“1st Assignment (Assignment for Mid Term)”

Course Title: Business Ethics

Course Code: BUS 332

Submitted For
Ashok Chakraborty
Assistant Professor
Department of Business Administration

Submitted By
Abdullah Al Shahariar Shihab
Id: 18200012
Batch: 13th
Department of Business Administration

Date of Submission
December 15th, 2020

Ranada Prasad Shaha University

Table of Contents
What is market system? Discuss the features of the market systems. .................................................. 3
Discuss three main ethical problems that arise from contracts. Put your own examples to illustrate
the concept. ............................................................................................................................................ 4
Illustrate agent principal relationships along with the roles of agents. ................................................. 5
Case 1 ...................................................................................................................................................... 7
Case 2 ...................................................................................................................................................... 7
Case 3 ...................................................................................................................................................... 8
Case 4 ...................................................................................................................................................... 9
What is market system? Discuss the features of the market
systems.
Decisions in a market are made on the basis of prices, which in turn result largely from
supply and demand. The principal aim of business firms in a market system is to maximize
the return on investment or, in other words, to make a profit. Individuals, as well, are
assumed in economic theory to be market actors who trade with each other or else buy
products from or sell their labor or other goods to a firm. Like firms, individuals make
decisions in a market on the basis of prices and seek to maximize their own welfare to the
limits of their assets. Individuals make a “profit” for themselves to the extent that what they
gain in trade exceeds what they give up. Features of the System The market system is
characterized by three main features:

1. Private Ownership of resources and the goods and services produced in an economy.
2. Voluntary exchange, in which individuals and firms are free to enter into mutually
advantageous trades.
3. The profit motive, whereby economic actors engage in trading solely to advance
their own interests or wellbeing.
Discuss three main ethical problems that arise from contracts.
Put your own examples to illustrate the concept.
A market actor who fails to perform—by not delivering promised goods or refusing to pay,
for example—is obviously breaching an agreement or contract, and such cases of
nonperformance are obviously wrong and require little explanation. However, actual
contracts are often vague, ambiguous, incomplete, or otherwise problematic, causing
reasonable people to be uncertain or disagree about whether a contract’s terms have been
fulfilled. Disputes of this kind, which are not uncommon, are often taken to court. In actual
business practice, three main ethical problems with contracts arise.

1. They are implicit. Many contracts in business are not explicitly formulated but are left
implicit because of a desire or a need to avoid excessive legalism and to keep some
flexibility. Business is sometimes better conducted with a handshake than a written
contract. Thus, employee contracts may contain explicit terms about pay and job
description, but leave implicit any promises of specific job responsibilities,
advancement opportunities, or guarantees of job security. Such matters may be better
left to the unstated understandings of implicit contracts rather than to the legally
enforceable language of explicit contracts. However, implicit contracts are subject to
disagreements, and since they are generally not legally enforceable, they may be
violated with impunity. Example: A laid-off employee may believe that he had been
guaranteed greater job security than was the case, or a company may change its policy
to offer less job security, which may be legally permissible in the absence of an
explicit contract.
2. They are incomplete. A perfect contract in which every detail and contingency are
addressed may be impossible to formulate because the transaction is too complex and
uncertain to plan fully. Even if a fully explicit contract is sought, it may be impossible
to draft it in complete detail. Example: In hiring a chief executive officer (CEO),
neither the CEO nor the board of a company can anticipate all the situations that
might arise and agree upon detailed instructions for acting in each one. Indeed, the
CEO is being hired precisely for an ability to manage complexity and to handle
unanticipated events successfully. The best that can be done is typically to require the
CEO to exert his or her best effort, to set and reward certain goals, and to impose a
fiduciary duty to act in the shareholders’ interest. The CEO’s contract with a firm is
necessarily an incomplete contract.
 3. They lack remedies. The contracts that occur in market exchanges often consider only
the duties or obligations of each party to the other and fail to specify the remedies in
cases of breach. What ought to be done in cases where one party is unable or
unwilling to fulfill a contract? Such situations are often the subject of ethical and legal
disputes. While remedies for breaches can usually be made explicit, there is evidence
that firms often prefer to leave this matter implicit, in which case courts are called
upon to determine a just outcome.5 One problematic area of justice in breaches occurs
when a party does not observe a contract in which the cost of observance would
exceed the penalty for breach. Example: A question of ethics arises when
homeowners who owe more on a mortgage than a house is worth walk away and
return the house to the bank. On the one hand, the homeowner has signed a loan
agreement to repay the full amount of the loan, and, on the other, the contract signed
provides only for repossession as the penalty for nonpayment. These three features of
contracts—being implicit and incomplete and lacking remedies—give rise to many
situations in which the ethical course of action is unclear and disputable.

