Mba1034 cg law ethics week 12 ethics 072013
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ETHICS SYSTEMS
Stephen Ong, BSc(Hons) Econs (LSE), MBA International Business(Bradford)
Visiting Fellow, Birmingham City UniversityVisiting Professor, Shenzhen University
MBA1034 GOVERNANCE, LAW & ETHICS
• Discussion: The role of Accountancy firms
1
• Utilitarianism, Rights & Justice, and Management
2
• Case Discussion : The Galleon Group & Insider Trading
3
Today’s Overview
1. Open Discussion
• Prem Sikka, (2008),"Enterprise culture and accountancy firms: new masters of the universe", Accounting, Auditing & Accountability Journal, Vol. 21 Iss: 2 pp. 268 – 295
2. UTILITARIANISM
Topics Covered• Introduction• The managerial role of ethics• What ethics is and is not• Personal and business ethics• Ethics and individual interests• Ethics, politics, and change• Casuistry• The methodology of ethics• The relationships among moral philosophy,
ethics, and political philosophy
Topics Covered• Utilitarianism: A consequentialist
system• Utilitarian duty and the Calabresi and
Melamed principles• Act and rule utilitarianism• Utilitarianism and rights• Criticisms of utilitarianism• Utilitarianism in application
Introduction
• The content of corporate social responsibility is provided by ethics• Ethics and its application in
management constitute a broad and deep subject
The Managerial Role of Ethics
• As a normative approach, ethics provides principles for:–Evaluating alternatives –Formulating policies to take
into account the interests, rights, and liberties of those affected
What Ethics Is and Is Not• Ethics is a systematic approach to moral judgments based on
reason, analysis, synthesis, and reflection• Ethics addresses matters of importance to human well-
being, autonomy, and liberty• Ethics is based on moral standards that are independent of
the declarations of governments or other authoritative bodies
• Ethics is the discipline concerned with judgments based on moral standards and the reasoning therefrom
• The focus of ethics is not on:
– Simple temptation– Issues involving direct mutual advantage
Business Ethics • The application of ethics principles to
issues that arise in business
Personal and Business Ethics
• In personal ethics, an individual is the principal• Business ethics:– Pertains to situations in which individuals:• Are In an organizational position • Act as agents of the company and its owners
– Differs from personal ethics because a manager has accepted the responsibilities associated with the position occupied
Ethics and Individual Interests
• Ethical behaviour enables society to realize the benefits from social interactions– Allows individuals to rely on the word and conduct of
others• Ethical behaviour does not always make an
individual or a firm better off
• Good ethics may not always be profitable, unethical behaviour can result in substantial losses
Ethics, Politics and Change
Casuistry
• Approach to moral practice that seeks to balance competing considerations by: –Making exceptions to principles in
particular cases• Characterized as a false art of making
exceptions in particular situations, resulting in the violation of underlying principles
Appropriate and Inappropriate Methods of Applied Ethics
Process of Ethics Analysis
21-17
Moral Philosophy•Concerned with deducing moral principles and standards from axioms or self-evident principles
Political Philosophy•Related to ethics and moral philosophy but focuses on institutions to govern the interactions among individuals
Relationship Between Moral Philosophy and Ethics
Utilitarianism: A Consequentialist System• In a consequentialist system, an action is
moral if it produces better consequences than any other alternative
• Utilitarianism is a consequentialist system with two particular features:–Consequences are to be evaluated in terms
of the preferences of individuals affected– Those preferences are to be aggregated
Summary of the Components of Utilitarianism• Utilitarianism is a moral philosophy that holds
that:• Moral good is judged in terms of consequences• Consequences are evaluated in terms of human well-
being• Human well-being is evaluated in terms of individual
preferences• The rightness of an action is judged by the aggregate
well-being, or good, it yields• The morally justified action maximizes aggregate
well-being
Utilitarian Duty and the Calabresi and Melamed Principles• The most difficult aspect of applying
utilitarianism, or any other ethics system, is:–Determining who has the duty to take a
moral action• The Calabresi and Melamed principles
