MgtS 4461 – Business and Society

Lesson plan: February 5, 2008

Common Ethical Problems (2)

Goals of lesson:

Chapter 3 presents common ethical issues that students may (unfortunately) confront early in their careers after graduating. Today, we look at issues of consumer confidence and whistle-blowing. Consumer confidence concerns issues such as confidentiality (what information can you reveal to whom under what circumstances), product safety (how safe can and should products be and who should bear the costs of product safety), truth in advertising (what’s the “line” between puffery and false advertising) and fiduciary responsibilities (special duties of care owed by persons whose clients cannot be reasonably expected to understand the nature of the issues involved in decision-making). Whistle-blowing considers a course of action an employee takes when s/he decides that a situation at the company they work is intolerable. This situation generally is not personal (“I’m angry about my pay!”) but ethical in nature (“There’s an ethical issue / problem here!”) Whistle-blowing is one of the most precarious activities an employee can engage in, and we consider what steps to take in escalating one’s efforts to resolve the situation.

• Students will understand the basics of consumer confidence issues, including confidentiality, product safety, truth in advertising and fiduciary responsibilities.
• Students will understand the steps to be followed when engaging in whistle-blowing activity.

Consumer confidence issues

Q1. Confidentiality

This mini-case considers employers as “consumers” of information about university graduates who apply for jobs. It is a fact-based case.

A while ago, there was an article in Business Week discussing how several Ivy League schools had entered into grade non-disclosure agreements with their students. (That is, neither the students nor the schools were allowed to reveal the students’ grades – with or without permission.)

1a. Why might schools and students agree to this type of agreement?

1b. What would each of them get out of this type of deal? Who would suffer? Why?

1c. Is this just an example of consumer privacy, or is it “political correctness run amok”?

Q2. Product safety

In the past several year or two, we’ve heard many reports of food products being contaminated by e-coli bacteria. A recent PBS report indicated that up to 40% of ground beef used in the school lunch program in America is contaminated with e-coli. Several years ago, a well-known Duluth restaurant was closed (it’s now a parking lot) because it sickened several customers with food poisoning. This leads me to ask:

2a. How safe should products be? How safe is “safe enough? How do you define “safe”?

2b As consumers, how much risk are you willing to take on? How does it vary based on product? (I.e., How do your personal risk preferences differ for products like cars, as compared to restaurant meals? How much would you pay to ensure you had a safe(r) car? (And define safer.)

2c. Who should decide how much safety is built into a given product? How should consumers be informed about product safety?

Q3. Truth in advertising

If you’ve been following the news lately, you’ll be aware that we’re in a credit crisis caused by overenthusiastic sale and purchase of “option ARM” mortgages. An option ARM is an adjustable-rate mortgage product that offers a low “teaser” rate for an initial period, and then the rate resets to a much higher rate later on. Many purchasers of these products assert that they were unaware of the interest rate resets. Try to answer the following questions:

3a. What was the option ARM mortgage originally designed to accomplish? Who were the original prospective customers for this product? Did it make sense for them? Why or why not?

More generally, what sort of borrowers would probably benefit from these types of mortgages? Under what circumstances? (If you have your laptop, you may be able to find this information online.)

3b. Why and how did the “target borrowers” change? Is the new target market an “appropriate” market for this product? Why or why not?

3c. Is the shift in borrowing patterns “ethical”? Why or why not? If it’s not ethical, what changed would you make to make it more ethical?

3d. Did this type of accounting for these mortgages make sense when these option ARMS were being offered to their original customers? If you were an investor in one of the companies that originated this type of loan, would you have been concerned about the security of your investment when it first started? Why or why not?

3e. If you’re an investor in a company highly involved in this business today, how concerned are you about your investment?

3f. If you were the Chairman of the US Federal Reserve, what actions might you take, and why?

Q4. Information asymmetry and fiduciary responsibilities in consumer confidence issues

Overall, many of the concerns about consumer confidence issues deal with what are known as “information asymmetries.” That is, in many cases, the information possessed by and available to the business far exceeds (in both quantity and quality) that available to the consumer. Information asymmetries also form the basis for fiduciary responsibilities. Try to think about how information asymmetries play out in professions such as medicine, law, and accounting.

Whistle-blowing

Q5. A hypothetical whistle-blowing case (based on a true case)

You work at a small convenience store in the Central Hillside. One of your big “seasonal” items, not surprisingly, is Egg Nog (a Christmas delicacy not to be over-indulged in by dieters!). Shortly into the New Year, your boss tells you to box up all the left over Egg Nog (which cannot be returned to the supplier) and freeze it for the next holiday season. (These dairy products’ “sell before” labels have day and month, but not year.) You know that this could result in spoiled products and sick customers. Your cousin suffered severely from food poisoning when she was a child, and you know freezing the Egg Nog could cause similar problems. Using the guide on pages 79-83, what do you do?

Q6. Reflecting on your experiences with whistle-blowing

Have you ever been in a situation at work where you felt there were ethical problems? Think about how you handled it. Were you happy with the outcomes? Now, think about how you could have handled it using the process outlined on pages 79-83. What are the similarities and differences between how you handled it and how the text suggests you handle it? Do you think you could have generated a better outcome if you had used the procedure outlined in the text? Why or why not?

Conclusions:

• When dealing with sensitive issues, it is particularly critical to think about data confidentiality. Do you have the right to disclose what you know?
• While it seems “obvious” that products should be “safe,” determining how safe is “safe enough” may not be trivial, and it’s not apparent who can, will, and should pay for additional levels of safety.
• There may be situations where there is information asymmetry that produces special fiduciary responsibilities (the need to act in the best interests of another).
• Whistle-blowing can be a perilous activity that can cost you your job, your reputation, or worse. It’s something not to be entered into lightly and without consulting those who may be affected by your choices. Proceed with caution!