ETHICAL NORMS AND LEGAL REGULATIONS IN MODERN BUSINESS

Abstract

A large number of business leaders, as well as ordinary people, do not make a clear distinction between ethical norms and legal regulations; consequently, they expect morality would solve the legal issues, but confuse moral behaviour with mere compliance to the law. This study attempts to clarify this matter, discussing several matters: What is a norm in general; the necessary relationship between norms and freedom; the structure of norms; the normative statements; the distinctions between moral norms and legal regulations. Illustrated by a few case studies, the conclusion of this paper claims that too often mere legality does not insure the morality of business decisions and practices.

Headnote

Abstract: A large number of business leaders, as well as ordinary people, do not make a clear distinction between ethical norms and legal regulations; consequently, they expect morality would solve the legal issues, but confuse moral behaviour with mere compliance to the law. This study attempts to clarify this matter, discussing several matters: What is a norm in general; the necessary relationship between norms and freedom; the structure of norms; the normative statements; the distinctions between moral norms and legal regulations. Illustrated by a few case studies, the conclusion of this paper claims that too often mere legality does not insure the morality of business decisions and practices.

Keywords: Ethical norms, freedom, legal regulations, normative statements, social rules, structure of norms.

In a previous paper called "Law and Morality in Modern Business" - that will be printed in another scientific journal - I tried to reject the notion that keeping the law is the only moral duty in business. Some people believe they could sum up the whole morality of business in one single principle: "Obey the law." What else a businessperson might be expected? "Some have said that corporate concern about business ethics can be reduced or eliminated by turning problems over to the legal department. The operative idea is 'let the lawyers decide; if it's legal, it's moral.' Although this tactic would simplify matters, moral evaluation needs to be distinguished from legal evaluation." (Beauchamp, Tom L. et al, 2009, p. 4) In short, I have stated several arguments against this legalist approach, pleading for the notion that, no matter how important, the law cannot and should not solve all the difficult issues which currently confront business people: 1) The very efficiency of the legal system depends on the moral attitude towards the notion of legality, since conformity with the law is not, in itself, a legal matter, but a moral obligation. 2) Every law can be, and should be evaluated from a moral viewpoint. Occasionally, keeping a bad law might be a perfect way to act against one's moral beliefs. 3) The law cannot and must not regulate every aspect and each moment of our lives. When the law has nothing to say, people still need a moral guide of their decisions and actions. 4) Most often the law tells us how to proceed, but not what we should do. The law is concerned with the means that we may use, but the choice of our ends in life is a moral matter of each person. 5) One final reason why, beyond the strict conformity with the law, ethics could be sometimes requested, is the national character of legislation, whereas ethical principles claim to be generally valid. Ethical standards play a specific and irreplaceable part in the decision making process involved in a fair market economy.

I hope my arguments were valid. And yet, there still is one difficult problem to discuss. I met some well-intended businesspersons who definitely admit that honest business involves certain ethical standards beyond strict legality. But when it comes to defining and understanding the difference between moral standards and legal regulations, things are far from being clear. Too often, people speak in good faith of moral rules in business, but they keep on thinking of legal duties, as if there was no sharp difference between these two types of norms. I met business leaders, diplomats, journalists ready to talk about business ethics. Most often, they began to deplore the fact that in Romania too many people and companies steal, lie, and cheat; too much corruption, bribery, dubious bids, tax frauds, etc. To fix this polluted business environment, they say, we need to enforce business ethics. I disagree. All of these bad behaviours are, of course, immoral deeds. But primarily they are illegal actions and it is up to the legal system to deal with them. The specific field of business ethics begins where the law stops. Within the limits of the law, business persons are confronted with a lot of choices - all of them legal, and yet not equally valid from an ethical viewpoint.

