Ethics: A Brief Introduction



Stevens Institute of Technology

Howe School of Technology Management

White Paper

Teaching Normative Ethical Theory

Using an Online Quiz

by

William Guth1, Michael Steinmann2, Edward A. Stohr2and Harry Jin2

1 New York University

2 Stevens Institute of Technology

January 14, 2011

1. Introduction and Objectives

A charge that is frequently lodged against the practical utility of ethics as a field of study in application to business decisions concerns the apparent failure of communication between theorists and business practitioners. Critics of the discipline often point out that business ethicists are usually academics, and even worse, philosophers, who speak in the language of abstract ethical theory. Thus, they are accused of expressing their ideas in terms that are essentially meaningless to the ordinary business person who possesses little or no philosophical training.

To the extent this criticism is justified, it places the business practitioner on the horns of a dilemma. Without the guidance of robust normative theories about what constitutes ethical decisions and actions, practitioners are forced to make business decisions and take actions on the basis of either emotion, or some other conceptual framework that does not explicitly take an ethical perspective, e.g., the capital asset pricing model. When the ethical quality of decisions and actions taken on other than ethical bases are called into question by critics, as increasingly they are in the United States and elsewhere, business practitioners are generally unable even to explain, much less justify their actions in ethical terms. In a world demanding ethical decisions and actions from business practitioners, it is increasingly necessary for them to develop their understanding of the main normative approaches to ethical reasoning, and their skill at applying these approaches to business decisions and actions.

The Howe School of Technology Management at Stevens Institute of Technology recently implemented an online ethics quiz as a pedagogical device to develop students’ ability to reason ethically. This idea is not unique - similar ethics quizzes are common in business, government and at other business schools. What is perhaps somewhat unusual is that our quiz was designed to foster understanding and application of three well-known approaches to ethical reasoning; deontological (applying universal moral rules), teleological (considering the consequences of actions) and virtue-based (considering the actions that a virtuous person would take). Through the online quiz, student explanations of their ethical choices in business cases based on real-life situations were captured automatically. Analysis of these explanations reveals some interesting and unexpected patterns of thought as explained later in this article.

2. Ethics: A Brief Overview of Major Moral Philosophies

Ethics can usefully be defined as the conscious reflection on our moral beliefs and attitudes though the use of normative ethical theories.

Normative ethical theories can generally be broken down into three categories: deontological, teleological and virtue ethics. The first two are considered action-based theories of morality because they focus entirely upon the actions which a person performs. When actions are judged morally right based upon their consequences, we have teleological or consequentialist ethical theory. When actions are judged morally right based upon how well they conform to some set of duties, we have a deontological ethical theory.

Whereas these first two theories focus on the question "What should I do?" the third asks an entirely different question: "What sort of person should I be?" With this we have a virtue-based ethical theory - it doesn't judge actions as right or wrong but rather the character of the person doing the actions. The person, in turn, makes moral decisions based upon which actions would make one a good person.

Deontology and Ethics

Deontological moral systems are characterized primarily by a focus upon adherence to independent moral rules or duties. Thus, in order to make the correct moral choices, we simply have to understand what our moral duties are and what correct rules exist which regulate those duties. When we follow our duty, we are behaving morally. When we fail to follow our duty, we are behaving immorally.

Immanuel Kant is considered by many to be the preeminent deontological moral philosopher. According to Kant, an ethical action does more than just follow the “letter of the law (legality)”, it follows “the spirit of the law (morality).” An ethical action is done out of a commitment to duty, not because the action corresponds to social rules.

In his Grounding for the Metaphysics of Morals, Kant states that all morality is based on one universal law. This law, the “categorical imperative”, can be formulated in the following words:

“Act only according to that maxim whereby you can at the same time will that it should become a universal law.”

With every given action, we have to ask ourselves whether our decision could be shared by everyone. An example to illustrate this is the following:

“Another man in need finds himself forced to borrow money. He knows well that he won’t be able to repay it, but he sees also that he will not get any loan unless he firmly promises to repay it within a fixed time. He wants to make such a promise, but he still has conscience enough to ask himself whether it is not permissible and is contrary to duty to get out of difficulty in this way. Suppose, however, that he decides to do so. The maxim of his action would then be expressed as follows; when I believe myself to be in need of money, I will borrow money and promise to pay it back, although I know that I can never do so. Now this principle of self-love or personal advantage may perhaps be quite compatible with one’s entire future welfare, but the question is now whether it is right. I then transform the requirement of self-love into a universal law and put the question thus: how would things stand if my maxim were to become a universal law? He then sees at once that such a maxim could never hold as a universal law of nature and be consistent with itself, but must necessarily be self-contradictory. For the universality of a law which says that anyone believing himself to be in difficulty could promise whatever he pleases with the intention of not keeping it would make promising itself and the end to be attained thereby quite impossible, inasmuch as no one would believe what was promised him but would merely laugh at all such utterances as being vain pretenses.”

