100 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
and pay $2 million to the collapsed firm. Fog Cutter agreed that while he was in prison, he would keep his title,
responsibilities, salary, bonuses, and other benefits. It also agreed to a $2 million “leave of absence payment.” The
NASD delisted Fog Cutter from the Nasdaq. Fog Cutter appealed to the Securities and Exchange Commission, which
dismissed the appeal. Fog Cutter appealed.
…………………………………………………………..……………………………………………………………………
Notes and Questions
What about the continued listing of other companies—such as Martha Stewart Living Omnimedia—on
stock exchanges despite the convictions and imprisonment of their chief executives? Fog Cutter pointed this
out. The court said, “This amounts to a selective prosecution argument, and it goes nowhere. To prove selective
prosecution, a claimant must be part of a protected class under the Equal Protection Clause and show not only that
ANSWER TO “THE ETHICAL DIMENSION” QUESTION IN CASE 5.3
Should more consideration have been given to the fact that the company Fog Cutter was not convicted of
a violation of the law? Why or why not? Yes, because those controlling more than half of Fog Cutter’s stock appear
ANSWER TO “THE GLOBAL DIMENSION” QUESTION IN CASE 5.3
What does the decision in this case suggest to foreign investors who may be considering investments in
securities listed in U.S. exchanges? The decision in this case may indicates to foreign investors that the businesses
CHAPTER 5: ETHICS AND BUSINESS DECISION MAKING 101
securities are delisted. This suggests that investments in exchange-listed securities are relatively safe and that any risk
is limited to normal business risks.
ADDITIONAL BACKGROUND—
Ethics, Calvinism, and the Search for Profits
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—whose name is an adapted form of Jean Cauvin—was familiar with the writings of Plato, Seneca, and St.
Augustine. In a speech written to be delivered in an inaugural ceremony at the University of Paris in 1533, Calvin
expressed radical theological views. Forced to flee France, Calvin settled in Geneva, Switzerland. Calvin’s works
include Institutes of the Christian Religion.
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
Calvin’s Protestant ethics stressed hard work, self-denial, and an organization of one’s life to serve God. The
development of Protestant ethics was a motivating force for the rise of capitalism, because it encouraged hard work
even when there was no need for it. Material success as a result of work was interpreted as a sign of faith and possible
salvation.
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, because of market imperfec-
tions—the lack of competition in some markets, the difficulty of obtaining perfect information about products and
3. A Way of Doing Business
4. Employee Recruiting and Retention
This focus can help a firm retain its employees, especially altruistic younger workers.
IV. Making Ethical Decisions
The goal is to ensure that all corporate actors think more broadly about how their decisions and actions will affect
other employees, shareholders, customers, and the community. Guidelines include—
• The law: Is the action you are considering legal?
• Business rules and procedures: Is the action you are considering consistent with company policies and
procedures?
V. Practical Solutions to Corporate Ethics Questions
A practical method to investigate and solve ethics problems might include five steps—
• Inquiry: Identify the parties, specify the problem, and list the relevant ethical principles.
• Discussion: Put together a list of action options and resolution goals.
• Decision: Come to a consensus decision on an action plan.
VI. Business Ethics on a Global Level
There are important ethical differences among, and within, nations. Some countries, for example, largely reject any
role for women professionals, which may cause difficulties for American women conducting business transactions in
those countries.
ENHANCING YOUR LECTURE—
CHAPTER 5: ETHICS AND BUSINESS DECISION MAKING 103
GOOGLE CHINA
Doing business on a global level can sometimes involve serious ethical challenges. Consider the ethical firestorm
that erupted when Google, Inc., decided to market “Google China.” This version of Google’s widely used search engine
was especially tailored to the Chinese government’s censorship requirements. To date, the Chinese government has
maintained strict control over the flow of information in that country. The government’s goal is to stop the flow of
“harmful information.” Web sites that offer pornography, government criticism, or information on other sensitive
topics, such as the Tiananmen Square massacre in 1989, are censored—that is, they cannot be accessed by Web users.
