Chapter 04 – Business Ethics, Corporate Social Responsibility, Corporate Governance, and Critical Thinking
CHAPTER 04
BUSINESS ETHICS, CORPORATE SOCIAL RESPONSIBILITY,
CORPORATE GOVERNANCE, AND CRITICAL THINKING
I. OBJECTIVES
After reading this chapter, a student should know:
A. The importance of ethical decision making to all business managers.
B. The major issues in the corporate social responsibility debate.
C. The definitions, strengths, and weaknesses of various definitions of ethical conduct.
D. The recommendations for improving corporate governance and corporate social
responsibility.
E. A framework for processing facts and ethical principles that will lead to ethical decision
making.
F. The common thinking errors that interfere with the process of making well reasoned
decisions.
G. The common pitfalls that lead to bad decisions.
H. How to resist requests from bosses to act unethically.
I. How to lead ethically.
II. ANSWER TO INTRODUCTORY PROBLEM
A. This is a new problem. It is designed to allow students to discover that most of them already
have a clearly shaped, ethical viewpoint that connects with accepted ethical theories. Many
ethics professors start their discussion of ethics by asking students to identify an example of
ethical conduct that they have observed. The students should next be asked why they think
the conduct was ethical. If students are too shy or unable to offer suggestions of ethical
behavior, use the example in the problem or create your own. In either case, ask students to
assess why the behavior is ethical. You will want to see if students justify the behavior by
resorting to the ethical theories we have presented in the text. Eventually, whether or not the
students make a connection with the material in the text, direct students to the relevant ethical
theories.
B. You may ask students to evaluate each of the examples in the problem using the Guidelines
for Ethical Decision Making that are listed in Figure 1 on page 112 and explained on pages
112 to 117. In doing so, they should consider all four ethical theories explained in the
textbook, including profit maximization and utilitarianism. The ethics of some of the
behaviors are not clear cut, unlike a situation when one is asked to violate the law, such as
reporting false earnings. Here things are more subtle. For example, why not spend more
time working for one’s business or relaxing rather than helping a friend’s daughter obtain an
internship? Would a profit maximizer act only in a way that is apparently in the long-run
interest of the firm? Or would he also consider the remote benefits to the firm from helping
someone needing an assist in her career? Is it OK that the firm suffers a bit because Justice
Theory suggests we help someone who needs help? Does the firm necessarily suffer when an
executive uses her time to help out someone who is not a firm stakeholder?
C. Many of these examples, such as hiring a convicted felon, recalling a product, and opening a
plant in Indonesia, should not only engage students, but also engender vigorous debate.
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Chapter 04 – Business Ethics, Corporate Social Responsibility, Corporate Governance, and Critical Thinking
D. Sometimes students and even executives will say, “What we are talking about isn’t even in
the ethical arena. These are things that are just things that should be done.” We usually
pause for a bit while holding our hands to our sides and nodding our heads, and then say,
“Now you understand what ethics is all about.”
III. SUGGESTIONS FOR LECTURE PREPARATION
A. The Structure of This Chapter
1. This chapter was about 95% rewritten in the 12th Edition, and two new sections on
“Common Characteristics of Poor Decision Making” and “Leading Ethically” were added
to the 13th Edition. The structure facilitates students understanding and interest in this
overwhelming yet highly important area. We believe students will find this chapter
highly readable and relevant. You should be able to spend less time in class going
through definitions with students and more time going through ethical problems that will
impress on your students the need to use a framework that will help them make better and
more nearly ethical decisions.
2. You can stay current with recent business ethics and corporate governance developments
by reading Business Week and the Wall Street Journal. The Wall Street Journal allows
you to subscribe to a weekly email alert covering ethics issues.
B. Why Study Business Ethics?
1. This shouldn’t be too difficult of a sell today in light of the high-profile ethical failings of
the last decade, and especially with the credit crunch of 2008-2012 caused by individuals
and businesses who defrauded banks by taking loans they knew they would not or were
likely not to repay. Nonetheless, some of your students, especially MBAs, will be cynical
and argue that unethical behavior isn’t always punished. We take that question head on
by answering that while true that bad people sometimes prosper, most successful people
are ethical, and top managers tend to be at least as ethical as most people are and far more
ethical than most people think they are. Unethical behavior is recognized and is a
stumbling block, if not an absolute impediment, to reaching the top of most
organizations. While not true in some organizations where those at the top are corrupt,
those are the exceptions. In most organizations, unethical people don’t go very far. Most
people don’t want to be around unethical people.
2. Note that there is nothing new about ethical failings of managers or others in high places
and nothing special about the United States as a forum for unethical conduct. Human
failings based in laziness, ignorance, stupidity, selfishness, and meanness has made
unethical and illegal conduct a part of human society for millennia. It’s not even clear
that the financial impact of today’s ethical failings is more spectacular than some of those
of the robber barons in the late 1800s, although the absolute volume is larger.
