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Smith And Roberson's Business Law, 17th Edition Solution Manual

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    PART ONE: The Legal Environment of Business 1 - Part One: The Legal Environment of Business CONTENTS C hapter 1 Introduction to Law Chapter 2 Business Ethics and the Soci al Responsibility of Business Chapter 3 Civil Dispute Resolution C hapter 4 Constitutional Law Chapter 5 Administr ative Law Chapter 6 Criminal Law Chapter 7 Intentional Torts Chapter 8 Neg ligence and Strict Liability ETHICS QUESTIONS RAISED IN THIS PART 1. Are all laws moral? Should all laws be moral? How should morality be determined? 2. Are laws always just? 3. Which is more important, morality or justice? 4. Why is there a difference between the treatment of cases brought under civil law and those brought under criminal law? Should there be a difference? 5. In some cultures being involved in a lawsuit is something about which to be ashamed. Our society has been criticized for being overly litigious. In fact, we even go on television to sue in " Judge Judy " and other similar shows. Is our culture “sue - happy?” Should access to the court system be restricted? 6. From an ethical perspective, what obligations does a person who has been harmed by another person or by a business have to attempt settlement of the matter through negotiation before resorting to a lawsuit? 7. The Bill of Rights was drafted to protect individuals from their own government, not from criminals. Because of this, the defendant in a criminal case has rights that are constitutionally protected. The victims of the crime do not have as many rights in the criminal trial as does the defendant. Should our legal system pay more attention to the victims of crime? How should the victim's rights be protected in a criminal trial? 8. Is a no - fault system covering torts ethically preferable to the fault - based negligence system we now have? 9. Are businesses morally responsible for injuries that are caused by products they sell or manufacture? What about copy - cat injuries? ACTIVITIES AND RESEARCH PROBLEMS 1. Have students draw a diagram of two overlapping circles, with one circle labeled “Moral” and the other labeled “Legal.” The area of overlap would be both moral and legal. Then list several controversial topics of current interest (e.g., abortion, capital punishment, marijuana smoking, etc.) for students to place within an area of the diagram (or outside the circles if it is neither moral nor legal). Can any of these issues be absolutely determined to be moral or immoral? 2. Are there any laws in our country’s history that have been repealed on the basis of their immorality? Are there any laws still in existence that should be repealed? Have students discuss their opinions. 3. How does American common law differ from English common law? 4. Have students write a fictitious case involving questionable ethics in a business decision. 5. For a general discussion of law, or preceding the study of criminal law and procedure recruit someone

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    2 PART ONE: The Legal Environment of Business - outside the class to rush in and commit a "crime" such as stealing the professor's textbook. After the stranger leaves, have the students write a description of what happened. Then compare the details of the eyewitnesses and discuss the legal implications of the event. 6. Have students make a list of the key events in their lives, then have them list and discuss laws that relate to those events. 7. Research the historic legal codes of other civilizations, such as the Hebrews and Babylonians, or of other societies around the world today, and compare the crimes, punishments, and criminal procedures to those in the United States today. 8. Have students prepare a survey form on crimes affecting businesses. The form could include types of crime that affect the business (such as customer theft, employee theft, and bad checks); the amount of loss; the cost of the crimes; and the cost of security. Then have the whole or part of the class interview the managers of businesses. Have the students report to the class and compare the results with local and national statistics available from law enforcement professionals. 9. In recent years many states have instituted victim's assistance programs and crime victim's restitution programs. Investigate to find whether your state has such programs. Compare programs in various states. Chapter 1 INTRODUCTION TO LAW Nature of Law [1 - 1] Sources of Law [1 - 3] Definition of Law [1 - 1a] Constitutional Law [1 - 3a] Functions of Law [1 - 1b] Judicial Law [1 - 3b] Law and Morals [1 - 1c] Common Law Law and Justice [1 - 1d] Equity Classification of Law [1 - 2] Restatements of Law Substantive and Procedural Law [1 - 2a] Legislative Law [1 - 3c] Public and Private Law [1 - 2b] Treaties Civil and Criminal Law [1 - 2c] Executive Orders Administrative Law [1 - 3d] Legal Analysis [1 - 4] Cases in This Chapter Ryan v. Friesenhahn (Given as an example of how to brief a case) Chapter Outcomes After reading and studying this chapter, the student should be able to:  Identify and describe the basic functions of law.  Distinguish between ( 1 ) law and justice and ( 2 ) law and morals.  Distinguish between ( 1 ) substantive and procedural law, ( 2 ) public and private law, and ( 3 ) civil and criminal law.  Identify and describe the sources of law.  Explain the principle of stare decisis .

