Archive for the ‘contract’ Category
Contracts are an essential part of modern business. Contracts make business partners more reliable, fostering trust beyond the limits of basic human trustworthiness and a firm handshake. Indeed, one of the main ways in which all modern economies treat corporations as ‘persons‘ under the law is evidenced by the fact that corporations can sign, and be bound by the terms of, contracts. Contracts provide uniformity and security. Contracts can also be contentious, hence the evolution of an entire branch of law known as Contract Law.
Sometimes, one party or another comes to regret signing a contract, especially long-term contracts. Two such cases have been in the news recently.
One story involves consumers regretting signing contracts, in particular mobile phone contracts. Here in Ontario, a bill has been introduced that attempts to improve mobile phone contracts for consumers, including making it easier for consumers to end contracts without massive penalties. It turns out that consumers like the low, low phone prices made possible by long-term contracts, but aren’t so fond of actually paying the full price of such contracts. And most people, I suspect, sympathize with the consumer here rather than with the phone companies who want to see their contracts honoured.
The other story about contracts flips that one on its head. It’s a story about frequent fliers who bought tickets — essentially, signed contracts — giving them unlimited first-class flying on American Airlines. But this time, it’s not the consumer who came to regret the deal, but rather the company. You see, American, when they sold these tickets years back (for prices in the quarter-million dollar range) didn’t foresee the ways in which some customers would use — and perhaps abuse — the privileges those tickets embodied. A handful of super-frequent fliers are using their lifetime tickets so intensively that they’re each costing the airline something like a million dollars a year.
Of course, this story is unlikely to generate much sympathy. Most people dislike big corporations like American Airlines, and almost everyone has reason to gripe about airlines in particular. Tough luck, suckers! And after all, a big corporation like that can afford it, right? Well, no, as it turns out profit margins in that industry are vanishingly thin, and even negative in some years. (In related news American recently asked a bankruptcy court to nullify its contracts with various labour unions.)
The more general question here has to do with whether we should protect people (and companies) from the results of their poor decisions. One set of reasons has to do with protecting the interests of persons: as a society, we have duty to protect each other at least to some extent. And in the commercial domain the consequences of certain choices can be unclear. This is a reason for laws encouraging clarity of contract, if not provisions for voiding them altogether.
Another set of reasons has to do with the social benefits, both of contracts and of occasionally voiding them. Contracts are designed to reduce the risk of doing business; but the act of signing a contract also involves taking a risk, namely the risk that things will turn out differently than you had expected, and that holding up your end of the bargain will end up being disadvantageous. And we want people, and companies, to take those kinds of risks; without them, commerce (and hence our standard of living) would return to stone age levels. So we may in some situations want to provide safety nets to make such risk-taking reasonable. Whether we have the moral imagination needed to see the full range of costs and benefits to the full range of relevant parties is another matter.
A recent story quotes Fred Green, the CEO of the Canadian Pacific Railway, as saying that he won’t sacrifice safety in pursuit of profits. In his words, he won’t violate the terms of his company’s unwritten ‘social licence’ to operate.
The notion of a ‘social licence to operate’ reflects the notion that in order for a business to be successful, in the long run, the support and goodwill of society is essential. This includes everything from the willingness of a local community to walk into your store to buy things, to the willingness of neighbours to put up with the noise of your trucks driving past, to the willingness of duly elected representatives of the people to pass the kinds of legislation that makes modern commerce possible.
This raises the question: just how does a company earn, and maintain, its social licence to operate? How, in other words, can — or should — a business show its gratitude, or pay its debt to society?
There are a number of ways, and they are not mutually exclusive.
One option is through charitable donations. Corporate philanthropy is as old as the hills, but is generally pooh-poohed by proponents of modern CSR, who favour instead things like collaborative efforts to build local skills and capacity.
Another way is by paying special attention to social impacts, beyond what is required by law. For example: selling junk food is perfectly legal, and arguably fully ethical, at least on a case-by-case basis. But a food seller that looks to the aggregate social consequences of its junk-food sales, and tries to mitigate negative impacts, might be said to be doing so as part of its social licence to operate.
