Management Question

‫المملكة العربية السعودية‬
‫وزارة التعليم‬
‫الجامعة السعودية اإللكترونية‬

Kingdom of Saudi Arabia
Ministry of Education
Saudi Electronic University

College of Administrative and Financial Sciences

Assignment 1
Business Ethics and Organization Social Responsibility (MGT
422)
Due Date: 04/10/2025 @ 23:59

Course Name: Business Ethics and
Organization Social Responsibility
Course Code: MGT 422

Student’s Name:

Semester: First

CRN:

Student’s ID Number:

Academic Year: 2025/26th

For Instructor’s Use only
Instructor’s Name:
Students’ Grade:

/10

Level of Marks: High/Middle/Low

General Instructions – PLEASE READ THEM CAREFULLY
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•
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•
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Restricted – ‫مقيد‬

The Assignment must be submitted on Blackboard (WORD format only) via allocated
folder.
Assignments submitted through email will not be accepted.
Students are advised to make their work clear and well presented, marks may be reduced
for poor presentation. This includes filling your information on the cover page.
Students must mention question number clearly in their answer.
Late submission will NOT be accepted.
Avoid plagiarism, the work should be in your own words, copying from students or other
resources without proper referencing will result in ZERO marks. No exceptions.
All answered must be typed using Times New Roman (size 12, double-spaced) font. No
pictures containing text will be accepted and will be considered plagiarism).
Submissions without this cover page will NOT be accepted.

Learning Outcomes:
No

Course Learning Outcomes (CLOs)

CLO-1

Define a solid understanding of prominent theories of ethics and morality

CLO-2

Develop awareness and understanding of cultural and national differences related to ethics

CLO-3

Justify their rationale for decisions related to acceptable and unacceptable business conduct
based on the business ethics principles.
Illustrate the role of social responsibility in the functional areas and strategic processes of
business and a comprehensive framework for analyzing and resolving ethical issues and
dilemmas in an organization.
Work with others effectively as a team member in business ethics research projects or case
studies
Write coherent project about a case study or an actual research about ethics

CLO-4
CLO-5
CLO-6

Case Study
Assignment: Ethical Dilemma in Practice (Chapter1- 4)
Scenario
You are a mid-level manager at GlobalTech, a multinational firm that manufactures smart home devices.
Recently, the company has been under pressure to deliver new products faster to compete with rivals.
•

Background: Last year, GlobalTech faced public criticism after a data privacy breach, which
hurt its reputation and trust with consumers.

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Current Issue: A new product, “SmartLife Hub,” is set for release. During testing, your
engineering team discovers a flaw: under certain conditions, the device may record conversations
without user consent. Fixing the issue will delay launch by three months and cost millions.

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Organizational Pressure: Your CEO emphasizes “beating the competition” and privately
suggests you ignore the issue for now, promising a software patch after launch.

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Stakeholders: Customers, employees, investors, regulators, and your own career are all affected.

Short answers:
Answers:
1. Is this problem only a legal issue, or also an ethical one? How does trust and reputation play into
your decision? [3 Marks]
2. Apply two prescriptive approaches (e.g., utilitarianism vs. deontology) to decide whether to
launch the product now or delay. Explain how each approach leads to a different outcome. [4
Marks]
3. How might individual differences (e.g., locus of control, cognitive moral development, or moral
disengagement) influence how managers in your team perceive this issue? Give examples of
different responses. [3 Marks]

Restricted – ‫مقيد‬

Answers:

Restricted – ‫مقيد‬

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CHAPTER

1

INTRODUCING STRAIGHT
TALK ABOUT MANAGING
BUSINESS ETHICS: WHERE
WE’RE GOING AND WHY

INTRODUCTION
Back in 1993, when we sat down to write the first edition of this book, people wondered if business ethics was just a fad. At that point, companies were just beginning
to introduce ethics into orientations and management training programs. In academia,
business ethics was just beginning to gain traction as a subject for serious academic
study and some business schools were going so far as to require a business ethics
course to graduate.
Back then there was still the feeling among many experts that business ethics—
like time management, quality circles, and other management buzzwords of the
day—would soon become a footnote in texts that described business fads of the late
twentieth century. Despite multiple waves of scandal over the years, these have often
been portrayed as temporary blips. For example, one prominent business writer for
Fortune Magazine wrote an article in 2007 entitled ‘‘Business is Back!’’ Here’s a
choice excerpt . . . ‘‘It must be said: The shaming is over. The 51/2 year humiliation
of American business following the tech bubble’s burst and the Lay-Skilling-FastowEbbers-Kozlowski-Scrushy perp walks that will forever define an era has run its
course. After the pounding and the ridicule, penance has finally been done. No longer
despised by the public, increasingly speaking up and taking stands, beloved again by
investors, chastened and much changed—business is back.’’1 Could he have been
more wrong? Business managed to outdo itself on the shame index yet again just
about a year later. We’ve seen these ethical debacles occur regularly for the past
25 years. As a result, we’re convinced that business ethics is far from a fad. It’s an
ongoing phenomenon that must be better understood and managed and for which
business professionals must be better prepared.
We tell our students that serious ethical scandals often result from multiple parties
contributing in their own small or large ways to the creation of a catastrophe. As you’ll

2

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read later on in this book, Enron’s collapse in 2001 was not just the failure of Enron
executives and employees, but also the failure of Enron’s auditors, the bankers who
loaned the company money, and the lawyers who never blew the whistle on Enron’s
shenanigans. However, no scandal of recent years—not even Enron—matches the
financial industry debacle in 2008. The crisis was unparalleled in its scope and has
fueled public outrage like no other business disaster in our lifetime. The aftermath has
people around the world angry and mistrustful of companies, governments, regulators,
rating agencies, and the people who work in them. If there was ever a crisis of trust and
confidence, this is it. It is also a textbook-perfect example of how numerous people’s
actions (and inactions) can conspire to spawn an almost unimaginable calamity.
Recent business history has proven beyond any doubt that divorcing business
from ethics and values runs huge risks. Rushworth Kidder,2 the highly regarded
ethics writer and thinker, recently wrote about the financial debacle and the resulting
public anger. He eloquently described how free marketers cite Adam Smith’s Wealth
of Nations to justify a breed of capitalism that abhors regulation and focuses on shortterm profits over long-term stewardship. Kidder wisely noted that 17 years before his
more famous book, Smith wrote another one entitled The Theory of Moral Sentiments. Smith’s first book deserves more attention because he always presumed that
the messages from these two books would go hand in hand. Smith’s ‘‘moral sentiments’’ work rests on the assumption that human beings are empathetic; they care
about others, and they derive the most joy from human love and friendship. His book
opened with the following statement: ‘‘How selfish soever man may be supposed,
there are evidently some principles in his nature, which interest him in the fortune of
others. . . . ’’3 Smith believed that a good life derives from the expression of ‘‘beneficence,’’ not from material wealth. He acknowledged that self-love (which he also
acknowledged) can spur the individual to better his own condition by besting competitors. But he argued that this must be done in a just manner and in the spirit of fair
play as judged by an informed, ethical, and impartial spectator. We care what others
think of us because we are first and foremost social beings. But we also are moral
beings who want to do the right thing because it is the right thing to do (not just to
win the praise of others). According to Smith, virtuous persons balance prudence
(mature self-love), strict justice, and benevolence, and ideal societies are comprised
of such persons. Finally, a flourishing and happy society is built upon a foundation of
justice and rules of conduct that create social order. Smith was confident that humankind would progress toward this positive ethical state; he called on leaders to avoid
the arrogance of power and, instead, to be virtuous statesmen. Kidder’s point was that
capitalism will succeed only when firmly tethered to a moral base, and he reminds us
that Adam Smith—that hero of free marketers—knew that better than anyone.
We completely agree. We began this book almost 20 years ago with the firm
belief that business isn’t just ‘‘better’’ when companies and businesspeople are ethical, but rather that good ethics is absolutely essential for effective business practice.
This is not just empty rhetoric. Work is essential to life, and most people work for a
business of some kind. How we work and the standards we uphold while we are
working affect much more than just commerce. Our business behavior also affects

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SECTION I INTRODUCTION

our personal and company reputations, politics, society at large, and even national
reputation. For example, the 2008 financial crisis, while global in scope, had its roots
in the United States, and the nation’s reputation has suffered because of the behavior
of individuals and companies. Similarly, China’s reputation has suffered because
of contaminants found in Chinese exports such as infant formula, drywall (used in
construction), and children’s toys. So, corporate misbehavior does not happen in a
vacuum, and it’s not just corporate reputations that suffer as a result. These scandals
cast long shadows, and they often affect entire industries and countries. In this complex and increasingly transparent world, where reputation influences everything from
who wants to hire you or trade with you to who buys your products to who finances
your debt—and much more—unethical behavior in business is a very big deal
indeed. So, let’s take a closer look at the elephant in the room: the near collapse of
the financial markets in 2008 and what it has to do with business ethics.

THE FINANCIAL DISASTER OF 2008
The implosion of the financial markets in 2008 was largely not the result of illegal
behavior. For the most part, the activities that brought down the U.S. economy and
others around the world were not against the law, at least not yet (government regulators and the legal system often play catch-up after ethical debacles in business).
Many of those activities, however, were unethical in that they ultimately produced
great harm and were contrary to a number of ethical principles such as responsibility,
transparency, and fairness. Let’s start with some of the factors that laid the groundwork for the disaster in the United States.

