Enlightened and Governance

7/31/2019 Enlightened and Governance

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Copyright 2010 Pearson Education Canada / J A McLachlan 4 - 1

Chapter Four

Ethical Theories:

Enlightened Self-interestContractarianism

Feminist EthicsEthical Relativism and Absolutism


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Copyright 2010 Pearson Education Canada / J A McLachlan 4- 2

Enlightened Self-interestThomas Hobbes

The natural condition of humans is

constant conflict. We must impose

moral and legal structures uponourselves in order to live together.

This means subjecting our natural egoismto the following eight restraints:

(Continued)


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Enlightened Self-interest

1. Claim as much liberty as we are willing

to grant to others.

2. Keep promises and perform contractsto which we have agreed.

3. Acknowledge the equality of all.

4. Do not demand of others what we are

unwilling to do ourselves.

(Continued)


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5. Things that cannot be dividedshould be shared in common.

6. People who disagree should submittheir dispute to arbitrators.

7. Judges should be impartial.

8. We should not do to others whatwe dont want them to do to us.

(Continued)


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It is in our own best interest that everyone,

including we ourselves, lives by these

restraints, in order to escape anarchy.

Therefore, according to enlightened self-

interest, an action is morally acceptable if it

benefits an individual (or organization)

without intentionally harming others, and

the benefits counterbalance the harm.


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Applying Enlightened Self-interest

Dr. Kevorkian was convicted and imprisoned

for performing physician-assisted suicide on

his terminally-ill patients at their request.

According to enlightened self-interest (an

action is morally acceptable if it benefits an

individual without intentionally harming

others, and the benefits counterbalance the

harm) were his actions ethical or unethical?


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Proponents and Critics View ofEnlightened Self-interest

What are some arguments that someonewho believed in enlightened self-interestwould give to support this ethical

framework?

What are some arguments that someonewho did not agree with enlightened self-

interest would make to criticize thisethical framework?



ContractarianismJohn Rawls

An implied agreement or social contractintended to ensure equality and justice for allmembers of a society.

We reach this agreement by three steps:1. Consider your contingent attributes

(the physical, psychological, intellectual,

cultural and social attributes which limitones freedom and cause inequity betweenpeople.)

(Continued)



Contractarianism

2. Imagine an unbiased original position

(a condition of not yet knowing our

personal contingent attributes.)3. Determine what moral and legal rules

you would agree to in a state of

ignorance, to protect your primarygoods.



Rawls Three Primary Goods

1. Health (access to health care)

2. Liberty (freedom to pursue our

interests within acceptable bounds)

3. Opportunity (to achieve secondary

wants [wealth, etc.] through ourown efforts)



Applying Contractarianism

Consider a rule at work or in school, which youdo not agree with.

Why do you consider it wrong?

Under what circumstances (consider different contingentattributes) would you appreciate this rule?

If you did not know what your contingent attributes would be,would you make this rule?

If not, what rule would you make (from the original position) for

this situation?Does your rule protect the primary goods of everyone

concerned?



Proponents and Critics View

of Contractarianism

What are some arguments that someone

who believed in contractarianism would

give to support this ethical framework?


who did not agree with

contractarianism would make tocriticize this ethical framework?



Feminist Ethics

Ethics of Careintent is to strengthenrelationships and sense of community

Originated in Carol Gilligans studies offemale moral development

Emphasis is on sensitivity, caring and

ones responsibility to others, ratherthan on objectivity and individuality

(Continued)



Feminist Ethics

Rules must be substantively equal for

women and men, and take into

consideration the different roles andresponsibilities men and women

hold at work and also outside of

work.



Applying Feminist Ethics

Name some workplace issues that affect femaleemployees.

How might the following be perceived to be

substantively unfair to women:

Equal numbers of sick days and personal leavedays?

Hiring practices that rely on networking?

Promotions and salary grids measured in monthsof work accrued?

(Continued)


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Applying Feminist Ethics

What policies would be substantively fairto all employees?

Consider a current social issue, such assame-sex marriage. Which side of thatissue shows a more caring approach to

others? Which side promotes andstrengthens relationships betweenpeople?


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Proponents and Critics View ofFeminist Ethics


who believed in feminist ethics would

give to support this ethical framework?


who did not agree with feminist ethics

would make to criticize this ethical

framework?


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Ethical Relativism andAbsolutism

Ethical relativism means that what is

morally right or wrong is relative to the

situation or to the culture you are in.

