William R.

Holmes © 2021

Unit Two: Thinking about Business Ethics

2.0 Introduction
2.1 Morals, ethics and ethical theory
2.2 Ethical absolutism and ethical relativism
2.3 Traditional ethical theories
2.3.1 Egoism
2.3.2 Utilitarianism
2.3.3 Rights theory
2.3.4 Theory of duties
2.3.5 Fairness and justice
2.4 Contemporary ethical theory
2.4.1 Virtue ethics
2.4.2 Discourse ethics
2.4.3 Feminist ethics
2.4.4 Postmodern ethics
2.5 Pluralism
2.6 Consideration in ethical decision-making
2.6.1 Moral negligence
2.6.2 Moral blindness
2.6.3 Moral recklessness
2.6.4 Ethical decision-making models
2.7 Business and Society
2.8 Continued occurrence of ethical infractions
2.9 Business ethics education and training

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Unit 2: Cases
2.1 Lockheed Martin Corporation
2.2 Google in China: Conflicting Ethical Theories
2.3 JK2 Westminster L.L.C: A landlord’s abuse of administrative process

2.4 Merck and Company Inc.

2.5 The Sub-prime Mortgage Crisis

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2.0 Introduction

Philosophers and academics have been pondering the concepts of right and wrong, good and evil for
centuries. They have sought to define what makes a good person and to determine how a good person
should behave. Theories have been developed to help guide individuals in making decisions that are
moral and ethical. Yet, despite all of the aforementioned musings, the modern news media is full of
stories of ethical transgressions, corruption, deceit and misdeeds. This is particularly true in business
and in the crossroads of business and politics. Opening the business section of a newspaper reveals a
significant number of examples of business organisations facing ethical challenges. The reasons for this
are many and complex.

Aristotle believed that “man tends to injustice if it benefits him and he is not faced with undue
consequences from his unjust actions.” If credence is given to Aristotle’s statement, then individuals
would naturally be drawn to looking for ways to further their goals by whatever means possible,
provided they could get away with immoral or unethical behavior without consequence. Even if Aristotle
was mistaken about humankind’s natural tendencies, it cannot be denied that there exist individuals
who are drawn to engage in corrupt activities because of greed, weakness, or sociopathic tendencies.
The ingenuity of the human race allows those so inclined to look for ever more innovative ways to
engage in corrupt practices without being discovered.

Not all unethical activity in business is the result of corrupt and criminally based activity. The continuing
increase in the rate of societal and technological change has created a kind of hyper-reality which
facilitates the emergence of new, never before seen ethical issues for which there are no precedents.
The rapid shift from the industrial age to the knowledge economy, then the digital economy, and to
what is now termed the innovation economy, has changed the way and speed with which transactions
are conducted and how wealth is gained and lost. Advances in technology have created new ethical
issues that continue to generate ethical debate. Issues like genetically modified food, cloning, stem cell
technology, gene mapping, autonomous vehicles, just to name a few, generate vigorous debate from all
sides. Just as society and technology continue to advance and evolve, so must ethical thinking and the
state of ethical theory.

This chapter provides an overview of the evolution of ethical thinking and ethical theory from traditional
ethical theory through to contemporary ethical theory. The role of this book is not to endorse any
particular theory over another, but to provide the reader with a broad set of tools and concepts which
can be used to help inform their ethical decision-making.

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2.1 Morals, ethics and ethical theory

Many writers, both contemporary and historical, fail to differentiate between morals and ethics, often
using the two terms synonymously. The two terms are, however, distinctly different in meaning,
although related to each other. Ethics can be defined as moral standards constituted by values and
judgments with respect to right and wrong. Morals are concerned with the norms, values, and beliefs
which are embedded in the social processes which define right and wrong for an individual or a
community. Ethics, on the other hand, is the study of morality and the application of reason to
elucidate specific rules and principles that determine right and wrong. These rules and principles
constitute ethical theory. Ethics rationalises morality in order to produce ethical theory that can then be
universally applied to any situation or problem.

Ethical theories attempt to describe governing frameworks and principles that determine right and
wrong actions and behaviours for any given situation. Traditional ethical theories can be divided into a
number of categories; normative versus descriptive, and consequentialist versus non-consequentialist.
Normative ethical theories are theories that attempt to describe what ought to be the correct way to act
morally. These normative ethical theories arose mainly as an attempt to develop a set of rules and
guidelines that could be used to guide ethical decision-making. The development of normative ethical
theory was an early recognition that ethical decision-making in the context of ethical dilemmas was both
complex and difficult and the average person could not be relied upon to make the ethical choice
themselves and thus required assistance in determining the correct ethical path. Descriptive ethical
theories, on the other hand, seek to describe how individuals actually behave and what decisions in
situations with an ethical component are actually made.

Ethical theories can be consequentialist or non- consequentialist in nature. Consequentialist ethical

theories focus on the outcome of an action in order to assess whether that action is right or wrong. Non-
consequentialist ethical theories, on the other hand, focus on the motivations or intent that lead to an
action in determining whether that action is right or wrong. When considering non-consequentialist
approaches to ethical theory, it must be remembered that even the best of intentions can lead to
disastrous outcomes due to incomplete knowledge, incompetence or just plain bad luck. Conversely,
when thinking about consequentialist theories it is important to note that intentions that are rooted
purely in self-interest and that may be devoid of any positive ethical intent can lead to extremely
positive outcomes.

Think of the hypothetical situation where two individuals, completely independent of each other, are
working feverishly towards the development of a low cost, environmentally clean, risk free, and easily
accessible source of energy. The consequences of success for either or both parties are largely the
same; this new source of energy would eliminate the need to burn fossil fuel, vastly reducing human
impact on the environment and slowing climate change. The difference here lies in the different
motivations of the two individuals. The first individual is driven by the desire to make the world a safer
place to live, to preserve the environment, and to better the state of human existence. The second
individual is driven by the recognition that being the creator of this new safe, clean, plentiful, affordable

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and accessible form of energy has the potential to make him wealthy beyond his wildest dreams. Who
is the more ethical of the two individuals? The consequences of their respective actions would be the
same; the environment would benefit substantially and either of the respective individuals would reap
the financial rewards. The difference lies in the motivations of the two individuals; the first is acting
altruistically while the second is acting purely out of self-interest. Consequentialist ethical theory would
place each of these individuals on the same moral footing while non-consequentialist theory would
place the individual acting out of altruism on a higher moral plane than the individual acting out of self-
interest. Should we care about what motivates or drives an individual to do good? If we do care, how
do we judge what internally motivates an individual? Consequentialist outcomes are most likely to be
observable and quantifiable. The intentions and motivations of an individual are much more difficult to
determine as they are often only known by the individual themselves.

2.2 Ethical Absolutism and Ethical Relativism

Over the evolution of ethical theories two extreme positions developed. The first was the idea that
there are universal moral principles that span time and place. This position is known as ethical
absolutism and lies at the root of most traditional ethical theory. These theories represent an attempt
to establish universally applicable moral principles that can be objectively applied to everyone
everywhere at any time, regardless of context.

Ethical relativism, on the other hand, recognizes that right and wrong is often subjective and dependent
on the context within which an ethical issue exists. Ethical relativism denies the existence of a universal
morality that can be rationally determined. Rights and wrongs cannot be rationally determined and
consistently applied. Ethical relativism contends that right and wrong depends on the context within
which the ethical issue is being considered, including the person making the decision, the culture in
which they exist, who is affected, and the expected outcomes.