Illustrate agent principal relationships along with the roles of

agents.
The principal-agent relationship is an arrangement in which one entity legally appoints
another to act on its behalf. In a principal-agent relationship, the agent acts on behalf of the
principal and should not have a conflict of interest in carrying out the act. The relationship
between the principal and the agent is called the "agency," and the law of agency establishes
guidelines for such a relationship. A principal-agent relationship is often defined in formal
terms described in a contract. For example, when an investor buys shares of an index fund, he
is the principal, and the fund manager becomes his agent. As an agent, the index
fund manager must manage the fund, which consists of many principals' assets, in a way that
will maximize returns for a given level of risk in accordance with the fund's prospectus. The
principal-agent relationship can be entered into by any willing and able parties for the
purpose of any legal transaction. In simple cases, the principal within the relationship is a
sole individual who assigns an agent to carry out a task; however, other relationships under
this guise have a principal that is a corporation, a nonprofit organization, a government
agency or a partnership.
“Agents have an obligation to perform tasks with a certain level of skill and
care and may not intentionally or negligently complete the task in an improper
manner.”

The agent is most often an individual capable of understanding and ultimately carrying out
the task assigned by the principal. Common examples of the principal-agent relationship
include hiring a contractor to complete a repair on a home, retaining an attorney to perform
legal work, or asking an investment advisor to diversify a portfolio of stocks. In each
scenario, the principal is the individual seeking out the service or advice of a professional,
while the agent is the professional performing the work.
 Case 1
A sales representative for a struggling computer supply firm has a chance to close a multimillion-
dollar deal for an office system to be installed over a two-year period. The machines for the first
delivery are in the company’s warehouse, but the remainder would have to be ordered from the
manufacturer. Because the manufacturer is having difficulty meeting the heavy demand for the
popular model, the sales representative is not sure that the subsequent deliveries can be made on time.

Answer: Any delay in converting to the new system would be costly to the customer; however,
the blame could be placed on the manufacturer. Should the sales representative close the deal
without advising the customer about the problem? – As a sales representative working for a
firm, the success or failure of a deal is partly due to the sale representative. Though it is his/her
job to make sure that they agree to more deals, at the same time the clients have to be well
informed of every detail of the deal.

It is ethical to inform the client properly and not to leave any piece of information out – the
truth is better than a false claim. However, this might cause the sales representative to lose the
deal, in which the company would in turn suffer as well. However, if he/she didn’t inform the
client, the deal would have probably taken place. The chances of a delay are relatively high
considering it says above that the manufacturer has trouble meeting the heavy demands. After
closing the deal, the customer would expect everything to be delivered on time, obviously
unaware of the problems with the manufacturer.

It would anger the client if there was any delay and the risk of legal actions against the firms
would increase. In my opinion, being ethical and informing the customer is important in more
ways than one. It not only creates goodwill towards the company and its representatives, but
also helps in creating a long-standing relationship with the customer. He/she must know how
to balance short-term profits against long standing gains from ethical behavior.

Case 2
The director of research in a large aerospace firm recently promoted a woman to head
an engineering team charged with designing a critical component for the new plane. She
was tapped for the job because of her superior knowledge of the engineering aspects of
the project but the men under her direction have been expressing resentment at working
for a woman by subtly sabotaging the work of the team. The director believes that it is
unfair to deprive the woman of advancement merely because of the prejudice of her male
colleagues, but quick completion of the designs and the building of a prototype are vital
to the success of the company.

