Archive for the ‘corporations’ Category

SkyDrive: Is Microsoft a Nanny State?

When should a corporation play the role of legal and moral enforcer? And when does a corporation start to take on the obligations — and limits — of a government?

Consider Microsoft’s Windows 8 operating system. When it was released last year, the new OS has met with mixed reviews. But at least one review, by PC World, noticed something interesting about SkyDrive, the new cloud storage service integrated into Windows 8:

“Microsoft restricts the types of files you may upload: Illegally copied commercial content is prohibited, and so are files that contain nudity or excessive violence.”

Just what does that mean? Let’s focus here just on the nudity part.

During an online Q&A session this summer, two Microsoft engineers clarified. Apparently SkyDrive’s rules mean that you are free to store your nudie pics, as long as they don’t include any child pornography. But if you use SkyDrive’s file-sharing feature, the limits are more strict: no nudity at all. So, those topless beach photos from your Mexican vacation are OK to store, but not to share. Is Microsoft checking to make sure stored erotica doesn’t include children? That’s not clear.

This raises interesting problems related to the amount of control that corporations have over everyday activities like storing computer files, especially when — as is the case with many tech companies — their services become part of the infrastructure of our lives, woven into everything we do.

Such power isn’t going to go away. But it does raise questions about the ethical standards that apply to corporate behaviour. If corporations have the kinds of power that were once reserved for states, do they then have the same kinds of obligations? Do the same standards for surveillance and search-and-seizure apply to Microsoft and its users as apply to a government and its citizens?

Of course, if Microsoft users don’t like it, they are in principle free to opt out. There are alternatives to SkyDrive — including Dropbox, Apple’s iCloud, and many others. But Microsoft’s market penetration in terms of operating systems means that for many users (especially ones who aren’t technically sophisticated) SkyDrive is the default. And default options matter; there’s a vast psychological literature on how often people simply go with the default, even when an alternative is available that would advance their interests better.

With great market power comes great responsibility.

Corruption Overseas: An Ethics & Compliance Minefield

The problem of corruption is a tough nut to crack. The bulk of bribery and other forms of corruption (though by no means all of it) goes on in developing countries where rule of law is lax and the opportunities for profit are rich. Companies succumb to the temptations at their peril. The ROI on bribes is pretty hard to specify, and the jail time that can result ought to be a pretty good deterrent. But evidently that doesn’t make the problem much easier.

Last week, in conjunction with Canadian Business, the Jim Pattison Ethical Leadership Program hosted an executive seminar on the topic, called “The Ethics and Compliance Minefield: New Rules for Doing Business Overseas.” The day’s schedule included terrific speakers from Siemens, the World Bank, and the RCMP. (If you want to find out more, see here.)

A number of themes came to the fore during the day.

First was the role of rationalizations. As I’ve written before, rationalizations play a key role in all sorts of wrongdoing. Good people generally need to give themselves excuses if they’re going to do bad things and still look at themselves in the mirror in the morning. This is nowhere more true than in the realm of corruption. Claims like, “That’s just how business is done over there,” and “No one really gets hurt,” or “We’ve always done it that way” or “That’s the only way we’ll make our sales targets” are often false, and seldom provide cogent support for the moral conclusions they are intended to support.

The second theme that came up repeatedly was the question of control systems. Companies whose employees and agents engage in bribery seem (anecdotally, at least) to have weak internal controls. And that’s not surprising. In order for a few million dollars to go “missing” here and there, and end up in the pockets of local politicians or shady middle-men, you’ve pretty much got to be mislabelling the money at the very least. This sort of thing should be worrisome, and not just from the point of view of ethics and compliance. Sloppy business is sloppy business.

A third theme that arose was the notion that companies who want to avoid corruption face what is really just a special case of a more general set of management challenges. Instituting appropriate financial controls is a general standard management challenge. Ensuring overall organizational integrity (in the broadest sense) is a standard management challenge. And engaging in serious organizational change (such as in the wake of a bribery scandal, for instance) is a standard management challenge. In other words, this stuff is the stuff that good managers, and good leaders, ought to be good at, and if they’re not they need to get good at it or face peril.

