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Business & society ethics and stakeholder management pdf

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1 BUSINESS ETHICS, THE CHANGING ENVIRONMENT, AND STAKEHOLDER MANAGEMENT 1.1 Business Ethics and the Changing Chapter Summary Environment Questions Point/CounterPoint Exercises 1.2 W hat Is Business Ethics? Why Real-T ime Ethical Dilemma Does It Matter? Cases 1.3 Levels of Business Ethics 1. B ernard L. Madoff Investment Ethical Insight 1.1 Securities LLC: Wall Street Trading Firm 1.4 F ive Myths about Business Ethics 2. C yberbullying: Who’s to Blame 1.5 Why Use Ethical Reasoning in and What Can Be Done? Business? Notes 1.6 Can Business Ethics Be Taught and Trained? 1.7 P lan of the Book OPENING CASE Blogger: “Hi. i download music and movies, limewire and torrent. is it illegal for me to download or is it just illegal for the person uploading it. does anyone know someone who was caught and got into trouble for it, what happened them. Personally I dont see a difference be- 1 tween downloading a song or taping it on a cassette from a radio” The Recording Industry Association of America (RIAA), on behalf of its member companies and copyright owne rs, has sued more than 30,000 people for unlawful downloading. RIAA detectives log on to peer-to - peer networks where they easily identify illegal activity since users’ shared folders are visible to all. The majority of these cases have been settled out of court for 1,000–3,000, but fi nes per music track can go up to 150,000 under the Copyright Act. The nation’s fi rst fi le-s haring defendant to challenge an RIAA lawsuit, Jammie Thomas-R asset, reached the end of the appeals process to 12 Business Ethics overturn a jury-d etermined 222,000 fi ne in 2013. She was ordered to pay this amount, which she argued was unconstitutionally excessive, for downloading and sharing 24 copyrighted songs using the now- defunct fi le- sharing serv ice Kazaa. The Supreme Court has not yet heard a fi le-s haring case, having also declined without comment to review the only other appeal following Thomas-R asset’s. (In that case, the Court let stand a federal jury- imposed fi ne of 675,000 against Joel Tenen- baum for downloading and sharing 30 songs.) “As I’ve said from the beginning, I do not have now, nor do I anticipate in the future, having 220,000 to pay this,” Thomas- Rasset said. “If they do decide to try and 2 collect, I will fi le for bankruptcy as I have no other option.” Students often use university networks to illegally distribute copy- righted sound recordings on unauthorized peer-to -peer ser vices. The RIAA has issued subpoenas to universities nationwide, including net- works in Connecticut, Georgia, Kansas, Michigan, Minnesota, New Jersey, Pennsylvania, Rhode Island, Texas, Virginia, and Washington. Most universities give up students’ identities only after offering an oppor- tunity to stop the subpoena with their own funds. As in earlier rounds of lawsuits, the RIAA is utilizing the “John Doe” litigation proc ess, which is used to sue defendants whose names are not known. RIAA president Cary Sherman has discussed the ongoing effort to reach out to the university community with proactive solutions to the problem of illegal fi le- sharing on college campuses: “It remains as im- portant as ever that we continue to work with the university community in a way that is respectful of the law as well as university values. That is one of our top priorities, and we believe our constructive outreach has been enormously productive so far. Along with offering students legiti- mate music servic es, campus- wide educational and technological initia- tives are playing a critical role. But there is also a complementary need for enforcement by copyright owne rs against the serious offenders—to remind people that this activity is illegal.” He added: “Illegally downloading music from the Internet costs everyone— the musicians not getting compensated for their craft, the owne rs and employees of the thousands of record stores that have been forced to close, legitimate online music serv ices building their busi- nesses, and consumers who play by the rules and purchase their music legally.” On the other hand, once the well- funded RIAA initiates a lawsuit, many defendants are pressured to settle out of court in order to avoid oppressive legal expenses. Others simply can’t take the risk of large fi nes that juries have shown themselves willing to impose. New technologies and the trend toward digital consumption have made intellectual property both more critical to businesses’ bottom lines and more diffi cult to protect. No company, big or small, is immune to the intellectual property protection challenge. Illegal downloads of 1 The Changing Environment and Stakeholder Management 3 music are not the only concern. A new wave of lawsuits is being fi led against individuals who illegally download movies through sites like Napster and BitTorrent. In 2011, the U.S. Copyright Group initiated “the largest illegal downloading case in US history” at the time, suing over 23,000 fi le sharers who illegally downloaded Sylvester Stallone’s movie The Expendables. This case was expanded to include the 25,000 users who also downloaded Voltage Pictures’ The Hurt Locker, which increased the total number of defendants to approximately 50,000, all of whom used peer-to - peer downloading through BitTorrent. The lawsuits were fi led based on the illegal downloads made from an Internet Proto- col (IP) address. The use of an IP address as identifi er presents ethical issues—fo r example, should a parent be responsible for a child down- loading a movie through the family’s IP address? What about a landlord who supplied Internet to a tenant? Digital books are also now in play. In 2012, a lawsuit was fi led in China against technology giant Apple for sales of illegal book down- loads through its App Store. Nine Chinese authors are demanding pay- ment of 1.88 million for unauthorized versions of their books that were submitted to the App Store and sold to consumers for a profi t. Again, the individual IP addresses are the primary way of determining who performed the illegal download. Telecom providers and their customers face privacy concerns, as companies are being asked for the names of customers associated with IP addresses identifi ed with certain down- loads. Privacy activists argue that an IP address (which identifi es the sub- scriber but not the person operating the computer) is private, protected information that can be shown during criminal but not civil investiga- tions. Fred von Lohmann, se nior staff attorney with the Electronic Fron- tier Foundation, has suggested on his orga niza t ion’s blog that “courts are not prepared to simply award default judgments worth tens of thou- sands of dollars against individuals based on a piece of paper backed 3 by no evidence.” 