers seeking profit and time-to-market deadlines. R&D managers also can benefit
from doing a stakeholder analysis, before disasters like the Challenger occur. The discussion of the levels of
business ethics in Chapter 1 also provides professionals with a way of examining their individual ethics and
moral responsibilities.
Accounting and Finance Professionals and Managers as Stakeholders
Accounting and finance professionals are responsible for the welfare of clients and safeguard their financial
interests. Financial planners, brokers, accountants, mutual fund managers, bankers, valuation specialists, and
insurance agents have the responsibility of ensuring reliable and accurate transactions and reporting of other
people’s money and assets.45 Many of these professions are part of regulated industries; however, the recent
corporate scandals at Enron, Tyco, Arthur Andersen, and other large firms showed that company culture,
individual and team judgment, greed, and lack of integrity contributed to executives’ “cooking the books.”
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Financial fraud, stealing, and gambling away employees’ pensions, and shareholders’ investments were part of
the illegal activities officers of these firms directed and led. Although the Sarbanes-Oxley Act, the Revised
Sentencing Guidelines, and stricter company ethics and reporting codes (see Chapter 4) have helped prevent
illegal activity in these professions, problems remain.
Factors in these professions that trigger unethical activities include: (1) pressures from senior officers and
supervisors to “maximize profits,” sometimes at any cost; (2) lack of integrity (truthfulness, conscience) of
leaders, supervisors, and employees; (3) corporate cultures that devalue clients, investors, and employees; (4)
requests from clients to change financial statements and tax returns and commit tax fraud; (5) conflict of
interest and lack of auditor independence between client and auditing firm; and (6) blurring professional and
personal roles and responsibilities between client and professional. These issues are in part related to societal,
structural problems. For example, the U.S. financial system emphasizes and rewards short-term, quarterly
earnings that help create many of the pressures and poor practices listed above. Chapters 4 and 5 deal with
these topics in more detail.
Public Relations Managers as Stakeholders
PR managers must constantly interact with outside groups and corporate executives, especially in an age when
communications media, external relations, and public scrutiny play such vital roles. PR managers are
responsible for transmitting, receiving, and interpreting information about employees, products, services, and
the company. A firm’s public credibility, image, and reputation depend on how PR professionals manage
stakeholders because PR personnel must often negotiate the boundaries between corporate loyalty and
credibility with external groups. These groups often use different criteria than corporate executives do for
measuring success and responsibility, especially during crises. Moral dilemmas can arise when PR managers
must defend company actions that have possible or known harmful effects on the public or stakeholders. A
stakeholder analysis can prepare PR managers and inform them about the situation, the stakes, and the
strategies they must address.
Human Resource Managers as Stakeholders
Human resource managers (HRMs) are on the front line of helping other managers recruit, hire, fire,
promote, evaluate, reward, discipline, transfer, and counsel employees. They negotiate union settlements and
assist the government with enforcing Equal Employment Opportunity Commission (EEOC) standards.
HRMs must translate employee rights and laws into practice. They also research, write, and maintain
company policies on employee affairs. They face constant ethical pressures and uncertainties over issues about
invasion of privacy and violations of employees’ rights. Stakeholders of HRMs include employees, other
managers and bosses, unions, community groups, government officials, lobbyists, and competitors.
Moral dilemmas can arise for these managers when affirmative action policies are threatened in favor of
corporate decisions to hide biases or protect profits. HRMs also straddle the fine line between the individual
rights of employees and corporate self-interests, especially when reductions in force (RIFs) and other hiring or
firing decisions are involved. As industries restructure, merge, downsize, outsource, and expand
internationally, HRMs’ work becomes even more complicated.
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Summary of Managerial Moral Responsibilities
Expert and functional area managers are confronted with balancing operational profit goals with corporate
moral obligations toward stakeholders. These pressures are considered “part of the job.” Unfortunately, clear
corporate directions for resolving dilemmas that involve conflicts between individuals’ rights and corporate
economic interests generally are not available. Using a stakeholder analysis is “like walking in the shoes of
another professional”: you get a sense of his or her pressures. Using a stakeholder analysis is a step toward
clarifying the issues involved in resolving ethical dilemmas. Chapter 2 presented moral decision-making
principles that can help individuals think through these issues and take responsible action.
3.7 Issues Management, Integrating a Stakeholder Framework
Issues management methods complement the stakeholder management approach. It may be helpful to begin
by identifying and analyzing major issues before doing a stakeholder analysis. Many reputable large companies
use issues managers and methods for identifying, tracking, and responding to trends that offer potential
opportunities as well as threats to companies.46 Before discussing ways of integrating stakeholder management
(and analysis) with issues management, issues management is defined.
What Is an Issue?
An issue is a problem, contention, or argument that concerns both an organization and one or more of its
stakeholders and/or stockholders. Teresa Yancey Crane, founder of the Issue Management Council, explains
the relationship between an issue and issue management the following way: “Think of an issue as a gap
between your actions and stakeholder expectations. Second, think of issue management as the process used to
close that gap.”47 The gap can be closed in a number of ways, using several strategies. A primary method is
using an accommodating policy. Providing public education, community dialogue, and changing expectations
through communication are some accommodating strategies used in issues management. Solving complicated
issues may sometimes require radical actions, like replacing members from the board of directors and the
senior management team.48
Issues management is also a formal process used to anticipate and take appropriate action to respond to
emerging trends, concerns, or issues that can affect an organization and its stakeholders. “Issues management
is a . . . genuine and ethical long-term commitment by the organization to a two-way, inclusive standard of
corporate responsibility toward stakeholders. Issues management involves connectivity with, rather than
control of, others. Issues managers help identify and close gaps between expectation, performance,
communication, and accountability. Issues management blends ‘many faces’ within the entity into ‘one voice.’
Like the issues themselves, the process is multi-faceted and is enhanced by the strategic facilitation and
integration of diverse viewpoints and skills.”49
Many national and international business-related controversies develop around the exposure of a single
issue that evolves into more serious and costly issues. Enron’s problems in the beginning surfaced as an issue
of overstated revenue. After months of investigation, members of the highest executive team were found to
have been involved in deception, fraud, and theft. Ford had the Bridgestone/Firestone Explorer tire crisis in
2001 with what appeared to be faulty tires (see Ethical Insight 3.1). The issue escalated to questions about the
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design of the Ford vehicle itself, then to questions about many international deaths and accidents over a
number of years. The CEO of Ford eventually lost his job.
Ethical Insight 3.1
Classic Crisis Management Case
• Crisis management experts criticized Bridgestone/Firestone for minimizing their tires’ problems
during the week of August 11, 2000. The experts gave the company mixed reviews on its handling of
the recall of 6.5 million tires that were responsible for 174 deaths and more than 300 incidents
involving tires that allegedly shredded on the highway in 1999. The tire maker’s spokespersons
claimed the poor tread on the tires was caused by underinflation, improper maintenance, and poor
road conditions.
• Mark Braverman, principal of CMG Associates, a crisis management firm in Newton,
Massachusetts, noted that the company blamed the victim and that Bridgestone/Firestone lacked a
visible leader for its crisis management effort. “The CEO should be out there, not executive vice
presidents.”
• Steven Fink, another crisis management expert, noted that “After they [Bridgestone/Firestone]
announced the recall, they were not prepared to deal with it. They were telling consumers they will
have to wait up to a year to get tires. And things like busy telephone call lines and overloaded web
sites—these are things that can be anticipated. That’s basic crisis management.”
• Stephen Greyser, professor of marketing and communications at Harvard Business School, stated,
“It’s about what they didn’t do up to now. The fact that [Bridgestone/Firestone] is just stepping up to
bat tells me they’ve never really had the consumer as the principal focus of their thinking.”
• Defending the way Bridgestone/Firestone handled the crisis was Dennis Gioia, professor of
organizational behavior at Smeal College of Business Administration at Pennsylvania State
University: “With hindsight, you can always accuse a company of being too slow, given the history of
automotive recalls. Sometimes you can’t take hasty action or you would be acting on every hint there’s
a problem. It can create hysteria.”
Question for Discussion
Who do you agree or disagree with among these crisis management consultants? Explain.
Source: Consultants split on Bridgestone’s crisis management. (August 11, 2000). Wall Street Journal, A6.
Other Types of Issues
There are other types of issues arising from the external environment that involve different companies and
industries. For example, the issue of obesity has become prominent in the United States. Once considered a
personal lifestyle problem, obesity is now seen as a public health disease, and its treatment can be paid for by
one’s health insurance. This issue involves insurance companies, the corporations who employ individuals
facing this problem, employment attorneys, families of those individuals affected, and taxpayers, to name a
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few. Another issue that affects numerous stakeholders is drivers who drink. U.S. mothers who have lost their
children to this growing phenomenon have discovered that this issue is not a set of isolated events, but
widespread. Mothers Against Drunk Driving (MADD) was founded in the 1980s by Candy Lightner, whose
13-year-old daughter Cari was killed by a drunken hit-and-run driver as she walked down a suburban street in
California. The impact broke almost every bone in her body and fractured her skull, and she died at the scene
of the accident. “I promised myself on the day of Cari’s death that I would fight to make this needless
homicide count for something positive in the years ahead,” her mother later wrote.50
Programs like 60 Minutes, Dateline, and Frontline introduce breaking news that focuses on events, crises,
and innovative practices that are being faced and addressed. Stakeholder and issues management frameworks
can be used to understand the evolution of these issues in order to responsibly manage or change their effects.
Stakeholder and Issues Management: “Connecting the Dots”
Issues and stakeholder management are used interchangeably by scholars and corporate practitioners, as the
two following quotes illustrate:
For many societal predicaments, stakeholders and issues represent two complementary sides of the same coin.51
Stakeholders tend to organize around “hot” issues, and issues are typically associated with certain vocal stakeholder groups. Issues
management scholars can therefore explore how issues management requires stakeholder prioritization, and how stakeholder management
gets facilitated when managers have deep knowledge of stakeholders’ issue agendas. Earlier research also suggests that whether or not
stakeholders decide to get involved with certain issues has a profound influence on issue evolution, and as does the timing and extent of their
involvement.52
Applying stakeholder and issues management approaches should not be mechanical. Moral creativity and
objectivity help, as discussed in Chapter 1. A general first step is to ask: “What is the issue, opportunity, or
precipitating event that an organization is facing or has experienced? How did the issue emerge?” Generally
there are several issues that are discovered. The process begins by analyzing and then framing which issues are
the most urgent and have (or may have) the greatest impact on the organization. At this point, you can begin
to ask who was involved in starting or addressing the issue. This triggers the beginning of a stakeholder
analysis and the steps discussed earlier in the chapter. Depending on how the issue evolved into other issues—
or whether there was a crisis at the beginning, middle, or end of the issue evolution—you will know which
issues management framework from the following section is most relevant for the analysis of the situation.
Actually, stakeholder analysis questions help “connect the dots” in understanding and closing the gaps of
issues management. Stakeholder questions help discover “who did what to whom to influence which results,
and at what costs and outcomes.” A major purpose in analyzing and effectively managing issues and
stakeholders is to create environments that enable high-performing people to achieve productive and ethical
results.
Moral Dimensions of Stakeholder and Issues Management
Some studies argue that moral reasoning is “issue-dependent” and that “people generally behave better when
the moral issue is important.”53 Questions regarding issue recognition include: To what extent do people
actually recognize moral issues? Is it by the magnitude of the potential consequences or the actual
consequences of the issue? Is it by the social consensus regarding how important the issue is? Is it by how
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likely it is that the effects of the issue will be felt or how quickly the issue will occur?54 Ethical reasoning and
behavior are an important part of managing stakeholders and issues because ethics is the energy that motivates
people to respond to issues. When ethical motives are absent from leaders’ and professionals’ thinking and
feeling, activities can occur that cost all stakeholders. Teaching you to detect and prevent unethical and illegal
actions by using these methods is an aim of this section.
Companies face issues every day. Some issues lead to serious consequences—defective products, financial
fraud, fatal side effects of drugs, oil spills, the loss of millions of lives to the effects of tobacco, violence from
use of firearms, or the theft of pensions from ordinary employees who worked a lifetime to accrue them.
Other issues evolve in a way that leads to spectacular outcomes: the invention and commercialization of the
Internet, information technology that provides wireless access to anyone at any time in any place, and the
capability to network customers, businesses, suppliers, and vendors. Learning to identify and change issues for
the good of the organization and for the common and public good is another goal of the stakeholder
management approach.
Types of Issues Management Frameworks
This section presents two general issues frameworks for mapping and managing issues before and after they
evolve or erupt into crises. These frameworks can be used with the stakeholder management approach. Using
a stakeholder analysis (which is part of the general stakeholder management approach) explains the “who,
what, where, why, and what happened” that affects an issue. After you have read the first two issues
management approaches shown in Figures 3.8 and 3.9, you will see that either or both can be used to identify
and analyze a major issue (crisis or potential opportunity) for an organization, as is explained below.
Figure 3.8 illustrates a straightforward framework that organizations can use for anticipating and thinking
through issues to prevent a crisis. This is a somewhat generic model that has evolved within the issues
management field. Identifying, tracking, and developing responses to issues are the thrusts of the process.
More recently, companies like General Electric, Patagonia, Costco, and others use issues frameworks with the
intent of acting in socially responsible ways, not only to protect their own companies and businesses from
environmental and economic “threats,” but also to protect the environment and extend their reputations for
“doing the right thing.”
The steps in Figure 3.8, then, can also be used to plan and manage issues that may have already affected an
organization. Senior officers and staff would probably use this framework in their strategizing and “what if”
scenarios. If you are analyzing a case such as the BP rig explosion and oil spill, you can use this framework to
show what steps the organization could have taken to prevent such disasters, and the steps actually taken to
manage the issues under investigation. You can also use a stakeholder analysis at any point in this model.
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Figure 3.8
Six-Step Issues Management Process
Source: Based on Coates, J., Jarratt, V., and Heinz, L. (1986). Issues management. Mt. Airy, MI: Lomond Publications, 19–20.
Figure 3.9 is more specific and focuses on the evolution of an issue from inception to resolution. This
framework, which is not organization-specific like Figure 3.8, is more likely to be used by analysts, managers,
and scholars studying issues that have warning signs which, if attention is given to them, can prevent
escalating problems. In many cases, a stakeholder analysis can show why strategies and actions of particular
stakeholders short-circuited the issue’s evolution through all the stages in this figure.
First Approach: Six-Step Issues Management Process
The first method, as noted, is the most straightforward and most appropriate for companies or groups
scanning the environment for issues that can impact their businesses and internal environments. A third-party
observer could also use this approach to describe how a company acted in retrospect or could act in the future.
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Figure 3.9
Seven-Phase Issue-Development Process
Source: Adapted on Marx, T. (1986). Integrating public affairs and strategic planning. California Management Review, Fall, 29(1), 145.
However, this model would not be suitable for examining how an issue evolved over time, or for analyzing
precrisis signs or symptoms of an event. The process involves the following steps, illustrated in Figure 3.8.55
1. Environmental scanning and issues identification.
2. Issues analysis.
3. Issues ranking and prioritizing.
4. Issues resolution and strategizing.
5. Issues response and implementation.
6. Issues evaluation and monitoring.
These steps are part of a firm’s corporate planning process. In the strategic issues management process, a
firm uses a selected team to work on emerging trends as they relate to the industry and company. As Heath
noted, “The objective of issues management is to make a smart, proactive, and even more respected
organization. This sort of organization is one that understands and responds to its stakeseekers and
stakeholders.”56
This framework is a basic approach for proactively mapping, strategizing, and responding to issues that
affect an organization. With regard to this chapter’s opening case, if you, as an objective third-party observer,
were analyzing BP’s situation, what issues can you identify that might affect the company? As you identify
each issue (step 1), you might begin to analyze any organizational and/or environmental issue that offered
clues about the condition of the rig. Then you could examine the issues and their impact on the organization
and other stakeholders before and after the explosion (step 2). The remaining steps would involve analyzing
how BP handled the crisis (steps 3–6).
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This six-step process also enables you to advise upper-level managers and directors in the company
regarding precautions to take to avoid the illegal and unethical consequences of an issue. This model sharpens
your ability to see the effects of issues on organizations from conception to response and monitoring.
Second Approach: Seven-Phase Issue Development Process
Issues are believed and have been observed to follow a developmental life cycle. Views differ on the stages,
phases, and time involved in such a life cycle. Thomas Marx’s reasoning fits with the seven-phase evolution of
a public’s “felt need” or outcry through that need or demand’s becoming a law. The entire cycle has been
estimated at taking eight years, as illustrated in Figure 3.9—with the use of the Internet, social media, and
mobile devices, this time span will likely be shortened.57
1. A felt need arises (from emerging events, advocacy groups, books, movies).
2. Media coverage is developed (television segments, such as on 60 Minutes, 20/20, FOX News, CNN, and
breaking news on the Internet from the Wall Street Journal, New York Times, and other news and blogging
sources).
3. Interest group development gains momentum and grows.
4. Policies are adopted by leading political jurisdictions (cities, states, counties).
5. The federal government gives attention to the issue (hearings and studies).
6. Issues and policies evolve into legislation and regulation.
7. Issues and policies enter litigation.
BP’s CEO and top-level team could have used this framework to anticipate and perhaps prevent the
explosion; and if not prevent the explosion, they could have responded to the public in a more timely and
concerned way. With the Internet, it no longer takes seven years for this model to move from phase one to the
last (litigation) phase. Once local and federal legislators learn about a volatile news-breaking public issue,
especially if the media has exposed it, company representatives may respond sooner.
“While the accident could have been prevented, BP might have avoided its intense and deserved public
flogging if only it had respected the best practices for managing a crisis.”58 Bryant and Hunter go on to
explore who is to blame for the spill:
BP has for many years publicly claimed to be laser focused on safety. But inside the company, it was clearly focused on cost cutting, at the
expense of safety. Furthermore, regulators and environmental groups have not been fooled by BP’s public statements, though they have
allowed the company to continue to operate as usual. Who then is to blame for the spill? Is it BP, which has been driving cost cutting hard
and succeeding? Or its contractors, who have had to operate to meet BP’s specifications and who, in order to meet budget, changed
operating procedures? Is it government regulators, who have been well aware of BP’s violations, but have allowed it not to pay its fines and to
continue to operate? Is it the public, users of oil, whose insatiable demands for petrochemical products has led to the overuse of a limited
natural resource that, it could be claimed, forced firms like BP to take on ever more risky operations to meet demand (note that figures
suggest that the operations in the Gulf account for nearly 20 percent of the United States’ domestic oil production)? Or, is it investors,
demanding ever higher returns on their investment over shorter periods of time, driving BP executives to squeeze efficiencies from
operations that were designed to be effective—not efficient, in order to maximize earnings per share?59
Stakeholder management methods can be used with this issue management approach in order to identify
those groups and individuals who moved an issue from one phase to another and who helped change the
nature of an issue. Usually different stakeholder groups redefine issues as these constituencies compete with
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one another, using different sources of power, as discussed earlier.
This seven-phase framework is also useful in identifying and following public issues that do not necessarily
originate with corporations, and could be applied to such issues as drunk-driving, obesity, global warming,
and even to natural disasters such as Hurricane Sandy in 2012, Katrina in 2005, or the 2004 Indian Ocean
earthquake and tsunami. Issues frameworks and stakeholder analysis can help identify the effectiveness of
public and private organizations in detecting and responding to events that result in crises. Sometimes the
aftermath of a catastrophic event can result in a larger crisis than the precipitating event itself.
Marx illustrated his model with the origins of the automobile safety belt issue.60 The four stages of this
case, according to Marx, were reflected by the following events:
1. Social awareness: Ralph Nader’s now-classic book, Unsafe at Any Speed, published in 1965, created a social
expectation regarding the safe manufacturing of automobiles. The Chevrolet Corvair, later pulled off the
market, was the focus of Nader’s astute legal and public advocacy work in exposing manufacturing defects.
2. Political awareness: The National Traffic and Motor Vehicle Safety Act and the resulting safety hearings in
1966 moved this expectation into the political arena.
3. Legislative engagement: In 1966, the Motor Vehicle Safety Act was passed, and four states began requiring
the use of seat belts in 1984.
4. Litigation: Social control was established in 1967, when all cars were required to have seat belts. Driver
fines and penalties, recalls of products, and litigation concerning defective equipment further reinforced the
control stage.
Nader’s pioneering consumer advocacy and legal work with regard to U.S. automobile manufacturing set an
enduring precedent for watchdog congressional and voluntary advocacy groups that initiated laws that are still
in effect.
Many other books have served as catalysts to mobilize the U.S. public and ultimately influence Congress to
pass legislation. A brief list includes, for example, Thomas Paine’s Common Sense (1776), which rallied the
public against the British monarchy and is believed to have been the single most powerful influence that
mobilized widespread support for the Revolutionary War—over 100,000 copies were sold in the first few
months of its publication. Mary Wollstonecraft’s A Vindication of the Rights of Women (1792) was the first
literary statement promoting women’s rights and led to the movement that gave women the right to vote in
America. Upton Sinclair’s novel The Jungle (1906) shocked the nation by exposing the wretched conditions of
Chicago’s meatpacking industry and the impoverished lives of immigrants who worked there. The book
influenced legislation on employment laws and safety standards related to meatpacking and the food industry
in general. Silent Spring (1962) by Rachel Carson brought to the attention of millions the loss of endangered
species and the environment and pressured some of the first legislation in these areas.61 Refer to Chapter 5 to
see later books on food and diets that also have made an impact on national policy.
Take any industry or scan the news, then select an issue and see if you can predict and/or observe the
possible path the issue may take through these different stages. This issue evolution process provides a
window into the emergence and evolution of public policies and laws in U.S. society. Issues are not static or
predetermined commodities. Stakeholder interests and actions move or impede an issue’s development. To
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understand how an issue develops, or is unable to develop, is to understand how power works in a political
system in which market and nonmarket forces pressure the ethics and values of stockholders and stakeholders.
3.8 Managing Crises
On January 15, 2009, US Airways Flight 1549 took off from LaGuardia Airport in New York City bound for
Charlotte/Douglas International Airport, North Carolina, with the ultimate destination of Seattle-Tacoma
International Airport in Washington. During its initial climb, the plane hit a flock of Canadian Geese.
Despite losing engine power, Captain Chesley Burnett “Sully” Sullenberger III and his crew safely landed the
plane on the Hudson River off midtown Manhattan. That landing is now known as the “Miracle on the
Hudson.” The crew was later awarded the Master’s Medal of the Guild of Air Pilots and Air Navigators,
which stated “This emergency ditching and evacuation, with the loss of no lives, is a heroic and unique
aviation achievement.” It was later described as “the most successful ditching in aviation history.”62
Captain Sullenberger’s crisis leadership style was focused, technically and intuitively accurate and creative,
calm, sympathetic, positive, and transparent. Consequently, his leadership during a time of intense crisis is
celebrated as heroic, although he personally does not feel comfortable with that term. Captain Sullenberger’s
actions that day now serve as an exemplary role model of crisis leadership.63
Crisis management methods evolved from the study of how corporations and leaders responded (and
should have responded) to crises. Using crisis management methods with stakeholder management methods is
essential for understanding and possibly preventing future fiascos because crises continue to occur in a number
of areas: product/service crises (e.g., JetBlue’s 2007 weather-related mishap); consumer products (the classic
crisis with Ford’s use of faulty Bridgestone/Firestone tires), financial systems (Enron and the recent subprime
lending crisis), and government/private contractor projects (Boston’s 2006 Big Dig tunnel partial ceiling
collapse and the 1986 Challenger disaster). Captain Sullenberger’s response to the crisis he faced in the
scenario discussed above is a success story. Unfortunately, most corporate leaders have not responded so
courageously.
Steven Fink states that a crisis is a “turning point for better or worse,” a “decisive moment” or “crucial
time,” or “a situation that has reached a critical phase.” He goes on to say that crisis management “is the art of
removing much of the risk and uncertainty to allow you to achieve more control over your destiny.”64 Crises,
from a corporation’s point of view, can deteriorate if the situation escalates in intensity, comes under closer
governmental scrutiny, interferes with normal operations, jeopardizes the positive image of the company or its
officers, or damages a firm’s bottom line. A turn for the worse also could occur if any of the firm’s
stakeholders were seriously harmed or if the environment was damaged. The following two approaches
describe ways that organizations can respond to crises. You may turn to Chapter 4 to review some of the
classic corporate crises, in addition to the more contemporary BP rig explosion and oil spill, that have
occurred over the past few decades. Having such examples as the Exxon Valdez, the Ford Pinto disaster, and
other crises in mind would be informative as you read how to examine and respond to a crisis from a
stakeholder management perspective.
The model in Figure 3.10 shows a crisis consisting of four stages: (1) prodromal (precrisis), (2) acute, (3)
chronic, and (4) conflict resolution. Judgment and observation are required to manage these stages. This
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approach differs from the second one in that a precrisis stage is included.65
The prodromal stage is the warning stage. If this stage is not recognized or does not actually occur, the
second stage (acute crisis) can rush in, requiring damage control. Clues in the prodromal stage must be
carefully observed. For example, BP blamed Transocean and Halliburton for the explosion; these companies
blamed BP for taking a laissez-faire or lax approach to safety and equipment that required upgrading. What
happens in the prodromal stage when these types of attitudes and values clash within and between companies
and work groups? Was there a warning sign or symptom that employees and managers at BP and/or the
licensed companies saw that a crisis was possible? If so, why do you think these warning signs were not taken
more seriously?
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Figure 3.10
Four Crisis-Management Stages
Fink, S. (1986). Crisis management: Planning for the inevitable. New York: American Management Association, 26.
In the second stage, acute crisis, damage has been done. The point here is to control as much of the damage
as possible. This is often the shortest of the stages. In the BP crisis, the explosion took the crew on the rig by
surprise. Should they have been more suspecting that a crisis or problem like this could occur?
The third stage, chronic crisis, is the clean-up phase. This is a period of recovery, self-analysis, self-doubt,
and healing. Congressional investigations, audits, and interviews occur during this stage, which can linger
indefinitely, according to Fink. A survey of Fortune 500 CEOs reported that companies that did not have a
crisis management plan stayed in this stage two and a half times longer than those who did. Did BP’s leaders’
actions during the chronic stage of the crisis change from the way they reacted during the first stage? Why or
why not?
The final stage, crisis resolution, is the crisis management goal. The key questions here are: What can and
should an organization’s leaders do to speed up this phase and resolve a crisis once and for all? Has BP learned
from the disaster? Are new safety issues and requirements in effect at present?
How Executives Have Responded to Crises
Not all CEOs and organizational leaders respond the same to crises. JetBlue’s founder and CEO, David
Neeleman (who is still revered in the company), resigned as CEO and issued a customer “Bill of Rights” after
one of the worst crisis in the airline’s history during the winter of 2007, when “nine airplanes full of angry
passengers sat for six hours or more on the tarmac at John F. Kennedy International Airport in New York,”66
costing the airline $30 million. A classic crisis management model developed by Archie Carroll suggests a
different type of CEO response mode in its five phases of corporate social response to crises related to product
crises.67 This model illustrates how corporations have, and many continue to, actually responded to serious
crises. The phases, illustrated in Figure 3.11, are (1) Reaction, (2) Defense, (3) Insight, (4) Accommodation,
and (5) Agency. For a full description of the BP crisis, a more thorough case appears at the end of this chapter
and can be used to apply the crisis management methods presented here. Did the then BP CEO react first
and then respond? If so, why do you think many CEOs go into a “reaction” mode at the first realization of a
crisis?
Figure 3.11
Corporate Social Responses
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Source: Adapted from Carroll, A. (1977). A three-dimensional conceptual model of corporate performance. Academy of Management Review,
4(4), 502.
It is interesting to observe how some executives continue to deny and/or avoid responsibility in crises that
become disastrous. Knowledge of these stages certainly would be a first step toward corporate awareness. Let’s
look more closely at each stage.
According to this model, the Reaction stage is the first phase when a crisis has occurred. Management lacks
complete information and time to analyze the event thoroughly. A reaction made publicly that responds to
allegations is required. This stage is important to corporations, because the public, the media, and the
stakeholders involved see for the first time who the firm selects as its spokesperson, how the firm responds,
and what the message is. Notice that a classic crisis in which the leadership and management of a company
responded positively—and did not react either negatively or with denial—to a crisis was the Tylenol case. In
1982, seven people died after taking Tylenol capsules that had been tampered with and laced with cyanide.
Tylenol’s market sank from 37% to 7%. James Burke, Johnson & Johnson’s chairman, and a seven-member
team focused first on protecting people and customers, then saving the product. Thirty-one million bottles of
Tylenol nationally were recalled and all advertising was stopped until the problem was solved. An 800 number
was set up and corporate headquarters held several press conferences with a live satellite feed. Two months
later, “Tylenol was reintroduced into the market with triple-seal tamper-resistant packaging, [and the
company] offered coupons for the products, created a new discounted pricing program, new advertising
campaign and gave more than 2,250 presentations to the medical community.”68 Two management crises
experts said that Johnson & Johnson actually increased their credibility after the crisis, and that their response
became the “gold standard” for responding to crises.69
The second stage of the model, Defense, signals that the company is overwhelmed by public attention. The
firm’s image is at stake. This stage usually involves the company’s recoiling under media pressure. But this
does not always have to be a negative or reactive situation.
The third stage, Insight, is the most agonizing time for the firm in the controversy. The stakes are
substantial. The firm’s existence may be questioned. The company must come to grips with the situation
under circumstances that have been generated externally. During this stage, the executives realize and confirm
from evidence whether their company is at fault in the safety issues of the product in question.
In the fourth stage, Accommodation, the company either acts to remove the product from the market or
refutes the charges against product safety. Addressing public pressure and anxiety is the task in this stage.
During the last stage, Agency, the company attempts to understand the causes of the safety issue and
develop an education program for the public.
How could the CEO in the BP case have performed differently according to this model of crisis
management? Research news and media reports on the Internet on this and other crises. Take special note of
how companies respond morally to their stakeholders. Observe the relative amount of attention companies
sometimes give to consumers, the media, and government stakeholders. Use the frameworks presented in this
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chapter to help inform your observations and judgments. Develop a timeline as the crisis unfolds. Notice who
the company chooses as its spokesperson. Determine how and why the company is assuming or avoiding
responsibility.
Crisis Management Recommendations
A number of suggestions that corporations can follow to respond more effectively to crises are briefly
summarized here. More in-depth strategies and tactics can be found in several sources.70
• Face the problem: Don’t avoid or minimize it. Tell the truth.
• Take your “lumps” in one big news story rather than in bits and pieces. “No comment” implies guilt.
• Recognize that, in the age of instant news, there is no such thing as a private crisis.
• Stage “war games” to observe how your crisis plan holds up under pressure. Train executives to
practice press conferences, and train teams to respond to crises that may affect other functional areas
or divisions.
• Use the firm’s philosophy, motto, or mission statement to respond to a crisis. For example, “We
believe in our customer. Service is our business.”
• Use the firm’s closeness to customers and end users for early feedback on the crisis and to evaluate
your effectiveness in responding to the events.
The following tactical recommendations are also helpful crisis prevention and management techniques:
• Understand your entire business and dependencies.
• Understanding your business provides the basis upon which all subsequent policies and processes are
based and, therefore, should not be rushed.
• Carry out a business impact assessment.
• Having identified the mission critical processes, it is important to determine what the impact would
be if a crisis happened. This process should assess the quantitative (such as financial and service
levels) and the qualitative (such as operational, reputation, legal and regulatory) impacts that might
result from a crisis and the minimum level of resource for recovery.
• Complete a 360-degree risk assessment, where managers, their peers and direct reports evaluate each
other’s style and performance. This is used to determine the internal and external threats that could
cause disruption and their likelihood of occurrence. Utilizing recognized risk techniques, a score can
be achieved, such as high-medium-low, 1 to 10, or unacceptable/acceptable risk.
• Develop a feasible, relevant, and attractive response. There are two parts to this stage: developing the
detailed response to an incident and the formulation of the business crisis plan that supports that
response.
• Plan exercising, maintenance, and auditing. A business crisis plan cannot be considered reliable until
it has been tested. Exercising the plan is of considerable importance, as a plan untested becomes a
plan untrusted.71
Finally, issues and crisis management methods and preventive techniques are only effective in corporations
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if:
• Top management is supportive and participates.
• Involvement is cross-departmental.
• The issues management unit fits with the firm’s culture.
• Output, instead of process, is the focus.72
Chapter Summary
Organizations and businesses in the twenty-first century are more complex and networked than in any
previous historical period. Because of the numerous transactions of corporations, methods are required to
understand an organization’s moral obligations and relationships to its constituencies.
The stakeholder management approach provides an analytical method for determining how various
constituencies affect and are affected by business activities. It also provides a means for assessing the power,
legitimacy, and moral responsibility of managers’ strategies in terms of how they meet the needs and
obligations of stakeholders.
Critics of stakeholder theory argue that corporations should serve only stockholders since they own the
corporation. They hold that stakeholder theory: (1) negates and weakens fiduciary duties managers owe to
stockholders, (2) weakens the influence and power of stakeholder groups, (3) weakens the firm, and (4)
changes the long-term character of the capitalist system. A major response to the critics of stakeholder theory
states that societies and economies involve market and nonmarket interests of diverse stakeholders as well as
stockholders. To understand and effect responsible corporate strategies, methods that include different players
and environmental factors—not just stockholders or financial interests—are required.
A stakeholder analysis is a strategic management tool that allows firms to manage relationships with
constituents in any situation. An individual or group is said to have a “stake” in a corporation if it possesses an
interest in the outcome of that corporation. A “stakeholder” is defined as an individual or group who can
affect or be affected by the actions or policies of the organization.
Recent studies have indicated that profits and stockholder approval may not be the most important driving
forces behind management objectives.73 Job enrichment, concern for employees, and personal well-being are
also important objectives. These studies reinforce the importance of the stakeholder management approach as
a motivating part of an organization’s social responsibility system.
The implementation of a stakeholder analysis involves a series of steps designed to help a corporation
understand the complex factors involved in its obligations toward constituencies.
The moral dimensions of managerial roles also have a stakeholder perspective. The stakeholder approach
can assist managers in resolving conflicts over individual rights and corporate objectives. This approach can
help managers think through and chart morally responsible decisions in their work.
The use of stakeholder analysis by a third party is a means for understanding social responsibility issues
between a firm and its constituencies. Ethical reasoning can also be analyzed relative to the stakeholder
management approach.
Preventing and effectively negotiating disputes is a vital part of the work of professionals and leaders. We
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discussed several alternative dispute resolution (ADR) methods in the chapter, emphasizing consensual,
relational, and integrative methods that seek win—win approaches. The full range of dispute resolution
methods is important to learn because conflict is part of ongoing organizational change.
Issues and crisis management frameworks complement stakeholder analysis as social responsibility
methods. Understanding what the central issues are for a company and how the issues evolved over time can
help effectively and responsibly manage changes in a company’s direction and operations. Crisis management
frameworks help to predict, prevent, and respond to emergencies. Issues and stakeholder management
methods used together provide an overall approach to leading and managing organizational change
responsibly and ethically.
Questions
1. With regard to this chapter’s opening case, what, if anything, could BP’s CEO have done differently to
have prevented and/or avoided the resulting fall-out from the crisis? Explain.
2. Briefly describe a dispute in which you were an important stakeholder. How was the situation resolved (or
not resolved)? What methods were used to resolve the situation? Looking back now, what methods could or
should have been used to resolve that situation? For example, what would you now recommend happen to
effectively resolve it fairly?
3. Which of the types of power (described in this chapter) that stakeholders can use have you effectively used
in a conflict or disagreement over a complex issue? Briefly explain the outcome and evaluate your use(s) of
power.
4. Which roles and responsibilities in this chapter have you assumed in an organization? What pressures did
you experience in that role that presented ethical dilemmas or issues for you? Explain.
5. What reasons would you offer for encouraging leaders and/or managers to use the stakeholder approach?
Would these reasons apply to teams?
6. Give a recent example of a corporation that had to publicly manage a crisis. Did the company spokesperson
respond effectively to stakeholders regarding the crisis? What should the company have done differently in
its handling of the crisis?
7. Describe how you would feel and what actions you would take if you worked in a company and saw a
potential crisis emerging at the prodromal or precrisis stage. What would you say, to whom, and why?
8. Using Figure 3.4, identify a complex issue-related controversy or situation in which you, as a stakeholder,
were persuaded to move from one position (cell) to another and why-for example, from Nonsupportive to
Supportive, or from Mixed Blessing to Marginal. Explain why you moved and what the outcome was.
9. Argue both the pros and cons of stakeholder theory, using some of the arguments in the chapter as well as
your own. What is your evaluation of the usefulness of the stakeholder management approach in
understanding and analyzing complex issues?
Exercises
1. Describe a situation in which you were a stakeholder. What was the issue? What were the stakes? Who
were the other stakeholders? What was the outcome? Did you have a win-win resolution? If not, who won,
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who lost, and why?
2. Recall your personal work history. Who were your manager’s most important stakeholders? What, in
general, were your manager’s major stakes in his or her particular position?
3. In your company or organization, or one in which you have worked, what is the industry? The major
external environments? Your product or service? Describe the major influences of each environment on your
company (for example, on its competitiveness and ability to survive). Evaluate how well your company is
managing its environments strategically, operationally, and technologically, as well as in relation to products
and public reputation.
4. Choose one type of functional area manager described in the chapter. Describe a dilemma involving this
manager, taken from a recent media report. Discuss how a stakeholder analysis could have helped or would
help that manager work effectively with stakeholders.
5. Describe a complex issue that is evolving in the news or media. Explain how the issue has evolved into
other issues. Which issues management framework would help track the evolution of this issue? Explain.
6. Describe a recent crisis that involved a product. Which phase of the crisis management model do you
believe is the most important for all involved stakeholders? Explain.
Real-Time Ethical Dilemma
I worked as a marketing manager in Belgium for a mid-sized engineering company. Total revenues for the
company were $120 million. The company had recently gone public and, in two public offerings, had raised
more than $60 million. The firm was organized into four distinct strategic business units, based on products.
The group that I worked in was responsible for more than $40 million in sales. We had manufacturing plants
in four countries.
Our plant in Belgium manufactured a component that was used in several products, which produced $15
million in revenue. However, these products were old technology and were slowly being replaced in the
industry. The overhead associated with the plant in Belgium was hurting the company financially, so they
decided to sell the facility. The unions in Belgium are very strong and had not approved the final sale
agreement. After this sale, the workforce was going to be reduced by half. Those who were laid off were not
going to receive full severance pay, which, in Belgium, could take several years, and then workers would
receive only 80% of total payment—a drastic change from what is offered in the United States. I was surprised
that our executives in the United States had stated that the sale agreement was more than fair—contrary to
the union’s position. A strike was imminent; the materials manager was told to stock 10 weeks of product.
My ethical dilemma started after the strike began. Originally, the company thought the strike would not
last longer than a couple of days. Instead of causing a panic among our customers, management decided to
withhold information on the strike from our customers and sales force. I could understand the delay in telling
our customers, but to withhold information from our sales force was, I believed, unconscionable. Inevitably,
our inside sales representatives became suspicious when they called the Belgium plant to get the status of an
order, and nobody answered. They called me, and I ignored the corporate request and informed them of the
strike. When it became obvious that the strike was going to be longer than anticipated, I asked the vice
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presidents of marketing and sales about our strategy for informing the affected customers. They looked at me
quizzically and told me to keep things quiet (“don’t open a can of worms”) because the strike should be over
soon. In addition, they dictated that Customer Service should not inform customers of the strike and excuses
should be developed for late shipments.
The strike lasted longer than 12 weeks. In this time, we managed to shut down a production line at Lucent
Technologies (a $5-million customer) with only a couple of days notice and alienated countless other valuable
and loyal customers. I did not adhere to the company policy: I informed customers about the strike when they
inquired about their order status. I also told Customer Service to direct any customer calls to me when we
were going to miss shipments. This absolved them of the responsibility to tell the customer.
We did not take a proactive stance until 11 weeks into the strike, when the vice president of sales sent a
letter informing our customers about the strike—too little and much too late to be of any help. The materials
manager was fired because he only stocked 10 weeks of product, even though management thought he should
have been conservative with his estimates. Halfway through this ordeal, I updated my resume and started a
search for a new job. It was clear that management was more concerned about their year-end bonus than
doing the right thing for the long-term prospects of the company and its customers.
Questions
1. Do you agree with the writer’s decision to inform customers about the strike? Explain.
2. Did management have the right to withhold this information from customers? Explain.
3. Explain what you would have done, and why, if you had been in the writer’s situation.
4. What should management have done in this case? When? Why?
Cases
Case 6
The BP Deepwater Horizon Explosion and Oil Spill: Crisis and Aftermath
The BP Deepwater Horizon spill is a multifaceted disaster that, despite popular opinion, cannot be explained
by any one root cause. The April 20, 2010 oil spill was a point of crisis for oil giant BP, and CEO Tony
Hayward faced a significant challenge in responding to this crisis.
The events leading up to the BP blowout unearth a highly complex network of circumstances, which
though preventable, together culminated in the worst environmental disaster in American history.
Repercussions of the incident are still felt today, and all stakeholders involved have an opportunity to learn
about the significance of crisis management.
Events Leading up to the BP Spill
In March 2008, the Occupational Safety and Health Administration (OSHA) stated on public record that BP
had one of the worst safety records in its industry. This same month, the Minerals Management Service
(MMS) gave BP an exclusive right to drill a parcel of Gulf of Mexico floor called Block 252, for a fixed fee of
$34 million. Over the coming months, BP boarded a rig to supervise contractors who set out to drill the
Macondo well using Transocean rigs.
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On October 2009, Hurricane Ida hit the drilling site, damaging BP’s oil rig and requiring BP to rent a
more technologically sophisticated rig, called Deepwater Horizon.
The Point of Crisis
On April 9, 2010, BP exerted unreasonable pressure during drilling and fractured the rock in its well.
According to the National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling, “BP
informed its lease partners Anadarko and MOEX that ‘well integrity and safety’ issues required the rig to stop
drilling further.” BP management compared safety to profit-maximization and made the decision to plug the
fractures in an effort to maximize profit, rather than cease drilling. The plug worked, but BP knew it was
precarious, and that they needed to mitigate this risk by balancing pressure carefully. After the incident, BP
wells leader admitted that losing returns “was the No. 1 risk.”
The Warning Signs
When BP and Halliburton tested float valves, BP used a decision tree to evaluate the job based on whether
there were lost returns on the cement factor, rather than engineering or risk principles and decided the test
went well enough to excuse Schlumberger technicians, who were also scheduled to perform cement evaluation
tests. That decision, which was based on an effort to save the company time and money, was another example
of a decision that could have prevented the oil well blowout that is ironically costing over $20 billion in
remediation to date.
BP is documented to have sought Halliburton’s counsel on how it could use cement centralizers to mitigate
some of this drilling risk. However, due to low inventory, BP again allegedly compromised on quality and
safety by changing Halliburton’s design and using the wrong kind of cement centralizers.
Halliburton conducted a routine cement slurry test which revealed that the foam was unstable, but they did
not adequately report or address it. This event was sadly not uncommon among the various subcontractors on
the Deepwater Horizon project. There appeared to be a team culture of poor communication driven by an
effort to save time, money, and reputation, which ironically resulted in catastrophic loss of the same, at the
expense of stakeholders of this project.
The company finished its cement job and began to lock down the Macondo well so it could move a smaller
rig into place, but BP had amended Deepwater’s procedures to omit a pressure test (which would have checked
the bottomhole cement job), among other things. (Incidentally, on April 12, BP had sent its amendments to
the procedure to the MMS, but there is no evidence that they were reviewed.) While this combination of
events, which were caused by several actors, was highly uncanny and improbable, given the circumstances of
the weak cement job, their occurrence proved to be deadly. The more that the details of the story were
unraveled, the more sweeping the participation among parties and stakeholders in the negligence, insufficient
funding, and insufficient communication that led to the Deepwater Horizon explosion surfaced.
BP was also discovered to have used a broken pressure gauge during this same time. This too became a
critical issue that, if it had been prevented, could have possibly averted the disaster. Still, the root cause of
these errors is unclear, as the disaster could have been prevented with tighter risk management protocol, more
sufficient inspection, as well as closer attention to fluctuation in gauge readings. Nonetheless, incompetence
and risk mitigation planning negligence again appeared to be rife on the job.
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Other important precrisis warnings included the fact that the well was leaking and was in danger of
exploding. The site workers were also found to have not adequately read or responded to the confounding
results of the pressure test, i.e., they needed to use a different gauge to detect a leak that was later found in the
well. This also indicated negligence (and incompetence) on behalf of site workers as they should have checked
for this. Drill-pipe pressure increased 250 psi as shown on the monitor, but no one appeared to be checking
the monitor. As could be expected from these warnings, the pressure relief valve soon blew. In response to
this, the pumps were shut off; but pressure increased and no one seemed trained to know the significance of
this issue and appropriate action was not taken. The warning signs were ignored.
Next, mud emerged on rig floor indicating that there was a problem in the well. Six-eight minutes passed
before this was addressed, and the spill was not diverted overboard. The lack of response indicated negligence
in emergency response training and a disregard for the warning signs that a crisis was coming.
After countless emergency indications, a high enough concentration of natural gas leaked into the air to
cause an ignition. This explosion forced five million barrels of oil into the Gulf of Mexico over 87 days; the
worst environmental disaster in American history.
The Aftermath—Response to the Crisis
During the emergency response, scientists, including Ian MacDonald of Florida State University, alleged that
BP withheld the facts around the spill, likely to protect its reputation. Possibly due to this obfuscation, it took
87 days until the well was finally capped on July 15, 2010.
Aside from some controlled burning and microbial digestion, only upon the capping of the well did the
remediation of the oil’s damage truly begin. BP set up a $20 billion claims fund, which is still being
administered as of March 2012. It is estimated that BP will pay $585 million in pollution violations. The
company “has claimed about $40 billion in charges to cover the costs of litigation and cleanup”. New CEO
Bob Dudley has a difficult task ahead in continuing remediations. BP has already set aside $3.5 billion to
cover expected Clean Water Act fines on the estimated 3.2 million barrels spilled. However, the ripple effect
of the spill has had no small impact on the Gulf Area tourism and fishing, which has somehow gone
unaccounted for in BP’s legal restoration.
The legal aftermath of the spill is very consequential, as the U.S. Department of Justice (DOJ) filed a civil
suit against BP and its business partners. This civil suit is expected to be followed by criminal charges-so
much so that BP has already divested some assets.
Legislatively, oil companies are likely to face much more strict safety, environmental, risk management and
reporting standards in the future. From the federal government level, President Obama is pushing for the cut
of oil subsidies, which could lead to higher oil prices for consumers.
This type of large environmental crisis required swift corrective action and strategic public relations. There
are many lessons to be learned from the way BP continues to handle the consequences of the accident and the
way it employed crisis management.
Fatal Ethical Flaws
The root fatal flaws in this drilling project were not scientific in nature, but rather the tears in the
fundamental ethical fabric of the team and its strategic business partners-negligence, poor risk management,
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and possible willful obfuscation of information for the apparent purpose of salvaging reputation, while risking
the safety and well-being of BP’s stakeholders.
The first ethical flaw is negligence. While some degree of mistakes is unavoidable due to human error, BP
and its constituent contractors displayed a systematic failure to prevent error, which could be classified as
negligence. At the time of this case, several claims had been filed against BP to this extent, but courts have not
rendered a decision and BP executives expect the case to last until at least 2014. What made the events
surrounding the explosion tragic is that there were many opportunities for BP to make choices that could have
prevented the disaster, but team members systematically compromised the safety and stakeholder
consideration, when it cut corners to save time and to maximize profits, flying in the face of justice and
utilitarianism, as discussed in the following section. This distinction is both ethically significant and
economically consequential for businesses as it is embedded in our criminal law system, which penalizes on
the basis of negligence.
A subset of this negligence was the failure to report safety risks, which was endemic to the broader BP
contracting team, including Halliburton, Transocean, and BP staff. To this point, BP was ironically
celebrating Deepwater Horizon’s seven years of safety at the exact moment of the explosion. As this problem
was so pervasive, and as the moral burden of a team’s culture lies with its leadership, this implicated BP in this
failure.
A third classification of ethical failure recognized by the U.S. legal system is willful misconduct, which
implies a conscious and willful choice to endanger others when other options are available. Whether or not
this will be found sufficiently compelling in court, this could be seen in several of BP’s decisions, including its
decision to drill after fracturing the well and its decision to dismiss Schlumberger before testing the well. At
this point in BP’s work, BP made both an ethical and financial miscalculation by actively choosing to
compromise many of its stakeholders’ safety, economic livelihood, environment, and personal property to
maximize its own profits. This decision was systematic and was not made in isolation, suggesting abuse and
grounds for liability on the part of BP and its team members.
Whether or not BP will be indicted for criminal charges, BP and nine of its business associates have faced
civil charges from the DOJ in pursuit of remediation of the damages under the Oil Pollution Act and Clean
Water Act. In this is an important lesson: companies like BP should consider not just the letter of the law, but
the spirit of the law, such as the anti-pollution provisions of the Oil Pollution and Clean Water Acts when
guiding ethical decisions. A big part of BP’s damaging ethical tapestry is its failure to consider its stakeholders
in driving its corporate strategy. By balancing their focus on short-term profits and considering others in their
business, as well as governments, consumers, and the environment, BP’s costly mistakes could also have been
averted. This Stakeholder Management Approach identifies corporate strategy by mapping and evaluating the
implications of strategy through the lens of stakeholder impact as shown in the following analysis. This
approach is built upon “win-win” collaborative outcomes rather than short-term profits by identifying the
issue at hand, by assessing the nature of stakeholder interest, by assessing each stakeholder’s power, identifying
stakeholder moral responsibilities, and developing the appropriate strategies and tactics. Incidentally, these
same outcomes will likely save companies like BP up to billions of dollars in the long run.
Questions for Discussion
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1. Who and what factors were responsible for the Deepwater Horizon Oil Spill?
2. Evaluate BP’s corporate culture from an ethical standpoint. What role did top management have in shaping
that culture?
3. What actions could/should BP management have taken in response to the many early warning signs? Did
the “in action” of BP demonstrate the company’s ethics? Explain.
4. What responsibility did BP’s partners and oversight agencies like OSHA have in the crisis?
5. How did BP’s corporate strategy affect its ethical decision making?
6. Do companies like BP should have an ethical responsibility to protect the environment? Why or why not?
Sources
“BP could reach settlement for Gulf oil spill this week.” The Washington Post.
http://www.washingtonpost.com/business/economy/bp-could-reach-settlement-for-gulf-oil-spill-this-
week/2012/02/20/gIQALU52PR_story.html, accessed March 21, 2012.
Gillis, J. (May 19, 2010). Scientists fault lack of studies over gulf oil spill. New York Times.
http://www.nytimes.com2010/05/20/science/earth/20noaa.html?th&emc=th&_r=0, accessed April 22,
2014.
Mauer, Richard and Anna M. (May 8, 2010). Gulf Oil Spill: BP Has A Long Record of Legal, Ethical
Violations. http://www.mcclatchydc.com/2010/05/08/93779/bp-has-a-long-record-of-legal.html, accessed
February 12, 2011.
National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling, Deep Water: The Gulf
Oil Disaster and the Future of Offshore Drilling. (January 2011), p. 89.
National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling, Deep Water: The Gulf
Oil Disaster and the Future of Offshore Drilling. (January 2011), p. 104.
National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling, Deep Water: The Gulf
Oil Disaster and the Future of Offshore Drilling. (January 2011), p. 129.
Office of the Press Secretary, The White House. (June 15, 2010). “Remarks by the President to the Nation on
the BP Oil Spill.” http://www.whitehouse.gov/the-press-office/remarks-president-nation-bp-oil-spill,
accessed March 21, 2012.
Passwaters, Mark. (December 15, 2010). “DOJ files Deepwater Horizon civil suit.”
http://www.snl.com/interactivex/article.aspx?id=12278731&KPLT=2.
Passwaters, Mark. (January 6, 2011). “National commission on BP spill blames cost cutting,
mismanagement.” http://www.snl.com/interactivex/article.aspx?id=12178252&KLPT=6&Printable=1.
Passwaters, Mark. (January 6, 2011). “National commission on BP spill blames cost cutting,
mismanagement.” http://www.snl.com/interactivex/article.aspx?id=12178252&KLPT=6&Printable=1.
Swint, B. Law and Medicine, “The Legal Aspects of the BP Deep Oil Spill” June 22, 2010.
http://lawandmedicine.wordpress.com/2010/06/22/the-legal-aspects-of-the-bp-deep-oil-spill/.
Thomas, Pierre, Lisa A. Johes, Jack Cloherty, and Jason Ryan. “BP’s Dismal Safety Record.” (May 27, 2010).
ABC News. http://abcnews.go.com/WN/bps-dismal-safety-record/story?id=10763042.
Yanke, Greg. BP’s Gulf Oil Spill: Where Ethics and Legal Advice Collide. (June 2, 2010).
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http://www.nytimes.com2010/05/20/science/earth/20noaa.html?th&emc=th&_r=0

