Production Ethics

Elias George. K
MBA (FT) 2nd Yr

1
 Business Ethics
 Business Ethics is Applied Ethics.
 It is the APPLICATION of our understanding
of what is GOOD and RIGHT to that
assortment of Institutions, Technologies,
Transactions, Activities and Pursuits that we
call BUSINESS.

2
 Production Ethics
 PRODUCTION ETHICS or Production
Business Ethics is an area of business ethics
dealing with the duties of a company to
ensure that its PRODUCTS AND
PRODUCTION PROCESSES DO NOT
CAUSE HARM.
 BUT………there is usually a degree of danger
in any product or production process and it is
difficult to define a degree of permissibility.

3
 Production Ethics
Let us briefly consider how one company, Merck and
Company once dealt with the issue of “River
Blindness”.
 River blindness in tropical Africa (about 85 million at
risk)
 Bite of the black fly
 Dr William Campbell of Merck finds evidence of a
cure based on Ivermectin in 1979
 Pleads with WHO, US Govt, affected Govts – none
responds
 Company teams up with many voluntary orgs and
gives the drug free.

4
 Production Ethics
 Over 20 million people received Mectizan
free in 2004
 Company official – the only ethical choice
was to make it – long term advantage
 Japanese example – Merck had brought
streptomycin to Japan after World war 2 to
eliminate tuberculosis – made loss
 Merck is the largest US pharmaceutical
company in Japan
5
 Production Ethics
 Businesses are often said to be run for the
benefit of their owners, i.e. their
“shareholders”.
 However, other “stakeholders” are also an
important part of business decision making.
 As such, businesses should act in a
responsible and ethical manner and
consider the possible effects of any
decisions they make.

6
The Stakeholders

Suppliers

Customers Communities

Future
Owners Stakeholders
Generations

Employees *Environment

Government

7
 Stakeholders
Responsibilities to stakeholder groups:
 Shareholders – Generate profits
and pay dividends
 Customers – provide good quality products
at reasonable prices. Safety, honesty, decency and
truthfulness
eg: A-class failing the elk test
 Employees – health and safety at work, security, fair pay,
equal opportunities
 Suppliers – pay on time, pay fair rates
for the work done, provide element of security

8
 Stakeholders
 Local Community – provide employment, safe working
environment, minimise pollution and negative externalities
– provide external benefits?
 Government – abide by the law, pay taxes, abide by
regulations
 Management – their aims versus those
of the organisation as a whole
 Environment – limit pollution, congestion, environmental
degradation, development, etc.

9
 Stakeholders
1) Air Pollution:
 Sources: factories, machines or vehicles
emitting poisonous gases into atmosphere.
 Impacts: a) Acid rain, destroying thousands
of forest.
 b) CFCs. The use by some firms of CFCs in
refrigerators has contributed to the break
down of the ozone.
 c) Global Warming
10
 Stakeholders
2) Water Pollution:
 Sources: Industries like brewing and
chemical manufacturing dump waste to the
nearby water source.
 Impacts: a) Polluting our drinking water.
 b) Polluting the sea which threatens
thousands of life in the ocean.

11
 Stakeholders
3) Congestion and Noise:
 Sources: Businesses’ logistics activities
 Impacts: a) Traffic congestion.

4) Destruction of the environment:

 Sources: Buildings in rural areas
 Impacts: a) Deprive villagers and visitors of previously
unspoilt countryside.
c) Increase noise and congestion levels in village.

5) Waste Disposal

12
 Markets and Consumer
Protection (1)
 Consumer safety is seen as a good that is most efficiently
provided through the mechanism of free market whereby
sellers must respond to consumer demands.
 If consumers want products to be safer - must be willing to
pay more for safer products and shows preference for
manufacturers of safe products.
 Producers must build more safety into their products or
they risk losing customers to competitors.
– Market ensures that producers respond adequately to consumer’s
desires for safety

13
 Markets and Consumer
Protection (2)
 If consumers:
– do not place a high value on safety
– unwilling to pay for safety or
– has no preference for safer products
 then it is wrong to push increased levels of safety down their
throat through government regulations.
 Such government interference distorts markets, making them unjust,
disrespectful of rights and inefficient.
 Only consumers can say what value they place on safety and they
should be allowed to register their preferences through free choices in
markets and not to be coerced by businesses or governments into
paying for safety levels they may not want.

