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doctrine by creating more exceptions, such as protection for Employees are human beings, with dignity and emo-
freedom of speech in the workplace, which is considered in tional attachments, not feelingless robots. This is not to
the next section. Indeed, many other laws, such as those say that inadequate employees should not be replaced
prohibiting discrimination and unsafe working conditions, with better performers, but employees at least deserve to
already restrict the right of employers to dismiss at will by find out the reasons for underlying employment changes.
And if employees are to take charge of their careers, they
specifying reasons for which an employee cannot be dis-
should receive good reasons for employment decisions
missed. Other critics question whether the arguments for
and full information.17
employment at will based on property rights and freedom
of contract support the doctrine. However, the main source Some writers argue that employers ought to enable
of opposition to employment at will has come from critics workers to keep their knowledge and skills up to date so
who maintain that employees have a moral right to due that they can easily move to other jobs in the event of job
process in employment decisions that is incompatible with loss. Rosabeth Moss Kanter contends that although
this legal doctrine. Thus, the main alternative to employ- employers cannot and should not be expected to provide
ment at will is a legally recognized right to due process. job security, they have a duty to give workers what she
The term “due process” occurs in the Fourteenth calls “employability security,” which is a matter of provid-
Amendment to the U.S. Constitution, which provides that ing work that “will enhance the person’s value in terms of
no state shall “deprive any person of life, liberty, or property future opportunities.”18
without due process of law.” In this political context, due Third, some proponents of a right to due process
process is a check on the arbitrary exercise of government argue that treating employees fairly is simply good man-
power: The state may not use its considerable power in agement practice that pays off in increased productivity.
ways that harm citizens in important respects without ade- Although job security alone is unlikely to have much effect,
quate justification. This justification consists not only in hav- there is considerable evidence to show that worker partici-
ing an adequate cause or good reason for the state’s action pation in all aspects of a firm’s operations enhances pro-
but also in following fair or just procedures. The concept of ductivity and that some measure of job security is essential
due process in employment is similar to its application in a for gaining the benefits of greater employee involvement.19
political context. Employers have less power than govern- One objection to this efficiency-based argument is that if
ment to adversely affect individuals, but termination of according employees due process has productivity gains,
employment, in particular, can still inflict grievous harm on then employers do not need a legal requirement to do this;
workers. Due process in employment, then, restricts the the market alone will provide adequate incentives to secure
right of an employer to dismiss an employee without having due process. Thus, if employment at will is the default
a just cause and without following just procedures. legal rule, employers and employees will contract away
from this situation in order to gain the benefits of greater
job security. John J. McCall addresses this objection by
8.2.1: Support for Due Process arguing that the efficacy of such contracting depends on
Three broad arguments are offered in support of a right to what is the default legal rule, and that having employment
due process. at will “as the background default rule may actually inhibit
First, it is argued that a terminated employee suffers an efficient bargaining outcome.”20
some substantial harm that ought not to be inflicted with- The debate over the efficiency of employment at will
out an adequate reason and a fair hearing. If comparable and due process or job security as default rules is not easily
jobs were readily available, then no employee would be resolved. In general, the argument that employment at will
harmed by being forced to change; but when jobs are scarce is a more efficient default rule rests on the assumption that
and the alternatives are less desirable, the loss of a job is a employers and employees are fully rational and well-
significant financial blow. In addition, our social standing informed and so can bargain effectively, whereas the argu-
and self-esteem are closely linked to our work, so that a job ment for due process questions whether the two parties
loss may also result in some psychological harm. Because a can bargain rationally with full information.
job is so essential to our well-being, it should not be subject
to the arbitrary power of an employer. Employers have
great power over us, and this power should be exercised 8.2.2: Law of Due Process
responsibly. A law that requires employers to have a good The effect of a law that ensured due process would be to
reason and provide a fair hearing for any dismissal is rea- introduce the legal right not to be dismissed without cause
sonable, then, in view of power that they hold. and a fair hearing into every employment relation. This
A second argument for a right to due process is that right would be guaranteed for all employees and would
this right is owed out of respect for the dignity of work- not depend on an explicit contract and the implied cove-
ers. Tara J. Radin and Patricia H. Werhane argue, nant of good faith and fair dealing that currently constitute
enterprises largely forgo donations entirely and, conse- greater the returns on profitable investments and the more
quently, must generate most of their revenue from the quickly these returns can be realized. In particular, equity
sale of products or services. Merely having a worthy mis- capital enables a social enterprise to grow—to “scale up” in
sion will not protect a revenue-dependent organization the jargon—and implement innovative ideas more effec-
from failure; it must, like any business, generate enough tively for greater impact. Nonprofits, by contrast, typically
revenue to cover all its costs. grow slowly and are unable to change quickly due to their
reliance on donations. Nonprofits also face pressure to use
Competing as a Nonprofit  The nonprofit form is
donations for their intended purpose and not, for example,
ideally suited for an organization with a mission. Any non-
to invest in building capacity or to attract the best talent
profit has the opportunity to supplement donations with
with higher pay. These benefits of equity capital are
sales revenue (although it will be taxed on income unre-
enhanced by the increasing interest of investors in making
lated to its mission). An enterprising or commercial non-
an impact along with gaining financial return in the move-
profit can survive in a highly competitive market only by
ment known as “impact investment.” Social enterprises
offering products or services that are equal or superior to
also benefit from the development of innovative forms of
those of competitors. In some cases, survival is possible
capital that meet the special circumstances of mission-
due to a lack of competitors (Benetech, for example, found
driven organizations, as well as the unconventional inter-
new, unserved markets). In other cases, the goods offered
ests of impact investors.
by a nonprofit may be preferred by consumers because the
In their competition with standard for-profit busi-
sale supports a mission they favor (Girl Scout cookies, for
nesses, social enterprises benefit from access to many of the
example). The nonprofit form is so well suited to the pur-
resources of traditional nonprofit organizations. Most
suit of a mission that one may wonder:
notably, the attractive missions of both nonprofits and for-
Why would the founders of a mission-driven organiza- profit social enterprises lead to fruitful collaborations with
tion choose the for-profit form and seek to operate it as a individuals and community groups, which willingly lend
business, especially since this form largely precludes their talents, creative ideas, and organizational capabilities.
access to charitable donations? Governments are also more willing to work with mission-
driven organizations, whether nonprofit or for-profit, than
In order for for-profit social enterprise to make eco-
with business corporations in joint efforts to provide social
nomic sense, the incorporation of a mission-driven organi-
benefits. Indeed, governments are major purchasers of the
zation in the for-profit form must enable it to have greater
goods and services provided by social enterprises. For
social impact than would be possible for a nonprofit
example, some municipalities favor suppliers that employ
organization with the same mission. Put simply, a for-
persons with disabilities, who might otherwise require
profit social enterprise is possible—that is, has a competi-
greater welfare assistance.
tive advantage in the market—only if its mission can be
In addition to accessing more resources, social enter-
pursued more effectively as a business than as a charity.
prises can gain competitive advantage by utilizing them
From an economic point of view, a for-profit mission-
more effectively. This task is served mainly by innovation.
driven social enterprise can gain a competitive advantage
in two ways: It can gain access to greater resources and/or Examples
it can utilize the available resources more effectively in
• Jim Fruchterman’s discovery of a pattern recogni-
making an impact. Both of these factors—access to and
tion technology had many applications—missile
utilization of resources—depend on a third, critical factor
guidance systems was one—but only he had the
in social enterprise, namely, innovation. Social enterprise
idea of using it in a reading machine for the blind.
is, above all, a matter of being innovative in meeting criti-
However, developing the idea into a product—and
cal human needs.
also founding a company, Benetech, for bringing the
Competing as a For-Profit  The main benefit of idea to market, as well for making new discoveries
for-profit social enterprise over its nonprofit competition is and creating new products from them—was highly
access to equity capital and other kinds of return-seeking innovative.
investment. Nonprofits may obtain loans on which they • Another example of a now commonplace idea that
pay interest, but this source of funding is severely limited. was novel at the time of development is microfi-
Equity capital, by contrast, is available only to for-profit nance, for which Muhammad Yunus and the Gra-
corporations inasmuch as equity investors are compen- meen Bank of Bangladesh were awarded the Nobel
sated with profits, which, by definition, cannot be made by Peace Prize in 2006. The idea of making loans in
nonprofit organizations.77 small amounts to the very poor is not original, but
The benefits of equity capital for social enterprises are in the face of critics who argued that it could never
numerous. The more capital available to a business, the be done profitably, Muhammad Yunus devised a
 method to make it work and, in the process, created necessary for attracting charitable donations to a non-
a major banking institution, which today has many profit organization. People are willing to give money to a
imitators. nonprofit, not only because they want to support the mis-
sion but also because the nondistribution constraint
assures them that their money will not be diverted for
12.5.3: Mission and Trust other purposes. Without this assurance, contributions
As previously noted, a for-profit corporation can have any would be more difficult to obtain.
legal objective. Thus, it can have a social mission in addi- Although for-profit social enterprises largely forgo
tion to, or even instead of, the objective of earning profits donations or contributions, their successful operation still
for shareholders. The objective or mission of a for-profit depends on a high degree of trust, which it must somehow
corporation is determined by whatever group has control. obtain without the benefit of the nondistribution con-
In a new enterprise or start-up, this group is the founders. straint. The need for trust arises because, more than a
As an organization grows, the mission can be maintained standard business, a social enterprise must gain the active
as long as these founders or their successors, who have support of its employees, the people it serves, government,
control, remain committed to it. and the public. An ordinary business operates mostly in a
However, a for-profit social enterprise encounters market, buying the inputs that it needs (mainly workers
difficulty in maintaining a social-benefit mission once it and raw materials) and selling the outputs (products or
obtains equity capital from outside investors. The source services) to customers. For this kind of market-based activ-
of this difficulty is that investors are reluctant to supply ity, little trust is required because contracts provide the
equity capital without obtaining some measure of control, necessary assurance. By contrast, a for-profit social enter-
because control is the main means by which they can prise, like a nonprofit, operates more in a community than
ensure the profits that constitute their return. In the stand- in a market and is heavily dependent on the willing coop-
ard for-profit corporation, equity capital providers usually eration of many different groups. This willingness to coop-
become the shareholders, with legal rights of control. In erate would not be possible without assurance that the
consequence, maximizing profits—which are distributed shared mission of the enterprise will be pursued. For these
to the shareholder–investors—becomes the objective of the reasons, trust is essential for social enterprises, especially
corporation, because this is what profit-minded sharehold- when they are for-profit.
ers want. Both of these problems—preserving the mission
For a social enterprise, like any business, it is difficult and building trust—can be addressed to some extent by
to obtain equity capital without ceding some control, but innovative forms of corporate governance. In the United
once outsiders gain some control, they are in a position to States, for-profit social enterprises can now incorporate in
compromise or even abandon the mission in favor of many states as a benefit corporation. A similar incorpora-
greater profits. That is, they could replace a social benefit tion form in the United Kingdom is the community interest
with profit maximization as the objective of the social company. Both of these forms of incorporation require that
enterprise, thereby turning it into a conventional for-profit the venture be organized primarily for a recognized
business. The main benefit of a for-profit social enterprise, socially beneficial purpose, with profit as a secondary or
namely access to equity capital, thus becomes a significant incidental aim. The legislation for these alternative incor-
liability. This liability partially explains why many social poration forms also contains provisions about consider-
enterprises remain controlled by a small group of investors ing the interests of all groups in society in decision
and are not publicly traded. Smaller, like-minded groups making and about reporting activities in a highly trans-
of investors tend to remain more focused on an enterprise’s parent manner. In addition, the designation Certified B
social mission, as opposed to large, diverse investor Corporation—not be confused with the benefit corpora-
groups, which typically exercise control with a view pri- tion—is awarded by a nonprofit organization, the B Lab,
marily to profitability. for business corporations that voluntarily pledge them-
A second liability facing for-profit social enterprises selves to high standards of transparency, accountability,
is the loss of trust, which results from the opportunity and social performance.
to make a profit. The defining feature of a nonprofit The benefit corporation and the community interest
organization is what Henry Hansmann terms the nondis- company forms of incorporation serve to create trust by
tribution constraint.78 Nonprofits are legally barred from proclaiming a social mission and installing safeguards to
distributing assets for any purpose other than the maintain it. The Certified B Corporation designation seeks
advancement of their mission. Any surplus revenues— the same ends but without conferring any legal require-
which constitute profits in a for-profit corporation—must ments or protections. In the United States, the need for new
be retained by a nonprofit as an organizational asset. This incorporation statutes for social enterprise was highlighted
nondistribution constraint is critical in building the trust by the sale of Ben & Jerry’s to Unilever, a relentlessly
bottom line-focused company. Although Ben Cohen and
Jerry Greenfield expressed firm opposition to the sale, they Table 12.3 Nonprofit versus For-Profit Social Enterprises
claimed to have been forced by corporate law. In their view, How are nonprofit and for-profit social enterprises alike? How are
they different? Compare the main characteristics of each type of
the board was legally obligated to sell to the highest bidder
social enterprise. Then hide the cells to quiz yourself.
without regard for the company’s original social mission.
Nonprofit SE For-Profit SE
Advocates of benefit corporation legislation argue that the
Definition A nonprofit whose main A business created for a
outcome would have been far different had the founders source of revenue is social purpose, that
been able to incorporate under more recently enacted stat- earned income, not operates in a socially-
utes. This argument is countered, however, by claims that donations beneficial manner

the board was not legally required to sell the company and AKA Enterprising nonprofits, Possible forms:
commercial nonprofits • subsidiary of a hybrid
that standard corporate law, judiciously applied, is suffi- nonprofit
cient for the needs of social enterprises.79 • benefit corporation
(community interest
Comparing Nonprofit and For-Profit Social company)
Enterprises  The major characteristics of nonprofit and • Certified B Corporation

for-profit social enterprises are outlined in Table 12.3. Example(s) Benetech (technology to Patagonia (environmen-
aid global literacy) tally-sustainable
clothing)
WRITING PROMPT Toms Shoes (donates
shoes to the needy)
Potential Advantages of For-Profits Available funding Sales, donations, loans Sales, equity capital,
Goodwill Industries International is a nonprofit that has been serving impact investment
people with disabilities for over 100 years. In 2014 Goodwill provided Advantages Tax benefits Equity capital allows
job training, assistance in finding employment, and other community Income from donations faster growth, more
services to 9.8 million people in the United States and Canada. It effective use of
People have more confi-
funds its operations with sales of donated items from its chain of more resources
dence in nonprofit
than 3,000 retail thrift stores and through its shopgoodwill.com web- causes Ability to retain profit
site. Could Goodwill have been as successful as it has been in pursu-
Challenges Need for innovation Need for innovation
ing its mission if it had been founded as a for-profit social enterprise?
Pressure to use dona- Pressure to give some
The response entered here will appear in the tions for given purposes control to outside
performance dashboard and can be viewed by Limits on spending investors
your instructor. Difficulty keeping focus
on social mission over
profit
Submit Loss of public trust

Conclusion: Corporate Social Responsibility

The meaning of corporate social responsibility and the The development of social enterprise shows that this chal-
arguments for it, as well as the attitudes of business toward lenge can be met not only by conventional CSR programs
it, have changed dramatically over the past 50 years. The but also by new kinds of businesses that have a social mis-
vigorous debate over the normative case for CSR gave sion as their very reason for existence. The challenge for
way eventually to a wary acceptance and then an enthusi- society is to make demands on corporations of all kinds
astic embrace of the business case. Along the way, the for greater responsibility that best utilize their capabilities
question about CSR changed from whether to how. and resources.
­However, whether the meaning of CSR also shifted to fit
with what business was willing and able to do is an open
question. What is undeniable is that, in the words of The End-of-Chapter Case
Economist magazine, “CSR is thriving.” CSR has become a
virtual industry, with most large corporations proclaiming
Studies
long lists of activities. The challenge now for corporations This chapter concludes with three case studies.
is to be strategic about CSR and develop programs that The focus of large corporations on social responsibility
provide the greatest benefit for themselves and society. may result from pressure by outside activists, as occurred at
 Starbucks (“Starbucks and Fair Trade Coffee”) and Coca-Cola and farmworkers to lift themselves out of poverty by invest-
(“Coca-Cola’s Water Use in India”), or it may be due to the ing in their farms and communities, protecting the environ-
commitment of visionary inside leaders, such as Jeffrey Swartz ment, and developing the business skills necessary to
(“Timberland and Community Service”). In all three of these compete in the global marketplace.” Products, including not
cases, the changes produced by a focus on social responsibil-
only coffee but also tea, cocoa, rice, vanilla, honey, sugar, and
ity were beneficial, both for the corporation and for society.
flowers, qualify for fair trade certification if the six condi-
Together, these three cases make a powerful argument for the
proposition that, in Mr. Swartz’s phrase, “commerce and jus- tions described in Table 12.4 are met.
tice” can be successfully combined to produce enduring
socially responsible corporations.
Table 12.4 Requirements for Fair Trade Certification
How well do you understand the principles of “fair trade” and its
objectives? Review the required conditions for a product to receive
fair trade certification and the explanation of each. Hide the cells in
the table to quiz yourself.
Case: Starbucks and Fair Condition Description
Trade Coffee Fair prices Democratically organized farmer groups receive a
guaranteed minimum floor price and an additional
Starbucks built a fast-growing business on a corporate phi-
premium for certified organic products. Farmer
losophy of putting people first. This philosophy began organizations are also eligible for pre-harvest credit.
with employees, providing good working conditions and Fair labor Workers on Fair Trade farms enjoy freedom of asso-
treating them all with dignity and respect. Howard Schultz, conditions ciation, safe working conditions, and living wages.
Forced child labor is strictly prohibited.
the leader of the company, who bought it from its founders
Direct trade Importers purchase from Fair Trade producer groups
in 1989, wrote in his book Pour Your Heart into It that if you as directly as possible, eliminating unnecessary mid-
“treat people like family . . . they will be loyal and give their dlemen and empowering farmers to develop the
business capacity necessary to compete in the
all.”80 Customers were also important for Starbucks. The global marketplace.
aim of the company to create enthusiastic, loyal customers Democratic and Fair Trade farmers and farmworkers decide demo-
was secured by offering a special ambience in its stores and transparent cratically how to invest Fair Trade revenues.
organizations
a guarantee of the finest coffee available. The Starbucks
mission statement expressed a firm commitment not only Community Fair Trade farmers and farmworkers invest Fair Trade
development premiums in social and business development pro-
to treat employees and customers well but also to benefit jects such as scholarship programs, quality-improve-
communities and protect the environment. It was charac- ment training, and organic certification.

teristic of the Starbucks philosophy that the mission state- Environmental Harmful agrochemicals and GMOs are strictly pro-
sustainability hibited in favor of environmentally sustainable farm-
ment mentioned the need for profitability last. ing methods that protect farmers' health and
preserve valuable ecosystems for future generations.

Fair Trade Campaign The fair trade movement addresses several factors in
global coffee trade that disadvantage small growers in
In 2000, Starbucks was confronted with a demand that the developing countries.
company buy fair trade coffee.81 Global Exchange, a non-
governmental organization (NGO) that focused on human What challenges do these small coffee growers face?
rights, accused Starbucks of making a profit at the expense First, the coffee market consists of a long supply chain with
of coffee growers in poor countries, who received a small many intermediaries between the growers and the eventual
portion of the world price for their beans. The first salvo in consumers. In 2000, more than 50 percent of all coffee beans
the Global Exchange campaign took place in February with were grown on small plots of land. Individual growers and
a demonstration at a San Francisco Starbucks store. A few some small cooperatives lacked the machinery for the next
days later, leaders from the NGO appeared at the annual stage of hulling the beans, leading them to sell their crop to
meeting of Starbucks and threatened a national boycott if the owners of local mills. From there, the raw beans passed
the company refused to buy and promote fair trade coffee. through many layers of middlemen before they were roasted
The fair trade movement, which gained impetus in the and offered for sale to consumers. As a result, growers
1990s, seeks fair compensation for the producers of basic received only a small portion of the world market price for
commodities and mutual respect between producers and finished beans.
buyers. In 1999, the organization TransFair USA began offer- Second, many growers had difficulty obtaining financing
ing a certification for fair trade coffee, and Global Exchange and so were forced to sell their anticipated crop to middle-
launched an education campaign to persuade consumers to men for a cash advance. Not only did this arrangement limit
buy coffee with the TransFair USA logo.82 According to their bargaining power over price, but it also kept them mired
TransFair USA, “Fair Trade Certification empowers growers in a continuous cycle of poverty.
 Third, the prices of all agricultural commodities are sub- Starbucks executives also needed to consider the
ject to wide fluctuations based on supply and demand. High impact of sourcing fair trade coffee on the company’s rela-
prices when supplies are short encourage overproduction, tionships with its regular suppliers around the world who
which leads to subsequent low prices; and when the result- had managed to obtain the high price offered by Starbucks
ing reduction in supply leads to higher prices, the cycle starts only by meeting the company’s high standards. As one
over again. By 2000, an oversupply of coffee beans had executive explained,
pushed prices down to the lowest levels in 50 years, and the
The relationships I have with growers were built over the
world price for raw beans fell to 64 cents per pound. Although last 20 years. It’s taken some of them years before I would
in 2000, Starbucks paid an average of $1.24 per pound, use their beans consistently and pay them $1.25 or more.
which was almost double the lowest price, much of the differ- Now I was being asked to use another farmer who I didn’t
ence was due to the company’s purchase of premium beans. know and pay him the same price without the same qual-
ity standards.

Starbucks Responds Many of Starbucks’ suppliers could not meet the criteria
for fair trade certification because they were large growers
The demand by Global Exchange for Starbucks to purchase
and not individual farmers or cooperatives, and so they could
and promote fair trade coffee fit with the principles in the
not be run democratically as the fair trade criteria required.
company’s mission statement, especially the commitment
Starbucks executives also faced the following questions.
to apply high standards in the purchase of coffee beans.
Some customers had requested not only fair trade coffee How much of the higher price for fair trade coffee
but also coffee grown in the shade to protect bird habitats would actually reach the growers?
and organic coffee grown without chemicals.83 However, Critics of the fair trade movement charge that too many fair
the customer demand for fair trade coffee was unknown. trade dollars end up in the pockets of middlemen and NGOs.84
Partners (the Starbucks term for employees) might find TransFair USA claims that fair trade can eliminate as many as
more satisfaction in their work if the company were to offer five layers of middlemen by enabling growers to deal directly
fair trade coffee and might be distressed by a boycott with American wholesalers and thereby double or triple their
against the company. Moreover, Starbucks had already income.85 However, it is difficult for purchasers of fair trade
worked with NGOs on several social and environmental coffee to know how much the growers actually benefit. Trans-
projects. The company contributed to CARE, an interna- Fair USA and other organizations that certify fair trade prod-
tional humanitarian organization devoted to fighting ucts collect a fee for monitoring and licensing growers. In
global poverty, with instructions that its funds be directed 2005, TransFair USA collected $1.89 million in fees, spending
to coffee-growing countries. In 1998, Starbucks joined with most of this amount on salaries, travel, and other expenses for
Conservation International to promote shade-grown cof- its 40 employees.86 Fee income rose to $7 million by 2009.87
fee, which brought many benefits to coffee cooperatives in Ensuring that fair trade products meet the criteria for cer-
Chiapas, Mexico. In 1994, Starbucks established a depart- tification involves some monitoring, and so the relevant ques-
ment of Environmental Affairs, and created a department tion is whether this monitoring will be done by third parties,
of Corporate Social Responsibility in 1999. such as TransFair USA, or by the buyer, in this case Star-
Although the demand by Global Exchange fit with bucks. In any event, monitoring imposes an extra cost that is
Starbucks’ mission, company executives were concerned borne ultimately by some party—either the grower in the form
whether it was compatible with Starbucks’ successful strat- of a lower price for beans, the consumer in the form of higher
egy of offering high-quality coffee at premium prices. The prices for the brewed coffee, or by Starbucks shareholders in
company’s reputation was built on meeting customers’ the form of lower earnings.
expectations of a certain experience. Sourcing fair trade cof-
fee would mean dealing with suppliers whose record for Is the fair trade movement an effective solution to
consistent high quality, uniformity in taste, and reliability in the economic problems of coffee production by small
delivery was unknown. The head of bean purchasing at growers in a world market?
Starbucks cautioned, “This was an uncharted category, and, The fluctuation of supply and demand due to alternating
as marketers, we were concerned about endorsing a prod- overproduction and underproduction and the lack of credit
uct that didn’t meet our quality standards.” Although the that forces growers into a cycle of indebtedness are the inev-
price of free trade coffee was only 6 cents per pound more itable result of too many coffee growers tilling small plots of
than Starbucks generally paid, additional costs would be land. Another solution besides the fair trade movement is to
incurred in identifying fair trade growers and working with consolidate coffee bean production in larger farms with the
them, if necessary, to meet Starbucks’ high standards. capacity to switch to other agricultural products as the mar-
Developing a marketing campaign would entail further ket changes. Such a transformation might force some grow-
costs. ers off their land and reduce them to laborers for large
growers, or else it would send them to the cities in search of Brown University and the Amos Tuck School of Business
other employment. at Dartmouth College, Jeffrey Swartz assumed a variety
The fair trade movement offers the prospect of improving of positions at Timberland, becoming chief operating
the lives of one group of growers. However, unless demand officer in 1991 at the age of 31 and president and CEO
for coffee beans increases—and worldwide per capita con- seven years later.
sumption of coffee has been declining since the 1960s—the
main effect of the fair trade movement is that the coffee that “Commerce and Justice”
is purchased by sellers, such as Starbucks, comes from the
growers of fair trade coffee. As a result, the growers of non- Under the leadership of Jeffrey Swartz, Timberland Com-
fair trade coffee will sell less, and so the welfare of coffee pany developed an expanding program of community ser-
growers worldwide will be unchanged. vice in an effort to combine “commerce and justice.” The
centerpiece of this program was the trademarked Path of Ser-
vice, launched in 1992, which allowed employees to devote
Shared Writing: Starbucks and 16 hours of company-paid time each year to community ser-
Fair Trade Coffee vice. Path of Service was expanded to 32 hours in 1994, and to
How much confidence do you have in the effectiveness of the fair 40 hours in 1997. The purpose, as stated by Swartz, was “to
trade certification system? Do you think buying fair trade coffee is engage the skills and talents of employees to create long-term
a step in the right direction for Starbucks and other coffee retail- solutions for critical community needs.” Although participa-
ers, even if the system is flawed? Explain.
tion was optional, employees were encouraged to use the
hours for their own favored causes or to participate in com-
A minimum number of characters is required
to post and earn points. After posting, your pany-sponsored events. A new Community Enterprise
response can be viewed by your class and Department was created to support the Path of Service pro-
instructor, and you can participate in the gram and other community service initiatives.
class discussion.
The origin of Timberland’s commitment to community
service was a chance encounter that Swartz made with the
Post 0 characters | 140 minimum
Boston-based nonprofit organization City Year. City Year
was founded in 1988 to engage young people in a year of
full-time service that gave them “the skills and opportuni-
ties to change the world.” After Timberland responded
Case: Timberland and twice to requests for donations of boots, a founder of City
Community Service Year called on Swartz to thank him and invited him and
other Timberland employees to spend four hours of com-
Our company is organized around values. Not out of con-
munity service with a group of City Year volunteers. Swartz
venience, but out of necessity.88
accepted the invitation and was appalled by the social
—Jeffrey Swartz, President and CEO, problems he saw, as well as inspired by the possibilities for
Timberland Company change. He reported of his experience:
Jeffrey Swartz, the President and CEO of Timberland And I found myself not a mile from our headquarters,
Company, was the third-generation leader of a formerly face to face with the stories you read in the newspaper,
family-owned business that went public in 1987. 89 In face to face with a vision for America not unlike the one
1955, Swartz’s grandfather, a Russian immigrant, bought that drew my grandfather to leave Russia in steerage so
the Abington Shoe Company, located in South Boston, many years ago. . . . Behind my desk again, safe no longer,
Massachusetts, and brought his two sons into the busi- moved by my own sense of purpose having served, albeit
briefly, all that mattered was figuring out how service
ness. The iconic Timberland boot was introduced in 1965
could become part of daily life at Timberland.90
when the Swartz family developed a process for fusing
rubber soles to leather uppers to form a rugged, water- Swartz gradually increased Timberland’s support for
proof boot that was also less expensive to produce. The City Year by making an initial pledge of $1 million annu-
success of the Timberland boot led the Swartz family to ally for three years, later extended for another five years,
relocate in 1969 to Stratham, New Hampshire, and to and loaning a Timberland executive to assist in marketing
change the name to Timberland Company in 1978. The for City Year. Swartz became chairman of City Year’s
growing company began to market a variety of casual national board. In turn, City Year organized team-building
and work footwear under the Timberland brand, and, exercises for Timberland employees, aided in creating com-
later, introduced clothing and accessories for men, munity service projects, and, in 2000, located an office in
women, and children, as the company expanded sales to Timberland’s headquarters. Timberland expanded its com-
Europe, Asia, and Latin America. After graduation from munity service program with two full days of activities,
one in the spring that coincided with Earth Day and another be the embodiment of commerce and justice, and that’s a
in the fall called Serv-a-palooza. The company extended its different model.
collaboration with nonprofit organizations by establishing
This is a model that had served Timberland well as it
links with Share Our Strength, an antipoverty group, and
survived and even prospered in the highly competitive
with Skills USA, which provided vocational training for
footwear industry. The questions remain, however, whether
young people.
this is a model for many companies or industries, and
whether it would remain a viable model for Timberland if
Testing the Commitment its competitive environment changed or the company faced
another economic downturn.
If Timberland had remained a family-owned business, then
Swartz could indulge his passion for service because he
Do you think Timberland’s commitment to communi-
would be using his own resources. As a public company,
ties and social values was sustainable?
however, he was responsible to shareholders. This respon-
sibility was tested in the mid-1990s, when profits fell, and The economic situation did change for Timberland in 2011,
in 1995 the company suffered its first loss in net income. when rising leather prices and higher labor costs combined
Although he was urged to cut the community service pro- to squeeze profits, which dropped 30 percent in the first
gram, Swartz resisted. He believed that instead of being an quarter of the year.91 A bid by clothing giant VF Corporation
expense that could be cut in bad times, the cost of commu- to buy Timberland for $2.3 billion was quickly accepted by
nity service was an investment of resources that contrib- the board of directors and the shareholders, and Jeffrey
uted to the company’s success. Community service, in his Swartz gave up his leadership position and left the company
view, was a key part of the strategy at Timberland for ful- his family founded and had managed for three generations.
filling the company’s mission and values, which in turn VF Corporation, which marketed Lee and Wrangler jeans,
were integral to the company’s main goals that included Nautica apparel, and North Face outerwear, kept the iconic
strong financial performance. Timberland brand but rolled operations into its Outdoor and
The mission of Timberland was stated in the compa- Action Sports divisions. Swartz was apparently comfortable
ny’s 2006 CSR Report as “To equip people to make their with the change, declaring “I am confident that while our
difference in the world.” Four core values were identified ownership structure has changed, what makes Timberland
as guides for all company activity. These were humanity, unique and special will not.”92
humility, integrity, and excellence. And five “bold goals” His confidence was borne out. A human relations execu-
were set forth: tive for the Outdoor division said, “VF recognizes that service
is a critical element of Timberland’s culture,” and announced
• Become the authentic outdoor brand of choice by pro- that beginning in 2012, the two events of Earth Day and
viding inventive and practical products to our con- Serv-a-palooza would be observed by both the Outdoor and
sumers the Action Sports divisions. The VF executive explained, “We
• Be the business partner of choice by providing distinc- joined Timberland in service at last year’s Serv-a-palooza and
tive value to our customers saw the benefits service brings to the work environment, the
• Be a top employer of choice globally community, and to the business.”93 In April 2012, more than
4,500 VF employees observed Earth Day with service pro-
• Be the reference for socially accountable business g
­ lobally
jects in 71 locations across the United States.
• Deliver exceptional financial performance for share-
holders
Shared Writing: Timberland
Swartz believed that these measures of the company’s and Community Service
success—its mission, values, and goals—required not only Do you agree with Jeffrey Swartz’s belief that “doing well and
the community service program but also ambitious initia- doing good are not separate ideas” but “inseparable ideas”? Do
tives to protect the environment and secure human rights you share his confidence that Timberland’s new owner, VF Cor-
in its manufacturing facilities worldwide. poration, will continue to uphold Schwartz’s ideals and act on
them? How could this continuity be assessed today? Explain.
Swartz expressed his belief in this connection of com-
merce and justice in the following way: A minimum number of characters is required
to post and earn points. After posting, your
We operate on the core theory, on the belief that doing response can be viewed by your class and
well and doing good are not separate ideas; they are instructor, and you can participate in the
inseparable ideas. That, in fact, they are inextricably class discussion.
linked and that everything we do, every business decision
we make, every strategy we promulgate, every speech we Post 0 characters | 140 minimum
make, or every pair of boots or shoes that we ship, have to
 When the Coca-Cola plant in Kaladera opened in 1999,

Case: Coca-Cola’s Water it drew approximately 52.8 million gallons annually from
the local aquifer, which was approximately 0.4 percent of
Use in India the amount of underground water being consumed.
On December 29, 2005, officials at the University of Mich- Improvements in water efficiency—including a switch
igan sent a letter informing The Coca-Cola Company that, from refillable glass bottles to single-use plastic containers,
effective January 1, 2006, all purchases of Coke products which do not require washing but create landfill waste—
for on-campus sale in vending machines, cafeterias, res- eventually cut water use in half, so that in recent years, the
taurants, residence halls, and sport arenas would be sus- Kaladera plant had accounted for only 0.2 percent of local
pended.94 This suspension was the latest development in water consumption. The impact of this relatively small
an ongoing campaign by student activists to support high usage on the water table was exacerbated, however, by
standards of corporate conduct around the world through heavy consumption in the summer months, which coin-
enforcement of a university Vendor Code of Conduct, cided with the period of least annual rainfall.
which had been adopted in the spring of 2004 to address Although several other industrial facilities in the area,
issues of human rights and environmental protection. including a paper pulp plant, were also water-intensive
Coca-Cola, whose contract with the university was worth producers, Coca-Cola was probably the largest single user
$1.4 million, became a target in this campaign after Amit of water. However, the fraction of 0.2 percent is minuscule
Srivastava, the founder of India Resource Center, spoke in comparison to total water use, most of which occurred in
on campus to raise student awareness about the depletion agriculture. Agricultural use alone exceeded the natural
of groundwater around the plants producing Coke recharge rate, so the water table would have been lowered
­products.95 to some extent regardless of household and industrial use.
According to the Wall Street Journal, activists had Moreover, Coca-Cola claimed, though proof was lacking,
accused Coca-Cola of “sucking local Indian communities that the 140 rain water harvesting structures built by the
dry through excessive pumping of groundwater.”96 The company returned more than 15 times the amount of water
greatest attention was focused on a plant in Kaladera, an to the aquifer than the Coke plant drew. However, many of
impoverished community in the arid Indian state of these structures—which consisted of deep shafts dug in the
Rajasthan, where water was supplied entirely by under- ground—were found by a study to be in dilapidated condi-
ground aquifers.97 The local watershed, which covered tion, and their efficacy in returning rain water to the aquifer
about 120 square miles, had been officially declared was also questioned.98
“overexploited” in 1998. The groundwater level had Critics of Coca-Cola’s water use also considered how
dropped from 30 feet belowground to 128 feet over a much water the company was “entitled” to use based on an
period of 20 years, and since 1996, the rate of the drop equitable sharing of resources in proportion to the eco-
had increased to 4.5 feet per year. This lowering of the nomic benefit of water use.
groundwater level had forced farmers to drill ever deeper
wells and install more powerful pumps, and the resulting What do you think was determined to be Coca-Cola’s
difficulty of obtaining water limited crop output and the “fair share” of the water?
number of acres under cultivation. Although most of the water consumption occurred in agri-
The causes of this reduction in the water supply were culture, farmers constituted 15 percent of the local popula-
disputed. Although Rajasthan receives little rainfall and tion (not counting family members who work on family
suffers from periodic droughts, weather conditions had not farms), and the whole population depended critically on the
worsened in recent years. However, urbanization, popula- food produced by local farms. By comparison, the highly
tion growth, and higher incomes had increased the demand mechanized Coca Cola plant employed between 70 and
for water to the point where annual usage exceeded the 250 people, depending on the season, who constituted a
natural recharge rate by 135 percent. In recent years, farm- very small portion of the population. On the basis of employ-
ers, who used 91 percent of the water—the other nine per- ment alone, one observer calculated that the company’s
cent went to household and industrial consumption—had “fair share” of water use would be only 0.15 percent.99 This
drilled more wells, enlarged their fields, and shifted to more figure would be further reduced by considering the impor-
water-intensive crops. Because electricity was supplied at tance of agricultural to the welfare of the people in com-
little or no cost and was subject to frequent outages, farmers parison to other uses of water. The government had
often left their pumps running constantly, thereby wasting prioritized water use in the order: clean drinking water first,
large quantities of water. Farmers had also resisted adop- followed by agricultural use, power generation, and, finally,
tion of drip irrigation systems, which, although costly and industrial production. In the category of industrial produc-
difficult to maintain, reduce the amount of evaporation by tion, soft drinks are unlikely to be rated very highly by the
releasing water directly into the soil. Indian people.
 The University of Michigan campus remained Coke- term interest of both our business and the communities
free for the first three months of 2006. During this time, where we operate to be good stewards of our most critical
Coca-Cola engaged in discussions with TERI (The Energy shared resource, water.”102
and Resources Institute), a highly respected research uni-
versity in India devoted to environmental protection, to Shared Writing: Coca-Cola’s
undertake an independent study of the impact of the com- Water Use in India
pany’s operations.100 On April 11, 2006, an agreement was Are you satisfied with the resolution of this case? Do you think the
reached in which the sale of Coca-Cola products was University of Michigan should have insisted on the recommenda-
allowed to resume pending the findings of the TERI study, tions made by TERI in its report? Did Coca-Cola adequately
­handle the situation, or do you think it should have done more on
which would be released to the public without any interfer-
its own? Explain.
ence by the company. Although the TERI report confirmed
many basic facts about Coca-Cola’s role in groundwater A minimum number of characters is required
depletion and recommended some changes that were never to post and earn points. After posting, your
response can be viewed by your class and
implemented, the university was satisfied with the find- instructor, and you can participate in the
ings and, on October 13, 2008, a university official declared class discussion.
the student complaint “resolved to our satisfaction.”101 In
2011, the Coke’s chairman and CEO, Muhtar Kent, affirmed, Post 0 characters | 140 minimum
“At The Coca-Cola Company, we are transforming the way
we think and act about water stewardship. It is in the long-
Chapter 12 Quiz: Corporate Social Responsibility
Chapter 13
Governance, Accountability,
and Compliance
Learning Objectives
13.1 Identify the moral arguments and legal misconduct, and how flaws in the system
rules for shareholders’ control of publicly have allowed major scandals
held corporations, and the additional
13.3 Evaluate the components of corporate ethics
considerations for protecting the interests of
programs, the federal guidelines designed to
other stakeholders
punish and prevent misconduct, and how
13.2 Critique how financial reporting, corporate adopting a code of ethics benefits companies
management roles, and the law function to
prevent fraud and other kinds of corporate

Case: Fraud at WorldCom carrier. In 1995, the emerging conglomerate assumed the name
WorldCom. The acquisitions enabled WorldCom’s stock to
When WorldCom filed for bankruptcy on July 22, 2002, its become a darling of Wall Street through creative accounting
stock, which was once worth more than $180 billion, became devised by the company’s whiz-kid CFO, Scott Sullivan.
1
virtually worthless. Although the company reported $107 billion Mr. Sullivan utilized several accounting treatments that
in assets, it had accumulated more than $41 billion in debt in served to steadily increase WorldCom’s earnings, along with
the course of a buying spree that had fueled its rapid growth. its stock price.2 In each acquisition, the value of the assets was
The downfall of WorldCom was sealed in late June, when the reduced by charging future expenses against them. The result
company revealed that more than $3.8 billion had been was lower earnings initially but a guarantee of higher earn-
improperly booked as revenue, a figure that eventually rose to ings over time. The value of the assets was further reduced
$11 billion. The revelation of improper accounting forced by transferring funds to “cookie-jar” reserves that could be
WorldCom to write down more than 75 percent of its reported tapped when needed to meet analysts’ earnings expectations.
assets. WorldCom set new world records for the largest com- In addition, some of the book value of the assets acquired was
pany ever to go bankrupt, surpassing Enron, and for the larg- shifted from tangible or hard assets, which had to be charged
est accounting fraud. against earnings over a short period, to intangible assets, such
as brand name and good will, which could be amortized over
longer periods of time. As a result, a smaller amount due to
Creative Accounting the acquisitions had to be charged against earnings as the
WorldCom started as a small long-distance carrier founded in company was growing. The overall effect of these account-
Clinton, Mississippi, in 1984, by nine investors. One of the found- ing treatments was to give a picture of a growing company
ers was Bernard J. (Bernie) Ebbers, who was a former milkman, with a reliable, steadily rising income. This effect was critical
bartender, high school basketball coach, and, at the time, owner for WorldCom’s growth since acquisitions were financed with
of 13 budget hotels. After Mr. Ebbers was asked to take the helm WorldCom stock, and the rising price of the stock enabled the
of the struggling company, it began to expand through aggressive company to make more acquisitions.
acquisitions. Between 1991 and 1997, 65 regional and national This rosy financial picture did not match the company’s
telephone companies were bought, culminating in 1997 with the ­operations. Bernie Ebbers was known as a hands-off manager
purchase of MCI, then the nation’s second-largest long-distance with little concern for the integration of the companies he

297
­acquired. The employees and customers of the acquired com- announced their plans to resign. When he heard this news, Mr.
panies remained segmented, and departments of the com- Ebbers assured Mr. Myers that the accountants would never
pany, including the critical legal staff, were located in different be asked to do this again. Scott Sullivan also attempted to pla-
cities. Each office had its own policies and managerial style. cate the distraught accountants. He is reported to have said,
More importantly, the telephone routing equipment that han- “Think of it as an aircraft carrier. We have planes in the air.
dled calls and the customer and maintenance services were Let’s get the planes landed. Once they are landed, if you still
not combined into a seamless system. Complaints from dis- want to leave, then leave. But not while planes are in the air.”8
gruntled users flooded the company. The company culture that Mr. Sullivan assured them that the transfer was not illegal and
was developing encouraged “a systemic attitude conveyed that he would assume full responsibility. The two accountants
from the top down that employees should not question their agreed to stay.
superiors, but simply do what they were told.”3 In a report is- At the end of the first quarter of 2001, it became evident
sued after WorldCom’s collapse, Mr. Ebbers was recalled as that WorldCom would not meet its expected earnings target
saying that the project to write a code of ethics was “a co- without a boost from accounting. Increased competition in the
lossal waste of time,” and the writers of the report observed, telephone industry, overcapacity of telephone lines, and a
“While we have heard numerous accounts of Ebbers’ demand decreased demand for telephone services combined to reduce
for results—on occasion emotional, insulting, and with express the revenues of all companies. This time, there were not enough
reference to the personal financial harm he faced if the stock accruals for line leases left to cover the expected shortfall, and
price declined—we have heard none in which he demanded or so Mr. Sullivan developed another plan. Ms. Vinson was ordered
rewarded ethical business practices.”4 to record $771 million of line expenses as capital investment. In
Despite its dysfunctional operations, WorldCom was able its bid to grow, WorldCom had entered into expensive long-
to continue its accounting-aided financial success as long as term leases of telephone lines that were being underutilized,
new acquisitions were found. This strategy by acquisitions and the excess expense was a drain on the company’s bottom
came to a halt when the company’s ambitious bid to acquire line. Mr. Sullivan’s rationale for recording a portion of the line
Sprint was scuttled by the U.S. Department of Justice in July lease payments as capital investment was that the unused
2000. Suddenly the revenues needed to meet analysts’ expec- capacity was a resource that would enable the company to
tations had to be found elsewhere. It was reported that at this grow. On the books, a capital investment shows up as an asset
point, “Ebbers appeared to lack a strategic sense of direction, rather than as an expense, and its cost can be spread over a
5
and the Company began drifting.” Scott Sullivan had a plan, longer period of time.
though. In October 2000, he ordered the controller David F. Although Ms. Vinson put together a résumé and began
Myers and the accounting director Buford Yates, Jr., to divert looking for another job, she made the accounting entry, back-
funds that had been set aside, as required by accounting rules, dating it to February. For the remainder of 2001, she was asked
to pay for line expenses. WorldCom’s telephone system re- to repeat the accounting procedure, improperly recording $560
quired the lease of telephone lines from other companies to million in the second quarter, $743 million in the third quarter,
complete calls, and the cost of these leases constituted a ma- and $941 million in the fourth, each time hoping the entry
jor expense, approximately 42 percent of total revenues. Be- would be the last.9 After realizing that the transfers would have
cause the revenues to pay for line expenses were collected to continue through 2002 if WorldCom were to meet analysts’
several months before the payments were due, generally ac- expectations, Ms. Vinson and another colleague announced to
cepted accounting principles (GAAP) required that funds be set Mr. Myers that they would no longer make these improper
aside as an accounting accrual so that the receipts and expen- entries into the company’s books.
ditures matched. If the cost of the line leases was less than the Further entries proved unnecessary. In March, investiga-
amount set aside, the difference could be added to revenue tors from the Securities and Exchange Commission (SEC)
as an accrual release, but not before the expenses were paid. began asking for documents, and Cynthia Cooper, World-
Com’s head of internal audit, also initiated inquiries. Betty

How did WorldCom’s scheme unravel? Vinson and Buford Yates hired an attorney and agreed to talk
with federal investigators in the hopes of avoiding indict-
The Scheme Unravels ments. On April 26, 2002, Mr. Ebbers was dismissed by the
The task of making the accounting entry that would release board of directors for a lack of strategic vision and also
the accruals fell to Betty Vinson, a diligent, hardworking, loyal because of difficulties from his outside business interests
employee, who, it was said by a colleague, would “do anything and his inability to repay loans made by the company. On
you told her to do.”6 Ms. Vinson said that she was “shocked” June 20, Ms. Cooper and her internal audit staff presented
when she was told to transfer $828 million from the reserved their findings to the board of directors, which demanded the
accruals to current revenues, and she expressed her view that resignations of Sullivan and Yates. On June 26, the SEC brought
7
the accounting entry was improper. She made the entry re- civil charges of fraud against WorldCom and began criminal
luctantly, and on October 26, 2000, she and another colleague proceedings against Bernie Ebbers, Scott Sullivan, David
 Myers, Buford Yates, and Betty Vinson. All were found guilty. detention. Although Ms. Vinson played a small role and was
Ebbers was sentenced to 25 years in prison, and Sullivan, to 5. put into a difficult situation by her superiors, the U.S. attorney
Myers and Yates each got one year, and Betty Vinson received who prosecuted the case said that “just following orders” is not
a sentence of five months in prison and five months of home an excuse for breaking the law.10

Points to Consider . . . illegal behavior. To ensure that shareholders and, indeed,

all stakeholders are protected from corporate malfeasance,
A corporation brings together many different groups— controls must be in place to ensure corporate accountabil-
most notably managers, employees, suppliers, customers, ity. In particular, the prominent examples of fraud perpe-
and, of course, investors—for the purpose of conducting trated by high-level executives at Enron, WorldCom,
business. Because these various corporate constituencies Adelphia, and Parmalat, to name just a few, show the need
have different and sometimes conflicting interests, many not only for better corporate governance but also for
problems arise, which must be resolved if business is to be tighter control systems. These systems include financial
conducted successfully. Ideally, these groups should coop- reporting requirements, effective oversight by boards of
erate harmoniously for maximum productivity and directors and company executives, and, in extreme cases,
mutual benefit. use of the criminal law. A control environment consists not
One critical problem in conducting business in the only of rules and policies for employees’ behavior but also
modern corporation is determining what group or groups securing compliance by educating employees about
should have major decision-making power or control. proper conduct and responding to possible misconduct.
This matter is the subject of corporate governance, and in For this purpose, most corporations have established cor-
the standard model of corporate governance, control is porate ethics programs. Both corporate accountability sys-
held by the shareholders in accord with a doctrine known tems and corporate ethics or compliance programs are
as shareholder primacy. Because they have the legal right of considered in this chapter.
control, shareholders are able to set the objective of a cor-
poration, which is generally regarded as maximizing prof-
its, and since profits accrue to shareholders, the objective of
a business corporation is commonly expressed as share-
13.1: Corporate
holder wealth maximization (SWM). One task of this chap- Governance
ter, then, is to understand the justification of shareholder
primacy and the resultant objective of SWM. 13.1 Identify the moral arguments and legal rules for
Even if corporations are controlled by shareholders, shareholders’ control of publicly held corporations,
conducting business is still a cooperative venture with con- and the additional considerations for protecting
tributions from many groups. The common cliché in busi- the interests of other stakeholders
ness, “Employees are our most important asset,” attests to In its broadest sense, corporate governance includes all the
the importance of this essential group. And Peter Drucker factors that determine how decisions are made in business
took issue with the focus on shareholders when he organizations that are organized as corporations. The
declared, “There is only one valid definition of business shareholders of publicly held corporations and the direc-
purpose: to create a customer.”11 Not only employees and tors, whom shareholders elect, are commonly recognized
customers but suppliers and non-shareholder investors, as having de jure or legal control, but these shareholders
such as bank lenders and bondholders, must be induced to and directors, as well as the managers, who typically exer-
contribute to the productive activity that creates the share- cise de facto control or control in fact of day-to-day business
holders’ profits. These groups, along with shareholders or operations, are subject to the power of many groups that,
stockholders, are commonly identified as stakeholders, and acting within their legal rights, strongly influence, and
because of their importance for success in business, the often determine, corporate decisions.
interest of these groups must be considered in corporate Most notable among these groups that affect corporate
decision making. A complete justification of shareholder decisions are
primacy necessarily involves an understanding of the
• governments at all levels, which have the legal power
proper role of all stakeholders, and not just shareholders,
to regulate and tax;
in corporate governance.
In addition to these problems involving decision- • auditors and accounting standard setters;
making power or corporate control, a corporation also • securities exchanges, which set many rules for listed
needs a control environment to ensure that employees companies;
do their job well and do not engage in unethical and/or • rating agencies, which rate a company’s securities;
 • banks, which provide loans and exercise close moni- ­ rganizations are not-for-profit. Although these other
o
toring; forms of organization are subject to governance rules, they
• the media, which inform the public of a company’s do not commonly involve the significant conflicts over con-
activities; and trol that characterize publicly held corporations, and, conse-
• all the markets in which corporations operate—capital quently, they raise fewer concerns about their governance.
markets, labor markets, commodity markets, and con-
Justifying Control Shareholders’ control of pub-
sumer markets.
licly held corporations means that they have the right to
In addition, many decisions in business firms are made make the major decisions about their operations, including
by employees at all levels as part of their role responsibili- the objective or ultimate goal to be sought. For-profit cor-
ties. These diverse groups provide a multitude of forces porations are commonly said to have the single objective of
that bear on corporate decision making. maximizing profits and, in so doing, maximizing share-
Viewed in this broad sense, corporate decision making holder value or shareholder wealth, which is the result of
is very highly dispersed among many groups, and the maximizing profits since shareholders are the recipients of
most recognized corporate governance actors—namely a firm’s profits. It is important to understand, however,
shareholders, directors, and senior executives—make com- that the objective of shareholder wealth maximization is
paratively few decisions. However, these decisions are not inherent in the for-profit corporate form but arises from
among the most important ones for the operation of a com- the exercise of the shareholders’ right of control. Using this
pany, and it is these major decisions that are identified with right of control, shareholders typically make the maximi-
questions about the ultimate de jure control of business zation of shareholder wealth the objective of the firm, but
organizations that are answered by corporate governance. this objective is a choice made by shareholders and is not a
Corporate governance in this more common, narrower legal requirement.12
sense of the term is the set of legal rules that confer rights Given the importance of control in the operations of
to make the most important decisions that constitute cor- corporations, the main moral question about corporate
porate control, as well as the legal rules that specify the governance is why shareholders, morally, ought to have
processes and procedures by which this decision-making this right of control and why, morally, their interests ought
power or control is exercised. to be the objective of the firm. This right of control with its
However, the assignment of control rights, as well as corresponding role for shareholders in a firm’s objective is
the processes and procedures for exercising these rights, is often expressed as the doctrine of shareholder primacy. So
of little importance in a corporation that is owned and the main moral question about corporate governance is the
managed by a single individual or a small group—which is justification of shareholder primacy.
to say a corporation without a separation of ownership and
de facto control. The legal rules that comprise corporate How are shareholders justified in having exclusive legal
control of publicly held corporations?
governance become critical mainly when there are a large
number of diverse shareholders and a separation of owner- The answers to further questions about the processes
ship and de facto control. Under such conditions, conflicts and procedures of corporate governance—for example, the
over control arise among the different parties, and legal specific rights of shareholders in exercising control and the
rules become necessary to protect the rights and interests fiduciary duty of officers and directors—follow largely
of each group and ensure that decisions serve the proper from the justification of the shareholder primacy doctrine.
corporate objective. In addition to the right to control, shareholders pos-
sess another defining right, namely, a claim on the residual
13.1.1: Shareholder Control revenues or profits of a corporation. Many groups have a
In a capitalist economy, most large business organizations claim on a corporation’s revenues. These include bond-
or firms are legally structured as publicly held for-profit holders, who have claims for interest and principal pay-
corporations, in which shares are bought and sold by the ments; employees, who have claims on revenues for
public in a stock market. In privately held corporations, by payment of wages; suppliers, who have claims for the pay-
contrast, shares are owned by the founders or else traded ment of materials; government, which has a claim for pay-
in private transactions. Start-up companies are typically ment of fees and taxes; and so on. Most of the income that
held privately by the founders, who eventually sell the a corporation generates from customers and other sources
company to investors in an initial public offering (IPO). By is paid out to a variety of groups that have fixed claims on
selling the company in an IPO, founders are able to “cash a firm’s revenue. Fixed claims are debts that a corporation is
out” and realize the value of the firm they have created. legally obligated to satisfy as long as the firm is solvent. A
Businesses may also be organized as sole proprietorships, firm that cannot satisfy all fixed claims or debts is, by defi-
partnerships, cooperatives, and the like, and many nition, insolvent. Whatever income remains after all fixed
claims are satisfied—that is, all bills are paid—constitutes corporation may include the assignment of decision-making
residual revenue, and the shareholders’ right to residual rights. In this way, the rules of corporate governance result
revenues constitutes residual claims. from individuals’ market transactions. Corporate law, espe-
Every claim on a corporation’s revenues is a return for cially in Anglo-American countries, permits business firms
some resource that is contributed for production. Employ- great latitude in choosing the terms of their legal incorpora-
ees contribute labor, suppliers contribute materials, and tion. In the United States, where corporate law is a function
bank lenders and bondholders contribute debt capital. of states, not the federal government, firms may choose to
(Customers do not contribute to production, but they pro- incorporate in the state with the most advantageous system.
vide the necessary element of revenue when they purchase Furthermore, much corporate law is default legislation that
product.) So shareholders, who typically finance a corpora- applies unless incorporators contract differently, and so the
tion with equity capital—as opposed to the debt capital amount of mandatory legislation that must be observed is
provided by bank lenders and bondholders—contribute a relatively small. (A third division is enabling legislation, which
necessary and distinctive resource, and they accept, in provides rules for accomplishing certain tasks, such as form-
return, the residual revenues or profits of the firm. ing a corporation.) Consequently, at least in Anglo-American
countries, the market is a major factor, along with public pol-
Shareholders may be defined, then, as the group that has
both the right of control and a claim on profits. icy, in explaining why shareholder primacy is central to cor-
porate governance.
The justification of the shareholders’ right of control,
or shareholder primacy, has two sources, which reach the WRITING PROMPT
same conclusion by different routes.
The Shareholder Primacy Doctrine
• One source is public policy, which asks, in this case, What is your opinion of the doctrine of shareholder primacy? Con-
what form of governance best serves the well-being of sider the justifications for the doctrine—the public policy and market
arguments—as described thus far. Summarize one argument and
society. explain whether you find it persuasive.
• The other source is the market, which reveals the form
The response entered here will appear in the
of governance that would result from voluntary mar- performance dashboard and can be viewed by
ket transactions. your instructor.

More specifically, corporations must contract in a mar-

ket with shareholders for the provision of equity capital. Submit
The question then becomes: What terms would corpora-
tions and investors find mutually agreeable, consistent Public Policy Traditionally, the law on corporate gov-
with all the other contracts that a corporation must form? ernance has been guided by two conceptions of the corpo-
Any system of corporate governance that emerges from the ration: one conception as the private property of the
market for equity capital is a reflection of how sharehold- owners of the enterprise and the other as a right granted or
ers’ property rights are exercised and protected. conceded by the state. However, the idea that shareholders
are the owners of the modern publicly held corporation
What is the significance of these two sources of whose claims are based on property rights ended with the
­support for shareholder primacy? separation of ownership and control that was observed by
Public policy’s support of shareholder primacy reflects the Adolf A. Berle, Jr., and Gardiner C. Means in their famous
fact that much of corporate governance is established in law 1932 book The Modern Corporation and Private Property.13
by government through legislation, regulation, and adjudica- There they argued that shareholders had forfeited any
tion, and public policy is a major factor guiding these pro- claim to control based on ownership because, with the sep-
cesses. Public policy is also reflected in public attitudes aration of ownership and control, they had ceased to exer-
toward business generally and in each company’s reputation. cise the responsibility traditionally associated with having
In creating the body of law for corporate governance, one of ownership.
government’s main concerns is to ensure that business Traditionally, control is a feature of property owner-
organizations serve the public good. Shareholder primacy ship, but ownership with control over a thing involves an
conduces to the public good mainly by providing the legal assumption of responsibility for the use of that thing. With
protection necessary for investors to fund business ventures. the separation of ownership and control, shareholders
Government action may also aim to protect property relinquish de facto day-to-day control to professional man-
rights, thus leading to the market as the second source of agers and, at the same time, relieve themselves of any legal
justification for shareholder primacy. Insofar as corporations responsibility for corporate actions. As a result, sharehold-
result from private contracting among individuals in the exer- ers of large, publicly held corporations cease to be owners
cise of their property rights, then the contracting that forms a in the full sense and become merely a provider of one kind
of resource needed by a corporation, namely, equity capital. The main reason for this greater efficiency and wealth-
According to Berle and Means, “The property owner who creating power stems from the shareholders’ role as resid-
invests in a modern corporation so far surrenders his wealth ual risk bearers. Given that the shareholders’ return on their
to those in control of the corporation that he has exchanged contribution to production, namely equity capital, is a claim
the position of independent owner for one in which he may on residual revenues or profits, only they have an incentive
become merely recipient of the wages of capital.”14 that a firm be maximally profitable as opposed to merely
Without property rights as a basis for shareholder pri- solvent. Any group with fixed claims, such as employees,
macy, what else could justify the claim that shareholders customers, or suppliers, has an interest only in a firm being
ought to have control of a corporation? solvent and thus able to satisfy this group’s fixed claims.
Groups with less incentive for risk:
Berle’s answer to this question was that without strong
shareholder control, corporate management would be • If employees, for instance, had control with only fixed
effectively unconstrained and that such power would be claims for wages, they would tend to operate the firm
dangerous to the economic order.15 It would be unwise, in with a low level of risk so as to assure their wages, even
Berle’s judgment, for the law to release managers from a though greater risk might lead to greater wealth crea-
strict accountability to shareholders, not out of respect for tion. Because the greater wealth creation would accrue
their property rights (for they have none) but as a matter of disproportionately to other groups, especially share-
sound public policy. In short, shareholder primacy is justi- holders in the form of profits, employees would be dis-
fied, in Berle’s view, for its efficacy in constraining and inclined to take risks that might be socially desirable.
guiding management, which is in the public’s interest. • Similarly, bondholders would prefer that a firm be
However, a more powerful public policy justification for operated at a low level of risk to avoid jeopardizing
the shareholders’ role in corporate governance can be con- their fixed claims for principal and interest payments,
structed by determining which group can operate a firm since they, like employees, would derive little benefit
most efficiently for maximum value or wealth creation. from maximal wealth creation.
Efficiency is both an economic and a moral value • Executives, too, would be sub-optimally risk averse
because operating a business organization efficiently— unless they were given incentives tied to profits, which
which means producing the greatest amount of output for is the rationale for compensating executives with per-
the least input—creates greater prosperity or material well- formance-based bonuses and stock options.
being than operating inefficiently. Other things being
Even if these other groups owned the corporation and
equal, we should prefer more rather than fewer material
thus received the profits, their incentives to achieve maxi-
goods from any given resources, and corporations ought to
mum profitability might conflict with their other interests
be governed so as to achieve this end. Therefore, if one
as employees, customers, bondholders, and so on. Further-
group can exercise ultimate decision-making power with
more, if more than one group owned a corporation, conflict
greater efficiency and wealth creation than any other
among these groups, each with different interests, might
group, then, on the basis of public policy, that group ought
impede efficient decision making.
to have control. Although this group may receive some
From the point of view of public policy, decisions in a
benefit from having control, its members also provide a
business organization ought to be made by the party or
service that makes everyone in society better off.
group with two features:
Incentives This public policy justification of share-
• the greatest amount of relevant knowledge and
holder primacy is completed by arguing that, under most
conditions, the financiers of a corporation—which is to say • the strongest incentives to operate the firm for maxi-
the investors of equity capital who receive the profits— mum efficiency and, consequently, maximum wealth
have the strongest incentives to achieve the greatest effi- creation.
ciency and hence to create the greatest amount of value or Although shareholders lack much of the knowledge
wealth, which benefits the whole of society. Under some necessary to operate a firm and, consequently, must rely on
conditions the greatest efficiency and wealth can be board directors to exercise general oversight and managers
obtained from control by employees or by customers or to exercise day-to-day control, they alone have the right
suppliers, and, as a result, some corporations are employee- incentives to operate a firm for maximum wealth creation.
owned, customer-owned, or supplier-owned. (These latter Moreover, the decisions that shareholders make about
are called cooperatives, and Henry Hansmann has sug- selecting a board of directors and approving major struc-
gested that the shareholder-owned firm can be viewed as a tural changes, such as mergers and acquisitions, are mat-
“capital cooperative.”16) However, corporations are most ters about which shareholders are or can become
commonly controlled by financiers or investors, and justifi- knowledgeable. Perhaps the most important decisions that
ably so due to their narrow focus on profits. shareholders make are to buy and sell stock, thereby s­ etting
prices for a company’s shares that constitute an up-to-the- • Second, equity capital has no fixed return, such as the
minute evaluation of a company’s performance and pros- specified interest on a loan or bond; the return is,
pects. In practice, shareholders make very few decisions, rather, the profits of a firm, which are variable and
but their central role in corporate governance derives from may even be negative. By accepting a return in the
the knowledge and, more importantly, the incentives they form of a claim on residual revenues, shareholders
have in making some of the most critical decisions in the become residual risk bearers. That is, they bear the risk
operation of a corporation. of not obtaining an expected return because of the var-
iability of residual revenues, including the possibility
The Market In their role as financiers or investors, that a firm may fail completely.
shareholders provide a critical resource needed by a busi-
ness organization, namely capital. In return, they receive a Being a residual risk bearer is not only a benefit—a
payment or claim on revenues, specifically the residual claim on the profits of a firm—but also a service that pro-
revenues or profits of the firm. In this respect, shareholders tects the fixed claims of other groups. Because sharehold-
are little different from other input providers, which ers do not need to be paid if there are no residual revenues,
include bank lenders, bondholders, employees, suppliers, a firm can suffer a loss without becoming insolvent and
and so on: They provide some resource and receive a pay- being forced into bankruptcy and possible liquidation. By
ment in return. All these groups contract with a firm, and serving as residual risk bearers, shareholders thus make
so the firm itself may be viewed as a nexus of all the con- the fixed claims of other groups more secure. Shareholders
tracts thus formed. To the extent that the return for the pro- are compensated for this service by the prospect of higher
vision of any input is insecure, a contract is necessary to returns when a firm is exceptionally profitable.
safeguard the return. On this nexus-of-contracts view, a The market justification for shareholder primacy holds
firm “buys” capital in the same way it buys labor or mate- that a firm contracts with investors in a market in order to
rials, and such a purchase is an economic transaction that obtain a necessary input, namely equity capital. In addi-
takes place in a market, namely a capital market, in the tion, investors provide the firm with risk-bearing services,
same way that a firm buys labor in a labor market and which are costly for investors and a benefit for all other
materials in commodities markets. groups. Like other providers of needed inputs, equity capi-
Corporate governance may be understood as the con- tal providers receive a return, which, for them, is the net
tract that a firm forms with its shareholders, who finance revenues or profits of the firm. This market justification of
the firm by providing equity capital. And the terms of this shareholder primacy is not yet complete, however, for
contract are determined mainly in a market through a pro- shareholder–investors also receive something else, in addi-
cess of negotiation by firms seeking capital and by inves- tion to profits: They, and they alone, receive certain control
tors seeking to deploy their savings, with each party rights. Along with the profits of a firm, they also “buy”
bargaining to obtain the best deal for itself. From a moral some measure of corporate control. In order to complete
point of view, any agreement or contract that is formed by this market justification and understand why the right to
mutual consent between firms and investors is justified in profits and control rights go together, it is necessary to
the same way that the outcome of any market exchange is examine a problem with the contract that a firm forms with
justified. The crucial task in justifying the role of sharehold- its equity capital providers.
ers in corporate governance is to understand why share-
holder primacy would result from contracting between a 13.1.2: The Shareholders’ Contract
firm and its financiers or investors. In particular, The role of residual risk bearer creates special contracting
Why would investors providing equity capital insist on problems for shareholders. The fixed claims of other
obtaining control, in addition to residual revenues or groups—employees for wages, for example, or suppliers
profits? for payments—are relatively easy to assure in legally
Alternatively, why would a firm seeking capital offer con- enforceable contracts. By contrast, the profitability of a firm,
trol rights in addition to a claim on residual revenues? upon which the return to shareholders depends, cannot be
mandated in a contract. In a firm without a separation of
The answer to both of these questions lies in the role of
ownership and control—that is, in a firm in which share-
shareholders as residual risk bearer. Equity capital is differ-
holders operate the business—there is no problem protect-
ent from debt capital, which is obtained in loans from
ing the shareholders’ return since they control the operation.
banks or in bonds sold to bondholders.
Profitability is in their hands. However, once shareholders
• First, equity capital is provided for the life of a firm leave the task of operating a firm to professional managers
with no provision for its return, unlike the fixed term and hence separate ownership and control, a problem arises
of a loan or a bond, during which time the whole prin- as to how shareholders can be assured that these managers
cipal must be repaid with interest. will operate the firm for maximum profitability.
What is the solution to this problem? c­ ontracting means. In short, control is worth more to resid-
The solution to this problem is for shareholders to accept the ual risk bearers than any other group, and so they are will-
role of residual risk bearer only on the condition that they also ing to pay more for it.
have control. The roles of residual risk bearer and holder of In addition, shareholders are able to bear the costs of
control rights are conceptually distinct. In theory, different residual risk bearing more economically than other groups,
groups could hold these roles, and sometimes they do. In which further reduces the cost overall.
practice, however, few investors would be willing to become
• First, shareholders as equity capital providers are bet-
residual risk bearers without obtaining control. Without con-
ter able than employees, customers, suppliers, or other
trol rights, investors would generally insist on significantly
groups to diversify their investments in a firm. One
higher returns to compensate for the greater risk, with the
reason why employee-owned firms, for example, are
result that the cost of capital for firms would be much higher.
relatively rare is that an employee’s whole wealth
Alternatively, firms can lower their capital costs by offering
becomes tied up in the company, thus increasing that
control rights as well as claims on profits when they seek
person’s overall level of risk.
capital from investors. Thus, control rights can be viewed not
only as a demand by investors to secure the return on their • Second, an active market for corporate control assures
contribution of capital but also as an offer from firms to obtain that if any group can operate a firm at lower cost or
investors’ capital on favorable terms. with greater efficiency or wealth creation than the cur-
rent shareholders, they will do so. As with any good in
Combining risk bearing and the right to control in the a market, corporate control will be obtained through
shareholders’ role is not a complete solution to the con- more efficient transactions by the party to whom it is
tracting problem, however. Shareholders cannot merely worth the most, which will be the party that can oper-
order managers to operate a firm for maximum profit, ate a corporation for maximal wealth creation.
because what managers need to do to make a firm maxi- To summarize, corporate governance is the contract
mally profitable is complex and uncertain. The best share- between shareholders and a firm that confers control rights
holders can do is ask managers to exert their best effort to on the shareholders, along with the benefit of managers’
be profitable. This is commonly done not only by aligning fiduciary duty, in order to protect the shareholders’ claim
managers’ interests with those of shareholders by means of to residual revenues or profits. Unlike the contracts that
bonuses and stock options, but also by imposing a fiduci- other groups enter into with a firm, this contract is unusu-
ary duty on managers to act in all matters in the sharehold- ally complex due to special contracting problems in the
ers’ interests. relationship between shareholders and the firm. Although
The fiduciary duty of directors and officers is a major the terms of this contract are, to some extent, specified by
feature of the law of corporate governance, which is law, corporations still have great flexibility to negotiate
designed to overcome the fact that shareholders cannot with investors in a market, and the law itself largely reflects
bind persons by explicit contracts that fully specify the the terms that would result from market negotiations.
conduct to be performed. That the fiduciary duty of man- Thus, the tendency of corporate governance laws to recog-
agement flows mainly to shareholders is often thought to nize the primacy of shareholders is determined by both
privilege shareholders in some way, but it should be public policy and the market and is justified on both
understood that making shareholders the sole benefi- grounds. That is, shareholder primacy serves to promote
ciary of managers’ fiduciary duty is a solution to the dis- the welfare of society and is the result of voluntary, effi-
tinctive contracting problem that equity investors have ciency-promoting market transactions.
with a firm. This solution reflects the vulnerability of
shareholders and the relative invulnerability of all other
WRITING PROMPT
groups, which, in any event, are better protected by, and
thus prefer, other contractual means for securing their Balancing Control, Risk, and Benefits
due return. How does the idea of a contract between a corporation and its
shareholders help to explain why the objective of managers and
This account provides a partial explanation of why
directors is ultimately shareholder wealth? How might it also help to
residual risk bearers would seek control, as well as the ben- explain why some companies are privately owned and managed
efit of managers’ fiduciary duty, namely to protect their at- rather than being public companies? What are the advantages and
disadvantages of being privately or publicly owned?
risk return for providing equity capital. Although assuming
residual risk and the right of control have costs for share- The response entered here will appear in the
holders, the benefit to them for incurring these costs is performance dashboard and can be viewed by
your instructor.
greater than the benefits for any other group with only
fixed claims, since these other groups can protect their
claims more effectively and economically by other Submit
13.1.3: Shareholders for shareholders is the ultimate goal of corporate activity,
this point does not provide much help in the daily conduct
and Stakeholders of business. By contrast, telling managers to handle stake-
Corporate governance, with its doctrine of shareholder pri- holder relationships well is a more practical action guide
macy and the objective of shareholder wealth maximiza- that may actually lead to greater profit. In addition, com-
tion, appears to privilege shareholders and elevate their panies faced with social and political challenges may find
interests above those of other groups, most notably that relationships with stakeholder groups are valuable
employees, customers, suppliers, and non-shareholder resources. James E. Post, Lee E. Preston, and Sybille Sachs
investors, as well as community members. These groups, argue that in recent years, corporations have been forced
along with shareholders or stockholders, are commonly by social and political challenges in their competitive envi-
identified as stakeholders. Sample definitions of a stake- ronments to become “extended enterprises,” in which rela-
holder are “those groups who are vital to the survival and tionships with stakeholders become not only necessary for
success of the corporation”17 and “any group or individual survival but also a source of organizational wealth.21 They
who can affect or is affected by the achievement of the write, “The long-term survival and success of a firm is
organization’s objectives.”18 The concept of a stakeholder determined by its ability to establish and maintain rela-
highlights the fact that a corporation interacts continually tionships within its entire network of stakeholders.”22
with its stakeholder groups and that much of the success of Third, the stakeholder theory can be used as a nor-
any business organization depends on how well all of mative account of how corporations ought to treat their
these stakeholder relationships are managed. various stakeholder groups. Normative stakeholder the-
The concept of a stakeholder is of undeniable impor- ory would have managers recognize the interests of
tance: Corporations have stakeholders, and their effective employees, customers, and others as worth furthering for
management is essential for achieving corporate success. their own sakes. As Donaldson and Preston explain, “The
More problematic is the use to be made of this concept. interests of all stakeholders are of ‘intrinsic value.’”23 The
How should managers of a firm think about stakehold- central claim of a normative stakeholder theory is that cor-
ers? In particular, how does the important task of manag- porations ought to be operated for the benefit of all those
ing stakeholder relationships fit with the doctrine of who have a stake in the enterprise, including employees,
shareholder primacy and the objective of shareholder customers, suppliers, and the local community. It is only
wealth maximization? this third, normative use of stakeholder theory that might
be incompatible with the standard model of corporate gov-
No less a corporate titan than Jack Welch, the former
ernance with its core features of shareholder primacy and
CEO of General Electric, who was hailed by Financial Times
shareholder wealth maximization. Some stakeholder theo-
as the “the father of the ‘shareholder value’ movement,”
rists argue that shareholder control of corporations unjustly
declared, “On the face of it, shareholder value is the dumb-
neglects the interests of other corporate constituencies.
est idea in the world. Shareholder value is a result, not a
Instead of serving only the interests of shareholders alone,
strategy. . . . Your main constituencies are your employees,
they argue that corporations ought to be run in the inter-
your customers and your products.”19 For Welch, there is
ests of all stakeholder groups.24
no necessary conflict between shareholder value and stake-
holder focus: The latter is essential for achieving the former. Protecting Stakeholders As a normative account
Stakeholder Theory The concept of stakeholders of corporate governance, stakeholder theory is sometimes
has been developed in recent thinking about firms into a presented as an alternative to the standard shareholder- or
theory, called stakeholder theory. Thomas Donaldson and stockholder-centered model, and a contrast is made
Lee E. Preston distinguish three uses of stakeholder theory: between the stockholder and stakeholder theories of corpo-
descriptive, instrumental, and normative.20 rate governance as incompatible systems. If this is done, the
First, the theory can be used as a description of the two theories agree on at least one point: The purpose of the
corporation that enables us to understand the corpora- firm is to enable each corporate constituency or stakeholder
tion better. Thus, a researcher who believes that the stake- group to obtain the maximum benefit from its involvement
holder theory accurately describes corporations can use it in the productive activities of a business organization. By
to answer questions about how corporations are organized providing inputs or resources to a firm, each group contrib-
and managed. The claim that stakeholder theory provides utes to the creation of wealth, and this wealth is then dis-
an accurate description can be confirmed to the extent that tributed among all participants. One point of disagreement
the answers to these research questions are put to a test between the two theories concerns how best to secure each
and empirically verified. group’s return from the benefit of joint production in a firm.
Second, the stakeholder theory can be used instru- What are the best means to ensure that each group
mentally as a tool for managers. Even if making a profit receives its rightful return?
 This question—how best to protect each stakeholder’s In this thought experiment, if each group would
interest—is largely a pragmatic one about the effectiveness prefer to opt out of a system that relies on managerial
of the available means. What protections work best in prac- discretion and to seek the protection of contracts and
tice? One way to answer this question is by conducting a legal rules, the superiority of the shareholder theory
thought experiment. over the stakeholder theory would be demonstrated. Of
course, such a preference would require a well-ordered
Suppose that the stakeholder theory were adopted by
system of legal rules and the dependable enforcement of
all firms in an economy. In such a system of corporate
contracts. Another conclusion that can be drawn is that
governance, all groups would share control of a firm,
on the stockholder theory, everyone can benefit from
managers would have a fiduciary duty to act in the
corporate activity without the need for management to
interests of all groups, and the objective of the firm
secure each group’s interest. If a firm is like a market, in
would be to maximize the return of every group. The
which everyone gains from economic transacting with-
resulting economy would exemplify stakeholder the-
out anyone being responsible for ensuring this outcome,
ory. Now, add one more condition: that each group is
then it is not necessary for managers to assume respon-
free to opt out of a stakeholder system of governance
sibility for ensuring that everyone benefits. Therefore,
and choose other means for protecting its interests.
from the premise that corporate activity should benefit
That is, they would have the opportunity to forgo the
all stakeholder groups, it does not follow that ensuring
protection of management acting in their interests and
this outcome is a task for management. The alternative of
seek contracts with a firm or different legal rules for
contracts and legal rules, which do not involve manage-
protecting their interests.
ment action but are secured in a market that is supported
Although opinions may differ on the system of corpo- by a sound legal system, may achieve this end more
rate governance that might emerge from this thought effectively.
experiment, there are good reasons to believe that each
group would prefer the shareholder model.
WRITING PROMPT
First, management decision making is a weaker form
A Rising Tide for All
of protection than legally enforceable contracts or legal
Explain whether you agree with the argument that focusing primarily
rules. When such contracts and rules are available, they are
on the interests of shareholders also serves the interests of all stake-
more likely to be preferred than a reliance on manage- holders in the end. Within the stakeholder model, what could replace
ment’s discretion. Shareholders are forced to rely on the shareholder wealth as the objective of management?
protection of a fiduciary duty imposed on management The response entered here will appear in the
because of problems that prevent them from utilizing fully performance dashboard and can be viewed by
specified contracts or precise legal rules. Fiduciary duty your instructor.
should be viewed, accordingly, not as a special privilege
that shareholders enjoy but as an imperfect substitute Submit
when more effective means for protecting a group’s inter-
ests are not available.25
Return to Stakeholders The second point of dif-
Second, corporate decision making is more efficient ference between the two theories involves the determina-
and effective when management has a single, clearly tion of a rightful return to non-shareholder stakeholders.
defined objective. The objective of maximum profits or Shareholders receive the profits of a corporation, while
shareholder wealth provides not only a workable deci- employees obtain wages, suppliers’ bills are paid, bond-
sion guide but also one that increases the total wealth holders are owed principal and interest payments, and so
creation of the firm.26 In turn, pursuing this singular on. The form of the return is not in question, but the
objective of total value creation enables each group to amount is. Hence, the question:
obtain a greater return. That is, each group can get a
larger piece of pie if the pie itself is larger. Thus, employ- Who or what should determine what each group receives
ees who seek greater job security or expanded benefits— in return for participating in the wealth-creating activities
of a firm?
which advocates of the stakeholder view would
support—are more likely to get these goods if the employ- This question concerns fairness or justice in distri-
ing company is prospering. A similar argument can be bution. Broadly speaking, there are two questions to be
developed for customers, suppliers, investors, and every asked in any economy: How to produce wealth and how
other stakeholder group. The benefits of a single objective to distribute it. Generally, decisions about production are
would be compromised if other groups sought, like share- made in a market on the basis of economic considera-
holders, to protect themselves with claims on manage- tions. On the stockholder theory, the market also
ment’s loyalty. ­d etermines how wealth is to be distributed, but the
resulting distribution may not be fair. The stakeholder
theory makes the just distribution of wealth a task of
13.2: Corporate
management by requiring managers to balance compet-
ing stakeholder interests. Not only does stakeholder
Accountability
theory give no guidance on how this balancing is to be 13.2 Critique how financial reporting, corporate
done, but managers also have neither the ability nor the management roles, and the law function to prevent
authority to determine a fair distribution. It is not only fraud and other kinds of corporate misconduct,
unreasonable to expect managers, who have enough and how flaws in the system have allowed major
responsibility making decisions about how to produce scandals
wealth, to handle questions about how it should be dis- The recent scandals at Enron, WorldCom, and other com-
tributed, but it is also dangerous in a democracy to allow panies were not the result of misconduct by a few indi-
unelected managers to make such crucial decisions. viduals. They revealed major weaknesses in the systems
Decisions about the distribution of wealth that depart of corporate control by which corporations are held
from market outcomes should be made, for the most accountable. The collapse of Enron, as well as WorldCom,
part, by governments through the political process, and involved fraudulent conduct by employees that evaded
not by managers of business organizations. the controls ordinarily imposed on corporations by finan-
The answers of the stockholder theory to the two ques- cial reporting requirements and oversight by executives
tions about protecting stakeholders and determining their and the board of directors. The Sarbanes-Oxley Act of 2002
just return are straightforward: (SOX), which was passed in the wake of Enron’s collapse,
• The best means for protecting each group’s rightful reflected the belief of Congress that there were deep flaws
return are contracts and legal rules, and in the American system of corporate accountability. The
• the return that each group has a right to receive is the various provisions of SOX thus address the three major
market value of its contribution. components of the American system for holding corpora-
tions accountable:
For example, employees typically work under legally
enforceable contracts that specify their wages and other • financial reporting,
conditions of employment, and any disputes arising from a • corporate management, and
contract can be litigated in court. In addition, legal rules, • criminal law.
mainly those of labor law, supplement employees’ con-
tracts to provide further protection. Similarly, suppliers
and consumers are protected by sales contracts, as well as Figure 13.1 Components of Corporate Accountability
the body of commercial law, and securities law and the law
of corporate governance protect the interest of investors in American
System for
the operation of a firm. By contrast, stakeholder theory Corporate
relies on managerial discretion both to protect each group’s Accountability
interests and to determine what return they should receive.
In the stakeholder-managed firm, the tasks of protecting Financial
Criminal Law
Reporting
group interests and balancing their interests fall to corpo-
rate managers.
Corporate
The main conclusion to be drawn from this discus- Management
sion is that the familiar model of shareholder control of
corporations is not only dominant in a market economy
but is also justified, even though the shareholders need This section examines how each of these three forms of
not be investors but could be any group, including accountability function to prevent fraud and other kinds of
employees, customers, or suppliers. In the American sys- corporate misconduct, and what weaknesses have permit-
tem of corporate governance, the control of corporations ted some major corporate scandals.
is left largely to the choices that each group makes
through contracting in a market. Through such market
contracting, each group is able to protect its interest and 13.2.1: Financial Reporting
gain its rightful share of the wealth created by engaging Enron’s filing for bankruptcy on December 2, 2002, fol-
in economic production. The stockholder model of corpo- lowed more than two months of revelations about the com-
rate governance is better able than the alternative of a pany’s declining financial situation. When third-quarter
stakeholder firm to best serve the interests of all stake- earnings were reported on October 16, 2001, Enron
holder groups. announced that it was writing down the value of certain
investments by $1.01 billion and that investor equity had there is an emerging set of International Financial Report-
shrunk by $1.2 billion. More bad news followed on Novem- ing Standards (IFRS).
ber 8 when the company revealed that its net income dat- Auditing is an inspection of an organization’s account-
ing back to 1997 was $586 million less than had been ing records to determine their accuracy, completeness, and
previously reported, due to improper accounting practices. reliability. This inspection may be conducted inside the
When investors realized that Enron’s reported income had organization by managerial accountants or internal audi-
been greatly exaggerated and that large amounts of debt tors, who are employees of the organization, or by outside,
had been hidden in dubious off-balance-sheet partner- independent public auditors, who are certified public
ships, all trust was eroded and the company’s stock lost accountants (CPAs). In addition to inspecting an organiza-
almost all value. tion’s financial accounting records, a CPA conducting an
Enron’s collapse was due not merely to bad business independent audit also examines the organization’s finan-
decisions that had been hidden from investors but also to a cial accounting system and offers a report or opinion about
plundering of the company by insiders. both the accounting records and the accounting system.
The independent auditor ’s report or opinion may be
What does this case illustrate about a company’s
unqualified, which means that the organization’s financial
financial reports?
records fairly represent its financial condition and have
The first line of defense against incompetence and outright
been prepared according to GAAP, or qualified, which indi-
criminality by corporate executives is a company’s financial
cates either that the audit was not complete in scope or that
reports. The law requires that public companies prepare
GAAP was not followed completely. An independent pub-
financial statements that present a fair and accurate picture
lic audit should be conducted in accord with Generally
of their financial condition, and these statements must be
Accepted Auditing Standards (GAAS).
audited and attested to by a certified public accounting firm.
If corporate accounting and auditing were properly
Although audited financial statements are intended primarily
done, then fraud and other kinds of financial wrongdoing
to aid investors in making sound investment decisions and to
would be difficult to commit, and detection would be easy.
increase the efficiency of financial markets, they also serve as
Individual accountants and auditors, being human, are
an important check on management by making corporate
subject to ethical lapses; but, more importantly, there are
operations more transparent. The ability of the market to
certain structural problems with the practices of account-
react swiftly to changes in a company’s situation makes it an
ing and auditing that impair their effectiveness as a first
effective monitor of managers’ performance. Because inves-
line of defense against financial scandals.
tors rely so heavily on financial reports, they are also tempt-
ing vehicles for committing fraud. By presenting a false
WRITING PROMPT
picture of a company’s financial condition, executives can
cover up poor performance and continue to receive lavish Auditing and Quality Control
compensation. In many of the recent scandals, fraudulent Given that financial fraud occurs even with the presence of outside
auditors, what steps do companies need to take in order to make
accounting also enabled executives to dump much of their sure that their financial statements remain accurate and trustworthy?
stock before bad news became public. How can a company better support the role of an outside auditor?

