Ethics and International Business - Lecture Notes 2014-2015

Lecture 1- Monday 13 April

“Chapter 1 and 2” > Introduction

The lecture started with the trolley problem: A trolley is approaching and can go two ways, left or right. In both cases, at least someone will die. It’s up to you to choose if the trolley should go left and kill 5 workers, or if the trolley should go right and kill 1 worker. The answer you give can be based on the following:

• Utilitarianism = A matter of counting; “Five is more than one”. Utilitarianism is comparable to a cost/benefit analysis. The benefits should at any time outweigh the costs. [Mill]

• Deontology = No sacrifices should be made and human life should be respected at any time. Anyone should decide over their own lives and faith. [Kant]

Ethical decision making can be very easily depicted as a process:
Recognition > Judgement > Intention > Behavior

This is not a linear process, where you start with recognition and then follow the steps and end up at behavior. Instead, it is possible for people to have a certain intention, and then fail to behave accordingly. Smokers for example, who have the intention to quit smoking, but don’t quit. Or people can fail to judge a situation properly and therefore their intentions and behaviors are affected and perceived wrong.

Ethical theories are the rules and principles that determine right and wrong for any given situation

• Normative ethics = Prescribes morally correct way of acting

• Descriptive ethics = Describes how ethical decisions are actually made in business

>> Ethical absolutism = Claims there are eternal, universally applicable moral principles

>> Ethical relativism = Claims morality is context-dependent and subjective

What follows is a discussion on ethical relativism. Ethical relativism may seem the perfect way to go about ethics, but if ethical relativism were true, criticizing others for their moral beliefs would be the same as criticizing them for their tastes. Or, if ethical relativism were true, one could find out what is right or wrong by observing what people in a certain culture believe about right and wrong. Finally, if ethical relativism were true, it would not make sense to speak about moral progress, namely, then there would never be a situation where something is perceived completely wrong and therefore banned by for example law.

How about cross-cultural differences and ethics? According to Integrative Social Contracts Theory, there are two kinds of moral standards

Hyper norms = Moral standards that should be applied to people in all societies

Micro social norms = Norms that differ from one community to another and that should be applied to people only if their community accepts those particular norms

How about religion and ethics? “Divine Command Theory” >> Refer to the 10 commands; there are several issues with this:

• Is action A good, because God says A is good?

• • How could God’s saying that A is good make A good?

  • God might make anything (murder, for example) good, arbitrarily

• Or does God says A is good, because A is good?

  • Then the resulting morality is not genuinely built on religious foundation

Based on this discussion, Thomas Aquinas (1225-1274) developed more plausible alternative argument, known as Natural Law Theory = “Everything in nature has a goal, determined by God. To find out which goal something has, you have to think about the function it fulfils”

>> Problem here: Can we say that a human being (as a human being, not as an employee) has a function?

Ethics is also about toleration, or freedom of speech that allows you to harm others. How can we justify the right to freedom of speech? Freedom of speech is a means to reaching truth and criticizing in order to become better out of it. Ethics is about biases, about the world, other people, or ourselves.

Lecture 2- Monday 20 April

“Chapter 3 and 4” > Ethical concepts, stakeholders, CSR

CSR and Stakeholder Theory

Friedman: only profit maximization should matter to firms.

His arguments:

• Moral responsibility: only human beings are responsible for their actions

• It is manager’s responsibility to act solely in the interests of shareholders

• Social issues and problems are the proper prounce of the State rather than corporate managers

Does this argumentation imply that Friedman wants an ethical-free zone? No. Friedman also says in his work: “… while conforming to the basic rules of society, law and ethics.” According to Friedman, firms should first act for ethics, than for the law, and then for economics.

Corporate Social Responsibility (CSR) is an opposing view when compared to that of Friedman. CSR is a corporation’s obligations toward society, and can be compared to a pyramid (from bottom to top, See also Slide of the Lecture Slides to be found on Nestor):

Economic responsibilities >> Legal responsibilities >> Ethical responsibilities >> Philanthropic responsibilities

Economic and legal are required by society, ethical is expected by society and philanthropic is desired by society.

