table of contents - cengage4ltrpress.cengage.com/mgmt/no_isbn_mgmt enrichment module...carol...

Table Of Contents

1. Case 1.10 - Puffing Your Résumé. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

2. Case 3.11 - Baseball Steroids. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

3. Case 4.2 - General Motors, Volkswagen, And The Traveling Executive. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

4. Case 5.2 - Wal-Mart and Julie Roehm: Conflicts vs. Affairs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

5. Case 5.6 - Drug Testing Of Employees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

6. Case 7.13 - GM Plant Closings And Efforts At Outplacement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

7. Case 7.16 - Exxon and Alaska. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

8. Case 8.15 - Executive Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

9. Case 11.3 - Giving and Spending the United Way. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

Cenga

ge Le

arning

Not For

Reprod

uctio

n

Cenga

ge Le

arning

Not For

Reprod

uctio

n

CASE 1.10Puffing Your RésuméThe résumé is a door opener for a job seeker. What’s on it can get you in the door orcause the door to be slammed in your face. With that type of pressure, it is not surpris-ing to learn that one 2006 study by a group of executive search firms showed that43 percent of all résumés contain material misstatements.12

Ed Andler, an expert in credential verification, says that one-third of all résumés con-tain some level of “creative writing.” Mr. Andler notes that assembly-line workers don’tmention misdemeanor convictions and middle managers embellish their educationalbackground. One reference-checking firm looked into the background of a securityguard applicant and found he was wanted for manslaughter in another state.

Vericon Resources, Inc., a background check firm, has found that 2 percent of the ap-plicants they investigate are hiding a criminal past. Vericon also notes, however, thatpotential employers can easily discover whether job candidates are lying about previousemployment by requesting W-2s from previous employers.

In one résumé-“puffing” case, according to Michael Oliver, a former executive recruit-er who is presently director of staffing for Dial Corporation, a strong candidate for a sen-ior marketing management position said he had an MBA from Harvard and four years’experience at a previous company, where he had been a vice president of marketing.Actually, Harvard had never heard of him, he had worked for the firm for only twoyears, and he had been a senior product manager, not a vice president.

In what may be the longest running case of undetected résumé misrepresentation,Marilee Jones, the dean of admissions of the Massachusetts Institute of Technology(MIT), resigned after twenty-eight years as an administrator in the admissions office.The dean for undergraduate education received information questioning Ms. Jones’sacademic credentials. Her résumé, used when she was hired by MIT, indicated that shehad degrees from Albany Medical College, Union College, and Rensselaer PolytechnicInstitute. In fact, she had no degrees from any of these schools or from anywhere else.She had attended Rensselaer Polytechnic as a part-time nonmatriculated student duringthe 1974–75 school year, but the other institutions had no record of any attendance attheir schools.

When Ms. Jones arrived at MIT for her entry-level position in 1979, a degree wasprobably not required. However, she did progress through the ranks of the admissionsoffice, and, in 1997, she was appointed dean of admissions. She explained that shewanted to disclose her lack of degrees at that point but that she had gone on for so longthat she did not know how to come clean with the truth. In an interview with the WallStreet Journal, about one month before she resigned, Ms. Jones said the exaggeration ofcredentials by applicants was frequent, “The way the whole college application system isset up now, it really does encourage cheating and lying.”13

In 1997, Dianna Green, a senior vice president at Duquesne Light, left her position atthat utility. The memo from the CEO described her departure as one that would allowMs. Green to pursue “other career interests she has had for many years.” Although thememo expressed sadness at her departure, Ms. Green had been fired for lying on her

12 Dan Barry, “Cheating Hearts and Lying Résumés,” The New York Times, December 14, 1997, pp. WK1, WK4.13 Barry, “Cheating Hearts and Lying Résumés,” pp. WK1, WK4.

Jennings Business Ethics, 6th Edition

1

Cenga

ge Le

arning

Not For

Reprod

uctio

n

résumé by stating that she had a master’s degree in business administration when, infact, she had no master’s degree.14

Ms. Green had worked her way up through the company and had been responsiblefor handling the human resources issues in Duquesne’s nine years of downsizing. At thetime of her termination, she was a director at Pennsylvania’s largest bank and knownwidely for her community service.

On the day following her termination, Ms. Green was found dead of a self-inflictedgunshot wound.15

Discussion Questions

1. What do you learn from the tragedy ofMs. Green? Peter Crist, a background checkexpert, said, “You can’t live in my world andcover stuff up. At some point in time, you willbe found out if you don’t come clean. Itdoesn’t matter if it was 2 days ago or 20 yearsago.” As you think through these examples,can you develop some important principlesthat could be important for your credo?16 Wasthe tragedy of Ms. Green avoidable? Was Du-quesne Light justified in terminating her?

2. George O’Leary was hired by Notre DameUniversity as its head football coach inDecember 2001. However, just five days afterNotre Dame announced Mr. O’Leary’s appoint-ment, Mr. O’Leary resigned. Mr. O’Leary’srésumé indicated that he had a master’sdegree in education from New York University(NYU) and that he played college football forthree years. O’Leary had been a student atNYU, but he never received a degree from theinstitution. O’Leary went to college in NewHampshire, but never played in a footballgame at his college and never received a letteras he claimed. When Notre Dame announcedthe resignation, Mr. O’Leary issued the follow-ing statement, “Due to a selfish and thought-less act many years ago, I have personallyembarrassed Notre Dame, its alumni andfans.” Why did the misrepresentations, whichhad been part of his résumé for many years,go undetected? Evaluate the risk associated

with the passage of time and a résumé inaccu-racy. Would it be wrong to engage in résumépuffing and then disclose the actual facts inan interview? Be sure to apply the models.

3. Suppose that you had earned but, due to ahold on your academic record because ofunpaid debts, had never been formallyawarded a college degree. Would you state onyour résumé that you had a college degree?

4. Suppose that, in an otherwise good careertrack, you were laid off because of an eco-nomic downturn and remained unemployedfor thirteen months. Would you attempt toconceal the thirteen-month lapse in yourrésumé?

5. The Phoenix Diamondbacks hired WallyBackman as the new team manager onMonday, October 1, 2004. By Friday, October 5,2004, the Diamondbacks’ owners announcedthat they were not hiring Wally Backman, butinstead would hire Bob Melvin, the formerSeattle Mariners manager, as the Diamond-backs’ new manager. For the 96 hours betweenone announcement and the next, the revela-tions about Wally Backman proved too muchfor the owners to swallow. Backman did notdisclose that he faced up to a year in jail forpossible violation of his probation in a DWIcase. His blood alcohol level at the time of hisDWI arrest was 68 percent higher than thatallowed by law. He was placed on probation,

14 The information was revealed after Ms. Green was deposed in a suit by a former subordinate for termination. Because Ms. Green hesitat-ed in giving a year for her degree, the plaintiff’s lawyer checked and found no degree and notified Duquesne officials. Duquesne officialsthen negotiated a severance package.15 It should be noted that Ms. Green was suffering from diabetes to such an extent that she could no longer see well enough to drive. Also,during the year before her termination, her mother had died of a stroke and her youngest brother also had died. Carol Hymowitz and RajuNarisetti, “A Promising Career Comes to a Tragic End, and a City Asks Why,” The Wall Street Journal, May 9, 1997, pp. A1, A8.16 JoAnn S. Lublin, “No Easy Solution for Lies on a Résumé,” Wall Street Journal, April 27, 2007, p. B2.


Case 1.10 - Puffing Your Résumé2

Cenga

ge Le

arning

Not For

Reprod

uctio

n

found to be at the early stages of alcoholdependency, and ordered to seek treatment. Hehad not sought treatment as required and wasfacing a probation violation as a result. He alsohad a charge of misdemeanor harassment in adomestic disturbance. The Diamondbacks’ own-ers indicated that when asked if there was any-thing more they should know about him and hisbackground, Mr. Backman indicated there wasnot. The Diamondbacks did not conduct a back-ground check. Mr. Backman had been with theDiamondbacks’ Class A club and had managedthat minor league team during 2004. However,over the next few days, the widely reported in-cidents came to the surface and the owners feltthey could not trust Mr. Backman, so they wentwith their second choice. Won’t complete can-dor prevent you from ever getting a job?17,18

Mr. Backman resolved his probation issuesand spent two years “lying low,” as he de-scribes it. In 2007, he managed the GeorgiaPeanuts, a baseball team in the IndependentSouth Coast League.

6. Is puffing a short-term solution in a tight jobmarket?

7. In a wrongful firing case brought againstHoneywell by a former employee, a federalcourt permitted Honeywell to use the defensethat the employee had lied on her résumé(over eight years before the litigation) by stat-ing that she had a college degree when shehad taken only six courses (two as audits) andthat she had managed property during a timewhen she owned no property and wasunemployed. Her discharge had nothing to dowith the puffing on her résumé, but the courtruled that “an employer may defend a wrong-ful discharge claim on the basis of factsunknown at the time of discharge.” A subse-

quent court decision has held that a previouslyunknown fact is not a defense to discrimina-tion, but it can always be used as grounds fortermination. Is it fair that employers can usethe résumé defense in any circumstance? Dis-cuss why candor in résumés is important toemployers. Explain why it is important to youwhen you are seeking a job.

8. James Joseph Minder was appointed to theboard of gun manufacturer Smith & Wesson,headquartered in Scottsdale, Arizona, in 2001.In early 2004, he assumed the position of chair-man of the board. One month later, he resignedas chair of the board because the localnewspaper, the Arizona Republic, reported thatMr. Minder had completed a 3.5- to 10-yearprison sentence for a series of armed robberiesand an escape from prison. He had carried asawed-off shotgun during the string of robber-ies, committed while he was a student at theUniversity of Michigan. Mr. Minder indicatedthat he had never tried to hide his past. In1969, when he was released from prison, hefinished his degree and earned a master’sdegree from the University of Michigan. Hespent twenty years running a successful non-profit center for inner-city youth until his retire-ment in 1997, when he moved to Arizona. Mr.Minder’s position is that the subject of his trou-bled youth and criminal past never came up, sohe never disclosed it.19 Evaluate Mr. Minder’sposition and silence. What do you think ofSmith & Wesson’s press release indicating thatMr. Minder “had led an exemplary life for35 years”? Mr. Minder remains on the board.Why did the public react so negatively to hispast and position?

9. Is there something for your credo that youlearn from all of this resume experiences?

17 Ed Price, “Backing Out,” Tribune, November 6, 2004, pp. C1, C3.,18 Scott Bordow, “Credibility Need Makeover after Fiasco,” Tribune, November 6, 2004, pp. C1, C3.19 http://money.cnn.com/2004/02/27/news/smith_wesson/?cnn=yes.


Case 1.10 - Puffing Your Résumé 3

Cenga

ge Le

arning

Not For

Reprod

uctio

n


Case 1.10 - Puffing Your Résumé4

Cenga

ge Le

arning

Not For

Reprod

uctio

n

CASE 3.11Baseball SteroidsOn March 17, 2005, former and current major league baseball players and CommissionerBud Selig testified before the U.S. House of Representatives Government Reform Commit-tee, along with the parents of young baseball players who had taken their own lives after tak-ing steroids. The House held hearings to determine whether government regulation of MajorLeague Baseball’s drug-testing policies to prevent and detect use in the sport is necessary.

