Short Essay Question

BUSINESS ETHICS Seventh Edition

Manuel G. Velasquez Santa Clara University

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C O N C E P T S & C A S E S

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Contents Preface vi

PART ONE Basic Principles 1

1 Ethics and Business 3 Introduction 4 1.1 The Nature of Business Ethics 8 1.2 Ethical Issues in Business 27

ON THE EDGE: A Traditional Business 35 1.3 Moral Reasoning 37

ON THE EDGE: WorldCom’s Whistleblower 42 1.4 Moral Responsibility and Blame 56

ON THE EDGE: Gun Manufacturers and Responsibility 63 CASES FOR DISCUSSION 64 Slavery in the Chocolate Industry 64 Aaron Beam and the HealthSouth Fraud 68

2 Ethical Principles in Business 73 Introduction 74 2.1 Utilitarianism: Weighing Social Costs and Benefits 76

ON THE EDGE: Should Companies Dump Their Wastes In Poor Countries? 80

2.2 Rights and Duties 90 ON THE EDGE: Working for Eli Lilly & Company 92

2.3 Justice and Fairness 105 ON THE EDGE: ExxonMobil, Amerada Hess, and Marathon Oil in Equatorial Guinea 113

2.4 The Ethics of Care 119 2.5 Integrating Utility, Rights, Justice, and Caring 124 2.6 An Alternative to Moral Principles: Virtue Ethics 126 2.7 Unconscious Moral Decisions 135

CASES FOR DISCUSSION 143 Traidos Bank and Roche’s Drug Trials in China 143 Unocal in Burma 145

PART TWO The Market and Business 149

3 The Business System: Government, Markets, and International Trade 151 Introduction 152 3.1 Free Markets and Rights: John Locke 157

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iv CONTENTS

3.2 Free Markets and Utility: Adam Smith 164 ON THE EDGE: Commodification or How Free Should Free Markets Be? 166

3.3 Free Trade and Utility: David Ricardo 172 3.4 Marx and Justice: Criticizing Markets and Free Trade 176

ON THE EDGE: Marx’s Children 178 ON THE EDGE: Napster’s Lost Revolution 182

3.5 Conclusion: The Mixed Economy, the New Property, and the End of Marxism 185

CASES FOR DISCUSSION 190 The GM Bailout 190 Accolade versus Sega 194

4 Ethics in the Marketplace 197 Introduction 198 4.1 Perfect Competition 200 4.2 Monopoly Competition 209

ON THE EDGE: Drug Company Monopolies and Profits 212 4.3 Oligopolistic Competition 215

ON THE EDGE: Fixing the Computer Memory Market 218 4.4 Oligopolies and Public Policy 225

ON THE EDGE: Oracle and Peoplesoft 229

CASES FOR DISCUSSION 230 Intel’s “Rebates” and Other Ways It “Helped” Customers 230 Archer Daniels Midland and the Friendly Competitors 235

PART THREE Business and Its External Exchanges: Ecology and Consumers 241

5 Ethics and the Environment 243 Introduction 244 5.1 The Dimensions of Pollution and Resource Depletion 246

ON THE EDGE: Ford’s Toxic Wastes 250 5.2 The Ethics of Pollution Control 263

ON THE EDGE: The Auto Companies in China 264 5.3 The Ethics of Conserving Depletable Resources 283

ON THE EDGE: Exporting Poison 286

CASES FOR DISCUSSION 293 The Ok Tedi Copper Mine 293 Gas or Grouse? 297

6 The Ethics of Consumer Production and Marketing 303 Introduction 304 6.1 Markets and Consumer Protection 306

CONTENTS v

6.2 The Contract View of Business Firm’s Duties to Consumers 308 6.3 The Due Care Theory 314

ON THE EDGE: The Tobacco Companies and Product Safety 316 6.4 The Social Costs View of the Manufacturer’s Duties 319

ON THE EDGE: Selling Personalized Genetics 320 6.5 Advertising Ethics 322

ON THE EDGE: Advertising Death to Kids? 324 6.6 Consumer Privacy 330

CASES FOR DISCUSSION 335 Becton Dickinson and Needle Sticks 335 Reducing Debts at Credit Solutions of America 339

PART FOUR Ethics and Employees 345

7 The Ethics of Job Discrimination 347 Introduction 348 7.1 Job Discrimination: Its Nature 350

ON THE EDGE: Helping Patients at Plainfield Healthcare Center 355 7.2 Discrimination: Its Extent 356 7.3 Discrimination: Utility, Rights, and Justice 367

ON THE EDGE: Driving for Old Dominion 372 ON THE EDGE: Peter Oiler and Winn-Dixie Stores 376

7.4 Affirmative Action 378

CASES FOR DISCUSSION 389 Should Kroger Pay Now for What a Ralphs’ Employee Did in the Past 389 Wal-Mart ’s Women 392

8 Ethics and the Employee 399 Introduction 400 8.1 The Rational Organization 401

ON THE EDGE: HP’s Secrets and Oracle’s New Hire 410 ON THE EDGE: Insider Trading or What Are Friends For? 414

8.2 The Political Organization 421 ON THE EDGE: Sergeant Quon’s Text Messages 425

8.3 The Caring Organization 446

CASES FOR DISCUSSION 450 Death at Massey Energy Company 450 Who Should Pay? 456

Notes 458 Photo Credits 485 Text Credits 485 Index 488

Preface

Business Ethics: Concepts and Cases continues to be one of the most widely used textbooks on business ethics, and remains popular among students because of its accessi- ble style and lucid explanations of complex theories and concepts. Providing clear explanations of ideas without oversimplifying them into caricatures of themselves is a major challenge for texts in this field (as any instruc- tor knows who has examined several texts on business ethics). Instructors who have used previous editions of this textbook have said that it does an outstanding job of meeting this challenge, while also providing an ex- cellent balance of ethical theory and managerial prac- tice. But the world does not stand still. Not only have our technologies, organizational forms, and managerial practices changed over the last few years, but our un- derstanding of ethical reasoning has developed and new moral issues have continued to challenge business. So it was necessary to revise the text and to provide fresh and updated treatments of these and other enduring ethical issues in business. To facilitate the study of these issues, this edition incorporates a number of valuable and ex- citing pedagogical devices including:

■ Six new and seven updated end-of-chapter cases ■ Twelve completely new “On the Edge” short

cases and six updated short cases in the body of the chapters

■ Eight newly illustrated short cases ■ Eight ABC News video clips posted online on the

book’s companion website, www.mythinkinglab. com to accompany eight of the end-of-chapter cases.

■ New graphs and charts, new pictures, and other visual materials

■ Study questions at the beginning of each chapter

■ Definitions of key terms in the margins and in the glossary

■ Summaries in the margins of all the basic ideas discussed in the text

■ New discussions of: moral reasoning, cor- porate social responsibility, impediments to

moral behavior, the influence of unconscious processes on moral behavior, globalization, technology, predatory pricing, the fraud tri- angle, sustainability, the value of work, recent business scandals, and much more.

■ Up-to-date statistics and data in all chapters. ■ End-of-chapter web resources

Although this new edition updates the contents of its predecessor, it retains both the basic organization and the conceptual framework of previous versions.

The primary aims of the text remain the same as in earlier editions. They are: (1) to introduce the reader to the ethical concepts that are relevant to resolving moral issues in business; (2) to impart the reasoning and ana- lytical skills needed to apply ethical concepts to business decisions; (3) to identify the moral issues involved in the management of specific problem areas in business; (4) to provide an understanding of the social, techno- logical, and natural environments within which moral issues in business arise; and (5) to supply case studies of actual moral dilemmas faced by businesses and business people.

