UNDERSTANDING BUSINESS ETHICS 3RD EDITION BY PETER A. STANWICK, SARAH D. STANWICK (CHAPTER 1_13) SOL

SOLUTIONS MANUAL

UNDERSTANDING BUSINESS ETHICS 3RD EDITION BY PETER A. STANWICK, SARAH D. STANWICK (CHAPTER 1_13) SOLUTIONS MANUAL Chapter 1 The Foundation of Ethical Thought The purpose of this chapter is to give the students a broad overview of the theoretical foundation that supports ethical decision-making. It is from this theoretical grounding that the students can understand how their decisions related to ethical issues can impact not only themselves but others as well. In addition, this chapter introduces the structure of the textbook which allows the instructor to also explain his or her structure for the class.

Key Learning Points There are a number of key learning points which can be accomplished when this chapter is presented to your students. These learning points include: 1. The chapter introduces the student to the concepts of ethics and business ethics.

2. Ethics is a complex concept to describe. Different philosophies have used different theories in order to help explain and guide ethical behavior.

3. Although some of the theories presented in this chapter were developed over two thousand years ago, they are appropriate and applicable to today‟s business environment.

4. This chapter demonstrates that the eight underlying principles presented in the Global Business Standards Codex are interrelated with each other as well as with the major philosophical theories related to ethics.

5. “Panera Cares Community cafes: A Loaf in Every Arm” demonstrates how one company can address the needs of many stakeholders.

6. Sir Nicholas Winton: A True Humanitarian demonstrates that one person can have an impact on many others by doing “the right thing” even at great personal risk.

Panera Cares Community Cafes: A Loaf in Every Arm The opening vignette highlights how one company, Panera Bread, has developed an outreach program of providing food for which the customers will pay only what they can. If the customer does not have any money, they can donate 1 hour of volunteer work in exchange for the meal.

An interesting fact is that 60 percent of the customers pay the retail value, 20 percent pay below the retail value, and 20 percent pay above the retail value of the meal.

1. Ask the class how many of them have volunteered for a nonprofit organization.

Follow up with those who respond positively by asking them why they volunteered. An additional follow-up question would be to ask if those same students would consider volunteering in the future.

2. How does Panera Bread satisfy the demands of the stockholders by potentially “giving away” food and profits?

It could be argued that Panera Bread has an enlightened stakeholder perspective to address the needs of its customers. Not only does this program support those in need in the local communities but it sends a message to all of Panera‟s stakeholders that it is interested in serving their needs. Furthermore, the long-term financial benefit of this program could be that as those customers increase their standard of living, they can afford to pay the full price of the meal and will have become brand loyal to Panera Bread due to this program.

3. Would this type of program work for other restaurants?

It is expected that this could create a lively discussion in the class. For those who agree that it could be transferred to other restaurants, the argument could be that the underlying philosophy of the program is to support those people in the local community who have food security issues.

Therefore, it should be applicable in any type of food service. For those who say no, it could be argued that Panera Bread probably has higher profit margins on its food than other type of quick service restaurants. Therefore, other fast-food restaurants such as McDonalds and Burger King do not have the flexibility to offer their food at “below cost”.

Definition of Ethics and Business Ethics To introduce the concepts of Ethics and Business Ethics to the students in the classroom, a good starting discussion point would be to ask the students what kind of ethical dilemmas they have faced in the past. A follow-up discussion point would be to ask them what type of ethical dilemmas they think they will face in their jobs after they have graduated.

The Role of Morals It is important for students to understand the three components of morals: individual principles, individual character, and the consequences of the actions. Due to the multifaceted nature of morals, the students need to realize that they may have ethical principles but if their character ignores or down plays the significance of the consequences, “ethical” people can do “unethical” actions. Therefore, the Greed is Good example from the movie Wall Street is a good visual example to highlight this potential conflict. Gordon Gekko believes that he has moral principles,

but based on his unethical character and his disregard for the consequences of his actions, he does unethical activities.

Is Greed Good?

During this discussion, playing the Greed is Good clip from the movie “Wall Street” (https://www.youtube.com/watch?v=6Da1tDKFfno) will enhance this argument. As they are watching the clip, ask the students to observe how the shareholders emotions shift during the speech to no longer supporting management‟s position on the acquisition to supporting Gordon Gekko‟s proposal. This discussion could also address the issue of a charismatic leader. Gordon Gekko is very charismatic and therefore makes his ideas much more convincing whether they are ethical or not.

Why is Studying Ethics Important?

The 2012 Ernst & Young study highlighted that 15 percent of the respondents reported that they would be willing to pay a bribe in order to close a deal. A follow-up question for the students would be how many of those respondents would also be willing to give a bribe but did not want to admit an illegal activity on the survey. Furthermore, 39 percent of the respondents stated that bribery was common in their industry. The results of this study have demonstrated that employees are consistently being challenged on their ethical beliefs. Since more employees are evaluated on their individual performance, there is a high financial incentive to perform unethical activities in order “to get the job done”. Therefore, the students need to be aware that they will face numerous ethical dilemmas in their careers and they need to understand what the potential consequences of those actions would have on their professional and personal life.

The Foundations of Ethical Theory Types of Ethical Examinations

Descriptive—The presentation of facts that relate to a specific set of circumstances related to an ethical issue.

Analytical—Using the facts of the ethical situation to try to understand or analyze the actions of the decision-makers as related to the ethical issue.

Normative—A prescribed course of action that is recommended to avoid unethical behavior in future.

An Example of Ethical Examinations Using Enron Executives Descriptive—Ken Lay and Jeff Skilling were found guilty of fraud based on their actions as top executives at Enron.

Analytical—Ken Lay and Jeff Skilling, through their cognitive lens, believed that they were doing nothing wrong. In addition, if they were doing something wrong doing, they were not aware of it and/or did not bother to ask about it. Alternatively, Ken Lay and Jeff Skilling knew

exactly what they were doing in a calculated attempt to defraud Enron‟s stockholders.

Furthermore, they actively tried to conceal their behavior in order to try to avoid prosecution by the federal government.

Normative—Need to have a code of ethics that creates real consequences if unethical behavior is detected. Try to ensure that power is not concentrated at the CEO level by having a separation of the CEO and the Chairman of the Board. Have the appointment of a Chief Ethics Officer who reports to the Board of Directors and is accountable to ensure the ethical conduct of all the employees within the firm. Revise the selection and reward system for employees to try and ensure that ethical people are selected and rewarded for their positive ethical behavior.

Teleological Frameworks

Ethical Egoism—Each individual‟s own self-interests drive them. On balance, there are more positive than negative results.

Utilitarianism—Each individual‟s actions will be based on providing the greatest good to the greatest number of people.

Sidgwick‟s Dualism—The middle ground between Ethical Egoism and Utilitarianism. Sidgwick argues that self-interest can be included in determining the greatest good for the greatest number and that the other two theories are not mutually exclusive.

After these three theories have been presented, a good leading discussion point would be to discuss what drives a free market system. If it is individual self-interest, is it an Ethical Egoism based system? If this is true, then why are there so many nonprofit organizations? Could Sidgwick‟s Dualism be the answer—that a free market system is driven both by the extrinsic rewards by the accumulation of material goods as well as the intrinsic rewards of helping others?

This would support Sidgwick‟s argument that individual actions need to be explained from the rational benevolence aspect of Utilitarianism and the prudence aspect of Ethical Egoism. At this point, you can refer back to the opening vignette on the Panera Cares program. It could be argued that the Panera Cares program would be an example of Sidgwick‟s Dualism. It is an outreach program which serves the needs of the community (utilitarianism) while still focusing on receiving revenues and profits from the program (ethical egoism).

Deontological Frameworks Existentialism—The only person who can determine right and wrong is based on the free will of the person making the decisions. As a result, duty is connected with actions—each individual determines the value of his/her actions.

Contractarianism (Social Contract Theory)—All individuals agree to social contracts to be members within society. As a member of society, each individual agrees to certain social norms.

As a result, the values and norms developed by society must be fair to everyone who is a member of society.

Kant’s Ethics—Individual free will to make decisions needs to be converted into universal free will. It attempts to bridge the gap between existentialism and contractarianism by proposing that each individual would act in the same manner as anyone else in society if he/she also had to address the same set of circumstances.

Using WorldCom as an Example of Deontological Frameworks Existentialism Bernie Ebbers claimed that he did nothing wrong and justifies his actions based on his individual interpretation of the value of his actions. His interpretation is that he did not do anything wrong; therefore, he will continue to believe he did nothing wrong.

Contractarianism By being a publicly traded company, WorldCom agreed to certain social norms including being truthful and being transparent when disclosing the financial performance of its firm.

Kant’s Ethics Cynthia Cooper would be a good example of Kant‟s Ethics in which the individual makes ethical decisions based on his/her own free will. This would be considered a good example of the philosophy of Kant‟s Ethics since she believed that others in her place would act in the same universal manner.

Seven Guiding Principles to Support Ethical Actions 1. Fidelity—An individual needs to keep explicit and implicit promises.

2. Reparation—An individual must act on repairing the consequences of previous wrongful acts.

3. Gratitude—An individual must be able to show gratitude for the kindness that others have given him or her.

4. Justice—An individual should try to see that any goods are fairly distributed.

5. Beneficence—An individual should focus on trying to improve the lives of others.

6. Self-improvement—An individual should improve oneself by focusing on virtue and intelligence.

7. Noninjury—Any individual should not cause harm to others.

Links with previous ethical philosophies include:

   

Ethical Egoism—self-improvement Utilitarianism—beneficence and noninjury Existentialism—fidelity and self-improvement Contractarianism—fidelity and justice

The Seven Deadly Sins The seven deadly sins are: lust, gluttony, greed, sloth, wrath, envy, and pride. An interesting discussion could start with asking the students whether some sins are more serious than others and if so which ones. Are there any sins in which the students do not believe is/are really a sin?

In addition, are there circumstances in which it is acceptable to embrace a deadly sin? In a highly competitive global marketplace, do you need to have some of the characteristics of the seven deadly sins in order to succeed in business?

The Trolley Problem The trolley problem is a classic ethical dilemma. It is a case in which you must decide which is the “least of the two evils”. In either scenario, there is at least one life lost due to the actions of the decision-maker. If the students stated that they would select the option in which only one person would die, ask them if they would make the same decision if it was a family member?

Friend? Business associate?

Global Business Standards Codex Fiduciary Principle—Similar to agency theory, the fiduciary principle states that managers have a legal responsibility to protect the interests of the stakeholders.

Property Principle—Each employee needs to respect the property of the firm and the property of others.

Reliability Principle—Each employee must honor his/her commitments to the firm.

Transparency Principle—Each employee should conduct business in a truthful and open manner.

Dignity Principle—Similar to the Golden Rule, the dignity principle states that employees should treat others with dignity.

Fairness Principle—Stakeholders who have a vested interest in the business decisions made by management should be treated fairly.

Citizenship Principle—Every employee should act as a responsible citizen in the community.

Questions for Thought

1. Which of the teleological framework most closely match your ethical beliefs? Under what circumstances would you shift toward another of the frameworks? For example, if you were trapped in downtown New Orleans during Hurricane Katrina, what would you do to stay alive and provide for your family?

You should receive all three components of the teleological framework. If this is the case, you can create a debate between the ethical egoism and utilitarianism believers. As the debate continues, it would be interesting to see whether they could see Sidgwick‟s Dualism as a compromise between the two viewpoints. Humans have a basic instinct for survival so it would also raise a good discussion as to how far a student would go toward unethical and illegal behavior in order to survive. Hurricane Katrina is a classic example, of people who were stranded in downtown New Orleans doing whatever they could to survive. In addition, you could also discuss the role or lack of the role of government officials during Hurricane Katrina to bring relief to those individuals who did not have any other options available to them.

2. Do you think “Greek Is Good”? Can a free market economic system survive without human greed?

Again you should have students that present both perspectives on the “value of greed”. A free market economic system is based on individual motivation which is based on individual incentives. As a result, humans are motivated to satisfy their own self-interests. As a result, accumulation of resources is necessary for survival which is based on the deadly sin of greed. As was stated in the chapter, with the underlying premise that greed is needed in order for a free market economic system to function efficiently, there is also a universal understanding that there should be in place rules, regulations, and mechanisms to ensure that the drive to accumulate resources for one individual does not infringe on the rights of others.

3. Which of the seven deadly sins do you believe is the most serious to commit? Which of the seven deadly sins do you believe is the least serious to commit? Do you think certain sins have gained or been reduced in importance over time?

Students will have varying opinions on the severity of these sins although it is probably expected that sins such as Wrath, Lust, and Envy may be considered more serious since these emotions may be more closely associated with creating harm to others. The least serious would probably be Sloth and Gluttony because they are emotions that usually only impact the individual. Greed and Pride are probably the two sins in which it could be argued that may, at times, be necessary for the survival of the individual. The students should have various opinions as to whether certain sins have gained or have been reduced in importance over time but there may be common agreement that Greed and Pride may not be considered as serious as was in past generations.

4. Using the principles set forth in the Global Business Standards Codex, find an example of a company that does or did not follow one of the principles. Discuss the implications of the company‟s actions.

You also may start discussion by asking whether the students would rank each of the eight principles as having the same level of importance. If they do not feel they should be ranked equally, have the students rank them for you and justify their rankings.

The tobacco industry is a good example for students to evaluate whether tobacco companies are following the eight principles. The students will find that, in general, tobacco companies do not follow the guidelines which could lead to a discussion as to how can a corporation be very profitable and ignore these eight principles. Also ask them whether the omission of the principle(s) would impact whether you would: invest in the company, buy products from the company or work for the company.

As a supplementary question, you can ask the students to find a company that has publicly stated that they embrace all of eight principles. As based on a recent internet search, there are no companies that have publically embraced the Global Business Standards Codex. This could raise the question as to why no companies have publicly stated they are using the Global Business Standards Codex as part of their strategic focus.

Real-Life Ethical Dilemma Exercise The story of Sir Nicolas Winton is inspirational and should resonate with the students with a comparison of Oskar Schindler which was portrayed in the movie “Schindler‟s List”. Sir Winton risked his own life to save 669 children from almost certain death in Nazi Germany. There is an excellent 60 minutes segment on Sir Nicolas called Saving the Children (https://www.youtube.com/watch?v=c0aoifNziKQ).

1. Discuss how this issue would be addressed using each of the teleological frameworks.

From an Ethical Egoism perspective, the children are grateful for the chance to survive and from Sir Winton‟s perspective, he had the confidence that he would be able to achieve the “impossible”. From a utilitarianism perspective, Sir Winton‟s resulted in saving 669 human lives based on one individual‟s belief that he could save them. From a Kant‟s Dualism perspective, Sir Nicolas embraced the challenge and proved that he was capable of saving the children and the children were saved.

2. Explain why Sir Winton is considered a humanitarian.

Sir Winton personifies the belief of having empathy for those who are suffering. As a true humanitarian, Sir Winton was fully committed to the utilitarianism belief that the actions of one person should be based on providing the greatest good for the greatest number. Sir Winton has set a wonderful example of an individual who views the value of helping others above the value of his own life.

3. Winton saved many children on his orphan trains. Discuss the ethical implications of what Winton accomplished.

The ethical implications are that one person can make a difference. Sir Winton demonstrated that because of his courage and determination, he was able to save the lives of 669 children. The net result was that the legacies of the families of those children have been saved because the children were able to survive, and become parents and grandparents.

Chapter 2 The Evolving Complexities of Business Ethics

The purpose of this chapter is to present a general summary of current issues that are related to business ethics. This chapter allows the instructor to further entrench the value of strong positive ethical behavior in a business setting. The chapter also highlights that it can be difficult to determine and interpret what is ethical and unethical behavior based on the potential internal biases of every person.

Key Learning Points

1. Student realizes that even famous pop stars such as Bono may exercise behavior that to outsiders may be considered unethical and is inconsistent with the person’s own beliefs pertaining to aiding the less fortunate.

2. This chapter addresses the global nature of ethical issues. Regardless of the industry and country, ethical issues and resolving ethical dilemmas are universal.

2. The History of Business Ethics highlights the longevity of unethical behavior. As was stated in the beginning of the Preface of the textbook, unethical behavior is as old as commerce itself. As long as there is a finite amount of resources, some people will continue to try to obtain those resources by whatever means possible.

3. The discussion on integrity helps students understand the distinction between legal and ethical behavior. While some students will always state that their ethical values will be based on the legal standards, the role of integrity in the decision-making process allows students to see that there are benefits to moving beyond the minimum legal standard.

4. Discussion of unethical behavior can be linked directly to the Bono case at the beginning of the chapter. It is important for the students to understand that their perceptions may not correspond with the perception of others. This discussion could lead to a general discussion on heuristics and “rules of thumb” and their role in making ethical decisions. The discussion could also lead to how decision-makers can rationalize unethical behavior.

5. The cheating culture is an excellent topic for students to understand that the rationale of unethical behavior is not just an occurrence in a corporate setting. The example of making false statements on a person’s resume should reinforce to the students that there can always be evaluation based on providing accurate information even if it is years after the false information was first presented to an employer.

Bono: I Still Haven’t Found The Tax Rate That I’m Looking For (p. 21)

This case allows for a good opening discussion on the complexities of business ethics. The title is a takeoff of the U2 hit song “I Still Haven’t Found What I’m Looking For” and relates to U2’s quest to find the lowest tax rates for their royalties.

The first question to ask is that although other artists are mentioned in the case, including three members of the Rolling Stones, why was U2 and, specifically, Bono selected as the focus of the article.

Bono was selected because of his apparent hypocritical approach to tax avoidance. The members of the Rolling Stones have never gone to developed countries asking them to contribute more aid to those countries that are poorer. Elvis Presley never stated the role of government was to help end poverty.

Bono is the focus because he has volunteered to be evaluated based on higher ethical standards than other rock stars. Bono’s actions beg the question why should governments give more aid to developing countries when he and the other members of U2 are purposely trying to reduce the level of money that is given to governments.

In February 2008, Bono was in the news again with another apparent hypocritical stance related to the expansion of a hotel he owns with U2 guitarist, the Edge, in Dublin. He wants to expand the 177-yearold Clarence Hotel but failed to convince an independent planning watchdog in Dublin of his plans even after a lunch which included several bottles of wine. The 150 million Euro proposed renovation (220 Million $US) would triple the size of the hotel. “The Clarence demolition is an old-fashioned moneydriven, anti-environmental exploit … Bono is behaving like just another private-jet-addicted property speculator feeding on Ireland’s greedy zeitgeist” stated Michael Smith who is a member of the independent planning watchdog organization. The Dublin planning committee had approved the renovation in November 2007 stating that the renovation would improve the economy in Dublin. In addition, U2 also wants to develop a 394-foot tower in the Dublin’s docklands called the U2 tower. It is expected to be completed in 2011 and would be the city’s largest building. Another critic of the two projects, Ian Lumley, stated that “Taken together, these are two egomaniacal projects”. In January 2008, Bono was asked about his apparent inconsistencies related to what he says and his actions. He concluded that there was not a conflict between his social activism and his financial investments. “I long

since grew out of the idea that artists good, businessmen bad … I got over than one when I was 22” stated Bono.1

The Global Complexities of Business Ethics (p. 22)

The opening quotes from Arthur Jensen in the movie Network highlight how many corporations view the world from their reality. By putting corporations instead of countries as the centralized source of power globally, it would explain why corporations and CEO can have a distorted reality as to how their decisions impact their various stakeholders. As was stated in the chapter, that speech is 40 years old yet could be considered even more relevant that when Network was released. (https://www.youtube.com/watch?v=NKkRDMil0bw)

History of Business Ethics (p. 23)

The purpose of this section is to highlight that unethical behavior is as old as commerce. As long as there are items of value that are finite, some people will try to obtain those items unethically. Early “unethical” commerce dealing include “giving” companies established by a country (e.g., England) exclusive rights to newly discovered land in order to create “English” colonies. Not only did this strategy limit options available to customers but it “forced” a predetermined culture and beliefs into a new country setting. The 1960s highlighted unethical activities by companies that were related to areas such as discrimination and illegal drug use in the workplace. The 1970s were highlighted with scandals related to defense contractors, human rights, and the natural environment. In the Gordon Gekko era of the 1980s, scandals related to savings and loans fraud and the role of corporate raiders moved to the forefront in issues related to ethical concerns. The 1990s shifted toward ethical dilemmas facing multinational firms including outsourcing issues in developing countries. The end of the 1990s and the beginning of the 2000s were the pinnacle of unethical behavior by major corporations in both the United States (Enron, WorldCom and Tyco) and around the world (Siemens, De Beers, Tokyo Electric Power) The net result was increased by government intervention globally with the centerpiece legislation in the United States being the Sarbanes-Oxley Act that was passed in 2002.

The Role of Integrity (p. 25)

Students must understand that integrity is a foundation belief that must be incorporated in the decisionmaking process in order to ensure that ethical decisions are made. Decision-makers must take into account a number of factors to insure their decisions are made with integrity including: possessing 1

Doyle, Dara. Bono‟s Dublin Hotel Plan Pits Rocker Against Preservationists. Bloomberg News. February 21, 2008. pp 1-2.

humility, maintaining concern for the greater good, having ability to be truthful, being able to fulfill commitments, striving for fairness, being able to take responsibility for your own actions, having respect for the individuals, being able to celebrate the good fortune of others, helping aid in the development of others, being able to reproach unjust acts, being able to forgive their actions, helping others when they are in need, and encouraging other individuals to learn how to develop ethical behavior. This would be a good opportunity for a learning point with the students by asking them whether they have ever made a decision that was based on integrity. Follow up by questioning whether another individual made a decision that impacted them that was not based on integrity.

Is Everyone Unethical? (p. 27)

This question should lead to a lot of lively classroom discussion. The key component of this section is that the students may be “guilty” of these heuristics and not even being aware of it. It is through the illusion of objectivity that individuals convince themselves that they are being fair and ethical while others would not agree with that conclusion. It is during this section of the chapter that you can link Bono’s actions with the concepts. Bono appears to believe there is no contradiction with his actions and his viewpoint. This shows that even very public figures can be caught in the “unintentional unethical conduct” web.

Implicit Prejudice In this case, the person has unconsciously already evaluated the validity of the information and/or actions of others based on pre conceived stereotypes which the decision is not aware of. A good example to explain this concept is the current investigation pertaining to illegal steroid use of major league baseball players. Does the student either believe or not believe the baseball player based on whether that student is a fan of the team the player played on in the past? If the student is a “loyal” fan of the player, do they believe them regardless of the evidence? Alternatively, if they do not like the baseball player, do they believe he is guilty regardless of the evidence?

In-Group Favoritism This is a very common occurrence due to human nature. As humans, we like to interact with people who share our same interests. As a result, we are more likely to spend time with people who share our same interests which can result in the unethical concept of in-group favoritism. If, for example, a subordinate went to the same fraternity/sorority, grew up in the same neighborhood, liked the same sports and sports teams, it would be very likely that this social connection would result in spending more time with each other. It could also result in the subordinate helping out the employee because they have become social friends. The net result is that other employees that are not included within that specific social network would not receive the same “benefits” from the subordinate.

Claiming Credit for Others’ Actions A very common issue is to evaluate your own contribution to a task significantly higher than others contributions. Since you only have complete information pertaining to your own contribution, you will evaluate yourself highly since you can present to yourself all the areas where you have made contribution. However, you do not have complete information about the actions of others so you assume that their contribution is less.

Conflicts of Interest A conflict of interest occurs when there are personal benefits for making a decision which are not available to others. The “conflict” is based on the idea that the decisions made by the manager should represent the interests of the company and the stakeholders instead of purely the interests of the decision-maker.

The Cheating Culture (p. 29)

The Cheating Culture should create a good discussion topic in the classroom. The students should be able to draw on their own experiences where they have observed or know of someone who has cheated at school. One of the focal points of the discussion is to ask why cheating is so widespread. The responses could include: very low probability of getting caught; everyone does it; it does not harm anyone; sometimes you need a “shortcut” in order to get a good grade due to other time commitments.

The discussion could then lead to the example of presenting falsified information on your resume. It is expected that some students will state that an embellishment of the facts is not bad because, again, it does not harm someone. In addition, it is good “marketing” to present your activities in the most positive light. Of course, the counter-response is that this misleading and false information creates an unfair advantage for those who use this information to obtain a job. Furthermore, by misrepresenting the applicant’s qualifications, it can create a permanent damaging effect on the image and the reputation of the individual.

Grade Inflation and the Institutional Pressure to Cheat (p. 32)

This section was included in this chapter to demonstrate that unethical behavior occurs on both sides of the table. Not only are there ethical challenges for the students not to cheat, there are also ethical challenges for teachers and administrators not to cheat. For both sides of the coin, the underlying motivation is the “reward” for cheating versus the potential consequences.

The Role of Technology and Cheating (p. 33)

Plagiarism has always been a challenge in an academic setting, but with the advancement in technology, it has become so much easier just to cut and paste someone else’s ideas. Again, the same rationales would be used by the students in order to “justify” copying work from the internet. Again, the students need to weigh the convenience of “stealing” other people’s ideas with the threat of being caught and the subsequent consequences of those actions. It could be pointed out to the students that their true value to any corporation is their ideas and their creativity and that cannot be found on someone’s web site. This creates a very similar analogy to the misleading information presented on a person’s resume. A person can falsely claim to have skills and expertise in areas in which they are not familiar with and a person can “copy” ideas from others, but, they will be asked for their own ideas based on their alleged skills and if they are not able to produce satisfactory results, it will have a negative impact on their career.

Generational Differences Pertaining to Ethics

The summary of the generational differences presented in Table 2.1 demonstrates that as society evolves so do the beliefs of society. In the movement from Baby Boomers to Millennials, it is apparent that what is considered core values of a generation have shifted. Hard working, loyal, and idealistic Baby Boomers have been replaced by tech-savvy multitasking Millennials. However, the true shift in generations can be seen in the negative traits where Baby Boomers are workaholics with a sense of entitlement while the Millennials have shorter attention spans and are not loyal to any organization. The lack of loyalty of employees could ultimately lead, in the future, to more unethical behavior by the employees since they are not loyal to any one organization.

The Role of Trust in Ethical Conduct

The role of trust leads directly from the last comment made in the previous section. If employees are no longer loyal to an organization, how can trust be established between the firm and the employee?

Therefore, truly enlightened firms understand that the development of trust between the workers and the firm not only leads to more productive and happy employees, but they are less likely to be involved in unethical activities since it would break the trust between the employee and the firm.

Questions for Thought

1. Why do you think that Bono fails to see the inconsistencies of his actions?

Bono has appeared to have done an excellent job in departmentalizing his decision-making. It appears as if his public appeals for more aid do not have a direct link to his own personal wealth. In addition, it appears that Bono is using the argument that the legal standard is the ethical standard as it pertains to taxes. There is nothing wrong with using the legal standard as the ethical standard if you do NOT have a reputation of presenting higher ethical goals than others. Again, Bono’s actions do not appear to correspond with his arguments.

What could Bono do now to help correct this perceived hypocritical behavior?

The best alternative for Bono may be to establish a trust fund for the difference between his tax payments and his potential tax payments if the royalties were still being taxed in Ireland. By accumulating the difference in these two tax rates, Bono could present the money in the trust fund to directly aid developing countries that need financial help.

2. Do you agree with the argument that corporations are more powerful than governments? Do you expect corporations to become weaker or more powerful in the future?

The argument that corporations have more power now and in the future is based on who specifically makes decisions that impact the day to day living conditions of individuals around the world. It could be argued that, yes, corporations have become more powerful than countries since they are global and, therefore, can impact government policies in multiple countries. Furthermore, global corporations have the ability, through lobbying to have a direct influence on the policy making decisions made by governments globally. It is expected that this power will only grow in the future since there does not appear to be a counterbalancing force that would reduce the power of global multinationals.

