Chapter 2
ETHICS AND CORPORATE SOCIAL
RESPONSIBILITY
An Organization’s Responsibility to Its Customers
Customers are another group of essential stakeholders. A corporation must gain and retain loyal buyers if
it is to stay in business for long. Treating customers well usually increases profits and helps shareholders.
But when, if ever, does an organization go too far? If a leader “puts customers first” in a way that
significantly diminishes the bottom line, has she acted inappropriately? The shareholder model says yes.
Organization’s Responsibility to Overseas Contract
Workers
Industrialization has always been the first stepping stone out of dire poverty—it was in England in
centuries past, and it is now in the developing world. Eventually, higher productivity leads to higher
wages.
When governments or customers try to force factories in the developing world to pay higher wages, the
factory owners typically either relocate to lower wage countries or mechanize, thereby reducing the need
for workers. In either case, the local economy suffers. Companies argue that higher wages lead to
increased prices, which, in their turn, drive away customers.
Additional Case: Oconus DOD Employee Rotation Action Group, et al.
v. William S. Cohen, Secretary, Department of Defense1
Facts: Civilian employees of the Department of Defense (DOD) with overseas work assignments brought
an action to invalidate a proposed DOD policy change. The DOD policy would allegedly make it harder
for overseas employees to receive extensions beyond the five-year limitation for overseas work
assignments.
In addition, the DOD proposed policy permits local military commands to grant civilian employees
extensions beyond five years on a case-by-case basis. The latest revision of the five-year policy limits
also transfers authority to grant extensions from the local level to the major command level. Plaintiffs
claim that military commands have reduced the number of civilian employees remaining overseas more
than five years and have granted extensions beyond five years only in increasingly rare circumstances.
Plaintiffs ask the Court to find that Draft Subchapter 1230 is “arbitrary and capricious.”
Issue: Was the DOD’s policy change “arbitrary and capricious?”
Holding: The Court held that the proposed DOD policy change was not arbitrary and capricious.
Defendant’s motion for summary judgment is granted.
Plaintiffs argue that Draft Subchapter 1230 resulted in denials of many extensions of overseas tours of
duty, causing significant hardship to the professional and personal lives of those affected. However, the
court ruled that all changes in the practice of granting extensions of overseas tours of duty have been
made pursuant to CPM Subchapter 301.4, not Draft Subchapter 1230. There is no hardship that Plaintiffs
can claim under the revised Draft Subchapter 1230 only possibly under Subchapter 301.4.
Finally, Plaintiffs’ injury is “conjectural or hypothetical” because they did not actually suffer the injury.
Other overseas employees did. Plaintiffs, therefore, had no claim to make in court. The DOD policy
change was not arbitrary and capricious.
Question: Why didn’t the Plaintiffs have a claim in court?
1 140 F.Supp.2d 37, United States District Court, District of Columbia.
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Chapter 2 Ethics and Corporate Social Responsibility 2
Answer: Because they were not affected by the revised policy as they claimed. They anticipated
Question: Does the DOD have a responsibility to their overseas employees?
Answer: Yes, in general, DOD has a responsibility to its overseas employees. But this case is
about a specific law that was not the subject of this lawsuit. Plaintiffs anticipated hardship under
When the Going Gets Tough
How should an employee respond to an employer that tolerates unethical behavior? Three principal
choices: loyalty, exit, and voice.
Corporate Social Responsibility
In addition to examining a company’s duty not to cause harm, we must also consider whether companies
have a responsibility to contribute positively to the world around them.
Multiple Choice Questions
1. Milton Friedman was a strong believer in the _____________ model. He _______________ argue that
a corporate leader’s sole obligation is to make money for the company’s owners.
(a) shareholder; did
(b) shareholder; did not
(c) stakeholder; did
(d) stakeholder; did not
2. Which of the following wrote the book, Utilitarianism, and believed that moral actions should
“generate the greatest good for the greatest number”?
(a) Milton Friedman
(b) John Stuart Mill
(c) Immanuel Kant
(d) None of the above
3. Which of the following believed that the dignity of human beings must be respected, and that the most
ethical decisions are made out of a sense of duty or obligation?