provide a framework for reasoning about the assignment of duty
Act Utilitarianism• Focuses on the consequences of a
particular action in a particular situation• Prescribes the action that yields the
greatest aggregate well-being for everyone affected by the action
Rule Utilitarianism• Focuses on a general rule of
behaviour to be followed by all individuals in all similar situations
Jointly Determined Consequences
• In many situations consequences are jointly determined by the actions of more than one person–In such a situation, a second
form of rule utilitarianism is applicable
Utilitarianism and Rights
• Rights may be classified as:–Intrinsic - To be respected because
they have moral standing independent of the consequences they yield–Instrumental - To be respected
because they lead to desirable consequences
Criticisms of Utilitarianism
• Philosophical criticisms • Interpersonal comparisons of
utility• Identifying costs and benefits• The measurement problem• The information problem
Utilitarianism in Application• Methodology:– Identify the alternatives – rules of behaviour and
actions– For each alternative, identify the set of consequences
for all persons affected– Determine which of the consequences are social
costs and which are social benefits– Evaluate and estimate the social costs and social
benefits– Choose the action or rule that yields the greatest
difference between social benefits and social costs
Case - Gilead Sciences : The Gilead Access Program for HIV Drugs• A major milestone in AIDS treatment
therapy was reached in October 2001• The FDA approved Gilead’s breakthrough
drug Viread as a first-line treatment for AIDS patients
• Gilead was motivated by the suffering of patients with HIV/AIDS • Wanted its drugs to be available to those who needed
them in the least developed countries• No single governing body provided regulatory standards and
oversight for pharmaceuticals
Case - Gilead Sciences : The Gilead Access Program for HIV Drugs–A drug had to be registered in each
country before it could be used• Patent protection allowed
pharmaceutical companies to control drug pricing and distribution
• In most developing countries, the company had no physical presence
• Gilead was developing its access program in a charged environment
Case - Consumer Awareness or Disease Mongering? GlaxoSmithKline and the Restless Legs Syndrome
• Restless legs syndrome - Neurological disorder characterized by an uncontrollable urge to move the legs– Accompanied by unpleasant and sometimes
painful sensations in the legs• GSK recognized the potential of Requip to
treat RLS after doctors had begun to prescribe it for the disorder
• The Restless Legs Syndrome (RLS) Foundation, of Rochester, Minnesota, conducted research on and provided education about RLS
Case - Consumer Awareness or Disease Mongering? GlaxoSmithKline and the Restless Legs Syndrome
• Disease-mongering - Corporate-sponsored creation or exaggeration of maladies for the purpose of selling more drugs• For a year in advance of approval of
Requip in the United Kingdom GSK had advertised in doctors’ magazines to promote awareness of RLS
2.3RIGHTS AND
JUSTICE
Topics Covered• Introduction• Classification of ethics systems• Classes of rights• Kantian maxims or moral rules• Applied rights analysis• Conflicts among rights• Equal employment opportunity• Paternalism• Neoclassical liberalism• Categories of justice theories• Rawls’s theory of justice• Higher order standards for evaluating ethics systems
Introduction• Consequentialist ethics systems such as
utilitarianism focus on:–The good and evaluate the good in terms
of individuals’ preferences for consequences
• Rights established under a consequentialist system are instrumental– Their justification is in terms of the
consequences they yield
Classification of Ethics Systems• Teleological - Define the rightness of
an action in terms of the good its consequences yield–Also called consequentialist systems
• Deontological - Holds that moral right takes precedence over the good–Can be evaluated by considerations
independent of, or in addition to, consequences
Teleological and Deontological Ethics Systems
Rights• May be derived from moral principles• May be established through political
choice• These often reflect moral principles• Established through legislation• Established through private agreements• Established by implicit contracts
Negative and Positive Rights
• Negative rights impose duties on people and the state not to interfere with the actions of a person – For example, freedom of speech and
assembly• Positive rights impose affirmative duties