http://www.mcclatchydc.com/2010/05/08/93779/bp-has-a-long-record-of-legal.html

http://www.whitehouse.gov/the-press-office/remarks-president-nation-bp-oil-spill

http://www.snl.com/interactivex/article.aspx?id=12278731&KPLT=2

http://www.snl.com/interactivex/article.aspx?id=12178252&KLPT=6&Printable=1

http://www.snl.com/interactivex/article.aspx?id=12178252&KLPT=6&Printable=1

http://lawandmedicine.wordpress.com/2010/06/22/the-legal-aspects-of-the-bp-deep-oil-spill/

http://abcnews.go.com/WN/bps-dismal-safety-record/story?id=10763042

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February 12, 2011.
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http://online.wsj.com/article/SB10001424052748704329104576138342199677406.html?
KEYWORDS=BP+oil+department+of+justice.
Case 7
Mattel Toy Recalls
On August 2, 2007, NBC’s John Yang reported on the Today show a “global recall” from Fisher Price
involving approximately a million toys. Presenting the initial reactions from stunned mothers, the report
showed public anxiety over the risk to children’s safety. That recall would be only the first of three major
recalls in that month for Mattel, the parent company of Fisher Price. There had been critical steps preceding
these recalls and additional actions followed.
This case describes the actions taken by key stakeholders during Mattel’s three major recalls in August
2007, one of which was the largest recall ever initiated by the world’s largest toy company.
Where It Began
According to Mattel executives, lead paint was discovered on some of its toys by a European retailer. On July
6, 2007, Mattel halted the production of toys at the manufacturing plant that produced the toys, while the
company initiated an investigation. On July 18, Mattel gave a New York Times reporter a tour of the
manufacturing facility in Guanyao, China, and its safety lab in Shenzhen, China. Mattel’s position during the
investigation was that it was unaware of whether the issue was an isolated problem or if there was a larger-
scale impact.
On July 26, Mattel executives received data that confirmed there was a safety risk in 83 of their products.
This prompted them to contact retailers who were distributing the affected toys. The communication was
made known to the public on August 1, 2007. According to Mattel, the issue was self-identified and the
Consumer Product Safety Commission was made aware of the problem. David Allmark, general manager of
Fisher Price, a division of Mattel, committed to vigorously investigate and learn from the problem through
the following statement: “We are still concluding the investigation, how it happened. But there will be a
dramatic investigation on how this happened. We will learn from this.” Allmark also indicated that the recall
was accelerated, which gave Fisher Price the opportunity to quarantine approximately two-thirds of the
967,000 toys before they were sold to the public.
On August 8, Mattel identified the vendor responsible for the recalled toys. Mattel’s CEO, Robert Eckert,
issued the following statement during an interview regarding the contract manufacturer that produced the
toys: “This is a vendor plant with whom we’ve worked for 15 years; this isn’t somebody that just started
making toys for us.” In an interview, Eckert stated: “They understand our regulations, they understand our
program, and something went wrong. That hurts.” Mattel further communicated that they were unaware of
whether the manufacturer had received materials from a certified supplier or if they had substituted materials
from a non-certified supplier.
On August 11, 2007, the head of the manufacturing company linked to the Mattel recall of toys containing
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lead-based paint committed suicide. Zhang Shuhong, who led Lee Der Industrial Co., was found dead in his
factory in China.
More Bad News
On August 14, 2007, Mattel issued two additional recalls related to toys developed by Chinese contract
manufacturers. The first action was in response to a second instance of lead paint being discovered in a die
cast vehicle model marketed as a character from the movie Cars. This recall affected 436,000 toys, all of which
were manufactured by a different company than Lee Der Industrial Co. According to Mattel, the products
were manufactured between May and July of 2007 and were discovered as part of a systemic review of its toy
manufacturing following the initial finding of lead paint.
The second action was taken to expand the scope of an earlier recall to address 18.2 million magnetic toys
that had a “design flaw.” The recall included 63 types of toys that had been manufactured since 2002 and were
confirmed by the Consumer Product Safety Commission as having been manufactured in China. This “design
flaw” allowed small magnets to come apart from the toy with the risk of being swallowed by children. The
first incident likely involved 7-year-old Paige Kostrzewski in July 2005. Kostrzewski had accidentally
swallowed two magnets, which then gravitated to each other based on their magnetic pull while inside her
intestines. Surgery revealed that the magnets had punctured holes in her intestines, and, according to her
mother, “caused everything to just seep into her body.” Luckily, Kostrzewski recovered after a two-week
hospital stay and follow-up treatment to address an infection. As a result, in November 2005 Mattel
voluntarily recalled 4.4 million of the models, 2.5 million of which were in the United States.
With regard to the August 14 recalls, Nancy A. Nord of the Consumer Product Safety Commission
indicated that no recent injuries had been reported for the products being recalled and that the action was
“intentionally broad to prevent injuries.” However, previous recalls in November 2005 of the magnetic “design
flaw” in Polly Pocket toys did include injuries. Specifically, 19 children have required surgery and one child
has died since 2003. According to the New York Times article titled “Mattel Recalls 19 Million Toys Sent
from China,” published on August 15, 2007, Mattel executives had stated the previous day that “in the long
run [we] are trying to shift more of [our] toy production into factories [we] own and operate—and away from
Chinese contractors and sub-contractors.” However, the same article clarified that the cause of the recall was
based on a design flaw, and that while the Chinese manufacturers were producing the toys, the design of the
product was developed by Mattel—who is ultimately responsible for the specification.
What Took So Long?
Following the recalls, public speculation grew as to whether Mattel could have warned the public of these
safety risks any earlier. Gerrick Johnson, an analyst with BMO Capital Markets, felt that Mattel could have:
“You have to alert the public right away. I think it’s a public relations nightmare more than anything else.”
Other analysts believe the company has been proactive and transparent. Sean McGowan, an analyst at
Wedbush Morgan Securities Inc. felt Mattel would achieve a “long-term trust” as a result of it “being honest
about investigating any other problems.”
According to the Wall Street Journal article titled “Safety Agency, Mattel Clash over Disclosures,” the
Consumer Product Safety Commission has a policy that requires manufacturers to report “all claims of
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potentially hazardous product defects within 24 hours, with few exceptions.” In the case of the recall of 18
million magnetic toys, Mattel took months to collect and analyze data and reports before notifying the agency.
Companies that produce similar toys as Mattel, with magnetic components, have worked with the Consumer
Product Safety Commission since early 2006.
Based on the company’s history, this noncompliance represents a systemic practice. The company has been
fined twice for what was described as “knowingly withholding information regarding problems that “created
an unreasonable risk of serious injury or death.”
The first incident was related to a failure to report a fire hazard in a timely manner for its Power Wheels
motorized toys, which were intended to be ridden by children aged two years or older. According to Ann
Brown, chair of the Consumer Products Safety Commission, Mattel knew of the risk to children’s safety,
however “did nothing for years.” The penalty for not reporting the hazard to the agency was assessed in 2001
after a recall of 10 million toys in 1998. According to the agency, there were approximately 150 reports of fires
in the Power Wheels cars, as well as up to 10 times that number of complaints for overheating and other
deficiencies prior to the company issuing the recall. The Consumer Product Safety Commission remained
skeptical of Mattel’s handling of the Power Wheels recall, and initiated at least nine different investigations
into whether problems had occurred following the recall.
The second fine was issued for a problem that occurred just a year after the Power Wheels penalty. In
2002, Mattel became aware of issues with its Little People Animal Sounds Farm. The complaints claimed
that tiny screws used in the farm could become loose and pose the risk of a child accidentally swallowing
them. In an investigation conducted by the U.S. government, it was determined that Mattel was made aware
of 33 reports of this safety hazard—including one instance of a baby swallowing the screw, which required
emergency surgery—before informing the Consumer Product Safety Commission. Mattel reached a
settlement of $975,000 yet denied any wrongdoing. A recall of the product was initiated in April 2003.
Mattel is also under scrutiny for the more recent recalls involving the 18 million units of toys containing
magnetic components. Between the initial Polly Pocket recall in November 2006 and the expanded recall of
August 2007 for the same issue, Mattel received an additional 400 reports of similar magnetic hazards with
different toys. It is not currently known how long Mattel waited before notifying the agency of these reports.
The Consumer Product Safety Commission is currently investigating Mattel on the timeliness of its reporting
practices and has not made that information public. However, when Mattel CEO Robert Eckert was asked in
September 2007 of the date of disclosure for the magnetic component recall, he responded that “he couldn’t
remember when the company brought the complaints about the magnets to the attention of authorities.”
While there have been specific cases of untimely disclosures from Mattel, there have also been comments
issued from Eckert rationalizing Mattel’s untimely practice and justifying its position for waiting extended
periods before notifying the agency and the public. Eckert has claimed that the company discloses problems
on its own timetable, due to a belief that the regulatory requirements are “unreasonable.” Furthermore, Eckert
claimed that Mattel should have the ability to evaluate any reports of safety hazards prior to reporting them to
the agency or the public. The Consumer Product Safety Commission disagreed in a statement issued by the
agency’s spokesperson, Julie Vallese: “It’s a statute; it’s clear.” In late 2007, the agency initiated a formal
investigation into the timeliness of Mattel’s hazardous incidents reporting process to examine its more recent
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disclosures.
The Aftermath
Following the lead paint recall on August 1, 2007, Mattel communicated that it would evaluate methods of
addressing the problem. CEO Eckert indicated that this would include the possibility of reducing the amount
of toys it produces through contract manufacturers. In what appeared to be an attempt at distancing the
company from its Chinese contract manufacturers, Eckert issued the following statement: “I, like you, am
deeply disturbed and disappointed by recent events. We were let down, and so we let you down.”
Despite comments that deflected a portion of the responsibility, Eckert also made statements following the
second cycle of recalls issued on August 14 that attempted to appease consumers and regain their trust. In a
full-page advertisement taken out in major newspapers such as the New York Times, USA Today, and the Wall
Street Journal, Eckert stated: “Our long record of safety at Mattel is why we’re one of the most trusted names
with parents, and I am confident that the actions we are taking now will maintain that trust.”
Following the initial comments issued by Mattel, Chinese manufacturers defended themselves against
inferences that U.S. companies did not share the blame. The following statement was issued by China’s
General Administration of Quality Supervision, Inspection, and Quarantine: “Chinese original equipment
manufacturers were doing the job just as importers requested, and the toys conformed with the U.S.
regulations and standards at the time of the production.” Specific to Mattel, the organization stated: “Mattel
should improve its product design and supervision over product quality.”
In September 2007, Mattel seemed to agree with the Chinese position, and launched a public relations
campaign to issue a formal apology to those in China whose reputations were affected. Mattel’s executive vice
president for worldwide operations, Thomas Debrowski, met with the head of Chinese Product Safety, Li
Changjiang, to issue the following statement: “Mattel takes full responsibility for these recalls and apologizes
personally to you, the Chinese people, and all of our customers who received the toys.” Debrowski went on to
specifically identify the design flaw as the root cause of the magnetic-component-based recall: “The vast
majority of those products that were recalled were the result of a design flaw in Mattel’s design, not through a
manufacturing flaw in China’s manufacturers.”
In addition, the company issued a formal statement which referenced the lead paint recall as well. The
statement called the scope of the recall “overly inclusive, including toys that may not have had lead in paint in
excess of the U.S. standards.” The statement continued, “The follow-up inspections also confirmed that part
of the recalled toys complied with the U.S. standards.”
On September 12, 2007, a congressional hearing was held to attempt to identify what needed to be done to
ensure that the types of recalls issued by Mattel do not continue. Congress assigned equal blame to all parties
across the board, including Chinese safety standards, Mattel, and the Consumer Product Safety Commission.
Mattel recognized its level of responsibility through a response from Eckert: “We are by no means perfect.”
Mattel continued that it would rectify the situation by taking steps such as better oversight of quality controls
for its contract manufacturers and instituting its own laboratories for testing of its products.
The Consumer Product Safety Commission has conceded that it is understaffed. From 1974 to 2007, the
agency’s employee number has been reduced from 800 to 400. What is even more alarming is that there is
only one resource dedicated to the actual testing of toys.
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The Chinese manufacturers were also identified by Congress. Republican senator Sam Brownback of
Kansas concluded that “‘Made in China’ has now become a warning label.” Brownback continued: “We’re
seeing this in the charts and we’re seeing it in the products and it’s got to stop.”
While the fallout from the 2007 toy recalls will continue for Mattel and all parties involved, the result will
likely be stricter policy, stronger internal quality controls, and improved subcontractor oversight, all of which
will ultimately benefit consumer safety. Mattel Toys has not had a recall since this debacle.
Stricter Legislation
In a response to the Mattel Toys recalls, the Consumer Product Safety Improvement Act of 2008 was passed.
According to http://CPSC.gov:
The Consumer Product Safety Improvement Act (CPSIA) of 2008 requires that nearly all children’s
products:
a) comply with all applicable children’s product safety rules;
b) are tested for compliance by a CPSC-accepted laboratory;
c) have a written Children’s Product Certificate (issued by the manufacturer or importer) that provides
evidence of the product’s compliance; and
d) have permanent tracking information affixed to the product and its packaging.
The CPSIA also requires domestic manufacturers or importers of non-children’s products
(cpsc.gov/generaluse) for which a consumer product safety rule, or any similar rule, ban, standard, or
regulation under any law enforced by the CPSC is in effect, to issue a “General Certificate of Conformity”
(cpsc.gov/gcc). The GCC must be based on a test of each product or a reasonable testing program.
Ironically, however, Mattel Toys received a reprieve on item b in this law. Mattel-owned laboratories have
been deemed “firewalled third-party laboratories” and therefore, Mattel Toys can use their own laboratories
for testing mandated by this Act.
Questions for Discussion
1. Identify the major stakeholders in the case. Who was responsible for what went wrong and why?
2. What are the ethical issues in the case, and for whom?
3. Do you think cross-cultural dynamics and misunderstandings played a role in the resulting problems in the
case? Explain.
4. Was there a prodromal (precrisis) phase in this case? If so, identify this stage and the event(s) that explain
it.
5. Which issues management framework would you suggest to best explain this case? Why?
6. Is it ethical that Mattel is partially exempt from the Consumer Product Safety Improvement Act of 2008?
What signal and impact would this exemption send to and have on the industry?
Sources
This case was developed from material contained in the following sources:
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Casey, N., and A. Pastor. (September 4, 2007). Safety agency, Mattel clash over disclosures. WSJ.com.
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Consumer Product Safety Improvement Act. (October 26, 2013). CPSC.gov.
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Improvement-Act/, accessed January 7, 2014.
D’Innocenzio, A. (August 14, 2007). Mattel defends itself on safety of toys. WashingtonPost.com.
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February 3, 2014.
D’Innocenzio, A., and N. Metzler. (August 2, 2007). Lead paint leads to Fisher Price toy recall.
WashingtonPost.com. http://www.washingtonpost.com/wp-
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Fisher Price fined for keeping mum on toy risk. (March 1, 2007). CNNMoney.com.
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says-design-flaw-responsible-for/, accessed February 3, 2014.
Mattel CEO admits it could have done a better job. (September 12, 2007). NBCNews.com.
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Mattel CEO: Rigorous standards after massive toy recall. (November 15, 2007). CNN.com.
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Mattel issues new massive China toy recall. (August 14, 2007). NBCNews.com.
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Mattel, primary reason for toy safety laws, gets exempt from it. (October 26, 2013). Consumerist.com.
http://consumerist.com/2009/08/28/mattel-primary-reason-for-toy-safety-law-gets-exempted-from-it/,
accessed January 7, 2014.
Mom: Girl got sick after swallowing Mattel magnets. (August 15, 2007). CNN.com.
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(RSS%3A+Most+Recent), accessed February 3, 2014.
Sass, R. Fisher Price Toys from China Recalled. Yahoo.Voices. http://voices.yahoo.com/fisher-price-toys-
china-recalled-475864.html, accessed February 3, 2014.
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http://www.theguardian.com/business/2007/aug/13/china

http://www.cpsc.gov/en/Regulations-Laws–Standards/Statutes/The-Consumer-Product-Safety-Improvement-Act/

http://www.washingtonpost.com/wp-dyn/content/article/2007/08/14/AR2007081401275.html

http://www.washingtonpost.com/wp-dyn/content/article/2007/08/01/AR2007080102320.html

http://money.cnn.com/2007/03/01/news/companies/fisher_price/index.htm

http://www.foxnews.com/story/2007/09/21/mattel-apologizes-to-china-over-toy-recall-says-design-flaw-responsible-for/

http://www.nbcnews.com/id/20738314/#.UsukD_QW2So

http://edition.cnn.com/2007/US/08/14/recall/index.html?section=cnn_latest

http://www.msnbc.msn.com/id/20254745/

http://consumerist.com/2009/08/28/mattel-primary-reason-for-toy-safety-law-gets-exempted-from-it/

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http://www.nytimes.com/2007/08/15/business/worldbusiness/15imports.html?pagewanted=all, accessed
January 7, 2014.
Case 8
Genetic Discrimination
Genetic discrimination is defined by the Centers for Disease Control and Prevention as “prejudice against
those who have or are likely to develop an inherited disorder.” Advances in science make possible the
determination of whether specific gene mutations exist, and the ability to discover the likelihood of an
individual developing a disorder based on the existence of these mutations. These developments have created
situations that concern the public: their privacy and possible employment livelihood. One of the major issues
noted by the National Human Genome Research Institute (NHGRI) is the possibility that individuals who
have taken this testing, and received positive results, will be turned down for health insurance or employment.
This possibility will most probably be at issue depending on the political party and dominant political
persuasion in power at both the national and state levels, as well as with the Supreme Court.
Many people with family histories or other factors that determine their susceptibility to certain diseases or
disorders will have to make a decision about whether to be tested for the existence of certain genetic sequences
or mutations. A major factor in this decision will be how this information will be used and who will be able to
access the results. Patients may choose to refuse testing that could save their lives or improve their quality of
life because they fear future discrimination. Employers with group insurance plans may want to know whether
any of their employees are predisposed to a specific disorder. Insurance providers would also like to have the
results of genetic testing to assist in underwriting policies. Both of these scenarios are likely to lead to
discrimination against or exclusion of certain individuals for either employment or insurance coverage.
Human Genome Project
One of the major catalysts of the advancement of genetic testing and the interpretability of genetic
information was the Human Genome Project. The Human Genome Project began in 1990 as a joint effort
between the National Institutes of Health and the United States Department of Energy. The project had six
goals: (1) to identify all of the approximately 20,000–25,000 genes in human DNA; (2) to determine the
sequence of the 3 billion chemical base pairs that make up human DNA; (3) to store this information in
databases; (4) to improve tools for data analysis; (5) to transfer related technologies to the private sector; and
(6) to address the ethical, legal, and social issues (ELSI) that may arise from the project. In addition to
helping meet these goals, accomplishments leading to the project’s completion in 2003 have also contributed
to major advances in scientific research and health care, primarily in the areas of medicine and genetic testing.
Understanding the genes and sequences associated with common diseases has future implications for the
entire human population, and will help to detect and possibly remedy disorders with more precise and
targeted treatments.
Business Response
Even before the entire human genome had been sequenced and published, and the implications of the
discovery had been reviewed to establish guidelines and boundaries, biotechnology companies and others
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conducting scientific research had begun to develop uses for this new way of looking at human conditions and
diseases. One question from this new branch of medical technology is who, if anyone, should own gene
sequences and who has the rights to one’s genetic information? The issue of patenting gene sequences began
long before the map of the human genome was completed and prior to consequences of granting these patents
were able to be seriously examined. Companies had already begun to submit applications and receive approval
for gene sequences that had some still unknown future use and potential profitability. According to Modern
Drug Discovery contributor, Charles W. Schmidt, “[T]hose who seek patents usually want to protect research
investments in one of two markets: gene- and protein-based drug development or diagnostic testing that
searches for gene sequences linked to a given illness.” Even without strong federal regulations to guide the use
and ownership of test data and eliminate the reluctance of people to agree to testing, companies developing
genetic tests believed that patenting is necessary to protect an industry that is someday likely to generate
millions in profits. Those in opposition to this view have trouble allowing ownership of something that is so
personal. The major caveat to granting these patents is that it limits and slows the competition in the industry
to find uses for and make advances in an already patented gene sequence. However, if there is no guarantee of
exclusive ownership with the outcome of research, companies may choose not to move forward in research.
The main issue of a significant business response to scientific advancements in genetic testing and gene
sequencing is ensuring that laws and regulations keep up with technology and medical advances to prevent
major abuse, ownership, and privacy issues.
Two following cases illustrate the evolution between 2001 and 2013 of EEOC (Equal Employment
Opportunity Council) enforcement with regard to the genetic nondiscrimination Title II law.
The Burlington Northern and Santa Fe Railroad Case
In February 2001, the Equal Employment Opportunity Commission (EEOC) filed a suit against the
Burlington Northern and Santa Fe Railroad for secretly testing some of its employees. The genetic tests
conducted had been developed by Athena Diagnostics in Worcester, Massachusetts, to detect a rare
neuromuscular disorder, but Burlington Northern had been using them to validate and predict claims of carpal
tunnel syndrome made by railroad workers. This incident, and others like it across the United States and
Europe over the following years, raised concerns about the access and rights that employers have to their
employees’ medical and genetic information. In this case, if Burlington Northern had discovered that
employees with carpal tunnel syndrome had a genetic predisposition to the injury, the company could have
claimed that the ailment was not job related and therefore denied payment of any medical bills. The EEOC
filed its suit referencing the American Disabilities Act’s statement that “it is unlawful to conduct genetic
testing with the intent to discriminate in the workplace.” Cases like this alerted lawmakers and activists to the
growing concerns of discrimination in the workplace based on genetic information, and upon closer
examination of the issue, revealed significant inconsistencies and gaps in the laws currently protecting the
rights of employees.
The following lawsuit is the first initiated by the EEOC to effectively enforce GINA (Genetic Information
Nondiscrimination Act of 2008). This case and the previous one summarized above (Burlington Northern
Santa Fe Railway Company in Fort Worth, Texas, also for carpal tunnel syndrome in April 2001) emphasize
the integral relationship between conduct prohibited under GINA and conduct prohibited under the
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Americans with Disabilities Act of 1990 as amended (42 U.S.C. §12101 et seq., Pub. L. 101-336). “GINA
Title II prohibits both the acquisition and the use of genetic information in employment contexts.”
Rhonda Jones
Rhonda Jones was a temporary memo clerk for Fabricut, Inc. Her temporary employment was running out
when she applied for a permanent position with Fabricut. The Company at first offered her the position
before violating the GINA Title II law when, as part of its pre-employment medical examination, it allegedly
requested Rhonda Jones’ family history with regard to several specific conditions. “GINA defines ‘genetic
information’ broadly to include family medical history.” Based on the pre-employment medical examination,
Fabricut allegedly “required Jones to obtain additional testing to rule out carpal tunnel syndrome (CTS).”
Even though later testing did rule out CTS, because of information she gave the company, Fabricut allegedly
withdrew their job offer “on the basis of the pre-employment medical examination and its view that she had
CTS.”
“As part of the consent decree settling the case, Fabricut agreed to pay $50,000 in damages. The company
also agreed to undertake corrective actions that include posting a non-discrimination notice to employees.
GINA requires that employers post a non-discrimination notice, and ‘Equal Employment Opportunity is the
Law’ posters are readily available on the EEOC web site. Fabricut also agreed to have its employees
responsible for hiring decisions undergo non-discrimination training and further agreed to distribute non-
discrimination policies to its employees.”
Government Response to Advances in Genetic Testing and Discrimination
As with most human resource issues, companies cannot always be trusted to act in the best interests of their
individual employees, especially where privacy rights are concerned. Throughout the past two decades, the
United States has drafted and passed several laws addressing the issue of discrimination by employers and
private businesses, and protecting employees who speak out against discriminatory behavior. One of the most
well-known regulations in this category is the Americans with Disabilities Act of 1990 (ADA), which
prohibits discrimination in hiring on the basis of a disability. Similarly, Title VII of the Civil Rights Act of
1974 prohibits employment discrimination on the basis of race, color, religion, sex, and national origin.
According to National Institutes of Health Consultant Robert B. Lanman, J.D., who was commissioned in
May 2005 by the Secretary’s Advisory Committee on Genetics, Health, and Society to examine the adequacy
of current laws protecting against genetic discrimination, these laws have not been updated to specifically
relate to genetic discrimination. They offer protection to the extent that a genetic predisposition is common in
a specific race or other group protected under the ADA or Civil Rights Act. In his executive summary,
Lanman offered the example of Tay-Sachs disease, which is prevalent in persons of Eastern European Jewish
ethnicity. Discrimination based on the genetic information of an individual that is unrelated to an individual’s
race or ethnicity would not currently fall under the protection of the ADA or Civil Rights Act.
A major section of the pieced-together legislation that is currently protecting citizens from genetic
discrimination is the Health Insurance Portability and Accountability Act of 1996 (HIPAA). This act
prohibits insurance companies from (1) excluding members because of a preexisting condition that is based
solely on the results of genetic testing or family history, (2) imposing eligibility requirements, or (3) restricting
182

coverage based on genetic information. HIPAA does not restrict insurance companies from “requesting,
purchasing, or otherwise obtaining genetic information about an individual,” and it does not restrict insurance
companies from charging higher premiums or including this genetic information in the underwriting process.
The major problem with the state and federal regulations enacted to date is that genetic information is
either not mentioned as a basis for discrimination, or it is not defined consistently throughout existing laws.
The United States has two primary concerns: protecting the privacy of genetic information, and preventing
discrimination based on genetic information—especially by employers and insurance companies. To address
this issue, new federal regulation must cover gaps left in existing directives and account for future
developments in the industry. The hodgepodge of existing laws combined with the inconsistency of state laws
leaves too many loopholes to provide comprehensive protection for the general public.
The Genetic Information Nondiscrimination Act of 2005
On February 17, 2005, the Senate passed S.306, the “Genetic Information Nondiscrimination Act of 2005”
with a vote of 98–0. The law was then passed on to the House of Representatives on March 10, 2005, where
it was referred to the Subcommittee on Health. No further action has been taken, and the bill has not yet
become a law. The proposed bill specifically “prohibits discrimination on the basis of genetic information with
respect to health insurance and employment.” In addition, it amends the Employee Retirement Income
Security Act of 1974 (ERISA) and the Public Health Service Act (PHSA) to include in their definitions of
genetic information, any results of genetic testing and information pertaining to whether or not testing was
performed. It would also disallow insurance companies from adjusting premiums based on the results of
genetic testing, and prevents them from requiring genetic tests for subscribers or their dependents. The law
concludes by covering fines and penalties and calls for a commission to review advances in science and
technology and developments in genetic testing six years after the enactment of the law to make
recommendations and amendments. This bill in 2005 was considered dead in the House of Representatives
but was resubmitted for consideration in 2007.
One possible reason for not yet signing the Genetic Information Nondiscrimination Act is resistance from
the Health Insurance Association of America (HIAA), and the claim that additional federal regulation is not
needed. Opponents of the bill see sufficient restrictions in the current existing laws, and do not see the
necessity of new legislation. However, Lanman’s report, “An Analysis of the Adequacy of Current Law in
Protecting Against Genetic Discrimination in Health Insurance and Employment,” points out several
shortcomings in the combined efforts to protect individuals from this type of discrimination. More
importantly, future advances in bio- and medical technology need to be accounted for—and somewhat are—
by this new proposed bill.
The bill’s consequences for employers and health insurance providers are focused around the idea of being
informed. Since health insurance costs are rising, and they are likely to continue to rise due to advances in
medicine, testing, and the ability to prolong life, employers must be more aware of the costs of hiring
additional employees. Health insurance providers also must remain competitive in balancing the cost of
providing health care coverage and mitigating the financial risk to themselves. If employers and health
insurance providers are not privy to all of the information available concerning the insured parties, premiums
will not be fair or balanced.
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While the health insurance companies will probably not come out ahead in this battle, some of their
concerns should be taken into consideration if the bill is to be amended before it is passed. For example, one
of the members of the Human Genome Project’s Committee for Ethical, Legal, and Social Implications,
Nancy L. Fisher, MD, asks if genetic testing and health insurance can coexist. Fisher’s main concern is the
definition of terms like “preexisting condition” and “genetic information,” and how new laws will affect not
only the health insurance industry, and its ability to survive, but also the financial cost for taxpayers if “society
decides that everyone is entitled to comprehensive health care.”
May 21, 2008: The Genetic Information Nondiscrimination Act
The Genetic Information Nondiscrimination Act (GINA), referred to as “the first civil rights legislation of
the 21st century” was reintroduced to Congress and became a law on May 21, 2008. The law prevents
employers and insurers from using genetic data against individuals and employees. The law states that (1)
employers cannot deny a person a job because s/he is genetically predisposed to develop a particular disease or
condition; (2) insurers cannot use an individual’s genetic profile to deny coverage or raise his/her premiums;
and (3) now protected, an individual benefits from medical genetic testing without concern with regard to
results being used against him/her. However, the law does not protect third parties from using an individual’s
genetic results, including the military. It is also plausible that an individual may still be at risk of being
discriminated against with regard to health insurance.
Title II GINA Law now
As stated earlier, the two cases presented, 2001 and 2013, illustrate the difference in EEOC’s effectiveness in
enforcing the Title II GINA law. Given the history of disputes over genetic testing, ownership and
commercialization of genetic tests and research results, and employees at risk and who may or may not have a
preexisting genetic condition, at present, this federal law appears to be serving its intended purpose.
Questions for Discussion
1. What is genetic discrimination, and why is it an issue?
2. Who would benefit and who would be at risk if genetic testing and the results of such tests were legal and
could be required of employees? Explain.
3. Explain the ethical principle(s) that could be used to (a) argue against genetic testing of employees and (b)
argue for genetic testing.
4. Explain your position on the issue of genetic testing by employers.
5. How does the outcome of Rhonda Jones’ case affect employers? Is there now a fair balance between the
Title II GINA law and employers? Explain.
Sources
This case was written by Jaclyn Publicover and Bentley University, under the direction of Joseph W. Weiss,
for classroom discussion, and not for any type of official or unofficial decision making by personnel or
management. Sources cited and used in the case are in the public domain. This case was developed from
material contained in the following sources:
184

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http://www.ornl.gov/sci/techresources/Human_Genome/project/about.shtml

http://www.genome.gov/10002328

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186

Notes
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2. Thomas, Pierre, Johes, Lisa A., Cloherty, Jack, and Ryan, Jason. (May 27, 2010). BP’s dismal safety
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http://iveybusinessjournal.com/topics/leadership/bp-and-public-issues-mismanagement#.Unf_n_mTySo

Management Review, 29(1), 141–147; and Power, P. (August 16, 2004). Calm in a crisis. Lawyer.
http://www.thelawyer.com/calm-in-a-crisis/111565.article, accessed November 4, 2013.
61. Listverse. (March 20, 2008). 10 books that changed America. http://listverse.com/2008/03/20/10-
books-that-changed-america/.
62. Wald, M., and Baker, A. (January 18, 2009). 1549 to Tower: We’re gonna end up in the Hudson. New
York Times, A29; Gittens, H., Dienst, J., and Hogarty, D. (January 15, 2009). Plane crashes into Hudson:
Hero pilot saves everyone. NBC New York. http://www.nbcnewyork.com/news/archive/Plane-Crashes-in-
Hudson-River.html; Olshan, J., and Livingston, I. (January 17, 2009). Quiet air hero is Captain America.
New York Post. US Airways Flight 1549 (n.d.). Wikpedia.
http://en.wikipedia.org/wiki/US_Airways_Flight_1549, accessed October 27, 2013.
63. Ibid.
64. See Marx, op. cit.
65. Ibid.
66. Bailey, Jeff. (February 19, 2007). JetBlue’s C.E.O. is “mortified” after fliers are stranded. New York
Times. http://www.nytimes.com/2007/02/19/business/19jetblue.html?pagewanted=1&_r=2&ref=todayspaper,
accessed March 13, 2012.
67. Matthews, J. B., Goodpaster, K., and Nash, L. (1985). Policies and persons: A casebook in business ethics.
New York: McGraw-Hill.
68. Prbookgroup. (April 13, 2009). Case study: Tylenol poisonings.
http://crisiscomm.wordpress.com/2009/04/13/case-study-tylenol-poisonings/, accessed November 6, 2013.
69. Ibid.
70. Mitroff, I., Shrivastava, P., and Firdaus, U. (1987). Effective crisis management. Academy of
Management Executive, 1(7), 283–292.
71. Power, op. cit.
72. Wartick, S., and Rude, R. (1986). Issues management: Fad or function? California Management
Review, 29(1), 124–140.
73. Key, op. cit.
191

http://www.thelawyer.com/calm-in-a-crisis/111565.article

http://listverse.com/2008/03/20/10-books-that-changed-america/

http://www.nbcnewyork.com/news/archive/Plane-Crashes-in-Hudson-River.html

http://en.wikipedia.org/wiki/US_Airways_Flight_1549

http://www.nytimes.com/2007/02/19/business/19jetblue.html?pagewanted=1&_r=2&ref=todayspaper

