EME 444
Global Energy Enterprise

Nonmarket Strategy and Ethics

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The information analysis framework described in previous lessons is used to guide the formulation of nonmarket strategy. Intiatially, multiple possible nonmarket strategies are generated for consideration--which nonmarket action(s) best serve our interests? Baron (2010, p 50) recommends that these alternative strategies be evaluated in three stages: Screening, Analysis and Choice.

The screening stage identifies and eliminates nonmarket strategy alternatives that are a) against the law, b) contrary to company/organization policy or c) violate widely accepted ethics principles.

The analysis stage relies on economics, political science and other social sciences to predict the actions and reactions of other stakeholders. The analysis stage also takes into account moral motivations of nonmarket behavior and how others may react to the actions taken.

In the third stage, a choice is made. The objective for making the selection is typically value creation, measured in terms of the impact on stakeholder(s). However, if the issue involves moral concerns, then principles of well-being, rights and justice must be considered.

Ethics

One reason a strategy may be screened out is because it violates accepted ethics. But what does this mean? Ethics is a systematic (or codified) approach to moral judgments. Ethics deals with matters of human well being, liberty and freedom and is based on moral standards that are impartial, universal and independent of governments and authoritative bodies. But making an "ethical" decision is often easier said than done. For example, drug testing in the workplace is ethical in one sense, if it keeps society safe. But unethical in another sense if it violates a worker's right to privacy. These questions can be particularly challenging for energy industries where corporations compete in a marketplace under a long shadow of powerful nonmarket forces loaded with uncertainty--involving the environment, regulation and customers who themselves are struggling to balance their energy needs, pocketbooks and moral compasses. Are any of us driving the car we think is most "right"? More likely, we are driving a car we can afford and that is "right enough."

Business ethics is the application of ethics principles to issues that arise in business. ...business ethics pertains to situations in which individuals are in an organizational position and act as agents of the company and its owners. [...] In an organization role, a manager must reason about situations in which virtue is not always present, conceptions of what is good or right differ among individuals, and interests are in conflict. [...] Good ethics is not necessarily beneficial to an individual or profitable for a firm; however, good ethics is good for society and is a requirement of good management. Although good ethics may not always be profitable, unethical behavior can result in substantial losses (Baron, 2010, p. 655).

The following are four reasons (Baron, 2010, p. 711) why it is important that decision makers maintain a sensitivity to moral dimensions of an issue:

  • It can help managers avoid wrongs that may otherwise result from a narrow focus on the firm's interests.
  • It can help management anticipate nonmarket actions and pressures.
  • It can render managers more likely to make decisions that serve the long-run interests of society and ultimately of business itself.
  • It addresses the context of corporate social responsibility is found in ethics principles.

But making ethical choices, even by even the most well intended, can be difficult. Many of us have personally been in situations where we wanted to do the "right" thing, but really didn't know what the right thing was. Tell, don't tell? In business, decisions need to be made in situations where there are competing moral claims that require judgments about the effects of decisions on individuals, their rights, and their well being. How does one do this?

Davis (1999) recommends seven "tests" for evaluating alternatives and ethical decision making:

  • Harm test: Does this option do less harm than alternatives?
  • Publicity test: Would I want my choice of this option published in the newspaper?
  • Defensibility test: Could I defend choice of option before congressional committee or committee of peers?
  • Reversibility test: Would I still think choice of this option good if I were adversely affected by it?
  • Colleague test: What do my colleagues say when I describe my problem and suggest this option is my solution?
  • Professional test: What might my profession's governing body for ethics committee say about this option?
  • Organization test: What does the company's ethics officer or legal counsel say about this?

A particularly egregious (and illegal) breach of corporate ethics was revealed in 2015 when it was found that Volkswagen had installed so-called "defeat devices" in millions of their vehicles.  These devices were pieces of software that would alter the operational characteristics of the engine when they determined that an emissions test was being run. When this happened, the emissions (e.g. carbon dioxide and nitrogen) would be lower than they would be under standard operating conditions.  Note that this precipitated both nonmarket (e.g. fines by the U.S. EPA) and market (car sales slumping) activity.  Read the following summary.  Can you identify any of Davis' ethical tests that were not violated? Seriously - go through them one-by-one and think about it! (Note that the firm is still dealing with consequences of this action, and that new details of unethical and illegal behavior have been surfacing.)