Who are the stakeholders anyone involved or that can influence the case Who in this case followed teleological ethics? Please explain. 3.Who in this case followed deontological ethics? Pleas

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Ethics and the Conduct of Business Eighth Edition

John R. Boatright Loyola University Chicago

Jeffery D. Smith Seattle University

Editor in Chief: Ashley Dodge Program Team Lead: Amber Mackey Managing Editor: Sutapa Mukherjee Program Manager: Carly Czech Sponsoring Editor: Bimbabati Sen Editorial Project Manager: Janet Wehner, Aptara Development Editor: Sue M. Park, Aptara Editorial Assistant: Casseia Lewis Director, Content Strategy and Development: Brita Nordin VP, Director of Marketing: Maggie Moylan Director of Field Marketing: Jonathan Cottrell Senior Marketing Coordinator: Susan Osterlitz Director, Project Management Services: Lisa Iarkowski Print Project Team Lead: Vamanan Namboodiri Project Manager: Pooja Aggarwal Operations Manager: Mary Fischer Operations Specialist: Carol Melville/Mary Ann Gloriande Associate Director of Design: Blair Brown Interior Design: Kathryn Foot Cover Art Director: Maria Lange Cover Design: Heather Marshall, Lumina Datamatics, Inc. Cover Art: 孤飞的鹤/Fotolia Digital Studio Team Lead: Peggy Bliss Digital Studio Project Manager: Liz Roden Hall Digital Studio Project Manager: Elissa Senra-Sargent Full-Service Project Management and Composition: Jogender Taneja, iEnergizer Aptara®, Ltd. Printer/Binder: CK Cover Printer: Phoenix

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Library of Congress Cataloging-in-Publication Data Names: Boatright, John Raymond, 1941– author. | Smith, Jeffery David, 1971– author. Title: Ethics and the conduct of business / John R. Boatright, Loyola University Chicago, Jeffery D. Smith, Seattle University. Description: Eighth edition. | Boston: Pearson, [2017] Identifiers: LCCN 2015050453| ISBN 9780134167657 | ISBN 0134167651 Subjects: LCSH: Business ethics. | Social responsibility of business. Classification: LCC HF5387 .B6 2017 | DDC 174/.4—dc23 LC record available at http://lccn.loc.gov/2015050453

ISBN-10: 0-13-416765-1 ISBN-13: 978-0-13-416765-7

10 9 8 7 6 5 4 3 2 1

iii

9 Health and Safety 182

10 Marketing and Advertising 208

11 Ethics in Finance 239

12 Corporate Social Responsibility 268

13 Governance, Accountability, and Compliance 297

14 International Business Ethics 325

References 357

Credits 380

Index 387

1 Ethics in the World of Business 1

2 Ethical Decision Making 21

3 Ethical Theories 46

4 Whistle-Blowing 65

5 Business Information and Conflict of Interest 82

6 Privacy 106

7 Discrimination and Affirmative Action 133

8 Employment Rights 156

Brief Contents

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v

3 Ethical Theories 46 Case: Big Brother at Procter & Gamble 46

3.1: Utilitarianism 48 3.1.1: Principle of Utility 48 3.1.2: Cost–Benefit Analysis 50

3.2: Kantian Ethics 52 3.2.1: Universalizability 52 3.2.2: Respect for Persons 53

3.3: Virtue Ethics 53 3.3.1: What Is Virtue? 54 3.3.2: Defending the Virtues 54 3.3.3: Virtue in Business 55

3.4: Rights 55 3.4.1: Meaning of Rights 55 3.4.2: Kinds of Rights 56

3.5: Justice 57 3.5.1: Nature and Value of Justice 57 3.5.2: Aristotle on Distributive Justice 58 3.5.3: Rawls’s Egalitarian Theory 59 3.5.4: Nozick’s Entitlement Theory 59

Conclusion: Ethical Theories 60

Case: Exporting Pollution

Case: Clean Hands in a Dirty Business

Case: Conflict of an Insurance Broker

Case: An Auditor’s Dilemma

4 Whistle-Blowing 65 Case: Time’s Persons of the Year 65

4.1: What Is Whistle-Blowing? 67

4.2: Justification of Whistle-Blowing 69 4.2.1: Loyal Agent Argument 69 4.2.2: Meaning of Loyalty 71 4.2.3: Conditions for Justification 71

4.3: Right to Blow the Whistle 73 4.3.1: Existing Legal Protection 73 4.3.2: Arguments against Protection 75 4.3.3: Arguments for Protection 75

4.4: Developing a Policy 76 4.4.1: Benefits and Dangers 76 4.4.2: Components of a Policy 76

Conclusion: Whistle-Blowing 77

Case: A Whistle-Blower Accepts a “Deal”

Case: A Whistle-Blower’s Quandary

Case: Who’s a Whistle-Blower?

