CHAPTER 1

1. CHAPTER 1 Ethics and the Law

2. OVERVIEW • A brief overview of several theories of ethics and systems of justice. • Business ethics defined and discussed in relation to economic performance. • A description of notable examples of social responsibility and irresponsibility on the part of corporations. • How certain conduct raises ethical as well as legal issues. • Explanations that an action may be legal yet still unethical. • A perspective on the role of the corporation and its managers in ensuring ethical conduct and the evolving role of the law in this area.

3. DIFFERENT THEORIES OF ETHICS • Teleological theory- the ethical good of an action is to be judged by the effect of the action on others. • Deontological theory- focuses on the motivation and principle behind an action than on the consequences.

4. TELEOLOGICAL THEORY Utilitarianism- a major teleological system of beliefs that operates under the proposition that the ideal is to maximize the total benefit for everyone involved.

5. DEONTOLOGICAL THEORY • Rawlsian moral theory- aims to maximize the plight of the worst-off person in society by developing principles behind a “veil of ignorance.” • Kantian theory- looks to the form of an action, rather than the intended result, in examining the ethical worth. • Universalizabilty- asks whether one would want everyone to act in this manner. • Reversibilty- asks whether one would want such a rule applied to one’s self.

6. COMPARATIVE JUSTICE CATEGORIES • Distributive justice- focuses on how the burdens and benefits of a particular system are distributed. • Compensatory justice- aims at compensating people for the harm done by others. • Retributive justice- may also be appropriately applied when someone does harm to another, yet the focus is more on how to deter the person from inflicting another harm.

7. AQUINAS ON LAW AND ETHICS • Saint Thomas Aquinas (1225?-1274), a theologian and philosopher, believed that an unjust law was contrary to God’s eternal law and could not properly be considered a law at all. • Aquinas believed human law must be just to be considered law. To be just, a human law must be: • Constant with a reasoned determination of the universal good. • Within the power of individuals to fulfill. • Clearly expressed by legitimate authority. • Approved by custom. • Widely promulgated. Historical Perspective

8. Case 1.1 Meinhard v. Salmon FACTS. The Bristol Hotel in New York City was leased to Salmon for twenty years, 1902-1922. Salmon and Meinhard entered into a joint venture agreement, with Meinhard as the financial backer. Meinhard agreed to pay for half the moneys needed to operate the property, in exchange for 40% of the the net profits for the first five years and 50% for the years thereafter. In 1922, Elbridge Gerry became the owner of the property and entered into a 20 year lease agreement with Salmon for the hotel and the surrounding property. Meinhard demanded to be included in the lease but was turned down. Meinhard sued. ISSUE:Did Salmon, as Mienhard’s joint venturer, have a relationship of trust (or fiduciary duty) to Meinhard that obligated him to give Meinhard the opportunity to be included in a new lease covering property that was originally leased by Salmon on behalf of the joint venture? HELD: A fiduciary is held to ethical standards “stricter than the morals of the marketplace”. The court awarded one-half the lease to Meinhard.

9. SOCIAL RESPONSIBILITY AND PROFITS • Nobel Prize winner in economics Milton Friedman asserts that the only guiding criterion for the corporation should be profitability. • Richard Nunan argues that corporations are better equipped than the government to handle certain issues. • Who do you agree with?

10. ECONOMIC PERFORMANCE AND ETHICS • One possible solution to the tension between economic performance and ethics is to set minimum ethical standards that all employees must meet. • Managers must try to demonstrate that high ethical standards lead to business success.

11. SOCIAL RESPONSIBILITY Issues of social responsibility arise in the areas of product safety, the environment, sweatshops and underpaid foreign workers, advertising campaigns, antitrust violations, client conflicts of interest, managed earnings, and Internet companies.

12. CONSUMERS AND PRODUCT SAFETY Socially responsible businesses place a heavy emphasis on the safety of their products. Huge costs have been associated with failure to meet the public’s perception of what is safe.

13. CONSUMERS AND PRODUCT SAFETY • Johnson & Johnson and Tylenol—in 1992 recalled 31 million bottles of Tylenol after deaths from cyanide poison tampering were reported. • Coca-Cola recalled 14 million cases of product in five European countries after two plants were responsible for the contamination of the soft drink, although no deaths were reported. • Copley Pharmaceutical—in 1994 recalled one of their biggest sellers, albuterol, because of bacterial contamination. • General Motors--In 1999, GM ordered to pay punitive and compensatory damages to 6 people who were burned when their 1979 Chevrolet Malibu’s fuel tank exploded in a crash.

