CHAPTER 5 Business Ethics and the Legal Environment of

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                                Business Ethics and the
                                Legal Environment
                                of Business

Learning Objectives
After studying this chapter you should be able to:

1. Understand the relationship between ethics    WHY IS THIS IMPORTANT ?
   and the law and appreciate why it is          A friend who is an A-student has offered to write
   important to behave ethically.                your paper, which is worth 25% of your grade, for
                                                 $50. You need the course to graduate because you
2. Differentiate between the claims of the       only have a low C average. You hate writing, do it
                                                 very poorly, and know others have had good results
   different stakeholder groups affected by a
                                                 submitting this student's papers as their own. Will
   company's actions.                            you pay the money and submit the paper or submit
                                                 your own paper and pray for a good result?
3. Identify the four main sources of business       This chapter will help you learn how to act ethi-
   ethics, and describe four rules that can be   cally when facing dilemmas in your business and
   used to help companies and their              personal life. This is important because the decisions
   employees behave ethically.                   you make will affect your own future and those of
                                                 stakeholders of the organizations that employ you.
4. Describe some methods companies can
   use to strengthen their ethical rules and

5. Appreciate the important ways in which a
   nation's business laws and regulations
   affect business commerce, occupations,
   and organizations.
A Question of Business
How Different Ethical Stances Can Help
or Harm a Company
How can companies ensure their managers and employees follow their ethical codes of conduct?

In 1982, managers at Johnson & Johnson             problems. Nevertheless, a few months later,
(J&J), the well-known medical products com-        DC's chairman, Keith McKennon, announced
pany experienced a crisis. Seven people in the     that the company was discontinuing its breast
Chicago area had died after taking Tylenol cap-
sules that had been laced with cyanide. J&J's
top managers needed to decide what to do. The
FBI advised them to take no action because the
likelihood that supplies of Tylenol outside the
Chicago area were contaminated was very low.
Moreover, withdrawing the drug from the mar-
ket would cost the company millions of dollars.
J&J's managers were of a different mind, how-
ever. They immediately ordered that supplies of
all Tylenol capsules in the U.S. market be with-   implant business and closing the factories that
drawn and sent back to the company, a move         produced them.
that eventually cost J&J more than $150 million.     Soon after DC's withdrawal from the implant
  In 1992, managers at Dow Corning (DC), a         business, it became known that a DC engineer
large pharmaceutical company that had pio-         had questioned the safety of silicon breast
neered the development of silicon breast           implants as early as 1976. In 1977, the engi-
implants, received disturbing news. An increas-    neer had sent top managers a memo summa-
ing number of reports from doctors throughout      rizing the results of a study by four doctors who
the United States indicated that many women        reported that 52 out of 400 implant procedures
who had received DC's silicon implants were        had resulted in ruptures. In response to a court
experiencing health problems ranging from          order, the company eventually released this
fatigue to cancer and arthritis due to ruptured    memo, along with hundreds of other pages of
implants. DC's managers believed that the avail-   internal documents. Women filed hundreds of
able evidence did not prove that fluid leaking     lawsuits against DC for knowingly selling a
from the implants was the cause of these health    product that may have been defective. Lawyers
140                     Chapter Five

accused DC of deliberately misleading the pub-           without jobs. They also lost much of the per-
lic and of giving women whose implants had               sonal capital they had invested in the company.
caused medical problems false information to             In this case, the unethical and illegal behavior
protect the interests of the company.                    of its managers and employees destroyed their
    Dow Corning's ethical stance eventually cost         company.
the company billions in product liability claims.            The behavior of DC and AA managers seemed
In fact, the size of these claims pushed the             out of character to many people. Both companies
company into Chapter 11 bankruptcy, and it               had widely publicized and well-developed internal
remained there for eight unprofitable years until        ethics rules that were supposed to reign in and
2004 when a judge accepted its plan to pay               prevent unethical behavior. When confronted with
future damages to settle all the lawsuits against        a crisis, their ethics systems did not prevent either
it and allowed it to resume full control of its busi-    company's managers behaving unethically and
ness. Its managers' unethical behavior almost            illegally. J&J also had a system of ethical rules in
destroyed the company.                                   place. At its center is a credo describing its ethical
    In 2002 the accounting giant, Arthur Ander-          stance toward customers, employees, and other
sen (AA) was found guilty of obstruction of jus-         groups (see Table 5.2, p. 156). Why did J&J's
tice for shredding documents related to its              credo lead its managers to act ethically while
audits of the Enron Corp. Apparently, senior             DC's and AA's did not?
partners at AA, to hide evidence of its fraudu-              One reason appears to be that J&J's man-
lent auditing of Enron's accounts, ordered AA's          agers believed in their company's ethical values,
middle managers to shred thousands of pages              so that when confronted with an ethical dilemma
of accounting documents in an effort to hide             as in 1982, they consistently followed the credo's
AA's role in the Enron scandal.                          rules when making business decisions. At DC
    When knowledge of AA's illegal actions               and AA, in contrast, managers had been just
became public in 2001, however, the company's            "going through the motions." When push came to
reputation had already collapsed. Most of the            shove, they protected their own interests and
companies it audited, such as Merck, Freddie             those of their companies in illegal ways. Both
Mac, and Delta Airlines had terminated their             companies paid the price. Within months of its
contracts with the company. After AA was con-            decision to pull Tylenol from store shelves, how-
victed of obstruction of justice it lost its auditing    ever, J&J regained its status as leader in the
license to practice accounting in the United             painkiller market and has since increased its
States. With the collapse of their company, its          market share because of its enhanced reputation
partners and employees found themselves                  for being a highly ethical company.1 

