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BUSINESS ETHICS AN INTRODUCTION Daniela Pianezzi [email protected]

Siena, 18 March 2016

“Accountants appear to exhibit lower levels of moral reasoning than other professional groups. Accounting students become less ethical as they progress through their accounting education. Accounting students are less ethically aware than other students. Accounting students don’t recognize the broader social responsibility issues associated with professionalism. Most accounting students think that accounting is an amoral and technical activity.” McPhail, K., & Walters, D. (2009).

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Why bother?

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WHAT IS ETHICS? ETHICS IS A BRANCH OF PHILOSOPHY

NORMATIVE ETHICS

DESCRIPTIVE ETHICS

APPLIED ETHICS

META‐ETHICS

“Ethics is undoubtedly concerned with the question what good conduct is” Moore, G. E. (1993).

[from Ancient Greek ἦθος (êthos, “character, moral nature”)].

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ETHICAL DILEMMAS (1) ETHICS IS ABOUT DECISION MAKING

A trolley is running out of control down a track. In its path are five people who have been tied to the track by a mad philosopher. Fortunately, you could flip a switch, which will lead the trolley down a different track to safety. Unfortunately, there is a single person tied to that track. Should you flip the switch or do nothing? 6

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ETHICAL DILEMMAS (2)  ETHICS IS ABOUT DECISION MAKING

You are on a footbridge watching a trolley speeding down a track that will kill five unsuspecting people. You can push a fat man over the bridge onto the tracks to save the five. (You cannot stop the trolley by jumping yourself, only the fat man is heavy enough.) Would you do it?

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KOHLBERG'S COGNITIVE MORAL DEVELOPMENT  ETHICS IS ABOUT MORAL DEVELOPMENT

1) Infancy: Obedience/Punishment 2) Pre‐school: Self‐Interest 3) School‐age: Conformity and Interpersonal Accord 4) School‐age: Authority and Social Order 5) Teens: Social Contract 6) Adulthood: Universal Principles

Kohlberg, L. (1985)

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ETHICAL APPROACHES DIFFERENT APPROACHES RAISE DIFFERENT ETHICAL QUESTIONS

e.g. capability approach by A.  Sen and M. Nussbaum.

e.g. philosophies of J.  Bentham and J. S. Mill

e. g. theory of justice by J.  Rawls 9

AN EXAMPLE OF NORMATIVE ETHICS COST‐BENEFIT ANALYSIS IS BASED ON CONSEQUENTIALISM

CONSEQUENTIALISM:  Good consequences make it a good  action. 

Cost‐Benefit Approach:   

Take any action; Compute the benefits and harms of the consequences for everyone affected. If the action brings more total happiness than unhappiness for more people, it is justified. If it causes moral total unhappiness for more people, it is wrong.

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THE FORD PINTO CASE BETTER THAT ONE SHOULD DIE…

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In May of 1968, the Ford Motor Company decided to introduce a subcompact car  and produce it domestically. The Ford Pinto appeared on the market in 1970. 

•

The death of three women on August 10, 1978 when their car was hit by another  vehicle traveling at a relatively low speed initiated the lawsuits and scandals in  which Ford endured for decades focused on the design flaw of the gas tank. 

•

Evidence surfaced that the executives at Ford Motor Company were aware and  acknowledged that the design was flawed and potentially dangerous. A review of  the cost‐benefit analysis was deemed insufficient and Ford opted not to change  the design of the fuel tank.

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THE FORD’S COST‐BENEFIT ANALYSIS 

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THE PHILIP MORRIS CASE SMOKING CAN AID STATES’ ECONOMY 

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BUSINESS ETHICS THERE IS NOT A SINGLE DEFINITION

'business ethics'  is  rules,  standards, codes, or principles   which  provide  guidelines  for   morally right  behavior  and   truthfulness  in  specific situations. 

