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College of Administrative and Financial Sciences
Assignment 1
Deadline: 06/03/2021 @ 23:59
Course Name: Business Ethics and
Organizational Social Responsibility
Student’s Name:
Course Code: MGT 422
Student’s ID Number:
Semester: II
CRN: 21955
Academic Year: 1440/1441 H
For Instructor’s Use only
Instructor’s Name: Dr. Swapnali Baruah
Students’ Grade: /5
Level of Marks: High/Middle/Low
ï‚· The Assignment must be submitted on Blackboard (WORD format only) via
allocated folder.
ï‚· Assignments submitted through email will not be accepted.
ï‚· Students are advised to make their work clear and well presented, marks may be
reduced for poor presentation. This includes filling your information on the cover
ï‚· Students must mention question number clearly in their answer.
ï‚· Late submission will NOT be accepted.
ï‚· Avoid plagiarism, the work should be in your own words, copying from students or
other resources without proper referencing will result in ZERO marks. No exceptions.
ï‚· All answered must be typed using Times New Roman (size 12, double-spaced) font.
No pictures containing text will be accepted and will be considered plagiarism).
ï‚· Submissions without this cover page will NOT be accepted.
Course Learning Outcomes
CLO 1 Demonstrate a solid understanding of prominent theories of ethics and morality.
CLO 6 The capacity to write coherent project about a case study or an actual research about ethics.
Read the following case and answer the questions
As a counselor in an outplacement firm, you’ve been working with Irwin for six
months to find him a new position. During that time, he has completed extensive
assessment work, to determine if he’s in an appropriate profession or if he might
benefit from a career change. The results of the assessment indicate that Irwin has
low self-esteem, probably could benefit from psychotherapy, and is most likely illsuited for his current profession. Irwin has been actively interviewing for a position
that’s very similar to two others he has held and lost. He desperately wants and needs
this job. The company where he is interviewing happens to be one of your most
important clients. You receive a call from the head of human resources at the
company, who tells you that Irwin suggested she call you for information about his
abilities, interests, and personality style as measured by the assessment process. She
also asks you for a reference for Irwin. Since he has, in effect asked that you share
information with this woman.
Assignment Question(s):
(5 Marks)
1. Identify and explain the ethical dilemma in this case? What are your obligations to Irwin, who is
your client in this case? (2 Marks, minimum requirement: 400 words)
2. The HR asks you to share information with her, is it okay for you to give her an honest
assessment of Irwin? (2 Marks, minimum requirement: 400 words)
3. Is there a way for you to be honest, yet not hurt Irwin’s chances to obtain this job? Or is that
important? What will you do? (1 Mark, minimum requirement: 200 words)
Page 4
Page 1
Straight Talk About How To Do It Right
Fifth Edition
Distinguished Professor of Organizational Behavior and Ethics
Smeal College of Business
The Pennsylvania State University
Fox School of Business
Temple University
Page 2
George Hoffman
Lise Johnson
Sarah Vernon
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Library of Congress Cataloging-in-Publication Data
Treviño, Linda Klebe.
Managing business ethics : straight talk about how to do it right / Linda Klebe Treviño, Katherine
A. Nelson. – 5th ed.
p. cm.
Includes index.
ISBN 978-0-470-34394-4 (pbk.)
1. Business ethics. 2. Business ethics–Case studies. I. Nelson, Katherine A. II. Title.
HF5387.T734 2010
1740 .4–dc22
Printed in the United States of America
10 9 8 7 6 5 4 3 2 1
Page 3
Page 4
Page 5
Introduction 2
The Financial Disaster of 2008 4
Borrowing Was Cheap 4
Real Estate Became the Investment of Choice 5
Mortgage Originators Peddled ‘‘Liar Loans’’ 5
Banks Securitized the Poison and Spread It Around 6
Those Who Were Supposed to Protect Us Didn’t 7
Moving Beyond Cynicism 9
Can Business Ethics Be Taught 13
Aren’t Bad Apples the Cause of Ethical Problems in Organizations? 13
Shouldn’t Employees Already Know the Difference between Right and Wrong?
Aren’t Adults’ Ethics Fully Formed and Unchangeable? 16
This Book is about Managing Ethics in Business 19
Ethics and the Law 20
Why Be Ethical? Why Bother? Who Cares? 21
Individuals Care about Ethics: The Motivation to be Ethical 21
Employees Care about Ethics Employee Attraction and Commitment 23
Managers Care about Ethics 23
Executive Leaders Care about Ethics 24
Industries Care about Ethics 26
Society Cares about Ethics: Business and Social Responsibility 27
The Importance of Trust 27
The Importance of Values 29
How the Book is Structured 30
Conclusion 32
Discussion Questions 32
Page 6
Exercise: Your Cynicism Quotient
Notes 34
Introduction 38
Ethical Dilemmas 38
Prescriptive Approaches to Ethical Decision Making in Business 39
Focus on Consequences (Consequentialist Theories) 40
Focus on Duties, Obligations, and Principles (Deontological Theories)
Focus on Integrity (Virtue Ethics) 46
Eight Steps to Sound Ethical Decision Making in Business 52
Step One: Gather the Facts 52
Step Two: Define the Ethical Issues 52
Step Three: Identify the Affected Parties (the Stakeholders) 53
Step Four: Identify the Consequences 54
Step Five: Identify the Obligations 56
Step Six: Consider Your Character and Integrity 56
Step Seven: Think Creatively about Potential Actions 57
Step Eight: Check Your Gut 58
Practical Preventive Medicine 58
Doing Your Homework 58
When You’re Asked to Make a Snap Decision 59
Conclusion 61
Discussion Questions 62
Exercise: Clarifying Your Values 63
Case: Pinto Fires 64
Notes 69
Introduction 71
Ethical Awareness and Ethical Judgment 71
Individual Differences, Ethical Judgment, and Ethical Behavior
Ethical Decision-Making Style 76
Cognitive Moral Development 77
Locus of Control 84
Machiavellianism 85
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Moral Disengagement 86
Facilitators of and Barriers to Good Ethical Judgment 88
Thinking about Fact Gathering 88
Thinking about Consequences 89
Thinking about Integrity 91
Thinking about Your Gut 93
Unconscious Biases 94
Emotions in Ethical Decision Making 95
Toward Ethical Action 97
Revisiting the Pinto Fires Case: Script Processing and Cost-Benefit Analysis
Cost-Benefit Analysis 103
Conclusion 105
Exercise: Understanding Cognitive Moral Development 105
Discussion Questions 106
Notes 107
Introduction 111
Identifying Your Values—and Voicing Them 112
People Issues 114
Discrimination 115
Harassment, Sexual and Otherwise 119
Conflicts of Interest 122
What Is It? 123
How We Can Think about This Issue 125
Why Is It an Ethical Problem? 126
Costs 126
Customer Confidence Issues 127
What Is It? 127
How We Can Think about This Issue 131
Why Is It an Ethical Problem? 131
Costs 131
Use of Corporate Resources 132
What Is It? 132
How We Can Think about This Issue 136
Why Is It an Ethical Problem? 136
Costs 136
When All Else Fails: Blowing the Whistle 137
When Do You Blow the Whistle? 139
How to Blow the Whistle 140
Conclusion 145
Discussion Questions 145
Notes 147
Page 8
Introduction 150
Organizational Ethics as Culture 151
What Is Culture? 151
Strong versus Weak Cultures 151
How Culture Influences Behavior: Socialization and Internalization 152
Ethical Culture: A Multisystem Framework 153
Alignment of Ethical Culture Systems 154
Ethical Leadership 156
Executive Leaders Create Culture 156
Leaders Maintain or Change Organizational Culture 157
Other Formal Cultural Systems 166
Selection Systems 166
Values and Mission Statements 168
Policies and Codes 169
Orientation and Training Programs 171
Performance Management Systems 172
Organizational Authority Structure 175
Decision-Making Processes 178
Informal Cultural Systems 180
Role Models and Heroes 180
Norms: ‘‘The Way We Do Things around Here’’ 182
Rituals 182
Myths and Stories 183
Language 185
Organizational Climates: Fairness, Benevolence, Self-Interest, Principles 187
Developing and Changing the Ethical Culture 188
How an Ethical Culture Can Become an Unethical Culture 189
Becoming a More Ethical Culture 190
A Cultural Approach to Changing Organizational Ethics 192
Audit of the Ethical Culture 193
A Cultural Systems View 193
A Long-Term View 194
Assumptions about People 194
Diagnosis: The Ethical Culture Audit 194
Ethical Culture Change Intervention 196
The Ethics of Managing Organizational Ethics 198
Conclusion 198
Discussion Questions 198
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Case: Culture Change at Texaco 199
Case: An Unethical Culture in Need of Change: Tap Pharmaceuticals
Notes 203
Introduction 207
Structuring Ethics Management 208
Making Ethics Comprehensive and Holistic 210
Managing Ethics: The Corporate Ethics Office 211
Ethics and Compliance Officers 212
The Ethics Infrastructure 214
The Corporate Ethics Committee 215
Communicating Ethics 215
Basic Communications Principles 216
Evaluating the Current State of Ethics Communications 219
Multiple Communication Channels for Formal Ethics Communication 220
Interactive Approaches to Ethics Communication at USAA 222
Mission or Values Statements 224
Organizational Policy 226
Codes of Conduct 227
Communicating Senior Management Commitment to Ethics 227
Formal and Informal Systems to Resolve Questions and Report Ethical Concerns
Using the Reward System to Reinforce the Ethics Message 238
Evaluating the Ethics Program 239
Surveys 240
Values or Compliance Approaches 242
Globalizing An Ethics Program 243
Conclusion 245
Discussion Questions 245
Case: Improving an Ethical Culture at Georgia-Pacific 247
Appendix: How Fines Are Determined under the U.S. Sentencing Guidelines 252
Notes 253
Introduction 255
In Business, Ethics Is about Behavior 255
Practical Advice for Managers: Ethical Behavior 256
Our Multiple Ethical Selves 256