           Overview                         As the behavior of Johnson & Johnson's, Dow Corning's, and Arthur
                                            Andersen's managers suggests, managers may interpret their respon-
                        sibilities to their customers and to their organizations in very different ways. Johnson
                        & Johnson moved immediately to protect the public even though there was little
                        chance that any other supplies of Tylenol were contaminated. Dow Corning's man-
                        agers postponed action and, to safeguard the profits of their company, did not con-
                        front the fact that their product was defective and dangerous. As a result, women
                        continued to receive silicon breast implants, and the potential for harm increased.
                        Arthur Andersen's managers intentionally committed illegal actions to protect their
                        own interests. Their sole goal was to hide evidence of their wrongdoing at the
                        expense of the public.
                           As the story of these companies suggests, an important ethical dimension is present
                        in most kinds of business decision making. In this chapter, we examine the nature of
                        the obligations and responsibilities a business has to the people and society affected
                        by the way it operates. First, we examine the nature of ethics and the sources of ethi-
                        cal problems. Second, we discuss the major groups of people, called stakeholders, who
                        are affected by business. Third, we look at four rules or guidelines that companies can
                        use to decide whether a specific business decision is ethical or unethical. Fourth, we
                               Business Ethics and the Legal Environment of Business                                  141

                               consider the sources of business ethics and the way companies can promote ethical
                               behavior. Finally, we examine the legal environment of business and describe the
                               many kinds of laws, rules and regulations that must be followed, both at home and
                               abroad, if a company is to do business in an honest and ethical way. By the end of this
                               chapter you will understand the central role that ethics plays in shaping the practice
                               of business and the life of a people, society, and nation.

                   The Nature                         Suppose you see a person being mugged in the street. How will
                                                      you behave? Will you act in some way to help even though you
                     of Ethics                        risk being hurt? Will you walk away? Perhaps you might adopt
                                                      a "middle-of-the-road approach" and not intervene but call the
                               police instead? Does the way you act depend on whether the person being mugged is
                               a fit male, an elderly person, or even a street person? Does it depend on whether
                               there are other people around, so you can tell yourself, "Oh well, someone else will
                               help or call the police. I don't need to"?

ethical dilemma
                               Ethical Dilemmas
The quandary people           The situation described above is an example of an ethical dilemma, the quandary
experience when they          people find themselves in when they have to decide if they should act in a way that
must decide whether or
                              might help another person or group, and is the "right" thing to do, even though
not they should act in a
                              doing so might not be in their own self-interest. A dilemma may also arise when a
way that benefits someone
else even if it harms others
                              person has to decide between two different courses of action, knowing that
and isn't in their own self-  whichever course he or she chooses will result in harm to one person or group even
interest.                     though it may benefit another. The ethical dilemma here is to decide which course of
ethics The inner-guiding      action is the "lesser of two evils."
moral principles and              People often know they are confronting an ethical dilemma when their moral scru-
values people use to          ples  come into play and cause them to hesitate, debate, and reflect upon the "right-
analyze a situation and       ness"  or "goodness" of a course of action. Moral scruples are thoughts and feelings that
decide what is "right."       tell a person what is right or wrong; they are a part of a person's ethics. Ethics are the
                                                                inner-guiding moral principles, values, and beliefs
                                                                people use to analyze a situation and decide what is
                                                                "right." At the same time, ethics also indicate what
                                                                inappropriate behavior is and how a person should
                                                                behave to avoid doing harm to another person.
                                                                   The essential problem in dealing with ethical
                                                                issues, and thus solving moral dilemmas, is that there
                                                                are no absolute or indisputable rules or principles
                                                                that can be developed to decide if an action is ethical
                                                                or unethical. Put simply, different people or groups
                                                                may dispute which actions are ethical or unethical
                                                                depending on their own personal self-interest and
                                                                specific attitudes, beliefs, and values. How, therefore,
                                                                are we and companies and their managers to decide
What would you do if you witnessed a mugging?                   what is ethical and act accordingly?

