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Cengage Advantage Books: Essentials of Business Law 5th Edition

978-1285427003 Chapter 2 Lecture Note Part 1

June 21, 2019
Chapter 2
Suggested Additional Assignments
Ask students to bring to class a newspaper, magazine, or internet article that raises ethical issues
regarding a US company doing business overseas. They should be prepared to identify the ethical
issues and discuss them using the checklist in the chapter.
Interview: Businesspeople on Ethics
Each student (or group of students) can interview a businessperson about ethics dilemmas they have
faced. How did they handle the dilemmas? Did they make the right decisions? Do they wish they had
made a different choice? How did their decisions impact their companies? Their lives?
Role Play: Rienzi Plaza
Landlord Sheldon Baskin faces a decision. His rent-subsidy contract with the federal government has
expired and he can raise rents at Rienzi Plaza by as much as 500 percent. If he raises rents to market
rates, then 140 poor and elderly tenants will have to leave. Divide students into groups to represent
various stakeholders: the landlord, the tenants, investors, and the government officials who administer
the rent-subsidy program. Students should brainstorm the business and ethical issues facing their
respective stakeholders, devise negotiating positions, and then engage in an all-stakeholder discussion
moderated by the instructor.
Chapter Overview
Chapter Theme
Ethical behavior offers significant advantages. Society as a whole benefits; executives who behave
ethically have happier, more fulfilled lives; and unethical behavior can destroy a company and the
individuals who engage in such behavior. Many students have never discussed these issues with
parents, instructors, or religious leaders. It is useful for an authority figure to say openly that ethical
behavior is important.
It is also important for students to examine ethical issues from a variety of points of view and for them
to develop their own “Life Principles” – the rules by which they live their own lives.
This chapter will present several important issues:
1. What is the role of business in society?
2. Why bother to act ethically at all?1
3. What is the most important consideration when making an ethical decision? To do the right
thing for the right reason? Or to do what produces the most favorable results?
4. Is lying ever acceptable?
5. Should you apply your personal ethics in the workplace? Or should you have different ethical
values at home and at work?
6. Is the primary role of corporations to make money? Or do they have responsibilities to
workers, communities, customers, and other "stakeholders"?
The Role of Business in Society
A fundamental question in business ethics is: What is the purpose of a corporation?
1 Some of the ethics cases and discussion questions featured in this chapter are adapted from Applied Business
Ethics by Dean A. Bredeson, Cengage Learning, 2011.
2 Unit 1 The Legal Environment
To whom does a corporation owe responsibility – its shareholders? Or, in addition to shareholders, to
its stakeholders, which include employees, customers, and the community and countries in which the
company operates? Differing viewpoints yield distinct responses to ethical dilemmas, particularly
when the law does not require a particular outcome.
Corporate managers face many choices in which the most profitable option is not the most ethical
choice. Sometimes, doing the right thing will lead to a loss of profits or even one’s job. Conversely,
engaging in unethical behavior may increase profits, but may ignore stakeholders, or even be criminal.
Why Be Ethical?
Society as a Whole benefit from Ethical Behavior
Mutual trust is a vital part of a successful society. No society will survive long if the people are
constantly having to protect themselves from dishonesty and the government is compelled to regulate
businesses severely to ensure fairness.
People Feel Better When they Behave Ethically
Researchers who study happiness find that people expect material goods to make them happier than
they actually do. Almost no matter how much people earn, they feel they would be happier if their
income were just a little bit higher. So what does make people happy in the long run? Good
relationships, satisfying work, ties to the community—all available at no additional cost.
Profitability is generally not what motivates managers to care about ethics. Managers want to feel good
about themselves and the decisions they have made; they want to sleep at night.
Unethical Behavior Can Be Very Costly
Unethical behavior does not always damage a business, but it certainly has the potential of destroying a
company overnight. So why take the risk?
Even if unethical behavior does not devastate a business, it can cause other, subtler damage. In one
survey, a majority of those questioned said that they had witnessed unethical behavior in their
workplace and that this behavior had reduced productivity, job stability, and profits. Unethical behavior
in an organization creates a cynical, resentful, and unproductive workforce.
Although there is no guarantee that ethical behavior pays in the short or long run, there is evidence that
the ethical company is more likely to win financially. Ethical companies tend to have a better
reputation, more creative employees, and higher returns than those that engage in wrong-doing.
But if we decide that we want to behave ethically, how do we know what ethical behavior is?