14
 Markets and Consumer
Protection (3)
 The critics of this market approach respond that the benefits
of free markets are obtained with certainty only when
markets have the seven characteristics that define them:-
a) there are numerous sellers and buyers
b) everyone can freely enter and exit the market
c) everyone has full and perfect information
d) all goods in the market are exactly similar
e) there is no external costs
f) all buyers and sellers are rational utility maximizers
g) the market is unregulated

15
 Markets and Consumer
Protection (4)
 These characteristics are absent in consumer markets,
focusing especially on characteristics (c) and (f).
 Markets are efficient only if participants have full and
perfect information about the goods they are buying.

16
 Theories on Ethical Duties
of Manufacturers
Th eori e s on E t h i c al D u t i e s of M an u f a ct u rer s

3 Th eori e s

C on t e n t V i e w "D u e C ase" V i e w S oci a l C ost s V i e w

- p l a ces g r e at e r resp on si b i l i t y on t h e con su m er -p l a ces g r e at e r resp on si b i l i t y on -p l a ces g r e at e r resp on si b i l i t y on
t h e m an u f a ct u rer t h e m an u f a ct u rer
17
Contract View of Business Firm’s
Duties to Consumers
 The view that the relationship between a business
firm and its consumers is essentially a contractual
relationship and the firm’s moral duties to the
customer are those created by this contractual
relationship.

18
 Moral Duties to Consumers
Under Contractual Theory (1)
 Complying with the terms of the sales contract and
secondary duties (Duty to comply).
 Disclosing the nature of the product (Duty of
Disclosure).
 Avoiding misrepresentation and (Duty Not to
Misrepresent).
 Avoiding the use of duress and undue influence
(Duty not to Coerce).

19
 Moral Duties to Consumers
Under Contractual Theory (2)
 (1) Duty To Comply
– The next basic moral duty that a business firm
owns its customers (under contract view) is the
duty to provide consumers with a product that
lives up to those claims that the firms expressly
made about the product which led the
customers to enter the contract freely.

20
 Moral Duties to Consumers
Under Contractual Theory (3)
 (1) Duty to comply
– Eg. Winthrop Laboratories - marketed a painkiller that it
advertised as nonaddictive. A patient using the
painkiller became addicted to it and died of overdose.
– Court found Winthrop liable for the patient’s death
because although it had expressly stated that the drug
as non addictive Winthrop Labs. had failed to live up to
its duty to comply with this express contractual claim
 Carlill Vs Carbolic Smoke Ball

21
 Moral Duties to Consumers
Under Contractual Theory (4)
 (1) DUTY TO COMPLY
– The express or implied claims that a seller might make
about the qualities possessed by the product range over
a variety of areas are affected by a number of factors.
– The definition of product quality used here is : the
degree to which product performances meet
predetermined expectation with respect to :-
– a) reliability
– b) service life
– c) maintainability
– d) safety

22
 Moral Duties to Consumers
Under Contractual Theory (5)
 (a) Reliability
– The probability that at product will function as
the consumer is led to expect that it will
function.

23
 Moral Duties to Consumers
Under Contractual Theory (6)
 (b) Service Life
– The period of time during which the product will
function as effectively as the consumer is lead
to expect it to function;
 Eg. wear and tear
– obsolescence (technological changes)

24
 Moral Duties to Consumers
Under Contractual Theory (7)
 (c) Maintainability
– The ease with which the product can be
repaired and kept in operating condition;
 Eg. warranty

25
 Moral Duties to Consumers
Under Contractual Theory (8)
 (d) Product Safety
– The degree of risk associated with using a
product.

26
 Moral Duties to Consumers
Under Contractual Theory (9)
 (2) THE DUTY OF DISCLOSURE
– An agreement is not binding unless both parties to the
agreement knows what they are doing and freely
choose to do it.
– The seller who intends to enter to contract with a
customer has a duty to disclose exactly what the
customer is buying and what the terms of the sale are.
– The seller has a duty to inform the buyer of any
characteristics of the product that could affect the
customer’s decision to purchase the product.

27
 Moral Duties to Consumers
Under Contractual Theory (10)
 For Example:-
– if the product the consumer is buying
possesses a defect that poses a risk to the
user’s health or safety, the consumer
should be so informed.
 Seller’s should also disclose a product’s
components or ingredients, its performance
characteristics, cost of operation, product ratings
and any other applicable standards.

28
 Moral Duties to Consumers
Under Contractual Theory (11)
 (3) THE DUTY NOT TO MISREPRESENT
– Misrepresentation renders freedom of choice
impossible
– Misrepresentation is coercive
– A person who intentionally misled, acts as the
deceiver wants the person to act and not as the
person would freely have chosen to act if the
person had known the truth.