The committee issued subpoenas for the hearing to seven current or former majorleague players: Jose Canseco, Jason Giambi, Mark McGwire, Rafael Palmeiro, Curt Schilling,Sammy Sosa, and Frank Thomas. Subpoenas were also issued to four baseball officials:Robert Manfred, executive vice president and labor counsel, Major League Baseball; DonFehr, executive director and general counsel, Major League Baseball Players Association;Sandy Alderson, former general manager of the Oakland Athletics and current MLBexecutive vice president of baseball operations; and Kevin Towers, general manager ofthe San Diego Padres. Only Jose Canseco, Don Fehr, and Rob Manfred had alreadyagreed to appear voluntarily, according to a release by the committee chair.76

Committee Chair Tom Davis made an opening statement that offered the backgroundon the issues related to steroid use that had led to the congressional investigation andthis hearing:77

Fourteen years ago, anabolic steroids were added to the Controlled Substance Act as a Schedule IIIdrug, making it illegal to possess or sell them without a valid prescription. Today, however,evidence strongly suggests that steroid use among teenagers—especially aspiring athletes—is alarge and growing problem. There is an absolute correlation between the culture of steroids inhigh schools and the culture of steroids in major league clubhouses. Kids get the message whenit appears that it’s okay for professional athletes to use steroids. If the pros do it, college ath-letes will, too. And if it’s an edge in college, high school students will want the edge, too.

There is a pyramid of steroid use in society. And today, our investigation starts where itshould: with the owners and players at the top of the pyramid.

Congress first investigated drugs and professional sports, including steroids over 30 yearsago. I think perhaps the only two people in the room who will remember this are me and Com-missioner Selig, because I believe he became an owner in 1970.

In 1973, the year I first ran for Congress, the House Committee on Interstate and ForeignCommerce concluded a year-long investigation that found—and I quote—“drug use exists … inall sports and levels of competition … In some instances, the degree of improper drug use—primarily amphetamines and anabolic steroids—can only be described as alarming.”

The Committee’s chairman—Harley Staggers—was concerned that making those findingspublic in a hearing would garner excessive attention and might actually encourage teenagers touse steroids. Instead, he quietly met with the commissioners of the major sports, and theyassured him the problem would be taken care of.

76 http://www.commondreams.org/news2005/0309-22.htm.77 House Committee on Government Reform press release, March 9, 2005, “Government Reform Committee Statement on Issuance of Sub-poena to Major League Baseball Executives and Players,” CommonDreams.org News Center, http://www.commondreams.org/news2005/0309-22.htm; accessed 12/12/2007.


2

Cenga

ge Le

arning

Not For

Reprod

uctio

n

Chairman Staggers urged Baseball Commissioner Bowie Kuhn to consider instituting toughpenalties and testing. And he trusted Commissioner Kuhn to do that. In fact, in a press release inMay 1973, Chairman Staggers said—and again I quote—“Based on the constructive responsesand assurances I have received from these gentlemen, I think self-regulation will be intensified,and will be effective.”

But as we now know from 30 years of history, baseball failed to regulate itself.

Let’s fast forward to 1988. Jose Canseco was widely suspected of using steroids. Fans inopposing parks even chanted the phrase “steroids” when he came to bat. But according toMr. Canseco, no one in major league baseball talked with him or asked him any questions aboutsteroids. He was never asked to submit to a drug test. Instead, he was voted the AmericanLeague’s Most Valuable Player.

In 1991, Fay Vincent, then baseball’s commissioner, finally took unilateral action and releaseda Commissioner’s Policy that said “the possession, sale, or use of any illegal drug or controlledsubstance by Major League players and personnel is strictly prohibited … This prohibition appliesto all illegal drugs and controlled substances, including steroids.” This policy didn’t give MajorLeague Baseball the right to demand that players take mandatory drug tests, but it was a step inthe right direction and demonstrated the league’s authority to act on its own to respond to allega-tions of steroid use.

In 1992, Bud Selig was appointed commissioner and replaced Mr. Vincent. One year later, in1993, the Centers for Disease Control reported that 1 in 45 teenagers had used illegal steroids.

In 1995, the first of a series of detailed investigative reports about steroid use in baseballwas published. The Los Angeles Times quoted one major league general manager who said:“We all know there’s steroid use, and it’s definitely become more prevalent… I think 10% to20%.” Another general manager estimated that steroid use was closer to 30%.

In response to that story, Commissioner Selig said, “If baseball has a problem, I must saycandidly that we were not aware of it. But should we concern ourselves as an industry? I don’tknow.”

In 1996, Ken Caminiti, who was using steroids, won the Most Valuable Player Award. Thatsame year, Pat Courtney, a major league spokesman, commented on steroids and said, “I don’tthink the concern is there that it’s being used.”

In 1997, the Denver Post investigated the issue, reporting that as many as 20% of big leagueballplayers used illegal steroids.

In 1998, baseball hit the height of its post-baseball strike resurgence, as Sammy Sosa andMark McGwire both shattered Roger Maris’s home run record.

In 1999, the Centers for Disease Control reported that 1 in 27 teenagers had used illegalsteroids.

In July 2000, a Boston Red Sox infielder had steroids seized from his car. Three months later,the New York Times published a front-page story on the rampant use of steroids by professionalbaseball players. And here’s what a major league spokesman said the very same year: “steroidshave never been much of an issue.”

In June 2002, Sports Illustrated put steroids on its cover and reported that baseball “hadbecome a pharmacological trade show.” One major league player estimated that 40% to 50% ofmajor league players used steroids.


Case 3.11 - Baseball Steroids6

Cenga

ge Le

arning

Not For

Reprod

uctio

n

After that Sports Illustrated article, Major League Baseball and the players’ union finally agreedto a steroid testing regimen. Independent experts strongly criticized the program as weak and lim-ited in scope. But in 2003, when the first results were disclosed, Rob Manfred, baseball’s Vice Pres-ident for labor relations, said, “A positive rate of 5% is hardly a sign that you have rampant use ofanything.”

The same year, the Centers for Disease Control reported that 1 in 16 high school studentshad used illegal steroids.

The allegations and revelations about steroid use in baseball have only intensified in recentmonths. We have learned that Jason Giambi, a former most valuable player, Gary Sheffield, andBarry Bonds, who has won the most valuable player award seven times, testified before a feder-al grand jury in San Francisco about their steroid use.

The Centers for Disease Control and Prevention tells us that more than 500,000 high schoolstudents have tried steroids, nearly triple the number just ten years ago. A second national sur-vey, conducted in 2004 by the National Institute on Drug Abuse and the University of Michigan,found that over 40 percent of 12th graders described steroids as “fairly easy” or “very easy” toget, and the perception among high school students that steroids are harmful has dropped from71 percent in 1992 to 56 percent in 2004.

This is but a snapshot of the startling data we face. Today we take the committee’s first stepstoward understanding how we got here, and how we begin turning those numbers around.Down the road, we need to look at whether and how Congress should exercise its legislativepowers to further restrict the use and distribution of these substances.

Our specific purpose today is to consider MLB’s recently negotiated drug policy; how the testingpolicy will be implemented; how it will effectively address the use of prohibited drugs by players;and, most importantly, the larger societal and public health ramifications of steroid use.

Yesterday, USA Today reported that 79 percent of players surveyed believe steroids played arole in record-breaking performances by some high-profile players. While our focus is not on theimpact of steroids on MLB records, the survey does underscore the importance of our inquiry.

A majority of players think steroids are influencing individual achievements—that’s exactlyour point. We need to recognize the dangerous vicious cycle that perception creates.

Too many college athletes believe they have to consider steroids if they’re going to make it tothe pros; high school athletes, in turn, think steroids might be the key to getting a scholarship.It’s time to break that cycle, and it needs to happen from the top down.

When I go to Little League opening games these days, kids aren’t just talking about their favor-ite teams’ chances in the pennant race; they’re talking about which pro players are on the juice.

After the 1994 MLB players strike, rumors and allegations of steroid use in the league beganto surface. Since then, long standing records were broken. Along with these broken records cameallegations of steroid use among MLB’s star players. Despite the circulating rumors of illegal druguse, MLB and the Players Association did not respond with a collective bargaining agreement toban the use of steroids until 2002. The result was an almost decade long question mark as to,not only the validity of the new MLB records, but also the credibility of the game itself.

In February of this year, former MLB All-Star Jose Canseco released a book that not only al-leges steroid use by well known MLB players, but also discusses the prevalence of steroids inbaseball during his 17-year career. After hearing Commissioner Bud Selig’s public statements


Case 3.11 - Baseball Steroids 7

Cenga

ge Le

arning

Not For

Reprod

uctio

n

that MLB would not launch an investigation into Mr. Canseco’s allegations, my Ranking MemberHenry Waxman wrote me asking for a Committee hearing to, quote, “find out what really hap-pened and to get to the bottom of this growing scandal.” End quote. Furthermore, today’s hear-ing will not be the end of our inquiry. Far from it. Nor will Major League Baseball be our sole oreven primary focus. We’re in the first inning of what could be an extra inning ballgame.

This is the beginning, not the end. We believe this hearing will give us good information aboutthe prevalence of steroids in professional baseball, shine light on the sometimes tragic results ofsteroid use by high school and college athletes, and provide leads as to where to take our investi-gation next.

Leads from Senator Bunning about how to restore integrity to the game.

Leads from medical experts about how to better educate all Americans about the very realdangers of steroid use.

Leads from parents whose stories today will poignantly illustrate that, like it or not, profes-sional athletes are role models, and their actions can lead to tragic imitation.

We are grateful to the players who have joined us today to share their perspectives on therole and prevalence of performance enhancing drugs in baseball. Some have been vocal aboutthe need for baseball to address its steroid problem; I applaud them for accepting this calling.

Others have an opportunity today to either clear their name or take public responsibility fortheir actions, and perhaps offer cautionary tales to our youth. In total, we think the six currentand former players offer a broad perspective on the issue of steroids and baseball, and we’relooking forward to hearing from all of them.

Finally, we are fortunate to have with us a final panel of witnesses representing MLB, thePlayers’ Association, and front office management. This panel is, quite frankly, where the rubberwill meet the road. If the players are cogs, this is the machine. If the players have been silent,these are the enforcers and promoters of the code.

Ultimately, it is MLB, the union, and team executives that will determine the strength of thegame’s testing policy. Ultimately, it is MLB and the union that will or will not determine account-ability and punishment. Ultimately, it is MLB and the union that can remove the cloud over base-ball, and maybe save some lives in the process.

Oh, somewhere in this favored land the sun is shining bright;The band is playing somewhere, and somewhere hearts are light;And somewhere men are laughing, and somewhere children shout;But there is no joy in Mudville – until the truth comes out.78

Following are excerpts from the players’ and former players’ testimony:Jose Canseco, whose book, Juiced, alleges that he, Sammy Sosa, and Mark McGwire,

all used steroids:

The book that I wrote was meant to convey one message. The preface makes my position very clear.I do not condone or encourage the use of any particular drugs, medicine, or illegal substances in anyaspect of life. I did not write my book to single out any one individual or player. I am saddened thatthe media and others have chosen to focus on the names in the book and not on the real culpritbehind the issue.

