Archive for the ‘compliance’ Category
In Bangladesh, on Wednesday, a building collapsed, killing at least 260 people. The factories in the building made garments for a number of global retailers, including Canada’s Joe Fresh. This weekend, I’m very likely going shopping at Joe Fresh, and with a clear conscience. People threatening to boycott the brand are woefully misguided. Their sorrow is justified; a change in their shopping habits is not.
The events in Bangladesh represent an utterly horrible loss of life. Anyone unmoved by such a tragedy is less than human. But to see this as an indictment of Joe Fresh, or of Western consumers, is a serious mistake.
So, just what happened in Bangladesh? The 8-story building that collapsed on Wednesday housed a number of garment factories, a shopping mall, and a bank. The people who died did so partly due to the fact that someone in Bangladesh made a very, very bad decision: police had ordered the building evacuated the day before, due to structural defects, but factory managers ignored that order. That was an immoral decision, and perhaps a criminal one. I hope those managers are brought to justice.
Now, yes, it’s true that the purchasing decisions of Canadian consumers are also part of the causal chain that led to those deaths. But causal connection is not the same as moral responsibility. Every event, tragic or not, is the culmination of countless contributing factors. To be part of a causal chain is not the same as causing something to happen. There is no reasonable sense in which Canadians shopping at Joe Fresh are responsible for Wednesday’s deaths.
In fact, Canadians shopping at Joe Fresh are doing a lot of good. Places like Bangladesh — people in places like Bangladesh — absolutely rely on the jobs provided by the international garment industry. That is, there are people in developing countries who only have jobs because people in the industrialized West buy clothes from retailers who subcontract to manufacturers in places like Bangladesh.
None the less, some people are expressing outrage at the fact that Bangladeshis are dying so that Canadians can have cheap clothes. Is this situation really so unique? In North America, the deadliest trade is commercial fishing, followed closely by mining and logging. Does anyone imagine that no corners are cut in those industries, no safety standards violated? So Canadians, too, are dying…dying so that Canadians can have cheap crab and haddock, cheap oil and aluminum, and cheap wood and paper products. Actually, a lot of that stuff goes for export, so Canadians are dying so that people from other countries can have those things cheaply. Such is globalization: millions of people world-wide take risks that they think are worth taking, in order to make a living, and they can do so because people on the other side of the world are willing to pay them to.
But of course, companies like Joe Fresh still have some obligation to make sure that their subcontractors are treating employees decently. And the company certainly acknowledges as much. According to a statement on the brand’s Facebook page, their parent company, Loblaws Inc. has…
“robust vendor standards designed to ensure that products are manufactured in a socially responsible way, ensuring a safe and sustainable work environment. We engage international auditing firms to inspect against these standards. We will not work with vendors who do not meet our standards.”
In other words, the company makes exactly the promise it ought to make. Of course, there’s only so much it can do to guarantee that its subcontractors won’t break the law, on the other side of the planet. But then again, there’s notoriously little any company can do to guarantee that its subcontractors won’t break the law, whether it operates on the other side of the planet or just down the street.
Has Joe Fresh done enough in this regard? It’s impossible to say from the outside. But what’s crucial, here, is to see that even an event as tragic as Wednesday’s building collapse in Bangladesh does nothing to impugn the company’s integrity. Should we ask questions? Of course we should. But these events shouldn’t make us jump to conclusions. Nor will they deter me, at least, from going shopping this weekend.
Canadian engineering giant SNC-Lavalin continues to provide plenty of fodder for ethics classroom discussion, and making news in all the wrong ways. Over just the last three days, the company has made headlines for making over $1 million in illegal political donations in Quebec, for disguising dodgy payments to an agent in Angola, and for police searching the home of a former executive as part of a prosecution involving more than a dozen criminal charges.
Against this backdrop, slightly less attention has been paid to an announcement last week that the company had hired a former Siemens executive to take over the role of Chief Compliance Officer, a portfolio that ostensibly puts him in charge of ethics, too.
