Ch 03

Fundamentals of Business Fundamentals of Business LawLaw

Summarized Cases, 8th Ed., and Excerpted Cases, 2nd Ed.

ROGER LeROY MILLERInstitute for University Studies

Arlington, Texas

GAYLORD A. JENTZHerbert D. Kelleher Emeritus Professor in Business Law

University of Texas at Austin

Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning.

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Learning ObjectivesLearning Objectives• What is business ethics and why is it

important? • How can business leaders encourage

their companies to act ethically? • How do duty based ethical standards

differ from outcome-based ethical standards?


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Learning ObjectivesLearning Objectives• What are six guidelines that an

employer can use to evaluate whether his or her actions are ethical?

• What types of ethical issues might arise in the context of international business transactions?


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• Ethics is the study of right and wrong behavior; whether an action is fair, right or just.

• In business, ethical decisions are the application of moral and ethical principles to the marketplace and workplace.

Business EthicsBusiness Ethics


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• Directors and Officers owe a complex set of ethical duties to the company, shareholders, customers, community, employees, and suppliers.

• When these duties conflict, ethical dilemmas are created.

Why is Business Ethics Why is Business Ethics So Important?So Important?


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• Attitude of Top Management.– Management must be committed to creating an

ethical company.– Management must set realistic goals for production.– Management must deal with unethical issues

quickly• (Unethical) Behavior of Owners and

Managers.– CASE 3.1 Baum v. Blue Moon Ventures, LLC

(5th Circuit, 2008).

Importance of Importance of Ethical LeadershipEthical Leadership


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• Duty Based Ethics - derived from religious and philosophical principles.– Religious Ethical Standards– Kantian Ethics– Rights Principles

• Outcome-Based Ethics - seek to ensure a given outcome.– Utilitarianism.

Approaches to Approaches to Ethical ReasoningEthical Reasoning


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• The rightness or wrongness of an action is usually judged according to its conformity to an absolute rule that commands a particular form of behavior.

• The motive of the actor is irrelevant in judging the rightness or the wrongness of the action.

• These rules often involve an element of compassion.

Religious Ethical Religious Ethical StandardsStandards


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• Premised on the belief that general guiding principles for moral behavior can be derived from human nature.

• The categorical imperative is a central postulate of Kantian ethics.– The rightness or wrongness of an action is

judged by estimating the consequences that would follow if everyone in a society performed the act under consideration.

Kantian EthicsKantian Ethics


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• This principle derives from the belief that every duty gives rise to a corresponding right.

• The belief in fundamental rights is a deeply embedded feature of Western culture.

• The ethicality of an action is judged by how the consequences of the action will affect the rights of others.

Rights PrincipleRights Principle


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• An action is ethical based on whether it produces the greatest good for the greatest number of people upon which it has an effect.

• A cost-benefit analysis must be performed to determine the effects of competing alternatives on the persons affected.

• The best alternative is the one that produces the greatest good for the greatest number.

UtilitarianismUtilitarianism


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Corporate Social Corporate Social ResponsibilityResponsibility

• Corporations should be interested in impact on civil rights, environment, consumer protection, employee safety and welfare.– Stakeholder Approach. – Corporate Citizenship.– CASE 3.2 Fog Cutter Capital Group, Inc. v.

Securities Exchange Commission (2007).


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Creating Ethical Creating Ethical Codes of ConductCodes of Conduct

• Codes Must be Well-Written.• Companies Should Provide Ethics

Training to Employees.• Sarbanes-Oxley Act and Web-Based

Reporting.– SO requires confidential ethics reporting

systems to “raise red flags” about practices.


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• Moral Minimum: Legal compliance is the moral (ethical) minimum.– Simply obeying the law does

not necessarily make the business practice ethical.

– What about Excessive Executive Pay?

– Determining the Legality of a Given Action.

How the Law Influences How the Law Influences Business EthicsBusiness Ethics


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• The Law Cannot Control All Business Behavior.– Breaking the Law: Backdating Stock Options.– When is Backdating Illegal?– The consequences of Illegal Backdating.– Misleading Regulators: Oxycontin.

• “Gray Areas” in the Law.– CASE 3.3 Guin v. Brazos Higher Education

Service Corp. (Minnesota, 2006).

How the Law Influences How the Law Influences Business EthicsBusiness Ethics


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Making Ethical Making Ethical Business DecisionsBusiness Decisions

• Six Guidelines:– 1. The Law.– 2. Rules and Procedures.– 3. Values.– 4. Conscience.– 5. Promises.– 6. Heroes.


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• American companies must be trained in cross-cultural business practices.

• Monitoring the Employment Practices of Foreign Suppliers.– Corporate Watch groups can disseminate

information instantly around world.• Foreign Corrupt Practices Act.

– Bribes and Accounting Practices.

Business Ethics on Business Ethics on A Global LevelA Global Level

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Ch 03