The text is organized into four parts each contain- ing two chapters. Part One provides an introduction to basic ethical theory. A fundamental perspective de- veloped here is the view that ethical behavior is the best long-term business strategy for a company. By this I do not mean that ethical behavior is never costly. Nor do I mean that ethical behavior is always rewarded or that unethical behavior is always punished. It is ob- vious, in fact, that unethical behavior sometimes pays off, and that ethical behavior can impose serious losses on a company. When I argue that ethical behavior is the best long-range business strategy, I mean merely that over the long run, and for the most part, ethi- cal behavior can give a company important competi- tive advantages over companies that are not ethical. I present this idea and argue for it in Chapter 1, where I also indicate how we come to accept ethical stan- dards and how such standards can be incorporated into our moral reasoning processes. Chapter 2 critically discusses four kinds of moral principles: utilitarian

vi

principles, principles based on moral rights, principles of justice, and the principles of an ethic of care. These four kinds of moral principles, it is argued, provide a framework for resolving most of the kinds of ethical dilemmas and issues that arise in business. In addition, Chapter 2 discusses virtue theory as an alternative to a principles-based approach and discusses automatic moral decision-making and casuistry.

Having defined the nature and significance of ethi- cal standards and having identified four basic criteria for resolving moral issues in business, I then bring the resulting theory to bear on specific moral issues. Thus, Part Two examines the ethics of markets and prices; Part Three discusses environmental and consumer is- sues; and Part Four looks at employee issues. I assume in each part that in order to apply a moral theory to the real world we must have some information (and theory) about what that world is really like. Consequently, each chapter in these last three parts devotes several pages to laying out the empirical information and theory that the decision-maker must have if he or she is to apply moral- ity to reality. The chapter on market ethics, for exam- ple, provides a neoclassical analysis of market structure; the chapter on discrimination presents several statistical and institutional indicators of discrimination; the chap- ter on the individual in the organization relies on three models of organizations.

Each chapter of the text contains two kinds of ma- terials. The main text of the chapter sets out the con- ceptual materials needed to understand and address some particular type of moral issue. In addition, each chapter includes short cases in the main body of the chapter, and longer cases at the end of the chapter, that describe real business situations in which these moral issues are raised. I have provided these discussion cases on the pedagogical assumption that a person’s ability to reason about moral matters will improve if the person attempts to think through some concrete moral prob- lems and allows himself or herself to be challenged by others who resolve the issue on the basis of different moral standards. These kinds of challenges, when they arise in dialogue and discussion with others, force us to confront the adequacy of our moral norms and motivate us to search for more adequate principles when our own are shown to be inadequate. Some of the rationale for these pedagogical assumptions is discussed in Chapter 1 in the section on moral development and moral reason- ing. I hope that I have provided sufficient materials to allow the reader to develop, in discussion and dialogue with others, a set of ethical norms that they can accept as adequate.

New to this Edition

Although dozens of large and small revisions have been made in all the chapters of this edition, the follow- ing changes from the previous edition’s text should be noted by previous users of this text.

Chapter 1 includes new discussions of corporate social responsibility, integrative social contracts the- ory, the link between emotions and moral reasoning, and impediments to moral behavior. A new “On the Edge” short case has been added entitled “A Tra- ditional Business,” and an older one entitled “Was National Semiconductor Morally Responsible?” has been removed and, like all other deleted cases, was archived on the Companion Website. The end- of-chapter case “Aaron Beam and the HealthSouth Fraud” is added, and “Enron’s Fall” was removed and archived.

Chapter 2 has an expanded discussion of the mis- takes people can make when approaching utilitarian theory for the first time; a new discussion of the claim that context, not character, determines moral behavior; a new section on the influence of unconscious mental processes on moral behavior; and a new discussion of the relation between conscious moral reasoning on the one hand, and unconscious moral decision-making, moral intuition, and cultural influences on the other hand. The “On the Edge” short case, “Conflict Diamonds” was dropped and a new one added titled “Should Com- panies Dump Their Wastes in Poor Countries?” The end-of-chapter case “Publius” was removed and ar- chived, and a new case added named “Traidos Bank and Roche’s Drug Trials in China.”

Chapter 3 has a revised introduction and an expanded discussion of “alienation” in Marx. New “On the Edge” short cases include: “Commodification or How Free should Free Markets Be?” and “Marx’s Children,” while “Brian’s Franchise” was removed and archived. The older end-of-chapter case “Glaxo- SmithKline, Bristol-Myers Squibb, and AIDS in Africa” was replaced with the new case “The GM Bailout.”

Chapter 4 has a revised introduction, a new discus- sion of predatory pricing, and a new section on “Incen- tives, Opportunities, and Rationalization.” The new end-of-chapter case “Intel’s ‘Rebates’ and Other Ways It ‘Helped’ Customers” replaces the older “Playing Monopoly: Microsoft.”

The introduction to Chapter 5 has been revised, and its discussions of pollution and resource deple- tion have been revised and completely updated with new charts and graphs. A new section on sustainability

PREFACE vii

viii PREFACE

was added. The new “On the Edge” short case, “Ford’s Toxic Wastes” replaced “The Aroma of Tacoma,” and the short case, “The Auto Companies in China” was ex- tensively revised and updated. Both of the two end-of- chapter cases were revised and updated.

The introduction to Chapter 6 has been revised. The new short case “Selling Personalized Genetics” was added, and the other two cases on the tobacco industry were revised. At the end of the chapter, the case “Reducing Debts at Credit Solutions of America” was added and “The Ford/Firestone Debacle” was removed.

In Chapter 7 all the statistical materials were brought up to date and several new graphs were added, while the section on comparable worth programs was removed. Two new “On the Edge” short cases in this chapter are “Helping Patients at Plainfield Healthcare Center” and “Driving for Old Dominion.” The older short case “Wall Street: It’s a Man’s World” was re- moved and archived. Both of the end-of-chapter cases have been updated.

In Chapter 8 all the statistics have been updated and the discussion of conflicts of interest was revised; the older section, “Working Conditions: Job Satisfac- tion” was removed and a new discussion on the value of work was added. All of the older “On the Edge” short cases were removed, and three completely new short cases were added entitled “HP’s Secrets and Oracle’s New Hire,” “Insider Trading or What Are Friends For?” and “Sergeant Quon’s Text Messages.” The new end-of-chapter case “Death at Massey Energy Com- pany” replaces “Gap’s Labor Problems.”

Support for Instructors and Students

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Instructor’s Manual with Tests ( 0-205-01767-3 ):

For each chapter in the text, this valuable resource pro- vides a detailed outline, list of objectives, and discussion questions. In addition, test questions in multiple-choice, true/false, fill-in-the-blank, and short answer formats are available for each chapter; the answers are page refer- enced to the text. For easy access, this manual is available at Preface vii www.pearsonhighered.com/irc.

PowerPoint Presentation Slides for Ethics: Theory and Practice (0-205-01769-X):

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Acknowledgments

Like every textbook author, I owe a very large debt of gratitude to the numerous colleagues and other scholars around the world from whom I have shamelessly bor- rowed ideas and materials. They all, I hope, have been duly recognized in the notes. Thank you to Marc Or- litzky, The University of Redlands; Barbara Fechner, South East Community College; and Rodney Stevenson, University of Wisconsin—Madison for their feedback. I owe a special debt to my colleagues in the Management Department where I teach, especially to Dennis Moberg. But my largest debt is owed to my wife and family who have patiently (and sometimes not so patiently) had to put up with me while I remained obsessively preoccupied with writing and revising the present edition of this book. To Maryann, Brian, Kevin, and Daniel: Thank You.

Manuel G. Velasquez Aptos, California

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PART ONE

Basic Principles BUSINESS ETHICS IS APPLIED ETHICS. IT IS THE APPLICATION OF OUR UNDERSTANDING OF WHAT IS GOOD

AND RIGHT TO THAT ASSORTMENT OF INSTITUTIONS, TECHNOLOGIES, TRANSACTIONS, ACTIVITIES, AND

PURSUITS THAT WE CALL BUSINESS. A DISCUSSION OF BUSINESS ETHICS MUST BEGIN BY PROVIDING A

FRAMEWORK OF BASIC PRINCIPLES FOR UNDERSTANDING WHAT IS MEANT BY THE TERMS GOOD AND RIGHT ;

ONLY THEN CAN ONE PROCEED TO PROFITABLY DISCUSS THE IMPLICATIONS THESE HAVE FOR OUR BUSI-

NESS WORLD. THESE FIRST TWO CHAPTERS PROVIDE SUCH A FRAMEWORK. CHAPTER 1 DESCRIBES WHAT

BUSINESS ETHICS IS IN GENERAL AND EXPLAINS THE GENERAL ORIENTATION OF THE BOOK. CHAPTER 2

DESCRIBES SEVERAL SPECIFIC APPROACHES TO BUSINESS ETHICS, WHICH TOGETHER FURNISH A BASIS FOR

ANALYZING ETHICAL ISSUES IN BUSINESS.