14. COMMUNITIES AND THE ENVIRONMENT Closely akin to product safety is environmental safety. Disregard for safety has resulted in some spectacular environmental disasters that have severely hurt the surrounding communities.

15. COMMUNITIES AND THE ENVIRONMENT • Union Carbide and Bhopal • In Dec. 1984, forty tons of methyl isocyanate gas was emitted from the plant outside Bhopal, India. At least 200,000 victims from death or illness. • Shell & Brent Spar & Nigeria • In 1995, Royal Dutch/Shell oil company planned on disposing of the Brent Spar oil platform by sinking it in the North Atlantic. After protests, they agreed to salvage it inside, incurring twice as much costs. Shell also refused to help stop the hanging of Ogoni activists, who protested the unfair compensation by the Nigerian government for the oil Shell was taking from their land.

16. COMMUNITIES AND THE ENVIRONMENT Shell and Brent Spar and Nigeria In March 1997, Shell released a new operating charter reflecting a commitment to the environment, health, safety, and human rights.

17. EMPLOYEES: SWEATSHOPS, CHILD LABOR, RESTRUCTURINGS, AND CONTINGENT WORKERS • Indentured Servitude in Marianas Islands • In August 1999, 50,000 sweatshop laborers from the Mariana Islands demanded $1 Billion from a number of U.S. corporations, alleging that the companies had participated in a program of indentured servitude. The corporations paid $1.25 million to settle the case and agreed to allow inspections of their factories. • Child Labor at Wal-Mart • In 1992, the press revealed that Wal-Mart was selling products labeled “Made in the U.S.A.” which were actually made in Bangladesh by child laborers.

18. EMPLOYEES • Leveraged Buyouts • During the 1980’s, managers and bankers financed hundreds of leveraged buyouts with junk bonds. A number of companies declared bankruptcy when they were unable to repay the debt incurred in their LBOs. • Contingent Workers • Many large companies in the 1990s reduced their full-time work force and hired more part-time, temporary, and contract workers. These employees received less pay, benefits, and no pensions. In recent lawsuits against Microsoft and Time Warner, contingent workers claim they were unfairly denied benefits.

19. CONSUMERS AND ADVERTISING • Targeted Marketing • In 1991, G. Heileman Brewing Co. planned to release a new malt liquor aimed at the African American community. The malt beverage would have been the strongest malt liquor on the market. African American activists groups protested and the product was withdrawn. • Marketing Tobacco and Beer to Children • RJR Nabisco (maker of camel cigarettes) was criticized for using Old Joe Camel, a cartoon character, for advertisement. In 1997, they agreed to drop the Joe Camel ads. • In 1999, the FTC surveyed the eight largest alcoholic beverage companies and found that they advertised their product in media popular to children.

20. CUSTOMERS AND ANTITRUST • Microsoft and Abuse of Monopoly Power • In April 2000, a judge ruled that Microsoft Corp. had illegally maintained and sought to extend its monopoly in the personal computer operating system markets, and ordered a breakup of the company. • Archer Daniels Midland and Price-Fixing • In 1995, the U.S. Justice Dept. charged Archer Daniels Midland (ADM), and several of its top executives with colluding with competitors to coordinate price increases and to allocate sales of lysine products among themselves as part of an international price-fixing scheme.

21. CLIENTS AND CONFLICTS OF INTEREST • Ernst & Young • In 1998, Ernst & Young agreed to pay $185 million to one it’s clients, Merry-Go-Round Enterprises. The law firm Swidler & Berling advised Merry-Go-Round to consult with turnaround experts Ernst & Young. When a conflict arose, Swidler & Berling intervened on Merry-go Round’s behalf. Ernst & Young failed to disclose to the retailer its business relationship with Swidler & Berling and Merry-Go Round’s main landlord, Rouse Company.

22. CLIENTS AND CONFLICTS OF INTEREST • Management Buyouts • Management-led buyouts present unique conflicts of interest. When management is doing the buying, it’s objective is to buy at the lowest possible price, which conflicts management’s responsibility to obtain the highest price for the existing shareholders. • Morgan Bank • Sterling Drug was a longtime client of Morgan Bank of New York. When Hoffman-LaRoche suprisingly took over Sterling, Morgan bank was not surprised because the bank was also Hoffman-LaRoche’s financial adviser.

