Can Profitability and Morality Co-exist?

Business Ethics and Corporate Governance

INTRODUCTION TO BUSINESS ETHICS

What is Business??

Business is a legally recognized organizational entity existing within an economically

free country designed to sell goods and/or services to consumers or other businesses,

usually in an effort to generate profit. It is a commercial activity engaged in as a means of

livelihood or profit, or an entity which engages in such activities.

What is Ethics?

Ethics are standards of conduct that indicate how one should behave based on moral

duties and virtues. Ethics means

• character or manner

• Science of morals

• Recognized rules of conduct

• Moral principles

Objectives of Ethics

• Studies human behaviour

• Establishes moral standards & norms of behaviour

• Makes judgement on human behaviour

• Prescribes moral behaviour

• Expresses an opinion

What is Business Ethics??

Business Ethics is simply- an application of ethics in business. When business people

speak about “business ethics” they usually mean one of three things: (1) avoid breaking

the criminal law in one’s work-related activity; (2) avoid action that may result in civil

law suits against the company; and (3) avoid actions that are bad for the company image.

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Businesses are especially concerned with these three things since they involve loss of

money and company reputation.

In theory, a business could address these three concerns by assigning corporate attorneys

and public relations experts to escort employees on their daily activities. Anytime an

employee might stray from the straight and narrow path of acceptable conduct, the

experts would guide him back. Obviously this solution would be a financial disaster if

carried out in practice since it would cost a business more in attorney and public relations

fees than they would save from proper employee conduct. Perhaps reluctantly, businesses

turn to philosophers to instruct employees on becoming “moral.” For over 2,000 years

philosophers have systematically addressed the issue of right and wrong conduct.

Presumably, then, philosophers can teach employees a basic understanding of morality

will keep them out of trouble.

Although being moral may save a company from some legal and public relations

nightmares, morality in business is also costly. A morally responsible company must pay

special attention to product safety, environmental impact, truthful advertising, scrupulous

marketing, and humane working conditions. This may be more than a tight-budgeted

business bargained for.

What is Morality?

Ethics is the study of morality and that a person begins to do ethics when he or she turns

to look at the moral standards that have been absorbed from family, church, friends and

society, and begin asking whether these standards are reasonable or unreasonable and

what these standards imply for situations and issues.

Morality refers to ethical issues — principles of right and wrong conduct — as well as

instances of real behaviour — the manner in which individuals comply more or less fully

with such standards. To encourage moral conduct, early theological representations of sin

and evil highlighted the body's capacity for suffering. In the medieval and early modern

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ages, morality referred to a religious framework; through diet and bodily maintenance,

the individual was expected to defend himself against the temptation of the flesh.

Codes of morality have evolved in keeping with larger cultural, historical, and economic

currents.

The only definition which can be given to morality is “That which is selfish is immoral

and that which is unselfish is moral”. The natural tendency of every human being; taking

everything from everywhere and heaping it around one centre, that centre being mans

own individual self. When this tendency begins to break, then begins morality. This is

fundamental basis of all morality.

We find that as knowledge comes, man grows, morality is evolved and the ides of non-

separateness begins. Morality can be either cultivated or inherited. A smile from the air

hostess is morality cultivated and a smile from a child is inherited.

What is Profit?

Profit is the reward of factors of production in accordance with the source of service. It is

the excess of income over cost of production. For economists, Profit is the excess over

the opportunity cost. For accountants, Profit is the difference between income and

expenditure computed according to certain rules and regulations.

Profit can be classified as Tangible and Intangible Profit. The objectives of a business

determine the interpretation of profit. Profit acts as an incentive that attracts businessmen

and potential investors to produce and to introduce new products and cost reduction

measures.

Profitability is of two types: Tangible and Intangible

(a) Tangible

Return on Investment

Cash flows

Dividends

(b) Intangible

Trust of the consumers of the organization

Evaluation of the Organizations profits

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Status of the people behind the organization

Theories of Profit

1. Reward for taking risk-

The theory attributes profit to the act of risk undertaken by the owners. It assumes

that other factors remaining the same, higher the risk, higher the rate of return.

2. Compensation for Frictional Factors -

Some economists associate profit with imperfections in the adjustment of the

economy to dynamic changes in the modern world. Benefits due to some change in

the dynamic forces will enable entrepreneurs to enjoy a higher return on investment

for a while till the economy reaches new equilibrium.

3. Reward for Innovation-

According to this theory, profit is the reward for introducing innovations. Innovations

change a stable economy to a dynamic one. Profits arise during the period of

transition from one equilibrium to another.

For long-term profitability, apart from financial profits, firms also look for intangible

profits which may help them to sustain in the long run. These intangible profit concepts

include-

1. Goodwill of customers - A company may for example ignore the after sales

service to show good results in the short run. But a company with a vision of a

long term standing will sacrifice the short term profitability by giving after sales

service, leading to customer loyalty.

2. Harmonious Labor Relations - these require expenditure to be incurred on labor

welfare, imparting of skills to labor which may reduce short term profits but

contribute significantly to the long term profitability of the firm.

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3. Goodwill in Society – Maintaining the quality of products, keeping up the service

level, undertaking corporate social responsibility, safeguarding the environment

will amount to goodwill in the society.

4. Technological Advancement – this requires allocation of resources for research

and development. In the dynamic society, the long term existence of a firm

depends on the innovative strength acquired by it.

5. Easier Access to Finance – for long term profitability, capital should be kept

intact. This will help the firm to undertake expansion through resources generated

within the organization. This helps in reducing dependence on outside resources

of finance. Also, if required, the sound policies and goodwill help the easier

access of finance from outside resources.

Thus the profit concept of the firm depends on the objectives of the business and the

interpretation of profit. Profit must be fairly and justly earned & distinguished from some

other kind of gains & it must be a ‘reasonable’ profit.

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Can Ethics & Morality co-exist with Profit?

There is one and only social responsibility of business and that is to use its resources and

engage in activities designed to increase its profits so long as it stays within the rules of

the game, which is to say engages in open and free competition without deception or

fraud.