Ethical absolutism has been criticised as oversimplifying ethical issues by ignoring the importance of
contextual factors in evaluating situations requiring ethical decision-making. It is often argued that there
exist no two ethical problems that are exactly the same because each exists within its own unique
context. Ethical absolutism has been accused of not recognizing or respecting the different ethical
frameworks and mores that exist across cultures and societies. The importance of cross-cultural ethical
decision- making has become increasingly evident subsequent to the advent of globalization and its
corresponding mixing of cultures. In times gone by, individuals were born, educated, socialized,
employed, retired and laid to rest in the same community and culture throughout their lives without
being exposed to people from different backgrounds or cultures. In today’s globalized and integrated
environment it is the norm to be placed in situations where individuals from multiple backgrounds and
cultures interact.

An argument often put forward against ethical relativism is that it opens the door as a defence of
actions that may be acceptable in one culture but not the other. The question that ethical relativism
invites is whether or not it is acceptable for an individual to act in violation of his or her own culture’s
ethical standards when operating in a culture where such behaviour is acceptable. Most people would

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find it difficult to suppress the moral framework developed during their upbringing and acculturation in
order to engage in activities unacceptable in their home culture just because they happened to be
operating in a foreign land where those activities are acceptable. The case of Lockheed Martin
Corporation in Japan below provides an illustration of some of the difficulties that can arise when
parties from different cultures, who do not necessarily understand the differences in business practices
between their respective cultures, attempt to engage in complex transactions.

Case 2.1 Lockheed Martin Corporation

In 1976, Lockheed’s vice chairman confessed to a United States Senate sub-committee to paying roughly
US$ 3 million in bribes to the office of Kakuei Tanaka, the Prime Minister of Japan to help facilitate the
sale of its TriStar aircraft to All Nippon Airlines (ANA).

The Lockheed Martin Corporation, a manufacturer of military and commercial aircraft was in serious
financial difficulty. They desperately needed a significant sale to shore up their finances. They were in
negotiations with Japan Airlines, the national airline of Japan to fill the airline’s requirements for
additional commercial aircraft. A. Carl Kotchian was the president of Lockheed from 1967 until 1975
and vice-chairman until 1977. In his memoir, Lockheed Sales Mission: Seventy Days in Tokyo, published
in Tokyo, Kotchian noted that in making payments and pledges for payments to Japanese officials in the
efforts to sell several of its aircraft to ANA, he had not violated any United States law. Because there
was no specific legislation in Japan forbidding government officials from accepting “gifts” from foreign
business interests, no Japanese law had been broken, either. Furthermore, never had Lockheed
communicated directly with any Japanese government officials with respect to these payments, nor had
Lockheed ever suggested or brought up the matter of these payments. These payments were made on
the advice of Lockheed’s Japanese agents who Lockheed trusted to guide them through local business
practices. He believed that by securing the sale of aircraft to ANA, he was saving the company from
financial distress and ensuring thousands of its employees continuing employment. Paying bribes on the
advice of trusted local agents in accordance with be local business practices, he believed to be justifiable
behavior in securing such an important sale. Kotchian was also confident that other aircraft companies
also engaged in similar practices.

Even though Kotchian never suggested the payments or discussed them with Japanese government
officials, he did know that the payments were destined for the office of the prime minister. The only
reason that these bribery payments were not in violation of US law was because they had not occurred
on US soil. The outrage in Japan and the US that ensued once the bribery scandal became public led to
the dismissal of several high-ranking Japanese politicians and criminal charges against a number of
Japanese government officials and Lockheed executives. This scandal eventually led to the introduction
of the US Foreign Corrupt Practices Act of 1977, the law which forbids US citizens from bribing foreign
government officials regardless of where in the world this activity occurs.

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Kotchian was justifying Lockheed’s payment of bribes to Japanese government officials on a number of
fronts. His first justification was that he was working to secure the livelihoods of hundreds, possibly
thousands, of Lockheed employees. Here he was acting in the self-interest of his company. His second
justification involved the use of ethical relativity to validate what he believed to be acceptable behaviour
in a culture that was foreign to him. He makes no comment on the ethics of Lockheed’s behaviour in
the context of his home culture. His third justification involved the blind faith that Lockheed placed in
the contracted Japanese agents to guide them through the nuances of Japanese business practices.
Casting the blame on the Japanese agents is meant to somehow excuse Lockheed from any unethical
behaviour. Kotchian’s final justification for the payment of these bribes was that it was a requirement
for doing business internationally and winning bids away from competing firms who were conducting
themselves similarly. This begs the question of whether one party’s unethical behaviour somehow
justifies like behaviour by another, which is clearly not the case. The Lockheed case had enduring
impacts on policy and business practice internationally. These impacts will be discussed further in
Chapter XX.

Clearly, ethical relativism demands the consideration of different cultural norms and values and the
recognition that awareness of these differences is important when conducting business in a cross-
cultural context. Ethical relativism should not be used as a justification for disregarding one’s own
ethical framework and engaging in behaviour that is contradictory to the mores exhibited by one’s home
culture. While it may be the case that context needs to be considered when engaged in ethical decision-
making, on a macro level, it is possible to point to examples of ethical absolutes. The concept of the
“golden rule” that posits that no individual should do anything to anyone else that they would not have
done to themselves can be held up as an example of an ethical rule with universal application. Each
major world religion has some version of the golden rule among its basic tenants.

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2.3 Traditional ethical theories

Philosophers have long debated the relationship between self-interest and ethical behaviour. Acting
solely in one’s own best interest, while bringing pleasure or prosperity to the individual, may do so at
the expense of harming other. Plato believed that “man tends to injustice if it benefits him and he is not
faced with undue consequences from his unjust actions.” Thomas Hobbes (1996) believed that a society
which allowed the unfettered freedom to do whatever one pleased would inevitably lead to a life that
was “nasty, brutish, and short.”

A social contract among individuals allows each of them to forego some of their freedoms in exchange
for a well ordered and peaceful society. Rules, laws, or norms of conduct would ensure that individuals
within a society were prevented from exercising their freedoms in ways that harmed others by
prescribing various forms of sanctions or punishments for those individuals failing to abide by the social
contract. These sanctions or punishments represent the consequences Plato refers to that individuals
are likely to face subsequent to their own unjust behavior.

2.3.1 Egoism

Egoism as a theory treats self-interest as a foundation of morality and ethical decision making. Ethical
egoism is a normative theory that posits that individuals as moral agents ought to act in their own self-
interest. Henry Sidgwick (1874) introduced ethical egoism in his book “the Methods of Ethics”
describing it as similar to utilitarianism, but focused on the individual’s utility rather than a collective
utility. Ethical egoism should not be viewed as a carte blanche to act in a way that disadvantages others
in the quest to maximize one’s own utility, but it does recognize that one’s own self-interest is the
primary driver in moral decision-making. A rational actor may forego an act that would provide them
with immediate pleasure if they perceived that act to cause them harm in the future or to decrease their
utility in the long run. For many, engaging in an act that causes harm to others may cause a greater
disutility in terms of a guilty conscience than any benefits accruing from that act.

2.3.2 Utilitarianism

The theory of utilitarianism posits that the correct outcome is one which maximizes the aggregate utility
of the people affected by an action. Under utilitarianism, sometimes known as the greatest happiness
principle, the moral action will lead to the greatest happiness for the greatest number of people.
Measuring happiness or utility is fraught with difficulty; different people achieve happiness in different
ways and weighing the relative utility of those affected positively by an action compared to the disutility
experienced by those negatively affected can be extremely subjective. Utilitarianism as a prescription
for action also has the potential to disadvantage groups holding a minority position which is in
opposition to the action most favoured by the majority. As with democracy there is always the
possibility of the tyranny of the majority whereby the interests of a distinct group of individuals is
consistently and continuously subordinated to the differing interests of the majority.

