Business Law and Ethics, Case Study Example

Due to the increase in recent scandals involving major corporations, there has been great concern over the failures of corporate governance within an organizations. The lax regulation and persistent of corporation governance to keep stakeholders’ interest as a priority has led to several ethical and legal breaches in standards. There seemed to be an unending trend in unethical and illegal misconduct, which patterned corruption and fraud. In order for corporate governance to work, however, business managers and directors must comply with the legal and ethical requirements for greater transparency and accountability.  The basic principles of fiduciary duties incorporate attitudes rooted in the managerial behavior, which is consistent with the principle of natural law that is applied to officers and directors.

Johnston points out in his article, the fiduciary principle can apply to the duties of managers to the organization and its shareholders. (Johnston 2) The underlying components of this has been embedded throughout case law and within every business transaction. The principles of fiduciary duties define the relationship and the specific roles for the management and the stakeholders. More specifically, “In most fiduciary relationships, the fiduciary is given control over some aspect of life or property of another (the beneficiary) with the expectation that the fiduciary will exercise that control for the benefit of the beneficiary” (Johnston 2). In applying natural law to the business world, it requires an arbitrary approach that are a system of principles that are used in guiding the conducts of humans. This is in the aspect that the nature of man to be free and rational, where they are able to decipher right from wrong. In the implementation of the stakeholder model of corporate governance regards all those in the organization, the duties of the corporate governance is to maximize profit and shareholder gain. (Johnston 13)

In Johnston’s view of natural law and fiduciary duty in the application of stakeholder theory, it will not work in practice. His reasoning being as explained that, the interests’ conflict, it would be like shareholders serving two masters. Within his perspective corporate managers all have a duty to the entire organization, as it is equal to the duty of owed to the shareholders. This is problematic because in decisions that affect the organization not everyone benefits. According to Johnston, “without the guidance provided by the principle that long-term shareholder value comes first, it will be difficult for managers to make a decision. (Johnston 14).  In regarding Johnston’s view, I agree. This creates political strife in deciding which decisions are better served for the underlying purpose of maximizing profit, and the gain of the shareholders. This will give heed to managers serving their own interest, as they are able to cite a constituency that no decision could be made in serving the needs of the stakeholder or the shareholder. This was seen as evident in the cases of Bernie Ebbers and other company heads that made irrational and unethical decisions. So in that regard in order to avoid scandals such as those it cannot work in practice. In corporate governance, one of the primary purposes is to mitigate problems between the organization and the shareholders, while also serving in the best interest of shareholders. While managers do not have a fiduciary duty to stakeholders, they still have an ethical obligation to them, including treating them with respect, and more importantly not to deceive the public (Johnston 14).

In Steven Kelman’s view, the cost/benefit analysis within organizations leads to flawed ethical result. His view is plausible as cost benefit analysis places a numerical value on weight of decision making that cannot be quantified. Cost-benefit is a flawed because managers often use this method as a comparison to business means to humans. This is evident in the Ford Pinto case, as Ford wanted to put out a product they assumed would provide more profit for the company, and in doing so, it caused more harm than good. Cost-benefit analysis follows a version of utilitarianism in which, “would give moral sanction to a lie, for instance, if the satisfaction of an individual attained by telling the lie was greater than the suffering imposed on the lie’s victim” (Kelman 2). In accessing the accurate calculations of cost-benefit analysis, not only must organizations place a dollar value on entities, but also on others in which a monetary amount is usually not placed on, such as human life. In regards to economist that must implement a cost-benefit analysis, they must assess, not for just human life, but the willingness of person to pay for products or services in which the organizations provide (Kelman 4) However, through much criticism in which a dollar value is placed is ethically flawed. The problems of cost-benefit analysis are that it takes the reasoning out of the decision process.  However, while Kelman does make a point in his critic, there is some criticism that can be given from his perspective. Kelman realizes that a dollar value is placed on things that are usually do not have a monetary value, but it is useful in determining what is better for a person or an organization than another. This can be seen in Utilitarianism view, but that is not always the case for organizations that use the cost-benefit analysis to make unethical decision that serve the interests of their agenda.

This can be seen as a perspective that is taken with corporate responsibility in which companies have the obligation not only to their employees and the rest of the organization, but also to the public. Environmental and social issues must be taken into consideration when companies make decisions that are based on their production and operations processes. The business model is usually practiced in a self-regulating mechanism in which organizations tries to beyond what is required in regards to the ethical and legal standards set. Corporate responsibility must incorporate not only the interests of the shareholders, but also other members of the organization, and stakeholders. In the long run, organizations can gain profit, and gain trust not only with the members of people in their organization but also, the public once again. In the application of corporate responsibility used in case studies, there are several examples that can be used. Over the course of the 90s to the early 2000s, there were several major companies that fell to accounting scandals in the United States. Not only did it draw the ire of the public, but also of the government, in which had to implement the Sarbanes-Oxley Act, that was needed to regulate the behaviors of the organization, and the leaders. When a company adheres to the ethical standards, and the right inclinations of cost-benefit analysis it can provide a positive gain for the entire organization. The value is marked by the Unitarianism perspective in which the greatest good for the greatest number of people. Unlike companies such as Ford, Enron, WorldCom, and more recently GM, they cut corners and made unethical decisions in deciding that they would get more profit if more people would buy their products. Those companies did not value their corporate responsibility, nor their obligations for stakeholders throughout the organization.