The question is of whether, in defining the business and understanding it as a moral

reality, we should focus primarily on its goal of producing goods and services or of

generating profits. A single concept of profit is not by itself sufficient to define what we

mean by business.

Even goods and services have to be really goods and services from the view point of

enhancing total human existence (P F Camenisch). While quoting the anti-social

responsibility perspective of the business Evans reasons that since the society supplies the

mandate and power to business, it must respond to social obligations while earning

profits.

This is no way means that ethics in business is a means to profit. Morality is an end, a

justification in itself. The fundamental basis of trust is moral.

Business leaders, sincerely and with the best of intentions, sometimes state that the

primary purpose of a corporation is not to make a profit, but to meet human needs, to

serve the consumer, etc. While this may be true of some corporations, and while on some

level it may be true of all corporations, the public in general finds such statements

unpersuasive, even hypocritical and many stockholders may possibly see them as

indicative of managerial malfeasance.

It may well help clear the air if corporations would simply acknowledge that their

primary purpose is to make a profit and then stood ready to show why and how that is a

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defensible, a necessary, even a good thing in the present system. But at the same time

they should acknowledge- and this would seem to be what executives trying to cast an

altruistic light on corporations are trying to say- that the purpose of business, or of the

economic system of which the corporation is a part, is not to make profit making

possible, but to fulfill human needs or to provide goods and services which sustain and

enhance life. This identifies profit’s proper place within the corporation while

acknowledging its subordination to larger societal purposes beyond the corporation.

A business is considered to be ethical only if it tries to reach a trade-off between its

economic objectives & its social obligation

First, the purpose of business is to generate a profit. Neither carries any moral

implications at the start. Then, how we conduct business does have moral and ethical

weight.

But business has an obligation to shareholders (or the owner) first and foremost to

generate a profit — within the bounds of what is legal, moral, and ethical. There is a

symbiotic relation between ethics and business in which ethics naturally emerges from a

profit-oriented business. There are both weak and strong versions of this approach.

The weak version is often expressed in the dictum that good ethics results in good

business, which simply means that moral businesses practices are profitable. For

example, it is profitable to make safe products since this will reduce product liability

lawsuits. Similarly, it may be in the best financial interests of businesses to respect

employee privacy, since this will improve morale and thus improve work efficiency. The

long-term best interests of businesses are served by seeking a trusting relation with the

public.

This weak version, however, has problems. First, many moral business practices will

have an economic advantage only in the long run. This provides little incentive for

businesses that are designed to exclusively to seek short-term profits. As more and more

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businesses compete for the same market, short-term profits will dictate the decisions of

many companies simply as a matter of survival. Second, some moral business practices

may not be economically viable even in the long run. For example, this might be the case

with retaining older workers who are inefficient, as opposed to replacing them with

younger and more efficient workers. Third, and most importantly, those moral business

practices that are good for business depend upon what at that time will produce a profit.

In a different market, the same practices might not be economically viable. Thus, any

overlap that exists between morality and profit is both limited and incidental.

The strong version of this profit approach takes a reverse strategy and maintains that, in

a competitive and free market, the profit motive will in fact bring about a morally proper

environment. That is, if customers demand safe products, or workers demand privacy,

then they will buy from or work for only those businesses that meet their demands.

Businesses that do not heed these demands will not survive. Since this view maintains

that the drive for profit will create morality, the strong version can be expressed in the

dictum that good business results in good ethics, which is the converse of the above

dictum. Proponents of this view, such as Milton Friedman, argue that this would happen

in the United States if the government would allow a truly competitive and free market.

But this strong view also has problems, since it assumes that consumers or workers will

demand the morally proper thing. In fact, consumers may opt for less safe products if

they know they will be saving money. For example, consumers might prefer a cheaper

car without air bags, even though doing so places their own lives and the lives of their

passengers at greater risk, which is morally irresponsible. Similarly, workers may forego

demands of privacy at work if they are compensated with high enough wages. In short,

not every moral business practice will simply emerge from the profit principle as

suggested by either the weak or strong views.

In our culturally pluralistic society, the only business-related moral obligations that are

majority-endorsed by our national social group are those obligations that are already

contained in the law. These include a range of guidelines for honesty in advertising,

product safety, safe working conditions, and fair hiring and firing practices. In fact, the

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unifying moral force of businesses within our diverse society is the law itself. Beyond the

law we find that the moral obligations of businesses are contextually bound

Five fairly broad moral principles suggested by philosophers are as follows:

1. Harm principle: businesses should avoid causing unwarranted harm.

2. Fairness principle: business should be fair in all of their practices.

3. Human rights principle: businesses should respect human rights.

4. Autonomy principle: businesses should not infringe on the rationally reflective

choices of people.

5. Veracity principle: businesses should not be deceptive in their practices.

6. Stakeholder principle: businesses should consider all stakeholders' interests that

are affected by a business practice. A stakeholder is any party affected by a

business practice, including employees, suppliers, customers, creditors,

competitors, governments, and communities. Accordingly, the stakeholder

approach to business ethics emphasizes that we should map out of the various

parties affected by a business practice

Businesses are driven by the motive to make a profit. Stockholders demand a return on

their investment, and this mandate transfers down through the management hierarchy.

Part of making a profit is to reduce costs, and environmental responsibility is highly

costly, with few immediate financial rewards.

There may be a divergence between the existence of profit and social well-being. Firms

guided by tangible financial profit exclusively, often ignore the welfare of the society.

Some firms also tend to have a short-term view of profits. Firms which wish to survive in

the long run may require sacrificing immediate gain to create a good image which will be

useful in the long run.

“Profit is a dirty word” said Jawaharlal Nehru in 1950s. During those days, private sector

companies were looked down upon as exploiters of labour, and obsessed with profits.

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Industries were nationalized, restrictions on labour layoff, growth were discouraged and

profit was unjustified. This resulted in deep rooted web of beauracracy and lethargy in

the system, which fostered unethical practices like bribes. The political scenario then

forced private sector companies to break rules to even survive. But today, corruption is so

entrenched into the system that bribes and other unethical practices have become obvious

and necessities.