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    CHAPTER 1 INTRODUCTION TO LAW 3 - TEACHING NOTES Law concerns the relations between and among individuals as those relations affect social and economic order. It affects the rights and duties of every citizen and many non - citizens. Law is both prohibitory , meaning certain acts must not be committed, and mandatory , meaning certain acts must be done, sometimes in a set way. Additionally, law is permissive : certain acts are allowed, but not required by the law. 1 - 1 NATURE OF LAW The law is a continuously changing process of developing a workable set of rules that balance the individual and group rights of an evolving society. 1 - 1a Definition of Law Legal scholars have defined law in various ways, including: • “predictions of the way that a court will decide specific legal questions” • “a rule of civil conduct prescribed by the supreme power in a state, commanding what is right, and prohibiting what is wrong” • a general command that a state or sovereign makes to those who are subject to its authority by laying down a course of action enforced by judicial or administrative tribunals. Most legal scholars would agree with Rosco Pound, that the term “law” has multiple meanings and that defining it is not a simple task. *** Chapter Outcome *** Identify and describe the basic functions of law. 1 - 1b Functions of Law The functions of law are to maintain stability in the social, political, and economic system through (1) dispute resolution, (2) protection of property, and (3) the preservation of the state while at the same time permitting ordered change. 1. Disputes are inevitable in a complex society and may involve criminal or non - criminal matters. Law provides rules to resolve disputes and avoid personal revenge. 2. Law protects ownership of property and allows for agreements (contracts) to exchange property. (This text deals with many aspects of this including contracts, sales, commercial paper, and business associations.) 3. Law preserves the state . It ensures that changes are result of elections, legislation, and referenda rather than revolution, sedition, and rebellion. 1 - 1c Legal Sanctions Sanctions are the means by which the law enforces the decisions of the court, such as fines, imprisonment and capital punishment.

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    4 INTRODUCTION TO LAW CHAPTER 1 - *** Chapter Outcome *** Distinguish between law and justice. Distinguish between law and morals. 1 - 1d Law and Morals Though law is affected by morals, law and morality are not the same. Some actions have no moral implications but have legal sanctions, whereas other actions have no legal sanctions but do have moral implications. Some actions have both moral impact and legal sanction. NOTE: See Figure 1 - 1: Law and Morals. 1 - 1e Law and Justice Law and justice are distinct but interrelated concepts. • Justice may be defined as “the fair, equitable, and impartial treatment of the competing interests and desires of individuals and groups, with due regard for the common good.” • Justice depends on the law, but the law does not guarantee justice, since laws can be unjust. (Think back to “legal” slavery and the “legal” actions of Nazi Germany or of the South African apartheid government .) 1 - 2 CLASSIFICATION OF LAW Because the law is vast, it is helpful to organize it into categories such as: (1) substantive and procedural, (2) public and private, and (3) civil and criminal. Basic to understanding these classifications are the terms right and duty. A right is the ability of a person, with the aid of the law, to require another person to perform or to refrain from performing a certain act. A duty is the obligation the law imposes upon a person to perform or to refrain from performing a certain act. Duty and right exist together: a person cannot have a right without some other person (or all persons) having the corresponding duty. NOTE: See textbook Figure 1 - 2 which outlines the classifications of law. *** Chapter Outcome *** Distinguish between ( 1 ) substantive and procedural law, ( 2 ) public law and private law, and ( 3 ) civil law and criminal law. 1 - 2a Substantive and Procedural Law Substantive law creates, defines, and regulates legal rights and duties. Procedural law sets forth rules for enforcing those rights that are created by the substantive law. 1 - 2b Public and Private Law Public law is the branch of substantive law that deals with the government's rights and powers and its relationship to individuals or groups. Private law is that part of substantive law governing individuals and legal entities (such as corporations) in their relationships with one another. 1 - 2c Civil and Criminal Law Civil law defines duties and deals with the rights and duties of individuals among themselves. (It is part of

