CHAPTER 2
Business Ethics
Chapter Goals
The objective in Chapter Two is to introduce self-regulation as a technique for achieving a more desirable
role for business in society. One finds that students often do not recognize the relationship between the
free market, ethics and the law. Therefore, the instructor might remind the students that the law is
probably most accurately regarded as a last resort after the market and self-regulation (ethics) have
demonstrably failed. Therefore, ethics is not to be addressed in the abstract or as an afterthought. Rather,
it should be at the heart of the students’ inquiries.
Chapter Learning Objectives
At the end of this chapter, students will be able to:
1. Describe some of the ethics issues associated with America’s recent banking and finance
crisis.
2. Discuss America’s current moral climate.
3. Discuss the leading ethical decision-making theories.
4. Distinguish between teleological and deontological ethical systems.
5. Distinguish utilitarianism and formalism.
6. Describe Kohlberg’s theory of moral development.
7. Describe some of the forces that encourage unethical behavior in the workplace.
8. Explain the general purpose of ethics codes in the workplace.
9. Explain the general requirements of the Foreign Corrupt Practices Act.
10. Discuss some of the risks and rewards of whistle-blowing.
Chapter Outline
Part One—Introduction to Ethics
This chapter will examine the ethical climate of business and the role of ethics in business decision
making. Our goal here is not to teach morality but to sensitize the reader to the vital role honor plays in
building a sound career and a responsible life.
Practicing Ethics: Baseball Bats Encourage Subprime Loan Approvals
Hardiman was an appraiser for New Century Financial in 2004 and 2005. Her job was to weed out bad
mortgage applications. Hardiman says she was fired for refusing to approve weak loans.
New Century was the nation’s leading specialized subprime mortgage lender in 2006 with $51.6 billion in
loans. To achieve that volume, New Century and others often sold subprime mortgages with “teaser”
adjustable rates to Americans with poor credit.
A. The Financial Crisis: A Corporate Scandal?
Corporate misconduct has been a staple of the news in this 21st century. The nation’s (and the
world’s) ongoing financial crisis, the most threatening since the Great Depression, appears to have
been the product of a variety of forces including inadequate government regulation, dangerously easy
credit, overextended borrowers, real estate speculation, greed, and a collapsed housing market. The
facts may never be fully clear, but the International Monetary Fund has estimated that worldwide
losses attributable to the U.S. residential and commercial real estate market collapse at about one
trillion dollars or $142 per person in the entire world.
B. Too Big To Jail?
As of this writing in 2013, one of the continuing frustrations of the 2008 financial meltdown and the
widespread financial misconduct of recent years is the fact that America’s big banks have been largely
untouched by criminal prosecution. Money laundering, mortgage fraud, foreclosure fraud, big rigging,
and more have been discovered, but prosecutions have not followed. In fairness we note that tens of
billions of dollars in settlements and civil penalties have been achieved.
Proving criminal wrongdoing “beyond a reasonable doubt”—and particularly proving the required intent
to commit a crime—are daunting burdens. Thus, the government often leaves the wrongdoing to
regulators who can pursue civil causes of action with their more modest standard of proof.
A Conscience at Goldman Sachs?
“It makes me ill how callously people still talk about ripping off clients,” mid level Goldman Sachs
executive Greg Smith wrote in The New York Times as he was resigning from the firm in 2012. Smith,
33, a Stanford graduate and finalist for a Rhodes scholarship, wrote that he was once proud of
Goldman Sachs’s culture of teamwork, integrity, humility, and concern for clients, but that spirit, he
said, had been lost. Goldman Sachs says that regular employee feedback contradicts Smith’s
characterizations. Critics say Smith was angry because he had been denied a promotion and raise
prior to his departure. One Goldman client told The New York Times that the company had traded
against its clients for years. “Come on, that is what they do and they are good traders, so I do
business with them.”
C. A Pattern of Abuse
The subprime mortgage crisis was not the first instance of morally unhinged corporate conduct. The
subprime scandal is reminiscent of the savings and loan crisis of the 1980s when $150 billion
evaporated, in part because of criminal behavior. The corporate greed of the Enron era played out on
worldwide televisions as some of the great titans of American commerce shuffled off to prison.
Ethics Survey
Executive wrongdoing has been a significant problem in recent years, but what about questionable
employee behavior? Should some commonplace worker practices be considered unethical? The
Ethics Officer Association and the Ethical Leadership Group sampled a cross section of workers at
large companies nationwide.
I. America’s Moral Climate
Perhaps more than ever, Americans are questioning the nation’s moral health. A 2013 NBC poll showed
that 43 percent of Americans believe “a decline in moral values” is the number-one source of problems as
a nation.
Sociologist David Callahan’s book The Cheating Culture: Why More Americans Are Doing Wrong to Get
Ahead argues that we are a society in moral decline. The result of this winner-take-all ethos, Callahan
thinks, is a nation increasingly falling into two groups: a “winning class” who cheated their way to the top
and an “anxious class” who fear falling behind if they too do not cheat. Cheating, in one form or another,
does seem to be routine in American life.
Sex or Cell Phone?
Cell phone practices may offer some insights about what we value most in life. Consider these recent
study results:
A 2013 survey found more than twice as many Americans were willing to give up sex for a week as
to give up their cell phones.
Twelve percent of U.S. mothers between the ages of 18 and 35 (“Millennial moms”) admit to having
used their cell phones while having sex.
Fourteen percent of cell phone users in 15 nations admit to having interrupted sex to answer their
cell phones.
