BA107 Social and Political Environment of Business

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BA107 Social and Political Environment of
Business

• Summer 2003
• WEEK 2
• Ethics

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Agenda for today

• A game
• What is ethical?
• Nike case discussion
• For next time

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The Ultimatum Game

• I have 10 that I want to give to split between
  two people.
• Problem How to divide it?
• Game rules
• Proposer offers some amount to the responder.
• If responder accepts, then they split the money
  accordingly.
• If responder refuses, neither gets any money.
• Example Chris offers a 8/2 split. If Pat is
  willing to accept 2 or less, then I pay out. If
  Pat says more than 2, then I keep my money.

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The Classroom Version

• The left half of the class are proposers
• On an index card, write down the last four digits
  of your SID and the maximum amount you are
  willing to give to the responder.
• The right half are responders
• On an index card, write down the last four digits
  of your SID and the minimum amount you are
  willing to accept from the proposer.
• I will randomly draw one card from each pile and
  will pay out the proposed split if
  responderltproposer.

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The Classroom Version continued

• Now lets find out the offer from the proposers
• Now find out the response
• How did you do

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Moving onto the topic at hand. What is ethics
and what is it not? Is it the same as right vs
wrong?
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Golden Rule

• Buddhism Hurt not others with that which pains
  yourself (Udana-Varga 5,1)
• Islam No one of you is a believer until he
  desires for his brother that which he desires for
  himself (Hadith)
• Judaism What is hateful to you, do not to your
  fellow men. That is the entire Law all the rest
  is commentary (The Talmud, Shabbat 3id )
• Christianity All things whatsoever ye would that
  men should do to you, do ye even so to them for
  this is the law and the prophets.(The Gospel of
  Matthew Matt 712, Luke 631)

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Golden Rule

• Confucianism Do not do to others what you would
  not like yourself. Then there will be no
  resentment against you, either in the family or
  in the state. (Analects 122 )
• Hinduism This is the sum of duty do naught onto
  others what you would not have them do unto you.
  (Mahabharata 5,1517)

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What does it mean when we say a company is
ethical? Is it companies or their employees that
are ethical?
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Another Example Fairness?

• Neoclassical economics makes an unambiguous
  normative prediction for individuals behavior in
  the ultimatum game.
• Proposers should offer one penny.
• Responders should say yes to one penny.
• Arguably they should say yes to 0 payment.
• Can someone explain this prediction?
• Is this prediction logical?
• Would the prize size matter?
• Is this a fair way to split the prize?
• Is it descriptive of actual human behavior?
• Thoughts
• Group results

Utotal U() U(fairness)
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So lets try another way to split. The famous,
you split I pick the chocolate bar approach.

• Similar to the ultimatum game except that a
  payment is guaranteed to occur
• What if you have more than two people?
• Does this seem fair?
• Is it more fair than ultimatum?

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John Rawls veil of ignorance uses this
approach to determine just and moral choices.

• In a nutshell
• Suppose you knew that you were going to get one
  of two options but you didnt know which.
• How would you want to define the options?
• Example You know youll get one of the 10
  splits but you dont know which. How would you
  split the 10?
• Rawls claims that the decisions you make behind a
  veil of ignorance will be just.

Pop quiz Should there be a defined income
transfer from Nike stockholders to the overseas
workers?
Wrinkle After you decide, you will become either
a Nike stockholder or one of the overseas workers.
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Turning to business, and to facilitate
discussion, lets focus on areas in which we all
have experience.
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Scenario 1 The order effect

• Anderson (1965) says that, when presented with a
  list of attributes, people will weigh the early
  ones more heavily.
• While researching firms you read about a CEO who
  is envious, stubborn, critical, generous,
  industrious, and intelligent. In general, how
  likeable do you think he is?
• While researching firms you read about a CEO who
  is intelligent, industrious, generous, critical,
  stubborn, and envious. In general, how likeable
  do you think he is?

A recent study at a major investment firm showed
that senior directors had a higher opinion when
given the top description.
Just to be fair, a car salesman describes the
pros and cons of both his car and the competitor
you mentioned you were thinking of. But, he
describes his car in pro-con order and the
competitors in con-pro order. Ethical?
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Scenario 2 The anchoring effect

• Tversky and Kahneman (1974) say that
  peoples judgements can be systematically
  affected by irrelevant facts.
• In front of you is a wheel of fortune. The
  perimeter is lined with an array of numbers, and
  after the wheel is spun, the needle lands on
  10/65. You are asked, Is the percentage of
  African countries in the UN greater or less than
  10/65? Not having given the matter much
  thought, you answer 45. You are then asked to
  estimate the exact percentage.

People in 10 condition 25 People in 65
condition 45
Youre looking at a car that costs about 20k.
The car salesman looks at your credit
application. I see the last two digits of your
phone number are 71. Do you think you should pay
more or less than 71k for this car. With a
quizzical look, you say, less of course. He
then asks, Well how much do you think you should
pay? Ethical?
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Scenario 3 Just like M.J.

• Nike sneakers Just Like Mike
• Uniform Service Jerry Rice
• If you use x, you will look like me.
• Others?

Argument 1 Celebrity endorsements, even when
not relevant, provide information because a
celebrity would never risk their name (aka brand)
by endorsing something that wasnt
good. Argument 2 Celebrity endorsements work
by invoking a blatantly unrealistic Just Like
(fill in the blank) image. Jane Famous Person
just bought a car just like this? If false, is
it ethical? If true, is it ethical?
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Special good deal for those students who said
they are interested in marketing.

• Are marketers ethical?
• Are marketers unethical?
• Wheres the boundary?
• If society continues to increase the emphasis on
  ethics, is marketing a sustainable activity?

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The Nike case study

• Some Numbers
• AVG wage of a Vietnamese worker in Nike
  factories 1.50 a day (545 per year) in early
  90s
• Compare with American workers 8 per hour
• Vietnamese workers in other factories 250 per
  year
• Michael Jordan millions
• One pair of Nike Air Pegasus 70
• How did Nike respond to the accuse?
• Apparel Industry Partnership (set of standards to
  ensure that products were no sweat)/Fair Labor
  Association (oversee compliance)
• Worker Rights Consortium (companies would have to
  pay a living wage) (students) Can this work?

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The Nike case study

• Questions to be answered
• Who cares and why?
• Will American workers benefit from fair labor
  practice?
• Will Vietnamese workers benefit?
• Is it fair to pay average local minimum? What
  about a living wage?
• Globalization and its discontent Does American
  ethical codes work elsewhere?

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Homework for Wednesday

• Read The Collapse of Enron case in the book
• Read Chapter 14 (Stockholders and Corporate
  Governance)
• Remember that Paper Proposal and First Journal
  are due

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Homework for Wednesday Flaming Fords the rest
of the story.

• Ford Pintos had a tendency to explode if hit in a
  rear-end collision.
• Probability of any given Pinto having such an
  accident is low. Probability of it exploding if
  hit is also low.
• Ford explicitly calculated that
• (Design change) gt CarsLawsuit/boom
  P(accident)P(boomaccident)
• What do you think?
• Is cost/benefit analysis inherently unethical?
• Dont consumers make the same tradeoffs?
• What if your retirement depended on Ford stock
  price?