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    CHAPTER 1 INTRODUCTION TO LAW 5 - private law.) NOTE: Civil law is not the same as a civil law system, discussed later in this chapter. Criminal law establishes duties and involves offenses against the community. (It is part of public law.) The purpose of the civil law is to compensate the injured party (plaintiff), while the purpose of criminal law is to punish the wrongdoer. Typically, the civil law awards money for damages or an order for the defendant to behave in a certain way, while criminal law imposes a fine or imprisonment on the guilty party. The party bringing a civil action has the burden of proof, which he must support with a preponderance of the evidence (meaning the greater weight). The government bringing a criminal case must proof the defendant’s guilt beyond a reasonable doubt, which is a significantly higher burden of proof than that in a civil case. NOTE: See textbook Figure 1 - 3, which compares civil and criminal law. *** Chapter Outcomes *** Identify and describe the sources of law. Explain the principle of stare decisis . 1 - 3 SOURCES OF LAW • Federal and state constitutions • Federal treaties (agreements between or among independent nations) • Federal and state statutes (laws passed by a legislative body such as the U.S. Congress or the legislature of a state) • Executive orders (legislation issued by a President or governor) • Ordinances of local municipal governments • Rules and regulations of federal and state administrative agencies • Federal and state court decisions NOTE: See Figure 1 - 3, Hierarchy of Law 1 - 3a Constitutional Law A constitution sets forth the basic principles by which a government is guided, as well as the limitations on governmental authority. The U.S. Constitution is the supreme law of the nation; a state constitution is the highest law within that state. Federal law is supreme in cases of conflict with state law. One of the fundamental principles of the U.S. Constitution is Judicial Review , which is the power of courts to determine constitutionality of all laws. 1 - 3b Judicial Law Case decisions establish precedent in our common law system and must also be consulted when researching a legal question. In the common law system, parties to a dispute initiate and conduct litigation (an adversary system ) . The principle of stare decisis requires that inferior courts stay consistent with prior decisions of higher courts on cases with similar facts. A civil law system , which is less prevalent than common law within the United States, depends on comprehensive legislative enactments (called codes) and an inquisitorial system of determining disputes. In the inquisitorial system , the court, rather than the parties, initiates litigation, investigates pertinent facts, and conducts the presentation of evidence.