Accounting and Auditing Accounting is the The response entered here will appear in the
recording and presentation of the financial transactions of performance dashboard and can be viewed by
your instructor.
an organization. Any organization, whether it is a business
corporation, a not-for-profit organization, or a government
Submit
unit, must keep track of its revenues and expenditures and
compile this information in ways that provide managers
with an understanding of the organization’s financial con- Job Pressure Managerial accountants and internal
dition. Accountants also compile an organization’s finan- auditors, who are employees of a company, and the outside
cial information in reports that are presented to outside CPAs, who are engaged by the client company, are subject
parties, such as creditors from whom the organization is to intense pressure to achieve the financial picture that top
seeking loans or the government, which requires that cer- executives want to convey. Often the pressure comes to
tain information be disclosed. All public companies are meet earnings expectations in order to maintain a compa-
required by law to issue an annual report that details all ny’s stock price or allow executives to make bonus or stock
assets, liabilities, revenues, and earnings in a consolidated option targets. Such “earnings management” is possible
balance sheet and income statement. In the United States, because accounting rules allow great flexibility in their
all accounting must be done in accord with established application. This flexibility is permitted so that companies
rules, known as generally accepted accounting principles can choose the accounting treatments that provide the fair-
(GAAP). Each country has its own version of GAAP, and est representation of their financial condition. ­However, a
company’s own accountants and its CPA firm may be pres- both auditing and consulting services to a client. Critics of
sured to go along with accounting treatments that give an this arrangement charge that since consulting services are
inaccurate or misleading picture of the company’s financial usually more lucrative than auditing, firms have an incen-
condition but serve management’s interest. tive to avoid alienating clients by conducting aggressive
Arthur Levitt, a former chairman of the SEC, addressed audits in order to maintain the consulting engagements.
the abuse of the flexibility in the accounting system with a The other source of conflict results from the dual loyalty of
call for higher ethical standards: auditors. The word “public” in “certified public account-
ant” indicates that an audit is conducted to serve sharehold-
Our accounting principles weren’t meant to be a strait-
jacket. Accountants are wise enough to know they can- ers and the investing public. However, CPAs are engaged
not anticipate every business structure, or every new and compensated by the companies they audit, thus mak-
and innovative transaction, so they develop principles ing these companies the clients of the accounting firm.
that allow for flexibility to adapt to changing circum- Since the interests of a client company and the public can
stances. That’s why the highest standards of objectivity, be different, should the CPA firm balance these interests
integrity and judgment can’t be the exception. They in some way or regard the interest of the public as
must be the rule.27 ­paramount?
Of course, accountants may also be pressured to In 1984, the U.S. Supreme Court declared the public
approve accounting treatments that are not in accord with interest paramount:
GAAP, as when WorldCom personnel were ordered to
record accruals as revenue and line charges as capital By certifying the public reports that collectively depict a
corporation’s financial status, the independent auditor
expenses. Such cases require accountants to have the moral
assumes a public responsibility transcending any employ-
courage to resist. CPAs are not employees who can be fired
ment relationship with the client. The independent public
for failing to please management; but CPA firms are still
accountant performing this special function owes alle-
selected by management, and they have a strong incentive giance to the corporation’s creditors and stockholders as
to please the client in order to be retained. Enron, for exam- well as to the investing public. This “public watchdog”
ple, was one of Arthur Andersen’s most valued clients, and function demands that the accountant maintain total
the company succeeded in having accountants who objected independence from the client at all times and requires
to Enron’s accounting removed from the Enron team.28 complete fidelity to the public trust.29

Conflict of Interest CPA firms have many inter- The ideal of total independence from the client and
ests besides serving clients, which put them in conflict-of- complete fidelity to the public is very difficult to achieve in
interest situations. In addition to a desire by a firm to retain practice, in view of the competition for clients and the high
clients, individual CPAs may have a financial relationship fees they generate. These two sources of conflict of interest
with the company being audited by, for example, owning have led to proposals—so far unimplemented—that audit-
stock in that company or a company doing business with ing and consulting services be provided by separate firms
it. The CPA firm may also have other clients who have and that audits be publicly funded.
business relationships with or who are competitors of the
company being audited. Any such relationships might WRITING PROMPT
impair the objectivity and independence of the CPAs Conflicts of Interest and the “Big Four”
engaged in an audit. For this reason, “The Code of Profes- There are four international accounting and auditing organizations
sional Conduct of the American Institute of Certified Pub- that dominate this sector of the financial services market: Deloitte
lic Accountants” requires CPAs to maintain objectivity and Touche Tohmatsu, PricewaterhouseCoopers, Ernst & Young, and
KPMG. (Before the Enron scandal, Arthur Andersen belonged to this
independence and be free of conflicts of interest. group, which was then known as the “Big Five.”) Do you think the
The AICPA code specifically prohibits having “any dominance of so few firms increases or decreases the likelihood that
direct or material indirect financial interest” in an audit cli- there will be conflicts of interest—or could it be helpful for preventing
them? Explain your reasoning.
ent and any loan from the company or anyone related to it.
This prohibition does not address the conflict that results The response entered here will appear in the
when auditors take positions with a company that he or performance dashboard and can be viewed by
your instructor.
she formerly audited. The prospect of an attractive job with
an audit client might influence an auditor’s judgment.
Submit
Indeed, a number of top executives at Enron had previ-
ously been with the Houston office of Arthur Andersen on
the Enron account. Confidentiality Accountants have a strict duty of
CPA firms encounter two other sources of conflicts of confidentiality that prevents them from disclosing any
interest. One source arises when accounting firms provide confidential information about a client without that client’s
consent, except when required to do so by law. One such • Title II, titled “Auditor Independence,” prohibits the
legal requirement is that an accounting firm that with- provision of certain nonaudit services to an audit cli-
draws from an auditing engagement because of suspected ent, requires that the lead audit partner for any client
wrongdoing by the client must file a report with the SEC be rotated at least every five years, and imposes a one-
detailing the reasons for the withdrawal. However, any year waiting period before accepting employment
other information about suspected wrongdoing should not with an audit client.
be disclosed to other parties, including any companies that • Title IV, “Enhanced Financial Disclosures,” requires
are harmed by the wrongdoing or another accounting firm that publicly traded companies develop their own sys-
that takes over the engagement. An example of the difficul- tems of internal control over financial reporting and
ties that a duty of confidentiality creates is provided by the provide periodic reports on the effectiveness of those
experience of Arthur Andersen in the late 1960s. systems.
Example: After an Arthur Andersen team audited In signing SOX, President George W. Bush declared,
Fund of Funds and found no problems, the same team “This law says to corporate accountants: the high stand-
began an audit of King Resources, which had business ards of your profession will be enforced without exception;
dealings with Fund of Funds. The auditors discovered the auditors will be audited; the accountants will be held to
that King Resources had sold properties to Fund of account.”31
Funds at inflated prices. If Andersen informed Fund of
Funds of the fraud, then King Resources might sue for WRITING PROMPT
breach of confidentiality. However, if Andersen said
Bridging the Expectations Gap
nothing, then Fund of Funds might sue Andersen for
A decade after the Sarbanes-Oxley Act of 2002 was enacted, the
concealing the information. Andersen chose the latter news media reported that according to financial insiders, the law had
course and was successfully sued by Fund of Funds helped to improve the integrity of corporate financial reporting and
for failing to disclose the inflated prices.30 reduce instances of fraud. Explain whether you think this act of gov-
ernment was necessary to reduce financial misconduct. Would
cases like Enron have prompted investors and other market actors
The Expectations Gap  The ability of auditors to to demand better financial reporting and auditing without new laws?
detect fraud and other wrongdoing is limited by what audi- The response entered here will appear in the
tors are expected to do and what they can reasonably performance dashboard and can be viewed by
accomplish. An audit conducted according to GAAS is not your instructor.
intended to be a forensic audit to uncover fraud; rather, it is
designed to provide reasonable assurances that a compa- Submit
ny’s records are accurate representations. Auditors examine
the records prepared by the company’s own accountants,
and they test only selected transactions. If a company’s 13.2.2: Executives and Directors
accounting system is judged to be adequate, then less effort The main locus of decision making in corporations is in
is expended in testing. A “clean” or unqualified opinion director boardrooms and executive suites. Accordingly,
attests only the accuracy of the company’s books and not to directors and executives, especially the chief executive
the company’s solvency or future prospects. Because the officer (CEO), play a critical role in ensuring corporate
public expects auditors to do more than this and accepts a accountability.
“clean” opinion as a “clean bill of health,” there is an
Example: Although the Enron board of directors
“expectations gap” between what the public expects of
included many distinguished, competent, and diligent
auditors and what auditors actually do. The expectations
individuals and exemplified many good corporate
gap could be closed so as to make auditors more effective at
governance practices, its members twice voted to
detecting fraud, but doing so would involve greater costs
rescind the company’s conflict-of-interest policy so
and change the nature of auditing. The question from a reg-
that the chief financial officer (CFO), Andrew Fastow,
ulatory point of view is whether auditors or federal and
could serve as the managing partner of several special
state investigators can better serve as detectors of fraud.
purpose entities. These off-balance-sheet partnerships
The Sarbanes-Oxley Act of 2002 contains a number of
not only allowed Fastow to enrich himself at the
provisions that address the problems with accounting and
expense of Enron shareholders but also created enor-
auditing.
mous risks of which the board was apparently una-
• Title I created the Public Company Accounting Over- ware. The twin failures of the board of directors to
sight Board, which has the power to review audits, set exercise its proper oversight role and of the CFO to
additional auditing standards, and sanction firms for avoid flagrant conflicts of interest were major causes of
conducting inadequate audits. Enron’s collapse.
 Another cause of the massive fraud at Enron lay with rare for an executive to hold multiple CEO positions, a
its other top executives, including the CEO, Jeffery CEO has a strong incentive to avoid dismissal, and new
Skilling, and the chair of the board, Kenneth Lay. Skill- CEOs are drawn from the ranks of aspiring executives
ing was convicted in 2006 of 19 counts of conspiracy, who have incentives to excel. Thus, the market for CEO
insider trading, obstruction of justice, and securities talent perhaps works best at lower levels among poten-
fraud and was sentenced to more than 24 years in tial CEOs, who help support the current one.
prison, later reduced to 14. Lay was convicted in a joint • Fourth, an active market for corporate control serves
trial with Skilling of 10 criminal charges, with a likely to discipline underperforming or self-serving manage-
prison sentence of 20 or 30 years, but he died before his ment by the threat of a takeover. Although hostile
scheduled sentencing. takeovers are relatively rare in Europe and Japan and
The example of Enron illustrates that top executives increasingly more difficult to wage in the United
may be not only weak points in ensuring accountability in States, greater pressure by institutional investors has
a corporation but also important subjects of accountability been successful, in many instances, in producing the
systems. Systems must be in place to ensure the accounta- same kind of change that a hostile takeover would
bility of both boards and executives as well as the effective- achieve.
ness of their roles in holding others to account.
Role of Directors Corporate directors are elected
Role of the CEO The CEO of a company makes the by the shareholders to exercise their right of control in the
most important decisions and thus effectively manages it. operation of a corporation. In this role, directors select and
CEOs typically have the greatest amount of knowledge of monitor the CEO of the corporation, approve the compa-
any participant in decision making and so are in the best ny’s overall strategic plan, and ensure that adequate con-
position to ensure accountability. In addition, CEOs have trol systems are in place. The board also exercises control
considerable influence in the selection and retention of through an audit committee that reviews financial reports,
board members, so that, to some extent, they are responsi- a nominating committee that recruits new board members,
ble only to themselves and hence in the greatest need to be and a compensation committee that sets the compensation
held accountable. package for the CEO. In addition to its control responsibili-
The key to holding CEOs and other top executives to ties, the members of the board, who have wide experience
account is creating the right incentives. This is achieved by and extensive connections, also provide advice to the top-
four main means. management team and offer crucial outside resources.
Board members are characterized as inside or outside
• First, both officers and directors of a corporation have directors depending on whether they are currently execu-
a legally imposed fiduciary duty to act in all matters in tives of the corporation, and outside directors are desig-
the shareholders’ interest. Although this duty is legally nated as independent if they have no relationship with the
enforceable in that officers and directors can be sued corporation other than service on the board. In the United
for breaches, both are protected by the business judg- States, the chairman of the board is often the CEO—called
ment rule that exempts them from suits for good faith “CEO duality”—although the two roles may be separated,
business decisions. Moreover, successful suits for and they often are in other countries.
breach of fiduciary duty are generally limited to egre- In most of the recent scandals, boards of directors have
gious acts of incompetence or self-dealing, so that not been complicit in any wrongdoing but have been una-
fiduciary duty provides a relatively weak incentive for ware of what was occurring in the companies they suppos-
being accountable. edly controlled. For some directors, this ignorance was due
• Second, executives’ interests can be effectively aligned to a lack of attention, a lack of competence, a lack of inde-
with those of shareholders by a substantial ownership pendence, conflicts of interest, or some combination of
interest or performance-based compensation through these four factors. Board members are often chosen by the
bonuses and/or stock options. In this way, CEOs act CEO, and probably too many of them were close associates
more like shareholders because they, in fact, become of the CEO, celebrities who brought little but their name to
significant shareholders themselves and not merely the board or else CEOs themselves who did not have the
hired professional managers. Indeed, managers with time to devote their full attention. However, much of the
an ownership stake may have a greater incentive than failure of corporate boards to prevent wrongdoing, like the
shareholders to operate a firm profitably since their failure of accountants and auditors, was due to structural
investment is less diversified than that of shareholders. features, many of which were addressed by SOX.
• Third, a competitive labor market for CEOs and other Among the factors contributing to failed board perfor-
executive positions places a premium on a manager’s mance is a low percentage of independent directors. A
success in his or her current job. Even if it is relatively sign of good board practice is a majority of independent
directors with crucial committees, most notably the nomi- WRITING PROMPT
nation, compensation, and audit committees, constituted
The Sarbanes-Oxley Act
entirely by independent directors. Board members cannot
Review the sample SOX provisions listed above. What ethical princi-
be expected to know about misconduct in the organiza- ple or general requirement is each provision intended to address?
tion, but they are responsible for having control systems Are you surprised that any of these tasks or prohibitions were not
and accounting procedures capable of detecting it. Some already dictated by law? Or do you think any of the provisions are
unnecessary? Explain.
boards had failed to evaluate the adequacy of the systems
and procedures in place. Although board members must The response entered here will appear in the
have the confidence to leave a CEO free to operate a com- performance dashboard and can be viewed by
your instructor.
pany, they should also exercise greater independence by,
for example, conducting some executive sessions without
Submit
the CEO and other chief officers present. Some have pro-
posed to increase board independence by separating the
roles of CEO and chairman or, at least, appointing a desig- 13.2.3: Criminal Prosecution
nated or lead director to guide the independent members.
The law, both criminal and civil, is a major means of hold-
Good board practice also calls for the audit committee
ing not only individuals but also corporations accountable.
to meet with the independent auditors in an executive ses-
The successful criminal prosecutions of Jeffrey Skilling of
sion to satisfy themselves that there are no financial irregu-
Enron and Bernie Ebbers, the CEO of WorldCom, illustrate
larities. Some of the other proposals for reform include
the power of the law to achieve accountability. Criminal
reducing the number of boards on which directors sit,
and civil law is applied not only to individuals but also to
reducing the number of members on a board, increasing
corporations. Arthur Andersen, the accounting firm that
the number of meetings held annually, and increasing the
had signed off on Enron’s faulty financial reports, was
amount of work done by committees. Increasing the com-
indicted on March 14, 2002, for obstruction of justice in
pensation of board members and including stock grants
shredding documents; and when the firm was found guilty
and stock options have been proposed as ways of provid-
three months later, it, too, collapsed like Enron before it.
ing greater incentives for them to focus on protecting
Fraud and conspiracy to commit fraud are criminal
shareholder interests.
offenses for which both individuals and corporations can
A number of provisions in the Sarbanes-Oxley Act
be prosecuted. Other misdeeds for which corporations
address the problems of inadequate executive and board
have been prosecuted criminally include unsafe products
oversight. Among the highlights:
and working conditions, bribery and corruption, and will-
• SOX requires the CEO and the CFO to certify that they ful pollution. Criminal prosecution, along with financial
have reviewed every report filed with the SEC and reporting and the roles of executives and directors, serves
that, to the best of their knowledge, the report does not as a means for holding corporations accountable. Individu-
contain any material misstatements. als and corporations may also be prosecuted for civil rather
than criminal offenses. Generally, a criminal offense
• Section 404 requires every public company to assess
involves some harm to the state, whereas a civil offense
annually the adequacy of its internal control system
arises from the violation of some regulation or a private
and its procedures for financial reporting. The audit
right. Crimes are generally more serious than civil offenses
committee of the board is required by SOX to be com-
and usually result in a more severe sanction or penalty.
posed entirely of independent directors, and at least
Prosecutors often have the choice of bringing a criminal or
one member must be a “financial expert.”
a civil indictment against an individual or a corporation.
• SOX also requires that the independent auditor meet
Criminal prosecutions are state actions, but civil suits may
with the audit committee of the board and that the
be brought by either the state or private individuals.
committee be solely responsible for selecting, compen-
sating, and monitoring the independent auditor. Theoretical Problems The main theoretical prob-
• Finally, a significant source of abuse was removed by lem with prosecuting corporations was neatly stated by an
banning corporate loans to company executives. eighteenth-century Lord Chancellor of England who was
quoted as saying, “Did you ever expect a corporation to
Although SOX has been subjected to considerable crit- have a conscience, when it has no soul to be damned, and
icism, especially for the cost of complying with Section 404, no body to be kicked?”32 Unlike natural persons, corpora-
the legislation represents a significant effort by Congress to tions are legal fictions that appear to lack the two essential
improve the effectiveness of executives and directors in elements for criminal liability: a mind that has the neces-
preventing the kinds of misconduct that occurred at Enron sary knowledge and intent and a body that can perform
and other companies. the criminal act. In law, these elements are mens rea (a guilty
mind) and actus reus (the guilty act). In addition, a corpora- J­ustice, direct federal prosecutors in decisions about
tion also lacks a body that can be punished; it cannot be whether to charge corporations with crimes. Under the
imprisoned, for example. However, corporate decision principles, corporations are less likely to be criminally
making exhibits features apart from the actions of the indi- prosecuted if they voluntarily cooperate with investiga-
viduals who make up a corporation that may be described tors and do not shield employees.
by saying the corporation knows, intends, and so on. Simi- The main effects of these two influential documents
larly, there are actions performed by individuals that may have been to encourage organizations to implement ethics
be attributed to a corporation, especially when that person programs, disclose wrongdoing, admit guilt, provide
is acting in an organizational role. requested documents, fire employees who refuse to testify,
Because the ascription of mental states and actions to and withhold support for employees’ legal expenses.
corporations is speculative, legislators and judges have Although the cooperative approach may prevent miscon-
been ambivalent about the applicability of corporate crimi- duct before it occurs and facilitate the prosecution of crimes
nal law. In practice, proving the necessary elements of mens that are committed, it may raise ethical issues of its own.
rea and actus reus is difficult. Corporate criminal action has John Hasnas has argued that in cooperating with investiga-
been traditionally established by the legal doctrine of tors, corporations may violate employees’ rights to confi-
vicarious liability, by which a principal may be held liable dentiality and privacy and destroy the trust that is
for the actions of his or her agent. However, this doctrine necessary for corporations to function.33 If this is the case,
might unfairly hold a corporation liable when an employee then company executives are faced with a choice between
acts outside the scope of his or her role. It is often difficult protecting the company from legal liability and acting ethi-
to determine when an employee is acting on behalf of the cally toward their employees.
corporation or on his or her own. Moreover, the main pun-
ishment that can be imposed on a corporation is a mone- WRITING PROMPT
tary fine, which is borne by the shareholders, who may be
Who Takes the Fall?
innocent of the crime and victims as well.
Consider the extent to which any individual in a large corporation
should be held accountable for criminal misconduct. For instance,
Practical Problems In addition to the theoretical who should take responsibility for a fraudulent report: the person
problems, prosecutors face enormous practical difficulties who ultimately signed off on it or the person who prepared it?
in building a case against individuals or a corporation for Explain your reasoning.

white-collar crimes, given the diffuse nature of corporate The response entered here will appear in the
decision making and corporate action and the inaccessibil- performance dashboard and can be viewed by
ity of information. your instructor.
The fraudulent transactions at Enron typically
involved many people, each with responsibility for only Submit
one small part of the paperwork involved, and none of
these participants may have had knowledge of the full
scope of any given transaction. Absent a “smoking gun” 13.3: Corporate Compliance
that shows knowledge and intent by specific individuals,
criminal charges against corporations are not easily proven 13.3 Evaluate the components of corporate ethics
in court. To overcome this problem, the American legal sys- programs, the federal guidelines designed to
tem has shifted emphasis to a corporation’s pre- and post- punish and prevent misconduct, and how adopting
offense behavior. The aim of the law has been to prevent a code of ethics benefits companies
misconduct before it can occur and to encourage coopera- Corporations are increasingly paying attention to ethics in
tion by the corporation to settle charges quickly and expose the conduct of employees at all levels of the organization.
the individuals responsible. Unlike the emphasis on corporate social responsibility,
This new cooperative approach is the result of two which focuses on the impact of business activity on society
developments: at large, the corporate ethics movement addresses the need
to guide individual decision making and to develop an
• the federal Sentencing Guidelines for Organizations,
ethical workplace environment. Much of the impetus in
implemented in 1991, and
the United States has come from recognition of the dangers
• the Principles of Federal Prosecution of Business
posed by individual misconduct. However, unethical busi-
Organizations, which was promulgated first in 1999.
ness practices are seldom due to a lone rogue employee but
The sentencing guidelines, discussed later in this usually result from factors in the organization.34 Ethics
chapter, guide judges in the sentencing of organizations, programs are designed, therefore, to create an organization
and the principles, issued by the U.S. Department of that fosters ethical conduct. No program can prevent
momentary lapses of judgment, much less intentional In addition, more than 500 U.S. corporations have
wrongdoing, and ethical misconduct has occurred in com- established the position of ethics officer to oversee all
panies with exemplary ethics programs. aspects of an ethics program. Many companies without an
This section examines corporate ethics programs in ethics officer still assign the main responsibilities to one or
regard to two questions: more high-level executives.
This list of components does not reveal the range of
• What are the standard components of an ethics
corporate ethics programs. At one end of the spectrum are
­program?
programs designed merely to secure compliance with the
• What leads corporations to adopt a program, and what
law and with the company’s own rules and policies. The
do they expect to achieve?
goals are to prevent criminal conduct and violation of
Some companies have adopted ethics programs in government regulations on one hand, and to protect the
response to serious scandals, whereas others seek to pre- company from self-interested action by employees on the
vent scandals before they occur. In particular, the corporate other. Compliance of this kind is essential in any organiza-
ethics movement has been spurred by the Federal Sentenc- tion, but some corporations take a broader view of ethics.
ing Guidelines, which offer lenient treatment for convicted At the other end of the spectrum are ethics programs that
organizations with an effective ethics program. These are communicate the values and vision of the organization,
primarily defensive strategies aimed at legal compliance. seek to build relations of trust with all stakeholder groups,
However, many corporations strive for a higher level of and emphasize the responsibility of each employee for
conduct in the belief that a reputation for integrity pro- ethical conduct.
vides a strategic advantage. Like all other corporate initia- Lynn Sharp Paine describes this latter kind of program
tives, though, ethics programs represent an investment as an integrity strategy in contrast to the compliance strategy
that must be justified, and so we need to take a critical look that is represented by the former kind.36 While a compliance
at their benefits and also at possible objections to them. approach imposes standards of conduct on employees and
attempts to compel acceptable behavior, a program guided
by integrity aligns the standards of employees with those of
13.3.1: Program Components the organization and enables them to act ethically. An integ-
Every organization has an ethics program of some kind, rity strategy seeks to create conditions that foster right
although it may not be recognized as such.35 In the broad- action instead of relying on deterrence and detection. These
est sense, an ethics program consists of the rules and poli- conditions are created by the whole management team
cies of an organization and the procedures and systems for rather than being relegated to lawyers or others in compli-
motivating and monitoring ethical performance. Rules and ance, and by employing the whole resources of the organi-
policies include the culture and values of an organization zation. In particular, the full range of procedures and
and formal documents, such as mission statements, codes policies, the accounting and control systems, and the deci-
of ethics, policy and personnel manuals, training materials, sion-making structures of the corporation are utilized for
and management directives. Compliance with rules and the end of fostering right conduct. An integrity strategy also
policies is secured by various procedures and systems for attempts to motivate employees by appealing to their values
orientation, training, compensation, promotion, auditing, and ideals, rather than relying solely on material incentives.
and investigation. These procedures and systems are
essential functions in any business organization. Compa-
nies with an identifiable ethics program are distinguished
13.3.2: Program Benefits
by the emphasis that they place on these functions and the The main benefit of an ethics program is to prevent ethi-
manner in which they address them. cal misconduct by employees. Employee misconduct is
The components of a corporate ethics program gener- costly to companies not only in direct losses but also in
ally include: those sustained from a tarnished reputation. The total cost
to Sears, Roebuck, and Company for settling suits nation-
• a code of ethics, wide over allegations that its Sears Auto Centers made
• ethics training for employees, unnecessary repairs has been estimated to be $60 million
• means for communicating with employees about mat- (see Case: Sears Auto Centers). In addition, the trust of con-
ters of ethics, sumers that enabled the company to enter the competitive
• a reporting mechanism for enabling employees to auto repair market was seriously damaged.
report alleged wrongdoing, The financial services industry has produced some
• an audit system for detecting wrongdoing, and examples of very costly misconduct.
• a system for conducting investigations and taking cor- • A bond-trading scandal at Salomon Brothers in 1991
rective action. cost the firm almost $1 billion.
 • In 1994 Prudential Securities agreed to pay fines and vendors operate by different standards, and so a compa-
penalties in excess of $700 million for crimes commit- ny’s ethics program helps make its standards known. For
ted in the sale of limited partnerships in the 1980s. example, some companies notify suppliers of their policy
• A Japanese copper trader hid losses estimated at on gift giving and ask them to respect it.
$2.6 billion from his employer, Sumitomo Corporation. The existence of an ethics program is an assurance not
• Nicholas Leeson, a 29-year-old, Singapore-based only to socially responsible investors, who look for such
trader for Barings Bank, destroyed this venerable indicators, but also to shareholders generally, who want to
­British firm by losing more than $1 billion in unauthor- avoid the cost of major scandals.
ized trading. Example: The shareholders of Caremark International,
• In 2008, a rogue trader at Société Générale lost more Inc., a health care provider, sued the individual mem-
than $7 billion for the French bank. bers of the board of directors for failing to prevent
criminal violations that cost the company $260 million.
In some instances, the main loss from employee mis-
In deciding this case, the Delaware Chancery Court
conduct has been the company’s reputation. For example,
held in 1996 that directors have a fiduciary duty to the
NYNEX adopted an ethics program after learning that
shareholders to ensure that the corporation’s reporting
between 1984 and 1988, its purchasing unit had hosted an
systems are reasonably well designed to provide man-
annual convention in Florida for suppliers and company
agement with sufficient information to detect viola-
employees featuring strippers and prostitutes. The public
tions of law.37 The Caremark decision has been described
exposure of these events—dubbed “pervert conventions”
as a “wake-up call” to directors that they may be per-
by the press—came at the same time when the struggling
sonally liable for their failure to ensure that a corpora-
company was seeking an unpopular $1.4 billion rate increase
tion has an adequate compliance system in place.38
from the New York State Public Service Commission.
A second benefit of ethics programs is that they pro- Of course, an ethics program is only one means for
vide a managerial tool for adapting the organization to securing compliance. However, the Caremark decision,
rapid change. Among the factors that have led corpora- combined with the Federal Sentencing Guidelines, pro-
tions to adopt ethics programs are increased competition, vides a strong incentive for developing one.
the development of new technologies, increased regula-
tion, recent mergers and acquisitions, and the globalization
13.3.3: Federal Sentencing
of business. The problems at NYNEX, for example, were
not confined to risqué parties. The breakup of AT&T in Guidelines
1984 had forced NYNEX and all Baby Bells to compete in In 1984, Congress created the U.S. Sentencing Commission
an unfamiliar environment that required new ways of in order to bring greater uniformity and effectiveness to
doing business. NYNEX needed to provide individual the sentences that judges impose for federal crimes. In
guidance to employees during a period in which all the developing new guidelines, the Sentencing Commission
rules were being rewritten. Mergers and acquisitions also departed from prevailing practices by holding organiza-
disrupt familiar routines and create the need to develop tions responsible for the conduct of individual decision
new ones rapidly. Finally, a formerly domestic company makers and creating incentives for organizations to pre-
that becomes a global enterprise must not only set the rules vent misconduct by their members. Under the Federal Sen-
for its own employees’ behavior abroad but must also tencing Guidelines for Organizations, which took effect in
mesh its conduct with that of foreign customers, suppliers, 1991 and were revised in 2004, the sentence for an organi-
and joint venture partners. zation that has been convicted of a federal crime depends,
Third, ethics programs help organizations manage in part, on the effort that has been made to prevent and
relations with external constituencies. An ethics program detect criminal wrongdoing, including the adoption of an
serves to reassure customers, suppliers, investors, and the “effective ethics program.”
general public of the serious intent of a corporation to The federal sentencing guidelines have the dual aim of
adhere to high ethical standards. It is no accident that the imposing a just sentence on any convicted organization
first ethics programs were developed by defense contrac- and influencing the conduct of all organizations. The for-
tors, which have only one customer, namely, the Depart- mer aim is achieved by guidelines that base the penalty on
ment of Defense. The Defense Industry Initiative, which the seriousness of the offense and the culpability or blame-
commits each signatory to develop an ethics program, was worthiness of the organization. The guidelines provide not
an attempt to assure this all-important customer of its only for fines that punish an organization but also for resti-
trustworthiness after defense contractors that falsified tution to the victims, and the fines can be set so as to wipe
records were fined and forced to make restitution. Prob- out any gain for an organization from its criminal activity.
lems often develop when a company and its suppliers or In addition, the severity of the fines, which can reach
$290 million or the higher of the gain to the organization or needed time to understand what had happened and
the loss to the victims, provides a powerful incentive for because the Japanese Ministry of Finance feared that dis-
organizations to take preventive steps and to cooperate in closure would have an adverse impact on markets in Japan.
an investigation. However, if the bank had adopted an adequate compliance
program, perhaps the loss would have been detected ear-
How the Guidelines Work The first step in apply-
lier with less severe consequences.
ing the guidelines is determining a base fine. This amount
is generally taken from a table that ranks crimes according Effective Ethics Programs The Federal Sentenc-
to their seriousness and assigns a monetary amount to ing Guidelines defines an effective ethics program as one
each level. The base fine ranges from $5,000 for a level “that has been reasonably designed, implemented, and
6 offense or lower (embezzlement, theft, bribery of a public enforced so that it generally will be effective in preventing
official) to $72.5 million for a level 38 offense or higher. and detecting criminal conduct.”40 The program need not
Commercial bribery, for example, is a level 8 offense with a prevent or detect every instance of wrongdoing, but the
$10,000 base fine, and money laundering is a level organization must have practiced “due diligence,” which
20 offense with a base fine of $650,000. involves the following steps.41
The base fine may then be either increased or
decreased by a multiplier based on a “culpability score” 1. The organization must have established compliance
(see Table 13.1). standards and procedures that are reasonably capable
of reducing misconduct.
2. Specific high-level personnel must have been assigned
Table 13.1 Determining a Culpability Score responsibility for overseeing compliance with the
The culpability score, which ranges from 1 to 10, is determined by standards and procedures.
starting with 5 points and subtracting or adding points for certain
factors, such as those listed below. 3. The organization must take due care not to assign sub-
Points added to 5 Points subtracted from 5 stantial discretionary authority to individuals with a
+ 5 points if high-level personnel − 1 to 5 points for:
propensity to engage in illegal behavior.
were involved in the wrongdoing • self-reporting an offense 4. Standards and procedures must have been communi-
+ 3 points if the organization • cooperation with investigation cated to all employees and agents through such means
obstructed the investigation or
­prosecution of the crime • existence of an ethics program as publications and training programs.
+ 2 points if similar misconduct had • accepting full responsibility
5. The organization must have taken reasonable steps to
occurred before
ensure compliance by using monitoring and auditing
systems and a reporting system that employees may
The significant factor for the development of an ethics use without fear of retaliation.
program is that a sentencing judge subtracts three points if 6. The standards must have been consistently enforced
the offense occurred “despite an effective program to pre- through appropriate disciplinary measures, including,
vent and detect violation of the law.” (This provision does as appropriate, the punishment of employees who fail
not apply if high-level personnel were involved or if they to detect an offense by others.
delayed reporting the offense after becoming aware of it.)
7. After an offense has been detected, the organization
As previously mentioned, for each culpability score,
must have taken all reasonable steps to respond appro-
there is a range from which a judge can choose a multiplier
priately and to prevent further similar offenses.
that either reduces or increases the base fine. The minimum
multiplier is 0.05, which reduces the fine imposed to 5 per- The specific actions involving these steps will depend
cent of the base fine. The maximum multiplier is 4.00, on many factors, including the size of the organization, the
which quadruples the base fine. Hence, the highest fine is nature of the industry, and the organization’s prior history.
$72.5 million (the highest base fine) multiplied by 4.00 (the Although the Federal Sentencing Guidelines provides
highest multiplier), or $290 million. a strong incentive for corporations to establish ethics pro-
The highest fine imposed so far by using the Federal grams and contains a good definition of an effective ethics
Sentencing Guidelines is $340 million levied against Daiwa program, questions have been raised about the overall
Bank in New York, even though the bank was a victim of approach of the guidelines and specific features of the defi-
unauthorized trading by an employee that cost the bank nition. First, there is no solid evidence that ethics programs
$1.1 billion.39 The charge against the bank was that officials are more effective than other kinds of compliance systems
had failed to inform U.S. officials within 30 days of the dis- in preventing illegal behavior. Some evidence indicates
covery of the loss as required by law. The bank officials that misconduct occurs not because of ignorance about the
engaged in the cover-up in part to avoid a decline in the standards for acceptable conduct but because of organiza-
bank’s stock price but also because they felt that they tional pressures and the actions of peers.42 To be effective,
therefore, an ethics program must go beyond setting and Since 2004, the New York Stock Exchange and NAS-
enforcing rules and include the goal-setting and reward DAQ have required listed companies to adopt and publish
systems of an organization. The need to move beyond the a code of ethics, and under the 2009 Sarbanes-Oxley Act, a
mere enforcement of rules was one reason why the federal publicly held company must disclose whether it has
sentencing guidelines were revised in 2004 to require that adopted a code of ethics for senior executives and explain
corporations develop an organizational culture that any absence of a code.46 Many companies, especially those
encourages ethical behavior, using wording that is similar with global operations, have voluntarily committed them-
to Paine’s call for organizational integrity.43 selves to observe codes developed by non-business groups,
Second, to the extent that ethics programs are not effec- such as the United Nations Global Compact and the OECD
tive, the guidelines may encourage corporations to create Guidelines for Multinational Enterprises.
highly visible “window dressing” programs at the expense
Types of Codes Codes of ethics vary widely, falling
of more substantive initiatives. Moreover, most large corpo-
into three main types.
rations already have compliance programs that would sat-
isfy the guidelines’ requirements, so that little is to be • The most common is a statement of specific rules or
gained by offering a reduction in any fine. But small firms standards for a variety of situations. These are most
may be penalized for investing their more limited resources often called codes of conduct or statements of business
in a formal ethics program when other systems of control standards or practices.
might be more effective in preventing misconduct. • A second type is a statement of core values or the
vision of an organization, sometimes called a credo or
WRITING PROMPT mission statement. These statements frequently
The Range of Corporate Ethics Programs include affirmations of the commitments of a company
Recall the range of corporate ethics programs discussed earlier in to key stakeholders, such as customers, employees,
Section 13.3.1, from those adopting a compliance strategy to those and the community.
with an integrity strategy. Where on this scale would you place the
type of program recommended by the Federal Sentencing Guide- • Third are corporate philosophies that describe the
lines? Explain your reasoning. beliefs guiding a particular company. Perhaps the best
known of these is Hewlett-Packard’s “The HP Way.”
The response entered here will appear in the
performance dashboard and can be viewed by Corporate philosophy statements are generally writ-
your instructor. ten by the founders of businesses in emerging indus-
tries, such as computers, where new ways of doing
Submit business are needed.
Most codes of ethics combine elements of the first two
13.3.4: Codes of Ethics types, but at least one firm, Levi Strauss & Company, has
adopted all three kinds of statements.
The first step in developing an ethics program, and the
only step that some companies take, is a code of ethics. The What is the Levi Strauss code of ethics?
development of ethics codes for corporations is a relatively
Levi Strauss’s Ethical Guidelines
recent phenomenon, with most having been written since
1970.44 In many instances, these codes replaced other kinds An Aspiration Statement describes what kind of company its
of documents, such as policy manuals, executive direc- members want it to be. A Code of Ethics explains the val-
tives, and customary practices. An early prominent code of ues and ethical principles that guide action. And finally, Levi
ethics was “The Penney Idea,” a set of seven principles set Strauss has adopted a document entitled “Global Sourcing
forth by the merchandizing pioneer J.C. Penney in 1913. and Operating Guidelines,” which contains very specific rules
A major impetus for the development of corporate eth- on working with business partners and choosing countries
ics codes was provided by the influential National Com- for operations.
mission on Fraudulent Financial Reporting (the “Treadway A few weeks before the guidelines were officially
Report”), issued in October 1987. This report recommended, adopted, Levi Strauss canceled a contract with a supplier in
Saipan (a U.S. territory) after reports of human rights viola-
Public companies should develop and enforce written
tions. Subsequently, the U.S. Department of Labor charged
codes of corporate conduct. Codes of conduct should fos-
that the contractor worked the employees, mostly Chinese
ter a strong ethical climate and open channels of commu-
nication to help protect against fraudulent financial women, up to 11 hours a day in guarded compounds and
reporting. As a part of its ongoing oversight of the effec- paid them well below the Saipan minimum wage. The con-
tiveness of internal controls, a company’s audit commit- tractor settled the charges for $9 million. One Levi Strauss
tee should review annually the program that management manager observed, “If anyone doubted the need for guide-
establishes to monitor compliance with the code.45 lines, this convinced them.”
 In addition to company codes of ethics, there are many • A written document enables an organization to clarify
industry codes, generally adopted by a trade organization. standards that may otherwise be vague expectations
These include organizations for the advertising, banking, left to individual interpretation. Where there is disa-
direct marketing, franchising, insurance, and real estate greement on the appropriate standards, codes can
industries. achieve a measure of consensus, and where standards
Because a commitment to high ethical standards and are lacking or in need of revision, codes enable an
self-regulation is integral to a profession, most professional organization to create new ones. This is especially true
groups have also developed ethics codes to which their for American corporations with foreign operations
members are generally required to subscribe. Among pro- and relationships, although a code of ethics may need
fessions with codes of ethics are physicians, lawyers, to be modified when applied abroad.
accountants and auditors, architects, engineers, financial • Codes of ethics are an effective means for disseminat-
planners, public administrators, consultants, and journal- ing standards to all employees in an easily understood
ists. Unlike company and industry codes of ethics, which form.
are of recent origin, some professional codes are as old as • Finally, an effective code of ethics that is enforced in an
the profession, as witness the Hippocratic oath for physi- organization provides employees with a tool for resist-
cians, which dates from the fourth century b.c. ing pressure to perform unethical or illegal actions. A
Use Figure 13.2 below to review the three main types code of ethics may enable employees to do what they
of company codes of ethics. believe to be right.

Even well-written codes of ethics have

Figure 13.2 Codes of Ethics limitations, and badly written ones may have
Main Types of Codes of Ethics some unintended consequences. An emphasis
on rules may create a rigid literalness that dis-
Code of Conduct Mission Statement Corporate Philosophy courages judicious discretion. An especially
A statement of specific A statement of core A statement describing dangerous situation is created when employ-
rules or standards of values or the vision of the beliefs guiding a ees conclude that whatever is not prohibited is
conduct an organization corporation
• The most common • These frequently • Example: Hewlett- permitted. Some codes focus primarily on
type of code identifies include affirmations Packard’s “The HP employee misconduct that can harm the com-
acceptable and of the commitments of Way”
pany, which may lead to cynicism about the
unacceptable actions a company to key • Generally written by
in a variety of stakeholders, such as the founders of purpose of ethics. Some companies do not
situations customers, employees, businesses in adopt a code of ethics because they believe
• Also called statements and the community. emerging or evolving
of business standards • Sometimes called a industries
that their way of doing business is best
or statements of credo or statement of achieved by maintaining a strong culture and
business practices values leading by example. Other companies believe
that a code is inappropriate to their situation
because extensive government regulation and
WRITING PROMPT internal auditing are sufficient to deter both unethical and
illegal behavior.
The Value of Codes
Studies of which companies adopt codes of ethics
You are looking for a company to invest in and you have narrowed
your choices down to several companies that differ only by the type reflect these advantages and disadvantages. Codes are
of ethical code they have adopted. How would you compare these more prevalent in large companies, in companies with
codes to make a final investment decision? Explain what elements more complex structures, especially those that have grown
you would require in a code, at a minimum, or whether your require-
ments would depend on the specific industry.
rapidly or recently merged, and in companies that have
high visibility and depend on their reputation.47 Codes of
The response entered here will appear in the ethics are less common among financial firms—investment
performance dashboard and can be viewed by
your instructor. banks, for example—in part because of the extensive gov-
ernment regulation, but also because of the strong incen-
Submit tive to monitor employee behavior closely.
There is no blueprint for writing a code of ethics.
Both the procedure and content must arise from specific
Reasons for Adoption The reasons for adopting a features of the company in question. However, some val-
code of ethics include those that lead companies to develop ues, such as respect of the individual, fair treatment,
ethics programs. Even without a program, a code of ethics honesty, integrity, responsibility, trust, teamwork, and
serves a number of valuable functions. quality, are included in typical codes, as are such topics
as conflict of interest, use of company resources, gifts and of top-level management. A code is unlikely to be suc-
entertainment, confidentiality of information, and work- cessful, though, if it is imposed from the top down. Ide-
place behavior. There is one common trait of all success- ally, everyone in a company should have “ownership” of
ful codes of ethics, however: They have the clear support the code.

Conclusion: Governance, Accountability, and Compliance

The modern corporation is a remarkable form of economic shareholders’ rightful “voice” in corporate affairs. Similarly,
organization that enables everyone in society to interact for the commonly accepted idea that directors on corporate
mutual gain. Ideally, everyone should benefit from the boards have a strong fiduciary duty to act in the interests of
wealth-creating power of business corporations. In order shareholders is tested in “The Sale of Trans Union.” This land-
mark case in corporate law yields the surprising conclusion
for corporations to function and provide their benefits, sev-
that it may not be in the shareholders’ interest to insist on
eral problems must be solved. First, corporations must be
high standards of fiduciary duty for board directors.
legally structured so that investors, employees, customers,
suppliers, and other groups that participate in productive
activity are protected. This is part of the task for corporate
governance. Second, corporations must be held accounta-
ble so that corporate executives do not engage in fraud or Case: Sears Auto Centers
other wrongdoing. In addition to corporate governance, On June 11, 1992, the CEO of Sears, Roebuck and Company,
this task is addressed by accounting and auditing, a corpo- Edward A. Brennan, learned that the California Depart-
ration’s board of directors, and criminal law. Third, there ment of Consumer Affairs (DCA) was seeking to shut
must be a control environment within the corporation to down the 72 Sears Auto Centers in that state.48 A yearlong
detect and deter employee misconduct. This is the task of undercover investigation by the DCA had found numerous
the corporate compliance function, of which an effective instances in which Sears employees had performed unnec-
ethics program is a major component. When an economic essary repairs and services. Officials in New Jersey quickly
system combines all of these elements together—corporate announced similar charges against six local Sears Auto
governance, corporate accountability, and corporate com- Centers, and several other states, including Florida, ­Illinois,
pliance—the results can be a prosperous society. Where and New York, opened their own probes into possible con-
one or more of the elements are absent, the corporation sumer fraud. In the wake of this adverse publicity, reve-
cannot achieve its full potential. nues from the auto centers fell 15 percent, and the public’s
trust in Sears was badly shaken.

End-of-Chapter Case The Investigation

Studies Sears Auto Centers, which were generally connected with a
Sears department store, concentrated on basic “undercar”
This chapter concludes with three case studies. services involving tires, brakes, mufflers, shock absorbers,
The “Sears Auto Centers” case illustrates a theme that and steering mechanisms. Investigators from the DCA’s
occurs throughout this course: Wrongdoing in business is Bureau of Automotive Repair purchased old vehicles in
often the result of faulty practices, policies, and strategies, need of minor repairs and disassembled the brakes and
which create systemic, rather than purely individual, ethical suspension systems. After examining and photographing
vulnerabilities and which consequently require a systemic each part, the investigators towed the automobiles to a
response rather than a focus merely on individual conduct. A
shop where they requested a brake inspection. In 34 of 38
welcome outcome of Sears’s experience in this case was the
instances, Sears employees recommended unnecessary
development of a model corporate ethics compliance pro-
repairs and services, and some auto centers charged for
gram. The other two cases explore often misunderstood
aspects of corporate governance. The popular but false idea parts that were not installed or work that was not per-
that shareholders are the “owners” of a corporation, with vir- formed. The average overcharge was $235, but in two cases
tually unlimited legal powers to direct their “property,” is the amount overcharged exceeded $500.
tested in the case “Shareholder Rights at Cracker Barrel.” Brennan had been notified in December 1991 of early
This case provides an opportunity to determine the limits of results from the investigation, and Sears executives
negotiated for six months with California officials. The Why did Sears switch to this incentive commission
company objected to the state’s position that no part system?
should be replaced unless it had failed and claimed that The changes in the compensation system at Sears Auto
many repairs were legitimate preventive maintenance. Centers were part of a company-wide effort to boost lagging
For example, there is disagreement in the industry on performance. In 1990, net income for all divisions, including
whether brake calipers should be reconditioned when- Allstate (insurance), Coldwell Banker (real estate), and Dean
ever the pads are replaced. In addition, some of the auto- Witter (brokerage), dropped 40 percent. Net income for the
mobiles used in the investigation showed signs of merchandising group, which included the department stores
damage from worn parts that had already been replaced, and the auto centers, fell 60 percent. Brennan, CEO since
thus leading mechanics to believe that repairs were 1985, was under strong pressure to cut costs and increase
needed. The DCA moved to revoke the licenses of all revenues. Some dissident shareholders were urging the
Sears Auto Centers in the state after the negotiations board of directors to spin off the more profitable insurance,
broke down over details of the financial settlement. real estate, and brokerage divisions and focus on the ailing
merchandising group. Brennan’s response was to cut jobs,
A Systemic Problem? renovate stores, and motivate people. The overall thrust,
according to a story in BusinessWeek, was to “make every
California officials charged that the problems at the Sears employee, from the sales floor to the chairman’s suite focus
Auto Centers were not confined to a few isolated events on profits.” Some critics of Sears attribute the problems at
but constituted systemic consumer fraud. According to a the auto centers to an unrealistic strategic plan that sought to
deputy attorney general, “There was a deliberate decision wring more revenue out of the auto repair business than was
by Sears management to set up a structure that made it possible. Robert Monk, who unsuccessfully sought a seat on
totally inevitable that the consumer would be oversold.” the company’s board, said, “Absent a coherent growth strat-
Until 1991, service advisers, who make recommendations egy, these sorts of things can happen.”
to customers, were paid a flat salary, but subsequently their
compensation included a commission incentive. The ser-
vice advisers were also required to meet quotas for a cer-
Company Response
tain number of parts and services in a fixed period of time. At a press conference on June 22, 1992, Edward Brennan
The new incentive system also affected the mechanics who announced that, effective immediately, Sears would elimi-
perform the work on the customers’ automobiles. Instead nate its incentive compensation system for automotive
of an hourly wage that was paid regardless of how much service advisers and all product-specific sales goals.
work was done, mechanics now received a lower hourly Although he admitted that the company’s compensation
wage that was supplemented by an amount based on the program “created an environment where mistakes did
time required to install a part or perform a service. The occur,” Brennan continued, “We deny allegations of fraud
company determined how long it should take to complete and systemic problems in our auto centers. Isolated errors?
each job, and a mechanic could earn the former hourly Yes. But a pattern of misconduct? Absolutely not.” He reaf-
wage only by finishing the work in the time specified. firmed his belief that the California investigation was
Under this system, slow workers would earn less than flawed and that Sears was practicing responsible preven-
before, but a mechanic could also earn more by working tive maintenance. He further announced that the company
faster than expected. would retain an independent organization to conduct ran-
Commissions and quotas are commonly used in dom “shopping audits” to ensure that no overcharging
competitive sales environments to motivate and monitor would occur. Sears also paid $8 million to settle claims in
employees. However, critics of Sears charge that there California and gave auto center customers $50 coupons
were not enough safeguards to protect the public. One that were expected to cost the company another $3 million.
former auto center manager in Sacramento complained The total cost, including legal bills and lost sales, is esti-
that quotas were not based on realistic activity and were mated to have been $60 million.
constantly escalating. He said that “sales goals had On September 30, 1992, Sears revealed plans to spin off
turned into conditions of employment” and that manag- its three nonretail divisions, Allstate, Coldwell Banker, and
ers were “so busy with charts and graphs” that they Dean Witter, and to reorganize the merchandising group. A
could not properly supervise employees. A mechanic in new CEO, Arthur C. Martinez, succeeded Brennan and
San Bruno, California, alleged that he was fired for not began a turnaround of the company. In describing his
doing 16 oil changes a day and that his manager urged vision, Martinez said, “I want to revisit and intensify the
him to save his job by filling the oil in each car only half- theme of our customer being the center of our universe.” A
way. This illustrated, he said, the “pressure, pressure, cornerstone of Martinez’s strategy, according to the New
pressure to get the dollar.” York Times, was “clean business ethics.”
 Shared Writing: Sears Auto Centers accorded to any shareholder holding stock worth $1,000;
this amount has since been raised to $2,000.
By requiring that “every employee, from the sales floor to the
However, the shareholders were not allowed to vote
chairman’s suite focus on profits,” what message was CEO Bren-
nan sending about the priority of ethical considerations com- on NYCER’s proposed resolution. Rule 14a-8 also permits a
pared to profits? Explain whether you believe that the lack of company to refuse to submit a proposed resolution to a
guidelines to protect Sears’ customers was an oversight or a shareholder vote under several conditions, one being that
deliberate omission. the resolution deals with the “ordinary business opera-
Review and comment on at least two classmates’ responses,
tions” of the company.49 The management of Cracker Bar-
including one that opposes your own.
rel judged that this shareholder resolution dealt with
A minimum number of characters is required ordinary business operations and, thus, could legally be
to post and earn points. After posting, your withheld from the company’s proxy materials. A company
response can be viewed by your class and
instructor, and you can participate in the that rejects a proposed resolution is required to notify the
class discussion. Securities and Exchange Commission (SEC) of the action.
The SEC agreed with the judgment of the Cracker Barrel
Post 0 characters | 140 minimum management and issued a “no-action” letter affirming
management’s decision.50
This decision by the SEC constituted a significant shift
of position and created a storm of protest. In 1976, the SEC
Case: Shareholder Rights interpreted “ordinary business operations” in such a way
at Cracker Barrel that a resolution could be rejected only if it involved “busi-
Cracker Barrel Old Country Stores, Inc., based in Lebanon, ness matters mundane in nature” and did not involve “any
Tennessee, operated a chain of restaurants and gift shops, substantial policy or other considerations.”51 Between 1976
mostly in the South and Midwest, that featured southern- and 1992, the SEC ruled that a number of resolutions deal-
style cooking. In 1991, many Cracker Barrel shareholders, ing with equal employment opportunity had to be submit-
along with the company’s employees and members of the ted to the shareholders because diversity was not a
public, were outraged when at least 11 employees were dis- “mundane” matter and it involved a “substantial policy”
missed for their sexual orientation. The gay and lesbian given the importance of a diverse workforce for a compa-
employees ran afoul of a new company policy that Cracker ny’s competitiveness. Using the same reasoning, the SEC
Barrel would no longer employ individuals whose sexual ruled in 1990 that AT&T was required to submit for a share-
preferences “fail to demonstrate normal heterosexual val- holder vote a resolution by a white supremacist group that
ues” or whose lifestyle was “contrary to traditional American asked AT&T to abandon its entire affirmative action pro-
values.” The fired employees had no legal protection since gram.52 The SEC’s 1992 Cracker Barrel ruling meant that
discrimination laws do not cover sexual orientation. The shareholders had no right to vote on any resolution dealing
public could only boycott the restaurants by staying away, with a company’s employment policies, even when some
which many did. However, the outraged shareholders had a shareholders believed that the policy, like Cracker Barrel’s
power that everyone else lacked: They were the owners of policy decision not to hire gays or lesbians, was morally
Cracker Barrel, and they could exercise their rights as owners objectionable. If shareholders are the owners of a company,
to bring about change—or at least they thought they could. do they not have the right to force a vote and make their
voice heard? Some people consider the right to vote on
important issues a matter of shareholder democracy.
The Shareholder Resolution Supporters of the SEC’s Cracker Barrel ruling note that
The $22 billion New York City Employees’ Retirement Sys- the shareholders have already elected the board of directors,
tem, known as NYCERS, which owned 121,000 shares of which, in turn, selects the management team. If shareholders
Cracker Barrel stock worth around $4.5 million, proposed a disapprove of the way in which the board and management
resolution to be voted on at the 1992 annual meeting. are running a company, then they should attempt to vote
­NYCER’s shareholder resolution was that the two words them out. In the meantime, shareholders should leave the top
“sexual orientation” be added to the company’s equal executives free to run a company as they see fit and not inter-
employment policy and that the company take steps to fere in day-to-day operations. Indeed, boards of directors
ensure compliance with the amended policy. The legal basis typically involve themselves only in the selection of manage-
of NYCER’s action was Rule 14a-8 of the 1934 Securities ment and the overall strategy of the company and leave all
Exchange Act, which permits shareholders to propose reso- other matters to the management team. However, directors
lutions to be included in the company’s proxy materials that are usually nominated by a committee of the board, and fed-
are submitted to shareholders for a vote as part of an annual eral and state law does not, in general, give shareholders any
meeting. At the time, the right to propose a resolution was right to nominate candidates of their own.53 Usually, the
shareholders’ only power is to withhold votes from a slate
presented to them by the current board. In response to
demands for greater shareholder democracy, the SEC
Case: The Sale of Trans Union
announced plans in 2003 to examine whether shareholders Promptly at noon on Saturday, September 20, 1980, nine
should have a greater voice in the nomination of directors.54 members of the board of directors of Trans Union Corpora-
By the end of 2007, though, no changes had been made. tion gathered for a hastily called special meeting.56 None of
the five outside directors had been informed of the meet-
Limiting Shareholder Voice ing’s purpose or had been provided in advance with any
materials to study. Only one hour earlier did any of the top
Shareholder activists tend to be state and union pension executives learn of the plan to be proposed to the board by
funds, religious organizations, and other social action groups the chairman and CEO, Jerome W. Van Gorkom. The plan
that use the shareholder resolution process to advance their was to sell the company for a price of $688 million to the
own causes. For example, in 1971, the Episcopal Church pro- Marmon Group, headed by Jay A. Pritzker, a prominent
posed a resolution that General Motors cease operations in takeover specialist and chairman of the Hyatt hotel chain.
South Africa in protest against the country’s racial apartheid
policy. During the Vietnam War, shareholder resolutions Planning the Sale
were proposed by antiwar activists to force Dow Chemical
Trans Union Corporation was a publicly traded, diversified
Company to stop manufacturing napalm. Typically, share-
holding company, located on LaSalle Street in Chicago.
holder resolutions included in proxy materials are defeated
Founded in 1968 out of the Union Tank Car Company,
by large margins. However, the aim of activist shareholders
Trans Union was engaged primarily in the business of leas-
is usually not to affect corporate behavior but to effect larger
ing railroad cars. Although the company was doing well, it
social change by increasing public awareness of issues. Even
could not match the lower rates of its competitors in the
when such activism is socially beneficial, though, critics
railroad-car leasing business due, in large part, to its inabil-
charge that shareholder resolutions are a distraction for cor-
ity to benefit from an investment tax credit. Because the
porations and that social change ought to be brought about
credit was offered as an offset on the company’s taxable
through the political process, not by means of shareholder
income, Trans Union could not realize the full benefit since
resolutions. Some argue that people who are citizens in a
deductions for depreciation reduced its taxable income
democratic state do not need shareholder democracy.
below the full amount of the credit. Lobbying efforts in
In 1998, the SEC reversed the Cracker Barrel ruling and
Congress for a change in the tax code to permit the receipt
reverted to a case-by-case application of the two-part 1976
of the credit in cash had proved fruitless. Among the other
test that asked whether the resolution involved “business
solutions to this problem examined by company executives
matters mundane in nature” and did not involve “any sub-
were a leveraged buyout by management and a sale to a
stantial policy or other considerations.” In announcing the
larger company with more taxable income.
change, the SEC observed that since the Cracker Barrel rul-
On his own, without consulting the board or any other
ing, “the relative importance of certain social issues related
executives except one, Van Gorkom arranged to meet with
to employment has re-emerged as a consistent topic of
Pritzker at the latter’s home on Saturday, September 13.
widespread public debate.”55 As a result of this reversal,
The two men had been acquainted socially for more than
the power of shareholders to vote on matters that concern
10 years and had worked together on the Chicago School
them was increased.
Finance Authority to rescue the city school system from a
Shared Writing: Shareholder Rights financial crisis. Rather than merely seeking to discern Pritz-
at Cracker Barrel ker’s interest, Van Gorkom presented him with a detailed
proposal based on a $55-per-share price, which represented
Explain whether shareholders should have a right to vote directly
on a company’s employment policies. Would this ability open the a premium of 48 percent over the current price and 62 per-
door to shareholders "micro-managing" daily operations, or is it cent over the average of the high and low prices during
justifiable given how such policies shape the public’s perception 1980. Van Gorkom explained how Pritzker could finance
of the company (and thus influence its profitability)? the deal so as to realize the extra value reflected in the pre-
Review and comment on at least two classmates’ responses.
mium. Pritzker was interested in the deal, and after several
A minimum number of characters is required more meetings over the next few days to settle certain
to post and earn points. After posting, your details, he announced that he was ready to make a $55-per-
response can be viewed by your class and share all-cash offer for the company. However, Pritzker
instructor, and you can participate in the
class discussion.
insisted that the deal had to be completed by Sunday of
that week, September 21.
Post 0 characters | 140 minimum At an 11:00 a.m. meeting of top executives on Satur-
day morning, September 20, the reaction was decidedly
negative. Van Gorkom gave an oral account of the pro- completed, and that committed the company to provide
posed agreement to his management team with no sup- any potential bidder with confidential financial informa-
porting documentation. Several of the executives tion. However, these conditions were not recorded in the
questioned how the $55 price had been determined and meeting minutes nor incorporated into the final agree-
whether it was too low. Objections were also made to sev- ment. Moreover, the board did not reserve the important
eral conditions that Pritzker had inserted that would dis- right to actively solicit other bids.
courage any rival bidders for the company. Some That evening was the opening night of the Chicago
executives also expressed concern about the adverse tax Lyric Opera season. Following tradition, Van Gorkom and
consequences of an all-cash buyout for certain sharehold- his wife hosted a formal pre-opera gala party on the 25th
ers. The executives realized, though, that the decision was floor penthouse of the Trans Union Building for a large
not theirs to make: The board of directors had the respon- number of Chicago’s elite, including the Pritzkers. During
sibility of deciding whether to approve the proposed the celebration, Van Gorkom and Pritzker, attired in tuxe-
agreement and submit it to the shareholders for a vote. dos, slipped down to the floor below where a team of law-
yers was putting the final touches on the sale documents.
Before leaving for the opera—a production of Modest
Board Consideration Moussorgsky’s “Boris Godunov”—they signed the agree-
During the two-hour special board meeting on September ment to sell Trans Union to Pritzker’s Marmon Group. This
20, immediately following the session with company exec- agreement, which still had to be presented for a share-
utives, Van Gorkom gave a 20-minute oral presentation of holder vote, was not yet complete, though. Pritzker was
the proposed agreement, again without providing written forced to make some concessions to keep key Trans Union
copies. He did not offer any analysis to support the executives from leaving, but he also added some provi-
$55-per-share price. He did not claim that this was the sions that further limited the board’s ability to obtain a bet-
highest price that could be obtained but only that it was a ter offer or withdraw from the deal. Van Gorkom
fair price, which the shareholders should be allowed to reconvened the board for a meeting on October 8. How-
accept or reject. It is common in such situations to seek a ever, the final agreement, executed on October 10, con-
fairness opinion from an investment advisory firm to attest tained provisions that differed from what Van Gorkom had
that the price placed on a company for sale is fair, but no told the directors. No member of the board had read the
such opinion had been sought in this case. Van Gorkom final agreement, and Van Gorkom himself apparently failed
did not mention that he had proposed the $55 price to to appreciate the implications of some of the changes.
Pritzker rather than receiving an offer at this price from
him. He defended the price on the ground that once the
Pritzker offer was announced, other bidders could come
Shareholder Challenge
forth, thus allowing the market to determine the highest On January 26, 1981, the board met and voted to proceed
price that could be obtained. with the sale. The shareholders approved the sale with
The chief financial officer of Trans Union, who had not 69.9 percent in favor, 7.25 percent against, and 22.8 percent
been aware of the proposed agreement until that morning, not voting. Before the vote, a group of shareholders brought
told the board that he had not attempted to determine the a class-action suit challenging the sale. These shareholders
company’s value. The studies he had done were aimed, sought to hold the individual board members personally
rather, at analyzing the feasibility of a management buyout liable for failing to fulfill their fiduciary duty in approving
at different share price levels in the $50 to $60 range. He the sale, citing specifically the duty of candor to disclose
explained that this methodology would not yield a valid fully all relevant information and a duty of care to inform
price for the company but would produce only a reasona- themselves fully before taking action. The monetary award
ble approximation. He told the board that, in his opinion, sought was the difference between the sale price of $55 per
$55 was “in the range of a fair price” but “at the beginning share and the true value of the company.
of the range.” An outside lawyer, who had been retained by Although directors and officers of publicly held corpo-
Van Gorkom to advise the company on the sale, told the rations have a fiduciary duty to shareholders, they also
board, correctly, that a fairness opinion was not legally have the benefit of the business judgment rule, which pro-
required and that they might be sued by shareholders if tects them from shareholder suits alleging a breach of fidu-
they did not allow the shareholders to vote on the offer. ciary duty as long they act reasonably and there is no
At the end of two hours, the directors voted to accept evidence of negligence, bad faith, fraud, or self-dealing.
the proposed agreement, without having read it. The The purpose of the business judgment rule is to insulate
board members later claimed that they had attached two corporate decision making from second-guessing by the
conditions to the agreement that reserved the right to courts and to avoid unnecessary personal risk for individ-
accept a better offer if one were made before the deal was ual officers and directors, which might make them unduly
cautious. According to this rationale, shareholder interests been the highest amount obtainable, it was still a fair price.
are better served if the fiduciary duty of corporate actors is Other critics have stressed the cost involved in gathering
not excessively stringent but is tempered by the business and processing information compared with the benefit for
judgment rule. shareholders and the need to rely on the expert opinion of
The Delaware Supreme Court reversed a lower court company management and professional advisers.
ruling and found that Van Gorkom and the other directors In response to this negative reaction, the Delaware
guilty of a breach of their fiduciary duty. The opinion of the General Assembly passed legislation that allowed corpora-
judge writing for the majority stated the following: tions chartered in the state to protect directors and officers
from shareholder suits for failure to fulfill the standard of
Under the business judgment rule there is no protection
for directors who have made “an unintelligent or unad- fiduciary duty employed in the Trans Union case. The
vised judgment.” A director’s duty to inform himself in effect of this legislation was to permit corporations, with
preparation for a decision derives from the fiduciary shareholder approval, to bypass the decision in the Trans
capacity in which he serves the corporation and its stock- Union case, and, subsequently, virtually all large Delaware-
holders. Since a director is vested with the responsibility incorporated companies have done this. As a result, suc-
for the management of the affairs of the corporation, he cessful suits for breach of fiduciary duty today can be
must execute that duty with the recognition that he acts brought only for egregious cases of fraud, bad faith, or self-
on behalf of others. Such obligation does not tolerate dealing and not merely for the kind of conduct exhibited by
faithlessness or self-dealing. But fulfillment of the fiduci- the directors of Trans Union Corporation.
ary function requires more than the mere absence of bad
faith or fraud. Representation of the financial interests of
others imposes on a director an affirmative duty to protect Shared Writing: The Sale of Trans Union
those interests and to proceed with a critical eye in assess- Explain whether or not Trans Union’s board of directors failed in
ing information of the type and under the circumstances their fiduciary duty to shareholders. If all board members were
present here.57 held to the standard set by the Delaware Supreme Court, what
positive and negative effects might this high standard have on
This decision provoked a strong, immediate reaction, their performance as directors?
with one critic calling it “surely one of the worst decisions Review and comment on at least two classmates’ responses.
in the history of corporate law.”58 One dissenting judge in
the case opined that while the board may not have read the A minimum number of characters is required
material, they were experienced men of business who to post and earn points. After posting, your
response can be viewed by your class and
knew the company thoroughly, had confidence in its top instructor, and you can participate in the
executives, and understood the need, in this case, for quick class discussion.
action. The five outside directors on the board were very
knowledgeable about mergers and acquisitions and had a Post 0 characters | 140 minimum
thorough grasp of Trans Union’s financial condition and
strategic direction. Four of them were CEOs of other com-
panies, and the fifth was a former dean of the University of Chapter 13 Quiz: Governance, Accountability, and
Chicago business school. While $55 per share may not have Compliance
Chapter 14
International Business Ethics
Learning Objectives
14.1 Categorize the various ethical problems that multinational corporations and foreign
multinational companies may face in their contractors should consider to improve on
foreign operations, especially while those set by market mechanisms
conducting business in less-developed
14.4 Evaluate the various forms of bribery and
countries
factors that foster them, the ethical problems
14.2 Explain how the moral concepts of rights, with bribery, and the diverse means and
welfare, and justice offer guidelines for strategies for combating bribery
conducting international business and the
14.5 Relate the challenges multinational
role of global civil society in developing and
companies face in dealing with repressive
enforcing these guidelines
governments, and how a strategy of
14.3 Describe the ethical issues in determining constructive engagement can be applied to
wages and standards for working conditions operations in countries with a record of
in international business, and factors that human rights abuses