Borrowing Was Cheap
First, borrowing money became really cheap. In 2000, stocks in high-technology companies had soared to unsustainable heights and that bubble finally burst. To soften the
effects on the U.S. financial markets, Alan Greenspan, who headed the Federal
Reserve at that time, lowered the Fed Funds rate (the rate at which banks borrow
money from the Federal Reserve) to almost zero. That move, seemingly innocent at
the time, injected huge amounts of money into the U.S. financial system. It made the
cost of borrowing so low that it fueled a glut of consumer borrowing. Suddenly, it was
amazingly cheap to buy a new car, a wide-screen television, a backyard pool, a larger
home, a second home, and all sorts of designer goodies. There was even encouragement to indulge. Following the terrorist attacks in September 2001, President George
W. Bush told people that if they wanted to help the economy they should go shopping. And people did. Household debt levels rose to $13.9 billion in 2008, almost
double what households owed in 2000, and savings dipped into negative territory.
(Since the financial crisis, household savings have risen to 6.9 percent.4) Responsible
borrowers should have thought about what they could afford rather than what bankers
would lend to them. And responsible lenders should have established that borrowers
could actually afford to pay back the loans before lending them money.

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Real Estate Became the Investment of Choice
Of course, people also want to invest in something safe, and what could be safer than
real estate? There had been relatively few instances of real estate values declining,
and when they did the declines were generally shallow and short-lived. A point of
pride in the United States was the high percentage of Americans who owned their
own homes. Investing in a home traditionally had been a very safe investment and
one that was slow to appreciate in value. But suddenly in the early 2000s, real estate
investing became a real moneymaker. With a backdrop of historically low interest
rates, real estate became such a popular way to invest that demand soon outstripped
supply and prices soared. The value of homes skyrocketed—homes that were selling
for $300,000 in one year sold for $450,000 the next. Prices rose so fast that speculation grew tremendously. People bought houses with almost no down payment,
remodeled them or waited a few months, and then resold the houses for a quick profit.
A number of popular television programs showed viewers how to ‘‘flip’’ real estate
properties for profit.
Since the cost of borrowing was so low and home equity had grown so quickly,
many consumers borrowed on the equity in their homes and purchased additional real
estate or a new car or financed a luxury vacation. For example, suppose someone
purchased a house for $500,000 in 2003. By 2005, the home might have been worth
$800,000. The home owner refinanced the mortgage—borrowing as much as the
entire current worth of the house (because its value could only go up, right?), which
resulted in a $300,000 cash infusion for the home owner. This practice was very
popular, and it laid the groundwork for a huge disaster when the housing values fell
off a cliff in 2008 and 2009. Imagine the home owner who refinanced the home
just described. Imagine that he took the $300,000 and purchased a summer home and
a sports car and paid for his children’s college educations. Suddenly, home values
plummeted and his house lost 30 percent of its value, which was common in markets such as California, Florida, Nevada, or Arizona, where the real estate bubble
was particularly inflated. After the real estate bubble burst, his house was worth
$560,000. Now suppose he loses his job and needs to sell his house because he can’t
afford the mortgage payments. He can’t get $800,000 for his home, which is what he
owes on his mortgage. His only choice is to work with the mortgage holder (probably
a bank) to refinance (unlikely) or declare bankruptcy and walk away from the house.
This is what a lot of home owners have done, and it is one of the factors at the heart
of the current financial crisis. Lots of folks were in on this bubble mentality, getting
what they could in the short term and not thinking very much about the likelihood (or
inevitability) that the bubble would burst.

Mortgage Originators Peddled ‘‘Liar Loans’’
In the early 2000s, as housing investments increased in popularity, more and more
people got involved. Congress urged lenders Freddie Mac and Fannie Mae to expand
home ownership to lower-income Americans. Mortgage lenders began to rethink the

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SECTION I INTRODUCTION

old rules of financing home ownership. As recently as the late 1990s, potential home
owners not only had to provide solid proof of employment and income to qualify
for a mortgage, but they also had to make a cash down payment of between 5 and
20 percent of the estimated value of the home. But real estate was so hot and returns
on investment were growing so quickly that mortgage lenders decided to loosen those
‘‘old-fashioned’’ credit restrictions. In the early 2000s, the rules for obtaining a mortgage became way less restrictive. Suddenly, because real estate values were rising so
quickly, borrowers didn’t have to put any money down on a house. They could borrow the entire estimated worth of the house; this is known as 100-percent financing.
Also, borrowers no longer needed to provide proof of employment or income. These
were popularly called ‘‘no doc’’ (no documentation) or ‘‘liar loans’’ because banks
weren’t bothering to verify the ‘‘truth’’ of what borrowers were claiming on their
mortgage applications.

Banks Securitized the Poison and Spread It Around
At about the same time liar loans were becoming popular, another new practice was
introduced to mortgage markets. Investors in developing countries were looking to
the United States and its seemingly ‘‘safe’’ markets for investment opportunities.
Cash poured into the country from abroad—especially from countries like China
and Russia, which were awash in cash from manufacturing and oil respectively.
Wall Street bankers developed new products to provide investment vehicles for
this new cash. One new product involved the securitization of mortgages. (Note:
structured finance began in 1984, when a large number of GMAC auto receivables
were bundled into a single security by First Boston Corporation, now part of Credit
Suisse.) Here’s how it worked: Instead of your bank keeping your mortgage until it
matured, as had traditionally been the case, your bank would sell your mortgage—
usually to a larger bank that would then combine your mortgage with many others
(reducing the bank’s incentive to be sure you would pay it back). Then the bankers
sold these mortgage-backed securities to investors, which seemed like a great idea
at the time. Real estate was traditionally safe, and ‘‘slicing and dicing’’ mortgages
divided the risk into small pieces with different credit ratings and spread the risk
around. Of course, the reverse was also true, as the bankers learned to their horror.
This method of dividing mortgages into little pieces and spreading them around
could also spread the contagion of poor risk. However, starting in 2002 and for
several years thereafter, people couldn’t imagine housing values falling. So much
money poured into the system, and the demand for these mortgage-backed security
products was so great, that bankers demanded more and more mortgages from
mortgage originators. That situation encouraged the traditional barriers to getting a
home mortgage to fall even farther. These investment vehicles were also based
upon extremely complex mathematical formulas (and old numbers) that everyone
took on faith and few attempted to understand. It looks like more people should
have followed Warren Buffett’s sage advice not to invest in anything you don’t
comprehend! Add to that toxic mix the relatively new idea of credit-default swaps

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(CDS). These complex financial instruments were created to mitigate the risk financial firms took when peddling products like securitized mortgages. CDS are insurance contracts that protect the holder against an event of default on the part of a
debtor. One need not own the loan or debt instrument to own the protection, and
the amount of capital tied up in trading CDS is very small compared to trading
other debt instruments. That is a very significant part in the increase in popularity
at sell-side and buy-side trading desks. The big insurance company, AIG, was a
huge player in this market, and so were the large banks. The firms that were counterparties to CDS never stepped back from the trading frenzy to imagine what
would happen if both the structured finance market and the real estate bubble burst
(as all bubbles eventually do) at the same time. Both underwriters and investors
would be left holding the bag when the music stopped playing—and the U.S. taxpayer has had to bail out most of the financially-stressed firms to save the entire
financial system from collapse. Please note that all of this happened in a part of the
market that was virtually unregulated.

Those Who Were Supposed to Protect Us Didn’t
One protection against financial calamity was thought to be the rating agencies such
as Standard and Poor’s and Moody’s. They rate the safety or soundness of securities,
including those securitized mortgage products. A credit opinion is defined as one
which rates the timeliness and ultimate repayment of principal and interest. But, like
everyone else, the rating agencies say they didn’t foresee a decline in housing prices;
and consequently, they rated the mortgage securities as being AAA—the highest
rating possible, which meant that the rating agencies considered these securities to be
highly safe. The agencies are the subject of much criticism for their role in the crisis.
If they had done a better job analyzing the risk (their responsibility), much of the
crisis might have been avoided. But note that these rating agencies are hired and paid
by the companies whose products they rate, thus causing a conflict of interest that
many believe biased their ratings in a positive direction. So, people who thought they
were making responsible investments because they checked the ratings were misled.
Another protection that failed was the network of risk managers and boards of
directors of the financial community. How is it that one 400-person business that was
part of the formerly successful insurance behemoth, AIG, could invest in such a way
that it brought the world’s largest insurance company to its knees? The risk was
underestimated all around by those professionals charged with anticipating such
problems and by the board of directors that didn’t see the problem coming. The U.S.
government (actually taxpayers) ended up bailing out AIG to the tune of $170 billion.
The risk managers and boards of other financial firms such as Citigroup, Merrill
Lynch, Lehman Brothers, Bear Stearns, and Wachovia were similarly blind.
On Wall Street, there were other contributing factors. First, bank CEOs and other
executives were paid huge salaries to keep the price of their firms’ stocks at high
levels. If their institutions lost money, their personal payouts would shrink. So, bank
executives were paid handsomely to bolster short-term profits. The Wall Street