Preface ix About the Authors xi

1 Ethics in the World of Business 1 Case: Merck and the Marketing of Vioxx 1

1.1: Business Decision Making 4 1.1.1: Nature of Business 5 1.1.2: Levels of Decision Making 6

1.2: Ethics, Economics, and Law 7 1.2.1: Ethics and Economics 7 1.2.2: Ethics and Law 9

1.3: Ethics and Management 11 1.3.1: Ethical Management and Management

of Ethics 11 1.3.2: Ethics and the Manager’s Role 12

1.4: Ethics in Organizations 13 1.4.1: Individual Decision Making 14 1.4.2: Organizational Decision Making 15

Conclusion: Ethics in the World of Business 16

Case: A Sticky Situation

Case: Beech-Nut’s Bogus Apple Juice

Case: Ethical Uncertainty at Bath Iron Works

Case: A Faked Résumé at Yahoo

2 Ethical Decision Making 21 Case: HP and the Smart Chip 21

2.1: Market Ethics 22 2.1.1: The Market System 22 2.1.2: Ethics in Markets 24 2.1.3: Breaches and Fraud 25 2.1.4: Wrongful Harm 26 2.1.5: Market Failure 27 2.1.6: Summary of Market Ethics 30

2.2: Roles, Relationships, and Firms 30 2.2.1: Agents and Principals 31 2.2.2: Fiduciaries and Professionals 31 2.2.3: Firms 32 2.2.4: Summary of Roles, Relationships,

and Firms 35

2.3: Ethical Reasoning 35 2.3.1: Philosophical Accounts 36 2.3.2: Psychological Accounts 37 2.3.3: Framework for Reasoning 38

Conclusion: Ethical Decision Making 41

Case: Lavish Pay at Harvard

Case: Broken Trust at Bankers Trust

Case: KPMG’s Tax Shelter Business

Contents

vi Contents

Case: Privacy of Text Messages

Case: Plugging Leaks at HP

Case: Information Handling at ChoicePoint

7 Discrimination and Affirmative Action 133

Case: Race Discrimination at Texaco 133

7.1: What Is Discrimination? 135 7.1.1: Civil Rights Act of 1964 135 7.1.2: Disparate Treatment/Impact 136 7.1.3: Forms of Discrimination 137

7.2: Sexual Harassment 138 7.2.1: Defining Sexual Harassment 138 7.2.2: Forms of Sexual Harassment 139 7.2.3: Further Issues 140

7.3: Objections to Discrimination 140

7.4: Preventing Discrimination 142 7.4.1: Analysis, Recruitment, and Assessment 142 7.4.2: Objective Tests 142 7.4.3: Subjective Evaluations 143 7.4.4: Sexual Harassment Programs 144

7.5: Affirmative Action 145 7.5.1: Affirmative Action Plans 146 7.5.2: Court Actions on Plans 146 7.5.3: Compensation Argument 147 7.5.4: Equality Arguments 149 7.5.5: Utilitarian Arguments 150 7.5.6: Problems with Affirmative Action 151

Conclusion: Discrimination and Affirmative Action 152

Case: Jacksonville Shipyards

Case: Sex Discrimination at Walmart

8 Employment Rights 156 Case: The Firing of Robert Greeley 156

8.1: Employment at Will 157 8.1.1: Property Rights Argument 158 8.1.2: Freedom of Contract Argument 159 8.1.3: Efficiency Argument 160 8.1.4: Exceptions 161

8.2: Right to Due Process 162 8.2.1: Support for Due Process 163 8.2.2: Law of Due Process 163

8.3: Freedom of Expression 164 8.3.1: Defining Freedom of Expression 165 8.3.2: Legal Protection for Expression 165 8.3.3: Arguments over Expression 166

