Business Ethics

S e v e n t h E d i t i o n

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Business Ethics

Richard T. De George University of Kansas

Prentice Hall Boston Columbus Indianapolis New York San Francisco Upper Saddle River

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S e v e n t h E d i t i o n

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Library of Congress Cataloging-in-Publication Data De George, Richard T.

Business ethics/Richard T. De George. —7th ed. p. cm.

Includes index. ISBN-13: 978-0-205-73193-0 (alk. paper) ISBN-10: 0-205-73193-7 (alk. paper)

1. Business ethics. 2. Business ethics—Case studies. I. Title. HF5387.D38 2010 174′.4—dc22

2009029462

10 9 8 7 6 5 4 3 2 1

ISBN 10: 0-205-73193-7 ISBN 13: 978-0-205-73193-0

CONTENTS

v

Preface xi

Introduction

Chapter 1 Ethics and Business 1 Horatio Alger and Stock Options 1

The Myth of Amoral Business 3

The Relation of Business and Morality 5

Business Ethics and Ethics 9

The Case of the Collapsed Mine 18 Study Questions 20

Moral Reasoning in Business

Chapter 2 Conventional Morality and Ethical Relativism 21 Purchasing Abroad: A Case Study 21

The Levels of Moral Development 22

Subjective and Objective Morality 24

Descriptive Relativism 26

Normative Ethical Relativism 27

Moral Absolutism 31

Moral Pluralism 32

Pluralism and American Business 33

Pluralism and International Business 33

Pluralism, Business, and the Law 35

Business and Religious Ethics 36

Approaches to Ethical Theory 38 Study Questions 41

Chapter 3 Utility and Utilitarianism 43 An Airplane Manufacturing Case 43

Utilitarianism 43

Act and Rule Utilitarianism 47

Objections to Utilitarianism 50

Utilitarianism and Justice 52

Applying Utilitarianism 53

Utilitarianism and Bribery 56 Study Questions 60

Chapter 4 Moral Duty, Rights, and Justice 61 The Johnson Controls Case 61

Deontological Approaches to Ethics 62

Reason, Duty, and the Moral Law 63

Application of the Moral Law 67

Imperfect Duties, Special Obligations, and Moral Ideals 71

Rights and Justice 73 Study Questions 81

Chapter 5 Virtue Ethics and Moral Reasoning 82 The Case of Dora and Joe 82

Virtue 82

Applying Moral Reasoning 87 Study Questions 97

Chapter 6 Moral Responsibility: Individual and Corporate 98 The Love Canal Case 98

Moral Responsibility 99

Excusing Conditions 100

Liability and Accountability 104

Agent and Role Moral Responsibility 106

The Moral Status of Corporations and Formal Organizations 108 Study Questions 112

Moral Issues in Business

Chapter 7 Justice and Economic Systems 114 The Case of the Two Slaveholders 114

Moral Evaluation of Economic Systems 115

Moral Evaluation of Contemporary Systems 119

Economic Models and Games 120

A Capitalist Model 121

Capitalism and Government 125

A Socialist Model 128

Comparison of Models and Systems 130

Economic Systems and Justice 131 Study Questions 133

vi Contents

Chapter 8 American Capitalism: Moral or Immoral? 134 The Case of Bill Gates and Warren Buffet 134

The American Economic System 136

Relation of the American Government to the American Economic System 138

The Marxist Critique 141

Non-Marxist Moral Critiques of American Capitalism 146

The Moral Defense of the American Free-Enterprise System 148

Nonsocialist Alternatives to Contemporary American Capitalism 152

Philanthropy 156 Study Questions 157

Chapter 9 The International Business System, Globalization, and Multinational Corporations 159 The WTO and Agriculture: A Case Study 159

Justice and the International Economic System 161

The Globalization of Business 164

Multinational Corporations and Ethics 167

Ethical Guidelines for Multinational Operations 173

Multinationals and Human Rights 175

International Codes 176

Cross-cultural Judgments, Negotiation, and International Justice 180 Study Questions 183

Chapter 10 Corporations, Morality, and Corporate Social Responsibility 185 The Case of Malden Mills 185

Privately Owned, Small and Medium-sized Businesses 187

Concept of the Corporation: Shareholder versus Stakeholder 190

Moral Responsibility Within the Corporation 192

Corporate Social Responsibility 198

Corporate Codes 206

Corporate Culture and Moral Firms 208 Study Questions 209

Chapter 11 Corporate Governance, Disclosure, and Executive Compensation 211 The Enron Case 211