The Kenneth Lay Example 257
The Dennis Levine Example 259
Practical Advice for Managers: Multiple Ethical Selves 259
Rewards and Discipline 260
People Do What’s Rewarded and Avoid Doing What’s Punished 260
People Will Go the Extra Mile to Achieve Goals Set by Managers 261
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How Goals Combined with Rewards Can Encourage Unethical Behavior
Practical Advice for Managers: Goals, Rewards and Discipline 263
Recognize the Power of Indirect Rewards and Punishments 264
Can Managers Really Reward Ethical Behavior? 266
What about the Role of Discipline? 267
Practical Advice for Managers: Discipline 269
‘‘Everyone’s Doing It’’ 270
People Follow Group Norms 270
Rationalizing Unethical Behavior 270
Pressure to Go Along 271
Practical Advice for Managers: Group Norms 271
People Fulfill Assigned Roles 272
The Zimbardo Prison Experiment 273
Roles at Work 274
Conflicting Roles Can Lead to Unethical Behavior 275
Roles Can Also Support Ethical Behavior 275
Practical Advice for Managers: Roles 276
People Do What They’re Told 276
The Milgram Experiments 277
Obedience to Authority at Work 279
Practical Advice for Managers: Obedience to Authority 279
Responsibility Is Diffused in Organizations 279
‘‘Don’t Worry—We’re Taking Care of Everything’’ 280
Diffusing Responsibility in Groups 280
Diffusing Responsibility by Dividing Responsibility 281
Diffusing Responsibility by Creating Psychological Distance 282
Practical Advice for Managers: Personal Responsibility 283
Conclusion 284
Discussion Questions 285
Case: Sears, Roebuck, and Co.: The Auto Center Scandal 285
Notes 289
Introduction 292
Managers and Employee Engagement 292
Managing the ‘‘Basics’’ 295
Hiring and Work Assignments 295
Performance Evaluation 296
Discipline 299
Terminations 301
Why Are These Ethical Problems? 303
Costs 303
Managing a Diverse Workforce 304
Diversity 305
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Harassment 306
Family and Personal Issues 307
Why Are These Ethical Problems? 309
Costs 309
The Manager as a Lens 310
The Buck Stops with Managers 310
Managers Are Role Models 313
Managing Up and Across 314
Honesty Is Rule One 315
Standards Go Both Ways 315
Conclusion 316
Discussion Questions 317
Notes 318
Introduction 322
Why Corporate Social Responsibility? 322
Types of Corporate Social Responsibility 329
Economic Responsibilities 329
Legal Responsibilities 330
Ethical Responsibilities 330
Philanthropic Responsibilities 331
Triple Bottom Line and Environmental Sustainability 334
Is Socially Responsible Business Good Business? 337
The Benefit of a Good Reputation 338
Socially Responsible Investors Reward Social Responsibility 338
The Cost of Illegal Conduct 339
The Cost of Government Regulation 340
What the Research Says about Social Responsibility and Firm Performance
Being Socially Responsible Because It’s the Right Thing to Do 346
Conclusion 348
Discussion Questions 348
Case: Merck and River Blindness 349
Notes 351
Introduction 354
Managing Stakeholders
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Ethics and Consumers 356
Conflicts of Interest 357
Product Safety 365
Advertising 369
Ethics and Employees 373
Employee Safety 374
Employee Downsizings 378
Ethics and Shareholders 381
Ethics and the Community 386
Why Are These Ethical Issues 388
Costs 388
Conclusion 389
Discussion Questions 389
Notes 394
Introduction 399
Focus on the Individual Expatriate Manager 400
The Difficulties of Foreign Business Assignments 400
The Need for Structure, Training, and Guidance 400
Foreign Language Proficiency 401
Learning about the Culture 401
Recognizing the Power of Selective Perception 403
Assumption of Behavioral Consistency 404
Assumption of Cultural Homogeneity 404
Assumption of Similarity 405
Ethics-Related Training and Guidance 405
How Different Are Ethical Standards in Different Cultures—Really? 411
Development of Corporate Guidelines and Policies for Global Business Ethics
The Organization in a Global Business Environment 417
Deciding to Do Business in a Foreign Country 417
Development of a Transcultural Corporate Ethic 425
Conclusion 429
Discussion Questions 429
Case: Selling Medical Ultrasound Technology in Asia 431
Case: Google Goes to China 434
Appendix: Caux Round Table Principles for Business 440
Notes 444
Page 13
The popular business press is replete with feature stories describing ethical meltdowns and how those corporate misdeeds have eroded the public trust of business
leaders and their organizations. As most of us learned at our parents’ knees, trust and
reputation are built over many years and take but an instant to be destroyed. So here
we stand at a crossroads. Is it going to be business as usual for business? Or are businesspeople going to commit to regaining the trust of our peers, our families, and our
fellow citizens?
In response to this crisis of trust, universities across the country are scrambling
to design new courses that incorporate leadership, communication skills, the basics of
human resources management, and ethics. That’s why we wrote this book; we want
to make the study of ethics relevant to real-life work situations. We want to help
businesspeople regain the trust that’s been squandered in the last few years.
This book is different from other business ethics texts in several key ways: First,
it was written by an unusual team. Linda Trevi~no is Distinguished Professor of Organizational Behavior and Ethics in the Management and Organization Department of
the Smeal College of Business at the Pennsylvania State University. Her prolific research on the management of ethical conduct in organizations is published in the
field’s best journals and is internationally known and referenced. She has more than
20 years of experience in teaching students and executives in university and nonuniversity settings, and she also has experience as a corporate consultant and speaker
on ethics and management issues. Kate Nelson is a full-time faculty member at the
Fox School of Business at Temple University in Philadelphia, where she teaches
management, business ethics, and human resources to undergraduates. Before joining
Temple’s faculty, Kate worked for more than 30 years in strategic organizational
communication and human resources at a variety of companies including Citicorp,
Merrill Lynch, and Mercer HR Consulting. She also has worked as a consultant specializing in ethics and strategic employee communications and has designed ethics
programs for numerous organizations. We think that bringing together this diverse
mix of theory and practice makes the book unique.
Page 14
Second, the approach of this book is pragmatic, and that approach is a direct response to complaints and suggestions we have heard from students,
employees, and corporate executives. ‘‘Make it real,’’ they have said. ‘‘Tell us
what we need to know to effectively manage people. Take the mystery out of
this subject that seems so murky. Get to the point.’’ This book starts with the
assumption that ethics in organizations is about human behavior in those organizations. We believe that behavior results from a number of factors, many of
which can be influenced by managers and the organizations themselves. As a
result, this book is organized into sections about individuals, managing in organizational context, and organizations in their broader environment, the ethical
dilemmas managers face, and how they might solve them. It also features philosophical and psychological factors of decision making, ethical culture, how managers can influence employees’ behavior through ethical leadership, what
corporations are doing to encourage ethical behavior and corporate social responsibility, and international business ethics.
Third, we have used a different mix of examples than is found in conventional
business ethics texts. Most texts focus on high-level, corporate dilemmas: ‘‘Should
senior executives be paid at a particular level? Should this industry do business in
China? Should American environmental laws apply to American companies operating overseas?’’
Although these are interesting issues, the vast majority of students and
employees will never have to face them. However, they will have to hire, manage, assess performance, discipline, fire, and provide incentives for staff, as well
as produce quality products and services and deal effectively and fairly with
customers, vendors, and other stakeholders. As a result, although we do feature
some classic corporate ethics cases, many of the cases in this book center on the
kinds of problems that most people will encounter during the course of their
careers. All of the ‘‘hypothetical’’ cases in this text are based on actual incidents
that have happened somewhere—it’s the real stuff that goes on every day in
offices across the country.
Fourth, this book was developed with the help of students at a number of
universities and with guidance from numerous managers and senior executives
from various corporations and organizations. We have incorporated the latest research on ethics and organizational behavior into this text, and much of the material that appears within these pages has been tested in both university and
corporate settings.
Fifth, we believe this book is easy to use because it is organized to be flexible. It can be used alone to teach an ethics course, or it can be used as a supplement to a more conventional, philosophical text. The sections in this book
basically stand alone and can be taught in a different sequence than is presented
here, and the book also has many cases and vignettes you can use for class discussion. Wiley will create custom versions of the text with selected chapters if
requested to do so. To help teach this course, the instructor’s guide provides
resources such as outlines, overheads, discussion questions, and additional cases
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for class discussion; it also supplies references to many other resources that can
be used to teach the course.