Another way is by paying its taxes. That might seem trivial, a mere matter of following the law. But given the complexity of the tax code, the number of loopholes, and the size of some companies’ accounting departments, a commitment to paying your fair share is probably non-trivial.
Another way a company can earn and keep its social license to operate is by a commitment to looking for ‘win-wins.’ In this category, we could place various efforts at seeking energy efficiency and waste reduction. Of the many ways a company can look to save money, some are socially valuable, and opting to pursue those over others might be seen as supportive of a company’s social licence.
And finally, there’s the old (and true) point made by Milton Friedman years ago, which is that companies contribute socially by making goods and services that people want. What does Merck ‘give back?’ It gives us pharmaceuticals that relieve pain and suffering. What does BP contribute? It finds and refines the oil without which our economy would literally grind to a halt. What does my local coffee shop do for the community? It provides a place to get in out of the rain, have a cup of coffee, and chat with a friend.
Now it’s quite likely that no one of these is sufficient. Each of them is a plus, and counts towards a company’s social licence, but likely some combination is necessary. From this range of options, each company chooses how it thinks it can best earn and keep its social licence to operate. Different mixes will make sense for different companies in different industries. There’s no one right combination that will let a company merit its social licence. Innovation and variety are a good thing, here. Let a hundred flowers blossom!
Two days ago, I asked — in the wake of the Costa Concordia disaster — whether the captain is duty-bound to “go down with his ship.” The question, I said, bears not just on the obligations of sea captains, but on individuals in positions of responsibility at organizations of all kinds. It also has implications for how organizations enculture individuals so that they see following through on promises as more than just a contractual obligation.
But today I’ll make explicit the analogy that is likely on the minds of most readers of this blog: never mind sea captains…what about CEOs? Does the CEO of a “sinking” company have a duty to “go down with the ship?”
First, it’s worth pointing out that sea captains don’t literally have to go down with the ship: closer to the truth is that they’re supposed to be the last ones off, or as close to last as is possible and permits them to do their duty to preserve the lives of crew and passengers. Similarly, bankruptcy for the company doesn’t literally have to imply bankruptcy for the CEO. In some cases, surely, bankruptcy isn’t the CEO’s fault, and there’s no reason to think that justice demands that a blameless CEO walk away penniless. But they should stick around to see the job done, even if that implies some financial risk to themselves.
Second, it seems to me that, as in the case of sea captains, the answer here has to depend a lot on the details of the situation. Sometimes staying aboard will genuinely help, and sometimes it won’t. Also, a CEO’s ill health might be a decent excuse, in some cases. And indeed, some corporate “captains” aren’t even wanted on a sinking ship: in 2008, for example, the US government forced Robert B. Willumstad to resign as CEO of the faltering AIG, and replaced him with Edward M Liddy. The idea that the captain should stick around to help only makes sense where the captain’s services continue to be seen as having value.
Third, there are several different ways in which a CEO can “abandon ship,” and they might not all be equally ethically bad. Abandoning ship could mean selling shares that are about to tank, or it might mean resigning prior to bankruptcy. Or it might mean resigning prior to an inevitable criminal investigation: several rats are known to have abandoned Enron’s sinking ship — Jeff Skilling, for example. Worst of all, perhaps, are “take the money and run” situations. Arranging a bonus for yourself just prior to declaring bankruptcy is the moral equivalent of looting the ship’s safe (or perhaps scuttling all the lifeboats) prior to prematurely abandoning ship.
As always, we need to be careful when engaging in moral reasoning by analogy. A company is not a boat, and bankruptcy is not the same as sinking. But what’s certainly true is that in both cases, the ethical requirements of leadership don’t end at the first sign of trouble.
Italian cruise-ship Captain Francesco Schettino is in jail, following an incident that left 6 dead and (at present) 29 missing. Among the accusations levied against is that he fled the foundering vessel before it was empty. (According to maritime law, a captain doesn’t literally have to “go down with the ship,” but he or she is supposed to be the last one off after ensuring the safety of others.)
