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Ethics and Responsibility in Business ERB Workshop vide draft McNutt: Tao of Ethics© Patrick McNutt & Elena Demidenko

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Presentation on theme: "Ethics and Responsibility in Business ERB Workshop vide draft McNutt: Tao of Ethics© Patrick McNutt & Elena Demidenko"— Presentation transcript:

1 Ethics and Responsibility in Business ERB Workshop vide draft McNutt: Tao of Ethics© Patrick McNutt & Elena Demidenko Follow @tuncnunc

2 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.

3 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.

4 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

5 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.

6 Unit 1 Fundamentals of ethics in business

7 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.

8 Non-linear thinking in ERB Governance: Adopting a Code of Ethical Practice Compliance: Performance to duty and risk minimal Ethics: Responsibility and duty

9 ‘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

10 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 21 st 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.

11 Ethical dilemma: utility v wealth or pre- transfer 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

12 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

13 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.

14 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

15 Unit 2 Responsibility and Performance in Business

16 Bargaining and Edgeworth Contracting Paretian ethics and the Edgeworth Contract Curve Pareto non-comparability Principal-agent and TCEs ‘agency costs’ Employee governance and AP L Hume’s paradox and Mr ‘Three Eyes’ Rawls ‘reflective equilibrium’ Descartes’ Grand Narrative


18 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

19 18 Corporate Governance: 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 Legal Goodwill. Conflict of principles Kant: Implemented through: Define duties Assign responsibilities, CoEP Performance measures and rewards Monitoring and P-A Transparent Universal Tools: - A formalised Code of Conduct, - Risk Governance Structure and - Risk Management Process

20 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

21 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 AP L and Williamson-Coase agency perspective in Unit 2 as outlined Ricketts’ diagram.

22 Compliance and ERM Good governance ►risk management Self-regulation v formal control Legal compliance Enterprise Risk Management (ERM) influenced by: ethics, strategy and performance Governance ERM Compliance

23 22 Managerial incentives: The Ricketts’ diagram Trust and Incentives W1 W2 B C B A E3E1 E2 E(0; 0) Ricketts’ rationale 1. W1 E1 2. We want 2E1 = E2 3. If W1 W2 Then A C 4. If W1 + B = W2 Then A B Certainty line W Legend: W – wage E – effort B - discretionary bonus AB – cost of effort Cost of effort

24 23 Governance: Ethics, Risk and Compliance Achieving business objectives in a risk-based ethics Compliance: Transparency and Disclosure Ethics and Corporate Social Responsibility Rights and Obligations of Board of Directors; Rights of Shareholders Risk Management and Internal Control

25 24 Risk Culture Could be Measured: Ethical Maturity Framework Not in Compliance Accountability ≠ Responsibility No Duties Ethical Compliance Accountability = Responsibility Duties Fulfilled Lack of RM structure, duties & responsibilities. RM activities depend on individual initiative and verbal knowledge. Risk to organisational integrity & ethics. 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 enterprise- wide. 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.

26 25 Key success factors to instill a risk culture within an p-firm organisation

27 26 Implementing a risk-based Good Governance Linking Strategy, Risk, Performance and Monitoring Mission: Responsible reproduction Values: Integrity; Excellence; Responsibility; Innovation Passion Strategies Key performance indicators are aligned to the strategy and monitored Identify, assess and prioritise major business and emerging risks to strategy Strategic planning Monitor and adjust Business risk management Manage, monitor and report on the risks Vision: No greater chance, no better care

28 27 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?

29 Unit 3 Competition, Compliance and Economics of Antitrust

30 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

31 Materials extracted and made available to all from [2005] McNutt Law, Economics & Antitrust Chapter 8 Competitive Harm pp207- 236 Fig 8.1 and Fig 8.2 Chapter 9 Non-Market Economics pp237-257 Chapter 10 The Reach of the Law pp259-282

32 Economics of antitrust Market structures v market system as applied in antitrust 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.

33 Antitrust Compliance analysis: Classroom exercises from Kaelo v2.0 in 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’.

34 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


36 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


38 Unit 4 Trust and International ‘Good’ Governance

39 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

40 39 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 ( South Africa - the King III Report (2009) Stock Exchange listing rules : 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) 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‘.

41 40 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 21 st 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

42 41 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………..

43 Zen thought for the day Leaves falling Lie on one another The rain beats the rain

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