29
 Moral Duties to Consumers
Under Contractual Theory (12)
– Free choice is an essential ingredient of a
binding contract - intentionally misrepresenting
the nature of a commodity is wrong.
– The deception may be created by a verbal lie as
when a new model is described as new or may
be created by a gesture as when as unmarked
used model is displayed together with several
new models.

30
 Moral Duties to Consumers
Under Contractual Theory (13)
– Varieties of Misrepresentation
 computer software or hardware manufacturer may
market a product it knows contains “bugs” without
informing the buyers of that fact.
 Manufacturer may give a product a name that the
manufacturer knows will confuse with the brand
name of a higher-quality competing product
(Microsoft).
 A producer may solicit paid “testimonials” from
professionals who have never really used the
product. Eg. Slimming products, herbal products.

31
 Moral Duties to Consumers
Under Contractual Theory (14)
 (4) DUTY NOT TO COERCE
– People act irrationally when under the influence
of fear or emotional stress.
– When a seller takes advantage of a buyer’s fear
or emotional stress to extract consent to an
agreement that the buyer would not make if the
buyer was thinking rationally, the seller is using
duress or undue influence to coerce.

32
 Moral Duties to Consumers
Under Contractual Theory (15)
– An unscrupulous funeral director may skillfully
induce guilt-ridden and grief-stricken survivors
to invest in funeral services they cannot afford.
– Entry into a contract requires freely given
consent, therefore the seller has a duty to
refrain from exploiting emotional states that
induce buyers to act irrationally against their
best interests.

33
 The Due Care Theory (1)
 The due care theory of the manufacturer’s
duties to consumers
 The view that because manufacturers are in a more
advantaged position, they have a duty to take special
care to ensure that consumers’ interests are not
harmed by the products that they offer them.
 The doctrine of caveat emptor (buyer beware) is
replaced with the doctrine of caveat vendor (seller
beware)

34
 The Due Care Theory (2)
 The “due care” view hold that because consumers
must depend on the greater expertise of the
manufacturer, the manufacturer not only has a
duty to deliver a product that lives up to the
express and implied claims about it, but also has a
duty to exercise due care to prevent others from
being injured by the product even if the
manufacturer explicitly disclaims such
responsibility and the buyer agrees to the
disclaimer (Exemption clause -reasonableness)

35
 The Due Care Theory (3)
 Due care must enter into:
– the design of the product
– the choice of reliable materials for constructing the
product
– manufacturing processes involved in putting the product
together
– the quality control used to test and monitor production
– warning, labels and instructions attached to the product

36
 The Due Care Theory (4)
 According to due care view, the
manufacturer in virtue of a greater expertise
and knowledge, has a positive duty to take
whatever steps to ensure that when the
product leaves the plant it is safe as
possible and customer has right to such
assurance.

37
 Producer’s Responsibilities
According to Due Care Theory
 (1) DESIGN
(1)
– Manufacturer should ascertain whether the design of an article
conceals any danger, whether it incorporates all feasible safety
devices, whether it uses materials that are adequate for the
purposes the product is intended to serve.
– Manufacturer must conduct research and extensive tests to
uncover any risks that will be involved in employing the article
under various conditions of use.
– This requires testing the product under different conditions of
consumer use and selecting materials strong enough to stand up to
all probable usages (Taguchi Methods)

38
 Producer’s Responsibilities
According to Due Care Theory
 (2) Production
(2)
– Production manager should control the manufacturing
processes so as to eliminate any defective items, identify
any weaknesses that become apparent during production.
– Ensure that shortcuts, substitution of weaker materials or
other economizing measures are not taken during
manufacture that would compromise the safety of the final
product.
– There must be adequate quality control over materials
that are to be used in the manufacture of the product and
over various stages of manufacture. (SPC, IPQC,
Ishikawa diagram)

39
 Producer’s Responsibilities
According to Due Care Theory
(3)
 (3) INFORMATION
– Manufacturer should fix labels, notices, or
instructions on the product that will warn the
user of all dangers involved in using or misusing
the item, and that will adequately guard the user
against harm or injury. Eg. Poison labels on
pharmaceutical products.