This book was written for you. We have listened to your complaints and
your wish lists and have tried to pare this complicated subject down to a digestible size. The cases that appear in this book all happened to people just
like you, who were not as prepared to deal with the dilemmas as you will be
after taking this course. Before you get into this book, we have one suggestion:
know that regardless of how large an organization you find yourself in, you’re
not some little cog in a giant wheel. You have the power to change not only
your own behavior and knowledge of ethics but also the behavior and knowledge of the people you work with. Use that power: the job you save may be
your own.
We also want to suggest that when interviewing for your next job, you try to
make sure that you’re joining an organization that values ethics. Are ethics and values described in the firm’s recruiting materials? Do organizational representatives
talk about ethics and values during their interviews with you? When you ask about
how their organization demonstrates ethics and values, does your interviewer respond
enthusiastically, or does he or she look like a deer caught in headlights so you instantly know that he or she has never even considered this question before? It’s much
easier to get into an ethical organization in the first place than try to get out of an
unethical one later on.
It takes a lot of work by a lot of people to make a project like this come together. We’ll begin with some joint thank-yous. Then, because this process has
been so meaningful for each of us, we will separately share our more personal
We both offer our heartfelt appreciation to current and former executives
who helped us with this and previous editions, in particular, Larry Axline, Jeffrey Braun, Jacquelyn Brevard, Earnie Broughton, Steve Church, Frank Daly,
Srinivas Dixit, Ray Dravesky, Kent Druyvesteyn, Dennis Jorgensen, John
O’Byrne, Joe Paterno, Robert Paul, Jo Pease, Shirley Peterson, Vin Sarni, Carl
Skooglund, Nan Stout, Phil Tenney, and George Wratney. All shared their valuable time and advice, some of them on multiple occasions. Their wisdom can be
found throughout this book, but especially in Chapter 6. They helped bring the
subject of managing business ethics to life.
We also wish to thank Gary Weaver (University of Delaware) for being our
philosophy adviser for the first edition, and Dennis Gioia (Penn State faculty
member and dear friend) for sharing his Pinto fire case and especially his
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John Wiley & Sons, Inc. is a fine publisher with a superb team. These people
encouraged, nudged, nudged, and nudged again. We have many Wiley people to
thank for helping to make this book a success.
The book’s past and present reviewers also contributed significantly to making
this a better book, and we thank them as well. We also thank our students and particularly Penn State undergraduate, MBA, and Executive MBA students who provide us
with excellent feedback and advice semester after semester.
I have always wondered what makes people do especially good and bad things.
As the child of Holocaust survivors, I have a unique perspective on and curiosity about such issues. My parents and their families escaped Nazi Germany before Hitler began killing Jews en masse, but not before my maternal grandfather
was severely beaten and not before my fraternal grandfather was taken to a concentration camp (euphemistically referred to as a work camp at the time). My
father’s family received papers allowing them to emigrate from Germany to the
United States shortly before the war began (in spring 1939), allowing my grandfather to be released from the camp where he was being held. Both families
landed in New York, where they survived through sheer grit, perseverance, and
belief in the American dream. Although my family never dwelled on their experiences in Germany, I grew up with a special sensitivity and concern for equality
and fair treatment. I traveled to Germany with my dad and brother about 30
years ago. We visited the tiny towns where Mom and Dad were born and met
some wonderful German people who had helped them or at least tried to. I
walked through a German village holding hands with the elderly woman who
had been my maternal grandmother’s best friend and who urged the family to
leave Germany because she anticipated the worst. I met another elderly woman
who had cared for my father and aunt when they were children and who tried to
take care of their home when they were forced to leave everything behind.
These were special people, and the opportunity to connect with them holds a
special place in my heart. So my family and background influenced me in ways
I can’t fully grasp with my mind but in ways that I feel in my soul. And I know
that my quest to understand what makes people do good and bad things has
something to do with that influence.
Many special people have helped along the path that brought me to the writing of
this book. I’ll begin by thanking my mentors in the doctoral program at Texas A&M
University’s management department. Many thanks to Stuart Youngblood (now at
Texas Christian University), Don Hellriegel, Richard Woodman, Dick Daft (now at
Vanderbilt University), and Mary Zey, who encouraged my early theorizing and research in business ethics. They told me to go with my gut and to do what was important, and they supported my every step. My exceptional colleagues in the
Page 17
Management and Organizational Department at Penn State have also been supportive
all along the way. They have read my papers and challenged me to think harder and
make my work ever better.
My thanks also to the colleagues who have worked with me on ethics-related
research over the years and who have been partners in learning about the management of business ethics: particularly Gail Ball, Michael Brown, Ken Butterfield,
James Detert, David Harrison, Laura Hartman, Jennifer Kish Gephart, Don McCabe,
Bart Victor, Gary Weaver, and more. This shared learning has contributed to the
book in important ways.
Shortly after becoming a faculty member at Penn State, I had the good fortune to
meet my friend and coauthor, Kate Nelson. I was intrigued by a brief Wall Street
Journal article about Kate’s work at Citibank (you’ll read more about that later). We
met and became fast friends, who (believe it or not) loved talking about business
ethics. We decided to write an article together, and the rest, as Kate says, is history.
Kate brought the real world into this book. She was also willing to tell me when I was
getting too academic (not her words exactly). It became clearer and clearer to me that
we were supposed to write this book together, and I’m very glad we did. Thanks,
The article became a book proposal that we first shared with publishers at the
Academy of Management meeting in 1992 (almost 20 years ago now). Shortly thereafter, Bill Oldsey (formerly publisher at John Wiley & Sons, Inc.) showed up in my
office at Penn State. His enthusiasm for the book was immediate and infectious, and
he talked us into writing a textbook rather than a trade book. I want to thank Bill for
the special part he played.
Over the years, Penn State colleagues, administrators, and donors have continued to support my efforts in the area of business ethics. I am grateful to the Cook
family, especially the late Ann Cook, for supporting business ethics at Smeal and the
Cook Fellowship that I held for a number of years. My thanks also to Mrs. Mercedes
Shoemaker (and her late husband, Albert) for supporting the Shoemaker program in
Business Ethics that has brought us wonderful speakers on the topic of business
ethics year after year. Finally, I am especially grateful to Dean James Thomas for
naming me Distinguished Professor of Organizational Behavior and Ethics.
My association with the Ethics Resource Center Fellows program (see www.
ethics.org) has connected me with executives who manage ethics in large business
organizations as well as consultants and those in government who are interested in
making the business world (and the rest of the world, for that matter) a more ethical
place. I appreciate the relationships and the learning that have come from this association as well as the time these executives have shared with me. In particular, I appreciate the funding that this group has provided for research that has found its way into
this book, especially research on executive ethical leadership.
My heartfelt thanks also go to family members, colleagues, and many dear
friends not only for cheering me on (as usual) but also for their many contributions to
this book. They have served as readers and interviewees. They have provided clipping services, helped me make contacts, and offered ideas for cases. They were there
Page 18
when I was overwhelmed. I can’t thank them enough. Finally, I thank the light of my
life, Dan, for the inspiration, love, and support he provides every day of my life and
for being one of the most ethical human beings I know.
I began to learn about ethics and integrity as a very young child in a family where
‘‘doing it right’’ was the only option. I was blessed to grow up hearing about how
your reputation is priceless and you must always guard it and act in ways that
enhance that reputation. As a result, my biggest debt is to my parents, the late Harry
R. and Bernadette Prendergast Nelson (formerly of New Hartford, New York), and
my brother, James V. Nelson of Pasadena, California. My parents worked tirelessly
to set Jim and me on the right path, and Jim’s generosity and enthusiastic support
encouraged me not only to teach ethics but also to write this book. (Jim proved to me
that one can be an investment banker and have high ethical standards, and I’m very
proud of him.) I’m also grateful to Jim’s wife, Susan, for her many encouraging
words of support and for giving our family its two most precious additions, Conor
Vincent and James Patrick Nelson. Thanks to my dearest friends, for their friendship,
love, and support: Rose Ciotta, Elizabeth Dow, Carol Dygert, Ann Frazier Hedberg,
and Gail Martin. Thanks also to the educational institutions that provided me with a
sound footing in values: Utica Catholic Academy in Utica, New York, and the College of Mount St. Vincent in Riverdale, New York.
If I had ever known how much fun it is to teach, I might have made the
transition to academia much earlier. Many thanks to the deans at the Fox School
of Business at Temple University—including Moshe Porat, Rajan Chandran, and
Diana Breslin Knudson, who took a chance on my teaching ability—and thanks
to my many students past and present, who have enriched my life in ways I
could not have imagined. Sincere thanks also to my many colleagues at Temple,
who were so welcoming to this corporate refugee and who made me feel so
much a part of this wonderful institution, especially: Norm Baglini, Gary Blau,
Debbie Campbell, Kathleen Davis, Arlene Dowd, Deanna Geddes, Terry Halbert, John McClendon, and Don Wargo.
Thanks go to the many managers who, each in his or her own way, taught
me that business ethics need not be an oxymoron: Christopher York, Don Armiger, Peter Thorp, Judith Fullmer, Jerry Lieberman, and Jane Shannon—all formerly with Citicorp in New York City; and Debra Besch, Charlie Scott, and
Lea Peterson, all currently or formerly with Mercer HR Consulting in Philadelphia and Boston. And thank you to Allan Kennedy, the coauthor of the groundbreaking book from the late 1970s, Corporate Cultures. While working at
Citicorp as a McKinsey consultant back in 1985, Allan was the very first person
who encouraged me to go into ethics by helping me germinate the idea of designing an ethics game for Citicorp.
