New York University

LEONARD N. STERN SCHOOL OF BUSINESS NEW YORK UNIVERSITY

PROFESSIONAL RESPONSIBILITY: MARKETS, ETHICS & LAW (COR2-GB.3101) EMBA: January 2012

PROFESSOR Bruce Buchanan  Office: KMC 10-97  Office Hours: by appointment  Phone: 212 998-0530  Email: [email protected]  Secretary: [email protected] or 998-0048

COURSE OBJECTIVES

The purpose of this course is to introduce the student to a broad range of “non-market” issues encountered by managers and business professionals, and to help the student develop a set of analytical perspectives for making judgments when such issues arise. In economics many of these issues can be described as market failures or imperfections. To a limited extent, we will illustrate how the legal system is used to redress such failures of the market economy. We will also examine the role of ethical norms and reasoning in resolving such issues in managerial life, and in establishing standards of professional responsibility.

More directly, the student in this course will exercise professional judgment through discussion and analysis. Most such exercises will require the analysis of one or more cases, as indicated on the attached schedule of class assignments. In addition, we will study writings in the fields of ethical reasoning, professional responsibility, and the law.

DIGITAL COURSE PACKETS

Most cases and readings for this course are found on Blackboard. However, Blackboard will not be available until December. Therefore, cases and readings that you are encouraged to focus on will be available on XanEdu (http://www.xanedu.com/).

PREPARATION FOR CLASS

Each class session consists of several study modules. Each study module contains readings and study questions. Your primary obligation in this course is to prepare for class discussion by thorough reading and analysis of assigned materials. Case discussions and in-class activities are an essential part of the course. All students are responsible for mentally preparing answers to all of the study questions before coming to class. The instructor will ask some students to provide their answers orally, as a basis for further discussion.

1 GRADING

The weights for the student’s overall grade are: Class Participation 20% Homework: Class Journals (1 per Session) 40% Term Paper Project 40%

CLASS JOURNALS

Each student will keep a written journal of each and every session. This journal is NOT A SUMMARY of the session, rather it is a REACTION TO THE SESSION. I want to know what you think of the ideas discussed in the session, were they: New? Banal? Insightful? Wrong? Applicable? Outrageous? Drill down on one or two issues or ideas, don’t flit from one to the other. USE COURSE READINGS AS SUPPORT FOR YOUR IDEAS OR AS TARGETS FOR YOUR ARGUMENTS. Please be as intellectually and emotionally honest as you can. If you think the instructor has said something stupid in class, say so, and why. Do not worry about offending him.

ENTRIES FOR 1/9, 1/11, and 1/13 DUE ON 1/23 ENTRY for 1/28 and 2/10 DUE ON 2/18

TERM PAPER DESCRIPTION: (1 page typed)

DUE: 1/25 A one-page description of your term paper project as described below.

2 TERM PAPER PROJECT: (8 – 12 pages typed & double-spaced)

DUE: 2/25

The purpose of this paper is to allow the student to apply principles of professional responsibility to an actual, specific business situation. The student will describe a situation with which he or she has first-hand familiarity. The student may have been a major or minor actor in the situation, or may have merely witnessed the situation. In any event, the requirements are that the situation raise ethical or legal issues and that the student was there. It would not be appropriate to analyze a situation if you were not in a position to observe it directly. Organize the term paper as follows:

I. Situation Provide a description of the situation or practice; this description must be detailed and rich enough to allow the reader to get a clear sense of the issues and circumstances (2-4 pages).

II. Analysis Apply some method or methods of ethical (or perhaps legal) reasoning to the situation and examine the results of this application. Are the results logical, beneficial, counter intuitive, or in any other way problematic? Here the student should apply, wherever appropriate, concepts from the course and its readings. Also, the student should cite the relevant law (2-4 pages).

III. Resolution & Conclusion Describe how the situation was actually resolved. Discuss this resolution in light of the ethical analysis from section II (2-4 pages).

Evaluation of Term Paper Project: Good performance (hence good grades) on this assignment consists of systematically and thoroughly applying relevant concepts and methods from the course to the situation, and in testing the worth of those concepts and methods in resolving the ethical issues it presents.

