Chapter 2
BUSINESS ETHICS AND
THE SOCIAL RESPONSIBILITY OF BUSINESS
A. Law versus Ethics D. Ethical Responsibilities of Business
B. Ethical Theories 1. Regulation of Business
1. Ethical Fundamentalism 2. Corporate Governance
2. Ethical Relativism 3. Arguments against Social Responsibility
3. Utilitarianism a. Profitability
4. Deontology b. Unfairness
5. Social Ethics Theories c. Accountability
6. Other Theories d. Expertise
C. Ethical Standards in Business 4. Arguments in Favor of Social Responsibility
1. Choosing an Ethical System a. The Social Contract
2. Corporations as Moral Agents b. Less Government Regulation
c. Long-Run Profits
Cases in This Chapter
(NOTE: These are not actual court cases, but original vignettes which pose ethical
problems in business situations. A discussion guide for each is found prior to the
answers to problems at the end of this instructor’s manual chapter.)
Chapter Outcomes
After reading and studying this chapter, the student should be able to:
Describe the differences between law and ethics.
List and contrast the various ethical theories.
Describe cost-benefit analysis and explain when it should be used and when it should be avoided.
Explain Kohlberg’s stages of moral development.
Explain the ethical responsibilities of business.
TEACHING NOTES
Ethics can be broadly defined as the study of what is right or good for human
beings. It pursues the question of what people ought to do and what goals they
should pursue.
Business ethics is not a special set of ethics that applies only in business
settings, but rather a subset of ethics.
Ethical questions apply to relationships among and between:
• a business and its employees, its customers, and its owners
In business ethics, it is helpful to employ a seeing-knowing-doing model in which
the decision-maker follows these steps:
• See (identify) the ethical issues in the proposed conduct and any
alternative options
• Know (resolve) which is the best option
• Do (implement) the chosen option
A. LAW VERSUS ETHICS
*** Chapter Outcome ***
Describe the di&erences between law and ethics.
Law is strongly a&ected by moral concepts (ethics), but law and morality are not
B. ETHICAL THEORIES
Certain ethical rules are based on theory rather than experimentation (a priori
reasoning).
*** Chapter Outcome ***
List and contrast the various ethical theories.
Ethical Fundamentalism
Also called absolutism. Individuals look to a central authority or set of rules for
guidance, e.g., the Bible, the Koran, the writings of Karl Marx.
Ethical Relativism
A theory under which actions must be judged by what individuals subjectively
feel is right or wrong for themselves. Although apparently similar, the doctrine
of situational ethics di&ers substantially in that it requires one to judge
another person’s actions by first putting oneself into that person’s situation.
Utilitarianism
*** Chapter Outcome ***
Describe a cost-benefit analysis and explain when it should be used and when it should be
avoided.
Utilitarian notions of moral correctness are the basis for the general concept of
making a cost-bene%t analysis in a business or managerial decision. The
purpose of a cost-benefit analysis is to choose the most cost e&ective method
for pursuing a goal after comparing the direct and indirect costs and benefits of
proposed alternatives. If increasing net wealth, especially on a short-term basis,
is the goal, a sound cost-benefit analysis is a helpful tool.
Deontology
NOTE: See textbook discussion of Immanuel Kant’s deontological theories.
Social Ethics Theories
Focus on a person’s obligations to others and also on individual rights and
obligations.
Social egalitarians believe that society should provide all persons with equal
goods and services irrespective of their contributions to the society’s overall
wealth.
Distributive justice also considers the needs and rights of all people, yet
stresses the equality of opportunity, not of results.
Libertarians claim that di&erences in wealth simply demonstrate di&erent
levels of skill in the marketplace. Taking wealth earned by some and giving it to
others is unfair.
Other Theories
Intuitionism holds that all rational people possess the ability to decide the
C. ETHICAL STANDARDS IN BUSINESS
*** Chapter Outcome ***
Explain Kohlberg’s stages of moral development.
