978-1285428710 Section 3 SECTION 3B

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SECTION 3B – APPLYING SOCIAL RESPONSIBILITY AND

STAKEHOLDER THEORY

CASE 3.8 – SKITTLES, TRAYVON MARTIN, AND SOCIAL RESPONSIBILITY

Use PowerPoint Slide 101.

Answers and Key Discussion Items

1. Have the students discuss the line between allowing a social movement to progress and capitalizing

on that movement, that is grounded in tragedy. The company here may have taken the best

approach – don’t get involved and issue a simple statement. The company has sales increases

2. The issue of donations is another question – perhaps Wrigley just chose to stay out of the issue all

CASE 3.9 – GUNS, STOCK PRICES, SAFETY, LIABLITY, AND SOCIAL

RESPONSIBILITY

Answers and Key Discussion Items

1. While the manufacturers and sellers of the Saturday night special weapons may not be legally

responsible or liable for the injuries or deaths caused by their weapons, there could be moral

The trend has been not to hold those who manufacture and sell liable for the illegal acts committed

with guns, however, moral culpability arises particularly in those cases in which the seller has not

2. The successful market niche of the Jennings’ weapon is one part of the ethical analysis. A second

portion would be to examine other stakeholders. Doesn’t ease of availability make it better for those

who seek to buy guns for protection, but cannot generally afford them? Will price make any

3. The Second Amendment adds a legal angle to the production and sale of guns. It also adds an

emotional element because of its origins and our longstanding understanding of its importance in the

4. The Smith & Wesson dilemma is a good one to use to show the students how the failure to consider

all stakeholders is a dilemma that can be very costly to the company. In this situation, and perhaps

for many different reasons, Smith & Wesson assumed that it was doing the “right thing,” because it

The case is a good one to also illustrate that there are times when a business cannot possible please all

of its constituencies and then what? What seems socially responsible can actually end up costing jobs,

as it did here.

CASE 3.10 – THE CRAIGSLIST CONNECTIONS: FACILITATING CRIME

Answers and Key Discussion Items

1. Generally, we do not hold those who run ads responsible for what happens as a result of those ads –

connections are made and, in the case of Soldier of Fortune magazine, in one situation, a mercenary

was hired through a bodyguard ad placed there and killed someone’s wife for money. The wife’s

2. The stakeholders are the users of the site, their friends and family, law enforcement agencies in the

areas where ad placers and responders live, buyers, sellers, and other advertisers. The decisions

CASE 3.11 – PLANNED PARENTHOOD BACKLASH AT COMPANIES AND

CHARITIES

Answers and Key Discussion Items

1. In cases such as this, with highly emotionally charged issues, the companies cannot win. They have

encountered issues in which public opinion differs and public outcry on both sides is strong. Also, they

On issues this sensitive, tying marketing to contributions is a fatal mistake. Under Friedman’s notion,

If the contributions are consistent with the firms’ values, they may not be consistent with a group of

The ethics of the situation are that attacks be answered or the firm loses customers and money; a

violation of its duties to its investors. From an economic perspective, giving in may save shareholders

2. The stakeholders are the cancer patients, their families, the research funding, and other contributors

to the fund. The boycott proved to be destructive for the Komen Foundation with donations lost.

Perhaps the question is whether it was worth affecting a good cause for a stance on an issue about

3. Yes, Merck’s dilemma is not as easily solved as Dayton-Hudson’s philanthropy and contributions.

This is a product line that has profit potential. The issue is directly related to the business and is not

4. These companies (Walmart is one) have made a decision not to draw controversy by simply not

dealing with the product. There are lost revenues, but the data indicates the loss is not significant in

comparison to boycotts that would have occurred. The decisions vary because the customer base

READING 3.12 – THE REGULATORY CYCLE, SOCIAL RESPONSIBILITY,

BUSINESS STRATEGY, AND EQUILIBRIUM

Use PowerPoint Slides 102 and 103 – “Social/Regulatory/Litigation Cycle”.

