Corporate and Individual Behavior

After this long and hopefully provocative introduction to the conflicts between economic efficiency and ethical considerations, this blog now offers thirty questions that have both ethical and economic consequences. Do not expect these questions to have clear answers. You may even find some of the expositions or scenarios to be not only controversial but outright offensive. Perhaps this is unavoidable to get you to consider ethics not just as “yet-another-exercise necessary to pass a class,” but as “food for thought.” To learn, it is essential that you discuss ethical dilemmas with your colleagues and friends. I promise that you will not only find the discussion entertaining, but that you will be shocked as to how widely differing their points of views will be.
For all of the scenarios that follow, it is important that you consider whether your answers depend on the following:
• if you have exclusive access to the economic resource in question. For example, are you the only producer of your product or the only available employer, or are there many standby alternatives?
• if the fact that others (e.g., your competitors) engage in the same questionable activity can excuse or mitigate your own ethical flaws.
• if you represent yourself or if you represent someone else—that is, if you are the sole owner of the company vs. if you are a part owner of the company vs. if you are an executive of a company.
Who you represent is an important “if.” By law, as a corporate executive, you have a fiduciary obligation to your shareholders. The seminal opinion on this subject was written by the New York Court of Appeals in 1984:
Because the power to manage the affairs of a corporation is vested in the directors and majority shareholders, they are cast in the fiduciary role of “guardians of the corporate welfare.” In this position of trust, they have an obligation to all shareholders to adhere to fiduciary standards of conduct and to exercise their responsibilities in good faith when undertaking any corporate action. Actions that may accord with statutory requirements are still subject to the limitation that such conduct may not be for the aggrandizement or undue advantage of the fiduciary to the exclusion or detriment of the stockholders.
The fiduciary must treat all shareholders, majority and minority, fairly. Moreover, all corporate responsibilities must be discharged in good faith and with “conscientious fairness, morality and honesty in purpose.” Also imposed are the obligations of candor and of good and prudent management of the corporation. When a breach of fiduciary duty occurs, that action will be considered unlawful and the aggrieved shareholder may be entitled to equitable relief.
Most economists and a number of courts have interpreted fiduciary responsibility to mean that managers must maximize shareholders’ profits to the best of their abilities.
• if you do not represent the corporate entity, but the government. That is, would you argue in favor of an action if you were a corporation that you would prohibit if you were the government? If you do take the stance that it is the role of the government to make rules and companies should be free to live inside the rules, then also consider also that companies are free to donate to politicians and lobby government—and many actively do so to influence governmental rules and legislation. Is the government a benevolent arbitrator, or a set of politicians willing to be corrupted?
• if the social cost to prevent an unethical behavior is too high. In some instances, it might require an Orwellian police state to prevent a non-desirable behavior. In other cases, “paying to prevent bad behavior” may also create bad incentives for future bad behavior that tries to obtain such payments in the first place.
• if you do not represent either the corporation or the government, but your faith’s religious institution. How do you reconcile your economic views with your religion’s ethical views?
Another interesting question is whether you consider the ethical dilemma to be rare or common, and whether you believe it to become more or less common in the future.
Each of the scenarios below is followed by some additional questions, often more specific than the above considerations. These additional questions are not replacements for the above set of questions.
You cannot possibly cover all 30 questions in an introductory finance course. In fact, you may not be able to discuss more than one or two points per class session. Given time constraints, to help you make a choice among the questions, I have marked some of the more important cases in bold and with an extra bullet.