Choosing an Ethical System
Lawrence Kohlberg’s Stages of Moral Development provides insight into
ethical decision-making. Under Kohlberg’s model, people progress through
stages of moral development basically as a function of age and education. The
pre-conventional or childhood stage, is one where a person’s moral perspective
is based only on a punishment/reward concept. The conventional or adolescent
NOTE: See Figure 2-1, Kohlberg’s Stages of Moral Development
Corporations as Moral Agents
Because corporations are not persons but rather artificial entities created by the
State, it is not obvious whether they can or should be held morally accountable.
D. ETHICAL RESPONSIBILITIES OF BUSINESS
Some regulation is necessary to check overreaching greed in our system of
modified capitalism.
*** Chapter Outcome ***
Explain the ethical responsibilities of business.
Regulation of Business
According to Adam Smith’s model for the perfect capitalistic system,
governmental oversight is necessary, but should be limited. Beyond setting the
rules and enforcing them, Smith felt government should stand aside. Increased
governmental intervention has occurred, however, because this model cannot be
relied on to achieve objectives such as national defense, conservation of natural
resources, health and safety, and social security. Successful government
regulation involves carefully balancing regulations to preserve competition and
those that attempt to advance other social objectives.
Corporate Governance
The demand for ethical and social responsibility of business also results from the
sheer size, and therefore power, of individual corporations. The 500 to 1,000
largest publicly held corporations– controlled by a small group of corporate
o<cers– own the great bulk of the industrial wealth of the United States.
Historically, these corporate o<cers often also served on the board of directors.
During the past two decades, however, regulations have substantially decreased
the in>uence of these “inside directors.” Even though the prevalence of outside
directors on boards and audit committees has increased, instances of corporate
Arguments Against Social Responsibility
profitability — Since corporations are artificial entities established for
profit-making, their only obligation should be to return as much money as
possible to the direct stakeholders, the shareholders.
Unfairness — Whenever corporations engage in social activities such as
supporting the arts or education, they divert funds rightfully belonging to the
shareholders and/or the employees to unrelated third parties.
Accountability — A corporation may decide to support a variety of social
causes but, unlike a governmental body, will be required to submit to little public
scrutiny.
Expertise — Although a corporation may have a high level of expertise in
selling its goods and services, it may not be able to carry on social activities with
the same degree of competence.
Arguments in Favor of Social Responsibility
A corporation’s primary objective is to make a return on its investment by
producing a quality product at a fair price. Most people agree, however, that
corporations have obligations beyond making a profit and avoiding harm to
others.
The Social Contract — Since society allows for the creation of corporations and
gives them special rights, including a grant of limited liability, this argument
holds that corporations reciprocally owe a responsibility to our society.
NOTE: See Figure 2-2, The Stakeholder Model.
Less Government Regulation — When corporations act responsibly,
regulation is unnecessary. In addition, by taking a more proactive role in aiding
CASE
Pharmakon Drug Company
BACKGROUND
William Wilson, senior vice president of research, development, and medical
(RD&M) at Pharmakon Drug Company, received both his Ph.D. in biochemistry
and his M.D. from the University of Oklahoma. Upon completion of his residency,
Dr. Wilson joined the faculty at Harvard Medical School. He left Harvard after five
years to join the research group at Merck & Co. Three years later, he went to
Burroughs-Wellcome as director of RD&M, and, after eight years, Dr. Wilson
joined Pharmakon in his current position.
William Wilson has always been highly respected as a scientist, a manager, and
an individual. He has also been an outstanding leader in the scientific
community, particularly in the e&ort to attract more minorities into the field.
DECLINING GROWTH
During the previous eight years, Pharmakon experienced tremendous growth:
253 percent overall, with yearly growth ranging from 12 percent to 25 percent.
During this period, Pharmakon’s RD&M budget grew from $79 million to $403
million, and the number of employees rose from 1,192 to 3,273 (see Figure 2-3).
During the previous two years, however, growth in revenue and earnings slowed
considerably. Moreover, in the current year, Pharmakon’s revenues of $3.55
billion and earnings before taxes of $1.12 billion were up only 2 percent from the
previous year. Furthermore, both revenues and earnings are projected to be >at
or declining for the next five years.
PROBLEM AND PROPOSED SOLUTIONS
In response, the board of directors has decided that the company must
emphasize two con>icting goals: increase the number of new drugs brought to
market and cut back on the workforce in anticipation of rising labor and
marketing costs and declining revenues. Accordingly, Dr. Wilson has been
instructed to cut costs significantly and to reduce his workforce by 15 percent
over the next six months.
