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Ethics and Responsibility in
Business
ERB Workshop
vide draft McNutt: Tao of Ethics©
Patrick McNutt & Elena Demidenko
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
• 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
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.
Unit 1
Fundamentals of ethics in
business
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?
• ‘De-Kant’ make a decision: X or Y without recourse to emotions or
religious faith or tradition
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 and Fable of Bamboo Flute
• 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: utility v wealth or pretransfer v post-transfer
• Let us call the situation before the transfer 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 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 slide: ‘thief of nature’ transfer
Classroom Case:
Thief of Nature Transfer
• Derek has a book that Amartya wants. Derek would sell the book to
Amartya for $20 and Amartya would pay $30 for it. The $10 is surplus
value than could be consumed in transaction costs.
• A thief takes the book from Derek and gives it to Amartya for less than
would be consumed in transaction costs or for less if the two were to
haggle over the distribution of the $10 surplus value.
• The forced transfer from Derek to Amartya by the thief of nature
produces a gain in social wealth = $10 even though Derek has lost
something he values with no compensation.
• Next slide: let’s de-Kant by allowing emotions, rights, liberties or claim
rights, ‘edited ethics’ experience, ‘a right thing to do’ criterion
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.
• Derek has a ‘claim right’ to the book.
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
18
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.
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
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
22
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
23
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.
24
Key success factors to instill a risk culture within an
p-firm organisation
25
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
26
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?
27
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 2015
• 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
• Define the Nash equilibria [next slide] and Prisoners’ Dilemma
• Analyse the Payoff matrix
(B,Y) > (A, X)
• 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
Player 2
Strategy A
Strategy X
Strategy Y
0,0
8,-5
-5,8
10,10
Player 1
Strategy B
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‘.
39
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
40
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………..
41
Zen thought for the day
Leaves falling
Lie on one another
The rain beats the rain