Case: Mattel’s Toy Woes from its modest founding in 1945 to a global giant that by 2007
produced 800 million items a year under more than 100 regis-
In 2007, consumers everywhere were alarmed by reports of tered brands, including Fisher-Price toys, Hot Wheels and
hazardous Chinese products, ranging from tainted pet food Matchbox cars, and Barbie and American Girl dolls. Mattel had
and toothpaste to defective automobile tires.1 None of these long experience manufacturing in Asia, with the first Barbie dolls
scares, though, matched the concern in the United States produced in Japan in 1959. Like other toy companies, Mattel
over lead paint on toys manufactured for Mattel in China, sought low-wage labor in developing countries, closing its last
which led to two highly publicized recalls in August of that U.S. plant in 2002; but, unlike its competitors, Mattel recognized
year. On August 2, 2007, Mattel jointly announced, with the the perils of outsourcing production to independent factories.
Consumer Products Safety Commission, a voluntary recall of The needs to ensure product quality and prevent counter-
1.5 million Chinese-made toys containing impermissible feiting led Mattel to own and operate its own plants abroad rather
amounts of lead. Shortly before this announcement, the than outsourcing production to contract factories. Of Mattel’s
company became aware of lead contamination in another 10 company-owned foreign facilities, 5 were in China. By 2007,
line of toys produced by a different vendor, which became 65 percent of Mattel products were made in China, although
the subject of another voluntary recall on August 14. These one-half of its products worldwide were made in company-
­
two recalls undermined the confidence of consumers not owned factories. These Mattel factories manufactured the com-
only in all products made in China but also in the ability of a pany’s most valuable core products, which were vulnerable to
company, even one as diligent as Mattel, to effectively counterfeiting and other problems that could affect brand image.
enforce its stringent standards of safety in an extended The other half, which consisted of less valuable and less vulner-
global supply chain. able, noncore products, was manufactured by independent con-
tract factories, 37 of which Mattel dealt directly with in China.
The Recalls However, these 37 factories used subcontractors, which, in turn,
had their own subcontractors, so that in 2007, Mattel toy produc-
Mattel, Inc., with headquarters in El Segundo, California,
tion in China involved an estimated 3,000 companies.
was the world’s largest toy company by revenue. It grew
325
 The August 2 recall affected products manufactured by Lead paint was not the only hazard known to Mattel at this
Lee Der Industrial, located in Foshan, China, in Guangdong time. Because magnets in some toys could be dislodged and
province, where most toy production was clustered. Mattel ingested by children, resulting in intestinal blockage and rup-
had sourced from Lee Der for 15 years, during which time the ture when the magnets joined together, Mattel also instituted a
Chinese vendor had generally observed the stringent guide- recall of 17.4 million units of some popular magnet-based toys,
lines that Mattel had long imposed to ensure safety. Lead mostly Polly Pocket, Batman, and Doggie Daycare play sets.
paint is a well-recognized hazard due to the serious neuro-
logical effects of lead, especially on the bodies of young chil- Assigning Blame
dren, who are apt to ingest it from chewing on toys. Although
The initial reaction of Mattel was to blame the vendors for viola-
generally banned, lead paint is still in common use because
tions of long-standing rules that the company had carefully devel-
it has a brighter color, is easier to apply to hard surfaces,
oped and implemented. With decades of experience in Asia,
and, most important, is 30 percent cheaper than nonlead
Mattel recognized the risks from long supply chains for materials,
paint. Mattel vendors were permitted to source paint from
and so it insisted that its vendors follow a list of detailed rules
only eight approved suppliers, which were required to test
designed to ensure product quality and safety. One observer
paint batches to ensure that they met standards and to link
commented, “Mattel was in China before China was cool, and
each batch with the certificates of compliance. The vendor
they learned to do business there in a good way. They understood
was responsible for checking the certification of each batch,
the importance of protecting their brand, and they invested.”2
and Mattel checked the records and conducted its own tests
Mattel’s system involved close monitoring but still depend-
at least every three months. Once a vendor was approved,
ed, to some extent, on the vendors’ voluntary compliance, which
it was prohibited from moving production to any new facility
was subject to failure. Robert A. Eckert, the Mattel CEO, com-
without notifying Mattel.
mented that “we wouldn’t have faced this problem if our suppli-
Lee Der, which manufactured 83 different products for
ers followed the rules.” Another executive explained, “I think it’s
Mattel, used three of the approved paint suppliers. One of
the fault of the vendor who didn’t follow the procedures we’ve
these suppliers apparently ran short of yellow paint and found
been living with for a long time.”3 In addition to the recalls, Mattel
on the Internet a company that provided 330 pounds of yel-
stepped up the enforcement of its rules with a three-stage safety
low pigment for a cost of $1,250, accompanied by falsified
check that involved testing every batch of paint by the vendor,
documents that the supplier failed to detect. Later attempts
testing samples of finished products by Mattel, and conducting
to locate this company proved futile, and the individuals in-
random, unannounced inspections of vendors. Mattel also tight-
volved have disappeared. Although Lee Der had equipment
ened the rules requiring that vendors notify the company of the
for conducting lead tests, it was not used for the newly sup-
use of any subcontractors before engaging them and imposed a
plied paint. The lead paint on some Mattel products manufac-
new rule that prohibited subcontractors from outsourcing further.
tured by Lee Der was discovered by a French importer, which
immediately notified Mattel headquarters. Mattel executives Whom did critics blame?
also received a report of lead on some toys from a mother in Critics placed some of the blame on Mattel and the competi-
the United States using a home test kit. At first, Mattel thought tive environment in which the company operates. The toy
that Lee Der had corrected the problem of lead paint, but the industry depends heavily on fads in which a few novel items
company soon realized that it faced a more serious systemic prove extraordinarily popular but sell for very short periods. It is
problem and quickly ceased accepting deliveries from the essential that companies constantly innovate and rush new
troubled Chinese vendor. products into production quickly in the right quantities and at
The August 14 recall involved 460,000 units of the the right times (generally in the last two quarters of the year
Sarge car in the Pixar line from another vendor, Early Light when the vast majority of toys are sold). Above all else, it was
Industrial Company, which Mattel had used satisfactorily for important to find the right price point for marginal consumers.
20 years. In this case, Early Light had subcontracted the Mattel had developed a very rigorous, detailed bidding process
painting of the olive-green roof of the car to another com- that forced vendors to compete not only on quality and delivery
pany but provided the paint from an authorized supplier. but also on price. Although retail customers are price sensitive
However, the subcontractor either ran out of paint or else in buying toys, even more pressure for low prices comes from
sold the paint and bought a cheaper substitute from an un- the giant retailers, such as Walmart, Target, and Toys “R” Us,
approved supplier. Contrary to Mattel rules, the use of the which together account for 45 percent of Mattel sales.
subcontractor had not been disclosed. Following an exten- In China, the rising costs of labor and materials and the rising
sive testing of other products, which revealed more cases value of the currency, the yuan, put tremendous pressure on ven-
of lead paint on toys, Mattel stopped all production in China dors to cut corners wherever possible. One critic noted, “There
until the source of the problem could be discovered and cor- was a lot of scapegoating China, but . . . this was caused by a
rected, and the company instituted another recall of a few system that is designed to push down costs and speed up deliv-
products on September 4, 2007. ery. There are root causes and Mattel is behind those.”4 Although
 scapegoating China took some pressure off Mattel and made it How do you think Mattel responded to these issues?
look like a victim rather than a perpetrator, other critics argued
that the vast majority of recalls were due not to manufacturing
Mattel’s Response
faults, such as lead paint, but to design flaws that originated In response to this unwelcome publicity and to intense pres-
with the toy companies themselves. One study found that over sure from the “anti-sweatshop” movement, Mattel developed
the past 20 years, 76 percent of all recalls of toys were due to a model program that included a set of Global Manufacturing
design problems, such as the loose magnets in Mattel’s mag- Principles. The company also submitted to monitoring by an in-
net-based products, and only 10 percent were caused by faulty dependent organization, the International Center for Corporate
5 Accountability (ICCA), which was willing to be engaged only on
manufacturing.
Mattel’s efforts to blame vendors backfired. Chinese the condition that its reports be made public. In the view of one
government officials and industry leaders feared that the observer, Mattel “has gone further than any other company to
public image being conveyed by Mattel threatened the ex- be a good corporate citizen with regard to its Chinese opera-
port basis of the Chinese economy. The owner of the Lee tions.”6 Although Mattel aggressively addressed problems in
Der factory, Zhang Shuhong, aged 52, committed suicide in the treatment of workers, it did not adopt the same auditing
his empty factory after Mattel ceased accepting deliveries. and monitoring processes for product safety. According to the
Mr. Zhang had a reputation for treating workers well, pay- head of ICCA, “The code was designed to protect Chinese
ing wages on time, and not requiring mandatory overtime. He workers from being exploited. N
­ obody was thinking about un-
had devoted his life to the company and was preparing, at safe products. They were thinking about cheap products.”7
the time, to open a newly completed $5 million plant. His last To allay Chinese concerns about the recalls, Mattel met
act was to order that the machinery be sold so the workers with government officials and issued a press release clarifying
could be paid. that the recall of toys with magnets was a design flaw for which
Mattel has also been criticized for not treating consum- Mattel took full responsibility, and the press release also admit-
er safety with the same kind of care that the company has ted that some of the toys that had been withdrawn from the
devoted to worker protection. Before Christmas 1999, the market had low levels of lead that did not exceed the standards
NBC news program Dateline broadcast a story about Mat- of the United States or any other country. This press release
tel’s alleged use of underage workers in Indonesia, and the was perceived by some as an apology that exonerated the Chi-
magazine U.S. News and World Report featured a cover story nese vendors. Senator Charles Schumer complained, “It’s like
with the headline “Sweatshop Christmas.” At the time, work- a bank robber apologizing to his accomplice instead of the per-
ers, mostly young women on three- to four-year contracts, son who was robbed. . . . They’re playing politics in China
worked 10-hour days, six days a week for around $120 to rather than doing what matters.”8 Mattel responded that its
$175 a month; they generally lived in crowded on-site dor- statement had been “mischaracterized” and replied, “Since
mitories, had their meals deducted from their pay, and were Mattel toys are sold the world over, Mattel apologized to the
often forced into working overtime. Chinese today just as it has wherever its toys are sold.”9

Points to Consider . . . Mattel, find it difficult to ensure the integrity of their prod-
ucts. Environmental standards in developing countries are
Increasingly, business is being conducted across national also invariably lower than those of developed countries.
boundaries. As large multinational corporations (MNCs) MNCs may also operate in countries with repressive gov-
that have long operated in other countries are expanding ernments that routinely violate human rights and in so
their international presence, they are being joined by doing become complicit in their barbarous deeds. This is
smaller domestic firms going abroad for the first time. especially true in extractive industries, such as oil and min-
Intense competition and profitable opportunities are forc- erals, since companies must go where the resources are
ing companies worldwide to enter the global marketplace, located. And in countries with pervasive corruption, it
whether they are ready or not. may be advantageous, and even necessary, to conduct
This development presents a host of ethical problems business by paying bribes, as discussed in Case: Walmart
that managers are often unprepared to address. Some of in Mexico.
these problems arise from the diversity of business stand- Additional problems result from the power of multi-
ards around the world and especially from the lower national corporations to affect the development in emerg-
standards that generally prevail in developing countries. ing economies. MNCs often exploit the cheap labor, lower
Companies are able to pay wages and impose working standards, and natural resources of developing countries
conditions that are shockingly low by U.S. standards, and without making commensurate investments that would
yet they usually operate well above the standards of local advance local economic development. These problems are
firms. With extended supply chains, companies, such as exacerbated when companies successfully avoid onerous
regulations and their fair share of taxes. Even though in the United States? Should they follow the practices of
developing countries invariably benefit to some extent the host country and adopt the adage “When in Rome, do
from the activities of MNCs, the distribution of the gains is as the Romans do”? Or are there special ethical standards
usually unequal. Critics ask whether it is fair for corpora- that apply when business is conducted across national
tions from developed countries to return so little to the boundaries? If so, what are these appropriate standards for
less-developed parts of the world from which they derive international business?
so much. Unfortunately, there are no easy answers to these ques-
Operations in foreign countries also raise questions tions. In some cases, the standards contained in American
about the proper role of corporations in political affairs. law and morality ought to be observed beyond our bor-
Most multinationals consider themselves to be guests in ders; in other cases, there is no moral obligation to do so.
host countries and refrain from influencing local govern- Similarly, it is morally permissible for managers of MNCs
ments. However, Google was widely criticized for enabling to follow local practice and “do as the Romans do” in some
the Chinese government to censor the Internet and thereby situations but not others. Even if there are special ethical
maintain its dictatorial control. MNCs have an opportunity standards for international business, these cannot be
to play a constructive role in countries making the transi- applied without taking into account differences in cultures
tion from a socialist, planned economy to a free market. and value systems, the levels of economic development,
The high levels of repression and corruption in some of and the social, political, and legal structures of the foreign
these countries, though, present special challenges. countries in which MNCs operate.
This chapter begins with the problem of determining
How should multinational corporations conduct business
the appropriate ethical standards for operating globally,
in countries with different cultures and value systems?
especially when multinational companies conduct busi-
ness in less-developed countries. Applying home country In answering this question, there are two extremes.
standards in all parts of the world is generally not morally
• The absolutist position is that business ought to be
required, but adopting host country standards for wages,
conducted in the same way the world over with no
working conditions, and other matters may be morally
double standards. In particular, U.S. corporations
impermissible. The first question addressed is, what prin-
ought to observe a single code of conduct in their deal-
ciples can guide us in finding a justifiable middle ground?
ings everywhere. This view might be expressed as,
These principles are then applied to the issue of wages and
“When in Rome or anywhere else, do as you would
working conditions, especially in factories with which
at home.”10
MNCs contract for the production of their goods. Although
• The opposite extreme is relativism, which may be
bribery is universally recognized as wrong, it, too, is a
expressed in the familiar adage, “When in Rome, do as
practice that is viewed differently around the world and
the Romans do.” That is, the only guide for business
may sometimes be an unavoidable condition of operating
conduct abroad is what is legally and morally accepted
in some countries. Accordingly, a section is devoted to
in any given country where a company operates.
understanding the critical problem of foreign bribery.
Finally, this chapter examines the challenges of dealing Neither of these positions can be adopted without
with repressive governments that engage in massive viola- exception. The generally high level of conduct that follows
tions of human rights. from “When in Rome, do as you would at home” is not
morally required of MNCs in all instances, and they should
not be faulted for every departure from home country
14.1: Different Standards standards in doing business abroad. However, “When in
Rome, do as the Romans do” is not wholly justified either.
14.1 Categorize the various ethical problems that
The mere fact that a country permits bribery, unsafe work-
multinational companies may face in their foreign
ing conditions, exploitive wages, and violations of human
operations, especially while conducting business
rights does not mean that these practices are morally
in less-developed countries
acceptable, even in that country. Even what is legal in a
The main charge against multinational corporations is that country may be difficult to determine, but ascertaining the
they adopt a double standard, doing in less-developed accepted ethical standards is especially problematic. Brib-
countries what would be regarded as wrong if done in the ery, for example, is almost universally condemned, but the
developed world. However, many criticized practices are people in some countries may consider it to be less offen-
legal in the countries in question and may not be consid- sive than those elsewhere, and it may be tolerated (but not
ered unethical by local standards. Should MNCs be bound approved) as an unavoidable practice. In such situations,
by the prevailing morality of the home country and, in the what is the local standard with regard to bribery? The
case of American corporations, act everywhere as they do debates over absolutism and relativism—two of the
­ ositions on the “what to do in Rome” question—revolve
p United States when the country was less affluent and con-
around four important points: cerned with more pressing matters.
• relevant differences between countries, Example: The accident at the Union Carbide plant in
• the influence of different outlooks, Bhopal, India, in 1984, which exposed hundreds of
• the right to decide, and thousands of poor local residents to 40 tons of highly
toxic methyl isocyanate, resulted from some safety
• business necessity.
lapses that would be morally wrong in any country.
Some low levels of safety may be regarded as viola-
14.1.1: Relevant Differences tions of basic human rights anywhere. However, the
Some conditions in other countries, especially those in less- design and operation of the Bhopal plant, which pro-
developed parts of the world, are different in morally rele- duced a much needed pesticide, Sevin, also resulted
vant ways. As a result, different standards may be morally from trade-offs that were favored at the time by the
permitted, indeed required. Indian government to promote agricultural develop-
If Rome is a significantly different place, then standards ment. The plant was located in populous Madhya
that are appropriate at home do not necessarily apply Pradesh state to increase employment there, manual
there. rather than automatic gauges and valves were installed
to create more jobs and cut costs, and a less-safe
First, practices may have different impacts under dif-
method for producing Sevin in which methyl isocy-
ferent conditions, so that what is unethical in one coun-
anate was an intermediate step was used to make the
try may not be so in another. For example, pharmaceutical
pesticide more affordable to poor farmers.13 Although
companies have been criticized for adopting a double
these trade-offs had tragic consequences, some of them
standard in promoting drugs in less-developed countries
might be considered reasonable given the urgent need
with more indications for their use and fewer warnings
of India for a cheap pesticide to grow sufficient food
about side effects. Although such practices may be
for its burgeoning population. Such trade-offs would
designed solely to promote sales—in which case, they
not be made in the wealthier United States at the pre-
may be considered unethical—some drugs may be medi-
sent time, but this country made different trade-offs
cally appropriate in a poor country for a wider range of
between safety and other values at earlier stages of its
medical conditions, and hence may be ethically indicated
economic development.
for them.

Example: With regard to one powerful but dangerous 14.1.2: Variety of Outlooks
antibiotic, which is prescribed in the United States
The absolutist position assumes that one country’s stand-
only for very serious infections, doctors in Bolivia
ards are correct and that they should be imposed on people
claim that this limited use is a luxury that Americans
elsewhere, perhaps in conflict with their own moral values
can afford because of generally better health. “Here,”
and principles. Acting on these assumptions ignores the
they say, “the people’s general health is so poor that
wide variety of ethical outlooks in the world. Although
one must make an all out attack on illness.”11 Thus, an
some bedrock conceptions of right and wrong exist among
antibiotic that should be marketed in the United States
people everywhere, many variations occur due to cultural,
with one set of indications might be justifiably sold
historical, political, and economic factors.
abroad with a more extensive list if, indeed, the drug’s
These differences are important, first, because they
benefits vary according to conditions.
may affect the meaning of acts performed. For example, lav-
Second, the relative level of economic development ish gifts that would be considered bribes or kickbacks in
must be taken into account in determining the appropri- the United States are an accepted and expected part of
ate standards for different countries. Thomas Donaldson business in Japan and some other Asian countries. This dif-
suggests that in evaluating a standard in a less-developed ference in perception is due, in part, to the role that gift
country, we should ask what standard would be adopted giving plays in building relationships, which are more crit-
in our home country if it were at a comparable level of eco- ical in Asian business. Thus, giving gifts in Japan and
nomic development.12 Health and safety standards in the China is usually understood not as an attempt to improp-
developed world are very stringent, reflecting greater erly influence a person’s judgment but rather as a means of
affluence and a greater ability and willingness to pay for cementing a legitimate relationship.14 Similarly, whistle-
more safety. The standards of these countries are not blowing, which is generally viewed favorably in the United
always appropriate in poorer, less-developed countries States as a moral protest, is regarded unfavorably in Japan
with fewer resources and more pressing needs, and lower and China as an act of disloyalty. In both cases, there are
standards for health and safety were prevalent in the differences among people in various countries about the
very meaning of what a person has done in giving a gift or be bribes. Relationships are often the result of school and
blowing the whistle. work ties that arise from decades of interactions and mutu-
The impact of historical, political, and economic differ- ally beneficial exchanges that cannot be quickly duplicated
ences can be seen in Russian views of business ethics. The by outsiders, who consequently feel that they are victims
collapse of communism and the chaotic development of of cronyism. On the other hand, guanxi exists not only
free markets in the former Soviet Union have created great because of the Confucian emphasis on relationships but
uncertainty about ethical business behavior.15 Although also because of the need for trust among business partners
Russians and Americans agree on many matters, such as in a society without legally enforceable contracts and effi-
the importance of keeping one’s word, paying debts, com- cient, transparent markets, which are taken for granted in
peting fairly, and avoiding extortion, they still differ in Western Europe and the United States. Thus, whether the
their ethical assessment of certain other matters. practice of guanxi is ethical depends not only on the ethical
value of relationships but also on their usefulness in over-
Examples: coming a lack of trust in a society that has not yet devel-
• Less stigma is attached in Russia to making pay- oped reliable laws and markets.
ments for favors (blat), falsifying information, and
coordinating prices because of the prevalence of
these practices in the previous planned economy
14.1.3: Right to Decide
and the lack of efficient markets that require imper- The absolutist position denies the right of the people who
sonal, arm’s-length exchange, truthful information, are affected to decide on important matters of business
and accurate prices. The lack of a workable legal conduct. The primary responsibility for setting standards
system forces Russian managers to ignore senseless should rest on the government and the people of the coun-
and contradictory regulations. Unfortunately, a cer- try in which business is being conducted. The argument
tain amount of lawlessness is necessary for operat- that the people affected have a right to decide is not a form
ing in the current business environment. of ethical relativism. The fact that people approve of a cer-
• On the other hand, Russia’s socialist tradition leads tain practice does not make it right. The argument is rather
them to criticize America’s tolerance for exorbitant an expression of respect for the right of people to govern
pay differentials and massive layoffs. their own affairs, rightly or wrongly. Imposing the stand-
ards of a developed country on developing countries is
• As in Japan, whistle-blowing is viewed with suspi-
criticized by some as a form of “ethical imperialism.”
cion, but for a different reason: It reminds Russians
The process of avoiding “ethical imperialism” and
of the informer ethos that existed during the com-
allowing the people affected to decide must be approached
munist era.
cautiously. A respect for the right of people to set their
In addition to historical, political, and economic differ- own standards does not automatically justify corporations
ences, culture can deeply influence not only basic values in inflicting grave harm on innocent people, for example,
but also the nature of a people’s moral thinking. The most or violating basic human rights. Furthermore, it may be
striking feature of East Asian ethics, which is based on the difficult to determine what people have decided. Some
teachings of Confucius or Confucianism, is the central role countries lack the capacity to regulate effectively the activ-
of long-term relationships. These rest on a high level of ities of MNCs within their own borders. The governments
trust and reciprocity among all the parties and require of developing countries are, in many instances, no less
careful attention to each party’s interests so as to maintain committed than those in the United States and Europe to
harmony. In a society built on relationships, ethical obliga- protecting their people against harm, but they do not
tions depend not on universal moral principles that charac- always have the resources—the money, personnel, and
terize the western Judeo-Christian heritage but on the institutions—to accomplish the task.
duties that attend specific roles and relationships. Accord- Some countries with the capacity to regulate multina-
ingly, norms in such a society tend to be relative or situa- tionals lack the necessary will. MNCs, through the exercise
tional rather than absolute and universal. 16 Instead of of economic power, including bribery, are able to influence
known rules that are applied equally to all, moral decisions regulatory measures. The governments of developing
are made on a case-by-case basis with attention to specifics. countries are also careful not to offend the developed coun-
An example of a Confucian-based ethical difference is tries on which they depend for aid. Furthermore, the
the Chinese practice of guanxi, in which business depends absence of laws against unethical business practices is
on a web of long-term reciprocal relationships. Foreigners sometimes part of a pattern of oppression by local elites
complain that because of guanxi, they cannot do business that exists within the country itself, so that MNCs are tak-
in China without first building the necessary long-term ing advantage of the immorality of others when they fol-
relationships, which may involve payments that appear to low the law of countries with corrupt governments.
 Consequently, we need to ask whether a standard in a • Similarly, during the period of apartheid in South
host country, if it is lower than that at home, truly repre- Africa, some American companies defied the gov-
sents the considered judgment of the people in question. ernment and integrated their workforces.
Does the standard reflect the decision that people would There are some situations, however, in which a com-
make if they had the capacity to protect their own inter- pany is morally obligated to withdraw if there is no other
ests effectively? way to do business. Some companies have refused to do
A genuine respect for the right of people to determine business in certain countries because they believe that
which standards to apply in their own country requires a involvement in an immoral system cannot be justified.
careful and sympathetic consideration of what people
WRITING PROMPT
would do under certain hypothetical conditions rather
than what is actually expressed in the law, conventional What to Do in Rome
morality, and commonly accepted practices. Consider the two “when in Rome” sayings that have been applied to
conducting business abroad: “when in Rome, do as you would at
home” and “when in Rome, do as the Romans do.” Write your own ver-
14.1.4: Business Necessity sion of these sayings to describe how MNCs generally should conduct
business in countries with different cultures and value systems, taking
Some practices may be justified where local conditions into account the issues discussed in this section. Explain your view.
require that corporations engage in them as a necessary
The response entered here will appear in the
condition for doing business. This point may be performance dashboard and can be viewed by
expressed by saying, “We don’t necessarily agree with your instructor.
the Romans, but find it necessary to do things their way.”
American firms with contracts for projects in the Middle Submit
East, for example, have complied in many instances with
requests not to station women and Jewish employees in
those countries. Although discrimination of this kind is 14.2: Guidelines
morally repugnant, it is (arguably) morally permissible
when the alternative is to risk losing business in the for Multinationals
­Muslim world. 14.2 Explain how the moral concepts of rights, welfare,
A more complicated case was posed by the boycott of and justice offer guidelines for conducting
Israel, which was begun by the countries of the Arab international business and the role of global civil
League in 1945. In order to avoid blacklisting that would society in developing and enforcing these
bar them from doing business with participating Arab guidelines
League countries, many prominent U.S. companies coop-
If neither home country nor host country standards pro-
erated by avoiding investment in Israel. Other firms, how-
vide complete guidance, what rules or principles should
ever, refused to cooperate with the boycott for ethical
multinational corporations follow? Just as important is the
reasons. (Congress addressed this issue in 1977 by amend-
question of rule-making power or authority. That is, who
ing the Export Administration Act to prohibit American
should rightfully participate in the rule-making process for
corporations from cooperating with the Arab League boy-
the conduct of multinational corporations? In recent dec-
cott against Israel.)
ades, both rule-making power and authority have shifted
As with the other arguments, “There is no other way
from national governments to what has been termed
of doing business” cannot be accepted without some quali-
“global civil society.”18
fications. The alternative is seldom to cease doing business;
This section considers both questions:
rather, the claim that a practice is “necessary” often means
merely that it is the easiest or most convenient way of • First, the basis for guidelines for conduct in interna-
doing business. tional business
Examples: • Second, the role of global civil society in developing
and enforcing these guidelines
• The embargo against Israel greatly complicated the
problem of doing business in the Middle East, but Guidelines for the conduct of multinational corpora-
some companies, including RCA, Coca-Cola, Hertz, tions are based on three main considerations: rights, wel-
and John Deere, were able to avoid cooperating fare, and justice. All of these are relevant moral concepts;
with the boycott and still have business relation- the challenge is determining exactly how they apply to
ships in Arab countries, although their success was international business. These three concepts are further
due, in part, to loopholes and inconsistencies in the incorporated into a number of international codes for
enforcement process.17 global business practice.
14.2.1: Rights to freedom of speech and association), employing child
labor (the right to minimal education), and bribing govern-
Thomas Donaldson has proposed that corporations have
ment officials to violate their duty or seeking to overthrow
an obligation to respect certain rights, namely those that
democratically elected governments (the right to political
ought to be recognized as fundamental international
participation).
rights.19 MNCs are not obligated to extend all the rights of
Donaldson recognizes that it may be impossible to
U.S. citizens to people everywhere in the world, but there
observe all these rights, especially in less-developed coun-
are certain basic rights that no person or institution, includ-
tries where human rights violations are routine. However,
ing a corporation, is morally permitted to violate. Funda-
insofar as the acceptance of a practice in a host country is
mental international rights are roughly the same as natural
due to its low level of economic development, we can per-
or human rights, and some of these are given explicit rec-
form what he calls the rational empathy test:
ognition in such documents as the United Nations Univer-
sal Declaration of Human Rights, the International Would we, in our home country, regard the practice as
Covenant on Social, Economic, and Cultural Rights, and morally permissible under conditions of similar economic
the International Covenant on Civil and Political Rights. development?

Specifying Rights The main problem with a princi- As previously discussed, this test employs home-
ple to respect fundamental international rights (or funda- country standards but asks us to apply them in a hypo-
mental rights, for short) is specifying the rights in question. thetical situation of a lower level of development, which
Even undeniable human rights that create an obligation for may have prevailed in the past.22
some person or institution, such as the government of a Applying Rights Although Donaldson’s list of funda-
country, are not always relevant to a multinational corpo- mental rights sets some minimal conditions for ethical
ration. Moreover, observing a right ranges from merely not behavior, it is not a complete guide for managers.
depriving people of some protection to ensuring the fulfill- First, the bearing of these rights on controversial ques-
ment of a right. For example, everyone has a right to sub- tions is not wholly clear.
sistence, but a corporation may be under no obligation to
feed the hungry in a country where it operates, especially if Example: No one disputes that causing starvation by
doing so has no relation to its business activity. It has an destroying farmland is a human rights violation. But
obligation, however, not to contribute directly to starvation what does the right to subsistence tell us about cases in
by, say, destroying farmland. In general, Donaldson claims, which multinationals convert land from the produc-
a corporation is morally bound only by those minimal tion of domestic crops to foods for export? Even
duties such that “the persistent failure to observe [them] though the MNC is acting within its rights within a
would deprive the corporation of its moral right to exist” free market as a property owner, and even though the
and not by maximal duties whose fulfillment would be country may benefit from more productive use of the
“praiseworthy but not absolutely mandatory.”20 land, the ability of local people to feed themselves may
Donaldson suggests the following fundamental rights be severely curtailed, especially if the increased income
as a moral minimum: from export-driven production is not equitably dis-
tributed in the country. Has the multinational violated
1. The right to freedom of physical movement the right of these people to subsistence? To this kind of
2. The right to ownership of property question, Donaldson’s rights-based approach offers
3. The right to freedom from torture little guidance.
4. The right to a fair trial Second, many of the most difficult moral questions in
5. The right to nondiscriminatory treatment international business do not involve rights at all. Although
6. The right to physical security rights violations by corporations receive great public atten-
tion, they are relatively infrequent. The critical issues at the
7. The right to freedom of speech and association
forefront of global business today focus more on abuses of
8. The right to minimal education power by multinationals and on their failure to aid devel-
9. The right to political participation oping countries.
10. The right to subsistence21 Example: The OECD Guidelines for Multinational
Instances of these rights, according to Donaldson, Enterprises, adopted by the Organization for Eco-
include publicly shaming or penalizing corporations for nomic Cooperation and Development (OECD), covers
not providing safety equipment to protect employees from such matters as competing fairly, disclosing informa-
serious hazards (the right to physical security), using coer- tion, paying taxes, considering countries’ balance-of-
cive tactics to prevent workers from organizing (the right payment and credit policies, utilizing appropriate
 technologies, and aiding economic development. In No company intends to do harm; any harm results rather
general, the goal of the OECD guidelines is to achieve from its regular business activity. However, a company can
a smoothly functioning global economic system that engage in such activity knowing that harm will result. In
spreads the benefits widely, rather than to protect some instances, this harm may be wrong, as when a firm
people’s rights. produces oil in such a way that the land is polluted. On the
other hand, a firm might open a plant that, because of its
In sum, guidelines based on human rights provide a
efficiency, will drive local competitors out of business. This
bedrock moral minimum. As a recent special report from
latter result, unlike the former, is not wrong but is merely
the Secretary General of the United Nations asserts, not
the working of market forces. In a well-functioning econ-
only do states have the duty to protect human rights, but
omy, more efficient producers should replace the less effi-
multinational corporations have a responsibility to respect
cient. For the same reason, polluting oil production (Is
rights in countries where they operate and to remedy situa-
there any other kind?) may be acceptable if the benefits
tions when rights are infringed.23 This “Protect, Respect,
outweigh the costs. What DeGeorge’s first guideline pre-
and Remedy” framework forms the core of the United
sumably excludes is pollution that results from unjustifia-
Nations Guiding Principles on Business and Human
bly low standards. What standards ought to be adopted,
Rights. However, the application of these rights-based
however, is a question not merely about the harm done but
guidelines is difficult in more controversial situations
about the benefit gained—and also about how these ought
where guidance is most needed. It is unclear, for example,
to be distributed.
what type and degree of remedy multinational corporations
The same problems afflict DeGeorge’s second guide-
should provide when the violation of rights is due largely
line, do more good than harm. Economic theory tells us that
to a weak or corrupt government. The guidelines are also
all voluntary exchange results in more good than harm for
inapplicable to many other pressing matters, such as
the reason that no one makes a trade that is not beneficial.
whether cooperation between a multinational corporation
Thus, as long as a multinational corporation offers employ-
and a state should be suspended due to the government’s
ment in a factory and workers in a developing country are
violation of its citizens’ rights in areas unrelated to the
willing to accept, then everyone is better off. This defense
cooperative venture.
of multinationals’ presence raises two questions.

• How much more good than harm should a multina-

14.2.2: Welfare tional bring to a country like Indonesia?
Richard DeGeorge offers seven basic guidelines for multi- • Second, does it matter that multinationals are often
national corporations that cover a variety of moral consid- able to use their market power to reap most of the ben-
erations, including rights. However, several of these rules efit, leaving the host country with a narrow balance of
concern avoiding harm and providing benefits. His guide- good over harm?
lines are as follows:
The answers to these questions depend not on whether
1. Multinationals should do no intentional direct harm. more good than harm is produced but on whether the out-
2. Multinationals should produce more good than harm come is obtained justly.
for the host country. Multinationals are criticized primarily in cases where
3. Multinationals should contribute by their activity to they take more than a fair share by exploiting their supe-
the host country’s development. rior position in an imperfect market. A developed country,
such as the United States, attempts to maintain perfect
4. Multinationals should respect the human rights of
markets by preventing monopolies and other conditions
their employees.
that reduce fair competition. However, the marketplace
5. To the extent that local culture does not violate ethical that MNCs encounter in less-developed countries is highly
norms, multinationals should respect the local culture imperfect. Under such circumstances, some outcomes may
and work with and not against it. be criticized for resulting from unfair competition. As
6. Multinationals should pay their fair share of taxes. Manuel Velasquez observes, DeGeorge’s approach “fails to
7. Multinationals should cooperate with the local gov- take seriously the importance of justice in evaluating the
ernment in developing and enforcing just background activities of multinationals.”25
institutions.24

The first three of these guidelines express in different 14.2.3: Justice

ways a duty to consider the welfare of people in a host Much of the criticism of multinational corporations rests
country. The first, do no intentional direct harm, is vacuous if on considerations of justice. Even when MNCs respect
it excludes all actions with a legitimate business purpose. human rights and produce more good than harm, their
activities may still be criticized for being unfair or unjust. firms, so the possible loss of tax revenues is enormous.
This is true even for the outcomes of voluntary market Consequently, the major countries of the world are trying
exchanges when they occur in imperfect markets, as when to tighten accounting standards to prevent abuses. The
a multinational exploits a monopoly position. OECD Guidelines for Multinational Enterprises requires
firms to disclose financial statements on a regular basis and
Distribution of Benefits One kind of unfairness
provide relevant information requested by taxing authori-
cited by critics is the often one-sided distribution of the ben-
ties. Furthermore, the Guidelines states that an enterprise
efits from foreign investment. Certainly, the gap between
should “[r]efrain from making use of the particular facili-
rich and poor countries is an urgent moral concern, and
ties available to them, such as transfer pricing which does
multinational corporations have much to offer. Thus, the
not conform to arm’s length standard, for modifying in
third of DeGeorge’s guidelines is that “[m]ultinationals
ways contrary to national laws the tax base on which mem-
should contribute by their activity to the host country’s
bers of the group are assessed.” This arm’s-length standard
development.” The main questions, however, are:
is feasible when a market exists for the good in question,
1. Who should act to aid the development of the country and for other goods a market price can be approximated by
where a foreign business is investing? calculating the costs of production.26
2. What should be done to aid in this development?
If avoiding taxes by means of transfer pricing violates no
National governments and world organizations are laws, why should multinationals not take full advantage
the primary actors, and it is questionable what role multi- of this opportunity?
nationals should play. What should they do to aid develop-
The same question can be asked of paying bribes,
ment other than engage in business activity?
offering kickbacks, and similar practices. One answer,
The answer to the first question depends, in part, on
offered by Norman E. Bowie, is that these actions violate
how we answer the second question about what should
the rules that are required for markets to operate. The very
be done. What is the most effective strategy for aiding
possibility of market exchanges depends on the general
developing countries? The main approach being taken
observance of certain rules of honesty, trust, and fair deal-
today is to increase foreign investment and export pro-
ing. Because businesses benefit from the marketplace that
duction in an increasingly integrated world economy. If
these rules make possible, they are taking an unfair advan-
this ­development—generally called globalization—is the
tage, being a freeloader so to speak, by simultaneously vio-
most effective strategy, then multinational corporations
lating these rules. “Contrary behavior,” Bowie writes, “is
can contribute best by being efficient—but responsible!—
ultimately inconsistent and self-defeating.”27
businesses. Indeed, if MNCs are expected to expend
An obvious difficulty is determining the essential
resources on development, they may then choose not to
rules for markets to operate. That problem aside, is avoid-
invest in poorer countries, thus depriving them of any aid.
ing taxes by means of transfer pricing really a violation of
However, opponents of globalization, such as the protest-
market morality? One might argue that transfer prices
ers at meetings of the World Trade Organization (WTO),
should be set in ways that have the clear economic pur-
propose other strategies for development that would place
pose of enabling a company to compete effectively in the
greater responsibilities on multinational corporations.
marketplace. Setting transfer prices for no purpose other
Rules of the Market Another kind of unfairness is than reducing taxes is not a genuinely competitive activity
violating the rules of the market, which is to say engaging but merely an exercise in tax reduction for its own sake.
in unfair competition and otherwise taking unfair advan- Indeed, whether a transaction serves a reasonable busi-
tage. One example is the ability of multinationals to avoid ness purpose is a test that U.S. courts use to determine
paying taxes by means of transfer pricing. Transfer prices whether a tax shelter is legal.
are the values assigned to raw materials and unfinished Individually, the concepts of rights, welfare, and jus-
products that one subsidiary of a company sells to another. tice do not provide complete guidance for MNCs in
Because transfer prices are set by the company and not the addressing the many moral challenges of operating in a
market, they can be raised or lowered so that most of the global environment, but each one is appropriate for certain
profits are recorded in countries with low tax rates. This problems, and used together they form a powerful
use of transfer pricing is facilitated by the fact that multina- resource. The successful use of these guidelines depends
tionals are usually able to avoid disclosure of the relevant on a careful analysis of any given ethical problem to deter-
financial information. As a result, host countries often have mine the relevant moral considerations and the specific
little knowledge of a company’s true financial situation. factual details of the situation. These guidelines cannot be
Tax avoidance through transfer pricing is a critical applied, moreover, without a deep understanding of and
problem for both developed and developing countries. respect for the local context—the history, politics, economy,
Approximately a third of world trade takes place within and culture—of the country in question. The guidelines
can gain further force and clarity by being incorporated business leaders, meeting in Caux, Switzerland, developed
into international codes of ethics to which multinational the Caux Roundtable Principles for Business.
corporations can subscribe. These codes have many features in common and cover
the following areas:

14.2.4: International Codes 1. employment practices,

Given the diversity of ethical outlooks in the world, is it 2. consumer protection,

possible to agree on a single code of ethics for business 3. environmental preservation,
worldwide? Such a goal must be achievable if globaliza- 4. political involvement,
tion is to succeed. The theologian Hans Küng has observed
5. bribery and corruption, and
that “the very phenomenon of globalization makes it clear
6. human rights violations.
that there must also be a globalization of ethics.”28 Sub-
stantial agreement is being achieved through a number of They draw strength from the widespread recognition
codes that have been developed by international organiza- that the guidelines represent universal values, which give
tions involving governments, international governmental them moral authority. William C. Frederick finds four basic
bodies (such as the United Nations), multinational corpo- ethical concerns from which international codes derive
rations, and other private organizations, including non- moral authority: national sovereignty, equality, market
governmental organizations (NGOs). All of these diverse integrity, and human rights (see Figure 14.1). Any guide-
actors are participants in global civil society. lines not supported by these sources—to aid in a country’s
The foundational document for human rights is the development, for example—do not have strong moral
1948 United Nations Universal Declaration on Human authority and hence are less effective.
Rights. In 1966, the United Nations adopted two agree-
ments that have subsequently been ratified—and, to dif-
fering degrees, implemented—by the major countries of Figure 14.1 Moral Authority of International Codes30
the world: the International Covenant on Social, Eco- An effective code of ethics for international business derives its
nomic, and Cultural Rights and the International Cove- moral authority from a respect of four basic ethical concerns.
nant on Civil and Political Rights. Since 1972, the United
Nations had been developing a code of conduct for multi-
Sources of
national corporations, a project that never came to com- Moral
pletion. However, in 2000, the UN, under the leadership of National Authority Human
Secretary-General Kofi Annan, launched the Global Com- Sovereignty Rights
pact, which consists of 10 principles covering human
rights, labor, anticorruption, and the environment. The
premise of this agreement is that “business, as a primary Equality Market
driver of globalization, can help ensure that markets, com- Integrity

merce, technology and finance advance in ways that ben-

efit economies and societies everywhere.” By 2014, more
than 7,000 businesses in 145 countries had become signa- How are these codes enforced?
tories of the Global Compact.
The International Labour Organization, which dates Global Civil Society?
from 1919 and is now a specialized agency of the United The development and enforcement of these codes lie in the
Nations, sets many international standards, including realm of global civil society, which is the result of a redistribu-
those of the Tripartite Declaration of Principles concerning tion of power among nation states, international bodies, pri-
Multinational Enterprises and Social Policy (1977). More vate corporations, industry groups, and private NGOs. With
recently, the OECD, whose members are the more devel- a decline in the power of nation states—and also in the ab-
oped countries of the world, has adopted the OECD Guide- sence of international government, which has not developed
lines for Multinational Enterprises. Several interfaith as many expected after World War II—the main alternative is
religious bodies have developed codes. The most promi- voluntary, collaborative rule making by a combination of pub-
nent are the Principles for Global Corporate Responsibility, lic and private actors. Regulation within a state consists of
adopted by the U.S.-based Interfaith Center on Corporate codified, legally enforceable rules that originate with legisla-
Responsibility and similar organizations in Great Britain, tures, regulatory agencies, and other bodies with rule-making
Ireland, and Canada, and the Interfaith Declaration on authority. Civil society regulation, by contrast, develops from
International Business Ethics, which resulted from a dialog multiple sources, largely outside governments, often in re-
among Christians, Jews, and Muslims.29 A group of world sponse to urgent needs for guidance.31 The resulting rules
are commonly enforced through the benefits of compliance “the Nike product has become synonymous with slave
and the threat of retaliation for not cooperating. Although wages, forced overtime, and arbitrary abuse.”33 How did a
compliance is usually voluntary, countries and companies prominent company, whose “swoosh” logo is a symbol for
usually find it in their interest to abide by the major codes. the “Just Do It” spirit, come to be associated with deplora-
ble labor practices?
The rise of global civil society regulation poses great
challenges for multinational corporations. Instead of Case: Nike in Southeast Asia
merely passively complying with national laws and per-
Nike’s phenomenal success is due to a visionary strategy that
haps actively lobbying governments in nation states,
was developed by Phil Knight during his student days at the
MNCs have been thrust into an unaccustomed rule-­making
Stanford Business School. The strategy involves outsourcing
role in which they must interact extensively with nonstate
all manufacturing to contractors in low-wage countries and
actors, especially NGOs. In fulfilling this role, they assume
pouring the company’s resources into high-profile marketing.
a kind of political power that they do not possess in nation
One Nike vice president observed, “We don’t know the first
states.32 This role requires MNCs to develop a high degree
thing about manufacturing. We are marketers and design-
of competency in social matters in order to engage effec-
ers.”34 Central to Nike’s marketing effort was placing the Nike
tively in this global rule-making process, and it also
“swoosh” on the uniforms of collegiate and professional ath-
requires them to exercise a degree of responsibility suffi-
letes and enlisting such superstars as Michael Jordan and
cient to gain legitimacy in this new role.
Tiger Woods. When Nike was founded in 1964, the company
The guidelines for multinationals and the various
contracted with manufacturers in Japan, but as wages in that
international codes of ethics that are discussed in this sec-
country rose, Nike transferred production to contractors in
tion are applied in the following three sections to the prob-
Korea and Taiwan. By 1982, more than 80 percent of Nike
lems of wages and working conditions, foreign bribery,
shoes were made in these two countries, but rising wages
and countries with repressive governments that violate
there led Nike to urge its contractors to move their plants to
human rights.
Southeast Asia. By 1990, most Nike production was based
in Indonesia, Vietnam, and China.
WRITING PROMPT In the early 1990s, young Indonesian women working in
International Codes of Ethics
plants under contract with Nike started at 15 cents an hour.
How helpful do you think international codes are in guiding decisions
With mandatory overtime, which was often imposed, more
and helping to resolve day-to-day ethical problems? What are the experienced workers might make $2 for a grueling 11-hour
advantages and disadvantages of adopting individual company day. The Indonesian minimum wage was raised in 1991 from
codes rather than industry-wide codes?
$1.06 for a seven-hour day to $1.24, only slightly above the
The response entered here will appear in the $1.22 that the government calculated as necessary for “min-
performance dashboard and can be viewed by imum physical needs.” The women lived in fear of their often
your instructor.
brutal managers, who berated them for failing to meet quo-
tas and withheld pay to enforce discipline. Indonesian labor
Submit laws, lax to begin with, were flouted with impunity by con-
tractors, since the government was eager to attract foreign
investment. Workers often toiled in crowded, poorly venti-
14.3: Wages and Working lated factories, surrounded by machinery and toxic chemi-
cals. There was little effective union activity in Indonesia, and
Conditions labor strikes were firmly suppressed by the army.
Nike’s initial response to growing criticism was to deny
14.3 Describe the ethical issues in determining wages any responsibility for the practices of its contractors. Their
and standards for working conditions in stance was that these were independent companies from
international business, and factors that which Nike merely bought shoes. The workers were not
multinational corporations and foreign contractors Nike employees, and their wages were above the legal mini-
should consider to improve on those set by market mum and the prevailing market rate. When asked about
mechanisms labor strife in some factories supplying Nike, John Wood-
In 1998, Nike was the leader in the sports shoe industry, man, the company’s general manager for Indonesia, said
with annual sales of $9.5 billion and a 40 percent share of that he did not know the causes and added, “I don’t know
the American sneaker market, when it became a lightning that I need to know.”35 Mr. Woodman defended Nike by
rod for worldwide protests over alleged “sweatshop” con- arguing, “Yes, they are low wages. But we’ve come in here
ditions in factories across Southeast Asia. In a May 1998 and given jobs to thousands of people who wouldn’t be
speech, Phil Knight, the founder and CEO, admitted that working otherwise.”36
 Public concern about multinational corporations has c­onditions. As long as workers are willing to accept
focused in recent years on manufacturing companies, pri- employment on the terms offered, then almost any mutu-
marily in the footwear, apparel, toy, and electronics indus- ally agreeable arrangement is justified. It then follows that
tries, and their relations with foreign contractors. Virtually no wage can be too low in a free market. However, using
all major manufacturers of consumer and light industrial the market as a mechanism for determining acceptable
products have adopted the strategy pioneered by Nike and standards for wages and working conditions in developing
outsourced the actual assembly to contractors in Southeast countries encounters two obstacles.
Asia and Central America. This development benefits con- 1. Need for Minimum Standards. First, even developed coun-
sumers and industrial buyers everywhere by lowering the tries do not rely solely on the market but set certain min-
cost of goods, and jobs are created in countries that desper- imum conditions by law, such as minimum wage laws,
ately need them. Overall, the manufacture of goods in fair labor standards, and health and safety regulations.
countries with low labor costs is advantageous to devel- These conditions reflect, in part, the recognition of cer-
oped and developing countries alike. tain human rights that ought to be observed in all eco-
To many critics, however, the benefits must be weighed nomic activity. Thus, one rationale for minimum wage
against a long list of wrongs that includes very low wages laws is that it is unjust to pay workers less than a cer-
and substandard working conditions, as well as the use of tain amount. That is, some wages are unjustifiably low,
child labor, lack of contribution to local development, and even if enough workers would accept them. Although
association with repressive regimes. Some of the factories multinational corporations and their foreign contractors
operated by multinationals and their foreign contractors generally pay the legal minimum wage in the countries
are alleged to be “sweatshops” of the kind that operated in where they operate, this amount often provides only a
developed countries until the passage of protective legisla- basic subsistence for one person, if that. Consequently,
tion in the early twentieth century. The critics also question critics argue that the standard should be a “living wage”
the ability of foreign contracting to advance economic that enables a worker to live with dignity and support a
development. Instead of improving the lives of people, family, given the local cost of living.
they charge, the contracting system leads to greater misery
2. Poor Market Conditions. The second obstacle to using the
for the bulk of the population and to a wider gap between
market to set wages and working conditions is the pos-
the rich and the poor. Although outsourcing may benefit
sibility that the conditions for a free market that gener-
developed countries by the cheaper products that are
ally prevail in developed countries are lacking in the
imported, these countries may be harmed when the
less-developed world. In particular, the mass of unem-
exported jobs create unemployment at home.
ployed, desperately poor people in less-developed
countries constitutes a pool of workers willing to accept
WRITING PROMPT
bare subsistence wages. The market for labor in any
“Made in . . . ?”
given country may also be artificially low because of lax
If consumers look at product labels to see where the items were
enforcement of worker protection laws and political
manufactured, what additional information about the working condi-
tions in that country would they need to be aware of in order to repression that prevents workers from organizing.
make an ethical choice about purchasing it? Although the role of correcting such market failures gen-
The response entered here will appear in the
erally falls to national governments—by enacting and
performance dashboard and can be viewed by enforcing minimum wage laws, for example—this form
your instructor. of protection is often uncertain in less-developed coun-
tries with weak, corrupt, or oppressive governments.
Submit Consequently, we need to consider the extent to which
market forces should be allowed to operate in the setting of
wages and the extent to which principles of human rights
14.3.1: Setting Wages
ought to be applied. In setting wages, the two extremes are
How should the standards for wages and working condi- a human rights-based “living wage” and a pure “what the
tions be determined? market will bear” economic determination—with the pos-
One answer is that these standards should be set by the sibility of somehow combining elements of both.
market. In developed countries, the determination of In addition to identifying the morally appropriate
wages and working conditions results primarily from the level of pay and the method for determining this level,
competition among employers for desirable workers, there are questions about responsibility:
which compels them, generally, to offer high wages and Should the tasks of identifying and determining wage
good working conditions. On this view, there is nothing levels be the responsibility of multinational corporations
unjust about jobs with lower pay and poorer working or the host countries—or some combination of the two?
Argument for Market Wages  In support of the ing the number of jobs available), but the effect in a less-
market mechanism, economists argue that the wages paid developed country is different. A relatively small minority
by multinational corporations and their foreign contrac- of urban workers, who already make above-average
tors are usually above the minimum wage and the pre- wages, may benefit, but the vast majority will suffer for the
vailing market rate. As a result, the jobs in these factories lack of jobs, and the economy will not develop for lack of
generally pay better than work in local enterprises, and foreign investment. For this reason, the economist Jagdish
regular employment in the formal economy is vastly Bhagwati contends, “Requiring a minimum wage in an
superior to work in the informal sector, which includes overpopulated, developing country . . . may actually be
agriculture, domestic service, and small, unregulated morally wicked.”37
manufacturing. Even so, the wages paid for factory work
are seldom sufficient to provide what the nation’s govern- Arguments against Market Wages  Critics of
ment calculates as the minimum for a decent standard of the economic argument counter that it fails to consider the
living or the minimum physical needs for one person, let possibility of exploitation. It assumes that whatever wages
alone a family. In many poor countries of Southeast Asia people are willing to accept is just without considering the
and Central America, the minimum wage set by law is lack of alternatives for many workers, who are, arguably,
below the official poverty level. coerced into settling for low pay. However, most of the
Moreover, economists warn that raising the pay scales jobs in question are among the best paying in these less-
in a developing country has serious adverse consequences. developed countries, so the case for exploitation is weak.
Well-intentioned efforts to improve the condition of fac- Moreover, the “living wage” position seems to entail that
tory workers will ultimately reduce the number of jobs and no job at all is preferable to one below the living-wage
the level of foreign investment. If a government raises the standard. Although developing countries are forced to
minimum wage or multinationals and foreign contractors keep wages low in their competition with each other to
are pressured to pay above-market wages, the result will attract foreign investment, they still seem to prefer all the
be a reduced incentive to relocate jobs from higher-wage low-wage jobs they can get, regardless of whether they
countries, which tend to have more productive workers pay a “living wage.”
and a better infrastructure for manufacturing. Workers in A second argument of critics is that higher pay could
developed countries command a higher wage because of be offered without much impact on multinational corpora-
greater skills and knowledge, as well as access to technol- tions or their customers in developed countries. Critics
ogy; infrastructure, such as transportation and markets, observe that the labor cost for a pair of shoes or a shirt is
further increases the advantages of employing high-wage usually a few cents and that paying a few cents more
workers. Consequently, firms will have little reason to would add little to the ultimate price. However, this obser-
move to a less-developed country unless it offers signifi- vation overlooks the point that the labor of any one worker
cantly lower labor costs to compensate for the lower pro- may earn only a few cents, but much more labor goes into
ductivity and inferior infrastructure. a pair of shoes or a shirt than that required for assembly. If
Low labor costs constitute a competitive advantage for all the workers who make the raw materials and provide
a poor country, and attracting investment on this basis pro- other resources involved in production are considered,
vides jobs that can lead to greater development. Indeed, then paying each one a few cents more per item for his or
formerly low-wage countries, such as Korea, Taiwan, and her contribution would constitute a considerable amount
Malaysia, have successfully employed this strategy for cre- and would discourage a multinational from investing in a
ating higher-paying jobs. If firms do not take advantage of developing country.
the low-cost labor in countries like Indonesia and Vietnam, The dispute between those who advocate paying the
then they are depriving these countries of the opportunity market rate for labor and those favoring a “living wage” is
to use their main competitive edge, namely unemployed not over the ultimate end, which is to improve the welfare
workers, to begin the process of development. This com- of people in developing countries. The difference lies in the
petitive advantage is also lost if multinational corporations appropriate means. Economists argue that requiring higher
and their foreign contractors are required, say by public wages is counterproductive; it harms the very people we
pressure, to pay above-market wages, since there would be are trying to benefit. The only path to prosperity is eco-
little incentive for multinationals to relocate. nomic development, and this requires an attractive climate
This economic argument shows, first, why less-­ for foreign investment. Proponents of a “living wage”
developed countries should not raise the minimum wage believe, on the other hand, that payment of wages above a
beyond the market value of its labor. In a developed coun- certain level is morally required. To offer less than a “living
try, raising the minimum wage generally benefits low- wage” is to unjustly exploit an opportunity for cheap labor.
wage workers without much effect on others (although As discussed earlier, a minimum wage is intended to
some argue that low-wage workers are harmed by reduc- protect workers from the exploitation that could result if
wages were set solely by market forces, but most often it is to organize. In some instances, young women have been
not a “living wage.” See Figure 14.2 below. forced to take contraceptive pills or undergo pregnancy tests,
and they have been dismissed for becoming pregnant. Many
factories lack adequate ventilation, sanitation facili-
Figure 14.2 Legal Minimum Hourly Wage in OECD Countries, 2015 ties, medical supplies, and fire safety provisions,
The Organization for Economic Cooperation and Development (OECD) is an and workers often have little protection from dan-
international organization that promotes economic growth and development. The
gerous machines and toxic chemicals.
graph shows the minimum wage in some OECD nations as the net hourly pay
(after taxes), adjusted for purchasing power in U.S. dollars. This means that the Certainly, some deplorable working condi-
listed wages allow workers to buy a comparable amount of goods as they would tions are morally unjustifiable. However, the eco-
in the U.S. The adjusted wages in this chart do not “buy more” in countries nomic argument about wages also applies to
where the cost of living is lower.
working conditions inasmuch as both are matters
Based on these values, would you consider the minimum wage a “living wage” in
any of the countries shown? How many hours would a minimum-wage earner in
of cost. In some instances, though, workplace
each country need to work in order to purchase basic life necessities or maintain abuses—such as degrading punishment, forced
a modest standard of living? overtime, and confinement to company quarters—
Source: OECD, “FOCUS on Minimum wages after the crisis: Making them pay,” May 2015
have little or no economic justification. However,
Mexico 1.01 costs, as well as benefits, are relevant factors in
Latvia 1.46 determining a morally justifiable level for working
Chile 2.22 conditions. According to a World Bank report,
Estonia 2.49
“Reducing hazards in the workplace is costly, and
Hungary 2.58
Czech Republic 2.84 typically the greater the reduction the more it
Slovak Republic 2.99 costs. . . . As a result, ­setting standards too high can
Turkey 3.49 actually lower workers’ welfare.”38
Poland 3.59
One reason for this outcome is that invest-
Portugal 4.41
Greece 4.42
ment to improve working conditions may come at
Israel 4.87 the expense of wages. More significantly, if higher
Slovenia 5.14 standards inhibit foreign investment, then fewer
Spain 5.37 jobs are created and more of those available are in
Japan 5.52
local industries with lower pay and working con-
Korea 5.85
United States 6.26 ditions. Still, working conditions below some
United Kingdom 7.06 basic level should not be permitted by any multi-
Canada 7.18 national corporation, and a consensus has
Germany 7.19 emerged among multinational corporations about
New Zealand 7.55
this level. The main focus now is on how best to
Netherlands 8.20
France 8.24 implement working condition ­standards.
Ireland 8.46
Belgium 8.57 Developing a Code For many companies,
Luxembourg 9.24
Australia
the first step has been to adopt codes of conduct
9.54
for their own operations and those of contractors.
$0 $1 $2 $3 $4 $5 $6 $7 $8 $9 $10
In 1992, six years before conditions in its factories
US $ per Hour
across Southeast Asia sparked protests around the
world, Nike adopted a “Code of Conduct” and a “Memo-
14.3.2: Working Conditions randum of Understanding,” which were included with all
When the television personality Kathie Lee Gifford was contracts. The Nike code specified the following conditions:
confronted in 1996 with evidence that the line of clothes
she endorsed was made in Honduras by young girls 13 • It forbade hiring anyone under 18 in shoe manufacture
and 14 years old, working 20-hour days for 31 cents an and under 16 for producing clothing (unless higher
hour, she resolved to correct these abuses. The same year, ages are mandated by law).
Life magazine published a photograph of a 12-year-old boy • It stipulated that workers be paid the higher of the
in Pakistan stitching a Nike soccer ball. Phil Knight replied legal minimum wage or the prevailing wage, with a
that “Nike has zero tolerance for under-age labor.” Reports clear, written accounting of all hours and deductions.
on contractors for other American companies described • Although forced overtime is permitted, provided
women who were confined to factory compounds, berated employees are informed and fully compensated
and beaten for violating rules or failing to meet quotas, for- according to local law, the code required one day off in
bidden to use toilets, and fired for protesting or attempting seven and no more than 60 hours a week.
 Nike also developed a comprehensive Management of around the globe—not to mention the cost of $3,000 to
Environment, Safety and Health (MESH) policy that pro- $6,000 for each factory visit—are daunting enough, but the
vided for safety standards, a safety committee in each fac- participants have sharply disagreed on issues of principle.
tory, and free personal protective equipment for at-risk For starters, who should do the monitoring? Accounting
employees. firms often lack expertise in local situations, whereas activ-
Although these actions addressed the major areas of ist groups may not be wholly objective. What qualifications
concern, critics charged that Nike had not gone far enough should monitors have? How should audits be conducted?
by 1992 in setting high standards. In 1990, Reebok, a Nike Should audits be unannounced or scheduled in advance?
competitor, adopted a far-reaching human rights policy Should all of a firm’s contractors be audited or only a sam-
and inserted human rights language in its contracts. Ree- ple? Should the reports be made public? What actions
bok also committed itself to auditing its contractors for should be taken when violations are discovered?
compliance with the human rights policy. Nike, too,
Remaining Problems As these questions suggest, the
agreed to auditing by hiring the firm Ernst & Young to
solution to the problem of sweatshops requires a sustained,
conduct site visits of its contractors. In 1996, Nike also
committed effort by all concerned parties. Considerable pro-
hired the civil rights leader Andrew Young to investigate
gress has been made on working conditions—but not on
factories in Asia and to report his findings. Both efforts
wages. A New York Times article profiled a woman who was
were denigrated by critics, who challenged the compe-
fired in 1995 for protesting conditions at a factory in El Sal-
tence of these parties to conduct thorough audits and
vador. Six year later, the woman returned to work at the fac-
questioned their independence inasmuch as Nike was
tory where workers now enjoy coffee breaks in a terrace
footing the bill. Nike’s commitment was further under-
cafeteria and work in clean, breezy surroundings, but she
mined when an internal Ernst & Young report, leaked to
earns only 60 cents an hour, 5 cents more than before.39
the press in 1997, revealed serious health and safety issues
Child labor presents an especially thorny issue.
in a Vietnamese factory.
Although an estimated 150 million children under the age of
14 work worldwide, less than 5 percent of these make goods
Industry Action As illustrated by the struggles of
for export. The vast majority are employed in the informal
Nike and Mattel (discussed in Case: Mattel’s Toy Woes),
economy that contains the most dangerous jobs. Virtually
the challenges of managing foreign contractors are beyond
every country bans child labor, but enforcement is often inef-
the capability of any single company and require an indus-
fective. Although multinationals should abide by the law
try-wide approach.
and refrain from employing children, the main challenge is
• First, imposing higher standards on contractors, moni- how to deal with existing factories that employ children. A
toring their factories, and enforcing compliance are New York Times editorial observes, “American consumers are
costly, and any firm that incurs these costs when its com- right to insist that the goods we buy are not made with child
petitors do not is put at a competitive disadvantage. labor. But these efforts will backfire if children kicked out of
• Second, each firm deals with thousands of contractors, these factories drift to more hazardous occupations.”40
which in turn manufacture for many brands. The only In response to this problem, the International Labour
solution, therefore, is an industry-wide effort. Organization has worked with governments and busi-
nesses to establish special schools for approximately 10,000
The first initiative occurred in 1997 with the launch of
children who worked in garment factories and to pay their
the Apparel Industry Partnership (AIP), which Nike imme-
parents for the lost wages. Ultimately, the solution to the
diately joined. Convened by the White House, a group of
problem of child labor is not merely to prohibit the employ-
industry, labor, consumer, and human rights leaders com-
ment of underage workers but also to provide schooling
mitted themselves to develop a strong workplace code of
for children and jobs for parents so that child labor is no
ethics with internal monitoring and an independent, exter-
longer an economic necessity.
nal monitoring system. The AIP was succeeded the next
year by the Fair Labor Association (FLA), which has pre-
served the same goals. In response to the concern of college 14.4: Foreign Bribery
students, the Worker Rights Consortium (WRC) was organ-
14.4 Evaluate the various forms of bribery and factors
ized to address specifically the conditions under which col-
that foster them, the ethical problems with bribery,
legiate apparel with a school’s logo is manufactured.
and the diverse means and strategies for combating
The experiences of the FLA and the WRC reveal sub-
bribery
stantial agreement on principles and standards, although
the issue of a “living wage” has been divisive. The main Bribery is one of the most common and controversial issues
stumbling block has been monitoring. The practical diffi- that multinational corporations face. Bribery is universally
culties of monitoring tens of thousands of contractors condemned, and no government in the world legally
­ ermits the bribery of its own officials. However, bribery
p i­nterest of a country’s people, and a briber makes a pay-
exists to some extent in every country and is endemic to ment with the intention of inducing an official to violate
more than a few. The main ethical question about bribery is that duty. This violation of duty is a form of corruption. A
whether companies are justified in making corrupt pay- ­corrupt official, the bribee, is one who willingly accepts a
ments when they believe them to be necessary for doing payment—often after a request or a demand—that would
business in a corrupt environment. lead him or her to act in a way that violates a duty. A bribe
occurs once an offered payment has been accepted, regard-
Although the demand for a bribe may be unethical, is it
less of whether the bribee acts as the briber intends. Indeed,
unethical to give in to a demand?
such a failure to achieve the desired result is one of the
Those who pay bribes often appeal to the slogan, “We risks of offering a bribe to a corrupt official since such a
don’t agree with the Romans, but find it necessary to do dishonest person is not easily trusted.
things their way.” Others may defend their actions by cit- In a common scenario, bribes are made in cash pay-
ing the fine line between outright bribery and other kinds ments either directly in “under-the-table” transactions or
of more innocent payments. Some even argue that bribery, indirectly through deposit in a bank account. However, the
under certain conditions, is a beneficial practice. The forms of payment, which are numerous, can include seem-
United States has legally prohibited certain kinds of pay- ingly legitimate arrangements, such as:
ments since the passage of the Foreign Corrupt Practices
• a relative or confederate is hired, usually for little or no
Act (FCPA) in 1977, and more recently other developed
work;
countries have agreed to make payments to foreign offi-
cials illegal. Such laws require some justification, though, • goods or services are purchased from a favored sup-
since they put the companies of these countries at a disad- plier, usually at inflated prices;
vantage in competing with less scrupulous rivals. • the official or another party becomes a partner in a
The issue of bribery is far from simple. joint venture, usually sharing in the profit but making
no investment; or
• First, the term “bribe” is vague. It applies to many dif-
• a contribution is made to some philanthropy that is
ferent kinds of payments with varying interpretations,
usually a front for personal gain.
ranging from gift giving and influence peddling to
kickbacks and extortion. There is need, therefore, to Typically, bribes are not paid directly by employees of
develop a definition and make some distinctions, as a bribing company but funneled indirectly through locally
well as to understand the factors that foster bribery and hired consultants or joint-venture partners, and funds for
allow it to flourish. An understanding of these causes the bribes may be disguised as consulting fees or joint-
enables us not only to explain where bribery is more venture expenses.
likely to occur but also to develop means to reduce it. The purposes for which bribes are paid are similarly
• Second, this section addresses the question of what is diverse. They include attempts to secure the following:
wrong with bribery and the arguments, advanced by • the approvals of bids or sales, which are commonly
some, that question the harm. sought by bribery
Finally, the means for combating bribery, including the • licenses to operate
U.S. Foreign Corrupt Practices Act and its justification, are • access to scarce or subsidized resources
discussed. • favorable legal rulings
• avoidance of investigations or political pressures, and
14.4.1: What Is Bribery? the like.