A. College Students
In perhaps the largest cheating scandal in school history, about 125 Harvard University
undergraduates were investigated for collaborating on a 2012 take-home examination in a course on
government. A large 2006 survey found 56 percent of graduate students in business admitted to
cheating at least once in the previous year, the largest percentage of any discipline surveyed. The
cheating evidence is discouraging, but some evidence of change should also be noted. Harvard MBA
students have received a great deal of attention for their voluntary campaign to sign “The MBA Oath,”
a pledge that Harvard MBAs will act ethically, “serve the greater good,” and avoid advancing their own
“narrow ambitions” at the expense of others. Now an international oath project pledges higher
standards of integrity and service by business leaders.
B. Changing Values?
Responding to the 2012 survey, a record 81 percent of first-year students valued wealth as a goal, but
only 46 percent sought a “meaningful philosophy of life.” That result is essentially a reversal of the
1971 survey when 37 percent of freshmen identified being “very well off financially” as an essential or
very important objective, and 73 percent felt the same about “developing a meaningful philosophy of
life.” One study based on the Narcissistic Personality Inventory of college students nationwide,
responding to such statements as “I think I am a special person,” concluded that the average college
student today is about 30 percent more self-absorbed than the average student in 1982.
Too Little Studying = Cheating?
According to the 2011 National Survey of Student Engagement, business majors spend less time
studying than students in any other broad field. Nearly half of senior business majors say they study
fewer than 11 hours per week outside of class. According to the Collegiate Learning Assessment
national essay test, business majors in their first two years of college improve their writing and
reasoning skills less than any other major.
Part two—Analyzing Ethical Dilemmas
I. Ethics Theories
Business ethics refers to the measurement of business behavior based on standards of right and wrong,
rather than relying entirely on principles of accounting and management. The pressure to produce is
intense, and the temptation to cheat may be great. Therefore, when the businessperson faces a difficult
decision, a common tactic is simply to do what he or she takes to be correct at any given moment. In one
survey of ethical views in business, 50 percent of the respondents indicated that the word ethical meant
“what my feelings tell me is right.”
Philosophers have provided powerful intellectual support for that approach. Existentialists, led by the
famed Jean-Paul Sartre, believe standards of conduct cannot be objectively discovered or rationally
justified via ethical theory and reasoning. No actions are inherently right or wrong. In Sartre’s famous
interpretation, existence precedes essence. First humans exist; then they individually define what they are
—our essence. Therefore, each individual is free, with no rules to turn to for guidance.
Responsibility
Indian spiritual, political, and civil rights leader, Mahatma Gandhi, viewed moral responsibility quite
differently from Sartre. Gandhi’s view: “All humanity is one undivided and indivisible family, and each one
of us is responsible for the misdeeds of all others.”
A. Universal Truths?
Philosophers seek to provide guidance beyond the uncertainties of ethical relativism.
1. Religion
Judeo–Christian beliefs, Islam, Confucianism, Buddhism, and other faiths are powerful ethical
voices in contemporary life. They often feature efforts such as the Golden Rule to build absolute
and universal standards. Scholarly studies indicate that most American managers believe in the
Golden Rule and take it to be their most meaningful moral guidepost. Faith, rather than reason,
intuition, or secular knowledge, provides the foundation for a moral life built on religion.
Spirituality at Work
Many businesses directly practice Christian principles in the workplace. Hobby Lobby, for example,
closes its 525 stores on Sunday, donates Christian counseling services, and buys holiday ads
promoting the Christian faith. The growing spirituality movement in business often does not involve
religion at all. Rather, managers may see spirituality as an expression of the whole person and a
part of the broader search for meaning in life. Business, they think, must acknowledge the soul to
maximize performance. [See http://www.bbc.co.uk/religion/ethics]
2. Libertarianism
Contemporary philosopher Robert Nozick built an ethical theory rooted in personal liberty. For him,
morality coincided with the maximization of personal freedom. Justice and fairness, right and wrong
are measured not by equality of results (such as wealth) for all, but from ensuring equal opportunity
for all to engage in informed choices about their own welfare.
3. Virtue Ethics
In recent years, an increasing number of philosophers have argued that the key to good ethics lies
not in rules, rights, and responsibilities but in the classic notion of character. As Plato and Aristotle
argued, attention should be given to strategies for encouraging desirable character traits such as
honesty, fairness, compassion, and generosity. [For an overview of virtue ethics, see
http://plato.stanford.edu/entries/ethics-virtue]
B. Teleology or Deontology—An Overview
Teleological ethical systems (often referred to as consequentialist ethical systems) are concerned with
the consequences, the results, of an act rather than the act itself. A teleological view of life involves
ends, goals, and the ultimate good. Duty and obligation are subordinated to the production of what is
good or desirable. To the deontologist, on the other hand, principle is primary and consequence is
secondary or even irrelevant. Deontology, derived from the Greek word meaning duty, is directed
toward what ought to be, toward what is right. Similarly, deontology considers motives.
C. Teleology
Utilitarianism
A decision that maximizes the ratio of good over evil for all those concerned is the ethical
course. Jeremy Bentham and John Stuart Mill were the chief intellectual forces in the
development of utilitarianism. Their views and those of other utilitarian philosophers were not
entirely consistent. As a result, at least two branches of utilitarianism have developed. According
to act-utilitarianism, one’s goal is to identify the consequences of a particular act to determine
whether it is right or wrong. Rule-utilitarianism requires one to follow those rules that generate
the greatest value for society. In sum, the principle to be followed for the utilitarian is the
greatest good for the greatest number.
Deontology
Formalism
In the formalistic view of ethics, the rightness of an act depends little on the results of the act.
Kant believed in the key moral concept of “the goodwill.” The moral person is a person of
goodwill, and that person renders ethical decisions based on what is right, regardless of the
consequences of the decision.
Kant propounded the categorical imperative, the notion that every person should act on only
those principles that he or she, as a rational person, would prescribe as universal laws to be
applied to the whole of humankind. A moral rule is “categorical” rather than “hypothetical” in that