HANDOUT I

Ethics and Business

Introduction: -

There is no better way to begin an investigation into the relationship between ethics and
business than by looking at how real companies have attempted to incorporate ethics into
business. Consider, then how one company, Merck and Company dealt with the issue of
“river blindness”.

River blindness is an agonizing disease that afflicts some 18 million impoverished people
living in remote villages along the banks of rivers in tropical regions of Africa and Latin
America. The disease is caused by a tiny parasitic worm that is passed from person to
person by the bite of the black fly which breeds in river waters. The worms burrow under
a person’s skin where they grow as long as two feet curled up inside ugly round nodules
half an inch to an inch in diameter. Inside the nodules the worms reproduce by releasing
million of microscopic offspring called microfilaria that wriggle their way throughout the
body moving beneath the skin, discoloring it as they migrate, and causing lesions, and
such intense itching that victims sometimes commit suicide. Eventually, the microfilaria
invade the eyes and gradually blind the victim.

Spraying pesticides to eradicate the black fly faltered when it developed immunity to the
pesticides. Moreover, the only drugs available to treat the parasite in humans have been
so expensive, have such severe side effects, and require such lengthy hospital stays that
the treatments are impractical for the destitute victims who live in isolated villages. In
many countries people have fled the areas along the rivers, abandoning large tracts of rich
fertile land. Many of them, however eventually return because distant lands prove
difficult to farm. Most villagers along the rivers come to accept the nodules, the torturous
itching, and eventual blindness as an inescapable part of life.
In 1979, Dr. William Campbell a research scientist working for Merck and Company, an
American drug company discovered evidence that one of the company’s best selling
animal drugs Ivermectin, might kill the parasite that cause river blindness. Campbell and
his research team therefore petitioned Merck’s chairman, Dr. P. Roy Vagelous, to allow
them to develop a human version of the drug, which up to then was used only on animals.
Merck managers quickly realized that if the company succeeded in developing a human
version of the drug the victims of the disease were too poor to afford it. The medical
research and large scale clinical testing required to develop a version of the drug for
humans could cost over $100 million. It was unlikely the company could recover these
costs or that a viable market could develop in the poverty stricken regions were
affordable, it would be virtually impossible to distribute it since victims lived in remote
areas, and had no access to doctors, hospitals, clinics, or commercial drugs outlets. Some
managers also pointed out that if the drug had adverse side effects when administered to
humans, ensuing bad publicity might taint the drug and adversely affect sales of the
animal version of the drug which were about $300 million a year. The risk of harmful
side effects was heightened by the possibility that incorrect use of the drug in
underdeveloped nations could increase the potential for harm and bad publicity. Finally if
a cheap version of the drug was made available, it might be smuggled to black markets
and sold for use on animals there by undermining the company’s lucrative sales of
Ivermectin to veterinarians.

Merck manager were undecided what to do. Although the company had worldwide sales
of $2 billion a year, its net income as a percent of sales was in decline due to the rapidly
rising costs of developing new drugs, the increasingly restrictive and costly regulations
being imposed by government agencies a lull in basic scientific breakthroughs, and a
decline in the productivity of company research programs. 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. As a result of increasing public concern over rising health costs,
government programs such as Medicare and Medicaid had recently put caps on
reimbursements for drugs and required cheaper generic drugs in place of the branded
name drugs that were Merck’s major source of income. In the face of these worsening
conditions in the drug industry, Merck managers were reluctant to undertake expensive
projects that showed little economic promise, such as the suggested development of a
drug for river blindness. Yet without the drug millions would be condemned to lives of
intense suffering and partial or total blindness.

