REL 228/MGT 228 - DePaul University



REL 228/MGT 228

Business, Ethics, and Society

Prof. Douglas Lamont

WEEK FOUR: LECTURE/DISCUSSION

Theme for the week: Cracking down on the world’s biggest welfare moochers, CEOs, and the new world of Christian social ethics.

1. Avarice versus Integrity, virtue ethics, moral acts, and moral actors.

Michael Eisner. Porky Pig Mike was dragged out of the chairman’s seat at the Walt Disney Company. This moocher has not cultivated profits or his successor for the firm. Therefore, he still is the firm’s CEO. Was he incompetent or simply shrewd? In 1993, when Disney earnings fell 63%, he earned $263 million—the highest pay of any executive of a public company. Egoism breeds a lack of integrity. Athletes and movie stars earn ridiculous sums as well, but at least they earn them in arm’s length negotiations.

Boards of directors. Why did the Disney board pay Eisner $1 billion since 1996 to run the company into the ground? Couldn’t the board find a CEO for less money? Why do corporate boards routinely overpay for mediocrity? CEOs shave costs by laying off people, closing plants, and outsourcing, but CEOs don’t shave costs by cutting their own salaries and benefits. The result is as follows: the top executive suites are the world’s last enclaves of socialism. Immoral sentiments from utilitarianism permit boards and CEOs to hide behind Rawl’s veil of ignorance, and both underscore a lack of virtue ethics.

Corporate governance. Tweedy, Browne, which owned 18% of Hollinger, squawked at the unauthorized payments to Conrad Black, former CEO. Mutual funds, pension funds, and other public shareholders must pay attention to what the dominant CEO does or does not do, and the CEO’s impact on shareholder value. The Disney board split the job of chairman and CEO into two jobs. 43% of Disney shareholders think this is a cosmetic change and want Eisner to go. Eisner’s job is to increase earnings 30% in 2004, and produce double-digit earnings annually to 2007, or his contract won’t be renewed in 2006. The neglect of shareholders and other stakeholders is an immoral act and undermines Kant’s categorical imperative.

Great CEO pay heist. The free market is not at work here. The average CEO of a major corporation now gets $10.8 million a year, almost 20 times as much as in 1981. “The salary of the [CEO] of the large corporation is not a market award for achievement,” says John Kenneth Galbraith. “It is frequently in the nature of a warm personal gesture by the individual to himself.” Pay is decided by a few board members, often the CEO’s friends, who are CEOs themselves, and sympathetic to the argument that $200 million is about right for such hard work. The use of Rawl’s veil of ignorance offers more opportunities for immoral acts.

Avarice is human. Consultants on executive pay know they won’t get follow up jobs if they skim on CEO pay. Here is their apologia for following Rawl’s veil of ignorance:

1) CEOs increase shareholder value and should get a small portion of the increase. Should they not give back a portion of their earnings when shareholder value declines? Something is wrong when Jeffrey Skilling of Enron gets $100 million in the run-up to his company’s disintegration.

2) The board negotiates the pay packages with CEOs. However, there is a huge supply of would-be CEOs and negligible demand from companies for new ones, so the price for CEOs should be cheap.

3) The board pays CEOs an obscene sum so it won’t lose them. However, CEOs have few transferable skills and are little in demand elsewhere. The average 63-year -old CEO has a zero chance of finding a better job elsewhere.

Conclusion, Eisner is 62 and so desperate to hold onto his job because no one other company would have him as CEO. After the shareholder revolt at Disney, shareholders and other stakeholders have positive rights. They demand social and economic justice from boards of directors, CEOs, and the executive suite. This is new context of Christian social ethics.

Source: Nicholas D. Kristof, “Millions for Moochers,” The New York Times, March 6, 2004, p. A27. M.D. Litonjua, “Global Capitalism: The New Context of Christian Social Ethics,” Theology Today, 56:2 (July 1999): 210-228. Vincent J. Samar, “Positive Rights and the Problems of Social Justice,” Business Ethics Quarterly, 9:2 (April 1999), 361-375. “Split Decision,” Barrons, March 8, 2004, p. 13. Elizabeth Wine, “Rise of the corporate crusaders,” Financial Times, March 5, 2004, p. 20.

II. Personal views of instructor

Question: Can individuals and groups focus more on the integrity of the moral actor than on the moral act itself?

