Deck 22: Ethics and Organizational Architecture

Question 1

The text notes that many firms that use animals in production or advertising adopt the animal treatment standards of the American Society for Prevention of Cruelty to Animals. Why do companies adopt a professional group's standard of behavior?

Answer 1

Professional groups such as ASPCA are well respected advocacy groups. Having the stamp of approval from such professional groups can be a practical way to deflect criticism from the press or, ultimately, from customers.

Question 2

Ethics might be defined as virtuous behavior. Clearly, over time, a market economy perceives wealth creation as one form of virtuous behavior. What can go wrong in this process?

Answer 2

Wealth creation could involve activities that violate the law. Fraud and other illegal activities reduce the welfare of others and reduce the efficiency of the marketplace. Reputational concerns may reduce illegal activity but are not usually a good substitute for well functioning legal systems in promoting efficient market systems.

Question 3

Economist Jack Hirshleifer notes that, "Altruism economizes on the costs of policing and enforcing contracts." Since economics assumes that people act in a self-interested manner, what could he possibly mean?

Answer 3

Increased trust between contracting parties reduces the level of expected opportunistic behavior and make contracts more attractive. Fewer contingencies need be written into contracts and monitoring costs decline. As a result, more contracts are made, and gains from trade increase.

Question 4

Ralph Nader has long argued that large corporations in oligopolistic markets should use their vast productive powers to redress social ills. Implementing this policy may put the company:

A) in conflict with the government.
B) in conflict with its trade unions.
C) in conflict with the process of wealth maximization.
D) on a list of companies disliked by religious groups.

Question 5

Ethics codes in corporate life tend to emphasize (a) compliance with laws and regulations, (b) honesty and integrity, and (c) avoidance of conflicts of interests. Which one is the most important in today's world? How does economics help in understanding its importance?

Question 6

Martha Stewart seems to have made a bad decision concerning the use of insider information in selling ImClone stock. The resulting negative publicity on the issue caused value of her corporation, Martha Stewart Living, to fall by almost half. This example is supposed to show that:

A) insider trading can pay off in certain circumstances.
B) ethics and wealth creation are not linked in any way.
C) stock markets are fickle stewards of wealth.
D) ethics and wealth creation are closely linked.

Question 7

Ethics can be defined as:

A) virtuous behavior.
B) following the letter of the law.
C) employing people with minority status.
D) a philosophy that believes the "ends justify the means."

Question 8

What are some mechanisms for encouraging ethical behavior?

Question 9

If a manager complies with all laws and regulations, then he can be confident that he:

A) is completely ethical.
B) is fairly unethical.
C) has begun to deal with ethical issues.
D) will never run into ethical problems at work.

Question 10

Citigroup, of which Solomon is one division, was found guilty of unethical behavior in 2003. The separate divisions of brokerage, investment banking, and insurance were coordinated for the benefit of the company, but to the detriment of external investors. This scandal followed the one in the 1990s. Discuss the issues of organization architecture that can lead to recurring corporate scandals like this. What possible changes in organizational architecture might reduce the temptation for managers to cheat in the process of wealth creation?

Question 11

Business norms:

A) are standards of accepted behavior.
B) are the same as equilibrium prices.
C) are equivalent to contract laws.
D) somewhat like business forms.

Question 12

Compensating differentials for employees can be seen as one measure as adjusting for:

A) wages being paid at market rates.
B) problems of ethical conflict.
C) not pursuing wealth creation as a corporate goal.
D) being a risk-taking entrepreneur.

Question 13

The key mission of a firm's managers or owners is:

A) ethical behavior.
B) following all laws of regulations.
C) maximizing the value of the firm.
D) hiring a large number of employees.

Question 14

In the United States, there are numerous organizations - some sponsored by business and others that are independent of business - that monitor the behavior, the product quality, and the service provided by businesses. What role do these organizations have in the process of promoting ethical behavior?

Question 15

Ethics is about making good decisions. Sometimes it is hard to see what economics has to do with ethics until you remember that economics is often defined as the:

A) science of choice.
B) key branch of theology.
C) disciple with high moral standards.
D) area that understands nothing about ethics.

Question 16

Economist Adam Smith noted that in trade, different ethical standards seem to prevail in different situations. In a market environment where customers will never be seen again, there is a tendency towards:

A) market inefficiency.
B) sellers cheating on price or quality.
C) supply to not equal demand.
D) increased honesty in transactions.

Question 17

Economist Milton Friedman argued that the goal of corporations should be "to make as much money for its owners as possible while conforming to the basic rules of society." What does this mean in terms of corporate ethical behavior?

Question 18

Economist Milton Friedman argued that ethical behavior is really the same as:

A) unethical behavior.
B) wealth maximization.
C) wealth minimization.
D) ignoring the basic requirement of a market economy.