1.1 Business Ethics and the Changing Environment The Internet is changing everything: the way we communicate, relate, read, shop, bank, study, listen to music, get news and “TV,” and participate in poli- tics. Of course the last “third billion” of people in undeveloped countries are 4 not participating on broadband as is the rest of the world, but they predictably will, fi rst through mobile phones. Businesses and governments operate in and are disrupted by changing technological, legal, economic, social, and po litica l environments with competing stakeholders and power claims, as many Middle Eastern countries in parti c u lar are experiencing. Also, as this chapter’s opening case shows, there is more than one side to every complex issue and debate in- volving businesses, consumers, families, other institutions, and professionals. 4 Business Ethics When stakeholders and companies cannot agree or negotiate competing claims among themselves, the issues generally go to the courts. The RIAA, in the opening case, does not wish to alienate too many college students because they are also the music industry’s best customers. At the same time, the association believes it must protect those groups it repre- sents. Not all stakeholders in this controversy agree on goals and strategies. For example, not all music artists oppose students downloading or even sharing some of their copyrighted songs. Off ering free access to some songs is a good adver- tising tactic. On the other hand, shouldn’t those songwriters and recording companies who spend their time and money creating, marketing, distribut- ing, and selling their intellectual property protect that property? Is fi le sharing, without limits or boundaries, stealing other people’s property? If not, what is this practice to be called? If fi le sharing continues in some form, and ends up helping sales for many artists, will it become legitimate? Should it? Is this just the new way business models are being changed by 15– 26 year olds? While the debate continues, individuals (15 year olds and younger in many cases) who still illegally share fi les have rights as private citizens under the law, and recording companies have rights of property protection. Who is right and who is wrong, especially when two rights collide? Who stands to lose and who to gain? Who gets hurt by these transactions? Which group’s ethical positions are most defensible? Stakeholders are individuals, companies, groups, and even governments and their subsystems that cause and respond to external issues, opportunities, and threats. Corporate scandals, globalization, deregulation, mergers, technology, and global terrorism have accelerated the rate of change and brought about a climate of uncertainty in which stakeholders must make business and moral decisions. Issues concerning questionable ethical and illegal business practices confront everyone, as the following examples illustrate: • The subprime lending crisis in 2008 involved stakeholders as varied as con- sumers, banks, mortgage companies, real estate fi rms, and homeowners. Many companies that sold mortgages to unqualifi ed buyers lied about low- risk, high-r eturn products. Wall Street companies, while thriving, are also settling lawsuits stemming from the 2008 crisis. In 2013, “Hundreds of thou- sands of subprime borrowers are still struggling. Subprime securities still pose a signifi cant legal risk to the fi rms that packaged them, and they use up 5 capital that could be deployed elsewhere in the economy.” In 2011, Bank of America announced that it would “take a whopping 20 billion hit to put the fallout from the subprime bust behind it and satisfy claims from angry 6 investors.” The ethics and decisions precipitating the crisis contributed to tilting the U.S. economy toward recession, with long-la sting eff ects. • The corporate scandals in the 1990s through 2001 at Enron, Adelphia, Halliburton, MCI WorldCom, Tyco, Arthur Andersen, Global Crossing, Dynegy, Qwest, Merrill Lynch, and other fi rms that once jarred share- holder and public confi dence in Wall Street and corporate governance may now seem like ancient history to those with short- term memories. Enron’s 1 The Changing Environment and Stakeholder Management 5 bankruptcy with assets of 63.4 billion defi es imagination, but World- Com’s bankruptcy set the record for the largest corporate bankruptcy in U.S. history (Benston, 2003). Only 22% of Americans express a great deal or quite a lot of confi dence in big business, compared to 65% who express 7 confi dence in small business. Confi dence in big business reached its high- est point in 1974 at 34%, and even during the dot- com boom in the late 1990s it hovered at 30%. The lowest rating of 16% was polled in 2009 after the subprime lending crisis, and although public confi dence has slightly increased, the signifi cant diff erential in American confi dence between big and small business belies a public mistrust of big business that may not be 8 easily repaired. • The debate continues over excessive pay to those chief executive offi cers (CEOs) who posted poor corporate per for mance. Large bonuses paid out during the fi nancial crisis made executive pay a controversial topic, yet investors did little to solve the issue. “Investors had the opportunity to provide advisory votes on executive pay at fi nancial fi rms that received TARP funds in 2009, and they gave thumbs up to pay packages at every single one of those institutions. This proxy season, with advisory votes now widely available (thanks to the Dodd-Frank Act), only fi ve companies’ executive compensation packages have received a thumbs down from share- 9 holders.” The Bureau of Labor Statistics noted that while median CEO sala- ries grew at 27% in 2010, overall worker pay only increased by 2.1%. “It’s been almost three years since Congress directed the Securities and Exchange Commission to require public companies to disclose the ratio of their chief executive offi cers’ compensation to the median of the rest of their employ- 10 ees’. The agency has yet to produce a rule.” An inde penden t 2013 analysis by Bloomberg showed that “Across the Standard & Poor’s 500 Index of companies, the average multiple of CEO compensation to that of rank-an d- 11 fi le workers is 204, up 20 percent since 2009.” • Some critics on the right of the po liti cal spectrum argue that companies are becoming overregulated since the scandals. Others argue there is not suffi cient regulation of the largest fi nancial companies. The Sarbanes- Oxley Act of 2002 is one response to those scandals. This act states that corporate offi