Annotated Slides Intro To Business Ethics

Introduction to Business Ethics (1)
Dr. Matthias Uhl

m.uhl@tum.de
Peter Löscher Chair of Business Ethics
Dr. Matthias Uhl (TUM) | Introduction to Business Ethics | WS 2021/22 1

TUM School of Governance
Technical University of Munich
Literature
Christoph Lütge & Matthias Uhl

Wirtschaftsethik
München: Vahlen 2018
There is also an english version available.

(Business Ethics : An Economically Informed Perspective)

Overview of Lecture:
Introduction
Chapter 1: Basic Concepts
Chapter 2: Historical-economic Background: Premodern and Modern
Chapter 3: Foundations and Tools of Business Ethics
Chapter 4: Recent Problems: Ethics of Digitization
Chapter 5: Corporate Ethics

Introduction

Why Business Ethics? (1/3)

On October 2, 2018, Saudi-Arabian dissident
Khashoggi entered Saudi consulate in Istanbul to
obtain documents, but was never seen leaving
By November 16, 2018, CIA had concluded Saudi
Crown Prince Mohammad bin Salman ordered
Khashoggi's assassination
After receiving "hundreds, if not thousands" of posts
urging him not to attend the Future Investment
Forum, Siemens withdrew from Ryadh conference
Source: wikipedia.org

In 2018, up to 1.1 m people died from AIDS-related
diseases
70% of them are from countries of sub-Saharan
Africa
Worldwide HIV could be confined through
antiretroviral medication
What obligations do Western pharmaceutical

companies have to supply Africa with
antiretroviral medications?

In 1981, American Express developed a
campaign according to which the company gave
2 cent to charity for each credit card transaction.
Credit card returns increased by 28 percent.
Can Corporate Social Responsibility become a

business case?
General Perception (1/3)

Public perception is coined by virtue ethics:
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Distrust of certain population groups such as bankers,
speculators, "grasshoppers", etc.
Bertold Brecht: "Bankrobbery: An initiative by the
unprofessional. A true professional founds a bank."
Criticism targets involved actors and not structures



What do Germans Think about Entrepreneurs? (1/5)

Survey of the Bundesverband Deutscher Banken 2005
"Die Zukunft der Sozialen Marktwirtschaft"
(The Future of the Social Market Economy)
Critical view on the engagement of corporations in social issues


How many corporations promote societal welfare?
(in %)
7 3 4
26
60
A lot Many Not so many None Don't know
Source: Die Zukunft der Sozialen Marktwirtschaft 10/2005; n=1528


The social commitment of corporations over the last few years did «
(in %)
5 11
33
51
Increase Not change Decrease Don't know


High corporation profits are morally questionable
(in %)
5
37
58
Yes
No No
Yes Don't know


Society benefits from high profits
(in %)
2
23
75
Yes No Don't know

CSR Reporting Development

CSR reporting rate of the 250 biggest companies worldwide:
Increase from 35% in 1999 to 95% in 2011
100
75
50
25
0
1993 1996 1999 2002 2005 2008 2011 2013 2015
N 100 CSR reporting rate G 250 CSR reporting rate
Source: KPMG Survey of Corporate Responsibility Reporting 2015
The Ford Pinto Case

Ford Pinto (1/7)

Car of the lower compact class,
developed by Ford in the 1960s as a
reaction to the first Japanese compact car
and the popular German Volkswagen
³Käfer´
Introduction in 1970
Price 2,000 USD
§1.400 EUR in 2018
Ford Pinto (2/7)

Problem
Fuel tank behind the rear-wheel

Thus damage caused by rear-end collisions at low
speed
Possibility of leaking fuel, danger of explosion
Engineers hinted to the problem
Managers reasoned about the costs
Source: automotopad.com
Ford Pinto (3/7)
Source: youtube.com
Ford Pinto (4/7)

Question to Ford: Protecting rubber shell for the fuel tank?
Cost calculation:
Fitting costs: 11 USD/vehicle for 12.5 m scheduled cars
137.5 m USD
Costs, if not attached (Calculation of the Ford-statisticians):

2,100 burning vehicles (average time value 700 USD)
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at that time: 200,000 USD)
KHDYLO\LQMXUHGLQVXUDQFHFODLPHGÄYDOXH³86'
49.5 m USD
Source: barfblog.com
Ford Pinto (5/7)

Decision: No rubber shell
In the following years after the decision
ca. 60 lethal accidents
ca. 120 heavily burn injured people
117 lawsuits were brought against Ford
Pinto was withdrawn from the market 1980
Source: cjsmith96.wordpress.com
Ford Pinto (6/7)

Decision: No rubber shell
Ethical evaluation?
No contravention (prevailing rule, tank has to remain intact at the speed of 20 mph was
implemented)
Pinto was "statistically" as secure as every other compact vehicle (according to Ford)
Human life is constantly evaluated
Increased safety measures in traffic, e.g. backfitting of older cars with airbags?
11 USD per vehicle are still 0.5 percent of the sales

Ford Pinto (7/7)

Problems for Ford
Loss of reputation, especially when the calculation was discovered
Trial against Ford
First US Corporation accused of manslaughter
No conviction
However: five months after the case, the Pinto production was stopped for good.
Æ Starting point for Corporate Social Responsibility (CSR)

Æ Long-term ethics and commercial success compatible

What is the value of life?

Value of life
NHTSA in 1972
Future Productivity Losses 173,300
Medical Costs 1,125
Property Damage 1,500 $ 200,725 in 1972
Insurance Administration 4,700 ‫ ؙ‬$ 1,175,471 in 2017
Legal and Court 3,000 ‫¼ ؙ‬LQ
Employer Losses 1,000
9LFWLPµV Pain and Suffering 10,000
Funeral 900
Other 5,200
$ 200,725 Source: Dowie 1977/1994, p. 26
Value of life
Market value of body
Oxygen (O) ca. 63% 133.48
Carbon (C) ca. 20% 713.00
Hydrogen (H) ca. 10% 0.02
Nitrogen (N) ca. 3.0% 120.00 ¼LQ2008
Calcium (Ca) ca. 1.5% 20.85 ‫¼ ؙ‬LQ2017
Phosphor (P) ca. 1.0% 13.90
Potassium (K) ca. 0.3% 10.25
Sulfur (S) ca. 0.2% 8.00
Other ca. 1.3% 2.95
¼ Source: Klarne 2008, p. 68
Value of life
KZ Buchenwald in 1941
Daily Wage 6,00
Daily Food - 0,60
Daily Amortization - 0,10
Avg. Life Expectancy 9 m 270 * 5.30 = 1,431.00 1,631 RM in 1941
‫ ؙ‬6,708 EUR in 2017
Revenue from Personal
Belongings and Dental Gold 198.00
Costs for Cremation - 2.00
RM 1,621.00
Source: Strand 2005, p. 52
Value of life
Value of body parts
Legs 511,345
Head 110,846
Genitals 30,247
Internal Organs 107,310 1,672,349 EUR in 2008
Arms 113,832 ‫ ؙ‬1,856,307 EUR in 2017
Dorsum 226,445
Sensory Organs 234,149
Nervous System 145,436
Other 193,329
EUR 1,672,349
Source: Winner et al. 2008, p. 92
Dr. Matthias Uhl

m.uhl@tum.de

Introduction
Chapter 2: Historical-economic Background: Premodern and Modern

Chapter 1
Basic Concepts
1.1 Problems in Business Ethics as Interaction Problems

Robinson Crusoe and Friday

Robinson Crusoe alone on an island:
Daily struggle for life
Biggest problem is scarcity
Producer and consumer at the same time
Æ "Robinson Economics"
FRIDAY COMES INTO PLAY
Two individuals are competing for limited resources

Scarcity becomes a social problem
Æ Interaction problem as economic problem

Basic Elements of Problems in Business Ethics
1st Element: 2nd Element:

At least two actors An environment of scarcity
Scarcity leads to conflicts

Focus is on interaction of individuals
Individual problems become social problems
How to react to conflicts? Possibilities: combat, altruism, cooperation
Business Ethics begins when Friday arrives on the island

Cooperation as a Solution to Scarcity Problems (1/2)

There are two approaches to think about scarcity problems
→
this is always about now to disribute the Output
1. Criterion of Distributive Justice: How should a given cake be split?
Existing quantity of goods is given → this does not
orange
/
Distribution based on rules leg equality equity l performance )
.
/ . . .
)
Criterion is usually to get a result as equitable as possible
Distributional issues treated in isolation, problem of scarcity itself is not addressed

and persists

job !
this is an economists
Cooperation as a Solution to Scarcity Problems (2/2)

There are two approaches to think about scarcity problems that's the politicoans job
←
not so much con armed
Casualty) about the distribution of the pie but ratner the maximitation of the pie
→
itself
2. Criterion of Allocative Justice: How can we improve the supply of goods quantitatively or
> max imitation of Output
qualitatively to satisfy more demand than before?
Best possible allocation of scarce production factors (labor, raw materials, capital, etc.)
is crucial
Determine which scarce production factors should be allocated and used to satisfy
which needs
Gains from cooperation, problem of scarcity should be mitigated

Peter Löscher Chair of Business Ethics When economists Started out with a more
nowsic app roach more focus allocation
now
way on
→
Allocation Problems in Economics (1/2)

Scarcity problems should be understood as allocation problems to counteract scarcity problem
Connection to economics
Interdependence of production and distribution; have to be discussed simultaneously.
(different distribution of "cake" influences its size)
Shareholders invest in the production of goods or services and anticipate return on their
investment
µ
e. g. similartaxes for
all to not
endangd motivation
Efficient allocation of means of production through redistribution that causes little

distortions in incentive mechanisms

Allocation Problems in Economics (2/2)

Example: Economic Policy
Governments redistribute wealth and income by levying taxes and social security contributions
including the payment of social benefits
Which criteria (equity, equality etc.) do we use to arrange redistributions?
Which combination and distribution of produced goods does maximize productivity?
How can we prevent undesired effects such as free-riding or negative externalities?
Institutional design determines whether gains from cooperation can be achieved

Limits of Individual Moral Actions µ

the Christian
thing
to do
Example: The virtue-ethical question "What should I do?" makes Robinson to give
up half of his stocks to Friday.
> they are just administuing the
scarcity and don't this k about
Result: Nobody gets enough to eat. what to do about it :
economic took at the problem
it does not matter

³,WLVQRWIURPWKHEHQHYROHQFHRIWKHEXWFKHUWKHEUHZHURUWKHEDNHUWKDWZHH[SHFWRXU
that much
why people do
dinner, but from their regard to their own interest. We address ourselves, not to their humanity it as
long as it is to
but to their self-ORYHDQGQHYHUWDONWRWKHPRIRXURZQQHFHVVLWLHVEXWRIWKHLUDGYDQWDJHV³ everyone's ad

vantage
(Adam Smith, "Wealth of Nations", 1846, p. 26)
strong ly influence d by the ideas of
en
light meint
Decoupling of motive and result Æ morality is interpreted as an unintended result

not ethical it is it
of intentional action in the US Win Win V
Germany ideas of Kant sacrif.us
:
> : ~,
you profit , too
antut if people do not do it for reasons it it doesn't matter Why

Huge
'
the can t people
right be ethical
:
vs .
Dr. Matthias Uhl (TUM) | Introduction to Business Ethics | WS 2021/22 do it as long as it hdps 10
makes business ethics district from other

Outcome for Business Ethics > this
parts of ethics
Solution: Business Ethics should not be based on actions and their motives, but on the
conditions under which they are carried out. in Stead of
het pfui to appellI the individual !
e.
g
.
judging
it is not always people for bi boy im pro ue
Reasons →
usually it is breiter to
charge
the Conditions of
your action
^
the conditions of in anti ves
( and party accept that

1. Individual virtues cannot solve structural problems )
are who
they they are
2. Problems in Business Ethics are by nature systemically interaction and interdependence

problems intuitive
>
very after very ~
things the Micro Level have very counter intuitive results on the aggregate
on
3. Conditions of the modern world:

>
much focused virtus because for most
we are so
part of
Rising degree of complexity in economic relations
on
history virtue has brougnt

*
human us
very for ( sharing in your Own
Prevalence of mutual interdependences between individuals, firms and nation states

Sometimes
ethics not an exercise of reflection sometimes you have to out and Ivy you will be Surprise
only be go
can →
> ,
* well) this does not work good

Dr. Matthias Uhl (TUM) | Introduction to Business Ethics | WS 2021/22 Community work
really → to
day
as
anymore 11
Chapter 1
Basic Concepts
1.2 Ethics and Economics ±

Definitions and Methodological Deductions

Classification of Philosophy
Theoretical Philosophy
What does exist? (Ontology) also is the r a
gg
What is the order of the world? (Metaphysics)
Wissenschaftstheorie
What can I know? (Epistemology, Philosophy of Science)
What is the relation of language and reality?
(Philosophy of Language) ...
Practical Philosophy
What should I do? (Ethics) -
Z
What is the best means to achieve an end? (Economics)

What is the best order of society? (Political Philosophy) I
History of Philosophy these
go
aIs have to
come from the Outside Source: tetraktys.de
Ethics and Ethos

Basic idea of "ethos":
"਩șȠȢ" = originally: Space of living, position, horse stables,
then also: habit, custom, tradition
"ਵșȠȢ" = Character, disposition, custom, tradition, habit
Aristotle: Triad of politics, ethics and economics

These3wer.no/-somuchconsidezdin-
isolation as
they are now
adays
Ethics and Morality (1/2)

Since Cicero: Ethos/Conventions = "mores" Æ Morality
Colloquially often used interchangably:

"Ethics" instead of "morality"
Philosophical usage: what you empiri ally obserue
µ do
> Observer and de scribe what
they
Morality as a complex of rules and norms that (should) I or what
they should
do them)
determine people's actions justitia ting > no
accor
ding to
Ethics as theory of morality (reflecting on morality)

( science that deals with morality ) Source: wikipedia.org
Ethics and Morality (2/2)

Morality:
Aggregate of rules of action, standards, norms, values, conceptions of
significance that guide or ought to guide the actions of human beings
Determines actions or ought to determine actions ( some

people are awar of this
,
Others azn t
'
→ people are
tot alter in
Violation leads to violations of oneself and/or others
a
Sporting other
people 's ethical short •
mings
than their Own )

Ethics - Overview first clarity

looking
what
at e.
you mean
g. normative
ethics
before
✓
lusually not done . . .
)
Meta-Ethics
Normative Descriptive
Ethics Ethics
Deontological Consequentialist
Virtue Ethics lulilitainism)
Ethics Ethics
Contractualist
Utilitarianism
Ethics
Act Rule
Utilitarianism Utilitarianism

Technical University of Munich not ned with meta ethics
of justitiation cancer -
describes the ease , no means ,
Descriptive and Normative Ethics

Descriptive Ethics:
Description, systematization und explanation of normative systems
e.g. ethnology, moral psychology, evolutionary biology, behavioral economics
→ e.
g.
how can it be that we consi der things unethical to
day that were to
tally normal 200
years ago
?
Normative Ethics
Conditions for approval and compliance
Evaluation of an economic order as "just" or "unjust"
«FRQWDLQVmany empirical constituent parts
( but offened)
> reines on a Iot of promises which are ultimate lyempirichl people don't see it

Normative Ethics and Meta-Ethics

Normative Ethics
Definition: Ethics is the analysis of human conduct from the perspective of "good" and
"bad" respectively "morally right" and "morally wrong"
Different from psychology and humanities
the uns but ratner
not the content of
✗ over
anhing big questions
> ratner in
analytical terms
Meta-Ethics L
Focuses on nature of morality, often relies on semantic analysis of moral judgments

Difference between cognitivism and non-cognitivism (can moral statements be true?)
normative statements can not true false , they are
Not directly related to content of rules or norms

be son as or
>
ultimately questions of last which can beHer or work be justified

find A have not to und
normative truths out there which can
Maybe
we we
> There are
objective
find them
Dr. Matthias Uhl (TUM) | Introduction to Business Ethics | WS 2021/22
them
get but in principle we can
19
Meta-Ethical Questions
According to Richard Garner and Bernard Rosen
(1967: Moral Philosophy: A Systematic Introduction to Normative Ethics and Meta-Ethics)
1. Moral Semantics:
What is the meaning of moral terms or judgments?
2. Moral Ontology:
What is the nature of moral judgments?
3. Moral Epistemology:
How may moral judgments be supported or defended?

e. g. is under
payment violati on of
dignity !
Example: Different Levels of Ethics "
µ
"
)
> no real content ( not like you are not all owed to rape some one
"Human dignity is inviolable." (Article 1, German Constitutional Law)
According to the German Constitutional Law human

Descriptive: dignity is inviolable.
No one, not even public authorities, ought to

Normative: compromise human dignity. (Human rights!)
What does "is" mean? Does the statement imply a normative

meaning? Is an embryo a "human"? What about a corpse?
Meta-Ethical: What does "dignity" mean? Can it be reduced to physical
integrity?
→ ins
isting on the meaning
Different Types of Normative Ethics (1/16)
Moral judgments based on«
Rationale
behind Conse-
Action as Purpose of Utility of
action quences of
such action action
action
(mens rea) How do you
eualuale
did he /she do the consequences of

the
Why
that ? action !
sometimes evaluates
> everyone
Consequences differently

<
Most
publidy spread ethics
Virtue Ethics
Good and happy life = virtuous life
faust Certain
<
on
promoting
Goal: Enhancement of certain virtues values within individuals
Examples of virtues: Wisdom, justice, courage, moderation

For example: Aristotle
you understand
what are
on a
you
Goal: Happiness (eudaimonia) of human beings supposed to do you will automationIly do it
( in theory and back in ancient greece )
<
Virtue as attitude, determined by rationality and educational background / practice

Virtuous life = to find a reasonable mean between two extremes
For example: Bravery as a golden middle way between daring and cowardliness
The golden mean is the best, that can be achieved individually.

!
trying
is
always worse
Deontological Ethics vs. Consequentialism µ
"
" bad
e.
g. trying is .
Deontological Ethics (to deon = duty) → even if in WWZ ajew

was
hiding at
your
to Kant
place and a nazi walked in accor
ding
Action as such is crucial to evaluate it as good or bad you would have had to till the touth
Calculation of the consequences only additional, not as crucial normative criterion!

Kant: Categorical Imperative: <
³Act only according to that maxim whereby you can, at the same time, will that it
VKRXOGEHFRPHDXQLYHUVDOODZ´
Good will: No calculation of the consequences!
Grounded in nature
Nature of action: e.g. prohibition of contraception

Deontology
Immanuel Kant
1724 ± 1804
German philosopher
According to Kant, philosophy ultimately aims at answering three

questions:
³:KDWFDQ,NQRZ":KDWVKRXOG,GR":KDWPD\,KRSH"´
Source: Immanuel-kant.net

Deontological Ethics vs. Consequentialism
Deontological Ethics (to deon = duty)

needed if you want
apply deontdogical
ethics strictly
strict oder
ing of
> rates to
Example: ( other wise ries night intoter )
Lying is always morally wrong. Even if a murderer asks about the hiding place of his victim,
one is obliged to tell the truth.
Æ Problem: Clash of different moral norms, if consequences are not taken into consideration
uHist
:
not the action but most importanty the
Further critique: consequences should be con sidhzd
Implementation issue, exploitation risk

Issue of value pluralism

Economics has problem with
Technical University of Munich a
Modeling truly altouistic acts
.

