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Chapter 5
Business Ethics
INTRODUCTION
Among the concepts examined in this chapter are the nature of business ethics and the relationship between
ethics and the law. Because of this relationship, a careful study of business law will help your students to understand
what is and what is not considered by society to be ethical behavior in business. Throughout the text, the relation
between particular laws and the broad, underlying ethical premises on which they rest is discussed.
This chapter also presents issues that are involved in determining business ethical responsibility. Business
ethics involves the application of ethical standards to business activities.
Ultimately, the goal of this chapter is to provide students with basic tools for analyzing ethical and social
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CHAPTER OUTLINE
I. Business Ethics
Ethics is the study of what constitutes right and wrong behavior. Ethics focuses on morality and the
application of moral principles in everyday life. Business ethics focuses on what constitutes ethical behavior in
the world of business. Business ethics is not a separate kind of ethics.
A. WHY IS STUDYING BUSINESS ETHICS IMPORTANT?
An understanding of business ethics is important to the long-run viability of a business, the well being of
its officers and directors, and the welfare of its employees.
1. Profit Maximization
2. The Rise of Corporate Citizenship
ADDITIONAL BACKGROUND—
The Pursuit of Profit
Historically, the pursuit of profit was suspect because it pits self-interest against community-oriented
interests. In the sixteenth century, with the spread of Calvinism, which valued hard work and regarded
business success as evidence of God’s grace, business activity became more respectable. Calvinism grew
out of the theological doctrines of French Protestant reformer John Calvin (1509-1564).
Calvin’s theology is the foundation of the Presbyterian, or non-Lutheran, churches, recognizing only the
Bible as the authority in questions of religious belief. Its premises include
• The total depravity of man resulting from Adam’s fall.
• The absolute power of God’s will.
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unaccounted for (pollution, for example). Today a socially responsible firm modifies the ethics of capitalism
With the Industrial Revolution, the pursuit of profit was firmly united with the welfare of society by the
economic theory of capitalism. Profit is good, so the theory goes, because it shows that resources are being
put to highly valued uses. The search for profit is not always in society’s best interest, so the criticism goes,
B. THE IMPORTANCE OF ETHICS IN MAKING BUSINESS DECISIONS
To maximize profits and indicate good corporate citizenship, businesses should evaluate a decision’s
• Legal implications.
1. Long-Run Profit Maximization
2. The Internet Can Ruin Reputations
The Internet has increased the potential for damage to the reputation of a business by employees,
ENHANCING YOUR LECTURE—
“SUCKS” SITES—CAN THEY BE SHUT DOWN?
In today’s online environment, a recurring challenge for businesses is how to deal with cybergripers—
those who complain in cyberspace about corporate products, services, or activities. For trademark owners,
the issue becomes particularly thorny when cybergriping sites add “sucks,” “fraud,” “scam,” “ripoff,” or some
other disparaging term as a suffix to the domain name of a particular company. These sites, sometimes
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reputations and goodwill?
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THE TRADEMARK ISSUE
A number of companies have sued the owners of “sucks” sites for trademark infringement in the hope that
a court or an arbitrating panel will order the owner of that site to cease using the domain name. To date,
however, companies have had little success pursuing this alternative. In one case, Bear Stearns Companies,
Inc., sued a cybergriper, Nye Lavalle, alleging that Lavalle infringed its trademark by creating Web sites
including “Bear Stearns” in the domain names. Some of these sites were called “BearStearnsFrauds.com,”
“BearStearnsCriminals.com,” and “BearStearnsComplaints.com.”
FOR CYBERGRIPERS, THE MORE OUTRAGEOUS THE SUFFIX, THE BETTER
For cybergripers, the message seems to be clear: the more outrageous or obnoxious the suffix added to
a target company’s trademark, the less likely it is that the use will constitute trademark infringement. This
point is underscored in decisions reached by other courts as well. In Taubman Co. v. Webfeats,b for
FOR CRITICAL ANALYSIS
How might cybergriping sites help to improve the ethical performance of the businesses they
criticize? Can business owners do anything to prevent the use of their marks in “sucks” sites?
3. Image Is Everything
C. THE RELATIONSHIP OF LAW AND ETHICS
The law does not, and cannot, codify all ethical requirements. Laws are general and broad in purpose
and scope.
