Download Slideshow for Ethics and Responsibility in Business Workshops

Ethics & Responsibility in
Business
ERB Workshop
(Optional) vide draft McNutt: Tao of Ethics©
Patrick McNutt
www.patrickmcnutt.com
Follow @tuncnunc
Lesson Plan I
• Day I: Introduce Kantian ethics in a search for an ethical foundation
and a firm-specific Code of Ethical Practice (CoEP). Business ethics v
ethics in business.
Allocation of Case-Work: Cases Selected at Workshop for
Real-Time ‘Live’ Cases
Group Case Work:
Ethical dilemma + Discovery Essay + Justification Essay
• Day 1 and 2: Introduce Edgeworth contracting: Premise that an
ethical foundation requires trade-offs & bargaining, rationality &
reason, time consistency; introduce ethics as a process of adaptation
and evolution of morality in time.
Lesson Plan II
• Day 2 & 3: Arguments from non-cooperative game theory: rational to
betray, rational to cheat, altruism and fairness.
Dominance, Selfishness, Fairness, Altruism
Propensity to be altruistic v temptation to cheat
Self-enforcing mechanism, Prisoners’ dilemma, Assurance Game
• Day 3: Group Work presentation on the ethical dilemma, rhetoric v ad
hominem responses to case resolution, CoEP v categorical
imperative.
• Day 3: Post-Workshop Blackboard Online Forum: Challenges for an
international code of good governance based on an ethical
foundation.
Tao of Ethics ©
yin + yang for ethics in business as a complementary,
interconnected and interdependent ethics
• Yin [is this Aristotle-Hume
tradition?]
• What kind of person should I
be?
• Emotions and Virtue ethics
• Intuitive Wisdom
• Reason
• Cooperation
• Virtue ethics
• Synthesis
• Yang [is this Plato-Kant
tradition?]
• What ought I to do in
situation X??
• Reason and Duty
• Obey a moral law
• Rational knowledge
• Science
• Competition
• Analysis
SELF-ENFORCING MECHANISM:
Obey the Rule; Property Rights;
Self Interest; Respect for Others
Note: Payoff reflect Preferences: Payoffs A,B
Strategy I
Keep Left
Strategy II
Keep Right
Strategy I
Keep Left
1,1
Strategy II
Keep Right
-1,-1
-1,-1
1,1
4
Unit 1
Fundamentals of ethics in
business
Tao of Ethics ©
What is an ethical point of view?
• Utilitarianism: Mill and
Bentham
• ‘Greatest Happiness
Principle’
• Means justify the end
• Max U(..) and reason
• Unjust rules: are ‘low wages’
right if they lead to
consumer happiness?
• If so, then ‘low wages’ are
moral by rule utilitarianism?
• Deontology: Kant and Rawls
• The philosophy of the
‘golden mean’ and ‘reflective
equilibrium’ (justice)
• Rationality and reason
• Morality is not the same as
self-interest. Moral rule is
obeyed because it is the
right thing to do.
• Individuals as ‘ends’ and
human dignity and human
rights.
What is Ethics in ERB?
McNutt (2010): ‘Edited ethics’: what is your experience? A rational
player asks: What’s in it for me? What does society say? What contract
should I enter or be party to?
• Kantian decision: X or Y without recourse to emotions or religious
faith or tradition or legal precedent.
Moral judgement: Mr A should tell Ms B the truth
Moral rule: Mr A should not lie
Kant’s moral theory is independent of consequences
• One’s duty is to be done for duty’s sake
• ‘Not lying’ becomes a universal categorical imperative.
• ‘Time consistent morality’: a rational preference for X over Y does not
depend on when in time that choice occurs.
Non-linear thinking in ERB
Ethics:
Responsibility and
duty
Governance:
Adopting a
Code of Ethical Practice
Compliance:
Performance to duty
and risk minimal
‘I-think-You-think-I-think’
Rawls: ‘veil of ignorance’ and ‘reflective
equilibrium’
We discuss the ethical dilemma as
Sen’s paradox or Fable of the Bamboo Flute
in the Study Guides. Check the discussion in Unit
1 on Blackboard Notes 1-5 and/or in McNutt
(2005): Law, Economics & Antitrust
Ethical dilemma & Kantian ethics
• Responsibility is about each person fulfilling their duty: Employee has
right to minimum wage but employer has duty to pay…inherent
‘agency costs’ in not fulfilling one’s duty so resolved usually by
legislation
• Norms (right v wrong) and values (good v bad) and rules: Benefit >
Cost in a calculated benefit-cost ratio, $B > $C
• Kantian philosophy rejects any form of consequentialism
(utilitarianism)..McNutt challenges that a neo-Kantian in 21st century
might recognise that a universal law is an end in itself?
