Managerial Economics and Organizational Architecture, 5e Managerial Economics and Organizational Architecture, 5e Chapter 22: Ethics and Organizational Architecture McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc All Rights Reserved Managerial Economics and Organizational Architecture, 5e Ethics and Organizational Architecture • Ethics and organizational architecture are closely related • Corporate performance evaluation systems, reward systems and assignment of decision rights can be designed to encourage ethical behavior 22-2 Managerial Economics and Organizational Architecture, 5e Ethics and Choices • Individuals choose among alternatives to maximize their well-being • Business ethics seeks to proscribe behaviors deemed inappropriate for firms – Taking gifts – Bribing government officials – Misrepresenting data – Discriminatory practices – Boycotting third parties 22-3 Managerial Economics and Organizational Architecture, 5e Business Ethics and Corporate Policy • What is ethics – No consensus – Corporations are not ethical, individuals are – Whose interests managers serve? 22-4 Managerial Economics and Organizational Architecture, 5e Value Maximization • Economic Darwinism – By maximizing a firm’s value, all stakeholders can share a bigger pie – Only those firms that are able to produce quality products at low costs will survive • Market failure and regulation – Result in misallocation of resources – May result in regulation 22-5 Managerial Economics and Organizational Architecture, 5e Value Maximization • Compensating differentials • Corporate Social Responsibility – Firms should engage in activities that fall into this category up to the point where the marginal benefit equals the marginal costs 22-6 Managerial Economics and Organizational Architecture, 5e Corporate Policy Setting • In dealing with questions with potentially contentious ethical implications firms – Should use input from diverse stakeholders – Be aware of different legal standards in countries – Understand business norms and standards – Assess the public’s reaction 22-7 Managerial Economics and Organizational Architecture, 5e Mechanisms for Encouraging Ethical Behavior • Ethical lapses often arise from conflicts of interest • The following help mitigate these problems – Repeat sales – Warranties – Third-party monitors – Disclosure – Ownership structure 22-8 Managerial Economics and Organizational Architecture, 5e Contracting Costs: Ethics and Policy Implementation • Trade-offs between monitoring and shirking – Warranties reduce risk • Prices customers pay will be lower if shirking is expected • Altruism economizes on the costs of policing and enforcing contracts 22-9 Managerial Economics and Organizational Architecture, 5e Codes of Ethics • How firms control ethical behavior? – Have employees voluntarily adopt standards – Write contracts that align interests of those involved to behave ethically – Write codes of ethics and provide training • Why are they effective? – Altering preferences – Altering incentives 22-10 Managerial Economics and Organizational Architecture, 5e Codes of Ethics • Education – Employees may uncertain of ethical standards • Corporate culture 22-11 .. .Managerial Economics and Organizational Architecture, 5e Ethics and Organizational Architecture • Ethics and organizational architecture are closely related •... of different legal standards in countries – Understand business norms and standards – Assess the public’s reaction 22-7 Managerial Economics and Organizational Architecture, 5e Mechanisms for Encouraging... systems, reward systems and assignment of decision rights can be designed to encourage ethical behavior 22-2 Managerial Economics and Organizational Architecture, 5e Ethics and Choices • Individuals