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978-1285428710 Section 7 SECTION 7A

Page Count
9 pages
Word Count
1984 words
Book Title
Business Ethics: Case Studies and Selected Readings 8th Edition
Marianne M. Jennings
Use PowerPoint Slides 267 and 268.
Answers and Key Discussion Items
1. Be sure to have the students understand that two sets of books, whether in financial reporting or
safety, present the same problem because the underlying ethical issue is the same company
officials are giving or allowing a false impression. Financial reporting seems more complex, but only
the strategies are – the issue is the same. Here are some things to discuss:
a. One set of books is disclosed; one is not disclosed to the public.
b. One reflects real performance; the other does not.
c. Both sets of information are relevant to determining how the company is doing, either financially
or in safety performance.
2. See d-g above for the risks.
3. Safety will suffer because the company begins to believe the books it reports, not the actual results or
Legal Issues
The court held McDonald’s liable, although it is a decision at variance from other jurisdictions. An excerpt
from the decision appears below:
Faverty v. McDonald’s Restaurants of Oregon, Inc.
892 P.2d 703 (Ct. App. Or. 1995)
The jury at the trial court level had held McDonald’s liable and McDonald’s appealed the verdict on the
grounds that it was not legally liable.
Defendant argues that it was Theurer’s employer and, because of that relationship, it was subject to a
limited duty to both Theurer and plaintiff, as a matter of law.
According to defendant, there is no evidence that it knew or should have known that Theurer was so
exhausted or fatigued that it should have foreseen that working him three shifts in one 24-hour period
would create a foreseeable risk of harm to motorists such as plaintiff. Plaintiff argues that defendant failed
to preserve that argument and that, in any event, the evidence is sufficient to support the trial court’s
There is evidence that defendant controlled all work assignments. Therefore, defendant knew or had
reason to know of the number of hours Theurer had been working. There also is evidence that defendant
ordinarily did not use high school students to work after midnight, and when it did, it tried to limit that late
shift to once a week. Defendant also had a policy of not working its employees two shifts in one day.
According to at least one of the defendant’s managers, those policies were adopted and enforced out of
concern that employees not become overly tired on the job. In fact, defendant was aware that at least two
of its employees had recently had automobile accidents as a result of falling asleep while driving home
after working late shifts. There is evidence that, during and after his late-night shift, Theurer was visibly
fatigued, and that defendant’s managers were on site and saw Theurer throughout that shift. It is
undisputed that defendant knew that Theurer was a high school student, and that most of the high school
students who worked there drove to work in their own cars. On the basis of that evidence, a reasonable
jury could conclude that defendant knew or should have known that working Theurer so many hours
would impair his ability to drive home safely.
Defendant and the dissent insist that, because Theurer “volunteered” to work so many hours, the
evidence simply is insufficient to establish defendant’s negligence, as a matter of law. The evidence
shows that defendant – not its employees – generally controlled all work assignments and that defendant
penalized its employees for not working as assigned.
Second, even indulging the assumption that Theurer volunteered for his all-night shift, the evidence still is
sufficient to support the jury’s verdict. Defendant’s managers knew that Theurer already had been
scheduled to work more than its own policies permitted. Moreover, they saw him in a visibly fatigued state
and continued to work him as scheduled. In that regard, defendant was much like a bartender who served
alcoholic beverages to a visibly intoxicated person who then caused an automobile accident that harmed
another. No one required the intoxicated person to have the extra drink. He or she asked for the drink and
“volunteered” to pay for it. Nevertheless, the courts have held that, because the bartender saw the driver
in a visibly intoxicated state, and it is reasonably foreseeable that the customer will drive when he or she
leaves, the bartender is liable for the consequences of the automobile accident.
Finally, defendant itself conceded at trial that, if it had allowed Theurer to “volunteer” to work around the
clock three full days, the “court can almost say as a matter of law, allowing someone to work that long
without any rest or sleep might very well constitute affirmative misconduct by an employer, but [it] may be
a matter of degrees....”
Defendant, the dissent and the amid curiae the National Council of Chain Restaurants and the Defense
Research Institute, Inc., implore us to reverse the trial court’s judgment on the public policy ground that
the result is “patently unreasonable,” “shocking,” “farfetched” and “goes beyond the commonsense
application of tort law.” However, that argument was not made to the trial court, and we will not consider it
for the first time on appeal.
Answers and Key Discussion Items
1. The court ruled that it did, although the decision is one that is different from most states and their
liability standard. However, the legal standard is only a starting point. McDonald’s did set in motion a
series of events that sent a sleep-deprived employee out onto the roads. There are many underlying
2. Other employees, those on the highways after the shift, the employee and the employee’s health, the
3. One area that has significant issues in fatigue are interns and residences in medical school. Their
long shifts and sleeping on the job have been an area of significant attention and reform over the past
few years. Another industry is that of long-haul trucking. Another is airline pilots with some recent
Use PowerPoint Slide 269.
