Announcements

Date         Announcement

08/24/02    This site is online!
08/24/02    Section 3 Room has changed to 116 New Building. Bring your hardhat and hammer!

08/27/02    Final Exam date is set - Wednesday, September 25, 2002

08/29/02    Law and Morals: Intersection. In one of the sections today, a student questioned the Venn diagram that I presented towards the end of class. He suggested that law is completely encompassed by morals; that is, all law would be backed by morality (at least when it was originally conceived. Over time, as with the U.S. Constitution and the state sodomy laws, morals might change so that the law is no longer supported by them and they are eventually discarded.). I told the student that I'd think about it and report back.

I can't accept the student's assertion that all law is moral (unless you limited morality to egoism). First, as we showed in class today, the process for making the law is imperfect. Many interest groups attempt to influence it towards their own desired outcomes. In political science as commonly applied to the U.S. case, this competition of interest groups, called pluralism (similar in nature to competition in a market among firms), leads to a socially desirable outcome (utilitarian) and thus would have a moral basis. However, other political scientists don't see this competition. They see that certain interests have advantages in the system (perhaps they are better organized or financed or occupy "privileged" positions) while others have little or no voice. Under these circumstances, it could be that political (policy) outcomes only represent the desired outcome of a single actor. Thus, there theoretically could exist "public" policies that are merely private policies pushing forth the interest of a single group. Of course, the single group might desire something moral - perhaps good for society (utilitarian) or just or respecting others' liberty - but could just as easily desire something that is only good for them while bad for many (egoism). And of course, there are ways that laws might be used to infringe upon individual liberties without any offsetting social good (e.g., how Atty. General Ashcroft is handling "homeland security"). And of course we have seen instances in history where truly evil people have wrapped themselves up in the law to achieve their desired outcome (e.g., Hitler's Germany).

The student might be correct in that most -- perhaps nearly all -- law is backed by morality. That is probably why most people follow it without too much thought (it is already part of their thoughts). But in my book most and all aren't the same.

A related discussion that Stone mentions, but that I don't think I brought out sufficiently in any of the sections, is that law tends to work best on negatives (i.e., "don't intentionally harm or we'll prosecute you) but not very well on more 'aspirational' things (such as helping granny cross the road). We might think about some of the behavior that we do towards one another in class and how morals sanction a certain civility that makes hanging out with our colleagues far superior than if we only maintained behavior that followed the law (e.g., think about a jerk -- usually they are not doing illegal stuff, but oftentimes things that cross the social norms. Are these people who you want to hang out with? typically not [unless you're one of them!!!]: thus, they often get socially, not legally, sanctioned.).

08/29/02     We might reflect on the behavior of Mr. Collins and Mr. Krantz. Both were men with considerable experience in this industry and each had risen to lofty heights at Kidder Peabody. It seems reasonable to assume that both of them knew what Mr. Brant and Mr. Felis were up to. However, neither of them were willing to push very far: a few token conversations and that was it. The case states that they did not want to upset the goose that laid golden eggs (for KP and for them personally). What it seems  is that they were content to run KP in a legal/compliance way. That is, they would evaluate their business to see if it was legal (thus, through a lawyer). I suggest this is a dangerous way to run a business for at least two reasons. First, as we saw in this case, the law can change. Thus, if the only basis for action (or inaction in this case) is due to compliance with the law, it may be dangerous (not that you might not want advice on compliance). Second, and with some but not much respect to attorneys, these are fundamentally business decisions, not legal decisions. The decision is how do we want our brokers to conduct themselves? What kind of research do we want to do? What kind of clients do we wish to cultivate? etc.  I say that generally these are the types of questions that you --- MBA types --- are best trained to answer. It seems to me that if you are a top manager, you want to set a tone for what type of organization to run. You don't need to rely on counsel to help you -- it is a business decision.

09/02/02    Tipper-Tippee Insider Trading. This is a follow-up to a question that occurred last class in section 2. Tippers are people who give tips about securities and tippees are those who receive them. Generally, if anyone (a tippee) acquires material, non-public information as a result of a corporate insider's breach of her fiduciary duty, and that person knows or should know of such a breach, they can be held liable under Rule 10b-5 for insider trading. Tippers may be liable if they personally benefit. Remote tippees are tippees of tippees and may be held liable under this theory of insider trading.

09/05/02 Cost-Benefit Analysis: A decision-making tool: Some notes.

 It is derived from the Utilitarian form of reasoning (although it could be applied to egoism). One of its benefits is that it takes into account the interests of all individuals, present and future, who are affected by the action. This is particularly attractive given what we have learned about the political process: that many individuals or groups of individuals are not represented in the political process. Thus, CBA is apolitical in this sense. Also, CBA prioritizes our actions: we should only do the action that yields the highest net benefit. CBA:  Often seen as the "highest form" of decision making-- esp. in b-schools.

Calculated.

