Business Ethics Recall Questions

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1 - Monsanto

What was Agent Orange? What is MO-Bay? What has it to do with the vietnam war?

In 1954 monsanto cooperated with bayer to produce the chemical agent orange

Chemical was used during the "operation ranch hand" to destroy the rain forest the viet cong were hiding in

agent orange caused cancer and birth defects for following geneartion

What is monsantos history with GMO products?

first success with genetically modified plant cell in 1983

started the production of GMO sees in the 1990s

stated producing seeds that were resistant to their own produced glyphosate round up in 1996

bought west bred GMO wheat in 2009 → horizontal expansion

Why is monsanto critiquted?

Aggressive lobbying • Close connections to politicians • Close connections to secret services

What are Allegations against Monsanto?

Aspirin is toxic (Aspirin from Bayer)

Uranium for atomic bomb

Aspartame (Diet coke): produces tumours and holes in the brain

Bees are poisoned when trying to pollinate plant. Wipe out the worlds bee population (FAZ: 75% reduction in Germany’s insects)

more than 200.000 indian farmers bankcrupt because of GMO foods

GMO food and Glyphosate causes inflammation => rise in chronical diseases. (ARTE documentary: By wiping out healthy bacteria in intestines)

How does the Glenn Stone describe the current situtation of monsato?

the debate about GMO foods got very polarised and emotional

Anti-GMO groups needs "bad guys" to further appeal to the emotional aspects

Allegations against Monsanto are created, which makes Monsanto this "bad guy"

What does Vandana Shiva say about the Monsanto products?

patenting seeds makes people starve

260,000 farmers comitted suicide

seeds have always been renewable ressource → Monsanto is comitting genocide

What does Keith Kloor answer to her:

poor banking systems caused suicide rates

He is writing a journal in conjuciton with Monsanto, which makes him biased

What are monsantos future goals?

less water use in food production

digital farming and precision agriculture

What is greenpeaces response to the growing demand for agricultural products?

They are not accepting biotech even though there are certain advantages

opposing position against golden rice

What is golden rice?

What is the argument for the cancer cause of roundup?

First, this finding is all about relative risk. Non-Hodgkin lymphoma is one of the most common cancers in the U.S. and Europe, but the lifetime risk for most people, according to the American Cancer Society, is just 1 in 42 (2.4%) for men and 1 in 54 (1.9%) for women. A 41% increase in relative risk increases those numbers to 3.4% (men) and 2.6% (women)

What course of action would you suggest the company take? Is there more than one course of action? If so, what ethical framework is behind your reasoning?

Course of Action:

increase public awareness for the effects of GMO food on the consumers

more advertisement on the mission and goals of monsanto

apologising for the damages caused by agent orange

acting with corporate social responsibility

producing seeds that farmers can reuse rather than having to plant them new every year

Utilitarian Approach:

Actions should maximise general utility of the masses

GMO solves problem of feeding growing population

GMO saves land and ressources

GMO could be modified so that is heals human disease

At the same time GMO can be bad

Deontological approach:

Modifying nature is against the laws of nature. We should not play god

If everyone would use GMO, would it be reasonable?

Feeding people and preventing starvation

2 - Utilitarism and Deonthology

What are words?

sounds

concepts handed over from generations

not necessary representing reality

give our thinking certain structure

What is the difference between descriptive and normative ethics?

Descriptive

Describe how things are, what they look like

Explain systems

What is it like in ...?

Normative (Normen)

Evaluate standarts

Name requirements for approval and compliance with society

What is fair and unfair? What is good or bad?

Commenting on standarts and values

What part of ethics did Aristotle deal with? What question did he try to answer?

Descriptive Ethics:

How is a prevailing custome of a certain society implemented into my own custom?

How are we like? How are things done?

NOT → whether norms are right or wront, BUT how the norms are put into practice (Normative would be evaluation)

What are subsections of both descriptive and normative ethics? Is there a layer above?

Deonthology

What is deonthology?

A subcategory of normative ethics, that states that your intention to act in a certain way is what counts. The will what you intend to do is what matters. The intention in your hear matters. Intention is independent from the consequences.

Who is considered the most relevant philosopher for deonthology? What were his theories?

Immanuel Kant, with two concepts:

The Good Will

Good and right is simple the will or intention to do good but not the acts and effects that following your intentions

Even all inclinations (acts) combined are not able to compromise for any good intention

The good will should shine by itself and accomplish nothing

The Categorical imperative

Indentify the principles behind your actions

Life according to principles that you want others around your to also adopt.