Many people do not make a difference between ethics and morality. Most often, this confusion do not disturb the communication in ordinary language. But sometimes it is useful de recall that, properly speaking, ethics is a philosophical inquiry, concerned with morality. But what is morality? At first glance, the answer is easy. Almost everyone would submit that, among other things, but in the first place, morality is a system of norms, which we should keep in our social relationships if we wish to commit good deeds and to be good persons. An unexpected difficulty appears when we ask for a clear example of a moral norm. Spontaneously, we would think of such rules as "Never lie," "Never steal," "Respect the old folks," "Take good care of your children," "Do not cheat your wife or husband," etc. But wait a minute. On second thought, all of these rules are also legal regulations and, for religious people, they are God's orders. It is not at all easy to find norms which are purely moral and nothing but moral rules. This is not the case with other normative fields. "Keep the Sabbath," "Receive the Eucharist," "Confess your sins to your father confessor," "Pray five times a day, turning your face to Mecca," etc. are all purely religious commandments. "Pay your taxes," "Do not take bribe," "No house search is allowed without a warrant," "Always stop the car at the red light," etc. are all clear legal regulations. "Keep this product in cool, dry places," "Never press the 'Turn on' button if the device is unplugged," "Do not stand under tall trees when it is thundering," etc. are all technical instructions. "Break a Champagne bottle when a vessel is launched," "Always wear black at funerals," "Carry your bride in your arms across the threshold after the wedding ceremony," etc. are all traditional customs.

Since we cannot produce one single "pure" or exclusively moral norm, the only way to explain why and when a rule, such as "Never steal," has a moral meaning is to analyze the social functions and the structure of norms in general. That is why, in the first place, we must analyze some more general questions, namely: What is the meaning of the word "norm"? Which are the characteristics that make difference between a moral, a religious, and a legal norm?

What is a norm?

A norm is a pattern of behaviour, which should apply under various circumstances. Every norm is an abstract, ideal model of a specific kind of actions, which leaves aside the accidental and insignificant aspects of the social setting, to emphasize the unchangeable and important things to do or to avoid. This might hold true, but it is not enough. We must add a few specifications before stating an acceptable definition of norms.1

First, even though putting into practice a norm for a long time generates certain habits, the individual must accept consciously a normative pattern and deliberately follow the rule. Thus, automatic reflexes, stereotypes, and any kind of habits - good or bad - acquired imperceptibly and unwillingly by the individual do not have a normative nature. We can train an ape to shake hands or raise its hat, but the animal is not following a social custom. Some people always give a firm handshake, but they are not all following a social rule; they merely express their true character. I always put on my left sleeve first, but I have never decided to do so, and nobody ever told me to act like this - it is only a matter of habituation.

Second, a norm is a pattern of individual behaviour, but it has a general, super individual significance and validity. Let us say that one might decide for himself, "I shall never drink red wine," because he thinks it could be hazardous to his heart condition. Another person never takes an important action on Tuesday, because she is superstitious. The third person is in the habit of playing lawn tennis three times a week, to keep in good physical shape. Each person has his or her own rules of behaviour, but none of these personal rules is a norm, because they do not count as social patterns of behaviour, adopted and followed by a large group of people.

Finally, a person can consciously conform to a social standard of conduct only if the rule of action is explicitly stated a super individual pattern of behaviour. The simple statistical uniformity of social stereotypes, which individuals acquire by means of imitation or social training, has nothing in common with the normative action. Most of the people on a beach drink beer and play ball. The fans of a football team cheer with joy the victory of their idols, and boo with anger their defeat. Their behaviour is uniform, but only as consequence of a mimetic attitude - a matter of social psychology.

To sum up: a norm is a rule of conduct, having a super individual validity, explicitly stated by the collective consciousness as a standard of behaviour, deliberately accepted and followed by the individuals.2

Norms and freedom

A norm would be senseless if it demanded an impossible behaviour, such as "Wave your hands and fly" or "Walk on water," because nobody could do such things. A norm would also be absurd and irrational if it asked for an inevitable behaviour, such as "Do not stop breathing" or "Strive for happiness," as long as every person, by her nature, spontaneously does such things. Any norm supposes a free agent, who can do something, but does not have to do it. Therefore, the social function of a rational norm is to determine a free agent to comply with a certain pattern of conduct, because this pattern is socially desirable, but not always spontaneously put by everybody into practice. Consequently, human freedom is the ontological ground of normative behaviour.

Freedom of will is a very complicated matter, which has always tortured the minds of philosophers, scientists, and theologians. Fortunately, we do not have to resolve now this tricky metaphysical problem, concerning how freedom is possible in this universe. Actually, we all do experience our freedom of will, each time we have the real possibility to choose between practical alternatives. Sometimes, the outcome of our choices is socially unimportant or indifferent. It is no one's business if I spend my summer holyday in the mountains or on the seashore. Nobody cares if I choose between having a dog or a cat, and I always may decide in the morning whether I drink coffee, tea or milk.