1. Moral Minimum
The minimal acceptable standard for ethical business behavior is compliance with the law. But an
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CASE SYNOPSIS—
Case 5.1: Scott v. Carpanzano
Carpanzano.”
Rick Scott filed a suit in a federal district court against Salvatore Carpanzano and others, including
Carpanzano’s daughter Carmela, alleging claims relating to Scott’s loss of about $2 million in an escrow
account. Carpanzano failed to cooperate with discovery, did not respond to attempts to contact him by
certified mail, regular mail, or e-mail, refused to appear as requested and ordered, and did not finalize a
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Notes and Questions
she did in the actual case, she would not likely have been held to have willfully defaulted.
Suppose that Carmela had been an active participant in her father’s business. Would the result
have been different? Yes, and the court in its opinion indicated this by affirming the liability of Salvatore’s
Suppose that a basketball coach at State University (SU) engages in a scheme to obtain credits
and scholarships for the players in violation of the rules of the National Collegiate Athletic
Association (NCAA). Charged with conspiracy to commit fraud, the coach argues that he did not
break the law because his intent was not to harm, but to help, SU by ensuring a successful basketball
team. Should the coach be exonerated? No. The court should conclude that the coach’s intent was
ADDITIONAL CASES ADDRESSING THIS ISSUE —
Unethical and Illegal Business Conduct
Cases involving unethical and illegal business conduct include the following.
• United States v. Anderson, 580 F.3d 639 (7th Cir. 2009): The nominal president of a company, with
authority over its finances, met weekly with one of the men running it to discuss operations and knew that it
was misleading customers, supporting a conviction for wire fraud, mail fraud, and conspiracy.
• United States v. Maxwell, 579 F.3d 1282 (11th Cir. 2009): A fraudulent scheme to obtain construction
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contracts set aside for socially and economically disadvantaged companies resulted in a conviction for mail
fraud, wire fraud, and conspiracy to commit mail and wire fraud.
• United States v. Ware, 577 F.3d 442 (2d Cir. 2009): The defendant issued, edited, or approved press
releases with false and misleading statements about companies in which he held stock; sold the stock for
substantial profits following the releases when the price rose; and was convicted for securities fraud and
conspiracy to commit securities fraud and wire fraud.
• United States v. Brockenborrugh, 575 F.3d 726 (D.C. Cir. 2009): A scheme to obtain real property for a
deflated price supported a conviction for wire fraud and conspiracy to commit wire fraud, in circumstances
that included a forged deed and the defendant’s impersonation of a U.S. marshal.
• United States v. Stephens, 571 F.3d 401 (5th Cir. 2009): A conviction for conspiracy, wire fraud, and
• United States v. Wyatt, 561 F.3d 49 (1st Cir. 2009): A scheme to facilitate sizable loans to high-risk
• United States v. Lewis, 557 F.3d 601 (8th Cir. 2009): The secretive receipt of a $1.4 million payment from
a charitable organization that the recipient knew was misrepresenting its deteriorating financial condition led
2. Ethical Requirements
3. Private Company Codes of Ethics
Company codes of conduct are not law but outlines of policy and how employees are expected to act.
4. Industry Ethical Codes
Professional associations (such as the American Institute of Certified Public Accountants) also issue
5. “Gray” Areas in the Law
II. Business Ethics and Social Media
A. HIRING PROCEDURES
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Some employers review job candidates’ Facebook pages, blogs, and tweets. Some may reject
B. THE USE OF SOCIAL-MEDIA TO DISCUSS WORK-RELATED ISSUES
An employer cannot broadly prohibit employees from criticizing the company, or co-workers, via social
media.
1. Responsibility of Employers
2. Responsibility of Employees
Is it ethical for employees to make negative—and sometimes exaggerated—social media posts
III. Ethical Principles and Philosophies
How business decision makers decide whether a given action is the “right” one for their firms depends on the
ethical standards that are applied. Fundamental ethical reasoning approaches include the following.
A. DUTY-BASED ETHICS
Duty–based ethics are derived from religious authorities or philosophical reasoning. These standards are
focused on concepts of right and wrong, of duties owed and rights to be protected.