Role-Model Theory

"What if everyone else would behave in a certain way?"

What is one of the most popular interpretations of deonthology?

If consequences are unimportant and only intention counts, you as yourself have no advantage of having those intentions. You cannot enjoy doing good things, as those are not values in deonthology.

How is this interpretation transferred into business ethics and CSR?

Any socially responsible action by a firm is simply window dressing and does not have any ethical consequence.

What is the concept of the categorical imperative?

Act only according to theat maxim whereby you can, at the same time, will that it should become universal law:

Look at the principles behind your actions and think to yourself, "could I want everyone in society act according to those principles?"

What does the golden rule say?

Als Goldene Regel (lateinisch regula aurea; englisch golden rule) bezeichnet man einen alten und verbreiteten Grundsatz der praktischen Ethik[1] der auf der Reziprozität menschlichen Handelns beruht, in konventioneller Formulierung:

„Behandle andere so, wie du von ihnen behandelt werden willst.“

What is the difference between the categorical imparartive and the golden rule?

the Categorical Imperative is the Golden Rule without the religious aspect

According to the Christian doctrine, ‘the ultimate ground for the rightness or wrongness of a particular act is […] not within the grasp of the finite individual himself’ (Thomas, 1970, p. 188), and a divine instance is needed to provide such moral knowledge of what is right and wrong. But Kant argued that as we can neither know what God’s will is, nor can we reason about it, morality can never equate the mere fulfilment of God’s will

Rather, the Categorical Imperative is considered an autonomous principle that serves as a law of reason which humans impose on themselves.

Furthermore, the maxim of doing unto others as you want others to do unto you suggests partiality and is purely self-referential, whereas willing for a maxim to become a universal law means submitting oneself to a universally accepted and applicable standard

However, this is a mistake because ultimately the Golden Rule is ultimately merely an empirically based moral principle and, as such, we cannot derive a universalisation principle from it. Walker (2018), for example, posits that it might be morally inappropriate to universally apply the Golden Rule when the other person’s circumstances are significantly different. Consequently, we see a significant difference between the Golden Rule and the Categorical Imperative in how their notion of morality relates to both the self and to other beings.

The Golden Rule, therefore, is empathic and specific in that it requires us to put ourselves in others’ shoes. This is not the case for the Categorical Imperative, which impersonal despite its universal application.

the principle of reciprocity is essential to the Golden Rule. The Golden Rule requires the existence and interaction with other persons, and people’s attitude to one another is an essential component of the principle, whereas the Categorical Imperative, on the other hand, has no such requirement

What are consequences and interpretations of both theories?

The good will

you yourself have no advantage of simply having good intentions, as nobody will ever see or recognize your good actions ⇒ cannot enjoy doing good

Business Ethics:

social responsible initiative is only window dressing and empty words, as there is no action following

Categorial imperative

Morality is rational

Your emotions are not necessary indicative of what is right or wrong

Ethics should include some kind of right and wrong behavior analysis

Teacher is more on the normative ethics side

Utilitarism

What is utiilitarism and from what field of ethics does it originate from?

Utilitarism is a subcategory of consequentialist ethics and is opposing to contractualist ethics.

Contractualist ethics focuses on the general level while utilitarism focuses on individuals

Utilitarism stats that a good action is an action that maximizes utility.

Key messages of utilitarism?

Good Actions = What maximizes utility and happieness

Consequences of actions decide what is good and bad

Also reffered to as consequentialism, as the consequences of your behavior matter

Who is the founder of utilitarism? What did he say?

Jeremey Bentham (1748 - 1832):

woman rights to vote

legalize homosexuality

abolish death penalty

wanted democracy

wanted liberty of the press

What is the historical significance of Benthams ideas?

Back in 1700s, law and order of society was based on the law of god and the will of the king. The foundation of a christian society are those laws:

→ Bentham however argues that the foundation of society (so the law) should be based on what serves the society and what eventually maximized utility for society (rather than the kind or god)

Give two examples which criticise bentham and utilitarism.

What is Mill's approach to utilitarism?

The great happiness principle:

Actions are right in proportion as they tend to promote happiness, wrong as they tend to produce the reverse of happiness

Name arguments for and against utilitarianism:

Pro

Action without consequence doesn't help

reality counts

We cannot read or know the intentions of others

Con

Drugging people is wrong → Drugs can create fake realities, but we want to life an actual life and not some fake story.

Sacrificing the rights of a minority is wrong, no matter how usefull it is for the rest of the population

Covid?