(a) Milton Friedman
(b) John Stuart Mill
(c) Immanuel Kant
Chapter 2 Ethics and Corporate Social Responsibility 3
(d) None of the above
4. Kant believed that:
(a) It is ethical to tell a lie if necessary to protect an innocent person from great harm.
(b) It is ethical to tell a lie if the benefit of the lie outweighs the cost.
(c) It is ethical to make a true, but misleading, statement.
(d) It is wrong to tell an outright lie or to mislead.
5. The following statement is true:
(a) Most people are honest most of the time.
(b) Even people who do not believe in God are more likely to behave honestly after reading the Ten
Commandments.
(c) When confronted with wrong-doing, most people immediately recognize what is happening.
(d) People make their best ethical decisions when in a hurry.
Essay Questions
1. The Senate recently released a report on wrongdoing at JP Morgan Chase. It found that bank executives
lied to investors and the public. Also, traders, with the knowledge of top management, changed risk
limits to facilitate more trading and then violated even these higher limits. Executives revalued the
bank’s investment portfolio to reduce apparent losses. JP Morgan’s internal investigation failed to find
this wrongdoing. Into what ethical traps did these JP Morgan employees fall? What options did the
executives and traders have for dealing with this wrongdoing?
2. Located in Bath, Maine, Bath Iron Works builds high tech warships for the Navy. Winning Navy
contracts is crucial to the company’s success—it means jobs for the community and profits for the
shareholders. Navy officials held a meeting at Bath’s offices with its executives and those of a
competitor to review the specs for an upcoming bid. Both companies desperately wanted to win the
contract. After the meeting, a Bath worker realized that one of the Navy officials had left a folder on a
chair labeled: “Business Sensitive.” It contained information about the competitors’ bid information
that would be a huge advantage to Bath. William Haggett, the Bath CEO, was notified about the file
just as he was walking out the door to give a luncheon speech. What should he do? What pitfalls does
he face? What result if he considered Mill, Kant, or the Front Page test?
3. A group of medical schools conducted a study on very premature babies—those born between 24 and
27 weeks of gestation (instead of the normal 40 weeks). These children face a high risk of blindness
and death. The goal of the study was to determine which level of oxygen in a baby’s incubator
produced the best results. Before enrolling families in the study, the investigators did not tell them
Chapter 2 Ethics and Corporate Social Responsibility 4
that being in the study could increase their child’s risk of blindness or death. The study made some
important discoveries: the level at which too much oxygen increased the risk of blindness and level at
which too little increased the risk of death. What would Mills and Kant say about this decision not to
tell the families?
4. Because Raina processes payroll at her company, she knows how much everyone earns, including the
top executives. This information could make for some good gossip, but she has kept it all completely
secret. She just found out, however, that her boss knew that it is against company policy for her to do
payroll for C-level employees. Yesterday, the CEO went to her boss to confirm that he, the boss, was
personally doing the processing for top management. Her boss lied to the CEO and said that he was.
Then he begged Raina not to tell the truth if the CEO checked with her. Raina just got a message that
the CEO wants to see her. What does she say if he asks about the payroll?
5. Each year, the sale of Girl Scout cookies is the major fund-raiser for local troops. But because the
organization was criticized for promoting such unhealthy food, it introduced a new cookie, the Mango
Cremes with Nutrifusion. It promotes this cookie as a vitamin-laden, natural whole food. “A delicious
way to get your vitamins.” But these vitamins are a minuscule part of the cookie. The rest has more
bad saturated fat than an Oreo. The Girl Scouts do much good for many girls. And to do this good,
they need to raise money. What would Kant and Mill say? What about the Front Page test? What do
you say?
6. When James Kilts became CEO of Gillette Co., the consumer products giant had been a mainstay of
the Boston community for a hundred years. But the organization was going through hard times: Its
stock was trading at less than half its peak price and some of its storied brands of razors were wilting
under intense competitive pressure. In four short years, Kilts turned Gillette around—strengthening
its core brands, cutting jobs, and paying off debt. With its stock up 61%, Kilts had added $20 billion
in shareholder value.