1.         Strong presumption that an act should not be undertaken unless its benefits outweigh its costs.

 2.         All benefits and costs can be reduced to a common scale, usually monetary.

 3.         CBA is an important enough tool that it warrants the expense of data collection and analysis and the political efforts needed to give CBA higher priority than other methods of decision.

How does CBA work? 5 Steps:

 1.         The options must be identified

 2.         For each option, all the impacts, favorable and unfavorable, present and future, on all of society* (for utilitarian analysis) are determined.

 3.         Values, usually in dollars, are assigned to these impacts.  Favorable impacts are benefits, unfavorable are costs. Need to put in present values.

 4.         Net benefit (benefits minus costs) is calculated.

  5.        Choose highest net benefit.

CBA Key Concepts

Values must be determined (step #3). For goods that are traded in markets, that is relatively easy. For goods that are not traded, the task becomes much more challenging.

 Willingness to Pay:  A tool for measuring (valuing) impacts (benefits and costs)

How much are you willing to pay to avoid a probability of injury?

E.g., Would you pay $900 for a passenger-side airbag?

WTP = not only PxQ but additionally the consumer surplus (I would have been willing to pay $3 to park, but the parking lot only costs $1.

Willingness to Accept: How much would you be willing to receive to have a “worse off” position? (e.g., would you sell your bumper to me for $300?)  Probelm: Research has shown that WTA > WTP; in other words, once someone has something (a preexisting right), it takes more money to get it away than to get someone to pay for it.

Human Capital Approach: Can be used to value human life. Uses the discounted future earnings of the person (of course, many assumptions about proper discount rate, future salary raises, etc.). Problems: People might be willing to pay more than their job incomes for safety; Ignores losses to others. Gender and race differences in life incomes based upon actuarial (historical, statistical) data give rise to different values by these categories.

Opportunity Costs  Cost of best alternative use needs to be included. If Ford spent money modifying a tank, it might have been able to use that money to make a safer rear bumper. Or the cost for you to get a MBA is the tuition plus what you could have earned working for two years.

09/03/02    Interesting Read: Charles Perrow, Normal Accidents. Some of you, particularly our engineering/science types, might be interested in reading this book (we used to read one chapter for the Pinto case). Perrow is a sociologist who examines industrial accidents. He basically argues that when you have a system with lots of parts (complicated) that is tightly coupled in time or proximity (that is one thing quickly affects another, or a bumper of one car that is suddenly in contact with a bumper of another car at a certain velocity), then accidents should be considered "normal" or expected (he calls them systems accidents). There are chapters on things such as nuclear meltdowns (3 mile island), ship collisions, air travel, space travel, chemical manufacturing, and the like. Pretty decent book!

09/05/02    Here is the link to the attorney's code of ethics on client confidentiality.  http://www.abanet.org/cpr/mrpc/rule_1_6.html

09/09/02    ROOM CHANGE: For next Wednesday, September 18 (10:15-11:45), with our guest speaker from Shell, we will meet in 124 Herring Hall, and not the auditorium of the new building.

09/09/02    Review Sessions. Hey, been in this class for 2 1/2 weeks and don't know what's up? If so, you might want to go to a review session. I'll have two of them: one will be this Friday, September 13, from 3 - 4 p.m. in Herring Hall 124. The next will be on Friday, September 20, from 9 - 10 a.m. You are not required to attend but if you will -- and have questions -- please email them to me beforehand so that I can do any special preparation (schuler@rice.edu).

09/10/02    Bio of today's guest: Susan Cone Kilgore. Susan Cone Kilgore is an attorney in a private business law practice in Houston and Dallas, Texas with an emphasis on employment litigation and employment law. Ms. Kilgore teaches trial advocacy skills to lawyers through the National Institute of Trial Advocacy programs at Georgetown Law Center, Loyola University Law School, and Southern Methodist University Law School, as well as to law students at the Louisiana State University School of Law.  She has also conducted legal ethics programs for government attorneys with the United States Department of Defense, the Federal Deposit Insurance Corporation, and the United States Department of Justice. 

            In 2002, Ms. Kilgore retired from federal government service with the Federal Deposit Insurance Corporation.  In her twelve years of government service, Ms. Kilgore was stationed in Houston, Dallas, New York, and Washington, D.C., resolving commercial disputes and negotiating real estate transactions.  In her last four years with the FDIC, Ms. Kilgore defended the government against employment discrimination claims in federal courts around the country. 

            Susan Kilgore is licensed to practice law in the State of Texas and is also admitted to practice before several United States courts, including the United States Court of Appeals for the Armed Forces and the Supreme Court of the United States.  She has been active in the Houston and Dallas Bar Associations and is currently the Vice President for the 4^th Circuit of the Federal Bar Association. Before her government service, Ms. Kilgore was in private practice in Houston, Texas.  She is a graduate of Tulane University Law School and Newcomb College of Tulane University.  Susan Cone Kilgore is married to David Kilgore, of Houston, Texas.