Page 19
The most important thank-you goes to my wonderful husband, Stephen J.
Morgan—an honorable man if there ever was one—who inspires and loves me every
day. This book and my teaching would not be possible without his support, wisdom,
and encouragement.
Of course, a final thank-you goes to my coauthor, Linda Trevi~no, for her dear,
dear friendship and for working with me to produce this book in what, in comparison
to accounts from other writing teams, was an almost painless experience.
Page 20
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Back in 1993, when we sat down to write the first edition of this book, people wondered if business ethics was just a fad. At that point, companies were just beginning
to introduce ethics into orientations and management training programs. In academia,
business ethics was just beginning to gain traction as a subject for serious academic
study and some business schools were going so far as to require a business ethics
course to graduate.
Back then there was still the feeling among many experts that business ethics—
like time management, quality circles, and other management buzzwords of the
day—would soon become a footnote in texts that described business fads of the late
twentieth century. Despite multiple waves of scandal over the years, these have often
been portrayed as temporary blips. For example, one prominent business writer for
Fortune Magazine wrote an article in 2007 entitled ‘‘Business is Back!’’ Here’s a
choice excerpt . . . ‘‘It must be said: The shaming is over. The 51/2 year humiliation
of American business following the tech bubble’s burst and the Lay-Skilling-FastowEbbers-Kozlowski-Scrushy perp walks that will forever define an era has run its
course. After the pounding and the ridicule, penance has finally been done. No longer
despised by the public, increasingly speaking up and taking stands, beloved again by
investors, chastened and much changed—business is back.’’1 Could he have been
more wrong? Business managed to outdo itself on the shame index yet again just
about a year later. We’ve seen these ethical debacles occur regularly for the past
25 years. As a result, we’re convinced that business ethics is far from a fad. It’s an
ongoing phenomenon that must be better understood and managed and for which
business professionals must be better prepared.
We tell our students that serious ethical scandals often result from multiple parties
contributing in their own small or large ways to the creation of a catastrophe. As you’ll
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read later on in this book, Enron’s collapse in 2001 was not just the failure of Enron
executives and employees, but also the failure of Enron’s auditors, the bankers who
loaned the company money, and the lawyers who never blew the whistle on Enron’s
shenanigans. However, no scandal of recent years—not even Enron—matches the
financial industry debacle in 2008. The crisis was unparalleled in its scope and has
fueled public outrage like no other business disaster in our lifetime. The aftermath has
people around the world angry and mistrustful of companies, governments, regulators,
rating agencies, and the people who work in them. If there was ever a crisis of trust and
confidence, this is it. It is also a textbook-perfect example of how numerous people’s
actions (and inactions) can conspire to spawn an almost unimaginable calamity.
Recent business history has proven beyond any doubt that divorcing business
from ethics and values runs huge risks. Rushworth Kidder,2 the highly regarded
ethics writer and thinker, recently wrote about the financial debacle and the resulting
public anger. He eloquently described how free marketers cite Adam Smith’s Wealth
of Nations to justify a breed of capitalism that abhors regulation and focuses on shortterm profits over long-term stewardship. Kidder wisely noted that 17 years before his
more famous book, Smith wrote another one entitled The Theory of Moral Sentiments. Smith’s first book deserves more attention because he always presumed that
the messages from these two books would go hand in hand. Smith’s ‘‘moral sentiments’’ work rests on the assumption that human beings are empathetic; they care
about others, and they derive the most joy from human love and friendship. His book
opened with the following statement: ‘‘How selfish soever man may be supposed,
there are evidently some principles in his nature, which interest him in the fortune of
others. . . . ’’3 Smith believed that a good life derives from the expression of ‘‘beneficence,’’ not from material wealth. He acknowledged that self-love (which he also
acknowledged) can spur the individual to better his own condition by besting competitors. But he argued that this must be done in a just manner and in the spirit of fair
play as judged by an informed, ethical, and impartial spectator. We care what others
think of us because we are first and foremost social beings. But we also are moral
beings who want to do the right thing because it is the right thing to do (not just to
win the praise of others). According to Smith, virtuous persons balance prudence
(mature self-love), strict justice, and benevolence, and ideal societies are comprised
of such persons. Finally, a flourishing and happy society is built upon a foundation of
justice and rules of conduct that create social order. Smith was confident that humankind would progress toward this positive ethical state; he called on leaders to avoid
the arrogance of power and, instead, to be virtuous statesmen. Kidder’s point was that
capitalism will succeed only when firmly tethered to a moral base, and he reminds us
that Adam Smith—that hero of free marketers—knew that better than anyone.
We completely agree. We began this book almost 20 years ago with the firm
belief that business isn’t just ‘‘better’’ when companies and businesspeople are ethical, but rather that good ethics is absolutely essential for effective business practice.
This is not just empty rhetoric. Work is essential to life, and most people work for a
business of some kind. How we work and the standards we uphold while we are
working affect much more than just commerce. Our business behavior also affects
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our personal and company reputations, politics, society at large, and even national
reputation. For example, the 2008 financial crisis, while global in scope, had its roots
in the United States, and the nation’s reputation has suffered because of the behavior
of individuals and companies. Similarly, China’s reputation has suffered because
of contaminants found in Chinese exports such as infant formula, drywall (used in
construction), and children’s toys. So, corporate misbehavior does not happen in a
vacuum, and it’s not just corporate reputations that suffer as a result. These scandals
cast long shadows, and they often affect entire industries and countries. In this complex and increasingly transparent world, where reputation influences everything from
who wants to hire you or trade with you to who buys your products to who finances
your debt—and much more—unethical behavior in business is a very big deal
indeed. So, let’s take a closer look at the elephant in the room: the near collapse of
the financial markets in 2008 and what it has to do with business ethics.
The implosion of the financial markets in 2008 was largely not the result of illegal
behavior. For the most part, the activities that brought down the U.S. economy and
others around the world were not against the law, at least not yet (government regulators and the legal system often play catch-up after ethical debacles in business).
Many of those activities, however, were unethical in that they ultimately produced
great harm and were contrary to a number of ethical principles such as responsibility,
transparency, and fairness. Let’s start with some of the factors that laid the groundwork for the disaster in the United States.
Borrowing Was Cheap
First, borrowing money became really cheap. In 2000, stocks in high-technology companies had soared to unsustainable heights and that bubble finally burst. To soften the
effects on the U.S. financial markets, Alan Greenspan, who headed the Federal
Reserve at that time, lowered the Fed Funds rate (the rate at which banks borrow
money from the Federal Reserve) to almost zero. That move, seemingly innocent at
the time, injected huge amounts of money into the U.S. financial system. It made the
cost of borrowing so low that it fueled a glut of consumer borrowing. Suddenly, it was
amazingly cheap to buy a new car, a wide-screen television, a backyard pool, a larger
home, a second home, and all sorts of designer goodies. There was even encouragement to indulge. Following the terrorist attacks in September 2001, President George
W. Bush told people that if they wanted to help the economy they should go shopping. And people did. Household debt levels rose to $13.9 billion in 2008, almost
double what households owed in 2000, and savings dipped into negative territory.
(Since the financial crisis, household savings have risen to 6.9 percent.4) Responsible
borrowers should have thought about what they could afford rather than what bankers
would lend to them. And responsible lenders should have established that borrowers
could actually afford to pay back the loans before lending them money.
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Real Estate Became the Investment of Choice
Of course, people also want to invest in something safe, and what could be safer than
real estate? There had been relatively few instances of real estate values declining,
and when they did the declines were generally shallow and short-lived. A point of
pride in the United States was the high percentage of Americans who owned their
own homes. Investing in a home traditionally had been a very safe investment and
one that was slow to appreciate in value. But suddenly in the early 2000s, real estate
investing became a real moneymaker. With a backdrop of historically low interest
rates, real estate became such a popular way to invest that demand soon outstripped
supply and prices soared. The value of homes skyrocketed—homes that were selling
for $300,000 in one year sold for $450,000 the next. Prices rose so fast that speculation grew tremendously. People bought houses with almost no down payment,
remodeled them or waited a few months, and then resold the houses for a quick profit.
A number of popular television programs showed viewers how to ‘‘flip’’ real estate
properties for profit.
Since the cost of borrowing was so low and home equity had grown so quickly,
many consumers borrowed on the equity in their homes and purchased additional real
estate or a new car or financed a luxury vacation. For example, suppose someone
purchased a house for $500,000 in 2003. By 2005, the home might have been worth
$800,000. The home owner refinanced the mortgage—borrowing as much as the
entire current worth of the house (because its value could only go up, right?), which
resulted in a $300,000 cash infusion for the home owner. This practice was very
popular, and it laid the groundwork for a huge disaster when the housing values fell
off a cliff in 2008 and 2009. Imagine the home owner who refinanced the home
just described. Imagine that he took the $300,000 and purchased a summer home and
a sports car and paid for his children’s college educations. Suddenly, home values
plummeted and his house lost 30 percent of its value, which was common in markets such as California, Florida, Nevada, or Arizona, where the real estate bubble
was particularly inflated. After the real estate bubble burst, his house was worth
$560,000. Now suppose he loses his job and needs to sell his house because he can’t
afford the mortgage payments. He can’t get $800,000 for his home, which is what he
owes on his mortgage. His only choice is to work with the mortgage holder (probably
a bank) to refinance (unlikely) or declare bankruptcy and walk away from the house.