Corporate Governance 213

Corporate Disclosure 218

Contents vii

Insider Trading 224

Executive Compensation 233 Study Questions 237

Chapter 12 Finance, Accounting, and Investing 239 The Case of Lehman Brothers 239

Mortgages, Risk, and Financial Institutions 241

Corporate Takeovers and Restructuring 249

Accounting 257

Ethical Investing 261 Study Questions 268

Chapter 13 Safety, Risk, and Environmental Protection 270 The McDonald’s Polystyrene Case 270

Corporations, Products, and Services 271

Do No Harm 272

Safety and Acceptable Risk 273

Product Safety and Corporate Liability 276

Strict Liability 277

Production Safety 279

The Transfer of Dangerous Industries to Less Developed Countries 280

Environmental Harm 287

Pollution and Its Control 289

Global Warming and the Kyoto Protocol 294 Study Questions 296

Chapter 14 Whistle-Blowing 298 The Ford Pinto Case 298

Blowing the Whistle 299

Kinds of Whistle-Blowing 300

Whistle-Blowing as Morally Prohibited 303

Whistle-Blowing as Morally Permitted 306

Whistle-Blowing as Morally Required 310

Internal Whistle-Blowing 312

Precluding the Need for Whistle-Blowing 316 Study Questions 317

Chapter 15 Marketing, Truth, and Advertising 319 Case Study: Direct-to-Consumer Drug Advertising 319

The Nestlé Infant Milk Formula Case 321

Marketing 322

viii Contents

Advertising 332

Truth and Advertising 334

Manipulation and Coercion 338

Paternalism and Advertising 340

Prevention of Advertising 342

Allocation of Moral Responsibility in Advertising 343 Study Questions 346

Chapter 16 Workers’ Rights: Employment, Discrimination, and Affirmative Action 348 The Case of the 2008 Presidential Election: The End

of Affirmative Action? 348

Employment-at-Will 349

Rights in Hiring, Promotion, and Firing 351

Discrimination, Affirmative Action, and Reverse Discrimination 354

Discrimination 356

Changing Social Structures 361

Equal Employment Opportunity 362

Affirmative Action 364

Reverse Discrimination 367

Balanced or Preferential Hiring 368 Study Questions 374

Chapter 17 Workers’ Rights and Duties Within a Firm 376 Case Study: Drug and Polygraph Testing at Company X 376

The Rights of Employees Within a Firm 377

Employee Civil Rights and Equal Treatment 378

The Right to a Just Wage 381

Privacy, Polygraphs, and Drugs 388

Employee Duties 394

Worker Loyalty and Obedience 395

The Right to Organize: Unions 396

The Right to Strike 399 Study Questions 403

Chapter 18 Workers’ Rights and International Business 405 Nike: A Case Study 405

Child Labor 406

Sweatshops 409

Outsourcing and International Business 412

Migrant and Illegal Workers 413

Contents ix

Discrimination, Corrupt Governments, and Multinationals 417

The Right to Work 422 Study Questions 426

Chapter 19 The Information Age: Property and New Technologies 428 Two Intellectual Property Cases 428

Intellectual Property 431

Property: Information and Software 440

Patents and Pharmaceutical Drugs 451 Study Questions 453

Chapter 20 Information, Computers, the Internet, and Business 455 The Electronic Privacy at ABC Control Case 455

Business and Computers 456

Computer Crime 457

Computers and Corporate Responsibility 464

Computers and Privacy 466

The Changing Nature of Work 475 Study Questions 478

Chapter 21 Global Issues and International Obligations 480 The Case of Merck and Costa Rica 480

Global Issues 481

Famine, Malnutrition, and Moral Obligation 482

Cosmopolitanism and Poverty 488

Property and Allocation of the World’s Resources 490

Global Common Goods 497

Oil and the Depletion of Natural Resources 498 Study Questions 505

Conclusion

Chapter 22 The New Moral Imperative for Business 507 The End of an Era: A Case Study 507

The Changing Business Mandate 509

Quality of Work Life 513

The Role of Government 517

Corporate Democracy and the New Entrepreneur 519

Building a Good Society 520 Study Questions 522

Index 524

x Contents

PREFACE

xi

I was completing the seventh edition of this book in the fall of 2008, when suddenly—or so it appeared—the financial crisis that began in September of that year crashed upon the United States. The economy fell precipitously, together with the stock market, which by the spring of 2009 had lost half its value. Icons of the financial industry disappeared, went bankrupt, or were kept afloat by a series of infusions of federal money. General Motors was no longer solvent, the housing bubble burst, and millions of people lost their homes, their jobs, their savings, and their retirement funds. I received a number of emails from friends abroad saying that they had lost faith in capitalism and in business ethics. In their minds, the financial collapse was a joint product of a failed system and the greed that it had engendered.