The final theme that arose was cooperation. Stamping out corruption requires cooperation at several levels. It requires cooperation among countries, and in particular among their police forces and other enforcement agencies. It also requires cooperation between companies, who have a lot to learn from each other. (What, for example, might smaller companies learn from a been-there-done-that company like Siemens?) It also requires cooperation between different kinds of organizations — for example, between companies and law enforcement agencies.

None of this is easy. But given the potent ethical arguments against corruption, not to mention the potent legal penalties for being caught engaging in it, it’s a problem that needs to be tackled head-on.

The Occupy ‘Movement,’ 2 Years Later

Tuesday (2 days ago) was the nominal anniversary of the Occupy Movement. Or maybe that should be the Occupy ‘Movement,’ with scare-quotes softening any suggestion that an actual social movement of any scope has arisen and persisted.

September 17 of 2011, protestors flowed into New York’s Zuccotti Park, a small private park just two blocks from Wall Street in the city’s financial district. Months of periodic mayhem in isolated pockets ensued, with Occupy sit-ins and marches happening in cities all over the US and to a lesser extent around the world. In theory, Occupy was a protest against economic inequality, a reaction not just to the gap between “the 1%” and “the 99%,” but to the widening of that gap in the years following the financial crisis of 2008 and 2009.

In practice, Occupy became a rallying cry for complaints of all kinds. One Occupy rally I stumbled across here in Toronto featured speakers from a big trade union, members of which enjoy jobs that pay relatively well, and a representative of one of Canada’s aboriginal groups, whose complaints are legitimate but have little to do with having been left behind by capitalism. This dilution of the main Occupy message was unfortunate, since it virtually guaranteed that the movement would suffer additional criticism while at the same time raising the probability that such criticism would be avoid the real issue.

Two years later, it’s hard to see Occupy as having achieved much of anything, other than a lot of overtime for police and a few weeks’ fodder for the nightly news. Certainly its economic impact has been negligible. A year ago, on the 1-year anniversary, I suggested that the main lasting effect of Occupy was more cultural than economic, and that’s still true. Politicians now must now acknowledge income inequality in speeches, for example, but action has been scarce.

So inequality is now ‘on the table,’ but it’s not clear yet that putting it on the table means much in practice. I wrote two years ago that “Wall Street needs to be fixed, not occupied. Even a die-hard capitalist has to admit that there are problems with the way Wall Street runs, but those problems won’t be fixed by sit-ins. They need to come from an understanding, on the part of Wall Street and its supporters, that there are changes that should be made because those changes stand to make capitalism work better. Any changes that can’t be made on that basis — changes for example that simply redistribute money — will have to be made through legislation, if and when there is political will to do so.

Of course, Occupy doesn’t necessarily need to have brought lasting change in order to have been significant. It may be enough for that word to mark a moment in time. It reminds us that there was a day when people rose up in peaceful opposition to fight for an ideal. Even those who think the movement misguided should in principle be happy about its idealism. But then, it’s much harder to inspire idealism about the painfully slow, methodical route to institutional change, even when the slow and methodical route is the more plausible one.

Ethics of Risk Management

Business is, in many ways, all about risk. It’s about investing in R&D and in productive processes that may or may not result in products that customers want to buy. It’s about hiring people and then putting your company’s reputation into their hands. It’s about trying and doing new things, always aware of the chance of failure. Society flourishes because businesses are willing to take risks. Of course, some risks should not be taken, and others should be taken only subject to suitable safeguards. Risk, in other words, needs to be managed.

Modern risk management, as that term is used in corporate contexts, has its roots in finance and refers primarily to the management of financial risks. It relies heavily on mathematical models used for asset pricing and portfolio assessment. Banks use risk management techniques to determine how many loans and mortgages of what kinds to hand out, and on what terms, and to figure out (within regulated limits) how much capital they need to keep on hand in case depositors come calling to reclaim their deposits. This all requires careful calculations. Take too little risk, and you’ve got money sitting idle. Take too many risks and, well, you end up with what we saw back in 2008.

