Business Ethics. Why Ethics? Copyright Thomas P. Langdon. All Rights Reserved. 1

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1 Business Ethics Why Ethics? Law can only go so far. There are noble and economic reasons the encourage executives to study ethics. By studying ethical theories and understanding common reasoning fallacies, you will be able to assess the persuasiveness of other s arguments. It is not that humans have become any more greedy than in generations past. It is that the avenues to express greed have grown enormously. - Alan Greenspan Copyright Thomas P. Langdon. All Rights Reserved. 1

2 Why Act Ethically? Forestall public criticism Reduce lawsuit exposure Prevent Congress from regulating Make higher profits Corporate Social Responsibility Primary Business Objective: Maximization of Profits In pursuing profits, critics claim, corporations Ruin the environment Mistreat employees Sell dangerous products Corrupt the political process Are not as accountable to the public as governments Stakeholder Theory Derives from corporate social responsibility concept Corporation should balance interests of shareholders (in profit maximization) against the interest of other corporate stakeholders Employees Suppliers Customers Community Copyright Thomas P. Langdon. All Rights Reserved. 2

3 A Cautionary note People s ethical values can be diverse To influence someone with different ethical values, you must Determine his ethical viewpoint Speak in an ethical language that will be understood and accepted Ethical Theories Rights Theory Justice Theory Utilitarianism Profit Maximization Ethical Perspectives Teleological perspective Focuses on the results The end justifies the means Justice Theory, Utilitarianism, & Profit Maximization Deontological perspective Focuses on the act itself, irrespective of the results Rights Theory Copyright Thomas P. Langdon. All Rights Reserved. 3

4 Rights Theory Holds that certain rights are fundamental & must be respected by other humans. Immanuel Kant The Categorical Imperative Judge action by applying it universally We cannot use/manipulate others to achieve our own happiness. Modern Rights Theories Mixed deontological theories Abide by a moral rule unless a more important rule conflicts with it. Focus on fundamental rights Locke: Life, Liberty, property Critique of Rights Theory Strengths Protects fundamental rights Criticisms Difficult to achieve agreement about what rights are protected Does not consider costbenefit of action Rights theory may promote moral fanaticism and creates sense of entitlement Reduces innovation Copyright Thomas P. Langdon. All Rights Reserved. 4

5 Justice Theory 1971 John Rawls, A Theory of Justice Government should redistribute wealth Greatest Equality Liberty Principle: each person has equal right to basic rights & liberties Difference Principle: social inequalities are acceptable only if they cannot be eliminated without making the worstoff class even worse off Justice Theory Requires Decision making based on fairness & impartiality Focus on the outcome Robert Norzick (Harvard) Chief critic Argued that rights of individual are primary Nothing more was justified than minimal government that protected against violence & theft Justice Theory Strengths Protection of those least advantaged Motivation consistent with religious & secular philosophies that urge humans to help those in need Weaknesses Treats equality as absolute; does not consider costs An attempt to rearrange social benefits requires an accurate measurement of current wealth Copyright Thomas P. Langdon. All Rights Reserved. 5

6 Utilitarianism Requires maximization of utility for society as a whole Only act if benefits to society outweigh costs to society Focus: Society as a whole A utilitarian would harm him/herself if it benefits society Utilitarianism Teleological theory actions are good/bad depending on consequences Jeremy Bentham: maximizing utility means achieving the greatest overall balance of pleasure over pain. Thomas Carlyle: Utilitarianism is PIG PHILOSOPHY bases the goal of ethics on the swinish pleasures of the masses Types of Utilitarianism Act Utilitarianism Judges each act separately, assessing benefits/costs to society s members Time consuming Rule Utilitarianism Judges actions by a rule that over the long-run maximizes benefits over costs Quicker analysis Copyright Thomas P. Langdon. All Rights Reserved. 6

7 Critique of Utilitarianism Strengths Easy to articulate the standard of conduct do what is best for society Capitalist in nature by focusing on total social satisfaction, benefits, welfare, and wealth. Criticisms Difficult to measure pers pleasures/pains and satisf/dissatisf, not to mention those of all society s members Can force tyranny of the majority Not constrained by law; law is only one factor Profit Maximization Maximize business long-run profits within the limits of the law Liberal economists (Milton Friedman/Thomas Sowell) total social welfare is optimized if humans are permitted to work toward their own selfish goals. Utilitarianism vs. Profit Maximization Utilitarianism Focuses the actor on everyone s satisfactions and dissatisfactions Profit Maximization Optimizes social utility by requiring the decision maker to maximize profits for himself or his organization Copyright Thomas P. Langdon. All Rights Reserved. 7

