Ethical Decision Making

Approaches and Concerns

Lecture #3

Chapters covered: Brooks 5 and 6

 Recent Developments
Enron, Arthur Anderson, and WorldCom Scandals
led to the need for a corporate governance reform
Subsequent Adephia, Tyco, and HealthSouth further
heightened the need for an ethical decision making
model
Ethical Decision Making Model
(when you don't know what to do)
 Ethical Decision Making
Model
Based on concepts developed by philosophers
A tool for assessing decisions and actions
EDM assesses:
Consequences or well-offness created in terms of net
benefit or cost
Rights and duties affected
Fairness involved
Motivation or virtues expected
Ethical Decision Making Model
Growing focus on stakeholders rather than just
shareholders
You must consider:
Fundamental interests of stakeholders
Measurement of quantifiable impacts
Assessment of non-quantifiable impacts
 Fundamental Interests of
Stakeholders
1. Stakeholders’ interests should be better off as a
result of the decision
2. The decision should result in a fair distribution of
benefits & burden
3. The decision should not offend any of the rights of
any stakeholder, including the decision maker.

All three interests must be satisfied for a decision to be

considered ethical
Measurement of Quantifiable Impacts
Profit
Short term measurement
Items not included in profit:
Measurable directly
 Externalities

Not measurable directly

Bringing future to the present
Uncertain outcomes
Use estimates
Identify stakeholders & ranking interest
 Assessment of Non-Quantifiable
Impacts
Fairness among stakeholders

Rights of stakeholders
 Decision Making Approaches
Three practical approaches
Five question approach
Rate the act on profitability, legality, fairness, impact on
the rights of each individual stakeholder, and on the
environment
Moral standards approach
Act is ethical if it provides a net benefit to society, is fair
to all stakeholders, and is right
Pastin’s approach
Evaluate act based on company’s “ground rules”
 5 Question Approach
Five questions asked about proposed decision
Is the decision:
Profitable?
Legal? Society at large
Fair? To all
Right? To all
Going to further sustainable development? (optional)
The answers to all the questions must be
favorable. If not, the proposed decision will need
to be revised.
 Moral Standards Approach
(3 Moral Standards)
Moral Standard 1
 Utilitarian - maximize benefits to society
Question: Does the action maximize social benefits and
minimize social injuries?
 Moral Standard 2
Individual Rights – respect and protect
Question: Is the action consistent with each person’s
rights?
Justice - fair distribution of benefits burden
 Moral Standards Approach
Moral Standard 3
Justice - fair distribution of benefits burden
Question: will the action lead to a just distribution of
benefits and burdens?

All three moral standards must be applied. None is a

sufficient test by itself.
 Pastin’s Approach
(4 Questions)
 Ground Rule Ethics
Will the decision offend the ground rules or
fundamental values that govern their behavior or
designed behavior?
Reverse engineering – examine past decisions or actions
and understand how and why they were made.

 End-Point Ethics
Will the decision provide the greatest net good for all
concerned?
 Measure profit/loss, externalities
 Perform risk – benefit and cost – benefit analyses
 Rank stakeholders interests’
 Pastin’s Approach
Rule Ethics
 How will the decision impact the rights of the stakeholders
involved? BB- aggressive senior mgt, egoism at best

