BUA 220 ch.2

Startling Executive Decisions at American International Group

o American International Group (AIG) was once a respected, conservative worldwide insurance company based in New York. o Sold insurance that knew nothing about

• Kantian Ethics

o German philosopher Immanuel Kant (1724-1804), for example, identified some general guiding principles for moral behavior based on what he believed to be the fundamental nature of human beings o human beings are qualitatively different from other physical objects and are endowed with moral integrity and the capacity to reason and conduct their affairs rationally. o This categorical imperative-Individuals should evaluate their actions in light of the consequences that would follow if everyone in society acted in the same way.

• Accounting Requirements

o In the past, bribes were often concealed in corporate financial records. o second part of the FCPA is directed toward accountants. o All companies must keep detailed records that "accurately and fairly" reflect the company's financial activities o t have an accounting system that provides "reasonable assurance" that all transactions entered into by the company are accounted for and legal

• Religious Ethical Standards

o Judeo-Christian tradition, the Ten Commandments of the Old Testament establish fundamental rules for moral action o Other religions have their own sources of revealed truth

Executive Bonuses

o The industry had been profiting from the sale of risky assets to investors. Executives and others in the industry who had created and sold those risky assets suffered no liability—and even received bonuses. o Congress to include a provision in the American Recovery and Reinvestment Tax Act of 2009 o provision did not cap executive salaries but did severely restrict the bonuses that could be paid by firms that had received bailout funds under the Troubled Asset Relief Program (TARP).

• The Principle of Rights

o The principle that human beings have certain fundamental rights (to life, liberty, and the pursuit of happiness, for example) is deeply embedded in Western culture o principle of rights, or "rights theory," believe that a key factor in determining whether a business decision is ethical is how that decision affects the rights of other

Corporate Stock Buybacks

o Theory behind a stock buyback—the management of a corporation believes that the market price of its shares is "below their fair value. o Instead of issuing dividends to shareholders or reinvesting profits, management uses the company's funds to buy its shares in the open market, thereby boosting the price of the stock. o Who benefits? •Corporate executives who have been given stock options, which enable them to buy shares of the corporation's stock at a set price. When the market price rises above that level, the executives can profit by selling their shares.

• Stakeholder Approach

o a corporation would consider the impact of its decision on the firm's employees, customers, creditors, suppliers, and the community in which the corporation operates. o Reasoning: in some circumstances, one or more of these other groups may have a greater stake in company decisions than the shareholders do.

• Corporate Citizenship

o corporations should be good citizens by promoting goals that society deems worthwhile and taking positive steps toward solving social problems o companies are judged on how much they donate to social causes, as well as how they conduct their operations with respect to employment discrimination, human rights, environmental concerns, and similar issues.

• Prohibition against the Bribery of Foreign Officials

o first part of the FCPA applies to all U.S. companies and their directors, officers, shareholders, employees, and agents o prohibits the bribery of officials of foreign governments if the purpose is to induce the officials to provide business opportunities. o does not prohibit payment of substantial sums to minor officials whose duties are ministerial. These payments are often referred to as "grease," or facilitating payments. • accelerate the performance of administrative services that might otherwise be carried out at a slow pace. o Business firms that violate the FCPA may be fined up to $2 million. o Individual officers or directors who violate the act may be fined up to $100,000

The Foreign Corrupt Practices Act

• Another ethical problem in international business dealings has to do with the legitimacy of certain "side" payments to government officials • 1977 Congress passed the Foreign Corrupt Practices Act (FCPA), which prohibits U.S. businesspersons from bribing foreign officials to secure advantageous contracts.

Business Ethics

• Ethics can be defined as the study of what constitutes right or wrong behavior. o questions relating to the fairness, justness, rightness, or wrongness of an action. • Business ethics focuses on what constitutes right or wrong behavior in the business world and on how businesspersons apply moral and ethical principles to situations that arise in the workplace.

Practical Solutions to Corporate Ethics Questions

• Inquiry. o an understanding of the facts must be the initial action. The parties involved might include the mass media, the public, employees, or customers. At this stage of the process, the ethical problem or problems are specified. A list of relevant ethical principles is created. • Discussion. o a list of action options is developed. Each option carries with it certain ethical principles. Finally, resolution goals should also be listed. • Decision. o Working together, those participating in the process craft a consensus decision, or a consensus plan of action for the corporation. • Justification. o Does the consensus solution withstand moral scrutiny? At this point in the process, reasons should be attached to each proposed action or series of actions. Will the stakeholders involved accept these reasons? • Evaluation. o Do the solutions to the corporate ethics issue satisfy corporate values, community values, and individual values?

