Analogy is false and dangerous:
1. In poker deception is known, standard strategy. Not rly so in business
2. Poker/game is optional avoidable. Business activity not
3. Consequences of poker game relatively minor, business not.
“Basis for deciding right and wrong” in course pack
1. laws: yes but are all the laws correct?
2. religion: which? What implied? Persuasive to others?
but some people don’t have any religion and some religions conflict with each other.
compare alternative actions for consequences for all persons affected positive and
negative (benefits and harms), and degree/extent.
Choose the option that maximizes benefits, minimizes harms, “greatest happiness for the
Doing what’s best for the most people, cost benefit analysis. Everyone counts not one
person counts more than the other,
Utilitarianism cares about the consequences regardless of intent.
1. laws: yes but are all the laws correct?
2. religion: which? What implied? Persuasive to others?
but some ppl don’t have any religion and some religins conflict with each other.
3. Do whatever society, culture accepts?
=relativism: no such thing as right?
Philosophical sources: ethical theories
1. utilitarianism (john stewart mill, 1860s)
compare alternative actions for consequences for all persons affected
positive and negative (benefits and harms) and degree/extent
choose option that maximizes benefits, minimizes harm.
factual and measurable
flexible, not fixed rules realistic; moral tradeoffs and balances unavoidable
intentions don’t matter, only results do?
is everything comparable?
Look at the situation, you will know whether to do something or not by the act. No
looking at consequences.
Ex. I intend to break promises when convenient. Everyone can/should break promises
Scenario: if u had the chance to shoot the 2 911 plane in order to save the people in the
2 world trade building.
Virtue theory is a reaction of utilitarianism and deontology.
Rules and goals require judgment/interpretation
Business and social life not so different.
Disadvantages are: it is unclear, adults have already ideologies formed so it is hard to
S&L crisis (reading) 19661989
Beginning of the whole series of our economic and political problems started in the
housing sector in the US the subprime crisis/mortgage crisis. Before that it did happen,
and the lessons were not learned, so that time it happened on a larger scale and with more
consequences on an economic and political scale.
The subprime crisis: giving out mortgages to purchase loans to people ewho didn’t have
proper credit ratings to justify a mortgage. Mortgages given out to people who do not
satisfy the requirements of having a loan
Prime rate is lending the best rate to the bestreliable customers (opposite of sub prime)
Subprime mortgages, credit crunch, global recession, 20072008
collapse of housing market
major push by financial institutions to lend out more money for mortgages, get the
money, use it for investing. Propaganda “everyone should own their own home” the American dream. But not all these people were able to have this loan. And it depends on
whether interest rates stay stable or start to rise.
they provided loans to people who were not credit worthy, institutions start off these
people with low interest rates and then they rise. Institutions were not concerned about
how serious that would be. And there was fraud as well. An incentive for people to buy
mortgages was that housing prices were going up, so they thought they would have an
asset whose value would rise. But housing prices didn’t rise because too many houses
were built not enough ppl to buy them. Value went down. people were left with an asset
whose value decreased. Worth of the home was less than worth of the mortgage.
Financial institutions were not getting their interest payments because people couldn’t
afford to pay it.
securitization, mortgages bundled together and sold as investment
financial institutions bundled their different incoming investments to make it more
valuable (making them worth hundred of millions of dollars) and they chose to sell them
in order to make money. And this was lowering the worth of all the bundled mortgages.
bankruptcies, bailouts, takeovers of financial institutions, bear stearns,
lehman brothers, merril lynch, citigroup, AIG etc foreign as well
collapses were so rapid and serious. Money freezes in large financial institutions. Other
businesses are no longer able to get loans because the financial institutions cannot afford
do give them.
credit crunch at financial institutions stuck with bad debt “toxic assets”
spread to mfg sector from wall street to main street GM, Chrysler, etc
So the business sector suffers as well. Businesses cant get loans to continue their business
but also they themselves cant give loans anymore to their customers which was a major
part of their regular transactions.
Many people lost their homes, or left their homes because they couldn’t afford to pay the
mortgage and selling the house doesn’t help.
Cost and bailout was 153billion, govt/US taxpayers cover 123.8 billion.
This could be similar to what happened in 20072008, economic crisis.
Adam smith0 invisible hand, free market
Ethial issues with economic crisis:
Reckless, overly risky transactions, with consequences for others not just yourself
(employees, buyers of homes or investments, taxpayers, companies in trouble but
bonuses to execs.
Securitization instruments, tooo abstract, uncalculable worth
Insufficient govt regulation in housing sector
Insufficient govt regulation in financial sector Some enterprises too big to fail… so too big to exist? This is against free market
economy, which is that if something is not viable enough it should fail.