 Social Contract Ethics

 If the decision is formulated into an imaginary contract, is it
fair enough for me to enter freely into the contract?
 Role reversal by decision maker to act as a stakeholder to
examine impact and fairness of decision.
规则伦理
 该决定将如何影响相关利益相关者的权利 ?BB- 激进的高级管理人员，最好的利己主义
社会契约伦理
 如果这个决定被做成一份假想的合同，我自由订立合同是否公平 ?
 决策者角色互换，以利益相关者的身份来检验决策的影响和公平性。
 Extending and Blending the
Principles
 Stakeholders - fairness, respect, and rights
 Cost benefit analysis vs. profitability
 Integrating the Approaches
Philosophical approach – Consequences, utility,
duty, rights, justice and virtue expectation
Stakeholder approach – facts, rights, duties and
fairness in decision making
Necessary to use both approaches for comprehensive
analysis of an ethical decision.
 哲学方法——结果、效用、责任、权利、正义和美德期望
 利益相关者方法 - 决策中的事实、权利、义务和公平
 必须使用这两种方法对道德决策进行全面分析。
 Evaluate Alternative Actions From
Various
Even if not everyone
Ethical Perspectives
Which option will produce the most
gets all they want, will good and do the least harm?
everyone's rights and Utilitarian Approach: produce
dignity still be the greatest balance of benefits
respected? over harms.
Rights Approach:
Which option is fair to all
most dutifully
stakeholders?
respects the rights of
Fairness or Justice Approach:
all affected.
treats people equally, or if
unequally, that treats people
Which option would help all proportionately and fairly.
participate more fully in the life
we share as a family, Would you want to become the sort of person
community, society? who acts this way (e.g., a person of courage or
Common Good Approach: compassion)?
contributes most to the Virtue Approach: embodies the habits and
achievement of a quality values of humans at their best.
common life together.
Motivation & Expected Virtues
Why do these matter?
 Examples when motivation of self-interest causes failure
Employees who make decisions for wrong reasons =
High risk
EDM must have virtue expectations as a separate step
EDM 必须将美德期望作为一个单独的步骤
Assessment of Motivation & Behavior
How to determine whether there is a mens rea
(“guilty mind” in Latin), and thus an ethics gap?
Questions to ask
 Does the decision or action involve and exhibit the
integrity, fairness and courage expected?
 Does the decision or action involve and exhibit

motivation, virtues, and character expected?

 Who is really profiting?
 Ethical Decision Making Steps
1. Frame the ethical issue
2. Gather all the facts
3. Identify the stakeholders and obligations
4. List the relevant core values
5. Identify the operational issues
6. Identify the accounting issues
7. List all the possible alternatives
8. Make an ethical analysis of the alternatives
9. Decide on a course of action
10. Reflect on your decision
Operational and Accounting Issues
Have all the relevant persons and groups been
consulted and communicated to?
Does it comply with the law and the company
code and policies?
Are there internal controls in place to deal with
it?
Does it fit in with principles of good corporate
governance?
What are the key accounting issues: Revenue
recognition, GAAP?
 EDM Issues
Commons problem
 Refers to the inadvertent or knowing overuse of
jointly owned assets or resources.
 Origin of concept

 Modern day relevance

 Its lesson = Desensitization can develop bad EDM

Decision paralysis
 Causes

 Complexity of analysis
 Uncertainty, time constraints
 Aids for More Ethical Action
Iterative Improvement
“Practice Makes Perfect”

“Satisficing”
“Should not let perfection be the enemy of
good”
Settle on a decision that’s good enough and