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SECTION I INTRODUCTION

traders were similarly compensated—they were paid multimillion-dollar bonuses for
taking outsized risks in the market. What seemed to matter most were the short-term
profits of the firm and the short-term compensation of those making risky decisions.
The traders took risks, the bets were at least temporarily successful, and the bankers
walked off with multimillion-dollar bonuses. It didn’t matter that the risk taking was
foolish and completely irresponsible in the long run. The bonus had already been
paid. Consequently, a short-term mentality took firm root among the nation’s bankers, CEOs, and boards of directors.
Finally, we can’t examine the financial crisis without questioning the role of
regulatory agencies and legislators. For example, for a decade, investor Harry
Markopolos tried on numerous occasions to spur the Securities and Exchange
Commission to investigate Bernard L. Madoff. The SEC never did uncover the
largest Ponzi scheme in the history of finance. The $65-billion-dollar swindle
unraveled only when Madoff admitted the fraud to his sons, who alerted the SEC
and the U.S. attorney’s office in New York in December 2008. Others who are
culpable in the financial crisis are members of the U.S. Congress, who deregulated the financial industry, the source of some of their largest campaign contributions. Among other things, they repealed the Glass-Steagall Act, which had been
passed after the U.S. stock market crash in 1929 to protect commercial banking
customers from the aggression and extreme risk taking of investment bank
cultures. The act created separate institutions for commercial and investment
banks, and they stayed separate until the merger of Citicorp and Travelers to
form Citigroup in 1998. The two companies petitioned Congress to eliminate
Glass-Steagall, claiming that it was an old, restrictive law and that today’s markets were too modern and sophisticated to need such protection. And Congress
listened. Those 1930s congressmen knew that if two banking cultures tried to
exist in the same company—the staid, conservative culture of commercial banking (our savings and checking accounts) and the razzle-dazzle, high-risk culture
of investment banking—the ‘‘eat what you kill’’ investment bank culture would
win out. Some said that staid old commercial banks turned into ‘‘casinos.’’ But,
interestingly, casinos are highly regulated and are required to keep funds on hand
to pay winners. In the coming months, we expect to learn more about the behavior that led to this crisis. As we noted earlier, much if not most of it was probably
legal because of the lack of regulation in the mortgage and investment banking
industries. But look at the outcome! If only ethical antennae had been more sensitive, more people might have questioned products they didn’t understand, or spoken out or refused to participate in practices that were clearly questionable. As
just one tiny example, could anyone have thought it was ethical to sell a product
they called a liar loan, knowing that the customer surely would be unable to repay
(even if it was legal to do so)?
You’ll read much more about the crisis and its relationship to ethics in subsequent chapters. Right now, let’s delve into the cynicism this and previous scandals
have created and then try to move beyond it so that you can do things differently in
the future.

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MOVING BEYOND CYNICISM
After multiple waves of business scandal, some cynicism (a general distrust) about
business and its role in society is probably healthy. But cynicism about business has
truly become an epidemic in the United States. To be fair, we should note that
although the financial industry screwed up royally, at the same time most other mainstream American companies were ‘‘running their companies with strong balance
sheets and sensible business models.’’5 Most companies were responsible, profitable,
and prudent. Because they had serious cash reserves, many of them have actually
managed to weather the recent crisis reasonably well. But the attention has not
been on these responsible companies. It’s been on the financial sector and its
irresponsibility. How bad is the cynicism? According to the 2009 Edelman Trust
Barometer6—a survey of almost 4,500 college-educated people around the world—
it’s very bad, especially in the United States. (Edelman is the world’s largest independent public relations firm with 53 offices around the world. Its business is helping
companies build and maintain reputation.) Edelman’s study shows that consumer
trust in corporations has declined precipitously. More than half of the respondents
stated that they trust business less than they did one year ago (in 2008). The decrease
is particularly acute in the United States, where citizens have traditionally had higher
opinions of business than they do in Europe. The only part of the world where trust
levels have not declined is in the developing world—the so-called BRIC nations
(Brazil, Russia, India, China). The study also outlines the business case for trust.
Over a one-year period, 91 percent of consumers stated that they purchased a product
of service from a company they trust. Conversely, 77 percent of consumers refused to
purchase a product or service from a company that they mistrusted. This study
suggests that corporate reputation affects consumer buying patterns, and companies
risk harming their bottom line when they do not act to protect their good name.
But, consistent with our idea that business ethics is not a fad, neither is public
cynicism about business ethics new. We have written about it in every edition of our
book (since 1995). Surely, the factor that has contributed the most to cynicism in
recent years is the highly visible behavior of some of the nation’s leading corporations and executives, whose activities have garnered so much space in the business
press and on the evening news. How do you watch hour after hour of such reporting
and not walk away jaded? In the last few years, all you had to do was read about or
watch the news to feel cynical, and business school students are no exception. We
also note that business is not alone in its scandalous behavior. In recent years, we’ve
learned about government employees who stole or misused funds, academics who
falsified their research results, ministers who stole from their congregations, priests
who abused children, and athletes who took bribes or used performance-enhancing
drugs. It seems that no societal sector is immune.
Many of our readers are business school students, the current or future managers
of business enterprises. Surveys suggest that many business students are themselves
surprisingly cynical about business (given that they’ve chosen it as their future profession). They believe that they’ll be expected to check their ethics at the corporate

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SECTION I INTRODUCTION

door or that they will be pressured to compromise their own ethical standards in order
to succeed.7 Consider this scenario that took place at a large university: A professor
asked his class to name management behaviors that are morally repugnant. His class
struggled to name one! In another of his classes, the professor asked if the students
would dump carcinogens in a river. This time the class agreed that they would do so
because if they didn’t, someone else would. When the professor asked if they really
wanted to live in such a cynical environment, the class insisted that they already did.
The dismayed professor believed that the attitudes of his students were formed long
before they landed in his classroom. He agreed with other observers that the problem
goes way beyond business and business schools and that our society, with its emphasis on money and material success, is rearing young people who strive for achievement at any cost. One symptom: cheating is pervasive in many high schools and
colleges.8 This scenario is enough to make anyone wonder about today’s business
students. But at the same time, we know that students at many colleges and universities, including business schools, are encouraging their own faculty and administrators to establish newly invigorated academic integrity policies and honor codes. In an
honor code community, students take responsibility for implementing the academic
integrity policy and for holding each other accountable to it. They manage study-run
judiciaries that mete out serious discipline to their fellow students who tarnish the
community by cheating. These efforts, which are gaining real traction at many
schools, suggest that at least some students have had enough and are willing turn
from cynicism toward a proactive approach to change things.
A 2008 Aspen Institute study of nearly 2,000 MBA students from 15 leading
international business schools provides some insight into MBA students’ attitudes,
which appear to be moving in a less cynical direction. Similar to the findings of
Aspen’s 2002 survey, the 2008 survey of MBA students indicates that they anticipate
facing difficult values conflicts in their jobs and suggests some cynicism about ethics
in the workplace. However, about 40 percent of these students believe that their business education is preparing them to manage values conflicts ‘‘a lot,’’ and another
50 percent believe that they’re being prepared somewhat. Also, more than a quarter
of the respondents said they are interested in finding a job that gives them the opportunity to contribute to society (compared to only 15 percent in 2002). More than half
believe that safe, high-quality products and responsible governance and transparent
business practices are very important for a potential employer. In addition, more than
half said they would advocate alternative values or approaches in response to values
conflicts at work (many more than in 2002).9
The media may be largely responsible for students’ cynical attitudes. Think
about the depiction of business and its leaders in movies and on television. The
Media Research Center conducted a survey of 863 network TV sitcoms, dramas, and
movies in the mid-1990s. Nearly 30 percent of the criminal characters in these programs were business owners or corporate executives. Entrepreneurs were represented
as drug dealers, kidnappers, or sellers of defective gear to the military.10Fortune
magazine called this ‘‘the rise of corporate villainy in prime time.’’11 Movies have
abounded with negative messages about corporate America. Think Wall Street,

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Boiler Room, Civil Action, Glengarry Glen Ross, The Insider, Erin Brockovich,
Supersize Me, The Corporation, Enron: The Smartest Guys in the Room, Michael
Clayton, The International, Quiz Show, The Insider, and Bowling for Columbine.
And there are more such movies every year; we’re sure you can add to the list. A
much tougher exercise is to generate a list of movies that actually create a positive
ethical impression of business. Can you think of any? Consistent negative representation of business in the media has its effects. Academic research suggests that cynicism toward American business increased after study participants viewed the film
Roger & Me, which depicted ruthless plant closings and layoffs at General Motors.12
Imagine the cumulative, daunting effect of viewing countless movies and television
programs that portray business as corrupt and business leaders as ruthless and
unethical.
To counter that media-fueled cynicism at least somewhat, we encourage you to
think about your own life and the hundreds of reliable products and services you trust
and depend on every day as well as the people and businesses that produce them.
These good folks are businesspeople too, but it isn’t nearly as exciting or sexy for the
media to portray businesspeople who do the right thing every day. We also encourage
you to talk with businesspeople you know, perhaps people in your own family who
work for businesses. Do they feel pressured to compromise their ethical standards, or
do they see their employer in a more positive light? Interestingly, the Ethics Resource
Center’s 2009 National Business Ethics Survey found that only 8 percent of employees of for-profit enterprises report feeling pressured to compromise their ethical standards. That means that more than 90 percent say that they’re not feeling such
pressure. Also, nearly two thirds of these employees said that their own company has
a strong or strong-leaning ethical culture. What does that mean? To us, it means that
most Americans who work in business think that their own company and coworkers
are pretty ethical. Still, they read the same media accounts and see the same movies
and TV programs as everyone else, and these offerings influence cynicism about
American business in general.13
Finally, we won’t leave a discussion of cynicism without talking about the
events of September 11, 2001. While the business scandals of 2001–02 left many
cynical, the events of September 11, 2001, showed us some of the best in many individuals and businesses. We have read about the care, compassion, and assistance that
countless American firms gave to those who were harmed by the terrorist attacks.
Few firms were hit as hard as Sandler O’Neill & Partners, a small but profitable Wall
Street investment bank that lost 66 of its 171 employees—including two of the firm’s
leading partners—on September 11. The firm’s offices had been on the 104th floor of
the World Trade Center. Despite its dire financial straits, the firm sent every deceased
employee’s family a check in the amount of the employee’s salary through the end of
the year and extended health-care benefits for five years. Bank of America quickly
donated office space for the firm to use. Competitors sent commissions their way and
freely gave the company essential information that was lost with the traders who had
died. Larger Wall Street firms took it upon themselves to include Sandler in their
deals. The goal was simply to help Sandler earn some money and get back on its