on others to take particular action– For example, right to public education
Kantian Maxims or Moral Rules
• Categorical imperative - A fundamental axiom on which Kant’s system is based on–Serves two basic functions•Provides a basis for determining
maxims and moral rules•Prescribes that individuals are to act
in accord with those rules
The Relationship between Maxims and Rights• Kant’s system is expressed in
terms of maxims:–Which individuals have a moral
duty to respect•That duty establishes moral rights
Instrumental Rights•To be respected because they contribute to achieving better consequences, by, for example, enabling individuals to pursue their interests
Intrinsic Rights•To be respected in and of themselves and do not require any justification in terms of consequences or other considerations
Instrumental Rights and Consequences
Intrinsic Rights and Consequences
Criticisms of Kantian Rights
• Include:–Those that pertain to
deontological systems in general –Those specific to his system
Applied Rights Analysis
• In managerial decision making, rights have two effects:–They rule out certain alternatives,
such as those that would violate moral principles or legally protected rights–A right may impose an affirmative
duty that requires a firm to take particular actions
Granted Right•Established by moral consensus or by government and is accompanied by a clear assignment of the corresponding duty
Claimed Right•When the duty has not been clearly assigned, moral consensus is absent, or government has not spoken
Rights and Moral Standing
A Methodology for Rights Analysis
• Identify the rights claimed and their claimed moral bases
• Determine which claimed rights satisfy moral standards• If a claim is not morally justified, check whether it is
established by government– If it is, it is granted and is to be respected– If not, the claim need not be respected
• Identify the actions consistent with the protection or promotion of any morally justified rights
A Methodology for Rights Analysis
• Identify conflicts among rights– If there are none, those claimed rights with moral
standing are to be respected• If there are conflicts among rights with moral
standing:– Investigate the importance of the interests those
rights are intended to protect or promote• Prioritize the rights based on the importance of
those interests and determine the extent to which each is constrained by the others
• Choose the action that does best in terms of the priorities established
Conflicts Among Rights
• Rights and interests• Prioritization
Applied Rights Analysis: Integrity Tests
Equal Employment Opportunity• A principle supported by virtually all ethics
systems–Its importance is supported by legal
grants that provide for its public enforcement–Its legal manifestation is Title VII of the
Civil Rights Act of 1964:•Which prohibits discrimination on the basis
of “race, colour, sex, religion, or national origin”
Paternalism• Actions taken to benefit a person
without that person’s consent–Is a moral wrong–Is objectionable from a consequentialist
perspective because:• It denies individuals the opportunity
to make choices that would further their interests
Neoclassical Liberalism
• Emphasizes the liberty of individuals • Concerned with the relationships
between liberty and morality and between liberty and the state
Categories of Justice Theories
• Distributive• Compensatory• Retributive
Distributive Justice: Utilitarianism, Egalitarianism, and Rawlsian Justice
Injustice
• A general principle advanced in conceptions of justice is that:–An injustice is morally tolerated
only if it is necessary to avoid a greater injustice–Requires an ordering of injustices
Rawls’s Contractarian Framework
Difference Principle, Utilitarianism, Egalitarianism
Criticisms of Rawls’s Theory• One form of criticism centers on whether all individuals
in the original position would choose the same principles:• If so, whether they would choose Rawls’s principles rather
than some other principles• Another criticism centers on Rawls’s conclusion that:• In the original position, once liberties and equal
opportunity have been assured, society would choose institutions that provide the maximum benefit to the least advantaged
Methodology for Applying the Principles of Justice• Identify the liberties and rights involved• The principle of equal liberty• The principle of fair equality of opportunity• For the remaining alternatives, evaluate their
fairness implications for the pursuit of opportunities by those affected
• Choose among the remaining policies based on the difference principle
• Identify which parties have which duties
