1. MGT 3211 Business and Society BBA pg. 1-18:Ch. 1 Morality and Ethical theory Morality- concerned with social practices defining right and wrong. o It exists prior to acceptance or rejection of its standards by certain individuals. o Cannot be purely a personal policy or code and is not constrained to rules in professional codes of conduct adopted by corporations, etc. Ethical theory and moral philosophy point to reflection on the nature and justification of right actions. Morality consists of what persons ought to do in order to conform to societys norms of behavior. Ethical Theory- concerns the philosophical reasons for and against aspects of social morality. o Effort centers around Justification o Philosophers seek to justify a system of standards or some moral point of view In a society with diverse view of morality, it is likely that ones principals will be challenged. o A business women being morally right or wrong will be challenged within her organization if she cannot explain why she believes that action is right or wrong. To defend her assertion, she must be able to justify her position by providing reasonable arguments. Morality and Prudence Morality is learned virtually by every young child. o First step is to learn to distinguish moral rules from rules of prudence (self-interest). Rules of prudence dont touch the stove, look both ways before crossing, etc. Moral rules- share your toys, Dont pull your sisters hair, etc. Seek to control actions that affect other people. Self-interest and good ethics generally coincide. People are more concerned about the actions businesses take than with their motivations to perform those actions. o Distinction is important to philosophers because businesses might be prudentially justified but lack moral merit or might even be morally wrong. Ex. water and air pollution, forced work hours, deceitful marketing, etc. Acting morally is in the interest of business, and thus prudence is a strong motive for acting ethically. But, prudence often dictates a different business decision than does morality. Morality and Law Law- is the publics agency for translating morality into explicit social guidelines and practices and for stipulating punishments for offenses. Moral evaluation needs to be distinguished from legal evaluation, though the opposite would simplify matters (if its legal, its moral). Law is not the sole repository of a societys moral standards. If its legal, its not necessarily moral, If its illegal, its not necessarily immoral.

2. The Rule of Conscience Philosophers have judged appeals to conscious as alone insufficient and untrustworthy for ethical judgment. Consciences vary radically from person to person and time to time, and often altered by circumstance, religious belief, childhood and training. Moral justification must be based on a source external to individual conscience. Approaches to the Study of Morality and Ethical Theory Three approaches (dont always express rigid and clear distinguishable approaches. When understood as broad positions, they can serve as models of inquiry and valuable distinctions.) o 1. Descriptive Scientific study of ethics. Factual description and explanation of moral behavior and beliefs are typical. Ex. Moral attitudes, codes and beliefs such as sexual harassment and code of ethics in trade associations. o 2. Conceptual Conceptual study of significant terms in ethics. Ex. meanings of terms such as rigid, obligation, justice, good, virtue and responsibility. Crucial terms such as liability, deception, corporate intention and stakeholder. Also the proper analysis of the term Morality and the distinction between the moral and nonmoral are typical examples of these conceptual problems. o 3. Normative (prescriptive) A prescriptive study attempting to formulate and defend basic moral norms. Normative philosophy aims at what ought to be done and distinguished between what is, in fact, practiced. Ethical theory provides reasons for adopting a whole system of moral principles or virtues. Utilitarianism and Kantianism are widely discussed theories, but not the only such theories. Utilitarianism argue that there is but a single fundamental principle determining right of action Kantianism argue for principles that specify obligations rather than a balance of value. Ex. principle used to treat specific problems such as famine, conflict of interest, improper disclosure of information, environmental pollution, mistreatment of animals and racial and sexual discrimination. This use of ethical theory if referred to as applied ethics. Increased clarity of the principles of veracity (truthfulness) in which truth be told and when it may be withheld would presumably enhance understanding or moral requirements in areas such as disclosure of a patients medical history, balanced reporting in journalism, etc. 3. Relativism and Objectivity of Belief In certain cultures, moral rightness is contingent on cultural beliefs. o Some ethical relativists assert that whatever a culture believes is right or wrong really is right or wrong for the members of that culture. o If ethical relativism is correct then there is no criterion independent of ones culture for determining where a practice really is right or wrong. Ethical relativism provides that certain cultures get along better with cultures similar to theirs. Despite the influence of relativism and multiculturalism, there have been many attempts of both government agencies and multinational corporations to promulgate international codes of business. Moral philosophers have tended to reject relativism because when early Anthropologists probed beneath surface moral disagreements, the often discovered agreement at deeper levels on more basic values. o Ex. Tribal story, children caring about their parents. Despite obvious differences between practice and belief, people often do actually agree about what may be called ultimate moral standards. o In many moral controversies people seem to differ only because they have different factual beliefs. Ex. environmental efforts. Important to distinguish between relativism of judgment and relativism of standards. o Relativism of judgment- people may differ in their judgments but that doesnt mean they have different moral standards about the issue. o Relativism of standards- if a moral conflict did turn out to be a matter of fundamental conflict of moral standards, the conflict couldnt be removed If fundamental conflicts of moral standards were discovered in ethics, nothing more than skepticism about moral standards would be justified. (Cannot justify why your moral standard is correct and someone elses is wrong.) Moral Disagreements Methods in dealing with easing moral disagreements and conflicts o Obtaining Objective Informationmany moral disagreements can be at least partially resolves by obtaining additional factual information on which moral controversies turn. Information may have only a limited bearing over the resolution of conflict, yet it may have a direct and over powering influence in others. o Definitional Clarity controversies have been settled by reaching conceptual or definitional agreements over the language used by disputing parties If parties get on the same page about the definition of the concept, they probably didnt have a bona fide moral disagreement, but a conceptual one. o Example- Counterexample- resolving controversies by posing examples and opposing counterexamples. o Analysis of Arguments and Positions- expose the inadequacies in and unexpected consequences of arguments and positions. The fundamental axiom of negotiation is reason and be open to reason. Many moral disagreements may not be resolved by any of these four methods, but if used, a resolution seems more likely to occur. 