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feet.14 This is only one of the many stories that point to the good that exists in the
heart of American business. In this book, we offer a number of positive stories to
counterbalance the mostly negative stories portrayed in the media.
The bottom line is this. We’re as frustrated as you are about the media portrayal
of business and the very real, unethical behavior that regularly occurs in the business
community. But, we also know that the business landscape is a varied one that is
actually dominated by good, solid businesses and people who are even heroic and
extraordinarily giving at times. So, for our cynical readers, we want to help by doing
two things in this book: (1) empowering managers with the tools they need to address
ethical problems and manage for ethical behavior, and (2) providing positive examples of people and organizations who are ‘‘doing things right’’ to offset some of the
media-fueled negativity. We agree with Coach Joe Paterno, Penn State’s legendary
football coach, whose program has always been known for integrity. He said this in
response to our questions about cynicism: ‘‘I don’t care what cynical people say. I
don’t really pay attention. These are small people who . . . don’t have the confidence
or courage to do it the right way. And when they see someone doing it the right way,
deep down they feel guilty. They’d rather say that it can’t be done . . . that everybody cheats. I hear that all the time. ‘Fine,’ I say. ‘You think what you want.’ I know
what I do. People around me know. You’ve got to just run your organization. You
can’t worry about what these cynical people say.’’
Some business school students seem to agree with Joe. In May 2009, something
notable and quite positive happened. A group of 20 second-year students at Harvard
Business School created The MBA Oath in an attempt to articulate the values they felt
their MBA degree ought to stand for:
The MBA Oath
As a business leader I recognize my role in society.
&

&

My purpose is to lead people and manage resources to create
value that no single individual can create alone.
My decisions affect the well-being of individuals inside and
outside my enterprise, today and tomorrow.

Therefore I promise:
&

I will manage my enterprise with loyalty and care, and will not
advance my personal interests at the expense of my enterprise or
society.

&

I will understand and uphold, in letter and spirit, the laws and
contracts governing my conduct and that of my enterprise.
I will refrain from corruption, unfair competition, or business
practices harmful to society.

&

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&

&

&

&

13

I will protect the human rights and dignity of all people affected by
my enterprise, and I will oppose discrimination and exploitation.
I will protect the right of future generations to advance their standard of living and enjoy a healthy planet.
I will report the performance and risks of my enterprise accurately and honestly.
I will invest in developing myself and others, helping the management profession continue to advance and create sustainable
and inclusive prosperity.

In exercising my professional duties according to these principles, I
recognize that my behavior must set an example of integrity, eliciting
trust and esteem from those I serve. I will remain accountable to my
peers and to society for my actions and for upholding these standards.
This oath I make freely, and upon my honor.
This focus on positive values among business students and business in general
received significant publicity and turned into something of a movement. More than
400 graduates of Harvard Business School signed the oath, and they were joined by
business students from 119 other colleges and universities globally. For more information, go to www.mbaoath.org.

CAN BUSINESS ETHICS BE TAUGHT?
Given all that has happened, you may be wondering whether business ethics can be
taught. Perhaps all of the bad behavior we outlined earlier results from a relatively few
‘‘bad apples’’ who never learned ethics from their families, clergy, previous schools, or
employers.15 If this were so, ethics education would be a waste of time and money, and
resources should be devoted to identifying and discarding bad apples, not trying to
educate them. We strongly disagree, and the evidence is on our side.

Aren’t Bad Apples the Cause of Ethical Problems
in Organizations?
According to the bad apple theory, people are good or bad and organizations are
powerless to change these folks. This bad apple idea16 is appealing in part because
unethical behavior can then be blamed on a few individuals with poor character.
Although it’s unpleasant to fire people, it’s relatively easier for organizations to
search for and discard a few bad apples than to search for some organizational
problem that caused the apple to rot.
Despite the appeal of the bad apple idea, ‘‘character’’ is a poorly defined concept, and when people talk about it, they rarely define what they mean. They’re probably referring to a complex combination of traits that are thought to guide individual

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behavior in ethical dilemma situations. If character guides ethical conduct, training
shouldn’t make much difference because character is thought to be relatively stable:
it’s difficult to change, persists over time, and guides behavior across different contexts. Character develops slowly as a result of upbringing and the accumulation of
values that are transmitted by schools, families, friends, and religious organizations.
Therefore, people come to educational institutions or work organizations with an
already defined good or poor character. Good apples will be good and bad apples
will be bad.
In fact, people do have predispositions to behave ethically or unethically (we talk
about this in Chapter 3). And sociopaths can certainly slip into organizations with the
sole intent of helping themselves to the organization’s resources, cheating customers,
and feathering their own nests at the expense of others. Famous scoundrels like
Bernie Madoff definitely come to mind. Such individuals have little interest in
‘‘doing the right thing,’’ and when this type of individual shows up in your organization, the best thing to do is discard the bad apple and make an example of the incident
to those who remain.
But discarding bad apples generally won’t solve an organization’s problem with
unethical behavior. The organization must scrutinize itself to determine if something
rotten inside the organization is spoiling the apples. For example, Enron encouraged
a kind of devil-may-care, unethical culture that is captured in the film, Enron: The
Smartest Guys in the Room. Arthur Andersen’s culture morphed from a focus on the
integrity of audits to a consulting culture that focused almost exclusively on feeding
the bottom line (you’ll read more about that in Chapter 5). In this book you’ll learn
that most people are not guided by a strict internal moral compass. Rather, they look
outside themselves—to their environment—for cues about how to think and behave.
This was certainly true in the financial crisis when the mantra became ‘‘everyone is
doing it’’ (and making a lot of money besides). At work, managers and the organizational culture transmit many cues about how employees should think and act. For
example, reward systems play a huge role by rewarding short-term thinking and
profits, as they did in the recent financial crisis. In this book, you’ll learn about the
importance of these organizational influences and how to harness them to support
ethical behavior and avoid unethical behavior.
So, apples often turn bad because they’re spoiled by ‘‘bad barrels’’—bad work
environments that not only condone, but may even expect unethical behavior. Most
employees are not bad folks to begin with. But their behavior can easily turn bad if
they believe that their boss or their organization expects them to behave unethically
or if everyone else appears to be engaging in a particular practice. In this view, an
organization that’s serious about supporting ethical behavior and preventing misconduct must delve deeply into its own management systems and cultural norms and
practices to search for systemic causes of unethical behavior. Management must take
responsibility for the messages it sends or fails to send about what’s expected. If
ethics problems are rooted in the organization’s culture, discarding a few bad apples
without changing that culture isn’t going to solve the problem. An effective and lasting solution will rely on management’s systematic attention to all aspects of the

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organization’s culture and what it is explicitly or implicitly ‘‘teaching’’ organizational members (see Chapter 5).
This question about the source of ethical and unethical behavior reflects the
broader ‘‘nature/nurture’’ debate in psychology. Are we more the result of our genes
(nature) or our environments (nurture)? Most studies find that behavior results from
both nature and nurture. So, when it comes to ethical conduct, the answer is not
either/or, but and. Individuals do come to work with predispositions that influence
their behavior, and they should take responsibility for their own actions. But the
work environment can also have a large impact. In this book, you’ll learn a lot about
how that work environment can be managed to produce ethical rather than unethical
conduct.