3. Do you think how people view what is ethical has changed over time? How have the ethical values changed from your grandparents’ era. Explain

This question directly relates to the generational differences that have occurred in society. Examples that could be made include that smoking and wearing real fur coats were very common two generations ago but are now not considered as acceptable. Furthermore, the advancement in technology has opened up the door for multiple areas of ethical debates which were not possible 50 years ago. Issues

such as privacy, online bullying, and illegally downloading files have made society much more diverse in the type of ethical issues that must be addressed by the individual.

4. Do you believe we live in a cheating culture. Explain your answer.

It is expected that the vast majority would agree that we live in a cheating culture. Again, the advancement of technology has greatly eased the ability of anyone to cheat in everyday activities.

Whether it is illegally copying and pasting someone else’s ideas or downloading an illegally obtained music file, we live in the culture where “cheating” constantly occurs. Furthermore, through rationale and/or ignorance, the vast majority of the people may not even realize they are “cheating” or doing something that is unethical. One common belief that everything on the interest “should” be free with open access so why should individuals worry about their actions since they are now accepted in society.

Chapter 3 Stakeholders and Corporate Social Responsibility

The purpose of this chapter is to expose students to the interconnection between stakeholder theory and corporate social responsibility in ethical decision-making. This chapter presents concepts to highlight who has a vested interest in the company and outlines what the firm’s responsibilities are in addressing those interests. The chapter also discusses how firms should address issues related to human rights both domestically and globally.

Key Learning Points

There are a number of key learning points which can be accomplished when this chapter is presented to the students. These include:

1. Explain the concept of stakeholders.

2. Describe the differences between immoral, amoral, and moral managers.

3. Define power, urgency, and legitimacy with respect to stakeholder theory.

4. Describe the concept of trust with stakeholder groups.

5. Define triple bottom-line reporting.

6. Define a benefit corporation and the criteria to be classified as a B corporation.

7. Explain the concept of suppliers as stakeholders and its relationship to outsourcing.

8. Identify the different stakeholders that could exist for a company.

9. Define corporate social responsibility and discuss its components.

10. Explain the role of corporate reputation in an organization.

11. Explain the role of corporate philanthropy in an organization.

When is Fair Trade Not Fair? (p. 39)

1. What is the definition of Fair Trade?

The general definition of Fair Trade is that the farmers who grew the crop receive a “fair wage” for their efforts. As a result, the product usually has a higher selling price to compensate this “higher wage rate”.

2. Why is “Fair Trade” an ethical issue?

Fair trade is an ethical issue because it relates to the treatment of the firm’s suppliers. This case is a good example to use to distinguish between legal and ethical behavior related to stakeholder theory. It is expected that if the firms are trying to serve the needs of the stakeholders, they will be trying to have a strong positive relationship with the suppliers. As a result, the “ethical” thing to do would be to move beyond paying the legal wage rate and give the farmer a fair wage rate.

3. What are the competitive advantages of “Fair Trade”?

The competitive advantages for fair trade occur at both ends of the supply chain. By paying the farmer fair wages, the farmer will want to sell as much of his coffee as he can to the companies that will pay him a “premium” for his work. As a result, a strong loyal positive relationship will take place between the firm and the farmers. The second advantage occurs when the coffee is sold by the retailers. By presenting the coffee with a certified Fair Trade logo, the coffee will be differentiated versus coffee that does not have a logo. Therefore, customers that are aware of the Fair Trade issue and want to support Fair Trade will buy the coffee that has been certified.

4. What are the potential problems with Fair Trade?

As was highlighted in the case, one critical problem is to ensure that the farmers are receiving the fair wage premium. If, as was presented in the case, the middlemen are receiving the premium instead of the farmers, the ethical value of the fair wage premium is gone. In addition, if the retailers charge much higher prices than are warranted to compensate for the fair trade wage, the ethical value of the program has been diluted.

The second major issue is whether customers care about fair trade. The underlying assumption is that customers would be willing to pay a higher price for coffee with the end result being that the farmers receive more money for their efforts. However, customers may not care about the issue and, therefore, would not be willing to pay a “fair wage” premium in order to buy the coffee. The net result would be that the fair trade program would no longer be considered a competitive advantage but would be considered a competitive disadvantage.

What Is A Stakeholder? (p. 34)

Although a number of the students may not be familiar with the term stakeholder, it needs to be stressed that stakeholder theory is one of the underlying foundation concepts for the textbook.

Stakeholders can be defined as any group of individuals who have a vested interest in the day-to-day operations of the firm and the subsequent long-term operations of the firm. How firms act is directly related to how they are serving the needs of others. It is through stakeholder theory that different components of a firm’s ethical commitment can be integrated together.

It is important to note that stakeholder theory is not a new concept. As is highlighted in the textbook, the origins of stakeholder theory can be traced back to the 1930s when the issue was debated in the Harvard Law Review by Berle and Dodd. Milton Freedman made the next significant contribution to stakeholder theory be defining a very narrow scope to the term and supporting the view of Berle. By arguing that the role of the firm is to increase its profits, Freedman identified the investors as the only relevant stakeholder. As a result, a continuum had been established in which serving the needs of only one stakeholder, the stockholder, is at one end and serving the needs of all the relevant stakeholders is at the other end.

The Stakeholder Model (Figure 3-1; p. 41) shows the interconnecting relationship between the firm and the various stakeholders. Each of those stakeholders has an active interest in the firm’s operations and each of those stakeholders will present his/her discontent of the firm if individual needs are not being served. Stakeholders for the firm include: Government, Suppliers, Trade Associations, Investors, Employees, Political Groups, Customers, and Communities.

Management’s Response to Stakeholders (p. 35)

Moral Management and Stakeholders

Managers can display three different moral viewpoints based on their individual viewpoints. By focusing on moral, amoral, and immoral behavior, students can learn that two managers in the same company

can react very differently to the exact same set of circumstances. While it may be easy for the students to grasp the concept of a moral and immoral manager, the amoral manager may be more difficult to envision. As a result, it is important to highlight the potential ethical problems with an amoral manager.

By not including ethical values in the decision-making process, an amoral manager exposes him or herself to potential unintentional problems. As was mentioned in the textbook, physical requirements for job applicants may seem “necessary” in order to fulfill the commitment of the job. However, firms are also required to make accommodations when possible in order for potential applicants to be able to be considered for the position. In addition, an amoral perspective uses the legal standard as the default ethical standard. The limitation of this philosophy is that certain actions which are legal could also be considered unethical. For example, having “underage” children sew clothing together in a developing country even though they are within the legal guidelines of that country represents this type of philosophy.

Table 3-1 (p. 42) presents a good summary highlighting the differences in stakeholder interaction among the moral, amoral, and immoral managers. One thought-provoking question which you could ask is whether a manager has a “hybrid” relationship with stakeholders. In other worlds, could a manager act as an “immoral” manager with the local community, act as an “amoral” manager with their customers, and act as a “moral” manager with the firm’s stockholders. The simple answer is yes. Managers may not be consistent in their moral values. As was highlighted in “Is Everyone Unethical” in chapter 2, the manager may not even be aware of his or her inconsistent actions. As a result, how could the manager ensure that his or her actions are consistent among of the stakeholders? A simple solution would be to ask each of the stakeholders to evaluate the moral behavior of the manager. The feedback from the stakeholders could be used to verify the level of consistency of the actions of the manger to all the vested stakeholders.

Which Stakeholders Are More “Important”? (p. 43)

The relative “importance” of various stakeholders is based on the belief that there are contingency attributes that could require more attention by the managers. The role of power is a two-edged sword.

Just as the firm can exercise power over the stakeholders, the reverse is also true. Stakeholders have the legal power to sue and legally disrupt the operations of a firm based on unethical activities of the firm.

This leads into the concept of legitimacy. Stakeholders have a vested interest to monitor the activities of the firm since they are directly impacted by these activities. As a result, stakeholders can ensure that the activities of the firm are “legitimate”. Urgency is usually based on crisis activities which must be resolved within a set time frame. As a result, a strike by the workers of the firm increase the level of importance of the employees as a stakeholder since it directly impacts the current operations of the firm.

Four Roles through which Stakeholders Impact Organizations: (p. 44)

1. Stakeholders establish expectations (explicit or implicit) about corporate performance. The challenge occurs when the expectations of the stakeholders do not coincide with the expectations of the firm.

Whether it is the treatment of the employees, the financial performance of the firm, or the type of suppliers who provide the raw materials, there is always the potential for disconnect between the expectations of the stakeholders and management.

2. Stakeholders experience the effects of corporate behaviors. By definition, stakeholders will be directly impacted by the behavior of the firm since they have a vested interest in the operations of the firm. As a result, stakeholders will try to ensure that their “needs” are satisfied by the actions of the firm.

3. Stakeholders evaluate the effects of corporate behaviors on their interests or reconcile the effects of those behaviors with their expectations. As a continuation of number 2, if stakeholders believe their “needs” are not being satisfied, they will either try to make the firm adjust their actions or they will adjust their expectations concerning what are acceptable actions by the firm.

4. Stakeholders act upon their interests, expectations, experiences, and evaluations. This is by far the most comprehensive and, therefore, the most difficult stakeholders’ actions to anticipate from the firm’s perspective. By relying on their interests, expectations, experiences, and evaluation, there is a potential for large gaps in the perceptions of the stakeholders and the perceptions of the firm. Since each of the stakeholders could have varying interests, expectations, experiences, and evaluations, there could be inconsistencies among the stakeholders as to what is considered to be serving the needs.

Therefore, the axiom “you can’t be all things to all people” applies in that it would be impossible to satisfy all the expectations of every stakeholder. Therefore, firms must use the utilitarian philosophy of trying to serve the greatest good for the greatest number.

The Ability to Build Trust with the Stakeholders (p. 44)

Trust can be considered a moral exchange between the stakeholders and the managers of the firm. The three elements of trust which can impact the relationship between stakeholders and the firms are: rational prediction of outcomes, emotion, and a clear moral statement. Therefore, it is critical that the firms under the perspective in which the stakeholders view the firm since their perspective is their basis of reality and their perceptions of the level of trustworthiness of the firm may defer from the firm’s beliefs related to the trust level with the stakeholders. There are four dimensions that can enhance the level of trust between the stakeholders and the firms: ability, benevolence, integrity, and information quality. The underlying focus on these four dimensions is the ability to transparently collect and disseminate accurate information that is relevant to the stakeholders. The level of trust is based on the ability for both parties to believe that the communications are truthful and relevant to the needs of each party.

Triple Bottom-Line Reporting (p. 45).

Triple bottom-line reporting formalized the communication methods used by firms to present information to their stakeholders. By establishing not only financial reports, but also environmental and social reports, firms allow information to be communicated to those stakeholders that are interested in the information. The Internet has allowed stakeholders to raise their expectations pertaining to the quantity, quality, and speed in which information is available to them pertaining to the activities of the firm. The triple line reporting and the internet have also allowed firms to be able to present a comprehensive detailed narrative of their commitment to their stakeholders and their needs.

The Benefit Corporation (p. 46)

The benefit corporation (B Corp) is a relatively new corporate structure which addresses the triple bottom line approach to its stakeholders. Being certified as a B Corp allows firms of all sizes the ability to formally communicate to their stakeholders that they are committed to addressing their needs in addition to the financial needs of the stockholders.

Suppliers as Stakeholders (p. 47)

The discussion on the relationship with suppliers should allow students to understand that the firm must also monitor the activities of other companies who have a direct and indirect impact on its operations.

Since the firm’s reputation and image can be directly impacted by the operations of other companies, it is imperative that firms view suppliers as critical stakeholders. For example, companies will provide specific requirements to all of its suppliers in order for the supplier to be in compliance with their view.

Three components are important: 1. The supplier must be in strict compliance with the law.

2. The supplier must have respect for competition.

3. The supplier must not have any actual or perceived conflicts of interest with any other party.

The Ethics of Outsourcing (p. 47–48)

With recent incidents such as the use of lead-based paint by Chinese suppliers in the manufacturing of toys for Mattel, outsourcing continues to play a dominant role in raising issues of ethical standards. The

listing of the nine countries where outsourcing plays a dominant role in the manufacturing process (p.

48-49) highlights how global firms continue to move manufacturing to areas where labor is relatively inexpensive. Of course, the danger with this strategic move is that firms such as Mattel are linked based on the decision made by these third-party companies. As a result, use of child labor, poor and unsafe working conditions, use of toxic materials, discrimination, and labor violations becomes associated with the firm whose brand name is on the product. As a result, firms must provide continuous due diligence in order to ensure that their suppliers comply with the ethical requirements established by the firm.

Customers as Stakeholders (p. 49)

Customers obviously play a critical role as stakeholders since this is the major source of revenue for the firm. Firms must be able to identify and then satisfy the needs of the customers. In addition, the firms must ensure that factors such as the relationship with the suppliers coincide with the expectations of the customers. Again, the Mattel example highlighted how quickly customers demanded action once the information was available that some of the toys produced by outsourced suppliers had unacceptable levels of lead in the toy’s paint.

The issue of outsourcing from a customer’s perspective is incorporated in the first of four critical areas pertaining to the firm’s relationship with the customer. The four areas are:

1. The manufacturing process 2. Sales and quotes 3. Distribution 4. Customer service

It is through these four direct relationships with the customer that the firm can “show” the customer that there is a good faith relationship that has been established between the two parties. By providing ethical guidance at each of the four steps in the relationship with the customer, the firm has added potential value to the relationship. As a result, the firm can establish brand loyalty by ensuring that the customers’ needs are met in each of the four areas. If the firm does not provide value by ensuring that high ethical standards are maintained in addressing these four areas, there could be significant financial penalties. For example, Mattel’s stock price dropped by seven percent in the month after the use of lead paint in toys became public.2

2

Casey, Nicholas. Mattel Issue Third Major Recall; Top toy Brands Barbie, Fisher-price Are Latest Facing LeadPaint Issues. The Wall Street Journal. September 5, 2007. p. A3.

Government as a Stakeholder (p. 50)

The government will always be a leading stakeholder for any organization since they set the legal standards of operations. The issue of ethical standards impacting government regulations is twofold, Firstly, government regulations become the default ethical standards if the firm does not develop its own ethical standards. Secondly, government regulations can vary significantly from one country to another so that “acceptable ethical actions” in one country could be considered “unacceptable” in another country. This is due not only to the variance in laws governing other countries but also the culture of the country. The acceptable ethical values are based on the cultural values of the country.

NGOs as Stakeholders (p. 50)

NGO are often the voice for those who to do usually have a voice related to the operations of the firm.

Whether it is human rights, animal rights, or the natural environment, NGOs serve a valuable service in society. NGOs creates a community of likeminded individuals who collectively are able to ensure the needs of traditionally underrepresented groups have their needs heard by the firms and ensure the accountability of the firms to response to those needs.

Local Community and Society as Stakeholders (p. 51)

Local communities and society as a whole play active roles in monitoring the operations of a firm.

Traditional monitoring activities include pollution levels, treatment of citizens of local and broad-based communities, and fair and equitable benefits for the costs of economic development.

The Role of Corporate Social Responsibility (p. 51)

Corporate social responsibility (CSR) can be defined as the obligation companies have to develop and implement courses of action that aid in social issues impacting society, CSR can be tied directly to the relationship the firm has with the stakeholders. It is through these courses of action that the firm is able to identify and satisfy the needs of the stakeholders. The firm must have the ethical commitment to move beyond focusing on a single stakeholder (stockholders) and evolve into a fully encompassing corporate social citizen. It is through CSR developed strategies that firms can demonstrate their commitment to social issues that relate to their stakeholders.

The Competitive Advantage of Corporate Social Responsibility (p. 52)

CSR can enhance the firm’s competitive advantage through: moral obligation, sustainability, license to operate, and reputation. The corporate reputation of the firm can be a significant factor in enhancing firm competitive advantage. A firm with a strong positive corporate reputation allows the firm to attach and retain more customers than firms with a neutral or negative corporate reputation.

Components of Corporate Social Responsibility (p. 52)

Economic Responsibilities A firm is created to generate economic value. The underlying premise of any corporation is to generate a profit. However, the assumption that a firm cannot be profitable and be socially aware is incorrect.

Profitable firms can also be good corporate citizens and being a good corporate citizen can lead to higher levels of profitability.

Legal Responsibilities A firm has a legal requirement to abide by all the related laws and regulations that govern its operations in every country in which it does business. As was mentioned previously, legal responsibilities are the minimum standards established by a firm to dictate what acceptable and unacceptable behavior. By relying on legal requirements, the firm allows an external party, the government, to control the ethical decisions made by the firm.

Ethical Responsibilities As is stated in the textbook, ethical responsibilities of the firm shift with the changes in society. What was considered acceptable and unacceptable in the past may be viewed differently by today’s society.

As a result, the firm must have an effective communication flow between its global stakeholders and itself. A significant challenge for firms is to ensure consistency of ethical responsibilities. As was stated previously, different countries have different societal norms and values. As a result, firms must be aware of not only the blatant but also subtle differences in the different societies of the firm’s operations.

Discretionary Responsibilities The discretionary responsibilities can be the most challenging for firms to recognize and properly serve.

By being discretionary, these responsibilities are determined by the firm based on its own ethical vision and commitment. By supporting a charity or providing funding for local community social programs, firms are able to differentiate their activities from their competitors. As a result, discretionary responsibilities give the firm the opportunity to enhance its competitive advantage based on the social commitment relative to its competitors.

A summary of the priority given to these Corporate Social Responsibilities is shown in Figure 3-2 presented by Carrol (p. 54). This pyramid shows the order of priorities of a firm is to be profitable (Economic Responsibilities), obey the law (Legal Responsibilities), be ethical (Ethical Responsibilities), and finally being a good corporate citizen (Philanthropic Responsibilities). You could argue that this pyramid is similar to Maslow’s Hierarchy of Needs. The firm’s basic or physiological needs to survive are based on being profitable. The long-term survival of the firm is based on the financial ability to compete in the future. The firm’s safety needs are equivalent to the firm being a law abiding citizen. It is through the legal actions of all firms that the stakeholders will be treated in a safe manner. The ethical responsibilities of the firm could coincide with the social and esteem needs of the firm. In order to implement an effective ethical commitment, the firm must recognize the social benefits of having a positive relationship with its stakeholders as well as enhancing its own self-esteem by respecting the needs and concerns of the various stakeholders. Being a good corporate citizen would be equivalent to Maslow’s self-actualization. The pinnacle of both pyramids represents the final achievement of serving the needs of oneself and others. Self-Actualization allows the individual to “think beyond the box” and be creative and innovative with his/her thoughts. Being a good corporate citizen is identifying the firm’s discretionary or philanthropic responsibilities. This level allows the firm to be creative in how it can become a better corporate citizen based on its own creative ideas.

Maslow’s Hierarchy of Needs

Self-Actualization-Creativity, Spontaneity, Personal Growth, Fulfillment Esteem Needs-Achievement, Status, Respect for Others, Confidence Social Needs-Family, Friendships, Affection, Love Safety Needs-Protection, Security, Law and Order Physiological or Basic Needs-Water, Food, Shelter, Warmth, Sleep

Models of CSR (p. 55)

The Business Case Model could be compared with an Ethical Egoism approach to decision-making.

Investments related to CSR are based solely on the potential financial return for the investment. This leads to the skeptical view that many people perceive when a company announces a CSR program. The skeptical view would ask whether the firm is interested in helping the community or is the investment just another form of marketing the firm.

The Social Values-Led Model could be compared with Sidgwick’s Dualism approach to decision making.

The firm is addressing a specific need of a stakeholder which is beneficial to the stakeholder but it also will enhance the financial performance of the firm through focusing on the triple bottom-line performance measurement.

The Syncretic Stewardship Model could be compared with the Utilitarian approach to decision making.

The firm is fully committed to make decisions that will have a positive impact on as many stakeholders as possible. Therefore, the firm establishes a permanent cooperative relationship with its stakeholders.

How Firms Implement CSR (p. 57)

This section demonstrates that firms approach implementing a CSR philosophy from many different perspectives. A project-oriented philosophy focuses on single events and could be place on one end of the continuum. CSR becomes more integrated in the operations of the firm when a quality-oriented CSR approach is implemented. Continuing further along the continuum is the strategic CSR approach which incorporates the needs of stakeholders in the day-to-day operations of the firm. The transformational CSR approach not only incorporates CSR in the decision-making process but uses their CSR philosophy to change and evolve the firm to more closely fit the current and future needs of the stakeholders.

The Role of Corporate Reputation (p. 60)

The concept of corporate reputation is one in which the students can understand from their own experiences. As is discussed in Chapter 10 (Marketing and Advertising), you can ask the students whether they have boycotted a product because of the actions of the firm. You can also ask whether products they buy are based, in part, on their perception of the company. From a career perspective, you can ask the students how important is the reputation of the company when they are deciding which company to work for. As a follow up, you can state that everyone wants to be proud when someone asks which company they work for. Since an individual’s job is a major part of the identity of the person, it is important that they want to tell anyone who asks which company they work for. As a result, individuals want to work for companies which have a good reputation in society.

The Role of Corporate Philanthropy (p. 62)

Corporate Philanthropy could be considered a two edge sword related to the contributions given by firms. While society welcomes financial investments which improve various aspects of society, philanthropy is also a primary area in which skeptics of the motives of firms will identify just part of the marketing expense of the firm. As a result, firms must be transparent on the true motive(s) of their

philanthropic donations to society. Furthermore, firms would describe philanthropic investments which not only benefit society but the self-interests of the firm. For example, establishing scholarships for engineering program from a high technology company such as Google will not only benefit the recipients of the scholarship but also potentially benefit Google as future employees.

Questions for Thought

1. Why is fair trade an ethical issue? What are the competitive advantages of fair trade? What are the potential problems with fair trade?

Fair trade is an ethical issue because it has a mechanism in place that ensures a fair wage for each part of the value chain, allowing for each step in the supply chain to receive the benefits of the goods being sold. The competitive advantages of fair trade are directly related to how important or unimportant fair trade is perceived by the consumers. In parts of Europe, fair trade is a very important part of the decision-making process for consumers. In countries such as the United States, there are groups of people who consider fair trade as part of how a product can be differentiated while other consumers perceive no advantage for the company which is fair trade certified. As with any tracking process through a supply chain, the potential problems are to ensure that fair trade certification requirements are maintained at each step of the process. Without physically verifying the process, the consumers must rely on mechanisms within the certification process to make sure that fair trade benefits are extended to each party through the value chain.

2. Identify all of the different stakeholder groups and comment on their roles in corporations.

It would be useful to use Figure 3.1 to facilitate the discussion related to stakeholder groups. A potential avenue for discussion is to present a specific issue and ask the students who would be the most critical stakeholders whose needs should to be addressed immediately. For example, you can use the examples such as the releasing of toxic waste, the potential formation of unions, the decision to outsource, the decision to use temporary employees, and the decision to move corporate headquarters for tax benefits.

3. Why is a firm’s corporate reputation important? Explain how a company can quickly lose its positive corporate reputation.

As was discussed above, the firm’s corporate reputation not only impacts its sales to its customers but also its ability to attach and retain excellent employees. While intangible in nature, the impact of corporate reputation on the perception of individuals is tangible. You could also stress how important an individual’s reputation is for his/her career. When an individual’s reputation is damaged, that person may never be able to recover. You can cite examples of fallen CEOs such as Richard Scrushy, Jeff Skilling, Bernie Madoff, and Bernie Ebbers as examples of top-level executives who will never be able to recover their reputation. The classic example of a firm which quickly lost its positive reputation is BP. Before the Deepwater Horizon disaster, BP was considered very proactive environmentally and an industry leader

in developing nonfossil fuel alternative energy sources. After the disaster, BP’s reputation quickly became negative not only in the United States, but also globally.

Questions for the Real-Life Ethical Dilemma Exercise The Partial Sinking of the Costa Concordia

1. Which stakeholder(s) did the captain of the Costa Concordia consider based on the alleged actions described above?

It appears the captain only thought of one stakeholder, himself, when he decided to leave the ship before all the crew and passengers were evacuated. It is common knowledge and expectation that the captain should ALWAYS be the last person off a sinking ship since the captain is responsible for the safely of all the members of the staff and the passengers. Therefore, there was disbelief that the captain would leave early and only think of his own safety.

2. How were the different stakeholders affected by the disaster?

The passengers and crew were greatly affected since 32 passengers perished while 64 passengers sustain injuries. Furthermore, all the passengers had to go through the horrifying experience of a sinking ship when the sinking was preventable.

The stockholders had a significant financial impact of the disaster since the final cost of approximately $2 billion would could have been distributed as dividends or been re-invested into the company. The local community around the sinking was significantly impacted from an environmental perspective since the partial sinking disrupted the marine life as well as various waste products sent into the water from the ship.

3. What role should Carnival Corporation have in resolving the needs of the various stakeholders impacted by this disaster?

Carnival Corporation should not only focus on financial compensation but also guarantee to its stakeholders that this type of event should not happen in the future. Carnival needs to implement comprehensive control and monitoring systems in all of its ships to ensure that the captain does not have a complete autonomous decision-making ability. There must be safeguards in place so that the captain is not able to individually take the ship off its predetermined course without verification from the corporation.

Chapter 4 Ethics and Financial Reporting

The purpose of this chapter is to highlight the ethical issues that are related to financial reporting.

One of the critical lessons that the students need to learn in this chapter is that management is

responsible for the accuracy of the firm‟s financial statements. The external auditors are hired to verify the results, but it is the firm itself that creates the financial statements that are ultimately submitted to the government regulatory agency (the SEC in the United States). Therefore, students must understand that management‟s decisions determine the composition and the content of the firm‟s financial statements. Some of the issues that will be addressed in this chapter include the concept of “creative accounting”. The role of financial reporting and ethics, the responsibility of the external audits, the role of government regulations related to financial reporting, and common ways in which managers can manipulate the firm‟s financial statements are also covered.

Key Learning Points There are a number of key learning points which can be accomplished when this chapter is presented to the students. These include:

1.

2.

3.

4.

The role of creative accounting.

The specifics of Ponzi schemes.

Potential conflicts of interest that could occur in financial reporting.

The responsibilities of management, auditors, and audit committees with financial reporting.

5. How heuristics affect accounting.

6. Accounting “tricks of the trade”.

7. Off-balance sheet arrangements.

HSBC: Products for Tax Evasion and Money Laundering, but no Free Toaster (p. 69) The first issue of discussion is whether it was ethical for an employee to take data from the company and give it to French authorities. There should be discussion on both sides about whether the “ends justify the means”. In defense of Herve Falciani, it was unlikely that government officials would have any other means in order to acquire the client information that demonstrated tax evasion and money laundering. So, as was discussed in the vignette, is Falciani a thief or is he a whistleblower? Another question is whether the students agree with Falciani‟s ex-girlfriend who believed that he stole the data in order to sell it. If this was the case, could it be argued that this scenario in not that different than the Securities and Exchange Commission whistleblower program in which whistleblowers who identify illegal activities in which over $1 million in sanctions have been ordered by the SEC received between 10 and 30 percent of the money collected by the firms. (https://www.sec.gov/whistleblower). Another point to discuss is how a financial institution develops a culture in which it “customizes” the illegal needs of some of its customers. It could be argued that the culture for centuries of Swiss banks in order to guarantee complete privacy regardless of the origin of the money invested by the clients. The

rebuttal to that argument that society has changed and the expectations and accountability of financial institutions has also changed by expecting that banks need to be more cooperative with government agencies around the world. That being said, do you think HSBC is willing and able to change its culture to match the expectations of society?

The Role of Creative Accounting (p. 69) Creative accounting is just another way of saying that management has stepped outside the “box” related to certain accounting issues. The key aspect of creative accounting is to know where the ethical and legal interpretations of the accounting rules stop, and the unethical and illegal interpretations of the accounting rules begin. The humorous example of the producers can be a good opening discussion for class. There may have been a number of students who have either seen the play or the movie and can understanding what is meant by creative accounting. If you want some additional humorous examples, there are four potential video clips that can be shown in class. The first is called the Chartered Accountant Dance (A Chartered Accountant or a CA is a British term and is equivalent to a Certified Public Accountant in the United States (https://www.youtube.com/watch?v=NrbZPIu5G-k). In addition, Monty Python has three very funny skits that refer to CAs in Great Britain with the following themes: Vocational Guidance Counselor (https://www.youtube.com/watch?v=LqQlCOmXuHM); Accountants betting who will jump off the building next http://www.youtube.com/watch?v=j5aN0VmvFn4&feature=related); and The Audit (http://www.youtube.com/watch?v=mkAfl2RmAZc&feature=related).

