Business Ethics: Cases andSelected Readings, 7th Ed.Marianne M. JenningsUnit 7© 2012 Cengage Learning. All Rights Reserved...
The Cheerios Language“Cheerios is clinically proven to helplower cholesterol”276© 2012 Cengage Learning. All Rights Reserv...
The Cheerios Language – PostFDA Action• “As part of a heart healthy diet, the solublefiber in Cheerios and Honey Nut Cheer...
Cheerios Box Language – PostFDA Action“Products displaying the heart-check mark meetAmerican Heart Association food criter...
Rice Krispies Language“Now helps support your child’s immunity with25 percent daily value of anti-oxidants andnutrients – ...
280Subprime Loans and theMarkets: Practices and Issues• Taking advantage of borrowers who were high risk with loan terms t...
281Subprime Zig vs. Zag© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to...
282North Carolina’s PredatoryLending Law Provisions• Limitations on the amount of interest that can be charged onresidenti...
The Systemic Effects: What About Bob?Bob defaults•Bob’s lender loses payments;may have to change terms orforeclose•Purchas...
Reverse Mortgages vs. SubprimeReverse Mortgages• Limited income clients• Clients not usuallyfinancially sophisticated• Opt...
285The Voluntary Initiative on Adsfor Kids• Kraft• McDonald’s• PepsiCo• Coca-Cola• General Mills• Cadbury Adam’s• Kellogg’...
286Warranties© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicl...
287Privity of ContractManufacturerWholesalerRetailerno privityBuyerHousehold Guests Employee – Exam AlternativeUsers - Rea...
288Product LiabilityCONTRACT TORTExpress WarrantyImplied Warranty of MerchantabilityImplied Warranty of Fitness forParticu...
289Product Liability:Strict Tort Liability1) Defective condition unreasonably dangerousdesign manufacture warning2) Defend...
290Product Liability:Negligence1) Defective condition unreasonably dangerousdesign manufacture warning2) Defendant in busi...
A Study in Contrasts: TylenolThe 1982 Poisonings• Public disclosure• Voluntary recall• Timely response• Honored its credo•...
292Latency ActivismAwareness RegulationSocial Regulatory Cycle/LitigationLatency1994-2000Phase 3 StudiesReicin concernsMer...
About MerckFAVORABLE• Merck had an excellentreputation• One of Fortune’s mostadmired companies• Philanthropic in giving dr...
294Ford’s Unit Cost of $200,000Per Life© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicat...
295Cost Analysis for Pinto RedesignEstimatedCalendar Estimated Estimated Estimated Total CostSales Unit Cost Total Cost Pr...
296Internal Memo on theValue of Human LifeThe total benefit is shown to be just under $50 million, while the associated co...
297Numbers Pressure: Toyota“Wins for Toyota – Safety Group: Thecompany saved $100 million by convincingNHTSA that replacin...
Talking Toyota• 4.8 million cars recalled• Affects 8 models• Production halted at 5 U.S. plants where thecar models recall...
SUA Data• There were 131 SUA complaints in 2008 covering22 car brands• Toyota models were involved in 41% of thecomplaints...
Causation Theories1. Floor mats (Lexus and Avalon recall 2007) (19floor-mat recalls over the past 40 years)2. Tendency of ...
NTSA Office of DefectInvestigations (ODI)“ODI has not identified a vehicle-based defect that wouldhave produced the allege...
Talking ToyotaWhat is the condition that has prompted Toyota to take this action?In rare instances, there is a possibility...
How to Handle a Crisisa. Be forthcoming with information;b. Respond immediately;c. Recall, recall, recall;d. Do not blame ...
Peanut Corp of America“The cost is costing us huge $$$$....[We] desperately at least need to turn the RawPeanuts on our fl...
305The Reluctant Goody Two-Shoes at Marsh“I am not some Goody Two Shoes who believes thattruth is absolute, but I do feel ...
306Coke and Burger King: QuestionsThat Might Have Helped• What is my intention?• Are the results likely to accomplish that...
307Coke and Burger King: WhoWas Affected?• Burger King customers• Burger King executives• Burger King shareholders• Burger...
308Slotting Fees© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publ...
309Sears and the Costs of Over-Collecting from Bankrupt Customers• $60 million fine• $40 million in state fines• $12 milli...
