CRG650 CHAPTER 3

1. CHAPTER 3
APPROACHES TO
ETHICAL DECISION
MAKING

2. Topic Outline:
 Stakeholder Impact Analysis
 Developing a Comprehensive Ethical Decision-Making
(EDM) Framework

3. Topic outcome
Student must be
able to:
1. Explain and apply the
Ethical Decision-Making
Framework
2. Apply the Stakeholder
Impact Analysis
3. Explain the Fundamental
Interests of Stakeholders
4. Discuss the 3 Questions
Approach, 5 Questions Approach
and Pastin’s Approach
5. Recommend an ethical action
6. Demonstrate the measurement
of quantifiable and non-quantifiable
impacts

4. ETHICAL DECISION MAKING
FRAMEWORK

5. Recognize/Determine An
Ethical Issue
 Could this decision damage someone or
some group?
 Does this decision involve a choice
between a good and bad alternative?
 Is this issue about more than what is legal
or what is most efficient? If so, how?

6. Gather the Facts
 What are the relevant facts of the
case?
 What individuals and groups have an
important stake in the outcome?
Why?
 What are the options for acting?
Have all the relevant people and
groups been consulted?
 Evaluate Alternative Actions

7. Explore Possibilities & Actions
 Evaluate the options :
 Which option will produce the most good and do
the least harm? (The Teleology/Utilitarian
Approach)
 Which option best respects the rights of all who
have a stake?
 Which option follows the rules, act, duty and
obligation? (The Deontology Approach)
 Which option treats people equally or
proportionately? (The Justice & Fairness Approach)
 Which option leads me to act as the sort of person
I want to be? (The Virtue Approach)

8. The Impact of the Decisions
 Make a Decision and Test It
 Considering all these approaches, which
option best addresses the situation?
 Act and Reflect on the Outcome
 How can the decision be implemented
with the greatest care and attention to
the concerns of all stakeholders?
 How would the decision turn out and what
would be learned from this specific
situation?

9. STAKEHOLDERS IMPACT ANALYSIS (SIA)
 When a businessman or professional accountant faces
an ethical problem, the first resource for guidance
should be to corporate and professional codes of
conduct.
 However, the corporate and professional codes of
conduct often do not specifically apply to the particular
problem faced by a professional accountant.
 The decision maker can be guided by general ethical
principles within a framework to arrive at a defensible
ethical decision.
 This framework is known as STAKEHOLDER IMPACT
ANALYSIS.

10. STAKEHOLDER IMPACT ANALYSIS
 Modern corporations are now accountable to
shareholders and to non-shareholder groups, both of
which form the set of stakeholders to which a
company responds.
 Freeman (1984) : A stakeholder is anyone who is
affected by or can affect the objectives of the
organization.
 It has become evident that a company cannot reach
its full potential, if it losses the support of one of the
stakeholders.

11. MAP OF CORPORATE STAKEHOLDER ACCOUNTABILITY

12. STAKEHOLDER IMPACT ANALYSIS (cont’d)
 Modern corporations found out that their shareholders are
made up of persons and institutional investors who are
interested in longer-term time horizons and in how
ethically business is conducted.
 Ethical investors and many other investors, as well as
stakeholder groups, believe in managing the corporation
on a broader basis than short-term profit only.
 Usually, the maximization of profit in a longer than one-
year time frame requires harmonious relationships with
most stakeholder groups and their interests.
 Corporations found out that in the past, they were legally
and practically accountable to shareholders, but they are
also becoming increasingly accountable to stakeholders.

13. FUNDAMENTAL INTERESTS OF STAKEHOLDERS
• The proposed decision should result in
more benefits than costs.
Well-offness
• The distribution of benefits and burdens
should be fair.
Fairness
• The proposed decision should not offend
the rights of the stakeholders and the
decision maker.
Right
• The proposed decision should
demonstrate virtues reasonably expected.
Virtuosity
All four interests must be satisfied for a decision to be
considered ethical.

14. MEASUREMENT OF QUANTIFIABLE IMPACTS
PROFIT
• is fundamental to the interests of the shareholders.
• is a short-term measure, and that several important
impacts are not captured in the determination of profit
 can be corrected in two sections.
Items not included
in profit :
Measureable
directly.
Items not included
in profit : Not
measureable
directly.

15. ITEMS NOT INCLUDED IN PROFIT :
Measurable Directly
o Example :
When a company pollutes, the cost of cleanup is
usually absorbed by individuals, companies or
municipalities.
o These costs are referred to as externalities.
o Their impacts can often be measured directly by the
costs of cleanup incurred by others.

16. ITEMS NOT INCLUDED IN PROFIT :
Not measurable Directly
o Other externalities exist where the cost is included in
the determination of the company’s profit, but where
the benefit is enjoyed by persons outside of the
company.
o Examples:
 Donation and scholarship  the benefit cannot be
measured directly.
 Loss of health suffered by people absorbing pollution 
the cost cannot be measured directly.
o However, they should be included in an overall
assessment.