78 http://reform.house.gov/GovReform/Hearings/EventSingle.aspx?EventID=1637.



Cenga

ge Le

arning

Not For

Reprod

uctio

n

Because of my truthful revelations I have had to endure attacks on my credibility. I have had torelive parts of my life that I thought had been long since buried and gone. All of these attacks havebeen spurred on by an organization that holds itself above the law. An organization that chose toexploit its players for the increased revenue that lines its pockets and then sacrifice those sameplayers to protect the web of secrecy that was hidden for so many years. The time has come to endthis secrecy and to confront those who refuse to acknowledge their role in encouraging the behaviorwe are gathered to discuss.

The pressure associated with winning games, pleasing fans, and getting the big contract, ledme, and others, to engage in behavior that would produce immediate results.

Why did I take steroids? The answer is simple. Because, myself and others had no choice ifwe wanted to continue playing. Because MLB did nothing to take it out of the sport.

Baseball owners and the players union have been very much aware of the undeniable that asa nation we will do anything to win. They turned a blind eye to the clear evidence of steroid usein baseball. Why? Because it sold tickets and resurrected a game that had recently suffered ablack eye from a player strike.

In answer to a question, Mr. Canseco said,

It was as acceptable in the late ‘80s and the mid-’90s as a cup of coffee.79

Mark McGwire, now retired, and a record holder:

Asking me, or any other player, to answer questions about who took steroids in front of televi-sion cameras, will not solve this problem. If a player answers “no,” he simply will not bebelieved. If he answers “yes,” he risks public scorn and endless government investigations. Mylawyers have advised me that I cannot answer these questions without jeopardizing my friends,my family or myself. I intend to follow their advice.80

Curt Schilling, a Boston Red Sox player, also made a statement that included thefollowing:

First, I hope the Committee recognizes the danger of possibly glorifying the so-called author sched-uled to testify today or by indirectly assisting him to sell more books through his claims that whathe is doing is somehow good for this country or the game of baseball. A book which devotes hun-dreds of pages to glorifying steroid usage and which contends that steroid usage is justified andwill be the norm in this country in several years is a disgrace, was written irresponsibly and sendsexactly the opposite message that needs to be sent to kids. The allegations made in that book, theattempts to smear the names of players, both past and present, having been made by one who foryears vehemently denied steroid use should be seen for what they are, an attempt to make moneyat the expense of others. I hope we come out of this proceeding aware of what we are dealingwith when we talk about that so-called author and that we not create a buzz that results in youngathletes buying the book and being misled on the issues and dangers of steroids.

Rafael Palmeiro, a Baltimore Oriole at the time of the hearing, and former Texas Ranger,testified, “I have never used steroids. Period. I don’t know how to say it any more clearlythan that. Never. The reference to me in Mr. Canseco’s book is absolutely false.” ByAugust 2005, Mr. Palmeiro would be the first big-name player to be suspended underthe tougher policies that Commissioner Selig described at the congressional hearings.

79 http://reform.house.gov/GovReform/Hearings/EventSingle.aspx?EventID=1637.80 http://reform.house.gov/GovReform/Hearings/EventSingle.aspx?EventID=1637. Click on Mark McGwire.



Cenga

ge Le

arning

Not For

Reprod

uctio

n

By the time of the Palmeiro suspension, there had been six other players suspended fortesting positive. Mr. Palmeiro was suspended for 10 days following a drug test that waspositive for the presence of steroids.81 Several people associated with MLB said that theleague was aware of the positive test about one month before the suspension wasannounced but allowed Mr. Palmeiro to hit, as it were, the milestone of 3,000 hits beforesuspending him. MLB took out a full-page ad in major newspapers to congratulate Mr.Palmeiro on his achievement, only one of four players in the history of the game to reach3,000 hits and 500 home runs. He was then suspended. Congress also investigated Mr.Palmeiro for perjury but concluded it could bring no charges because there was toomuch time elapsed from when he testified and when he tested positive for steroids.There was no way to establish that he had used steroids prior to the hearing.

The regulatory process was stalled, but the Justice Department and local prosecutorscontinued their pursuit of the players. However, federal district courts dealt the prosecu-tion efforts a blow when federal judges ordered the government to return evidence agentshad seized from private labs, including the names of drug tests results of over 100 MajorLeague Baseball players. The evidence, and the names included, had been seized as part ofan investigation into possible perjury charges against some of the players. The federal pro-secutors appealed to the Ninth Circuit Court of Appeals and in a 2-1 decision the federalappellate court ruled that the federal government’s raid of testing labs in California andNevada that yielded positive test results was a constitutional search and seizure and thatthe information could be used for prosecution of the players. San Francisco player BarryBonds was indicted in November 2007 on federal charges of perjury before a grand juryas a result of this investigation that included evidence seized from Balco, Bay Area LabCooperative, one of the alleged suppliers of steroids to the baseball players.

The battle over the use—of the drug-testing results began when the Major LeagueBaseball Players’ Association—the union representing athletes who play for MajorLeague Baseball, filed a motion to quash the subpoenas that had been issued to the labs.The federal government then obtained warrants and conducted the searches at severallabs. The documents the government obtained in those searches included a twenty-five-page master list of all MLB players tested during the 2003 season and a thirty-four-pagelist of positive drug testing results for 34 players.

As the government’s case proceeded, MLB hired former Senator George Mitchell inMarch 2006 to conduct an investigation into the steroid issue in baseball as well as deter-mine whether the MLB’s policies were working. That report is due in December 2007.However, there was resistance to the choice because Mr. Mitchell serves on the board ofdirectors for the Boston Red Sox. Undaunted, former Senator Mitchell began an investi-gation that hit a roadblock when players refused to talk with him. Faced with litigation,Jason Giambi of the New York Yankees agreed to cooperate with Mitchell.82 Mitchellpursued Giambi because he testified before a grand jury in 2003 that he had used ster-oids and in an interview with USA Today said, “What we should have done a long timeago was stand up, players, ownership, everybody, and say, ‘We made a mistake.’”83

Congress has continued its involvement and oversight with Rep. Henry Waxman ofCalifornia, the chair of the committee that conducted the 2005 hearings, who said,“Federal legislation may be needed to restore confidence in the integrity of the game.”84

81 Bill Pennington, “Baseball Bans Longtime Star for Steroid Use,” New York Times, August 2, 2005, p. A1.82 Bob Nightengale, “Giambi Set to Cooperate with Mitchell,” USA Today, June 22, 2007, p. 1C.83 Id.84 Howard Fendrich, “Congress: Not Enough Evidence Against Palmeiro for Perjury Charges,” AP wire report, November 10, 2005.



Cenga

ge Le

arning

Not For

Reprod

uctio

n

In 2006, two reporters published Game of Shadows, a book in which steroid use byBarry Bonds and other players was not only obvious but had been testified about at thegrand jury. Commentators have noted that Mark Fainaru-Wada and Lance Williams didthe research and asked the tough questions that MLB should have been doing and theresult was a damning book that has resulted in Bonds being booed by baseball fans inevery stadium he enters. Tommy Lasorda said that if there were any celebrations forBonds upon breaking the record, he would not join in, “For me, records were meant tobe broken, but you don’t do it by cheating. When you’re stealing signs, that’s all part ofthe game. But when you cheat to that degree, it’s not good at all.”85

On December 13, 2007, former Senator George Mitchell released his report on ster-oids use in major league baseball to Commissioner Bud Selig. The full report and theexecutive summary can be found at mlb.com.


1. What is the responsibility of MLB withregard to the steroid issue? Be sure to applysome of the ethical analysis models you havestudied. Couldn’t MLB argue that it is not anenforcement agent, and it has no way ofdetermining whether every player is usingsteroids at any given time? Does thisargument excuse any responsibility on thepart of MLB?

2. Do you see any rationalizations for the steroiduse or the lack of an effective policy on its usein MLB?

3. What is the responsibility of MLB and theplayers to the young people who are usingsteroids?

4. Discuss the Canseco allegations that MLB justwanted revenue and turned a blind-eye to ste-roid use. Apply the various social responsibilitytheories to this point and discuss the flaws inthis competitive model. How does its conductwith Mr. Palmeiro affect your discussion ofthis question.

5. Commissioner Selig offered the following in histestimony, “I should also say a word about ourplayers. For some time now the majority of ourgreat and talented athletes have deeply—and

rightly—resented two things. They haveresented being put at a competitive disadvan-tage by their refusal to jeopardize their healthand the integrity of the game by using illegaland dangerous substances. And they havedeeply—and rightly—resented the fact thatthey live under a cloud of suspicion that taintstheir achievements on the field.”Using hisstatement, explain how unethical behaviorhurts those who comply with the rules. Applythese same principles to academic dishonesty.

6. When he was inducted into Baseball’s Hall ofFame in 2005, Ryne Sandberg said, “I didn’tplay the game right because I saw a rewardat the end of the tunnel. I played the gameright because that’s what you’re supposedto do.”86

7. Mark McGwire is eligible for the Hall of Famein 2007. Barry Bonds broke Hank Aaron’shome-run record in 2007, but did so before hewas indicted for perjury. Should these twoplayers be inducted into the Hall of Fame?Sports Illustrated has noted that Barry Bondscould end up “in baseball purgatory with PeteRose.”87 What lessons about ethics do theMcGwire and Bonds outcomes and controver-sy provide?

85 Bob Nightengale, “Lasorda to pass on any festivities for Bonds,” USA Today, May 12, 2006, 1C.86

“Sandberg, Boggs Relish Hall of Fame Induction Day,” USA Today, August 1, 2005, p. 1C.87 Tom Verducci, “The Consequences,” Sports Illustrated, March 13, 2006, p. 53.



Cenga

ge Le

arning

Not For

Reprod

uctio

n



Cenga

ge Le

arning

Not For

Reprod

uctio

n

CASE 4.2General Motors, Volkswagen, and the TravelingExecutiveJose Ignacio Lopez de Arriortua was a vice president with General Motors Corporation’sGM Espana, Opel, and GM Europe AG Division (GM). Shortly after his promotion tovice president in February 1993, Mr. Lopez resigned from GM and took a position aspart of the management board of Volkswagen AG, a German corporation (VW) onMarch 16, 1993.2

Joining Mr. Lopez at VW by March 22, 1993, were GM’s executive director of purchas-ing for GM Espana, Jorge Alvarez, a platform manager for the S-Car, O-Car and Opel;Rosario Piazza, a sourcing specialist for Opel; Hugo Van der Auwera, executive director ofworldwide purchasing for GM Continential (based out of Belgium); Francisco Garcia-Sanz,executive director of worldwide purchasing for GM’s electrical commodity group; AndriesVersteeg, manager-European liaison for advance purchasing and global sourcing; and Wil-liam Admiraal, an employee of GM who is also married to Lopez’s daughter, Irene.

