NDPPS Template Guide

NDPPS Template Guide

Ethics & Responsibility in Business ERB Workshop (Optional) vide draft McNutt: Tao of Ethics Patrick McNutt www.patrickmcnutt.com Follow @tuncnunc Lesson Plan I Day I: Introduce Kantian ethics in a search for an ethical foundation and a firm-specific Code of Ethical Practice (CoEP). Business ethics v ethics in business. Allocation of Case-Work: Cases Selected at Workshop for Real-Time Live Cases Group Case Work: Ethical dilemma + Discovery Essay + Justification Essay Day 1 and 2: Introduce Edgeworth contracting: Premise that an ethical

foundation requires trade-offs & bargaining, rationality & reason, time consistency; introduce ethics as a process of adaptation and evolution of morality in time. Lesson Plan II Day 2 & 3: Arguments from non-cooperative game theory: rational to betray, rational to cheat, altruism and fairness. Dominance, Selfishness, Fairness, Altruism Propensity to be altruistic v temptation to cheat Self-enforcing mechanism, Prisoners dilemma, Assurance Game Day 3: Group Work presentation on the ethical dilemma, rhetoric v ad hominem responses to case resolution, CoEP v categorical imperative. Day 3: Post-Workshop Blackboard Online Forum: Challenges for an international code of good governance based on an ethical foundation.

Tao of Ethics yin + yang for ethics in business as a complementary, interconnected and interdependent ethics Yin [is this Aristotle-Hume tradition?] What kind of person should I be? Emotions and Virtue ethics Intuitive Wisdom Reason Cooperation Virtue ethics Synthesis Yang [is this Plato-Kant tradition?] What ought I to do in situation

X?? Reason and Duty Obey a moral law Rational knowledge Science Competition Analysis SELF-ENFORCING MECHANISM: Obey the Rule; Property Rights; Self Interest; Respect for Others Note: Payoff reflect Preferences: Payoffs A,B Strategy I Keep Left Strategy II Keep Right Strategy I Keep Left

1,1 Strategy II Keep Right -1,-1 -1,-1 1,1 5 Unit 1 Fundamentals of ethics in business Tao of Ethics What is an ethical point of view? Utilitarianism: Mill and Bentham

Greatest Happiness Principle Means justify the end Max U(..) and reason Unjust rules: are low wages right if they lead to consumer happiness? If so, then low wages are moral by rule utilitarianism? Deontology: Kant and Rawls The philosophy of the golden mean and reflective equilibrium (justice) Rationality and reason Morality is not the same as

self-interest. Moral rule is obeyed because it is the right thing to do. Individuals as ends and human dignity and human rights. What is Ethics in ERB? McNutt (2010): Edited ethics: what is your experience? A rational player asks: Whats in it for me? What does society say? What contract should I enter or be party to? Kantian decision: X or Y without recourse to emotions or religious faith or tradition or legal precedent. Moral judgement: Mr A should tell Ms B the truth Moral rule: Mr A should not lie Kants moral theory is independent of consequences

Ones duty is to be done for dutys sake Not lying becomes a universal categorical imperative. Time consistent morality: a rational preference for X over Y does not depend on when in time that choice occurs. Non-linear thinking in ERB Ethics: Responsibility and duty Governance: Adopting a Code of Ethical Practice Compliance: Performance to duty and risk minimal I-think-You-think-I-think