Do Moral Standards Apply to Corporations or Only to Individuals?

Corporate organizations pose major problems for anyone who tries to apply moral

standards to business activities; can we say that the acts of these organisations are moral

or immoral in the same sense that the actions of human individuals are? Can we say that

these organisations are morally responsible for their acts in the same sense that human

individuals are? Or must we say that it makes no sense to apply moral terms to

organization as a whole but only to the individuals who make up the organization? In a

recent case, the justice department charged e. f. Hutton Corporation with operating an

elaborate fraud in which employees wrote overdraft on bank accounts that allowed e. f.

Hutton to derive interest earning that rightly belonged to the banks. Critics afterward

claimed that the justice department should have charged the individual managers of e. f.

Hutton, not the corporation, because “corporations don’t commit crimes, people do.” Can

moral notions like responsibility, wrong doing and obligation be applied to groups such

as corporations, or are individual people the only real moral agent?

Two views have emerged in response to this problem. at one extreme is the view of those

who argue that, because the rules that tie organization together allow us to say that

corporations act as individuals and have “intended objectives” for what they do, we can

also say that they are “morally responsible” for their actions and that their actions are

“moral” or “immoral” in exactly the same sense that a human being’s are. The major

problem with this view is that organizations do not seem to “act” or “intend” in the same

sense that individual humans do, and organizations differ from human beings in morally

important ways: organizations feel neither pain nor pleasure and they cannot act except

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through human beings. At the other extreme is the view of philosophers who hold that it

makes no sense to hold business organization “morally responsible” or to say that they

have “moral” duties. These philosophers argue that business organization are the same as

machines whose members must blindly and undeviatingly conform to formal rules that

have nothing to do with morality. Consequently, it makes no more sense to hold

organization “morally responsible” for failing to follow moral standards than it makes to

criticize a machine for failing to act morally. The major problem with this second view is

that, unlike machines, at least some of the member of organization usually know what

they are doing and are free to choose whether to follow the organization’s rules or even to

change these rules. When an organization’s members collectively, but freely and

knowingly, pursue immoral objectives, it ordinarily makes perfectly good sense to say

that the actions they perform for the organization are “immoral” and that the organization

is “morally responsible” for this immoral action.

A corporation acts when properly qualified members of the corporation carry out their

assigned duties within the scope of their assigned authority. Because corporate acts

originate in the choices and actions of human individuals who must be seen as the

primary bearers of moral duties and moral responsibility: human individuals are

responsible for what the corporation does because corporate actions flow wholly out of

their choices and behaviors. If a corporation acts wrongly, it is because of what some

individuals in that corporation chose to do.

In a modern corporation responsibility for a corporate act is often distributed among a

number of cooperating parties. Corporate acts normally are brought about by several

actions or omissions of many different people all cooperating together so that their linked

action and omissions jointly produce the corporate act. For example, one team of

managers designs a car, another team tests it, and a third team builds it; one person

orders, advises or encouragement; one group knowingly defrauds buyers and another

group knowingly but silently enjoys the resulting profits; one person contributes the

means and another person accomplishes the act; one group does the wrong and another

group conceals it.

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Hence it is difficult to ascertain as to who is to be held morally responsible for such

jointly produced acts. Traditional view advocates that those who knowingly and freely

did what was necessary to produce the corporate act are each morally responsible.

However there is a different school of thought that believes that when an organized group

acts together, the corporate act may be described as the act of the group and consequently

the corporate group and not only the individuals who make the group must be held

responsible for the wrongdoing. People generally attribute the acts of a corporation’s

managers to the corporation and not to managers as individuals. If we consider the case

of a large scale organization the employees there follow bureaucratic rules that link their

activities together to achieve corporate outcomes of which the employee may not even be

aware. The engineers in one department may build a component with a certain

weaknesses, not knowing that another department plans to use that component in a

product which these weaknesses will render dangerous. Employees may feel pressured to

conform to company rules with whose corporate outcomes they may not agree but which

they feel they are not in a position to change. Therefore a person working under a

bureaucratic set up is not necessarily morally responsible for every corporate act that he

or she brings about.

Sometimes it may also happen that employees in a corporation go along with a wrongful

corporate act although they know to some extent that it is wrong and if intended can

withdraw their cooperation. However they unwillingly go along because of pressures

placed on them. In this case one must weigh the seriousness of the wrongful act against

the uncertainty, difficulty, and degree of involvement that were present. The more

seriously wrong a corporate act is the less is the employee’s responsibility mitigated by

the uncertainty, pressures and minimal involvement.

People say that in a case when a subordinate act on the orders of a legitimate superior the

subordinate is absolved of his wrongdoing. Though the subordinate is the one who is to

carry out the orders of his superior he is not to be culpable for his fallacies. There have

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been instances in the past when employees have been forced upon to obey the directives

of their superiors and when the faux pass has been later discovered the managers argue

that the wrongdoing should be attributable to the organization as a whole and not him

alone.

However it would be a mistaken belief to think that an employee who freely and

knowingly does something wrong is absolved of all responsibilities under the guise of

“following orders”. Also it must be known that an employee has no obligation to obey an

order to do what is immoral. A superior can force him by putting significant economic

pressures on an employee and such pressure does mitigate the employee’s responsibility

but it does not totally eliminate it.

Thus when a superior orders an employee to carry out an act that both of them know

wrong, the employee along with the superior is morally responsible for the act if he or

she carries it out.

Thus,

The beggar is never happy… We are all beggars. Whatever we do we want a return…

Ask nothing; want nothing in return. Give what you have to give; it will come back to you

– but do not think of that now… Yet have the power to give: give, and there it ends. Learn

that the whole of life is giving, that nature will force you to give. So give willingly… Ask,

therefore, nothing in return; but the more you give, the more will come to you.

……..Vivekananda, Los Angeles (1990)

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Case Studies

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TATA-PANTALOON STUDY

CASE REGARDING MINORITY INVESTOR INTEREST AND INVESTOR

CONFIDENCE IN THE COMPANY

Tata Group and Pantaloon retail India limited (PRIL).