Link into classroom discussion of
Thief of Nature (cardinal numbers) and Fable of Bamboo Flute
(subjective value set)
• A utilitarian is not someone who argues that some calculations have
some place but that they must occupy all the space there is.
Ethical dilemma: Solution in terms of
utility v wealth or pre-solution v post-solution
• Let us call the situation before the solution takes place State of Nature
1 and the situation after it takes place State of Nature 2 .
• Key question for policy-makers: Is State of Nature 2 in any respect
superior to State of Nature 1 ?
• In other words is there a transfer? Is there a gain in wealth? Is the
gain in wealth considered in itself, any gain at all?
• Hypothesis: that State of Nature 2 is not better than State of Nature 1
in any respect. Agree or Disagree?
• When would a post-transfer State of Nature be preferred? Refer to
Edgeworth trade-offs and Pareto comparability.
Next slides: Law of Diminishing MU and ‘Thief of Nature’ transfer
Law of diminishing marginal utility prevails in that the MU loss of
£10 from a rich individual is less than the MU gain of £10 to a poor
individual. Why?
Is it the level criterion for rich v poor? What if Amartya has £100
and you take £10 does his Marginal Utility still decrease? What if
Amartya had £1m?
Rational people with high opportunity costs employ ‘stand-ins’ to
stand in line for an iPhone6 or a concert ticket. Why?
A school is anxious that parents turn up late to collect children at
end of school day. The school has to provide an additional teacher
and resources to look after the children left waiting. So the school
begins to fine late parents. The incidence of lateness increased.
Why?
RATIONAL PEOPLE WITH
HIGH OPPORTUNITY COSTS
EMPLOY ‘STAND-INS’ TO
STAND IN LINE
FOR AN IPHONE5 OR A CONCERT TICKET OR PAY A ‘GOUGED’ PRICE TO A TICKET RESELLER.
WHY?
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Classroom Case:
Thief of Nature Transfer
• Derek has a book that Amartya wants. In a market setting Derek
would sell the book to Amartya for $20 but Amartya would pay $30 for
it. The $10 is surplus value that could, for example, be consumed in
transaction costs. Example: if Derek knows that Amartya is prepared
to pay $30 he will haggle up to $30. Or what could Amartya do with
$10?..opportunity cost criterion
• Hypotheses: If Amartya gifts the $10 to a beggar total welfare (utility)
increases. What if a thief steals the book from Derek and sells it to
Amartya for $30, The forced transfer from Derek to Amartya by the
thief of nature produces a gain in social wealth (book market value =
$30) even though Derek has lost something he values at $20 with no
compensation.
• Amartya has a willingness-to-pay $30 and any price less than $30 is a
gain accruing to Amartya, an economic rent.
Classroom Discussion: de-Kant and your ‘edited’
ethics - Fable of the Bamboo Flute
Identify and discuss the ethical dilemma
• Derek is poor and sick and miserable and the book is one of his few comforts.
He is willing to sell for $20 to get medicines.
• Amartya is rich and content. He is willing to spend $30 which is a small part of
his wealth.
• If the thief makes the transfer with no compensation total utility falls but
wealth increases.
• But what if Derek has a ‘claim right’ to the book?
• When you include emotions, rights, liberties or claim rights or ‘a right thing to
do’ criterion in the decision process we call this process ‘de-Kanting’ with an
‘edited ethics’ experience as with Fable of Bamboo Flute.
Value set as ethics in business
• Value Set = Code of Ethical
Practice
• General rights and duties
• Legal rights and duties
• Categorical
imperative/universal law
• S-firm
• What is Business Ethics?
• Is it ‘business bashing’?
• Linking management
behaviour to company
value?
• Ethics to govern
management behaviour?
• P-firm
Unit 2
Responsibility and
Performance in Business
Bargaining and Edgeworth Contracting
• Paretian ethics and the Edgeworth Contract Curve
• Pareto non-comparability
• Principal-agent and TCEs ‘agency costs’
• Employee governance and APL
• Hume’s paradox and Mr ‘Three Eyes’
• Rawls ‘reflective equilibrium’
• Descartes’ Grand Narrative
Corporate Governance v ‘Good’ Governance
• No universal concept of corporate governance, CG
• Is CG an ethical standard or a behavioural rule?