Government agencies enforce the censorship and encourage citizens to inform on one another. Thousands of Web
sites are shut down each year, and the sites’ operators are subject to potential imprisonment.
GOOGLE’S RESPONSE
Google defends its actions by pointing out that its Chinese search engine at least lets users know which sites are
being censored. Google China includes the links to censored sites, but when a user tries to access a link, the program
states that it is not accessible. Google claims that its approach is essentially the “lesser of two evils”: if U.S. companies
did not cooperate with the Chinese government, Chinese residents would have less user-friendly Internet access.
Moreover, Google asserts that providing Internet access, even if censored, is a step toward more open access in the
future because technology is, in itself, a revolutionary force.
THE CHINESE GOVERNMENT’S DEFENSE
The Chinese government emphasizes that its censorship of the Internet is no different from the controls placed on
information access by other national governments. As an example, it cites France, which bans access to any Web sites
FOR CRITICAL ANALYSIS
Do you agree with the assumption made by Google that technological advances and the desire of the
Chinese people to embrace liberty will overcome, in time, the current limitations imposed by the Chinese
government?
104 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
a. “As cited in Tom Ziller, Jr., “Web Firms Questioned on Dealings in China,” The New York Times, February 16, 2006.
A. THE MONITORING OF EMPLOYMENT PRACTICES OF FOREIGN SUPPLIERS
Concerns include the rights and the treatment of foreign workers who make goods imported and sold in the
United States by U.S. firms. Should a U.S firm refuse to deal with certain suppliers or make arrangements to
monitor their workplaces to make sure that the workers are not being mistreated?
B. THE FOREIGN CORRUPT PRACTICES ACT
Side payments to government officials in exchange for favorable business contracts are not unusual in some
countries, nor are they considered to be unethical.
1. Prohibition against the Bribery of Foreign Officials
2. Bribery by Foreign Companies
4. Penalties for Violations
Business firms may be fined up to $2 million. Individuals can be fined up to $100,000 (the firm cannot pay
the fine) and imprisoned up to five years.
TEACHING SUGGESTIONS
1. To emphasize the relation between law and ethics, emphasize their distinction by discussing the theory of civil
disobedience. Ethics are created by moral values. Whether to obey the law is itself an ethical question. Some
individuals may choose to ignore the law if their ethical principles conflict with it. If there is a conflict between a law
and an ethic, should an individual disobey the law, or should an individual obey the law even if he or she
thinks it would be unethical to do so? Is there a higher law than what society provides in a particular place at
a particular time?
2. Ethical standards are subjective. They are derived from personal religious beliefs or philosophical assumptions
concerning the nature of goodness, fairness, rightness, or justice. Each of us decides what we believe in and how to act
3. There are a number of hypotheticals that could be used to introduce this chapter’s subject matter. Have students
imagine that they own a company at which there is an opening at a beginning level. There are two applicants—one,
the students’ personal friend and the other, a member of the opposite sex (or of a minority). The latter individual is
more qualified for the job than the friend. Ask the students to suppose that in spite of whatever profit the most
qualified person might generate, they would rather have their friend on the job. State that in this hypothetical, hiring
the friend would violate the law against discrimination. Would the students hire the friend in violation of the law?
she expected a lower salary than they had been prepared to offer based on other companies’ salaries for
similar positions? (2) paying the lower salary would violate no law? (3) the position was unique within the
company (so that there were not other employees with whom she could compare pay)?
4. To introduce social responsibility, a hypothetical involving a violation of the law could be given, but a violation as
to which there is no risk of being caught. For example, have students suppose that as businesspersons they will have
an opportunity to make more money by meeting with competitors and fixing prices, conduct which is illegal. For this
hypothetical, tell them that the authorities will not discover that the prices have been fixed. In fact, the price rise could
be small—pennies per item—but the increases in net profit could be considerable. Is price-fixing fair? Ethical?