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What is “business ethics”?

What is corporate social responsibility?

Is ethical relativism right?

How does moral development happen?

What role do emotions have in ethical reasoning?

What are the impediments to moral behavior?

When is a person morally responsible for doing wrong?

Ethics and Business

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In business the handshake is an expression of trust, and ethical behavior is the foundation of trust.

4 BASIC PRINCIPLES

Maybe the best way to introduce a discussion of business ethics is by looking at how a real company has incorporated ethics into its operations. Consider then how Merck & Co., Inc., a U.S. drug company, dealt with the issue of river blindness.

River blindness is a debilitating disease that has afflicted about 18 million impov- erished people living in remote villages along the banks of rivers in tropical regions of Africa and Latin America. The disease is caused by a tiny parasitic worm that is passed from person to person by the bite of the black fly, which breeds in fast-flowing river waters. The tiny worms burrow under a person’s skin, where they grow as long as 2 feet curled up inside ugly round nodules half an inch to an inch in diameter. Inside the nodules, the female worms reproduce by releasing millions of microscopic offspring called microfilariae that wriggle their way throughout the body moving beneath the skin, discoloring it as they migrate, and causing lesions and such intense itching that vic- tims sometimes commit suicide. Eventually, the microfilariae invade the eyes and blind the victim. In some West African villages, the parasite had already blinded more than 60 percent of villagers over fifty-five. The World Health Organization estimated that the disease had blinded 270,000 people and left another 500,000 with impaired vision.

Pesticides no longer stop the black fly because it has developed immunity to them. Moreover, until the events described below, the only drugs available to treat the parasite in humans were so expensive, had such severe side effects, and required such lengthy hospital stays that the treatments were impractical for the destitute victims who lived in isolated rural villages. In many countries, young people fled the areas along the rivers, abandoning large tracts of rich fertile land. Villagers who stayed to live along the rivers accepted the nodules, the torturous itching, and eventual blind- ness as an inescapable part of life.

In 1980, Dr. Bill Campbell and Dr. Mohammed Aziz, research scientists working for Merck, discovered evidence that one of the company’s best-selling animal drugs, Ivermectin, might kill the parasite that causes river blindness. Dr. Aziz, who had once worked in Africa and was familiar with river blindness, traveled to Dakar, Senegal, where he tested the drug on villagers who had active infections. Astonishingly, he discovered that a single dose of the drug not only killed all the microfilariae, it also made the fe- male worms sterile and made the person immune to new infections for months. When Aziz returned to the United States, he and Dr. Campbell went to see Merck’s head of research and development, Dr. P. Roy Vagelos, a former physician. They showed him their results and recommended that Merck develop a human version of the drug.

At the time, it cost well over $100 million to develop a new drug and test it in the large-scale clinical studies the U.S. government required. Roy Vagelos realized that even if they succeeded in developing a human version of the drug for the victims of river blindness, “It was clear that we would not be able to sell the medicine to these people, who would not be able to afford it even at a price of pennies per year.” 1 And even if the drug was affordable, it would be almost impossible to get it to most of the people who had the disease since they lived in remote areas without access to doctors, hospitals, clinics, or drug stores. Moreover, if the drug had bad side effects for hu- mans, these could threaten sales of the animal version of the drug, which were about $300 million a year. Finally, if a cheap version of the human drug was made available, it could be smuggled through black markets and resold for use on animals, thereby undermining the company’s sales of Ivermectin to veterinarians.

Although Merck had worldwide sales of $2 billion a year, its net income as a percent of sales had been in decline due to the rapidly rising costs of developing new drugs, the increasingly restrictive and costly regulations being imposed by govern- ment agencies, a lull in basic scientific breakthroughs, and a decline in the produc- tivity of company research programs. The U.S. Congress was getting ready to pass

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ETHICS AND BUSINESS 5

the Drug Regulation Act, which would intensify competition in the drug industry by allowing competitors to more quickly copy and market drugs originally developed by other companies. Medicare had recently put caps on reimbursements for drugs and required cheaper generic drugs in place of the branded-name drugs that were Merck’s major source of income. In the face of these worsening conditions in the drug indus- try, was it a good idea for Merck to undertake an expensive project that showed little economic promise? On top of all this, Vagelos later wrote:

There was a potential downside for me personally. I hadn’t been on the job very long and I was still learning how to promote new drug development in a corporate setting. While we had some big innovations in our pipeline, I was still an unproven rookie in the business world. I would be spending a consid- erable amount of company money in a field, tropical medicine, that few of us other than Mohammed Aziz knew very well . . . CEO Henry Gadsden had become worried—with good cause—about Merck’s pipeline of new products, and he had hired me to solve that problem. It was as obvious to me as it was to Mohammed and Bill that even if Ivermectin was successful against river blindness, the drug wasn’t going to pump up the firm’s revenue and make the stockholders happy. So I was being asked to take on some risk for myself and for the laboratories. 2

Vagelos knew he was faced with a decision that, as he said, “had an important ethical component.” Whatever the risk to the company and his career, it was clear that without the drug, millions would be condemned to lives of intense suffering and partial or total blindness. After talking it over with Campbell, Aziz, and other manag- ers, Vagelos came to the conclusion that the potential human benefits of a drug for river blindness were too significant to ignore. In late 1980, he approved a budget that provided the money needed to develop a human version of Ivermectin.

It took seven years for Merck to develop a human version of Ivermectin. The company named the human version Mectizan. A single pill of Mectizan taken once a year could eradicate from the human body all traces of the parasite that caused river blindness and prevented new infections. Unfortunately, exactly as Vagelos had earlier suspected, no one stepped forward to buy the miraculous new pill. Over the next sev- eral years, Merck officials—especially Vagelos who by then was Merck’s chief execu- tive officer (CEO)—pleaded with the World Health Organization (WHO), the U.S. government, and the governments of nations afflicted with the disease, asking that someone—anyone—come forward to buy the drug to protect the 100 million people who were at risk for the disease. None responded to the company’s pleas.

When it finally became clear no one would buy the drug, the company decided to give Mectizan away for free to victims of the disease. 3 Yet, even this plan proved dif- ficult to implement because, as the company had earlier suspected, there were no es- tablished distribution channels to get the drug to the people who needed it. Working with the WHO, therefore, the company financed an international committee to pro- vide the infrastructure to distribute the drug safely to people in the Third World and to ensure that it would not be diverted into the black market to be sold for use on ani- mals. Paying for these activities raised the amount it invested in developing, testing, and now distributing Mectizan to well over $200 million, without counting the cost of manufacturing the drug itself. By 2010, Merck had given away more than 2.5 billion tablets of Mectizan worth approximately $3.5 billion and was providing the drug for free to 80 million people a year in Africa, Latin America, and the Middle East. Besides using the drug to relieve the intense sufferings of river blindness, the company had expanded the program to include the treatment of elephantiasis, a parasitic disease

6 BASIC PRINCIPLES

that often coexists with river blindness which Merck researchers discovered could also be treated with Mectizan. By 2010, over 300 million people had received Mectizan to treat elephantiasis and 70 million more received it the following year.

