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?