Playskool, Inc. Case: 50 Years in Chicago; Lincoln Logs; 1968 Acquired by Milton Bradley; 1984 Acquired by Hasbro Industries - New Company Hasbro Bradley; Sept 19,1984 - announced Chicago facility closed; 700 jobs moved to East Coast in December

1980 Playskool - $1mil Industrial Revenue Bond (IRB); low interest tax exempt; seek city sponsorship; no public money involved; IRB approved; city approved application; funds used to buy automated equipment; Playskool employed 1200 people in Chicago; Predicted an increase of 446 workers if IRB Approved; Instead, employment decreased to 700

Problems with Chicago Plant: Underutilization of Plant; poor construction of 1967 Addition; Difficulty attracting R&D toy staff to Chicago; Narrowly profitable -only because of goods brought in from overseas; Chicago Workforce; 75% Black and Hispanic; 60% Women; Unionized; Average Wage - $7 per hour; One Proposed Relocation Site - 100% White Community; Non-Union; Hasbro Bradley Denied Plans of Plant Closure

Greater North Pulaski Development Council told would not move profitable plant; Severance and Job Placement Program; Posting of Names of Potential Employers; Posting Specific Job Openings; Outplacement Seminars on Job Search Techniques for Salaried Employees; Offered Transfers to 70 Workers; Severance Package Over $3 mill Ratified by Union; Union Offered Outplacement Seminars in English and Spanish

Community Reaction: Robert Mier - City Economic Development Commissioner “This corporation has shown no sense of responsibility”; West Side Jobs Network and Greater North Pulaski Development Corporation; Requested Closing be Reconsidered; Community Groups - Asked City to file suit since in violation of IRB Agreement; Employee Ownership or new owner; Rally Held at Toys-R-Us Store - Nov. 10; Speakers called for Boycott; Another Rally at Toys-R-Us - Nov. 23- Biggest Shopping Day of Year

National Media Attention; New York Times; Wall Street Journal; “Hasbro, The Grinch Who ‘Stole’ Jobs”; City Files Suit; December 4 - Mayor Harold Washington filed suit against Hasbro-Bradley to stop closing; Claimed violation of IRB; December 6 - Hasbro -Bradley paid over $1 mill to purchase IRB

City and Hasbro-Bradley Agreement – January: City Dropped Lawsuit; Playskool operations continued through most of 1985 with 125 employees; Job Search Facilities Available to All Employees; $500 Paid to Employers for Each Playskool Employee Hired; $100 Award to Employees Providing Job Leads; $300,000 Advertising Campaign - Gayle Sayers - TV Commercials and Print Ads to Help Place Employees

End of Crisis; West Side Jobs Network Called Off Boycott; Stephen Hassenfeld, Chairman of Hasbro-Bradley, “We’re doing all these things on our own initiative. Even if we had won the lawsuit, our ethical responsibility would have been the same. There is no deal here.”

Business Ethics: The application of general ethical concepts to the unique situations confronted in business. It asks what is right or wrong behavior in business and what principles or rules can be used as guidance in business situations; Tells people what they ought to do; Set of principles or rules

The Four Concepts of Ethics

Relativism: There is no universal standard by which morality can be judged; What is correct for one society may be wrong for another; Ethics and morality are relative. Problems: There are no absolutes - murder, slavery, torture, rape OK; leads to conclusion - each person’s opinion is correct; Nothing that anyone does is morally wrong

Egoism: One ought to act in his or her own self interest; Ethical behavior is that which promotes one’s own self interest; Does not mean should not obey laws - only do so if in self interest. Problem: Externalities associated with private actions - OK to dump toxic wastes as long as don’t get caught.

Utilitarianism: The morality of an action can be determined by its consequences; An action is ethical if it promotes the greatest good for the greatest number; Benefits and Costs of an Action to Whomsoever They Accrue; The ends justify the means.

B1 + B2 + B3 + ... +Bn> C1 + C2 + C3 + ... +Cn; Then the Action is Ethical; B1 + B2 + B3 + ... +Bn< C1 + C2 + C3 + ... +Cn; Then the Action is Unethical

Utilitarianism Example: Harry Truman and Decision to Drop Bomb on Japan

Can lead to unjust consequences; Restrictions against the majority to protect a minority is not utilitarian

Deontologism: Derived from the Greek word for Duty; Actions are not justified by their consequences. Factors other than good outcomes determine the rightness of actions; It is the means which are important

Categorical Imperative, Developed by Immuel Kant: "I ought never to act except in such a way that I can also will that my maxim should become a universal law". Are you willing to permit everyone to adopt the action? Yes - Moral; No - Immoral