8 Critique of Profit Maximization Strengths Competition leads to efficient allocation of resources, maximizing total social utility Requires action within the constraints of the law Each actor is disciplined by the marketplace Criticisms Human failings make it impossible to maximize profits Does not deal with allocation of wealth Can it be ethical to comply with laws that reflect the interests of business (due to lobbying) at cost to others? Ethics often transcends law Improving Corporate Governance Ethics Codes SOX requires disclosure of whether a company has adopted a code of ethics Ethical Instruction Greater Shareholder Involvement Consider all stakeholders interests For profit maximizers, this wisdom is apparent Common Facts of Problem Companies (Including ENRON, WorldCom, Tyco, etc.) Corporate wrongdoers acted in their own selfish interest Corporate reward system encouraged them to act selfishly, illegally, and unethically Wrongdoers acted without effective supervision Copyright Thomas P. Langdon. All Rights Reserved. 8

9 Guidelines for Ethical Decision Making 1. What Facts impact my decision? 2. What are the Alternatives? 3. Who are the Stakeholders? 4. How do the alternatives impact Society As A Whole? 5. How do the alternatives impact My Firm? 6. How do the alternatives impact Me, the Decision Maker? Guidelines for Ethical Decision Making 7. What are the Ethics of each alternative? 1. What would a utilitarian do? 2. What would a profit maximizer do? 3. What would a rights theorist do? 4. What would a justice theorist do? Guidelines for Ethical Decision Making 8. What are the Practical Constraints of each alternative? 9. What Course of Action should be taken and how do we Implement it? Copyright Thomas P. Langdon. All Rights Reserved. 9

10 Thinking Critically Critical Thinking: evaluating arguments logically, honestly, and without bias Non Sequiturs Conclusion that does not follow from the facts. I don t get paid enough, so I ll take a few supplies. Appeals to Pity Generates support for proposition by focusing on victim s predicament. Example: Murder victim s family wants to testify at trial. Copyright Thomas P. Langdon. All Rights Reserved. 10

11 False Analogies An analogy argues that since something is like something else in one way, it is also like it in another respect. EXAMPLE: If our firm creates offbalance sheet partnerships, it will become bankrupt, like ENRON. Begging the Question Arguer takes for granted the thing he or she is setting out to prove. Type of circular reasoning EXAMPLE: You should tell the truth because lying is wrong. Argumentum ad Populum Argument to the people An emotional appeal to popular beliefs, values, or wants. Fallacy: Just because many people believe something it does not become truth. Copyright Thomas P. Langdon. All Rights Reserved. 11

12 Bandwagon Fallacy Similar to argumentum ad populum We should or should not do something merely because one or more other people or firms are doing it. Example: baseball player Ken Caminiti on steroids At first I felt like a cheater. But then I looked around and everyone was doing it. (Sports Illustrated, June 2002). Argumentum ad Baculum argument to club The arguer uses threats or fear to bolster his position. Common in business/family settings. Argumentum ad Hominem argument against the man Attack the speaker, not the reasoning. Types Attack character Attack consistency last year you stated Guilt by association Copyright Thomas P. Langdon. All Rights Reserved. 12

13 Argument from Authority Rely on quality of expert, not the argument Example: The President says That s good enough for me. Argument to reverence (respect) Example: Who are you to disagree with False Cause Observing two events and concluding there is a causal link between them when none exists The Gambler s Fallacy Mistaken belief that independent prior outcomes affect future outcomes Copyright Thomas P. Langdon. All Rights Reserved. 13

14 Reductio ad Absurdum Carries an argument to its logical end, without considering whether it is an inevitable or probable result. Slippery Slope Example: If we allow you time off to go to your aunt s funeral, we have to let anyone off anytime they want. Appeals to Tradition Infer that because something has been done a certain way in the past, it should be done the same way in the future. The Lure of the New We should do or buy something merely because it is just released or improved. Copyright Thomas P. Langdon. All Rights Reserved. 14

15 Sunk Cost Fallacy Attempt to recover invested time, money, and other resources by spending still more time, money, or other resources. Common among stock market investors. Resisting Requests to Act Unethically Recognizing unethical requests and bosses Buying Time Allows more fact finding Consider alternatives Find a Mentor and a Peer Support Group Find Win-Win Solutions Work within the firm to stop the unethical act Prepare to lose your job Copyright Thomas P. Langdon. All Rights Reserved. 15