35
CHAPTER 5
ETHICS AND BUSINESS DECISION MAKING
ANSWERS TO QUESTIONS
AT THE ENDS OF THE CASES
CASE 5.1—QUESTIONS (PAGE 96)
WHAT IF THE FACTS WERE DIFFERENT?
Suppose that Skilling had been a lower-level Enron employee acting at the direction of an Enron
executive who had the authority to tell him that Enron sanctioned his fraud. Would the result in this
case have been different? Explain. The result would have been different because Skilling would not have
been acting on his own volition but at the direction of his employer. Under the law as explained in the
text, when an employer sanctions the fraudulent conduct of its employee, the employee (and any other
conspirators) do not deprive the employer of their honest services.
THE ETHICAL DIMENSION
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?
CASE 5.2—QUESTIONS (PAGE 98)
1A. 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 from his perspective, under Title VII he was not discriminated against because of that
environment. In other words, he did not suffer the hostile environment because of his gender, and that
was the crucial factor.
36 UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS
2A. 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
CASE 5.3—QUESTIONS (PAGE 103)
THE ETHICAL DIMENSION
Should more consideration have been given to the fact that 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
to have believed that there were good business reasons for the firm’s deal with Wiederhorn. Those
shareholders must have thought that “Wiederhorn’s continuing commitment to the company and his
return to an active role in the company after his incarceration were essential to preserving Fog Cutter’s
core business units.” No, because, as the NASD found, the SEC apparently perceived, and the court set
out, “the company’s actions were contrary to the public interest and a threat to public confidence in the
Nasdaq exchange.”
THE GLOBAL DIMENSION
ANSWERS TO QUESTIONS IN THE REVIEWING FEATURE
AT THE END OF THE CHAPTER
1A. Ethical problems in business
The primary reason that most ethical problems occur in business is the desire to increase sales (or not
lose them), thereby increasing profits for the corporation. Clearly, this was the motivating reason for
Arnett’s trying to cover up negative publicity and refusing to investigate potentially adverse side effects
of the company’s product (Kafluk).
2A. Principle of rights
CHAPTER 5: ETHICS AND BUSINESS DECISION MAKING 37
A principle of rights adherent would likely conclude that the conduct was unethical. A key factor is how a
decision affects others. This includes not only the firm’s owners and employees but also customers and
society. Arnett did not take into account the potential effect on persons outside the corporation. Had
she considered the effect that Kafluk might have on consumers and society, Arnett would at least have
allowed additional research on its safety and risks.
3A. Utilitarian theory
Utilitarians believe that an action is morally correct when, among the people that it affects, it produces
4A. Foreign Corrupt Practices Act
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.
ANSWER TO DEBATE THIS QUESTION IN THE REVIEWING FEATURE AT THE END OF THE
CHAPTER
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 attitude is that executives and managers (and even directors) may be looking at only short-run
profits. They therefore might ignore the long-run profitability to their company. If a drug that works
38 UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS
ANSWERS TO QUESTIONS AND CASE PROBLEMS
AT THE END OF THE CHAPTER
5–1A. Business ethics
(Chapter 5—Pages 94–96, 101 & 104)
Of course, it was unethical to sell goods that their maker knew were defective and could cause harm.
This is the most reasonable and likely conclusion under any set of standards, even if it were possible to
eventually obtain a negative result with respect to a defect from testing that repeatedly yielded a
5-2A. QUESTION WITH SAMPLE ANSWER: Approaches to ethical reasoning
Factors for the firm to consider in making its decision include the appropriate ethical standard. Under
the utilitarian standard, an action is correct, or “right,” when, among the people it affects, it produces
the greatest amount of good for the greatest number. When an action affects the majority adversely, it
5–3A. Ethical conduct
(Chapter 5—Pages 94 & 104)
Crawford should be denied compensation. He is not entitled to any fees because he was not a
5-4A. Ethical conduct
(Chapter 5—Pages 93–94)
The court granted a summary judgment in the defendants’ favor, and Price appealed to the Mississippi
Supreme Court, which affirmed this judgment. The state supreme court applied a “wrongful conduct
5-5A. CASE PROBLEM WITH SAMPLE ANSWER: Ethical leadership
The court granted Howard’s motion and vacated the convictions that had been grounded on the “honest
services” theory. The court concluded that the facts distinguishing the Merrill employees’ case from
Howard’s case were “nuanced,” and this “indeed compels the vacatur of Howard’s convictions for
conspiracy . . . and wire fraud.” As in the Nigerian barge deal, Project Braveheart was designed to
40 UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS
profitable so that he would seem to succeed as an employee and be compensated for this success. In
other words, his interest as an employee was aligned with EBS’s specific goal. Therefore, his
participation in Braveheart was “beyond the reach of the honest–services theory of fraud.”