Theories of Ethics
When making ethical decisions, people sometimes focus on the reason for the decision – they want to
do what is right. Thus, if they think it is wrong to lie, then they will tell the truth no matter what the
consequence. Other times, people think about the outcome of their actions. They will do whatever it
takes to achieve the right result, no matter what they have to do to obtain it. This choice – between
doing right and getting the right result – has been the subject of much philosophical debate.
Utilitarian Ethics
Under utilitarian ethics, a correct decision is one that tended to maximize overall happiness and
minimize overall pain. Risk management and cost-benefit analyses are examples of utilitarian business
Chapter 2 Ethics and Corporate Social Responsibility 3
The critics of utilitarian thought argue that it is simply not possible to "measure" happiness. Others say
that utilitarians simply let the ends justify the means, and that they allow for bad behavior so long as it
generates good in the end. A third group argues that utilitarian philosophies err in equating pleasure
with ethical behavior, and pain with wrongful behavior.
Deontological Ethics
Many ethicists believe that utilitarians have it all wrong, and that the results are not as important as the
reason for which the decision is made. To a deontological thinker, the ends do not justify the means.
The best-known proponent of the deontological model was an eighteenth-century German philosopher
Immanuel Kant. He thought that human beings possessed a unique dignity, and that no decision that
treated people as commodities could be considered just, even if the decision tended to maximize overall
happiness, or profit, or any other quantifiable measure. Most followers of deontological ethics agree
that utilitarianism is lacking, and that winning in the end does not automatically make a decision right.
Ethical decisions, they argue, are those made for good and moral reasons in the first place, regardless
of the outcome.
Rawlsian Justice
John Rawls raised the question of what type of society we would choose if we did not know what our
status in the society would be. Would we choose a society that treated everyone equally or one that
treats everyone fairly? What types of jobs would receive the most reward?
Ethical Traps
Ethical traps create great temptation to do what you know to be wrong or fail to do what you know to
be right.
Money is a powerful lure because most people believe that they would be happier if only they had
A recent study found that more creative people tend to be less ethical. The reason? They are better at
rationalizing their bad behavior.
Warren Buffett has been quoted as saying, “The five most dangerous words in business may be:
‘Everybody else is doing it.’” Humans are social animals who are often willing to follow the leader,
even to a place where they do not really want to go.
Following Orders
When someone in authority issues orders, even to do something clearly wrong, it is very tempting to
comply. Fear of punishment, the belief in authority figures, and the ability to rationalize all play a role.
To “smooth earnings” sounds a lot better than to “cook the books” or plain old “commit fraud.” And
“file sharing” sounds friendly and helpful—it has a very different ring than “stealing intellectual
property,” which is what it really is. In making ethical decisions, it is important to use accurate
terminology. Anything else is just a variation on rationalization.
Lost in a Crowd
When in a group, people are less likely to take responsibility, assuming that someone else will. They
tend to check the reactions of others, and if everyone else seems calm, they assume that all is right.
Bystanders are much more likely to react if they are alone and have to form an independent judgment.
4 Unit 1 The Legal Environment
Blind Spots
People often ignore – sometimes consciously – unethical behavior of others, despite that evidence of
such behavior is obvious.
Lying: A Special Case
We are taught from an early age that we must tell the truth. And usually, honesty is the best policy. The
consequences of lying can be severe: students are suspended, employees are fired, and witnesses are
convicted of perjury. Sometimes the problems are subtler but still significant: a loss of trust, a loss of
Applying the Principles
Personal Ethics in the Workplace
Should you behave in the workplace the way you do at home or do you have a separate set of ethics for
each part of your life? What if your employees behave badly outside of work – should that affect their
About the Ethics Cases
New to this edition are several Ethics Cases in the book. The discussion questions do not have clear,
right or wrong answers. Students should be encouraged to explore the various possibilities, options,
and ethical and other ramifications of the situations in order to arrive at their own ethical conclusions.
Ethics cases examined in this chapter:
- Lincoln at War: Examining President Abraham Lincoln’s political efforts to end slavery in the
United States.
- Diamonds in the Rough: Examining the practice of accepting gifts from customers in exchange
for preferential treatment.
- Train Spotting: Examining ethical obligations to help others in need, or expose those engaged
in unethical behavior.
- Truth in Borrowing: Examining the impulse to falsify information in a loan application for
monetary gain.
- No Sheen on Sheen: Examining broadcasting television network CBS’s response to actor
Charlie Sheen’s bizarre behavior.
