Chapter 4: The Ethical Firm Flashcards
…. is the constraint that forces discipline on a firm, rather than defining its ….
Profit
Purpose
Who propounded the nostrum that the sole purpose of a firm is to make profit?
Milton Friedman
Between “the primary purpose of business should be to make ….” versus “Making a profit should be only one …… , - three to one to the former.
profit
consideration
Our societies have fractured from national based identities to skill based identities.
A microcosm of this process is that the peer group of the CEO has shifted from being with the fellow …. in his company to being with fellow ….. in other companies
Workers
CEOs
…..-…. performance in companies incentivised by highly geared pay.
Hence why CEOs pay increase ten fold compares to workers - tied to indicators of ….-…. performances
Short term x2
If a CEO has to drive up quarterly profits, how can it be done? Option 1 is build a company like Johnson v Johnson, with good, trusting …… between the firm and its workers, its suppliers and its customers. Pays off but takes a … ….
relationships
Long time
If a CEO has to drive up quarterly profits, how can it be done? Option 2 is to cut all expenditures that are not essential for ….
Sounds good as should lead to efficiency but since past CEOs will have already cut the fat, the largest remaining category of expenditure that can be cut most easily without rapidly affecting production is ….
Will eventually hit output.
Investment rate of companies whose shares are …. is 2.7%, that of those whose shares are ….. held is 9%.
In UK, corporate investment in research and development is far below the average for advanced economies.
Production
investment
UK and USA
Traded
privately
If a CEO has to drive up quarterly profits, how can it be done? Option 3 is not to waste time on any real decisions about ….. or ….., but to rearrange the company’s accounts
No established rules as to how accounts are drawn up- enables profit to be increased, decreased or shifted from one subsidiary to another.
Scam becomes uncovered - Enron, Robert Maxwell of Mirror Group, and Philip Green of BHS. Each striped their companies of the …. fund, leaving thousands of employees impoverished
production or investment
pension
Public policy has gone wrong due to antiquated ideologies:
Ideology of the right assert faith in ‘…. ….’ and denigrates all policy intervention. Its solution is ‘get the government off the back of business: ….!’
the market
deregulate
Public policy has gone wrong due to antiquated ideologies:
Ideology of the left denigrates …. and condemns the managers of firms and funds as ….. Solution is state control of companies.
capitalism
greedy
Companies called …. are owned by a trust run in the interests of its workforce. Reflecting this, workers receive a substantial share of profits as an annual bonus.
The same percentage is paid to a shop-floor worker as to the …..
All have a say in how the company is run through a series of local, regional and national councils, electing 80% of the company’s governing council.
Mutuals
CEO
John Lewis is an example of a mutual company, owned collectively by people with a …. …. in it, such as workers, or customers, as opposed to shareholders.
direct interest
One fatal temptation of companies with mutuals is those in ownership and control are legally entitled to …. the company from its mutual status to a one whose owners have shares that can be sold on financial markets.
convert
In Britain, the scope of demutualisation was created by a change in 1986, underpinning the previous law had been social norms that recognised such a move as …..
unethical
Won’t work to tackle unethical firms:
- Regulation
Forget asymmetrical information between managers of company and fund manager, worry about asymmetrical information between these companies and the …
Regulation can only go so far due to election cycles, incentive to re-invest profits, government desire to receive high auction bids etc.
- Public ownership
regulator