However, many other choices have serious consequences on some other people, and these choices are not socially unimportant or indifferent. It is everyone's business if I spend my summer holyday stealing cars or shooting at people in the street. You would probably agree that everybody should care if I like to torture dogs and cats or if I enjoy eating other human beings. And people would not agree that I always may decide in the evening to beat my wife up or to molest my children. As Aristotle says, man is a social animal, who by his nature lives among, and together with, other people. Social life requires a system of uniform individual behaviours, without which the coherence and continuity of society would not be possible. On the other hand, the patterns of conduct concentrate a very long collective practical experience, which cannot pass, like instincts, from one generation to the next by means of heredity, but only by means of education. Thus, the most important function of norms is the socialization of the individuals. As rules of action, the norms are supposed to establish a certain uniformity of the individual behaviours, determining the individuals to rule consciously and willingly their lives in accordance with a social standard, proven by a long history as being able to guarantee a certain coherence and stability of the social life. As social psychologists have experimentally proven, there is in all of us a strong urge to conform to the majority. A normative pattern requires more than simple conformity, imposed by unconscious behavioural mechanisms, because it puts at work the human mind and understanding, which implies the active function of language.

The normative statements

As a matter of thought, we can be aware of a pattern of conduct by means of a normative statement - a combination of words, meaning that we ought to do something. A sentence is said to be normative when it contains at least one normative term - a word that does not refer to a material or ideal object, process or characteristic, but to a certain way of our doing or not doing something. The most common and important normative terms might help in the classification of the normative statements.

§ Ought and must . "He ought to do this" or "She must do that" are obligations or duties. I must give lectures to my students; they ought to study; he must treat his parents with respect, and we all ought to drive on the right side in Europe, and on the left side in Britain.

§ In their negative forms, ought and must are contained by interdictions or forbiddances, such as "He ought not to do this" or "She must not do that." I ought not to take bribe; my students must not copy while taking written tests, and everybody is forbidden to smoke in the classroom.

§ Finally, we call permissions sentences such as "He may do this" or "She is allowed to do that." In a weak sense, a specific behaviour is allowed whether nothing interferes with the free will of an individual. I may walk or catch a bus; you may drink soda, orange juice or coffee; he may write with a pencil, a fountain pen or a ball pen. In a stronger sense, a person is permitted to do something when an authority guarantees that person's right to do something. I may frankly express my beliefs because I have the constitutional right to free speech - but I may not use dirty words in public or make false allegations. I may own a car, a house or a company because our constitution guarantees the private property - but I may not own another person, etc.3

The structure of norms

A norm cannot reduce to a normative statement. Any real and functional norm is a complex social relationship, which supposes a few necessary elements.

First, the normative authority is the social force that establishes a certain pattern of behaviour, being able to enforce it, and to make people follow the rule. For example, the state or the government are the authorities of all the legal and administrative regulations; God and the Holy Church are the source of all religious duties and forbiddances; the experts and their competence issue the technical instructions; the public opinion and tradition enforce the specific customs of a nation.

Second, the subject of a norm consists in a category of people, subordinated to the authority and supposed to comply with the rule. Sometimes, the subject is explicitly defined. For instance, all of the Romanian citizens must obey the Romanian laws, all the drivers in the world must follow the same rules, all the students ought to pass their exams, etc. In other cases, the subject is not clearly specified. There are norms that apply to everyone, such as "No smoking," "Do not steal," "Do not commit suicide," "Pay your debts," and so on. Finally, there are norms that everyone must accept if one wishes to accomplish certain tasks or to belong to a certain community. It is the case of technical instructions, such as "If the device stops, press the red button," "Take two pills after meals," etc. or the case of traditional customs.

Third, the application field of a norm is a class of situations and practical contexts in which the authority demands the subject to follow a certain rule. "Do not kill" is a valid rule in times of peace, but not valid for military at war. "Take the bullet into your chest" is a rule of honour for a body guard, but only when he is on duty and the target of the bullet is his boss, whereas a doctor must give medical attendance to anyone in need, even if he is not on duty.

Fourth, the rule of action or the content of the norm is the specific pattern of behaviour demanded by the authority.

Finally, the normative authority enforces any effective norm by means of certain sanctions - punishments and rewards, as consequences of the subject's actions, which deserve a reward if he conforms to the established standard of conduct or a punishment if he breaks the rule.