(Anti monopoly legislation called Sherman antitrust legislation in US)
In housing and financial transactions: deception, fraud
jp morgan chase, fraud allegation, kept investors in dark about mortgagebacked bonds
specifically by bear sterns, investment bank taken over by JP in 2008 (at “fire sale price”
urged by federal govt.)
goldmann sachs fined $550 million in 2012
wall street investment banking firm
fined 550$ million in 2012 by SEC/securities exchange commission
money from fine to US government and to investors
goldmand sachs was selling to various investors (CEOS) at the same time as another arm
of that same firm was selling them short. So on the one side they were selling to
customers saying this is good investment, on the other side they knew these were
troubled assets and were fined.
Ethical issue: Taking advantage of the situation and doing dishonest and fraudulent
Goldmann had received from
$5bilion investment Berkshire Hathaway/Warren Buffet
$10billion from US govt TARP program in 2008. It repaid with interest. TARP program
when govt was buying up troubled assets of investors helping the(under G Bush).
Stimulus package (under Obama) was different. TARP costed taxpayers around $60
Ethical question: who’s getting the help, the investors were getting help but people with
troubled homes did not get compensated and lost their homes.
Enron energetic rise, dramatic fall
Fall in 2001
energy co. Houston texas, started 1985
was the biggest energy co of all time and suddenly collapsed.
involved in futures trading inviolving energy, the value of these was beyond what they
could control and pay.
thay started of (simply) exploring for and providing energy in the form of natural gas,
after a while they moved into being middle men by way of selling futures contracts for
large blocks of gas mostly to business and govts. They would sell them by asking for a
premium and customers would not be subject to market fluctuations. Enron coudn’t
afford the prices being promised, didn’t profit, got into debt.
Enron benefited from deregulation in energy sector, (lifiting regulation, ability to invest
in all kinds of things which was previously limited by govt) and “future contracts” originally innovative, but pricing? Figuring assets? Based on assumptions. not realistic.
they did not what the worth of the future contracts were that they were selling.
Then they didn’t properly register the losses on their books.
Created SPE’s to allocate the losses into these sub companies.
This is legal to an extent. But $38 billion debt by SPEs, only $13bill. Debt on books (e.g.
outside partners or investors for SPE but often Enron provides)
Execs: loans to selves
Execs: on eve of bankruptcy, huge bonuses and sell much stock.
warnings, attempted whistleblowing, but stonewalling
CEO was found guilty and criminally indicted. Died from heart problems.
Another major executive who testified was sent to jail
Another was the brains behind the SPE’s and was found guilty
Fall 2008, US court many shareholders partial compensation from fund by banks and
financial institutions that benefited (aided?) (total over $6 billion = 50% of loss)
Accounting firm was Arthur Anderson, was a very prestigious company, in the end they
came under scrutiny, were indicted and collapsed as well.
New legislation came out of this in US and Canada:
Sarbanesoxley Act SOX act, US, 2002
new govt body oversee, investigate, discipline, accounting firms and public companies
this in addition to SEC
CEO/CFO must certify finance statement
New standard/rules for accounting
Audit committees must be independent
Accountants cant also be consultants
Major changes to finance situation must be promptly public
Heavier penalties for fraud, etc.
No federal securities regulatory authority
Only industrialized country without federal body
CSA = Can. Securities commission, etc. just assn. of prov/territ agencies
Eg. OSC = Ontario securities commission, etc.
1. Ontario bill 198 in 2002 as parallel to SOX (so: CSOX)
Similar in other provinces, etc
2. New initiative 2010 by Fed Govt to set up, Canadian Securities regulatory
authority i.e. federal authority: via Canada securities act passed by harper govt.
Law challenged in supreme court by several provinces (alberta, quebec, Manitoba,
SC Dec2011 rules: Fed Govt lacks constitutional authority
July 2012 US Govt/Obama passes new financial regulation Doddfrank wall street reform and consumer protection act
New regs controlling US banking
Controls derivatives, creates bureau of consumer financial protection etc.
Affects Canadian companies doing business on US stock exchanges and Others indirectly
Regulation: clear, fair, sable rules and expectations, on all sides, so customers can be
properly informed and ethical business can be performed
Selfregualtion? By individual business?
Mission statement/code of ethics
Board of directors ..in Control?
Importance of independent directors…
Mnagers control perks
This isn’t adequate because board of directors are only going to oversee everything if
they are independent so some of them are from outside of the business, this is also a
possible problem because they wont be informed of all the technicalities of that business.
They will just authorize things the managers decide, since they don’t know themselves.
Hollinger, a compliant, ineffective board
selfregulation by industry or profession as whole?
The problem of selfinterest/free riders
Effects on third parties
People are going to end up with bad homes, dangerous, things that aren’t in their interest,
which pushes the argument for regulation. Businesses disagree because they say it gets in
their way and makes inefficient business.