4. The Problems of Egoism Thought that corporations and executives act purely from prudence no other interests than the context of competition. Egoist contends that all choices either do involve or should involve self-promotion as their sole objective. Two main varieties of egoism o Psychological Egoism- view that everyone is always motivated to act in his or her perceived self-interest. Descriptive theory about human motivation. People always do act on the basis of perceived interest. If true, the whole enterprise of normative ethics is futile. When confronted with what looks to be an altruistic act, egoists may appeal to unconscious motives of self-interest or claim that every act is based on some desire of the person performing the act. o Ethical Egoism- Theory stating that the supreme principal of conduct is to promote ones well-being above everyone elses. Normative theory about what people ought to do. People always ought to act on the basis of self-interest. Doesnt view that one should always ignore the interests of others but, rather, that one should take account of and act on the interests of others only if it suits ones own interests to do so. Egoistic Business Practices and Utilitarian Results o Ethical egoism leads to utilitarian outcomes. Smith said, corporations and individuals pursuing their individual interests thereby promote the public good, so long as they abide by the rules that protect the public. RR pg. 1-19: Ch. 1 Relativism - Right and wrong are relative to the customs of ones society. - The truth depends on ones point of view- the society in which one happens to have been raised Divine Commands - Socrates accepted the belief in Gods and that they may issue instructions. But this isnt the basis of ethics. We have to distinguish 2 possibilities; either the Gods have some reason for the instructions or they dont. If not, their commands are nearly arbitrary. Aristotle - Offered a detailed account of the virtues- the qualities of character that people need to do well in life. o Ex. courage, prudence, honesty, etc. - Said everything in nature exists for a purpose. Natural Law - Laws of nature specify how things ought to be, as well as how things are. 5. The Social Contract - Hobbes assumed that good and bad are just names we give to things we like and dislike. - The benefits of social living go far beyond companionship; social cooperation makes possible schools, hospitals, etc. - Multi-cooperative societies can only exist if we adopt certain rules of behavior. - The theory of understanding morality o Takes the mystery out of ethics and makes it practical o Makes it clear how morality can be rational and objective o Explains why we should care about ethics. o Gives us a sensible and mature way of determining what our ethical duties really are. o Treats human beings as self-interested creatures and does not assume that they are naturally altruistic. We ought to behave altruistically without assuming that we are naturally altruistic. Altruism and Self-interest - Not many philosophers today would accept Hobbes egoistic view of human nature. It seems evident that humans have at least some altruistic feelings. Utilitarianism - The ultimate moral principal is that we should always do whatever will produce the greatest possible balance of happiness over unhappiness for everyone who will be affected by our action. - Implies that if an activity makes people happy, without anyone being harmed, it cannot be wrong. Impartiality - Is the utilitarian view or social contract view correct? - Utilitarians believe that we have a very extensive moral duty to help other people - Social Contract theorists deny this saying that we care more for some people than others. - Both views appeal ultimately to our emotions. Kant - As with utilitarianism and the social contract theories, Kant sought to explain ethics without appealing to divine commands or moral facts. - His solution was to see morality as a product of pure reason - What was important for him was doing ones duty, which he said that a persons duty was not determined by calculating consequences. - His ultimate moral principle was called Categorical Imperative 6. Notes: Distinction between Morality and Ethical Theory - Morality is the difference between right and wrong o Constructed by the society in which we live - Ethical Theory is concerned with justifying why a society believes something is right or wrong - Roughly interchangeable Distinction between Morality and Prudence - Prudence- acting in my own self interest - Moral Rules- when it concerns or affects other people Ethical Egoism - Choose the actions that benefit me the most, or harms me the least. - Not much different than prudence Law vs. Moral Rules - Just because an action is legal, doesnt mean its ethical. - Moral- source of authority is deductive reasoning. o Deductive Reasoning- general principle to a particular case o Inductive Reasoning look at many instances in order to draw a general conclusion Utilitarian Principle - Follow one general principal - Applies deductive reasoning to a case. Conscious BBA pg. 18-41 (ch.1 contd.) Normative Ethical Theory: Utilitarianism Ethical Theories - Utilitarian Theories o The moral worth of actions or practices is determined by their consequences. o Utilitarians believe that the purpose or function of ethics is to promote human welfare by minimizing harms and maximizing benefits. o Two foundations or sources of utilitarian thinking from Mill. Normative foundation in the principle of utility Psychological foundation in human nature o John Stuart Mill proposes his principle of utility- the greatest happiness principle as the foundation of normative ethical theory. - Essential Features of Utilitarianism o First, utilitarianism is committed to the maximization of the good and the minimization of harm and evil. The means to maximization is efficiency means of higher profits and lower prices. Maximization of profits comes from maximizing production from limited economic resources. 7. o Second, is a theory of the good. Efficiency itself is simply an instrumental good; its valuable strictly as a means to something else, an intrinsic good. Hedonistic utilitarians believe that only pleasure and happiness can be intrinsically good. They believe any act or practice that maximizes pleasure is right. Pluralisticutilitarians- argue that other values besides pleasure possess intrinsic worth such as friendship, knowledge, courage, health and beauty. Have multiple intrinsic values. In recent philosophy, neither of these approaches have prevailed. Another theory is individual preferences- the concept of utility is understood not in terms of happiness or friendship, but in terms of satisfaction in individual preferences as determined by a persons behavior. In business, utility is measured by a persons purchases. A major problem arises over morally unacceptable preferences. o Third essential feature of utilitarianism is its commitment to the measurement and comparison of goods. Trying to compare one persons pleasures with another to decide which is greater. - Act and rule utilitarianism o Act utilitarian argues that in all situations one ought to perform that act that leads to the greatest good for the greatest number. Ex. you ought to tell the truth. They would not hesitate to break a moral rule if breaking it would lead to the greatest good for the greatest number in a particular case. o Rule utilitarian- reserve a more significant place for rules, which they do not regard as expandable on grounds that utility is maximized in a particular circumstance. - Criticisms of utilitarianism o A major problem is whether preference units or some other utilitarian value such as