Ethics CSR and decision making Fred Wenstp 10312021

Ethics, CSR and decision making Fred Wenstøp 10/31/2021 Fred Wenstøp 1

Overview • Foundations of ethics • The development of consequential decision analysis in management from Hume to Jensen • Including CSR in decision making – Ranking decision alternatives – Weighting decision criteria 10/31/2021 Fred Wenstøp 2

Ethical foundation of decision making • Virtue ethics (Dydsetikk) • Teleological ethics Teleos = goal • Consequential ethics – Aristotle (384 – 322 BC) – Corporate core values – CSR? • Deontological ethics To deon = duty – Immanuel Kant (1724 -1804) – Rule based management – CSR? 10/31/2021 Fred Wenstøp – – – David Hume (1711 -76) Utility theory Management by objectives The balanced scorecard Stakeholder theory CSR? 3

Virtue ethics 1 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 10/31/2021 Fred Wenstøp Aristotle (384 – 322 BC) 4

Virtue ethics 2 of 3 10/31/2021 Fred Wenstøp 5

Virtue ethics 3 of 3 10/31/2021 Fred Wenstøp 6

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) 10/31/2021 Fred Wenstøp 7

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 10/31/2021 Fred Wenstøp 8

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. ” 10/31/2021 Fred Wenstøp Max Weber (1864 -1920) 9

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 – – Aristotle Hume Jeremy Bentham John Stuart Mill 10/31/2021 Fred Wenstøp 10

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 10/31/2021 Fred Wenstøp David Hume (1711 -76) 11

Summary: the war in Iraq • 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) • 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 • The UN rule against the war – Violation of the right’s of Iraq • G. W. Bush’s possible motive for the war • Virtue ethics – To right the wrongs of his father 10/31/2021 Fred Wenstøp – Make amends for own offence – Be proud of himself and family 12

Rationality 1944 • John von Neumann and Oscar Morgenstern – Formalisation of 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 10/31/2021 Fred Wenstøp 13

Management by objectives 1954 • 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 1960 s and 70 s 10/31/2021 Fred Wenstøp Peter Drucker 14

Multi Criteria Decision Making 1976 • 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 10/31/2021 Howard Raiffa Fred Wenstøp 15

Rationality 1982 • Dagfinn Føllesdal – The status of rationality assumptions. Dialectica 36(4): 301 -316 • Four dimensions of rationality – rationality as logical consistency • pertains both to values and beliefs – rationality as well-foundedness of beliefs • beliefs are well supported by available evidence – rationality of action • application of decision theory – rationality as well-foundedness of values • reflective equilibrium that gives a stable set of convictions that are relevant for the decision situation 10/31/2021 Fred Wenstøp 16

Emotion and decision making 1994 • A. Damasio: Decartes Error. – New York, Putnam’s sons • Case: Phineas Gage • Experiment 1: – A group of people, some normal and some suffering from prefrontal deficiency was – Exposed to a fire alarm – Shown value laden pictures • Experiment 2: – Choice of card decks 10/31/2021 Antonio Damasio Fred Wenstøp 17

The locus of decision Neocortex Prefrontal lobes Amygdala Stimulus Feelings Emotional response from the body Primary emotions trigger Secondary emotions trigger 10/31/2021 Fred Wenstøp 18

Stake Holder Theory 1984 • R. Edward Freeman – Value creation for stakeholders –. . or is it stockholders ? • Corporate governance problematic 10/31/2021 Fred Wenstøp 19

The Balanced Scorecard • Kaplan & Norton 1996 – 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 10/31/2021 Fred Wenstøp 20

Enlightened stakeholder theory 2001 • 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 10/31/2021 Fred Wenstøp 21

Current topics for CSR* *Randers 2003 1 of 2 • Should our company ”facilitate/buy” a more rapid reply from the Russian Ministry of Fisheries? – This sounds like corruption – Rule based ethics apply • The answer is no 10/31/2021 Fred Wenstøp 22

Current topics for CSR* *Randers 2003 • Should our company reduce its CO 2 emissions faster than required by the Kyoto agreement? – – • • 2 of 2 This could contribute to a slower increase of the CO 2 concentration in the atmosphere, especially if it could have a signal effect for others to follow It could improve company image It could appeal to current and new customers It would cost The answer is: maybe We have to work out the optimal reduction rate taking into consideration tradeoffs between – – 10/31/2021 Consequent global reduction of tons of CO 2 per year Consequent improvements of company image rating Consequent increase in market share Annual costs Fred Wenstøp Only if stakeholders are seen as ends in themselves 23

CSR and Decision Making • Assume that you have an important decision problem where you want to take CSR into account – Apply rule based ethics where legal rules apply – Disregard virtue ethics (? ) • Then apply consequential ethics 1. Identify the stakeholders that may be impacted 2. Identify the relevant objectives of those stakeholders These are your decision criteria 3. Estimate the scores of the impacts for each of your alternatives 4. Weight the decision criteria Using your gut feelings 5. Figure out which alternative has the highest weighted gain 10/31/2021 Fred Wenstøp 24

Stakeholders impacted Case : EB- 1 of 5 • Elektrisk Bureau (EB) • Decision maker – Norwegian company with 15 000 employees in 1988 – EB Lørenskog produced telecom products at a loss – Petter Gottschalk • Stakeholders likely to be impacted • Alternatives available – – Find new owners Close down Let the employees take over Continue as before 10/31/2021 Fred Wenstøp – – Owners Employees Society Customers 25

Objectives of the stakeholders Case : EB - 2 of 5 • Owners – Minimize economic loss • PV measured in million NOK • Employees – Maximize the number of workplaces remaining at Lørenskog • Society – Maximize EB’s public rating • EB’s own rating index, % with a positive impression of EB • Customers – Maximize probability of continued supply to customers 10/31/2021 Fred Wenstøp 26

Estimate of impact scores Case : EB - 3 of 5 10/31/2021 Fred Wenstøp 27

Weighting the criteria Case : EB - 4 of 5 Pro&Con © Fred Wenstøp 10/31/2021 Fred Wenstøp 28

Calculating performance Case : EB - 5 of 5 10/31/2021 Fred Wenstøp 29