Discussion

“I believe in God. I believe in an after life. I believe in God having a plan. I prayed a lot during the days after 9/11 . . . I used to say, ‘I’m making all these decisions so fast. So God please, you have to make them right.’ I would walk into churches during that time and repeat these prayers,” Rudolph Giuliani in Suzanne Glass, “A man of the world,” Financial Times, January 25/January 26, 2003, p. III.

The key to making sound ethical decisions is knowing that the work put into finding a right answer is more important than always being right. Executives failed in 1993-2003 to solve manufacturing, productivity, and marketing problems because they were more interested in maximizing their personal wealth during the stock market bubble years. Boards of directors failed to reign in executives who were cooking the books because the former were consultants to the firm or they were unprepared for their fiduciary responsibilities. Auditors failed in 2001-2003 because they too were consultants to the firm and they had a stake in making things look good; auditors became the highest paid fiction writers in the country.

Did money blind US corporate lawyers in the activities of recent market miscreants? In theory, the way lawyers are paid may create incentives to turn a blind eye to wrongdoing. Ethically, lawyers are required to counsel their clients to do what is legal. The vast majority of lawyers are compensated through a system whose title—“eat what you kill”—reflects a competitive spirit that encourages rule-bending. Lawyers are rewarded for taking short-term risks, regardless of the long-term consequences for the client. “Eat what you kill” does not punish lawyers for taking risks that go bad.

According to the American Bar Association’s Ethics 2000 report, the result is that most US lawyers say Yes to clients; because saying No might immediately cut their income. “The interests of the lawyers don’t count; they are suppose to be independent, but they are business people looking for work.” Lawyers are suppose to exercise their judgment in the client’s interest rather than their own, but they also want to earn a living. “Any seller of services wants to please the buyer.”

Both lawyers and accountants benefited by keeping Enron happy. However, the potential conflict of interest is not as severe for lawyers as it is for accountants. Accountants must protect the investing public by providing independent verification of financial results. If they trade a clean audit report for a lucrative consulting contract, accountants have violated their public duty. But the role of lawyers is different. They are meant to advocate for clients, not for the public interest.

Lawyers may have failed shareholders in the recent scandals and money may have subtly motivated them to do so. But there is no quick fix to the problem of paying lawyers. Today in the US, law is big business.

III. Justice and Economic Distribution

A. Tax relief for the wealthy and greater inequality in the distribution of income in the US in the tax code have been important aspects in changing the US tax code since the 1970’s. The gap between the wealthiest 10 percent and the poorest 10 percent is greater in the US than in any other industrialized country. Real wages for 90 percent of the male labor force are below what they used to be.

B. Middle-level managers have fared much better, and top executives have done spectacularly well. See the Eisner, Weil, Kozlowski, and Milken stories. Shaw, BE, pp. 83-87.

IV. Ten Ethical principles

A. Self-interest (Protagoras). Never take any action that is not in the long-term self-interests of yourself and your organization to which you belong.

B. Personal virtues Plato and Aristotle). Never take any action that is not honest, open, and truthful, and which you would not be proud to see reported widely in national newspapers and on network television.

C. Religious injunctions (St. Augustine in the West and St. Basil in the East). Never take any action that is not kind, and that does not build a sense of community, a sense of all of us working together for a commonly accepted goal.

D. Government requirements (Hobbes and Locke). Never take any action that violates the law, for the law represents the minimal moral standards of our society.

E. Utilitarian benefits (Bentham and Mill). Never take any action that does not result in greater good than harm for the society of which you are a part.

F. Universal rules (Kant). Never take any action that you would not be willing to see others, faced with the same or a closely similar situation, also be required to take.

G. Individual rights (Rousseau and Jefferson). Never take any action that abridges the agreed-upon rights of others.

H. Economic efficiency (Adam Smith). Always act to maximize profits subject to legal and market constraints and with full recognition of external costs.

I. Distribute justice (Rawls). Always choose an action that maximizes the benefit to the least in society.

J. Contributing liberty (Nozick). Never take any action that will interfere with the rights of others for self-development and self-fulfillment.

V. The Nature of Justice

Just versus unjust: vague. Fairness versus unfairness: uneven treatment rather than equality. Theories: utilitarian; libertarian; egalitarian (Rawls). Shaw, BE, pp. 97-90. Three types of justice: Communitative (or contractual fairness). Distributive (or economic parity). Social justice (or equal participation).

