Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

7 - 2 WorldCom Opening Case  Bernard Ebbers built WorldCom into a global telecommunications giant.  Ebbers used use all of his WorldCom stock as collateral for bank loans.  In 2000 Ebbers gave the first in a string of instructions to report false revenues and use accounting tricks to disguise rising expenses.  Ebbers testified that he had no knowledge of the fraud, but five of his subordinates testified against him.  Ebbers was sentenced to 25 years in prison for securities fraud, unprecedented for a white-collar crime.  Some question whether his sentence was fair. Ebbers is seen now as unethical, a criminal, and deficient as a leader.

7 - 3 What are Business Ethics?  Business ethics is the study of good and evil, right and wrong, and just and unjust actions in business.  Although all managers face difficult ethical conflicts, applying clear guidelines resolves the vast majority of them.  Ethical traditions that apply to business support truth telling, honesty, protection of life, respect for rights, fairness, and obedience to law.  Eliminating unethical behavior may be difficult, but knowing the rightness or wrongness of actions is usually easy.  Some ethical decisions are troublesome because although basic ethical standards apply, conflicts between them defy resolution.  Some ethical issues are hidden and hard to recognize.  Some ethical issues are very subtle.

7 - 4 Two Theories of Business Ethics  The theory of amorality is that business should be conducted without reference to the full range of ethical standards, restraints, and ideals in society.  The apex of this view came during the latter half of the nineteenth century.  The theory of amorality has far less public acceptance today, but it lives on quietly.

7 - 5 Two Theories of Business Ethics (continued)  The theory of moral unity is that business actions are judged by the general ethical standards in society, not by a special set of more permissive standards.  Actions are not moral just because they make money.  Ethical conflicts cannot be avoided simply because they arise in the course of business.

7 - 6 Major Sources of Ethical Values in Business

7 - 7 Religion  The great religions converge in the belief that a divine will reveals the nature of right and wrong behavior in all areas of life, including business.  Christian managers often seek guidance in the Bible.  In Islam the Koran is a source of ethical inspiration.  In the Jewish tradition, managers can turn to rabbinic moral commentary in the Talmud and the books of Moses in the Torah.

7 - 8 Philosophy  Even after two millennia, there remains considerable dispute among ethical thinkers about the nature of right action.  Greek ethics  Socrates asserted that virtue and ethical behavior were associated with wisdom and taught that insight into life would naturally lead to right conduct.  Plato carried this doctrine of virtue as knowledge further by elaborating the theory that absolute justice exists independently of individuals and that its nature can be discovered by intellectual effort.

7 - 9 Philosophy (continued)  Aristotle spelled out virtues of character in the Nicomachean Ethics and advocated a regimen of continuous learning to improve ethical behavior.  Epictetus taught that virtue was found solely within and should be valued for its own sake, arguing that this inner virtue was a higher reward than external riches or worldly success.  The great Catholic theologians St. Augustine and St. Thomas Aquinas both believed that humanity should follow God’s will; correct behavior in business and in all worldly activity was necessary to achieve salvation and life after death.

Philosophy (continued)  Secular philosophers such as Baruch Spinoza tried to demonstrate ethical principles with logical analysis rather than ordain them by reference to God’s will.  Immanuel Kant tried to find universal and objective ethical rules in logic.  Jeremy Bentham developed the idea of utilitarianism as a guide to ethics, validating two dominant ideologies: democracy and industrialism.  John Locke developed and refined doctrines of human rights and left an ethical legacy supporting belief in the inalienable rights of human beings.

The Realist School of Ethics  The realists believed that both good and evil were naturally present in human nature; human behavior would inevitably reflect this mixture.  Niccolò Machiavelli argued that important ends justified expedient means.  Herbert Spencer supported a harsh ethic that justified vicious competition among companies because it furthered evolution.  Friedrich Nietzsche said that “nice” ethics were prescriptions of the timid, designed to fetter the actions of great men whose irresistible power and will were regarded as dangerous by ordinary mortals.

Cultural Experience  Every culture transmits between generations a set of traditional values, rules, and standards that define acceptable behavior.  Civilization is a cumulative cultural experience consisting of three stages:  Hunting and gathering stage  Agricultural stage  Industrial stage

Ethical Variation in Cultures  Ethical values differ among nations as historical experiences have interacted with philosophies and religions to create diverging cultural values and laws.  The school of ethical universalism holds that in terms of biological and psychological needs, human nature is everywhere the same.  The school of ethical relativism holds that although human biology is everywhere similar, cultural experience creates widely diverging values, including ethical values.  Because of globalization, corporations struggle with the question of how to apply conduct codes across cultures.

Law  Laws codify, or formalize, ethical expectations.  Corporations and their managers face a range of mechanisms set up to:  Deter illegal acts  Punish offenses  Rehabilitate offenders

Damages  In civil cases courts may assess damages, or payments for harm done to others by a corporation.  Compensatory damages are payments awarded to redress concrete losses suffered by injured parties.  Punitive damages are payments in excess of a wronged party’s actual losses, awarded to deter similar actions and punish a corporation.  Since the purpose of punitive damages is to punish and deter misconduct, they must be large enough to cause pain, yet they raise many questions about fairness.

Criminal Prosecution of Managers and Corporations  Managers may be prosecuted for criminal actions undertaken in the course of their employment.  Corporations are criminally liable for corrupt actions or omissions of managers if those actions are intended to benefit the corporation.  Criminal prosecution of corporations and their executives is exceptionally difficult.

Factors That Influence Managerial Ethics

How Corporations Manage Ethics  Establish standards and procedures.  Create high-level oversight.  Screen out criminals.  Communicate standards to employees.  Monitor and set up an anonymous hotline.  Enforce standards, discipline violators.  Assess areas of risk, modify the program.