business ethics
VincentL
MarketFailureApproachtoBusinessEthics.pptxMarket Failure Approach to Business Ethics
Heath has a Reaction Against CSR and Stakeholder Theory Misguided Ideas
2
Profit Maximization v. Self Interest
Joseph Heath: “Profit maximization and self interest are not the same thing, and the failure to distinguish adequately between the two can be a source of enormous confusion.”
Stakeholder Theory Misconceptions (CSR)
Stakeholder theory suggests that…
Employees/Manager are to act on their self interest
Which is to provide independent action to do what is right for society, which will lead to
Spending less time focused on the shareholder.
Heath disagrees with this concept.
Profit Maximization v. Self Interest
Single Shareholder
Shareholder is also the sole employee
Self Interest of SH is the same self interest of the employee = maximize SH value
Single Shareholder
Employee
Maximize SH Value
No division of labor – small proprietorship
Division of labor – larger company, managers are not shareholders
Maximize Self Interest
Employee
Employee
Heath’s Hypothesis
Efforts to make employees consider the rights of “stakeholders” is misguided.
“Alternatively, profit maximization, understood as an obligation, rather than an expression of self interest, provides a perfectly legitimate platform for the development of a robust moral code”.
MEDICAL DOCTOR ANALOGY
Where does the “obligation” stem from…
Physicians and Patients:
Physicians have an obligation to provide the best care to their patients, and they are not allowed to let self-interest creep into their decision making.
Example: gain $$ to perform a surgery when it is not needed.
Managers are like Doctors
Managers and Shareholders:
Managers have an obligation to provide the best decision making to shareholders, so that shareholders get the greatest increase in value.
Managers should not engage in self-interested behavior, such as caring for other stakeholders – it divorces the employee from their obligations.
But there is a problem with this pure analogy
Improving a
patient’s health
Ethical
Making profit
Ethical
LAW ANALOGY
Lawyers and the guilty
Changing the analogy to law…
Lawyers and clients:
Once engaged, lawyers have a duty to ensure they provide the best service for their client, even if the client is known to be guilty, and even if the lawyer does not like the client.
This activity of representing someone who you know is guilty is contrary to practical morality.
Lawyers and guilty, continued
What justifies a lawyers behavior is the fact that they operate in a context of an institution with differentiated roles.
The outcome of this behavior is a vigorous interaction where justice is served when both sides of the law have the obligation to fight for their client. The acquittal of defendant may be maximized – even though that is not the intent of the system.
The end of the exchange is JUSTICE.
(improvement of the system for all)
(maximize the benefits for everyone in society)
Lawyers and managers are alike
The manager should seek to maximize profit for the same reason the trial lawyer looks to have his client acquitted – even if the lawyer has a self interest not to do so.
Moralizing critique of the profit motive is comparable to attacking lawyers for defending rapists and murders.
Managers should be concerned not with profit maximizing for the sake of profit – BUT BECAUSE IT MAKES THE SYSTEM MORE EFFICIENT
But there is a problem with this pure analogy
Defending the guilty
Ethical
Making profit
Ethical
Creates an efficient legal system
Maximizing SH Value
Ethical
Creates an efficient capital system
Making the system more efficient
By maximizing profit in a competitive markets, we will expect decrease in waste, decrease in price, best use of resources…plus maximize personal virtues of participants.
BUT in the short run….it also leaves people out of the market – makes certain people rich – increases the potential divide between the rich and the poor
Market Failures Occur
They occur when companies are deceptive to consumers
When companies do something that remove free competition
When the price does not reflect the full costs
ETHICAL SYSTEM
CONSIDERATION
THREE COMPONENTS
Maximizes Market Virtues and Efficiency
(LONG RUN)
Maximizes Virtues of Market Participants
Steer Clear of SHORT RUN Market Failures
“Disruptive Technology”
Disruptors
BLOCK CHAIN
and
ARTIFICIAL INTELLIGENCE (AI)
(6) Questions of the Day
What is the basic idea of the tech?
