BADM 2133 UNIT 7

Business Ethics: Cases and
Selected Readings, 7th Ed.
Marianne M. Jennings
Unit 7
© 2012 Cengage Learning. All Rights Reserved. May not be
scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.

The Cheerios Language
“Cheerios is clinically proven to help
lower cholesterol”
276© 2012 Cengage Learning. All Rights Reserved. May not be

The Cheerios Language – Post
FDA Action
• “As part of a heart healthy diet, the soluble
fiber in Cheerios and Honey Nut Cheerios can
help lower cholesterol and reduce the risk of
heart disease.”
• “In addition, Cheerios has the seal of approval
of the American Heart Association.”

Cheerios Box Language – Post
FDA Action
“Products displaying the heart-check mark meet
American Heart Association food criteria for
saturated fat and cholesterol for healthy
people over the age of 2.”

Rice Krispies Language
“Now helps support your child’s immunity with
25 percent daily value of anti-oxidants and
nutrients – vitamins A, B, C, and E.”

280
Subprime Loans and the
Markets: Practices and Issues
• Taking advantage of borrowers who were high risk with loan terms they
could not meet or with loans that ballooned beyond their payment ability
after a few years
• Undue complexity in loan structure for consumers already struggling with
credit issues
• Lending to full value of the property
• Home equity loans that left owners with no equity
• Appraisals that inflated the value of the property thus allowing more loans
• Qualifying borrowers for loans with falsification of financial information
and other background data
• Financiers were purchasing the mortgage loans without discussing or
revealing the level of risk; mortgage-backed bonds were traditionally
higher rated than leveraged debt, which is what most of the subprime
market was
• Hedge funds were also based on the perceived risk, not the real risk that
was hidden – no one was really told of the true credit and collateral
quality of the loans

281
Subprime Zig vs. Zag

282
North Carolina’s Predatory
Lending Law Provisions
• Limitations on the amount of interest that can be charged on
residential mortgage loans in the amount of $300,000 or less as
well as any additional fees lenders add on to the loans.
• Limits on fees that may be charged in connection with a
modification, renewal, extension, or amendment of any of the
terms of a home loan, other than a high-cost home loan. The
permitted fees are essentially the same as those allowed for the
making of a new loan, with the exception of a loan application,
origination, or commitment fee.
• Limits on fees to third parties involved with the processing of the
loan.
• Eliminates penalties for consumers who pay off their debts early.
• Requires lenders to verify income of debtors.
• Puts limits on fees brokers can collect for arranging mortgages.

The Systemic Effects: What About Bob?
Bob defaults
•Bob’s lender loses payments;
may have to change terms or
foreclose
•Purchaser of bundled mortgages
has a devalued asset on its
books, particularly if Bob is
joined by Betty, Bill, Brent, and
all through the alphabet
•Bob’s neighborhood is affected
by an ill-maintained, an empty,
and/or a foreclosed home; value
of homes drops, affecting taxes,
affecting government revenue,
and keep on going
Lender
•Tightens credit
•More homes on the market
•Harder to sell properties
•Market glutted with homes for
sale
•Construction slows down
•Those employed in the
construction industry are laid off
•Decorators, landscapers, title
companies ,and their employees
suffer loss of income and jobs
•These employees default on
more mortgages
•Lender can’t sell mortgages
•Credit freezes
Purchaser of bundled
mortgages
•Forced to revalue the worth of
the mortgage-based instruments
•Their assets are worth less
•They are downgraded
•They cannot sell mortgage
instruments
•Investors begin selling their
investments
•Market drops
•Money pool no longer there
•Frozen markets
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole or in part.
283

Reverse Mortgages vs. Subprime
Reverse Mortgages
• Limited income clients
• Clients not usually
financially sophisticated
• Options for loans and needs
vary
• Circumstances could change
rapidly
• Very large potential market
Subprime
• Limited income clients
• Clients not usually
financially sophisticated
• Options for loans and needs
vary
• Circumstances could change
rapidly
• Very large potential market

285
The Voluntary Initiative on Ads
for Kids
• Kraft
• McDonald’s
• PepsiCo
• Coca-Cola
• General Mills
• Cadbury Adam’s
• Kellogg’s
• Hershey’s
• Mars, Inc.
• Unilever

286
Warranties

287
Privity of Contract
Manufacturer
Wholesaler
Retailer
no privity
Buyer
Household Guests Employee – Exam Alternative
Users - Reasonably Anticipated Other States
privity
privity
privity