3. Ethics in Action (p. 100). This quote from Freeman Dyson shows why humans feel
conflicted when making ethical decisions affecting a large number of interested persons:
it is part of our basic make up to be concerned not just about ourselves, but also our
families, local communities, nation, and world as a whole, among other interests.
C. The Corporate Social Responsibility Debate
1. You may wish to cover at this time all the materials on the corporate social responsibility
debate, including the proposals to modify corporate governance, which are covered on
pages 106 to 111. We chose to cover the materials on corporate governance when
evaluating profit maximization as an ethical construct, and we suggest you do the same.
To us it made sense for students to understand sequentially the reasons that maximizing a
firm’s profits can be ethical conduct, the factors interfering with a manager’s decision
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Chapter 04 – Business Ethics, Corporate Social Responsibility, Corporate Governance, and Critical Thinking
making process that may lead to less than optimal decisions, the proposals to modify
corporate governance, and the reasons the law may be the best constraint on unethical
managers.
2. At the very least you will want to frame the debate between those who on the one hand
see capitalism as fundamental not only to society’s economic prosperity but also to its
citizens’ political freedoms and on the other hand those who see capitalism and business
as an exploiter of labor and the environment for the personal profit of those who control
businesses. You students should be able to identify evidence of this conflict in the
political and economic debates of the next several years as a new president and the two
political parties vie for control of the legislative process in America.
D. Ethical Theories
1. This is the heart of the chapter. We spend a lot of time and space defining and explaining
the strengths and weaknesses of four main categories of ethical theories. Students should
be able to understand most of this on their own, which was our objective. Nonetheless,
you may want to review the theories and to ensure that the students understand how the
theories differ yet overlap.
2. Log On (p. 100): If you want to discuss some additional philosophies, check out the
philosophers and their thinking at this website.
3. Rights Theory
a. Cover Kant’s categorical imperative and modern rights theories, especially those that
rank rights.
The Global Business Environment: The Golden Rule (p. 102): Note the similarities
between the golden rule and Kant’s categorical imperative. Note that the golden rule
is universally recognized in all societies and religions.
b. Note the evolution of fundamental rights from Locke to Brecht. As the textbook
indicates, the right to health care is a part of the modern liberal agenda. Note that
employer-paid health care did not exist until after World War II, when some
employers offered health care coverage to their employees as a way to evade
governmentally imposed wage controls in the post-war United States. That is, this
arguably fundamental human right first arose as an economic response to government
limitations on business conduct. Your students can find in the media the arguments
for and against national health care in America.
c. Examples: Problem Cases ## 3, 4, 5, and 7.
d. Ask students to recite the strengths and criticisms of rights theory. One critic on
rights theory called it “nonsense on stilts.”
4. Justice Theory
a. Ask students to define Rawls’s Greatest Equal Liberty Principle and the Difference
Principle. Ask them for examples in which Rawls’s theory of justice would provide
guidance.
Examples: Problem Case # 4.
b. Note Nozick’s criticism of Rawls. Why is Nozick’s libertarian theory also a justice
theory? Because he equates equality of opportunity with justice or fairness.
c. Point out that many of the strengths and criticisms of justice theory are shared with
rights theory. Is that also true about Nozick’s libertarian viewpoint? The argument
that justice theory stifles innovation and productivity is not as strong a criticism of
Nozick’s viewpoint. Lack of equal opportunity can stifle productivity, if for example,
someone who is bright and innovative can’t get the funding or education to develop
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Chapter 04 – Business Ethics, Corporate Social Responsibility, Corporate Governance, and Critical Thinking
his idea but a dimwit son of a wealthy family has no problem financing a wasted
college education and half-baked business ideas.
5. Utilitarianism
a. Ask students to define the essence of utilitarianism: an act is ethical if the benefits to
society outweigh the detriments.
b. Note the differences between Bentham’s and Mill’s characterizations of
utilitarianism. Mill would also consider satisfactions and dissatisfactions of animals,
anything that has a face.
c. Compare act and rule utilitarianism, and note the practical necessary for rules that
guide our conduct. Could a utilitarian have a rule that he will always obey the law?
Yes, if he concludes that in the long-run such a rule maximizes society’s benefits over
detriments.
d. Examples: Problem Case ## 5 and 6.
e. Cover the strengths and criticisms of utilitarianism. What if someone came in your
classroom and demanded that you kill one or your students or he would kill everyone
in your class? What would your students want you to do? Can your students think of
a real world example that creates that kind of ethical dilemma? How about killing
the weakest member of a group stranded on a snow-covered mountain so the others
in the group can eat his flesh and survive? The weakest will die first, and all will die
if the others don’t eat his flesh. How about killing a steer to feed a family? How
about taking water a farmer uses for irrigation so a town of 100,000 people has
enough water for its citizens to drink?