GM filed suit under the Lanham Act (protection against the taking of trade secrets)and alleged that Mr. Lopez, from as early as August 1992 until his departure in March1993, secretly communicated with VW representatives about a job and promised tobring along with him to his new job at VW business plans and trade secrets.3 Specifical-ly, the suit alleges that Mr. Lopez was to bring along confidential documents, transparen-cies, and computer diskettes that contained the following information:4

• Listings of GM and Opel components by worldwide supplier, price, terms, conditions, and deliveryschedules

• A copy of GM’s Product Purchasing System (PPS)

• A copy of GM Europe’s European Purchasing Optimization System (EPOS)

• Plans for “Plant X,” the factory of the future

• Future auto plans to the year 2003

• Future strategies for purchasing5

GM alleged that Lopez and those GM employees who went with him to Volkswagentook over 20 cartons of stolen documents, entered the data on computers over a month-long period at VW, and had the documents transferred to a third party for shredding inorder to destroy the evidence of the documents being taken from GM. An audit by KPMGPeat Marwick, commissioned by GM, concluded that the documents had been taken.6 Fol-lowing an initial denial in which VW’s CEO, Ferdinand Piech, referred to the GM chargesas “mudslinging,” VW admitted in August 1993 that the former GM employees had indeedtaken the documents but that they were destroyed shortly after they began their work atVW and that VW never had access to the information. In a statement admitting the docu-ment theft, VW said that GM employees “destroyed documents which could possibly beattributed to GM and could contain critical information, in order to remove any danger of

2 William M. Carley, “Secret Suit: What Did He Know?” The Wall Street Journal, January 19, 1988, pp. B1–B8.3 General Motors Corporation v. Ignacio Lopez de Arriortua, 948 F.Supp. 656 (E.D. Mich. 1996).4“Judge Sets Michigan Venue for GM Suit Against VW,” The Wall Street Journal, October 18, 1996, p. B5.

5 John Templeman and Peggy Salz-Trautman, “VW Figures Its Best Defense May Be a Good Offense,” Business Week, August 19, 1993,p. 29.6 Ferdinand Protzman, “VW Sets a Board Meeting on G.M. Dispute,” The New York Times, October 5, 1993, p. c4.


3

Cenga

ge Le

arning

Not For

Reprod

uctio

n

distribution at Volkswagen.”7 The release also added that its own internal investigationfound nothing “which could warrant the accusation of industrial espionage.” The statementalso added that the “young men didn’t act correctly toward their former employer.”8

In June 1993, German officials discovered four boxes of trade secret documents in thehome of one of the associates of Lopez, as well as others in Lopez’s home.9 Those boxeswere seized and German authorities ultimately indicted Mr. Lopez and three others whotransferred to VW. German authorities continued with their prosecution despite VW’spress release because the destruction did not mean the information was not ultimatelyused and the company had not used a third party to conduct the internal investigation.

These circumstances ultimately resulted in 11 different legal proceedings, includingthe German charges and the suit by GM for violations of the Lanham Act as well asRICO violations. Mr. Lopez was indicted on six counts of wire fraud and interstatetransportation of stolen property in May 2000. The indictment alleges that in the fourmonths preceding his departure from GM, Mr. Lopez and his assistants made anextraordinary number of requests for confidential documents.

Mr. Lopez was indicted, not under the Economic Espionage Act (EEA) because thatact was passed largely because of the Lopez/VW scenario and was enacted after the fact.Ex post facto laws cannot be applied to conduct occurring before the passage, but undercomputer fraud statutes.10 The EEA makes it a crime for employees to download, copy,e-mail, transfer, or in any way provide information about their current companies totheir new companies.

VW settled the suit by GM in 1997 by agreeing to pay $100 million. VW did not,however, admit any wrongdoing as part of that settlement. Mr. Lopez settled his criminalcharges by the German government by agreeing to pay $224,000 to charity. Mr. Lopezleft VW in 1996, largely because the company did not fulfill what he said was its promiseto him to allow him to build a “dream factory.” Mr. Lopez works as an auto consultantwhile living in the Basque region of Spain. In 1998 he was in an auto accident and suf-fered brain damage which has resulted in memory lapses. Of the whole GM/VW scenar-io, Mr. Lopez was disappointed that VW did not build his dream factory, “If I hadknown that, I wouldn’t have changed jobs. It was my error.”11


1. Do you think what the GM employees did waswrong?

2. Wouldn’t Mr. Lopez have most of the keys tothe supply chain management system of GMin his head anyway?

3. Don’t competitors hire employees from theircompetitors with the hope of bringing in expe-

rience? Is there a line between sharing experi-ence and sharing systems?

4. Would you have taken the documents?

5. Does it make a difference that the documentsare related to the supply chain and not newproducts or ideas?

7“VW, GM Spy’ Feud,” Arizona Republic, July 30, 1993, p. B1.

8 Audrey Choi, “VW Discloses GM Documents Were Destroyed,” The Wall Street Journal, August 9, 1993, p. A3.9 Ferdinand Protzman, “German Prosecutors Link Lopez to Secret GM Papers,” The New York Times, July 23, 1993, pp. C1, C2.10 Keith Bradsher, “Former G.M. Executive Indicted on Charges of Taking Trade Secrets,” The New York Times, May 23, 2000,pp. C1, C2.11 Id.


Case 4.2 - General Motors, Volkswagen, And The Traveling Executive14

Cenga

ge Le

arning

Not For

Reprod

uctio

n

CASE 5.2Wal-Mart and Julie Roehm: Conflicts vs. AffairsIn 2007, Wal-Mart was in litigation with a former advertising executive, Ms. JulieRoehm, who filed a wrongful termination suit against the company, seeking moneyunder her contract with Wal-Mart because the company had not given her a valid rea-son for termination. Wal-Mart counterclaimed for its legal fees as well as for the da-mages (costs) it experienced when it had to rebid the advertising agency contract Ms.Roehm had awarded. Wal-Mart alleged that there was a conflict of interest in that awardof the advertising contract because Ms. Roehm had accepted expensive meals and othergifts from the agency, a violation of Wal-Mart’s code of ethics.

In its counterclaim, Wal-Mart alleged that Ms. Roehm had an affair with SeanWomack (both are married with children), her second-in-command at the company.E-mails allegedly sent to Mr. Womack from Ms. Roehm. Mrs. Womack had providedWal-Mart with copies of the e-mails from the Womacks’ personal computer.

I hate not being able to call you or write you. I think about us together all the time. Little mo-ments like watching your face when you kiss me.24

The filing also accuses the two of seeking employment with Draft FCB. Draft FCBwas the company that was awarded the Wal-Mart ad account by Ms. Roehm. As notedearlier, Wal-Mart fired Draft FCB after the revelations about the conflicts and has sincehired Interpublic Group. Wal-Mart’s decision to terminate Draft FCB’s contract cameafter Wal-Mart learned the following information, perks that Roehm and Womackenjoyed via Draft FCB (and which were included in Wal-Mart’s counterclaim filings):

• $1,100 dinner

• $700 LuxBar in Chicago

• $440 at the bar in the Peninsula Hotel

Draft FCB cooperated with Wal-Mart by providing copies of the e-mail communica-tions between its employees and Roehm and Womack. However, Draft FCB also releaseda statement indicating that the employee who was communicating with Womack aboutemployment for the two had no authority to negotiate such employment contracts andeven lacked any authority to engage in business development.

Once Wal-Mart counterclaimed, Ms. Roehm fired back with her own allegations, onesthat basically argued that “what’s sauce for the goose is sauce for the gander,” a timelesslegal principle in these battles of will. She alleged that Lee Scott, Wal-Mart’s CEO, en-joyed favorable prices from Irwin Jacobs, a supplier of Wal-Mart’s, on everything fromjewelry to boats and that Mr. Scott’s son, Eric, has worked for Mr. Jacobs for years.25 Herallegation was that Mr. Scott was not fired for these conflicts and, ergo, she wasdismissed wrongfully or inconsistently for her alleged breach of Wal-Mart’s conflictspolicies. Wal-Mart’s code of ethics states that employees are not to have social relation-ships with suppliers if those relationships create even the appearance of impropriety.26

24 Louise Story and Michael Barbaro, “Wal-Mart Criticizes 2 in a Filing,” New York Times, March 20, 2007, pp. C1, C5. Ms. Roehm says thee-mail is out of context and not from her.25 Gary McWilliams and James Covert, “Roehm Claims Wal-Mart Brass Defy Ethics Rules,” Wall Street Journal, May 27, 2007,pp. A1, A5.26 Id.


4

Cenga

ge Le

arning

Not For

Reprod

uctio

n

Although Wal-Mart and Mr. Jacobs dismissed the allegations as false and outrageous,Mr. Jacobs and Mr. Scott acknowledged that their families have vacationed together andthat Mr. Jacobs attended Mr. Scott’s daughter’s wedding. Mr. Jacobs has also stated thatwhen the two are out together, Mr. Scott always pays and will not allow Mr. Jacobs topay for even a lunch or other meal. Mr. Jacobs also says, “I swear to God Lee nevercalled me about [putting Eric to work].”27

Less than a year following its filing, Julie Roehm ended her wrongful termination suitagainst Wal-Mart, and Wal-Mart has agreed not to pursue its claims against Ms. Roehm.Ms. Roehm also noted that some of the allegations she made about Irwin Jacobs, one ofWal-Mart’s suppliers, were inaccurate. Ms. Roehm said she was dropping her suitbecause it was financially draining and because she had been given information thatindicated her allegations about Mr. Jacobs were not true. Wal-Mart indicated it was sat-isfied with the withdrawal of the suit, would not pursue the matter further, and waspleased to be able to move forward. Ms. Roehm did not receive any money in the dis-missal settlement.28


1. How does this case relate to the phrase “toneat the top,” and what does “tone at the top”mean as it relates to ethics and ethical culturein a company?

2. What problems do inconsistencies in enforcingrules present to a company? How does incon-sistency relate to due process?

Compare & Contrast1. Ms. Roehm has also alleged that she was terminated because she did not fit into Wal-Mart’s simple

and conservative culture. Ms. Roehm is a nationally known advertising executive whose ads forChrysler caused a stir when the ads showed car buyers telling their child that he was conceived inthe back seat of a car. How does this “culture fit” issue relate to the Hopkins case? Is it possible foremployers to articulate “fit” as a criterion for continuation of employment, or is subjectivity auto-matically a part of that standard?

2. Why did Ms. Roehm and Mr. Womack feel that the strict and clear Wal-Mart policies on relation-ships with suppliers and vendors of the company did not apply to them? Why did they acceptthe expensive restaurant and bar perks while Mr. Scott insisted on paying when he was out withMr. Jacobs?

27 Id.28 Ann Zimmerman, “Wal-Mart, Roehm Drop Lawsuits,” Wall Street Journal, Nov. 5, 2007, p. A4


Case 5.2 - Wal-Mart and Julie Roehm: Conflicts vs. Affairs16

Cenga

ge Le

arning

Not For

Reprod

uctio

n

CASE 5.6Drug Testing of EmployeesJohn Lawn, the former director of the Drug Enforcement Administration (DEA), sup-ported mandatory drug testing, calling it “critical [i]n those occupations where either thepublic trust or public safety is involved.”50 He listed doctors, lawyers, airline pilots, truckdrivers, and teachers as examples and urged the professions to develop their own rulesand regulations for drug testing.

The percentage of employers who test employees for drugs increased from 22 percentin 1987 to 67 percent in 2001. However, some employees have questioned the accuracyof the tests and have filed suit challenging the tests and their resulting termination. Andsome employers note that employees can tamper with the test results.