When asked why the company invested so much money and effort into re- searching, developing, manufacturing, and distributing a drug that makes no money, Dr. Roy Vagelos, CEO of the company, replied that once the company suspected that one of its animal drugs might cure a severe human disease that was ravaging people, the only ethical choice was to develop it. Moreover, people in the Third World “will remember” that Merck helped them, he commented, and will respond favorably to the company in the future. 4 Over the years, the company had learned that such ac- tions have strategically important long-term advantages. “When I first went to Japan 15 years ago, I was told by Japanese business people that it was Merck that brought streptomycin to Japan after World War II to eliminate tuberculosis which was eating up their society. We did that. We didn’t make any money. But it’s no accident that Merck is the largest American pharmaceutical company in Japan today.” 5

Having looked at how Merck dealt with its discovery of a cure for river blindness, let us now turn to the relationship between ethics and business. Pundits sometimes quip that business ethics is a contradiction in terms—an “oxymoron”—because there is an inherent conflict between ethics and the self-interested pursuit of profit. When ethics conflicts with profits, they imply, businesses always choose profits over eth- ics. Yet, the case of Merck suggests a different perspective—a perspective that many companies are increasingly taking. The managers of this company spent $200 mil- lion developing a product that they knew had little chance of ever being profitable because they felt they had an ethical obligation to make its potentially great benefits available to people. In this case, at least, a large and very successful business seems to have chosen ethics over profits. Moreover, the comments of Vagelos at the end of the case suggest that, in the long run, there may be no inherent conflict between ethical behavior and the pursuit of profit. On the contrary, the comments of Vagelos suggest that ethical behavior creates the kind of goodwill and reputation that expand a com- pany’s opportunities for profit.

Not all companies operate like Merck, and Merck itself has not always operated ethically. Many—perhaps most—companies will not invest in a research and develop- ment project that will probably be unprofitable even if it promises to benefit humanity. Every day newspapers announce the names of companies that choose profits over ethics or that, at least for a time, profited through unethical behavior—Enron, Worldcom, Global Crossing, Rite-Aid, Oracle, ParMor, Adelphia, Arthur Andersen, Louisiana- Pacific, and Qwest—are but a few of these. In 2004, even Merck was accused of failing to disclose heart problems associated with its drug Vioxx, and in 2010 the company put $4.85 billion into a fund to compensate patients who said they had suffered heart at- tacks or strokes because they had used Vioxx. (In spite of its significant lapse in regard to Vioxx, Merck has remained committed to operate ethically and has continued to win dozens of awards for its openness and ethically responsible operations.) 6

Although there are many companies that at one time or another have engaged in unethical behavior, habitually unethical behavior is not necessarily a good long-term business strategy for a company. For example, ask yourself whether, as a customer, you are more likely to buy from a business that you know is honest and trustworthy or one that has earned a reputation for being dishonest and crooked. Ask yourself whether, as an employee, you are more likely to loyally serve a company whose ac- tions toward you are fair and respectful or one that habitually treats you and other workers unjustly and disrespectfully. Clearly, when companies are competing against each other for customers and for the best workers, the company with a reputation for ethical behavior has an advantage over one with a reputation for being unethical.

ETHICS AND BUSINESS 7

This book takes the view that ethical behavior is the best long-term business strategy for a company—a view that has become increasingly accepted during the last few years. 7 This does not mean that occasions never arise when doing what is ethical will prove costly to a company. Such occasions are common in the life of a company, and we will see many examples in this book. Nor does it mean that ethical behavior is always rewarded or that unethical behavior is always punished. On the contrary, unethical behavior sometimes pays off, and the good guy sometimes loses. To say that ethical behavior is the best long-range business strategy just means that, over the long run and for the most part, ethical behavior can give a company significant competitive advantages over companies that are not ethical. The example of Merck suggests being ethical is good business strategy, and a bit of reflection on how we, as consumers and employees, respond to companies that behave unethically supports the view that un- ethical behavior leads to a loss of customer and employee support. Later, we will see what more can be said for or against the view that ethical behavior is the best long- term business strategy for a company.

The more basic problem is, of course, that the ethical course of action is not always clear to a company’s managers. In the Merck case, Roy Vagelos decided that the company had an ethical obligation to proceed with the development of the drug. Yet to someone else the issue may not have been so clear. Vagelos notes he would be “spending a considerable amount of company money” in a way that would not “make stockholders happy” and that would put his own career at “some risk.” Don’t the managers of a company have a duty toward investors and shareholders to invest their funds in a profitable manner? Indeed, if a company spent all of its funds on chari- table projects that lost money, wouldn’t it soon be out of business? Then, wouldn’t its shareholders be justified in claiming that the company’s managers had spent their money unethically? And should Vagelos have risked his career, with the implications this had for his family? Is it so clear, then, that Vagelos had an ethical obligation to invest in an unprofitable drug? What reasons can be given for his belief that Merck had an obligation to develop the drug? Can any good reasons be given for the claim that Merck had no such obligation? Which view do you think is supported by the strongest reasons?

Although ethics may be the best policy, then, the ethical course of action is not always clear. The purpose of this book is to help you, the reader, deal with this lack of clarity. Although many ethical issues remain difficult and obscure even after a lot of study, gaining a better understanding of ethics will help you deal with ethical uncer- tainties in a more adequate and informed manner.

This text aims to clarify the ethical issues that you may face when you work in a business and perhaps, become part of a company’s management team. This does not mean that it is designed to give you moral advice nor that it is aimed at persuad- ing you to act in certain “moral” ways. The main purpose of the text is to provide you with a deeper knowledge of the nature of ethical principles and concepts along with an understanding of how you can use this knowledge to deal with the ethical choices you will encounter in the business world. This type of knowledge and skill should help you steer your way through ethical decisions like the one Vagelos had to make. Everyone in business is confronted with decisions like these, although usually not as significant as deciding whether to pursue a potential cure for river blindness. Before you even start working for a company, for example, you will be faced with ethical decisions about how “creative” your resume should be. Later, you may have to decide whether to cut corners just a little in your job, or whether to give your rela- tive or friend a company contract, or whether to put a little extra into the expenses you report for a company trip you made. Or maybe you will catch a friend stealing from the company and have to decide whether to turn him in, or you will find out

8 BASIC PRINCIPLES

your company is doing something illegal and have to decide what you are going to do about it, or maybe your boss will ask you to do something you think is wrong. Ethical choices confront everyone in business, and this text hopes to give you some ways of thinking through these choices.

The first two chapters will introduce you to some methods of moral reasoning and some fundamental moral principles that can be used to analyze moral issues in business, as well as some of the obstacles that can get in the way of thinking clearly about ethical issues. The following chapters apply these principles and methods to the kinds of moral dilemmas that confront people in business. We begin in this chapter by discussing three preliminary topics: (1) the nature of business ethics and some of the issues it raises, (2) moral reasoning and moral decision-making, and (3) moral re- sponsibility. Once these notions have been clarified, we devote the next chapter to a discussion of some basic theories of ethics and how they relate to business.

1.1 The Nature of Business Ethics

According to the dictionary, the term ethics has several meanings. One of the mean- ings given to it is: “the principles of conduct governing an individual or a group.” 8 We sometimes use the term personal ethics , for example, when referring to the rules by which an individual lives his or her personal life. We use the term accounting ethics when referring to the code that guides the professional conduct of accountants.

A second—and for us more important—meaning of ethics according to the dic- tionary is this: Ethics is “the study of morality.” Just as chemists use the term chemistry to refer to a study of the properties of chemical substances, ethicists use the term ethics to refer primarily to the study of morality. Although ethics deals with morality, it is not quite the same as morality. Ethics is a kind of investigation—and includes both the activity of investigating as well as the results of that investigation—whereas mo- rality is the subject matter that ethics investigates.

Morality

So what, then, is morality? We can define morality as the standards that an individual or a group has about what is right and wrong, or good and evil. To clarify what this means, let’s consider another case, one that is a bit different from the Merck case.

Several years ago, B. F. Goodrich, a manufacturer of vehicle parts, won a military contract to design, test, and manufacture aircraft brakes for the A7-D, a new light airplane the U.S. Air Force was designing. To conserve weight, Goodrich managers guaranteed that their compact brake would weigh no more than 106 pounds, contain no more than four small braking disks or “rotors,” and be able to repeatedly stop the aircraft within a specified distance. The contract was potentially very lucrative for the company and so its managers were anxious to deliver a brake hat “qualified,” that is, that passed all the tests the U.S. Air Force required for the A7-D.