happiness can be measured and compared to determine the best action among the alternatives. Acknowledge that accurate measurements of others goods or preferences can seldom be provided because of limited knowledge and time. o Utilitarianism has also been criticized that it ignored nonutilitarian factors that are needed to make moral decisions. The most prominent omission cited is a consideration of justice. o Rule utilitarians maintain that the criticisms of utilitarianism previously noted are short sided because they focus on injustices that might be caused through a superficial or short term application of the principle of utility. They argue that promoting utility doesnt eventuate in overall unjust outcomes. Kantian Ethical Theories - Kantian respect for persons 8. o Kant argued that persons should be treated as ends and never purely as means to the ends of others. Not prohibiting the use of persons as means to the ends of other people, just not exclusively as a means to their ends. o In Kantians theories respect for the human being is said to be necessary- not just as an opinion or at ones discretion- because human beings possess a moral dignity and shouldnt be treated as if they had merely the conditional value possessed by machinery, robots and capital. respect for the individual o Kants theory finds motives for actions to be the highest importance, in that it expects persons to make the right decisions for the right reasons. Believe that motives- in particular, motives of moral obligation- count substantially in moral evaluation. Must act for the sake of obligation- not merely in accordance with obligation. That is, the persons motive for action must involve recognition of the duty to act. o An action has moral worth only if performed by an agent who possesses what Kant called a good will. A person has good will only if the motive for action is moral obligation. o Kant developed a fundamental moral law: I ought never to act except in such a way that I can also will that my maxim should become a universal law. This principal is called the categorical imperative because it admits no exceptions and is absolutely binding, and also gives instruction about how one must act. - Universalizability o Kants strategy was to show that the acceptance of certain kinds of action is self- defeating, because universal participation in such behavior undermines the action. - Criticisms of Kantianism o Theories have been criticized as narrow and inadequate to handle various problems in the moral life. o Some people say Kant emphasized universal obligations at the expense of particular obligations. Critics maintain that persons are entitled to show favoritism to their loved ones. This criticism suggests that Kantianism (and utilitarianism0 has too broadly cast the requirement of impartiality and doesnt adequately account or those part of moral life involving partial, intimate or special relationships. Contemporary challenges to the dominant theories - 3 popular replacements for, or supplements to, Kantian and utilitarian theories are o 1. Right theories based on human rights o 2. Virtue theories based on character traits o 3. Common morality theories generally obligation-based. Rights theories - The moral obligation not to interfere with a person follows from the right. The obligation is derived from the right. - However, few right based theories deny the importance of obligations (or duties), which they regard as central to morality. There is correlativity between obligations and rights. - 2 types of obligations 9. o Negative obligations- those that require that we not interfere with the liberty of others. A valid claim to liberty. Because no one has to act to honor it Ex. the right not to be beaten, sold into slavery, etc. o Positive obligations- require that certain people or institutions provide benefits or services. A valid claim on goods and services. Someone has to provide something. Ex. rights to food, medical care and insurance. Virtue ethics - Ethics should look to decision making by persons of good character, that is, a virtuous person. - Descends from the classical Hellenistic tradition represented by Plato and Aristotle. - People acquire virtues as they do skills. - Aristotle says a virtuous character is neither natural nor unnatural; its cultivated and made a part of the individual much like a language or tradition. - This approach relies on the importance of having correct motivational structure. - The person disposed by character to be generous, caring, compassionate, sympathetic and fair who should be the one recommended, admired, praised and held up as a moral model. Common-morality theories - According to this approach, virtually all people in all cultures grow up with an understanding of the basic demands of morality. - The common morality is simply the set of norms shared by all persons who are seriously committed to the objectives of morality. A prologue to theories of Justice - Distinctions between just procedures and just results exist. Preferably to have both. The moral point of view - All theories discussed in this chapter share certain elements that could be referred to as the right attitude to take in ethics. This is often referred to as the moral point of view. - The moral point of view is rational in the sense that it involves the application of reason rather than feeling or mere inclination. - The moral point of view is universal in the sense that the principles or propositions ascertained therefrom apply to all persons and to all relevantly similar circumstances. - The moral point of view is impartial in the sense that a moral judgment is formed without regard to particular advantaging or disadvantaging properties of persons. Notes: Extra credit: 1. What is the basic proposition of utilitarian ethical theory? 2. What is the basic proposition of Kantian ethical theory? 3. What is the fundamental similarity between utilitarian and Kantian ethical theories and what is the fundamental difference between them? - They are both normative ethical theories. What you ought to be doing. Practical ethics. 10. - Utilitarian theory is based off consequences or results. Kantian theory is you act out alone, regardless of consequences. Bonus re-do: Similarities: - The fundamental similarity between utilitarian and Kantian ethical theories is that they are both normative ethical theories. They explain what you ought to be doing. In class, you presented them to be thought of as practical ethics. Differences: - Utilitarian theory states that the moral worth of actions or practices is based off consequences or results. - Kantian theory states that you act out alone, regardless of consequences. Kants theory finds motives for actions to be the most important, in that it expects persons to make the right decisions for the right reasons, not basing the decision off future consequences. 