After many earnest discussions among Vagelos and his management team they came to
the conclusion that the potential human benefits of a drug for river blindness were too
significant to ignore. Many of the managers felt, in fact, that because of these human
benefits the company was morally obligated to proceed in spite of the costs and the slim
chance of economic reward. In late 1980, Vagelos and his fellow managers approved a
budget that provides the sizable funding needed to develop a human version of
Ivermectin.
After seven years of expensive research and numerous clinical trials, Merck succeeded in
developing a human version of Ivermectin: A single pill of the new drug taken once a
year would eradicate from the human body all traces of the parasite that caused river
blindness and would prevent new infections. Unfortunately exactly as the company had
earlier suspected no one stepped forward to buy the miraculous new pill. Merck officials
pleaded with the world Health Organization the U.S. Government and the governments of
nations afflicted with the disease, asking that someone –anyone- come forward to buy the
drug to protect the 85 million people who were at risk for the disease. None responded to
the company’s pleas. Merck decided therefore that it would give the drug away for free to
potential victims. However this plan proved difficult to implement because as the
company had earlier feared there were no established distribution channels to get the drug
to the people who desperately needed it. Working with the World Health Organization
therefore the company financed an international committee to provide the infrastructure
to distribute the drug safely to people in the third world and to ensure it would not be
diverted into the black market to be sold for use on animals. By 1996 the committee
working with government and private voluntary organizations, had provided the drug to
millions of people effectively transforming their lives and relieving the intense suffering
and potential blindness of the disease.
Asked why the company had invested so much money and effort into researching
developing, manufacturing and distributing a drug that made no money Dr. P. Roy
Vagelos replied in an interview that once the company suspected that one of its animal
drugs might cure a severe human disease that was ravaging people the only ethical choice
was to develop it. Moreover people in the third world “will remember” that Merck helped
them he commented and would respond favorably to the company in the future. Over the
years the company had learned Vagelos claimed that such actions have strategically
important long- term advantages. “When I first went to Japan fifteen years ago, I was told
by Japanese business people that it was Merck that brought streptomycin to Japan after
World War II to eliminate tuberculosis which was eating up their society. We did that. We
did not make any money. But it’s no accident that Merck is the largest American
pharmaceutical company in Japan today”.

Having looked at how Merck and Company dealt with their discovery of a cure for river
blindness, let us now return to reflect on the relationship between ethics and business.
Pundits sometimes quip that “business ethics” is a contradiction in terms because there is
an inherent conflict between ethics and the self- interested pursuit of profit. When ethics
conflicts with profits they imply businesses always choose profits over ethics. Yet, the
case of Merck and company suggests a somewhat different perspective, a perspective that
many companies are increasingly taking. The management of this company spent tens of
millions of dollars developing a product that they knew had little chance of ever being
profitable because they felt they had an ethical obligation to make its potential benefits
available to people. In this case at least a large and very successful business chose ethics
over profits. Moreover, the comments of Vagelos at the end of the case suggest that in the
long run there may be no inherent conflict between ethical behavior and the pursuit of
profit. The comments of Vagelos suggest, on the contrary that ethical behavior creates the
kind of goodwill and reputation that expand opportunities for profit.

Not all companies of course operate like Merck and many perhaps even most companies
will not invest in a research and development project that they have good reason to
suspect will prove unprofitable. A glance at the headlines of newspapers in fact will
reveal many cases of companies that choose profits over ethics and enough cases of
companies that have profited through unethical behavior. Although companies often
engage in unethical behavior however habitual unethical behavior is not necessarily a
good long- term business strategy for a company. Ask yourself for example whether, as a
customer you are more likely to buy from a business that you know is honest and
trustworthy or from one that has earned a reputation for being dishonest and crooked? Or
ask yourself whether as an employee you are more likely to loyally serve a company
whose actions towards you are fair and respectful or one that habitually treats you and
other workers unjustly and disrespectfully? Clearly when companies are competing
against each other for customers and for the best workers, the company with a reputation
for ethical behavior has an advantage over one with a reputation for being unethical.
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. Neither does it mean that ethical behavior is always rewarded nor
that unethical behavior is always punished. On the contrary, unethical behavior
sometimes pays of 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 will se what more can be said for or against
the view that ethical behavior is the best long- term business strategy for a company.
The more basic problem is of course that the ethical course of action is not always clear
to a company’s managers. In the Merck case, some company managers including Dr. Roy
Vagelous, the company’s CEO felt it was clear that the company had an ethical obligation
to proceed with the development of the drug. Yet the issue was perhaps not as clear as
they claimed. Don’t the managers of the company have a duty toward investors and
shareholders to invest their funds in a profitable manner? Indeed if a company spent all of
its funds on charitable projects that lost money would not it soon be out of business? And
then wouldn’t its shareholders be justified in claiming that the company’s managers had
spent their money unethically? Is it so clear then that Merck had an ethical obligation to
invest in an unprofitable drug? Can any good reason be given for the claim that Merck
had an obligation to develop the drug? Can any good reason be given for the claim that
Merck had an obligation to develop the drug? Can any good reason be given for the claim
that Merck had no such obligation? Which view is supported by the strongest reasons?

Although ethics may be the best policy then the ethical course of action is not always
clear. The purpose of this book is to help the reader deal with this lack of clarity.
Although many ethical issues remain difficult and obscure even after a great deal of study
nevertheless gaining a better understanding of ethics will help the manager deal with
ethical uncertainties in a more adequate and more informed manner.

