Midterm Flashcards
Ethics
Analysis of the principles of right or wrong (moral standards) that govern
Descriptive Ethics
Involves describing, characterizing, and studying morality
Focuses on what is occurring
Normative Ethics
Demands a more meaningful moral anchor than just “everyone is doing it”
Focuses on what ought or should be occurring
Relativism across time & cultures
Morality changes with time and across cultures and corporations must adapt to meet modern standards of society to remain profitable.
Moral Relativism
Nobody is right or wrong. Everyone ought to tolerate the behavior of others even when large disagreements about morality exist.
Moral Absolutism
There are universal ethical standards.
Universal Declaration of Human Rights
Milestone document in the history of human rights as it sets for the first time in history fundamental human rights to be universally protected
Conventional Approach
Moral conduct (act that has been committed) compared with Moral standards (principles of what is good and bad)
Moral reasoning: Outcome of applying standards to conduct
Moral standards in business
Respect for authority structure
Loyalty to organization
Performance/results driven
Conformity to principles and practices
Behavioral Ethics
A field of social scientific research that seeks to understand how people actually behave when confronted with ethical dilemmas. It refers to behavior that is judged according to generally accepted norms of behavior
Danger of Conventional Approach
Biases: Cognitive biases are systematic patterns of deviation from norm and/or rationality in judgment
o The “Self-Serving” Bias: To pick and choose which source of norms one wishes to use based on what will justify current actions or to maximize self-return
o Monkey Business Illusion
Ethical Decision-Making Levels
- Individual level
- Organizational level
- Business system level
Ethical Displacement
Identification of the appropriate level for a decision is crucial
Ethics and the Law
Law covers the basics, ethics covers more
Ethics, Economy, and the Law
Tradeoff between legality, morality, and profitability
Utilitarianism
Moral worth of actions is determined by their consequences
* Ethicality of actions is irrelevant
* Actions and policies should be evaluated based on the benefits and costs they impose on society
* The only morally right action in any situation is that whose utility is greatest by comparison to the utility of all other alternatives
* Example: Robin hood good
Disadvantages of Utilitarianism
- Human lives have a price tag
- Ignores legality of actions
- Allows for discrimination of people if outcome is good
Cost-Benefit Analysis
Use of monetary units (instead of pleasure or pain) to express the consequences of various alternatives
* Utilitarianism
* Any project in which the dollar amount of benefits exceeds dollar amount of costs ought to be chosen
* Example: Health insurance covers expensive medicine for young people before old or disabled people
Kantian Ethics
Actions are primary from a moral standpoint
* An action is socially acceptable if it can be universalized
* Universalizability: “What if everyone did that?”
* Reversibility: “How would you like it if someone did that to you?”
* People should be treated as ends and never purely as means to the ends of others
* Safeguards human rights, legality, integrity of people
* Example: Duty to tell the truth regardless of consequences; Robin Hood bad
How are Utilitarianism and Kantian similar?
Both focus on universality of actions and respect for people
Virtue Ethics
“What kind of person should we be?”