6. Profit Maximization
a. Most business students will understand the economic underpinning of profit
maximization since they have taken a microeconomics course, but your non-business
students may need assistance in understanding that total social wealth is maximized if
everyone seeks to use society’s resources most productively, that is, in ways that
society values most highly. That might in some cases mean turning farmland into a
housing subdivision, using the land for farming, or planting trees which may be used
for housing construction or enjoyed for recreation or hunting.
b. Note that a business manager acting for her business must act in the best interests of
the business, not her own selfish interest. When acting for herself, however, she may
maximize her own profits.
c. Emphasize that a profit maximizer must act within the limits of the law. This is one
way in which profit maximization can differ from utilitarianism.
d. Note how profit maximization views rights that rights theory and justice theory
consider determinative of a course of action. To a profit maximizer, any one right is
merely one of many factors to consider when choosing to take a course leading to
optimal profits for the business.
e. Examples: Problem Cases ## 3, 4, 5, 6, and 7.
f. Cover the strengths and weaknesses of profit maximization as an ethical construct.
You may want to structure this in a point-counterpoint format. You can go back and
forth almost ad infinitum. We do this on pages 104-106.
g. Ethics in Action: Minimum Wage Laws (p. 105): This is a highly topical issue, and
you can spend quite a bit of time on this debate. The ethic box frames most of the
major arguments against a minimum wage set by government. Your students should
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Chapter 04 – Business Ethics, Corporate Social Responsibility, Corporate Governance, and Critical Thinking
be able to make arguments for a minimum wage that reflect Rights Theory and
Justice Theory.
h. Improving corporate governance and corporate social responsibility.
1) We suggest covering the corporate governance debate and the suggested
solutions at this time. It fits neatly after the criticisms of profit maximization.
Go through all the corporate governance laws and proposals. Note particularly
the requirements of the Sarbanes-Oxley Act of 2002, the NYSE, and NASDAQ
in ethics codes, shareholder voting rights, board independence, and executive
compensation. You may want to look at or assign the materials on Sarbanes-
Oxley in Chapters 43, 45, and 46.
2) Ethics in Action: Google Code of Conduct (p. 107): Google’s ethics code is
fairly similar to ethics codes of other companies created in the last ten years. Ask
your students whether they believe that Google’s basic creed, “Don’t Do Evil,” is
sufficiently clear to provide real ethical guidance.
Many companies publish their ethics codes on the web. For another example, see
Apple’s comprehensive and detailed Business Conduct Policy by using your
search engine with the words “Apple Business Conduct Policy.”
3) We provided quite a bit of material on perverse incentives and board supervision
of executives and audit firms. One of the more striking disclosures during the
recent ethics fallout was that a high percentage of audit committee members
couldn’t define basic accounting terms like retained earnings.
4) We may be biased, but we are lawyers and this is a business law textbook, so we
make a strong argument for the law being the best means of controlling corporate
conduct. Note that all the ethical failings of the late 1990s and early 2000s were
also illegal acts. If the executives at Tyco, WorldCom, Enron, and ImClone had
complied with the law by not looting their corporation, not breaching their duty
of loyalty to the corporation, not booking revenue illegally, not trading on inside
information, and not shredding evidence, they would have avoided liability and
unethical conduct. Many of the bad loans that led to the credit crunch of 2008
and 2009 were made to borrowers who acted fraudulently and were made by
banks whose loan officers failed to comply with the business judgment rule of
corporation law.
Example: Problem Case #8.
E. Guidelines for Ethical Decision Making
1. If the ethical theories are the meat of this chapter, the guidelines form a skeleton that give
the theories shape and structure. Without the guidelines, it is easy to overlook facts,
alternative courses of action, and stakeholders that determine the best action. Nearly
equally important is consideration of the method of implementation.
2. List on the board or on a slide the Guidelines for Ethical Decision Making. Explain each
one clearly. Give a brief example of each guideline.
a. Note that getting the facts is the first guideline. This is fundamental, because a
decision can’t be made in a vacuum.
Example: Problem Case # 1.
b. Note also that listing the alternatives is next. Another common failing of decision
makers is that they don’t consider all the possible options. Having a good
imagination is important to top business managers.
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Chapter 04 – Business Ethics, Corporate Social Responsibility, Corporate Governance, and Critical Thinking
3. Go through examples of ethical and good decision making using the guidelines.
Examples: Problem Case ## 2, 3, and 6: These problems cases have facts that work well
with the guidelines.
4. Log On (p. 117): This is a good website to find guides for ethical decision making.
F. Thinking Critically
1. We thought that good thinking was so important to good decision making that we needed
to include some materials on common thinking errors. Decades ago, virtually every
college student took a philosophy class that taught reasoning. Today, few students,
especially business students, take such a course.