Legal Issues
Cintas paid a record OSHA fine. Below is an excerpt from the government’s press release on the matter:
The U.S. Department of Labor's Occupational Safety and Health Administration (OSHA) today proposed
$2.78 million in penalties against Ohio-based Cintas Corp. following an inspection into the March 2007
employee death at the Cintas laundry facility in Tulsa, Okla. The employee was killed when he fell into an
operating industrial dryer while clearing a jam of wet laundry on a conveyor that carries the laundry from
the washer into the dryer.
Cintas is the largest uniform supplier in North America, with more than 400 facilities employing more than
34,000 people. The facility in Tulsa has 160 employees.
"Plant management at the Cintas Tulsa laundry facility ignored safety and health rules that could have
prevented the death of this employee," said Assistant Secretary of Labor for OSHA Edwin G. Foulke Jr.
Forty-two willful, instance-by-instance citations allege violations of the OSHA lockout/tagout standard for
the failures to shut down and to lock out power to the equipment before clearing jams, and to train four
employees responsible to clear jams that lockout/tagout applies and how to perform the operations. One
repeat citation alleges the failure to protect employees from being struck or pinned by the conveyor. Three
serious citations allege the failures to protect employees from falls, to have a qualified person inspect the
lockout/tagout procedures and to certify the procedures as required.
In a separate case, OSHA today issued five repeat and two serious citations with penalties totaling
$117,500 for violations of the lockout/tagout and machine guarding standards found at the Cintas
Columbus, Ohio, facility. OSHA also has opened investigations in Arkansas and Alabama. Washington, an
OSHA State Plan state, has issued four citations with proposed fines totaling $13,650, alleging violations
for similar hazards at the Yakima Cintas facility.
A willful violation is one committed with intentional disregard of the requirements of the Occupational
Safety and Health Act or plain indifference to employee safety or health. A serious violation is one that
could cause death or serious physical harm to employees, and the employer knew or should have known
of the hazard.
Answers and Key Discussion Items
1. P=ƒ(x) The probability of an ethical outcome is a direct function of the amount of money involved.
Continue to draw in Units One and Two to help students see that the issues remain the same despite
the changes in the fact patterns. When employees are incentivized, without the presence of the lines
2. Have the students consider the following quotes (use PowerPoint Slide 270) to discuss the tension:
The values in conflict are those of the corporate culture and those of safety. In settling the case for
90% of the proposed penalty, OSHA agreed to retain experts to bring the two more into lines.
OSHA’s Asst. Secretary stated:
“Plant management at the Cintas Tulsa laundry facility ignored safety and health rules
The CEO of Cintas, Scott Farmer, expressed the familiar:
“Any accident is one too many at Cintas, and we remain heartbroken over the loss of our
He added:
“Since these events, we’ve been cooperating with OSHA as its inspectors reviewed these
incidents working with inspectors as they studied the washroom equipment, interviewed
What does he mean? Compliance? Students should focus on numbers-based safety vs. real safety
3. If a company is ignoring safety practices or regulations, employees are at risk for injuries, so there is
organizational abuse. The same, however, can happen, if the organization imposes evaluation or
Answers and Key Discussion Items
1. There is false impression – mines were not safe; violating the rules; taking unfair advantage of
2. He says that he thought that what he was doing was legal – he did not notify anyone individually – he
3. There were at least two managers who said in court that the CEO was involved, but, to date, he has
Use PowerPoint Slides 271 - 274.
Legal Issues
A company is liable for damages and injuries caused by its failure to live up to a reasonable and prudent
person standard. BP had not performed safety and inspection processes that were standard in the
industry for the pipeline and the refinery. The result is negligence exposure on those events. However,
the refinery is a workers’ compensation issue, so the payments there will be limited to the scheduled
amounts under the state system unless there is an exception for gross negligence. The Oil Spill Act
covers BP’s damages on the Prudhoe Bay pipe bursting and Deepwater Horizon. BP will be responsible
for the cost of clean-up, but there is also the negligence liability under state law. In the Exxon case,
Exxon was held liable to fishers, hunters, and others whose livelihoods were affected by the Valdez spill.
BP has already starting paying these groups with the $20-billion fund. In short, there is tremendous
liability exposure for BP here from state and federal laws, both statutory and through negligence
standards. The classic confrontation of values occurred here in the ethical realm: safety vs. margins;
inspections vs. cost savings. Conflicting values and which wins out? Again, the focus on the immediate
costs was misguided because the executives failed to factor in the “what if” costs of cutting back on
maintenance on the pipeline and at the refinery.
Answers and Key Discussion Items
1. Legal issues are the compliance with OSHA safety standards, liability for spills, explosions, injuries.
Negligence includes how the refinery and the pipelines and rigs were operated, whether they met
2. One of the provisions of codes of ethics in U.S. and international operations is taking responsibility for
the conduct of contractors and not using them in an arm’s length way so as to distance yourself from
3. The conduct of BP is a classic situation in which a company focused only on the immediate costs of
maintenance without taking into account the long-term implications of their failure to perform the
The conduct of the traders in controlling the market presented significant antitrust issues and
violations of those U.S. laws.