Deontological Ethics (to deon = duty)

Ethics of conviction
Motives as criterion
Quasi-deontological
7RDFWÄRXWRIGXW\³YVWRDFWÄLQDFFRUGDQFHZLWKGXW\³
e.g.: Corporations act ultimately out of profit interests (not out of duty)
Æ Cause-related marketing


action per is
→ an se no
Longer Wrong
!
How for does consiaoation of Consequences have to go
sometimes cruüal !
Consequentialism > Ying is
Consequences of actions are crucial to distinguish between good and bad actions
Consideration of purpose and means
Long term vs. short term consequences? → when do I stop
?
(Unintended) side effects? → is it

my obligation
to for see
everything
!

to the nie vi dates
In deontology : it's
wrong
because not
alling
acc
ording your obligation
TUM School of Governance bad
it's because the consequences
Technical University of Munich rule utilitaianism :
wrong are

→
trans lat the Consequences into Utility !
Utilitarianism → part of conseauenlialism
utility person 1 +
utility person 2 + .
=
utility overall
conseauentialislic!
. . .
→
always does not consi der
single entity
→
euvy person as a
Utility is crucial to distinguish between good and bad actions

in erase the ha pines of Many people
8WLOLW\RIWKHÄJUHDWHVWQXPEHU³QRWXWLOLW\RIWKHLQGLYLGXDO
Act Utilitarianism I the most
pur for m)
Example: Corruption in an individual case can produce positive consequences
good idea to cross the street right now )
took at each act individual ly leg is it !
indeed → .
a
example with childzn

Rule Utilitarianism
Street when the
looking at rule ( red )
a
What counts is the utility of the rule never Cross
night is
a
→
eg
.
( eslablish Situation in which the Utility of

the
"
we should a
"
is mhximized
that is warst off
.
person
→ different approach

Utilitarianism
Jeremy Bentham
1748 ± 1832
English philosopher, legal scholar and social reformer
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PHDVXUHRIULJKWDQGZURQJ´

Utilitarianism
Problems of Utilitarianism: individuals

How can we
aggregate utility among
How should utility be calculated? <
Individual and its rights are less important than society

Utility of majority can be raised at the expense of
(small) minority (John Rawls)


Liberalism (1/3)
John Stuart Mill

1806 ± 1873
also focus on the
quality of actions !
→ less hedonistic ,
some actions
English philosopher and political economist
are
weighedhigher than Others
"That the only purpose for which power can be rightfully exercised
over any member of a civilized community, against his will, is to
prevent harm to others." " "
Harm principle
↳ not Self ! to one

Liberalism (2/3)
as long as there
principles are
guaranleed the
,
"On Liberty" 1859 state has no

right to inter fer in the decision
making authority
single individual !of the
The freedom of thought and emotion. This includes freedom to act on such
thought, i.e., freedom of speech
The freedom to pursue tastes (provided they do no harm to others), even
if they are deemed "immoral"
The freedom to unite so long as involved members are adults, involved
members are not forced, and no harm is done to others


Liberalism (3/3)
Harm Principle (J. S. Mill)
"That no one should be forcibly prevented from acting in any way he

chooses provided his acts are not invasive of the free acts of others."
→ Harm principle

Imagine you have to found a society.

h-%Edi-E-tnea.name
Which five guiding principles would you choose?
Content in mind how should
dual ethics : not some particular we
pro ce
certain process with which we each those
eualuate the actions but we
say imagine a
be ethical most ethical because

results and Whatever we then find out to a
it has been cache d as the res uH of a fair ethical process .


Contractualism (1/3)
John Rawls assume people come

get
to to :
on what
1921 ± 2002 ter ms for the organisation of this society

would ?
they agre
US-American philosopher all agre it mast be ethical !
→ if they
"A Theory of Justice" (1971)

try to put yourself behind this Veil and
trytorcconsider
Contractualism (2/3) 1-
Mings → do
you still ne them as fair ?
John Rawls ± "A Theory of Justice" the rsult is left pr Hy open !
it is a procedure !
VEIL OF IGNORANCE <
IN THE ORIGINAL POSITION ALL INDIVIDUALS ARE BEHIND THE VEIL OF

IGNORANCE, THEY DO NOT KNOW WHICH ROLE THEY WILL PLAY IN THE FUTURE
SOCIETY. AGAINST THIS BACKGROUND THEY HAVE TO NEGOTIATE A SOCIAL
CONTRACT, EVERYONE WILL AGREE WITH. THE NEGOTIATED RULES WILL BE
APPROVED OF, IF ALL INDIVIDUALS IN ALL POSITIONS ARE BETTER OFF IN THE
END.

Contractualism (3/3)
intellectual
disability ,
in come
capabiuities
Criterion: Instead of maximizing utility via rule
. .
,
.
Æ Consent (of all people) to a rule ( under certain position that don't know about )
a
they
(Social) Contract Theory (Hobbes, J. M. Buchanan)
Criterion of consensus (win-win, mutual benefits)
No maximization disregarding the individual interest
Individual is taken into consideration

ethics and moral !
Technical University of Munich Some relationship as
Economy and Economics (1/2)

Economy someone who deals with
scacity and wants to get the most out of a Situation
→
"Household": Domain of the discipline economics
Economics
Traditionally: Science of the domain "Economy"
Æ Meanwhile it comprises also phenomena such as culture, political
methoddogy : Maxi mization
offices, elections, education, family, phenomena of addiction, health ^

of the constraints !
Nowadays rather characterized by certain methodology

all different of behavior in toms of the economic method dogg
>
explaining sort
)
leg .
of büsing ,
even economics
Marriage ,
.
. .

Economy and Economics (2/2)

ng good prdictions
Maki
good theory
:
Economics > essence of a
DEFINITION OF ECONOMICS
ECONOMICS DEALS WITH THE EXPLANATION AND DESIGN OF THE CONDITIONS
AND CONSEQUENCES OF INTERACTIONS ON THE BASIS OF INDIVIDUAL COST-
BENEFIT CALCULATIONS. considoing basichlly everything the basis of individual cost benefit
→ on - -
calculations ( even family )

eg
.
.
,
.
.
(following Gary S. Becker, 1930 - 2014)

"
>
"
invasion of other domains by economics
Sometimes described as "economic imperialism", initially coined

negatively, later on adopted by representatives themselves

Business Ethics (1/2)

Two Concepts
1) Business Ethics as "Hyphenated Ethics"

Ethics "for the economy"
Just like Medical Ethics, Bioethics, Media Ethics, (QJLQHHULQJ(WKLFV«
2) Business Ethics as ethics with economic method

Ethics viewed from a certain perspective: in centive scheues
sanctioning have , ,
behavioral
effects in mind
ÆImplementation of norms: transfer of rules into (social) world
r
dner to the mks ?
Morality is reconstructed by economic means will people want to a

Business Ethics (2/2)
DEFINITION OF BUSINESS ETHICS

BUSINESS ETHICS IS A DISCIPLINE OF PRACTICAL PHILOSOPHY THAT EXPLORES
WHICH NORMS CAN BE CONSTITUTED AND IMPLEMENTED UNDER CONDITIONS
OF MODERN SOCIETY.
that there Certain ideas present in the

go assumption
are
no I on
the Modern world !

whole society in

Chapter 1
Basic Concepts
1.3 Situating Business Ethics in Philosophy

Ethics and Economics
Fundamental Contrast or Two Sides of Same Coin?

Two Options for Theory in Business Ethics (1/11)

Dualism vs. Monism
What ought to be done in light of conflicting demands for action?

e.g., shareholders vs. stakeholders
^
( in cnasing ROI )
Fundamental contrast of
Morality and Business shareholder theory just focus the shareholder it is
:
on not
your
s
,
Ethics and Economics obligation right being the agent of your

+
shareholders to consi der Use

anything
also have to con si der other
Stakeholder
theory
:
you things
ennionment )
(e. g. employees , , . . .
45

Dualism vs. Monism
Dualism
Calls for decision on one position or at least "mediation" between both positions
Final aim: "domestication" of economy ethical rotations within which the flourish
economy an
m>
Proximity to everyday intuitions of many if not most people


Dualism vs. Monism
Dualism
Examples:
Morality OR Economy
Altruism OR Egoism
Solidarity OR Competition
Ecology OR Economy
Common Welfare OR Self-interest
Common Welfare OR Efficiency

Dualism vs. Monism
Dualism
Close to perception of human beings (shareholder's benefit from mass dismissals)

Consequences: Appeals to conscience and postulation of values (prioritization of
"moral values") there is not always Someone to blame ! difticult due to Complex supply chain
→ ey
.
train
Attribution of blame, search for culprits dominates discussion (
Many reasons why eg .
a
has an accident )
Question of norm implementation plays subordinate role
one ptrobkm with autonomous machine s
Dr. Matthias Uhl (TUM) | Introduction to Business Ethics | WS 2021/22 → Who is to blame ? 48

Dualism vs. Monism
Examples for Dualistic View (1/2)

Karl Kraus (ca. 1920)
"You want to study Business Ethics? Then you have to decide on either Business or Ethics!"
Ulrich Döring ("Allgemeine BWL", FAZ 2010)

Making profit is ethical: Shareholder approach is right; morality in the economy is simply
"
"
dysfunctional You cannot align business & economics
Ä7KH6WDNHKROGHUDSSURDFKWULHVWRPDNHHQWUHSUHQHXUVDFWPRUDOO\YLDFROOHFWLYHGHFLVLRQVDW
the round table. In business practice the discourse-ethical approach is doomed to fail.
&XVWRPHUVVXSSOLHUVLQYHVWRUVVWDIIDQGWKHSXEOLFKDYHFRQIOLFWLQJFRQFHUQV³


Dualism vs. Monism
people want that's why they buy
is what it
Examples for Dualistic View (2/2) What people bug
→ not true because people don't really
know what
they want / med
Erich Fromm (1976)
→ true reeds are much snake , less gredy style of King
"To Have or to Be"
Leaving the realm of "possession"; aiming towards an attitude of "being":

"True needs of the human being" vs. "Requirements of economy"
"Exploitation of nature by man" vs. "Cooperation between man and nature"
"Mutual antagonism between man" vs. "Solidarity"
"Maximum consumption" vs. "Reasonable consumption" (for benefit of human beings)


to there norms ? nee d economic
How are we getting actors to •mply →
you
Limit of Dualistic Approach: Problem of Implementation means
Actors involved agree that

postulated goal
Actors in competition comply
(e.g, implementing
with moral requirement
environmental protection)
is desirable
Reason:
If actors follow moral appeal, they are vulnerable to exploitation and expect to suffer
competitive disadvantages


Dualism vs. Monism
Monism
"Economics as a continuation of ethics by other means"

Central normative criterion: mutual improvement
>
justify ethical ideas
so that
they Cause
Mutual improvement
Therefore, all parties can agree on certain rules
Morality and Economics are considered two sides of the same coin.
Basis: modern understanding of economics


Dualism vs. Monism
Monism
(WKLFVFDQµWPDNHLQGLYLGXDOVZRUNFRQVWDQWO\DJDLQVWWKHLURZQLQWHUHVW
( Sequence of choias )
Ethics has to show that acting according to moral rules is in the aggregate
(not in an individual case!) more advantageous than breaking these rules


Dualism vs. Monism
Monism
Correspondence with David Hume's (1711-1776) view:
Finally, it is the aim of moral philosophy to show that all its
demands are in the interest of the individual
Only with (general) advantages can one expect people

to act according to moral norms in everyday life

Dualism vs. Monism
Monism
Morality is surface
(In daily life) ethical phenomena are just surface
Underneath (mutual) advantages are hidden
Nine tenth of iceberg are under water surface → consi do the Whole
picton
What if competition does not lead to mutual benefits and does not increase
benefits on aggregate level?
Unternehmenethik
Term "Business Ethics" >
what should be the or do of the
economy itself
?
how should the economy be

oganitd ?
German term "Wirtschaftsethik" without adequate equivalent in English
English:
"Business ethics"
"Economic ethics" Æ very uncommon
Corporate Social Responsibility = CSR
French:
"Éthique des affaires"
"Éthique de O¶pFRQRPLH" Æ very uncommon

Ethics and Economics: Two Sides of Same Coin

Coincidence of ethics and economics can be illustrated with
debate over introduction of universal health insurance in USA
Ethical argument
Right to general primary health care regardless of income
Economic argument
Bad health conditions of working population are detrimental to
economy as whole and create high opportunity costs
Moral Quality of Economics
Economics does not maintain its moral quality through individual

moral acts ± its moral quality is in overall system
To understand and induce changes in system, actors (e.g.,

managers) need to be modelled as self-interested beings
Moral concept of solidarity has to be implemented through

suitable order framework

Relevance to Corporate Ethics (1/2)

( obligation of a
Single Company / NGOs / )
. . .
Ideal:
Perfect economic condition/ framework (all actions fixed in details)
Æ Business ethics is systemically relevant
Real:
"Complete" framework is practically impossible due to dynamic nature of
global markets
Æ Corporate ethics is complementary to business ethics
Covered Contract
→ orientalis on for Situations which are not
by

Relevance to Corporate Ethics (2/2)

Consider for example: Theory of Incomplete Contracts
Starting point
Assumes that human interactions are governed by contracts, formal
(e.g. codified laws) and informal (e.g. promises)
Problem Oliver Hart (*1948) and Bengt
Holmström (*1949):
These contracts are incomplete in number of ways (for example: Nobel Memorial Prize in Economic
Sciences in 2016
performance and consideration are not precisely defined)
Æ Incomplete contracts thus increase uncertainty not
everything can m and should be speäfied
room for adaptation

>
Goal of Corporate Ethics:
Recommendations for actions in face of incomplete contracts
Parallelism of Corporate Ethics and Business Ethics

Two important aspects:
1. Business ethics (level of regulation) and Corporate ethics (level If companies and business
partners anticipate that a
of action) must not be in conflict with each other company will be protected
from insolvency due to its
2. Dualism vs. Monism systemic relevance, the
market risk premiums lose
What is relationship between profits and morality? their significance and
incentives are created for
taking large risks at the
expense of the general
public.
If morality is systematically implemented at the expense of profits, does it then have

a realistic chance in the long run?
Risk of a Dualistic Corporate Ethic

Example: Klaus Steilmann (1929 - 2009)
German businessman who founded company "Klaus Steilmann
GmbH & Co. KG" in 1958
Company evolved due to a strategy of low prices to one of the
main players in Europe
Globalization put the company under strong pressure to lower
costs starting from the 1990s
Steilmann kept his German staff despite their higher labor costs
Bankruptcy in 2006 could only be avoided because of a take-over
by the Italian manufacturer "Radici-Group"
Corporate Ethics as Risk Management (1/2)

Monistic Corporate Ethics:
Postulate of incentive-compatible implementability

Importance
Moral actions have to be reconstructed as self-interested actions
Moral missteps can involve high risk for the company's success
Example: Consumer boycotts
Result
Morality is part of entrepreneurial calculus
Moral behavior and pursuit of profit become two sides of the same coin

Corporate Ethics as Risk Management (2/2)

Reputation
Goal: Represent yourself as reliable producer/trading partner

Signaling reliability through collective or individual action
Therefore, customer loyalty and maintenance of business contacts in
absence of specific contracts
Reputation serves as check on Opportunism

Three Types of Responsibility

Behavioral responsibility
Companies are responsible for their actions and resulting consequences.
(Compliance, product responsibility, advertising methods, etc.)
Regulatory responsibility
Entrepreneur is obliged to participate in improvement of the social or political order.
Discourse responsibility
Companies are called upon to participate in public discourse on social and political foundations
of global society.

Dr. Matthias Uhl

m.uhl@tum.de
1
Introduction
Chapter 2: Historical-economic Background: Pre-modern and Modern

NO YEARS & NVMBERS
Chapter 2
Historical-Economic Background:
Pre-modern and Modern Societies
2.1 Ethics of Actions and Ethics of Conditions

Economic Conditions and Moral Norms

The validity of moral norms in business ethics depends (above all) on the prevailing economic conditions
Strong change in the economic conditions and structures:

distinction !
Pre-modern and modern worlds Æ Paradigm shift systematic
cietal
technologieat ,
so
Ethical concepts from philosophies of the past century are not easily transferable developments
( also in the
economy)
Reason: Earlier ethical concepts were not wrong in themselves, but moral thinking could not catch up with
developments in other human domains

Historical Background (1/2)

Small communities and only a few isolates cities
(until 1000 AD: Only 10 cities with more than 100,000 inhabitants):
Rome (the largest city around 100 AD)

Cordoba (around 1000)
Beijing (from 1500 ± 1800)
London (around 1900)
"
"
given by god
Predetermined order and leadership (divine right to rule, mandate of heaven)
Low interregional communication options (Lütge, 2005): Interactions mostly among known
individuals
Source: Leo von Klenze, wikipedia.org
Historical Background (2/2)

high pinion for >
o people wo
King in
agriculture !
Strong importance of agriculture for peasants and nobility
(cf. Garnsey et al., 2015)
Objectives of the political economy: Self-sufficiency and

protection from natural forces (risk aversion), subsistence
↳ survive shelter ,
,
. .
.
Economy as a private affair (oikos = house; nomos = law)
Clear notions of a hierarchy of professions or castes

(Ancient Greece, premodern India, Tokugawa shogunate or
Joseon dynasty)
Social Classes in Antiquity

³$OOof you in the city are certainly brothers,' we shall say to them in telling the tale, 'but the god (sic!), in
fashioning those of you who are competent to rule, mixed gold in at their birth; this is why they are most
honored; in auxiliaries, silver; and iron and bronze in the farmers and the other craftsmen´
↳ wealth comes from agriculture
(Politeia, 442, a-c)
Æ Ranking of professions and exclusion of particular groups from political participation
Æ Differences of human beings by nature

Changed Structures of Modern World (1/2)

Fundamental differences
1. People can influence their behavioral conditions (For example: participation in the political
sphere), limited degree of predetermined order of things and lack of a universally
recognized external authority Æ multitude of different goals and beliefs
2. Strong increase in individual mobility in geographic, social, cultural, and professional

dimensions: Multiculturism and Pluralism
3. The material wealth of humanity saw an exponential growth since the Industrial
Revolution that has intensified since 1945

Changed Structures of Modern World (2/2)

4. Modern society is characterized by the fact that individuals can escape direct "moral"
control relatively easily, because social norms are not enforced by face-to-face control
(excommunication, outlawing, moral appeal)
ÄHH day to
Pre-modern: Ethics of actions = quest for individual character improvement

Modern: Ethics of conditions rather than ethics of actions must be the center of ethical
considerations
Conclusion: Change from premodern to modern societies requires a change from ethics of
actions to ethics of order
very had to over come the ethics of actions

Erosion of Traditional "Moral Monopolies"
Members of Catholic church in Germany Regular church visitors in Austria (%)

27 30
26 25
25 20
24 15
23 10
22 5
21 0
2004 2006 2008 2010 2012 2014 2016 1973 1977 1981 2001 2006 2010 2016

Economy and Growth in Antiquity

another
"
"
What one person gains is a I Oss for person
Zero-sum game:
Hardly any growth in antiquity mai

my reorganization by distribution
→
Static income distribution: "The profit of one is the loss of anotherµ

Political consequence: Distribution struggles and political instability
Winners of income distributions are either the "poor" or the "rich"
"
" " "
→ make the p oo riche or the ich poonr