This structure of norms in general might be of great help to distinguish between moral rules and other types of norms, such as the religious commandments and legal regulations. "Do not steal," for instance, is a religious norm for those people who believe that stealing is forbidden by God's will. Such a divine order has its source in the Supreme Being, which is far beyond this world and above the individual. The religious norms come from a transcendent authority, endowed with the magical power to reward or to punish the believer, both in his lifetime - spent here, on earth - and after his material death, deciding the fate of his immortal soul. The religious norms are external or heteronomous - because the individual gets his orders from outside his conscience; a separate force is telling him what to do and not to do, and his only free option is between compliance and disobedience. We all know there are many faithful thieves - people who believe in God and are perfectly aware of His forbiddance of theft; however, they keep on stealing, and hope that, listening to their prayers and confessions, God will forgive them in the end. But what about those people - and they are a lot nowadays - who have lost their faith in God? Most of them still accept and follow the rule "Do not steal," even though they do not feel watched by the invisible eye of the Almighty God.

Moral norms and legal regulations

The elements we have included in the structure of norms might help to tackle the differences between law and morality from a different angle. One might say that people abstain from stealing because they are afraid of breaking the law; after all, before being an offence to God, theft is a legal offence. However, definitely this claim does not stand. Everyone must have experienced at least once a situation in which he could steal something, certain that he would escape legal punishment, but he did not steal. Such experiences show us the difference between legal and moral norms. The law is clearly heteronomous, like the religious commandments, except two important aspects. First, the legal authority is not transcendent; it belongs to this world, having different names: Parliament, Government, President, Administration, Court, etc. Secondly, the punishments given by the legal system have nothing in common with the afterlife - they all happen in this world.

A genuine moral norm is always autonomous: the individual follows the rule of action because his conscience, acting as an internal force, is telling him to do so. I must not steal not (only) because God forbids theft (after all, maybe God will forgive my sin or perhaps I do not believe in God), and not (only) because I am afraid of the legal punishment (let us say I am certain that nobody will ever know that I have stolen). I must not steal because I do believe that theft is wrong, and wrongdoing would make me a bad person, and this holds true not only for me, but for everyone. The authority that establishes and enforces the moral norms is the so-called moral conscience - a complex human ability to judge what is good or bad, what is right or wrong, guiding our free will towards good and right deeds. Different ethical theories try to explain in various ways the origin, development, power, and limits of moral conscience. Despite the differences between different ethical theories, most of them emphasize this very important characteristic: moral norms originate in an internal (but not merely subjective) authority: the moral conscience.

The subject of any legal regulation is the citizen of a certain state or the member of a certain organization. Every one of us must obey the Romanian laws as long as we live in our country, and every one of us must conform to the laws of a foreign state when he or she is abroad. I must keep the deontological code of my profession, but I do not have the specific duties of a doctor, a fire fighter or a lifeguard. At present, there are no universal laws because there is no universal authority able to enforce them. The subject of any genuine moral norm is any human being; a moral norm claims to be valid for everyone. As moral duties, "Never lie," "Never cheat," "Never steal," "Never kill," etc. do not address a particular group of people, but each man and woman in the world. This does not mean that all of the moral norms really are universal. We know there are many moral duties and forbiddances specific to a certain social, cultural, and historical context. We also know there are, however, at least a few moral norms found in almost all the cultures of the world. Anyway, we have to emphasize that moral norms claim to be valid for everyone. This characteristic, called universalizability, is founded by the moral conscience, which also claims being a universal authority.

The same difference between law and morality appears as far as the application field of norms is concerned. The legal norm always applies to specific circumstances, and what the law does not forbid is legally permitted. The moral norms claim to be valid under any circumstances. In the U.S.A., a man prosecuted in court may refuse to speak against himself if he calls the Fifth Amendment of the American Constitution; morally speaking, he ought to tell the truth, no matter the consequences for himself. If a man has an illegitimate child, he has no legal obligation towards that child if the court could not prove that he is the natural father; from a moral standpoint, however, he ought to take care of his child and the child's mother. There are many moments in our lives when the law does not tell us what to do or what to avoid in our behaviour. Yet there is no kind of situation with no moral significance and consequences. Every moment in our lives means something to us or to the others, and everything we do or do not do leads to certain outcomes, which could make human condition better or worse.