Lewis, (1985).  14

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THE THREE LEVELS OF BUSINESS ETHICS ETHICS CONCERNS BOTH THE INDIVIDUAL AND SOCIETY MICRO LEVEL The rules for fair exchange between two individuals (the nature of promises and other obligations, the intentions, consequences and other implications of an individual’s actions, the grounding and nature of various individual rights). MOLAR LEVEL The basic unit of commerce today: the corporation (the role of corporation in society and the role of the individual in the corporation) MACRO LEVEL The institutional or cultural rules of commerce for an entire society (‘the business world’) (justice, legitimacy and the nature of society – e.g. what are the legitimate (and illegitimate) roles of government in business life?what is the role of government regulation?) Solomon (2002)

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THE MICRO LEVEL THE VOLKSWAGEN CASE ‐ ETHICS IS ABOUT TRUST

In September 2015, the Environmental Protection Agency (EPA) found that many VW cars being sold in America had a "defeat device" ‐ or software ‐ in diesel engines that could detect when they were being tested to measure carbon dioxide emissions levels, changing the performance accordingly to improve results. The German car giant has since admitted cheating emissions tests in the US.

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THE MOLAR LEVEL ETHICS CONCERNS THE ROLE OF BUSINESS IN SOCIETY

o THE SHAREHOLDERS’ APPROACH:  “the social responsibility of business is to  Increase its profits ‐ within the rules of the  game (no deception or fraud)” ‐ Milton  Friedman (1962) o THE STAKEHOLDERS’ APPROACH: “Every business creates, and sometimes  destroys, value for customers, suppliers,  employees, communities and financiers.  The idea that business is about  maximizing profits for shareholders is  outdated and doesn’t work very well, as  the recent global financial crisis has  taught us.” ‐ R. Edward Freeman (1984)

 

Business and society depend on each other, and have mutual obligations Pressure groups and advocates help ensure that public expectations of business change

THE OLIVETTI CASE AN EXAMPLE OF CSR «Può l’industria darsi dei fini? Si trovano questi semplicemente nell’indice dei profitti?  Non vi è qualcosa di più affascinante, una destinazione, una vocazione anche nella vita  di una fabbrica?»  (Adriano Olivetti, 23 aprile 1955)   1919: A family allowance of 12 lire per  dependent child.   The Olivetti Female Workers regulations   1934: Nursery schools, summer holiday  camps and factory services (canteens,  automotive services)   Technical and vocational schools which  offered scholarships to help the most able  young people to become foremen and  engineers;  Cultural services (Olivetti Cultural Centre) and  educational services (libraries, evening  courses for employees) were organised.  18

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CSR TODAY DIFFERENT TOOLS PROMOTE THE DIFFUSION OF CSR Sustainable development: “a development which meets the needs of current generations without compromising the ability of future generations to meet their own needs”. ‐ Brundtland Commission*, 1987 

UN GLOBAL CONTACT: a United Nations initiative to encourage businesses worldwide to adopt sustainable and socially responsible policies, and to report on their implementation. The UN Global Compact is a principle‐based framework for businesses, stating ten principles in the areas of human rights, labour, the environment and anti‐corruption. Companies are brought together with UN agencies, labour groups and civil society. (https://www.unglobalcompact.org/)

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GRI ‐ GLOBAL REPORTING INITIATIVE: is an independent institution whose mission is to develop and disseminate globally applicable sustainability reporting guidelines (https://www.globalreporting.org)

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SOCIAL BALANCHE SHEET: it is a document able to furnish the diverse stakeholders with information on the social effects derived from the company’s business choices. 19

THE MACRO LEVEL THE LAW IS NOT ALWAYS ETHICAL The Transatlantic Trade and Investment Partnership (TTP) – a treaty being hammered out between the EU and the US with woefully little scrutiny – could grant companies the same legal rights as nation states, enabling them to sue elected governments in secret courts to block policies that dent future profits. •

THE VATTENFALL’S CASE: The Swedish power company Vattenfall is currently suing Germany because it is not happy with the nuclear phase‐out. Vattenfall wants over 3.7 billion euros in compensation for the decommissioning of the Krümmel and Brunsbuttel nuclear power plants in the context of the German nuclear phase‐out following the Fukushima disaster.

•

THE PHILIP MORRIS’ CASE: Philip Morris sued uruguay after it adopted a number of anti‐tobacco regulations with a view to implementing the 2003 world health organisation’s framework convention on tobacco control, aimed at tackling the health dangers posed by tobacco 20

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THE LIMITS OF LEGISLATION LAWS ARE NOT ENOUGH!