The Foreign Corrupt Practices Act (FCPA) forbids Ameri- The only common factor is that what is sought is some-
can corporations to offer or make any payment to a foreign thing within the decision-making authority of a public offi-
official for the purpose of “influencing any act or decision cial who has the discretion to grant or withhold it.
of such foreign official in his official capacity or of inducing Like other kinds of misconduct, the incidence of bribery
such foreign official to do or omit to do any act in violation is a function of the opportunity presented, the amount to be
of the lawful duty of such official” in order to obtain or gained, and the likelihood of success—or alternatively the
retain business.41 risk of prosecution. Consequently, bribery is more likely to
This legal prohibition accords with standard philo- occur in countries in which the approval of government offi-
sophical definitions of bribery.42 The key point is that a cials is required for doing business. In a country with well-
bribe is a payment made with an intention to corrupt and developed laws and regulations that allow little discretion
accepted in a way that is corrupting. More specifically, a for public officials, and with a small public sector that leaves
public official has a duty to make all decisions in the most business to be conducted in markets by private
i­ndividuals and corporations, there is little opportunity for the highest bribe is likely to be the most efficient producer.
bribes to be demanded or offered. On the other hand, in a Combating bribery, on this view, may impede development
state-dominated economy in which much business is con- by maintaining an inefficient status quo. Thus, the political
ducted with the national or local government, where public scientist Samuel P. Huntington observes, “In terms of eco-
officials make key decisions about the purchase of goods, nomic growth, the only thing worse than a society with a
the approval of projects, and the like, great opportunities are rigid, over-centralized, dishonest bureaucracy is one with a
created for bribes to be demanded and/or offered. rigid, over-centralized and honest bureaucracy.”44
For example, a bribe might be paid not only to gain The “greasing the wheels” argument does not give suf-
approval of a bid for the operation of, say, a large construc- ficient weight to the full costs of bribery in a less-developed
tion project, but also to gain advance information about the country.45
bid requirements or to shape the terms of the bid requests
to favor one bidder. Economies in which multiple licenses What are the economic costs of bribery?
are needed to operate a business, or in which the state con-
These can be outlined as follows
trols access to scarce or subsidized resources, are also fer-
tile conditions for bribery to occur. Bribes may also be paid • Causing capital flight. Bribery reduces the resources
to avoid costs, such as those associated with paying taxes available in an economy when elites transfer money out
or complying with regulations. Bribes are more likely to of the country into secret foreign bank accounts. In the
occur when the risks of discovery and apprehension are case of some African countries, this loss has amounted
low because of lax or erratic enforcement. Even a high risk to billions of dollars.
for accepting bribes may be offset by the size of the bribe • Shortchanging citizens. Money for bribes need not
offered, which leads to the dilemma that more vigilant come from the greater efficiency of the bribe payer but
enforcement of antibribery laws may reduce small pay- from overcharging or delivering substandard products or
ments but increase the amount that other officials demand services. In this way, the ultimate purchasers, the citi-
in order to make bribery worth the risk. zens of a country, are shortchanged by getting less for
what they pay. Ordinary citizens may lose in other ways
14.4.2: What’s Wrong with Bribery? when taxes are raised or spending is cut to cover the
The immorality of demanding or accepting bribes is implicit loss when the government overpays for goods and ser-
in the definition of bribery: A government official is violating vices, or when the bribes lead to lax enforcement of reg-
a duty, which in itself is a wrong. In addition, inducing such ulations concerning tax collection, working conditions,
a violation by offering a bribe is commonly recognized as or environmental protection.
wrong as well. Corrupting others is as wrong as being cor- • Altering local priorities. The spending priorities of
rupt oneself. Beyond these obvious points, however, lies the a country may be distorted when government officials
more relevant question of whether the wrongfulness of brib- choose large, complex projects from which bribes can
ery is of sufficient gravity to make it an object of concern. be extracted instead of more urgently needed goods and
services that do not offer the same opportunities for de-
How serious is the problem of bribery?
manding bribes. Thus, developing countries often end
If bribery is relatively harmless or even somewhat bene- up with an abundance of dams and power plants to the
ficial, then there is no reason to make it illegal by such means neglect of education and medical care.
as the FCPA and to expend great resources combating it.
• Wasting resources. The sheer amount of time that
Some economists have argued that bribery has the
business people in corrupt countries must spend dealing
capacity to aid development by introducing an element of
with government officials and complying with needless
efficiency by “greasing the wheels” in an otherwise ineffi-
regulation detracts from productive activity.
cient economy.43 These defenders of bribery begin with the
• Encouraging over-regulation. Finally, the potential
observation that in many developing economies, the gov-
for demanding bribes leads government officials to cre-
ernment officials and other elites tend to dominate the
ate even more efficiency-impeding laws and regulations
economy for their own benefit, and they are often indiffer-
that confer ever more discretion on them. One expert
ent or hostile to foreign investors and local entrepreneurs,
on corruption writes, “Thus, instead of corruption
who may upset the cozy status quo. When outsiders are
­being the grease for the squeaky wheels of a rigid
able to overcome this bureaucratic inertia by paying
­administration, it becomes the fuel for excessive
bribes—which they can afford to do because of their greater
and discretionary regulations. This is one mecha-
efficiency in conducting business—they aid development
nism whereby corruption feeds on itself.”46
by putting resources to their most productive use. Indeed,
competition among potential bribers itself is a factor in Use Figure 14.3 to review these adverse effects of
­promoting efficiency, since the party that is able to afford bribery on the host country.
 combat due to its secretive nature and deep penetration. It
Figure 14.3 Economic Effects of Bribery
occurs, of necessity, out of the public eye, and it often
involves networks of individuals and institutions that thwart
Causes Capital Encourages
Flight Effects Over-regulation efforts to prosecute wrongdoers and to bring about reform.
of For example, when the proceeds from bribery are
Bribery
widely shared by government officials, including bureau-
Shortchanges Wastes
crats, legislators, and judges, then everyone who might act
Citizens Resources constructively has an interest in maintaining a corrupt sys-
tem. Moreover, bribery is a classic collective choice prob-
Alters Local lem in that no single honest company or official can
Priorities singlehandedly make any difference: Any company that
refuses to offer bribe or any official who declines to accept
one will have no effect as long as others are willing to
In addition, bribery has many adverse noneconomic
engage in the practice. Any solution to the problem must
consequences. For one, it enriches elites in a country, which
involve action that affects everyone. Finally, any effective
leads to greater inequality and also to loss of public confi-
action must address the root causes of bribery, which are
dence in government. Susan Rose Ackerman writes, “Sys-
the conditions that create numerous opportunities for
tematic corruption undermines the legitimacy of
bribes in substantial amounts without significant risk.
governments, especially in democracies, where it can even
Table 14.1 lists entire sectors of industries that business
lead to coups by undemocratic leaders. By contrast, non-
executives worldwide believe to be particularly prone to
democratic governments can use corruption to maintain
bribery, according to Transparency International’s 2011
power by spreading benefits.”47 These factors may also
Bribe Payers Index.
result in greater political instability, which, in turn, dis-
courages foreign direct investment. Furthermore, in a cul-
ture of bribery, the most unscrupulous prosper, and others Table 14.1 World’s 10 Industries Most Likely to Involve
Bribery
must emulate them if they are to succeed. Such a corrupt
culture is corrosive for the development of personal char- Based on survey responses by business and government officials in
various countries, a scale from 0 to 10 has been created Transparency
acter and a healthy social order. International, an anti-corruption organization, where 0 represents the
Thus, the evidence is that bribery imposes a great cost, belief that bribery always occurs and 10 that it never occurs. The
both economic and noneconomic, on developing countries. industries are listed in order from most to least likely to involve bribery.
Although estimates are difficult to formulate across so Industry Sector Score (0–10)
many diverse countries, one calculation is that bribery con- Public works contracts and construction 5.3
stitutes an additional tax of 20 percent on investment.48 Real estate, property, legal, and business services 6.1
Thus, each investment dollar could bring, on average, one- Utilities 6.1
fourth more development if the country could eliminate Oil and gas 6.2
the damaging effects of bribery. Mining 6.3
Power generation and transmission 6.4
WRITING PROMPT Pharmaceutical and healthcare 6.4

The Costs of Institutionalized Bribery Heavy manufacturing 6.5

What additional costs might bribery impose on a company beyond Arms, defense and military 6.6
the amount of the payment? Explain whether or not the costs that Fisheries 6.6
bribery also imposes on a country should be the responsibility of the
Source: Transparency International, “Results by Sector,” Bribe Payers Index Report 2011.
company paying the bribe.

The response entered here will appear in the WRITING PROMPT

performance dashboard and can be viewed by Individual Actions in a Corrupt System
your instructor.
Consider the different industries listed in Table 14.1 above and the
factors that might make them particularly susceptible or conducive
Submit to bribery. Do you think it is possible for a single solution to effec-
tively stop bribery in all of these areas, or would each area require a
unique approach? How might these approaches differ? Explain.
14.4.3: Combating Bribery The response entered here will appear in the
If bribery is morally wrong as well as economically and performance dashboard and can be viewed by
your instructor.
socially undesirable, then corporations and governments
should take reasonable steps to reduce the incidence of brib-
Submit
ery around the world. Unfortunately, bribery is difficult to
Anti-Bribery Strategies  It has already been kinds of support for well-intentioned governments seek-
observed that the opportunities for bribery are created in ing to reduce ­bribery.49 The motive for funding agencies
the area of overlap between business and government and banks to consider bribery in their loan practices stems
where public officials have discretionary authority to make not only from an economic concern that their funds not be
decisions that affect economic activity. wasted through bribery but also from the recognition that
One strategy to combat bribery, then, is to alter the the political conditions that foster bribery strongly impact
role of government in the economy. Limiting government economic development. In other words, they recognize
involvement and increasing the prominence of free mar- that the economic function of lending cannot be separated
kets is one possibility. However, merely limiting the from the politics of a country.
involvement of government may not be an improvement if In addition to reducing the opportunities for bribery,
corruption is replaced only by oligopoly, in which elites the problem can be addressed by more vigorous enforce-
can still make exorbitant profits. ment of antibribery laws and the activity of international
Genuine progress can be made only by reforms that organizations. For example, the Hong Kong Independent
promote healthy competition and proper regulation. Such Commission Against Corruption and the Corrupt Practices
progress may occur with extensive government involve- Investigation Bureau in Singapore are government-created
ment in the economy as long as there are well-designed units that have proven to be highly effective at uncovering
rules, known by all and impartially applied, that leave lit- and prosecuting instances of bribery.
tle room for discretion. The efficacy of such rules is
increased by openness and accountability in the decision- What actions are international organizations taking?
making process. For example, the incidence of bribery Other Examples
might be reduced if fewer licenses were required for oper-
• A private NGO, Transparency International, consists of
ating a business and the licensing process was made sim-
more than 90 chapters in countries around the world that
pler and more routine. Similarly, the fewer government
seek, according to its website, “to promote transparency
contracts that are let, the less opportunity there is for brib-
in elections, in public administration, in procurement and
ery, but the same result can be achieved if bidding on con-
in business . . . . [and] to use advocacy campaigns to
tracts is conducted openly and in accord with fair,
lobby governments to implement anti-corruption reforms.”
consistently applied rules.
Since much bribery involves civil servants in gov- • Highly visible tools of Transparency International are the
ernment bureaucracies, a second strategy consists of civil annual “Corruption Perception Index,” which ranks coun-
service reform. Pay might be increased, for example, in tries on the perceived level of corruption, and the “Bribe
order to reduce the temptation among low-paid officials to Payers Index,” which ranks countries according to their
demand or accept bribes. In some countries, the pay of civil willingness to restrict bribery by domestic companies.
servants is extremely low on the assumption that they will • In 2003, the United Nations General Assembly adopted
supplement their meager wages with bribes, which the “Convention Against Corruption,” which focuses on
becomes a self-fulfilling expectation. Reform might also the prevention and criminalization of bribery and on inter-
include more selective recruitment and better training in national cooperation to combat it and recover plundered
order to build a more professional civil service. Higher pay assets.
for civil servants, accompanied by good pension, may
The most prominent examples of antibribery initia-
reduce the incidence of bribery not only by removing the
tives are the U.S. Foreign Corrupt Practices Act of 1977
need for the income but also by making the jobs so attrac-
(FCPA, amended in 1988) and the “Convention on Com-
tive that the risk of losing them will deter bribe taking.
bating Bribery of Foreign Public Officials in International
A third strategy for reducing the opportunities for
Business Transactions,” adopted by the countries of the
bribery consists of more careful selection of govern-
OECD in 1997.
ment projects. This might be done by eliminating those
that are most vulnerable to bribery and closely monitor- • The OECD convention commits each member country
ing the ones that go forward. This check can be imposed to change its laws to accord roughly with the FCPA.
most effectively on developing countries by funding Specifically, OECD members, which include the
agencies, such as the World Bank and the International world’s richest nations, have agreed to prohibit brib-
Monetary Fund, as well as the investment banks that pro- ery of foreign officials, impose criminal penalties on
vide loans. These agencies and banks, most of which have those found guilty, and allow for the seizure of profits
adopted formal anti-bribery policies and procedures, gained by bribery.
combat bribery by evaluating the integrity of individual • Both initiatives concentrate on the “supply” side by
projects and the ability of the countries in question to con- changing the conduct of corporations that have been
trol bribery, as well as by providing expertise and other paying bribes.
Table 14.2 Strategies for Combating Bribery
Identify the general strategy that describes each set of related tactics and goals for combating bribery in the two left columns. Show the cells
to check your answers.
Anti-Bribery Tactic(s) Goals Strategy
Limit government involvement and promote Design and enforce proper regulations to clarify and simplify Alter the government’s role in the
free markets and healthy competition processes economy
Pay civil servants more to remove the need Make civil service jobs so attractive that the risk of losing them will Reduce the temptation to demand
for extra income deter bribery or accept bribes
Carefully select projects to eliminate those Closely monitor approved projects; have funding agencies and Eliminate bribery in government
most vulnerable to bribery lending institutions perform checks projects
Create special law enforcement units to Promote international standards against corruption to combat Focus on enforcing laws to prevent
uncover and prosecute instances of bribery bribery; use international cooperation to recover plundered assets and criminalize bribery

Many observers are optimistic that the FCPA and the defined broadly to include not only government employ-
OECD convention will significantly reduce the incidence ees but also any person acting in an “official capacity,” and
of foreign bribery and produce a more level playing field the Act also covers payments to political parties and candi-
for all multinational corporations, but the evidence to dates for office in foreign countries. The payment must be
date is not encouraging. The 2014 report by Transparency intended to induce a foreign official to violate a duty by
International on enforcement of the OECD convention misusing his or her official position in a way that confers
­concludes, some benefit to the bribing party. The law does not require
that the payment be accepted or achieve its purpose; the
“creating a corruption-free level playing field for global
trade is still far from being achieved.”50 mere offer or promise of a payment constitutes a violation
of the Act.
Use Table 14.2 to review the various ways in govern- The FCPA also prohibits payments through intermedi-
ments can help companies make progress toward aries or third-parties while knowing or having reason to
­“corruption-free” international business. know that any portion will be used to bribe foreign offi-
Foreign Corrupt Practices Act (FCPA) Since cials. Much business in foreign countries is conducted
1997, it has been against U.S. law for an individual or a through intermediaries, who may pay bribes without the
company to bribe a foreign official for the purpose of knowledge of the American firm. When American firms
obtaining or retaining business. The FCPA was enacted by enter into joint ventures with foreign companies, they may
Congress in part to protect American interests. The wide- have a similar lack of control over the conduct of their
spread use of slush funds to make payments during the business partners and the maintenance of their books.
1970s raised fears that U.S. corporations were engaging in Deliberately avoiding knowledge of an agent’s activities is
false financial reporting that compromised the integrity of not an adequate defense, and so companies should take
securities markets. When the Securities and Exchange precautions to “know their agents.” Among the advised
Commission encouraged the voluntary disclosure of for- precautions are
eign payments without fear of prosecution, more than 400
• checking out the reputation of the agent and being sure
companies admitted to paying a total of $300 million that
that the agent has some genuine service to provide;
was not fully accounted for in their books. In addition,
• paying the agent only an amount commensurate with
Congress was concerned that foreign payments by Ameri-
the services provided and seeking an accounting of all
can corporations were undermining the governments of
expenses incurred;
friendly countries around the world and interfering in the
conduct of U.S. foreign policy. • avoiding suspicious requests, such as depositing the
money in a certain bank account; and
Provisions of the FCPA The FCPA applies not only
• obtaining a detailed agreement that includes a pledge
to American citizens and companies but also to certain for-
not to violate the FCPA and the right to terminate the
eign entities that conduct business in the United States. In
contract for any violation.
addition to the prohibition of bribery, the Act contains an
accounting section that requires companies to maintain Certain kinds of payments are legally permitted and
financial records that accurately and fairly represent trans- do not constitute bribes under the FCPA. These include
actions in reasonable detail, including the amount and the “facilitating payments,” which are made to expedite the
purpose of all payments, and to develop a system of inter- performance of “routine governmental action.” Also
nal accounting controls sufficient to ensure that these called “grease payments,” these are small sums paid to
records are accurately and fairly stated. A foreign official is lower-level officials to lubricate the rusty machinery that
provides government services. Facilitating payments do c­ onduct of American firms. The immorality of bribery
not induce anyone to violate a duty. Still, they are gener- comes close to being a universal norm and is prohib-
ally prohibited by the same governments that create the ited by laws in many countries, including the m
­ embers
need for them, although the laws on such matters are of the OECD.
rarely enforced. Also excluded from the category of bribes
by the FCPA are reasonable expenditures for legitimate
expenses, such as entertaining a foreign official in the 14.5: Human Rights
course of doing business. Finally, any payments that are
permitted or required by the written laws of the country in Abuses
question are legal under the FCPA. Although such pay- 14.5 Relate the challenges multinational companies
ments might still be considered bribes, the drafters of the face in dealing with repressive governments, and
FCPA did not believe that individuals or corporations how a strategy of constructive engagement can be
should be prosecuted in the United States for abiding by applied to operations in countries with a record of
local laws elsewhere. The stipulation that the laws be writ- human rights abuses
ten is designed to ensure that the payments are really legal
and not merely customary. Case: Microsoft in Russia
For violations of the FCPA, which are prosecuted by As part of an aggressive effort to combat the unlicensed use
the U.S. Department of Justice, corporations may be fined of its popular software programs, Microsoft employs lawyers
up to $2 million and individuals may be fined up to and cooperates with government agencies worldwide in sys-
$100,000 and imprisoned for up to five years (and the fine tematic enforcement campaigns. In September 2010, the
for an individual may not be paid by the corporation). New York Times broke a story about how the police in R ­ ussia
were using illegal, pirated software as a pretext for raiding ad-
Justification of the FCPA The justification for a vocacy groups and opposition newspapers and for carting
legal prohibition on foreign bribery is rather straightfor- off computers filled with critical documents.52 In some cases,
ward. A double standard is employed if a country permits its the targets of these raids had proper licenses for the software
companies to do abroad what they are forbidden to do at installed, and often charges of software piracy were never
home. It has already been demonstrated not only that brib- filed; but the disruption of activities and the cost of fighting
ery is morally wrong but also that it severely harms eco- the charges were enough to cripple their operations. Although
nomic development. The main arguments to the contrary are software piracy is rampant in Russia, the Times article report-
that bribery is necessary for doing business in some coun- ed that the police “rarely if ever carry out raids against advoca-
tries and that a country that prohibits its own companies cy groups or news organizations that back the government.”
from bribing places them at an unfair competitive advan- Microsoft lawyers were reported to work closely with the
tage. Some have argued that the FCPA is a form of “ethical police, sometimes initiating investigations and defending the
imperialism” that imposes our values on other countries. company as a victim of the criminal conduct, and some were
These contrary arguments are not very persuasive. accused of helping corrupt police to extort money from the
targets of piracy investigations.53 Although Microsoft execu-
• First, if foreign bribery is wrong, then the fact that tives denied that company lawyers initiated any investiga-
America’s competitors around the globe practice it tions, they admitted that the lawyers had participated in them
does not provide a justification. but only because their involvement was required by Russian
• Second, American firms have been able to compete in law. The victims appealed to Microsoft for protection, and
many instances without bribing, in part by developing the Moscow Helsinki Group, an influential human rights
better products and services and marketing them watch organization, accused Microsoft of being complicit in
aggressively. Anecdotal evidence suggests that bribery “the persecution of civil society activists.”54
is involved in many contracts that U.S. firms fail to Initially, Microsoft responded to these charges and the
attain, but it is difficult to determine who would have damaging publicity by stressing its right to protect the com-
obtained the award had there been a level playing pany’s products from piracy and explaining how the com-
field. No academic studies to date have documented pany carefully selects, trains, and monitors its local lawyers
substantial loss of business due to the FCPA.51 Even if and how it seeks to prevent individuals and organizations
some loss of business has occurred, it must be weighed from falsely claiming to represent Microsoft.55 Within a few
against the other benefits that led Congress to enact days, Microsoft reversed course and announced new poli-
the FCPA. That is, is the United States as a nation bet- cies. A spokesperson declared, “We want to be clear that we
ter off for the passage of this act? unequivocally abhor any attempt to leverage intellectual
• Third, the FCPA is scarcely an instance of “ethical property rights to stifle political advocacy or pursue improper
imperialism” just because it applies only to the personal gain. We are moving swiftly to seek to remove any
incentive or ability to engage in such behavior.”56 Specifically, The second kind of decision can generally be made in
Microsoft announced that it had barred its lawyers from tak- accord with the guidelines for multinationals discussed
ing part in piracy investigations, was granting blanket soft- prior in this chapter.
ware licenses to all advocacy groups and newspapers, and Accordingly, this section addresses the first question of
was providing legal aid to all victims of the piracy crackdown. country selection. Is it ethical to operate in a country with a
These actions effectively undercut the legal basis for police repressive government that engages in systemic human
action against groups opposed to the Russian government. rights abuses? Furthermore, if a company engages, can it
However, Microsoft has yet to condemn the raids or criticize separate itself from any human rights abuses committed
the Russian government for violations of human rights for by the government or should it be held morally and legally
fear of jeopardizing its ability to do business in the country. liable for these abuses?

The experience of Microsoft in Russia exemplifies the chal-

lenges faced by multinational corporations as they operate WRITING PROMPT
in countries with repressive governments that engage in Business and Politics
massive violations of human rights. A few countries, one Explain the extent to which the conduct of a governing regime
should influence a company’s decision to conduct business in other
being Burma (also called Myanmar), are so repressive that
countries. When might such considerations take priority or compel a
many companies avoid them entirely, and the ones that company to enter—or withdraw from—a country?
operate there face international censure. No company can
The response entered here will appear in the
operate in such a country without giving substantial sup- performance dashboard and can be viewed by
port to an utterly corrupt and brutal regime, and Burma your instructor.
earns Freedom House’s “absolute worst rating for political
rights and civil liberties.”57 In other countries, such as Rus- Submit
sia, China, Nigeria, Indonesia, and Venezuela, it is possible
for multinational corporations to conduct business ethi-
cally, albeit with some challenges.
14.5.1: Constructive Engagement
Examples: Is it ethical to operate in a country with a repressive gov-
• Chrysler, which operates a Jeep plant in a joint ven- ernment that engages in systemic human rights abuses?
ture with the Chinese government, was pressured Companies that operate in Burma and other “ethically
in 1994 by the government to dismiss an employee, challenging environments”59 commonly defend them-
Gao Feng, a devout Christian, who had been selves by describing their strategy as “constructive engage-
arrested for planning a worship service and candle- ment.” The argument is that although human rights abuses
light vigil on the fifth anniversary of the Tiananmen do occur, the company, on the whole, is making a positive
Square massacre.58 After firing him for being absent contribution that would not occur in its absence. Such a
during his interrogation in jail, Chrysler relented in defense rests on utilitarian grounds of benefit or welfare,
the face of international criticism and reinstated his which may be strong, but it does not address the possible
employment, following which he was arrested charge that a company may do some good but still be com-
again and sent to a reeducation camp. plicit in human rights abuses.
• In 1995, Royal Dutch/Shell, which produced oil in The success of a constructive engagement strategy
the Ogoniland region of Nigeria, became embroiled depends on two factors:
in controversy when the company was called upon
• first, on the receptiveness of the government in a coun-
to intervene to prevent the execution of Ogoni activ-
try to change and,
ist Ken Saro-Wiwa, who had criticized Shell’s envi-
ronmental record and was convicted for murder in • second, on the commitment and effectiveness of a
what was perceived as a kangaroo trial. company with regard to such change.

Multinational corporations must decide, Constructive engagement is a high-minded approach,

filled with good intentions, but it is difficult to implement
• First, whether to enter certain countries by making effectively. Progress is not easily documented, and the
direct investments, selling products, or sourcing approach may serve as a convenient rationalization for
materials. “business as usual,” especially when there is no realistic
• Then, they must consider how to operate ethically, hope for change and the company is insincere or ineffec-
which, in the “Protect, Respect, and Remedy” frame- tual in seeking it. However, some effort may be preferable
work, includes respecting human rights and remedy- to unrestricted engagement, in which no attempt is made
ing infringements. to be constructive.
 Guidelines for constructive engagement are difficult to 14.5.2: Liability for Abuses
formulate since so much depends on the local context. For
example, the original Sullivan Principles, drafted in 1977 to Should a company be held morally and legally liable for
abuses committed by the government of a country in
guide companies choosing to do business in apartheid-era
which it operates?
South Africa, were focused mainly on equal treatment and
improved conditions for black and colored employees. Although multinational corporations may rightly claim
Later, a different set of Global Sullivan Principles was that they do not commit human rights abuses in countries
developed to provide more general guidance under all where they operate, they may still have knowledge of and
conditions. provide some resources for actions by a government that
John R. Schermerhorn suggests that companies doing violates people’s rights, and they may also be the intended
business in a country such as Burma ought to adhere to the beneficiary of the government’s repression.
following basic principles.60
Examples:
• Management control over all aspects of local opera-
• Unocal, a U.S.-based oil company, committed to
tions, including labor practices, conditions of employ-
build a 256-mile pipeline to deliver natural gas from
ment, and subcontracting.
the Yadana field in Burma to a terminal in Thailand.
• Management commitment to inviolable respect for
During the construction, which occurred between
human dignity, basic rights, and good citizenship in all
1993 and 1998, several human rights groups, includ-
aspects of local operations.
ing Greenpeace, Amnesty International, and
• Management control over local use of the corporate Human Rights Watch, charged that the Burmese
identity and brand names, including government- army was conscripting forced labor, relocating peo-
sponsored public relations and advertising. ple without compensation, and brutally suppress-
• Management commitment to control revenue set- ing dissent. A consultant hired by Unocal in 1995
asides to improve conditions of life for local employ- confirmed these charges.
ees and broader citizenry, including housing, public • Also in the 1990s, Mobil Oil Company (now Exxon-
services, education, and healthcare. Mobil) operated gas wells in the Aceh region of
• Management confidence in the basic rights of local citi- Indonesia, where the government was fighting local
zens to personal safety, freedom of movement, politi- separatist rebels. It is alleged that Mobil provided
cal participation, and economic advancement. buildings where villagers were tortured, raped, and
• Management commitment to annual and objective executed; loaned heavy equipment such as excava-
external audits of all aspects of local operations and to tors to dig mass graves; and paid the wages of sol-
the public release of audit results. diers who burned and pillaged homes in the
surrounding area.
Non-engagement occurs when a company chooses not
to enter a certain country. Such a decision may be based In each of these cases, the companies did not them-
solely on sound business considerations. Among these selves actively commit these crimes, but they had some
considerations are threats to a company’s brand image and knowledge of the events (how much is disputed), pro-
intellectual property, exposure of employees to risks of vided not insignificant support (perhaps unwittingly),
health and safety or human rights violations, and subjec- and received substantial benefits (willingly or not). If the
tion of the company to risks from corruption and social allegations against Unocal and Mobil are true, then the
and political instability that would impede normal opera- companies are morally culpable of complicity in human
tions. Alternatively, a company may decide for explicitly rights abuses in accord with standard conditions for
moral reasons not to engage. These reasons may include an responsibility, which are the actions performed (what is
incompatibility of particular environments with a compa- done) and one’s state of mind (knowledge and intent).
ny’s mission or values or a commitment to support certain Each company denies the allegations, but the guiding
social causes, including organized boycotts such as the principles are clear.
boycott in the 1970s designed to end apartheid in South Less clear is the legal right of victims of human rights
Africa. For example, Robert Haas, the CEO of Levi Strauss, abuses to seek remedy in court. Should foreign nationals
made the decision in 1993 to discontinue relations with have the right to bring suit against U.S. companies in
suppliers in China and to defer any direct investment American courts for human rights violations? Some vic-
because of concern about pervasive violations of basic tims from Burma and Aceh have sought to do so by means
human rights. However, five years later, in 1998, Levi of a law, the Alien Tort Claims Act (ATCA), which was
Strauss decided to resume sourcing in China and to sell enacted by Congress in 1789 for reasons that remain
clothing there. murky. The ACTA states, “The district courts shall have
original jurisdiction of any civil action by an alien for a Some of these questions were addressed in 2013 when
tort only, committed in violation of the law of nations or a the U.S. Supreme Court ruled in a suit brought by several
treaty of the United States.” The “law of nations” appar- Nigerian citizens who claimed to be victims of human
ently refers to any wrongs that are generally prohibited in rights abuses by Shell Oil Company. 62 The unanimous
different legal systems, such as torture. Indeed, the law decision to reject the suit appears to deny use of the ATCA
remained unused for 200 years before it was invoked to by foreigners to seek redress for human rights violations in
allow a suit against military officers from Paraguay, now U.S. courts, except when national interests are sufficient to
living in the United States, by the family of a man they overcome a presumption against extraterritorial applica-
tortured to death. tion of U.S. law. Whether those interests include a forum to
Both the legal interpretation and the moral justifica- redress human rights violations remains an open question.
tion of the ATCA are in dispute. Many cases have wound
their way through the courts with conflicting and incon- WRITING PROMPT
clusive rulings, and debate is raging over the wisdom of
Justice for Victims
allowing such suits in U.S. courts.61 Legal questions about
Should foreign nationals whose human rights have been violated by
interpretation concern who has standing to sue and U.S. companies operating in their country have the right to sue those
whether corporations or only individuals can be sued. companies in American courts? What other options, if any, are open
Questions of moral justification tend to pit considerations to these victims, assuming the legal system in their home country
cannot help them?
of justice—whether victims of human rights abuses should
not have some legal remedy in U.S. courts when American The response entered here will appear in the
corporations are complicit—against practical concerns performance dashboard and can be viewed by
your instructor.
about how extensive liability might impact the ability of
corporations to operate abroad or open them to frivolous
Submit
law suits.

Conclusion: International Business Ethics

Operating abroad, especially in less-developed countries, i­ nternational agreements and codes of ethics. As the guide-
creates dilemmas that lead to charges of serious ethical fail- lines for multinational corporations become more detailed
ings. Multinational corporations generally recognize a and comprehensive, the need for special standards of inter-
social responsibility and attempt to fulfill their responsi- national business may diminish, and business conduct
bilities everywhere they are located. The major causes of may eventually be the same worldwide.
occasional failures to act responsibly are not inattention
and lack of effort but the diversity of political and legal
systems around the world and differences in economic
development. Foreign operations give rise to challenges— End-of-Chapter Case
and also create opportunities for misconduct—that simply
do not exist for purely domestic enterprises.
Studies
The main quandaries facing all MNCs are deciding This chapter concludes with three case studies.
which standards to follow and determining how to observe These three cases vividly demonstrate the obvious but
these standards. We have seen that neither of the two critical point that multinational corporations encounter prob-
extreme positions on the choice of standards is satisfactory. lems abroad that would not occur at home—or, if they did
The familiar adage “When in Rome, do as the Romans do” occur there, would be more easily handled. In “H.B. Fuller in
Honduras,” a company with a stellar reputation for social
and the opposite, “When in Rome or anywhere else, do as
responsibility is criticized for the tragic misuse of a major prod-
you would at home,” are both inadequate guides. Instead,
uct. Not only is this misuse due to abject poverty in a develop-
this chapter offers guidelines for developing and imple-
ing country, but the resources necessary for addressing the
menting special standards for the conduct of international problem, which would be available domestically, are not pre-
business that can be applied to such matters as so-called sent abroad. A study of the blatant bribes paid by executives
sweatshops, foreign bribery, and human rights abuses. of Walmart’s Mexican subsidiary (“Walmart in Mexico”) is use-
Ultimately, the solution for many of the ethical problems ful for exploring the factors that allowed this misconduct to
of international business lies in the development of occur in an otherwise reputable parent company, and also the
 factors that contributed to the home office’s inept handling of officials in Honduras but also from customers and share-
the subsequent investigation. “Google in China” presents the holders in the United States. One shareholder asked,
story of an ongoing challenge for the world’s largest Internet “How can a company like H. B. Fuller claim to have a
company in the world’s largest country. How Google manages social conscience and continue to sell Resistol, which is
to operate in a country that practices extensive censorship will
‘literally burning out the brains’ of children in Latin
affect not only the future of this iconic company itself but also
America?” The company’s mission statement placed its
millions of Internet users in a changing part of the world.
commitment to customers first, followed by its responsi-
bilities to employees and shareholders. And the statement
affirms: “H. B. Fuller will conduct business legally and
ethically . . . and be a responsible corporate citizen.” When
Case: H. B. Fuller in Honduras the company acquired its subsidiary in Honduras, the
CEO at the time said,
In 1985, journalists began writing about a new social prob-
lem in Honduras that created an acute dilemma for H. B. We were convinced that we had something to offer Latin
Fuller Company, based in St. Paul, Minnesota.63 The news America that the region did not have locally. In our own
stories described the ravaging effects of glue sniffing small way, we also wanted to be of help to that part of the
among the street children of Tegucigalpa, the capital of world. We believed that by producing adhesives in Latin
America and by employing only local people, we would
Honduras, and other Central American cities. The drug of
create new jobs and help elevate the standard of living.
choice for these addicts was Resistol, a glue produced by a
We were convinced that the way to aid world peace was
Honduran subsidiary of H. B. Fuller, and the victims of this to help Latin America become more prosperous.
debilitating habit were known, in Spanish, as resistoleros.
The negative publicity was sullying the company’s stellar Company executives faced the dilemma of whether
reputation for corporate social responsibility, and company these expressions of H. B. Fuller’s aspirations could be
executives came under great pressure to address the prob- ­reconciled with the continued production of Resistol in
lem quickly. Honduras.

Background of the Problem Addressing the Problem

Poverty in Honduras had forced many families to send In addressing the problem posed by the marketing of
their children into the streets to beg or do odd jobs. The Resistol, the options for H. B. Fuller were limited. Commu-
earnings of these children were critical to the support of nity activists in Honduras proposed the addition of oil of
many families, especially those headed by a single mother. mustard to all solvent-based adhesives. This chemical,
Some children lived in the streets in order to avoid abusive allyl isothiocyanate, produces a reaction that has been
homes; others were abandoned or orphaned. Many chil- compared to getting an overdose of horseradish. Adding it
dren, some as young as five or six, sought relief from their to Resistol would effectively deter anyone attempting to
misery by sniffing glue containing volatile solvents that inhale the fumes. However, research revealed that oil of
produce a temporary elation and sense of power. These mustard has many side effects, including severe irritation
chemicals are addictive and lead to irreversible damage to of the eyes, nose, throat, and lungs, and it can even be fatal
the brain and liver. The victims of solvent abuse generally if inhaled, swallowed, or absorbed through the skin. In
stagger as they walk and exhibit tense, aggressive behavior. addition, adhesives with oil of mustard have a shelf life of
Resistol is a brand name for a line of adhesives manu- only six months. H. B. Fuller executives were convinced
factured by a wholly owned subsidiary of H. B. Fuller and that the addition of oil of mustard was not an acceptable
marketed throughout Latin America. The solvent-based solution. However, in 1989, the Honduran legislature
adhesives favored by glue sniffers were widely used in passed a law requiring oil of mustard, despite the lobbying
shoemaking and shoe repair and were readily available on efforts of H. B. Fuller.
the street. H. B. Fuller had urged the press not to use the Another alternative was a community relations effort
term “resistoleros” because other brands of adhesives to alert people about the dangers of glue sniffing and to
were used as well and the problem was with the abuse of address the underlying social causes. By working with
Resistol, not the product itself. Nevertheless, the name community groups and the government, the company
was commonly used in Honduras to describe the street could spread the responsibility and expand its resources.
children addicted to solvents. One of H. B. Fuller’s most On the other hand, the community groups in Honduras
successful brands had thus become synonymous with a and elsewhere in the region were not well organized, and
major social problem. the government was unstable and unreliable. In 1982, the
Criticism of H. B. Fuller for its involvement in this Gillette Company had faced a similar problem with its
problem came not only from activists and public health ­solvent-based typewriter correction fluid, Liquid Paper,
 which was being abused by youngsters in the United States. worldwide were located in Mexico.64 Throughout 2003,
Gillette also rejected the possibility of adding oil of Mexican managers of the retail giant Walmart pursued an
­mustard, but the company’s community relations effort aggressive plan to open a new store in the city of Teoti-
was facilitated by the existing network of private and huacán on land that was not zoned for commercial devel-
­government-sponsored drug education programs. In Hon- opment. Teotihuacán (pronounced tay-o-tea-wah-KHAN)
duras, H. B. Fuller did not have the same base of commu- boasts some of Mexico’s most significant remnants of the
nity and government support. A community relations effort ancient Aztec civilization, and many parts of the city
would be much more difficult in a less-developed country. remained protected for cultural and archeological reasons.
H. B. Fuller executives also considered withdrawing all Resisting Walmart’s concerted efforts to change the appli-
solvent-based adhesives from the market and perhaps sub- cable zoning ordinance, Teotihuacán’s city council voted
stituting water-based products, but these alternatives were on August 6, 2003, to reaffirm a ban on commercial devel-
not very attractive from a business point of view. Further- opment in the proposed area.65
more, they would have no impact on the critical social prob-
lem of glue sniffing by street children. The waste of young
lives would continue unless conditions were changed. But
Gaining Approval
what could a modest-sized company located in St. Paul, Surprisingly, on August 20, 2003, the state Office of Urban
Minnesota, do to address a problem caused by deep cul- and Regional Planning, which certified and published cit-
tural, social, political, and economic forces? A failure to act, ies’ zoning proposals, made an unexpected and appar-
however, would seriously damage H. B. Fuller’s carefully ently unauthorized revision to Teotihuacán’s zoning map
built reputation for corporate social responsibility. that designated the land in question as eligible for com-
mercial use. Walmart neither made a formal request for
Shared Writing: H. B. Fuller in Honduras this last-minute change nor petitioned the state planning
office to alter the map. However, in the days between the
What should H.B. Fuller do in order to “do more good than harm”
city council’s vote and the state planning office’s revision,
in Honduras? Explain which of the following actions the company
should take in order to sufficiently address the problem, or Walmart managers in Mexico displayed a confidence that
describe alternatives: the development would proceed by undertaking environ-
mental assessments of the area, obtaining approval for
• Add the mustard oil to the glue, as required by Honduran law
additional construction funding, and seeking building
• Support community efforts to alleviate the plight of street
children permits. Internal Walmart records show that Sergio Cicero
• Stop the sale of Resistol in Honduras altogether, in order to Zapata, a high-level real estate manager in the company’s
make it inaccessible to street children Mexican subsidiary, authorized a payment of $52,000 on
Review and comment on at least two classmates’ the day after the Office of Urban and Regional Planning
­responses. formally published the altered version of Teotihuacán’s
zoning map.
A minimum number of characters is required
to post and earn points. After posting, your According to Cicero, the intended recipient of that
response can be viewed by your class and payment was the director of the state planning office, who
instructor, and you can participate in the
was responsible for publishing an official record of a city’s
class discussion.
zoning decisions. Around the same time, further payments
were authorized by Cicero that enabled the construction of
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Walmart’s store in Teotihuacán, including $114,000 to the
mayor of Teotihuacán to secure building licenses, road con-
struction permits, and certification that the land was free
from archaeologically sensitive artifacts. Eventually the
Case: Walmart in Mexico store in Teotihuacán was built, and it remained open,
Walmart became a household name in Mexico in 1991 despite vocal resistance from community activists and
when Walmart Stores, Inc., headquartered in Bentonville, members of the city council.66
Arkansas, entered into a joint venture with the longtime The development of Walmart’s Teotihuacán store has
Mexican retail firm Cifra. This joint venture led to the been revealed to be only a small part of a systematic effort
opening of new stores under the names Walmart and within its Mexican operations to secure favorable treat-
Sam’s Club, along with Cifra’s Superama and Bodega Aur- ment on many matters by bribing government officials.67
rerá outlets. Walmart purchased Cifra in 1997, creating Investigations by journalists and by Walmart officials in the
Walmart de Mexico, which eventually became the largest United States in response to news stories also prompted
employer in Mexico with more than 209,000 workers reviews by the U.S. Department of Justice and the Securi-
across 2,200 stores. By 2014, one-fifth of all Walmart stores ties and Exchange Commission on whether Walmart
­ iolated the anti-bribery provisions of the Foreign Corrupt
v CEO, Munich sent memos to Walmart’s executive vice
Practices Act (FCPA) during the early- to mid-2000s.68 president and senior internal auditor, as well as to the
Bribery in Walmart’s Mexican operations was sophis- chief executive officer, H. Lee Scott, regarding what she
ticated and well-organized. Alarmed by what he had perceived to be credible evidence that bribery was prac-
observed, Cicero initially reported the company’s use of ticed at the highest levels of management in Walmart de
bribes to Walmart executives in the United States to Mexico. Rather than hiring a law firm with expertise in
expose what he considered to be significant wrongdoing. FCPA compliance to lead an investigation, executive lead-
He emailed Walmart’s general counsel for international ership at Walmart opted to conduct an internal inquiry led
operations, Maritza Munich, on September 21, 2005, and by Walmart’s own lawyers in conjunction with the com-
identified specific practices that he and other Walmart de pany’s corporate investigations unit.72 Shortly before this
Mexico officials routinely used to secure bureaucratic decision, the chief executive of Walmart de Mexico,
actions in the company’s favor.69 These included permis- C astro-Wright, was promoted to vice chairman of
­
sions by local zoning boards and city councils, successful Walmart’s U.S. operations.
environmental impact assessments, and, in some cases, Within one day, the lead investigators uncovered evi-
expedited construction and land use permits. Such spe- dence confirming hundreds of cases where gestores were
cial treatment was instrumental in receiving timely legal paid tens of thousands of dollars to secure permits. Two
authorization to open new stores as part of its aggressive gestores alone received payments totaling $8.5 million.73
expansion plans. Central to Cicero’s allegations was that These payments not only coincided with Castro-Wright’s
the top leaders at Walmart de Mexico, including the chief tenure at Walmart de Mexico but also mirrored periods of
executive, Eduardo Castro-Wright, and general counsel, growth in which new stores were built. They also discov-
José Luise Rodríguezmacedo Rivera, had authorized ered that Walmart de Mexico’s own auditors had previ-
irregular payments, which were believed to have totaled ously notified Castro-Wright and Rodríguezmacedo about
more than $16 million between 2003 and 2005 and almost possible violations of American and Mexican anti-bribery
$24 million in total since the formation of Walmart de laws. However, the same auditors claimed that Rod-
Mexico.70 ríguezmacedo edited their reports to remove information
materially relevant to Walmart de Mexico’s legally ques-
How were the bribes conducted?
tionable activities. This editing effectively kept officials at
Cicero was part of this strategy Walmart headquarters ignorant of the bribery taking
place in Mexico.
It was his job to cultivate relationships with well-placed,
highly trusted individuals within the communities where
Walmart de Mexico was seeking to build stores. Those in- Criticizing the Investigation
dividuals were known as gestores, agents who help others
In late 2005, the new chief executive of Walmart de ­Mexico,
to successfully navigate Mexico’s byzantine bureaucracy.
Eduardo Solórzano Morales, was openly critical of the
Cicero recruited gestores to arrange and subsequently de-
ongoing corporate investigation being coordinated from
liver bribes on behalf of Walmart. Cicero reported to Munich
the Bentonville headquarters, stressing that the investiga-
that he would provide envelopes of cash to gestores who
tors were secretive, too aggressive in their interviews, and
subsequently handed the money to mayors, city council
insensitive to the business culture of Mexico. In response,
members, and other bureaucrats to do Walmart’s bidding.
Walmart leaders, including CEO Scott, held a meeting on
The gestores would submit invoices that covered the bribe
February 3, 2006, to reorganize the investigation unit’s
payments as well as their fees, which were typically 6 per-
bribery probe in Mexico. A new company policy was
cent of the bribe amounts paid. These invoices used special
developed that placed greater responsibility for investiga-
terminology to disguise the nature of the payments. Bribes
tions on Walmart subsidiaries. This effectively meant that
were recorded for accounting purposes as innocuous fees
the company’s investigation into bribery by Walmart de
for services or permits.71
Mexico was now largely under the direction of Rodríguez-
After Cicero’s initial disclosure, Munich urged execu- macedo, the same general counselor who was initially
tives in Arkansas to begin an investigation. Following suspected of involvement in the Mexican bribe payments.
standard FCPA-prescribed practices, Walmart maintained The fact that Rodríguezmacedo was now formally leading
a strict anti-corruption policy that prohibited any employee the investigation of alleged bribery in Mexico was clearly
from offering anything of value to a government official on in conflict with the practices prescribed by Walmart’s own
behalf of Walmart. Munich initially appointed a Mexican ethics and compliance office, which recommended that
attorney to investigate the allegations of bribery. In addi- “investigations should be conducted by individuals who
tion to notifying Michael Duke, vice chairman of Walmart do not have any vested interest in the potential outcomes
in charge of international operations and later to become of the investigation.”74 Yet, it was Rodríguezmacedo who
wrote a final report of the Mexican inquiry, which con- “It is astounding that Google, whose corporate philosophy
cluded “there was no evidence or clear indication of is ‘don’t be evil’, would enable evil by cooperating with
bribes paid to Mexican government authorities with the China’s censorship policies just to make a buck.” He con-
purpose of wrongfully securing any licenses or per- tinued, “Many Chinese have suffered imprisonment and
mits.” 75 His six-page report remained silent on his torture in the service of truth—and now Google is collabo-
involvement and that of other executives in expunging rating with their persecutors.”79 Another congressman
prior audits of payments to gestores. The report recom- complained, “Instead of using their power and creativity to
mended that managers no longer use gestores and that the bring openness and free speech to China, they have caved
parent company make a renewed commitment to its anti- in to Beijing’s outrageous but predictable demands, simply
corruption policy. for the sake of profits. . . . They enthusiastically volunteered
In late 2011, upon learning of an upcoming story in the for the Chinese censorship brigade.”80 What had Google
New York Times that would provide damaging details of the done to receive such criticism?
investigation, Walmart eventually disclosed the informa-
tion it had gathered about bribery within its Mexican oper-
ations. Its attorneys and compliance officers met with the
Entering China
U.S. Department of Justice and the Securities and Exchange After its founding in 1998, Google quickly became a lead-
Commission to “self-disclose” its knowledge of possible ing provider of web-based services on the strength of its
violations of the FCPA.76 This decision was accompanied popular search engine Google.com. With a mission “to
by a press release describing Walmart’s new anti-bribery organize the world’s information and make it universally
efforts, including the formation of a new FCPA compliance accessible and useful,” the founders deliberately set about
director within its Mexican subsidiary, updated training to build an unconventional company. In the Registration
procedures for its employees, more robust internal account- Statement filed when the company went public in 2004,
ing controls, and regular reporting to the audit committee the founders, Larry Page and Sergey Brin, said that their
of the company’s board of directors on matters related to its goal was “to develop services that significantly improve
ongoing bribery investigation.77 By 2104, Walmart had the lives of as many people as possible,” and they explained
spent almost $440 million on FCPA-related internal investi- that the slogan “Don’t be evil” was intended to convey the
gations of its Mexican operations and was facing share- belief that in the long term, Google employees and its
holder lawsuits for the negligent oversight of its Mexican shareholders will be better served “by a company that
subsidiary.78 does good things for the world even if we forgo some
short-term gains.”81
Shared Writing: Walmart in Mexico In an effort to bring the benefits of its search engine
to China, a land of 1.3 billion people with an estimated
Was Walmart led astray by the corrupt business culture in ­Mexico,
110 million Internet users, Google created in 2002 a
or did the company take advantage of it? How might one justify
Walmart’s decision to keep the results of its internal investigation ­Chinese-language home page, similar to the home pages
confidential until 2011? What was the parent company hoping to in other languages that appear when the location of a
achieve by handing the investigation over to Walmart de Mexico computer is recognized by the website. Because Google’s
and the same general counsel who had approved the bribes in servers were located outside China, the website was not
the first place?
subject to any Chinese legal restrictions. Google searches
Review and comment on at least two classmates’ responses.
were completed just as they would be if the site were
A minimum number of characters is required accessed in any other country. However, the Internet
to post and earn points. After posting, your entered China through fiber optic cables that ran through
response can be viewed by your class and nine licensed international Internet service providers.
instructor, and you can participate in the
class discussion.
This control of the physical pathways of the Internet ena-
bled the Chinese government to filter signal transmis-
sions in and out of the country. When Chinese users
Post 0 characters | 140 minimum
requested searches on sensitive topics, such as the Tian-
anmen Square protests of 1989, Tibet, or the banned
group Falun Gong, screens would go blank, error mes-
sages would appear, or else the connection would be
Case: Google in China diverted to government-approved websites free of any
At a congressional hearing on February 15, 2006, a Google objectionable content. Because of the filtering—known as
executive sat with representatives from Microsoft and the “Great Firewall of China”—access to Google in China
Cisco as their companies were charged with violating was slow and unreliable, but a great deal of information
human rights in China. One member of Congress declared, was still available.
Trouble Develops upon national customs and habits.”85 Moreover, censor-
ship was enforced by numerous state agencies with
On September 3, 2002, Google vanished entirely from com- ­overlapping authority, and the material considered objec-
puter screens across China. The Chinese government had tionable changed frequently. The intended effect was to
blocked all access. Although service was restored two make Internet services use their own judgment about what
weeks later, the intensity of filtering appeared to have content to allow. In order to know the permissible limits,
increased. Google executives eventually realized that the Google developed its own list of forbidden words and top-
company could not fulfill its mission without a presence in ics by testing the Chinese filtering system and noting what
China. Other American companies, including Yahoo! and content was blocked.
Microsoft already had operations in the country, and In developing Google.cn, the company followed three
Google was losing market share not only to these domestic key principles.
competitors but also to Chinese start-ups. The local com-
pany Baidu increased its market share from less than 3 per- • First, Google resolved to notify users when search
cent in 2003 to 46 percent in 2005, while Google’s share was results had been removed. In this way, the act of filter-
30 percent and falling.82 In late 2004, Google undertook an ing was made transparent.
assessment of its strategy in the Chinese market by consult- • Second, the private information about users was not
ing with Chinese Internet experts and users, human rights collected so that the company could not be compelled
activists, government officials, and business leaders. to disclose it to the government. As a result, Google
According to a Google executive, made the decision not to offer e-mail or blog sites in
From these discussions, we reached the conclusion that China, which had led to difficulties for other American
perhaps we had been taking the wrong path. Our search companies. Yahoo!, for example, had been criticized
results were being filtered; our service was being crip- for acceding to government demands that it disclose
pled; our users were flocking to local Chinese competi- e-mail records, which enabled authorities to learn the
tors; and, ultimately, Chinese Internet users had less identity of two dissidents, who were subsequently
access to information than they would have had.83 tried and sentenced to prison terms.
On January 27, 2006, Google launched Google.cn, a • Third, the Chinese version of Google.com continued to
China-based website. In order to operate in China, the be available in addition to Google.cn, so that Google.cn
company had to obtain a license that committed it to would only expand the information available to
observe Chinese laws and regulations, which required that ­Chinese users and not reduce it in any way.
a licensed Internet company censor its own content. Google
explained its decision as a matter of balancing its commit- Some critics complained that these measures were not
ment to its users and its own mission: enough. In particular, the notification to users that content
had been blocked did not disclose the nature of the content.
The requirements of doing business in China include
One dissident complained that the user could no longer tell
self-censorship—something that runs counter to G ­ oogle’s
what was being blocked: “It was one thing when you hit on
most basic values and commitments as a company.
Despite that, we made a decision to launch a new prod- links that did not work. You could see what was blocked.
uct for China—Google.cn—that respects the content The new Google hides the hand of the censor.”86 On the
restrictions imposed by Chinese laws and regula- other hand, many Chinese users were becoming more
tions . . . . [O]ur decision was based on a judgment that savvy about hiding their tracks by using proxy servers and
Google.cn will make a meaningful—though imperfect— anonymizer programs and getting around the Great Fire-
contribution to the overall expansion of access to infor- wall of China to access foreign material. Information and
mation in China.84 software for using the Internet were spread by “hactivists”
working outside China.87 So Google’s self-censorship
would have less effect on the ability of users to benefit from
Living with Censorship the Internet.
Abiding by Chinese laws and regulations was not an easy Moreover, Google was not alone in enabling the cen-
matter, though. Censorship in China did not operate by sorship of the Internet in China. Cisco and Microsoft had
clear and specific guidelines about what is and is not per- provided the hardware and software that sat atop the
mitted. Instead, a climate of intimidation was created by fiber optic cables at the border that conducted the filter-
vague rules that were enforced in an unpredictable but ing. And Google is not the only web information source
harsh manner. Prohibited content included material that faced with the question of whether to enter China. The
“damages the honor or interests of the state” or “disturbs operators of Wikipedia have been urged by Chinese users
the public order or destroys public stability” or “infringes to create a version of the online encyclopedia that would
be acceptable to Chinese authorities.88 All of Wikipedia Shared Writing: Google in China
has been blocked in China. The activists argue that
Google eventually ended its self-censorship in China by shutting
99.9 percent of the encyclopedia would remain intact after
down its local servers and redirecting users to its uncensored
self-censoring and that access to all of this information services in Hong Kong. The Chinese government continues to
would be of great benefit to the Chinese people. However, censor and periodically restrict or block Google services and
Wikipedia, like Google, is founded on the principle of content in the mainland—to the frustration of international busi-
uncensored information. nesses, journalists, activists, and local students and academics.
Decide whether it makes sense for Google to continue trying to
Google’s leaders believed that given the choice of stay-
provide free access to information and expand in China, having
ing out of China and going in under the conditions imposed already tried the path of compromise, and explain your view.
by the Chinese government, they made the right decision, Review and comment on at least two classmates’ responses,
one in keeping with the company’s own mission and prin- including one that opposes your own.
ciples. As one executive explained, “Don’t be evil” is “an
A minimum number of characters is required
admonition that reminds us to consider the moral and ethi-
to post and earn points. After posting, your
cal implications of every single business decision we make. response can be viewed by your class and
We believe that our current approach to China is consistent instructor, and you can participate in the
class discussion.
with this mantra.”89

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Chapter 14 Quiz: International Business Ethics

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References
Chapter 1 26. For a discussion of these problems, see Joseph L. Badaracco, Jr., and
Allen P. Webb, “Business Ethics: A View from the Trenches,” Califor-
1. Much of the information for this case comes from “Report of the nia Management Review, 37 (1995), 8–28.
Honorable John R. Martin, Jr., to the Special Committee of the
Board of Directors of Merck & Co., Inc. Concerning the Conduct of 27. Barbara Toffler, Final Accounting: Ambition, Greed, and the Fall of
Senior Management in the Development and Marketing of Vioxx,” Arthur Andersen (New York: Broadway Books, 2004), 257.
5 September 2006, henceforth cited as “Martin Report.” 28. Saul W. Gellerman, “Why ‘Good’ Managers Make Bad Ethical
2. Quoted in John Simons, “Will Merck Survive Vioxx?” Fortune, Choices,” Harvard Business Review, 64 (1986), 85–90.
1 November 2004. 29. For a discussion of the conditions under which this rationalization
3. Anna Wilde Mathews and Barbara Martinez, “E-Mails Suggest might have justificatory force, see Ronald M. Green, “When Is ‘Eve-
Merck Knew Vioxx’s Dangers at an Early Stage,” Wall Street Journal, ryone’s Doing It’ a Moral Justification?” Business Ethics Quarterly, 1
1 November 2004. (1991), 75–93.
4. Barry Meier and Stephanie Saul, “Marketing of Vioxx: How Merck 30. Gresham M. Sykes and David Matza,“Techniques of Neutralization:
Played Game of Catch-Up,” New York Times, 11 February 2005. A Theory of Delinquency,” American Sociological Review, 22 (1957),
5. Alex Berenson, “Evidence in Vioxx Suits Shows Intervention by 664–70. For an application of the criminology literature to business
Merck Officials,” New York Times, 24 April 2005. ethics, see Joseph Heath, “Business Ethics and Moral Motivation: A
Criminological Perspective,” Journal of Business Ethics, 83 (2008),
6. Mathews and Martinez, “E-Mails Suggest Merck Knew Vioxx’s 595–614.
­Dangers at an Early Stage.”
31. The seminal work in this area was done by Daniel Kahneman and
7. Simons,“Will Merck Survive Vioxx?” Adam Tversky, for which Kahneman was awarded the Nobel Prize
8. Ibid. in economics in 2002 (Since Tversky had died earlier, he was not
eligible for a Nobel Prize).
9. “Punishment for Merck,” New York Times, 23 August 2005.
32. David M. Messick and Max H. Bazerman, “Ethical Leadership and
10. Martin Report, 177.
the Psychology of Decision Making,” Sloan Management Review, 37
11. Ibid, 179. (1996), 9–22.
12. Richard T. DeGeorge, Competing with Integrity in International 33. Max H. Bazerman and Michael D. Watkins, Predictable Surprises: The
­Business (New York: Oxford University Press, 1993), 97–99. Disasters You Should Have Seen Coming, and How to Prevent Them
13. Albert Z. Carr, “Is Business Bluffing Ethical?” Harvard Business (Boston, MA: Harvard Business School Press, 2004).
Review, 46 (1968), 143–153. 34. Gino Francesca, Don A. Moore, and Max H. Bazerman,“See No Evil:
14. Amartya Sen, “Does Business Ethics Make Economic Sense?” Why We Overlook Other People’s Unethical Behavior,” in Social
Business Ethics Quarterly, 3 (1993), 45–54. Decision Making: Social Dilemmas, Social Values, and Ethical Judg-
ments, ed. Roderick M. Kramer, Ann E. Tenbrunsel, and Max H.
15. Suzanne Alexander, “Child World Says Rival Cheats, Toys ‘R’ Us ­Bazerman (New York: Routledge, 2009).
Answers: ‘Grow Up,’” Wall Street Journal, 19 September 1991.
35. These factors are described in John Darley, “How Organizations
16. The results of experiments with the ultimatum bargaining game
Socialize Individuals into Evildoing,” in Codes of Conduct: Behavioral
are presented in Robert H. Frank, Passions within Reason: The Stra-
Research into Business Ethics, ed. David M. Messick and Ann E.
tegic Role of the Emotions (New York: W. W. Norton, 1988), 170–74.
­Tenbrunsel (New York: Russell Sage Foundation, 1996).
For a discussion of the implications for business ethics, see
­Norman E. Bowie, “Challenging the Egoistic Paradigm,” Business 36. This case was prepared by Kerry Winans under the supervision of
Ethics Quarterly, 1 (1991), 1–21. Professor John R. Boatright. Copyright 1995 by John R. Boatright.
17. Steve Lohr, “Lessons from a Hurricane: It Pays Not to Gouge,” New 37. Much of the information for this case is taken from James
York Times, 22 September 1992. Traub, “Into the Mouth of Babes,” New York Times Magazine,
24 July 1988.
18. Daniel Kahneman, Jack L. Knetch, and Richard Thaler,“Fairness as a
Constraint of Profit-Seeking: Entitlements in the Market,” American 38. Material for this case is taken from Rushworth M. Kidder, How Good
Economic Review, 76 (1986), 728–41. People Make Tough Choices (New York: Fireside, 1995), 35–38; Glenn
19. Douglas C. Dacy and Howard Kunreuther, The Economics of Natural Adams, “Bath Iron Works CEO Admits Ethics Breach, Steps Down,”
Disasters (New York: Free Press, 1969), 115–16. The Associated Press, 16 September 1991; Jerry Harkavy, “Haggett
Severs Ties with Shipyard in Aftermath of Photocopy Scandal,” The
20. Lynn Sharp Paine, “Law, Ethics, and Managerial Judgment,” Journal Associated Press, 25 September 1991; Suzanne Alexander,“Bath Iron
of Legal Studies Education, 12 (1994), 153–69. Works Says Haggett Quit as Chief,” Wall Street Journal, 17 Septem-
21. This phrase is taken from Norman E. Bowie, “Fair Markets,” Journal ber 1991; and Joseph Pereira and Andy Pasztor, “Bath Chairman, 2
of Business Ethics, 7 (1988), 89–98. Vice Presidents Quit under Navy Pressure over Secret Data,” Wall
Street Journal, 26 September 1991.
22. Christopher D. Stone, Where the Law Ends: The Social Control of
­Corporate Behavior (New York: Harper & Row, 1975), 94. 39. Michael J. De la Merced and Evelyn M. Rusli,“Yahoo Chief to Leave
as Company Strikes a Deal with Loeb,”New York Times, 13 May 2012.
23. Thomas Donaldson, “Values in Tension: Ethics away from Home,”
Harvard Business Review, 4 (1996), 48–62. 40. James B. Stewart, “In the Undoing of a C.E.O., a Puzzle,” New York
Times, 18 May 2012.
24. David Luban, Alan Strudler, and David Wasserman,“Moral Responsi-
bility in the Age of Bureaucracy,” Michigan Law Review, 90 (1991–92), 41. Dominic Rushe,“Embattled Yahoo CEO Scott Thompson Reportedly
2348–92. Set to Quit over Fake Resume,” The Guardian, 13 May 2012.
25. Robert Jackall, Moral Mazes: The World of Corporate Managers 42. De la Merced and Rusli, “Yahoo Chief to Leave as Company Strikes
(New York: Oxford University Press, 1988). a Deal with Loeb.”
357
Chapter 2 16. This point is made by Russell Hardin, “Collective Action as an
Agreeable n-Person Prisoners’ Dilemma,” Behavioral Science, 16
1. Information for this case is taken mainly from In re: HP Inkjet Printer (1971), 472–79.
Litigation, Master File No. C053580 JF, Second Consolidated and
Amended Class Action Complaint, United States District Court, 17. C. Ford Runge, “Institutions and the Free Rider: The Assurance
Northern District of California; and In re: HP Inkjet Printer Litiga- Problem in Collective Action,” Journal of Politics, 46 (1984), 154–81.
tion, Master File No. C05-3580 JF, Stipulation of Settlement, United 18. For the empirical significance of the prisoner’s dilemma, see Anatol
States District Court, Northern District of California. Rapoport and Albert M. Chammah, The Prisoner’s Dilemma (Ann
2. For discussion of the ethical justification market system, see Allen Arbor, MI: University of Michigan Press, 1965); and Robert Axelrod,
Buchanan, Ethics, Efficiency, and the Market (Totowa, NJ: Rowman The Evolution of Cooperation (New York: Basic Books, 1984).
and Littlefield, 1988); Gerald Dworkin, Gordon Bermant, and Peter 19. Thomas C. Schelling,“Command and Control,”in Social Responsibil-
G. Brown, eds., Markets and Morals (Washington, DC: Hemisphere, ity and the Business Predicament, ed. James W. McKie (Washington,
1977); Virginia Held, ed., Property, Profits, and Economic Justice DC: Brookings Institution Press, 1974), 103–05.
(Belmont, CA: Wadsworth, 1980); Allan Gibbard, “What’s Morally
Special about Free Exchange?” in Ethics and Economics, ed. Ellen 20. Ibid., 103.
Paul, Fred Miller, Jr., and Jeffrey Paul (Oxford: Blackwell, 1985); and 21. Meinhard v. Salmon, 164 N.E. 545 (1928).
Amartya Sen, On Ethics and Economics (Oxford: Blackwell, 1987).
22. Ronald M. Coase, “The Nature of the Firm,” Economica, N.S., 4
3. Friedrich A. von Hayek, The Constitution of Liberty (Chicago, IL: (1937), 386–405.
University of Chicago Press, 1960); and Law, Legislation, and Liberty,
23. Because the right to incorporate is alleged to “inhere” in the right to
3 vols. (Chicago, IL: University of Chicago Press, 1973, 1976, 1979).
own property and to contract with others, this view is also known as
For Hayek’s critique of socialist planned economies, see The Road to
the inherence theory.
Serfdom (Chicago, IL: University of Chicago Press, 1944).
24. Dodge v. Ford Motor Co., 170 N.W. 668, 685 (1919).
4. David Gauthier, Morals by Agreement (Oxford: Oxford University
Press, 1986). For criticism, see Daniel M. Hausman, “Are Markets 25. Adolph A. Berle, and Gardiner C. Means, The Modern Corporation
­Morally Free Zones?”Philosophy and Public Affairs, 18 (1989), 317–33. and Private Property (New York: Macmillan, 1932).
5. Stewart Macaulay, “Non-contractual Relations in Business: A 26. The view that incorporation is a privilege “conceded” by the state in
­Preliminary Study,” American Sociological Review, 28 (1963), 55–67. order to achieve some social good is also known as the concession
theory.
6. For an insightful account of the relation between business ethics
and market failures, see Joseph Heath, “Business Ethics Without 27. E. Merrick Dodd, “For Whom Are Corporate Managers Trustees?”
Stakeholders,” Business Ethics Quarterly, 16 (2006), 533–57. Harvard Law Review, 45 (1932), 1145–63, 1148.
7. For a brief discussion of this assumption, see Sen, On Ethics and 28. Ibid., 1162.
Economics, 10–28. 29. Adolph A. Berle, The 20th Century Capitalist Revolution (New York:
8. Some economists and behavioral scientists recognize altruism and Harcourt, Brace & World, 1954), 169.
moral commitment and attempt to incorporate them into economic 30. Bart Victor and John B. Cullen, “The Organizational Bases of Ethi-
theory. See, for example, Edmund S. Phelps, ed., Altruism, Morality, cal Work Climates,” Administrative Science Quarterly, 33 (1988),
and Economic Theory (New York: Russell Sage Foundation, 1975); 101–25; Deborah V. Cohen, “Creating Ethical Work Climates: A
­Harvey Leibenstein, Beyond Economic Man (Cambridge, MA: Harvard Socio-Economic Perspective,” Journal of Socio-Economics, 24
University Press, 1976); David Collard, Altruism and Economy: A Study (1995), 317–43; James E. Wimbush and Jon M. Shepard,“Toward an
in Non-Selfish Economics (New York: Oxford University Press, 1978); Understanding of Ethical Climate: Its Relationship to Ethical
Howard Margolis, Selfishness, Altruism, and Rationality: A Theory of Behavior and Supervisory Influence,” Journal of Business Ethics, 13
Social Choice (Cambridge: Cambridge University Press, 1982); Amitai (1994), 637–48.
Etzioni, The Moral Dimension: Towards a New Economics (New York:
Free Press, 1988); and Robert H. Frank, Passions within Reason: The 31. See, for example, John M. Darley, “How Organizations Socialize
Strategic Role of the Emotions (New York: W. W. Norton, 1988). Individuals into Evildoing,” in Codes of Conduct: Behavioral Research
into Business Ethics, eds., David M. Messick and Ann E. Tenbrunsel
9. On the concepts of bounded rationality and satisficing, see Herbert (New York: Russell Sage Foundation, 1996), 13–43.
A. Simon, Administrative Behavior: A Study of Decision Making Pro-
cesses in Administrative Organization, 3rd ed. (New York: Free Press, 32. For an introduction to the large literature on organizational justice,
1976), originally published in 1947; James G. March and Herbert A. see Blair H. Sheppard, Roy J. Lewicki, and John W. Minton, Organi-
Simon, Organizations (New York: John Wiley & Sons, 1958); and zational Justice: The Search for Fairness in the Workplace (New York:
Richard M. Cyert and James G. March, A Behavioral Theory of the Lexington Books, 1992).
Firm (Upper Saddle River, NJ: Prentice Hall, 1963). 33. Darley,“How Organizations Socialize Individuals into Evildoing,” 13.
10. See Buchanan, Ethics, Efficiency, and the Market, 24–25. 34. The concept of the moral point of view is developed in Kurt Baier,
11. Felicity Barringer,“California Adopts Limits on Greenhouse Gases,” The Moral Point of View: A Rational Basis of Ethics (Ithaca, NY:
New York Times, 20 October 2011. ­Cornell University Press, 1958).
12. The disparity between private and public consumption in the United 35. Baier, The Moral Point of View, 88.
States is the major theme in John Kenneth Galbraith, The Affluent 36. Kenneth E. Goodpaster and John B. Matthews, Jr., “Can a Corpora-
Society (Boston, MA: Houghton Mifflin, 1958). tion Have a Conscience,”Harvard Business Review, 60 (1982), 132–41.
13. If everyone attempts to be a free rider, however, then certain kinds 37. Onora O’Neill, “Practical Principles and Practical Judgment,” Hast-
of collective choices are impossible unless people are coerced in ings Center Report, 31 (2001), 15–23.
some way. See Mancur Olson, The Logic of Collective Action
­(Cambridge, MA: Harvard University Press, 1965). 38. Baier, The Moral Point of View, 195–96.

14. For an insightful study of this problem, see Amartya Sen, Collective 39. Daniel Kahneman, Thinking, Fast and Slow (New York: Farrar, Straus
Choice and Social Welfare (San Francisco, CA: Holden Day, 1970). and Giroux, 2011).
Also, Kenneth Arrow, Social Choice and Individual Values, 2nd ed. 40. Lawrence Kohlberg, The Psychology of Moral Development: The
(New York: John Wiley & Sons, 1963). Nature and Validity of Moral Stages (San Francisco, CA: Harper &
15. For discussion of the prisoner’s dilemma, see any book on game Row, 1984).
theory, such as R. Duncan Luce and Howard Raiffa, Games and Deci- 41. Jonathan Haidt, The Righteous Mind: Why Good People Are Divided
sions (New York: John Wiley & Sons, 1957). by Politics and Religion (New York: Pantheon Books, 2012).
42. Max H. Bazerman and Ann E. Tenbrunsel, Blind Spots: Why We Fail 68. Cassell Bryan-Low, “KPMG Didn’t Register Strategy: Former Part-
to Do What’s Right and What to Do about It (Princeton, NJ: Princeton ner’s Memo Says Fees Reaped from Sales of Tax Shelter Far Out-
University Press, 2011), 62–66. weigh Potential Penalties,” Wall Street Journal, 17 November 2003.
43. David Desteno and PiercarloValdesolo, Out of Character: Surprising 69. Ibid.
Truths about the Liar, Cheat, Sinner (and Saint) Lurking in All of Us
70. Howard Gleckman, Amy Borrus, and Mike McNamee, “Inside the
(New York: Random House, 2011).
KPMG Mess: Why Eight Partners May Be Facing Jail Time—and
44. Bazerman and Tenbrunsel, Blind Spots, 68–69. These authors distin- What the Justice Dept.’s Suit Could Mean for the Tax-Shelter Busi-
guish a “should self,” which makes judgments about right conduct, ness,” Business Week, 5 September 2005, 46–47.
and a “want self,” which is concerned with needs and desires. The
71. Jonathan D. Glater,“8 Former Partners of KPMG Are Indicted,” New
dominant self at the time of any decision varies, they claim, on fea-
York Times, 30 August, 2005.
tures of the environment.
72. Floyd Norris, “KPMG, a Proud Lion, Brought to Heel,” New York
45. Francesca Gino, Sidetracked: Why Our Decisions Get Derailed, and
Times, 30 August 2005.
How We Can Stick to the Plan (Boston, MA: Harvard Business Review
Press, 2013).
46. Dan Ariely, The (Honest) Truth about Dishonesty: How We Lie to Chapter 3
­Everyone—Especially Ourselves (New York: Harper Collins, 2013), 23.
1. Information in this case is taken from Alecia Swasy, Soap Opera: The
47. David Brooks, The Social Animal: The Hidden Sources of Love, Char- Inside Story of Procter & Gamble (New York: Touchstone, 1994);
acter, and Achievement (New York: Random House, 2012). James S. Hirsch,“Procter & Gamble Calls in the Law to Track News
48. For a discussion of the concept of integrity in business ethics, see Leak,”Wall Street Journal, 12 August 1991; James S. Hirsch and Milo
Robert Audi and Patrick E. Murphy, “The Many Faces of Integrity,” Gegelin,“ P&G Says Inquiry on Leak to Journal Was Done Properly,”
Business Ethics Quarterly, 16 (2006), 3–21. Wall Street Journal, 13 August 1991; James S. Hirsch and Milo
­Gegelin, “What Possessed P&G,” Wall Street Journal, 13 August
49. Robert C. Solomon, Ethics and Excellence: Cooperation and Integrity 1991; James S. Hirsch, “No Charges Are Expected in P&G Affair,”
in Business (New York: Oxford University Press, 1992), 168. Wall Street Journal, 14 August 1991; Mark Fitzgerald,“Cops Investi-
50. Lynn Sharp Paine,“Managing for Organizational Integrity,” Harvard gate News Leak,” Editor & Publisher, 17 August 1991; James S.
Business Review, 72(1994), 106–17. Hirsch, “P&G Won’t Bring Criminal Charges as a Result of Probe,”
Wall Street Journal, 19 August 1991; William Safire, “At P&G: It
51. Stephanie Strom, “Harvard Managers’ Pay Criticized,” New York Sinks,” New York Times, 5 September 1991; “P&G Looks for a News
Times, 4 June 2004. Leak,” ABA Journal (November 1991); “Biggest Business Goofs of
52. Ibid. 1991,” Fortune, 13 January 1992, 80–83.
53. Charles Stein,“Harvard Pays 2 Top Money Managers $25m: Endow- 2. This formulation of RU follows that given by David Lyons for what
ment’s Salaries Down from Last Year; Critics Call System Lavish,” he calls “ideal rule-utilitarianism.” David Lyons, Forms and Limits of
Boston Globe, 23 November 2004. Utilitarianism (Oxford: Oxford University Press, 1965), 140.
54. Stephen M. Marks,“Alums Decry University Investor Salaries,” Har- 3. Some philosophers hold that there is no difference between the two
vard Crimson, 12 December 2003. formulations. See Lyons, Forms and Limits of Utilitarianism; R. M.
Hare, Freedom and Reason (Oxford: Oxford University Press, 1963);
55. Strom,“Harvard Managers’ Pay Criticized.”
and Alan F. Gibbard, “Rule-Utilitarianism: Merely an Illusory Alter-
56. Ibid. native?” Australasian Journal of Philosophy, 43 (1965), 211–20.
57. Charles Stein, “Harvard Will Keep Disputed Pay Policy under New 4. See, for example, Lionel Robbins, An Essay on the Nature and Sig-
Chief,” Boston Globe, 15 October 2005. nificance of Economic Science (London: Macmillan, 1932), 140; and
58. Steve Bailey,“Harvard’s PR Problem,”Boston Globe, 10 September 2004. Kenneth Arrow, Social Choice and Individual Values, 2nd ed. (New
York: John Wiley & Sons, 1963), 9.
59. Marks,“Alums Decry University Investor Salaries.”
5. A defense of interpersonal comparisons of utility by a prominent
60. William C. Symonds,“Leaving Harvard Greener: Investment Super- economist is I. M. D. Little, A Critique of Welfare Economics, 2nd ed.
star Jack Meyer’s Legacy Is Worth Every Penny He Was Paid,” Busi- (Oxford: Oxford University Press, 1957).
nessWeek, 24 January 2005, 44.
6. For an authoritative exposition, see E. J. Mishan, Cost–Benefit Analy-
61. Sara Rimer and Alan Finder,“Harvard to Aid Students High in Mid- sis (New York: Praeger, 1976).
dle Class,” New York Times, 11 December 2007.
7. These points are made by Steven Kelman, “Cost–Benefit Analysis:
62. Michael Lewis, “Harvard Fund Managers Deserve Better: Meyer’s An Ethical Critique,” Regulation (January–February 1981), 33–40.
Team Shamed Out by ‘High’ Salaries That Weren’t,” Financial Post
Investing, 21 January 2005. 8. See M. W. Jones-Lee, The Value of Life: An Economic Analysis
­(Chicago, IL: University of Chicago Press, 1976); and Michael D.
63. Information on the case is taken mainly from Saul Hansell,“P&G Sues Bayles, “The Price of Life,” Ethics, 89 (1978), 20–34. For criticism of
Bankers Trust over Swap Deal,”New York Times, 28 October 1994; Saul these methods, see Steven E. Rhoads,“How Much Should We Spend
Hansell, “Bankers Trust Settles Suit with P&G,” New York Times, to Save a Life?” in Valuing Life: Public Policy Dilemmas, ed. Steven
10 May 1996; Floyd Norris, Procter’s Tale: Gambling in Ignorance,” Rhoads (Boulder, CO: Westview Press, 1980).
New York Times, 30 October 1994; and Kelley Holland and Linda
­Himelstein,“The Bankers Trust Tapes,”BusinessWeek, 16 October 1995. 9. Peter Passell,“How Much for a Life? Try $3 to $5 Million,” New York
Times, 29 January 1995.
64. This spread is a useful indicator of expected interest rates since long-
term bonds are more reflective of expectations than short-term ones. 10. Ibid.