Edward Freeman is a big name in CSR, he is the ‘founding father’ of the stakeholder.

Stakeholder = Any group/individual who can affect or is affected by the achievement of the organization’s actions. Stakeholders have legitimate claims towards the organisation

• Principle of corporate rights: corporation has obligation not to violate rights of others

• Principle of corporate effect: corporation is responsible for effects of actions on others

Overview of normative concepts

Utilitarianism

Actions and policies should be evaluated on the basis of benefits and costs; Alternatives should be determined and evaluated. In order to draw a conclusion on which alternative is best, utility (happiness) should be maximized.

Golden Rule

We must act solely on reasons we would be willing to have anyone in a similar situation act on. What if everyone would do this in this way? How would you like it if someone did this to you like this? These are questions that should be asked when applying the Golden Rule.

Autonomy

Autonomy stresses that you should never use people as a means to an end, but always treat them as they autonomously consent to be treated. Humans have a certain dignity that makes them different from other objects.

Virtue

Virtue is acquired, you can learn it. It is about choosing action in between two extremes. An example could be that you could help a friend, which would leave you with a loss in reputation, or you could not help a friend and not suffer the reputation loss. What would you choose? Virtue ethics is about Living Well (It’s not one minute of happiness, but sustained happiness throughout your life) and Doing Good (It’s not about a mere feeling)

>> Living well and doing good are to be seen in relation to the common good, the social good

Individualism

Individualism tells us that the community is the sum of individuals with own thoughts and principles. We can rationally and autonomously decide to change our beliefs, convictions, preferences, values, etc.

Collectivism

We are in important respects determined by our social, cultural, religious, and other backgrounds. Collectivism also implies that all not of our beliefs, convictions, values, etc. are chosen completely rationally and autonomously.

in between information

Individualism vs. collectivism may be a dispute among social scientists about the way human beings act, and it also figures in debates about how society ought to be organized.

CAUX Roundtable Principles >> In order to bridge the gap between individualists and collectivists.

Other issues concerning individualism/collectivism

• Virtue may also be considered as collectivist ; versions of virtue theory see virtues as character traits that contribute to the realization of the common good. One may speak about the common good of a society, but also the common good of a firm, a hospital, a university

Justice

Distribute according to …

• Egalitarianism = Distribute equally to everyone

• Capitalism = Distribute according to contribution

• Socialism = Distribute according to need and ability

• Libertarian = Distribute by free choices

John Rawls : people have same basic liberties. Social and economic inequalities are allowed, but only if they are the greatest benefit of the least advantaged or with respect to offices and positions open to all under conditions of equality of opportunity. Refer to Slides 40-43 of the Lecture Slides to be found on Nestor. There are four people among who something has to be distributed. There is the footballer, the worker, the prime minister, and the teacher. In the first case, each gets the exact same amount. In the second case, each get a completely different amount, with two getting extremely few and two getting extremely much. In the third scenario, there are still differences in what each person gets, but the differences are less extreme. Thereby, the teacher gets least, but still gets more than he would get in situation one where everything was equal.

Situation 4, finally, also contains differences, but the differences are even smaller than in the third case. Still, the teacher is worst off, but still better off than in situation 1 where everything was equal, and he is better off than he was in situation 2 and 3. Therefore, situation four is most optimal.

>> If in situation 4 the footballer would get 110 instead of 11, situation four is still most optimal. Namely, you look at the one that is least well off and compare that to other situations. In that case, the teacher still is better off than in the three situations before.

Care

Decisions are made in the context of human interrelations. We should care for those dependent on and related to us. There is no unencumbered us.

Shareholders

Shareholder = Have very divided functions and interests. This is among shareholders and management, and between two or more shareholders.

