Professional Responsibility

Day 1
What is This Class About?

Why are We Here?

Our Course Outline
1. PART I: Institutional Reality - The Role of Business in Society
a) The Purpose of Business
b) Business Design
c) The role of the professional
d) Market failure

2. Part II: Individual Responsibility: The Role of the Professional Within the Business
a) Social psychology
b) A bit of law

3. PART III: Intellectual Capital – Tools for Achieving Corporate Excellence

a) Diversity and Inclusion
b) Truth
c) Individual Purpose
d) Leadership and Culture
Introductions
Meet another classmate. Ask them:

1. Name a species that describes where they are from and explain why
2. A bit of work experience background
3. A fun fact about them
4. An experience that they will never forget

Introduce Your Classmate

What is the Purpose of Business? Why?

Why Is It Important to You?

Has it Changed Over Time?

Discuss in Groups of 2
Share with Class
A Short History of the World
and the Purpose of Business
A Quick History of the World …

1st presence of life Eukaryotic cells Multi-cellular life Early

Earth formed Prokaryotic cells (with nucleus) Cambrian Explosion 1st Hominids Homo sapiens

4.5 bn y.a. 3.7 bn y.a. 1.5 bn y.a. 0.5 bn y.a. 7 mn y.a. 0.2 mn y.a.
A Quick History of the World … a Quick History of Business & Society
The Great Leap Neolithic Era
Forward (the advent of farming)
80,000 y.a. 10,000 y.a.
Society begins to organize
Homo Sapien brains
itself around settlements that
gain the capacity for
later become cities.
reason, logic, fiction,
Most humans no longer have
story-telling
to be engaged in “full-time”
hunting and gathering, paving
the way for new professions
Earliest records
of trade
5000 y.a.
The Assyrian empire becomes the
most powerful in the world, driven
by trade between Babylon and
Anatolia. They had sophisticated
contracts (“narruqqums”) that
defined terms in which investors
provided capital for traders, division
of profits, early divestment,
dividends, convertible debt
The Code of Hammurabi
(Babylon)
~ 4000 y.a
Legal text that strictly enforced private
property rights, recognized the sanctity of
contracts, regulated inheritances, set
wage and price controls. The notions of
active and passive investors, separation of
company’s assets and obligations of
owners, subsidiaries and mergers emerges
 The Birth of Philosophy and the First Corporations
Socrates Buddha 2500 y.a.

• There is an explosion of literature covering morality,

virtue, logic, the scientific method, democracy

• Ancient Rome adopts the idea of “legal personhood,” the ancestor

to modern corporations, creating the separation of ownership and
management, limited liability and entity shielding.

• India adopts the idea of legal personhood (sreni) as early

as 800 BCE

• Legal personhood was used primarily for public bodies such

as municipalities, universities, charities and temples.

• It was still widely believed that the only honorable way of

acquiring wealth was through war or the ownership of land

Confucius
The “proto-corporation” is primarily used for social purposes
 • Guilds of Medieval Europe resemble some combination
The Guilds of the Medieval Era of professional association, trade union, cooperative and
cartel.

• Two broad types – merchant guilds (given rights over

trade routes, regions) and craft guilds (occupation-driven
such as hatters, bakers, weavers, blacksmiths)

• Created opportunities for apprenticeships and

entrepreneurship, monitored quality for all members

• Had monopoly power over an industry or a region, and

raised and lowered prices to their advantage. They
required licenses for new members

• The more powerful masters often had roles in local

government and secured economic and political privileges

• The guilds justified their power and monopolies through

social purpose. They claimed to create employment,
The Arms of the Hanseatic League provide training, protect quality and contributed
tremendously to charity
The Rules of the Hatters of London (1347 A.D.),
as accepted by Thomas Leggy, the Mayor of London

Monopoly power

Long-term training
Today, Germany spends more than 6x per capita
than the U.S. on re-training and apprenticeship

80% of Swedes expressed positive views about

robots and AI, while 72% of Americans were worried
about the future of robots and AI*

Quality Control

* European Commission, Pew Research Center

 Theological Concerns Largely Dominate Economic Thinking

• Christian economic thought praises work, but criticizes

trade, material desire and usury

• The ministers of church and state promote a life of

austerity, though not necessarily for themselves

Giotto’s fresco at the Arena Chapel, Padova, Italy

Jesus and the Money Lenders
The Birth of the Modern Corporation –
Joint Stock Companies (1500 – 1800)
Private business interests begin to seek incorporation
A number of states began to grant corporate charters to those
interest that could advance the state’s global ambitions.
Incorporation required Parliamentary approval.
England: Muscovy Company (1551), Levant Company
(1581), East India Company (1600), Hudson Bay
Company (1670), South Sea Company (1711)
These companies received monopoly status for
certain trade routes and territories. They waged wars
with their own private armies and fleets, built forts
and infrastructure, conquered territories, negotiated
treaties, and in the case of the Dutch East India
Company, even minted their own corporate currency.
These companies also justified their monopolies and
power through social purpose and saw themselves as
social entities. They were seen as providing economic
prosperity and home, national prestige and
employment. The directors of the British East India
company became the largest charitable donors in the
United Kingdom
But the Age of Enlightenment Period begins …
• Protestant theologian John Calvin emphasizes
Protestant virtues of hard work, self denial,
patience, honesty and duty. Calvin adds that
being good at business is far more pleasing in
the sight of God than being a warrior or a monk.
• Incorporation was available only to the
privileged few
• British merchants began to use common law
trusts to avail some of the benefits of
incorporation
• Merchants begin raising money and issuing
shares without Parliamentary approval
• Parliament passes the Bubble Act in 1720 to
make all such “non-chartered” companies
illegal and void
• But merchant activity and capital formation
continued to explode. By the early 1800s, the
number of trusts outnumbered the number of
chartered companies by 10 to 1
This is the World that Adam Smith is Born Into …

• Early days of industrialization

• The “means of production” are dominated by

multinational monopolies with powerful shareholders

• Tremendous small business activity, but often

suppressed by corporate interest groups

• The height of the global slave trade Milton Friedman wearing

Adam Smith tie

But Adam Smith isn’t what economists and politicians portray him as …
• Outspoken critic of the guilds, charter companies and monopolies, and believed their private
“It is not from the
exploitation outweighed their public benefits (called them “a conspiracy against the public.”
benevolence of the butcher,
the brewer, or the baker • Defended public services such as education and poverty relief, funded through taxation, and was
that we expect our dinner, deeply concerned about poverty and inequality even in a well-functioning market system
but from their regard to
their own self-interest. • Was against slavery and believed it was less productive than paid employment

The Invisible Hand • “When the regulation, therefore, is in favour of the workmen, it is always just and equitable; but
it is sometimes otherwise when in favour of the masters.”
Incorporation no longer regulated
New York (1811)
In 1844, Parliament passes the Registration Act, giving
anyone the right to incorporate

While this democratizes incorporation, it also takes away any

formal link between business and social purpose
Connecticut (1816)

New Jersey (1837)

In 1881, courts rule that charity has no role in corporations

In 1957, the courts reverse this
The Wild West of Capitalism Drives Innovation and Power Asymmetry
Nathan Mayer Cornelius
Rothschild Vanderbilt
By 1904, 318 firms control 40% of American manufacturing assets.

