Business Ethics Notes (Mid Terms)

Lecture 1
Financial Disaster 2008
Direct Causes:
1. Shadow Financial Market

Credit default swaps

Securitized mortgages (slice and dice)
Derivatives
Hedge funds

2. Subprime Mortgages

Liar loans
No income verifications when lending money
Consumers bought more than they could afford

3. Regulatory Climate

Glass-Steagall Act repealed

Debt regulations for banks eased
Markets can self-regulate
Revolving door between regulators and companies
Government is the main problem

4. Incentives

Big rewards for short term thinking (companies and individuals)

Contributing Factors:
1.
2.
3.
4.
5.

Herd Mentality
Investment Banks
Lots of cheap money available
Rating Agencies
Innovation

Bottom Line: Arrogance, greed and total recklessness

Players of the 2008 Financial Disaster
Rating Agencies

CEOs

Financial Professors
Mortgage Originators

Regulators

Legislators

Went public and became shareholder owned

Paid fees by companies they were supposed to rate
(better ratings)
Took investment banks advice on how to rate
securitized mortgages
Compensation driven by stock price focused on short
term effects rather than long term benefits
Many did not fully understand the sophisticated
financial products their firms peddled
Paid huge salaries and bonuses for short term results
Relaxed lending standards
Created sophisticated products consumers did not
understand
Asleep at the switch
Looking for higher paying jobs in the finance industry
Lobbied and paid by the financial industry to relax

Business Ethics Notes (Mid Terms)

Investors
Home Owners

regulations
Believed that the market can self-regulate
Punished companies that did not deliver huge returns
Bought more houses than they could afford
Home values plummeted and mortgages were under
water
Home values sink and are worth less than their
mortgages

Business Ethics in Teaching

False assumptions:

Bad apples are the cause of ethical problems in organizations

Employees should already know the differences between right and wrong
Adults ethics are fully formed and their moral values are unchangeable

Ethics A set of moral principles or values

Business Ethics Behaviour that is consistent with the principles, norms and standards of
business practice that have been agreed upon by society
Relationship between ethics and the law:

What is ethical might be against the law

What is against the law might not be unethical

Stakeholders in Ethical Issues:

Employees
Managers
Executives
Societies Investors, consumers, suppliers, environment

Lecture 2
Ethical Dilemma situation where values are in conflict two or more values you hold dear
conflicts, personal value conflicts with organizational value
3 Main Approaches:
1. Focus on consequences consequentialist theories
2. Focus on duties, obligations and principles deontological theories
3. Focus on integrity virtue ethics
1. Focus on Consequences Consequentialist Theories
Utilitarianism best known consequentialist theory

Identify alternative actions and consequences to stakeholders

Best decision is to yield the greatest net benefits to society
Worst decision is one that yields the greatest net harm to society

Example: Nationalization of Financially Distressed Firms

Questions to ask:

Can I identify all the stakeholders? Immediate, distant?

What are the potential actions I could take?

Business Ethics Notes (Mid Terms)

What are the harms and benefits for stakeholders given potential decisions / actions?
What decision will produce the most benefit and least harm for the greatest number of
people and for society at large?
Bottom Line: To carry out the action that
produces the greatest good for the greatest
number of people and for society overall

Advantages
Practical
Underlies business thinking

Disadvantages
Difficult to evaluate all consequences
Rights of minorities can be sacrificed

2. Focus on Duties, Obligations, Principles (Deontological Theories)

Decisions based upon abstract universal principles honesty, promise-keeping,

fairness, rights, justice, and respect
Focus on doing what is right (consistent with principles) rather than doing what that will
maximize societal welfare (utilitarianism)

1. Golden Rule

Basic moral rule found in religion and families provides and important deontological
guide
Treat others as you would have them treat you
Assumption is that both parties are ethical
An ethical person will not expect someone else to be unethical to him / her

2. Kants Categorical Imperative

Act as if the maxim of the action were to become a universal law of nature consider
whether the rationale of your action is suitable to become universal law or principle for
everyone to follow
What kind of world would it be if everyone behaved this way?
Would I want to live in a world like this?

