The Myths of Business and Ethics

1. Alpha Pi MuBusiness Ethics Presentation The Myths of Business and Ethics Prof. Mulligan Nov. 30, 2006

2. What’s the Goal Economic Legal Normative

3. Myth # 1: The Law • The law requires business leaders to maximize short-term profits for shareholders, even if this means injuring other “stakeholders.”

4. Corporate Structure Shareholder Shareholder Shareholder Shareholder Shareholder Limited rights and duties • Voted in by shareholders to represent their interests. • Oversight Duties/Major Transactions • Accountable to Shareholders Board of Directors • Perform day-to-day management of Corporation directly or via subordinates. • Accountable to Board CEO CFO COO G.C. Etc.

5. Duty to Maximize Profits? • American Law Institutes Principles: • “with a view to enhancing corporate profit and shareholder gain.” In the long term • Must follow law • May consider ethical considerations • May make charitable donations

6. Business Judgment Rule • As the Delaware Supreme Court puts it: “An acknowledgment of the managerial prerogatives of . . . directors . . . . It is a presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.” Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984).

7. Constituency Statutes --- N.Y. Bus. Corp. Law § 717 (b) In taking action . . . a director shall be entitled to consider, without limitation, (1) both the long-term and the short-term interests of the corporation and its shareholders and (2) the effects that the corporation`s actions may have in the short-term or in the long-term upon any of the following: (i) the prospects for potential growth, development, productivity and profitability of the corporation; (ii) the corporation`s current employees; (iii) the corporation`s retired employees and other beneficiaries . . . . (iv) the corporation`s customers and creditors; and (v) the ability of the corporation to provide, as a going concern, goods, services, employment opportunities and employment benefits and otherwise to contribute to the communities in which it does business.

8. Myth # 2: Economics • Shareholders desire profit maximization at all costs.

9. Shareholder Value • Prof. Greenwood argues that shareholders are real people and care about much more than merely increased profits.

10. Triple Bottom Line • John Elkington coined this term • The idea is that stakeholders (and thus the firm itself) will value a firm via three functions: • Economic • Social • Environmental

11. Novo Nordisk • How might this be done in a firm? • Novo Nordisk (diabetes cures) sees its business model this way. • Thus it issues Social and Environmental statements like a financial statement

12. Go Shopping in Ann Arbor • Note how many businesses market on a “good business” motif.

13. Myth # 3: Ethics • “East is East and West is West and never the ‘tween shall meet.” --- Kipling • Business decisions are not moral decisions and moral decisions are always anti-business.

14. Problems for Legal Regimes Christopher Stone, some thirty years ago, leveled a critique of legally imposed corporate social performance regimes arguing that they: • react only after a problem had occurred, • cost too much in policing and enforcement, • attempt to frame societal values in legalese, and • focus upon legal duties to the detriment of moral aspirations. Christopher D. Stone, Where the Law Ends: The Social Control of Corporate Behavior (1975)

15. If not Law, what? What “really” governs relationships in the world of sale of goods? • Reputation • Leverage • Need to make future sales • Wanting to be an honest broker • Ethical constraints

16. The Myth of Amoral Leaders • Are business leaders by and large amoral or worse yet evil • Willful v. Negligent

17. Nike Images: Child Labor

18. Would you? • Business choices are human/moral decisions. • Your choices as a • Consumer • Investor • Employee • Manager • Director • All these actions are moral choices