The events delayed completion of this edition as I waited to see what changes the government would make in the country’s financial institutions, in its approach to the auto and other industries that required bailouts, and with respect to mortgages and housing. But unlike my colleagues abroad to whom I referred, I did not see either capitalism or business ethics as the main culprit, although surely lack of sufficient government regulation and greed on the part of many in the financial industries played a significant role in the financial debacle. It was not capitalism that failed; rather the difficulties were caused by the absence of a proper balance between the free market and appropriate government regulation and control. The free market remains the best indi- cator of consumer wants and needs and the most efficient engine for satisfying those. But the free market is not always self-correcting and requires government control to keep it fair and to reign in its most rapacious tendencies. Business ethics likewise did not fail, but was and is all the more needed before, during, and after the time of crisis. If a mass murderer goes on a rampage, we do not say that the ethical injunction against murder is a failure to be done away with, nor do we think the laws outlawing murder should be repealed. The same kind of argument holds with respect to ethics in business. To the extent that self-serving greed at the expense of others was among the causes of the financial meltdown, it shows that not enough companies practiced the self-restraint required if the system is to work for everyone’s benefit, that not enough moral pressure was put on boards of directors and top managers, and that too many lost their moral compass or their compass is in need of recalibration. If anything, the events of 2008–2009 show the need for more emphasis on both ethics and regulation, rather than less of either.

Nor were the recent events unique in our lifetime. In the many years since the first edition of this book appeared, courses in business ethics have become firmly established in colleges, business schools, and MBA programs. Such courses took root in the post-Watergate era and were nurtured by successive exposés involving executive fraud; bribes and kickbacks; illegal political contributions; airplane disasters; and the sale of defective tires, automobiles, and other products. Consumerism, the cry for increased governmental control, and a changing attitude of large numbers of people toward business and its social responsibility have made questions of business ethics topics of general and current concern. Business ethics is no longer considered a contra- diction in terms, and most large corporations have taken measures to incorporate at least some of the trappings of ethics into their structures.

This book is an attempt to cover the field in a systematic and reasonably comprehensive way. It deals first with the techniques of moral reasoning and argumentation that are needed to analyze moral issues in business. It then raises basic questions about the morality of economic systems, especially that of the United States. It next discusses a variety of current and pressing

moral issues in business from corporate governance to workers’ rights to legitimate computer use. Because business has changed, this edition attempts to mirror the ethical issues raised by those changes, foremost of which are ethical questions that stem from information technology and the globalization of business. Although in earlier editions the questions of international business ethics came after a discussion of business ethics in a given society, the two are integrated in this edition because business is now global.

This is not simply a book in general ethics that takes its examples from the business world. Ethics as a discipline has a long and venerable history. But students do not need to know that history, nor do they need to know the large number of disputed questions with which that discipline abounds, in order to engage in moral thinking. Moral issues are pressing, and people must grapple with them using the best tools available at the time. I try, therefore, to introduce the student to as much of the technical aspect of ethics as is necessary in order to approach moral issues intelli- gently and to take part in the ongoing debate about the morality of certain social and business practices. The aim of my initial chapters is a practical one, and to achieve this end I necessarily ignore or pass over lightly some of the theoretical issues on which much of contemporary professional ethical thought is focused. Students, I assume, come to classes in business ethics with a good deal of moral background. They are not nonmoral beings who must be made moral but rather moral beings who can be helped to think through moral issues and to argue cogently and effectively for their moral views. The present edition, as did past editions, highlights how to apply the standard ethical approaches in analyzing issues, problems, and cases.

