Corporate Finance - Chp. 24: Corporate Ethics

Question 1

• Key stakeholders

Answer 1

• Stockholders –
• Employees –
• Managers –
• Members of the board of directors –

Question 2

• External stakeholders

Answer 2

• Customers
• Suppliers
• Creditors
• Unions
• Governments

Question 3

• Shareholders looking for

Answer 3

• Return on invested capital
• Growth

Question 4

Principal – agent relationship (PAR)

Answer 4

• when one group delegates decision making to another group
  
  • can create problems because the group receiving the power (the agent) generally has an asymmetric information advantage over the group making the delegation (the principal)
  • PAR problem compounds with more layers of management

Question 5

• Controlling PAR problems through corporate governance procedures

Answer 5

• Guide the behavior of agents by setting goals and principles of behavior.
• Reduce the asymmetry of information.
• Lead to the removal of agents who misbehave and violate ethical principles.

Question 6

Friedman Doctrine

Answer 6

only social responsibility of a business is to increase profits “within the rules of the game,”

Question 7

Utilitarianism

Answer 7

• business must weigh the consequences to society of each of their actions and seek to produce the highest good for the largest number of people
  
  • Modern cost-benefit analysis is an application of this principal

Question 8

Kantian ethics

Answer 8

people are different from other factors of production; they are more than just an economic input and deserve dignity and respect

Question 9

Rights Theories

Answer 9

all individuals have fundamental rights and privileges, and that the pursuit of the utilitarianism’s greatest good does not trump these fundamental rights.

Question 10

Justice Theories

Answer 10

• just distribution of economic output. fair rules are decided ahead of time by participants who don’t know their own particular individual characteristics.
  
  • differencing principal - holds the unequal division must benefit the least-advantaged members of society

Question 11

Steps to ethical behavior

Answer 11

• . Promote those with strong personal ethics
• 2. Build an organization and culture that value ethical behavior highly.
• 3. Select leaders who will implement #2.
• 4. Establish a systematic decision process that incorporates a moral compass, rights theory, and Rawls’s theory of justice. Then turn this process into a series of yes or no decision tools
• 5. Appoint ethics officers
• 6. Establish strong corporate governance procedures
• 7. Show moral courage by supporting managers who make tough decisions consistent with good business ethics