Of course, ultimately, the fraud of the participants in the barge and Braveheart transactions and
other sham deals resulted in the crumbling into bankruptcy of Enron, wiping out thousands of jobs,
more than $60 billion in market value, and more than $2 billion in pension plans for its employees and
5–6A. Corporate social responsibility
(Chapter 5—Pages 101–103)
It could be argued that the defendants have an ethical responsibility to society to voluntarily take steps
to reduce the availability of their products to meth makers. This might have become a more certain
obligation once the defendants were aware that their products were used in the manufacture of meth.
5–7A. Business ethics on a global scale
(Chapter 5—Pages 95–96 & 104–105)
In Pfizer’s case, it would appear that the potential for short-run profit maximization, by quickly testing
and marketing Trovan, took precedence over any consideration of ethics. This action alone arguably
violates ethical standards, particularly in light of its results.
As a corporation, Pfizer might have applied the five-step procedure set out in the text to review
the ethical conflicts in a test of Trovan. The first step is to specify the facts, the problem, and the ethical
principles at issue. The second step is to discuss potential actions and their effects. The third step is to
come to a consensus as to what to do. This consensus should withstand moral scrutiny (the fourth step)
and fulfill corporate, community, and individual values (the fifth step). It seems unlikely that a proposed
Trovan test on the facts described in the problem would have survived the fourth step, under either a
duty-based or an outcome-based ethical standard.
5–8A. Violation of internal ethical codes
(Chapter 5—Pages 96–98)
The appeals court stated that “Havensure alleges that Prudential violated its own internal policies and
that this violation suffices to render Prudentials’s conduct wrongful. This argument has no legal basis.
5-9A. A QUESTION OF ETHICS: Copyrights
(a) Digital editing technology has proven to be both a boon and a bane to the movie industry.
The technology eases the legitimate production and editing of films for a wide spectrum of audiences
and purposes. But this technology also makes it easier to edit films without the creators’ and owners’
consent. In the circumstances of this case, for example, CleanFlicks and its competitors bought DVDs of
the studios’ films, cracked the encryption code on the disks intended to thwart copying, and altered the
movies. Using the altered disks as master copies, the firms created new DVDs, which they sold or rented
If money was not the motivation for the claims of any of the parties to this suit, what was?
With respect to the legality of the parties’ conduct in this case, the court concluded that
CleanFlicks’ “business is illegitimate” and issued a summary judgment in the studios’ favor, ordering
CleanFlicks and the others to turn over all of the copies of their versions of the studios’ films to be
destroyed. The court pointed out that “[t]he right to control the content of the copyrighted work . . . is
the essence of the law of copyright.” This was the impetus for the studios’ counterclaim, at least, and in
the court’s view this was the principle at the heart of this case.
The court emphasized that “the intrinsic value of the right to control the content of the
copyrighted work . . . is the essence of the law of copyright. Whether these films should be edited in a
manner that would make them acceptable to more of the public playing them on DVD in a home
environment is more than merely a matter of marketing,” or appealing in a particular manner to a
certain segment of the market; “it is a question of what audience the copyright owner wants to reach.
. . . [T]he infringing parties are exploiting a market for movies that is different from what the Studios
have released into and for an audience the Studios have not sought to reach.”
CHAPTER 5: ETHICS AND BUSINESS DECISION MAKING 43
person (the supervisor) and that this person has a long memory. In other words, she tells the new
sales rep that he will be endangering his career if he questions the safety of a drug or the ethics
of a marketing strategy. These statements clearly show that the corporate culture at this
company discourages employees from questioning the ethics of their conduct and encourages
them to vigorously market drugs for any use for which they can be sold.
ANSWER TO VIDEO QUESTION NO. 5–10
Real World Legal: Pharzine, Scene 1 and Scene 2
(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 maximization,
which would be reflected in a higher market value. If all firms strictly adhered to the goal of
profits to suffer. Thus, business ethics is consistent only with long-term profit maximization. An
overemphasis on short-term profit maximization is the most common reason that ethical
problems occur in business.
(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) In Scene 2, when the new sales rep suggests that they talk with the corporation’s legal or
human 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