cers will serve prison time and pay large fi nes if they are found guilty of fraudulent fi nancial reporting and of deceiving shareholders. Implementing this legislation requires companies to create accounting oversight boards, establish ethics codes, show fi nancial reports in greater detail to investors, and have the CEO and chief fi nancial offi cer (CFO) personally sign off on and take responsibility for all fi nancial statements and internal controls. Implementing these provisions is costly for corporations. Some claim their profi ts and global competitiveness are negatively aff ected and the regula- 12 tions are “unenforceable.” • U.S. fi rms are outsourcing work to other countries to cut costs and im- prove profi ts, work that some argue could be accomplished in the United States. Estimates of U.S. jobs outsourced range from 104,000 in 2000 to 6 Business Ethics 400,000 in 2004, and to a projected 3.3 million by 2015. “Forrester Re- search estimated that 3.3 million U.S. jobs and about 136 billion in wages would be moved to overseas countries such as India, China, and Russ ia by 2015. Deloitte Consulting reported that 2 million jobs would move from the United States and Eur ope to overseas destinations within the fi nancial serv ices business. Across all industries the emigration of serv ice jobs can be 13 as high as 4 million.” Do U.S. employees who are laid off and displaced need protection, or is this practice part of another societal business trans- formation? Is the United States becoming part of a global supply chain in which outsourcing is “business as usual” in a “fl at world,” or is the working middle class in the United States and elsewhere at risk of predatory indus- 14 trial practices and in eff ec tive government polices? • Will robots, robotics, and artifi cial intelligence (AI) applications replace humans in the workplace? This interesting but disruptive development poses concerns. “The outsourcing of human jobs as a side eff ect of global- ization has arguably contributed to the current unemployment crisis. How- ever, a growing trend sees humans done away with altogether, even in the 15 low-w age countries where many American jobs have landed”. What will be the ethical implications of the next wave of AI development, “where full- blown autonomous self-le arning systems take us into the realm of sci- ence fi ction— delivery systems and self-d riving vehicles alone could change 16 day- to- day life as we know it, not to mention the social implications.” AI also extends into electronic warfare (drones), education (robot assisted or led), and manufacturing (a Taiwanese company replaced a “human force of 1.2 million people with 1 million robots to make laptops, mobile devices and 17 other electronics hardware for Apple, Hewlett-P ackard, Dell and Sony”). One futurist predicted that as many as 50 million jobs could be lost to ma- chines by 2030, and even 50% of all human jobs by 2040. These large macro-le vel issues underlie many ethical dilemmas that aff ect business and individual decisions among stakeholders in organizations, pro- fessions, as well as individual lives. Before discussing stakeholder theory, and the management approach that it is based on, and how these perspectives and methods can help individuals and companies better understand how to make more socially responsible decisions, we take a brief look at the broader envi- ronmental forces that aff ect industries, organizations, and individuals. Seeing the “Big Picture” Pulitzer Prize-w inning journalist Thomas Friedman, continues to track megachanges on a global scale. His 2011 book, That Used to Be Us: How America Fell Behind in the World It Invented and How We Can Come Back, sug- gests an agenda for change to meet larger challenges. His books, The World Is Flat 3.0, and The Lexus and the Olive Tree, vividly illustrate a macroenviron- mental perspective that provides helpful insights into stakeholder and issues 18 management mind- sets and approaches. Friedman notes, “Like everyone 1 The Changing Environment and Stakeholder Management 7 e lse trying to adjust to this new globalization system and bring it into focus, I had to retrain myself and develop new lenses to see it. Today, more than ever, the traditional boundaries between politics, culture, technology, fi nance, na- tional security, and ecol ogy are disappearing. You often cannot explain one without referring to the others, and you cannot explain the whole without reference to them all. I wish I could say I understood all this when I began my career, but I didn’t. I came to this approach entirely by accident, as successive changes in my career kept forcing me to add one more lens on top of another, 19 just to survive.” After quoting Murray Gell-M ann, the Nobel laureate and former profes- sor of theoretical physics at Caltech, Friedman continues, “We need a corpus of people who consider that it is important to take a serious and profes- sional look at the whole system. It has to be a crude look, because you will never master every part or every interconnection. Unfortunately, in a great many places in our society, including academia and most bureaucracies, prestige accrues principally to those who study carefully some narrow aspect of a problem, a trade, a technology, or a culture, while discussion of the big picture is relegated to cocktail party conversation. That is crazy. We have to learn not only to have specialists but also people whose specialty is to spot the strong interactions and entanglements of the diff erent dimensions, and then take a 20 crude look at the whole.” POINT/COUNTERPOINT File Sharing: Harmful Theft or Sign of the Times? This exercise provides a more complete case with student interaction. “I watch some of my favorite shows on hulu .com for free and I buy others on Amazon or iTunes. I pay a fee to use Pandora for ad- free internet radio, or Spotify for specifi c music playlists. But like many of my friends, I don’t own a TV, so when there is no other way to access a show, I will download it from a torrent fi le-sh aring site.” —Interview with a Generation Y “Millennial” The Recording Industry Association of America (RIAA), on behalf of its member companies and copyright own ers, has sued more than 30,000 people for unlawful downloading. RIAA detectives log on to peer- to- peer networks where they easily identify illegal activity since users’ shared folders are visible to all. The majority of these cases have been settled out of court for 1,000–3,000, but fi nes per music track can go up to 150,000 under the Copyright Act. The nation’s fi rst fi le- sharing defendant to challenge an RIAA lawsuit, Jammie Thomas-R asset, in 2013 reached the end of the appeals pro cess to overturn a jury-d etermined 222,000 fi