Chapter 02 – Defining Business Ethics
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CHAPTER 2
Defining Business Ethics
Table of Contents
Chapter Summary and Learning Outcomes 2-2
Learning Outcomes 2-2
Frontline Focus: “The Customer is Always Right” Questions 2-2
Learning Outcome 1 2-3
Learning Outcome 2 2-3
Learning Outcome 3 2-4
Learning Outcome 4 2-5
Learning Outcome 5 2-5
Learning Outcome 6 2-6
Life Skills 2-6
Progress ✓Questions 2-7
Ethical Dilemma 2-10
Frontline Focus: “The Customer is Always Right—Carol Makes a Decision” Questions 2-13
Key Terms 2-13
Review Questions 2-14
Review Exercises 2-15
Internet Exercises 2-16
Team Exercises 2-16
Thinking Critically 2-19
Chapter 02 – Defining Business Ethics
Chapter Summary
This chapter begins by defining how ethics are applied to business behavior. It describes and
explains who the stakeholders are in an organization, their interests in the organization, and the
impact on them from unethical behavior. Many people, because of the track record over the past
two decades, believe that business ethics is an oxymoron, the combination of two contradictory
terms. This chapter also discusses the history of business ethics and the dramatic changes that
have taken place in the business environment over the last five decades. It continues going into
deeper detail about the definition and resolution of ethical dilemmas. It discusses four commonly
held rationalizations that can lead to misconduct. In conclusion, this chapter begins looking at the
aspects in building and operating an ethical business.
Learning Outcomes
After studying this chapter, the student should be able to:
1. Define the term business ethics.
3. Discuss the position that business ethics is an oxymoron.
4. Summarize the history of business ethics.
5. Identify and propose a resolution for an ethical dilemma in your work environment.
6. Explain how executives and employees seek to justify unethical behavior.
Extended Chapter Outline
Frontline Focus
“The Customer is Always Right” Questions
1. Look at Figures 2.1 and 2.2, and identify which stakeholders would be directly impacted by
Dave’s plan to sabotage the new healthy menu.
2. Describe the ethical dilemma that Carol is facing here.
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3. What should Carol do now?
Carol must decide if her values are strong enough to stand up to this dilemma. She could go
Learning Outcome 1: Define the Term Business Ethics.
• Business ethics is the application of ethical standards to business behavior.
• Students of business ethics can approach the topic from two distinct perspectives:
o A descriptive summation of the customs, attitudes, and rules that are observed within
a business.
o A normative (or prescriptive) evaluation of the degree to which the observed
customs, attitudes, and rules can be said to be ethical.
Learning Outcome 2: Identify an Organization’s Stakeholders.
• Figure 2.1 maps out the relevant stakeholders for any organization and their respective
interests in the ethical operation of that organization—stockholders or shareholders,
employees, customers, suppliers/vendor partners, retailers/wholesalers, federal
Chapter 02 – Defining Business Ethics
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Learning Outcome 3: Discuss the Position that Business Ethics is an Oxymoron.
• Over the last two decades, the ethical track record of many organizations would lead
people to believe that no ethical policies or procedures have been in place.
• Corporate governance is the system by which business corporations are directed and
controlled.
o CEO salaries have increased while shareholder returns have fallen.
o CEOs continue to receive bonuses while the stocks of their companies underperform
the market average and thousands of employees are being laid off.
• Therefore, it is understandable that many observers would believe that the business world
lacks any sense of ethical behavior whatsoever.
o Some would even argue that the two words are incompatible and “business ethics” is
Chapter 02 – Defining Business Ethics
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o The code of ethics can be seen to serve a dual function:
➢ As a message to the organization’s stakeholders, the code should represent a
Learning Outcome 4: Summarize the History of Business Ethics
• Figure 2.3 illustrates several dramatic changes that have taken place in the business
environment over the last five decades:
o The increased presence of an employee voice has made individual employees feel
more comfortable speaking out against actions of their employers that they feel to be
Learning Outcome 5: Identify and Propose a Resolution for an Ethical Dilemma in Your
Work Environment.
• When employees observe unethical behavior (e.g., fraud, or theft of company property) or
are asked to do something that conflicts with their own personal values, the extent of the
guidance available to them is often a series of clichés:
Chapter 02 – Defining Business Ethics
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o Truth versus loyalty—do you tell the truth or remain loyal to the person or
organization that is asking you not to reveal that truth?
o Short-term versus long-term—does your decision have a short-term consequence or a
longer-term consequence?
o Justice versus mercy—do you perceive this issue as a question of dispensing justice
or mercy? (Which one are you more comfortable with?)