Case Study: Tylenol Poisonings

4
THE CORPORATION AND EXTERNAL
STAKEHOLDERS
Corporate Governance: From the Boardroom to the Marketplace
4.1 Managing Corporate Social Responsibility in the Marketplace
Ethical Insight 4.1
Point/CounterPoint
4.2 Managing Corporate Responsibility with External Stakeholders
Ethical Insight 4.2
4.3 Managing and Balancing Corporate Governance, Compliance, and Regulation
Ethical Insight 4.3
4.4 The Role of Law and Regulatory Agencies and Corporate Compliance
4.5 Managing External Issues and Crises: Lessons from the Past (Back to the Future?)
Chapter Summary
Questions
Exercises
Real-Time Ethical Dilemma
Cases
9. Conscious Capitalism: What Is It? Why Do We Need It? Does It Work?
10. Goldman Sachs: Hedging a Bet and Defrauding Investors
11. Google Books
Notes
OPENING CASE
When you read “The TJX Companies, Inc. V.A.L.U.E. Corporate Social Responsibility Report 2013” and
see Carol Meyrowitz’s letter, you would never believe the crisis that rocked the company in 2008 ever
happened. This case illustrates one difference between companies that learn, change, and grow, and those that
do not.
TJX seems to practice its VALUE proposition, “Vendor Social Compliance, Attention to Governance,
Leveraging Differences, United With Our Communities and Environmental Initiatives.” Forbes reported in
2013 that the TJX Companies (NYSE: TJX) has taken over the #95 spot from Capital One Financial Corp
(NYSE: COF). Although the company, as with several other retailers, could improve its customer satisfaction
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index score, it has recovered from the 2008 crisis recounted here.1
On January 17, 2008, TJX Companies, Inc., a leading retailer in the field of clothing and home fashions
that operates stores domestically and internationally, announced that the organization had experienced an
unauthorized intrusion of its computer systems.2 Customer information, including credit card, debit card, and
driver’s license numbers, had been compromised. This intrusion had been discovered in December of 2006,
and it was thought that data and information as far back as 2003 had been accessed and/or stolen. At the
time, approximately 45.6 million credit card numbers had been stolen. In October of 2007, the number rose
to 94 million accounts.3 This is one of the largest credit card thefts or unauthorized intrusions in recent
history.
Because of the lax security systems at TJX, the hackers had an open doorway to the company’s entire
computer system. In 2005, hackers used a laptop outside of one of TJX’s stores in Minnesota and easily
cracked the code to enter into the Wi-Fi network. Once in, the hackers were able to access customer
databases at the corporate headquarters in Framingham, Massachusetts. The hackers gained access to millions
of credit card and debit card numbers, information on refund transactions, and customer addresses and phone
numbers. The hackers reportedly used the stolen information to purchase over $8 million in merchandise.4
TJX used an outdated WEP (wired equivalent privacy) to secure its networks. In 2001, hackers were able
to break the code of WEP, which made TJX highly vulnerable to an intrusion. (Similar data breaches have
occurred within the past few years at the firms ChoicePoint and CardSystems Solutions.) In August of 2007,
a Ukrainian man, Maksym Yastremskiy, was arrested in Turkey as a potential suspect in the TJX case.
According to police officials, Yastremskiy is “one of the world’s important and well-known computer
pirates.”5 He led two other men in the scheme.6
Even though the intrusion was discovered in December of 2006, the company did not publicize it until a
month later. Consumers felt that they should have been notified of the breach once it was discovered.
However, TJX complied with law enforcement and kept the information confidential until it was told it could
notify the public. Retail companies such as TJX that use credit card processing are required to comply with
the Payment Card Industry Data Security Standard (PCI DSS). The PCI DSS is a set of requirements with
the purpose of maximizing the security of credit and debit card transactions. A majority of firms have not
complied with this standard, as was the case with TJX.
A number of stakeholders were involved in this break-in: consumers, who were put at great risk; banks;
TJX (its shareholders, management, employees, and other internal parties who did business with and were
invested in the firm); the credit card companies; the law enforcement and justice systems; the public; other
retail firms; and the media, to name a few. Chief executive officer (CEO) Carol Meyrowitz took an active role
in informing the public in statements on the company’s web sites and through the media about the company’s
responsibility and obligations to its stakeholders during and after the investigation. TJX also contacted various
agencies to help with the investigation. A web site and hotline were established to answer customer questions
and concerns.
The intrusion cost TJX approximately $118 million in after-tax cash charges and $21 million in future
charges. Although TJX incurred substantial legal, reimbursement, and improvement costs, the company’s
pretax sales were not negatively affected. Sales during the second quarter of fiscal year 2008 increased
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compared to second quarter sales from fiscal year 2007.7
At the end of 2007, TJX reached a settlement agreement with six banks and bankers’ associations in
response to a class action lawsuit against the company.8 In the spring of 2008, TJX settled in separate
agreements with Visa ($40.9 million with 80% acceptance) and MasterCard International (a maximum of $24
million with 90% minimum acceptance). There was almost full acceptance of the alternative recovery offers by
eligible MasterCard accounts.9 Note that those issuers who accept the agreements and terms “release and
indemnify TJX and its acquiring banks on their claims, the claims of their affiliated issuers, and those of their
sponsored issuers as MasterCard issuers related to the intrusion. That includes claims in putative class actions
in federal and Massachusetts state courts.”10
Affected customers were reimbursed for costs such as replacing their driver’s licenses and other forms of
identification and were offered vouchers at TJX stores and free monitoring of their credit cards for three years.
Customer discontent was reportedly expressed after the intrusion; however, customer loyalty returned,11 as
was evidenced in sales numbers.
4.1 Managing Corporate Social Responsibility in the Marketplace
Corporate social responsibility (CSR) involves an organization’s duty and obligation to respond to its
stakeholders’ and the stockholders’ economic, legal, ethical, and philanthropic concerns and issues.12 This
definition encompasses both the social concerns of stakeholders and the economic and corporate interests of
corporations and their stockholders. Generally, society cannot function without the economic, social, and
philanthropic benefits that corporations provide. Leaders in corporations who use a stakeholder approach
commit to serving broader goals, in addition to economic and financial interests, of those whom they serve,
including the public.
Managing CSR in the marketplace with multiple stakeholder interests is not easy. As discussed in Chapter
2, ethics at the personal and professional levels requires reasoned and principled thinking, as well as creativity
and courage. When ethics and social responsibility escalate to the corporate level, where companies must
make decisions that affect governments, competitors, communities, stockholders, suppliers, distributors, the
public, and customers (who are also consumers), moral issues increase in complexity, as this chapter’s opening
case illustrates. For organizational leaders and professionals, the moral locus of authority involves not only
individual conscience but also corporate governance and laws, collective values, and consequences that affect
millions of people locally, regionally, and globally. Patagonia, for example, is a company that conducts its
outdoor apparel business with a 360-degree focus of responsibility. The company takes responsibility for the
actions of all members of its supply chain and for impacts on the environment. This attitude is integrated into
the culture of the company, its organizational structure (with a new Director of Social/Environmental
Responsibility position created in 2010), and its relationship with suppliers. It has developed a “contractor
relationship assessment,” a scorecard system that is used to rate the performance of each factory. Patagonia,
along with many other companies, now recognizes a broader scope of accountability and the interests of
multiple stakeholders.13
In the opening case, the TJX executives had to deal not only with their own customers, but with banks (in
a class action suit), credit card companies, the media, competitors, and a network of suppliers and distributors
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—as well as their own reputation. What may have seemed like a routine technical security problem turned
into the largest-known credit card theft/unauthorized intrusion in history. Had the CEO not stepped in and
become a responsible spokesperson and decision maker for the company, customers may not have responded
in kind.
The basis of CSR in the marketplace begins with a question: What is the philosophical and ethical context
in which CSR and ethical decisions are made? For example, not everyone is convinced that businesses should
be as concerned about ethics and social responsibility as they are about profits. Many believe that ethics and
social responsibility are important, but not as important as a corporation’s performance. This classical debate
—and seeming dichotomy—between performance, profitability, and “doing the right thing” continues to
surface not only with regard to CSR, but also in political parties and debates over personal and professional
ethics. The roots of CSR extend to the topic of what a “free market” is and how corporations should operate
in free markets. Stated another way, does the market sufficiently discipline and weed out inefficient “bad
apples” and wrongdoers, thereby saving corporations the costs of having to support “soft” ethics programs?
Ethical Insight 4.1
Ethical Issues in the TJX Case
After reading the opening case, answer and be prepared to discuss in class these questions:
1. If you had been assigned to investigate, report, and offer recommendations from this case, how would you
respond to this question: Who was to blame for the security breach and why?
2. Which factor, in your judgment, was the most important contributor to TJX’s security breach: the lack of a
comprehensive security policy and legal procedures OR issues with the company’s corporate leadership and
culture? Explain.
3. What will work best for TJX in this case: discipline from the legal and judicial system OR required changes
in the company’s leadership and culture regarding security? Explain.
The type of information security breach experienced by TJX has become almost commonplace for large
organizations, particularly with business trends toward electronic data collection and storage and the
increasing complexity of technology. Corporations now have an ethical responsibility for preventive, detective,
and corrective actions regarding the protection of stakeholder information. The following is a list of the top
ten “massive security breaches” of recent years:14
1. TJX (February 2007). “Thieves had stolen information on possibly tens of millions of credit and debit
cards. The company first thought its systems had been compromised for about eight months, but it turned out
the vulnerability might have lasted for almost a year longer than that. The incident wound up costing TJX
millions of dollars paid to the Federal Trade Commission (FTC), credit card companies, banks, and
customers. Eleven hackers were eventually arrested for the break-in. Security breaches have only increased in
scope and frequency in recent years, as more businesses store their data in digital files and thieves become
increasingly sophisticated in how they gain access to those files.”
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2. CardSystems Solutions (June 2005). “MasterCard announced that up to 40 million credit card holders
were at risk of having their data stolen—and 200,000 definitely had. CardSystems Solutions had improperly
stored the card data, unencrypted, in order to do research on the transactions.”
3. Heartland Payment Systems (2009). “The company revealed that tens of millions of transactions might
have been compromised. The company’s computers were infected with malware.”
4. Bank of New York Mellon (February 2008). This was an instance of “a physical security breach rather than
an electronic one, the Bank of New York Mellon simply lost a tape. The company sent 10 unencrypted
backup tapes to a storage facility. When the storage firm’s truck arrived at the facility, however, only nine
tapes were still on board. The missing tape contained social security numbers and bank account information
on 4.5 million customers.”
5. Hannaford Brothers (March 2008). “Hackers had gained access to more than 4.2 million credit card
transactions. By the time word got out, more than 1,800 of the credit card numbers had already been used at
company stores. The breach resulted in two class action lawsuits on behalf of customers.”
6. HM Revenue and Customs (November 2007). “Two computer discs holding personal information on 25
million British citizens had been lost in the mail. The discs had been sent by courier via the HMRC’s internal
mail system.”
7. U.S. Department of Veterans Affairs (2009). The agency sent a troubled hard drive out for repair without
first erasing the unencrypted data contained on the disc—personal information for about 76 million veterans.
8. Certegy (2007). An employee of this subsidiary of Fidelity National Information Service “had been
stealing customer records and selling them to a data broker. The records included credit card, bank account,
and other personal information, and Certegy estimated the breach affected 8.5 million customers. Certegy
wound up out nearly $1M in donations and court costs.”
9. Oklahoma Department of Human Services (April 2009). Someone removed a laptop containing
unencrypted client records from the office. “They left the laptop in their car, someone broke into the car, and
the names, social security number, and other sensitive information on about a million Oklahomans went
missing.”
10. Health Net (May 2009). “The Connecticut health care provider reported that an unencrypted portable
storage device was missing, containing seven years’ worth of financial and medical information on 1.5 million
customers. The Connecticut attorney general promptly filed suit. Health Net settled for $250,000.”
Free-Market Theory and Corporate Social Responsibility
Free-market theory holds that the primary aim of business is to make a profit. As far as business obligations
toward consumers, this view assumes an equal balance of power, knowledge, and sophistication of choice in
the buying and selling of products and services. If businesses deliver what customers want, customers buy.
Customers have the freedom and wisdom to select what they want and to reject what they do not want. Faulty
or undesirable products should not sell. If businesses do not sell their products or services, it is their own fault.
The marketplace is an arena of arbitration. Consumers and corporations are protected and regulated—
according to this view—by Adam Smith’s (one of the modern founders of capitalism) notion of the “invisible
hand.” What would have happened to TJX customers without regulation?
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Several scholars argue that Adam Smith’s “invisible hand” view is not completely oriented toward
stockholders. For example, Eugene Szwajkowski argues that “Smith’s viewpoint is most accurately positioned
squarely between those who contend firms should act out of self-interest and those who believe corporations
should be do-gooders. This middle ground is actually the stakeholder perspective. That is, stakeholders are in
essence the market in all its forms. They determine what is a fair price, what is a successful product, what is an
unacceptable strategy, what is intolerable discrimination. The mechanisms for these determinations include
purchase transactions, supplier contracts, government regulation, and public pressure.”15 Szwajkowski
continues, “Our own empirical research has clearly shown that employee relations and product quality and
safety are the most significant and reliable predictors of corporate reputation.”16
Economist and free-market advocate Milton Friedman is noted for a philosophical view summarized in the
following quote: “The basic mission of business [is] thus to produce goods and services at a profit, and in
doing this, business [is] making its maximum contribution to society and, in fact, being socially responsible.”17
Friedman more recently stated that even with the recent corporate scandals, the market is a more effective way
of controlling and deterring individual wrongdoers than are new laws and regulations.18
Free markets require certain conditions for business activity to help society. These conditions include (1)
minimal moral restraints to enable businesses to operate and prevent illegal activities such as theft, fraud, and
blackmail; (2) full competitiveness with entry and exit; (3) relevant information needed to transact business
available to everyone; and (4) accurate reflection of all production costs in the prices that consumers and firms
pay (including the costs of job-related accidents, injuries from unsafe products, and externalities, which are
spillover costs that are not paid by manufacturers or companies, but that consumers and taxpayers often pay,
e.g., pollution costs). Legal and ethical problems arise when some or all of these conditions are violated, as in
this chapter’s opening case.
Problems with the Free-Market Theory
Although the free-market theory continues to have its advocates, controversy also exists regarding its
assumptions about stakeholders and consumer-business relationships. For example, consider these arguments:
1. Most businesses are not on an equal footing with stakeholders and consumers at large. Large firms
spend sizable amounts on research aimed at analyzing, creating, and—some argue—manipulating the demand
of certain targeted buyers and groups. Children and other vulnerable groups, for example, are not aware of the
effects of advertising on their buying choices.
2. As discussed in Chapter 5, it has been questioned as to whether many firms’ advertising activities
truthfully inform consumers about product reliability, possible product dangers, and proper product use. A
thin line exists between deceit and artistic exaggeration in advertising.
3. The “invisible hand” is often nonexistent for many stakeholders and, in particular, for consumers in need
of protection against questionable, poorly manufactured products that are released to market. One reason a
stakeholder view has become a useful approach for determining moral, legal, and economic responsibility is
that the issues surrounding product safety, for example, are complex and controversial.
Another important argument against free-market theory is based on what economists refer to as “imperfect
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markets,” that is, markets in which competition “is flawed by the ability of one or more parties to influence
prices.”19
Intermediaries: Bridging the Disclosure Gap
Inequality of information available to companies and stakeholders is attributable in part to imperfect markets.
Investors, for example, rarely have access to complete information to make investment decisions. They must
settle for incomplete and/or inaccurate information. The presence of “intermediaries” can help managers and
other designated officers obtain accurate information that might otherwise be willfully withheld and/or
manipulated for personal gain or misplaced and lost from neglect.
Two general types of intermediaries are financial and information. Financial intermediaries include venture
capitalists, banks, and insurance companies; information intermediaries include auditors, analysts, rating
agencies, and the press. These intermediaries obtain information to provide stakeholders with a more
complete and accurate financial picture of the company’s position in markets. Intermediaries can prevent
leaders and managers of companies from taking unfair advantage of imperfect markets by intentionally failing
to disclose information to relevant stockholders and stakeholders. The Lehman Brothers, for example, used
what is called a “Repo 105” scheme to falsely increase their balance sheet by billions of dollars, thereby
misleading stakeholders in and since 2007. This scheme involved repurchase agreements, in which Lehman
Brothers entered into agreements to “sell” and then “buy back” toxic assets from other banks. This secretive
process misled investors since the company recorded the agreements as sales and removed the bad assets from
the financial statements, thus showing stakeholders incorrect and misleading information about the company’s
financial performance. Lehman had more information than its stakeholders and intentionally chose not to
disclose its complete and accurate books.20
Another example of imperfect and skewed market power occurs in Africa, “where a few pharmaceutical
companies effectively control the availability of several key drugs. In effect, they are beyond the financial
means of millions of Africans or their governments. When a few dominating companies cut the prices of
several key ingredients of the AIDS cocktail, they demonstrated this power. But this also revealed a further
imperfection in the real market, where only rickety systems, if any, exist to deliver the drugs to patients
requiring sophisticated and continuous follow-up care.”21
Mixed-Market Economies
The debate regarding free markets, imperfect markets, and other forms of social organization is interesting
but not always helpful in describing how these systems actually work in the marketplace. The free-market
system has been more accurately described by economist Paul Samuelson as a “mixed economy.”22 Mixed
economies include a balance between private property systems and the government laws, policies, and
regulations that protect consumers and citizens. In mixed economies, ethics becomes part of legal and business
debates. Principles of justice, rights, and duty coexist with utilitarian and market principles.
A realistic approach to managing social responsibility in a mixed-market economy is the stakeholder
management approach. Instead of separating profit-making from social and ethical goals, corporate leaders
can accomplish both, as the following sections show.
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POINT/COUNTERPOINT
Too Big to Fail (TBTF)
The “theory” behind “too big to fail” (TBTF) institutions was invoked during the most recent U.S. financial
crisis. Governmental assistance to large failing financial institutions, mainly some of the largest banks, was
necessary because their failure would have been catastrophic for the U.S. and even global economies. The idea
was and is unpopular in part because it justifies subsidizing the Wall Street institutions that played a
significant part in that near meltdown. Since banks and these larger financial institutions are returning to their
previous practices, the next major meltdown may be closer than previously believed possible.
On the other hand, some progress has been made. The Federal Deposit Insurance Corp. claims it is now
prepared to take over the parent companies of large failing lenders, if necessary. Making banks safer for the
economy means opening more capital to facilitate investments and loans. Banks have to be able to invest to
survive and thrive. The financial health of the four TBTF banks (Bank of America, Citigroup, JPMorgan,
Wells Fargo) is central to the U.S. economy as this country faces the continued debate on the debt ceiling and
the failed monetary policy that will soon be led by the new Federal Reserve chairperson. The larger a firm’s
capital is at any time, the larger the shrinkage in asset values it can suffer before becoming insolvent. It seems
obvious that the purpose of helping a large bank and financial institution gain safety and protection from
failure is to raise its capital requirements, so it can take any shock to the value of its assets.
But again, TBTF helps large banks at the expense of community banks, which are also essential to our
economy, small investors, and individuals. By making failure less common, it creates “moral hazard” (the
subsidization of bad behavior) in our financial system. To avoid another 2008 near meltdown, a robust plan to
take over a failing financial firm is needed, and market participants need to understand that they have to
absorb their own losses—not taxpayers. Investors have to believe that banks are “too big to bail.” On the other
hand, shareholders, creditors, and the parent company would have to take the pain—even to the point of
going out of business. Shareholders would be out of business, creditors would sustain huge losses, and top
executives probably would be fired.
Instructions: (1) Each student individually adopts either the Point or CounterPoint argument below, justifying
their reasons (using arguments from this case and other evidence/opinions). (2) Then, either in teams or
designated arrangements, each shares their reasons. (3) Class debrief and sharing of insights.
POINT: Let them fail if they bring it on themselves and everybody else. Wall Street titans, risky bankers, and
investors who seek only financial gain have forgotten the original mission of banks and financial investment
firms: to help small businesses, individual investors, and families needing mortgages to get those funds. This is
what growing and sustaining a middle class, a democratic society, and a socially responsible business
environment is all about; the U.S. stock market and business system is based on honest yet “competitive
enough” strategies and practices.
COUNTERPOINT: Large financial institutions and banks must be supported to compete with global rivals
and to protect the U.S. standard of living and way of life. Such institutions are large but require support.
It is naive to believe that small banks and financial institutions can finance multimillion-dollar real estate
and other projects that support the economic and social growth that sustains the standard of living of
Americans and other global citizens. Enabling banks to grow capital to protect their assets during downtimes
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is one of the only ways to permit them to survive; otherwise, the government and taxpayer dollars will be
needed. The United States is not a socialist or government-run society, rather it is based on free enterprise
where there are no artificial ceilings for growth.
SOURCES
Guerrera, Francesco. (September 30, 2013). Too big to bail appears to take hold. Blogs. WSJ.com.
http://blogs.wsj.com/moneybeat/2013/09/30/too-big-to-bail-appears-to-take-hold/, accessed January 8,
2014.
Guttentag, Jack M. (October 16, 2013). Is the “too big to fail” problem too big to solve? Part II.
HuffingtonPost.com. http://www.huffingtonpost.com/jack-m-guttentag/is-the-too-big-to-fail-
problem_b_4101117.html, accessed January 8, 2014.
Heineman, Ben W., Jr. (October 3, 2013). Too big to manage: JP Morgan and the mega banks. HBRBlog
Network. http://blogs.hbr.org/2013/10/too-big-to-manage-jp-morgan-and-the-mega-banks/, accessed
January 8, 2014.
Shah, Neil. (October 16, 2013). How to deal with “too big to fail.” Blogs.WSJ.com.
http://blogs.wsj.com/economics/2013/10/16/how-to-deal-with-too-big-to-fail/, accessed January 8, 2014.
Simon, Ammon. (October 21, 2013). How to fix too big to fail. National Review Online.
http://www.nationalreview.com/article/361719/how-fix-too-big-fail-ammon-simon, accessed January 8,
2014.
4.2 Managing Corporate Responsibility with External Stakeholders
The Corporation as Social and Economic Stakeholder
The stakeholder management approach views the corporation as a legal entity and also as a collective of
individuals and groups. The CEO and top-level managers are hired to maximize profits for the owners and
shareholders. The board of directors is responsible for overseeing the direction, strategy, and accountability of
the officers and the firm. To accomplish this, corporations must respond to a variety of stakeholders’ needs,
rights, and legitimate demands. From this perspective, the corporation has primary obligations to the
economic mandates of its owners; however, to survive and succeed, it must also respond to legal, social,
political, and environmental claims from stakeholders, as noted earlier. Figure 4.1 illustrates the moral stakes
and corporate responsibilities of firms’ obligations toward their different stakeholders.
200

http://blogs.wsj.com/moneybeat/2013/09/30/too-big-to-bail-appears-to-take-hold/

http://www.huffingtonpost.com/jack-m-guttentag/is-the-too-big-to-fail-problem_b_4101117.html

http://blogs.hbr.org/2013/10/too-big-to-manage-jp-morgan-and-the-mega-banks/

http://blogs.wsj.com/economics/2013/10/16/how-to-deal-with-too-big-to-fail/

http://www.nationalreview.com/article/361719/how-fix-too-big-fail-ammon-simon

Figure 4.1
External Stakeholders, Moral Stakes, and Corporate Responsibilities
Source: Based on Caux Round Table. (March 2009; updated May 2010). Principles for business. CauxRoundTable.org.
http://www.cauxroundtable.org/index.cfm?menuid=8, accessed January 10, 2014.
One study has argued that “Using corporate resources for social issues not related to primary stakeholders
may not create value for shareholders.”23 This finding does not suggest that corporations refrain from
philanthropic activities; rather, “The emphasis on shareholder value creation today should not be construed as
coming at the expense of the interests of other primary stakeholders.”24
Shareholder value obsession began in 1976, when it was argued that the owners of companies were not
getting full, open, and honest disclosure from professional managers.25 A major problem was and is not with
placing the emphasis on “shareholder value,” but on “the use of short-term increases in a firm’s share price as a
proxy for it.” “Ironically, shareholders themselves have helped spread this confusion. Along with activist hedge
funds, many institutional investors have idolized short-term profits and share-price increases rather than
engaging recalcitrant managers in discussions about corporate governance or executive pay. Giving
shareholders more power to influence management (especially in America) and encouraging them to use it
should prompt them and the managers they employ to take a longer view.”26
Critics have not identified a realistic alternative measure of success to shareholder value. Critics of the
shareholder model endorse a “stakeholder” model as described and used in this text.27 “For capitalism to
thrive, it urgently needs reform in three areas: shifting from a narrow focus on shareholders to a broader
community of stakeholders; adopting an owner-based governance model aimed at building companies with
high longevity; and moving from quarterly measures of performance to much longer timeframes.”28
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http://www.cauxroundtable.org/index.cfm?menuid=8

Corporations are economic and social stakeholders. This is not a contradiction but a leadership awareness
and choice that requires balancing economic and moral priorities. In the discussion below, we explore the
ethical basis on which the relationships between corporations and their stakeholders are grounded. We then
turn to the external compliance and legal dimension of stakeholder management, which is also required for
effectively dealing with external constituencies.
The Social Contract: Dead or Desperately Needed?
The stakeholder management approach of the corporation is grounded in the concept of a social contract.
Developed by early political philosophers, a social contract is a set of rules and assumptions about behavior
patterns among the various elements of society. Much of the social contract is embedded in the customs of
society. Some of the “contract provisions” result from practices between parties. Like a legal contract, the
social contract often involves a quid pro quo (something for something) exchange. Although globalization,
massive downsizing, and related corporate practices continue to pressure many employer—employee
relationships, the underlying principles of the social contract, like mutual trust and collaboration, remain
essential. Reputation of a firm, as well as for leaders, managers and professionals, is still a foundation for
business as well as social exchanges, contracts, and practices.
The social contract between a corporation and its stakeholders is often based on implicit as well as explicit
agreements. For example, as Figure 4.1 indicates, when corporations and stakeholders base their negotiations
and provisions of services and products on moral standards as well as production-oriented metrics, the success
of the business and the satisfaction of the stakeholders increase, and the public’s confidence in the businesses
also is enhanced. A loss of public confidence can be detrimental to the firm and to its investors. One way to
retain and to reinforce public confidence is by acting in an ethical manner, a manner that shows a concern for
the investing public and the customers of the firm.29 The question is not really whether a social contract
between a corporation and its stakeholders exists, but what the nature of the contract is and whether all parties
are satisfied with it. Are customers satisfied with the products and services and how they are treated by a
company’s representatives? Are suppliers, distributors, and vendors all satisfied by the contractual agreements
with the corporation? Do members of the communities a company is located in and serves believe the
company is a responsible and responsive citizen? Does the company pay its fair share of taxes? Do employees
believe they are paid a fair wage, have adequate working conditions, and are being developed?
Balance between Ethical Motivation and Compliance
Ethics programs, as part of the social contract, are essential motivators in organizations. Studies suggest that
ethics programs matter more than compliance programs on several dimensions of ethics, for example,
awareness of issues, search for advice, reporting violations, decision making, and commitment to the firm.30
Business relationships based on mutual trust and ethical principles combined with regulation result in long-
term economic gains for organizations, shareholders, and stakeholders.31 If corporate leaders and their firms
commit illegal acts, taxpayers end up paying these costs. Corporate leaders and their stakeholders, therefore,
have an interest in supporting their implicit social contract as well as their legally binding obligations.
There is a balance to be maintained between external regulation and self-regulation based on the public’s
trust in corporations. A 2011 Maritz poll found that “approximately 25% of employees report having less trust
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in management than they did last year. Only 10 percent of employees trust management to make the right
decision in times of uncertainty. The percentage increases to 16% among employees 18–24 years of age who
only recently entered the workforce and didn’t directly experience many of the management scandals of the
past 10 years.” The poll also notes that only “slightly more than one in ten Americans (14%) believes their
company’s leaders are ethical and honest. In addition, the poll found that only 12% of employees believe their
employer genuinely listens to and cares about its employees, and only seven percent of employees believe
senior management’s actions are completely consistent with their words.”32 This mistrust has translated into a
global call for greater regulation of large companies. A poll of 20 nations found that “solid majorities in every
country favored more regulation of large companies to protect the rights of workers, the rights of consumers,
and the environment. A majority in 15 of the 20 countries also favored greater government regulation to
protect the rights of investors.”33
Covenantal Ethic
The covenantal ethic concept is related to the social contract and is also central to a stakeholder management
approach. The covenantal ethic focuses on the importance of relationships—social as well as economic—
between businesses, customers, and stakeholders. Relationships and social contracts (or covenants) between
corporate managers and customers embody a “seller must care” attitude, not only “buyer beware.”34 A
manager’s understanding of problems is measured not only over the short term, in view of concrete products,
specific cost reductions, or even balance sheets (though obviously important to a company’s results), but also
over the long term, in view of the quality of relationships that are created and sustained by business activity.35
It may also be helpful to understand the concept of a covenantal ethic in an organizational context by pointing
out how great leaders are able to attract and mobilize followers to a vision and beliefs based on the
relationship they develop with those being led. Classic leaders like Franklin Roosevelt, John F. Kennedy, and
Martin Luther King Jr. instilled an enduring trust and credibility with their followers. We explain more of
these dynamics in Chapter 6; here, the point is that corporate leaders still inspire and motivate followers
through their vision, purposive mission, and leading-by-example that result in a type of social contract.
Warren Buffet, Bill Gates, and Richard Branson are such examples.
The Moral Basis and Social Power of Corporations as Stakeholders
Keith Davis argues that the social responsibility of corporations is based on social power, and that “if a
business has the power, then a just relationship demands that business also bear responsibility for its actions in
these areas.” He terms this view the “iron law of responsibility” and maintains that “in the long run, those who
do not use power in a manner in which society considers responsible will tend to lose it.” Davis discusses five
broad guidelines or obligations business professionals should follow to be socially responsible:
1. Businesses have a social role of “trustee for society’s resources.” Since society entrusts businesses with its
resources, businesses must wisely serve the interests of all their stakeholders, not just those of owners,
consumers, or labor.
2. Business shall operate as a two-way open system with open receipt of inputs from society and open
disclosure of its operations to the public.
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3. “Social costs as well as benefits of an activity, product, or service shall be thoroughly calculated and
considered in order to decide whether to proceed with it.” Technical and economic criteria must be
supplemented with the social effects of business activities, goods, or services before a company proceeds.
4. The social costs of each activity, product, or service shall be priced into it so that the consumer (user) pays
for the effects of his consumption on society.
5. Business institutions as citizens have responsibilities for social involvement in areas of their competence
where major social needs exist.36
The above guidelines provide a foundation for creating and reviewing the moral bases of corporate
stakeholder relationships. The public is intolerant of corporations that abuse this mutual trust, as recent
surveys show. For example, a BusinessWeek/Harris Poll found that “72% of Americans say they believe that
business has too much power over American life. Furthermore, 66% of those polled agree that companies care
more about making large profits than about selling safe, reliable, quality products. At the same time, pressure
for companies to take on more responsibilities in their communities seems to be rising.”37
The MSN Money Customer Service Hall of Fame includes the 10 companies out of 150 of the country’s
largest consumer names most often rated as “excellent” for customer service in MSN Money’s survey. In 2013,
they were Amazon.com, Marriott, Hilton, UPS, FedEx, Google, State Farm, Samsung, Trader Joe’s and
Lowe’s. Among the ten worst companies for customer service in 2013 were financial institutions and cable
and insurance providers: Bank of America (bank), Comcast, Bank of America (credit card), Dish Network,
Citigroup (credit card), Wells Fargo (credit card), Wells Fargo (bank), Citibank (bank), AT&T, and Discover
Financial Services. Whereas economic, environmental, and other factors affect customer satisfaction with
companies and industries—especially those listed in this survey at this time—if an industry or company
continues to score low on the index, it should serve as a wakeup call to the stockholders and corporate leaders.
Many times some element of poor stakeholder management can also be part of the problem, whether
perceived or experienced.38
Corporate Philanthropy
Corporations practice social responsibility in several ways, also known as “external engagements,” which
means the efforts a company makes to manage its relationships with stakeholders and groups and institutions
in need of assistance. These relationships can and should include a wide variety of activities: not just corporate
philanthropy, community programs, and political lobbying, but also aspects of product design, recruiting
policy, and project execution. “In practice, however, most companies have relied on three tools for external
engagement: a full-time CSR team in the head office, some high-profile (but relatively cheap) initiatives, and
a glossy annual review of progress.”39
Such activities are often measured through the impact of corporate philanthropy by counting the number
of individuals who are helped by a particular program. Philanthropy, however, can also reduce business risk,
open up new markets, engage employees, build the brand, reduce costs, advance technology, and deliver
competitive returns. “Corporate philanthropy is usually defined in contrast to various ‘shared’ or ‘blended’
value approaches to corporate social responsibility (CSR), in which companies seek to do well by doing good.”
It is more helpful to view corporate philanthropy as a discovery phase in investment in a social issue. Such
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philanthropic investments can serve as incubators for promising ideas and mechanisms for learning both
community and corporate needs. “Much like R&D, philanthropy allows companies to make thoughtful
investments in sectors where the return profile is typically more speculative. Of course, philanthropy is not the
only strategy for companies to play meaningful corporate-citizenship roles. Business leaders should use every
tool in their CSR portfolio to help create economic value that can help address relevant societal issues.”40
A corporation’s social responsibility also includes certain types of philanthropic responsibilities, in addition
to its economic, legal, and ethical obligations. Corporate philanthropy is an important part of a company’s role
as “good citizen” at the global, national, and local levels. The public expects, but does not require, corporations
to contribute and “give back” to the communities that support their operations. Procter & Gamble’s
reputation has been enhanced by its global contributions. Some of the greatest recent corporate
philanthropists include Warren Buffet, Bill and Melinda Gates, and Mark Zuckerberg.41 Buffett pledged
12,220,852 shares of Berkshire Hathaway class “B” stock, valued at more than $1 billion, to each of his three
children’s foundations. The Howard G. Buffett Foundation has contributed funds to agricultural
development, clean-water projects, and programs working to fight poverty.42
Managing Stakeholders Profitably and Responsibly: Reputation Counts
Globalization and the shifting centers of financial power and influence, the ongoing diffusion of information
technology, and the threat of other Enrons continue to pressure corporate competition, along with
increasingly wider shareholder activism. “The result is that many employees, investors, and consumers are
seeking assurances that the goods and services they are producing, financing, or purchasing are not damaging
to workers, the environment, or communities by whom and where they are made.”43 There is, consequently,
renewed interest in the area of CSR; that is, how a business respects and responds responsibly to its
stakeholders and society as well as to its stockholders.44
Ethical Insight 4.2
Employers’ Agreed on Goals for Colleges and Universities
A recent online survey by Hart Research Associates showed that employers place the greatest degree of
importance on the following areas:
• Ethics: “Demonstrate ethical judgment and integrity” (96% important; 76% very important).
• Intercultural Skills: “Comfortable working with colleagues, customers, and/or clients from diverse
cultural backgrounds” (96% important, 63% very important).
• Professional Development: “Demonstrate the capacity for professional development and continued new
learning” (94% important, 61% very important).
Questions for Discussion
1. Do you agree that college/university education should emphasize ethical judgment and integrity as a
priority in learning? Why or why not?
2. If so, do you believe learning ethical judgment and integrity are as important as the major one chooses as a
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concentration? Explain.
Source: Hart Research Associates. (April 13, 2013). It takes more than a major: Employer priorities for college
learning and student success, an online survey among employers conducted on behalf of: the Association of
American Colleges and Universities, p. 6 (4th area of online survey out of 11). AACU.org.
http://www.aacu.org/leap/documents/2013_EmployerSurvey , accessed January 8, 2014.
Most executives and professionals are interested in their stakeholders and are law abiding. Reputation
remains one of the most powerful assets in determining the extent to which a company manages its
stakeholders effectively. There is also evidence that socially responsible corporations have a competitive
advantage in the following areas:
1. Reputation.45
2. Successful social investment portfolios.46
3. Ability to attract quality employees.47
The organization Business Ethics ranks the top 100 socially responsible corporations in terms of
citizenship. Business Ethics uses its own collected data, including the Domini 400 Social Index (which also
tracks, measures, and publishes information on companies that act socially responsible). The Standard &
Poor’s 500 plus 150 publicly owned companies are ranked on a scale that measures stakeholder ratings. Harris
Interactive, Inc. and Reputation Institute, a New York-based research group, conducted an online nationwide
survey of 10,830 people to identify the companies with the best corporate reputations among Americans at the
turn of the millennium.48 The Reputation Quotient (RQ) is a standardized instrument that measures a
company’s reputation by examining how the public perceives companies based on 20 positive attributes,
including emotional appeal; social responsibility; good citizenship in its dealings with communities,
employees, and the environment; the quality, innovation, value, and reliability of its products and services;
how well the company is managed; how much the company demonstrates a clear vision and strong leadership;
and profitability, prospects, and risk.
The executive director of the Reputation Institute, Anthony Johndrow, noted, “Reputation is much more
than an abstract concept; it’s a corporate asset that is a magnet to attract customers, employees, and
investors.”49 Google took top place in the Reputation Institute’s annual Global Pulse U.S. 2011 study, with
Apple and The Walt Disney Company following at second and third place. The study measures an “analysis
of the world’s 100 top-rated companies based on input from over 55,000 consumers in 15 countries.” The
following trends were discovered as a result of this study:
• “58% of people’s willingness to recommend a company is driven by their perception of the company;
only 42% depends on perceptions of the company’s products and services.
• Two-thirds of C-suite executives at the 150 largest U.S. companies believe we have already entered
the Reputation Economy.
• Among the 150 largest companies in the U.S., 25 percent now coordinate their reputation strategy
and enterprise story through the CEO’s office.
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http://www.aacu.org/leap/documents/2013_EmployerSurvey

• Companies with excellent reputations are two and a half times more likely to have CEOs setting the
strategy for enterprise positioning than those with weaker reputations.”50
Brands are among companies’ most—if not the most—valued assets because they reflect and are an integral
part of their reputations and identities. The top ten most and least reputable brands in America for 2013 are
listed in Table 4.1.
Table 4.1
Ten Most- and Least-Reputable Companies in America (2013)

Ten most-reputable brands Ten least-reputable brands
1. Amazon 51. Comcast
2. Apple 52. Wells Fargo
3. Walt Disney 53. JPMorgan Chase
4. Google 54. BP
5. Johnson & Johnson 55. Citigroup
6. Coca-Cola 56. Bank of America
7. Whole Foods Market 57. American Airlines
8. Sony 58. Halliburton
9. Procter & Gamble 59. Goldman Sachs
10. Costco 60. AIG
Source: Ragan’s PR Daily. (February 14, 2013). The 10 most— and the 10 least—reputable brands. PRDaily.com.
http://www.prdaily.com/Main/Articles/The_10_mostand_the_10_leastreputable_bran,13835.aspx#, accessed January 9, 2014. Permission
granted; also found in the original source, Harris Interactive. (February 2013). The Harris Poll 2013 RQ® Summary Report, p. 9. For a more
complete description of this ranking, see A Survey of the U.S. General Public Using the Reputation Quotient®.
http://www.harrisinteractive.com/vault/2013%20RQ%20Summary%20Report%20FINAL , accessed February 7, 2014.
The Harris Poll RQ ranks companies’ reputations on six dimensions: social responsibility; vision and
leadership; emotional appeal; products and services; financial performance; and workplace environment. The
general public rates companies by completing online surveys that are analyzed and used in marketing and
policy decisions. You can score your own organization’s reputation in Ethical Insight 4.3, “Rank Your
Organization’s Reputation.”
4.3 Managing and Balancing Corporate Governance, Compliance, and
Regulation
While leaders and their teams build the reputations of their corporations through high productivity, trust, and
good deeds shown toward their stakeholders while satisfying competitive demands of the marketplace, it is
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http://http://www.harrisinteractive.com/vault/2013%20RQ%20Summary%20Report%20FINAL

