WORLDCOM, ENRON AND OTHERS… Ethics and Business Decision Making

Ethics can be defined as…. The study of what constitutes right or wrong behavior. Business ethics focuses on what constitutes right or wrong behavior in the business world and on how moral and ethical principles are applied by business persons to situations that arise in their daily activities in the workplace.

Why is it important? An in depth understanding of business ethics is important to the long run viability of a corporation. Also important to the well being of the individual officers of the corporation, as well as to the welfare of the firm’s employees. Officers/partners in the corporations owe a fiduciary duty (a duty of trust and loyalty ) to each other and to the firm.

Setting the right ethical tone Many unethical decisions are made simply because they can be. In other words, the decision makers not only have the opportunity to make such decisions but also are not too concerned about being seriously sanctioned for their unethical actions.

The importance of ethical leadership Attitude of top management-managers who are not totally committed to maintaining an ethical workplace will rarely succeed in creating one.  Surveys of executives indicate that management’s behavior, more than anything else, sets the ethical tone of a firm. If managers act unethically, employees will do the same.

The importance of ethical leadership Looking the other way-a manager who looks the other way when she or he knows about an employees unethical behavior also sets an example-one indicating that unethical behavior will be tolerated.

The importance of ethical leadership Periodic evaluation-some companies require their managers to meet individually with employees and to grade them on their ethical behavior. This serves two purposes, it demonstrates to employees that ethical matters and it gives the employees an opportunity to see how the measured up.

Creating an ethical code of conduct Provide ethics training to employees Johnson and Johnson uses web based ethics training Hershey Corp. was the first corporation in U.S. to require ethics training. Corporate compliance programs  Sarbanes-Oxley Act of 2002 requires that companies set up confidential systems so that employees may raise red flags about suspected illegal or unethical auditing and accounting practices.

Conflicts and Trade-offs Management constantly faces ethical trade-offs, some of which may lead to legal problems.  Downsizing-reduce costs but it will harm employees who are laid off or fired  Who goes first? Management decides…..

Companies the defy the rules See page 105 for Enron case study, in a nutshell…. Enron was the first company to benefit from the deregulation of electricity market. By 1998, Enron was the largest energy trader in the market. Enron diversified into water, power plants, and high speed internet and fiber optics. Because Enron's managers received bonuses based on whether they met earnings goals, they had an incentive to inflate the anticipated earnings on energy contracts, which they did. Enron included anticipated earning in its current earnings report. Then, to artificially maintain its reported earnings, Enron created a complex network of subsidiaries that enabled it to move losses to its subsidiaries and hide its debts. The overall effect of these actions was to increase Enron's apparent net worth. These transactions were frequently carried out in the Cayman Islands to avoid paying federal income taxes. Enron's CEO started a pattern of self dealing by doing business with companies owned by his children. Enron's management was informed about these incidents of misconduct on numerous occasions, yet the company concealed the issues for years until they were bankrupt.

Companies the defy the rules Merck and Company  Maker of VIOXX, received approval from U.S. Food and Drug Admin. in 1999 to market Vioxx for the treatment of acute pain in adults, had fewer side effects than traditional pain meds, relief for arthritis, etc…  Trouble began to appear, patients who took it for eight months or longer had up to 4 times as many heart attacks and strokes as patients using a different pain med. At its peak, 20,000,000 people used Vioxx.

Merck pulled the drug from the market in Sept. 2004, after published reports showed that a cardiologist proposed to show a study in 2001 proving a link between Vioxx and heart failure. Merck declined to see the study. Thousands (139,000+) of reported heart attacks, many ending in death. Merck lost its first Vioxx lawsuit, in which the jury awarded $253 million to Carol Ernst, widow of Robert Ernst. Award was later reduced to $25 million due to Texas’s cap on punitive damages.

Business Ethics and Law Legal compliance is considered a moral minimum behavior.  Laws regulate behavior  Gray areas in the law-legality of some decisions are unclear.  Pregnant, suddenly job is being eliminated?

Ethical Reasoning Each person, when faced with a particular ethical dilemma, engages in ethical reasoning, a process in which the individual examines the situation at hand in light of their own moral standards.  Duty based-religious ethical standards such as the Ten Commandments,  Kantian ethics-based upon philosophical reasoning, fundamental nature of human beings  Principle of Rights-how any decision affects other individuals rights

Outcome based ethics-utilitarianism Based on the premise of “The greatest good for the greatest number”  Uses cost-benefit analysis which is looking at the negative and positive effects of any decision

Globally Various cultures and religions throughout the world create conflicts in ethics frequently between foreign and U.S. businesspersons.  Ie: Inviting a business contact out for a drink, role of women in other countries,  U.S. has laws protecting against sexual harassment, and laws prohibiting bribery, etc…some countries do not have these protections.  Research the country you are planning to do business with…..

Protections for global business… Foreign Corrupt Practices Act-passed in 1977 prohibits U.S. businesspersons from bribing foreign officials to secure beneficial contracts, has accounting requirements, and has penalties for violations. Prior to that, press and government officials uncovered a number of business scandals which led to the law being passed.

Other nations Are passing laws, in 1997 the Organization for economic Cooperation and Development created a treaty that made bribery a serious crime. By 2004, at least 35 countries had adopted the treaty. Ethics Resource Center-non-profit organization devoted to promoting ethics since 1922.