Ethical absolutism means that what is

morally right or wrong is absolute, no

matter what the situation is or whatcountry or culture you are in.


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Absolutism

Moral truths are the same for everyone.

All morals are Some morals areabsolute no matter absolute in any

what the situation. situation, others

are relative to thesituation.


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Cultural Relativism

Moral truths are relative to each culture

but the same for everyone within the

culture.

All morals are Some morals are

relative to the relative to the culture,culture. others are absolute.


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Individual relativism

Moral truths are relative to each

individual.

All morals are Some morals

relative to the are relative to

individual. the individual,

others are absolute.


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Theoretical Approaches

Deontological

(duty or principles)

Teleological

(ends or consequences)

Divine Command Theory Socrates Healthy SoulKantian Duty Ethics Utilitarianism (J. S. Mill

Virtue Ethics (Aristotle) Enlightened Self-interest

Contractarianism (Rawls)

Feminist Ethics

Absolutism Relativism


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Normative and Descriptive Ethics

Descriptive ethics describes the ethical cultureof an organization.

Normative ethics sets a norm or standard for

ethical behaviour.

They are often used to analyze the currentethical climate or culture within an

organization (descriptive) and to compare itto an ideal or desired standard of ethicalbehaviour (normative).

(Continued)


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Normative and Descriptive Ethics

Descriptive Ethics Normative Ethics

Observes and describes

peoples actualbehaviour

Sets a standard for how

people ought to behave

Explains why people

behave this way

Justifies why people

ought to behave this

way

The behaviour we

exhibit defines us

Our conscious choices

of action define us


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Corporate Governance

Corporate governance is:

A relationship among stakeholders used to

determine and control the strategic direction

and performance of organizations Concerned with making strategic decisions

more effectively

Used to establish order between a firmsowners and its top-level managers whose

interests may be in conflict


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Internal Governance

Mechanisms Ownership Concentration

Relative amounts of stock owned

by individual shareholders and

institutional investors Board of Directors

Individuals responsible

for representing the firms

owners by monitoring top-levelmanagers strategic decisions


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Internal Governance Mechanisms

Executive Compensation

Use of salary, bonuses, and

long-term incentives to align

managers interests withshareholders interests


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External Governance Mechanisms

Market for Corporate

Control

Purchase of a firm that is

underperforming relative toindustry rivals in order to

improve its strategic

competitiveness


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Separation of Ownership and

Managerial Control Basis of the Modern Corporation

Shareholders purchase stock, becoming

residual claimants

Shareholders reduce risk by holding

diversified portfolios

Professional managers are contracted toprovide decision making


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Separating Ownership and

Managerial Control

Modern public corporation form leads to

efficient specialization of tasks:

Risk bearing by shareholders

Strategy development and decision making by

managers


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An AgencyRelationship

Figure 10.1

Hire

and create


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Agency Relationship Problems

Principal and agent have divergent interests andgoals

Shareholders lack direct control of large, publicly

traded corporations Agent makes decisions that result in the pursuit

of goals that conflict with those of the principal

It is difficult or expensive for the principal to

verify that the agent has behaved appropriately

Agent falls prey to managerial opportunism


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Managerial Opportunism

The seeking of self-interest with guile

(cunning or deceit)

Managerial opportunism is:

An attitude (inclination)

A set of behaviors (specific acts of self-

interest)

Managerial opportunism prevents themaximization of shareholder wealth (the

primary goal of owner/principals)


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Response to Managerial

Opportunism Principals do not know beforehand which

agents will or will not act opportunistically

Thus, principals establish governance and

control mechanisms to prevent managerialopportunism


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Examples of the Agency Problem

Possible Problems Product diversification

Increased size, and relationship of size to managerialcompensation

Reduction of managerial employment risk

Use of Free Cash Flows

Managers prefer to invest these funds in additional

product diversification (see above)

Shareholders prefer the funds as dividends so theycontrol how the funds are invested


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Agency Costs and Governance

Mechanisms

Principals may engage in monitoring

behavior to assess the activities and

decisions of managers

However, dispersed shareholding makes it difficultand inefficient to monitor managements behavior

Boards of Directors have a fiduciary duty

to shareholders to monitor management However, Boards of Directors are often accused ofbeing lax in performing this function


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Governance Mechanisms

Large block shareholdershave a strong incentive tomonitor managementclosely: Their large stakes make it worth

their while to spend time, effort andexpense to monitor closely

They may also obtain Board seatswhich enhances their ability to

monitor effectively

Financial institutions arelegally forbidden fromdirectly holding board seats

OwnershipConcentration (a)