Last week I had the pleasure of hosting Professor John Boatright, as part of the Business Ethics Speakers Series that I run at the Ted Rogers School of Management. John is the guy who literally wrote the book on ethics in finance. He’s author of Ethics in Finance and editor of Finance Ethics: Critical Issues in Theory and Practice. There simply is no one better on issues of ethics in finance. And his topic last week was an important one: “The Ethics of Risk Management: A Post-Crisis Perspective.”

As John’s talk pointed out, the advent of modern risk management strategies is, somewhat ironically, implicated in the financial crisis of ’08-’09, from which we are still recovering. The mathematical models risk managers use made possible the popularization of collateralized debt obligations (CDOs) and credit default swaps (CDSs). And the fact that there were actual hard-core equations behind these instruments — which Warren Buffett “financial weapons of mass destruction” — made them seem far safer than they were. This illusion of safety encouraged very high levels of leveraging, with what we now know to be disastrous consequences.

One of the other things that John’s talk clarified for me was that there’s a kind of ambiguity in the very term “risk management.” To the public, the idea of “managing” risks sounds very much like the idea of “reducing” risks. And that, of course, sounds like a very good thing. But risk management absolutely is not the same as risk reduction. Indeed, it can be quite the opposite. Risk management is the art of finding the right level and mix of risks, the right ‘risk profile.’ What matters ethically, as John pointed out is which risks are managed, by whom, by what means, for whose benefit.

The other point from John’s talk that I want to highlight here has to do with the ‘corporatization’ of risk management. As John pointed out, business firms both encounter and create risk, and risks are encountered by both firms and by individuals in society. If, as seems to be the case, risks to individuals are increasingly being managed by corporations, we as a society need to be acutely aware of the way corporations think about risk. John quoted author Michael Power as saying that “Risk is the basis for corporations to process morality.” In other words, risk is the lens through which corporations consider and act upon their obligations.

The problem here is clear: risk is an inherently outcomes-based construct, and not everything we care about ethically is a matter of outcomes. We also care about rights and duties, and about justice in the way good and bad outcomes are distributed. If risk becomes the lens through which obligations are examined, something important is being left out. Corporate risk management, in other words, is itself a mechanism that brings risks that need to be managed.

Ethics on Wall Street: Hate the Player, Not the Game!

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.

Obamacare and Business Values

Yesterday, the US Supreme court mostly upheld Obamacare, also known as the Patient Protection and Affordable Care Act. (See the full decision here [PDF].)

The Big Decision may have been made, but clearly lots remains to be sorted out. One of the questions that arises, from an ethical point of view, is the way that businesses, including especially insurance companies, should conduct themselves under the new plan.

Under Obamacare, Americans will be required to carry health insurance (or face a penalty) and, importantly, insurance companies will be required to sell policies to all comers, regardless of pre-existing health conditions. While the debate has focused primarily on the proper role of government, the Patient Protection and Affordable Care Act clearly has significant implications for private companies.

Note how different this is from, for example, Canada’s system. In Canada, insurance is provided by provincial health plans, and care is provided by physicians (as private contractors) and private, not-for-profit hospitals. Private insurers still play a role in pharmaceutical coverage, but almost no role at all in basic healthcare. Under Obamacare, in comparison, insurance companies effectively become an instrument of public policy: important elements of the way they conduct their business (and in particular the actuarial rules they apply) will no longer be up to them. This is far from the only example of private companies playing a role in public insurance: in the UK, private companies play a significant role in administering employment insurance services, and in some Canadian provinces private insurance brokers sell auto insurance plans underwritten by a public insurer. With regard to insurance, the distinction between private and public is far from water-tight.

How should companies conduct themselves when they play a role in delivering publicly-mandated insurance? Should they continue to think of themselves entirely as private, profit-seeking entities? Or should they — like industrial firms during times of war — take up public values?