* Morality is about acquiring and practicing characters traits that conduce to a good life
* Doesn’t focus on ethicity of actions or their ends
* Example: Robin Hood questionable
*Not in competition with Deontological nor Utilitarian approach- An additional tool
Justice Theories
Focus on the attainment of a just distribution of economic goods and services
* A just distribution is one that is considered fair and equitable
* John Rawls argued that all economic goods and services should be distributed equally except when an unequal distribution would work to everyone’s advantage
* Example: Socialism countries; Robin Hood
Internationalization
Producing in one country but selling locally or vice versa
Globalization
The shift toward a more integrated and interdependent world economy
Integration of
technology, markets, politics, cultures,
labor, production, and commerce
*Both process and result of integration
Globalization of Markets
The merging of historically distinct and separate national markets into one huge global marketplace leads to creating of global products i.e. McDonalds
Globalization of Production
Sourcing of goods and services from locations around the globe to take advantage of national differences in the cost and quality of factors of production (labor, energy, land, and capital)
Macro Drivers of Globalization
- Technological Changes
o Internet
o Logistics 4.0: Efficient transportation i.e. Amazon Prime & Supply chain i.e. Automation - Decline of Barriers to Trade
o Decrease on import taxes
o Lower trade barriers enable companies to view the world as a single market and establish production activities in optimal locations
o Made globalization of markets and production a theoretical possibility. Technological change made it a tangible reality. - Openness to Foreign Investments: Free circulation of capital worldwide
o Used to be forbidden from investing in other countries i.e. China
o Most common: Investments from Western countries to Eastern countries & Eastern countries to third-world countries BUT vice versa can happen
Current Barriers to Trade
Technical barriers- Security reasons
o Sanitary and Phyto-sanitary Measures
o Most protectionist country: United States- Most important customers worldwide so want to keep them protected and safeMost protectionist country: United States- Most important customers worldwide so want to keep them protected and safe
Growth of Multinational Enterprises (MNEs)
Corporations that own or control production or service facilities in multiple countries, normally outside the country of the consumer
Benefits of MNEs
o Low costs of product enable MNE to sell its products for lower prices and make a higher income
o Less stringent laws and regulations in the host country compared to the home country makes it easier to operate
Cons of MNEs
MNEs become so powerful that they can influence local governments and politics because they are dependent on their business i.e. Investment banks
Fair Trade Pattern
An aim for fairer pricing
In a traditional trade pattern, more middlemen take more cuts
Tax Havens
Just as companies look for the cheapest place to manufacture, they also have subsidiaries in areas with lower taxes
Effects of Growth of Multinational Corporations
- Resource transfer and cultural effects
o Cultural: Local culture becomes more aligned with multinational companies’ business approach - Employment effects
o Offshore production vs. Freeing resources - Balance of payment effects
- Effects on competition and economic growth
Dark Sides of Globalization
- Crime and corruption
- Economic poverty and child slave labor
- Global digital divide: Different levels of access to technology
- Westernization (Americanization) of cultures
- Loss of nation-state sovereignty: Destroys ability of governments to protect the interests of their citizens against powerful multinational corporations
Left’s Opinion on Globalization
BAD
Communism is about power to people. Capitalism is about power to corporations
Right’s Opinion on Globalization
BAD
‘Make America Great Again’: American jobs, American production
3 Features of a Market System
- Private ownership of goods and services
- Voluntary exchange, individuals and firms are free
- Profit motive, mutually advantageous trades
Market Structures depend on…
o # of buyers and sellers
o If the good is commonly available
Perfect Competition
Many sellers selling the exact same product without knowledge of the other sellers’ prices
Theoretical market
Power to customers
Imperfect Competition (Monopolistic Competition)
Many sellers, Availability of the good
Sellers can look at each other’s prices
a. More differentiation in product, marketing, prices, etc. to try to win competition
b. Some control over prices
c. *Customer has most power
Oligopoly
Fewer sellers
Ability to see each other’s prices
More information exchange between sellers
a. More control distribution over of product & prices
b. Profit-sharing
c. Specialty products allow for higher prices
d. Similar products
e. Pharmaceuticals sector, Fashion sector
f. Power to sellers
Monopoly
One seller who sells when, if, for however much they want
a. Government regulation prevents ability to play God- Price set at high boundary
b. Energy sector, Weapons sector, Pharmaceuticals sector, Utilities sector
c. Seller has most power
Sellers will tend to “segregate” customers to create situations similar to an oligopoly/monopoly
Robert Nozick’s Theory of Markets
“Market outcomes are just, no matter how unequal they may be, as they result from voluntary transactions.”
John Rawl’s Theory of Markets
“Market outcomes may need to be altered when they lead to unjust levels of inequality.”