Because of the accusations and confusion, the Department of Health and Human Ser-vices is expected to issue its employee drug-testing guidelines by the end of the year. Theguidelines will dictate certain types of jobs for which employees must always be tested(pilots, conductors) and also provide procedures for conducting the tests that will thenbecome prima facie evidence of accuracy of the test results.51

The federal government has Supreme Court approval for 113 drug testing programs,but state law regulates private employers in the administration of their tests. Some stateslimit testing to safety-sensitive jobs; other states require probable cause as a prerequisitefor testing employees. Courts continue to address issues of employer need and employeeprivacy, along with questions involving drug test reliability.

A Seattle equipment company worker complains: “I am so tired of hearing that I havea right to privacy. What about our right to safety?”52

J.–F. Spencer, a production manager for Pennwalt Pharmaceutical of Rochester, NewYork, expresses his feelings as follows:

People at work who are illegally using drugs are infringing on the rights of law-abiding indivi-duals. It is an invasion of privacy, but until someone comes up with a better way to keep peopleon drugs out of high-risk jobs, I will put up with it.53

But a Boston executive maintains, “Individual rights are too precious to be compro-mised by this route. Other ways must be found to combat drug problems in the work-place.”54 New Jersey Superior Court Judge Donald A. Smith, Jr., wrote in a decisionstriking down the discharge of an employee who tested positive for marijuana and Val-ium, “Whether it be a private or public employer, a free-for-all approach to drug testingcannot be tolerated.”55

Kim Haggart, a quality-assurance manager at Dragon Valves, Inc., adopts the follow-ing position: “If the job is high-risk or safety-sensitive, testing should be requiredbecause impairment can affect the health and safety of others.”56

50 David Hess, “Drug Tests Urged in Jobs Dealing with Public Trust,” Arizona Republic, August 19, 1986, p. A1.51 Stephanie Armour, “Accused Workers Challenge Drug-Test Results in Court,” USA Today, July 16, 2001, p. 1B.52

“Test Workers for Drugs?” Industry Week, December 14, 1987, p. 17.53 Id.54 Id.55 Wayne A. Green, “Drug Testing Becomes Corporate Mine Field,” The Wall Street Journal, November 21, 1989, p. B1.56

“Test Workers for Drugs?” p. 18.


5

Cenga

ge Le

arning

Not For

Reprod

uctio

n


1. What steps do you think an employer shouldtake to ensure the validity of the drug tests?

2. Is there a difference between drug tests fornew employees and using company-wideongoing drug testing?

3. Is ongoing drug testing necessary?

4. You are the manager of a pizzeria that oper-ates solely as a pizza delivery business. As youcontemplate drug testing for your drivers, con-sider the following questions.

a. What safety issues are involved with yourdrivers?

b. Will your testing be random or scheduled?Explain your choice.

c. Will you test all employees or just your dri-vers? Explain.

d. Will you test employees who are in anaccident? Why? Why not?

e. Why do you think you should—or shouldnot—test your employees?

f. Will you test only suspicious drivers?g. What penalties will you impose on em-

ployees who test positive?h. What opportunities for rehabilitation will

you offer for employees who testpositive?

i. How will you ensure the accuracy of thetests?

j. Will you inform drivers of your testing poli-cy before hiring them? Why? Why not?


Case 5.6 - Drug Testing Of Employees18

Cenga

ge Le

arning

Not For

Reprod

uctio

n

CASE 7.13GM Plant Closings and Efforts at OutplacementBleeding from losses of $4.45 billion for 1991, General Motors (GM) announced on Feb-ruary 24, 1992, that it would close twenty-one plants over the next few years, with twelveto be shut down in 1992, affecting more than 16,300 workers.92

GM is the nation’s largest manufacturer, and the $4.45 billion loss was the largest everin American corporate history.93 Robert C. Stempel, then-GM chairman, said the UnitedStates was in an unusually deep automotive slump: “The rate of change during the pastyear was unprecedented. And no one was immune to the extraordinary events whichaffected our lives and the way in which we do business.”94

More than 3,400 workers at GM’s North Tarrytown, New York, plant were to be laidoff by 1995. The plant manufactured GM mini-vans: the Chevrolet Lumina, the PontiacTrans Sports, and the Oldsmobile Silhouette. The mini-van, originally designed in theUnited States, was executed by GM with a wide stance and a sloping, futuristic nose.From 150,000 to 200,000 of the vans were expected to be sold annually, but sales reachedonly 100,000 per year—one-half of the Tarrytown plant’s capacity.95 Dealers maintainedthe shape of the van was too avant-garde for significant sales. “It looks like a Dustbus-ter,” noted a GM manager anonymously.96

GM executives acknowledged that building one model per plant was a sloppy andexpensive way to do business.97

The Tarrytown UAW local had negotiated with GM in 1987 to bring the mini-vanproduction to the plant. The union members voted to accept innovative and cooperativework rules to replace expensive practices under the old contract. Also, state and localgovernments contributed job training funds, gave tax breaks, and began reconstructingrailroad bridges to win the mini-van production plant.98

Dan Luria, automotive analyst for the Industrial Technology Institute, a nonprofitinstitute in Ann Arbor, Michigan, said “The workers did all the right things to get themini-van but GM was just too optimistic about how many it could sell.”99

In his speech announcing the closures, Stempel said, “We are asking you to helpremake the world’s largest automobile company. We can’t wait.”100

Tarrytown was only the beginning of the GM closures. In February 1993, GMannounced the closure of 21 plants, with resulting layoffs of 16,300 workers. Anotherclosure was the Willow Run plant in Ypsilanti Township, Michigan, a loss of 2,200 jobs.However, Ypsilanti Township and Washtenaw County filed suit challenging the closurebecause GM had promised to build cars at Willow Run through the late 1990s inexchange for tax abatements.101 The suit alleged $13.5 million was owed in back taxes byGM for reneging on its promise to operate the plant. The suit was settled in 1994 withGM agreeing to pay half the abated taxes.102

92 James B. Treece, “The Plants That GM Will Probably Padlock,” Business Week, December 14, 1992, pp. 34–35.93 Doron P. Levin, “Court Backs G.M. on Plant Closing,” The New York Times, August 5, 1993, p. C4.94 Doron P. Levin, “GM Picks 21 Plants to Be Shut as It Reports a Record U.S. Loss,” The New York Times, February 25, 1992, p. A1.95 Adam Bryant, “Swinging the G.M. Ax: Which Plants Are Next?” The New York Times, November 10, 1992, p. C1.96 Doron P. Levin, “Vehicle’s Design Dooms Van Plant,” The New York Times, February 26, 1992, p. C4.97 David Woodruff and Zachary Schiller, “Smart Step for a Wobbly Giant,” Business Week, December 7, 1992, p. 38.98 Arthur S. Hayes, “Concerns Find It Harder to Leave Town after Receiving Tax Breaks,” The Wall Street Journal, March 1, 1993, p. B10.99 Levin, “Vehicle’s Design Dooms Van Plant,” p. C4.100 William McWhirter, “Major Overhaul,” Time, December 30, 1991, p. 56.101 Doron P. Levin, “Judge Blocks Plan by G.M. to Close a Plant in Michigan,” The New York Times, February 10, 1993, pp. C1, C5.102 James Bennet, “G.M. Settles Suit over Plant Closing,” The New York Times, April 15, 1994, p. C3.


6

Cenga

ge Le

arning

Not For

Reprod

uctio

n


1. When unions and governments provide finan-cial assistance in exchange for promises froma manufacturer to locate a plant in a particulararea, should the plant owner have an obliga-tion to continue operations?

2. Did GM just make a business decision to stoplosses?

3. Should workers and governments absorb thecost of business risks, such as a poor-sellingmini-van?

4. Did GM renege on its promise to YpsilantiTownship and Washtenaw County? Shouldbusiness setbacks excuse plant closures?Should tax abatements be repaid?


Case 7.13 - GM Plant Closings And Efforts At Outplacement20

Cenga

ge Le

arning

Not For

Reprod

uctio

n

CASE 7.16Exxon and AlaskaOn March 24, 1989, the Exxon Valdez ran aground on Bligh Reef, south of Valdez,Alaska, and spilled nearly 11 million gallons of oil into Prince William Sound. The cap-tain of the tanker was Joseph Hazelwood.

The Ninth Circuit Court of Appeals offered the following description of the accidentin its review of the federal district court’s award of damages against Exxon:

The vessel left the port of Valdez at night. In March, it is still dark at night in Valdez, the whitenights of the summer solstice being three months away. There is an established sea lane thattakes vessels well to the west of Bligh Reef, but Captain Hazelwood prudently took the vesseleast of the shipping lanes to avoid a heavy concentration of ice in the shipping lane, which is aserious hazard. Plaintiffs have not claimed that Captain Hazelwood violated any law or regula-tion by traveling outside the sea lane. The problem with being outside the sea lane was that theship’s course was directly toward Bligh Reef.

Bligh Reef was not hard to avoid. All that needed to be done was to bear west about thetime the ship got abeam of the navigation light at Busby Island, which is visible even at night,some distance north of the reef. The real puzzle of this case was how the ship managed to runaground on this known and foreseen hazard.

There was less than a mile between the ice in the water, visible at night only on radar, andthe reef. Captain Michael Clark, an expert witness for the plaintiffs, testified that an oil tanker ishard to turn, more like a car on glare ice than a car on asphalt:

Q: Let’s talk a minute about how you turn one of these vessels. Now, this we’re talking about a vesselhere that’s in excess of 900 feet long, all right? Over three football fields. What’s it like to turn one ofthese?

A: Well, it’s not like turning a car or a fishing boat or something. There is a—as you are traveling in onedirection and you put the rudder over, even though the head of the vessel will turn, your actual direc-tion of travel keeps going in the old direction. Sort of like you’re steering a car on ice; you turn thewheel and you just keep going in the same direction. Eventually you’ll start to turn and move in thedirection you’re headed for.

Q: Okay. Is it just as easy as turning a car?A: No.Q: And does it make any sense to try to compare changing course in one of these vessels fully laden to

that of turning a corner with a car?A: No.Q: To make it turn on a vessel, there has to be a rudder command given?A: Yes.Q: And once you give that rudder command, is that the end of the turn?A: No. No, you have to watch and make sure that the rudder command is made as you ordered it and to

make sure that it’s having the desired effect.Q: Is there anything else that has to be done in order to put it on the course that you want it on?A: Yes, you usually have to give counter rudder to slow the turn down.


7

Cenga

ge Le

arning

Not For

Reprod

uctio

n

Considering the ice in the water, the darkness, the importance of turning the vessel away fromBligh Reef before hitting it, and the tricky nature of turning this behemoth, one would expect anexperienced captain of the ship to manage this critical turn.

But Captain Hazelwood left the bridge. He went downstairs to his cabin, he said, to do somepaperwork. A special license is needed to navigate the oil tanker in this part of Prince WilliamSound, and Captain Hazelwood was the only person on board with the license. There was testi-mony that captains simply do not leave the bridge during maneuvers such as this one and thatthere is no good reason for the captain to go to his cabin to do paperwork at such a time. Cap-tain Hazelwood left the bridge just two minutes before the turn needed to be commenced, whichmakes it all the more strange that he left at all.