Just what values are instantiated in a public insurance scheme is a matter of some debate. Public insurance schemes are often seen as promoting egalitarian values — ‘we’re all equal and hence all deserve equal access to basic healthcare.’ Others argue that what’s really at stake in such schemes is not equality, but efficiency (and argue that the current patchwork American system, for example, is quite inefficient in a number of ways). Others argue that, for insurance quite generally, solidarity is the key value — and one with obvious salience when insurance is part of the welfare state. Of course, to the extent that insurance companies are “merely” private corporations, they are guided by basic norms related to loyally seeking profits for shareholders. But even private insurance companies are subject to special limits on their profit-seeking. From a legal point of view, it is recognized that insurance companies are morally special: the legal principle of uberrima fides implies that the level of trust required between insurer and insured makes the relationship special, from an ethical point of view. And then, with regard to mutuals and not-for-profit insurers, stewardship of a shared resource (i.e., the insurance fund upon which members rely) is a key value. It seems right that private and public insurers would be guided by different mixes of these values.

So the question American health insurance companies face, at least in principle, is whether they should conduct themselves like private or public entities. And the question Americans face is which standard to hold them to. The answer, I think, is not clear. But it’s worth pointing out that the goals of an institution — public or private — don’t automatically have to be the goals of the larger system of which it is part. As I’ve pointed out elsewhere, the individual parts of a system don’t need to act according to the values of that system — sometimes they contribute by playing a more narrow role.

The coming years are sure to see significant changes in the US insurance industry. Whether the US government can succeed in getting private insurers to play a public-policy role remains to be seen, and depends in part on the willingness of those insurers to take up a public mission. But it depends just as much on whether the system Obama has designed is capable of harnessing the profit motive of insurance companies using it to get them to perform an important social function.

Will Facebook’s IPO Bring New Public Responsibilities?

Today, with the advent of its much-anticipated IPO, Facebook, Inc. will be “going public.” From a legal and regulatory point of view, that’s a significant change, bringing for example new requirements for financial transparency. But what does it imply from an ethical point of view? The phrase “going public” here is somewhat misleading. The event doesn’t do anything as dramatic as changing Facebook from a private to a public entity. It simply means that shares in the company will now be available to members of the public, and traded on the publicly-accessible stock markets.

Regardless, many people already do think of Facebook as a “public” institution in some sense. They think of corporations in general as public institutions, with public responsibilities beyond just keeping their noses clean. The very act of incorporation, after all, requires a framework of public laws to enable it, as do key aspects of modern incorporation such as limited liability. The view here is that if the public allows, and indeed enables, incorporation, it has the right to expect something in return.

Many people also point to history: once upon a time, corporations were chartered by the government as instruments of the public good — to sail in search of treasure, to build bridges, and so on. Of course, the way things used to be is typically a pretty poor argument for how they ought to be today. It is, in general, a good thing that corporations are not now thought of as creatures of the state. If you’re an entrepreneur with a good idea, you don’t need to bow to a prince or bureaucrat to be allowed the privilege of incorporating. That is a good thing. We allow incorporation, and the limited shareholder liability that goes with it, because of the socially-useful stuff this allows corporations to do en route to building wealth for their shareholders.

So I think it is generally misguided to think of corporations as public entities, at least as this applies to corporations in general. Corporations are private entities, ones that play a role in an overall system — namely, the Market — which arguably exists to promote the public good in some sense. But to infer, from the notion that the Market has a role in promoting the public good, the notion that each corporation exists for that purpose, amounts to committing the ‘Fallacy of Division,’ the fallacy of assuming that the parts of a system necessarily share the characteristics of the system as a whole.

So Facebook isn’t, just by being a corporation, an instrument of the public good in any grand sense, and it won’t become one when it “goes public.”

But Facebook is not, in my view, a corporation just like any other. As I’ve argued before, there’s reason to think that a company like Facebook — public or not — has special obligations due to its role as a piece of communications infrastructure. It is such an integral part of so many people’s social lives and patterns of communication, and it has so few real competitors, that I think it is in some ways more like a public utility than like a private company.

