Chapter5.pdf

5
CORPORATE RESPONSIBILITIES, CONSUMER
STAKEHOLDERS, AND THE ENVIRONMENT

5.1 Corporate Responsibility toward Consumer Stakeholders

5.2 Corporate Responsibility in Advertising
Ethical Insight 5.1

5.3 Controversial Issues in Advertising: The Internet, Children, Tobacco, and Alcohol
Ethical Insight 5.2

5.4 Managing Product Safety and Liability Responsibly
Ethical Insight 5.3

5.5 Corporate Responsibility and the Environment

Chapter Summary

Questions

Exercises

Real-Time Ethical Dilemma

Cases
12. For-Profit Universities: Opportunities, Issues, and Promises
13. Fracking: Drilling for Disaster?
14. Neuromarketing
15. WalMart: Challenges with Gender Discrimination
16. Vioxx, Dodge Ball: Did Merck Try to Avoid the Truth?

Notes

OPENING CASE

U.S. health care spending related to obesity in 2013 was $190 billion. The newly released
United Nations (UN) report on global nutrition does not make for very uplifting reading: amid
an already floundering global economy, the reality of a fattening planet is dragging down world
productivity rates, while increasing health insurance costs to the tune of $3.5 trillion per year
—or 5% of global gross domestic product (GDP).1 Obesity in the workforce leads to
expensive health care, interruptions in productivity, and days absent from work. Obesity and
overall weight gain in the American population changed from a problem to a crisis when it

Weiss, Joseph W.. Business Ethics : A Stakeholder and Issues Management Approach, Berrett-Koehler Publishers, Incorporated, 2014. ProQuest Ebook Central,
http://ebookcentral.proquest.com/lib/apus/detail.action?docID=1565988.
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was made an issue of public concern by the Food and Drug Administration (FDA) and the
National Center for Health Statistics (NCHS). A survey conducted from 2007–2009 indicated
that 34.4% of the U.S. adult population was overweight or obese.2 An even more striking
statistic is found in the weight increase experienced by children and adolescents in the United
States. Current research estimates that 17% of children and adolescents (12.5 million
children), ages 2 to 19, are overweight or obese. Higher prevalences of adult obesity were
found in the Midwest (29.5%) and the South (29.4%). Lower prevalences were observed in
the Northeast (25.3%) and the West (25.1 %).3 Carrying excess weight causes an increased
risk for medical conditions, including coronary heart disease, stroke, hypertension, sleep
apnea, and some forms of cancer. The rise in obesity comes despite efforts by First Lady
Michelle Obama to promote healthy eating, and New York mayor Michael Bloomberg’s size
restriction on sugary drinks. The problem has become so profound that the U.S. Health and
Human Services Department actually declared obesity a disease affecting the population in
2004. On June 18, 2013, the nation’s largest physicians’ group classified obesity as a medical
“disease,” despite the recommendations of a committee of experts who studied the issue for a
year.4

In a 2006 survey of 1,000 households, conducted for Medicine & Law Weekly, results
showed that 51% of the households would like to see fast food restaurants under the regulation
of the government, while only 37% were opposed to such an action.5 Consumers are suggesting
that they are looking for more regulations to be placed on the fast food industry to provide them
with a wider variety of healthier meal options.

Another reason cited for the overall increase in overweight and obese individuals in the
United States is the ease of selecting calorie-packed foods and the high cost associated with
eating healthy. The Centers for Disease Control and Prevention has pointed out that the
availability of foods that are high in fat, sugar, and calories has made it increasingly more
convenient for consumers to select those foods.6 Availability is not the only factor at play. A
downward trend in the cost of calories, combined with a downward trend in physical exertion
at work, has also contributed significantly to the rise in obesity.7

Fast food chains have reacted to consumers’ demand for healthier menus by making changes
to their menus and marketing strategies. McDonald’s has a new “Go Active” campaign,
featuring new, healthy menu items, such as salads topped with chicken and a new fruit and
walnut salad. Many of these changes have been targeted at children’s nutrition. The “What’s
Hot in 2012” survey from the National Restaurant Association revealed the top-10 menu trends
for 2012:

1. Locally sourced meats and seafood.
2. Locally grown produce.
3. Healthful kids’ meals.
4. Hyper-local items.
5. Sustainability as a culinary theme.
6. Children’s nutrition as a culinary theme.
7. Gluten-free/food allergy-conscious items.