also true that laws and regulations set standards for acceptable and unacceptable business practices and
behaviors. Just as the market is not entirely “free,” neither are all stakeholders and constituencies honest, fair,
and just in their motives and business transactions. The corporate scandals exemplified by Enron and others
demonstrated that entire corporations can be brought down by top-level executives and their teams. Lessons
from the scandals also showed that corporate boards of directors, CEOs, chief financial officers (CFOs), and
other top-level administrators require legal constraints, compliance rules, regulation, and the threat and
provision of punishment when crimes are committed. Wrongdoers inside and outside corporations must have
boundaries set and disciplinary actions applied not only to protect the innocent, but also to enable businesses
to exist and succeed. The “rule of law” enables capitalism and democracies to thrive. Research also shows that
both “carrot” (motivational, ethical incentives) and “stick” (legal compliance and potential disciplinary action)
approaches are necessary to enable workforces and leaders to be productive and law-abiding. Figure 4.2
illustrates a “carrot and stick” balancing approach that effective corporations use in providing both a legal and
ethical culture and transactions, internally and with external stakeholders, as shown in Figure 4.2.
Figure 4.2
Corporate Social Responsibility and Stakeholder Management: Balancing the “Carrot” and
“Stick” Approaches
Ethical Insight 4.3
Rank Your Organization’s Reputation
Score a company, college, or university at which you worked or studied on the following characteristics. Be
objective. Answer each question based on your experience and what you objectively know about the company,
college, or university.
1 = very low; 2 = somewhat low; 3 = average; 4 = very good; 5 = excellent
___ Emotional appeal of the organization for me
___ The social responsibility of the organization
___ The organization’s treatment of employees, community, and environment
___ The quality, innovation, value, and reliability of the organization’s products and/or services
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___ The clarity of vision and strength of the organization’s leadership
___ The organization’s profitability, prospects in its market, and handling of risks
___ Total your score
Interpretation: Consider 30 a perfect score, 24 very good, 18 average, 12 low, and 6 very low.
Questions for Discussion
1. How did your company/organization do on the ranking? Explain.
2. Explain your scoring on each item; that is, give the specific reasons that led you to score your company as
you did.
3. Suggest specific actions your organization could take to increase its Reputation Quotient.
In this section, we discuss the “stick” approach (legal compliance and regulation) in more detail. With our
focus here on the corporation and external stakeholders, we limit our discussion of laws to (1) the Sarbanes-
Oxley Act (SOX), and a brief overview of the (2) Federal Sentencing Guidelines for Organizations (FSGO),
and then discuss (3) laws regulating competition, consumer protection, employment
discrimination/pay/safety, and the environment. Chapter 5 covers legal and social issues related to the
corporation and consumer stakeholders, and Chapter 7 addresses employee stakeholders.
Most corporations effectively govern themselves, to a large extent, through their own control systems and
stakeholder relationships. A public corporation’s federal and state charter provides the legal basis for its board
of directors, stockholders, and officers to govern and operate the company. However, as Enron and other
corporate scandals have demonstrated, self-governance cannot be counted on to work well alone. A question
often repeated from the scandals is, “Where were the boards of directors when the widespread fraud,
deception, and abuse of power occurred?”
A recent Time magazine cover read, “How Wall Street Won: Five Years after the Crash, It Could Happen
All Over Again.”51 The article makes five recommendations for preventing another financial subprime
mortgage lending crisis, based on the author’s research and interviews with leading experts from financial and
university institutions: 1. Fix the Too-Big-To-Fail Problem, 2. Limit the Leverage (of banks), 3. Expose
Weapons of Mass Financial Destruction (“derivatives” trading), 4. Bring Shadow Banking Into the Light, and
5. Reboot the Culture of Finance. In summary, these five recommendations argue that some of the largest
banks in the United States need closer self- and government regulation in their lending and investing practices
in order to stop certain derivatives and high-risk investing from wrecking the economy again. Steps toward
this goal include reinstating the former Fed chairman Paul Volcker’s rule to “separate government-insured
commercial lending from risky trading operations.” Reinstating and implementing provisions of the 1933
Glass-Steagall Act, which separates commercial from risky lending practices by banks, along with the Dodd-
Frank legislation, would also address this problem.
Other suggestions include limiting the leverage larger banks and mortgage companies have to make risky
loans. Leverage means the ability “to borrow more money than they can immediately repay.” Too much
leverage gives banks incentives to overinvest more funds than they have to meet their operating obligations.
Also, making “shadow banking”—hiding the amount and types of investments made—more transparent
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would expose those financiers who put banks, customers’ money, and the economy at risk. Finally, “rebooting
the culture of finance” in the United States is necessary. The United States suffers from the Wall Street-
driven “financialization” of the economy. The original purpose and mission of banks is to lend to real people
and businesses, not using customers’ and small businesses’ money to bankroll high-risk investing, especially
when the larger banks limit access to credit to small banks and individuals. Also, the credit ranking system of
banks that pays professionals in that system to rank them must change. This system is self-defeating; the
credit ratings do not change banking practices, and large-scale questionable investment banking practices
could lead to further meltdowns of the economy.52
There are a number of other reasons why many of the larger, prominent corporate boards of directors in
different industries, not only banking, did not execute their mandated legal and ethical responsibilities during
the past financial meltdown and crisis. These include lack of independence, insider roles and relationships,
conflicts of interest, overlapping memberships of board members with other boards, decision-by-committees,
well-paid members with few responsibilities, and lack of financial expertise and knowledge about how
companies really operate.53 There, however, are improvements being made legislatively and in business and
board practices.
Best Corporate Board Governance Practices
Most corporate boards act responsibly toward their stakeholders and in the best interests of shareholders. The
wake of the large corporate scandals of the early 2000s has led to several best practices for a board of directors.
“The Board of Directors must be committed to its functions, be functional and make informed decisions.”54
This can be achieved through greater objectivity, independence, and oversight by all board members.55
With very few exceptions, governance activists have achieved most of the reforms they have sought to effectuate. According to Spencer
Stuart’s 2012 U.S. Board Index, 84% of S&P 500 companies have adopted a majority voting standard, 83% have annually elected boards,
and 84% of their directors are independent—to name but a few of the more trendy governance issues in recent years. However, those who
make their living in the corporate governance industry will undoubtedly continue to push these proposals at smaller companies, and come up
with additional requirements and heightened standards to propose with each new proxy season. By way of example, ISS’s 2013 corporate
governance policy updates tighten its board responsiveness policy and recommend that shareholders vote “against” or “withhold” their votes
for incumbent directors who fail to act on a shareholder proposal that received the support of a majority of votes cast in the previous year, as
compared to ISS’s prior standard, which looked at whether the proposal received a majority of outstanding shares the previous year or the
support of a majority of votes cast in both the last year and one of the two prior years.56
The following section discusses the two laws best known for defining the regulations and best practices for
companies and their boards of directors.
Sarbanes-Oxley Act
The 2002 Sarbanes-Oxley Act (SOX) was a direct regulatory response by Congress to corporate scandals.
(PricewaterhouseCoopers called this law the most important legislation affecting corporate governance,
financial disclosure, and public accounting practice since the 1930s.)57 The “carrot” approach, or corporate
self-regulation, did not work for Enron and other firms involved in scandals; Congress realized that a “stick”
approach (laws, regulations, disciplinary actions) was also required. A summary of SOX shows that federal
provisions were established to provide oversight, accountability, and enforcement of truthful and accurate
financial reporting in public firms. Some of the major issues included (1) a lack of an independent public
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company accounting board to oversee audits, (2) conflicts of interest in companies serving as auditors and
management consultants to companies, (3) holding top-level officers (CEOs and CFOs) accountable for
financial statements, (4) protecting whistle-blowers, (5) requiring ethics codes for financial officers, and (6)
other reforms as the list below shows.
The key aspects of SOX can be summarized as follows:
• Establishes an independent public company accounting board to oversee audits of public companies.
• Requires one member of the audit committee to be an expert in finance.
• Requires full disclosure to stockholders of complex financial transactions.
• Requires CEOs and CFOs to certify in writing the validity of their companies’ financial statements.
If they knowingly certify false statements, they can go to prison for 20 years and be fined $5 million.
• Prohibits accounting firms from offering other services, like consulting, while also performing audits.
This constitutes a conflict of interest.
• Requires ethics codes for financial officers of companies that are registered with the Securities and
Exchange Commission (SEC).
• Provides a 10-year penalty for wire and mail fraud.
• Requires mutual fund professionals to disclose their vote on shareholder proxies, enabling investors to
know how their stocks influence decisions.
• Provides whistle-blower protection for individuals who report wrongful activities to authorities.
• Requires attorneys of companies to disclose wrongdoings to senior officers and to the board of
directors, if necessary; attorneys should stop working for the companies if senior managers ignore
reports of wrongdoings.58
SOX also defines several reforms aimed at improving problems of boards of directors.
There are other “best practices” guidelines for boards, including:
1. Separating the role of chairman of the board when the CEO is also a board member.
2. Setting tenure rules for board members.
3. Regularly evaluating itself and the CEO’s performance.
4. Prohibiting directors from serving as consultants to the companies which they serve.
5. Compensating directors with both cash and stock.
6. Prohibiting retired CEOs from continuing board membership.
7. Assigning independent directors to the majority of members who meet periodically without the CEO.59
The roles and responsibilities of CEOs and organizational leaders are discussed in Chapter 6.
The July/August 2012 cover story of Financial Executive was titled “Sarbanes-Oxley—A Decade Later”
and summarized the impact of SOX:
The act created the Public Company Accounting Oversight Board to police the accounting profession and set auditing standards. It shored
up the role of the audit committee, making it independent and responsible for hiring, firing and overseeing external auditors, removing that
authority from management.
Under Section 404, companies were required to establish internal controls and procedures for financial reporting. Another section
mandated that both the chief executive and chief financial officers personally attest that they have reviewed the auditors’ report and that it
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“does not contain any material with untrue statements or material omission” or anything that could be “considered misleading.”
Sarbanes-Oxley also instituted “clawback” provisions requiring CEOs and CFOs to return ill-gotten gains to their employer. In one
notable case, Ian McCarthy, former CEO at Atlanta-based Beazer Homes USA Inc., and former CFO James O’Leary both agreed to return
all of their cash bonuses, incentive and equity-based compensation for 2006. McCarthy had to relinquish more than $5.7 million in cash
plus $772,232 in stock sale profits, along with some 120,000 in restricted stock shares; O’Leary returned $1.4 million.60
But Congress has been moving in the opposite direction. Two recent laws—the Dodd-Frank Wall Street
Reform and Consumer Protection Act of 2010 and 2013’s Jumpstart Our Business Startups Act (the JOBS
Act)—have largely served to weaken SOX. Dodd-Frank exempted public companies with a “public float”
below $75 million, thereby removing 42% of public companies, according to figures cited by the Council of
Institutional Investors and Center for Audit Quality in a joint letter last November.61 The letter implored
both the chairman and ranking members of the House Financial Services Committee to not further reduce
safeguards, to no avail. Similarly, a broad range of investor-protection groups and regulators have expressed
alarm that the JOBS Act, signed into law by President Barack Obama in early April, “guts” SOX. Among
other things, it exempts newly public “emerging growth companies” from meeting Section 404 obligations for
five years following an initial public offering.62
Pros and Cons of Implementing the Sarbanes-Oxley Act
Critics of SOX argue against the implementation and maintenance of the law for the following reasons:
1. It is too costly. One estimate from a survey by Financial Executives International stated that firms with
$5 billion in revenue could expect to spend on average $4.7 million implementing the internal controls
required, then $1.5 million annually to maintain compliance.63 An average first-year cost for complying with
Section 404 of the Act (i.e., creating reliable internal financial controls and having management and an
independent auditor confirm the reliability) was estimated at $4.36 million.64 Others argue that the costs
exceed the benefits, especially for small firms. “Smaller companies that are audited by the Big Four will have
to pay higher audit fees even if they are not subject to Sarbanes-Oxley as the additional audit requirements of
Sarbanes-Oxley creep into their methodologies. Many private companies and smaller public companies are
realizing that the Big Four have designed their audits to serve the Fortune 500 companies and that this model
is slow and expensive.”65
2. It impacts negatively on a firm’s global competitiveness. This argument is also based on the costs of
keeping internal operations compliant with the act. Critics argue that other companies around the globe do
not have this expense, so why should U.S. public firms?
3. Government costs also increase to regulate the law.
4. CFOs are overburdened and pressured by having to enforce and assume accountability required by the
law.
5. Critics claim that implementing SOX requirements throughout an organization is too costly and
wasteful for small and mid-sized firms wishing to go public.
6. SOX reduces the willingness of corporations to take risks.
7. Accrual accounting is seen as being more “expensive” under SOX, as certain expenses like R&D must be
expensed when incurred, reducing current earnings. This may make earnings management a more attractive
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and “cheaper” option for management.
8. SOX is sometimes faulted for not preventing the financial crisis and the great recession of 2008–2009,
from which the U.S. economy has yet to recover.66
Paul Volcker and Arthur Levitt, two widely respected experts previously from the SEC and Federal
Reserve respectively, offered the following counterclaims to some of the previous criticisms:67
1. The costs of implementing SOX are minimal compared to the costs of not having it—recall the $8
trillion in stock losses alone during the great “recession” and banking crisis of 2008 and the near collapse of
the global economy, not counting the damage done to employee families and effects on the economy at large.
2. “Companies have better internal control environments as a result of Sarbanes-Oxley. This will lead to
more accurate information being available to investors who are more confident in making investing decisions.
All participants in financial reporting have increased responsibilities and consequences for not living up to
those responsibilities.”68
3. The changes required to implement this law are difficult; however, a recent Corporate Board Member
magazine survey found that more than 60% of 153 directors of corporate boards of directors believe the effect
of SOX has been positive for their firms, and that more than 70% viewed the law as also positive for their
boards.69
4. The data does not support the argument that this law presents a competitive disadvantage to global
firms. The NASDAQ stock exchange added six international listings in the second quarter of 2004. A survey
by Broadgate Capital Advisors and the Value Alliance found that only 8% of 143 foreign companies that issue
stocks that trade in the United States claimed that SOX would cause them to rethink entering the U.S.
market.70
5. If a company uses SOX as a reason to not go public, the firm should not go public or use investors’
funds. U.S. markets are among the most admired in the world because they are the best regulated.
6. Financial officers who complain about the requirements of SOX may in fact be suffering from the lack
of internal controls they had before. In 2003, 57 companies of all sizes said they had material weaknesses in
their controls, after their auditors, who were paid to test financial controls, were terminated. These same
auditors decreased their testing of internal controls because they faced pressures to cut their fees.
7. Requiring top executives and financial officers to personally sign off on and take personal ownership of
the books is an initial deterrent of fraud and improves organizational culture.
8. SOX has resulted in improvements in the accounting industry in the wake of the fall of former
accounting giant Arthur Andersen, at the hand of the Public Company Accounting Oversight Board.
9. Ernst & Young’s Les Brorsen sees creation of the PCAOB to police the auditing profession—coupled
with corporate governance rules’ putting a public company’s board-level audit committee, rather than
company management, in charge of the auditing process—as “the top two fundamental changes” brought
about by the act. “It’s fair to say that the largest single impact of Sarbanes-Oxley was to end 100 years of self-
regulation,” he says. Related to that, Brorsen adds, “Improved corporate governance is one of the hallmarks of
the legislation.”71
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The costs and benefits of implementing SOX continue to be debated. Still, Volcker and Levitt argue that,
“While there are direct money costs involved in compliance, we believe that an investment in good corporate
governance, professional integrity, and transparency will pay dividends in the form of investor confidence,
more efficient markets, and more market participation for years to come.”72 Certainly guidelines and specific
ways to simplify, decrease unnecessary costs, and streamline implementation of this law must be addressed as
companies strive to compete locally, nationally, and especially globally.
The Federal Sentencing Guidelines for Organizations: Compliance Incentive
Before the 2002 SOX, the 1991 Federal Sentencing Guidelines for Organizations (FSGO) were passed to
help federal judges set and mitigate sentences and fines in companies that had a few “bad apples” who had
committed serious crimes. The FSGO were also designed to alleviate sentences on companies that had ethics
and compliance programs. Under the FSGO, a corporation (large or small) receives a lighter sentence and/or
fine—or perhaps no sentence or probation—if convicted of a federal crime, provided that the firm’s ethics and
compliance programs were judged to be “effective.” The FSGO changed the view of corporations as entities
that were legally liable and punishable for criminal acts committed within their boundaries to the view of the
corporation as a moral agent responsible for the behavior of its employees. As a moral agent, the corporation
could be evaluated and judged on how effective the leaders, culture, and ethics training programs were toward
preventing misconduct and crime.73
Companies that acted to prevent unethical and criminal acts would, under the FSGO, be given special
consideration by judges when being fined or sentenced. A points system was established to help mitigate the
fine and/or sentence if the company displayed the following seven criteria:
1. Established standards and procedures capable of reducing the chances of criminal conduct.
2. Appointed compliance officer(s) to oversee plans.
3. Took due care not to delegate substantial discretionary authority to individuals who are likely to engage in
criminal conduct.
4. Established steps to effectively communicate the organization’s standards and procedures to all employees.
5. Took steps to ensure compliance through monitoring and auditing.
6. Employed consistent disciplinary mechanisms.
7. When an offense was detected, took steps to prevent future offenses, including modifying the compliance
plan, if appropriate.74
The FSGO have been revised to reflect the post-Enron corporate environment. The revisions add
specificity to the 1991 version, include top-level officers’ accountability, and attempt to increase the
effectiveness and integration of a company’s ethics and compliance programs with its culture and operations.
Ed Petry, former director of the Ethics Officer Association (EOA), served on the federal committee that
revised the FSGO. Petry summarized some of the prominent revisions as follows:75
• Compliance and ethics programs (C&EP) are now described in a standalone guideline.
• The connection between effective compliance and ethical conduct is stressed.
• Organizations are required to “promote an organizational culture that encourages ethical conduct and
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a commitment to compliance with the law.”
In 2010, the FSGO were revised again. The most notable change promoted the practice of opening a
direct line of communication from the chief compliance officer, or those with “operational responsibility for
the compliance and ethics program,” directly to the governing body on any concerns involving actual or
potential criminal conduct.76 SOX and the Revised Federal Sentencing Guidelines (RFSGO) serve as
constraints and deterrents to immoral and criminal corporate conduct that ultimately affects stakeholders and
stockholders.
Table 4.2 shows RFSGO. SOX is an attempt by the U.S. federal government to provide stricter
compliance guidelines and disciplinary actions to corporations in the wake of corporate scandals. The RFSGO
add incentives to companies to self-regulate while following laws aimed at protecting the interests of
shareholders and stakeholders, including the public. In the following section, an overview of the role laws and
congressional agencies play in protecting the public, consumers, and other stakeholders is provided.
Table 4.2
Revised Federal Sentencing Guidelines for Organizations (RFSGO) (2004)
1. Exercise due diligence to prevent and detect criminal conduct.
2. Promote an organizational culture that encourages ethical conduct and a commitment to compliance with
the law.
3. The organization shall use reasonable efforts not to include within the substantial authority personnel of
the organization any individual whom the organization knew, or should have known through the exercise of
due diligence, has engaged in illegal activities or other conduct inconsistent with an effective compliance and
ethics program.
4. (A) The organization shall take reasonable steps to communicate periodically and in a practical manner its
standards and procedures, and other aspects of the compliance and ethics program, to the individuals
referred to in subdivision (B) by conducting effective training programs and otherwise disseminating
information appropriate to such individuals’ respective roles and responsibilities.
(B) The individuals referred to in subdivision (A) are the members of the governing authority, high-level
personnel, substantial authority personnel, the organization’s employees, and, as appropriate, the
organization’s agents.
5. The organization shall take reasonable steps:
(A) to ensure that the organization’s compliance and ethics program is followed, including monitoring and
auditing to detect criminal conduct;
(B) to evaluate periodically the effectiveness of the organization’s compliance and ethics program;
(C) to have and publicize a system, which may include mechanisms that allow for anonymity or
confidentiality, whereby the organization’s employees and agents may report or seek guidance regarding
potential or actual criminal conduct without fear of retaliation.
6. The organization’s compliance and ethics program shall be promoted and enforced consistently
throughout the organization through (A) appropriate incentives to perform in accordance with the
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compliance and ethics program; and (B) appropriate disciplinary measures for engaging in criminal conduct
and for failing to take reasonable steps to prevent or detect criminal conduct.
7. After criminal conduct has been detected, the organization shall take reasonable steps to respond
appropriately to the criminal conduct and to prevent further similar criminal conduct, including making any
necessary modifications to the organization’s compliance and ethics program.
Source: 2004 Federal Sentencing Guidelines, chapter 8, part B: Remedying harm from criminal conduct, and effective compliance and ethics
programs excerpted from §8B2.1. Effective Compliance and Ethics Program of the 2004 Federal Sentencing Guidelines.
http://www.ussc.gov/Guidelines/2004_guidelines/Manual/gl2004 .
4.4 The Role of Law and Regulatory Agencies and Corporate Compliance
Government at the federal, state, and local levels also regulates corporations through laws, administrative
procedures, enforcement agencies, and courts. Regulation by the government is necessary in part because of
failures in the free-market system discussed earlier. There are also power imbalances between corporations,
individual consumers, and citizens. Individual citizens and groups in society need a higher authority to
represent and protect their interests and the public good.77
The role of laws and the legal regulatory system governing business serves five purposes:
1. Regulate competition.
2. Protect consumers.
3. Promote equity and safety.
4. Protect the natural environment.
5. Ethics and compliance programs to deter and provide for enforcement against misconduct.78
The corporate scandals again exemplified a failure of internal corporate governance and self-regulation by
all parties (internal and external to corporations) involved. Individual leaders’ greed, ineffective boards,
investment banks, and financial companies and traders all conspired with Enron and other companies in the
scandals to commit fraud, theft, and deceit. Corporate scandals cannot be initiated and sustained without the
direct or indirect assistance and/or negligence from the SEC, banks, investment traders and managers, media,
Wall Street, federal legislators, and other players.79 The subprime lending crisis also showed how an entire
system of stakeholders in the financial, banking, credit and lending system, and government can be involved in
a crisis that has been attributed in large part to “predatory lending” practices. As with the corporate scandals,
in the subprime crisis one asks, “Where were the federal, state, and local governmental and congressional
regulators?” Still, the justice system did serve sentences to executives in the corporate scandals. Starting with
Enron and followed by WorldCom, Qwest, Tyco, HealthSouth, and others, more than $7 trillion in stock
market losses were accrued. These losses also cost American employees and families more than 30% of their
retirement savings.80 A quick summary will illustrate the aftermath of some of the major scandals.
• Enron Corporation: Former chairman and CEO Ken Lay died before being tried and sentenced. Jeffrey
Skilling, a former executive, was fined $45 million and is currently serving a 24-year, 4-month prison
sentence at the Federal Correctional Institution in Waseca, Minnesota.81 On June 21, 2013, Skilling
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http://www.ussc.gov/Guidelines/2004_guidelines/Manual/gl2004

succeeded in getting his prison sentence reduced by 10 years as part of a court-ordered reduction. With court
action, victims of Skilling’s crimes will finally receive more than $40 million that he owes them.82 The
former CFO, Andrew Fastow, is currently serving a six-year prison sentence at the Federal Detention
Center in Oakdale, Louisiana. His wife, former Enron assistant treasurer Lea Fastow, was sentenced to one
year in federal prison and one year of supervised release in a halfway house.83 Since leaving prison in 2011
and resuming life with his wife Lea and two sons in Houston, where Enron was based, Fastow has kept a
low profile. He reportedly now works 9-to-5 as a document-review clerk at the law firm that represented
him in civil litigation.84
• WorldCom, Inc.: Former CEO Bernard Ebbers pleaded not guilty to fraud and conspiracy charges for
allegedly leading an accounting fraud estimated at more than $11 billion. A 2002 class action civil lawsuit
against Ebbers and other defendants resulted in a settlement worth over $6 billion to be distributed to over
830,000 individuals. Ebbers is currently serving 25 years at a federal prison in Louisiana.85 Scott Sullivan,
former CFO, pleaded guilty to fraud charges, testified against Ebbers, and received a five-year prison
sentence. Sullivan is currently serving his sentence at the federal prison in Jessup, Georgia.86
• Tyco International Ltd.: Former CEO Dennis Kozlowski and CFO Mark Swartz were accused of stealing
$600 million from the company. A New York state judge declared a mistrial in the case because of pressure
on a jury member. Kozlowski received a sentence of 8 1/3 to 25 years in prison. Both Kozlowski and Swartz
could be eligible for parole after six years, 11 months. Kozlowski is currently serving at least eight years and
four months at the Mid-State Correctional Facility in Marcy, New York. Swartz was sentenced to at least
eight years and four months of prison and ordered to pay $72 million in fines and restitution.87 On
September 23, 2013, both men left a minimum-security prison in Harlem for steady clerical jobs and
overnights in apartments following their headline-grabbing $134 million corporate fraud convictions.88
• Adelphia Communications Corporation: Founder John Rigas was convicted and sentenced to 12 years. At age
88, Rigas could be a poster child for inmates who might seek early release from prison because of the hazards
of advanced aging. His son Timothy received 17 years for conspiracy and bank and securities fraud. Rigas’s
other son Michael was acquitted of conspiracy charges.89
• Credit Suisse First Boston: Frank Quattrone, a former investment banking executive who made millions
helping Internet companies go public during the dot-com boom, was convicted of obstruction of justice and
sentenced to 18 months. His first trial in 2003 ended in a hung jury. Quattrone now runs Qatalyst Partners,
a San Francisco-based investment bank focused on advising technology companies on mergers and
acquisitions. The University of Pennsylvania has received a $15 million gift to examine the U.S. criminal
justice system from someone who has had some experience with it: Quattrone himself. The justice center
will be housed at the law school of the Ivy League university in Philadelphia.90
• HealthSouth Corporation: Former CEO Richard Scrushy was federally charged with leading a multibillion-
dollar scheme that inflated HealthSouth earnings to show the company was meeting Wall Street forecasts.
Sixteen former HealthSouth executives were charged as part of a conspiracy to inflate company earnings.
Scrushy is the only executive who has not pleaded guilty and is not cooperating with investigators. Scrushy
was acquitted in a federal criminal trial related to the alleged $2.7 billion fraud. At a civil trial in Jefferson
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County Circuit Court in 2009, however, Scrushy was found liable for the accounting fraud and ordered to
pay HealthSouth nearly $2.9 billion in damages. In an unrelated case, in 2006 Scrushy and former Alabama
governor Don Siegelman were convicted of bribery and honest services fraud. Prosecutors alleged Scrushy
bought a seat on a hospital regulatory board by arranging $500,000 in donations to Siegelman’s 1999
campaign to establish a state lottery. Scrushy, who was released from prison in 2012, recently lost the appeal
of that conviction to the 11th Circuit Court of Appeals. HealthSouth asserts Scrushy has not paid his debt
to the company and its shareholders because he owes them $2.8 billion, not counting the rapidly mounting
daily interest, according to Scrushy’s filing.91
• Martha Stewart, founder of Martha Stewart Living Omnimedia, was convicted of conspiracy, obstruction of
justice, and lying about her personal sale of ImClone Systems shares. She was refused a new trial on perjury
charges against a government witness. Stewart was sentenced to five months in prison. Her broker, Peter
Bacanovic, was fined $2,000.92
• Samuel D. Waksal, founder and former CEO of ImClone Systems, was sentenced to seven years in prison
for securities fraud, perjury, and other crimes he committed with ImClone stock trades to himself, his father,
and his daughter at the end of 2001. Waksal founded Kadmon in 2010 as the successor to ImClone, the
company that developed the cancer drug Erbitux and was acquired by Indianapolis-based Lilly in 2008. His
new company is also working on cancer medicines, and drugs for hepatitis C, inflammatory disorders, and
genetic diseases. It’s in the same building, along Manhattan’s East River, as ImClone. Despite the well-
known travails, ImClone was able to bring a very successful drug to market and then get itself acquired. By
Wall Street standards, that’s a success.93
• Qwest Communications International, Inc.: Denver federal prosecutors did not win a conviction against four
former mid-level executives accused of scheming to deceptively book $34 million in revenue for the
company. Grant Graham, former CFO for Qwest’s global business unit; Bryan Treadway, a former assistant
controller; Thomas Hall, a former senior vice president; and John Walker, a former vice president, were
found not guilty on 11 charges of conspiracy, securities fraud, wire fraud, and making false statements to
auditors. Hall received probation and paid a $5,000 fine.94
• American International Group (AIG): Former vice president Christopher Milton received a four-year sentence
in 2009 for his role in a $500 million fraud case. He was convicted of conspiracy, mail fraud, securities fraud,
and making false statements to the SEC.95
• Bernard L. Madoff Investment Securities LLC: In 2009, Bernard Madoff was sentenced to 150 years in prison
for his elaborate and long-running Ponzi scheme. Madoff pled guilty to 11 counts of financial crimes.96
• Fannie Mae: As a result of the Fannie Mae fraud and the subprime mortgage crisis, Leib Pinter, a former
executive of Olympia Mortgage Corporation, was sentenced to 97 months in prison on charges of conspiracy
to commit wire fraud. He was ordered to pay $43 million in restitution. In December of 2011, the SEC
charged six former top executives of Fannie Mae and Freddie Mac with securities fraud.97
Why Regulation?
Although governmental legislation and oversight of corporations is an imperfect system, one can always ask:
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Would you rather live in a system where these laws and controls did not exist? It is also important to note
here, as Figure 4.2 shows, that laws are designed to protect and prevent crime and harm, monopolies, and the
negative (“externalities”) effects of corporate activities (pollution, toxic waste), and also to promote social and
economic growth, development, and the health, care and welfare of consumers and the public. Laws provide a
baseline, boundaries, and minimum standards for distinguishing acceptable from unacceptable business
practices and behaviors. Values, motivations, beliefs, and incentives to do what is right are also necessary in
corporations, as they are in other institutions and society in general. The legal and regulatory system is
necessary in society and business to establish ground rules and boundaries for transactions. It is not, however,
sufficient alone to accomplish this task. The second observation to keep in mind in this discussion is that even
with federal, state, and local laws, governmental regulatory agencies in contemporary capitalist democracies
are part of political systems—where lobbyists and interest groups compete for resources, influence, and
programs for their own ends. In such systems, the legislative and judicial branches of government are designed
to provide arbitration and conflict resolution with law enforcement. The following regulatory agencies serve
educational as well as legal purposes for corporations serving consumers in the marketplace.
Laws and U.S. Regulatory Agencies
Some of the major laws promoting and prohibiting corporate competition include:
• Sherman Antitrust Act, 1890: Prohibits monopolies, as the case of Microsoft illustrates.
• Clayton Act, 1914: Prohibits price discrimination, exclusivity, activities restricting competition.
• Federal Trade Commission (FTC) Act, 1914: Enforces antitrust laws and activities.
• Consumer Good Pricing Act, 1975: Prohibits price agreements in interstate commerce between
manufacturers and resellers.
• Antitrust Improvements Act, 1976: Supports existing antitrust laws and empowers Department of
Justice investigative authority.
• FTC Improvements Act, 1980: Empowers the FTC to prohibit unfair industry activities.
• Trademark Counterfeiting Act, 1980: Gives penalties for persons violating counterfeit laws and
regulations.
• Digital Millennium Copyright Act, 1998: Protects digital copyrighted material such as music and
movies.
Laws Protecting Consumers
Consumers require information and protection from products that may be unsafe, unreliable, and even
dangerous, as Chapter 5 shows. While tobacco (now also “smokeless” tobacco), alcohol, and more recently
cocaine, along with other so-called dangerous products continue to be marketed, consumer laws and
regulatory agencies that you may have seen online or read about have a long history:
• Pure Food and Drug Act, 1906: Prohibits adulteration (ruining) and mislabeling on food and drugs
in interstate commerce.
• FTC Act, 1914: Creates the FTC to govern trade and competitive practices.
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• Federal Food, Drug, and Cosmetic Act (FDCA), 1938: Amends the Pure Food and Drug Act of
1906 to protect consumers from adulterated and misbranded items and charged the Food and Drug
Administration (FDA) with the safety of publically marketed drugs.
• Federal Hazardous Substances Act, 1960: Controls labels on hazardous substances of products used
in houses.
• Truth and Lending Act, 1960: Requires full disclosure of credit terms to buyers.
• Consumer Product Safety Act, 1972: Establishes safety standards and regulations of consumer
products (created the Consumer Product Safety Commission [CPSC]).
• Fair Credit Billing Act, 1974: Requires accurate, current consumer credit reports.
• Equal Credit Opportunity Act (ECOA), 1974: Prohibits credit discrimination on the basis of race,
gender, religion, age, marital status, national origin, or color.
• Fair Debt Collection Practices Act, 1978: Prohibits abusive debt collection practices and allowed
consumers to dispute and/or validate debt information.
• Nutrition Labeling and Education Act, 1990: Requires food labels to include standard nutritional
facts.
• Telephone Consumer Protection Act, 1991: Issues procedures to avert undesired telephone
solicitations.
• Children’s Online Privacy Protection Act, 1998: Requires the FTC to make rules to collect online
information from children under 13 years old.
• Gramm-Leach-Bliley Act, 1999: Allows commercial banks, investment banks, insurance companies,
and securities firms to consolidate.
• Do Not Call Implementation, 2003: Coordinates the FTC and the Federal Communications
Commission (FCC) to provide consistent rules on telemarketing practices.
• Fair and Accurate Credit Transactions Act (FACT), 2003: Requires credit agencies to provide a free
annual copy of credit reports and created a national system for identity theft fraud alert.
Laws Protecting the Environment
Mercury from China, dust from Africa, smog from Mexico—all of it drifts freely across U.S. borders and
contaminates the air millions of Americans breathe, according to recent research from Harvard University, the
University of Washington, and many other institutions where scientists are studying air pollution. There are
no boundaries in the sky to stop such pollution, no Border Patrol agents to capture it.98
The environment is seen less as an inexhaustible free source of clean air, water, soil, and food, and more as
a valued resource that requires protection—globally, regionally, and locally. As the sample of environmental
laws below indicates, the environment constitutes sources of human, food, vegetation, and animal life.
• Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA), 1947: Regulated the use of pesticides
and herbicides. The 1996 amendments facilitate registration of pesticides for special (so-called
minor) uses, reauthorize collection of fees to support reregistration, and require coordination of
regulations implementing FIFRA and the FDCA.99
• Clean Air Act, 1970: Designates air-quality standards; state implementation plans are, however,
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required for enactment of policies under this Act. In 1990 several progressive and creative new
themes were embodied in amendments to the Act, themes necessary for effectively achieving the air-
quality goals and regulatory reform expected from these farreaching amendments.100 This Act:
Encourages the use of market-based principles and other innovative approaches, like performance-based
standards and emission banking and trading.
Provides a framework from which alternative clean fuels will be used by setting standards in the fleet and
California pilot program that can be met by the most cost-effective combination of fuels and technology.
Promotes the use of clean low-sulfur coal and natural gas, as well as innovative technologies to clean high-
sulfur coal through the acid-rain program.
Reduces enough energy waste and creates enough of a market for clean fuels derived from grain and
natural gas to cut dependency on oil imports by 1 million barrels/day.
Promotes energy conservation through an acid-rain program that gives utilities flexibility to obtain needed
emission reductions through programs that encourage customers to conserve energy.
• National Environmental Act, 1970: Establishes policy goals for federal agencies and enacts the
Council on Environmental Quality to monitor policies. Amended in 1986.
• Federal Water Pollution Control Act, 1972: Prevents, reduces, and eliminates water pollution.
Amended in 1990.
• Marine Protection, Research, and Sanctuaries Act, 1972: Regulated the dumping of materials into
the ocean. Amended in 1992.
• Noise Pollution Act, 1972: Controls noise emission of manufactured products.
• Endangered Species Act, 1973: Provides a conservation program for threatened and endangered
plants and animals and their habitats.
• Safe Drinking Water Act, 1974: Protects the quality of drinking water in the United States; sets
safety standards for water purity and requires owners and operators of public water to comply with
standards.
• Toxic Substances Act, 1976: Requires testing of certain chemical substances; restricts use of certain
substances. Amended in 1992.
• Oil Pollution Act, 1990: Established penalties for oil spills and damage.
• Food Quality Protection Act, 1996: Requires a new safety standard that must be applied to all
pesticides used on foods (reasonable certainty of no harm).
Other laws regarding the environment, consumers, equity and discrimination are discussed in Chapter 7.
Taken together, this sample of laws aimed at protecting stakeholders, the public, and the system in which
business is conducted indicates the complexity of transactions, responsibilities, and number of stakeholders
with which corporations do business. Business ethics and social responsibility can arguably be seen not as a
luxury and/or dichotomy, but as a necessity in providing for and protecting the common good. This point
should become even more evident in the concluding section of this chapter, which illustrates classic cases of
corporate crises in which stakeholder relationships were not well-managed.
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4.5 Managing External Issues and Crises: Lessons from the Past (Back to the
Future?)
Companies have made serious mistakes as the result of poor self-regulation. As several contemporary
corporate crises and now-classic environmental and product- and consumer-related crises illustrate,
corporations have responded and reacted slowly and many times insensitively to customers and other
stakeholders. The Internet may decrease the time executives have to respond to potential and actual crises.
We conclude this chapter by reviewing some of the major crises from the 1970s to the present, since several
of these are only now being resolved. These cases also serve to remind corporate leaders and the public that
there is a balance between legal regulation and corporate self-regulation. When corporations fail to regulate
themselves and to provide just and fair corrective actions to their failures, government assistance is needed.
We noted in Chapter 3 that issues and crisis management should be part of a company’s management
strategy and planning process. Failure to effectively anticipate and respond to serious issues that erupt into
crises have been as damaging to companies as the crises themselves. Prior to the BP Deepwater Horizon oil rig
explosion and spill, the Exxon Valdez oil spill was biggest U.S. environmental disaster. The Manville
Corporation’s asbestos crisis is another, almost forgotten disaster, that is also summarized in the feature boxes
on the following pages. As the philosopher George Santayana is noted for saying, “Those who do not
remember the past are condemned to repeat it.” A sample of other classic crises includes the following:
• In June 2001, Katsuhiko Kawasoe, Mitsubishi Motor Company’s president, apologized for that firm’s 20-
year cover-up of consumer safety complaints. (The company also agreed in 1998 to pay $34 million to settle
300 sexual harassment lawsuits filed by women in its Normal, Illinois, plant. This is one of the largest
sexual-harassment settlements in U.S. history.)
• By the end of 2001, the American Home Products Corporation paid more than $11.2 billion to settle about
50,000 consumer lawsuits related to the diet-drug combination of fenfluramine and phentermine, commonly
known as “fen-phen.” In addition, the company put aside $1 billion to cover future medical checkups for
former fen-phen users and $2.35 billion to settle individual suits.
• Between 1971 and 1974, more than 5,000 product liability lawsuits were filed by women who had suffered
severe gynecological damage from A. H. Robins Company’s Dalkon Shield, an intrauterine contraceptive
device. Although the company never recalled its product, it paid more than $314 million to settle 8,300
lawsuits. It also established a $1.75 billion trust to settle ongoing claims. The firm avoided its responsibility
toward its customers by not considering a recall for nine years after the problem was known.
• Procter & Gamble’s Rely tampon was pulled from the market in 1980 after 25 deaths were allegedly
associated with toxic shock syndrome caused by tampon use.
• Firestone’s problems first came to light in 1978, when the Center for Auto Safety said it had reports that
Firestone’s steel-belted radial TPC 500 tire was responsible for 15 deaths and 12 injuries. In October 1978,
after attacking the publicity this product received, Firestone executives recalled 10 million of the 500-series
tires. Firestone recently paid $7.5 million in addition to $350,000 to settle the first case in the
Bridgestone/Firestone Ford Explorer crisis. Two hundred injury and death lawsuits have been settled since
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the recall, and it is estimated that it will cost $50 million to settle the lawsuits.
• A federal bankruptcy judge approved Dow Corning Corporation’s $4.5 billion reorganization plan, with
$3.2 billion to be used to settle claims from recipients of the company’s silicone gel breast implants and the
other $1.3 billion to be paid to its commercial creditors. A jury had already awarded $7.3 million to one
woman whose implant burst, causing her illness. The company is alleged to have rushed the product to
market in 1975 without completing proper safety tests and to have misled plastic surgeons about the
potential for silicone to leak out of the surgically implanted devices. More than 600,000 implants were
subsequently performed.
Johns Manville Corporation Asbestos Legacy: Still Paying, 2013
“They’ll be following in our footsteps,” said Robert A. Falise, chairman of the Manville Personal Injury
Settlement Trust, which was created by the bankruptcy court to ensure a steady source of money to pay
claims filed against Johns Manville Corporation (JM) by workers exposed to asbestos in their
workplaces. The company will be responding to outstanding claims by asbestos victims and their
families for several decades. In fact, “as of the first quarter of 2012, the trust had paid 773,990 claims in
the amount of approximately $4.3 billion, and the trust expects to receive more claims.”
In June 2000, the company was sold to Warren Buffett for $1.9 billion in cash and the assumption
of $300 million in debt. The asbestos-related trust, created to pay claimants, received $1.5 billion. As of
March 2001, the trust had paid more than $2.5 billion to 350,000 beneficiaries. There are still more
than a half million claimants and another half million expected to file. Looking back, reviews of JM’s
social responsibility management of the complex web of issues surrounding its asbestos production are
mixed.
Asbestosis, mesothelioma, and lung cancer—all life-threatening diseases—share a common cause:
inhalation of microscopic particles of asbestos over an extended period of time. The link between these
diseases and enough inhaled asbestos particles is a medical fact. JM is a multinational mining and forest
product manufacturer, and it was a leading commercial producer of asbestos. As of March 1977, 271
asbestos-related damages suits were filed against the firm by workers. The victims claimed the company
did not warn them of the life-threatening dangers of asbestos. Since 1968, the company has paid more
than $2.5 billion in such claims. And since the 1950s, it has faced hundreds of lawsuits from workers:
their estimated value is more than $1 billion. By 1982, JM was facing more than 500 new asbestos
lawsuits filed each month. Consequently, in August 1982, the company filed for Chapter 11 bankruptcy
in order to reorganize and remain solvent in the face of the lawsuits; the firm was losing more than half
the cases that reached trial. The reorganization was approved, and a $2.5 billion trust fund was set up to
pay asbestos claimants. Shareholders surrendered half their value in stock, and it was agreed that
projected earnings over 25 years would be reduced to support the trust.
JM devised a settlement that gave the Manville Personal Injury Settlement Trust enough cash to
continue meeting claims filed by asbestos victims. Under the settlement, the building products division
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stated it would give the trust 20% of Manville’s stock and would pay a special $772 million dividend in
exchange for the trust’s releasing its right to receive 20% of Manville’s profits. After the transaction, the
trust would own 80% of Manville and have $1.2 billion in cash and marketable securities, plus $2.3
billion in assets. This transaction enabled JM to rectify its balance sheet. Also, it changed its name to
Schuller Corporation.
After JM spent several years operating under Chapter 11 of the U.S. Bankruptcy Code, the company
emerged with $850 million in cash, 50% of its common stock, a claim on 20% of the company’s
consolidated profits, and bonds with a face value of $1.3 billion. The trust is expected to pay 10% of an
estimated $18 billion in present and future asbestos claims to 275,000 victims who already have filed
claims.
JM’s social responsibility toward its workers, the litigants, the communities it serves, and society has,
at best, been uneven. Since 1972, the company has been active and cooperative with the U.S.
Department of Labor and the American Federation of Labor and Congress of Industrial Organizations
(AFL–CIO) in developing standards to protect asbestos workers. However, Dr. Kenneth Smith—the
medical director of one of the firm’s plants in Canada—refused in the 1970s to inform JM workers that
they had asbestosis.
There is also the complication and confusion of evolving and changing legislation on asbestos. The
U.S. Supreme Court, as stakeholder, has not taken a stand on who is liable in these situations: Are
insurance firms liable when workers are initially exposed to asbestos and later develop cancer, or are
they liable 20 years later? Also, right-to-know laws are not definitive in state legislatures. Does that
leave JM and other corporations liable for the government’s legal indecision?
Of the original 16,500 personal injury plaintiffs, 2,000 have died since the reorganization in 1982.
With Warren Buffet’s purchase of the company and the asbestos trust solidified, the management of
this issue for the company is over.
Note that companies continue to settle asbestos lawsuits. The Mesothelioma Reporter web site
(www.mesotheliomareporter.org) tracks and reports these settlements. For example, a recent settlement
was reported for Pfizer subsidiary Quigley Co. and others who were defendants in a trial “that alleged
that they caused personal injury by exposure to asbestos. The asbestos sometimes caused
mesothelioma.” That web site reported ABC News as stating that “Pfizer will establish a trust for the
payment of pending claims as well as any future claims. It will contribute $405 million to the trust over
40 years through a note, and about $100 million in insurance. Pfizer will also forgive a $30 million loan
to Quigley.” As with other corporate crises, the aftermath continues.
SOURCES
Gross, D. (April 29, 2001). Recovery lessons from an industrial phoenix. New York Times.
http://www.nytimes.com/2001/04/29/business/business-recovery-lessons-from-an-industrial-
phoenix.html. Updates can also be found on the following sites: http://www.asbestos.com,
http://www.claimsres.com/ and http://www.law360.com/companies/johns-manville-corp.
Johns Mansville (n.d.). Asbestos.com. http://www.asbestos.com/companies/johns-manville.php, accessed
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http://www.mesotheliomareporter.org

http://www.nytimes.com/2001/04/29/business/business-recovery-lessons-from-an-industrial-phoenix.html

http://www.asbestos.com

http://www.claimsres.com/

http://www.law360.com/companies/johns-manville-corp

http://www.asbestos.com/companies/johns-manville.php

October 25, 2013.
Pfizer to pay $430 million to settle asbestos claims. (September 3, 2004). Mesothelioma Reporter.
Tejada, C. (1996). Manville settlement gives trust enough cash for asbestos claims. Wall Street Journal.
QUESTIONS FOR DISCUSSION
1. Should asbestos victims’ claims be the liability of Johns Manville or of the decision makers who
authorized the work policies and orders?
2. Who was or is to blame for the asbestos-related deaths and injuries in this case?
3. Is the declaration of Chapter 11 bankruptcy and the creation of a trust the best or only solution in
this case? Who wins and who loses with this type of settlement? Why?
4. What ethical principle(s) did Johns Manville’s owners and officers use regarding this type of
settlement? What principle(s) do you believe they should have used? Explain.
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The Exxon Valdez, Second Worst Oil Spill in U.S. History: Twenty-Five
Years Later, Exxon Still Hasn’t Paid for Long-Term Environmental
Damages
“A year after the Exxon Valdez ripped open its bottom on Bligh Reef [off the Alaskan coast] and
dumped 11 million gallons of crude oil, the nation’s worst oil spill is not over. Like major spills in the
past, this unnatural disaster sparked a frenzy of reactions: congressional hearings, state and federal
legislative proposals for new preventive measures, dozens of studies, and innumerable lawsuits.” The
grounding of the oil tanker on March 24, 1989, spread oil over more than 700 miles. Oil covered 1,300
miles of coastline and killed 250,000 birds, 2,800 sea otters, 300 seals, 250 bald eagles, and billions of
salmon and herring eggs, according to the Exxon Valdez Oil Spill Trustee Council, which manages
Exxon settlement money. Sounds somewhat like the BP oil disaster, doesn’t it?
Fast forward to 2013, and note the following: “Today, government studies confirm that most of the
populations and habitats injured by the spill have not fully recovered, and some are not recovering at all.
Despite this, the government’s Reopener claim focuses solely on remediating intertidal oil. Government
studies report thousands of gallons of Exxon Valdez oil still in beaches today, that this oil is still ‘nearly
as toxic as it was the first few weeks after the spill,’ that ‘the remaining oil will take decades and possibly
centuries to disappear entirely,’ and that tests on nearshore animals ‘indicate a continuing exposure to
oil.’”
Exxon’s failure to pay the $5 billion in assessed damages is noteworthy. “After 14 years of appeals, in
2008 the U.S. Supreme Court (invoking a peculiar 1818 maritime ruling) reduced the punitive
judgment to only $507 million, with the appeals court adding another $470 million in interest. . . .
Although Exxon has not paid the claim, the government spill account today has $195 million, much of
which can be used to fund beach remediation work, in expectation that this will be reimbursed if and
when Exxon finally pays the claim.”
A grand jury indicted Exxon in February 1990. At that time, the firm faced fines totaling more than
$600 million if convicted on the felony counts. More than 150 lawsuits and 30,000 damage claims were
reportedly filed against Exxon, and most had not been settled by July 1991, when Exxon made a secret
agreement with seven Seattle fish processors. Under that arrangement, Exxon agreed to pay $70 million
to settle the processors’ oil-spill claims against Exxon. However, in return for the relatively quick
settlement of those claims, the processors agreed to return to Exxon most of any punitive damages they
might be awarded in later Exxon spill-related cases.
Exxon paid about $300 million in damages claims in the first few years after the spill. However,
“lawyers for people who had been harmed called that a mere down payment on losses that averaged
more than $200,000 per fisherman from 1990 to 1994.” Twenty-five years after the disaster, “the U.S.
Justice Department and State of Alaska say they are still waiting for long overdue scientific studies
before collecting a final $92 million claim to implement the recovery plan for unanticipated harm to
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fish, wildlife and habitat.”
The charge that the captain of the Exxon Valdez, Joseph Hazelwood, had a blood-alcohol content
above 0.04% was dropped, but he was convicted of negligently discharging oil and ordered to pay
$50,000 as restitution to the state of Alaska and to serve 1,000 hours cleaning up the beaches over five
years. Exxon executives and stockholders have been embroiled with courts, environmental groups, the
media, and public groups over the crisis. Exxon has paid $300 million to date in nonpunitive damages
to 10,000 commercial fishermen, business owners, and native Alaskan villages.
In 1996, a grand jury ordered Exxon to pay $5 billion in punitive damages to the victims of the 1989
oil spill. At the time that the fish processors had entered the secret agreement with Exxon, they did not
know the Alaskan jury would slap the company with the $5 billion punitive damages award. One of the
judges claimed that had the jury known about this secret agreement, it would have charged Exxon even
more punitive damages. As of 2001, Exxon had not paid any of these damages. It is also estimated that
with Exxon’s reported rate of return on its investments, it makes $800 million every year on the $5
billion it does not pay. (The company would have made back the $5 billion it refused to pay with
accrued interest by 2002.) Brian O’Neill, the Minneapolis lawyer who represents 60,000 plaintiffs in the
suit against Exxon, stated, “I have had thousands of clients that have gone bankrupt, got divorced, died,
or been down on their financial luck” while waiting for the settlement. Looking back on this case, the
November 2001 federal appeals court ruling opened the way for a judge to reduce the $5 billion
punitive verdict. (However, the 1994 jury award of $287 million to compensate commercial fishermen
was not reduced.)
In 2004, the Environmental News Network (ENN) reported that local residents and several
government scientists are still at odds as to “whether Exxon Mobil Corporation should be forced to pay
an additional civil penalty for the spill. . . . The landmark $900 million civil settlement Exxon signed in
1991 to resolve federal and state environmental claims included a $100 million re-opener clause for
damages that ‘could not reasonably have been known’ or anticipated.”
EPILOGUE
On June 25, 2008, the Supreme Court reduced the previously determined $5 billion punitive damages
award against ExxonMobil to $507.5 million. Since Justice Samuel A. Alito Jr. owns Exxon stock, he
did not participate in the final decision. With regard to whether Exxon should be held accountable for
Captain Hazelwood’s irresponsibility in the case, the court split 4-to-4. “The effect of the split was to
leave intact the ruling of the lower court, the United States Court of Appeals for the Ninth Circuit,
which said Exxon might be held responsible.”
Justice David Souter hinted in his last paragraph on behalf of the 5-to-3 majority that this decision
reflected the rule he was announcing for federal maritime cases in the Exxon case, “a rule that generally
dictates a maximum 1:1 ratio between a punitive damages award and a jury’s compensatory award.” In
effect, by reducing the Exxon Valdez verdict to $500 million, the court set a 1:1 ratio by passing the
$507.5 million compensatory damage portion of the jury’s award in this case. Stakeholders were divided
on the outcome of the case. It should be recalled that Exxon had previously paid over $2 billion during
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the past 19 years on environmental cleanup and $1.4 billion in fines and compensation to thousands of
fishermen and cannery workers.
Exxon chairman and CEO Rex Tillerson recently stated that “We have worked hard over many
years to address the impacts of the spill and to prevent such accidents from happening in our company
again.” A different reaction came from the hard-hit Alaskan town of Cordova, where fishermen and
local businesses suffered bankruptcies and even suicides in the long aftermath of the crises: “The
punitive damages claim ‘was about punishing [Exxon] so they wouldn’t do it somewhere else,’ said
Sylvia Lange, who owns a hotel and bar frequented by fishermen. ‘We were the mouse that roared, but
we got squished.’” As a result of the June 2008 Supreme Court decision, fishermen and others hurt by
the disaster will receive about $15,000 instead of $75,000. Note that in 2007, ExxonMobil earned a
record $40.6 billion in profits. The company could pay the punitive award with four days profits.
LaRue Tone Hosmer, a noted ethicist, stated, “The most basic lesson in accident prevention that
can be drawn from the wreck of the Exxon Valdez is that management is much more than just looking
at revenues, costs, and profits. Management requires the imagination to understand the full mixture of
potential benefits and harms generated by the operations of the firm, the empathy to consider the full
range of legitimate interests represented by the constituencies of the firm, and the courage to act when
some of the harms are not certain and many of the constituencies are not powerful. The lack of
imagination, empathy, and courage at the most senior levels of the company was the true cause of the
wreck of the Exxon Valdez.” Kiley Kroh, deputy editor of the Climate Progress blog, stated that “Critics
of the delay say the ongoing struggle to hold Exxon accountable for unanticipated environmental
damages in Alaska offers clear lessons to be learned regarding the continuing process of determining
BP’s long-term liability for the Deepwater Horizon catastrophe, a spill that was 20 times larger than
Exxon Valdez.”
SOURCES
Allen, S. (March 7, 1999). Deep problems 10 years after Exxon Valdez/Worst oil spill in US has
lingering effects for Alaska, industries. Wall Street Journal, A1.
Dumanoski, D. (April 2, 1990). One year later—The lessons of Valdez. Boston Globe, 29.
Exxon Valdez fine excessive, court says. (November 8, 2001). USA Today, 6A.
Hosmer, L. (1998). Lessons from the wreck of the Exxon Valdez: The need for imagination, empathy,
and courage. Business Ethics Quarterly, 122.
Kroh, K. (2013). 25 years after Exxon Valdez oil spill, company still hasn’t paid for long-term
environmental damages. ThinkProgress.org. http://thinkprogress.org/climate/2013/07/15/2301451/,
accessed January 8, 2014.
Liptak, A. (June 26, 2008). Damages cut against Exxon in Valdez case. NYTimes.com.
http://www.nytimes.com/2008/06/26/washington/26punitive.html?_r=0, accessed January 8, 2014.
McCoy, Charles. (June 13, 1996). Exxon’s secret Valdez deals anger judge. Wall Street Journal, A3.
Parloff, R. (June 25, 2008). Supreme Court slashes $2.5B Exxon Valdez award. Fortune.com.
http://legalpad.blogs.fortune.cnn.com/2008/06/25/supreme-court-slashes-25b-exxon-valdez-award/,
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http://thinkprogress.org/climate/2013/07/15/2301451/

http://www.nytimes.com/2008/06/26/washington/26punitive.html?_r=0

http://legalpad.blogs.fortune.cnn.com/2008/06/25/supreme-court-slashes-25b-exxon-valdez-award/

accessed 2008.
Rawkins, R. (February 28, 1990). U.S. indicts Exxon in oil spill. Miami Herald, 5.
Savage, D. (June 26, 2008). Punitive damages against Exxon in oil spill case slashed by 80%.
LATimes.com. http://www.latimes.com/news/nationworld/nation/la-na-valdez26-
2008jun26,0,3673626.
Steiner, R. (August 26, 2013). Exxon spill case still unresolved. JuneauEmpire.com.
http://juneauempire.com/opinion/2013-08-26/exxon-spill-case-still-unresolved#.UmvoE_mTySo,
accessed January 8, 2014. Also see http://www.adn.com/2013/09/16/3078683/compass-exxon-
valdez-spill-is.html#storylink=cpy.
QUESTIONS FOR DISCUSSION
1. Who was at fault in this case and why?
2. Should Captain Hazelwood have been convicted of criminal drunkenness in this case? If so, how
would that have changed the outcome of the settlement? If not, why?
3. Did Captain Hazelwood settle his “debt” in this case by agreeing to serve 1,000 hours in cleanup
time in Alaska? Explain.
4. Describe Exxon’s ethics toward this disaster based on what it had paid over the years up to the June
15, 2008, Supreme Court decision.
5. How much should the 33,000 commercial fishermen, Alaska Native peoples, landowners, businesses,
and local governments have been paid as compensation, and why?
6. Respond to Hosmer’s statement. Do you believe this sentiment applies to all responsibilities of senior
executives in corporations; that is, do they need to show imagination, empathy, and courage toward
all their constituencies? Explain your answer.
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http://www.latimes.com/news/nationworld/nation/la-na-valdez26-2008jun26,0,3673626

http://juneauempire.com/opinion/2013-08-26/exxon-spill-case-still-unresolved#.UmvoE_mTySo

http://www.adn.com/2013/09/16/3078683/compass-exxon-valdez-spill-is.html#storylink=cpy