Tata Group

There are 98 companies under the Tata group (Tata sons and Tata industries). The major

listed companies in the group are

1) Tata consultancy services

2) Tata motors

3) Tata steel

4) VSNL

5) Tata power

The group approximately represents approximately 3.2 % of India’s GDP. it has a

turnover of 28.8 bn $ and 2.8 bn $ profit for FY-07.

GROUP HOLDING STRUCTURE

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All the 98 companies are either held by these two promoter group and/or by cross holding

by other group companies in each other. The promoter stake in majority of these

companies is less than 33 % of overall shareholding. But still they are the majority

shareholder as a large chunk is held by FII, FI and public.

Now the problem with the way new companies are formed in the Tata group is that the

minority shareholder of the other group companies who have been with the company like

the promoter, don’t benefit from the formation of new company as the new company is

formed at the group level and not as a subsidiary of the existing companies. So the capital

put by minority shareholder and their faith in management of the group is not paid by the

group to them buy allotting them shares of the newly formed companies and benefit from

it.

Ex – when they formed Infifti Retail (technical agreement with Woolworth for sourcing

electronic/ white goods) .It is a 100 % subsidiary of Tata sons and not a subsidiary or as a

part of Trent (Westside, landmark and star India bazaar) which would have been in the

same line of business and benefited the minority shareholders of Trent which is a listed

company.

Pantaloon retail India limited (PRIL)

There are 15 companies under the Pantaloon retail India limited (PRIL).The major Lines

of business in the company are

1) Pantaloons

2) Central

3) Big bazaar

4) Fashion station

5) Food bazaar

6) Depot

7) Star and sitara

8) Gen M , M port and M bazaar

9) E zone

10) Furniture bazaar

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11) Home town

The group has a turnover of 1 bn $ and 20 mn $ profit for FY-07.

The Subsidiaries joint ventures of PRIL are given below.

•73% HSRIL (Home)

•74% FCH (Capital)

•100% F/Media (OOH)

•100% F/Bazaar (E-Tailing)

•100% F/Logistics (SCM)

•100% PFP (Sourcing)

•100% Pantaloon Food Solutions (F&B)

Joint Ventures

•49% Planet Retail

•51% Liberty

•50% GiniJony

•50% Blue Foods

•50% Talwalkar

•50% Manipal

•50% Capital land (REIT & MM)

•50% Alpha Group

Here PRIL is adding all the business lines under PRIL and the benefits of which of

which are got by both majority and minority stake holder and the capital markets

understands this and therefore gives, it gives a better PE ratio to Tata group (Trent).

Particulars Sales (Cr) Market cap (Cr) Market Price EPS PE

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Trent 455.78 1,295.86 665 20 33.2PRIL 3,393.47 12,378.95 822 8.18 100

Above data is as on 12/01/08.

As we all know PE ratio is dependent on investor confidence and investor confidence is

because the minority investor knows that PRIL won’t cheat them with future business

opportunities and profits.

This shows that PRIL which did a morally right thing by having all its business under

PRIL and have been rewarded by higher PE and vice versa for Trent.

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RELIANCE CASE STUDY

RELIANCE JAMNAGAR FACTORY -- ACHIEVING DEVELOPMENT

WITHOUT THE CAUSING ANY ADVERSE EFFECT TO THE ENVIRONMENT

At Reliance Jamnagar, clean environment for sustainable development is of prime

concern, and is an important business objective, achieved by every employee’s

contribution and responsibility towards environmental performance.

Reliance Jamnagar has committed to the protection of environment. The design of state

of the art effluent treatment plant, low NOX burners in Furnaces and zero liquid effluent

discharge ensure the safety of the environment. Treated sewage, industrial effluent and

stack emissions are extensively monitored to ensure no harm is done to the environment.

Reliance is committed to transform the arid land in and around the complex into a lush

green belt. Following are the major improvements achieved during 2000-2006.

1. Reduction in Emission of CO2 (Tons/Kilotons of Crude processed) to 10.25.

2. Planting of 4.0 million trees in and around the complex has already been done till

March 2005 which includes planting of 51,000 Nos of additional Trees during

2004-05. Plantation of 35,000 trees in the direction of further enhancement of

benefits of greening like CO2 absorption & improved microclimate etc during last

year.

3. Reduction of plastic cup consumption from 5.1 Lakhs cup (In 2000) per month to

3.2 Lakh (2003) per month

4. Construction of landfill facility for the disposal of hazardous waste.

5. Incinerator plant is installed of 200Kg/Hr capacity for to incinerate the Hazardous

Waste like Oily Rags, Oily sludge & other oily contaminated material.

6. Reverse Osmosis (RO) installed of cap. 110 m3/hr.

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7. Commitment to Safety is of paramount importance at Reliance. New work permit

procedures developed with the help of M/S Shell expertsare being consistently

followed in Jamnagar. The new procedure provide for more checks and

responsibility according to the hazard potential of each activity.

8. Achieved 100% recycle of treated effluent in the industrial complex and

residential township.

The British Safety Council conducted a Safety and Health Management audit at Jamnagar

and awarded the highest Five Star rating to the site in 2003.

How Reliance took care of Environmental concerns during Construction phase

The pipelines were laid on a trestle from land fall point to Jetty (4 kms distance)

to avoid disturbance to inter-tidal mud flats.

Labour colonies with sanitation facilities were provided for construction work

force. STPs were provided and treated sewage was used for green belt

development.

Top soil removed from plant area during leveling was used in green belt area to

increase top soildepth.

Large ponds were created to collect the storm water and use it for construction

needs.

Sea route was used to bring heavy plant and machinery thus avoiding traffic

problems in the road

Selection of Jetty and seawater intake locations based on satellite images for

minimal impact on environment

The Jetty was located in a natural channel between two small islands where no

sedimentation occurs – periodical dredging was avoided

Greenery developed over 2000 acres, more than 3 times the statutory requirement

and presently sequestering 60% of the CO2 liberated from the complex.

