Archive for the ‘regulations’ Category
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.
Tanning beds are rapidly joining cigarettes in the “it’s only legal because no one has figured out how to outlaw it” category. Indeed, even their legality is slipping. Jurisdictions from Prince Edward Island to Texas, for example, are banning minors from tanning salons. Not surprisingly, dermatologists are pleased. Indeed, the Canadian Dermatology Association has issued a release, noting that indoor tanning “causes premature aging and… increases a person’s risk of developing skin cancer, including melanoma, the deadliest form of skin cancer.”
Is this a business that should exist at all? Sure, even a potentially-dangerous product can be used safely if used in suitable moderation. But the question here has to be whether moderation is the norm, and whether customers will know what moderation means.
Protecting minors is the regulatory low-hanging fruit. Protecting kids is an easy sell. Tanning beds pose a risk to anyone who uses them, but teens are in particular need of protection. Studies have suggested that younger people are more vulnerable to the harmful effects of ultra-violet radiation. And teens, in particular, tend to be both obsessed with appearance and under the sway of a general belief in their own invincibility. And According to the the dermatologists, “tanning before the age of 35 has been associated with a significant increase in the risk of melanoma.”
But beyond the case of minors, shouldn’t we all be free to tan at will? Well, yes and no. Freedom is a good thing, sure. But freedom in the marketplace is predicated on the idea that everyone involved is more or less rational and well-informed. This imposes an obligation on businesspeople to be honest and forthright about risks associated with their products. But tanning salons themselves may be promoting a number of myths that make artificial tanning seem safer than it is.
If you’re only still in business because no one has figured out how to make your product illegal, you should probably consider a new line of business.
The issue of ethics in the food industry never really goes away, but there are times when it garners more than its usual share of headlines. About a month ago, the New York Times published a lengthy piece called “The Extraordinary Science of Addictive Junk Food,” by Michael Moss, author of “Salt Sugar Fat.” The piece is a riveting look at the often-cynical moves made within the food industry within recent decades to use our tastebuds against us, to use our love of salt and sugar and fat to persuade us to buy products that are making us more overweight and less healthy.
The next headline had to do with NYC Mayor Michael Bloomberg’s attempt to push back by banning supersized sugary drinks. The move had many fans. Not among those fans: Starbucks, which said it simply would not comply, the American Beverage Association, and New York State Court Judge Milton Tingling, who accepted the ABA’s request to block Bloomberg’s plan.
Most recently, and related to all of the above, the New York Times recently ran an opinion piece on the need to impose stricter regulations on food companies in order to slow the industry’s otherwise seemingly inexorable march toward ever more addictive, and less healthy, prepared foods. The piece was written by a guy named Michael Mudd, a former executive VP at Kraft, no less.
Mudd’s key point is essentially that if the food industry is going to be reined in, government is going to have to do it, since the industry shows little interest in restraining itself. In other words, to borrow Mudd’s words, government is going to have to “force ethics” on the industry.
There are at least two significant problems with framing the issue this way.
The first problem has to do with chalking it all up to a lack of ethics. This is entirely the wrong diagnosis. Or, to be precise, even if the food industry suffers from an ethics deficit, that deficit is not necessarily the root cause of the problem. The unfortunate truth is that there are some problems for which “more ethics” simply is not a viable solution. Ethics is about finding rules that make social living better, but it assumes some overlap of interests. In particular, ethics only works where we have a shared sense that our lives—or our businesses—would go better if we followed a few rules. Ethics isn’t fundamentally about self-sacrifice; it’s about mutual restraint for mutual benefit. That’s why ethics is generally important in business: harmony is good for business. But it’s still a competitive game, and at the end of the day all the competitors want to win. Unless you can show the food industry that its interests will somehow be promoted by playing by a different set of rules, then an ethical solution just isn’t in the cards.