What connection could there be between deontology / kant and utilitarism?

Kant refers to relations between individuals, as when we face someone directly we need to think of how we ourselves should behave. At the same time Bentham and Mill refer to the actions towards societal consequences if e.g a politician needs to decide how to deal with a large amount of people that are affected by decisions.

Kant: Small scale

Utilitarism: Large scale → At some point you need to value happieness and the see what maximizes utility for some group.

Ford Pinto Case

How would you describe the disagreement between Milton Friedman and the young Michael Moore with regard to Ford Pinto? (see youtube video) Please give pros and cons for both their arguments.

Moore: Putting a monetary value on human lives is bad. → Companies should not just consider profits

Ford estimated that the law suit in case of a death of one human due to the increased chance of explosion would cost them about $200.000. They also estimated that about 200 people would die from that rear end collision. In total the cost resuliting from that would be $40.000.000.
The cost of installing a $12 plastic protection to each car sold were estimated to be higher which lead them to the decision to leave out that part.

Friedman:

Nobody can accept the principle that we put a price on a human life, but we do it all the time
The real question to be asked is whether ford should have disclosed the information about the gas tank and leave the decision with the consumer whether they want to pay $13 extra to reduce their risk of dying by ~1% → We can all reduce our risk of dying by not doing certain things, but this decision lies with us.

Trolley Problem and unethical actions

What happens here?

Change the leaver to safe 5 people but kill one other person?

What makes the decision difficult?

situation and proximity makes a differnece

there insecurance with regard to the outcome of you action

does kicking of the fat man actually stop the train?

pushing the fat man is actually physical while pushing a level is a distanced action which actually makes it easier to change the direction of the train

What role does social accpetance play when surveying decisions?

We want to belong and we adjust our opinions according to the masses.

What happend during the Milgram experiment

Distance and obedience to authorities fostered unethical actions. Combined with comittments

What are two explanations for unethical actions?

Distance to the happening

The presence of authorities

What do you need to be aware of when having ethical debates?

Look out for premises and assumptions

Identify the subject matter → Often people argue, but not about the same / key thing

3 - History of Business Ethics

Pre-Modern to industrial revolution

Overview over economic development starting pre-industrial revolution:

What is the Pre-Modern society? What are the characteristics

Trade for profit is no virture - aristotle

Religious thinking: Rich will never enter the kingdom of god

Central authority: Church and Aristrocracy → Abused rest of population by spreading the word of whealth as bad → Made it easier for the poor to accept

Low productivity

Zero-Sum Games → because of low productivity, if one person gets rich someelse gets poor → Profit at expense of others

What are plus sum games?

Interaction and cooperation / competition increases production, both parties win at least something by participating

What changed during the renaissance between 1500-1600?

Reformation of the church under martin luther 1517

first attempt to challenge to opinion of the church

Rationality replaces superstition

Coperinus → The sun is the center of the universty

Commerce and burgeosie

Buorgeoisie started challenging the status of the aristrocacy

⇒ Change in mentality from trade is bad

Hard working and being successful = God's blessing

It is your duty to contribute to the society.

What did John Locke say? What were his ideas used for?

The natural state is one of equality

Civil society is created for the protection of property

Property is based on work → What you work for you own

⇒ Those ideas were base for the declaration of independence in 1776

What are the key ideas of the enlightenment?

Catholic church is fallible

Man is born free and equal

We all posses reason, we all think, so we all have access to the truth

The king is a normal human being and not selected by god

Dare to think! Reason is King! - Kant

State is only there to protect and provide - Adam Smith

When and What happened during the industrial revolution?

In 1750 - so during the enlightenment:

Steam engine was invented

bourgeoisie of tradesman and industrialies developed

urbanization

populaiton increase

electrification

When and what caused the french revolution

1789:

abolute monarchy and corrupt leadership

unfair land distribution and societary structures

enlightenment ideas spread

infaltion

formation of national assembly

storming of the bastille

What were the reasons for the extreme produtivity during and after the industrial revolution?

What are the two books that adam smith wrote and what are his key messages?

Theory of Moral sentiments

Man has feelings of compassion and empathy

Applies to small groups

Wealth of Nations

Modern Economics

No society can flourish if the major part of society is poor and miserable

Every individual is taking actions for their own benefit, which invisibilly brings whealth and properity to the whole nation.

Supply regulated by demand. Those who offer are going to be rewarded

The invisible hand will regualte the markest

The wealth of nations is about the specific conditions of liberal eocnomy. Under which conditions is liberal economy efficient?

