Chapter 2
BUSINESS ETHICS AND SOCIAL
RESPONSIBILITY
Suggested Additional Assignments
Research
Ask students to bring to class a newspaper, magazine, or internet article that raises ethical issues
Interview: Businesspeople on Ethics
Each student (or group of students) can interview a business person about ethics dilemmas they have
faced? How did they handle them? Did they make the right decisions? Do they wish they had made a
different choice? What were the impacts of their decisions on their companies? On their lives?
Role Play: Rienzi Plaza
Landlord Sheldon Baskin faces a decision. His rent-subsidy contract with the federal government has
Chapter Overview
Quotes of the Day
“The one and only social responsibility of business is to increase its profits.” –Milton Friedman (b.
1912), Nobel laureate in economics. “The business of business is serving society, not just making
money.” –Dayton Hudson corporate constitution.
Chapter Theme
It is also important for students to examine ethical issues from a variety of points of view and for them to
develop their own Life Principles – the rules by which they live their own lives.
In this chapter, we will present five basic issues.
1. Why bother to act ethically at all?
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2. What is the most important consideration when making an ethical decision? To do the right thing
for the right reason? Or to do what produces the most favorable results?
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3. Should you apply your personal ethics in the workplace? Or should you have different ethical
values at home and at work?
4. Is the primary role of corporations to make money? Or do they have responsibilities to workers,
communities, customers, and other “stakeholders”?
5. When, if ever, is lying acceptable?
Why Bother to Act Ethically At All?
Key Issue
“Doing the right thing” may not generate the greatest profit but over the long run it will lead to the
greatest personal satisfaction and fulfillment.
Question: What do you need to be happy in life?
Answer: Sometimes students give pretty outrageous answers: $1 billion, a mistress; etc. It is useful
General Question: Is money an accurate measure of happiness? Are they willing to make a trade–
off between reducing their earnings to spend more time with their friends and family? What trade–
offs did their parents make?
Question: What if, after making purchases at the local drugstore, you realize that the cashier forgot
to charge you for an item? Or suppose a waitress forgets to charge you for the drink you ordered with
your meal?
Answer: It is useful to begin the ethics discussion with small, personal issues such as these because
Society as a Whole Benefits from Ethical Behavior
Mutual trust is a vital part of a successful society. No society will survive long if the people are
constantly having to protect themselves from dishonesty and the government is compelled to regulate
People Feel Better When they Behave Ethically
Researchers who study happiness find that people expect material goods to make them happier than they
Unethical Behavior Can Be Very Costly
Unethical behavior does not always damage a business, but it certainly has the potential of destroying a
company overnight. So why take the risk?
Chapter 2 Business Ethics and Social Responsibility 3
Even if unethical behavior does not devastate a business, it can cause other, subtler damage. In one
But if we decide that we want to behave ethically, how do we know what ethical behavior is?
Theories of Ethics
When making ethical decisions, people sometimes focus on the reason for the decision – they want to do
what is right. Thus, if they think it is wrong to lie, then they will tell the truth no matter what the
Utilitarian Ethics
Under utilitarian ethics, a correct decision is one that tended to maximize overall happiness and minimize
Deontological Ethics
Many ethicists believe that utilitarians have it all wrong, and that the results are not as important as the
reason for which the decision is made. To a deontological thinker, the ends do not justify the means.
Rawlsian Justice
John Rawls raised the question of what type of society we would choose if we did not know what our
status in the society would be. Would we choose a society that treated everyone equally or one that treats
everyone fairly? What types of jobs would receive the most reward?
Ethical Traps
Ethical traps create great temptation to do what you know to be wrong or fail to do what you
know to be right.
Money
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Rationalization
A recent study found that more creative people tend to be less ethical. The reason? They are better at
rationalizing their bad behavior.
