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Subject 3. Ethics and Strategy

An ethical decision is one that typical stakeholders would find acceptable because it aids stakeholders, the organization, or society. An unethical decision is one that a manager would prefer to disguise or hide because it enables a company or individual to gain at the expense of society or other stakeholders.

The purpose of business ethics is to give people the tools for dealing with moral complexity in business. It does not help people distinguish right from wrong. Most people know the difference between right and wrong, and they act on that information in their private lives, but fail to do so in their professional lives.

Business ethics emphasizes two points. First, that business decisions have an ethical component, and second, that managers must consider the ethical implications of strategic decision before choosing a course of action.

The Roots of Unethical Behavior

There are five causes of unethical behavior:

  • There are people who do not care about ethical values. Since they have no personal ethical values, they do not have any basis for understanding or applying ethical standards in business. These people do not think about right and wrong. They only think, "What's in it for me?" and "Can I get away with it?"

  • Some people make unethical choices because they are not sure about what really is the right thing to do. They sometimes do not realize they are behaving unethically when they make "sound" business decisions.

  • An organizational culture that de-emphasizes business ethics and considers all decisions to be purely economic ones.

  • Pressure can drive people to do things they wouldn't normally do. Pressure to succeed, pressure to get ahead, pressure to meet deadlines and expectations, pressure from co-workers, bosses, customers, or vendors to engage in unethical activities or at least look the other way.

  • Unethical leadership.

Philosophical Approaches to Ethics

A philosophy can provide managers with a moral direction.

The Friedmand Doctrine:

  • The social responsibility of business is to increase its profits.
  • The shareholders can decide for themselves what social initiatives to take part in rather than having their appointed executive in a firm decide for them.

Utilitarian Theories:

  • The consequences (outcomes) determine if an action is moral or not.
  • An ethical decision is one that does the most good for the most people. It is the one that maximizes utility.
  • Drawbacks:

    • Sometimes it's hard or even impossible to measure the benefits, costs and risks of a course of action.
    • It does not consider justice.

Kantian Ethics:

  • Each human being has inherent worth. You ought not treat humans as a means to an end. In other words, you shouldn't use people to get what you want.

Rights Theories:

  • An ethical decision is one that does not violate the rights of any stakeholders.
  • Along with rights come obligations.

Justice Theories:

  • The justice perspective asserts that an ethical decision is one that distributes benefits and harms across stakeholder groups in a fair or impartial way.
  • Rawls, in his theory of justice, thinks that redistribution of wealth and taxes are justified if it is the best way for the "worst off" to benefit from social and economic inequalities. He thinks total economic equality is just (perhaps in a socialist state), but he thinks that a capitalistic system might actually be better and help the "worst off" by rewarding productive behavior to give an incentive to increase productivity and therefore prosperity.

Practice Question 1

Most ethical issues are due to conflict between:

A. The goals of stockholders and the goals of employees.
B. The goals of the enterprise and the fundamental rights of important stakeholders.
C. The goals of stockholders and the goals of top management.

Correct Answer: B

Stakeholders have basic rights that should be respected. It is unethical to violate those rights.

Practice Question 2

The Friedman doctrine views ______ as the economic engine of the organization and the only group to which the firm must be socially responsible.

A. employees
B. shareholders
C. customers

Correct Answer: B

Milton Friedman takes a shareholder approach to social responsibility. As such, the goal of the firm is to maximize profits and return a portion of those profits to shareholders as a reward for the risk they took in investing in the firm.

Practice Question 3

Which approach could result in the unjustified treatment of minority?

A. The Friedman Doctrine
B. Utilitarian and Kantian Ethics
C. Rights Theories

Correct Answer: B

Utilitarian theories support actions that produce the greatest good for the greatest number of people.

Practice Question 4

The government subsidizes the big bank industry by using tax money to give the big banks billions of dollars to help the big bank industry avoid bankruptcy. Was any right being violated according to the Rawls?

Correct Answer: Yes

Property rights are being violated in this case, but is it also unjust? If this form of redistribution will help the "worst off", then it is just. However, it seems likely that Rawls would agree that saving an incredibly powerful company from going bankrupt would somehow benefit those who are the "worst off".

Practice Question 5

Which statement is true?

A. A company can be considered behaving ethically if it stays within the bounds of the law.
B. The information asymmetry between principals and agents is bad and should be corrected.
C. Friedman DOES NOT state businesses should sometimes engage in deception and fraud if necessary to maximize profits.

Correct Answer: C

A is false. There are many gray areas in the law. A company's action might be legal but clearly unethical.

B is false. It is not necessarily a bad thing. In some cases withholding some information from stockholders may be a good thing for stockholders.

C is true.

Practice Question 6

Consider the case of sweatshop labor, which is legal in some developing countries. Which approach will most likely support such a practice?

A. The Friedman Doctrine
B. Utilitarian and Kantian Ethics
C. Rights Theories

Correct Answer: A

Friedman's arguments suggest that improving working conditions beyond the level required by the law and necessary to maximize employee productivity will reduce profits and is therefore not appropriate.

Practice Question 7

Which approach holds that the moral worth of actions or practices is determined by their consequences?

A. The Friedman Doctrine
B. Utilitarian Theories
C. Rights Theories

Correct Answer: B

Utiliatrianism is a version of Consequentialism. It states that one should judge an action morally by its consequences, that one should do whatever maximizes the good. An action is right if its consequences if its contribution are no worse than its alternatives' consequences. Thus an action may be right even if its consequences are very poor, so long as the alternatives are worse.

Study notes from a previous year's CFA exam:

3. Ethics and Strategy