Questions of the Day
What is the basic of the tech?
What industries will be impacted?
Positively
Negatively
Questions of the Day
What is the basic of the tech?
What industries will be impacted?
Positively
Negatively
Should we invest?
Questions of the Day
What is the basic of the tech?
What industries will be impacted?
Positively
Negatively
Should we invest?
How will Wall Street be impacted?
Questions of the Day
What is the basic of the tech?
What industries will be impacted?
Positively
Negatively
Should we invest?
How will Wall Street be impacted?
How will the new disruptions alter geo/political dynamics?
Questions of the Day
What is the basic of the tech?
What industries will be impacted?
Positively
Negatively
Should we invest?
How will Wall Street be impacted?
How will the new disruptions alter geo/political dynamics?
What are the ethical consequences to consider?
What is
Blockchain
Technology
Crashing the Kids Party – Second Wave of Blockchain
29
What is Blockchain?
A shared public registry of who owns what and who transacts what (BLOCK)
These transactions are secured by cryptography and linked together to create a history (CHAIN)
Decentralized network of participants who are incentivized to maintain a database
30
Before Blockchain
Sensitive Data
Personal, financial, identity
Single entity 3rd party data storage = Vulnerable to hacking, leaks, and fraud
Firms sell our sensitive data to unknown 3rd parties
Online merchants, platforms, banks trusted with our data
31
https://www.youtube.com/watch?v=tDmXJ28lyEY
After Blockchain
Sensitive Data
Personal, financial, identity
Sensitive Data is encrypted / saved on a distributed network instead of stored on a single database
You alone have the unique key to access your own data
You control which 3rd parties, if any can access your data
32
How does it work?
33
The Centralized Bank Model
34
35
Bank of America Ledger
I AM THE BANK
A New Way
36
A Distributed Ledger
A database held and updated independently by each participant (or node) in a large network.
Each person (node) updates new records independently
Once every (majority) node agrees on the records, consensus has been reached ( A block has been formed)
No central administrator
Think of a spreadsheet – everybody in the room needs to update with changes and then compare and contrast each one to arrive at a consensus that the spreadsheets are identical
37
Cryptography
The art of protecting information by transforming it (encrypting it) into an unreadable format, called cipher text. Only those who possess a secret key can decipher (or decrypt) the message into plain text.
“Private key” - i.e Social Security Card
“Public key” - i.e Email address
A
Locked
C
Locked
B
Unlocked
38
What makes it work?
39
How do participants who don’t trust each other, create a network that functions efficiently?
40
Example: Why do drivers trust that their peers will follow the same agreed upon rules?
41
Incentives
If you don’t follow rules, you get a ticket = Monetary
If you drive poorly, you will get in an accident = Death or Injury
If you drive well, insurance costs go down. = Monetary
The answer as to why everyone else will drive well in general is because they are reasoning the same way you are, minimizing the economic cost as well as the potential for death an injury
42
Crypto Economics
Miners perform calculations required to do the work necessary to create blocks
Miners are incentivized via Tokens (cryptocurrency) and transaction fees to solve a complicated problem which in effect creates a new block
In Bitcoin, a miner receives 12.5 Bitcoin for solving the block and also chooses which transactions can be included in next block (can extract rent for this)
In Proof of Stake protocol, tokens are taken away for bad actions
43
An Example
44
Has anyone heard of a smart contract?
45
Smart Contract
A computer protocol intended to facilitate, verify, or enforce the performance of a contract.
46
Legal Agreements
Smart contract platform that will allow lawyers to make legally binding and self-executing agreements on the blockchain.
Can call existing agreements and customize to a new contract
This will then provide a transparent and secure contracting system that always allows all permissioned parties to see what is happening without the need for a central authority to manage or control the execution of the contract
OpenLaw
47
Employee Offer Agreement
Confidentiality Agreement
Restriction Stock Grant
Alternative Dispute Resolution Agreement
Financial Settlement
Remove the need for clearinghouses and long settlement
Stocks, Bonds, and Derivatives can settle on trade date rather than the T+3 or T+2 complications
48
IBM is partnering with Walmart, Nestlé, Dole, Tyson Foods, Kroger, and others, to use blockchain technology to track food throughout the complex global supply chain.