From that point of view, the idea of Facebook going public is slightly more interesting. Because this quasi-utility is about to face a new set of pressures. Its managers (including especially CEO Mark Zuckerberg) will now be beholden to a greatly expanded constituency of shareholders. Of course, Facebook has long had shareholders, but they were far fewer in number. And those early shareholders were also different in terms of expectations and levels of patience. People who get in on the ground floor of a tech company like Facebook are speculating in a very significant way. They may have big dreams for their stake in the company, but they are less likely to demand growth on a quarterly basis the way shareholders in a widely-held company are likely to do.

The new wave of shareholders are likely to insist on ever-growing profits — this at a time when many people are expressing doubts about the company’s room for growth. How well the company will treat its customers in the face of such pressures is yet to be seen. For example, there are surely lots of ways for the company to make money by selling the right bits of the vast trove of information it currently has about its roughly 900 million users. Will the company sacrifice your privacy in pursuit of profits?

For better or for worse, the company may well be able to resist such temptations, because of the way control of the company is structured. As has been widely noted, Zuckerberg will still exercise nearly unfettered control. He will retain over 50% of voting stock, making him the controlling shareholder in addition to being both CEO and Chair of the Board. Whether that’s good or bad depends on how he exercises that power, and the goals he chooses to aim for. He has, for instance, has publicly disavowed profit as a primary motive. He’s been quoted as saying that, at Facebook, “we don’t build services to make money; we make money to build better services.” This implies, for instance, that Zuckerberg wouldn’t sell your private information just to make a buck. But — who knows? — he might conceivably do it for other reasons. But if all goes well, Zuckerberg’s profits-be-damned approach will act as a check on what might be seen as the baser impulses of the investing public. And if his own ambitions stray too much from the public good, then hopefully the ‘discipline of the market’ will act as a check on the tech visionary himself.

The Problems With the “People’s Rights Amendment”

Corporate personhood is one of the most badly misunderstood concepts in discussions of corporate behaviour and responsibility. It is also one of the most essential tools for promoting human wellbeing and protecting individual human liberties.

People get angry — understandably and often justifiably angry — when they see instances in which corporations have too much power. But the response, the way such anger is directed, is not always constructive. Indeed, sometimes it’s downright counterproductive.

Witness, for example, the recent move in the US to propose a “People’s Rights Amendment.” (It’s a project of citizens group “Free Speech for People”, and the bill was introduced in congress by Congressman Jim McGovern of Massachusetts.) This is a hail-Mary attempt to amend the US Constitution, largely in response to the US Supreme Courth’s controversial Citizens United decision. That decision, rooted in constitutional arguments about free speech, removed certain limits on corporate political donations. Like many people, I worry about the effects of that decision; but I worry even more about the potentially disastrous effects of the proposed remedies.

Now, a lot of people believe that the US Supreme Court, in the Citizens United decision, invented the notion of Corporate Personhood. That belief is both false and wildly US-centric. But aside from getting history wrong, this belief has resulted in a backlash that has included some wrong-headed proposals for shifting the balance of power back to The People. And the People’s Rights Amendment is one of those.

Here are the 3 sections of the proposed “People’s Rights Amendment”:

Section 1. We the people who ordain and establish this Constitution intend the rights protected by this Constitution to be the rights of natural persons.

Section 2. People, person, or persons as used in this Constitution does not include corporations, limited liability companies or other corporate entities established by the laws of any state, the United States, or any foreign state, and such corporate entities are subject to such regulation as the people, through their elected state and federal representatives, deem reasonable and are otherwise consistent with the powers of Congress and the States under this Constitution.

Section 3. Nothing contained herein shall be construed to limit the people’s rights of freedom of speech, freedom of the press, free exercise of religion, and such other rights of the people, which rights are inalienable.

There are two problems here, and they are rooted in Sections 2 and 3 respectively.