Most industrial workers made less than a livable wage and worked
under dangerous conditions. African-Americans worked in the
lowest paid jobs.

Incorporation is Democratized,
But the Winners of the System Win Big

Andrew Carnegie John D. Rockefeller Werner von Siemens

A Backlash from a New Generation of Thinkers – late 1800s
Karl Marx
Observed the dissociation
between labor and value
The owner of the means of
production claims rights to the
surplus value of labor
The capitalists will gain wealth
at a faster rate than labor,
leading to revolution
John Ruskin
Oxford polymath who was
critical of excessive
consumption and the growth
in production of unnecessary
consumer goods
Famously stated that the
role of the merchant is “to
provide”
Mahatma Gandhi
Translated Ruskin’s work into
local Indian languages and
applied his philosophies in India
Proponent of small-scale
industry and economic
autonomy from Great
Britain; Warns against the
excesses of consumerism
Charles Dickens
One of the harshest critics of
capitalism
Writes the novel “Hard
Times,” which takes aim at
heartless capitalists that take
advantage of labor and
children
The Evolution of Stakeholder Rights

Early Stakeholder Rights Laws (Mostly Consumer Protections) Stakeholder Laws that Protect Employees

Sherman Antitrust Act (1890) to protect against monopoly power National Labor Relations Act (1935)
Helpburn Act (1906) to regulate railroad pricing
Fair Labor Standards Act (1938)
Pure Food and Drug Act (1906) to protect the safety of consumers
Equal Employment Opportunity Commission (1965)
Federal Trade Commission (1914)
Occupational Safety Health Administration (1970)
The Emergence of Unions
Stakeholder Laws that Protect Communities

Federal Communications Commission (1933)

Federal Aviation Administration (1958)

Environmental Protection Agency (1970)

The Great Depression and the Social Entity Conception
John Maynard Keynes
Challenges the idea that free markets would
automatically provide full employment
That is, that as long as workers are flexible with their
wage demands, everyone who wanted a job would have
one
Inadequate demand (due to loss of consumer confidence)
could lead to prolonged periods of high unemployment. Free
markets have no self-balancing mechanisms that lead to full
employment
From the 1920s – 1970s, the corporation begins
to take on some characteristics of social entities
Large corporations are less founder driven and
start looking more like independent entities with
purposes, duties and loyalties
“Managers are no longer attorneys for stockholders; they are
becoming trustees of an institution. If you will pardon me for being
personal, it makes a great deal of difference in my attitude towards
my job as an executive of General Electric Company whether I am a
trustee of the institution or an attorney for the investor. If I am a
trustee, who are the beneficiaries of the trust? To whom do I owe my
obligations?”
- Owen Young, President of GE
Paves the way to Keynesian economists to justify government
intervention to moderate the booms and busts in economic activity
The Irony of Marxist Communism in Russia
• In the Communist Manifesto (1848), Marx and Engels
call for a political unification of European workers to
achieve a communist revolution over capitalism

• But Russia wasn’t an industrial capitalist economy. It was an

imperial monarchy with a land-owning class and serfdom,
high levels of inequality and deep poverty

• Vladimir Lenin, founder of the Bolshevik Party, argued that

the first Marxist revolution could not occur in an
industrialized country, where exploitation of their colonies
led to higher standards of living in the home country and
more peaceful labor-capital relations. It would have to take
place in a less developed country like Russia

• By 1985, about 1/3rd of the world’s population is living in

countries following Marxist / Communist ideals, where the
means of production are significantly owned by the state

Marxist economics didn’t work … power simply moves from the corporation to the state.
The state proves to be poor at economic planning,
and economic decisions get mired in bureaucracy and corruption
Economic Stagnation and the End of the Cold War …
Lead to the Era of Milton Friedman and GE
• Nobel-laureate Kenneth Arrow ”proves” that
competitive, free markets are efficient, but only
under perfect conditions of information symmetry,
rational behavior, no negative externalities (1954)
Is this a case where the caveat is more important
than the thesis?

• Slowing growth, stagflation and growing international

Milton Friedman Gordon Gekko from Wall Street competition give rise to the idea that American
corporations have become “soft” and shareholder
primacy takes hold. The Friedman doctrine: “The
responsibility of business is to make profits.”

• The failure of Marxist economics, the end of the

Cold War, and the advent of the internet and the
dot-com boom provide additional fuel for
shareholder capitalism ideals

• “Neutron” Jack turns GE in the world’s highest

Kenneth Arrow Jack Welch Ronald Reagan valued company by 2000
But, Others Are Not So Sure … and argue that the party will eventually end
Edward Freeman

• Incomplete information (information asymmetry)

prevents markets from achieving social efficiency
• Other market failures such as monopoly and
negative externalities make it impossible for markets
to be efficient for everyone.

Stakeholder Theory:
It is in the best interest of a
corporation to serve all its
Joseph Stiglitz stakeholders including
Nobel Prize 2001 customers, suppliers,
Vernon Smith Daniel Kahneman employees, community and
Nobel Prize 2002 shareholders

”Actual behavior” is different than “Rational behavior”

Some Takeaways
• Business and trade are age-old. The corporation (which offered convenient, risk mitigation
and perpetuity) evolves to serve as a more efficient vehicle.

• The idea of the corporation as a social entity or connected with social outcomes is also age-
old. For most of history, it is “statutorily” connected.

• The presumption of a social purpose often shielded corporations from public criticism,
since the owners or managers could argue that the corporation’s exploitation of workers or
customers served a larger public purpose.

• The pendulum of economic power swings between different actors – from the
monopolistic guilds/charter companies to free-market entrepreneurs to the state and back
to free-market entrepreneurs. In each case, does the pendulum swing too far?
And then the world changes …
 The Financial Crisis of 2008-09 and the
Pandemic renew discussions around the
current capitalist system

Keynes is invoked by
Bush / Paulson,
Obama / Geithner
Trump / Mnuchin
Biden / Yellen

Government intervention to moderate the

inevitable booms and busts of economic activity

• Government intervention prevents

Depressions, but Inequality Grows
• Keynes saves the day, but the ghost of
Marx looms.
• Loose monetary policy reduces the cost of
capital and fuels economic activity, but leaves
workers behind.
 There was a sentiment that the banks got away, not
just unscathed, but more powerful, while the average
American feels a sense of loss or stagnation …

• From 2006 to 2012, $7 trillion in home equity was lost*

• In 2012, 22% of homeowners with mortgages were

under water
Foreclosure Rates Spike During Great Recession

• Median wealth from 2005-2009 dropped 66% for

Hispanic households and 53% for Black households

Is there a parallel with Big Tech and the Pandemic?

* The Russell Sage Foundation and The Stanford Center on Poverty and Inequality
Taps into an entirely new data
source –
Income tax data which goes
back further than census data
Explores the depths of wealth
amongst the top 0.1%
Calculates that the rate of return
on capital (investor class) in the
West is 4-5% per annum, while the
growth in income (workers) is 1%
per annum since as far back as
1700
Suggests that inequality
doesn’t only pose issues
for economic and political
stability …
… but that with most of the
wealth already at the top,
greater wealth accumulation
doesn’t further stimulate the
economy, as the wealthy
don’t have much more to
spend on.
In other words, inequality is
bad for economic growth
Other Mega-Trends Driving a Sense of Despair
Real Per-Capita Cost of Health Care Up from under $2000 per person to over $11,000 per person

Total Cost of Health Care

= $3.8 trillion per annum
The Cost of a College Education More Than Doubles in 20 years
(while inflation only increases by 50%)
How Dare You?