23. CLIENTS AND CONFLICTS OF INTEREST • Morgan Guaranty • Morgan Guaranty Trust Company was criticized when it helped one client, SmithKline Beecham Corp., buy a firm that another client, Corning Glass Works, had agreed to purchase.

24. INVESTORS • Managed Earnings • In an effort to meet securities analysts’ earnings expectations and thereby avoid the punishing drop in stock price that usually follows a company’s announcement that its earnings were below Wall Street’s estimates, a number of public companies are managing earnings. • “Silicon.Valley.con” • The increase of dot.com companies engaged in electronic commerce are raising ethical concerns. Most importantly, some question the practice of creating a company for the sole purpose of making millions in an IPO rather than building a sustainable enterprise with long-term economic value.

25. POSITIVE ACTION • Ford • Plans on selling a hybird gas-and-electric-powered sports utility vehicle in 2003. • Conoco • After the Exxon Valdez oil spill in 1989, Conoco ordered two new oil tankers with double hulls which can prevent or limit spills. • Levi Strauss • After finding out that children were working for two of their suppliers in Bangladesh, they agreed to pay the children’s tuition, purchase their books and clothes, pay their wages while they attended school, and offered them jobs when they turned fourteen.

26. POSITIVE ACTION • Merck • After WWII, Merck & Co. provided medicine to treat tuberculosis in Japan. They also developed and gave away a drug that cures river blindness. • BP Amoco • Bp instituted measurable objectives to ensure that it was doing what it could to create a sustainable planet. • McDonald’s & Packagers • McDonalds and other users of packaging have made innovative changes in their products and packaging to reduce the environmental impact of paper manufacturing and disposal.

27. PROMOTING ETHICAL BEHAVIOR • Fair treatment of employees • Mission statements • Codes of ethics • Oversight committees • Ethics training • Making it easier to blow the whistle

28. THE LAW AND THE “UNETHICAL” ROLE OF THE LAW The law -civil as well as criminal- plays an important part in promoting ethical conduct. Ethical behavior often requires a higher standard than that prescribed by the law; an action that is unethical may nonetheless be legal.

29. Case 1.2 Riddle v. Arizona Oncology Services, Inc. FACTS. Arizona Oncology Services, Inc. (AOS) employed a radiology technician knowing she had a history of drug abuse. After finding out she was high on cocaine while on the job, she was dismissed for the day. She left the premises and ran into the plaintiff’s vehicle, seriously injuring him. ISSUE. Does AOS had a duty to act reasonably to protect third parties from foreseeable risk of harm? HELD. Plaintiff’s case dismissed, foreseeability alone does not create a legal duty to Plaintiff.

30. Case 1.3 United States v. Park FACTS. John Park, CEO of Acme Markets, Inc., was informed of violations (rat infestation) by his company from the FDA in 1971. Park was told by his employees that the vice-president was taking care of the matter. In 1972, the FDA found evidence of the same violations. ISSUE: Can the CEO of a company be held vicariously and strictly criminally liable under the Federal Food, Drug and Cosmetic Act for the introduction of misbranded and adulterated articles into state commerce? HELD: Yes. CEO held vicariously and strictly criminally liable for acts of corporation because CEO had authority to maintain physical integrity of product.

31. EMPLOYER’S LIABILITY FOR RACIAL DISCRIMINATION BY EMPLOYEES • Denny’s Restaurants agreed to pay more than $54 million to settle two class action lawsuits filed by African American customers. It is the largest settlement under the federal public accommodation laws. • In 1997, Texaco agreed to pay more than $100 million to African American employees for racial discrimination in hiring and promotion.

32. EMPLOYEE DRUG TESTING AND E-MAIL MONITORING • Businesses can make and enforce rules regarding drug use or possession in the work place. • Monitoring employee’s e-mail may be legal, but the employer should always advise employees in advance of its intentions to do so.

33. WHITE-COLLAR CRIME The Federal Corporate Sentencing Guidelines provide a rating system, including aggravating and mitigating factors, to determine the appropriate sentence for companies convicted of federal crimes.

34. ENSURING ETHICAL CONDUCT • Ethical behavior is reinforced when: • Top management exemplifies the company’s values and takes a leadership role in programs to promote ethics. • The company creates an atmosphere of openness and trust in which employees feel comfortable in reporting violations. • Activities to enhance and reward ethics are part of every operational level of the company.