1. Ethics and the Conduct of Business
Eighth edition
Chapter 2
Ethical Decision Making
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2. Modules Introduction: Ethical Decision Making 2.1: Market Ethics
2.2: Roles, Relationships, and Firms
2.3: Ethical Reasoning
Conclusion: Ethical Decision Making
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3. 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
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4. 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
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5. 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
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6. 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
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7. 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
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8. Figure 2.1: Prisoner’s dilemma
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9. 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
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10. 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
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11. 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
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12. 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
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13. 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
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14. 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
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15. 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
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16. 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
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17. Conclusion: Ethical Decision Making
Two parts of business ethics
Roles and relationships
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