Before leaving, Captain Hazelwood added to the complexity of the maneuver that needed tobe made: he put the vessel on autopilot, which is not usually done when a vessel is out of theshipping lanes, and the autopilot program sped the vessel up, making it approach the reef fasterand reducing the time during which error could be corrected. As Captain Hazelwood left, he told[Gregory] Cousins, the third mate, to turn back into the shipping lane once the ship was abeam ofBusby Light. Though this sounds plain enough, expert witnesses testified that it was a great dealless clear and precise than it sounds.

There are supposed to be two officers on the bridge, but after Hazelwood left, there was onlyone. The bridge was left to the fatigued third mate, Gregory Cousins, a man in the habit of drinkingsixteen cups of coffee per day to keep awake. Cousins was not supposed to be on watch—hiswatch was ending and he was supposed to be able to go to sleep—but his relief had not shown up,and Cousins felt that it was his responsibility not to abandon the bridge. He was assisted only by thehelmsman, Robert Kagan. Kagan, meanwhile, had forgotten his jacket, ran back to his cabin for it,and returned to the bridge a couple of minutes before the time the turn had to be initiated. Cousinsand Kagan thought they had conducted the maneuver, but evidently they had not. When Cousinsrealized that the vessel was not turning, he directed an emergency maneuver that did not work.91

Hazelwood had a history of drinking problems and had lost his New York driver’slicense after two drunken-driving convictions. The court described the problem as follows:

Captain Hazelwood’s departure from the bridge, though unusual, was not inexplicable. Theexplanation put before the jury was that his judgment was impaired by alcohol. He was an alco-holic. He had been treated medically, in a 28 day residential program, but had dropped out ofthe rehabilitation program and fallen off the wagon. He had joined Alcoholics Anonymous, buthad quit going to meetings and resumed drinking. Testimony established that prior to boardinghis ship, he drank at least five doubles (about fifteen ounces of 80 proof alcohol) in waterfrontbars in Valdez. The jury could have concluded from the evidence before them that leaving thebridge was an extraordinary lapse of judgment caused by Captain Hazelwood’s intoxication.There was also testimony that the highest executives in Exxon Shipping knew Hazelwood had analcohol problem, knew he had been treated for it, and knew that he had fallen off the wagonand was drinking on board their ships and in waterfront bars.92

Hazelwood had joined a twenty-eight-day alcohol rehabilitation program mentionedin 1985. Almost a week after the Prince William Sound accident, Exxon revealed thatHazelwood’s blood-alcohol reading was 0.061 in a test taken ten and one-half hours after

91 From In re Exxon Valdez, 270 F.3d 1215 (9th Cir. 2002).92 270 F.3d 1222.


Case 7.16 - Exxon and Alaska22

Cenga

ge Le

arning

Not For

Reprod

uctio

n

the spill occurred—a level that would indicate intoxication. Exxon also announced it hadfired Hazelwood.

The magnitude of the spill seemed almost incomprehensible. U.S. Interior SecretaryManual Lujan called the spill the oil industry’s “Three Mile Island.” After ten days, thespill covered 1,000 square miles and leaked out of Prince William Sound onto beachesalong the Gulf of Alaska and Cook Inlet. A cleanup army of 12,000 was sent in with hotwater and oil-eating microbes. The workers found more than 1,000 dead otters, 34,400dead seabirds, and 151 bald eagles that had died from eating the oil-contaminatedremains of seabirds.

By September 15, Exxon pulled out of the cleanup efforts after having spent $2 billionbut recovering only 5 to 9 percent of the oil spilled. Alaskan officials said about 20 to 40percent of the oil had evaporated. This meant that 50 to 75 percent of the oil was eitheron the ocean floor or on the beaches.

Hazelwood was indicted by the State of Alaska on several charges, including criminalmischief, operating a watercraft while intoxicated, reckless endangerment, and negligentdischarge of oil. He was found innocent of all charges except the negligent discharge ofoil, fined $50,000, and required to spend 1,000 hours helping with the cleanup of thebeaches. Exxon paid Hazelwood’s legal fees. Hazelwood now works as a maritime con-sultant for a New York City law firm and still holds a valid sea license.

When the Valdez was being repaired, ship workers observed that Hazelwood and hiscrew had kept the tanker from sinking by quickly sealing off the hatches to the ship’stank, thus making a bubble that helped stabilize the ship. Citing incredible seamanship,the workers noted that an 11-million-gallon spill was preferable to a 60-million one—thetanker’s load.

Following the spill, critics of Exxon maintained that the company’s huge personnelcutbacks during the 1980s affected the safety and maintenance levels aboard its tankers.Later hearings revealed that the crew of the Valdez was overburdened with demands forspeed and efficiency. The crew worked ten- to twelve-hour days and often had their sleepinterrupted. Lookouts frequently were not properly posted, and junior officers were per-mitted to control the bridge without the required supervision. Robert LeResche, oil-spillcoordinator for Alaska, said, “It wasn’t Captain Ahab on the bridge. It was Larry and Curlyin the Exxon boardroom.”93 In response to critics, Exxon’s CEO Lawrence Rawl stated,

And we say, “We’re sorry, and we’re doing all we can.” There were 30 million birds that wentthrough the sound last summer, and only 30,000 carcasses have been recovered. Just look athow many ducks were killed in the Mississippi Delta in one hunting day in December! Peoplehave come up to me and said, “This is worse than Bhopal.” I say, “Hell, Bhopal killed more than3,000 people and injured 200,000 others!” Then they say, “Well, if you leave the people out, itwas worse than Bhopal.”94

On January 1, 1990, a second Exxon oil spill occurred when a pipeline under theArthur Kill waterway between Staten Island and New Jersey burst and spilled 567,000gallons of heating oil. New York and New Jersey officials criticized Exxon, citing shoddyequipment and poor maintenance. It was six hours after an alarm from the pipeline safe-ty system went off before Exxon workers shut down the pipeline. Albert Appleton, NewYork City commissioner on the environment, said, “Exxon has a corporate philosophy

93 In re Exxon Valdez, 296 F.Supp.2d 1071 (D. Alask. 2004).94 Jay Mathews, “Problems Preceded Oil Spill,” Washington Post, May 18, 1989, pp. A1, A18.


Case 7.16 - Exxon and Alaska 23

Cenga

ge Le

arning

Not For

Reprod

uctio

n

that the environment is some kind of nuisance problem and a distraction from the realbusiness of moving oil around.”95

Late in February 1990, Exxon was indicted on federal felony charges of violating mar-itime safety and antipollution laws in the Valdez spill. The charges were brought afterExxon and the Justice Department failed to reach a settlement. The oil company alsofaced state criminal charges. Alaska and the Justice Department also brought civil suitsagainst Exxon for the costs of cleaning up the spill. Approximately 150 other civil suitswere filed by fishing and tour boat operators whose incomes were eliminated by the spill.At the time of the federal indictment, Exxon had paid out $180 million to 13,000 fisher-men and other claimants.

By May 1990, Exxon had renewed its cleanup efforts at targeted sites with 110employees. Twice during 1991, Exxon reached a plea agreement with the federal gov-ernment and the state on the criminal charges. After Alaska disagreed with the termsof the first, a second agreement was reached in which Exxon consented to plead guiltyto three misdemeanors and pay a $1.15 billion fine. The civil litigation was settledwhen Exxon agreed to pay $900 million to both Alaska and the federal governmentover ten years.

The plea agreement with the governments did not address the civil suits pendingagainst Exxon. At the end of 1991, an Alaska jury awarded sixteen fishers more than$2.5 million in damages and established a payout formula for similar plaintiffs in futurelitigation against Exxon. As of September 1994, Exxon had spent $2 billion to clean upshores in Alaska.

Exxon has had a stream of payouts since 1991—a total of $3.4 billion of its $5.7 billionin profits for that period. Payouts included the following:

• $20 million to 3,500 native Alaskans for damages to their villages

• $287 million to 10,000 fishers

• $1.5 billion for damages to wildlife

• $9.7 million for damages to Native American land

In September 1994, a federal jury awarded an additional $5 billion in punitivedamages against Exxon for the suits filed since 1991. The original verdict of Exxon’srecklessness and the resulting damage awards were made by a jury following a trial thatended in 1994. The damage award was the largest in history at that time. Exxon’s stockfell two and five-eighths points following the verdict. Exxon appealed the verdict to the9th Circuit.

In 1996, during a court review of the distribution of an award in an Alaskan case, a WallStreet Journal article revealed that Exxon had reached secret agreements with fish proces-sors that would require them to refund the punitive damages awarded by juries. Apparent-ly, some type of high-low settlement was reached with the plaintiffs prior to trial, but thejury trial proceeded without disclosure of the settlement and potential refund by the plain-tiffs. Under a high-low settlement, the parties agree to a ceiling and a floor on the amountof damages that can be awarded. If the parties reach a $1 million–$5 million high-lowagreement, they mean that $5 million will be the maximum damage award (includingpunitive damages and lawyers’ fees) and $1 million will be the minimum award, regardlessof the jury’s actual verdict. The parties are guaranteed an outcome they can live with

95 Chris Welles, “Exxon’s Future: What Has Larry Rawl Wrought?” Business Week, April 2, 1990, 72–76.



Cenga

ge Le

arning

Not For

Reprod

uctio

n

regardless of what the jury comes back with as a verdict. Often companies reach high-lowverdicts because they need a court decision in order to take issues up on appeal, but theyare concerned about their exposure in allowing a jury carte blanche on their liability. Fur-ther, even without an appeal, a verdict can bring a certain finality as well as precedent towhat could be a number of cases or cases that will be brought in the future. Some believethat in the Exxon high-low agreement, there was a refund provision that required the plain-tiffs to return or refund part of the settlement if the verdict came in at a lower range.

U.S. District Judge H. Russel Holland learned of the high-low agreements and calledthem an “astonishing ruse” to “mislead” the jury. Judge Holland set aside the agreementsand allowed punitive damages to stand.

By November 1, 1996, Exxon had settled all of the Valdez cases and settled with itsinsurers for its claims. Exxon recovered $780 million of its $2.5 billion in costs, includingattorney fees, from its insurers. Exxon had been in litigation with its insurers over cover-age. Eugene Anderson, a lawyer who represents corporations in insurance actions, notedthat insurance companies virtually always deny all large claims because “they pay law-yers much less each year in these cases than they earn in interest.”96

In November 2001, the U.S. Court of Appeals for the 9th Circuit ruled that the $5 bil-lion verdict in the Exxon Valdez case for punitive damages was excessive. The case wasremanded to the federal district court for a redetermination of that damage figure.97 Onremand, the verdict was reduced to $4 billion and appealed again. It was remanded againfor damage redetermination because of new U.S. Supreme case law on damages, and thelast amount entered on record in 2004 was $4.5 billion.98

Exxon has since publicly admitted responsibility for the spill and has paid in excess of$3 billion to clean up the area along the Alaska coastline that has been a prime fishingarea and an economic base for people of the area.99

The $287 million verdict for the fishermen, awarded as compensatory damages forthe loss of their fishing rights during the cleanup, was upheld by the 9th Circuit.