1. Religious Ethical Principles
Religious standards dictate how one should treat others (“Do unto others as you would have them
do unto you”) and are generally absolute. For businesses, religious principles can—
2. Principles of Rights
According to the principle that persons have rights (to life and liberty, for example), a key factor in
determining whether a business decision is ethical is how that decision affects the rights of others,
including employees, consumers, suppliers, the community, and society.
a. Conflicting Rights
b. Resolving Conflicts
3. Kantian Ethical Principles
Immanuel Kant believed that people should be respected because they are qualitatively different
from other physical objects.
a. People Are Not a Means to an End
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b. Categorical Imperative
ADDITIONAL BACKGROUND—
Immanuel Kant, Critic of Pure Reason
A professor of logic and metaphysics at the University of Konigsberg, where he had been educated,
Immanuel Kant (1724-1804) devoted much effort to his philosophical works, including Critique of Pure
Reason, Critique of Practical Reason, Critique of Judgment, and Foundations of the Metaphysics of Morals.
Kant believed that reality can be perceived only to the extent that it complies with the aptitude of the mind that
B. OUTCOME-BASED ETHICS: UTILITARIANISM
Utilitarianism focuses on the consequences of an action, not its nature or a set of moral values or
religious beliefs.
1. Cost-Benefit Analysis
An action is morally correct, or “right,” when it produces the greatest amount of good for the
greatest number of individuals. Applying this theory requires—
• A determination of who will be affected.
2. Problems with the Utilitarian Approach
An act that produces the greatest good for the most may not seem to be the most ethical.
ADDITIONAL BACKGROUND—
Jeremy Bentham, Founder of Utilitarianism
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Jeremy Bentham (1748-1832) achieved prominence as a philosopher, jurist, reformer, and founder of
utilitarianism. Bentham was educated at Oxford and admitted to the bar but did not practice law. Instead he
pursued legal, political, and social reform, applying principles of ethical philosophy in his efforts. Bentham
believed that the greatest happiness for the greatest number is the basis of morality. Happiness and pleasure
Bentham has been much praised for the application of his philosophy in the area of legal reform. An
essential part of legal utilitarianism is reliance on the free market and individual initiative. Bentham also
believed in majority rule and the implementation of as much democracy as possible. He assumed that
businesslike rationality could solve all human problems. On the other hand, Bentham has been much
criticized for his failure to account for or to understand any human emotion other than rational self-interest.
As John Stuart Mill pointed out in a famous essay, Bentham seemed not to understand honor, personal
C. CORPORATE SOCIAL RESPONSIBILITY
Corporate social responsibility involves incorporating a commitment to good citizenship, with a
commitment to making ethical decisions, improving society and minimizing environmental impact.
1. The Social Aspects of CSR
Corporations can actively promote social goals and move toward solving social problems. Some
2. The Corporate Aspects of CSR
3. Stakeholders
Stakeholders include employees, customers, creditors, suppliers, advocacy groups, and the
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IV. Making Ethical Business Decisions
Business decisions involve legal concerns, financial questions, health and safety concerns, and ethical
components. All corporate actors should think broadly about how their decisions and actions will affect other
employees, shareholders, customers, and the community.
A. A SYSTEMATIC APPROACH
Business Process Pragmatism—a practical method to investigate and solve ethics problems—includes
five steps—
• Inquiry: Identify the parties, specify the problem, and list the relevant ethical principles.
ADDITIONAL BACKGROUND—
Guidelines to Making Ethical Business Decisions
Guidelines for evaluating whether a decision or an action is ethical can be found in the law, business
rules and procedures, social values, an individual’s conscience, an individual’s promises and obligations to
others, and personal or societal heroes. An action is most likely ethical if it is consistent with the law, or at
least the “spirit” of the law, as well as company policies, and if it can survive the scrutiny of one’s conscience
and the regard of one’s heroes without betraying one’s commitments to others.
These guidelines include—
• The law: Is the action you are considering legal?
• Promises to others: Will your action satisfy your commitments to others, inside and outside the firm?
• The law: Is the action you are considering legal?
B. THE IMPORTANCE OF ETHICAL LEADERSHIP
Management must set and apply the same ethical standards to themselves and their company’s
employees.