>> Corporate governance is a form of stakeholder management

Principal-Agent Relation

Two reasons why manager-stakeholder relations are special (Shankman 1999)

• Conflicts of interest

• Informational asymmetry

Above information applied to practical cases

Porsche Case – Porsche wanted to buy Volkswagen, where the Porsche family (major shareholder) lacked sufficient information. Their CEO, Wendelin Wiedeking, was the first to earn 100 million euros in Germany in one year. In 2009, Porsche was very close to bankruptcy. In March 2012, Porsche’s CFO was charged with fraud (See Slide 54 of the Lecture Slides to be found on Nestor). The problem, now, is that the average CEO salary in UK is £6.5m, with an average annual pay rise for CEOs 11%. The CEO increases outstrip shareholder returns and performance-related pay leads to large salaries that cause unrest within corporations. How much do you have to pay executives?”

Normative arguments:

• Utilitarianism

• • ‘We can’t hire if we pay less’ >> We need a very talented executive, and that costs money

• Autonomy

  • Contract between free agents

• Virtues

  • What sort of person do you want to be? >> Do you want to be the person who earns way to much? Do you want to be a person who pays executives way to much?”

• Justice

  • Is this to the benefit of the least advantaged?

Employee case - One of the very first ethical concerns for employees is working conditions. Globalisation allows corporations to have broad range of choice of location, where investors tend to choose country with most ‘preferable’ conditions.

This means that developing countries compete to attract foreign investment due to their low level of regulation and social provisions. This leads to a race to the bottom in environmental and social standards and employees suffer from this.

Normative arguments:

• Utilitarianism

• • Consider all consequences, and don’t let your judgement be biased in favor of nearby stakeholders

• Virtue

  • How do you want to get rich? By exploiting the poverty of others, or by helping them?

• Justice

  • To the benefit of the least advantaged?

Vulnerable consumers case - Lack education or information on products and are thus easily confused or manipulated due to old age and senility. They are in exceptional physical or emotional need, lack the necessary income, too young, etc. Consumers are very easily misled, as the video that was shown during the lecture proves.

Normative arguments:

• Utilitarianism

• • What’s the harm here?

  • Opportunity costs?

• Autonomy

  • Would you autonomously consent to such marketing?

• Virtue

  • Again, do you want to earn your money by misleading consumers? Or specific to the movie: do you want to earn money by making children nag?

Lecture 3- Monday 4 May

“Chapter 5” > USA

Capitalism

Keynes: “I think that capitalism, wisely managed, can probably be made more efficient for attaining economic ends than any alternative system, but that in itself it is in many ways extremely objectionable”
Capitalism both has major advantages and disadvantages. Keynes says that we cannot do better than capitalism; capitalism is the best system available, although there are things wrong with the system. 3 ingredients of capitalism: freedom, market, and private property
>> There is some overlap with liberalism regarding these ingredients (that is the connection between liberalism and capitalism).

2 important questions to be asked here:

• How to analyse property, market, freedom?

• What value has property, market, freedom?

The answers to these questions vary across countries

Property (1st ingredient of capitalism)
Two dimensions along which we may think what property is:
Extent: What is it that I can do with my property?
Range: What is it that I can own?

Extent = What can I do with my property?
Can I use, manage, destroy, exclude my property ? You can do more with your property in the U.S. than in the Netherlands
>> What you can do depends on the country you are in.
E.g. a canal house in Amsterdam. You cannot renovate it although you own it. It is a monument and you may not change it.
Right to compensation, income
Transfer rights (rent and sale)

Range = What kind of things can be property?
Property can be Consumer goods, Productive goods, Natural resources, One’s body, or One’s labour
>> Also differs between countries.

There are several arguments in favour of private property.

• ‘Mix’ your labour with something else, then it becomes yours (Things that I pick up from the beach (and do not belong to anyone else) are mine. When I put labour into it, the things are mine).

• People are goal-pursuers, and property helps them to pursue goals (property helps satisfying certain goals)

• Without property, no utility (property helps generating growth. If there was no property, corporations would not exist)

>> These arguments above are three different arguments that are in favour of the right to earn property.