Dr. Wilson called a meeting with his management team to discuss the workforce
reduction. One of his managers, Leashia Harmon, argued that the layo&s should
be made “so that recent gains in minority hiring are not wiped out.” The
percentage of minority employees had increased from 2.7 percent eight years
ago to 8.3 percent in the previous year (see Figure 2-3). The minority population
in communities in which Pharmakon has major facilities has remained over the
years at approximately 23 percent. About 20 percent of the RD&M workforce
have a Ph.D. in a physical science or in pharmacology, and another 3 percent
have an M.D.
Dr. Wilson immediately recognized that any system of reducing the workforce
would be di<cult to implement. Moreover, he was concerned about fairness to
employees and maintaining the best qualified group to carry out the area’s
mission. He was very troubled by a merit or seniority system if it could not
maintain the minority gains. In fact, he had even thought about the possibility of
using this di<cult situation to increase the percentage of minorities to bring it
more in line with the minority percentage of the communities in which
Pharmakon had major facilities.
ISSUES:
The general issue is the appropriateness of a<rmative action in the private
sector. Does the use of a<rmative action when a company is downsizing di&er
from when a company is hiring or conferring other benefits?
The specific issue is how should Pharmakon implement its layo&s and what
criteria should it use?
OPTIONS: Layo&s and/or terminations should be based on which one or
combination of the following?
1) Cause
2) Merit based on a newly established, reliable, and valid evaluation system
3) Seniority
4) Proportionate (maintain the current percentage of minority employees)
5) Enhancement of minority (increase the percentage of minorities)
6) Encourage voluntary retirement (either with or without incentives)
7) Lottery
8) Pay cuts across the board
9) Other
ANALYSIS OF THE VARIOUS OPTIONS:
How does each of the options impact the following goals of Pharmakon?
1) Productivity
2) Fiscal soundness
3) Minority presence and preservation of minority gains
4) Employee morale
DECISION:
Have students justify their recommendations.
ADDITIONAL DISCUSSION:
• A8rmative Action: Discuss the benefits and costs of a<rmative action.
• Diversity: How does one place a value on diversity? How should a
diversity policy be implemented?
• Equality: How is equality determined—by outcome or by opportunity?
• Political Correctness: What is political correctness? Is it appropriate? Is
it relevant to the issues raised in Pharmakon?
CASE
Mykon’s Dilemma
Jack Spratt, the newly appointed CEO of Mykon Pharmaceuticals, Inc., sat at his
desk and scratched his head for the thousandth time that night. His friends
never tired of telling him that unless he stopped this habit he would remove
what little hair he had left. Nevertheless, he had good reason to be perplexed—
the decisions he made would determine the future of the company and, literally,
the life or death of thousands of people.
As a young, ambitious scientist, Spratt had gained international fame and
considerable fortune while rising quickly through the ranks of the scientists at
Mykon. After receiving a degree from the Executive MBA program at the
Kenan-Flagler Business School, University of North Carolina at Chapel Hill, he
assumed, in rapid succession, a number of administrative positions at the
company, culminating in his appointment as CEO. But no one had told him that
finding cures for previously incurable diseases would be fraught with moral
COMPANY BACKGROUND
Mykon, a major international research-based pharmaceutical group, engages in
the research, development, manufacture, and marketing of human health-care
products for sale in both the prescription and over-the-counter (OTC) markets.
The company’s principal prescription medicines include a range of products in
the following areas: antiviral, neuromuscular blocking, cardiovascular,
anti-in>ammatory, immunosuppressive, systemic antibacterial, and central
nervous system. Mykon also manufactures other products such as muscle
relaxants, antidepressants, anticonvulsants, and respiratory stimulants. In
addition, the company markets drugs for the treatment of congestive heart
failure and the prevention of organ rejection following transplant.
Mykon’s OTC business primarily consists of cough and cold preparations and
several topical antibiotics. The company seeks to expand its OTC business in
various ways, including the reclassification of some of its prescription drugs to
OTC status. Mykon’s OTC sales represented 14 percent of the company’s sales
during last year.
