{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Chapter 03 - R 1 R 2 R 3 R 4 R 5 CHAPTER 3 REVIEW QUESTIONS...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Background image of page 2
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Background image of page 4
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: R. 1. R. 2. R. 3. R. 4. R. 5. CHAPTER 3 REVIEW QUESTIONS We define corporate or business ethics as establishing right and wrong conduct for situations within a corporate or business environment. However, ethical decisions can only be rationally viewed as being between the people that contract through the corporation such as shareholders, bondholders, managers, employees, customers, and so forth. Questions of corporate ethical behavior are therefore questions of actions by one person or groups of people within the corporation with respect to its effect on another person or groups of people. To discuss whether a specific company is unethical requires further specification to identify clearly the people involved. An externality is any effect or consequence of a transaction on someone other than the parties initiating and agreeing to the transaction. Positive externaltities would be benefits external to the transaction such as when a new restaurant provides diners with a new alternative. Negative externalities are disadvantages or costs external to the transaction such as the effect of the new restaurant of taking away some of the customers of the existing restaurants. Technically, the effects are only considered externalities if they are not "priced" in the transaction such as when the restaurant would pay for highway improvements to prevent traffic problems. Societies constrain some negative externalities through regulations, criminal and civil law. In addressing questions of ethical behavior between people in the corporation, this text draws the distinction between ethical conduct that we require from others, called "gottas," from ethical conduct that we do not require from others, called "oughttas." An oughtta is something that a person believes is morally correct but which is not legally required. A gotta is required behavior. The contractual rights approach to corpOrate ethics analyzes behavior on the basis of rights. Individuals and their rights that they have contractually retained form the foundation to this approach. The discussion of contractual rights in the United States is simplified because many of the rights of the people are set forth in the US. Constitution and the Declaration of Independence. For example, the Constitution declares that people have a right to own, keep, and control the property that they have earned in exchange for their labor or which they have been lawfully given by others. The property rights View of business ethics is built on the contractual rights approach discussed in question 4 above. In this View, the right to set goals and objectives rests with the owners of the assets. Thus, the goal of a corporation is to achieve the most desirable possible results for its shareholders, and we would generally expect shareholders to desire the greatest possible market value to their stock and therefore their wealth. 14 R. 6. R. 7. R. 8. Property rights makes the goal of assets or contracts clear —— the goal is set by the owner subject to the required behavior of the society. Shareholders will determine the goal of a corporation since they own the corporation. Many ethical decisions are not questions of legal or illegal behavior but instead are personal decisions. These issues often come down to a conflict between helping yourself and doing something for others. A different type of ethical decision is a public policy ethical decision which uses the government to redefine what is required of people. For example, the passage of a certain act, such as the Clean Air Act, forces a change in behavior by turning unrequired behavior into required behavior. An essential point around the debate of business ethics is that market values can price business ethics just as market values can price all other cash flows to the firm. Thus, a corporation that maximizes shareholder wealth by maximizing the firm’s stock price is making the stock as desirable as possible to investors. If investors care about ethical issues, they will find the stock of an unethical firm to be less desirable and its stock price will be lower than if it were an ethical firm. In order to maximize shareholder wealth, decisions must be made using the same set of ethical beliefs that investors have and use in making everyday investment decisions. Market prices therefore are gauges of the values of the free society which produces them. As discussed in question 7 above, if the market prices ethics, then ethical decisions cannot be considered separate from the expected cash flow stream of the overall investment decision. If a set of investment choices is considered by investors to be unethical, then the market value of these decisions will reflect these ethics. Decisions of corporate ethics are embedded into all corporate investment, financing, and working capital management decisions such that ethics, per se, does not change the objective of the firm. 15 CHAPTER 3 PROBLEMS In many ways, writing a solutions manual to the problems of Chapter 3 is like writing an answer key to a personality test! Throughout the answers that follow, please keep in mind that many of the answers are opinions. 1.a.Ob.G c. O/G Some safety and reliability is often required, but obviously, no product can ever be made totally safe and totally reliable. d. G e. O/G Some level of performance is required, but obviously advertising stretches the performance of most products. f. 0 g. 0 2. a. N b. Y c. N d. Y e. N f. Y g. Y Note that c.&g. follow from a. Violates shareholder rights to private property. . Violates shareholder rights to private property. Violates workers rights to private property (having contracts with regard to their human capital upheld). . Violates shareholder rights to private property. None. None. Violates shareholder rights to private property. . Violates shareholder rights to private property. None. None. None. Violates shareholder rights to private property. 111. Violates shareholder rights to private property. 90‘?” rw'r-r-zrqo 1-th 4. a. T. It is generally believed that pay levels reflect this ethic. b. T. It is generally believed that required rates of return reflect this ethic. c. T. It is generally believed that required rates of return reflect this ethic. 5. It would be hoped that a corporation that engaged in clearly detestable behavior such as racial hatred and environmental destruction would experience drops in stock prices even if the financial effects of the activities were to increase net cash flows through time. The reason would be that investors would be so ethically repulsed by the actions that they would not hold the stock or at least would require a much greater return, causing the price to fall. In this question we are not addressing the more likely market forces that would cause the stock price to drop. Realistically speaking, consumer boycotts and 16 governmental intervention would punish clearly unethical behavior by lowering the net cash flows. However, this question asks the important question as to whether financial markets would punish the behavior as well. . Clear thinking reveals that all normal humans in a modern society frequently engage in numerous examples of saving money despite putting themselves and others in danger. The most common example is when a person drives a car an extra distance in order to make additional money or to save money. Examples include driving to a job, driving to a better paying job, driving to a job interview, driving to a store that is further but offers a discount, driving on a detour to avoid a toll, speeding to avoid being late to work, owning a car that is not built like a tank, having less that virtually an unlimited number of smoke detectors, not installing powerful air and water filtration systems, eating and serving foods that are less heathful because they are cheaper, having no airbag or at least none for each seat, and so forth. In fact, the typical person’s life is so full of decisions that invovle a money vs. safety tradeoff that it is remarkable that people point fingers whenever a corporation even suggests that they do the same. Virtually every major corporate and personal decision involves money, safety and some aspect of a tradeoff between the two. . There is no clear answer. However, it is important to note that virtually all medicines will cause serious problems or death to at least a few users even if used correctly. The idea that a drug should not be sold unless it is 100% safe is ludicrous! Even natural and perfectly prepared foods (e.g., fish) cause death to people with allergies. Thus, answer a. is simply idealistic fantasy. . Virtually any meaningful economic activity has endless potential effects on other people — — somewhat like the idea that a butterfly’s wings can cause a hurricane thousands of miles away. A society that does not regulate any externalities is essentially an anarchy and most would argue would be an extremely undesirable place. A society that attempts to control all externalities would effectively cease to function. Thus, the economic essence of a society is the procedures and policies by which externalities are tolerated or controlled. This exercise is designed to try to show how ridiculous it is to try to identify a comprehensive list of potential externalities to a transaction. More importantly, it should show how ridiculous it is to think or suggest that all externalities should be measured and controlled. 17 ...
View Full Document

{[ snackBarMessage ]}