Market (2nd ingredient of capitalism)

Free market = A market wherein individuals freely exchange goods with others

Free trade = Free trade is the exchange of goods between countries with no restrictions

Arguments from private property:

• Market is where we voluntarily exchange property, and we have right to do that

Argument from utility:

• Markets lead to good social outcomes via invisible hand (it benefits us all)

• Mutual benefit

• Meshing plans: pizza and beer example
  >> You own pizza and I own beer but we both want to have a pizza and a beer for lunch. We are going to exchange the pizza and the beer in order to have mutual benefit.

Adam Smith was a professor of moral philosophy and the author of Wealth of Nations.

See slide 18 and 19 of the Lecture Slides to be found on Nestor for some quotes of Wealth of Nations. Basic theory;

If I sell something to you in a free market, I do not do that because I care for you. I care for me and I want to make money (benevolence of self-interest). Smith says that we should let the market work (the invisible hand). By letting the market work, we are going to benefit the society. We will not benefit every person separately in the society but the market will advance the interest of the society.

Freedom (3rd ingredient of capitalism)

Negative freedom = To be free from interference, the right to be ‘left alone’

Positive freedom = To be free to do certain things, to have opportunities. The things that are worthwhile doing in life.

The harm argument: I am allowed to do everything I want to do but I cannot harm someone else

>> ‘’The right to swing my fist ends where the other man’s nose begins’’ (Oliver Wendell Holmes, Jr.)

What is the value of freedom?

• People are goal-pursuers, and you need freedom to pursue goals

• Without freedom, you cannot assume responsibility, and people have to be responsible for their own lives

• You cannot realise yourself if others instead of you make the decisions

• To develop your individuality you need freedom

Liberalism

Liberalism is based on freedom (positive or negative, see above), equality/justice (see Lecture 2), and neutrality.

Neutrality = State is supposed not to have a view of what the good life amounts to, which effectively restricts the sort of reasons that lawmakers can use and thus restricts the sort of laws that arise.

Business ethics management

Business ethics management = The direct attempt to formally or informally manage ethical issues or problems through specific policies, practices and programs. Components:

• Mission or values statements

• Codes of ethics

• Reporting/advice channels

• Risk analysis and management

• Ethics managers, officers and committees

• Ethics consultants

• Ethics education and training

• Stakeholder consultation, dialogue and partnership programmes

• Auditing, accounting and reporting

Codes of ethics

Codes of ethics = Voluntary statements that commit organisations, industries or professions to specific beliefs, values and actions and/or set out appropriate ethical behaviour for employees. Four types (and according real life examples):

• Corporate codes of ethics

• • Ahold Code of Conduct

• Professional codes of ethics

  • Code of Ethics International Federation of Accountants

• Industry codes of ethics

  • Electronic Industry Citizenship Coalition Code of Conduct

• Group codes of ethics

  • CAUX Roundtable Principles of Business

Codes of ethics became popular during 1990s and 2000s, where almost all large US firms have a code. Codes consist of Principles and/or standards, Practical guidelines, how to handle: Labour standards, Environment, Consumers, Bribery, and Competition.

There is little empirical evidence to suggest that having a formal written code is sufficient or necessary for ensuring ethical behaviour

Are there Global Codes? Firms should at any time respect core human values, local traditions and believe that context matters when deciding right and wrong. For example: Gift giving in Japan.

Ethics programmes, culture and leadership

Formal ethics programmes typically include;

• Compliance

• • Preventing, detecting, punishing

• Values

  • Encourage commitment to company values

  • Most effective approach

• External

  • Encourage commitment to stakeholder values

• Protection

  • Protect top management from blame

  • Harmful approach

Informal ethics programmes typically include;

• Culture change

• • Create a ‘more ethical’ culture

  • Lengthy process, seldom successful

• Cultural learning

  • Promotes moral imagination

  • Focus on smaller subgroups in firm

All leadership is moral leadership and sets an ethical tone at the top of the company. Approaches to leadership ; Cultural change approach (It is the leader’s role to articulate and personify values the organisation aspires to inspire employees to follow their lead) and Cultural learning approach (Role of leadership is one of participation and empowerment in order to foster moral imagination and autonomy).