VI. The Utilitarian View

Aristotle asked the following question: What do I mean by happiness? Happiness is the overarching value, and the basis for determining right and wrong. Justice is a matter of promoting social well-being. Justice is not an independent moral standard. The maximization of happiness ultimately determines what is just and unjust. Mill: conflict between two principles of justice occurs in the realm of economic distribution, and only social utility (the utilitarian standard) can provide an intelligent and satisfactory way of resolving conflicts. Consider the following:

1. Type of economic ownership.

2. The way of organizing production and distribution.

3. The type of authority arrangements.

4. The range and character of material incentives.

5. The nature and extent of social security and welfare provisions.

F. Mill argued for greater worker participation and utilitarians argue for greater equality of income. Shaw, BE, pp. 90-94.

VII. The Libertarian Approach

A. Ideal of liberty, or the absence of interference by other persons. Liberty takes priority over all other values and moral concerns.

B. The state must be a minimal “night-watchman.”

C. Nozick’s Theory of Justice

4. All people have certain basic moral rights (Lockean rights). These individual rights impose firm, virtually absolute restrictions on how we may act.

5. Entitlement theory: people are entitled to their goods, money, and property as long as they have acquired them fairly.

6. Transfer holdings: gaining goods through a legitimate acquisition is OK, but not through theft, force, or fraud. Theft of knowledge.

7. Wilt Chamberlain, coach of the Tampa Bay Buccaneers, and other highly paid sports personalities; Hollywood royalty (Paul Newman, Julia Roberts, etc.) and other highly paid entertainment personalities.

8. No restrictions on market transactions.

9. Private property and property rights. Shaw, BE, pp. 94-101.

VIII. Integrity (Virtue Ethics)

A. Questions: Are corporations persons of integrity? Should we focus on them as moral actors? Or should we focus on their moral acts?

B. Virtue theory stresses the role of society in moral development. Becoming a virtuous person requires having the proper belief structure as a way to guide one’s action. Advertising is one of the ways in which the proper belief structure is communicated from corporations to society as a whole and to groups and individuals. Advertising may have insignificant causal effect. Virtue theory illustrates the necessity of a community to promote virtue through its marketing institutions, and its advertising and public relations practices.

IX Rawls’s Theory of Justice

A. The lottery of success: Who wins, who loses.

1. “Merit is a very funny word . . . Who said life was fair? Who says that we get what we deserve? I can’t say I have a moral right to this wealth. In a sense, it’s a complete accident in my life . . . Money is a validation of my life,” Eric Schmidt, the CEO of the software company Novell. 400 of the richest Americans are entirely self-made. Is that true for the following: Bill Gates. Warren Buffett. Ted Turner. Jeff Bezos. Tiger Woods. Their habits of hard work are part of their social inheritance. Did their parents and grandparents help?

2. The radical premise of Rawls’s thought is that he considers all the qualities that are normally described as merit actually to be the product of pure luck. Rawls holds that all success is the product of “accidents of natural endowment and the contingencies of social circumstance” that they are “arbitrary from a moral point of view.”

3. Rawls concludes that people have no automatic right to the fame or money generated by their labor. The markets are profoundly unfair. Choosing from behind the “veil of ignorance,” Rawls contends that inequalities of wealth are permitted only when they serve the interests of the disadvantaged members of the population.

B. Two principles

3. Each person is to have an equal right to the most extensive total system of equal basic liberties compatible with a similar system of liberty for all.

4. Social and economic inequalities are to satisfy two conditions. First, they are to be attached to positions and offices open to all under conditions of fair equality of opportunity; and second, they are to be the greatest expected benefit of the least advantaged members of society (the difference principle).

5. The first principle takes priority over the second.

F. Rawls intends his theory as a fundamental alternative to utilitarianism, and Rawls rejects Nozick’s entitlement theory. Rawls says no one deserves his or her particular natural characteristics. We cannot say Robert Redford deserves to be handsome, etc. Therefore, we have no strong claim to the economic rewards they might bring.

G. Rawls vision of society is as a cooperative project for mutual benefit. Shaw, BE, pp. 101-110.

X. Cases in Shaw:

Steel Industry.

Poverty in America.

Prof. Douglas Lamont, 2/21/03, revised 4/7/04.

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