Under the new system, if a consumer falls ill from E. coli traced to a batch of lettuce, scanning the barcode would quickly show where it came from and where other lettuce from the same batch went.
Imagine the amount of time and money Chipotle could have saved?
Supply Chain
49
How will this be a major Disrupter?
50
Key attributes of the Blockchain
51
Increases Transparency
Provides more information to everyone in the transaction - quickly
Reduces the possibility of central manipulation
The code is “typically” available for everyone to see
Limited monopoly power
Many times they share each others technology
You control your data
Transparency
Removes Bottlenecks
Tamper-Proof
Realigns Ownership
Financing
blockchain
52
Finance Questions
What is a token?
How are these companies raising capital so quickly?
What is a token sale or ICO?
Is a token equity?
What is the relationship between tokens and equity?
What does the SEC say?
What do other governing authorities say about tokens?
53
What are Tokens?
Digital Assets
Utility Token
Security Token
Platform Use
FTC Oversight
Financial Use
SEC Oversight
Token Sale
An initial coin offering or secondary offering, where owners of blockchain companies are selling tokens to anyone with the money to afford it, including but not limited to weak agents, people of lesser means, etc…
Many times there are limited disclaimers and requirements to raise the capital – limited size restrictions
Token Rights
Tokens typically have no voting rights, liquidation rights or similar preferences provided to equity or debt holders.
Typically, they are provided some access to a platform or a project. Sometimes they are provided a dividend or guaranteed payment, but limited to no rights in the underlying company.
Relationship with Equity
Equity holders still control the company and the voting.
Many times there are automated governance structures, but most times there are still equity investors.
SEC Position
Slowly analyzing
Cautiously analyzing
Judiciously thinking through the issues
IRS Position
Taxed as real property – short term and long term capital gains treatment….
Many crypto investors are not reporting their gains.
QUESTIONS
What is
Artificial Intelligence?
AI = the ability to harness the power of data aggregation, computing power, and biological knowledge, all with the intention of hacking humans.
Ability to Hack Humans =
B (Biological Knowledge) *
C (Computing Power) *
D (Data)
[Prof.Yuval Noah Harari)
Data
Collection
(Internet, Sensor Technology
(Biological, Behavioral)
Computing Power
(Processing Speeds, CPU)
Application to Human Experience
(Algorithms)
Convergence of Technology
Online records,
Digital photos
Geo coding
Sensor
Modern smart devices dwarf the power of the supercomputers of the 1960/1970s
Greater understanding of how the human body works… better opportunity to program behavior
63
Build algorithms based on a set of rules…
“if X, then Y”
Tried to build a system based on the brain’s processes
Type of AI
Used mainly for answering questions with a limited number of answers
CODES RULES
Envisioned to answer similar questions as humans….with an endless possibility of moves
TEACH THE COMPUTER HOW TO THINK
RULE BASED APPROACH
NEURAL APPROACH
64
Build algorithms based on a set of rules…
“if X, then Y”
Tried to build a system based on the brain’s processes
Type of AI
Used mainly for answering questions with a limited number of answers
CODES RULES
Envisioned to answer similar questions as humans….with an endless possibility of moves
TEACH THE COMPUTER HOW TO THINK
RULE BASED APPROACH
NEURAL APPROACH
EXPERT
SYSTEMS
65
Build algorithms based on a set of rules…
“if X, then Y”
Tried to build a system based on the brain’s processes
Type of AI
Used mainly for answering questions with a limited number of answers
CODES RULES
Envisioned to answer similar questions as humans….with an endless possibility of moves
TEACH THE COMPUTER HOW TO THINK
RULE BASED APPROACH
NEURAL APPROACH
STATISTICAL MODEL BASED ON OBSERVATION
“BLACKBOX”
66
Neural Approach (the god approach)
This approach:
LIMITED HUMAN INTERFERENCE
(DEEP LEARNING)
Trying to build an artificial brain
Tons of different data: pics, vids, text, sounds, smell(?), touch
AlphaGo
AlphaGo
Zero
68
What can we learn from
those short videos?
