Why teach ethics? in business schools?

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Why teach ethics?in business schools?

• W. Guth
• New York University

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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
• Whos 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?

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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

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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

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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

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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 otherthe man within
  immediately calls to himthat he is no better
  than his neighbor, and that byunjust 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

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The Corporation flawed institutional character?

• Corporate 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 societys most powerful
  institution. The troubles on Wall Street today,
  beginning with Enron..., can be blamed in part on
  the corporations 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)

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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

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Ethics/Prudence Decision Types

• Bad Decision Violates a partys 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.

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Ethics/Prudence Decision Types (Contd)

• Exploit Market Failure Violates a partys
  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 someones 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)

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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

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Teleological theories of ethics

• Egoism a person (corporation) ought to do
  whatever is in his/her (the corporations) 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 ones actions the
  stakeholder versus stockholder approach to
  management decision-making

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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 Kants
  categorical imperatives?
• Contractarianism (Hobbes) social exchange
  contracts are morally binding, even if not
  formally discussed and signed (Japanese approach
  to business contracts)

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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

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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

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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