Ethical Implications of Trade
©
Silvio Meli
Senior Magistrate
silvio.meli@gov.mt
President
Commission for Fair Trading
Malta
Competitiveness Strategies for Small States
Islands and Small States Institute
University of Malta
2Oth April, 2010
I.
Layout of Presentation
General Layout
I.
Layout of Presentation
II.
Defining the Terms
III.
Justice
IV.
Ethical Trading
V.
Competition Law
VI.
Conclusion
I.
Layout of Presentation contd.
Itemized Layout
I.
Layout of Presentation contd.
Itemized Layout
I.
Layout of Presentation
II.
Defining the Terms
•
Trade
o
o
o
o
o
o
o
•
•
•
•
Ethics
Virtues
Values
Justice
Market
Exchange
Barter
Money
Stock Exchange
Financial Markets
Market Prices
I.
Layout of Presentation contd.
Itemized Layout
III.
Justice
•
Value
o
o
•
Types
o
o
•
In General
In Particular
Law
Commutative
Distributive
I.
Layout of Presentation contd.
Itemized Layout
IV.
Ethical Trading
•
Ethical Trading
o
o
•
•
•
Benefits
Effects
Social Responsibility Factor
o
o
o
o
o
o
•
Objectives
Implication
On the Market
On the Workforce
On the Environment
On the Community
Human rights
Protection of the Environment
Transparency Factor
o
o
Bribery and Corruption
Fighting Corruption
I.
Layout of Presentation contd.
Itemized Layout
V.
Competition Law
•
•
•
Subject Matter
Economic Activity
Prohibited Agreements
o
o
o
Effect
Agreements Include
Types of Prohibited Agreements
Horizontal Price-Fixing
Horizontal Market Sharing
Cartels
Collusive Tendering
Information Sharing
Collective Exclusionary Agreements
De Minimis Rule
I.
Layout of Presentation contd.
Itemized Layout
•
VI.
Abuse
o
o
o
o
o
o
o
o
o
o
o
Conclusion
of Dominance
Aim
Dominance
Abuse
Exploitation
Requisites
Concept
Types of Abuse
Presumption of Dominance
Unfair Purchase or Selling Price
Market Power
Types of Markets
Product Market
Geographic Market
Temporal Market
II.
Defining the Terms
II.
Defining the Terms contd.
• Trade
o A mechanism that usually operates within a market.
o Involves the voluntary exchange of goods, services and
information.
o Originally it was carried out through barter. Later money was
introduced as a means of exchange.
o Later still, stock exchanges were devised.
o Trade was greatly simplified and promoted.
o Gave raise to the specific product or financial markets.
o Market prices started to emerge.
II.
Defining the Terms contd.
• Market
o A jurisdictional limit where goods, services and information
are traded or exchanged.
o May vary in:
Size.
Range.
Product.
Geographical scale.
II.
Defining the Terms contd.
• Exchange
o
o
o
o
Usually takes place through money transactions.
Therefore, Price is central.
Profit Motive is very often essential.
Participants involved are usually:
Buyers.
Sellers.
Entrepreneurs.
Consumers.
II.
Defining the Terms contd.
• Barter
o The direct exchange of goods and services for
corresponding material substitutes.
o Took place in the earlier stages of economic activity.
o When money was developed, barter declined.
II.
Defining the Terms contd.
• Money
o Accepted as a form of payment for equivalent item bought
or sold.
o Developed as:
a medium of exchange.
a unit of account.
o Value depended on its being declared legal tender.
II.
Defining the Terms contd.
• Financial Market
o Provides trading facilities for traders and stock brokers.
o Provides facilities for the issue and redemption of securities
as well as other financial instruments and capital events
including the payment of dividends.
o Is a mechanism that allows people to buy and sell, (trade), at
a price that reflects the market price in:
• Financial securities, (such as stocks and bonds).
• Commodities, (such as precious metals).
• Fungible items of value at low transaction costs and at prices
o Securities that are traded on a stock exchange include:
Shares issued by companies.
Investment products.
Bonds.
II.
Defining the Terms contd.
• Market Price
o Is the economic price for which a good, service, or
information is offered in the market.
o May be determined by:
Product and
Geographic
market
II.
Defining the Terms contd.