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    6 INTRODUCTION TO LAW CHAPTER 1 - Common Law — a body of law established by previous rulings of courts in a common law system. These decisions serve as precedents for later cases. Equity — a supplementary system of judicial relief separate from the common law, based upon settled rules of fairness, justice and honesty. Remedies include: specific performance, injunction, reformation, and rescission . In most jurisdictions, a single court administers both common law and equity. Restatements of Law — The large and growing volume of court decisions in the United States led to the Restatements of Law, an orderly restatement of the general common law. It is now regarded as the authoritative statement of the common law of the United States. It covers many areas, including torts, contracts, agency, property, and trusts. The Restatements were written by the American Law Institute (ALI) , a distinguished group of lawyers, judges, and law professors . Currently the ALI is made up of more than 4,300 members. 1 - 3c Legislative Law Legislative law consists of statutes passed by legislatures. Statutes may repeal judge - made law as long as the statute is not unconstitutional. Today, most new laws come through the legislative branch because they can choose the issues that need attention while courts can only deal with issues in the cases brought before them. The need for uniformity among state statutes led to the codification of large parts of business law. The most successful example of this effort is the Uniform Commercial Code (UCC) , prepared under the joint sponsorship and direction of the ALI and the Uniform Law Commission (ULC), which is also known as the National Conference of Commissioners on Uniform State Laws . All fifty states, the District of Columbia, and the Virgin Islands have adopted the UCC. (Louisiana has adopted only part of the UCC.) The ULC has drafted more than 300 uniform laws including the Uniform Partnership Act, the Uniform Limited Partnership Act, and the Uniform Probate Code. The ALI has developed a number of model statutory formulations, including the Model Code of Evidence, the Model Penal Code, a Model Land Development Code, and a proposed Federal Securities Code. In addition, the American Bar Association has promulgated the Model Business Corporation Act . Treaties — Agreements between or among independent nations; if signed by the President and approved by the Senate, it has the legal force of a federal statute. Executive Orders — The President has the power to issue executive orders, which carry the authority of a law. 1 - 3d Administrative Law The branch of public law that governs the powers and procedures of governmental entities (other than courts and legislatures); often involves public health, safety and welfare. Administrative law is created by administrative agencies in the form of rules, regulations, orders, and decisions to carry out the regulatory powers and duties of those agencies. 1 - 4 LEGAL ANALYSIS While all U.S. Supreme Court decisions are reported, not every case decided by the U.S. District Courts and the U.S. Courts of Appeals are reported. Each circuit has established rules determining which decisions are published. Decisions in state trial courts generally are not published but are filed in the office of the clerk of the court. Decisions of state courts of appeals are published in volumes called “reports,” numbered

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    CHAPTER 1 INTRODUCTION TO LAW 7 - consecutively. Some states rely on a commercial reporter and no longer publish official reports. The decisions of courts in the federal system are found in a number of reports. For instance, Lefkowitz v. Great Minneapolis Surplus Store, Inc ., 251 Minn. 188, 86 N.W.2d 689 (1957), indicates that the opinion in this case may be found in Volume 251 of the official Minnesota Reports at page 188; and in Volume 86 of the North Western Reporter, Second Series, at page 689; and that the opinion was delivered in 1957. Normally, the reported opinion in a case includes: 1. the essential facts, the nature of the action, the parties, what happened to bring about the controversy, what happened in the lower court, and what pleadings are material; 2. the issues of law or fact; 3. the legal principles involved; 4. the application of these principles; and the decision. A serviceable method by which students may analyze and brief cases after reading and comprehending the opinion is to write a brief containing the following: 1. the facts of the case 2. the issue or question involved 3. the decision of the court 4. the reasons for the decision Example of Briefed Case The following case is printed both in its entirety and in briefed form in the student’s textbook. It is printed only in briefed form here. The purpose of including this case is to give an example of how to brief a case. BRIEF OF CASE Ryan v. Friesenhahn I. Facts: Todd Friesenhahn, son of Nancy and Frederick Friesenhahn, held an open invitation party at his parent's home that encouraged guests to bring their own bottle. Sabrina Ryan attended the party, became intoxicated, and was involved in a fatal accident after she left the party. Sandra and Stephen Ryan, Sabrina’s parents, sued the Friesenhahns for negligence, alleging that the Friesenhahns were aware of underage drinking at the party and of Sabrina's condition when she left the party. The trial court granted summary judgment for the Friesenhahns. II. Issue: Is a social host who serves alcoholic beverages to a minor liable in negligence for harm suffered by the minor as a result of the minor’s intoxication? III. Decision: In favor of the Ryans. Summary judgment reversed and case remanded to the trial court.