Answers and Key Discussion Items

1. Some examples of issues that are currently in the latency stage of the regulatory cycle:

a. Cell phones – safety issues with driving and some regulations and prohibitions on their use.

Some states prohibit use while driving. The issue continues to evolve.

b. ATM fees – amounts, double-charging.

c. Credit card payments – must arrive by 9 AM on due date to avoid late fee charges and mail is not

delivered by 9 AM.

regulation because of the foreclosures and economic fall-out from those loans. Dodd-Frank

2. Businesses could limit fees, control cell phone use – any action that is voluntary and addresses an

evolving issue is action that may stave off regulation and save money in the long run. It is also action

Regulation and litigation mean more cost, more details, and more time, but not necessarily a

resolution. Use PowerPoint Slide 103 to show the relationships of these factors by graph.

CASE 3.13 – FANNIE, FREDDIE, WALL STREET, MAIN STREET, AND THE

SUBPRIME MORTGAGE MARKET: OF MORAL HAZARDS

Use PowerPoint Slides 104 and 105.

Note: The Fannie Mae case has been in the text for several editions. The case initially appeared in the

book because the company had been named by Business Ethics magazine (Marjorie Kelly, editor) as the

most ethical company in America. However, in 2005, one of the years in which the honor was bestowed,

Fannie Mae had to issue a restatement of $7 billion. With the exception of Franklin Raines, the

leadership of the company remained and Fannie began its amazing expansion into the acquisition of

home mortgages, including a significant number of subprime mortgages, particularly from Countrywide

Mortgage. This new case takes up the story after the restatement in 2005 to the 2008 meltdown and

eventual government takeover of Fannie because of the drop in real estate values, the resulting mortgage

defaults, and a portfolio so large that there could not be sufficient guarantees without federal intervention.

Answers and Key Discussion Items

1. Point out to the students that the external evaluation process has not been effective in detecting

fraudulent or weak company structures and ineffectual boards. This case is yet another illustration

that one cannot equate social responsibility with the basic virtue ethics. A company can be socially

responsible in its community and still engage in earnings manipulation that eventually rises to the

2. The signals at Fannie Mae that were missed included phenomenal earnings performance that just

kept going; an officer team completely focused on the share price and numbers because their

bonuses and compensation were tied to that performance; promised continuing double-digit growth;

flexible accounting treatment for assets and loan quality; bonus plans tied to EPS with a specific

3. Incentive plans and bonuses should be encased in a set of values, a credo if you will. And those who

are responsible for the administration of internal controls who are covered under bonus plans seems

4. Dealing with volatility was not the issue. Those at Fannie Mae were using volatility formulas to

5. The pep talk was strictly numbers based. And the executive presented the goal as a “no excuses”

proposition. The 6.46 EPS became, in the words of the office, “a moral obligation.” That talk coupled

with the “no more surprises” philosophy almost guaranteed that employees would remain silent about

The promise of “too big to fail” was one that indicated institutions such as Fannie Mae, AIG, and

Goldman could not be allowed to fail because of the impact their failures would have on the markets

and, as a result, on the economic system. If there is a known risk in investment, those who are held

accountable for that risk are more measured and careful, according to the moral hazard theory. The

moral hazard theory could have helped Fannie in its rapid expansion. If it knew that it was on the line

6. There are economists who say the walk-away is the smart thing to do because business does it all

the time. “Everybody does it” precludes ethical analysis. Ethical analysis looks at the impact our

choices and conduct have on others, including neighborhoods, communities, and the economic

system. In lieu of, “Hey, I’m just getting what I can just like everyone else,” ponder, “What if everyone

behaved as you are?” What would things look like if everyone just walked away? Well, the economic

CASE 3.14 – CRUISES, COMFORT, AND COSTS

Use PowerPoint Slide 106.

Answers and Key Discussion Items

1. The ethical issues include:

a. Safety of the passengers

b. Medical care for passengers

2. The benefits are that they are not subject to U.S. court jurisdiction (for the most part) and that they

are not required to pay income taxes.