Causes of Economic Growth in Modern Age

Technological progress (navigation, steam engine) and gain of scientific knowledge
(Galileo Galilei, Isaac Newton)
> more demand high production distributed over a higher amant
+ on
Increasing economies of scale by implementing new technologies of people

t
Introduced competition & increasing international trade cheapo production
Premodern societies: Face-to-Face trade
Modern societies: centers with high production levels
Since 1990: Economic transformations in China, India, Russia and Vietnam and the
transition to modern market economies → on going process
Æ 1 billion people have been liberated from extreme poverty

Economic Growth and Extreme Poverty

absolute limit of existence
µ
Percentage of world population (%) that has less
than 1.90 USD (KKP 2011) per day Share of world population (%) living in slums
100 100
80 80
60 60
40 40
20 20
0 0
1980 1985 1990 1995 2000 2005 2010 1980 1985 1990 1995 2000 2005 2010
Source: Worldbank 2018

Ethics of Actions (1/2)

Economic conditions: subsistence economy that should ensure survival
Tradional Ethics:
Perception of society as zero-sum game:
³%\being rich, I make others poor I may not even know."
(Giovanni Ruccelai, 1475 -1525)
Virtue of moderation in consumption

Risk aversion → you med to take risks now a
day s
> not back then !
activities been as
ricky
were
and Vice !
gnedy
Risk Aversion in Antiquity: An Example
L
³,WLVWUXHWKDWWRREWDLQPRQH\E\WUDGHLVVRPHWLPHVPRUHSURILWDEOH
were it not so hazardous; and likewise money-lending, if it were as
honourable. Our ancestors held this view and embodied it in their laws,
which required that the thief be mulcted double and the usurer fourfold;
how much less desirable a citizen they considered the usurer than the
thief, one may judge from this. And when they would praise a worthy
man their praise took this form: "good husbandman, good farmer"; one
VRSUDLVHGZDVWKRXJKWWRKDYHUHFHLYHGWKHJUHDWHVWFRPPHQGDWLRQ´
(Cato the Elder, De agricultura)

"
valve d Mean of economy
only
Ethics of Actions (2/2)

A famous example of the ethics of actions is the story of St. Martin who
slices his coat into two parts with his sword, giving one half to the freezing
beggar the some → redistributi on as
environmental scarüty stays
the most ethical action
This altruistic act is frequently considered to be the epitome of a good deed
In the domain of the ethics of actions, this example can be viewed from two
angles
Unselfish act is the epitome of a good deed
Conceived as improvement of individual's character
Ethics of condition: Problem is not solved on structural level Æ both are freezing
Solidarity and Competition heauily dischssed !
,
Is there a fundamental conflict between competition and solidarity?
!
often poceiued games
as zero Sum -
>
If modern societies are not zero-sum games:
"Social interaction for the benefit of all, including the disadvantaged" (Homann, 2003)
^
from his perspective

Competition enables growth and growth increases the size of the cake
Empirical findings: Market economy and competition explain the economic growth after the
industrial revolution
> in create the overall Size of the Cake
Does competition promote solidarity more than sharing?

Economic Order (1/3)

if the process of
the com petition
Competition is not "war of all against all"
itself is fair then the out one
Conditions and rules of competition: mast be fair as well
Enabling prosperity enhancing competition

Prohibit certain types of behavior (violence, fraud, tax evasion)
New (ethical) goal: Performance competition

Preferences of customers in center → discipline the
providers
Quality and cost of the products
Æ Conditions of actions in focus and not the motivation


Causes of re-evaluation of competition and individual striving:
machs it
longer leasing) implement
there is no
You can no
1. Elimination of Social Control Sancti institution
r oning
Pre-modern: Social control via face-to-face mechanisms Æ Strong deterrent potential
Modern: Ever-changing cooperation partners, complex causal connections and effects of
actions (externalities) (into action of two which Might hurt another person)
Self-control/Conscience of the individual leads to competitive disadvantage in competition
if you add to the framework
→ no more Nom
for personal Moral adions


Causes of re-evaluation of competition and individual striving:
as
long as it is not inKnded contra
ry to what was practical
→
for
hundreds of
2. Self-interest as a "modern form of charity" years
does > ethics not always have to hurt
Crucial: Suitable framework promotes prosperity and induces people to produce what
benefits their fellow human beings
Self-interested action at the expense of others should be prevented
Preferences do not only refer to monetary or material advantages
Modern ethics of investment instead of pre-modern ethic of moderation
accumutation of
Morey is no longer ethical condlmnabk risks are no longer problemdie
> ,
Æ Under this view, traditional conflict between "good" DOWUXLVWLFEHKDYLRUDQG³EDG´HJRLVPLV

no longer valid
sei fish due to this idea ?
> do people get
Ethical Quality of Competition (1/2)

The following applies if the competition takes place in an appropriate regulatory framework:
Self-interests can be directed in such a way that they bring the greatest benefit to fellow
human beings and society
Exploitation must be prevented by rules
Uncertain consequences of enforcing ethical values irrespective of framework conditions
are avoided you have
→ to understand the em
piri al effects of this action Does this
really had to the
Recognizing the complexity of contemporary socio-economic systems behavior want to
you
achieve?
Æ Competitive market economy as systemic approach of business ethics

(
H you do not about the consequences this
a)
TUM School of Governance was
can
ethical action
very
Ethical Quality of Competition (2/2)

Example of shortcomings of traditional ethics of action:
Burning 105 tons of confiscated ivory in 2016
Goal: fight against illegal poaching
Ethical perspective:
Poachers hunt for high profits
Burning 105 tons reduced supply, but increased prices
Demands stay constant, price of ivory increased Æ higher profits attract more poaching
If systematic connections are overlooked, even well-intentioned acts can often lead to
unforeseen and above all unwanted consequences
> empirical information / data are
highly important for the discipline of ethics itself
Chapter 2
2.2 The Benefits of the Market and Competition

Competition (1/3)
What does competition mean?
Competition is state of ³FRPSHWLWLYHVWULYLQJ´

"It is merely a metaphor to call competition competitive war, or simply, war. The function of
battle is destruction; of competition, construction." (Mises, 1922, p. 291)
The distinction between competition and struggle is important

Struggle: Natural and "without rules" → those with most power will prvail
Competition: Without a suitable set of rules, competition as an artificial structure can
quickly lead to a "ruinous competition" (Hobbes, 1642)

Competition (2/3)
Conceptual history and linguistic usage
Multiple people
Latin: competere = "trying to achieve something at the same time" Æ abiding by rules vs.
concurrere = "collide, converge" Æ refers to direct combat, not abiding rules
English: Competition = Rivalry Æ competition from competere
German: Wettbewerb Æ key concept of liberal economics and social science - put into
other contexts (for example: Political competition, biological competition, etc.)

Competition (3/3)
Six that are inseparably linked to the success story of market economies:
1. Market as an instrument for the use of distributed and local knowledge

2. Market as a method of discovery
3. Market as an engine of innovation
4. Market as a control mechanism
there has a more e-Active
5. Market as an instrument of disempowerment → never been system of eoding
6. Market as an instrument of self-discipline power positions ( if you want to have more democratic
institutions in countries , make them more
open to Markets)

The Market as a Method for the Use of Knowledge

The market as an instrument for the use of distributed and local knowledge
Economist and Nobel Prize laureate Friedrich A. Hayek describes economic relations and human needs as
³Dcomplex and spontaneous RUGHU´ → many decentratized plans on the Micro und
→ in our Minds oder has to be
:
planned
Planned Economy:
Describe complex social structures and optimize by way of general laws
General production quotas and prices are set Millions of
price plans of people
:
in the price
refkcting
Market Economy: what market Planno considers
9 ms a
Human needs and conditions are constantly changing ( price)

scazity indicator of a
Market processes dispersed knowledge of all individuals in the price

The Market as a Method for the Use of Knowledge

The market as an instrument for the use of distributed and local knowledge
Fire in South American copper mine Æ interruption of production Æ supply volume is

decreasing Æ price of copper is rising (with steady demand)
German medium-sized companies using copper can react to this and replace copper with
other precious metal that is now cheaper
people do not have to understand how this works
Optimization of limited resources it just does →
The price as an indicator of the shortage of a good contains information that can be reacted
to without understanding nature of price changes

The Market as a Method of Discovery (1/2)

Input: Knowledge of millions of people (swarm intelligence); Output: Unimagined market
solutions → without a precious plan
Competition: the constant exchange of information and the constant pressure of
competition > Sometimes products developed in parallel ( wade of resource)
are
Creation of goods, concepts, services and convictions that can not be sensibly controlled
Findings may not only affect products or services, but also spheres of human coexistence
in general

The Market as a Method of Discovery (2/2)

Competition works as an engine for innovations and improvements in products and services
Joseph Schumpeter (1912 - 1950)

³'\QDPLFHQWUHSUHQHXULDOW\SHDnd genius cult of the 19th century. ( eg established .
The process of "creative destruction" Æ improvement and new development of products CompanieS )
^
> new great finding> but
party destruction of old economic Sector s
William Baumol (1922 - 2017)
Rule-based market economy with competition itself brings forth this type of entrepreneur; incentive
systems
Pre-modern: competition was often suppressed or obstructed in some way (e.g.: guilds)
Feedback: innovations and competition results give rise to a feedback effect

The Market as a Control Mechanism

Control Mechanism in the Pre-modern period → lack of Moral contro I to
day
Face-to-face control
Social control in small communities
Modern: control function of the market
Cost and duration weaken the effectiveness of legal processes
Instead: companies are subjected to control from outside and inside
a) Externally: control over stakeholder relations and discipline of the market
b) Internally: Shareholders control mechanism (for example, via the Supervisory Board)

The Market as an Instrument of Disempowerment

Due to its structural features, the market serves as an important instrument of
disempowerment
Impartiality of the market

Market mechanisms reward only what meets demand → critiäzed in Capitalism not enough
:
com
petition
Automatically, limitation of power positions as they are threatened by competition
No abuse of power
E.g., Microsoft in the late 1990s: Even companies with a large market share and thus a
certain power position can never be sure that they will not have competitors

The Market as an Instrument of Self-Discipline

Success is possible only through cooperation with other partners
Business transaction occurs if both parties believe that they benefit from the exchange,
competing companies need to reconcile their own idea of advantage with that of their future
partners distribution Outcomes
entangllment ofand motiv es
Does competition generate fairness?
Ultimatum Game: (9/1) is rejected, which is irrational under
traditional assumptions of money maximization
Empirically: Fair distributions especially among participants from
cultures of competition
Reason: interaction with strangers; reputation building
→
people who are exposed to petition
com are more
Lively to pro pose fair allocation
( empirieally shaun)
Chapter 2
2.3 The Fair Price
?
Is the price fair
}
due to demand procedure it has to be
if it
along
a
supply etnia.gg
-
-
no come
price as
just
a
scarcitg indicator
to
day34
→

The Fair Price ± Antiquity (1/4)

Economics and ethics from the perspective of Platonic philosophy:
Main objective: state-sponsored pursuit of virtue (Plato, Nomoi)

Rejection of profit and utility maximization
Call for an upper limit on ownership
Special regulations for economic transactions:
A fixed daily price per good
Profit only in modest margins, as a modest premium on the "value" of a
good
Seller knows "value" of goods, does not have to charge premium (assumption)

Economics and ethics from the perspective of Aristotelian
philosophy:
Theory of Price: Principle of Equalizing Justice:

Proportionality of the price depends on need
Assessment of work performance depends on social position
Economics and Chrematistic:

Economics (Art of house-keeping) takes place within clear limits and
is therefore morally permissible
Chrematistic (The study of wealth) as enrichment at the expense of
others is immoral (Zero-sum game)

Cicero's view on the price mechanism
During a famine on Rhodes, a trader conveys grain from Alexandria to the island. He knows
that more ships with Egyptian grain are under way to the island, but his dilemma is: should he
share this information or should he sell at the highest price possible? (De Officiis, III, 13, 57.)
Pro argument: The grain belongs to the dealer (freedom of action and ownership)
Contra argument: The community of all people forbids exploiting such knowledge. Because
there is a "right value" of a good that every person actually knows.
Objective valuation is typical of antiquity
i
value of
gods
it are
the value of to
everyone
can
just See a
good and
agnes on
day
→ :
Dr. Matthias Uhl (TUM) | Introduction to Business Ethics | WS 2021/22 subjektive 37

The Fair Price ± Middle Age (1/2)

Morality and economy in the Old and New Testaments
Assumption: The "fair" price is in place: Moses already made the clear demand that no one
should "take advantage of his brother" in a transaction (3 Moses 25,14)
> in his tribe
An a-priori suspicion: "A merchant can hardly keep himself from doing wrong, or a huckster
from sin." (Sir 26.29)
Gospel of Matthew: "No one should go too far" and take advantage of his or her trading
partner. (Mt 6,24)
Notion of the Last Judgment: Do not endanger security through wealth

The Fair Price ± Middle Age (2/2)

Morality and Economy for Augustine (354 - 430)
Theory of Values and Ranking of These Values (De Civitate Dei)

The purchase price, however, is based exclusively on human needs
Ranking of human needs from experience: thus an objective value
theory
Augustine does not see trading gains as something bad per se
(although he also points out the moral dangers).
Chapter 2
2.4 The Prohibition of Interest and Usury

The Prohibition of Interest and Usury in the Antiquity

"If your brother becomes poor and cannot maintain himself with you, you shall support him
as though he were a stranger and a sojourner, and he shall live with you. Take no interest
from him or profit, but fear your God, that your brother may live beside you. For thou shalt
QRWOHQGKLPWK\PRQH\LQLQWHUHVWQRUYLFWXDOVIRUDQDGGLWLRQDOFKDUJH³(5 Moses 23,19f)
> interest is prohibited
Clear prohibition of interest
Duty to help among relatives
Not applied to: behavior towards outsiders
You may charge interest to a foreigner, but to your countrymen you shall not charge
interest, so that the LORD your God may bless you in all that you undertake in the land
which you are entering to possess." (Deuteronomy 23:19)
Æ Moral rule that can be maintained in small groups or face-to-face societies
Technical University of Munich intoest = evil
The Prohibition of Interest and Usury in Ancient Greece (1/2)

In Plato's "Nomoi":
Great assets through interest = power that can undermine the laws of the state
Contrast between state and capital (analogy to Karl Marx)
The State = highest moral good

Plato rejects lending money for interest because it can destroy the social order
In Plato's "Politeia":
General intuition: interest is perceived as evil
Credit trade increases number of poor in the state

tost
Taking in
is d-hi
ally rejected because it's many you
don't
have to work for
The Prohibition of Interest and Usury in Ancient Greece (2/2)

,QWKH1LFRPDFKHDQ(WKLFVDQG3ROLWLFVRI$ULVWRWOHWKHSURILWJHQHUDWHGWKURXJKLQWHUHVWLVXQQDWXUDO³
Reason: It does not come from work, but from the money itself
"There are two sorts of wealth-getting, as I have said; one is a part of household management, the other is
retail trade: the former necessary and honorable, while that which consists in exchange is justly censured;
for it is unnatural, and a mode by which men gain from one another. The most hated sort, and with the
greatest reason, is usury, which makes a gain out of money itself, and not from the natural object of it. For
money was intended to be used in exchange, but not to increase at interest. And this term interest, which
means the birth of money from money, is applied to the breeding of money because the offspring resembles
WKHSDUHQW:KHUHIRUHRIDQPRGHVRIJHWWLQJZHDOWKWKLVLVWKHPRVWXQQDWXUDO´
(Aristotle, Politics)

The Prohibition of Interest and Usury in Christian Doctrine

Council of Nicaea (325 AD): forbidden by law „
Ban on money lending against interest

Emperor Constantine translated decisions into laws
Trading in loans against interest was punished with infamy
Other Councils that emphasized the prohibition of interest:

Lateran Council 1139
Council of Lyons 1274
Council of Vienne 1311
Pope Pius VIII announced in 1830 the lifting of the interest ban

The Prohibition of Interest and Usury in Islam (1/2)

The prohibition of interest in the 4XU¶DQand Sharia
Interest prohibition (Arabic: Riba) applies to the demand and the payment of interest
Interest as non-Muslim, because LWLVDFTXLUHGZLWKRXWDFKLHYHPHQW³
Gegenleistung
keine
Interest is understood as a premium for which there is no consideration
"But those who devour interest become like the one whom Satan has bewitched and
PDGGHQHGE\KLVWRXFK7KLVEHFDXVHWKH\VDLG6HOOLQJLVWKHVDPHDVWDNLQJLQWHUHVW³
But Allah has allowed selling and forbidden taking interest (Sure 2, Verse 275)
The waiver of consumption is not recognized as consideration
postponement

The Prohibition of Interest and Usury in Islam (2/2)

Islamic banking as an alternative?
Lender participates in the profit and loss of a credit financed company (equals equity)
Profit only if risk of loss is also borne
Problems:
No distinction between equity and debt. Borrowing is usually less risky (priority) and
therefore important for many companies
Many social policy instruments rely on interest
all kinds of insurance policies are rejected in Islam according to the traditional
understanding if they are not based on donations

Dr. Matthias Uhl

m.uhl@tum.de
Introduction

3. Foundations and Tools of Business

Ethics
3.1 Philosophical principles and tools
3
which
Nhether it is a problem depends on
theory you
use
Deontological Ethics → always be consistcnt !
CSR example: Measures to improve social or environmental image of company
Is this behavior ethically positive? > not so much a

problem for
a consequen Haust
Deontologically: no, because the goal is pure profit maximization
In addition, maximizing profits corrupts ethical goals → not even neutral
Deontological ethics does not only look at results for making ethical judgements but
also at certain characteristics of the behavior!
2
>
whet her it is
right or
Wrong is completely de coupUd from the results , only ethical Motivation matters
Characteristics of Behavior ± 3 Aspects

> not ONLY about the Consequences
Strict and not-strict deontological ethics:
Ethical correctness of an act or even a law really independent of result of an action?
Æ Fundamentally less sensitive to empirical conditions
Situational independence:
For example, if it is fundamentally wrong to lie, then this applies to all possible situations
Goal of deontological ethics:
Respecting/protecting values of action
Basic Mode: principles are more important than consequences
5
Deontology by Immanuel Kant (1724-1804)

Action is only obligatory if it satisfies the categorical imperative:
"Act only according to that maxim whereby you can, at the same time, will that it should become a
universal law."
Test procedure: May I lie?