Guidance in Dealing with People: People should never be treated as a means to an end, but as ends in themselves; To treat people as ends requires respect for persons; Reject slavery; Deals with murder, rape, etc; How to deal with employees

General Ethical Behavior: Builds security, friendliness, cooperation and trust in a society; These are public goods created by generally ethical behavior

What are characteristics of Public Goods? Not subject to exclusion - cannot exclude people from consumption even if they do not contribute; Joint Supply - Provide for one individual, provide for all; Free Rider Problem

Categorical Imperative and Public Goods: Security, Friendliness, Cooperation and Trust; Not Subject to Exclusion; Joint Supply; Free Rider Problem

Ethical Dilemmas in Business: Conflict of Interest; Have two interests - cannot purse one without having negative impact on other; Two Types - Private Interest Conflicts with Corporate; Business Interest Conflicts with Public

Whistle blowing: Act of disclosing wrongdoing in an organization; Like blowing a whistle to call attention to a thief; Types: Internal and External

Can Cause Bitterness in Organization: Dissent - Must speak out against others in organization; Breach of Loyalty - Perceived as one who violates confidentiality and loyalty; Accusation - Singles out specific individuals as threats to organization or the public; Possible Retaliation; Fired; Blacklisted; Transferred to undesirable locations; Lifestyles, sex lives and mental stability questioned; Physical abuse and murder possible

Failure to Reveal Wrongdoing: Severe problems for society or organization; Can be implicated as an accessory before or after the fact

Challenger Disaster: Morton-Thiokol; O-rings; Cold in Florida; Engineers warned o-rings could fail; NASA made decision to launch space shuttle anyway

Cautious Approach to Whistle blowing: Make sure situation involves an imminent threat to society or to the business; Document all allegations; Examine internal whistle blowing first; Should you remain anonymous?; Get another job first

Bribery: A payment, usually to a public official, to induce that person to either do something improper or to influence decisions or actions. Extortion: same as bribery, recipient of payment initiates transaction

Case: International consulting firm - designs and supervises construction of hydroelectric power generating systems; Your proposal is far superior to any other; technically; lowest bid; To get job, must deposit $250,000 in official’s personal Swiss bank account; Should you pay the money?

Foreign Corrupt Practices Act of 1997 [bribery is made illegal]; Allowed grease payments [money to speed up the process through the bureaucratic system]; Standard Practice in most foreign countries; Results in lost business opportunities for US companies; American tax dollars may be used to pay bribe

Bluffing and Deception: Negotiating a labor contract; Plant has experienced losses over past several years - not clear why; Want concessions from labor; Tell labor that plant will be closed if no concessions are made. In reality , no such plans contemplated; Is this ethical?

Managerial Implications: Top Management Leadership; Organizational Culture; Realistic Goal Setting; Ethics Audit; Code of Ethics; Ethics Committee; Ethics Advocate; Whistle blowing Mechanism; Ethics Training

Polaroid in and Out of South Africa: Apartheid System; 17% White 70% African; Whites only could be in government, possess firearms; Enforced segregation of races; Blacks relegated to "native reserves"; Blacks allowed to own 13% of land; Whites - 87%; Black workers paid less than Whites

US Involvement in South Africa: 320 American companies there; American companies controlled 43% of petroleum market, 23% of auto sales, 70 percent of computer business. Polaroid: Rumors that products used in Pass Book System; Commission to South Africa; No sales to government; Improve salaries for Blacks for local distributors and suppliers; Training program so Blacks could take better jobs; Some profits for Black education

Success of Program: Improvements in Black salaries, advancement and benefits; Principle of same pay for same job accepted; Ban on direct sales successful; Ban on indirect sales not successful

Sales to Government through Frank and Hirsch: Secretly selling Polaroid products to government; Billed as shipments through drugstore in Johannesburg; Polaroid terminated its involvement in South Africa

What is the ethics of American companies doing business in a country with human rights abuses? Was Polaroid responsible for the use of its products? Are companies responsible for the use of their products? Was Polaroid’s presence a positive or negative influence on Blacks?