Confidentiality of Term Paper Projects: The contents of the term paper projects that you submit are held confidential. The term papers are not read by anyone other than the professor and are not disseminated in any fashion to other person(s).

If you have any concerns about confidentiality, you are invited to disguise names and dates as long as it does not change the ethical issues raised by the situation.

3 NOTE: Focus on the readings and cases in red that are bolded which can be found on XanEdu (see Laura Deffley for username and password). All of the readings and cases listed below will be available on Blackboard which should be accessible by December.

COURSE SCHEDULE TOPICS & ASSIGNMENTS

SESSION #1 A DATE: 1/9 MARKET FAILURES & PROFESSIONAL DILEMMAS READINGS Coursepack Economic Theories of Linda N. Edwards & Course Concepts Regulation: Normative Franklin R. Edwards (market failure) vs. Positive The Price of Lobster The Economist Moral Standards Across Thermidor http:/www.suboceansafety. Borders org Pollution Case Dean Starkman Control By Law Highlights Trend to Let Employees Take the Rap.

Making An Ethical Halbert and Ignulli Course Concepts Decision (ethical theories) A Role for Virtue in Koehn Course Concepts Ethics (ethical theories)

STUDY QUESTIONS 1. Why do market failures tend to bring about laws or regulations to counter their effects?

2. Based on the Edwards article which market failures or imperfections are present in the “Lobster Thermidor” (The Economist) case? In the “Pollution” (Starkman) case?

3. How might ethical methodology help an executive or legislator to make more effective decisions in the presence of market imperfections?

4 SESSION #1B DATE: 1/9 TRUTH & DISCLOSURE

READINGS Course Pack Bluffing Jim T. Priest Course Concepts (business bluffing) Reputation and Corporate Keith Weigel & Colin Course Concepts Strategy: A Review of Camerer (game theory) Recent Theory and Applications Bitter Pill Ralph T. King, Jr Truth & Disclosure (“Truth”) Familiar Refrain: Douglas A. Blackmon “Truth” Consultant’s Advice on Diversity was Anything but Diverse Today’s Analyst Often Roger Lowenstein “Truth” Wears Two Hats Double Agents in the Roy C. Smith “Truth” Financial System The Numbers Game Arthur Levitt “Truth”

You Have The Only Peter Elkind “Truth” Hard Copy What the Doctor’s Aren’t Arlene Weintraub “Truth” Disclosing Doctor’s Paid to Prescribe Vanessa Fuhrmans “Truth” Generic Pills

STUDY QUESTIONS 1. Would a “Bluffer” (Priest) voice any objections to the (i) corporate actions of Boots described in “Bitter Pill” and (ii) Towers Perrin in the “Familiar Refrain” case? Do you agree with Priest? Can you identify any market failures in “Bitter Pill” and “Familiar Refrain”?

5 SESSION # 2A DATE: 1/11 GIFTS, SIDE DEALS & CONFLICTS OF INTEREST

READINGS Course Pack Neutral Omni-Partial Ronald M. Green Course Concepts Rule Making Bribery & The Foreign http://www.usdoj.gov/crimina Gifts, Side Deals & Corrupt Practices Act l/fraud/docs/dojdocb.html Conflicts of Interest (“Gifts”) Buynow Stores Bruce Buchanan Gifts Roger Berg Ronald M. Green Gifts Wall Street and the Gretchen Morgenson & Pat Gifts Nursery School McGeehan Hat Trick Gretchen Morgenson Gifts A Bribe by Any Other Neil Weinberg Gifts Name Marsh & McLennan Ingo Walter Gifts Companies The Doctor vs. Device Arlene Weintraub Gifts Makers

STUDY QUESTIONS 1. Make a list of all the gift practices described in Buynow Stores. In your judgment, which of these, if any, are inappropriate? Use ethical concepts and methods from the Green readings to support your position.

2. Do the Roger Berg and Wall Street Nursery School cases differ materially from Buynow Stores? Use ethical concepts and methods from the Green readings to support your position.

