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Why teach ethics? in business schools? W. Guth New York University Enron, WorldCom, Global Crossing, Kmart, Polaroid, Arthur Andersen, Xerox, Quest • Increasingly frequent images of disgraced and sometimes handcuffed corporate executives appear on television screens and in major newspapers • Who’s to blame? Check one! – – – – – – – – Mom and Dad? Priests, Rabbis, Mullahs? Primary and secondary school systems? Business schools? The business system in the U.S.? Materialistic culture in the U.S.? Self-interested human nature? All of the above? Market Failure! • According to economic theory, resources in any economy will be allocated fairly and efficiently by markets – SO LONG as those markets function PROPERLY– i.e., transparently, competitively, non-coercively, with price as the measure of the exchangeable value of goods • Principal causes of market “failure” – – – – – – Monopoly power “Public goods” External effects Information asymmetry High transaction costs in confronting “abusers” High costs of monitoring behavior under conditions of “moral hazard” in contracts When markets fail • Managers still have to make decisions about how to use the resources of their companies • To protect the interests of the larger society, laws may be passed to guide/punish managerial decisions • In the absence of relevant laws, managers can attempt to apply ethical analysis to guide decision-making towards integrating the interests of the larger society with the interests of the company • In the absence of relevant law and/or ethical analysis, managers will be guided by their self-interested human nature Self-interest and economic liberalism • “It is not from the benevolence of the butcher, the brewer, or the baker that we expect out dinner, but from their regard to their own interest. We address ourselves not to their humanity, but to their self-love, and never talk to them of our own necessities, but of their advantages” • Adam Smith, The Wealth of Nations, 1776 But, must self-interest be constrained? • “One individual must never prefer himself so much even to any other individual, as to hurt or injure that other, in order to benefit himself, though the benefit to the one should be much greater than the hurt to the other…the man within immediately calls to him…that he is no better than his neighbor, and that by…unjust preference he renders himself the proper object of contempt and indignation (and he deserves punishment) for having violated one of those sacred rules, on the tolerable observation of which depend the whole security and peach [output] of human society” • Adam Smith, The Theory of Moral Sentiments, 1759 The Corporation – flawed institutional character? social responsibility is the new creed of business leaders today, a self-conscious corrective to earlier greed-inspired visions of the corporation. Despite this shift, the corporation itself has not changed. It remains, as it was at the time of its origins....,a legally designated ‘person’ designed to valorize self-interest and invalidate moral concern. Most people would find its ‘personality’ abhorrent, even psychopathic, in a human being, yet curiously we accept it in society’s most powerful institution. The troubles on Wall Street today, beginning with Enron..., can be blamed in part on the corporation’s flawed institutional character, but the company was not unique for having that character. Indeed, all public companies have it....” • Balkan, Joel, The Corporation: The Pathological Pursuit of Power and Profit, (Free Press, 2004, p. 28) • “Corporate Business Prudence and Business Ethics • The prudent manager seeks to maximize the long-run risk-adjusted value of the firm to its shareholders • The ethical manager avoids violating the rights of other parties in the economy. • Any decision will be prudent, ethical, both, or neither, as follows: Business Prudence and Business Ethics Prudent Ethical No No Bad Decision Lose/Lose Yes Exercise Moral Restraint Yes Exploit Market Failure Good Ethics Is Good Business Ethics/Prudence Decision Types • Bad Decision – Violates a party’s rights (e.g., fraud) and the firm is found out and punished (e.g., Prudential Securities $1.4 billion settlement) • “Good Ethics is Good Business” – Honoring rights can be linked to longer run shareholder value (e.g., building reputation and loyalty). Sometimes rhetorically embellished as “enlightened self-interest.” Ethics/Prudence Decision Types (Cont’d) • Exploit Market Failure – Violates a party’s rights, but there is little risk of retaliation (e.g., aggressive billing hours, churning accounts, skimping on workplace safety), so on a risk-adjusted basis shareholders’ interests are served, but at the expense of someone’s rights • Exercise Moral Restraint – the market fails, but instead of exploiting it (even with low risk of getting caught), the decision respects the rights of affected parties, thereby lowering returns to shareholders – Often confronts, “all our competitors are doing it, so we have to do it – e.g., bribery in foreign countries) Applying ethical theory – Can it help? • Ethical relativism – Individual – Cultural • Normative ethics – Teleological • Evaluates outcomes for individuals or groups, rather than the moral quality of the actions taken – Deontological • Defines moral duties that restrain certain actions irrespective of the value of the consequences Teleological theories of ethics – Egoism – a person (corporation) ought to do whatever is in his/her (the corporation’s) best interest – (which is also the best interest of its shareholders) – Utilitarianism – one ought to seek to produce the greatest possible balance of good over evil, or the least possible balance of evil over good, for all who will be affected by one’s actions – the stakeholder versus stockholder approach to management decision-making Deontological theories of ethics • Kantianism – moral behavior is a matter of holding, without exception, to certain principles – Categorical imperatives • A person should be willing to live in a world in which the action they chose to take would be repeated for the same reasons whenever the same situation arose, even if he/she happened to be on the receiving end of such action • A person may not use other human beings as means to achieve his/her own purposes – The Mirror Test at GE – an application of Kant’s categorical imperatives? • Contractarianism (Hobbes) – social exchange “contracts” are morally binding, even if not formally discussed and signed (Japanese approach to business contracts) Modern Normative Ethics • NORM – neutral, omni-partial rule-making-an attempt to integrate teleological and deontological ethical theory Ronald Greene – 1994 • Integrative Social Contracts Theory – differentiates between macro and micro social contracts and proposes a method for integrating them Thomas Donaldson, Thomas Dunfee – 1998 • Normative vs empirical research in ethics Purposes of Teaching Ethics in Business Schools • To introduce students to a broad range of contemporary “non-market” issues encountered by business professionals • To develop a set of analytical perspectives for making judgments when such issues arise • To illustrate how the legal system is used to redress market failures • To examine the role of ethical norms and reasoning in resolving non-market managerial issues, and in establishing standards of professional responsibility One Approach • • • • • • • • • • • • • • Session 1 – Market Failure, Law and Ethical Analysis Session 2 - Truth and Disclosure Session 3 - Gifts, Side Deals, and Payoffs Session 4 - Whistle Blowing and Loyalty Session 5 – Agency and Fiduciary Duty Session 6 – Trade Secrets Session 7 – Control by Law Session 8 – Moral Standards Across Borders Session 9 – Product Liability Session 10- Sales and Marketing Session 11- Insider Trading Session 12- Workplace Rights Session 13- Right to Privacy Session 14- Responsibility to Stakeholders