ne. She was ordered to pay this amount, which she argued was unconstitutionally excessive, for downloading and shar- ing 24 copyrighted songs using the now- defunct fi le- sharing servi ce Kazaa. The Supreme Court has not yet heard a fi le-s haring case, having also declined without comment to review the only other appeal following Thomas- Rasset’s.8 Business Ethics Students often use university networks to illegally distribute copyrighted sound recordings on unauthorized peer-to - peer ser vices. The RIAA issues subpoenas to universities nationwide, including networks in Connecticut, Georgia, Kansas, Michigan, Minnesota, New Jersey, Pennsylvania, Rhode Island, Texas, Virginia, and Washington. Most universities give up students’ identities only after off ering an opportunity to stop the subpoena with their own funds. As in earlier rounds of lawsuits, the RIAA is utilizing the “John Doe” litigation proce ss, which is used to sue defendants whose names are not known. RIAA President Cary Sherman cites the ongoing eff ort to reach out to the university community with proactive solutions to the problem of illegal fi le sharing on college campuses, saying, “It remains as important as ever that we continue to work with the university community in a way that is respectful of the law as well as university values. . . . Along with off ering students legiti- mate music servi ces, campus-w ide educational and technological initiatives are playing a critical role. But there is also a complementary need for enforce- ment by copyright own ers against the serious off enders— to remind people that this activity is illegal and . . . co sts everyone.” On the other hand, once the well-f unded RIAA initiates a lawsuit, many defendants are pressured to settle out of court in order to avoid oppressive legal expenses. Others simply can’t take the risk of large fi nes that juries have shown themselves willing to impose. New technologies and the trend toward digital consumption have made intellectual property both more critical to businesses’ bottom line and more diffi cult to protect. No company, big or small, is immune to the IP protec- tion challenge. Illegal downloads of music are not the only concern. A new wave of lawsuits is being fi led against individuals who illegally download movies through sites like Napster and BitTorrent. In 2011, the U.S. Copyright Group initiated “the largest illegal download- ing case in U.S. history” at the time, suing over 23,000 fi le sharers who il- legally downloaded Sylvester Stallone’s movie, The Expendables. This case was expanded to include the 25,000 users who also downloaded Voltage Pictures’ The Hurt Locker, which increased the total number of defendants to approximately 50,000 who used peer-to - peer downloading through Bit- Torrent. The lawsuits are fi led based on the illegal downloads made from an IP address. Digital books are also now in play. In 2012, a lawsuit was fi led in China against technology giant Apple for sales of illegal book downloads through the App Store. Nine Chinese authors are demanding payment of 1.88 mil- lion for unauthorized versions of their books that were submitted to the App Store and sold to consumers for a profi t. Again, the individual IP addresses are the primary way of determining who performed the illegal download. Telecom providers and their customers face privacy concerns, as companies are being asked for the names of customers associated with IP addresses iden- tifi ed with certain downloads. Privacy activists argue that an IP address (which identifi es the subscriber but not the person operating the computer) is private, protected information 1 The Changing Environment and Stakeholder Management 9 that can be shown during criminal but not civil investigations. Fred von Lohmann, seni or staff attorney with the Electronic Frontier Foundation, has suggested on his orga ni zat ion’s blog that “courts are not prepared to simply award default judgments worth tens of thousands of dollars against individu- als based on a piece of paper backed by no evidence.” Instructions: (1) Each student team individually adopts either the Point or CounterPoint argument and justifi es their reasons (arguments using this case and other evidence/opinions). (2) Then, either in teams or designated arrange- ments, each shares their reasons. (3) The class is debriefed and insights shared. POINT: File sharing is theft, and endangers the entire structure of incen- tives that allows the creation of digital media. Downloading even one song illegally has severe costs for the musicians and the own ers and employees of the companies that produce songs, and legitimate online music ser vices, not to mention consumers who purchase music legally. Those responsible, even peripherally, for illegal fi le sharing should be tracked down by any means possible and held accountable for these costs and damages. COUNTERPOINT: The generation that grew up with the advent of digital media has a well-c ultivated expectation of ease and freedom when it comes to accessing music, televi sion, and books using the Internet. Companies are willing to capitalize on that ease to boost their profi ts. It is unethical to use technology and the legal system to “make examples” of those (possibly innocent bystanders whose IP addresses were used by others) who are simply showing the fl aws and gaps in distribution strategies. SOURCES The exercise was authored by Taya Weiss and draws on the following sources: Brian, M. ( January 7, 2012). Apple facing 1.88 million lawsuit in China over sales of illegal book downloads. http:// thenextweb.c om/a pple /2012 /01 /07 /apple -facing-1 -88 -million-l awsuit-i n-c hina-o ver-s ales -of-i llegal-b ook -downloads/ , accessed March 7, 2012. Kravets, David. (March 18, 2013). Supreme Court OKs 222K verdict for sharing 24 songs. Wired.com. http:// www .wired.c om/ threatlevel/2 013 /03 /scotus-ja mmie -thomas -rasset /, accessed January 8, 2014. Kirk, Jeremy. (2008). U.S. judge pokes hole in fi le-s haring lawsuit. Court ruling could force the music industry to provide more evidence against people accused of illegal fi le sharing, legal experts say. InfoWorld.com. ht tp://www .infoworld .com /article/0 8/0 2/2 6 /US-j udge-p okes-h ole-i n-fi le -sharing -lawsuit_1 .html, accessed March 7, 2012. McMillan, G. (May 10, 2011). Are you one of 23,000 defendants in the U.S.’ biggest illegal download lawsuit? Time.com. http://tec hland.t ime.c om/2 011 /05 /10/a re-you -o ne-o f -23000-d efendants -in-t he-u s -biggest-i llegal-d ownload -lawsuit/ , accessed March 7, 2012. Pepitone, J. ( June 10, 2011). 