Insider trading: people using info from the inside of the company that enables them to
profit form stock transactions. You buy stock and profit in a way that other people cant
because they don’t have the same knowledge.
2001 Martha Stewart, ImClone
196873 licensed securities broker, member New York stock Exchange
Martha stewart living omnimedia
1997 founded 1997 IPO, stewart billionaire books, magazines, television show, home
2001 Martha Stewart on board of the New York stock exchange
she had an investment in a pharmaceutical drug. It was looking very promising.
she sold a chunk of her investment in the cancer drug, right before the price of it went
way down. She knew that it would go down she lied to the authorities about what went on, she denied evidence that they had against
her, so she was jailed for obstruction of justice.
Insider trading is on of the hardest charges to prove, and it is very serious, unethical, and
legal. So they never found out if she actually acted on insider trading.
Micheal Milken junk bonds and leverage buyouts/takeovers
New york investment firm, Drexel burnham lambert
Becomes most profitable on wall street
Drexel goes bankrupt
They cant prove that he did insider trading but he was charged with obstruction of justice.
1990 Milken accepts plabargain
pays $900 million in fines, suits, etc
serves 2yrs prison
European Community: Judgement of the court of first instance (Luxembourg)
Microsoft challenged by authorizes about being in monopolistic practices.
Regarding Windows media player
windows was the biggest computer software, it was pretty much the only god option
media player was always included in the software, for free. Competitors said people are
being forced to use it since it comes with it and because Microsoft arranged it so that you
couldn’t use other media players with Microsoft windows.
MS abused dominant position, infringed EC treaty
1. Tying windows media player w windows PC operating system
2. MS had refused to provide competitors “interoperability information” for
developing, distributing competitive products
Inhibiting competition, new products
MS fine, 497 million pounds
Consumers no choice, irrelevant that no special charge for player
MS must supply specifications, not “source code”
MS wont be enabling competitors to clone/reproduce its products
Must offer option, windos w and without player
Milton friedman critical of claims against MS because they deserve it by their
success, they got to that competitive position from their success.
Oct 9, 2012
From “Caveat Emptor” to “Caveat Vendor”?
=Buyer beware to seller beware Who’s responsible for when products go bad.
pharmaceutical product recalls – major consequences
beef, e coli
why is there the shift form buyer responsibility to seller?
Consumers are able to go elsewhere
but major concern is the issue of expertise, specialized knowledge
Need for informed consent, genuine free choice
Complication buyerseller equal information
If the buyer is to make an informed choice, the seller needs to be responsible for
having a good product because it is impossible for the consumer to know about a
product they didn’t create.
Different standards/levels of responsibility:
1. Negligence – lack of due care
2. Strict Liability – US
Issue not blame/fault; only compensation
Deep pocket? Incentive for future?
Ex: having icy front door entrance and someone slips, your responsibility
When the issue is common, it is the seller’s fault and they have the responsibility to fix it
and deal with consequences.
Nestle: marketing infant formula 1970s90s in LDCs
Swissbased multinational corp (MNC):
Nestle Infant formula, marketing it in thirdworld countries
Encouraging powder milk as opposed to breastfeeding (many benefits to breastfeeding)
seductive, deceptive practices to market the product:
ex. Giving free samples, once you start formula for the baby, you cant stop it and
change to breastfeeding
Nestle would send employees dressed like nurses (not actually nurses) and
persuade mothers to use the formula
formula has to mixed with water, and so many countries don’t have trusted,
healthy water and therefore the formula will not be healthy for the baby
this issue attracted a lot of attention all over the world, protests, boycotts, a lot of
criticism towards nestle, and then nestle changed their unethical practices
1979 WHO World Health Org. establishes code for infant formula US opposes. But
nestle finally accepts. Beechnut and the NoApplejuice Jucie, 19771990 (Text)
Producer of baby food
Obtains apple juice concentrate from supplier at unusually low prices
Chemists at Beech, then external lab, claim: substance not genuine
Apple juice for infants what was being sold was not actually apple concentrate, but a
fake form of it
When outsiders stated becoming aware the US gov’t got involved
BN execs ignore, suppress
U.S. FDA (Food and Drug Administration), investigates
BN execs stall, stonewall, shipped to foreign countries
1986 BN and execs indicted
Compnay fined, some plead guilty, some go to trial, then guilty
McDonalds, too hot coffee. 1992 (not in readings)
70 year old women sues for spillage in lap at McD drivethrough
Car was stopped; her drink fell, she got serious burn and skin grafts
Jury awards $160K compensation + $2.3 million punitive damage
Why was the responsibility on the seller?
The coffee that McDonalds was selling was significantly hotter to consumers of other
McDonalds had been warned before about this problem
People have had similar problems to this but not as extreme
so they were responsible for foreseeable problems which they were negligent to fix.