Ethics

What then is ethics? Ethics is the activity of examining ones moral standards or the moral
standards of a society, and asking how these standards apply to our lives and weather
these standards are reasonable or unreasonable, that is, whether they are supported by
good reason 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?

Take Vandivier and the B.F. Goodrich case as an example. Vandivier had apparently been
raised to accept the moral standard that one has an obligation to tell the truth, and so he
felt that in his particular situation it would be wrong to write a false report on the break.
But we might ask whether writing what we felt was a false report was really wrong in his
particular circumstances. Vandivier had several important financial obligations both
toward himself and toward other people. He states, for example that he had just married
and that he had just bought a house and so he had mortgage payments to make each
month and had to provide support for his family. If he did not write the report as he was
ordered to do then he would be fired and not be able to live up to these obligations. Don’t
these moral obligations toward himself and his family outweigh his obligation not to
write a false report? What is the basis of his obligation to tell the truth and why is the
obligation to tell the truth greater or lesser than a person’s obligations toward himself and
his family? Consider next Vandivier’s obligations toward his employer? Does the
obligation to obey ones employer outweigh the obligation not to write a false report?
What is the source of both of these obligations and what makes one greater or lesser than
another? Consider also that the company B.F. Goodrich and all its managers insisted that
the best course of action was to write the report qualifying the brake. If sometimes went
wrong with the brake or the contract the company B.F. Goodrich, would be held
accountable not Vandivier who the company B.F. Goodrich would be held accountable
not Vandivier who was a lower-level employee. Since the company not Vadivier would be
held accountable did the company have the moral right to make the final decision about
the report instead of Vandivier who was a lower- level employee? Does the moral right to
make a decision belong to the party that will be held accountable for the decision? W hat
is the basis of such a right and why should we accept it? Consider finally that Vadivier
states that in the end his personal refusal to participate in writing the report would have
given him some “satisfaction” but would have made no difference to what happened
since someone else would have been hired to write the report. Since the consequences
would be the same whether he agreed or refused, did he really have a moral obligation to
refuse? Does one have a moral obligation to do something that will make no difference?

Notice the sort of question that Vandivier’s case leads to ask. They are questions about
whether it is reasonable to apply various moral standards to his situation questions about
whether it is reasonable to say that one moral standard is more or less important than
another and question about what reasons we might have even to hold these standards.
When a person asks these kinds of questions about his or her moral standards. When a
person asks these kinds of questions or about the moral standards of his or her society the
person has started to do ethics. Ethics is the study of moral standards because it is the
process of examining the moral standards of a person or society in order to determine
whether these standards are reasonable or unreasonable, and 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 choice
that fill our lives.

Ethics is not the only way to study morality. The social sciences, in fact also study
morality but do so in a way that is quite different from the approach to morality that is
characteristic of ethics. While ethics is normative study of ethics, the social sciences
engage in a descriptive study of ethics. A normative study is an investigation that
attempts to reach normative conclusions that is conclusions about what things are good or
bad or about what actions are right or wrong. In short a normative study aims to discover
what ought to be. As we have seen ethics is a study of moral standards whose explicit
purpose is to determine as far as possible which standards are correct or supported by the
best reasons, and so it attempts to reach conclusions about moral right and wrong and
moral good and evil.

Business Ethics

This characterization of ethics has been intended to convey an idea of what ethics is. Our
concern here however is not with ethics in general but with a particular field of ethics:
business ethics. Business ethics is a specialized study of moral right and wrong. It
concentrates on moral standards as they apply particularly to business policies,
institutions and behavior.
As this description of business ethics suggests, the issue that business ethics covers
encompass a wide variety of topics. To introduce some order into this variety it will help
if we distinguish three different kinds of issues that business ethics investigates: systemic,
corporate, and individual issues. Systemic issues in business ethics are ethical questions
raised about the economic, political, legal and other social systems within which business
operate. These include questions about the morality of capitalism or of the laws,
regulations, industrial structures, and social practices within which American business
operate.

Moral Development And Moral Reasoning

Level one: Pre-conventional Stages

At these first two stages the child is able to respond to rules and social expectations and
can apply the labels “good”, “bad”, “right” , “wrong”. These rules, however are seen as
something external imposed on the self. Right and wrong are interpreted in terms of the
pleasant or painful consequences of actions or in terms of the physical power of those
who set the rules. If one were to ask a five year-old for example whether stealing is
wrong she or he will say it is; If one then asks the child why it is wrong the answer will
be something like, “Because Mommy will punish me if I steal”. The child can see
situations only from his or her own point of view and since the child does not yet have
the ability to identify with others to any great extent, the primary motivation is self-
centered.