The clearest distinction between law and morality appears when we analyze the rule of action - the normative sentence that demands a specific pattern of behaviour. Both moral and legal norms are either affirmative (obligations or duties) or negative (forbiddances or interdictions). Very often, however, we notice that the law only forbids, whereas morality forbids and urges to do something. Telling lies is forbidden both by the law and by morality, but only morality urges us all to tell the truth, even though being honest could be detrimental to our personal self-interest. Let us say I know that my neighbour is a thief or that he is in the habit of molesting his children when coming home drunk. If asked in court, being under oath, I must tell everything I know about my neighbour's behaviour, but otherwise I am not legally supposed to speak. According to morality, it is my duty to interfere, trying to determine my neighbour to stop stealing or molesting his children - if necessary, by calling the police and reporting his misbehaviour. Both law and morality forbid theft, but only in the moral field we can find a norm telling us not only "Do not steal," but "Be generous, give to your peer in need from your plenty." If I stole something and proved as a thief, I would be both legally and morally responsible. Yet no court of law shall ever prosecute, judge, and convict me because I refused to give my neighbour some money - the money he needed for paying his children's school taxes or his wife's urgent surgery, necessary to save her life. Legally clean, I should feel morally guilty of avarice and selfishness. Both the law and morality claim: "Do not kill," but only morality urges "Save a life if you can, even taking risks for your own person." I may not kill an innocent person. Whether I am a murderer, I should expect be prosecuted and convicted, but if a man, a woman or a child is in danger - drowning or closed in a burning house - it is not my legal duty to risk my own life trying to rescue the potential victim, but it is my moral duty to do so.

This leads us to an important distinction regarding the social function of law and morality. The legal norms should establish a minimal sociability, enforcing rules that control our hostility towards our neighbours. Without strong legal regulations, the society would be pretty much a battlefield or a jungle - Hobbes's state of nature. The moral norms try to establish a maximum of sociability, enforcing rules that stimulate our solidarity and compassion with our neighbours. Strong moral norms would make our world a better place to live in. To sum up, the legal norms urge us to refrain from being dangerous, injurious or prejudicial to the others, whereas the moral norms do the same thing, but they also urge us to be good, friendly and helpful to the others.

History proves that a society can survive without strong and effective moral norms; our country, at present, is a sad example of a morally confused and incoherent society. However, no complex, historically evolved society could ever survive without the force of law. That is why there is an important difference between the legal and the moral sanctions. First, the legal system counts on punishments, but has no rewards - if we do not consider the fact of not being punished as a reward, and leaving aside that living in a society protected by law is much better than always being the potential victim of criminals. Morality inflicts punishments for the wrongdoing - shame, remorse, blame, contempt, isolation, etc. - but also offers rewards for the right behaviour - such as praise, gratitude, satisfaction, and joy. Secondly, the legal punishments are external and material, even physical sanctions: imprisonment, and all sorts of penalties, damage compensations, confiscations, etc. These punishments are inflicted by an external force, which constraints the convict to pay his sentence, no matter if he feels guilty and remorseful for his crime or not. The most powerful weapon of law is the external physical force. The legal norm expects the subject to obey, not necessarily to approve of it. Even though I might disapprove of one legal norm or another, because I find it stupid or unfair, as long as I keep the rule I am legally innocent. However, if I break the law, even though I might approve of it, I am guilty and I have to pay. Morality has its own external sanctions, given by the other people: blame, contempt, isolation or even exclusion from community. Yet the most important and characteristic moral sanctions are internal and spiritual: shame, remorse, regret. These feelings arouse from our moral conscience. As long as I obey the moral rule because my moral conscience approves of it, my own "inner court" would condemn me when I break the moral law, forgetting about my duties.

The differences between moral rules and legal regulations explain why, so often, certain matters get opposite solutions from an ethical and a legal perspective. As John Boatright says, "approval from a company's legal department does not always assure a successful legal resolution, and companies have prevailed in court only to suffer adverse consequences in the marketplace. As a practical matter, then, managers need to consider both the ethical and legal aspects of a situation in making a decision for many reasons".4 There are several reasons for that. First, the law is inappropriate for regulating certain aspects of business activity. Not everything that is immoral is illegal. Some ethical issues in business concern interpersonal relations at work or relations between competitors, which would be difficult to regulate by law. Second, the law is often slow to develop in new areas of concern. The law is primarily reactive, responding to problems that people in the business world can anticipate and deal with long before they come to public attention. Good examples are sexual harassment or the legal protection of whistle blowers. Third, the law itself often employs moral concepts that are not precisely defined, so that it is impossible in some instances to understand the law without considering matters of morality. Examples of imprecisely defined legal concepts are the requirement of good faith, "fair dealing," "best effort," and "due care." A fourth argument, closely related to the preceding one, is that the law itself is often unsettled, so that whether some course of action is legal must be decided by the courts. And in making a decision, the courts are often guided by moral considerations. Fifth, a pragmatic argument is that the law is a rather inefficient instrument, and an exclusive reliance on law alone invites legislation and litigation where it is not necessary. Although business leaders lament the explosion of product-liability suits by consumers injured by defective products, for example, consumers are left with little choice but to use the legal system when manufacturers themselves hide behind "If it's legal, it's morally okay." Adopting this motto, then, is often short sighted, and businesses may often advance their self-interest more effectively by engaging in greater self-regulation that observes ethical standards.5 (Boatright, op.cit., pp. 16-17)