Teleology and Ethics

Teleological moral systems are characterized primarily by a focus on the consequences which any action might have (for that reason, they are often referred to as consequentalist moral systems, and both terms are used here). Thus, in order to make correct moral choices, we have to have some understanding of what will result from our choices. When we make choices which result in the correct consequences, then we are acting morally; when we make choices which result in the incorrect consequences, then we are acting immorally.

A widely known principle deducible from teleological moral theory is called the “Principle of Utility”: that principle which approves or disapproves of every action according to whether it increases or diminishes the amount of happiness of the party whose interest is in question.

The party whose interest is in question has historically been studied from two different perspectives, labeled egoism and utilitarianism:

– Egoism – a person ought to do whatever is in his/her best interest, without consideration of the impact on others of that person’s actions.

– Utilitarianism – one ought to seek to produce the greatest possible balance of good over evil, or the least possible balance of evil over good, for all who will be affected by one’s actions

When it is applied as a normative position, ethical egoism argues that each individual is intimately familiar with his/her individual wants and needs, and at the same time, is uniquely suited to pursue those wants and needs effectively. Not being knowledgeable about the wants and needs of others, and not being well situated to pursue them even if he/she could know them, the individual who sets out to address the wants and needs of others is bound to bungle the job and end up doing more mischief than good, according to an ethical egoist. Ethical egoists also argue that to give charity to someone is to degrade him/her, implying that he/she is unable to look out for him/herself. Some ethical egoists believe that is why the recipients of charity are so often resentful rather than appreciative.

Adam Smith in his book, The Wealth of Nations, links the pursuit of self-interest to the betterment of society through the guidance of an “invisible hand," i.e., free market exchange.

“It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own self-interest... [Every individual] intends only his own security, only his own gain. And he is in this led by an invisible hand to promote an end which was no part of his intention. By pursuing his own interest, he frequently promotes that of society more effectually than when he really intends to promote it." (Smith, 1776, book 1, Chapter 2, para.2)

This statement is often quoted in support of policy positions favoring free trade, free markets, and eliminating government regulation of business. It is important to underline, however, that even Adam Smith says “frequently” - not always. In other words, pursuit of self interest can be and sometimes is detrimental to other individuals and/or to the broader society in which it takes place.

In contrast to ethical egoism, utilitarianism often asks us to put aside self-interest for the sake of the whole. In addition, utilitarianism always asks us to do the most, to maximize utility, not to do the minimum.

For any given action, the utilitarian must calculate:

– How many people will be affected, negatively as well as positively

– How intensely they will be affected

– Similar calculations for all available alternatives

– Choose the action that produces the greatest overall amount of utility, i.e., positive minus negative impacts for all affected

Critics of utilitarianism as a normative ethical position typically raise two important issues:

1. Can everything be quantified? Some critics maintain that some of the most important things in life (love, family, etc.) cannot easily be quantified, while other things (productivity, material goods) may get emphasized precisely because they are quantifiable. These critics point to the following danger in the application of utilitarianism: if it can’t be counted, it doesn’t count.

2. Are quantified goods necessarily commensurable? Are a fine dinner and a good night’s sleep commensurable? Can one be traded or substituted for the other?

Virtue Ethics

Virtue-based ethical theories place much less emphasis on which rules people should follow and instead focus on helping people develop good character traits, such as kindness and generosity. These character traits will, in turn, allow a person to make the correct decisions later on in life. Virtue theorists also emphasize the need for people to learn how to break bad habits of character, like greed or anger. These are called vices and stand in the way of becoming a good person.

According to "virtue ethics", there are certain ideals, such as excellence or dedication to the common good, toward which we should strive and which allow the full development of our humanity. These ideals are discovered through thoughtful reflection on what we as human beings have the potential to become. There are wide variations in the “virtues” advocated by major writers considered to be virtue-based ethical theorists.