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2.3.3 Rights Theory

The Theory of Rights first appeared in 17th century writings of Thomas Hobbes and John Locke, but
modern rights theory is associated with the 18th century philosopher Immanuel Kant. Natural rights are
certain basic, important, unalienable entitlements that should be respected and protected in every
single action. These include freedom of speech and conscience, free consent, and the right to privacy
and due process.

Rights theory is based on consensus about nature of human dignity, but it is biased toward the western
individualistic view of morality. Rights theory holds that human beings possess these rights and the duty
to respect them regardless of any utilitarian benefits that the exercise of the rights and duties may
provide for others. Proponents of rights theory argue that moral standards should promote the
individual’s welfare and protect the individual’s choices against encroachment by society.

There are a number of challenges involved in relying on rights theory as a basis for evaluating ethical
behaviour. Anyone using a rights based approach to decision-making would only take an action if it did
not violate the rights of any stakeholder. It is possible, however, for stakeholders to have conflicting
rights in situations where preserving the rights of one individual may infringe on the rights of another.

Case 2.2 - Google in China: Conflicting ethical theories

A clash of ethical theories on an international scale occurred in the now famous case of Google’s
expansion into China. Google first offered their search-engine services in the Chinese language in 2000.
Prior to 2005, Chinese internet users could access google.com, which was hosted on servers outside of
China in the United States. Google had no obligation or requirement to sensor material that the Chinese
government regarded as sensitive or inflammatory because that material was stored on servers outside
of China. The Chinese government began to construct firewalls and to block access to material it did not
wish its populace to be exposed to. Because of the Chinese government’s increasingly intrusive
censorship activities, users of the Chinese version of the google search engine often experienced slow
and unreliable service,

Google, recognizing the size and potential of the Chinese market, decided to launch a Chinese based
domain, google.cn. The company opened a research and development centre in China in July 2005,
hiring Dr. Kai-Fu Lee, a predominant Chinese computer scientist and industry pioneer, to run the new
centre. Hosting the google.cn servers in China would improve service by increasing search speed and
reliability. Google would, however, now be required to “self-sensor and purge any search results of
which the government disapproved.” (Shah, 2006, p. 4) To let users know that they we complying with
Chinese law, google displayed notations to alert users that content has been blocked; a practice similar
to the action google takes in Germany and France where notifications are provided when Google blocks
users from accessing sites promoting Nazi paraphernalia (Liedtke, 2005).

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Google’s decision to submit to Chinese censorship laws would not come without repercussions. The
decision to censor and purge search results within google.cn met with a great deal of disapproval in the
United States and other parts of the Western world. Protestors gathered to voice their opposition to
Google’s move into China outside of Google’s headquarters in California, letter campaigns deluged
Google’s CEO, and a group of Google senior executives were called into congressional hearings (Shah,
2006). Google was faced with a classic ethical dilemma. On one hand, Google saw their mission to
provide the greatest access to information to the greatest number of people as being a noble pursuit.
On the other side of the coin, there are many who hold that the suppression of information through
censorship is a violation of public rights and should not be condoned. If Google were to choose to
uphold their mission, they would do so at the cost of implicitly condoning and facilitating censorship by
the Chinese government. If Google were to uphold a stance against censorship they would do so at the
cost of denying the Chinese population access to the world’s preeminent search engine and the
information that it could allow them to access.

Google argued that by entering China they were making the world’s information as accessible in China
as the laws would permit. Google believed their actions were ethical, and their decision to enter China
was a step towards making the world’s information more accessible to the greatest number of people.
Those who opposed Google’s move into China argued that the Chinese government’s censorship of
information stifled dissent and subjugated the people. Human rights activists in China could not be
heard and negative reporting on government activities would be quashed. Information on events such
as the Tiananmen Square confrontation in 1989 would be denied to the general public. There were
many who called Google’s motivations for moving into China into question, arguing that Google was
subverting its own stated values in favour of the self-interested pursuit of profits.

Google’s argument in favour of launching google.cn and entering China was a utilitarian stance. They
believed that allowing the greatest number of people improved access to the world’s information, even
if that information was censored, was providing the greatest aggregate good. This clashed with the
arguments provided by those who advocated the rights based argument that by allowing Chinese
government censorship, Google was adversely infringing on the rights of free speech and access to
information by individual activists and organisations that held views contrary to the Chinese
government.

The primacy of individual rights supported by rights theory has a bias towards western individualism.
Chinese culture holds a more collectivist position which places the good of the group above that of the
individual. The Chinese government would argue that censorship is necessary to maintain an orderly
and peaceful society. It should be noted that the issue of censorship in China did not originate with
Google’s arrival; the Chinese government has a long history of censoring the information available to its
people. Many individuals in China simply accept this government censorship of information as a fact of
life because they have never known anything different. Ethical relativists could argue that different
attitudes towards censorship constitute a cultural difference. While censorship may be unacceptable in
western society, it is accepted in China. Ethical absolutists, like rights theorists, would argue that free

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speech is a universal right and should not be violated regardless of where and in what culture it occurs
irrespective of any utilitarian consequences.

The story does not end after Google decided to launch google.cn and expand into China. Google
engaged in censorship as required by the Chinese government. Google soon found itself on a slippery
slope; by acquiescing to the Chinese government’s requests for censorship of certain materials, Google
had opened itself up to repeated and increasingly intrusive requests by the Chinese government for
further censorship. As the Chinese government demanded more and more control of the information
available on google.cn, Google found its position in China increasingly uncomfortable. Finally, in 2010,
Google upped its stakes in China and left the country. By this time, Baidu, the Chinese search engine,
had developed its presence and technology to a point where it could fill the void left by Google’s
departure from China.

2.3.4 Theory of duties

The German philosopher, Immanuel Kant (1724-1804) believed that there existed a supreme principle of
morality and that mankind had a universal duty to act morally. In developing his theory of duties, Kant
devised his ‘Categorical Imperative’ which consisted of three maxims, which if applied universally, would
serve as a guide to moral behaviour. The maxims focused on consistency of action, the importance of
human dignity, and universality of application. Kant’s theory is deontological in nature, focusing not on
the consequences of an action, but in the rightness, or wrongness, of the execution of our moral duty.

• Maxim 1: Consistency
Act only according to that maxim by which you can at the same time will that it should become a
universal law.

• Maxim 2: Human Dignity

Act so that you treat humanity, whether in your own person or in that of another, always as an
end and never as a means only.

• Maxim 3: Universality
Act only so that the will through its maxims could regard itself at the same time as universally
lawgiving.

The theory of duties does present a number of challenges. As a non-consequentialist ethical theory it
undervalues the outcomes generated by basing ethical decision-making strictly on duty. Kant’s
Categorical Imperative has been criticized as failing to take into account the importance of context in
decision making in the face of ethical dilemmas. The idea that adhering to one’s duty is the only ethical
way to behave is overly simplistic and facilitates a misplaced optimism that outcomes will automatically
be just.

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2.3.5 Fairness and justice

It is not uncommon for the first characterization of any injustice, whether real or perceived, to be that it
is unfair. For anyone who has spent time with children, the refrain “it’s not fair!” is heard all too often.
But what is fair and what is just? In defining justice, it is not unusual to refer to fairness, which becomes
problematic if one is also unsure of the definition of fairness.

Fairness is often thought of as an equal sharing of something between parties or participants. What that
something may be is often open for discussion. A fair division of toys among children ensures that each
child receives the same amount of toys as the other children. A fair division of labour within a family
implies that each party expends the same amount of effort in completing a set of tasks, even though the
tasks themselves may be different. Fair pay for equal work infers that those engaged in work of similar
quality, complexity or importance should be similarly remunerated. And fair punishment means that
the punishment should fit the crime or misdeed without being either excessive or minimized to the
point where it is ineffective. Fairness must take into account a significant number of parameters
including quantity, quality, value, and relevance. In the world of business, market forces may also come
into play with respect to what is seen to be fair. For instance, a labourer with a rare and unusual skill
may be able to command a significantly higher wage for his or her work than a senior executive simply
because of lack of supply of that particular skill relative to the demand for it. This is true even though
the work in which the executive engages in may be more complex and require greater effort. How is
this fair? There may be many justifications; the labourer is being fairly rewarded for the effort in
acquiring his or her unique skill; exercising this skill as an employee provides a unique benefit to the
employer which may provide added value further on, and; providing the employer with access to this
unique skill denies access of the competition to said skill.

