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Chapter Four
Ethical Theories:
Enlightened Self-interestContractarianism
Feminist EthicsEthical Relativism and Absolutism
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Enlightened Self-interestThomas Hobbes
The natural condition of humans is
constant conflict. We must impose
moral and legal structures uponourselves in order to live together.
This means subjecting our natural egoismto the following eight restraints:
(Continued)
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Enlightened Self-interest
1. Claim as much liberty as we are willing
to grant to others.
2. Keep promises and perform contractsto which we have agreed.
3. Acknowledge the equality of all.
4. Do not demand of others what we are
unwilling to do ourselves.
(Continued)
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Enlightened Self-interest
5. Things that cannot be dividedshould be shared in common.
6. People who disagree should submittheir dispute to arbitrators.
7. Judges should be impartial.
8. We should not do to others whatwe dont want them to do to us.
(Continued)
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Enlightened Self-interest
It is in our own best interest that everyone,
including we ourselves, lives by these
restraints, in order to escape anarchy.
Therefore, according to enlightened self-
interest, an action is morally acceptable if it
benefits an individual (or organization)
without intentionally harming others, and
the benefits counterbalance the harm.
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Applying Enlightened Self-interest
Dr. Kevorkian was convicted and imprisoned
for performing physician-assisted suicide on
his terminally-ill patients at their request.
According to enlightened self-interest (an
action is morally acceptable if it benefits an
individual without intentionally harming
others, and the benefits counterbalance the
harm) were his actions ethical or unethical?
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Proponents and Critics View ofEnlightened Self-interest
What are some arguments that someonewho believed in enlightened self-interestwould give to support this ethical
framework?
What are some arguments that someonewho did not agree with enlightened self-
interest would make to criticize thisethical framework?
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ContractarianismJohn Rawls
An implied agreement or social contractintended to ensure equality and justice for allmembers of a society.
We reach this agreement by three steps:1. Consider your contingent attributes
(the physical, psychological, intellectual,
cultural and social attributes which limitones freedom and cause inequity betweenpeople.)
(Continued)
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Contractarianism
2. Imagine an unbiased original position
(a condition of not yet knowing our
personal contingent attributes.)3. Determine what moral and legal rules
you would agree to in a state of
ignorance, to protect your primarygoods.
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Rawls Three Primary Goods
1. Health (access to health care)
2. Liberty (freedom to pursue our
interests within acceptable bounds)
3. Opportunity (to achieve secondary
wants [wealth, etc.] through ourown efforts)
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Applying Contractarianism
Consider a rule at work or in school, which youdo not agree with.
Why do you consider it wrong?
Under what circumstances (consider different contingentattributes) would you appreciate this rule?
If you did not know what your contingent attributes would be,would you make this rule?
If not, what rule would you make (from the original position) for
this situation?Does your rule protect the primary goods of everyone
concerned?
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Proponents and Critics View
of Contractarianism
What are some arguments that someone
who believed in contractarianism would
give to support this ethical framework?
What are some arguments that someone
who did not agree with
contractarianism would make tocriticize this ethical framework?
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Feminist Ethics
Ethics of Careintent is to strengthenrelationships and sense of community
Originated in Carol Gilligans studies offemale moral development
Emphasis is on sensitivity, caring and
ones responsibility to others, ratherthan on objectivity and individuality
(Continued)
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Feminist Ethics
Rules must be substantively equal for
women and men, and take into
consideration the different roles andresponsibilities men and women
hold at work and also outside of
work.
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Applying Feminist Ethics
Name some workplace issues that affect femaleemployees.
How might the following be perceived to be
substantively unfair to women:
Equal numbers of sick days and personal leavedays?
Hiring practices that rely on networking?
Promotions and salary grids measured in monthsof work accrued?
(Continued)
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Applying Feminist Ethics
What policies would be substantively fairto all employees?
Consider a current social issue, such assame-sex marriage. Which side of thatissue shows a more caring approach to
others? Which side promotes andstrengthens relationships betweenpeople?
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Proponents and Critics View ofFeminist Ethics
What are some arguments that someone
who believed in feminist ethics would
give to support this ethical framework?
What are some arguments that someone
who did not agree with feminist ethics
would make to criticize this ethical
framework?
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Ethical Relativism andAbsolutism
Ethical relativism means that what is
morally right or wrong is relative to the
situation or to the culture you are in.
Ethical absolutism means that what is
morally right or wrong is absolute, no
matter what the situation is or whatcountry or culture you are in.
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Absolutism
Moral truths are the same for everyone.
All morals are Some morals areabsolute no matter absolute in any
what the situation. situation, others
are relative to thesituation.