PRODUCTION
Mykon carries out most of its production in Rotterdam in the Netherlands and in
Research Triangle Park, North Carolina, in the United States. The latter is the
company’s world headquarters. The company’s manufacturing processes
typically consist of three stages: the manufacture of active chemicals, the
incorporation of these chemicals into products designed for use by the
consumer, and packaging. The firm has an ongoing program of capital
expenditure to provide up-to-date production facilities and relies on advanced
technology, automation, and computerization of its manufacturing capability to
help maintain its competitive position.
Production facilities are also located in ten other countries to meet the needs of
local markets and to overcome legal restrictions on the importation of finished
products. These facilities principally engage in product formulation and
packaging, although plants in certain countries manufacture active chemicals.
RESEARCH AND DEVELOPMENT
In the pharmaceutical industry, R&D is both expensive and prolonged, entailing
considerable uncertainty. The process of producing a commercial drug typically
takes between eight and twelve years as it proceeds from discovery through
development to regulatory approval and finally to the product launch. No
assurance exists that new compounds will survive the development process or
obtain the requisite regulatory approvals. In addition, research conducted by
JACK SPRATT
Every society, every institution, every company, and most important, every
individual should follow those precepts that society holds most dear. The pursuit
of profits must be consistent with and subordinate to these ideals, the most
important of which is the Golden Rule. To work for the betterment of humanity is
the reason I became a scientist in the first place. As a child, Banting and Best
were my heroes. I could think of no vocation that held greater promise to help
mankind. Now that I am CEO I intend to have these beliefs included in our
company’s mission statement.
His search was not totally blind. Some years earlier, Frans Berger, a well-known
but eccentric scientist, had written extensively about the variety of plant life and
fungi that >ourished in the jungles of the Bobonaza River region deep in the
Amazon watershed. Although he spent twenty years there and discovered
nothing of medical significance, the vast number and intriguing uniqueness of
his specimens convinced Spratt that it was just a matter of time before a major
breakthrough would occur.
Spratt also had some scientific evidence. While working in Mykon’s laboratory to
finance his graduate education in biology and genetics, Spratt and his
supervisors had noticed that several fungi could not only restore damaged skin
but, when combined with synthetic polymers, had significant e&ects on internal
cells. Several more years of scientific expeditions and investigations proved
promising enough for Mykon to send Spratt and a twenty-person exploration
team to the Amazon Basin for two years. Two years became five, and the
Spratt’s joy was short-lived, though. Public awareness of the drug quickly spread,
and groups pressured the FDA to shorten or eliminate its normal approval
process, which ordinarily takes more than seven years. People dying from the
virus’s e&ects demanded immediate access to the drug.
THE DRUG
Mirroring the insidiousness of HIV itself, the structure of Sprattalin is
extraordinarily complex. Consequently, it takes four to seven months to produce
a small quantity, only 25 percent of which is usable. It is expensive; each unit of
Sprattalin costs Mykon $20,000 to produce. The projected dosage ranges from
ten units for asymptomatic HIV-positive patients who have normal white blood
cell counts to fifty units for patients with low white blood cell counts and
full-blown AIDS. The drug appears to eliminate the virus from all patients
regardless of their stage of the disease. However, it does not have any
restorative e&ect on patients’ compromised immune systems. Accordingly, it is
expected that asymptomatic HIV-positive patients will revert to their normal life
expectancies. It is not clear what the life expectancy will be of patients with
full-blown AIDS, although it is almost certain that their life expectancy would be
curtailed.
Supply of Sprattalin The company has estimated that the first two years of
production would yield enough Sprattalin to cure 6 percent of all asymptomatic
HIV-positive patients. Alternatively, the supply would be su<cient to treat 4
percent of all patients with full-blown AIDS. Children constitute 6 percent of all
people living with HIV/AIDS. See Figures 2-6 and 2-7 for statistics on the HIV/AIDS
epidemic.
Interested parties have argued that the solution to production problems is clear:
build larger facilities. However, even with production levels as low as they are,
the bottleneck in supply occurs elsewhere. The fungus on which the whole
process depends is incredibly rare, growing only in two small regions near Jatun
Presently there are no known methods of cultivating the fungus in the laboratory.