Weiss, Joseph W.. Business Ethics : A Stakeholder and Issues Management Approach, Berrett-Koehler Publishers, Incorporated, 2014. ProQuest Ebook Central,
http://ebookcentral.proquest.com/lib/apus/detail.action?docID=1565988.
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8. Locally produced wine and beer.
9. Sustainable seafood.
10. Whole-grain items in kids’ meals.

A report from the Yale University Rudd Center for Food Policy and Obesity noted that
approximately 84% of parents with children aged 2 to 11 took their families to a fast food
restaurant weekly. Although fast food restaurants are reevaluating their menus to include more
healthful options for children, the study showed that of 3,039 kids’ meal combinations
possible, only 12 met the nutritional criteria for preschool-age children and only 15 met the
criteria for older children.8 Subway leveraged the story of Jared Fogle, the Indiana University
student who once weighed 425 pounds. By making Subway’s healthy sandwiches a part of his
daily diet, and combining them with regular exercise, Fogle was able to lose 245 pounds in a
year. On March 25, 2013, a leaked internal memo showed that McDonald’s believed it would
lose 22% of its 18–34-year-old customers to what’s perceived as the healthier option,
sandwich chain Subway, without adding the “wrap” onto its menu.9

The FDA has also joined the fight against obesity by initiating programs to “count calories.”
Its goals include pressuring fast food companies to provide more detailed and accurate
information about nutrition content to their diners as well as educating consumers. With the
partnership between the fast food chains and the FDA, consumers stand to be better informed
about their options to become and remain healthy. Restaurants and company web sites now
provide consumers with nutritional information for menu items. Restaurants have teamed up
with nutritionists who can offer helpful suggestions. When presented with healthier options, it’s
in the hands of consumers to make the right choices to improve their health.

5.1 Corporate Responsibility toward Consumer Stakeholders
As the largest national economy in the world, the United States produced $16.2 trillion worth
of goods and services (GDP) in 2012. China’s growing economy earned it the second place
slot, with a GDP of 8.2 trillion in 2012.10 Consumer spending in the United States accounts for
about two-thirds of total economic activity. Consumers may be the most important stakeholders
of a business. If consumers do not , commercial businesses cease to exist. The late
management guru Peter Drucker stated that the one true purpose of business is to create a
customer.11 Consumer confidence and spending are also important indicators of economic
activity and business prosperity. Consumer interests should be foremost when businesses are
designing, delivering, and servicing products. Unfortunately, this often is not the case. As this
chapter’s opening case shows, giving customers what they want may not be what they need;
also, not all products are planned, produced, and delivered with consumers’ best health or
safety interests in mind. Many companies have manufactured or distributed unreliable
products, placing consumers at risk. The effects (and side effects) of some products have been
life-threatening, and have even led to deaths, with classic cases being the alleged effects of the
Merck drug Vioxx, the Bridgestone/Firestone tires on the Ford Explorer, tobacco products and
cigarettes that contain nicotine, the Ford Pinto, lead-painted toys, and numerous other

Weiss, Joseph W.. Business Ethics : A Stakeholder and Issues Management Approach, Berrett-Koehler Publishers, Incorporated, 2014. ProQuest Ebook Central,
http://ebookcentral.proquest.com/lib/apus/detail.action?docID=1565988.
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examples. At the same time, the majority of products distributed in the United States are safe,
and people could not live the lifestyles they choose without products and services. What, then,
is the responsibility of corporations toward consumer stakeholders?