3. Their overhead is reduced because they do not have as much regulatory compliance, their wages are

much lower than resort wages would be.

CASE 3.15 – ICE-T, THE BODY COUNT ALBUM, AND SHAREHOLDER UPRISINGS

Legal Issues

The First Amendment protections are against government abridgement or interference with our right to

speak, not because individuals are offended and react with a boycott or protest. Individuals can respond

with actions that do harm us, but they have not abridged our rights – only the government can abridge

those rights.

Further, clarify for the students that First Amendment protections apply to GOVERNMENT control of

speech, not private decisions on what to publish, produce, or broadcast. This is private action and not

technically a First Amendment dilemma.

Answers and Key Discussion Items

1. It is artistic freedom, but the sensationalism of it all does make money. Freedoms also bring

2. Discuss with the students how they would have gone about making the decision. Remind them that

the head of Time Warner’s record division was terminated in June 1995. Levin should have been

3. Time Warner does not want to be seen as a censor. Remind the students that the First Amendment

prohibits governments from censoring speech. Private individuals do not have to support, sponsor, or

4. Shareholder objections should influence corporate conduct. As Milton Friedman phrases it,

managers of the corporation are simply agents of the company and are accountable to them. If you

5. The termination of the executives associated with the decisions for this product demonstrates, at least

indirectly, Time Warner’s message that the company cannot have these types of controversies.

6. There is great irony in Ice-T’s new found success in his role as a police officer.

7. Ironically, the Rolling Stones are exercising the rights they have under intellectual property protections

to prevent the use of their music in a way that they find offensive. There is no abridgment of rights

here because they are not a government entity. They are placing limits on artistic expression that

Compare & Contrast

Why was Reebok’s position with Ross so different from Time Warner’s position with Ice-T? Reebok

reacted quickly, but Reebok was also not coping with the artistic issue – it was dealing with a product

endorsement and it had more flexibility.

It is always difficult for companies to imagine the kinds of issues that celebrities and sports figures can get

involved in. Morals clauses could be based on headlines or Internet coverage. Clause could include

anything that would tend to affect the brand or reputation of the hiring organization. Any criminal charges,

The values in conflict are our respect for the right of expression vs. the accountability to shareholders,

stakeholders, and the moral ecology of our communities. There is money to be made from such CDs.

Indeed, the publicity from the controversy may well generate sales. On the other hand, there is outcry

from a large group of shareholders about the property of such a CD and its lyrics. The case is one that

deals squarely with the Novak responsibilities of a corporation, such as dealing with the moral ecology of

CASE 3.16 – ATHLETES AND DOPING: COSTS, CONSEQUENCES, AND PROFITS

This case, changed from last edition, shifts from a focus on the baseball steroids scandals (which are

ongoing) to a way to understand the various levels of ethical issues and how some levels of ethical issues

cannot be fixed unless and until there are organizational and industry changes. Use PowerPoint Slides

107 and 108.

Answers and Key Discussion Items

1. MLB was not involved in the supplying of steroids to the players, so there is no legal or criminal issue

involved. The dilemma is one of, “Well, you could continue to see the player usage and not be legally

However, the long-term implications need to be considered. This type of below-the-radar activity

does have an influence on organizational culture and the activities of the players can influence the

MLB cannot wash its hands of responsibility if, for no other reason, than that the usage does affect all

2. The rationalizations that occurred included: “Everybody does it.” “This is the way it has always been

done.” “It doesn’t really hurt anyone.” “If I don’t do it, another player will and another club benefits.”