Plato is the first philosopher who tried to give a systematic account of virtue. In his book, Republic, he describes the four so-called “cardinal virtues”: wisdom, courage, moderation, and justice. These virtues correspond to different fundamental aspects of human life. Wisdom corresponds to reason and intelligence, courage corresponds to the will, and moderation corresponds to pleasures and desires.

• Wisdom is not expert knowledge, but the right attitude towards the crucial questions of human life.

• Courage is not so much braveness in fight, as the inner strength to uphold the conviction about what is truly good.

• Moderation is not the suppression of pleasures and desires, but their cultivation and refinement.

• Justice does not correspond to single aspect of human life, but means an overall disposition to lead a good life. It refers to Plato’s idea that in order to always do what is ethically good, one needs a stable and durable harmony of one’s inner life. A just person “really sets his own house in good order and rules himself” (Republic, 443 c-d).

For Aristotle, in his book Nichomachean Ethics, it is important to hit the right mean between excess and deficiency, as many virtues turn into vices if they are exaggerated. Besides the four cardinal virtues, he mentions liberality, magnanimity, ambition, patience, truthfulness, wittiness, and modesty. Like courage and moderation, these virtues can easily be misused, and allow for a “more or less” that cannot be generally defined.

Applying Ethics to Business Decisions

What follows is an introduction to the application of normative ethical theories to three real business cases describing ethical issues facing a particular business manager. Please read the cases and decide if you strongly approve, approve, disapprove, strongly approve or are undecided about the action taken by the manager in the case, making explicit your reasoning in coming to your decision. You will be provided at a later date with an application of normative ethical theory to these cases developed by your faculty.

References

Immanuel Kant. Grounding for the Metaphysics of Morals, Second Section: Transition from Popular Morality to a Metaphysics of Morals (translated by J.Ellington, Indianapolis: Hackett 1981).

Adam Smith. An Inquiry into the Nature and Causes of the Wealth of Nations, edited by Edwin Cannan, Chicago:University of Chicago Press, 1976.

3. The Online Ethics Quiz: Mechanics

The online ethics quiz is taken by all students enrolled in a first-semester core course which is the starting point for an “ethics thread” required of all graduate students. Instructors in other graduate courses contribute to the thread by introducing ethical topics and discussing cases involving ethical issues in their courses.

The ethics quiz was successfully piloted in the summer and fall semesters of 2009 and became a formal requirement for all Howe School masters and Ph.D. students in fall 2010. All students in the above core course are also automatically enrolled in a zero-credit, zero-cost online “course” using Stevens’ WebCampus distance learning facility. In the online workshop, students are required to read a short introduction to ethical reasoning after which they are asked to state their level of agreement with the actions taken by management in four short business cases that are based on real life situations. The students are also asked to explain their reasons for supporting or opposing the action taken by the protagonist in each case. After they have responded to each case, students are able to view a “model solution” that discusses the case from the different ethical viewpoints. After completion of the quiz, students are provided with bar charts showing how students from a past semester responded to each of the cases. All answers are anonymous. Students “pass” the quiz if they provide answers to all four cases and complete a brief survey.

The introduction to the online quiz, which is read by all students describes the intended pedagogy as follows:

Stevens Institute of Technology has long emphasized the importance of ethical behavior. The foundation of our academic culture is wholly dependent on the personal integrity of our students, staff and faculty members and our graduates are expected to uphold these ideals throughout their careers.

In recent years, we have witnessed numerous examples of unethical behavior by our business leaders. These range from corporate malfeasance in the case of Enron, WorldCom and Arthur Andersen at the beginning of this century, to a collective failure of the financial industry to police itself resulting in the current financial crisis, and to individual corruption on a major scale, such as in the notorious “Ponzi” schemes of the last year.

Ethical behavior, then, is important not only because it is the “right” thing to do, but also because it is the foundation of our society and economic system.

The educational objectives of this course are:

1. To raise your awareness of the ethical issues embedded in many managerial decisions

2. To introduce you to the major normative ethical theories developed by philosophers to guide thinking about such issues

3. To illustrate the application of these theories to the managerial decisions facing managers in four real case situations

4. To make it possible for you to compare your reactions to the decisions taken by the four managers in those case situations to the reactions of your fellow students (and faculty) at Stevens Institute of Technology as a basis for further discussion with them in various classes.