                               Ethics and the Law
                               The first answer to this question is that society as a whole, using the political and legal
                               process, can lobby for and pass laws that specify what people can and cannot do. In
                               the last chapter, for example, we examined the many different kinds of laws that exist
                               to govern business. Laws also specify what sanctions or punishments will follow if
                               those laws are broken.
                                   Different groups in society lobby for laws to be passed based on what they believe
                               is right or wrong. Once a law is passed, the decision about how to behave in a certain
142                        Chapter Five

                           situation moves from the personally determined ethical realm to the socially deter-
                           mined legal realm. If you do not conform to the law, you can be prosecuted and

                           Changes in Ethics over Time
                              Neither laws nor ethics are fixed principles cast in stone, however. Both change over
                              time. As a society's ethical beliefs change, its laws change to reflect them. As we saw
                              in Chapter 2, it was considered both ethical and legal to own slaves in ancient Rome
                              and Greece and in the United States until the nineteenth century. Ethical views
                              regarding whether slavery was morally right subsequently changed, however, and
                              slavery was later outlawed.
                                 In most societies today behaviors like murder, theft, slavery, and rape are consid-
                              ered unacceptable and prohibited. But many other kinds of behaviors are open to dis-
                              pute when it comes to whether they are ethical or should be made illegal or not.
                              Some people might believe that a particular behavior such as smoking tobacco or
                              possessing guns is unethical and should be made illegal. Others might argue that it is
                              up to individual people if they want to own guns or smoke. In the United States it is,
                              of course, illegal to possess or use marijuana even though it has been shown to have
                              many medical uses. Some cancer sufferers and AIDS patients find that marijuana
                              relieves many of the side effects of medical treatment, like nausea and lack of
                              appetite. Yet, in the United States, the Supreme Court has held that the federal gov-
                              ernment can prohibit doctors from prescribing marijuana to these patients, so their
                              suffering goes on. By contrast in Canada there has been a widespread movement to
                              decriminalize marijuana, and in other countries, marijuana is perfectly legal.
                                 The point is laws can and do change as people's ethical beliefs change. For exam-
                              ple, in Britain in 1830, there were over 350 different crimes for which a person could
                              be executed, including sheep stealing. Today there are none. Capital punishment has
                              been abolished. As you can see, both ethical and legal rules are relative: No absolute
                              standards exist to determine how we should behave. Consequently, we frequently
                              get caught in moral dilemmas and are continually faced with ethical choices. It is a
                              part of life.
                                 Companies and their managers are no different. Some make the right choices,
                              while others do not. In the early 2000s, a rash of scandals occurred at major U.S.
                              companies, including Enron, WorldCom, Tyco, Merrill Lynch, and others. Managers
                              in some of these companies clearly broke the law and defrauded investors. In other
                              cases, managers used legal loopholes to divert hundreds of millions of dollars in cor-
                              porate money for their own use. At WorldCom, for example, former CEO Bernie
                              Ebbers used his position to place six of his friends on WorldCom's 13-member board
                              of directors. Obviously these six people voted in favor of Ebbers's recommendations
                              to the board. As a result, Ebbers received huge stock options and a personal loan of
                                                              over $150 million from WorldCom. In return, his sup-
                                                              porters were well rewarded for being directors. Among
                                                              other perks, Ebbers allowed them to use WorldCom's
                                                              corporate jets for a minimal fee--something that saved
                                                              them hundreds of thousands of dollars each year.
                                                                 Although not all of the activities Ebbers and other
                                                              corporate wrongdoers engaged in were illegal, this does
                                                              not make these behaviors ethical. In many cases soci-
                                                              eties later pass laws to close the loopholes used by
                                                              unethical people, such as Ebbers and Rockefeller, dis-
                                                              cussed in Chapter 2, who gain at the expense of others.
                                                              But ordinary people, not just corporate executives make
                                                              everyday decisions in the course of business about what
Do you think marijuana should be legalized, and, if so, under is ethical and what is not. A case in point is the pirating
what circumstances? Do you think U.S. laws will eventually    of digital products using the Internet, as Business in
change to allow marijuana to be used more freely?             Action discusses.
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