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MERCK CASE STUDY

A disease called “River Blindness” was spreading in countries of Africa and Latin

America. In 1979 ‘18 million’ impoverished people were suffering from this severe

disease. This disease was passed by Black Fly which breeds in river water and transfer

the disease by the bite of the black fly from person to person. The spreading of disease

was also spoiling the fertile land which was present near the banks of the rivers, forcing

the cultivation far away from the banks, reducing the productivity and the quality of the

agricultural produce.

There were only 2 alternates available for stopping the disease.

1. Spraying of pesticides: - This would probably kill the black flies but pollute the

river water which people used to consume. Over a period of time this alternative

became ineffective as the carrier of the parasite got immune to the pesticide

spray.

2. Expensive medicines: - At that time market had some medicines that could

probably cure the disease but it came along with severe side effects. The patient

that could afford the medicine also had to be hospitalized for the treatment of

side effects and pay huge hospital bills

Mr. William Campbell, one of the researchers in the R&D department of Merck noticed

that one of the best selling animal drugs “Ivermectin” if researched and clinically tested

on humans could result in for cheap effective drug for River Blindness. He proposed the

same to Chairman Dr. Roy Vagelos and mentioned that the medical research and clinical

trials would cost around $100 million for development of the human version of

Ivermectin.

There was a lot of risk associated with development of the human version of Ivermectin

as the human version would be cheaper than the animal version, it would be black

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marketed and used on animals. The whole thing would bring a bad name to the company

and it could lose sale of $300 million of the animal version. Also at the same time profits

were declining as a percentage of sales and the costs were rising due to heavy

expenditure on research and development. United Stated Government were also passing

the Drug regulation act in which no drugs which are used on animals can be used on

humans and few other restrictions on development on new drug. There were cheap

generic drugs which were available in the market for the same, so there was risk of

selling the drug at a premium price.

After several meeting with Dr. Vagelos, Mr. Campbell & his team was finally given the

go ahead for development of human version of Ivermectin in 1980. Seven years of

extensive research and clinical trials, human version of Ivermectin was finally developed.

Single pill a year was the dosage of the drug which would prevent and cure the disease.

When the drug was finally ready for distribution, no one came forward to support claims

of the drug and helped in distribution of the same. World Health Organisation, United

States Government and the Government of nations afflicted with disease also backed out.

Merck did not have the distribution strength to go all out and hence was looking for some

help from the organisations.

Approximately 85 million people were at risk and therefore Merck decided to distribute

the drug free of cost to all potential people at risk in association with private orgnisations

and later was joined by The World Health Organisation.

When asked in a press conference, Why so much of money was spent when the result of

it was not well known, Chairman Dr Roy Vagelos said:- “Once the company suspected

that one of its animal drug might cure severe human disease that was ravaging people the

only ethical choice was to develop it.

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Case Study: Bausch & Lomb's ReNu with MoistureLoc®

Bausch & Lomb released ReNu with MoistureLoc as a new contact lens cleaning solution

in November, 2004. ReNu with MoistureLoc was marketed as a "no-rub", one step

disinfecting contact lens solution and was sold in the US, Europe, and Asia.

Use of ReNu with MoistureLoc has been shown to cause Fusarium keratitis. Fusarium

keratitis is an infection of the cornea caused by the Fusarium fungus. It is a serious

infection that requires aggressive and timely treatment. If Fusarium is untreated, it can

lead to permanent loss of vision.

Symptoms of Fusarium keratitis may include:

Eye pain

Blurry vision

Redness, burning, and itching in the eye

Excessive eye discharge

Increased sensitivity to light

Health officials in Hong Kong began noticing an increase in Fusarium keratitis associated

with ReNu with MoistureLoc usage in June, 2005. Within one month, Bausch & Lomb

learned of six Fusarium keratitis cases in Hong Kong, but did not inform the Food &

Drug Administration (FDA). By February, 2006, Bausch & Lomb had removed ReNu

with MoistureLoc from Asian markets, yet still did not warn US consumers for 2 months.

On March 3, 2006, Bausch & Lomb was first notified of 3 cases of Fusarium keratitis in

the US. The FDA began investigating Bausch & Lomb's manufacturing plant for ReNu

with MoistureLoc later that month. Bausch & Lomb finally recalled all unused bottles of

ReNu with MoistureLoc in the US on April 13, 2006. On May 15, 2006, Bausch & Lomb

issued a global recall of ReNu with MoistureLoc. At the same time, the FDA issued a

report critical of Bausch & Lomb's handling of the recall and its failure to respond to a

consumer health crisis.

The Center for Disease Control (CDC) estimated that 30 of the 109 cases of Fusarium

keratitis reported in all of 2005 and part of 2006 were traceable to Renu with

MoistureLoc. By May 19, 2006, 130 cases of Fusarium keratitis were reported by contact

lens wearers to the CDC reported using ReNu with MoistureLoc. By the time of Bausch

& Lomb's recall, 2.3 million patients had used ReNu with MoistureLoc.

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May 17, 2006

FDA finds Bausch and Lomb didn't follow the rules. FDA says 35 cases were not

reported properly. Bausch & Lomb denies the allegations and said it communicated

promptly and directly with the FDA regarding reports the company received about

fusarium infections. On Tuesday, the FDA released the findings of an inspection team

that was at the Greenville plant from March 22 until May 15. In a report, the team faulted

Bausch & Lomb in 20 procedural areas. Inspectors said Bausch & Lomb failed to:

Do a complete design plan for the ReNu with MoistureLoc product.

Follow procedures to prevent contamination of equipment and product.

Properly define and document procedures for controlling environmental

conditions.

Implement procedures to control storage of product in storage areas and stock

rooms.

Conduct quality control audits.

Implement procedures to prevent problems during handling of product.

Ensure appropriate design, construction, placement, and installation of

manufacturing equipment.

Properly document maintenance activities.

Still, the FDA said that while the team's observations at the plant may indicate deviations

from current good manufacturing practice, they do not necessarily support a connection

between ReNu with MoistureLoc and the fungal infections.