4. The pressure that the company was feeling was that when oil prices were low, it had to get as much
oil out there as possible to sell it to keep money coming in – no time for maintenance. When oil
Why do people and companies make decisions, which, in hindsight, seem to be based on voids in
reasoning and analysis? (drivers)
What were the consequences of the decision? (in cases not yet resolved, you must anticipate the
What are the fixes? (we are just now beginning that segment of the course)
5. Why and What They Missed (numbers issues)
Difficult to make pipeline maintenance worth it because when oil prices are down, expense really
hurts margins; when oil prices are up, maintenance shuts off high-revenue periods and BP’s
margins were the worst in the industry
$20 per barrel and 11,000 barrels per day
Double whammy – for every safety/maintenance problem you solve, costs go up and revenues go
down simultaneously
Issues Evolving (noise)
Should not have been “shocked, shocked” that there were problems with the pipeline
Employee raised issue (retaliatory conduct with transfer)
Consultant raised issue
Hamel (complete with Hollywood connections (Spacek) and the emotion of little guy vs. big oil
Culture (why noise, apart from economics, was ignored)
Pressure from company: cost-cutting culture
Personal pressure: salaries of workers – wanted to keep it going
Retaliatory fits here, too
Green company
Halo of SR: alternative fuels investments
Consequences (also shows what they missed)
Analyst downgrades
Market cap – share prices goes from $76.85 (year high) to $65.81 – double-digit drop – about a
15% drop in a year of record oil prices
In the parlance of the youth, what BP did to save maintenance costs to increase margins was “so not
worth it”. By this time in the course the students should be spotting a continuous theme that ethics
The following is a memo, written at an executive level, the provides insights for the students and
Why The Prudhoe Bay Spill Occurred
The operation of an oil pipeline presents unusual challenges vis-à-vis maintenance levels. When oil
prices are down, extensive maintenance affects margins, with the resulting impact on profits and
share price. When oil prices spike, as they did in 2006, shutting down pipelines for maintenance
means both an increase in costs and a decrease in revenues. For every safety/maintenance problem
that is addressed or resolved, costs increase as revenues decline. BP faced additional pressure on
Because of favorable circumstances and financial pressures, BP had not cleaned the Prudhoe Bay
pipe systems since 1992. BP did not employ the industry standard of smart-pigging, relying rather on
the less reliable coupon method. Pipeline experts agree that smart-pigging should be done at least
every 5 years and is the only reliable method for detecting corrosion. BP had not done this ultrasound
method since 1998. The maintenance deferrals were also justified by BP managers and employees
because when the 1977 pipeline was built the estimated life of the Prudhoe Bay fields was 25 years.
This anticipated failure of the oil source made maintenance seem cost ineffective, particularly as the
What the Financial Analysis of Maintenance Deferral Missed
Because of the double-digit drop in BP’s share price and resulting effect on capitalization, BP has
been downgraded by analysts. BP faces an increased cost of capital even as it is forced to spend
$50,000,000 for Prudhoe Bay repairs with a loss of about $20,000,000 in revenues (assuming a flow
Why BP Employees and Managers Ignored Signals of Flaws in Maintenance Analysis
The Prudhoe Bay spill should not have been a surprise. Nor is the spill explained as an unfortunate
event at a good company. Over time, questions about BP’s safety management and pipelines were
emerging. There was the 1999 accident in New Mexico that raised flags about safety processes. In
the 2003-2006 period there were several events that, if grouped and analyzed, provided a signal of
the need for greater maintenance at the Prudhoe Bay pipeline. An employee, who was transferred as
a result, expressed concerns about the pipeline and maintenance, as did an industry consultant. The
The BP Culture Role in the Maintenance Analysis
Both employee interviews and press coverage indicate that BP had a “cost-cutting” culture. The
quotations on cost reductions (despite the ongoing budget increases for Prudhoe maintenance)
contribute to current public relations setbacks and are being used in litigation, regulatory proceedings,
and, most likely, the ongoing grand jury investigation in Alaska. Generous salaries of pipeline workers,
along with the transfer of a worker who raised concerns about the pipelines, served to ensure a
6. There will be more regulation of both pipelines and refineries as well as additional inspections by
government regulators. As discussed in the cycle reading, if we make good choices when there is no
7. OSHA is able to assess criminal sanctions only when the conduct is a repeat violation and/or
company officials had been warned about the issues and took no action to remedy them or did not
follow up with subordinates to be sure that they had been remedied. The penalties under the Clean
8. Changing a report without the knowledge of its signatories is giving a false impression. This action,
perhaps more than substance, contributed to the court’s ruling against the Secretary. The Secretary
9. Mr. Hayward offers an important lesson for all of us who are in business – we ultimately carry the
accountability for these kinds of events, even when the law exonerates us or the company takes

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