Shouldn’t Employees Already Know the Difference
between Right and Wrong?
A belief associated with the good/bad apple idea is that any individual of good character should already know right from wrong and can be ethical without special training—that a lifetime of socialization from parents and religious institutions should
prepare people to be ethical at work. You probably think of yourself as an individual
of good character, but does your life experience to date prepare you to make a complex business ethics decision? Did your parents, coaches, and other influential people
in your life ever discuss situations like the one that follows? Think about this real
dilemma.
You’re the VP of a medium-sized organization that uses chemicals in its production processes. In good faith, you’ve hired a highly competent scientist to ensure that
your company complies with all environmental laws and safety regulations. This
individual informs you that a chemical the company now uses in some quantity is not
yet on the approved Environmental Protection Agency (EPA) list. However, it has
been found to be safe and is scheduled to be placed on the list in about three months.
You can’t produce your product without this chemical, yet regulations say that you’re
not supposed to use the chemical until it’s officially approved. Waiting for approval
would require shutting down the plant for three months, putting hundreds of people
out of work, and threatening the company’s very survival. What should you do?
The solution isn’t clear, and good character isn’t enough to guide decision making in this case. As with all ethical dilemmas, values are in conflict here—obeying
the letter of the law versus keeping the plant open and saving jobs. The decision is
complicated because the chemical has been found to be safe and is expected to be
approved in a matter of months. As in many of today’s business decisions, this complex issue requires the development of occupation-specific skills and abilities. For
example, some knowledge in the area of chemistry, worker safety, and environmental
laws and regulations would be essential. Basic good intentions and a good upbringing
aren’t enough.
James Rest, a scholar in the areas of professional ethics and ethics education,
argued convincingly that ‘‘to assume that any 20-year-old of good general character

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can function ethically in professional situations is no more warranted than assuming
that any logical 20-year-old can function as a lawyer without special education.’’17
Good general character (whatever that means) doesn’t prepare an individual to deal
with the special ethical problems that are likely to arise in a career. Individuals must
be trained to recognize and solve the unique ethical problems of their particular occupation. That’s why many professional schools (business, law, medicine, and others)
have added ethics courses to their curricula, and it’s why most large business organizations now conduct ethics training for their employees.
So, although individual characteristics are a factor in determining ethical behavior, good character alone simply doesn’t prepare people for the special ethical problems they’re likely to face in their jobs or professions. Special training can prepare
them to anticipate these problems, recognize ethical dilemmas when they see them,
and provide them with frameworks for thinking about ethical issues in the context of
their unique jobs and organizations.

Aren’t Adults’ Ethics Fully Formed and Unchangeable?
Another false assumption guiding the view that business ethics can’t be taught is the
belief that one’s ethics are fully formed and unchangeable by the time one is old
enough to enter college or a job. However, this is definitely not the case. Research
has found that through a complex process of social interaction with peers, parents,
and other significant persons, children and young adults develop in their ability to
make ethical judgments. This development continues at least through young adulthood. In fact, young adults in their twenties and thirties who attend moral development educational programs have been found to advance in moral reasoning even
more than younger individuals do.18 Given that most people enter professional education programs and corporations as young adults, the opportunity to influence their
moral reasoning clearly exists.
Business school students may need ethics training more than most because
research has shown they have ranked lower in moral reasoning than students in
philosophy, political science, law, medicine, and dentistry.19 Also, undergraduate
business students and those aiming for a business career were found to be more likely
to engage in academic cheating (test cheating, plagiarism, etc.) than were students in
other majors or those headed toward other careers.20 At a minimum, professional
ethics education can direct attention to the ambiguities and ethical gray areas that are
easily overlooked without it. Consider this comment from a 27-year-old Harvard student after a required nine-session module in decision making and ethical values at the
beginning of the Harvard MBA program.
Before, [when] I looked at a problem in the business world, I never consciously examined the ethical issues in play. It was always subconscious
and I hope that I somewhat got it. But that [ethics] was never even a
consideration. But now, when I look at a problem, I have to look at the
impact. I’m going to put in this new ten-million-dollar project. What’s

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going to be the impact on the people that live in the area and the environment. . . . It’s opened my mind up on those things. It’s also made me
more aware of situations where I might be walking down the wrong path
and getting in deeper and deeper, to where I can’t pull back.21
In 2004, Harvard’s MBA class of 1979 met for its 25-year reunion. The alumni
gave the dean a standing ovation when he said that a new required course on values
and leadership was his highest priority and then pledged to ‘‘live my life and lead the
school in a way that will earn your trust.’’22
It should be clear from the above arguments that ethics can indeed be taught.
Ethical behavior relies on more than good character. Although good upbringing may
provide a kind of moral compass that can help the individual determine the right
direction and then follow through on a decision to do the right thing, it’s certainly
not the only factor determining ethical conduct. In today’s highly complex organizations, individuals need additional guidance. They can be trained to recognize the
ethical dilemmas that are likely to arise in their jobs; the rules, laws, and norms that
apply in that context; reasoning strategies that can be used to arrive at the best ethical
decision; and the complexities of organizational life that can conflict with one’s
desire to do the right thing. For example, businesses that do defense-related work are
expected to comply with a multitude of laws and regulations that go far beyond what
the average person can be expected to know.
The question of whether ethics should be taught remains. Many still believe that
ethics is a personal issue best left to individuals. They believe that much like proselytizing about religion, teaching ethics involves inappropriate efforts to impose
certain values and control behavior. But we believe that employers have a real
responsibility to teach employees what they need to know to recognize and deal with
ethical issues they are likely to face at work. Failing to help employees recognize the
risks in their jobs is like failing to teach a machinist how to operate a machine safely.
Both situations can result in harm, and that’s just poor management. Similarly, we
believe that, as business educators, we have a responsibility to prepare you for the
complex ethical issues you’re going to face and to help you think about what you can
do to lead others in an ethical direction.
DEFINING ETHICS Some of the controversy about whether ethics can or should be
taught may stem from disagreement about what we mean by ethics. Ethics can be
defined as ‘‘a set of moral principles or values’’—a definition that portrays ethics as
highly personal and relative. I have my moral principles, you have yours, and neither
of us should try to impose our ethics on the other.
But our definition of ethics—‘‘the principles, norms, and standards of conduct
governing an individual or group’’—focuses on conduct. We expect employers to
establish guidelines for work-related conduct, including what time to arrive and leave
the workplace, whether smoking is allowed on the premises, how customers are to be
treated, and how quickly work should be done. Guidelines about ethical conduct
aren’t much different. Many employers spend a lot of time and money developing

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policies for employee activities that range from how to fill out expense reports to
what kinds of client gifts are acceptable to what constitutes a conflict of interest or
bribe. If we focus on conduct, ethics becomes an extension of good management.
Leaders identify appropriate and inappropriate conduct, and they communicate their
expectations to employees through ethics codes, training programs, and other communication channels.
In most cases, individual employees agree with their company’s expectations
and policies. For example, who would disagree that it’s wrong to steal company
property, lie to customers, dump cancerous chemicals in the local stream, or comply
with regulations on defense contracts? At times, however, an employee may find the
organization’s standards inconsistent with his or her own moral values or principles.
For example, a highly religious employee of a health maintenance organization may
object to offering abortion as an alternative when providing genetic counseling to
pregnant women. Or a highly devoted environmentalist may believe that his or her
organization should go beyond the minimum standards of environmental law when
making decisions about how much to spend on new technology or on environmental
cleanup efforts. These individuals may be able to influence their employers’ policies.
Otherwise, the person’s only recourse may be to leave the organization for one that is
a better values match.
Whether or not we prefer to admit it, our
ethical conduct is influenced (and to a large degree controlled) by our environment.
In work settings, leaders, managers, and the entire cultural context are an important
source of this influence and guidance. If, as managers, we allow employees to drift
along without our guidance, we’re unintentionally allowing them to be ‘‘controlled’’
by others. If this happens, we’re contributing to the creation of ‘‘loose cannons’’ who
can put the entire organization at risk. Guidance regarding ethical conduct is an important aspect of controlling employee behavior. It can provide essential information
about organizational rules and policies, and it can give guidance about behavior that
is considered to be appropriate or inappropriate in a variety of situations.
But should organizations be ‘‘controlling’’ their employees in this way? B. F.
Skinner,23 the renowned psychologist, argued that it’s all right, even preferable, to
intentionally control behavior. He believed that all behavior is controlled, either
intentionally or unintentionally. Therefore what was needed was more intentional
control, not less. Similarly, ethical and unethical behavior in organizations is already
being controlled explicitly or implicitly by the existing organizational culture (see
Chapter 5). Thus organizations that neglect to teach their members ‘‘ethical’’ behavior may be tacitly encouraging ‘‘unethical behavior’’ through benign neglect. It’s
management’s responsibility to provide explicit guidance through direct management and through the organization’s culture. The supervisor who attempts to influence the ethical behavior of subordinates should be viewed not as a meddler but as a
part of the natural management process.
To summarize, we believe that educational institutions and work organizations
should teach people about ethics and guide them in an ethical direction. Adults are
GOOD CONTROL OR BAD CONTROL?

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open to, and generally welcome, this type of guidance. Ethical problems are not
caused entirely by bad apples. They’re also the product of bad barrels—work environments that either encourage unethical behavior or merely allow it to occur.
Making ethical decisions in today’s complex organizations isn’t easy. Good intentions and a good upbringing aren’t enough. The special knowledge and skill required
to make good ethical decisions in a particular job and organizational setting may
be different from what’s needed to resolve personal ethical dilemmas, and this
knowledge and skill must be taught and cultivated.