Events according to the reverse chronological order:

May 15, 2006

Bausch Lomb is permanently removing its Greenville-made ReNu with MoistureLoc

Baush and Lomb contact lens solution from the worldwide market after concluding the

product's formula may increase the risk of fungal eye infections in certain unusual

circumstances. Problems with the solution were reported in the United States, Singapore,

Hong Kong, and Malaysia -- all markets served by the Greenville plant. The U.S. Food

and Drug Administration dispatched a team of investigators to the plant March 22, and on

April 10, Bausch Lomb said it had stopped shipments of ReNu with MoistureLoc from

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the plant. The company and the FDA said they believe they've solved the mystery and

that it lies in the chemical properties of ReNu with MoistureLoc in the manufacturing

process at the Greenville plant. Exhaustive testing revealed that ReNu with MoistureLoc,

under certain conditions, such as if the bottle cap is left open, allows a polymer film to

form, and the Fusarium fungus, found just about everywhere, can survive on the film,

insulated from alexidine, the disinfectant in ReNu with MoistureLoc. The fungal

infections appear to be related to the design of this particular solution and don't stem from

a problem with the manufacturing and the way in which the product leaves the facility.

April 20, 2006

Bausch Lomb class action lawsuits likely in multiple states. In Miami, an attorney is

seeking class action status for a lawsuit against Bausch & Lomb for ReNu eye infections.

The lawsuit alleges that plaintiffs have suffered painful eye fungus injections. These

infections permanently scarred the cornea of the Bausch Lomb class action plaintiff, a

woman who used its contact lens solution. The lawsuit follows a similar Bausch & Lomb

class action suit filed in New York that also alleges the company failed to remove the

fungus from the Renu with MoistureLoc eye solution and/or caused the fungus to grow in

the manufacturing process.

April 15, 2006

The company asks retail stores to take ReNu with MoistureLoc Bausch and Lomb contact

lens solution made in the Greenville plant off the shelves temporarily but did not request

that the solution be returned to the company. CEO Ron Zarrella said neither the company

nor the FDA had discovered contamination at the plant after nearly three weeks of

testing. The company's request that retailer pull its product did not apply to other Bausch

& Lomb products or ReNu with MoistureLoc made outside the United States. The

request came as several U.S. retailers led by Wal-Mart., Walgreen, and CVS Corp., were

pulling the ReNu Bausch and Lomb contact lens solution with MoistureLoc solution off

their shelves on their own.

The company stopped shipments of MoistureLoc in the United States when the CDC said

it was scrutinizing 109 reports of fungal keratitis infections in patients in 17 states over

the past 10 months.

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April 12, 2006

Bausch & Lomb said that neither the company nor any of the five federal inspectors had

found any evidence that contact lens solution made at its Greenville plant is connected to

eye fungus infections after nearly three weeks of testing. The company also doesn't have

any plans to furlough or lay off any of the approximately 450 workers at the Pelham

Road facility, even though it halted shipments of solution made there. CEO Ron Zarrella

said that tests have been conducted on samples of solution made at the plant, solution

from store shelves, and solution used by victims who became infected and none have

revealed evidence of the fungus. He said test results of swabs taken in non sterile areas of

the plant aren't back from labs, but it won't be surprising if they are positive because the

Fusariam fungus is found just about everywhere. Zarrella told analysts the company is

ramping up production of another contact lens solution now that some retailers are

pulling ReNu with MoistureLoc from their shelves but it wasn't immediately clear how

that might affect the Greenville plant.

April 12, 2006

Singapore: 36 more cases of fusarium keratitis reported since the last update in late

February (then 39 cases). In total, 75 cases of fungal corneal infection with a history of

contact lens use have been reported.

April 10, 2006

Bausch & Lomb stopped shipping product to U.S. stores but said stores could continue to

sell existing product until supplies ran out. "There's no indication there is a formula

problem here," CEO Zarrella said.

March 31, 2006

Bausch and Lomb is collaborating in a surveillance program and scientific investigation

to track and investigate the incidence of the infection with health authorities and leading

experts around the world including the United States.

March 22, 2006

FDA begins inspection of Bausch & Lomb, Greenville, S.C. plant.

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March 18, 2006

Eight victims required corneal transplants to avert blindness. Only 30 cases investigated

thus far. Of those 30 cases, 28 wore soft contacts and all but two used ReNu products.

Five of the 26 who used ReNu also used other solutions.

March 8, 2006

A New Jersey ophthalmologist reports three cases of rare fungal infection, fusarium

keratitis to the CDC within the last three months. The U.S. investigation begins.

February 20, 2006

Bausch Lomb voluntarily suspends sales in Singapore, Malaysia, and Hong Kong after 29

cases of fungal keratitis are found in Asia since November 2005.

December 2005

Bausch & Lomb mentions but downplays the Hong Kong incident to the FDA.

November 2005

Hong Kong health officials tell Bausch & Lomb about the noted increase in hospital

admissions due to contact-lens-related keratitis from June to September 2005.

June 15, 2005

First reported fusarium case reported in the United States

Subprime Crisis case study

The question of morality or Moral hazards occurs when parties who are mostly insulated

from risk behave differently from the way they would normally behave if they were fully

exposed to the risk. Or put another way, moral hazards often result in sub-par behaviour

stemming from not having enough skin in the game. The sub prime mortgage crisis has

led to investment portfolio losses in great companies like Citibank and other public

companies like Money Gram. Stock prices fall and individual investors take a hit when

these companies are forced to write down the value of their investment portfolios.