3 things we call ethics: - 1. Descriptive o How people actually behave when confronted with an ethical decision. Not ought to do but what we indeed do. o Lawrence Kohlberg- said children learn what is right and wrong because of their punishments due to wrong behavior - 2. Philosophical o Concerns with how we define something like justice. How we conceptualize the basic terms that are involved in ethical thinking. - 3. Normative o What should one do. How should one behave when faced with an ethical decision. o Comprised of many different kinds of theories: Consequentialist Determines what is right or wrong in terms of its outcome and consequences. Ethical egoist o The right thing to do is what is most beneficial to me. Utilitarian theory o Concern for the consequences of the action, but the consequences given the big picture. Not so much the action itself. o Act Concerned with the outcome of a particular action. o Rule Concerned with following the rules, except when breaking the rule results in a greater good for a greater amount of people. Nonconsequentialist 11. RR pg. 20-28:Ch. 2 Argument - Consists of one or more premises and a conclusion, together with the claim that the conclusion follows from the premises. - In order for an argument to be sound: the argument must be valid and the premises must be true. Moral Skepticism - The idea that there is no such thing as objective moral truth. - It is not the idea that we cannot know the truth, but the more radical idea that where ethics is concerned, truth does not exist. - The essential point in different ways: o Morality is subjective; it is a matter of how we feel about things, not a matter of how things are. o Morality is only a matter of opinion, and one persons opinion is just as good as anothers. o Value exists only in our minds, not in the world outside us. - The Cultural Differences argument: o One argument might be based on the observation that in different cultures people have different ideas concerning right and wrong. Ex. Infanticide (leaving a child to die)is neither objectively right nor objectively wrong; it is merely a matter of opinion that varies from culture to culture. o Is it a sound argument? 1. Are the premises true? Premises are what people believe. Yes because some cultures did accept infanticide. 2. Does the conclusion really follow from the premises? Is the argument valid? The conclusion here concerns not what people believe, but whether infanticide really is immoral. No- the cultural differences argument is not valid. o 2 common reactions: When an argument is invalid, and it is pointed out that the argument is false, people react by saying but right and wrong are matters of opinion. They made the mistake of thinking that if we reject the argument, we are somehow impugning on the truth of the conclusion. **If an argument is unsound, then it fails to provide any reason for thinking the conclusion is true. The conclusion still may be true- but the point is just that the unsound argument gives no support. People object that it is unfair to compare morality with an obviously objective matter. Ex. the shape of the earth because we can prove the shape with scientific methods.We know the flat-earthers are wrong. But 12. morality is different and there is not a way to prove that a moral opinion is true or false. This objection misses the point. Says that this conclusion is derived from a different set of facts, namely, facts about what is and is not provable. o **But the cultural differences argument tries to derive the skeptical conclusion about morality from a certain set of facts, namely, the facts about cultural disagreements. o Important to keep arguments separate. Arguments may have the same conclusion, but may be fundamentally different because they appeal to different considerations in trying to prove the conclusion- they have different premises. - The Provability argument: o Is a more general form of argument If there were any such thing as objective truth in ethics, we should be able to prove that some moral opinions are true and others false. But we cannot prove which moral opinions are true and which are false. Therefore, there is no such thing as objective truth in ethics. o If we can sometimes give good reasons for our moral judgments, what accounts for the persistent impression that they are unprovable? o Two reasons why the provability argument appears better than it is: 1. There is a tendency to focus attention only on the most difficult moral issues. This makes it easy to believe that proof in ethics is impossible. But there are many simpler matters that all reasonable people must agree. 2. It is easy to confuse 2 matters that are really very different; 1. Proving an opinion to be correct 2. Persuading someone to accept your proof - Conclusion o Two of the most important arguments in support of Moral Skepticism seem to be no good. Moral skepticism may be true, but better arguments will have to be found. o Summarization of what we learned about evaluating arguments: Arguments are offered to provide support for a theory or idea; a philosophical theory may be regarded as acceptable only if there are sound arguments in its favor. An argument is sound only if its premises are true and the conclusion follows logically from them. Conclusion follows from the premises if the following is so: If the premises were true, the conclusion would have to be true also. A conclusion can follow from premises even if those premises are in fact false. A conclusion can be true and yet not followed from a given set of premises. In evaluating an argument, we ask two separate questions: Are the premises true? And, does the conclusion follow from them? Important to avoid 2 common mistakes: be careful to keep arguments separate and not to confuse different issue. And, we should not think an argument is stronger than it is simply because we happen to agree with its 13. conclusion. If an argument is unsound, doesnt mean the conclusion is false- just means that this argument does nothing to show it is true. RR pg. 29-48: Ch. 3,4,5 Ch.3 Utilitarianism - The ultimate moral principle, the principle of Utility, requires us to always choose the action or social policy that provides the most happiness for all. - Bentham was a philosopher and became the leader of a group of philosophical radicals known as the Benthamites. He explained why we behave like we do seek pleasure and avoid pain and explained why we judge some things to be good and others evil. Developed the ultimate moral principle. - One of his followers was James Mill. His son John Stuart became the leading advocate of utilitarian theory in the next generation. - The following are excerpts from Mills book Utilitarianism: - II. What Utilitarianism is.. o Utility, or Greatest Happiness Principle, hold that actions are right in proportion as they tend to promote happiness, wrong as they tend to produce the reverse of happiness. - IV. Of What Sort of Proof the Principle of Utility is Susceptible o Questions about ends are questions about what things are desirable. The utilitarian doctrine is, that happiness is desirable, and the only thing desirable, as an end; all other things being only desirable as means to that end. o Sole evidence that it is possible to produce that anything is desirable, is that people do actually desire it. o Each persons happiness is a good, and the general happiness, therefore, a good to the aggregate of all persons. o Happiness has made out its title as one of the ends of conduct, and consequently one of the criteria of morality. o The ingredients to happiness, are desired and desirable in and for themselves; bedsides being means they are a part of the end. Virtue, according to the utilitarian doctrine, is not naturally and originally part of the end, but it is capable of becoming so; and in those who love it disinterestedly it has become so, and is desired and cherished, not as a means to happiness, but as a part of their happiness. 