Inadequate  they cannot take into account all  possible cases. Intrusive they are imposed from without  (intrinsic vs. extrinsic motivation) Self‐defeating crowding out effect: when  extrinsic motivation crowds out  and diminishes intrinsic  motivation in some area of  human action 21

BUSINESS ETHICS AN INTRODUCTION Daniela Pianezzi [email protected]

Siena, 19 March 2016

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THE FRAUD TRIANGLE FRAUD INVOLVES A NORMALIZATION OF DEVIANCE 

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FRAUD ENABLERS MORE INTERNAL CONTROL IS NEEDED

management fraud involves falsifying financial information for the benefit of the person committing the crime.  Factors contributing to fraud:  ‐ Poor internal controls  ‐ Management override of internal  controls  ‐ Collusion between employees  ‐ Collusion between employees  and third parties  2014 – Association of Certified Fraud Examiners http://www.acfe.com/rttn‐red‐flags.aspx

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FRAUD DETECTION TIPS ARE THE MOST COMMON WAY TO DETECT FRAUD

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WHISTLEBLOWING IT IS A WAY TO FIGHT FRAUD

Whistleblowing is the action of someone who decides to disclose  illegal, irregular, dangerous, immoral or illegitimate practices. Top 4 reasons for not reporting: 1) The conviction that no corrective  action would take place 2) Fear of retaliation* 3) Fear that they wouldn’t remain  anonymous  4) The assumption that someone else  would do it *It occurs when an employer punishes an employee for engaging in legally protected activity.  Retaliation can include any negative job action, such as demotion, discipline, firing, salary reduction,  or job or shift reassignment. But retaliation can also be more subtle. 26

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PROTECTION FOR WHISTLEBLOWERS – EUROPE ONLY FEW COMPANIES HAVE VISIBLE WHISTLEBLOWING POLICIES

http://www.linklaters.com/Insights/ThoughtLeadership/Whi stleblowing/Pages/Index.aspx

February and March 2014.

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PROTECTION FOR WHISTLEBLOWERS – ITALY IN THE PRIVATE SECTOR THERE ARE NOT SPECIFIC REGULATIONS FOR  WHISTLEBLOWERS

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ETHICAL DILEMMA

LOYALITY OBLIGATION  VS.  ETHICAL OBLIGATION TO BE HONEST

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INCENTIVIZING WHISTLEBLOWING USA, 2010:  congressional approval of DODD‐FRANK ACT Additional monetary incentives for  whistleblowing: • up to twice the amount of wages  lost due to retaliation • attorneys’ fees. • cash awards between 10% and  30% of amounts that the SEC (U.S.  Securities and Exchange  Commission) recovers based on  the whistleblower’s report.

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CRITICISMS IS IT ETHICAL TO PROVIDE FINANCIAL INCENTIVES? 

External reporting to the SEC (U.S. Securities and Exchange  Commission) is required to invoke Dodd‐Frank protections.  It may lead an individual to report the matter to the SEC  rather than work within internal channels to correct the  wrongdoing.  It serves only to create a perverse incentive for employees to  hunt for information about potential corporate fraud or  illegalities, disclose nothing to the employer, and then report  the information to the government only when the violations  have grown to a size that would warrant payment of a large  enough “bounty” to justify the risk to their careers. 31

Incentivize: “to motivate or encourage (a person,  esp. an employee or customer) by providing a  (usually financial) incentive”

(OECD definition, word date back to 1968)

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THE ROLE OF INCENTIVES INCENTIVES ARE THE CORNERSTONE OF MODERN LIFE

1958:  Economics is “the world of prices, wages, interest rates,  stocks and bonds, banks and credit, taxes and expenditure”  Samuelson (1958) Appearance of “incentivize” or “incentivise” in major newspapers

1980s

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1990s

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2000s

6159

2010‐11

5885

2011: “An economy is just a group of people interacting with one  another as they go about their lives” Mankiw et al. (2011) 33

WHEN MONEY INCENTIVES ARE COUNTERPRODUCTIVE (1) CASE 1: Switzerland, incentives offered to compensate  residents for accepting a nuclear waste facility .