- Breathing the Fumes: Examining the ethical obligation of corporations to provide safer
products to consumers.
- The Storm After the Storm: Examining a company’s dilemma in choosing whether to focus on
its domestic employees or relocate overseas.
- Mickey Weighs In: Examining media conglomerate Disney’s decision to limit advertisements
to only those that promote healthy foods.
- A Worm in the Apple: Examining a corporation’s responsibility to improve working conditions
in overseas factories.
- The Beauty of a Well-Fed Child: Examining cosmetic company Clarins’s promotional offer that
pledges resources to help feed needy children.
Additional Case: Conair v. Nexxus et al.2
2 641 F.Supp. 473 United States District Court, S.D. New York.
Chapter 2 Ethics and Corporate Social Responsibility 5
Facts: Conair Corporation alleged they were libeled by statements contained in two advertisements in
trade journals. The defendants are The Nexxus Products Co., Service Publications, Inc. owned by Jheri
Redding, publisher of American Hairdresser Salon Owner, and Vance Publishing Corporation, publisher
of Modern Salon.
Conair and Defendants are engaged in the manufacture and distribution of hair shampoo, conditioner
and hair products. Both parties compete in the styling and packaging of their respective products. They
generally attempt to imitate the styling or packaging of a competitor's successful product.
Redding has been a recognized leader and creator of various hair care products, including shampoos,
conditioners, rinses and permanent wave solutions for more than five decades.
In 1979, Redding formed the Nexxus Products Company. It is not disputed that Nexxus became a
highly successful company in the hair products business. Redding's association with it is a significant
part of its success.
Hair care distributors and purchasers of Conair and Nexxus competing products were and are confused
as to their brand. Upset, Nexxus decided to advertise to “set the record straight” and “to get the truth to
the trade so that the beauty salon owners” [Nexxus customers] could be informed judgment if they
wanted to use products actually formulated by him.
The advertisements were published in two hair care journals, Modern Salon and American Hairdresser,
in December 1983. The advertisements engaged clients in the hair care industry. Both are similar in
factual content except for several changes in the American Hairdresser advertisement. The journals
were distributed nationwide.
The Modern Salon advertisement states:
Are you tired of unscrupulous sales people lying to you? So am I!
I haven't been associated with Jheri Redding Products Company for almost 25 years. Yet, here they are again—
using my name—telling you this is my new company—WELL IT ISN'T!
Jheri Redding Products Company is a registered trademark with the U.S. Government. I can't get the Conair
Company to stop using it—and I offered to buy the company (Jheri Redding Products) in 1979 and they would not
So... here we go again—another company trying to RIP YOU OFF!
For the record...
“Jheri Redding Laboratories” has nothing to do with me.
For the record...
Conair owns the Jheri Redding Products Company—I DON'T!
For the record...
My family owns Nexxus Products Company. I formulate the products for Nexxus and ONLY Nexxus.
For the record...
The next time some lying salesperson tells you something about Mr. Jheri Redding, show him this ad... and throw
him out.
For the record...
What can you do about it? Call Lee Rizzuto-he owns Conair and Jheri Redding Products Company- (201) 287–4800
and tell him to stop trying to...
signed (Jheri Redding)
President, Director of Research
Nexxus Products Company
Conair contends that both publications are false. They claim that each publication is responsible for
each advertisement because the words “conned,” “rip off,” and “lying,” as commonly understood,
accuse plaintiffs of stealing and defrauding their customers and the public with unethical conduct. The
6 Unit 1 The Legal Environment
advertisements claim “accusations of activity on the part of the plaintiffs that is criminal and a gross
violation of business ethics.”
Defendants filed for summary judgment, alleging that there were no genuine issues of fact. Nexxus
claims that the language contained in the advertisements are expressions of opinion that are entitled to
absolute immunity from liability under the first amendment. Conair asserts there was no valid basis for
the statements in the advertisements.
Issue: Did the words used by Nexxus and the advertisers (“conned,” “rip off,” and “lying”) cause
customers and the public to believe that Conair was engaged in a gross violation of business ethics?
Holding: The District Court judge ruled in favor of Nexxus and granted them summary judgment. The
Court ruled, inter alia, that the phrases “unscrupulous sales people lying,” “lying salesperson,” “rip you
off,” and “don't be conned,” were rhetorical hyperbole insufficient to establish defamation. The average
reader in the industry understood that the references were accusing them of criminal conduct. But the
phrases were merely vigorous epithets used by those who considered “themselves unfairly treated and
sought to bring what they alleged were the true facts to the readers.” Further, the terms “unscrupulous
sales people,” “lying salesperson,” “conned” and “ripped off” were expressions of opinion which did
not give rise to a cause of action for libel.