Note that Section 2 says that incorporated entities don’t get constitutional rights at all. So that means, for example, no 4th Amendment limits on search and seizure of corporate property. So, under this proposed Amendment, no one’s investments — not your stock portfolio, not your RRSP, not your pension plan — is immune from arbitrary seizure by the state. It also means that a corporation would have no right to due process when charged with a crime. The implications for shareholders and employees, here, are potentially disastrous. Under the People’s Rights Amendment, any corporation you’ve invested in, or where you work, could effectively be seized and shut down without cause, without trial, without explanation. This surely limits corporate power, but at enormous cost — namely an enormous increase in the power of the state. Not the people; the state.

I should also add that this Amendment seems also to apply also to unions, nonprofits, and churches. None of them would, under the People’s Rights Amendment, retain these rights against the state, and all would be enormously vulnerable.

But all of that only matters if Section 3 doesn’t exist, because Section 3, if taken seriously, guts the whole thing. Section 3 reasserts that people, human beings, do have rights, and that nothing in Section 2 can be construed as limiting those rights. So as the owner of a corporation, or as a shareholder in one, Section 3 assures you that your property — including presumably the property of the corporation you own, or the property of the corporation from which you derive dividends — cannot be subject to unreasonable search and seizure, and cannot be confiscated without due process. Whew!

The point here is that people, real flesh-and-blood people, rely on business corporations and other ‘corporate entities’ in a huge number of ways. They are how we make our living. They are the instruments of our collective success. Where the power of those instruments needs to be limited, as it surely sometimes does, it cannot be done by pulling the rug out from under individual, human liberties. And so if corporate power is to be reined in, it will have to be done through a mechanism considerably less clumsy than the People’s Rights Amendment.

Greg Smith, Goldman Sachs, and Corporate Culture

By now everyone has heard that a guy named Greg Smith wrote a letter this week. Who is Greg Smith and why does anyone care? Why is Greg Smith’s letter getting attention from anyone who isn’t a Goldman Sachs employee, customer, or shareholder? Sure, he’s a mid-level executive at one of the world’s most powerful financial institutions. So he’s certainly not a nobody. And sure, Goldman, like other big financial institutions today, is seen by many as the corporate embodiment of evil, and so people are bound to be fascinated by an insider’s repudiation of the firm — especially accompanied, as it was, by a good dollop of juicy details. But there’s more to it than that, and the “more” here is instructive.

I think the key to understanding why Smith’s letter caused such an uproar is the fact that Greg Smith’s letter taps into the deep, dark fear that every consumer has, namely the fear that, somewhere out there, someone who is supposed to be looking out for us is instead trying to screw us. Smith’s letter basically said that that is exactly what is going on at Goldman, these days: the employees charged with advising clients about an array of complex financial decisions are, according to Smith, generally more focused on making money than they are on serving clients.

Now, first a couple of words about the letter. It goes without saying that we should take such a letter with a grain of salt. It’s just one man’s word, after all. Now that doesn’t make Smith’s account of the tone at Goldman implausible. He’s not the first to suggest that there’s something wonky at Goldman. It just means that we should balance his testimony against other evidence, including for example the kinds of large-scale surveys of Goldman employees that the company’s own response to Smith’s letter cites. Then again, such surveys are themselves highly imperfect devices. Either way: buyer beware.

(Note: one group that must take this stuff seriously is Goldman’s Board of Directors. A loyal employee taking a risk like Smith has is not a good sign, and his story deserves to be investigated thoroughly by the Board.)

OK, so let’s bracket the reliability of Smith’s account, and ask — if it accurately reflects the tone at Goldman — why that matters.

It matters because of this awkward fact: in many cases, in business, all that stands between you the customer and getting ripped off is that amorphous something called “corporate culture.” Most of us are susceptible to being ripped off in all kinds of ways by the businesses we interact with. That’s true whether the business in question is my local coffee shop (is that coffee really Fair Trade?) or a financial institution trying to get me to invest in some new-fangled asset-backed security. My best hope in such cases is that the business in question fosters a culture within which employees are expected to tell me the truth and help me get the products I really want.