65. Hansell,“P&G Sues Bankers Trust over Swap Deal.” 11. Rosemary Tong, Ethics in Public Policy Analysis (Upper Saddle
River, NJ: Prentice Hall, 1986), 20.
66. The process of developing and marketing tax-shelter products is
described in The Role of Professional Firms in the U.S. Tax Shelter 12. Mark Sagoff, “At the Shrine of Our Lady of Fatima, or Why Political
Industry, Report Prepared by the Permanent Subcommittee on Questions Are Not All Economic,” Arizona Law Review, 23 (1981),
Investigations of the Committee on Homeland Security and 1283–98.
­Governmental Affairs, United States Senate, 13 April 2005. 13. Kelman,“Cost–Benefit Analysis,” 39.
67. U.S. Department of Justice, Press Release and Statement of Facts, 14. Richard M. Titmuss, The Gift Relationship: From Human Blood to
29 August 2005. Social Policy (London: Allen & Unwin, 1971).
15. Peter Singer,“Rights and the Market,”in Justice and Economic Distri- 30. For a discussion of Aristotle’s principle, see Hans Kelsen,“Aristotle’s
bution, ed. John Arthur and William H. Shaw (Upper Saddle River, Doctrine of Justice,” in What Is Justice (Berkeley and Los Angeles:
NJ: Prentice Hall, 1978), 213. University of California Press, 1957); and Renford Bambrough,
16. Titmuss, The Gift Relationship, 246. “Aristotle on Justice,” in New Essays on Plato and Aristotle, edited by
Renford Bambrough (London: Routledge & Kegan Paul, 1965).
17. For a discussion of the logical force of this question, see Colin
Strang,“What If Everyone Did That?” Durham University Journal, 53 31. Taken from William K. Frankena, “Some Beliefs about Justice,” in
(1960), 5–10. Freedom and Morality, edited by John Bricke (Lawrence, KS: Univer-
sity Press of Kansas, 1976).
18. For analyses of the virtues, see Philippa Foot, Virtues and Vices and
Other Essays in Moral Philosophy (Berkeley, CA: University of 32. For a discussion of this list, see Nicholas Rescher, Distributive Justice
California Press, 1978); Peter T. Geach, The Virtues (Cambridge:
­ (Indianapolis, IN: Bobbs-Merrill, 1966), chapter 4.
Cambridge University Press, 1977); Rosalind Hursthouse, On Virtue 33. John Rawls, A Theory of Justice (Cambridge, MA: Harvard University
Ethics (Oxford: Oxford University Press,1999); Gregory E. Pence, Press, 1971), 302.
“Recent Work on the Virtues,” American Philosophical Quarterly, 21
34. Robert Nozick, Anarchy, State and Utopia (New York: Basic Books,
(1984), 281–97; James D. Wallace, Virtues and Vices (Ithaca, NY:
1974), 153–55.
­Cornell University Press, 1978); G. H. von Wright, The Varieties of
Goodness (London: Routledge & Kegan Paul, 1963). 35. Ibid., 155–60.
19. Robert C. Solomon, Ethics and Excellence: Cooperation and Integrity 36. Ibid., 151.
in Business (New York: Oxford University Press, 1992). 37. Ibid.
20. This method of explaining rights is derived from Joel Feinberg,“The 38. Individuals could voluntarily agree with others to contribute to the
Nature and Value of Rights,” Journal of Value Inquiry, 4 (1970), 243– relief of poverty, in which case an obligation would exist. See ibid.,
57. Reprinted in Joel Feinberg, Rights, Justice, and the Bounds of Lib- 265–68.
erty (Princeton, NJ: Princeton University Press, 1980), 143–55.
39. This case is based on a memo written by Lawrence Summers, then
21. This term is used in H. J. McCloskey, “Rights,” Philosophical Quar- chief economist at the World Bank. See“Let Them Eat Pollution,”The
terly, 15 (1965), 115–27; and also in Richard A. Wasserstrom,“Rights, Economist, 8 February 1992, 66.
Human Rights, and Racial Discrimination,” Journal of Philosophy, 61
(1964), 628–41. For a useful survey of different accounts, see Rex 40. Material for this case is taken from Alix M. Freedman, “How a
Martin and James W. Nickel, “Recent Work on the Concept of Tobacco Giant Doctors Snuff Brands to Boost Their ‘Kick’,”Wall Street
Rights,” American Philosophical Quarterly, 17 (1980), 165–80. Journal, 26 October 1994; and Philip J. Hilts, “Snuff Makers Are
Accused of a Scheme to Lure Young,” New York Times, 27 April 1995.
22. Closely related is a distinction between negative and positive liberty.
A poor man is free (in a negative sense) to buy a loaf of bread, for 41. This case is based on actual events, but the names of the companies
example, as long as no one stands in his way, but he is not free (in a have been disguised. The case was prepared by Michael Streett
positive sense) unless he has the means to buy the bread. Compare under the supervision of Professor John R. Boatright. Copyright
these two senses in the case of “fee for service” medical care, which 1995 by John R. Boatright.
secures free choice, and socialized medicine, which provides free
access. Which system of medical care is more “free”? The classic dis-
cussion of this distinction is Isaiah Berlin,“Two Concepts of Liberty,” Chapter 4
in Four Essays on Liberty (Oxford: Oxford University Press, 1969). 1. Richard Lacayo and Amanda Ripley, “Persons of the Year,” Time,
23. Among the many works describing natural or human rights are 30 December 2002, 30.
Maurice Cranston, What Are Human Rights? (New York: Basic 2. Information on Watkins is taken from Amanda Ripley and Maggie
Books, 1963); B. Mayo, “What Are Human Rights?” in Political Singer, “The Special Agent,” Time, 30 December 2002, 34; Mimi
­Theory and the Rights of Man, ed. D. D. Raphael (Bloomington: Schwartz and Sherron Watkins, Power Failure: The Inside Story of the
­Indiana University Press, 1967); D. D. Raphael,“Human Rights, Old Collapse of Enron (New York: Doubleday, 2003).
and New,”in Political Theory and the Rights of Man; Maurice Cranston,
“Human Rights, Real and Supposed,” in Raphael, Political Theory 3. Information on Cooper is taken from Amanda Ripley, “The Night
and the Rights of Man; and A. I. Melden, Rights and Persons (Berkeley Detective,”Time, 30 December 2002, 44; Kurt Eichenwald and Simon
and Los Angeles: University of California Press, 1977). Romero, “Inquiry Finds Effort at Delay at WorldCom,” New York
Times, 4 July 2002.
24. See Stuart M. Brown, Jr., “Inalienable Rights,” Philosophical Review,
64 (1955), 192–211; and B. A. Richards, “Inalienable Rights: Recent 4. Information on Rowley is taken from Amanda Ripley and Maggie
Criticism and Old Doctrine,” Philosophy and Phenomenological Singer, “The Special Agent,” Time, 30 December 2002, 34; James
Research, 29 (1969), 391–404. Risen and David Johnston, “Traces of Terror: The Intelligence
Reports,” New York Times, 24 May 2004; Jim Yardley, “Traces of
25. Locke’s theory of natural rights is the subject of great controversy. ­Terror: The Agent,” New York Times, 25 May 2004; Neil A. Lewis,
Two introductions are W. Von Leyden, “John Locke and Natural “Traces of Terror: The Overview,” New York Times, 29 May 2004;
Law,” Philosophy, 31 (1956), 23–35; and William J. Wainwright,“Nat- Philip Shenon,“Traces of Terror: The Intelligence Reports,” New York
ural Rights,” American Philosophical Quarterly, 4 (1967), 79–84. Times, 31 May 2004; Neil A. Lewis and Don Van Natta, Jr.,“Traces of
26. Aristotle makes the distinction between compensatory and retribu- Terror: The Hearings,” New York Times, 6 June 2004; David Johnston
tive justice in terms of voluntary and involuntary relations. A contract and Neil A. Lewis, “Traces of Terror: The Congressional Hearings,”
is a voluntary arrangement between two people, whereas the victim New York Times, 7 June 2004; Robin Toner, “Traces of Terror: The
of an assault enters into the relation involuntarily. Many commenta- Whistle-Blower,” New York Times, 7 June 2004.
tors have found this a rather awkward way of making the distinction. 5. “Coleen Rowley’s Memo to FBI Director Robert Mueller: An Edited
27. The distinction between comparative and noncomparative justice is Version of the Agent’s 13-Page Letter,” 21 May 2002.
discussed in Joel Feinberg, “Comparative Justice,” Philosophical 6. Paul Fahri,“A Whistle That Can Pierce the Glass Ceiling: Are Women
Review, 83 (1974), 297–338, reprinted in Feinberg, Rights, Justice, More Likely to Warn of Problems?” Washington Post, 6 July 2002.
and the Bounds of Liberty.
7. Marcia P. Miceli, Janelle B. Dozier, and Janet P. Near, “Blowing the
28. The distinction is discussed in Brian Barry, Political Argument Whistle on Data Fudging: A Controlled Field Experiment,”Journal of
­(London: Routledge & Kegan Paul, 1965), 97–100. Applied Social Psychology, 21 (1991), 301–25; and Randi Sims and
29. For a discussion of the connection, see Gregory Vlastos,“Justice and John P. Keenan, “Predictors of External Whistleblowing: Organiza-
Equality,” in Social Justice, ed. Richard B. Brandt (Upper Saddle tional and Intrapersonal Variables,” Journal of Business Ethics,
River, NJ: Prentice Hall, 1962). 17 (1998), 411–21.
 8. Anita F. Hill,“Insider Women with Outsider Values,”New York Times, 33. Two studies of the MSPB in 1980 and 1983 showed that it had done
6 June 2002. little to encourage employees to report waste and corruption or to
9. Helen Thomas,“Women Whistle-blowers Did Right Thing,”Houston prevent retaliation against those who did. See Rosemary Chalk,
Chronicle, 15 June 2002. “Making the World Safe for Whistleblowers,” Technology Review, 91
(January 1988), 55.
10. Myron Peretz Glazer, quoted in Caroline E. Mayer and Amy Joyce,
“Blowing the Whistle,” Washington Post, 10 February 2002. 34. Public Company Accounting Reform and Investor Protection
­(Sarbanes-Oxley) Act, Pub. L. No. 107–204, 116 Stat. 745.
11. Dan Ackman, “Sherron Watkins Had Whistle, but Blew It,” http://
www.forbes.com/2002/02/14/0214watkins.html. 35. See Elleta Sangrey Callahan and Terry Morehead Dworkin, “Do
Good and Get Rich: Financial Incentives for Whistleblowing Under
12. For a discussion of the etymology of the word, see William Safire, the False Claims Act,” Villanova Law Review, 37 (1992), 273–336.
Safire’s Political Dictionary, 3rd ed. (New York: Random House,
1978), 790. 36. Gardiner Harris and Duff Wilson,“Glaxo to Pay $750 Million for Sale
of Bad Products,”New York Times, 26 October 2010. The award was a
13. Walter Pincus, “A True Whistleblower Doesn’t Behave Like Edward percentage of the amount received by the federal government, which
Snowden,” Washington Post, 2 June 2014. was $436.4 million, so the whistle-blower’s share was 22 percent.
14. Sissela Bok, “Whistleblowing and Professional Responsibility,” New 37. Alan F. Westin, Whistle Blowing! (New York: McGraw-Hill, 1981), 134.
York Education Quarterly, 11 (1980), 7–10.
38. Ibid., 136.
15. Petermann v. International Brotherhood of Teamsters, 174 Cal. App. 2d
184, 344, P. 2d 25 (1959). This case is discussed further in chapter 8 in the 39. Ralph Nader, Peter J. Petakas, and Kate Blackwell, eds., Whistle
section on unjust dismissal because Petermann was fired for testifying. Blowing: The Report of the Conference on Professional Responsibility
(New York: Grossman, 1972), 4.
16. Erik Wemple, “Edward Snowden: ‘Leaker’, ‘Source,’ or ‘Whistle-
blower’,” Washington Post,10 June 2013. 40. This is advocated by Patricia H. Werhane,“Individual Rights in Busi-
ness,” in Just Business: New Introductory Essays in Business Ethics,
17. James M. Roche,“The Competitive System to Work, to Preserve, and ed. Tom Regan (New York: Random House, 1984), 114–18.
to Protect,” Vital Speeches of the Day (May 1971), 445.
41. Malin,“Protecting the Whistle-blower from Retaliatory Discharge,”309.
18. Bok,“Whistleblowing and Professional Responsibility,” 330.
42. For discussions of whistle-blowing policies, see Tim Barnett, “Why
19. One form of this argument is examined in Alex C. Michalos, A Prag- Your Company Should Have a Whistleblowing Policy,” SAM
matic Approach to Business Ethics (Thousand Oaks, CA: Sage Publi- Advanced Management Journal, 57 (1992), 37–42; and Marcia P.
cations, 1995), 44–53. Miceli and Janet P. Near, Blowing the Whistle: The Organizational and
20. The concept of agency is not confined to law but occurs in econom- Legal Implications for Companies and Employees (New York: Lexing-
ics (especially the theory of the firm) and organizational theory. For ton Books, 1992), chapter 7.
a useful collection of articles exploring the ethical relevance of 43. This case is based on an experience reported to Professor John T.
agency theory, see Norman E. Bowie and R. Edward Freeman, eds., Delaney, University of Iowa. Some details have been changed. Used
Ethics and Agency Theory (New York: Oxford University Press, 1992). with the permission of Professor Delaney.
21. Raphael Powell, The Law of Agency (London: Pitman and Sons, 1965), 7. 44. Information for this case is taken mainly from United States of Amer-
22. Second Restatement of Agency, Sec. 387. A Restatement is not a stat- ica ex rel. Dr. Peter Rost v. Pfizer Inc., and Pharmacia Corporation,
ute passed by a legislature but a summary of the law in a given area, Civil Action No. 03-11084-JLT, United States District Court, District
written by legal scholars, which is often cited in court opinions. of Massachusetts, 30 August 2006; and United States of America ex
Other important Restatements are those on contracts and torts. rel.Peter Rost v. Pfizer, Inc., and Pharmacia Corporation, Civil Action
23. Second Restatement of Agency, Sec. 358, Comment f. No. 03-11084-PBS, United States District Court, District of Massa-
chusetts, 14 September 2010.
24. Michalos, A Pragmatic Approach to Business Ethics, 51.
45. Alex Berenson, “At Pfizer, the Isolation Increases for a Whistle-
25. Myron Peretz Glazer and Penina Migdal Glazer, “Whistleblowing,” Blower,” New York Times, 8 June 2005.
Psychology Today (August 1986), 39. See also Myron Peretz Glazer
and Penina Migdal Glazer, The Whistle-Blowers: Exposing Corrup- 46. Alex Berenson, “Pfizer Fires a Vice President Who Criticized the
tion in Government and Industry (New York: Basic Books, 1989). Company’s Sales Practices,” New York Times, 2 December 2005.

26. Albert O. Hirschman, Exit, Voice, and Loyalty (Cambridge, MA: 47. Asadi v. G.E. Energy (USA), LLC, Civil Action No. 4-12-345, United
­Harvard University Press, 1970), 77. States District Court, S.D. Texas, Houston Division, June 28, 2012.

27. Ibid., 79. 48. Khaled Asadi v. G.E. Energy (USA), LLC, In the United States Court
of Appeals for the Fifth Circuit, No. 12-20522, July 17, 2013.
28. Charles Peters and Taylor Branch, Blowing the Whistle: Dissent in the
Public Interest (New York: Praeger, 1972), 269. 49. Comments on Proposed Rules for Implementing the Whistleblower
Provision of Section 21F of the Securities and Exchange Act of 1934,
29. For similar lists, see Richard T. DeGeorge, Business Ethics, 6th ed. File No. S7-33-10.
(Upper Saddle River, NJ: Prentice Hall, 2006), 307–15; Gene G.
James, “Whistle Blowing: Its Moral Justification,” in Business Ethics: 50. National Business Ethics Survey of the U.S. Workforce (Arlington, VA:
Readings and Cases in Corporate Morality, 4th ed., edited by W. Ethics Resource Center, 2014).
Michael Hoffman, Robert E. Frederick, and Mark S. Schwartz (New 51. Nat Rudarakanchana, “SEC Seeks to Expand Corporate Whistle-
York: McGraw-Hill, 2001), 294. blower Protection, But It’s Too Late for One,” International Business
30. Bok,“Whistleblowing and Professional Responsibility,” 307. Times, 21 February 2014.
31. For a more thorough discussion of the practical aspects of whistle-
blowing, see Peter Raven-Hansen,“Dos and Don’ts for Whistleblow- Chapter 5
ers: Planning for Trouble,” Technology Review, 83 (May 1980), 34–44. 1. Mattel v. MGA Entertainment, 616 F. 3rd 904 (2010). See also Mattel
32. See Martin H. Malin, “Protecting the Whistle-blower from Retaliatory v. MGA Entertainment, 782 F. Supp. 2nd 911 (2011); and Mattel v.
Discharge,” Journal of Law Reform, 16 (Winter 1983), 277–318; Douglas MGA Entertainment, 705 F. 3rd (2013).
Massengill and Donald J. Petersen,“Whistleblowing: Protected Activity 2. Margaret Talbot,“Little Hotties,” New Yorker, 4 December 2006, 74.
or Not?”Employee Relations Law Journal, 15 (Summer 1989), 49–56; and
Elleta Sangrey Callahan and Terry Morehead Dworkin, “Internal 3. Anne D’Innocenzio, “Barbie Gets Hipper, Trendier to Fight the
Whistleblowing: Protecting the Interests of the Employee, the Organi- Competition,” USA Today, 22 January 2002.
zation, and Society,”American Business Law Journal, 37 (1991), 267–308. 4. “Toys: Flavas of the Week,” Newsweek, 3 August 2003.
 5. Mattel alleges that MGA kept Mr. Bryant’s involvement secret, but 32. Michael Davis,“Conflict of Interest,” Business and Professional Ethics
MGA denies this by citing numerous instances of disclosure. “MGA Journal, 1 (1982), 17–27, makes a threefold distinction between
Entertainment vs. Mattel—Fact vs. Fiction,”Reuters, 21 August 2008. actual, latent, and potential conflicts of interest. Latent conflict of
6. Talbot,“Little Hotties.” interest involves conflict situations that can reasonably be foreseen,
whereas potential conflict of interest involves conflict situations that
7. “MGA Entertainment vs. Mattel—Fact vs. Fiction.” cannot reasonably be foreseen.
8. Robyn Hagan Cain, “Ninth Circuit Reduces Bratz Award, Tells 33. The rule reads,“A lawyer shall not represent a client if the represen-
­Toymakers to ‘Play Nice’.” FindLaw, U.S. Ninth Circuit (blog), 25 tation of that client will be directly adverse to another client unless:
January 2013. http://blogs.findlaw.com/ninth_circuit/2013/01/ninth- (1) the lawyer reasonably believes the representation will not
circuit-reduces-bratz-award-tells-toymakers-to-play-nice.html adversely affect the relationship with the other client; and (2) each
9. Restatement (Third) of Agency (2006), Sec. 8.05. A Restatement is not client consents after consultation.”
a statute passed by a legislature but a summary of the law in a given 34. See Abraham J. Briloff, “Do Management Services Endanger Inde-
area, written by legal scholars, which is often cited in court opinions. pendence and Objectivity?” CPA Journal, 57 (August 1987), 22–29.
10. It should be understood that most agency and fiduciary relation- 35. National Society of Professional Engineers, Code of Ethics for Engi-
ships are created by contract, so the duties of confidentiality based neers, 1987, III, 2(b).
on relationships and those based on contracts do not constitute
mutually exclusive categories. 36. “Media Policies Vary on Preventing Employees and Others from
Profiting on Knowledge of Future Business Stories,”Wall Street Jour-
11. Michael S. Baram, “Trade Secrets: What Price Loyalty?” Harvard nal, 2 March 1984.
Business Review, 46 (November–December 1968), 66–74.
37. Carpenter et al. v. United States, 484 U.S. 19 (1987).
12. Dave Jamieson, “Jimmy John’s Makes Low-Wage Workers Sign
‘Oppressive’ Noncompete Agreements,”Huffington Post, 13 October 38. Warren A. Law, “Wall Street and the Pubic Interest,” in Wall Street
2014. See also, Neil Irwin, “When the Guy Making Your Sandwich and Regulation, ed., Samuel L. Hayes (Boston, MA: Harvard Busi-
Has a Noncompete Clause,” New York Times, 14 October 2014. ness School Press, 1987), 169.

13. Steven Greenhouse, “Noncompete Clauses Increasingly Pop Up in 39. American Bar Association, Model Rules of Professional Conduct, Rule 1.7.
Array of Jobs,” New York Times, 1 June 2014. 40. Cleveland Horton, “Ethics at Issue in Lotus Case,” Advertising Age,
14. See Kevin McManus,“Who Owns Your Brain?”Forbes, 6 June 1983, 178. 21 December 1987.

15. See Harlan M. Blake, “Employee Covenants Not to Compete,” 41. This case is based on Andy Serwer, “P&G Comes Clean on Spying
­Harvard Law Review, 73 (1960), 625–91. Operation,” www.fortune.com, 30 August 2001; Julian E. Barnes,
“Unilever Wants P&G Placed under Monitor in Spy Case,”New York
16. Dunn v. Frank Miller Associates, Inc., 237 Ga. 266 (1976). Times, 1 September 2001; Andrew Edgecliffe-Johnson and Adam
17. Originally presented by John Locke (1632–1704), who was an influ- Jones, “Unilever Seeks Review after P&G ‘Spying,’” Financial Times,
ential English political philosopher. For a discussion of the Lockean 1 September 2001; “P&G, Unilever Settle Spy Case,” Advertising
view as well as the utilitarian argument, see Edwin C. Hettinger, Age, 6 September 2001; Julian E. Barnes,“P&G Said to Agree to Pay
“Justifying Intellectual Property,” Philosophy and Public Affairs, 18 Unilever $10 Million in Spying Case,” New York Times, 7 September
(1989), 36–51. 2001; Andy Serwer, “P&G’s Covert Operation: An Intelligence-
Gathering Campaign against Unilever Went Way Too Far,” www.
18. Rebecca Eisenberg, “How Can You Patent Genes,” American Journal
fortune.com, 17 September 2001.
of Bioethics, 2 (2001), 3–11.
42. In re El Paso Corporation Shareholder Litigation, C.A. No. 6949-CS
19. See Association for Molecular Pathology et al. v. Myriad Genetics, Inc.,
(Del. Ch. February 29, 2012).
et al., USSC No. 12-398 (2013). The unanimous decision in this case
held that a naturally occurring DNA segment that is merely isolated 43. Andrew Ross Sorkin,“As an Advisor, Goldman Guaranteed Its Pay-
cannot be patented but that a synthetically created DNA segment day,” New York Times, 5 March 2012.
that does not occur naturally is patent eligible.
20. Copyright Term Extension Act of 1998, Pub. L. 105-298.
Chapter 6
21. Economic Espionage Act of 1996, Pub. L. 104-294.
1. Soroka v. Dayton Hudson, 1 Cal. Rptr. 2d 77 (Cal. App. 1 Dist. 1991).
22. Alan Farnham, “How Safe Are Your Secrets?” Fortune, 8 September
1997, 114–20; Chaim A. Levin, “Economic Espionage Act: A Whole 2. Frank H. Williams, “Selecting Best Type of Salespeople Easy with
New Ballgame,” New York Law Journal, 2 January 1997, 5. This Set of Test Questions,” Dry Goods Economist, 21 April 1923, 15.
23. These are essentially the facts in the classic case Peabody v. Norfolk, 3. Barton Gellman and Laura Poitras,“U.S., British Intelligence Mining
98 Mass. 452 (1868). Data from Nine U.S. Internet Companies in Broad Secret Program,”
Washington Post, 7 June 2013.
24. Wexler v. Greenberg, 160 A. 2d 430 (1960).
4. Adam Liptak and Michael Schmidt, “Judge Upholds N.S.A.’s Bulk
25. For a discussion of the ethical issues, see Mark Michael, “Patent Collection of Data on Calls,” New York Times, 28 December 2013.
Rights and Better Mousetraps,”Business and Professional Ethics Jour-
nal, 3 (1983), 13–23. 5. For a discussion of this problem, see Karl J. Duff and Eric T. Johnson,
“A Renewed Employee Right to Privacy,” Labor Law Journal, 34
26. For a summary of the law in other countries, see Stanley H. Lieberstein, (1983), 747–62.
Who Owns What Is in Your Head? (NewYork: Hawthorne Books, 1979),
225–32. 6. See Al Noel, “Privacy: A Sign of Our Times,” Personnel Administra-
tor, 26 (March 1981), 59–62.
27. International News Service v. Associated Press, 248 U.S. 215 (1918).
7. Lee Rainie, Sarah Kiesler, and Mary Madden,“Anonymity, Privacy and
28. Lynn Sharp Paine, “Corporate Policy and the Ethics of Competitor Security Online,” Pew Research Center Report, 5 September 2013.
Intelligence Gathering,”Journal of Business Ethics, 10 (1991), 423–36.
8. See Ian Brown and Christopher Mardsen, Regulating Code: Good
29. Much of the material in this paragraph and the one following is con-
Governance and Better Regulation in the Information Age (Cam-
tained in Steven Flax,“How to Snoop on Your Competitors,”Fortune,
bridge, MA: MIT Press, 2013), 118–21; Adam Thierer,“The Danger of
14 May 1984, 28–33.
Making Facebook, LinkedIn, Google and Twitter Public Utilities,”
30. Diana B. Henriques with Kurt Eichenwald, “A Fog over Enron, and Forbes 24 July 2011.
the Legal Landscape,” New York Times, 27 January 2002.
9. For information on the Sociological Department, see Robert Lacey, Ford:
31. Second Restatement of Agency, Sec. 385. Emphasis added. The Men and the Machine (Boston, MA: Little, Brown, 1986), 117–25.
10. These new technologies are described in Gary T. Marx and Sanford 33. Fried, An Anatomy of Values, 9. A similar account is given in James
Sherizen,“Monitoring on the Job: How to Protect Privacy as Well as Rachels,“Why Privacy Is Important,” Philosophy and Public Affairs, 4
Property,” Technology Review, 89 (November–December 1986), (1975), 295–333.
63–72. See also Gary T. Marx, “The New Surveillance,” Technology
34. Fried, An Anatomy of Values, 148.
Review, 88 (May–June 1985), 42–48.
35. See Jeffrey H. Reiman, “Privacy, Intimacy, and Personhood,”
11. See John C. North,“The Responsibility of Employers for the Actions
­Philosophy and Public Affairs, 6 (1976), 26–44.
of Their Employees: Negligent Hiring Theory of Liability,” Chicago-
Kent Law Review, 53 (1977), 717–30; and Marian M. Extejt and Wil- 36. Parent, “Privacy, Morality, and the Law,” 275. A similar point is
liam N. Bockanic,“Theories of Negligent Hiring and Failure to Fire,” expressed in Reiman,“Privacy, Intimacy, and Personhood,” 33.
Business and Professional Ethics Journal, 8 (Winter 1989), 21–34. 37. Arguments of this kind are presented in Wasserstrom,“Privacy,” and
12. Alan F. Westin,“The Problem of Privacy Still Troubles Management,” Reiman,“Privacy, Intimacy, and Personhood.”
Fortune, 4 June 1979, 120–26. See also Joyce Asher Gildea, “Safety 38. Deborah Ehling v. Monmouth-Ocean Hospital Service Corp., et al.,
and Privacy: Are They Compatible?” Personnel Administrator, U.S. Dist. Ct., D.N.J., No. 2:11-cv-03305 (2012).
27 (February 1982), 80–83.
39. See John C. North,“The Responsibility of Employers for the Actions
13. Sally Beatty, “Reader’s Digest Targets Patients by Their Ailments,” of Their Employees: Negligent Hiring Theory of Liability,” Chicago-
Wall Street Journal, 17 April 1998. Kent Law Review, 53 (1977), 717–30; and Marian M. Extejt and
14. Michael W. Miller,“Patients’ Records Are Treasure Trove for Budding ­William N. Bockanic, “Theories of Negligent Hiring and Failure to
Industry,” Wall Street Journal, 27 February 1992. Fire,”Business and Professional Ethics Journal, 8 (Winter 1989), 21–34.
15. Samuel Warren and Louis D. Brandeis, “The Right to Privacy,” Har- 40. Natasha Singer, “On Campus, A Faculty Uprising over Personal
vard Law Review, 4 (1890), 193–220. Two earlier discussions are James Data,” New York Times, 14 September 2013.
Fitzjames Stephen, Liberty, Equality, and Fraternity (New York: 41. Steve Early, “Why Workers Should Be Wary about ‘Corporate’
Henry Holt, 1873); and E. L. Godkin,“Rights of the Citizen, Part IV— ­Wellness,” The Nation, 26 February 2013.
To His Own Reputation,” Scribner’s Magazine, 8 (1890), 58–67.
42. Zachary Schiller and Walecia Konrad, “If You Light Up on Sunday,
16. Olmstead v. United States, 277 U.S. 438 (1928). Don’t Come in on Monday,” BusinessWeek, 26 August, 1991, 70.
17. The case is Roberson v. Rochester Folding Box Co., 171 N.Y. 538 (1902). 43. Jeremy Peters, “Company’s Smoking Ban Means Off-Hours, Too,”
18. Griswold v. Connecticut, 381 U.S. 479 (1965). New York Times, 8 February 2005.
19. William L. Prosser, “Privacy,” California Law Review, 48 (1960), 383– 44. “The Issue: A Blog, a Flight Attendant, and a Firing,” Bloomberg
423, 389. Other writers who argue that privacy is a complex of rights ­Businessweek, 15 July 2008.
are Frederick Davis, “What Do We Mean by ‘Right to Privacy?’” 45. Kashmir Hill, “Feds Okay Start-up That Monitors Employees’ Inter-
South Dakota Law Review, 4 (1959), 1–24; and Judith J. Thomson, net and Social Media Footprints,” Forbes, 15 June 2011.
“The Right to Privacy,” Philosophy and Public Affairs, 4 (1975),
46. Laura Noble and Don Davis, “Social Media and Employment Law,”
­295–315. For criticism of Prosser, see Edward J. Bloustein,“Privacy as
North Carolina Bar Association, 2 January 2014, retrieved from
an Aspect of Human Dignity: An Answer to Dean Prosser,” New
http://laborandemploymentlaw.ncbar.org.
York University Law Review, 39 (1964), 962–1007.
47. Denine K. Carr, “Do Employers Have the Right to Demand Social
20. Eisenstadt v. Baird, 405 U.S. 438 (1972).
Media Passwords from Job Applicants and Employees?” New York
21. See W.A. Parent,“Privacy, Morality, and the Law,”Philosophy and Public State Bar Association Journal, 24 (2013), 7–10.
Affairs, 12 (1983), 269–88; H. J. McCloskey, “Privacy and the Right to
48. Noble and Davis,“Social Media and Employment Law.”
Privacy,” Philosophy, 55 (1980), 17–38; and Joseph R. DesJardins, “Pri-
vacy in Employment,” in Moral Rights in the Workplace, ed. Gertrude 49. For a partial defense of disclosure policies, see Adam Moore,
Ezorsky (Albany, NY: State University of NewYork Press, 1987), 127–39. “Employee Monitoring: Evaluative Surveillance v. Privacy,” Business
Ethics Quarterly, 10 (2000), 697–709.
22. For statements of this definition, see Charles F. Fried, An Anatomy of
Values (Cambridge, MA: Harvard University Press, 1970); Richard A. 50. Steve Lohr, “Unblinking Eyes Track Employees,” New York Times,
Wasserstrom,“Privacy,”in Today’s Moral Problems, 2nd ed., edited by 21 June 2014.
Richard A. Wasserstrom (New York: Macmillan, 1979); Elizabeth L. 51. This point is made by Parent, “Privacy, Morality, and the Law,” 280.
Beardsley,“Privacy: Autonomy and Selective Disclosure,” in Privacy, Much of the argument in this section is derived from Parent’s analy-
ed. J. Roland Pennock and John W. Chapman (New York: Atherton sis of wrongful invasion of privacy.
Press, 1971); and Arthur Miller, The Assault on Privacy (Ann Arbor,
MI: University of Michigan Press, 1971). 52. See Thomas H. Murray, “Thinking the Unthinkable about Genetic
Screening,” Across the Board, 20 (June 1983), 34–39.
23. Alan F. Westin, Privacy and Freedom (New York: Atheneum, 1967), 7.
53. DesJardins,“Privacy in Employment.”
24. Richard B. Parker, “A Definition of Privacy,” Rutgers Law Review, 27
(1974), 275–97, 279. 54. This point is made by Donald Harris, “A Matter of Privacy: Manag-
ing Personal Data in Company Computers,” Personnel, 64 (February
25. This point is made by Parent,“Privacy, Morality, and the Law,” 273. 1987), 34–43.
26. Ibid., 269. 55. See Anne E. Libbin, Susan R. Mendelssohn, and Dennis P. Duffy,
27. Ibid., 269–70. “The Right to Privacy, Part 5: Employee Medical and Honesty Test-
ing,” Personnel, 65 (November 1988), 38–48.
28. These two cases are contained in Marx and Sherizen, “Monitoring
on the Job,” 67. 56. George G. Brenkert, “Privacy, Polygraphs and Work,” Business and
Professional Ethics Journal, 1 (1981), 19–35, 30.
29. Westin, Privacy and Freedom, 31–42.
57. David T. Lykken,“Polygraphic Interrogation,”Nature, 307 (23 February
30. For criticisms of these arguments, see McCloskey, “Privacy and the 1984), 681–84.
Right to Privacy,” 34–35; and Parent, “Privacy, Morality, and the
Law,” 275–76. 58. “Scientific Validity of Polygraph Testing: A Research Review and
Evaluation,” Technical Memorandum OTA-TM-H-15 (Washington,
31. Stanley I. Benn, “Privacy, Freedom, and Respect for Persons,” in DC: Office of Technology Assessment, November 1983).
­Pennock and Chapman, Privacy, 10–11.
59. Danah Boyd and Kate Crawford, “Critical Questions for Big Data:
32. Hyman Gross, “Privacy and Autonomy,” in Pennock and Chapman, Provocations for a Cultural, Technological and Scholarly Phenome-
Privacy, 174. non,” Information, Communication and Society, 15 (2012), 662–79.
60. Theresa Payton and Theodore Claypoole, Privacy in the Age of Big Google, Inc., v. Agencia Española de Protección de Datos,” Press
Data (Lanham, MD: Rowman & Littlefield, 2014). Release, 13 May 2014; and David Drummond, “We Need to Talk
61. Julia Angwin, “The Web’s New Gold Mine: Your Secrets,” Wall about the Right to Be Forgotten,” The Guardian 10 July 2014.
Street Journal, 30 July 2010; see also Joseph Turow, The Daily You: 86. California Business and Professional Code §22575; see also Kamala
How the New Advertising Industry Is Defining Your Identity and Harris, “Making Your Privacy Practices Public,” California Depart-
Worth (New Haven, CT: Yale University Press, 2011), especially ment of Justice, May 2014.
chapter 5.
87. Shawn C. Helms,“Translating Privacy Values with Technology,”Boston
62. Federal Trade Commission, “Data Brokers: A Call for Transparency University Journal of Science and Technology Law, 7 (2001), 288–326.
and Accountability,” May 2014, 23–33.
88. Declan McCullagh, “Intel Nixes Chip-Tracking ID,” Wired News, 27
63. Ibid., 32. April 2000.
64. Ibid., iv. 89. Federal Trade Commission, “Protecting Consumer Privacy in an Era
65. Amitai Etzioni,“Privacy Merchants: What Is to Be Done?”University of Rapid Change: A Proposed Framework for Business and Policy-
of Pennsylvania Journal of Constitutional Law, 14 (2012), 929–51; makers,” Preliminary Staff Report, December, 2010; Antonio
Federal Trade Commission,“Data Brokers,” 49–51. Regalado, “High Stakes in Internet Tracking: Will ‘Do Not Track’ Kill
Off Innovation along with Targeted Advertising?” MIT Technology
66. Federal Trade Commission,“Data Brokers,” vi–vii. Review, 4 June 2012.
67. Finn Brunton and Helen Nissenbaum, “Vernacular Resistance to 90. This case is drawn from The City of Ontario et al. v. Quon et al., 560
Data Collection and Analysis: A Political Theory of Obfuscation,” U.S. 746 (2010).
First Monday, 16 (May 2011).
91. Lyle Denniston, “Texting and Privacy on the Job,” ScotusBlog, 19
68. Office of Oversight and Investigations,“A Review of the Data Broker April 2010.
Industry: Collection, Use and Sale of Consumer Information for
Marketing Purposes,” U.S. Senate Committee on Commerce, 92. Adam Liptak,“Justices Get Personal Over Privacy of Messages,”New
­Science and Transportation, Staff Report for Chairman Rockefeller, York Times, 20 April 2010.
18 December 2013, 23. 93. Ontario v. Quon, 749.
69. Federal Trade Commission,“Data Brokers,” 39. 94. Ontario v. Quon, 747.
70. Emily Steel and Julia Angwin, “On the Web’s Cutting Edge, 95. Ontario v. Quon,748.
­Anonymity in Name Only,” Wall Street Journal, 4 August 2010.
96. Ontario v. Quon, 751.
71. Dunbar v. Google, Inc., U.S. Dist. Ct. D. E. Tex., No. 5:10-cv00194
97. Quon v. Arch Wireless Operating Co., 529 F.3d 892 (2008), 909.
(2010); Benjamin Herold, “Google under Fire for Data Mining Stu-
dent Email Messages,” Education Week, 13 March 2014. 98. “Respecting Privacy at H.P.,” company document.
72. Scott Thurm and Yakari Kane, “Your Apps Are Watching You,” Wall 99. This case is based largely on Damon Darlin, “H.P. Chairwoman
Street Journal, 17 December 2010; Jim Edwards,“How Google’s New Aims Not to Be the Scapegoat,” New York Times, 9 September 2006;
Web Tracking Plan Could Give It a Monopoly Over Facebook and Damon Darlin and Matt Richtel, “Spying Uproar Causes Shuffle in
Apple,” Business Insider, 28 September 2013. Boardroom,” New York Times, 13 September 2006; and Damon
­Darlin,“Deeper Spying Is Seen in Hewlett Review,” New York Times,
73. Julia Angwin and Jennifer Valentio-Devries, “Google’s iPhone
18 September 2006.
Tracking: Web Giant Bypassed Apple Browser Settings for
Guarding ­Privacy,” Wall Street Journal, 17 February 2012; Federal 100. Damon Darlin, “Ex-Chairwoman among 5 Charged in Hewlett
Trade Commission, “Google Will Pay $2.5 Million to Settle FTC Case,” New York Times, 5 October 2006.
Charges It Misrepresented Privacy Assurances,” Press Release, 101. Darlin,“Deeper Spying Is Seen in Hewlett Review.”
9 August 2012.
102. Damon Darlin, “H.P. Is Said to Study Infiltrating Newsrooms,” New
74. Claire Miller and Tazina Vega, “Google Introduces New Social Tool York Times, 20 September 2006.
and Settles Privacy Charge,” New York Times, 31 March 2011.
103. David A. Kaplan,“Suspicions and Spies in Silicon Valley,” Newsweek,
75. For a detailed review of Facebook’s privacy policy, see Mark Chen, 18 September 2006, 40.
“Interactive Contracting in Social Networks,” Cornell Law Review,
97(2012), 1533–56. 104. Darlin and Richtel,“Spying Uproar Causes Shuffle in Boardroom.”

76. Vindu Goel, “Flipping Switches on Facebook’s Privacy Controls,” 105. Darlin,“Ex-Chairwoman among 5 Charged in Hewlett Case.”
New York Times, 30 January 2014. 106. Darlin,“H.P. Chairwoman Aims Not to Be the Scapegoat.”
77. Vindu Goel, “Americans Say They Want Privacy, But Act as If They 107. Darlin and Richtel,“Spying Uproar Causes Shuffle in Boardroom.”
Don’t,” New York Times, 13 November 2014.
108. Inside ChoicePoint, 2007, company publication.
78. Kirsten Martin,“Facebook (A): Beacon and Privacy,” Case BRI-1006,
109. Robert O’Harrow, Jr., “ChoicePoint Data Cache Became a Powder
Business Roundtable Institute for Corporate Ethics, 2010.
Keg: Identity Thief’s Ability to Get Information Puts Heat on Firm,”
79. Polly Sprenger,“Sun on Privacy: ‘Get Over It’,” Wired News, 26 Janu- Washington Post, 5 March 2005.
ary 1999.
110. Derek V. Smith, The Risk Revolution: Threats Facing America & Tech-
80. Lawrence Lessig, Code and Other Laws of Cyberspace (New York: nology’s Promise for a Safer Tomorrow (Atlanta, GA: Longstreet
Basic Books, 1999). Press, 2004), 9.
81. Ibid., 154. 111. Robert O’Harrow, “In Age of Security, Firm Mines Wealth of Per-
82. Ibid., 155. sonal Data,” Washington Post, 20 January 2005.

83. Ibid., 156. 112. Federal Trade Commission, 2006 Identity Theft Survey Report,
November 2007.
84. These camps are described and analyzed in Karl D. Belgum, “Who
Leads at Half-time? Three Conflicting Views on Internet Privacy,” 113. Ibid.
Richmond Journal of Law & Technology, 6 (Symposium 1999). 114. Steven Brill in the foreword to Smith, The Risk Revolution, xi.
85. This requirement impacts what Internet companies, such as Google 115. Robert O’Harrow, Jr., “ID Data Conned from Firm: ChoicePoint
and Yahoo, can display in search results to users. See European Case Points to Huge Fraud,”Washington Post, 17 February 2005. The
Court of Justice, “Judgment in Case C-131/12: Google Spain SL, figure of 163,000 is contained in the Complaint for United States v.
 ChoicePoint, Inc., United States District Court for the Northern 19. Harris v. Forklift Systems, Inc., 510 U.S. 17 (1993).
­District of Georgia, Civil Action No. 106-CV-0198.
20. Barbara Presley Noble, “Little Discord on Harassment Ruling,” New
116. Complaint for United States v. ChoicePoint, Inc. York Times, 13 November 1993.
117. Federal Trade Commission, “ChoicePoint Settles Security Breach 21. Burlington Industries v. Ellerth, No. 97–569, and Faragher v. City of
Charges; to Pay $10 Million in Civil Penalties, $5 Million for Boca Raton, No. 97–282.
­Consumer Redress,” Press Release, 26 January 2006.
22. This analysis and the phrase “taste for discrimination” are due to
118. Complaint for United States v. ChoicePoint, Inc. Gary S. Becker, The Economics of Discrimination, 2nd ed. (Chicago,
119. Gary Rivlin, “Keeping Your Enemies Close,” New York Times, IL: University of Chicago Press, 1971).
12 November 2006. 23. This point is also made in Milton Friedman, Capitalism and Freedom
120. Ibid. (Chicago, IL: University of Chicago Press, 1962), 109–10. Friedman
uses the analysis to argue against legislation curbing discrimination
on the grounds that competition alone is sufficient to bring discrim-
Chapter 7 ination to an end.

1. Material for this case is drawn from Bari-Ellen Roberts, Roberts v. 24. See Kenneth J. Arrow, “The Theory of Discrimination,” in Discrimi-
Texaco (New York: Avon Books, 1998); Amy Myers Jaffe, “At Texaco, nation in Labor Markets, ed. Orley Ashenfelter and Albert Rees
the Diversity Skeleton Still Stalks the Halls,” New York Times, (Princeton, NJ: Princeton University Press, 1973); Lester C. Thurow,
11 December 1994; Peter Fritsch, “Trustee of Big Fund with Texaco Generating Inequality (New York: Basic Books, 1975); Dennis J.
Stock Says Tape Shows ‘Culture of Disrespect,’” Wall Street Journal, Aigner and Glen G. Cain, “Statistical Theories of Discrimination in
6 November 1996; Kurt Eichenwald,“The First Casualties in Scandal Labor Markets,” Industrial and Labor Relations Review, 30 (1977),
at Texaco,” New York Times, 7 November 1996; Kurt Eichenwald, 175–87; and Barbara R. Bergmann and William Darity, Jr., “Social
“The Two Faces of Texaco,” New York Times, 10 November 1996; Relations, Productivity, and Employer Discrimination,” Monthly
Adam Bryant, “How Much Has Texaco Changed?” New York Times, Labor Review, 104 (April 1982), 47–49.
2 November 1997. 25. John Rawls, A Theory of Justice (Cambridge, MA: Harvard University
2. Earl A. Molander, “Affirmative Action at AT&T,” in Responsive Capi- Press, 1971), 83.
talism: Case Studies in Corporate Conduct (New York: McGraw-Hill, 26. Rosabeth Moss Kanter, in Men and Women of the Corporation (New
1980), 56–70. York: Basic Books, 1977), proposes “batch” promotions of two or
3. 42 U.S.C. 2000e-2. more individuals from excluded groups so that they can support
each other and break down barriers.
4. Diaz v. Pan American World Airways, Inc., 442 F.2d 385 (1971).
27. These points are made in Albemarle Paper Company v. Moody, 422
5. Dothard v. Rawlinson, 433 U.S. 321 (1977). U.S. 405 (1975).
6. Griggs v. Duke Power Company, 401 U.S. 424 (1970). 28. Clara Watson v. Fort Worth Bank and Trust, 487 U.S. 977 (1988).
7. The precedent of Griggs was altered by several subsequent court 29. “In the Supreme Court of the United States: Clara Watson v. Fort
decisions, most notably Wards Cove Packing Co. v. Antonio, 490 U.S. Worth Bank and Trust,” American Psychologist, 43 (1988), 1019–28.
642 (1988), which made it more difficult for employees to sue for See also an accompanying explanation by Donald N. Bersoff,“Should
discrimination. A 1991 civil rights bill largely restored the interpreta- Subjective Employment Devices Be Scrutinized? It’s Elementary, My
tion of Griggs that had prevailed before. Dear Ms. Watson,” American Psychologist, 43 (1988), 1016–18.
8. See, for example, Macy v. Department of Justice, EEOC Appeal No. 30. Equal Employment Opportunity Commission, Charges Alleging
0120120821 (2012) and Castello v. U.S. Postal Service, EEOC Request Sexual Harassment FY 2010 – FY 2014.
No. 0520110649 (2011).
31. The study by Freada Kelin is reported in Susan Crawford, “A Wink
9. For a discussion of these and other problems, see James G. Frierson, Here, a Leer There: It’s Costly,” New York Times, 28 March 1993.
“Religion in the Workplace,”Personnel Journal, 67 (July 1988), 60–67;
and Douglas Massengill and Donald J. Petersen, “Job Requirements 32. United Steelworkers and Kaiser Aluminum v. Weber, 443 U.S. 193
and Religious Practices: Conflict and Accommodation,” Labor Law (1979).
Journal, 39 (July 1988), 402–10. 33. Johnson v. Transportation Agency, Santa Clara County, 480 U.S. 616
10. Eliza G. C. Collins and Timothy B. Blodgett, “Sexual Harassment: (1987).
Some See It … Some Won’t,” Harvard Business Review, 59 (March– 34. The landmark cases are Fullilove v. Klutznick, 448 U.S. 448 (1980);
April 1981), 76–95. City of Richmond v. J. A. Croson Company, 488 U.S. 469 (1989); and
11. Barbara A. Gutek, Sex and the Workplace (San Francisco, CA: Jossey- Adarand v. Peña, 115 S. Ct. 896 (1995).
Bass, 1985), 43–44. 35. Grutter v. Bollinger, 539 U.S. 982 (2003), and Gratz v. Bollinger, 539
12. Catharine A. MacKinnon, Sexual Harassment of Working Women U.S. 244 (2003).
(New Haven, CT: Yale University Press, 1979), 193. 36. Fisher v. University of Texas at Austin, U.S. Court of Appeals for the
13. Meritor Savings Bank v. Vinson, 477 U.S. 57 (1986). Fifth Circuit, No. 09-50822 (2014).

14. The expert witness in Robinson v. Jacksonville Shipyards, Inc., who 37. James P. Hackett, quoted in Steven Greenhouse and Jonathan D.
made this point was Susan Fiske. The term “sex role spillover” was Glater, “Companies See Law School Ruling as a Way to Help Keep
developed by Veronica F. Nieva and Barbara A. Gutek, Women and the Diversity Pipeline Open,” New York Times, 24 June 2003.
Work: A Psychological Perspective (New York: Praeger, 1981). 38. Bernard R. Boxill, “The Morality of Preferential Hiring,” Philosophy
15. Robert C. Ford and Frank McLaughlin,“Sexual Harassment at Work: and Public Affairs, 7 (1978), 247.
What Is the Problem?” Akron Business and Economic Review, 20 39. Ibid., 248.
(Winter 1988), 79–92.
40. For a defense of this principle, see Alan H. Goldman,“Justice and Hiring
16. Ellison v. Brady, 924 F.2d 872 (1991). See also Howard A. Simon, by Competence,”American Philosophical Quarterly, 14 (1977), 17–26.
“Ellison v. Brady: A ‘Reasonable Woman’ Standard for Sexual Har-
41. For an argument of this kind, see James Nickel, “Classification by
assment,”Employee Relations Law Journal, 17 (Summer 1991), 71–80.
Race in Compensatory Programs,” Ethics, 84 (1974), 147–48.
17. Bundy v. Jackson, 641 F.2d 934 (D.C. Cir. 1981).
42. These points are made by George Sher,“Preferential Hiring,” in Just
18. Linda Greenhouse, “High Court to Decide Burden of Accusers in Business: New Introductory Essays in Business Ethics, ed. Tom Regan
Harassment Cases,” New York Times, 2 March 1993. (New York: Random House, 1984).
43. Boxill,“The Morality of Preferential Hiring,” 266. 8. Lochner v. New York, 198 U.S. 45, 25 S.Ct. 539 (1905).
44. Douglas Rae, Inequalities (Cambridge, MA: Harvard University 9. West Coast Hotel v. Parrish, 300 U.S. 379 (1937). In a landmark deci-
Press, 1981), 66–68. sion, Nebbia v. New York, 291 U.S. 502 (1934), the Supreme Court
45. Ronald Dworkin, Taking Rights Seriously (Cambridge, MA: Harvard had previously ruled that states have the power to regulate busi-
University Press, 1978), 223–39; and Ronald Dworkin, A Matter of ness—and thereby limit the property rights of owners—for the sake
Principle (Cambridge, MA: Harvard University Press, 1985), 293–331. of the public welfare. The decision in West Coast Hotel thus extends
the precedent of Nebbia, which concerned the setting of prices, to
46. Dworkin, Taking Rights Seriously, 227. matters of employment.
47. For criticism of Dworkin’s argument, see Robert L. Simon,“Individ- 10. The efficiency argument for employment at will is presented in
ual Rights and ‘Benign’ Discrimination,” Ethics, 90 (1979), 88–97. Richard Epstein, “In Defense of the Contract at Will,” University of
48. Ibid., 91. Chicago Law Review, 51 (1984), 947–82.
49. Quoted in Peter Perl, “Rulings Provide Hiring Direction: Employers 11. Petermann v. International Brotherhood of Teamsters, 174 Cal. App. 2d
Welcome Move,” Washington Post, 3 July 1986. 184, 344 P. 2d 25 (1959).
50. The example and much that follows is taken from Alan Wertheimer, 12. Frampton v. Central Indiana Gas Company, 260 Ind. 249, 297 N.E. 2d
“Jobs, Qualifications, and Preferences,” Ethics, 94 (1983), 99–112. A 425 (1973). In addition, see Kelsay v. Motorola, 74 Ill. 2d 172, 384 N.E.
different kind of argument for the relevance of race as a qualifica- 2d 353 (1978); Sventko v. Kroger Co., 69 Mich. App. 644, 245 N.W. 2d
tion is presented by Michael Davis, “Race as Merit,” Mind, 42 151 (1976).
(1983), 347–67. For a criticism of the kind of argument presented 13. Nees v. Hocks, 272 Or. 210, 536 P. 2d 512 (1975).
by Wertheimer, see Robert K. Fullinwider, The Reverse Discrimina-
tion Controversy: A Moral and Legal Analysis (Totowa, NJ: Rowman 14. Greeley v. Miami Valley Maintenance Contractors, Inc.
and Littlefield, 1980), 78–86; and Alan H. Goldman, Justice and 15. Toussaint v. Blue Cross and Blue Shield of Michigan and Ebling v.
Reverse Discrimination (Princeton, NJ: Princeton University Press, Masco Corporation, 408 Mich. 579, 272 N.W. 2d 880 (1980).
1979), 167–68.
16. Fortune v. National Cash Register Company, 364 N.E. 2d 1251 (1977).
51. Manuel G. Velasquez, Business Ethics: Concepts and Cases, 5th ed.
(Upper Saddle River, NJ: Prentice Hall, 2002), 423–24. 17. Tara J. Radin and Patricia H. Werhane, “Employment-at-Will,
Employee Rights, and Future Directions for Employment,” Business
52. Regents of the University of California v. Bakke, 438 U.S. 265 (1978). Ethics Quarterly, 13 (2003), 113–30, 115.
53. Hirabayashi v. United States, 320 U.S. 81 (1943). 18. Rosabeth Moss Kanter, When Giant’s Learn to Dance (New York: Free
54. Material for this case is taken from Lois Robinson v. Jacksonville Ship- Press, 1990), 321.
yards, Inc., No. 86–927-Civ-J-12 (1991). 19. See Casey Ichniowski,“Human Resource Management and Produc-
55. Reed Abelson, “Suing Wal-Mart but Still Hoping to Move Up,” New tive Labor-Management Relations,” in Research Frontiers in Indus-
York Times, 23 June 2004. trial Relations and Human Resources, ed. David Lewis et al. ­(Madison,
WI: Industrial Relations Research Association, 1992); David Levine
56. Plaintiff’s Third Amended Complaint, Betty Dukes, et al. v. Wal-Mart
and Laura D’Andrea Tyson, “Participation, Productivity and the
Stores, Inc., United States District Court, Northern District of Cali-
Firm’s Environment,” in Paying for Productivity: A Look at the
fornia, Case No. C-01–2252 MJJ.
­Evidence, ed. Alan Blinder (Washington, DC: Brookings Institution
57. Steven Greenhouse,“Wal-Mart Faces Lawsuit over Sex Discrimina- Press, 1990); Jeffrey Pfeffer, The Human Equation: Building Profits by
tion,” New York Times, 16 February 2003. Putting People First (Cambridge, MA: Harvard Business School
58. Robert Parloff,“The War over Unconscious Bias,”Fortune, 15 October Press, 1998).
2007, 90. 20. John J. McCall, “A Defense of Just Cause Dismissal Rules,” Business
59. Ibid. Ethics Quarterly, 13 (2003), 151–75, 159. For further discussion of
the effect of default rules, especially in employment, see Pauline
60. Principal Brief for Wal-Mart Stores, Inc., Betty Dukes, et al. v. Kim, “Bargaining with Imperfect Information: A Study of Worker
­Wal-Mart Stores, Inc., U.S. Court of Appeals for the Ninth Circuit, Perceptions of Legal Protection in an At-Will World,” Cornell Law
Nos. 04–16688 and 04–16720. Review, 83 (1997), 105–60; David Millon, “Default Rules, Wealth
61. Parloff,“The War over Unconscious Bias.” ­Distribution and Corporate Law Reform: Employment at Will versus
Job Security,” University of Pennsylvania Law Review 146 (1998),
62. Ibid.
975–1041; Cass Sunstein, “Switching the Default Rule,” New York
63. Reed Abelson “6 Women Sue Wal-Mart, Charging Job and Promo- University Law Review, 77 (2001), 106–43.
tion Bias,” New York Times, 20 June 2001.
21. Uniform Commissioners’ Model Employment Termination Act, Uni-
64. Parloff,“The War over Unconscious Bias.” form Laws Annotated, 7A Cumulative Annual Pocket Part (St. Paul,
65. Clara Watson v. Fort Worth Bank and Trust, 992. MN: West Publishing, 1997), Prefatory Note.
22. Jill M. Dieterle, “Freedom of Conscience, Employee Prerogatives,
Chapter 8 and Consumer Choice,” Journal of Business Ethics, 77 (2008), 191–
203; Richard Lippke,“Speech, Conscience, and Work,” Social Theory
1. Greeley v. Miami Valley Maintenance Contractors, Inc., 49 Ohio St. 3d and Practice, 18 (1992), 237–58.
228 (1990); 551 N.E. 2d 981 (1990).
23. David C.Yamada,“Voice from the Cubicle: Protecting and Encourag-
2. H. G. Wood, A Treatise on the Law of Master and Servant (Albany, NY: ing Private Employee Speech in the Post-Industrial Workplace,”
John D. Parsons, Jr., 1877), 134. Berkeley Journal of Employment and Labor Law, 19 (1998), 1–59.
3. Paine v. Western & A.R.R., 81 Tenn. 507, 519–20 (1884). 24. Ibid., 21.
4. Philip J. Levine, “Towards a Property Right in Employment,” Buffalo 25. These distinctions are made in Bruce Barry, “The Cringing and the
Law Review, 22 (1973), 1084. Craven: Freedom of Expression In, Around, and Beyond the Work-
5. Clyde W. Summers, “Employment at Will in the United States: The place,” Business Ethics Quarterly, 17 (2007), 263–96.
Divine Right of Employers,” University of Pennsylvania Journal of 26. “Court Upholds Ruling on Free Speech Law,” New York Times,
Labor and Employment Law, 3 (2000–2001), 65–86, 65, and 66. 5 October 1999.
6. Adair v. United States, 208 U.S. 161, 28 S.Ct. 277 (1907). 27. Todd Wallack,“Beware If Your Blog Is Related to Work,”San Francisco
7. Coppage v. Kansas, 26 U.S. 1, 35 S.Ct. 240 (1914). Chronicle, 24 January 2005.
28. Barry,“The Cringing and the Craven,” 265. 48. Robert A. Dahl, A Preface to Economic Democracy (Berkeley and Los
29. As of 2006, 26 states had enacted such laws, mainly in response to Angeles, CA: University of California Press, 1985), 111.
employers who prohibit smoking, even away from work. See Karen 49. Ibid., 115.
L. Chadwick, “Is Leisure-Time Smoking a Valid Employment Con- 50. Ibid., 118.
sideration?” Albany Law Review, 70 (2006), 117–41. By 2010, the
number of states with laws protecting employees who smoke off the 51. Ibid., 122–33.
job was 29. National Conference of State Legislatures, “Discrimina- 52. Jan Narveson, “Democracy and Economic Rights,” Social Philosophy
tion Laws Regarding Off-Duty Conduct,” 18 October 2010. and Policy, 9 (1992), 45–49.
30. Pickering v. Board of Education, 391 U.S. 563 (1968). 53. Dahl, A Preface to Economic Democracy, 73–83.
31. Holodnak v. Avco Corporation, 423 U.S. 892 (1975). In other Supreme 54. Robert Mayer, “Robert Dahl and the Right to Workplace Democ-
Court decisions, the right to speak out on matters of public concern racy,” Review of Politics, 63 (2001), 221–247, 230.
was upheld in cases involving a police officer, a firefighter, and a
55. John Kell, “Wal-Mart to Increase Hourly Wages for Thousands of
public health nurse. Muller v. Conlisk, 429 F. 2d 901 (7th Cir. 1970);
Store Associates,” Fortune, 19 February 2015.
Dendor v. Board of Fire and Police Commissioners, 11 Ill. App. 3d 582,
297 N.E. 2d 316 (1973); Rafferty v. Philadelphia Psychiatric Center, 56. See Rosen, Sherwin, “The Economics of Superstars,” American Eco-
356 F. Supp. 500 (E.D.Pa. 1973). nomic Review, 71 (1981), 845–58; Robert H. Frank and Philip J. Cook,
The Winner-Take-All Society (New York: Free Press, 1995).
32. Connick v. Myers, 461 U.S. 138 (1983).
57. Robert Pollin and Stephanie Luce, The Living Wage: Building a Fair
33. For one presentation of these arguments, see Lucy Vickers, Freedom
Economy (New York: New Press, 1998).
of Speech and Employment (Oxford: Oxford University Press, 2002).
58. Agnes Radomski and John Thomason, “If Congress Wont’ Raise the
34. See C. Edwin Baker, Human Liberty and Freedom of Speech (New Minimum Wage, These Cities Will,” The Nation, 16 July 2014.
York: Oxford University Press, 1989); Cynthia L. Estlund, “Free
Speech and Due Process in the Workplace,” Indiana Law Journal, 71 59. Richard T. DeGeorge, Moral Issues in Business, 6th ed. (Upper Sad-
(1995), 101–51; Kent Greenawalt, “Free Speech Justifications,” dle River, NJ: Prentice Hall, 2006), 364.
Columbia Law Review, 89 (1989), 119–55. 60. For a classic statement of the economist’s argument, see George J.
35. Barry,“The Cringing and the Craven,” 287–88. Stigler, “The Economics of Minimum Wage Legislation,” American
Economic Review, 36 (1946), 358–65. A fuller presentation is con-
36. See Greenawalt,“Free Speech Justifications,” 141–42. tained in Charles Brown, Curtis Gilroy, and Andrew Kohen, “The
37. Estlund,“Free Speech and Due Process in the Workplace,” 13. Effect of the Minimum Wage on Employment and Unemployment,”
Journal of Economic Literature, 20 (1982), 487–528.
38. Frank Heller, Eugen Pusic, George Strauss, and Bernhard Wilpert,
Organizational Participation: Myth and Reality (Oxford: Oxford 61. Brown, Gilroy, and Kohen, “The Effect of Minimum Wage on
­University Press 1998), 15. Employment and Unemployment.”
39. Janice R. Foley and Michael Polanyi, “Workplace Democracy: Why 62. David Card and Alan B. Krueger, Myth and Measurement: The New
Bother?” Economic and Industrial Democracy, 27 (2006), 173–91. Economics of the Minimum Wage (Princeton, NJ: Princeton Univer-
sity Press, 1995).
40. Although employee ownership is rare in industrial firms, which
require extensive financial capital, they are common in businesses 63. Richard B. Freeman, “The Minimum Wage as a Redistributive Tool,”
that involve mainly human capital, such as professional services. If Economic Journal, 106 (1996), 639–49.
partnerships in accounting, law, and other services are regarded as 64. John Keenan, “The Elusive Effects of Minimum Wages,” Journal of
employee owned, then they are very common indeed. Employee- Economic Literature, 33 (1995), 1949–65; and Marvin H. Kosters, ed.,
owned firms are more prevalent in Italy, France, and Spain. See The Effect of the Minimum Wage on Employment (Washington, DC:
Henry Hansmann, The Ownership of Enterprise (Cambridge, MA: The AEI Press, 1996).
Harvard University Press, 1996), 66–69.
65. Marvin H. Kosters, “Employment and the Minimum Wage: What
41. For examples of workplace democracy in the United States, see Does the Evidence Show?” in The Effect of the Minimum Wage on
Jaclyne Badal,“Can a Company Be Run as a Democracy?”Wall Street Employment, 104.
Journal, 32 April 2007.
66. “Two Decades of CEO Pay,” Forbes, http://www.forbes.com/
42. Abraham Sagie and Meni Koslowsky, Participation and Empower- lists/2012/12/ceo-compensation-12-historical-pay-chart.html
ment in Organizations: Modeling, Effectiveness, and Applications
67. Equilar, Inc., Executive Compensation Data Firm Equilar Releases
(Thousand Oaks, CA: Sage Publications, 2000).
Annual CEO Pay Study, Press Release, 13 April 2014.
43. Foley and Polanyi, “Workplace Democracy” offers a health-based
68. Derek Bok, The Cost of Talent: How Executives and Professionals Are
argument. For other arguments, see John J. McCall,“Employee Voice
Paid and How It Affects America (New York: The Free Press, 1993),
in Corporate Governance: A Defense of Strong Participation Rights,”
102.
Business Ethics Quarterly, 11 (2001), 195–213; and Patricia H.
­Werhane, Persons, Rights, and Corporations (Englewood Cliffs, NJ: 69. Stuart D. Wechsler, “Would Adam Smith Pay Them So Much?”
Prentice Hall, 1985). Forbes, 28 May 1990, 210.
44. Carol Pateman, Participation and Democratic Theory (Cambridge: 70. Graef S. Crystal, In Search of Excess (New York: W. W. Norton, 1991).
Cambridge University Press, 1970). 71. Brian J. Hall and Jeffrey B. Liebman, “Are CEOs Really Paid Like
45. Richard Sobel, “From Occupational Involvement to Political Participa- Bureaucrats?” Quarterly Journal of Economics, 113 (1998), 653–91.
tion: An Exploratory Analysis,”Political Behavior, 15 (1993), 339–353, 349. 72. Xavier Gabaix and Augustin Landier, “Why Has CEO Pay Increased
46. Neil Carter,“Political Participation and the Workplace: The Spillover So Much?” Quarterly Journal of Economics, 123 (2008), 49–100.
Thesis Revisited,” British Journal of Politics and International Rela- 73. Lucian Bebchuk and Jesse Fried, Pay without Performance: The
tions, 8 (2006), 412–26. Unfulfilled Promise of Executive Compensation (Cambridge, MA:
47. For one form of the argument, see George G. Brenkert, “Freedom, Harvard University Press, 2004).
Participation and Corporations: The Issue of Corporate (Economic) 74. Most notably, William Bratton, “The Academic Tournament over
Democracy,” Business Ethics Quarterly, 2 (1992), 251–79. Another Executive Compensation,”California Law Review, 93 (2005), 1557–84;
argument is offered in Christopher McMahon, Authority and John E. Core, Wayne R. Guay, and Randall S. Thomas, “Is U.S. CEO
Democracy: A General Theory of Government and Management Compensation Inefficient Pay without Performance?” Michigan Law
(Princeton, NJ: Princeton University Press, 1994). Review, 103 (2004–2005), 1142–85; and Stephen M. Bainbridge,
 “Executive Compensation: Who Decides?” Texas Law Review, Chapter 9
83 (2004–2005), 1615–62.
1. “Chronology of Firestone/Ford Knowledge of Tire Safety Defect,”
75. David Goldenberg, “Interview with Fired Google Blogger,” Gelf http://www.citizen.org.
­Magazine, 16 February 2005.
2. John Greenwald,“Tired of Each Other,” Time, 22 June 2001, 50–56.
76. Christine Negroni, “Fired Flight Attendant Finds Blogs Can Back-
fire,” New York Times, 16 November 2004. 3. Keith Bradsher, “Firestone Engineers Offer a List of Causes for
Faulty Tires,” New York Times, 19 December 2000.
77. Lisa Belkin, “Queen of the Mommy Bloggers,” New York Times,
23 February 2011. 4. Matthew L. Wald,“Rancor Grows between Ford and Firestone,”New
York Times, 13 September 2000.
78. Traci Purdum, “Sun Microsystems’ CEO Blogs,” Industry Week, 20
July 2006. See also Jonathan Schwartz, “If You Want to Lead, Blog,” 5. Mark Truby, “Firestone CEO Quits, New Chief Rips Ford,” Detroit
Harvard Business Review, 83 (November 2005), 30. News, 11 October 2000.

79. Traci Purdum, “Sun Microsystems’ CEO Blogs: Jonathan Schwartz, 6. Ibid.
President and CEO of Sun Microsystems Inc., Reaches Employees, 7. Francisco Toro and Frank Swoboda,“Venezuela Puts Blame on Ford,
Partners and Customers via His Twice-weekly Blog.” IndustryWeek, Firestone,” Washington Post, 1 September 2000.
20 July 2006. Retrieved 9 April 2015 from http://www.industryweek.
8. James V. Grimaldi and Frank Swoboda, “Ford Offers Tire Data
com/public-policy/sun-microsystems-ceo-blogs.
­Comparison,” Washington Post, 18 September 2000.
80. Tiffany Black,“How to Handle Employee Blogging,” Inc. Magazine, 26
9. Ibid.
April 2010, http://www.inc.com/guides/2010/04/employee-blogging-
policy.html. 10. Bradsher,“Firestone Engineers Offer a List of Causes of Faulty Tires.”
81. Julie Bosman, “Author’s Unmasking Won’t Stop Book,” New York 11. Caroline E. Mayer and Frank Swoboda, “A Corporate Collision,”
Times, 25 February 2014; Leslie Kaufman and William Alden, “Book Washington Post, 20 June 2001.
Deal Falls Apart for Parodist of Goldman,” 7 March 2014.
12. Ibid.
82. Information in this case is taken from John Holusha, “G.M. Pact
13. Keith Bradsher, “Firestone Stops Sales to Ford, Saying It Was Used
Seeks High Degree of Cooperation,” New York Times, 28 July 1985;
as Scapegoat,” New York Times, 22 May 2001.
William Serrin, “Bold G.M. Pact Draws Praise, and Some Caveats,”
New York Times, 3 August 1985; John Holusha, “Saturn Division 14. World Health Organization, “Asbestos: Elimination of Asbestos-
Finds a Home in the Heartland,” New York Times, 4 August 1985; Related Diseases,” Fact Sheet No. 343, July 2014.
Maralyn Edid, “How Power Will Be Balanced on Saturn’s Shop 15. Much of the following description of health and safety problems is
Floor,” BusinessWeek, 5 August 1985; Doron P. Levin, “Saturn: An adapted from Nicholas Askounes Ashford, Crisis in the Workplace:
Outpost of Change in G.M.’s Steadfast Universe,” New York Times, Occupational Disease and Injury (Cambridge, MA: MIT Press, 1976).
17 March 1991; Doron P. Levin, “At Saturn Plant, a Vote on Innova-
tion,” New York Times, 14 November 1991; David Woodruff,“Saturn: 16. For a review of the controversy that discredits the industry claim, see
Labor’s Love Lost?” BusinessWeek, 8 February 1993, 122; Robyn Robert H. Hall,“The Truth about Brown Lung,” Business and Society
Meredith, “Many at the Saturn Auto Factory Are Finding Less to Review, 40 (Winter 1981), 15–20.
Smile About,”New York Times, 6 March 1998; Robyn Meredith,“Sat- 17. For a critical assessment of state efforts, see Joseph A. Page and
urn Union Votes to Retain Its Cooperative Company Pact,” New York Mary-Win O’Brien, Bitter Wages (New York: Grossman, 1973), 69–85.
Times, 12 March 1998; Keith Bradsher, “Labor’s Peace with G.M.
Unraveling at Saturn,” New York Times, 22 July 1998; Frank Swo- 18. Sec. 5(a)(1). This clause is the subject of much legal analysis. See ­Richard
boda, “Saturn Experiment in Jeopardy,” Washington Post, 6 March S. Morley, “The General Duty Clause of the Occupational Safety and
1999; Keith Bradsher, “Saturn’s Plant’s Union Leaders Are Voted Health Act of 1970,”Harvard Law Review, 86 (1973), 988–1005.
Out,” New York Times, 26 February 1999; Saul A. Rubenstein and 19. Patricia H. Werhane, Persons, Rights, and Corporations (Upper
Thomas A. Kochan, Learning from Saturn (Ithaca, NY: Cornell Uni- ­Saddle River, NJ: Prentice Hall, 1985), 132.
versity Press, 2001).
20. Mark MacCarthy, “A Review of Some Normative and Conceptual
83. Holusha,“Saturn Division Finds a Home in the Heartland.” Issues in Occupational Safety and Health,” Environmental Affairs, 9
84. Serrin,“Bold G.M. Pact Draws Praise, and Some Caveats.” (1981), 782–83.