Rawls: veil of ignorance and reflective equilibrium We discuss the ethical dilemma as Sens paradox or Fable of the Bamboo Flute in the Study Guides. Check the discussion in Unit 1 on Blackboard Notes 1-5 and/or in McNutt (2005): Law, Economics & Antitrust Ethical dilemma & Kantian ethics Responsibility is about each person fulfilling their duty: Employee has right to minimum wage but employer has duty to payinherent agency costs in not fulfilling ones duty so resolved usually by legislation Norms (right v wrong) and values (good v bad) and rules: Benefit > Cost in a calculated benefit-cost ratio, $B > $C Kantian philosophy rejects any form of consequentialism (utilitarianism)..McNutt challenges that a neo-Kantian in 21st century

might recognise that a universal law is an end in itself? Link into classroom discussion of Thief of Nature (cardinal numbers) and Fable of Bamboo Flute (subjective value set) A utilitarian is not someone who argues that some calculations have some place but that they must occupy all the space there is. Ethical dilemma: Solution in terms of utility v wealth or pre-solution v post-solution Let us call the situation before the solution takes place State of Nature 1 and the situation after it takes place State of Nature 2 . Key question for policy-makers: Is State of Nature 2 in any respect superior to State of Nature 1 ? In other words is there a transfer? Is there a gain in wealth? Is the gain in wealth considered in itself, any gain at all?

Hypothesis: that State of Nature 2 is not better than State of Nature 1 in any respect. Agree or Disagree? When would a post-transfer State of Nature be preferred? Refer to Edgeworth trade-offs and Pareto comparability. Next slides: Law of Diminishing MU and Thief of Nature transfer Law of diminishing marginal utility prevails in that the MU loss of 10 from a rich individual is less than the MU gain of 10 to a poor individual. Why? Is it the level criterion for rich v poor? What if Amartya has 100 and you take 10 does his Marginal Utility still decrease? What if Amartya had 1m? RATIONAL WITH Rational people with highPEOPLE opportunity costs employ stand-ins to stand in line for an iPhone6 or a concert ticket. Why?

HIGH OPPORTUNITY COSTS A school is anxious that parents turn up late to collect children at end of school day. The school has to provide an TO additional teacher EMPLOY STAND-INS STAND IN LINE FOR IPHONE5 OR Ato CONCERT TICKETthe OR PAY A GOUGED TO A TICKET RESELLER. andANresources look after children

leftPRICE waiting. So the school WHY? begins to fine late parents. The incidence of lateness increased. 13 Classroom Case: Thief of Nature Transfer Derek has a book that Amartya wants. In a market setting Derek would sell the book to Amartya for $20 but Amartya would pay $30 for it. The $10 is surplus value that could, for example, be consumed in transaction costs. Example: if Derek knows that Amartya is prepared to pay $30 he will haggle up to $30. Or what could Amartya do with $10?..opportunity cost criterion Hypotheses: If Amartya gifts the $10 to a beggar total welfare (utility)

increases. What if a thief steals the book from Derek and sells it to Amartya for $30, The forced transfer from Derek to Amartya by the thief of nature produces a gain in social wealth (book market value = $30) even though Derek has lost something he values at $20 with no compensation. Amartya has a willingness-to-pay $30 and any price less than $30 is a gain accruing to Amartya, an economic rent. Classroom Discussion: de-Kant and your edited ethics - Fable of the Bamboo Flute Identify and discuss the ethical dilemma Derek is poor and sick and miserable and the book is one of his few comforts. He is willing to sell for $20 to get medicines. Amartya is rich and content. He is willing to spend $30 which is a small part of his wealth. If the thief makes the transfer with no compensation total utility falls but

wealth increases. But what if Derek has a claim right to the book? When you include emotions, rights, liberties or claim rights or a right thing to do criterion in the decision process we call this process de-Kanting with an edited ethics experience as with Fable of Bamboo Flute. Value set as ethics in business Value Set = Code of Ethical Practice General rights and duties Legal rights and duties Categorical imperative/universal law S-firm What is Business Ethics? Is it business bashing?