In the past century alone, the temperature has climbed 0.7 degrees
Celsius, roughly 10x the average rate of ice-age-recovery warming

Greta Thunberg

May 6, 2019
New research shows that some 150 million people are now living
on land that will be below the high-tide line by midcentury*

Shanghai

Vietnam

* Climate Central, October 29, 2019 Mumbai

To keep
temperature rise to
1.5 degrees Celsius,
this is what we have
to do and why it is
so challenging

A Case Study of
Livestock Production
 Stakeholder Capitalism, as a Principle, Has Taken Hold

Edward Freeman
See Letter Here The “purpose” of
business is not to
make money … it is to
serve its stakeholders
Study finds that companies that signed Business
Roundtable Statement of Purpose were more likely to lay Human behavior is
off workers and pay out capital to investors during the
not so “simple” and
pandemic than companies that did not sign it
purely concerned
- Tyler Wry, UPenn Wharton with self-interest
Leaders in the Business Community Propose an Evolution for Capitalism

What is the right level of profit?

1. The primacy of purpose in strategy
Purpose: What is 2. Ecosystem orchestration (to pursue
the Higher Calling purpose outside its own boundaries)
of Business? 3. Performance management across
human, social, natural, financial
capital

Social Enterprise: SDG Compass:

The purpose of business is not Helps business
Invest in the
only serve the interests of align strategies
stakeholder ecosystem
stakeholders, but to optimize toward meeting
and grow the pie
their well-being UN SDG Goals

The business of Impact / ESG Measurement Emerges

Economists Call For Reforms to Even the Playing Field

• Definition of monopoly needs to be expanded

• Contracts and Bankruptcy Law Favors the Privileged

• Tax reform (e.g. capital gains)

• Minimum Wage and Labor Rights

The Perception of the Purpose of Business is in Flux

Profit Maximization

• Higher Calling
• Driving change in the world (e.g.
through innovation)
• Serve stakeholders and society

The Big Debate: Can You Have It All?

To Design a Business We Must Consider its “Purpose”
" It is the pervading law of all things organic, and inorganic,
of all things physical and metaphysical, of all things human
and all things super-human, of all true manifestations of the
head, of the heart, of the soul, that the life is recognizable in
its expression, that form ever follows function. This is
the law."

— Louis Sullivan, 1896

i.e.
The purpose of a building should be
the starting point for its design

Analogue:
The purpose of a business should be
the starting point for its design
 Corporation Design: Think Like an Architect

The promise about its

Unique Value Proposition; products and services;
Competitive Advantage The promise to society

MARKET
BRAND
ADVANTAGE

OWNERSHIP CHARTER GOVERNANCE

Who Owns the The Firm’s Constitution: How the Firm is Run:
Business Purpose, Leadership selection,
Shareholders, Goals Board composition,
Stakeholders, By-laws, Board election,
Guaranty Building, Buffalo, NY, 1896 No Ownership Voting procedures Board responsibilities
Problem: Today’s Landscape Is Driven By Investor ”Mono-Culture”

Maximize inefficiencies resulting Often drive over-consumption to

in substantial externalization of the detriment of users and the
costs to society planet

MARKET
BRAND
ADVANTAGE
Often delegated to
OWNERSHIP CHARTER GOVERNANCE attorneys, but central to
design and purpose.

Institutional C-Corp or LLC with a mandate Investor-driven;

Shareholders; to maximize returns, often in Stock-based
Private Equity the short-run compensation
 How might you redesign this business?

Break-Out into Groups of 2.

Research for 10 minutes and discuss with class.
Professional Responsibility
Day 2
Let’s Talk About Efficient Markets and Market Failure
THE ECONOMICS OF MARKET FAILURE

For Markets to optimally function, 4 If Not: What Harm Does this

conditions must be met: Cause?

Monopoly / Monopsony Poverty for sellers or buyers, often

Perfect Competition leading to a tragedy of the commons
All market participants are tiny, atomistic “price Power to set prices from the sell side or buy side
takers.”

Perfect Information Information Asymmetry One party to a transaction gains

Everyone knows everything about every market One party to the transaction knows more than outsized power and influence, causing
offering. others inequality and negative health
outcomes

No Externalities Unchecked Negative Externalities Inequality, negative health outcomes,

All “costs” are priced into all products or services. Damages to another party without consequences to early mortality
the producer

No Unregulated Public Goods Overuse of Public Goods Climate change, plastic pollution,
Hence no “tragedy of the commons.” “Tragedy of the commons” or environmental species extinction
damage
 A Perfectly Competitive Or Efficient Market

Consumer Surplus
P
S
• Large numbers of competitors

• Each player is “price taker”

Equilibrium (welfare maximizing point)
• No super normal profits

• Maximizes total welfare

D
Q

Producer Surplus
 Firm Level Demand Curve In a Competitive Market

• Firm has no power to set prices. It is a ”price taker”

D
• For any amount of quantity produced, its
price remains the same

• Therefore, Marginal Revenue = Price (MR = P)

q q+1 q
 Firm Level Behavior Without Competition. What is the Cost to Society?
Consumer Surplus
Consumer Surplus
P P
S MC
Deadweight The firm maximizes profit
loss when MR = MC, and
produces fewer goods …
Equilibrium (welfare
maximizing point) … but can charge the Higher
Price on the demand curve

D MR D
Q q

Producer Surplus Producer Surplus

Fewer goods are produced and purchased than are optimal for an efficient market,
Resulting in a deadweight loss – a real cost to society
 Negative Externality
Deadweight Loss
Example: Production Level

P
Ssocial Sprivate • Producers result in negative economic
consequences to another party
without bearing the consequences
Equilibrium (social welfare maximizing point)
• Producers produce more product
Equilibrium (private welfare maximizing point) than what is optimal for society

• Leads to a Deadweight Loss, welfare

is not maximized and there is a cost
D
to society
Q
 Overuse of Public Goods - Externality
Deadweight Loss

P
Ssocial Sprivate • Chocolate producers result in negative
consequences to the environment, and
in turn, to humans
Equilibrium (social welfare maximizing point)
• Chocolate producers manufacture
Equilibrium (private welfare maximizing point) more product than what is optimal
for society

• Leads to a Deadweight Loss, welfare

D is not maximized and there is a cost
to society
Q
Market Inefficiencies are the source of all profits

The question is are they ethically or morally defensible?

The question is how far do firms’ business models push those inefficiencies?

What is the extent of costs that are ”externalized” to society and the planet?
Provide 1 example of each that you have experienced
or read about. Describe the cost to society

• Monopoly
• Monopsony
• Asymmetric Information
• Negative Externalities
• Tragedy of the Commons

Break out into Groups of 2 for 10 minutes

 Introducing Corporate Design

 Corporations sometimes create extreme market inefficiencies and social costs,

ranging from price gouging to human rights abuse to environmental
degradation to social anxiety. The list is long.