17. ITEMS NOT INCLUDED IN PROFIT :
Not measurable Directly (cont’d)
o It is possible to measure these impacts directly through
the use of surrogates or mirror image alternatives.
o Example : scholarship  a surrogate for the benefit
could be the increase in earnings gained by the
recipient.
o Loss of health  the value could be estimated as the
income lost plus the cost of medical treatment plus the
loss of productivity in the workplace involved as
measured by the cost of fill-in workers.

18. BRINGING THE FUTURE TO THE PRESENT
Capital budgeting analysis (CBA) : Future values are
discounted at an interest rate that reflects the expected
interest rates in future years (NPV).

19. Benefits include
revenues and good
externalities
Costs include costs
plus bad
externalities
Using the net present value approach of capital budgeting
analysis, the benefits and costs of a proposed action can be
assessed as follows:
NPV = PV of benefits − PV of costs of proposed action
BRINGING THE FUTURE TO THE PRESENT (cont’d)

20. DEALING WITH UNCERTAIN OUTCOMES
o There are estimates that are uncertain.
o However, the analysis can be based on the best
estimates, on three possibilities (most optimistic,
pessimistic, and best estimate), or on expected values
developed from a computer simulation.
o All of these are expected values.
Expected Value
of an Outcome
Value of the
Outcome
Probability of
that Outcome
occurring
= ×

21. DEALING WITH UNCERTAIN OUTCOMES (cont’d)
The advantage of this expected value formulation is that the
cost-benefit analysis framework can be modified to include
the risk associated with outcomes to be included  risk-
benefit analysis (RBA)
Risk-adjusted or
Expected Value
of Net Benefits
Expected PV of
Future Benefits
Expected PV of
Future Costs
= −

22. IDENTIFYING STAKEHOLDERS & RANKING THEIR
INTERESTS
 The usefulness of a SIA depends on the full identification
of all stakeholders and their interest, and on a full
appreciation of the significance of the impacts on the
position of each.
 Sometimes, CBA does not fully reflect the importance of
a stakeholder or of the impact involved.
 Example : Scholarship to a poor recipient could create a
benefit for that person of greater impact compared to a
person who is well-off.
 Mitchell, Agle and Wood (1997) suggest that
stakeholders and their interests be evaluated on THREE
(3) dimensions.

23. ASSESSMENT OF NON-QUANTIFIABLE IMPACTS
o A decision will be considered unethical unless it is seen to
be fair to all stakeholders.
o Fairness is evidenced by a relatively even distribution of
the benefits and burdens springing from a decision.
o Example: it is possible that a decision to increase taxes
may weigh more heavily on high-income earners but be
seen as relatively fair in terms of their capacity to pay
those taxes.
FAIRNESS AMONG STAKEHOLDERS
o A decision will only be considered ethical if its impacts do
not offend the rights of the stakeholders impacted upon,
and the rights of the person making the decision.
RIGHTS OF STAKEHOLDERS

24. Types of Stakeholder Impact
Analysis
 TRADITIONAL 5-QUESTION APPROACH :
Graham Tucker
 TRADITIONAL PASTIN’s APPROACH.
TRADITIONAL MORAL STANDARDS
APPROACH :
Valesquez

25. Traditional
Decision-
Making
Approaches
1. Traditional 5-
Question
Approach
2.
Traditional
Moral
Standards
Approach
3.
Traditional
Pastin
Approach

26. TRADITIONAL 5-QUESTION APPROACH : Graham Tucker
This approach involves the examination or challenge of
a proposed decision through the five questions.
Is the decision…… Stakeholder interest examined
…profitable? Shareholders’ – usually short-
term
…legal? Society at large – legal
enforceable rights
…fair? Fairness for all
…right? Other rights of all
…going to further
sustainable development?
Specific rights

27. TRADITIONAL MORAL STANDARDS APPROACH :
Valesquez
This approach offers a framework that is more suited to the
consideration of decisions which have significant impacts
outside the corporation.
Moral standard Question of proposed decision
Utilitarian:
Maximize the net benefit
to society as a whole
Does the action maximize social
benefits and minimize social
injuries?
Individual rights :
Respect and protect
Is the action consistent with
each person’s right?
Justice :
Fair distribution of benefits
and burdens
Will the action lead to a just
distribution of benefits and
burdens?

28. TRADITIONAL PASTIN’s APPROACH
This approach examines the four key aspects of ethics.
Key aspect Purpose of examination
Ground rule ethics To illuminate an organization’s and/or an
individual’s rules and values
End-point ethics To determine the greatest net good for all
concerned
Rule ethics To determine what boundaries a person
or organization should take into account
according to ethical principles
Social contract
ethics
To determine how to move the boundaries
to remove concerns or conflicts