Learning Outcome 6: Explain How Executives and Employees Seek to Justify Unethical
Behavior.
• Saul Gellerman identified “four commonly held rationalizations that can lead to
misconduct”:
o A belief that the activity is within reasonable ethical and legal limits—that is, that it
Chapter 02 – Defining Business Ethics
Life Skills
Making Tough Choices
This Life Skills box discusses what happens when your personal values appear to directly
conflict with those of your employer. Three options are open—leave and find another job; keep
your head down, do what you have been asked to do, and hold on to the job; or, talk to someone
in the company about how uncomfortable the situation is making you feel and see if you can
change things. All three options are tough choices.
Progress Questions
1. Explain the term business ethics.
2. Explain the difference between a descriptive and prescriptive approach to business ethics.
3. Identify six stakeholders of an organization.
4. Give four examples of how stakeholders could be negatively impacted by unethical
corporate behavior.
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5. Define the term oxymoron and provide three examples.
6. Is the term business ethics an oxymoron? Explain your answer.
7. Define the term corporate governance.
8. Explain the term code of ethics.
9. Identify a major ethical dilemma in each of the last five decades.
Following are some of the major ethical dilemmas in each of the last five decades:
• 1960s—environmental issues, increased employee-employer tension, civil rights
Chapter 02 – Defining Business Ethics
10. Identify a key development in business ethics in each of the last five decades.
Following are the key developments in business ethics in each of the last five decades:
• 1960s:
o Companies begin establishing codes of conduct and values statements
• 1980s:
o ERC develops the U.S. Code of Ethics for Government Service
o ERC forms first business ethics office at General Dynamics
• 2000s:
o Business regulations mandate stronger ethical safeguards (Federal Sentencing
Guidelines for Organizations; Sarbanes-Oxley Act of 2002)
11. Which decade saw the most development in business ethics? Why?
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12. Which decade saw the most ethical dilemmas? Why?
13. Give four examples of the clichés employees often hear when faced with an ethical dilemma.
Some examples of the clichés employees often hear when faced with an ethical dilemma are:
14. List the four types of ethical conflict.
The four types of ethical conflict are:
15. List the three principles available to you in resolving an ethical dilemma.
The three principles for resolving an ethical dilemma are:
16. Give an example of an ethical business dilemma you have faced in your career, and explain
how you resolved it, indicating the type of conflict you experienced and the resolution
principle you adopted.
Students’ responses will vary. The ethical dilemma described should fit the definition—a
Chapter 02 – Defining Business Ethics
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Ethical Dilemma
2.1 – The Ford Pinto
1. Should a manufacturer go beyond government standards if it feels there may be a potential
safety hazard with its product?
Students’ responses will vary. Students may argue that a manufacturer should go above and
2. Once the safety issue became apparent, should Ford have recalled the vehicle and paid for
the retrofit? Should it have invited owners to pay for the new barrier if they so chose? If only
half the owners responded to the recall, what would the company’s obligation be?
Student responses will vary. Some of the students may feel that Ford should have recalled
the vehicle and paid for the retrofit once they knew that there was a safety issue. Ford’s
3. Is there a difference for a consumer between being able to make a conscious decision about
upgrading safety features (such as side airbags) and relying on the manufacturer to
determine features such as the tensile strength of the gas tank?
Student responses will vary. There is a huge difference between being able to make a
conscious decision about a safety-feature upgrade and relying on a manufacturer to
4. Once Pintos had a poor reputation, they were often sold at a discount. Do private sellers have
the same obligations as Ford if they sell a car they know may have design defects? Does the
discount price absolve sellers from any responsibility for the product?
Chapter 02 – Defining Business Ethics
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Education.
from any responsibility for the product. It is important for sellers to have a strong code of
ethics in their business transactions.
1. Summarize the positions of both critics and supporters of these tax strategies.
2. Supporters and critics of these tax strategies agree that corporations are making use of legal
financial options that are available to them under current tax law. However, does that equate
to ethical business conduct? Why or why not?
Student responses will vary. Some of them may say that what Microsoft, Apple, Hewlett-
Packard (HP), and Google are doing does not equate to ethical business conduct. They may
cite the following reasons to support their answer:
3. The French chairman and CEO of Louis Vuitton, Bernard Arnault, recently announced that
he was leaving France for Belgium, allegedly to avoid the new highest-income tax rate of 75
percent. Is that any different from what corporations are doing? Why or why not?
example, elected to shift the intellectual property (IP) rights for software that the company