 Our hypothesis is that, In many cases, the problem can be traced to poor
corporate design, especially when the corporation takes the form of a profit
maximizing, investor-owned, investor-governed entity with short term goals.

 The “Community Governed Corporation” allows us to envision

possibilities and create new corporate structures that more
efficiently serve both markets and society, all within the principles of
market capitalism.
 Wait a Minute: Are Corporations Really “Designed”?

A corporation is an artificial being, invisible, intangible, and existing only in contemplation of law.

Being the mere creature of law, it possesses only those properties which the charter of its creation
confers upon it, either expressly, or as incidental to its very existence.

These are such as are supposed best calculated to effect the object for which it was created.

Among the most important are immortality, and, if the expression may be allowed, individuality;
properties, by which a perpetual succession of many persons are considered as the same, and may
act as a single individual.

It is chiefly for the purpose of clothing bodies of men, in succession, with these qualities and
capacities, that corporations were invented, and are in use.

- John Marshall
Dartmouth v Woodward 1819
To Design a Business We Must Consider its “Purpose”
" It is the pervading law of all things organic, and inorganic,
of all things physical and metaphysical, of all things human
and all things super-human, of all true manifestations of the
head, of the heart, of the soul, that the life is recognizable in
its expression, that form ever follows function. This is
the law."

— Louis Sullivan, 1896

i.e.
The purpose of a building should be
the starting point for its design

Analogue:
The purpose of a business should be
the starting point for its design
 Corporation Design: Think Like an Architect

The promise about its

Unique Value Proposition; products and services;
Competitive Advantage The promise to society

MARKET
BRAND
ADVANTAGE

OWNERSHIP CHARTER GOVERNANCE

Who Owns the The Firm’s Constitution: How the Firm is Run:
Business Purpose, Leadership selection,
Shareholders, Goals Board composition,
Stakeholders, By-laws, Board election,
Guaranty Building, Buffalo, NY, 1896 No Ownership Voting procedures Board responsibilities
Problem: Today’s Landscape Is Driven By Investor ”Mono-Culture”

Maximize inefficiencies resulting Often drive over-consumption to

in substantial externalization of the detriment of users and the
costs to society planet

MARKET
BRAND
ADVANTAGE
Often delegated to
OWNERSHIP CHARTER GOVERNANCE attorneys, but central to
design and purpose.

Institutional C-Corp or LLC with a mandate Investor-driven;

Shareholders; to maximize returns, often in Stock-based
Private Equity the short-run compensation
 Henry Hansmann’s
Corporate Design Question
from
The Ownership of Enterprise

Efficient business design minimizes the sum of both

collective action costs of ownership and governance
and social costs of market inefficiencies

To maximize benefits, and minimize

costs, who should “own” the firm?
Investors?
Customers?
Suppliers?
Employees?
No One?
Government?
 What are the Rights of Owners?

Owners usually have “property” rights to the firm; that is:

 Right to control the firm

 Right to the profits of the firm
 Rights to the assets of the firm upon dissolution of business.

but

Owners also bear the costs of governance such as guidance, monitoring,

reporting, and due process.
 Who Should Own? Hansmann’s Elegant Answer

The analysis just offered suggests that, all other things equal, costs will
be minimized if ownership is assigned to the class of patrons for whom
the problems of market contracting—that is, the costs of market
imperfections—are most severe.

I use the expression "cost-minimizing" here to mean "efficient" in the

economist's very broad sense of that word—that is, to refer to a situation
in which there is no alternative arrangement that could make any class of
patrons better off, by their own subjective valuation, without making
some other class worse off to a greater degree.
 Efficient Ownership Assignments

Market Inefficiency Likely Efficient Ownership

Monopoly Power Customers

Information Asymmetries Customers, Not One (NFP)

Monopsony Power Suppliers, Employees

Who Owns the Harvard Coop?
Who Owns REI?
Who Owns a Savings and Loan?
Who Owns Park Slope Food Coop?
Who Owns New York Life?
Who Owns 740 Park Avenue?
Who Owns These Brands?
Who Owns Amul?
Who Owns Your Car Service?
Who Owns This Bank?
Who Owns Mondragon?
Who Owns Coop Home Care Associates?
Who Owns McKinsey?
 Extending Hansmann’s Insights: The Next Steps

• Hansmann largely ignores the effects of negative externalities,

because these costs are born by society, not “patrons” of the firm.

• Hansmann’s focus is Ownership, but Chartering, Governance, and

Branding can be effective tools of corporate design.

• Hansmann assumes (perhaps implicitly) that a firm will take only

one design over time, but design change can drive efficiency.
 The Social and Environmental Costs of Market Inefficiencies
FOOD INDUSTRY TOBACCO
Human Health
$1.145 trillion (US) Human Health
$600 billion (US)
Environmental
* CDC
$805 billion (US)
* Rockefeller Foundation

Social Costs Social Costs

$1.1 trillion $3.7 trillion

(Global) (Global)
* Prof. Gernot Wagner, NYU * Dalberg, WWF
** White House

OIL & GAS PLASTIC

Often, the Root Cause of Indefensible Market Inefficiencies Goes Back to

management’s perceived “Fiduciary Duty to the Shareholder”
The Social and Environmental Costs of Market Inefficiencies

SOCIAL MEDIA

 Reduced productivity
 Mental illness
 Orthopedic injuries

 Fascism
 The Social and Environmental Costs of Market Inefficiencies

MONOPSONY POWER
OVER WORKERS
 The cost of public assistance to fast
food workers is $7 billion
* UC Berkeley Labor Center
 11% of the federal budget
($665 bn) goes toward
economic security programs

 Amazon workers amongst the top  25% ($1.4 trillion) goes toward
recipients of SNAP and Medicaid Medicaid and Medicare
* GAO

MONOPSONY POWER
OVER SUPPLIERS

 60% of the world’s 1 billion

farmers live in poverty

 Farmer poverty is the biggest

cause of deforestation, which
results in 10-15% of GHGs
 Extending Hansmann …
Can “society” be assigned ownership when the potential costs of negative
externalities are substantial? Case Study of Open AI.

• The founders of Open AI acknowledge the potential large-scale negative

externalities to society

• “Society” has been assigned ownership and economic rights through 51% ownership
by a nonprofit. Returns to investors (e.g. Microsoft) are capped at 7X to 100X, with
surplus returns to the nonprofit
 Extending Hansmann …
Can stakeholders and the “community” be assigned ownership when the costs
of market inefficiencies are substantial?
Case Study of Athletes Unlimited

A enterprise of women’s sports leagues started by Jonathan Soros

• “Mission Equity” used to raise capital from investors. Each investor agrees to a return they will
be satisfied with, with surplus returns going to the ”mission” of the company. Mission equity
signals an acknowledgement that maximizing returns will not maximize welfare for society.

• In the case of Athletes Unlimited, surplus returns are distributed to athletes and organizations
representing the interests of fans and the public.

Is there an Opportunity for a New Design?