Stage One: Punishment and Obedience Orientation:

At this stage the physical consequences of an act wholly determine the goodness or
badness of that act. The child reasons for doing the right thing are to avoid punishment or
to defer to the superior physical power of authorities. There is little awareness that others
have needs and desires similar to ones own.

Stage Two: Instrument and Relativity Oriented

At this stage the right actions become those that can serve as instruments for satisfying
the child’s own needs or the needs of those for whom the child cares. The child is now
aware that others have needs and desires similar to his or her own and begins to defer to
them in order to get them to do what he or she wants.
Level Two: Conventional Stages

Maintain the expectations of ones own family peer group or nation is now seen as
valuable in its own right regardless of the consequences. The person at this level of
development does not merely conform to expectations but exhibits loyalty to the group
and its norm. If one were to ask an adolescent at this level about why something is wrong
or why it is right for example the adolescent would probably answer in terms of “what
my friends think”, or “what my family has taught me”, or “what we Americans hold” or
even, “what our laws say”.
The adolescent at this stage is now able to see situations from the point of view of others
but the only perspectives the adolescent can take up are the familiar viewpoints of the
people who belong to the adolescent’s own social groups such as her family, her pets, her
organization, her nation, her social class and she assumes that “everyone” is like them.
The person is motivated to conform to the group’s norms and subordinates the needs of
the individual to those of the group.

Stage Three: Interpersonal Concordance Orientation

Good behavior at this early conventional stage is living to the expectations of those for
whom one feels loyalty, affection and trust such as family and friends. Right action is
conformity to what is generally expected in ones role as a good son, daughter, brother,
friend, and so on. Doing what is right is motivated by the need to be seen as a good
performer in ones own eyes and in the eyes of others.

Stage Four: Law and Order Orientation

Right and wrong at this more mature conventional stage now come to be determined by
loyalty to ones own larger nation or surrounding society. Laws are to be upheld except
where they conflict with other fixed social duties. The person is now able to see other
people as parts of a larger social system that defines individual roles and obligations, and
he or she can separate the norms generated by this system from his or her interpersonal
relationships and motives.
Level Three: Post-conventional, Autonomous, or Principled Stages

At these stages the person no longer simply accepts the values and norms of the groups to
which he or she belongs. Instead the person now tries to see situations from a point of
view that impartially takes everyone’s interest into account. The person questions the
laws and values that society has adopted and redefines them in terms of self-chosen moral
principles that can be justified in rational terms. If an adult at this stage is asked why
something is wrong., the person will respond in terms of what has been decided through
processes that are “fair to everyone”, or in terms of “justice”, or “human rights”’ or
“society’s over-all welfare”. The proper laws and values are those, which conform to
principles to which any reasonable person would be motivated to commit himself or her
self.

Stage Five: Social Contract Orientation

At this first post-conventional stage, the person becomes aware that people hold a variety
of conflicting personal views and opinions, and emphasizes fair ways of reaching
consensus by agreement, contract, and due process. The person believes that all values
and norms are relative and that apart from this democratic consensus all should be
tolerated.

Stage Six: Universal Ethical Principles Orientation

At this final stage right action comes to be defined in terms of moral principles chosen
because of their logical comprehensiveness, their universality and their consistency.
These ethical principles are not concrete like the ten commandments but abstract general
principals dealing with justice, society’s welfare, the equality of human rights, respect for
dignity of individual human beings and with the idea that persons are ends in themselves
and must be treated as such. The person’s reasons for doing what is right are based on a
commitment to these moral principles, and the person sees them as the criteria for
evaluating all other moral rules and arrangements including democratic consensus.
Moral Reasoning

We have used the term moral reasoning repeatedly. What does the term mean? Moral
reasoning process by which human behaviors, institutions or policies are judged to be in
accordance with or in violation of moral standards. Moral reasoning always involves two
essential components: 1) an understanding of what reasonable moral standards require,
prohibit, value or condemn and 2) evidence or information that shows that a particular
person, policy, institution, or behavior has the kinds of features that these moral standards
require, prohibit, value, or condemn. Here is an illustration of moral reasoning whose
author is offering us his reasons for claiming that American social institutions are unjust.

The nonwhite … living in American society, fight for American society thereby enabling
others to live disproportionately well. But the non-white… do not share in the benefits of
the American society in which they live and for which they fight and to which they
contribute. Forty-one percent of Negroes fall below the poverty line as compared with 12
percent of whites. Infant mortality is three times high among nonwhite babies as among
white. Whereas Negroes make up 11 percent of the nations work force they have but 6
percent of the nations technical and professional jobs, 3 percent of the managerial jobs,
and 6 percent of jobs in skilled trades. Discrimination which prevents people from getting
out of their society what they contribute is unjust.

