Ethics and the Conduct of Business Eighth edition Chapter 2 Ethical Decision Making Copyright © 2017, 2012, 2009 Pearson Education, Inc. All Rights Reserved

Modules Introduction: Ethical Decision Making 2.1: Market Ethics 2.2: Roles, Relationships, and Firms 2.3: Ethical Reasoning Conclusion: Ethical Decision Making Copyright © 2017, 2012, 2009 Pearson Education, Inc. All Rights Reserved

Learning Objectives 2.1: Recognize the features of the market system, the ethics of market transactions, and the problems created by imperfect market conditions 2.2: Identify the duties and obligations associated with fundamental business roles and relationships in markets and firms 2.3: Describe the philosophical and psychological approaches to ethical reasoning and the principles that constitute a moral framework for business conduct Copyright © 2017, 2012, 2009 Pearson Education, Inc. All Rights Reserved

Introduction: Ethical Decision Making A buyer and seller come together to trade Business activity involves roles and relationships Seven basic principles of ethical decision making Copyright © 2017, 2012, 2009 Pearson Education, Inc. All Rights Reserved

2.1: Market Ethics (1 of 4) 2.1.1: The Market System Objective: Recognize the features of the market system, the ethics of market transactions, and the problems created by imperfect market conditions 2.1.1: The Market System Features Justification Market outcomes 2.1.2: Ethics in Markets Self-interest Morally free zone Ethics for imperfect markets 2.1.1: The Market System Point 1- Features Private ownership Voluntary exchange Profit motive Point 2- Justification Efficiency Welfare enhancement Liberty Limited and spontaneous order Information gathering Point 3- Market outcomes Market transactions produce greater gains for some than others Market returns are results of risks taken Must address justness of market outcome 2.1.2: Ethics in Markets Point 1- Self-interest Accepted and justified motive of trading Gains by mutual agreement or consent Point 2- Morally free zone Everyone completes exchange by fulfilling terms of agreements Transfer by force is theft or expropriation Transactions result in wrongful harm as a result of wrongful act Failure to fulfill required conditions leads to market failure Point 3- Ethics for imperfect markets Observing agreements or contracts Avoiding force and fraud Not inflicting wrongful harm Acting responsibly in cases of market failures Copyright © 2017, 2012, 2009 Pearson Education, Inc. All Rights Reserved

2.1: Market Ethics (2 of 4) 2.1.3: Breaches and Fraud Objective: Recognize the features of the market system, the ethics of market transactions, and the problems created by imperfect market conditions 2.1.3: Breaches and Fraud Implicit Incomplete Lack remedies Fraud and manipulation 2.1.4: Wrongful Harm Obligations of morality Due care and negligence 2.1.3: Breaches and Fraud Point 1- Implicit To avoid legalism and to keep flexibility Subject to disagreements Point 2- Incomplete Transaction is too complex and uncertain Impossible to draft in detail Point 3- Lack remedies Contracts fail to specify remedies in case of breach Firms leave remedies for breach implicit Point 4- Fraud and manipulation Misinterpretation Materiality Intent to deceive Reliance Harm 2.1.4: Wrongful Harm Point 1- Obligations of morality Market participants deserve compensation when they suffer loss Companies can be sued by anyone who suffers injury from a defective product Point 2- Due care and negligence Manufacturers should exercise due care and not negligence Companies should avoid intentional harms Copyright © 2017, 2012, 2009 Pearson Education, Inc. All Rights Reserved

2.1: Market Ethics (3 of 4) 2.1.5: Market Failure Conditions Objective: Recognize the features of the market system, the ethics of market transactions, and the problems created by imperfect market conditions 2.1.5: Market Failure Conditions Externalities Public goods Collective choice 2.1.5: Market Failure Point 1- Conditions Perfect competition Competitions are imperfect to some degrees Homo economic us is faulty Satisficing Point 2- Externalities Negative externality fails to record a cost of production Positive externality fails to reflect a benefit Point 3- Public goods Commodity used by everyone Provided by governments Little profit in public goods Point 4- Collective choice Aggregation of large number of individual choices Would be rational and benefits the society Copyright © 2017, 2012, 2009 Pearson Education, Inc. All Rights Reserved