Congress passed the Oil Spill Act in response to the Valdez disaster as well as otherprovisions that effectively preclude the Valdez from ever entering Prince William Soundagain.100

After the ten-year marking point of the spill, many scientists undertook studies ofPrince William Sound and reached conclusions along the lines of the following, from awebsite that archives summaries of all the papers presented at the conference on the ten-year anniversary of the Valdez spill:

Natural interannual variability in the structure of the biological infaunal communities is the largestand most consistent signal observed in this study, not any residual effects of the oil spill. The re-sults of statistical analyses of the data (ANCOVA) showed no indication of continuing oiling effectsin 1998.101

The scientists also noted a natural weathering process that appears to dissipate the oiland diminish its toxicity through the effects of weather and water, even before the oildisappears.

96 Barbara Rudolph, “Exxon’s Attitude Problem,” Time, January 22, 1990, 51.97 Joseph B. Treaster, “With Insurers’ Payment, Exxon Says Valdez Case Is Ended,” New York Times, November 1, 1996, p. C3.98 In re Exxon, 270 F.3d 1215 (9th Cir. 2001).99

“$5 B Exxon Verdict Is Tossed Out,” National Law Journal, November 19, 2001–November 26, 2001, A6. See also http://www.exxon.com.100 33 U.S.C. §2732 (2001).101 http://www.valdezscience.com/page/index.html.



Cenga

ge Le

arning

Not For

Reprod

uctio

n

As of 2006, neither the clean-up nor the litigation surrounding the Valdez spill wascompleted. The 1991 settlement had a loophole that allowed the government (either fed-eral or state) to claim up to $100 million in additional damages for a fifteen-year period.On Thursday, June 2, 2006, the State of Alaska and the Justice Department, relying onthe loophole, demanded an additional $92 million in damages. The amount is needed,according to the exercise of the clause in the agreement, because of oil still present alongthe beaches.

Exxon has argued that there is $145 million still left in the trust fund and that if therewere any ongoing damage or concerns, the trustees had the responsibility to fix it withthose funds. This issue, along with an appeal on the award of $4.5 billion in punitivedamages, are still in the courts.


1. Evaluate Exxon’s “attitude” with regard to thespill.

2. Why did the company cut back on staff andmaintenance expenditures?

3. Was Exxon management morally responsiblefor the spill?

4. What changes in Exxon’s ethical environmentwould you make?

5. Would Exxon make the same decisions aboutHazelwood and cost cutting given the costs ofthe spill?

6. Evaluate the ethics in Exxon’s secret deal onpunitive damages.

7. Evaluate the ethics of the insurers in denyinglarge claims in order to earn the interest whilelitigation over the claim is pending.

8. Why do you think the court held that thepunitive damage verdict was excessive?Is there another social issue regardinglitigation here?

Compare & ContrastWhat are the differences between environmental policy and approaches at Herman Miller vs. Exxon?

Sources:Barringer, Felicity, “$92 Million More Is Sought for Exxon Valdez Cleanup,” New York Times, June 2,

2006, p. A13.Dietrich, Bill, “Is Oil-Spill Skipper a Fall Guy?” (Phoenix) Arizona Republic, January 28, 1990, p. A2.“Exxon Labeled No. 1 in Bungling a Crisis,” (Phoenix) Arizona Republic, March 24, 1990, p. A8.“Exxon, Lloyd’s Agree to Valdez Settlement,” Wall Street Journal, November 1, 1996, p. B2.“Exxon Stops the Flow,” Time, March 25, 1992, p. 51.“Exxon to Pay $1.1 Billion in Spill,” (Phoenix) Arizona Republic, March 13, 1991, p. A3.Foster, David, “Oily Legacy,” Mesa (Arizona) Tribune, March 18, 1990, p. D1.Galen, Michele, and Vicky Cahan, “Getting Ready for Exxon vs. Practically Everybody,” Business Week,

September 25, 1989, 190–192.Galen, Michele, and Vicky Cahan, “The Legal Reef Ahead for Exxon,” Business Week, March 12,

1990, p. 39.Hayes, Arthur S., and Milo Geyelin, “Oil Spill Trial Yields $2.5 Million,” Wall Street Journal, September 11,

1991, p. B2.Kangmine, Linda, and Carol Castaneda, “For Alaska, Tide Has Changed,” USA Today, June 14, 1994, p. 3A.“Like Punch in Gut: Exxon Skipper Talks,” (Phoenix) Arizona Republic, March 25, 1990, pp. A1, A12.



Cenga

ge Le

arning

Not For

Reprod

uctio

n

Marshall, Steve, “Jury Rules Exxon Must Pay $287 Million to Alaska Fishermen,” USA Today, August12, 1994, p. 3A.

McCoy, Charles, “Exxon Reaches $1.15 Billion Spill Pact That Resembles Earlier Failed Accord,” WallStreet Journal, October 1, 1991, p. A3.

McCoy, Charles, and Peter Fritsch, “Legal Experts Surprised by Exxon Deals with Fish Processors inValdez Case,” Wall Street Journal, June 14, 1996, p. B5.

“Native Americans Awarded $9.7 Million from Exxon,” National Law Journal, October 10, 1994, A19.“Nice Work, Joe,” Time, December 4, 1989, 48.“Paying up for the Exxon Valdez,” Time, August 8, 1994, 18.Rempel, William C., “Exxon Captain Acquitted,” (Phoenix) Arizona Republic, March 23, 1990, p. A1.Rubin, Julia, “Exxon Submits Final Oil-Spill Cleanup Plan,” Burlington Vermont Free Press, April 28,

1990, p. 2A.Satchell, Michael, and Betsy Carpenter, “A Disaster That Wasn’t,” U.S. News & World Report, Septem-

ber 18, 1989, pp. 60–69.Schneider, Keith, “Jury Finds Exxon Acted Recklessly in Valdez Oil Spill,” New York Times, June 14,

1994, pp. A1, A8.Schneider, Keith, “$20 Million Settlement in Exxon Case,” New York Times, July 26, 1994, p. A8.Solomon, Caleb, “Exxon Attacks Scientific Views of Valdez Spill,” Wall Street Journal, April 15, 1993,

pp. B1, B10.Solomon, Caleb, “Exxon’s Real Problem: Many of Its Oil Fields Are Old and Declining,” Wall Street

Journal, September 19, 1994, pp. A1, A6.Solomon, Caleb, “Jury to Weigh Exxon’s Actions in Spill,” Wall Street Journal, June 7, 1994, p. B5.Sullivan, Allanna, “Exxon Begins Final Defense in Valdez Spill,” Wall Street Journal, May 2, 1994, pp. B1, B3.Sullivan, Allanna, and Arthur S. Hayes, “Exxon’s Plea Bargaining,” Wall Street Journal, February 21,

1990, p. B8.Tyson, Rae, “Valdez Cleanup Is Skin Deep,” USA Today, March 22, 1994, p. 3A.



Cenga

ge Le

arning

Not For

Reprod

uctio

n



Cenga

ge Le

arning

Not For

Reprod

uctio

n

CASE 8.15Executive CompensationCEOs in U.S.-based companies earn 363 times more than the average employee, whereasJapanese CEOs earn only sixteen times more.108 Since 1990, the CEO pay levels havemore than doubled when stock options are included.

Michael S. Kesner, then-national director of compensation and benefits consulting forthe now-defunct Arthur Andersen Company (however, Accenture is the firm that wasfounded by Andersen affiliates and is still in existence), notes,

With restructuring, cost-cutting, and consolidation the order of the day, the actual impact of,say, a $5 million CEO pay package on the bottom line of a $2 billion sales company is not clearlythe issue. People are now saying, to paraphrase the sound advice of late Illinois Senator EverettDirksen, “Hey, a percent of a billion here and a percent of a billion there adds up to real mon-ey.” In light of widespread plant closings, layoffs, and long lines of unemployed workers seekinglimited jobs, “pay for performance” has simply taken a backseat to what the general public con-siders “fair.”109

Warren Buffett, the chief executive officer of Berkshire Hathaway, disclosed that hissalary of $100,000 remained the same in 1998 but that his fees for being a director fellabout 11 percent to $176,600. Some of the salary and fees are taken in cash, and some inequity securities.

Mr. Buffett does not use a compensation committee or consultant to determine thesalaries of his officers. He alone makes the recommendations to the board on what hebelieves the officers should be paid. Prior to the imposition of SEC requirements, theproxy materials for Berkshire Hathaway did not include any information on how salariesare determined or whether they are competitive.

Berkshire Hathaway permits bonuses for officers, but none have been paid in a numberof years. The highest paid officer for Berkshire Hathaway earned more than Mr. Buffett andwas paid $412,500 in 2001, with $31,500 additional compensation from subsidiaries.110

The levels of CEO compensation have outraged large institutional investors and smallshareholders. Shareholder proposals calling for reform in the setting of executive paywere submitted at the 1997 annual meetings of forty-three companies, and the trend hascontinued to increase, with such proposals at 324 meetings in the 2003–2004 period.Three-fourths of the 1,082 proposals in 2004 dealt with corporate governance.111 Eliza-beth Holtzman, a trustee of the New York City Employees Retirement System, said, “It isunconscionable to have sky-high executive compensation that is not related to long-termcorporate performance.”112

Ben & Jerry’s Homemade, Inc., the Vermont ice cream manufacturer, once limited itsCEO pay to seven times the average worker’s salary (with the company’s acquisition byUnilever, the pay limits of its founders are no longer in place). Herman Miller, a Fortune500 company, limits its CEO’s pay—salary and bonus—to twenty times the averageemployee paycheck, which was $28,000 in 1991. The average CEO compensation inthe other Fortune 500 companies is 117 times the salary of the average worker.

108 Jill Abramson and Christopher J. Chipello, “High Pay of CEOs Traveling with Bush Touches a Nerve in Asia,” Wall Street Journal, Decem-ber 30, 1991, p. A1.109 Gary Strauss, “Study: Some CEO Salaries Don’t Compete,” USA Today, September 28, 1999, p. 3B.110 Form 14 found in the SEC filings for the company under Securities and Exchange Commission, “Edgar,” http://www.sec.gov/edgar/searchedgar/webusers.htm.111 http://www.securities.stanford.edu.112

“Reebok Comes under Fire for Executive Pay,” Wall Street Journal, March 21, 1991, p. G1.