To successfully complete this course, it is required that you

1.  Read a “Brief Introduction to Ethical Reasoning”

2.  Read the first case, indicate how strongly you approve or disapprove of the decision taken by the manager, and describe your major arguments in support of your answer.

3.  Read the application of normative ethical reasoning provided for the first case.

4. Repeat the process for the three remaining cases.

5. After responding to the four cases, and reading the application of normative reasoning provided for each, read “What is the RIGHT answer to each of the cases?” Make a note to yourself with the answers to the following questions:

How do I think most of my fellow Stevens students (and faculty) responded to the decisions reached by each of the managers in the four cases? (By “most”, do I mean less than a majority but more than any other, a bare majority, a strong majority, or an overwhelming majority?) Why do I think most of them responded that way?

6. After making a note to yourself with your answers to the above question, examine the data summarizing the results for all those who have taken the course presented in “(title to be determined)”

Make a note to yourself with your answer to the following questions:

How did my responses compare to those of my fellow Stevens students (and faculty)? What questions would I like to discuss with those whose responses differed from mine?

4. The Four Business Cases

The following four business cases are based on real business situations. Following the presentation of each case, a “model solution” for the case is provided that discusses the action taken by management from the different points of view of the major philosophical approaches presented in the previous section.

The preamble to each case as presented to the students is as follows:

As an example of the ethical issues facing a particular business manager, please read the following small business case and decide if you strongly approve, approve, disapprove, strongly approve or are undecided about the action taken by the manager in the case. After you have done this, please provide a brief explanation of your choice.

There is no single correct answer to this case! Different positions are possible based on the particular ethical viewpoint that you adopt.

----- Your answer will be treated as strictly confidential -----

Upon completion of this exercise, you will be provided with a response showing the application of different normative theories to this situation.

Business Ethics Vignette - #1: Fare and Shear

Foudy is a sales person for Fare and Shear, stockbrokers. Foudy has been instructed to recommend to his customers the bonds of Electric Power Company because the brokerage firm is carrying a very heavy inventory of these bonds. Foudy does not believe the bonds are a good investment under present circumstances, given his forecast of rising interest rates, and increasing bankruptcy risk for Electric Power Company. He is very reluctant to recommend the bonds. The brokerage firm has increased the sales commissions on the bonds, making them more attractive for sales persons to sell than any other product. Foudy decides to follow the company directive and recommend the bonds.

What is your opinion of Foudy’s actions?

|Strongly approve |Approve |Undecided |Disapprove |Strongly disapprove |

Model Solution for Case 1 – Foudy at Fare and Shear Stockbrokers

NOTE: There is no correct solution to this case. The following “answer” merely indicates different reasoning approaches based on the ethical philosophies described in the “Introduction to Ethical Reasoning” material that you read at the start of theses exercises.

It is clear that it is to Foudy’s best monetary interest to recommend the Electric Power Company bonds – indeed, doing so may be essential to him keeping his job. Thus, from the egoism perspective in the teleological approach to ethical reasoning, one would have to strongly approve of him deciding to follow the company directive. This perspective has many proponents, some of them summarizing their position under the heading “greed is good.” Milton Friedman, a Nobel laureate economist, has advocated this position since the early 1970’s.

The utilitarian perspective in the teleological approach requires that the actor attempt to achieve the greatest possible good over evil in the action taken. Obviously, if Foudy is correct, his customers will lose money as a result of buying the bonds. He will still gain his commissions on the sales, however, no matter what happens to his customers. So, he will win, no matter what happens; customers will lose if his beliefs about the bonds turn out to be correct. Does Foudy’s certain gain outweigh the risk of loss to his customers if he is correct about the bonds not being a good investment? How much he will gain versus how much his customers might lose is indeterminable from the information in the case. From the utilitarian normative ethical perspective, however, many would at least approve of his decision to follow the company directive.

From a deontological moral theory perspective, the question is what is Foudy’s duty in the situation described? Does Foudy have a duty to inform his customers of his personal views of the quality of the securities he is recommending, or they are considering? Certainly not – at least according to contemporary business practice and law! How about according to some broader concept of duty – such as the duty to be transparent and honest at all times in one’s dealings with customers? From this normative ethical perspective - applied that broadly - many would at least disapprove of Foudy’s decision to recommend the bonds.