An older Goodrich engineer, John Warren, designed the brake. A young engi- neer named Searle Lawson was given the job of determining the best material to use as the brake lining and testing the brake to make sure it “qualified.” Searle Lawson was in his twenties. He had just graduated from school with an engineering degree and Goodrich had only recently hired him.

Lawson built a “prototype”—a working model—of the small brake to test lining materials. He found that when the brake was applied, the linings on the four rotors heated up to 1500 degrees and began disintegrating. When he tried other linings and

morality The standards that an individual or a group has about what is right and wrong or good and evil.

ETHICS AND BUSINESS 9

got the same results, Lawson went over Warren’s design and decided it was based on a mistake. By his own calculations, there was not enough surface area on the ro- tors to stop an airplane in the required distance without generating so much heat the linings failed. Lawson went to Warren, showed him his calculations and suggested Warren’s design should be replaced with a new design for a larger brake with five rotors. Warren rejected the suggestion that his design was based on a mistake that a “green kid” just out of engineering school had discovered. He told Lawson to keep trying different materials for brake linings until he found one that worked.

But Lawson was not ready to give up. He went to talk with the manager in charge of the project and showed him his calculations. The project manager had repeat- edly promised his own superiors that development of the brake was on schedule and knew he would probably be blamed if the brake was not delivered as he had promised. Moreover, he probably felt he should trust Warren who was one of his best engineers, rather than someone just out of engineering school. The project manager told Law- son that if Warren said the brake would work, then it would work. He should just keep trying different materials like Warren told him to do. Lawson left the project manager feeling frustrated. If he did not have the support of his superiors, he thought, he would just keep working with the brake Warren designed.

Several weeks later Lawson still had not found a lining that would not disinte- grate on the brake. He spoke with his project manager again. This time his project manager told him to just put the brake through the tests required to “qualify” it for use on the A7-D airplane. Then, the manager told him in no uncertain terms that no matter what, he was to make the brake pass all its qualifying tests. His manager’s or- ders shook Lawson and he later shared his thoughts with Kermit Vandivier, a techni- cal writer who had been assigned to write a report on the brake:

I just can’t believe this is really happening. This isn’t engineering, at least not what I thought it would be. Back in school I thought that when you were an engineer you tried to do your best, no matter what it cost. But this is something else. I’ve already had the word that we’re going to make one more attempt to qualify the brake and that’s it. Win or lose, we’re going to issue a qualification report. I was told that regardless of what the brake does on tests, it’s going to be qualified. 9

Lawson put together a production model of the brake and ran it through the tests a dozen times. It failed every time. On the thirteenth attempt, Lawson “nursed” the brake through the tests by using special fans to cool the brake and by taking it apart at each step, cleaning it carefully, and fixing any distortions caused by the high heat. At one point, a measuring instrument was apparently deliberately miscalibrated so it indicated that the pressure applied on the brake was 1000 pounds per square inch (the maximum available to the pilot in the A7-D aircraft) when the pressure was actually 1100 pounds per square inch.

Kermit Vandivier, who was to write the final report on the tests, was also trou- bled. He talked the testing over with Lawson who said that he was just doing what the project manager had ordered him to do. Vandiver decided to talk with the senior ex- ecutive in charge of his section. The executive listened, but then said, “It’s none of my business and it’s none of yours.” Vandivier asked him whether his conscience would bother him if during flight tests on the brake something should happen resulting in death or injury to the test pilot. The Goodrich executive answered, “Why should my conscience bother me? . . . I just do as I’m told, and I’d advise you to do the same.” 10

When Kermit Vandivier was told to write up a report that concluded the brake had passed all qualifying tests, he refused. Such a report, he felt, would amount to

10 BASIC PRINCIPLES

“deliberate falsifications and misrepresentations” of the truth. 11 But a short time later, he changed his mind. He later said:

My job paid well, it was pleasant and challenging, and the future looked rea- sonably bright. My wife and I had bought a home . . . If I refused to take part in the A7-D fraud, I would have to either resign or be fired. The report would be written by someone anyway, but I would have the satisfaction of knowing I had had no part in the matter. But bills aren’t paid with personal satisfaction, nor house payments with ethical principles. I made my decision. The next morning I telephoned [my superior] and told him I was ready to begin the qualification report. 12

Lawson and Vandivier wrote the final report together. “Brake pressure, torque values, distances, times—everything of consequence was tailored to fit” the conclu- sion that the brake passed the qualifying tests. 13 A few weeks after Goodrich pub- lished their report, the U.S. Air Force put the brakes on A7-D test planes and pilots began flying them.

Below, we will talk about what happened when test pilots flew the planes equipped with the Goodrich brakes. At this point, note that Lawson believed that as an engi- neer he had an obligation “to do your best, no matter what it cost,” and that Vandi- vier believed it was wrong to lie and to endanger the lives of others, and believed also that integrity is good and dishonesty is bad. These beliefs are all examples of moral standards. Moral standards include the norms we have about the kinds of actions we believe are morally right and wrong, as well as the values we place on what we believe is morally good or morally bad. Moral norms can usually be expressed as general rules about our actions, such as “Always tell the truth,” “It’s wrong to kill innocent people,” or “Actions are right to the extent that they produce happiness.” Moral values can usually be expressed with statements about objects or features of objects that have worth, such as “Honesty is good,” and “Injustice is bad.”

Where do moral standards come from? Typically, moral standards are first learned as a child from family, friends, and various societal influences such as church, school, television, magazines, music, and associations. Later, as we ma- ture, our experience, learning, and intellectual development will lead us to think about, evaluate, and revise these standards according to whether we judge them to be reasonable or unreasonable. You may discard some standards that you decide are unreasonable, and may adopt new standards because you come to believe they are more reasonable than the ones you previously accepted. Through this maturing process, you develop standards that are more rational and so more suited for deal- ing with the moral issues of adult life. As Lawson and Vandivier’s example shows, however, we do not always live up to the moral standards we hold; that is, we do not always do what we believe is morally right nor do we always pursue what we believe is morally good. Later in the chapter, we will look at how our actions can become disconnected from our moral beliefs.

Moral standards can be contrasted with norms or standards we hold about things that are not moral. Examples of nonmoral standards and norms (sometimes also called “conventional” standards and norms) include the standards of etiquette by which we judge people’s manners as good or bad, the rules of behavior set by parents, teachers, or other authorities, the norms we call the law by which we determine what is legally right and wrong, the standards of language by which we judge what is gram- matically right and wrong, the standards of art by which we judge whether a painting or a song is good or bad, and the sports standards by which we judge how well a game of football or basketball is being played. In fact, whenever we make judgments about

moral standards The norms about the kinds of actions believed to be morally right and wrong as well as the values placed on what we believe to be morally good and morally bad.

nonmoral standards The standards by which we judge what is good or bad and right or wrong in a nonmoral way.

ETHICS AND BUSINESS 11

the right or wrong way to do things, or judgments about what things are good and bad, or better and worse, our judgments are based on standards or norms of some kind. In Vandivier’s case, we can surmise that he probably believed that reports should be written with good grammar; that having a well-paid, pleasant, and challenging job was a good thing; and that it’s right to follow the law. The conventional norms of good grammar; the value of a well-paid, pleasant, and challenging job; and the laws of government are also standards, but these standards are not moral standards. As Vandivier’s decision demonstrates, we sometimes choose nonmoral standards over our moral standards.

How do we distinguish between moral and nonmoral or conventional standards? Before reading any further, look at the two lists of norms below and see if you can tell which is the list of moral norms and which is the list of nonmoral norms:

Quick Review 1.1

Moral Norms and Nonmoral Norms • From the age of three we

can distinguish moral from nonmoral norms.

• From the age of three we tend to think that moral norms are more serious than nonmoral norms and apply everywhere independent of what authorities say.

• The ability to distinguish moral from nonmoral norms is innate and universal.

Group One Group Two “Do not harm other people,” “Do not eat with your mouth open,” “Do not lie to other people,” “Do not chew gum in class,” “Do not steal what belongs to others.” “Do not wear sox that do not match.”