This is what a lot of home owners have done, and it is one of the factors at the heart
of the current financial crisis. Lots of folks were in on this bubble mentality, getting
what they could in the short term and not thinking very much about the likelihood (or
inevitability) that the bubble would burst.
Mortgage Originators Peddled ‘‘Liar Loans’’
In the early 2000s, as housing investments increased in popularity, more and more
people got involved. Congress urged lenders Freddie Mac and Fannie Mae to expand
home ownership to lower-income Americans. Mortgage lenders began to rethink the
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old rules of financing home ownership. As recently as the late 1990s, potential home
owners not only had to provide solid proof of employment and income to qualify
for a mortgage, but they also had to make a cash down payment of between 5 and
20 percent of the estimated value of the home. But real estate was so hot and returns
on investment were growing so quickly that mortgage lenders decided to loosen those
‘‘old-fashioned’’ credit restrictions. In the early 2000s, the rules for obtaining a mortgage became way less restrictive. Suddenly, because real estate values were rising so
quickly, borrowers didn’t have to put any money down on a house. They could borrow the entire estimated worth of the house; this is known as 100-percent financing.
Also, borrowers no longer needed to provide proof of employment or income. These
were popularly called ‘‘no doc’’ (no documentation) or ‘‘liar loans’’ because banks
weren’t bothering to verify the ‘‘truth’’ of what borrowers were claiming on their
mortgage applications.
Banks Securitized the Poison and Spread It Around
At about the same time liar loans were becoming popular, another new practice was
introduced to mortgage markets. Investors in developing countries were looking to
the United States and its seemingly ‘‘safe’’ markets for investment opportunities.
Cash poured into the country from abroad—especially from countries like China
and Russia, which were awash in cash from manufacturing and oil respectively.
Wall Street bankers developed new products to provide investment vehicles for
this new cash. One new product involved the securitization of mortgages. (Note:
structured finance began in 1984, when a large number of GMAC auto receivables
were bundled into a single security by First Boston Corporation, now part of Credit
Suisse.) Here’s how it worked: Instead of your bank keeping your mortgage until it
matured, as had traditionally been the case, your bank would sell your mortgage—
usually to a larger bank that would then combine your mortgage with many others
(reducing the bank’s incentive to be sure you would pay it back). Then the bankers
sold these mortgage-backed securities to investors, which seemed like a great idea
at the time. Real estate was traditionally safe, and ‘‘slicing and dicing’’ mortgages
divided the risk into small pieces with different credit ratings and spread the risk
around. Of course, the reverse was also true, as the bankers learned to their horror.
This method of dividing mortgages into little pieces and spreading them around
could also spread the contagion of poor risk. However, starting in 2002 and for
several years thereafter, people couldn’t imagine housing values falling. So much
money poured into the system, and the demand for these mortgage-backed security
products was so great, that bankers demanded more and more mortgages from
mortgage originators. That situation encouraged the traditional barriers to getting a
home mortgage to fall even farther. These investment vehicles were also based
upon extremely complex mathematical formulas (and old numbers) that everyone
took on faith and few attempted to understand. It looks like more people should
have followed Warren Buffett’s sage advice not to invest in anything you don’t
comprehend! Add to that toxic mix the relatively new idea of credit-default swaps
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(CDS). These complex financial instruments were created to mitigate the risk financial firms took when peddling products like securitized mortgages. CDS are insurance contracts that protect the holder against an event of default on the part of a
debtor. One need not own the loan or debt instrument to own the protection, and
the amount of capital tied up in trading CDS is very small compared to trading
other debt instruments. That is a very significant part in the increase in popularity
at sell-side and buy-side trading desks. The big insurance company, AIG, was a
huge player in this market, and so were the large banks. The firms that were counterparties to CDS never stepped back from the trading frenzy to imagine what
would happen if both the structured finance market and the real estate bubble burst
(as all bubbles eventually do) at the same time. Both underwriters and investors
would be left holding the bag when the music stopped playing—and the U.S. taxpayer has had to bail out most of the financially-stressed firms to save the entire
financial system from collapse. Please note that all of this happened in a part of the
market that was virtually unregulated.
Those Who Were Supposed to Protect Us Didn’t
One protection against financial calamity was thought to be the rating agencies such
as Standard and Poor’s and Moody’s. They rate the safety or soundness of securities,
including those securitized mortgage products. A credit opinion is defined as one
which rates the timeliness and ultimate repayment of principal and interest. But, like
everyone else, the rating agencies say they didn’t foresee a decline in housing prices;
and consequently, they rated the mortgage securities as being AAA—the highest
rating possible, which meant that the rating agencies considered these securities to be
highly safe. The agencies are the subject of much criticism for their role in the crisis.
If they had done a better job analyzing the risk (their responsibility), much of the
crisis might have been avoided. But note that these rating agencies are hired and paid
by the companies whose products they rate, thus causing a conflict of interest that
many believe biased their ratings in a positive direction. So, people who thought they
were making responsible investments because they checked the ratings were misled.
Another protection that failed was the network of risk managers and boards of
directors of the financial community. How is it that one 400-person business that was
part of the formerly successful insurance behemoth, AIG, could invest in such a way
that it brought the world’s largest insurance company to its knees? The risk was
underestimated all around by those professionals charged with anticipating such
problems and by the board of directors that didn’t see the problem coming. The U.S.
government (actually taxpayers) ended up bailing out AIG to the tune of $170 billion.
The risk managers and boards of other financial firms such as Citigroup, Merrill
Lynch, Lehman Brothers, Bear Stearns, and Wachovia were similarly blind.
On Wall Street, there were other contributing factors. First, bank CEOs and other
executives were paid huge salaries to keep the price of their firms’ stocks at high
levels. If their institutions lost money, their personal payouts would shrink. So, bank
executives were paid handsomely to bolster short-term profits. The Wall Street
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traders were similarly compensated—they were paid multimillion-dollar bonuses for
taking outsized risks in the market. What seemed to matter most were the short-term
profits of the firm and the short-term compensation of those making risky decisions.
The traders took risks, the bets were at least temporarily successful, and the bankers
walked off with multimillion-dollar bonuses. It didn’t matter that the risk taking was
foolish and completely irresponsible in the long run. The bonus had already been
paid. Consequently, a short-term mentality took firm root among the nation’s bankers, CEOs, and boards of directors.
Finally, we can’t examine the financial crisis without questioning the role of
regulatory agencies and legislators. For example, for a decade, investor Harry
Markopolos tried on numerous occasions to spur the Securities and Exchange
Commission to investigate Bernard L. Madoff. The SEC never did uncover the
largest Ponzi scheme in the history of finance. The $65-billion-dollar swindle
unraveled only when Madoff admitted the fraud to his sons, who alerted the SEC
and the U.S. attorney’s office in New York in December 2008. Others who are
culpable in the financial crisis are members of the U.S. Congress, who deregulated the financial industry, the source of some of their largest campaign contributions. Among other things, they repealed the Glass-Steagall Act, which had been
passed after the U.S. stock market crash in 1929 to protect commercial banking
customers from the aggression and extreme risk taking of investment bank
cultures. The act created separate institutions for commercial and investment
banks, and they stayed separate until the merger of Citicorp and Travelers to
form Citigroup in 1998. The two companies petitioned Congress to eliminate
Glass-Steagall, claiming that it was an old, restrictive law and that today’s markets were too modern and sophisticated to need such protection. And Congress
listened. Those 1930s congressmen knew that if two banking cultures tried to
exist in the same company—the staid, conservative culture of commercial banking (our savings and checking accounts) and the razzle-dazzle, high-risk culture
of investment banking—the ‘‘eat what you kill’’ investment bank culture would
win out. Some said that staid old commercial banks turned into ‘‘casinos.’’ But,
interestingly, casinos are highly regulated and are required to keep funds on hand
to pay winners. In the coming months, we expect to learn more about the behavior that led to this crisis. As we noted earlier, much if not most of it was probably
legal because of the lack of regulation in the mortgage and investment banking
industries. But look at the outcome! If only ethical antennae had been more sensitive, more people might have questioned products they didn’t understand, or spoken out or refused to participate in practices that were clearly questionable. As
just one tiny example, could anyone have thought it was ethical to sell a product
they called a liar loan, knowing that the customer surely would be unable to repay
(even if it was legal to do so)?
You’ll read much more about the crisis and its relationship to ethics in subsequent chapters. Right now, let’s delve into the cynicism this and previous scandals
have created and then try to move beyond it so that you can do things differently in
the future.
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After multiple waves of business scandal, some cynicism (a general distrust) about
business and its role in society is probably healthy. But cynicism about business has
truly become an epidemic in the United States. To be fair, we should note that
although the financial industry screwed up royally, at the same time most other mainstream American companies were ‘‘running their companies with strong balance
sheets and sensible business models.’’5 Most companies were responsible, profitable,
and prudent. Because they had serious cash reserves, many of them have actually
managed to weather the recent crisis reasonably well. But the attention has not
been on these responsible companies. It’s been on the financial sector and its
irresponsibility. How bad is the cynicism? According to the 2009 Edelman Trust
Barometer6—a survey of almost 4,500 college-educated people around the world—
it’s very bad, especially in the United States. (Edelman is the world’s largest independent public relations firm with 53 offices around the world. Its business is helping
companies build and maintain reputation.) Edelman’s study shows that consumer
trust in corporations has declined precipitously. More than half of the respondents
stated that they trust business less than they did one year ago (in 2008). The decrease
is particularly acute in the United States, where citizens have traditionally had higher
opinions of business than they do in Europe. The only part of the world where trust
levels have not declined is in the developing world—the so-called BRIC nations
(Brazil, Russia, India, China). The study also outlines the business case for trust.