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    8 INTRODUCTION TO LAW CHAPTER 1 - IV. Reasons: Accepting the Ryans’ allegations as true, the Friesenhahns were aware that minors possessed and consumed alcohol on their property and specifically allowed Sabrina to become intoxicated. The Texas Alcoholic Beverage Code provides that a person commits an offense if, with criminal negligence, he “makes available an alcoholic beverage to a minor.” A violation of a statute constitutes negligence per se if the injured party is a member of the class protected by the statute. Since the Alcoholic Beverage Code was designed to protect the general public and minors in particular, Sabrina is a member of the class protected by the Code. Therefore, we find that the Ryans stated a cause of action against the Friesenhahns for the violation of the Alcoholic Beverage Code In considering common - law negligence as a basis for social host liability, the Texas Supreme Court has held that there are two practical reasons for not imposing a third - party duty on social hosts who provide alcohol to adult guests: first, the host cannot reasonably know the extent of his guests' alcohol consumption level; second, the host cannot reasonably be expected to control his guests' conduct. However, this rationale does not apply where the guest is a minor. The adult social host need not estimate the extent of a minor's alcohol consumption because serving minors any amount of alcohol is a criminal offense. Furthermore, the social host may control the minor, with whom there is a special relationship, analogous to that of parent - child.

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    CHAPTER 2 BUSINESS ETHICS/SOCIAL RESPONSIBILITY OF BUSINESS 1 - Chapter 2 BUSINESS ETHICS AND THE SOCIAL RESPONSIBILITY OF BUSINESS Law Versus Ethics [2 - 1] Ethical Responsibilities of Business [2 - 4] Ethical Theories [2 - 2] Regulation of Business [2 - 4a] Ethical Fundamentalism [2 - 2a] Corporate Governance [2 - 4b] Ethical Relativism [2 - 2b] Arguments Against Social Responsibility [2 - 4c] Utilitarianism [2 - 2c] Profitability Deontology [2 - 2d] Unfairness Social Ethics Theories [2 - 2e] Accountability Other Theories [2 - 2f] Expertise Ethical Standards in Business [2 - 3] Arguments in Favor of Social Responsibility [2 - 4d] Choosing an Ethical System [2 - 3a] The Social Contract Corporations as Moral Agents [2 - 3b] Less Government Regulation Long - Run Profits Cases in This Chapter (NOTE: These are not actual court cases, but original vignettes which pose ethical problems in business situations. A discus sion guide for each is found prior to the answers to problems at the end of this instructor’s manual chapter.) Pharmacon Drug Company Mykon’s Dilemma Oliver Winery, Inc JLM, Inc. Sword Technology, Inc. Vulcan, Inc. Chapter Outcomes After reading and studying this chapter, the student should be able to:  Describe the difference between law and ethics.  Compare the various ethical theories.  Describe cost - benefit analysis and explain when it should be used and when it should be avoided.  Explain Kohlberg’s stages of moral development.  Explain the ethical responsibilities of business. TEACHING NOTES Ethics can be broadly defined as the study of what is right or good for human beings. It pursues the question of what people ought to do and what goals they should pursue. Business ethics is not a special set of ethics that applies only in business settings, but rather a subset of ethics. Business ethics , a branch of applied ethics, is the study and determination of right and good in business. Ethical questions apply to relationships among and between: • a business and its employees, its customers, and its owners • competing businesses • a business and society at large