85. Holusha,“G.M. Pact Seeks High Degree of Cooperation.” 21. These two factors are discussed by Alan Gewirth, who cites them as
exceptions to his claim that persons have a right not to have cancer
86. Bradsher,“Labor’s Peace with G.M. Unraveling at Saturn.” inflicted on them by the actions of others. See Alan Gewirth,
87. William Serrin, “Giving Workers a Voice of Their Own,” New York “Human Rights and the Prevention of Cancer,” in Human Rights:
Times Magazine, 2 December 1984, 126. Essays on Justification and Applications (Chicago, IL: University of
Chicago Press, 1982). For an evaluation, see Eric Von Magnus,
88. Information for this case is taken from Michael Barbaro, “Wal-Mart “Rights and Risks,” Journal of Business Ethics, 2 (1983), 23–26.
to Expand Health Plan for Workers,” New York Times, 24 October
2005; Steven Greenhouse and Michael Barbaro, “Wal-Mart Memo 22. See H. L. A. Hart and A. M. Honoré, Causation in the Law (Oxford:
Suggests Ways to Cut Employee Benefit Costs,” New York Times, 26 Oxford University Press, 1959), 64–76.
October 2005; Michael Barbaro, “Wal-Mart to Expand Health Plan,” 23. U.S. Code 21, 348(c) (3).
New York Times, 24 February 2006; Michael Barbaro and Reed Abel-
son, “Wal-Mart Says Health Plan Is Covering More Workers,” New 24. Federal Register, 39, no. 20 (29 January 1974), 3758. Emphasis added.
York Times, 11 January 2007; Michael Barbaro and Reed Abelson,“A 25. Food Quality Protection Act of 1996, Public Law No. 104–170, 110
Health Plan for Wal-Mart: Less Stinginess,” New York Times, 13 Stat. 1489 (1996).
November 2007; Michael Barbaro, “Wal-Mart Crosses a Health
26. Gewirth,“Human Rights and the Prevention of Cancer,” 189.
Insurance Threshold,” New York Times, 23 January 2008; “Supple-
mental Benefits Documentation,” Board of Directors Retreat FY06, 27. AFL-CIO v. American Petroleum Institute, 448 U.S. 607 (1980).
Wal-Mart Stores, Inc., company document, 2005; “Wal-Mart’s 28. For an argument of this kind, see Tibor R. Machan, “Human Rights,
Health Care Benefits Are Competitive in the Retail Sector,”company Workers’ Rights, and the Right to Occupational Safety,” in Moral
document, n.d. Rights in the Workplace, ed. Gertrude Ezorsky (Albany, NY: State
89. Greenhouse and Barbaro, “Wal-Mart Memo Suggests Ways to Cut University of New York Press, 1987), 45–50.
Employee Benefit Costs.” 29. W. Kip Viscusi, Risk by Choice (Cambridge, MA: Harvard University
90. Barbaro and Abelson,“A Health Plan for Wal-Mart.” Press, 1983), 80.
30. The following argument is adapted from Norman Daniels, “Does BFOQ defense. The weaker business necessity defense is applica-
OSHA Protect Too Much?” in Moral Rights in the Workplace, 51–60. ble only to disparate impact discrimination, in which a policy not
31. Robert Nozick, “Coercion,” in Philosophy, Science and Method, ed. discriminatory on its face still serves to exclude protected groups
Sidney Morgenbesser, Patrick Suppes, and Morton White (New disproportionately.
York: St. Martin’s Press, 1969). 51. Western Airlines v. Criswell, 472 U.S. 400 (1985).
32. In considering whether a person voluntarily chooses undesirable 52. For the sake of simplicity, the discussion in this section focuses
work when all of the alternatives are even worse as a result of the only on manufacturers, but a responsibility for product safety
actions of other people, Nozick says that the answer “depends upon extends to wholesalers, distributors, franchisers, and retailers,
whether these others had the right to act as they did.” Robert among others, although their responsibility is generally less than
Nozick, Anarchy, State, and Utopia (New York: Basic Books, 1974), 262. that of manufacturers.
33. Some philosophers have attempted to give a morally neutral analy- 53. The conditions under which a negligent act is a cause of injury to
sis of coercion that involves no assumptions about what is morally another person (known in law as proximate cause) are complicated.
required. See David Zimmerman, “Coercive Wage Offers,” Philoso- See any standard textbook on business law for an explanation.
phy and Public Affairs, 10 (1981), 121–45.
54. Larsen v. General Motors Corporation, 391 F. 2d 495 (8th Cir. 1968).
34. Information on this case is contained in Whirlpool Corporation v. 55. LeBouef v. Goodyear Tire and Rubber Co., 623 F. 2d 985 (5th Cir. 1980).
Marshall, 445 U.S. 1 (1980).
56. See Ed Timmerman and Brad Reid,“The Doctrine of Invited Misuse:
35. Thomas O. McGarity, “The New OSHA Rules and the Worker’s A Societal Response to Marketing Promotion,”Journal of Macromar-
Right to Know,” Hastings Center Report, 14 (August 1984), 38–39. keting, 4 (Fall 1984), 40–48.
36. For a version of this argument, see ibid. Much of the following dis- 57. Commercial National Bank of Little Rock, Guardian of the Estate of Jo
cussion of the autonomy argument is adapted from this article. Ann Fitzsimmons v. General Motors Corporation, U.S. Dist. Ct.
37. This point is made in Ruth R. Faden and Tom L. Beauchamp, “The E.D.Ark., No. LR-C-79-168 (1979).
Right to Risk Information and the Right to Refuse Health Hazards 58. United States v. Carroll Towing Co., 159 F. 2d 169 (2nd Cir. 1947).
in the Workplace,” in Ethical Theory and Business , 7th ed., edited by
Tom L. Beauchamp and Norman E. Bowie (Upper Saddle River, NJ: 59. Bashada v. Johns-Manville Products Corp., 90 N.J. 191, 447 A. 2d 539
Prentice Hall, 2004), 204–11. (1982). The “state-of-the-art” defense has been accepted in other
cases. See, for example, Boatland of Houston, Inc. v. Bailey, 609 S.W.
38. This exception suggests a further argument for the right to know 2d 743 (Tex. 1980). For an overview, see Jordan H. Leibman, “The
based on fairness. Employers who knowingly place workers at risk Manufacturer’s Responsibility to Warn Product Users of Unknowa-
are taking unfair advantage of the workers’ ignorance. See McGarity, ble Dangers,” American Business Law Journal, 21 (1984), 403–38.
“The New OSHA Rules and the Worker’s Right to Know,” 40.
60. Henningsen v. Bloomfield Motors, Inc. and Chrysler Corporation, 161
39. Ibid., 41. A. 2d 69 (1960).
40. Wendy W. Williams, “Firing the Woman to Protect the Fetus: The 61. MacPherson v. Buick Motor Company, 217 N.Y. 382 (1916).
Reconciliation of Fetal Protection with Employment Opportunity
Goals under Title VII,” Georgetown Law Journal, 69 (1981), 641–704, 62. Baxter v. Ford Motor Company, 168 Wash. 456, 12 P. 2d 409 (1932);
659–60. 179 Wash. 123, 35 P. 2d 1090 (1934).
41. Gail Bronson, “Issue of Fetal Damage Stirs Women Workers at 63. Greenman v. Yuba Power Products, 59 Cal. 2d 57, 377 P. 2d 897, 27
Chemical Plants,” Wall Street Journal, 9 February 1979. Cal. Rptr. 697 (1963). The theory was enunciated 19 years earlier in
Escola v. Coca-Cola Bottling Co., 24 Cal. 2d 453, 150 P. 2d 436 (1944).
42. “Company and Union in Dispute as Women Undergo Sterilization,”
New York Times, 4 January 1979; “Four Women Assert Jobs Were 64. Escola v. Coca-Cola Bottling Co.
Linked to Sterilization,” New York Times, 5 January 1979; Philip 65. Richard A. Epstein, Modern Products Liability Law (Westport, CT:
Shabecoff, “Job Threats to Workers’ Fertility Emerging as Civil Quorum Books, 1980), 27. Epstein holds, however, that this princi-
­Liberties Issue,” New York Times, 15 January 1979; and Bronson, ple has limited application in product liability cases.
“Issue of Fetal Damage Stirs Women Workers at Chemical Plants.”
66. George P. Fletcher,“Fairness and Utility in Tort Theory,”Harvard Law
43. United Automobile Workers et al. v. Johnson Controls, Inc., 449 U.S. Review, 85 (1972), 537–73; Richard A. Epstein, “A Theory of Strict
187, 111 S.Ct. 1196 (1991). Liability,” Journal of Legal Studies, 2 (1973), 151–204; and Jules L.
44. This point is made in Ronald Bayer, “Women, Work, and Reproduc- Coleman, “The Morality of Strict Tort Liability,” William and Mary
tive Hazards,” Hastings Center Report, 12 (October 1982), 14–19. Law Review, 18 (1976), 259–586. Richard Posner argues that the
Aristotelean principle of compensatory justice in a negligence sys-
45. Williams,“Firing the Woman to Protect the Fetus,” 647. tem, correctly understood, is the same as the principle of efficiency
46. Equal Employment Opportunity Commission and Office of Federal that underlies strict liability. See Richard Posner,“A Theory of Negli-
Contract Compliance Programs, “Interpretive Guidelines on gence,” Journal of Legal Studies, 1 (1972), 29–96; and Richard Posner,
Employment Discrimination and Reproductive Hazards,” Federal “The Concept of Corrective Justice in Recent Theories of Tort Law,”
Register, 1 February 1980, 7514. Journal of Legal Studies, 10 (1981), 187–206.
47. Williams,“Firing the Woman to Protect the Fetus,” 663. 67. This proposal was contained in S. 44, an unsuccessful bill introduced
in the 98th Congress.
48. Cited in Bronson, “Issue of Fetal Damage Stirs Women Workers at
Chemical Plants.” 68. U.S. House of Representatives, Committee on Education and the
Workforce, Subcommittee on Employer–Employee Relations,
49. These examples are cited in Lois Vanderwaerdt,“Resolving the Con- ­Testimony of Mr. Gary Avary, 24 July 2001.
flict between Hazardous Substances in the Workplace and Equal
Employment Opportunity,” American Business Law Journal, 21 69. “What Is HNPP?” http://www.hnpp.org/whatis.htm.
(1983), 157–84. 70. EEOC v. Burlington Northern Santa Fe Railroad Co., No. C01-4013
50. The Supreme Court did not consider the business necessity (N.D. Iowa, filed 9 February 2001).
defense, because only the BFOQ defense was held to be applicable 71. David Rubenstein, “Burlington Northern Discovers a Third Rail:
in this case. The reason for not considering the business necessity Burned by a Genetic Test,” Corporate Legal Times, July 2001, 68.
test is that the fetal protection policy adopted by Johnson Controls
was judged by the Court to be disparate treatment, which is to say 72. Ibid.
that a distinction was made explicitly on the basis of sex, and dis- 73. Darryl van Duch, “EEOC Goes after Genetic Testing,” National Law
parate treatment discrimination requires the more demanding Journal, 7 May 2001.
74. Karen Long,“Can Genes Cost You Your Job? Experts Ponder the Eth- 16. Holley,“A Moral Evaluation of Sales Practices,” 7.
ics of Genetic Tests in Workplace,”Cleveland Plain Dealer, 16 Decem-
17. Tom L. Beauchamp, “Manipulative Advertising,” Business and
ber 2001, Sunday Life, L1.
­Professional Ethics Journal, 3 (1984), 1–22.
75. Genetic Information Nondiscrimination Act of 2008, Public Law
18. Manipulative sales practices that exploit the poor are well docu-
110-233, 122 Stat. 881,
mented in David Caplovitz, The Poor Pay More (New York: Free
76. This case is based on United Automobile Workers et al. v. Johnson Con- Press, 1963); Alan R. Andreasen, The Disadvantaged Consumer (New
trols, Inc., 449 U.S. 187, 111 S.Ct. 1196 (1991). Other sources include York: Free Press, 1975); and Report by the National Advisory Commis-
Linda Greenhouse,“Court Backs Right of Women to Jobs with Health sion on Civil Disorders, 29 February 1968, better known as the
Risks,” New York Times, 21 March 1991; Stephen Wermiel, “Justices Kerner Commission Report.
Bar ‘Fetal Protection’ Policies,”Wall Street Journal, 21 March 1991; and
19. David Segal (“The Haggler”), “Selling It With Extras, or Not at All,”
Anne T. Lawrence,“Johnson Controls and Protective Exclusion from
New York Times, 8 September 2012. See also, David Segal, “A Hard
the Workplace,” Case Research Journal, 13 (1993), 1–14.
Sell on the Extras, Revisited,” New York Times, 1 December 2012.
77. This case is adapted from David Zivan, “The Playskool Travel-Lite 20. David Holley, “Information Disclosure in Sales,” Journal of Business
Crib,” Center for Design Research, University of Chicago, 5 Novem- Ethics 17 (1998), 631–41.
ber 2002, with permission. This document, which is in the public
domain, may be downloaded from http://www.chicagocdr.org. 21. Carson,“Deception and Withholding Information in Sales,” 279.
Much of the content of the case is taken from Linda Ginzel, as inde- 22. Holley,“Information Disclosure in Sales,” 632.
pendent administrator of the estate of Daniel Keysar, deceased, and on
behalf of Boaz Keysar, Ely Keysar, and Linda Ginzel, next of kin, plain- 23. Ibid., 638
tiff, v. Kolcraft Enterprises, Inc., and Hasbro, defendants, #98L7063, 24. Aamena Ahmed, “The Push to Label Genetically Modified Prod-
Circuit Court of Cook County, County Department Law Division. ucts,” New York Times, 23 March 2014.
78. “What’s New in Design,” Adweek, 4 December 1989, 53. 25. Sandi Doughton,“Science Panel Says GMO Labeling Would Cost —
79. Mitch Lipka, “Deaths of Six Babies Exposed Fatal Flaws of System,” But How Much Remains Unknown,” Seattle Times, 9 October 2013.
Sun Sentinel, South Florida, 28–30 November 1999. 26. Alessandro Nicolia, Alberto Manzo, Fabio Veronesi, and Daniele
80. Ibid. Rosellini, “An Overview of the Last 10 Years of Genetically Engi-
neered Crop Safety Research,” Critical Reviews in Biotechnology, 34
81. Kids in Danger,“About Us.” http://www.kidsindanger.org. (2014), 77–88.
27. Chris MacDonald and Melissa Whellams, “Corporate Decisions
Chapter 10 about Labelling Genetically Modified Foods,” Journal of Business
1. Iris Cohen Selinger, “The Big Lottery Gamble,” Advertising Age, 10 Ethics 75 (2007), 181–89.
May 1993, 22. 28. Cheryl L. Reed,“The ‘Wild, Wild West’ in Loans,” Chicago Sun-Times,
2. As of 2015, six states did not support lotteries; these states were 15 August 2004.
Alabama, Alaska, Hawaii, Mississippi, Nevada, and Utah. 29. See Daniel Kahneman, Jack L. Knetch, and Richard Thaler,“Fairness
3. Figures are from U.S. Census,“Income and Apportionment of State- as a Constraint on Profit-Seeking: Entitlements in the Market,”
Administered Lottery Funds: 2008.” Most of the information in this American Economic Review, 76 (1986), 728–41.
case is derived from Charles T. Clotfelter and Philip J. Cook, Selling 30. John B. Hinge, “Critics Call Cuts in Package Size Deceptive Move,”
Hope: State Lotteries in America (Cambridge, MA: Harvard Univer- Wall Street Journal, 5 February 1991.
sity Press, 1989); and Charles T. Clotfelter, Philip J. Cook, Julie A.
Edell, and Marian Moore,“State Lotteries at the Turn of the Century: 31. For an alternative see Brian Chen,“T-Mobile Shakes Up Its Service,”
Report to the National Gambling Impact Study Commission,” 23 New York Times, 27 March 2013.
April 1999. 32. Much of this discussion is adapted from Frank V. Cespedes,“Ethical
4. Clotfelter and Cook, Selling Hope, 186. Issues in Distribution,” in Ethics in Marketing, ed. N. Craig Smith
and John A. Quelch (Burr Ridge, IL: Irwin, 1993).
5. Clotfelter et al.,“State Lotteries at the Turn of the Century.”
33. Michael Lewis, “McDonald’s: More Innovative than Apple,” Daily
6. John Koza, “Who Is Playing What? A Demographic Study,” Public Finance, 13 June 2013.
Gaming, 12 (March–June 1984), 31–40.
34. George Brenkert, Marketing Ethics (Malden, MA: Blackwell Publish-
7. Selinger,“The Big Lottery Gamble.” ing, 2008), 92.
8. Amos Tversky and Daniel Kahneman, “Judgment under Uncer- 35. See Giles Slade, Made to Break: Technology and Obsolescence in
tainty: Heuristics and Biases,” Science 185 (1974), 1124–31. America (Cambridge, MA: Harvard University Press, 2006).
9. Selinger,“The Big Lottery Gamble.” 36. Catherine Rampell,“Cracking the Apple Trap,”New York Times Mag-
10. James M. Stearns and Shaheen Borna,“The Ethics of Lottery Adver- azine, 3 November 2013, 16.
tising: Issues and Evidence,” Journal of Business Ethics, 14 (1995), 37. Jeremy Bulow, “An Economic Theory of Planned Obsolescence,”
43–51. Quarterly Journal of Economics 101(1986), 729–50.
11. The average lottery expenditure of families with annual incomes 38. See Joseph Guilitnan, “Creative Destruction and Destructive Crea-
under $25,000 is less than $600. Clotfelter et al., “State Lotteries at tions: Environmental Ethics and Planned Obsolescence,” Journal of
the Turn of the Century.” Business Ethics 89(2009), 19–28.
12. Theodore Levitt, The Marketing Imagination (New York: Free Press, 39. Brenkert, Marketing Ethics, 100.
1986), 19.
40. Sony Corporation,“Towards a Brighter Future with Laser ­Projection,”
13. Eric Chemi, “Advertising’s Century of Flat-Line Growth,” Bloomberg June 2014.
Businessweek, 3 March 2014.
41. Brenkert, Marketing Ethics, 61–63.
14. David Holley, “A Moral Evaluation of Sales Practices,” Business and
42. Allan Kimmel and N. Craig Smith, “Deception and Marketing
Professional Ethics Journal, 5 (1986), 3–21.
Research: Ethical, Methodological and Disciplinary Implications,”
15. Thomas L. Carson, “Deception and Withholding Information in Psychology and Marketing, 18 (2001), 663–89.
Sales,”Business Ethics Quarterly, 1 (2001), 275–306. See also Thomas
43. Market Research Society, MRS Code of Conduct, 1 September 2014, 12.
L. Carson, Lying and Deception: Theory and Practice (New York:
Oxford University Press, 2010). 44. Brenkert, Marketing Ethics, 64.
45. Marketing Research Society, MRS Code of Conduct, 14. 70. This is not the only ground for objecting to product placement.
46. Brenkert, Marketing Ethics, 68. ­Critics also cite the element of deception and the corrupting effect of
product placement on the artistic integrity of movies. See Beng Soo
47. See Marketing Research Association, MRA Code of Marketing Ong, “Should Product Placement in Movies Be Banned?” Journal of
Research Standards, October 2013, 2–4. Promotion Management, 2 (1995), 159–76.
48. Brenkert, Marketing Ethics, 69. 71. John Kenneth Galbraith, The Affluent Society (New York: Houghton
49. Patrick Murphy, Gene Laczniak, Norman Bowie, and Thomas Klein, Mifflin, 1958), 128.
Ethical Marketing (Upper Saddle River, NJ: Pearson, 2005), 58–61. 72. Ibid., 124–25.
50. William M. Pride and O. C. Ferrell, Marketing: Basic Concepts and 73. Friedrich August von Hayek,“The Non Sequitur of the ‘Dependence
Decisions, 10th ed. (Boston, MA: Houghton Mifflin, 1997), 40. Effect’,” Southern Economic Journal, 27 (April 1961), 346–48. Similar
51. See Harry L. Darling,“How Companies Are Using Corporate Advertis- points are made in Levitt,“The Morality(?) of Advertising,” 84–92.
ing,” Public Relations Journal, 31 (November 1975), 26–29; William S. 74. Packard, The Hidden Persuaders, 110.
Sachs, “Corporate Advertising: Ends, Means, Problems,” Public Rela-
tions Journal, 37 (November 1981), 14–17; and S. Prakash Sethi,“Insti- 75. Although this practice is generally accepted as legitimate persuasion,
tutional/Image Advertising and Idea/Issue Advertising as Marketing an interesting issue is posed by the increasing use of marketing
Tools: Some Public Policy Issues,”Journal of Marketing, 47 (1983), 68–78. research in jury selection and the formation of legal strategy. If law-
yers start adopting the techniques of advertisers, then they could
52. Theodore Levitt,“The Morality (?) of Advertising,” Harvard Business open themselves up to many of the same criticisms. See Scott M.
Review, 48 (July–August 1970), 84–92, 85. Smith,“Marketing Research and Corporate Litigation … Where Is the
53. Federal Trade Commission, Complaint In the Matter of L’Oreal Balance of Ethical Justice?”Journal of Business Ethics, 3 (1984), 185–94.
USA, Inc., Docket No. C-122 3016, 30 June 2014. 76. For a comprehensive summary of advertising’s critics, see Richard
54. For examples, see David M. Gardner, “Deception in Advertising: A W. Pollay, “The Distorted Mirror: Reflections on the Unintended
Conceptual Approach,” Journal of Marketing, 39 (1975), 40–46; and Consequences of Advertising,” Journal of Marketing, 50 (1986),
Thomas L. Carson, Richard E. Wokutch, and James E. Cox, Jr., “An 18–36. Much of this section is drawn from this article.
Ethical Analysis of Deception in Advertising,” Journal of Business 77. Lynn Sharp Paine,“Children as Consumers: The Ethics of Children’s
Ethics, 4 (1985), 93–104. Television Advertising,” Business and Professional Ethics Journal, 3
55. Ivan L. Preston, “Reasonable or Ignorant Consumer? How the FTC (1984), 119–45.
Decides,” Journal of Consumer Affairs, 8 (1974), 131–43, 132. 78. For a critique of television’s impact on children, see Marie Winn, The
56. Gelb v. FTC, 144 F. 2d 580 (2nd Cir. 1944). Plug-In Drug, 2nd rev. ed. (New York: Penguin Books, 2002).
57. See Bonnie Liebman,“Nouveau Junk Food: Consumers Swallow the 79. Stuart Dredge, “SuperAwesome Promises ‘Kid Safe’ Mobile Ads for
Back-to-Nature Bunk,” Business and Society Review, 51 (1984), Children’s Apps,” The Guardian, 16 September 2014.
47–51.
80. Ying Chen, Sencun Zhu, Heng Xu, and Yilu Zhou,“Children’s Expo-
58. Campbell Soup, 77 FTC 664 (1970). sure to Mobile In-App Advertising: An Analysis of Content Appro-
59. See Jeanne Saddler, “Campbell Soup Will Change Ads to Settle priateness,” Proceedings of the International Conference on Social
Charges,” Wall Street Journal, 9 April 1991. Computing (2013), 196–203.

60. “F.T.C. in Accord with Campbell,” New York Times, 10 April 1991. 81. Marya Mannes, But Will It Sell? (New York: Lippincott, 1964), 32.

61. Vance Packard, The Hidden Persuaders (New York: David McKay, 82. See Juliet B. Schor, The Overspent American: Why We Want What We
1957), 20–21. Don’t Need (New York: Basic Books, 1998).

62. Ibid., 25. 83. Pollay,“The Distorted Mirror,” 25.

63. Herbert J. Rotfeld,“Fear Appeals and Persuasion,”Current Issues and 84. Varda Langholz Leymore, Hidden Myth: Structure and Symbolism in
Research in Advertising, 11 (1989), 21–40. Advertising (New York: Basic Books, 1975), x.
64. Ibid., 35. 85. Vickie Rutledge Shields and Dawn Heinecken, Measuring Up: How
Advertising Affects Self-Image (Philadelphia, PA: University of Penn-
65. For one example, see “Secret Voices: Messages That Manipulate,” sylvania Press, 2002), x.
Time, 10 September 1979, 71.
86. This case is made in documentary films by Jean Kilbourne, Still Kill-
66. A researcher who claims to find evidence for both the frequency and ing Us Softly: Advertising Images of Women (Cambridge, MA: Cam-
the effectiveness of subliminal advertising is Wilson Brian Key, who bridge Documentary Films, 1987); and Slim Hopes (Amherst, MA:
has written three books: Subliminal Seduction (Upper Saddle River, Media Education Foundation, 1999).
NJ: Prentice Hall, 1974); Media Sexploitation (Upper Saddle River,
NJ: Prentice Hall, 1976); and The Clam-Plate Orgy and Other Sub- 87. For ethical guidelines, see John Douglas Bishop,“Is Self-Identity Image
liminal Techniques for Manipulating Your Behavior (Upper Saddle Advertising Ethical?”Business Ethics Quarterly, 10 (2000), 371–98.
River, NJ: Prentice Hall, 1980). A generally negative appraisal of the 88. Erich Fromm, Man for Himself: An Inquiry into the Psychology of Eth-
effectiveness of the technique is offered in Norman F. Dixon, Sub- ics (New York: Rinehart, 1947).
liminal Perception (London: McGraw-Hill, 1971). For evidence spe-
cifically on advertising, see Stephen G. George and Luther B. 89. Erving Goffman, Gender Advertisements (London: Marion Boyars,
Jennings, “Effect of Subliminal Stimuli on Consumer Behavior:
­ 1978), 17.
­Negative Evidence,” Perceptual and Motor Skills, 41 (1975), 847–54; 90. “Media Uproar over Billboards in Poor Areas,” New York Times,
Del I. Hawkins, “The Effects of Subliminal Stimulation on Drive 1 May 1989.
Level and Brand Preference,”Journal of Marketing Research, 8 (1970),
91. Diana P. Hackbarth et al., “Collaborative Research and Action to
322–26; and Timothy E. Moore, “Subliminal Advertising: What You
Control the Geographic Placement of Outdoor Advertising of Alco-
See Is What You Get,” Journal of Marketing, 46 (1982), 38–47.
hol and Tobacco Products in Chicago,” Public Health Reports, 116
67. Richard T. DeGeorge, Business Ethics, 6th ed. (Upper Saddle River, (2001), 558–67.
NJ: Prentice Hall, 2006), 343.
92. Philip J. Hilts,“Health Chief Assails Reynolds Co. for Ads That Target
68. See Michael Schudson, Advertising, The Uneasy Persuasion: Its Blacks,” New York Times, 19 January 1990.
Dubious Impact on Society (New York: Basic Books, 1984), 102–13.
93. George G. Brenkert, “Marketing to Inner-City Blacks: PowerMaster
69. Rob Walker, “The Hidden (in Plain Sight) Persuaders,” New York and Moral Responsibility,” Business Ethics Quarterly, 8 (1998), 1–18.
Times Magazine, 5 December 2004. Much of the information about this case is taken from this article.
94. Marc Lacey, “Marketing of Malt Liquor Fuels Debate,” Los Angeles following discussion is taken from this article. See also Alan R.
Times, 15 December 1992. Andreasen, ed., Ethics in Social Marketing (Washington, DC:
95. Bruce Horovitz, “Brewer Faces Boycott over Marketing of Potent Georgetown University Press, 2001).
Malt Liquor,” Los Angeles Times, 25 June 1991. 121. Federal Trade Commission, World’s Largest Manufacturer of Spice
96. Paul Farhi, “Surgeon General Hits New Malt Liquor’s Name, Ads,” and Seasoning Products Agrees to Settle Price Discrimination Charges,
Washington Post, 26 June 1991. Press Release, 8 March 8 2000; McCormick & Company, Inc., 2013
Annual Report.
97. Brenkert,“Marketing to Inner-City Blacks,” 14–15.
122. Robert J. Aalberts and Marianne M. Jennings, “The Ethics of Slot-
98. Google, Inc., 2014 Financial Tables. ting: Is This Bribery, Facilitation Marketing or Just Plain Competi-
99. Google, Inc., “How AdWords Works”; Darren Dahl, “Real Life Les- tion?” Journal of Business Ethics, 20 (1999), 207–15.
sons in Using Google Adwords,” New York Times, 14 October 2009. 123. Ibid., 208.
100. Some information in this case is drawn from Emily Steel and Julia 124. Federal Trade Commission, Complaint Filed in the Matter of McCor-
Angwin, “On the Web’s Cutting Edge, Anonymity in Name Only,” mick & Company, Inc., Docket No. C-3939, 2 May 2000.
Wall Street Journal, 4 August 2010.
125. Ibid.
101. For a discussion of the limitations of search engine optimization, see 126. Ibid.
David Kesmodel,“Sites Get Dropped by Search Engines after Trying
to ‘Optimize’ Rankings,” Wall Street Journal, 22 September 2005. 127. “Spice Pricing Case Settled,” New York Times, 9 March 2000.
102. Somini Sengupta, “What You Didn’t Post, Facebook Might Still 128. Federal Trade Commission, Complaint Filed in the Matter of
Know,” New York Times, 26 March 2013. ­McCormick.
103. Eilene Zimmerman, “Facebook Revamps Ads to Compete with 129. Federal Trade Commission, World’s Largest Manufacturer of Spice
Google,” New York Times, 16 January 2014. and Seasoning Products Agrees to Settle Price Discrimination Charges.

104. Somini Sengupta, “Study Finds Broad Wariness over Online Track- 130. Federal Trade Commission, Complaint Filed in the Matter of
ing,”New York Times, 8 October 2012; See also Kirsten Martin,“Infor- ­McCormick.
mation Technology and Privacy: Conceptual Muddles or Privacy 131. Ibid.
Vacuums?” Ethics and Information Technology, 14 (2011), 267–84.
132. “Spice Pricing Case Settled.”
105. Nordstrom, Inc.,“Nordstrom.com Privacy Policy,” 2015.
133. Federal Trade Commission, Complaint Filed in the Matter of
106. See Jonathan Mayer and John Mitchell, “Third-Party Web Tracking: ­McCormick.
Policy and Technology,” IEEE Symposium of Security and Privacy,
134. 15 U.S. Code § 13; Aalberts and Jennings, “The Ethics of Slotting,”
13 March 2012.
210; Federal Trade Commission, Press Release.
107. Vindu Goel, “With New Ad Platform, Facebook Opens Gates to Its
135. Federal Trade Commission, Dissenting Statement of Commission-
Vault of User Data,” New York Times, 29 September 2014.
ers Orson Swindle and Thomas Leary in McCormick & Company,
108. “Data: Getting to Know You,” The Economist, 13 September 2014. Inc., Docket No. C-3939, 2 May 2000. This disagreement stemmed
from different applications of the so-called “Morton Salt” inference
109. “The Murky World of Third Party Web Tracking,” MIT Technology
established by the U.S. Supreme Court. See Federal Trade Commis-
Review, 12 September 2014.
sion v. Morton Salt Company 334 U.S. 37 (1948).
110. For a discussion of this proposal, see Ian Brown and Christopher
136. Some information in this case is drawn from Emily Steel and Julia
Mardsen, Regulating Code: Good Governance and Better Regulation in
Angwin, “On the Web’s Cutting Edge, Anonymity in Name Only,”
the Information Age (Cambridge: MIT Press, 2013), 56–57.
Wall Street Journal, 4 August 2010.
111. Some information in this case is drawn from Steel and Angwin,“On
137. 15 U.S.C. § 1691.
the Web’s Cutting Edge.”
138. Steel and Angwin,“On the Web’s Cutting Edge.”
112. The Economist,“Data: Getting to Know You.”
139. Dana Mattioli, “On Orbitz, Mac Users Steered to Pricier Hotels,”
113. See the “Do Not Track Me Online Act of 2011” proposed by U.S. Wall Street Journal, 23 August 2012.
Representative Jackie Speier, H.R. 654, 112th Cong. (2011).
140. Jennifer Valentino-Devries, Jeremy Singer-Vine, and Ashkan Soltani,
114. Yves-Alexandre de Montjoye, Laura Radaelli, Vivek Singh, and Alex “Websites Vary Prices, Deals Based on Users’ Information,” Wall
Pentland,“Unique in the Shopping Mall: On the Reidentifiability of Street Journal, 24 December 2012.
Credit Card Metadata,”Science, 347 (2015), 536–39; See also ­Natasha
Singer, “With a Few Bits of Data, Researchers Identify ‘Anonymous’ 141. Kirsten Martin, “Information Technology and Privacy: Conceptual
People,” New York Times, 2 February 2015. Muddles or Privacy Vacuums?” Ethics and Information Technology, 14
(2011), 267–84.
115. Lee Rainie, Sarah Kiesler, and Mary Madden, “Anonymity, Privacy
and Security Online,” Pew Research Center Report, 5 September 142. Lisa Bolton, Luk Warlop, and Joseph Alba,“Consumer Perceptions of
2013. Price (Un)Fairness,” Journal of Consumer Research, 4 (2003), 474–91.

116. William Launder, “When Ads Look Like Content: FTC Examines 143. Carl Obermiller, David Arnesen, and Marc Cohen, “Customized
Issues Around ‘Sponsored Content,’” Wall Street Journal,1 Decem- Pricing: Win-Win or End Run?”Drake Management Review, 1 (2012),
ber 2013; Margaret Sullivan,“Pledging Clarity, the Times Plunges in 12–28.
to Native Advertising,” New York Times, 19 December 2013. 144. Steel and Angwin,“On the Web’s Cutting Edge.”
117. Launder,“When Ads Look Like Content.” 145. Liz Moyer and Juliet Chung, “Hedge-Fund Manager Presses Case
118. The seminal work is Philip Kotler and Eduardo L. Roberto, Social against Herbalife,” Wall Street Journal, 20 December 2012.
Marketing: Strategies for Changing Public Behavior (New York: Free 146. Herbalife, Ltd., “Herbalife Opportunity,” retrieved from http://
Press, 1989). opportunity.herbalife.com.
119. Alan R. Andreasen, Marketing Social Change (San Francisco, CA: 147. Herbalife, Ltd., 2013 Annual Report, p. 50, retrieved from http://
Jossey-Bass, 1995), 7. ir.herbalife.com.
120. George G. Brenkert, “Ethical Challenges of Social Marketing,” Jour- 148. Herbalife, Ltd., “About Herbalife,” retrieved from http://company.
nal of Public Policy and Marketing, 21 (2002), 14–25. Much of the herbalife.com.
149. Federal Trade Commission,“Multilevel Marketing,”August 2012. 18. Public Law Number 111-24, 123 United States Statutes at Large, 1734.
150. Frank Partnoy, “Is Herbalife a Pyramid Scheme,” The Atlantic, 19. For examples, see Joshua M. Frank, Dodging Reform: As Some Credit
21 May 2014. Card Abuses Are Outlawed, New Ones Proliferate (Center for
151. Pershing Square Capital Management, L.P., “Executive Summary: Responsible Lending, 10 December 2009).
Who Wants to Be a Millionaire? A Short Thesis on Herbalife, Ltd. 20. This question is addressed in Hersh Shefrin and Meir Statman,
(NYSE: HLF),” Sohn Investment Conference, 20 December 2012; “Ethics, Fairness and Efficiency in Financial Markets,”Financial Ana-
and Pershing Square Capital Management, L.P., “Side by Side: A lysts Journal (November–December 1993), 21–29, from which por-
Comparison of Fortune Hi-Tech Marketing and Herbalife,” 14 tions of this section are derived.
March 2013.
21. John Maynard Keynes, The General Theory of Employment, Interest,
152. Steven Solomon,“What’s at the Center of the Debate Over Herbal- and Money (New York: Harcourt Brace & Co., 1936), 159.
ife,” New York Times, 10 January 2013.
22. The example is taken from Anthony Kronman, “Contract Law and
153. Bostick v. Herbalife International of America, Inc. et al., U.S. Dist. Ct. Distributive Justice,” Yale Law Journal, 89 (1980), 472–79.
C.D. Cal., No. 13-2488 (2013); see also Herbalife International of
America, Inc. v. Ford et al., U.S. Dist. Ct. C.D. Cal., No. 07-2529 (2009). 23. Berkshire Hathaway Annual Report, 2002.

154. Pershing Square Capital,“Side by Side.” 24. Chartered Financial Analyst Institute, Financial Market Integrity
Outlook: 2011, January 2011.
155. Pershing Square Capital,“Executive Summary.”
25. Nicholas Kaldor, “Speculation and Economic Stability,” Review of
156. North American “sales leaders” (the lowest of Herbalife’s eight dis- Economic Studies, 7 (1939), 1–27, 1.
tributor levels) are reported to have a year-to-year retention rate of
nearly 55 percent in 2013. See Herbalife, Ltd., 2013 Annual Report, p. 9. 26. Joe Nocera,“Sewers, Swaps and Bachus,”New York Times, 22 April 2011.

157. Sara Germano and Brent Kendall,“Federal Trade Commission Starts 27. “Money, Power & Wall Street,” a documentary produced by Front-
Herbalife Probe,” Wall Street Journal, 12 March 2014. line, Public Broadcasting Service, aired April 24 and May 1, 2012.
28. Bruno Biais and Paul Woolley,“The Flip Side: High Frequency Trad-
ing,” Financial World, February 2012, 34–35.
Chapter 11
29. Ellen Brown, “Computerized Front-Running,” Counterpunch, 24
1. Securities and Exchange Commission v. Goldman, Sachs & Co. and April 2010.
Fabrice Tourre, United States District Court, Southern District of New
York, Complaint 10-CV-3229 (BSJ). The quotation of the email mes- 30. New York State Office of the Attorney General, “Remarks by Attor-
sage, sent on January 23, 2007, is translated from the original French. ney General Eric T. Schneiderman to the 2013 Bloomberg Markets
50 Summit,”Press Release, 24 September 2013; Matthew Phillips,“Is
2. Susanne Craig and Ben Protess, “Former Trader Is Found Guilty,” High-Frequency Trading Insider Trading?” Bloomberg Businessweek,
New York Times, 1 August 2013. 4 April 2014.
3. Securities and Exchange Commission v. Goldman Sachs & Co. and 31. Findings Regarding the Market Events of May 6, 2010: Report of the
Fabrice Tourre, Final Judgment as to Defendant Goldman, Sachs & Staffs of the CFTC and SEC to the Joint Advisory Committee of Emerg-
Co., United States District Court, Southern District of New York, ing Regulator Issues, 30 September 2010.
Complaint 10-CV-3229 (BSJ).
32. “FINRA Sanctions Trillium Brokerage Services, LLC, Director of
4. No relation to the then-Secretary of the Treasury, Henry “Hank” Trading, Chief Compliance Officer, and Nine Traders $2.26 Million
Paulson. for Illicit Equities Trading Strategy,” FINRA News Release, 13 Sep-
5. Although this loss was offset by the $15 million fee Goldman Sachs tember 2010.
earned, the settlement with the SEC included a forfeiture of this 33. Buttonwood, “Not So Fast: The Risks Posed by High-Frequency
amount. Trading,” Economist, 6 August 2011, 62.
6. Nate Raymond, “Ex-ACA Chief Says in ‘Fabulous Fab’ Trial He Was 34. SEC v. Texas Gulf Sulphur, 401 F.2d 19 (1987).
Surprised by Paulson Bet,” Reuters, 22 July 2013.
35. Chiarella v. U.S., 445 U.S. 222 (1980); Dirks v. SEC, 463 U.S. 646
7. “Senate Committee Holds Fourth Hearing on Wall Street and the (1983); U.S. v. Chestman, 903 F.2d 75 (1990); U.S. v. Willis, 737 F.
Financial Crisis: The Role of Investment Banks,” U.S. Senate Perma- Supp. 269 (1990); U.S. v. O’Hagen, 117 S.Ct. 2199 (1997); and SEC v.
nent Committee on Investigations, 26 April 2010. Dorozhko, 574 F.3d 42 (2nd Cir. 2009).
8. Jay L. Walker [pseudonym], The Complete Book of Wall Street Ethics
36. In general, U.S. law does not require timely disclosure of market-
(New York: William Morrow and Company, 1987).
moving events but prohibits only false representations and insider
9. Tara Bernard, “Making Brokers Toe the Mark,” New York Times, trading in the meantime. The European approach, based on equal
14 February 2015. access to information, generally requires prompt disclosure of
10. Mark Maremont, “Burned by Merrill,” BusinessWeek, 25 April 1994, ­market-moving events on the premise that investors have a right to
122–25. such information as soon as possible. See Marco Ventoruzzo,“Com-
paring Insider Trading in the United States and in the European
11. Ellen E. Schultz,“You Need a Translator for Latest Sales Pitch,” Wall Union: History and Recent Development,” European Corporate
Street Journal, 14 February 1994. Governance Institute, Working Paper No. 257/2014, May 2014.
12. Michael Quint, “Met Life Shakes Up Its Ranks,” New York Times, 29 37. U.S. v. Newman, 1:12-cr-00121, U.S. District Court, Southern District
October 1994. of New York, and U.S. v. Newman and Chiasson, 13-1917, U.S. Court
13. Daisy Maxey, “SEC Targets ‘Reverse Churning’ by Advisers,” Wall of Appeals for the Second Circuit. The conviction in District Court
Street Journal, 24 February 2014. was overturned by the Appeals Court, in a decision that, if it stands,
would require the government to show in any criminal prosecution
14. Marshak v. Blyth Eastman Dillon & Co., Inc., 413 F. Supp. 377, 379 for insider trading that a tipper received some benefit as part of a
(1975). quid pro quo arrangement.
15. Kaufman v. Merrill Lynch, Pierce, Fenner & Smith, 464, F. Supp. 528,
38. Stephen Bainbridge, “The Second Circuit’s Egregious Decision in
534 (1978).
SEC v. Dorozhko,” 29 July 2009, www.professorbainbridge.com.
16. Report of the Committee on Compensation Practices, issued by the
39. Jill E. Fisch, “Start Making Sense: An Analysis and Proposal for
Securities and Exchange Commission, 10 April 1995.
Insider Trading Regulation,” Georgia Law Review, 26 (1991–92),
17. NASD Rules of Fair Practice, art. III, sec. 2. 179–252.
40. Saikrishna Prakash, “Our Dysfunctional Insider Trading Regime,” 67. Roberta S. Karmel,“The Duty of Directors to Non-shareholder Con-
Columbia Law Review, 99 (1999), 1491–1550. stituencies in Control Transactions—A Comparison of U.S. and U.K.
41. Alan Strudler and Eric W. Orts, “Moral Principle in the Law of Law,” Wake Forest Law Review, 25 (1990), 61–83, 68.
Insider Trading,” Texas Law Review, 78 (1999–2000), 375–483. 68. Most of the information in this case is taken from Verified Complaint,
42. James B. Stewart,“Delving into Morass of Insider Trading,”New York Supreme Court of the State of New York, Plaintiff, against, Strong
Times, 19 December 2014. Financial Corporation et al., defendants; and Securities and Exchange
Commission, Administrative Proceeding, File No. 3–11498, In the
43. Henry Manne, Insider Trading and the Stock Market (New York: Free Matter of Strong Capital Management, Inc. et al., Respondent.
Press, 1966).
69. Richard Strong was also chairman and chief executive officer of the
44. This point is argued in Jennifer Moore, “What Is Really Unethical parent company Strong Financial Corporation. To simplify the com-
about Insider Trading?”Journal of Business Ethics, 9 (1990), 171–82. plex corporate structure of the Strong enterprises, all references are
45. Carpenter et al. v. U.S., 484 U.S. 19 (1987). to Strong Capital Management.

46. U.S. v. O’Hagen. 70. Each mutual fund operates as a separate company with its own
board of directors and contracts with an investment company, such
47. Peter Lattman,“Galleon Chief Sentenced to 11-Year Term in Insider as SCM, to serve as an investment advisor.
Case,” New York Times, 13 October 2011.
71. Peter Elkind,“The Secrets of Eddie Stern,” Fortune, 19 April 2004.
48. “Linking Expert Mouths with Eager Ears,”The Economist, 18 June 2011.
72. The estimate is by Stanford University business professor Eric Zitze-
49. Peter Drucker,“To End the Raiding Roulette Game,”Across the Board witz. Janice Revell and David Stires, “Making Sense of the Mutual
(April 1986), 39. Fund Scandal,” Fortune, 24 November 2003.
50. Michel T. Halbouty, “The Hostile Takeover of Free Enterprise,” Vital 73. Elkind,“The Secrets of Eddie Stern.”
Speeches of the Day (August 1986), 613.
74. Information for this case is taken from reporting by Kurt Eichenwald
51. See Michael C. Jensen,“The Takeover Controversy,” Vital Speeches of for the New York Times and Tom Fowler and Mary Flood for the Hou-
the Day (May 1987), 426–29; Michael C. Jensen,“Takeovers: Folklore ston Chronicle. Kurt Eichenwald, “4 at Merrill Accused of an Enron
and Science,” Harvard Business Review (November–December Fraud,” New York Times, 18 March 2003; Kurt Eichenwald,“An Enron
1984), 109–21. Trial with Big Stakes for Ones Ahead,”New York Times, 20 September
52. Jensen,“Takeovers”; Michael C. Jensen and Richard S. Ruback,“The 2004; Kurt Eichenwald, “First Criminal Trial to Examine Enron Deal
Market for Corporate Control: The Scientific Evidence,” Journal of Begins,”New York Times, 22 September 2004; Kurt Eichenwald,“Wit-
Financial Economics, 11 (1983), 5–50; and Douglas H. Ginsburg and ness Tells of Hearing about Merrill-Enron Side Deal,” New York
John F. Robinson, “The Case against Federal Intervention in the Times, 24 September 2004; Kurt Eichenwald,“Former Executive Testi-
Market for Corporate Control,” Brookings Review (Winter–Spring fies, Offering Insider’s Look at Enron’s Deal Making,” New York
1986), 9–14. Times, 28 September 2004; Kurt Eichenwald, “Ex-Enron Treasurer
Describes Discomfort with Barge Deal,” New York Times, 7 October
53. F. M. Scherer, “Takeovers: Present and Future Dangers,” Brookings 2004; Tom Fowler and Mary Flood,“Merrill Lynch to Settle with SEC,”
Review (Winter–Spring 1986), 15–20. Houston Chronicle, 21 February 2003; Tom Fowler and Mary Flood,
54. For a discussion of coercion in tender offers, see John R. Boatright, “Prosecutors: E-mail Show Enron Deal on Barges Was Sham,” Hou-
“Tender Offers: An Ethical Perspective,” in The Ethics of Organiza- ston Chronicle, 6 October 2004; Mary Flood,“Enron Trial Is Wrapping
tional Transformation: Mergers, Takeovers, and Corporate Restructur- Up Today,” Houston Chronicle, 27 October 2004.
ing, ed. W. Michael Hoffman, Robert Frederick, and Edward S. Petry, 75. Information on this case is taken from the following sources: United
Jr. (New York: Quorum Books, 1989). States of America v. Martha Stewart and Peter Bacanovic, United
55. Philip L. Cochran and Steven L. Wartick, “‘Golden Parachutes’: A States District Court, Southern District of New York, Superseding
Closer Look,”California Management Review, 26 (1984), 111–25, 113. Indictment S1 03 Cr. 717 (MGC); U.S. Securities and Exchange
Commission, Plaintiff against Martha Stewart and Peter Bacanovic,
56. Michael C. Jensen, “The Takeover Controversy: Analysis and Evi- Defendants, United States District Court, Southern District of New
dence,” in Knights, Raiders, and Targets: The Impact of the Hostile York, Complaint 03 CV 4070 (NRB); Jeffrey Toobin, “Lunch at
Takeover, ed. John C. Coffee, Jr., Louis Lowenstein, and Susan Rose- ­Martha’s,”New Yorker, 3 February 2003; Jeffrey Toobin,“A Bad Thing,”
Ackerman (New York: Oxford University Press, 1988), 340. New Yorker, 22 March 2004.
57. Peter G. Scotese,“Fold Up Those Golden Parachutes,” Harvard Busi- 76. Toobin,“A Bad Thing.”
ness Review (March–April 1985), 168–71, 170.
77. Ibid.
58. Cochran and Wartick,“Golden Parachutes,” 121.
78. U.S. Securities and Exchange Commission, “Martha Stewart and
59. Scotese,“Fold Up Those Golden Parachutes,” 168. Peter Bacanovic Settle SEC’s Insider Trading Charges,”Press Release
60. Jensen,“The Takeover Controversy,” 341. 134, 7 August 2006.

61. J. Gregory Dees, “The Ethics of ‘Greenmail,’” in Business Ethics: 79. U.S. Securities and Exchange Commission, “SEC Charges Martha
Research Issues and Empirical Studies, ed. William C. Frederick and Stewart, Broker Peter Bacanovic with Illegal Insider Trading,” press
Lee E. Preston (Greenwich, CT: JAI Press, 1990), 254. release 69, 4 June 2003.

62. These arguments are developed and evaluated in Dees, “The Ethics 80. Mylene Mangalindan, Don Clark, and Robin Sidel, “Software
of ‘Greenmail.’” Assault: Oracle’s Bid for PeopleSoft Offers Possible Taste of Future,”
Wall Street Journal, 9 June 2003.
63. John C. Coffee, Jr.,“Regulating the Market for Corporate Control: A
Critical Assessment of the Tender Offer’s Role in Corporate Govern- 81. “PeopleSoft CEO Comments on Oracle Offer,” PeopleSoft Press
ance,” Columbia Law Review, 84 (1984), 1145–1296. Release, 6 June 2003.

64. This is argued in Roger J. Dennis, “Two-Tiered Tender Offers and 82. Andrew Ross Sorkin and Laurie Flynn,“Oracle Takes a $5 Billion Jab
Greenmail: Is New Legislation Needed?” Georgia Law Review, 19 at PeopleSoft,” New York Times, 7 June 2003.
(1985), 281–341. 83. Carrie Kirby, “Oracle Gets a Run for Its Money: Hostile Bid for Peo-
65. Paramount Communications, Inc. v. Time Inc., 571 A.2d 1140 (1990). pleSoft Turns into a Battle,”San Francisco Chronicle, 22 December 2003.
84. Mangalindan, Clark, and Sidel,“Software Assault.”
66. See Eric W. Orts, “Beyond Shareholders: Interpreting Corporate
Constituency Statutes,” George Washington Law Review, 61 (1992), 85. “What’s Behind Oracle’s Unwelcome Bid for PeopleSoft,” Knowl-
14–135. edge@Wharton, 17 June 2003.
86. Andrew Ross Sorkin,“PeopleSoft Rejects Bid from Oracle,”New York 21. S. Prakash Sethi, “Dimensions of Corporate Social Performance: An
Times, 13 June 2003. Analytical Framework for Measurement and Analysis,”California Man-
87. Oracle was able to offer so much more than the price in its original agement Review, 17 (Spring 1975), 62. Emphasis in original omitted.
offer because, once it gained access to PeopleSoft’s books, Oracle 22. Committee for Economic Development, Social Responsibilities of
discovered that the revenue from maintenance contracts was sig- Business Corporations (New York: Committee for Economic Devel-
nificantly higher than the company had previously estimated. opment, 1971), 15.
23. Reputation Institute, The 2015 Global Rep Trak 100 Report.
Chapter 12 24. The concept of corporate social responsiveness is developed in
Robert W. Ackerman and Raymond A. Bauer, Corporate Social
­
1. Gretchen Morgenson, “GE Capital vs. the Small-Town Folk Hero,” Responsiveness: The Modern Dilemma (Reston, VA: Reston, 1976).
New York Times, 24 October 2004.
25. William C. Frederick, “From CSR1 to CSR2: The Maturing of
2. Michael Ryan, “They Call Their Boss a Hero,” Parade Magazine, ­Business-and-Society Thought,” Business and Society Review, 33
8 September 1996, 4–5. (1994), 150–64.
3. Bruce D. Butterfield, “What Flames Could Not Destroy,” Boston 26. Donna J. Wood, “Corporate Social Performance Revisited,” Academy
Globe, 8 September 1996. of Management Review, 16 (1991), 691–718, 693.
4. Ryan,“They Call Their Boss a Hero.” 27. James E. Post and Shawn L. Berman,“Global Corporate Citizenship
5. “Bridging the Gap,” PBS NewsHour transcript, 20 March 1996. in a Dot.com World: The Role of Organizational Identity,”in Perspec-
tives in Corporate Citizenship, eds., Jorg Andriof and Malcolm
6. Thomas Teal,“Not a Fool, Not a Saint,” Fortune, 11 November 1996, ­McIntosh (Sheffield, UK: Greenleaf Publishing, 2001).
201–203, 201.
28. Pierre-Yves Néron and Wayne Norman, “Citizenship, Inc.: Do We
7. “Bridging the Gap.” Really Want Businesses to Be Good Corporate Citizens?” Business
8. Ross Kerber, “Future Tense: Feuerstein’s Vision for Malden Mills, Ethics Quarterly, 18 (2008), 1–26. See the four commentaries on this
Commitments to Lawrence are Not Shared by Firm’s New Owners,” article in the same issue and the authors’ responses.
Boston Globe, 29 January 2004. 29. For a history of corporate social responsibility, see Kenneth E.
9. Radley Balko, “Altruism? Bah, Humbug,” Apple Daily, 22 December Goodpaster, Corporate Social Responsibility: The American Experi-
2004. ence (New York: Cambridge University Press, 2012).
30. McKie,“Changing Views,” 18–19.
10. N. Craig Smith, “Corporate Social Responsibility: Not Whether but
How?” California Management Review, 45 (2003), 52–76. 31. See, for example, Richard Musgrave, The Theory of Public Finance
(New York: McGraw-Hill, 1959), in which the three functions of
11. David Hess, Nikolai Rogovsky, and Thomas W. Dunfee, “The New
securing efficiency (which includes considerations of externalities),
Wave of Corporate Community Involvement: Corporate Social Ini-
equity, and stability properly belong to government.
tiatives,” California Management Review, 44 (2002), 110–25.
32. Holders of the classical view generally favor market solutions over gov-
12. For a comprehensive account of the historical development of the
ernment action in the belief that many externalities result from a lack,
concept of corporate social responsibility, see Kenneth E. Goodpaster,
rather than an excess, of free-market forces and that regulation is often
ed., Corporate Responsibility: The American Experience (New York:
ineffective. Still, they usually admit the principle that government regu-
Cambridge University Press, 2012). See also, Morrell Heald, The
lation is appropriate in some instances to deal with externalities.
Social Responsibilities of Business: Company and Community,
1900–1960 (Cleveland, OH: Case Western Reserve University Press, 33. For an explanation and discussion of this concept, see Arthur M.
1970); Clarence C. Walton, Corporate Social Responsibilities (Belmont, Okun, Equality and Efficiency: The Big Tradeoff (Washington, DC:
CA: Wadsworth, 1967); and James W. McKie, “Changing Views,” in Brookings Institution Press, 1975).
Social Responsibility and the Business Predicament, ed., James W. 34. Edward S. Mason, ed., The Corporation in Modern Society (New York:
McKie (Washington, DC: Brookings Institution Press, 1974). Among Atheneum, 1974), 5.
the first advocates was Howard R. Bowen, Social Responsibilities of
the Businessman (New York: Harper & Brothers, 1953). 35. Theodore Levitt, “The Dangers of Social Responsibility,” Harvard
Business Review, 36 (September–October 1958), 41–50, 49.
13. André Habisch, Jan Jonker, Martina Webner, and René Schmidpeter,
eds., Corporate Social Responsibility across Europe (Berlin, Germany: 36. John G. Simon, Charles W. Powers, and Jon P. Gunnemann, “The
Springer, 2005). Responsibilities of Corporations and Their Owners,” in The Ethical
Investor: Universities and Corporate Responsibility (New Haven, CT:
14. “Two-Faced Capitalism,” The Economist, 24 January 2004, 53. Yale University Press, 1972), 16–17.
15. Milton Friedman, Capitalism and Freedom (Chicago, IL: University of 37. Keith Davis, “Five Propositions for Social Responsibility,” Business
Chicago Press, 1962), 133. Horizons, 18 (June 1975), 19–24, 20. Italics in the original.
16. Ibid., 133. The quotation by Adam Smith is from The Wealth of 38. Keith Davis and Robert L. Blomstrom, Business and Society: Environ-
Nations, Book IV, chapter II. This famous paragraph concludes,“It is ment and Responsibility, 3rd ed. (New York: McGraw-Hill, 1975), 50.
an affectation, indeed, not very common among merchants, and
39. This objection is formulated in Kenneth E. Goodpaster and John B.
very few words need be employed in dissuading them from it.”
Matthews, Jr., “Can a Corporation Have a Conscience?” Harvard
17. See, for example, Robert B. Reich, Supercapitalism: The Transforma- Business Review, 60 (January–February 1982), 132–41.
tion of Business, Democracy, and Everyday Life (New York: Knopf, 40. Ibid., 140.
2007), chapter 5.
41. Simon, Powers, and Gunnemann, “Responsibilities of Corporations
18. Joseph W. McGuire, Business and Society (New York: McGraw-Hill, and Their Owners,” 22–25.
1963), 144. For the point that the assumption of responsibility must
be voluntary, see Henry Manne and Henry C. Wallich, The Modern 42. Milton Friedman, “The Social Responsibility of Business Is to
Corporation and Social Responsibility (Washington, DC: American Increase Its Profits,” New York Times Magazine, 13 September 1970,
Enterprise Institute, 1972), 5. 33. Italics are added for emphasis.

19. Archie B. Carroll, “A Three-Dimensional Conceptual Model of Cor- 43. Ibid., 122.
porate Performance,” Academy of Management Review, 4 (1979), 44. Reich, Supercapitalism, 197.
497–505.
45. Marvin A. Chirelstein, “Corporate Law Reform,” in Social Responsi-
20. Ibid., 500. bility and the Business Predicament, 55.
46. “Just Good Business: Special Report on Corporate Society Respon- 75. Anthony Page and Robert A. Katz,“The Truth about Ben and Jerry’s,”
sibility,” The Economist 19 January 2008, 24. Stanford Innovation Review, 10 (Fall 2012), 38–43.
47. David Vogel, The Market for Virtue, The Potential and Limits of Corpo- 76. Monica Gerber, “Warby Parker May Have a Better ‘Buy One, Give
rate Society Responsibility (Washington, DC: Brookings Institution One’ Model,” Christian Science Monitor, 22 December 2011.
Press, 2005), 17.
77. Both for-profit businesses and nonprofit organizations seek to
48. Ibid., 47–49. earn revenues in excess of expenses, and this surplus of earnings
49. The Forum for Sustainable and Responsible Investment, Report on over expenses constitutes net revenues. The difference between
US Sustainable, Responsible and Impact Investing Trends, 2014. the for-profit and nonprofit forms is that the net earnings of a
for-profit business can be distributed to investors as profits,
50. Eurosif, European SRI Study 2012. while a nonprofit must retain all net earnings for use in fulfilling
51. Michael E. Porter and Mark R. Kramer, “Strategy and Society: The its mission.
Link between Competitive Advantage and Corporate Social Respon- 78. Hansmann, “The Role of Non-Profit Enterprise”; and Henry Hans-
sibility,” Harvard Business Review, 84 (December 2006), 78–92, 82. mann, The Ownership of Enterprise (Cambridge, MA: Harvard Uni-
52. Ibid., 80. versity Press, 1996).
53. Hess, Rogovsky, and Dunfee, “The New Wave of Corporate Com- 79. Page and Katz,“The Truth about Ben and Jerry’s.”
munity Involvement,” 113. 80. Howard Schultz, Pour Your Heart Into It (New York: Hyperion,
54. “Sustainability and Our Future,” company document, 2003. 1997), 127.
55. Porter and Kramer,“Strategy and Society,” 84. 81. Information on this case, unless indicated otherwise, comes from
Paul A. Argenti,“Collaborating with Activists: How Starbucks Works
56. Donald G. McNeil, Jr., “Coca-Cola Joins AIDS Fight in Africa,” New with NGOs,” California Management Review, 47 (2004), 91–116.
York Times, 21 June 2001.
82. In 2010, TransFair USA changed its name to Fair Trade USA.
57. Ibid.
83. Sam Dillon, “Seeking a Seal of Approval for Socially Aware Coffee,”
58. Daniel Gilbert and Justin Scheck, “BP Is Found Grossly Negligent in
New York Times, 1 April 2000.
Deepwater Horizon Disaster,” Wall Street Journal, 4 September 2104.
84. Jennifer Alsever, “Fair Prices for Growers: Simple Idea, Complex
59. World Business Council for Sustainable Development, “Corporate
Reality,” New York Times, 19 March 2006.
Social Responsibility: Making Good Business Sense,”January 2000, 15.
85. Ibid.
60. Joshua D. Margolis and James P. Walsh, People and Profits? The
Search for a Link between a Company’s Social and Financial Perfor- 86. Ibid.
mance (Mahwah, NJ: Lawrence Erlbaum, 2001). 87. Colleen Haight, “The Problem with Fair Trade Coffee,” Stanford
61. For a discussion of the problems of evaluating social performance, Social Innovation Review, Summer 2011.
see Aaron Chatterji and David Levine, “Breaking Down the Wall of 88. Jeff Swartz, “Doing Well and Doing Good,” Brookings Review, 40
Codes: Evaluating Non-Financial Performance,” California Manage- (2002), 24.
ment Review, 48 (2006), 29–51.
89. Information on this case, unless otherwise noted, is taken from the
62. This argument is developed in Wayne Norman and Chris McDon- Timberland Company website Timberland.com and James Austin,
ald,“Getting to the Bottom of the ‘Triple Bottom Line,’”Business Eth- Herman B. Leonard, and James W. Quinn, “Timberland: Commerce
ics Quarterly, 14 (2004), 243–62. and Justice,” Harvard Business School, Case 9–305–002, December
63. Costco Wholesale Corporation, Corporate Governance and Citizenship, 2004.
http://phx.corporate-ir.net/phoenix.zhtml?c=83830&p=irol- 90. Swartz,“Doing Well and Doing Good,” 24.
govhighlights
91. Michael J. De La Merced,“VF Corporation to Buy Timberland,” New
64. These details are reported by Costco Wholesale Corporation, Corpo- York Times, 13 June 2011.
rate Sustainability Report 2015, January 2015, pp. 8–14.
92. VF Corporation Press Release, 13 September 2011.
65. Ibid., p. 9.
93. Timberland,“VE Embraces Timberland’s Commitment to Earth Day,”
66. Costco Wholesale Corporation, U.S. Securities and Exchange Com- Timberland.com, http://responsibility.timberland.com/service/vf-
mission Form SD, Specialized Disclosure Report, 1 June 2015, p. 4. embraces-timberlands-commitment-to-earth-day/.
67. Ibid. 94. “Coke in the Cross Hairs: Water, India, and the University of Michi-
68. Costco Wholesale Corporation, “Costco’s Conflict Minerals Policy gan,” University of Michigan, Case 1-429-098, 25 July 2010.
Statement,” 30 May 2014. 95. The student campaign against Coca-Cola not only involved com-
69. Costo, U.S. Securities and Exchange Commission Form SD, pp. 6–7. pany operations in India but also alleged human rights violations in
Columbia. In addition to water depletion, the concerns in India
70. Kim Alter, “Social Enterprise Typology.”Virtue Ventures, 13 April 13
included possible pesticides in Coke products.
2006.
96. Steve Stecklow, “How a Global Web of Activists Gives Coke Prob-
71. J. Gregory Dees,“Enterprising Nonprofits.”Harvard Business Review,
lems in India,” Wall Street Journal, 7 June, 2005.
76 (1998), 55–67.
97. Much of the information in this case is from Aneel Karnani,“Corpo-
72. Henry Hansmann, “The Role of Non-profit Enterprise,” Yale Law Jour-
rate Social Responsibility Does Not Avert the Tragedy of the Com-
nal, 89 (1980), 835–901. In Hansmann’s terminology, the donor-reliant
mons—Case Study: Coca-Cola India,” University of Michigan, Ross
nonprofit organization is a“donative nonprofit,”in contrast to the“com-
School of Business Working Paper Series, February 2014; and the
mercial nonprofit”that generates significant amounts of earned revenue.
TERI Report, Independent Third-Party Assessment of Coca-Cola Facil-
73. National Geographic Society, Annual Report, 2012. Since member- ities in India, The Energy and Resources Institute, 2008.
ship dues include a subscription to the magazine, some portion of
this amount constitutes earned revenue rather than donations. In 98. Independent Third-Party Assessment of Coca-Cola Facilities in India.
2012, donations or contributions other than membership dues 99. Karnani, “Corporate Social Responsibility Does Not Avert the Trag-
amounted to less than 4 percent of total revenues. edy of the Commons.”
74. Beneficent Technology, Inc., and Bengineering, Inc., DBA Benetech, 100. In addition, the company agreed that allegations of human rights
Consolidated Financial Statements and Independent Auditor’s violations in Colombia would be investigated by the International
Report, Years Ended December 31, 2013 and 2012. Labour Organization (ILO) under similar terms.
101. CFO’s Letter to Coca Cola Company, October 13, 2008, University Fiduciary Duties,” Stetson Law Review, 21 (1999), 23–44; Richard
of Michigan, http://www.vpcomm.umich.edu/pa/key/coke.html. Marens and Andrew C. Wicks, “Getting Real: Stakeholder Theory,
102. The Coca-Cola Company, The Water Stewardship and Replenish Management Practice, and the General Irrelevance of Fiduciary Duties
Report, January 2011. Owed to Shareholders,”Business Ethics Quarterly, 9 (1999), 273–93.
26. Michael C. Jensen, “Value Maximization, Stakeholder Theory, and
the Corporate Objective Function,” Business Ethics Quarterly, 12
Chapter 13 (1992), 235–56; Anant K. Sundaram and Andrew C. Inkpen, “The
1. Information on this case, unless indicated otherwise, is taken from Corporate Objective Revisited,” Organizational Science, 15 (2004),
Dennis R. Beresford, Nicholas deB. Katzenbach, and C. B. Rogers, Jr., 350–63.
“Report of Investigation by the Special Investigative Committee of 27. Arthur Levitt,“The ‘Numbers Game,’” Remarks to New York Univer-
the Board of Directors of WorldCom, Inc.,” 31 March 2003, hereafter sity Center for Law and Business, 28 September 1998.
“Report of Investigation.”
28. See Barbara Ley Toffler with Jennifer Reingold, Final Accounting:
2. For details, see Kurt Eichenwald,“For WorldCom, Acquisitions Were Ambition, Greed, and the Fall of Enron (New York: Broadway Books,
Behind Its Rise,” New York Times, 8 August 2002. 2003); and Kurt Eichenwald, Conspiracy of Fools (New York: Broad-
3. “Report of Investigation,” 21. way Books, 2005).
4. Ibid., 19. 29. United States v. Arthur Young & Co., 79 L.Ed.2d 826, 836; 104 S. Ct.
1495 (1984).
5. Ibid., 49.
6. Susan Pulliam,“Over the Line: A Staffer Ordered to Commit Fraud, 30. Karen Arenson,“Anderson [sic] Firm Is Found Guilty of Fraud,”New
Balked, Then Caved,” Wall Street Journal, 23 June 2003. York Times, 5 November 1981. For a discussion of this“Catch 22,”see
Norman E. Bowie, “Accountants, Full Disclosure, and Conflicts of
7. Ibid. Interest,” Business and Professional Ethics Journal 5 (1986), 60–73.
8. Ibid. 31. “President Bush Signs Corporate Corruption Bill,” Office of the
9. Ibid. Press Secretary, Press Release, 30 July 2002.
10. Ibid. 32. Edward, First Baron Thurlow, in H. L. Mencken, A New Dictionary of
Quotations on Historical Principles from Ancient and Modern Sources
11. Peter F. Drucker, People and Performance (Boston, MA: Harvard Busi- (New York: Knopf, 1942), 223.
ness School Press, 2007), 95.
33. John Hasnas, Trapped: When Acting Ethically Is against the Law
12. See Lynn Stout, The Shareholder Value Myth: How Putting Sharehold- (Washington, DC: Cato Institute, 2006).
ers First Harms Investor, Corporations, and the Public (San Francisco,
CA: Berrett-Koehler, 2012). 34. Lynn Sharp Paine,“Managing for Organizational Integrity,” Harvard
Business Review, 72 (March–April 1994), 106.
13. Adolf A. Berle, and Gardiner C. Means, The Modern Corporation and
Private Property (New York: Macmillan, 1932). 35. Steven N. Brenner,“Ethics Programs and Their Dimensions,”Journal
of Business Ethics, 11 (1992), 391–99.
14. Ibid., 3.
36. Paine,“Managing for Organizational Integrity.”
15. Adolf A. Berle, “For Whom Corporate Managers Are Trustees: A
Note,” Harvard Law Review, 45 (1931–1932), 1365–72. 37. In re Caremark International Inc. Derivative Litigation. Civil Action
No. 13670 (Del. Ch. 1996).
16. Henry Hansmann, The Ownership of Enterprise (Cambridge, MA:
Harvard University Press, 1996), 13–14. 38. Dominic Bencivenga, “Words of Warning: Ruling Makes Directors
Accountable for Compliance,” New York Law Journal, 13 February
17. William M. Evan and R. Edward Freeman, “A Stakeholder Theory of
1997, 5.
the Modern Corporation: Kantian Capitalism,” in Ethical Theory and
Business, 4th ed., edited by Tom L. Beauchamp and Norman E. 39. For an explanation, see Jeffrey M. Kaplan, “Why Daiwa Bank Will
Bowie (Upper Saddle River, NJ: Prentice Hall, 1993), 79. Pay $340 Million under the Sentencing Guidelines,”Ethikos, 9 (May–
June 1996), 1–3, 11.
18. R. Edward Freeman, Strategic Management: A Stakeholder Approach
(Boston, MA: Pitman, 1984), 46. 40. United States Sentencing Commission, Federal Sentencing Guide-
lines Manual, §8A1.2, Commentary, Application Note 3(k).
19. Francesco Guerrera,“Welch Condemns Share Price Focus,”Financial
Times, 12 March 2009. 41. Ibid., Application Note 3(k)(1–7).
20. Thomas Donaldson and Lee E. Preston,“The Stakeholder Theory of 42. O. C. Farrell, Debbie Thorne LeClair, and Linda Ferrell,“The Federal
the Corporation: Concepts, Evidence, and Implications,” Academy of Sentencing Guidelines for Organizations: A Framework for Ethical
Management Review, 20 (1995), 65–91. Compliance,” Journal of Business Ethics, 17 (1998), 353–63.
21. James E. Post, Lee E. Preston, and Sybille Sachs, “Managing the 43. Paine,“Managing for Organizational Integrity.” See Michael Green-
Extended Enterprise: The New Stakeholder View,” California Man- berg, Corporate Culture and Ethical Leadership under the Federal Sen-
agement Review, 45 (2002), 6–28. See also, James E. Post, Lee E. tencing Guidelines: What Should Boards, Management and Policy
­Preston, and Sybille Sachs, Redefining the Corporation: Stakeholder Makers Do Now? RAND Center for Corporate Ethics and Govern-
Management and Organizational Wealth (Stanford, CA: Stanford ance, 2012, 16–17, http://www.rand.org/pubs/conf_proceedings/
University Press, 2002). CF305.html.
22. Post, Preston, and Sachs,“Managing the Extended Enterprise,” 7. 44. Corporate Ethics, The Conference Board, Research Report No. 900
(1987), 14.
23. Donaldson and Preston, “The Stakeholder Theory of the Corpora-
tion,” 67. 45. National Commission on Fraudulent Financial Reporting, Report of
National Commission on Fraudulent Financial Reporting, 1987, 35.
24. Freeman, Strategic Management; R. Edward Freeman and William
M. Evan, “Stockholders and Stakeholders: A New Perspective on 46. Lynn S. Paine, Rohit Deshpandé, Joshua D. Margolis, and Kim Eric
Corporate Governance,” California Management Review, 25 (1983), Bettcher,“Up to Code: Does Your Company’s Conduct Meet World-
88–106; and R. Edward Freeman and William M. Evan, “Corporate Class Standards,” Harvard Business Review, 83 (2005), 122–33.
Governance: A Stakeholder Interpretation,” Journal of Behavioral
47. Messod D. Benish and Robert Chatov, “Corporate Codes of Con-
Economics, 19 (1990), 337–59.
duct: Economic Determinants and Legal Implications for Inde-
25. Jonathan R. Macey, “An Economic Analysis of the Various Rationales pendent Auditors,” Journal of Accounting and Public Policy, 12
for Making Shareholders the Exclusive Beneficiaries of Corporate (1993), 3–35.
48. Material for this case is taken from Lynn S. Paine and Michael A. 13. Dan Kurtzman, A Killing Wind: Inside Union Carbide and the Bhopal
Santoro, “Sears Auto Centers (A),” Boston, MA: Harvard Business Catastrophe (New York: McGraw-Hill, 1987); and Paul Shrivastava,
School Publishing, 1993; Kevin Kelly, “How Did Sears Blow This Bhopal: Anatomy of a Crisis (Cambridge, MA: Ballinger, 1987).
Gasket?”BusinessWeek, 29 June 1992, 38; Julia Flynn,“Did Sears Take
14. See Paul Steidlmeier,“Gift Giving, Bribery and Corruption: Manage-
Other Customers for a Ride?” BusinessWeek, 3 August 1992, 24–25;
ment of Business Relationships in China,” Journal of Business Ethics,
Judy Quinn, “Repair Job,” Incentive, October 1992, 40–46; Jennifer
12 (1993), 157–64.
Steinhauer, “Time to Call a Sears Repairman,” New York Times, 15
January 1998; News from Sears, Roebuck and Co., Press Release, 22 15. Sheila M. Puffer and Daniel J. McCarthy,“Finding Common Ground
June 1992. in Russian and American Business Ethics,” California Management
Review, 37 (Winter 1995), 29–46.
49. The other conditions are that the proposed resolution involves (1) a
personal grievance, (2) a personal benefit to the party proposing the 16. Ernest Gundling,“Ethics and Working with the Japanese: The Entre-
resolution that is not shared by other shareholders, (3) vague or preneur and the ‘Elite Course,’” California Management Review, 33
misleading statements, and (4) an impractical goal that the com- (Spring 1991), 2–39; John L. Graham and N. Mark Lam, “The Chi-
pany lacks the power to achieve. nese Negotiation,” Harvard Business Review, 81 (October 2003),
82–91.
50. Cracker Barrel Old Country Store, Inc., SEC No-Action Letter, Fed.
Sec. L. Rep. 76418, 13 October 1992. 17. Nancy Turck, “The Arab Boycott of Israel,” Foreign Affairs, 55 (April
1977), 472–93.
51. Adoption of Amendments Relating to Proposals by Security Hold-
ers, Exchange Act Release No. 12999, 41 Fed. Reg. 52994 (1976). 18. Jessica T. Mathews,“Power Shift,” Foreign Affairs, 76 (1997), 50–66.
52. American Telephone & Telegraph Co., SEC No-Action Letter, 1990 19. Donaldson, The Ethics of International Business.
WL 2285776 , 5 January 1990.
20. Ibid., 62.
53. Some corporations have bylaws or charters that permit nomination
21. Ibid., 81.
of directors by shareholders.
22. Ibid., 124.
54. “Commission to Review Current Proxy Rules and Regulations to
Improve Corporate Democracy,” Securities and Exchange Commis- 23. John Ruggie,“Protect, Respect and Remedy: A Framework for Busi-
sion, Press Release 46, 14 April 2003. ness and Human Rights,” Report to the Human Rights Council of
55. Amendments to Rules on Shareholder Proposals, Exchange Act the United Nations by the Special Representative of the Secretary
Release No. 34–40018, 63 Fed. Reg. 29106 (1998). For a discussion, General on the Issue of Human Rights and Transnational Corpora-
see Phillip R. Stanton,“SEC Reverses Cracker Barrel No-Action Let- tions, A/HRC/8/5, 7 April 2008, 3.
ter,” Washington University Law Quarterly, 77 (1999), 979–92. 24. Richard T. De George, Competing with Integrity in International
56. Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985). Business (New York: Oxford University Press, 1993), 45–56.