I was interviewed about this recently on BNN, (see video here) and the key question not surprisingly was whether having hired a new Compliance Officer is going to be enough to turn the company around, either in terms of ethics or in terms of reputation. In this regard, I think three key points need to be made.
First, a word about the relationship between ethics and compliance. The new guy SNC has hired (Andreas Pohlmann) is first and foremost in charge of compliance. Compliance with the law will of course be a very good start for SNC, but it’s just a start. Ethics has to be part of the picture. For that matter, even if Pohlmann’s only goal is to get the company consistently onto the right side of the law, there’s good reason he should pay attention to ethics, so that employees at SCN understand the ethical underpinnings of the laws the company has been breaking.
Second, the company needs to see that its reputation has to be built on more than its ability to pull off big engineering projects. SNC needs to be a company all stakeholders – including investors – can trust, because trust is the foundation of business. Given its track record so far, if I were looking for a big engineering contractor I wouldn’t put much trust in SNC at all. If they play fast-and-loose with the rules as much as they seem to, what’s to say they aren’t going to play fast-and-loose with their obligations to me, too?
Finally, the company needs to get past its apparent belief that bribery is just part of doing business. Bribery isn’t just illegal — illegal pretty much everywhere, even in places where it’s tragically common — it’s also bad business. And by “bad business,” I mean it is bad capitalism. It’s the opposite of free and open competition.
If SNC is going to regain its place as a rockstar Canadian company, it needs to show that it can go out there and compete and win on quality, rather than on its ability to bend and break rules.
The development goals of many underdeveloped nations are seriously hampered by illicit flows of money. The money sent into those countries in the form of aid and foreign direct investment is, in many cases, dwarfed by the money that flows out as a result of money laundering, bribery, and dodgy transfer pricing. Some estimates put that outflow as high as a trillion dollars. And a lot of that money flows through, between, or within corporations.
I recently took part in a panel discussion on this topic, part of a larger event put on by a group called Academics Standing Against Poverty (ASAP).
Here are a few of what I take to be the key points, not necessarily in order of presentation, from my discussion of the topic:
Corporations have two different categories of responsibilities when it comes to curbing illicit financial flows. First, they are of course responsible for their own behaviour. Under this heading, corporations have three key obligations. First is not to game the system to avoid taxes. Minimizing taxes — even going to significant lengths to avoid taxes — may seem to be part and parcel of a manager’s obligation to maximize profits. But there is no general obligation to maximize profits, and certainly no such obligation to do so ‘at all costs.’ Even the weaker duty to ‘put shareholders first’ is a vague enough concept to be consistent with a principled stance against aggressive tax avoidance, even where taxes can be avoided legally.
A second direct obligation has to do with transparency about transfer pricing. When goods or services are being sold between branches of a multinational, the prices charged should be fair and should be rooted in a clear methodology. And total taxes paid internationally should be reported in a company’s audited annual reports. Even when gaming the system is legal, it is dishonourable.
Third, companies should have zero tolerance for bribery. Besides being corrosive to local economies, bribery is often just a lousy competitive strategy: it involves payments that cannot be guaranteed to work, and when they don’t work there is of course no recourse to the courts. Businesses generally know this, but sometimes see bribery as a necessary evil; they need to work to make it less necessary.
In addition to these direct obligations regarding their own behaviour, big companies arguably have some responsibility for the indirect effects of their operations. Major corporations support entire ecosystems of smaller businesses — suppliers, subcontractors, agents, and so on. And activities within that ecosystem can be a major source of illicit transfers. Corporations should assume some responsibility for illegal and unethical activities in their shadow. This should at least mean setting clear standards for the behaviour of the companies with which they interact, and sharing best practices. Companies are starting to do this with regard to bribery, but they should consider extending that to other areas.