The traditional approach to ethics is an individualistic one. Our notions of morality, moral worth, and moral praise and blame have grown up primarily from consideration of the human person as a moral agent. We know what it means to call a person moral or his actions morally praiseworthy. The present edition adds the dimension of virtue, character, and caring to the discussion, three concepts that have taken on increasing importance in recent years. Yet economic systems do not act in a way comparable to the way human individuals act; and corporations and nations act only figuratively and through the agency of human intermediaries. Moral language must be used with care and caution when applied outside of the realm of human individuals and their actions. Special problems arise when considering the morality of corporations, nations, and people—problems that concern the meaning of moral terms, and problems that must be faced and clarified if we are to be clear about our moral judgments in these areas. I assume that there is little need to argue that murder is wrong, that stealing and lying are in general wrong, or that discrimination on the basis of sex, race, or creed is immoral in business as in other areas of life. There is no need therefore for a course in business ethics to arrive at or justify those conclu- sions. But many of the questions of business ethics that involve corporate governance, reverse discrimination, truth in advertising, whistle-blowing, and disclosure, among others, are not clear- cut. They require careful analysis and a weighing of appropriate facts and applicable principles in order to arrive at justifiable answers. Our society is clearer on some of these issues than on others. I have tried to present the complexities of each problem and to weigh the opposing views on an issue. When I have taken sides, I have given my reasons for doing so; if an argument is inconclu- sive, I have indicated where and why. On broad social issues no argument will be the final one, and my hope is that students using this text will, by reading it, be encouraged and emboldened to help continue and advance the public debate on these issues.

I do not think it is sufficient simply to identify moral problems in business, to determine what actions are right and wrong, and to demand that people be moral heroes in doing what is required of them. If practices are immoral and if people are faced with the obligation of sacrificing their jobs and their security to fulfill their moral obligations, then those practices

xii Preface

should be changed. I therefore attempt not only to discuss what is morally required of a person in a firm—a worker, a manager, a member of the board of directors—but also what structures are conducive to a person’s accepting moral responsibility and fulfilling his or her moral obligations. How firms can be reorganized so as to preclude the necessity for whistle-blowing is as pressing (if not more pressing) a question as asking when a person is morally obliged to blow the whistle.

Business is a social activity and, like all social activity, could not function unless certain moral prerequisites were fulfilled. Recent experience in some of the states of the former Soviet Union has demonstrated this clearly. An analysis of needed prerequisites and of the social and business structures conducive to morality form, I believe, an important and frequently neglected aspect of business ethics. At each stage of investigation, therefore, I raise and attempt to answer not only the question of whether a particular practice is moral or immoral but also the question of what alternative can and should be pursued with respect to immoral practices. The morality of individuals should not be separated from the morality of business procedures and institutions, and in what follows I handle them together to the extent possible.

I start each chapter with a case or two that raises an issue pertinent to the contents of that particular chapter. I have also incorporated in a number of chapters actual and fictitious case studies to illustrate specific principles, to exemplify ways of analyzing moral problems, and to contrast varying approaches to an issue. For those who wish additional cases, the daily newspaper carries ample materials for analysis and current, specific, timely examples of moral issues in business.

Although I have written this book so that it develops a total view through successive chapters, each chapter can be studied apart from the others. Those who wish to omit the analysis of some issues and concentrate on a selected few can do so without a loss of intelligibility. Those wishing to read further on a topic will find suggestions in the footnotes and references to material on both sides of controversial questions.

Each chapter is followed by study questions that highlight the contents of the chapter and can be taken as a guide to the chapter. The questions also contain one or two cases or brief issues not explicitly covered in the chapter, which may be used for discussion, reflection, or written paper assignments. Each successive edition of this book has attempted to take into account the significant research that has appeared in the intervening years as well as the pertinent developments in business and society. The present edition of this book continues to do so. In addition to cases and footnotes, all the chapters have been updated, many have been significantly revised, and both new chapters and new cases have been added. The chapter order has been slightly changed. I have redone the chapter on finance and accounting in the light of the financial situation up through the spring of 2009. The chapters on the Information Age and on computers and the Internet have been updated. The chapters on international business have all been integrated into other chapters in the light of globalization. Despite these changes, the book’s aim, approach, and theme remain the same. American business and business throughout the world can be made more moral. This book is an attempt to help its readers think about how this goal might be accomplished.

Because so much information is now available on the Internet, I have added many references to material found there. Although such references make going to the sources cited much easier for most users of the book, Web sites are notorious for disappearing and for dropping items that are no longer current. I have tried to use sources that were likely to continue to exist for a number of years to come, and all the references were current at the time of publication.

R. T. De George

Preface xiii

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1

HORATIO ALGER AND STOCK OPTIONS

In the last decades of the nineteenth century, the novels by Horatio Alger caught the imagination of young Americans. The stories presented a “rags to riches” plot, involving the energetic and dedicated work of the hero. The novels gave flesh to the widespread belief that America was the land of opportunity in which those who worked hard could make it big. Hard work and a little luck were all that was required.

