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Chapter 5
Ethics and Business Decision Making
See Separate Lecture Outline System
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.
88 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or
in part.
ADDITIONAL RESOURCES—
VIDEO SUPPLEMENTS
The following video supplements relate to topics discussed in this chapter—
PowerPoint Slides
To highlight some of this chapter’s key points, you might use the Lecture Review PowerPoint slides compiled for
Chapter 5.
Business Law Digital Video Library
The Business Law Digital Video Library at www.cengage.com/blaw/dvl offers a variety of videos for group or
individual review. Clips on topics covered in this chapter include the following.
• Ask the Instructor
Ethics: Business Ethics an Oxymoron?—Businesses that act ethically can and do succeed in the marketplace.
Like all human activity, business is dependent upon at least a basic set of moral standards. And in the long run, since
unethical conduct is detrimental to relationships and reputation, ethical corporate conduct can be a competitive
advantage.
• Real World Legal
Pharzime Corporation, Scene 3—A pharmaceutical sales rep meets with a doctor to introduce new uses of a
medical profession.
• LawFlix
CHAPTER 5: ETHICS AND BUSINESS DECISION MAKING 89
Breaking Away—Others do get ahead by cheating (Scene in which the Italian racing team switches his gears on a
hill, gesture rudely, then uses their tire pump to get him out of the race).
90 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
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 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.
ANSWER TO VIDEO QUESTION LTR. B
In Scene 2, a new sales rep discusses the company’s off-label marketing strategy with a veteran sales
rep. Is it unethical or illegal for a sales rep to represent that he is a doctor when he has a doctorate degree in
chemistry but is not actually a physician? Explain. The man has a doctorate degree, but he is not a medical doctor
(physician). Although he may not be lying, he is clearly misrepresenting an important fact (about being a doctor) with
the intent of getting appointments with busy physician-clients so that he can sell Gensol. It is clearly unethical and
possibly illegal (fraud—see Chapter 14).
C. “GRAY AREAS” IN THE LAW
The legality of an action is not always clear. Because there are many laws regulating business, it is possible to
violate one without realizing it. There are also many “gray areas” in which it is difficult to predict how a court will
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
CHAPTER 5: ETHICS AND BUSINESS DECISION MAKING 91
suffix to the domain name of a particular company. These sites, sometimes collectively referred to as “sucks” sites, are
established solely for the purpose of criticizing the products or services sold by the companies that own the marks. In
some cases, they have been used maliciously to harm the reputation of a competitor. Can businesses do anything to
ward off these cyber attacks on their reputations and goodwill?
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
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 example, a cybergriping case
decided by the U.S. Court of Appeals for the Sixth Circuit, the court stressed that Internet users were unlikely be
confused by “sucks” sites using the Taubman Company name. Because the allegedly infringing domain names all ended
with “sucks.com,” the court concluded that they were unlikely to mislead Web site visitors into believing that the
trademark owner was the source or sponsor of the complaint. The court also noted in its opinion that, generally, the
more vicious an attack site’s domain name, the less likely that a cybergriper will be found liable for trademark
infringement.
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?
Case 5.1: United States v. Skilling
Enron Corp, was an international, multi-billion dollar enterprise comprised of four businesses that bought and sold
energy, owned energy networks, and bought and sold bandwidth capacity. Jeffrey Skilling—Enron’s president and chief
operating officer, and a member of its board of directors—became Enron’s chief executive officer in February 2001. In
August, he resigned. Four months later, Enron crashed into bankruptcy. An investigation uncovered a conspiracy to
deceive investors about Enron’s finances to ensure that its stock price remained high. Skilling was convicted in a federal
district court of various crimes, including conspiring to commit fraud to deprive Enron and its shareholders of the
“honest services” of its employees. He was sentenced to 292 months’ imprisonment and three years’ supervised
release, and ordered to pay $45 million in restitution. The U.S Court of Appeals for the Fifth Circuit affirmed the
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Notes and Questions
Skilling later argued that his statements to the financial analysts at the conference in January 2001 were “merely
harmless puffery.” What distinguishes harmful statements from “harmless puffery”? In this case, the distinction
lies in Skilling’s statements meeting the test for fraud—misrepresentations, intended to deceive, on which the injured
parties justifiably relied to their detriment. Here, too, these and his other statements were specific, not vague, and
definite, not suggestive or exaggerated. Puffery would have been a boast that “we’re the best company in the world”
or “we’ll be making money when our competitors have gone out of business.”
ANSWER TO “THE ETHICAL DIMENSION” QUESTION IN CASE 5.1
During Skilling’s tenure at Enron, the mood among the employees must have been upbeat because the
company’s situation would have appeared “rosy.” Is there anything unethical about this situation? Discuss.
The lack of ethics in the situation stems from Skilling’s use of deceit to create it. Whether or not such conduct supports
a criminal conviction—although given the number of federal crimes, it is a distinct possibility—a “rosy” business is
bound to collapse like a house of cards and harm all of its stakeholders if its “success” is founded on falsity.
ADDITIONAL CASES ADDRESSING THIS ISSUE —
Recent cases involving convictions for criminal conspiracies to commit fraud in business contexts 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 contracts
set aside for socially and economically disadvantaged companies resulted in a conviction for mail fraud, wire fraud, and
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
• United States v. Carbo, 572 F.3d 112 (3d Cir. 2009): A private contractor was convicted of conspiracy to commit
honest services mail fraud, in connection with a scheme to conceal conflicts of interest in the awarding of government
contracts by a municipal official.
• United States v. Stephens, 571 F.3d 401 (5th Cir. 2009): A conviction for conspiracy, wire fraud, and identity
theft was based on a scheme to obtain donations for hurricane relief through a bogus Web site purporting to be a
charitable organization.