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Governance Mechanisms (contd)

The increasing influence of

institutional owners (stock

mutual funds and pension

funds) Have the size (proxy voting

power) and incentive

(demand for returns to funds)

to discipline ineffective top-level managers

Can affect the firms choice of

strategies

OwnershipConcentration (b)


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Shareholder activism:

Shareholders can convene to

discuss corporations direction

If a consensus exists,shareholders can vote as a

block to elect their candidates

to the board

Proxy fights There are limits on

shareholder activism available

to institutional owners in

responding to activists tactics

OwnershipConcentration (c)


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Board of directors Group of elected individuals that

acts in the owners interests to

formally monitor and control the

firms top-level executives

Board has the power to:

Direct the affairs of the organization

Punish and reward managers

Protect owners from managerial

opportunism

OwnershipConcentration

Board of Directors(a)


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Composition of Boards: Insiders:the firms CEO and

other top-level managers

Related Outsiders:individuals

uninvolved with day-to-dayoperations, but who have a

relationship with the firm

Outsiders:individuals who

are independent of the firmsday-to-day operations and

other relationships


Board of Directors(b)


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Criticisms of Boards ofDirectors include: Too readily approve managers self-

serving initiatives

Are exploited by managers withpersonal ties to board members

Are not vigilant enough in hiring and

monitoring CEO behavior

Lack of agreement about the

number of and most appropriaterole of outside directors


Board of Directors(c)


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Enhancing the effectiveness

of boards and directors: More diversity in the backgrounds

of board members Stronger internal management and

accounting control systems

More formal processes to evaluate

the boards performance

Adopting a lead director role Changes in compensation of

directors


Board of Directors(d)


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Forms of compensation: Salary, bonuses, long-term

performance incentives, stock

awards, stock options

Factors complicatingexecutive compensation: Strategic decisions by top-level

managers are complex, non-routine

and affect the firm over an extendedperiod

Other variables affecting the firms

performance over time


Board of Directors

Executive

Compensation (a)


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Limits on the effectivenessof executive compensation:

Unintended consequences of

stock options

Firm performance not as

important than firm size

Balance sheet not showing

executive wealth

Options not expensed at the

time they are awarded


Board of Directors

Executive

Compensation (b)


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Individuals and firms buy ortake over undervalued

corporations Ineffective managers are usually

replaced in such takeovers

Threat of takeover may

lead firm to operate more

efficiently

Changes in regulations

have made hostile

takeovers difficult


Board of Directors

Executive

Compensation

Market forCorporate Control (a)

G


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Governance Mechanisms

(contd) Managerial defense tactics

increase the costs of

mounting a takeover

Defense tactics mayrequire:

Asset restructuring

Changes in the financial

structure of the firm

Shareholder approval

Market for corporate

control lacks the precision


Board of Directors

Executive

Compensation

Market forCorporate Control (b)


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International Corporate Governance:

Japan Important governance factors:

Obligation

Family

Consensus

Banks (especially main

bank)are highly influential with

firms managers

Keiretsus:strongly interrelatedgroups of firms tied together by

cross-shareholdings


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International Corporate Governance

Japan (contd)

Other governance characteristics:

Powerful government intervention

Close relationships between firms and

government sectors

Passive and stable shareholders who exert

little control Virtual absence of external market for

corporate control


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Capital MarketStakeholders

Governance Mechanisms and

Ethical BehaviorIt is important to serve the interests of thefirms multiple stakeholder groups!

Shareholders in this group are

viewed as the most importantstakeholder group

The focus of governancemechanisms is to control

managerial decisions to assureshareholder interests

Interests of shareholders isserved by the Board of Directors


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Product MarketStakeholders


Ethical Behavior (contd)

Product market stakeholders

(customers, suppliers and hostcommunities) andorganizational stakeholdersmay withdraw their support ofthe firm if their needs are notmet, at least minimally


It is important to serve the interests of thefirms multiple stakeholder groups!


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Organizational

Stakeholders


Ethical Behavior (contd)

Some observers believe that

ethically responsible companiesdesign and use governancemechanisms that serve allstakeholders interests

Importance of maintainingethical behavior is seen in theexamples of Enron, WorldCom,HealthSouth, Tyco, Adelphi, andAhold NV

Product MarketStakeholders


It is important to serve the interests of thefirms multiple stakeholder groups!

Enlightened and Governance

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