In the theory of moral sentiments Smith describes some of the conditions

we need to have the right sentiments, passions and emotions to be moral
especially our passions are the basis of social order

the (expresssion of) passion of one person is also experiences by other persons.

identify the right sentiments and actions by applying the principle of prudence

self interest based on proper understanding of interests, discriple and security, as well as the concern for health, fortune, reputation and happieness.
also delay gratification and think about the long term effects of your actions.

What are critical movements against capitalism?

Aristotle and Christianity

In 19th century: Socialism

Ideas formed after french revolution → Karl Marx, Lenin, Darwin, Engels

What are the commonly know advantages of capitalism?

20th century developments

Key events only from the 20ies?

When was the first world war? What key change happened in russia?

1914-1918

in 1917 the feudal system in russia was replaced by the souviet union

What caused the wall street crash 1929? What economic period followed afterwards?

causes

overproduction in agriculture
low demand due to stagnating wages
easy accsess to speculation → stock market crash lead to protectionism by each county

from 1929 till 1939 the great depression followed, eventually also being one of the causes for WW2 in 1938

What institutions were established to stabilize the world economy after WW2?

World Bank, OECS, IMF

Efforts to establish ITO failed, only GATT was established

in 1995 GATT was transformed into the WTO

How did the US become new economic power? What happened to the dominance of the UK?

Britain losing indian colonies

Iranian revolution let to loss of OIL concessions in Iran

Suez crisis in 1956 let to the loss of control of the red and mediterranian sea.

When did Milton Friedman publish his theory of shareholder management?

In 1970, so still during the golden age, but rather till the end of it.

When did the Oil Crisis happen? Together with what other effects did the european and us economy slowly lose power?

Oil crisi → 1973

there was also increasing competition from japan, taiwan and korea

to fight against decreasing economic development, public debt especially in europe grew exponentially → keynes defiic spending

Explain the concept of deficit spending

Prevent people from saving their money → Low demand causes crisis.

⇒ Government should stimulate demand through lower taxes and public spending = Deficit spending

Gov. Debt is then paid back during growth period

When did Freeman publish his theory of stakeholder management?

In 1984, so during the time of economic decline in europe and us.

he stated that for ongoing economic growth both economies need to take into account the global economic development and not just focus on profits.

When did the dot-com bubble burst?

Between 2000 and 2002.

What was Hayek's idea to deal with the Bankrupcy of the UK? How did margaret Thatcher support his idea?

leave the markets alone and get rid of the central banks

Margaret fought the trade unions and deregulated the economy.

How did clinton and bush initiate and continue the econmic deregulation in the US?

Clinton 1999: Abolishment of Steagall Act → Separation between commercial and investment banks not given anymore → Commercial banks able to gamble on the stockmarket with employee and customer savings

Bush in 2000: Lowering interest rates to 1,0

Bushes "To own your own house" plan → Enabling subprime mortages and loans

Why do some politicians believe international trade is a good idea? What is your opinion? (pros and cons?)

Pro international trade

Decreased consumer prices, as outsourcing and offshoring production often provides possibility of cheaper labor, thus reducing cost for the company and thus eventually reducing costs for the consumer
More overall utility and faster economic development. Each country specializing in certain economic sectors increases possibility of innovations. Innovations drive the economy.
The great depression following WW1 became worse after each country started to increase protectionism. → The increased international cooperation after WW2 together with the free market economy lead to a flourishing economy until the oil crisis in 1973.

Con:

Interdependence → especially supply chain. Example suez channel
Race to the bottom → Loss of quality? Loss of jobs?
Lack of rules and control → Example burning of factory hall in bangladesh

Please give examples of bad incentive structures in banking that contributed to the financial crises in 2008. How can incentive structures be aligned with the interests of the organisation?

Bad incentive strucures:

Abolishment of glass-seagull act → Allowing commercial banks to engage in stock-market trading with customer money.
Sub-Prime mortages (Bush) → lending money to people with bad credit ratings.
Manager boni through stock options → Unsustainable profit maximisation. Short term, cooking the books, market manipulation.

Better incentives that align with the interest of the organization:

Linking management boni to the success and failure of products. Needs to invest with own money in products, so if they fail they will lose their money
Require Managers to personally sign off the financial reports and link false disclosure of information to inprisonment
Postpone boni payments
UK Copo Gov code explaining that management boni should not exceed what is necessary to attract, retain and motivate management.