8

Cenga

ge Le

arning

Not For

Reprod

uctio

n

Max DePress, a member of Herman Miller’s founding family and chairman of the com-pany’s board, said, “People have to think about the common good. Our CEO and seniorofficers make good competitive salaries when the performance is there.”113 Miller’s non-unionized plant workers support the plan. He said, “This is a fair and equitable way topay.… If they tried to revoke it, people would speak out.”114

Company CEO Total Compensation

MBNA Charles M. Cawley $46,285,747Bear Stearns James E. Cayne $39,533,712Occidental Petroleum Ray R. Irani $29,470,293SBC Edward Whitacre $28,894,652Merrill Lynch E. Stanley O’Neal $28,097,489Sprint Gary D. Forsee $27,157,374KB Home Bruce Karatz $26,858,373Altria Group Louis C. Camilleri $23,936,679Cendant Henry R. Silverman $22,813,045Goldman Sachs Henry M. Paulson Jr. $21,400,579Lehman Brothers Richard S. Fuld Jr. $20,878,386Lockheed Martin Vance D. Coffman $20,260,325

In 1992, Congress limited the ability of companies to deduct CEO compensation fromtheir taxes as a means of controlling increases. The upper limit for deduction of CEOwages was $1 million (with some exceptions). The result was the extensive use of stockoptions to get around the limitation (see Reading 6.16 for the market impact of optionsand the resulting issues for companies). However, the salary figures for 2007, as revealedin the proxies for publicly traded companies, have reached heretofore unknown highs.The salaries appear below in the table. But 2007 information on CEO salaries found yetanother nuance to the disclosure rules. Because of SEC changes in the required pay disclo-sures for the top five officers and directors of publicly traded companies, many officers’pay reflects that they lost money for the year. For example, Ian G. Cockwell, the CEO ofBrookfield Homes, had a negative salary of $2.3 million. His figures, under the new disclo-sure rules that were approved on Christmas Eve 2006, show the following:

Salary and bonus for 2006 $620,000Other compensation (dividends) $170,000Options gains $4,200,000Realized deferred gains $2,900,000

However, because he was given stock options awards, the SEC rule requires that theawards be valued at the market price. The market price for Brookfield stock has declinedsubstantially, as is the case with all homebuilders for 2006. So, when the decline in valueof the stock is taken away from the options and deferred gains, the result is that the CEOmade a negative $2.3 million.115

113 Jacqueline Mitchell, “Herman Miller Links Worker-CEO Pay,” Wall Street Journal, May 7, 1992, p. B1.114 Id.115 Gretchen Morgenson, “Weird and Weirder Numbers on Pay Reports,” New York Times, March 11, 2007, Sunday Business sec., pp. 1and 4.


Case 8.15 - Executive Compensation30

Cenga

ge Le

arning

Not For

Reprod

uctio

n

The result of the new SEC pay disclosure mandates is that there is the accountingnumber for executive pay, there is the disclosure number for the SEC, there is the num-ber for what the executives actually put in the bank, and then there is the real or truenumber. CEO compensation depends on who is asking. The pay charts for CEOs havebecome meaningless because they depend on stock value, number of options, grantdates, and a host of other factors now part of the salary disclosure regulations.

A new area of shareholder focus is perks provided to executives that are counted aspart of the compensation package for tax purposes or reflected in the total benefits paidreports to shareholders. In March 2007, a new SEC rule required companies to make fulland detailed disclosures of the perks provided to the top executives of the company. The“gross-up” is the perk that has shareholders and governance experts talking. Cars, dri-vers, private jet flights, and insurance policies are all typical perks that can reach to about$200,000. This amount is considered income for IRS purposes, so the company grossesup the CEO’s pay to cover the tax bill on the perks. One corporate governance expertcalls it the “ultimate in pigginess.”116

The types of perks many CEOs enjoy (in order of the number of corporations offeringthem) are as follows:

• Annual physical

• Company car

• Financial planning

• Car phone

• Car allowance

• Tax planning and/or tax return preparation

• Country club membership

• First-class air travel

• Company airplane usage

• Health club membership

• Luncheon club membership

• Legal counseling

• No- or low-interest loans

There appears to be no limit to the types of perks executives receive.For example, Vince McMahon, head of WWF (Worldwide Wrestling Federation), re-

ceives up to $50,000 per year for cleaning expenses. Macy’s, Bloomingdale’s, and otherdepartment stores offer up to 38 percent discounts to their executives. Avon’s AndreaJung had a $19,000 security system installed in her home at company expense.


1. So long as a company is performing and pro-viding a return to investors and growth in the

value of their investment, should executivecompensation be an issue?

116 Greg Farrell, “Most Galling of All Perks Could Be ‘Gross-Ups,’” USA Today, April 16, 2007, p. 2B.


Case 8.15 - Executive Compensation 31

Cenga

ge Le

arning

Not For

Reprod

uctio

n

2. Should CEO pay be tied to workers’ compensa-tion? Should CEO pay be tied to companyperformance?

3. Who should establish executive pay rates?

4. Is government regulation of executive payhelping or interfering with the issue of solvingthe problem “How much is too much?”

5. How can executive compensation have animpact on company performance as well as

share performance? How do you think MiltonFriedman would react to controls on levels ofcompensation? How do you think he wouldreact to this type of compensation program?

6. Do you see any additional conflict issues withthe perks? Do you see any issues that are pre-vented because executives are given theseperks? Reflect on the piece on the “tone at thetop” (Reading 6.14), and offer an employee’sview on the perks.


Case 8.15 - Executive Compensation32

Cenga

ge Le

arning

Not For

Reprod

uctio

n

CASE 11.3Giving and Spending the United WayThe United Way, which evolved from the local community chests of the 1920s, is anational organization that funnels funding to charities through a payroll deductionsystem.

Ninety percent of all charitable payroll deductions in 1991 were for the United Way.This system, however, has been criticized as coercive. Bonuses, for example, were offeredfor achieving 100 percent employee participation. Betty Beene, president of United Wayof Tristate (New York, New Jersey, and Connecticut), commented, “If participation is100 percent, it means someone has been coerced.”16 Tristate discontinued the bonusesand arm-twisting.

United Way’s system of spending also came under fire through the actions of WilliamAramony, president of the United Way from 1970 to 1992. During his tenure, UnitedWay receipts grew from $787 million in 1970 to $3 billion in 1990. But some ofAramony’s effects on the organization were less positive.

In early 1992, the Washington Post reported that Aramony

• was paid $463,000 per year.

• flew first class on commercial airlines.

• spent $20,000 in one year for limousines.

• used the Concorde for trans-Atlantic flights.17

The article also revealed that one of the taxable spin-off companies Aramony hadcreated to provide travel and bulk purchasing for United Way chapters had bought a$430,000 condominium in Manhattan and a $125,000 apartment in Coral Gables,Florida, for his use. Another spin-off had hired Aramony’s son, Robert Aramony, as itspresident.

When Aramony’s expenses and salary became public, Stanley C. Gault, chairmanof Goodyear Tire & Rubber Company, asked, “Where was the board? The outsideauditors?”18 Aramony resigned after fifteen chapters of the United Way threatened towithhold their annual dues to the national office.

Said Robert O. Bothwell, executive director of the National Committee for ResponsivePhilanthropy, “I think it is obscene that he is making that kind of salary and askingpeople who are making $10,000 a year to give 5 percent of their income.”19

In August 1992, the United Way board of directors hired Elaine Chao, the PeaceCorps director, to replace William Aramony at a salary of $195,000, with no perks.20 Shereduced staff from 275 to 185 and borrowed $1.5 million to compensate for a decline indonations. By 1995, United Way donations had still not returned to their 1991 level of$3.2 billion. Ms. Chao has since left the United Way and has served as secretary of laborfor the Bush administration since 2001. Ms. Chao is married to Republican U.S. SenatorMitch McConnell of Kentucky.

16 Susan Garland, “Keeping a Sharper Eye on Those Who Pass the Hat,” Business Week, March 16, 1992, 39.17 As reported in “Ex-Executives of United Way Indicted,” (Phoenix) Arizona Republic, September 14, 1994, p. A6.18 Garland, “Keeping a Sharper Eye on Those Who Pass the Hat,” p. 39.19 Felicity Barringer, “United Way Head Is Forced Out in a Furor over His Lavish Style,” New York Times, February 28, 1992, p. A1.20 Desda Moss, “Peace Corps Director to Head United Way,” USA Today, August 27, 1992, p. 6A; and Sabra Chartrand, “Head of PeaceCorps Named United Way President,” New York Times, August 27, 1992, p. A8.


9

Cenga

ge Le

arning

Not For

Reprod

uctio

n

In September 1994, William Aramony and two other United Way officers, includingthe chief financial officer, were indicted by a federal grand jury for conspiracy, mailfraud, and tax fraud. The indictment alleged the three officers diverted more than $2.74million of United Way funds to purchase an apartment in New York City for $383,000,interior decorating for $72,000, a condominium, vacations, and a lifetime pass onAmerican Airlines. In addition, $80,000 of United Way funds were paid to Aramony’sgirlfriend, a 1986 high school graduate, for consulting, even though she did no work.

On April 3, 1995, Aramony was found guilty of twenty-five counts of fraud, conspira-cy, and money laundering. Two other United Way executives were also convicted.Mr. Aramony was sentenced to eighty-four months in prison (and fined $300,000) andwas released in 2004. He lives in Alexandria, Virginia, and United Way executives con-tinue to refer to his tenure and all the problems associated with it as “the greatunpleasantness.”

By April 1998, donation levels were still not completely reinstated, but did increase(up 4.7 percent) for the first time since the 1992 Aramony crisis. Relationships betweenlocal chapters and the national organization were often strained, and the recent BoyScouts of America boycott has created additional tension. United Way’s donations fell11 percent since 1991 while overall charitable giving was up 9 percent.

In January 2000, a federal district court judge awarded Mr. Aramony the full valueof his deferred compensation plan, or $4.2 million. Judge Shira Scheindlin ruled in favorof Mr. Aramony because she said there was no clause for forfeiting the money ifMr. Aramony committed a felony. Such a so-called bad boy clause had been discussedby the board when it was in the process of approving the deferred compensation plan forMr. Aramony and other United Way executives. However, the bad-boy clause nevermade it into the final agreement.21

However, Judge Scheindlin also ruled that United Way could withhold $2.02 millionof the amount due to cover salary, investigation costs, and interest on those amounts.She did not award Mr. Aramony attorneys’ fees for having to bring the suit againstUnited Way to collect his deferred compensation.

Many in the nonprofit field say that the shadow of William Aramony looms over thenonprofit world.


1. Was there anything unethical aboutAramony’s expenditures?

2. Was the board responsible for theexpenditures?

3. Is the perception as important as the actsthemselves?

4. If Aramony were a CEO of a for-profit firm,would your answers change?

5. What obstacles did Chao face as she assumedthe United Way helm?

6. Do you think Aramony should have asked forhis deferred compensation funds?

Sources:Allen, Frank E., and Susan Pulliam, “United Way’s Rivals Take Aim at Its Practices,” Wall Street Journal,

March 6, 1992, pp. B1, B6.

21 David Cay Johnston, “Ex-United Way Chief Owed $4.2 Million,” New York Times, January 5, 2000, p. C4.


Case 11.3 - Giving and Spending the United Way34

Cenga

ge Le

arning

Not For

Reprod

uctio

n

Barringer, Felicity, “Ex-Chief of United Way Vows to Fight Accusations,” New York Times, April 10,1992, p. A13.

Duffy, Michael, “Charity Begins at Home,” Time, March 9, 1992, 48.“Ex-Executives of United Way Indicted,” (Phoenix) Arizona Republic, September 14, 1994, p. A6.Kinsley, Michael, “Charity Begins with Government,” Time, April 6, 1992, 74.Moss, Desda, “Change Is Focus of United Way Meeting,” USA Today, August 19, 1992, p. 7A.Moss, Desda, “Former United Way Chief Charged with Looting Funds,” USA Today, September 14,

1994, p. 1A.Moss, Desda, “United Way’s Ex-Chief Guilty of Using Funds,” USA Today, April 14, 1995, p. 1A.


Case 11.3 - Giving and Spending the United Way 35

Cenga

ge Le

arning

Not For

Reprod

uctio

n


Case 11.3 - Giving and Spending the United Way36

Cenga

ge Le

arning

Not For

Reprod

uctio

n