50,000 BitTorrent users sued for alleged illegal downloads. CNNMoney.com. http://mone y .cnn .com/2 011 /06/1 0 /technology /bittorrent_l awsuits/i ndex.ht m, accessed March 7, 2012.s t n e m n o r i v n E l a n o i t 10 Business Ethics Recording Industry Association of America. (March 2008). New wave of illegal fi le sharing lawsuits brought by RIAA. RIAA .com. http://www .riaa .com/n ewsitem.ph p?n ews_y ear _fi lter=2004 & resultpage=10& id=D119AD49 -5C18-2 513-A B36 -A06ED24EB13D, accessed March 7, 2012. von Lohmann, F. (February 25, 2008). RIAA File-Sh aring Complaint Fails to Support Default Judgment. Electronic Frontier Foundation. https://www .eff .org /deeplinks/2 008 /02/r iaa -fi le-s haring -complaint-f ails-s upport -default -judgment, accessed February 19, 2014. Environmental Forces and Stakeholders Organizations and individuals are embedded in and interact with multiple changing local, national, and international environments, as the above discus- sion illustrates. These environments are increasingly merging into a global system of dynamically interrelated interactions among businesses and econo- mies. We must “think globally before acting locally” in many situations. The macro- level environmental forces shown in Figure 1.1 aff ect the perfor mance and operation of industries, organizations, and jobs. This framework can be Figure 1.1 Environmental Dimensions Affecting Industries, Organizations, and Jobs Political Governmental / Industry Economic regulatory Organization Job Legal Demographic / social Technological a N d n a l a n o i t a n r e t n I 1 The Changing Environment and Stakeholder Management 11 used as a starting point to identify trends, issues, opportunities, and ethical problems that aff ect people and stakes in diff erent levels. A fi rst step toward understanding stakeholder issues is to gain an understanding of environmen- tal forces that infl uence stakes. As we present an overview of these envi- ronmental forces here, think of the eff ects and pressures each of the forces has on you. The economic environment continues to evolve into a more global context of trade, markets, and resource fl ows. Large and small U.S. companies are expand- ing businesses and products overseas. Stock and bond market volatility and in- terdependencies across international regions are unpre ced ented, including the Eu rope a n market and the future of the euro, which is challenged by some de- faulting economies. The rise of China and India presents new trade opportuni- ties and business practices, if human rights problems can be solved in those countries. Do you see your career and next job being aff ected by this round of globalization? The technological environment has ushered in the advent of electronic com- munication, online social networking, and near- constant connectivity to the Internet, all of which are changing economies, industries, companies, and jobs. U.S. jobs that are based on routine technologies and rules- oriented procedures are vulnerable to outsourcing. Online technologies facilitate changing corporate “best practices.” Company supply chains are also becom- ing virtually and globally integrated online. Although speed, scope, economy of scale, and effi ciency are transforming transactions through information technology, privacy and surveillance issues continue to emerge. The boundary between surveillance and conve n ience also continues to blur. Has the com- pany or orga niza t ion for which you work used surveillance to monitor Inter- net use? Electronic democracy is changing the way individuals and groups think and act on po liti cal issues. Instant web surveys broadcast over interactive web sites have created a global chat room for po liti cal issues. Creation of online communities in the 2004, 2008, and 2012 presidential campaigns have proved an eff ective poli ti cal strategy for both U.S. parties’ fundraising programs and mobilizing of new voters. Have you used the Internet to participate in a national, local, or regional po litica l pro cess? The government and legal environments continue to create regulatory laws and procedures to protect consumers and restrict unfair corporate practices. Since Enron and other corporate scandals, the Sarbanes- Oxley Act of 2002 and the revised 2004 Federal Sentencing Guidelines were created to audit and constrain corporate executives from blatant fraudulence on fi nancial statements. The Dodd- Frank Act of 2010 established the Consumer Financial Protection Bureau, whose mission is to protect consumers by carryin g out fed- eral consumer fi nancial laws, educating consumers, and hearing complaints from the public, and more recently that Bureau has been functioning to help 21 citizens with credit card abuses in parti cu lar. Several federal agencies are also changing— or ignoring— standards for corporations. The U.S. Food and Drug Administration (FDA), for example, has sped up the required market approval time for new drugs sought by 12 Business Ethics patients with life- threatening diseases, but lags behind in taking some unsafe drugs off the market. Uneven regulation of fraudulent and anticompetitive practices aff ects competition, shareholders, and consumers. Executives from Enron and other large U.S. fi rms involved in scandals have been tried and sentenced. Should the banks that loaned them funds also be charged with wrongdoing? Should U.S. laws be enforced more evenly? Who regulates the regulators? The sub- prime lending crisis raises some of the same questions. Who can the public trust for advice about mortgages and substantial loans? Who is responsible and accountable for educating and constraining the public in such transactions in a demo cratic, capitalist society? Legal questions and issues aff ect all of these environmental dimensions and every stakeholder and investor. How much power should the government have to administer laws to protect citizens and ensure that business transac- tions are fair? Also, who protects the consumer in a free-m arket system? These issues, which are exemplifi ed in the fi le-s haring controversy as summarized in this chapter’s opening case, question the nature and limits of consumer and corporate laws in a free- market economy. The demographic and social environment continues to change as national boundaries experience the eff ects of globalization and the workforce becomes more diverse. Employers and employees are faced with aging and very young populations; minorities becoming majorities; generational diff erences; and the eff ects of downsizing and outsourcing on morale, productivity, and secu- rity. How can companies eff ectively integrate a workforce that is increasingly both younger and older, less educated and more educated, technologically sophisticated and technologically unskilled? In this book these environmental factors are incorporated into a stakeholder and issues management approach that also includes an