From a virtue-based ethical perspective, the question is would a “good person” recommend the bonds against his personal judgment that they are not a good investment? Many would immediately see deciding to do so as a violation of such virtues as “honesty,” “integrity,””, concern for the welfare of others.” From this normative ethical perspective, one would have to be able to identify a widely recognized virtue that would be served by recommending the bonds to approve of Foudy’s decision. None come to mind at the moment!

How Students Responded to the Actions Taken in this Case

Fall 2009: 180 respondents

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Business Ethics Vignette - #2: Reed Engineering

Reed Engineering Company faces a very competitive situation in bidding for a large contract to construct a new store for a large discount chain. Inasmuch as the firm is seriously in need of the work, Pennings, a partner in the firm, suggests that Reed submit a bid, which will certainly be low, but will still make a profit if the firm uses inferior materials. Pennings is certain that this can be done without arousing the suspicion of building inspectors. Pennings, who majored in business in college and has an MBA with a specialization in finance, believes that any firm which is awarded the contract will have to do that since the bidding is so competitive. He also told Reed that he believes the use of inferior materials “will not significantly increase the risks of fire and building collapse.” Reed, senior partner, agrees, stating that it is probably a frequent practice in the industry anyway.

What is your opinion of Reed’s actions?

|Strongly approve |Approve |Undecided |Disapprove |Strongly disapprove |

Model Solution for Case 2 – Reed at the Reed Engineering Company

NOTE: There is no correct solution to this case. The following “answer” merely indicates different reasoning approaches based on the ethical philosophies described in the “Introduction to Ethical Reasoning” material that you read at the start of theses exercises.

The egoism perspective in the teleological approach to moral reasoning would clearly strongly approve of Reed’s decision. Pennings believes the company will lose the business if Reed doesn’t submit the low bid and use the inferior materials. He also believes that the building inspectors won’t catch on to the use of inferior materials, so there is no possibility of fines or penalties being imposed that will reduce the profit on the contract. And, in his opinion, the use of the inferior materials will not significantly increase the risk of fire or building collapse. (He gives no basis for his opinion on the risk of fire or building collapse, but we know the basis cannot be engineering expertise.)

From the utilitarian perspective in the teleological approach, a number of questions would need to be asked before making a decision. First and foremost is the question of what are the risks of physical harm to the employees and customers of the new store associated with using the inferior materials. If the building collapses, it could seriously harm or kill a number of people – a very significant potential evil outcome. Pennings, who has his degrees in business and finance, cannot be viewed as an expert on how safe it might be to use inferior materials. How does the profit made on the contract compare to the risk of physical harm to one or a number of people? From the utilitarian perspective in the teleological approach, many would strongly disapprove of Reed’s decision, if there was any significant chance that physical harm might result from the use of inferior materials.

Less significant possible evils possibly resulting from the use of inferior materials would be higher operating costs (heat and air conditioning, for example) and shorter building life. It could turn out that the use of inferior materials would over time actually increase the cost of the building to the discount chain, not decrease it. If that would be the outcome, the discount chain would be harmed, while the Reed Engineering Company would make its profit. Under that circumstance, many analysts from the utilitarian perspective would disapprove of Reed’s decision, as there is no basis for concluding that Reed’s benefit outweighs the discount chain’s harm.

Does Reed have a duty to avoid using inferior materials, even if the building inspectors won’t catch it? If inferior materials means simply “less than the best, but fully adequate to prevent harm,” then most analysts from the deontological approach to moral reasoning would argue Reed does not have a duty to avoid using them. If “inferior materials” means “less than the best, and not clearly adequate to prevent harm,” most analysts from this perspective would have to at least disapprove of Reed’s decision.

Would a “good person” deliberately deceive the building inspectors, and the discount chain, by using the inferior materials? What virtue would be served by doing so? Some might argue that the virtue of “economy” might be served. The discount chain gets a lower price for the building; its customers might get lower prices because of the discount chain’s lower depreciation costs; and no one notices the difference between inferior and not inferior materials. While Reed may be serving the virtue of “economy,” others taking the virtue-based approach to moral reasoning might argue that he is violating at least several other virtues, such as “honesty, integrity, and transparency” – forcing consideration of the relative merits of the different virtues relevant in the situation.