8.4: Workplace Democracy 167 8.4.1: Participation and Democracy 167 8.4.2: Arguments for Democracy 168

8.5: Worker Compensation 169 8.5.1: Setting Wages 170

5 Business Information and Conflict of Interest 82

Case: Barbie vs. the Bratz Girls 82

5.1: Confidential Information 84 5.1.1: Duty of Confidentiality 85 5.1.2: Competitive Employment 86 5.1.3: Impact of Restrictions 87

5.2: Proprietary Information 88 5.2.1: Intellectual Property 88 5.2.2: Defining Trade Secrets 89 5.2.3: Property Rights Argument 90 5.2.4: Fair Competition Argument 91 5.2.5: Competitor Intelligence 92

5.3: Conflict of Interest 93 5.3.1: Defining Conflict of Interest 95 5.3.2: Some Relevant Distinctions 95 5.3.3: Kinds of Conflict of Interest 96 5.3.4: Managing Conflict of Interest 98

Conclusion: Business Information and Conflict of Interest 102

Case: The Aggressive Ad Agency

Case: Procter & Gamble Goes Dumpster Diving

Case: A Conflict-Laden Deal

6 Privacy 106 Case: Psychological Testing at Dayton Hudson 106

6.1: Challenges to Privacy 108 6.1.1: Privacy in the Workplace 108 6.1.2: Privacy in the Marketplace 109

6.2: Meaning and Value of Privacy 110 6.2.1: History of the Concept 111 6.2.2: Defining Privacy 111 6.2.3: Utilitarian Arguments 112 6.2.4: Kantian Arguments 113

6.3: Privacy Away from Work 114 6.3.1: Justifying Monitoring 114 6.3.2: Limits to Monitoring 115

6.4: Privacy of Employee Records 116 6.4.1: Ethical Issues with Records 117 6.4.2: Justifying a Purpose 117 6.4.3: Disclosure to Outsiders 118 6.4.4: Gathering Information 119 6.4.5: Accuracy, Completeness, and Access 120

6.5: Big Data Analytics 120 6.5.1: Data Collection 121 6.5.2: Ethical Issues with Big Data 122

6.6: Using the Internet 123 6.6.1: Information Collection 123 6.6.2: Ethical Issues with Internet Use 124 6.6.3: Protecting Privacy 125

Conclusion: Privacy 128

Contents vii

10.6: Irrational Persuasion 224 10.6.1: Threats to Free Choice 225 10.6.2: Dependence Effect 225

10.7: Impact of Advertising 226 10.7.1: Impact on Persons 226 10.7.2: Impact on Society 228

10.8: Internet Advertising 229 10.8.1: Online Placement 229 10.8.2: Ethics of Placement 230

10.9: Social Advertising 232 Conclusion: Marketing and Advertising 233

Case: McCormick’s Pricing Strategy

Case: Capital One’s Online Profiles

Case: Herbalife: A Pyramid Scheme?

11 Ethics in Finance 239 Case: Goldman Sachs and the Abacus Deal 239

11.1: Financial Services 241

11.1.1: Deception 242

11.1.2: Churning 243

11.1.3: Suitability 244

11.2: Financial Markets 245

11.2.1: Fairness in Markets 246

11.2.2: Derivatives and HFT 248

11.3: Insider Trading 251

11.3.1: Theories of Insider Trading 252

11.3.2: Evaluation of the Two Theories 253

11.3.3: Recent Insider Trading Cases 254

11.4: Hostile Takeovers 255

11.4.1: Market for Corporate Control 256

11.4.2: Takeover Tactics 257

11.4.3: Role of Directors 260 Conclusion: Ethics in Finance 261

Case: SCM Mutual Funds

Case: Merrill Lynch and the Nigerian Barge Deal

Case: Martha Stewart: Inside Trader?