Conformity
Warren Buffett has been quoted as saying, “The five most dangerous words in business may be:
Following Orders
When someone in authority issues orders, even to do something clearly wrong, it is very tempting to
Euphemisms
To “smooth earnings” sounds a lot better than to “cook the books” or plain old “commit fraud.” And “file
Lost in a Crowd
When in a group, people are less likely to take responsibility, assuming that someone else will. They tend
Applying Personal Ethics in the Workplace
Should you behave in the workplace the way you do at home or do you have a separate set of ethics for
each part of your life? What if your employees behave badly outside of work – should that affect their
employment?
Stakeholder Ethics
A fundamental question in business ethics is: What is the purpose of a corporation?
Definitions
The Shareholder Model: Noted economist Milton Friedman argued that corporations have two
primary responsibilities. First, they must comply with the law. Second, they must make as much money
as possible for shareholders.
Companies were legally required to follow the “shareholder model” until the decade after the close of
Chapter 2 Business Ethics and Social Responsibility 5
The Stakeholder Model: The alternative point of view is that corporations should take care of more
than shareholders alone. It is not that the owners of a corporation should be ignored—shareholders are
The Debate
Every executive will treat employees well if she believes that doing so will lead to increased profits.
The Organization’s Responsibility to Its Employees
Organizations cannot be successful without good workers. In many circumstances the shareholder and
About the Ethics Cases
New to this edition are several Ethics Cases in the book. The discussion questions do not have clear, right
An Organization’s Responsibility to Its Customers
Customers are another group of essential stakeholders. A corporation must gain and retain loyal buyers if
Organization’s Responsibility to Overseas Contract Workers
Industrialization has always been the first stepping stone out of dire poverty—it was in England in
centuries past, and it is now in the developing world. Eventually, higher productivity leads to higher
wages.
When governments or customers try to force factories in the developing world to pay higher wages, the
When, if Ever, is Lying Acceptable?
We are taught from an early age that we must tell the truth. And usually, honesty is the best policy. The
consequences of lying can be severe: students are suspended, employees are fired, and witnesses are
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Suggested Additional Assignment Follow–up: Interview
If students conducted the interview with a business person, this would be a good time to discuss them.
Multiple Choice Questions
1. Milton Friedman was a strong believer in the _____________ model. He _______________ argue
that a corporate leader’s sole obligation is to make money for the company’s owners.
(a) shareholder; did
(b) shareholder; did not
(c) stakeholder; did
(d) stakeholder; did not
2. In the 1919 lawsuit Dodge v. Ford, the Dodge brothers and other major shareholders sued Henry Ford
and his board of directors over nonpayment of dividends. The Michigan Supreme Court sided with
_______________ . Incorporation laws at the time ____________ companies to follow the
shareholder model.
(a) Ford; required
(b) Ford; permitted
(c) The Dodge brothers; required
(d) The Dodge brothers; permitted
3. Which of the following historic events led to a significant change in corporation laws, and permitted
companies to follow the stakeholder model?
(a) The Great Depression
(b) World War II
(c) The Election of John F. Kennedy
(d) The Moon Landing
(e) The Supreme Court’s decision in Brown v. Board of Education
4. Which of the following wrote the book, Utilitarianism, and believed that moral actions should
“generate the greatest good for the greatest number“?
(a) Milton Friedman
Chapter 2 Business Ethics and Social Responsibility 7
(b) John Stuart Mill
(c) Immanuel Kant
(d) None of the above
5. Which of the following believed that the dignity of human beings must be respected, and that the most
ethical decisions are made out of a sense of duty or obligation?
(a) Milton Friedman
(b) John Stuart Mill
(c) Immanuel Kant
(d) None of the above
Essay Questions
1. Executives were considering the possibility of moving their company to a different state. They wanted
to determine if employees would be willing to relocate, but they did not want the employees to know
the company was contemplating a move because the final decision had not yet been made. Instead of
asking the employees directly, the company hired a firm to carry out a telephone survey. When
calling the employees, these “pollsters” pretended to be conducting a public opinion poll and
identified themselves as working for the new state’s Chamber of Commerce. Has this company
behaved in an ethical manner? Would there have been a better way to obtain this information?