14. Ch. 4 Utilitarianism and Integrity - The reason utilitarianism cannot understand integrity is that it cannot coherently describe the relations between a mans projections and his actions. - Two Kinds of Remoter Effect: o There is a psychological effect on the agent. - Moral feelings that we can and cant live without, to come to regard those feelings from a purely utilitarian point of view, that is to say, happenings outside our moral self, is to lose a sense of ones identity; to lose integrity. - Basically, if you cannot disregard a pure utilitarian point of view for a moral view you cant live without, you have lost your integrity. Ch. 5 The Experience Machine - Why not to plug into it: o We want to do certain things, and not just have the experience of doing them. o We want to be a certain way, to be a certain sort of person. Someone floating in a tank could be considered an indeterminate blob. o It would limit us to a man-made reality, to a world no deeper or more important than that which people can construct. - We learn that something matters to us in addition to experience and what one is like. Notes: Validity - If the conclusion doesnt follow necessarily from the premises, then the argument is not valid. - Has to do with the form of the argument. Not so much the content. o Ex. all men are mortal. Socrates is man. Therefore, Socrates is mortal. o Ex. Females are mothers. Fran is a female. Therefore, she is a mother. Unsound argument because of the counterexamples of females that dont fit the premises of being a mother. If the premises were to be true, the conclusion would also be true. - Ex. If we can prevent (A) a bad thing from occurring, then we are morally obligated (B) to so do. o 2 circles. The bigger circle represents moral obligation. Within that circle is a smaller circle that represents how we are able to prevent something bad. Another smaller circle inside represents reporting the bad action. o Decost can prevent (A) bad occurrences by reporting it (C). He is morally obligated (B) to report it (C). A=B=C o We established validity. o Whistle blower should figure out their moral sacrifice and consequence of not reporting. - Ex. Some famous people live in Georgia. Jimmy Carter is from Georgia. Therefore, Jimmy Carter is famous. 15. o Not valid. Not able to make the conclusion because Jimmy Carter being from Georgia doesnt automatically make him famous. Ethical reasoning - Premise of principle o Derived from Normative ethical theory - Premises of fact o Derived from Case analysis, particular situation that we are dealing with. - Conclusion - Series of syllogisms John Stuarts Utilitarianism - People object to utilitarianism on the same grounds they reject Epicureans maximize pleasure, discriminate between levels of pleasure. - Have to be careful how you define pleasure - Mill was trying to defend the basic utilitarian principle against the kinds of objections that can be raised to that principle. Careful how you define happiness. BBA pg. 45-69 Ch. 2 The Purpose of the Corporation The socially responsible corporation is the good corporation. Stockholder Management vs. Stakeholder Management For many, the view that the purpose of a corporation is to make profits for stockholders is accepted. o Thought is associated with Milton Friedman. Friedman has two main arguments for his position: 1. Stockholders are the owners of the corporation, and hence corporate profits belong to the stockholders. Managers are agents of the stockholders and have a moral obligation to manage the firm in the interest of the stockholders, which is to maximize shareholder wealth. 2. Stockholders are entitled to their profits as a result of a contract among the corporate stakeholders. Stockholders bear the risk when they supple capital, and profit is the contractual return they receive for risk taking. Friedman believes that these voluntary contractual arrangements maximize economic freedom and that economic freedom is a necessary condition for political freedom. o Political rights gain efficacy in a capitalist system. o The existence of capitalist markets limits the number of politically based decisions and thus increases freedom. Although managers may not be obligated to maximize profits, they certainly do have an obligation to avoid conflicts of interest where it appears that they benefit at the expense of the stockholders. An Alternative way to understand the purpose of the corporation is to consider those affected by business decisions, who are referred to as corporate stakeholders. 16. o From the stakeholders perspective, the classical view is problematic in that all emphasis is placed on one stakeholder- the stockholder. o Although any person affected by corporate decisions is a stakeholder, most stakeholder analysis is focused on a special group of stakeholders whose existence was necessary for the firms survival: stockholders, employees, customers, managers, suppliers, and the local community. Managers who manage from the stakeholders perspective see their task as harmonizing the legitimate interests of the primary corporate stakeholders. R.Edward Freeman argues that managers have an ethical responsibility to manage the organization for all stakeholders. Which view is better? Friedmanite view that the purpose of the firm is to maximize profits or the stakeholders view that the firm is to be managed in the interests of the various stakeholders. Boatright concedes that the purpose of the firm is to benefit every stakeholder group. o However, he argues that management decision making is an inefficient means of protecting the interests of nonshareholder stakeholders and that a system of governance marked by shareholder primacy better serves the interests of all stakeholders. o Boatright argues that the theory actually compliments the stockholder view in 2 ways First, reminds managers that they have an obligation to correct for such things as market failures and externalities to ensure the markets work as they should to produce benefits for all. Second, stakeholder management can be seen as a guide for the ethical management of the firm rather than as an alternative system of corporate governance. May not be a great difference between stockholder governance and stakeholder governance. What distinguished a Friedmanite from a stakeholder theorist is the motivation a manager has for considering stakeholders interest. o The Friedmanite treats stakeholders well to make a profit, whereas the stakeholder theorists treat stakeholders well because it is the right thing to do. The Social Responsibility of Business is to Increase Profits (By Milton Friedman) Business cannot have responsibilities, only people can. The first step toward clarity in examining the doctrine of the social responsibility of business is to ask precisely what it implies for whom. o Individuals who are responsible for businessmen are individual proprietors or corporate executives. o A corporate executive is an employee of the owners of a business. Has a direct responsibility to employers which is to conduct the business in accordance with their desires, which generally is to make as much money as possibly while conforming to the basic rules of society, both in law and embodied ethical custom. o Executives should not spend the extra money on whatever they decide. This raises political questions on 2 levels: principle and consequences. o The difficulty of exercising social responsibility illustrates the great virtue of private competitive enterprise- it forces people to be responsible for their own 17. actions and makes it difficult for them to exploit other people for selfish or unselfish purposes. o It is good that the governments having the responsibility to impose taxes and such for social purposes such as controlling pollution or training the hard-core employed, but the problems are too urgent to wait on the slow course of political processes, that the exercise of social responsibility by businessmen is a quicker and surer way to solve pressing current problems. o In practice, the doctrine of social responsibility is frequently a cloak for actions that are justified on other grounds rather than a reason for those actions. o The political principle that underlies the market mechanism is unanimity. o The political principle that underlies the political mechanism is conformity. Managing