USA versus Europe in business ethics; Codes of ethics US phenomenon

Palazzo argues US managers see ethics as something that can be managed, and German managers as something private and difficult. In the US, business and ethics are not seen as antagonistic, especially through Protestantism, where US citizens expect more from business in terms of ethics than European citizens.

Lecture 4- Monday 12 May

“Chapter 6 and 7” > European Ethics and Islamic Ethics

European Ethics

What are European ethics? It is very difficult to talk about the ethics of 40 countries and 700 million people, who all have different political and religious histories, and who all have different degrees of secularization.

Remember from the last lecture (Lecture 3): USA versus Europe in business ethics. Who of the two is more individualistic? Europeans generally think of moral values as a matter for private reflection, but they also allow their behaviors to be regulated by the government. Americans are more comfortable with managing ethics and with a greater liberty of actions. Europeans attribute responsibility for behavior to institutions and expect them to be designed to reflect the society’s interests and value. Stakeholders are assumed to deserve some kind of institutional representation, like employees for example via unions. In America, on the other hand, individual agents and even individual corporations are attributed responsibility.

>> In America there is business ethics that speak to the manager and prescribe the manager what to do. In Europe there is economic ethics that speak to the citizen.

‘Social Europe’ : Business practices, and rules between government, labor, and corporate managers are co-determined. This is collaborative.

Discourse ethics = Aims to solve ethical conflicts by providing a process of norm generation through a real conversation between all relevant participants. Key elements;

• Different parties in a conflict should come together and engage in a discourse

• ‘Ideal discourse’ criteria: Assess the arguments, not the interests or the power

• The aim is to come to conclusions than can withstand reasonable scrutiny from multiple perspectives

‘Europe’s Invisible Religion’ >> Christianity and Capitalism, who are not always friends! Europe’s current attitudes were shaped by theological debates about market morality.
Example: In the Netherlands in 1975 the first Chair of Ethics was appointed outside a theology department.

Catholicism in Europe: 2 features

1. Organicism = A conception of human society as a living, necessarily governed by a head which all other members must obey if it is to remain visible

2. Constructivism = The assumption that we have it in our power so to shape our institutions that of all possible sets of results that which we prefer to all others will be realized

Islamic Ethics

The contrast of the Islamic ethics with that of Europe is that there is a very visible religion, which dominates public life and discourse. Islamic ethics are very worldly instead of secular, and morality is seen as a religious obligation.

Humans are distinguished by their accountability to God rather than their rationality. Islamic ethics put greater ethical requirements on the individual, sometimes even quasi-legally.

Islamic ethics see an Eurythro challenge, where compatibility with the progress of moral thinking is still debatable. For example, there is a separate, but equal approach to gender, paternalism and democracy.

Explicit business ethics

There is dignity of trade and productive work, with lots of rules and principles about standard business ethics topics, which include: just price, fairness in negotiation, honesty, meritocracy, sustainability.

Social justice = Personal responsibility for social outcomes. There is an emphasis on meeting basic needs of all first, before personal profit.

• Shura; The public consultation principle of power

• Trusteeship concept of wealth – ‘benevolent paternalism’

The main point in Islamic finance is the principle of partnership structure. Financial transactions must be fair, with equal partnership and neither party more exposed to risk. There should be no interest involved, only profit sharing.

>> Big contrast with Western capitalism: If you borrow money you have to pay it back with interest, even if your business fails.

Book chapter 2:

• Conduct = Choice behavior

• Context = Rules, institutions, pressures, resource constraints

• Content = Values, meanings, normative expectations

Conduct can clash with content: Certain patterns may become normal and are sustained by some social mechanism, but do not necessarily reflect values. Examples here are dueling in Europe, footbinding China, child labor in India and binge drinking in Sweden.

>> European ‘choice of constraints’: In some circumstances individuals cannot act effectively according to their ethical values

Example: If adult wages are too low to support a family, then children must be exploited as an economic resource.