• Ethics
o Ethos: character.
o Seeks to
Address questions about:
Morality
Value Judgements
Study the concepts involved in practical reasoning.
o Studies what is
Good
Right
Duty
Virtue
Justice
Bad
Wrong
Obligation
Value
Fairness
II.
Defining the Terms contd.
• Virtues
o Is an analysis of human rightness.
o Is the value mankind gives to human behaviour:
A habitual disposition.
Inherent in the human will – rather than in the intellect.
o Is the conformity of one’s life and conduct to moral/ethical
principles.
o Consists in discovering and adopting the right characteristic
disposition of the will towards the ends that reason prescribes for
human actions i.e. that they are:
Just.
Courageous.
Moderate.
II.
Defining the Terms contd.
• Values
o Is taken into account in decision-making.
o One should be inclined to take values into consideration to
influence choice.
o They act as guides to assist in directing one’s actions.
o May be:
Subjective: as personal choices.
Objective: the requirements of rationality guide and correct
personal choices.
II.
Defining the Terms contd.
• Justice
o Cardinal Values
Prudence.
Fortitude.
Justice.
Temperance.
o One of the greatest discoveries in the history of
mankind’s self-understanding.
o First seen in Plato’s Symposium.
When Agathon takes his turn at making a speech in
praise of love.
Was host at that famous banquet.
Obviously sprung from earlier speculative thinking as
no special reason is given for this approach.
III.
Justice
III.
Justice contd.
• Value
o The constant and enduring will to render to others what is
their due.
o Is directed to the common good.
o Is the most important moral virtue.
Always in relation to others.
Inherent in one’s will rather than in one’s intellect.
Subjective: depends on one’s will.
Objective: seeks the good of other human beings.
III.
Justice contd.
o In General
Justice in general, is a moral virtue in general.
The goodness of justice is the goodness of every virtue.
All moral virtues are directed to the common good.
Justice is directed to the common good.
Laws of the political community prescribe the moral
virtues of the citizen.
o In Particular
Directs human beings in their relations, (with other
human
beings;
animals;
environment;
future
generations), with regard to particular goods.
Involves:
External actions.
External things
III.
Justice contd.
• Types
• Commutative:
o The duties of individuals and groups to other individuals and
groups.
o The notion of exchange.
• Distributive:
o The duties of the community to ensure that individuals and
groups receive a fair share of the community’s goods.
o This should be proportionate to their:
Contribution to the community.
Needs.
GoM1
Slide 24
GoM1
Ghandi:" reduce your wants to satisfy your needs".
Government of Malta, 4/4/2010
III.
Justice contd.
• Law
o
o
o
o
An order of reason.
For the common good.
By one with authority.
Promulgated.
IV.
Ethical Trading
IV.
Ethical Trading contd.
• Ethical Trading
o Objectives
Go beyond the strictly economic.
Consider the wider implications of business.
Are becoming increasingly important.
o Implication
Business acquires a social connotation.
One therefore looks beyond the strictly economic.
Decisions become socially relevant.
Lacking such animus causes social harm.
IV.
Ethical Trading contd.
• Benefits
o Makes the enterprise more competitive.
o Promotes the advantage of the:
Undertaking.
Consumer.
Competitiveness.
IV.
Ethical Trading contd.
• Effects
o Builds sales.
o Customers learn to choose to buy on more than strictly
financial factors.
o Attract investment.
o Staff loyalty and
increase
o Motivation
o Trust is enhanced through transparency.
o Boost revenue.
o Save money.
o Open business to new ideas.
o Go beyond the minimum legal obligations.
IV.
Ethical Trading contd.
• Social Responsibility Factor
o On the Market:
Promotion of the product.
From where and
one obtains supplies.
How
How the product is sold.
o On the Workforce:
Wages paid.
Conditions of work.
Equal opportunities policy.
o On the Environment:
Emissions and
Waste
policy.
IV.
Ethical Trading contd.
o On the Community
“Good Neighbour” policy.
What one puts back into the community.
o Human Rights
Secure the basic human rights in one’s relationship with suppliers.
o Protection of the Environment
Is translated as implementing Sustainable Development Policies.
Has now even emerged as a moral obligation.
Includes the attempt to repair damage already done.
Involves:
Design Processes: replace toxic substances with less harmful ones.