Answer: The Universal Declaration of Human Rights (1948) does state that “all human beings
are born free and equal in dignity and right”. This therefore brings us to a conclusion that
gender discrimination is obviously, unethical. Treating both genders the same way on the other
hand is highly ethical. In the case above, the woman is an expert in engineering and has much
to contribute to the project. The men under her have been showing resentment and sabotaging
the work will only cause lack of productivity in the project, causing it to be unbeneficial for
the entire company. This is an example of male chauvinism where the males feel superior to
the females.

Here it shows that they feel like they are too good to work under a female, even though she is
well informed of her job. In my opinion, the Director here plays a very important part. As a
Director he should be good at handling his staff and not let them get out of control. I
personally do not think that he should remove the woman, because he himself believes that
prejudice is unfair. He too understands the importance of his job and would hire the right
person for it. If it’s against his beliefs, he should inform the male workers the consequences
of any hindrance on the progress. This way, he can ensure that they understand the cost of
their biased attitude and straighten them out and it would be disastrous to the company.

Case 3
The vice president of marketing for a major brewing company is aware that college
students account for a large population of beer sales and that people in this age group
form lifelong loyalties to particular brands of beer. The executive is personally
uncomfortable with the tasteless gimmicks used by her competitors in the industry to
encourage drinking on campuses, including beach parties and beer-drinking contests. She
worries about the company’s contribution to underage drinking and alcohol abuse among
college students.

Answer: Should she go along with the competition? In this case, I do believe that the marketing
director should go along with her competition. In the beginning, the main aim of a business is
to make a profit. Profit maximization is the main aim of a business. She herself is aware that
the youth of the generation are the ones that form loyalties to particular brands of beer. As an
MD for a brewing company, her job entails for her to be able to target this youth group and get
them hooked unto their beer.

The case states that there is a lot of competition. They need to find a unique selling point, which
makes them different in selling the same product. The director herself is uncomfortable with
the tricks used to attract their attention. I think she should go along with her competition,
because even though there is a drinking age of 18+ or 21+, kids hardly follow these rules
anyway. Even though she herself doesn’t believe in encouraging underage drinking, she should
be aware that these tricks aren’t solely responsible for the youth of today and their drinking
habits. She can advertise her alcohol, with her brand name without graphical descriptions of
parties – this way she can compete with her rivals and at the same time incorporate a little bit
of what she believes in Ethically, it would be wrong to encourage something that is against the
law, but in my opinion from the business view, when competition is there the aim is to be on
top of it.

Case 4
The CEO of a midsize producer of a popular line of kitchen appliances is approached
about merging with a larger company. The terms offered by the suitor are very
advantageous to the CEO, who would receive a large severance package. The
shareholders of the firm would also benefit, because the offer for their stock is
substantially above the current market price. The CEO learns, however, that plans call
for closing a plant that is the major employer in a small town. The firm has always taken
its social responsibility seriously, but the CEO is now unsure of how to balance the welfare
of the employees who would be thrown out of work and the community where the plant
is located against the interest off the shareholders. He is not sure how much to take his
own interests into account.

Answer: Should he support a merger that harms the community but benefits the shareholders
and himself? – The case above states that CEO of a company is approached about merging
with a larger company. It is beneficial to the CEO of the company, as well as the shareholders
of the firm. The main aim of a business is to work hard in order to achieve a goal that is to
maximize profits and let the business expand in many ways. It states in the case that it will be
very beneficial to both the shareholders and the CEO.
The problem reflects on principal-agent framework in which differential objectives can result
in organizational problems. This means that every individual has different objectives and want
different things and a conflict between these can cause a problem within the organization. It is
also mentioned above that the firm has always been socially responsible and this merger will
also harm the firm’s reputation – as employees lose their jobs and homes. To the public eye,
they have always seen this firm as being socially conscious but if this merger were to take place
then it would seem like a very selfish act, as their employees would be thrown out of work.

The compensation pay would not even matter. And the firm’s reputation would go downhill.
Ethically, this would be incorrect. Another reason to consider is the merger itself. In the short
run it may be beneficial to the shareholders and the CEO as well as the company but in the long
run there is guarantee that the stock value will be higher considering the fragility of the market
environment.

Other problems such as cultural differences may also arise. So, with this in regard, I believe
that the CEO should not agree to this merger. Even the employees are something to think about.

He should not just think about his opinion but his employees are the one that also make a
difference to the company, and that is why he should not agree to the merger.