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Chapter 40:
Ethics and Business
Decision Making
©2001 West Legal Studies in Business. All Rights Reserved.
§1: Nature of Business Ethics
• Ethics is the study of right and wrong
behavior in the world of business; the
fairness, rightness or justness of a course of
conduct.
• In business, ethical decisions are the
application of moral and ethical principles
to the marketplace and workplace.
©2001 West Legal Studies in Business. All Rights Reserved.
Defining Business Ethics
• Morals are universal guidelines or
“revealed” truths. Ethics is a reasoned set of
principals of conduct derived from morals.
• Ethical Reasoning - the process by which
an individual links her moral and ethical
convictions to the choice of actions to be
taken in a particular situation.
©2001 West Legal Studies in Business. All Rights Reserved.
Conflicting Duties
• Directors and Officers owe a complex set of
ethical duties to the company, shareholders,
customers, community, employees, and
suppliers.
• When these duties conflict, ethical
dilemmas are created.
• Case 40.1: Varity v. Howe (1996).
©2001 West Legal Studies in Business. All Rights Reserved.
Internet and Ethics
• A company’s actions come under quick
scrutiny with the power of email and the
internet.
• When a corporation embarks on a course of
business deemed “unethical” by a special
interest group, the news will spread around
the world in a matter of minutes.
• 1 in 9 investors have “socially responsible”
investments. Gallup Poll.com
©2001 West Legal Studies in Business. All Rights Reserved.
§ 2: Approaches to
Ethical Reasoning
• Duty Based Ethics - derived from religious
and philosophical principles.
– Religious Ethical Standards.
– Kantian Ethics.
– Rights Principles.
• Outcome-Based Ethics - seek to ensure a
given outcome.
– Utilitarianism.
©2001 West Legal Studies in Business. All Rights Reserved.
Religious Ethical Standards
• The rightness or wrongness of an action is
usually judged according to its conformity
to an absolute rule that commands a
particular form of behavior.
• The motive of the actor is irrelevant in
judging the rightness or the wrongness of
the action.
• These rules often involve an element of
compassion.
©2001 West Legal Studies in Business. All Rights Reserved.
Kantian Ethics
• Premised on the belief that general guiding
principles for moral behavior can be derived
from human nature.
• The categorical imperative is a central
postulate of Kantian ethics.
– The rightness or wrongness of an action is
judged by estimating the consequences that
would follow if everyone in a society
performed the act under consideration.
©2001 West Legal Studies in Business. All Rights Reserved.
Rights Principle
• This principle derives from the belief that
every duty gives rise to a corresponding
right.
• The belief in fundamental rights is a deeply
embedded feature of Western culture.
• The ethicality of an action is judged by how
the consequences of the action will affect
the rights of others.
©2001 West Legal Studies in Business. All Rights Reserved.
Utilitarianism
• An action is ethical based on whether it
produces the greatest good for the greatest
number of people upon which it has an
effect.
• A cost-benefit analysis must be performed
to determine the effects of competing
alternatives on the persons affected.
• The best alternative is the one that produces
the greatest good for the greatest number.
©2001 West Legal Studies in Business. All Rights Reserved.
§3: Ethical Decision Making
• A sound ethical decision-making model will
include consideration of:
– The legality of the contemplated action.
– The ethicality of the contemplated action, as
determined by reference to the relevant code of
ethics, established ethical priorities, and public
opinion.
– Case 40.2: NY State Society of CPA’s v Eric
Louis Associates (1999).
©2001 West Legal Studies in Business. All Rights Reserved.
Corporate Compliance
• A number of contexts, within the employeremployee relationship, are fraught with
ethical considerations, such as:
– Having a system in place to detect, prevent,
eliminate, and punish behavior of a harassing
nature toward employees.
– Avoiding wrongful discharge, either actual or
constructive.
– Adhering to ethical principles during corporate
restructuring and downsizing.
©2001 West Legal Studies in Business. All Rights Reserved.
Codes Of Ethics
• Adopted by business entities as a way to:
– Provide standard guidance to executives and
managers.
– Take into account the duties owed by the
business to its various stakeholders.
©2001 West Legal Studies in Business. All Rights Reserved.
Ethical “Gray Areas”
• Sometimes whether an action is legal or
ethical depends on how a court or
administrative agency interprets a statute.
What if different courts disagree?
• Case 40.3: Pavlik v. Lane Ltd. (1998).
• If managers, in good faith, believe they are
complying with a statute and later are ruled
against, was their action unethical?
©2001 West Legal Studies in Business. All Rights Reserved.
§4: Maximum vs.
Optimum Profits
• Ethical priorities of the executive’s
institution will have an effect on whether
she chooses maximum profits versus
“optimum profits.”
• The sacrifice of some profitability resulting
from adherence to an institution’s ethical
and legal priorities produces what business
ethicists refer to as optimum profits.
©2001 West Legal Studies in Business. All Rights Reserved.
§5: The Ever-Changing
Ethical Landscape
• What causes a societies’ ethics to change?
• Seventy-five years ago a corporation’s
ethical duty was only to its shareholders and
maximize profits. Only two questions were
asked: Is it legal? Is it profitable?
• The globalization of business impacts US
companies, suppliers, wages of foreign
workers, consumers.
©2001 West Legal Studies in Business. All Rights Reserved.
Focus on Ethics
• Fiduciary Duties:
– Duty of Loyalty.
– Duty of Care.
– Departing Partners.
• Insider Trading.
• Minority Shareholders.
• Franchise Relationships.
©2001 West Legal Studies in Business. All Rights Reserved.
Law on the Web
• Ethics at the Corporate Governance Website.
• Ethics at DePaul University.
• The U.N. Global Compact on Ethics and
Human Rights.
• Legal Research Exercises on the Web.
©2001 West Legal Studies in Business. All Rights Reserved.