The next two cases illustrate from different angles how legal matters conflict with ethical standards, showing that "legally clean" does not always mean "ethically justified."

Texaco in the Ecuadorean Amazon

Tom Beauchamp presents in his impressive treatise on business ethics this very eloquent case study.

The Ecuadorean Amazon is one of the most biologically diverse forests in the world and is home to an estimated 5 percent of Earth's species. [. . .] Ten thousand feet beneath the Amazon floor lies one of Ecuador's most important resources: rich deposits of crude oil. [. . .] For 20 years American oil companies, lead by Texaco, extracted oil from beneath the Ecuadorean Amazon in partnership with the government of Ecuador. They constructed 400 drill sites and hundreds of miles of roads and pipelines, including a pipeline that extends for 280 miles across the Andes. Large tracts of forest were clear-cut to make way for these facilities. [. . .]6

Officials estimate that the primary pipeline alone has spilled more than 16.8 million gallons of oil into the Amazon over an 18-year period. Spills from secondary pipelines have never been estimated or recorded; however, smaller tertiary pipelines dump 10,000 gallons of petroleum per week into the Amazon, and production pits dump approximately 4.3 million gallons of toxic production wastes and treatment chemicals into the forest's rivers, streams, and groundwater each day. (By comparison, the Exxon Valdez spilled 10.8 million gallons of oil into Alaska's Prince William Sound.) Significant portions of these spills have been carried downriver into neighbouring Peru.

Critics charge that Texaco ignored prevailing oil industry standards that call for the reinjection of waste deep into the ground. Rivers and lakes were contaminated by oil and petroleum; heavy metals such as arsenic, cadmium, cyanide, lead, and mercury; poisonous industrial solvents; and lethal concentrations of chloride salt, and other highly toxic chemicals. The only treatment these chemicals received occurred when the oil company burned waste pits to reduce petroleum content. Villagers report that the chemicals return as black rain, polluting what little freshwater remains. What is not burned off seeps through the unlined walls of the pits into the groundwater. Cattle are found with their stomachs rotted out, crops are destroyed, animals are gone from the forest, and fish disappears from the lakes and rivers. Health officials and community leaders report adults and children with deformities, skin rashes, headaches, dysentery, infections, respiratory ailments, and disproportionately high rates of cancer. In 1972, Texaco signed a contract requiring to turn over all of its operations to Ecuador's national oil company, Petroecuador, by 1992. Petroecuador inherited antiquated equipment, rusting pipelines, and uncounted toxic waste sites. Independent estimates place the cost of cleaning up the production pits alone at $600 million. From 1995 to 1998, Texaco spent $40 million on cleanup operations in Ecuador. In exchange for these efforts, the government of Ecuador relinquished future claims against the company.

Numerous international accords - including the 1972 Stockholm Declaration on the Human Environment signed by over 100 countries, including the United States and Ecuador - identify the right to a clean and healthy environment as a fundamental human right and prohibit both state and private actors from endangering the needs of present and future generations. Ecuadorean and Peruvian plaintiffs, including several indigenous tribes, have filed billion-dollar class-action lawsuits against Texaco in U.S. courts under the Alien Tort Claims Act (ACTA). Enacted in 1789, the law was designed to provide noncitizens access to U.S. courts in cases involving a breach of international law, including accords. Texaco maintains that the case should be tried in Ecuador. However, Ecuador's judicial system is notoriously corrupt [. . .] and lacks the infrastructure necessary to handle the case (e.g., the city in which the case would be tried lacks a court house). Texaco defended its actions by arguing that it is in full compliance with Ecuadorean law and that it had full approval of the Ecuadorean government.

