Managerial Economics and Organizational Architecture, 5e Managerial Economics and Organizational Architecture, 5e Chapter 22: Ethics and Organizational Architecture McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.

Managerial Economics and Organizational Architecture, 5e Ethics and Organizational Architecture Ethics and organizational architecture are closely related Corporate performance evaluation systems, reward systems and assignment of decision rights can be designed to encourage ethical behavior 22-2

Managerial Economics and Organizational Architecture, 5e Ethics and Choices Individuals choose among alternatives to maximize their well-being Business ethics seeks to proscribe behaviors deemed inappropriate for firms –Taking gifts –Bribing government officials –Misrepresenting data –Discriminatory practices –Boycotting third parties 22-3

Managerial Economics and Organizational Architecture, 5e Business Ethics and Corporate Policy What is ethics –No consensus –Corporations are not ethical, individuals are –Whose interests do managers serve? 22-4

Managerial Economics and Organizational Architecture, 5e Value Maximization Economic Darwinism –By maximizing a firm’s value, all stakeholders can share a bigger pie –Only those firms that are able to produce quality products at low costs will survive Market failure and regulation –Result in misallocation of resources –May result in regulation 22-5

Managerial Economics and Organizational Architecture, 5e Value Maximization Compensating differentials Corporate Social Responsibility –Firms should engage in activities that fall into this category up to the point where the marginal benefit equals the marginal costs 22-6

Managerial Economics and Organizational Architecture, 5e Corporate Policy Setting In dealing with questions with potentially contentious ethical implications firms –Should use input from diverse stakeholders –Be aware of different legal standards in countries –Understand business norms and standards –Assess the public’s reaction 22-7

Managerial Economics and Organizational Architecture, 5e Mechanisms for Encouraging Ethical Behavior Ethical lapses often arise from conflicts of interest The following help mitigate these problems –Repeat sales –Warranties –Third-party monitors –Disclosure –Ownership structure 22-8

Managerial Economics and Organizational Architecture, 5e Contracting Costs: Ethics and Policy Implementation Trade-offs between monitoring and shirking –Warranties reduce risk Prices customers pay will be lower if shirking is expected Altruism economizes on the costs of policing and enforcing contracts 22-9

Managerial Economics and Organizational Architecture, 5e Codes of Ethics How do firms control ethical behavior? –Have employees voluntarily adopt standards –Write contracts that align interests of those involved to behave ethically –Write codes of ethics and provide training Why are they effective? –Altering preferences –Altering incentives 22-10

Managerial Economics and Organizational Architecture, 5e Codes of Ethics Education –Employees may uncertain of ethical standards Corporate culture 22-11