Chapter Summary
Managing corporate social responsibility (CSR) from the corporate board of directors to the marketplace
requires commitment, and significant time, effort, and resources from organizations. At stake is a company’s
reputation, and even survival. External regulation is also required to help define guidelines and practices for
companies to act responsibly toward their stakeholders, communities, and society.
The corporation as social and economic stakeholder was presented from the perspectives of the social
contract and covenantal ethic. Corporate social responsibility was also discussed from legal, ethical,
philanthropic, and pragmatic viewpoints. Managing and balancing legal compliance with ethical motivation
was illustrated by the Sarbanes-Oxley Act and the Revised Federal Sentencing Guidelines for Organizations.
A section on legal and regulatory laws and compliance presented the complexity of areas in which
corporations must navigate with federal, state, and local agencies before creating and distributing their
products and services. A summary of recent corporate scandals was given to demonstrate the need for legal
compliance in corporations. Arguments were offered to explain that legal compliance legislation and programs
alone are necessary but not sufficient enough to motivate ethical and legal behavior in organizations.
Corporate responsibility toward consumers was presented by explaining these corporate duties: (1) the duty
to inform consumers truthfully; (2) the duty not to misrepresent or withhold information; (3) the duty not to
unreasonably force consumer choice or take undue advantage of consumers through fear or stress; and (4) the
duty to take “due care” to prevent any foreseeable injuries. The use of a utilitarian ethic was discussed to show
the problems in holding corporations accountable for product risks and injuries beyond their control.
The free-market theory of Adam Smith was summarized by way of explaining the market context
governing the exchange of producers and buyers. Several limits of the free market were offered: that imperfect
markets exist; the power between buyers and sellers is not symmetrical; and the line between telling the truth
and lying about products is very thin. Economist Paul Samuelson’s “mixed economy” was introduced to offer a
more balanced view of free-market theory and of the unrealistic demands often placed on corporations in
marketing new products.
An overview of two classic business ethics cases, Johns Manville Corporation and the Exxon Valdez oil
spill, were presented to illustrate how legal and regulatory agencies are part of a much broader stakeholder
system involving communities and groups in the marketplace. Laws and regulations, as mentioned earlier, are
necessary but not sufficient enough forces with which corporate leaders must adhere to in order to act fairly
toward their constituencies while being profitable.
Questions
1. Identify a company or organization in the media or with which you are familiar that operates ethically.
What are the reasons this company/organization is ethical? (You may refer to the leadership, management,
products, or services of the organization.)
2. Do you believe that the Sarbanes-Oxley Act is not needed? Explain or offer a different argument.
3. Are the 2004 Revised Federal Sentencing Guidelines, in your opinion, helpful to organizational leaders and
boards of directors in promoting more ethical behavior? Explain. What other actions, policies, or
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procedures would you recommend?
4. Which of the corporate crises summarized at the end of the chapter were you unfamiliar with? Do you
believe these crises represent “business as usual” or serious breakdowns in a company’s system? Why?
5. After reading the Johns Manville and Exxon Valdez summaries, identify some ways these crises could have
been (1) avoided and (2) managed more responsibly after they occurred.
6. What was your score on the “Rank Your Organization’s Reputation” quiz in Ethical Insight 4.3? After
reading previous chapters in this book, how would you describe the “ethics” of your organization, university,
or college toward its customers and stakeholders? Explain.
7. Do you believe the covenantal ethic and social contract views are realistic for large organizations like Bank
of America, JPMorgan, ExxonMobil, and Citibank, or federal agencies like the FTC and the Department
of Defense? Why or why not? Explain.
8. What is the free-market theory of corporate responsibility, and what are some of the problems associated
with this view? Compare this view with the social contract and stakeholder perspectives of CSR.
9. If you had to select either the legal/compliance (“stick”) approach or the voluntary/ethical compliance
(“carrot”) approach toward running a corporation, which would you choose, and why? What would be likely
consequences (positive and negative) of your choice? Explain.
Exercises
1. In this chapter’s opening case, why do you think it took such a large-scale security breach for TJX to start a
serious corporate “ethics” program?
2. Outline some steps you would recommend for preventing future corporate scandals like Enron,
WorldCom, and the subprime lending crisis based on the contents of this chapter.
3. If you were consulting with a large corporation’s executive team and were asked to talk about how that team
could think about a social contract including stakeholder management reasoning, what would you
recommend? Write down your advice.
4. You have been invited as a student who has studied business ethics to present a case to a CEO, CFO, and
ethics officer of a mid-size firm wanting to be Sarbanes-Oxley compliant. You have been asked to discuss
and help them argue the pros and cons of implementing this law. Lay out your approach and arguments,
and be ready to tell them what you would recommend they do and why.
5. A large company has invited you to join in a discussion with their legal and human resource officers about
integrating ethics into and between their departments. They want your ideas. Use Figure 4.2 and any other
ideas from this and previous chapters to outline what you would contribute. Write up a paragraph to share
with your class/group.
6. Find a recent article discussing an innovative way in which a corporation is helping the environment.
Explain why the method is innovative, and whether you believe the method will actually help the
environment or simply help the company promote its image as a good citizen. Use parts of this chapter to
evaluate your answer.
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Real-Time Ethical Dilemma
My job requires that I lie every day I go to work. I work for a private investigation agency called XRT. Most
of the work I do involves undercover operations, mobile surveillances, and groundwork searches to determine
the whereabouts of manufacturers that produce counterfeit merchandise.
Each assignment I take requires some deception on my part. Recently I have become very conscious of the
fact that I frequently have to lie to obtain concrete evidence for a client. I sometimes dig myself so deeply into
a lie that I naturally take it to the next level, without ever accomplishing the core purpose of the investigation.
Working for an investigative agency engages me in assignments that vary on a day-to-day basis. I choose to
work for XRT because it is not a routine 9-to-5 desk job. But to continue working for the agency means I will
constantly be developing new untruthful stories. And the longer I decide to stay at XRT, the more involved
the assignments will be. To leave would probably force me into a job photocopying and filing paperwork once
I graduate from college.
Recently I was given an assignment which I believed would lead me to entrap a subject to obtain evidence
for a client. The subject had filed for disability on workers’ compensation after being hit by a truck. Because
the subject refused to partake in any strenuous activity because of the accident, I was instructed to fake a flat
tire and videotape the subject changing it for me. Although I did not feel comfortable engaging in this type of
act, my supervisors assured me that it was ethical practice and not entrapment. Coworkers and other
supervisors assured me that this was a standard “industry practice,” and that we would go out of business if we
didn’t “fudge” the facts once in a while. I was told, “Do you think every business does its work and makes
profits in a purely ethical way? Get real. I don’t know what they’re teaching you in college, but this is the real
world.” It was either do the assignment or find myself on the street—in an economy with no jobs.
Questions
1. What is the dilemma here, or isn’t there one?
2. What would you have done in the writer’s situation? Explain.
3. React to the comment, “Do you think every business does its work and makes profits in a purely ethical
way? Get real. I don’t know what they’re teaching you in college, but this is the real world.” Do you agree or
disagree? Why?
4. Describe the ethics of this company.
5. Compare and contrast your personal ethics with the company ethics revealed here.
Cases
Case 9
Conscious Capitalism: What Is It? Why Do We Need It? Does It Work?
Introduction
Conscious Capitalism: Liberating the Heroic Spirit of Business (2013) is a best-selling book written by John
Mackey, CEO of Whole Foods, and Rajendra Sisodia, a management professor at Babson College. A major
tenet of the book states, “Conscious capitalism is an evolving paradigm for business that simultaneously
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creates multiple kinds of value and well-being for all stakeholders: financial, intellectual, physical, ecological,
social, cultural, emotional, ethical and even spiritual. This new operating system for business is in far greater
harmony with the ethos of our times and the essence of our evolving beings.” The four core tenets underlying
the business practices of conscious capitalism include “higher purpose and core values, stakeholder integration,
conscious leadership and conscious culture and management.” Mackey’s Whole Foods business embodies
these principles, as do several other selected companies that the book exemplifies. This case presents the
purpose, goal, and need for conscious capitalism that, since the publication of the book, has now become a
movement.
Why Conscious Capitalism?
Mackey and Sisodia’s book is not the first to initiate a change in the ways businesses should change. In his
review of Conscious Capitalism, Alan Murray states that “Capitalist guilt is nearly as old as capitalism itself, but
it has seen a resurgence since the financial crises of 2007.” Bill Gates called for a new system of “creative
capitalism” in 2008 at a World Economic Forum in Davos, Switzerland. He was upset that pharmaceuticals
paid more attention to baldness than curing global diseases like malaria. Michael Porter, a Harvard Business
School professor, in 2011 called for “shared-value capitalism,” arguing that business leaders were too occupied
by short-term financial profits, more so than “the well-being of customers, the depletion of natural resources,
the viability of suppliers, and the concerns of the communities in which they produce and sell.” Mackey and
Sisodia continue in this tradition, writing that “With few exceptions, entrepreneurs who start successful
businesses don’t do so to maximize profits. Of course they want to make money, but that is not what drives
most of them. They are inspired to do something that they believe needs doing. The heroic story of free-
enterprise capitalism is one of entrepreneurs using their dreams and passion as fuel to create extraordinary
value for customers, team members, suppliers, society, and investors.”
Since the fall of the Berlin Wall in 1989, it has been undisputed in business circles that capitalism and free
markets are the best way to promote prosperity and grow economies internationally. Significant progress has
been made since the inception of free-enterprise capitalism. Many believe that most of the world’s problems
today, such as poverty, education inequality, and problems in undeveloped nations, can be solved through
innovations brought about by free markets and free-enterprise capitalism. The poorest nations might be
encouraged to embrace the ideas of free-enterprise capitalism to achieve similar successes as the developed
countries, such as the United States, Japan, and others.
Free-enterprise capitalism is approximately 200 years old. Below is a partial list of accomplishments during
the past two centuries, attributed to free-enterprise capitalism.
• Average income per capita on a global level has increased by over 1,000% since 1800.
• Average life expectancy globally has increased to 68 years, much greater than the historical average of
30 years.
• Two hundred years ago, 85% of the world’s population lived on less than $1 a day in today’s terms.
Today that number is 16%.
• In just the last 40 years, undernourished people globally has decreased from 26% to 13%; if the
current trend continues, it is estimated hunger will be virtually eliminated in the twenty-first century.
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• Two hundred years ago, the world was almost completely illiterate and today 84% of adults have the
ability to read.
• With economic freedom has come political freedom: 53% of people currently live in countries that
have democratic governments elected by universal suffrage, compared to zero people 120 years ago.
• Two key factors that have led to the success of free-enterprise capitalism have been entrepreneurship
and innovation, combined with freedom and dignity of those transacting business. Both are necessary
for capitalism’s continued progress going forward. Entrepreneurs are also to be admired in an
economy devoted to free-enterprise capitalism because they are the drivers of innovation that
improves our lives, companies’ competitive position, and economies.
Why is Capitalism under Attack?
Despite the achievements of free-market capitalism, it is criticized by many around the world. Capitalism has
a branding problem, in which its image has been tarnished for various reasons. Entrepreneurs driving
capitalism should be admired, yet so many are vilified. Capitalism by many around the world is depicted as a
zero-sum game, in which workers are exploited and consumers are cheated by business owners. Critics of
capitalism argue that this alleged, intentional process results in greater inequality between the rich and the
poor, fragmentation among communities, and environmental degradation, all with the motivation of making a
profit. In this portrayal, business owners and entrepreneurs are depicted as being motivated by greed, seeking
profit maximization as a way of doing business, since ethical theory claims that people will only pursue their
self-interest at the expense of others.
Underlying reasons of capitalism’s branding problem stem, in part, from the corporate scandals that rocked
the United States in 2000–2002. Some of the more well-known scandals include Enron, WorldCom, Tyco,
and Adelphia Cable, all of which involved executive mischief, causing widespread losses for investors,
partners, and communities alike. The latest widespread scandal in the United States—the subprime lending
crisis in 2008—led to the longest recession since the Great Depression. This crisis was caused by illegal and
unethical actions of large corporations and companies across all levels of the financial sector. Many of the
major banks were lending to those who did not qualify, and then securitizing those loans for sale to other
banks and consumers. The rating agencies, who were getting paid fees by the major banks, evaluated all of
these securitized mortgage products as AAA (risk-free). Consumers during that time were overwhelmed by
debt that they could not afford. These actions resulted in a continuing widespread financial crisis that further
divided Main Street from Wall Street and society in general from capitalism.
Mackey and Sisodia believe there are several reasons for the attacks on capitalism. First, they argue that
there has been an intellectual hijacking of capitalism by economists and critics. These parties have placed
capitalism in a narrow, self-serving identity helping to paint capitalism as a profit-maximizing machine.
Second, many businesses are operating at a low level of consciousness regarding their purpose and the large
impact they have on the world. Third, the industrial era that gave rise to a mechanistic view of business, in
which employees were seen as resources of production, embraced the goal of receiving the most output from
as little input as possible. And finally, expanding regulations and the size of the government has produced a
mutant form of capitalism, dubbed “crony capitalism.”
This biased thinking is prevalent in the consciousness of many today. Wall Street analysts must meet
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quarterly earnings projections for all public companies. Many of these analysts tend to view any stakeholder
(other than stockholders) as net drainers of value; that is, if you pay employees more, you will earn less in
profits. This is a misunderstanding among many today about business in general, which dates back to the turn
of the twentieth century when so-called “robber barons” wielded vast sums of wealth and were not ashamed to
flaunt it. For example, Cornelius Vanderbilt was alleged to have said the following when he was warned about
violating the law: “Law? Who cares about the law? Hain’t I got the power?”
This dated way of thinking, although seemingly still practiced by some as evidenced in the corporate
scandals between 2000 and 2002, shows a low consciousness and moral concern for stakeholders, which can
lead to unintended consequences that affect stockholders as well as stakeholders—and, in fact, the entire
global economy. This zero-sum concept leads to short-term thinking and can inadvertently support reckless
risk-taking among those driven only by short-term profits. If a company seeks only or mainly to maximize
profits, it will pressure its entire supply chain to disregard real-time data and constraints. For example,
suppliers who are continually dictated to provide product and services to meet unrealistic goals may be
rewarded for a few quarters, but in the long-term such suppliers will do one of three things: go out of
business; do business elsewhere; or provide products of lower quality, all of which cause havoc to a company’s
supply chain. Other consequences, such as disregard for the environment and low employee engagement, have
led to the public perception of corporations as greedy, selfish, exploitative, and untrustworthy. Mackey and
Sisodia write that “Business is good because it creates value, it is ethical because it is based on voluntary
exchange, it is noble because it lifts people out of poverty and creates prosperity.” Capitalism is therefore
challenged to become more “conscious” of its heroic nature.
In 2002, a Gallup poll delineated problems with the perceptions of corporations. The poll found that “90%
of Americans felt that people running corporations could not be trusted to look after the interests of their
employees, and only 18% thought that corporations looked after their shareholders. 43% believed senior
executives were only in it for themselves.” The New York Times was also quoted, stating “the majority of the
public . . . believes that executives are bent on destroying the environment, cooking the books and lining their
own pockets.” One reason for distrust of executives, in addition to the 2000–2002 scandals, is exorbitant
executive pay. The Institute of Policy Studies showed that the ratio of CEO to average employee salaries in
1980 was 42 to 1, in 1990 it was 107 to 1, and in 2000 it was 525 to 1. In recent years the ratio has declined to
325 to 1, however the discrepancy is still too large, even outrageous compared to all other professional pay-
scale comparisons.
The public image spurred by recent corporate Enron and large banks’ “too big to fail” crises caused by
greed and reckless practices have tainted trust of businesses and even capitalism. Chris Meyer and Julia Kirby
stated the following in a keynote address at Bentley University (Waltham, MA) on the future of capitalism:
“We capitalists are stuck in two deep ruts right now. One of those ruts is an overemphasis on return on equity,
as it has become one of the primary (if not the primary) barometer of success for a company.” Meyer and Kirby
argue that a fixture on return on equity alone is not an appropriate proxy of the value a company provides, and
that by fixating on a single metric, business is committing social suicide. Meyer and Kirby also assert that
businesses in general are obsessed with competition, which can be just as harmful as helpful. Competition in
free markets has driven innovation in the past, as companies seek out competitive advantages with new
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products and ways to improve the world; but an infatuation with competition, simply for its own sake, will not
help drive the innovation needed if people and companies are hindered from being collaborative and inspiring
productive change. Former Dupont CEO Charles Holliday has stated that “Dupont’s long history has shown
us that no company, however strong and competitive, can go it alone. Involvement in outside organizations
and endeavors is a way of learning and leading.”
So, where do we go from here? The CEO of General Electric, Jack Immelt, is quoted in Rajendra Sisodia’s
book Firms of Endearment as saying, “To be a great company today, you have to be a good company.” Under
conscious capitalism, good businesses make money by creating value for others, not only by maximizing
profits. It is essential for free-enterprise capitalism to be grounded in an ethical system based on shared value
creation for all stakeholders. To prosper, companies will have to shift mindsets and practices by listening to
and learning from today’s customers. This shift represents a change not only in what people want but also in
how products should be designed both aesthetically and functionally. For businesses to reach full potential, a
new paradigm must be created to move beyond the simplistic models toward a higher purpose and value
creation for all parties. Conscious capitalism is one step in that direction.
What Is Conscious Capitalism?
Doug Rauch, former CEO of Trader Joe’s and current CEO of Conscious Capitalism, Inc., defines conscious
capitalism as “recognition that we are interconnected and interrelated. That business at its core is a story of
us.” Jack Canfield, one of my company’s advisory board members, describes the conscious capitalism process
as building “sustainable, trusting partnerships with people and the earth, adhering to the core values of
respect, integrity, and ethics.”
A distinction must be made, however, between conscious capitalism and corporate social responsibility
(CSR)—some believe these are one in the same. CSR is generally defined as a company’s efforts that go
beyond what is required by regulators in terms of societal and environmental impacts. To further delineate the
distinctions between conscious capitalism and CSR, Edward Freeman, a thought leader on stakeholder
relationship management, has stated,
Assume you are CEO and you are asked the following: Your company’s products improve lives. Suppliers want to do business with your
company because they benefit from this relationship. Employees really want to work for your company, and are satisfied with their
remuneration and professional development. And you’re a good citizen in the communities where you are located; among other things, you
pay taxes on the profits you make. You compete hard but fairly. You also make an attractive return on capital for shareholder and other
financiers. However, are you socially responsible? (Freeman, 2006, 4)
Freeman notes that CSR, although intended to be beneficial, actually helps to reinforce the “separation
thesis” that business and society are two distinct entities. At its worst, the separation thesis can generate a
destructive idea of capitalism, in which CSR becomes an add-on to business to help lessen the harsh
consequences of doing capitalistic business. This style of thinking fails to recognize the central role business
plays in the global improvement in the well-being and prosperity of mankind. CSR is generally seen as
beneficial to and contributing positive impacts on societies. However, because of the separation thesis, people
may still view capitalism as harmful and interpret CSR as an extension of business—not integral to
corporations’ actual functioning.
Freeman has therefore developed his own version of CSR (company stakeholder responsibility), which
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breaks down the separation thesis and describes business as an enterprise with moral ramifications, not
needing the arm of social responsibility. In this view, capitalism is a system of social cooperation working
together to create value that could not be created by individuals. From Freeman’s perspective, the idea of
corporate social responsibility is unnecessary and the baseline for conscious capitalism (i.e., a stakeholder
approach) is set.
The Four Tenets of Conscious Capitalism
The base of conscious capitalism lies in four tenets: higher purpose; stakeholder integration; conscious
leadership; and conscious culture and management. To fully understand the tenets, further delineation is
necessary. The tenet of higher purpose depicts the powerful and broad impacts business has on the world.
These impacts can be much greater when business is based on a higher purpose that goes beyond just
generating profits and shareholder value. Purpose is the reason a company exists. Yes, all companies need to
make money to survive, but they do not survive to make money. Professions such as lawyers, doctors, teachers,
etc., put an emphasis on public good and have purposes beyond self-interest; so should business. When
entrepreneurs originally create their companies, the majority create them for a purpose, to fill a need in
society. Having a higher purpose helps to create a high degree of engagement among all stakeholders, rallying
around a singular idea. This helps catalyze creativity, innovation, and organizational commitment—all
benefits of pursuing a higher purpose beyond profits.
The second tenet of conscious capitalism is stakeholder integration. This tenet is rather similar to the
Freeman style of management discussed earlier. A stakeholder is considered to be an entity that impacts or is
impacted by a business. Stakeholders include employees, suppliers, the environment, investors, and more.
Conscious businesses recognize that stakeholders are interdependent and that their business must be
organized to provide optimal value creation for all parties. Stakeholders cannot be treated as individuals
because business is a world of interconnected parties. Optimizing value creation for all stakeholders enables
the whole system to flourish, not just the company at the center. It also helps to create a harmony of interests
among the interdependent stakeholders, so that each party knows it is part of a much larger ecosystem.
To achieve a commitment to the stakeholder approach, we revisit Freeman and his version of CSR, in
which he states there are four levels of commitment. Level 1 is a basic value proposition, in which a company
must ask itself how it makes its stakeholders better off and what the company stands for. Level 2 involves
sustained cooperation among stakeholders, in which the principles and values are established to base everyday
engagement between the parties. Level 3 deals with understanding broader societal issues. At this level,
companies must ask themselves how the basic value proposition staged in Level 1 and the principles of Level 2
either fit or contradict key trends and opinions in society. Level 4 deals with ethical leadership, which falls
under the third tenet of conscious capitalism.
The third tenet of conscious capitalism is conscious leadership. Every conscious business needs a conscious
leader; it is nearly (if not fully) impossible to have a conscious business without a leader at the helm who
shares the values of the firm and its higher purpose. To be a conscious leader, one must be motivated first and
foremost by service to the higher purpose of the firm and creating value for all stakeholders. Conscious leaders
reject the old model of fear-based command-and-control leadership and accept the “carrot and sticks” model
as primary motivational tools. This model seeks to mentor, motivate, and inspire people into accomplishing
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their tasks and seeks to stimulate innovation and creativity over fear. Conscious leaders must also know what
values and principles inform their leadership, their individual sense of purpose, and what they stand for as a
leader. With conscious leadership in place, the fourth tenet of conscious capitalism becomes easier to achieve.
The fourth tenet of conscious capitalism is conscious culture and management. In a conscious business, the
culture within the firm is a tremendous source of strength and continuity. This type of culture naturally
evolves from the firm’s and management’s commitments to higher purpose, stakeholder interdependence, and
conscious leadership. A pure focus on the first three tenets of conscious capitalism should ultimately lead to a
conscious culture inspired by commitment, innovation, and creativity. Some may ask why culture is so
important. A 2005 study by the Economist Intelligence Unit found that 56% of U.S. executives felt that the
single greatest obstacle to growth for their firm was corporate culture. Conscious businesses, because of their
culture, do not face these obstacles on their path to growth. The key to establishing conscious culture and
achieving the fourth tenet is to understand the connection between management and culture.
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Figure 1
Culture and Management Must Connect
Source: Based on a presentation that R. Sisodia gave at the 2012 Conscious Capitalism Conference at Bentley University, Waltham, MA.
For conscious businesses to thrive, a conscious culture is necessary, which entails management promoting a
different type of leadership style. The type of management approach to leadership can either magnify or
depress the human need to care. Emphasizing a leadership style that connects what people feel and value to
how people work promotes achievement beyond the ordinary scope of traditional businesses. The leadership
style found in conscious businesses focuses on decentralization, empowerment, and collaboration. This style of
management leads to an amplified ability of the firm to continuously innovate and create multiple kinds of
value and wealth (not just financial) for all stakeholders as described by the flow chart in Figure 1, which
illustrates the interconnectedness required between culture and management in conscious capitalism firms.
Firms of Endearment (FoEs)
So what exactly is a FoE? It is a “company that endears itself to stakeholders by bringing the interests of all
stakeholder groups into strategic alignment. No stakeholder benefits at the expense of any other stakeholder
group and each prospers as the others do.” FoEs embrace a different idea than most companies. When
looking at customers, they strive for share of heart, and not share of wallet. The theme with this form of
thought is if you earn a share of the customer’s heart, she will gladly offer you a bigger share of her wallet; do
the same for an employee and that employee will give back with substantial increases in productivity and
overall work quality. FoEs define the conscious capitalism movement and are at the forefront of conscious
business practices, leading the business world into its much-needed evolution. FoEs include Amazon, Honda,
Southwest, BMW, IDEO, Starbucks, CarMax, IKEA, Timberland, Caterpillar, JetBlue, Toyota, Commerce
Bank, Johnson & Johnson, Trader Joe’s, The Container Store, Jordan’s Furniture, UPS, Costco, LL Bean,
Wegmans, eBay, New Balance, Whole Foods, Google, Patagonia, Harley-Davidson, and REI.
FoEs have a distinct set of core values that help differentiate them from competitors. Some of the values
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have already been mentioned, such as aligning stakeholder interests. There is a laundry list of values distinct to
FoEs, and it is pertinent to point out a few here. First, employee compensation and benefits are significantly
greater than the standard for the company’s category/industry, while executive salaries are modest, leading to a
smaller ratio of CEO pay to average pay. FoEs also devote larger amounts of time to employee training than
their competitors, part of the reason for lower FoE employee turnover than the industry average. FoEs
consider corporate culture to be their greatest asset and therefore their primary source of competitive
advantage. They seek to keep it that way by humanizing the company experience for customers and employees
alike, by projecting a genuine passion and connecting emotionally.
From a FoE perspective, stakeholders are understood through the acronym SPICE, which stands for
society, partners, investors, customers, and employees. Society is part of the local communities in which FoEs
are embedded, as well as larger communities in need of resources for societal improvement. FoEs include
governments and non-governmental organizations (NGOs) as well. Partners include upstream partners such
as suppliers, as well as downstream partners such as retailers, thus representing the broad spectrum of what
businesses would consider partners. Investors as a stakeholder include both individual and institutional
shareholders, as well as lenders who have helped finance the company. Customers include both individual and
organizational (business) customers, but extend beyond the current customer. FoEs view customers past,
present, and future with equal affection and seek for share of heart from all. This is a similar viewpoint to how
FoEs view employees. Employees past, present, and future are all stakeholders. Families are also included in
their consideration of employees as stakeholders. All in all, FoEs have an extremely broad view of stakeholders
and take each into equal consideration when planning firm strategy.
The best way to understand a FoE is to understand how one operates. For our purposes we will focus on
Whole Foods as an example of a FoE. Mackey defines the values and concepts that have helped Whole Foods
establish and maintain its conscious culture, as well as its competitive advantage against other grocers. For
Mackey, purpose involves businesses needing to shift from profit maximization to purpose maximization in an
effort to resurrect the brand of business. Purpose maximization is a powerful concept in that it drives
everything the firm does. It aligns stakeholders by focusing on a purpose, and ironically, it typically results in
making more money than ever thought possible (even more than profit maximization). Mackey further
delineates Whole Foods’ culture by discussing the concept of decentralization, which involves having 8–10
teams within each store and each team being self-managed. The teams are responsible for the operations of
their specific store. They make decisions regarding hiring, product selection, merchandising, compensation,
and more. Teams are rewarded through gain-sharing and not individual performance; 92% of Whole Foods
stock options are granted to nonexecutives, whereas in a typical corporation, 75% of options will go to the top
five executives. The key to this type of decentralization is that it empowers employees to make their own
decisions. By allowing the teams to make decisions on their own, empowerment is greatly increased which
helps lead to greater loyalty. Mackey claims that without empowerment, decentralization is useless.
Not only does Whole Foods focus on decentralization, but they also focus on authenticity and
transparency, both of which foster trust. The current system of information-sharing in business is “need to
know,” which depresses trust within an organization. FoEs focus on being transparent with all stakeholders.
Whole Foods accomplishes this by sharing all relevant financial information with team members, including
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compensation. Another FoE, The Container Store, is a private company and therefore has no obligation to
share its financial information, and yet the store shares all of its financial statements with all of its employees
every year. Whole Foods also seeks to promote love and care within its organization. One way of doing so is
through “Appreciations.” Every meeting at Whole Foods is ended by one employee voluntarily expressing an
appreciation for another employee, thus helping to shift the culture from judgment to love. All of this leads to
continuous innovation, which is the key to having a sustainable competitive advantage. Lastly, Whole Foods
is committed to collaboration, because innovation without collaboration is far less valuable. Collaboration
combined with the other elements listed above is the recipe for success with Whole Foods and many FoEs,
making them the truly great firms they are.
Conscious Capitalism: A Different View
The theme of this section has been touched upon throughout the case, but it is important for readers to
remain focused on how conscious capitalism is an evolution and improvement of the current U.S. system of
capitalism. Conscious capitalism opens up a different mindset. The trade-off thinking of the current system
creates an “if/then” mindset leading to restricted options for managers. Conscious capitalism creates
“both/and” thinking, which allows managers, entrepreneurs, and ambassadors of capitalism to open their mind
to seemingly contradictory conditions, such as paying employees higher wages than industry averages and yet
having higher profit margins than industry averages. Further, the “if/then” thinking leads to a zero-sum
mindset, in which one stakeholder can only benefit at the expense of another and this system is becoming
unsustainable for reasons illustrated previously. In order for value to be created by capitalism, each participant
must make a profit; that is, each stakeholder must receive back more value than they originally invested. If
stakeholders do not receive value from taking part in the system, they will eventually drop out. The exclusive
pursuit of profit maximization has done enormous damage to this system and the reputation of capitalism as
profit maximization, by definition, means giving as little and getting as much as possible. The conscious
capitalism system of shared value creation increases opportunities by an order of magnitude as the mind breaks
free of zero-sum, profit-maximization thinking.
The heroic story of free-enterprise capitalism is not one of profit maximization; it is one of entrepreneurs
using their passion as fuel to create extraordinary value for customers, team members, suppliers, investors, and
society. Business is far greater than just the sum of the individual stakeholders. Business is the
interrelationship, interconnection, shared purpose, and shared values that various stakeholders of the business
cocreate and coevolve together. FoEs and proponents of conscious capitalism do not view stakeholders as
competing claimants on the value pool, but rather as active contributors to it. Overall, conscious capitalism
creates a better environment than the current system. Companies motivated by higher purposes create
sustained wealth for investors (see Figure 2); improve the lives of customers by satisfying their needs; elevate
human satisfaction through fulfilling work; and build the social, cultural, infrastructural, and ecological wealth
of society.
Conscious capitalism is, then, a revolution of traditional free-enterprise capitalism that opens up thinking
to shared value creation for all stakeholders. Companies that follow this model are given the title “Firm of
Endearment” and base their business models off trust, authenticity, innovation and more. These firms tend to
pay employees more, work with suppliers to strengthen both firms, and have lower executive pay than most
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businesses today. The brand of business needs rejuvenation and conscious capitalism is at the forefront of
revitalizing the natural good that business creates. But does conscious capitalism’s business model provide
financial success?
Conscious Companies
Presentation of Original Research
Critics of conscious capitalism argue that if employees are paid more, suppliers are treated well and paid a fair
price, etc., these numbers should ultimately hit the bottom line of the conscious firms, thus affecting their
stock price. Research has been done on this subject and provides amazing results. Studies on those firms that
Mackey and Sisodia select and label as FoEs found that those companies generally earn higher shareholder
returns, have premium price-to-earnings ratios, and earn a premium return on equity, all while incurring no
more risk than the overall stock market. Over a 10-year time period, FoEs produced a cumulative return of
1,026%, while the S&P 500 managed only 122%. There was also another series of firms called “Good to
Great,” based on the James Collins book by the same title, with most of these firms focused strictly on profits.
These firms also outperformed the S&P 500 but dramatically underperformed FoEs with a cumulative return
of 331%, as seen in Figure 2. Note the comparison of FoEs’ cumulative 10-year stock market performance
(1,026%) with the exemplary company sample in Good to Great (331%), and to the S&P 500 (122%) for that
same period.
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Figure 2
10-Year FoE Performance
Source: Sisodia, R., Wolfe, D., and Sheth, J. (2007). Firms of endearment: How world-class companies profit from passion and purpose, 137. Upper
Saddle River, NJ: Wharton School Publishing.
Additionally, FoEs had an average price-to-earnings ratio of 26.8, while the S&P 500’s was 18.4 and Good
to Great companies’ 16.8. Sisodia and his coauthors examined the average beta of these firms. Beta is the
tendency of a security’s returns to respond to swings in the market and is commonly used as a measure of risk.
The average beta is that of the market (S&P 500), which is 1. A beta under 1 suggests that a stock, or group
of stocks, is less risky than the overall market. Sisodia and his coauthors found that FoEs had an average beta
of .92, thus leading to the conclusion that FoEs produce superior returns with less risk than the overall
market, the ideal risk-return relationship for investors.
Updated Financial Analysis of FoEs
The research presented above was published in 2004 and included 17 public companies. An updated 2012
analysis consisted of 75 public companies split into four different tiers: highly conscious (elite); conscious;
nearly conscious; and international. The “highly conscious” tier consists of 10 companies that embrace the
four tenets of conscious capitalism. The “conscious” tier has 35 companies that embrace most aspects of
conscious capitalism. These firms could improve one or two of the conscious capitalism tenets in order to be
considered highly conscious companies. The “nearly conscious” tier consists of 12 firms that had one or two
larger issues in their performance and record of conduct, indicating issues they had with at least one important
stakeholder group. Finally, the “international” tier consists of 18 companies with headquarters and operations
located outside the United States. Represented countries include India, Germany, the United Kingdom, and
Canada.
Method of Analysis in Updated Study
The analysis used the four tiers noted above, comparing each tier individually to the S&P 500, Dow Jones
Industrial Average (DJIA), and the Russell 3000. An analysis was also performed combining the firms in the
“conscious” and “highly conscious” tiers, comparing them to the same three indices. The analysis dates back to
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1997, with separate analyses done on the 3-, 5-, 10- and 15-year stock price performance of the selected firms.
The study focused on the stock prices and beta of the selected firms, with the objective of duplicating the
results found previously using a larger sample size and also showing the effects different levels of consciousness
have on the financial performance of a company. Essentially, the hypothesis is that FoEs provide superior
returns than the overall market with less risk.
The stock price and dividend data was pulled from Bloomberg terminals and was used to calculate
quarterly holding period returns from 12/31/1997 to 12/31/2012. For firms that have been public less than 15
years, they were simply added into the analysis once public stock price data became available. This was done
so that not having a stock price (return would be zero) would not drag down the returns for overall index. The
quarterly returns were then averaged together to create an index for each tier of firms. The quarterly returns
for the index were then compounded to account for reinvesting dividends. The betas were also pulled from
Bloomberg for the individual firms using a linear stock price regression from 12/31/1997 to 12/31/2012 and
then averaged together to create an index beta for each tier of firms.
Results of the Analysis
The results of the financial analysis affirmed the previously published results regarding FoEs, even with the
expansion to a larger number of firms including international firms. Figures 3 and 4 illustrate the cumulative
and annualized performance of each tier of the firms explained above, in comparison to the S&P 500, DJIA,
and Russell 3000. It is interesting to note that the “Elite FoEs” have the best performance of all the firms,
with the “Conscious” (second tier) firms lagging the first tier but vastly outperforming the major stock indices.
Finally, the “Nearly Conscious” firms still triple the performance of the major indices.
Another interesting observation is that the “Conscious International” firms also vastly outperform the
market as a whole, validating that the model works internationally as well as domestically. It is also important
to note the differences in returns over the different time periods. In the three-year analysis, while the selected
firms still outperform the major indices, they do so by a smaller margin than the 5-, 10-, and 15-year analysis,
with the gaps widening the longer the analysis is performed. This further supports the argument that the
conscious business model is effective over the long-term performance of a company, both financially and
socially.
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Figure 3
Results of Cumulative Performance of Tiered Firms
The paradox of profits holds true as these firms do not pursue profit as their objective for being, as
indicated previously, but rather pursue a higher purpose, enabling a more holistic view of what business can
be. The argument that these firms cannot succeed financially is simply a fallacy as evidenced by the analysis
presented here, as ultimately all financial performance is enveloped in the stock price of a firm.
In the updated beta analysis, there is a slight diversion from the research presented previously. The FoEs
analyzed in Firms of Endearment had a beta of .92, while the firms in the updated analysis have betas slightly
higher than 1, as shown in Figure 5.
Figure 4
Cumulative Performance Summary Comparing Fund Indices
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Figure 5
Beta of Indices
Although the betas of the firms are higher than the market average of 1, they are only slightly higher, and
with their vast outperformance of the market it is fair to say that investors in these firms will tolerate slightly
higher volatility. Also, the beta is only one measure of risk, measuring volatility. A long-term investor seeking
firms that outperform the market over 3, 5, 10, etc., years is not as concerned with volatility as a Wall Street
trader seeking to take advantage of day-to-day price movements. Essentially the point to be made is that these
firms carry little to no extra risk in comparison to the overall market and yet vastly outperform the market over
the long term.
Conclusion
Conscious capitalism’s business model is timely, even long overdue. Businesses should not be solely focused on
profits, but should adopt a more holistic approach to doing business. Conscious capitalism integrates all
stakeholders, creating a greater pool of wealth for all involved in the ecosystem. Embracing conscious
capitalism has proven to bode well for the companies that choose to do so. Conscious firms are healthy,
growing businesses able to survive long-term, outperform competitors, and can generate outstanding returns
in the stock market. Through the free markets and competition mechanisms of free-enterprise capitalism, it is
my belief that firms embracing conscious capitalism will rise further to the top, and more companies will
embrace the model as it becomes the only way to compete in the marketplace with shifting dynamics, wants,
and needs. Conscious capitalism is the future of business.
Questions for Discussion
1. Why are the reasons conscious capitalism resurfaced an important topic in the press?
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2. What are the basic principles and tenets of Mackey and Sisodia’s book and the conscious capitalism
movement that make it different from other related movements and similar topics?
3. What does ethics have to do with conscious capitalism as presented by Mackey and Sisodia?
4. Why is conscious capitalism not just a theory?
5. What do research results from the updated study in the article show?
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Case 10
Goldman Sachs: Hedging a Bet and Defrauding Investors
Securities Exchange Commission Charges Goldman Sachs
On April 16, 2010, the Securities and Exchange Commission (SEC) charged Goldman Sachs & Co. and one
of its vice presidents with defrauding investors. During this time, the U.S. economy was in a state of severe
recession following the subprime mortgage crisis. Goldman Sachs was charged with defrauding investors by
misstating and omitting key facts about a financial product linked to subprime mortgages. The company had
sold a financial product to investors created by the hedge fund Paulson & Co., which had bet against the
success of the product. This case details the actions leading to the largest-ever settlement paid by a Wall
Street firm to the SEC.
The ABACUS 2007-AC1 Product
Development of the ABACUS 2007-AC1 product began in 2007. It was a collateralized debt obligation
(CDO). CDOs are based on the performance of subprime residential mortgage-backed securities. Paulson &
Co., one of the largest and most profitable hedge funds, approached Goldman Sachs and paid the firm to
structure a deal in which Paulson & Co. would add the mortgage securities to their portfolio. The hedge fund
took a “short position” against the ABACUS product and the mortgage securities, betting on residential
mortgages to fail. Placing the securities in a CDO would temporarily hide the true value of the loans and
mislead investors; and when the loans went into default, the price of the product would plummet. Those who
bet against the CDO stood to make significant profits.
On April 26, 2007, the transaction between Goldman Sachs and Paulson & Co. closed. Paulson & Co.
paid Goldman Sachs $15 million to structure and market the ABACUS product. Paulson & Co. is one of the
most profitable hedge funds in history, overseeing more than $32 billion in assets. Founded by John Paulson,
a Harvard MBA graduate and one of the world’s wealthiest people, the hedge fund had earnings in the tens of
billions in each of the most recent fiscal years. The majority of Paulson’s profits came from the collapse of the
housing market. He predicted the billion-dollar write-downs of mortgage-backed securities and took
advantage of that foresight. Paulson found subprime mortgages with adjustable rates in areas like California,
Arizona, Florida, and Nevada—states that had experienced high increases in home prices that were severely
inflated and would drop significantly.
Goldman Sachs knew of Paulson & Co.’s strategic approach to the ABACUS 2007-AC1. In marketing
the ABACUS product, Goldman Sachs stated that the securities were selected by ACA Management LLC.
ACA was a reputable third party with experience in residential mortgage-backed securities. Investors were not
informed that Paulson & Co. had also played a significant role in selecting the securities in the portfolio and
that Paulson & Co. stood to benefit if the ABACUS securities defaulted. ACA and the other investors, IKB
Bank, were still responsible for due diligence regarding the investment. While Paulson & Co. engaged in the
selection process of the securities in the ABACUS portfolio, ACA analyzed and approved every security in
the deal. ACA had the final authority over the securities included in ABACUS.
The fact that ACA, an objective third party, had the final approval in the selection of the portfolio was
important to investors. IKB, a German bank, stated that if it had known of Paulson & Co.’s role in the
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selection of the mortgage-backed securities and their intended short position, it would not have invested in
the product.
Goldman Sachs knew of the potential harmful consequences in selling the ABACUS product but chose to
ignore the risks in favor of profits. CDOs were financial products that hedge funds like Paulson & Co. could
bet on with very little risk. Goldman Sachs was not the only firm to engage in the practice of creating CDOs.
More than $250 billion of these products were sold into the market in the two years leading up to the U.S.
financial crisis. Many have speculated that a majority of these CDOs were deliberately designed to fail, similar
to the ABACUS.
The Case against Fabrice Tourre
The man responsible for ABACUS was Fabrice Tourre. Tourre was a 31-year-old mid-level trader who’d
been working at Goldman Sachs since 2001. Tourre foresaw the downfall of highly leveraged securities as
early as 2005. He was one of the few who understood the complexity of the securities and saw an opportunity
to help Goldman Sachs offset some of its impending losses. Tourre oversaw the ABACUS product from the
beginning. He structured the transaction, marketed the product, and spoke directly with investors. With the
knowledge that Paulson & Co. had designed ABACUS to fail, Tourre and Goldman Sachs chose not to
disclose this information to investors. Tourre also misled the so-called third-party creators of ABACUS,
ACA, into believing that Paulson & Co. had contributed approximately $200 million to the equity of
ABACUS. Goldman Sachs again did not disclose that Paulson & Co.’s interests were contrary to ACA’s.
Once the SEC lawsuit was filed, Goldman Sachs very quickly distanced itself from Tourre; continually
declined to comment on Tourre’s case; and even aided the SEC investigation of his actions. Tourre defended
himself vigorously and claimed that he did not intentionally mislead investors. He stated that the marketing
materials for ABACUS were incomplete and that additional information may have been needed. Many times,
Tourre called himself “the Fabulous Fab.” When asked if he regretted his actions, Tourre’s only response was
that he was “sad and humbled about what happened in the market.” Tourre’s actions received respect from
Wall Street bankers and traders, who admired the way he foresaw the collapse in the housing market and, in
turn, structured a lucrative deal for his client, Paulson & Co. In the banking industry, he was a legend.
The Downfall
ABACUS was created in April of 2007. It received a AAA rating from both credit-rating agencies, Moody’s
and Standard & Poor’s. These agencies are never informed of the identity of the investors who participated in
the deal. Due to the events surrounding the housing market bubble, the credit agencies’ ability to rate
securities was called into question.
During 2007, an internal conversation began within Moody’s to determine whether lower ratings should be
issued on CDOs and other deals involving mortgage bonds or other assets. It was determined that more
evidence was needed to prove any deterioration in the housing market. Other rating firms acted similarly,
choosing to ignore the signs of an impending collapse and allowing many ABACUS-like structured deals to
enter the market.
By October 2007, 83% of the residential mortgage-backed securities in the ABACUS portfolio had been
downgraded, and the remaining 17% were trending negative. By January 2008, 99% of the securities had been
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downgraded. The German Bank, IKB, investors into ABACUS 2007-AC1, allegedly lost more than $1
billion.
In April 2010, the SEC filed complaint charges against Goldman Sachs and Fabrice Tourre for the actions
taken in structuring and marketing the ABACUS 2007-AC1. The SEC reported violations of section 17(a)
of the Securities Act of 1933; section 10(b) of the Securities Exchange Act of 1934; and Exchange Act Rule
10b-5. The SEC was seeking injunctive relief, disgorgement of profits, prejudgment interest, and financial
penalties. The chairman and CEO of Goldman Sachs, Lloyd Blankfein, spoke candidly and proclaimed that
the day the suit by the SEC was filed was “one of the worst days in my professional life.”
The Settlement
On July 15, 2010, Goldman Sachs entered into a settlement with the SEC, neither acknowledging any
wrongdoing nor denying the SEC’s allegations. In a statement made by Goldman Sachs, the only admittance
made by the firm was “that the marketing materials for the ABACUS 2007-AC1 transaction contained
incomplete information. In particular, it was a mistake for the Goldman marketing materials to state that the
reference portfolio was ‘selected by’ ACA Management LLC without disclosing the role of Paulson & Co.
Inc. in the portfolio selection process and that Paulson’s economic interests were adverse to CDO investors.
Goldman regrets that the marketing materials did not contain that disclosure.”
The timing of the settlement announcement came only hours after the Senate had passed legislation to
reform the U.S. financial system. Many saw this as political posturing by the SEC and a message for the rest
of the financial industry. Goldman Sachs paid the SEC $550 million to settle the charges. It was the largest
settlement ever paid to the SEC by a Wall Street firm. On the day the settlement was announced, Goldman
Sachs’ stock price rose over 4%. The settlement agreement ended three months of uncertainty with the firm.
Investors saw it as a positive step, noting that top management was kept intact. The $550-million figure was
far lower than the anticipated $1-billion estimate predicted by many analysts.
In addition to the monetary settlement, Goldman Sachs was forced to make several internal changes. The
firm was required to increase training for employees who deal with mortgage securities and increase oversight
in the structuring and marketing of those securities. The settlement resulted in new industry-wide regulation.
In its handling of Goldman Sachs, the SEC and its director of enforcement, Robert Khuzami, made it clear
that the agency wanted to send a message not only to the firm, but to the entire industry.
Follow-up
Fabrice Tourre’s battle, however, did not stop there. As the New York Times stated, “Mr. Tourre was found
liable in August [2013] on six counts of civil securities fraud after a three-week jury trial in Lower
Manhattan.” He has since filed for a retrial (September 2013) because “there was a lack of evidence to support
the jury’s decision on some counts and that evidence was not presented to the jury in other instances.” Tourre
is still awaiting a judgment.
Reflections on Goldman Sachs and the ABACUS Product
The economic environment is often one of the primary forces behind stakeholder decisions, as in this case.
The way in which the economic climate is trending may be a predictor of many business decisions. This was
undoubtedly the case in Goldman Sachs’ decision to structure, market, and sell CDOs. Goldman Sachs and
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Fabrice Tourre realized the impending collapse of the housing market and the resulting losses for the firm.
Paulson & Co. also understood the economic climate and bet against the mortgage-backed securities that
Goldman Sachs sold to investors.
The government and legal environment also made it possible for Goldman Sachs to engage in unethical
practices. The lack of transparency in marketing materials for the ABACUS product was not uncommon.
Investment banks were not forced to disclose to rating agencies the investors in the product, nor were they
required to identify the security selection process. ACA, the objective third party, had the opportunity to
review all the securities in the portfolio, as was their legal right, but because of the lack of a legal obligation for
Goldman Sachs to disclose certain information, ACA was at a considerable disadvantage when it came time
to evaluate many of the underlying assets in the portfolio.
Corporate Crisis Management Phases
An interesting aspect of the Goldman Sachs case was the reaction of the firm to the filing of the SEC lawsuit.
The corporate social response stages in crisis management frameworks appropriately describe the experiences
that characterized Goldman Sachs’ dealing with the lawsuit. During the “reaction” stage—when the crisis first
occurred—a firm is unsure of all the facts surrounding the crisis, but must look confident for its stakeholders.
Goldman Sachs’ stock plummeted when word of the lawsuit hit Wall Street. CEO Lloyd Blankfein
categorically denied any wrongdoing, insisting that the charges were fraudulent. This led to the second stage,
“defense,” when a firm’s reputation is at risk and speculation arises as to the future of the firm. In Goldman’s
case, analysts were predicting billion-dollar fines and changes at the management level. The “insight” stage
soon follows as a firm is forced to consider the fact that they may be at fault. To appease the SEC, Goldman
Sachs not only conducted an internal review of the ABACUS product, but also of many similar products. This
led to the fourth stage, “accommodation,” when a firm acknowledges wrongdoing, apologizes, and reassures
the public of its stability. Goldman Sachs apparently turned trader Fabrice Tourre into a scapegoat, distancing
itself from him and claiming that he had control over the ABACUS product. The firm also settled with the
SEC for a record sum, but still far short of the predicted estimates. The SEC vowed to implement regulation
that would increase transparency in the marketing of complex securities, and Goldman Sachs pledged to
increase oversight in the structuring and selling of these securities. Goldman Sachs’ stock is higher at the time
of writing than it was previous to the lawsuit.
Questions for Discussion
1. Was Goldman Sachs just taking advantage of a situational opportunity in the marketplace in this case?
Explain and justify your answer.
2. Who, if anyone, was to blame for the illegal actions taken in this case and why or why not?
3. Who paid and at what “price” for the financial/economic and social costs of the transactions and results of
transactions here?
4. Do the ends justify the means in this case, as it turns out? Explain and offer evidence.
5. What ethical and social responsibility lessons can you offer from this case and the aftermath? Explain.
Sources
This case was developed from material contained in the following sources:
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Barr, Colin. (April 16, 2010). SEC charges Goldman Sachs with fraud. CNN Money.
http://money.cnn.com/2010/04/16/news/companies/sec.goldman.fortune/index.htm, accessed January 7,
2014.
Cook, Nancy. (May 5, 2010). Fabrice Tourre’s new street cred. Newsweek.com.
http://www.newsweek.com/2010/05/05/fabrice-tourre-s-new-street-cred.html, accessed January 7, 2014.
Craig, S. (October 1, 2013). Fabrice Tourre seeks a new trial. DealBookNYTimes.com.
http://dealbook.nytimes.com/2013/10/01/fabrice-tourre-seeks-a-new-trial/, accessed January 7, 2014.
Fabrice Tourre: “I did not mislead investors.” (April 27, 2010). CBS News.com.
http://www.cbsnews.com/stories/2010/04/27/business/main6436951.shtml, accessed January 7, 2014.
Goldfarb, Zachary A. (April 24, 2010). SEC confident on IKB part of Goldman Sachs lawsuit.
WashingtonPost.com. http://www.washingtonpost.com/wp-
dyn/content/article/2010/04/23/AR2010042305223.html, accessed January 7, 2014.
Goldman, Sachs & Co. (July 15, 2010). Settlement with the SEC. GoldmanSachs.com.
http://www2.goldmansachs.com/our-firm/on-the-issues/sec-settlement.html, accessed February 5, 2011.
Goldman Sachs “victory” ushers change for Wall Street. (July 16, 2010). Bloomberg.com.
http://www.businessweek.com/news/2010-07-16/goldman-sachs-victory-ushers-change-for-wall-
street.html, accessed January 7, 2014.
Goldman settles with S.E.C. for $550 Million. (July 15, 2010). DealBookNYTimes.com.
http://dealbook.nytimes.com/2010/07/15/goldman-to-settle-with-s-e-c-for-550-million/, accessed April
23, 2012.
Moyer, L. (April 26, 2010). Blankfein: SEC case filing “one of the worst days in my professional life.”
Forbes.com. http://blogs.forbes.com/streettalk/2010/04/26/blankfein-sec-case-filing-one-of-the-worst-
days-in-my-professional-life/, accessed January 7, 2014.
Paulson says role in Goldman CDO was “appropriate.” (April, 21 2010).
http://www.bloomberg.com/news/2010-04-21/paulson-co-tells-investors-its-role-in-goldman-cdo-was-
appropriate-.html, accessed January 7, 2014.
Swanson, Jann. (October 22, 2008). Rating agencies hit for role in financial crisis. Mortgage News Daily.
http://www.mortgagenewsdaily.com/10232008_Ratings_Agencies_.asp, accessed January 7, 2014.
U.S. Securities and Exchange Commission (SEC). (April 16, 2010). SEC charges Goldman Sachs with fraud
in structuring and marketing of CDO tied to subprime mortgages. SEC.gov.
http://www.sec.gov/news/press/2010/2010-59.html, accessed February 4, 2011.
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http://money.cnn.com/2010/04/16/news/companies/sec.goldman.fortune/index.htm