Corporate Responsibilities and Consumer Rights
Two landmark books that inspired the consumer protection movement in the United States were
Upton Sinclair’s The Jungle (1906), which exposed the unsafe conditions at a meat-packing
facility, and Ralph Nader’s Unsafe at Any Speed (1965), which created a social expectation
regarding safety in automobiles. Then Fast Food Nation: The Dark Side of the All-American
Meal (2001) by Eric Schlosser, followed by The Carnivore’s Dilemma (2008) by Tristram
Stuart and Robert Kenner’s 2008 documentary Food, Inc., investigated the nature, source,
production and distribution of food in the United States in particular. George Ritzer’s The
McDonaldization of Society (2011) drew attention to the pervasive influence of fast food
restaurants on different sectors of American society, as well as on the rest of the world. In
providing “bigger, better, faster” service and questionable food products, McDonald’s has
been the leader in creating—or reinforcing—a lifestyle change that, as the opening case shows,
contributes to obesity. Morgan Spurlock’s 2004 documentary, Super Size Me, also explored the
fast food industry’s corporate influence and encouragement of poor nutrition for profit.

As Steven Fink’s issues evolution framework in Chapter 3 illustrated, a “felt need” arises
from books, movies, events, and advocacy groups, and builds to “media coverage.” This then
evolves into interest group momentum, from which stakeholders develop policies and later
legislation at the local, state, and federal levels. This same process has occurred and continues
to occur with consumer rights. The books and documentaries mentioned here have contributed
to articulating and mobilizing the issues of obesity, unsafe cars, and quality of life to the public.

The following universal policies were adopted in 1985 by the UN General Assembly to
provide a framework for strengthening national consumer protection policies around the world.
Consider which policies apply to you as a consumer:

1. The right to safety: to be protected against products, production processes, and services
which are hazardous to health or life.

2. The right to be informed: To be given facts needed to make an informed choice, and to be
protected against dishonest or misleading advertising and labeling.

3. The right to choose: to be able to select from a range of products and services, offered at
competitive prices, with an assurance of satisfactory quality.

4. The right to be heard: to have consumer interests represented in the making and execution
of government policy, and in the development of products and services.

5. The right to satisfaction of basic needs: to have access to basic essential goods and
services, adequate food, clothing, shelter, health care, education and sanitation.

6. The right to redress: to receive a fair settlement of just claims, including compensation for
misrepresentation, shoddy goods or unsatisfactory services.

7. The right to consumer education: to acquire knowledge and skills needed to make
informed, confident choices about goods and services while being aware of basic consumer

Weiss, Joseph W.. Business Ethics : A Stakeholder and Issues Management Approach, Berrett-Koehler Publishers, Incorporated, 2014. ProQuest Ebook Central,
http://ebookcentral.proquest.com/lib/apus/detail.action?docID=1565988.
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rights and responsibilities and how to act on them.
8. The right to a healthy environment: to live and work in an environment which is
nonthreatening to the well-being of present and future generations.12

From an ethical perspective, corporations have certain responsibilities and duties toward
their customers and consumers in society:

• The duty to inform consumers truthfully and fully of a product or service’s content,
purpose, and use.

• The duty not to misrepresent or withhold information about a product or service that
would hinder consumers’ free choice.

• The duty not to force or take undue advantage of consumer ing and product
selection through fear or stress or by other means that constrain rational choice.