Then suddenly Kilts sold Gillette to Procter & Gamble Co. for $57 billion. So short was Kilts’s stay
in Boston that he never moved his family from their home in Rye, New York. The deal was sweet for
Gillette shareholders—the company’s stock price went up 13% in one day. And tasty also for Kilts—
his payoff was $153 million, including a $23.9 million reward from P&G for having made the deal
and a “change in control” clause in his employment contract that was worth $12.6 million. In
addition, P&G agreed to pay him $8 million a year to serve as vice chairman after the merger. When
he retires, his pension will be $1.2 million per year. Moreover, two of his top lieutenants were offered
payments totaling $57 million.
Any downside to this deal? Four percent of the Gillette workforce—6,000 employees—were fired. If
the payouts to the top three Gillette executives were divided among these 6,000, each unemployed
worker would receive $35,000. The loss of this many employees (4,000 of whom lived in New
England) had a ripple effect throughout the area economy. Although Gillette shareholders certainly
benefited in the short run from the sale, their profit would have been even greater without this $210
million payout to the executives. Moreover, about half the increase in Gillette revenues during the
time that Kilts was running the show were attributable to currency fluctuations. A cheaper dollar
increased revenue overseas. If the dollar had moved in the opposite direction, there might not have
been any increase in revenue. Indeed, for the first two years after Kilts joined Gillette, the stock price
declined. It wasn’t until the dollar turned down that the stock price improved.
Chapter 2 Ethics and Corporate Social Responsibility 5
Do CEOs who receive sweeteners have too strong an incentive to sell their companies? Is it unseemly
for them to be paid so much when many employees will lose their jobs?
Discussion Questions
1. While waiting in line in a supermarket, you observe a woman trying to pay with food stamps. Under
the law, food stamps cannot be used to pay for prepared items so the register would not accept the
stamps in payment for a $6 container of chicken noodle soup from the deli counter. The woman
explained that she was sick and did not have the energy to cook. She just wanted to go home and go to
bed. In general, you agree that this law is reasonable—people on limited budgets should not be buying
more expensive prepared food. But the woman is sick. Would it be ethical for you to pay for her
chicken soup if she agreed to buy $6 worth of your grocery items?
2. In Japan, automobile GPS systems come equipped with an option for converting them into televisions
so that drivers can watch their favorite shows, yes, while driving. “We can’t help but respond to our
customers’ needs,” says a company spokesperson.2 Although his company does not recommend the
practice of watching while driving, he explained that it is the driver’s responsibility to make this
decision. Is it right to sell a product that could cause great harm to innocent bystanders? Where does
the company’s responsibility end and the consumer’s begin? What would Mill and Kant say?
3. Darby has been working for 14 months at Holden Associates, a large management consulting firm. She
is earning $75,000 a year, which sounds good, but does not go very far in New York City. It turns out
that her peers at competing firms are typically paid 20% more and receive larger annual bonuses.
Darby works about 60 hours a week, more if she is traveling. A number of times she has had to
reschedule her vacation or cancel personal plans to meet client deadlines. She hopes to go to business
school in a year and has already begun the application process.
Holden has a policy that permits any employee who works as late as 8:00 p.m. to eat dinner at
company expense. The employee can also take a taxi home. Darby is in the habit of staying until 8:00
p.m. every night, whether or not her workload requires it. Then she orders enough food for dinner, with
leftovers for lunch the next day. She has managed to cut her grocery bill to virtually nothing.
Sometimes she invites her boyfriend to join her for dinner. As a student, he is always hungry and
broke. Darby often uses the Holden taxi to take them back to his apartment, although the cab fare is
twice as high as to her own place.
Sometimes Darby stays late to work on her business school applications. Naturally she uses Holden
equipment to print out and photocopy the finished applications. Darby has also been known to return
catalog purchases through the Holden mailroom on the company dime. Many employees do that and
the mailroom staff do not seem to mind.
Is Darby doing anything wrong? What ethical traps is she facing? What would your Life Principle be
in this situation?