40
 Producer’s Responsibilities
According to Due Care Theory
(4)
– Instruction should be clear and simple, and
Instruction should be clear and simple, and
warning of any hazards involved in using or
misusing the product should be clear, simple
and prominent.
– In case of drugs, manufacturers have a duty to
warn physicians of any risks or dangerous side
effects that research or prolonged use have
revealed (Vioxx, Celebrex, Lipobay,
Phenylpropanolamine, Thalidomide)

41
 The Social Costs View of
Manufacturer’s Duties (1)
 The view that a manufacturer should pay the
costs of any injuries sustained through any
defects in the product even when the
manufacturer exercised all due care in the
design and manufacture of the product and
has taken all reasonable precautions to
warn users of every foreseen danger.

42
 The Social Costs View of
Manufacturer’s Duties (2)
 Manufacturer has a duty to assume the risks
of even those injuries that arise out of
defects in the product that no one could
reasonably have foreseen or eliminated.
 This theory is a strong version of the
doctrine caveat vendor. Let the seller take
care.

43
Strict Liability (Absolute Liability)
A legal doctrine that holds that
manufacturers must bear the costs of
injuries resulting from product defects
regardless of fault.
 The third theory formed the basis of the
legal doctrine of strict liability (Eg. Rylands v
Fletcher)

44
 The Social Cost View (1)
 Manufacturer should pay the costs of all injuries
caused by the defect in a product even if exercised
due care (Eg. Proton : defects in the steering wheel)
 Argues that injuries are external costs that should
be internalized.
– Manufacturer bear the external costs that results
from these injuries as well as the internal costs of
design and manufacture and all costs are
internalized and added on as part of the price of
the product.

45
 The Social Cost View (2)
 Internalizing all costs in this way, will lead to a more
efficient use of society’s resources:
– First, because the price will reflect all the costs of
producing and using the artifact, market forces will
ensure that the product is not over produced and
resources are not wasted on it.
– Second, since manufactures have to pay the costs for
the injuries they will be motivated to exercise greater
care and reduce the number of accidents.

46
 Criticism of the Social Cost View
 Unfair to manufacturers since it forces them to compensate
unforseeable injuries.
 Assumption that adherence to the social cost view will
prevent accidents is false.
– By relieving consumers of the responsibility of paying for
their own injuries the social costs theory will encourage
carelessness in consumers
 Leads to successful consumer lawsuits in cases where
manufacturers took all due care.

47
 Production Ethics - Benefits
• Ethical Behavior can be good for sales
• “Ethical behavior can improve the
recruitment and retention of staff
Eg: Mark and Spencer
• Ethical behavior can motivate
employees

48
 Production Ethics - Drawbacks
 Increase in Costs
 Loss of profit
 Conflicts: Profit vs. Ethics
 Huge Range of Business practice

49
Controlling Environmental Cost
 “Through Government regulation”…
Setting limits on the maximum amount of pollution.
 “Through Taxation”…
The aim of taxation is to ensure that the “social
cost” of any pollution caused by a firm is paid for.
(E.g. A firm which produces a $5 product with
“Environmental unfriendly” packaging might be
taxed $0.50 for this packaging, raising the price to
$ 5.50.)

50
 Controlling Environmental Cost
 “Through Compensation”…
Firms could be forced by law to compensate those affected by such negative
externalities.
(E.g. Airport might provide grants to nearby residents, so that they can
purchase double glazing and other types of insulation, which provide
protection from aircrafts noise.)
 “Pollution Permits”…
These allow businesses a certain amount of emissions. If the business
reduces its pollution below a certain level, it can save the allowance and sell
it.
 Other alternatives including:
 Education,
 Government subsidization,
 Consumers pressure, etc…

51
 Encouraging Ethical Behaviour
 Government intervention:
Government can intervene directly to ensure that a
business accepts the consequences of its behavior.
(E.g. in Germany, all retailers and manufacturers are
required to recycle 80% of their packaging.)
 Self regulation:
Government can work with particular industries and
business sectors to encourage the creation of regulatory
bodies which help to control the activities of business.
(E.g. the Press Complaints Authority and The Advertising
Standards Authority in UK.)

52
 Encouraging Ethical Behaviour
 Market pressure:
Some commentators believe that there is no need for
government to exert direct pressures on businesses to
act responsibly because the ‘free market’ will act
effectively to police less responsible businesses. The
argument is that such businesses will be unpopular with
consumers, who will be less likely to purchase their
products. Thus consumers’ behavior will force
irresponsible businesses to act with greater
accountability.
 Pressure group:
Pressure group such as animal welfare pressure group
can sometimes exert influence over firms.

53
THANK YOU

54