Looking at Edward Freeman’s model of Stakeholder Analysis involves the theories of business ethics and organizational management, in which it evaluates the organizations’ management of morals and values. More importantly in Freeman’s model he provides several approaches in that can be incorporated within both the traditional view of shareholder obligation, in regards to the binding legal obligation of fiduciary duty, that makes their view a priority. Within the new view, the stakeholder’s theory includes the organization and other stakeholders that integrate not only a market view of the organization’s environment, but also a resource view for sustainability, and a socio-political level. The Stakeholder Analysis model, must yield itself to the importance placed on the value of corporate social responsibility. The view of Freeman is that the only social responsibility of the organization is for the engagement in activities, and the use of resources that are designed for the increase in profits staying in the legal and ethical guidelines.

Corporate social responsibility for any organization is to maximize the profits of shareholders, but also to incorporate other stakeholders as well.  In my opinion, corporate social responsibility does not conflict with the legal obligations of fiduciary duties, but only adds to their ability to maximize the wealth of shareholders. Organizations are not just legal institutions that enable private business transactions for individuals, but also have a greater significance in which affects the society at large. Just as organizations have shareholders in which they have legal and ethical obligations to, but also to those that are not shareholders. Organizations must respect them, ensure not to harm them, and to treat them fairly. While it may be a conflict in satisfying the interest of both the shareholders and stakeholders, corporate social responsibility is implemented throughout the organization. It is not a model in which only designated to one area. Corporate social responsibility can be a beneficial component in each organization for every member.

In applying the statistical test using the Hosmer model, the risks looks that the goodness of fit for the population. In regards to the case, the population or group that would benefit the most are low-income families that cannot afford high end products usually not sold in their local stores. While this may raise several ethical and borderline legal complications, families and individuals within the inner city would be able to purchase expensive food at a considerable markdown. However, the most beneficial group will be the organization itself that would be able to continue to make a profit off of the defective wafers. This increases the wealth in shareholders, but also other members of the organization, such as buyers. Of course, the same groups the company would think would beneficial, are also the same that would be harmed. The low-income families that live within the inner city, have the dangerous potential of becoming sick or exposed to serious bacterial infections that can lead to lawsuits for the company. If the company were to get sued, not only would they lose business, sales and profits would decline, and this would also affect the interests, and wealth of the organization’s shareholders. In regards to the organization, it would also affect the stakeholders that would lose jobs, and trust within the organization. The ethical and legal decisions that the manager is making is problematic to all groups in involved. It pushes the boundaries of cost-benefit analysis, as well the corporate responsibility to the customers. In regards to the obligations owed to members of the organization, there are fiduciary duties to shareholders that must be taken into consideration. If shareholders feel that it is in their best interest to ship the defective wafers, then it is up to the corporate governance to mitigate and serve the interest of the shareholders to increase their wealth.

Through regulations and statutes, shareholder can exercise their rights to ship the wafers.  Those that will be ignored in having the wafers shipped include shareholders such as, employees, customers, and society at large. This is evident in the wants of Sarah, which had to question her ethical principles as the demand for wafers to be sent to inner city stores by Maria. (Hosmer 3-1) There is a moral dilemma within this situation in which, Sarah does not want to ship the defective wafers, and would rather throw them away. However, Maria using cost-benefit analysis believes in maximizing the profits of the company, instead of the values of human lives that could potential be damaged. If the rest of the shareholders or stakeholders were aware that defective food was being sent out to anyone, regardless of geographic location or socio-economic status, this can be legal problem, more so even an ethical problem. Customers and buyers that operate within the inner city will be sent defective food that can cause injury, lead to lawsuits, bad publicity, and go against the moral principles in which people choose not to do harm to others.

The economic outcomes if the organization decides to ship the wafers, can instantly be beneficial to the organization. However, if people take the boxes back, and the buyer wants a refund, the organization can lose money. If the organization decides not to ship, they will also lose money, however, they have instill trust in the society that they willing to not put their customers in harm’s way, which could lead to future gains. In either scenario, the organization will not be able to increase the wealth of their shareholders. The legal requirement are established not only in the organization’s policy, but by the SEC, and common laws, that organizations must follow. Customers have consumer rights, in which organizations are prohibited from selling defective merchandise to the public. Consumer laws are put in place to protect the customers. Organizations can be liable for legal repercussions that can be jeopardized the wealth and revenue of the organization. Following the moral principles, organizations as well as people within the organization have a moral obligation to not harm others, abide by the laws, and follow rational reasoning in decision making, which is the core of ethics. Organizations must follow good the moral duties outlined by not only the values instilled in each individual, but also those influenced by principles of morality, and law. Overall within organization, the moral principles and legal frameworks set a guideline for organizations to follow for all members.

Works Cited

“Sarah Goodwin and Impure Products.” Hosmer Case 3-1. N.d. Print.

Johnston Jr, Joseph F. “Natural Law and the Fiduciary Duties of Business Managers.” Journal of Markets & Morality. 2011. Print.

Kelman, Steven. “Cost-Benefit Analysis: An Ethical Critique.” AEI Journal on Government and Society Regulation. Jan 1981. Print.