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Business Law Ch. 4

Ethics
The study of what constitutes right or wrong behavior.
– has to do with the fairness, justness, rightness, or wrongness of an action
Business Ethics
Decisions businesses make/have to make and whether those decisions are right or wrong.
– has to do with how business people apply moral and ethical principles in making their decisions
– directors and officers owe a complex set of ethical duties to their stakeholders
Profit Maximization
Theory: profit maximization leads to the most efficient allocation of scarce resources
– as resources were not sufficiently reallocated to cover costs of social needs, people became dissatisfied with this theory
Triple Bottom Line
– a corporation’s profits
– its impact on people
– its impact on the planet
When making decisions, a business should evaluate:
1. Legal implications
2. Public relations impact
3. Safety risks
4. Financial implications
Corporate Stock Buybacks
Corporate management believes stock is undervalued, so (instead of issuing dividends) it buys its stock in the stock market.
– result: boosts share value
– leads to an ethical dilemma
Long Run Profit Maximization
– short-run profit maximization: a company may increase its profits by continuing to sell a product, even though they know it’s defective
– long-run profit maximization: unethical conduct will cause profits to suffer because of things like lawsuits, large settlements, and publicity
Moral Minimum
Mere compliance with the law.
– lowest ethical level society will tolerate
– just because it’s legal doesn’t mean it’s ethical
Creating Ethical Codes of Conduct
– codes of conduct outline the company’s policies on particular issues and indicate how employees are expected to act
– one of the most effective ways to promote ethical behavior in an organization
– ex: ethics training for employees
Ethical Uncertainty
“Grey areas” in the law make it difficult to predict how a court will apply a given law to a particular action.
Ethics is divided into two categories:
1. duty based ethics: every person has certain duties to others (religious, principle of rights, kantian)
2. outcome based ethics: focuses on impacts of a decision on society or on key stakeholders (utilitarianism)
Religious Ethical Principles
The rightness or wrongness of an action is judged according to its conformity to an absolute rule that commands a particular form of behavior.
– the motive of the actor is irrelevant in judging the rightness or the wrongness of the action
– these rules often involve an element of compassion
– ex: helping the poor
Principles of Rights
Principle that human beings have certain fundamental rights.
– every duty gives rise to a corresponding right
– the ethicality of an action is judged by how the consequences of the action will affect the rights of others
Kantian Ethical Principles
General guiding principles for moral behavior can be derived from human nature.
– categorial imperative: the rightness or wrongness of an action is judged by estimating the consequences that would follow if everyone in society performed the act under consideration
Utilitarianism
Action is ethical based on whether is produces the greatest good for the greatest number of people.
– if it affects the majority adversely, it’s morally wrong
Applying the utilitarian theory requires:
1. a determination of which individuals will be affected
2. a cost-benefit analysis (assessing negative and positive effects of alternative actions on these individuals)
3. a choice among alternative actions that will produce max societal utility
Corporate Social Responsibility
Combines a commitment to good citizenship with a commitment to making ethical decisions, improving society, and minimizing environmental impact.
– social aspect: corporations must demonstrate that they are promoting goals that society deems worthwhile and are moving toward solutions to social problems
– corporations have a duty to shareholders AND stakeholders (stakeholders: other groups affected by corporate decisions)
Making Ethical Business Decisions
1. Inquiry (identify problem)
2. Discussion (determine goals for decision)
3. Decision (make a decision)
4. Justification (reasons for decision)
5. Evaluation (analyze solution)
The Sarbanes-Oxley Act
Requires companies to set up confidential systems so that employees can “raise red flags” about suspected illegal/unethical auditing and accounting practices.
Monitoring Business Practices of Foreign Suppliers
– many businesses contract with companies in developing nations because wage rates there are lower
– “corporate watch” groups discover and publicize unethical corporate behavior
Foreign Corrupt Practices Act (FCPA)
Prohibits U.S. business persons from bribing foreign officials to secure beneficial contracts, even though it might be lawful in that country.
– does not prohibit payment of substantial sums to minor officials or payments to private companies
– all companies must keep detailed records that “accurately and fairly” reflect their financial activities
– penalties for businesses: up to $2 million
– penalties for individuals: $100,000 and up to 5 yrs in prison

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