4 - Corporate Social Responsibility

Theories

Milton Friedman - Shareholder Management

What is the basic idea friedmans theory?

The social responsiblity of a business is to increase it's profits

Does a business have social responsibilities?

No, only people can have responsibilites, a corporation as a legal person not.

social responsiblity is the job of politics not businessses

What is the role of executives / managers towards an enterprise?

The manager is the agent of the invididuals who own the corporation. His responsiblity is to serve them.

He as an agent for the owners operats the business and all it's ressources.

What role does a manager have when it comes to "social responsibilities"?

Social responsibilities are e.g to his family, his conscience, his feelings of charity, his church, his clubs, his city, his country.

Regarding those responsibilties he is acting as a principal, deciding on his own how to spend and allocate his OWN resources.

What does it mean to say that the corporate executive has a "social responsibility" in his capacity as businessman?

it must mean that he is to act in some way that is not in the interest of his employers or other stakeholders. For example, that he is to refrain from increasing the price of the product in order to contribute to the social objective of preventing inflation, even though a price increase would be in the best interests of the corporation.

⇒ Indirectly the manager is spending somebody else's money to benefit general society.

The stockholders or the customers or the employees could separately spend their own money on the particular action if they wished to do so.

What is the reason for an executive to be elected? What happens if he conducts "socially responsibile actions?"

the executive is an agent serving the interests of his principal

This justification disappears when the corporate executive imposes "taxes" and spends the proceeds for "social" purposes.

How much expertise does an executive have on socially responsiblity measures? E.g reducing inflation?

He is presumably an expert in running his company--in producing a product or selling it or financing it. But nothing about his selection makes him an expert on inflation. → If his measures are effective and what the end-result are is not known

Robert Freeman - Stakeholder Management

What defines a sucesfull business according to freeman?

A business that creates value for customers, suppliers, employers, communities and shareholder

What is the role of a manager according to freeman?

Ensure that the interest of all stakeholders are moving in the right (positive / developing) direction → find an intersection of interest so that everyone benefits

How does the role of a manager change when a firm is transitioning from simple familiy owned to separation of ownership?

If family owned the production process is rather simple

With separation of ownership and development of the firm the manager is forced to pay attention to all the owners and new employees.

What are the elements of freemans stakeholder map?

What is the difference between primary and secondary shareholders?

Primary → Anyone direcly affected or directly involved with the company

Secondary → Anyone indirectly affected by the actions of the company. Broader society, Government, media and academics, ...

What are problems with stakeholder management?

Information and time consuming

Often time and information are not available and it is also not easy to communicate to all the stakeholders

finding interest intersections is not always possible

Porter and Kramer - Creating Shared Value

According to porter and kramer, what is the problem with the capitalist system in recent years?

capitalist system and efforts to embrace CSR actually caused major social and enviornmental problems

What solution do they recommend?

create shared value → use businesss to solve social problems

What is the main reason for the increased social and environmental damage?

increased globalisation and thus race to the bottom

Social Business

What is a social business?

Business for the purpose of solving social problems

human being are two dimensional → earning money and the will to give away at the same time

What is are the reasons behind the statement "Serving shareholder doesn't mean putting profit above all else"

Corporations became so powerful in recent years that they are able to influence overall social developments

Maximizing profit does not contibute well to that necessarily and shareholders value more than just maximizing market share

both shareholders and citizens start to decide on how companies should behave not only with their wallet but also with their values (e.g buying organic instead of cheap)

What might companies do to determine the values of their shareholders and customers? What might be a problem here?

polling members on some fundamental choices and values and then make decisions accordingly

challenge: not all corporation are facing obvious morally relevant choices.

Practical Aspects

What are some additions that were made to the millennium goals with the 2015 sustainable development goals?

clean water

affordable and clean energy

industrial innovation

sustainable cities and communities

responsible consumption and production

climate action

protect the life below water and life on land

What does Sustainability mean? What CSR Theory is it related to?

concept developed due to development of enviormental problems on top of society problems → CSR alone is outdated

Freemans approach is realted → he looks for long term sustainable development and survival → economically and enviormentally

What is ESG?

Enviromental, social, governance

UN Global Compact

What is the role of the united nations global impact?

CRS plattform asking cooperating companies to embrace universal principles and partner the united nations

What is Blue Washing?

companies claiming to comply with the UN standarts but they are actually not

What was interesting about Kofi Annans speech in 1999 looking at the historical context?

he already saw that corporate world is highly productive, but there are also many loosers

we need to help those and take care of their interest
make sure that there is social stability on either side

What are the four key goals of the global compact?