Introducing the “Community Governed Corporation”
 Benign Design: 5 Elements (MOCGB)
Given the properties of a particular market and community, a corporation should have
the following properties:
• Benign Market Advantage – designed to ensure the market inefficiencies the firm
creates are morally defensible
• Benign Ownership – “broadly efficient” to serve society as well as owners,
accounting for all costs and benefits to all parties.
• Benign Charter – designed to protect society and stakeholders while serving owners.
• Benign Governance – designed to give voice to all parties affected by corporate
actions, and for effective corporate citizenship.
• Benign Branding – designed to clearly promise, and deliver, benefits to customers
and all stakeholders.
The Community Governed Corporation (CGC) – A Benign, Efficient Design
The Butterfly Charter – a Two Stage Charter

STAGE 1: INVESTOR-OWNED STAGE 2: STAKEHOLDER-GOVERNED

INVESTORS STAKEHOLDERS INVESTORS

Governed by
100% stakeholders, Stakeholders or the
No investors CGC buy out
investors with debt
CGC CGC
or earnings

If structured as a company buy-

The CGC is a Design that back of all investors, shares can
Shifts Ownership and Governance to Stakeholders be retired and CGC can become
through market mechanisms a nonstock company
 Investor-Owned Corporate Design

Low Cost of Collective Action

Investors aligned on profit motive

High Cost of Inefficiencies

As business saturates its marketplace,
profit motive drives market inefficiencies

STARTUP GROWTH MATURITY

 Stakeholder Governed Corporate Design

High Cost of Collective Action

Stakeholders don’t have common goals;

Require training to operate business

Low Cost of Inefficiencies

Stakeholders have no fiduciary duty to shareholders

STARTUP GROWTH MATURITY

 The Community Governed Corporation (CGC)
INTRODUCING: The Butterfly Charter

Stage 1: Investor Owned

Low Cost of Collective Action

Stage 2: Stakeholder Governed

Low Cost of Market Inefficiencies

STARTUP GROWTH MATURITY

CGCs Can Be Formed Through “Creation” or “Conversion”
CGC “Creation”
CGCs can be new enterprises that
are designed at inception with
two-stage charters.
The terms of the buy-out for
investors would be pre-determined
“Mission Equity” funding through
capped returns can raise capital
that exits the firm over time.
CGC “Conversion”
Large companies that cause
significant market inefficiencies
can be “converted” or “flipped” to
CGCs through stakeholder or
community buy-outs.
Buy-outs would be negotiated on
commercial, market-driven terms
Imagine Altria, Smith & Wesson,
Twitter or GEICO as stakeholder
governed or community governed
 STAGE 2, STAKEHOLDER GOVERNED END STATES AND ANALOGUES

STAKEHOLDERS NO OWNERS NO OWNERS INVESTORS NONPROFIT

Stakeholder Stakeholder Trustee Stakeholder Stakeholder

100% governed
100% governed
100% governed
governed governed

CGC CGC NON-PROFIT CGC CGC

• Stakeholders buy out
investors and own 100% of
company
• Resembles a cooperative
• Company buys back all • Company buys back all • No shares are bought • Company is gifted or
shares and becomes a shares and becomes a or retired bought by a stakeholder
non-stock company non-profit • Voting rights and run nonprofit
• Stakeholder governed, • Serves a charitable cause governance move to
but operates in the stakeholders
competitive marketplace

There are many analogues, but none of these had envisioned two-stage charters,
and in all cases took decades to develop
How Might We Apply the CGC to
Community Development?
 STAGE 1: INVESTOR-OWNED & GOVERNED
HOW MIGHT WE …
1. Traditional investor-driven model
INVESTORS helps attract sufficient capital and
Bring sufficient capital and expertise
expertise to create world- 2. Charter must enshrine stakeholder
1 class community-oriented
100%
commitment and stakeholder
governed end-state
businesses CGC
3. Pre-determine terms of investor exit

STAGE 2: STAKEHOLDER-GOVERNED

STAKEHOLDERS INVESTORS
Keep profits in the
2 community and Governed by
When the company is
governance with the stakeholders,
mature, stakeholders
No investors
community or the CGC itself buys
CGC out investors with debt
or earnings
Introducing a Community (CGC) Fund that draws Surplus returns can be used to
investors from within the community support the community. Examples
include:
1. ESOP for workers
This can be anchored by a major institution (e.g. 2. Health care
university, hospital, CGO) in the community and/or INVESTORS 3. Job training
investors that live in or near the community 4. Seed capital for under-privileged
entrepreneurs
MISSION CAPPED
Invest in: EQUITY RETURN
1. Existing community businesses seeking to expand Community Governed / Professionally Managed
2. Community businesses where the founder is
COMMUNITY (CGC) 1. Evaluate investments
planning retirement 2. Structure deal terms
3. New businesses that the community needs FUND
3. Board service
A portfolio approach reduces the investment risk, 4. Portfolio management
enables scale and increases impact 5. Support Services

Health
Theaters Restaurants Book Stores Bakeries Real Estate
Clinics

Communities maintain their character, surplus cash flow stays in the community and market concentration is minimized
 11:00 am on a Sunday Morning - Community Institutions Have Market Advantage

A business is not something that should just happen to a community, coming in from the outside without warning or dialogue.
 “Only through participation by the many in the responsibilities and
determinations of business can Americans secure the moral and
intellectual development which is essential to the maintenance of liberty.”

- Louis Brandeis
Dissent, Liggett Co. v. Lee, 288 U.S. 517 (1933), at 580.
 Definition of Social Enterprise

A venture that mitigates a morally indefensible inefficiency

by creating a morally defensible inefficiency

How does d.light
improve the well-
being of humans
and the planet?

What market failures

does d.light reverse?
Amplified Business Models

6.5 oz 20 oz 50 oz

1960s Today

Negative Externality: Diabetes /

heart disease crisis, water crisis
Business Models Can Reverse Negative Externalities

16 teaspoons of sugar No sugar and real fruit,

Produced in shelf stable but required completely
environment with syrup and new fresh food supply
carbonated water at scale chain infrastructure
Amplified Business Models

Recommender Systems with

Machine Learning

Negative Externality: Misinformation,

depression, violence
Business Models Can Reverse Negative Externalities

Advertising-based search engine Ad-free search engine

Business model relies on consumer data Business model relies on fee
Amplified Business Models

Negative Externality: Obesity,

emissions
Business Models Can Reverse Negative Externalities

Cheap, addictive, unhealthy fast food Affordable, healthy fast food

Chocolate
The Stakeholder View: Human and Environmental Suffering

Poverty Deforestation

• Cote d’Ivoire has lost

90% of its rainforest
since 1960

• 40% of cocoa in West

Africa is sourced from
national parks

• 5 million small holder cocoa farmers

• Average daily income in Ghana = $0.40-$.45
• Average daily income in Cote d’Ivoire = $0.78
• 2.1 million children involved in production
The Market Failure View
Overuse of Public Goods –
Monopsony “Tragedy of the Commons”

• Species extinction

• Deforestation
accounts for 15% of
greenhouse gas
emissions

• Shipping cocoa beans

is less efficient than
shipping chocolate
bars, resulting in
greater emissions
• Farmers mostly cultivating low-value,
from transportation
hybridized beans
• Farmers have little to no access to
manufacturers. Cocoa trades hands 5-10 times
before being made into chocolate.
Information Asymmetry Deadweight Loss
P
S

Equilibrium (private welfare maximizing point)