ethical analysis of actors external and internal to organizations. The larger perspective underlying these analytical approaches is represented by the following question: How can the common good of all stakeholders in controversial situations be realized? Stakeholder Management Approach How do companies, the media, po liti cal groups, consumers, employees, com- petitors, and other groups respond in socially ethical and responsible ways when they eff ect and are aff ected by an issue, dilemma, threat, or opportunity from the environments just described? The stakeholder theory expands a nar- row view of corporations from a stockholder- only perspective to include the many stakeholders who are also involved in how corporations envision the fu- ture, treat people and the environment, and serve the common good for the many. Implementing this view starts with understanding the ethical impera- tives and moral understandings that corporations that use natural resources and the environment must serve, as well as providing for those who buy their products and serv ices. This view and accompanying methods are explained in more detail in Chapters 2 and 3 especially and inform the whole text. 1 The Changing Environment and Stakeholder Management 13 The stakeholder theory begins to address these questions by enabling individuals and groups to articulate collaborative, win–wi n strategies based on: 1. Identifying and prioritizing issues, threats, or opportunities. 2. Mapping who the stakeholders are. 3. Identifying their stakes, interests, and power sources. 4. Showing who the members of coali t ions are or may become. 5. Showing what each stakeholder’s ethics are (and should be). 6. Developing collaborative strategies and dialogue from a “higher ground” perspective to move plans and interactions to the desired closure for all parties. Chapter 3 lays out specifi c steps and strategies for analyzing stakeholders. H ere, our aim is to develop awareness of the ethical and social responsibili- ties of diff erent stakeholders. As Figure 1.2 illustrates, there can be a wide range of stakeholders in any situation. We turn to a general discussion of “business ethics” in the following section to introduce the subject and moti- vate you to investigate ethical dimensions of organ i zati ona l and professional behavior. Figure 1.2 Primary vs. Secondary Stakeholder Groups Special-Interest Groups Local Community Groups Consumer Groups Primary Owners Stakeholders Suppliers FIRM Customers Employees Environmental Media Groups Secondary Society American Civil Stakeholders at Large Liberties Groups14 Business Ethics 1.2 What Is Business Ethics? Why Does It Matter? Business ethicists ask, “What is right and wrong, good and bad, harmful and benefi cial regarding decisions and actions in or gan i za tional transactions?” Ethical reasoning and logic is explained in more detail in Chapter 2, but we note here that approaching problems using a moral frame of reference can infl uence solution paths as well as options and outcomes. Since “solutions” to business and organ i za tion al problems may have more than one alternative, and sometimes no right solution may seem available, using principled ethical thinking provides structured and systematic ways of decision making based on values, not only perceptions that may be distorted, pressures from others, or the quickest and easiest available options—t hat may prove more harmful. What Is Ethics and What Are the Areas of Ethical Theory? Ethics derives from the Greek word ethos— meaning “character”—a nd is also known as moral philosophy, which is a branch of philosophy that involves “systematizing, defending and recommending concepts of right and wrong 22 conduct.” Ethics involves understanding the diff erences between right and wrong thinking and actions, and using principled decision making to choose actions that do not hurt others. Although intuition and creativity are often involved in having to decide between what seems like two “wrong” or less desirable choices in a dilemma where there are no easy alternatives, using ethical principles to inform our thinking before acting hastily may reduce the negative consequences of our actions. Classic ethical principles are presented in more detail in the next chapter, but by way of an introduction, the follow- ing three general areas constitute a framework for understanding ethical theo- 23 ries: metaethics, normative ethics, and descriptive ethics. Metaethics considers where one’s ethical principles “come from, and what they mean.” Do one’s ethical beliefs come from what society has prescribed? Did our parents, family, religious institutions infl uence and shape our ethical beliefs? Are our principles part of our emotions and attitudes? Metaethical perspectives address these questions and focus on issues of universal truths, the will of God, the role of reason in ethical judgments, and the meaning of ethical 24 terms themselves. More practically, if we are studying a case or observing an event in the news, we can inquire about what and where a parti cu lar CEO’s or professional’s ethical principles (or lack thereof ) are and where in his/her life and work history these beliefs were adopted. Normative ethics is more practical; this type of ethics involves prescribing and evaluating ethical behaviors—w hat should be done in the future. We can inquire about specifi c moral standards that govern and infl uence right from wrong conduct and behaviors. Normative ethics also deals with what habits we need to develop, what duties and responsibilities we should follow, and the consequences of our behavior and its eff ects on others. Again, in a busi- ness or or gan i zati ona l context, we observe and address ethical problems and issues with individuals, teams, leaders and address ways of preventing and/or solving ethical dilemmas and problems. 