BSZ_IM_Ch22_4e - Managerial Economics and Organizational...

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Managerial Economics and Organizational Architecture Instructor’s Manual Part 1: Chapter Overview and Solutions Chapter 22: Page1 CHAPTER 22 1 E THICS AND O RGANIZATIONAL A RCHITECTURE This chapter uses the economic framework to provide insights into the topic of corporate ethics. It makes five basic arguments: (1) The term ethics has many different meanings which can change across cultures and time. (2) If a corporation is to survive in a competitive environment, it must maximize value. Taking care of corporate “stakeholders,” such as employees and local communities can be important, but such care can only be taken so far. (3) Private markets provide strong incentives for ethical behavior by imposing substantial costs on institutions and individuals that depart form accepted social standards. (4) Some corporations misplace considerable effort in trying to change employees’ preferences through corporate ethics programs. The economic view, instead, takes the employees’ preferences as given and focuses on incentives. (5) Ethics programs can be valuable in communicating the firm’s expectations to employees. C HAPTER O UTLINE E THICS AND C HOICES C ORPORATE M ISSION : E THICS AND P OLICY S ETTING Ethics Value Maximization Corporate Social Responsibility Economists’ View of Social Responsibility Corporate Policy Setting Mechanisms for Encouraging Ethical Behavior C ONTRACTING C OSTS : E THICS AND P OLICY I MPLEMENTATION C ODES OF E THICS Altering Preferences Education Corporate Culture C ASE S TUDY : T HE T YLENOL T RAGEDY AND S C REDO S UMMARY 1 Portions of this chapter were published in C. Smith (1992), “Economics and Ethics: The Case of Salomon Brothers,” Journal of Applied Corporate Finance 5:2, 23–28, and J. Brickley, C. Smith, and J. Zimmerman (1994), “Ethics, Incentives, and Organizational Design,” Journal of Applied Corporate Finance 7:2, 20–30.
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Managerial Economics and Organizational Architecture Instructor’s Manual Part 1: Chapter Overview and Solutions Chapter 22: Page2 T EACHING THE C HAPTER We do not lecture on this chapter. Typically, we have a class discussion about whether it is “ethical” for managers to focus on shareholder value. Also some contemporary examples of ethical issues are discussed. A useful case for illustrating the issues that arise in implementing a corporate ethics program is Martin Marietta: Managing Corporate Ethics (A) (Harvard Business School Case #9-393-016). Also, we discuss the Tylenol minicase. C ASE S TUDY T HE T YLENOL T RAGEDY AND S C REDO Johnson & Johnson sells a diverse array of products, including baby care, first aid and surgical products, prescription drugs, and industrial products. It operates in a decentralized fashion through 190 companies in 175 countries. Each business unit has its own focused mission. Some units employ thousands of people, and others, as few as six. Each business unit is organized around a given market and a given set of customers.
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This note was uploaded on 04/27/2010 for the course FIN 320f taught by Professor Toprac during the Spring '08 term at University of Texas.

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BSZ_IM_Ch22_4e - Managerial Economics and Organizational...

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