 People’s willingness to host  the nuclear waste site went  down (from 51 to 25 percent)  For many villagers,  willingness to accept the  nuclear waste site reflected  public spirit THEY WERE NOT WILLING TO SELL OUT THEIR SAFETY AND PUT THEIR  FAMILIES AT RISK FOR MONEY 34

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WHEN MONEY INCENTIVES ARE COUNTERPRODUCTIVE (2) CASE 2: Israeli day‐care centres: Introduction of a fine for parents 

who came late to pick up their children   It did not reduce the  number of late‐arriving  parents, but increased it.  when they eliminated the  fine, the elevated rate of  late arrivals persisted. WHAT WAS ONCE SEEN AS A MORAL OBLIGATION TO ARRIVE ON TIME  WAS NOW SEEN AS A MARKET RELATIONSHIP (PAY FOR A SERVICE) 35

“Market values were  coming to play a greater  and greater role in social  life. Economics was  becoming an imperial  domain. Today, the logic of  buying and selling no  longer applies to material  goods alone but  increasingly governs the  whole of life. It is time to  ask whether we want to  live this way."  M. J. Sandel 36

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THE PROBLEM Each year, hundreds of thousand of babies are born to drugs‐ addicted mothers

Some of these babies are born addicted to drugs, and a great many of them will suffer child abuse or  neglect.

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The Solution

1997, North Carolina.

“Scientific development depends in part on a  process of non‐incremental or revolutionary  change. The usual prelude to changes of this sort is,  I believed, the awareness of anomaly, of an  occurrence or set of occurrences that does not fit  existing ways of ordering phenomena. The changes  that result therefore require 'putting on a different  kind of thinking‐cap'.”

Barbara Harris launched the «Project prevention»: offer drug‐ T. S. Kuhn addicted women $300 cash if they will undergo sterilization or long‐ 38 term birth control. 

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RIGHT TO PROCREATION FOR SALE

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POLLUTING SMOG REACHES RECORD LEVELS IN CHINA

The Problem 40

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The Solution Emissions trading: allows countries  that have emission  units to spare to  sell this excess  capacity to  countries that are  over their targets. Kyoto Protocol (Article 17) 41

RIGHT TO POLLUTE FOR SALE

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The Problem

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The Solution

In Dallas, they pay second graders $2 for  each book they read.  To collect the cash,  students have to take  a computerized quiz  to prove they’ve read the book.

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DUTY TO LEARN FOR SALE

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WHY WORRY?

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INEQUALITY 47

CORRUPTION 48

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«We have to decide what values should govern the  various domains of social and civic life.[…] When we decide that certain goods may be bought and sold,  we decide to treat them as commodities, as instruments of profit and use. But not all goods are  properly valued in this way. […] We drifted from  having a market economy to being a market society»  Sandel (2012)

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Thank you for your attention!

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REFERENCES (1) 

Cheffers, M., & Pakaluk, M. (2007). Understanding accounting ethics. Sutton, MA: Allen David Press. Duska, R., Duska, B. S., & Ragatz, J. A. (2011). Accounting ethics. John Wiley & Sons; Ladenson, R. (1995). Ford Pinto Case. Kahneman, D. (2011). Thinking, fast and slow. Macmillan. Kant, I.(1785) Groundwork for the Metaphysics of Morals. Kohlberg, L. (1985). Kohlberg’s stages of moral development. Theories of development. Upper Saddle River, NJ: Prentice‐Hall, 118‐136. Low, M., Davey, H., & Hooper, K. (2008). Accounting scandals, ethical dilemmas and educational challenges. Critical Perspectives on Accounting, 19(2), 222‐254. McPhail, K., & Walters, D. (2009). Accounting & Business Ethics: An Introduction. Routledge. Mintz, S. M., & Morris, R. E. (2008). Ethical obligations and decision making in accounting: Text and cases. McGraw‐Hill/Irwin. Rawls, J. (1971). A Theory of Justice (Cambridge. Mass.: Harvard University). Rousseau, J. J. (1994). Discourse on political economy and the social contract. Oxford University Press.

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REFERENCES (2)     

Sandel, M. J. (2012). What money can't buy: the moral limits of markets. Macmillan. Sandel, M. J. (2010). Justice: What's the right thing to do?. Macmillan Sen, A. (1997). Economics, business principles and moral sentiments. Business Ethics Quarterly, 7(3), 5‐15. Solomon, R. C. (2002). Business Ethics. In Chadwick, R. F., & Schroeder, D. (2002). Applied ethics: critical concepts in philosophy (Vol. 6). Taylor & Francis. Lewis, P. V. (1985). Defining ‘business ethics’: Like nailing jello to a wall.Journal of Business ethics, 4(5), 377‐383.

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