Do we want "lying" to become a generally morally permissible act?
Not even a criminal wants to live in a world where people constantly lie
Lying is morally unacceptable
Today: Norman E. Bowie, for instance, pursues a Kantian approach
Source: (1) Kant, Grundlegung zur Metaphysik der Sitten, Akademie-Ausgabe 1902 ff., Bd. 04, 421.07-08
6
Example: Launch of Hijacked Aircraft

Legal basis: Right to life and physical integrity (Art. 2 Basic Law)
Case: Kidnapped plane flying towards a football stadium (evacuation impossible)
IS IT ETHICALLY JUSTIFIABLE TO SHOOT DOWN PLANE?
NO! YES!
Deontological: Art. 2 GG must not be violated, no Consequentialist: minimize harm, life must be balanced
matter how high the damage will be. against each other.
life from this perspective you have to balance life
weigh life against
:
not
you mag
> >
7
Consequentialist Ethics
Again: Marketing and PR measures of companies
Is behavior ethically positive?
Consequentialist: Yes, because the measures have positive effects on humans, animals
or nature
Consequences are crucial for evaluation, reasons (e.g., profit maximization) are
irrelevant!
8
Behavioral Implications as Ethical Evaluation

Example:
When John tries to rescue a child from a well, a bumblebee is chased up and flies into a cabin of a
truck, whereupon the driver loses control and drives headlong into a crowd of people.
Was John's attempt to rescue the child immoral?
8QLQWHQWLRQDOO\-RKQ¶VDFWLRQFDXVHGPRUHKDUPWKDQJRRG
Consequentialism: Only predictable consequences are considered in the evaluation of an
action!
9
The Utilitarianism
Meta ethics
Normative Ethics Descriptive Ethics
Consequentialist Ethics
lboth people have to

agree)
Utilitarian Ethics Contractualist Ethics
Act utilitarianism Rule utilitarianism
10
just assume that it's

ethical promises they
people are too
rardy stetig the on making and the save for other
not the case offen

people
Consequentialist Theories - Differences (1/2)
→
What is the target variable or the bundle of targets to be maximized?

Utilitarianism (best known variation of consequentialism): Maximization of happiness
But: What is happiness?
John Stuart Mill:
different book
eating steak has
quality than
reading
a
distinguishes between different qualities of happiness. → e.
g. a a .
Peter Singer: important question

Target variable = preference fulfillment
d
Action is aimed at achieving certain goals, not cognitive happiness (e.g., clean environment for future
generations) > Whose happiness
n do we on Sido ? Hass müde er s ? a
dog ? → Can it Suffer ?
Goal achievement does not have to lead to happiness → even after your dead important and influenlial
Other theories:
Openness of concept of preference
Bentham : Whatever you do is
good ,
who is he to deäde high / low pleasure ?
11
Consequentialist Theories - Differences (2/2)

In what consequences should we be interested in?
Maximization of favorable consequences for all people living today or for those living today and
in the future? if you had to die because Cleopatra Wanted to take a
e.
g.
Question of intergenerational justice bath you wouldit find that fair even if the decision was made 1000
Maximization of human happiness or the happiness of all sentient beings in general? years age .
What is the object of the consequentialist calculus?

Traditional: Calculus is applied to actions, rules of action and institutions
12
Weakness of Act Utilitarianism

Excessively demanding for individual
Benefit of all should be maximized
Every single decision becomes moral issue
Influence of sequences of action sequences on happiness is difficult to determine
Happiness of the individual could be sacrificed for happiness of the mass

of people
e.g., cooperation with totalitarian states can have a positive effect on the majority of people, but
at the same time endanger minorities
13
often have certain no imSand in certain Cases we feel like the- norms don't fit
Technical University of Munich very you
ethicist
should
always be consisxnt
→ as an
you
eitherforayousdftoaccepttbeno.in
→ should resolve the tension
you
:
Reflective Equilibrium OR ad
just the norm
Conception ad just your
Ä:KDWZHVKRXOGGR"³± Two types of compulsory collisions
Clash between norms and individual cases: Vertical norm conflict

Example: violation of prohibition of bribery vs. corporate code (e.g. secure jobs)
Opposing norms: Horizontal norm conflict

Norm: Certain ethical paradigm that dictates the maxim of action
Individual case judgment: value judgment in a real action situation independent on an ethical
paradigm
Example: Trolley problem
14
&
for us :
huge difference between
billig tätig die
Trolley Dilemma (1/4) m-notethicdlyjuslif.to

i a con
Sequential very st it is the some I different for eg .
Moral thought experiment based on publications by Karl Engisch, Philippa Foot, Judith prisoners)
Thomson and Peter Unger, Philippa Foot, 1967:
"A tram is out of control and threatens to overrun five people. By moving a switch, the tram
can be diverted to another track. Unfortunately, there is another person. Can the death of
one person be accepted (by moving the switch) in order to save the lives of five people?"
Militari an redun harm there people that die
:
:
→ tat man should be pasted too)
way adapt your

other : norm
Best known theoretical case of moral dilemma
Sources: Philippa Foot 1967: The Problem of Abortion and the Doctrine of the Double Effect. In: Oxford Review, 5 (5), 5-15.
15
instrumentalerte him / her
you push person you

Technical University of Munich a
When
Collateral
vs .
damage
Trolley Dilemma (2/4)
General Norm
Judith is utilitarian.
Norm: Maximize happiness of all,
i.e. sacrifice one person to save others
versus
Individual case decision

Judith's refusal to move switch to reroute train.
Value judgment: You must not consciously decide against a person!
Source: iflscience.com
16
Trolley Dilemma (3/4)

General Norm
Judith is utilitarian.
Norm: Maximize happiness of all,
i.e. sacrifice one person to save the others
versus
Individual case decision

Judith is unwilling to throw person on tracks to stop the train
Value judgement: You must not push person down!
17
lifes are not aHound to

I
Germany
Trolley Dilemma (4/4) each other !
be
weighed against
Is it legitimate to weigh lives against each other?
Legal situation in Germany:
German Aviation Security Act (before 2005): Legal permission to shoot down passenger aircraft in the
event of hijacking in order to minimize fatalities. lconscqoentialist )
Judgment of the Federal Constitutional Court 2006:

"The authorization of the armed forces to shoot down an aircraft intended to be used against
human life by force of arms by direct impact in accordance with 14 (3) of the Aviation Security
Act is incompatible with the right to life in accordance with Article 2 (2) sentence 1 of the Basic
Law in conjunction with the human dignity guarantee in Article 1 (1) of the Basic Law to the
extent that people on board the aircraft who have not been involved in an act are affected".

Fünf 18
Trolley Dilemma: Autonomous Driving Cars (1/19)

The Moral Machine is an online platform developed from a research
project at the Massachusetts Institute of Technology (MIT)
( controNed 10,000s of people with there
questions to
figure out
consislent for those Situation )

sort of moral
jedgements
Aims of platform are:
1. Identifying a broad view on how machines should solve moral
dilemmas
2. Offering a forum where public can discuss ethically problematic
scenarios
source: moralmachineresults.scalablecoop.org
19
swuve ?
Should the or be programme d to
→ in denontdogy :
no A most people yes
:
5 persons vs. 1 person
Source: MIT Moral Machine
20
5 persons vs. 1 animal
21
3 persons vs. 3 animals
22
Situation s ?
Technical University of Munich Should life expectancy matter in those
What should the or be all owedto identity lage /
gender / numbol .
. .
)?
3 younger vs. 3 older

persons persons
23
3 women vs. 3 men
24
Safe discriminate in fav or
Cars would
always passe ngos
TUM School of Governance →
of your passenger
s
3 passengers vs. 3 pedestrians
25
who Cause the Situation ( drive
) be
Should the
TUM School of Governance one
the one who is sacrificed ?
3 pedestrians vs. 3 passengers
26
red
Is it justif able to Kid the people
walking the
light in
the Kw ?
or do to Save the Ones that are
adhoirg to ( different in different
Cultures e.
g.
Trolley Dilemma: Autonomous Driving Cars (9/19) rates important
very
I
in
Germany
permitted prohibited
road crossing vs. road crossing

they nen the red
light 27
nie !
Should the value for the Society play a

nie ? ( Criminal vs. nobel prize Winner )
Should the tax contribution play a
3 physicians vs. 3 bank

managers
28
1 law-abiding
vs. 1 criminal
person
29
Peter Löscher Chair of Business Ethics With the technology we have the nombo of traffic deaths could
be redund to at least 90% ( experts say )
→ discussi on on borderline cases with
very fundamental disagreements an
general
Trolley Dilemma: Autonomous Driving Cars (12/19) ethical thrones
that should be
applied
Invention of automobile in late 1800s paved way for also
very
hadto be
unprecedented forms of mobility consisteht !
Since their introduction, however, motor vehicles

have led to massive number of deaths
In USA alone, from 1899 to 2016: approx. 3.7 million
deaths
Deaths in accidents involving motor vehicles in the
USA in 2017: 37,133
Source: NHTSA
30

Annual road deaths in Germany since 1950
25.000
20.000
15.000
10.000
5.000
0
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Source: Destatis
31

Possible advantages:
9 Avoidance of accidents
9 Reduction of physical and mental stress
9 Time saving, convenience
Automation can also be useful for ethical reasons!

9 Between 90 and 95% of all accidents are due to human error
Source: t-online.de
But: Automated driving needs rules!

Æ Uber accident in Arizona 2018
32

Autonomous driving at a critical point - due to missing rules!
Uber accident in Arizona 2018
Necessary questions to ask:
Is the technology mature?

Missing ethical rules?
Source: abc News
33

Levels of autonomous cars Source: VDA 2016
Stage 0 Stage 1 Stage 2 Stage 3 Stage 4 Stage 5
Driver Only Assisted Partially Highly automated Completely Driverless

automated automated
driver executes driver executes driver must not
longitudinal and longitudinal or driver must permanently no driver required no driver required
lateral guidance on lateral guidance on permanently monitor system in the specific case from start to
a permanent basis a permanent basis monitor system of application finish
no intervening system takes over driver must be system can

vehicle system the other function System executes potentially able to automatically the system
active longitudinal and take over cope with all performs the
lateral guidance in situations in driving task
specific cases specific completely for all
applications road types. Speed
ranges and
environmental
conditions
34

Ethics Commission for Automated and Networked Driving of the
Federal Ministry of Transport and Digital Infrastructure: World's first
ethics guidelines for automated driving, presented in Berlin, June
2017
20 ethics guidelines, e.g.:

Personal injury takes precedence over damage to property
Liability passes from user/owner to manufacturer and operator of software
General programming to reduce total number of personal injuries

permissible
Source: bmvi.de
35

Guidelines of the Ethics Committee
1. Partial and fully automated traffic systems serve first of all to improve
the safety of all those involved in road traffic. In addition, the aim is
to increase mobility opportunities and enable further benefits. The
technical development obeys the principle of private autonomy in the
sense of independent freedom of action.
2. The protection of people has priority over all other considerations of

usefulness. The aim is to reduce damage to the point of complete
avoidance. The approval of automated systems is only justifiable if it
promises at least a reduction of damage in the sense of a positive
risk balance compared to human driving performance.
Source: bmvi.de
36

Guidelines of the Ethics Committee
7. In hazardous situations, which prove to be unavoidable despite all

technical precautions, the protection of human life has the highest
priority in a balancing of legal interests. Programming must
therefore be designed within the framework of what is technically
feasible in such a way as to accept animal or property damage in
the event of conflict if this can prevent personal injury.
8. In unavoidable accident situations, any qualification according to
personal characteristics (age, sex, physical or mental constitution)
is strictly prohibited. A general programming to reduce the number
of personal injuries can be justifiable. Those involved in creating
mobility risks must not sacrifice uninvolved persons.
Source: bmvi.de
37
Veil of Ignorante
> Refkctive Equilibrium
( align norm +
Process of Mutual Adjustment (Rawls 1979) situation)
Contradiction of general principle and individual case judgment

individual one-off judgments should be discarded
Successive consideration process
Two sorts of balances
Vertical: Horizontal:
Balancing between individual case Balancing of different general
judgments and general principles principles
Æ Coherence between intuitions, case-by-case judgments, norms and supreme principles AND
Æ Harmonious whole in which judgments and principles support each other
> make your

judgement ansieht !
38
Yet an !
in cohoent is even work
Weaknesses
Problem of operationalization
not necessary
Coherence moral truth
Coherent system of case-by-case judgments, intuitions, rules and general principles do not
need to be right
Example: Possibility of a coherent belief system despite local endemic corruption
make different cetera a decisions would say that ethics is

everyone night
one
iust-%dE.at
nos
Coherence criterion alone is not enough, danger of ethical relativism (= norms

and values are time-bound/expression of the respective times)
39
TUM School of Governance What if we have different ethic tveooi es
in ?
a
society
Two Types of Dissent in Modern and Pluralistic Societies
What is a good life? What is morally imperative?

People live together in a small space Controversies especially in ethical and
Different backgrounds, languages, economic issues
hobbies, lifestyles E.g. fair price/salary? Freedom vs.
No more consensus on how to live your Exploitation? Markets for blood, organs,
life sex? Distribution of wealth? To what
extend is inequality socially
acceptable?
Dissent does not lead to problems Dissent leads to problems
40
Three Tools for Establishing Norms under Dissent
Goal: generate ethical principles to deal with differences of opinion
ignoana ?
Contractual concepts → which contract would under the Veil of
grce on
we a
Democratic majority principle → We accept what the majority wants ( what if the Majority want a
new Hitw ? )
counls
Justification and Deliberation → Discourse ethics :
power of argument
41
Contractual Concepts
Basic Idea:
moral norms, institutions, and the institutional structures of societies are only legitimate, if they
have the consent of the population
Ability to consent instead of actual consent: consent can be expected on the basis of
interests/preferences
Hypothetical contracts instead of de facto contracts: Large number of hypothetical

contract participants Goal Mutual Conant :
m> assume
yourself in a situation whoethese power relations are not in place to come
up
that all
with a nom
we can
agree on .
understand contract-theoretical logic as kind of thought experiment

42
Contractarianism vs. Contractualism
Contractarianism Contractualism
traditionally by Thomas Hobbes (1588-1679) Immanuel Kant (1724-1804)
→ want to Subject to the contract
contracting parties maximizer of one's own utility morally motivated agents
conditions of use divergent interests + little Similar interests + common moral
moral common ground basis
for pluralistic societies for communities with a

with cultural differences strong cultural foundation
43
( Maybe a
tyranny for )
minorities
Democratic Majority Principle

Idea:
dissent votes on moral questions
majority opinion as a tool for establishing standards
Serious problems:
Discrimination against minorities possible (e.g. majority prohibits catholicism/cars/ same-
sex marriages)
Majority principle can lead to suppression. It needs additional normative regulations

(e.g.: fundamental rights)
44
Discourse Ethics - Consensus as a Goal

Ideal of Discourse Ethics:
"No speaker shall be prevented from exercising (his) established rights by coercion within or
outside the discourse."
Essential principles:
"Equal participation in discourse"
Securing "rule-free discourses"
Only better argument counts
possibility to put yourself into the position of the opponent
assume a
way power positions
Aim of Discourses: Consensus Finding! Æ But is that realistic in practice?

Source: Jürgen Habermas 1983: Moralbewusstsein und kommunikatives Handeln. Suhrkamp, Frankfurt/M., 97-99.
45
Three Difficulties for Reaching a Consensus

Principal reasons
some affected of moral norm are in principle excluded from discourse
Example: minors, non-born (intergenerational justice!)
Pragmatic reasons
Number of people affected is too big to involve everyone. → will the Ones most affected be
able to
partia pate
Motivational reasons
Some participants are unwilling to search for a viable solution.
for Business Ethics

very important
still
'
salaies)
( offen
arguments
Stern from Discourse ethics e.
g. regarding mangos
46
Discourse Ethics as Business Ethics according to Ulrich

Business Ethics:
"Profit making must be justified in corporate policy deliberation processes

vis-à-vis all stakeholders."
to reach certain condusion

→ discourse would be the
right way a
47
Dr. Matthias Uhl

m.uhl@tum.de
Introduction

3. Foundations and Tools of Business

Ethics
3.2 Economic and socio-scientific fundamentals
and tools
3
does not sdfishness

Rationality ration
ality imply
Derived from Latin "ratio"

Translated: "calculation", "reason"
Max Weber: Two distinctions
(instrumental rationale
ty )
Purposive rationality Value rationality
Relationship between a vs. Reasonableness of a
goal and the means certain goal
t
n either good or bad (e. g. goal Kid as Many people as possible
:
→
use an atomic bomb)
Max Weber 1864 - 1920
Assessment of social
Individual rationality vs.
conditions
↳ very often con sidos value
rationalen
4
Instrumental Rationality and Value Rationality

Instrumental Rationality Value Rationality
Goal-Means-Relationship: Reasonableness of a certain goal:

Goal is exogenous ( given Inken for granted)
, Goals have to be justified
+\SRWKHWLFDO,PSHUDWLYHÄ,I Correctness of the goal dependent
objective A is to be achieved, then on e.g. moral, religious or aesthetic
PHDQV%IXOILOOVWKLVSXUSRVH³ beliefs
Efficiency: vs Effectiveness:
"things are done right" "right things are done"
In relation to a certain Correctness dependent on criteria
predetermined goal
offen stand of economist I they have find Solution )
> a
problem+ a
5
Interdependency Between Goals and Means

should have an
Homann 1980: no consideration in isolation possible! H
you
have a
goal you
idea hetto it
w is realistic!
Permanent feasibility study:

Feedback between goals and means is consequently necessary
Ä2XJKWLPSOLHVFDQ³
Focus only on instrumental rationality not enough for economics
> distinction on
conceptual Level is important
No strict separation between instrumental rationality and value rationality
Source: Karl Homann 1980: Die Interpendenz von Zielen und Mitteln. Mohr Siebeck, Tübingen.
6
always strive for Morey!

Technical University of Munich economics does not have to mean that you more
economist don't can about the pnfoences ,
they just take them for granta what behavior ?

→
Serge
Open Concept of Advantage in Economics it does not
> as
long as
6WLJOHU%HFNHUÄPDWWHUVof WDVWHFDQQRWEHGLVSXWHG³ harm others
Question: What should be the subject of scientific research?