Next, a point with regard to how businesses interact with governments. The least controversial, over-arching norm for business is to play by the rules of the game. Normally, governments set rules and as long as businesses play within those rules, they are at least coming close to meeting their obligations. But not all governments are equally capable of setting and enforcing the requisite rules. And the absence of clear rules doesn’t imply an absence of obligations. So, for example, the fact that the government of a small developing nation hasn’t passed regulations (as Canada and the US have done) that set standards for fairness in transfer pricing doesn’t mean that a company can be complacent.
Finally — and this bit of advice is aimed at development advocates — it is important to avoid thinking of transnational corporations as the enemy. My sense is that a significant subset of folks who are concerned with development are focused on the negative side-effects of corporate involvement in developing nations. What we need to do, though, is to harness the power of corporations rather than regretting it. Business corporations, in addition to being potent organizations, have a vested interest in reducing poverty worldwide. Anyone living on $1.25 a day makes a lousy customer and a lousy employee. Of course, corporations face a collective action problem when considering how to reduce poverty. No one corporation can do much on its own, and it’s a challenge to find ways to get long-term interests in poverty reduction to override short-term interests in profits. But still, the development community needs to see corporations as important partners. We can’t let a culture war over capitalism get in the way of helping the world’s poor.
The video of our panel discussion is now available, here:
On Wednesday, The United States Anti-Doping Agency (USADA) released a small mountain’s worth of evidence against champion cyclist Lance Armstrong. Not surprisingly, comparisons to corruption in the world of business were not far behind. On Twitter, a number of wags referred to Armstrong as the “Bernie Madoff of cycling,” or variants on that.
The comparison with Madoff is unsurprising. In both cases, you have wrongdoing of impressive scope. In both cases, the wrongdoing was truly brazen, going on right under the noses of regulators. In both cases, you can’t escape the feeling that someone should have been able to figure it all out sooner. And in both cases, you see the eventual fall of a man who was a hero to many.
But the comparison is also off-target in important ways.
For one thing, the USADA’s account of things suggest that Armstrong was not just a cheat, but a ringleader. While others may have been complicit in Madoff’s scheme, there’s no suggestion that he engaged in organized, cynical bullying to push others into wrongdoing the way Armstrong apparently did. Armstrong is accused of having used his position of leadership to coerce others into cheating too.
The bigger difference, though, has to do with differences in the nature of the competitive contexts in which Armstrong and Madoff were each embroiled. Madoff was a stockbroker and investment advisor. It is a job in which an honest person can find success. For all the talk of Wall Street being a place where crooks thrive, there’s no indication that an investment advisor has to be a crook just to survive or to do his or her job effectively. And even if it were the case that cooking the books was somehow normal, something “everyone was doing,” that fact would do absolutely nothing to justify Madoff’s ponzi scheme. It’s not something that, in any sense, Madoff had to do.
Armstrong, on the other hand, was a cyclist competing at elite levels, during an era in which, by all accounts, doping was absolutely rampant. And in such a setting, it does at least arguably matter that “everybody does it.” It is an unfortunate fact that in the world Armstrong competed in, for every individual cyclist doping was a necessary evil, a way of keeping the playing field level. Any cyclist not engaging in doping was effectively relegating himself to the back of the pack. That’s not an excuse, but it’s an accurate description of the facts of the case.
So doping was, in a sense, non-optional for the elite cyclist trying to do his job properly, because after all his job is to try to win. And during the era in question, doping was apparently “allowed” under the unwritten rules of the cycling game. It was embedded in the social norms of the relevant group. It was, in other words, a collective problem. Regrettable, to be sure, but the sort of problem that is devilishly hard to solve, and against which individual integrity is absolutely impotent to solve it.