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BADM 2133 UNIT 7

  1. 1. Business Ethics: Cases andSelected Readings, 7th Ed.Marianne M. JenningsUnit 7© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  2. 2. The Cheerios Language“Cheerios is clinically proven to helplower cholesterol”276© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  3. 3. The Cheerios Language – PostFDA Action• “As part of a heart healthy diet, the solublefiber in Cheerios and Honey Nut Cheerios canhelp lower cholesterol and reduce the risk ofheart disease.”• “In addition, Cheerios has the seal of approvalof the American Heart Association.”277© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  4. 4. Cheerios Box Language – PostFDA Action“Products displaying the heart-check mark meetAmerican Heart Association food criteria forsaturated fat and cholesterol for healthypeople over the age of 2.”278© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  5. 5. Rice Krispies Language“Now helps support your child’s immunity with25 percent daily value of anti-oxidants andnutrients – vitamins A, B, C, and E.”279© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  6. 6. 280Subprime Loans and theMarkets: Practices and Issues• Taking advantage of borrowers who were high risk with loan terms theycould not meet or with loans that ballooned beyond their payment abilityafter a few years• Undue complexity in loan structure for consumers already struggling withcredit 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 informationand other background data• Financiers were purchasing the mortgage loans without discussing orrevealing the level of risk; mortgage-backed bonds were traditionallyhigher rated than leveraged debt, which is what most of the subprimemarket was• Hedge funds were also based on the perceived risk, not the real risk thatwas hidden – no one was really told of the true credit and collateralquality of the loans© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  7. 7. 281Subprime Zig vs. Zag© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  8. 8. 282North Carolina’s PredatoryLending Law Provisions• Limitations on the amount of interest that can be charged onresidential mortgage loans in the amount of $300,000 or less aswell as any additional fees lenders add on to the loans.• Limits on fees that may be charged in connection with amodification, renewal, extension, or amendment of any of theterms of a home loan, other than a high-cost home loan. Thepermitted fees are essentially the same as those allowed for themaking 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 theloan.• 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.© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  9. 9. The Systemic Effects: What About Bob?Bob defaults•Bob’s lender loses payments;may have to change terms orforeclose•Purchaser of bundled mortgageshas a devalued asset on itsbooks, particularly if Bob isjoined by Betty, Bill, Brent, andall through the alphabet•Bob’s neighborhood is affectedby an ill-maintained, an empty,and/or a foreclosed home; valueof homes drops, affecting taxes,affecting government revenue,and keep on goingLender•Tightens credit•More homes on the market•Harder to sell properties•Market glutted with homes forsale•Construction slows down•Those employed in theconstruction industry are laid off•Decorators, landscapers, titlecompanies ,and their employeessuffer loss of income and jobs•These employees default onmore mortgages•Lender can’t sell mortgages•Credit freezesPurchaser of bundledmortgages•Forced to revalue the worth ofthe mortgage-based instruments•Their assets are worth less•They are downgraded•They cannot sell mortgageinstruments•Investors begin selling theirinvestments•Market drops•Money pool no longer there•Frozen markets© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied orduplicated, or posted to a publicly accessible website, in whole or in part.283
  10. 10. Reverse Mortgages vs. SubprimeReverse Mortgages• Limited income clients• Clients not usuallyfinancially sophisticated• Options for loans and needsvary• Circumstances could changerapidly• Very large potential marketSubprime• Limited income clients• Clients not usuallyfinancially sophisticated• Options for loans and needsvary• Circumstances could changerapidly• Very large potential market284© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  11. 11. 285The Voluntary Initiative on Adsfor Kids• Kraft• McDonald’s• PepsiCo• Coca-Cola• General Mills• Cadbury Adam’s• Kellogg’s• Hershey’s• Mars, Inc.• Unilever© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  12. 12. 286Warranties© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  13. 13. 287Privity of ContractManufacturerWholesalerRetailerno privityBuyerHousehold Guests Employee – Exam AlternativeUsers - Reasonably Anticipated Other Statesprivityprivityprivity© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  14. 14. 288Product LiabilityCONTRACT TORTExpress WarrantyImplied Warranty of MerchantabilityImplied Warranty of Fitness forParticular Purpose402A – Strict TortLiabilityNegligence© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  15. 15. 289Product Liability:Strict Tort Liability1) Defective condition unreasonably dangerousdesign manufacture warning2) Defendant in business of using, selling, or manufacturingproduct3) Condition of product is the same© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  16. 16. 290Product Liability:Negligence1) Defective condition unreasonably dangerousdesign manufacture warning2) Defendant in business of using, selling, or manufacturing product3) Condition of product is the same4) Knowledge of defect© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  17. 17. A Study in Contrasts: TylenolThe 1982 Poisonings• Public disclosure• Voluntary recall• Timely response• Honored its credo• Positive reputationThe 2010 Quality Control• Did not notify regulator• Did surreptitious recall• Did not respond immediatelywhen consumer complaintscame in• Risked harm by not honoringits credo• Criminal charges291© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  18. 18. 292Latency ActivismAwareness RegulationSocial Regulatory Cycle/LitigationLatency1994-2000Phase 3 StudiesReicin concernsMerck beginsalternative usestudiesAwareness2001 -20042001 FDA letter2001 ClevelandstudiesSafety committeeInitial findingsSales forceQuestionsSome suits filedActivism2004CirculationMerck withdrawalof Cannuscio nameClass-action litigationbeginsRegulationSeptember 2004Vioxx recalled andwithdrawnLitigation ongoingSEC investigationJustice Dept.investigationFDA issueReserves created© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  19. 