THIS BOOK IS ABOUT MANAGING ETHICS
IN BUSINESS
This book offers a somewhat unique approach to teaching business ethics. Instead of
the traditional philosophical or legalistic approach, we take a managerial approach.
Between us, we have many years of experience in management, in consulting, and in
management teaching and research. Based on this experience, we begin with the
assumption that business ethics is essentially about human behavior. We believe that
by understanding human behavior in an organizational context, we can better understand and manage our own and others’ ethical conduct. Kent Druyvesteyn was vice
president for ethics at General Dynamics from 1985 to 1993 and one of the first
‘‘ethics officers’’ in an American company. He made a clear distinction between
philosophy and management in his many talks with students and executives over the
years. As he put it, ‘‘I am not a philosopher and I am not here to talk about philosophy. Ethics is about conduct.’’
We agree with Mr. Druyvesteyn. After years of study and experience, we’re convinced that a management approach to organizational ethics is needed. As with any
other management problem, managers need to understand why people behave the
way they do so that they can influence this behavior. Most managers want the people
they work with to be productive, to produce high-quality products, to treat customers
well, and to do all of this in a highly ethical manner. They also want and need help
accomplishing these goals.
Therefore we rely on a managerial approach to understanding business ethics.
We introduce concepts that can be used to guide managers who want to understand
their own ethical behavior and the behavior of others in the organization. And we
provide practical guidance to those who wish to lead their department or organization
in an ethical direction.
We define ethical behavior in business as ‘‘behavior that is consistent with the
principles, norms, and standards of business practice that have been agreed upon by
society.’’ Although some disagreement exists about what these principles, norms, and
standards should be, we believe there is more agreement than disagreement. Many
of the standards have been codified into law. Others can be found in company and
industry codes of conduct and international trade agreements.
Importantly, we treat the decisions of people in work organizations as being
influenced by characteristics of individuals and organizations. We also recognize

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CHARACTERISTICS OF INDIVIDUALS
Individual differences
Cognitive biases

Process of Individual Ethical Decision Making
ETHICAL
AWARENESS

ETHICAL
JUDGMENT

ETHICAL
BEHAVIOR

CHARACTERISTICS OF ORGANIZATIONS
Group and organizational pressures
Organizational culture
FIGURE 1.1 The Ethical Decision-Making Process

that work organizations operate within a broad and complex global business context.
We will cover individual decision making, group and organizational influences, and
the social and global environment of business. The first part of this perspective, the
influences on individual decision making, is represented in Figure 1.1.

ETHICS AND THE LAW
It’s important to think about the relationship between the law and business ethics
because if one could just follow the law, a business ethics book wouldn’t be necessary. Perhaps the easiest way to visualize the relationship between business ethics
and the law is in terms of a Venn diagram (Figure 1.2). If we think of the law as
reflecting society’s minimum norms and standards of business conduct, we can see a
great deal of overlap between what’s legal and what’s ethical. Therefore most people
believe that law-abiding behavior is also ethical behavior. But many standards of
conduct are agreed upon by society and not codified in law. For example, some conflicts of interest may be legal, but they are generally considered unethical in our
society and are commonly prohibited in codes of ethics. Having an affair with someone who reports to you may be legal, but it is considered unethical in most corporate
contexts. As we said earlier, much of the behavior leading to the 2008 financial crisis
was legal, but unethical. So the domain of ethics includes the law but extends well
beyond it to include ethical standards and issues that the law does not address.
Finally, there are times when you might encounter a law that you believe is unethical.
For example, racial discrimination was legal in the United States for a long time. But
racial discrimination was and is highly unethical. Similarly, many companies do
business in developing countries with few, if any, laws regulating environmental
pollution or labor conditions. They can ‘‘legally’’ pollute the air and water in these
countries. Such companies have to choose between adhering to ethical standards that
are higher than the legal standards in those countries and deciding that it’s okay to

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Ethics

Law
FIGURE 1.2 Relationship between Ethics and Law

harm the well-being of these people and communities. So the legal and ethical domains certainly overlap, but the overlap is far from complete.

WHY BE ETHICAL? WHY BOTHER? WHO CARES?
Assuming that you ‘‘buy’’ the notion that business ethics can be taught, and that as
current or future managers you have a role to play in creating an environment supportive of ethical conduct, you may still wonder why you should care about being
ethical. As workers, we should care about ethics because most of us prefer to work
for ethical organizations. We want to feel good about ourselves and the work we do.
As responsible citizens, we must care about the millions of people who lost retirement savings because of the greed of those at AIG, Citigroup, Lehman Brothers,
Merrill Lynch, and other financial firms that brought down the global economy in
2008. These people are our parents, spouses, siblings, children, and friends—they’re
us! We live in a world community, and we’re all inextricably connected to each other
and to the environment that surrounds us. Our future depends on our caring enough.
Above all, it is the right thing to do.

Individuals Care about Ethics: The Motivation To Be Ethical
Classical economists assume that practically all human behavior, including altruism,
is motivated solely by self-interest—that humans are purely rational economic actors
who make choices solely on the basis of cold cost-benefit analyses. But a new group
of economists who call themselves behavioral economists have found that people are
not only less rational than classical economists assumed, but more moral. Much evidence suggests that people act for altruistic or moral purposes that seemingly have
little to do with cost-benefit analyses.24 For example, people will mail back lost wallets to strangers, cash and all; help strangers in distress; and donate blood marrow for
strangers or a kidney to a family member. Also, the large majority of people will
refrain from stealing even if it’s easy to do so.

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In his book The Moral Dimension, Amitai Etzioni25 cited many more examples
and research evidence to document his claim that human action has two distinct sources: the pursuit of self-interest and moral commitments. Accordingly, most human
decisions are based on ethical and emotional considerations as well as rational economic self-interest. People are motivated by both economic and moral concerns.
In a typical behavioral economics experiment called ‘‘the ultimatum game,’’
subject A in the experiment receives 10 one-dollar bills and can give subject B any
number of them. Subject B can choose to accept or reject A’s offer. If B accepts, they
each get what was offered. If B rejects the offer, each gets nothing. From a pure
economics perspective, A would do best offering B one dollar and keeping the rest.
B should accept that offer because, in economic terms, getting one dollar is better
than nothing. But most A subjects offer B close to half the total, an average of about
four dollars. B subjects who are offered one or two dollars generally reject the offer.
Economists can’t explain this result based upon rational self-interest. People’s sense
of fairness seems to be driving both subjects’ behavior. Interestingly, when people
play the game with a machine, they are more likely to play as classical economics
would predict because they don’t expect a machine to be ‘‘fair.’’ Autistic A players
(whose autism means that they don’t take others’ feelings into account) also play as
the theory would predict. So most people expect fair play in their interactions with
other human beings, and they will even forgo economic benefits in order to maintain
a fair system.
Neuroscience is also beginning to substantiate the moral sense that develops
in humans. New imaging technologies have allowed scientists to locate a unique
type of neuron in the brain—spindle cells—that light up when people perceive
unfairness or deception. Only humans and African apes have these cells. But an
adult human has over 82,000 of them, whereas a gorilla has around 16,000 (perhaps
explaining why a gorilla might save a human child). A chimp has less than 2,000.
In humans, these cells appear at around 4 months of age and gradually increase
with moral development.26
In 2003, neuroscientists looked inside the brains of people playing the ultimatum
game using functional magnetic resonance imaging (fMRI) scans. They found that
unfair offers were associated with heightened activity in parts of the brain associated
with strong negative emotions as well as in other parts of the brain associated with
long-term planning. Those who rejected the unfair offers had more activity in the
emotional part of the brain, which is the part that usually wins out.27
Given these research findings, we begin this book with an important assumption—that, as human beings and members of society, all of us are hardwired with a
moral and ethical dimension as well as self-interested concerns. People care about
ethics for reasons that stem from both of these sources.
Beyond being hardwired for fairness and altruism, employees are also concerned
about their personal reputations. In today’s work environment, success depends on an
individual’s ability to work effectively with others. Trust greases the wheels of working relationships with peers across departments and on project teams. We disagree with
the old adage that ‘‘nice guys (or gals) finish last.’’ If it looks like bad guys (or gals)

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come out ahead, this is generally a short-run result. A reputation for being difficult to
work with, dishonest, or mean often catches up with you as coworkers withhold important information and promotions go to others. Given the importance of relationships to
effectiveness in business today, your reputation for integrity is an essential ingredient
for success and personal satisfaction. This is even truer in an age of social networking
that can send news of bad behavior to a broad audience in seconds.

Employees Care about Ethics: Employee Attraction
and Commitment
Organizations are concerned about their ability to hire and retain the best workers.
The evidence suggests that employees are more attracted to and more committed to
ethical organizations. ‘‘People who know that they are working for something larger
with a more noble purpose can be expected to be loyal and dependable, and, at a
minimum, more inspired.’’28
Graduating students at nearly 150 colleges and universities now sign or recite the
‘‘Graduation Pledge,’’ in which they promise to ‘‘take into account the social and
environmental consequences of any job’’ they consider. They also pledge to ‘‘try to
improve these aspects of any organizations’’ where they work. Elite universities such
as Harvard and Cornell are participating. Prospective employers should be very interested in these graduates and their concerns that go beyond just making a living.29
(Go to www.graduationpledge.org for more information.)
Recent surveys confirm that it may be important to consider how potential and
current employees are affected by an organization’s ethics. In a survey conducted by
Working Woman magazine, ‘‘a strong majority of those polled said that they would
not work for a company with a history of environmental accidents, insider trading or
worker accidents, or a law firm that defends known racketeers.’’30 In another survey
conducted by a national opinion research firm, ethical corporate behavior, honest
company communications, and respectful treatment ranked among employees’ five
top-ranked goals—before good pay, which was 11th on the list, and job security,
which ranked 14th. Ethical corporate behavior was ranked so high because ‘‘workers
translate the ethics of the company into how they’re personally treated.’’ People
‘‘want to be proud of where they work.’’ They ‘‘don’t want to work for bandits, and
when companies get negative publicity for their activities, workers suffer.’’31

Managers Care about Ethics
Managers care about ethics in part because they face the thorny problem of how to
prevent and manage unethical behavior in their ranks. Ask any manager for examples, and be prepared to spend the day listening. More than their jobs depend on this
concern—managers can be held legally liable for the criminal activities of their subordinates. Further, the U.S. Chamber of Commerce estimates that workplace theft
costs U.S. businesses between $20 billion and $40 billion each year, and employees