3. Rawls Veil of Ignorance For deciding what is fair

What would decisions be if decision makers knew nothing about their identities or
status?
Most useful when fairness concerns are central to the decision
Develop ethical rules that does not unfairly advantage or disadvantage another group
Neutral people will arrive at fair principles that will grant all individuals equal rights to
basic liberties and equal opportunities

Advantages
Rights approach found in public policy
debates (abortion)

Disadvantages
Determining which rule or principle to
follow
Deciding which rule or principle takes
precedence
Reconciling
deontological
and

Business Ethics Notes (Mid Terms)

consequentialist approaches when
they are in conflict (doing what is best
for society and doing what is right)
3. Focus on Integrity (Virtue Ethics)

Focus on integrity of moral actor rather than the act to be a good person because that
is the type of person you want to be important that the individual intends to be good
and becomes a moral agent to ultimately creating an organizational context that
supports ethical behaviour
o Considers character, motivations, intentions
o Character is defined by ones community
Need to identify relevant community community that holds you to the highest ethical
standards
Disclosure rule how would you feel if you behaviour appeared in public?
Useful for individual working within a professional community that has developed a
high standard of ethical conduct for community members

Advantages
Can rely upon community standards

Disadvantages
Limited agreement about community
standards
Many communities have not done this
type of thinking
Community may be wrong

Oath for Managers

Service to public and society

Balance multiple stakeholders interest
Acting with integrity in the enterprises interest
Adherence to the law
Accurate and transparent reporting
Respectful and unbiased decision making
Professional development
Responsibility to protect the profession

8 Steps to Sound Ethical Decision Making

1. Gather the facts facts might be unavailable, decision makers might explicitly avoid
getting facts
2. Define the ethical issues
3. Identify the affected parties identify the stakeholders involved role playing to
understand different perspectives
4. Identify the consequences derived from consequentialist approach long term vs
short term consequences, symbolic consequences, consequence of secrecy
5. Identify the obligations vary based on roles played
6. Consider your character and integrity
7. Think creatively about potential actions
8. Check your gut
Practical Preventive Medicine When asked to make a snap decision
1. Pay attention to your gut do not underestimate the internal warning systems
2. Ask for time

Business Ethics Notes (Mid Terms)

3. Find out more about the organizational policy read companys code of conduct or
policy manual
4. Ask manager or peers for advice
5. Disclosure rule ask yourself
6. Develop relationships with people outside the chain of command get to know HR,
legal, audit and other departments able to provide you with relevant information
Lecture 3: Psychological Approach
Relationship between Ethical Awareness, Judgement and Action:
Ethical Awareness Ethical Judgement Ethical Action
Influence on Ethical Awareness People are more likely to be ethically aware, to
recognize the ethical nature of an issue or decision if:

If peers agree something is wrong peers believe that it is ethically problematic look
at social environment for guidance in ethical dilemma situations triggers memory of
past experiences and think of situation in ethical terms
If ethical language is used ethical language such as: integrity, honesty, fairness or
negative language such as: lying, cheating, stealing terms are attached to existing
cognitive categories that have ethical content use of neutral language (euphemistic
language) keep individuals from thinking about the ethical implications of a decision
or action; however, use of euphemistic language might not be intentionally unethical
If potential for serious harm is recognized potential serious harm to others

Individual differences influence how we make ethical decisions influences our ethical
judgement and ethical actions
Manages can:

Encourage employees to be ethically aware by providing trainings

Discuss employees about the types of ethical issues which they are likely to face and
why issues are ethically problematic
Encourage employees to discuss these issues among themselves use ethical
language during interactions, think about consequences of actions and take
responsibility for consequences of decisions made

5 Individual Differences:
1.
2.
3.
4.
5.

Ethical Decision Making Style

Cognitive Moral Development
Locus on Control
Machiavellianism
Moral disengagement

1. Ethical Decision Making Styles

Individuals have preferences for particular prescriptive ethical theories

Idealism consequentialist approach persons concern for the welfare of others
Relativism deontological theories emphasis on ethical principles being dependent on
the situation rather than being applicable to all situations
If prone to only one approach, consciously force yourself to consider more one
approach

2. Cognitive Moral Development

Ethical judgement and action individuals must decide what course of action is
ethically right

Business Ethics Notes (Mid Terms)

Kohlbergs moral reasoning theory cognitive developmental theory that focuses

primarily on how people think about and decide what course of action is ethically right
Propose that moral reasoning develops sequentially through three broad levels each
with 2 stages

Level 1 Preconventional individual is very self-centred and views ethical rules as

imposed from outside the self

Stage
o
o
Stage
o

1 Obedience and Punishment Orientation

Limited to thinking about obedience authority for its own sake
Avoiding punishment by authority figures is the key consideration
2 Instrumental Purpose and Exchange
Concern for personal reward and satisfaction become considerations in addition
to a kind or market reciprocity
o Following rules only when it is in ones immediate interest
o Right is an equal exchange, getting a good deal

Level 2 Conventional individual is still extremely focused on others but is less selfcentred and has internalized the shared moral norms of society

Stage 3 Interpersonal accord conformity, mutual expectations

o What is right is thought to be that which pleases or helps others or is approved
by those close to you
o Living up to what is expected of you by your peers
o Interpersonal trust and social approval are important
Stage 4 System maintenance upholding duties and laws
o Perspective broadens to consider society
o Individual is concerned with fulfilling agreed upon duties and following laws that
are designed to promote common good
o Upholding laws and rules except in extreme cases where they conflict with social
duties