In the case of sub-prime lending, a moral hazard occurred precisely because the

players within it all profited by making imprudent loans, without bearing the burden of

making good on the loans if they went bad. From mortgage brokers who loaned money

that was not theirs, to banks who sought to sell the investment risk on to others in the

form of high-yielding mortgage-backed securities, prudent mortgage standards were

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shirked in exchange for profit as the risk was passed on The financial collapse of Wall

Street is the fiscal consequence of the economic philosophy that now governs America--

that markets are always good and government is always bad. But it is also the moral

consequence of greed, where private profit prevails over the concept of the common

good. Another example of greed of Americans is the American dream of having house

outside the city. That led to purchase of huge houses by them. And, alas, many

Americans, feeling richer because their houses had a higher market value, took out home

equity loans and spent the money. Some mortgage loan originators and real estate agents

encouraged new homeowners to take on larger mortgages than they could afford. Worse,

to disguise the costs of these mortgages, many pushed adjustable rate mortgages to

unsuspecting consumers. When interest rates rise, the new homeowners find they can't

afford their mortgage. This has contributed greatly to an economic mess that might well

lead to an American recession. The moral hazard in this is that the loan originators and

the real estate salesmen make their commissions and can usually walk away regardless of

what happens down the road. These mortgages are bundled together and sold to investors

as mortgage-backed securities. There was little incentive for those selling the loans to

seriously evaluate whether or not the consumer could pay the loan in the long run. In the

worst cases of fraud, those selling the loans knew the consumers had little chance of

meeting their payments but misled the consumers into believing the housing market

would always rise and the loan could always be refinanced. If each loan originator and

real estate agent in these transactions had been forced to keep their wealth invested in the

mortgages they sold, it's unlikely we'd have a sub prime mortgage crisis today

The whole system of credit checking broke down because breaking the system served the

interests of too many who could profit from a broken system.

Many single-family homes were not owned by a family who planned to live there, but

were owned by “a wanna-be real-estate mogul” looking to sell it quickly. These

properties were often highly leveraged Some investors will point fingers at the

executives. Many of the executives at these large companies point their fingers at the debt

rating system. It seems these professional investors should have seen the dangers inherent

in over-investing in mortgage-backed securities.

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We know that banks are a great investment, because they're in the business of selling

money for more than it's worth. We also know that the near impossibility of the average

investor evaluating the quality of the loans the bank is making. This means what is

fundamentally a sound business creates a risk for retail investors who don't have a full

view into the operations of the bank.

The employee at one of the troubled bank confessed that “we were encouraged to use

sub-prime loans rather than FHA or the FANNIE A- because we made more on sub-

prime. Our portfolio of A- was fine, but we couldn't package it for what they did the sub-

prime loans. Then we could just keep getting lower and lower quality loans approved”.

The recent one harming the morality is related to micro lending. There was an article -

"The Ugly Side of Micro lending: How big Mexican banks profit as many poor

borrowers get trapped in a maze of debt." It posed the question: Were some of these

lenders more interested in getting loan shark rates of interest than making a social

difference? At what interest rate does offering loans cease helping and become loan

sharking? If micro lending moves from social entrepreneurship into for-profit

entrepreneurship, that changes the dynamic. Social entrepreneurs use business methods to

bring about positive social change.

Rather than people risking a small amount, they might start looking at micro lending as a

way to earn a high return. Then, the profit motive moves in and pushes out the initial

motivation for making these loans in the first place. Suddenly, we'll have micro loan

moguls, bundled goat loans, and every poor person from Tanzania to Haiti will seek

shack-improvement loans. The "service providers" and loan originators will run amuck

seeking more and more transaction fees. The evaluation of the loan and its reasonableness

will go out the window. More loans would mean more transaction fees. This will destroy

the credibility of the micro lending process. What started as a legitimate service can be

destroyed by greed.

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The case study: Infosys, the business in ethical way

In the event of what happened to IT giant Satyam in recent time, the question of can

profitability and morality co-exist has raised its importance. It’s not about just a

company, but an entire business community of the country that comes under suspicious

thoughts. To be on optimistic front, we would like to quote an example from the same IT

industry which will enable to strengthen the Indian Business image with its sustainable

performance over the years in different parameters of the business. We are talking about

the second largest Indian IT company that is Infosys technologies ltd.

A ten thousand rupees initiative started by a visionary person with the support of seven

members in year 1981 in a small flat in pune; 28 years down the line we are talking about

more than 4billion dollar revenue of a corporate giant. What caused such a

transformation?? It’s not just profits or sustainable growth. There are few significant

things which they have done differently as compared to their peers. Yes, we are talking

about a moral side of business, and no discussion of moral in business is complete

without mentioning the name Infosys. So what makes it different from others? Let’s look

at some points.

Vision and Mission: A vision which is formed by a visionary itself Mr. Narayan

Murthy to become a largest IT company in India with a sustainable excellence

and to be known as an organization which is ‘powered by intellect and driven by

values’ This mission and vision is divided into set of measurable parameters

which can be deployed in top down approach to achieve the desired results.

CLife base work culture:

C stands for customer delight

L stands for leadership by example

I stand for integrity

F stands for Fairness

And E stands for excellence

Such as the work culture of an organization which helps it to achieve those objectives

mentioned in vision and mission. It is really an ideal role model in way in which they

have employed these principles. It was the first company to start with Global delivery

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model i.e. to develop a software solution at client’s location (overseas) to enhance

customer satisfaction and repeat business.

To enhance transparency in reporting mechanism, they started presenting their statements

in US GAAP format. It was the first company to show Economic value added calculation

in the annual reports which presents the view of actual value added to shareholder’s

wealth.

They have always maintained excellence is the only parameters whiling recruiting talent.

As Mr. Murthy said, Human Resource is our most valued asset. Infosys started with

Campus connect program accommodating near about 5000 engineering colleges across

the country to help the students gain practical knowledge in order to enhance their

employability. The thing worth mentioning here is the social side of their business that is

Infosys foundation trust. They started with this initiative in year 2000 under the guidance

of Ms. Sudha Murthy. It has contributed towards development of underprivileged people

especially from rural area. It generously contributed towards national cause such as

natural calamities.

Now one may ask question what a corporation of Infosys’s stature can gain out of such

activities. A brief explanation. An investor values an organization based on its share

price. It is an ultimate measure to gauge the performance of a company. It is not all about

business income and profitability. It takes into account an investors’ confidence, which is

expressed in terms of P/E ratio. And as archives say it all Infosys has always obtained

higher P/E than Satyam, Which is a basis for overall valuation. Thus Infosys presents a

classic case in this competitive environment that how a profitability and morality can co-

exist. They have certainly enhanced their present value by securing sustainable future.