Equilibrium (social welfare maximizing point)

Dsocial Dprivate

Consumers lack information on the hazards of cocoa production and would

purchase less if aware
 Because the Supply Chain Looks Like This …

Almost no direct sourcing; No manufacturers at source

If Farmers Captured More Value, It would Solve Poverty and Result in Reforestation
 Unique Attributes

• Buys direct from farmers, dis-intermediating supply chain

• Works with farmers to ferment cocoa, adding more value

• The only American chocolate company with its own factory

in Africa – results in more efficient logistics

• Fine flavor, single-origin cocoa delivers a better product to

the consumer
Beyond Good Is the Only American Chocolate Maker with Its Own Factory at Source in Africa
Reverses stakeholder suffering
• Farmer generates 2x to 3x income
• Farmer has the wherewithal to plant
shade trees (which is good for cocoa
trees), which replenishes the forest
• Lemur population is growing
• Higher quality and healthier product
for the consumer
Reverses market failure
• Impact of poverty due to
monopsony reduced
• Positive externality to the
environment through reforestation
• Positive externality to the
environment through increased
biodiversity
• Positive externality due to improved
health outcomes
Design a business that mitigates the potential market
inefficiencies that could be caused by ChatGPT

• Describe the market inefficiency you perceive

• Describe the product / service offering for users / consumers
• What are its key features and benefits?
• What is the business model?
• How does it reverse the market inefficiency?
• Are there new market inefficiencies that it might create?

15 minutes: Work in Groups of 3

Professional Responsibility
Day 3
 Social Psychology

• The study of the causes & consequences of

social behavior

• Two Lessons:
 The situation is more powerful than we realize
 Social reality is a social construction
A Puzzle: Nazi Germany
Three Identical Strangers
https://www.youtube.com/watch?v=c-OF0OaK3o0
 Social Psychology

• CONFORMITY – Asch (1955)

pressure of the group

• AUTHORITY – Milgram (1962) –

shields one from
• accountability

• IDENTITY – Tajfel (1970)

The Asch Experiment (1955) - CONFORMITY

https://www.youtube.com/watch?v=TYIh4MkcfJA
https://www.youtube.com/watch?v=LqALdEvtTY4
Social pressures encourage conformity
– People will deny what they see

Is there a biological root to this?

Henri Tajfel

• Oxford social psychologist

• Lost most of his family to the Holocaust

• Produced pioneering work on

prejudice and group identity theory
 Minimal Group Paradigm Study
Step 1
1. 64 boys (14-15 years of age) come to a psychology lab in groups of 8. They all knew
each other well.
This established a
2. The boys were shown clusters of dots on a screen, and the boys were asked to
baseline for no
estimated the number of dots in each cluster.
intergroup behavior
3. Based on this, the boys were assigned to groups at random, but were told they were
assigned based on being an “overestimater” or “underestimater,” or “highly accurate” or
”poorly accurate.” They did not know who the other members of their assigned group
were.

Step 2
1. The boys were asked to give small awards of real money to other boys in the In Step 2, he would
experiment, and were told if the other boys were members of the same group (in- add variables to see
group) or members of another group (out-group) at what point
intergroup
discrimination
Results: A large majority of boys gave more money to members of their own group than occurs
to members of another group.
 The Milgram Experiment (1965)
Obedience to Authority

https://www.youtube.com/watch?v=GD0PVFrNYH
4
ABC Remake – 2015
(first 13 mins)

123
 Obedience to Authority

“I was just following

orders”

Key Features
1. Shielded from Accountability
2. Slippery Slope - First steps are easy. But once you’ve taken a
few, it’s hard to stop.

Is there a biological root to this?

 Motivated Reasoning
• Emotions and intuitions are nearly automatic responses,
but reasoning operates much more slowly.

• Before we can use reasoning to make a decision, our

emotional or intuitive response generates a preference.

• We may process subsequent information with the

motivation to reach our desired conclusion.

• We will try harder to reach the conclusion we already

prefer, and we tend to ignore information that is
inconsistent with it.

Is there a biological root to this?

Takeaways

Social psychology
--Social reality is a social construction
--The situation is more powerful than we realize.

Asch shows conformity.

Tajfel shows how easily we form groups.
Milgram shows obedience.
Zimbardo shows power of social roles
 Social Psychology Worksheet – Personal Life

Social Pressure Provide an example What You Could/Should Do

Conformity

The Group Forms

Obedience to Authority

Using the worksheet, reflecting on times when you felt subject to

social pressures. Draw on experiences from your personal life.
 Social Psychology Worksheet – Professional Life

Social Pressure Provide an example What You Could/Should Do

Conformity

The Group Forms

Obedience to Authority

Using the worksheet, reflecting on times when you felt subject to

social pressures. Draw on experiences from your professional
life.
 Social Psychology Worksheet

Social Pressure Name a company or situation that you

have experienced or one in the news
where these social pressures led to a
major legal or ethical dilemma

Conformity

The Group Forms

Obedience to Authority
 The Law – Some Context

• The US has 51 legal systems

• Federal level examples – antitrust, patent laws

• State level examples – contract and tort

• Federal and state level examples – employment and trade

secrets
 The Law – Some Context
“Common Law”

• The U.S. and most states are common law jurisdictions – the
courts not only interpret statutes and regulations but
themselves make law in the form of decisions that can bind
other courts

• Examples – contracts and property law

 The Law – Some Context
Ambiguity

The law is often ambiguous and difficult to apply

For example, the steps for an IPO are clearly spelled out
in federal securities law, but the question of what
information is material and thus must be disclosed does
not always have a clear-cut answer
 The Law and Ethics are not the same thing
• The law often expresses and enforces social, ethical and moral norms (e.g. hate
crimes), but it can also be disconnected from these.

EXAMPLES:

• In most states, you are free as a legal matter to watch someone drown even if
you could save them without risk to yourself.

• Taking credit for a co-worker’s idea is not illegal, nor is yelling at a new employee
in front of co-workers that they are stupid because they missed a typo.

• The law doesn’t permit discrimination, but does not mandate most inclusion
policies

In short, the law is a necessary but not sufficient guide to business decisions.
 Major Laws
False Claims Act. Seeks to punish those who fraudulently bill the government.

Antitrust Laws. Seeks to limit unfair competition / monopoly power

The Securities Act (1933) and the Securities Exchange Act (1934).
Mandates disclosures in connection with issuing and trading securities.

Foreign Corrupt Practices Act. Seeks to prevent US companies from

engaging in bribery or corruption internationally.

US Federal Sentencing Guidelines. Rules that set out a uniform policy for
sentencing individuals and organizations of felonies and serious
misdemeanors

Sarbanes-Oxley. Regulates publicly traded companies as it relates to

disclosures, conduct, internal controls, board responsibilities

Dodd-Frank. Regulates financial products, credit rating agencies,

corporate governance etc.
 The Digital Markets Act
(some highlights)

• Defines ”Gatekeepers” as platforms that have a strong intermediation position, linking

a large user base to a large number of users. Would affect search engines, social
media platforms, e-commerce companies, video/audio streaming companies, web
browsers, etc.

