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Alpha Pi MuBusiness Ethics Presentation

The Myths of Business and Ethics

Prof. MulliganNov. 30, 2006

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What’s the Goal

Economic

Normative

Legal

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Myth # 1: The Law

• The law requires business leaders to maximize short-term profits for shareholders, even if this means injuring other “stakeholders.”

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Corporate Structure

Shareholder Shareholder Shareholder Shareholder Shareholder

Board of Directors

CEO

CFO COO G.C. Etc.

Limited rights and duties

•Voted in by shareholders to represent their interests.

•Oversight Duties/Major Transactions

•Accountable to Shareholders

•Perform day-to-day management of Corporation directly or via subordinates.

•Accountable to Board

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Duty to Maximize Profits?

• American Law Institutes Principles: • “with a view to enhancing corporate profit

and shareholder gain.” In the long term• Must follow law• May consider ethical considerations• May make charitable donations

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Business Judgment Rule

• As the Delaware Supreme Court puts it: “An acknowledgment of the managerial

prerogatives of . . . directors . . . . It is a presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.” Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984).

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Constituency Statutes --- N.Y. Bus. Corp. Law § 717

(b) In taking action . . . a director shall be entitled to consider, without limitation, (1) both the long-term and the short-term interests of the corporation and its shareholders and (2) the effects that the corporation`s actions may have in the short-term or in the long-term upon any of the following:

(i) the prospects for potential growth, development, productivity and profitability of the corporation;

(ii) the corporation`s current employees; (iii) the corporation`s retired employees and other

beneficiaries . . . . (iv) the corporation`s customers and creditors; and (v) the ability of the corporation to provide, as a going

concern, goods, services, employment opportunities and employment benefits and otherwise to contribute to the communities in which it does business.

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Myth # 2: Economics

• Shareholders desire profit maximization at all costs.

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Shareholder Value

• Prof. Greenwood argues that shareholders are real people and care about much more than merely increased profits.

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Triple Bottom Line

• John Elkington coined this term

• The idea is that stakeholders (and thus the firm itself) will value a firm via three functions:– Economic– Social– Environmental

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Novo Nordisk

• How might this be done in a firm?

• Novo Nordisk (diabetes cures) sees its business model this way.

• Thus it issues Social and Environmental statements like a financial statement

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Go Shopping in Ann Arbor

• Note how many businesses market on a “good business” motif.

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Myth # 3: Ethics

• “East is East and West is West and never the ‘tween shall meet.” --- Kipling

• Business decisions are not moral decisions and moral decisions are always anti-business.

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Problems for Legal Regimes

Christopher Stone, some thirty years ago, leveled a critique of legally imposed corporate social performance regimes arguing that they:

(1) react only after a problem had occurred, (2) cost too much in policing and enforcement, (3) attempt to frame societal values in legalese, and

(4) focus upon legal duties to the detriment of

moral aspirations.

Christopher D. Stone, Where the Law Ends: The Social Control of Corporate Behavior (1975)

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If not Law, what?

What “really” governs relationships in the world of sale of goods?

• Reputation• Leverage• Need to make future sales• Wanting to be an honest broker• Ethical constraints

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The Myth of Amoral Leaders

• Are business leaders by and large amoral or worse yet evil

• Willful v. Negligent

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Nike Images: Child Labor

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Would you?

• Business choices are human/moral decisions.

• Your choices as a – Consumer– Investor– Employee– Manager– Director

• All these actions are moral choices