Socially responsible? Does it make any difference what the extra profit is used for? If the students imagine
that they need the money, would price-fixing be wrong? Would their answers be different if there was an
even chance that they would be caught? Why?
5. It might be pointed out that in a capitalist system it is essential that accurate information be disseminated to avoid
6. Suggest that students apply the same type of analytical reasoning to ethical problems that they apply to
considering and deciding legal issues.
Cyberlaw Link
Should ethical standards be adapted to deal with the new forms of social disruption made possible by the
Internet (for example, data theft, hacking, virus implanting, and invasion of privacy)? What new ethical
standards, if any, are needed to resolve problems online?
DISCUSSION QUESTIONS
1. How does a law come to be an expression of an ethical principle? A law is what society deems proper behavior. An
2. What are reasons for unethical business behavior? Employers or owners who condone it. The belief that it won’t be
discovered. The corporate structure, which can insulate individuals from responsibility for their acts through its distance from
the acts’ consequences and the collectivity (impersonality?) of corporate decision making. Lack of clarity as to what ethical
3. In negotiating a business deal, is “strategic misrepresentation” permissible? Do you have to disclose ev-
erything? These questions concern the ethical conflict inherent in a business context. From a duty-based ethics viewpoint, in
4. Why would a corporation prefer to be seen as ethical? Consumers may be less willing to buy products of companies
5. Does a company have a duty to act in socially or politically beneficial ways? There is no agreement as to whether a
6. How does a corporation’s investment in a political or social agenda affect its duty to its shareholders? People
7. To whom might a corporation owe a duty? A corporation may owe a duty to its shareholders, its employees and their
families, its customers, and society as a whole. What must a corporation do if it finds itself subject to conflicting duties?
8. Because business controls so much wealth and power, what duty does it arguably have to society? It has been
9. Do businesses have an ethical duty to use enhanced security measures to protect confidential customer
information? Why or why not? For example, if an employer allowed its employee to store customers’ unencrypted
personal information on a laptop outside of the office, would this violate any ethical duty? Yes, because the information
ACTIVITY AND RESEARCH ASSIGNMENTS
1. Suggest that students research the basis for their personal ethical standards. How well (or poorly) do these bases
coincide with the law as they know it? Is there a code of human conduct so basic that everyone would agree to follow
it?
2. Have students research the conflict that seems to exist between the Judeo-Christian and Islamic ethics, between the
Western and Arabic cultures. Is the apparent gap bridgeable? Do we in fact have a common ethics? Do our ethics at
least derive from a common source?
3. Ask students to discover exactly how a value can become a law. What does the lobbying process involve? Do your
students believe that good customs actually do become law? What factors distinguish good from bad customs?
4. Have students choose an employer and discover as much as they can about the people who work for the employer. What
are the job categories and what percentages of each are held by women and minorities? How does the employer
108 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
EXPLANATION OF A SELECTED FOOTNOTE IN THE TEXT
Footnote 2: The Baums run an asset recovery business. In one case, they recruited clients by misrepresenting the
facts and pretending to be licensed to practice law in Texas. They filed “gratuitous, malicious” pleadings, lied to the court, and
otherwise abused the judicial process. The court imposed sanctions, including an injunction to prohibit the Baums from filing
claims related to the same case in any Texas state court without the permission of a certain federal judge. Later, the Baums
injected themselves into a bankruptcy case in which they engaged in similar tactics. The injunction was expanded to include
filings in any federal or state court or agency in Texas. The Baums appealed. In Baum v. Blue Moon Ventures LLC, the U.S.