1 The Changing Environment and Stakeholder Management 15 Descriptive ethics involves the examination of other people’s beliefs and principles. It also relates to presenting—d escribing but not interpreting or evaluating—f acts, events, and ethical actions in specifi c situations and places. In any context—organ i za tion al, relationship, or business—our aim here is to understand, not predict, judge, or solve an ethical or unethical behavior or action. Learning to think, reason, and act ethically helps us to become aware of and recognize potential ethical problems. Then we can evaluate values, as- sumptions, and judgments regarding the problem before we act. Ultimately, ethical principles alone cannot answer what the late theologian Paul Tillich called “the courage to be” in serious ethical dilemmas or crises. We can also learn from business case studies, role playing, and discussions on how our ac- tions aff ect others in diff erent situations. Acting accountably and responsibly is still a choice. Laura Nash defi ned business ethics as “the study of how personal moral norms apply to the activities and goals of commercial enterprise. It is not a separate moral standard, but the study of how the business context poses its own unique problems for the moral person who acts as an agent of this sys- tem.” Nash stated that business ethics deals with three basic areas of manage- rial decision making: (1) choices about what the laws should be and whether to follow them; (2) choices about economic and social issues outside the do- main of law; and (3) choices about the priority of self- interest over the com- 25 pany’s interests. Unethical Business Practices and Employees The seventh (2011) National Business Ethics Survey (NBES), which obtained 26 4,800 responses representative of the entire U.S. workforce, reported an ethical environment unlike any we have seen before in America: “American employees are doing the right thing more than ever before, but in other 27 ways employees’ experiences are worse than in the past.” The survey fi nd- ings are summarized below in terms of the “bad” and “good” news found in the workforce: The “Bad” News • Retaliation is on the rise against employee whistle-blowers, with 22% of employees who reported misconduct experiencing some form of retaliation. • More employees (13%) feel pressure to compromise their ethical standards in order to do their jobs. • The number of companies with weak ethical cultures has grown to near-r ecord highs, now at 42%. The “Good” News • The workplace is experiencing the lowest levels of misconduct, with only 45% of employees witnessing misconduct. • A record high (65%) of those employees now report misconduct.16 Business Ethics • Management is improving its oversight and increasing eff orts to raise awareness about ethics—3 4% of employees felt more closely watched by management, and 42% of employees recognized increased ethical awareness eff orts. The authors of the survey note that an ethical downturn is on the horizon. The economic decline and high unemployment have created a unique ethical environment fueled by other modern factors like social networking. “Re- search has revealed a signifi cant ethics divide between those who are active on 28 social networks and those who are not.” Specifi c Types of Ethical Misconduct Reported The top fi ve most frequently observed types of misconduct were: misuse of company time (33%), abusive behavior (21%), lying to employees (20%), com- pany resource abuse (20%), and violating company Internet use policies (16%). Types of misconduct with the largest increases included: sexual harassment, substance abuse, insider trading, illegal po liti cal contributions, stealing, and en- 29 vironmental violations. Many employees still do not report misconduct that they observe, and fear of retaliation is increasingly valid. “When all employees are asked whether they could question management without fear of retaliation, 19 percent said it was not safe to do so.” The most common forms of retaliation include: exclu- sion by management from decision and work activity (64%), cold shoulder attitudes from other employees (62%), verbal abuse from management (62%), not given promotions or raises (55%), and cut pay or hours (46%). This re- taliation can lead to instability in the workplace by driving away talented employees. “About seven of 10 employees who experienced retaliation plan 30 to leave their current place of employment within fi ve years.” Ethics and Compliance Programs Ethical components of company culture include: “management’s trustwor- thiness, whether managers at all levels talk about ethics and model appro- priate behavior, the extent to which employees value and support ethical conduct, accountability and transparency.” Eleven percent of companies in 2011 had weak ethical cultures. Companies can reduce ethics risks by invest- ing in a strong ethics and compliance program: “86% of companies with a well- implemented ethics and compliance program also have a strong ethics 31 culture.” The Retaliation Trust/Fear/Reality Disconnect Of the 65% of employees who reported witnessing misconduct in the 2011 NBES, 22% (or approximately 9 million employees) experienced retaliation. These victims of retaliation are far more likely to report misconduct to an outside source, rather than to a member of management. This can have many 32 negative consequences for stakeholders involved. 1 The Changing Environment and Stakeholder Management 17 Reporting rates are much higher in companies that have well- implemented ethics and compliance programs; only 6% of employees in companies with strong ethics and compliance programs did not report observed misconduct. It is interesting to note the impact of social networking on the ethical environment of a company. According to the 2011 NBES: • “Active social networkers report far more negative experiences of work- place ethics. As a group, they are almost four times more likely to experi- ence pressure to compromise standards and about three times more likely to experience retaliation for reporting misconduct than co-w orkers who are less active with social networking. They also are far more likely to observe misconduct.” Seventy-t wo percent of active social networkers surveyed observed misconduct; 42% felt pressure to compromise standards; and 56% experienced retaliation after reporting misconduct. • Active social networkers, as discussed in this chapter’s opening case, are also more likely to believe that questionable behaviors are acceptable. Forty- two percent of active social networkers felt that it was acceptable to blog or tweet negatively about their company or colleagues; 42% felt that it was acceptable to buy personal items on a company credit card as long as it was paid back; 51% felt it was acceptable to do less work as payback for cuts in pay or benefi ts; 50% felt it was acceptable to keep a copy of confi dential work documents in case you need them in your next job; and 46% felt that it was acceptable to take a copy of work software home for use on their personal computer. Only about 10% of non-a ctive social networkers felt that these 33 activities were acceptable. Are you an active social networker? Do these results resonate with you? These fi ndings suggest that any useful defi nition of business ethics must address a range of problems in the workplace, including relationships among professionals at all levels and among corporate executives and external groups. Why Does Ethics Matter in Business? “Doing the right thing” matters to fi rms, taxpayers, employees, and other stakeholders, as well as to society. To companies and employers, acting