Question: Why did the court rule in favor of Defendants even though they used obvious insults
that implied Conair was an unethical company?
Answer: Because the two companies were well-known public companies engaged in a publicly
Question: Would it be ethical for Conair to behave in the same way towards Nexxus? What if
they claim they wanted to defend their reputation so that they wouldn’t lose customers?
Stakeholder Ethics
To whom does a corporation owe a duty?
The Shareholder Model: Noted economist Milton Friedman argued that corporations have two
primary responsibilities. First, they must comply with the law. Second, they must make as much money
as possible for shareholders.
Companies were legally required to follow the "shareholder model" until the decade after the close of
World War II. After American corporations supplied much of what was needed to stop Hitler, many
politicians changed their attitudes towards benevolent decisions made by corporations. They softened
restrictive language in corporation laws, so that companies could "do good deeds." Such action was not
and is still not required, but it is allowed.
The Stakeholder Model: The alternative point of view is that corporations should take care of
more than shareholders alone. It is not that the owners of a corporation should be ignored—
shareholders are included as one of several groups of stakeholders in a firm. But, a company must also
look out for (among others) its employees, its customers, and the communities in which it operates. It
may even be that companies have an obligation to broader interests such as "society" or "the
The Organization’s Responsibility to Society
Many products can potentially cause harms to customers and employees. What is the company’s
responsibility to those who are unwittingly harmed by its products?
Chapter 2 Ethics and Corporate Social Responsibility 7
The Organization’s Responsibility to Its Employees
Organizations cannot be successful without good workers. In many circumstances the shareholder and
stakeholder models agree that employees should be treated well. Disgruntled workers are likely to be
unmotivated and unproductive. But sometimes, looking out for employees may not lead to higher
profits. In these cases, does an organization have a duty to "take care" of its workers? The shareholder
model says no; the stakeholder model takes the opposite view.
Additional Case: Barenboim et al. v. Starbucks Corporation3
Facts: Defendant Starbucks Corporation is a Washington-based coffeehouse company that operates
hundreds of outlets in New York State. Each Starbucks employs four categories of employees: baristas
(entry-level), shift supervisors (minimal supervisory responsibilities), assistant store managers
(increased supervisory responsibilities such as interviewing employees) and store managers (highest
rank in the workforce structure).
Starbucks maintains a written policy governing the collection, storage and distribution of customer
tips. Pursuant to this policy, each Starbucks store places a container at the counter where customers
may deposit tips. Once these tip canisters become full, Starbucks requires that they be emptied into a
bag and the money is stored in a safe. At the end of each week, the tips are tallied and distributed in
cash to two categories of employees—baristas and shift supervisors—in proportion to the number of
hours each employee worked. Starbucks does not permit its assistant store managers or store managers
to share in the weekly distribution of tips.
In 2008, plaintiffs, two former Starbucks baristas, brought a class action in the United States District
Court for the Southern District of New York alleging that Starbucks' policy of including shift
supervisors in the tip pools was unlawful. They claimed only baristas should receive tips and not shift
Issue: Does New York Law prohibit an employer from distributing pooled tips to shift supervisors who
were principally responsible for serving customers, but who also had limited supervisory
Holding: Under the NY Labor Law statute regarding gratuities, employees with limited supervisory
responsibilities may participate in employer-mandated tip pool.
Related Case: Matamoros et al. v. Starbucks4
Facts: Same facts as above, but Starbucks locations are in Massachusetts.
Issue: Under the Massachusetts Tips Law, which categories of employees should receive tips?
Holding: The Massachusetts court ruled that shift supervisors did not qualify as “wait staff” eligible to
participate in tips pools under provisions of Massachusetts Tips Act. In other words, in Massachusetts,
shift supervisors could not receive tips from the tip pool. Only baristas could receive tips.
Question: If the shift supervisors work for the same company, are they being treated ethically,
if they can receive tips in one state but not another?
Question: Why can shift supervisors receive tips from the tip pool in New York State, but not
in Massachusetts even if the employees work for the same company?
Question: Are these ethical decisions?
3 2013 WL 3197602 (New York).
4 699 F.3d 129, United States Court of Appeals, First Circuit. (Massachusetts) .

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