“We’ll wait until the lawyers tell us there is a problem.” This is the club and industry level of the issue

By turning a blind eye, the clubs hurt themselves because some used and some didn’t and only

certain teams were able to benefit from the use of steroids. Ignoring a social issue that affects your

The MLB’s steps taken with regard to Palmeiro demonstrate a commitment to begin solving the

problem, with testing and sanctions. Enforcement is a key part of culture. Each enforcement action

The Commissioner is explaining that those who abide by the rules are at a disadvantage when the

rules are not enforced and players are permitted to get away with steroid use. The players who abide

by the rules cannot be as strong or large as those who use steroids. They are placed at a competitive

3. Sandberg has a very clear personal credo about the way to play the game. In fact, he is a purist

when it comes to ethical thought because it is important to him to not only abide by the rules because

The sagas of McGwire and Bonds are the results of what happens when rules are not enforced over

a longer period of time. These two players have been allowed to achieve certain goals while violating

the rules. Now, the result is (good Laura Nash observation – how did they get into the position of the

There are many lessons here. One is that the truth percolates. Everyone danced around the issue of

steroid use for a long time, but eventually the Mitchell report revealed that steroid use was in all clubs

and that inaction had exacerbated the problem. The Mitchell Report, released in December 2007 was

The lessons for a credo are fairly straightforward. I would never engage in illegal activity in order to

get a job, to keep a job. I would never lie when confronted with the truth about my behavior. There

4. The layers addressed here are the clubs and the industry. Use PowerPoint Slides 109 and 110 to

illustrate the pressure the players were experiencing, as well as their trainers, and how widespread

the behavior was. The union can have a role in affecting the industry by dealing with the issue

CASE 3.17 – BACK TREATMENTS AND MENINGITIS IN AN UNDER-THE-RADAR

INDUSTRY

Legal Issues

So, to some extent, prescient thinking was present here, but such advance warnings exacerbate hindsight

bias. At the time, the compounding companies may have been acting in good faith by challenging the

increased federal regulation in an area traditionally under the states’ authority.

With hindsight bias, the lobbying efforts are depicted as the evil acts of business owners trying to hide

shoddy practices. And the question, because of what has happened becomes, “If you were so safe, why

were you so worried about additional regulation or inspections?” In hindsight, even benign acts

undertaken within our rights can seem diabolical.

Its operations are under the microscopic scrutiny that hindsight bias brings. On the one hand you have

many former employees and customers who express shock at the events because they felt the company

was meticulous about safety. On the other hand, there are employees who have offered information about

the company’s culture and the signals they received as they worked in production.

Oh, what wisdom from that simple sentence, “That won’t fly here.” That sentence is the key to avoiding

the grueling punishment of hindsight investigations. Hindsight investigations are only grueling when you

have those rounded corners, those little day-to-day meanderings away from the rules. We meander and

allow employees to meander because there is no immediate consequence when we slip off the mark just

a bit. For example, those who fly know that flight attendant enforcement of “turn off all electronic devices”

is spotty at best. Airplane mode is good enough for many passengers. And some passengers are able to

continue watching their DVD right through take-off and landing. Some flight attendants surrender after

passengers fail to heed the first three requests. The lax enforcement is probably due to varying opinions

on the effect of such devices on the plane’s equipment. No one sees any immediate harm from being lax.

However, one airline incident will find the FAA, passengers, and relatives lined up with magnifying

glasses, explaining the lack of enforcement on electronic devices. We often cannot see the

consequences of not following the rules until hindsight teaches us, or, at a minimum, punishes us for lax

effort.

“That won’t fly here” takes on new meaning with this illustration. All employees have the right and the

responsibility to speak up when they see any slip, however slight the rounded corner, in compliance. In

fact, there are teaching moments when someone proposes a little bend of the rule for expediency’s sake.

The clear signal should be a simple, “That doesn’t fly here.”

Answers and Key Discussion Items

1. The compounding labs were permitted to operate without much regulation as long as they kept their

operations clean. However, once this incident occurred, a wave of state regulations came about

2. The good labs are lumped in with the one that caused the problems. Those in an unregulated

3. In an industry, those businesses that take the lead in eliminating bad actors will benefit because the

regulation will not be necessary and they can continue with lower costs. But, if the bad actor