The History of Ponzi Schemes (p. 70) The discussion on Ponzi schemes could focus on how they can be created and how they eventually fail. Of course, this discussion would also coincide with the Bernard Madoff case.

One question which you could ask the students is that since Ponzi schemes have been in existence for 100 years, why do they still work today? The answer is that greed can cloud the rational behavior of individuals. It should be very clear that no investor can “guarantee” the consistent return on an investment month after month and year after year. As a result, there should be an immediate red flag which says “Do Not Invest” whenever this guarantee is part of the pitch for the investment. However, very wealthy and intelligent individuals continue to be swindled out of their investments by unusually charismatic individuals would convinced the potential investors that their programs are not Ponzi schemes when, of course, in reality they are Ponzi schemes.

Ethical Philosophies and Accounting Issues (p. 161) Table 4-1 which is shown on page 73 highlights the link between ethical philosophies and accounting issues. Ask your students how many are accounting and finance majors. For those who raised their hands, ask them whether they agree with these linkages. Table 4-1 is an effective table to re-enforce the philosophical ethical theories that were presented in Chapter 1.

In addition, the table demonstrates how those philosophical ethical theories can be directly linked to practical application which is development of financial reports. Therefore, it is from this foundation that managers have a philosophical ethical duty to present correct financial statements and those financial statements need to be transparent so that the entire firm‟s stakeholders can understand how the financial statements were created.

Table 4-2 extends the philosophical theories by presenting five presuppositions of external financial reporting. You could ask your accounting and finance students whether they would agree with these five presuppositions. They probably will answer that they do not feel as comfortable with these presuppositions as opposed to the philosophical theories presented in Table 4-1.

Where were the Auditors? (p. 74) One of the most common questions asked during the recent corporate scandals was “where were the auditors during the years and years of false financial information”. Hired by the firm to evaluate the validity of the financial statements, external auditors are responsible for identifying and potentially resolving unethical and illegal interpretation of the Generally Accepted Accounting Principles or GAAP. The textbook highlights the potential conflicts of interest that allow for less rigorous auditing of the firm‟s financial statements. Since the auditing fee is paid by the firm, the firm is the client and the object of the audit. Therefore, conflict of interest can occur if the auditors want to make sure the managers are happy and that they will select the same auditor in the future. Therefore, creative accounting at its limits may be considered acceptable to the auditors since the employees of the audit firm are evaluated based on the number of bookable hours that are charged to the client. One of the components of the Sarbanes-Oxley Act is that auditing firms are no longer allowed to also generate revenue by being a consultant to the firm for which it is conducting an audit.

In addition, auditors may have a personal conflict of interest if they have a personal financial investment in a firm in which they are performing an audit.

As part of the domino effect, the auditors want to make management happy and management wants to make shareholders happy. Shareholders are happy if there is a “clean” audit which means there are no outstanding issues that impact the validation of the financial statements.

The Use of Heuristics in Auditing (p. 76) The students need to be aware that everyone uses heuristics to make decisions. As a result, every decision is based on the individual‟s personal interpretation of the information used to make a decision. Therefore, for auditors, these “rules of thumb” can supersede an objective evaluation of important information which is critical in evaluating the financial reporting of a firm. Since the rule of the external audit is to ensure that the financial statements are complete and accurate,

heuristics can reduce the ability of auditors to guarantee that their evaluation is complete and accurate.

A Comprehensive Model of Top Management Fraud (p. 80) The examination of top management fraud highlights the various factors that can answer the question of why did top-level managers commit fraud. By examining the antecedents, individual level moderators, type of managerial fraud and the effects, the students should realize that the decision to commit fraud can be based on a number of different factors. The students need to understand that they may start moving toward accepting their own participation in fraudulent behavior if they do not realize how external factors can impact their decisions. For example, if the student gets a job in a high pressure industry and consistently is being pressured by his/her boss to increase the financial performance for the department. It could be the first step down the “slippery slope” of unethical behavior. The boss may ask the individual to “book” a sale for this quarter even though it should not be recognized until next quarter. The boss would explain this it is ok because the department will get back “in balance” the following quarter. Once the individual goes down that slope, there is not an opportunity to get back onto a level ethical playing field.

Accounting Shenanigans or Tricks of the Trade (p. 83) Revenue Recognition is by far the most common manipulation of a firm‟s financial performance.

Since companies in different industries acquire revenue from different methods, revenue recognition can easily become a “gray” area when it comes to interpretation. For example, at Enron, the Mark to Market accounting for revenue allowed Enron to recognize revenue for the complete amount of a contract even if the contract was over multiple years. This approach which was approved by Enron‟s external auditor, Arthur Andersen, allowed Enron to manipulate its revenues on a quarterly basis to ensure it corresponded with Enron‟s forecast.

One-time charges are allowed when a financial event occurs one time only. Since this event is not expected to occur again, it is treated as a one-time charge in the accounting records. Firms that want to manipulate their financial statements can continue to categorize an event as a onetime charge when, in actuality, it will likely occur again in the future. It was alleged that when Tyco would buy companies, it would have the acquiring company to take “one time” charges to reduce cash flow before it was merged with Tyco. These charges were not one time in nature, but Tyco incorporated these charges in place so that when the company became part of Tyco, the new division would quickly report higher earnings and cash flows after the deal was completed to make management look good.

Raiding the Reserves or Cookie Jar Accounting occurs when the firm manipulates cash reserves in order to increase or decrease the reported revenues for the time period. In 2004, Fannie Mae was accused of using “cookie jar” accounting to manage its revenues. It was alleged that current

expenses were deferred on the financial statements so that profitability would be higher resulting in the executives receiving bonuses due to Fannie Mae meeting its profitability targets.

Lease Accounting deals with the specific criteria in which leases are recorded on the firm‟s balance sheet. Currently, leases are classified as capital or operating leases. If a lease is classified as capital, the asset value must be reported as an asset and the required payments must be classified as a liability. For operating leases, no asset or liability values need to be recorded and only the expense amount of the lease payments are reported every year. As a result, firms can effectively leave off millions of dollars in debt that should actually be classified as a capital lease but are recorded as an operating lease.

Off-Balance Sheet financing creates separate legal entities from the parent company. Former Enron CFO Andy Fastow used off-balance sheet transactions to eliminate a massive amount of debt from Enron‟s balance sheet. Enron‟s debt was transferred to partnership companies established by Fastow. The net result was that Enron was “able” to report much higher financial performance than was actually the case.

Earnings Management is similar in scope to the cookie jar reserves. Earnings management is the ability of the managers of the firm to manipulate the account balances in various items on the firm‟s financial statements. Through this management process, managers can control what the final balances will be in these accounts and then can report these “accurate” numbers to their investors. Earnings management is usually used to ensure that the firm meets the forecasted results for the quarter or for some other time period. How common is earnings management? It appears to be much more common than people realize. A study by Myers, Myers and Skinner titled “Earnings Momentum and Earnings Management” reported that almost 600 companies in their study reported increases in earnings for 20 consecutive quarters over the past four decades, although the professors concluded that not all of the companies may have committed fraud and that there could be legitimate reasons for their amazing growth records. They also assumed that a number of firms in the study did consciously manipulate their quarterly numbers to ensure the steady growth pattern over time.

Questions for Thought 1. Swiss banks have had a long tradition of keeping information about their clients confidential. Is this still the correct strategic focus to take in the 21st century? Should the United States government have the right to demand information pertaining to United States citizens who have bank accounts in countries other than the United States?

As was discussed above, society has changed and Swiss banks need to change to match the expectations of society. With real-time 24-hour financial transactions, financial institutions globally need to be accountable and responsible to respect and comply with government regulations around the world. With the explosion of technology related to the digital transfer of money, the era in which money can be physically “hidden” in banks is an obsolete concept for Swiss banks to cling to.

It could be argued that the United States has the right to demand information pertaining to its citizens regardless of the origin of the information. Furthermore, by insisting that US citizens report their global earnings, it provides a more equitable collection process of taxes needed by the US government.

2. Why is earnings management considered a trick of the trade? Explain.

As was discussed previously, earnings management allows managers to manipulate the financial results of the firm to ensure they meet whatever financial projections as well as satisfy any financial criteria established as a condition for personal financial rewards. Therefore, the selfinterests of the managers supersede the interests of the stockholders and other stakeholders.

3. In all the accounting scandals of the past decade, where were the auditors? Explain.

This is the question that is asked again and again by investors of these companies. The auditors have a fiduciary duty to do their job of determining the validity of the firm‟s financial statements. The standard response by the accounting firms was that they were not given the information needed to discover the fraud. The investor‟s response to that would be that it should have been part of the auditors‟ job to uncover this information as part of the audit. The net result was that the auditors had become too “close” with their clients. The clients loved that the auditors were no longer comprehensive in their audits and the auditing firms loved all the money they saved by not doing a comprehensive audit. Furthermore, for a number of companies, the auditing firm was also doing consulting for the firm which created a direct conflict of interest. As a result, the auditing firm had a double vested interest in the firm and, therefore, would do whatever it took to satisfy the needs of its client. The net result was both sides were happy but none of the other stakeholders were happy. As these firms moved closer to bankruptcy, payments to suppliers and employees became threatened and the government was receiving financial information that was not true.

4. Why do Ponzi schemes continue to work time after time?

As was mentioned above, greed can cloud the judgment of very intelligent people. Through this haze of greed, individuals lower their guard protecting their assets. Confidence artists who are very good at their craft can tell the potential investor a convincing story as to why their proposed investment will work and why it is not a Ponzi scheme. They need to be very good or else they are not able to implement their Ponzi scheme.

Questions for the Real-Life Ethical Dilemma Exercise Tales from Lehman’s Crypt 1. What role should government regulators have in the brokerage industry? Why do you think the

regulators were not more active before the 2008 financial crisis?

Government regulators are the “watch dogs” that are needed in order to make sure everyone “plays by the rules”. As a result, all stakeholders expect the government agencies in charge of

monitoring the brokerage industry would do a proper due diligence investigating the various firms within the industry. An interesting aspect related to government agencies that monitor corporations in that the level of examining the actions of brokerage firms can depend on the dominant viewpoint of the US government. When the prevailing view is one of deregulation and laissez faire economics, agencies such as the SEC and the Department of Justice may receive less pressure to actively pursue activities on Wall Street. Alternatively, if the dominant viewpoint is one of government intervention, it could be assumed that there is a more aggressive mandate for the SEC and the Department of Justice to be more aggressive and thorough in investigating the behavior of Wall Street.

2. What would you do if you knew these “packages” were going to fail in the future?

A movie released in 2015 titled “The Big Short” addresses this question. (http://www.imdb.com/title/tt1596363/). In the movie, based on actual events, a small group of investors realized that the housing market in the United States was going to eventually collapse because of these packages of high risk mortgages. These investors bet against the housing industry by buying “short” positions which means they would make money if the price of these packages went down. The net result was that they made billions of dollars betting against the housing industry. While this was an extreme example, if you knew that the housing market was going to collapse, you could sell your house before the collapse and rent a house until the housing market declines and you could then buy another house at a lower cost.

3. Would you be a whistle-blower if you warned investors about the danger of these

packages? If you did blow the whistle, who would you contact?

These are both excellent questions that are addressed in the movie. These small groups of investors tried to warn other people that the housing market was going to collapse but no one believed them because of the sheer size and value of the housing market. In addition, they told the banks and rating agencies such as Standard and Poor‟s that the market was going to collapse, but again they could not convince the main players in these agencies that the market was going to collapse.

Chapter 5 Ethical Leadership and Corporate Governance

The purpose of this chapter is to highlight the ethical issues that are related to ethical leadership and corporate governance. Managers of any organization play two critical roles in the development of a strong positive ethical environment. The first is to be ethical leaders and lead by example what is acceptable and appropriate within the organization. The second key role is to ensure everyone in the organization supports an ethical environment including those individuals representing the interest of the firm’s stakeholders, the Board of Directors.

Key Learning Points There are a number of key learning points which can be accomplished when this chapter is presented to the students. These include:

8. Define ethical leadership.

9. Distinguish between transformational leadership and transactional leadership.

10. Describe the transformation of a moral person to an ethical leader, citing examples of leadership styles.

11. Define corporate governance and the role of ethics in corporate governance matters.

12. Describe the purpose of the board of directors and the core ethical values that should guide them.

13. Identify some of the decisions made by the board of directors.

“Nut Rage” on the Tarmac at JFK: It’s a Good Thing She Didn’t Ask to See the Wine List (p. 89) This opening vignette is a good example of how the power of an executive can distort personal reality.

While it was not “proper” procedure to give the nuts in a bag, it is ridiculous to take the original stand by Korean Air Lines that Ms. Cho was just fulfilling her duties as the vice-president in charge of Korean Air’s in-flight services. A good discussion point would be to ask the students how did Ms. Cho’s reality of what is acceptable became so detached with the other passengers of the plane. In addition, you could ask how they would feel if their flight was delayed 20 minutes because a vice president wasn’t happy with how nuts were served to them. From a corporate governance perspective, this vignette highlights the imperative of having a check and balance system related to the power of the top executives of any firm.

It is the duty of the top-level managers to make decisions that maximum the benefits to the firm’s stakeholders instead of only their own self-interests.

Transformational and Transactional Leadership (p. 91) It is important for the students to realize the distinction between a transformational and transactional leader. It is expected that every manager should be, at a minimum a transactional leader. In other words, it is expected that every manager should provide an ethically supportive climate in which the expectations of every employee are to follow the ethical guidelines presented by the firm. In addition, it is the manager’s responsibility to provide positive reinforcements and negative punishments based on the ethical actions of the individuals. Therefore, the manager must ensure that a proper control mechanism is in place to ensure the proper ethical conduct of the employees.

However, the true mission of the manger is to help provide and encourage transformational ethical leaders. A transformational ethical leader allows the firm and employees to enhance their ethical commitment to all the firm’s stakeholders. In addition, a transformational ethical leader has the ability to transfer his or her own ethical vision to the employees allowing for an additional enforcement of the proper ethical conduct of the employees within the firm.

A Manager’s Ability to Develop Trust, Commitment, and Effort (p. 92)

What is duty?—moral problems—Trust

What is right?—moral reasoning—Commitment

What is integrity?—moral courage—Effort

In Figure 5-1 presented on page 93, the model of Trust, Commitment, and Effort is presented. One of the questions you could ask your students is whether these three constructs need to be presented simultaneously to the firm’s employees or could they be sequential in nature. It could be argued that management could have an opportunity to establish these three attributes in a sequence. The first would be trust because without this foundation the rest of the model would collapse from the employee’s perspective. After trust is established, the goal of the manager is to get the “buy-in” by the employees via commitment. The employees must be active and not passive as related to the ethical vision of the firm. After trust and commitment have been established, the subsequent effort of the employees can be capitalized on by the firm. The firm has established the foundation of trust and commitment so that the employees want to work in establishing the ethical vision of the firm.

The Responsibility of Managers (p. 93)

The foundation of the role managers should play in the decision-making process was established by Chester Barnard in his book, The Functions of the Executive. In his book, Barnard argues that managers have a moral responsibility for every decision they make. Therefore, Barnard assigns not only responsibility but also accountability to managers for their actions.

Ethics can be used by firms to differentiate themselves in the marketplace. As is the case with the firm’s reputation, a firm’s ethical commitment can separate themselves from their competitors which could enhance their competitive advantage. The obvious caveat with this strategy is that if the firm uses its ethical commitment as a competitive advantage, the firm must make sure that the correct control and monitoring systems are in place to ensure that the employees are not involved in unethical activities.

Therefore, if ethics is a critical factor in the firm’s competitive advantage, it should also be a critical factor in ensuring proper ethical compliance.

The Transformation from Moral Person to Ethical Leader (p. 94)

Figure 5-2 summarizes the role ethical leadership can have with strategic planning and corporate culture. You could present the concepts in Figure 5-2 from this perspective. In order for managers to be proactive in the role as ethical leaders, they need to first have the traits of a moral person. As a result, integrity, honesty, and trustworthiness are the cornerstone of the foundation of ethical leadership. It is these traits that drive the behaviors and decision-making of the manager. Therefore, once the core has been established, the ethical behaviors and decision-making will logically follow. Without the moral traits, the manager cannot become an effective moral manager. Since the role of the moral manager is to be a role model, to help in the decisions pertaining to rewards and punishment and to communicate the ethical values of the firms, the grounding of these actions also started with the underlying traits of the moral person.

Figure 5-3 on page 96 highlights the four quadrants related to moral person and moral manager. One question to ask your students is whether it is possible for a manager to move from one quadrant to another. The simple answer to this question is yes, but the shift probably could occur more frequently in certain quadrants. The “easiest” shift is from an Ethical to a Hypocritical Leader and from an Inconsistent to an Unethical Leader.

Ethical Leader to Hypocritical Leader

In order for this shift to take place, the manager starts to ignore his or her ethical responsibilities as a manger. As a result, what is told to his or her subordinates is no longer consistent with his or her actions. Therefore, it could be argued that this shift took place with Martha Stewart. She was initially an ethical leader and then became a hypocritical leader after lying to the FBI.

Inconsistent Leader to Unethical Leader

In order for this shift to take place, the manager who initially had the traits of a strong moral person has lost those traits. This scenario could take place if the manager does not place the moral traits in high regard. This may be the case since the inconsistent manager is not transferring the value of those traits to his or her supervisors. As a result, since these traits are not being transferred, they may no longer be considered of value to the manager which would lead him or her to becoming an unethical leader.

It would be very difficult for a manager to go in the opposing direction than the previous two examples.

Since both the hypocritical and unethical leaders have weak moral traits as a person, it is not expected for those traits to change. In addition, once the managers have established a reputation as being

hypocritical or unethical, it would be hard to convince employees that they have “turned over a new leaf”. As a result, it would be highly unlikely that a hypocritical leader could become an ethical leader or an unethical leader could become an inconsistent leader.

Ethics and Corporate Governance (p. 97)

Corporate governance is defined as the system that is used by firms to control and direct their operations and the operations of their representatives, the employees. This definition identifies both the broad and narrow focus of corporate governance. It is broad in the sense that the firm has some freedom in its ability to design a control system in order to help guide the actions and behavior of its employees. It is narrow in the sense that although there is flexibility in the type of control system that can be adopted, there are rigid requirements as to what specific type of behavior is to be controlled and monitored.

Board of Directors (p. 97)

The role of the board of directors is to be “agents” of those individuals who have invested capital in the firm. It is through this agency theory that the board of directors is required to look out for the best interests of the stockholders. This governance structure has evolved over time to include not only the interests of the stockholders but also the interests of the vested stakeholders. The rationale of this expanded focus is that if the other stakeholders are not satisfied, it could have a negative impact on the financial performance of the firm, which is the primary interest of the stockholders. Furthermore, the board of directors is also responsible for communicating the actions of the firms, the establishment of ethical systems and code of ethics, and the selection of the firm’s external auditor.

Six Values of Board Members (p. 98)

The six values of board members: honesty, integrity, loyalty, responsibility, fairness, and citizenship are excellent characteristics of not only board members but all members of the organization. It is through these positive ethical values that firms can feel comfortable that they are having a positive impact with their relationship with their stakeholders.

Board Members

Recommendations for board members to make sure the interests of the stakeholders are represented in their decision-making process:

1. The board of directors should make at least an annual evaluation of the CEO based on the established goals and strategies of the firm. It seems like a simple requirement to evaluate how well the CEO is achieving the goals of the firm. However, performance appraisal can become quite complicated for a CEO because there are multiple metrics to consider when evaluating the performance of the CEO and the firm. In addition, not having the correct alignment between the goals of the CEO and the goals of the firm can create a financial disconnect.

2. The evaluation of the CEO should be done solely with outside board members. This recommendation would be very effective if it were implemented more frequently. Since the CEO has a vested self-interest on his or her own evaluation, he or she will “stack the deck” whenever it is feasible. As a result, the CEO will try to have as much of a “home court” advantage as possible when he or she is being evaluated. Of course, the CEO will argue that only “inside” board members truly know how hard the CEO works since they interact with the CEO on a day-to-day basis. By having a majority of insider members evaluating the CEO, it is likely that the CEO will receive a more favorable evaluation than if only outside board members did the evaluation.

3. All the outside board members should meet at least once a year without the presence of the CEO. The purpose of this recommendation is to ensure that the board members are not unduly influenced by the CEO when they are developing strategic decision pertaining to the operations of the firm. By omitting the presence of the CEO, outside board members would probably be more likely to be outspoken and honest about the actual performance of the firm and of the CEO.

4. The members of the board should ensure that there are clear and appropriate listings of qualifications for proposed membership to the board, and those qualifications should be made available to the shareholders. The listing of qualifications establishes a formal document and procedure in order to evaluation the capabilities of each board member. This evaluation process would ensure that bias and/or favoritism should not impact the selection of board members.

5. Outside board members should be members who are responsible for the recruitment and selection of new board members based on the established qualifications. This recommendation is to ensure that the policies and procedures in the recruitment and selection process for a new board are followed correctly.

Shareholders (p. 97)

Recommendations for shareholders:

1. Institutional shareholders should view themselves as active owners of the firm, not just investors.

Since institutional shareholders have a high level of concentrated power due to the number of shares their investment represents, this recommendation suggests that these investors should not be passive but be aggressive in ensuring the needs of all the stockholders and stakeholders are met.

2. The shareholders should not be involved in or question the day-to-day activities of the firm’s operations. The shareholders are not responsible for micro managing the operations of the firm. By investing in the firm, the shareholders have given the managers the authority to make the decisions related to day-to-day operations.

3. Shareholders should use the rights to evaluate annually the performance of the members of the board. Through proxy statements, shareholders have the ability to vote board members in or out.

However, for most firms only a very small percentage of the individual investors actually use their right to vote.

4. Shareholders need to be informed when the firm does an evaluation of the board members. This refers to the level of transparency of communication between the firm and the shareholders. The more transparent a firm is, the more information is available for the shareholders to help them evaluate the performance of the board members and the firm.

5. Shareholders need to understand that a common goal of all shareholders is to support the firm so it continues to be an ongoing corporate concern. This recommendation highlights the underlying principle of why a firm is created in the first place, in order to become profitable to survive as a long-term viable entity.

The Role of the Board of Directors (p. 100)

Figure 5-4 on page 100 highlights the continuum of involvement by the board members.

The passive board is also called a “rubber stamp” board because they will approve whatever is presented to them. On a “rubber stamp” board, the approvals come so quickly it is like having the board stamping each proposal with its approval and the stamp “bouncing up in the air” and quickly stamping the next proposal like a rubber stamp. This type of board involvement was very common in the past since there was a lack of transparency of the actions of the board and the stockholders and stakeholders did not demand accountability of the board.

The certifying board is a step forward pertaining to being involved in the strategic decisions of the firm.

The role of the certifying board is similar to the mandate of an enforcement officer. The certifying board verifies the legality of the actions of the board but does not move beyond this responsibility. As a result, employees of the firms would still be allowed to make unethical decisions as long as they were legal.

The engaged board moves one step closer to becoming a fully involved board. An engaged board is proactive and is not just responding to ideas proposed by management but offers their own ideas of the future course of the firm. An engaged board becomes actively involved with the CEO in the formulation of strategic ideas which also ensured that ethical issues are incorporated in the decision-making process

An intervening board considers themselves to be of equal stature as it pertains to the decision-making process within the firm. An intervening board becomes actively involved in all major decisions pertaining to the firm.

An operating board is the highest level of involvement by the board of directors. The key distinction between the operating board and the intervening board is the operating board controls the decisionmaking process. As a result, the CEO only has one vote when decisions are made. Therefore, the CEO’s decision may not always be implemented by the firm if the majority of the board does not agree with the decision.

A Contingent Perspective on Corporate Governance (p. 101)

The contingent perspective highlights the many “hats” that board members wear representing the interests of the stakeholders. Like a parent, board members must be supportive and give guidance when necessary, and also monitor and punishment when the behavior of the managers is not acceptable. For those top-level managers that view the board as purely a control mechanism, they would rely almost solely on the auditing function of the board. For those top-level managers that view the board as a valuable resource that can enhance the long-term survival of the firm, the board serves all four roles. In fact, operating boards allow top-level managers to take full advantage of the skill set and expertise of the board members to transform the future vision of the firm.

Ethics and the Structure of the Board of Directors (p. 102)

This section of the chapter highlights the ethical limitations of having a board of directors which has a majority of inside board members. By having a concentration of power in board members who have a direct relationship with the firm and the CEO, an inside dominant board is more likely not to challenge the status quo and usually is located in the low end of the involvement continuum. The underlying reason for their lack of active involvement is that the power is concentrated with the CEO who is usually also the Chairman and who is also considered the superior of the board members. As a result, it would be a risky career move to disagree with the ideas presented by the CEO.

The Benefits of a Strong Board of Directors (p. 102)

Stanwick and Stanwick found that having a strong board of directors resulted in a positive impact on the performance of the firm. By having a board that was: dominated by outsiders, had a large personal financial investment in the firm, and having the board members be limited to the number of other boards they could be a member resulted in the firm having a higher financial performance. This empirical study gave validity to the theoretical concept that boards can make a difference in the performance of the firms if they are structured in an effective manner.

CEO Compensation and Ethical Reputation (p. 102)

Stanwick and Stanwick found that there was not a direct relationship between CEO compensation and the financial performance of the firm. Although this result was shown in previous research, Stanwick and Stanwick extended work in the area by examining the CEO of the 100 corporate citizens based on a ranking done by Business Ethics magazine. As a result, Stanwick and Stanwick assumed that if any CEOs would want to make sure that their compensation was tied directly to the performance of the firm, it would be firms that have a high ethical reputation. The study did find a direct relationship with the level of compensation and the ethical ranking of the firm but the most interesting result was that CEOs of firms that had LOST money actually received, on average, a higher level of compensation than the CEOs of firms that were profitable. This result highlighted the apparent disconnect between the actions of the CEO related to the strategic focus of the firm and the actions of the CEO related to his or her own compensation levels. It is expected that CEOs of firms that lost money would certainly accept and should even volunteer to accept lower levels of compensation to match the poor performance of the firm.

Ethical Viewpoints Explaining CEO Compensation (p. 103)

The use of Kantian ethics can help justify the self-interest behavior of CEOs. Using the rationale that everyone would make the same decision under the same set of circumstances gives creditability to this argument. However, an enlightened CEO should view compensation from another perspective of Kantian ethics. Instead of viewing justification for the compensation from the perspective that everyone will take advantage of the opportunity to generate high levels of compensation since they are given this opportunity, an enlightened CEO would use Kantian ethics to claim that he or she would refuse this high level of compensation because of the belief that anyone else in this same position would also refuse this high level of compensation.

As is stated in the textbook from an ethical egoism perspective, a CEO is rewarded when his or her performance is based on the performance of the firm. However, as was shown in the Stanwick and Stanwick study, there is not always a link between CEO compensation and the financial performance of the firm. As a result, it could be proposed that there is a disconnect between the reward system of the CEO and the goals and objectives of the firm. If the CEO is also the chairman of the board, he or she selects membership on the compensation committee. If membership on the compensation committee is composed of a majority of inside board members, the CEO has effectively “stacked the deck” in his or her favor. As a result, it could be concluded that in many incidences there is not an ethical component in the calculation of a CEO’s compensation. Again, this point highlights the difference between the legal and ethical standard. It may be legal to pay a CEO over 400 times the compensation of an average worker in the firm, but is it ethical? Can any human being justify that his/her contribution to any organization is 400 times greater than any other employee within the organization?