Now culture is a notoriously hard thing to define, and harder still to manage. Culture is sometimes explained as “a shared set of practices” or “the way things are done” or “the glue that holds a company together.”

Why does culture matter? It matters because, other things being equal, the people who work for a company won’t automatically feel inspired to spend their day doing things that benefit either the company or the company’s clients. People need to be convinced to provide loyal service. In part, such loyalty can be had through a combination of rewards and penalties and surveillance. Work hard, and you’ll earn a bonus. And, Treat our customers well, or your fired. And so on.

But sticks and carrots will only get you so far. Far better if you can get employees to adopt the right behaviours voluntarily, to internalize a set of rules about loyal service and fair treatment. An employee who thinks that diligence and fair treatment just go with the turf is a lot more valuable than one who needs constantly to be cajoled. And, humans being the social animals that we are, getting employees to adopt and internalize a set of rules is a lot easier if you make it part of the ethos of a group of comrades. Once you’ve got the group ethos right, employees don’t act badly because, well, that’s just not the sort of thing we do around here! In the terminology used by economists and management theorists, culture helps solve ‘agency problems.’ Whatever it is that you want employees to be focusing their energies on, corporate culture is the key.

Of course, there’s still the problem of what exactly employees should be focusing their energies on. Should they be taking direct aim at maximizing profit? Or should they be serving customers well, on the assumption that good service will result in profits in the long run? In any reasonably sane market — one without ‘TBTF‘ financial institutions — the latter strategy would be the way to go, practically every time. And that fact is precisely what makes large-scale commerce practical. Consumers enjoy an enormous amount of protection from everyday wrongdoing due to the simple fact that most businesses promote basic honesty and decency on the part of their employees.

Unfortunately, it’s far from clear that Goldman operates in a sane market. So it is entirely plausible that the company could have allowed its corporate culture to drift away from seeing customers as partners in long-term value creation, toward seeing them as sources of short-term revenue. I don’t know whether Greg Smith’s tale is true, and representative of the culture at Goldman Sachs. But if it is, that means not just that Goldman isn’t serving its clients well. It means that Goldman embodies a set of values with the potential to undermine the market itself.

Is 7-Eleven My “Neighbour”?

I live on the edge of Toronto’s Little Portugal. There are two corner stores in my neighbourhood. One is a 7-Eleven. The other is a small, family-owned convenience store. I shop at both stores from time to time — to pick up eggs, bread, whatever.

Is there any ethical difference between shopping at 7-Eleven, on one hand, and shopping at the little Portuguese place, on the other?

At least some advocates of the “buy local” movement would say I absolutely ought to shop at the locally-owned Portuguese place. After all, it’s a part of my community, whereas 7-Eleven is a multinational corporate entity. But wait…7-Eleven is a franchise. So even though the parent company isn’t local, the owners of the franchise very likely are. The owners of that franchise are just as much part of my community as the owners of the Portuguese place are…minus the franchise fee they pay to Seven-Eleven Japan Co. Ltd. (Does that count?)

But still, the 7-Eleven, even if locally-owned, is still part of the 7-Eleven empire. When I shop at my 7-Eleven, I’m patronizing that empire. I am, to some extent, entering into a relationship with the parent company. So this question occurs to me: is Seven-Eleven Japan Co. Ltd. in any sense my “neighbour”, one to which (or to whom!) I owe the neighbourly obligation of shopping at their franchise?

Major corporations are increasingly expected to think of themselves as good neighbours, and as having obligations to local communities. But the “neighbour” relation is generally thought of as being reciprocal, as are the duties it implies. If you are my neighbour, then I am your neighbour, and vice versa. So if 7-Eleven, and other major corporations, are expected to act as good a neighbour, should we all reciprocate, and act as good neighbours to them in turn?

I don’t have an answer to offer to this question. But I think the reciprocity that is normally a feature of the concept “neighbour” ought to be part of the larger conversation about how we think of the role of business corporations not just in our economy, but in our communities.

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