Legal requirements aside, is there an ethical obligation for a captain to risk life and limb to stay on board until the last passenger and crewmembers are off? The answer is pretty clearly “yes.” Like many jobs, the job of captaining a ship comes with a range of risks and benefits. As long as the risks were understood when the job was taken on, you’re obligated to follow through.
There’s a more general point to be made here about the nature of ethics, and about ethics education and training.
Ethics often requires of us actions that we’d rather not carry out. You should tell the truth, even when it would be more convenient not to. You should keep your promises, even when breaking them would be more profitable. This is necessarily the case: if ethics only ever required you to do things you already wanted to do, there’d be no need for ethical rules (or at least no need to think of them as rules in the prescriptive sense).
But there’s at least a superficial tension, here, with the idea that ethics should be useful. After all, if having and following an ethical code doesn’t benefit us in some way, why bother? Sure, it’s easy enough to say “The right thing to do is the right thing to do,” but a system of ethics needs some justification in terms of human well-being or it’s just not going to be very credible, not to mention stable. Indeed, some ethical systems are subject to serious criticism precisely because their implications for human well-being are negative. Yes yes, I understand that your code of honour requires you to kill the man who killed your brother, but don’t you see how crazy this all is?
So there’s got to be some connection between ethics and benefit. And it’s not enough to point to social benefit. After all, pointing out that the community benefits from me taking ethics seriously merely pushes the question of justification to a second level: why should I care about the good of the community, especially if doing so requires significant self-sacrifice?
None of this should engender skepticism or cynicism. It just means we need to think carefully about who benefits, and how, from a system of ethics.
It also means that we need to think about how we can help individuals keep the promises that it was in their interest, initially to make. Captain Schettino found it in his interest to make certain promises (albeit perhaps implicit ones) when he signed on to be captain of the Costa Concordia, but then all of a sudden found himself in a situation where it was not in his interest to keep that promise. Threats of punishment were understandably insufficient, here. Staying out of jail is no great incentive if you’re free-but-dead.
Organizations of all kinds — including especially corporations and professional associations — need to work hard to help members think of the relevant ethical rules as something more than the terms of a contract, to help members become the sorts of people who simply would never abandon ship when they are needed most.
I’ve blogged a number of times about what is commonly and loosely called “executive compensation.” The term is woefully imprecise. In point of fact, most “compensation” is not, in fact, compensation. The carrot dangled in front of a horse is not compensation; it is motivation. Compensation is what you give someone after the fact as reward for a job well done, or at least for a job that met contractual requirements. If I hire the neighbour’s kid to mow the lawn, and he does so, then I should compensate him. Most of the money garnered by senior executives at publicly-traded companies these days is not, in fact compensation. It’s money they get from selling shares in the company, shares granted to them as part of an effort to align their interests with the interests of shareholders.
The looseness of use of that word in the realm of finance is not at all unique. Witness the “bonuses” paid to AIG employees two years ago, which were not in fact performance bonuses at all but rather retention payments designed to keep key employees on what seemed at the time to be a sinking ship.
See more recently this piece by Peter Whoriskey for the Washington Post: With executive pay, rich pull away from rest of America. Here’s just a taste:
The top 0.1 percent of earners make about $1.7 million or more, including capital gains. Of those, 41 percent were executives, managers and supervisors at non-financial companies, according to the analysis, with nearly half of them deriving most of their income from their ownership in privately-held firms….
Notice that (contrary to the article’s title) the key factor in the growth of executive income here is not in fact “pay.” The key factor is investment income. And it’s not even “pay” in the loose sense of ‘money given by an employer,’ since there’s no indication here what portion of that investment income comes from shares in a CEO’s own company, say, versus a diversified portfolio. But it’s hard to hold Whoriskey to blame for the linguistic imprecision here; confusing pay and compensation and income is altogether standard.
The other point to be made here is about justice. According to Whoriskey, “…executive compensation at the nation’s largest firms has roughly quadrupled in real terms since the 1970s, even as pay for 90 percent of America has stalled…” Setting aside imprecision of language, that suggests a significant disparity — not disparity of outcomes (which are a given, here) but disparity of rate of improvement.