Apparently, the delicate ecology that allows it to exist in only one region of the
earth is somehow distressed enough by either transport or lab conditions to
render it unable to grow and produce the drug’s precursor. Scientists are
feverishly trying to discover those factors that will support successful culture.
However, with limited quantities of the starting material and most of that
pressured into production, the company has enjoyed no success in this
endeavor. Because of Sprattalin’s complexity, attempts to synthesize the drug
have failed completely, mainly because, like aspirin, it is not known how the drug
works; thus, Sprattalin’s e&ectiveness remains shrouded in mystery.
Allocation of Sprattalin In response to the insu<cient supply, a number of
powerful consumer groups have made public their suggestions regarding the
allocation of Sprattalin. One proposition advanced would use medical records to
Other groups propose an opposite approach, arguing that because supply is so
drastically short, Mykon should make Sprattalin available only to asymptomatic
HIV patients. They require the least concentrations of the drug to become well,
thus extending the drug’s supply. They also have the greatest likelihood of
returning to full life expectancies. Under this proposal, people who have
full-blown AIDS would be ineligible for treatment. Such patients have previously
come to terms with their impending mortality, have fewer psychological
adjustments to make, and represent, on a dosage basis, two to five healthier
patients. In meting the drug out in this manner, proponents argue, the drug can
more readily meet the highest public health objectives to eradicate the virus and
prevent further transmission.
Even at these prices, though, demand far exceeds supply. Jack Spratt and the
rest of the Mykon executives predict that the company could easily sell available
supplies at twice the proposed price.
A growing number of Mykon executives disagree with the passive stance the
company has taken in pricing the product. In their view, a 20 percent markup
represents a meager return for the prolonged risk and high levels of spending
that the company incurred to develop the drug. Moreover, it leaves little surplus
for future investment. Furthermore, eight years is too long to amortize the R&D
expenses because Sprattalin, though the first, is unlikely to be the last anti-HIV
drug, now that Mykon has blazed a path. Other, more heavily capitalized
companies are racing to reverse engineer the drug, and the availability of
competing drugs remains only a matter of time. Accordingly, the company
cannot realistically count on an eight-year window of opportunity.
Foreign markets further exacerbate the pricing perplexity. Other countries, with
less privatized health care, have already promised their citizens access to
MAKING THE DECISION
In the past few months, Jack Spratt had seen many aspects of the most
important project in his life become not only public knowledge but also public
domain. Because of the enormous social and political consequences of the
discovery, it is unlikely that the government will allow Mykon to control the
destiny of either Sprattalin or ultimately the company.
ISSUES:
1) Supply—How much fungus do you use immediately? How much do you
conserve for future use?
2) Allocation—How should the drug be allocated?
3) Pricing—At what price should the drug be sold?
ALLOCATION OPTIONS — The drug should be distributed on which one or
which combination of the following criteria?
1) Based on how long a patient has been seeking medical assistance
2) Triage system—those that are in the most desperate condition get the
medication first
3) Only to asymptomatic HIV patients
4) Based on fault —give priority to less culpable victims
5) Free market—the highest bidders
6) Lottery—(a) charge everyone who enters the lottery with the winners
receiving the drug without additional charge or (b) an open lottery with
the winners receiving the right to purchase the drug
7) Based on patient’s nationality— (a) by the percentage of the company’s
business in that country; (b) by the percentage of patients in that country,
PRICING OPTIONS —
1) Free market
2) Like any other new drug
3) Free—to all or to some patients
4) A healthy profit margin—that is, a profit higher than the industry norm
ANALYSIS OF THE VARIOUS OPTIONS:
How does each of the options impact the following goals and concerns?
1) Fairness—to patients, stockholders, US citizens, other nationals, those who
cannot a&ord to pay
2) What can or should be done to prevent a black market in the drug?
3) Can and should a su<cient quantity of the fungus be preserved for future
research?
DECISION:
Have the students justify their decision.
ADDITIONAL DISCUSSION:
• Can this case be decided without determining who lives and who dies?
• Who should make this type of decision: The company? A government? An
international body?