• Key parameters are ethics, transparency and compliance
• Align company behaviour to shareholder value
• Managing ethics as a rule-based process
• CSR and the J-curve effect
• Demidenko-McNutt Ethical Maturity Index
Corporate Governance:
www.ragm.com
Definitions and key principles
“Corporate Governance is the system by which companies are directed and controlled”:
Cadbury Committee Report, UK 1992
Corporate Governance Principles:
•
•
•
•
•
•
•
•
Accountability
Transparency
Fairness and balance
Honesty
Dignity
Kant: Implemented through:
•
•
•
•
•
Define duties
Assign responsibilities, CoEP
Performance measures and rewards
Monitoring and P-A
Transparent Universal Tools:
Legal
- A formalised Code of Conduct,
Goodwill.
- Risk Governance Structure and
Conflict of principles
- Risk Management Process
20
What is ‘Good’ governance? = governance with an
ethical foundation….
• Define s-firm with stakeholders and duties
• How the stakeholders ought to behave.
• Analysing a Paretian ethic
• Encoding a Kantian responsibility
• Process of evolution and Edgeworth contracting
• Stakeholders contracting and optimal point
▼
Code of Ethical Practice, CoEP
CLASSROOM EXERCISE
Practically…
• Principal-agent dilemma
• Monitoring and performance
• Manne’s internal controls (BoD) v external controls on firm (SOX and
Combined Codes) and risk management standards such as ISO
31000
• Incentives and trust mechanisms
Examples: McNutt’s s-firm and APL and Williamson-Coase
agency perspective in Unit 2 as outlined Ricketts’ diagram.
Managerial incentives: The Ricketts’ diagram
Trust and Incentives
W
Certainty line
W2
C
B
Ricketts’ rationale
B
W1
A
1.
W1
2.
We want 2E1 = E2
3.
If
W1
Then
A
If
W1 + B = W2
Then
A
4.
E1
W2
C
B
Legend:
W – wage
E – effort
B - discretionary bonus
(0; 0)
E3
E1
E2
E
AB – cost of effort
23
Compliance and ERM
• Good governance ►risk
management
• Self-regulation v formal
Governance
control
• Legal compliance
• Enterprise Risk
ERM
Management (ERM)
influenced by:
ethics, strategy and
performance
Compliance
Governance: Ethics, Risk and Compliance
Achieving business objectives in a risk-based ethics
Ethics and Corporate Social
Responsibility
Risk Management and Internal
Control
Rights and Obligations of Board
of Directors; Rights of
Shareholders
Compliance: Transparency and
Disclosure
25
Stakeholder Value
Risk Culture Could be Measured:
Ethical Maturity Framework
Ad-hoc,
not in compliance
Isolated activities
Coordinated activities
Holistic ethical
system
Risk governance ethical maturity
Not in Compliance
Accountability ≠
Responsibility
No Duties
Lack of RM structure,
duties & responsibilities.
RM activities depend on
individual initiative and
verbal knowledge.
Risk to organisational
integrity & ethics.
Ethical Compliance
Accountability = Responsibility
Duties Fulfilled
Nominal RM structure,
duties & responsibilities
at the top level.
Uncoordinated top down
RM activities in some
functional units.
Risk to organisational
integrity & ethics.
Consistent RM
structure, duties &
responsibilities at the top
& middle level.
Coordinated RM
activities enterprisewide.
Evident organisational
integrity & ethics.
RM roles &
responsibilities are
aligned to organisational
authorities &
accountabilities.
RM is embedded in the
enterprise management.
.
Strong integrity & ethics
on all levels.
26
Key success factors to instill a risk culture within an
p-firm organisation
27
Implementing a risk-based Good Governance
Linking Strategy, Risk, Performance and Monitoring
Strategic planning
Mission: Responsible reproduction
Vision: No greater chance, no better care
Monitor and adjust
Values: Integrity; Excellence;
Responsibility;
Innovation Passion
Business risk management
Strategies
Identify, assess and prioritise
major business and emerging risks
to strategy
Key performance indicators are
aligned to the strategy and monitored
Manage, monitor and report
on the risks
28
CoEP Risk Culture Checklist
The creation of a Kantian CoEP within a company requires a ‘YES’ answer to
each question:
A ‘No’ creates the threat of unknown risk
• Does your organisation have
a clear set of risk management objectives?