6 SESSION # 2B DATE: 1/11 WHISTLE BLOWING & LOYALTY

READINGS Course Pack The Return of Qui Tam Priscilla R. Budeiri Whistle Blowing Aircraft Brake Scandal Kermit Vandivier Whistle Blowing He Told. He Suffered. Kurt Eichenwald Whistle Blowing Now He’s a Hero A Whistle-Blower Rocks Charles Haddad, with Amy Whistle Blowing an Industry Barrett How Ex-Accountant James Bandler & Mark Whistle Blowing Added Up To Trouble for Maremont Humbled Xerox Moment of Truth: A Donald Schepers & Whistle Blowing Whistleblower’s Dilemma Harry Rosen in the Financial Services Industry Legal Tangle At The Business Week Whistle Blowing Fountain of Youth Fraud Busting Begins At Mark Green Whistle Blowing Home Airline Safety: A Stanley Holmes Whistle Blowing Whistleblower’s Tale The Salaryman Accuses Martin Fackler Whistle Blowing Delta Industries Lawrence Zicklin Whistle Blowing

STUDY QUESTIONS 1. Consider the position of Searle Lawson in the “Aircraft Brake Scandal” case. At what point, if any, should he have blown the whistle to someone outside B.F. Goodrich?

2. Mark Jorgeson (“He Told He Suffered” - Prudential) and James Bingham (“How Ex-Accountant” - Xerox) worked at major corporations where they tried to bring truthful accounting numbers to the attention of top management and investors. What personal risks did they run? How did the outcomes of their cases reflect their different approaches to whistle blowing?

7 SESSION # 3A DATE: 1/13 AGENCY & FIDUCIARY DUTY

READINGS Course Pack Disloyal Agents David Cavers Agency & Fiduciary Duty (“Agency”) Optimal Health Insurance Mark V. Pauly Course Concepts (moral hazard) Quality Department Lawrence Zicklin Agency Stores Old City Enterprises Lawrence Zicklin Agency The Man Who Paid the Richard A. Oppel, Jr. Agency Price for Sizing Up Enron Plasma International TW. Zimmer & P.L.Preston Agency You Bought, They Sold Mark Gimein Agency My Patients Are Dying Lawrence Zicklin Agency At The Center of Fraud, Susan Pulliam Agency WorldCom Official Sees Life Unravel Insolvency of the Fannie Nouriel Roubini Agency and Freddie Predicted Here Two Years Ago. What Happens Next? Or How to Avoid the “Mother of All Bailouts”

STUDY QUESTIONS 1. Sketch out the relationships between parties described or implied in the case “Quality Department Stores.” Given your analysis, how should the investment manager vote?

2. Considering the Gimein reading (“You Bought, They Sold”) what are appropriate limits, if any, on sales of stock by corporate insiders? Does this behavior present any moral hazards, particularly to shareholders? Do the fiduciary duties materially differ with the behavior of Chung Wu broker (“Man Who Paid the Price”)?

8 SESSION # 3B DATE: 1/13 BOARD OF DIRECTORS

READINGS Course Pack Corporate Liability Amy Onder and Adam J Board of Directors Exposure and the Potential Siegelheim (“Directors”) Risk of Individual Director (business judgment rule) Liability Our Schizophrenic William T. Allen Course Concepts Conception of the Business Corporation Crisis of Corporate Ethics Roy C. Smith “Directors” The Director’s New Joan Lubin “Directors” Clothes Excerpts from the Report New York Times “ Directors” of a Special Committee Investigating Enron Boeing CEO Resigns Renae Merle “ Directors” Over Affair With Subordinate Off To The Races Again, Eric Dash “Directors” Leaving Many Behind A CEO’s Dilemma Lawrence Zicklin “Directors”

Companies Promise Mark Maremont “Directors” CEO’s Lavish Posthumous Paydays House Panel Finds Gretchen Morgenson “Directors” Conflicts in Executive Pay Consulting Executive Pay: Conflicts U.S. House of “Directors” of Interest Among Representatives, Committee Compensation on Oversight & Government Consultants Reform