In this sense, doping is much more like bribery than like a ponzi scheme. Where bribery is rampant, it may literally be true that a company cannot compete without engaging in that kind of corrupt behaviour. But bribery, like doping, is an arms race that no one can be sure of winning. And the damage it does is significant. Like doping, it exposes competitors to all sorts of dangers. And when such behaviour is exposed — as in the case of Walmart Mexico earlier this year — the result is not just scandal, but a loss of confidence in the integrity of the game itself.
Samsung and Apple recently shared the spotlight as the parties to a billion dollar intellectual property lawsuit. Now, Samsung has replaced Apple as the tech company in a different spotlight — the spotlight, that is, consisting of accusations of mistreating Chinese workers. A report by the New York-based NGO China Labor Watch says that Chinese factories making devices and components for Samsung are guilty of a range of abuses. Employees working more than 100 hours of overtime in a month. Children under 16 working in factories. Failure to provide safety clothing where appropriate. And on and on.
A few key points are worth noting.
First, a note about overtime. It’s worth pointing out that China Labor Watch criticizes overtime — voluntary overtime — as if overtime were a bad thing. But at the Foxconn factories supplying Apple, at least, the biggest complaint of workers was that they wanted more overtime. If anything similar is the case at the Samsung factories, this implies that stricter limits on overtime would indeed be a bad thing, at least from the workers’ point of view.
Of course, wanting more overtime doesn’t prove that things are great at the factories; it just proves that workers want more money than they make during a regular workday. After all, if you pay people poorly enough, everyone will literally beg you for more overtime.
But then, it’s also worth remembering that “overtime” is a social construct. The amount of hours someone should work in a week is a matter of convention, and in North America and Europe we established the conventional 35 or 40 hour work week once we could afford to do so. Not everyone is yet so lucky.
Second, it is a mistake to lump all the accusations in together, as if they were all of a kind. They aren’t. Some of the complaints have to do with things that are susceptible to tradeoffs. Long hours, for example, may be acceptable if workers believe the loss of leisure time is justified by the extra income. It’s arguably a matter of rational calculations for each worker.
Other complaints, in comparison, have to do with rights, and rights are traditionally regarded as not being readily subjected to such calculations. We don’t allow voters in a democracy to literally sell their votes, for example. We put such a high value on the right to democratic participation that we forbid voters from making tradeoffs of this kind, from weighing how much they value their ability to vote against how much they value some quantity of money. Now, back to Samsung. One of the issues raised by China Labor Watch is that workers in the factories lacked a mechanism by which to lodge complaints. The existence of such a mechanism in the workplace might arguably be said to be a right. Such being the case, Samsung cannot simply argue that its workers are making a rational tradeoff here. Rights, as the saying goes, are trumps.
Finally, a note about accountability. As law professor Stan Abrams points out, one of the key factors differentiating the Apple and Samsung cases is that Samsung owns or controls many of the factories in question. Apple, on the other hand, was (and is) criticized for conditions at factories owned by its subcontractor. But since it didn’t run those factories it could plausibly deny knowledge and perhaps responsibility. Samsung, on the other hand, has no such refuge. When you own or control a factory, you can’t plausible, ethically, deny that you know how workers are being treated.
That’s not to say that the Apple and Samsung cases are categorically different. In both cases, the companies in question need to take a hard look at how their products are being made. But consumers and investors need to take a hard look, too. And that means not just casting a spotlight, but doing the hard mental work of thinking through some complicated questions of right and wrong.
A recent survey of Wall Street executives paints a bleak picture of the moral tone of a central part of our economic system.
According to the survey (conducted for Labaton Sucharow LLP), 24 percent of respondents believe that financial professionals need to engage in unethical behaviour in order to get ahead. 26 percent report having observed some form of wrongdoing, and 16 percent suggested that they would engage in insider trading if they thought they could get away with it.
Two points are worth making, here.