• Does your executive take risk management seriously?
• Does ownership of risk management really reside in the business?
• Is there a structure for strong risk oversight and challenge?
• How risk aware is the business [C-suite)?
29
Unit 3
Competition, Compliance
and Economics of
Antitrust
Bedrock of Compliance
• Perfect competition as ethical standard
• Chicago v Harvard SCP paradigms in antitrust
• Harm to consumer v harm to competition (competitors)
• Competition ‘good’ ≡ monopoly ‘bad’
• ‘Reasonable price and Predatory pricing
• Zero-price phenomenon
• credible mechanisms and cartel pricing
• Oligopoly hypothesis: concentration-collusion
• Monopoly, IPRs and innovation cycles and Chandler v Schumpeter
Materials extracted and made
available to all from [2005]
McNutt Law, Economics & Antitrust
Chapter 8 Competitive Harm pp207236 Fig 8.1 and Fig 8.2
Chapter 9 Non-Market Economics
pp237-257
Chapter 10 The Reach of the Law
pp259-282
Economics of antitrust
• Market structures v market system as applied in antitrust
economics..markets in 21st century ‘evolve’ with technology
and time…eg Xerox in 1970s, Microsoft in1980s but Apple
and Google in 21st century
• Competition and oligopoly: presumption of co-ordination and
collusion
• Competition ‘good’ implies that monopoly ‘bad’
• What is a just price? P = LMC = LAC
• Cartel pricing and credible mechanisms: cartels eventually
break down due to mistrust amongst alleged cartel members
v jurisdictions have ‘whistleblower’ legislation as an incentive.
Antitrust Compliance analysis: Classroom exercises from
Kaelo v2.0 in www.patrickmcnutt.com
• Relevance of Chandler (strategy leads to structure) v
Schumpeter (destructive technology and time-variant
monopolies)
• Chicago antitrust (efficiency measures) v Harvard SCP antitrust
(concentration measures).
• Oligopoly dilemma: concentration and collusion.
• Concentration measures: Exercises in Kaelo v2.0
• Perfect competition diagram as the benchmark for economic
analysis: triangle ABC is maximum consumer welfare..Note as
price rises above p= LMC =LAC, welfare as measured ‘falls’.
Antitrust Compliance and ‘Injury’ to Competition
Defendant firm in a ‘moot court’
• Perfect competition as an ethical standard. Harm (= Injury) to
consumer v harm to competition (competitors)
• Predatory pricing and ‘reasonable price’ - what is a reasonable
price?
• ‘Good Monopoly’ in non-price focus with IPRs & innovation
• Injury to competition 1. zero-price dispersion. 2. product
differentiation. 3. search costs
• Stigler’s dilemma: the stability of a cartel across time
• The legal meaning of a cartel v signalling
Antitrust Compliance and Prisoners’ Dilemma
The ‘game theory’ narrative for a defendant firm
• Ethical dilemma as a Nash equilibria [next slide] and Prisoners’
Dilemma
• Analyse the Payoff matrix
Payoffs follow preference
• Commitment and chat: one-shot and repeated play
• Punishment ‘grim’ strategy
• Strategy Set in terms of credible mechanisms
• ‘Accidental sameness in price’ standard
• Folk Theorem
CLASSIC PRISONERS’ DILEMMA
Payoffs A, B
Strategy I = cooperate/trust and Strategy II = selfish/ cheat
Strategy I
Strategy II
Strategy I
2,2
0,3
Strategy II
3,0
1,1
38
Kantian Equilibrium
1. Read Chapter8 in Graafland textbook for context.
2. Prompt notes from Patrick McNutt on Blackboard based on
discussion at
http://www.patrickmcnutt.com/blog/edited-ethics-mr-three-eyes/
39
Kantian Equilibrium defined
1. Equivalent to the Nash bargaining equilibrium in a
classic PD game between two parties in a transaction.
2. Equivalent to a solution point on the Edgeworth
contract curve as rational players negotiate or contract
from an off-contract curve point at State of Nature 1 to
post-contract post-transfer State of Nature 2
40
Finding a solution to an ethical dilemma:
Deterrence and credible punishment if rules are broken or trust
betrayed. Observed punishment so rubbish is not collected, rules
are broken, common lawns are not maintained.
Ethical dilemma is embedded in a classic Prisoners’ dilemma
wherein trust and cooperation is betrayed. Punishment creates a
Nash equilibrium outcome.