http://www.newsweek.com/2010/05/05/fabrice-tourre-s-new-street-cred.html

http://www.cbsnews.com/stories/2010/04/27/business/main6436951.shtml

http://www.washingtonpost.com/wp-dyn/content/article/2010/04/23/AR2010042305223.html

http://www2.goldmansachs.com/our-firm/on-the-issues/sec-settlement.html

http://www.businessweek.com/news/2010-07-16/goldman-sachs-victory-ushers-change-for-wall-street.html

http://blogs.forbes.com/streettalk/2010/04/26/blankfein-sec-case-filing-one-of-the-worst-days-in-my-professional-life/

http://www.bloomberg.com/news/2010-04-21/paulson-co-tells-investors-its-role-in-goldman-cdo-was-appropriate-.html

http://www.mortgagenewsdaily.com/10232008_Ratings_Agencies_.asp

http://www.sec.gov/news/press/2010/2010-59.html

Case 11
Google Books
In October 2008, a broad class of authors and publishers, the Authors Guild, the Association of American
Publishers, and Google announced a settlement agreement that will unlock access to millions of out-of-
print books in the U.S. and give authors and publishers new ways to distribute and control access to their
works online. If approved by the Court, the settlement will:
• Generate greater exposure for millions of in-copyright, out-of-print books, by enabling students, scholars,
and readers to search, preview, and purchase online access to these works;
• Open new opportunities for authors and publishers to sell their copyrighted works and to maintain
ongoing control over the ways those books can be displayed;
• Create an independent, not-for-profit Book Rights Registry that will locate and represent rightsholders,
making it easier for everyone, including Google’s competitors, to license works;
• Offer a means for U.S. colleges, universities, and other organizations to obtain subscriptions for online
access to collections from some of the world’s most renowned libraries;
• Provide free, full-text, online viewing of millions of out-of-print books at designated computers in U.S.
public and university libraries; and
• Enable unprecedented access to the written literary record for people who are visually impaired.
The above settlement agreement continues to be controversial even after the revision. The Court denied the
request for final settlement approval on March 22, 2011. The case then pinged back onto the desk of judge
Denny Chin, who, to consider fair use, will have to look at issues such as the “purpose and character” of the
copying.
Google has become synonymous with a new wave of companies seeking to become the leaders in their
industries and make an impact on the world through creativity, social responsibility, and ethical behavior.
Google began in 1996 as BackRub, a search engine project created by two Stanford Computer Science
graduate students, Larry Page and Sergey Brin. Google has since built such strong brand recognition that it is
now listed in the Oxford English Dictionary as a verb commonly used in everyday language. The company is
known for its mission “to organize the world’s information and make it universally accessible and useful.”
Google has created many tools and applications that have revolutionized how people use the Internet and
access information. Google is now a leading search engine and major player in the advertising industry, with
keyword advertising being the primary source of revenue and market capitalization.
Birth of Google Books
In 2003, Google began its development of Google Books, an online index of millions of books that can be
previewed or read for free. The Google Print program, which later became Google Book Search (Google
Books) began in December 2003 as an “experimental program that indexes excerpts of popular books,
blending the content from these works into regular Google search results.” At this point in time, Amazon was
already offering a service called “Search Inside the Book,” which provided customers with screenshots of
various pages of books, in some cases making the full text of a book available online. Initially, the Google
Books project made only very brief excerpts available from search results. These short excerpts usually
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included only author biographies, jacket reviews, the inside jacket, or the book’s introduction. Included along
with the brief excerpts were links to purchase the book at Amazon, Barnes and Noble, and Books-A-Million.
Booksellers did not have to pay for these links, nor did Google seem to benefit from any purchases resulting
from these links. Google worked in partnership with various prominent publishing houses, such as Dell,
Knopf, Random House, and Fodor’s on this project and showed interest in “working with rights holders who
own or control a ‘substantial’ amount of content for inclusion in the Google Print program.”
In December 2004, the Google Print program partnered with the libraries of Harvard, Stanford, University
of Michigan, Oxford, and the New York Public Library and began scanning books. In Google’s
announcement of this partnership, cofounder Larry Page explained that “Even before we started Google, we
dreamed of making the incredible breadth of information that librarians so lovingly organize searchable
online.” This partnership and the digitizing of books was to be integrated with the Google index to make it
searchable for users worldwide, “increas[ing] the visibility of in and out of print books . . . mak[ing] it possible
to search across library collections including out of print books and titles that weren’t previously available
anywhere but on a library shelf . . . and generat[ing] book sales via ‘Buy this Book’ links and advertising.”
Google Scholar
In May 2005, Google added “institutional access” to their Google Scholar program (the beta version was
launched in October 2004), which allowed students and other researchers to “locate journal articles within
their own libraries.” Students and researchers were now provided an opportunity to “discover relevant
information so they can build on the work of others and ‘stand on the shoulders of giants.’”
Also in 2005, Google showed its support for writers and produced the first Mountain View book event
with Malcolm Gladwell, author of Blink and The Tipping Point. This began the Authors@Google program,
which has hosted more than 480 authors in 12 offices across the United States, Europe, and India.
Legal Implications
On September 20, 2005, the Author’s Guild, Inc. and certain named individual authors brought a class-action
suit against Google for copyright infringement by scanning library books and intending to use the scanned
works on the Google web site without prior authorization from the authors/copyright owners. A month later,
a group of publishers brought a similar suit, alleging that Google had refused to obtain prior authorization
from publishers for its Library Project, relying instead on the doctrine of “fair use.” Google answered the
publishers’ complaint in 2005 and an amended class-action complaint in mid-2006, asserting affirmative
defenses of the First Amendment of the United States Constitution (free speech) and “one or more of the
exceptions to 17 U.S.C. § 106 [the exclusive copyright rights, including reproduction and public display,
allegedly infringed] set forth at 17 U.S.C. §§ 107-122 [including “fair use,” archival use and library use].” The
“fair use” exception is set forth as follows:
§ 107. Limitations on exclusive rights: Fair use
Notwithstanding the provisions of sections 106 and 106A, the fair use of a copyrighted work, including such use by reproduction in copies or
phono-records or by any other means specified by that section, for purposes such as criticism, comment, news reporting, teaching (including
multiple copies for classroom use), scholarship, or research, is not an infringement of copyright. In determining whether the use made of a
work in any particular case is a fair use the factors to be considered shall include—(1) the purpose and character of the use, including
whether such use is of a commercial nature or is for nonprofit educational purposes; (2) the nature of the copyrighted work; (3) the amount
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and substantiality of the portion used in relation to the copyrighted work as a whole; and (4) the effect of the use upon the potential market
for or value of the copyrighted work.
The fact that a work is unpublished shall not itself bar a finding of fair use if such finding is made upon
consideration of all the above factors.
Because the entire book was scanned, factor (3) weighed against Google, who argued that only portions
were made available for a particular search (see next section) and that its use was “transformative”—it didn’t
serve the same purpose as the copyrighted work relative to factor (1), and the effect of the search use actually
promoted the market for the full copyrighted works, particularly out-of-print or obscure works under factor
(4), nothwithstanding Google’s commercial benefit through advertising under factor (1).
In August 2006, 100 libraries on 10 campuses of the University of California joined the Google Books
Library Project and Google’s Book Search began to offer free PDF downloads of books in the public domain.
Google Books was able to offer its readers the ability to download and read PDF versions of out-of-copyright
books. In the announcement of the new partnership, Google noted, “we do not enable downloading of any
book currently under copyright. Unless we have the publisher’s permission to show more, we display only
small snippets of text—at most, two or three sentences surrounding your search term—to help you determine
if you’ve found what you’re looking for.”
Google Patent Search
In December 2006, Google released Google Patent Search, which uses the same technology as Google Books
Search. Utilizing the United States Patent and Trademark Office (USPTO), Google Patent Search searches
patents issued in the United States that are public-domain government information, and images of the entire
database of U.S. patents readily available online via the USPTO web site.
The Legal Battle Continues
As a public debate over Google’s fair use continued, the Google Books class action went through further
proceedings. “In October 2008, Google announced a settlement agreement with a broad class of authors and
publishers to make the world’s books even more accessible online. If approved, the agreement will help readers
access millions of hard-to-find, out-of-print books; it will provide new opportunities for authors and
publishers to sell their works; and it will further the efforts of our library partners to preserve and maintain
their collections while making books more accessible for people on their home computers, in their academic
institutions, and in public libraries across the U.S.”
The settlement provided a Registry overseeing copyrighted works for which payments would be made by
Google for distribution to copyright holders and that works would be automatically included, unless the
copyright holders expressly opted out. Since that time, hundreds of letters and formal objections have been
filed with the court from authors and publishers who opted out. Many of these also objected to the control
Google had over copyrighted works through the operation of the Registry. Although preliminarily approved, a
fairness hearing for final approval of the settlement agreement was delayed.
In December 2008, Google expanded Google Book Search to include magazine articles by partnering with
different publishers. This partnership gave access to the archives of magazines that were otherwise inaccessible
to readers.
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“On November 13, 2009, the parties to the settlement filed an amended agreement with the U.S. District
Court for the Southern District of New York. Over the last several months, we have been carefully reviewing
the submissions filed with the Court, including that of the Department of Justice. The changes made to the
settlement were developed to address many of these concerns, while preserving the core benefits of the
agreement.”
The amended agreement created an “Unclaimed Works Fiduciary” to address the interests of those who
had not yet claimed their works, and otherwise provided for negotiation of revenue splits. The court
preliminarily approved the agreement on November 19, 2009, and a fairness hearing was scheduled for
February 18, 2010. The U.S. Department of Justice filed an objection, stating in a press release that “the
changes do not fully resolve the United States’ concerns. The . . . amended settlement agreement still confers
significant and possibly anticompetitive advantages on Google as a single entity, thereby enabling the
company to be the only competitor in the digital marketplace with the rights to distribute and otherwise
exploit a vast array of works in multiple formats.”
The Appeal Court ruling is a very strong signal to Judge Denny Chin that fair use does indeed apply. “We
believe that the resolution of Google’s fair use defense in the first instance will necessarily inform and perhaps
moot our analysis of many class certification issues, including those regarding the commonality of plaintiffs’
injuries, the typicality of their claims, and the predominance of common questions of law or fact,” the ruling
reads. As has been noted with regard to the “fair use” policy, “Google has been scanning all sorts of books and
publishing them in the popular Google Books service. Books that are out of copyright are available in their
entirety while books that are probably protected by copyright laws may be searched but only small snippets of
the text are displayed to the user.”
Judge Barrington D. Parker cited the “enormous societal benefit” that would result when someone at home
in Muncie, Indiana, accessed books that otherwise would require a trip to a distant library. The judge also
referred to the “logic of the thing” as he described how an academic author eager to get a treatise read by other
researchers might welcome Google copying the work rather than collecting “a few dollars in damages because
Google put it in their database.”
The Authors Guild is seeking $750 in damages for each copyrighted book Google copied, which would
cost Google more than $3 billion, Google attorney Seth Waxman said. The Authors Guild argues Google is
not making “fair use” of copyrighted material by offering snippets of works. Google has defended its library,
saying it is fully compliant with copyright law.
Google as a Stakeholder
Google’s mission is altruistic by nature. The company handles its internal organization and employees by
using an environment of trust in employees and their work ethic. Google achieves its well-known creative and
casual workplace environment through an emphasis on “team achievements and pride in individual
accomplishments that contribute to our overall success . . . put[ting] great stock in our employees–energetic,
passionate people from diverse backgrounds with creative approaches to work, play and life.” Fostering
creativity in their employees has been a key attribute of Google and has truly set them apart from other
companies. It has also brought about many innovative projects that Google and the greater world has been
beneficiary to. Google makes a great priority of documenting these company ideals that align with their
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mission and references these ideals in all of their projects.
The way that Google has chosen to interpret and reinterpret its famous mission has been the center of
much debate, not only in regard to Google Books but also its relationship with China. When Google first
announced that it would be entering China, many of its historically largest supporters rallied to protest this
expansion, citing that if the company entered China, it would be going against its mission because of the
Chinese government’s history of controlling what information citizens were allowed to access. Google chose
to interpret its mission more broadly and argued that it was bringing information to a population that
deserved search capabilities, notwithstanding some censorship. In recent months, Google has unfortunately
struggled in China.
Among the stakeholders in this case are Google’s employees, partners, clients/advertisers, and product
developers. The public shareholders—who are interested in higher share prices and possible dividends—may
support Google Books and the settlement if it is likely to increase profits, without regard (necessarily) to
Google’s stated mission. Other stakeholders (with regard to the Google Books project) are the Authors Guild,
their authors, publishers, libraries, schools and universities, their professors, current students, prospective
students, alumni, newspapers, magazines, bloggers, independent writers, journalists and researchers, various
advocacy groups, various law/research communities (which include the intellectual property community etc.),
and Google’s competitors, which include Amazon, Apple, and Microsoft. The other stakeholders that are in
the broader reach are the U.S. government, various trade-industry groups, the print industry, international
governments, and other farreaching users.
Conclusion
Google programs like Google Books, Google Scholar, and Google Patent Search have the potential to serve
as an invaluable resource by compiling and indexing research and works from countries across the globe. The
compiling process, however, presents several ethical dilemmas—particularly regarding the ownership of works
scanned and compiled. This has already been seen through lawsuits like the class-action suit brought by
authors, publishers, the Authors Guild, and the Association of American Publishers, which resulted in the
October 2008 settlement. The settlement has since fallen through and the class-action lawsuit was restarted
by the Authors Guild in December 2011. The Authors Guild is demanding that Google pay authors for
works scanned without permission. “Jim Pitkow, who sold a Web-search company to Google in 2001, said
‘Google has probably spent hundreds of millions of dollars scanning books and that has not been legitimized.’”
A new survey has shown, however, that authors are benefiting from their works being posted on Google
Books and that the site makes works easier to find.
Google is working to address copyright and domain issues in order to make its index available to worldwide
Internet searches and finally settle the long-standing battle with the Authors Guild.
Many issues are at stake for these various stakeholders and each of their perspectives could prove to have
various impacts and meanings for Google. The most prominent viewpoint that has been at the heart of the
debate is that of the authors, writers, and creators of the works that are being scanned and made available on
Google Books. As statements on Google Books indicate, these stakeholders are made up of “supportive,”
“non-supportive,” and “mixed blessing” stakeholders, as discussed in Chapter 2. Some authors, particularly
lesser-known and poorly published ones, welcome the accessibility of their works to the public because of the
257

Google indexing and search capabilities—these are like the lesser-known musicians unrepresented by record
labels with their marketing power who welcomed file-sharing. Popular authors and publishers—like many
popular musicians and the record labels—may find their work pirated in perfect and costless digital copies,
directly diminishing the rewards for their efforts. Other stakeholders, including some authors, Google
competitors along its lengthy vertical chain, and the U.S. Department of Justice, are concerned about the
power Google holds in controlling the Registry established in the settlement and amended settlement.
At the heart of authors’ claims is copyright. In the United States, the Constitution, article I, section 8,
clause 8, provides for the power of Congress “To promote the Progress of Science and useful Arts, by securing
for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.”
Those who favor a limitation of authors’ rights to restrict dissemination of their works often refer to this
constitutional quid pro quo, arguing that copyright should support society’s progress by limited incentives,
which are secondary to the greater good. Of course, the same argument that supports Google’s seeking a
profit for providing digital means of dissemination of knowledge supports an author’s seeking a profit for
providing content to be disseminated.
Congress codified at 17 U.S.C. § 107, set out above, four factors to be assessed in determining a fair use
exemption from copyright claims. This means that you can copy small parts for use in other works (such as a
paper) as long as this was not for profit or would not affect the market for the copyrighted work. It also allows
“transformative uses,” such as the “Hairy Woman” parody of “Pretty Woman” by 2 Live Crew. Also, archiving
(digitizing) of your own copies of books—for example, a library photocopying its decaying manuscripts—is
specifically provided in law.
In the original Google Books project, university libraries were being archived, availing of the archive
exception to copyright. As mentioned above, Google also defended the copyright infringement actions on the
basis of the fair use of displaying snippets of a copyrighted work as results for keyword searches, arguing that
this was a transformative use.
As mentioned, the early fear was the costless digital dissemination of copyrighted works, as exemplified by
the digitization (MP3) and costless copying of music popularized first by Napster file-sharing. In an earlier,
analog world, in the Betamax case, the Supreme Court found that damage to the market for copyrighted
television programs by videotape recording for “time-shifting” was speculative, so such recording was fair use,
which led to the development of the videotape industry. But videotapes could not be copied over and over
again without degrading—unlike the perfect copies of digital music.
The debate, however, has now focused on the control of the distribution by Google. The question is
control of pricing. In the one prominent digital music distribution scheme that has resulted in steady
revenues, Apple’s iTunes, Apple controls distribution by routinely updating its security code and by charging a
single rate ($0.99) for a song, popular or unpopular. As expected, musicians (or more often, their recording
labels) who are in greater demand complain that their songs should command higher prices (and royalties to
them). Interestingly, Amazon followed a similar pricing strategy in its standard $9.99 for Kindle downloads,
but is now challenged by Apple, who has attracted publishers by going to $19.99 for iPad downloads. Amazon
has been forced to be more flexible in its prices. Is freer flow of information promoted by lower, standard
prices for books established by distributors such as Google, Amazon (contesting Google) and Apple
258

(contesting Amazon)? Or do the in-demand content providers have the better argument that they should
command higher prices?
The letter of the copyright law of fair use is not clearly determinative. Courts are moved by policy
considerations and ethical concepts. Thus, the Betamax case turned in part because Fred Rogers testified at
the trial court that he wanted children to be able to watch his program by time-shifting; that is, recording for
later viewing.
Google did not go all the way to try its fair-use defense, but settled on a revenue splitting scheme that
promises to help lesser-known authors to reap royalties. Whether the better-known authors and their
publishers succeed in wresting control may depend on how well they assess the market at double the Amazon
price.
In conclusion, Google’s attempt to maintain its altruist mission, “to organize the world’s information and
make it universally accessible and useful,” as supported by its need for revenues to support this effort, is
aligned with some authors (lesser-known authors in need of exposure) and with its investors (on the revenue
side), but it still conflicts with the claims to incentives by better-known authors and their publishers. In
addition, Google’s control of the Registry in the settlement is perceived by many (their competitors, the U.S.,
and international governments) as a threat to competition in the marketplace. While Google settled with
some of the “non-supportive” stakeholders, they have yet to satisfy other authors who are still fearful that their
work will be undervalued and pirated.
There is a moral tension between the “public good” rationale of the U.S. Constitution incentive to authors
and a natural right that authors feel exists regardless of the aforementioned public good. In Europe, many
have been rallying to fight the Google Books project, as they believe in authors’ natural rights and “moral
rights” to their creations. To maintain the integrity and control of one’s creation is a principle shared by many
and is itself thought of as the ultimate public good.
Questions for Discussion
1. In your opinion, should Google be allowed to copy books and post them online without the explicit
knowledge and/or permission of the authors? Why or why not?
2. What control should authors have over the access to their works online?
3. If you were Google, would you have asked for permission prior to posting books or posted them and then
asked for forgiveness when necessary? Explain. How does this reflect your personal ethics?
4. Do you think Google’s strong brand recognition and size allows it to get away with more than other
companies or individuals? Why or why not?
5. Is the Google Books idea fundamentally wrong? Why or why not? What potential benefits does it have to
society?
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62. Ibid.
63. Volcker, P., and A. Levitt, Jr. (June 14, 2004). In defense of Sarbanes-Oxley. Wall Street Journal, A16.
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68. Volcker and Levitt, op. cit.
69. Ibid.
70. Ibid.
71. Ibid.
72. Ibid.
73. United States Sentencing Commission. (January 2003). Increased penalties under the Sarbanes-Oxley
Act of 2002.
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sentencing guidelines for organizations. DII Signatory Workshop/Best Practices Forum.
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5
CORPORATE RESPONSIBILITIES, CONSUMER
STAKEHOLDERS, AND THE ENVIRONMENT
5.1 Corporate Responsibility toward Consumer Stakeholders
5.2 Corporate Responsibility in Advertising
Ethical Insight 5.1
5.3 Controversial Issues in Advertising: The Internet, Children, Tobacco, and Alcohol
Ethical Insight 5.2
5.4 Managing Product Safety and Liability Responsibly
Ethical Insight 5.3
5.5 Corporate Responsibility and the Environment
Chapter Summary
Questions
Exercises
Real-Time Ethical Dilemma
Cases
12. For-Profit Universities: Opportunities, Issues, and Promises
13. Fracking: Drilling for Disaster?
14. Neuromarketing
15. WalMart: Challenges with Gender Discrimination
16. Vioxx, Dodge Ball: Did Merck Try to Avoid the Truth?
Notes
OPENING CASE
U.S. health care spending related to obesity in 2013 was $190 billion. The newly released United Nations
(UN) report on global nutrition does not make for very uplifting reading: amid an already floundering global
economy, the reality of a fattening planet is dragging down world productivity rates, while increasing health
insurance costs to the tune of $3.5 trillion per year—or 5% of global gross domestic product (GDP).1 Obesity
in the workforce leads to expensive health care, interruptions in productivity, and days absent from work.
Obesity and overall weight gain in the American population changed from a problem to a crisis when it was
made an issue of public concern by the Food and Drug Administration (FDA) and the National Center for
Health Statistics (NCHS). A survey conducted from 2007–2009 indicated that 34.4% of the U.S. adult
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population was overweight or obese.2 An even more striking statistic is found in the weight increase
experienced by children and adolescents in the United States. Current research estimates that 17% of children
and adolescents (12.5 million children), ages 2 to 19, are overweight or obese. Higher prevalences of adult
obesity were found in the Midwest (29.5%) and the South (29.4%). Lower prevalences were observed in the
Northeast (25.3%) and the West (25.1 %).3 Carrying excess weight causes an increased risk for medical
conditions, including coronary heart disease, stroke, hypertension, sleep apnea, and some forms of cancer. The
rise in obesity comes despite efforts by First Lady Michelle Obama to promote healthy eating, and New York
mayor Michael Bloomberg’s size restriction on sugary drinks. The problem has become so profound that the
U.S. Health and Human Services Department actually declared obesity a disease affecting the population in
2004. On June 18, 2013, the nation’s largest physicians’ group classified obesity as a medical “disease,” despite
the recommendations of a committee of experts who studied the issue for a year.4
In a 2006 survey of 1,000 households, conducted for Medicine & Law Weekly, results showed that 51% of
the households would like to see fast food restaurants under the regulation of the government, while only 37%
were opposed to such an action.5 Consumers are suggesting that they are looking for more regulations to be
placed on the fast food industry to provide them with a wider variety of healthier meal options.
Another reason cited for the overall increase in overweight and obese individuals in the United States is the
ease of selecting calorie-packed foods and the high cost associated with eating healthy. The Centers for
Disease Control and Prevention has pointed out that the availability of foods that are high in fat, sugar, and
calories has made it increasingly more convenient for consumers to select those foods.6 Availability is not the
only factor at play. A downward trend in the cost of calories, combined with a downward trend in physical
exertion at work, has also contributed significantly to the rise in obesity.7
Fast food chains have reacted to consumers’ demand for healthier menus by making changes to their
menus and marketing strategies. McDonald’s has a new “Go Active” campaign, featuring new, healthy menu
items, such as salads topped with chicken and a new fruit and walnut salad. Many of these changes have been
targeted at children’s nutrition. The “What’s Hot in 2012” survey from the National Restaurant Association
revealed the top-10 menu trends for 2012:
1. Locally sourced meats and seafood.
2. Locally grown produce.
3. Healthful kids’ meals.
4. Hyper-local items.
5. Sustainability as a culinary theme.
6. Children’s nutrition as a culinary theme.
7. Gluten-free/food allergy-conscious items.
8. Locally produced wine and beer.
9. Sustainable seafood.
10. Whole-grain items in kids’ meals.
A report from the Yale University Rudd Center for Food Policy and Obesity noted that approximately
84% of parents with children aged 2 to 11 took their families to a fast food restaurant weekly. Although fast
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food restaurants are reevaluating their menus to include more healthful options for children, the study showed
that of 3,039 kids’ meal combinations possible, only 12 met the nutritional criteria for preschool-age children
and only 15 met the criteria for older children.8 Subway leveraged the story of Jared Fogle, the Indiana
University student who once weighed 425 pounds. By making Subway’s healthy sandwiches a part of his daily
diet, and combining them with regular exercise, Fogle was able to lose 245 pounds in a year. On March 25,
2013, a leaked internal memo showed that McDonald’s believed it would lose 22% of its 18–34-year-old
customers to what’s perceived as the healthier option, sandwich chain Subway, without adding the “wrap”
onto its menu.9
The FDA has also joined the fight against obesity by initiating programs to “count calories.” Its goals
include pressuring fast food companies to provide more detailed and accurate information about nutrition
content to their diners as well as educating consumers. With the partnership between the fast food chains and
the FDA, consumers stand to be better informed about their options to become and remain healthy.
Restaurants and company web sites now provide consumers with nutritional information for menu items.
Restaurants have teamed up with nutritionists who can offer helpful suggestions. When presented with
healthier options, it’s in the hands of consumers to make the right choices to improve their health.
5.1 Corporate Responsibility toward Consumer Stakeholders
As the largest national economy in the world, the United States produced $16.2 trillion worth of goods and
services (GDP) in 2012. China’s growing economy earned it the second place slot, with a GDP of 8.2 trillion
in 2012.10 Consumer spending in the United States accounts for about two-thirds of total economic activity.
Consumers may be the most important stakeholders of a business. If consumers do not buy, commercial
businesses cease to exist. The late management guru Peter Drucker stated that the one true purpose of
business is to create a customer.11 Consumer confidence and spending are also important indicators of
economic activity and business prosperity. Consumer interests should be foremost when businesses are
designing, delivering, and servicing products. Unfortunately, this often is not the case. As this chapter’s
opening case shows, giving customers what they want may not be what they need; also, not all products are
planned, produced, and delivered with consumers’ best health or safety interests in mind. Many companies
have manufactured or distributed unreliable products, placing consumers at risk. The effects (and side effects)
of some products have been life-threatening, and have even led to deaths, with classic cases being the alleged
effects of the Merck drug Vioxx, the Bridgestone/Firestone tires on the Ford Explorer, tobacco products and
cigarettes that contain nicotine, the Ford Pinto, lead-painted toys, and numerous other examples. At the same
time, the majority of products distributed in the United States are safe, and people could not live the lifestyles
they choose without products and services. What, then, is the responsibility of corporations toward consumer
stakeholders?
Corporate Responsibilities and Consumer Rights
Two landmark books that inspired the consumer protection movement in the United States were Upton
Sinclair’s The Jungle (1906), which exposed the unsafe conditions at a meat-packing facility, and Ralph
Nader’s Unsafe at Any Speed (1965), which created a social expectation regarding safety in automobiles. Then
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Fast Food Nation: The Dark Side of the All-American Meal (2001) by Eric Schlosser, followed by The Carnivore’s
Dilemma (2008) by Tristram Stuart and Robert Kenner’s 2008 documentary Food, Inc., investigated the
nature, source, production and distribution of food in the United States in particular. George Ritzer’s The
McDonaldization of Society (2011) drew attention to the pervasive influence of fast food restaurants on
different sectors of American society, as well as on the rest of the world. In providing “bigger, better, faster”
service and questionable food products, McDonald’s has been the leader in creating—or reinforcing—a
lifestyle change that, as the opening case shows, contributes to obesity. Morgan Spurlock’s 2004 documentary,
Super Size Me, also explored the fast food industry’s corporate influence and encouragement of poor nutrition
for profit.
As Steven Fink’s issues evolution framework in Chapter 3 illustrated, a “felt need” arises from books,
movies, events, and advocacy groups, and builds to “media coverage.” This then evolves into interest group
momentum, from which stakeholders develop policies and later legislation at the local, state, and federal
levels. This same process has occurred and continues to occur with consumer rights. The books and
documentaries mentioned here have contributed to articulating and mobilizing the issues of obesity, unsafe
cars, and quality of life to the public.
The following universal policies were adopted in 1985 by the UN General Assembly to provide a
framework for strengthening national consumer protection policies around the world. Consider which policies
apply to you as a consumer:
1. The right to safety: to be protected against products, production processes, and services which are hazardous
to health or life.
2. The right to be informed: To be given facts needed to make an informed choice, and to be protected against
dishonest or misleading advertising and labeling.
3. The right to choose: to be able to select from a range of products and services, offered at competitive prices,
with an assurance of satisfactory quality.
4. The right to be heard: to have consumer interests represented in the making and execution of government
policy, and in the development of products and services.
5. The right to satisfaction of basic needs: to have access to basic essential goods and services, adequate food,
clothing, shelter, health care, education and sanitation.
6. The right to redress: to receive a fair settlement of just claims, including compensation for misrepresentation,
shoddy goods or unsatisfactory services.
7. The right to consumer education: to acquire knowledge and skills needed to make informed, confident choices
about goods and services while being aware of basic consumer rights and responsibilities and how to act on
them.
8. The right to a healthy environment: to live and work in an environment which is nonthreatening to the well-
being of present and future generations.12
From an ethical perspective, corporations have certain responsibilities and duties toward their customers
and consumers in society:
• The duty to inform consumers truthfully and fully of a product or service’s content, purpose, and use.
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• The duty not to misrepresent or withhold information about a product or service that would hinder
consumers’ free choice.
• The duty not to force or take undue advantage of consumer buying and product selection through fear or
stress or by other means that constrain rational choice.
• The duty to take “due care” to prevent any foreseeable injuries or mishaps a product (in its design and
production or in its use) may inflict on consumers.13
Although these responsibilities seem reasonable, there are several problems with the last responsibility,
known as “due care” theory. First, there is no straightforward method for determining when “due care” has
been given. What should a firm do to ensure the safety of its products? How far should it go? A utilitarian
principle has been suggested, but problems arise when use of this method adds costs to products. Also, what
health risks should be measured and how? How serious must an injury be? The second problem is that “due
care” theory assumes that a manufacturer can know its products’ risks before injuries occur. Certainly, testing
is done for most high-risk products; but for most products, use generally determines product defects. Who
pays the costs for injuries resulting from product defects unknown beforehand by consumer and manufacturer?
Should the manufacturer be the party that determines what is safe and unsafe for consumers? Or is this a form
of paternalism? In a free market (or at least a mixed economy), who should determine what products will be
used at what cost and risk?14
Related to the rights presented above, consumers also have in their implied social contract with
corporations (discussed in Chapter 4) the following rights:
• The right to safety: to be protected from harmful commodities.
• The right to free and rational choice: to be able to select between alternative products.
• The right to know: to have easy access to truthful information that can help in product selection.
• The right to be heard: to have available a party who will acknowledge and act on reliable complaints
about injustices regarding products and business transactions.
• The right to be compensated: to have a means to receive compensation for harm done to a person
because of faulty products or for damage done in the business transaction.15
These rights are also constrained by free-market principles and conditions. For example, “products must
be as represented: Producers must live up to the terms of the sales agreement; and advertising and other
information about products must not be deceptive. Except for these restrictions, however, producers are free,
according to free-market theory, to operate pretty much as they please.”16
“Buyer Beware” and “Seller Take Care”
The age-old principle of “let the buyer beware” plays well according to free-market theory, because this
doctrine underlies the topic of corporate responsibility in advertising, product safety, and liability. In the
1900s, the concept of “let the seller take care” placed responsibility of product safety on corporations17 (which
we discuss later in this chapter under product liability). Several scholars argue that Adam Smith’s “invisible
hand” view is not completely oriented toward stockholders.
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Consumer Protection Agencies and Law
Because of imperfect markets and market failures, consumers are protected to some extent by federal and state
laws in the United States. Five goals of government policymakers toward consumers are:
1. Providing consumers with reliable information about purchases.
2. Providing legislation to protect consumers against hazardous products.
3. Providing laws to encourage competitive pricing.
4. Providing laws to promote consumer choice.
5. Protecting consumers’ privacy.18
Some of the most notable U.S. consumer protection agencies include:
1. The Federal Trade Commission (FTC): deals with online privacy, deceptive trade practices, and competitive
pricing.
2. The Food and Drug Administration (FDA): regulates and enforces the safety of drugs, foods, and food
additives, and sets standards for toxic chemical research.
3. The National Highway Traffic Safety Administration (NHTSA): deals with motor vehicle safety standards.
4. The National Transportation Safety Board (NTSB): handles airline safety.
5. The Consumer Product Safety Commission (CPSC): sets and enforces safety standards for consumer products.
6. The Department of Justice (DOJ): enforces consumer civil rights and fair competition.
Governmental and international agencies also work to protect consumers’ legal rights. The Consumer
World web site (http://www.consumerworld.org/pages/agencies.htm) has an extensive list of consumer
protection agencies that includes the United States and international countries, including India, Hong Kong,
Korea, Mexico, Canada, and Estonia, as well as other European countries. The strategic vision of the EU
consumer policy “aims to maximise consumer participation and trust in the market. Built around four main
objectives the European Consumer Agenda aims to increase confidence by: reinforcing consumer safety;
enhancing knowledge; stepping up enforcement and securing redress; aligning consumer rights and policies to
changes in society and in the economy.”19
5.2 Corporate Responsibility in Advertising
Advertising is big business. Direct marketing advertising was 54.3% of the total advertising spending in 2009,
while 2010 total direct marketing spending was estimated at $153.3 billion.20 Figure 5.1 shows ad dollars
spent by the industry in 4th quarter 2012 over 2011, according to Nielsen.
The extent to which advertising is effective is debatable, but because consumers are so frequently exposed
to ads, it is an important topic of study in business ethics. The purpose of advertising is to inform customers
about products and services and to persuade them to purchase them. Deceptive advertising is against the law.
A corporation’s ethical responsibility in advertising is to inform and persuade consumer stakeholders in ways
that are not deceitful. This does not always happen, as the tobacco, diet, and fast food industries, for example,
have shown.
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Figure 5.1
Ad Dollars Spent by Selected Industry and Percentage Change Fourth Quarter 2012 over Fourth
Quarter 2011
Source: Adapted from Nielsen. (March 14, 2013). U.S. ad spend increased 2% in 2012 on strong Q3. Nielsen.com.
http://www.nielsen.com/us/en/newswire/2013/u-s–ad-spend-increased-2–in-2012-on-strong-3q.html.
Ethics and Advertising
At issue, legally and ethically for consumers, is whether advertising is deceptive and creates or contributes to
creating harm to consumers. Although advertising is supposed to provide information to consumers, a major
aim is to sell products and services. As part of a selling process, both buyer and seller are involved. As
discussed earlier, “buyer beware” imparts some responsibility to the buyer for believing and being susceptible
to ads. Ethical issues arise whenever corporations target ads in manipulative, untruthful, subliminal, and
coercive ways to vulnerable buyers such as children and minorities. Also, inserting harmful chemicals into
products without informing the buyer is deceptive advertising. The tobacco industry’s use of nicotine and
addictive ingredients in cigarettes was deceptive advertising.
The American Association of Advertising (AAA) has a code of ethics that helps organizations monitor
their ads. The code cautions against false, distorted, misleading, and exaggerated claims and statements, as
well as pictures that are offensive to the public and minority groups. The following questions can be used by
both advertising corporations and consumers to gauge the ethics of ads:
1. Is the consumer being treated as a means to an end or as an end? And what and whose end?
2. Whose rights are being protected or violated intentionally and inadvertently? And at what and whose costs?
3. Are consumers being justly and fairly treated?
4. Are the public welfare and the common good taken into consideration for the effects as well as the
intention of advertisements?
5. Has anyone been or will anyone be harmed from using this product or service?
The Federal Trade Commission and Advertising
The Federal Trade Commission (FTC) and the Department of Labor (DOL) are the federal agencies in the
United States appointed and funded to monitor and eliminate false and misleading advertising when
corporate self-regulation is not used or fails. Following is a sample of the FTC’s guidelines:
The FTC Act allows the FTC to act in the interest of all consumers to prevent deceptive and unfair practices. In interpreting Section 5 of
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the act, the Commission has determined that a representation, omission or practice is deceptive if it is likely to:
• mislead consumers
• affect consumers’ behavior or decisions about the product or service
In addition, an act or practice is unfair if the injury it causes, or is likely to cause, is:
• substantial
• not outweighed by other benefits
• reasonably avoidable
The FTC Act prohibits unfair or deceptive advertising in any medium. A claim can be misleading if
relevant information is left out or if the claim implies something that’s not true. For example, a lease
advertisement for an automobile that promotes “$0 Down” may be misleading if significant and undisclosed
charges are due at lease signing. In addition, claims must be substantiated, especially when they concern
health, safety, or performance. The type of evidence may depend on the product, the claims, and what experts
believe is necessary. If your ad specifies a certain level of support for a claim (e.g., “tests show X”), you must
have at least that level of support.
Sellers are responsible for claims they make about their products and services. Third parties—such as
advertising agencies or web site designers and catalog marketers—also may be liable for making or
disseminating deceptive representations if they participate in the preparation or distribution of the advertising
or know about the deceptive claims.21
Pros and Cons of Advertising
Advertising is part of doing business, and not all advertising is deceptive or harmful to consumers. The
arguments, both for and against advertising, raise awareness that provides information to both companies and
consumers in their production and consumption of information and transactions. General ethical arguments
for and against advertising are summarized below.
Ethical Insight 5.1
Signs of an Advance-Fee Loan Scam: “Red Flags” from the FTC
• A lender who isn’t interested in your credit history. A lender who doesn’t care about your credit
record should give you cause for concern. Ads that say “Bad credit? No problem” or “We don’t care
about your past. You deserve a loan” or “Get money fast,” or even “No hassle—guaranteed” often
indicate a scam.
• Fees that are not disclosed clearly or prominently. Any up-front fee that the lender wants to collect
before granting the loan is a cue to walk away, especially if you’re told it’s for “insurance,”
“processing,” or just “paperwork.” Legitimate lenders often charge application, appraisal, or credit
report fees. It’s also a warning sign if a lender says they won’t check your credit history, yet asks for
your personal information, such as your Social Security number or bank account number.
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• A loan that is offered by phone. It is illegal for companies doing business in the United States by
phone to promise you a loan and ask you to pay for it before they deliver.
• A lender who uses a copy-cat or wannabe name. Crooks give their companies names that sound like
well-known or respected organizations and create web sites that look slick.
• A lender who is not registered in your state. Lenders and loan brokers are required to register in the
states where they do business. To check registration, call your state attorney general’s office or your
state’s Department of Banking or Financial Regulation.
Source: Federal Trade Commission. (2012). Consumer Information, Advance-Fee Loans. http://www.consumer.ftc.gov/articles/0078-advance-
fee-loans.
Arguments for Advertising
Arguments that justify advertising and the tactics of puffery and exaggeration include:
1. Advertising introduces people to, and influences them to buy, goods and services. Without advertising,
consumers would be uninformed about products.
2. Advertising enables companies to be competitive with other firms in domestic and international
markets. Firms across the globe use advertisements as competitive weapons.
3. Advertising helps a nation maintain a prosperous economy. Advertising increases consumption and
spending, which in turn creates economic growth and jobs, which in turn benefits all. “A rising tide lifts all
ships.”
4. Advertising helps a nation’s balance of trade and debt payments, especially in large industries, such as
the food, automobile, alcoholic beverage, and technology industries, whose exports help the country’s
economy.
5. Customers’ lives are enriched by the images and metaphors advertising creates. Customers pay for the
illusions as well as the products advertisements promote.
6. Consumers are not ignorant. Buyers know the differences between lying, manipulation, and colorful
hyperbole aimed at attracting attention. Consumers have freedom of choice. Ads try to influence desires
already present in people’s minds. Companies have a constitutional right to advertise in free and democratic
societies.22
Arguments against (Questionable) Advertising
Critics of questionable advertising practices argue that advertising can be harmful for the following reasons.
First, advertisements often cross that thin line that exists between puffery and deception. For example,
unsophisticated buyers, especially youth, are targeted by companies. David Kessler, former commissioner of
the FDA, referred to smoking as a pediatric disease, since 90% of lifelong smokers started when they were 18
and half began by the age of 14.23
Another argument is that advertisements tell half-truths, conceal facts, and intentionally deceive with
profit, not consumer welfare, in mind. For example, the $300—$400 billion food industry is increasingly
being watched by the FDA for printing misleading labels that use terms such as “cholesterol free,” “lite,” and
“all natural.” Consumers need understandable information quickly on how much fat (a significant factor in
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heart disease) is in food, on standard serving sizes, and on the exact nutritional contents of foods. This is
increasingly relevant as food-marketing efforts increase. In 2010, for example, $1.24 trillion of food was
supplied by food-service and food-retailing operations, which together make up the food-marketing system.24
At stake in the short term for food companies is an outlay of between $100 million and $600 million for
relabeling. In the long term, product sales could be at risk.
One of the great paradoxes of Americans today is their obsession with diet and health, while having one of
the worst diets in the world. Also noted earlier, more than two-thirds of adults and more than one-third of
children in the United States are obese or overweight. Food industry executives say that customers ask for
low-fat food but rarely buy it. For many Americans, the problem is not just that they are consuming so much
fat, it is that they don’t know what they are eating. While government standards for weight and other
recommended health-related metrics change, the 2010 government-recommended daily caloric intake of adult
men in the United States is between 2,000 and 3,000, depending on age and the level of physical activity; the
recommended calories for adult women is 1,600–2,400, also depending on age and level of physical activity.
This range is still current in 2014. Many Americans far exceed those recommendations, in part because of
their increasing reliance on restaurant food.25
Advertising and Free Speech
Because ads are often ambiguous, sometimes misleading, and can omit essential facts, the legal question of
“free speech” enters more serious controversies. In commercial speech cases, there is no First Amendment
protection if it can be proven that information was false or misleading. In other types of free speech cases,
people who file suit must prove either negligence or actual malice.26
Should certain ads by corporations be banned or restricted by courts? For example, should children be
protected from accessing pornography ads on the Internet? Should companies that intentionally mislead the
public when selling their products be denied protection by the court?27 The U.S. Supreme Court has
differentiated commercial speech from pure speech in the context of the First Amendment. (See Central
Hudson Gas and Electric Corporation v. Public Service Commission, 1980, and Posadas de Puerto Rico Associates v.
Tourism Company of Puerto Rico, 54 LW 4960). Pure speech is more generalized, relating to political,
scientific, and artistic expression in marketplace dealings. Commercial speech refers to language in ads and
business dealings. The Supreme Court has balanced these concepts against the general principle that freedom
of speech must be weighed against the public’s general welfare. The four-step test developed by Justice Lewis
F. Powell Jr. and used to determine whether commercial speech in advertisements can be banned or restricted
follows:
1. Is the ad accurate, and does it promote a lawful product?
2. Is the government’s interest in banning or restricting the commercial speech important, nontrivial, and
substantial?
3. Does the proposed restriction of commercial speech assist the government in obtaining a public policy goal?
4. Is the proposed restriction of commercial speech limited only to achieving the government’s purpose?28
For example, do you agree or disagree with the conservative plurality on the Supreme Court that has
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argued in the tobacco smoking controversy to give more free speech rights to tobacco companies? This has
been suggested by Lawrence Gostin: “The [Supreme] [C]ourt has held that the FDA lacks jurisdiction to
regulate cigarettes. The court observed that Congress, despite having many opportunities, has repeatedly
refused to permit agency regulation of the product. Thus, Congress has systematically declined to regulate
tobacco but has also preempted state regulation. Moreover, the Supreme Court’s recent assertion of free
speech rights for corporations prevents both Congress and the states from meaningfully regulating advertising.
To the extent that commercial speech becomes assimilated into traditional political and social speech, it could
become a potent engine for government deregulation. And, perhaps, that is the agenda of the court’s
conservative plurality.”29
The commercial speech doctrine remains controversial. The Supreme Court has turned to the First
Amendment to protect commercial speech (which is supposedly based on informational content). Public
discourse is protected to ensure the participation and open debate needed to sustain democratic traditions and
legitimacy. The Supreme Court has ultimate jurisdiction over decisions regarding the extent to which
commercial speech, in particular, ads, and cases meet the previous four standards.
Recent judicial decisions regarding a number of areas, (including consumer privacy, spam, obesity,
telemarketing, tobacco ads, casino gambling advertising, and dietary supplement labeling (see Greater New
Orleans Broadcasting Association Inc. v. United States and Pearson v. Shalala) have sent the message that “The
government’s heretofore generally accepted power to regulate commercial speech in sensitive areas has been
restricted.” Regulators have prohibited certain advertisements and product claims based on the government’s
authority to protect public safety and the common good. The courts have sent the government (namely, the
FDA) “back to the drawing board” to write disclaimers for claims it had argued to be inconclusive. The FDA’s
regulatory power has currently been curtailed.30
Paternalism, Manipulation, or Free Choice?
Moral responsibility between corporate advertisers and consumers can also be viewed along a continuum. At
one end of a spectrum is paternalistic control; that is, “Big Brother” (the government, for example) regulates
what consumers can and should hear and see. Too much protection can lead to arbitrary censorship and limit
free choice. This is generally not desirable in a democratic market economy. At the other extreme of the
continuum is free choice and free speech that are not regulated by any external government controls. Vulnerable
groups—children, youth, the poor for example—may be more at risk from predatory advertisements, for
example, unregulated pornography and scam advertising. Between these extremes, corporations develop ads to
both create and meet consumer demand to buy products and services. The moral and commercial control
corporations have in this space can constrain free choice through researched ads that range between puffery,
ambiguity, exaggeration, half-truths, and deception to serve corporate interests. Ideally, corporations should
seek to inform consumers fully and truthfully while using nonmanipulative, persuasive techniques to sell their
products—assuming the products are safe and beneficial to consumer health and safety.
Enforcement of advertising can also be viewed along this continuum. Outright bans on ads can result in
court decisions that determine a corporation’s right to free speech under the Constitution. The latest such
complaint comes from Columbia Law Professor (and former senior adviser to the Federal Trade Commission)
Tim Wu in the New Republic article titled, “The Right to Evade Regulation: How Corporations Hijacked the
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First Amendment.”
Wu criticizes court decisions protecting commercial speech rights as a return to the discredited Lochner era
of the early twentieth century, when some judges began interpreting the Due Process Clause as a license that
allowed them to overturn economic legislation based on their own economic policy preferences.31 At the other
end of the spectrum, when actual harm and damage can be shown to have occurred as a result of and/or
related to deceptive advertisements, the legal system intervenes. As moral and legal disputes occur over
specific ads on the paternalism versus manipulation continuum, debate also continues as a matter of
perception and judgment from different stakeholder views. In the following section, specific controversial
issues of advertising online, children and youth as targets of advertising, and tobacco and alcohol ads are
discussed.
5.3 Controversial Issues in Advertising: The Internet, Children, Tobacco,
and Alcohol
Advertising and the Internet
Advertising on the Internet and cell phones presents new opportunities and problems for consumers. The
ubiquity of Internet and cell phone communication and advertising is evident from these growing indicators:
• 4.85 billion people worldwide are expected to use mobile phones by 2015.
• 37% of consumers access social media on a mobile phone.
• 82 million Americans are expected to be using tablets by 2015.
• Mobile ad spending is expected to grow to $2.55 billion by 2014. This total includes spending for
messaging, display, search, and video formats for mobile advertising.
• Total spending on mobile advertising will soar from roughly $8.5 billion this year to more than $31.1
billion in 2017, while overall online ad spending will grow from $42.3 billion to $61.4 billion during
the same period. By 2017, eMarketer expects that about 60% of search ad spending will be devoted to
mobile devices.
• Mobile is also forecast to account for a larger share of display dollars, though not quite to the same
extent as search. By 2017, 48.4% of online display advertising (including banners, video, rich media,
and ads such as Facebook’s Sponsored Stories and Twitter’s Promoted Tweets) will be on mobile
devices (including tablets), up from an estimated 21.7% this year.32
In addition, YouTube’s mobile business will generate approximately $800 million in 2013. According to
Martin Pyykkonen, an analyst from Wedge Partners, YouTube accounted for about 10% of Google’s $14
billion in sales in last quarter of 2013, with as much as 25% of YouTube revenues coming from mobile.33
The social networking web sites also draw large numbers of unique and returning viewers. For example,
according to comScore, Inc.’s Video Metrix service, Google Inc., including YouTube, drew 154 million
unique viewers in March 2013 and Facebook Inc. had 64 million unique viewers in the same period. Over
182,000 million unique viewers in the United States watched 39.3 billion online videos during this same
period. Video ad views totaled 13.2 billion.
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Google sites topped the 2012 U.S. unique web visitors list with 191.4 million visitors; while Facebook
drew overall viewer engagement with 10.8 percent of online minutes spent. Google, Facebook, Yahoo,
Microsoft, AOL, and Amazon were the top six sites on both these metrics during the 2012 year.34
The ubiquity of ads on the Web continues to cause ethical problems, particularly for parents and those who
wish to protect youth from a host of mobile media instant access via cell phones and pop-up ads, and exposure
to web sites and advertisements dealing with sex, pornography, violence, drinking, and tobacco.
Pop-up and pop-under ads (ads that open up in a separate browser window) are used on some of the most
visited web sites. In place of TV commercials that confront consumers with 30-second product introductions,
the new “advertainment” shorts (also known as “commission content”) that pop up on different mobile devices
present product or service information to the viewer through a story. For example, Madonna starred in a
BMW-funded film directed by her husband. “You’re not using a product-based appeal, you’re using an image-
based appeal.” It is important to mention that while stars such as Justin Bieber, Miley Cyrus, Lindsay Lohan,
Lady Gaga, and Snooki draw attention to large numbers of virtual viewers in ads and infomercials, once their
perceived and/or actual reputation is tainted, the attention can also turn.35
The Thin Line between Deceptive Advertising, Spyware, and Spam
In addition to undesirable pop-up ads and other aggravating forced online advertising, is the more serious
problem of Internet spyware and spam—which problems are now global because of the Internet. The U.S.
House of Representatives Judiciary Committee passed the Internet Spyware Prevention Act of 2004,
predicting that the problem of spyware would be solved. The act carries penalties of up to five years in prison
for using spyware that leads to identity theft. The Department of Justice was given $10 million to find ways to
fight spyware and phishing—the act of sending email to a user falsely claiming to be an established legitimate
enterprise. There have been other bills introduced by Congress to curb spyware and related Internet crimes.
The debate continues over whether or not congressional legislation and laws can stop Internet spyware and
spam. Critics of congressional action alone argue that both industries and government must work to end spam
and spyware.36 Europe, also involved in solving cybercrime as well as daily scam-ming, takes a wider
stakeholder involvement approach that includes legal enforcement and educating industry representatives and
consumers. The European Cybercrime Convention, sponsored by the Council of Europe, provides a treaty for
combating global cybercrime. The cybercrime convention was approved by 30 countries, including Canada,
Japan, South Africa, and the United States, and has been ratified by eight countries.37 In December 2010,
Canada’s government passed the Canadian Anti-Spam Law (CASL), designed to regulate specific areas of
electronic commerce, including what are known as commercial electronic messages (CEMs). These
encompass SMS messaging, social media messaging, and e-mail communications. Although the enforcement
date has not yet been set, enforcement is expected to begin in 2014.38 Figure 5.2 shows the seriousness of
Internet spam, spyware, and data breach statistics by industry.
The FTC has extensive guidelines for online advertising. For example, this governmental agency offers
“Clear and Conspicuous Disclosures in Online Advertisements.” The following is only a sample from the
FTC web site.
When it comes to online ads, the basic principles of advertising law apply:
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1. Advertising must be truthful and not misleading.
2. Advertisers must have evidence to back up their claims (“substantiation”).
3. Advertisements cannot be unfair.39
Figure 5.2
Internet Spam, Spyware, and Crime
The FTC’s web site states that a particular disclosure is clear and conspicuous under the following
conditions:
• the placement of the disclosure in an advertisement and its proximity to the claim it is qualifying;
• the prominence of the disclosure;
• whether items in other parts of the advertisement distract attention from the disclosure;
• whether the advertisement is so lengthy that the disclosure needs to be repeated;
• whether disclosures in audio messages are presented in an adequate volume and cadence and visual
disclosures appear for a sufficient duration; and
• whether the language of the disclosure is understandable to the intended audience.40
The following section presents specific advertisement issues in the areas of children and youth (as targets)
and tobacco and alcohol.
Advertising to Children
It is estimated that half of American children have a television in their bedroom, and “one study of third
graders put the number at 70%. And a growing body of research shows strong associations between TV in the
bedroom and numerous health and educational problems.” With the advent of mobile phones, gaming
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consoles, tablets, laptops, smart TVs, and e-readers, children are exposed at early ages with access to the
Internet. Microsoft asked 1,000 adults who were non-parents and parents, “How old is too young for kids to
go online unsupervised?” Eight years old was the average age given that children were allowed independent
Internet and device use.41
This is a disturbing number given the unlimited availability of and exposure to explicit sexual,
pornographic, and other questionable content on ads and web sites, mixed with carefully crafted
entertainment that is enhanced by new technologies. Should children and youth be exposed to the
uncontrolled Internet through mobile phones and be able to log on from their computers, or from computers
in libraries and cyber cafés, to web sites showing explicit sexual and pornographic pictures and videos? At issue
is both how much protection can and should parents and guardians exert over children, and how much
government protection through censorship does the public want? Although many telecom providers offer
controls for parents, as do private firms through products such as CyberPatrol, CYBERsitter, and WebTrack,
the issue also remains one of principle: How much regulation interferes with free speech for all? Moreover,
file-sharing technologies and availability of pornography and other questionable content for children provide
opportunities not only for users to see explicit material, but to share the content instantly.
Another ethical problem involves companies targeting children at too early an age—between 8 and 9 years
old with ads. The phenomenon known as age compression—KGOY (“kids getting older younger”)—refers to
“tweens” (between childhood and teenage years). This market is targeted by such companies as Alberto-
Culver, Estee Lauder, Procter & Gamble, and Unilever. The tween market was estimated to be between $7
and $8.5 billion in 2012. Marketing strategies include products such as youth hair care, cosmetics, and
skincare.42 Children at this age are more vulnerable to persuasive techniques.43 Rosalind Wiseman, the author
of Queen Bees and Wannabes, stated her opinion about the lack of responsibility of parents of children who are
permitted to buy questionable products for their children’s ages: “Mothers and fathers do really crazy things
with the best of intentions. I don’t care how it’s couched, if you’re permitting this [i.e., allowing the purchase
of these products] with your daughter, you are hyper-sexualizing her. It’s one thing to have them play around
with makeup at home within the bubble of the family. But once it shifts to another context, you are taking
away the play and creating a consumer, and frankly, you run the risk of having one more person who feels
she’s not good enough if she’s not buying the stuff.”44
Protecting Children
European, Asian, African, and North American countries are addressing issues on advertising to children.
The Children’s Online Privacy Protection Act (COPPA) and the FTC’s implementing rule took effect April
21, 2000. Commercial web sites directed to children younger than 13 years old, or general audience sites that
are collecting information from a child, must obtain parental permission before collecting such information.
The FTC also launched a special site at http://www.ftc.gov/kidzprivacy to help children, parents, and the
operators understand the provisions of COPPA and how the law will affect them.45 In 1974, the Children’s
Advertising Review Unit (CARU) of the National Advertising Division of the Council of Better Business
Bureaus was created to develop guidelines for self-regulating children’s advertising (see
http://www.caru.org/guidelines/guidelines ). CARU approaches companies that violate COPPA. In May
2008, CARU recommended and received approval from the operator of the web site http://www.stardoll.com
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http://www.caru.org/guidelines/guidelines