Lecture 5- Monday 17 May

“Chapter 8 and 9” >

African ethics

Ubuntu = Represents ethics in part of Africa, not whole of Africa. It is concerned with the here and now, human needs. It is not divine, but a very different kind of moral philosophy: it must be gathered from observation of behaviour, relations, traditions, sayings.
Example: The way employees are treated is not as human resources or a means to an end, but as an end in themselves.

Another aspect of Ubuntu is collectivism, which is represented by Akan. Akan is a crocodile with two heads but one stomach, which refers to collectivist values of sharing and the common good. The common good, here, is not the sum of individuals’ interests. Instead, it is the general fundamental needs of all humans like peace, security, freedom, dignity, respect, justice, equality and happiness.

Nelson Mandela ‘Long walk to freedom’ – and back to democracy.

When assessing actions, don’t ask if it meets universal principles or moral law (deontology sort of view), instead it should be asked if the action advances the common good (some form of utilitarianism).

Post-colonialism

The colonial legacy was about political and business organizations practicing authoritarian, hierarchical, centralized and bureaucratic leadership. All in conflict with African ethics

>> Is Africa in this light a Western creation?

Western colonisers demarcated the continent as a distinct unit and built the communications systems and infrastructure that joined it together. The African identity can’t be separated from the representations provided by the West. Christianity and Islam have been in Africa for hundreds of years and had major influences on development of social norms, politics, and ethical understanding.

Africa is facing a challenge of modernity: How to move forward while remaining true to ourselves? What is authentic? Is this the right question?
Example: Attitudes to homosexuality ; Is being extremely against homosexuals really something African? Or the legacy of colonialism led by Christian missionaries on a civilizing mission?

There is this division between the rich North and the poor South. Africa is not taken seriously. Its GDP is extremely low, it accounts for only 2-3% of world trade and has no military relevance at all. Africa is very often seen as not morally real to the Western world.

Extending business ethics

Madonna adopted two ‘orphans’ from Malawi, while these were officially not orphans; they had some family left they could go to. Is what Madonna did (not adopting ‘real’ orphans, so some sort of children shopping) ethical? Is what Madonna did more a transaction or is it really charity what she did?

We all know how to analyze business, powerful multinationals exploiting their powers. We seem to have different standards when it comes down to charities. The recipients of charity should just be grateful rather than be treated as stakeholders.

Asia

China is a very religious society, but not in the sense there is a god behind it. This makes their religion different from the philosophical kind of religion we are used to. In China religion manifests itself mostly in virtues, codes of behavior. It is very influential as part of the education system and cultural identity.

Confucianism is a kind of virtue ethics: rightness cannot be judged on the basis of excpetionless general principles but a matter of judgement in the particular situation. Confucianism uses stories and examples in order to teach people about the main beliefs. The focus is on how people treat each other in the fabric of everyday life and the welfare of the country depends on the moral cultivation of the people.

Is Confucianism conservative? According to Confucianism, you should adapt yourself to the demands of your station and perform your pre-scripted role as perfectly as possible. This may indicate conservatism. It is also strongly encouraged for a leader to benevolent and for an inferior to be loyal. Power is hoped to be benevolent, but is ultimately unaccountable.

Is Confucianism anti-business? The superior man should understand righteousness and the inferior man should understand profits. The gentleman-scholar is free from worldly needs and contributes to the society (common good) via civil services.

Guanxi stresses the need for having personal relationships as a basis for business. Is this about ethics or is this just about the way things are done around here (norm)? Guanxi is not particularly Confucian, so it is hard to attribute it to ethics. Shortcomings:

• It is private and unaccountable

• It doesn’t apply to all customers (the baby milk scandal from 2008 for example)

• Widely disliked, but still expected

Lecturer’s view on the ‘myth’ of ethical relativism: Do we exaggerate our differences? Is there any culture that endorses corruption or murder? Is Chinese culture really incompatible with democracy? Is the universalism of human rights falsified by the behavior of the American government? The real challenge is to take each other seriously. ​