9 SESSION # 4A DATE: 1/28 CONTROL BY LAW

READINGS Course Pack Living with the Jeffrey Kaplan, Linda S. Control By Law Organizational Dakin, Melinda R. Smolin Sentencing Guidelines Strong Law Enforcement Is Eliot Spitzer Control By Law Good for the Economy Prosecutors’ Tough New Laurie P. Cohen Control By Law Tactics Turn Firms Against Employees Life in a Federal Ann Davis Control By Law Prosecutor’s Cross Hairs Deals & Consequences London Thomas Jr. Control By Law The Thompson Memo, http://www.usdoj.gov/dag/cftf/co Control By Law U.S. Dept. of Justice. rporate_guidelines.htm 1/20/2003 Ebbers’ Sentence Adds Up Dan Small Control By Law How Many CFO’s Been Kate Plourd Control By Law Convicted? How Prepared Are Ronald Berenbeim Control By Law Companies for the Revised Sentencing Guidelines? The Convergence of Ronald Berenbeim & Jeffrey Control By Law Principle and Rule-Based Kaplan Ethics Programs In Justice Shift, Eric Lichtblau Control By Law Corporate Deals Replace Trials United States Department McNulty Memorandum: Control By Law of Justice Principles of Federal Prosecution of Business Organizations

STUDY QUESTIONS 1. How do you think the U.S. Sentencing Guidelines (“Living with the Organizational Sentencing Guidelines”) might change corporate behavior? Consider this from the perspective of the corporation as employer (“Prosecutors’ Tough New Tactics”).

2. Do you agree with the current trend towards the deferred prosecution of white-collar crime (“In Justice Shift”)?

3. What are the implications of the Corporate Sentencing Guidelines for employees, CFOs and judges? Consider the situation of Sharon Hogge (”Life in a Federal Prosecutor’s Cross Hairs”).

10 SESSION # 4B DATE: 1/28 INSIDER TRADING

READINGS Course Pack What is Insider Trading? http://www.sec.gov/answers/ Insider Trading insider.htm

An Accountant’s Small Tom L. Beauchamp Insider Trading Time Insider Trading Raymond Dirks and Roy C. Smith Insider Trading Equity Funding of America Trading Room Ethics Lawrence Zicklin Insider Trading Martha Stewart Roy C. Smith Insider Trading The Case for Insider Henry G. Manne Insider Trading Trading The Cost of Inequity The Economist Insider Trading Should Securities Firms Be Nouriel Roubini Insider Trading Regulated and Supervised Like Banks

STUDY QUESTIONS 1. Should the accountant, Davidson, trade on the information he has obtained from Wolff (“Accountant’s Small Time”)? Use legal theories of insider trading as defined by the Securities and Exchange Commission http://www.sec.gov/answers/insider.htm (“What is Insider Trading/”) and ethical concepts to support your position.

2. Compare the behavior of Dirks (“Raymond Dirks”) with that of Stewart (“Martha Stewart”) in relationship to the concept of fiduciary duty. Why was Dirks reprimanded by the SEC but ultimately exonerated by the Supreme Court? Use legal and ethical concepts to support your position.

3. Do laws forbidding insider trading make financial markets more or less efficient? Use ideas from both economics and ethics to justify your position.

11 SESSION # 5A DATE: 2/10 SOCIAL RESPONSIBILITY TO STAKEHOLDERS

READINGS Course Pack The Social Responsibility Milton Friedman Social Responsibility of Business is to Increase Its Profits Our Schizophrenic William T. Allen Course Concepts Conception of the Business Corporation Restricted Reasons and Arthur Isak Applbaum Course Concepts Permissible Violation Toy Maker Faces Joseph Pereira Social Responsibility Dilemma as Water Gun Spurs Violence Bally’s Grand Casino, Heidi Evans Social Responsibility For Elaine Cohen, Is Her One True Home Cut Loose Anne-Marie Cusac Social Responsibility Down and Out in White Nelson D. Schwartz Globalization & Domestic Collar America Markets Credit Card Companies Joseph Cahill Social Responsibility Target New Niche: the Mentally Disabled The Right Thing: When Jeffrey Seglin Social Responsibility Good Ethics Aren’t Good Business Bridging the Logistical Ronald E. Berenbeim Globalization & Domestic Divide: Integration of Poor Markets Countries in Global Supply Chains

STUDY QUESTIONS 1. What advice would Friedman (“The Social Responsibility of Business”) give to the CEO of Larami Corp., manufacturer of the Super Soaker (“Toymaker Faces Dilemma”)? Do you agree with Friedman? Use ethical methods and concepts of fiduciary duty to support your position.