Level 3 Post conventional or principled individual has developed beyond identification

with others expectations, laws, and rules to make decision more autonomously

Stage 5 Social contract and individual rights

o Emphasis is still on rules and laws represent social contract
o Individuals are willing to question the law and to consider changing the law for
socially useful purposes
o Take into account moral laws about societys laws creation of greatest societal
good and not because of majority opinion
Stage 6 Theoretical stage only
o Following ethical principles of justice and rights
o Acting in accord with principles when laws violate principles not just blindly
follow

3. Locus of Control
An individuals perception of how much control he or she exerts over events in life (External
Vs Internal)

High internal locus of control believes that outcomes are primarily the result of his or
her own efforts
High external locus of control believes that life events are determined primarily by
fate, luck or powerful events
Developed over a long time interaction with people and the social environment

Business Ethics Notes (Mid Terms)

Thought of as a stable individual characteristic that differentiates people from each

other
Locus of control does not shift easily but it can change over time due to strong life
interventions or compelling situations
Help managers understand how employees think and react in a variety of situations
(ethical)
o Internals are more likely to see the connection between their own behaviour and
outcomes and therefore take responsibility for their behaviour
o Internals are more likely to do what they think is right - take charge of their own
lives

4. Machiavellianism Associated with unethical actions

Self-interested
Opportunistic
Deceptive
Manipulative
Ends justify the means will win no matter what the cost or how it affects other people
Likely to engage in self-interested actions that can put the entire organization at risk

5. Moral Disengagement
Tendency for some individuals to deactivate their internal control system in order to feel
alright about doing unethical things
Can be organized into 3 categories
o
o
o

Thinking about behaviour that makes bad behaviour more acceptable (1,2,3)
Distorting consequences or reducing personal responsibility for bad outcomes (4,5,6)
Reduce the persons identification with the victims of unethical behaviour (7,8)

8 mechanisms for moral disengagement:

1. Euphemistic language (liar loans) make it seem more acceptable
2. Moral justification thought to be okay because there are some socially valued
outcome
3. Advantageous comparison compare own behaviour to more reprehensible behaviour
and make theirs seem more okay
4. Displacement of responsibility (someone else asked me to do it) as a result of an
authority figures dictates
5. Diffusion of responsibility (it is not my job) reduce personal accountability by looking
to others
6. Distorting consequences (it is no big deal) less serious than they are
7. Dehumanization individuals make those who would be harmed less worth of ethical
consideration because they are thought to be different
8. Attribution of blame (it is their own fault)
Cognitive Barriers to Good Ethical Judgement faced by all of us
Barriers of Facts Gathering I know the facts

Overconfidence
Confirmation trap

Barriers to Consideration of Consequences

Reduced number of confidence make it more manageable

Self vs others cost benefits for society for multiple stakeholders
Ignore consequences that affect few

Business Ethics Notes (Mid Terms)

Risk underestimated illusion of optimism, illusion of control (really in charge of what is

happening)
Consequences over time escalation of commitment

Thoughts about Integrity

Illusion of superiority or illusion of mortality

Paying attention to Gut

Gut may be wrong

Ethical Decision Making Framework

Throughput model cognitive model to isolate ethical positions in managerial decisions
economics and cultural incentives viewed in an ethical model
P Perceptions, I Information, J Judgement, D
Decisions
6 Dominant Ethical Pathways
1.
2.
3.
4.
5.
6.

PD Psychological egoism
PJD Deontology Position
IJD Utilitarian Position
IPD Relativism
PIJD Virtue Ethics
IPJD Ethics of Care

1. Psychological Egoism

Shortest pathway
Individuals motivated to act in their self-interest (economic)
Circumstance is perceived (perception) Decision is taken
Downplays information and judgement (Do not allow info and judgement to alter
perspective or allow for a more thoughtful analysis)

2. Deontological Position

Decision is induced by a judgement based on perception of a circumstance

Perception understand what our ethical duties and what correct rules exists to
regulate those duties before making adequate judgement
Ignores information (rules and laws encoded within ones environment)
Rules and laws are framed (perception) Applied and analysed in a situation
(judgement) Decision is made (decision)

3. Utilitarian Position

Business Ethics Notes (Mid Terms)

Expansion of ethical egoism committed to the maximization of the good and

minimization of harm and evil to a society
Collective egoism
Advocates that society should always produce the greatest possible balance of positive
value or the minimum balance of negative value for individuals affected
Decision is morally correct when its derived utility is higher than other alternative
choices (cost-benefits analysis)

