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BUSINESS ETHICS Ethical Decision Making and Cases

TENTH EDITION

O. C. Ferrell University of New Mexico

John Fraedrich Southern Illinois University—Carbondale

Linda Ferrell University of New Mexico

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Business Ethics: Ethical Decision Making & Cases, 10e O.C. Ferrell, John Fraedrich and Linda Ferrell

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WCN: 02-200-203

To James Collins Ferrell and George Collins Ferrell.

—O.C. Ferrell

To Debbie FIBJ. —John Fraedrich

To Bruce and Becky Nafziger. —Linda Ferrell

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FM TITLEBRIEF CONTENTS

4: Sustainability Challenges in the Gas and Oil Industry 424

5: New Belgium Brewing: Ethical and Environmental Responsibility 434

6: National Collegiate Athletic Association Ethics and Compliance Program 444

7: Google: The Quest to Balance Privacy with Profitss 458

8: Zappos: Delivering Customer Satisfaction 475

9: Enron: Questionable Accounting Leads to Collapse 486

10: Home Depot Implements Stakeholder Orientation 498

11: Frauds of the Century 508

12: Insider Trading at the Galleon Group 517

13: Whole Foods Strives to Be an Ethical Corporate Citizen 525

14: Apple Inc.’s Ethical Success and Challenges 537

15: PepsiCo’s Journey Toward an Ethical and Socially Responsible Culture 548

16: Ethical Leadership at Cardinal IG: The Foundation of a Culture of Diversity 563

17: Better Business Bureau: Protecting Consumers and Dealing with Organizational Ethics Challenges 572

18: Managing the Risks of Global Bribery in Business 583

19: Mattel Responds to Ethical Challenges 594

20: Best Buy Fights Against Electronic Waste 604

Index I-615

PART 1: An Overview of Business Ethics 1 1: The Importance of Business Ethics 1

2: Stakeholder Relationships, Social Responsibility, and Corporate Governance 28

PART 2: Ethical Issues and the Institutionalization of Business Ethics 57 3: Emerging Business Ethics Issues 59

4: The Institutionalization of Business Ethics 90

PART 3: The Decision-Making Process 125 5: Ethical Decision Making 126

6: Individual Factors: Moral Philosophies and Values 152

7: Organizational Factors: The Role of Ethical Culture and Relationships 181

PART 4: Implementing Business Ethics in a Global Economy 211 8: Developing an Effective Ethics Program 213

9: Managing and Controlling Ethics Programs 239

10: Globalization of Ethical Decision-Making 272

11: Ethical leadership 308

12: Sustainability: Ethical and Social Responsibility Dimensions 344

PART 5: Cases 380 1: Monsanto Attempts to Balance Stakeholder

Interests 382

2: Starbucks’ Mission: Social Responsibility and Brand Strength 396

3: Walmart Manages Ethics and Compliance Challenges 407

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FM TITLECONTENTS

Chapter 2: Stakeholder Relationships, Social Responsibility, and Corporate Governance 28 Chapter Objectives, 28 | Chapter Outline, 28

An Ethical Dilemma, 29

Stakeholders Define Ethical Issues in Business 31 Identifying Stakeholders, 32 • A Stakeholder Orientation, 33

Social Responsibility and Ethics 36 Issues in Social Responsibility 38 Social Responsibility and the Importance of a Stakeholder Orientation 40 Corporate Governance Provides Formalized Responsibility to Stakeholders 41

Views of Corporate Governance, 45 • The Role of Boards of Directors, 46 • Greater Demands for Accountability and Transparency, 46 • Executive Compensation, 47

Implementing A Stakeholder Perspective 48 Step 1: Assessing the Corporate Culture, 49 • Step 2: Identifying Stakeholder Groups, 49 • Step 3: Identifying Stakeholder Issues, 49 • Step 4: Assessing Organizational Commitment to Social Responsibility, 50 • Step 5: Identifying Resources and Determining Urgency, 50 • Step 6: Gaining Stakeholder Feedback, 50