http://www.stardoll.com

to “modify the site to assure it is in compliance with CARU’s guidelines and the federal Children’s Online
Privacy Protection Act (COPPA).” CARU observed that the Stardoll web site offered “a virtual world where
visitors can design fashions for paper dolls and play other dress-up games.” When registering for basic
membership on the site, visitors must first select one of the following two options: “12 year [sic] and under” or
“13 year [sic] and under.” Potential members who clicked on the “12 year and under” link were asked to enter
their gender and a username, password, and e-mail address. Once that information was submitted, the next
screen asked for a parent’s e-mail address. After CARU requested changes to the web site, Stardoll decided to
implement a neutral age-screening process and tracking mechanism.46
Advertising and media companies are also working with government agencies to change media strategies.47
For example, the Media Monitoring Project (MMP) was created in South Africa because of increasing rates
of obesity in children. The European Advertising Standards Alliance (EASA) and the European Sponsorship
Association (ESA) joined together in January 2008 to form the Joint Arbitration Panel that will review “and
adjudicate on consumer complaints about event sponsorship, an issue that is generally not covered in the
ethical codes of most self-regulatory organisations (SROs) in Europe.”48
Tobacco Advertising
Critics argue that tobacco and alcohol companies, in particular, continue to promote products that are
dangerously unhealthy and that have effects that endanger others. According to the World Health
Organization (WHO), cigarettes are “the only legal product that kills half of its regular users when consumed
as intended by the manufacturer.”49
Eighteen percent of American adults were cigarette smokers in 2012, according to a report released by the
National Center for Health Statistics.50 The tobacco industry spent approximately $8.2 billion in 1999 on
traditional magazine direct-to-consumer advertising. Cigarette companies reportedly are targeting low-
income women and minorities in their ads and focusing less on college-educated consumers. Three-thousand
new teenagers and youth begin smoking each day. One out of three is predicted to die from tobacco-related
illnesses—many when they are middle-aged.51
The Marlboro man, the infamous and now defunct Old Joe Camel, and other cigarette brands linked
adventure, fun, social acceptance, being “cool,” and risk-taking to smoking. Several new tobacco products have
been produced to entice youth and smokers. “Cigarettes, smokeless tobacco, and cigars have been introduced
in an array of candy, fruit, and alcohol flavors. R. J. Reynolds’ Camel cigarettes, for example, have come in
more than a dozen flavors, including lime, coconut and pineapple, toffee, and mint. Flavorings mask the
harshness of the products and make them appealing to children; new smokeless tobacco products have been
marketed as ways to help smokers sustain their addiction in the growing number of places where they cannot
smoke. In addition to traditional chewing and spit tobacco, smokeless tobacco now comes in teabag-like
pouches and even in dissolvable, candy-like tablets. . . . New products and marketing have been aimed at
women, girls and other populations. The most recent example is R. J. Reynolds’ Camel No. 9 cigarettes, a
pink-hued version that one newspaper dubbed ‘Barbie Camel’ because of marketing that appealed to girls.”52
Despite the fact that cigarette brand product placement in movies was banned by the 1998 Tobacco Master
Settlement Agreement, cigarettes appeared in two out of three top-grossing movies in 2005. More than one-
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third of the movies were youth-rated films. The number of movies with tobacco-related scenes has gone down
since 2005, but in 2010 more than 30% of top-grossing movies rated G, PG, and PG-13 had tobacco scenes.
And studies show that young people who see smoking in movies are more likely to start smoking.53
The Tobacco Controversy Continues
The tobacco controversy took yet another turn in 2004 when the DOJ brought the largest civil action against
the tobacco industry, alleging that the industry defrauded and misled the public for 50 years regarding health
risks of cigarette smoking. The DOJ requested $280 billion from the industry to repay its “ill-gotten” profits.
A final judgment and opinion was issued in August 2006, finding big tobacco companies guilty of violating
racketeering laws and defrauding the public. The U.S. Supreme Court made this ruling final in June 2010 by
refusing to hear any further appeals. Tobacco companies are now prohibited from misleading and false
advertising and must submit annual marketing data to the government. Ill-gotten profits must be surrendered
to the government.54
William Schultz, a former DOJ lawyer who helped develop the case, states that, “What the government
will argue is that the tobacco industry had a strategy to create doubt over health risks that made smokers more
hesitant to quit, and those not smoking more likely to start. The fraud is that the companies knew about the
health risks but created doubt and controversy about them to maintain their sales.”55 The lawsuit “has the
potential to significantly transform the industry—forcing it to increase cigarette prices sharply, to change how
it markets and promotes its product, and to spend billions for stop-smoking programs.”56
The Supreme Court ruled unanimously in June 2001 that states have no right to restrict outdoor tobacco
advertising near schools and public parks. The ruling, a victory for tobacco companies, followed a
Massachusetts case that prohibited tobacco ads within 1,000 feet of public parks, playgrounds, and schools.57
The 2001 ruling raised questions regarding the topic of advertising and free speech, for example: Does a
corporation have the same free speech rights under the First Amendment to purchase advertising as people
have to air political, social, and artistic views? For most of the nation’s history, the Supreme Court has said
that commercial speech (offering a product for sale) does not deserve the same protection as political speech.
In a series of cases from the Rehnquist Court, “businesses were given powerful new First Amendment rights
to advertise hazardous products.”58 While the battle between antismoking and prosmoking stakeholders
continues, the paramount issue for antismoking proponents ranges from a total ban on all tobacco products to
this statement by Dan Smith, president of the American Cancer Society Cancer Action Network: “The future
is a smoke-free country where in public places, you can go and it’s smoke free. I also think the future is much
higher taxes on tobacco products.”59
Alcohol Advertising
Alcohol abuse is the third-leading cause of preventable death in the United States.60 The following statistics
explain why:
• Percent of adults 18 years of age and over who were current regular drinkers (at least 12 drinks in the
past year): 51.5%.
• Percent of adults 18 years of age and over who were current infrequent drinkers (1–11 drinks in the
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past year): 13.6%.
• Number of alcoholic liver disease deaths: 15,990.
• Number of alcohol-induced deaths, excluding accidents and homicides: 25,692.
• 79,000 annual deaths attributed to excessive alcohol use.
“Up to 40% of all hospital beds in the United States (except for those being used by maternity and
intensive care patients) are being used to treat health conditions that are related to alcohol consumption,” and
approximately 15 million of the full-time employed workers in the United States are heavy drinkers of
alcohol.61 Almost 3 million children have serious alcohol problems but less than 20% get the needed
treatment.
The Centers for Disease Control and Prevention report that “Alcohol is the most commonly used and
abused drug among youth in the United States, more than tobacco and illicit drugs. Although drinking by
persons under the age of 21 is illegal, people aged 12 to 20 years drink 11% of all alcohol consumed in the
United States. Over 90% of this alcohol is consumed in the form of binge drinking. On average, underage
drinkers consume more drinks per drinking occasion than adult drinkers. In 2008, there were approximately
190,000 emergency room visits by persons under age 21 for injuries and other conditions linked to alcohol.”62
Alcohol ads also raise problems for consumers. Critics of alcohol ads argue that youths continue to be
targeted as primary customers, enticed by suggestive messages linking drinking to popularity and success.
Anheuser-Busch has been castigated for advertising its alcohol-heavy Spykes “Liquid Lunchables” which
come in a colorful, two-ounce container in “kid-friendly flavors like Spicy Mango, Hot Melons, Spicy Lime,
and Hot Chocolate.” As the watchdog consumer nonprofit Center for Science in the Public Interest (CSPI)
noted about this drink, “these so-called Spykes aren’t juiceboxes, they’re malt liquor with more than twice the
alcohol concentration of beer.”63
Ethical Insight 5.2
Are Minors (Individuals under the Legal Drinking Age) Personally Responsible for Their
Voluntary Choices? Should Minors Be Punished as Adults?
On November 13, 2003, Ayman Hakki filed a lawsuit in Washington, DC, against several alcohol producers.
The suit claimed that in an effort to create brand loyalty in the young, the defendants had deliberately
targeted their television and magazine advertising campaigns at consumers under the legal drinking age for
more than two decades.
Hakki asked for damages that included all of the profits the defendants had earned since 1982 from the
sale of alcohol to minors. He also sought class-action status for his suit. The plaintiff class consisted of all
parents whose underage children had purchased alcohol in the last 21 years.
What is your opinion regarding the following quote? “Suits against tobacco and alcohol companies for
targeting youthful purchasers reflect a particular philosophy regarding people under the legal drinking or
smoking age: they are too immature to take full responsibility for their actions. This philosophy is in serious
tension with the approach that has increasingly come to dominate our society’s approach to juvenile criminal
justice: when minors commit crimes, they ought to be held accountable and punished as adults.”
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Sources: Colb, S. F. (December 3, 2003). A lawsuit against “big alcohol” for advertising to underage drinkers. FindLaw.com.
http://writ.news.findlaw.com/colb/20031203.html, accessed February 25, 2014. Social host liability. (author not identified). FindLaw.com.
http://injury.findlaw.com/accident-injury-law/social-host-liability.html, accesssed February 25, 2014.
Product labeling and packaging are also two critical issues that are related to advertising. In a 2008 poll
conducted by the Opinion Research Corporation, 1,003 Americans aged 21 and over were asked to identify
the information that consumers consider most important on an alcohol label. The following results were
reported:
• 77%: labels on products showing the alcohol content.
• 73%: the amount of alcohol shown in each serving.
• 65%: the calories shown in each serving.
• 57%: the carbohydrates in each serving.
• 52%: the amount of fat in each serving.
It was noted that “These findings reinforce a previous online survey conducted for Shape Up America! in
December 2007, which reported that 79 percent of consumers would support alcohol labeling that
summarizes the Dietary Guidelines’ advice.”64
5.4 Managing Product Safety and Liability Responsibly
Managing product safety should be priority number one for corporations. As a sign in one engineering facility
reads, “Get it right the first time or everyone pays!” Product quality, safety, and liability are interrelated topics,
especially when products fail in the marketplace. As new technologies are used in product development, risks
increase for users.
How Safe Is Safe? The Ethics of Product Safety
Each year, thousands of people die and millions are injured from the effects of smoking cigarettes, and using
diet drugs, silicone breast implants, and consumer products such as toys, lawn mowers, appliances, power
tools, and household chemicals, according to the Consumer Product Safety Commission (CPSC). But how
safe is safe? Few, if any, products are 100% safe. Adding the manufacturing costs to the sales price to bolster
safety features would, in many instances, discourage price-sensitive consumers. Just as companies use
utilitarian principles when developing products for markets, consumers use this logic when shopping. Risks
are calculated by both manufacturer and consumer. However, enough serious instances of questionable
product quality and lack of manufacturing precautions taken occur to warrant more than a simple utilitarian
ethic for preventing and determining product safety for the consuming public. This is especially the case for
commercial products such as air-, sea-, and spacecrafts, over which consumers have little, if any, control.
Are cigarettes safe products? “Tobacco is the leading preventable cause of death in the United States.
Cigarette smoking causes about one of every five deaths in the United States each year,” about 443,000 deaths
annually.65
Are other types of drugs safer than nicotine and additives in cigarettes? A metaanalysis (i.e., “the first
comprehensive scientific review of both published studies and unpublished data that pharmaceutical
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companies have said they own and have the right to withhold”) by the British medical journal, the Lancet,
found that “most antidepressants are ineffective and may actually be unsafe for children and adolescents.” This
is an interesting finding in light of a recent Mayo Clinic study that found nearly 70% of Americans are on at
least one prescription drug and more than half receive at least two prescriptions—many of which are
antidepressants.66
The meta-analysis study reported that youth (ages 5–18) should avoid certain antidepressants—Paxil,
Zoloft, Effexor, and Celexa—because of the risk of suicidal behavior with no benefit from taking the drug.
Prozac was found an effective drug for depressed children and had no increased suicide risk.67 Doctors signed
more than 164 million prescriptions for antidepressants in 2008, according to IMS Health, making
antidepressants one of the most prescribed drugs in the United States.68 It is interesting to note that,
according to the study, the British government recommended against the use of most antidepressants for
children, except for Prozac. EU regulators have recommended against Paxil being given to children, and the
U.S. FDA has requested drug manufacturers warn more strongly on their labels about possible links between
the drugs taken by adolescents and “suicidal thoughts and behaviors.”
Consumers also value safety and will pay for safe products up to the point where, in their own estimation,
the product’s marginal value equals its marginal cost; that is, people put a price on their lives whether they are
rollerblading, sunning, skydiving, drinking, overeating, or driving to work.69
Product Safety Criteria: What Is the Value of a Human Life?
The National Commission on Product Safety (NCPS) notes that product risks should be reasonable.
Unreasonable risks are those that could be prevented or that consumers would pay to prevent if they had the
knowledge and choice, according to the NCPS. Three steps that firms can use to assess product safety from an
ethical perspective follow:70
1. How much safety is technically attainable, and how can it be specifically obtained for this product or
service?
2. What is the acceptable risk level for society, the consumer, and the government regarding this product?
3. Does the product meet societal and consumer standards?
These steps, of course, do not apply equally to commercial aircraft and tennis shoes.
Estimates regarding the monetary value of human life vary. As Ethical Insight 5.3 illustrates, a recent
methodology estimates the value of a human life at $129,000.
Ethical Insight 5.3
What Is the Value of a Human Life? $129,000
Stanford economists Stefanos Zenios and his colleagues at the Stanford Graduate School of Business used
kidney dialysis as a benchmark. Every year, dialysis saves the lives of hundreds of thousands of Americans who
would otherwise die of renal failure while waiting for an organ transplant. It is also the one procedure that
Medicare has covered unconditionally since 1972, despite rapid and sometimes expensive innovations in its
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administration. To tally the cost-effectiveness of such innovations, Zenios and his colleagues ran a computer
analysis of more than half a million patients who underwent dialysis, adding up costs and comparing that data
to treatment outcomes. Considering both inflation and new technologies in dialysis, they arrived at $129,000
as a more appropriate threshold for deciding coverage. “That means that if Medicare paid an additional
$129,000 to treat a group of patients, on average, group members would get one more quality-adjusted life
year,” Zenios says. Based on patient surveys, one “quality-of-life” year is defined as about two years of life on
dialysis.
Take the $500,000 death benefit the government pays families when a soldier is killed in Iraq or
Afghanistan. Or the cost calculations that for-profit health insurers make to determine how much coverage
they’ll give customers. In fact, at least some Americans seem at ease with allowing money to play a prominent
role in health care decisions.
The study showed that for the sickest patients, the average cost of an additional quality-of-life year was
much higher, at $488,000. “It is difficult to justify the burden and expense of dialysis when persons have other
serious health conditions such as, for example, advanced dementia or cancer,” says co-author Glenn Chertow,
a nephrology professor at the Stanford School of Medicine. “In these settings, dialysis is unlikely to provide
any meaningful benefit.” But with organs, including kidneys, for transplant so scarce, is it justifiable to deny
these patients a chance to live through dialysis? It is a question, Zenios says, that everyone should approach
with trepidation. “What is the true value of a human life? That’s what we’re asking people.” He adds, “I
wouldn’t pretend to know.”
Source: Kingsbury, K. The value of a human life: $129,000. (May 20, 2008). Time.com.
http://www.time.com/time/health/article/0,8599,1808049,00.html, accessed January 8, 2014.
Regulating Product Safety
Because of the number of product-related casualties and injuries annually and because of the growth of the
consumer movement in the 1960s and 1970s, Congress passed the 1972 Consumer Product Safety Act, which
created the CPSC. This is the federal agency empowered to protect the public from unreasonable risks of
injury and death related to consumer product use. The five members of the commission are appointed by the
president. The commission has regional offices across the country. It develops uniform safety standards for
consumer products; assists industries in developing safety standards; researches possible product hazards;
educates consumers about comparative product safety standards; encourages competitive pricing; and works to
recall, repair, and ban dangerous products. Each year the commission targets potentially hazardous products
and publishes a list with consumer warnings. It recently targeted Cosco for the faulty product design of
children’s products. The death of an 11-month-old in July 1988 in a Cosco-designed crib was never reported
by the company, even though the company began to redesign the product. Cosco was forced to pay a record
$1.3 million in civil penalties to settle charges that it violated federal law by failing to report hundreds of
injuries and the death.71
The CPSC is constrained in part by its enormous mission, limited resources, and critics who argue that the
costs for maintaining the agency exceed the results and benefits it produces.
Consumer Affairs Departments and Product Recalls
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Many companies actively and responsibly monitor their customers’ satisfaction and safety concerns. A number
of companies are using cell phone text messages to add more interactivity to their ads and consumer support.
In addition, increased real-time mobile messaging, social networking services, Web browsing, and personal
information management applications are being offered by some companies like Microsoft, to not only keep
in touch with its customers but to also provide entertainment for them. Microsoft has teamed with Sony
Ericsson Mobile Communications to give consumers more control over digital content.72 Another way that
companies can help consumers is by recalling their products when defects are noticed.
Many companies aggressively and voluntarily recall defective products and parts when they discover them
or are informed about them. Mattel recalled over 700,000 toys in 2007 because of lead-paint issues. When
unsafe products are not voluntarily recalled, the Environmental Protection Agency (EPA), National Highway
Traffic Safety Administration (NHTSA), FDA, and CPSC have the authority to enforce recalls of known or
suspected unsafe products. Recalled products are usually repaired. If not, the product or parts can be replaced
or even taken out of service. American autos are frequently recalled for replacement and adjustment of
defective parts.
Amitai Etzioni, a noted business ethicist, argues that “There is, of course, no precise way of measuring how
much more the public is willing to pay for a safer, healthier life via higher prices or taxes, or by indirect drag
on economic growth and loss of jobs. In part this is because most Americans prefer to deal with these matters
one at a time rather than get entangled with highly complex, emotion-laden general guidelines. In part it is
also because the answer depends on changing economic conditions. Obviously, people are willing to buy more
safety in prosperity than in recession.”73
Product Liability Doctrines
Who should pay for the effects of unsafe products, and how much should they pay? Who determines who is
liable? What are the punitive and compensatory limits of product liability? The payout in 2001 in litigation
and settlements in diet-pill cases alone totaled $7 billion. Merck settled its Vioxx case with a $4.85 billion
payout to settle approximately 50,000 lawsuits, with payouts beginning in August 2008. An additional $950
million was paid along with a guilty plea made to a criminal misdemeanor charge of illegally marketing Vioxx
in November 2011. The $950 million includes a “$321.6 million criminal fine and $628.3 million to resolve
civil claims that Merck sold Vioxx for unapproved uses and made false statements about its cardiovascular
safety.” In 2013 Merck agreed to pay $23 million to settle claims it duped consumers into buying the drug.74
Sixty companies have filed for bankruptcy court protection, and defendant companies and insurers have
spent approximately $54 billion to date to settle asbestos liability-related lawsuits from products used in the
1970s. More than 600,000 asbestos-related suits have been filed, and many are still being resolved to this day.
In February of 2012, for example, a $19.5 million settlement was offered as a part of the suit against W. R.
Grace & Co. for the victims of asbestos exposure from its vermiculite plant located in Libby, Montana. A $43
million settlement was previously approved in 2011 for 1,128 victims of asbestos, approximately 400 of whom
were killed.75
The doctrine of product liability has evolved in the court system since the early twentieth century, when the
dominant principle of privity was used. Until the decision in MacPherson v. Buick Motor Company (1916),
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consumers injured by faulty products could sue and receive damages from a manufacturer if the manufacturer
was judged to be negligent. Manufacturers were not held responsible if consumers purchased a hazardous
product from a retailer or wholesaler.76 In MacPherson, the defendant was ruled liable for harm done to Mr.
MacPherson. A wheel on the car had cracked. Although MacPherson had bought the car from a retailer and
although Buick had bought the wheel from a different manufacturer, Buick was charged with negligence.
Even though Buick did not intend to deceive the client, the court ruled the company responsible for the
finished product (the car) because—the jury claimed—it should have tested its component parts.77 The
doctrine of negligence in the area of product liability was thus established. The negligence doctrine means that
all parties, including the manufacturer, wholesaler, distributor, and sales professionals, can be held liable if
reasonable care is not observed in producing and selling a product.
The doctrine of strict liability is an extension of the negligence standard. Strict liability holds that the
manufacturer is liable for a person’s injury or death if a product with a known or knowable defect goes to
market. A consumer has to prove three things to win the suit: (1) an injury happened; (2) the injury resulted
from a product defect; and (3) the defective product was delivered by the manufacturer being sued.78
Absolute liability is a further extension of the strict liability doctrine. Absolute liability was used in Beshada
v. Johns Manville Corporation (1982). Employees sued Johns Manville for exposure to asbestos. The court
ruled that the manufacturer was liable for not warning of product danger, even though the danger was
scientifically unknown at the time of the production and sale of the product.79 Medical and chemical
companies, in particular, whose products could produce harmful but unknowable side effects years later, would
be held liable under this doctrine.
Legal and Moral Limits of Product Liability
Product liability lawsuits have two broad purposes. First, they provide a level of compensation for injured
parties, and second, they act to deter large corporations from negligently marketing dangerous products.80 A
California jury awarded Richard Boeken, a smoker who had lung cancer, a record $3 billion in a suit filed
against Philip Morris in 2001. In 2007, a Los Angeles judge ruled for Boeken’s 15-year-old son on an issue
related to his lawsuit against Philip Morris, which he argued was liable for the death of his father. The $3
billion suit awarded earlier had been reduced to $55 million. Boeken (age 57) died in January 2002, seven
months after the verdict. The disease had spread to his spine and brain.81 The legal and moral limits of
product liability suits evolve historically and are, to a large degree, determined by political as well as legal
stakeholder negotiations and settlements. Consumer advocates and stakeholders (for example, the Consumer
Federation of America, the National Conference of State Legislators, the Conference of State Supreme Court
Justices, and activist groups) lobby for strong liability doctrines and laws to protect consumers against
powerful firms that seek profits over consumer safety. In contrast, advocates of product liability law reform
(for example, corporate stockholders, Washington lobbyists for businesses and manufacturers, and the
President’s Council on Competitiveness) argue that liability laws in the United States have become too costly,
routine, and arbitrary. They claim liability laws can inhibit companies’ competitiveness and willingness to
innovate. Also, insurance companies claim that all insurance-paying citizens are hurt by excessive liability laws
that allow juries to award hundreds of millions of dollars in punitive damages because insurance rates rise as a
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result.
However, a two-year study of product liability cases concluded that punitive damages are rarely awarded,
more rarely paid, and often reduced after the trial.82 The study, partly funded by the Roscoe Pound
Foundation in Washington, DC, is the most comprehensive effort to date to show the patterns of punitive
damages awards in product liability cases over the past 25 years. The results of the study are as follows:
1. Only 355 punitive damages verdicts were handed down by state and federal court juries during this period.
One-fourth of those awards involved a single product—asbestos.
2. In the majority of the 276 cases with complete posttrial information available, punitive damages awards
were abandoned or reduced by the judge or the appeals court.
3. The median punitive damages award for all product liability cases paid since 1965 was $625,000—a little
above the median compensatory damages award of $500,100. Punitive damages awards were significantly
larger than compensatory damages awards in only 25% of the cases.
4. The factors that led to significant awards—those that lawyers most frequently cited when interviewed or
surveyed—were failure to reduce risk of a known danger and failure to warn consumers of those risks.
A Cornell study reported similar findings.83
Furthermore, an earlier federal study of product liability suits in five states showed that plaintiffs won less
than 50% of the cases; a Rand Corporation study that surveyed 26,000 households nationwide found that only
1 in 10 of an estimated 23 million people injured each year thinks about suing; and the National Center for
State Courts surveyed 13 state court systems from 1984 to 1989 and found that the 1991 increase in civil
caseloads was for real-property rights cases, not suits involving accidents and injuries.84
Contrary to some expectations, another study found that “judges are more than three times as likely as
juries to award punitive damages in the cases they hear.” Plaintiffs’ lawyers apparently mistakenly believe that
juries are a soft touch, and “they route their worst cases to juries. But in the end, plaintiffs do no better before
juries than they would have before a judge.” The study also found that the median punitive damages award
made by judges ($75,000) was nearly three times the median award made by juries ($27,000).85
Product Safety and the Road Ahead
As outsourcing practices continue and new technologies are increasingly used in products, problems for both
corporations and consumers will persist. Corporations face issues of cutting costs and increasing quality to
remain competitive, while at the same time sacrificing some control over their manufacturing processes
through outsourcing. Consumers must trust corporations’ ability to deliver safe and healthy products,
including food, drugs, toys, automobiles, and medical products. Consumer stakeholders must rely on
government agencies such as the FDA and the CPSC to monitor and discipline corporations that violate basic
safety standards and practices. Consumers can also use the many watchdog nonprofit groups that monitor and
advise on the quality of different projects. Consumer Reports (http://www.ConsumerReports.org) is one such
organization. Corporations must rely on state-of-the-art monitoring and safety programs in their respective
industries—such as Six Sigma (http://www.6-sigma.com), ISO 9000 (a quality assurance program), and other
Total Quality Management (TQM) programs.
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5.5 Corporate Responsibility and the Environment
There was a time when corporations used the environment as a free and unlimited resource. That time is
ending, in terms of international public awareness and increasing legislative control. The magnitude of
environmental abuse, not only by industries but also by human activities and nature’s processes, has awakened
an international awareness of the need to protect the environment. At risk is the most valuable stakeholder,
the earth itself. The depletion and destruction of air, water, and land are at stake. Consider the destruction of
the rain forests in Brazil; the thinning of the ozone layer; climatic warming changes from carbon dioxide
(CO2) accumulations; the smog in Mexico City, Los Angeles, and New York City; the pollution of the seas,
lakes, rivers, and groundwater as a result of toxic dumping; and the destruction of Florida’s Everglades
National Park. At the human level, environmental pollution and damage cause heart and respiratory diseases
and skin cancer. The top environmental concerns include climate change; energy, water, biodiversity, and land
use; chemicals (toxics and heavy metals); air pollution; waste management; and ozone layer depletion.86
We will preview and summarize some of the issues to indicate the ethical implications. The purpose here is
not to present in great detail either the scientific evidence or all the arguments for these problems. Rather, our
aim is to highlight some issues and suggest the significance for key constituencies from a stakeholder and
issues management approach and related ethical implications and concerns.
The Most Significant Environmental Problems
Toxic Air Pollution
More people are killed, it is estimated, by air pollution (automobile exhaust and smokestack emissions) than
by traffic crashes. The so-called greenhouse gases are composed of the pollutants carbon monoxide, ozone,
and ultrafine particles called particulates. These pollutants are produced by the combustion of coal, gasoline,
and fossil fuels in cars. A 2013 American Lung Association report noted that “Still, over 131.8 million people
—42 percent of the nation—live where pollution levels are too often dangerous to breathe,” and “roughly half
the people (50.3%) in the United States live in counties that have unhealthful levels of either ozone or particle
pollution.” The top five most polluted cities 2013 by ozone levels are: Los Angeles, CA; Bakersfield, CA;
Visalia, CA; Fresno, CA; and Sacramento, CA. The five most polluted cities at the time of writing by year-
round particle pollution are: Bakersfield, CA; Visalia, CA; Phoenix, AZ; Los Angeles, CA; and Hanford,
CA.87 Figure 5.3 shows America’s Top Five Global Warming Polluters.
Air pollution and greenhouse gases are linked to global warming, as evidenced in:
• The five-degree increase in Arctic air temperatures, as the earth becomes warmer today than at any
time in the past 125,000 years.
• The snowmelt in northern Alaska, which comes 40 days earlier than it did 40 years ago.
• The sea-level rise, which, coupled with the increased frequency and intensity of storms, could
inundate coastal areas, raising groundwater salinity.
• The atmospheric CO2 levels, which are 31% higher than preindustrial levels 250 years ago.88
Nationally, carbon dioxide emissions are a major source of air pollution. America’s top five warming
polluters (by CO2 emissions from company-owned or -operated power plants) are listed in Figure 5.3. These
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companies had estimated annual CO2 emissions of 70 million tons and reported 2003 revenues of $4.4
billion.89 Internationally, greenhouse gas emission statistics show that Spain had the largest increase in
emissions, followed by Ireland, the United States, Japan, the Netherlands, Italy, and Denmark. The EU,
Britain, and Germany had emission decreases during this period (see Figure 5.4).
Figure 5.3
America’s Top Five Global Warming Polluters
Figure 5.4
Global Non-CO2 Percent Emissions Change in 6 Regions
To stabilize the climate, global carbon emissions must be cut in half, from the current 6 billion tons a year
to under 3 billion tons a year. This reduction can be accomplished by producing more efficient cars and power
plants, using mass transit and alternative energy, and improving building and appliance standards. These
changes would also help alleviate energy crises as well as global warming and air pollution.90
Water Pollution and the Threat of Scarcity
Approximately 1 billion people worldwide lack access to improved water sources. This lack of access comes
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with a heavy price. Some 2 million deaths a year worldwide are attributable to unsafe water and to poor
sanitation and hygiene, mainly through infectious diarrhea. Cholera is still reported to the World Health
Organization (WHO) by more than 50 countries, and about 260 million people are infected with
schistosomiasis. Unsafe levels of arsenic and fluoride in water supplies have exposed millions to cancer and
tooth damage. The “increasing use of wastewater in agriculture is important for livelihood opportunities, but
also associated with serious public health risks. 4% of the global disease burden could be prevented by
improving water supply, sanitation, and hygiene.”91
Water pollution is a result of industrial waste dumping, sewage drainage, and runoff of agricultural
chemicals. The combined effects of global water pollution are causing a noticeable scarcity. Water reserves in
major aquifers are decreasing by an estimated 200 trillion cubic meters each year. The problem stems from the
depletion and pollution of the world’s groundwater. “In Bangladesh, for instance, perhaps half the country’s
population is drinking groundwater containing unsafe levels of arsenic. By inadvertently poisoning
groundwater, we may turn what is essentially a renewable resource into one that cannot be recharged or
purified within human scales, rendering it unusable.”92 It is estimated that the United States will have to
spend $1 trillion over the next 30 years to begin to purify thousands of sites of polluted groundwater. An EPA
report estimated that it could cost between $900 million and $4.3 billion annually to implement one of the
tools under the Clean Water Act for cleaning up the nation’s waters.93 It will require an integrated global
effort of public and private groups, of individuals and corporations, to begin planning and implementing
massive recycling, including agricultural, chemical, and other pollution controls to address water protection
and control. Many companies have already begun conservation efforts. Xerox has halved its use of
dichloromethane, a solvent used to make photoreceptors. The firm also reuses 97% of the solvent and will
replace it with a non-toxic solvent. The Netherlands has a national goal of cutting wastes between 70% and
90%.
Causes of Environmental Pollution
Some of the most pervasive factors that have contributed to the depletion of resources and damage to the
environment include:
1. Consumer affluence. Increased wealth—as measured by personal per capita income—has led to increased
spending, consumption, and waste.
2. Materialistic cultural values. Values have evolved to emphasize consumption over conservation—a mentality
that believes in “bigger is better,” “me first,” and a throwaway ethic.
3. Urbanization. Concentrations of people in cities increase pollution, as illustrated by Los Angeles, New York
City, Mexico City, Sao Paulo, and Santiago, to name a few.
4. Population explosion. Population growth means more industrialization, product use, waste, and pollution.
5. New and uncontrolled technologies. Technologies are produced by firms that prioritize profits, convenience,
and consumption over environmental protection. Although this belief system is changing, the
environmental protection viewpoint is still not mainstream.
6. Industrial activities. Industrial activities that, as stated earlier, have emphasized depletion of natural
resources and destructive uses of the environment for economic reasons have caused significant
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environmental decay.94
Enforcement of Environmental Laws
A number of governmental regulatory agencies have been created to develop and enforce policies and laws to
protect the general and workplace environments. The Occupational Safety and Health Administration
(OSHA), CPSC, EPA, and the Council on Environmental Quality (CEQ) are among the more active
agencies that regulate environmental standards. The EPA, in particular, has been a leading organization in
regulating environmental abuses by industrial firms.
In the 1970s, the EPA’s mission and activities concentrated on controlling and decreasing toxic substances,
radiation, air pollution, water pollution, solid waste (trash), and pesticides. The EPA has since used its
regulatory powers to enforce several important environmental laws such as:
• The Clean Air Act of 1970, 1977, 1989, and 1990: The latest revision of this law includes provisions for
regulating urban smog, greenhouse gas emissions, and acid rain, and for slowing ozone reduction.
Alternative fuels were promoted and companies were authorized to sell or transfer their right to
pollute within same-state boundaries—before, pollution rights could be bought, sold, managed, and
brokered like securities.
• The Federal Water Pollution Control Act of 1972: Revised in 1977, this law controls the discharge of
toxic pollutants into the water.
• The Safe Drinking Water Act of 1974 and 1996: Established national standards for drinking water.
• The Toxic Substances Control Act of 1976: Created a national policy on regulating, controlling, and
banning toxic chemicals where necessary.
• The Resource Conservation and Recovery Act (RCRA) of 1976: This legislation provides guidelines for
the identification, control, and regulation of hazardous wastes by companies and state governments.
The $1.6 billion Superfund was created by Congress in 1980. It provides for the cleanup of chemical
spills and toxic waste dumps. Chemical, petroleum, and oil firms’ taxes help keep the Superfund
going, along with U.S. Treasury funds and fees collected from pollution control. One in four U.S.
residents lives within four miles of a Superfund site. It is estimated that 10,000 sites still need
cleaning, and it may cost $1 trillion and take 50 years to complete this work.95
• Chemical Safety Information, Site Security, and Fuels Regulatory Relief Act of 1999: Created standards
for storing flammable fuels and chemicals.
The Ethics of Ecology
Advocates of a new environmentalism argue that when the stakes approach the damage of the earth itself and
human health and survival, the utilitarian ethic alone is an insufficient logic to justify continuing negligence
and abuse of the earth. For example, Mark Sagoff argues that cost-benefit analysis can measure only desires,
not beliefs. In support of corporate environmental policies, he asks, “Why should we think economic
efficiency is an important goal? Why should we take wants and preferences more seriously than beliefs and
opinions? Why should we base public policy on the model of a market transaction rather than the model of a
political debate? Economists as a rule do not recognize one other value, namely, justice or equality, and they
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speak, therefore, of a ‘trade-off’ between efficiency and our aesthetic and moral values. What about the trade-
off between efficiency and dignity, efficiency and self-respect, efficiency and the magnificence of our natural
heritage, efficiency, and the quality of life?”96
This line of reasoning raises questions such as these: What is a “fair market” price or replacement value for
Lake Erie? The Atlantic Ocean? The Brazilian rainforest? The stratosphere?
Five arguments from those who advocate corporate social responsibility from an ecology-based
organizational ethic include the following:
1. Organizations’ responsibilities go beyond the production of goods and services at a profit.
2. These responsibilities involve helping to solve important social problems, especially those they have helped
create.
3. Corporations have a broader constituency than stockholders alone.
4. Corporations have impacts that go beyond simple marketplace transactions.
5. Corporations serve a wider range of human values than just economics.97
Although these guidelines serve as an ethical basis for understanding corporate responsibility for the
environment, utilitarian logic and cost-benefit methods will continue to play key roles in corporate decisions
regarding their uses of the environment. Also, judges, courts, and juries will use cost-benefit analysis in trying
to decide who should pay and how much when settling case-by-case environmental disputes. Some experts
and industry spokespersons argue that the costs of further controlling pollutants such as smog outweigh the
benefits. For example, it is estimated that the cost of controlling pollution in the United States has exceeded
$160 billion. It costs the EPA $7 billion a year to regulate air pollution, and the benefits range from $19
billion to $167 billion.98 A WHO study has estimated that air pollution will cause 8 million deaths worldwide
by 2020. How many lives would justify spending $160 billion annually? Although some benefits of controlling
pollution have been identified, such as the drop in emissions, improvement of air and water quality, cleanup of
many waste sites, and growth of industries and jobs related to pollution control (environmental products,
tourism, fishing, and boating), it is not clear whether these benefits outweigh the costs.99 One question
sometimes asked regarding this issue is: Would the environment be better off without the environmental laws
and protection agencies paid by tax dollars?
Green Marketing, Environmental Justice, and Industrial Ecology
An innovative trend in new ecology ethical thinking is linking the concepts of green marketing, environmental
justice, and industrial ecology.100 Green marketing is the practice of “adopting resource conserving and
environmentally-friendly strategies in all stages of the value chain.”101 The green market was estimated at 52
million households in the United States in 1995. One study identified trends among consumers who would
switch products to green brands: 88% of consumers surveyed in Germany said they would switch, as would
84% in Italy, and 82% in Spain. Nearly 70% of respondents across the globe said they were somewhat to very
willing to spend more on a green product, compared to the same product without green features. Only 11% of
respondents were not willing at all to spend more money for green features. In open-ended comments, many
analysts noted that the recession heavily influences their buying decisions at the current time, and cutting costs
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seems more important to the average consumer than purchasing green products. Respondents would,
however, buy green products if the price were not significantly higher.
In write-in responses, some respondents expressed concern that green products are not necessarily healthier
or better for the environment, even though they claim to be. According to one respondent from the EU, “It’s
sometimes hard to know how much of that is just marketing and how sustainable green products are in the
longer term rather than just being good to someone’s conscience.”102 Companies are adopting green
marketing as a competitive advantage and are also using green marketing in their operations. For example,
packaging materials that are recyclable, pollution-free production processes, pesticide-free farming, and
natural fertilizers.
Environmental justice is “the pursuit without discrimination based on race, ethnicity, and/or
socioeconomic status concerning both the enforcement of existing environmental laws and regulations and the
reformation of public health policy.”103 Linking environmental justice to green marketing involves identifying
companies that would qualify for visible, prestigious awards—such as the Edison Award—for producing the
best green products. To win the award, companies need to demonstrate that they had, for example, (1)
produced new products and product extensions that represented an important achievement in reducing
environmental impact, (2) indicated where and how they had disposed of industrial and toxic materials, and
(3) incorporated recycling and use of less toxic materials in their strategies and processes.
The green marketing and environmental justice link to industrial ecology is made in the long-range vision
and practice of companies’ integrating environmental justice into sustainable operational practices on an
industrywide basis. Industrial ecology is based on the principle of operating within nature’s domain—that is,
nothing is wasted; everything is recycled.
Rights of Future Generations and Right to a Livable Environment
The ethical principles of rights and duties regarding the treatment of the environment and multiple
stakeholders are (1) the rights of future generations and (2) the right to a livable environment. These rights
are based on the responsibility that the present generation should bear regarding the preservation of the
environment for future generations. In other words, how much of the environment can a present generation
use or destroy to advance its own economic welfare? According to ethicist John Rawls, “Justice requires that
we hand over to our immediate successors a world that is not in worse condition than the one we received
from our ancestors.”104
The right to a livable environment is an issue advanced by William T. Blackstone.105 The logic is that each
human being has a moral and legal right to a decent, livable environment. This “environmental right”
supersedes individuals’ legal property rights and is based on the belief that human life is not possible without a
livable environment. Therefore, laws must enforce the protection of the environment based on human
survival. Several landmark laws have been passed, as noted earlier, that are based more on the logic related to
Blackstone’s “environmental right” than on a utilitarian ethic.
Recommendations to Managers
Boards of directors, business leaders, managers, and professionals should ask four questions regarding their
actual operations and responsibility toward the environment:
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1. How much is your company really worth? (This question refers to the contingent liability a firm may have
to assume depending on its practices.)
2. Have you made environmental risk analysis an integral part of your strategic planning process?
3. Does your information system “look out for” environmental problems?
4. Have you made it clear to your officers and employees that strict adherence to environmental safeguarding
and sustainability requirements are a fundamental tenet of company policy?106
Using the answers to these questions, an organization can determine its stage on the corporate
environmental responsibility profile. The stages range from Beginner (who show no involvement and minimal
resource commitment to responsible environmental management) to Proactivist (who is actively committed
and involved in funding environmental management).
Finally, managers and professionals can determine whether their company’s environmental values are
reflected in the following ethical principles presented in R. Edward Freeman and Joel Reichart’s article,
“Toward a Life Centered Ethic for Business.”107
The Principle of Connectedness. Human life is biologically dependent on other forms of life, and on
ecosystems as a whole, including the nonliving aspects of ecosystems. Therefore, humans must establish some
connection with life and respect that it exists because living things exist in some state of cooperation and
coexistence.
The Principle of Ecologizing Values. Life exists in part because of the ecologizing values of linkage, diversity,
homeostatic succession, and community. There is a presumption that these values are primary goods to be
conserved.
The Principle of Limited Competition. “You may compete [with other living beings] to the full extent of your
abilities, but you may not hunt down your competitors or destroy their food or deny them access to food. You
may compete but may not wage war.” (We would add to the last sentence, “without just cause.”)108
Chapter Summary
The ethical principles related to corporate responsibility toward consumers include: (1) the duty to inform
consumers truthfully; (2) the duty not to misrepresent or withhold information; (3) the duty not to
unreasonably force consumer choice or take undue advantage of consumers through fear or stress; and (4) the
duty to take “due care” to prevent any foreseeable injuries. The use of a utilitarian ethic was discussed to show
the problems in holding corporations accountable for product risks and injuries beyond their control. These
principles continue to apply in contemporary advertising online, through cell phones, and media.
Businesses have legal and moral obligations to provide their consumers with safe products without using
false advertising and without doing harm to the environment. The complexities and controversies with respect
to this obligation stem from attempts to define “safety,” “truth in advertising,” and levels of “harm” caused to
the environment. The Federal Trade Commission’s guidelines for online marketing show that this agency has
considerable power and legitimacy in informing the public about ads; it also serves as a useful watchdog on
corporate advertising and product regulation. Arguments for and against advertising were presented, with
problematic examples of false advertising from the food and tobacco industries highlighted.
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Product safety and liability were discussed through the doctrines of negligence, strict liability, and absolute
liability. The legal and moral limits of product liability were summarized. States are now moving to limit
punitive damages in product liability cases, and tort reform is predicted to change the direction of product
liability litigation toward more protection for manufacturers than for injured consumers.
Corporate responsibility toward the environment was presented by showing how air, water, and land
pollution is a serious, long-term problem. Federal laws aimed at protecting the environment were
summarized. Increasing concern over the destruction of the ozone layer, the destruction of the rain forests,
and other environmental issues has presented firms with another area where economic and social
responsibilities must be balanced. Innovative concepts and corporate attitude changes were discussed. Green
marketing, environmental justice, and industrial ecology principles are being practiced by a growing number
of corporations, particularly in Europe—especially since green products and clean manufacturing processes
(and certifications) offer a competitive advantage. An innovative move by some corporations is to include
environmental safety practices in the strategic, enterprise, and supply-chain dimensions of industrial activities
and practices. A diagnostic enables a company to identify its stage of social responsibility toward the
environment.
Questions
1. What advertisements—and where do these appear (TV, Internet, print)—do you find “unethical” but legal?
Explain.
2. What ethical principles of advertising apply to consumers in all cultures and countries? Explain.
3. Identify some problems associated with the free-market theory of corporate responsibility (discussed in
Chapter 4) for consumers? Compare this view with the social contract and stakeholder perspectives (also
discussed in Chapter 4) of corporate social responsibility.
4. Where does the liability of a company end and the responsibility of consumers begin for products? Explain
your answer as you define this question more specifically.
5. What constitutes “unreasonable risk” concerning the safety of a product? Identify considerations that define
the safety of a product from an ethical perspective.
6. Do you believe the environment is in trouble from climate change and global warming, or do you believe
this is “hype” from the press and scientists? Explain.
7. Evaluate and comment on this statement: “North American and European countries have created waste,
pollution, and environmental devastation for decades, even centuries. Is it fair that countries like China and
India should have the same sanctions now regarding their use of technologies, fuels, and other polluting
devices as North America and Europe?”
Exercises
1. Identify a recent example of a corporation accused of false or deceitful advertising. How did it justify the
claims made in its ad? Do you agree or disagree with the claims? Explain.
2. In a paragraph, explain your opinion of whether the advertising industry requires regulation.
3. Can you think of an instance when you or someone you know was affected by corporate negligence in terms
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of product safety standards? If so, did you or the person communicate the problem to the company? Was
any action taken regarding the defective product? Explain.
4. Do you believe cigarette, cigar, and pipe smoking should be banned from all public places where passive
smoking can affect nonsmokers? Explain. Use the following (or other) web sites to argue your position:
http://www.cdc.gov; http://www.tobacco.org; http://www.thetruth.com; http://www.trytostop.org;
http://www.cancer.org; http://www.getoutraged.com.
5. Find a recent article discussing the environmental damage caused by a corporation’s activities. Recommend
methods the firm in the article should employ to reduce harmful effects on the environment.
6. Find a recent article discussing an innovative way in which a corporation is helping the environment.
Explain why the method is innovative and whether you believe the method will really help the environment
or will only help the company promote its image as a good citizen.
Real-Time Ethical Dilemma
Questionable Conflict of Interest
I am a project manager who supports corporate-citizenship-funded programs for our large insurance company.
I am responsible for helping choose proposals to support for environmental, community education, and
alumni related projects. Last year, the division in which I work facilitated 120 sponsorships, engaged 100
employees, and provided nearly 25 speakers to various programs.
We have a set of criteria to guide our decision-making process and to help proposals that demonstrate real
need. This focus aligns with the mission of the company. Still, there are many organizations with proposals
that are high profile, legacy, and/or ones also supported by executives at our firm. These executive-backed
requests sometimes receive preferential treatment over the requests that do meet our needs criteria. Several
individuals and groups in the company who are aware of these exceptions either shrug it off or feel
comfortably conflicted.
Executives form close ties with some of the groups who receive funding without going through our formal
process. A dilemma our group faced last year occurred when one executive pressured us to fund a nonprofit
that his sister founded. It was a small nonprofit with an environmental focus in an unassigned area and
community in which our Program operates. Since this is not the only time executives have bypassed our
company policy, it is one that smacked of nepotism!
While I hesitate to judge whether or not this particular executive was right or wrong, I continue to have
issues with the assumed power and authority that executives in our firm take to trump our mandated mission
and decisions with regard to funding needy programs. What more should I have done (should I do) to stand
up for my personal and professional beliefs?
My reasoning to execute the sponsorship of that particular program was because I was afraid of the
backlash if I did not act. The organization has created a culture where this is acceptable and even though I am
not comfortable with this part of our culture, I cannot do much to change it at this point. I cringe at this
particular situation and others since I was raised with an ethic of fairness and acting justly toward others. If all
people cannot act in a certain way, then no one should act that way. It is difficult managing this process in the
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http://www.cdc.gov

