MGT610 Business Ethics Assignment 1 Solution Spring 2013

Liquefied Petroleum Gas (LPG) has been a deregulated sector in Pakistan for almost a decade.
The primary objective of this price deregulation by the government was to bring more
investment in the oil and gas sector of Pakistan. Local production in the country is less than the
demand of this product. According to a rough past estimate, local production of LPG in the
country is 1600 metric ton and its demand is around 3000 metric ton per day. Different LPG
companies that were licensed by Oil & Gas Regulatory Authority (OGRA) had to manage the
product demand of the market mostly through de‐marketing activity and import of LPG (in few

cases through illegal channels from Iran). This massive gap in the supply and demand of the
product also created black marketing and import of product without paying taxes on the import
and without the prior permission of OGRA. Price trend in the market over the years is that this
product’s price increases in winter due to extra demand and decreases in summer due to
decrease in the demand. LPG initially was thought to be a pro‐poor fuel but it was not the actual
case in the market because its prices remained out of the reach for a poor person during winter
Real time scenario
In a routine price cartel situation just before the winter season, managers of the different LPG
licensed companies were sitting together in a meeting for deciding a mutually agreed price with
extra and unchecked profit during the upcoming winter season. Most of the managers were
keen to have a constant increase in the price during winter with their mutual consensus but one
of the managers, Mr. Ali suggested that this constant increase in the fuel price will increase the
suffering of common and poor people. All the other stake holders heavily criticized Mr. Ali as he
was suggesting a cut on the profit for the interest of society. Some of the senior managers in
that meeting told Mr. Ali that he had no right to think for these ethical considerations in
business as he is representing his company as an employee and that there is no such law to
regulate the price of the product. Mr. Ali’s point of view was that he was also representing the
same interest of his company for increasing the profit but he said that he is also seriously
concerned about the low purchasing power of this fuel of the common person and that he will
remain firm on this argument. This initiated a new dimension of brainstorming for social
responsibility and ethical consideration in that business meeting. Now on one side there was
short term strategy to earn high profit and on the other side, there was a long term strategy of
business growth with ethical consideration.
Considering the above mentioned scenario, answer the following questions based on the knowledge that you have acquired from this course so far.

1: In your point of view, what may be the possible reason of prisoner’s dilemma in this situation? How will the ethical consideration help this business sector as a long term growth strategy? (10 Marks)

The Prisoner’s Dilemma is a classic example of games theory, an area of mathematics whose foundations were laid down by John Nash.

The Prisoner’s Dilemma shows that, in certain circumstances, if the members of a group trust each other, they can choose a course of action that will bring them the best possible outcome for the group as a whole. But without trust each individual will aim for his or her best personal outcome – which can lead to the worst possible outcome for all.

In the Prisoner’s Dilemma two players act as prisoners who have been jointly charged of a crime (which they did commit) but questioned separately. The police only have enough evidence to be sure of a conviction for a minor offence, but not enough for the more serious crime.

The prisoners made a pact that if they were caught they would not confess or turn witness on each other. If both prisoners hold true to their word they will only be convicted of the lesser offence. But the dilemma occurs when the police offer each prisoner a reduced prison term if they confess to the serious offence and give evidence against the other prisoner.


Companies with a strong ethical identity tend to maintain a higher degree of stakeholder satisfaction, positively influencing the financial results of the company, according to the Ethical Investment Research Service. Conversely, lack of personal and professional ethics can lead to negative financial results, as recently evidenced by the collapse of Wall Street firms. Risky loans and questionable business practices put many banking and insurance firms in a precarious position. Ensuring ethical behavior at your company can help improve your company’s economic performance.

Avoiding Unnecessary Risks

In our capitalist society, the economy emphasizes private ownership in a privately controlled economy. Companies exist primarily to make money for their owners and shareholders. Generating a profit is the main goal. Short-term profit tends to be more important than long-term success. Without confidence in management, stakeholders tend to limit investments, negatively affecting growth. According to EIRIS, studies show that ethics-related news influences a company’s share price for better or worse, revealing effects of between 0.5% and 3% of share price.

Validating Return on Investment

Whether a company has outside investors, relies on venture-capital funding or reinvests its own profits, keeping accurate records is essential to long-term success. Announcing large returns that are the result of fraudulent accounting can lead to issues that ultimately hurt a company’s performance. Ethical business practices can help companies avoid legal problems and negative financial results that arise once the unethical behavior is discovered. These practices can also help companies provide a consistent return on investment as they continue focusing on operating effectively and efficiently without the distractions of bad press and negative public perception, hurting business.

Earning from Green Environmental Practices

As people become more aware of companies’ impact on the environment, they want to do business with companies that reflect their values. For example, if your production processes cause water pollution, you may be able to conduct business in a cost-effective manner for the short term, but public opinion and pressure to improve your impact on the environment may actually reduce your sales profit in the long run. Avoid these situations by acting responsibly in the first place.

Improving Employee Morale

Employees prefer to work at companies where they will be treated with dignity, respect and fairness. When companies establish a high standard for ethical business conduct, employees know that they will be treated well. In return, they treat customers the same way. Companies with high levels of customer satisfaction tend to generate a higher degree of customer loyalty, repeat business and more market share in the long run. Customers may decline to deal with a business that causes them to be suspicious and afraid. Businesses that contribute to their community, maintain good relationships with government authorities and other businesses tend to be more successful in the long run. These companies will not get distracted by unnecessary lawsuits and other activities that detract from producing quality products and services that enable positive financial results for the company.

2: How can Mr. Ali create the spirit of moral reasoning in this interest group? Discuss with logical points. (10 Marks)

Moral reasoning is individual or collective practical reasoning about what, morally, one ought to do. Philosophical examination of moral reasoning faces both distinctive puzzles — about how we recognize moral considerations and cope with conflicts among them and about how they move us to act — and distinctive opportunities for gleaning insight about what we ought to do from how we reason about what we ought to do.

Moral reasoning is the process of determining right or wrong in a given situation. According to the American psychologist, Lawrence Kohlberg, people develop through three levels of moral reasoning as needed by situations they encounter. The lowest level of development involves making decisions of morality based on the prospect of punishment – in other words, by trying to avoid getting punished. At the second level a person perceives an absolute right and wrong and believes the law is the judge of morality. A person has reached the highest level when they make moral choices based on social contracts, or unspoken agreements to behave a certain way, and when they can generalize ethical principals beyond their own interests. This is a more abstract type of reasoning and not one based on simple ideas such as trying to avoid punishment.