Question 19

Corporate responsibility may require changing the mission of the company to a 'constrained' wealth maximization. Is it possible for a few firms in the marketplace to shift their objective functions in this way? Why?

Question 20

Johnson & Johnson, a personal care products company, has a four-tiered credo or mission. In order, it states its relationship to customers, employees, communities, and, finally, stockholders. This credo seems to increase the ethical behavior of this corporation. Why doesn't it conflict with wealth creation?

Question 21

Many businesses face the same customers over and over again. Repeat business generally:

A) increases ethical behavior toward customers.
B) reduces ethical behavior toward customers.
C) has no impact on ethical behavior.
D) is the sign of a poorly-run business.

Question 22

Corporate ethics problem is basically:

A) a problem of controlling CEO salaries.
B) a problem of controlling shirking.
C) a problem of controlling opportunism.
D) a problem of controlling incentives.

Question 23

To design a value-increasing architectural system we need:

A) top management to assign decision rights, middle management to evaluate performance, and an external agency to sanction unethical behavior
B) a clear partition between assigning decision rights and evaluating performance from sanctioning unethical behavior
C) internal consistency between assigning decision rights, evaluating performance, but sanctioning unethical behavior must be left to top management
D) internal consistency between assigning decision rights, evaluating performance and sanctioning unethical behavior

Question 24

Consumer Reports and other organizations rank companies on the quality of their products and the reliability of their services. These companies provide:

A) an incentive for corporate cheating.
B) an internal audit function for corporate honesty.
C) useless information.
D) an external check for corporate honesty.

Question 25

The optimal amount of shirking or opportunistic behavior by an agent:

A) can be determined apriori.
B) is less than zero.
C) is zero.
D) is greater than zero.

Question 26

Incentive problems in a business can easily cause:

A) wealth maximization.
B) employees enhancement.
C) risk reduction.
D) ethical problems.

Question 27

We know that:

A) the terms corporate culture and corporate ethics are well understood.
B) the term corporate ethics can be well articulated, but not corporate culture.
C) the term corporate culture can be well articulated, but not corporate ethics.
D) the terms corporate culture and corporate ethics are elusive.

Question 28

Which of the following will control incentive problems in a corporation?

A) Managers to check on their employees email and other activities closely.
B) Managers to force employees to adopt higher and stringent ethical standards.
C) Managers and employees to adopt pre-defined ethical standards.
D) Managers and employees to adopt higher and stringent ethical standards.

Question 29

If managers are rational, they will only cheat - engage in unethical behavior - when:

A) laws allow unethical behavior.
B) the expected gains are greater than the expected costs.
C) the expected costs are greater than the expected gains.
D) the expected gains are equal to the expected costs.

Question 30

Warranties:

A) are not important costs in the business world.
B) leave contracting costs unchanged in the business world.
C) increase contracting costs in the business world.
D) reduce contracting costs in the business world.

Question 31

Information asymmetries in constructing a contract between buyer and seller can lead the seller to:

A) try harder to satisfy the consumer.
B) shirk.
C) increase ethical behavior.
D) make a perfect contract.

Question 32

That corporations have obvious and simplistic written code of honor only to defend themselves from legal action is:

A) the correct view.
B) the most common view.
C) a perfectly understandable view.
D) a cynical view.

Question 33

"The goal of the corporation is to make money for its owners" is viewed:

A) by the shareholders as moral.
B) by many professionals as immoral.
C) by many advocates of corporate ethics as moral.
D) by many advocates of corporate ethics as immoral.

Question 34

Milton Friedman's view about the corporate social mission:

A) acknowledges that shareholders are likely to use some of their wealth for altruistic purposes.
B) assumes shareholders are not rational.
C) advocates that corporations engage in philanthropic activities.
D) applies only to U.S. corporations.

Question 35

Contracts ensure:

A) alignment of interests of managers, employees and top management.
B) alignment of interests of managers and shareholders.
C) alignment of interests of employees and shareholders.
D) alignment of interests of managers, employees and shareholders.

Question 36

A seller warranty is often offered to a consumer to:

A) assure the consumer that cheating will not occur.
B) bring attention to the cheating in that industry.
C) increase the risk assumed by the consumer.
D) increase the cost of doing business.

Question 37

Many codes of ethics attempt to alter or reinforce standards of behavior. An economist wouldn't argue with the codes but would probably note that:

A) the codes need to be posted in every office to be effective.
B) codes will never in any circumstances help.
C) designing an organizational architecture with proper incentives is more important.
D) the laws of supply and demand usually require that codes of ethical behavior are tertiary artifacts.

Question 38

Recently the White House press secretary, after serving for three years, wrote a book criticizing president Bush's policies in the middle east. Professionals in the field are of the view that the press secretary was:

A) totally clueless.
B) being opportunistic with regards to making quick bucks in an election year.
C) well within his rights to express his opinion to persuade the public.
D) inconsistent regarding professional code of journalistic ethics.