Justice is often defined as the simultaneously fair treatment of individuals in a given situation with the
result that everybody gets what they deserve. Getting what one deserves may refer to a fair
punishment, a fair outcome, or experiencing a fair process. Punishments fairly applied are referred to as
retributive justice. Retributive justice is often thought of as applying a punishment that fits the crime.
This biblical “eye for an eye; tooth for a tooth” application of punishments is often criticized because it is
vengeful in nature and that it does little to add to the well-being of the victim. The problem of adhering
too closely to the principle of retributive justice lies in the fact that because actions befitting
punishments are behaviours that are considered abhorrent to society, applying the similar action as the
crime committed by the perpetrator to the perpetrator as punishment is also viewed as cruel or
abhorrent. An alternative view of fair punishment is restorative justice. Restorative justice is applied
with the intention of having the perpetrator pay restitution to the victim in an effort to bring the victim
as close to the condition they enjoyed prior to the crime or misdeed inflicted upon them by the
perpetrator. In cases where it may not be possible to return a victim to their original pre-event
condition because of the irreversible nature of the crime, restorative justice may be replaced by
compensatory justice. Compensatory justice requires the perpetrator of the crime to somehow
compensate the victim by providing them with something of value (usually money) which adequately
compensates the victim for that which they have lost. One of the practical problems with applying

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punishments under the principles of either restorative or compensatory justice is the frequent inability
of the perpetrator to come up with the means required to either compensate the victim or to restore
the wronged party to their previous condition.

Applying punishments for misdeeds in business is fraught with complexities and ambiguity. Firstly, one
must ask whether the action taken was intentional or whether it was taken in good faith without the
foreknowledge that anyone would be harmed. Secondly, there is often a significant element of
ambiguity in determining who was actually harmed and to what extent. In the case of insider trading,
for instance, it is easy to see the benefits to the perpetrators, but the victims may be unaware that they
have been harmed, or if they are, they would have significant difficulty in establishing the extent of that
harm.

Distributive justice is the idea that the outcomes of an event or a transaction should be fair to the
parties involved. This does not require that the outcomes are necessarily equal, but that there is some
measure by which they can be rationally justified. Economists and philosophers have long debated the
fairness of outcomes. On one end of the scale is the idea that all individuals should be treated equally in
terms of the distribution of material wealth by society. In this scenario, each individual would receive
the same amount of benefit in material terms regardless of the job they performed; a physician would
receive the same pay as a bus driver, a nuclear physicist, or a janitor. This version of egalitarian
distribution of wealth, which lies at the foundation of communist economic theory, does not take into
account the amounts of effort expended, the acquired or innate abilities or skills of the worker, or the
importance of the work being accomplished. At the other end of the political spectrum lies the free
enterprise theory espoused by proponents of capitalism that the concept of equality of opportunity in
which each individual has the equal opportunity to leverage their efforts, talents, intelligence, skills and
abilities in the pursuit of material wealth. The downside of this version of distributive justice lies in the
outcomes for those who are not endowed with the necessary attributes to allow them to eke out a living
that will sustain them. The reality in most societies lies closer to the middle of the spectrum, where
those individuals blessed with attributes that permit them to succeed may do so, but with the proviso
that those at the lower end of the economic ladder lacking such attributes are provided for in some kind
of social safety net. Adam Smith (1937), often referred to as the father of market economics, regarded
the ultimate luxury as the ability to assist those less well off. The utility gained assisting the less
fortunate by an individual who had successfully amassed significant material wealth naturally provided a
safety social net.

Finally, procedural justice is the idea that the process of coming to a resolution is comprehensive,
subject to due diligence, and of a level of rigour suitable to the crime or misdeed in question. The
concept of procedural justice is applied equally to victims of crimes or misdeeds and the perpetrators of
those actions. Perpetrators, for instance, should not be held in custody for extended periods of time
awaiting the ruling on a simple misdemeanour. Likewise plaintiffs who are seeking a relatively minor
amount of compensation for a small claim should not be expected to endure undue legal expenses or
excessive wait times in order to have their case heard. The administrative processes applied to resolving
minor disputes is expected to be efficient, simple and straightforward while the procedures applied to

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disputes involving significant consequences may be necessarily more involved and complex. Procedural
justice increasingly plays a role in business disputes where one party has a significantly greater pool of
resources available to them than the other party in the dispute. There are a seemingly endless number
of stories where corporations have used procedural delays and expenses to exhaust the resources of
those who have launched legitimate grievances against them. The dispute becomes a waiting game in
which the side with the greater resources can delay and wait out their opponent until the opponent
runs out of resources and can no longer afford to pursue litigation.

In some cases, the use of administrative process can be used to aggressively subjugate certain
individuals or groups. A spurious law suit launched against an individual or group unable to defend
themselves due to lack of knowledge or understanding of the law, or the inability to obtain the
resources needed to acquire the necessary expertise, can lead to rulings in favour of the aggressor.
Rulings such as this, because of the inability of the defending party to launch a legitimate defence, may
be viewed as a failure of administrative justice. The case presented below chronicles one such example
of a company, JK2 Westminster L.L.C., misusing the judicial system for their own gain.

Case 2.3: JK2 Westminster L.L.C: A landlord’s abuse of administrative process

JK2 Westminster L.L.C. is a holding company which owns several thousand rental units in Maryland that
it acquired in 2011 or shortly thereafter. These rental units are mostly townhouses or low rise
apartment buildings in lower income neighbourhoods. As in any large scale rental complexes, there
were number of cases where renters moved out of their rented properties for legitimate reasons prior
to the expiration of their leases. These reasons could have included illness, need for repairs to the unit,
infestations, or troublesome neighbours, among other things. In each of these cases, the renters ought
the permission of the property management firm representing the owner to move out without penalty.
Many of these moves occurred up to three of four years prior to JK2 Westminster L.L.C. acquiring these
properties. (MacGillis, 2017)

When the rental properties were acquired by JK2 Westminster L.L.C., the company acquired not just the
physical assets but also any debts or outstanding rents owed by the tenants. JK2 Westminster L.L.C.
took the aggressive stance that any tenant that had vacated a rental property prior to the completion of
their lease owed the owners of the property penalties, fees, and rent, often adding up to sums between
$3,000 and $5,000 per instance. This included tenants who had moved out up to four years prior to JK2
Westminster L.L.C.’s acquisition of the properties. JK2 Westminster L.L.C. and their lawyers relentlessly
pursued these former and current tenants, issuing summons ordering them to appear in court. Many of
the tenants either did not appear or appeared without legal counsel. Not being familiar with legal
process and lacking the resources to acquire the legal support to be able to defend themselves, many of
these tenants either failed to defend themselves at all or could not plead their case sufficiently enough
to avoid being found liable for payment of the penalties, fines, and back rent demanded by JK2
Westminster L.L.C. In addition to the amounts demanded by the landlord, tenants incurred legal
expenses and interest on monies owed. JK2 Westminster L.L.C. then proceeded to demand that wages

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and bank accounts be garnisheed in order that they receive the funds they claimed they were owed. As
a result of these actions by JK2 Westminster L.L.C., many of these tenants were forced out of their
homes and, in some cases, lost their employment. While $3,000 to $5,000 per case may not seem like a
significant amount of money to a real estate holding company, JK2 Westminster L.L.C. and their lawyers
were pursuing hundreds of such cases at a time.