I can be e.
g. hdpingchildrn)
Gary Becker (1930-2014),
Preferences Situative Restrictions Nobel Prize 1992
Actions can be explained by Objectively observable

changing preferences across individuals
Lack of theory on Allow an interpretation of
development of preferences corresponding behavioral
conditions
Methodologically sufficient to
consider preferences as Methodologically meaningful
George Stigler (1911-1991),
exogenous and stable and focus on the subject of investigation Nobel Prize1982
( given) rcstrictions in any given frame → Ster behavior with nstäctions
Source: George Stigler/Gary Becker 1977: De gestibus non est disputandum. In: The American Economic Review, 67 (2), 76-90.
7
Methodological Individualism
Question in background: How can social phenomena be explained?
idivi dvds at the Micro Level
explain e
very macro phenomena by looking at the
Every analysis of a society begings with the individuum.
What it is NOT: A statement about true nature of man/concrete form of human behavior
(= ontological individualism)
Methodological individualism makes statement about how to develop good theory about
social phenomena
8
Methodological Collectivism/Holism
You cannot only describe it bottom -
up
!
Contrary to methodological individualism
( also top -
down ! )
Starting point of holism: Every individual behavior is

based on social circumstances.
Macro phenomena can not be explained by individual behavior.
Example: System Theory (Luhmann)
9
Subjective Concept of Advantage (1/2)

Subjective concept of advantage :
Value of a good depends on individual advantage it brings
to the respective consumer
(
only you can decide to
w het it is
good)
Gossen's First Law:

The marginal benefit of a good decreases with increasing
consumption
( if a homeless person 1€ it is him / her millionaire
you give very important for
a
,
wouldit oare )
probably downward
→
utility function is
doping
-
10
Subjective Concept of Advantage (2/2)

Anticipation of the marginal principle in John Law, 1705 :
ÄGoods have a Value from the Uses they are apply'd to; And their Value is
Greater or Lesser, not so much from their more or less valuable, or
necessary Uses: As from the greater or lesser Quantity of them in proportion
to the Demand for them. Example. Water is of great use, yet of little Value;
Because the Quantity of Water is much greater than the Demand for it.
Diamonds are of little use, yet of great Value, because the Demand for
Diamonds is much greater, than the Quantity of them³
Quelle: John Law 1705/1750: Money and Trade Considered: With a Proposal for Suppluying the Nation with Money. R.&A. Foulis, Glasgow.
11
Classical Paradox of Value (1/2)

!
Why is a diamond more expensive than water? →
scarcity
|
Exchange Value vs. Value of Utility
Water low very high supply & demand
Diamond very high low
Already Adam Smith saw no direct connection of both value concepts
12
Classical Paradox of Value (2/2)

Why is a diamond more expensive than water?
Labor theory of value Marginalism

Objective value theory Subjective value theory
The value of a good can be explained Individual use of a good is directly
by amount of working time spent on it dependent on its available quantity
Unable to solve the classical Solves the paradox

value paradox
Exchange value of water in desert high, in a city rather low

13
and
if a
person does somethis over over
again you assume
maxi mit their all the time )

that it is to utility ( e. g. drinks
Whiskey
function
→ this con chdes an
utility
Theory of Revealed Preferences
Using this theory (Revealed Preference Theory), utility functions can be constructed from the
actor's observed choices.
Example: Decision maker has choice between good A and good B or good B and good C
One observes, following preferences:

A is chosen over B
we have to make certain assumption
B is chosen over C
the
→ if person violates ttese assumptions
Revealed Preferences: his / her behavior is
Good A is preferred to good B Computing irrational
Good B is preferred to good C into Models
=p cannot a put
→ so A meist be Closer over C
14
Criterion of Transitivity
Derivation of complete order of preferences
Two revealed preferences (A > B and B > C)
Assumption of transitivity : if A > B and B > C

A>C
Result: Decision maker prefers good A to good C. Order of preference: A > B > C
IMPORTANT: Last preference itself was not observed!
It is an indirectly revealed preference
Assumption of transitivity must be fulfilled
15
Instrumental Use of Utility Functions

Wrong interpretation: one decision maker prefers one good over another because it maximizes
his utility → we can
only obsove a behaviour and then on Street a utility function that for mally
des cribcs this
in behavior a mathematical way .
A utility function is merely a formulation of consistent individual choices

Certain consistence requirements must be imposed on the choices, since idiosyncratic
(transitivity )
behavior cannot be modeled
> no mathematics
Empirical studies that violate axioms pose a challenge to neoclassical theory
function Could Model
that !
Descriptions of behavior through utility functions are just an "as if".

Success depends on success of the prediction
16
TUM School of Governance a situation in which transitiv ity is not frltilkd :
always show to Colours with nom paint which are just sklghtly
different indifferent (probably) about but
Ordinal Utility Function ewy Step
→
you are
usually not about back or while which would be the
What must be present in order to specify an ordinal utility function? conclusion
1. Transitivity (see above)

2. Completeness you have → an opini on about everything > you
have to make
a decision
in dittert vs . in de cis; ve
Any pair of goods X and Y can be compared
This means: either a good is preferred or one is indifferent between the two goods
→ has
egoism
no
this to do with
Result:
Ordinal order of goods, this means the alternatives can be ranked from best to worst
17
Concept of Indifference
Meaning:
A good X is liked as much as a good Y
Delineation from indecisiveness:
Indecisiveness Indifference
Period of reflection time is needed to There is no period for reflection
weigh the respective benefits of the needed, someone knows that both
two goods you would
→ be
willig to pay to alternatives have the same value
get more time
18
Rationality of Decision Maker

all on to model
utility function
a
Sufficient criteria for an ordinal utility function: >
Transitivity + Completeness
Additional axioms that can be posed on decision makers as a requirement for rationality, for
example:
Irrelevance of third alternatives

From a set of alternatives of goods X and Y, preference is given to X.
Preference relation must not change if a good Z is added
19
mis understand the economic

>
depends on a
ing of
Homo Economicus theory you
: have to Model
utility functions and
do what in crcases
you your utility but this
A picture of man ascribing a selfish motive to man? most not at all times be selfish! )
NO!: only a postulate of consistency for decision making
Open concept of advantage on the example of Mother Teresa:
Puts welfare of children above her own I is this truly altruistic when it feeds your utility? )
Compatible with homo economicus model if behavior is consistent
Egoistic action in the narrow sense is due to logic of situation (for example in anonymous
markets)
What constitutes a benefit to the individual is up to him!

20
Homo Economicus: Behavioral Assumption for Limited

Set of Questions suicides roman Hc
relationship
> e. g.
not appüchble to ,
,
.
.
.
to Choi as
nsumption
→ but •
Homo eeconomicus approach:
opens the fundamental possibility of modeling human behavior under conditions of scarcity
vs.
Ä$Q\WKLQJJRHV³DSSURDFK
Allows idiosyncratic behavior
Prohibition of any abstraction from contingent circumstances (prevents modeling)
Rejection of homo economicus raises questions about adequate alternatives
21
Economics as Situation Theory

Falsification of homo economicus by psychology/behavioral sciences?
Economic method is still successful
Reason: its special scope
No behavioral theory, but situation theory
Reality and world view of the people are hidden
True motivation of actors irrelevant
Actors do not act as homo economici per se, but by situationally accounting for
actions of others in their decision
Modeling of interaction processes that forces individual actors to adapt behavior

based on situational incentive structure
22
Economics and Economic Policy In which direction do we want
state the problems to deer the behavior given the t

1. Step: you just 2. Step:
individuals act ?
consisxntly p
Economics asks for ... Economic policy asks for ...
Actions of individual actors under Institutions to implement the answers
given framework conditions Regulatory policy/economic framework
Type, quantity and mode of production Process policy to influence process of
of goods to be produced economic activity
Distribution of goods among members → What is the state of society that we want
of society to a chieue ?
Which social condition is desirable? Open concept of utility
How can social common good be operationalized?
23
I all ocativel
Hayek 1967: Distributive and Procedural Justice (1/2)

Respectively: consequentialist vs. procedural theories of justice
it we need
1. Distributive Justice:
we want to
judge Consequences to talk about procedureI justice
Theories: leg everyone
.
has a different utility from tax inCrashs )
E.g. Utilitarianism → if it was tue result of a fair process , the out come is fair too !
Social interpretation of happiness
Fair state means: greatest happiness of the greatest number
( sum of
Exhibited in the context of specific welfare functions Utility of the individuals)
vs.
Pareto-Criterion
Result-oriented minimum consensus
Source: Friedrich August von Hayek: Rechtsordnung und Handelsordnung. In: E. Streißler (Hrsg.), Zur Einheit der Rechts und Staatswissenschften.
CF. Müller, Heidelberg, 3-20.
24
Hayek 1967: Distributive and Procedural Justice (2/2)

Respectively: consequentialist vs. procedural theories of justice
2. Procedural Justice:
Equality ideal of formal civil liberties
Issues of procedural justice, rather than result orientation
Theories: fair procedure >

=
fair out come
Entitlement Theory (Robert Nozick)
Friedrich A. Hayek: The market as place of spontaneous order
Source: Friedrich August von Hayek: Rechtsordnung und Handelsordnung. In: E. Streißler (Hrsg.), Zur Einheit der Rechts und Staatswissenschaften.
CF. Müller, Heidelberg, 3-20.
25
of the Society sort

evoy analysis
most
with the individual

Distributive Justice
How can different social conditions be compared? prefoences →
Utility function
(not the other way around)
r
1. Value judgments must be traced back to judgments of individuals
2. Individual value judgments can be described as revealed preferences about utility functions
3. In order for utility levels to be intersubjectively comparable, a cardinal scale level is
necessary
4. Through welfare functions different benefit levels can be compared. Depending on choice
of welfare function, different results emerge
26
Economics and Value Judgments

will , only the wishes of the individual
> no
General
Normative individualism:
Value judgments are attributed to wishes and needs of individuals
>
you
know what is best for you as
long as
you
wettere functions by to aggregate
>
Individual sovereignty: do not in
pose horn on others ( not Many
then individual wishes
Every member of society can judge its own situation to day e.
g.
individual s !
Obesiteg ) =D how do
you weigh
across
Methodological individualism:
There is no superordinate social value that can not be attributed to value judgments of
individual members of society
27
out !
> Keeps meta
physics "
" " "
bad
Utility Function → not a levant if a certain behavior
is good or
Concept of utility function:

Sufi h ,
Individual objectives can be indirectly derived from choice utility people are not -
they
selfish in a
way that
actions Sometimes gap between what people
>
say
and do are only
Revealed preferences can be described by utility functions they maximize !
(assumption: certain consistency requirements).

utility function
Only functional role:
Keep metaphysics out of decision theory
Individuals "have" no utility function.
Individuals behave as if they maximize function.
quantity of goods
28
Cardinal Utility Scale

Intention is to individualistically substantiate social goals
Question: How can individual benefits be aggregated/compared?
Necessary௙௙cardinal scale level → nee de d to coupon utilities

Distances between the utility values can be meaningfully interpreted
Intersubjective comparability of benefits is ensured.
Examples:
Temperature in degrees Celsius
Time
Temperature difference between 10 C and 20 C is the same as between 5 C and 15 C
29
Utilitarian Welfare Function W

"
is nhximiled
→ e. sterblich
a Situation when
Formula:
௡
ܹ ௎ ൌ ෍ ߙ݅ ‫݅ݑ‬ሺ‫ݔ‬ሻ
௜ୀଵ
ܹ ௎ : Utilitarian welfare function

‫ݑ‬௜ : utility for individuum i
ߙ௜ : weighting factor for individual i. Special case: ჴ1 =...= ჴn= 1 ( utilitarinism)
could also have other assumptions

‫ݔ‬ : state of society > you
I
/ )
gender lage
in come . .
(e. g.
.
Social welfare as the weighted sum of the individual utilities of individuals
30
Nash Welfare Function → much more sensitive to individual

utility
individual Whole
e.
g. if the utility of one soi
,
then the
Formula: function toms to O

௡
ܹ ே ൌ ෑ ‫ݑ‬௜ ‫ݔ‬ ఈ೔
௜ୀଵ
ܹ ே : Nash welfare function

ߙ௜ : weighting factor for individual i
‫ݔ‬ : state of society
Sensitive to variations of individual utility (example.: ‫ݑ‬ଷ଼ସ ൌ Ͳ ՜ ܹ ே ൌ Ͳ)
31
Technical University of Munich >
very diffiait to come up with a Welfare function all people
would on ?
agile
Rawlsian Welfare Function →

only Cars about the
utility of the pos on that
is work off is best off !
Formula:
ܹ ெ ൌ ݉݅݊ ‫ݑ‬ଵ ‫ ݔ‬ǡ ǥ ǡ ‫ݑ‬௠ ‫ݔ‬
ܹ ெ : Rawlsian welfare function based on John Rawls's "Theory of Justice"

( )
it would be casio to talk about thirgs if people
‫ݔ‬ : state of society
state the welfare function
Could expü city
they are
taking about
Operationalization of maximin criterion: ܹ ெ at maximum when individual of
society who is worst off, realizes the maximum benefit
32
Problem of Previous Welfare Functions

Assumption: interpersonal comparability of utilities
Example: Utility of a beer = 100 vs. Utility of tomato juice = 10

But: Beer is ten times as attractive as beer is not a meaningful statement
Contemporary utility interpretation: only ordinal statements like e.g. "better"/"worse",

distances between utility values are not interpreted
> e.
g.
beer is not pater red 10 ✗ more than tomato juice
Cardinal utility concept is rejected today by most economists

x2 and it would
(
you
could take the whole utility function
not
charge the meaning ) 33
Pareto Criterion (1/3) > no social Observer
Assumption: Social conditions can only be judged from

individual point of view
Definition Pareto-efficiency:
State A is Pareto-superior compared to State B, if at least one
individual is better off in State A and no other individual is worse
off.
Vilfredo Pareto (1848-1923)
→ assumption people
:
are
envy
-
free
Social conditions can be classified with this criterion
34
Pareto Criterion (2/3) this Slope

very point
on is
e
State X: Utility of consumer 2 pareto etticient

-
whetro Y or 2- is
Certain utility level for 1 and 2 → no argument Criterion

with the Pareto
-
be to
Under utility-possibility frontier
both win !
not Pareto efficient, because better position L
is possible
v Y
State Y:
1 and 2 are better off than in State X Consumer 1 wirst
State Y is Pareto-superior in relation to 2 loses
Consumer
State X X
L
Z
This applies to all points located northeast of
State X
Utility of consumer 1
35
TUM School of Governance What Matters a tot is the Status quo
:
if you have a Situation in which you can

only hdp Ore
will do
Pareto Criterion (3/3) party by haiming an other that is not some
thiy economist
I a I though here distribution would be

fairer at ✗ than at Z)
Z: Utility of consumer 2 " want to

but not all parties would go to Y
On utility-possibility frontier
=p Find Pareto Improvement all parties
a
No other condition is achievable without ✗ to Y )
agree on (e.g.
here :
can
discrimination of an individual
Y
From X to Z: from Pareto-inefficient <
state to Pareto optimum

^
no pasto improvement
However: no Pareto improvement porto

Consumer 1 is improving, but consumer 2's X improvement
consumption is declining
Z
! shift from Outcome perspective to process !

perspective Utility of consumer 1
36
Welfare functions I way

much more innocent than less
assumptions)
Pareto Criterion: Results
Pareto efficiency and Pareto optimum:
Movement from Pareto inefficient state to Pareto optimum does not necessarily mean a Pareto
enhancement (movement from X to Z)
A Pareto enhancement does not yet imply a pareto-efficient state (movement of X to a point
Northeast of it, but below the pareto-efficient curve)
Pareto improvements as a minimum consensus:

Who would object to one side being better off if the other side does not suffer?
Most likely no one. Assumption: no envy!
Compared to welfare functions: Pareto criterion is normatively more appealing

37
String vs. Weak Pareto Criterion

When is one social State A preferred over another State B?
Strong Pareto Criterion:

In A, at least one individual is better off without another being disadvantaged
Weak Pareto Criterion: I Weak in sense that it is had to tutti II )

a
very
In A, all individuals are better off
Counter-intuitive?
Mnemonic: the weak Pareto principle is empirically more difficult to realize
38
and then
much
face xd
TUM School of Governance Ethics should be more on the Status quo
Step by Step improvement
finding siNations which are little -
in
that all versus of

society can asrce on
Buchanan's Critique of Distributive Justice Approaches

Problem with Robinson Crusoe example:
Cardinal economic problem of scarcity must not be
described solely in individual case
Danger thereby: inferrences from individual to society are
often problematic
Leap from individual utility maximization to maximizing
utility of society is wrong
Essential interactions between individuals must not be James M. Buchanan (1919-
2013), Nobel Prize 1986
hidden
Economics is essentially interaction economics

Source:Geoffrey Brennan und James M. Buchanan 1985: The Reason of Rules. Constitutional Political Economy. CUP, Cambridge/New York
39
Buchanan's Critique of Welfare Economics (1/2)

1. Welfare economics tends towards intervention science ( too theoretical)
Criteria of outcome justice requires orientation toward theoretical ideal (e.g. Pareto Optimum)
If the ideal is not achieved, there is a tendency for state interventions
2. Efficiency criterion is unrealistic

Efficiency criterion: Any equilibrium that occurs in the complete market is a Pareto optimum
Complete market is a theoretical ideal Efficiency criterion is unrealistic
Abstract scale, instead of criterion of justice
Economics has lost its orientation function in society
Economics should be re-connected and upgraded in the public discourse
40
Buchanan's Critique of Welfare Economics (2/2)

3. Efficiency ideal regardless of wishes of individuals
Pareto Optimum is determined independently of market process independent of desires of
individuals
Market as "Calculation Machine" (Samuelson 1954, 388)
Deviation of status quo from Pareto optimum = market failure (market prevented from doing
calculative work)
Correction: indifference between democratic process and benevolent dictator
Welfare economics raises efficiency to a normative requirement, which is to be achieved by
state control
Welfare Economics does not take the actual desires of those affected into account
Source: Paul Samuelson 1954: The Pure Theory of Public Expenditure. In: The Review of Economics and Statistics, 387-389.
41
%XFKDQDQ¶VCriterion of Consensus (1/3)

Buchanan's demand: an internal and not ideal criterion, rather than a theoretical ideal for
comparing different social conditions
Criterion of agreement/consent: Consistent orientation based on status quo
Can a situation be established from here and now

that everyone agrees to?
don't start with a theoretical ideal but with the States -
quo
(then took at processes , not Outcomes ! ↳
pareto improvement not ,
pareto efficiency )
42

State X as a starting point (status quo) Utility of consumer 2
Focus on all states that reach a consensus

between players starting from State X
successive movement in northeastern

direction
X
Reference point: status quo and not
external Pareto criterion of complete
competition
Utility of consumer 1
43

Three key findings/interpretations:
on
> that both parties asre
1. A heuristic that changes from external perspective of efficiency to internal perspective of

" "
political processes (mutual consent!) rule of thumb
2. Market as an interaction process for reciprocal improvement through exchange acts,

rather than an algorithm whose performance has to be measured against the efficiency
ideal
3. Move away from Pareto optimum as distribution criterion and return to Pareto improvement
as process criterion Æ should refer to rules, not individual actions
44
Example of a Consensual Rule

Criteria:
Rule must be derived from metarules/rules of higher order
These metarules must sometimes be sufficiently general to be unanimously approved
Example:
Establishment of a state with a monopoly on the use of force
End of Hobbes's war of all against all each other )
Generate universal peace dividend ( eg proent people from Viking
there for it is a
→ all are beItv off this
way
Porto improvement
45
Technical University of Munich out comes but
the interaction between two
> no one wants the
* then it is not
pure Coordination gare situation that Goth do not desire
a
individuals had to a
Dilemma Structures vs. Pure Coordination Games

v
Pure coordination games: be so Ned by
cannot
There are basically no divergent interests between individuals
both individual s
However, it requires a well-known rule for coordination with each other appeals as
do not want the situation

Example: left or right-hand drive
d ar all
Assumptions: →
but
you nee
No driver has a preference for driving on the left/right side
All have preference for everyone driving on same side
e- L
Main prtoena #hat is more
there is a common -
known rule with

Coordination: important than possible two pzpcnces)) Coordination Game
which the on
If achieved, no individual incentive to deviate from rules *
be Saved
Equilibrium is self-enforcing
Rule violations do not have to be sanctioned
if you don't know the rule this can be Chatten ging to
→ so Ne
46
Dr. Matthias Uhl (TUM) | Introduction to Business Ethics | WS 2021/22 le g. dressCode)
.
Pure Coordination Games: Example

‫݊݋݅ݐ݌݉ݑݏݏܣ‬ǣ ܽ ൐ ܾ Player 2
→ how much a is pretord is drive left drive right
!
not important
I II
drive left a, a b, b
Player 1
III IV
drive right b, b a, a
47
Dilemma Structures
> because of the Structure of
Basic assumption: the situation
Theoretically possible and mutually desired gains from cooperation can not be realized
Behavioral interdependencies as main reasons:

No interaction partner can control outcome alone → Outcome into action
ges from
einer
Anyone who acts with respect to common interests risks being exploited
Pareto-inferior equilibrium: best possible result is not achieved
48
3ULVRQHU¶V'LOHPPD(1/2)
Description of the situation: Two prisoners are suspected of joint crime
They are isolated and interrogated in separate rooms
Maximum sentence for the crime: three years imprisonment assumption they :
want to spend less time
in prison
Both are silent (= cooperation): due to minor offenses only one year imprisonment
Both confess (= defection): two years imprisonment
One is silent (= cooperation) and the other confesses (= defection): leniency and thus no
imprisonment for the latter, maximum penalty of three years for the former
49
3ULVRQHU¶V'LOHPPD(2/2)
High relevance in theory:
Patterns of interaction:
Two persons interact with each other
Interdependence of behavior:
No person can determine result of the interaction alone
> either one or the other !
Mirror-inverted situation:
( cannot Cooper an a bit )
Both persons each have two strategies: cooperate and defect you
No behavioral commitment: there is no precious Contract this would not be beIp tut
→
,
Crucial: In advance, there was no effective commitment of people to a strategy
50
people are
ly for their
most Own
utility
the more
anonymous people get
the more more
y
sic Ones the
goal
model players as
you always
3ULVRQHU¶V'LOHPPD1RUPDO)RUP sdfish agents ( which
is not necessary
true ) what Maximi tes
→
your
Player 2
altruistic behavior utility might very well a
feeliys
→ mini Mile the
harm to the Ottos ottos
for
cooperate defect
I II
cooperate 2, 2 0, 3
Player 1
III IV
of what 2
→ irre spective player defect 3, 0 1, 1
does it's always Setter for A
,
player
to delect
dominant strategy
→ trans ated into utilities (not years dis played here)
51
Prisoner's Dilemma: Evaluation (1/2)

the other
Situation Player 1 (analogously for Player 2): if
weigh the pagoff of
you
Depending on the decision of Player 2:

this would
already refuct in your utility
Player 2 cooperates: Defection maximizes payoff (3 > 2)

Player 2 defective: Defection maximizes payoffs (1 > 0)
Defection is the dominant strategy
Both players defect Quadrant IV (payout: 1, 1)
No player has an unilateral incentive to change strategy: Nash equilibrium
52
if you tousing on Virtue s sowie
you cannot
are
TUM School of Governance problems with
Technical University of Munich this Structure
Prisoner's Dilemma: Evaluation (2/2)

they are work off thanthey
If both players cooperate, payoff would be higher: Could be but it is
nobody's fault
L
payoff (Quadrant I) = 2, 2 > payoff (Quadrant IV) = 1, 1
Pareto-inferior Nash-Equilibrium (mutual improvement is possible)
No improvement of the situation by their own effort

to the individual
outsiders are not covered it does not hdp to appeal
!
by the game !
of the
game
but to
charge the Streak
Individually rational behavior leads into rationality trap: t
realization of shared interests fails because of structure of interaction situation
53
Wants to put people in
law enforcement a
prisoners dilemma
Technical University of Munich want people to Contess !
no because they
→ because companies should on
pete
3ULVRQHU¶V'LOHPPDA Useful Tautology (1/2)

Criticism of some authors at the Prisoner's Dilemma:
Contrary to the model-theoretical approach, experiments show that many people cooperate de
facto
!
prisoners dilemmas should not
always be over come
Answer: Prisoner's Dilemma as ...
Empirically falsifiable assumption vs. Useful tool
Experiments only test presumed prisoner dilemmas.

Central: Distinction between payoff in units of utility values and in units of money
54
3ULVRQHU¶V'LOHPPDA Useful Tautology (2/2)

Example:
Two players with two cards each ("cooperate" and "defect")

Cards are shown simultaneously to the experiment director
Payout matrix as on Slide 52
Both cooperate, payoff of 2 for each
Was Prisoner's Dilemma falsified?
Error in the argument: monetary units here no utility units
Possibilities: Players are friends (do not play egotistically), fear of subsequent ILVWILJKW«
Players do not play Prisoner's Dilemma

55
Ordinal Utility Concept

Meaning:
Differences between two utilities can not be meaningfully interpreted (not twice as bad , . .
.
Decisive: Ranking of utilities
Affine transformation (multiplication of all values with equal factor) does not change ranking
No specific utilities necessary. Rankings in payoff matrix only have to follow a certain sort of
inequality to constitute a prisoner's dilemma. Here:
ܽ൐ܾ൐ܿ൐݀
56
*HQHULF3ULVRQHU¶V'LOHPPD1RUPDOForm
Assumptionǣ ܽ ൐ ܾ ൐ ܿ ൐ ݀ Player 2
cooperate defect
I II
cooperate b, b d, a
Player 1
III IV
defect a, d c, c
57
5HOHYDQFHRI3ULVRQHU¶V'LOHPPD"
e.g. Ken Binmore 2011:
Prisoner's Dilemma represents a situation in which dice are as loaded against cooperation as
they could possibly be
Can other dilemmas describe reality better?
Here: prisoner's dilemma as a paradigmatic case that makes cooperation problems salient
that are ethically relevant
we have SituationÖT which two

people are in a work Situation than
still relevant because

could be which are not their fault but are owed to the Situation and
y
that cannot
they escape .
Source: Ken Binmore 2011: Natural Justice. Oxford University Press, Oxford.
58
Stag Hunt
Description of situation:
Two hunters can either choose to hunt hares on their own or join forces to kill a stag together
Benefits of split stag > benefit of hare
Hare can be killed alone, deer only in cooperation
If a hunter breaks the agreement to go hunting together and instead goes hunting hares,
other one goes out empty handed
Generic payoff matrix: ܽ > ܾ > ܿ
59
without institutions h are pag off
:
Peter Löscher Chair of Business Ethics >
"
het ping
Sbg payoff
"
> Institutions an us ralize a -
There is a isn that there is
Stag Hunt: Normal Form no Cooperation !
‫݊݋݅ݐ݌݉ݑݏݏܣ‬ǣ ܽ ൐ ܾ ൐ ܿ Hunter 2
Stag hunt Hare hunt

I II
Stag hunt a, a c, b
Hunter 1
III IV
Hare hunt b, c b, b
Herr hunt is not a dominant
n
!
Strategy but it is not
iisky
Pareto ineffizient situation in
paris on to
com Goth
hunting stags
60
still dieImmatic problem

Stag Hunt: Results
Two possibilities:
1) Both hunters stick to agreement and cooperate
2) One player does not trust other and goes hunting hare, because he fears to go out empty
handed. Possible reasons:
If difference between a and b is low Slight doubt is enough
Maximin Strategy Maximize lowest payout
Situation more cooperation-friedly than prisoner's dilemma, but mutually beneficial

cooperation may still not be achieved
61
with di in toots
verging
Combination of Coordination game + game
Battle of the Sexes

Description of the situation:
A couple would like to spend the evening together (main concern)
Two possible meeting points: Cinema and football stadium
They forgot to agree on a meeting place
Woman prefers football stadium, man prefers cinema
Generic payoff matrix: ܽ > ܾ > ܿ
62
Technical University of Munich first paterno is to meet but no indifferente
about
meeting place
Battle of the Sexes: Normal Form
‫݊݋݅ݐ݌݉ݑݏݏܣ‬ǣ ܽ ൐ ܾ ൐ ܿ Woman
different
utility for the situation
Cinema Stadium
I > II
Cinema a, b c, c
Man
III IV
Stadium c, c b, a
63
Battle of the Sexes: Results (1/2)

Two Nash equilibria in pure strategies:
Quadrant I Quadrant IV
If woman goes to stadium, it If man goes to cinema, it is
is also best for man to go to also best for woman to go to
stadium cinema
no dominant strategy
Cooperation fails if:
Both go to their favorite place OR
Both want to do other a favor ( which would in cnase their
)
utility too
64
Battle of the Sexes: Results (2/2)

Interest to coordinate is entangled with a distribution conflict
No pure coordination game
Clearly diverging preferences regarding coordination solution

Connection of converging and diverging interests
Incentive structure suits reality: Often we want to get together with others, but have
different ideas about specifics
65
Overcoming Dilemma Structures

Task of Business Ethics:
Identify factors that prevent cooperation for mutual benefit.
Constitutional Perspective (Buchanan): Two Essential Solutions
State: Social cooperation:

Social institution that comes Individuals refrain from actions
about through a collective barter due to imminent sanctions
^
( external) ( internat)
e.
g. Conscience
→ moral 66
Example: Traffic Offenders (1/2)

Analysis using Prisoner's Dilemma:
Situation A:
Player 1 (traffic offender) breaks traffic rules
Player 2 (other road users) sticks to it Player 2
Quadrant III cooperate defect
Situation B: I II
Constancy of the behavior of others leads to cooperate b, b d, a
Player 1
change in behavior of Player 1
Quadrant I III IV
defect a, d c, c
‫݊݋݅ݐ݌݉ݑݏݏܣ‬ǣ ܽ ൐ ܾ ൐ ܿ ൐ ݀
67
Example: Traffic Offenders (2/2)

Result: Consensus of behavioral change fails because
ܷ‫ͳ ݎ݁ݕ݈ܽܲ ݕݐ݈݅݅ݐ‬ǡ ܳ‫ ܫܫܫ ݐ݊ܽݎ݀ܽݑ‬൐ ܷ‫ͳ ݎ݁ݕ݈ܽܲ ݕݐ݈݅݅ݐ‬ǡ ܳ‫ܫ ݐ݊ܽݎ݀ܽݑ‬
‫ ܽ ݎ݋‬൐ ܾ
Traffic offender is better off, if he breaks the rules while everyone else sticks to them
Therefore, unilateral behavioral changes fail to pass a consensus test
68
Ability to Approve
Instead: constitutional consensus test asks for ability to approve of rules
Is a general violation of rules preferred over a of

general compliance of rules?
Example of the traffic offender: general rule violation = Quadrant IV
ܷ‫ͳ ݎ݁ݕ݈ܽܲ ݕݐ݈݅݅ݐ‬ǡ ܳ‫ ܫܫܫ ݐ݊ܽݎ݀ܽݑ‬൐ ܷ‫ͳ ݎ݁ݕ݈ܽܲ ݕݐ݈݅݅ݐ‬ǡ ܳ‫ܸܫ ݐ݊ܽݎ݀ܽݑ‬
‫ ܾ ݎ݋‬൐ ܿ
Crucial: comparison between general defection (status quo minor) and general
cooperation (Pareto-better alternative).
69
Experimental Economic Research: Basics

Idea: analysis of actual behavior of actors under incentive structures
Assumption: economic situations can be investigated in isolated experiments
Two approaches:
Reality test for established theories Development of more realistic theories

Theoretical predictions are checked Economic situations are constructed
against behavior of test subjects The obtained data might lead to
Distinct behavioral hypotheses can development of consistent theory for
be falsified experimentally observed behavior
70
Very Brief History

1947 Paul Samuelson: impossibility of experimental economic research
Ceteris paribus condition cannot be maintained in a social-scientific context
This means: changes in the dependent variable cannot be attributed to changes of the
independent variable ( not can be Dept anstarrt )
everything
1948 Edward Chamberlin: first lecture-hall experiments with students on imperfect
competition
2002 Vernon L. Smith: Nobel Prize for his use of laboratory experiments in economics
Trend: increasing use of field experiments
Source: Paul Samuelson 1947: Foundations of Economic Analysis
71
([SHULPHQWDO(FRQRPLF5HVHDUFK«
«DVPHWKRGIRU%XVLQHVV(WKLFV of asking people and
in Stead are
µ possible King
Lied to
Actual behavior of actors can be examined within context of economic incentives
No "cheap talk" (like in hypothetical surveys), actual behavior is observed instead of mere
statements of intent
Method to put implementability of desired moral actions under conditions of modern

societies to test
72
Introduction to Business Ethics
Dr. Matthias Uhl

m.uhl@tum.de
Introduction

5. Corporate Ethics
>
adhuing to the law
5.1 Compliance as a Minimum Ethical Requirement
> Minimum ethical requirement to adhere to the

principles I could also be to KH -
imposed
Principles )
"
often CompanieS
"
do more contribution
→
voluntary
3
NO Compliance !
„
The term "Compliance" >

Could come from EU , industry ,
Self im posed ,
-
. .
.
Æ 2UJDQL]DWLRQ¶VFRQIRUPLW\ZLWKUXOHVWKDWDUHH[RJHQRXV&RUSRUDWH6RFLDO5HVSRQVLELOLW\UXOHVDUH
endogenous
> without
discussing the underYing principles ! then
compliance !
:
Æ Adherence to self-imposed principles (collective or company-specific self-binding )
Minimum requirement: Compliance with laws and regulation in the fields of anticorruption, competition,
data protection, labor/employment law, foreign trade legislation and environmental protection.
In addition: conformity to self-imposed principles ("code of conduct")
In the following: Only the compliance with exogenous rules! > often very vague so that
they cannot
become a
problem for the
Company
4
TUM School of Governance before the time of the internet
,
rue violaHons were
offen not discovered !
Compliance in the 21st Century

Is compliance with legal requirements and industry or company guidelines
self-evident or not?
Due to the internet, social media and NGOs (e.g. Greenpeace) Æ loss of control over
company's communication → power of single employees got much bigger leg to Leak information)
a .
( before :
asymmetrie Communication)
Æ Due to symmetric communication, the misconduct of companies reaches the public
much faster Æ reputational risks
Æ Increased needs of transparency requirements emerged with new technologies

costs for
>
transparency have become
very low
5
Compliance Risks (1/2)

Violations of law in course of business operation (1/2)
Fines:
Regulations in Germany: in article 30, paragraph 4 OWiG (Act on Administrative
Offences)
Guilt might be attributed to the authorized representative bodies, authorized signatories, and other
authorized representatives
Penalty might be imposed which skims off the economic advantage of the company arising from
r
the unlawful act
Legal uncertainty with regard to the scope of the forfeiture! (Gross principle of disgorgement)
Æ Reputational risks and criminal prosecution How do we Measure this economic misconduct
?
→
on substrat the cost a firm had for this
disgorge net gain we
or
gross gain
? r
e
g. if they bibed Someone
-
6
"
Unwissen schützt vor
"
Compliance Risks (2/2) Strafe nicht

-
not true for compliance
→ if
Management Knew , the firm is
than it
Violations of law in course of business operation (2/2) punished management
more
say
did not
did not know because
they
Violation of company's supervisory duty (1): Conduct
any analysis
130 OWiG
Members of management and other company representatives may be held criminally liable
Management-level liability under criminal law: overall responsibility and complete jurisdiction of
company management applies here
If no analysis of compliance risks was applied: Management carried out an analysis of compliance risks
PDQDJHPHQWµV liability according to 130 OWiG but then decided (e.g. due to costs) to not implement
suitable prevention measures:
ÄWorst case scenario³here: ignorance can protect
against punishment)
7
Public Procurement Law > principles are

applied more
or less strict
Æ Companies need to be law-abiding and trustworthy to be considered for public procurement

procedure (especially in construction and defense industry)
According to article 97 paragraph 4 GWB (Act against Restraints of Competition) a company must be law-
abiding and trustworthy to be considered in the awarding of public contracts:
Conviction and fines paid by companies are publicly available in the commercial central register
If companies are exempted from public procurement, it can end up in a vicious circle (especially if
competitors become more active)
The re-approvement process of companies requires comprehensible confidence-building
measures
↳
very costy
8
> there are penalties exemption from public procurement
, ,
people are Sent to jail but most important (because

Maybe
some ,
also mordest to Measure ) :
Reputational Risks
Arise through disclosed rule violations
Legal violations tend to garner a great deal of attention in the press (national and
international)
Negative Effects:
Less chances of attracting new talents (social aspects)
Employees' motivation suffers from criticism of social environment
Stigmatized companies are threatened with sales losses due

to eroded trust with customers
Compliance-breaches play an important role in (institutional) investors
decisions to invest leg you nay not be Listed in some fonds anymore if
.
there was a
Compliance beach )
9
Risks of Non-Compliance
Consequences of corporate misconduct
Types and examples of corporate misconduct
Corruption → g. present in deueloping countries

e.
Antitrust laws → important for e. g. companiesin a very competitive Situation

Data protection (privacy issues)
Identification of company-specific compliance risks

"
tits all app roach
"
one
do not a
apply
-
>
10
if not for private again but for e.g. again

Corruption (1/3) of a
Company
:
not Corruption in
International
the Sense of
Transparency ✓
Definition: Corruption is the abuse of entrusted power for private gain (Transparency
International) I will make e.
g .
are
your company gets
contract and
Forms of corruption: a long -
tom we will not took
for other
supplios as
long as
you make are that I
well
Bribery of government officials (e.g., Interactions between private actors (e.g., easy
mayors) purchasing managers)
Transparency International: NGO founded 1993 in Germany with the aim of curbing
corruption by publishing of a model code of conduct
> Shows you development
Annual release of the "Corruption Perception Index":

there !
maybe a
gap
Measures perceived (not actual) corruption in the public sector (based on expert surveys)
Rates 186 countries (scale from 100 (very clean) to 0 (highly corrupt))
11
Corruption (2/3)
https://www.transparency.org/news/feature/cpi_2018_global_analysis
12
very had stody
to because
you can only Observer the
!
peak of the
iceberg
behavior
Corruption (3/3) > if people know they are obsoued , their
Changes
Difficult to detect phenomenon - victims often unaware and barely identifiable: therefore important in
structures prone to corruption to provide verifiability and publicity
According to estimates (IMF, 2016) the annual amount of paid bribes amounts to 1,5 ± 2 trillion USD
Anti-corruption laws differ by country and sector:

Germany: Since 2002, bribes paid by German companies to foreign business partners have been declared an act
liable to prosecution also removing tax deductibility of these kind of payments.
Changes at insistence of USA that have had an anti-foreign-bribery law since 1977
Do the German regulations represent a competitive disadvantage for the German export-industry?
Still, the Federal Criminal Police Office (BKA) investigated a considerable amount of corruption
offences (according to Article 299, German Criminal Code) How can we then the individual
streng responsibility?
^
then on
always at least 2 actors in udued in a bribe →
responsibility between these 2 diffuses
" "
did not have
you did not ofto it
"
have to to accept it
"
>
you ,
13
Corruption Scandal at Siemens

Similar scandals before such as Siemens' Greek bribery scandal (Summer Olympics
2004)
Outcome:
Trials in Munich and Washington D.C. suspended in December 2008
CEO Kleinfeld and chairman of the board von Pierer were discharged, one former CEO came
into custody
Fines amounting to 1 billion EUR were imposed
After the scandal a comprehensive compliance program was implemented,

monitored by the former Federal Minister of Finance (Theo Waigel, CSU)
14
Anti-Trust Laws (1/5)

Other reason for legal accusation: violation of anti-trust laws
Evidence of bi- or multilateral coordination of behavior between competing
companies "spontaneous-solidary parallel behavior" > you want competitions to be in a
'
prisoners dilemma ✓
Aim of cartel: ( so that

they dort coopeate and en nich on the experte of the s
Consumer )
Æ Members of a cartel want have the same benefits like monopolists without giving up legal and
economic autonomy (maximization of collective profits by price fixing)
Anti-trust laws serve the purpose to prevent these arrangements between companies
that contain market-competition
For companies with market-dominating positions special anti-trust regulations apply

!
>
regulations are more important the s matter the numbo of competitions are
15

Ethical assessment of cartels:
Important role of competition as driver of social progress
Competition as incentive to produce better and cheaper products
capitalism has the problematiken den cy to for M Monopolist c powers
!
>
<
acknowkdgedvoyee.ly
³3HRSOHRIWKHVDPHWUDGHVHOGRPPHHWWRJHWKHUHYHQIRUPHUULPHQWDQGGLYHUVLRQEXW
the conversation ends in a conspiracy against the public, or in some contrivance to raise
SULFHV´
(Adam Smith, Wealth of Nations)
16

