Business and society ethics

Business Ethics

Dick Grasso was paid compensation that was deemed to be excessive. Grasso's compensation at one point was in the same ballpark as what the NYSE made. The scandal had poor optics - it looked bad on the NYSE to have paid their top executive so much.

The stakeholders are Grasso, the NYSE, and Eliot Spitzer. Grasso's stake is personal reputation and over $100 million. The NYSE's stake is their reputation. Spitzer's stake is also reputation, that of himself and that of the state of New York's control over the stock market.

The NYSE has no social responsibility to pay Grasso a salary within any band. The board of directors of the NYSE is free to pay Grasso whatever they want, and he is free to accept it. There is no logical or ethical reason for Spitzer and the state to become involved, other than the optics.

Ethically, there is nothing wrong with offering or accepting substantial amounts of compensation. The board of directors of the New York Stock Exchange is responsible to those entities with an ownership stake in the exchange and nobody else. They are all financially savvy individuals and part of their job is to understand executive compensation. Therefore, it is reasonable that they paid Grasso an amount that they felt was fair. No ethical issue can come from that. It may look bad in the public eye, but Grasso's compensation is a professional matter between him and the board. The firing of Grasso smacks of political pandering, and was unjust. Ethically and legally, a firing should be conducted on the basis of job performance, not optics.

Case 7: Character is an essential component of leadership. A business is an organization of people, working towards a goal. The leader must be able to lead the people, and to do that must have their respect. Moreover, the CEO role is a position of trust. The board is entrusting the CEO with substantial amount of power and control. The CEO has that control on the understanding that they are working on behalf of the shareholders, and working in the best interests of other key stakeholders such as the employees. If a CEO lacks integrity, that will trickle down through the organization, as was endemic at Tyco in the early 90s, for example.

The waiter rule is simplistic, but reasonable. When a person is in a position of power, others see them and treat them differently. The key to the waiter rule is that it represents the removal of the veil - you see the person for how they really are rather than how they want you to see them. In that regard, the rule is effective. But it is by no means foolproof. A single incident is not always a valid way in which to judge a person's character. Character is a trait that often emerges over time. The waiter rule is valid is a rule of thumb, but is not something that should be relied upon for a position as important as that of the CEO.

I do agree that boards should consider character when hiring for executive positions, simply because of the level of control executives have, but the waiter rule is not the most effective way to judge character. Moreover, it has been presented as a critical component of CEO hiring, and that is entirely absurd. There are many important parts to the CEO's role, and the waiter test only tests one of those components, and not very well. While I can understand the underlying principle of the waiter rule, its practical application is problematic.

Case 10: Martha Stewart traded stock based on information that Sam Waksal and his family had dumped ImClone stock. The Waksal clan had done this prior to a public announcement about the failure of their new cancer drug to receive FDA approval.

The stakeholders were Stewart, Stewart's broker and the government. Ultimately, the Waksals were not directly involved in Stewart's ethical situation. The issue was whether or not it was unethical to dump ImClone stock based on the information she had. One of the fundamental principles of the market is that it must work fairly for everybody.

What Stewart did was illegal and unethical. I do not feel that she was a scapegoat, except maybe in the media. Many other corporate scandals of the era were resolved with serious jail time; Bernard Ebbers of WorldCom received twenty-five years for his crimes. Stewart's crime was different ethically because she did not directly hurt others, but rather hurt them by proxy by undermining the integrity of the stock market.

The sentence for Stewart was fair. Five months is a tough stand, but in the grand scheme of things it is a light sentence. If I was on the board of MSO, I would not hesitate to bring Ms. Stewart back as an executive. Her ethical misjudgment occurred with her own stock portfolio. There is no evidence that she compromised MSO with her actions. Furthermore, she built the company herself and has proven herself successful in the position.

Her history does not affect my opinion on her products. I feel she made a poor decision, but that her offense is hardly so grave as to warrant an unforgiving attitude.

Case 13: The case surrounds the issue of whether ethics in golf relate to ethics in business. Most CEOs cheat at golf, yet few think they cheat at business. But is it ethical to cheat at golf?

I do feel that we live in a cheating culture. The fact remains that rules are only as good as their enforcement. This is probably one key difference between cheating on the course and cheating in the boardroom. Golf is not managed by strong rule of law - transgressions are rarely prosecuted and punishments, if any, are minimal. Therefore golf course ethics are not an indictment of an executive's character in business. However, they are a measure of the executive's character. If the executive cheats at golf, they are liable to cheat in business, at least when they consider the stakes or the punishment to be low.

But it is that dichotomy surrounding the rule of law that differentiates ethics in one's personal life with those in their professional life. The rule of law plays a significant role in curbing one's tendencies towards unethical behavior. Businesspeople are accustomed to making rational decisions. Therefore, if the punishment for transgression is severe, they will behave ethically. For most of us, ethical transgressions in our personal lives are not punished severely. In the golf game, the punishment is never going to be severe. In business, the CEO could lose his job or go to jail. This marks a fundamental difference between the two situations.