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2.4 Contemporary ethical theories

As new ethical issues continued to emerge and evolve, so did ethical thinking. In order to address
emerging ethical issues, new ethical theories emerged. These contemporary theories attempt to
approach ethics from different angles and in different contexts. Often these new theories were an
attempt to fill in the holes and spaces that traditional ethical theories were perceived to have left
unaddressed.

2.4.1 Virtue ethics

Virtue ethics is a non-consequentialist theory that contends that morally correct actions are those
undertaken by actors with virtuous characters. In this vein, the voyage towards morally correct
behaviour requires the formation of a virtuous character. This begs the question of whether virtuous
character traits are inherent or whether they can be acquired through training or education. Similarly, it
needs to be determined which virtues determine a virtuous character; moral virtues or intellectual
virtues, and how do we define and recognize these virtues. Furthermore, how is it that we can
accurately determine whether an individual actually possesses these virtues?

Consequentialist theories rely on outcomes of actions in order to determine whether or not they are
morally correct. As a non-consequentialist theory, virtue ethics relies on much more subjective
measures. It leaves open the possibility that someone with a virtuous character may, through ignorance,
incomplete information, or just plain bad luck, take an action which has disastrous ethical
consequences. Similarly, one who consistently acts ethically may, in fact, be morally bankrupt with
ulterior motives for trying to bolster his or her reputation.

Take the case of Bernie Madoff, former celebrity investment advisor. Mr. Madoff was revered for his
philanthropy, supporting health research, hospitals, higher education and the arts. He was clearly an
example of someone exhibiting the goodwill and generosity of a person with a virtuous character, until
he was discovered to have been defrauding his clients for decades. If his transgressions had never been
discovered, or even if it had never been found out that the reasons for his philanthropy were other than
virtuous, he would still be regarded as a person of virtuous character.

2.4.2 Discourse Ethics

Discourse ethics is a theory which aims to resolve ethical conflicts through the application of a process
of norm generation through rational reflection and discussion by all relevant participant stakeholders on
each of their own positions and experiences. Habermas (1983) surmised that the various parties in a
conflict could gather together to discuss the settlement of the conflict, ultimately devising a solution
acceptable to everyone. The goal of discourse ethics is ultimately the peaceful settlement of conflicts
(Steinmann and Löhr, 1994). The practice of discourse ethics is the basis for political diplomacy.

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2.4.3 Feminist Ethics

Feminist ethics is an approach to ethics that recognizes women’s moral experiences relative to
traditional ethical theory, which is dominated by a more masculine outlook. Feminist ethics prioritizes
empathy, harmonious and healthy social relationships, care for one another, and avoidance of harm
above the abstract principles often associated with traditional ethical theory.

Feminist ethics is synonymous with the “ethics of care” and emphasizes cooperation and compromise
over competition and winning by focusing on processes rather than outcomes or results. The more
masculine based approach to ethics, or the “ethics of rights” regards individuals as autonomous and
independent entities concerned with fairness and impartiality while feminist ethics views people as
interdependent members of a social web or network whose concern is the avoidance of harm and the
maintenance of harmonious relationships.

The appeal of feminist ethics lies largely in its orientation to keeping the peace, caring for the
community and empathizing with those within it. By focusing on the addressing of conflicts within the
roles and responsibilities of the actors within the social network, the focus of feminist ethics or the
ethics of care is, by nature, less confrontational than the masculine orientation which tends towards the
conflict of rights and duties between individuals with a focus on fairness, equal protection and due
process.

2.4.4 Postmodern ethics

A piece of advice that is often provided to those placed in positions where they are faced with difficult
decisions is to pay attention to the idea that if a certain action or decision does not feel right, it probably
isn’t. This begs the question of what it is that influences our feeling that something is not right.
Postmodern ethics regards this feeling as a moral impulse which is an emotional response that cannot
necessarily be tied to any sort of rational analysis. A postmodernist approach to ethical decision making
is an approach which encourages an individual actor to “listen to their gut” with respect to formulating
their views on what constitutes the right or wrong course of action when faced with an ethical decision.
This recognition that individuals possess a moral compass that drives their emotional perceptions of
right and wrong does not necessarily divorce ethical decision-making from rationality, but rather it
recognizes that ethical decision-making exists within a context which includes the aggregate experiences
and feelings of the decision-maker. This moral impulse encourages individuals to regard each situation
independently and to question established rules and practices when their feelings, convictions, and gut
reactions are in conflict with those rules and practices.

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2.5 Pluralism

The preceding discussion has offered an overview of a number of traditional and contemporary ethical
theories. The goal is not to select one which best suits the environment of a particular entity, but rather
to recognize that each of these theories provide a different perspective on any given moral dilemma. By
looking at an issue through the lens of each of these theories, one can develop a more comprehensive
understanding of the issue at hand. This understanding provides a more compelling basis on which to
base a decision rather than relying on a single approach to ethical decision-making.

Even in cases where theories may conflict, examining the issues through these conflicting theoretical
lenses can facilitate greater insight into the problem. As such, these theories become complimentary
rather than mutually exclusive.

Crane and Matten (2007) argue that for the practical purpose of making effective decisions in business
there is no one theory or single approach that constitutes the best or most accurate view of a moral
dilemma. In actuality, they suggest that all of these theoretical approaches serve to throw different light
each from different angles on a given problem or situation. Being able to inspect a situation through
these multiple lenses allows for a fuller picture and a greater understanding of the problem. Even while
many of these theories may initially appear contradictory and in some cases mutually exclusive, when
viewed as part of a plurality of ethical theory they are actually complimentary in nature. By asserting
that no one theory can be applied to each and every situation and by recognizing that a multitude of
theories can be applied to inform ethical decision making an any situation requiring ethical decision
making, this pluralistic application of ethical theory occupies the middle ground between ethical
absolutism and ethical relativism.

When engaged in ethical decision making, one cannot underestimate the importance of context.
Context is the totality of the characteristics of the surrounding environment within which a given
situation occurs. There are no two situations that exist within exactly the same context. The multitude
of external influences, regardless of their size or significance, can play a role in influencing the ethical
decision made.

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2.6 Considerations in Ethical Decision-Making

Competence in ethical decision-making is a skill like any other. As such, ethical decision-making skills
can be improved with the training and experience required to develop the sensitivity, awareness,
knowledge, and the conceptual frameworks necessary for dealing with ethical issues. Developing ethical
decision-making skills does not infer that one will be more likely to come up with the right answer, as
complex ethical issues and dilemmas often have no black and white right answer. Competence in
ethical decision-making allows one to understand the ethical issue from multiple angles and to
appreciate the influence and complexities within its specific context. This understanding will assist the
ethical decision-maker in coming to an informed judgement with respect to the possible actions to be
taken and outcomes to be expected when dealing with an ethical issue.

When addressing ethical issues, the ethical decision-maker needs to be mindful of several pitfalls that
can impede the effectiveness of their decision-making process. Moral negligence, moral recklessness
and moral blindness can handicap effective decision-making.

2.6.1 Moral Negligence

Moral negligence is the failure to take into consideration something that should be considered in coming
to an ethical decision. Moral negligence amounts to a lack of awareness and for purposes of illustration
can be compared to legal negligence. Assume you construct a railing around your raised patio. You
prop up the railing to see what it looks like and you leave it that way without securing it. A guest comes
onto the patio and you fail to warn them not to lean on the unsecured railing. The guest leans on the
railing and falls off the patio injuring themselves. You were negligent in failing to recognize the danger
and in failing to warn your guest of that danger. As a result of your negligence, harm occurred to your
guest.