Chapter 6: Government Regulation of Products, Prices and the Workplace: Growth of Regulation Over Time (Federal Register 65,000 pages per year); Massive increases in expenditures and personnel devoted to regulation

Reasons for Government Regulation:

Public Interest Theory (Government Regulation Exists to Correct Some of the Shortfalls of the Free Enterprise System): Insure Competition, Impact Externalities, Provide Public Goods (Information), Equalize Income (Minimum Wage), Stabilize Economy (Wage and Price Controls, National Economic Planning, Both Failures), Social Objectives (Non-discrimination in hiring, Fair housing, Job safety)

Interest Group Theory (Regulation is a way to advance the objectives of special interest groups; Industries seek out regulation to legally fix prices, prohibit entry by competitors, and obtain subsidies

Traditional Industry Regulation: Primarily Economic Regulation; ICC, CAB, FCC; On Decline; Capture Theory - Regulatory Commission becomes captive of the industry it is supposed to regulate

New Social Regulation: Cuts Across Industries; EPA, OSHA, CPSC; Difficult for single industry to capture; Capture - by groups preoccupied by specific task (Radical Environmentalists – EPA); Concern with benefits of regulation - little concern with costs

Problems of Government Regulation: Traditional Industry Regulatory Agencies Captured by industry - max returns to industry (Social issues get little examination); New Social Regulatory Agencies (Focus on Broad Social Goals - health of industries get little or no concern)

Methods of Regulation: Performance Standards; Design Standards; Prohibition; Licensing; Price Setting; Labeling and Information Disclosure; Inspections, Grading and Testing; Recalls and Product Seizures

Why Government Regulation? Maybe Best Policy Tool Available; Better Chance of Getting Through Public Policy Process; Market Based Solutions - use fewer bureaucrats; Market-based Solutions - may cost government money - compliance costs treated as free good

Interstate Commerce Commission (ICC): 1887 - Act to Regulate Commerce - first government regulatory agency; (Prior to 1887) Rail only means of transportation; Decreasing Cost industry; Ruinous Competition -cut rate pricing; pricing Pools - Cartel arrangements to fix prices

History of Cartels: Low Prices - Loosing Money; Cartel Agreement Formed; Must reduce output - to make higher prices stick; Cheating on cartel agreement - secret rebates; Wholesale cheating - Cartel agreement falls apart

State Regulation of the Railroads: Granger Laws - Led by Illinois; Economic regulation of the RR industry; Prohibited Long haul/short haul discrimination - a form of price discrimination, Secret rebates, Free passes to public officials

Supreme Court Decisions: Munn v Illinois 1877 - gave states and federal government the right to regulate business; Wabash Railway Co. v Illinois - Granger laws declared unconstitutional, only federal government could regulate interstate commerce

ICC Established 1887- Act to Regulate Commerce became law - established ICC as first federal government regulatory agency; Legalized Price Fixing - with ICC supervision; Control of entry and exit; Publication of Rates

Two Views of Regulation: Public Interest Theory - Railroads abused power; Special Interest-Capture Theory (railroads could not enforce cartel agreements; Needed Federal government to enforce agreements; Capture of ICC by railroad interests)

Motor Carrier Act of 1935: Depression of 1930’s; Easy entry; Cut-throat competition; trucks wanted regulation to reduce competition

Impacts of Regulation: Rail bankruptcies after WWII; Low rates on rail dependent traffic; high rates on truck competitive traffic; unprofitable lines; Innovation stifled - Big John Hoppers; Inefficiency - trucking - circuitous route limitations, gateway restrictions; Entry restrictions - Certificate of Public Convenience and Necessity. Ingot Molds Case: MC of shipment $4.69 per ton; Rate could not fall below $7.19 per ton; Truck -barge rate $5.19 per ton

Deregulation: Staggers Rail Act of 1980; Motor Carrier Act of 1980; Trucking Industry Regulatory Reform Act - 1994; ICC Elimination Act of 1995; Surface Transportation Board replaces ICC

Consumer Movement: Upton Sinclair - The Jungle – disclosed unsafe conditions of meat-packing industry; Ralph Nader - Unsafe at Any Speed – disclosed problems of the Chevy Corvair; Consumer movement is mainly associated with Ralph Nader

Food and Drug Administration (FDA); 1906 Food and Drug Act - labeling of food and patent medicines; FDA Established in 1931; 1937 Elixir Sulfanilamide - 107 people died; 1938 Food, Drug and Cosmetic Act - all new drugs to be approved for safety; 1961-1962 Thalidomide tragedy in Europe, not US; 1958 Delaney Amendment - food additives prohibited that cause cancer in man or laboratory animals; 1962- Kefauver Amendments - Drug companies must demonstrate efficacy of products as well as safety

Methods of Enforcement; Premarket clearance of drugs and medical devices; Recalls of unsafe products; Testing of drugs, food, medical devices and cosmetics; Inspections of factories; Labeling requirements of drugs and food - e.g. nutrition information

Impact of FDA Regulations; Cost of bringing new drug to market; 8-10 year process; New drugs for rare diseases - not developed; AIDS - efficacy must be proved; Avoidance of tragedy - Thalidomide

Occupational Safety and Health Administration (OSHA); Goal: Regulation of the safety of the workplace; Started out forcing firms to comply with existing voluntary standards. Methods of Enforcement: Standard Setting; Inspections and Citations; Information and Consultation with companies

Impacts of OSHA Regulations; Probably minimal - most injuries result from workplace error; Small business - greatest impact - reduces competition by creating a barrier to entry; Conflicting Regulations - sausage guards.