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    CHAPTER 2 BUSINESS ETHICS/SOCIAL RESPONSIBILITY OF BUSINESS 2 - • businesses and countries at an international level In business ethics, it is helpful to employ a seeing - knowing - doing model in which the decision - maker follows these steps: • See (identify) the ethical issues in the proposed conduct and any alternative options • Know (resolve) which is the best option • Do (implement) the chosen option 2 - 1 LAW VERSUS ETHICS *** Chapter Outcome *** Describe the difference between law and ethics. Law is strongly affected by moral concepts (ethics), but law and morality are not the same. Legality is often a reliable guide to ethical behavior, but it cannot be relied upon as a perfect standard. Legal acts may be immoral, illegal acts may be moral. 2 - 2 ETHICAL THEORIES *** Chapter Outcome *** Compare the various ethical theories. Certain ethical rules are based on theory rather than experimentation ( a priori reasoning). 2 - 2a Ethical Fundamentalism Also called absolutism. Individuals look to a central authority or set of rules for guidance, e.g., the Bible, the Koran, the writings of Karl Marx. 2 - 2b Ethical Relativism A theory under which actions must be judged by what individuals subjectively feel is right or wrong for themselves. Although bearing some similarities, the doctrine of situational ethics differs substantially in that it requires one to judge another person’s actions by first putting oneself into that person’s situation. 2 - 2c Utilitarianism Those actions that produce the greatest net pleasure, compared to net pain, are better in a moral sense. Act utilitarianism assesses each separate act in order to determine whether it produces net pleasure over pain. Rule utilitarianism supports rules that at their inception would appear to be the best hope of producing maximum pleasure for the greatest number of people. *** Chapter Outcome *** Describe a cost - benefit analysis and explain when it should be used and when it should be avoided. Utilitarian notions of moral correctness are the basis for the general concept of making a cost - benefit analysis in a business or managerial decision. The purpose of a cost - benefit analysis is to choose the most cost effective method for pursuing a goal after comparing the direct and indirect costs and benefits of proposed alternatives. If increasing net wealth, especially on a short - term basis, is the goal, a sound cost -

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    CHAPTER 2 BUSINESS ETHICS/SOCIAL RESPONSIBILITY OF BUSINESS 3 - benefit analysis is a helpful tool. 2 - 2d Deontology From the Greek word deon , meaning duty or obligation; stresses that certain principles are always right or wrong, no matter the outcome. Actions should be judged by means and motives, rather than only results. NOTE: See textbook discussion of Immanuel Kant’s deontological theories. 2 - 2e Social Ethics Theories Focus on a person’s obligations to others and also on individual rights and obligations. Social egalitarians believe that society should provide all persons with equal goods and services irrespective of their contributions to the society’s overall wealth. Distributive justice also considers the needs and rights of all people, yet stresses the equality of opportunity, not of results. Libertarians claim that differences in wealth simply demonstrate different levels of skill in the marketplace. Taking wealth earned by some and giving it to others is unfair. 2 - 2f Other Theories Intuitionism holds that all rational people possess the ability to decide the rightness of an action, though some people have more insight into ethical behavior than others. The “good person” philosophy is similar, and declares that to act morally, we should emulate those who seem to always choose the “good” or “right” choice. Television Test" judges the appropriateness of a decision based on whether we would be comfortable with having that decision known by all the world, as if it had been broadcast on television. 2 - 3 ETHICAL STANDARDS IN BUSINESS *** Chapter Outcome *** Explain Kohlberg’s stages of moral development. 2 - 3a Choosing an Ethical System Kohlberg’s Stages of Moral Development provides insight into ethical decision - making. Under Kohlberg’s model, people progress through stages of moral development basically as a function of age and education. The pre - conventional or childhood stage, is one where a person’s moral perspective is based only on a punishment/reward concept. The conventional or adolescent stage is one where an individual conforms his behavior to meet group or peer expectations. Some people may reach the third, or post - conventional, adult level where individuals conform to internalized moral principles simply because they understand why the principles are right. NOTE: See Figure 2 - 1, Kohlberg's Stages of Moral Development Some psychologists assert that most people function in all three of Kohlberg's stages simultaneously. 2 - 3b Corporations as Moral Agents Because a corporation is a statutorily created entity, is not clear whether it should be held to a standard of moral accountability.

