Ethics and decision making

1. Ethics and decision making Fred Wenstøp Fred Wenstøp

2. Overview • Foundations of ethics • Virtue ethics • Deontological ethics • Consequential ethics • History of managerial consequential decision analysis • Hume • Drucker • Raiffa • Freeman • Kaplan and Norton • Jensen Fred Wenstøp

3. The US objectives for the war To free the peoples of Iraq To prevent future spread and use of weapons of mass destruction To limit international terrorism To secure oil supply (maybe) The UN rule against the war Violation of the right’s of Iraq G.W. Bush’s possible motive for the war To right the wrongs of his father Consequential ethics The war is ethical because the intended consequences are good and weigh less than possible side-effects Deontological ethics War is wrong because it violates the UN Rights of Nations, no matter how good the possible consequences are Virtue ethics Make amends for own offence Be proud of himself and family Ethical mindsets: the war in Iraq Fred Wenstøp

4. Virtue ethics (Dydsetikk) Aristotle (384 –322 BC) Corporate core values Deontological ethics To deon = duty Immanuel Kant (1724-1804) Rule based management Teleological ethics Teleos = goal Consequential ethics Jesus David Hume (1711-76) Utility theory Management by objectives The balanced scorecard Stakeholder theory Ethical foundation of decision making Fred Wenstøp

5. Virtue ethics1 of 3 • Virtues and vices (dyder og laster) • tell the character of a person • describe action and feelings • Aristotle • Virtue promotes human flourishing • Several dimensions of attitude, depending on circumstance • A virtuous person is balanced, neither deficient nor excessive in any dimension Aristotle (384 –322 BC) Fred Wenstøp

6. Virtue ethics2 of 3 Fred Wenstøp

7. Virtue ethics3 of 3 Fred Wenstøp

8. Deontological ethics • Duty based ethics • Actions posses moral worth only when we do our duty for its own sake, not because of its consequences • Kant’s categorical imperative • “Act only on that maxim through which you can at the same time will that it should become a moral law!” Immanuel Kant (1724-1804) Fred Wenstøp

9. Kantian rules • UN Universal Declaration of Human Rights, 1948 • The rights are considered absolute regardless of their consequences. • UN Global Compact CSR-rules • nine principles for good corporate conduct in the areas of human rights, labour and the environment • UN Rights of nations • In the UN covenant on civil and political rights • Examples • the right to self determination • the right to own, trade, and dispose of their property freely, and not be deprived of their means of subsistence Fred Wenstøp

10. Rule based Management The ideal bureaucracy “The dominance of a spirit of formalistic impersonality, sine ira et studio, without hatred or passion, and hence without affection or enthusiasm. The dominant norms are concepts of straightforward duty without regard to personal considerations. Everyone is subject to formal equality of treatment; that is, everyone is in the same empirical situation. This is the spirit in which the ideal official conducts his office.” Max Weber (1864-1920) Fred Wenstøp

11. Logic of appropriateness • J. G. March (1994): • How Decisions Happen • Descriptive Decision Theory • Rule Following Decision Making • When individuals and organizations fullfill identities, they follow rules or procedures they see as appropriate.. • Neither preferences nor expectations of future consequences enter directly the calculus Fred Wenstøp

12. Teleological ethics • If the intention motivating the action is good in terms of the ultimate goal being pursued, then the action itself is ethical • Teleological (or consequential) ethics focus on goals rather than actions • Spokesmen • Jesus • Hume • Jeremy Bentham • John Stuart Mill Fred Wenstøp

13. Matthew 12, 10-12 “And behold, there was a man which had his hand withered. And they asked him, saying, is it lawful to heal on the Sabbath days? that they might accuse him. And he said unto them, What man shall there be among you, that shall have one sheep, and if it fall into a pit on the Sabbath day, will he not lay hold on it, and lift it out? How much then is a man better than a sheep? Wherefore it is lawful to do good on the Sabbath days. ” Fred Wenstøp

14. Hume’s law • There are no intrinsic good or evils • Reason cannot be the basis of morality • Reason can show us the best way to achieve our ends, but it cannot determine our ultimate desires • “‘Tis not contrary to reason to choose my total ruin, to prevent the least uneasiness of an Indian” • Hume’s law • There is a gulf between facts and values, between “is” and “ought” • We must formulate objectives and judge consequences accordingly David Hume (1711-76) Fred Wenstøp

15. Rationality1944 • John von Neumann and Oscar Morgenstern • Formalisation of the theory of utility • Rationality defined as consistency through axioms • The principle of rationality as utility maximisation • One dimensional theory of utility John von Neumann 1903 – 1957 Fred Wenstøp

16. Management by objectives1954 • Peter Drucker • The Practice of Management • Introducion of MBO • specific performance objectives • jointly determined by subordinates and their superiors • progress toward objectives periodically reviewed • rewards are allocated on the basis of this progress • MBO was universally accepted • flourished in the 1960s and 70s Peter Drucker Fred Wenstøp

17. Multi Criteria Decision Making1976 • R. Keeney and H. Raiffa: • Decisions with multiple objectives. John Wiley & Sons • Dichotomy between facts and values • Good decision analysis requires the separation between objective facts and subjective values • Multi-objective decision making • Formalisation of weighting Howard Raiffa Fred Wenstøp

18. R. Edward Freeman Value creation for stakeholders .. or is it stockholders ? Corporate governance problematic Stake Holder Theory1984 Fred Wenstøp

19. The Balanced Scorecard1996 • Kaplan & Norton • Translating strategy into action: The Balanced Scorecard. Harvard Business Press. • The focus is on performance drivers • Early signals • Financial measures too slow • Dynamic consequence analysis needed • No single company objective function Fred Wenstøp

20. Enlightened stakeholder theory2001 • Michael C. Jensen: Value maximization, stakeholder theory, and the corporate objective function. J. Applied Corporate Finance, 14 (3), 2001 • Same as Freeman’s stakeholder theory, but … • maximization of the long run value of the firm is the basis for requisite tradeoffs between stakeholders Fred Wenstøp