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Cultural Relativism
Moral truths are relative to each culture
but the same for everyone within the
culture.
All morals are Some morals are
relative to the relative to the culture,culture. others are absolute.
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Individual relativism
Moral truths are relative to each
individual.
All morals are Some morals
relative to the are relative to
individual. the individual,
others are absolute.
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Theoretical Approaches
Deontological
(duty or principles)
Teleological
(ends or consequences)
Divine Command Theory Socrates Healthy SoulKantian Duty Ethics Utilitarianism (J. S. Mill
Virtue Ethics (Aristotle) Enlightened Self-interest
Contractarianism (Rawls)
Feminist Ethics
Absolutism Relativism
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Normative and Descriptive Ethics
Descriptive ethics describes the ethical cultureof an organization.
Normative ethics sets a norm or standard for
ethical behaviour.
They are often used to analyze the currentethical climate or culture within an
organization (descriptive) and to compare itto an ideal or desired standard of ethicalbehaviour (normative).
(Continued)
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Normative and Descriptive Ethics
Descriptive Ethics Normative Ethics
Observes and describes
peoples actualbehaviour
Sets a standard for how
people ought to behave
Explains why people
behave this way
Justifies why people
ought to behave this
way
The behaviour we
exhibit defines us
Our conscious choices
of action define us
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Corporate Governance
Corporate governance is:
A relationship among stakeholders used to
determine and control the strategic direction
and performance of organizations Concerned with making strategic decisions
more effectively
Used to establish order between a firmsowners and its top-level managers whose
interests may be in conflict
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Internal Governance
Mechanisms Ownership Concentration
Relative amounts of stock owned
by individual shareholders and
institutional investors Board of Directors
Individuals responsible
for representing the firms
owners by monitoring top-levelmanagers strategic decisions
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Internal Governance Mechanisms
Executive Compensation
Use of salary, bonuses, and
long-term incentives to align
managers interests withshareholders interests
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External Governance Mechanisms
Market for Corporate
Control
Purchase of a firm that is
underperforming relative toindustry rivals in order to
improve its strategic
competitiveness
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Separation of Ownership and
Managerial Control Basis of the Modern Corporation
Shareholders purchase stock, becoming
residual claimants
Shareholders reduce risk by holding
diversified portfolios
Professional managers are contracted toprovide decision making
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Separating Ownership and
Managerial Control
Modern public corporation form leads to
efficient specialization of tasks:
Risk bearing by shareholders
Strategy development and decision making by
managers
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An AgencyRelationship
Figure 10.1
Hire
and create
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Agency Relationship Problems
Principal and agent have divergent interests andgoals
Shareholders lack direct control of large, publicly
traded corporations Agent makes decisions that result in the pursuit
of goals that conflict with those of the principal
It is difficult or expensive for the principal to
verify that the agent has behaved appropriately
Agent falls prey to managerial opportunism
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Managerial Opportunism
The seeking of self-interest with guile
(cunning or deceit)
Managerial opportunism is:
An attitude (inclination)
A set of behaviors (specific acts of self-
interest)
Managerial opportunism prevents themaximization of shareholder wealth (the
primary goal of owner/principals)
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Response to Managerial
Opportunism Principals do not know beforehand which
agents will or will not act opportunistically
Thus, principals establish governance and
control mechanisms to prevent managerialopportunism
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Examples of the Agency Problem
Possible Problems Product diversification
Increased size, and relationship of size to managerialcompensation
Reduction of managerial employment risk
Use of Free Cash Flows
Managers prefer to invest these funds in additional
product diversification (see above)
Shareholders prefer the funds as dividends so theycontrol how the funds are invested
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Agency Costs and Governance
Mechanisms
Principals may engage in monitoring
behavior to assess the activities and
decisions of managers
However, dispersed shareholding makes it difficultand inefficient to monitor managements behavior
Boards of Directors have a fiduciary duty
to shareholders to monitor management However, Boards of Directors are often accused ofbeing lax in performing this function
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Governance Mechanisms
Large block shareholdershave a strong incentive tomonitor managementclosely: Their large stakes make it worth
their while to spend time, effort andexpense to monitor closely
They may also obtain Board seatswhich enhances their ability to
monitor effectively
Financial institutions arelegally forbidden fromdirectly holding board seats
OwnershipConcentration (a)
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Governance Mechanisms (contd)
The increasing influence of
institutional owners (stock
mutual funds and pension