Corporate Governance and Stakeholders (p. 79)

Figure 5-5 (p. 104) summarizes the relationship between stakeholders and corporate governance. The figure shows that the stakeholders drive the corporate governance system by ensuring that the needs and expectations are met by the firm. In addition, the figure shows that the corporate governance system needs to address the issues of global image through eliminating corruption and acknowledging the role of global compliance standards. It is also imperative that the vision of the top-level managers is incorporated into the corporate governance system. Without the vision and commitment of top-level managers, the corporate governance system could not be successfully created and/or implemented. The net result of a strong and effective corporate governance system is an acceptable and satisfactory level of governance and compliance performance by the firm. This figure is imperative from the student’s perspective to ensure that the students understand the interdependent relationships that must take place is order to have an effective and successful firm based on its corporate governance and corporate compliance.

Questions for Thought

1. In the opening vignette, a top-level executive went into a rage over a bag of nuts. What do you think the underlying cause of this behavior is? Do you think a year in prison is the correct sentence for her behavior?

As was stated above, the reaction of the executive is based on the power she had over the employees in the airplane. To demonstrate to everyone in first class, she wanted to make sure it was known that she was an important person and that if the nuts were not served correctly, she had the authority to turn the plane around. She may have thought that since she was the daughter of the chairman of Korean Air Lines, she could consider it as a trip on her own private plane as the judge stated. You will get students that would argue both for and against the fairness of a year in prison for her actions. It could be argued that the true cost of Ms. Cho was the subsequent humiliation in the press and the firing of her position as executive vice president.

2. What are some ways in which a board of directors can increase its power? Under what circumstances can its power be decreased?

The board can increase its power if it can demonstrate that its actions related to its supervising, coaching, and steering role have enhanced the performance of the firm. The more valuable the input of the board in the decision-making process, the more powerful it will be in the future since the top-level managers see the enhanced value of their recommendations. The board will weaken its power if it is ineffective in providing effective recommendations to the top-level managers or it is not given the opportunity to provide recommendations to the top-level managers. If the top-level managers perceive that the only role of the board is its auditing role, the power is weakened because they are not “invited” to bring their skills and knowledge to the decision-making process.

3. Do you perceive yourself as a transformational or transactional leader? Explain your answer.

To answer this question, you need to ask the classic question whether leadership is based on nature or nurture. If you believe that leaders have innate traits that they are born with, then those individuals can be a transformational leader at any age. Nurturing your individual skills and exposing yourself to knowledge will help with the development in becoming a transformational leader over time. It could also be argued that a transformational leader is a combination of both nature and nurture. Under this belief, every individual is born with the capability of being a transformational leader but it needs to be developed through the nurturing process before it can be fully developed.

Real-Life Ethical Dilemma Exercise A True Global Ethical Leader: Tim Berners-Lee (p. 105)

1. Why do you think Time Berners-Lee “gave away” such valuable software?

Tim Berners-Lee is a great example of having a utilitarian philosophy of life. It could be argued that he believed that his software was too important for mankind to be viewed from purely an economic

perspective. He could have believed that the interest will have such a dominant impact on mankind that it needed to be available to everyone.

2. If you had developed the software that established the Internet, would you make this software available for free to anyone in the world? Why or why not?

You should get both sides presented by the students. For those who would not make the software available for free, you could ask them how their life would be different today if it was not available for free to everyone.

3. What do you think would have happened to the Internet during the past 20 to 25 years if a company had charged for Internet use?

You can start the discussion by asking your students how many times every day they use the internet.

The follow-up question would be how many times would they use the Internet if it cost 5 cents every time the student uses it? The world has fundamentally changed because of the Internet. As a result, the Internet has become a core part of day-to-day living. It would be a very different world if restricted access and/or financial cost was included in the use of the Internet.

Chapter 6 Strategic Planning, Corporate Culture, and Corporate Compliance The purpose of this chapter is to highlight the ethical issues that relate to strategic planning, corporate culture, and corporate compliance. After the material is presented in this chapter, the students should have a better understanding of the critical role strategic planning, corporate culture, and corporate compliance have in the formulation and implementation of an effective ethics program. It should become clear to the students that ethical decision-making should be integrated at every step of the decision-making process. Therefore, firms should view all decision-making as being equal to ethical decision-making. Some of the issues that will be examined in this chapter include the benefits of including ethics in the decision-making process and the costs of having an unethical corporate culture. Furthermore, the chapter addresses other relevant issues such as how a firm can recover from an ethical crisis and/or disaster, and how changes in the corporate culture may be necessary in order to implement a more effective ethics program for the firm.

Key Learning Points There are a number of key learning points which can be accomplished when this chapter is presented to the students.These learning points include: 1. Explain the concept of strategic planning with respect to ethics.

2.

3.

4.

5.

6.

7.

8.

9.

Explain the ethics life cycle.

Explain ethical strategic decision-making from a global perspective.

Discuss ethical crisis and disaster recovery.

Define corporate culture.

Explain how ethical values can be changed.

Describe the process for embedding values and positive ethics in an organization.

Explain the difference between corruption, embezzlement, extortion, and bribery.

Describe the various forms of corruption.

When Ethics Drive a Change in Strategy (p. 107) 1. Why do you think it was important for Sanford Weill to stay on as Chairman of the Board after Charles Prince was picked as the new CEO? Weill‟s justification for staying with Citigroup was to make sure the company was being steered “in the right direction for the future”. What that phrase means is that Weill wanted to make sure that the strategic goals and ideals which he had established as CEO would continue to be the goals for Citigroup. In addition, by remaining as Chairman of the Board, Weill still had significant power in the company and could challenge, and reject the strategic direction proposed

by Prince if Weill did not believe it was the correct direction.As was discussed in Chapter 4 on Corporate Governance, when the CEO and Chairman of the Board are two separate individuals, the power of the CEO is weak since the CEO does not control the agenda of the Board of Directors. When CEO duality occurs, which is when the CEO is also the Chairman of the Board, this one individual has significant control over all of the operations within the firm.

2. Why did three top-level employees at Citigroup want to leave after two years with Prince as CEO? The simple answer is that they did not agree with the direction Prince was steering Citigroup with its shift in strategic focus. One of the areas where it appeared that Prince made a fundamental change was the shift from a mono shareholder to a multi-stakeholder focus. The goals set by Sanford Weill were all financial in nature. As a result, Weill was catering to only the needs of the investors. By including corporate reputation and comprehensive ethics programs in the strategic decision-making at Citigroup, Prince viewed all the stakeholders as valuable groups whose needs should be identified and met.

3. Why do you think there were multiple ethical problems at Citigroup when Prince took over as CEO?

The multiple ethical problems appear to be caused by focusing solely on the stockholders in their decision-making process. One of the dangers of focusing solely on financial returns is that managers may not ask (or want to ask) how the financial results were achieved as long as the goals were met. Under a “don‟t ask, don‟t tell” financial philosophy, managers are not as

concerned about the means to get to the financial goals as long as the ends are met. Therefore, as long as Citigroup was growing in size and profitability, everyone within Citigroup was “happy”.

Update on Charles Prince In an ironic twist, Charles Prince was forced to resign as CEO in November 2007 due to a $5.9 billion write off of subprime mortgage loans that Citigroup was carrying. There are a number of ethical issues related to subprime mortgages issued by financial institutions including whether ethically these financial institutions should have been involved in mortgages which were too difficult for the customers to pay off. In addition, it was alleged that a number of financial institutions did not fully disclose all the terms and conditions of these subprime loans. However, Charles Prince did not leave Citigroup as a poor man. Mr. Prince had earned $53.1 million during his four-year tenure at Citigroup and also had stock holdings of Citigroup that were valued at $94 million when he was forced to resign.

Ethics and Strategic Planning (p. 107) In order for students to understand the interconnectedness between ethics and strategic planning, a learning tool that could be used is the Ethical SWOT analysis. The Ethical SWOT analysis allows the decision-maker to visualize the pros and cons of a decision that could have ethical implications.

SWOT stands for Strengths, Weaknesses, Opportunities, and Threats Strengths—These are the internal strong characteristics within the firm that can be used to help implement the ethical decision. Some examples of strengths could be:           

Strong corporate reputation Positive image Corporate ethical philosophy Ethical vision of top managers The results of previous ethical decisions A formal code of ethics Having an effective ethics training program Having an ethics officer Having a strong relationship with stakeholders Using a triple line evaluation of performance Having a strong financial performance which allows continued ethics based investments.

Weaknesses—These are internal weak characteristics within the firm that need to be resolved.Some examples of weaknesses could be:  

Negative corporate reputation and image No ethical vision for top-level managers

      

Zero or minimal ethics based training for the firm‟s employees Ignoring the needs and expectations of at least some of the stakeholders Focusing solely on financial goals No formal code of ethics No formal ethics training program No ethics officer No ethics evaluation process.

Opportunities—These are future courses of action which the company can take to enhance their ethical standing. Some examples of opportunities include:        

Resolve the ethical weaknesses that are listed in the Ethical SWOT Benchmark ethical performance against the industry and an ethical trend setter Give employees incentives to suggest improvements in their current ethics programs Give employees incentives to identify ethical violations to the responsible party with the firm Use state-of-the art technology to help facilitate the monitoring and ethical control procedures of the employees Establish liaisons with government agencies which monitor the firm‟s industry Establish membership in voluntary industry based organizations that support strong ethical standards Review how both domestic and international competitors address the same ethical issues.

Threats—These are external factors that can impact the ethical standards of a firm.Some examples of threats are:        

Change in government regulations Change in competitor‟s focus Addition of new competitors Downturn in the economy of the countries in which the firm competes in Changes in technology which the firm has failed to adopt Changes in customer‟s perceptions of the image of the firm Change in other stakeholder‟s perceptions of the image of the firm Change in the demands and expectations of the stakeholders.

The Ethical Cycle (p. 108) The presentation of the Ethical Cycle allows the student to understand the ethical decisionmaking process from a linear perspective. The students should be able to quickly grasp the sequential step process in making ethical decisions. It should be stressed that it can be open to interpretation of the “facts” that are collected at each step in the Ethical Cycle.

Moral Problem Statement

The identification of the moral problem could be viewed differently by different decisionmakers. For example, those issues which may be “legal” but may not be “ethical” could result in some decision-makers determining that there is not a moral problem. For example, if India “allows underage” girls to sew garments together, is there a moral issue to consider since this could be the legal age of work in India?

Problem Analysis The problem analysis step in the ethical cycle sets the tone for the decision-maker to incorporate factors beyond simply using his or her heuristics to develop a solution. It is critical that the students understand that decision-makers must consider others who are impacted by their decisions. That is why stakeholder theory is intertwined within all the chapters of the textbook.

Decision-makers must understand the wants and needs of other vested parties to their decision process. Furthermore, the decision process must have boundaries in order to help guide the course of action. Therefore, the decisions must be within the boundaries of the moral values of the individual and the firm. The third critical point is determination of the relevant facts. Again, this can be a subjective process. Each individual will make his/her own determination of what facts are “relevant” and which facts are not. As a result, a different interpretation of “relevance” can result in a different analysis of the problem.

Options for Action The students must understand that options for action should not be considered “lightly” in this analysis. Different viable alternative courses of action must be considered by the decision-maker.

Each decision must result in obtainable results that can be measured against the overall goals and objectives of the firm.

Ethical Judgment It is the responsibility of the decision-maker to “maximize” the level of satisfaction for the stakeholders of the firm. As a result, the decision-maker must always reconcile his or her actions with the demands of the stakeholders which occur during the ethical judgment step in the Ethical Cycle.

Reflection Reflection is a time in which the decision-maker pauses the process to reflect on how the decisions were made and how the decisions will be impacted by others. The reflection stage allows the decision-maker one more chance to ensure that the course of action developed to resolve the moral problem is in the best interest of all the vested stakeholders of the firm.

Using Ethical Decisions to Build Character (p. 109) When ethical decisions are made, they build character in the decision-maker by creating defining moments. Defining moments are decisions which can impact all the subsequent ethical decisions made by the individual. These defining moments could be compared to “forks in the road” in

which the individual must decide which path to follow. Both of the paths can be plausible and acceptable; however, the decision about which path to take aids in the direction of future decisions of the individual.

Who Am I? Defining moments can help determine the core values of the decision-maker. It is during the “Who am I” defining moment that the decision-maker must address conflicting feelings and intuition in the decision-making process. It is also during this stage that the individual ethical values come to the surface as part of the decision-making process.Furthermore, it also forces the decision-maker to think “outside the box” for new and innovative approaches to addressing ethical issues.

Who Are We? Defining moments can help incorporate the individual‟s ethical beliefs with those of other employees within the firm. By addressing the questions of: (1) what are the different interpretations or points of view that can be used to develop an effective course of action, (2) what point of view would most closely align with the “general or majority” view of the employees within the firm, and (3) how can the manager ensure that his or her interpretation of the ethical value will be supported by his or her subordinates and peers.

Who Is the Company?

Defining moments can be used as tools to help clarify what ethical paths should be taken by executives within the firm. Questions at this stage include asking the executive whether he or she has done everything within his/her power to develop a proper ethical course of action; have the decision-makers considered nontraditional approaches in order to address the ethical issues and what individuals create ideas that can be used to convert a proposed course of ethical action into an implemented course of ethical action.

How to Address Ethical Decision-Making from a Global Perspective (p. 111) The Mapping of the Ethical Philosophies presented in Figure 6-3 highlights the different ethical philosophies that can be observed globally. It is very important for a manager to understand that different countries have different cultures which can lead to different ethical philosophies. As a result, it is a critical error to assume that everyone in the world acts in the same manner and agrees to the same ethical philosophy. In the United States, the ethical philosophy that would represent the majority of people would be one focusing on serving self-interest from an ethical perspective. Therefore, ethical egoism would most closely match this belief pattern.

Alternatively, countries in the Pacific Rim would probably more coincide with a group or utilitarianism approach. Therefore, when a global corporation designs its ethical philosophy and training program, it must take these cultural differences into account. Ethical training programs may be changed or altered depending on the country in which the ethical training takes place.

How to Address Ethical Crisis and Disaster Recovery (p. 112) The ethical crisis and disaster recovery typology presents a good set of guidelines for firms to follow when they are facing an ethical crisis. Have your students look over the examples for each of the four categories in Table 6-1. Ask them which of those examples would, in their opinion, be more harmful for the long-term survival of the firm. Now, ask them which of those examples would least likely have any long-term impact on the firm. The next set of questions refers to reducing the risk of having theses crises occur. For each of the four quadrants, ask what specifically can be done to reduce the probability that each of those examples would not occur.

Some potential answers could be:

Internal—Normal     

Product failure or recall-tight quality control Sexual harassment-comprehensive policy and training with zero tolerance Workplace violence- comprehensive policy and training with zero tolerance Vandalism-comprehensive monitoring systems Strike-partnership relationship with employees

Internal—Abnormal    

Corporate scandal-comprehensive ethics training and monitoring Information theft-comprehensive information technology security Copyright infringement-aggressive legal action Records tampering-employee monitoring and controls

External—Normal    

Supplier failure-have backup suppliers available Industrial espionage-comprehensive security systems Product category failures-high quality control Industry-wide technology attacks, membership in voluntary industry associations and high information technology security

External—Abnormal    

Terrorism-Comprehensive security in all phases of the firm‟s operations Industry deregulation-strong liaison with government agencies and officials Reputation issues-aggressive legal action Natural disasters-risk analysis of probability of occurrence

Corporate Culture (p. 112) Corporate culture plays a critical role in the establishment and maintenance of a strong ethical belief system for the employees. The shared values and beliefs of the employees must coincide with the ethical vision of the firm. As a result, managers must ensure that the corporate culture is supportive of a positive ethical climate. Therefore, referring back to the characteristics of a moral manger, the responsibility of being a good model, the ability to reward positive ethical behavior and punish unethical behavior, and the ability to communicate the ethical vision of the manager can only be accomplished if the corporate culture supports these characteristics. As a result, the corporate culture is the “glue” that holds together the guidance needed by the mangers in order to ensure that the firm has a positive ethical climate. In order to ensure that the corporate culture is supportive of the firm‟s ethical belief, the firm must “protect” the corporate culture from threats that can have a negative ethical impact on the firm.

How Managers Can Change a Corporate Culture (p. 115) From an ethical perspective, the challenge of changing a corporate culture occurs when there has been an ethical crisis and/or failure. If the firm has a strong positive, ethical supportive culture, the culture does not need to be changed. However, if an ethics scandal hits the firm, the firm‟s corporate culture must change. For some firms such as Enron, the financial collapse which was included with the ethical collapse was too great for recovery. For other firms such as WorldCom, the change in culture also includes the change in the name of the company. By changing its name from WorldCom to MCI, the top-level managers have given a signal to the marketplace that not only has the company culture changed, but so has the company. Other companies such as Tyco are able to make corporate culture changes within the framework of their existing organization.

The opening scenario in Chapter 12 highlights how Tyco changed its corporate culture as it recovered from its corporate scandal.

Whichever option the firm selects in order to change the culture of the firm, the trust and commitment of the employees must take place before the change can be executed. Employee trust and commitment is critical before managers can expect effort by the employees. Therefore, employees must be involved in the culture change, they must have input on what changes will take place and they must agree to their new responsibilities based on the execution of the culture changes. It is only after these steps have taken place that the firm can expect a significant change in culture to support new ethical focus.

Evaluation of Corporate Culture (p. 116) From an ethical perspective, it is very simple to evaluate the firm‟s corporate culture. Part of the ethics training process should include an evaluation of the ethical knowledge of the employees.

Employees should be well versed on what the ethical philosophy of the firm is as well as what their responsibilities are to ensure the ethical integrity of the firm is maintained. Managers must remember that codes of ethics, ethics training, and ethics learning are continuous events that evolve over time. As a result, the code of ethics is a “living document” that can change as the view of society changes. Economic and social conditions around the world can impact the content of the presentation of ethics from a training perspective. Furthermore, all employees need to be involved in the learning process as it relates to corporate ethics.

Using Organizational Integrity to Link Corporate Culture to Corporate Compliance (p.

118) A starting discussion point would be to ask your students to define integrity and ask them to give examples of integrity. A follow-up question would be: have you had to change your perception of a person‟s integrity and if so, why? It is important for the students to understand that a commitment to ethical actions is an integration of many concepts such as trust, integrity, commitment, and reputation. As with a firm or individual‟s reputation, if the firm‟s level of integrity has been perceived to be weakened, it can have a significant impact on all the firm‟s stakeholders.

Ethics and Corporate Compliance (p. 119) As the Deloitte & Touche study states at the beginning of this discussion, corporate compliance should be viewed as an opportunity and not just as a burdensome cost of doing business.

Corporate compliance moves beyond simply ensuring that the firm is following all government regulations to include the ability of firms to reduce risk and revise their policies and procedures to be consistent with their ethical vision. The five-step process highlighted on page 119 demonstrates how implementing an effective corporate compliance program can become a linchpin for the firm‟s ability to effectively implement their ethical vision.

Step 1: Risk/Cultural assessment—This assessment is needed in order for the firm to understand the underlying philosophy of the employees as it pertains to compliance issues. This assessment helps tailor the components and the comprehensiveness of the compliance system.

Step 2: Review of the current compliance system ensures that whatever revisions are made to the current system correspond with the overall compliance vision of the top managers of the firm.

Step 3: Review of current ethical policies and procedures ensures that the compliance system complements the ethical policies and procedures of the firm.

Step 4: Review of communication, training, and implementation process for the compliance system ensures that employees are well informed of their responsibilities as well as held accountable for their actions.

Step 5: Self-assessment of the compliance system is based on the belief that the compliance system is not static and must be constantly reviewed in order to ensure consistency with the current vision of top-level managers within the firm.

Table 6-3 (p. 120) highlights the difference between the legal and ethical approaches to corporate compliance. This comparison is an excellent way to present the differences between the legal and ethical standards that can be established by the firm. While the legal view of ethics focuses on restricting and creating requirements, the ethical view is based on an agreed upon set of principles. While the legal objective is to not break the law, the ethical objective is to behave in a responsible manner. The legal method examines rules and the implementation of regulations while the ethical method considers ethics as an integrated part of the decision-making process and, therefore, does not need to be considered in isolation. The behavior assumption assumes opposite outcomes, while the legal view wants to control negative consequences.The ethical view considers the positive results on incorporating ethical values in the decision-making process.

The US Federal Sentencing Guidelines for Organizations (p. 119) The US Federal Sentencing Guidelines for Organizations was the first major formal document that presented potential specific organizational consequences for specific organizational crimes.

The Federal Sentencing Guidelines required firms to establish an effective compliance program.

The critical aspect of the Federal Sentencing Guidelines is that it allows the US government to present potential legal remedies for unethical activities such as fraud, environmental violations, and antitrust actions. By presenting specific guidelines for potential jail time and fine amounts, the Federal Sentencing Guidelines helped establish uniform penalties for lack of corporate compliance. In addition, the Federal Sentencing Guidelines gave a clear message to top-level managers that the US government will closely monitor their activities.

Corporate Compliance Systems and Global Corruption (p. 121) The Corruption Perceptions Index is developed by Transparency International. Transparency International is a global organization that examines the level of corruption around the world.

Table 6-4 (p. 122) highlights the Corruption Perceptions Index for 2014. It is interesting to note that Scandinavian countries are well represented at the top of the index which represents the lowest level of corruption. In addition, while Canada and the United Kingdom did respectively well on their rankings (tenth and fourteenth), the United States was ranked seventeenth.

The United States does better on the ranking of the Bribe Payers Index also created by Transparency International. In the BPI rankings for 2014, the United States came in tenth with Canada coming in sixth and the United Kingdom coming in ninth. A question to ask the students is whether they are surprised by these rankings and if they are, can they explain them. One explanation could be that the countries that are ranked near the top of both indexes have more comprehensive monitoring systems in place to track the activities of government officials.

The US Foreign Corrupt Practices Act (p. 123) The US Foreign Corrupt Practices Act (FCPA) is the government regulation that defines and explains the consequences of employees of US-based firms giving bribes to aid in doing business in another country. A common complaint of FCPA by US companies is that it gives them an unfair disadvantage as compared with non US-based firms that do not have this restriction.

Critics point out that a common custom in other countries is to give your “foreign partners” expensive gifts as a token of their long term professional and personal relationships. In addition, in many countries it is expected that financial incentives will be given to government officials in exchange for receiving favorable treatment from the government. The argument against this behavior supports the distinction between the legal and ethical standard. It is quite true that US firms would be at a competitive disadvantage if they cannot offer “bribes” because they would not be playing on a “level playing field”. However, an underlying component of any effective ethics program is consistency across all the countries in which the firm does business. The managers of the firm cannot pick and choose which countries and under which scenarios they would apply a different ethical standard. Furthermore, stakeholders in other countries such as customers and suppliers would welcome a US-based firm when it is expected that the partnership would be based on a strong ethical commitment.

Questions for Thought 1. These questions are answered at the beginning of the document.

2. Explain why ethical decision-making is so important in the strategic planning process.

A major focal point of this chapter is for students to understand that ethics should not be considered a standalone issue when strategic planning takes places. Ethics should be fully integrated in the decision-making process to the point that it does not even have to be identified.

If ethics is effectively integrated in the strategic planning process, ideas will automatically be accepted or rejected based on their ethical merits.

3. Explain corporate culture in light of ethical conduct.

Again, one of the underlying concepts in this chapter is that corporate culture and ethics are intertwined. As a result, for a firm to be sustainable in addressing the needs of its stakeholder, positive ethics must be fully incorporated in the corporate culture of the firm. Therefore, it is

critical for managers to understand the role corporate culture plays when adjustments are needed in the ethical philosophy of the firm. Adjustments cannot be made to the ethical beliefs of the employees if the corporate culture of the firm is not changed.

4. Examine the compliance program of a publicly held company. Does the company have a mission statement related to ethics? Comment on the program.

This should create a good discussion having different students explain the reason for selecting the company to examine and what results they found related to an ethics-related mission statement. It would also be interesting to compare companies within the same industry to determine if there is significant variance in the results.

Real-Life Ethical Dilemma Exercise IOC Investigates Selling Olympic Tickets (p. 125) 1. Should selling tickets at a higher price than the actual cost be illegal?

There should be students that support both sides of this argument. For those who do not have a problem selling tickets above face value, ask them where there are laws against this practice. The underlying issue is that the Olympic officials obtain these tickets without going through a public distribution. Therefore, because of their position as Olympic officials, they were able to obtain tickets while non-Olympic officials did not have the same opportunity.

2. If the officials state the money was going to government programs of their respective countries, would that make any difference in the decision from an ethical perspective.

Again, you should have students presenting both sides of the argument. This question raises the belief that the “ends justify the means”. Therefore, if the end result is beneficial, then there should be less scrutiny on the actions taken to get to that end result. An alternative would be for the Olympic officials to give the tickets to individuals in their respective countries at no cost.

3. Should the real solution be that the IOC charge a higher price for the tickets so that demand will equal supply.

The short answer is yes. It appears that there is a simple disconnect between the supply of tickets and the demand for the tickets. In addition, another solution would be to have the Olympic officials go through the same public channels as everyone else in order to obtain their tickets. It appears that the Olympic officials feel “entitled” to receiving this “benefit” because of the fact that they are Olympic officials.

Chapter 7 Decision-Making and Human Resource Issues

The purpose of this chapter is to highlight the ethical issues that relate to decision-making and human resource issues. After the material is presented in this chapter, the students should have a better understanding on the critical role decision-making and human resources have in the formulation and implementation of an effective ethics program. It should become clear to the students that ethical decision-making should be integrated at every step of the decision-making process. Therefore, firms should view all decision-making as being equal to ethical decision-making. Some of the issues that will be examined in this chapter include the benefits of including ethics in the decision-making process and the costs of not having proper human resource policies in place.

Key Learning Points

There are a number of key learning points which can be accomplished when this chapter is presented to the students. These learning points include:

1.

2.

3.

4.

5.

6.

Describe the six stages of Kohlberg’s moral development model.

Describe the two ethical studies done at Yale and Stanford Universities.

Describe the two components of organizational justice.

Explain the importance of workplace diversity from an ethical viewpoint.

Explain equity theory.

List the reasons employees steal from organizations and some of the red flags that could indicate employee theft.

The Triangle Shirtwaist Factory Fire: How Tragedy Can Create Change (p. 126)

The Triangle Shirtwaist Factory Fire is an excellent example to explain to your students that sometimes government has to step in with regulations and controls when industry is not able to govern its own actions. Based on this horrific accident, the fundamental view of how employees were viewed by the US government and by their employers changed permanently. The passage of the Wagner Act sent the signal to all American manufacturers that the previous way of treating workers would no longer be tolerated. In addition, the passage of labor legitimation forced employers to be more accountable for the safety and working conditions of their employees despite the additional costs.

CBS news has an excellent summary of the impact the fire had personally and nationally called From the Ashes. https://www.youtube.com/watch?v=4ulaG9x4GpE.

Ethical Decision-Making: Kohlberg’s Six Stages of Moral Development (p. 128)

Kohlberg’s six stages demonstrate how the moral development of an individual evolves through six stages. You can ask the students to describe how their moral development has evolved over time. Do the students believe they are currently at the sixth stage? If they believe they are at stage six, ask them to describe an ethical dilemma which they have had to address. As a follow-up question, ask them what previous experiences helped them resolve the ethical dilemma.

The Role of Emotion in Moral Decision-Making (p. 129)

Milgram’s Experiment Milgram’s study of obedience is a classic case study of how individuals can blindly follow the orders of superiors. Milgram’s study empirically examined his belief that this blind obedience does not just occur in unique circumstances such as Nazi Germany, but can occur in peaceful conditions in the United States. The obvious question to ask the students is whether they would agree to continue the experiment even if they knew it may cause permanent or fatal harm to another person. It is expected that all the students would state that they would refuse to follow orders once the consequences became harmful. When this response is given, you can follow up by asking why did they think that they would have a different response from those in the experiment.