for Stakeholders (By R. Edward Freeman) The basic idea that businesses, and the executives who manage them, actually do and should create value for customers, suppliers, employees, communities and financiers (or shareholders). The Dominant Story: Managerial Capitalism with Shareholders at the Center: o Management of a firm became separated from the ownership of the firm. And in order to be successful, top managers of the business had to simultaneously satisfy the owners, the employees and their unions, suppliers and customers. This organization of businesses along the lines set forth here was known as managerial capitalism or laissez faire capitalism, or shareholder capitalism. o As businesses grew, managers developed a means of control via the divisionalized firm. The rise of bureaucracy and managerialism was so strong that economist Joseph Schumpeter predicted that it would wipe out the creative force of capitalism. o During the last 50 years this managerial model has put shareholders at the center of the firm as the most important group for managers to worry about. o The Dominant Model is Resistant to Change: The Managerial view of business with shareholders at the center is inherently resistant to change. Change should only occur when the shareholders are unhappy, and as long as the executives can produce a series of incrementally better financial results there is no problem. Unfortunately in todays world there is just too much uncertainty and complexity to rely on such a single criterion. Business in the twenty-first century is global and multifaceted, and shareholder value may not capture the dynamism. The Dominant Model is Not Consistent with the Law: o The law of corporations gives a less clear answer to the question of in whose interest and for whose benefit the corporation should be governed. o Companies must take the interest of customers into account, by law. o The Dominant Model is Not Consistent with Basic Ethics: The Separation Fallacy Sentences like x is a business decision have no ethical content or any implicit ethical point of view. And sentences like x is an ethical business decision, the best thing to do all things considered have no content or implicit view about value creation and trade. 18. Two Implications Rejecting this Theory: First, almost any business decision has some ethical content. To see if its true, ask whether the following questions make sense for virtually any business decision: o The Open Question Argument: 1. If this decision is made for whom is value created and destroyed? 2. Who is harmed and/or benefited by this decision? 3. Whose rights are enables and whose values are realized by this decision (and whose arent)? 4. What kind of person will I (we) become if we make this decision? In order to create value we believe it is better to focus on integrating business and ethics within a complex set of stakeholder relationships rather than treating ethics as a side constraint on making profits. o The Integration Thesis: Most business decisions, or sentences about business have some ethical content, or implicit ethical view. Most ethical decisions, or sentences about ethics have some business content or implicit view about business. If critiques are correct about the dominant theory model, we need to reconceptualize the language that we use to understand how business operates. Following principle is implicit in most reasonably comprehensive views about ethics. o The Responsibility Principle: Most people, most of the time, want to, actually do and should accept responsibility for the effects of their actions on others. o Without something like the responsibility principle it is difficult to see how ethics gets off the ground. Managing for Stakeholders: o Business is a set of relationships among groups which have a stake in the activities that make up the business. It is about how customers, suppliers, employees, financiers (stockholders, bondholders, banks, etc.), communities and managers interact and create value. To understand a business is to know how these relationships work. Executives manage and shape these relationships. o Figure 1 pg. 61 o Stakeholders and Stakes: Stakeholder can be defined in numerous ways First, any business is about creating value for those groups without whose support, the business would cease to be viable. However, as a business starts up, sometimes one particular stakeholder is more important than another. 19. Also, the idea that a group or individual can affect a business, then the executives must take that group into consideration in thinking about how to create value. The Responsibility of the Executive in Managing for Stakeholders: o Executives have a stake like every other employee in terms of an actually or implied employment contract. They are expected to look after the health of the overall enterprise, to keep the varied stakes moving in roughly the same direction, and to keep them in balance. o We need to see stakeholder interest as joint, and not opposed. o Managing for stakeholders is about creating as much value as possible for stakeholders, without resorting to trade-offs. o To create value for stakeholders, executives must understand that business is fully situated in the realm of humanity. Stakeholders are human beings, not mere placeholders for social roles. o One main assumption of the managerial view with shareholders at the center is that shareholders only care about returns, and therefore their agents, managers should only care about returns. This does not fit either our experiences or our aspirations. o Business works in part because of our urge to create things with others and for others. Some Arguments for Managing for Stakeholders: o The Argument from Consequences: A number of theorists have argued that the main reason that the dominant model of managing for stakeholders is a good idea is that it leads to the best consequences for all. These arguments invoke the idea of the invisible hand, whereby each business actor pursues her own self-interest and the greatest good actually emerges. Problem: the argument only works under very specialized conditions that seldom describe the real world and that there is no guarantee that the greatest good will actually result. Managing for stakeholders may actually produce better consequences for all stakeholders because it recognizes that stakeholders interests are joint. If a stakeholder will benefit at the expense of others, and it keeps up continuously over time, stakeholders will either: o 1. Exit to form a new stakeholder network that satisfies their needs. o 2. Use the political process to constrain the offending stakeholder. o 3. Invent some other form of activity to satisfy their particular needs. If stakeholder relationships are understood to be fully embedded in morality, then there is no need for an idea like corporate social responsibility. We can replace it with corporate stakeholder responsibility, which is a dominant feature of managing for stakeholders. o The Argument from Rights: One way to understand managing for stakeholders is that is assumes that stakeholders have some rights. 