• provide companies advertising on their platform with the tools and information
necessary for advertisers and publishers to carry out their own independent
verification of their advertisements hosted by the gatekeeper

• allow third parties to inter-operate with the gatekeeper’s own services in certain
specific situations

• allow their business users to access the data that they generate in their use of the
gatekeeper’s platform

• End users must not be prevented from uninstalling any of the gatekeeper's
preinstalled software or apps, such as an internet search engine.

• The gatekeeper's own products and services must not be given preferential treatment,
in particular with regard to the presentation or ranking on the platform
 Design a Stakeholder law for AI

1. How might this change how we operate? How might it benefit humanity?

2. What are the potential negative externalities?

3. Who are the potentially affected stakeholders?

4. What are the key tenets of the policy you might enact?

https://www.wsj.com/articles/i-cloned-myself-with-ai-she-fooled-my-b
ank-and-my-family-356bd1a3?mod=hp_lead_pos7

Groups of 2
20 Minutes Discussion and Share With Class
 Insider Trading Laws

1. An insider breaches a fiduciary duty to their company & trades

in their stock (e.g. trades based on nonpublic information)

2. Tipper – Tippee. Four Requirements

1. Tipper breaches a fiduciary duty (loyalty, confidentiality) owed to their

company by disclosing the nonpublic material information to the tippee
2. Tippee knows or should have known about the tipper’s breach of fiduciary duty
3. Tippee uses the inside information to trade.
4. Tipper receives a benefit - the benefit can be either economic or non-economic,
i.e. relationship building.

3. Misappropriation Theory of Insider Trading

Agent misappropriates (steals) nonpublic material information in breach of a

fiduciary duty owed to their Principal.
 Major Discrimination Laws
Title VII if the Civil Rights Act of 1964
Makes it illegal to discriminate against someone on the basis of race, color, religion,
national origin, or sex. This was further expanded by the Equal Employment
Opportunity Act of 1972.
Supreme Court rules (2020) that this
Equal Pay Act of 1963 extends to gay and transgender workers
Makes it illegal to pay different wages to men and women if they perform equal work in the
same workplace.

The Age Discrimination In Employment Act of 1967

Protects people who are 40 or older from discrimination because of age.

The Pregnancy Discrimination Act of 1978

Makes it illegal to discriminate against a woman because of pregnancy, childbirth, or
a medical condition related to pregnancy or childbirth.

Title I of the Americans with Disabilities Act of 1990

Makes it illegal to discriminate against a qualified person with a disability in the private
sector and in state and local governments.
 Interview Questions You Cannot Ask

When Did You Graduate from College?

Where Did You Grow Up?

Where Are You Originally From?

How Many Kids Do You Have?

Have You Been Arrested?

What is Truth?
 Cicero: De Officiis (on duties)
--44 BCE, By Marcus Tullius Cicero (great
Roman orator)
--Written as letter to his son
--Sets out to define ideals of public
behavior
--Describes eternal issues in business
Where does one draw the line between
truth & disclosure?
Do you cross the line by speaking too
much?
Or by not saying enough?
  Diogenes You Antipater
Minimalist Expedient Maximalist
Not Expedient

1) Wheat at Rhodes Buy low, sell high   Sell at a fair price

with transparency

2) Defective Villa Buyer can choose to   You may want to sell

inspect or not to that person again
someday

3) Fishing Villa Lipstick on a pig, Your reputation as a

bells and whistles, trickster will catch up
etc. to you

Principles: Don’t commit illegal It is your duty to

fraud, but caveat consider the interest
emptor = Buyer of your fellow
Beware human. As a
businessperson, you
serve society.
 Logical Truth

Empirical Truth

Political Truth

Emotional Truth
 Making An Ethical Decision
Ethical Egoism
Ethical egoism encourages
people simply to do whatever
is best for themselves
(a form of Consequentialism)

Morality is…nothing more or

less than expedience

The invisible hand aggregates

individual expedience to
create the common good
Adam Smith
 Making An Ethical Decision
Utilitarianism
“Utilitarianism asks us to
compare the harms and
benefits of an action not just
for the decider but for all
persons who will be affected
by the decision.”
(a form of Consequentialism)

Morality is a kind of MATH

Jeremy Bentham
In the news
 Making An Ethical Decision
Deontology
Deontology: “Steadfastness
to universal principles, e.g.,
respect for persons and
property, fairness, truth-
telling…”

Morality is a kind of LOGIC

Immanuel Kant
 Making An Ethical Decision
Virtue Ethics

Virtue ethics: The

cultivation of many human
excellences; training and
habit lead to automatically
good behavior.
Morality is… a bunch of
skills, acquired by practice.
There is no formula… you
must develop wisdom.
“Virtue ethics directs our
attention to what human beings
are capable of being, on how
they can cultivate the habits of
good character that will
naturally lead them to their
fullest potential” - Aristotle
 Making An Ethical Decision
Virtue Ethics

What Are the Virtues? What Are the Virtues?

Courage – bravery/valor Honor – respect/reverence/admiration

Temperance – self-control/restraint Friendliness – conviviality and sociability

Liberality – charity/generosity  
Truthfulness – straightforwardness,
frankness and candor
Magnificence –
radiance/joie de vivre
Wit – sense of humor/absurdity  
Pride – self-satisfaction
Friendship –
  camaraderie/companionship
Good Temper –
equanimity/level headedness Justice- impartiality/fairness
 Making An Ethical Decision
NORM
Neutral Omni-Partial Rule-
Making

Morality as a test that

passes public disclosure

“The New York Times Test”

Ronald Green
 The Ethical Theories

• Rights-based
Interest-based
– Typical questions
• Whose
What basic
interests
rightsmatter?
do human beings have (equality, liberty, etc.)?
• How
Whatshall
is thethose
“greatest
rightsgood
be weighed
for the greatest
& administered?
number?”
• How will it look
benefit
in the
andheadlines
harm stakeholders?
of tomorrow’s NYT?

• Virtue-based
Duty-based
– Typical questions
• Can
Whatthe
virtues
actionare
betypical
willed character
to be a universal
traits oflaw?
the virtuous person?
• What
Does itistreat
the right
human balance
beingsofas
virtue
ends,(golden
not means?
mean)?
• What
Wouldwillit be
myOKgrandma
if everyone
think?
did it?
• Discuss: which of these
approaches do you use
in your personal life?
• And in your work life?
• Give examples
• 5 minutes quiet time
and then share
 BARRIERS TO AN ETHICAL ORGANIZATION
It’s The Barrel Not The Apples

Why do good people do the • The Only Way is Ethics?

wrong thing even when they http://ethicalsystems.org/content/o
know its wrong? nly-way-ethics-new-whitepaper

“I count him braver who

overcomes his desires than him
who conquers his enemies, for
the hardest victory is over self”
- Aristotle
It’s The Barrel Not The Apples
Why do good people do bad things?
Research (and hundreds more like
them) reveals why, although we see
ourselves as inherently good, in
certain circumstances we are likely
to behave badly.
1. Everyone else is: fMRI scans show
that the part of our brain which makes
moral judgments is less active when
we’re in a group
2. It’s not fair: when we feel wronged,
we’re more likely to lie, cheat and steal
3. We’re tired or emotional: decisions
taken in the heat of the moment tend to
be less ethical
It’s The Barrel Not The Apples
Why do good people do bad things?