Energy Consumption: replace equipment with energy efficient machinery
and by using of renewable resources:
IV.
Ethical Trading contd.
• Transparency Factor
o Bribery and Corruption
Create uneven trading conditions.
Here the goal-post is constantly being changed to suit the
powers that be.
Produce a disincentive to trade.
Damage the economic system.
Foreign investment will not be forthcoming.
Only unreliable investment protagonists will be attracted.
IV.
Ethical Trading contd.
o Fighting Corruption
It is necessary to maintain a high standard of business
integrity.
Identify risk areas.
A much publicized anti-corruption and anti-bribery policy
is necessary.
The violation of such norms are to be thoroughly
investigated and severely disciplined.
Accurate financial records are to be kept.
Detailed procedure to be followed during business
transactions.
The prohibition of offering, giving and accepting of gifts or
hospitality.
The prohibition of donations to political parties.
Donations, if allowed, are at least to be disclosed and
publicized.
Whistle-Blower’s Protection is to be legislatively secured.
V.
Competition Law
V.
Competition Law contd.
• Subject Matter
o Undertaking:
“…any person whether an individual, a body corporate or
unincorporate or any other entity, pursuing an economic activity, and
includes a group of undertakings”.
o E.C.J. Hofner and Elser vs. Macrotron 1991:
“…the concept of
an undertaking encompasses every entity engaged in an economic activity
regardless of the legal status of the entity and the way in which it is
financed”.
• Economic Activity
o A broad general term.
o Profit-Making motive is not necessary.
o NGOs, Government Departments and Agencies are subject to
competition review.
o Commission vs. Italy 1998:
“…any activity consisting in the offering
of goods and services on the market”.
V.
Competition Law contd.
Prohibited Agreements
V.
Competition Law contd.
Prohibited Agreements
• Prohibited Agreements
o Article 5 of Chapter 379 is modeled on Article 101, (formerly 81), of
the Treaty of the European Union.
o Include all anti-competitive cooperation between firms.
o When the parties in any way express their joint intention to conduct
themselves on the market in a specific way.
o Direct contact is not necessary.
o Involves any:
Agreement
Decision or
between undertakings or
associations of undertakings
Concerted Practice
o Having the:
Object or
Effect
Preventing
Restricting
Distorting
Competition
V.
Competition Law contd.
Prohibited Agreements
o Effect
Null and
Unenforceable
ipso iure
o Agreements Include
Directly or indirectly fix purchase or selling price or other trading
condition.
Limit or control production, markets, technical development or
investment.
Share of markets or of sources of supply.
Impose dissimilar conditions to equivalent transactions to parties
outside the agreements – creating a competitive disadvantage.
Subject the conclusion of contracts to the acceptance of
supplementary obligations which have no connection with the subject
of such contracts.
V.
Competition Law contd.
Prohibited Agreements
o Types of Prohibited Agreements
Horizontal Price-Fixing
Equivalent to theft.
Involves discounts and rebates.
Notify party of prices one intends to charge.
Adopt identical cost-accounting methods.
Horizontal Market Sharing
Agreement on the apportionment of:
Geographic
markets.
Product
Customer
V.
Competition Law contd.
Prohibited Agreements
Cartels
Undertakings agree to limit production.
Effect: Prices tend to rise.
Examples:
Quota restrictions.
Monopolies.
Collusive Tendering
Collaboration in the tendering process.
Agree on submitting equivalent prices.
Rotating beneficiaries who submit the lowest tender.
V.
Competition Law contd.
Prohibited Agreements
Information Sharing Agreements
Acquire an accurate reading of circumstances.
Share relevant geographic – product market statistics.
Information exchange:
Of Little Concern
Of Major Concern
General statistical information
Confidential data.
Levels of demand/supply.
Individual price policies.
New technologies available.
Investment projects.
Individual outputs
.
V.
Competition Law contd.
Prohibited Agreements
Collective Exclusionary Agreements
Like cartels.
Aim at driving competitors out of the market.
Impede competitors from entering the market.
Examples:
Exclusive dealing with a preferred undertaking.
Suppliers boycott a particular distributor as he is outside the
cartel.
De Minimis Rule
When the market share is less than 10%.
Agreement is unlikely to restrict competition.
Is a iuris tantum presumption.