288
Product Liability
CONTRACT TORT
Express Warranty
Implied Warranty of Merchantability
Implied Warranty of Fitness for
Particular Purpose
402A – Strict Tort
Liability
Negligence

289
Product Liability:
Strict Tort Liability
1) Defective condition unreasonably dangerous
design manufacture warning
2) Defendant in business of using, selling, or manufacturing
product
3) Condition of product is the same

290
Product Liability:
Negligence
1) Defective condition unreasonably dangerous
design manufacture warning
2) Defendant in business of using, selling, or manufacturing product
3) Condition of product is the same
4) Knowledge of defect

A Study in Contrasts: Tylenol
The 1982 Poisonings
• Public disclosure
• Voluntary recall
• Timely response
• Honored its credo
• Positive reputation
The 2010 Quality Control
• Did not notify regulator
• Did surreptitious recall
• Did not respond immediately
when consumer complaints
came in
• Risked harm by not honoring
its credo
• Criminal charges

292
Latency ActivismAwareness Regulation
Social Regulatory Cycle/Litigation
Latency
1994-2000
Phase 3 Studies
Reicin concerns
Merck begins
alternative use
studies
Awareness
2001 -2004
2001 FDA letter
2001 Cleveland
studies
Safety committee
Initial findings
Sales force
Questions
Some suits filed
Activism
2004
Circulation
Merck withdrawal
of Cannuscio name
Class-action litigation
begins
Regulation
September 2004
Vioxx recalled and
withdrawn
Litigation ongoing
SEC investigation
Justice Dept.
investigation
FDA issue
Reserves created

About Merck
FAVORABLE
• Merck had an excellent
reputation
• One of Fortune’s most
admired companies
• Philanthropic in giving drugs
to other countries
• Vioxx was a great and
needed drug
• Numbers were statistically
insignificant, i.e. risk was
small
• Conducting research
UNFAVORABLE
• Conflicts on the studies
• Training with sales people
• Touting Vioxx for other uses
• Statistically insignificant
• Success of drug was critical
for Merck’s financial
performance
• Questions from the FDA
• Withdrawal of Merck
author
• Handling of initial suits

294
Ford’s Unit Cost of $200,000
Per Life

295
Cost Analysis for Pinto Redesign
Estimated
Calendar Estimated Estimated Estimated Total Cost
Sales Unit Cost Total Cost Present Value 1970
Year (1,000) ($) ($ million) ($ million)
1970 76 18.66 1.418 1.418
1971 328 18.66 6.120 5.564
1972 287 18.66 5.355 4.425
1973 268 18.66 5.001 3.757
1974 192 18.66 3.583 2.447
1975 170 18.66 3.172 1.969
1976 106 18.66 1.978 1.116
Total 20.696
Automotive News, Almanac Issues for 1971-1979, Slocum Publishing Company, Detroit, 1971, and Marketing
Services, Inc., Detroit, 1972-1979

296
Internal Memo on the
Value of Human Life
The total benefit is shown to be just under $50 million, while the associated cost is $137 million.
Thus, the cost is almost three times the benefits, even using a number of highly favorable benefit
assumptions.
Benefits:
Savings: 180 burn deaths, 180 serious burn injuries, 2,100 burned vehicles
Unit cost: $200,000 per death, $67,000 per injury, $700 per vehicle
Total Benefits: 180 x ($200,000) plus 180 x ($67,000) plus 2100 x ($700) = $49.15 million
Costs:
Sales: 11 million cars, 1.5 million light trucks
Unit cost: $11 per car, $11 per truck
Total costs: 11,000 x ($11) plus 1,500,000 x ($11) = $137 million

297
Numbers Pressure: Toyota
“Wins for Toyota – Safety Group: The
company saved $100 million by convincing
NHTSA that replacing the floor mats in
55,000 vehicles solved the sudden
acceleration issue.”
From an internal Toyota document (September 2007) used in
Congressional hearings
Four days later there was a fatal sudden-acceleration crash in
Texas; 4 people were killed; floor mats were in the trunk
THE MILGRAM AND BURGER STUDIES

Talking Toyota
• 4.8 million cars recalled
• Affects 8 models
• Production halted at 5 U.S. plants where the
car models recalled are manufactured
• SUA (Sudden Unintended Acceleration)
298