Now according to Leslie McCall, a sociologist quoted in Whoriskey’s story, people become concerned about such inequality “…when it seems that extreme incomes for some are restricting opportunities for everyone else.” And that may be true about people’s reactions. But of course, it’s very hard for people to tell when it is actually the case that extreme incomes for some are restricting opportunities for others. As economists often point out, income is not a fixed pile, waiting to be handed out. The way you distribute income actually changes the size of the ‘pie’ due to the way money incentivizes. Incentivizing executives with stock and stock options may on the whole be a failed experiment, but that doesn’t change the fact that it is impossible to know whether the average worker would be better or worse off had those incentives never been offered.
Ontario’s public-sector unions are up in arms, over a secret deal granted by the government to one particular union. All of the province’s public-sector unions were to receive just a 2 per cent raise for 2012, part of an austerity plan aimed at taming the province’s multibillion-dollar deficit. But one union, the Ontario Public Service Employees Union, was secretly given a 3 per cent raise, “in exchange for non-wage concessions.”
See the details here: Employers up in arms over Ontario’s ‘secret’ wage deal, by Karen Howlett for the Globe and Mail.
The generosity of the deal is in sharp contrast to the McGuinty government’s pronouncements on the need to rein in spending in the public sector as it grapples with a multibillion-dollar deficit. Its flagship restraint measure consists of a voluntary two-year wage freeze for public sector workers who bargain collectively.
Against this backdrop, revelations that a sweetened deal was reached in December, 2008, for a union that often sets the benchmark has upset many employers in the sector….
For my purposes, the fact that the employer in question here happens to be a government is entirely beside the point. An employer is an employer, and this story could in principle have happened in the private sector.
Now, there’s an interesting side-issue here about whether limits expressed in terms of percentage points ultimately make much sense: we don’t know what “non-wage concessions” the government got from OPSE in return for the extra 1%, but it is entirely possible that it is something better for provincial coffers, in the long run. The non-wage benefits that unionized workers enjoy often amount to a large portion of their total compensation. But as I say, that’s a side issue. Wages per se have a special salience in labour negotiations, both because of their immediate impact on workers’ pocketbooks, and because of their symbolic significance.
The key ethical issues here have to do with transparency, and whether other unions have a right to know the details of one particular kindred union’s negotiations with the employer they share in common. There are reasons for and against transparency. On one hand, a reasonable level of transparency is essential for benchmarking, and knowing how much other groups are earning is a precondition for seeking wage parity. In that sense, transparency serves justice. On the other hand, wanting to know how much someone else makes is not the same as having a right to that information. An argument needs to be made that having such information serves an essential purpose. Also, more generally, such benchmarking can have a tendency to ratchet salaries upwards, sometimes pushing compensation higher than is warranted either by performance or by the law of supply and demand.
Equally interesting is the government’s (i.e., the employer’s) rationale for the secrecy:
“By bargaining hard, the government protected taxpayers,” said Geetika Bhardwaj, a spokeswoman for Government Services Minister Harinder Takhar. “That has one union upset because they wanted more from taxpayers and didn’t get it. We make no apologies for that.”
Two things are worth noting about this rationale:
The first is that, taken seriously, it justifies entirely too much. No behaviour is beyond the pale, so long as it saves taxpayers a few bucks.
The second thing worth noting about this rationale is that it makes plain an important truth: spending a budget is a zero-sum game. Many people treat “a good deal for the working man” as an unqualified good. But in government, as in business, every dollar in an employee’s pocket is a dollar taken out of someone else’s pocket. That’s as true for Walmart or GM as it is for the Government of Ontario.
Last month I posted about some Ethical Issues for the Chilean Miners. There, I pondered the moral force of the contract that the 33 trapped miners signed while still underground, promising each other to share equally the eventual profits of any future publicity. This month, I’m quoted in an article on that same topic, in Canadian Business. Here’s the online version: Intellectual property: Underground dealing in Chile, by Angelina Chapin
The story of “los 33,” the Chilean miners stuck underground for 69 days has all the makings of a good narrative: complication, action, mystery and a happy ending. Presciently, the miners made a pact while they were underground to share whatever profits come from telling their story and are rumoured to have decided to collectively author a book. According to The Guardian, they even had a lawyer send down a contract to make the “blood pact” legal, meaning when Hollywood producers come knocking, they’ll have a whole group to bargain with.