During the last two decades, numerous studies have shown that the human abil- ity to distinguish between moral norms and conventional or nonmoral norms emerges at a very early age and remains with us throughout life. 14 The psycholo- gist Elliot Turiel and several others have found that by the age of three, a normal child has acquired the ability to tell the difference between moral norms and con- ventional norms. By age three, the child sees violations of moral norms as more serious and wrong everywhere, while violations of conventional norms are less serious and wrong only where authorities set such norms. 15 For example, three year olds will say that while it is not wrong to chew gum at schools where teach- ers do not have a rule against it, it is still wrong to hit someone even at schools where teachers do not have a rule against hitting. Because this ability to distin- guish between moral and conventional norms develops in childhood, it was not just easy, but trivially easy for you to see that the norms in group one are moral norms, and those in group two are conventional. This innate ability to distinguish moral norms from conventional norms is not unique to Americans or Europeans or Westerners; it is an ability that every normal human being in every culture develops. 16 People in all cultures may not completely agree on which norms are moral norms (although there is a surprising amount of agreement) and which are conventional, but they all agree that the two are different and that the difference is extremely important.

So what is the difference between moral norms and nonmoral or conventional norms? This is not an easy question to answer even if three year olds seem to know the difference. However, philosophers have suggested six characteristics that help pin down the nature of moral standards (and psychologists like Elliot Turiel and others have drawn on the work of philosophers to help them distinguish moral from non- moral norms in their studies).

First, moral standards deal with matters that are serious, i.e., matters that we think can seriously wrong or significantly benefit human beings. 17 For example, most peo- ple in American society hold moral standards against theft, rape, enslavement, murder, child abuse, assault, slander, fraud, lawbreaking, and so on. All of these plainly deal with matters that people feel are serious forms of injury. Because they are about serious mat- ters, violating moral standards is seen as seriously wrong and we feel that the obliga- tion to obey moral standards has greater claim on us than conventional norms do. In

12 BASIC PRINCIPLES

the Goodrich case, it was clear that both Lawson and Vandivier felt that lying in their report and endangering the lives of pilots were both serious harms and so both were moral matters, whereas adhering to grammatical standards was not. And because the benefits of developing a cure for river blindness were so significant, Dr. Vaglos felt that Merck had an obligation to develop the medicine Mectizan.

Second, and strikingly, we feel that moral standards should be preferred to other values including (and perhaps especially) self-interest. 18 That is, if a person has a moral obligation to do something, then he or she is supposed to do it even if this conflicts with other, conventional norms or with self-interest. In the Goodyear case, for example, we feel that Lawson should have chosen the moral values of honesty and respect for life over the self-interested value of keeping his job. This does not mean, of course, that it is always wrong to act on self-interest; it only means that when we believe a certain standard or norm is a moral norm, then we also feel that it would be wrong to choose self-interest over the moral norm. This second characteristic of moral standards is related to the first since part of the reason why we feel that moral standards should be preferred to other considerations is because moral standards deal with serious matters.

Third, unlike conventional norms, moral standards are not established or changed by the decisions of authority figures or authoritative bodies. Laws and legal standards are established by the authority of a legislature or the decisions of voters while family norms and classroom norms are set by parents and teachers. Authorities do not estab- lish moral standards, however, nor does their validity rest on voters’ preferences, and so they cannot be changed by the decision of any person or group. Instead, the valid- ity of moral standards rests on whether the reasons that support and justify them are good or bad; when moral standards are based on good reasons, the standards are valid.

Fourth, moral standards are felt to be universal. 19 That is, if we genuinely hold that certain standards—such as “Do not lie” or “Do not steal”—are moral standards, then we will also feel that everyone should try to live up to those standards, and we will get upset when we see others transgressing them. When we learned that Bernard (“Bernie”) Madoff, and the managers of Enron and Lehman Brothers had all been ly- ing to us and to their investors, and that Pfizer managers stole at least $1 billion from taxpayers, while Tenet Healthcare and HCA managers stole almost as much, we did not feel that it was okay. for them to have violated our moral standards against lying and theft. We did not think: “It was okay for them to lie and steal, so long as they felt it was okay.” Nor did we think: “Although I feel lying and stealing is wrong, they do not have to abide by my moral standards.” On the contrary, the public got angry precisely because they felt that the standards against lying and stealing are moral standards, and so everyone has to abide by them, whether they want to or not. Conventional norms, on the other hand, are not seen as universal. Laws, for example, apply only within a specific jurisdiction; family rules are authoritative only within the family; game rules apply only to those playing the game, and so on.

Fifth, and generally, moral standards are based on impartial considerations. 20 The fact that you will benefit from a lie while others will be harmed is irrelevant to whether lying is morally wrong. Some philosophers have expressed this point by say- ing that moral standards are based on “the moral point of view”—that is, a point of view that does not evaluate standards according to whether they advance the inter- ests of a particular individual or group, but one that goes beyond personal interests to a “universal” standpoint in which everyone’s interests are impartially counted as equal. 21 Other philosophers have made the same point by saying that moral standards are based on the kinds of impartial reasons that an “ideal observer” or an “impar- tial spectator” would accept, or that in deciding moral matters “each counts for one and none for more than one.” 22 As we are going to see in the next chapter, however,

Quick Review 1.2

Six Characteristics of Moral Standards • Involve serious wrongs or

significant benefits • Should be preferred to

other values including self-interest

• Not established by authority figures

• Felt to be universal • Based on impartial

considerations • Associated with special

emotions and vocabulary

ETHICS AND BUSINESS 13

although impartiality is a characteristic of moral standards, it must be balanced with certain kinds of partiality, in particular, with the partiality that arises from legitimate caring for those individuals with whom you have a special relationship, such as fam- ily members and friends. Morality says that we should be impartial in those contexts where justice is called for, such as when we are setting salaries in a public company. But morality also identifies certain contexts, such as taking care of family members, where preferential caring for individuals can be morally legitimate and perhaps, even morally required.

Last, moral standards are associated with special emotions and a special vocabulary. 23 For example, if I act contrary to a moral standard, I will normally feel guilty, ashamed, or remorseful; I will describe my behavior as “immoral” or “wrong,” and I will feel bad about myself and experience a loss of self-esteem. A careful reading of Lawson’s and Vandivier’s statements, for example, suggests that they felt ashamed and guilty about what they were doing. And when we see others acting contrary to a moral standard we accept, we normally feel indignation, resentment, or even disgust toward those persons; we say that they are not “living up” to their “moral obligations” or their “moral responsibilities” and we may esteem them less. This is perhaps what you felt when reading about what Lawson and Vandivier did.

Moral standards, then, are standards that deal with matters that we think are of serious consequence, are based on good reasons and not on authority, override self- interest, are based on impartial considerations, and are associated with special feelings such as guilt and shame, and with a special moral vocabulary such as “obligation,” or “responsibility.” We learn these standards as children from a variety of influences and revise them as we go through our lives.

Ethics

What, then, is ethics? Ethics is the discipline that examines your moral standards or the moral standards of a society. It asks how these standards apply to your life and whether these standards are reasonable or unreasonable—that is, whether they are supported by good reasons or poor ones. So you start to do ethics when you take the moral standards you have absorbed from family, church, and friends and ask yourself: What do these standards imply for the situations in which I find myself? Do these standards really make sense? What are the reasons for or against these standards? Why should I continue to believe in them? What can be said in their favor and what can be said against them? Are they really reasonable for me to hold? Are their impli- cations in this or that particular situation reasonable?

