Topic 7: Duties to the Company

Part One: Basic Moral Responsibilities of Employees


Basic issues: What responsibilities do business professionals have?

Moral and legal responsibilities to the company that employs her.

Responsibilities that come from her profession.

Other moral and legal responsibilities that are independent of her role as an employee or member of a profession.

What duties do we owe to our employers?

Legally, all employees are "agents" of their employers; they have an obligation to act on behalf of the employer (the "principal").

The law of agency has developed along side of moral norms that have to do with the idea that the principal has certain legitimate expectations concerning the behavior of the agent. The law of agency reflects moral ideas about what expectations by the principal are indeed fair and legitimate, and what kinds of behaviors by the agent are consistent with these fair and legitimate expectations.

This basic duty includes more specific obligations:



Due care and skill


Respect for employer’s property

For lower-level employees, the legal duties to the employers are fairly narrow and clear-cut.


The Agency Relationship for Managerial Employees and Business Professionals: For higher level employees, these basic moral obligations still exist, but they are more open-ended.

The agency relationship between professional/managerial agents and their principals is sometimes called a fiduciary relationship; the duties it places on the agent are often called fiduciary duties.

When acting as an agent, the business professional has a relationship to her/his employer/client that is much like

The relationship between doctor to patient

The relationship between lawyer to client

Although the same basic duties exist that exist for lower level employees, for higher level employees, they are much more open-ended and require much more judgement and pro-active behavior.

(Pro-active) loyalty

(Open-ended) obedience

(Expert) due care/skill

(Judicious) communication

(Proper managing of and) respect for company property (including intangible property, such as money, information, and authority).


Topic 7: Duties to the Company

Part 2: Conflict of Interest, Company Property, and Abuse of Power


Loyalty and Conflicts of Interest

Conflicts of interest arise when you get involved in a situation in which your fiduciary obligations conflict with some other obligation or interest.

Kinds of Conflict of Interest

Potential vs actual

Apparent vs. real



Competing against principal

Secret Incentives

Question: What’s wrong with conflicts of interest?

Preventative Measures

Specific policies

Disclosure, recusal, and divestiture

General rule: It is easier to avoid temptation than to resist it.


Managing Company Property:

Managing versus misusing

The owners of the company typically will give their employees and other agents control over a number of things.

These things are given to the agent’s control by the principal for the sole purpose of enabling the agent to better look out for the interests of the principal.

If the agent uses these things for his/her own personal purposes without explicit authorization by the principal, the agent is misappropriating (i.e., stealing) someone else’s property.

Failure to respect physical and financial property


Misappropriation/unauthorized use



Abuse of power or position

This is closely related to conflict of interest.

It occurs when an agent uses her/his position and the authority that goes with it in a way that does not benefit the principal.

It is essentially analogous to the misappropriation of company property.

Topic 7: Duties to the Company

Part 3: Insider Trading


Insider Trading

Definition: The SEC has defined illegal insider trading as "the purchase or sale of any security of any issuer, on the basis of material, nonpublic information about that security or issuer, in breach of a duty of trust that is owed directly, indirectly, ore derivatively, to the issuer, or to any other person who is the source of the material, nonpublic information."

In simpler (but less legally precise) terms, insider trading occurs when a person trades a stock based on material information about the company that is not accessible to the public, and which was gotten because someone violated a fiduciary or other duty of confidentiality.

Legal Status:

The legal issues surrounding insider trading are complex and ever-changing

Insider trading is governed by the SEC under the Securities Exchange Act of 1934, and a whole web of subsequent SEC administrative rules, court decisions, and Congressional acts.


Primary — Insider trading of a stock by someone who has a fiduciary duty to the company whose stock it is.

Secondary — Insider trading by someone who does not herself have any fiduciary obligations of their own to the company whose stock they are trading, but who got the inside information because of someone else violating a fiduciary duty to the company whose stock it is.

Theories about the moral status of insider trading

Theory One: Insider trading is bad because it harms the market.

Question: In what way, if any, does insider trading harm the market?

Theory Two: Insider trading is good because it helps the market

Question: In what way, if any, might insider trading help the market?

Theory Three: Insider trading is bad because it involves an unfair advantage. (This is often called the "Unfair Advantage Theory")

Question: In what way, if any, is insider trading unfair?

Theory Four: Insider trading is bad because it involves the violation of a fiduciary obligation to the company whose stock it is (and thus, ultimately, to the owners of the company). (This is often called the "Misappropriation Theory").

Question: How does insider trading violate a duty to the company whose stock is being traded?

Is insider trading really unethical? (Notice that this is much the same question as the question of whether we should have laws against insider trading.)







Topic 7: Duties to the Company

Part 4: The Limits of Loyalty


The Limits of Employee Loyalty

The basic conflict: Duties that arise from the agency (employment) relationship vs. other moral duties that are independent of that relationship.

Basic principle: The moral duties that arise with the agency/employment relationship do NOT override or make irrelevant one’s other moral duties. One cannot ignore one’s other moral duties just because the boss has given you instructions to do so.

The "Nuremberg Defense" has been rejected by civilized societies

The agency relationship is a fundamentally moral and legal relationship that exists for the benefit of society (to allow efficient division of labor, etc.); it cannot be used to justify conduct that is illegal or otherwise harmful to society or its members.


The "Milgram Effect"

One might ask, given that most people realize that the Nuremberg Defense is defective, why does the abdication of responsibility happen at all?

One answer to this question is provided by psychological theory and experiment, the most famous of which is the work of Stanley Milgram.

In the setup depicted in the film clip, 40 subjects were tested.

No one stopped before reaching 300 volts, which was highest voltage labeled as "intense shock;" the next highest voltage was labeled as "extreme intensity shock" (5 stopped at that point)

8 more stopped somewhere between 315 and 360 volts ("extreme intensity shock).

1 more stopped at 375 volts (the first switch labeled as "danger: severe shock").

26 (yes, twenty-six), or 63%, went all the way to the end–450 volts, labeled "XXX."

The mean maximum voltage level administered was 360 volts.

In the setup in which the "teacher" had to physically place the "learner’s" hand on the electric plate to administer the shock, the numbers were as follows (n=40):

No one stopped before reaching 135 volts (one person stopped at this level).

16 people stopped at 150 volts

3 more stopped at 180 volts.

At various points over the interval between 210 and 300 volts, 5 more stopped.

3 more stopped between 315 and 345 volts.

12 people (yes, that’s twelve), that’s 30% went all the way to 450 volts.

Conclusion: The human tendency to follow instructions, even when those instructions harm other persons, seems to be very strong–indeed, much stronger than one might have guessed.

The Milgram Effect in action: Three Notorious Examples of the Abdication of Responsibility

The Holocaust

My Lai

Kitty Genovese

Question: Why is it important for business persons to know about the Milgram Effect?