Linking management behaviour to company value? Ethics to govern management behaviour? P-firm Unit 2 Responsibility and Performance in Business Bargaining and Edgeworth Contracting Paretian ethics and the Edgeworth Contract Curve Pareto non-comparability Principal-agent and TCEs agency costs Employee governance and APL Humes paradox and Mr Three Eyes

Rawls reflective equilibrium Descartes Grand Narrative Corporate Governance v Good Governance No universal concept of corporate governance, CG Is CG an ethical standard or a behavioural rule? Key parameters are ethics, transparency and compliance Align company behaviour to shareholder value Managing ethics as a rule-based process CSR and the J-curve effect Demidenko-McNutt Ethical Maturity Index Corporate Governance: www.ragm.com Definitions and key principles Corporate Governance is the system by which companies are directed and controlled: Cadbury Committee Report, UK 1992 Corporate Governance Principles:

Accountability Transparency Fairness and balance Honesty Dignity Legal Goodwill. Conflict of principles Kant: Implemented through:

Define duties Assign responsibilities, CoEP Performance measures and rewards Monitoring and P-A Transparent Universal Tools: - A formalised Code of Conduct, - Risk Governance Structure and - Risk Management Process 21 What is Good governance? = governance with an ethical foundation. Define s-firm with stakeholders and duties

How the stakeholders ought to behave. Analysing a Paretian ethic Encoding a Kantian responsibility Process of evolution and Edgeworth contracting Stakeholders contracting and optimal point Code of Ethical Practice, CoEP CLASSROOM EXERCISE Practically Principal-agent dilemma Monitoring and performance Mannes internal controls (BoD) v external controls on firm (SOX and Combined Codes) and risk management standards such as ISO 31000 Incentives and trust mechanisms Examples: McNutts s-firm and APL and Williamson-Coase agency perspective in Unit 2 as outlined Ricketts diagram.

Managerial incentives: The Ricketts diagram Trust and Incentives W Certainty line W2 C B Ricketts rationale B o st o C W1

rt fo f fe A 1. W1 2. We want 2E1 = E2 3. If W1

Then A If W1 + B = W2 Then A 4. E1 W2 C B

Legend: W wage E effort B - discretionary bonus (0; 0) E3 E1 E2 E AB cost of effort 24 Compliance and ERM

Good governance risk management Self-regulation v formal control Legal compliance Enterprise Risk Governance ERM Management (ERM) influenced by: ethics, strategy and performance Compliance Governance: Ethics, Risk and Compliance

Achieving business objectives in a risk-based ethics Ethics and Corporate Social Responsibility Risk Management and Internal Control Rights and Obligations of Board of Directors; Rights of Shareholders Compliance: Transparency and Disclosure 26 Stakeholder Value Risk Culture Could be Measured: Ethical Maturity Framework

Ad-hoc, not in compliance I solated activities Coordinated activities Holistic ethical system Risk governance ethical maturity Not in Compliance Accountability Responsibility No Duties Lack of RM structure, duties & responsibilities. RM activities depend on individual initiative and

verbal knowledge. Risk to organisational integrity & ethics. Ethical Compliance Accountability = Responsibility Duties Fulfilled Nominal RM structure, duties & responsibilities at the top level. Uncoordinated top down RM activities in some functional units. Risk to organisational integrity & ethics. Consistent RM structure, duties & responsibilities at the top & middle level. Coordinated RM

activities enterprise-wide. Evident organisational integrity & ethics. RM roles & responsibilities are aligned to organisational authorities & accountabilities. RM is embedded in the enterprise management. . Strong integrity & ethics on all levels. 27 Key success factors to instill a risk culture within an p-firm organisation 28

Implementing a risk-based Good Governance Linking Strategy, Risk, Performance and Monitoring Strategic planning Mission: Responsible reproduction Vision: No greater chance, no better care Monitor and adjust Values: Integrity; Excellence; Responsibility; Innovation Passion Business risk management Strategies Identify, assess and prioritise major business and emerging risks

to strategy Key performance indicators are aligned to the strategy and monitored Manage, monitor and report on the risks 29 CoEP Risk Culture Checklist The creation of a Kantian CoEP within a company requires a YES answer to each question: A No creates the threat of unknown risk Does your organisation have a clear set of risk management objectives?