2. You will hear students make these mistakes all semester when they answer your questions
in class. Begging the question and false cause are especially common. You will want to
point out students’ thinking errors during the course of the semester.
3. Log On (p. 122): If you want to cover more fallacies or cover them in greater detail,
check out or assign these websites.
4. A good exercise is to ask students to find one example of each thinking error in their
everyday life, either from TV advertisements, the press, or their dealings with others.
There are some hazards. We’ve heard back from MBAs that our students’ spouses are not
particularly receptive to having their thinking errors exposed.
5. Example: Problem Cases ## 9 and 10.
G. Common Characteristics of Poor Decision Making
1. This section was added in the 13th edition because it gives students a simple and short
explanation of why good people, people who are honestly motivated, still make decisions
that after further review are unethical or irrational. There is some redundancy, because
some of its points are covered in the Guidelines for Ethical Decision Making and some
are covered in the Thinking Critically section. But its major points are new material.
2. For some of our classes on ethics, we use this section as the foundation for the
presentation, relating everything else in the chapter to the major points. For example,
overconfidence and failure to understand complexity can be explained in part by a failure
to consider all the stakeholders and their interests, something the Guidelines for Ethical
Decision Making require.
3. Under complexity, we talk a bit about wanting to be team players. We could have
included a separate subsection on groupthink, which is a major impediment to good
decision making. The common causes of groupthink are an insulated and cohesive team,
team pressure for its members to conform, the team or team leader discrediting dissent,
members self censoring their comments, and the team or team leader misconstruing a
member’s silence as consent to team decisions. Good ways to combat groupthink are
having an impartial leader for the team, encouraging devil’s advocates, seeking input
from outside experts, breaking the group into subgroups that report their independent
conclusions to the team as a whole, and having a last chance meeting for team members
to pose concerns about a decision.
4. Example: Problem Case # 10.
H. Resisting Requests to Act Unethically
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Chapter 04 – Business Ethics, Corporate Social Responsibility, Corporate Governance, and Critical Thinking
1. This is a very important section of the chapter, because often our students are order–
takers. Thus, learning how to circumvent an order to do an unethical act is important to
our students’ ethical conduct and survival in their jobs.
2. Go through each item listed on pages 123 to 126. You may want to use the Concept
Review on page 125. Note the structure of that concept review. The student is in the
middle, and all the tactics feeding into her help her resist requests to act unethically.
3. Example: Problem Case # 10.
4. The strategies in this section are in general good advice for any person hoping to succeed
and move up in any business. It is especially important for a new employee to find a
mentor and peer support group.
I. Leading Ethically
1. This is another recently added section that begged for inclusion, because some of our
students are already in leadership positions and others will be if their careers progress as
we hope.
2. Go through each item listed on pages 126 to 127. We like to relate these leadership
values to those used when raising children. In fact, the older we authors get, the more we
recognize that we must treat our students, our co-workers, and subordinates the way we
treated our children: respectfully while communicating, modeling, and reinforcing core
values.
Example: Problem Case #11.
IV. RECOMMENDED REFERENCES
A. Badaracco, Leading Quietly: An Unorthodox Guide to Doing the Right Thing (2002).
B. Badaracco, Defining Moments: When Managers Must Choose between Right and Right
(1997).
C. Bastiat, That Which Is Seen and That Which is Not Seen: The Unintended Consequences of
Government Spending (1850).
D. Berle & Means, The Modern Corporation and Private Property (rev. ed. 1968).
E. Bloomenthal, Sarbanes-Oxley Act in Perspective (2002).
F. Bruner, Deals from Hell: M&A Lessons that Rise Above the Ashes (2005).
G. Cahn, The Moral Decision (1956).
H Dimma, Excellence in the Boardroom: Best Practices in Corporate Governance (2002).
I. Hamilton & Trautman, Sarbanes-Oxley Act of 2002: Law and Explanation (2002).
J. Hayek, The Road to Serfdom (1944).
K. Henderson & Cooper, Making Great Decisions in Business and Life (2006).
L. Levitt & Dubner, Freakonomics: A Rogue Economist Explores the Hidden Side of
Everything (2005).
M. Plous, The Psychology of Judgment and Decision Making (1993).
N. Ridley, The Rational Optimist: How Prosperity Evolves (2011).
O. Sowell, Applied Economic: Thinking Beyond Stage One (2008).
P. Sowell, Basic Economics: A Common Sense Guide to the Economy (3rd Ed. 2007).
Q. Sowell, Economic Facts and Fallacies (2nd ed., 2011).
R. Stone, Where the Law Ends: the Social Control of Corporate Behavior (1975).
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Chapter 04 – Business Ethics, Corporate Social Responsibility, Corporate Governance, and Critical Thinking
S. Williams, Liberty versus the Tyranny of Socialism: Controversial Essays (2008).
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