optimal at that point in time

 Common EDM Pitfalls
Focus on short-term profit and shareholder only impacts
Focus only on legalities
Limits to fairness
Limits to scrutinizing all stakeholder rights
Conflicts of interest
Interconnection of stakeholders
Failure to identify all stakeholder groups
Failure to rank specific interests of stakeholders
Exclusion of well-offness, fairness, or rights
Failure to consider the motivation for the decision
Failure to consider virtues expectations
External Auditor Expectations - Fraud
(SAS 99)
 Mandatory discussion and brainstorming among the audit team about
the potential and causes for material misstatement in the financial
statements due to fraud before and during the audit
 Guidance to be followed about data gathering and audit procedures to
identify the risks of fraud
 Mandatory assessment of the risks of fraud based upon the risk factors
found
 Increased standards for examination, documentation, and reporting
on audit steps taken to assure that manipulation did not occur
 Other measures including: support of research on fraud, development
of antifraud criteria and controls, allocation of 10% of CPE credits to
fraud study, developing fraud training classes, encouraging antifraud
education at universities, etc.
 Sarbanes-Oxley 2002
Management is expected to report on the system of
internal controls
External auditors must report on the system as well
as on management’s report
 Ethical Risks
Risks of not meeting stakeholder expectations
Leads to a potential loss of support for a
corporation’s objectives
Exceeding expectations leads to an opportunity
of greater support through the creation of a
competitive advantage
 Risk and Opportunity Identification
and Assessment
Phase I Phase 2 Phase 3
Develop a Compare Reports by
projected, activities to • Stakeholder group
ranked expectations to
understanding identify ethics • Product or service
of stakeholder risks and
• Corporate objective
interests/ opportunities
expectation • Hypernorm value
Inputs, • Reputation driver
Confirmation outputs,
Identify
quality Reputation driver: trustworthiness,
Dynamic analysis
credibility, reliability, responsibility
Rank: urgency,
Hypernorm: honesty, fairness, compassion,
power, legitimacy
integrity, predictability, responsibility
 Workplace Ethics
1. Employee Rights
2. Privacy and Dignity
3. Fair Treatment
4. Healthy and Safe Work Environment
5. Ability to Exercise One’s Conscience
6. Trust and Its Importance
 Employee Rights
Legal and business environment changed in the
1970s
Now employees’ rights rank higher than employers’
TABLE 6.4
EMPLOYEE RIGHTS THEMES IN NORTH AMERICA
Privacy and dignity of person, personal information and property:
 Boundaries of personal rights, employers rights and right of the public
 Proper procedures: notification and consent
 Testing for substance abuse
 Harassment, sexual and otherwise
Fair treatment:
 Discrimination: age, race, sex, employment, pay
 Fair policies
 Is equal treatment fair?
Healthy and safe work environment
 Expectations: reasonability, right to know, stress, family life, productivity
 Quality-of-life concerns: smoking, health
 Family-friendly workplaces
Ability to exercise conscience
 Blind loyalty
 Whistle-blowing
Trust – the key to leadership, innovation, loyalty, and performance – depends on ethics
 Operations: downsizing, contingent workforce
 Privacy and Dignity
An individual’s personal rights are more important
than those of an employer, unless the employer’s
interest is:
reasonable
legitimate
morally acceptable
Informed Consent
Time to deliberate
A free choice among reasonable alternatives
Adequate info to understand the problem and options
 Privacy and Dignity
Harassment
Is objectionable on grounds of
 Dignity and Privacy
 Fairness
Any improper behavior directed at you that
 You find offensive
 The other person knew or ought reasonably to have known
would be unwelcome
Test:
 What the offended party thought
 Whether the local authorities think it is reasonable behavior
The claim should be investigated immediately and
discretely
 If the claim is justified
 Offender should be warned or dismissed
 If no prompt action,
 legal proceedings
 Fair Treatment
Discrimination
Unethical and illegal if it involves age, race, gender and
sexual preference
Equal opportunity for employment
Equal pay for equal work
Ex: workers in North America
Fair wages, fair hours, fair consideration for promotion
and for downsizing, fair hearing
Fair due process
 If dismissal is required, adequate notice or pay
Disability
More than fair, but ethical
 Healthy and Safe Work
Environment
Workers must know what the risks are in advance
Right-to-Know Law
Orgs must notify of :
 hazardous substances
 processes
 related treatment
Concern over less tangible areas of pressure
Hours of overtime expected
Extreme levels of productivity
No work life balance
Examples:
Smoke-free workplace
Fitness and recreation
On-site daycare
Flexible work hours
Ability to Exercise One’s Conscience
Whistle-blower protection program
Purpose: to encourage whistle-blower to come forward
w/n the org, rather than have them report their
concerns outside the org
Without revealing the name of whistle-blower
 Fair investigation
 Reports of inquires received