09/17/02    Here is a link to a web-site where you can view the missile sites in Cuba. http://www.fas.org/irp/imint/cuba.htm  The images are towards the bottom of the page at this site.

09/17/02    Here is a link to a course in political science at the University of Pennsylvania that also reviews Graham Allison's models from his study of the Cuban missile crisis. http://www.ssc.upenn.edu/polisci/psci150/modules/bur/lecture.htm

09/17/02    Study terms for final exam: For each of the following terms or phrases, you should be able to define, provide the strengths and weaknesses (where appropriate), and provide an example.  I'll try to produce a printer-friendly version shortly.

Principal-Agent Relationship

Fiduciary Duty

Law and Ethics (limits of law-Stone; moral basis of the law-class)

Market and Ethics (limits of markets-Stone, class)

Egoism

Utilitarianism

Existentialism

Social Contract

Kant’s Ethics

Subjectivism

Cultural Relativism

Virtue Ethics

Cost-Benefit Analysis

Stakeholders

Duties of Directors and Senior Managers

Corporate Social Responsibility (various views: Friedman, Dayton, and Norris)

Model 1: Rational Actor (Allison)

Model 2: Organizational Processes (Allison)

Model 3: Organizational Politics (Allison)

09/18/02    Finance Tutors Wanted. Rice University's Athletic Department is looking for persons interested in tutoring for several finance courses offered in the Economics Dept. Hours are flexible - typically it is one-on-one tutoring with an athlete and you would arrange for the hours. Pay is $12/ hour. Contact Lisa Fikes (lfikes@rice.edu, x-6096) to sign up.

09/23/02    Rooms for Final Exam. We will have rooms 116, 212, 214, 312, 314. Go to one, find a chair, sit down, and write a great exam and go home to do better stuff!!!

09/23/02  More sane reading on Sarbanes-Oxley.

10/08/02    Final Exam Information.

    Total points of the exam: 60.  Average: 53.6 (89.3%)  High: 61 (60 + 1 extra credit). Low: around 40

    Regrading? Are you nuts? No, I'll only take the exam back if I added your points incorrectly.

    Pobrecita Maria?  You may recall the final essay concerned what to do about Maria, your employee who had just stolen $100 part from the factory. You could either call the cops (which had a high likelihood that she'd be arrested, convicted, and sentenced to death) or do something else. How many students do you think called the cops?..... Answer is 47 (29%). 105 said they would not call the police (most would handle it internally, such as by firing her or docking pay). 12 gave me lame wishy-washy answers that I couldn't figure out call/not call.

10/08/02    Final Grades.  I have turned in the grades to the MBA Program office. They will release them per standard operating procedure (model II).

10/15/02    More Sarbanes-Oxley from BizEthics Buzz October 2002.

BizEthics Buzz   October 2002

* UNDER-REPORTED ETHICS DETAILS OF THE SARBANES-OXLEY ACT

The Sarbanes-Oxley Act has significant portions that deal with ethics, which have not been as prominently publicized as other aspects of the recently enacted law. Three provisions not widely reported upon are these:

1. Companies must disclose whether or not they have a code of ethics, and if not why not. They must also disclose any change in or waiver of ethics codes.

2. Whistleblowing employees are protected for providing information to federal officials, congressional members, and company supervisors.

3. Attorneys must report material evidence of a securities law violation, or breach of fiduciary duty, to the chief legal counsel or CEO. If those parties fail to respond, attorneys must report to the board. Some attorneys believe this duty may conflict with their field’s existing ethical codes of conduct.

The other provisions of the act, more generally known, are these:

* CEOs and CFOs must certify their financial reports are accurate, or suffer penalties of $1 million and up to 10 years in prison for "knowing" violations, and up to $5 million and 20 years for "willful" violations.

* All personal loans to executives and directors by public companies are banned.

* Executives are required to pay back bonuses or equity-based compensation, if companies later restate their financials.

The Sarbanes-Oxley Act is discussed in an excellent on-line review by Perkins Coie, from which this is drawn. See www.perkinscoie.com.

10/15/02    Foreign Corrupt Practices Act.

Here are a few sites with information on the FCPA.

McGuireWoods (a law firm)    http://www.mcguirewoods.com/news-resources/publications/corporate_services/article75.asp

Northrup Grumman (a defense contractor; includes a FCPA "quiz") http://sensor.northgrum.com/ethics/Documents/FCPA.pdf

Article from Indiana Lawyer (a trade publication)   http://www.icemiller.com/publish/corrupt.htm

10/15/02    U.S. Sentencing Guidelines

Here is the site for the U.S. Sentencing Commission:  http://www.ussc.gov/

Copyright 2002, Doug Schuler

Please report any technical errors on this page to:
Webmaster Brett Solberg.