Case: Oracle’s Hostile Bid for PeopleSoft

12 Corporate Social Responsibility 268 Case: Competing Visions at Malden Mills 268

12.1: The CSR Debate 270

12.1.1: Meaning of CSR 271

12.1.2: Examples of CSR 272

12.1.3: Related Concepts 273

12.2: Normative Case for CSR 274

12.2.1: Classical View 274

12.2.2: Friedman on CSR 276

12.3: Business Case for CSR 278

12.3.1: The Market for Virtue 278

12.3.2: Competitive Advantage 280

8.5.2: Market Outcomes 170 8.5.3: Minimum Wage 172

8.6: Executive Compensation 173 8.6.1: Criticism of CEO Pay 174 8.6.2: Justifying CEO Pay 174 8.6.3: Problems with Justification 175

Conclusion: Employment Rights 176

Case: Fired for Blogging at Google

Case: Worker Participation at Saturn

Case: Health Benefits at Walmart

9 Health and Safety 182 Case: The Ford–Firestone Brawl 182

9.1: Rights in the Workplace 184 9.1.1: Meaning of Health and Safety 184 9.1.2: Protecting Health and Safety 185

9.2: Hazardous Work 188 9.2.1: Justifying a Right to Refuse 189 9.2.2: Justifying a Right to Know 191

9.3: Reproductive Hazards 192 9.3.1: Scientific Background 193 9.3.2: Fetal Protection Policies 193 9.3.3: Charge of Discrimination 194 9.3.4: Defending against the Charge 195 9.3.5: Remaining Issues 195

9.4: Product Safety 196 9.4.1: Due Care Theory 196 9.4.2: Contractual Theory 198 9.4.3: Strict Liability Theory 200

Conclusion: Health and Safety 203

Case: Genetic Testing at Burlington Northern

Case: Johnson Controls, Inc.

Case: The Collapsing Crib

10 Marketing and Advertising 208 Case: Selling Hope 208

10.1: Marketing Ethics Framework 210

10.2: Sales Practices and Labeling 212 10.2.1: Deception and Manipulation 212 10.2.2: Information Disclosure 213 10.2.3: Labeling 214

10.3: Pricing and Distribution 215 10.3.1: Anticompetitive Pricing 215 10.3.2: Unfair Pricing 217 10.3.3: Distribution 218

10.4: Development and Research 219 10.4.1: Product Development 219 10.4.2: Marketing Research 220

10.5: Deceptive Advertising 222 10.5.1: Defining Deceptive Advertising 222 10.5.2: Applying the Definition 224

viii Contents

14 International Business Ethics 325 Case: Mattel’s Toy Woes 325

14.1: Different Standards 328 14.1.1: Relevant Differences 329 14.1.2: Variety of Outlooks 329 14.1.3: Right to Decide 330 14.1.4: Business Necessity 331

14.2: Guidelines for Multinationals 331 14.2.1: Rights 332 14.2.2: Welfare 333 14.2.3: Justice 333 14.2.4: International Codes 335

14.3: Wages and Working Conditions 336 14.3.1: Setting Wages 337 14.3.2: Working Conditions 339

14.4: Foreign Bribery 340 14.4.1: What Is Bribery? 341 14.4.2: What’s Wrong with Bribery? 342 14.4.3: Combating Bribery 343

14.5: Human Rights Abuses 346 14.5.1: Constructive Engagement 347 14.5.2: Liability for Abuses 348

Conclusion: International Business Ethics 349

Case: H. B. Fuller in Honduras

Case: Walmart in Mexico

Case: Google in China

References 357 Credits 380 Index 387

12.4: Implementing CSR 281 12.4.1: Program Selection and Design 281 12.4.2: Reporting and Accountability 283

12.5: Business with a Mission 285 12.5.1: Social Enterprise 286 12.5.2: Competing Successfully 287 12.5.3: Mission and Trust 289

Conclusion: Corporate Social Responsibility 290

Case: Starbucks and Fair Trade Coffee

Case: Timberland and Community Service

Case: Coca-Cola’s Water Use in India

13 Governance, Accountability, and Compliance 297

Case: Fraud at WorldCom 297

13.1: Corporate Governance 299 13.1.1: Shareholder Control 300 13.1.2: The Shareholders’ Contract 303 13.1.3: Shareholders and Stakeholders 305

13.2: Corporate Accountability 307 13.2.1: Financial Reporting 307 13.2.2: Executives and Directors 310 13.2.3: Criminal Prosecution 312

13.3: Corporate Compliance 313 13.3.1: Program Components 314 13.3.2: Program Benefits 314 13.3.3: Federal Sentencing Guidelines 315 13.3.4: Codes of Ethics 317

Conclusion: Governance, Accountability, and Compliance 319

Case: Sears Auto Centers

Case: Shareholder Rights at Cracker Barrel

Case: The Sale of Trans Union

ix

issues and the arguments for them are taken from a wide variety of sources, including economics and the law. The study of ethical issues in business is not confined to a sin- gle academic discipline or even to the academic world. The issues selected for discussion are widely debated by legis- lators, judges, government regulators, business leaders, journalists, and, indeed, virtually everyone with an inter- est in business.