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are thought to be responsible for much of it.32 In addition to self-interested behavior,
employees may engage in unethical behavior because they think (rightly or wrongly)
that it’s expected or that their behavior is justified because they’ve been treated unfairly. Or they simply may not know they are doing something that’s considered to be
unethical.33
Whatever its source, subordinates’ unethical behavior is a management problem
that won’t go away. It becomes even more of a challenge as restructuring continues
to reduce management layers, thus leaving fewer managers to supervise more workers. With more workers to supervise, the manager can’t directly observe behavior.
Restructuring also increases the number of part-time or contingency workers. These
workers are likely to feel less loyalty to the organization and may be more prone to
engage in unethical behaviors such as theft.
Furthermore, more workers may cross the line between ethical and unethical behavior in response to fierce business competition and strict focus on the bottom line.
Employees may believe that they can help the company succeed (at least in the short
term) by fudging sales figures, abusing competitors, or shortchanging customers.
Those who are potential layoff candidates are also more likely to flirt with impropriety.34 Many perceive the message to be: ‘‘reaching objectives is what matters
and how you get there isn’t that important.’’35 Therefore today’s managers may have
to work even harder to communicate the idea that ethical conduct is expected, even in
the midst of aggressive competition.
Finally, many managers understand the positive long-term benefit a reputation
for ethics can bring to business dealings. Carl Skooglund, former ethics officer at
Texas Instruments, had this to say:
There are very positive, even competitive, reasons to be ethical. If you
walk into a relationship and somebody says, ‘‘I know you, I know your
track record, I can trust you,’’ that’s important. Two years ago, in a survey that we sent out to employees, I received an anonymous comment
from somebody who said, ‘‘A reputation for ethics which is beyond
reproach is a silent partner in all business negotiations.’’ I agree and it
works in all personal and business relationships. An unethical company is
very difficult to do business with. You can’t trust them. You’re never sure
if a commitment’s a commitment. At TI, our customers have told us that
they can be sure of one thing: Once TI commits, we’re going to break our
tail to make it happen. That’s an easy company to do business with.

Executive Leaders Care about Ethics
Some of us are understandably cynical about CEO ethics after the widely publicized
scandals, huge compensation packages, and CEO ‘‘perp walks’’ of recent years. But
many business executives do care about ethics in their own organizations and about
business’s image in society.

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John Akers, former chairman of the board of IBM, wrote: ‘‘No society anywhere
will compete very long or successfully with people stabbing each other in the back;
with people trying to steal from each other; with everything requiring notarized confirmation because you can’t trust the other fellow; with every little squabble ending
in litigation; and with government writing reams of regulatory legislation, tying business hand and foot to keep it honest. . . . There is no escaping this fact; the greater
the measure of mutual trust and confidence in the ethics of a society, the greater its
economic strength.’’36
Jeffrey Immelt, the CEO of General Electric, spoke powerfully about ethics at
Columbia University in October 2008 (available for viewing on YouTube). Immelt
described how, above all else, leaders had to consider their organizations and protect
their organizations for shareholders, employees, and the greater good. ‘‘I believe that
ethical behavior in 2008 starts first and foremost, as always, with a real sense of permanence, excellence, accountability, and safety, making sure that the enterprise
endures no matter how tough the situation becomes.’’
Jamie Dimon, CEO and chairman of JPMorgan Chase, talked about the importance of reputation in a June 2009 talk at Harvard Business School, his alma mater.
He said, ‘‘There is a book on each of you. It’s already being written. If I spoke to your
teachers, your friends, your professionals, your parents, I would know whether you’re
trusted, how hard you work, whether you’re ethical. . . . That book is already growing. Write it the way you want it to be written. . . . When you’re caught in situations
that are uncomfortable—you can always make the right decision. It’s your responsibility whether you accept to do something or not, and it will be in that book written
on you.’’ Later in that same speech, he said, ‘‘Standards are not set by Harvard Business School or the federal governments of the world; they are set by you. You have to
set high standards for performance. . . . You also have to set high standards of integrity. At a lot of companies, you’ll hear, ‘‘Don’t worry about it, everyone does it that
way.’’ No, they don’t. And that standard’s got to be set across the board at all levels,
from little things to big things. I’ve been with kids who lied on T&Es [travel and
entertainment expenses]—they shared a cab and both put in 100% of the cab bill. . . .
That’s stealing. If I caught you doing that, I’d fire you. And everyone in the company knows that.’’ He also said, ‘‘surround yourself with truth tellers. . . . Every
leader needs at least one person around who tells them the truth. One is not
enough. If you are a leader and you have seven or eight people reporting to you
and one is a truth teller, you have a problem. Every single one of them should be
a truth teller. Dimon ended with this: ‘‘You will have awesome power that affects
people’s lives. Use it wisely and be just with it. . . . If you want to be a leader, it
can’t be about money. And, it can’t be about you. It’s about what you will eventually leave behind. What would you want on your tombstone? . . . For mine, I
just hope they say, ‘‘We miss him, and the world is a better place for him having
been here.’’37 Interestingly, Dimon and his team recognized the problems with
subprime mortgages early, and JPMorgan Chase ended up virtually alone among
the big banks in avoiding the worst fallout from the financial crisis. They exited
the business of securitizing mortgages when business was still booming and their

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competitors (e.g., Citigroup, Merrill Lynch) were making bundles of cash. Perhaps
those truth tellers had something to do with this wise action. Dimon is known as
being vigilant about controlling risk even when that means short-term losses.38 It
paid off big this time.
Warren Buffett, the legendary investor and CEO of Berkshire Hathaway, had
perhaps the best idea about ethics and integrity when he said, ‘‘Somebody once said
that in looking for people to hire, you look for three qualities: integrity, intelligence,
and energy. And if they don’t have the first, the other two will kill you. You think
about it; it’s true. If you hire somebody without the first, you really want them to be
dumb and lazy.’’39
We believe that organizational ethics is a distinct managerial concern that must
be addressed by management at all levels of the organization.

Industries Care about Ethics
When companies get bad publicity for ethical scandals, whole industries suffer. So,
in some industries, companies have joined together in voluntary efforts to promote
ethical conduct among organizations in the industry. Prominent among these efforts
is the Defense Industry Initiative. A cynic might say that these initiatives are aimed
solely at preventing more intrusive government regulation and that companies in
these industries don’t truly ‘‘care’’ about ethics. Certainly, these types of initiatives
have generally begun in response to a scandal or crisis. But over the years, they tend
to take on a life of their own. Members internalize beliefs about appropriate conduct,
hire support staff, and develop structures for enforcement that become institutionalized among member organizations. The Defense Industry Initiative on Business Conduct and Ethics (DII) is a major voluntary industry initiative. It is described on the
organization’s website (www.dii.org) as ‘‘a consortium of U.S. defense industry contractors which subscribes to a set of principles for achieving high standards of business ethics and conduct.’’ It developed out of the President’s Blue Ribbon
Commission on Defense Management (the Packard Commission), which was convened after a number of defense-industry scandals in the early 1980s. In 1986, the
commission concluded that the industry could be improved by focusing on corporate
self-governance. A number of companies voluntarily joined forces to ‘‘embrace and
promote ethical business conduct,’’ and their work together continues today. As of
July 2009, over 80 companies were signatories; as such, they have agreed to live
according to the following obligations:
&

Adopt a written code of conduct.

&

Conduct employees’ orientation and training with respect to the code.

&

Provide employees a mechanism to express concerns about corporate compliance with procurement laws and regulations.

&

Adopt procedures for voluntary disclosure of violations of federal procurement laws.

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&
&

27

Participate in Best Practices Forums.
Publish information that shows each signatory’s commitment to the above.

The organization hosts a two-day Best Practices Forum each year, in which the
industry’s prime customer, the Department of Defense, participates. It also hosts
workshops on specific topics, including an annual one-day workshop to train ethics
professionals, and publishes an annual report to the public and government summarizing DII activities.

Society Cares about Ethics: Business and Social
Responsibility
Business ethics also matters because society cares. From an economic perspective,
businesses are powerful. Wal-Mart’s size and profits make it a more powerful economic force than most countries. Business is learning that it must use its power
responsibly or risk losing it. Using power responsibly means being concerned for the
interests of multiple stakeholders—parties who are affected by the business and its
actions and who have an interest in what the business does and how it performs.40
These stakeholders include many constituencies: shareholders, employees, suppliers,
the government, the media, activists, and many more. And these stakeholders have
the power to interfere with a firm’s activities. For example, employees can strike,
customers can stop buying products, protesters can bring bad publicity, and the government can act to regulate a firm’s activities. Consequently, it’s a matter of paramount importance for organizations to consider all of their various stakeholders and
what those stakeholders expect and require before they make decisions that will
affect those various audiences. Increased regulation is almost a certain societal
response to business scandal, and with new regulation come increased costs and
reduced power for business. In addition, organizations that do not act responsibly
risk criminal liability and the resulting financial damage. Even without criminal
liability, businesses that don’t act responsibly risk their reputations, and a lost reputation is tough to rebuild. As business becomes more global and business practices
more transparent, it’s almost impossible to hide bad behavior. There is a growing
emphasis worldwide on corporate social responsibility (CSR), and this emphasis and
the reasons for it are covered in much more detail in Chapter 9.