In May 2001, U.S. District Judge Jed Rakoff rejected the applicability of the ACTA and dismissed the case on grounds of forum non conveniens. Judge Rakoff argued that since "no act taken by Texaco in the United States bore materially on the pollution-creating activities," the case should be tried in Ecuador and Peru. In October 2001, Texaco completed a merger with Chevron Corporation. Chevron and Texaco are now known as Chevron Texaco Corporation. In August 2002, the U.S. Court of Appeals for the Second Circuit upheld Judge Rakoff's decision.7

This is a clear case of conflict between legal technicalities, which can exonerate one corporation of tough legal sanctions, and the ethical standards of decency and integrity in business. It also shows that legal verdicts, taken by judges, frequently entail ethical debates and quandaries. From a strict legal point of view, Judge Rakoff could decide either in favour or against the interest of Texaco. He decided to support the corporation on certain ethical grounds; yet many observers and commentators of the case accused Judge Rakkof of immorality. As for Texaco, even though it kept the convenient legal regulations from Ecuador, from an ethical perspective the company had a loss of credibility, in an industry already stained by a very bad environmental record. The next case illustrates a different kind of disharmony between legislators and ethics: sometimes, good intentions materialize in legal regulations that entail absurd, perverse consequences.

Legal regulations and absurd consequences

This lack of nuance in the absolute rights approach is especially problematic when the costs of removing certain amounts of pollution are high in comparison to the benefits that will be attained. Consider the situation of a pulp business as reported by its president:

Surveys conducted along the lower Columbia River since completion of primary treatment facilities at our mills show that water-quality standards are being met and that the river is being used for fishing, swimming, water supply, and recreation. In all respects, therefore, the 1985 goals of the Federal Water Pollution Control act are presently being met [in 1975]. But the technical requirements of the act call for installation of secondary treatment facilities at our mills at Camas and Wauna. The cost will be about $20 million and will not result in any measurable improvement of water quality on the river.

On the contrary, the total environmental effect will be negative. We calculate that it will take about $7 million kwh of electricity and nearly 8,000 tons of chemicals to operate these unnecessary facilities. Total power requirements will involve burning 90,000 bbl/year of scarce oil, in turn creating 900,000 lb of pollutants at the generating source. [. . .] Similar trade-offs occur in the field of air-control technology. For example, moving from 98 percent to 99.8 percent removal of particulate matter requires four times as much purchased energy as it took to get from zero to 98 percent control.8

Protection of environment is in itself a praiseworthy idea; nonetheless, enacting legal regulations, which cause even more serious damages to the environment, is a short sighted approach of legislation, that deserves ethical criticism. Perhaps one the most striking examples of conflict between morality and legality might be the next almost incredible story, presented by John Boatright.

KPMG and the tax shelter industry

In the 1990s, KPMG, one of the "big four" accounting firms, began offering tax shelters to corporations and wealthy investors. In addition to standard audit and consulting services, KPMG aggressively developed and marketed a number of innovative ways for clients to avoid taxes. Not only did individuals and businesses reduce taxes on billions of dollars of gains, but KPMG partners pocketed many millions for their assistance.

Acting like any business developing a new product, KPMG established a "Tax Innovation Centre" to generate ideas and to research the accounting, financial, and legal issues. Previously, tax shelters had been individualized for particular clients, but the new ones were intended to be generic, mass-marketed products. Once a strategy was approved, it was energetically promoted to likely clients by the firm's sales force. KPMG tax professionals were turned into salespeople. They were given revenue targets and urged to use telemarketing and the firm's own confidential records to locate clients. The strategies - which bore such acronyms as OPIS, BLIPS, FLIP, and SOS - generally involved complicated investment with cooperating foreign and offshore banks that generated phantom losses that could be used to offset capital gains or income from other investments. The shelters were accompanied by opinion letters from law firms that assessed their legality. The gain to KPMG and their clients and the loss to the U.S. Treasury were significant. The four main tax shelters marketed by the firm generated over $11 billion in tax deductions for clients, which yielded at least $115 million in fees for KPMG and cost the government $2.5 billion in lost tax revenue.9

During the period in which KPMG tax shelters were sold, no court or Internal Revenue Service (IRS) ruling had declared them illegal. However, KPMG failed to register the shelters with the IRS as required by law. Registration alerts the tax authorities to the use of the shelters and permits them to investigate their legality. One KPMG partner attributed this failure to a lack of specific guidance by the IRS on the rules for registration and the agency's lack of interest in enforcing the registration requirement. Furthermore, this partner calculated that for OPIS, the firm would pay a penalty of only $31,000 if the failure to register were discovered. This amount was more than outweighed by the fees of $360,000 for each shelter sold.