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    CHAPTER 2 BUSINESS ETHICS/SOCIAL RESPONSIBILITY OF BUSINESS 4 - 2 - 4 ETHICAL RESPONSIBILITIES OF BUSINESS Some regulation has always been necessary to check overreaching greed in our system of modified capitalism. *** Chapter Outcome *** Explain the ethical responsibilities of business. 2 - 4a Regulation of Business According to Adam Smith’s model for the perfect capitalistic system, governmental oversight is necessary, but should be limited. Beyond setting the rules and enforcing them, Smith felt government should stand aside. Increased governmental intervention has occurred, however, because this model cannot be relied on to achieve objectives such as national defense, conservation of natural resources, health and safety, and social security. Successful government regulation involves carefully balancing regulations to preserve competition and those that attempt to advance other social objectives. 2 - 4b Corporate Governance The demand for ethical and social responsibility of business also results from the sheer size, and therefore power, of individual corporations. Many people — and even members of the corporate community itself — believe that companies have an obligation to sponsor projects that benefit society in ways beyond the economics of producing goods and services. In July 2010, the Dodd - Frank Wall Street Reform and Consumer Protection Act (Dodd - Frank Act) was enacted, improving accountability and transparency in the financial system, protecting consumers from abusive financial services practices, and improving corporate governance in publicly held companies. 2 - 4c Arguments Against Social Responsibility Profitability — Since corporations are artificial entities established for profit - making, their only obligation should be to return as much money as possible to the direct stakeholders, the shareholders. Unfairness — Whenever corporations engage in social activities such as supporting the arts or education, they divert funds rightfully belonging to the shareholders and/or the employees to unrelated third parties. Accountability — A corporation may decide to support a variety of social causes but, unlike a governmental body, will be required to submit to little public scrutiny. Expertise — Although a corporation may have a high level of expertise in selling its goods and services, it may not be able to carry on social activities with the same degree of competence. 2 - 4d Arguments in Favor of Social Responsibility A corporation’s primary objective is to make a return on its investment by producing a quality product at a fair price. Most people agree, however, that corporations have obligations beyond making a profit and avoiding harm to others. The Social Contract — Since society allows for the creation of corporations and gives them special rights, including a grant of limited liability, this argument holds that corporations reciprocally owe a responsibility to our society. NOTE: See Figure 2 - 2, The Stakeholder Model.

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    CHAPTER 2 BUSINESS ETHICS/SOCIAL RESPONSIBILITY OF BUSINESS 5 - Less Government Regulation — When corporations act responsibly, regulation is unnecessary. In addition, by taking a more proactive role in aiding with society’s problems, corporations create a climate of trust and respect that may make government more lenient in regulations. Long - Run Profits — Corporate involvement in social causes has the effect of creating goodwill which simply makes good business sense from a long - run profit perspective.