Key differences:
Exclusionary conduct: Exploitative abuse:
Behavior that primarily harms competitors of the Behavior that harms customers and suppliers
market-dominating company horizontal Structure vertickt Structure
Example: Inappropriate and enforced business conditions

Competitive pricing which can often be below that a company imposes, e.g. on its dependent
the prime costs of a company ( for Certain time ) a suppliers leg if you svpply only BMW )
.
Aim: Aim:
Penetration of market and crowding out of other Exploitation of dependents
companies
>
atthough the Customer might have profi xd
from this new competitor
17

Distinction between types of illegal agreements :
Horizontal agreement: Vertical agreement:
Coordination between competitors Coordination between suppliers and customers
Example: Example:
price fixing, geographical division of sales markets, binding independent dealers to minimum resale
exchange of confidential information prices or reselling certain products only to end
customers from a specific EU member state
Gentlemen's agreements: one- or more-sided coordination of behaviors of companies

participating in competition
18

Example: Lorry Cartel
Price coordination over 14 years: Daimler AG (D), Iveco (I), Volvo-Renault (S/F),
DAF (NL), MAN (D)
Dominated 90% of the market for medium and heavy lorries
MAN AG gave indications on an existing cartel (whistleblowing): Benefited from
leniency program Æ was not fined itself
Penalty payments in 2016, total: 3 billion Euros (which went to EU budget and reduced
the contributions of member states)
Daimler AG: Highest fine (1 billion euros)
Compensation payments to customers
19
Data Privacy (1/2)

Focus of German legal situation (Federal Data Protection Act, 2009):
Confidentiality: Information has to be processed securely
Any use of personalized data must be justified
Data has to be anonymous or pseudonymous
Obligation to report unlawful access to data
Introduction of technical equipment to monitor the performance of employees requires the approval of
the works council
all did this
> not a
case of a cartel
, they just
Examples:
Food giants and discounters like Rewe, Edeka, Aldi, Lidl, Penny, Tengelmann made use of unauthorized
video surveillance or other monitoring activities (see e.g. Schlautmann et al. 2012)
For compliance violations: substantial fines
20
Data Privacy (2/2)

Example: Spying scandal at Lidl
Unauthorized monitoring of employees

Hiring of detectives in more than 219 stores throughout Germany
Between 2006 - 2008, more than 30 Lidl sales companies had
commissioned store detectives with cameras in more than 900 cases
who prepared comprehensive audit reports about the conduct of
Quelle: haufe.de
employees (information about the appearance and the private life of
employees)
Violation of Article 2 of the Constitution which guarantees the free
development of individuals' personality
Lidl was fined to almost 1.5 million Euros
21
very individual
Determination of Company-Specific Compliance Risks

Implementation of a compliance program can/should not aim at misconduct of single
employees but rather prevent systematic misconduct
Analysis of companies business structure is crucial: Compliance risks are often
company-specific
Rule of thumb: Companies dealing with public-sector customers are more prone to
corruption than companies dealing with private-sector customers
> therefor
managers sometimes ty
to a
qui re black Morey
Corruption is only possible when money flows can be diverted outside the firm Æ
therefore important to keep track of all payment activities
Systematic corruption often occurs through the use of business intermediaries Æ
examination of business transactions via third parties should be done
very fully → are
22
Key Tasks of Compliance (Moosmayer, 2012)

Prevention of Reaction on
corporate corporate
misconduct misconduct
1 2 3
Exposures of
corporate
misconduct
23

Prevention of Corporate Misconduct

Communication for prevention: Corporate Culture that adopts a clear stance when it
comes to compliance issues
Decisive Role:
Ä7RQHIURPWKH7RS³(company management)
Ä7RQHIURPWKH0LGGOH³(department heads and
team leaders)
Prevention of corporate misconduct also for the
> Otten
rigoros tone from the top (
very
Ethical code (corporate integrity) ) which is not how it is hand / ed in feat
Whistleblowing systems very narrow degree ( also depends Public
→
Compliance training and consultation on the altre)

Due diligence of business partners
Efficacy screening of implemented measures
24
Ethical Codex (1/2)

Ethical codes are the central part of compliance programs:
Clearly and precisely formulated, naming most important rules and demands towards
employees you
have to pennt them in
→ certain do without
a
suggeSling
or certain
prioritya
Content depends on results of company-specific risk analysis (i.e. cross-industry similarities

and differences) e.
g also
mention
→
industry specific risks problems for your Competitions
, ,
. . .
Often: separate code of ethics for the finance sector =D particular ly Marsh
Code of ethics should be accessible via homepage for all employees (in case of misconduct
it can be proven that regulations existed)
25
Ethical Codex (2/2)

Ethical code: Different levels of information and different characteristics (Kaptein, 2014)
Authentical: Code needs to be tailored to the company
Morally justificable: Mission Controllable:

Viewpoints of the company Neither under- nor over-
are subject to strict moral Core Values ambitioned; no ambiguous
testing (regular statements
reevaluation according to
Responsibility
social changes)
Norms and Rules
26
Whistleblowing (1/2)
Whistleblower systems allow employees and suppliers to report
misconduct outside of the established reporting line
To avoid "culture of denunciation" comprehensive communication is
key when implementing this kind of system
Knowledge about misconduct combined with uncertainty (how to behave
in such situations?) constitutes great psychological stress for
employee Æ negative impact on work performance
all this
→
great est impact at
night important that you can
numbo at
night too
27
Whistleblowing (2/2)
Preconditions of an effective whistleblowing systems (Tur, 2014):
Anonymity (no personal disadvantage for whistleblowers)
Accessibility (place and time Æ optimal use of existing whistleblowing opportunities)
Open Communication (feedback for the whistleblower)
Language Coverage (no language barrier should hinder whistleblowing)
Narrowing of the issues to be recorded (only infractions and violations of standards can
be reported)
Documentation
28
Correct Application of the Code of Ethics: Training

The correct application of compliance measures requires employees to participate
regularly in trainings concerning content of the ethical code
> offen very
vague trainings hdp to speüfy
so
Aim: to increase awareness of what is right and wrong and train the ability to judge
critical situations (awareness training)
Use of different methods for compliance training:

E-Learning module
Case study
Management workshops for managers
Ad-hoc support for field staff per app
Important: Offer advice + have effective knowledge management system
29
business partners also in toms
screening of possible
a of ethical behavior & Compliance !
Due Diligence
Important function in preventive measures: the choice of business partners
Indicators which make specific examination mandatory:

Potential business partners come from countries where corruption is spread
Explicit request of performance-based remuneration (rather than a fixed compensation)
In the case of dealing with business partners closely related to public sector
Insistence on unusual payment terms
Æ Adequacy and reasonability of the investigations!
Before carrying out the actual due diligence:

Development of risk-adjusted indicator sets for risk analysis of pre-selected third parties to be
investigated
> dependsa tot on
Company industry
+
30
Effectiveness Monitoring of Implemented Measures (1/2)

Internal Audit (each business unit, compliance department or revision) vs. external
audit (e.g. experts)
Guidelines in Germany:
Principles for the Proper Performance of Reasonable Assurance Engagements Relating
to Compliance Management Systems (2011)
31
Peter Löscher Chair of Business Ethics "
"
TUM School of Governance Feedback Circle
Effectiveness Monitoring of Implemented Measures (2/2)

Feeds into s Compliance culture: ³7RQHIURPWKH
Compliance Culture 7RS´GHILQLWLRQRIFRPSDQ\YDOXHV
1 2
Compliance screening and
improvement: Reporting,
8 Compliance targets: Definition of the
documentation and responsibility 3
main targets of compliance
Compliance communication:
Communication with employees 7 Compliance risks: Identification of
4
in regard to compliance measures company-specific compliance risks
6 5
Compliance organization: Compliance program: Measures how
Clarification of responsibilities, role- to cope with risks
assignment
32
die AmisConduct before it naked had
Peter Löscher Chair of Business Ethics you want to gets but then it is

Technical University of Munich to
really punish it into
Mally because you lack options ( also because had
Measures night be taken to court )
Detection of Misconduct (1/2)

Supervisory duty: Indications of misconduct have to be followed up!
Mostly through internal investigations:
1. Identification of misconduct
2. Stopping of misconduct
3. Sanctions very sensitive
→
Identification of weaknesses in compliance frameworks (adjustments can be made)

Legal difficulties - hand over a corresponding investigation to an investigating
authority
Involvement of employees in internal investigations: under certain circumstances
grant amnesty (under employment law) in exchange for cooperation SULVRQHU¶V
dilemma)
33
Technical University of Munich there has to be some Standard procedure that
for all
you apply cases
Detection of Misconduct (2/2) > no

judgement in the process
Legal examination of the hint

Get more information from the
no
Does the hint prove to be substantial? whistleblower
Formal investigation commission as in- yes Does the hint prove to be substantial?
company Legal basis
no
Preparation of an investigation plan Closing of process
Conduct of investigations and statements

of the persons concerned
no
Does the hint prove to be substantial? Closing of process
Informing the management about the

completion of the investigation
Informing the management about the
Follow-up of the actions proposed by the completion of the investigation
investigation team
34
Reaction to Misconduct
Consequences of misconduct must be drawn, otherwise compliance soon becomes a
mere lip service (incentives: reward/sanctions)
Reaction to misconduct: disciplinary sanctions →

very
little means if you don't want it
Admonition to
get public
Disciplinary warning letter
Cutbacks of bonus payments
Relocation
Termination of contract
Additional compliance trainings
35
Integration of Compliance into Organization (1/2)

Autonomous Organization of Compliance
Chief Compliance Officer (CCO)
Compliance Office
Compliance Officers Mostly used by corporations
(authority to lay down
guidelines)
(operative business) Compliance performs each
of the basic functions
Whistleblowing Systems
Headquarter Reporting to the CCO
Legal Advice
Divisions
Training
Regions
Reporting
Central Functions Operative Functions
36
Integration of Compliance into Organization (2/2)

Organizational Matrix
Compliance Comitee Mostly used by medium-sized companies

Compliance departement limited to the function of
prevention
Compliance Division Detection of and reveal to misconduct carried out
by other departments in the company (e.g. HR)
Revision
Compliance Comitee: CCO and heads of
Legal Division
departments involved in the process
Requires fewer resources than the autonomous
Accounting organization but more coordination efforts are
needed
HR Department
37
Compliance in the Organization

Possibility to immediately escalate the investigations WRWKHFRPSDQ\¶VPDQDJHPHQW
Compliance-Organization reports to Company Management
Facts regarding compliance departments in German companies:

82% assess company's compliance risk
67% have internal anti-corruption guidelines
76% have one or more employees in charge of compliance; at least 50% have a CCO
Chief Compliance Officer
BUT: Only 54% of the CEOs state compliance as top priority
Sources: Deloitte Development LLC (2016), Ernst & Young (2015), Hogan Lovells (2016), PwC (2015)
> diffus from Lip service
38
Limits of Compliance: IHC in Burma (1/4)

Compliance to legal and self-imposed rules on its own does not protect a company from
a loss of image or boycotts (even in the B2B sector)!
e.g. IHC Caland in Burma
Burma Mid 90s: IHC Caland:

- Bad human rights situation in Burma Dutch corporation in the offshore gas and oil
industry (formerly also shipbuilding), today: SBM
- 1997: Clinton issued ban on new investments Offshore
- Heineken, Interbrew, HP, etc. then withdrew

from the country
- US/NL: Consumers threatened with protests

against companies continuing to operate
39
IHC Caland in Burma (2/4)

IHC Caland's investments in Burma: Protests against the investments:
Worldwide protests against the involvement
IHC &DODQG¶V investment in Burma: of IHC in Burma
Signature of a 15-year contract with the
Burmese Government in 1998 for an Allegation: support for oppression of the
offshore project (volume: several hundred Burmese people/support of the military
million euros, joint venture) regime
Previously, US oil company Texaco had Publication of IHC Caland financial networks
withdrawn, presumably because of US by protest groups to identify which investors
investment ban were indirectly involved in business with
Burma
Source: http://www.ib-sm.org/CaseIHCCaland.pdf
40

Code of Conduct and compromise:
IHC Caland's point of view: In 2000, IHC Caland set up code of conduct
Business is legitimate as long as there is no Nonetheless, they wanted to stick to the

NL/EU embargo policy of signing contracts in countries
without official embargo
Duty of company is only to act within the
legal framework Another contract with Burma was closed
IHC referred to its B2B relationships which Two important shareholders sold their shares
played no role in moral issues
In 2003, representatives met with Burma's
Nevertheless, IHC had difficulty financing the ambassador to discuss human rights issues
project as Dutch banks refused to finance it
IHC Caland follows OECD guidelines Æ FNV
and CNV check compliance
41
it is offen not sufficient to just ad here to the law !

Further Developments:
2003: Stricter sanctions against Burma (President Bush)
2013: EU suspends sanctions against Burma

Conclusion:
- Regardless of whether investments by western
companies promote human rights violations, IHC
Caland case shows that public can also exert
considerable pressure on B2B
- It is also in the interest of company to calculate
reputational risks beyond legal framework
Æ Compliance alone is not sufficient!
42
Limits of Compliance
There is always danger that compliance with legal and self-imposed rules will not be
perceived by as sufficient by public
Risk avoidance: Companies continuously check in course of a learning process,
whether existing rules are sufficient or whether new rules are required (adaptation to
current developments) > issues of CSR become issues of compliance
Effective risk management: imposing own rules in context of corporate social
responsibility before they are codified in written law
it breed it at least
> you you
don't have dions
any Legal san
43
Introduction to Business Ethics
Dr. Matthias Uhl

m.uhl@tum.de
Introduction

5. Corporate Ethics
5.2 Different Perspectives on Corporate Social Responsibility
3
Friedman: Profit Maximization as Corporate Goal

"The Social Responsibility of Business is to
Increase its Profits"
- Milton Friedman
Friedman's HVVD\Ä7KH Social Responsibility of Business is to Increase its

3URILWV´(1970) is regarded one of most influential views in Business Ethics
According to this view, managers have clear and well-defined goal they
should achieve: Maximization of profits for shareholders
"CSR" would be use of resources for goals that are not required by
shareholders
want
> CSR is just giving customer what they
4
Background and classification of the theory

1. Neoclassical paradigm (Coase 1960)
Requirements:
Clearly defined ownership rights and free exchange of property via efficient markets: Optimization of
results; goal for companies: create efficient result
Indiviuals are interest-driven (economic freedom, free decision-making)
ÆIncentive: profit maximization through efficient use of resources

ÆWelfare promotion for society through responsible actions of the enterprise, if it achieves
maximum profit with resources at its disposal
5
Background and Classification of Theory

2. Systematic Perspective
Requirements:
Justification of property-based free market economy and associated promotion of welfare
ÆMarket participants with limited restricitions by state bodies

Æ economic freedom to act as consumer or producer
Æ Political voice of citizens (consumers) (e.g., right to vote)
ÆExertion of political influence of citizensÆ Protection of freedom in economic sphere against state
encroachments
6
duce fair because
differentiale Companies
: who e.
g. pro
to
Technical University of Munich their customers want them to and firms who produnfair
add some sur plus ( Friedman has a
problem with
Tasks of Managers the Law )
Shareholders employ managers for specific purpose (profit maximization)

Æ Use for "moral" purposes (social, ecological, etc.) is thus improper use of resources
Managers don't have expertise to make good use of resources in areas outside their area of business
Resources will be allocated to achieve certain ends that are chosen by management (non-democratic
decision)
Costs of this behavior will usually be allocated to customers or employees (forced tax)
Managers thus undermine ownership rights

Æ endangering of liberal economic system
Responsibility for social problems lies with state - not with companies
it it's not then not do it ?
>
against the law
Why
16
Society's Regulatory Framework (1/2)

ÆIrresponsible action would just be an act that violates
law of the state (Friedman 1971, "Capitalism and
)UHHGRP³
ÆProfit maximization is only permitted within society's
regulatory framework (according to Smith's "invisible
hand"), for benefit of all
ÆEach individual should work on such framework
ÆPower of state should be curtailed to not interfere in
market processes
Source:
www.unsichtbarehand.wordpress.com
Core task of state:
Establish and maintain regulatory framework then
> if it is a
problem
e
very
should a dhere to it
Company
.
8
Society's Regulatory Framework (2/2)

Market and freedom of individuals Limitation of power of state (esp.
must get largest possible space intervention in market processes)
State is responsible for

³Rules of *DPH´
9
Goal of Companies
Companies:
Æ Friedman: Companies emerged from free association of individuals and their property
Æ Objective and tasks of companies: determined by owner (has the right to do so)
Who determines tasks of company and who bears responsibility?
Æ usually managers, employed by owner „

HE can then
privacy give
Charity
mon
ey to
Agent (Manager) Profit maximization Principal (Owner)
According to Friedman, a company can NOT be responsible for an act because of its
nature Æ "Corporate responsibility" is in fact semantic category defect
artificial Unstrut like
> an
a
company
cannot have
responsibility
10
Social Goals and Corporate Responsibility (1/3)

Assumption: companies are resource-rich actors Æ they should be responsible for
society
BUT:
How can individual know if particular expenditure of resources serves
"social interest" if manager can not know what "social interest" is?
Through agent's commitment to principal, goal of business is to maximize profits (fiduciary duty).
Principal can easily judge fulfillment of goal and quality of work of agent via data 6RFLDOJRDOV")
Æ By complying with legal frameworks and basic moral standards, company is already paying
attention to other stakeholders
11
* what customers want , Otto wise :

TUM School of Governance your
Technical University of Munich abuse of morey

Friedman's examples of misunderstood forms of "social justice": of the
1. Forego price increase to meet social desire to avoid inflation → Steering inflation is not the goal company
2. Environmental protection beyond legal framework (achievement only by cost factor) only okay if this is *
3. Recruitment of long-term unemployed rather than better-qualified workers (social integration)

if you See tom benefit for
>
only okay long your County
-
Criticism:
Managers, as agents, utilize resources that do not belong to them and are entrusted to
them for another purpose
Risk of shifting decision-making power over social developments Æ undermine central
pillar of free society, namely property
Only small group (of managers) who neither have the mandate nor the competence
decides on social investment
Incentive problem (no means to audit manager's performance)
12
( it doesn't it
CSR is either
empiy mean
anything ) or
thing and then should nit have it either

Technical University of Munich Means some we
way

it it doesn't its not CSR mean in
Criticism: business
>
gful part but a of a
Strategy
Investment in social projects would diminish profit; it is illegitimate form of taxation of
owners (against paradigm of profit maximization)
Illegitimate: Taxation is not brought about by adequate procedure (checks and balances), but by
small group of managers who do not have sufficient competence (time of the old war tear of social ism ) :
Danger of collectivism through corporate social responsibility: By emphasizing

social responsibility, it is implied that profit motive of companies is wrong
Assumption of social responsibility as "compensation" for morally dubious profit
striving
If managers do not fulfill claims: "iron fist" by state compulsion (danger for liberal
social order)
Æ Task of state institutions is to account for social responsibility

13
day Companie
do not act nation
to : s
only ally anymore
institution that takes of and is
Technical University of Munich > there is no
supranational are
everything
maximize it's profits !
responsible for the ries → no framework in which the
Company can
ethicdly
Why is Corporate Ethics then Necessary at all?