A summary of the study is shown in this video: https://www.youtube.com/watch?v=xOYLCy5PVgM&nohtml5=False

If the students state that the study took place in 1962 and is no longer relevant, you can show this video in which ABC redid the experiment. https://www.youtube.com/watch?v=AwOeCF27PzM&nohtml5=False

Rationalizing Unethical Behaviors (p. 25)

Three ethical tests can be used for a business decision:

Transparency—It refers to the ability for others to have access to the same information so that they can understand how the decision was made

Effect—Who will be affected by this decision? What will be the short-term and long-term effects of the decision?

Fairness—Will the decision be considered fair by those that are impacted by it? This incorporates the interests of the stakeholders in the decision-making process.

Ethical Decision-Making and Moral Intensity (p. 132)

You can ask your students if they have had personal experiences in which the magnitude of the consequences impacted how they made a decision. You could then ask your students what kind of ethical dilemmas they think they will face once they have graduated. This would be a good time to interject the concept of moral intensity from a personal perspective. For example, what would they do if they knew they would be fired if they did not follow through with an illegal action. What would their reaction be if the action was legal but unethical?

The Role of Power and Influence in Ethical Decisions (p. 133)

“With great power comes great responsibility”

Even though this quote is from a comic book character, a lot of your students will immediately be familiar with it. Using a quote from Spiderman allows the students to understand that ethics can take place even in the make believe world of Peter Parker and Uncle Ben. This reinforces the ideal that ethics impact not only the decisions made as employees, but also as citizens of the world.

Managing Power The Stanford Experiment (p. 134)

The Stanford experiment highlights that obedience is a core part of the cognitive process of individuals.

Regardless of whether it is giving shocks for wrong answers or abusing “prisoners” who don’t conform to the rule set by the “guards”, it is human nature to obey orders. The Stanford experiment showed that without proper restraint, human beings will continue to act in amanner which is considered acceptable even if it is unethical. The result of the Stanford experiment was the implementation of stringent

guidelines on how human subjects can be used in any experimental setting in which the behavior of the subjects is manipulated.

An excellent documentary by the BBC on the Stanford experiment can be found on YouTube. Be warned that there is some graphic language in the documentary

https://www.youtube.com/watch?v=760lwYmpXbc

A Machiavellianism Approach to Decision-Making

A discussion on Machiavellianism should yield some interesting discussion points with your students.

You can start the discussion by asking whether they have ever manipulated someone in order to achieve their own goal. The follow-up question would be whether they have ever felt that they had been manipulated by someone is order for that person to achieve his or her goal.

An example of a scenario you could ask your students to consider is you are shopping with your friend and your friend grabs an item (e.g. Shirt, purse, CD, shoes, book) and there is only one of these items.

You convince your friend that he or she should not buy it and you return later to the store and buy it yourself, is that ethical? Is that Machiavellianism?

How to Control Power and Influence

The challenge of trying to control power and influence is to realize the level of power and influence you could have over other employees. It does not matter whether the power is legitimate or implied, managers must understand that what they say and how they act can greatly influence the behavior of his or her subordinates. From an ethical perspective, power and influence can be used to ensure the employees are committed to the ethical philosophy of the firm.

Human Resource Issues (p. 135)

Human resource issues are tied directly to the firm’s corporate culture. It is through the firm’s ethical focus related to human resources that firms can develop and cultivate a strong positive ethical corporate culture. It is important for the students to understand that a strong ethical culture supported by strong ethical human resource policies allow the firm to enhance and sustain its competitive advantage by attracting and retaining exceptional employees. Therefore, the stronger the human resource commitment of the firm is to ethical conduct, the higher the potential financial benefit will

occur for the firm. Ask your students how firms try to determine how ethical the student is when they interview the students. Are there formal written questionnaires? Does the interviewer ask the students for their response based on different hypothetical scenarios? Does the interviewer ask the students to give an example when they had an ethical dilemma to resolve?

The Role of Workplace Diversity (p. 136)

The students need to be made aware that diversity is critical in the firm from both an ethical and financial perspective. Diversity allows the firm to ensure that the viewpoints of the firm mirror the viewpoints of the global population. In addition, diversity allows the firm to evolve in its commitment to ensure that employees act in an ethical manner. By increasing the level of diversity in the firm, the presentation of alternative viewpoints is given which can help ensure that the actions by the firm are done in an ethical manner. In addition, diversity challenges the status quo in both the decision-making and operations of the firm. This allows the firm to be resistant into moving towards a groupthink perspective in which only one viewpoint is considered and agreed upon in the decision-making process.

Ethical Climate and Organizational Misbehavior (p. 137)

Organizational misbehavior can be classified into three different types:   

Type S which is misbehavior which benefits the individual Type O which is misbehavior which benefits the organization Type D which is misbehavior that is intended to inflict damage to the organization

It would be interesting to ask the students whether one type of behavior is worse than another. For example, does the valuation of the type of misbehavior depend on the consequences of the misbehavior? If this is the case, Type D would always be the worst type of misbehavior and Type O would also be the “best” misbehavior from the perspective of the firm. In addition, could it be argued that Type S misbehavior is “relatively” harmless since it only benefits the individual? Of course, the rebuttal to this discussion is that the decision-maker must evaluate the level of misbehavior not from the perspective of the individual or the firm, but from the perspective of the stakeholders of the firm.

From this perspective, each type of misbehavior can have a significant negative impact on critical stakeholders of the firm.

It would be also interesting to ask the students whether they have ever experienced or observed misbehavior in the form of: Production Deviance; Political Deviance; Property Deviance; Personal Aggression; or Employee Theft. If the students have observed this type of behavior, you can follow up

the discussion by asking what their reaction was when they saw this type of behavior take place within an organization. An additional avenue of discussion is to ask whether other employees including the individual’s supervisor was aware of this type of behavior and if so, what their reaction to this information was.

Sexual Harassment and Sexual Discrimination

The focus of this discussion could be based on examining the consequences from both an individual and firm perspective. Sexual harassment and discrimination creates a hostile work environment. Similar to the impact of office bullying, sexual harassment creates fear and anxiety for the individual on a consistent basis. The emotional and legal consequences of allowing this type of behavior in a corporate setting can be dramatic. From a firm perspective, it could be argued that this type of toxic culture is not just demonstrated in sexual harassment. A firm that condones this type of behavior, more than likely, has other areas in which unethical and illegal behavior is not condemned. Therefore, sexual harassment and discrimination could be viewed as a symptom of a systemic unethical corporate climate in which there are potentially numerous areas that this type of behavior is allowed. For example, if this is the culture of the firm, how does it treat its other critical stakeholders if it views this treatment of its employees as appropriate?

A Silicon Valley Example of Sexual Discrimination Ellen Pao had refused an offer of $1 million to settle the case out of court against Kleiner Perkins. The result of the trial was that the decision was in favor of Kleiner Perkins. On June 17, 2015, Ellen Pao was ordered to pay Kleiner Perkins $276,000 to cover the legal costs of the case.3

Office Bullying

Office bullying is another example of a toxic corporate culture is which unacceptable treatment of employees by other employees is allowed. While some supervisors may not consider office bullying as a high priority to resolve, the emotional stress on the employees and the potential legal costs require appropriate action by the supervisors. Of course, another issue is if the supervisor is the bully. In that case, the employee has fewer options in which to resolve the issue. The only effective course of action may be to ask to be transferred to another department or leave the firm.

Employee Monitoring

3

Jim Christie. 2015. Ellen Pao owes Kleiner Perkins $276,000 for Lawsuit Costs: Judge. Reuters. June 17.

The students should be aware that their actions will be continuously be monitored in the workplace.

Regardless of the device, technology now allows firms to monitor, in real time, every minute of the work day. A question which could start a good discussion is whether this monitoring should be acceptable “after” the work day is over. For example, should the firm have access to the GPS location of a companyowned device 24 hours a day? Should a firm have the ability to expect an employee to monitor his/her email when he/she is not working. One saleswoman filed a lawsuit against her employer because she was required to download an app on her phone which was able to track her location 24 hours a day.4 The question becomes where does a firm’s drive for productivity superseded the privacy rights of the employee.

The Ethical Issues Related to Extreme Jobs

The obvious question to ask your students is whether they would want to have an extreme job. You can pose the question based on the hypothetical criteria in which an extreme job for some companies is the only way for advancement and higher income levels. This should lead to the discussion of work–life balance. You can ask the students which is more important their work or their family. An excellent description of an extreme job environment was an article published in the New York Times titled “Inside Amazon: Wrestling Big Ideas in a Bruising Workplace”, August 15, 2015.

http://www.nytimes.com/2015/08/16/technology/inside-amazon-wrestling-big-ideas-in-a-bruisingworkplace.html?smid=tw-share&_r=0

A counterargument of the value of an extreme job can be seen in an article published in the Wall Street Journal titled “Dealing with the ‘Daddy Track’: Men Face Challenges Going Part Time. September 1, 2015.

http://www.wsj.com/articles/dealing-with-the-daddy-track-men-face-challenges-going-part-time1441099800

Questions for Thought

1. Describe the similarities and differences between the studies conducted at Yale University and Stanford University.

4

David Streitfeld. “Data-Crunching Is Coming to Help Your Boss Manage Your Time”. The New York Times.

August 17, 2015.

The Milgram experiment and the Stanford experiment highlight the innate need of individuals to obey authority. Whether it is shocking a subject or verbally abusing a “prisoner” for not following orders, human beings are “wired” to execute the orders of those of authorizes. Milgram proved the hypothesis that the rationale of “just following orders” can occur not just in Nazi Germany, but also in New Haven, Connecticut. The major difference between the two studies is the degree of extreme measures used to obey orders. While the subjects in the Milgram experiment pretended to be physically injured by the test, the Stanford experiment had much more extreme behavior of the guards. The guards used physical and verbal abuse as a method to ensure the prisoners followed orders. In addition, the extreme behavior of the guards forced the creator of the experiment, Philip Zimbardo, to stop the experiment after six days instead of the end of the planned two weeks.

2. Sexual harassment is a critical area for misbehavior in companies. Can a company eliminate sexual harassment? Why or why not?

A simple answer is that there is not a method which can totally eliminate sexual harassment. If an individual wants to sexually harass another employee, there is no an option which can stop this action.

However, firms can be very proactive to ensure that individuals understand the consequences if they do sexually harass another employee. Based on the comprehensive nature of the firm’s policy and procedures AND a track record of how the firm has addressed sexual harassment claims in the past will give the relevant information to every employee as to what the consequences would be if they did become involved in sexual harassment.

3. Diversity is an important issue in all organizations. What is the importance of addressing diversity and how can diversity be achieved?

Just as unethical behavior such as sexual harassment and office bullying creates a toxic corporate culture, diversity creates the opposite effect. By definition, embracing diversity allows for multiple viewpoints and perspectives in how a firm addresses the needs of the stakeholders. Therefore, diversity will foster a positive and ethically supported culture in which peer pressure will hopefully eliminate discriminatory behavior such as sexual harassment and office bullying. In addition, diversity also allows the firms to develop a more comprehensive strategic focus since their customers are also diverse. It creates a more succinct match for the firm’s strategy and customer needs.

Real-Life Ethical Dilemma Exercise When the Stork Delivers a Pink Slip Questions

1. Do you think employers need to giver pregnant women special accommodations?

The simple answer is yes. The reason is that firms should view employees holistically instead of adjust a means of production. The philosophy of how to treat pregnant women relates to the firm’s overall

corporate culture. A strongly positive employee supportive culture results in higher employee satisfaction and productivity which more than offsets the financial costs of making special accommodations for pregnant women. For example, Patagonia has had onsite child care for its employees for thirty years.5 You could ask the students how Patagonia factors child care costs in its production process and why Patagonia would do this. Again, the goal of any firm is to attract and retain excellent employees. This is one method in which this goal can be accomplished

2. How often do you think pregnancy is part of the decision process when layoffs occur within a firm?

While the firm will never admit that pregnancy may be a factor in the decision to lay off employees, it is expected that it certainty would be a consideration in many firms. However, this firm would not only fixate on pregnancy, but may also make lay off decisions based on other discriminatory criteria such as age, religious affiliation, and sexual orientation. It could be argued that if the firm discriminates against one class of employees, it probably also discriminates against other classes of employees. As a result, the firm would need to try and “cover up” this discriminatory decision-making process in order to avoid potential lawsuits.

3. Do you think there are certain industries that would be more like to fire pregnant women? Do you think there are certain industries that would be less likely to fire pregnant women?

The answer to both is yes. It could be argued that male-dominated industries such as brokerage firms and investment banking firms may be more likely to fire pregnant women. Industries that have been traditionally more female dominated such as apparel industries may be more likely to accommodate pregnant women. Two articles that describe the potential discriminatory behavior of male-dominated firms are:

“A Colleague Drank My Breast Milk and Other Wall Street Tales”. The New York Times. January 24, 2016

http://www.nytimes.com/2016/01/24/opinion/a-colleague-drank-my-breast-milk-and-other-wallstreet-tales.html

“Zenefits Once Told Employees: No Sex in Stairwells”. The Wall Street Journal. February 22, 2016

http://www.wsj.com/articles/zenefits-once-told-employees-no-sex-in-stairwells-1456183097

5

http://www.patagonia.com/us/product/family-business-30-years-of-innovative-on-site-child-care-hardcoverbook?p=BK760-0

Chapter 8 Ethics and the Environment The purpose of this chapter is to highlight the ethical issues that can pertain to firms when they make decisions impacting the natural environment. The students will be presented material which explains the ethical challenges of addressing natural environment issues. In addition, students will be exposed to how companies can use the natural environment to enhance their competitive advantage and can be directly included in firms‟ performance evaluation as part of the triple bottom line. Furthermore, current environmental issues such as environmental sustainability and climate change will also be addressed in the chapter. The chapter also addresses how firms can use climate change as a strategic option.

Key Learning Points There are a number of key learning points which can be accomplished when this chapter is presented to the students.

1. Explain the concept of Tragedy of the Commons and integrate it with environmental ethical issues.

2. Comment on the natural environment as a stakeholder and as a competitive advantage.

3. Identify areas in which firms can be environmentally proactive.

4. Describe the various environmental stakeholders.

5. List some of the major environmental regulations in the United States.

6. Describe some of the benefits of establishing a voluntary partnership with the US Environmental Protection Agency.

7. Explain environmental justice.

8. Describe the importance of a firm‟s carbon footprint.

The Intersection of Billboards and Environmental Sustainability: A Peruvian Example (p.

150) This opening vignette highlights how countries and corporations can view improving the natural environment not as a threat, but as an opportunity. In order to help address the need for clean water, billboards were developed which filters the water in the air into a condensed form. A question to ask your students is whether this type of billboard would work in the United States.

When they say yes it would, you can follow up with the question as to why these types of billboards are not used in the United States. While the purity of water may not be a concern in the United States, availability of water is a concern. For example, drought areas could benefit from this type of billboard. In addition, major cities would receive benefits from the use of billboards which filter the polluted air into purified air. This example highlights that innovation can occur in any part of the world and could also be transferred to other parts of the world if individuals become aware of the opportunities.

The Tragedy of the Commons (p. 151)

The tragedy of the commons highlights the underlying challenge it is to have collective society be protective pertaining to the natural environment. The tragedy of the commons is based on the concept that free access with unrestricted use of any finite resource will ultimately ruin the resource through overexploitation. It is important for students to understand that there is real value in these “free” resources. As a result, there has to be a protection system in place to safeguard the value of these free resources. One question you could ask your students is how much they would be willing to pay for clean air. If you HAD to buy pure oxygen, it would cost approximately $62 for 42 liters based on one medical supply company‟s product. How much is the free air now worth to the students? How much is clean water worth to a student? You can point out that when students buy drinking water in a bottle, if a bottle of drinking water (16 ounces) costs $1 then water would cost $8 per gallon. Now ask them again how much they would be willing to pay for clean water. This example will prove to the students that EVERYONE takes for granted clean air and clean water. If we became a society in which we had to PURCHASE air and water, only the most affluent members of society would be able to survive. A video of Garrett Hardin explaining the tragedy of the commons can be found at http://www.youtube.com/watch?v=L8gAMFTAt2M.

Natural Environment as a Stakeholder (p. 151) As the textbook states, the natural environment could be considered a stakeholder without a voice. By definition, the natural environment should be considered a stakeholder since it has a vested interest in the operations of the firm. Even though it cannot “think” the natural environment reacts both favorably and unfavorably when actions are taken by the firm that have a direct impact. The natural environment “rewards” proactive environmental strategies by providing clean natural resources. Alternatively, the natural environment punishes firms that are “reactive” by having the firms address clean-up and other additional associated costs of production when the natural environment is polluted. Following the axiom “it‟s not nice to fool Mother Nature”, a proactive environmental commitment heightens the ability of the firm to survive in the long term based on environmental sustainability. Alternatively, those firms that view the environment as a “common” may be able to make short term financial gains, but will result in negative impacts in the long term.

Since the natural environment does not have a voice by itself (its proxy is environmental NGOs), decision-makers may not value it as a stakeholder. However, as is stated in the textbook, when a firm impacts the natural environment there is also potential impact for other stakeholders. The section concludes with the argument that traditional ethical theory such as utilitarian and Kantian ethics do not include consideration for the natural environment since it is not a human being. It is, therefore, argued that what should be done is redefine a stakeholder, if a stakeholder is a living being then utilitarian and Kant‟s ethics would include the natural environment by considering the greatest good for the greatest number of living beings and it should be a human‟s duty to consider the impact on all living things.

Natural Environment as A Competitive Advantage (p. 152)

This section is valuable to the students since it demonstrates the positive value added of considering the natural environment if it is integrated into the strategic focus of the firm. By focusing on the four strategic options, students will understand that there are many financial benefits of considering the natural environment to be a strategic stakeholder.

Strategy 1: Eco-efficiency focuses on the design process and the re-evaluation of the design of the product. By considering all by-products in the manufacturing process as a “waste” product, designers can look at more ecofriendly ways to design and manufacture new products. The net competitive result of implementing an eco-efficiency strategy is that it lowers the overall cost structure of the firm, resulting in higher profit margins.

Strategy 2: Beyond Compliance Leadership—This strategy gives empirical proof to the firm‟s stakeholders of their environmental commitment. Through the use of an environmental management system (EMS) or certification by the International Standards Organization (ISO 14000), firms are able to generate documentation that shows how they have integrated the natural environment in the manufacturing process. The competitive advantage of implementing a formal EMS and/or being ISO 14000 certified is that it allows the firm to differentiate its products and services based on these systems. The large caveat with this strategic focus is the underlying assumption that consumers acknowledge that there is value added by having the firms implementing these control systems. If the customers do not care whether the firms have an EMS in place or if the firm is ISO 14000 certified, then the customer would not be willing to pay a premium for goods and services that are produced by the firm. Another issue is to ensure that there is consistency in the monitoring of the environmental systems. As was demonstrated in the textbook, Shell Oil faced a large negative backlash when it dumped the Brent Spar oil rig in the North Sea. If the firm uses the natural environment to differentiate its products, it must ensure that the news is always positive as it relates to environmental issues.

Strategy 3: Eco-branding is based on the concept that firms use their overall corporate environmental commitment to help brand their products as eco-friendly from a firm that is ecofriendly. It is through this branding that firms would be able to help differentiate their products from their competitors. As was the case with strategy 2—beyond compliance leadership, ecobranding will only succeed if the customers put a premium value on the products and services based on their environmental commitment. The Timberland nutrition label highlights the amount of energy used to make a pair of shoes. This “out of the box” thinking brings interest and positive press reports for Timberland and again can be used to help enhance their competitive advantage.

Strategy 4: Environmental Cost Leadership is based on the belief that the reduction of manufacturing costs related to environmental pro-activeness can be converted into lower prices for products and services. Although similar to strategy 1—eco-efficiency, the difference is that environmental cost leadership uses the cost savings in the manufacturing process not to increase the profit margin per unit, but to lower the price of the goods and services. The net result is a lower profit margin per unit, but the assumption is that this will be more than compensated by the volume increase in the number of units sold.

Voluntary Environmental Compliance (p. 155)

Voluntary environmental compliance is adopted by firms that want to show the “evidence” to their stakeholders that they are in compliance but do not want to go through a formal process such as the ISO certification. The thirteen recommendations presented by Ramus are traditional areas in which firms could focus initially on environmental issues. From developing an annual environmental report to training the employees on environmental issues, voluntary environmental compliance gives the firms the freedom to pick and choose which areas they would like to focus on to support their environmental commitment. This “buffet” approach gives the firms the flexibility to adopt a combination of activities which best matches the environmental vision of the top management within the firm.

How to Adopt Sustainable Strategies using Firm Transformation (p. 155) The six-step process to incorporate sustainable strategies highlights the challenges and opportunities of top-level managers to make a significant transformation impact on the firm. As was the case with Ray Anderson of Interface (Case 11), a CEO can be a driving force in order to fundamentally change the environmental focus of a firm. The top levels must be champions and fully committed to the process in order for the transformation to succeed. Since the process can be challenging, both financially and time consuming, the path of least resistance for many firms in not to attempt this transformation process.

Employees as Environmental Stakeholders (p. 157) Catherine Ramus states that a major reason that proactive environmental initiatives fail is the lack of commitment by the employees. Her remedy is to include employees in the development of the environmental strategy of the firm.

1. Initiatives that decrease the environmental impact of the company through the policies of reuse and recycling. This can be called the first easy baby step of getting employees‟ commitment. This is a simple task to complete, yet the employees will be the first to see the results of their efforts. Furthermore, this task will instill pride in the employees by being able to claim to their friends and family that they have started a reuse and recycling program.

2. Initiatives that solve an environmental problem such as hazardous substance use reduction.

This second level of initiatives is more complex and time consuming than the first initiative.

However, the employees will further enhance their commitment to environmental issues AND their commitment to the firm because their ideas have moved beyond simple recycling strategies to become actively involved in the design and manufacturing process of the product. It is through the design and manufacturing that the reduction and substitution of hazardous material can take place.

3. Initiatives that develop a more eco-efficient product or service that uses fewer resources and/or less energy. This initiative extends the commitment and the ideas presented in initiative 2.

Instead of making incremental adjustments in the design and the manufacturing process which occurs in initiative 2, initiative 3 makes a quantum leap in the process. By actively being involved at the origin stage of the design and manufacturing process, the employees are now the

driving force of innovation and research and development of the firm. As a result, participation in these initiatives allows the ideas of the employees to help drive the future environmental direction of the firm.

NGOs as Environmental Stakeholders (p. 158) Nongovernmental Organizations (NGOs) have played a significant role in increasing the level of awareness of environmental issues. The Keep America Beautiful campaign is a classic example of how the environment moved into the forefront of people‟s consciousness. The pinnacle of the campaign was the Public Service Announcement in 1971 which featured Chief Iron Eyes Cody.

Here is the clip from YouTube (http://www.youtube.com/watch?v=X3QKvEy0AIk) that can allow your students to evaluate the effects of this Public Service Announcement Greenpeace Greenpeace is one of the best known environmental NGOs. It is active in forty countries and does not rely on donations from governments or corporations. Although some view that Greenpeace is an “extreme” environmental group using tactics like blocking fishing boats and strapping themselves to old forest trees, the impact of Greenpeace‟s message resonates around the world. It believes that these tactics are necessary in order to get its message across. A good way to evaluate Greenpeace‟s image is to do a word association game with your students. Tell them to tell you the first thoughts that come to their minds when you mention Greenpeace. The words used and the description of Greenpeace‟s actions would be a good starting point for a lively discussion.

Sierra Club Again, use word association with Sierra Club and the students will probably give you a different type of description. While Greenpeace may be described as “radical” and “extreme”, Sierra Club is probably viewed more of a mainstream NGO that tries to make change within the rules of society. As a result, the image of Sierra Club reinforces the conventional and traditional NGO. Environmental Defense Fund The Environmental Defense Fund is an NGO that was created by a small group of scientists who were motivated to resolve environmental issues after Rachel Carson‟s book Silent Spring was published. In the book, Carson warned that the overuse of pesticides and other chemicals would have such a negative impact on plants and wildlife that the eventual result will be a time when there will no longer be any songbirds to sing in the spring. From this foundation, the Environmental Defense Fund has continued with its mandate to use science and advanced technology to resolve current environmental issues.

Friends of the Earth Friends of the Earth could be considered to be the middle ground between Greenpeace and the Sierra Club. While it continues to challenge the status quo and social norms, it tries to make

changes within the system by using current laws to aid its cause. The example in the textbook highlights Friends of the Earth examining the financial statements of publicly traded companies to see how it accounts for environmental investments as well as resolving environmental issues.

Communicating the Firm’s Environmental Commitment to Its Stakeholders (p. 159) Stanwick and Stanwick empirically examined the relationship between the firm‟s environmental disclosures and its financial performance. They found that firms that had both an environmental policy and a detailed description of their environmental commitment had higher levels of financial performance than low-performing firms. Two conclusions can be inferred from these results. The first is that there appears to be proof that firms that are environmentally proactive are rewarded with higher financial performance. The second conclusion is that communicating environmental information to stakeholders enhances the firm‟s financial performance. The second conclusion could be due to the fact that stakeholders have a strong positive communication channel with the firm which addresses not only environmental issues but also other firm issues. As a result, the firm enhances the trust of the stakeholders and is also able to make adjustments to its strategy based on the feedback from its stakeholders. The results of the study also showed that firms that had a medium level of financial performance had the highest incidence of environmental policies and description pertaining to their environmental commitment. This result also supports the belief that firms use the natural environment as a way to enhance their competitive advantage and for firms that want to move into the high financial performance category, they believe that being proactive pertaining to the environment can help the firm achieve that goal.

US Government Regulations (p. 160) The summary of US environmental regulations highlights that even though people assumed that the government began to become involved in monitoring environmental issues in the 1970s the origin dates back to the 1930s. The variety of government regulations over the past seventy years shows not only how the type of government regulations evolved over time, but so did the types of environmental issues which the regulations were designed to address.

Environmental Accounting Issues (p. 160) The financial accounting aspect of environmental issues highlights the gray area in which firms interpret the impact of an environmental issue. If the firm does believe that the environmental issues have a “material” impact of the financial statements of the firm, it will not report with the same rigor as an issue that is considered material. The critical component of this type of reporting is a potential subjective evaluation by the firm and the firm‟s external auditor. If the materiality of the issue is open to interpretation, the firm will probably want to classify the issue as not material.

Environmental Justice (p. 161) Environmental justice can be defined as the systematic equal allocation of environmental benefits and burdens. The underlying premise is that certain demographic areas within US cities

were receiving a disproportional negative environmental impact without any positive impact to counterbalance the relationships. For example, incinerators, waste treatment facilities, and heavy polluting manufacturing plants would be located in urban areas that were primarily represented by a certain ethnic group and/or by a certain income level. In addition, there would be no effort in these areas for funding to improve the natural environment in the surrounding community.

The NIMBY or Not In My BackYard philosophy continues to hold true where certain communities will continue to battle to block any environmental activity that would negatively impact the local community.

Environmental Sustainability (p. 161) Environmental sustainability is the ability of an organization or a country to protect the use of future resources by properly maintaining and protecting the resources that are currently being used.

Sustainability can be defined based on three major components: 1. A system to ensure sustainable management of the earth‟s natural resources.

2. The development of social and institutional structures that would support the sustainable management of the natural resources.

3. Changes in the economic framework so it would support the sustainable management of the earth‟s natural resources.

Therefore, it can be concluded that the viability of all firms and the natural environment in the “long-term” is based on being a steward of sustainability. As Hart argues, the approaches to sustainability can vary significantly from country to country.

The Major Challenges to Sustainability (Table 8-3; p. 162) presents alternative approaches to sustainability based on financial strength of the country and three critical sustainability issues: pollution, depletion, and poverty. As is shown in the table, many countries in the world (survival and emerging economies) cannot afford to make the same type of financial investments as developed economies to enhance their level of sustainability.