funds) Have the size (proxy voting
power) and incentive
(demand for returns to funds)
to discipline ineffective top-level managers
Can affect the firms choice of
strategies
OwnershipConcentration (b)
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Governance Mechanisms (contd)
Shareholder activism:
Shareholders can convene to
discuss corporations direction
If a consensus exists,shareholders can vote as a
block to elect their candidates
to the board
Proxy fights There are limits on
shareholder activism available
to institutional owners in
responding to activists tactics
OwnershipConcentration (c)
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Governance Mechanisms (contd)
Board of directors Group of elected individuals that
acts in the owners interests to
formally monitor and control the
firms top-level executives
Board has the power to:
Direct the affairs of the organization
Punish and reward managers
Protect owners from managerial
opportunism
OwnershipConcentration
Board of Directors(a)
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Governance Mechanisms (contd)
Composition of Boards: Insiders:the firms CEO and
other top-level managers
Related Outsiders:individuals
uninvolved with day-to-dayoperations, but who have a
relationship with the firm
Outsiders:individuals who
are independent of the firmsday-to-day operations and
other relationships
OwnershipConcentration
Board of Directors(b)
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Governance Mechanisms (contd)
Criticisms of Boards ofDirectors include: Too readily approve managers self-
serving initiatives
Are exploited by managers withpersonal ties to board members
Are not vigilant enough in hiring and
monitoring CEO behavior
Lack of agreement about the
number of and most appropriaterole of outside directors
OwnershipConcentration
Board of Directors(c)
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Governance Mechanisms (contd)
Enhancing the effectiveness
of boards and directors: More diversity in the backgrounds
of board members Stronger internal management and
accounting control systems
More formal processes to evaluate
the boards performance
Adopting a lead director role Changes in compensation of
directors
OwnershipConcentration
Board of Directors(d)
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Governance Mechanisms (contd)
Forms of compensation: Salary, bonuses, long-term
performance incentives, stock
awards, stock options
Factors complicatingexecutive compensation: Strategic decisions by top-level
managers are complex, non-routine
and affect the firm over an extendedperiod
Other variables affecting the firms
performance over time
OwnershipConcentration
Board of Directors
Executive
Compensation (a)
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Governance Mechanisms (contd)
Limits on the effectivenessof executive compensation:
Unintended consequences of
stock options
Firm performance not as
important than firm size
Balance sheet not showing
executive wealth
Options not expensed at the
time they are awarded
OwnershipConcentration
Board of Directors
Executive
Compensation (b)
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Governance Mechanisms (contd)
Individuals and firms buy ortake over undervalued
corporations Ineffective managers are usually
replaced in such takeovers
Threat of takeover may
lead firm to operate more
efficiently
Changes in regulations
have made hostile
takeovers difficult
OwnershipConcentration
Board of Directors
Executive
Compensation
Market forCorporate Control (a)
G
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Governance Mechanisms
(contd) Managerial defense tactics
increase the costs of
mounting a takeover
Defense tactics mayrequire:
Asset restructuring
Changes in the financial
structure of the firm
Shareholder approval
Market for corporate
control lacks the precision
OwnershipConcentration
Board of Directors
Executive
Compensation
Market forCorporate Control (b)
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International Corporate Governance:
Japan Important governance factors:
Obligation
Family
Consensus
Banks (especially main
bank)are highly influential with
firms managers
Keiretsus:strongly interrelatedgroups of firms tied together by
cross-shareholdings
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International Corporate Governance
Japan (contd)
Other governance characteristics:
Powerful government intervention
Close relationships between firms and
government sectors
Passive and stable shareholders who exert
little control Virtual absence of external market for
corporate control
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Capital MarketStakeholders
Governance Mechanisms and
Ethical BehaviorIt is important to serve the interests of thefirms multiple stakeholder groups!
Shareholders in this group are
viewed as the most importantstakeholder group
The focus of governancemechanisms is to control
managerial decisions to assureshareholder interests
Interests of shareholders isserved by the Board of Directors
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Product MarketStakeholders
Governance Mechanisms and
Ethical Behavior (contd)
Product market stakeholders
(customers, suppliers and hostcommunities) andorganizational stakeholdersmay withdraw their support ofthe firm if their needs are notmet, at least minimally
Capital MarketStakeholders
It is important to serve the interests of thefirms multiple stakeholder groups!
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Organizational
Stakeholders
Governance Mechanisms and
Ethical Behavior (contd)
Some observers believe that
ethically responsible companiesdesign and use governancemechanisms that serve allstakeholders interests
Importance of maintainingethical behavior is seen in theexamples of Enron, WorldCom,HealthSouth, Tyco, Adelphi, andAhold NV
Product MarketStakeholders
Capital MarketStakeholders
It is important to serve the interests of thefirms multiple stakeholder groups!