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conviction for mail fraud, wire fraud, bank fraud, conspiracy, and money laundering.
D. SHORT-RUN PROFIT MAXIMIZATION
In the short run, unethical behavior may cause profits to increase. In the long run, however, such behavior may
lead to costly lawsuits, settlements and other payments, and bad publicity, undercutting profits.
ANSWER TO VIDEO QUESTION LTR. A
In Scene 1, two employees discuss whether to market their company’s drug as a treatment for other
conditions—even though the U.S. Food and Drug Administration (FDA) approved the drug for treating only
epilepsy. One employee argues that marketing the drug for more than the one treatment will increase the
company’s short–term profits and that obtaining FDA approval for other treatments will take too long. What
theory describes this employee’s perspective? Short-term profit maximization is the theory discussed in this
chapter that describes the man’s perspective. Some people argue that a corporation’s only goal should be profit
E. THE IMPORTANCE OF ETHICAL LEADERSHIP
Management must set and apply ethical standards to which they are committed. Employees will likely follow their
example.
1. Attitude of Top Management
2. Behavior of Owners and Managers
CASE SYNOPSIS—
Case 5.2: Krasner v. HSH Nordbank AG
David Krasner worked for HSH Nordbank AG, an international commercial bank. Krasner twice complained to HSH’s
human resources department, alleging that his supervisor Roland Kiser was violating the firm’s ethics policy.
Specifically, Krasner charged that Kiser was “creating a personal conflict of interest” and an unprofessional
CHAPTER 5: ETHICS AND BUSINESS DECISION MAKING 95
environment by advancing Melissa Campfield’s career at the expense of others who were more senior and qualified.
HSH investigated and found no violation of its ethics policy or the law. Krasner filed a suit in a federal district court
against his employer and supervisor. The defendants filed a motion to dismiss.
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Notes and Questions
Krasner brought this suit in a federal court under a federal law. Could he now sue the defendants in a
state court if he thought that he had been fired in violation of a state law? Krasner could now sue the defendants
ANSWERS TO QUESTIONS AT THE END OF CASE 5.2
1. Why did the court conclude that Krasner did not have a valid claim for “hostile environment”
discrimination? The court stressed that although Krasner may have been subjected to a hostile working environment
2. Suppose that a female employee had experienced the same type of treatment that Krasner had. Would
the female employee succeed in a Title VII claim of gender-based discrimination? Why or why not? A female
employee with identical complaints to those of Krasner probably would fare no better than Krasner did in trying to
satisfy the primary requirement for a case of gender-based discrimination: that the discrimination occurred, in fact,
because of the gender of the complainant. In contrast, if a woman had suffered some adverse employment action,
such as being demoted or not being promoted, because she refused to give sexual favors to a supervisor, she would
definitely have a cause of action for gender-based discrimination.
ANSWER TO VIDEO QUESTION LTR. C
In Scene 2, when the new sales rep suggests that they talk with the corporation’s legal or human
96 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
resources department about the drug’s safety for off-label uses, how does the woman respond? Does her
response encourage ethical conduct? Discuss fully. The woman responds by telling the new sales rep that they
should not discuss the ethical implications or safety of marketing Gensol for off-label uses with the legal or human
F. CREATING ETHICAL CODES OF CONDUCT
Most large corporations have codes of conduct that indicate the firm’s commitment to legal compliance and to
the welfare of those who are affected by corporate decisions and practices.
1. Ethics Training for Employees
2. The Sarbanes-Oxley Act
The Sarbanes-Oxley Act of 2002 requires firms to set up confidential systems for employees to report
suspected illegal or unethical financial practices.
II. Ethical Transgressions by Financial Institutions
Businesses’ ethical failures and mistakes underscore the need for ethical responsibility in business.
A. CORPORATE STOCK BUYBACKS
If the management of a company believes that its stock price is low, or below “fair value,” the company’s funds
can be used to buy shares, boosting their price. This benefits corporate executives who have stock options
through which they can buy shares at a potentially lower price and sell at the higher price. This is not illegal, but
can have the appearance of impropriety.
B. STARTLING EXECUTIVE DECISIONS AT AMERICAN INTERNATIONAL GROUP
A business’s decision to overextend its reach risks failure and, with an ill-timed expenditure of company funds,
III. Approaches to Ethical Reasoning
Ethical reasoning is the process by which an individual examines a situation according to his or her moral convictions or
ethical standards. Fundamental ethical reasoning approaches include the following.
A. DUTY-BASED ETHICS
1. Religious Ethical Standards
2. Kantian Ethics
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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 is doing the perceiving.
3. The Principle 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, customers, and society. One question is which rights take priority.
B. OUTCOME-BASED ETHICS: UTILITARIANISM
Utilitarianism is a theory developed by Jeremy Bentham and advanced by John Stuart Mill. It focuses on the
consequences of an action, not its nature or a set of moral values or religious beliefs. An action is morally correct,
ADDITIONAL BACKGROUND—
Jeremy Bentham, Founder of Utilitarianism
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
CHAPTER 5: ETHICS AND BUSINESS DECISION MAKING 99
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
C. CORPORATE SOCIAL RESPONSIBILITY
The question of corporate social responsibility concerns the extent to which a corporation should act ethically
and be accountable to society in that regard.
1. Stakeholder Approach
2. Corporate Citizenship
Corporations are sometimes urged to actively promote social goals. Some companies publish annual
corporate social responsibility—or sustainability, or citizenship—reports to highlight their activities.
CASE SYNOPSIS—
Case 5.3: Fog Cutter Capital Group Inc. v. Securities and Exchange Commission
With family members, Andrew Wiederhorn controlled more than 50 percent of the stock of Fog Cutter Capital