Over a one-year period, 91 percent of consumers stated that they purchased a product
of service from a company they trust. Conversely, 77 percent of consumers refused to
purchase a product or service from a company that they mistrusted. This study
suggests that corporate reputation affects consumer buying patterns, and companies
risk harming their bottom line when they do not act to protect their good name.
But, consistent with our idea that business ethics is not a fad, neither is public
cynicism about business ethics new. We have written about it in every edition of our
book (since 1995). Surely, the factor that has contributed the most to cynicism in
recent years is the highly visible behavior of some of the nation’s leading corporations and executives, whose activities have garnered so much space in the business
press and on the evening news. How do you watch hour after hour of such reporting
and not walk away jaded? In the last few years, all you had to do was read about or
watch the news to feel cynical, and business school students are no exception. We
also note that business is not alone in its scandalous behavior. In recent years, we’ve
learned about government employees who stole or misused funds, academics who
falsified their research results, ministers who stole from their congregations, priests
who abused children, and athletes who took bribes or used performance-enhancing
drugs. It seems that no societal sector is immune.
Many of our readers are business school students, the current or future managers
of business enterprises. Surveys suggest that many business students are themselves
surprisingly cynical about business (given that they’ve chosen it as their future profession). They believe that they’ll be expected to check their ethics at the corporate
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door or that they will be pressured to compromise their own ethical standards in order
to succeed.7 Consider this scenario that took place at a large university: A professor
asked his class to name management behaviors that are morally repugnant. His class
struggled to name one! In another of his classes, the professor asked if the students
would dump carcinogens in a river. This time the class agreed that they would do so
because if they didn’t, someone else would. When the professor asked if they really
wanted to live in such a cynical environment, the class insisted that they already did.
The dismayed professor believed that the attitudes of his students were formed long
before they landed in his classroom. He agreed with other observers that the problem
goes way beyond business and business schools and that our society, with its emphasis on money and material success, is rearing young people who strive for achievement at any cost. One symptom: cheating is pervasive in many high schools and
colleges.8 This scenario is enough to make anyone wonder about today’s business
students. But at the same time, we know that students at many colleges and universities, including business schools, are encouraging their own faculty and administrators to establish newly invigorated academic integrity policies and honor codes. In an
honor code community, students take responsibility for implementing the academic
integrity policy and for holding each other accountable to it. They manage study-run
judiciaries that mete out serious discipline to their fellow students who tarnish the
community by cheating. These efforts, which are gaining real traction at many
schools, suggest that at least some students have had enough and are willing turn
from cynicism toward a proactive approach to change things.
A 2008 Aspen Institute study of nearly 2,000 MBA students from 15 leading
international business schools provides some insight into MBA students’ attitudes,
which appear to be moving in a less cynical direction. Similar to the findings of
Aspen’s 2002 survey, the 2008 survey of MBA students indicates that they anticipate
facing difficult values conflicts in their jobs and suggests some cynicism about ethics
in the workplace. However, about 40 percent of these students believe that their business education is preparing them to manage values conflicts ‘‘a lot,’’ and another
50 percent believe that they’re being prepared somewhat. Also, more than a quarter
of the respondents said they are interested in finding a job that gives them the opportunity to contribute to society (compared to only 15 percent in 2002). More than half
believe that safe, high-quality products and responsible governance and transparent
business practices are very important for a potential employer. In addition, more than
half said they would advocate alternative values or approaches in response to values
conflicts at work (many more than in 2002).9
The media may be largely responsible for students’ cynical attitudes. Think
about the depiction of business and its leaders in movies and on television. The
Media Research Center conducted a survey of 863 network TV sitcoms, dramas, and
movies in the mid-1990s. Nearly 30 percent of the criminal characters in these programs were business owners or corporate executives. Entrepreneurs were represented
as drug dealers, kidnappers, or sellers of defective gear to the military.10Fortune
magazine called this ‘‘the rise of corporate villainy in prime time.’’11 Movies have
abounded with negative messages about corporate America. Think Wall Street,
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Boiler Room, Civil Action, Glengarry Glen Ross, The Insider, Erin Brockovich,
Supersize Me, The Corporation, Enron: The Smartest Guys in the Room, Michael
Clayton, The International, Quiz Show, The Insider, and Bowling for Columbine.
And there are more such movies every year; we’re sure you can add to the list. A
much tougher exercise is to generate a list of movies that actually create a positive
ethical impression of business. Can you think of any? Consistent negative representation of business in the media has its effects. Academic research suggests that cynicism toward American business increased after study participants viewed the film
Roger & Me, which depicted ruthless plant closings and layoffs at General Motors.12
Imagine the cumulative, daunting effect of viewing countless movies and television
programs that portray business as corrupt and business leaders as ruthless and
To counter that media-fueled cynicism at least somewhat, we encourage you to
think about your own life and the hundreds of reliable products and services you trust
and depend on every day as well as the people and businesses that produce them.
These good folks are businesspeople too, but it isn’t nearly as exciting or sexy for the
media to portray businesspeople who do the right thing every day. We also encourage
you to talk with businesspeople you know, perhaps people in your own family who
work for businesses. Do they feel pressured to compromise their ethical standards, or
do they see their employer in a more positive light? Interestingly, the Ethics Resource
Center’s 2009 National Business Ethics Survey found that only 8 percent of employees of for-profit enterprises report feeling pressured to compromise their ethical standards. That means that more than 90 percent say that they’re not feeling such
pressure. Also, nearly two thirds of these employees said that their own company has
a strong or strong-leaning ethical culture. What does that mean? To us, it means that
most Americans who work in business think that their own company and coworkers
are pretty ethical. Still, they read the same media accounts and see the same movies
and TV programs as everyone else, and these offerings influence cynicism about
American business in general.13
Finally, we won’t leave a discussion of cynicism without talking about the
events of September 11, 2001. While the business scandals of 2001–02 left many
cynical, the events of September 11, 2001, showed us some of the best in many individuals and businesses. We have read about the care, compassion, and assistance that
countless American firms gave to those who were harmed by the terrorist attacks.
Few firms were hit as hard as Sandler O’Neill & Partners, a small but profitable Wall
Street investment bank that lost 66 of its 171 employees—including two of the firm’s
leading partners—on September 11. The firm’s offices had been on the 104th floor of
the World Trade Center. Despite its dire financial straits, the firm sent every deceased
employee’s family a check in the amount of the employee’s salary through the end of
the year and extended health-care benefits for five years. Bank of America quickly
donated office space for the firm to use. Competitors sent commissions their way and
freely gave the company essential information that was lost with the traders who had
died. Larger Wall Street firms took it upon themselves to include Sandler in their
deals. The goal was simply to help Sandler earn some money and get back on its
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feet.14 This is only one of the many stories that point to the good that exists in the
heart of American business. In this book, we offer a number of positive stories to
counterbalance the mostly negative stories portrayed in the media.
The bottom line is this. We’re as frustrated as you are about the media portrayal
of business and the very real, unethical behavior that regularly occurs in the business
community. But, we also know that the business landscape is a varied one that is
actually dominated by good, solid businesses and people who are even heroic and
extraordinarily giving at times. So, for our cynical readers, we want to help by doing
two things in this book: (1) empowering managers with the tools they need to address
ethical problems and manage for ethical behavior, and (2) providing positive examples of people and organizations who are ‘‘doing things right’’ to offset some of the
media-fueled negativity. We agree with Coach Joe Paterno, Penn State’s legendary
football coach, whose program has always been known for integrity. He said this in
response to our questions about cynicism: ‘‘I don’t care what cynical people say. I
don’t really pay attention. These are small people who . . . don’t have the confidence
or courage to do it the right way. And when they see someone doing it the right way,
deep down they feel guilty. They’d rather say that it can’t be done . . . that everybody cheats. I hear that all the time. ‘Fine,’ I say. ‘You think what you want.’ I know
what I do. People around me know. You’ve got to just run your organization. You
can’t worry about what these cynical people say.’’
Some business school students seem to agree with Joe. In May 2009, something
notable and quite positive happened. A group of 20 second-year students at Harvard
Business School created The MBA Oath in an attempt to articulate the values they felt
their MBA degree ought to stand for:
The MBA Oath
As a business leader I recognize my role in society.
My purpose is to lead people and manage resources to create
value that no single individual can create alone.
My decisions affect the well-being of individuals inside and
outside my enterprise, today and tomorrow.
Therefore I promise:
I will manage my enterprise with loyalty and care, and will not
advance my personal interests at the expense of my enterprise or
I will understand and uphold, in letter and spirit, the laws and
contracts governing my conduct and that of my enterprise.
I will refrain from corruption, unfair competition, or business
practices harmful to society.
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I will protect the human rights and dignity of all people affected by
my enterprise, and I will oppose discrimination and exploitation.