Ethics and Climate Change (p. 162) Climate change continues to be a discussion topic in both the economic and political arena. It is important to ask your students whether they believe that greenhouse gas (GHG) emissions are responsible for climate change. You will probably have students supporting both sides of this question. For those who do not believe that GHG emissions are impacting the earth‟s climate, you can comment that even if humanity does not know for certain, would it not be better to take action to reduce GHG emissions instead of ignoring the issue. It would be beneficial to mankind if decision makers took the perspective that the benefits of reducing GHG emissions if it does impact climate change outweigh the costs in the reduction of GHG emissions. Table 8.4 (p. 163) highlights the projected impact GHG emissions will have on the earth‟s climate by 2050. GHG emissions are a global problem which requires global solutions.

Climate Change as a Strategic Option (p. 164) As with many environmental issues, climate change can be considered both a threat and an opportunity. It is a threat for those industries which depend on weather conditions and locations near the ocean and becomes an opportunity for those firms that view climate change as an avenue in order to improve the financial performance of the firm. By focusing on product and process opportunities, firms had not only decreased GHG emissions, but also can improve the competitive position of the firm relative to its competitors.

The Effects of Climate Change on the Firm (p. 165) It is important to tell your students that regardless of their beliefs, firms are already adjusting their strategic focus in order to adjust to climate change. For example, shipping companies are focusing on the opportunities of sailing through the Arctic Circle since it is expected that large areas will eventually be free of ice. As a result, industries that are directly impacted by climate change are moving forward to capitalize on new opportunities that were not available in the past.

A Firm’s Carbon Footprint (p. 166) In the future, it is expected that firms will be more accountable in calculating and reporting their carbon footprint based on their global operations. Publications such as the Carbon Disclosure Project 2010 Global 500 Report highlight that stakeholders want information related to the environmental impact of a firm. As a result, stakeholders will continue to evolve in their needs relative to information pertaining to the environmental performance of the firm.

Questions for Thought 1. The opening vignette is an inspiring example of social entrepreneurship. Why do you think there are not more examples of intertwining social commitment and entrepreneurship?

There could be a number of reasons why more entrepreneurs do not become social entrepreneurs.

Most entrepreneurs may perceive the vision of their company solely from a financial performance perspective so social issues do not become part of their strategic vision. In addition, some entrepreneurs may find it more difficult to start a business where there are market “limitations” for their product. Thirdly, entrepreneurs may believe that focusing on social issues distracts them from focusing on establishing and maintaining a competitive advantage. Of course, the rebuttal to these arguments is that addressing social issues can still lead to global markets and social responsibility can enhance the competitive advantage of the firm.

2. What role should businesses take in climate change? What should government‟s role be in climate change?

There should be a balance between business and government guidance on how firms should address climate change. From a business perspective, firms can establish voluntary commitments to reduce GHG emissions and as was mentioned previously using climate change as an

opportunity to enhance the firm‟s competitive advantage. Different countries have different viewpoints about the importance of the reduction of GHG emissions. However, GHG emissions are a global issue and global accords such as the Kyoto Treaty are good starting points to address the global issues related to climate change.

3. Do you believe that a business‟s carbon footprint will be an important competitive issue in the future?

Yes, as was mentioned previously, it appears that firms will become more accountable for their carbon footprints. As the global impact of climate change continues to evolve, it is expected that both governments and business will need to be much more proactive in their responses to GHG emissions. Therefore, it is in the firm‟s best interests to be proactive related to reducing its carbon footprint before it is mandated by its government to comply with new government regulations.

Real-Life Ethical Dilemma Exercise Bhopal Disaster Questions 1. Why has the US government not extradited former Union Carbide Chairman Warren Anderson to face his charges in India?

There is not a clear reason for this lack of action by the US government. However, whether it is not considered a high priority for the US government, or certain decision makers and the power/authority to block an extradition, the net result is that the belief from the people who were exposed in Bhopal that justice had not been served.

Warren Anderson died on September 29, 2014, and never returned to Bhopal.

2. How would Union Carbide‟s reaction to the gas leak be different if the plant was located in the United States?

The reaction by both Union Carbide and the local community would be dramatically different.

Union Carbide would be expected to resolve the crisis quickly since the health of thousands of citizens could be at risk. If Union Carbide did not act quickly enough, there would be enormous pressure from its stakeholders to resolve the issue. The consequences of not reacting quickly enough can be seen by BP in the Deepwater Horizon disaster (Case 25). Furthermore, as was the case of the Deepwater Horizon disaster, Union Carbide would probably face millions of dollars in government fines and billions of dollars settling class action lawsuits filed by injured parties of the disaster.

3. Do you think a payment of $550 is fair for the victims of the disaster? What do you think the payment would be if the disaster occurred in the United States?

Of course, from standards in the United States, $550, would not seem anywhere near a fair financial compensation for the victims of the disaster. However, based on the standard of living in India, $550 can be perceived as a large financial payment. As was mentioned in the answer to question 1, it would be expected that the families of the victims would receive millions of dollars in compensation for the death of an immediate family member.

4. Compare the US government‟s response to the BP Deepwater Horizon disaster with its response to the Union Carbide disaster.

The US government was much more proactive in forcing BP to resolve the oil leak. Of course, the primary reason is that the oil leak occurred in United States waters of the Gulf of Mexico.

Therefore, the US government had a direct interest in resolving this environmental disaster.

Through its significant level of fines imposed on BP, the US government also sent the message that it would not tolerate this type of disaster occurring in the future. Since US citizens and areas controlled by the United States were not involved in the Bhopal disaster, the US government had a much more passive role in addressing the concerns of the stakeholders impacted by the chemical leak.

Chapter 9 Ethics and Information Technology The purpose of this chapter is to highlight the ethical issues that relate to information technology.

This chapter should provide a lot of interesting discussions with your students. Since the students of today are much more technology savvy than previous generations, technology is embedded in their day-to-day activities. Therefore, after discussion of the information in this chapter, the students will realize that it is very easy to commit unethical activities with the use of technology.

The students will be exposed to issues such as why they need to study information technology, how firms can monitor computer and telephone communications, the privacy rights of employees and customers, the role of government regulations, and the USA PATRIOT Act. Key Learning Points There are a number of key learning points which can be accomplished when this chapter is presented to the students. These include: 1. Explain the types of critical analysis that can be used to evaluate information technology.

2. Discuss the issues associated with the privacy of employees.

3. Discuss the issues associated with the privacy of customers.

4. Identify ethical issues facing Internet usage.

5. Discuss areas for technology fraud, including those associated with the Internet.

6. Explain the USA PATRIOT Act. .

The Interview: Two Big Thumbs Down from North Korea (p. 169) The hacking of Sony Pictures created ethical issues for both the hackers and those that have been hacked. The power of technology was demonstrated when it was concluded that North Korean hackers were able to gain access to personal records related to Sony employees and confidential

decisions related to its business. Of course, Sony is responsible for protecting its data, but an additional question to ask is how and why were personal documents with confidential information existing in digital form which could eventually be obtained through hacking. For example, personal commentary by Sony‟s co-chairman and head of Sony‟s movie business highlighted potentially unethical treatment of actors and other executives within the movie industry. Furthermore, is it ethical to develop a movie in which the plot not only mocks the leader of North Korea, but also thickens the plot as the actors are asked to assassinate the leader at the end of the movie? You can ask the class what reaction would be if North Korea developed a movie which mocked the president of the United States and the main characters were asked to assassinate the president.

Why Are Information Technology Ethical Issues Important? (p. 170) The results of the survey done by the American Management Association and the ePolicy Institute should create quite a reaction from your students. They would probably find it hard to believe that 30 percent of the firms in the survey had to fire an employee due to misusing the Internet. At this point of the discussion, you can make it very clear to the students that in a work environment, the firm owns the computers and other devices and, therefore, they can control what activities are considered acceptable when the devices are used. To stress the point to the students, the survey showed that 66 percent of the firms monitored the employee‟s activities on the Internet to determine which Web sites were displayed. Furthermore, 45 percent of the firms monitored the content, the keystrokes used, and the amount of time spent of the computer. As a result, firms are trying to ensure that “slacker” activities do not occur either on the computer or by not using the computer. In addition, 43 percent of the firms reviewed computer files of employees and 73 percent reviewed email messages that were sent and received by the employees. As a result, not only is every minute monitored but what is being created electronically on the computer from a content perspective is also monitored. The survey also showed that 24 percent of the firms had employee email that was subpoenaed for legal cases and 15 percent of the firms had to address workplace lawsuits that were the result of employee email.

These two facts can be used in the classroom discussion to stress that every employee must be careful what is sent through email. Sensitive information can be used against the firm and the employee. You could also stress that if you think the information sent via email will offend one person, then that email should not be sent.

Another fact that may surprise the students is the level of monitoring of employees‟ activities by the firm. Forty-eight percent of the firms reported using video monitoring to observe the activities of the employees within the office. Furthermore, 3 percent of the firms used global positioning systems (GPS) to track cell phones and 8 percent of the firms used GPS to track company vehicles. The net result of this tracking is based on two reasons: legal and performance.

The legal reason is that video monitoring and other tracking can be used when employees become involved in illegal activities. These monitoring systems can be presented as proof of the behavior by capturing data that support the claims made by the firm. The second reason is that the firms want the employees to be as productive as possible. Therefore, these monitoring systems are used to help ensure that the employees are performing their jobs to the best of their ability.

Management Issues and Policy Areas for Information Technology (p. 171) Privacy—How much information should a manager have access to? Should firms try to “force” employees to stop smoking and join an exercise program or face having to pay higher insurance premiums? Should the same information be collected pertaining to managers as is collected for the subordinates? Should the same information be collected for the top-level managers of the firm?

Ownership—Who is the legal owner of the information? If new inventions are created within the firm‟s lab, who owns the information? If the answer is the firm, would there be circumstances where the answer would change to the inventor?

Control—Control refers to not only controlling information flow but also controlling the movements of the employees within a firm. When does control stop and privacy rights start?

Does the ethical impact of control depend on the specific set of circumstances? Are there areas of control that are always unethical?

Accuracy—It is dangerous to assume that all information collected by a firm is accurate. Since the content of the information can have a direct impact on the evaluation of an individual and/or the firm, the firm must ensure that the information is accurate. There must be safeguards in place to ensure that data are checked for accuracy before it is considered valid.

Security—Security is probably the number one challenge for firms pertaining to data collection.

Since data can hold personal and “valuable” information, individuals outside the organization may attempt to attack the information technology system of the firm to obtain access to the data.

The Next Step: Critical Analysis (p. 173) Stakeholder Analysis—How can the content of the IT issue impact stakeholders in different degrees? The stakeholders could be categorized based on either having a direct or indirect impact on the IT decision.

Utilitarian Goal-based Analysis—After the distinction between the direct and indirect impact on the stakeholders has been determined, the manager must ensure that the goal will satisfy the greatest number for the greatest good.

Rights-based Analysis—By examining the rights of the various stakeholders, the management can ensure that each stakeholder is being considered when the decisions are being made.

Furthermore, rights-based analysis ensures that both the legal and ethical standards of the firm are included in the decision-making process.

Duty-based Analysis—As a reinforcement to the rights-based analysis, the duty-based analysis confirms that the decisions made by the managers coincide with the ethical duties of the manager.

Privacy of Employees (p. 174)

The focus on email privacy can be presented simply to the students. The only email that is private is email that is sent from their own private system using their own private technology device during their own time. If the email is sent from firm machines, the employee has no privacy. If the email is sent using a firm‟s email address, the employee has no privacy. If the email was sent during working hours, the firm would probably have legal access to the email. It is also important to stress to the students that a “deleted” email is not really “deleted”. A file is only truly deleted if another file overwrites on that exact space on the hard drive. As a result, it is highly improbable that an email or any file actually disappears from the hard drive. The only two ways in which an individual can be sure that the file has disappeared is to have the hard drive swept clean which eliminates all files on the drive or physically destroying the hard drive.

Table 9-2 (p. 175) highlights the costs and benefits of using email. The benefits for the firm are enormous with valuable cost savings and increased efficiency through this “free channel” of communication. The costs of legal and time-consuming issues usually do not outweigh the significant benefits. As a result, firms encourage and support the use of email as a means of communication. Of course, one critical ethical issue which remains is the proper storage and security of the information that is transferred back and forth using email.

Types of Computer Monitoring (p. 176) The six criteria used to help determine whether an invasion of privacy is justified helps define the blurry line between ethical and unethical behavior as it is related to information technology (p 176).

1. For what purpose is the undocumented personal knowledge sought?—The legal and ethical argument for tracking the employees‟ activities whether they are aware of the monitoring or not is based on the justification ensuring the employees fulfill the requirements for their job.

Through these tracking mechanisms, employers can ensure that the employees are doing the activities within their job description which they are being compensated for.

2. Is this purpose a legitimate and important one?—Using the same justification as in #1, the underlying purpose of this monitoring is to ensure the employee is performing the required activities for his or her job. Therefore, the purpose would be both legitimate and important. Of course, there are always examples where the monitoring would not be legitimate and important if, for example, the employer monitored the activities within a restroom, changing room, or any other private location within the firm‟s building.

3. Is the knowledge sought through invasion of privacy relevant to its justifying purpose?—This question asks the management of the firm to determine the “cost/benefit” analysis of acquiring this information. If the information pertaining to personal safety and/or of critical interest to the firm and the country, then the managers have to decide “how far” they are willing to go to acquire the information. Again, the lines become blurry as to what extent management will go in order to obtain information.

4. Is invasion of privacy the only or the least offensive means of obtaining the knowledge?— This is also a judgment call by management within the firm. Again, the decision has to be based on what are the valid legitimate alternatives of acquiring the same information.

5. What restrictions or procedural restraints have been placed on the privacy-invading techniques?—This question raises the issue of what are the legal boundaries of acquiring the information. It is assumed that management is well versed in what the legal standards are for acquiring the information. Of course, if they are not well versed it is likely that they would become well versed after employees started filing lawsuits against the firm for illegal invasion of privacy.

6. How will the personal knowledge be protected once it has been acquired?—The safeguards that are in place to control the safety of the information is the direct responsibility of the firm.

Since the firm has taken the steps to acquire the information, it must also take the steps to ensure that the information is protected from being acquired by unauthorized individuals.

Telephone Monitoring (p. 177) While telephone monitoring within a firm setting has been a traditional method to observe the activities of employees at work, cell phone monitoring has greatly broadened the ability of firms to monitor the activities of employees. Since cell phones have become multimedia devices, voice communication is just one component within a cell phone that can be monitored. GSP tracking can be included within a cell phone so that the employers know exactly where the employee is.

In addition, the same monitoring software that can be used to track computer activities at work can be used to track those same functions on an employees‟ cell phone.

Privacy of Customers (p. 178) The basic underlying concept pertaining to the relationship between a firm and its customers is trust. If the customers give the firm personal and confidential information, it is expected and required by law that the firm safely keeps that information and disposes of it in an acceptable manner when it is no longer needed.

One of the many dangers pertaining to controlling customer‟s data is what happens to the data if the firm goes bankrupt. If the firm is struggling financially, it would try to sell its assets to reduce the financial losses if it believes the firm is going bankrupt. As a result, firms will try to sell anything of value in order to obtain much needed cash. One of the last remaining assets of a firm is the firm‟s customer list. Since this list is the source of revenue, it also can be a source of potential revenue for other companies. As a result, a firm cannot sell information pertaining to its customers, without the customer‟s consent and knowledge. This would result in having potentially confidential information pertaining to customers in the hands of a third party that does not have any formal or implied agreement pertaining to the management of this data.

An interesting assignment for your class would be to ask your students to compare the privacy agreement among different companies. If they make the comparison among firms in the same

industries but located in different countries, there may be significant differences in the privacy policies due to governmental and societal differences. This would bring home the point to the students that there are no universal or global guidelines and rules pertaining to privacy policy.

There is a lot of flexibility and, therefore, variance in how firms address the issue of privacy for their customers.

The Ethical Issues Related to Big Data (p. 179) Big data and business analytics have been entrenched as fundamental way in which firms can analyze the behavior of their customers and potential customers. Customers may not realize what is the price to have the convenience of the results of business analytics. Websites such as Amazon and eBay will give customers suggested products based on their current search and buying behavior. While this convenience has become part of the buying experience for the customers, the net results is that firms continue to gather personal information which they can use to profile their customers. In addition, the value of big data is evident in that the data collected by firms can be sold to “data brokers” who sell the information to interested third parties. Therefore, numerous firms may have access to a customer‟s personal profile without the customers‟ knowledge and consent.

An excellent 60 minutes‟ segment called The Data Brokers explains how the process works. https://www.youtube.com/watch?v=_Cty7ctycsI. The Challenge of Technology (p. 180) One of the critical underlying challenges of technology and the internet is the anonymous nature of the forum. Since there is usually no absolute way to confirm that with whom you are corresponding is the actual person they say they are corresponding to, a matter of trust must again be involved in the process. Stakeholders must trust what is been said about the actions, and the philosophy of the firm must be accurate and truthful. Customers must trust that the items pictured and described on the internet corresponding to the items they will receive. Employees must trust that they are being told the truth about the strategic focus and true motives of the decision of the managers that are relayed through emails and internal intranets. The government trusts that firms will self-report any government violations since it is required of them. The local communities will trust the firm‟s web site when it addresses issues of health and safety that can have a direct impact of the life of citizens of local communities where the firm‟s plants are located. Ask your students if they were ever “cheated” by a transaction that occurred online. If so, how did it change their behavior? In general, how would the behavior of the student change if he/she could not “trust” the firm with online transactions?

The speed of technology is also a significant challenge. The expectations are so high for quick responses to information that individuals expect instant responses to any information requests.

Ask your students how long do they expect it should take a professor to respond to an email?

How long should it take their parents? How long should it take a firm to respond to an email?

What do you do if it is taking longer than you thought to get a response?

The globalization of technology is also a significant challenge. Ask your students whether they would like the firm they work for to give them a Blackberry or other technical device as part of their job. For those who said yes, which will probably be most of the students, ask them what would be the acceptable hours for their boss to contact them on the Blackberry. What about if the student is waiting for a Chinese supplier to email which could occur at 3 am? Would it be acceptable for the firm to expect the employee to instantly respond to a 3-am email?

The Role of Government Regulations (p. 182) What should be the role of government regulations pertaining to the internet? This could be an initial question to ask your students to create a discussion. Some students would argue that there should be no government regulations since the internet was designed as a free forum for ideas and discussion without the control of the government. Others would probably argue that government regulation may not be bad but would not know what regulations should be implemented. Other students could state that government regulations are needed in order for ecommerce to continue to grow in the future. While some global treaties attempt to protect copyright property from been illegally “shared” on the internet, specific countries such as the United States has attempted to pass legislation to control privacy issues, electronic monitoring, child protection and other safety issues as it relates to the government. The quick answer to this question is that is appears to depend on the philosophy of the government and the norms and customs of the culture of the country to help determine what type of government action, if any, is used to help protect the users of the internet.

The Volunteer Censoring of Internet Search Information (p. 183) The example of major technology firms such as Good and Microsoft agreeing to censor the search results of Chinese users highlights the ebbs and flows related to privacy and the ability of users to exercise their human rights. While these companies are very resistant to give user information to the government in their criminal investigations, they are willing to agree to the terms of the Chinese government in providing software which censors information that is counter to the beliefs of the Chinese government.

Technology-Based Fraud (p. 184) Technology based fraud activities creates new opportunities for illegal use of private information and creates additional concerns for individuals who use the Internet for online transactions. Ask your students if they have ever been directly involved in an Internet fraud or know someone who has been involved. It probably would be quite surprising the number of people who raise their hand. If you make the assumption that “traditional” students are in their early twenties, they have been comfortable with technology all their lives. They probably always have had access to computers at school and they probably do not really think of a time when they did not communicate on the internet. As a result, they are very comfortable with communicating online and are probably more comfortable with giving personal information. One only has to look at the explosion of information available on social networks such as Twitter and Facebook to realize that these students are not afraid to post very private information about them in a public forum.

As a result, they are probably more likely to become involved in Internet fraud schemes since they are traditionally more trusting pertaining to communicating on the Internet.

An interesting question to ask your students is whether they have received junk mail in their apartment or dorm room mailbox. The answer is yes, of course, since everyone receives junk mail. Now ask they how did these companies gain access to their name and correct address. This question starts the students to think about who controls the data. The obvious answer is that since a legitimate company that the student has done business with has “sold” the student‟s name and address to a direct marketing firm who then has sold the name and address to clients. As a result, as the information is sold again and again, more and more businesses will have direct access to the student‟s name and address. Now ask the student whether they have supplied information such as their social security number, date of birth and/or driver‟s license number to an online web site. Now go through the same scenario and the students will quickly realize that they have lost control of this highly confidential information which could lead directly to identify theft.

You can then refer to Table 9-6 (p. 186) to highlight the potential problems data theft can have on individuals who are purely victims. They are purely victims because they did not even know that information pertaining to them was being used for illegal activities.

Internet Attacks (p. 185) Cyberterrorism is a continuous worrisome threat for both businesses and individuals. It is continuous since once authorities have “plugged up” one way which hackers attack a computer system; the hackers develop another method. The use of Spyware can mean that individuals could actually lose control of their computer and/or allow hackers into their individual hard drive. The use of Spyware that backfired on a company occurred at Sony. Sony wanted to include software with their music CDs to stop multiple copying of the music from the CD. The net result was that computer which the Spyware was attached became vulnerable to hacker attacks and in some cases; the hard drive of the computer was ruined. A complete description of this example is included in the “Music Industry: Ethical Issues in a Digital Age” case.

Ask your students what kind of security software they have to protect their computers. Now ask them what security software they have to protect their cell phones and other PDAs (personal digital assistant) such as a Blackberry or iPad. They probably will state they have security software for their computer but maybe not for their cell phones and PDAs. If so, ask them why.

If they said they do not need it or did not think they needed it, you can say they have just fallen into the trap the hackers wanted to set. Hackers will look for the weakest security system to try to invade. If there is no proper security on these portable devices, the individuals become vulnerable for attacks.

Another issue the students need to be aware of is the use of “free Wi-Fi” located in businesses such as coffee shops, airports, and malls. Wireless Fidelity or Wi-Fi is a great convenience but also poses a great danger. Every time an individual inputs a user name and password into a computer in a free Wi-Fi zone, there is a potential for a hacker to copy that information.

Software is available to collect and store user names and passwords that are used in a free Wi-Fi zone. As a result, individuals need to ensure their computers have the proper encrypted coding software so that this critical information is not captured by another person.

The USA Patriot Act (p. 187) In direct response to the terrorist attack on September 11, 2001, the United States Congress passed the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (PATROIT) Act. This act allowed the US government broad interpretation of what is considered critical information and also gave it broad abilities in its methods in order to obtain information. For example, this act gave the US government expanded ability to monitor and record electronic communications if, in the opinion of the government, there could be potential terrorist activities. It also required financial institutions and other firms included within the guidelines of the act to have detailed monitoring mechanisms in place to track their customer‟s activities. After reading the summary of the act, ask your students what circumstances would they believe monitoring electronic communications would be justified under the act. Also ask them under what conditions would this monitoring not be considered justified. You can relate this back to the utilitarian belief of trying to provide the greatest good to the greatest number.

Questions for Thought (p. 139) 1. In the opening vignette, was it the correct decision for Sony to stop the initial release of The Interview? What message did that action send to the hackers? The movie industry?

The actors? How would you respond to the same situation that Sony had to address?

It could be argued that Sony quickly folded under the pressure from the hackers. The lack of support by Sony to its critical stakeholder should be of great concern for anyone who does business with Sony. It is apparent that Sony made this decision solely on its own self-interests without considering the impact its decision would have on other parties that have a vested interest in the movie. Sony showed the hackers that the hackers won since Sony “agreed” to their demands of not showing the movie in movie theaters. For others in the movie industry, it showed that Sony does not “have their back” as partners if there is a crisis. The same is true for the actors. How could actors trust Sony to not take the same action in the future if the need arises?

2.Analyze the costs and benefits of using email presented in Table 9-3. These pertain to an employer‟s perspective. Prepare another table that presents the employee‟s perspective.

From the employer‟s perspective, the benefits outweigh the cost of using email. This simple conclusion is based on the fact that employers have the ability and the means to control the costs of email. Through computer monitoring software, employers can monitor whether there are any offensive communications and whether the email system is used purely for business matters.

Information overload is another matter since firms use email because it is quick, cheap, and efficient. Therefore, it would be a lot harder to control information overload.

From the employee‟s perspective, the benefits of the company‟s email system are not as strong.

Since it is controlled and monitored by the firm, the benefits shown from the employer‟s perspective means that email will continue to grow as a critical communication tool by firms.

Therefore, the benefits for the employees are that they are able to be more efficient with their jobs, they are able to be kept better informed about the matters pertaining to the firm and they can show evidence of their productivity based on the content of the email and when the email was sent. If an email is sent to a supervisor at 2 am, it demonstrates the total commitment of the employee. The costs are that the email system is used purely for business related functions and, therefore, becomes a bigger part of the everyday activities of every employee.

3. How has the control of the data collected by firm pertaining to customers changed over the years? What type of government regulations are in place to ensure the data does not go to unauthorized users?

While the ability to collect and permanently store personal data has exploded, there does not appear to be a matched increase in government control and industry monitoring of this information. As was discussed previously, the use of data brokers who buy and sell data have created the transfer of thousands of personal information files commonplace without and control mechanisms in place to control this transfer of information. Government regulations have not kept pace with the changing availability and transfer of data globally. While big data and data analytics have created great convenience for the customers, it may have come at a great personal cost.

Questions for the Real-Life Ethical Dilemma Exercise The Dark Side of Technology 1. Your boss has presented the idea of using homeless people in a project similar to what BBH Labs has done. What would you tell him? If your boss was determined to move forward with the project, what would you do?

This vignette is analogous to the example of 13 girls sewing soccer balls in Bangladesh. While it is legal to do this, is it ethical? It appears that while the homeless people are serving a purpose as Wi-Fi sources it could also be interpreted as disrespecting the personal dignity of the homeless person. As is the case with paying low wages to workers in other parts of the world, some would argue that it is better for the homeless person to get some money instead of zero money. This point is true but it still raises the question that could there be a more ethical way in which to serve this purpose. For example, could a homeless person move a suitcase or other device around as a portable Wi-Fi source? You should get students that will state they have no problem with doing this project which other students may refuse. If they refuse, you can ask them whether they would be willing to quit their job if the boss demands that they implement the project.

2. BBH Labs compared its project to homeless people selling newspapers on the street. Do you agree with this analogy?

It could be argued that these are two different experiences. Selling the newspaper on the street is a dignified way to make money while being a Wi-Fi “source” could be considered demeaning.

3. Do you agree with the perception that the Internet industry and Silicon Valley are selfabsorbed and do not care about anyone other than themselves?

There will be students that will agree with this viewpoint. Due to their wealth and power in American society, executives who work for Silicon Valley may have a distorted view of the world including their importance relative to others. If this is the case, it would support the view that the homeless should be lucky to get money to do whatever is asked of them.

4. Is there any difference between paying a homeless man to work in the United States for $20 a day and paying an 11-year-old girl to work for $2 a day in India? Explain your position.

As was stated in question 1, from an ethical point of view there is no difference. Both actions are legal but are they ethical. It can be argued that the true value of this project is to identify the true needs of these homeless people. Would it not be a better gesture for Silicon Valley to pool resources and develop affordable housing for these homeless people so they can take the first steps toward being more productive members of society? Would that not show the true values of the Silicon Valley executives instead of demeaning members of society for their own enjoyment?

Chapter 10 Marketing and Advertising The purpose of this chapter is to highlight the ethical issues that are related to marketing and advertising. This chapter should create some comprehensive discussions from the students since they are all aware of the impact marketing and advertising have in their lives. Discussing issues, such as green marketing and the connection between marketing and social media, should produce a number of diverse viewpoints on what should be the role of marketing and advertising for consumers and other stakeholders. The power of the stakeholders can be demonstrated in the use of consumer boycotts and product recalls which can have a significant financial and reputational impact on a firm. False and misleading advertising and advertising to children also highlight how advertising strategies can create significant ethical dilemmas for the firm related to the method and content of its advertising strategies.

