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Moral Issues in Business Overview Chapter Ten examines the following topics: Employees’ obligations to the firm, company loyalty, and the problem of conflicts of interest Insider trading or use of proprietary data Domestic and foreign bribery, gifts, kickbacks Obligations to third parties and the problem of conflict of duties and divided loyalties Whistle-blowing and its morality Self-interest in situations of tough moral choices Moral Issues in Business Chapter 10

Moral Issues in Business Introduction Whistle-blowing has become a significant part of the American workplace. It is based on an employee’s right to alert the public of a company’s wrongdoings. Questions regarding the employee’s moral duty and possible negative consequences are always involved. What rights do whistle-blowers have? What responsibilities do companies have regarding whistle-blowing? Moral Issues in Business Chapter 10

Obligations to the Firm Loyalty to the firm: The employment contract governs employer-employee relationships and provides a framework for respective obligations of employer and employee. The notion of company loyalty is commonplace, considered a coherent and legitimate concept. Loyalty requires reciprocity, and workers commonly believe that it is up to the company to earn and retain their loyalty. Moral Issues in Business Chapter 10

“Are employees who publicly protest wages or working conditions being disloyal to their employer?”

Obligations to the Firm Conflicts of interest arise when employees have a personal connection to a transaction – one substantial enough that it might affect their judgment or lead them to act against the interests of the organization. They are morally worrisome even if the person doesn’t act to the detriment of the employer. Employees should promptly extricate themselves from such conflicts or avoid them from the start. Moral Issues in Business Chapter 10

Obligations to the Firm Financial investments: Conflicts of interest may exist when employees have financial investments in suppliers, customers, or distributors with whom their organizations do business. There is no simple answer as to how much of a financial investment it takes to create a conflict of interest. Company policy usually determines the permissible limits of such financial interests. Moral Issues in Business Chapter 10

Abuse of Official Position Using one’s official position for personal gain is likely to violate one’s obligations to the organization. Example: Using corporate funds for private purposes such health club memberships, extravagant parties, vacation travel, etc. Insider trading: The buying or selling of stocks on the basis of nonpublic information that is likely to affect their price. Moral Issues in Business Chapter 10

Abuse of Official Position Inside traders defend their actions by claiming that they don’t injure anyone. It’s true that trading by insiders on the basis of nonpublic information seldom directly harms anyone. But, moral concerns arise from both indirect injury and direct injury. Moral Issues in Business Chapter 10

Abuse of Official Position Insiders and “Misappropriation”: The Securities and Exchange Commission (SEC) has recently argued that people who trade on confidential information, but are not traditional company insiders, are still guilty of insider trading if they have “misappropriated” sensitive information. Moral Issues in Business Chapter 10

“Raj Rajaratnam, hedge fund manager and co-founder of Galleon Group, was convicted on May 11, 2011, of insider trading and securities fraud. Some consider insider trading a victimless crime. Do you agree?”

Abuse of Official Position Critics of insider trading argue that: (a) It is unfair (b) It can injure other investors (c) It undermines public confidence in the stock market Defenders say that it performs a necessary and desirable economic function. But, executives who do this put their own interests before those of the company and its shareholders. Moral Issues in Business Chapter 10

Abuse of Official Position Proprietary data: Companies zealously guard information that may affect competitive standing. Patented or copyrighted information: Novel information that it is legally protected but not secret – others may access it but are forbidden to use it (without permission) for the life of the patent or copyright. Trade secrets: Any information that is not generally known, is valuable to its possessor, and is treated confidentially. Moral Issues in Business Chapter 10

Abuse of Official Position There are at least three arguments for legally protecting trade secrets: Trade secrets are the intellectual property of the company. The theft of trade secrets represents unfair competition. Employees who disclose trade secrets violate the confidentiality owed to their employers. Moral Issues in Business Chapter 10

Abuse of Official Position Employees who join a competitor: An especially troublesome problem for high-tech firms, where employees are often privy to sensitive information and are also prone to job-hopping. Two factors conspire to make this a morally complicated problem: Individual’s right to seek new employment Difficulty of separating trade secrets from the technical know-how, experience, and skills that comprise the employee’s own intellect and talents Moral Issues in Business Chapter 10

Moral Issues in Business Bribes and Kickbacks Bribe: a remuneration for the performance of an act that is inconsistent with the work contract or the nature of assigned task – can be money, entertainment, gifts, or preferential treatment. Kickback: a form of bribery that involves a percentage payment to a person who is able to influence or control a source of income. Moral Issues in Business Chapter 10