Started from a rules based algorithm,
Moved into a neural based algorithm,
100x better
Algo -- Acts, records, reconfigures, acts, records, reconfigures….does not forget
Phase 1
Internet Ai
Recommendation Engines
Improve Experiences
Movement toward the Ubermensch
Phase 2
Business Ai
Optimization of Decision Making
Pattern Recognition
Phase 3
Perception Ai
Face, speech, species recognition
Can self identify street lights, traffic patterns, can generate tasks
Phase 4
Autonomous Ai
Combination of seeing, hearing, reading
Have the ability to autonomous produce
Four phases are emphasized by Kai Fu Lee: AI Superpower (book)
RxThinking
71
Autonomous AI is at the early stages –
STILL MISSING MAJOR COMPONENTS:
Smell, Feel, Emotions
(Salk Institute is looking at smell)
Identified Challenges
Mis-identification (Dark Skin)
Bias in the data sets (Hurts upward mobilitiy)
Limited understanding of the how the algo’s work
Blackbox – limited information for user
Cost a lot of money to build – thus limits competition in the market…winner takes all
Removes jobs
Decreases available jobs
Provides limited information to user – Company controlled
Moves toward monopoly market
Intellectual Property Protection
Decreases available jobs
Provides limited information to user – Company controlled
Moves toward monopoly market
Intellectual Property Protection
Decreases Market Virtues and Efficiency
(LONG RUN)
Decreases available jobs
Provides limited information to user – Company controlled
Moves toward monopoly market
Intellectual Property Protection
Decreases Market Virtues and Efficiency
(LONG RUN)
Decreases Virtues of Market Participants
Decreases available jobs
Provides limited information to user – Company controlled
Moves toward monopoly market
Intellectual Property Protection
Decreases Market Virtues and Efficiency
(LONG RUN)
Decreases Virtues of Market Participants
Creates SHORT RUN Market Failures
What industries will be impacted?
(Four Variables to Consider)
Social
Social
Asocial
Social
Asocial
Optimization
Social
Asocial
Creativity
Optimization
SAFE ZONE
DANGER ZONE
HUMAN FACE,
COMPUTER BACK-END
HUMAN FACE, COMPUTER BAND-END
Structured Data
Unstructured Data
Social
Asocial
Creativity
Optimization
Structured Data
Unstructured Data
Lawyer
CEO
Defense Attorney
Artist
Radiologist
Tax Accountant
Loan Underwriter
Telemarketer
Financial Planner
Doctor
Teacher
Journalist
Financial Analyst
Scientist
Social Worker
WHITE COLLAR
LABOR
Bartender – Wait Staff
Fast Food Preparer
Garment Worker
Dishwasher
Truckdriver
Assembly line worker
Cook
Cashier
Receptionist
Physical Therapist
Hair Stylist
Taxi Cab Driver
Constructionist
Employment and Societal Disruption
The rising tide of artificial intelligence and business automation: Developing an ethical framework, Business Horizons (2018) 61, 823-832, SA Wright, AE Schultz
Employment and Societal Disruption
2013 Study – 47% of US Jobs can be automated in next decade or two (Carl Benedikt Frey, and Michael A. Osborne)
2016 OECD Study – 9% of US Jobs can be automated
2017 PWC Study – 38% of US Jobs can be automated by 2030
McKinsey – 50% of jobs around the world are automatable right now
Somewhere between 9% and 50% of jobs are automatable….and have the possibility to be replaced over the next 10-30 years….with most “developing states at higher numbers”
Jobs leave developing countries
Developed countries automate processes, and bring tech back home
Savings from the automation go back to shareholders
Developing nations fall further behind
The divide between the rich and poor grows
Jobs abandoned – Developing Countries
10 Minutes Break out session – Discuss Suggestions after
What hypothesis can you envision for the future if AI fulfills its vision?