Answer: The company’s approach was unethical and, frankly, stupid, relying on the assumption that
2. When a fire destroyed the Malden Mills factory in Lawrence, Massachusetts, its 70-year-old owner,
Aaron Feuerstein, could have shut down the business, collected the insurance money, and sailed off
into retirement. But a layoff of the factory’s 3,000 employees would have been a major economic
blow to the region. So instead Feuerstein kept the workers on the payroll while he rebuilt the factory.
These actions gained him a national reputation as a business hero. Many consumers promised to buy
more of the company’s Polartec fabric. In the end, however, the story did not have a fairy-tale ending:
Five years after the fire, Malden Mills filed bankruptcy papers. The company was not able to pay off
the loans it had incurred to keep the business going.
Did Feuerstein do the right thing?
3. Many socially responsible funds are now available to the investor who wants to make ethical choices.
The Amana fund buys stocks that comply with Islamic laws. For example, it will not invest in
holdings that earn interest, which is prohibited under Islamic law. The Ava Maria fund is designed for
Catholic investors, the Timothy funds for evangelicals. The Sierra Fund focuses on environmentally
friendly investments while the Women’s Equity Fund chooses companies that promote women’s
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interests in the workplace. On average, however, these socially responsible investments earn a lower
return than standard index funds that mirror the performance of a stock index, such as the Standard &
Poor’s 500.
Are socially responsible funds attractive to you? Do you now, or will you in the future, use them in
saving for your own retirement?
4. When James Kilts became CEO of Gillette Co., the consumer products giant had been a mainstay of
the Boston community for a hundred years. But the organization was going through hard times: Its
stock was trading at less than half its peak price and some of its storied brands of razors were wilting
under intense competitive pressure. In four short years, Kilts turned Gillette around—strengthening
its core brands, cutting jobs, and paying off debt. With its stock up 61%, Kilts had added $20 billion
in shareholder value.
Then suddenly Kilts sold Gillette to Procter & Gamble Co. for $57 billion. So short was Kilts’s stay
in Boston that he never moved his family from their home in Rye, New York. The deal was sweet for
Gillette shareholders—the company’s stock price went up 13% in one day. And tasty also for Kilts—
his payoff was $153 million, including a $23.9 million reward from P&G for having made the deal
and a “change in control” clause in his employment contract that was worth $12.6 million. In
addition, P&G agreed to pay him $8 million a year to serve as vice chairman after the merger. When
he retires, his pension will be $1.2 million per year. Moreover, two of his top lieutenants were offered
payments totaling $57 million.
Any downside to this deal? Four percent of the Gillette workforce—6,000 employees—were fired. If
the payouts to the top three Gillette executives were divided among these 6,000, each unemployed
worker would receive $35,000. The loss of this many employees (4,000 of whom lived in New
England) had a ripple effect throughout the area economy. Although Gillette shareholders certainly
benefited in the short run from the sale, their profit would have been even greater without this $210
million payout to the executives. Moreover, about half the increase in Gillette revenues during the
time that Kilts was running the show were attributable to currency fluctuations. A cheaper dollar
increased revenue overseas. If the dollar had moved in the opposite direction, there might not have
been any increase in revenue. Indeed, for the first two years after Kilts joined Gillette, the stock price
declined. It wasn’t until the dollar turned down that the stock price improved.
Do CEOs who receive sweeteners have too strong an incentive to sell their companies? Is it
unseemly for them to be paid so much when many employees will lose their jobs?
5. Many of America’s largest consumer product companies, such as Wal–Mart, Nike and Land’s End,
buy fabric produced in China by Fountain Set Holdings Ltd. Chinese government investigators
recently discovered that Fountain Set has contaminated a local river by dumping dye waste into it.
What responsibility do U.S. companies have to ensure safe environmental practices by overseas
suppliers?