4. Relativism Position (I + Psychological Egoism)

Decision makers use themselves or people around them as their basis for defending
ethical standards
Perspective allows individuals to change their ethical beliefs based on situation
circumstances
Maintains morality that is relative to norms of ones culture
Ethical relativist no universal moral standards since culture and changing
environments dictates appropriate ethical decision choices
Relativism Information that enhances or modifies perception before a decision is
made

5. Virtue Ethics Position (P + Utilitarian Position)

Based on classical Hellenistic Tradition cultivation of various traits of character

represented by Plato and Aristotle
Focuses on what makes a good person rather than what makes a good action
Situation is perceived (Perception) which influences the selection of information
(Information) that is followed by an analysis or judgement (Judgement) supporting the
final decision (Decision)
Could be interpreted within the concept of organizational image
Perceptions which are both internal and external to an organization can influence the
information gathering process before an analysis is made

6. Ethics of Care Position (I + Deontological Position)

Individuals develop an ability to listen alternative perspectives and consider the

implications on their decisions
Also known as stakeholder theory
Subjects decisions are motivated by not harming any stockholder
Ethics of care position states that relevant and reliable information (Information)
influences ones perception (Perception) in a particular situation
Modified perceptions are analysed (judgement) and then a decision is made (Decision)
Information dominates the perceptual stage in an open-minded individual

Ethical Process
Thinking Model
Psychological Egoism
(PD)
Deontological
Position
(PJD)
Utilitarianism
Position
(IJD)

Pressure

Opportunity

Rationalization

Wants, needs and

desires are high
If rules do not cover
situation, I may be
pressured
Goals are not
achieved

If you can get away

with it
New situation, no
policies

I deserve it

Relativism

Cultural, upbringing

Ends justify the

means
consequential
orientated
Based on situation or

No instructions or
supervisory to
contradict actions
Maximization of
profits for
shareholders
I deserve it

Business Ethics Notes (Mid Terms)

(IPD)
Virtue Ethics
(PIJD)

Ethics of Care
(IPJD)

etc affected by wants

needs and desires
Virtues such as
character, reputation
reduces but may not
eliminate pressures
Attempt to solve
problems of
stakeholders with
confronting,
contradictory goals
may not be possible

environment
Organization has
vastly different
opinions on what
constitutes virtues
Stakeholders are
spread across a wide
territory or
international
difficult to contact

Difficulty in
establishing the
nature of the virtues
When carried to an
extreme, this type of
a system can
produce decisions
that appear not
simply subjective but
arbitrary

Conflicts of Interests in Auditing Moral Seduction Theory

Selective Perception Bias auditors involuntary tendency to reach their own self-interest
even when they try to be independent

Since auditors are hired and fired by their own clients, they have persuasive economic
arguments to support client preferred goals

Escalation of commitment tendency to continue to invest in the losing course of action in

the hope of a favourable turn of events

Assuming that after the issuance of a clean audit report and the auditor will keep the
client, he or she will be morally compromised to act in the same unethical way for
subsequent audits

Discounting of information bias peoples tendency to only be aware of immediate

consequences of their actions

May lead auditors to perceive potential reputation loss and lawsuits costs as distant
and uncertain

Reasons to Release a Warning Signal (Ethical)

Normative behaviour based on accounting standards ethics of care and deontological

positions

1. Ethics of Care

Auditing standards promote an active role in every audit

Auditor opinion is supposed to be objective and not to harm third party interests
(stakeholder theory)

2. Deontology

Auditing standards require the issuance of a warning signal report when the company is
in a clear financial distress
Information gathering process is not essential bankruptcy probability is too high

Economic incentives utilitarian position (high litigation risk)

1. Utilitarianism (High Litigation Risk)

High chance of being in a lawsuit reputation issues

Reasons to Avoid a Warning Signal (Unethical)

Business Ethics Notes (Mid Terms)

Economic incentives psychological egoism, virtue ethics, relativism and utilitarian

(low litigation risk) position

1. Psychological Egoism

Auditors may avoid a warning signal due to their economic dependence on their clients
Auditors should be motivated to act in their perceived self-interest to maintain future
quasi-rents specific to a given client relationship

2. Relativism

Fear to cause damage to the financial situation of client and other stakeholders

3. Utilitarianism (Low Litigation Risk)

Low probability of being involved in a lawsuit reputational issue

4. Virtue Ethics

Overestimation of viability of managements plans and virtue ethics due to auditorclient close relationship
Personal values from their clients relationship are considered (perceptions)
Situation affects the evidence-gathering process consideration of aggravating and
mitigating circumstances
Personal values have a favourable influence on the possibility that managements plans
can reduce the doubt regarding the clients ability to continue in existence (Judgement)
Auditors will then decide not to release a warning signal (Decision)