Higher Order Standards for Evaluating Ethics Systems• The ethics systems based on utilitarian,
rights, and justice considerations use two general standards for determining which principles or rules have moral standing:–Universalizability (which implies
reversibility)–Unanimous impartial choice as in Rawls’s
original position
Case - Genetic Testing in the Workplace• Determines susceptibility to certain hazards can be
done from a sample of blood or other bodily fluid• Can be used for either screening or monitoring
purposes• Can also be used to monitor groups of employees
over time – To determine if they experience chromosome
damage due to exposure in the workplace• In 2008, Congress enacted and the president signed
the Genetic Information Nondiscrimination Act
Case - Chipotle Mexican Grill and Undocumented Workers
• Despite the success of the company in the marketplace, the management team faced: – A difficult challenge in its nonmarket environment
• In 2010 ICE conducted an investigation of Chipotle restaurants leading to the firing of 400 workers
• The chair of the immigration subcommittee of the House Judiciary Committee, Elton Gallegly (R-CA), argued that the use of E-Verify should be mandatory– The U.S. Chamber of Commerce reported that its members
had mixed reactions to making E-Verify mandatory• Advocates for undocumented workers argued that firing the
workers would simply drive them into the underground economy
Case - Environmental Injustice?• Addresses two aspects– Explanation for the empirical finding– Centers on whether the situation is unjust
• Explanations for the finding that minorities and those in poverty are disproportionately located proximate hazardous waste facilities1. Firms that construct and operate plants with toxic
emissions and hazardous waste facilities: Seek to impose harm on the poor and minorities
2. Locations for such facilities are chosen on an economic basis
3. Locations for toxic emissions and hazardous waste facilities are chosen based on economic considerations and with the intent of avoiding posing a risk to people
Case - Environmental Injustice?• The bulk of the empirical studies examining the
socio-economic characteristics of people who might be exposed to the hazards analyze:– The data at a point in time at which both the
toxic emission site and the people are present• Ann Wolverton, an economist at the EPA,
conducted an empirical study on Environmental Injustice– Supports the third explanation and not the first
or second explanations
2.4BEHAVIOURAL ETHICS
AND MANAGEMENT
Topics Covered
• Introduction• Behavioural ethics experiments• Managerial implications• The challenge of corporate social
responsibility• Sources of unethical behavior
Introduction
• Corporate statements of social responsibility and codes of ethics have become commonplace
Behavioural Ethics Experiments
• Self-interest, altruism, and fairness• Audience effects, the self, and corporate social
responsibility• Reciprocity• Behaviour in groups• Implications for the application of ethics principles• Moral suasion• Conclusions from the experiments• Extrapolation• Overconfidence in one’s self
Self-Interest, Altruism, and Fairness
• A dictator game involves two participants:– A proposer who unilaterally makes a decision about how
much of a sum of money, referred to as an endowment, to keep and how much to contribute
– A responder who takes no action and simply receives the contribution
• An unconditional altruist:– Takes into account the well-being of others
independently of their actions• A conditional altruist:– Takes into account the well-being of others conditional on
their past actions as well as their current situation
Audience Effects, The Self, and Corporate Social Responsibility• Audience effects studied to:– Assess whether proposers allocate a portion of the
endowment to the responder so as not to appear selfish either to the responder, the experimenter, or one self
• Audience effects can have implications for firms considering whether to practice corporate social responsibility (CSR)
• Audience effects should be a function of the size and composition of the audience
• Behaviour can also be affected by one’s own self-image
Reciprocity
• The simplest setting in which to study reciprocity is a variant of a dictator game referred to as an ultimatum game
Behaviour in Groups
• Group decisions have been studied using a (linear) public goods game in which:–All participants in a group have an
endowment that they can keep for themselves or– They can contribute some portion of it to a
public good that benefits all members of the group