How Students Responded to the Actions Taken in this Case

Fall 2009: 180 respondents

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Business Ethics Vignette - #3: Enray Corporation

Warren, CEO of Enray Corporation, a mid-sized distributor of pulp paper and paper products, listened to his CFO describe the company’s most recent violations of the covenants of its loan agreements with Bank of America. All the violations of the past year and half had to do with one customer, American Tissue Company, increasingly late in paying Enray invoices for its purchases of product from the company. The last series of delays resulted in Enray extending over $25 million in trade credit to ATC above the limit set by the bank in its latest line of credit loan agreement. The CFO’s attempts to get ATC to pay down its debt to Enray were being met with delaying tactics at best, and “downright arrogance” at worst. ATC was Enray’s largest (12% of total sales) and fastest growing customer. According to ATC’s audited financial reports, its liquidity had decreased significantly in the past year and a half, but its total debt to equity ratio remained only slightly below the industry norm. Enray’s CFO recommended cutting off further credit to ATC, and demanding that its outstanding loan balance be reduced to below the maximum set by the loan covenants within 60 days. He admitted that it was not likely for BoA to find out about the loan agreement violations for another 4-6 months, but noted that if they did find out, they would likely pull Enray’s line of credit. Warren, aware that if BoA pulled its line of credit to Enray it would push the company into bankruptcy, decided to ignore his CFO’s recommendation. He reasoned that if Enray continued to “work with” ATC “in what must be difficult times for them”, it would be rewarded in the future with preferred supplier status, thereby enhancing its profitability from ATC’s rapid growth.

What is your opinion of Warren’s actions?

|Strongly approve |Approve |Undecided |Disapprove |Strongly disapprove |

Model Solution for Case 3 – Warren at Enray Corporation

NOTE: There is no correct solution to this case. The following “answer” merely indicates different reasoning approaches based on the ethical philosophies described in the “Introduction to Ethical Reasoning” material that you read at the start of theses exercises.

At first glance, the egoism perspective of the teleological approach would be strongly supportive of Warren’s decision to ignore the advice of his CFO. He believes he will receive “preferred supplier” status in the future from continuing to lend money to the company’s largest and fastest growing customer. This means that Enray will likely to be able to grow its profits faster than its competitors, and its shareholders will get significantly better returns.

At second glance, even from the egoism perspective, the issue of how much bankruptcy risk he is taking must be addressed. Clearly, investing in the common shares of a company entails the highest level of bankruptcy risk of all the different types of financial investment in a company. It is clear that ATC is having “difficulties,” and may not be able to pay its debts to Enray. On the other hand, its published financial reports indicate that it is still close to the industry norm in terms of debt/equity ratio. Some analysts, even taking the egoism perspective in the teleological approach to moral reasoning, would disagree with Warren’s decision from purely and simply a risk/return perspective

From the utilitarian perspective, what is the balance between benefit and harm of all those affected by the decision? If Warren’s beliefs in being granted “preferred supplier” status, and therefore being able to grow profits faster than competitors turn out to be correct, it is clear that he (assuming he has stock options) and the shareholders of the company benefit significantly. But, what about the debt-holders, specifically BoA ? The debt-holders don’t benefit directly from the higher growth in profits since their return on the money lent is set by contractual terms. From their perspective, Warren’s decision to ignore his CFO’s advice significantly increases the risk of bankruptcy, while holding the return constant according to the lending agreements. They are thus being harmed by his decision. (Since he doesn’t tell them about the situation for fear of having them pull the line of credit, they will be unaware of the harm until such time as they discover the violations of the line of credit covenants themselves).

A similar analysis could be made for employees, though their perspective in the situation is potentially more complex. At least some of them most likely are covered by incentive systems that provide bonuses as performance improves. Thus, while Warren’s decision increases the risk of bankruptcy, it also increases the potential for those employees covered by incentive compensation systems to earn higher bonuses. For those employees, however, whose compensation is fixed – usually a large majority of employees in large companies – the conclusion would have to be similar to that for the debt-holders, i.e., they are being harmed.

For decades in the United States, it has been widely argued that managers of public companies have a fiduciary duty to shareholders of the company to do what is in their best interest. This is teleological egoism applied to a class of individuals related to the company – the shareholders. At least at first glance, Warren’s decision would be strongly supported from the egoism perspective on the teleological approach to ethical reasoning. From the utilitarian perspective, however, many would at least disapprove of Warren’s decision, as there is no analytical basis for judging the benefits to the shareholders to exceed the harm to the debt-holders, and to the majority of employees.