What can be done to ensure we have a global capital system that meets the notion of the Social Contract?
Developed an Integrated “Stakeholder “Framework
Corporate Responsibility
ACKNOWLEDGE THE TRANSITION
Identify the stakeholders who are going to be impacted by the Ai….
CUSTOMERS
EMPLOYEES
GOVERNMENT
COMPETITORS
UNIONS
Etc….
MINIMIZE DISRUPTION
What is the expectation of the Stakeholder? Social Contract
WHAT CAN THE COMPANY DO TO ENSURE THAT THE STAKEHOLDER CONTINUES TO RECEIVE SOCIAL EXPECTATION?
(retraining for employees)
(quality products and services)
(information)
REDUCE SOCIAL INEQUALITIES
How can you ensure that the society maintains a fair level of wealth…the same or improved?
WHAT CAN THE COMPANY DO
(retraining) (wealth transfer) (time) (global cooperation)
EMBRACE REGULATION AND OVERSIGHT
What can nations do to help in the transition?
NATIONS CAN PROVIDE SHORT TERM BENEFITS TO ENSURE RETRAINING
NATIONS CAN FUND NEW INITIATIVES NOW
CREATE MEANING OUTSIDE OF WORK
Redefine the purpose of work
FOCUS MORE ON MEANING OUTSIDE OF THE JOB….
Data as Labor
Market Solution
Major Tech Players – How do they make money?
What do they all need to be successful?
User data
The services are minimally viable without it….
Are you paid for your data?
You get free services…
Is that enough?
Market Cap
Revenue
$732 Billion
$111 Billion
$392 Billion
$41 Billion
$773 Billion
$178 Billion
$114 Billion
$11 Billion
$59 Billion
$12 Billion
$829 Billion
$265 Billion
IDEA: Data labor union / collective bargaining arrangement / data coop
An organization that holds your data and it can only be used by others if they pay for it.
KEY TAKEAWAYS:
Ai will be devastating,
As investors, we need to pay close attention to the geo/political as well the stakeholder risks and benefits,
We also need to look at our own careers/skills,
Think about country of investment in the short and mediate term,
Be proactive in ensuring a fair and equitable market exists,
Remove market failure possibilities,
Structure the market to get the most from it
QUESTIONS?
PersonSavings AccountTransaction 1Transaction 2Transaction 3Transaction 4Transaction 5
Alan Pralgever50,000,000$
Alan Walter7,000,000
Alexander Yarbrough240,000
Beth Haiet Meyer967,000
Carlos Ortiz2,000,000
Casey Gocel85,000
Chris Miller999,000
Christa Rapoport6,000,000
Christopher Flood100,000,000
Deirdre Wheatley-Liss30,000,000
Edward Deutsch8,000,000
Elizabeth Featherman6,000,000
Eugene Reynolds16,000,000
Frank Rosenberg200,000,000
Gary Koenigsberg3,500,000
Heather Schlemm100,000
Jason Navarino9,000,000
Jonathan Meyers900,000
Joseph Mellusi300,000
Judith Sheft140,000
Kurt Watkins1,380,000
Marie Tarmy1,934,000
Mark Annett1,000,000
Meryl Itzkowitz2,000,000
Michael Brown25,000,000
Mitchell Spingarn170,000
Natalie Richer12,000,000
Paul Linker120,000
Peter Tanella1,700,000
Philip Levitan15,000,000
Richard Yeskoo600,000
Robert Frucht50,000
Robert Kornitzer690,000
Rondell Walker4,000,000
Stephen Gruhin850,000
Stuart Brown3,000,000
Thomas Geraghty70,000
Tracy Nelson578,000
732,000,000,000$ 111,000,000,000$
773,000,000,000 178,000,000,000
392,000,000,000 41,000,000,000
114,000,000,000 11,000,000,000
59,000,000,000 12,000,000,000
829,000,000,000 265,000,000,000
2,899,000,000,000$ 618,000,000,000$