Telephone and/or email hotlines

 Trust and Its Importance
The org. will fall behind competitors whose
employees trust the company and its leader
If employees have sufficient trust,
Ethical renewal
 Participate wholeheartedly in restructuring sessions that even
involve downsizing
Contingent workforce
 Accept share work assignments or part-time work contracts w/
greater understanding
How to maintain trust?
Make trustworthy commitments to recall
employees to full-time status
Provide fair termination or contracting
arrangement
A contingent workforce
 International Operations
1. Impacts on Local Economies and their Cultures
2. Conflicts Between Domestic and Foreign
Cultures
3. Bribery, Facilitating Payments
4. Apparent Cultural Conflicts with Banning Gifts,
Bribes, or Facilitating Payments
5. Moral Imagination
6. Guidelines for Ethical Practice
Impacts on Global Economies and
Their Cultures
Multinational corp. must be careful not to have
unfavorable impacts on the local:
Labor market: wage rates, availability of supply
Raw material and other input markets
Political and legal processes
Religious and social customs
Cultural Imperialism
Ignore local religious and/or social customs
Difficult to obtain cooperation
 Conflicts Between Domestic and
Foreign Cultures
Differences in values
New broader and global accountability
Lawsuit
Lost reputation
Impact on the morale of domestic employees
 Bribery, Facilitating Payments
Facilitating Payment
Nominal in value
Speed up a result
Influences outcome
Bribe
Larger than nominal
Without it the desired
result would not occur
Influences outcome

Transparency International, the U.S. and Organization

for Economic Development (OECD) countries
developed a protocol
 Developed legislation similar to the U.S. Foreign Corrupt
Practices Act
 Allow a corp. that believes their foreign competitor is
bribing officials in a third country to pursue the offending
corp. through their domestic legal systems.
 Bribery, Facilitating Payments
Facilitating payments or bribes are problematic
for reasons other than illegality, including:
Adding to the cost of the operation, good or service
Undermining the practice of purchasing
Risking possible negative consequences from
stakeholder groups
Impossibility of enforcing performance
Impossibility of assessing sales force effectiveness
Indicating to employees that bribes are acceptable
Indicating to seeker of bribes that bribes are possible
 Moral Imagination
Devise alternatives that addresses needs in the host
culture but conforms to North American norms for
acceptable behavior
Gift giving is different from a bribe
All payment were made in public rather than in secret
 Corporate Social Responsibility
Performance and Accountability
 Corporate Social Responsibility Performance and
Accountability is now part of the paradigm shift that
has happened in Corporate America over the last
decade or so. The components of CSR are:
 Development of CSR (Corporate Social Responsibility
Performance and Accountability) framework
 Measurement of CSR performance
 Reporting of CRS
 Audit assurance of CSR reports
 Development of CSR framework

In past,
Social Responsibility = profits + jobs+ donations policies

Today, stakeholders’ expectations are higher and

corporations want to:
Impact favorably on them
Disclose those impacts and strategies that give rise to
them
Involve stakeholders in corporate planning and
decisions
 Development of CSR framework
Global Reporting Initiative (GRI) developed
Sustainability Reporting Guidelines
Comprehensive reporting framework
Instructive to those interested on improving CSR or
Corporate Social performance planning, delivery and
reporting
Guidelines are refined continuously
Other CRS frameworks: Screen of corporate
activities for ethical investors, developed by
private consultants
Measurement of CSR performance
 Indicators of CSR can take many forms
 Comparisons of Ethical Performance (Set of 80
indicators), used by EthicScan Canada
 Show categories like Codes of Guidance, Job
Creation, Treatment of Employees,
Environmental Management Programs, etc.
 Anticipatory measures: useful in revealing
attitudes of managers/employees toward
ethical issues:
 Employee attitude survey
 Customer or other stakeholder survey
 Evaluations by “paid shoppers”
 Media commentary assessment
Measurement of CSR performance
Quality assessments of:
 Code of conduct
 Training programs
 Reinforcements mechanisms:
 Newsletters/correspondence, Pay and reward
systems, Promotions
 Whistle-blowing atmosphere/protection:
 Follow-up on reported programs, Speed on