Contributions of a Stakeholder Perspective 51 Summary 51 Important Terms for Review, 53 | Resolving Ethical Business Challenges 54 | Check Your EQ, 55

PART 1: AN OVERVIEW OF BUSINESS ETHICS 1

Chapter 1: The Importance of Business Ethics 1 Chapter Objectives, 1 | Chapter Outline, 1

An Ethical Dilemma 2

Business Ethics Defined 4 Why Study Business Ethics? 6

A Crisis in Business Ethics, 6 • Specific Issues, 7 • The Reasons for Studying Business Ethics 8

The Development of Business Ethics 9 Before 1960: Ethics in Business, 9 • The 1960s: The Rise of Social Issues in Business, 10 • The 1970s: Business Ethics as an Emerging Field, 11 • The 1980s: Consolidation, 11 • The 1990s: Institutionalization of Business Ethics, 12 •The Twenty-First Century of Business Ethics, 13

Developing an Organizational and Global Ethical Culture 14 The Benefits of Business Ethics 15

Ethics Contributes to Employee Commitment, 16 • Ethics Contributes to Investor Loyalty, 17 • Ethics Contributes to Customer Satisfaction, 17 • Ethics Contributes to Profits, 19

Our Framework for Studying Business Ethics 19 Summary 22 Important Terms for Review, 23 | Resolving Ethical Business Challenges, 24 | Check Your EQ, 25

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vi Contents

PART 2: ETHICAL ISSUES AND THE INSTITUTIONALIZATION OF BUSINESS ETHICS 57

Chapter 3: Emerging Business Ethics Issues 59 Chapter Objectives, 59 | Chapter Outline, 59

An Ethical Dilemma 60

Recognizing an Ethical Issue (Ethical Awareness) 61 Foundational Values for Identifying Ethical Issues 63

Integrity, 63 • Honesty, 63 • Fairness, 64 Ethical Issues and Dilemmas in Business 65

Misuse of Company Time and Resources, 66 • Abusive or Intimidating Behavior, 66 • Lying, 69 • Conflicts of Interest, 70 • Bribery, 70 • Corporate Intelligence, 71 • Discrimination, 73 • Sexual Harassment, 75 • Fraud, 76 • Consumer Fraud, 79 • Financial Misconduct, 80 • Insider Trading, 81 • Intellectual Property Rights, 82 • Privacy Issues, 83

The Challenge of Determining an Ethical Issue in Business 84 Summary 85 Important Terms for Review, 86 | Resolving Ethical Business Challenges, 87 | Check Your EQ, 88

Chapter 4: The Institutionalization of Business Ethics 92 Chapter Objectives, 92 | Chapter Outline, 92

An Ethical Dilemma 93

Managing Ethical Risk Through Mandated and Voluntary Programs 94 Mandated Requirements for Legal Compliance 96

Laws Regulating Competition, 97 • Laws Protecting Consumers, 101 • Laws Promoting Equity and Safety, 103

Gatekeepers and Stakeholders 105 Accountants, 105 • Risk Assessment, 106

The Sarbanes–Oxley (Sox) Act 106 Public Company Accounting Oversight Board, 108 • Auditor and Analyst Independence, 108 • Whistle- Blower Protection, 108 • Cost of Compliance, 109

Dodd–Frank Wall Street Reform and Consumer Protection Act 109

New Financial Agencies, 109 • Consumer Financial Protection Bureau, 110 • Whistle-Blower Bounty Program, 110

Laws That Encourage Ethical Conduct 111 Federal Sentencing Guidelines for Organizations 112 Highly Appropriate Core Practices 115

Voluntary Responsibilities, 116 • Cause-Related Marketing, 116 • Strategic Philanthropy, 117

The Importance of Institutionalization in Business Ethics 118 Summary 118 Important Terms for Review, 120 | Resolving Ethical Business Challenges, 121 | Check Your EQ,122

PART 3: THE DECISION- MAKING PROCESS 125

Chapter 5: Ethical Decision Making 126 Chapter Objectives, 126 | Chapter Outline, 126