Does your executive take risk management seriously? Does ownership of risk management really reside in the business? Is there a structure for strong risk oversight and challenge? How risk aware is the business [C-suite)? 30 Unit 3 Competition, Compliance and Economics of Antitrust

Bedrock of Compliance Perfect competition as ethical standard Chicago v Harvard SCP paradigms in antitrust Harm to consumer v harm to competition (competitors) Competition good monopoly bad Reasonable price and Predatory pricing Zero-price phenomenon credible mechanisms and cartel pricing Oligopoly hypothesis: concentration-collusion Monopoly, IPRs and innovation cycles and Chandler v Schumpeter Materials extracted and made available to all from [2005] McNutt Law, Economics & Antitrust Chapter 8 Competitive Harm pp207236 Fig 8.1 and Fig 8.2 Chapter 9 Non-Market Economics pp237-257 Chapter 10 The Reach of the Law pp259-282

Economics of antitrust Market structures v market system as applied in antitrust economics..markets in 21st century evolve with technology and timeeg Xerox in 1970s, Microsoft in1980s but Apple and Google in 21st century Competition and oligopoly: presumption of co-ordination and collusion Competition good implies that monopoly bad What is a just price? P = LMC = LAC Cartel pricing and credible mechanisms: cartels eventually break down due to mistrust amongst alleged cartel members v jurisdictions have whistleblower legislation as an incentive. Antitrust Compliance analysis: Classroom exercises from Kaelo v2.0 in www.patrickmcnutt.com

Relevance of Chandler (strategy leads to structure) v Schumpeter (destructive technology and time-variant monopolies) Chicago antitrust (efficiency measures) v Harvard SCP antitrust (concentration measures). Oligopoly dilemma: concentration and collusion. Concentration measures: Exercises in Kaelo v2.0 Perfect competition diagram as the benchmark for economic analysis: triangle ABC is maximum consumer welfare..Note as price rises above p= LMC =LAC, welfare as measured falls. Antitrust Compliance and Injury to Competition Defendant firm in a moot court

Perfect competition as an ethical standard. Harm (= Injury) to consumer v harm to competition (competitors) Predatory pricing and reasonable price - what is a reasonable price? Good Monopoly in non-price focus with IPRs & innovation Injury to competition 1. zero-price dispersion. 2. product differentiation. 3. search costs

Stiglers dilemma: the stability of a cartel across time The legal meaning of a cartel v signalling Antitrust Compliance and Prisoners Dilemma The game theory narrative for a defendant firm Ethical dilemma as a Nash equilibria [next slide] and Prisoners Dilemma Analyse the Payoff matrix Payoffs follow preference

Commitment and chat: one-shot and repeated play Punishment grim strategy Strategy Set in terms of credible mechanisms Accidental sameness in price standard Folk Theorem CLASSIC PRISONERS DILEMMA Payoffs A, B Strategy I = cooperate/trust and Strategy II = selfish/ cheat

Strategy I Strategy II Strategy I 2,2 0,3 Strategy II 3,0 1,1 39 Kantian Equilibrium 1.Read Chapter8 in Graafland textbook for context. 2. Prompt notes from Patrick McNutt on Blackboard based on

discussion at http://www.patrickmcnutt.com/blog/edited-ethics-mr-three-eyes/ 40 Kantian Equilibrium defined 1. Equivalent to the Nash bargaining equilibrium in a classic PD game between two parties in a transaction. 2. Equivalent to a solution point on the Edgeworth contract curve as rational players negotiate or contract from an off-contract curve point at State of Nature 1 to post-contract post-transfer State of Nature 2 41 Finding a solution to an ethical dilemma: Deterrence and credible punishment if rules are broken or trust betrayed. Observed punishment so rubbish is not collected, rules are broken, common lawns are not maintained. Ethical dilemma is embedded in a classic Prisoners dilemma wherein trust and cooperation is betrayed. Punishment creates a Nash equilibrium

outcome. Hypothesis: If punishment or dissuasion is credible, so that a Prisoners Dilemma collapses to an Assurance Game, then a rational player will opt for the payoff-dominant strategy. If all players follow then we have a solution to the ethical dilemma. The solution is referred to as a Kantian equilibrium. E 42 ASSURANCE GAME B: Strategy I B:Strategy II Agree with neighbour /Edgeworth contract