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CASE ON EMPLOYEES

Employees: A significant class of stakeholders

Business ethics can be examined from various perspectives, including the perspective of

the employee, the commercial enterprise, and society as a whole. Very often, situations

arise in which there is conflict or compromise between one and more of the parties, such

that serving the interest of one party is a detriment to the others. Uncompromising

business ethics are an integral part of a morally strong company and of their way of doing

business.

While each organization should establish its own ethical framework, two cornerstones

must be in place in order to build an ethical organization: mutual trust and respect. In

personal interviews conducted with 100 Human Resource practitioners across the United

States in 1999 and 2000, these two characteristics surfaced time and again as critical

components of ethical organizations.

In an organization in which respect is a demonstrated value, employees and managers

treat each other with dignity and make it known that they care about the work they

perform. Individual differences and perspectives are appreciated and promoted. All

employees, regardless of their position, are recognized and rewarded for their

contributions.

In an organization where trust is prevalent, information is accurate, timely, and complete.

Coworkers share their ideas and concerns. People at all levels accept suggestions for

ways to improve the work. Alternatives are discussed freely, and clear and concrete goals

are developed and shared across the organization.

A compliance code can impact employee behaviors in only a limited way if genuine

change in organizational culture is absent. Such change can come about in a values-

driven organization that identifies values and invests considerable resources to make

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those values permeate all aspects of operations. Then, we will find employees opting to

make decisions consistent with those values, even when short-term payoffs are not

apparent.

Ethical business practice positively affects company performance. For example, if

employees are being treated well, it is likely that workplace productivity will increase.

Ethical business practices help in increasing job safety, employee relations as well as

result in a healthy balance between work and non-work aspects of employees' life. It can

also make it easier to recruit employees and make them stay longer, thereby reducing the

costs and disruption of recruitment and retraining.

In the presence of strong business ethics common errors such as the following are

avoided

Scapegoating

When customer complaints occur, perhaps employees blame everyone else, or every

other department. When goals aren't achieved, there may always seem to be someone's

else's doorstep on which the lay the fault. In the presence of strong ethics and values

embedded in the organization employees refrain from such activities.

Overpromising

"This company is the best place to work in the county!" "The promotion path here is

extremely fast." "We'll be going public within the year!" Are managers using these kinds

of statements frequently without knowing whether they're really true? If the norm is

making brash, optimistic (possibly untrue) statements to achieve a short-term result, it

would result in a bad image and poor ethical behavior on the part of the organization.

Turf "Guarding"

In today's rapidly changing marketplace, companies must be highly flexible to meet

customer demands. The result is that employees must be prepared to shift gears and learn

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new skills or serve on various work teams to complete projects. If an organization has

employees that hoard information and jealously guard their turf for any reason,

productivity may suffer and resentment can build. This kind of behavior indicates that

people don't trust their knowledge or expertise in someone else's hands.

Underachieving

Are employees allowed to barely "get by" and still be rewarded with a paycheck and even

promotions? Is mediocrity accepted because it's too difficult to fire people who aren't

really competent? If an organization takes the easy way out and tolerates employees who

are negative and only partially productive, long-term success is jeopardized.

Considering the case of Enron, Enron’s downfall is the greatest tragedy in corporate

history. Its decline, bankruptcy, and trials have made the name Enron iconic of corporate

hubris and unethical business practices. It caused a great degree of harm to employees

and the community at large.

The efficacy of corporate governance in monitoring managerial performance; the utility

of stock options in aligning managerial and shareholder interests, and the value of

employee ownership as both an incentive device as well as a retirement planning tool are

all important indicator’s of the company’s moral behavior. The fraudulent and disloyal

behavior in Enron impacted large numbers of working and middle-class employees.

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CONCLUSION

Most of the companies believe that they exist to make profits only. They justify their

focus on profits through following arguments:

1) Businesses are economic units and not social units. As long as I make profits, pay my

employees, deliver value to my shareholders, I am my existence is justified. I don’t exist

to do charity. My work is only to make profits, and government is responsible for social

development. A counter to this argument is businesses have license to make profits. But

do they have license to make profit at any cost?

2) Market (consumers) is king. They are the final authority to decide what should sell,

how much and at what price. So let market decide what should be sold. Make it

completely free and market driven economy. A counter to this argument is, is it practical

to let everything be decided by consumers or market?

3) Morality is a subjective phenomenon. What is immoral for you, is not for me. Like

paying bribe and getting work done might be immoral for you, but it is practical for me.

A counter to this argument is, is this a linguistic issue or there has to be a common

definition of ethics, there has to be some line drawn to by which everybody complies, and

by which the definition remains same for everybody.

4) Businesses are socially responsible people, as they provide employment to so many

people, pay taxes to government, improve quality of life of consumers etc. so if we focus

on profits for it, we should be allowed to do that, since we also do social responsibilities.

A counter to this argument is: do companies have right to do anything to make profit

behind the mask of social responsibility.

But till what extent can you push the line of ethics, or till what extent can companies

bend the rules.

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1) Till they are caught-like they say cheating is an art till you are not caught. But once

you are caught, you pay a heavy price. Like in case of colas, they never informed

consumers about pesticides content, but when they were exposed, they paid a heavy price

for it.

2) Till there is no option- consumers or employees will bear with the company as long as

they don’t have any other option. But they will immediately move when they get a more

transparent option. So you cannot buy loyalty.

3) Till the value you provide is much more than costs we pay for your immorality. It’s

like till Reliance provides much more value to shareholders and consumers, they will not

point out finger at Reliance’s immorality. But the day people feel Reliance’s values is not

worth the cost they pay for the rules it breaks, they will ask questions and justifications.

4) Till you make more people happy than sad. Till there are more people on your side,

than the other side, you will not be questioned.

So it’s not that being unethical or immoral only increases profits. Immorality does have

cost attached to it. Infact you pay a bigger price than benefit earned when you are caught.

You might get caught sooner or later. You might even be lucky enough to not get caught

in your existence, but you are only bargaining with time. Instead we can bargain with

profit, by letting some profit go. This means that in such cases, there would be lower

profits but “sustainable profits”. But from long term point of view it is best for a

company. So profitability and morality could be a tradeoff. But they can definitely co-

exist.

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