• The duty to take “due care” to prevent any foreseeable injuries or mishaps a
product (in its design and production or in its use) may inflict on consumers.13

Although these responsibilities seem reasonable, there are several problems with the last
responsibility, known as “due care” theory. First, there is no straightforward method for
determining when “due care” has been given. What should a firm do to ensure the safety of its
products? How far should it go? A utilitarian principle has been suggested, but problems arise
when use of this method adds costs to products. Also, what health risks should be measured
and how? How serious must an injury be? The second problem is that “due care” theory
assumes that a manufacturer can know its products’ risks before injuries occur. Certainly,
testing is done for most high-risk products; but for most products, use generally determines
product defects. Who pays the costs for injuries resulting from product defects unknown
beforehand by consumer and manufacturer? Should the manufacturer be the party that
determines what is safe and unsafe for consumers? Or is this a form of paternalism? In a free
market (or at least a mixed economy), who should determine what products will be used at
what cost and risk?14

Related to the rights presented above, consumers also have in their implied social contract
with corporations (discussed in Chapter 4) the following rights:

• The right to safety: to be protected from harmful commodities.
• The right to free and rational choice: to be able to select between alternative
products.

• The right to know: to have easy access to truthful information that can help in product
selection.

• The right to be heard: to have available a party who will acknowledge and act on
reliable complaints about injustices regarding products and business transactions.

• The right to be compensated: to have a means to receive compensation for harm done
to a person because of faulty products or for damage done in the business
transaction.15

Weiss, Joseph W.. Business Ethics : A Stakeholder and Issues Management Approach, Berrett-Koehler Publishers, Incorporated, 2014. ProQuest Ebook Central,
http://ebookcentral.proquest.com/lib/apus/detail.action?docID=1565988.
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These rights are also constrained by free-market principles and conditions. For example,
“products must be as represented: Producers must live up to the terms of the sales agreement;
and advertising and other information about products must not be deceptive. Except for these
restrictions, however, producers are free, according to free-market theory, to operate pretty
much as they please.”16

“ er Beware” and “Seller Take Care”
The age-old principle of “let the er beware” plays well according to free-market theory,
because this doctrine underlies the topic of corporate responsibility in advertising, product
safety, and liability. In the 1900s, the concept of “let the seller take care” placed responsibility
of product safety on corporations17 (which we discuss later in this chapter under product
liability). Several scholars argue that Adam Smith’s “invisible hand” view is not completely
oriented toward stockholders.

Consumer Protection Agencies and Law
Because of imperfect markets and market failures, consumers are protected to some extent by
federal and state laws in the United States. Five goals of government policymakers toward
consumers are:

1. Providing consumers with reliable information about purchases.
2. Providing legislation to protect consumers against hazardous products.
3. Providing laws to encourage competitive pricing.
4. Providing laws to promote consumer choice.
5. Protecting consumers’ privacy.18

Some of the most notable U.S. consumer protection agencies include:

1. The Federal Trade Commission (FTC): deals with online privacy, deceptive trade
practices, and competitive pricing.

2. The Food and Drug Administration (FDA): regulates and enforces the safety of drugs,
foods, and food additives, and sets standards for toxic chemical research.

3. The National Highway Traffic Safety Administration (NHTSA): deals with motor vehicle
safety standards.

4. The National Transportation Safety Board (NTSB): handles airline safety.
5. The Consumer Product Safety Commission (CPSC): sets and enforces safety standards for
consumer products.

6. The Department of Justice (DOJ): enforces consumer civil rights and fair competition.

Governmental and international agencies also work to protect consumers’ legal rights. The
Consumer World web site (http://www.consumerworld.org/pages/agencies.htm) has an
extensive list of consumer protection agencies that includes the United States and international
countries, including India, Hong Kong, Korea, Mexico, Canada, and Estonia, as well as other

Weiss, Joseph W.. Business Ethics : A Stakeholder and Issues Management Approach, Berrett-Koehler Publishers, Incorporated, 2014. ProQuest Ebook Central,
http://ebookcentral.proquest.com/lib/apus/detail.action?docID=1565988.
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http://www.consumerworld.org/pages/agencies.htm

European countries. The strategic vision of the EU consumer policy “aims to maximise
consumer participation and trust in the market. Built around four main objectives the European
Consumer Agenda aims to increase confidence by: reinforcing consumer safety; enhancing
knowledge; stepping up enforcement and securing redress; aligning consumer rights and
policies to changes in society and in the economy.”19

5.2 Corporate Responsibility in Advertising
Advertising is big business. Direct marketing advertising was 54.3% of the total advertising
spending in 2009, while 2010 total direct marketing spending was estimated at $153.3
billion.20 Figure 5.1 shows ad dollars spent by the industry in 4th quarter 2012 over 2011,
according to Nielsen.