Does Warren have a duty to at least attempt to honor the terms of the line of credit agreement with BoA? More generally, do managers have a duty to honor the terms of the contracts they have signed with customers, lenders, employees, suppliers? Most analysts using the deontological approach to moral reasoning would conclude they do, and thus would at least disapprove of Warren’s decision.

Would a “good person” deliberately violate the terms of loan agreements and increase the risk of bankruptcy leading to the dismissal of employees? What virtue would be served by doing so? Until recently, many business school faculty and business pundits would immediately answer “maximize shareholder wealth.” Holding aside the issue of risk versus return to shareholders, it is clear that, of those affected by his decision, only the shareholders (and those employees covered by incentive compensation schemes) could benefit from Warren’s decision. If through some line of economic reasoning, it could be firmly established that “good managers” maximize shareholder wealth, without concern for other stakeholders in the corporation, or for any broader concept of duty to society, then logic would dictate that “a good person” who has the responsibility of a manager would do the same. Dominant economic theory of the past several decades has supported “maximize shareholder wealth” as the appropriate overarching goal of management. Some economists are seriously questioning that theory today, and attempting to replace it with something that preserves its contribution, while avoiding its excesses.

How Students Responded to the Actions Taken in this Case

Fall 2009: 180 respondents

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Business Ethics Vignette - #4: Lloyd Enterprises

Shaw, Treasurer of Lloyd Enterprises, is about to retire and contemplates recommending one of two assistants for promotion to treasurer. Shaw is sure that the recommendation he makes will be accepted, but also knows that the assistant not recommended will find his/her promotion opportunities at the firm seriously limited. One of the assistants, Aalap Parikh, clearly seems the more qualified for the new assignment. Aalap was born and raised in Mumbai, India, but attended college in the U.S., and received an MBA degree from the Stern School of Business, New York University. He has worked for Lloyd Enterprises for eight years, after leaving his first job with another firm after five years. The other assistant, Robert Fritz, was born and raised in Boston, Massachusetts, where he stayed through college and graduate school (MBA) at Boston University. Robert is one year older than Aalap. Shaw recommends Robert for the job because he believes he “fits in better” with the top management group at Lloyd Enterprises, all of whom were born and raised on the East Coast of the U.S., and several of which also graduated from Boston University. He believes Fritz’s “fitting in better” with the top management group will be helpful in some general way to the company.

What is your opinion of Shaw’s actions?

|Strongly approve |Approve |Undecided |Disapprove |Strongly disapprove |

Model Solution for Case 4 – Shaw at Lloyd Enterprises

NOTE: There is no correct solution to this case. The following “answer” merely indicates different reasoning approaches based on the ethical philosophies described in the “Introduction to Ethical Reasoning” material that you read at the start of theses exercises.

Shaw apparently believes that ethnic diversity in the company’s top-management group is somehow or another not good for the company. So, in spite of believing that Aalap Parish is “clearly the more qualified” of the two candidates for his job, he recommends Robert Fritz, who he believes will “fit in” better with the top-management group at the company. This is clearly a case of discrimination against a person born and raised in India, even though he received his college and MBA degrees in the U.S., and has worked in the U.S. for at least eight years.

From the ethical egoism perspective, Shaw is simply making a decision that maximizes his own comfort. He claims that he is making his choice because it is the better choice for the company as a whole in some general and unspecified way. We don’t know from the facts presented whether or not Shaw is simply a bigot uncomfortable with others who are different from himself, or whether he truly believes that less diversity in management groups is better for the company than more diversity. If it is the latter, he is rejecting the increasingly widespread hypothesis among management scholars, and organizational leaders that, in general, more diversity is better than less diversity.

From the utilitarian teleological perspective, Shaw would have to think about how much harm he is doing to Aalap’s future career potential at the company, and compare it against Robert’s gain, plus the gain he claims will accrue to the company. Such a calculus would be very difficult/impossible for Shaw to rigorously justify. He apparently doesn’t know much about Aalap’s or Robert’s goals and ambitions, and made no effort to find out more. In addition, his belief that less diversity would be better for the company than more diversity would no doubt be challenged by a large number of observers of the case.

Does Shaw have a duty to avoid discrimination in the workplace? Many analysts would argue - reasoning from precepts central to many religions, and/or from preamble to the U.S. Declaration of Independence –

“We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness” -

that he does have such a duty. If these analysts believed that his discrimination resulted from his own bigotry, they would certainly strongly disapprove of his action.