Friedman did not take into
account nature of profit
maximization
"right" form: "wrong" form:

- Appropriate conditions - Misuse of companies' resources
- Institutional integration in society - Danger: Diminishing perceived legitimacy of
- Wealth creation market economy and the fundamental order
of freedom
- If "rules of the game" provide certain
latitude: irresponsible exploitation (e.g.
outsource production to country where child
ÆStarting point for business ethics research labor is not punished)
14
Corporate Ethics as Profit Maximation

Ability to maximize profits depends heavily on institutional framework, which in turn
depends on how companies put their profit motive into practice
e.g., perception of public that undesirable forms of profit maximization prevail Æ amendment of legal
framework Æ possibly disadvantageous position for companies
ethical into their actions
~> companies want to be faster than thepublic and al
ready in corporate principles daily
that I Gws don't
so
get passend
The question of how to implement maximization strategy is essential!
Example: Ä+LWand Run³Strategy
15
you can have different Views on profit max imitation
Peter Löscher Chair of Business Ethics How should we
Technical University of Munich because can
apply different discount rates ! T discount the future ?
you
in tuested in short profit max imitation while shareholders have ratten long tom in west
only
a
>
Managers are offen tom -
-
ÄHit and Run³Strategy (Suchanek et al., 2004) ¥

what is the
right for?m
of profit maximitation
Short-term profit strategy with products and services that are of inferior quality and not
sustainable
Usually such companies will leave market mostly after short time Æ no investment in
lasting reputation needed ideal view Market will take while to sort this out
> :
a
Friedman has taken this short-term form of profit into account, but perceives it as
marginal by referring to market forces:
1.Sorting out such behavior by market (not incentive-compatible) by
customers, suppliers and investors
2.National framework applies ("rules of game"), especially for external effects
("neighboring effects"): sanctioning of harmful behavior
Æ State as last resort for what the market itself can not solve
16
How Much Power does State Need?

State must have regulatory power to prevent unwanted forms of profit maximization
However, Friedman argued all his life for strong restriction of state activities, especially
against interference in free market
ÄIf you put the federal government in charge of the Sahara Desert, in 5 years
WKHUH
GEHDVKRUWDJHRIVDQG´(Milton Friedman)
Discrepancy:
State should be assigned more power and influence (regarding regulatory framework and
its design) Æ Otherwise, state framework is inadequate to prevent unwanted profit
maximization
17
Friedman's Two Restrictions

Friedman speaks of two restrictions within which companies should maximize their
profits:
1. Rules of Game (institutional framework, laws, regulations)
2. Basic moral principles
ÆIf neither principle is violated, maximizing profits is sole imperative of enterprise!
With incomplete regulatory framework, however:

In liberal society, task can not be completely passed on to state actors alone!
18
Co-Responsibility of Companies (1/2)

In addition to two restrictions on companies that Friedman names, there's also a
responsibility:
"Companies have responsibility for ensuring that they also

receive 'conditions of decision-making autonomy' in future
«
and if possible for improving them "by seeking to resolve
current or potential conflicts of profit and morality or improving
(institutional) conditions for resolving these conflicts."
(Suchanek, 2004)
19
Co-Responsibility of Companies (2/2)

Important: companies share responsibiliy for whether or not framework is viable
Company's interest: Minimize state regulations as much as possible
Longterm perspective: Follow rules of regulatory framework!
Society will give companies more room to maneuver only if it is convinced that it is not
exploited (expensive controls become superfluous!)
Trust of society in companies, that they will not abuse their liberties Æ society waives
having detailed and comprehensive regulation
Advantage for companies: Resulting latitude is often cheaper and preserves
flexibility they need in competition
20
( virtue ethics )
Concept of Honorable Businessman (1/2)

make business in
that Let's
> a
way you
Approach experienced renaissance due to financial crisis Sleep good at
night
Concept:
Collection of desired behaviors: "ethical

principles" in form of codes ( of Conduct )
For example Manifesto "Mission

Statement for Responsible Business
Conduct" signed by many top executives
21
Concept of Honorable Businessman (2/2)

But: Concept is not based on general principle
ÆNormative model >
very vague
Buzzwords in connection with honorable
businessman:
Honesty; moderation; accountability; decency;

meticulousness; reliability (keeping one's word);
sustainability; integrity; role-model function
Source: IHK Nürnberg
22
Differences between CSR and Honorable Businessman

more individual
CSR Honorable businessman
Responsibility of a business Acting Person (e.g., managers in small

(rather bigger companies) and medium-seized companies)
diffusion of into account
> no responsibility laben
Æ Promotion of ethical behavior of legal person (in form of enterprise)
Æ character of entrepreneur hard to apply to huge >
multilateral corporationS
Æ Individual ethical concept (moral demands on individual)
Æ Virtue-ethical approach (strong connection to individual character traits and virtues)
23
Honorable Businessman as Point of Orientation

Many professional groups have guiding principles, e.g. doctors, lawyers, etc.
Statute on the Provisional Regulation of Law of Chambers of Commerce and Industry

1
"... It is incumbent on them in particular to support and advise authorities through proposals, expert
opinions, and reports and to work for the preservation of the decency and customs of the honorable
businessman."
There are numerous models in various organizations and associations that define virtues
of honorable merchant, but:
Æ Principles derived from these virtues are indeterminate and abstract
24
Concept of Honorable Businessman

Lack of a unified basis of concept Æ historical and
conceptual approximation necessary
Could also be
> e.
g.
a
Company
Businessman (m/w) refers to economic subject who
conducts any kind of commerce (purchasing and
reselling/production and distribution) with degree of
autonomy !
virtues
always individual
> are
is appeating to individual virtv es still timly when more
?
and more decisions are
being made
by algorithms
Quelle: IHK Nürnberg
25
Concept of Honor
Interpretation of term only possible within social context
Æ Which actions are considered "honorable", "venerable", etc.?
Term consists of Old High German root êre and the Greek term for "good
reputation" (emphasizes social character of term)
ÆAn action is honorable if it is assessed positively by society (e.g. if it meets/

exceeds norms) Dual concept of honor
Internal honor: External honor:

Feelings of individual itself regarding its conscience Evaluations of social group
(recognition of other people necessary!) (mostly outsiders)
26
Concept of Honorable Businessman Today

Harvard Business School has issued MBA Oath for graduates to ensure "ethical
conduct" in business-related decisions (voluntary signing!)
Commitment to:
Æ Not promoting their own interest at expense of their
company or society
Æ Rejecting corruption and avoiding business practices that
harm society
ÆSupporting management profession as whole, acting
ethically and create sustainable prosperity
ÆReinforcing integrity and confidence in oneself through
one's own behavior
27
Criticism on Individual Ethics (1/4)

External concept of honor:
intercultural differences and historical fluctuations in meaning
¾ Different markets require different behaviors in order to get social recognition of respective
society →
very important specialty in today's globalised world
e
¾ Concept of honorable businessman is not stable!

¾ How can ethical model be implemented against background of value pluralism?
¾ Divergences in evaluation of actions even within cultural circle
Concept of honorable businessman can not act as guideline!

)
"
after usetul to in create the •neuen ce mal l " tribalism "

Morality is
very of s
groups
"
but ratner obst ade when it comes to interaction between
an
gro ups .
28

Free market economy: Demand for honorable businessman can become superfluous,
since companies have vested interest in being perceived as "honorable" and respectful
> in this Sense
empty
:
Is inner motivation to act with great honor relevant?
Businessman would not be honorable if he or she did not act out of intrinsic
motivation, but do purely instrumentally what is expected from him or her
Trust: trust-based relationships are very important in business ethics
29

Concept of honorable businessman has fallen out of time:
Concept comes from time, in which economic system was
much simpler than today (Late Middle Ages: no large
organizations with complex chains of action and responsibility)
in which dilemma Structures
> were
brgdy absont
Modern world: individual ethics meaningful on conditional level!

Need to implement ethical values in form of institutions and
rules ( opposed to honourable business man restriktions as a for of conscience
:
on within the individual )
Source: IHK Nürnberg
problem of the Structure of the Situation and not so much
>
usually a
a lack of individual virtuos
Plea to individuals to behave ethically are unenforceable unless competitors

behave "honorably" as well
30

Confidence-inducing performance of businesses essential, but mainly for purpose of
creating reputation (investment in future)
Æ Concept of honor seems unnecessary, even threatening
Concept depicts company's untimely normative ideal
Honorable businessman suggests a "trustworthy, SURSHURIILFLDO³
But: Dynamics and entrepreneurship should not be in the background!
Ethics necessary for a modern, dynamic society!
31
> shows how important it is to understand then
Technical University of Munich ethical con con s in the public
Ford Pinto (1/2)

Due to cheaper construction of Ford Pinto: Higher accident rate (dead and seriously
injured)
Calculation of management to produce cheaper despite increased likelihood of explosive
ignition of vehicle has become historical corporate scandal
Cost accounting of management: Retrofitting

car to avoid explosions would have been more
expensive than insurance damages that would
have been caused by explosions (calculation of
dead and seriously injured)
Æ Ethical evaluation of scandal?

Source: www.topsiages.com
started off business ethics
> really
32
Ford Pinto (2/2)

First, no moral guilt from Ford:
No violation of law or regulations.
Statistically not less safe than other registered cars
Conscious decision against retrofitting of cars: costs would have amounted to 0.5% of sales (lower
profitability)
Assessment of human life: nothing extraordinary; is also undertaken in economic evaluation of safety
measures in road or insurance sector
Still, one of worst scandals in automotive history
Reason: Public rejection of cost-benefit calculation of Ford
it
simply not adhere
enough to
is
only
> to the law s
33
Ethical rides as business risks
Immoral Behavior as Business Risk? (1/3)
Beginning of Business Ethics!

Critical Public: From then on, companies had to dealt with
Demands Responsible Business Conduct the new factor "reputation"
Case Ford Pinto: Immoral behavior can lead to business risk

There are hardly any large companies that do business without corporate ethics activities
often sacrifice profit for the Save of long tom profit maximization
> more
intelligent to
-
business ethics always to cuses the

long
> on -
nen
Economic Perspective: Why do Companies practice business ethics?
34

Milton Friedman (see chapter 5.2.1.):
"The social responsibility of business is to increase its profits³
Friedman ascribes task of social redistribution only to state
Æ Friedman considers unauthorized redistribution through company as misappropriation of capital
Criticism of Friedman's presentation:

Assumption that state is unable to perform tasks such as corrections of externalities or redistributive
mechanisms due to following premises:
State is dominated by interest groups
Social problems are outside legislative sphere of influence ( especially to day with Hansonding borders)
High transaction costs and inadequate information: only with great inefficiency
> lower Cost for the CompanieS !
Implies however: If state had full capacity to act, nothing could be objected to
Friedman's argumentation!
35

Also: fundamental objection to Friedman's point of view Æ every company has the
inherent duty to assume social responsibility
Stakeholder theories: > ethics first then economic considerations !

,
Corporate Responsibility: In case of doubt, also against economic interests of company

Question: How can demands be realized under permanently competitive conditions?
36
Business Ethics as Business Strategy: Reputation (1/2)
Theoretical core of economic and business ethics: monism

Problems characterized by conflicts of interest
> a situation whoe Friedman would that
Aim: say
Win-Win-Situation the concept is
empty
> reputation building is ultimate ly in the service of profit imitation
max
Non-anticipated interaction uncertainties: situation in which neither contracts nor

laws govern the rights and obligations of contractors
Mistrust: Does the other side use the loopholes for their own benefit?
Æ Can lead to preventive counterfeiting
Actors can counteract this with help of confidence-building measures and build
reputation!
37
Business Ethics as Business Strategy: Reputation (2/2)

Establishes business relations and thereby saves transaction
Reputation
represents capital: costs
Accumulating reputation by engaging in moral principles such as

Creating understand that you will
integrity and fairness →if
your business partners
trust and not exploit them even if
you could
reliability Under conditions of globalization: reputation as important
prerequisite for successful entrepreneurship
Premodern: trade limited to few actors, "face-to-face control";
immoral behavior was punished with ostracism
In globalized world: this type of control is systematically eliminated
(trade worldwide) Æ Mistrust and risk of preventive deception is
growing
38
Business Ethics as Business Strategy: Trust (1/2)
in line with
Trust saves transaction costs from economic perspective >
brought
economic reason
Economic perspective on ethical concept of trust: ing
( enab k a discourse)
How can trust be built and maintained in modern society? Which risks arise?
ÄThe definition of trust proposed in this research is the willingeness of a party to be

vulnerable to the actions of another party based on the expectation that the other will
perform a particular action important to the trustor, irrespective of the ability to
monitor or control that other party³(Mayer et al, 1995, S. 712)
39
Business Ethics as Business Strategy: Trust (2/2)
Core of trust: Reciprocal Altruism ( goes Goth Ways )
Altruism here does not mean that consideration is waived, but that performance and
consideration are temporally decoupled and contractually not explicitly secured
Trust capital: Positive impact for individual actors and economy as whole
Correlation of citizens' trust in country with prosperity indicator
Greater confidence in economic area also leads to greater prosperity (World Value
Survey, 2015)
40
Business Ethics as Business Strategy: Social Capital (1/4)
Developing a relationship of trust between two actors in multilateral relationship:

social capital
Trustee acquires claim of trust against third parties within contracting community
Acquires trust claim

trustee against third parties
third party Social capital with
factual, temporal and
personal decoupling
of performance and
consideration
trustee acts in
interest of trustor ¥
trustor does not Massa
ily apply to
the some person 41
ÆExample: Alumni associations

Graduates can expect support from each other, even if unknown
Social capital thus facilitates interaction and saves resources: no costly and time-
consuming controls
Protection of social capital: By sanctions in case of misuse of trust

Sanctions can be imposed by contracting party or third parties
Due to implicit nature of contracts: sanctions of informal nature, such as damage to reputation,
public disregard or social exclusion
Even in globalized world, moral misconduct becomes risk factor for businesses (e.g.
legal consequences of bribery)
42
Example Enron: rise and fall of energy company

1985: Founded by merger with gas pipelines Houston Natural Gas and Internorth
1992: Largest gas trader in North America
1996: Beginning of bookkeeping tricks "Market-to-Market $FFRXQWLQJ³
"Market-to-Market Accounting": the current value of future long-term revenue is counted as revenue Æ
2000: $10.78 million in revenue reported, but only $6.27 million actual revenue
1999 Founding of trading platform "Enron 2QOLQH³
2000: Stock price reaches all-time high: $90.56
Oct. 2001: Enron must make asset depreciations on investments
43
Oct. 5, 2001: Enron sells Portland General Corp. At a loss of $ 1.1 billion
Oct 16, 2001: Enron admits that accounting rules have been violated; profits were
corrected down by 20%
December 2, 2011: Stock falls to $0.26, Enron filed for bankruptcy
Destruction of billions of dollars of investment capital
2002: Collapse of accounting firm Arthur Andersen LLP due to involvement in Enron
scandal
2006: convictions of Kenneth Lay, Jeffery Skilling and other managers
44
( ethics that are based within the company itself)
Corporate Ethics as Management of

Moral Risks
45

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Introduction to Business Ethics (1)

Dr. Matthias Uhl

Dr. Matthias Uhl (TUM) | Introduction to Business Ethics | WS 2021/22 1

Christoph Lütge & Matthias Uhl

There is also an english version available.

Dr. Matthias Uhl (TUM) | Introduction to Business Ethics | WS 2021/22 2

Dr. Matthias Uhl (TUM) | Introduction to Business Ethics | WS 2021/22 3

Dr. Matthias Uhl (TUM) | Introduction to Business Ethics | WS 2021/22 4

Why Business Ethics? (1/3)

Why Business Ethics? (2/3)

What obligations do Western pharmaceutical

Why Business Ethics? (3/3)

Can Corporate Social Responsibility become a

General Perception (1/3)

Criticism targets involved actors and not structures

General Perception (2/3)

Dr. Matthias Uhl (TUM) | Introduction to Business Ethics | WS 2021/22 9

General Perception (3/3)

Dr. Matthias Uhl (TUM) | Introduction to Business Ethics | WS 2021/22 10

What do Germans Think about Entrepreneurs? (1/5)

Critical view on the engagement of corporations in social issues

Dr. Matthias Uhl (TUM) | Introduction to Business Ethics | WS 2021/22 11

What do Germans Think about Entrepreneurs? (2/5)

A lot Many Not so many None Don't know

Source: Die Zukunft der Sozialen Marktwirtschaft 10/2005; n=1528

What do Germans Think about Entrepreneurs? (3/5)

Increase Not change Decrease Don't know

Source: Die Zukunft der Sozialen Marktwirtschaft 10/2005; n=1528

What do Germans Think about Entrepreneurs? (4/5)

Source: Die Zukunft der Sozialen Marktwirtschaft 10/2005; n=1528

What do Germans Think about Entrepreneurs? (5/5)

Yes No Don't know

Source: Die Zukunft der Sozialen Marktwirtschaft 10/2005; n=1528

CSR Reporting Development

The Ford Pinto Case

Dr. Matthias Uhl (TUM) | Introduction to Business Ethics | WS 2021/22 17

Ford Pinto (1/7)

Ford Pinto (2/7)

 Fuel tank behind the rear-wheel

Ford Pinto (3/7)

Ford Pinto (4/7)

 Costs, if not attached (Calculation of the Ford-statisticians):

Ford Pinto (5/7)

Ford Pinto (6/7)

Dr. Matthias Uhl (TUM) | Introduction to Business Ethics | WS 2021/22 23

Ford Pinto (7/7)

Æ Starting point for Corporate Social Responsibility (CSR)

Dr. Matthias Uhl (TUM) | Introduction to Business Ethics | WS 2021/22 24

What is the value of life?

Dr. Matthias Uhl (TUM) | Introduction to Business Ethics | WS 2021/22 25

Introduction to Business Ethics (2)

Dr. Matthias Uhl

Dr. Matthias Uhl (TUM) | Introduction to Business Ethics | WS 2021/22 1

Dr. Matthias Uhl (TUM) | Introduction to Business Ethics | WS 2021/22 2

1.1 Problems in Business Ethics as Interaction Problems

Dr. Matthias Uhl (TUM) | Introduction to Business Ethics | WS 2021/22 3

Robinson Crusoe and Friday

FRIDAY COMES INTO PLAY

Two individuals are competing for limited resources

Dr. Matthias Uhl (TUM) | Introduction to Business Ethics | WS 2021/22 4

Basic Elements of Problems in Business Ethics

1st Element: 2nd Element:

Scarcity leads to conflicts

Fuel tank behind the rear-wheel

Costs, if not attached (Calculation of the Ford-statisticians):

but to their self-ORYHDQGQHYHUWDONWRWKHPRIRXURZQQHFHVVLWLHVEXWRIWKHLUDGYDQWDJHV³ everyone's ad

Prevalence of mutual interdependences between individuals, firms and nation states

What is the best means to achieve an end? (Economics)

Ethics as theory of morality (reflecting on morality)

Determines actions or ought to determine actions ( some

Focuses on nature of morality, often relies on semantic analysis of moral judgments

Not directly related to content of rules or norms

According to the German Constitutional Law human

No one, not even public authorities, ought to

What does "is" mean? Does the statement imply a normative

Examples of virtues: Wisdom, justice, courage, moderation

Virtue as attitude, determined by rationality and educational background / practice

Calculation of the consequences only additional, not as crucial normative criterion!

Implementation issue, exploitation risk