The extent to which advertising is effective is debatable, but because consumers are so
frequently exposed to ads, it is an important topic of study in business ethics. The purpose of
advertising is to inform customers about products and services and to persuade them to
purchase them. Deceptive advertising is against the law. A corporation’s ethical responsibility
in advertising is to inform and persuade consumer stakeholders in ways that are not deceitful.
This does not always happen, as the tobacco, diet, and fast food industries, for example, have
shown.

Figure 5.1
Ad Dollars Spent by Selected Industry and Percentage Change Fourth
Quarter 2012 over Fourth Quarter 2011

Source: Adapted from Nielsen. (March 14, 2013). U.S. ad spend increased 2% in 2012 on strong Q3. Nielsen.com.
http://www.nielsen.com/us/en/newswire/2013/u-s–ad-spend-increased-2–in-2012-on-strong-3q.html.

Ethics and Advertising
At issue, legally and ethically for consumers, is whether advertising is deceptive and creates
or contributes to creating harm to consumers. Although advertising is supposed to provide
information to consumers, a major aim is to sell products and services. As part of a selling

Weiss, Joseph W.. Business Ethics : A Stakeholder and Issues Management Approach, Berrett-Koehler Publishers, Incorporated, 2014. ProQuest Ebook Central,
http://ebookcentral.proquest.com/lib/apus/detail.action?docID=1565988.
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http://www.nielsen.com/us/en/newswire/2013/u-s–ad-spend-increased-2–in-2012-on-strong-3q.html

process, both er and seller are involved. As discussed earlier, “ er beware” imparts
some responsibility to the er for believing and being susceptible to ads. Ethical issues arise
whenever corporations target ads in manipulative, untruthful, subliminal, and coercive ways to
vulnerable ers such as children and minorities. Also, inserting harmful chemicals into
products without informing the er is deceptive advertising. The tobacco industry’s use of
nicotine and addictive ingredients in cigarettes was deceptive advertising.

The American Association of Advertising (AAA) has a code of ethics that helps
organizations monitor their ads. The code cautions against false, distorted, misleading, and
exaggerated claims and statements, as well as pictures that are offensive to the public and
minority groups. The following questions can be used by both advertising corporations and
consumers to gauge the ethics of ads:

1. Is the consumer being treated as a means to an end or as an end? And what and whose end?
2. Whose rights are being protected or violated intentionally and inadvertently? And at what
and whose costs?

3. Are consumers being justly and fairly treated?
4. Are the public welfare and the common good taken into consideration for the effects as well
as the intention of advertisements?

5. Has anyone been or will anyone be harmed from using this product or service?

The Federal Trade Commission and Advertising
The Federal Trade Commission (FTC) and the Department of Labor (DOL) are the federal
agencies in the United States appointed and funded to monitor and eliminate false and
misleading advertising when corporate self-regulation is not used or fails. Following is a
sample of the FTC’s guidelines:

The FTC Act allows the FTC to act in the interest of all consumers to prevent deceptive and unfair practices. In interpreting
Section 5 of the act, the Commission has determined that a representation, omission or practice is deceptive if it is likely to:

• mislead consumers
• affect consumers’ behavior or decisions about the product or service

In addition, an act or practice is unfair if the injury it causes, or is likely to cause, is:

• substantial
• not outweighed by other benefits
• reasonably avoidable

The FTC Act prohibits unfair or deceptive advertising in any medium. A claim can be
misleading if relevant information is left out or if the claim implies something that’s not true.
For example, a lease advertisement for an automobile that promotes “$0 Down” may be
misleading if significant and undisclosed charges are due at lease signing. In addition, claims
must be substantiated, especially when they concern health, safety, or performance. The type
of evidence may depend on the product, the claims, and what experts believe is necessary. If

Weiss, Joseph W.. Business Ethics : A Stakeholder and Issues Management Approach, Berrett-Koehler Publishers, Incorporated, 2014. ProQuest Ebook Central,
http://ebookcentral.proquest.com/lib/apus/detail.action?docID=1565988.
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your ad specifies a certain level of support for a claim (e.g., “tests show X”), you must have at
least that level of support.

Sellers are responsible for claims they make about their products and services. Third
parties—such as advertising agencies or web site designers and catalog marketers—also may
be liable for making or disseminating deceptive representations if they participate in the
preparation or distribution of the advertising or know about the deceptive claims.21

Pros and Cons of Advertising
Advertising is part of doing business, and not all advertising is deceptive or harmful to
consumers. The arguments, both for and against advertising, raise awareness that provides
information to both companies and consumers in their production and consumption of
information and transactions. General ethical arguments for and against advertising are
summarized below.

Ethical Insight 5.1

Signs of an Advance-Fee Loan Scam: “Red Flags” from the FTC

• A lender who isn’t interested in your credit history. A lender who doesn’t care about
your credit record should give you cause for concern. Ads that say “Bad credit? No
problem” or “We don’t care about your past. You deserve a loan” or “Get money
fast,” or even “No hassle—guaranteed” often indicate a scam.

• Fees that are not disclosed clearly or prominently. Any up-front fee that the lender
wants to collect before granting the loan is a cue to walk away, especially if you’re
told it’s for “insurance,” “processing,” or just “paperwork.” Legitimate lenders often
charge application, appraisal, or credit report fees. It’s also a warning sign if a lender
says they won’t check your credit history, yet asks for your personal information, such
as your Social Security number or bank account number.

• A loan that is offered by phone. It is illegal for companies doing business in the
United States by phone to promise you a loan and ask you to pay for it before they
deliver.

• A lender who uses a copy-cat or wannabe name. Crooks give their companies names
that sound like well-known or respected organizations and create web sites that look
slick.

• A lender who is not registered in your state. Lenders and loan brokers are required to
register in the states where they do business. To check registration, call your state
attorney general’s office or your state’s Department of Banking or Financial
Regulation.

Source: Federal Trade Commission. (2012). Consumer Information, Advance-Fee Loans.
http://www.consumer.ftc.gov/articles/0078-advance-fee-loans.

Weiss, Joseph W.. Business Ethics : A Stakeholder and Issues Management Approach, Berrett-Koehler Publishers, Incorporated, 2014. ProQuest Ebook Central,
http://ebookcentral.proquest.com/lib/apus/detail.action?docID=1565988.
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http://www.consumer.ftc.gov/articles/0078-advance-fee-loans

Arguments for Advertising
Arguments that justify advertising and the tactics of puffery and exaggeration include:

1. Advertising introduces people to, and influences them to , goods and services.
Without advertising, consumers would be uninformed about products.

2. Advertising enables companies to be competitive with other firms in domestic and
international markets. Firms across the globe use advertisements as competitive weapons.

3. Advertising helps a nation maintain a prosperous economy. Advertising increases
consumption and spending, which in turn creates economic growth and jobs, which in turn
benefits all. “A rising tide lifts all ships.”

4. Advertising helps a nation’s balance of trade and debt payments, especially in large
industries, such as the food, automobile, alcoholic beverage, and technology industries, whose
exports help the country’s economy.

5. Customers’ lives are enriched by the images and metaphors advertising creates.
Customers pay for the illusions as well as the products advertisements promote.

…