2. If you were the manager of “Bally’s Grand Casino”, would you treat Elaine Cohen any differently? What would Friedman (“Increase Profits”) advise the manager to do? Use ethical methods and legal concepts to support your position.

3. Did the CEO of Smith & Wesson fulfill his fiduciary duties (“The Right Thing”)? Justify your position. How would Applbaum (“Restricted Reasons & Permissible Violation”) judge his behavior?

12 SESSION # 5B DATE: 2/10 MORAL STANDARDS ACROSS BORDERS

READINGS Course Pack United States Bill of Rights http://www.usinfo.state.gov Moral Standards

In Praise of Cheap Labor: Paul Krugman Moral Standards Bad Jobs at Bad Wages… Human Rights on the Eve of His Holiness the Dalai Lama Moral Standards the 21st Century Universal Declaration of http://www.un.org Moral Standards Human Rights The Oil Rig Joanne B. Ciulla Moral Standards For Cruise Workers, Life is Joshua Harris Prager Moral Standards No “Love Boat” Stretching Federal Labor Seth Faison Moral Standards Law into the South Pacific Lives Held Cheap in Barry Bearak Moral Standards Bangladesh Sweatshops Nobodies: Does Slavery Exist John Bowe Globalization & in America? Domestic Markets Up Against Wal-Mart Karen Olsson Globalization & Domestic Markets An Ugly Side of Free Trade: Steven Green house & Moral Standards Sweatshops in Jordan Michael Barbaro Evildoers? Mure Dickie & Stephanie Moral Standards Kirchgaessner New York Manhole Covers, Heather Timmons and J. Moral Standards Forged Barefoot and Sweaty in Adam Huggins India

STUDY QUESTIONS 1. According to the “Universal Declaration” have any basic human rights been violated in the “Oil Rig” case? Are the ex-pats justified in getting better treatment than the Angolans?

2. Should cruise workers that service US ports enjoy the rights of other US workers (“Life Is No Love Boat”)? Are sweatshops unethical according to Krugman (“In Praise of Cheap Labor”) or the Dalai Lama?

3. Should US labor and safety laws apply to the Northern Mariana Islands (“Stretching Federal Labor”)?

4. Do human rights exist? If so, as the CEO of a corporation, how would you apply these ideas to workers in Bangladesh (“Lives Held Cheap in Bangladesh Sweatshops”)?

13 SESSION # 5C DATE: 2/10 DISCRIMINATION

READINGS Course Pack Equal Employment http://www.eeoc.gov Discrimination Opportunity Commission Sexual-Orientation Casey J. Dickinson Discrimination Protection Added to New York Law Foreign Assignment Thomas Dunfee and Diana Discrimination Robertson Now Look Who’s Jane Gross Discrimination Taunting. Now Look Who’s Suing Fear of Firing Michael Orey Discrimination Too Old to Work Adam Cohen Discrimination Can Employers Alter Ann Zimmerman Discrimination Hiring Practices to Cut Health Costs? Mind If I Peek At Your Brian Hindo Discrimination Paycheck?

STUDY QUESTIONS 1. In the “Foreign Assignment” case, how would you judge the actions of Bill Vitam? Use ethical concepts as well as the law, to justify your position. According to the EEOC, can the bank (employer) be held liable for sexual harassment created by its employees? Does the bank have any affirmative defenses according to the Equal Employment Opportunity Commission (http://www.eeoc.gov)?

2. Is it a form of discrimination to avoid hiring capable applicants who fall within a “protected class” due to potential litigation costs (“Fear of Firing”)?