An Ethical Dilemma 127

A Framework for Ethical Decision Making in Business 128

Ethical Issue Intensity, 128 • Individual Factors, 131 • Organizational Factors, 132 • Opportunity, 134 • Business Ethics Intentions, Behavior, and Evaluations, 137

Using the Ethical Decision-Making Model to Improve Ethical Decisions 138 Normative Considerations in Ethical Decision Making 139

Institutions as the Foundation for Normative Values, 140 • Implementing Principles and Core Values in Ethical Decision Making, 142

Understanding Ethical Decision Making 144 Summary 145 Important Terms for Review, 146 | Resolving Ethical Business Challenges, 147 | Check Your EQ, 148

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Contents vii

Chapter 6: Individual Factors: Moral Philosophies and Values 152 Chapter Objectives, 152 | Chapter Outline, 152

An Ethical Dilemma 153

Moral Philosophy Defined 154 Moral Philosophies 156

Instrumental and Intrinsic Goodness, 157 • Teleology, 158 • Deontology, 161 • Relativist Perspective, 162 • Virtue Ethics, 164 • Justice, 166

Applying Moral Philosophy to Ethical Decision Making 167 Cognitive Moral Development and Its Problems 168 White-Collar Crime 171 Individual Factors in Business Ethics 174 Summary 175 Important Terms for Review, 176 | Resolving Ethical Business Challenges, 177 | Check Your EQ, 178

Chapter 7: Organizational Factors: The Role of Ethical Culture and Relationships 181 Chapter Objectives, 181 | Chapter Outline, 181

An Ethical Dilemma 182

Defining Corporate Culture 183 The Role of Corporate Culture in Ethical Decision Making 185

Ethical Frameworks and Evaluations of Corporate Culture, 186 • Ethics as a Component of Corporate Culture, 188 • Compliance versus Values-Based Ethical Cultures, 189 • Differential Association, 191 • Whistle-Blowing, 192

Leaders Influence Corporate Culture 196 Power Shapes Corporate Culture, 196 • Motivating Ethical Behavior, 198 • Organizational Structure and Business Ethics, 199

Group Dimensions of Corporate Structure and Culture 202

Types of Groups, 202 • Group Norms, 204 Variation in Employee Conduct 205 Can People Control Their Actions Within a Corporate Culture? 206 Summary 207 Important Terms for Review, 208 | Resolving Ethical Business Challenges, 209 | Check Your EQ, 210

PART 4: IMPLEMENTING BUSINESS ETHICS IN A GLOBAL ECONOMY 211

Chapter 8: Developing an Effective Ethics Program 213 Chapter Objectives, 213 | Chapter Outline, 213

An Ethical Dilemma 214

The Responsibility of the Corporation as a Moral Agent 215 The Need for Organizational Ethics Programs 217 An Effective Ethics Program 219

An Ethics Program Can Help Avoid Legal Problems, 220 • Values Versus Compliance Programs, 222

Codes of Conduct 223 Ethics Officers 226 Ethics Training and Communication 227 Systems to Monitor and Enforce Ethical Standards 229

Continuous Improvement of an Ethics Program, 231 • Common Mistakes in Designing and Implementing an Ethics Program, 232

Summary 233 Important Terms for Review, 234 | Resolving Ethical Business Challenges, 235 | Check Your EQ, 236

Chapter 9: Managing and Controlling Ethics Programs 239 Chapter Objectives, 239 | Chapter Outline, 239

An Ethical Dilemma 239

Implementing Ethics Programs 241 The Ethics Audit 243 Benefits of Ethics Auditing 244

Ethical Crisis Management and Recovery, 247 • Measuring Nonfinancial Ethical Performance, 248 • Risks and Requirements in Ethics Auditing, 251

The Auditing Process 252 Secure Commitment of Top Managers and Board of Directors, 254 • Establish a Committee to Oversee the Ethics Audit, 255 • Define the Scope of the Audit Process, 255 • Review Organizational Mission, Values, Goals, and Policies and Define Ethical

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