Price differentiation
Charge different customers different prices for the same product
Benefits of price differentiation
o Allows needed uneconomic businesses (charity)
o Makes possible businesses with high initial costs and subsequent marginal costs
o May have positive redistribution effect
o Higher welfare (more access to products)
Benefits for companies of price differentiation
o Higher revenues
o Higher profits
o Setting of revenues to beat competitors
o Optimization of spare capacity
o Economies of scale
o Company can get even more monopolistic
Conclusions about Price Discrimination
o Whenever available alternatives are only price discrimination or no product at all, price discrimination is not unethical
o If price inequality generates more welfare than unitary pricing, it is ok
o Concern is not on the price inequality per se, but in the fairness of the underlying rationale for price inequality i.e. race, age, gender discrimination
o There is not unfairness if it can be proved that the price differentiation has a market justification
Versioning
Different standards of quality
Sold in different marketplaces, through different channels, in different times
* Price differentiation perfectly legal
Price skimming
Sold at a very high price and then gradually lowered
i.e. Apple lowers prices of old iPhone models
Selling discrimination
Gray area in which private companies technically can choose not to serve customers, discount customers, etc. unless there is regulation
Illegal Price Setting Practices
- Deceptive pricing: “Limited offer” that goes on forever
- Explicit collusion: Agreements between competitors is illegal under Sherman Anti-Trust Act but vertical price fixing between manufacturers and distributors is ok
- Price gouging: Illegal under state law
- Predatory pricing: Attempt to monopolize
- Bid rigging: Illegal under Sherman Anti-Trust Act
Shareholders
Owners of company with voting rights and who receive dividends
Shareholder Model
The only social responsibility of business is to increase profits so long as the company stays within the rules of law
Principal-Agent Model
Relationship between directors’ control and shareholders ownership
Stakeholder Model
Managers must take into account the interests and role of any group or individual who can affect or is affected by company operations
* Business became more complicated
* Different stakeholders are recognized by different states
Stakeholderism is the continuation of Shareholderism- No real opposition
Shareholderism was a sign of the times, and the world has gotten more complicated.
Why do companies embrace Stakeholderism?
Business is positively affected by customer perception of positive reputation, employee motivation, supplier stability, shareholder conscience investment
Pluralistic Stakeholderism
- Value creation is a collective effort among stakeholders
- Companies should redistribute to stakeholders i.e. Give back to fund supporting the future
Results of Stakeholderism or Shareholderism
o Shareholder theory prevails with clear link between management pay and stock performance
o Few cases where management pay is linked to stakeholder metrics
o Companies take into account value creation but until CEO pay is fully aligned, we may not be to stakeholderism yet
Stakeholders Engagement Cycle
- Identify the stakeholders
- Document their needs and expectations
- Analyze their impact/influence
- Define engagement strategy
- Take action and manage engagement
- Revise and repeat
Stakeholders Power/Attention Map
- Low Influence, Low Interest: Minimum regular contact
o e.g., Walmart customer - Low Influence, High Interest: Anticipate and meet needs
o e.g., Environmental NGO - High Influence, Low Interest: Keep informed
o e.g., Investor- More interested in financials than business operations - High Influence, High Interest: Manage and involve
o e.g., Joint venture partner- Microsoft and Intel
o Top managers deal with it
Materiality Matrix
Measures similarities in importance between stakeholders and company
Corporate Social Responsibility (CSR)
A commitment by organizations to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as the local community and society at large
Arguments against CSR- Similar to shareholder model
- Maximization of profits (Friedman)
- Costly- At least in the short term
- Business not equipped
- Dilutes business purpose
- Too much pressure from society already
- May limit global competitiveness
Arguments in favor of CSR
- Commitment to society’s values
- “Gives back” to society
- Promotes social cohesion (e.g. Employees’ welfare and diversity)
- Higher profits by doing the right thing
Carroll’s CSR Pyramid- The 4 Responsibilities
- Economic- Do it for profit
* Basic level
* Required - Legal- Obey the law
* Company may choose to follow or not
* Required - Ethical- Do the right thing, avoid harming
* i.e., Business choice to support communities, protect environment
* e.g., Recyclable packaging
* Expected - Philanthropic- Contribute to community
* i.e., Outside of business realm
* e.g., Giving to charity; Feeding the homeless
* Discretionary
H&M Case
Ultimately, choices are economic level on pyramid because cheap labor and economic benefits from using sustainable materials
Corporate Social Responsibility Stances
- Laissez-faire: Legal compliance; Make a profit, pay taxes, and provide jobs
* Construction - Enlightened self-interest: Sound business sense
* i.e., Retail is more enlightened than construction - Forum for stakeholder interaction: Sustainability or triple bottom line
* Pharmaceutical companies give patents for free - Shaper of society: Social and market change
* Pharmaceutical companies with COVID vaccine
From CSR to Sustainability
Integrating sustainability is a natural extension of stakeholder theory, including the ecological system as a stakeholder from which the firm obtains resources and to which it bears responsibility for its impacts, both positive and negative.