Creating Ethical Codes of Conduct

• One of the most effective ways of setting a tone of ethical behavior within an organization is to create an ethical code of conduct • Providing Ethics Training to Employees o For an ethical code to be effective, its provisions must be clearly communicated to employees. • The Sarbanes-Oxley Act and Web-Based Reporting Systems o help reduce corporate fraud and unethical management decisions. o requires companies to set up confidential systems so that employees and others can "raise red flags" about suspected illegal or unethical auditing and accounting practices.

Duty-Based Ethics

• Religious Ethical Standards • Kantian Ethics • The Principle of Rights

Making Ethical Business Decisions

• Six basic guidelines to help corporate employees judge their actions: 1. The law 2.Rules and procedures. 3. Values 4. Conscience 5. Promises 6. Heros

Short-Run Profit Maximization

• Some people argue that a corporation's only goal should be profit maximization, which will be reflected in a higher market valuation. • In the short run, a company may increase its profits by continuing to sell a product, even though it knows that the product is defective. In the long run, though, because of lawsuits, large settlements, and bad publicity, such unethical conduct will cause profits to suffer • business ethics is consistent only with long-run profit maximization.

The Importance of Ethical Leadership

• Talking about ethical business decision making is meaningless if management does not set standards. • managers must apply the same standards to themselves as they do to the employees of the company. • Attitude of Top Management o management needs to demonstrate its commitment to ethical decision making o Managers who set unrealistic production or sales goals increase the probability that employees will act unethically. • Behavior of Owners and Managers o Business owners and managers sometimes take more active roles in fostering unethical and illegal conduct. o Indicate to their co-owners, co-managers, employees, and others that unethical business behavior will be tolerated.

"Gray Areas" in the Law

• The law also contains numerous "gray areas," making it difficult to predict with certainty how a court will apply a given law to a particular action. • many rules of law require a court to determine what is "foreseeable" or "reasonable" in a particular situation

The Moral Minimum

• The minimum acceptable standard for ethical business behavior—known as the moral minimum—normally is considered to be compliance with the law • just because an action is legal does not necessarily make it ethical.

Ethical Transgressions by Financial Institutions

• best ways to learn the ethical responsibilities inherent in operating a business is to look at the mistakes made by other companies **• Corporate Stock Buybacks **• Startling Executive Decisions at American International Group **• Executive Bonuses

Approaches to Ethical Reasoning

• ethical reasoning—that is, a reasoning process in which the individual examines the situation at hand in light of his or her moral convictions or ethical standards. • two fundamental approaches o One approach defines ethical behavior in terms of duty, which also implies certain rights o other approach determines what is ethical in terms of the consequences, or outcome, of any given action.

Monitoring the Employment Practices of Foreign Suppliers

• few companies can assume that their actions in other nations will go unnoticed by "corporate watch" groups that discover and publicize unethical corporate behavior • As a result, U.S. businesses today usually take steps to avoid such adverse publicity—either by refusing to deal with certain suppliers or by arranging to monitor their suppliers' workplaces to make sure that the employees are not being mistreated.

Why Is Business Ethics Important?

• in-depth understanding of business ethics is important to the long-run viability of a corporation. • It is also important to the well-being of individual officers and directors and to the firm's employees. • unethical corporate decision making can negatively affect suppliers, consumers, the community, and society as a whole.

Business Ethics on a Global Level

• laws governing workers in other countries, particularly developing countries, have created some especially difficult ethical problems for U.S. sellers of goods manufactured in foreign countries • ethical ramifications of laws prohibiting U.S. businesspersons from bribing foreign officials to obtain favorable business contracts

Outcome-Based Ethics: Utilitarianism

• outcome oriented • focuses on the consequences of an action • an action is morally correct, or "right," when, among the people it affects, it produces the greatest amount of good for the greatest number. • Applying the utilitarian theory thus requires o 1.a determination of which individuals will be affected by the action in question; o (2)a cost-benefit analysis, which involves an assessment of the negative and positive effects of alternative actions on these individuals; and o (3)a choice among alternative actions that will produce maximum societal utility (the greatest positive net benefits for the greatest number of individuals).

Corporate Social Responsibility

• the idea that those who run corporations can and should act ethically and be accountable to society for their actions. • number of different theories today about how help resposible o 70 percent of those polled agreed that corporate citizenship must be treated as a priority. o 60 percent said that good corporate citizenship added to their companies' profits. • Stakeholder Approach • Corporate Citizenship

o Conflicting Rights

• there are often conflicting rights and people may disagree on which rights are most important

o Resolving Conflicts

• whichever right is stronger in a particular circumstance takes precedence.