GoM2
Slide 42
GoM2
Not iuris et de iure
Government of Malta, 4/6/2010
V.
Competition Law contd.
Prohibited Agreements
V.
Competition Law contd.
Abuse of Dominance
• Article 9 of Chapter 379 is modeled on Article 102, (formerly
82), of the Treaty of the European Union.
• Aim
o To regulate unilateral behaviour of undertakings having a
dominant position.
o Want to eliminate competitors.
o Object or Effect of action must be anti-competitive.
• Dominance
o Per se is not prohibited.
o Only abuse is.
o Shakespeare:
“O, It is excellent
To have a giant’s strength: but it is tyrannous
GoM3
To use it like a giant”.
Slide 44
GoM3
Measure for Measure, Act II, Scene 2.
Government of Malta, 4/6/2010
V.
Competition Law contd.
Abuse of Dominance
V.
Competition Law contd.
Abuse of Dominance
• Abuse
o
o
o
o
Is always bad and condemnable.
One is cutting down his price to a level where he makes a loss.
Aim: to eliminate rivals.
Involves:
Corrupt Practices.
Cartels.
Unfair Prices.
Limitation of Production.
• Exploitation
o Is a legitimate use of the situation.
o Actually increases competition.
V.
Competition Law contd.
Abuse of Dominance
• Requisites
o Dominance must be in a market.
o There must be an abuse.
o Activity in question must have an anti-competitive Object or
Effect – one of them is sufficient.
o Even if they are all in different markets.
• Concept
o Economic strength enabling firm to prevent effective competition.
o Attains the power to behave to an appreciable extent, independently
of competitors, suppliers, customers and ultimately, of its consumers,
(United Brands vs. Commission 1976).
o If one is competing on merits and success is objectively justified,
then there is no problem.
V.
Competition Law contd.
Abuse of Dominance
• Types of Abuse
o Directly or indirectly impose an excessive or unfair purchase or
selling price or other unfair trading condition.
o Charge prices below the average variable cost of a product to drive
rivals out of the market.
o Limit production, markets or technical development to the
prejudice of consumers.
o Refuse to supply goods and services to eliminate rivals.
o Apply dissimilar conditions to equivalent transactions with
different trading parties imposing a competitive disadvantage.
o Make contracts subject to acceptance of supplementary
obligations which have no connection to such contracts.
V.
Competition Law contd.
Abuse of Dominance
• Presumption of Dominance
o Malta: 40% or the relative market.
o E.C.J.:AKZO Case: 50%.
• Unfair Purchase or Selling Price
o
o
o
o
o
o
o
o
o
Price charged for the product.
Percentage increase in the price over the long/short term.
Relationship between the price and the cost of the product.
Period of time for which price was changed.
Economic value of the product.
Importance of product to consumers.
Riske associated with bringing the product to the market.
Expected changes in the market.
Price charged by similar undertakings in analogous markets.
V.
Competition Law contd.
Abuse of Dominance
• Market Power
o The definition of market power is a
Factual
Legal and
Economic
analysis
• Types of Markets
o Product Market
Legal test is that of interchangeability.
See if goods or services are in the same market.
See if they are substitutable.
Substitutability
Demand side – consumer’s perspective.
Supply side – SSNIP Test.
V.
Competition Law contd.
Abuse of Dominance
o Geographic Market
Proper definition of objective conditions is essential.
Must be properly analyzed.
Determine the proper confines of the issue.
o Temporal Market
Another important element to consider.
Markets may vary
From time to time.
From season to season.
VI.
Conclusion
VI.
Conclusion
• All this financial and economic change initiated in 1994 in
Malta’s bid to become a member of the European Union.
• Competition Law conceptually placed justice, (as fairness), in a
deserving pivotal position in all commercial activity.
• It perfectly fits in with the general ethical behavioural limits
expected in this constantly evolving domain.
• Justice is restored to its rightful station.
• It is in the benefit of:
o
o
o
o
Entrepreneur.
Consumer.
Employee.
The Economy as a whole.
• FAIR COMPETITION LAW is the only law that proclaims the
value of JUSTICE in its very title.
• Hopefully, we who operate so intimately with it, will live up to
its excellent qualities.
Ethical Implications of Trade
©
Thank You
Silvio Meli