The women previously asked for a lot of money to cover her medical expenses and
McDonalds refused. They went to court and McDonalds lost. So they had to pay, but an
amount smaller than what the woman asked for. And then the actual payment the women
got was smaller than that. She got her medical expenses covered.
There has been a major movement in the US (more than Canada) to reform the laws to
make sellers more responsible, to lessen the onus of negligence on sellers
Selling Shaving Cream
Commercial using sandpaper to show that the cream works well,
It turned out it wasn’t actually sand paper, it was Plexiglas (or substitute for sandpaper)
So they weren’t doing what they claimed they were doing in the commercial.
They didn’t use sandpaper in the studio under hot television lights because it would melt.
But they were able to do it.
They were charged with faulty advertisement, because they were claiming that they were
proving something by showing people, but they weren’t actually showing it, that’s
A celebrity in a commercial for a car no issue
An athlete in a commercial for an athletic product – the issue here is that maybe the
product is only good for that type of professional athlete not for us.
Oct 16, 2012
Joe Camel, and the Marlboro man
1995 Surpeeme court of Canada: total ban on cig. Advtg unconstitutional freedom of
expression includes corporations
new federal law: 1997 federal tobacco act
requires more prominent graphic warnings on cig. Pkgs
allows advantage in publications and places not directly to young people
no sponsoring sports events
no “lifestyle advertising”
issue: banning cigarettes because marijuana is banned, or legalizing marijuana and
2007 Canada(AttorneyGeneral) v. JTIMacdonals Corporation
(also other companies)
because of known health effect and because of company practices in past (trying to block
that image and presenting false information)
core ethical issue: no false advertising, misleading products.
Natural Resource. No longer free, unlimited
Overuse and abuse/damage
Now: environmental sustainability
Sources of the problems: “Tragedy of the commons”
Population growth is a problem that cannot be solved technically..
Everyone seeks to maximize his or her gain; our population growth should be zero (if we
assume our world to be finite) so as to stop wasting energy for the future.
We have limited resources (like prisoners dilemma) contrary of Adam Smith’s invisible
hand and problem with pollution. There should be laws to moderate
For land, 2 options: 1. public regulations to help environment, externalities, market externalities
or 2. privatize the land, because owners want to take care of what is theirs and or free
market balance costsbenefits. When ppl own something as their private property they
want to have value and continue in the future. Then there can be a charge for people to
Article says that reproducing should be regulated and people should use their conscience
in the matter. Freedom is only good if it benefits everybody.
The Case of the “Exon Valdez” (1989)
“Exxon Valdez” oil tanker runs aground off Alaska Coast
The worst oil spills in US history
11 mill gals. (240000 barrels)
Hundreds of thousands fish and birds die; damage to coast
1984 jury awards $287 million actual damages,
5$ billion punitive damages; reduced to $2.5 billion. (because the judge ruled it was too
largest punitive damage awards ever
plaintiffs: fishers, landowners, native Alaskans, local govt.
reduced on by Appeal Court to $2.5billion
2008 further reduced by US supreme court –
Exxon claim greatly excessive, by previous standards
Finally $508 mill.
Exxon already paid $3.5 billion for cleanup and lawsuits
Exxon Mobil corp. (Texas) profits 2006 $39.5 billion, largest ever for US company
Union Carbide plant in Bhopal, India 1984
Plant produced pesticides; gas leak (methyl isocyanate)
3000 die, thousands more later,
many more serious health effects, also many animal deaths.
1985 Union Carbide offers $7million interim relief.
Oct 30, 2012
“Exxon and Alaska” (text 405411)
1989 oil tanker, hits reef off Alaska; known hazard
worst oil spill (then) in US : 240K barrels
hunudreds thousand wildlife (fish, birds) die; damage to coast
capt. Not navigatin left “bridge”, ship on auto capt. Known alcoholism, drinking beforehand
cpt. Charged; innocent except for negligent discharge of oil 1994 jury awards $287 mill
damages, +5 billion punitive
largest punitive award ever
plaintiffs: fishers, landowners, native Alaskans, local gov’t
2008: US supreme court
Exon Shipping Co.
BP oil spill Gulf of Mexico Apr 20, 2010
Rig offshore Louisiana fire/explosion
11 killed 17 injured
oil spills 3 months, stopped Aug 2010
aprox. 172 million gals (Exxon Valdez: 10.8 mill gals.)
affects ocean and coastline:
wildlife, fishing, businesses
June 2010 BP sets up $20 billion fund for compensation so far paid out $5.5 billion,
JunJuly 2010 Obama stops offshore drilling; (“moratorium”)
Oct 2010 moratorium lifted, allows drilling; new standards
March 2012 BP accepts outofcourt settlement to pay $7.8 bill for 100,000 individuals
This apart form fines by gov’t, yet to be established