An underlying assumption of this course is that ethi- cal theory is essential for a full understanding of the posi- tions and arguments offered on the main issues in business ethics. Fortunately, the amount of theory needed is rela- tively small, and much of the discussion of these issues can be understood apart from the theoretical foundation provided here. The text also contains a substantial amount of legal material, not only because the law addresses many ethical issues but also because management deci- sion making must take account of the relevant law. Many examples are used throughout the text in order to explain points and show the relevance of the discussion to real-life business practice.

New to the Edition Preparation of the eighth edition of Ethics and the Conduct of Business has provided an opportunity to incorporate new developments and to increase its value in the class- room. The major changes from the previous edition are as follows:

• Chapter 5 on business information has been expanded to provide greater coverage on confidential information and the duty of confidentiality.

• Chapter 6 on privacy has been expanded to include more on the protection of both employee and consumer privacy against intrusions, especially from advances in technology.

• The section on product safety has been moved from Chapter 10 on marketing and advertising to the cover- age of worker health and safety in Chapter 9. This change has allowed expanded treatment in Chapter 10 of emerging issues in marketing and advertising, espe- cially those related to the use of social media and data analysis, which have been facilitated by the Internet.

• Chapter 12 on corporate social responsibility includes a new section on the recent development of for-profit businesses, known as social enterprises, which operate with a mission to deliver vital social services.

The eighth edition of Ethics and the Conduct of Busi- ness has reached two significant milestones. The first achievement, which is obvious to anyone read-

ing these words, is the transition to digital media. Through Pearson’s online platform REVEL, this text offers not only a new mobile reading experience—on computers, tablets, and even smartphones—but also a new approach to learn- ing, with many interactive features, videos, quizzes, and other educational tools. REVEL creates a new frontier in education for both students and instructors. It is exciting for us, as authors, to be pioneer participants in this promis- ing and innovative endeavor.

Users of previous editions will also note the appear- ance of a coauthor, Jeffery D. Smith. His collaboration in the eighth edition not only brings a fresh perspective to what is now a joint venture but also prepares for the future of this classic text, which first appeared more than 20 years ago. Under Jeffery’s guidance, Ethics and the Conduct of Business will hopefully continue to remain current and rel- evant through many new editions.

The eight editions of Ethics and the Conduct of Business have followed the development of the field of business ethics, which has grown in recent decades into an interdis- ciplinary area of study that has found a secure niche in both liberal arts and business education. Credit for this development belongs to many individuals—both philoso- phers and business scholars—who have succeeded in relating ethical theory to the various problems of ethics that arise in business. They have shown not only that busi- ness is a fruitful subject for philosophical exploration but also that future managers in the world of business can ben- efit from the results.

Ethics and the Conduct of Business, eighth edition, is a comprehensive and up-to-date discussion of the most prominent issues in the field of business ethics and the major positions and arguments on these issues. It is intended to be used as a text in business ethics courses on either the undergraduate or M.B.A. level. The substantial number of cases included provides ample opportunity for a case-study approach or a combined lecture–discussion format. There has been no attempt to develop a distinctive ethical system or to argue for specific conclusions. The field of business ethics is marked by reasonable disagree- ment that should be reflected in any good text for a course.

The focus of Ethics and the Conduct of Business is pri- marily on ethical issues that corporate decision makers face in developing policies about employees, customers, investors, and the general public. The positions on these

Preface

x Preface

have benefited from the support of the Banta Center for Business, Ethics and Society and my colleagues at the Uni- versity of Redlands. For everyone there I am grateful. My thanks also go to DePauw University’s Prindle Institute for Ethics for hosting me as the Nancy Schaenen Visiting Scholar while portions of the eighth edition were written. And I also owe so much to my lovely wife, Rita, who pro- vides support when I need it most and continues to keep me grounded.