57. Ibid., 872. 25. Manuel Velasquez, “International Business Ethics: The Aluminum
Companies in Jamaica,” Business Ethics Quarterly, 5 (1995), 865–82,
58. Daniel R. Fischel,“The Business Judgment Rule and the Trans Union 878.
Case,” Business Lawyer, 40 (1985), 1437–55, 1455.
26. Messaoud Mehafdi, “The Ethics of International Transfer Pricing,”
Journal of Business Ethics, 28 (2000), 365–81.
Chapter 14
27. Bowie,“The Moral Obligations of Multinational Corporations,” 529.
1. Information for this case is taken largely from David Barboza and
28. Hans Küng, “A Global Ethics in an Age of Globalization,” Business
Louise Story, “Toymaking in China, Mattel’s Way,” New York Times,
Ethics Quarterly, 7 (1997), 17–31, 18.
26 July 2007; Louise Storey, “After Stumbling, Mattel Cracks Down
in China,” New York Times, 29 August 2007; Louise Story, “Mattel 29. Simon Webley, “The Interfaith Declaration: Constructing a Code of
Official Delivers an Apology in China,” New York Times, 22 Septem- Ethics for International Business,” Business Ethics: A European
ber 2007; Jonathan Dee, “A Toy Maker’s Conscience,” New York Review, 5 (1996), 52–57.
Times, 23 December 2007; and “Testimony of Robert A. Eckert,
30. William C. Frederick,“The Moral Authority of Transnational Corpo-
Chairman and Chief Executive Officer, Mattel, Inc.,” Subcommittee
rate Codes,” Journal of Business Ethics, 10 (1991), 165–77.
on Commerce, Trade, and Consumer Protection of the Committee
on Energy and Commerce, Washington, DC, 19 September 2007. 31. David Vogel,“The Private Regulation of Global Corporate Conduct,”
Business and Society, 49 (2010), 68–87.
2. Barboza and Story,“Toymaking in China, Mattel’s Way.”
32. Andreas Georg Scherer, Guido Palazzo, and Dorothée Bauman,
3. Mattel Media Statement, 14 August 2007.
“Global Rules and Private Actors: Toward a New Role of the Trans-
4. Story,“Mattel Official Delivers an Apology in China.” national Corporation,” Business Ethics Quarterly, 16 (2006), 505–32.
5. Paul Beamish and Hari Bapuji, “Toy Recalls and China: Emotion vs. 33. John H. Cushman, Jr., “Nike to Step Forward on Plant Conditions,”
Evidence,” Management and Organization, 4 (2008), 197–209. San Diego Union-Tribune, 13 May 1998.
6. Dee,“A Toy Maker’s Conscience.” 34. Richard J. Barnet and John Cavanagh, Global Dreams: Imperial Cor-
7. Ibid. porations and the New World Order (New York: Simon & Schuster,
1994), 326.
8. Story,“Mattel Official Delivers an Apology in China.”
35. Adam Schwarz,“Running a Business,” Far Eastern Economic Review,
9. Mattel Media Statement, 21 September 2007.
20 June 1991, 16.
10. Norman E. Bowie, “The Moral Obligations of Multinational Corpo-
36. Barnet and Cavanagh, Global Dreams, 326.
rations,” in Problems of International Justice, ed., Steven Luper-Foy
(Boulder, CO: Westview Press, 1987), 97. 37. Jagdish Bhagwati and Robert E. Hudec, eds., Fair Trade and Harmo-
11. Ralph J. Ledogar, Hungry for Profits: U.S. and Drug Multinationals nization, vol. 1 (Cambridge, MA: MIT Press, 1996), 2.
in Latin American (New York: IDOC/North America, 1975), 46–47. 38. World Bank, Workers in an Integrating World Economy (1995), 75.
12. The test is this: “The practice is permissible if and only if the mem- 39. Leslie Kaufman and David Gonzalez, “Labor Standards Clash with
bers of the home country would, under conditions of economic Global Reality,” New York Times, 24 April 2001.
development relevantly similar to those of the host country, regard
40. “The Invisible Children,” New York Times, 20 February 2000.
the practice as permissible.”Thomas Donaldson, The Ethics of Inter-
national Business (New York: Oxford University Press, 1989), 103. 41. U.S.C. §78dd-1 (a)(1).
42. Michael Phillips, “Bribery,” Ethics, 94 (1984), 621–36; Thomas L. 63. This case was adapted from “H. B. Fuller in Honduras: Street Chil-
­Carson,“Bribery, Extortion, and the ‘Foreign Corrupt Practices Act,’” dren and Substance Abuse,”prepared by Norman E. Bowie and Ste-
Philosophy and Public Affairs, 14 (1985), 66–90; John Danley,“Toward fanie Ann Lenway.
a Theory of Bribery,” Business and Professional Ethics Journal, 2
64. Walmart Stores, Inc., “Walmart International”; and Funding Uni-
(1983), 19–39; and Kendall D’Andrade, Jr., “Bribery,” Journal of
verse, “Wal-Mart de Mexico, S.A. de C.V. History,” http://www.
­Business Ethics, 4 (1985), 239–48.
fundinguniverse.com/company-histories/wal-mart-de-mexico-s-a-
43. Most notably, Nathaniel H. Leff, “Economic Development through de-c-v-history.
Bureaucratic Corruption,”American Behavioral Scientist, 8 (1964), 8–14.
65. David Barstow and Alejandra Xanic von Bertrab, “How Wal-Mart
44. Samuel P. Huntington, Political Order in Changing Societies (New Used Payoffs to Get Its Way in Mexico,” New York Times, 18 Decem-
Haven, CT: Yale University Press, 1968), 386. ber 2012.
45. For discussions of the effect of bribery on development, see Susan 66. Barstow and von Bertrab,“How Wal-Mart Used Payoffs.”
Rose Ackerman, Corruption: A Study in Political Economy (New
67. Walmart Stores, Inc., “Walmart International,” from http://corporate.
York: Academic Press, 1978); Andrei Schleifer and Robert Vishny,
walmart.com/our-story/our-business/international/walmart-mexico.
“Corruption,” Quarterly Journal of Economics, 109 (1993), 599–617;
and Paolo Mauro, “Corruption and Growth,” Quarterly Journal of 68. Miguel Bustillo, “Wal-Mart Confirms Mexico Bribery Probe,” Wall
Economics, 110 (1995), 681–712. Street Journal, 22 April 2012; Walmart Stores, Inc., “Key Events in
Walmart Anti-Corruption Compliance,” from http://news.walmart.
46. Daniel Kaufman, “Corruption: The Facts,” Foreign Policy, 107
com/key-events-in-walmart-anti-corruption-compliance-2012.
(Summer 1997), 114–32, 116–17.
69. Barstow and von Bertrab,“How Wal-Mart Used Payoffs.”
47. Susan Rose Ackerman, “The Political Economy of Corruption—
Causes and Consequences,” The World Bank, Public Policy for the 70. Randal Archibold, “Even as It Hurts the Mexican Economy, Bribery
Private Sector, Note No. 74, April 1996. Is Taken in Stride,” New York Times, 23 April 2012; and David
Barstow, “Vast Mexico Bribery Case Hushed Up by Wal-Mart after
48. Kaufman,“Corruption: The Facts,” 120.
Top-Level Struggle,” New York Times, 21 April 2012.
49. See, for example, Susan Rose Ackerman, “The Role of the World
71. Barstow,“Vast Bribery Case Hushed Up by Wal-Mart.”
Bank in Controlling Corruption,” Law and Policy in International
Business, 29 (1997), 93–114. 72. Ibid.
50. Transparency International, Exporting Corruption: Assessing 73. Ibid.
Enforcement of the OECD Convention on Combating Foreign Bribery, 74. Ibid.
Progress Report 2014.
75. Ibid.
51. See Kate Gillispie,“Middle East Response to the U.S. Foreign Corrupt
Policies Act,” California Management Review, 29 (1987), 9–30; Paul J. 76. Walmart Stores, Inc., Form 8-K, 15 November 2012; and Shelly
Beck, Michael W. Maher, and Adrian E. Tschoegl, “The Impact of the Banjo, “Lawmakers, Wal-Mart Spar over Response to Bribery Alle-
Foreign Corrupt Policies Act on U.S. Exports,”Managerial and Decision gations,” Wall Street Journal, 10 January 2013.
Economics, 12 (1991), 295–303; and Cortney C. Thomas, “The Foreign 77. Walmart Stores, Inc., Statement in Response to Recent New York
Corrupt Practices Act: A Decade of Rapid Expansion Explained, Times Article about Compliance with the U.S. Foreign Corrupt Prac-
Defended and Justified,”Review of Litigation, 29 (2010), 439–70. tices Act, 21 April 2012.
52. Clifford J. Levy, “Russia Uses Microsoft to Suppress Dissent,” New 78. Walmart Stores, Inc., Form 10Q/A, 31 July 2013; Mark Friedman,
York Times, 11 September 2010. “Walmart Spends $230 Million on Mexican Bribery Investigation,”
53. Clifford J. Levy, “Microsoft under Fire Over Lawyers’ Actions,” New Arkansas Business, 10 June 2013; and Jef Feeley,“Wal-Mart Accused
York Times, 11 September 2010. of Using Mexican Governor to Push Bribes,” Bloomberg Business-
week, 29 January 2013.
54. Levy,“Russia Uses Microsoft to Suppress Dissent.”
79. “News from Congressman Chris Smith,” U.S, House of Representa-
55. “Statement by Microsoft,” New York Times, 11 September 2010. tives, Press Release, 26 January 2006.
56. Clifford J. Levy, “Microsoft Changes Policy over Russian Crack- 80. Elliot Schrage, Testimony of Google Inc. before the Subcommittee on
down,” New York Times, 13 September 2010. Asia and the Pacific, and the Subcommittee on Africa, Global Human
57. Freedom House, “Burma Marks Crackdown Anniversary as One of Rights, and International Operations, Committee on International
the World’s Worst Regimes,” https://freedomhouse.org/article/ Relations, United States House of Representatives, 15 February 2006
burma-marks-crackdown-anniversary-one-worlds-worst- (hereinafter “Schrage Testimony”).
regimes?page=70&release=705#. 81. “Letter from the Founders: ‘An Owner’s Manual’ for Google Share-
58. Michael H. Santoro, Profits and Principles: Global Capitalism and Human holders,” company document.
Rights in China (Ithaca, NY: Cornell University Press, 2000), 103. 82. “China Online Search Market Survey Report,” China Network
59. John R. Schermerhorn, Jr.,“Terms of Global Business Engagement in Information Center, August 2005.
Ethically Challenging Environments: Applications to Burma,” Busi- 83. “Schrage Testimony.”
ness Ethics Quarterly, 9 (1999), 485–505.
84. Ibid.
60. Ibid., 497.
85. Clive Thompson, “Google’s China Problem (and China’s Google
61. See, for example, Courtney Shaw, “Uncertain Justice: Liability of Problem),” New York Times Magazine, 23 April 2006, 64.
Multinationals under the Alien Tort Claims Act,” Stanford Law
Review, 54 (2002), 1359–86; Kerrie M. Taylor, “Thicker than Blood: 86. Joseph Kahn,“So Long, Dalai Lama: Google Adapts to China,” New
Holding Exxon Mobil Liable for Human Rights Abuses Committed York Times, 12 February 2006.
Abroad,” Syracuse Journal of International Law and Commerce, 31 87. Clay Chandler, Dan Zhang, Eugenia Levinson, and Joan L.
(2004), 273–97; and Gary Clyde Hufbauer and Nicholas K. ­Levinstein, “Inside the Great Firewall of China,” Fortune, 6 March
­Mitrokostas, Awakening the Monster: The Alien Tort Statute of 1789 2006, 148–58.
(Washington, DC: Institute for International Economics, 2003).
88. Thompson,“Google’s China Problem (and China’s Google Problem).”
62. Kiobel v. Royal Dutch Petroleum Company, 133 S.Ct. 1659 (2013).
89. “Schrage Testimony.”
Credits
Chapter 1 Excerpt on p. 1: Quoted in John Simons, “Will Merck Survive Education, Inc.; Figure 2.1 p. 32: © Pearson Education, Inc.; Excerpt on
Vioxx?” Fortune, 1 November 2004; Excerpt on p. 1: George W. Merck, p. 32: Meinhard v. Salmon, 164 N.E. 545 (1928); Figure 2.2 p. 32: © Pear-
Address to the Medical College of Virginia, Richmond (1 Dec 1950). son Education, Inc.; Excerpt on p. 33: Chief Justice John Marshall in his
Quoted in James C. Collins and Jerry I. Porras, Built to Last (1994, 1997), famous 1819 Dartmouth College v. Woodward decision; Excerpt on p. 34:
48; Case 1.1 p. 1–4: Much of the information for this case comes from Dodge v. Ford Motor Co., 170 N.W. 668, 685 (1919); Excerpt on p. 34: E.
“Report of the Honorable John R. Martin, Jr. to the Special Committee of Merrick Dodd, “For Whom Are Corporate Managers Trustees?” Harvard
the Board of Directors of Merck & Co., Inc. Concerning the Conduct of Law Review, 45 (1932), 1145–63, 1148; Excerpt on p. 35: John M. Darley,
Senior Management in the Development and Marketing of Vioxx,” 5 Sep- “How Organizations Socialize Individuals into Evildoing,” in Codes of
tember 2006, henceforth cited as “Martin Report; Excerpt on p. 2: Remarks Conduct: Behavioral Research into Business Ethics, eds., David M. Mes-
by Raymond V. Gilmartin, Chairman, President, and Chief Executive sick and Ann E. Tenbrunsel (New York: Russell Sage Foundation, 1996),
Officer, Merck & Co., Inc. 2002 Annual Business Briefing, December 10, 13–43; Excerpt on p. 36: Kurt Baier, The Moral Point of View: A Rational
2002; Timeline on p. 3: “Sequence of Events with VIOXX, since opening Basis of Ethics (Ithaca, NY: Cornell University Press, 1958), 88; Figure
of IND,” U.S. FDA Advisory Committees Briefing, 9 April 2005; Snigdha 2.3 p. 37: Based on Lawrence Kohlberg, The Psychology of Moral Devel-
Prakash and Vikki Valentine, “Timeline: The Rise and Fall of Vioxx,” opment: The Nature and Validity of Moral Stages (San Francisco, CA:
National Public Radio, 10 November 2007; “U.S. Pharmaceutical Com- Harper & Row, 1984); Excerpt on p. 38: Dan Ariely, The (Honest) Truth
pany Merck Sharp & Dohme Sentenced in Connection with Unlawful Pro- about Dishonesty: How We Lie to Everyone—Especially Ourselves (New
motion of Vioxx,” U.S. Department of Justice Press Release, 19 April 2012; York: Harper Collins, 2013), 23; Table 2.2 p. 38: Based on Lawrence Kohl-
Excerpt on p. 4: Mathews and Martinez, “E-Mails Suggest Merck Knew berg, The Psychology of Moral Development: The Nature and Validity of
Vioxx's Dangers at an Early Stage.”; Excerpt on p. 4: John Simons, “Will Moral Stages (San Francisco, CA: Harper & Row, 1984); Figure 2.4 p. 39:
Merck Survive Vioxx?” Fortune, 1 November 2004; Excerpt on p. 4: “Pun- © Pearson Education, Inc.; Excerpt on p. 40: Robert C. Solomon, Ethics
ishment for Merck,” New York Times, 23 August 2005; Excerpt on p. 4: and Excellence: Cooperation and Integrity in Business (New York: Oxford
Much of the information for this case comes from “Report of the Honor- University Press, 1992), 168; Box 2.2 p. 41: © Pearson Education, Inc.; Box
able John R. Martin, Jr. to the Special Committee of the Board of Directors 2.2 p. 41: © Pearson Education, Inc.; Excerpt on p. 42: Stephanie Strom,
of Merck & Co., Inc. Concerning the Conduct of Senior Management in “Harvard Managers' Pay Criticized,” New York Times, 4 June 2004;
the Development and Marketing of Vioxx,” 5 September 2006, henceforth Excerpt on p. 42: Charles Stein, “Harvard Pays 2 Top Money Managers
cited as “Martin Report.” 177; Excerpt on p. 4: Much of the information $25 M: Endowment's Salaries Down from Last Year; Critics Call System
for this case comes from “Report of the Honorable John R. Martin, Jr. Lavish,” Boston Globe, 23 November 2004; Excerpt on p. 42: Stephen M.
to the Special Committee of the Board of Directors of Merck & Co., Inc. Marks, “Alums Decry University Investor Salaries,” Harvard Crimson,
Concerning the Conduct of Senior Management in the Development 12 December 2003; Excerpt on p. 42: Stephanie Strom, “Harvard Man-
and Marketing of Vioxx,” 5 September 2006, henceforth cited as “Martin agers' Pay Criticized,” New York Times, 4 June 2004; Excerpt on p. 42:
Report.” 179; Table 1.1 p. 7: © Pearson Education, Inc.; Excerpt on p. 10: Steve Bailey, “Harvard's PR Problem,” Boston Globe, 10 September 2004;
This phrase is taken from Norman E. Bowie, “Fair Markets,” Journal of Excerpt on p. 42: Stephen M. Marks, “Alums Decry University Investor
Business Ethics, 7 (1988), 89–98; Table 1.2 p. 11: © Pearson Education, Salaries,” Harvard Crimson, 12 December 2003; Excerpt on p. 42: Michael
Inc.; Figure 1.1 p. 13: © Pearson Education, Inc.; Excerpt on p. 14: David Lewis, “Harvard Fund Managers Deserve Better: Meyer's Team Shamed
Luban, Alan Strudler, and David Wasserman, “Moral Responsibility in Out by ‘High’ Salaries that Weren't,” Financial Post Investing, 21 January
the Age of Bureaucracy,” Michigan Law Review, 90 (1991–92), 2348–92; 2005; Case 2.2 p. 42–44: Information on the case is taken mainly from Saul
Excerpt on p. 14: Barbara Toffler, Final Accounting: Ambition, Greed, Hansell, “P&G Sues Bankers Trust Over Swap Deal,” New York Times,
and the Fall of Arthur Andersen ((New York: Broadway Books, 2004), 28 October 1994; Saul Hansell, “Bankers Trust Settles Suit with P&G,”
257; Excerpt on p. 14: Saul W. Gellerman, “Why ‘Good’ Managers Make New York Times, 10 May 1996; Floyd Norris, Procter's Tale: Gambling in
Bad Ethical Choices,” Harvard Business Review, 64 (July–August 1986), Ignorance,” New York Times, 30 October 1994; and Kelley Holland and
85–90; Excerpt on p. 15: David M. Messick and Max H. Bazerman, “Ethi- Linda Himelstein, “The Bankers Trust Tapes,” BusinessWeek, 16 October
cal Leadership and the Psychology of Decision Making,” Sloan Manage- 1995; Figure 2.5 p. 43: © Pearson Education, Inc.; Excerpt on p. 43: Saul
ment Review (Winter 1996), 9–22; Case 1.2 p. 17: This case was prepared Hansell, “P&G Sues Bankers Trust Over Swap Deal,” New York Times,
by Kerry Winans under the supervision of Professor John R. Boatright. 28 October 1994; Excerpt on p. 43: Kelley Holland and Linda Himelstein,
Copyright (c) 1995 by John R. Boatright; Box 1.2 p. 16-17: © Pearson Edu- “The Bankers Trust Tapes,” BusinessWeek, 16 October 1995; Excerpt on
cation, Inc.; Case 1.3 p. 18: Much of the information for this case is taken p. 44: Howard Gleckman, Amy Borrus, and Mike McNamee, “Inside the
from James Traub, “Into the Mouth of Babes,” New York Times Magazine, KPMG Mess: Why Eight Partners May Be Facing Jail Time—and What the
24 July 1988; Case 1.4 p. 18–19: Based on Material for this case is taken Justice Dept.'s Suit Could Mean for the Tax-Shelter Business,” Business
from Rushworth M. Kidder, How Good People Make Tough Choices Week, 5 September 2005, 46–47; Excerpt on p. 44: Jonathan D. Glater, “8
(New York: Fireside, 1995), 35–38; Glenn Adams, “Bath Iron Works CEO Former Partners of KPMG Are Indicted,” New York Times, 30 August,
Admits Ethics Breach, Steps Down,” The Associated Press, 16 September 2005; Excerpt on p. 45: Floyd Norris, “KPMG, a Proud Lion, Brought to
1991; Jerry Harkavy, “Haggett Severs Ties with Shipyard in Aftermath of Heel,” New York Times, 30 August 2005;
Photocopy Scandal,” The Associated Press, 25 September 1991; Suzanne
Chapter 3 Case 3.1 p. 46–47: Information in this case is taken from Ale-
Alexander, “Bath Iron Works Says Haggett Quit as Chief,” Wall Street
cia Swasy, Soap Opera: The Inside Story of Procter & Gamble (New York:
Journal, 17 September 1991; and Joseph Pereira and Andy Pasztor, “Bath
Touchstone, 1994); James S. Hirsch, “Procter & Gamble Calls in the Law
Chairman, 2 Vice Presidents Quit under Navy Pressure over Secret Data,”
to Track News Leak,” Wall Street Journal, 12 August 1991; James S. Hirsch
Wall Street Journal, 26 September 1991; Excerpt on p. 19: James B. Stewart,
and Milo Gegelin, “P&G Says Inquiry on Leak to Journal Was Done Prop-
“In the Undoing of a C.E.O., a Puzzle,” New York Times, 18 May 2012;
erly,” Wall Street Journal, 13 August 1991; James S. Hirsch and Milo Gege-
Excerpt on p. 20: Dominic Rushe, “Embattled Yahoo CEO Scott Thompson
lin, “What Possessed P&G,” Wall Street Journal, 13 August 1991; James
Reportedly Set to Quit over Fake Resume,” The Guardian, 13 May 2012;
S. Hirsch, “No Charges Are Expected in P&G Affair,” Wall Street Journal,
Excerpt on p. 20: De la Merced and Rusli, “Yahoo Chief to Leave as Com-
14 August 1991; Mark Fitzgerald, “Cops Investigate News Leak,” Editor
pany Strikes a Deal with Loeb.”
& Publisher, 17 August 1991; James S. Hirsch, “P&G Won't Bring Crimi-
Chapter 2 Case 2.1 p. 21–22: Based on Information for this case is taken nal Charges as a Result of Probe,” Wall Street Journal, 19 August 1991;
mainly from In re: HP Inkjet Printer Litigation, Master File No. C053580 William Safire, “At P&G: It Sinks,” New York Times, 5 September 1991;
JF, Second Consolidated and Amended Class Action Complaint, United “P&G Looks for a News Leak,” ABA Journal (November 1991); “Biggest
States District Court, Northern District of California; and In re: HP Inkjet Business Goofs of 1991,” Fortune, 13 January 1992, 80–83;Excerpt on p. 46:
Printer Litigation, Master File No. C05-3580 JF, Stipulation of Settlement, Alecia Swasy, Soap Opera: The Inside Story of Procter & Gamble (New
United States District Court, Northern District of California; Excerpt on York: Touchstone, 1994); Excerpt on p. 47: Mark Fitzgerald, “Cops Inves-
p. 23: Adam Smith's The Wealth of Nations; Table 2.1 p. 32: © Pearson tigate News Leak,” Editor & Publisher, 17 August 1991; Excerpt on p. 47:

380
Alecia Swasy, Soap Opera: The Inside Story of Procter & Gamble (New 4-12-345, United States District Court, S.D. Texas, Houston Division, June
York: Touchstone, 1994); Excerpt on p. 47: Alecia Swasy, Soap Opera: 28, 2012; Excerpt on p. 80: Khaled Asadi v. G.E. Energy (USA), LLC, In the
The Inside Story of Procter & Gamble (New York: Touchstone, 1994); United States Court of Appeals for the Fifth Circuit, No. 12-20522, July 17,
Excerpt on p. 47: William Safire, “At P&G: It Sinks,” New York Times, 2013; Excerpt on p. 80: Comments on Proposed Rules for Implementing
5 September 1991; Figure 3.1 p. 48: © Pearson Education, Inc.; Excerpt the Whistleblower Provision of Section 21F of the Securities and Exchange
on p. 48: This formulation of RU follows that given by David Lyons for Act of 1934, File No. S7-33-10; Box 4.2 p. 77: © Pearson Education, Inc.
what he calls “ideal rule-utilitarianism.” David Lyons, Forms and Limits Chapter 5 Excerpt on p. 82: Mattel v. MGA Entertainment, 616 F. 3rd 904
of Utilitarianism (Oxford: Oxford University Press, 1965), 140; Figure 3.2 (2010); Excerpt on p. 83: Margaret Talbot, “Little Hotties,” New Yorker, 4
p. 49: © Pearson Education, Inc.; Excerpt on p. 51: Steven Kelman, “Cost- December 2006, 74; Figure 5.1 p. 84: © Pearson Education, Inc.; Excerpt on
Benefit Analysis: An Ethical Critique,” Regulation (January–February p. 85: Section 8.05 of the Restatement (Third) of Agency (2006); Excerpt on
1981), 33–40. p.39; Table 3.1 p. 51: © Pearson Education, Inc.; Excerpt on p. 89: Section 757 of the Restatement of Torts; Excerpt on p. 89: Section 757
p. 52: Immanuel Kant, Foundations of the Metaphysics of Morals (1785), of the Restatement of Torts; Excerpt on p. 89: Section 757 of the Restate-
Indianapolis; Cambridge : Hackett Publishing Company, 1981; Excerpt on ment of Torts; Excerpt on p. 89: Economic Espionage Protecting America's
p. 52: Immanuel Kant, Foundations of the Metaphysics of Morals (1785), Trade Secrets, Economic Espionage Act of 1996; Excerpt on p. 90: Wexler
Indianapolis; Cambridge: Hackett Publishing Company, 1981; Excerpt on v. Greenberg, 160 A. 2d 430 (1960); Excerpt on p. 90: Wexler v. Greenberg,
p. 52: Immanuel Kant, Foundations of the Metaphysics of Morals (1785), 160 A. 2d 430 (1960); Excerpt on p. 91: Wexler v. Greenberg, 160 A. 2d
Indianapolis; Cambridge : Hackett Publishing Company, 1981; Table 3.2 430 (1960); Excerpt on p. 91: Wexler v. Greenberg, 160 A. 2d 430 (1960);
p. 55: © Pearson Education, Inc.; Excerpt on p. 56: John Locke, Second Excerpt on p. 91: International News Service v. Associated Press, 248 U.S.
Treatise of Government, 1690; Figure 3.3 p. 57: © Pearson Education, Inc.; 215, 250 (1918) (Brandeis, J., dissenting); Excerpt on p. 91: International
Excerpt on p. 59: John Rawls, A Theory of Justice (1971), 302; Excerpt News Service v. Associated Press, 248 U.S. 215, 250 (1918) (Brandeis, J.,
on p. 60: Robert Nozick, Anarchy, State and Utopia (New York: Basic dissenting); Box 5.2 p. 91: © Pearson Education, Inc.; Excerpt on p. 92:
Books, 1974), 153–55. p.151; Excerpt on p. 60: Robert Nozick, Anarchy, International News Service v. Associated Press, 248 U.S. 215, 250 (1918)
State and Utopia (New York: Basic Books, 1974), 153–55. p.151; Case 3.2 (Brandeis, J., dissenting); Excerpt on p. 92: International News Service v.
p. 61: This case is based on a memo written by Lawrence Summers, then Associated Press, 248 U.S. 215, 250 (1918) (Brandeis, J., dissenting); Figure
chief economist at the World Bank. See “Let Them Eat Pollution,” The 5.2 p. 93: © Pearson Education, Inc.; Excerpt on p. 101: © Pearson Educa-
Economist, 8 February 1992, 66; Case 3.3 p. 61–62: Material for this case tion, Inc.; Excerpt on p. 94: Diana B. Henriques with Kurt Eichenwald,
is taken from Alix M. Freedman, “How a Tobacco Giant Doctors Snuff “A Fog over Enron, and the Legal Landscape,” New York Times, 27 Janu-
Brands to Boost Their ‘Kick’,” Wall Street Journal, 26 October 1994; and ary 2002; Excerpt on p. 94: E-mail from Sherron Watkins to Kenneth Lay,
Philip J. Hilts, “Snuff Makers Are Accused of a Scheme to Lure Young,” Enron Chairman (Jan 20, 2002), www.itmweb.com/f012002.htm; Excerpt
New York Times, 27 April 1995; Case 3.4 p. 62–63: This case is based on on p. 95: Second Restatement of Agency, Sec. 385. Emphasis added;
actual events, but the names of the companies have been disguised. The Excerpt on p. 97: Code of Business Conduct and Ethics, Fifth Third Ban-
case was prepared by Michael Streett under the supervision of Professor corp; Excerpt on p. 98: Carpenter et al. v. United States, 484 U.S. 19 (1987);
John R. Boatright. Copyright (c) 1995 by John R. Boatright; Box 3.2 p. 61: Excerpt on p. 99: Warren A. Law, “Wall Street and the Pubic Interest,” in
© Pearson Education, Inc. Wall Street and Regulation, ed. Samuel L. Hayes (Boston, MA: Harvard
Chapter 4 Excerpt on p. 65: E-mail from Sherron Watkins to Ken- Business School Press, 1987), 169; Excerpt on p. 102: Edward Warner,
neth Lay, Enron Chairman (Jan 20, 2002), www.itmweb.com/f012002. Lotus Sues Ad Agency, Claims It Offered Microsoft Trade Secrets, Info-
htm; Excerpt on p. 66: “Coleen Rowley's Memo to FBI Director Robert World, 21 Dec 1987; Excerpt on p. 102: Cleveland Horton, “Ethics at Issue
Mueller: An Edited Version of the Agent's 13-Page Letter,” 21 May 2002; in Lotus Case,” Advertising Age, 21 December 1987; Case 5.3 p. 103: This
Excerpt on p. 66: Anita F. Hill, “Insider Women with Outsider Values,” case is based on Andy Serwer, “P&G Comes Clean on Spying Operation,”
New York Times, 6 June 2002; Excerpt on p. 66: Helen Thomas, “Women www.fortune.com, 30 August 2001; Julian E. Barnes, “Unilever Wants
Whistle-blowers Did Right Thing,” Houston Chronicle, 15 June 2002; P&G Placed under Monitor in Spy Case,” New York Times, 1 Septem-
Excerpt on p. 66: Myron Peretz Glazer, quoted in Caroline E. Mayer and ber 2001; Andrew Edgecliffe-Johnson and Adam Jones, “Unilever Seeks
Amy Joyce, “Blowing the Whistle,” Washington Post, 10 February 2002; Review after P&G ‘Spying’,” Financial Times, 1 September 2001; “P&G,
Excerpt on p. 66: Cynthia Cooper, Coleen Rowley and Sherron Watkins, Unilever Settle Spy Case,” Advertising Age, 6 September 2001; Julian E.
Persons of the Year 2002, Time magazine; Excerpt on p. 67: Sissela Bok, Barnes, “P&G Said to Agree to Pay Unilever $10 Million in Spying Case,”
“Whistleblowing and Professional Responsibility,” New York Education New York Times, 7 September 2001; Andy Serwer, “P&G's Covert Opera-
Quarterly, 11 (1980), 7–10; Excerpt on p. 69: James M. Roche, “The Com- tion: An Intelligence-Gathering Campaign against Unilever Went Way
petitive System to Work, to Preserve, and to Protect,” Vital Speeches of the Too Far,” www.fortune.com, 17 September 2001; Excerpt on p. 105: Report
Day (May 1971), 445; Excerpt on p. 69: Sissela Bok, “Whistleblowing and of the Business Standards Committee, January 2011; Figure 5.3 p. 105:
Professional Responsibility,” New York Education Quarterly, 11 (1980), © Pearson Education, Inc.;
330; Excerpt on p. 69: Raphael Powell, The Law of Agency (London: Pit- Chapter 6 Excerpt on p. 106: Soroka v. Dayton Hudson, 1 Cal. Rptr. 2d
man and Sons, 1965), 7; Table 4.1 p. 69: © Pearson Education, Inc.; Excerpt 77 (Cal. App. 1 Dist. 1991); Excerpt on p. 111: Olmstead v. United States,
on p. 70: Second Restatement of Agency, Sec. 387. A Restatement is not a 277 U.S. 438 (1928); Excerpt on p. 111: Eisenstadt v. Baird, 405 U.S. 438
statute passed by a legislature but a summary of the law in a given area, (1972); Excerpt on p. 111: This point is made by W.A. Parent, “Privacy,
written by legal scholars, which is often cited in court opinions. Other Morality, and the Law,” Philosophy and Public Affairs, 12 (1983), 269–88.
important Restatements are those on contracts and torts; Excerpt on p. 70: p.273; Excerpt on p. 112: Richard B. Parker, “A Definition of Privacy,”
Section 395 of the Second Restatement of Agency; Excerpt on p. 70: Sec- Rutgers Law Review, 27 (1974), 275–97, 279; Excerpt on p. 112: This point
ond Restatement of Agency, Sec. 358, Comment f; Excerpt on p. 70: Alex is made by W.A. Parent, “Privacy, Morality, and the Law,” Philosophy
C. Michalos, A Pragmatic Approach to Business Ethics (Thousand Oaks, and Public Affairs, 12 (1983), 269–88. p.269; Excerpt on p. 112: This point
CA: Sage Publications, 1995), 44–53. p.51; Excerpt on p. 71: Myron Peretz is made by W.A. Parent, “Privacy, Morality, and the Law,” Philosophy
Glazer and Penina Migdal Glazer, “Whistleblowing,” Psychology Today and Public Affairs, 12 (1983), 269–88. p.269-70; Excerpt on p. 113: These
(August 1986), 39; Excerpt on p. 71: The Code of Ethics for U.S. Govern- two cases are contained in Gary T. Marx and Sanford Sherizen, “Monitor-
ment Service; Excerpt on p. 74: Public Company Accounting Reform and ing on the Job: How to Protect Privacy as Well as Property,” Technology
Investor Protection (Sarbanes-Oxley) Act, Pub. L. No. 107–204, 116 Stat. Review, 89 (November–December 1986), 63–72. p.67; Excerpt on p. 113:
745; Excerpt on p. 75: Westin, Whistle Blowing! 134; Excerpt on p. 75: Stanley I. Benn, “Privacy, Freedom, and Respect for Persons,” in Pennock
Westin, Whistle Blowing! 136; Table 4.2 p. 75: © Pearson Education, Inc.; and Chapman, Privacy, 10–11; Excerpt on p. 113: Fried, An Anatomy of
Excerpt on p. 76: Malin, “Protecting the Whistle-blower from Retalia- Values, 148; Excerpt on p. 113: W.A. Parent, “Privacy, Morality, and the
tory Discharge,” 309; Case 4.2 p. 78: This case is based on an experience Law,” Philosophy and Public Affairs, 12 (1983), 269–88, p.275. A similar
reported to Professor John T. Delaney, University of Iowa. Some details point is expressed in Reiman, “Privacy, Intimacy, and Personhood,” 33;
have been changed. Used with the permission of Professor Delaney; Case Figure 6.1 p. 117: © Pearson Education, Inc.; Excerpt on p. 120: George
4.3 p. 78: Information for this case is taken mainly from United States of G. Brenkert, “Privacy, Polygraphs and Work,” Business and Professional
America ex rel. Dr. Peter Rost v. Pfizer Inc. and Pharmacia Corporation, Ethics Journal, 1 (1981), 19–35, 30; Figure 6.2 p. 121: Federal Trade Com-
Civil Action No. 03-11084-JLT, United States District Court, District of mission, “Data Brokers: A Call for Transparency and Accountability,” May
Massachusetts, 30 August 2006; and United States of America ex rel.Peter 2014, 23–33; Excerpt on p. 124: Polly Sprenger, “Sun on Privacy: ‘Get Over
Rost v. Pfizer, Inc. and Pharmacia Corporation, Civil Action No. 03-11084- It’,” Wired News, 26 (January 1999); Excerpt on p. 125: Lawrence Lessig,
PBS, United States District Court, District of Massachusetts, 14 September Code and Other Laws of Cyberspace (New York: Basic Books, 1999). 154;
2010; Excerpt on p. 80: Asadi v. G.E. Energy (USA), LLC, Civil Action No. Excerpt on p. 125: Lawrence Lessig, Code and Other Laws of Cyberspace
(New York: Basic Books, 1999). 155; Excerpt on p. 125: Lawrence Lessig, River, NJ: Prentice Hall, 2002), 423–24; Excerpt on p. 152: Regents of the
Code and Other Laws of Cyberspace (New York: Basic Books, 1999). 156; University of California v. Bakke, 438 U.S. 265 (1978); Excerpt on p. 152:
Figure 6.3 p. 126: © Pearson Education, Inc.; Box on p. 128: © Pearson Hirabayashi v. United States, 320 U.S. 81 (1943); Box p. 152: © Pearson
Education, Inc.; Case 6.2 p. 128: This case is drawn from The City of Education, Inc.; Excerpt on p. 153: JSI adopted a policy entitled “Equal
Ontario et al. v. Quon et al., 560 U.S. 746 (2010); Excerpt on p. 128: Ontario Employment Opportunity", in 1980; Excerpt on p. 154: Reed Abelson,
v. Quon, 749; Excerpt on p. 129: Fourth Amendment to the United States “Suing Wal-Mart but Still Hoping to Move Up,” New York Times, 23 June
Constitution; Excerpt on p. 129: “Respecting Privacy at H.P.,” company 2004; Figure 7.3 p. 154: Data from Steven Greenhouse, “Wal-Mart Faces
document; Case 6.3 p. 129: This case is based largely on Damon Darlin, Lawsuit over Sex Discrimination,” New York Times, 16 February 2003;
“H.P. Chairwoman Aims Not to Be the Scapegoat,” New York Times, 9 Excerpt on p. 154: Robert Parloff, “The War over Unconscious Bias,” For-
September 2006; Damon Darlin and Matt Richtel, “Spying Uproar Causes tune, 15 October 2007, 90; Excerpt on p. 155: Robert Parloff, “The War over
Shuffle in Boardroom,” New York Times, 13 September 2006; and Damon Unconscious Bias,” Fortune, 15 October 2007, 90; Excerpt on p. 155: Betty
Darlin, “Deeper Spying Is Seen in Hewlett Review,” New York Times, Dukes Vs Wal-Mart Stores, Inc., November 29, 2004; Excerpt on p. 155:
18 September 2006; Excerpt on p. 130: David A. Kaplan, “Suspicions and Reed Abelson “6 Women Sue Wal-Mart, Charging Job and Promotion
Spies in Silicon Valley,” Newsweek, 18 September 2006, 40; Excerpt on Bias,” New York Times, 20 June 2001; Excerpt on p. 155: Clara Watson v.
p. 130: Damon Darlin and Matt Richtel, “Spying Uproar Causes Shuffle Fort Worth Bank and Trust, 992.
in Boardroom,” New York Times, 13 September 2006; Excerpt on p. 130:
Chapter 8 Excerpt on p. 157: Paine v. Western & A.R.R., 81 Tenn. 507,
Damon Darlin, “Ex-Chairwoman among 5 Charged in Hewlett Case,”
519–20 (1884); Excerpt on p. 158: Philip J. Levine, “Towards a Property
New York Times, 5 October 2006; Excerpt on p. 130: Damon Darlin and
Right in Employment,” Buffalo Law Review, 22 (1973), 1084; Figure 8.1
Matt Richtel, “Spying Uproar Causes Shuffle in Boardroom,” New York
p. 158: © Pearson Education, Inc.; Excerpt on p. 159: Clyde W. Summers,
Times, 13 September 2006; Excerpt on p. 130: Inside ChoicePoint, 2007,
“Employment at Will in the United States: The Divine Right of Employ-
company publication; Excerpt on p. 131: ChoicePoint company's motto.
ers,” University of Pennsylvania Journal of Labor and Employment Law,
Copyright 2015 LexisNexis Risk Solutions Inc. All rights reserved. Lexis-
3 (2000–2001), 65-86, 65 and 66; Excerpt on p. 159: Lochner V. People of
Nexis and the Knowledge Burst logo are registered trademarks of Reed
State of New York 198 U.S. 45 (1905); Excerpt on p. 159: Adair v. United
Elsevier Properties Inc., used with the permission of LexisNexis; Excerpt
States, 208 U.S. 161, 28 S.Ct. 277 (1907); Excerpt on p. 159: Coppage v. Kan-
on p. 131: Steven Brill in the foreword to Smith, The Risk Revolution, xi;
sas, 26 U.S. 1, 35 S.Ct. 240 (1914); Excerpt on p. 160: West Coast Hotel v.
Excerpt on p. 131: Federal Trade Commission, “ChoicePoint Settles Secu-
Parrish, 300 U.S. 379 (1937). In a landmark decision, Nebbia v. New York,
rity Breach Charges; to Pay $10 Million in Civil Penalties, $5 Million for
291 U.S. 502 (1934), the Supreme Court had previously ruled that states
Consumer Redress,” Press Release, 26 January 2006; Excerpt on p. 131:
have the power to regulate business—and thereby limit the property
Gary Rivlin, “Keeping Your Enemies Close,” New York Times, 12 Novem-
rights of owners—for the sake of the public welfare. The decision in West
ber 2006.
Coast Hotel thus extends the precedent of Nebbia, which concerned the
Chapter 7 Case 7.1 p. 133: Material for this case is drawn from Bari- setting of prices, to matters of employment; Figure 8.2 p. 161: © Pearson
Ellen Roberts, Roberts v. Texaco (New York: Avon Books, 1998); Amy Education, Inc.; Table 8.1 p. 161: © Pearson Education, Inc.; Excerpt on
Myers Jaffe, “At Texaco, the Diversity Skeleton Still Stalks the Halls,” p. 162: Frampton v. Central Indiana Gas Company, 260 Ind. 249, 297 N.E.
New York Times, 11 December 1994; Peter Fritsch, “Trustee of Big Fund 2d 425 (1973). In addition, see Kelsay v. Motorola, 74 Ill. 2d 172, 384 N.E.
with Texaco Stock Says Tape Shows ‘Culture of Disrespect’,” Wall Street 2d 353 (1978); Sventko v. Kroger Co., 69 Mich. App. 644, 245 N.W. 2d 151
Journal, 6 November 1996; Kurt Eichenwald, “The First Casualties in (1976); Excerpt on p. 162: Nees v. Hocks, 272 Or. 210, 536 P. 2d 512 (1975);
Scandal at Texaco,” New York Times, 7 November 1996; Kurt Eichen- Excerpt on p. 162: Greeley v. Miami Valley Maintenance Contractors, Inc.;
wald, “The Two Faces of Texaco,” New York Times, 10 November 1996; Excerpt on p. 162: Toussaint v. Blue Cross and Blue Shield of Michigan
Adam Bryant, “How Much Has Texaco Changed?” New York Times, 2 and Ebling v. Masco Corporation, 408 Mich. 579, 272 N.W. 2d 880 (1980);
November 1997; Excerpt on p. 133: Kurt Eichenwald, “The First Casual- Excerpt on p. 162: Fortune v. National Cash Register Company, 364 N.E.
ties in Scandal at Texaco,” New York Times, 7 November 1996; Excerpt 2d 1251 (1977); Excerpt on p. 163: Tara J. Radin and Patricia H. Werhane,
on p. 134: Texaco's Vision and Values, 1995; Excerpt on p. 135: Title VII “Employment-at-Will, Employee Rights, and Future Directions for
of the 1964 Civil Rights Act. Section 703(a), 42 U.S.C. 2000e-2; Excerpt on Employment,” Business Ethics Quarterly, 13 (2003), 113-30, 115; Excerpt
p. 135: Section 703(e) of Title VII, U.S. Section 703(e) of Title VII; Excerpt on p. 163: Rosabeth Moss Kanter, When Giant's Learn to Dance (New
on p. 135: Dothard et al. v. Rawlinson et al. 433 U.S. 336. (1977); Excerpt York: Free Press, 1990), 321; Excerpt on p. 163: John J. McCall, “A Defense
on p. 136: Justice Thurgood Marshall, quoted in Dothard v. Rawlinson of Just Cause Dismissal Rules,” Business Ethics Quarterly, 13 (2003), 151–
(433 U.S. 321, 97 S.Ct. 2720); Excerpt on p. 136: Griggs v. Duke Power 75, 159. For further discussion of the effect of default rules, especially in
Company, 401 U.S. 424 (1970); Excerpt on p. 136: Griggs v. Duke Power employment, see Pauline Kim, “Bargaining with Imperfect Information: A
Company, 401 U.S. 424 (1970); Excerpt on p. 137: Griggs v. Duke Power Study of Worker Perceptions of Legal Protection in an At-Will World,”
Company, 401 U.S. 424 (1970); Excerpt on p. 137: Title VII of the Civil Cornell Law Review, 83 (1997), 105–60; David Millon, “Default Rules,
Rights Act of 1964; Excerpt on p. 138: Sexual harassment. Equal Employ- Wealth Distribution and Corporate Law Reform: Employment at Will ver-
ment Opportunity Commission (EEOC); Figure 7.1 p. 139: Robert C. sus Job Security,” University of Pennsylvania Law Review 146 (1998),
Ford and Frank McLaughlin, “Sexual Harassment at Work: What Is the 975–1041; Cass Sunstein, “Switching the Default Rule,” New York Univer-
Problem?” Akron Business and Economic Review, 20 (Winter 1988), 79–92; sity Law Review, 77 (2001), 106–43; Excerpt on p. 164: Key proposal in the
Excerpt on p. 140: Ellison v. Brady, 924 F.2d 872 (1991). See also Howard Model Employment Termination Act. An Act To Require Cause for
A. Simon, “Ellison v. Brady: A ‘Reasonable Woman’ Standard for Sexual Employment Termination, Maine Employment Termination Act; Excerpt
Harassment,” Employee Relations Law Journal, 17 (Summer 1991), 71–80; on p. 165: David C. Yamada, “Voice from the Cubicle: Protecting and
Excerpt on p. 140: Barbara Presley Noble, “Little Discord on Harassment Encouraging Private Employee Speech in the Post-Industrial Workplace,”
Ruling,” New York Times, 13 November 1993; Excerpt on p. 140: Burl- Berkeley Journal of Employment and Labor Law, 19 (1998), 1–59. p.21;
ington Industries v. Ellerth, No. 97–569; Excerpt on p. 141: John Rawls, Excerpt on p. 165: Bruce Barry, “The Cringing and the Craven: Freedom of
A Theory of Justice (Cambridge, MA: Harvard University Press, 1971), Expression In, Around, and Beyond the Workplace,” Business Ethics
83; Table 7.1 p. 145: © Pearson Education, Inc.; Figure 7.2 p. 145: © Pear- Quarterly, 17 (2007), 263–96. 265; Excerpt on p. 167: Bruce Barry, “The
son Education, Inc.; Excerpt on p. 146: Adopted an Equal Employment Cringing and the Craven: Freedom of Expression In, Around, and Beyond
Opportunity Policy; Excerpt on p. 147: Grutter v. Bollinger: Joint State- the Workplace,” Business Ethics Quarterly, 17 (2007), 263–96.287–88;
ment of Constitutional Law Scholars; Excerpt on p. 147: James P. Hackett, Excerpt on p. 167: Cynthia L. Estlund, “Free Speech and Due Process in
quoted in Steven Greenhouse and Jonathan D. Glater, “Companies See the Workplace,” Indiana Law Journal, 71 (1995), 101–51, 13; Excerpt on
Law School Ruling as a Way to Help Keep the Diversity Pipeline Open,” p. 167: Frank Heller, Eugen Pusic, George Strauss, and Bernhard Wilpert,
New York Times, 24 June 2003; Excerpt on p. 148: Bernard R. Boxill, “The Organizational Participation: Myth and Reality (Oxford: Oxford Univer-
Morality of Preferential Hiring,” Philosophy and Public Affairs, 7 (1978), sity Press 1998), 15; Excerpt on p. 168: Janice R. Foley and Michael
247; Excerpt on p. 149: President Lyndon B. Johnson , 1965 commence- Polanyi, “Workplace Democracy: Why Bother?” Economic and Industrial
ment address at Howard University; Excerpt on p. 150: Ronald Dworkin, Democracy, 27 (2006), 173–91; Excerpt on p. 168: Richard Sobel, “From
Taking Rights Seriously (Cambridge, MA: Harvard University Press, Occupational Involvement to Political Participation: An Exploratory Anal-
1978), 223–39; Excerpt on p. 150: Robert L. Simon, “Individual Rights and ysis,” Political Behavior, 15 (1993), 339–353, 349; Excerpt on p. 168: Robert
‘Benign’ Discrimination,” Ethics, 90 (1979), 91; Excerpt on p. 151: Quoted A. Dahl, A Preface to Economic Democracy (Berkeley and Los Angeles,
in Peter Perl, “Rulings Provide Hiring Direction: Employers Welcome CA: University of California Press, 1985), 111; Excerpt on p. 169: Robert
Move,” Washington Post, 3 July 1986; Excerpt on p. 152: Manuel G. Mayer, “Robert Dahl and the Right to Workplace Democracy,” Review of
Velasquez, Business Ethics: Concepts and Cases, 5th ed. (Upper Saddle Politics, 63 (2001), 221–247, 230; Figure 8.3 p. 171: © Pearson Education,
Inc.; Excerpt on p. 172: Richard T. DeGeorge, Moral Issues in Business, 6th Chemical Plants,” Wall Street Journal, 9 February 1979; Excerpt on p. 195:
ed. (Upper Saddle River, NJ: Prentice Hall, 2006), 364; Excerpt on p. 174: International Union, United Automobile, Aerospace and Agricultural
Derek Bok, The Cost of Talent: How Executives and Professionals Are Implement Workers of America, UAW, v. Johnson Controls, Inc., 499 U.S.
Paid and How It Affects America (New York: The Free Press, 1993), 102; at 195, 203; Excerpt on p. 195: International Union, United Automobile,
Excerpt on p. 175: Stuart D. Wechsler, “Would Adam Smith Pay Them So Aerospace and Agricultural Implement Workers of America, UAW, v.
Much?” Forbes, 28 May 1990, 210; Box 8.2 p. 176: © Pearson Education, Johnson Controls, Inc., 111 S. Ct. 1196 (1991); Excerpt on p. 196: Second
Inc.; Excerpt on p. 177: Traci Purdum, “Sun Microsystems' CEO Blogs,” Restatement of Torts (Section 282); Table 9.1 p. 197: © Pearson Educa-
Industry Week, 20 July 2006; Case 8.3 p. 177: Information in this case is tion, Inc.; Excerpt on p. 197: Larsen v. General Motors Corporation, 391
taken from John Holusha, “G.M. Pact Seeks High Degree of Cooperation,” F. 2d 495 (8th Cir. 1968); Excerpt on p. 197: LeBouef v. Goodyear Tire and
New York Times, 28 July 1985; William Serrin, “Bold G.M. Pact Draws Rubber Co., 623 F. 2d 985 (5th Cir. 1980); Excerpt on p. 198: Bashada v.
Praise, and Some Caveats,” New York Times, 3 August 1985; John Holu- Johns-Manville Products Corp., 90 N.J. 191, 447 A. 2d 539 (1982); Excerpt
sha, “Saturn Division Finds a Home in the Heartland,” New York Times, 4 on p. 198: Uniform Commercial Code (UCC), Section 2-204(1); Excerpt
August 1985; Maralyn Edid, “How Power Will be Balanced on Saturn's on p. 198: Section 2-313 of the UCC; Excerpt on p. 199: Henningsen v.
Shop Floor,” BusinessWeek, 5 August 1985; Doron P. Levin, “Saturn: An Bloomfield Motors, Inc. 32 N.J. 358, 161 A.2d 69 (N.J. 1960); Excerpt on
Outpost of Change in G.M.'s Steadfast Universe,” New York Times, 17 p. 199: Henningsen v. Bloomfield Motors, Inc. 32 N.J. 358, 161 A.2d 69
March 1991; Doron P. Levin, “At Saturn Plant, a Vote on Innovation,” (N.J. 1960); Excerpt on p. 199: Henningsen v. Bloomfield Motors, Inc. 32
New York Times, 14 November 1991; David Woodruff, “Saturn: Labor's N.J. 358, 161 A.2d 69 (N.J. 1960); Excerpt on p. 200: Section 402A of the
Love Lost?” BusinessWeek, 8 February 1993, 122; Robyn Meredith, “Many Second Restatement of Torts; Excerpt on p. 200: Baxter v. Ford Motor Co.,
at the Saturn Auto Factory Are Finding Less to Smile About,” New York 168 Wash. 456, 12 P. (2d) 409, 88 A. L. R. 521; Excerpt on p. 200: Greenman
Times, 6 March 1998; Robyn Meredith, “Saturn Union Votes to Retain Its v. Yuba Power Products Inc., 59 Cal. 2d 57, 377 P.2d 897, 27 Cal. Rptr. 697
Cooperative Company Pact,” New York Times, 12 March 1998; Keith (Cal. 01/24/1963); Excerpt on p. 201: Section 402A of the Second Restate-
Bradsher, “Labor's Peace with G.M. Unraveling at Saturn,” New York ment of Torts; Excerpt on p. 201: Escola v. Coca-Cola Bottling Co.;Excerpt
Times, 22 July 1998; Frank Swoboda, “Saturn Experiment in Jeopardy,” on p. 201: Richard A. Epstein, Modern Products Liability Law (Westport,
Washington Post, 6 March 1999; Keith Bradsher, “Saturn's Plant's Union CT: Quorum Books, 1980), 27. Epstein holds, however, that this prin-
Leaders Are Voted Out,” New York Times, 26 February 1999; Saul A. ciple has limited application in product liability cases;Table 9.1 p. 202:
Rubenstein and Thomas A. Kochan, Learning from Saturn (Ithaca, NY: © Pearson Education, Inc.; Case 9.2 p. 203: U.S. House of Representatives,
Cornell University Press, 2001); Excerpt on p. 178: John Holusha, “Saturn Committee on Education and the Workforce, Subcommittee on Employer–
Division Finds a Home in the Heartland,” New York Times, 4 August Employee Relations, Testimony of Mr. Gary Avary, 24 July 2001; Excerpt
1985; Excerpt on p. 178: William Serrin, “Bold G.M. Pact Draws Praise, on p. 203: Americans with Disabilities Act of 1990; Case 9.3 p. 203: © Pear-
and Some Caveats,” New York Times, 3 August 1985; Excerpt on p. 178: son Education, Inc.; Excerpt on p. 203: Americans with Disabilities Act of
Quote from Saturn Philosophy set forth, Saturn Corporation; Excerpt on 1990; Excerpt on p. 203: David Rubenstein, “Burlington Northern Discov-
p. 178: John Holusha, “G.M. Pact Seeks High Degree of Cooperation,” ers a Third Rail: Burned by a Genetic Test,” Corporate Legal Times, July
New York Times, 28 July 1985; Excerpt on p. 178: Keith Bradsher, “Labor's 2001, 68; Case 9.4 p. 204: This case is based on United Automobile Work-
Peace with G.M. Unraveling at Saturn,” New York Times, 22 July 1998; ers et al. v. Johnson Controls, Inc., 449 U.S. 187, 111 S.Ct. 1196 (1991). Other
Case 8.4 p. 179: Information for this case is taken from Michael Barbaro, sources include Linda Greenhouse, “Court Backs Right of Women to Jobs
“Wal-Mart to Expand Health Plan for Workers,” New York Times, 24 with Health Risks,” New York Times, 21 March 1991; Stephen Wermiel,
October 2005; Steven Greenhouse and Michael Barbaro, “Wal-Mart Memo “Justices Bar ‘Fetal Protection’ Policies,” Wall Street Journal, 21 March
Suggests Ways to Cut Employee Benefit Costs,” New York Times, 26 Octo- 1991; and Anne T. Lawrence, “Johnson Controls and Protective Exclusion
ber 2005; Michael Barbaro, “Wal-Mart to Expand Health Plan,” New York from the Workplace,” Case Research Journal, 13 (1993), 1–14; Excerpt on
Times, 24 February 2006; Michael Barbaro and Reed Abelson, “Wal-Mart p. 204: David Rubenstein, “Burlington Northern Discovers a Third Rail:
Says Health Plan Is Covering More Workers,” New York Times, 11 Janu- Burned by a Genetic Test,” Corporate Legal Times, July 2001, 68; Excerpt
ary 2007; Michael Barbaro and Reed Abelson, “A Health Plan for Wal- on p. 205: International Union v Johnson Controls, Inc. 499 U.S. 187, 191
Mart: Less Stinginess,” New York Times, 13 November 2007; Michael (1991); Box p. 205: This case is adapted from David Zivan, “The Playskool
Barbaro, “Wal-Mart Crosses a Health Insurance Threshold,” New York Travel-Lite Crib,” Center for Design Research, University of Chicago, 5
Times, 23 January 2008; “Supplemental Benefits Documentation,” Board November 2002, with permission. This document, which is in the public
of Directors Retreat FY06, Wal-Mart Stores, Inc., company document, domain, may be downloaded from http://www.chicagocdr.org. Much
2005; “Wal-Mart's Health Care Benefits Are Competitive in the Retail Sec- of the content of the case is taken from Linda Ginzel, as independent
tor,” company document, n.d.; Excerpt on p. 180: Steven Greenhouse and administrator of the estate of Daniel Keysar, deceased, and on behalf of
Michael Barbaro, “Wal-Mart Memo Suggests Ways to Cut Employee Ben- Boaz Keysar, Ely Keysar, and Linda Ginzel, next of kin, plaintiff, v. Kol-
efit Costs,” New York Times, 26 October 2005; Excerpt on p. 180: Excerpt craft Enterprises, Inc., and Hasbro, defendants, #98L7063, Circuit Court of
on p. 180: Steven Greenhouse and Michael Barbaro, “Wal-Mart Memo Cook County, County Department Law Division.
Suggests Ways to Cut Employee Benefit Costs,” New York Times, 26 Octo-
Chapter 10 Excerpt on p. 208: Charles T. Clotfelter and Philip J. Cook,
ber 2005,
Selling Hope: State Lotteries in America (Cambridge, MA: Harvard
Chapter 9 Excerpt on p. 182: “Chronology of Firestone/Ford Knowl- University Press, 1989). p.186; Excerpt on p. 210: Theodore Levitt, The
edge of Tire Safety Defect,” http://www.citizen.org; Excerpt on p. 183: Marketing Imagination (New York: Free Press, 1986), 19; Excerpt on
Francisco Toro and Frank Swoboda, “Venezuela Puts Blame on Ford, p. 211: President John F. Kennedy proclaimed in 1962, as a movement for
Firestone,” Washington Post, 1 September 2000; Excerpt on p. 183: Keith consumer rights was developing in American society; Figure 10.1 p. 211:
Bradsher, “Firestone Stops Sales to Ford, Saying It Was Used as Scape- © Pearson Education, Inc.; Table 10.1 p. 216: © Pearson Education, Inc.;
goat,” New York Times, 22 May 2001; Excerpt on p. 185: Sec. 5(a)(1). This Excerpt on p. 220: Giles Slade, Made to Break: Technology and Obso-
clause is the subject of much legal analysis. See Richard S. Morley, “The lescence in America (Cambridge, MA: Harvard University Press, 2006);
General Duty Clause of the Occupational Safety and Health Act of 1970,” Excerpt on p. 222: William M. Pride and O. C. Ferrell, Marketing: Basic
Harvard Law Review, 86 (1973), 988–1005; Excerpt on p. 185: General Concepts and Decisions, 10th ed. (Boston, MA: Houghton Mifflin, 1997),
duty clause, 29 U.S.C. § 654, 5(b); Excerpt on p. 185: Patricia H. Werhane, 40; Excerpt on p. 222: Theodore Levitt, “The Morality (?) of Advertising,”
Persons, Rights, and Corporations (Upper Saddle River, NJ: Prentice Hall, Harvard Business Review, 48 (July–August 1970), 84–92, 85; Excerpt on
1985), 132; Box 9.2 p. 185: OSHA, “Top 10 Most Frequently Cited Stan- p. 223: Gelb v. FTC, 144 F. 2d 580 (2nd Cir. 1944); Excerpt on p. 223: John
dards” (inset box on https://www.osha.gov/Top_Ten_Standards.html); O. Ogbor, Ph. D. John O. Ogbor, Entrepreneurship in Sub-Saharan Africa:
Excerpt on p. 186: Federal Register, 39, no. 20 (29 January 1974), 3758. A Strategic Management Perspective (AuthorHouse, 2009); Excerpt on
Emphasis added; Excerpt on p. 186: Alan Gewirth, “Human Rights and p. 224: Vance Packard, The Hidden Persuaders (New York: David McKay,
the Prevention of Cancer,” in Human Rights: Essays on Justification and 1957), 20–21; Excerpt on p. 225: Richard T. DeGeorge, Business Ethics, 6th
Applications (Chicago, IL: University of Chicago Press, 1982). 189; Case ed. (Upper Saddle River, NJ: Prentice Hall, 2006), 343; Excerpt on p. 225:
9.2 p. 188: Information on this case is contained in Whirlpool Corporation John Kenneth Galbraith, The Affluent Society (New York: Houghton Mif-
v. Marshall, 445 U.S. 1 (1980); Figure 9.1 p. 190: © Pearson Education, Inc.; flin, 1958), 128; Excerpt on p. 225: John F. Kennedy's Address before the
Figure 9.2 p. 191: © Pearson Education, Inc.; Excerpt on p. 194: Wendy American Newspaper Publishers Association (27 April 1961); Excerpt on
W. Williams, “Firing the Woman to Protect the Fetus: The Reconciliation p. 226: John Kenneth Galbraith, The Affluent Society (New York: Hough-
of Fetal Protection with Employment Opportunity Goals under Title ton Mifflin, 1958), 124-25; Excerpt on p. 227: Marya Mannes, But Will It
VII,” Georgetown Law Journal, 69 (1981), 641–704, 663; Excerpt on p. 194: Sell? (New York: Lippincott, 1964), 32; Excerpt on p. 227: Richard W. Pol-
Cited in Gail Bronson, “Issue of Fetal Damage Stirs Women Workers at lay, “The Distorted Mirror: Reflections on the Unintended Consequences
of Advertising,” Journal of Marketing, 50 (1986), 18–36. p.25; Excerpt on Excerpt on p. 259: Peter G. Scotese, “Fold Up Those Golden Parachutes,”
p. 227: Varda Langholz Leymore, Hidden Myth: Structure and Symbolism Harvard Business Review (March–April 1985), 168–71, 168; Excerpt on
in Advertising (New York: Basic Books, 1975), x; Excerpt on p. 228: Philip p. 259: J. Gregory Dees, “The Ethics of ‘Greenmail’,” in Business Ethics:
J. Hilts, “Health Chief Assails Reynolds Co. for Ads That Target Blacks,” Research Issues and Empirical Studies, ed. William C. Frederick and Lee
New York Times, 19 January 1990; Excerpt on p. 228: Marc Lacey, “Market- E. Preston (Greenwich, CT: JAI Press, 1990), 254; Case 11.2 p. 261: Most of
ing of Malt Liquor Fuels Debate,” Los Angeles Times, 15 December 1992; the information in this case is taken from Verified Complaint, Supreme
Excerpt on p. 228: Bruce Horovitz, “Brewer Faces Boycott Over Market- Court of the State of New York, Plaintiff, against, Strong Financial Cor-
ing of Potent Malt Liquor,” Los Angeles Times, 25 June 1991; Excerpt on poration et al., defendants; and Securities and Exchange Commission,
p. 229: Paul Farhi, “Surgeon General Hits New Malt Liquor's Name, Ads,” Administrative Proceeding, File No. 3–11498, In the Matter of Strong
Washington Post, 26 June 1991; Excerpt on p. 229: For a discussion of the Capital Management, Inc. et al., Respondent; Box p. 261: © Pearson Edu-
limitations of search engine optimization see David Kesmodel, “Sites cation, Inc.; Excerpt on p. 262: Peter Elkind, “The Secrets of Eddie Stern,”
Get Dropped by Search Engines After Trying to ‘Optimize’ Rankings,” Fortune, 19 April 2004; Case 11.3 p. 263: Information for this case is taken
Wall Street Journal, 22 September 2005; Excerpt on p. 230: Nordstrom, from reporting by Kurt Eichenwald for the New York Times and Tom
Inc., “Nordstrom.com Privacy Policy,” 2015; Excerpt on p. 232: Alan R. Fowler and Mary Flood for the Houston Chronicle. Kurt Eichenwald, “4
Andreasen, Marketing Social Change (San Francisco, CA: Jossey-Bass, at Merrill Accused of an Enron Fraud,” New York Times, 18 March 2003;
1995), 7; Box on p. 233: © Pearson Education, Inc.; Excerpt on p. 235: Rob- Kurt Eichenwald, “An Enron Trial with Big Stakes for Ones Ahead,” New
inson-Patman Act, enforced by the FTC 15 U.S. Code § 13; Case 10.3 p. 235: York Times, 20 September 2004; Kurt Eichenwald, “First Criminal Trial
Some information in this case is drawn from Emily Steel and Julia Ang- to Examine Enron Deal Begins,” New York Times, 22 September 2004;
win, “On the Web's Cutting Edge, Anonymity in Name Only,” Wall Street Kurt Eichenwald, “Witness Tells of Hearing about Merrill-Enron Side
Journal, 4 August 2010; Excerpt on p. 236: Liz Moyer and Juliet Chung, Deal,” New York Times, 24 September 2004; Kurt Eichenwald, “Former
“Hedge-Fund Manager Presses Case Against Herbalife,” Wall Street Executive Testifies, Offering Insider's Look at Enron's Deal Making,” New
Journal, 20 December 2012; Excerpt on p. 237: Herbalife, Ltd., “Herbalife York Times, 28 September 2004; Kurt Eichenwald, “Ex-Enron Treasurer
Opportunity,” retrieved from http://opportunity.herbalife.com. Describes Discomfort with Barge Deal,” New York Times, 7 October 2004.
Tom Fowler and Mary Flood, “Merrill Lynch to Settle with SEC,” Houston
Chapter 11 Excerpt on p. 239: Securities and Exchange Commission v. Chronicle, 21 February 2003; Tom Fowler and Mary Flood, “Prosecutors:
Goldman, Sachs & Co. and Fabrice Tourre, United States District Court, E-mail Show Enron Deal on Barges Was Sham,” Houston Chronicle, 6
Southern District of New York, Complaint 10-CV-3229 (BSJ). The quota- October 2004; Mary Flood, “Enron Trial Is Wrapping Up Today,” Houston
tion of the email message, sent on January 23, 2007, is translated from the Chronicle, 27 October 2004; Case 11.4 p. 264: Information on this case is
original French; Excerpt on p. 240: Nate Raymond, “Ex-ACA Chief Says taken from the following sources: United States of America v. Martha
in ‘Fabulous Fab’ Trial He Was Surprised by Paulson Bet,” Reuters, 22 Stewart and Peter Bacanovic, United States District Court, Southern
July 2013; Excerpt on p. 241: “Senate Committee Holds Fourth Hearing on District of New York, Superseding Indictment S1 03 Cr. 717 (MGC); U.S.
Wall Street and the Financial Crisis: The Role of Investment Banks,” U.S. Securities and Exchange Commission, Plaintiff against Martha Stewart
Senate Permanent Committee on Investigations, 26 April 2010; Excerpt and Peter Bacanovic, Defendants, United States District Court, South-
on p. 241: Jay L. Walker [pseudonym], The Complete Book of Wall Street ern District of New York, Complaint 03 CV 4070 (NRB); Jeffrey Toobin,
Ethics (New York: William Morrow and Company, 1987); Figure 11.1 “Lunch at Martha's,” New Yorker, 3 February 2003; Jeffrey Toobin, “A Bad
p. 242: © Pearson Education, Inc.; Excerpt on p. 243: Marshak v. Blyth Thing,” New Yorker, 22 March 2004; Excerpt on p. 265: Jeffrey Toobin,
Eastman Dillon & Co., Inc., 413 F. Supp. 377, 379 (1975); Excerpt on p. 243: “A Bad Thing,” New Yorker, 22 March 2004; Excerpt on p. 265: Jeffrey
Kaufman v. Merrill Lynch, Pierce, Fenner & Smith, 464, F. Supp. 528, 534 Toobin, “A Bad Thing,” New Yorker, 22 March 2004; Excerpt on p. 265:
(1978); Excerpt on p. 243: Kaufman v. Merrill Lynch, Pierce, Fenner & U.S. Securities and Exchange Commission, “SEC Charges Martha Stewart,
Smith, 464, F. Supp. 528, 534 (1978); Excerpt on p. 244: NASD Rules of Broker Peter Bacanovic with Illegal Insider Trading,” press release 69, 4
Fair Practice, art. III, sec. 2. © 2015 FINRA. All rights reserved. FINRA is a June 2003; Excerpt on p. 266: Mylene Mangalindan, Don Clark, and Robin
registered trademark of the Financial Industry Regulatory Authority, Inc. Sidel, “Software Assault: Oracle's Bid for PeopleSoft Offers Possible Taste
Reprinted with permission from FINRA; Figure 11.2 p. 245: © Pearson of Future,” Wall Street Journal, 9 June 2003; Excerpt on p. 266: “PeopleSoft
Education, Inc.; Table 11.1 p. 246: © Pearson Education, Inc.; Excerpt on CEO Comments on Oracle Offer,” PeopleSoft press release, 6 June 2003;
p. 246: John Maynard Keynes, The General Theory of Employment, Inter- Excerpt on p. 266: Andrew Ross Sorkin and Laurie Flynn, “Oracle Takes
est, and Money (New York: Harcourt Brace & Co., 1936), 159; Figure 11.2 a $5 Billion Jab at PeopleSoft,” New York Times, 7 June 2003; Excerpt on
p. 248: © Pearson Education, Inc.; Excerpt on p. 249: Berkshire Hathaway p. 266: Carrie Kirby, “Oracle Gets a Run for Its Money: Hostile Bid for
Annual Report, 2002; Excerpt on p. 249: Nicholas Kaldor, “Speculation PeopleSoft Turns into a Battle,” San Francisco Chronicle, 22 December
and Economic Stability,” Review of Economic Studies, 7 (1939), 1–27, 1; 2003; Excerpt on p. 267: Mylene Mangalindan, Don Clark, and Robin
Excerpt on p. 249: Joe Nocera, “Sewers, Swaps and Bachus,” New York Sidel, “Software Assault: Oracle's Bid for PeopleSoft Offers Possible Taste
Times, 22 April 2011; Excerpt on p. 249: “Money, Power & Wall Street,” a of Future,” Wall Street Journal, 9 June 2003; Excerpt on p. 267: “What's
documentary produced by Frontline, Public Broadcasting Service, aired Behind Oracle's Unwelcome Bid for PeopleSoft,” Knowledge@Wharton,
April 24 and May 1, 2012; Excerpt on p. 251: Buttonwood, “Not So Fast: 17 June 2003; Excerpt on p. 267: Andrew Ross Sorkin, “PeopleSoft Rejects
The Risks Posed by High-Frequency Trading,” Economist, 6 August Bid from Oracle,” New York Times, 13 June 2003; Excerpt on p. 267:
2011, 62; Excerpt on p. 252: Section 10(b) of the 1934 Securities Exchange Andrew Ross Sorkin, “PeopleSoft Rejects Bid from Oracle,” New York
Act and the corresponding SEC Rule 10b-5; Excerpt on p. 253: Jill E. Times, 13 June 2003.
Fisch, “Start Making Sense: An Analysis and Proposal for Insider Trad-
ing Regulation,” George Law Review, 26 (1991–92), 179–252; Excerpt on Chapter 12 Excerpt on p. 268: Gretchen Morgenson, “GE Capital vs. the
p. 253: Saikrishna Prakash, “Our Dysfunctional Insider Trading Regime,” Small-Town Folk Hero,” New York Times, 24 October 2004; Excerpt on
Columbia Law Review, 99 (1999), 1491–1550; Excerpt on p. 253: Alan p. 269: Michael Ryan, “They Call Their Boss a Hero,” Parade Magazine, 8
Strudler and Eric W. Orts,” Moral Principle in the Law of Insider Trad- September 1996, 4–5; Excerpt on p. 269: Bruce D. Butterfield, “What
ing,” Texas Law Review, 78 (1999–2000), 375–483; Excerpt on p. 253: James Flames Could Not Destroy,” Boston Globe, 8 September 1996; Excerpt on
B. Stewart, “Delving into Morass of Insider Trading,” New York Times, p. 269: Michael Ryan, “They Call Their Boss a Hero,” Parade Magazine, 8
19 December 2014; Excerpt on p. 254: United States, Petitioner, v. James September 1996, 4–5; Excerpt on p. 269: “Bridging the Gap,” PBS News-
Herman O' Hagan No. 96-842; Excerpt on p. 255: CFA Institute Standards Hour transcript, 20 March 1996. Copyright NewsHour Productions LLC.
of Practice Handbook, 2010; Excerpt on p. 255: Richard J. Holwell quoted All rights reserved; Excerpt on p. 269: Thomas Teal, “Not a Fool, Not a
in Susan Pulliam and Chad Bray, "Trader Draws Record Sentence," Wall Saint,” Fortune, 11 November 1996, 201–203, 201; Excerpt on p. 269:
Street Journal, October 14, 2011, pp. A1-A2; Figure 11.4 p. 256: © Pearson “Bridging the Gap,” PBS NewsHour transcript, 20 March 1996. Copyright
Education, Inc.; Table 11.2 p. 257: © Pearson Education, Inc.; Excerpt on NewsHour Productions LLC. All rights reserved; Excerpt on p. 269: Rad-
p. 256: Peter Drucker, “To End the Raiding Roulette Game,” Across the ley Balko, “Altruism? Bah, Humbug,” Apple Daily, 22 December 2004;
Board (April 1986), 39; Excerpt on p. 256: Michel T. Halbouty, “The Hos- Excerpt on p. 271: Milton Friedman, Capitalism and Freedom (Chicago,
tile Takeover of Free Enterprise,” Vital Speeches of the Day (August 1986), IL: University of Chicago Press, 1962), 133; Excerpt on p. 271: Adam
613; Excerpt on p. 258: Michael C. Jensen, “The Takeover Controversy: Smith, The Wealth of Nations, Book IV, Chapter II (1776); Excerpt on
Analysis and Evidence,” in Knights, Raiders, and Targets: The Impact of p. 271: Archie B. Carroll, “A Three-Dimensional Conceptual Model of Cor-
the Hostile Takeover, ed. John C. Coffee, Jr., Louis Lowenstein, and Susan porate Performance,” Academy of Management Review, 4 (1979), 497–505.
Rose-Ackerman (New York: Oxford University Press, 1988), 340; Excerpt p.500; Excerpt on p. 272: S. Prakash Sethi, “Dimensions of Corporate
on p. 259: Philip L. Cochran and Steven L. Wartick, “‘Golden Parachutes’: Social Performance: An Analytical Framework for Measurement and
A Closer Look,” California Management Review, 26 (1984), 111–25, 121; Analysis,” California Management Review, 17 (Spring 1975), 62. Emphasis
in original omitted; Excerpt on p. 272: Committee for Economic Develop- © Pearson Education, Inc.; Table 12.4 p. 291: © Pearson Education, Inc.;
ment, Social Responsibilities of Business Corporations (New York: Com- Excerpt on p. 291: Howard Schultz, Pour Your Heart Into It (New York:
mittee for Economic Development, 1971), 15; Figure 12.1 p. 272: © Pearson Hyperion, 1997), 127; Case 12.2 p. 291: Information on this case, unless
Education, Inc.; Table 12.1 p. 273: © Pearson Education, Inc.; Excerpt on indicated otherwise, comes from Paul A. Argenti, “Collaborating with
p. 273: William C. Frederick, “From CSR1 to CSR2: The Maturing of Busi- Activists: How Starbucks Works with NGOs,” California Management
ness-and-Society Thought,” Business and Society Review, 33 (1994), 150– Review, 47 (2004), 91–116; Excerpt on p. 293: Fair Trade USA's web site;
64; Excerpt on p. 273: James E. Post and Shawn L. Berman, “Global Excerpt on p. 291: Jeff Swartz, “Doing Well and Doing Good,” Brookings
Corporate Citizenship in a Dot.com World: The Role of Organizational Review, 40 (2002), 24; Case 12.2 p. 293: Information on this case, unless
Identity,” in Perspectives in Corporate Citizenship, ed. Jorg Andriof and otherwise noted, is taken from the Timberland Company Web site www.
Malcolm McIntosh (Sheffield, UK: Greenleaf Publishing, 2001); Excerpt on timberland.com and James Austin, Herman B. Leonard, and James W.
p. 274: James W. McKie, “Changing Views,” in Social Responsibility and Quinn, “Timberland: Commerce and Justice,” Harvard Business School,
the Business Predicament, ed. James W. McKie (Washington, DC: Brook- Case 9–305–002, December 2004; Excerpt on p. 293: Fair Trade USA's web
ings Institution Press, 1974). 18–19; Excerpt on p. 275: Edward S. Mason, site; Excerpt on p. 293: Jeff Swartz, “Doing Well and Doing Good,” Brook-
ed., The Corporation in Modern Society (New York: Atheneum, 1974), 5; ings Review, 40 (2002), 24; Excerpt on p. 294: Mission of Timberland;
Excerpt on p. 275: Milton Friedman, “The Social Responsibility of Busi- Excerpt on p. 294: Core values of Timberland; Excerpt on p. 294: Bold
ness Is to Increase Its Profits,” New York Times Magazine, September 13, Goals of Timberland; Excerpt on p. 294: Jeff Swartz quoted in James Aus-
1970; Excerpt on p. 275: Theodore Levitt, “The Dangers of Social Respon- tin and Ezequiel Reficco, Corporate Social Entrepreneurship, Working
sibility,” Harvard Business Review, 36 (September–October 1958), 41–50, Paper 09-101; Excerpt on p. 294: VF Corporation Press Release, 13 Septem-
49; Excerpt on p. 275: John G. Simon, Charles W. Powers, and Jon ber 2011; Excerpt on p. 294: “VF Embraces Timberland's Commitment to
P. Gunnemann, “The Responsibilities of Corporations and Their Owners,” Earth Day,” http://responsibility.timberland.com/service/vf-embraces-
in The Ethical Investor: Universities and Corporate Responsibility (New timberlands-commitment-to-earth-day/; Case 12.4 p. 295: “Coke in the
Haven, CT: Yale University Press, 1972), 16–17; Excerpt on p. 275: Keith Cross Hairs: Water, India, and the University of Michigan,” University of
Davis, “Five Propositions for Social Responsibility,” Business Horizons, 18 Michigan, Case 1.429-098, 25 July 2010; Excerpt on p. 295: Steve Stecklow,
(June 1975), 19–24, 20. Italics in the original; Excerpt on p. 275: Keith Davis “How a Global Web of Activists Gives Coke Problems in India,” Wall
and Robert L. Blomstrom, Business and Society: Environment and Street Journal, 7 June, 2005; Excerpt on p. 296: CFO's Letter to Coca Cola
Responsibility, 3rd ed. (New York: McGraw-Hill, 1975), 50; Excerpt on Company, October 13, 2008, at http://www.vpcomm.umich.edu/pa/
p. 275: This objection is formulated in Kenneth E. Goodpaster and John B. key/coke.html; Excerpt on p. 296: The Water Stewardship and Replenish
Matthews, Jr., “Can a Corporation Have a Conscience?” Harvard Business Report, The Coca-Cola Company, January 2011.
Review, 60 (January–February 1982), 132–41. p.140; Excerpt on p. 276:
John G. Simon, Charles W. Powers, and Jon P. Gunnemann, “The Respon- Chapter 13 Case 13.1 p. 297: Information on this case, unless indicated
sibilities of Corporations and Their Owners,” in The Ethical Investor: Uni- otherwise, is taken from Dennis R. Beresford, Nicholas deB. Katzenbach,
versities and Corporate Responsibility (New Haven, CT: Yale University and C. B. Rogers, Jr., “Report of Investigation by the Special Investiga-
Press, 1972), 22–25; Excerpt on p. 276: Milton Friedman, “The Social tive Committee of the Board of Directors of WorldCom, Inc.,” 31 March
Responsibility of Business Is to Increase Its Profits,” New York Times 2003, hereafter “Report of Investigation”; Excerpt on p. 298: Dennis R.
Magazine, 13 September 1970, 33; Excerpt on p. 277: Robert B. Reich, Beresford, Nicholas deB. Katzenbach, and C. B. Rogers, Jr., “Report of
Supercapitalism: The Transformation of Business, Democracy, and Every- Investigation by the Special Investigative Committee of the Board of
day Life (New York: Knopf, 2007), chap. 5. p.197; Excerpt on p. 277: Mar- Directors of WorldCom, Inc.,” 31 March 2003. p.21; Excerpt on p. 298:
vin A. Chirelstein, “Corporate Law Reform,” in Social Responsibility and Dennis R. Beresford, Nicholas deB. Katzenbach, and C. B. Rogers, Jr.,
the Business Predicament, 55; Excerpt on p. 278: David Vogel, The Market “Report of Investigation by the Special Investigative Committee of the
for Virtue, The Potential and Limits of Corporate Society Responsibility Board of Directors of WorldCom, Inc.,” 31 March 2003. p.19; Excerpt on
(Washington, DC: Brookings Institution Press, 2005), 17; Excerpt on p. 278: p. 298: Dennis R. Beresford, Nicholas deB. Katzenbach, and C. B. Rogers,
Graduation Pledge of Social and Environmental Responsibility, Gradua- Jr., “Report of Investigation by the Special Investigative Committee of
tion Pledge Alliance, http://www.graduationpledge.org/; Table 12.2 the Board of Directors of WorldCom, Inc.,” 31 March 2003. p.49; Excerpt
p. 280: © Pearson Education, Inc.; Excerpt on p. 280: David Hess, Nikolai on p. 298: Susan Pulliam, “Over the Line: A Staffer Ordered to Commit
Rogovsky, and Thomas W. Dunfee, “The New Wave of Corporate Com- Fraud, Balked, Then Caved,” Wall Street Journal, 23 June 2003; Excerpt
munity Involvement: Corporate Social Initiatives,” California Manage- on p. 298: Susan Pulliam, “Over the Line: A Staffer Ordered to Commit
ment Review, 44 (2002), 110–25. p.113; Excerpt on p. 280: Michael E. Porter Fraud, Balked, Then Caved,” Wall Street Journal, 23 June 2003; Excerpt on
and Mark R. Kramer, “Strategy and Society: The Link Between Competi- p. 299: Peter F. Drucker, People and Performance (Boston, MA: Harvard
tive Advantage and Corporate Social Responsibility,” Harvard Business Business School Press, 2007), 95; Excerpt on p. 302: Adolf A. Berle, and
Review, 84 (December 2006), 78–92, 82; Excerpt on p. 280: Michael E. Por- Gardiner C. Means, The Modern Corporation and Private Property (New
ter and Mark R. Kramer, “Strategy and Society: The Link Between Com- York: Macmillan, 1932). p.3; Excerpt on p. 302: Henry Hansmann, The
petitive Advantage and Corporate Social Responsibility,” Harvard Ownership of Enterprise (Cambridge, MA: Harvard University Press,
Business Review, 84 (December 2006), 78–92, 80; Excerpt on p. 281: 1996), 13-14; Excerpt on p. 305: William M. Evan and R. Edward Freeman,
Michael E. Porter and Mark R. Kramer, “Strategy and Society: The Link “A Stakeholder Theory of the Modern Corporation: Kantian Capitalism,”
Between Competitive Advantage and Corporate Social Responsibility,” in Ethical Theory and Business, 4th ed., ed. Tom L. Beauchamp and Nor-
Harvard Business Review, 84 (December 2006), 78–92, 84; Excerpt on man E. Bowie (Upper Saddle River, NJ: Prentice Hall, 1993), 79; Excerpt
p. 281: Courtesy Whole Foods Market; Excerpt on p. 281: “Sustainability on p. 305: R. Edward Freeman, Strategic Management: A Stakeholder
and Our Future,” company document, 2003; Excerpt on p. 282: Donald G. Approach (Boston, MA: Pitman, 1984), 46; Excerpt on p. 305: Francesco
McNeil, Jr., “Coca-Cola Joins AIDS Fight in Africa,” New York Times, 21 Guerrera, “Welch Condemns Share Price Focus,” Financial Times, 12
June 2001; Excerpt on p. 282: World Business Council for Sustainable March 2009; Excerpt on p. 305: James E. Post, Lee E. Preston, and Sybille
Development, “Corporate Social Responsibility: Making Good Business Sachs, “Managing the Extended Enterprise: The New Stakeholder View,”
Sense,” January 2000, 15; Figure 12.2 p. 283: © Pearson Education, Inc.; California Management Review, 45 (2002), 6–28. p.7; Excerpt on p. 305:
Excerpt on p. 284: Costco Wholesale Corporation, U.S. Securities and Thomas Donaldson and Lee E. Preston, “The Stakeholder Theory of the
Exchange Commission Form SD, Specialized Disclosure Report, 1 June Corporation: Concepts, Evidence, and Implications,” Academy of Man-
2015, p. 4; Excerpt on p. 285: Costco Wholesale Corporation, U.S. Securi- agement Review, 20 (1995), 65–91. p.67; Figure 13.1 p. 307: © Pearson
ties and Exchange Commission Form SD, Specialized Disclosure Report, 1 Education, Inc.; Excerpt on p. 309: Arthur Levitt, “The ‘Numbers Game’,”
June 2015, p. 4. Available online at http://phx.corporate-ir.net/phoenix. Remarks to New York University Center for Law and Business, 28 Sep-
zhtml?c=83830&p=IROL-secToc&TOC=aHR0cDovL2FwaS50ZW5rd- tember 1998; Excerpt on p. 309: United States v. Arthur Young & Co.,
2l6YXJkLmNvbS9vdXRsaW5lLnhtbD9yZXBvPXRlbmsmaXBhZ2U9MTAz 79 L.Ed.2d 826, 836; 104 S. Ct. 1495 (1984); Excerpt on p. 310: “President
MTI3ODImc3Vic2lkPTU3&ListAll=1; Excerpt on p. 286: Kim Alter, “Social Bush Signs Corporate Corruption Bill,” Office of the Press Secretary, press
Enterprise Typology.” Virtue Ventures, 13 April 13 2006; Excerpt on p. 286: release, 30 July 2002; Excerpt on p. 312: Edward, First Baron Thurlow, in
Henry Hansmann, “The Role of Non-profit Enterprise,” Yale Law Journal, H. L. Mencken, A New Dictionary of Quotations on Historical Principles
89 (1980), 835-901; Excerpt on p. 286: National Geographic Society, Annual from Ancient and Modern Sources (New York: Knopf, 1942), 223; Table
Report, 2012; Excerpt on p. 287: Benetech's mission statement; Excerpt on 13.1 p. 316: United States Sentencing Commission, Federal Sentencing
p. 287: Patagonia's Mission Statement. Property of Patagonia, Inc. Used Guidelines Manual, §8A1.2, Commentary, Application Note 3(k); Excerpt
with permission; Excerpt on p. 287: Anthony Page and Robert A. Katz, on p. 316: United States Sentencing Commission, Federal Sentencing
“The Truth about Ben and Jerry's,” Stanford Innovation Review, 10 (Fall Guidelines Manual, §8A1.2, Commentary, Application Note 3(k); Excerpt
2012), 38–43; Table 12.3 p. 290: © Pearson Education, Inc.; Box p. 290: on p. 316: United States Sentencing Commission, Federal Sentencing
Guidelines Manual, §8A1.2, Commentary, Application Note 3(k)(1–7); “Running a Business,” Far Eastern Economic Review, 20 June 1991, 16;
Excerpt on p. 317: National Commission on Fraudulent Financial Report- Excerpt on p. 336: Richard J. Barnet and John Cavanagh, Global Dreams:
ing, Report of National Commission on Fraudulent Financial Reporting, Imperial Corporations and the New World Order (New York: Simon &
1987, 35; Figure 13.1 p. 318: © Pearson Education, Inc.; Box p. 319: © Pear- Schuster, 1994), 326; Excerpt on p. 338: Jagdish Bhagwati and Robert E.
son Education, Inc.;Case 13.2 p. 319: Material for this case is taken from Hudec, eds., Fair Trade and Harmonization, vol. 1 (Cambridge, MA: MIT
Lynn S. Paine and Michael A. Santoro, “Sears Auto Centers (A),” Boston, Press, 1996), 2; Excerpt on p. 339: Phil Knight quoted in Nike CEO: ‘I can’
MA: Harvard Business School Publishing, 1993; Kevin Kelly, “How Did change, May 12, 1998; Excerpt on p. 339: World Bank, Workers in an Inte-
Sears Blow This Gasket?” BusinessWeek, 29 June 1992, 38; Julia Flynn, grating World Economy (1995), 75; Figure 14.2 p. 339: Data from OECD,
“Did Sears Take Other Customers for a Ride?” BusinessWeek, 3 August “FOCUS on Minimum wages after the crisis: Making them pay,” May 2015
1992, 24–25; Judy Quinn, “Repair Job,” Incentive, October 1992, 40–46; (http://www.oecd.org/social/Focus-on-Minimum-Wages-after-the-cri-
Jennifer Steinhauer, “Time to Call a Sears Repairman,” New York Times, sis-2015.pdf, p. 3, Graph 2. Very big differences in net minimum wages.
15 January 1998; News from Sears, Roebuck and Co. press release, 22 June Direct link to data embedded in report: http://www.oecd.org/social/
1992; Excerpt on p. 320: Julia Flynn, “Did Sears Take Other Customers for Focus-on-Minimum-Wages-after-the-crisis-Figures-Data-2015.xls); Excerpt
a Ride?” BusinessWeek, 3 August 1992, 24–25; Excerpt on p. 320: Kevin on p. 340: “The Invisible Children,” New York Times, 20 February 2000;
Kelly, “How Did Sears Blow This Gasket?” BusinessWeek, 29 June 1992, Excerpt on p. 341: U.S.C. §78dd-1 (a)(1); Excerpt on p. 342: Samuel P. Hun-
38; Excerpt on p. 320: News from Sears, Roebuck and Co. press release, tington, Political Order in Changing Societies (New Haven, CT: Yale Uni-
22 June 1992; Excerpt on p. 320: Jennifer Steinhauer, “Time to Call a versity Press, 1968), 386; Excerpt on p. 342: Daniel Kaufman, “Corruption:
Sears Repairman,” New York Times, 15 January 1998; Excerpt on p. 321: The Facts,” Foreign Policy, 107 (Summer 1997), 114-32, 116–17; Excerpt on
Adoption of Amendments Relating to Proposals by Security Holders, p. 343: Susan Rose Ackerman, “The Political Economy of Corruption—
Exchange Act Release No. 12999, 41 Fed. Reg. 52994 (1976); Excerpt on Causes and Consequences,” The World Bank, Public Policy for the Private
p. 322: Amendments to Rules on Shareholder Proposals, Exchange Act Sector, Note No. 74, April 1996; Figure 14.3 p. 343: © Pearson Education,
Release No. 34–40018, 63 Fed. Reg. 29106 (1998); Excerpt on p. 324: Smith Inc.; Table 14.1 p. 343: Data from Transparency International, “Results by
v. Van Gorkom, 488 A.2d 858 (Del. 1985). 872; Excerpt on p. 324: Daniel R. Sector,” Bribe Payers Index Report 2011, Figure 4, http://files.transpar-
Fischel, “The Business Judgment Rule and the Trans Union Case,” Busi- ency.org/content/download/98/395/2011_BPI_EN.pdf; Table 14.2 p. 345:
ness Lawyer, 40 (1985), 1437–55, 1455. © Pearson Education, Inc.; Excerpt on p. 346: Clifford J. Levy, "Russia Uses
Microsoft to Suppress Dissent", The New York Times, September 11, 2010;
Chapter 14 Case 14.1 p. 325: Information for this case is taken largely Excerpt on p. 346: Clifford J. Levy, “Microsoft Changes Policy Over Rus-
from David Barboza and Louise Story, “Toymaking in China, Mattel's sian Crackdown,” New York Times, 13 September 2010; Excerpt on p. 347:
Way,” New York Times, 26 July 2007; Louise Storey, “After Stumbling, Freedom House, “Burma Marks Crackdown Anniversary as One of the
Mattel Cracks Down in China,” New York Times, 29 August 2007; Louise World's Worst Regimes, https://freedomhouse.org/article/burma-marks-
Story, “Mattel Official Delivers an Apology in China,” New York Times, 22 crackdown-anniversary-one-worlds-worst-regimes?page=70&release=705#;
September 2007; Jonathan Dee, “A Toy Maker's Conscience,” New York Excerpt on p. 347: John R. Schermerhorn, Jr., “Terms of Global Business
Times, 23 December 2007; and “Testimony of Robert A. Eckert, Chairman Engagement in Ethically Challenging Environments: Applications to
and Chief Executive Officer, Mattel, Inc.,” Subcommittee on Commerce, Burma,” Business Ethics Quarterly, 9 (1999), 485–505; Excerpt on p. 348:
Trade, and Consumer Protection of the Committee on Energy and Com- John R. Schermerhorn, Jr., “Terms of Global Business Engagement in Ethi-
merce, Washington, DC, 19 September 2007; Excerpt on p. 326: David Bar- cally Challenging Environments: Applications to Burma,” Business Ethics
boza and Louise Story, “Toymaking in China, Mattel's Way,” New York Quarterly, 9 (1999), 485–505. p.497; Excerpt on p. 349: Alien Tort Claims
Times, 26 July 2007; Excerpt on p. 326: Robert A. Eckert quoted in Hari Act, enacted by Congress in 1789, 28 U.S. Code § 1350; Box p. 349: © Pear-
Bapuji and Paul W. Beamish, Toy Recalls – Is China The Problem?, October son Education, Inc.; Excerpt on p. 353: Google's mission; Case 14.2 p. 350:
16, 2008; Excerpt on p. 326: Louise Storey, “After Stumbling, Mattel Cracks This case was adapted from “H. B. Fuller in Honduras: Street Children
Down in China,” New York Times, 29 August 2007; Excerpt on p. 326: and Substance Abuse,” prepared by Norman E. Bowie and Stefanie Ann
Louise Story, “Mattel Official Delivers an Apology in China,” New York Lenway; Excerpt on p. 352: David Barstow, “Vast Mexico Bribery Case
Times, 22 September 2007; Excerpt on p. 327: Jonathan Dee, “A Toy Mak- Hushed Up by Wal-Mart After Top-Level Struggle,” New York Times, 21
er's Conscience,” New York Times, 23 December 2007; Excerpt on p. 327: April 2012; Excerpt on p. 353: “News from Congressman Chris Smith,”
Jonathan Dee, “A Toy Maker's Conscience,” New York Times, 23 Decem- U.S, House of Representatives, press release, 26 January 2006; Excerpt on
ber 2007; Excerpt on p. 327: Louise Story, “Mattel Official Delivers an p. 353: Elliot Schrage, Testimony of Google Inc. before the Subcommittee
Apology in China,” New York Times, 22 September 2007; Excerpt on on Asia and the Pacific, and the Subcommittee on Africa, Global Human
p. 327: Mattel Media Statement, 21 September 2007; Excerpt on p. 328: Rights, and International Operations, Committee on International Rela-
Norman E. Bowie, “The Moral Obligations of Multinational Corpora- tions, United States House of Representatives, 15 February 2006 [hereinaf-
tions,” in Problems of International Justice, ed. Steven Luper-Foy (Boulder, ter “Schrage Testimony”]; Excerpt on p. 353: “Letter from the Founders:
CO: Westview Press, 1987), 97; Excerpt on p. 329: Ralph J. Ledogar, Hun- ‘An Owner's Manual’ for Google Shareholders,” company document;
gry for Profits: U.S. and Drug Multinationals in Latin American (New Excerpt on p. 354: Elliot Schrage, Testimony of Google Inc. before the Sub-
York: IDOC/North America, 1975), 46–47; Excerpt on p. 331: Jessica T. committee on Asia and the Pacific, and the Subcommittee on Africa,
Mathews, “Power Shift,” Foreign Affairs, 76 (1997), 50-66; Excerpt on Global Human Rights, and International Operations, Committee on Inter-
p. 332: Thomas Donaldson, The Ethics of International Business (New national Relations, United States House of Representatives, 15 February
York: Oxford University Press, 1989). p.62; Excerpt on p. 332: Thomas 2006 [hereinafter “Schrage Testimony”]; Excerpt on p. 354: Elliot Schrage,
Donaldson, The Ethics of International Business (New York: Oxford Uni- Testimony of Google Inc. before the Subcommittee on Asia and the Pacific,
versity Press, 1989). p.81; Excerpt on p. 333: Richard T. De George, Com- and the Subcommittee on Africa, Global Human Rights, and International
peting with Integrity in International Business (New York: Oxford Operations, Committee on International Relations, United States House of
University Press, 1993), 45–56; Excerpt on p. 333: Manuel Velasquez, Representatives, 15 February 2006 [hereinafter “Schrage Testimony”];
“International Business Ethics: The Aluminum Companies in Jamaica,” Excerpt on p. 354: Clive Thompson, “Google's China Problem (and China's
Business Ethics Quarterly, 5 (1995), 865–82, 878; Excerpt on p. 334: Mess- Google Problem),” New York Times Magazine, 23 April 2006, 64; Excerpt
aoud Mehafdi, “The Ethics of International Transfer Pricing,” Journal of on p. 354: Joseph Kahn, “So Long, Dalai Lama: Google Adapts to China,”
Business Ethics, 28 (2000), 365–81; Excerpt on p. 334: Norman E. Bowie, New York Times, 12 February 2006; Excerpt on p. 355: Elliot Schrage, Testi-
“The Moral Obligations of Multinational Corporations,” in Problems of mony of Google Inc. before the Subcommittee on Asia and the Pacific, and
International Justice, ed. Steven Luper-Foy (Boulder, CO: Westview Press, the Subcommittee on Africa, Global Human Rights, and International
1987), 529; Excerpt on p. 335: Hans Küng, “A Global Ethics in an Age of Operations, Committee on International Relations, United States House of
Globalization,” Business Ethics Quarterly, 7 (1997), 17–31, 18; Excerpt on Representatives, 15 February 2006 [hereinafter “Schrage Testimony”];
p. 335: Overview of the UN Global Compact; Figure 14.1 p. 335: Based on Excerpt on p. 355: Elliot Schrage, Testimony of Google Inc. before the Sub-
William C. Frederick, “The Moral Authority of Transnational Corporate committee on Asia and the Pacific, and the Subcommittee on Africa,
Codes,” Journal of Business Ethics, 10 (1991), 165–77; Excerpt on p. 336: Global Human Rights, and International Operations, Committee on Inter-
John H. Cushman, Jr., “Nike to Step Forward on Plant Conditions,” San national Relations, United States House of Representatives, 15 February
Diego Union-Tribune, 13 May 1998; Excerpt on p. 336: Adam Schwarz, 2006 [hereinafter “Schrage Testimony”].
Index
A Americans with Disabilities Act (ADA), 203, 204
Abacus, 239–241 American Telephone & Telegraph Company (AT&T), 134
ABN AMRO, 240 Americhem, 61
Absolutism, 328 Amnesty International, 348
business necessity, 331 Annan, Kofi, 335
moral relevance, country specific, 329 Anti-bribery strategies, 344
relativism contrasted with, 329 Anticompetitive pricing, 215–217
right to decide, 332–33 Apparel Industry Partnership (AIP), 340
variations, ethics, 329–30 APPROVe (Adenomatous Polyp Prevention on Vioxx), 3, 4
Accounting, 40 Ariely, Dan, 38
Ackerman, Susan Rose, 238, 343 Aristotle, 53–54, 57, 141, 147, 149
Ackman, William A. “Bill,” 236 on distributive justice, 58–59
Action Research Group, 129 Armstrong, Gary, 46, 47
Act-utilitarianism, 49 Arthritis, 1
Acxiom, 131 Arthur Andersen, 14, 66, 94, 96, 309, 310, 312
Adair v. United States, 159 Artz, Edward, 46
Adarand v. Peña, 147 Asadi, Khaled, 80–81
Ad networks, 121, 122, 231 Associated Press, 91–92
AdSense (Google), 176, 229–30, 231 Assumption of risk, 191
Advertising Auditing, 308
deceptive, 222–24 Auditor Independence, 310
defined, 222 Automobile Manufacturers Association, 199
impact of, 226–29 Autonomy, and hazardous work, 191
Internet and, 229–32 Avid consumers, 227
irrational persuasion, 224–26 Avoidance, in conflict of interest management, 99
lotteries, 208–9
native, 232 B
social, 232–33 Bad faith, 162
AdWords (Google), 229–30 “Bait-and-switch” advertising, 6, 212
Affirmative action, 133, 145–152 Bankers Trust, 42–44
compensation, 147–49 Baram, Michael S., 86
defenders of, 148 Bargaining, and information, 192
plans, 146–47 Barry, Bruce, 165, 167
problems with, 151–52 Bartz, Carol, 19–20
and quality, 151 Bath Iron Works (BIW), 18–19
and self-esteem, 151–52 Bausch & Lomb, 20
utilitarian view, 150–51 Baxter v. Ford Motor Company, 200
African Americans, and advertising, 209 Bayly, Daniel, 263
Age discrimination, 138 Beech-Nut, 18
Age Discrimination in Employment Act (ADEA), 138 Benefit corporation, 289–90. See also For-profit social enterprises
Agency relationship, 31 Benetech, 286–87
Agents. See also Fiduciaries Ben & Jerry’s, 287, 289–90
duties of, 70 Benn, Stanley I., 113
employees as, 22–24, 69–70, 86 Bentham, Jeremy, 48
as fiduciaries, 31–32, 33, 39, 245 Benzene, workplace hazard, 186–187
as intermediaries in foreign business, 345 Berle, Adolf A., Jr., 34, 301, 302
and principals, 31 Biased judgment, 97
as whistle blowers, 70 Big Data Analytics, 120–23
Aggregators, 121 data collection, 121–22
Agreements ethical issues, 122–23
confidentiality, 86 Bijour, Peter I., 133, 134
noncompetition, 87–88 Blankfein, Lloyd, 240
AIDS Board of Directors, 260, 261–62
prevention and advertising, 217 and corporate accountability, 311–12
social marketers and, 233 responsibility in takeovers, 258, 260
Alabama Board of Corrections, 135 Bok, Derek, 174
Alien Tort Claims Act (ATCA), 348–49 Bok, Sissela, 67, 69, 72
Allied Chemical Company, 193 Bona fide occupational qualification (BFOQ), 135, 195
Altruism, 27 Bounded rationality, 27–28
American Association of Advertising Agencies, 222 Bowie, Norman E., 334
American Bar Association, 96 Boxill, Bernard R., 148
American Cyanamid Company, 193 BP (British Petroleum), 282
American Petroleum Institute, 186–87 Brandeis, Louis D., 91
387
Breach of contract, 24, 25, 91 Code of Ethics for Engineers, 97
Breeden, Richard C., 94 The Code of Ethics for Government Service, 71
Brenkert, George G., 120, 229 Codes of ethics, reasons for adopting, 318–19
Brennan, Edward A., 319–20 Coercion
Bribe Payers Index, 343, 344 risk and, 187–88
Bribery, 327, 340–46 in workplace safety, 188
anti-bribery strategies, 344–45 Cohen, Ben, 287, 290
combating, 343–46 Collapsing crib, 205–7
defined, 341–42 Collective choice, 29–30
economic effects of, 342–43 Committee for Economic Development (CED), 272
immorality of demanding/accepting, 342–43 The Communist Manifesto (Marx), 48
Brockovich, Erin, 66 Community Interest Company, 289
Brokerage industry, and churning, 243 Community investment, 279
Bryant, Carter, 82–83 Comparable worth, 6
Buckingham Wax Company, 90, 91 Compensation. See Worker compensation
Buffett, Warren, 24, 175, 249 Compensatory justice, 57, 58, 148
Burger, Warren, 136 Competition, in conflict of interest management, 91–92
Burlington Industries v. Ellerth, 140 Competitive employment, 86–87
Burlington Northern Santa Fe Railroad (BNSF), 203–4 Competitive Intelligence Magazine, 103
Bush, George W., 204, 310 Competitor intelligence, 92–93
Business Complete Book of Wall Street Ethics, The, 241
decision making, 4–7 Confidential business information, 84–88
distinguishing features of, 5–6 trade secrets vs., 89
economic character, 5–6 Confidentiality agreements, 86
and law, 7, 10–11 violation of, 98
manager’s role, 12–13 Confining profiles, Internet and, 124
mission statements, 285–90 Conflict of interest, 83, 93–101
nature of, 5–6 actual vs. potential, 95–96
organizational character, 5–6 defined, 95
virtue ethics in, 53–55 Enron Corporation, 94
Business information, 83–93 individual/organizational, 96
confidential, 84–88 managing, 98–101
proprietary, 88–93 personal vs. impersonal, 96
Business to business sales (B2B), 212 types of, 96–98. See also specific types
Buzz marketing, 225 Confucianism, 330
Consequentialism, 48
C Constructive engagement, 347–48
Campbell Soup Company, advertising, 224 Consumer Financial Protection Bureau (CFPB), 244
Canary Capital, 263 Consumer Product Safety Act (1972), 212
“Capacity” arrangement, 262 Consumer Products Safety Commission (CPSC),
Capitalism and Freedom (Friedman), 271 184, 205
Capital One Financial Corporation, 235–36 Consumer Protection Act of 1972, 11
Cardozo, Benjamin, 32 Consumer sovereignty, 210
Carpel tunnel syndrome (CTS), 203 Context, 38
Carroll, Archie B., 271 Contract(s)
Categorical imperative principle, 52 and due-process provisions, 166
Caux Roundtable Principles for Business, 335 freedom of, 159
Certified public accountant (CPA), 308, 309 shareholders’, 303–4
Challenger explosion, 72 Contributory negligence, 198
Chief Executive Officer (CEO), 311–12 Convention Against Corruption, 344
and compensation, 99, 173–74 Cooper, Cynthia, 65
and corporate accountability, 310 Copyrights, 84
ethical decision making, 5 Copyright Term Extension Act of 1998, 89
Chief Financial Officer (CFO), 94, 241 Corporate accountability, 307–313
Child World, 8 accounting, 308
ChoicePoint, 130–32 auditing, 308
Chouinard, Yvon, 287 confidentiality, 309–10
Chrysler Corporation, 199 conflict of interest, 309
Churning, financial services, 243 criminal prosecution, 312–13
City of Richmond v. J. A. Croson, 147 executives/directors and, 310–12
Civil Rights Act (1964), 10, 11, 74, 135–36, 137, 139, 143, 145, 146, 193, financial reporting, 307–10
195, 205 job pressure, 308–9
Civil Service Reform Act of 1978, 74 Corporate citizenship, 273
Clara Watson v. Fort Worth Bank and Trust, 143–44 Corporate compliance, 313–319
Clayton Act (1914), 215 Federal Sentencing Guidelines, 315–17
CNET Networks, 129–30 Corporate decision making, 299, 300, 306, 313
Coase, Ronald, 33 Corporate ethics programs
Coca-Cola, 282, 291, 295–96 benefits, 314–15
Cochran, Philip L., 259 components, 314
Code and Other Laws of Cyberspace (Lessig), 124 Federal Sentencing Guidelines and, 315–17
Corporate governance, 299–307 Discrimination
shareholders’ control, 300–4 age, 138
stakeholders, 305–7 and compensation, 147–48
Corporate social responsibility (CSR), 268–296 defined, 135
business case for, 278–81 and fetal-protection policies, 205
classical view of, 274–76 forms of, 137–38
at Costco Wholesale Corporation, 284–85 handicapped, 138
debate on, 270–273 job analysis and, 142
examples of, 272–73 Kantian view, 141
Friedman on, 276–78 national origin, 137–38
implementing, 281–84 objections to, 140–41
meaning of, 271–72 objective tests, 142–43
normative case for, 274–78 prevention, 142–45
reporting and accountability, 283–84 price, 216
as source of competitive advantage, 280–81 religious, 137
Corporate social responsiveness, 273 sex, 137
Corporation in Modern Society, The (Mason), 274–75 subjective evaluations, 143–44
Corporations. See Firms utilitarian view, 140–41
Corruption Perception Index, 344 Disparate treatment/impact, 136–37
Cost-benefit analysis, 50–51 Distributive justice, 57–59
Costco Wholesale Corporation, 284–85 Diverting, market distribution, 219
Covert surveillance, competitor information, 93 Dodd-Frank Wall Street Reform and Consumer Protection Act (2010),
Cracker Barrel Old Country Stores, Inc., 321–22 74–75, 80, 244
Credit Card Accountability, Responsibility, and Disclosure Act Donaldson, Thomas, 305, 329, 332
(CARD), 244 Dow Chemical Company, 187, 322
Crystal, Graef, 175 Dow Jones Sustainability Index, 283
Customary pricing, 217 Drexel Burnham Lambert, 256
Cyber-Jeeves, 127 Drucker, Peter, 256, 299
Drug tests, 108, 112, 118, 119, 120
D Due care, 196–98
Dahl, Robert A., 168 standards of, 196–97
Daniel, Steve, 104 Due diligence, 316
Data aggregators, 121–22 Due process, 157, 162–64
Database marketing, 110 law of, 163–64
Davis, Keith, 275 support for, 163
Dayton Hudson Corporation, 106 Dukes, Betty, 154
Deception Dunn, Patricia C., 129–30
defined, 223 DuPont Company, 118
financial services, 242–43 Duty of confidentiality, 85–86
in sales, 213–14
and truth, 222–23 E
Deceptive advertising, 222–24 Ebbers, Bernard J. (Bernie), 65–66, 297–99, 312
defined, 222–24 Ebling v. Masco Corporation, 162
Decision making Eckert, Robert A., 326
corporate, 299, 300, 306, 313 Economic Espionage Act of 1996 (EEA), 89, 92
economic character, 5–6 Economic man, 27
individual, 6, 14–15 Economic responsibility, corporations, 271
levels of, 6–7 Economist, The (magazine), 251, 271, 278, 290
organizational character, 6 Efficiency, in market system, 27
in organizations, 15–16 Egalitarian theory of justice, 59
De facto control, 299, 300 Ehling, Deborah, 114–15
Defense Industry Initiative on Business Ethics and Conduct (DII), Electronic Privacy Information Center (EPIC), 126, 132
18–19 El Paso Corporation, 104
DeGeorge, Richard T., 7, 172, 225, 333 Employee Assistance Plans (EAPs), 109
Delaney Clause, 186 Employee records, 116–20
Deontological theories, 47–48 accuracy, 120
Dependence effect, 225–26 Employment, 6
Derivatives, 248–49 as contractual arrangement, 159
DesJardins, Joseph R., 118 and property rights, 158–59
Dichter, Ernest, 224–25 Employment at will, 157–62
Difference principle, 59 implied contract and, 162
Dignity, 40 public policy and, 162–62
Direct cause, workplace accidents, 186–87 Enhanced Financial Disclosures, 310
Direct competition, 97 Enron Corporation, 65, 66, 74, 80, 95, 96, 261, 263, 299, 307–8, 309,
Direct marketing, 218 310–11
Direct-to-consumer (DTC) advertising, 2 conflict of interest, 93–94
Disclosure Entitlements, 56, 162
in conflict of interest management, 99–100 Entitlement theory (Nozick), 59–60
employee information, 118–19 Environmental Protection Agency (EPA), 73, 156
information, 213–14 Epstein, Richard A., 201
Equal Employment Opportunity Commission (EEOC), 137 Financial reporting, 283–84
guidelines on sexual harassment, 138 Financial services, 241–45
Equal Employment Opportunity Policy, 146 Fiorina, Carleton S., 129
Equality of opportunity, 149 Firestone Tire and Rubber Company, 182
Equality of prospects, 149 Firms, 32–35
Equal Pay Act of 1963, 139 economic view, 33
Equity capital, 288, 289 legal view, 33–34
Equity/efficiency trade-off, 245, 274 sociological view, 34–35
Erbitux, 264, 265 First Executive Corporation, 256
Ernst & Young, 340 Fitzgerald, Duane D. “Buzz,” 18–19
Essay on Liberty (Mill), 166 Fixed claims, 300–1
Estlund, Cynthia L., 167 Flash trading, 250
“Ethical displacement,” 7 Food and Drug Administration (FDA), 1, 2, 78, 264
Ethical imperialism, 330, 346 Forbes (magazine), 66
Ethical management, 11–12 Ford Motor Company, 108, 117, 182, 197, 200
Ethical reasoning, 35–41 Foreign bribery, 14, 328, 336, 340–46
framework for, 38–41 Foreign Corrupt Practices Act (FCPA) (1977), 341, 344, 345, 352
philosophical account, 36–37 Forest Stewardship Council, 278
psychological accounts, 37–38 For-profit social enterprise, 287
Ethical theory, types of, 48 mission of, 289–90
Ethics nonprofit social enterprises vs., 290
and economics, 7–9 Fortune (magazine), 1
and law, 9–11 Foshee, Doug, 104, 105
management of, 11–13 Foundations of the Metaphysics of Morals (Kant), 52
in markets, 8–9 Four Ps, of marketing, 210
in organizations, 13–16 Fraud
Ethics and Excellence (Soloman), 55 defined, 26
“Ethics of trading,” 6 federal policies, to combat, 74
European Union Privacy Directive, 125 and manipulation, 26
Excessive trading, 243 in market transactions, 24, 40, 275
Exclusive dealing, 218 in securities trading, 165, 246, 252–53
Executive compensation, 173–75 Frederick, William C., 273, 335
Exit, Voice, and Loyalty (Hirschman), 71 Freedom, and marketing, 211
Exploitation, 172, 173 Freedom of expression, 164–67
Externalities, 8 defined, 165
negative, 28 legal protection for, 165–66
positive, 28 Freedom of Information Act (FOIA), 107
Extortion, 98 Free market
ExxonMobil, 348 conditions for, 8
fairness in, 8–9
F Free riders, 28, 29
Facebook, 114, 124, 230 Free speech. See Freedom of expression
Fair competition, 91 Fried, Charles, 113
Fair information practices, 125 Friedman, Milton, 271, 274
Fair Labor Association (FLA), 279, 340 on corporate social responsibility, 276–78
Fair market information, 211 “Frontrunning,” 100
Fairness Fruchterman, Jim, 287, 288
and insider trading, 252 FTSE4Good Index, 283
in markets, 8–9 Full-line forcing, 218
Fair Packaging and Labeling Act (1966), 212, 214 Furst, Robert, 263
Fair trade certification, 291 Futures contract, 249
False Claims Act of 1863, 74
Faragher v. City of Boca Raton, 140 G
Fastow, Andrew S., 94, 95–96, 263, 310 G. Heileman Brewing Company, 228
Federal Employers Liability Act (FELA), 203 Galbraith, John Kenneth, 225–26
Federal Sentencing Guidelines, 315–17 Galleon Group, 255
Federal Trade Commission Act (1914), 215 Gates, Bill, 24
advertising regulation, 222–23 Gauthier, David, 24
Fetal protection policies, 193–94 GE Capital, 268–69
and discrimination, 194 General Electric Energy, 80
Fetotoxins, 193 Generally accepted accounting principles (GAAP), 97, 298, 308
Feuerstein, Aaron, 268–70 Generally Accepted Auditing Standards (GAAS), 308
Fiduciaries, 31–32 General Motors Corporation, 69
Fiduciary duty, 25 General rights, 56
Fiduciary relationship, 32 Generic drugs, 2
Financial Industry Regulatory Authority (FINRA), 244 Genetically modified organism (GMO), 214
Financial markets, 245–51 Genetic testing, 108, 203–4
derivatives, 248–51 Gestores, 352, 353
fairness in, 246–48 Gewirth, Alan, 186
regulation of, 246 Gifford, Kathie Lee, 339
Gift Relationship: From Human Blood to Social Policy, The (Titmuss), 51 Hirschman, Albert O., 71
Gifts, and conflict of interest, 97 Home Depot, 9
Gilmartin, Raymond V., 1 Honesty
Glazer, Myron, 71 and reputation, 40
Global civil society, 331, 335, 336 and virtue, 54
Global Compact, United Nations, 317, 335 Hostile takeovers, 255–60
Global Exchange (NGO), 291, 292 defensive measures against, 257
Globalization, 270, 315 market for corporate control, 256–57
and business practices, 334 tactics, 257–60
of ethics, 335 Hostile working environment harassment, 138
Global Reporting Initiative (GRI), 283 factors contributing to, 139
Global Warming Solutions Act, 28 Hoyvald, Lars, 18
Globe Union, Inc., 204–5 Hughes, Mark, 160, 237
Glue sniffing, Honduras, 350–51 Human capital, 171
Goffman, Erving, 228 Human rights, 56
Golden parachute, 258–59 abuses, 346–49
Goldman Sachs, 262 Human Rights Watch, 348
“Good cause” concept, 164 Huntington, Samuel P., 342
Good faith, 10 Hurd, Mark V., 129–30
and hazardous work, 190 Hurricane Andrew, 9
Goodpaster, Kenneth E., 275 Hurwitz, Charles, 256
Goodwill, 56, 273
Goodyear tires, 183, 197 I
Google, 19, 80, 108, 123–24, 176–77, 229–30, 328, 353–55 Identity theft, 131
Graduation Pledge of Social and Environmental Responsibility, 278 IKB Deutsche Industriebank, 240
Graduation strategy, 62 “Image advertising,” 227
Gray markets, 219 ImClone Systems, Inc., 264
Greeley, Robert, 156, 157, 162 Implied contract, 162
Greenmail, hostile takeover, 259–60 Implied warranties, 198
Greenman v. Yuba Power Products, 200 Improper influence, competitor information, 93
Greenpeace, 348 Incentives, 302–3
Griggs v. Duke Power Company, 136, 143 Independent judgment, in conflict of interest management, 100
Griswold v. Connecticut, 111 Inequalities (Rae), 149
Gross, Hyman, 113 Inequalities, in distribution, 274
Guidelines for multinational corporation, 331–35 Information asymmetry, 247
justice, 333–35 Initial public offering (IPO), 99, 243, 300
rights, 332–33 Insider trading, 251–55
welfare, 333 cases, 254–55
Gunnemann, Jon P., 276 fairness theory, 252
property rights theory, 252–53
H Institute of Internal Auditors (IIA), 64
H. B. Fuller Company, 350 Institute of Social and Ethical AccountAbility (ISEA), 283
Haas, Robert, 348 Integrity, 40, 126
Haggett, William E., 18–19 Integrity strategy, 314, 317
Handicap discrimination, 138 Intellectual property, 88–89
Hansmann, Henry, 289, 302 Interfaith Declaration on International Business Ethics, 335
Harrington, Noreen, 262 Internal Revenue Service (IRS), 44
Harris, Louis, 107 International Center for Corporate Accountability (ICCA), 327
Harris v. Forklift Systems, Inc., 140 International codes, 335–36
Harvard Business Review, 138 International Covenant on Civil and Political Rights, 332, 335
Harvard Law Review, 111 International Covenant on Social, Economic, and Cultural Rights,
Harvard University, 41, 174 332, 335
Haverford Insurance Company, 62 International Financial Reporting Standards (IFRS), 308
Hazardous work, 188–92 International Labour Organization, 335, 340
right to know, 191–92 International News Service, 91, 92
right to refuse, 189–90 Internet, 122–27
Health and advertising, 229–32
meaning, 184–85 ethical issues, 123–24
protection, 185–88 and information collection, 123–24
Hedge fund, 262 online placement, 229–30
Hedonism, 48–49 principles of privacy on, 126
Henningsen v. Bloomfield Motors, Inc., 199 Investor advocacy, 279
Herbalife, 236–38 “Invisible hand” argument, 23, 24, 27, 271, 275
Hereditary Neuropathy with liability to Pressure Palsies (HNPP), 203 Iron Law of Responsibility, 275
Hewlett-Packard (HP) Irrational persuasion, 224–26
Invasion of privacy at, 129–30 Israel, Arab League boycott of, 331
smart chip technology of, 21–22
Hidden costs, 144 J
Hidden Persuaders, The (Packard), 224 Jacksonville Shipyards, Inc. (JSI), 153–54
High-frequency trading (HFT), 250 Jen, Mark, 176, 177
Jensen, Michael C., 175, 256, 258, 259 Malden Mills, 268–69, 270
Job analysis, 142 Mambro, Jamie, 102, 103
Job description, 12, 142 Management decision making, 306
Job immobility, 161 Managers
Job pressure, 308 as community leaders, 13
Job specification, 142 as company leaders, 13
Johnson, Lyndon B., 149 as economic actors, 13
Johnson Controls, Inc., 204–5 obligations, 12
Johnson v. Transportation Agency, 146 role in ethics, 12–13
Jordan, Michael, 336 specialized knowledge, 12
Judgment, biased, 11 Manipulation
Justice, 57–60 fraud and, 26, 246
egalitarian theory, 59 in sales, 212–13
entitlement theory, 59–60 Mannes, Marya, 227
and equality, 149 Manufacturer’s suggested retail price (MSRP), 217
kinds of, 57 Marginal product, 171, 173, 174
MNCs guidelines, 333–35 Marx, Karl, 48, 172
nature and value of, 57–58 Market Abuse Directive of 2003, 252
Justifying purpose, and privacy, 117–18 Market Basket (Staples store), 213
Market-clearing price, 171
K Market failures, 27–30
Kahneman, Daniel, 37 “Market for virtue,” 278–80
Kaiser Aluminum Company, 146 Marketing, 210
Kant, Immanuel, 40, 47, 52, 159 distribution, 218–19
Kantian ethics, 52 ethics, 210–12
on discrimination, 141 four Ps of, 210
on privacy, 113–14 labeling, 214–15
respect in, 53 pricing, 215–18
universalizability principle, 52–53 product development, 219–20
Kelman, Steven, 51 sales practices, 212–14
Kennedy, John F., 211 social, 232
Kent, Muhtar, 296 Marketing orientation, 227
Keyworth, George A., II, 130 Marketing research
Kidder, Peabody & Company, 98 overt methods, 221
Kinder Morgan, 104–5 primary/secondary sources, 221
Knight, Phil, 336, 339 Market maker, 250
Kolcraft Enterprises, 205 Market outcomes, 24, 170–72
KPMG, 44–45 Marketplace, privacy in, 109–10
Kramer, Mark R., 280 Market system
Küng, Hans, 335 challenges to justice, 8
ethics in, 24–25
L fairness in, 8–9
Labeling, 214–15 features of, 6
Law, and ethics, 9–11 free. See Free market
Lebow, Rob, 102–3 justification of, 8
Lee Der Industrial, 326 Market timing, stock trading, 261–62
Legal protection, for whistle-blowing, 73–75, 86, 88, 165–66 Marmon Group, 322, 323
Legal rights, 56, 57 Marshall, John, 33
Lessig, Lawrence, 124 Marshall, Thurgood, 136
Levine, Philip J., 158 Martha Stewart Living (magazine), 264
Levi Strauss & Company, 317 Martha Stewart Living Omnimedia (MSLO), 264
Levitt, Arthur, 309 Marx, Karl, 172
Levitt, Theodore, 210, 222, 275 Mason, Edward, 275
Lexis-Nexis, 131 Matching engine, 250
Life (magazine), 339 Mattel, Inc., 325
Living wage, 157, 172, 337, 338–39, 340 Matthews, John B., Jr., 275
LJM2 partnership, 263 Maximalism, 48, 49
Lochner v. New York, 159, 160 McCormick & Company, Inc., 233
Locke, John, 56, 158, 159 McDonald’s, 219, 282
Loeb, Daniel, 19 McGarity, Thomas O., 191, 192
L’Oréal, 223 McKie, James W., 274
Lotteries, 208, 209 McNealy, Scott, 124
Lotus Corporation, 102 Means, Gardiner C., 34, 301
“Low-balling,” 218 Measuring Up: How Advertising Affects Self-Image (Shields and
Loyalty, 32, 71, 77 Heinecken), 227
Medical information, 117, 122
M Merck, George W., 1
MacCarthy, Mark, 186 Merck & Co., 1
MacKinnon, Catharine A., 139 Meritor Savings Bank v. Vinson, 139
MacPherson v. Buick Motor Company, 200 Merit System Protection Board (MSPB), 74
Merrill Lynch & Co., 241, 261, 263 New England Journal of Medicine, 2, 3
Meyer, Jack R., 41 Newsweek (magazine), 82
MGA Entertainment, 82 New York City Employees’ Retirement System (NYCERS), 321
Miami Valley Maintenance Contractors, Inc., 156 New York Times, 4, 45, 46, 47, 129, 133, 232, 321, 340, 353
Michalos, Alex, 70 Nicomachean Ethics (Aristotle), 53, 147
Microsoft Corporation, 102 9/11 terrorist attack, 65, 68
Milken, Michael, 256 Noncompetition agreements, 85, 86, 87
Mill, John Stuart, 48, 166 Nondistribution constraint, 289
Miners’ Sickness and Other Miners’ Diseases, 184 Nonprofit social enterprises, 286
Minimum wage, 172–73 for-profit social enterprise vs., 290
rationales for, 172–73 mission of, 289–90
standards, 337 Nonsteroidal anti-inflammatory drugs (NSAIDs), 1
Misappropriation theory, 252, 253–54 Norris, Floyd, 45
Misleading prices, 217 Nozick, Robert, 24, 59, 188
Misrepresentation, competitor information, 93 Nutrition Labeling and Education Act (NLEA) (1990), 214
Mission statements, business, 285, 314
Misuse of position, 97–98 O
Mobil Oil Company, 348 “Objectification of the self,” 227
Model Employment Termination Act, 162, 164 Objective tests, 142–43
Model Rules of Professional Conduct, 96 Objectivity, in conflict of interest management, 99
Modern Corporation and Private Property, The (Berle and Means), 34, 301 Occupational Safety and Health Act of 1970 (OSH Act), 11, 74, 162,
Monetary values, 51 185
Monitoring O’Hagan, James, 254
arguments for justifying, 114–15 Oligopoly, 215, 216, 344
limits to, 115–16 Olmstead v. United States, 111
Monk, Robert, 320 Ombudsman, 68
Monopoly, 88, 208, 215, 216 Online placement, 229–230
Moral commitment, 27 Online Privacy Alliance (OPA), 126
Moral point of view, 22, 36–37 Open-endedness, agency relation, 95
Moral rights, 56–57 Option (derivative), 249
Moral self-governance, 40 Oracle Corporation, hostile bid for PeopleSoft, 266
Morgan Stanley, 104, 105 Organizational ethical climates, 34
Morton, Karyn, 235 Organizational harms, 34–35
Morton Thiokol, 72 Organizational justice, 34
Moscow Helsinki Group, 346 Organization for Economic Cooperation and Development (OECD)
Motorola, 40, 272 guidelines for MNCs, 332–33
MSCI KLD 400 Index, 283 nations, minimum wage in, 339
“Multilevel marketing,” 237, 238 Organizations, defined, 6
Multinational corporation (MNC) Original position, 141
double standard, 328–31 “Outsiders” in insider trading, 251, 252
guidelines for, 331–36 Ownership of ideas, 91
wages and working conditions, 336–40
Murphy, Kevin, 175 P
Mutagens, 193 Pacific Lumber Company, 255
Packard, Vance, 224, 226
N Paine, Lynn Sharp, 314
Nader, Ralph, 75 Paine v. Western & A.R.R., 157
Nasser, Jacques, 183 Parallel importing, 218, 219
National Association for the Advancement of Colored People Paramount Communications, 260
(NAACP), 235 Paramount Communications, Inc. v. Time Inc., 260
National Association of Securities Dealers, 244 Parent, W. A., 112
National Cash Register Company, 162 Parker, Richard B., 112
National Environment Policy Act of 1969, 11 Patagonia, 287
National Geographic Society, 286 Patents, 84, 88
National Highway Traffic Safety Agency (NHTSA), 183 Paulson, John, 239, 240
National Institute for Occupational Safety and Health (NIOSH), 186 Paulson & Co., 239, 240
National Labor Relations Act of 1935 (NLRA), 74, 75 PayPal, 19, 20
National Labor Relations Board (NLRB), 74, 75, 107 Pay Without Performance (Bebchuk and Fried), 175
National origin discrimination, 137 Penney, J.C., 206, 317
National Security Administration (NSA), 107 PeopleSoft, 266–67
National Society of Professional Engineers, 97 Pepper, John, 103, 104
Native advertising, 232 Perfect competition, 27
Natural rights, 56–57 Perkins, Thomas J., 130
Negative externalities, 28 Permissible exposure limit (PEL), 186, 192, 204
Negative rights, 56–57 Personal selling, financial services, 241
Negligence Personnel files, ownership of, 119, 120
contributory, 198 Petermann v. International Brotherhood of Teamsters, 68, 161
defined, 198 Pfizer, 78–80
element of, 198 Pharmacia, 78–79
Nestlé, 18, 280–81 Placement, in marketing, 210
Planned obsolescence, 220 Public goods, 28–29
Planned order, 23 Public life, and ethics, 9
Platform for Privacy Preferences Project (P3P), 127 Public policy, 161–62
Polartec/Polarfleece, 269 Public Works in Employment Act, 1977, 146
Polygraph test, 119–20
Porter, Michael E., 280 Q
Position, misuse of, 97–98 Quid pro quo harassment, 139
Positive externalities, 28
Positive rights, 56–57 R
Pour Your Heart into It (Schultz), 291 R. J. Reynolds Tobacco Company, 228
PowerMaster, malt liquor, 228 Race
Powers, Charles W., 276 and affirmative action, 151–152
Practical wisdom, 54 and discrimination, 133, 150, 151
Predatory pricing, 210, 215, 216 Rae, Douglas, 149
Preface to Economic Democracy, A, (Dahl), 168 Rajaratnam, Raj, 255
Preferential treatment programs, 150, 151, 152 Rational empathy test, 332
Pregnancy Discrimination Act of 1978, 135, 137 Rationalization, 14–15, 38, 226, 347
Preston, Lee E., 305 Rawls, John, 24, 59, 141
Price discrimination, 216, 234 Reader’s Digest, 110
Price-fixing, 215–16 Reciprocal dealing, 218
Price gouging, 217 Redbook (magazine), 138
Primary marketing research sources, 221 Redistribution, rationales for minimum wage, 172–73
Principal, agents and, 31 Redlining, 39
Principle of equal opportunity, 59 Reiman, Jeffrey H., 113
Principles for Global Corporate Responsibility, 335 Religious discrimination, 137
Priority rules, 100 Reproductive hazards, 192–96
PRISM program, 107, 108 Resale price maintenance, 216
Prisoner’s dilemma, 29–30 Research, marketing, 221
Pritzker, Jay A., 322, 323 Residual claims, 301
Privacy Residual risk bearing, 304
away from work, 114–16 Resistol, adhesive, 350
challenges to, 108–10 Respect, in Kantian ethics, 52–53
concept history, 111 Restatement of Agency, 70, 85, 95
defined, 111–12 Restrictions, impact on employment, 87–88
employee records, 116–20 Retaliation, 74–77
Kantian view, 113–14 Retributive justice, 57, 58
in marketplace, 109–10 Reverse churning, 243
meaning and value of, 110–14 Rights, 39–40, 55–57
in socialization process, 114 human, 56, 346–49
utilitarian view, 112–13 kinds of, 56–57
in workplace, 108–9 meaning of, 55–56
Privacy Act of 1974, 107 in MNC guidelines
Privacy-enhancing technologies (PETs), 127 Right to equal treatment, 150
Privacy laws, 111, 127, 131, 165 Right to know, hazardous work, 191–92
Privacy Protection Study Commission, 107, 110 Right to refuse, hazardous work, 189–90, 191
Private ownership, 23, 304 Risk, in workplace safety, 187–88
Privity, 200, 202 Roberts v. Texaco, 134
Procter & Gamble (P&G), 42–43, 46–47, 102, 103–4 Robinson, Lois, 139, 153, 154
Product, in marketing, 210 Robinson-Patman Act (1936), 235
Product development, 219–20 Roche, James M., 69
Product placement, 210, 225, 235, 236 Rossin Greenberg Seronick & Hill (RGS&H), 102
Product safety, 196–202 “Round trips,” in stock trading, 261, 262
contractual theory, 198–99 Rowley, Coleen, 65, 66, 68, 70
due care theory, 196–98 Royal Dutch/Shell, 347
strict liability theory, 200–2 Rules and policies, in conflict of interest management, 100
Professionals, 32, 39, 101, 103, 248, 253, 261 Rule-utilitarianism, 49
Profit motive, 23
Promotion S
discrimination, 133–34 Safety
in marketing, 210 meaning, 184–85
Property rights, 301–2 product. See Product safety
Property rights theory, insider trading, 34, 252 protection, 185–88
Proprietary business information, 84 Safire, William, 47
intellectual property, 84 Sagoff, Mark, 51
“Protect, Respect, and Remedy” framework, 333, 347 Sales practices, 212–14
Protected classes, 135, 136, 140 Santa Clara Transportation Agency, 146
Pseudobidding, 260 Sarbanes-Oxley Act of 2002 (SOX), 74, 75, 307, 310
Psychological testing, 106–7, 109 Satisficing, 28
Psychscreen, 106–7 Saturn Corporation, 177–78
Public Company Accounting Oversight Board, 310 Schelling, Thomas C., 30
Schermerhorn, John R., 348 Stone, Christopher D., 10
Schultz, Howard, 291 Stress, sexual harassment and, 139
Schwartz, Jonathan, 177 Strict liability theory, 200–2
Scotese, Peter G., 259 ethical arguments for, 201–2
Sears Auto Centers, 319–20 ethical objections, 202
Secondary marketing research sources, 221 legal issues, 200–1
Second Restatement of Agency, 70, 95 Strict scrutiny, 146, 147
Second Restatement of Torts, 196, 200, 201 Strong, Richard S., 261–62
Second Treatise of Government (Locke), 56 Strong Capital Management (SCM), 261
Securities Act of 1933, 242, 245 Structural changes, in conflict of interest management, 100
Securities and Exchange Commission (SEC), 73, 75, 80, 94, 98, 130, Subjective evaluations, 143–44
238, 240, 241, 261, 263, 264, 298, 321, 345, 351, 353 Subliminal communication, 225
Securities Exchange Act of 1934, 245, 248 Suitability, financial products, 244–45
Security Outsourcing Solutions, 129 Sullivan Principles, 348
Sentry Insurance Company, 107 Summers, Clyde W., 158–59
Set-aside provisions, 146 Sun Microsystems, 124, 177
Sethi, S. Prakash, 271 Swap (derivative), 249
Sex discrimination, 137 Swartz, Jeffrey, 291, 293–94
“Sex role spillover,” 139 Swasy, Alecia, 46
Sexual harassment, 138–40 Sweatshops, 36, 337, 340
defined, 138–39
forms of, 139–40 T
prevention program, 144–45 Target store, 106
Shadow pricing, 50, 51 Taxation, 277–78
Shareholder primacy, 299, 300–5 Tax avoidance, MNCs, 334
Shareholders, contracts for, 303–4 Tax shelter business (KPMG), 44–45
Shareholders’ control, 300–3 Teleological theories, 47, 48, 52
justification of, 300–1 Tender offers, 257, 258
Shareholder wealth maximization (SWM), 299 Teratogens, 193
Sherman Act (1890), 215 Tests, of ethical decisions, 41
Shipyards, Jacksonville, 153–54 Texaco, 133–34
Silkwood, Karen, 68 Texas Gulf Sulphur Company, 251
Simon, John G., 276 Texas Instruments, 115
Skilling, Jeffrey, 65, 311, 312 Theft of information, 93
Slotting allowances, 218–19 Theory of Justice, A, (Rawls), 59
Smith, Adam, 8, 12, 23, 24, 27, 271, 275 Third Point, 19–20
Smith, Derek V., 130–32 Thompson, Scott, 19–20
Social advertising, 222, 232–33 Threat to equality, Internet and, 125
Social and ethical auditing, accounting, and reporting (SEAAR), 284 3M, 147
Social enterprises, 286–87 Timberland Company, 293–94
defined, 270 Time (magazine), 65
for-profit, 287 Time and Warner Communications, Inc., 260
nonprofit, 286–87 Title VII, Civil Rights Act (1964), 74, 135–36
Social institution theory, 34 Titmuss, Richard M., 51
Socially responsible investment (SRI), 279, 283 Toffler, Barbara, 14
Social networking, 116, 124 Toms Shoes, 287
Social responsibility, corporations. See Corporate social responsibility Toussaint v. Blue Cross and Blue Shield of Michigan, 162
(CSR) Toyota, 15
Society, impact of advertising on, 228–29 Toys “R” Us, 8–9, 10
Software piracy, 39, 346 Trademarks, 88
Solomon, Robert C., 40, 55 Trade secrets
Soroka, Sibi, 106 confidential business information vs., 253–54
Special purpose entities (SPEs), 263 defined, 89–90
Specific rights, 56 protection, 90
Spontaneous order, 23 Transaction costs, 27
Stakeholders, 299, 305–7 TransFair USA, 291, 292
protection, 305–6 Transfer pricing, MNCs, 334
return to, 306–7 Transparency International, 343, 344
Stakeholder theory, 305 Trans Union Corporation, 322–24
Standards for Educational and Psychological Testing and the Principles Treatise on the Law of Master and Servant, A, (Wood), 157
for the Validation and Use of Personnel Selection Procedures Tripartite Declaration of Principles concerning Multinational
(APA), 144 Enterprises and Social Policy, 335
Stanford Business School, 336 Triple-bottom-line accounting (3BL), 281, 283
Starbucks Coffee Company, 170, 272, 291–93 Trustworthiness, 8
fair trade coffee, 291–93 Twitter, 115, 177
Steinberg, Saul, 259 Tying arrangement, 218
Stereotyping, 139, 141, 143, 154
Stern, Edward J., 262 U
Stewart, Martha, 264–65 Unconditionality of rights, 56
“Sticky asset,” 262 Unequal bargaining power, 247–48
Unequal information, 246–47 Weber v. Kaiser Aluminum, 146
Unfair pricing, 217–18 Welch, Jack, 269, 305
Uniform Commercial Code (UCC), 198 Welfare, MNCs guidelines, 333
Unilever, 103–4 Well-being, 211
United Auto Workers (UAW), 178, 205 Werhane, Patricia H., 163, 185
United Parcel Service, 282 West Coast Hotel v. Parrish, 160
Unit pricing, 217 Westin, Alan F., 75, 109, 111, 113
Universal Declaration of Human Rights, 55, 332 Wexler v. Greenberg, 90, 91
Universalism, 48, 49 Whirlpool Corporation, 188–89
Universality, rights, 56 Whistleblower Protection Act of 1989, 74
Universalizability principle, 52–53 Whistle-blowing, 12, 65
Universal Juice Company, 18 agents and, 70
University of Michigan Law School, admissions policy, 147 conditions for, 72
University of Michigan, Vendor Code of Conduct, 295–96 defined, 67–69
Uptown, cigarette, 228 and gender, 65–66
U.S. v. O’Hagan, 254 justification of, 69–73
Utilitarianism, 48–52 legal protection for, 73–75
act- and rule, 49 and loyalty, 71
on affirmative action, 151–52 policy, 76–77
on discrimination, 141 protection, 75–76
on privacy, 112–13 right for, 73–76
and right to know, 192 White House, 340
Utility, calculating, 49–50 Whole Foods Market, 280–81
Williams, Jay, 102, 103
V Williams, Wendy W., 194
Vagelos, Roy, 2 Williams Act (1968), 258
Van Gorkom, Jerome W., 322–24 Winans, R. Foster, 98
Veil of ignorance, 59 Women
VF Corporation, 294 pregnancy, and discrimination, 137
VIGOR (Vioxx Gastrointestinal Outcomes Research), 2, 3 reproductive hazards, 205
Vinson & Elkins, 94 sexual harassment, 138–40
Vioxx crisis, 4 Wood, Donna, 273
Virtue ethics, 53–55 Wood, Horace G., 157
defending, 54 Woodman, John, 336
defined, 54 Woods, Tiger, 336
Vogel, David, 278 Worker compensation, 169–73
Voluntary assumption of risk, workplace accidents, 187 pay-setting process, 170
Voluntary exchange, 23, 24 Worker participation, 167–68
von Hayek, F. A., 23, 226 Worker Rights Consortium (WRC), 340
Working conditions, MNCs, 339–40
W Workplace
Wages, MNCs, 336–40 health hazards, 184
argument for, 338 privacy in, 108–9
standards for, 337–39 rights in, 184–88
Waksal, Sam, 264–65 safety hazards, 184
“Walking the customer,” 213 Workplace democracy, 167–69
Wall Street Journal, 46, 47, 97–98, 129, 130, 254, 266, 295 defined, 168
Wall Street Reform and Consumer Protection Act (2010) World Business Council for Sustainable Development, 282
(Dodd-Frank), 74–75, 80, 244 WorldCom, 65, 66, 68, 74, 297–99
Walmart, 152–53, 154–55, 170, 179–81, 211, 216, 279, 327, 349, World Trade Organization (WTO), 334
351–53 Wrongful harm, 24, 26–27
Walt Disney Productions, 89, 259
Warby Parker, 287 Y
Warranties Yahoo, 19–20, 108, 123, 127, 232, 354
implied, 198–99 Yamada, David C., 165
problems with, 199 YouTube, 123
Warren, Samuel, 111
Wartick, Steven L., 259 Z
Watkins, Sherron, 65–66, 94 Zarella, Ronald, 20