http://www.tobacco.org

http://www.thetruth.com

http://www.trytostop.org

http://www.cancer.org

http://www.getoutraged.com

real world because people and organizations inevitably have competing interests, stakes, and power in the
hierarchy of a company.
Questions
1. What exactly is the conflict of interest here?
2. Is this a serious conflict of interest or just a “business as usual” situation? Explain.
3. What would you have done in this situation before the executive took a decision to fund the sister’s
program if you had been this project manager? Explain.
4. Describe the ethical principles (or reasoning) you used in your answer to question 3.
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Cases
Case 12
For-Profit Universities: Opportunities, Issues, and Promises
Background
For-profit colleges and universities, compared to their public institutional counterparts, are governed and
operated by private corporations. Enrollment in for-profit institutions over the past 20 years has increased
225%, taking in approximately 12% of all postsecondary students—2.4 million as of the 2010–2011 academic
year. Estimates for 2013 indicate that the top 50 for-profit colleges and universities headcount totals over
1,260,000. Because public community colleges, or many private universities, cannot meet this level of demand
from primarily working adults, part-time students, and working parents with students, for-profit institutions
provide an option for those who would otherwise not be able to receive a college education.
Competitive advantages of for-profit institutions include “flexible scheduling with year-round enrollment,
online options, small class sizes and convenient locations.” These characteristics attract a large and growing
student population entering the education market. It seems the entrepreneurial wave of for-profits has and
continues to serve a niche that traditional universities and institutions of higher learning have not served, and
perhaps cannot serve, at least to date.
Trouble in Paradise
For-profit higher education universities and colleges have entered the eye of the storm on Capitol Hill over
the last few years with regard to questionable recruiting practices and use of taxpayer funds that have not
resulted in gainful employment and promised results for many students. Although for-profit universities have
garnered the favor of Wall Street investors and have formed a powerful lobbying group to promote for-profit
interests, questions continue to surface as the boundaries between traditional academia and the business of
higher education blur.
Congressional Investigation
The 2012 report of a two-year investigation into for-profit colleges by the U.S. Senate’s Health, Education,
Labor, and Pensions Committee, comprised primarily of Democratic Party legislators, revealed staggering
statistics that have resulted in intense scrutiny by the federal government, creating a call to action for
regulation to monitor for-profit institutions. According to other recent investigations, currently “more than
$30 billion in taxpayer funds flow to the [for-profit] schools each year” and “about 60% of for-profit colleges
receive over 70% of their revenue from U.S. government programs.” These statistics, combined with some for-
profit student testimonies about the “dishonest” and “fraudulent” practices of their educational institutions,
have resulted in lawsuits. One such lawsuit reached settlement on July 26, 2013, after a “for-profit college in
Richmond, Va., agreed to pay $5 million in a class-action settlement filed by eight former students, who
argued that the training/education they received was a sham.”
Senator Tom Harkin of Iowa led the investigation into for-profit schools and stated that “in this report,
you will find overwhelming documentation of exorbitant tuition, aggressive recruiting practices, abysmal
student outcomes, taxpayer dollars spent on marketing and pocketed as profit, and regulatory evasion and
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manipulation.” He added that “These practices are not the exception—they are the norm. They are systemic
throughout the industry, with very few individual exceptions.”
The storm has continued to build since 2010 as the pressures for legislation increased, driven by senate
investigations, increasing litigation, and courts setting precedents. For-profit education probes began in 2010
when press reports started to “raise questions about the quality of proprietary institutions.” “These questions
stem from the rapid growth of this industry over the last few years, reported aggressive recruitment of students
by such institutions, increased variety in the delivery methods used to provide education to students, and the
value of the education provided by such institutions.”
College, Inc., PBS, and For-Profit Universities
A Public Broadcasting Service (PBS) documentary filmed in 2010 named College, Inc. profiled the for-profit
college industry, its historical roots, certain business practices, investors’ interests, and issues surrounding the
industry. The film examined the application of “private sector principles” to the education industry. The
documentary’s profile of Michael K. Clifford, a pioneer for-profit education investor and deal-maker,
provided a lens to view for-profit education as an opportunity for investors to both realize a financial return on
their investment, while also achieving so-called philanthropic goals; that is, helping failing U.S. universities
and colleges keep their doors open for students. (One of his specialties is buying faltering private U.S.
colleges).
Bringing a combination of what Clifford calls the “Three M’s: Money, Management, and Marketing,”
investors have been able to turn around some of the failing institutions and leverage significant value-adds,
such as accreditations, while helping the universities bring in huge profits using an improved profit business
model. Although there are concerns about the for-profits’ “business model,” the PBS documentary points out
that “‘Nonprofit’ colleges which pay their leaders executive salaries while operating multi-billion dollar sports
franchises have long since ceded the moral high ground when it comes to chasing the bottom line.”
Pressures on the For-Profit Sector
These external probes have jolted some in the for-profit educational sector as facts from the investigation and
large monetary settlements are highlighted by the media. For-profit supporters, however, continue to focus on
the impetus of creating these needed institutions, asserting that they “provide very necessary services for rural
people and for people learning certain trades” and primarily “help accommodate the mushrooming demand for
higher education.” political supporters, many of whom are Republicans, continue to point out the advantages
of for-profit education out of concern about the regulatory legislative framework proposed by the Obama
administration that emphasizes the “need to look for ways to improve the bad players, but not cast a wide net
over the industry.”
Key Issues
The for-profit higher education sector’s growth and controversy over its business model and practices have
triggered reaction and questioning at the state and federal government levels. Some of the primary issues
include: the quality of education of these institutions; the amount of money in scholarships and loans they
receive from the federal and state governments; the recruiting tactics they use to attract students; and the
failure of their graduates in finding jobs.
The National Conference of State Legislatures noted that “Critics of for-profit institutions argue that
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many schools and programs leave students with large amounts of debt, few employable skills, and at a greater
risk of not completing a degree at all. This is of greater concern because of the heavy federal subsidies that for-
profit institutions receive. . . . Lawmakers have begun to look for ways to better hold these schools
accountable for graduating students that can find gainful employment, not be overburdened with large debt
they are unable to pay back, and in this way ensure taxpayers are getting a good return on their investment.” A
key concern regarding for-profits’ business practices stems from the previously quoted statistics that said
“more than $30 billion in taxpayer funds flow to the schools each year” and “about 60% of for-profit colleges
receive more than 70% of their revenue from U.S. government programs.” The industry seems fundamentally
subsidized by public taxpayers who are the source of the money for these loans. As a consequence, a nervous
climate of uneasiness has developed that reflects the same concerns that preceded the recent U.S. subprime
lending and housing crisis.
A June 24, 2010, New York Times article titled “Battle Lines Drawn Over For-Profit Colleges” pointed out
that “one source of contention was the planned appearance at the hearings of Steven Eisman, a hedge fund
manager known for having predicted the housing market crash. He has recently compared the for-profit
college sector to the subprime mortgage banking industry—arguing that both grew rapidly based on lending
to low-income people with little ability to repay the loans.” For-profit schools make up nearly half of all
student defaults. For-profit schools claim to give students who have been turned away from other institutions
the opportunity of a higher education, but the reality is that the wider net they have cast primarily includes
lower-income individuals who do not have the propensity to be able to pay back these loans, therefore creating
an effective “house of cards” and a predicted “student loan bubble.”
Statistics from the U.S. Department of Education also showed that for the Fiscal Year (FY) 2011 two-year
and official FY 2010 three-year period, “For-profit institutions continue to have the highest average two- and
three-year cohort default rates at 13.6 percent and 21.8 percent, respectively. Public institutions followed at
9.6 percent for the two-year rate and 13 percent for the three-year rate. Private non-profit institutions had the
lowest rates at 5.2 percent for the two-year rate and 8.2 percent for the three-year rate.” In addition, “the
average tuition at for-profit colleges is $14,000 a year, compared with $2,500 at community college and
$7,000 in-state tuition at a public four-year college, the report found. . . . Students take out larger loans—and
default more often.” Given the current economic conditions, “with costs soaring, incomes stagnating and little
help from government; it was not surprising that total student debt, around $1 trillion, surpassed total credit-
card debt last year.” The findings of the for-profit universities investigations are pressuring states to increase
monitoring of those institutions. State legislatures in Connecticut, California, Michigan, Delaware, and
Maryland have already implemented criteria related to such monitoring.
Concluding Comments
It is in the interests of states and the federal government to effectively but fairly regulate for- and not-for-
profit higher education institutions for all stakeholders. With regard to this case, it is also in the interests of
for-profit universities and colleges to legally and ethically attract and recruit students, as well as charge rates
similar to comparable competitors, and to produce graduating students who can find gainful employment
given their education, skills, and abilities. The role of both the federal and state legislatures is to provide
“safeguards and transparency for students, hold schools accountable for providing meaningful degrees, and
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evaluate allocation of state student aid.”
How and in what ways for-profits will fit into the mix of a changing education landscape in the United
States and internationally remains to be seen—especially given the rise of massive online open curriculum
(MOOC) initiatives, rising student debt at all higher educational institutions, and the need for different types
of jobs and skills in this century.
Questions for Discussion
1. What are the main issues in this case with the for-profit higher university and college education sector?
2. Watch the online video College, Inc. produced by PBS. Evaluate PBS’s role in making the video and its
content. Is this a fair, objective account of for-profits? Why? If not, what information is needed in the
video? Explain your reasoning.
3. Identify some of the major stakeholders and issues using your answers and findings in the above questions,
and this case. After reviewing the major stakeholders’ interests, arguments, and facts regarding these issues,
what did you discover? What and whose arguments and information did you find most compelling to help
resolve the controversy? Where do you now stand and why on for-profit university institutions and
practices? Explain.
Sources
This case was developed from material contained in the following sources:
Blumenstyk, Goldie. (March 2, 2012). For-profit colleges compute their own graduation rates. Chronicle of
Higher Education. http://chronicle.com/article/For-Profits-Develop/131048/, accessed July 28, 2013.
Carey, Kevin. (May 10, 2010). “College, Inc.” Chronicle of Higher Education. Brainstorm.
http://chronicle.com/blogs/brainstorm/college-inc/23850, accessed July, 2013.
College Completion: Who graduates from college, who doesn’t and why it matters. Chronicle of Higher
Education. http://collegecompletion.chronicle.com/table/, accessed July 28, 2013.
Fain, P., and S. Jaschik. (2013). Obama on for-profits. InsideHigherEd.
http://www.insidehighered.com/news/2013/08/26/obama-speaks-directly-profit-higher-education-noting-
concerns-sector#ixzz2iPDydhPh, accessed January 7, 2014.
Lewin, Tamar. (July 29, 2012). Senate Committee report on for-profit colleges condemns costs and practices.
NYTimes.com. http://www.nytimes.com/2012/07/30/education/harkin-report-condemns-for-profit-
colleges.html, accessed January 7, 2014.
Maggio, John (writer), and Martin Smith (writer). (2010). College, Inc. [Documentary]. United States:
Frontline.
Marklein, Mary Beth. (July 26, 2013). For-profit college settles class-action lawsuit. USAToday.com.
http://www.usatoday.com/story/news/nation/2013/07/26/for-profit-college-settlement/2590877/, accessed
July 27, 2013.
National Conference of State Legislatures (NCSL). (July 2013). For profit colleges and universities.
NCSL.gov. http://www.ncsl.org/research/education/for-profit-colleges-and-universities.aspx, accessed
January 7, 2014.
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http://chronicle.com/article/For-Profits-Develop/131048/

http://chronicle.com/blogs/brainstorm/college-inc/23850

http://collegecompletion.chronicle.com/table/

http://www.insidehighered.com/news/2013/08/26/obama-speaks-directly-profit-higher-education-noting-concerns-sector#ixzz2iPDydhPh

http://www.usatoday.com/story/news/nation/2013/07/26/for-profit-college-settlement/2590877/

http://www.ncsl.org/research/education/for-profit-colleges-and-universities.aspx

Schouten, Fredreka, and Christopher Schnaars. (July 24, 2013). For-profit colleges giving big to helpful
House members. USA Today.com. http://www.usatoday.com/story/news/politics/2013/07/23/for-profit-
colleges-contributions-house-regulations/2579041/, accessed July 27, 2013.
Stiglitz, Joseph E. (May, 12, 2013). Student debt and the crushing of the American dream. NYTimes.com.
http://opinionator.blogs.nytimes.com/2013/05/12/student-debt-and-the-crushing-of-the-american-
dream/, accessed July 27, 2013.
The top 50 online colleges and universities by headcount. (July 9, 2013). Eduventures.com.
http://www.eduventures.com/2013/07/the-top-50-online-colleges-and-universities-by-headcount/,
accessed January 7, 2014.
U.S. Department of Education. (September 30, 2013). Default rates continue to rise for federal student loans.
ED.gov. http://www.ed.gov/news/press-releases/default-rates-continue-rise-federal-student-loans, accessed
January 7, 2014.
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http://www.usatoday.com/story/news/politics/2013/07/23/for-profit-colleges-contributions-house-regulations/2579041/

http://www.eduventures.com/2013/07/the-top-50-online-colleges-and-universities-by-headcount/

http://www.ed.gov/news/press-releases/default-rates-continue-rise-federal-student-loans

Case 13
Fracking: Drilling for Disaster?
In a lively 2013 CNN article, “Fears of Quakes and Flammable Tap Water Hit Britain as Fracking Looms,”
Dan Rivers and Ben Brumfield write, “The fear of fracking has come to Britain, replete with worries about
potential earthquakes and tap water tainted with natural gas that bursts into flames at the strike of a match.”
The lifting in May 2013 of a ban on extracting (drilling) for natural gas found in rock layers deep
underground in the town of Balcombe in southern England has several hundred protesters worried. Perhaps
they have seen the American documentary Gasland II (2013) by Josh Fox, which shows several American
homeowners losing the value of their properties and homes to certain energy corporations’ drilling and
releasing flammable gas in their kitchen sinks.
The debate over this drilling process in the United States and now in England has proponents and
opponents stating their claims and arguing for very large stakes. Opponents fear for their homes and property
values and potentially may have to leave their residences (many already have) because of the aftereffects and
devastation caused. Proponents, including President Obama, see natural gas on U.S. soil as an energy-
independent national strategy. Cuadrilla, the British energy company waiting to drill in Balcombe, “believes
there is about 200 trillion cubic feet of gas under the ground just within one of its local license areas. To put
that figure into context, the United Kingdom uses about 3 trillion cubic feet of gas a year.”
What Is Fracking?
Hydraulic fracturing or “fracking” is a process used to retrieve natural gas that is otherwise inaccessible. This
technology was first developed in the late 1940s and involves pumping a mixture of water, sand, and chemicals
—the “fracking fluid”—deep underground to break up shale rock formations and release pockets of gas.
Fracking usually occurs when a new well is drilled, but wells may be fractured multiple times to increase gas
extraction. In its lifetime, a well can be fracked up to 18 times; 90% of all oil and gas wells in the United
States are “fracked” to boost productivity, according to the Interstate Oil and Gas Commission.
First, a well is drilled until it nears the shale layer, typically 5,000 to 12,000 feet below ground. The bore
then changes direction and continues drilling horizontally. After the drill is removed, production casing is
inserted, and cement is pumped through and around the casing. The cement is installed to prevent anything
from getting into the fresh water aquifers. Explosive charges then puncture the casing and cement on the
horizontal portion of the drilled tunnel. A mixture of water, sand, and chemicals is pumped down the well and
out of these apertures at high pressures. The fracking fluid is over 99% water, but contains over 500 different
chemicals. As a result, a single “frack job” can require as much as 5 million gallons of water. The mixture
fractures the rock and allows the trapped gas to escape into the well bore.
The fracking process not only requires millions of gallons of water but also results in large amounts of toxic
waste. Some wastewater comes back up the well and must be collected. This wastewater contains dissolved
solids such as sulfates and chlorides, metals, and other potentially hazardous components. Conventional
municipal sewage or drinking water treatment plants cannot remove the sulfates and chlorides. Instead, the
fracking fluid must be sent to a treatment plant, injected into underground disposal wells, or mixed with fresh
water and reused.
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Benefits
Experts have known for years that natural gas deposits existed in deep shale formations, but until recently the
vast quantities of natural gas in these formations were not thought to be recoverable. Hydraulic fracturing
makes the drilling process more efficient and makes available vast new reserves of natural gas across the
country. Natural gas plays a key role in meeting the United States’ energy demands, supplying about 22% of
the total. The Energy Information Administration estimates that there is more than 1,744 trillion cubic feet
of technically recoverable natural gas that exists within the United States, 60% of which is contained as shale
gas, tight sands, and coaled methane. The total amount of this resource is estimated to be able to provide
enough natural gas to the United States for the next 90 years. Separate estimates of the shale gas resource
extend this supply to 116 years.
Shale formations in the United States containing large quantities of natural gas are concentrated in the
Northeast Appalachian range and the Rocky Mountain range of the West. The Marcellus Shale formation,
which extends from West Virginia and eastern Ohio through Pennsylvania and into southern New York,
could become one of the world’s most productive natural gas fields. It is estimated that this area alone
possesses 500 trillion cubic feet of gas or more, enough to supply the entire East Coast for 50 years. The
majority of “fraccisdents” have taken place across Pennsylvania in this Marcellus Shale formation, potentially
compromising the Delaware River, Monongahela River, and Susquehanna Rivers. With the help of fracking,
natural gas currently satisfies nearly one-quarter of the nation’s power needs. At current drilling rates and
consumption levels, it’s expected to provide more than half the nation’s natural gas by 2030, according to an
MIT study.
President of the American Chemistry Council (ACC), Cal Dooley states, “One of our highest priorities in
this country is to establish energy security and to reduce our dependence on imported oil. . . . We see a game-
changer here with our ability to capitalize on what is estimated to be a 100-year supply of natural gas in shale
deposits.” This abundant domestic supply of natural gas has provided the United States with a competitive
edge in overseas markets and a source for consumption within the country.
Sara Banaszak, senior economist for the American Petroleum Institute (API) further states, “Developing
domestic supplies of natural gas will mean billions of dollars in government revenue and reductions in
greenhouse gas emissions.” The industry boasts that gas is cleaner than oil or coal, emitting less pollution
when burned. In May 2010, an industry-financed study conducted at Pennsylvania State University estimated
that gas companies spent $4.5 billion developing the Marcellus Shale formation in Pennsylvania. As a result,
it has generated $389 million in state and local tax revenue and more than 44,000 jobs.
Instant Millionaires
The natural gas boom in the United States has resulted in big businesses compensating local individuals for
the use of their land to drill. Money is earned in signing bonuses, as well as royalties from the amount of gas
extracted. Other landowners cashed in by leasing their mineral rights and allowing gas companies to drill
horizontally under their properties. One company, Chesapeake Energy, claims to have contracted with a
million American households. This modern-day gold rush has enabled struggling locals to become practically
millionaires overnight.
Homeowners are offered anywhere from $350 to $30,000 an acre. With additional royalties, this can be a
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very tempting offer. Rowena Shager of Louisiana negotiated to lease her land. Within a short time, fracking
fluid had polluted her family’s drinking water. She states, “If I thought I was putting my family’s life in
jeopardy, or taking away from the value of my property, I never would have signed.” A significant number of
families are unaware of the potential risks involved when signing contracts with natural gas companies and
have suffered negative consequences as a result.
Environmental and Health Concerns
The fracking process has received significant attention in the threats it poses to the environment and human
health, particularly water and air pollution across the country. Regulators say that flushing too much of this
wastewater into a river could severely harm animals. In 2009, 16 cattle dropped dead near a Chesapeake
Energy drilling site in Louisiana after drinking from a mysterious fluid used by drillers that had flooded off
during a storm.
Fracking has also been responsible for well-water contamination, filling a basement with methane and
blowing up a house in Ohio, and poisoning 17 crows in Louisiana, according to a statement from U.S.
environmental group Sierra Club. Nonprofit organization Natural Resources Defense Council (NRDC)
warns that fracking could also trigger earthquakes in certain areas.
The industry maintains its position that hydraulic fracturing has been safe for decades, yet homeowners are
coming forward with an entirely different story. Because fracking takes place thousands of feet below the
water table where groundwater settles, local drinking water is at risk for contamination. Residents in six states
have documented more than 1,000 cases of water contamination as a result of hydraulic fracturing. In the
documentary Gasland (2010), Josh Fox travels across the country meeting families that have been affected by
hydraulic fracturing. From these interviews, there is evidence that drinking contaminated water has caused
headaches, brain damage, asthma, cancer, arsenic poisoning, and loss of taste and smell.
The small town of Dimock, Pennsylvania, is at the heart of the drilling debate. Cabot Oil drilled over 40
wells in just a few months. Gas then contaminated local drinking wells, making the water so hazardous that
families are able to ignite their drinking water and start a fire. In late 2009, a group of 19 Dimock residents
sued Cabot in federal court for contaminating their wells and devaluing their real estate. The case was finally
settled in December 2010, with Cabot Oil and Gas Corporation agreeing to pay $4.1 million to the families
affected by methane contamination attributed to faulty Cabot natural gas wells. The settlement also requires
Cabot to offer and pay to install whole-house gas mitigation devices in each of the affected homes. Once the
terms of the agreement have been met, Cabot plans to resume operations in Dimock.
Environmental Protection Agency (EPA)
A 2004 hydraulic fracturing study by the EPA found no evidence of water-table contamination. The study
concluded that 80% of the chemicals degrade underground or are recovered. Due to criticisms of the study, as
well as increased attention on fracking, the agency has recently begun a new two-year study of hydraulic
fracturing. In March 2012, the EPA released test results concluding that Dimock’s water contamination does
not pose any risk to human health. The arsenic levels were deemed safe; however, the water of six homes did
contain sodium, methane, chromium, and bacteria. Many residents have lost all trust in their drinking water
and say they will never use it again. The EPA is continuing its tests of Dimock homes’ drinking water.
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It has asked nine natural gas services providers to voluntarily disclose data on chemicals used in hydraulic
fracturing. These gas companies include BJ Services, Complete Production Services, Halliburton, Key Energy
Services, Patterson-UTI, PRC, Inc., Schlumberger, Superior Well Services, and Weatherford. The EPA
intends to use this data in this study underway to determine whether fracking has an impact on water quality
for residents living in the vicinity. By November 2010, Halliburton was the only company that refused to
voluntarily submit data. As a result, the EPA has issued a subpoena to Halliburton in order to gain this
information.
Congress and Regulation
Congress enacted the Clean Water Act in 1972 and the Safe Drinking Water Act in 1974, giving the EPA
the power to set national standards regarding maximum acceptable levels of water-contaminates in public
water systems. The Safe Drinking Water Act also authorizes states to create regulations to protect their
underground drinking water sources, as long as each state complies with the EPA’s minimum requirements
and receives EPA approval.
The George W. Bush administration introduced the Energy Policy Act (EPACT) of 2005 that exempted
oil and gas companies from certain federal regulations protecting drinking water, amending the Safe Drinking
Water Act. Bush’s vice president Dick Cheney was chairman and CEO of Halliburton Corporation from
1995 to 2000. His former employment and strong ties to the gas and drilling industry certainly influenced the
legislation.
EPACT changed the definition of “underground injection” to exclude “the underground injection of fluids
or propping agents (other than diesel fuels) pursuant to hydraulic fracturing operations.” This amendment,
which came to be known as the “Halliburton Loophole,” exempted fracking from federal law and gave
jurisdiction and authority over hydraulic fracturing operations to the states. Meanwhile, most state oil and gas
regulatory agencies do not require companies to report the volumes or names of chemicals being used in
extraction. According to the nonprofit Oil and Gas Accountability Project, one of the country’s dirtiest
industries enjoys the exclusive right to “inject toxic fluids directly into good quality groundwater without
oversight.” This is a significant issue because Americans get approximately half of all drinking water from
underground sources.
In 2009, U.S. Representative Diane Degette (Democrat, Colorado) introduced a bill called the Fracturing
Responsibility and Awareness to Chemical Act (FRAC Act). Under this bill, gas producers would be required
to disclose chemical identities of all constituents of the fracturing fluid, making this information available on a
web site.
This would allow emergency crews and first responders to have access to the chemical identities in the case
of an emergency. The bill would also close the Halliburton Loophole. As of 2013, Congress has not passed
this bill.
State Legislation
More than 30 states have varying degrees of shale production or exploration. A significant number of states’
legislation is based on rules laid down by Colorado following many stakeholder discussions. After documented
damage from fracking within the state, Colorado implemented a comprehensive drilling plan including:
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practices to minimize the negative effects on communities and the environment; drilling at a required distance
from homes; and reporting chemical identities.
Drilling in the Northeast is the most recent, while hydraulic fracturing operations in the southern and
western areas of the country are much more established. Drilling into the Marcellus Shale formation has
spurred up controversy and resistance. Pennsylvania passed regulations on fracking in November 2010,
requiring disclosure of a Material Safety Data Sheet with a list of additives used in drilling. In December
2010, New York tried to place a temporary ban on fracking until May 2011, in order to study environmental
impacts. Governor David Paterson vetoed the bill, stating that it would put many people out of work. Instead,
he issued an executive order instituting a moratorium that extended until July 1, 2011, beyond the date
specified in the original bill. Oil companies are pleased because this executive order makes a distinction
between the types of drilling, allowing horizontal drilling but disallowing vertical. Recently the cities of
Pit