Another fundamental difference is the nature of the rule. Golf rules are, for those not competing in the professional ranks, somewhat arbitrary. A wager is an informal competition, guided only by the rules the competitors agree to. In business, the rules are not arbitrary, but codified laws set out to ensure a high standard of behavior. Moreover, while CEOs on the course are merely hacking around, they are top-level professionals in business.

Case 15: The ethical issue in this case is whether to follow the company rules or not. A second ethical issue exists with regards to Jane's duty to the other sales reps.

In this situation, Jane should have simply filled her expense reports out properly, as she was trained to do. This would absolve her of any ethical issues with regards to the company. Jane owes no duty to the other reps, and therefore there is no ethical quandary with regards to exposing their fraud. Her only duty is to the company and as long as she fulfills that duty, she has no ethical or legal issues to worry about.

For Jane, if she reported the expenses properly, she may have been out of pocket on occasion. However, she would have been in solid legal standing, and the company would have paid her what she was owed. Had she inflated the expense report, she was at risk of losing her job.

Deontological principles could guide Jane here. Ann is appealing to a consequential logic, one in which a small wrong should be committed because the outcome could be negative for others. However, Jane needs to consider that the outcome is only negative because the others have transgressed in inflating their expense reports. Had they behaved ethically in the first place, they would not be exposed. Jane should therefore focus on doing the right thing herself, since her only duty is owed to the company and to herself.

Case 17: There are many ethical issues in this case. First is the issue of whether a person can be considered "illegal," especially in a land almost exclusively populated by immigrants. The second is with regards to the primary responsibility of business. The third is with regards to the primary responsibility of government. Illegal immigration, therefore, is primarily a political issue. The treatment of the undocumented workers has legal and economic implications, but is only an issue in the political arena.

Companies that hire illegal immigrants are being socially responsible. The argument that illegals suppress wages is not based on sound evidence - the jobs illegals do would otherwise be unfilled. If anything, hiring illegals is socially responsible because it gives those people an opportunity to better themselves, something they otherwise would not have had. The notion is especially absurd given that 99% of Americans received this same opportunity at some point in their own family's history. Furthermore, mankind has an obligation to look out for our fellow man. This duty transcends any sense of duty to a state or that state's rule of law.

The only small issue with regards to illegal immigrants is that with regard to legal immigrants, those who play by the rules, sometimes to their detriment. However, following legal channels may take longer but results in the ability to pursue meaningful employment, which illegals do not usually receive. This means that there are essentially two streams for new immigrants. Companies should continue to hire whoever they choose - it works well for the companies, helps grow the nation's economy and benefits the workers and their families. Moreover, the main duty of the company is to its shareholders, therefore the profit motive trumps all other considerations.

Case 21: Consumer groups are justified in their opposition to Coke on account of their use of sodium cyclamate. There is enough reason to believe that Coke leveraged their contacts to have the sweetener approved. Coke may have had a role in the approval. They have strong connections in government, and if the sweetener had been approved in other countries, it is reasonable to expect that they would have lobbied for it. The consumer groups would be equally justified whether Coke used influence or not, because they should be upset that such chemicals are being marketed as food. Moreover, if the FDA has not approved it, the groups have a right to know what the difference is, given that the FDA is the de facto worldwide standard for food safety.

Coca-Cola should have anticipated the reaction. They are using a substance that was once banned. They could have mitigated the situation, however, by providing knowledge ahead of and in conjunction with the Coke Zero launch. If the product is in fact safe, this should have been communicated openly.

What Coke should do now is to stay the course, and continue to use sodium cyclamate. To switch to another sweetener would be perceived as an admission of guilt, and would likely hurt Coke's image and market share more than continued use of the product. Furthermore, if they believe in the safety of sodium cyclamate enough to use it, they should believe in it enough to continue using it.

Also, if Coke believes that the product would pass an FDA test today, they should pursue that. A successful pass would end the controversy in Mexico almost immediately.

Case 22: There are several ethical issues in this case. One issue is the duty of care owed to workers at subcontracted firms by Nike. Another issue is the concept of living wage in an economic system driven by supply and demand. Yet another issue is the role of organized labor in the antisweatshop movement.

It is ethical for Nike to pay its endorsers millions no matter the wage of the factory workers, because the endorsers are worth more to the company. Endorsers in the athletic shoe business are worth millions of dollars in business every year. Nike's efforts were an economic responsibility, since the bad press had become potentially damaging to sales and share price. There is little Nike could have done to salvage its reputation - their opponents cared little for facts. One cannot use truth or reason to mitigate those types of attacks.

The AFL-CIO is using the antisweatshop movement to further its goals. It wants to eliminate competition by erecting trade barriers and lowering the competitive gap between nations. The students are definitely being used by the AFL-CIO, as they have greater moral ground than organized labor, and less obvious profit motive.

Nike's response has been to improve their governance of the factories in which their products are made. The implications of this are that firms can lose revenues if they do not monitor their overseas suppliers. It is critical for firms to avoid becoming the poster child for unethical behavior, which makes the firm a target for irrational and dishonest complainants.