I will protect the right of future generations to advance their standard of living and enjoy a healthy planet.
I will report the performance and risks of my enterprise accurately and honestly.
I will invest in developing myself and others, helping the management profession continue to advance and create sustainable
and inclusive prosperity.
In exercising my professional duties according to these principles, I
recognize that my behavior must set an example of integrity, eliciting
trust and esteem from those I serve. I will remain accountable to my
peers and to society for my actions and for upholding these standards.
This oath I make freely, and upon my honor.
This focus on positive values among business students and business in general
received significant publicity and turned into something of a movement. More than
400 graduates of Harvard Business School signed the oath, and they were joined by
business students from 119 other colleges and universities globally. For more information, go to www.mbaoath.org.
Given all that has happened, you may be wondering whether business ethics can be
taught. Perhaps all of the bad behavior we outlined earlier results from a relatively few
‘‘bad apples’’ who never learned ethics from their families, clergy, previous schools, or
employers.15 If this were so, ethics education would be a waste of time and money, and
resources should be devoted to identifying and discarding bad apples, not trying to
educate them. We strongly disagree, and the evidence is on our side.
Aren’t Bad Apples the Cause of Ethical Problems
in Organizations?
According to the bad apple theory, people are good or bad and organizations are
powerless to change these folks. This bad apple idea16 is appealing in part because
unethical behavior can then be blamed on a few individuals with poor character.
Although it’s unpleasant to fire people, it’s relatively easier for organizations to
search for and discard a few bad apples than to search for some organizational
problem that caused the apple to rot.
Despite the appeal of the bad apple idea, ‘‘character’’ is a poorly defined concept, and when people talk about it, they rarely define what they mean. They’re probably referring to a complex combination of traits that are thought to guide individual
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behavior in ethical dilemma situations. If character guides ethical conduct, training
shouldn’t make much difference because character is thought to be relatively stable:
it’s difficult to change, persists over time, and guides behavior across different contexts. Character develops slowly as a result of upbringing and the accumulation of
values that are transmitted by schools, families, friends, and religious organizations.
Therefore, people come to educational institutions or work organizations with an
already defined good or poor character. Good apples will be good and bad apples
will be bad.
In fact, people do have predispositions to behave ethically or unethically (we talk
about this in Chapter 3). And sociopaths can certainly slip into organizations with the
sole intent of helping themselves to the organization’s resources, cheating customers,
and feathering their own nests at the expense of others. Famous scoundrels like
Bernie Madoff definitely come to mind. Such individuals have little interest in
‘‘doing the right thing,’’ and when this type of individual shows up in your organization, the best thing to do is discard the bad apple and make an example of the incident
to those who remain.
But discarding bad apples generally won’t solve an organization’s problem with
unethical behavior. The organization must scrutinize itself to determine if something
rotten inside the organization is spoiling the apples. For example, Enron encouraged
a kind of devil-may-care, unethical culture that is captured in the film, Enron: The
Smartest Guys in the Room. Arthur Andersen’s culture morphed from a focus on the
integrity of audits to a consulting culture that focused almost exclusively on feeding
the bottom line (you’ll read more about that in Chapter 5). In this book you’ll learn
that most people are not guided by a strict internal moral compass. Rather, they look
outside themselves—to their environment—for cues about how to think and behave.
This was certainly true in the financial crisis when the mantra became ‘‘everyone is
doing it’’ (and making a lot of money besides). At work, managers and the organizational culture transmit many cues about how employees should think and act. For
example, reward systems play a huge role by rewarding short-term thinking and
profits, as they did in the recent financial crisis. In this book, you’ll learn about the
importance of these organizational influences and how to harness them to support
ethical behavior and avoid unethical behavior.
So, apples often turn bad because they’re spoiled by ‘‘bad barrels’’—bad work
environments that not only condone, but may even expect unethical behavior. Most
employees are not bad folks to begin with. But their behavior can easily turn bad if
they believe that their boss or their organization expects them to behave unethically
or if everyone else appears to be engaging in a particular practice. In this view, an
organization that’s serious about supporting ethical behavior and preventing misconduct must delve deeply into its own management systems and cultural norms and
practices to search for systemic causes of unethical behavior. Management must take
responsibility for the messages it sends or fails to send about what’s expected. If
ethics problems are rooted in the organization’s culture, discarding a few bad apples
without changing that culture isn’t going to solve the problem. An effective and lasting solution will rely on management’s systematic attention to all aspects of the
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organization’s culture and what it is explicitly or implicitly ‘‘teaching’’ organizational members (see Chapter 5).
This question about the source of ethical and unethical behavior reflects the
broader ‘‘nature/nurture’’ debate in psychology. Are we more the result of our genes
(nature) or our environments (nurture)? Most studies find that behavior results from
both nature and nurture. So, when it comes to ethical conduct, the answer is not
either/or, but and. Individuals do come to work with predispositions that influence
their behavior, and they should take responsibility for their own actions. But the
work environment can also have a large impact. In this book, you’ll learn a lot about
how that work environment can be managed to produce ethical rather than unethical
Shouldn’t Employees Already Know the Difference
between Right and Wrong?
A belief associated with the good/bad apple idea is that any individual of good character should already know right from wrong and can be ethical without special training—that a lifetime of socialization from parents and religious institutions should
prepare people to be ethical at work. You probably think of yourself as an individual
of good character, but does your life experience to date prepare you to make a complex business ethics decision? Did your parents, coaches, and other influential people
in your life ever discuss situations like the one that follows? Think about this real
You’re the VP of a medium-sized organization that uses chemicals in its production processes. In good faith, you’ve hired a highly competent scientist to ensure that
your company complies with all environmental laws and safety regulations. This
individual informs you that a chemical the company now uses in some quantity is not
yet on the approved Environmental Protection Agency (EPA) list. However, it has
been found to be safe and is scheduled to be placed on the list in about three months.
You can’t produce your product without this chemical, yet regulations say that you’re
not supposed to use the chemical until it’s officially approved. Waiting for approval
would require shutting down the plant for three months, putting hundreds of people
out of work, and threatening the company’s very survival. What should you do?
The solution isn’t clear, and good character isn’t enough to guide decision making in this case. As with all ethical dilemmas, values are in conflict here—obeying
the letter of the law versus keeping the plant open and saving jobs. The decision is
complicated because the chemical has been found to be safe and is expected to be
approved in a matter of months. As in many of today’s business decisions, this complex issue requires the development of occupation-specific skills and abilities. For
example, some knowledge in the area of chemistry, worker safety, and environmental
laws and regulations would be essential. Basic good intentions and a good upbringing
aren’t enough.
James Rest, a scholar in the areas of professional ethics and ethics education,
argued convincingly that ‘‘to assume that any 20-year-old of good general character
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can function ethically in professional situations is no more warranted than assuming
that any logical 20-year-old can function as a lawyer without special education.’’17
Good general character (whatever that means) doesn’t prepare an individual to deal
with the special ethical problems that are likely to arise in a career. Individuals must
be trained to recognize and solve the unique ethical problems of their particular occupation. That’s why many professional schools (business, law, medicine, and others)
have added ethics courses to their curricula, and it’s why most large business organizations now conduct ethics training for their employees.
So, although individual characteristics are a factor in determining ethical behavior, good character alone simply doesn’t prepare people for the special ethical problems they’re likely to face in their jobs or professions. Special training can prepare
them to anticipate these problems, recognize ethical dilemmas when they see them,
and provide them with frameworks for thinking about ethical issues in the context of
their unique jobs and organizations.
Aren’t Adults’ Ethics Fully Formed and Unchangeable?
Another false assumption guiding the view that business ethics can’t be taught is the
belief that one’s ethics are fully formed and unchangeable by the time one is old
enough to enter college or a job. However, this is definitely not the case. Research
has found that through a complex process of social interaction with peers, parents,
and other significant persons, children and young adults develop in their ability to
make ethical judgments. This development continues at least through young adulthood. In fact, young adults in their twenties and thirties who attend moral development educational programs have been found to advance in moral reasoning even
more than younger individuals do.18 Given that most people enter professional education programs and corporations as young adults, the opportunity to influence their
moral reasoning clearly exists.
Business school students may need ethics training more than most because
research has shown they have ranked lower in moral reasoning than students in
philosophy, political science, law, medicine, and dentistry.19 Also, undergraduate
business students and those aiming for a business career were found to be more likely
to engage in academic cheating (test cheating, plagiarism, etc.) than were students in
other majors or those headed toward other careers.20 At a minimum, professional
ethics education can direct attention to the ambiguities and ethical gray areas that are
easily overlooked without it. Consider this comment from a 27-year-old Harvard student after a required nine-session module in decision making and ethical values at the
beginning of the Harvard MBA program.
Before, [when] I looked at a problem in the business world, I never consciously examined the ethical issues in play. It was always subconscious
and I hope that I somewhat got it. But that [ethics] was never even a
consideration. But now, when I look at a problem, I have to look at the
impact. I’m going to put in this new ten-million-dollar project. What’s
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going to be the impact on the people that live in the area and the environment. . . . It’s opened my mind up on those things. It’s also made me
more aware of situations where I might be walking down the wrong path
and getting in deeper and deeper, to where I can’t pull back.21
In 2004, Harvard’s MBA class of 1979 met for its 25-year reunion. The alumni
gave the dean a standing ovation when he said that a new required course on values
and leadership was his highest priority and then pledged to ‘‘live my life and lead the
school in a way that will earn your trust.’’22
It should be clear from the above arguments that ethics can indeed be taught.