2.6.2 Moral Blindness

While moral negligence a failure to consider something that should be considered, moral blindness
amounts to the failure to see that there is an ethical issue at all. If we consider the previous example of
the patio railing, moral blindness is the failure to recognize that there may be any danger at all. The
morally negligent host, in contrast, recognized the danger but did not think in necessary to act on it.
Moral blindness occurs when one looks directly at an issue and fails to see that there is any moral
component to it.

2.6.3 Moral Recklessness

Someone who is morally reckless recognizes an ethical issue but fails to give it the attention it deserves
because of haste or lack of due concern. Once again, take the example of the patio railing. The morally
reckless host recognizes that there may be a danger posed to guests by the unsecured railing. He calls a
cursory “be careful” to guests heading towards the patio, thinking that this will be enough to keep them
safe, which it clearly is not. Legally, this situation amounts to negligence and the injured guest would

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have legal grounds to launch a suit. This case differs from moral blindness because the host recognized
the danger, and from moral negligence because the danger was considered and addressed, just not
adequately. The consideration of the danger was far too cavalier.

2.6.4 Ethical decision-making models

In an effort to inform ethical decision-making and to mitigate the dangers of moral negligence and moral
recklessness, a number of ethical decision-making models have been developed. These models usually
take the form of a systematic set of questions designed to assist the decision-maker in taking into
account differing perspectives that should be considered when addressing an ethical issue. Ethical
decision-making models are not intended to provide an answer or a solution to the ethical issue at hand,
but rather to facilitate a greater understanding of the depth, complexity, and context of the issue.

Many of these ethical decision-making models have been developed by organisations in an effort to
bring increased rigor and consistency to their ethical decision-making processes. The use of ethical
decision-making models within an organisation recognizes the existence of norms of behaviour and
values that are characteristic of that organisation and helps align decisions with those norms.
Individuals within an organisation may have differing insights and perspectives that they apply to their
own ethical decision-making. Research has found that individuals will often make different ethical
decisions at work than they would outside of work. This is often because an individual makes different
choices because they are a part of an organisation which has its own set of norms and values. The use
of an ethical decision-making model can create greater individual awareness of these norms and values
which in turn leads to more consistent collective decision-making.

It should be noted here that the use of ethical decision-making models is less effective at addressing
moral blindness. In order to make the decision to use an ethical decision making model, one has to first
recognize that there is a moral issue that needs to be addressed. If no moral issue is perceived there is
no reason to invoke an ethical decision-making model.

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2.7 Business and Society

From the time that humans began to interact and form societies, people have engaged in commerce. In
fact, it is fair to say that no successful society has ever existed without some form of economic activity.
In early times it was trade and barter of goods and labour, later to become more formalized commerce
using mediums of exchange such as money, precious metals, or livestock as a store of value. As people
banded together to engage in larger transactions and to form business enterprises, the power and
influence of business in society continued to grow. With the advent of the corporation and capital
markets, the ability of businesses to amass large pools of capital for large scale commercial ventures
provided them with the potential to make major contributions to society and, conversely, the potential
to inflict enormous harm.

Business and commerce serves society by furthering collective prosperity and fulfilling the needs and
wants of individuals. Society accords successful business people and entrepreneurs almost mythical
status. Individuals such as Alexander Graham Bell, inventor of the telephone, Henry Ford of the Ford
Motor Company, Thomas Watson of IBM, Bill Gates of Microsoft and Steve Jobs of Apple among others
are credited with changing the fabric of the society in which we live. Adam Smith believed that the free
market was governed by the aggregate of individual preferences rooted in individual self-interest. Order
is created out of the combined needs, wants, and desires of individuals within a society. The
aforementioned business people were able generate significant wealth and social impact by harnessing
those forces in creating products or services that appealed to the population.

The free market is not the only economic system. Command economies have developed with the intent
of bringing more order and economic equality to society. Past performance of these command
economies has not been as successful as free market economies, but the idea of central government
control over an economy in the interest of providing greater order has an appeal in many quarters.
Businesses in free market economies must recognize that they are allowed to operate because society
believes that the benefits they provide to society outweigh the costs. This social licence to operate is an
implicit permission which is rooted in society’s traditions, beliefs, customs, and practices.

The free market is not free in the sense that there are no constraints on the pursuit of profits.
Businesses operating under social licence are expected to comply with laws, pay taxes and operate in
accordance with the social norms that exist within a society. This includes behaving ethically and in a
socially responsible manner. It is important to remember that business needs to contribute a net benefit
to society in order to maintain its social licence.

One has only to pick up a newspaper or turn on the television news to see the continuing occurrence of
significant ethical infractions by business in all sectors. While certain practices such as bribery and graft
have existed for centuries, technological advances and changing business models and processes
continue to provide new ways for those of questionable moral fibre to engage in theft, fraud and
embezzlement.

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Societies are becoming increasingly aware of the existence and opportunities for unethical behaviour.
Stakeholders are increasingly demanding of their governments, institutions and businesses with respect
to the upholding their respective ethical responsibilities. But even with this increased awareness and
the vigilance and transparency of the media in reporting ethical transgressions, ethical infractions
continue to occur. Businesses must not only be aware of the ethical ramifications of their actions, they
must develop the capacity to govern themselves and manage the ethical environment within their own
organizations. As will be discussed further later in this text, businesses need to be able to evaluate
different methods of managing business ethics and to select the one that will help them best achieve
their goals.

There is a rather tired old joke that contends that business ethics is an oxymoron. The reason that many
find this humorous is that the number of transgressions reported in the media could easily lead one to
believe that business is indeed corrupt by nature. If this were so, business would soon lose its social
licence to operate because an excess of corrupt and unethical behaviour would indeed bring about a net
deficit to society. While it is true that businesses operate in order to generate net profits for their
owners and shareholders, conducting business within the rules and norms expected by society will have
a net benefit to society. Corruption occurs when businesspeople go beyond the acceptable boundaries
set by society by breaking laws and bending rules in trying to satisfy their greed.

Is it possible to succeed in business while maintaining a high ethical standard? Indeed there are far too
many examples of ethical businesses, business practices, and business people to list. Unfortunately,
those behaving unethically tend to feature in our consciousness because it is the ethical transgressions
that get the most media attention. There is increasing evidence that good ethics is good business, that
businesses can do well by doing good, and that self-interest and ethical behaviour are not mutually
exclusive. Indeed, ethical behaviour and self- interest can often be quite nicely aligned.

In many instances, doing the ethical thing (or not doing the unethical thing) just makes good business
sense in that it aligns with self-interest. The moral action results in the same outcomes as the self-
interested action. Take, for instance, the carpenter who makes the decision to stop disposing of his
waste wood and looking for ways to recycle it. He finds a wood chip manufacturer who will not only
take the waste wood off the carpenter’s hands, but actually pay the carpenter for his waste wood. The
carpenter intended to act ethically by finding a way to recycle his waste wood and found that doing so
worked in his best interests. The value of the reputational capital generated by behaving in a
consistently ethical manner can also serve the best interests of a business. A reputation for honesty and
ethical dealing can attract customers and positively affect the bottom line. People do not want to do
business with anyone who has earned a reputation as an immoral operator.

If the ethical decision does not necessarily align with the most profitable option, companies can, with a
little effort, squeeze additional benefits from choosing the ethical option. Making awareness of their
ethical stance a feature of their marketing and promotions strategy can have positive outcomes for a
company’s reputation, customer acquisition, and sales. The benefits to the bottom line can offset and,

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in some cases, more than compensate a firm for making the ethical choice that is not initially perceived
to be the most profitable.