Discussion Questions
1. Darby has been working for 14 months at Holden Associates, a large management consulting firm.
She is earning $75,000 a year, which sounds good, but does not go very far in New York City. It turns
out that her peers at competing firms are typically paid 20% more and receive larger annual bonuses.
Chapter 2 Business Ethics and Social Responsibility 9
Darby works about 60 hours a week, more if she is traveling. A number of times she has had to
reschedule her vacation or cancel personal plans to meet client deadlines. She hopes to go to business
school in a year and has already begun the application process.
Holden has a policy that permits any employee who works as late as 8:00 P.M. to eat dinner at
company expense. The employee can also take a taxi home. Darby is in the habit of staying until 8:00
P.M. every night, whether or not her workload requires it. Then she orders enough food for dinner,
with leftovers for lunch the next day. She has managed to cut her grocery bill to virtually nothing.
Sometimes she invites her boyfriend to join her for dinner. As a student, he is always hungry and
broke. Darby often uses the Holden taxi to take them back to his apartment, although the cab fare is
twice as high as to her own place.
Sometimes Darby stays late to work on her business school applications. Naturally she uses Holden
equipment to print out and photocopy the finished applications. Darby has also been known to return
catalog purchases through the Holden mailroom on the company dime. Many employees do that and
the mailroom staff do not seem to mind.
Is Darby doing anything wrong? How would you behave in these circumstances?
2. H. B. Fuller Co. of St. Paul is a leading manufacturer of industrial glues. Its mission statement says
the company “will conduct business legally and ethically.” It has endowed a university chair in
business ethics and donates 5% of its profits to charity. But now it is under attack for selling its
shoemakers’ glue, Resistol, in Central America. Many homeless children in these countries have
become addicted to Resistol’s fumes. So widespread is the problem that glue-sniffers in Central
America are called “resistoleros.” Glue manufacturers in Europe have added a foul-smelling oil to
their glue that discourages abusers. Fuller fears that the smell may also discourage legitimate users.
What should Fuller do?
Answer: The board of directors announced that the company would stop selling Resistol in Central
3. Steve supervises a team of account managers. One night at a company outing, Lawrence, a visiting
account manager, made some wildly inappropriate sexual remarks to Maddie, who was on Steve’s
team. When she told Steve, he was uncertain what to do, so he asked his boss. She was concerned that
if Steve took the matter further and Lawrence was fired or even disciplined, her whole area would
suffer. Lawrence was one of the best account managers in the region, and everyone was overworked
as it was. She told Steve to get Maddie to drop the matter. Just tell her that these things happen, and
Lawrence did not mean anything by it. What should Steve do? What ethical traps does he face? What
would be your Life Principle in this situation?
4 David has just spoken with a member of his sales team who has not met her sales goals for some
months. She has also missed 30 days of work in the past six months. It turns out that she is in the
process of getting a divorce, and her teenage children are reacting very badly. Some of the missed
days have been for court, others because the children have refused to go to school. If David’s team
does not meet its sales goals, no one will get a bonus and his job may be at risk. What should he do?
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5. Rapper Ice-T’s song Cop Killer generated significant controversy when it was released. Among other
things, its lyrics anticipate slitting a policeman’s throat. Such lyrics have become reasonably
common today, but they were much less common 20 years ago.
When Cop Killer was recorded, Time Warner, Inc. was struggling with a $15 billion debt and a
depressed stock price. Had Time Warner renounced rap albums with harsh themes, its reputation in
the music business—and future profits—might have suffered. This damage might even have spilled
over into the multimedia market, which was crucial to Time Warner’s future.
Did Time Warner do anything wrong when it decided to release Cop Killer?
6. You are negotiating a new labor contract with union officials. The contract covers a plant that has
experienced operating losses over the past several years. You want to negotiate concessions from
labor to reduce the losses. However, labor is refusing any compromises. You could tell them that,
without concessions, the plant will be closed, although that is not true. Is bluffing ethical? Under what
circumstances? What would Kant and Mill say? What is your Life Principle?