Alternatives to OSHA; Cost-Benefit Analysis of Regulations; Injury Tax; Required Insurance

National Highway Traffic Safety Administration (NHTSA); Regulation of Auto Safety; Enforces Fuel Economy Standards; Established 1966; National Traffic and Motor Vehicle Safety Act; Highway Safety Act; Issues automobile safety equipment standards

Three groups of standards: Pre-crash; Crash; Post-crash; Ford Pinto Case - exploding gas tanks

Motorcycle Safety; Methods of Enforcement; Certification and testing; Auto Safety Hotline; Recalls; Fines

Airbag Controversy; Joan Claybrook - Carter Administration; Reagan Administration - postponed implementation; In luxury cars; Now required in all cars; Small women and children - deaths and injury due to airbags

Impact of NHTSA Regulations: Fewer deaths and injuries on the highways; Increased cost of cars; Better fuel economy

Consumer Product Safety Commission (CPSC): Created in 1972; Goal: To protect consumers from dangerous consumer products; Sets or oversees standards for over 10,000 consumer products; Since early 1980’s - used Cost-Benefit Analysis of standard setting activities

Methods of Enforcement: Certification and Testing; Plant Inspection; Recalls, Seizures; Bans on sale of products

Impact of CPSC: Dangerous products taken off the market; Higher price of products; Unintended consequences - e.g. TRIS and Children’s Sleepwear

Benefits and Costs of Regulation: Benefits are substantial; Harmful drugs and products taken off market; Auto Safety; One estimate $80.6 bill per year

Costs of Regulation: Administrative and Compliance Costs; Government Cost - $8.3 bill; Business cost - $97.9 bil in 1979; 7.5 mil worker hrs filling out forms; 12.6 mill cubic feet of paper 3,675 miles 6.6 bill hours filling out gov forms - 3 million full time workers

Unintended Effects: Inefficiency and Waste - ICC; Higher Prices for Products - FDA, CPSC; Reduced Innovation - FDA, ICC; Create New Problems - CPSC Tris [flame-retardant chemical but caused cancer in animals]; Overlapping Regulations (OSHA & USDA, sausage guards); means becomes the goal, NHTSA

Alternatives to Current Regulations: Structural and Personnel Reforms (Cat that Barked); Deregulation (Transportation, Financial Institutions Deregulation, Telecommunications Deregulation); Cost-Benefit Analysis of Regulations; Benefits G.T. Costs Implement; Benefits L.T. Costs Don’t (How to measure benefits and costs: quantification problem; valuation problem); Self-regulation; National Assoc. of Broadcasters; Movie Industry; Regulatory Budget (Congress passes a limit on costs that could be imposed on business; Forces regulators to take compliance costs into account); Government Incentive Approach (Tax credits for compliance costs - Gives government incentive to keep compliance costs at a minimum since Washington looses this revenue)

Deregulation Alternatives: Middlemen; Brand Names Private Testing Organizations - Consumers’ Union; Sunset Laws

How about this alternative? Automatic termination of large agencies unlikely; Workload for Congress

Regulatory Budget Advantages: Agencies take compliance costs into account; Incentive to find least cost means of achieving goals of regulation

Regulatory Budget Disadvantages: How to measure compliance costs; Which costs are to be counted?

Johns Manville: filed for Chapter 11 bankruptcy - asbestos related lawsuits - had positive net worth of $1.1 bil

Health effects of asbestos: Abestosis; Lung cancer; Mesothelioma

Evidence of Cancer and Asbestos Link: Early evidence – 1932; 1960’s landmark study like it to lung disease for sure; Other earlier studies linked asbestos to lung cancer and other diseases; Manville maintained did not firmly establish link until 1960’s study

Chapter 11 bankruptcy: Projected costs of lawsuits $2 bil in early 1980’s; Bankruptcy code rewritten in 1978 (Requirement that co. had to be insolvent [was] left out); No one thought solvent company would file

Manville felt government should pay part of claims; Navy and other government agencies knew of hazards

Proposed Settlements: $50,000 Mesothelimona; $45,000 Lung cancer; $40,000 Abestosis; $1,000 Pleural Thickening; 11 cases settled Avg $666,000 each

Was Manville’s filing for bankruptcy ethical? Was it socially responsible? To what extent is Manville responsible for the use and manufacture of its products? If you were president of Manville, what would you do differently?

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