There may be other self-interested reasons for choosing the ethical option over a more profitable one.
Society, governments, and regulators have a preference for avoiding types of behaviour that are
perceived to be unethical and fostering more ethical forms of business conduct. Making an ethical
choice when decision-making (or avoiding the unethical choice), is the most likely action to satisfy
lawmakers and regulators. Not only will it help business to avoid litigation or regulatory sanctions, but a
reputation for consistent ethical decision-making is likely to decrease the amount of regulatory scrutiny,
which can be time consuming and expensive. A positive reputation for consistent ethical behaviour may
also create a willingness for society and regulators to overlook an ethical transgression should one
occur. If an ethical mistake is viewed as an anomaly, rather than part of a pattern of unethical
behaviours, forgiveness is more likely to be forthcoming.

There may be occasions when making the ethical decision may actually put a business at a disadvantage
relative to its competition. Take the house painter who prides himself on his honest and accurate
estimates when pricing potential painting jobs. The fact that his competitors are presenting lower cost
estimates in order to attract business, and then charging the customers for cost overruns as the job
nears completion. Our house painter could choose to lower his estimates so that he does not lose
contracts to his competition, or he could take the ethical high road and continue to be honest and
accurate in his estimates for the price of his work. In order to meet the competition’s aggressive pricing,
the painter could look for other ways to attract contracts. One way could be to guarantee estimates,
and cover any overruns himself. If his estimates are indeed honest and accurate, this policy would
increase his risk to a minimal extent while providing a potentially powerful marketing tool that would
help cement his reputation for fair dealing.

Ethical behaviour facilitates a stronger and more efficient business environment. While making the
ethical choice may be contrary to a company’s self-interests in the short term, ethical dealing enhances
the business environment. Trust and transparency is an important element in generating economic
efficiency within an economy. Economists view corruption as having the same effect on the economy as
an added tax without the benefits that taxation is meant to provide. Consider an economy or society
where bribery is the norm. Each transaction between two or more parties would involve one or more
parties being offered a bribe in order to facilitate the transaction. This adds a cost to each transaction.
Multiply this across all business transactions within a society and the result is a drag on economic
activity and a much less efficient economy.

It would be foolish to argue that doing the right thing is always in one’s best interests. Making the
ethical decision does not always coincide with one’s self-interest, either in the long term or in the short
term. There are occasions where making the ethical decision requires significant sacrifice by the
decision-maker. Why would someone make an ethical decision that was clearly contrary to their own
self-interest and could possibly cause them considerable harm? The short answer is; because ethics
demands it. Sacrificing one’s self to save others is clearly outside of the rescuers self-interest, but it

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happens because it is the right thing to do. The business person who shutters their company because it
is found that the product it produces may be unsafe or harmful is acting ethically, but at great personal
cost.

Self-interest to a large extent determines how we act and what we do. For businesses and business
leaders, self-interest forms the lion’s share of the motivation for increased profitability and growth. But
as the preceding discussion notes, self-interest is not the sole yardstick by which we judge ethical
behaviour. Psychological egoism contends that people are always motivated by self-interest and by
selfishness. Clearly, there have been many instances where people have acted or taken a position that
they believe to be the ethical choice, but is contrary to their self-interest. Ethical egoism is the idea that
self-interest acts as the reference point for what is morally right and morally wrong. By judging all
actions in light of their relationship to self-interest is again far too short-sighted. The moral perspective
has a much broader basis than self-interest alone.

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2.8 Continued occurrence of ethical infractions

Conceiving of and evaluating emerging and different ways of managing business ethics is something that
should be of ongoing importance to any business entity. Maintaining a positive ethical reputation and
protecting against ethical infractions, either internal or external, are clearly in the best interests of any
company. The lines between behaving ethically out of self-interest and behaving ethically because
behaving such is the just and moral thing to do have become irreversibly blurred. The Nobel prize-
winning economist Milton Friedman (1970) argued that the only moral duty a corporation had was to its
owners or shareholders. In Friedman’s view, the generation of profits was the overarching purpose of
any company and the only stakeholder to which a corporation should be held responsible was the
shareholder. With the emergence of stakeholder theory originally brought to prominence by Thomas
Freeman (****), corporations recognized that they needed to consider the wellbeing of all parties
affected by the operation of their business activities. It has now become accepted that ethical business
is good business and companies can do well by doing good. Studies indicate that the most successful
corporations tend to be ones with a history of, and reputation for, ethical behaviour and practices.

In the now famous case of American pharmaceutical company Merck & Co., Inc., the company surmised
that that the donation of a drug that cured a debilitating condition known as river blindness to those in
developing countries who required but could not afford treatment would ultimately benefit the firm to
an extent that would greatly exceed the lost revenues and manufacturing and distribution costs
incurred. While it is difficult to quantify the benefits of such actions, there are many examples of
companies engaging in philanthropic and socially impactful activities that are significant in terms of cost
and social impact that pay enormous returns in terms of reputational capital and company profile.

Case 2.4: Merck and Company Inc.

Merck is a major American pharmaceutical company which, in the late 1970s found that an antiparasitic
compound it was developing for use in livestock might be adapted for use in humans in order to treat,
and possibly cure, a condition called river blindness (onchocerciasis) that afflicted millions of people in
developing countries. River blindness is a condition that is caused by small worm-like parasites that
dwell in the bloodstream. These parasites are introduced by tiny black fly bites which transfer the larvae
of the parasitic worms into their human hosts. The parasites spread through the human body causing
severe discomfort and itching, ultimately affecting the eyes, and eventually leading to blindness. The
world health organization estimated at the time that 85 million people spread out through 35
developing countries either had the condition or were at risk of acquiring it.

Several millions of dollars would be required to develop the drug and to field test it before it would be
able to go to market. The problem for Merck was that those in need of the drug lived in third world
countries and were thus unable to afford treatment. The head of Merck’s research labs, Dr. P. Roy
Vagelos, who had championed the development of a research culture that focused on the alleviation of
human suffering, saw the development of a cure for a disease responsible for enormous human

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suffering as being completely aligned with that culture. Developing the drug would further Merck’s
understanding of parasitology in which it already served as a thought leader.

It took ten years to develop and test the drug, Mectizan, and to clear the regulatory hurdles required to
release Mectizan into the market. Merck was fully aware that they would face considerable challenges
commercializing their new drug. The company knew that the end user could not afford to purchase
Mectizan, but they believed a market existed in the form of third-party funders such as governments,
non-governmental organisations, charities and global health organisations. It soon became clear that the
hoped for third party funding would not be forth coming. Merck was then faced with a decision; should
they consider giving the drug away to those in need free of charge? By doing so, Merck would forego
any possibility of recovering the sunk research costs incurred in developing the drug while continuing to
incur the costs of manufacturing the product to meet what was considered to be substantial and open
ended demand.

In 1987, Merck formally announced that it would provide Mectizan, free of charge, to anyone who
needed it, for as long as it was required. Merck could afford to do this because it was garnering massive
profits from the sale of its livestock focused antiparasitic, Ivermectin. Merck hoped by giving away
Mectizan, significant good-will and reputational capital would be generated for the company and that a
greater focus on diseases specific to the developing world would be adopted by global pharmaceutical
companies.

Merck had one final major challenge to face with respect to its decision to provide Mectizan for free;
how to get the drug to the people who needed it. The people susceptible to river blindness lived in
areas not served by the infrastructure needed for the mass distribution of treatment. While Merck was
capable of manufacturing large quantities of the drug, it was not equipped to undertake the task of
distribution and treatment. Merck identified a number of areas of concern with the respect to the
distribution of the drug. Among these concerns were the tracking of locations where distribution had
occurred, the tracking of any adverse reactions, the management and maintenance of correct dosages,
and keeping the product out of the black market.