Take Vandivier and the B. F. Goodrich case as an example. Vandivier had appar- ently been raised to accept the moral standard that one has an obligation to tell the truth, and so he felt that in his particular situation, it would be wrong to write a false report on the brake. But we might ask whether writing what he felt was a false re- port was really wrong in his particular circumstances. Vandivier had several important financial obligations both toward himself and other people. He states, for example, that he had just married and bought a house, so he had mortgage payments to make each month and had to provide support for his family. If he did not write the report as he was ordered to do, then he would be fired and not be able to live up to these obligations. Do these moral obligations toward himself and his family outweigh his obligation not to write a false report? What is the basis of his obligation to tell the truth, and why is the obligation to tell the truth greater or lesser than a person’s obli- gations toward oneself and one’s family? Consider, next, Lawson’s obligations toward his employer, B. F. Goodrich. Doesn’t an employee have a moral obligation to obey his employer? Does the obligation to obey one’s employer outweigh the obligation to

Ethics The discipline that examines one’s moral standards or the moral standards of a society to evaluate their reasonableness and their implications for one’s life.

14 BASIC PRINCIPLES

“try to do your best” as an engineer? What is the source of both of these obligations, and what makes one greater or lesser than another? Consider, also, that the company and all its older and more experienced managers insisted that the best course of action was to write the report qualifying the brake. If something went wrong with the brake or the contract, B. F. Goodrich would be held accountable, not Lawson, who was a young and relatively low-level employee. Because the company, not Lawson, would be held accountable, did the company have the moral right to make the final decision about the report, instead of Lawson, who had just finished college? Does the moral right to make a decision belong to the party that will be held accountable for the deci- sion? What is the basis of such a right, and why should we accept it? Consider, finally, that Vandivier states that, in the end, his personal refusal to participate in writing the report would have given him some “satisfaction,” but would have made no difference to what happened because someone else would have been hired to write the report. Because the consequences would be the same whether he agreed or refused, did he really have a moral obligation to refuse? Can one have a moral obligation to do some- thing that will make no difference? Why?

Notice the sort of questions to which we are led by the choices Vandivier and Lawson faced. They are questions about whether it is reasonable to apply various moral standards to their situation, whether it is reasonable to say that one moral stan- dard is more or less important than another, and what reasons we might have to hold these standards. When you ask these kinds of questions about your own moral stan- dards or about the moral standards of your society, you have started to do ethics. Eth- ics is the study of moral standards—the process of examining the moral standards you or your society (or other societies) hold in order to determine whether these standards are reasonable or unreasonable and how, if at all, they apply to the concrete situations and issues you face. The ultimate aim of ethics is to develop a body of moral standards that you feel are reasonable for you to hold—standards that you have thought about carefully and have decided are justified for you to accept and to apply to the choices that fill our lives.

Ethics is not the only way to study morality. The social sciences—such as an- thropology, sociology, and psychology—also study morality, but do so in a way that is different from the approach to morality that ethics takes. While ethics is a norma- tive study of morality, the social sciences engage in a descriptive study of morality. A normative study is an investigation that tries to reach normative conclusions—that is, conclusions about what things are good or bad or about what actions are right or wrong. In short, a normative study aims to discover what ought to be. As we have seen, ethics is the study of moral standards whose explicit purpose is to determine as far as possible which standards are correct or supported by the best reasons, and so it tries to reach conclusions about moral right and wrong and moral good and evil.

A descriptive study is one that does not try to reach any conclusions about what things are truly good or bad or right or wrong. Instead, a descriptive study tries to de- scribe or explain the world without reaching any conclusions about whether the world is as it ought to be. Anthropologists and sociologists, for example, may study the moral standards that a particular village or culture holds. In doing so, they try to develop accurate descriptions of the moral standards of that culture and perhaps, develop a theory that explains how they came to hold those standards. However, it is not the aim of anthropologists or sociologists to determine whether these moral standards are correct or incorrect.

Ethics, in contrast, is a study of moral standards whose explicit purpose is to de- termine as far as possible whether a given moral standard (or moral judgment based on that standard) is more or less correct. The sociologist asks, “Do Americans believe that bribery is wrong?” whereas the ethicist asks, “Is bribery wrong?” The ethicist,

normative study An investigation that attempts to reach conclusions about what things are good or bad or about what actions are right or wrong.

descriptive study An investigation that attempts to describe or explain the world without reaching any conclusions about whether the world is as it should be.

ETHICS AND BUSINESS 15

then, is concerned with developing reasonable normative claims and theories, whereas an anthropological or sociological study of morality aims at providing descriptive characterizations of people’s beliefs.

Business Ethics

What we have said about ethics so far has been meant to convey an idea of what ethics is. Here, however, we are not concerned with ethics in general, but with a particular field of ethics: business ethics. Business ethics is a specialized study of moral right and wrong that focuses on business institutions, organizations, and activities. Busi- ness ethics is a study of moral standards and how these apply to the social systems and organizations through which modern societies produce and distribute goods and services, and to the activities of the people who work within these organizations. Busi- ness ethics, in other words, is a form of applied ethics. It not only includes the analysis of moral norms and moral values, but also tries to apply the conclusions of this analy- sis to that assortment of institutions, organizations, and activities that we call business .

As this description of business ethics suggests, the issues that business ethics covers encompass a wide variety of topics. To introduce some order into this variety, it will help if we keep separate three different kinds of issues that business ethics investigates: systemic, corporate, and individual issues. Systemic issues in business ethics are ethical questions raised about the economic, political, legal, and other institutions within which businesses operate. These include questions about the morality of capitalism or of the laws, regulations, industrial structures, and social practices within which U.S. businesses operate. One example would be questions about the morality of the government con- tracting system through which B. F. Goodrich was allowed to test the adequacy of its own brake design for the A7-D. Another example would be questions about the moral- ity of the international institutions with which Merck was forced to deal when it was looking for a way to get its cure for river blindness to the people who needed it most.

Corporate issues in business ethics are ethical questions raised about a particu- lar organization. These include questions about the morality of the activities, poli- cies, practices, or organizational structure of an individual company taken as a whole. One set of examples of this kind of issue would be questions about the morality of B. F. Goodrich’s corporate culture or questions about the company’s corporate deci- sion to “qualify” the A7-D brake. For example, did the Goodrich Company violate anyone’s rights when it qualified the brake? What impact did the company’s actions have on the welfare of the parties with whom it interacted? Were the company’s actions just or unjust to other parties? Another set of examples would be questions about the morality of Merck’s corporate decision to invest so many millions of dol- lars in a project that would probably not generate any profits. In doing this, did the company violate the rights of its stockholders? Was Merck’s action fair and just to the various parties it affected? Yet other questions might be directed at B. F. Goodrich’s corporate policies: Were ethics concerns part of its ongoing decision-making pro- cess? Did the company encourage or discourage employee discussions of how their decisions might impact the moral rights of other people?

Finally, individual issues in business ethics are ethical questions raised about a particular individual or particular individuals within a company and their behaviors and decisions. These include questions about the morality of the decisions, actions, or character of an individual. An example would be the question of whether Vandivier’s decision to participate in writing a report on the A7-D brake, which he believed was false, was morally justified. A second example would be the question of whether it was moral for Merck’s chair, Dr. P. Roy Vagelos, to allow his researchers to develop a drug that would probably not generate any profits.

business ethics A specialized study of moral right and wrong that concentrates on moral standards as they apply to business institutions, organizations, and behavior.

Quick Review 1.3

Business Ethics Is a Study of • Our moral standards

insofar as these apply to business

• How reasonable or unreasonable these moral standards we have absorbed from society are

• The implications our moral standards have for business activities.

16 BASIC PRINCIPLES

It is helpful when analyzing the ethical issues raised by a concrete situation or case to sort out the issues in terms of whether they are systemic , corporate , or individual issues. Often, the world presents us with decisions that involve a large number of extremely complicated interrelated kinds of issues that can cause confusion, unless the different kinds of issues are first carefully sorted out and distinguished from each other. Moreover, the kinds of solutions that are appropriate for dealing with systemic or corporate issues are not the same as the kinds of solutions that are appropriate for dealing with individual issues. If a company is trying to deal with a systemic issue— such as a government culture that permits bribery—then the issue must be dealt with on a systemic level; that is, it must be dealt with through the coordinated actions of many different social groups. On the other hand, corporate ethical issues can be solved only through corporate or company solutions. If a company has a culture that encourages moral wrongdoing, for example, then changing that culture requires the cooperation of the many different people that make up the company. Finally, indi- vidual ethical issues need to be solved through individual decisions and actions, and, perhaps, individual reform.