Court of Appeals for the Fifth Circuit affirmed the injunction. “Federal courts have the power to enjoin plaintiffs from future
In the case in which the Baums were initially enjoined—Clark v. Mortenson, 256 F.Supp.2d 661 (S.D.Tex. 2002)—the
court listed a number of examples of the misconduct of the principal parties. Perhaps Sheldon Baum exhibited the most
egregious behavior. In the words of Judge Lynn Hughes—
“Sheldon Baum’s relationship to the truth is pathological. In response to direct questions about simple
objective data, he says what he prefers the facts to be rather than what they demonstrably are.
“Sheldon Baum swore that he graduated from Tulane law school. The office of the general counsel at Tulane
said Sheldon did not graduate, and Baum himself offered in evidence a registrar’s letter attesting that he had
completed twelve hours.
“ . . . Similar conflicts exist between the statements of father and sons as between different versions of the
father’s own words.
“Sheldon Baum has had extensive experience with courts. He bears a felony conviction for procuring the theft
of his brother’s car in the 1980s. He has filed involuntary petitions in bankruptcy against others and has been barred by
the court from ever doing it again. . . . His participation in this lawsuit reveals another installment in his history of
acting on greed [and] malice.”
Would there have been any way for the Baums to operate their business ethically? One way in which the Baums
could have operated their business ethically would have been to comply with the law. They should not have pretended to be
lawyers when they not, they should not have misrepresented the facts to those they sought as clients, and they should not have
CHAPTER 5: ETHICS AND BUSINESS DECISION MAKING 109
lied to the courts. It is fair to note, though, that without the compliance of those clients, who may have been motivated by
greed, the Baums would not have been able to act.
Are there situations in which a business owner’s conduct would be more reprehensible than the Baums’
behavior in this case? Explain. When behavior is motivated by greed or some other base emotion, the only limit to unethical
ANSWERS TO ESSAY QUESTIONS IN
STUDY GUIDE TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
BY HOLLOWELL & MILLER
1. What is ethics? Ethics is the study of what constitutes right and wrong behavior. Ethics is involved in the answers to
such questions as: What is fair? What is just? What is the right thing to do? Ethics is not an abstract or static concept—values
2. What is the difference between legal and ethical standards? How are legal standards affected by ethical
standards? Legal standards are greatly affected by ethical standards, and there are areas common to both. Killing another
human being, for example, is rarely sanctioned by law and is commonly prohibited by religious and secular beliefs. Legal and
ethical standards are not the same, however. The law does not codify all ethical requirements. An action might be legal but un–
ethical. Compliance with the law does not always equate with ethical behavior.
REVIEWING—
ETHICS AND BUSINESS DECISION MAKING
Isabel Arnett is the chief executive officer (CEO) of Tamik, Inc., a pharmaceutical company that manufactures a
vaccine called Kafluk, which supposedly provides some defense against bird flu. The company began marketing Kafluk
throughout Asia. After numerous media reports that bird flu may soon become a worldwide epidemic, the demand for
1. This scenario illustrates one of the main reasons why ethical problems occur in business. What is that
reason? The primary reason that most ethical problems occur in business is the desire to increase sales (or not lose
2. Would a person who adheres to the principle of rights theory consider it ethical for Arnett not to disclose
potential safety concerns and to refuse to perform additional research on Kafluk? Why or why not? A principle
3. If Kafluk prevented fifty Asian people who were infected with bird flu from dying, would Arnett’s conduct in
this situation be ethical under a utilitarian model of ethics? Why or why not? Utilitarians believe that an action is
4. Did Tamik or Arnett violate the Foreign Corrupt Practices Act in this scenario? Why or why not? Because
Tamik did not attempt to pay off any Japanese government officials and only paid the injured families a cash
settlement, the corporation did not violate the Foreign Corrupt Practices Act.
DEBATE THIS:
Executives in large corporations are ultimately rewarded if their companies do well, particularly as
evidenced by rising stock prices. Consequently, shouldn’t we just let those who run corporations decide
which level of negative side effects of their goods or services are “acceptable”? The first problem with this