Protection of

Human rights
Environment
Labor

Fight against

corruption

What are the two principles related to protection of human rights?

What are the four principles related to the protection of labor?

What are the three principles related to the protection of the environment?

What is the legislative and executive power of the global compact?

ISO - International Organization for Standartdisation

What does the ISO do?

250 comities develop standarts about goods and services and should faciliate interantional trade and cooperation

What role did WW2 play for the founding of the ISO?

WW2 and the great depression in the 30ies cause a lot of protectionism and separation between the countries.

The ISO's goal was to reunite international trade

Global Reporting Initiative

What are the three main principles behind correct CSR reporting in the EU?

disclose material information

information that if omissed or misstated could potentially lead to false decisions made by the readers of the report

fair and balanced view

disclose both good and bad things in the same weight.

use umambiguous language

Comprehensive but concise

information on all three / four goals of the global compact

however sticking to only relevant insights for each

What is disclosed in the 101's of the GRI report?

Defining the context for the GRI report

defining the stakeholders

defining the sustainability issues

defining materiality in the context of that specific company

defining where comply or explain was used → why could there be some omission in the report

What is disclosed in the 102's and 103's?

Explaining the general strategy, the ethics and integrity and governanace of the company.

required is a statement from the senior decision maker about the correctness of the report.

What are the 4 subcategories of the 201's?

Economic performance:

Economic value generated

Revenue

Costs → Wages, operating costs, capital costs (interests, loans,...)

Financial implications and risk / opportunities due to climate change

those risks and opportuinity must have substantive chance of impact on operations, revenue, expenditure

Benefit plan obligations

corporate pension plan → agreement company and employees to provide funding for employees rentirement → payments aside from salaries

Financial assistance received from the government

What are the categories to report in the 300's?

Environmental issues with:

Energy Consumption inside

Energy Comsumption Outside

Energy intensity

Reduction of energy consumption

amount reduces

type of reduced energy

not reduction resulting from reduced production amounts but only for sustainable new methods

Reduction in energy requirements for the production

What are the categories to report under the 400's?

Social Aspects:

New employee hire and employee turnover

rate of new hires by age, gender and region

employee turnover → % of companies workforce voluntarily leaving the company in one year

Benefits provided

healthcare

disability and invalidity coverage
parental leave
rentirement

stock ownership

Labour / Mangement Relations → Communication between representatives and management

Occupational Health and Safety

How many injuries

Disease Rate

Lost Days, Absentee Rate

Training and Education

Career development

How much and gender distribution? Employee Category

Diversity and Equal opportunity

percentage of individuals in management (Gender, age, minorities)

Equal renumeration between woman and men

Supplier Assesment for Labour Practises

do suppliers coply with UNGC?

how many screened?

Supplier human rights assesment

Percentage of new suppliers that were screened using human right criteria

5 - Corporate Governance

What is Corporate Governance?

Rules on how to govern a corporation in a responsible manner

Part of the GRI, in the section of describing the company and it's management / operations

What should be organized within a company? And Why?

Responsibilities

checks and balances between management and board of directors

⇒ Avoid mismanagement, interest conflicts, wrong incentives, fraud ...

What is comply or explain?

either comply with all the rules, or if you break them, have a good reason why you broke them

What is the principal agent problem in this regard?

Principal gives the agent a task to fulfil. The agent is better informed than the principal. Asymmetric information

Shareholder is principal, agent is management?
shareholders are not owners but rather investors

What is the basic organization of a public company?

What is the problem with management and board of director control?

What are conflicts of interst on the supervisiory board level?

every member of the board shall only observe companies best interset not personal interests

don't open business opportunities to themselves to which actually the company is entitled

any conflicts are to be reported during the gerneral meeting

non-temporarly material interest conflicts of board memebers result in loss of board mandate.

What is the General Shareholder Meeting and what happens there?

One a year the management submits fiscal statement for al lshareholders

each one can speak

shareholders elect supervisory Board

How does the separation of control work in germany?

Dual board management system:

management board → executive
supervisory board elected by shareholders

if more than 500 employees: here at least 30% employee representatives need to be
supervisory board elects and discharges members of management board

What is the Financial reporting council's definition of corporate coveranace?

The purpose of corporate governance is to facilitate effective, entrepreneurial and prudent management that can deliver the long-term success of the company

What is the difference between a regualted and deregulated market?