20. The dominant story gives property rights in corporation exclusively to stakeholders, and the natural question arises about the rights of other stakeholders who are affected. Managing for stakeholders takes this question of rights very seriously. o The Argument of Character: One of the strongest arguments for managing for stakeholders is that it asks executives and entrepreneurs to consider the question of what kind of company they want to create and build. The answer to this question will be in large part an issue of character. Aspiration matters. Business virtues of efficiency, fairness, respect, integrity, keeping commitments and others are all critical in being successful at creating value for stakeholders. Taking a stakeholders approach helps people decide how companies can contribute to their well-being and the kinds of lives they want to lead. o The Pragmatists Argument: Business has evolved as a social practice, an important one that we use to create value and trade with each other. Business is about collaboration. Managing for stakeholders makes this plain so that we can get about the business of creating better selves and better communities. Notes Rights Ethical Theory Legal right can be taken away from you. Locke said we can invest in our natural right. Imposes utilitarian argument here. Virtue Ethics Integrity is a kind of virtue. A person with integrity is an honest person. Means we are consistent. o Integrity- adherence to moral and ethical principles; soundness of moral character; honesty. Honesty, courage are virtues. Ethical Relativism Ethical standards are a function of the society which one is living. Says there are no moral absolutes. Kantian says there are ethical absolutes. Utilitarian says it depends on the outcome of instituting ethical relativism in a particular society. If produces a net benefit for most people, it is acceptable. If not, it is not acceptable. Argument from cultural differences Locke Says we need a civil gov. to protect our property. Utilitarian Ethics 21. Einstein and your elderly parents are in a sinking boat. Utilitarians would say save Einstein because he would contribute to more aspects . Ethic if care John Stuart Mill Observe his way of thinking. Bernard Williams Can utilitarians take into an account of integrity. Experience Machine Does it matter if it is real or not if we did experience it? BBA pg. 69-90 (ch.2 contd) What is Wrong- and What is Right- with Stakeholder Management (John R. Boatright) Stakeholder management is generally contrasted with the standard form of corporate governance, in which shareholder interests are primary. Where stakeholder management goes wrong- failure of recognizing that a business organization in which managers act in the interest of the shareholders, at the same time, benefits all stakeholder groups. o The market is able to provide the desired benefits to the various stakeholders groups, they have no need for management to explicitly consider their interests in making decisions. Restated: Stakeholder management goes wrong by: 1) Failing to appreciate the extent to which the prevailing system of corporate governance, marked by shareholder primacy, serves the interests of all stakeholders. 2) Assuming that all stakeholder interests are best served by making this the task of management rather than using other means. 2 forms of Stakeholder Management: o First, corporations have stakeholders in the sense of groups who can affect or who are affected by the firms activities. Any successful corporation must manage its stakeholder groups, if for no other reason than to benefit the firm. To manage stakeholder relations is not necessarily to serve each groups interest, but to consider their interests sufficiently to gain their corporation. Managers role- not to coordinate the contributions of stakeholders, but to inspire them to put forth their best efforts in a joint effort to create valuable products and services. o Second, managers also have obligations to treat each stakeholder group in accord with accepted ethical standards. o The prevailing system of corporate governance may be expressed in 3 related propositions: 1) shareholders ought to have control 2) that managers have a fiduciary duty to serve shareholders interests alone 3) the objective of the firm ought to be to maximize shareholder wealth. 22. o The main thesis of stakeholder management can be stated by modifying each of these propositions: 1) stakeholders have a right to participate in corporate decisions that affect them 2) managers have a fiduciary duty to serve the interest of all stakeholder groups 3) the objective of the firm ought to be the promotion of all interests and not those of shareholders alone. o The issues in these 2 propositions are the heart of corporate governance. o Stakeholder management goes wrong when it is developed as an alternative system of corporate governance. Not only is it inferior to the prevailing system, but it involved crucial mistakes. o On the other hand, stakeholder management as a guide for managers is helpful to managers and constitutes a valuable corrective to some common misunderstandings of the argument for stockholder management. An Economic Approach to Corporate Governance o Individuals will frequently realize a greater economic return by cooperating with others in productive activity than by participating in a market alone. The Purpose of the Firm o There is a greater return on assets that are contributed to joint production. Because of this greater return, individuals with assets would voluntarily agree to contribute their assets to production in a firm. o The purpose of a firm is to enable individuals with economic assets to realize the full benefits of joint production. o A firm serves the interests of all participants in much the way a market does. A market is a device that enables everyone to advance their interests by making mutually advantageous trades. Similarly, a firm enables those with assets to engage in joint production and thereby realize a greater gain than they would alone in a market. The Role of Governance o Governance can be understood as the contractual agreements and legal rules that secure each input providers claim for the return due on that input providers contribution to the productivity of the firm. o Every asset contributed to joint production will be accompanied by a governance structure of some kind, which may vary depending on the features of the asset provided. Shareholder Governance o Shareholders are whatever group has the rights to control and to receive the profits of an enterprise. o Why is this group equity capital providersand not say employers or customers or all stakeholders? Equity capital is money provided to a firm in return for a claim on profits. Equity capital providers buy the future profits of a firm; or alternatively, in order to raise capital, a company sells its future profits to investors. o Since future profits are risky, investors not only provide capital but also assume much of the risk of the firm. 23. o The willingness of shareholders to bear their residual risk-which is the risk that results from having a claim on residual revenues rather a fixed claim- benefits all other input providers. As long as the firm is solvent- can pay all fixed obligations- then the claim on these groups are secure. o Why equity capital providers should also have control and the right to have the firm run in their interest? Control is the most suitable protection for their firm-specific asset. By contrast, the right of control is of little value to other input providers or stakeholder groups because their return is secure as long as a firm is solvent, not maximally profitable. o That equity capital provides control is in the best interests of the other stakeholder groups. First, everyone benefits when business organizations are maximally profitably because of greater wealth creation. Second, every nonshareholder group benefits when shareholders assume much of the risk of an enterprise because their return is all more secure. Third, without the right of control, quality capital providers would require a greater return to compensate for the increased risk to their investment. o Bottom line is that equity capital providers are usually (but not always) the shareholders of a firm, the group with control, because