response, Fairness of hearing process and of the

penalty assigned
 Reporting CSR
Corporation may have to decide where to report the
measurements:
Report only internally: Focus on program’s performance
objectives
Reports available to public: Disclosure of information in
dimensions of interest for its stakeholders
Noteworthy CSR reports (can be viewed on websites):
The Body Shop
The Co-operative Bank (UK)
VanCity Credit Union
Shell International (Environmental report have been
certified by KPMG and PWC)
Audit assurance of CSR reports
Auditing CSR reports are in its infancy stage
Isolated examples of attempts to audit or verify
CSR claims:
Europe: Public disclosure of environmental
performance
Canada: Most corporations audit internally
Mattel Independent Monitoring Council for Global
Manufacturing Principles (MIMCO)
 Crisis Management:
A Significant Problem Area
 What is a Crisis?
“An event that brings, or has the potential for
bringing, an organization into disrepute and
imperils its future profitability, growth, and ,
possibly its very survival” (Lerbinger).
 Crisis Management:
A Significant Problem Area
Crisis are pervasive in current business
environment
1997 Crisis Management Survey of Fortune 1000
Companies: 71% of companies had a crisis
management plan and/or program in place
Management looks to:
Avoid crisis if possible
If not possible to avoid, managed crisis as to minimize
the harm done
Ethical management knows that crisis resolution
decisions usually defines the company’s future
reputation
 Crisis Management:
A Significant Problem Area
In reality:
 Crisis cause a focus on SURVIVAL…
 Ethics behaviors are largely FORGOTTEN.
Example : Bhopal Tragedy (India)
 Questions:
 How to effectively include ethics considerations in
crisis management?
 How can management avoid potential negative impact
on the reputation of the company and officers when a
crisis arise?
 Crisis Management
 Objective: “Avoid crisis. If it not possible,
minimize the impacts”
 Process:
 Assessment
 Planning
 Management
 Crisis Assessment
 First step: Understand four phases of crisis
 Pre-crisis
 Uncontrolled
 Controlled
 Reputation restoration
 Second Step: Anticipation (Brainstorming)
 Natural disasters
 Technological disasters
 Different expectations leading to confrontations
 Malevolent acts: terrorists, governments, etc.
 Management failure to comply with environmental and
social mandates
 Management deception and misconduct
 Opportunity to improve ethical behavior
(Stakeholders-analysis framework)
 Crisis Planning
 Recognize warning signs: “red flags”
 Make contingency plans with ethical considerations
(table 6.5)
 Continue monitoring
 Internal training of management and employees
 Crisis Management
 Make decisions quickly
 Focus attention on crisis
 Shorten the uncontrollable phase
 Decisions should benefit ALL stakeholders and
enhance organization’s reputation
 迅速做出决定
 关注危机
 缩短不可控期
 决策应该使所有利益相关者受益，并提高组织的声
誉
FIGURE 6.3
PHASES OF A CRISIS

Unanticipated Crisis
Cost
Anticipated Crisis
To Organization

Continuing
Reputational
Impact
Post-
Control Crisis
Begins State
Reached
Time
Controlled
Phases Pre-crisis Reputation
Uncontrolled Restoration
TABLE 6.5
HOW TO INCORPORATE ETHICS INTO CRISIS MANAGEMENT
Prevention and warning:
 Code of conduct: identify values, adopt, emphasize and make effective
 Identify potential ethics problems and warning indicators, and pre-plan responses, as part of an
ongoing enterprise risk management and contingency planning program
 Ethical “red flags” or warning indicators:
 Training to emphasize how to identify and what to do about them
 Check as part of an ongoing enterprise risk management system
 Encourage by publicizing good examples, and awarding paper medals
Analytical approach:
 Apply a stakeholder-analysis framework as discussed in Chapter 5:
 External ethics consultant
 Checklist or specific time to consider:
 ethics issues, alternatives & opportunities
Decision itself:
 Ethics/company’s values: integrate into the decision making:
 Consider how the crisis or its impact can be influenced ethically–timing, cost, mitigation?
 Specific consideration of how to improve the organization’s reputation drivers
including–trustworthiness, responsibility, reliability, and credibility
 Specific ethical communications objectives
 Assign ethics watch-dog responsibility
 Use a checklist or template with specific ethics objectives
 Apply moral imagination as discussed in Chapter 5
Communications on ethical intent to:
 Media, employees, customers, government, public & other stakeholders