Implications For the Application of Ethics Principles• Rawls’s theory of justice criticized
because:– It represents a slice in time and ignores how
that slice in time was arrived at• The actions taken by individuals in the
past as well as events beyond their control determine where they are located on the justice frontier
Moral Suasion• Behaviour can be influenced by
moral suasion
Conclusions from the Experiments• Experimental findings discussed
suggest a number of conclusions about behaviour• Each of these should be interpreted
with caution and as a tendency rather than a law of human behaviour
Extrapolation
• Care must also be taken in extrapolating from experimental findings to real-world contexts
Overconfidence in One’s Self
• People often overestimate their ability to deal effectively with moral issues–The self-serving bias of moral
superiority can lead to overconfidence and reduced care:•When making decisions on issues
involving moral concerns
Managerial Implications• The most consistent conclusion from the
experiments is people differ in:• Behaviour• Preferences• Moral conduct
• Differ in the importance of factors such as:• The characteristics of those affected by their decisions• The audience for their actions• The scrutiny they face• The social context of their situation• How they take strategic considerations into account
Managerial Implications
• Implications of the experiments are relevant for:–Firms and their managers when
making decisions that involve moral concerns–Anticipating nonmarket action that
may be motivated by the (ethical) conduct of a firm
The Challenge of Corporate Social Responsibility• The spread of codes of ethics and statements of
social responsibility is due to:– A belief by some firms that they should be accountable
for conduct beyond profit maximization– A defensive motivation intended to avoid private
politics led by activists and other interest groups or to preempt public politics and additional government regulation
• Approaches used to giving standing to corporate social responsibility:– Triple bottom line– Balanced scorecard
Core Principles and Their Evolution• Johnson & Johnson’s “Our
Credo” identifies:–Commitments to a set of
stakeholders and can be revised as the set of relevant issues it faces evolves
Principles, Objectives, and Strategies
Sources of Unethical Behaviour
• Unethical behaviour has a number of sources:– Some are idiosyncratic to the particular
individuals involved –Others are functions of the managerial
practices or the policies of the firm itself–Personal weakness–Temptation–Narrow focus on the duties imposed by the
law–Reliance on an ethics framework
Case - Denny’s and Customer Service
• Six African American agents filed a lawsuit against Denny’s (a unit of Flagstar) restaurant for discrimination
• In response to the agents’ charges, Flagstar fired the manager of the restaurant for failure to report the incident–But maintained that the delay in serving the
black agents was not racially based • Other such incidents followed regularly forcing Denny’s
to apologize to customers, firing or transferring “bad-apple” employees, and creating a cultural diversity team
Case - Fresenius Medical Care in China• Human rights groups and activists had regularly
charged that China sold human organs harvested from executed prisoners, many of whom were sentenced to death for political crimes or for theft or corruption
• Fresenius Medical Care’s Nanfang facility was operated by Chinese doctors, and Fresenius had one employee in Hong Kong who monitored the facility– Fresenius’s investigation revealed that foreign patients
were receiving dialysis treatment at Nanfang for relatively short periods
CASE DISCUSSION : INSIDER TRADING
Case - Insider Trading• Illegal insider trading refers generally to buying or
selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security
• Rajaratnam, founded Galleon, which recorded a peak of $7 billion in funds under management– The government had been alerted to Rajaratnam’s
activities by messages uncovered during an investigation of a hedge fund run by his brother
– One source of information for Rajarartnam was expert networks• Primary Global Research
Core Readings• Baron, David P.(2013) Business and its environment, 7th
Edition, Pearson, Ch.21-23• Cheeseman, Henry R.(2013) Business law, 8th Edition,
Prentice Hall. Ch.2
Next Week’s Ideas for Discussion
• Bartram, S (2008) What lies beneath: foreign exchange rate exposure, hedging and cash flows. Journal of Banking and Finance, 32 (8). pp. 1508-1521.
QUESTIONS?
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