Until the courts of Congress explicitly outlaw a tax shelter, the line between legal and illegal tax strategies is often difficult to draw. The IRS typically employs the "economic substance" test: Do the transactions involved in a tax shelter serve a legitimate investment objective or is their only effect to reduce taxes? A tax shelter that offers no return beyond a tax saving is abusive in the view of the IRS. However, an IRS ruling is not legally binding until it is upheld by the courts, and the courts have occasionally held some shelters to be legal even if they do not involve any risk or potential return. One reason for such decisions is that tax shelters typically involve legitimate transactions combined in unusual ways. As one observer notes, "Most abusive shelters are based on legal tax-planning techniques - but carried to extremes. That makes it hard to draw sharp lines between legitimate tax planning and illicit shelters." Even when a shelter like those sold by KPMG is found to be legal, a tax saving is almost always the only outcome. According to an IRS commissioner, "The only purpose of these abusive deals was to further enrich the already wealthy and to line the pockets of KPMG partners."

When a tax shelter is found by the court to be abusive, the usual outcome is simply a loss of the tax advantage so that the client pays what would be owed otherwise plus any penalties. The issuer is seldom sanctioned. KPMG and other marketers of tax shelters generally protect themselves, first, by having the client sign a statement affirming that he or she understands the structure of the transaction and believes that it serves a legitimate business purpose. This makes it more difficult for the client to sue the firm. KPMG also sent all related documents to its lawyers in order to protect them from disclosure by claiming lawyer-client privilege.

Although some partners at KPMG thought that the tax shelters were illegal and raised objections, others argued for their legality - and, in any event, their shelters were an immensely profitable part of the firm's business. Aside from the huge fees, the motivation to market the shelters came from the KPMG culture, which New York Times business reporter Floyd Norris characterized as that of a "proud old lion."10

For those who believe that "If it's legal, it is ethical too," this case should be a reminder. High legal competence used for cheating the tax authorities fails to pass even the lowest ethical standards. This kind of situation upholds the opinion that some profits are not "reasonable" from a moral point of view. People call unscrupulous those individuals and companies that do not hesitate to use any available means to maximize their profit; they lack moral principles.11

Footnote

1 Cra ciun, Dan, Business and Morality. A Short Introduction to Business Ethics, Ed. ASE, Bucharest, 2003, p. 84.

2 Ibidem , p. 85.

3 Craciun, Dan, Business Ethics. Basic Concepts and Principles, Ed. ASE, Bucharest, 2012, p. 89.

4 Boatright, John, Ethics and the Conduct of Business, 6th edition, Prentice Hall, Upper Saddle River, NJ, 2009, p. 15.

5 Ibidem, pp. 16-17.

6 Beauchamp, Tom L., Bowie, Norman E., & Arnold, Denis G., eds., Ethical Theory and Business, 8th edition, Pearson-Prentice Hall, Upper Saddle River, NJ, 2009, p. 555.

7 Ibidem, p. 557.

8 Velazquez, Manuel, Business Ethics. Concepts and Cases, 6th edition, Prentice Hall, Upper Saddle River, NJ, 2006, pp. 230-231.

9 Boatright, op.cit., p. 26.

10 Ibidem, p. 27.

11 Dienhart, John W., Business, Institutions, and Ethics: A Text with Cases and Readings, Oxford University Press, Oxford, 2000, p. 28.

References

REFERENCES

Beauchamp, Tom L., Bowie, Norman E., & Arnold, Denis G., eds., (2009), Ethical Theory and Business, Eighth edition, Upper Saddle River, New Jersey, Pearson-Prentice Hall.

Boatright, John, (2009,) Ethics and the Conduct of Business, 6th edition, Upper Saddle River, New Jersey, Prentice Hall.

Craciun, Dan, (2003), Business and Morality, Bucharest, ASE Printing House.

Craciun, Dan, (2012), Ethical Business, Bucharest, ASE Printing House.

De George, Richard T., (2006), Business Ethics, 6th edition, Upper Saddle River, New Jersey, Prentice Hall.

Dienhart, John W., (2000), Business, Institutions, and Ethics: A Text with Cases and Readings, Oxford, Oxford University Press.

Velazquez, Manuel, (2006), Business Ethics: Concepts and Cases, 6th edition, Upper Saddle River, New Jersey, Prentice Hall.