Not much is known about its content, but the circumstances under which the contract was signed have experts wondering about its validity and whether the specifics should be abided by now that they’ve survived the rescue….
The article gives the last word to Toronto-based lawyer Calin Lawrynowicz, who makes a simple, practical suggestion: rather than wonder about the force of the subterranean contract, the miners ought to sit down to talk about it:
Lawrynowicz says, since the miners don’t have 33 lawyers explaining their individual rights, the group should reconvene with an arbitrator to make amendments to the contract, allowing for reductions and benefits in terms of the wealth distribution.
“It’s like a shotgun wedding in Vegas,” he says. “You may be able to have a great relationship after the fact, but have to reconfirm why you got together in the first place.”
On August 5, 33 miners went down into the San José copper-gold mine; over two months later, 33 entrepreneurs emerged from the mine. They were labourers once. Now they’re businessmen, and celebrities.
Their fame is already being used by major corporations for public relations purposes. The New York Times reported, for instance, that Apple has sent each of the miners a brand new iPod.
But the miners themselves will have decisions to make, about how (and indeed whether) to make use of their new fame. Hollywood will surely come knocking, for instance. Book deals have already been announced. How will they (and how should they) handle fame and fortune? And the miners have already made a good start on their entrepreneurial careers. While still down in the mine, they drew up a contract “ensuring they will equally profit from the lucrative media deals they expect to secure for sharing the story of their two month survival in the hope that they never have to work again.”
But a question arises about such a contract. Is it, in fact, legally binding? To get an indication of why that’s a real question, see this piece by Andrew Potter: Chilean miners: That far down, who decides what’s law?
What is striking about the situation in Chile is how much it resembles one of the most famous thought experiments in the philosophy of law, known as “The Case of the Speluncean Explorers.” Written by the Harvard law professor Lon Fuller and published in 1949, the paper explores the fictional case of five men who embarked on the exploration of a system of caves in a country known as the Commonwealth of Newgarth. When a landslide covers the entrance and traps the men, they sit down to await rescue….
In Fuller’s thought experiment, the miners are eventually driven to cannibalism, in order to survive. Fuller’s article is about whether such cannibalism would rightly be considered illegal, under those circumstances. Fuller makes the case that it is (at very least) possible to argue that it would not be. Laws are social artefacts, and miners trapped underground for an extended period are effectively cut off from, and hence no longer part of, any particular society. Andrew notes:
…trapped miners are living in what amounts to a mini society of their own. All sorts of problems could arise in such a cramped space, from disputes over the allocation of food and medical supplies to rules over respect for privacy to procedures for dealing with crimes like theft or assault. If sovereignty is defined by the ability to exercise a monopoly over the use of force, then whatever legal authority currently exists in the San Jose mine, it is not the Chilean government.
Now, Andrew’s hypothetical is about the reach of Chilean criminal law. As it turns out (as far as we know) no significant violence erupted among the 33, so that question remains hypothetical. But, as I noted above, other kinds of legal questions arise, including the bindingness of the contract the men made while down there.
I won’t speculate further on the question of legality, but even if the legality of the contract were to be successfully challenged, the question of whether the contract is morally binding would remain a live one. After all, 33 men gave their word, and honourable men should want to keep their promise. On the other hand, if we consider the circumstances under which the contract was arrived at, we quickly see that those circumstances were very far from the ideal circumstances for giving free and informed consent. Many things can render a contract both legally and morally suspect, including such things as undue influence and duress. It’s easy to imagine that men trapped, in close quarters, half a mile underground being subject to both of those.
At any rate, my aim here is not to cast a pall over what seems, so far, to be a happy ending to the miners’ ordeal. My aim is simply to point out that, as newly-minted celebrity-entrepreneurs, “los 33″ will face a range of ethical issues. What they have to learn, and what we have to learn from them, did not end when the last man finally saw the light of day.