THE IMPORTANCE OF TRUST
A more elusive benefit of ethics is trust. Although difficult to document, trust has
both economic and moral value. Scientists are beginning to understand the ‘‘biology
of trust.’’ In trusting relationships, neuroscientists have found that the brain releases a
hormone, oxytocin, that makes cooperation ‘‘feel good.’’
Trust is essential in a service economy, where all a firm has is its reputation for
dependability and good service. Individuals and organizations build trust accounts
that work something like a bank account.41 You make deposits and build your trust

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reserve by being honest and by keeping commitments. You can draw on this account
and even make mistakes as long as the reserve is maintained. Having a trust reserve
allows the individual or organization the flexibility and freedom to act without scrutiny, thus saving a great deal of time and energy in all types of relationships. Imagine
a marriage that is based on trust. The partners go about their daily business without
feeling any need to check up on each other or to hire private detectives to confirm the
other’s whereabouts. The same is true of trust-based business relationships, where a
handshake seals a deal and a business partner’s word is considered to be a contract.
Corporations also build trust with their customers.
Johnson & Johnson made a huge contribution to its trust account when it recalled
all Tylenol from store shelves after the poisoning crisis in 1982 (a situation discussed
in more detail in Chapter 10). Despite no recall requirement and huge recall costs, the
company put its customers first. Trust may be even more important in efforts at
global collaboration and alliances, and in cross-cultural management teams. Trust
encourages open exchange of ideas and information, reduces the need for costly controls, allows for rapid adjustment to change, and is associated with willingness to
work through cultural differences and difficulties.42
Trust accounts are easily overdrawn, however. And when they are, all flexibility
disappears. Every word and action is carefully checked and double-checked for signs
of dishonesty. In organizations, lawyers are hired, contracts are drawn up and signed,
and CYA (cover your you-know-what) memos fly. Recent corporate ethics scandals
have created a huge gap in the public’s trust. In an essay for Business Week titled
‘‘Can You Trust Anybody Anymore?’’ Bruce Nussbaum wrote:
There are business scandals that are so vast and so penetrating that they
profoundly shock our most deeply held beliefs about the honesty and integrity of our corporate culture. Enron Corp. is one of them. This financial
disaster goes far beyond the failure of one big company. This is corruption on a massive scale. Tremendous harm has befallen innocent employees who have seen their retirement savings disappear as a few at the top
cashed out. Terrible things have happened to the way business is conducted under the cloak of deregulation. Serious damage has been done to
ethical codes of conduct held by once-trusted business professionals. . . .
Investor confidence is critical to the success of our economic system. . . .
People increasingly feel the game is rigged. . . . Who can come to the
rescue? The reputations of many of the professionals who were counted
on to safeguard the economic system lie in tatters. . . . What’s to be
done? . . . The lesson from the Enron debacle should be to restore basic
integrity to the bottom line, ethics to business professionals, and clout to
overseers that even a deregulated economy need.43
The entire American business system relies on the public’s faith and trust. That
trust has been shattered in a manner that could be extremely costly to society. A decade ago, the public considered the debacles at companies such as Enron, Arthur

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Andersen, WorldCom, Tyco, and Adelphia not as an anomaly, but as an example of
the workings of a business culture that has lost its way. Although some strides were
made to correct that not-very-flattering image of business, the financial crisis of 2008
was truly devastating to public trust in business, government, finance, and the economy. Harris Interactive, a polling company that regularly surveys the public to determine trust levels, uncovered astoundingly low levels of trust following the financial
scandals of 2008. In a survey conducted in May 2009, Harris Interactive found that
only 4 percent of the respondents said that Wall Street firms are honest and trustworthy. The percentage is higher, but still dismal, for banks in general; 25 percent of
those surveyed would believe a statement made by someone who works for a bank.44
Unfortunately, all companies have been tainted by the scandals. Blue-chip companies
now face even closer scrutiny and skepticism of shareholders as they are being asked
to open their books and reveal much more information than has been recent practice.45 Meeting profit projections or beating them by a penny is being viewed suspiciously as evidence of accounting chicanery rather than reliability.46 Confidence and
trust in the system must be restored, or access to capital (the engine of the entire
system) could be cut off. The good news is that many corporations are responding.
Boards of directors are replacing inside members with outsiders who are seen as
more independent. Stock options are being expensed. CEO compensation packages
that are seen as excessive are being cut. And executives are asking their people
whether they are living by the ‘‘spirit of the law’’ as well as the letter of the law.47

THE IMPORTANCE OF VALUES
As a theme even broader than trust, you can think of values as a kind of ‘‘glue’’ that
guides our thinking across the book. Values are relevant to individuals, to organizations, and to societies. For individuals, values can be defined as ‘‘one’s core beliefs
about what is important, what is valued, and how one should behave across a wide
variety of situations.’’ For example, most of us agree that honesty, fairness, and respect for others are important values. Where individuals differ is in how they prioritize their values. For example, some people may believe that ambition is more
important than other values. Others may feel that helpfulness predominates. Strongly
held values influence important decisions such as career choice as well as decisions
in particular situations. For example, someone for whom helpfulness is most important is more likely to choose a ‘‘helping’’ profession such as social work, while someone for whom ambition is most important may be more likely to choose a business
career. In Chapter 2, you’ll have the opportunity to think about your own values and
how they influence your ethical decision making.
Values are also relevant at the organizational level. Many of you have seen organizational values statements that aim to create a shared sense of purpose among
employees and to convey something about the organization’s identity to outsiders. If
you haven’t, just look at company websites and you’ll see that most of them include
values statements. Values lists often include respect, integrity, diversity, innovation,
teamwork, and the like. Just as individual values guide individual thinking and action,

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organizational values guide organizational thinking and action. And, just as with individuals, the key question is how the organization prioritizes its values. For example, at
3M Corporation, no value is more important and more ingrained in the culture than
innovation. Innovation is encouraged in myriad ways and has been ‘‘baked’’ into the
culture through the commitment of senior executives, thus creating a culture that
rewards collaboration and teamwork and that views mistakes as opportunities to
learn.48 You’ll see in Chapter 5 that organizational values undergird the ethical culture
of an organization and influence how its managers and employees behave. So an organization that highly values diversity and respect is more likely to make efforts to hire
and retain a diverse workforce and to take diversity into consideration when making
supplier choices and other decisions. We know of an organization with a strong value
for diversity that walked away from business when a customer insisted on dealing only
with white males. However, organizations don’t always ‘‘really’’ value what they say
they value. That’s why values statements are often the butt of Dilbert jokes. For example, in Enron’s values statement, the verbiage described an organization where excellence and respect and integrity were key values. The scandal at Enron showed that
what Enron really cared about—maximizing profits at any cost—was a far cry from
what appeared in print on its values statement. For organizational values to work in a
positive way, the organization must live those values every day.
Societies and cultures also have shared values, and these are an important part of
the business environment and expectations of business and businesspeople. When we
talk about cross-cultural values, we often focus on the differences. But, as you’ll see
in Chapter 11, values across cultures are often more similar than different. Even in
corrupt cultures, if you ask people what they value, they’ll tell you that they would
prefer to live in an environment where everyone can be trusted to do business
honestly and fairly. We’ll return to a discussion of values again and again as a kind
of touchstone for ethical business practice.

HOW THE BOOK IS STRUCTURED
Section II of this book deals with ethics and the individual. Chapter 2 presents the
reader with an overview of some basic philosophical theories that have formed the
underpinning for the traditional study of individual ethical decision making from a
prescriptive viewpoint. Chapter 3 presents a more psychological approach to individual ethical decision making. It provides a kind of ‘‘reality check’’ for Chapter 2 by
suggesting that managers need to understand the individual characteristics that can
influence employees’ ethical decision making and the human cognitive biases that
can interfere with the ideal decision-making process (see Figure 1.1). Chapter 4 categorizes the common ethical problems individuals face at work and provides an
opportunity for you to apply learning. Chapter 4 is also about finding your moral
voice to raise or report ethical issues or to stand up for what you value. Despite the
best of intentions, and the most carefully reasoned ethical judgments, doing the right
thing can be difficult.

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Section III of the book focuses on the internal life of organizations, how they
develop ethical (or unethical) cultures, and how culture influences employee behavior. Chapter 5 focuses on business ethics as a phenomenon of organizational culture.
It provides a comprehensive overview of how an organization can build a culture that
reflects a concern for ethics, and how it can change its culture to be more supportive
of ethical conduct. This chapter also emphasizes the importance of executive ethical
leadership in creating a strong ethical culture. Chapter 6 follows with more practical
and specific advice on how organizations can design an ethics infrastructure as well
as effective communications and training programs. It also includes examples of the
programs various companies have implemented to encourage ethical conduct among
their employees. Many of these examples resulted from interviews we conducted
with top managers in these companies. Chapter 7, ‘‘Managing for Ethical Conduct,’’
introduces management concepts that can help explain the group and organizational
pressures that influence people to behave ethically or unethically. We also provide
practical advice for managers about how to use these management concepts to
encourage ethical conduct and discourage unethical conduct in their employees.
Finally, Chapter 8 explores how culture plays out at the manager’s level and features
a series of cases to test your knowledge of ethics and management skills.
After considering individuals and organizations, Section IV of this book looks at
organizations in the broader social environment (see Figure 1.3). Chapter 9 focuses

FIGURE 1.3 From Individuals to Organizations to Environments

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on corporate social responsibility and discusses the en…
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