19. About MerckFAVORABLE• Merck had an excellentreputation• One of Fortune’s mostadmired companies• Philanthropic in giving drugsto other countries• Vioxx was a great andneeded drug• Numbers were statisticallyinsignificant, i.e. risk wassmall• Conducting researchUNFAVORABLE• Conflicts on the studies• Training with sales people• Touting Vioxx for other uses• Statistically insignificant• Success of drug was criticalfor Merck’s financialperformance• Questions from the FDA• Withdrawal of Merckauthor• Handling of initial suits293© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  20. 20. 294Ford’s Unit Cost of $200,000Per Life© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  21. 21. 295Cost Analysis for Pinto RedesignEstimatedCalendar Estimated Estimated Estimated Total CostSales Unit Cost Total Cost Present Value 1970Year (1,000) ($) ($ million) ($ million)1970 76 18.66 1.418 1.4181971 328 18.66 6.120 5.5641972 287 18.66 5.355 4.4251973 268 18.66 5.001 3.7571974 192 18.66 3.583 2.4471975 170 18.66 3.172 1.9691976 106 18.66 1.978 1.116Total 20.696Automotive News, Almanac Issues for 1971-1979, Slocum Publishing Company, Detroit, 1971, and MarketingServices, Inc., Detroit, 1972-1979© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  22. 22. 296Internal Memo on theValue of Human LifeThe 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 benefitassumptions.Benefits:Savings: 180 burn deaths, 180 serious burn injuries, 2,100 burned vehiclesUnit cost: $200,000 per death, $67,000 per injury, $700 per vehicleTotal Benefits: 180 x ($200,000) plus 180 x ($67,000) plus 2100 x ($700) = $49.15 millionCosts:Sales: 11 million cars, 1.5 million light trucksUnit cost: $11 per car, $11 per truckTotal costs: 11,000 x ($11) plus 1,500,000 x ($11) = $137 million© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  23. 23. 297Numbers Pressure: Toyota“Wins for Toyota – Safety Group: Thecompany saved $100 million by convincingNHTSA that replacing the floor mats in55,000 vehicles solved the suddenacceleration issue.”From an internal Toyota document (September 2007) used inCongressional hearingsFour days later there was a fatal sudden-acceleration crash inTexas; 4 people were killed; floor mats were in the trunkTHE MILGRAM AND BURGER STUDIES© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  24. 24. Talking Toyota• 4.8 million cars recalled• Affects 8 models• Production halted at 5 U.S. plants where thecar models recalled are manufactured• SUA (Sudden Unintended Acceleration)© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.298
  25. 25. SUA Data• There were 131 SUA complaints in 2008 covering22 car brands• Toyota models were involved in 41% of thecomplaints• 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 – 4killed in their Lexus in September 2009© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.299
  26. 26. Causation Theories1. Floor mats (Lexus and Avalon recall 2007) (19floor-mat recalls over the past 40 years)2. Tendency of worn pedals to stick3. Tendency of overheated pedals to stick4. Tendency of pedals exposed to condensation tostick5. Software issue that can be changed by allowingthe brake to close the throttle (unidentifiedcircuitry issue)(expensive to identify)6. Defect is isolated from Indiana supplier© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.300
  27. 27. NTSA Office of DefectInvestigations (ODI)“ODI has not identified a vehicle-based defect that wouldhave produced the alleged engine surge in thepetitioner’s vehicle, nor was it able to witness such anevent when road testing the petitioner’s vehicle.Evaluation of a suspect throttle actuator removed fromthe petitioner’s vehicle did not reveal a componentproblem, warranty and parts sales of the actuator areunremarkable. These data do not support the existenceof a wide-spread defect or ongoing concern.”April 2007 – investigation followed two Camry fatalities© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.301
  28. 28. Talking ToyotaWhat 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 apartially 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, incertain 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 salessuspension 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, copiedor duplicated, or posted to a publicly accessible website, in whole or in part.302
  29. 29. How to Handle a Crisisa. Be forthcoming with information;b. Respond immediately;c. Recall, recall, recall;d. Do not blame others (e.g., the dog ate mymemo);e. Do not say it is not a big issue;f. Do not attempt to cover-up; andg. Do not discredit the media or the victims.303© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  30. 30. Peanut Corp of America“The cost is costing us huge $$$$....[We] desperately at least need to turn the RawPeanuts on our floor into money…We have other peanuts on the floor that wewould 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 thecompany’s product. The company has declared Chapter 7bankruptcy.© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.304
  31. 31. 305The Reluctant Goody Two-Shoes at Marsh“I am not some Goody Two Shoes who believes thattruth is absolute, but I do feel I have a pretty strictethical code about being truthful and honest. Theidea of ‘throwing the quote’ by quoting artificiallyhigh numbers in some predetermined arrangementfor us to lose is repugnant to me, not so muchbecause I hate to lose, but because it is basicallydishonest. And I basically agree with the commentsof others that it comes awfully close to collusionand price-fixing.”© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  32. 32. 306Coke and Burger King: QuestionsThat 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?© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  33. 33. 307Coke and Burger King: WhoWas 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)© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  34. 34. 308Slotting Fees© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.
  35. 35. 309Sears 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!© 2012 Cengage Learning. All Rights Reserved. May not bescanned, copied or duplicated, or posted to a publicly accessiblewebsite, in whole or in part.

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