Regulated: One supplier and no consumer choice → typicall for public utilities

Deregulated: Open competition

Enron

In what ways did Enron violate against the nowadays established principles of Corporate Governance?

What was enron? What did they do?

Started as gas extractor company. Later expanded into transmission and marketing as well as plactic industry

Who was Kenneth Lay? What is his background?

before enron responsible for energy policy at federal level

was CEO of different gas companies

How did the vertical and horizontal expansion look like?

Relevant concepts: Vertical Integration (Extracting, Pipelines, trading => control over the whole value chain) Horizontal Integration: Gas, oil, electricity (gas supply and trading, insurance, retail, banking for gas trading)

Why did Lay and Skilling want to deregulate the market for electricity?

From One supplier and little consumer choice to

→ Deregulation: Open market with many supliers

Why did enron lose money?

Failed investments in india → Indians coudn't affor the energy that enron produced

What did Andy Fastow create to tackle the loss in profits?

2000 partners companies

Export debt from india to those partner companies

only listing profits from india in balance sheet

As this failed over time, what did the management do?

The managers sold of their shares and told small stakeholders to invest their savings into enron

After the accounting firm arthur anderson got into consulting, what conflict of interest occured?

higher profitablilty of a firm means that they are likely to spend more money on cusulting services

Temptation for Arthur Anderson (auditing) to “cook the books”, i.e. make them look more profitable. High profitability => they can afford more Arthur Anderson consulting.

When enron was in trouble, what did Anderson do?

Started shredding documents about the fake numbers

went down in 2002 complety

World Com

What did World Com do during the Dot Com bubble?

Agressively buy up overrated but poor performing internet firms

What did World Com hide their missed targets between 1998 and 2002?

recorded expenses as investments and thus assets

long distance telecommunication line and related maintenance expenses were capitalized as asset → Accounting fraud of 107bn

Who is to blame for that accounting fraud? (3 main possibilities)

Accountants

Wall Street and their pressure for a booming economy and big earnings

Managers and their desire to receive highly profitable stock options → artifically driving the price of those options up.

What is the problem with providing stock options as incentives for managers to perform?

growing share prices mean instant profit

falling share prices do not really affect the managers money

just right before the manager is to receive his or her shares, they could cook the books and drive the stock price up or let the CEO buy stock to drive up the price

This is not sustainable and the risk for the mangers is way to low
If they believe they can manage the company and make it grow, they should be willing to take risks. If the company goes bankrupt, => lose their investment

What are solutions for better incentives?

managers to be required to invest in the products they are producing and selling

if these products fail, they loose all their investment

What did the FASB propose in 1993? What were reactions and what happend?

stock options should figure on the accounting statement as an expenditure

if a company sells shares to the CEO below their market price, the company is giving the CEO the price difference => that is an expense

protest from small IT firms in silicon valley, as they claimed that stock option providing helped to attacked brilliant minds

with this regulation they couldn't affort providing options anymore, as profits are slashed by 60%

the regulation was dismissed by the senate in 1998.

What did the SOX act as a reaction to enron and worldcom require from 2002?

= Mandatory accounting requirement:

Managers are personally responsible for correct information in annual reports

CEO must sign tax return

off-balance sheet transactions (subsidary firms) must be recorded

Auditor rotataion (all 3 years) → new accounting firm to make sure there is no corruption between company and accountants.

not realistic because: there are high starup costs between a new firm and a company. It takes time to get to know the firm → Understanding all the structures is hard

If you don't comply, you can end up in prision

Simens

How did simens justify corruption?

Corruption was necessary to consolidate after the effects of WW2 on the company.

Where did they hide corruption payments on the balance sheet?

Useful expenses (Nützliche Aufwendugen)

How and when did bribery become illegal for Simens

Since 1977 bribery of foreign officials was forbidden to US companies

Simens listing on the NYSE required the company to comply with the US FCPA

Before that german rules were allowing bribery for simens.

After bribery was forbidden, what did Simens do?

They continued practising corruption in third world countries but unwinded (abwickeln) the payments via secret bank accounts

Managers asked loyal employees to open up new bank accounts in switzerland

How was the continuing scandal discovered?

Midlevel executive Siekaczek orgaines transfer of 40-50 Mio € to secret swiss bank accounts.

got arrested for that → however discovered that his loyality was abused

confessed bribery

German Corporate Governance Code

Is the compliance with the DE CGC required?

No, not mandatory, however if no complicance is practised, explanations needs to be provided.

This priciple allows for essential flexibility to companies so that they can meed specific industry or company specific needs.