Does Shaw have a duty as a business manager seeking company growth and profitability to try to increase diversity in the workplace wherever possible? Few management experts would argue so. It has not been conclusively proven that, in general, more rather than less diversity in the workplace results over time in better decisions, productivity, and/or profitability- hence better performance of the firm- though the findings of a number of recent empirical studies point inconclusively in that direction. Cognitive diversity in top-management teams has been found in several studies to be correlated with firm performance, but as far as we know, there have been no empirical studies specifically of the relationship between ethnic diversity in top-management teams and firm performance. Those analysts who believe his choice of Robert rather than Aalap was based on his belief that less diversity is better than more diversity would either disapprove of his action, or indicate they were undecided.

From a virtue-based ethical perspective, would a “good person” choose Robert over Aalap? Discrimination against any person because of ethnicity, creed, color or other characteristics over which that person has limited to no control is widely regarded in Western societies, particularly the United States, as evil – the antithesis of virtue. In his role as a manager of a firm, however, many economists would argue that he has a fiduciary duty to the shareholders of the firm to try to make decisions that maximize the growth and profitability of that firm. If Shaw is not actually a bigot, but is choosing Robert over Aalap out of a genuine (but maybe an erroneous) belief that Robert will contribute more to the future growth and profitability of the firm, he is attempting to be a “good manager.” Shaw does not indicate how he reconciles his belief that Aalap is “clearly the more qualified” with his belief that Robert will contribute more, or if he even attempted to do so. Failure to reconcile these conflicting beliefs might indicate Shaw’s goal was not to attempt to maximize shareholder wealth, but rather to make a decision more comfortable to him because of his own prejudices.

How Students Responded to the Actions Taken in this Case

Fall 2009: 180 respondents

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5. Reflection: What is the RIGHT answer to each of these cases?

This analysis of the four cases using normative ethical theory illustrates the application of those theories to real problems facing mangers of companies. In each case, points were made both for and against the actions taken by the managers in the cases by applying all three major approaches to normative ethical theory to them. To many, this still begs the question – which normative theory is RIGHT.

Philosophers have created a vast body of literature over the centuries in their quest to answer this question. In spite of all this effort, each of the normative theories of ethics applied in this analysis of the cases still today has many adherents as well as critics. From our exploration of the ethics literature, however, we think it might be safe to say that virtue-ethics has been gaining proponents in the past several decades, while egoism-ethics has experienced a significant decline particularly in the past decade. Some philosophers argue that the virtues-based approach makes it possible to integrate “desirable” elements of both the deontological and the teleological approaches. For example, recent surveys of business school students indicate that there has been a significant increase in commitment to both the concept that business firms have a responsibility to the larger society of which they are part (deontological duty), and to the concept that firms have responsibility to make profits for their shareholders (teleological egoism). From this perspective, a “good manager” has the virtues (among others) of commitment to both responsibilities and to finding ways of serving both at the same time.

In addition, another apparent trend in the field of applied ethics is increasing acceptance of providing ethical guidance as one of the responsibilities of organizational leadership. The managers of some firms have taken this responsibility very seriously, providing employees with significant amounts of training in ethical analysis, and ethical leadership by example from top level managers. Many others appear to be paying at least “lip service” to concern for ethical behavior, apparently in an effort to convince critics that their firms “really do care” about the impact of their profit seeking behavior on the larger social system of which they are part. As part of this effort, many firms have recently developed and published Code of Ethics statements that attempt to identify behavior judged by the firm’s top-management to be ethical. As a practical matter, such statements typically attempt to provide general, rather than specific, guidance, leaving the employee the task of applying the general guidelines to the specifics of the cases they confront in the daily life of the firm. As an example, drawn from an educational institution (Stevens Institute of Technology) in its student Code of Conduct statement, the authors identify the “core values” of the school and insist that students must conduct themselves at all times in a manner that reflects these values:

“Stevens Institute of Technology is dedicated to providing an environment that reflects its core values of honor, academic integrity, trust, and mutual respect; and which offers opportunities for every student to develop academically, personally and professionally.”

From a normative ethics perspective, this is basically a virtues-ethics approach, with the virtues of honor, academic integrity, trust and mutual respect defining the good person. This approach to normative ethics is frequently adopted among managers of business firms who attempt to provide ethical guidance for their organizations.

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