Disagree with neighbour 2, 2 Payoff dominant 0, 1 1, 0 1, 1 Risk-dominant A: Strategy I Agree with neighbour/Edgeworth contract A: Strategy II Disagree with neighbour

43 Conditions and Constraints on a Stable Equilibrium Stable implies a solution to (ethical) dilemma Pareto criterion: Bargaining and negotiation such that at least no-one player is worse-off under the Pareto criterion. Thinking of Others Criterion: Trust and reliance on others to prefer the payoff-dominant strategy Credible Threats Criterion: A credible mechanism or threat of punishment. State of Nature v State of War Lockes self-enforcing mechanism in a civil ordered society or Hobbes Leviathan with a rule of law and government as 3rd party to the transaction. 44 Prisoners Dilemma converges to Assurance Game if Punishment/Dissuasion = -3 Kantian Equilibrium = (2,2)

Payoffs A, B Strategy I Strategy II Agree with neighbour Disagree with neighbour 2,2 Payoff dominant 0,4 4,0 1,1

Risk-dominant Strategy I Agree with neighbour Strategy II Disagree with neighbour 45 Unit 4 Trust and International Good Governance Domain of International Good Governance Ethical code (ethics v principles based) v rules and regulations Does Kantian responsibility support self-regulation? Transparency and enforcement of a universal law Compliance and enforcement

Prisoners Dilemma: comply or not comply to a universal law? Changing global nature of doing business Good Goverance v Corporate Governance Governance guidelines check www.icgn.org Corporate Governance/Risk Management Codes of better practice OECD Principles of Corporate Governance, The Combined Code on Corporate Governance by Hampel Committee on Corporate Governance (2010) (adopted by LSE) Turnbull report on best practice on internal control for UK listed companies (http://www.icaew.com) South Africa - the King III Report (2009)

Stock Exchange listing rules : New York Stock Exchange (NYSE) standards 303A.07, 09 (2003) Sarbanes Oxley assertions, declared in Section 404 (SOX 404) (2002) Securities Exchange Commission (SEC) reporting requirements (2003) London Stock Exchange (LSE) listing requirements (Carey 2004) ASX Standard for good Corporate Governance (Australian Standard 2007) The 2010 Bribery Act (UK) (2010) - a commercial organisation is now liable for the activities of associated third parties, as well as those of its own staff

and corporate ignorance offers no protection from prosecution. The only defence is that it 'had in place adequate procedures designed to prevent a person associated with it from undertaking such conduct. 48 Trust Hypotheses 1 to 4; Who Governs in a new Geo-Market Order? The following set of Hypotheses raise specific ethical issues that are germane to creating a universal code of good governance for 21st century. What one ought to do requires a discussion on each Hypothesis: Hypothesis 1: Changing global nature of doing business Hypothesis 2: Relevance of a global code of ethics Hypothesis 3: Responsibility v accountability in good governance Hypothesis 4: CSR and globalisation 49 Trust Hypotheses 5 to 9; Who Governs in a new Geo-Market Order? What is right (what one ought to do) and what is political (what one can actually achieve) are embedded in the evolving global/local nature of doing business

Hypothesis 5: National players v global players Hypothesis 6: Niche players and advertising and higher prices Hypothesis 7: Products with global reach and supply chain management Hypothesis 8: International competitiveness and national internal devaluation (lower wages) Hypothesis 9: The technology of internet and e-markets transcending national geographic boundaries End of Workshop and resume the debate online via Blackboard.. 50 Zen thought for the day Leaves falling Lie on one another The rain beats the rain

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