4. It’s a slippery slope: when we 5. Loyalty wins: we condone

deceive even slightly we lower our unethical behavior in people
ethical standards across the board who’ve done us a favor

6. The consequences are severe:

when the penalty for missing a
target seems unbearable, we’re
much more likely to break the rules
to achieve it
 It’s The Barrel Not The Apples
We know good people do bad things because

These findings (and hundreds more like them)

reveal why, although we see ourselves as
inherently good, we are likely to behave badly in
certain circumstances
 Why Do Good Intentions Not Work?

1. Screening for bad apples.

• There are not many bad people.
• Under 1% of men have a psychopathic profile and the proportion is even lower for women.
• In a study on dishonesty with 18,000 participants, only 12 were identified as ‘big cheaters’.
Collectively, they stole $150, or $12.50 each. The remaining 17,988 participants collectively stole 240
times as much: $36,000, even though this was at the lower average of $2 each.
• Redirecting attention on getting the 99% to behave more ethically will deliver greater and more
consistent returns.
 Why Do Good Intentions Not Work?

2. Publishing a code of conduct.

• There is no evidence of correlation, let alone causation, between publishing a code of conduct or corporate
values, and either ethical behavior or even the intention to behave ethically.
3. Penalties for misdemeanors.
• Conventional wisdom says that if you fine someone for doing something wrong they are less likely to do it. The
evidence suggests that, on the contrary, it might be encouraging them.
• MBA students behaved less ethically when they were told that there was a $300 fine for cheating. Instead of
seeing it as a question about doing right or wrong, they saw it as a commercial decision about balancing risk
and reward.
• Similar result when parents were told they would be fined if they picked up their children late. After the fines
were introduced and enforced, there were more late pick-ups than before. Parents switched from making a
moral decision about doing the right thing by not letting the teachers down, to considering the fine as
reasonably priced childcare.
 Why Do Good Intentions Not Work?

4. Speaking out
• Snitch, sneak, whistle-blower, super-grass, informant, tattletale, tell-tale.
• Two main reasons why people don’t speak out are fear they will suffer professionally or personally and
nothing will be done
5. Risk assessment
• Assessing risk doesn’t, by itself, do much to promote ethical behavior. Yet companies focus on the risk
assessment as the primary tool for change
6. Ethical training
• Ethical training can be helpful.
• However, most ethics training makes three broad assumptions: You can think your way logically to an ethical
outcome. What you learn in a ‘cold’ or calm state affects how you respond in a ‘hot’ or aroused state. We have
different views on what’s right or wrong so need guidance
• All three assumptions are false
 BARRIERS TO AN ETHICAL ORGANIZATION
Ethical Fading
Stumbling Into Bad Behavior
Max H.Bazerman and Ann Tenbrunsel, 2011

Regulators, prosecutors and journalists tend to focus on corruption caused by willful actions or
ignorance. But in our research, and in the work of other scholars who study the psychology of
behavioral ethics, we have found that much unethical conduct that goes on, whether in social life or
work life, happens because people are unconsciously fooling themselves. They overlook transgressions
— bending a rule to help a colleague, overlooking information that might damage the reputation of a
client — because it is in their interest to do so.

Example: Ford Pinto 1972

• https://www.youtube.com/watch?v=PAI5T8UecEY
 BARRIERS TO AN ETHICAL ORGANIZATION
Ill Conceived Goals
Setting goals and incentives to promote a desired
behavior but they encourage a negative one, i.e.
incentive structure rewards unethical behavior
Example: Wells Fargo’s Incentives Go Awry – Sept. 2016
“To meet quotas, employees have opened unneeded accounts
for customers, ordered credit cards without customers’
permission and forged client signatures on paperwork. Some
employees begged family members to open ghost accounts.”
BARRIERS TO AN ETHICAL ORGANIZATION
Motivated Blindness
We overlook the unethical behavior of others when it’s in our
interest to remain ignorant, i.e. people see what they want to
see. Turning a Blind Eye

Example: Penn State Sex Abuse, Jerry Sandusky, 2012

Sandusky, who spent decades on the Penn State staff, was convicted in June of
sexually abusing 10 boys over 15 years.

Sandusky is serving a 30- to 60-year sentence in a maximum security prison.

State Attorney General Linda Kelly said, ""They essentially turned a

blind eye to the serial predatory acts committed by Jerry Sandusky. This
was a conspiracy of silence by top officials to actively conceal the truth."
 BARRIERS TO AN ETHICAL ORGANIZATION
Indirect Blindness
We hold others less accountable for unethical behavior when
it’s carried out through third parties, i.e. when a manager tells
a subordinate “do whatever it takes to achieve a company goal.
Example: “Deeply troubling”, was how VW’s US CEO Michael Horn
described the situation, as he and other senior executives apologized for their
part in the multi billion-dollar scandal and acknowledged their failure.
Horn later blamed the problem on “a couple of software engineers”, saying he
had no knowledge of the deception.
How was it possible that senior management and the board weren’t aware
of a software application that affected 11 million cars?
 BARRIERS TO AN ETHICAL ORGANIZATION
Slippery Slope
We are less able to see others’ unethical behavior when it develops gradually

Example: Bernie Madoff

Bernie Madoff commented to his own secretary, “Well, you know what happens is, it
starts out with you taking a little bit, maybe a few hundred, a few thousand. You get
comfortable with that, and before you know it, it snowballs into something big.”
Madoff’s Ponzi scheme started when he engaged in misreporting to cover relatively small
financial losses. Over a 15-year period, the scam grew steadily ballooning to $65 billion,
even as regulators and investors failed to notice the warning signs.
 BARRIERS TO AN ETHICAL ORGANIZATION
Overvaluing Outcomes
Give a pass to unethical behavior if the outcome is good

Example: We hold a drunk driver who killed someone to a

different standard than one who drove drunk but did not kill
someone. The “identifiable victim effect”= we are more
concerned with identifiable victims than statistical ones. Example:
You are more likely to help a friend get a job than consider the
qualified applicants
who didn’t get the job
due to your
interference.
 BARRIERS TO AN ETHICAL ORGANIZATION
Overvaluing Outcomes
Give a pass to unethical behavior if
the outcome is good

Example: Ford Motor discovered in pre-

production crash tests the “potential danger of
ruptured fuel tanks” in the Ford Pinto. Ford then
engaged in a cost-benefit analysis on the costs of
lawsuits from a defective product and
“determined that it would be cheaper to pay off
lawsuits than to make repairs.”
https://www.youtube.com/watch?v=PAI5T8UecEY
 Exercise
Choose 2 barriers from below. Provide an example of each
(one that you have experienced or read about). Develop a
systems approach to preventing its future occurrence.

1. Ethical Fading – People are fooling themselves and overlook transgressions

2. Ill Conceived Goals – Goals or incentives that promote a negative outcome
3. Motivated Blindness – Overlooking unethical behavior when it is in our
interest to do so
4. Indirect Blindness – Unethical behavior that is carried out by third parties gets
a pass
5. Slippery Slope – Unethical behavior develops gradually and goes unnoticed
6. Overvaluing Outcomes – Unethical behavior gets a pass if the outcome is
good

Groups of 2
10 Minutes Discussion and Share With Class