The belief continued through the twentieth century in one form or another, despite the Great Depression and other evidences to the contrary. Oddly, alongside that belief was another contradictory one that anyone who was or became rich must have become so by unethical activity and behavior. The first belief received a perhaps unexpected impetus a hundred years after Horatio Alger in the newly developing high-tech industry. Microsoft is the best-known example. After its inception, it soon became known for hiring only the brightest and most dedicated workers. It attracted them not by offering them generous wages. On the contrary, their pay was in many respects noncompetitive, and they were expected to work extremely hard and long hours. But they were given stock options—a perk usually reserved only for the top executives of companies. The stock options allowed them to buy the company’s stock at a set price in the future, even if the stock had grown in value far beyond that price. And in its early years Microsoft grew at an incredibly fast rate. The result was a company with millionaire work- ers. At one point in the 1990s, it was estimated that one out of every ten Microsoft employees was a millionaire. Horatio Alger’s dream had been realized. The Microsoft story is only one out of many. Most of the well-known high-tech firms adopted a similar strategy. The innovative owners became billionaires. The workers who helped start the company and worked for it in its early years became millionaires.

Stock options as a part of worker compensation had multiple benefits. Not only did it mean potentially huge gains for employees, but it also cut down on the expenses of the company. It allowed Microsoft (and other companies) to pay lower wages, and it did not have to count the options as part of its expenses. On the downside, giving away millions of options diluted the stock and hence the worth of the shares held by shareholders. But the stock appreciated so rapidly that shareholders did not seem to mind, and did not complain. If the technique helped the company grow and its shares increase in value, so much the better.

C H A P T E R 1

Ethics and Business

2 Introduction

Beginning in 2000, however, the high-tech bubble burst, and the stock market, especially the stock of high-tech companies, plummeted. Options were no longer attractive, since the falling market made the exercise or strike price higher than the market price for shares. At companies like Microsoft, there began to be two levels of workers—those who had enjoyed the gravy train of growth and those hired later who did not. Some felt this was not fair to the latecomers. More generally, there were also two questions raised about the fairness of options. Since options were not counted as an expense, the financial reports of the company did not reflect its actual financial condition to potential investors. Second, even if the shareholders did not complain, the value of their stock was nonetheless diluted when the options were exercised. As of June 30, 2002, Microsoft had 1.6 billion options outstanding.1

In 2003, Mircosoft made headlines in many newspapers by announcing that it was discontinuing its employee stock option program, that it would start expensing any options it gave, and that it would introduce for its workers a stock plan, under which they would receive shares of restricted stock rather than options.2 If the value of the stock decreased, the employees would still have the value of the stock at any given time. In the case of options, in the event of a decline below the strike price, the workers had nothing. In an up-market, the workers would not gain as much as they might with stock options, but they would enjoy the increase enjoyed by all shareholders. The interests of the workers were therefore more closely linked with the interests of the shareholders. In good times both profited. In bad times both lost. But they did so together.

The decision was seen as being more equitable for workers and as better accounting, eliminating the questionable practice of not expensing options in the annual report and noting them only in a footnote. Some companies that used stock options for employees followed Microsoft’s lead.

Not all companies followed Microsoft’s lead. Some companies, once an employee’s stock options were “under water” or the strike price was below the market price and so worthless, repriced the old options with a new exercise price. The argument they presented was that unless they did so, they would lose their experienced employees. However, the options were originally intended as an incentive to work hard to raise the price of the stock. While it is true that if the options are no longer worth anything, the incentive is gone, repricing does not really provide a new incentive. Rather, repricing tells employees that if the stock continues to decline, the strike price will once again be lowered. And of course, stock options were not given only to employees. Most companies gave large blocs of options to their top executives. The policy of stock options thus raised three issues: One was the accounting issue; the second was the fairness to stockholders, since when options are exercised, they dilute the value of the outstand- ing shares; and the third was the undermining of a supposed incentive. This was especially seen as inappropriate with respect to stock options for senior executives who presided over the declining value of the stock.

In the spring of 2003, the International Accounting Standards Board started requiring that options be reported as an expense against earnings. The U.S. Financial Accounting Standards Board proposed a similar rule, instead of allowing options simply to be mentioned in a footnote in financial reports.3