Key Learning Points There are a number of key learning points which can be accomplished when this chapter is presented to the students. These include: 1.

2.

3.

4.

5.

6.

7.

8.

Describe the green marketing movement.

Explain the ethical issues that arise from relationship marketing.

Explain the effect of boycotts on business and the origin of boycotts.

Describe the activities of Johnson & Johnson around the Tylenol scare.

List the reasons why product recalls occur.

Describe the costs of conducting a product recall.

Explain the ethical considerations of purchasing and sales transactions.

Describe the marketing campaigns of tobacco companies.

There is now an app for Chauvinism (p. 190) Using a marketing strategy to “cut through the noise”, Pepsi decided to develop an app which men could use to help connect with women. As with any advertising message, one person‟s humor is another person‟s objection. The development and marketing of this app demonstrated that Pepsi did not properly understand the expectations of its stakeholders. This attempt to “lightheartedly” focus on interpersonal relationship quickly became as flat as a day old Pepsi.

The net result was that both men and women were deeply offended by this attempt to present a marketing campaign in which Pepsi would stand alone. Pepsi did stand alone by offending a large number of these customers. The decision to develop this app should never have left the conference room at Pepsi.

Here is a commercial pertaining to the app: http://adland.tv/commercials/amp-you-score-iphone-app-2009-30-usa Here is a commentary related to the APP: https://www.youtube.com/watch?v=HMIW4GqYggo The Seven Deadly Sins Related to Marketing (p. 191) The use of the seven deadly sins related to marketing ties in directly to the initial discussion of the seven deadly sins in Chapter 1. This linkage highlights that concepts discussed in normative ethical concepts can be applied to the strategic focus of the firm relative to its marketing strategy.

You can ask your students which of the seven deadly sins is the most effective marketing focus of a firm. Which of the seven deadly sins is the least effective marketing focus of a firm? Which of the seven deadly sins would potentially yield the most offensive marketing campaign for critical stakeholders? You can use the Pepsi App vignette as an example.

Green Marketing (p. 192) The underlying challenge of firms to use green marketing as a method to enhance their competitive advantage is the lack of environmental commitment by the employees. Based on the five classifications of consumers related to green marketing, over 50 percent have either a cynical view or no opinion on environmental issues related to their purchasing power. Only 9 percent, the true blue greens, are fully committed to proactive environmental actions related to buying products. Greenback green, which represent 6 percent of the public, are more committed than the general public in their purchasing decision related to environmental issues. Sprouts, who are 31 percent of the public and are willing to listen to the story presented by the firm regarding their environmental commitment, may purchase their product but not at a higher cost. Grousers with 19 percent and Basic brown with 33 percent have a cynical or no view related to environmental issues in their purchasing decision. Therefore, firms have an upward battle in the use of proactive environmental commitment as a way to differentiate their products. Since 83 percent of US consumers are not willing to pay a high price for products with a proactive environmental commitment, the firms are currently forced to focus on other avenues in which they can enhance its competitive advantage. However, it is expected that the percentage of these classifications would be significantly different in Europe and other parts of the world in which

environmental issues are a dominant factor in the purchasing pattern of consumers. You could ask your students to do some research in other countries to see how different green marketing is in other parts of the world.

Ethical Issues and Social Media (p. 195) An issue in which the students may not be familiar with is that firms can unethically and illegally submit fake recommendations and evaluations on various websites to present a favorable image of the firm. You can ask the students whether looking at the reviews of a restaurant or product helps them in determining whether to go to that restaurant or purchase that product. If it does, then they must understand that they could be relying on fake reviews and ratings. While websites such as Amazon verify whether the reviewer actually purchased the product, there are numerous websites where there is not a rigorous process used to evaluate the validity of the review.

The following article describes some of the issues of submitting false reviews: Give Yourself 5 Stars? Online, It Might Cost You. The New York Times. September 23, 2013 http://www.nytimes.com/2013/09/23/technology/give-yourself-4-stars-online-it-might-costyou.html Relationship Marketing and Privacy (p. 197) As is the case with many issues, relationship marketing presents a two-edge sword for the consumers. Consumers like the convenience of having firms making “recommendations” of products based on the similar buying patterns of others. In addition, through business analytics, firms are able to identify when to offer discounts and other promotions that are customized to the buying behavior of the individual. However, this collection of data can also present a dark side.

By obtaining more and more personal information on individuals, firms are able to erode the barriers of privacy between the consumer and the firm. In addition, individuals may not realize that any information captured by a firm may potentially be sold to third parties called data brokers who sell that information to their clients. Therefore, an individual buying an item online does not know who exactly will have subsequent access to the information that is provided by the consumer in order to purchase the item. You can ask your students whether the use of big data and business analytics is moving society more and more toward the dystopia presented by George Orwell in 1984. Is “Big Brother Watching You”?

The Role of Consumer Boycotts (p. 199) When you ask your students how much power they have in the marketplace, it is expected most will answer by saying little or no power. You can extend the discussion by stating that consumers have the ultimate bargaining power in that they do not have to buy any product or use any service unless it is a necessity offered by a monopoly. Consumer boycotts are a classic example of using collective bargaining power in order to change the decisions made by a firm.

You can use the Pepsi App vignette at the beginning of the chapter to illustrate how the pressure from various stakeholders can force a firm to change its strategic position. Furthermore, consumer boycotts not only can impact the financial performance of the firm but can also create

long-term damage to the image and reputation of the firm. From humble beginning in the 1880s with Charles Boycott, consumer boycotts have been an effective method of highlighting the displeasure various stakeholders have on a decision or decisions made by the firm. As listed on page 200, there are a number of different reasons why consumers are motivated to form and join a boycott.

The Ethical Challenges of Product Recalls (p. 200) The Johnson & Johnson recall of its Tylenol capsules is the “gold standard” of product recalls.

Even though Johnson & Johnson were not responsible for the tampering of the Tylenol capsules, the company made the decision to recall all the capsules. This is a classic example of a company whose actions are based on its code of ethics in which it is responsible to protect the health of its customers. You can ask the students whether the decision of Tylenol was the correct one from a financial perspective. How do they think the stockholders felt when Johnson & Johnson announced that they were going to spend $100 million to recall a product in which it was not responsible for the tampering of the product? This could lead to the discussion that by focusing on all the stakeholders instead of the short-term financial benefits, Johnson & Johnson enhanced its competitive advantage by telling its customers, through its actions, that it was committed to their well-being.

Financial Costs of a Recall (p. 202) The financial costs of a recall highlight the critical importance firms must emphasize to their employees in the development and manufacturing of a product. The costs of a recall can be in the millions of dollars but a product recall, if not executed quickly and comprehensively, can have a permanent, damaging impact on the image and reputation of the firm.

Ethics of Purchasing and Sales (p. 203) The examination of interorganizational power, interorganizational relationships, and interpersonal relational issues highlights the complex interaction in the purchasing and selling process. The relationship between buying and selling products is based both on individual and organizational dynamics. If one side has a higher level of bargaining power, it will use this power to its advantage in the negotiating process. In addition, firms will use their relationships with other firms to create favorable purchasing terms which could enhance their competitive advantage. However, the underlying ethical issues are related to the individuals who are involved in the negotiating process. Each side will use its power in order to create as favorable as possible terms of the contract. In addition to the formal power the individuals have in the negotiation process, it is in this step of the process where unethical behavior can be present. For example, a bribe can be offered by the seller as an “incentive” for the buyer to agree to the contract. In addition, other favorable personal benefits may be offered in order to close the deal. Therefore, it is imperative that the firm can “trust” its employees to not offer unethical incentives in order to complete the transaction.

False and Misleading Advertising (p. 205)

You can start the discussion in your class by asking your students what is their “favorite” false or misleading advertisement. It is expected that every student can present an example from a permanent sign that states the store is going out of business to a fast-food restaurant in which the hamburger they receive never looks like the picture on the menu. A follow-up to this discussion is to ask why firms do this knowing that customers are able to recognize that it is false and misleading. The simple answer is that there are many customers who do not realize that this type of advertising is false and misleading. There are many customers that will “trust” what a firm says related to its advertising without questioning the validity of the firm‟s statements. As a follow-up, you can ask your students why government agencies are not more proactive in shutting down this type of advertising. Again, the simple answer to this question is that false and misleading advertising is probably not a high priority for government regulators unless this type of advertising can result in financial and safety problems for the consumer.

The Eventual Truth of Advertising (p. 206) The tobacco industry has had a long negative image based on its strategic choices made pertaining to advertising. It can be disputed when the tobacco industry knew of the true harmful effects of smoking; however, the Tobacco Master Settlement Agreement in 1998 was the line in the sand related to tobacco companies denying the health risks of smoking. A good link between tobacco companies would be showing your class the Flintstone cartoon for Winston cigarettes. https://www.youtube.com/watch?v=mZvHiiWFbBU Of course, the Beverly Hillbillies also liked Winston cigarettes. https://www.youtube.com/watch?v=xEx44ETP8Ac Advertising to Children (p. 207) A good method to open the discussion on this topic would be to ask the students what commercials they remember from their childhoods. A follow-up question would be why they still remember these commercials? Was it the product they wanted? Was it the setting of the commercial? Was it the use of humor?

The Magic of Disney (p. 209) The decision by Disney to refuse to air nonnutritional food commercials is a direct tie with Disney‟s corporate social responsibility. Since Disney is committed to providing a positive experience to families globally, it is consistent with this message to ensure its advertising promotes nutritional foods. A comprehensive discussion on Disney‟s corporate social responsibility can be found in the Disney case.

Questions for Thought (p. 139) 2. Why do you think Pepsi decided to release the AMP app in the opening vignette? Do you think Pepsi officials were surprised by the response of the public?

It could be argued that Pepsi believed that this was just a harmless and humorous way to address men meeting women. You could ask the class whether they think any women were involved in any part of the decision-making process related to this app. As was stated in the vignette, every company tries to present an advertising campaign that can be separated from the noise of mass advertising. Of course, the true purpose is to rise above the noise, presenting a positive message and not a misogynistic message that offended both men and women. Yes, Pepsi would have been surprised because if it had anticipated this kind of negative feedback, it is hoped, it would never have released the app in the first place. The actions by Pepsi demonstrated that high-level executives can make horrible mistakes in misreading the needs and expectations of its stakeholders.

3. Why is there such concern about protecting children from marketing and advertising?

An underlying concern in the level of naivety of children relates to advertising. Children may believe everything stated in a commercial and can be easily convinced that they do not just want the product but they NEED to have the product. In addition, peer pressure can quickly add to the child demanding a product if they see their friends with the product. From a firm perspective, marketing and advertising are lifelong investments for the consumers. Therefore, companies know that the earlier in life that an individual buys a product, the more likely that individual will have a life time brand loyalty to that produce and company.

4. What should consumers demand when companies recall products? What are the ethical considerations for recalls?

The standard expectation of any stakeholder is that a firm will have a check and monitoring program in place to ensure that every product that is sold to a consumer is safe and serves the function which is communicated in its marketing and advertising. When a firm has to recall a product, the expectation is that the problem will be resolved as quickly as possible. Therefore, it is a realistic expectation that a firm will capture ALL the defective products in the recall. In addition, consumers are expected to be notified as soon as possible about the hazards of the products and the procedure used by the firm to recall the products.

5. Is green marketing just a fad? Explain your view.

As was discussed in the green marketing section of this chapter, green marketing is based on the perception of value by the consumer. If consumers do not value a proactive environmental strategy of a firm, they will not reward the firm by purchasing its product based on its environmental commitment. However, green marketing can be used as a way to enhance the competitive advantage of the firm if consumers view the environmental commitment of the firm as a positive action. This view is much more common in other parts of the world such as Western Europe. Through government regulations, NGOs, and community movements, commitment to the natural environmental has a higher propriety for many consumers when they make a purchasing decision.

Questions for Real-Life Ethical Dilemma Exercise Calculating the Financial Cost of a Life (p. 210) 1. What issues do you think the managers and engineers faced while developing a costbenefit analysis of replacing the Pinto gas tank?

It can be assumed that the underlying issue of the decision-makers is the ability to be totally disconnected to the human cost of doing this type of analysis. When numbers were calculated for the “total cost” of a human life, it still should have been a challenge ethically to convert those numbers into a cost without any emotional investment in the decision.

2. How could this cost-benefit analysis be implemented in the United States at the end of the 20th century?

The simple answer is that these calculations are still being done on products with faulty design.

The GM ignition case is another example of an automobile company making the same calculations 40 years after the Pinto disaster. It is obvious that these types of decisions are based on addressing the needs of only one stakeholder, the stockholders. As was discussed in numerous chapters and cases in this textbook, this narrow focus is short sighted in that the needs of all the stakeholders must be addressed. The only decision made by the firm is whether those needs and concerns are addressed before or after the decision has been made.

3. If you were working at Ford when the Pinto gas tank issue was discovered, what would you say to your boss if he or she told you this is what Ford was going to do to “Correct” the problem?

The appropriate course of action is to stop this decision from being implemented regardless of the personal cost. If you have raised your concerns to the boss and they are ignored, you would need to seek the opportunities to notify high-level executives within Ford anonymously. If there is not a whistleblower method of communicating these concerns, an alternative course of action is to notify other vested stakeholders such as governmental regulators and/or the media in order to force Ford to change its decision. Of course, it would be expected that you would be fired at some point in the process by releasing to the public the potential fatal results of Ford‟s decision not to change the design of the gas tank.

Chapter 11 Ethical Issues in the Developing World The purpose of this chapter is to highlight the ethical issues related to in the developing world.

This chapter should create some comprehensive discussions from the students since they all should have been aware of the many significant ethical issues related to developing countries globally. Discussing issues such as the bottom of the pyramid, social entrepreneurship, microfinancing, human rights, hunger, and poverty should produce a number of diverse viewpoints concerning the role of corporations in addressing the needs of stakeholders both domestically and also in developing countries. This chapter gives the instructor a good

opportunity to present the viewpoint that address social needs in developing countries as being financially beneficial for corporations.

Key Learning Points There are a number of key learning points which can be accomplished when this chapter is presented to the students. These include: 1. Describe the ethical issues that multinationals must focus on when dealing with Bottom of the Pyramid markets.

2. Describe the seven key principles for being profitable for BOP markets.

3. Define social entrepreneurship.

4. List and discuss the types of social entrepreneurs.

5. Describe the Grameen Bank‟s purpose.

6. Discuss the concept of fair trade and explain it significance for third-world countries.

7. Explain why human rights are important.

8. Explain why hunger and poverty must be addressed by business.

9. List the causes of hunger.

10. Explain the food versus fuel debate.

11. List the Millennium Development Goals.

Samsung Electronics and the Cycle of Child Labor (p. 213) The Samsung vignette highlights the complexities of global outsourcing. In its drive to reduce production costs, Samsung faced an ethical dilemma when it was determined that one of its suppliers was using child labor in the production of its products. A key discussion point for the students is for Samsung to temporarily suspend using the supplier in the production process. This begs the question why Samsung did not permanently cancel all future orders with the supplier.

The inconsistent behavior of Samsung was reinforced with its change in decision to use the suppler again for the production of its products in mere two weeks. Therefore, you can ask the students whether Samsung was truly committed to resolving the child labor issue or was it just trying to appease the critics who wanted Samsung to act in an ethical manner. The “punishment” to the supplier was the reduction of the orders by 30 percent. Again, this is evidence that Samsung was trying to silence the critics without changing its business model of a low-costdriven production process. Another question to ask the students is, since they now know the actions taken by Samsung to address child labor, would it impact their decision to buy Samsung products in the future. If the students respond that it would not impact their decision, then Samsung made the correct “business” decision in maintaining the supplier. This would reinforce Samsung‟s belief that while some stakeholders such as NGOs may be demanding strategic change by Samsung, American customers do not. A follow-up question would be, do you think this attitude is the majority viewpoint in other developed countries in the world?

The Bottom of the Pyramid (p. 213) The bottom of the pyramid presented a fundamental decision made by corporations—whether it is profitable for firms to focus on the 4 billion people who are at the bottom rung of the pyramid.

The conventional wisdom has been, for many firms, that it is not profitable to tackle this consumer segment since they cannot “afford” to buy the products produced by the firms. In order to address the needs and limited financial capabilities of consumers in this market, firms had to take an alternative viewpoint in the development of new products. In order to reduce the lead time in the development of products for developing countries, some firms would adopt an existing product to the new market by reducing the material and production costs. It can be argued that a more effective method would be to develop a new product from scratch. It is through this process that a firm can address cost issues before the product is designed. An underlying limitation of developing a “cheaper” version of an existing product is that there are potential quality and usability issues that weaken the ability of the product to effectively address the needs of the consumer. By starting from scratch, an alternative design and production process could be implemented which reduces costs while still effectively addressing the needs of the consumers.

New Generation Business Strategies for the Bottom of the Pyramid (p. 215) This segment addresses how firms can develop products that closely match the needs of the consumers in the lowest rung of the pyramid. It is through the process of local partnerships that firms are able to craft their products to more effectively address the needs of their consumers. A question to ask the students is how they would identify potential partners if their boss ask them to develop a new product for consumers in a developing country. Once a partner has been identified, you can ask the students how much autonomy would you allow the partner to have in the decision-making process for the development of the new product. Would you have a partner which would have an equity stake in the new product development? Which countries would the student focus on for the development of products in the developing world? China and India would be two common selections due to the combined population of 2.5 billion people.

Typology of Social Entrepreneurship (p. 217) Social entrepreneurship is a concept which most of the students should relate to. Of course, the clear distinction between entrepreneurship and social entrepreneurship is the integration of the social and financial mission of the firm. The typology of social entrepreneurs demonstrates that there are multiple approaches to take pertaining to social entrepreneurship. You can ask your students whether or not they would be interested in becoming a social entrepreneur. For those who respond positively, you can then ask which of the four types of social entrepreneurs would be the one mostly likely chosen by the students. For example, if the students are actively involved in a religious denomination, they may have already have used their abilities related to a social bricoleur by helping those in emergency need. For a social constructionist, an avenue which many students would consider based on the challenge of developing new products and services that are not currently available. It is similar to the goal of a traditional entrepreneur. A social engineer has a much more holistic approach to social entrepreneurship by looking at the big picture and examining “gaps” in systemic broad problems. While much more challenging, this aggressive approach in addressing social issues could have a profound positive permanent impact on those countries in which these businesses operate.

Microfinance (p. 219)

Brought to the forefront by Muhammad Yunus, microfinance is a simple solution to a complex problem. You can ask the students whether they have ever been denied a loan. If they have, you can ask what the reason was. The answers usually are related to a poor credit history and/or not enough assets to pledge as collateral. Muhammad Yunus completely changed this model by “trusting” the borrowers, usually women in rural villages, and the small loans given to them must be repaid. Not only does this help break the cycle of poverty in these villages, it gives a sense of empowerment to the women who use this money to develop their own businesses.

Fair Trade (p. 219) The fundamental issue related to fair trade is whether consumers are willing to pay a higher price for goods that have been certified through the Fair Trade process. Therefore, this would be the first question to ask your students—are they willing to pay more for Fair Trade goods. For those students who say yes, ask them how much more they would be willing to pay for Fair Trade goods. For those students who said no, ask them if two items were priced the same, would they pick the Fair Trade item. This discussion leads to having the students understand whether or not there is added value in going through the Fair Trade process for goods. It could be that in most classrooms, the majority of students would not pay a higher price for their coffee if it is Fair Trade certified. If this is the case, you could follow up on whether other parts of the world would agree with the philosophy that there is no added value for Fair Trade certification. In many countries in Europe, Fair Trade is considered in the purchasing decision process of consumers.

Therefore, Fair Trade is used as another avenue is which a firm can enhance its competitive advantage.

Human Rights (p. 221) Related to the discussion on outsourcing, human rights can have a significant impact on the decisions and consequences of firms that outsource their production to other countries. Since the supplier in a foreign country usually has autonomous control over the operations of the plants, firms which outsource to these facilities run the risk of having their corporate reputation significantly negatively impacted when these faculties do not treat workers properly and/or use child labor in their manufacturing process. It should be clear to the students that any firm that outsources its operations should have extreme level of due diligence in the manufacturing of their products. This is critical since the consumer cares less about where the product is made compared with the brand name of the product. A simple question is to ask your students is the country of origin of the clothing they are wearing today in class. It is expected that a very low number, if any, would know where their shirt or blouse was manufactured. However, they would be much more likely to remember the price they paid for that item of clothing. As was the case in the decision of Fair Trade, if country of origin is not important to a consumer, then there is no value added to produce products in certain countries. Therefore, firms then have the opportunity to select anywhere in the world to produce their products without having a negative impact on the purchasing decision-making process of the consumers.

Poverty and Hunger (p. 222)

Poverty and hunger can generate some emotional experiences for your students. You can ask your students if they want to share any experiences they have related to their own family or friends. Poverty and Hunger are critical areas in which a global approach must be taken. While poverty and hunger in other countries may not seem as a critical concern for the students, in reality it is. For example, terrorist organizations use food as a recruiting tool. For those individuals who are food insecure, the guarantee of three meals a day can convince the individual to become part of a terrorist group. In addition, terrorist groups have been known to block the transportation of food aid to areas in need in order to increase their control of that region of the country. A detailed discussion of the role of Food and Hunger is presented in the World Food Programme Case (Case 5).

The UN Millennium Development Goals (p. 227) The Millennium Development Goals Project was started in 2000 to address eight critical global areas. These goals “ended” in December 2015. They have been replaced with the United Nations 17 Goals to Transform Our World. The 17 goals are: 1. No poverty 2. Zero hunger 3. Good health and well-being 4. Quality education 5. Gender equality 6. Clean water and sanitation 7. Affordable and clean energy 8. Decent work and economic growth 9. Industry innovation and infrastructure 10. Reduced inequalities 11. Sustainable cities and communities 12. Reasonable consumption and production 13. Climate action 14. Life below water 15. Life on land 16. Peace, justice, and strong institutions 17. Partnerships for the goals6 A full description of each of the goals can be found at the United Nations Sustainable Development Goals website: http://www.un.org/sustainabledevelopment/blog/2015/12/sustainable-development-goalskick-off-with-start-of-new-year/ Questions for Thought (p. 230) 6. Why are poverty and hunger seen as business issues?

6

http://www.un.org/sustainabledevelopment/blog/2015/12/sustainable-development-goals-kick-off-with-start-of- newyear/

As with any social issue, one approach to resolve it is through private enterprise. Poverty and hunger can be considered two needs of any consumer which need to be addressed. It is the role of the firm to identify how to effectively serve these needs and still be profitable. Therefore, at its core, poverty and hunger should not be seen as threats to the global economy, but should be perceived as opportunities for firms to develop new products to address these critical human needs.

7. Do corporations have a responsibility to help solve hunger and poverty around the world?

Explain?

The simple answer is yes. As was discussed previously, terrorist groups use food and hunger as tools to recruit and retain followers. In addition, as individuals move from a food-insecure to a food-secure economic condition, they can now “afford” to buy other goods and services other than just the essential items for short-term and long-term survival. Furthermore, good corporate citizens can enhance their corporate reputation which could enhance their ability to differentiate themselves from their competitors. Good corporate citizens also can develop and embrace the social viewpoint of their employees which can lead to higher job satisfaction levels.

8. Why don‟t US firm focus on the poor as a potential target market?

The simple answer is that many firms do not feel “it is worth the effort” to target consumers with low incomes. However, as was discussed previously, this is not always the correct conclusion.

While consumers with lower income level may not afford to purchase many products, they are still purchasers of items. As a result, a firm needs to refocus the assumption by stating that every potential consumer is worth the effort, but the firm must make an effort to redesign its products so they can be offered at a lower price point. Therefore, it will take additional effort of the firm to redevelop a product, but the potential reward, 4 billion potential customers, can be enormous.

Real-Life Ethical Dilemma Exercise The True Cost of Cotton Questions 1. Why doesn‟t the Indian government enforce its own labor laws?

There are probably two fundamental reasons and they both are based on resources. The Indian government does not have the resources to employ enough inspectors to go to each facility on a regular basis. There may be, for example, facilities in which a government inspection may not have taken place for an extended period of time. The other plausible explanation could be the use of bribery. It is expected that the inspectors may ask or may just be given bribes from the factory owners in exchange for not reporting labor violations.

2. Why would parents send their children to work in such horrible work conditions?

Again, the circumstances in India are different than in developed countries such as the United States. For many families, they need every possible source of income so the children become wage earners like their parents. In addition, large family size creates additional financial burdens which can be relieved, in part, with “eligible” children working in the factories and, therefore, generate new resources instead of just taking resources from the family. As a result, from the parent‟s perspective, there may be less concern with the working conditions if it results in more money for the family.

3. Is it better for the girls to be working in the factory or providing no income at home?

Explain your position.

As was discussed in question 2, there could be many students who argue that these families may not have any other viable opportunities to earn money for the families. Of course, from the developed world perspective, these girls should be at school receiving an education. The value of a comprehensive education cannot be overstressed in its importance. It is through educated population and productive workers, who generate tax money for the government, India can improve the standard of living of these girls for their families.

Chapter 12 Establishing a Code of Ethics and Ethical Guidelines The purpose of this chapter is to help students understand the importance of having a code of ethics, as well as to give examples on how a firm can establish or revise their existing codes of ethics. This chapter will highlight the linkages between the code of ethics and the various stakeholders. This important integration is necessary for the firm to fulfill the needs and expectations of the stakeholders. In addition, by understanding the benefits of a good comprehensive code of ethics, firms are able to capture positive goodwill as well as potentially enhance their competitive advantage. In addition, the chapter presents some examples of “good” code of ethics and explains why these codes move these companies to the forefront of linking their ethical philosophy with the needs of their stakeholders. Furthermore, the chapter also demonstrates how one stakeholder, the government, can significantly influence the content of a code of ethics. The chapter concludes with some examples of global codes of ethics which can be used as a starting point for firms as the move from a domestic to a multinational corporation.

Key Learning Points There are a number of key learning points which can be accomplished when this chapter is presented to the students. These include: 1. Describe the role of a code of ethics in organizations.

2. List the four types of statements that a corporation may use to communicate its ethical viewpoint.

3. Explain the benefits of having a living code of ethics.

4. Describe the three major stages of TRM systems used when setting up a code of ethics.

5. List the recommended items for a code of ethics.

6. Explain the necessary ingredients for ethics programs to add value to organizations.

7. Identify the major global code of ethics.

How We are Fixing Up Tyco (p. 235) 1. Why do you think Eric Pillmore would take on the job of trying to fix Tyco?

The underlying reason why anyone would be involved in Tyco after the scandal would be based on the challenge that would be given to the men and women trying to correct the problems. In addition, it could be considered a relatively low-risk operation. Since many people had written off Tyco as a nonentity like WorldCom and Enron, there would not be a lot that would be expected from the people trying to turn around the company. In addition, if Eric and others are successful with the turnaround, there would be a large positive upside in their careers since they helped “steer” Tyco in the correct direction.

2. What would be the easiest and hardest part about trying to change the ethical values at Tyco?

The easiest part is that the “hardest” part is already done. The hardest part was getting rid of the unethical managers at the top of Tyco who were either directly involved in the fraud or were indirectly responsible by not taking proper responsibility and stopping the fraud. With the replacement of the board of directors and the CEO, Tyco now has a clean slate of top-level managers who should be willing to correct the negative image at Tyco.

The hardest part would be to build up the trust of the employees. While working in an unethical culture such as Tyco‟s, employees begin to lose trust in anyone since there is a hostile environment in which everyone tries to protect their own interests. As a result, the employees can be very protective and guarded with others within the company. So, when a “new team” comes on board, it may take some time for the employees to trust the new team. As a result, the hardest challenge for Eric Pillmore is to get a complete commitment of the Tyco employees for the ethical changes.