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    CHAPTER 2 BUSINESS ETHICS/SOCIAL RESPONSIBILITY OF BUSINESS 6 - CASE Pharmakon Drug Company BACKGROUND William Wilson, senior vice president of research, development, and medical (RD&M) at Pharmakon Drug Company, received both his Ph.D. in biochemistry and his M.D. from the University of Oklahoma. Upon completion of his residency, Dr. Wilson joined the faculty at Harvard Medical School. He left Harvard after five years to join the research group at Merck & Co. Three years later, he went to Burroughs - Wellcome as director of RD&M, and, after eight years, Dr. Wilson joined Pharmakon in his current position. William Wilson has always been highly respected as a scientist, a manager, and an individual. He has also been an outstanding leader in the scientific community, particularly in the effort to attract more minorities into the field. Pharmakon concentrates its research efforts in the areas of antivirals (with a focus on HIV), cardiovascular, respiratory, muscle relaxants, gastrointestinal, the central nervous system, and consumer health care (that is, nonprescription or over - the - counter medicines). Dr. Wilson is on the board of directors of Pharmakon and the company’s executive committee. He reports directly to the chairman of the board and CEO, Mr. Jarred Swenstrum. DECLINING GROWTH During the previous eight years, Pharmakon experienced tremendous growth: 253 percent overall, with yearly growth ranging from 12 percent to 25 percent. During this period, Pharmakon’s RD&M budget grew from $79 million to $403 million, and the number of employees rose from 1,192 to 3,273 (see Figure 2 - 3). During the previous two years, however, growth in revenue and earnings slowed considerably. Moreover, in the current year, Pharmakon’s revenues of $3.55 billion and earnings before taxes of $1.12 billion were up only 2 percent from the previous year. Furthermore, both revenues and earnings are projected to be flat or declining for the next five years. The cessation of this period’s tremendous growth and the likelihood of future decline have been brought about principally by two causes. First, a number of Pharmakon’s most important patents have expired and competition from generics has begun and could continue to erode its products’ market shares. Second, as new types of health - care delivery organizations evolve, pharmaceutical companies’ revenues and earnings will in all likelihood be adversely affected. PROBLEM AND PROPOSED SOLUTIONS In response, the board of directors has decided that the company must emphasize two conflicting goals: increase the number of new drugs brought to market and cut back on the workforce in anticipation of rising labor and marketing costs and declining revenues. Accordingly, Dr. Wilson has been instructed to cut costs significantly and to reduce his workforce by 15 percent over the next six months. Dr. Wilson called a meeting with his management team to discuss the workforce reduction. One of his managers, Leashia Harmon, argued that the layoffs should be made “so that recent gains in minority hiring are not wiped out.” The percentage of minority employees had increased from 2.7 percent eight years ago to 8.3 percent in the previous year (see Figure 2 - 3). The minority population in communities in which Pharmakon has major facilities has remained over the years at approximately 23 percent. About 20 percent of the RD&M workforce have a Ph.D. in a physical science or in pharmacology, and another 3 percent have an M.D. Dr. Harmon, a Ph.D. in pharmacology and head of clinical studies, is the only minority on Dr. Wilson’s seven - member management team. Dr. Harmon argued that RD&M has worked long and hard to increase

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    CHAPTER 2 BUSINESS ETHICS/SOCIAL RESPONSIBILITY OF BUSINESS 7 - minority employment and has been a leader in promoting Pharmakon’s affirmative action plan (see Figure 2 - 4). Therefore, she asserted, all layoffs should reflect this commitment, even if it meant disproportionate layoffs of nonminorities. Dr. Anson Peake, another member of Dr. Wilson’s management team and director of new products, argued that Pharmakon’s RD&M division has never discharged a worker except for cause and should adhere as closely as possible to that policy by terminating individuals solely based on merit. Dr. Rachel Waugh, director of product development, pointed out that the enormous growth in employment over the past eight years — almost a trebling of the workforce — had made the company’s employee performance evaluation system less than reliable. Consequently, she contended that because laying off 15 percent of her group would be extremely difficult and subjective, she preferred to follow a system of seniority. Dr. Wilson immediately recognized that any system of reducing the workforce would be difficult to implement. Moreover, he was concerned about fairness to employees and maintaining the best qualified group to carry out the area’s mission. He was very troubled by a merit or seniority system if it could not maintain the minority gains. In fact, he had even thought about the possibility of using this difficult situation to increase the percentage of minorities to bring it more in line with the minority percentage of the communities in which Pharmakon had major facilities. ISSUES: The general issue is the appropriateness of affirmative action in the private sector. Does the use of affirmative action when a company is downsizing differ from when a company is hiring or conferring other benefits? The specific issue is how should Pharmakon implement its layoffs and what criteria should it use? OPTIONS: Layoffs and/or terminations should be based on which one or combination of the following? 1) Cause 2) Merit based on a newly established, reliable, and valid evaluation system 3) Seniority 4) Proportionate (maintain the current percentage of minority employees) 5) Enhancement of minority (increase the percentage of minorities) 6) Encourage voluntary retirement (either with or without incentives) 7) Lottery 8) Pay cuts across the board 9) Other ANALYSIS OF THE VARIOUS OPTIONS: How does each of the options impact the following goals of Pharmakon? 1) Productivity 2) Fiscal soundness 3) Minority presence and preservation of minority gains 4) Employee morale 5) Potential for lawsuits 6) Public and community reaction 7) Shareholder reaction 8) Balancing of rights of current employees against past corporate/societal discrimination

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