So what happened after Searle Lawson and Kermit Vandivier turned in their report and the U.S. Air Force put the Goodrich brakes on planes flown by their test pilots? Lawson was sent as Goodrich’s representative to Edwards Air Force Base in California where the test flights took place. There, he watched as the brakes caused several near crashes when the pilots tried to land the planes. In one case, he saw an airplane go skidding down the runway when the pilot’s braking produced such intense heat inside the brake that its parts fused together and the wheels locked up. Surprisingly, none of the pilots were killed. When Lawson returned home, both he and Vandivier quit and notified the F.B.I. of what had been going on; this was their way of dealing with the individual issues their actions had raised. A few days later, Goodrich announced that it was replacing the small brake with a larger five-disk brake at no extra charge to the U.S. government, and in this way they tried to deal with the corporate issues the brake incident had created. About a year later, Lawson and Vandivier came before the U.S. Congress and testified about their experiences at Goodrich. Shortly thereafter, the U.S. Department of Defense changed the way it let companies test equipment so that it became harder for companies to submit fraudulent reports. These changes were responses to a key systemic issue that became obvious once the truth came out.

Applying Ethical Concepts to Corporations

The statement that business ethics applies ethical or moral concepts to corporate organizations raises a puzzling issue. Can we really say that the acts of organizations are moral or immoral in the same way that the actions of human individuals are? Can we say that corporations are morally responsible for their acts in the same sense that individuals are morally responsible for what they do? Or must we say that it makes no sense to apply moral terms to organizations as a whole, but only to the individuals who make up the organization? A few years ago, for example, employees of Arthur Andersen, an accounting firm, were caught shredding documents potentially prov- ing that Arthur Anderson accountants had helped Enron hide its debt through the use of several accounting tricks. The U.S. Justice Department then charged the now- defunct firm of Arthur Andersen with obstruction of justice, instead of charging the employees who shredded the documents. Critics afterward claimed that the U.S. Justice Department should have charged the individual employees of Arthur Andersen, not the company, because “Companies don’t commit crimes, people do.” 24 Can moral notions like responsibility , wrongdoing , and obligation be applied to groups such as cor- porations, or are individuals the only real moral agents?

Quick Review 1.4

Kinds of Ethical Issues • Systemic—ethical

questions about the social, political, legal, or economic systems within which companies operate

• Corporate—ethical questions about a particular corporation and its policies, culture, climate, impact, or actions

• Individual—ethical questions about a particular individual’s decisions, behavior, or character

ETHICS AND BUSINESS 17

Two views have emerged in response to this question. 25 At one extreme, is the view of those who argue that if we can say that something acted and that it acted intentionally , then we can say that thing is a “moral agent”; that is, it is an agent capable of having moral rights and obligations and being morally responsible for its actions, just like humans. The argument for this view goes like this: We can clearly say that corporations engage in actions and that they carry out those actions intentionally . Com- panies, for example, can “merge” together, make contracts, compete against other companies, and make products. And these things do not just happen: companies seem to do these things “intentionally.” But if an agent can act intentionally, then it can be morally responsible for its actions and it can be blamed when it does what is mor- ally wrong. It follows, therefore, that corporations are “morally responsible” for their actions, and that their actions are “moral” or “immoral” in exactly the same sense as those of an individual. The major problem with this argument, however, is that orga- nizations do not seem to “act” or “intend” in the same sense that people do. Unlike individuals, organizations have no minds to form “intentions” and are conscious of neither pain nor pleasure nor anything else; and unlike individuals organizations do not act on their own but instead humans must act for them.

At the other extreme, is the view of those who hold that it makes no sense to hold companies “morally responsible” or to say that they have “moral” duties. These peo- ple argue that business organizations are the same as machines whose members must blindly conform to formal rules that have nothing to do with morality. Consequently, it makes no more sense to hold organizations “morally responsible” for failing to fol- low moral standards than it makes to criticize a machine for failing to act morally. But the major problem with this second view is that, unlike machines, at least some of the members of organizations usually know what they are doing and are free to choose whether to follow the organization’s rules or even to change these rules. When an organization’s members collectively, but freely and knowingly pursue immoral objec- tives, it ordinarily makes good sense to say that the actions they performed on behalf of the corporation are “immoral” and that the organization is “morally responsible” for these immoral actions.

Which of these two views is correct? Perhaps neither is correct. The underly- ing difficulty with which both views are trying to struggle is this: Although we say that corporate organizations “exist” and “act” like individuals, they obviously are not human individuals. Yet, our moral categories are designed to deal primarily with hu- man individuals who feel, reason, and deliberate, and who act on the basis of their own feelings, reasons, and deliberations. So, how can we apply these moral categories to corporate organizations and their “acts”? We can see our way through these dif- ficulties if we first note that corporate organizations and their acts depend on hu- man individuals. Because corporate acts originate in the choices and actions of human individuals, it is these individuals who are the primary bearers of moral duties and responsibility. Human individuals are responsible for what the corporation does be- cause corporate actions flow wholly out of their decisions and behaviors. If a cor- poration acts wrongly, it is because of what some individual or individuals in that corporation chose to do; if a corporation acts morally, it is because some individual or individuals in that corporation chose to have the corporation act morally. As several law courts have held, the idea that the actions of a corporation are the actions of some “person” who is separate from the humans who carry out those actions, is a “legal fiction.” 26 This fiction is set aside (by “piercing the corporate veil”) when justice re- quires that those humans who really carried out the actions of the corporation should be held responsible for injuries “the corporation” caused. 27

Nonetheless, it makes perfectly good sense to say that a corporate organization has moral duties and that it is morally responsible for its acts. However, organizations

Quick Review 1.5

Should Ethical Qualities be Attributed Only to People or Also to Corporations? • One view says

corporations, like people, act intentionally and have moral rights, and obligations, and are morally responsible.

• Another view says it makes no sense to attribute ethical qualities to corporations since they are not like people but more like machines; only humans can have ethical qualities.

• A middle view says that humans carry out the corporation’s actions so they are morally responsible for what they do and ethical qualities apply in a primary sense to them; corporations have ethical qualities only in a derivative sense.

18 BASIC PRINCIPLES

have moral duties and are morally responsible in a secondary or derivative sense. A cor- poration has a moral duty to do something only if some of its members have a moral duty to make sure it is done. And a corporation is morally responsible for something only if some of its members are morally responsible for what happened (i.e., they acted with knowledge and of their own free will—topics we will discuss later).

The central point is that when we apply the standards of ethics to business, we must not let the fiction of “the corporation” obscure the fact that human individuals control what the corporation does. Consequently, these human individuals are the primary carriers of the moral duties and moral responsibilities that we attribute in a secondary sense to the corporation. This is not to say, of course, that the human beings who make up a corporation are not influenced by each other and by their corporate environment. Corporate policies, corporate culture, and corporate norms all have an enormous influence on the behavior of corporate employees. However, a corpora- tion’s policies, culture, and norms do not make the employee’s choices for him (or her) and so they are not responsible for the actions of that employee. We will return to this issue when we discuss moral responsibility toward the end of this chapter.

Objections to Business Ethics

We have described business ethics as the process of rationally evaluating our moral standards and applying them to business situations. However, many people raise objections to the very idea of applying moral standards to business activities. In this section, we address some of these objections and also look at what can be said in favor of bringing ethics into business.

Occasionally people object to the view that ethical standards should be applied to the behavior of people in business organizations. Persons involved in business, they claim, should single-mindedly pursue the financial interests of their firm and not side- track their energies or their firm’s resources into “doing good works.” Three different kinds of arguments are advanced in support of this view.

First, some have argued that in perfectly competitive free markets, the pursuit of profit will by itself ensure that the members of society are served in the most socially beneficial ways. 28 To be profitable, each firm has to produce only what the members of society want and has to do this by the most efficient means available. The members of society will benefit most, then, if managers do not impose their own values on a business, but instead devote themselves to the single-minded pursuit of profit and thereby to producing efficiently what the members of society value.