3. How effective do you think vignettes are as an ethical training tool?

As with any training process, you must have commitment and interest of the employees for any level of effectiveness. That being said, vignettes are a good visual example for employees to understand what is considered acceptable and unacceptable behavior. It would not be worthwhile to show vignettes of obvious unacceptable behavior such as walking out of the office with a company computer since all employees know that this is unacceptable. If you have these obvious vignettes, employees will start losing interest in watching for them since the creditability of the vignettes have been compromised by the type of content presented.

Role of Code of Ethics (p. 235) Figure 12-1 (p. 236) highlights the integration of different components to develop the ethical standards for the firm. This figure would be a good discussion point in which you could ask the

students which of the four components would have the greatest impact on changing the ethical standards. One answer could be the social values of society. The social norms will always drive what is considered acceptable and unacceptable behavior. Whether it is new government regulations, or a shift in consumers‟ tastes, a change in social values will also bring a significant change in ethical standards. Of the three factors within the shaded box, the institutional and organizational factors would be least likely to change since they have become firmly entrenched in the firm‟s value system. As a result, the personal factors would probably have the highest probability to change over time which would also result in a change in the ethical standards of the firm.

Code of Ethics and Stakeholders (p. 237) The use of the four values of integrity, justice, competence, and utility help explain how firms integrate meeting the needs and expectations of their stakeholders with the ethical strategic focus. One question to ask your students is whether each of those four values needs to be equal from a stakeholder perspective; it could be argued that utility is the most important since it is this value which addresses specifically the needs of the stakeholders. Another question to ask your students is whether stakeholders are truly concerned about the ethical strategic focus of the firm.

As with other issues related to stakeholder interactions, it could be assumed that stakeholders would be constantly monitoring the ethical strategic focus of the firm unless there has been information released about potential unethical activities and/or the firm is performing poorly and has not been able to satisfy the needs of the stakeholders from a financial or other goal perspective.

Benefits of a Code of Ethics (p. 238) The benefits of a code of ethics are stakeholder driven. Having a comprehensive code of ethics helps create a positive work environment which makes the employees highly motivated. It also increases the potential competitive advantage of the firm which makes the customers happy.

With these stakeholders being satisfied, it makes the managers happy. The net result is that the benefits of having a comprehensive code of ethics make it an easy decision whether every firm should have a code or not. The benefits would outweigh any time and financial costs involved in implementing a comprehensive ethical strategic vision.

A Living Code of Ethics (p. 239) A living code of ethics refers to the constant adjustments that can be made to a code of ethics. As the expectations and beliefs of society change, so does a firm‟s code of ethics. As a result, it is the responsibility of the top management team to continue to be champions ensuring that the values and beliefs presented in the code of the ethics coincide with the current views of society.

In addition, having a strong positive ethical corporate culture allows the firm to make these adjustments, when necessary, in a nonintrusive manner. The task of the top-level managers in ensuring a living code of ethics is to create an organizational learning environment so that the employees are confident that their decision matches the ethical focus of the firm.

The Role of Total Responsibility Management and Code of Ethics (p. 240)

Total Responsibility Management (TRM) is a useful tool for the students to use to understand how ethics management is a continuous process. Just as TQM looks for ways to continuously improve the performance of the firm, TRM serves the same purpose from an ethical management perspective. Students need to realize that ethics management requires continuous investment of time and resources by the firm so that the firm‟s ethical vision can evolve with the changing perceptions of the stakeholders.

It would be useful to draw a simple three-step model to highlight the states of TRM Inspiration ------- Integration ---------------- Innovation Process Process Process The inspiration process is the first and most critical step in the model. It is the most critical step since the decision made at this step drives the other two steps. It is the responsibility of the toplevel managers to not only embrace their ethical vision but also consider ideas that are not usually within the norm of the decision-making process. That is why this step is called the inspiration process. It is in this step that managers should be allowed to step outside the box in not only what their ethical vision should be but also how it should be formulated and implemented. It is also important to note that the stakeholders are integrated into the decisionmaking process at the inspiration process stage. Again, it is during this stage that creative ideas are encouraged; helping to satisfy the needs and expectations of the firm‟s various stakeholders.

The integration process addresses the ethical strategic formulation and implementation stage of the process. It is through the integration process that the ethical visions of the top-level managers are transferred into viable courses of action. By examining the strategic focus, human resource capabilities, and current management systems, the firm can adjust the vision to fit the strategic capabilities of the firm.

The innovation stage examines how well the strategic vision has been implemented and looks to see where improvements can be made when the inspiration process starts once again.

Steps for an Effective Code of Ethics (p. 243) The purpose of this section is to expose the students to the idea that there are many different ways in which an effective code of ethics can be developed. The underlying theme from each of these methods is that the method must align with the ethical beliefs of the top-level managers. It is from this alignment that the steps are created in order to develop an effective code of ethics.

Each code of ethics should be specialized and customized to the specific needs of the firm and the needs of the stakeholders of the firm.

Value of a Code of Ethics (p. 244) The listing of reasons why a code of ethics should be adopted (developed by Bondy, Matten, and Moon) highlights both the external and internal reasons why it is beneficial for the firm to adopt a code of ethics. Again, the specific justification for each firm depends on the ethical vision and

beliefs of the firm‟s top-level managers. Furthermore, enlightened firms continue to adjust their code of ethics to generate positive benefits for their stockholders, employees, and other stakeholders. In addition, these same firms understand how a strong positive ethical image can enhance their competitive advantage.

Examples of Codes of Ethics (p. 246) The examples of codes of ethics extend the value of a code of ethics section in the textbook. By giving specific guidance to what should be considered in a code of ethics, the students will realize that a code of ethics may incorporate a number of different areas in which they may not have realized that there could be potentially unethical activity from the firm‟s employees.

Furthermore, the examples of the codes of ethics show how the specific content of the code reinforces the ethical vision of the firm. Therefore, the code of ethics is a written representation of the ethical commitment the firm has for its various stakeholders.

Role of Government Regulations (p. 247) The role of government regulations is critical in any development of a firm‟s code of ethics. The government plays an active role in helping to shape and determine what should be included in a code of ethics. Government regulations and guidelines can dictate, in part, what should be included in a code of ethics along with the level of detail in describing the firm‟s ethical commitment in certain areas. For example, bribery is illegal for US-based firms but the firm has to determine when a genuine gift ends and a bribe begins. Is taking a client out to dinner a bribe?

How about giving a client a watch with the firm‟s logo on it? There are a couple of sample questions you could ask your students. State they are responsible for writing the specifics of the bribery section in their firm‟s code of ethics. What would they write? What would be their justification? Would other students agree with that justification? The students will quickly understand that there are a lot of “gray” areas which must be addressed in what may have been considered black and white in the code of ethics.

Global Code of Ethics (p. 248) The presentation of the global code of ethics helps the students understand that ethical issues are global issues and how they are resolved can vary based on where the ethical issues take place.

The comparison of the CRT, OECD, and UN code of ethics highlights that NRO put a significant level of emphasis on how firms conduct business around the world. In addition, this set of global codes of ethics demonstrates that NGOs are certainly stakeholders which firms must consider when they are developing and implementing their ethical vision. The global code of ethics also shows that some things that would be considered simple human rights in the United States are not necessarily so in other countries. As a result, it is important to stress to the students that human rights are not protected in other parts of the world and that there is a large disconnect between how employees are treated in the developed world versus how they are treated in the developing world.

Questions for Thought

1. Do you think codes of ethics really make a difference in an organization? Explain.

The simple answer is a qualified yes. A code of ethics makes a difference if the firm WANTS it to make a difference. Again, it is based on the ethical vision as to how worthwhile and beneficial a code of ethics is. Enron had a code of ethics that was over 60 pages long but if there was no commitment and support by the top-level managers, then it does not make a difference what was on those 60 pages. The value of a code of ethics depends, in part, on the actions of the top-level managers. The most important action a manager can do is to lead by an ethical example.

Subordinates will always watch the action of the superior to interpret what is acceptable and what is considered unacceptable behavior. If a manager is hypocritical or unethical, the code of ethics has no meaning.

A critical underlying value of any code of ethics is that it not only presents a formal presentation of the ethical philosophy of the firm but also gives written guidance to all the employees as to what is considered acceptable and unacceptable.

2. Find the Code of Ethics for UnitedHealth on the Internet. Comment on the topics addressed in UnitedHealth’s Code of Ethics. Do you feel the code adequately achieves its purpose? http://www.unitedhealthgroup.com/~/media/UHG/PDF/About/UNH-Code-ofConduct.ashx?la=en UnitedHealth‟s Code of Ethics has eight major categories: 1.

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Integrity Accountability Fair Compensation and Fair Dealing Privacy and Information Security Our Assets and the Environment Government Interactions Communications A Safe and Supportive Working Environment

Yet, it appears that UnitedHealth has had a legacy of unethical behavior. You can ask the students to research examples of unethical and illegal behavior by UnitedHealth. Here are three examples.

1. Former UnitedHealth Group CEO/Chairman Settles Stock Options Backdating Case for $468 Million (2007) https://www.sec.gov/news/press/2007/2007-255.htm 2. California regulators seek up to $9.9 billion in fines from PacifiCare (2010) http://articles.latimes.com/2010/sep/07/business/la-fi-pacificare-unitedhealth-20100908 3. UnitedHealth to Pay $500 Million Over Hepatitis Doctor (2013) http://www.bloomberg.com/news/articles/2013-04-09/unitedhealth-to-pay-500-million-overhepatitis-doctor

As a result, you can ask the students how can a firm produce a 43-page summary of its code of conduct yet continue to act unethically.

3. Many companies ignore or overlook differences in translating codes of ethics into other languages. Why is it important to have codes of ethics translated into the native languages of the countries in which the company may operate?

It is critical to have the code of ethics translated into the native language of other countries since the code of ethics is a critical reference document that needs to be consulted by all the employees of the firm. In addition, the translation of the code of ethics must occur by someone who is familiar with the potential subtle differences in the meaning and descriptions of words. It can be disastrous if someone from the home country makes the translation into another language because some words do not translate well into another language. This person must be someone who is experienced in that language that can create a meaningful translation of the code of ethics.

Real-Life Ethical Dilemma Exercise A Preventable Disaster This is a classic example of an organization in which everyone points at another person when identifying the blame. Like the scarecrow in The Wizard of Oz, both NASA and Morton Thiokol blame each other for the disaster. You can ask whether students know what Groupthink is and then ask if this occurred during the decision process to launch the Challenger. You can also present the eight symptoms of Groupthink.

1. Illusion of invulnerability—Creates excessive optimism that encourages taking extreme risks.

2. Collective rationalization—Members discount warnings and do not reconsider their assumptions.

3. Belief in inherent morality—Members believe in the rightness of their cause and therefore ignore the ethical or moral consequences of their decisions.

4. Stereotyped views of out-groups—Negative views of “enemy” make effective responses to conflict seem unnecessary.

5. Direct pressure on dissenters—Members are under pressure not to express arguments against any of the group‟s views.

6. Self-censorship—Doubts and deviations from the perceived group consensus are not expressed.

7. Illusion of unanimity—The majority view and judgments are assumed to be unanimous.

8. Self-appointed „mindguards‟—Members protect the group and the leader from information that is problematic or contradictory to the group‟s cohesiveness, view, and/or decisions7 Questions for the Real-Life Ethical Dilemma Exercise 1. What stakeholders’ interests were included in the decision about whether to launch the Challenger or not? Which critical stakeholder’s voice was missing from the discussion?

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http://www.psysr.org/about/pubs_resources/groupthink%20overview.htm

The critical stakeholders are President Reagan, Congress, Taxpayers, and Department of Education. However, the critical stakeholder group that was never asked for input in the decision to launch: the astronauts and their families. Should the astronauts have been informed of the risk before the launch took place even though they agreed to be astronauts knowing the risk?

2. How could the engineers separate their decision from the very real possibility that the decision would kill seven people?

By putting on their “management” hat, the engineers agreed to follow the demands of their customer, NASA. Even though when wearing the engineering hat, the engineers had some significant concerns about the reliability of the O rings and the ability of the O rings to function in very cold weather, that perspective was ignored by the engineers since NASA was a major client of Morton Thiokol and the company could not afford to lose NASA as a customer. As a result, the risk of loss of life of the astronauts was superseded by the financial risk of disappointing a client.

3. If you were at the meeting the night before the launch, what would you do? How would you try to convince others in the room to accept or agree with your decision?

The key would be to bring back the human element in the decision. The risk of aborting the launch would result in a lost opportunity but the risk of launching when that was not the correct decision would lead to loss of life. I would ask the individuals in the room if their son or daughter was one of the astronauts, what would be their decision? NASA had not built into its numerous check lists the emotional evaluation of a decision based on the potential fatal consequences.

Here is a good link to the explosion: https://www.youtube.com/watch?v=WDRxK6cevqw This commentary is from the NASA Control Center in Houston. This is a very effective video because it shows the reaction of the family members who were located in a special viewing area in the launch site. The visible expressions of grief can be seen on many of the faces of the family members.

Chapter 13 Evaluating Corporate Ethics The purpose of this chapter is to highlight the methods in which the ethical vision of the firm can be evaluated. One component is the effective implementation of an ethics training program.

Another area that is presented in the chapter is how to establish a global ethics training program.

Furthermore, the chapter also examines the link between enforcement and the ethics training program. The important role ethics officers have in ensuring the ethical standards are met within the firm is also examined. Furthermore, the chapter also addresses the issues of ethical audits and whistle-blowing. The role of government regulations and the impact on other stakeholders are also examined in the evaluation process of the firm‟s ethical vision.

Key Learning Points

There are a number of key learning points which can be accomplished when this chapter is presented to the students. These include: 1.

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Describe the components of organizational fraud.

List some of the specific goals of ethics training programs.

Describe how firms can increase the ethical awareness of employees.

Explain the key elements in a global ethics training program.

Explain how companies can enforce their ethics policies.

Describe the concept of ethical auditing.

List items that whistle-blowers should consider.

Describe the steps for establishing an ethics hotline.

The Hillsborough Disaster: The Tragic Story of 96 Lost Lives (p. 254) The Hillsborough disaster is an example where the lack of proper procedures and leadership resulted in the loss of 96 lives. While it is expected that watching a play-off soccer game would be an enjoyable experience, the severe overcrowding results in fans be crushed to death. Even though the soccer officials and the local police knew that there would be a large crowd and that the turnstiles getting into the stadium were narrow and few in number, there was no proactive plan to reduce the impact of overcrowding before the match started. In addition, once the crowd started to overwhelm the sections of the stadium near the Liverpool goal, the Police Chief Superintendent initially did nothing to solve the problem. As was the case with the Challenger vignette at the end of Chapter 12, this disaster could have been prevented and no lives would have been lost. It appears that the soccer officials may have felt that since there had overcrowding problems in the past that no additional protections were needed to ensure the safety of the fans. By not having a formalized process based on ethical values to guide their actions, both the soccer officials and the police failed in their duties to protect the fans.

Why Firms Need Ethics Training Programs (p. 255) The results of the survey by PricewaterhouseCoopers in 2011 should yield a number of interesting discussions for the students in the classroom. In general terms, there is a significant amount of fraud occurring within every type of firm in every type of industry. It would be useful to list some of the specific percentages and ask for comments from the students. After some discussion, open up the next line of questioning with this inquiry: “Do you think there is more fraudulent activity now versus 10 years ago; 20 years ago; 30 years ago? If they respond positively ask them to speculate why has there been an increase in fraudulent activity over the years. Some reasons could be: it is easier to commit fraud with current technology, there are more opportunities to acquire goods so there are more demands for additional money; as the population increases there may be less feeling of being part of a community; with multinational firms, employees in subsidiaries may feel isolated and believe they would be less likely to be caught than if they worked in the corporate headquarters.

Have your students look at Table 13-1 and ask them, based on the percentages given in the table, who would do business in Western Europe, Central & Eastern Europe … Africa? If you have a small number of students who would conduct business in Africa, ask them why they would not do business there; if their answer is that there is a 50 percent of economic crime in Africa, you can respond with that, once you know that information, is there anything that can be done to make sure fraud is not committed in your operations in Africa. The answer is yes. The key part of the discussion is that if you know before entry whether a country has a high or low fraud rate, you can make the necessary precautions before you make the investment. Use the analogy of certain cities; for example, Rome is known for pickpockets. If you know there are a lot of pickpockets in Rome, do you avoid visiting Rome or do you prepare yourself for the pickpockets and visit Rome? From a firm‟s perspective, they can prepare themselves when investing in a high fraud area by having a detailed comprehensive ethics training program, and a very strict and continuous monitoring system in place to track the activities of the employees.

Establishing an Ethics Training Program (p. 258) It is important for the students to understand that firms can use ethics training programs as part of a control system. An ethics training program is a useful tool for a firm to ensure that the employees behave properly and appropriate in the workplace setting. The combination of compliance-oriented and values-oriented training programs can provide the right mixture of “stick and carrot” as it relates to ethical issues. One question to ask the students would be whether the stick or the carrot would be a more effective means to get their attention related to ethical issues. It could be that the students may perceive the carrot as being more effective because they may have never had to receive punishment for unethical behavior. As a follow-up question, ask the students which method would be more effective if you were 50 years old with a family to support.

An interesting assignment for your students would be for them to select a company and ask them to develop an ethics training program for that company. You would give them guidelines such as: a budget, how long the program should be, who should have input for the ideas, and how the student would measure the success of the program.

Establishing a Global Ethics Training Program (p. 260) The students need to realize that as a company broadens its strategic position globally it must also broaden its ethics training program. The firm must be aware that different cultures warrant different approaches on how to address ethical issues. Not only must the firm move beyond rule formation and provide universal human rights guidelines, the firm must embrace the differences in the different country cultures in the ethics training program. This is why it is critical to stress the global cultural dimensions listed in Table 13-4.

These global dimensions help the students understand that not everyone communicates the same way and not everyone understands communications in the same way. In addition, traditional culture values such as respecting elders and only meeting with people at the same professional level can have a significant impact on not only what is said in the training programs but who says

it. For example, in some Pacific Rim countries, it would be considered an insult for a low-level human resource employee from the corporate headquarters to present the ethics training programs to vice presidents of one of the firm‟s subsidiaries.

Corporate Ethics Officers (p. 264) Corporate Ethics Officers play a critical role as the link between the ethical vision of the firm and the acceptance of that vision by the firm‟s employees. The corporate ethics officer roles are presented in Figure 13-1 highlight the many “hats” which they must wear. In the role of company security, counselor, and compliance officer, the corporate ethics officer has to be both “good cop” and “bad cop” depending on the circumstances. As a result, it is imperative that the corporate ethics officer is able to establish strong trusting relationships with the firm‟s employees.

An assignment that would show the multiple skills needed to be a corporate ethics officer would be to ask the students to write up a job description and the desired skills for applicants to be hired as a corporate ethics officer. You could have the student present their summaries to the rest of the class and have the students compare and contrast both the job descriptions and the necessary skills. You could even take the assignment one step further by creating a background for five top candidates who have applied to be a corporate ethics officer and require the students to select one of the five finalists. As part of the assignment, the student would have to justify the selection and explain his/her decision process which resulted in the decision outcome.

You could also use Figure 13-2 as a model to determine what characteristics are needed in order to be an effective ethics officer. Again, you could present the background of five finalists and based on the framework in Figure 13-2, have the students go through each step in the model to help explain which of the five finalists would be selected based on their decision-making process.

Ethical Auditing (p. 267) Ethical Auditing is a useful tool used by management to access the current validity of their ethical training program and the level of compliance of the ethical standards established by the firm. Through written and oral feedback, an ethical audit can help ascertain whether adjustments need to take place in the training programs as well as evaluate the level of knowledge the employees have pertaining to the ethical commitment of the firm.

An interesting assignment would be to ask your students to search the internet to see if they could find companies that have disclosed that they have done an ethics audit and what actions were taken by the firm to address the results of the ethical audit.

Whistle-Blowing (p. 267) Whistle-blowing is an interesting concept since it is very easy to understand but without real working experiences the students may have a hard time understanding why it is so difficult being a whistle-blower.

You could start the discussion by asking if anyone has watched the movie “The Insider” (1999) starring Russell Crowe and Al Pacino. If you have not seen the movie, it is well worth the time.

“The Insider” is the story of Jeffrey Wigand who was a senior Vice President of research at Brown and Williamson Tobacco Company. Dr. Wigand was forced to resign from B&W when he started challenging the idea that tobacco and nicotine were not addictive. During the course of the movie, it follows Dr. Wigand as he tries to tell his story to Mike Wallace on 60 minutes. This movie captures the essence of whistle-blowing in that one decision to provide information against a current or former employer may come at a heavy personal price for the whistle-blower.

The net result is that very few people are willing to be a whistle-blower because of the personal risks. However, if whistle-blowing leads to financial compensation such as receiving a percentage of the money saved by whistle-blowing, the participation rate would be much higher.

Hotlines (p. 268) Hotlines are a critical tool used to aid the transfer of confidential information from a whistleblower. Hotlines need to be anonymous so that employees do not feel they will be personally identified as “snitches” by informing on other employees. It is important to remember that whistle-blowers usually deal on a day-to-day basis with the people they inform on. As a result, it is critical that the identification of the source of information is never made public or else the whistle-blower may face reciprocal punishment from the violator.

A question to ask your students would be whether they would be willing to be a whistle-blower if they saw unethical activity. What about if the person is a close personal friend? Would they ever tell the violator “if you watch my back, I will watch yours”?

If they were to inform on a fellow employee, which method would they prefer from Table 13-8: In-house; Outsourced; Hybrid?

Government Regulations and Whistle-Blowing (p. 270) The passage of the Sarbanes-Oxley Act in 2002 became a foundation step in the protection of whistle-blower rights. With the passage of SOX, whistle-blowers were protected in that they could not be discharged, demoted, suspended, threatened, harassed, or discriminated against because the employee provided information showing unethical behavior. It is important to understand that in cultures that value group effort instead of individual effort, it is very difficult to be a whistle-blower. This is the case because the whole team takes responsibility for the actions of each member within the team. As a result, if a team member does something unethical, it is equivalent of the whole team doing something unethical. Therefore, with this corporate culture it would probably be more likely that the group tries to resolve the unethical issue instead of reporting it to a supervisor.

Evaluation of Ethics and Stakeholders (p. 273) The framework presented in Figure 13-3 highlights the relationship between the firm‟s stakeholders and the strategic focus of the firm. The stakeholders are the first step since they are

the driving forces for the ethical vision of the firm. It is by satisfying the ethical expectations of the stakeholders that the firm is able to have an effective ethical performance.

Based on the demands from the stakeholders, the firm can develop its strategic ethical formulation which would include the firm‟s code of ethics and other ethical policies and procedures. Once the formulation stage has been established, the firm then moves to the execution or implementation of the ethical vision via the firm‟s ethics training program. Once the training program has been implemented, a monitoring system must be used to evaluate the overall effectiveness of the ethical vision including the formulation and implementation aspects of the ethics strategy.

A very comprehensive assignment for your students would be to have them use the framework to design a complete ethical vision of a company. You could have them select an industry and state that they are the CEO of a new company in this industry and their job is to go through each of the 5 steps in the framework to develop the ethical vision of the firm.

Questions for Thought 1. Why do you think that many firms establish ethics policies but do not enforce them?

This is similar to a hypocritical moral leader. The firms state many things in their written documents but do not abide by them in their actions. The simple reason for having an ethics policy is that SOX requires that publicly traded firms must have a code of ethics that is AT LEAST binding to the top-level executives. As a result, firms are now required to have a code of ethics but it is similar to the old saying “You can take a horse to water but you can‟t make him drink”. Just because the code of ethics policy has been developed does not mean the employees agree or abide by the content of the code of ethics. Therefore, without the commitment of the employees, the code of ethics is a worthless document.

2. Can a company be ethical without having a formal ethics policy? Explain.

The answer is yes but it is probably rare. A company does not need a formal document to guide its behavior. A positive ethical culture within the firm will help guide the employees whenever there is a question of which course of action to take by the employees. In addition, employees may have mentors who can help advise them when they are faced with an ethical dilemma.

However, if the firm has a positive strong ethical culture and has a supportive system to ensure everyone does the proper action; it is highly likely that the firm will also have a formal code of ethics to reinforce the positive ethical culture of the firm.

3. Do you believe that CPAs would be the best group to perform ethics audits? Why or why not?

You could argue both yes and no for this question. Because of their training, CPAs have a strong analytic perspective on issues and are able to “ask the right questions” when it appears that there is something out of the ordinary. In addition, due to their training in financial auditing, they

would have a number of heuristics which would help them as they sort through the information pertaining to the ethics audit.

On the other hand, an ethics audit may require a different perspective than a traditional financially trained cognitive lens. Since there could be a number of areas that are open to interpretation, it may be more advantageous to have a person who is not trained to focus on black and white solutions to gray area problems.

4. Do you think hotlines for reporting ethical violations work? Explain your answer.

Hotlines could be considered one tool, but are not necessarily a way to guarantee the reporting of ethical violations. As was mentioned earlier, hotlines make the assumption that every employee would not be intimidated enough to inform on a colleague and potentially a close friend. It could very well be that there could be ethical violations that occur all the time within a facility and they are never reported. Part of the explanation is that the employees do not want to “rat” on a friend and the other reason could be that if I have some information about you and do not report it, you will not report any unethical information pertaining to me to my supervisor.

Real-Life Ethical Dilemma Exercise How About Some Free Popcorn? (p. 274) 1. Do you think the responsibilities of the intern programs at Fox Searchlight meet the conditions required by the Fair Labor Standards Act? It is hard to argue that number four on the list is not being met with the interns. It appears that the purpose of most internship is twofold. The ability to “try out” the interns to see if they would be a proper fit for the company if they were hired for a permanent position after the internship AND providing free labor that provides both short-term and long-term financial benefits for the firm.

While some internship programs are not financially profitable, it could be argued that firms do receive an immediate financial benefit by having the interns work for zero wages.

2. Are the criteria established in the FLSA related to unpaid interns obsolete?

The simple answer is yes. The origin of the internship program was similar to an apprentice program. A new worker would learn a craft by following an expert. In this case, the internship program would fulfill the expectation of finding qualified workers but it would also likely be at a financial cost to the firm. In addition, the FLSA was established over 70 years ago. Both the type of work and society has changed significantly over this time period. Therefore, the vast majority of internship programs are based on service industries which do not involve heavy manufacturing where an intern is “taught” how to mold steel or work with wood.

3. Why do companies decide not to pay interns?

The simple answer is based on the fact that they are not required by law to pay interns under an internship program. This decision refers back to the discussion between decisions that are legal

versus decisions that are ethical. While it may be legal for a firm not to pay interns, the real question is whether it is ethical. One question to ask the students is whether they have participated in internship programs and if so, did they get paid. It could be argued that regardless of the internship program, the interns are providing at least enough value to the firm to be paid minimum wage for their labor.

4. How committed is Fox Searchlight in its promise of a “foot in the door” to get a permanent position in the industry?

The promise of a “potential” permanent position is the only way in which unpaid internships can survive. If the interns knew there was no possibility for a permanent position, they would not apply to the internship program. Therefore, it is the “carrot” to encourage people to apply to the program. Since they are not under any obligation to offer permanent positions after the internship program has been completed, Fox Searchlight does not need to be concerned whether or not they are truly committed to offering permanent positions for the interns.

5. If 100 unpaid interns had received a salary and benefits of $20,000 a year. It would have added $2 million in expenses to the production of Black Swan. Would this amount be a financial burden for Fox Searchlight, based on the worldwide gross revenue of the firm?

The addition $2 million would have an insignificant impact on the financial performance of the firm. With global grosses of over $330 million, $2 million would be 0.606 percent of the total revenues generated by the movie. The true benefit of the $2 million would be that if Fox Searchlight was the only movie company to offer paid interns with $20 thousand a year, Fox would probably be overwhelmed by excellent intern candidates and would make the selection process for permanent employees after the internship programs much easier in selecting the top potential candidates for permanent position at Fox Searchlight. Fox Searchlight should view paying interns as a relatively inexpensive way of enhancing its competitive advantage by attaching the best talent to apply for permanent positions.