SUA Data
• There were 131 SUA complaints in 2008 covering
22 car brands
• Toyota models were involved in 41% of the
complaints
• Toyota holds 16% of the market
• Since 1999 there have been 31 recalls for SUA
• 24,000 SUA complaints from 1999-2009
• First fatality in Toyotas affected by this recall – 4
killed in their Lexus in September 2009
299

Causation Theories
1. Floor mats (Lexus and Avalon recall 2007) (19
floor-mat recalls over the past 40 years)
2. Tendency of worn pedals to stick
3. Tendency of overheated pedals to stick
4. Tendency of pedals exposed to condensation to
stick
5. Software issue that can be changed by allowing
the brake to close the throttle (unidentified
circuitry issue)(expensive to identify)
6. Defect is isolated from Indiana supplier
300

NTSA Office of Defect
Investigations (ODI)
“ODI has not identified a vehicle-based defect that would
have produced the alleged engine surge in the
petitioner’s vehicle, nor was it able to witness such an
event when road testing the petitioner’s vehicle.
Evaluation of a suspect throttle actuator removed from
the petitioner’s vehicle did not reveal a component
problem, warranty and parts sales of the actuator are
unremarkable. These data do not support the existence
of a wide-spread defect or ongoing concern.”
April 2007 – investigation followed two Camry fatalities
301

Talking Toyota
What is the condition that has prompted Toyota to take this action?
In rare instances, there is a possibility that certain accelerator pedal mechanisms may mechanically stick in a
partially depressed position or return slowly to the idle position.
What is the likelihood that my vehicle will experience this condition?
The condition is rare and does not occur suddenly. It can occur when the pedal mechanism becomes worn and, in
certain conditions, the accelerator pedal may become harder to depress, slower to return or, in the worst case,
stuck in a partially depressed position.
Are you continuing to investigate other models?
Toyota is confident that all models that contain the potentially sticking pedals have been identified.
Why has Toyota stopped selling the affected vehicles?
Until Toyota has finalized an appropriate remedy to address the potential for sticking accelerator pedals, a sales
suspension is necessary.
How long will this stop sale be in effect?
New cars covered by this recall will not be delivered until a remedy is finalized and then implemented.
When do you expect to have a remedy?
Toyota is making every effort to remedy this situation for customers as quickly as possible.
What options are you exploring for a remedy?
Toyota is reviewing a number of different options, and the company hopes to announce a remedy soon.
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
302

How to Handle a Crisis
a. Be forthcoming with information;
b. Respond immediately;
c. Recall, recall, recall;
d. Do not blame others (e.g., the dog ate my
memo);
e. Do not say it is not a big issue;
f. Do not attempt to cover-up; and
g. Do not discredit the media or the victims.

Peanut Corp of America
“The cost is costing us huge $$$$....
[We] desperately at least need to turn the Raw
Peanuts on our floor into money…
We have other peanuts on the floor that we
would like to do the same with.”
Stewart Parnell, CEO of Peanut Corporation of America,
e-mail sent January 19, 2009 on findings of salmonella in the
company’s product. The company has declared Chapter 7
bankruptcy.
304

305
The Reluctant Goody Two-
Shoes at Marsh
“I am not some Goody Two Shoes who believes that
truth is absolute, but I do feel I have a pretty strict
ethical code about being truthful and honest. The
idea of ‘throwing the quote’ by quoting artificially
high numbers in some predetermined arrangement
for us to lose is repugnant to me, not so much
because I hate to lose, but because it is basically
dishonest. And I basically agree with the comments
of others that it comes awfully close to collusion
and price-fixing.”

306
Coke and Burger King: Questions
That Might Have Helped
• What is my intention?
• Are the results likely to accomplish that goal?
• How would I feel if I were Burger King?
• Is it balanced?
• Is it fair?
• How would this look in the newspaper?
• What are the consequences?

307
Coke and Burger King: Who
Was Affected?
• Burger King customers
• Burger King executives
• Burger King shareholders
• Burger King franchise owners
• Coca-Cola shareholders
• Coca-Cola executives
• Marketing people (trust and reputation)

308
Slotting Fees

309
Sears and the Costs of Over-
Collecting from Bankrupt Customers
• $60 million fine
• $40 million in state fines
• $12 million shareholder suits
• $126 million write-off of bankruptcy debts
• $36 million settlement on class-action suit
• $118 million in coupons to affected customers
• $56 million in legal and administrative costs
• TOTAL of $448 million!

BADM 2133 UNIT 7

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