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The ethically relevant situation is defined by the

need to increase the performance of the company so

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that it meets the earnings targets. Failing to meet the

earnings targets will reflect negatively on the firm’s

potential and, as Levitt (1998) states result in stock

price decline, therefore, negatively impacting

shareholder wealth and the value of executive stock

options. But the constraints represented by Gener-

ally Accepted Accounting Principles (GAAP) re-

quire that revenue must be earned11 before it can be

recorded in the books.

The awareness that the company’s revenues might

not (at least not in the short-term) be improved by

normal and legal business activities, combined with

the aspiration to bring about the desired result in spite

of the existent calamities, translated into the CEO’s

incentive to deploy illegitimate means. In the case of

Schick, a scheme was devised that would result in the

appearance of increasing sales, though the greater

proportion of those ‘‘sales’’ were revenues that were

not earned, i.e., did not result in actual sales of

product to customers. The company’s CEO ordered

improper booking of sales using schemes that in-

cluded (1) shipping products to a holding-ware-

house at the end of the quarter and recording

these shipments as revenues, (2) recording as rev-

enues that the amounts associated with ‘‘sales’’ that

either were made under a ‘‘loaner’’ or ‘‘try and

buy’’ program where the customer had 30 days to

return the merchandise with no obligation, and (3)

recording sham transactions, i.e., sales that were

bogus.12 In all these cases, the criteria to record

the revenues were not met.

After improperly recording sales the CEO an-

nounced that revenues were up 165% for the quarter

ended June 1998.13 The fictitious sales continued to

be recorded throughout 1998, but in December of

that year, the company announced that it would

write-off $5 million in receivables, claiming that bad

debts had been piling up.14 Upon hearing this news,

the company’s stock price tumbled – by mid-January

1999 stock price was at about $7.06 per share, down

from over $28 per share in 1998.15 It was later dis-

covered that the revenues were overstated by more

than $5.5 million, slightly more than one-third of

the overall company proceeds.16

20 Edwin R. Micewski and Carmelita Troy



What were the particular motives of the CEO and

vice-president in perpetrating this fraud? In this case,

the SEC reports that the ‘‘admitted purpose was to

inflate revenues in order to meet [the company’s]

earnings targets.’’17 The SEC company filings show

that as of July 1998 Schick’s CEO owned over

2 million shares of company stock and its vice-presi-

dent had exercisable stock options worth about

$1,000,000.18 Since their personal, and not insignifi-

cant wealth, that was tied up in the company’s stock

would sharply decline if they reported that the com-

pany did not meet earnings targets, this suggests that

the executives had a personal stake in ensuring that the

company met its earnings targets by hook or by crook.

So then, to what extent were the ethical principles of

the members of the company’s management team

impaired because of their compensation arrangements?

And more generally, how can or how do creative

compensation plans, particularly those plans where

compensation is based on achieving accounting-based

targets (i.e., bonuses) or stock options granted as a part

of executive compensation, affect moral judgment?

The company and executives were prosecuted by

the SEC for the accounting fraud. While they neither

admitted nor denied the charges brought against them

in the litigation, the executives consented to a final

judgment order, which among other things required

payment of civil monetary penalties and in the case of

the vice-president, disgorgement of ill-gotten gains.

By evaluating this case, at this point, from a rather

popular deontological perspective, a deontological

consideration (or insight) could have eased the

CEO’s motivation in the following sense: a ‘‘last

resort’’ to fraud was not necessary if a longer-term

view had been taken; a temporary underperfor-

mance would not have endangered the company’s

existence and may not have put at risk the wealth of

the executives over the long-term; the expected

shortfall could have been used to boost the ambitions

of stakeholders, especially if the executives could

bring expectations to a more reasonable level, and

pro-active business strategies could have been laun-

ched to improve future performance, etc. In this

case, it is worth noting that despite the company’s

troubles, the analysts still maintained a positive

outlook for the company with one of the company’s

analysts stating that ‘‘the underlying technology is

strong and defensible.’’19 So then was the fraud

justifiable? A deontologically balanced evaluation of

the situation and a deontological decision would

have kept the business executives within the

boundaries of what is not only legally, but more

importantly, ethically legitimate and acceptable.

Deontological ethics – explained and applied

The example hopefully makes clear that the extent to

which an individual can pursue his or her own hap-

piness (profit, benefit, well-being, prosperousness)

without endangering any another person’s happiness is

a norm that is found outside the empirical relations of a

concrete situation. Based on a merely rational effort

that can be replicated by any rationally talented being,

the solution lies in the formal and normative

assumptions that first, the transcendental20 equality of

people has to be assumed; and second, the reconcili-

ation of individual human freedom based on this uni-

versal tenet of transcendental equality of all people has

to be posited as the crux of morality.

Only when freedom is considered to be an

ontological given to all people can the most foun-

dational idea of what is ethically right be grasped. If

the ethical right, then, is what frames the limits for

everything that could ever be considered to be

morally good, the core of justice can be understood

in the sense outlined by the preeminent deonto-

logical philosopher, Immanuel Kant. As a result of

his transcendental analysis Kant (tr. 1996) defines

right as follows: Right is the whole of conditions

under which the voluntary actions of any one person

can be harmonized in reality with the voluntary

actions of every other person, according to the

universal law of freedom (Kant, 1996: 24 [6:230]).

The formality of this approach may be considered

a weakness, but it is, in fact, a strength; it allows for

the application to all possible empirical conditions.

Moreover, it is transformation into positive law is

the core of the art of legislation.

Justice, in a most formal and normative sense, is

therefore, the reconciliation of individual human

freedom and marks the point of intersection where

the freedoms of different individuals meet. At the

core of the ethical question regarding human rela-

tions rests the issue of justice, as the minimal

requirement for ethical behavior.

Injustice or wrongdoing in all its forms takes

place when the action of one person transgresses

Business Ethics – Deontologically Revisited 21



the borderline of right as outlined above. Since

transgressing the ethical demarcation line between

right and wrong constitutes injustice, the degree or

scope of transgression delineates the amount of

injustice done. Transgressing action can be direct

and immediate, such as hitting and injuring some-

body by direct physical contact or stealing some-

body’s physical property; or the transgressing

activity can be indirect and gradual, such as the

calumniation of another’s reputation, perjury or

stealing intellectual property. Moreover, the activity

can relate to material aspects, such as physical

integrity or property; or immaterial aspects of

human relations, like honor and dignity.

Whatever the level of injustice, an individual

commits a wrong against another because of the

following consistent deontological inference:

If my…condition at all can be harmonized with the

freedom of anyone according to a universal law of

freedom, the one who hinders me thereon is unjust;

because this hindrance (this resistance) cannot be rec-

onciled with a universal law of freedom (Kant, tr.

1996: 24 [6:231]).

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