John R. Boatright

Jeffery D. Smith

I, John Boatright, would like to express my gratitude for permission to use material from the following sources:

John R. Boatright, Ethics in Finance, 2nd ed. (Malden, MA: Blackwell Publishers, 2008), copyright © 1999, 2008 by John R. Boatright; Ethics in Finance, 3rd ed. (Malden, MA: Wiley Blackwell, 2014), copyright © 2014 by John Wiley & Sons, by permission of the publisher.

John R. Boatright, “Financial Services,” in Michael Davis and Andrew Stark, eds., Conflict of Interest in the Professions (New York: Oxford University Press, 1999), copyright © 1999 by John R. Boatright.

John R. Boatright, “Corporate Governance,” Ency- clopedia of Applied Ethics, 2nd ed., Ruth Chadwick, ed. (Amsterdam: Elsevier, 2011), by permission of the publisher.

John R. Boatright, “The Shareholder Model of Corporate Governance,” in Robert W. Kolb, ed., Ency- clopedia of Business Ethics and Society (Thousand Oaks, CA: Sage Publications, 2008), by permission of the publisher.

• The Chapter 13 section on corporate governance has been completely rewritten for greater clarity and coherence.

• The eighth edition contains 58 short cases, including 12 new ones on such subjects as a falsified résumé at Yahoo, conflict of interest at Goldman Sachs, a firing at Google for blogging, profiling of Internet visitors by a major bank, variable pricing strategies in grocery stores, Herbalife’s unusual multilevel marketing scheme, Coca-Cola’s water use in India, and bribery by Walmart executives in Mexico.

Acknowledgments I, John Boatright, am grateful for the support of Loyola University Chicago and especially the Quinlan School of Business. I have benefited from the resources of the Raymond C. Baumhart, S.J., Chair in Business Ethics, which was created to honor a former president of Loyola University Chicago, who was also a pioneer in the field of business ethics. To Ray Baumhart I owe a special debt of gratitude. I am grateful as well to Jeffery Smith for graciously accept- ing my offer to become a coauthor of this edition and my ultimate successor in the preparation of future editions. Finally, my deepest expression of appreciation goes to my wife, Claudia, whose affection, patience, and support have been essential for the preparation of the eighth edition, as they were for the ones previous.

It goes without saying that I, Jeffery Smith, am excited to work with John Boatright on this important project and appreciate his generous offer to continue our collaboration on future editions. I hope to maintain the clarity, depth, and even-handedness that have made earlier editions so valuable to students and instructors. For over a decade, I

xi

Jeffery D. Smith is the Boeing Frank Shrontz Chair of Pro- fessional Ethics and Professor of Management in the Albers School of Business and Economics at Seattle Uni- versity, teaching ethics to management, accounting and finance students. He currently serves on the executive board of the Society for Business Ethics and the editorial board of the international journal of the Society, Business Ethics Quarterly. He is the editor of Normative Theory and Business Ethics (2008) and has published in a variety of business and philosophy journals. He received his Ph.D. from the University of Minnesota.

John R. Boatright is the Raymond C. Baumhart, S.J., Pro- fessor of Business Ethics in the Quinlan School of Business at Loyola University Chicago. He has served as the Execu- tive Director of the Society for Business Ethics, and is a past president of the Society. He was recognized by the Society in 2012 for a “Career of Outstanding Service to the Field of Business Ethics.” He is the author of the book Eth- ics in Finance, and has edited Finance Ethics: Critical Issues in Theory and Practice. He serves on the editorial boards of Business Ethics Quarterly, Journal of Business Ethics, and Business and Society Review. He received his Ph.D. in phi- losophy from the University of Chicago.

About the Authors

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1

Learning Objectives

1.1 Identify ethical issues created by diverse business situations and relationships and the level of decision making required to address them

1.2 Recognize the role of ethics in the conduct of business, with respect to economic principles and the law

1.3 Distinguish between ethical management and the management of ethics, and each of the three main roles of a manager

1.4 Analyze how ethical business conduct is challenged by decision making on individual and organizational levels

Chapter 1

Ethics in the World of Business

Case: Merck and the Marketing of Vioxx On September 30, 2004, Merck & Co. announced the with-

drawal of Vioxx, its h

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