legally and ethically means saving billions of dollars each year in lawsuits, settlements, and theft. One study found that the annual business costs of internal fraud range between the annual gross domestic profi t (GDP) of Bulgaria (50 billion) and that of Taiwan (400 billion). It has also been estimated that theft costs compa- nies 600 billion annually, and that 79% of workers admit to or think about stealing from their employers. Other studies have shown that corporations 34 have paid signifi cant fi nancial penalties for acting unethically. The U.S. De- partment of Commerce noted that “as many as one-t hird of all business failures annually can be attributed to employee theft.” Experts have estimated that ap- 35 proximately 40% of fraud and theft losses to American businesses are internal.18 Business Ethics Relationships, Reputation, Morale, and Productivity Costs to businesses also include deterioration of relationships; damage to rep- utation; declining employee productivity, creativity, and loyalty; ineff ec tive information fl ow throughout the orga niza t ion; and absenteeism. Companies that have a reputation for unethical and uncaring behavior toward employees also have a diffi cult time recruiting and retaining valued professionals. Integrity, Culture, Communication, and the Common Good Strong ethical leadership goes hand in hand with strong integrity. Both ethics and integrity have a signifi cant impact on a company’s operations. “ ‘History has often shown the importance of ethics in business – even a single lapse in judgment by one employee can signifi cantly aff ect a company’s reputation and its bottom line.’ Leaders who show a solid moral compass and set a forth- right example for their employees foster a work environment where integrity 36 becomes a core value.” A study of the 50 best companies to work for in Can- ada (based on survey responses from over 100,000 Canadian employees at 115 organizations, with input from 1,400 leaders and human resources profes- sionals) found that integrity and ethics matter in the following ways: there is more fl exibility and balance; values have changed; and organizations are valuing 37 new employees more since the demographics have changed. These changes are explained next. Integrity/Ethics What is the degree to which coworkers, managers, and sen ior leaders display integrity and ethical conduct? Eighty-e ight percent of employees at the top 10 best employers agreed or strongly agreed that coworkers displayed in- tegrity and ethical conduct at all times, whereas only 60% felt that way at the bottom 10 organizations. With respect to managers, the numbers were 90% at the top 10 and 63% at the bottom 10 organizations. A bigger diff erence existed with regard to whether se nior leadership displayed integrity and ethical conduct at all times, with 89% of employees at the top 10 best employ- ers agreeing or strongly agreeing, whereas less than half— 48%—felt that way 38 at the bottom 10 employers. The same study found that “engagement is higher at organizations where employees feel they share the same values as their employer” and that “sense of ‘common purpose’ can increase employee commitment, especially amongst older workers.” The authors also noted that “a perceived lack of integrity on the part of co-w orkers, managers and leaders has, as expected, a detrimental eff ect on engagement. What was perhaps unanticipated in the study fi ndings, however, was the really negative opinion of the ethics of seni or leadership at low-en gagement organizations.” Working for the Best Companies Employees care about ethics because they are attracted to ethically and socially responsible companies. Fortune magazine regularly publishes the 100 best com- 1 The Changing Environment and Stakeholder Management 19 panies for which to work (h ttp://money.cnn.com/magazines/fortune/best 39 -companies). Although the list continues to change, it is instructive to ob- serve some of the characteristics of good employers that employees repeatedly cite. The most frequently mentioned characteristics include profi t sharing, bonuses, and monetary awards. However, the list also contains policies and benefi ts that balance work and personal life and those that encourage social responsibility. Consider these policies described by employees: • When it comes to fl extime requests, managers are encouraged to “do what is right and human.” • There is an employee hotline to report violations of company values. • Managers will fi re clients who don’t respect its security offi cers. • Employees donated more than 28,000 hours of volunteer labor last year. The public and consumers benefi t from organizations acting in an ethi- cally and socially responsible manner. Ethics matters in business because all stakeholders stand to gain when organizations, groups, and individuals seek to do the right thing, as well as to do things the right way. Ethical companies create investor loyalty, customer satisfaction, and business perfor mance and 40 profi ts. The following section presents diff erent levels on which ethical issues can occur. 1.3 Levels of Business Ethics Because ethical problems are not only an individual or personal matter, it is helpful to see where issues originate, and how they change. Business leaders and professionals manage a wide range of stakeholders inside and outside their organizations. Understanding these stakeholders and their concerns will facili- tate our understanding of the complex relationships between participants in- volved in solving ethical problems. Ethical and moral issues in business can be examined on at least fi ve levels. Figure 1.3 illustrates these fi ve levels: individual, organ i zati ona l, association, 41 societal, and international. Aaron Feuerstein’s now classic story as former CEO of Malden Mills exemplifi es how an ethical leader in his seventies turned a disaster into an opportunity. His actions refl ected his person, faith, allegiance to his family and community, and sense of social responsibility. On December 11, 1995, Malden Mills in Lawrence, Massachusetts— manufacturer of Polartec and Polarfl eece fabrics and the largest employer in the city—wa s destroyed by fi re. Over 1,400 people were out of work. Feuer- stein stated, “Everything I did after the fi re was in keeping with the ethical standards I’ve tried to maintain my entire life, so it’s surprising we’ve gotten so much attention. Whether I deserve it or not, I guess I became a symbol of what the average worker would like corporate America to be in a time when the American dream has been pretty badly injured.” Feuerstein an- nounced shortly after the fi re that the employees would stay on the payroll while the plant was rebuilt for 60 days. He noted, “I think it was a wise