Business Ethics

Lecture# 1
Handout
Lets begins with a case study of Merck and Company, discussing how they dealt with the
problem of developing a drug that was potentially life-saving but which presented them
with little, if any, chance of earning a return on their investment.

The drug was Ivermectin, one of their best-selling animal drugs. The potential market for
the drug was those suffering from river blindness an agonizing disease afflicting about 18
million impoverished individuals in Africa and Latin America. The disease is particularly
horrendous: worms as long as two feet curl up in nodules under an infected person's skin,
slowly sending out offspring that cause intense itching, lesions, blindness, and ultimately
death (though many sufferers actually commit suicide before the final stage of the
disease).

The need for the drug was clear. However, the victims of river blindness are almost
exclusively poor. It seemed unlikely that Merck would ever recoup the estimated $100
million it would cost to develop the human version of the drug. Moreover, if there proved
to be adverse human side effects, this might affect sales of the very profitable animal
version that were $300 million of Merck’s $2 billion annual sales. Finally, Congress was
getting ready to pass the Drug Regulation Act, which would intensify competition in the
drug industry by allowing competitors to more quickly copy and market drugs originally
developed by other companies.

Questions: Was Merck morally obligated to develop this drug?

Their managers felt, ultimately, that they were. They even went so far as to give the drug
away for free. This story seems to run counter to the assumption that, given the choice
between profits and ethics, companies will always choose the former. The choice,
however, may not be as clear-cut as this dichotomy suggests. Some have suggested that,
in the long run, Merck will benefit from this act of kindness just as they are currently
benefiting from a similar situation in Japan.

Even so, most companies would probably not invest in an R & D project that promises no
profit. And some companies often engage in outright unethical behavior. Still, habitually
engaging in such behavior is not a good long-term business strategy, and it is the view of
this book that, though unethical behavior sometimes pays off, ethical behavior is better in
the long run.

A more basic problem is the fact that the ethical choice is not always clear. Merck, as a
for-profit corporation, has responsibilities to its shareholders to make a profit. Companies
that spend all their funds on unprofitable ventures will find themselves out of business.
This book takes the view that ethical behavior is the best long-term business strategy for
a company—a view that has become increasingly accepted during the last few years. This
does not mean that occasions never arise when doing what is ethical will prove costly to a
company. Such occasions are common in the life of a company, and we will see many
examples in this book. Nor does it mean that ethical behavior is always rewarded or that
unethical behavior is always punished. On the contrary, unethical behavior sometimes
pays off, and the good guy sometimes loses. To say that ethical behavior is the best long-
range business strategy means merely that, over the long run and for the most part, ethical
behavior can give a company significant competitive advantages over companies that are
not ethical. The example of Merck and Company suggests this view, and a bit of
reflection over how we, as consumers and employees, respond to companies that behave
unethically supports it. Later we see what more can be said for or against the view that
ethical behavior is the best long-term business strategy for a company.

This text aims to clarify the ethical issues that managers of modern business
organizations must face. This does not mean that it is designed to give moral advice to
people in business nor that it is aimed at persuading people to act in certain moral ways.
The main purpose of the text is to provide a deeper knowledge of the nature of ethical
principles and concepts and an understanding of how these apply to the ethical problems
encountered in business. This type of knowledge and understanding should help
managers more clearly see their way through the ethical uncertainties that confront them
in their business lives—uncertainties such as those faced by the managers of Merck.

1.1 Business Issues and Its Issues

According to the dictionary, the term ethics has a variety of different meanings. One of
its meanings is: "the principles of conduct governing an individual or a group”. We
sometimes use the term personal ethics, for example, when referring to the rules by
which an individual lives his or her personal life. We use the term accounting ethics
when referring to the code that guides the professional conduct of accountants.

A second—and more important—meaning of ethics, according to the dictionary, is:

This chapter discusses the case of B.F. Goodrich to clarify these definitions. Kermit
Vandivier was presented with a moral quandary: he knew that Goodrich was producing
brakes for the U.S. government that were likely to fail, but was required by his superiors
to report that the brake passed the necessary tests. His choice was to write the false report
and go against his ethical principles, or be fired and suffer the economic consequences.

He chose the former, even though his moral standards were in conflict with his actions.
Such standards include the norms we have about the kinds of actions we believe are right
and wrong, such as "always tell the truth." As Vandivier shows, we do not always live up
to our standards.

There are other types of standards as well, such as standards of etiquette, law, and
language. Moral standards can be distinguished from non-moral standards using five
characteristics:

1. Moral standards deal with matters that can seriously injure or benefit humans.
For example, most people in American society hold moral standards against theft,
rape, enslavement, murder, child abuse, assault, slander, fraud, lawbreaking, and
so on.
2. Moral standards are not established or changed by authoritative bodies. The
validity of moral standards rests on the adequacy of the reasons that are taken to
support and justify them; so long as these reasons are adequate, the standards
remain valid.
3. Moral standards, we feel, should be preferred to other values, including self-
interest.
This does not mean, of course, that it is always wrong to act on self-interest; it
only means that it is wrong to choose self-interest over morality
4. Moral standards are based on impartial considerations. The fact that you will
benefit from a lie and that I will be harmed is irrelevant to whether lying is
morally wrong.
5. Moral standards are associated with special emotions and a special vocabulary
(guilt, shame, remorse, etc.). The fact that you will benefit from a lie and that I
will be harmed is irrelevant to whether lying is morally wrong.

Ethics is the discipline that examines one's moral standards or the moral standards of a
society. It asks how these standards apply to our lives and whether these standards are
reasonable or unreasonable—that is, whether they are supported by good reasons or poor
ones. Therefore, a person starts to do ethics when he or she takes the moral standards
absorbed from family, church, and friends and asks: What do these standards imply for
the situations in which I find myself? Do these standards really make sense? What are the
reasons for or against these standards? Why should I continue to believe in them? What
can be said in their favor and what can be said against them? Are they really reasonable
for me to hold? Are their implications in this or that particular situation reasonable?

Taking Vandivier as an example, we might ask if writing the false report was really
wrong given his responsibilities to support his family. Moreover, the company, not
Vandivier, would be held responsible for any faulty brakes. Finally, even if he did not
cooperate and was consequently fired, the brakes would still be manufactured and
installed. The consequences of writing the report or not would be the same, except that if
he chose not to participate he would be fired. It is in considering such points that we
begin to do ethics.

Ethics is the study of moral standards—the process of examining the moral standards of a
person or society to determine whether these standards are reasonable or unreasonable in
order to apply them to concrete situations and issues. The ultimate aim of ethics is to
develop a body of moral standards that we feel are reasonable to hold—standards that we
have thought about carefully and have decided are justified standards for us to accept and
apply to the choices that fill our lives.
Ethics is not the only way to study morality. The social sciences—such as anthropology,
sociology, and psychology—also study morality, but do so in a way that is quite different
from the approach to morality that is characteristic of ethics. Although ethics is a
normative study of ethics, the social sciences engage in a descriptive study of ethics.