2 Chester Dawson, “Drivers Use Navigation Systems to Tune In,” Wall Street Journal, April 23, 2013.
Chapter 2 Ethics and Corporate Social Responsibility 6
4. Steve supervises a team of account managers. One night at a company outing, Lawrence, a visiting
account manager, made some wildly inappropriate sexual remarks to Maddie, who was on Steve’s
team. When she told Steve, he was uncertain what to do, so he asked his boss. She was concerned that
if Steve took the matter further and Lawrence was fired or even disciplined, her whole area would
suffer. Lawrence was one of the best account managers in the region, and everyone was overworked
as it was. She told Steve to get Maddie to drop the matter. Just tell her that these things happen, and
Lawrence did not mean anything by it. What should Steve do? What ethical traps does he face? What
would be your Life Principle in this situation?
5. David has just spoken with a member of his sales team who has not met her sales goals for some
months. She has also missed 30 days of work in the past six months. It turns out that she is in the
process of getting a divorce, and her teenage children are reacting very badly. Some of the missed
days have been for court, others because the children have refused to go to school. If David’s team
does not meet its sales goals, no one will get a bonus and his job may be at risk. What should he do?
6. Many people enjoy rap music at least in part because of its edgy, troublemaking vibe. The problem is
that some of this music could cause real trouble, Thus, Ice-T’s song “Cop Killer” generated
significant controversy when it was released. Among other things, its lyrics celebrated the idea of
slitting a policeman’s throat. Rick Ross rapped about drugging and raping a woman. Time Warner Inc.
did not withdraw Ice T’s song, but Reebok fired Ross over his lyrics. One difference: Time Warner
was struggling with a $15 billion debt and a depressed stock price. Reebok at first refused to take
action but then singing group UltraViolet began circulating an online petition against the song and
staged a protest at the main Reebok store in New York.
What obligation do media companies have to their audience? What factors matter when making a
decision about content?
7. You are negotiating a new labor contract with union officials. The contract covers a plant that has
experienced operating losses over the past several years. You want to negotiate concessions from
labor to reduce the losses. However, labor is refusing any compromises. You could tell them that,
without concessions, the plant will be closed, although that is not true. Is bluffing ethical? Under what
circumstances? What would Kant and Mill say? What result under the Front Page test? What is your
Life Principle?
8. Craig Newmark and Jim Buckmaster founded craigslist, the most popular website in the country for
classified ads. Rather than maximizing its profits, craigslist instead focused on developing a
community among its users. It was a place to find an apartment, a pet, a job, a couch, a date, a
babysitter and, it turned out, a prostitute. Most of the ads on craigslist were free, but blatant ads for
sex were not. Much of the company’s revenue was from these illegal services. Many of the prostitutes
available on craigslist were not independent entrepreneurs; they were women and girls bought and
sold against their wishes. To fight sex trafficking, craigslist required credit cards and phone numbers,
and it reported any suspicious ads. Law enforcement officials pressured craigslist to close the sex
section of its website. But some people argued that blocking these ads was a violation of free speech
and would just drive this business more underground where law enforcement officials were less likely
Chapter 2 Ethics and Corporate Social Responsibility 7
to be able to find it. Others said that banning these ads made the business model of selling children
for sex less profitable. Does it seem that trafficking women and children was in keeping with the
founders’ personal ethics code? What were their options? Could they have had any real impact on this
thriving industry? What pitfalls did they face?
9. You are a president of a small, highly rated, liberal college in California. Many of the dining hall
workers are Latino. Some of these workers are trying to organize a union, which would dramatically
increase the college’s costs at a time of budget pressure. One of your vice presidents suggests hiring a
law firm to review the college’s employment records to make sure all employees are in the United
States legally. What would you do?
10. Many socially responsible funds are now available to investors who want to make ethical choices. For
example, the Appleseed Fund avoids tobacco products, alcoholic beverages, gambling, weapons
systems, or pornography while the TIAA-CREF Social Choice Equity Premier Fund invests in
companies that are “strong stewards of the environment,” devoted to serving local communities and
committed to high labor standards. Are socially responsible funds attractive to you? Does it matter if
they are less profitable than other alternatives? How much less profitable? Do you now, or will you in
the future, use them in saving for your own retirement?