Figure 2.1: Prisoner’s dilemma Copyright © 2017, 2012, 2009 Pearson Education, Inc. All Rights Reserved

2.1: Market Ethics (4 of 4) 2.1.6: Summary of Market Ethics Objective: Recognize the features of the market system, the ethics of market transactions, and the problems created by imperfect market conditions 2.1.6: Summary of Market Ethics To address problems in imperfect markets Laws 2.1.6: Summary of Market Ethics Point 1- To address problems in imperfect markets Ethics is necessary in imperfect markets Problems include breaches, fraud, torts, market failures, and market outcomes Point 2- Laws Contract law addresses breach of contract Law of fraud and torts addresses fraud and torts Government regulation and legislation addresses market failure and outcomes Copyright © 2017, 2012, 2009 Pearson Education, Inc. All Rights Reserved

Table 2.1: Ethics in Markets Problems Elements Solutions Violation of agreements (breaches of contract) Breaches of contract often result from agreements that are implicit, incomplete, and lack immediate remedy. Contract law Principles for promise keeping Misrepresentation of information (fraud) Fraud involves not only misrepresentation of information but also materiality, intent to deceive, reliance, and harm. Anti-fraud law Principles for honesty Wrongful harm of others (torts) Torts are the intentional or negligent violation of rights in such matters as health, safety, privacy, property, and discrimination. Tort law Principles for due care Market failures (inefficiency) Market failures result in inefficiency due to low competition, externalities, public goods, and collective choice problems. Government regulation and legislation like antitrust law, consumer law, employment law, securities law, environmental law, taxation Special use of market Mechanisms Trustworthy behavior Table 2.1: Ethics in Markets Point 1- Problems Violation of agreements Misrepresentation of information Wrongful harm of others Market failures Point 2- Elements Agreements that are implicit, incomplete, and lack immediate remedy Includes misrepresentation of information, intent to deceive, reliance, and harm Intentional or negligent violation of rights Inefficiency due to low competition, externalities, public goods, and collective choice problems Point 3- Solutions Contract law and principles for promise keeping Anti-fraud law and principles for honesty Tort law and principles for due care Government regulation and legislation, special use of market mechanisms, and trustworthy behavior Copyright © 2017, 2012, 2009 Pearson Education, Inc. All Rights Reserved

2.2: Roles, Relationships, and Firms (1 of 2) Objective: Identify the duties and obligations associated with fundamental business roles and relationships in markets and firms 2.2.1: Agents and Principals Agents Duties of agents 2.2.2: Fiduciaries and Professionals Fiduciary Fiduciary duty Fiduciary relationship Defining features of profession Standard of profession 2.2.1: Agents and Principals Point 1- Agents Acts on behalf of principal Relationship is called agency relationship Employees are agents inside a firm Point 2- Duties of agents Work as directed Perform tasks with competence and care Act in interest of the principal within the scope of their authority 2.2.2: Fiduciaries and Professionals Point 1- Fiduciary Cares for another’s property and makes discretionary judgment Provides valuable services for those who cannot manage their assets Point 2- Fiduciary duty Act in the interest of the beneficiary No gaining of material benefit Point 3- Fiduciary relationship Trust Confidence Point 4- Defining features of profession Specialized body of knowledge High degree of organization and self-regulation Commitment to public service Point 5- Standard of profession Technical standards of competence Ethical standards Copyright © 2017, 2012, 2009 Pearson Education, Inc. All Rights Reserved