First, some perspective. Far from alarming, I think the number produced by this survey are relatively encouraging. Indeed, the numbers are so encouraging that I can’t help but suspect unethical attitudes and behaviours were seriously underreported by respondents. Only 26 percent had seen something unethical? Seriously? That seems unlikely. And the fact that only 16 percent said they would engage in insider trading is also relatively benign. There are, after all, people who believe that insider trading isn’t unethical at all, and shouldn’t be illegal. They argue that insider trading just helps make public information that shouldn’t be private in the first place. I don’t think that point of view hold water, but the fact that it’s put forward with a straight face makes it pretty unsurprising that a small handful of Wall Street types are going to cling to the notion.
Second, a survey like this highlights the difference between our ethical evaluation of capitalists, on one hand, and our ethical evaluation of capitalism, on the other. One of the major virtues of the capitalist system is that it is supposed to be able to produce good outcomes even if participants aren’t always squeaky clean. In no way does it assume that all the players will be of the highest virtue. Adam Smith himself took a pretty dim view of businessmen. In The Wealth of Nations, Smith wrote:
“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public.”
And yet despite his dim view of capitalists, Smith remained a great fan of capitalism — or rather (since the term “capitalism” hadn’t been coined yet) a fan of what he referred to as “a system of natural liberty.” The lesson here is that evidence (such as it is) of low moral standards on Wall Street shouldn’t make us panic. Perhaps it should make us shrug, and say, “Such is human nature.” The challenge is to devise systems that take the crooked timber of humanity and mould it in constructive ways. Governments need to take corporate motives as they are and devise regulations that encourage appropriate behaviour. And executives need to take the motives of their employees as they are and devise corporate structures — hierarchies, teams, incentive plans — that motivate those employees in constructive ways. In both cases, while the players should of course look inward at what motivates them, the rest of us should focus not on the players, but on the game.
I’m just back from New York, where I attended the Conference Board’s Business Ethics and Compliance Conference, as a guest of the organizers.
This is the third of 3 blog entries about the event.
This morning I saw two presentations. The first was by Matthew Tanzer, VP and Chief Compliance Counsel at Tyco. Tanzer’s talk was nominally about “Communicating and Managing FCPA Risk.” (The FCPA, or Foreign Corrupt Practices Act, is what makes it a crime under U.S. law for an American company to engage in bribery overseas, regardless of whether there are laws against bribery in the country in which the bribery takes place.) But more generally Tanzer’s talk was about the very sophisticated program Tyco has in place to train its roughly 110,000 employees on ethics & compliance. Tyco’s program includes a “Vital Values” newsletter, online training modules, and having 100% of its employes — many of them in far-flung branch offices in something like 60 countries — sign the company’s Code of Conduct every year. My initial critical thought about the latter: how much value is there in having people merely sign a Code of Conduct. Signing doesn’t reliably indicate understanding. But Tanzer’s justification was a good one: the ordeal involved in achieving a 100% signature rate signals commitment. In his words, “It says to employees that we’re serious about this.” Add to that the fact that something like 50,000 employees go through online training every year, and you start to see that Tyco does take this stuff seriously. (Oh, and on the topic of the relationship between ethics & legal compliance, Tanzer’s advice to the audience, most of whom have legal training: Not everyone in your organization is a lawyer, so don’t focus on law. Focus on ethics.)
The other presentation I saw this morning was by Douglas Smith, a lawyer with McGuireWoods LLP, on the impact of social networks and new communications technologies. Smith opened some eyes in the audience, I think, with regard to various ways in which employee use of social media can result in risks for their employers. But he also had words of caution for companies tempted to peek at employees’ (or prospective employees’) use of social media. Even when doing so doesn’t constitute actual invasion of privacy, it can, for example, result in employers seeing personal information that they are not legally allowed to use (under, e.g., Title 7 of the US Civil Rights Act).
(One point of criticism if Smith’s talk: given that it was a talk about new communications technologies at a conference on ethics & compliance, I would have liked to hear his thoughts on the positive ways in which companies are using blogs and Twitter to communicate with customers, critics, and other stakeholders.)