Hypothesis: If punishment or dissuasion is credible, so that a
Prisoners’ Dilemma collapses to an Assurance Game, then a
rational player will opt for the payoff-dominant strategy. If all players
follow then we have a solution to the ethical dilemma. The solution
is referred to as a Kantian equilibrium.
E
41
ASSURANCE GAME
B: Strategy I
B:Strategy II
Agree with
neighbour
/Edgeworth
contract
Disagree with
neighbour
2, 2
Payoff dominant
0, 1
1, 0
1, 1
Risk-dominant
A: Strategy I
Agree with
neighbour/Edgeworth
contract
A: Strategy II
Disagree with
neighbour
42
Conditions and Constraints on a Stable Equilibrium
Stable implies a solution to (ethical) dilemma
Pareto criterion:
Bargaining and negotiation such that at least no-one player is
worse-off under the Pareto criterion.
Thinking of Others Criterion:
Trust and reliance on others to prefer the payoff-dominant
strategy
Credible Threats Criterion:
A credible mechanism or threat of punishment.
State of Nature v State of War
Locke’s self-enforcing mechanism in a civil ordered society
or Hobbes’ Leviathan with a rule of law and government as 3rd
party to the transaction.
43
Prisoners’ Dilemma converges to Assurance Game if
Punishment/Dissuasion = -3
Kantian Equilibrium = (2,2)
Payoffs A, B
Strategy I
Strategy II
Agree with
neighbour
Disagree with
neighbour
2,2
Payoff
dominant
0,4
4,0
1,1
Risk-dominant
Strategy I
Agree with
neighbour
Strategy II
Disagree with
neighbour
44
Unit 4
Trust and International
‘Good’ Governance
Domain of International ‘Good’ Governance
• Ethical code (ethics v principles based) v rules and regulations
• Does Kantian responsibility support self-regulation?
• Transparency and enforcement of a universal law
• Compliance and enforcement
• Prisoners’ Dilemma: comply or not comply to a universal law?
• Changing ‘global’ nature of doing business
• Good Goverance v Corporate Governance
• Governance guidelines check www.icgn.org
Corporate Governance/Risk Management – Codes
of ‘better practice’
•
OECD Principles of Corporate Governance, The Combined Code on
Corporate Governance by Hampel Committee on Corporate Governance
(2010) (adopted by LSE) Turnbull report on best practice on internal control
for UK listed companies (http://www.icaew.com)
•
South Africa - the King III Report (2009)
•
•
•
•
•
New York Stock Exchange (“NYSE”) standards 303A.07, 09 (2003)
Sarbanes Oxley assertions, declared in Section 404 (“SOX 404”) (2002)
Securities Exchange Commission (“SEC”) reporting requirements (2003)
•
•
Stock Exchange listing rules :
London Stock Exchange (“LSE”) listing requirements (Carey 2004)
ASX Standard for good Corporate Governance (Australian Standard 2007)
The 2010 Bribery Act (UK) (2010) - a commercial organisation is now liable
for the activities of associated third parties, as well as those of its own staff
and corporate ignorance offers no protection from prosecution. The only
defence is that it 'had in place adequate procedures designed to prevent a
person associated with it from undertaking such conduct‘.
47
Trust Hypotheses 1 to 4; Who Governs in a new
Geo-Market Order?
The following set of Hypotheses raise specific ethical issues that are germane to creating a
universal code of good governance for 21st century.
What one ought to do requires a discussion on each Hypothesis:
• Hypothesis 1: Changing ‘global’ nature of doing business
• Hypothesis 2: Relevance of a global code of ethics
• Hypothesis 3: Responsibility v accountability in good governance
• Hypothesis 4: CSR and globalisation
48
Trust Hypotheses 5 to 9; Who Governs in a new
Geo-Market Order?
What is right (what one ought to do) and what is political (what one can actually achieve) are
embedded in the evolving global/local nature of ‘doing business’
• Hypothesis 5: National players v global players
• Hypothesis 6: Niche players and advertising and higher prices
• Hypothesis 7: Products with global reach and supply chain management
• Hypothesis 8: International competitiveness and national internal devaluation (lower
wages)
• Hypothesis 9: The technology of internet and e-markets – transcending national
geographic boundaries
End of Workshop and resume the debate online via Blackboard………..
49
Zen thought for the day
Leaves falling
Lie on one another
The rain beats the rain