As businesses grow in size, scope and complexity, so do the ethical issues they face. Add to this the
accelerated rate of societal change and exponential growth in the development, adoption and
consumption of technology and the increasing intertwining of global systems. International financial
systems, transportation infrastructures, and communication and information systems have become
interwoven and networked far beyond the constraints of national borders. The high level of global
integration can greatly amplify behaviours to the extent that these behaviours have far reaching
consequences, far exceeding the comprehension of those instigating those behaviours. Unethical
behaviours that may seem benign on a local scale can have global implications when repeated over and
over. Major systems failures include the great depression, the bursting of the dotcom bubble in the late
1990s, the financial crisis of 2008, as well as significant corporate failures such as the Enron Corporation
in the United States and Nortel Corporation in Canada.

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Case 2.5: The Subprime Mortgage Crisis

The subprime mortgage crisis resulted from a culmination of a series of events emanating from the
financial services industry. The events leading to the financial crisis of 2008 and the subsequent
recessions in North America and Europe began in 2007. Any in the financial industry believed that
pooling mortgages, securitizing them and selling the resulting mortgage backed securities on the
financial markets was a way of diversifying the risk of mortgage defaults by distributing that risk among
a large number of diversified holders of these mortgage-backed securities. The rise in popularity of, and
the increasing demand for, these mortgage-backed securities created an increasingly robust market for
mortgages.

This demand by securities firms for mortgages for the purpose of securitization and resale lead to
increasingly aggressive mortgage lending by banks and mortgage lenders. In order to generate the
mortgages required to meet this demand, mortgage lenders began to offer mortgages to increasingly
higher risk borrowers. Lenders also initiated a subprime teaser interest rate for the first six to twelve
months of the life of the mortgage in order to entice prospective homebuyers to borrow more. The
subprime mortgages were of increasingly lower quality and characterized my a much higher likelihood
of default.

These aggressive lending practices increased the demand for mortgages by prospective homeowners
and put upward pressure on real estate prices. The rising real estate prices created a false sense of
security among homeowners who assumed their properties would continue to increase in value; if they
were forced to sell, they would still have accrued a capital gain on the value of their property, or if the
mortgage payments got too onerous, they could always refinance their home based on the current
market value.

The default rate for mortgages in the United States started to increase as the teaser rates began to
expire and the real mortgage rates began to take effect, often significantly increasing the borrowers’
monthly payments. As more and more homeowners defaulted on their mortgages, the risk profile of
the securities backed by these pooled mortgages increased. The risk that had been “diversified” among
large numbers of investors had now become a systemic risk that spread throughout the entire global
financial system. Many of the largest US financial institutions, not to mention a large number of
international banks, held significant portfolios of mortgage-backed securities. As the increasing
occurrence of mortgage defaults threatened the stability of the market for mortgage backed securities,
and their associated derivative products, these assets became “toxic”, or of such high risk that no one
would touch them. The situation was further exacerbated by the extensive use of derivative
instruments such as credit default swaps, whose value was contingent on the underlying mortgage-
backed securities. The systemic risk presented by these toxic assets came very close to causing the
collapse of the global financial system and would probably have done so without the massive

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intervention by the governments in the United States and Europe to shore up financial institutions by
purchasing many of these assets.

This situation also had the effect of driving a significant tightening of the availability of mortgages for
prospective homeowners that, combined with the increasing number of houses hitting the real estate
market subsequent to their repossession by the mortgage lenders due to default, resulted in the
collapse of the housing market in the US. This led to a drop in prices so drastic that up to one third of all
homes in the United States had mortgages greater than their market value, creating further incentive
for borrowers to default on their mortgages and walk away from their homes.

The tightening of credit driven by the subprime crisis was the primary contributing factor of the
subsequent recession in the United States and Europe. It would have been much worse if national
governments had not intervened by purchasing toxic assets and injecting large amounts of liquidity into
the system.

The effects of the subprime mortgage crisis were not felt as keenly in Canada. This was attributed
mainly to the conservative nature of the closely regulated Canadian banking system. The Canadian
economy was never-the-less affected by the crisis because of the integrated nature of the international
financial system.

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2.9 Business ethics education and training

There has been significant discussion in both the public media and in academic literature on the role of
business education and its affects, either positive or negative, on the level of ethical behaviour existing
in business (Borkowski and Ugras, 1998). In an attempt to determine whether business students
possess a greater propensity towards self-interest in their motivation to act, a 2008 study (Sautter,
Brown, Littvay, Sautter and Bearnes, 2008) analysed the personalities of business students and their
peers studying in non-business majors. The authors used standard psychological tests designed to
measure levels of narcissism and levels of empathy. The results showed a marked difference between
the two groups, with the business students showing a greater degree of narcissism a lesser degree of
empathy than their non-business counterparts. The results clearly show that business students have a
higher tendency towards self-interested behaviour in decision-making. The results do not explain,
however, whether business education influences students in ways that accentuate these behaviours, or
whether students who already possess these characteristics in the first place are drawn towards
business education.

There also exists a significant quantity of literature focusing on the question of whether or not business
students can be trained in ethics and ethical decision-making in a way that will positively influence these
aspiring business leaders in their ethical behaviour in future business dealings. A meta-study of the
research in this area conducted by Borkowski and Ugras (1998) revealed extensive investigations into
this area in the 1990s. The significant increase in the interest in ethics and management education
during the two decades leading up to this meta-study was no doubt inspired by the significant number
of corporate failures that occurred in and around the bursting of the dot-com bubble.

A more recent global survey of 1,700 business students from 40 countries resulting from the United
Nations Principles for Responsible Education initiative revealed a progressive shift in the attitudes of
business students with respect to corporate citizenship and corporate social responsibility (Haski-
Leventhal and Concato, 2016). 75% of respondents felt that corporations had a duty to society and the
environment that goes beyond turning a profit. One of the key findings noted by the authors of this
study was that “(h)alf of the respondents would give up more than 20% of their initial financial benefit
to work for a company that cares about employees. One in five students would scarify 40% or more of
their future salary to work for a company that demonstrates several aspects of CSR.”

It should not be a surprise that attitudes towards business ethics change over time. As societies evolve,
so do attitudes and behaviours with respect to economic activity and the conducting of business.
Increased awareness and concern of the environmental impacts of human activity and a growing
sensitivity to the damage caused to communities and societies by corruption and inefficiency have led to
demands for greater levels of social responsibility from business. Similarly, there is a growing awareness
of the power that business has lead positive social change by innovating in ways that are both good for
society and good for business.

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Borkowski, S. C., & Ugras, Y. J. (1998). ‘Business students and ethics: A meta-analysis’. Journal of
Business Ethics, 17(11), 1117-1127.

Crane and Matten (2007)

Habermas (1983)

Haski-Leventhal, D and Concato, J. (2016). ‘The State of CSR and RME in Business Schools and the
Attitudes of their Students; Third bi-annual study’, United Nations Global Compact Principles for
Responsible Management Education,

http://www.unprme.org/resource-docs/MGSMPRMEReport2016.pdf (retrieved July 10, 2017)

Hobbes, T, 1996, Leviathan, New York, Oxford University Press (Oxford World’s Classics)

Kotchian, AC, 1977, 'The Payoff: Lockheed's 70-Day Mission to Tokyo', Saturday Review, 9 July, 1977, pp.
7-12.

MacGillis, A., 2017, ‘Kushnerville’ in The New York Times Magazine, New York Times, New York, NY

Sautter, JA, Brown, TA, Littvay, L, Sautter, AC, and Bearnes, B., 2008, ‘Attitude and Divergence in
Business Students: An Examination of Personality Differences in Business and Non-Business Students’ in
Electronic Journal of Business Ethics and Organization Studies, Vol. 13, No. 2 (2008).

Smith, A, 1937, An Enquiry into the Nature and Causes of the Wealth of Nations, New York, Modern
Library.

Steinmann and Löhr, 1994

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