What are the 7 things that are regualted by the CGC?

Management and supervision of and within the entire company

Appointment of the supervisory board

Composition of the supervisory board

Procedures within the supervisory board → how does supervision work?

Deal with conflicts of interest

Transparancy and external reporting

Renummeration policy of management board and supervisory board

What things does the supervisory board need to consider when determining the management board member rennumeration?

Tasks and responsiblities

Economic situation of the company

Salary of other management board members and employees in general

Focus on sustainable growth of the company

UK Corporate Governance Code

What are the three ways in which the board ensures long-term sustainability (principle 1)?

Entrepreneurial Board promoting long term sustainability through three main compoenents

Promote and establish a purpose, values and strategy

Manage ressources necessary to achieve that strategy

Establish a framework of risk mamagement to address problems within that strategy

What are the two parties the board should engage with?

Shareholder / Stakeholders → Should be able to discuss, engage and participate in strategy management.

Workforce / Employees → Should be able to easily raise matters of concern

How should the board deal with conflicts of interest?

take action to identify and manage conflicts of interest

make sure that influence from third parties does not compromise or override independent judgement

What are the three main parties with respect to principle two, devision of responsibilities?

The chair → leading the board and is responsible for overall effectiveness in directing the company

The board, with

Executive directors
(independent) non-executive directors → providing contructive challenge, strategic guidance and offer specialist advice

Company secretary → accompanies the board to ensure effective policies, processes, information flow, and resource management

What 3 things should board appointments be based on?

A formal, rigorous and transparent procedure that is

Based on merit and objective criteria and

should promote diversity of gender, social and ethical backgrounds, as well as cognitive and personal strenghts

On what 4 criteria should the board performance be assed on?

Composition

Diversity

Effectives of collaboration between members

Individual assessment of each members effectiveness

How can a company ensure the independence and effectiveness of internal and external audit?

establishment of formal and transparent policies and procedures

satisfy itself on the integrity of financial and narrative statements

How should the assessment of a company's presented to the public?

In a

Fair

Balanced and

Understandable

Way

Describe 2-3 principles for good corporate governance and explain why they are important with reference to Enron

An active, independent and professionally qualified Board is critical to effective corporate governance. Enron did not separate the CEO and Chairman of the Board role, they were not particularly diverse, with only one woman out of seventeen seats

In 1999, Enron’s board waived conflict of interest rules to allow chief financial officer, Andrew Fastow, to create private partnerships to do business with the firm

The accounting firm Arthur Anderson he was working for also offered consulting services. Thus they had the conflict of interest of cooking Enron's books so that they would buy more consulting services while on the other hand it was their job to accurately represent the true financial position.

6 - Corruption

What is corruption?

Misuse or abuse of power for self-interest rather than for the shareholders

What are the main reasons for corruption?

Institutionalisation

Environmental: Increased competition, stricted law enforcements and thus eventually poor performance

Management: Determines level of internal competition and level of enforcement

Rationalisation

Internal sensemaking processs

illegality and immorality of actions are relitivized with reference to different external circumstances

pointing fingers at others („othering“)
claiming that no one is harmed
profitability of the company should be focus / needs to be ensured

Socialisation

Intergration of newcomesers with the wish to belong to the group

What are measures against corruption?

Law enforcement → legal institutions

Management dedication to compliance

7 - Digitisation

What are the 5 main issues of digitization and ethics?

Increased surveillence

Danger of automatization and replacement of human labor

Uncontrolled use of artficial intelligence

Problems with online communication.

Emergence of big tech monopolies due to lack of rules

Why is privacy connected to freedom?

People act differently when they are being observed. Everyone has a right to be alone.

What role does surveillance play in the modern online economy/politics?

Manipulation of consumers -> strong influence on choices, decisions (e.g. CambridgeAnalytica). .. And identification of future needs => higher prices

Your digital footprint can be used against you.

Your data is used for tailored political propaganda

What are social consequences of automation?

Unemployment because jobs are replaced → decreasing purchasing power of the general population

Shift in power distribution → the one who controls the robots controlles everything

Higher entry qualifications on job environmen

⇒ Generally icreased social segregation

What are pros and cons of online communication?

What are potential problems with artificial intelligence?

What are problems with big tech companies and monopolies?

Big tech companies implement their own rules

almost no chance for small companies to enter the market

price fixing by big companies to control compeititon and minimize chance that small companies can enter the market

Field of digitisation is hard to regulate, as it is new and so broad → no official authority wants or can take responsibility and make the rules,