In this example the author has in mind a moral standard which he sets out at the end of
the paragraph: “ Discrimination which prevents people from getting out of their society
what they contribute is unjust”. The rest of the paragraph is devoted to citing evidence to
show that American society exhibits the kind of discrimination proscribed by this moral
principle. The author’s moral judgment that American society is unjust then is based on a
chain of reasoning that appeals to a moral standard and to evidence that American society
has the features condemned by this standard. Schematically then moral or ethical
reasoning usually has the kind of structure indicated in the figure.
 Factual information Moral judgment on the
Moral Concerning the policy, rightness or wrongness
Standards institution or behavior of the policy,
under consideration institution or behavior

Example: A society is Example: In American society Example: American

unjust if it does not treat 41% of Negroes fall below the society is unjust.
minorities equal to whites. poverty line as compared with 12% whites.

In many cases one or more of the three components involved in a person’s moral
reasoning will not be expressed. More often than not in fact people will fail to make
explicit the moral standards on which their moral judgment are based. A person might say
for example: “American society is unjust because it allows 41 percent of Negroes to fall
bellow the poverty line as compared with 12 percent of whites”. Here the unspoken moral
standard on which the judgment “American society is unjust” is based on something such
as “A society is unjust if it does not treat minorities equal to the majorities equal to the
majority”. And the disproportionate number of Blacks that fall below the poverty line is
being cited as evidence that minorities in America are not treated equally to white
majority. The main reason that moral standards are often not made explicit is that they are
generally presumed to be obvious. People put more of their efforts into producing
evidence that a given policy, institution or action conforms to or violates, their
unexpressed standards than they put into identifying or explaining the moral standards on
which their judgment rely. Failure to make ones moral standards explicit leaves one
vulnerable to all the problems created by basing critical decisions on unexamined
assumptions: The assumptions may be inconsistent, they may have no rational basis and
they may lead the decision maker into unwittingly making decisions with undesirable
consequences. We saw at the end of the last section two arguments that tried to show that
managers should not be ethical but both of which were based on assumed moral standards
that were unacceptable once they were made explicit.
To uncover the implicit moral standards on which a persons moral judgments are based
one has to retrace the person’s moral reasoning back to its bases. This involves asking
1)What factual information does the person accept as evidence for this moral judgment?
2) What moral standards are needed to relate this factual information to the moral
judgment?

Analyzing Moral Reasoning

There are various criteria that ethicians use to evaluate the adequacy of the moral
reasoning. First and primarily moral reasoning must be logical. The analysis of moral
reasoning requires that the logic of the arguments used to establish a moral judgment be
rigorously examined that all the unspoken moral and factual assumptions be made
explicit and that both assumptions and premises be displayed and subjected to criticism.
Second the factual evidence cited in support of a persons judgment must be accurate, it
must be relevant and it must be complete. For example the illustration of moral reasoning
quoted cites several statistics and relationships that are claimed to exist in America. If the
moral reasoning is to be adequate, these statistics and relationships must be accurate: they
must rest on reliable statistical methods and on well-supported scientific theory. In
addition evidence must be relevant: It must show that the behavior policy or institution
being judged has precisely those characteristics that are proscribed by the moral standards
involved. The statistics and relationships in the illustration of moral reasoning given for
instance must show that some people are “ prevented from getting out of society what
they contribute”, the precise characteristics that is condemned by the moral standards
cited in the illustration. And evidence must be complete: It must take into account all
relevant information and must not selectively advert only to the evidence that tends to
support a single point of view.
Third the moral standards involved in a person’s moral reasoning must be consistent.
They must be consistent with each other and with the other standards and beliefs the
person holds. Inconsistency between person’s moral standards can be uncovered and
corrected by examining situations in which these moral standards require incompatible
things. Suppose that I believe that 1) it is wrong to disobey an employer whom one has
contractually agreed to obey, and I also believe that 2) it is wrong to help someone who is
endangering innocent people’s lives. Then suppose that one day my employer insists that
I work on a project that might result in the deaths of several innocent people. The
situation now reveals an inconsistency between these two moral standards: I can either
obey my employer or avoid disloyalty, or I can disobey him and avoid helping endanger
people’s lives but I cannot do both.

Arguments for and Against Business Ethics

We have described business ethics as the process of rationally evaluating our moral
standards and applying them to business situations. However many people have raised
objections to the very idea of applying moral standards to business activities.