Moral Issues in Business Bribes and Kickbacks The Foreign Corrupt Practices Act (FCPA) of 1977 made it illegal for American companies to engage in bribery overseas. It dictates stiff fines and prison sentences for corporate officials engaging in bribery overseas. It requires that corporations establish strict accounting and auditing controls to guard against the creation of slush funds from which bribes can be paid. Moral Issues in Business Chapter 10

Moral Issues in Business Bribes and Kickbacks Limits of the FCPA: It does not prohibit grease payments to employees of foreign governments who have clerical or ministerial duties. The case against FCPA restrictions: Critics say the FCPA puts U.S. firms at a disadvantage and imposes U.S. standards on foreign countries. The case for FCPA restrictions: Defenders say that bribery can injure individuals, competitors, and political institutions while hurting economic growth and damaging the free market system. Moral Issues in Business Chapter 10

Moral Issues in Business Bribes and Kickbacks Bribery and payoffs are common business practices in other nations – but this does not imply that they are morally acceptable in those nations. Permitting U.S. companies to engage in foreign bribery encourages something in other countries that we consider too harmful to tolerate at home. So to allow bribery overseas is to apply a double moral standard. Moral Issues in Business Chapter 10

Gifts and Entertainment Gifts and entertainment are familiar in business practices and customer relations worldwide. But, they can raise conflict-of-interest problems and can border on bribery. Knowing where to draw the line is not always easy. Moral Issues in Business Chapter 10

Gifts and Entertainment Seven factors that a conscientious businessperson should consider: The value of the gift (or entertainment) Its purpose The circumstances under which it is given The position and sensitivity to influence of the person receiving the gift Accepted business practices in the industry Company policy What the law says Moral Issues in Business Chapter 10

Conflicting Obligations Balancing obligations to employer or organization, friends and coworkers, and outside parties can create conflicts and divided loyalties. To resolve such moral conflicts, we must identify the relevant obligations, ideals, and effects – then decide which area to prioritize. To reduce rationalization in decision making: Be willing to publicly defend our moral choice Discuss with others to avoid bias Moral Issues in Business Chapter 10

“The workers at the Fukushima Daiichi nuclear power plant took an enormous risk by staying in the plant to try to prevent a nuclear meltdown after a devastating earthquake and tsunami hit Japan in March 2011.”

Moral Issues in Business Whistle-Blowing Definition: An employee’s informing the public about the illegal or immoral behavior of an employer or an organization. Moral Issues in Business Chapter 10

Moral Issues in Business Whistle-Blowing One expert’s definition: A practice in which employees inform the public or a governmental agency about certain organization activities that: (a) Cause unnecessary harm (b) Are in violation of human rights (c) Are illegal (d) Run counter to the defined purpose of the institution (e) Are otherwise immoral Moral Issues in Business Chapter 10

Moral Issues in Business Whistle-Blowing What motivates whistle-blowers?: They believe that the public interest morally outweighs their loyalty to colleagues and their duties to the organization. Often, whistle-blowers are motivated by a sense of professional responsibility. Moral Issues in Business Chapter 10

Moral Issues in Business Whistle-Blowing When is it justified? Norman Bowie says it is morally justified if and only if the whistle-blower: Is operating from an appropriate moral motive Has exhausted all internal channels for dissent before going public Has found compelling evidence of wrongdoing Has carefully analyzed the dangers Has some chance of success Moral Issues in Business Chapter 10

Self-Interest and Moral Obligation Concern with self-interest when loyalty and duty conflicts is understandable and even warranted. What weight should self-interest be given in resolving cases of conflicting obligations? Some theorists believe that prudential considerations outweigh moral ones. Others say that nothing can outweigh morality but morality itself does not require us to make large sacrifices to right small wrongs. Moral Issues in Business Chapter 10

Self-Interest and Moral Obligation Two points about the relationship between prudential and moral considerations: Exaggerating the costs to ourselves allows us to rationalize away the damage we are doing to others. We have a collective interest in protecting the welfare of society by encouraging people to act in non-self-interested ways. Moral Issues in Business Chapter 10

Self-Interest and Moral Obligation The Sarbanes-Oxley Act (2002) legally protects those who report possible securities fraud. The act makes it unlawful for companies to “discharge, demote, suspend, threaten, harass, or in any other manner discriminate against” them. Companies need to develop explicit, proactive whistle-blower policies. In the long run, companies benefit from openness and a receptive attitude to moral questioning. Moral Issues in Business Chapter 10