control rights are the best means for protecting their particular firm-specific asset. Comparing Stockholder and Stakeholder Management: o At one point, stockholder and stakeholder management are in agreement: the purpose of the firm is to enable each corporate constituency or stakeholder group to obtain the maximum benefit from their involvement. o 2 questions: o One question is how best to protect or serve each stakeholder groups interest? On the economic approach, what each group is due is a return on the assets that they provide for joint production, and each asset is accompanied by a governance structure that protects this return. The distribution of the benefits or wealth that firms create is largely determined by the market, and the main concern of governance is to ensure groups receive what the market allots. Should they rely on management to best serve the interests of nonshareholder groups or better served by other means? o Second question is what are the interests of each group that ought to be protected or served? Stakeholder management advocates contend that even if the market return due to each group is adequately protected by other means, they are sometimes due more, and that these additional nonmarket benefits can be best provided by management. Instead of using the market alone to make this determination, stakeholder management would make this a task of management. Protecting Stakeholder interests: o First, management decision making is a weaker form of protection than legally enforceable contracts or legal rules. 24. Shareholders are forced to rely on the protection of a fiduciary duty because of the problems of uncertainty and complexity that prevent them from utilizing fully specified contracts or precise legal rules. o Second, *Shareholders saying corporate decision making is more efficient and effective if management has one single, clearly defined objective, shareholder wealth maximization which if pursued, increases the total wealth creation of the firm. o What the argument for stockholder management shows, however, is that reliance on management decision making, as stakeholder management proposes, is but one means and that many other means are available. o To benefit all stakeholder groups, this outcome is not a task for management. o It is an outcome that should be achieved by some means, but the alternative of contractual agreements and legal rules, which do not involve management decision making, may secure this end more effectively. o *Stockholder management believes that nonshareholder interests are usually better protected or served by various contractual agreements and legal rules rather than a reliance on management decision making. Securing Fairness for Stakeholders o Critics say stockholder management may be efficient, but its not fair. o 3 points: No reason to believe that contractual agreements and legal rules are any less adequate to ensure fairness than they are to secure each groups rightful return. Ensuring fairness in the distribution of wealth is not up to managers. Its a mistake to pursue fairness by means of corporate governance Corporate governance- is the contract that the shareholders make with the firm. Decency Means More than Always Low Prices: a Comparison of Costco to Wal-Marts Sams Club. By Wayne F. Cascio - Costco is the lowest-cost provider yet they pay the highest wages. - Treat employees very well. Turnover is only 17% - Costco works well in collective bargaining with unions. - Notes Stockholders Management Owners purpose was to maximize profit Stakeholders Management Stakeholders are people who have a stake in the firm. People whom the firm depends on for success. Employees, community, suppliers, customers, managers and stockholders. Managers job is to maximize the interests of the owners. Friedman 25. Owners are the principals. Executives are the agents and are obligated to act in the interest of the owner. If executives use funds non-consistent with the interests of the owners, it is not ok. They are constraints in pursuing profits. Not everything goes. o Ex. paper mill example. Going above and beyond environmental laws, Friedman would view this as corporate social responsibility and he wouldnt agree. It should be up to the owners. Managers do not have the right to make that choice. Freeman Boatright Treat people ethically and fair. Suppliers, customers, etc. are protected by contracts. Best way to serve the interest of all the stakeholders is to serve the interest of the owners. Owners are the only ones not protected by contracts. Look after the interests of the owners, we would indirectly look after all the stakeholders as well. Better than if we tried to attend to each one. Utilitarian argument. Cascio He compares Sams Club to Costco. Better to work for Costco because they get better benefits and treatments. Wall Street is having trouble with the fluctuation in the prices of stocks. Worried their operating costs will get too high. Stockholders argument. Stakeholders. Lower turnovers, which costs money. If you calculate these costs, you actually spend more money than retaining employees. Good ethics is good business. Dont have to squeeze employees to have high profits. Treat your employees well and it will generate higher profits. BBA pg. 101-104 Ch.2 Cases 3 and 4 Case 3 Merck and River Blindness - Merck is a pharmaceutical producer and supplier who created a cure for river blindness. They knew the product would be expensive to develop and test, but the Merck research scientists argued the drug was far too promising from a medical stand point to abandon. Once it was approved for human use, they explored third party payment options. They asked many organizations for donations but they were unsuccessful. Finally, Merck executives decided they would manufacture and distribute the drug for free. The companys decision was based off their core values. Case 4 H.B. Fuller in Honduras: Street Children and Substance Abuse - Kativo Chemical Industries was a wholly owned subsidiary of H.B. Fuller located in Honduras. They sold glue called Resistol, which was being abused by children on the streets of Honduras. Scientists found that the oil of mustard was a carcinogen and was being used in 26. the glue. A company policy of theirs was to give great autonomy to their foreign-owned subsidiaries. Stockholders of the corporation were asking how H.B.Fuller could still continue to sell this glue when it was harming and contaminating so many customers. Executives new headquarters should become actively involved in addressing the problem but due to the nature of the issue and the corporate policy of local responsibility, what should headquarters do? Paper Assignments Paper 1: The bulk of paper should be argument for that position along with an opposing argument to the position you are taking. It should be an issue for debate. Dont necessarily need to support what actually happened, rather what you should have done. Majority of paper should be used to defend your position on the issue. First paragraph should present the issue. Was Merck morally obligated to distribute the drug for free? o Start with the general utilitarian premise- the greatest amount of good and the least amount of harm is the best way to go. 3 premises: 1. Start with a general principle: The act of creating the greatest net benefit for all concerned is morally required. 2. Developing and distributing Mectizanis morally required. 3. Developing and distributing Mectizan will result in the greatest good for all concerned HB Fuller case: o Company says they could educate the public about the dangers of the glue o Kantian approach: You cant stop the bad thing from happening but you can do something to help reduce the problem