2.2: Roles, Relationships, and Firms (2 of 2) Objective: Identify the duties and obligations associated with fundamental business roles and relationships in markets and firms 2.2.3: Firms Economic view Legal view Sociological view 2.2.4: Summary of Roles, Relationships, and Firms Divided into two ethics Obligations Myriad roles and relationships 2.2.3: Firms Point 1- Economic view Black box Ways of organizing economic production in market and firms Business ethics include ethics of transaction and ethics of roles and relationships Point 2- Legal view A firm is a corporation Corporation is separate from any individuals Property rights theory The modern corporation and private property Social institution theory Point 3- Sociological view Organizational ethical climates Organizational justice Organizational harms 2.2.4: Summary of Roles, Relationships, and Firms Point 1- Divided into two ethics Ethics of market Ethics of roles and relationships Point 2- Obligations Constitute much of ethics Role and relationship obligations are determined by agreement or contract Point 3- Myriad roles and relationships Complex set of obligations Managers must attend to ethical climate, justice within organizations Copyright © 2017, 2012, 2009 Pearson Education, Inc. All Rights Reserved

2.3: Ethical Reasoning (1 of 2) Objective: Describe the philosophical and psychological approaches to ethical reasoning and the principles that constitute a moral framework for business conduct 2.3.1: Philosophical Accounts Moral point view Features of moral point view 2.3.2: Psychological Accounts Psychologist’s conclusion Daniel Kahneman’s perspective Lawrence Kohlberg’s perspective 2.3.1: Philosophical Accounts Point 1- Moral point view Standpoint for ethical decisions How ethical decisions should be made What considerations are relevant Point 2- Features of moral point view Willingness to seek out and act on reasons Requirement to be impartial 2.3.2: Psychological Accounts Point 1- Psychologist’s conclusion Decision making results in behavior Decisions and consequent behavior based far less on reasoning Point 2- Daniel Kahneman’s perspective System 1 thinking System 2 thinking Point 3- Lawrence Kohlberg’s perspective People develop cognitive ability through a series of three levels Takes place from infancy to adulthood Copyright © 2017, 2012, 2009 Pearson Education, Inc. All Rights Reserved

Table 2.2: Moral Development According to Kohlberg Level Stages Ethical Reasoning Pre-Conventional Morality Obedience and Punishment Orientation 2. Self-Interest Orientation People are focused on themselves and incapable of other-oriented ethical reasoning or behavior. Conventional Morality 3. Good Interpersonal Relations 4. Authority and Social Order Orientation People* are mindful of others, understand rules and laws, and conform to societal expectations. *Most adults Post-Conventional Morality 5. Social Contract and Individual Rights Orientation 6. Universal Principle Orientation People* can engage in mutually advantageous cooperation, understand the value of abstract moral principles, and practice sophisticated ethical reasoning. *Fewer than 20% of adults Table 2.2: Moral Development According to Kohlberg Point 1- Level Pre-conventional morality Conventional morality Post-conventional morality Point 2- Stages Obedience and punishment orientation Self-interest orientation Good interpersonal relations Authority and social order orientation Social contract and individual rights orientation Point 3- Ethical reasoning People are focused on themselves People are mindful of others People can engage in mutually advantageous cooperation Copyright © 2017, 2012, 2009 Pearson Education, Inc. All Rights Reserved

2.3: Ethical Reasoning (2 of 2) Objective: Describe the philosophical and psychological approaches to ethical reasoning and the principles that constitute a moral framework for business conduct 2.3.3: Framework for Reasoning Awareness of issues Identifying issues Resolving issues 2.3.3: Framework for Reasoning Point 1- Awareness of issues Necessary for application of any framework Consideration of harm done Point 2- Identifying issues Welfare Duty Rights Fairness Honesty Point 3- Resolving issues Questions to be asked Tests of ethical decisions Copyright © 2017, 2012, 2009 Pearson Education, Inc. All Rights Reserved

Figure 2.2: Candor, Care, Loyalty Point 1- Candor Fiduciary should disclose all information that the beneficiary would consider relevant Examples for violation of duty of candor Point 2- Care Fiduciary should manage what is entrusted with due care Example of breach of fiduciary duty Point 3- Loyalty Fiduciary should act in the interest of the beneficiary Fiduciary should avoid taking advantage of this relationship Copyright © 2017, 2012, 2009 Pearson Education, Inc. All Rights Reserved

Conclusion: Ethical Decision Making Two parts of business ethics Roles and relationships Copyright © 2017, 2012, 2009 Pearson Education, Inc. All Rights Reserved