Ethical behavior relies on more than good character. Although good upbringing may
provide a kind of moral compass that can help the individual determine the right
direction and then follow through on a decision to do the right thing, it’s certainly
not the only factor determining ethical conduct. In today’s highly complex organizations, individuals need additional guidance. They can be trained to recognize the
ethical dilemmas that are likely to arise in their jobs; the rules, laws, and norms that
apply in that context; reasoning strategies that can be used to arrive at the best ethical
decision; and the complexities of organizational life that can conflict with one’s
desire to do the right thing. For example, businesses that do defense-related work are
expected to comply with a multitude of laws and regulations that go far beyond what
the average person can be expected to know.
The question of whether ethics should be taught remains. Many still believe that
ethics is a personal issue best left to individuals. They believe that much like proselytizing about religion, teaching ethics involves inappropriate efforts to impose
certain values and control behavior. But we believe that employers have a real
responsibility to teach employees what they need to know to recognize and deal with
ethical issues they are likely to face at work. Failing to help employees recognize the
risks in their jobs is like failing to teach a machinist how to operate a machine safely.
Both situations can result in harm, and that’s just poor management. Similarly, we
believe that, as business educators, we have a responsibility to prepare you for the
complex ethical issues you’re going to face and to help you think about what you can
do to lead others in an ethical direction.
DEFINING ETHICS Some of the controversy about whether ethics can or should be
taught may stem from disagreement about what we mean by ethics. Ethics can be
defined as ‘‘a set of moral principles or values’’—a definition that portrays ethics as
highly personal and relative. I have my moral principles, you have yours, and neither
of us should try to impose our ethics on the other.
But our definition of ethics—‘‘the principles, norms, and standards of conduct
governing an individual or group’’—focuses on conduct. We expect employers to
establish guidelines for work-related conduct, including what time to arrive and leave
the workplace, whether smoking is allowed on the premises, how customers are to be
treated, and how quickly work should be done. Guidelines about ethical conduct
aren’t much different. Many employers spend a lot of time and money developing
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policies for employee activities that range from how to fill out expense reports to
what kinds of client gifts are acceptable to what constitutes a conflict of interest or
bribe. If we focus on conduct, ethics becomes an extension of good management.
Leaders identify appropriate and inappropriate conduct, and they communicate their
expectations to employees through ethics codes, training programs, and other communication channels.
In most cases, individual employees agree with their company’s expectations
and policies. For example, who would disagree that it’s wrong to steal company
property, lie to customers, dump cancerous chemicals in the local stream, or comply
with regulations on defense contracts? At times, however, an employee may find the
organization’s standards inconsistent with his or her own moral values or principles.
For example, a highly religious employee of a health maintenance organization may
object to offering abortion as an alternative when providing genetic counseling to
pregnant women. Or a highly devoted environmentalist may believe that his or her
organization should go beyond the minimum standards of environmental law when
making decisions about how much to spend on new technology or on environmental
cleanup efforts. These individuals may be able to influence their employers’ policies.
Otherwise, the person’s only recourse may be to leave the organization for one that is
a better values match.
Whether or not we prefer to admit it, our
ethical conduct is influenced (and to a large degree controlled) by our environment.
In work settings, leaders, managers, and the entire cultural context are an important
source of this influence and guidance. If, as managers, we allow employees to drift
along without our guidance, we’re unintentionally allowing them to be ‘‘controlled’’
by others. If this happens, we’re contributing to the creation of ‘‘loose cannons’’ who
can put the entire organization at risk. Guidance regarding ethical conduct is an important aspect of controlling employee behavior. It can provide essential information
about organizational rules and policies, and it can give guidance about behavior that
is considered to be appropriate or inappropriate in a variety of situations.
But should organizations be ‘‘controlling’’ their employees in this way? B. F.
Skinner,23 the renowned psychologist, argued that it’s all right, even preferable, to
intentionally control behavior. He believed that all behavior is controlled, either
intentionally or unintentionally. Therefore what was needed was more intentional
control, not less. Similarly, ethical and unethical behavior in organizations is already
being controlled explicitly or implicitly by the existing organizational culture (see
Chapter 5). Thus organizations that neglect to teach their members ‘‘ethical’’ behavior may be tacitly encouraging ‘‘unethical behavior’’ through benign neglect. It’s
management’s responsibility to provide explicit guidance through direct management and through the organization’s culture. The supervisor who attempts to influence the ethical behavior of subordinates should be viewed not as a meddler but as a
part of the natural management process.
To summarize, we believe that educational institutions and work organizations
should teach people about ethics and guide them in an ethical direction. Adults are
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open to, and generally welcome, this type of guidance. Ethical problems are not
caused entirely by bad apples. They’re also the product of bad barrels—work environments that either encourage unethical behavior or merely allow it to occur.
Making ethical decisions in today’s complex organizations isn’t easy. Good intentions and a good upbringing aren’t enough. The special knowledge and skill required
to make good ethical decisions in a particular job and organizational setting may
be different from what’s needed to resolve personal ethical dilemmas, and this
knowledge and skill must be taught and cultivated.
This book offers a somewhat unique approach to teaching business ethics. Instead of
the traditional philosophical or legalistic approach, we take a managerial approach.
Between us, we have many years of experience in management, in consulting, and in
management teaching and research. Based on this experience, we begin with the
assumption that business ethics is essentially about human behavior. We believe that
by understanding human behavior in an organizational context, we can better understand and manage our own and others’ ethical conduct. Kent Druyvesteyn was vice
president for ethics at General Dynamics from 1985 to 1993 and one of the first
‘‘ethics officers’’ in an American company. He made a clear distinction between
philosophy and management in his many talks with students and executives over the
years. As he put it, ‘‘I am not a philosopher and I am not here to talk about philosophy. Ethics is about conduct.’’
We agree with Mr. Druyvesteyn. After years of study and experience, we’re convinced that a management approach to organizational ethics is needed. As with any
other management problem, managers need to understand why people behave the
way they do so that they can influence this behavior. Most managers want the people
they work with to be productive, to produce high-quality products, to treat customers
well, and to do all of this in a highly ethical manner. They also want and need help
accomplishing these goals.
Therefore we rely on a managerial approach to understanding business ethics.
We introduce concepts that can be used to guide managers who want to understand
their own ethical behavior and the behavior of others in the organization. And we
provide practical guidance to those who wish to lead their department or organization
in an ethical direction.
We define ethical behavior in business as ‘‘behavior that is consistent with the
principles, norms, and standards of business practice that have been agreed upon by
society.’’ Although some disagreement exists about what these principles, norms, and
standards should be, we believe there is more agreement than disagreement. Many
of the standards have been codified into law. Others can be found in company and
industry codes of conduct and international trade agreements.
Importantly, we treat the decisions of people in work organizations as being
influenced by characteristics of individuals and organizations. We also recognize
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Individual differences
Cognitive biases
Process of Individual Ethical Decision Making
Group and organizational pressures
Organizational culture
FIGURE 1.1 The Ethical Decision-Making Process
that work organizations operate within a broad and complex global business context.
We will cover individual decision making, group and organizational influences, and
the social and global environment of business. The first part of this perspective, the
influences on individual decision making, is represented in Figure 1.1.
It’s important to think about the relationship between the law and business ethics
because if one could just follow the law, a business ethics book wouldn’t be necessary. Perhaps the easiest way to visualize the relationship between business ethics
and the law is in terms of a Venn diagram (Figure 1.2). If we think of the law as
reflecting society’s minimum norms and standards of business conduct, we can see a
great deal of overlap between what’s legal and what’s ethical. Therefore most people
believe that law-abiding behavior is also ethical behavior. But many standards of
conduct are agreed upon by society and not codified in law. For example, some conflicts of interest may be legal, but they are generally considered unethical in our
society and are commonly prohibited in codes of ethics. Having an affair with someone who reports to you may be legal, but it is considered unethical in most corporate
contexts. As we said earlier, much of the behavior leading to the 2008 financial crisis
was legal, but unethical. So the domain of ethics includes the law but extends well
beyond it to include ethical standards and issues that the law does not address.
Finally, there are times when you might encounter a law that you believe is unethical.
For example, racial discrimination was legal in the United States for a long time. But
racial discrimination was and is highly unethical. Similarly, many companies do
business in developing countries with few, if any, laws regulating environmental
pollution or labor conditions. They can ‘‘legally’’ pollute the air and water in these
countries. Such companies have to choose between adhering to ethical standards that
are higher than the legal standards in those countries and deciding that it’s okay to
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FIGURE 1.2 Relationship between Ethics and Law
harm the well-being of these people and communities. So the legal and ethical domains certainly overlap, but the overlap is far from complete.
Assuming that you ‘‘buy’’ the notion that business ethics can be taught, and that as
current or future managers you have a role to play in creating an environment supportive of ethical conduct, you may still wonder why you should care about being
ethical. As workers, we should care about ethics because most of us prefer to work
for ethical organizations. We want to feel good about ourselves and the work we do.
As responsible citizens, we must care about the millions of people who lost retirement savings because of the greed of those at AIG, Citigroup, Lehman Brothers,
Merrill Lynch, and other financial firms that brought down the global economy in
2008. The…
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