There’s a second reason why ethics isn’t enough. Ethics involves restraint on self-interested (or profit-seeking) behaviour. But the notion of restraint presumes some understanding of where to draw lines. But consider the dilemma faced by any company that sells a fundamentally sugary or fatty food, like Coke or Twinkies or Doritos. These products are delicious, and harmless if consumed as most of us consume them, namely in moderation. When the Coca Cola Company sells me a can of coke, it does absolutely nothing remotely unethical. I’m a grownup, well-informed about the nutritional characteristics of Coke, and besides this one coke is meaningless, health-wise.
But, yes yes, we all know that anyone drinking too much Coke is going to suffer ill effects, and a society that drinks too much Coke is going to suffer too. But how much is too much? No one can say. And simply imploring the Coca Cola Company to “be more ethical” is useless, here. True, we can implore them not to advertise in a way that targets kids, or not to promote ridiculously huge servings, but that leaves the fundamental paradox of their product untouched. Even a scrupulously ethical — indeed, saintly — Coca Cola Company would still find itself uncertain as to how to market its product. How would you sell a product that many people enjoy harmlessly, but that in the aggregate causes trouble?
Finally, the plea for “more ethics” in the food industry misses entirely the fact that that the food industry’s pattern of supplying us with excessive quantities of fat and sugar and salt constitutes a classic social dilemma, a situation in which each person’s (or company’s) behaviour is individually reasonable, but collectively disastrous. We’re poisoning ourselves with junk food for the same reason we’re burdening our atmosphere with giant quantities of carbon dioxide. Not because we’re stupid or unethical, but because my own efforts to reduce carbon emissions (or yours, or yours, or yours) are neither necessary nor sufficient to make a difference. Coke can’t solve the obesity problem. Nor can McDonalds. Nor Kraft. Nor… you get the picture.
So, yes, feel free to call for greater regulation of the food industry. But recognize that in doing so you’re not calling for more ethics. You’re admitting that even ethical companies can produce unwanted outcomes. A good understanding of the role of ethics in business must include some appreciation of the range of problems at hand, including the ones for which ethics is unnecessary, as well as the ones for which ethics simply is not enough.
A new study suggests that the pharmaceutical industry’s attempt to regulate its own activities with regard to advertising erectile dysfunction drugs has fallen far short of the mark. According to the study, co-authored by US professors Denis Arnold and Jim Oakley, some of the industry’s biggest companies failed repeatedly, over a period of years, to live up to the standards they set for themselves. The companies studied had all committed to the 2005 PhRMA Guiding Principles, but didn’t come close to living up to that commitment.
I suspect few will be surprised by this result, though they may be surprised by the extent of of the violations documented by Arnold and Oakley. Eli Lily’s Cialis campaign, Pfizer’s Viagra campaign, and Bayer Healthcare, GlaxoSmithKline, and Merck’s Levitra campaign violated more principles than they adhered to.
The notion of businesses regulating themselves raises plenty of eyebrows. Skepticism about business is high, and many people will find it hard to believe that profit-oriented businesses will respond to any rules that aren’t backed by the force of law. And the idea of the pharmaceutical industry — an industry not exactly famous for its ethics — self-regulating with regard to marketing a cash-cow category of drugs is sure to garner even more skepticism. Did anyone expect it to work in the first place?
But we shouldn’t let an example like this cast a pall over the notion of self-regulation more generally.
Self-regulation can mean lots of things. It can mean the tacit evolution of norms within an industry, a shared sense that “this is how things should be done.” It can mean efforts to establish industry-wide standards (such as GAAP) that end up being woven into legislated regulatory requirements, and enforced by courts. It can also refer to the simple fact that thousands of basic ethical issues are left up to individual businesses and individual employees. Some of those mechanisms can reasonably be expected to work reasonably well, for some issues. And others, unfortunately, probably cannot.
Self-regulation by means of industry-wide standard-setting is in some sense a best-case scenario for self-regulation. Companies within a single industry have a shared set of interests, including an interest in forestalling intrusive government regulation. They also in many cases form a true community, and are hence able to exert peer pressure on each other to promote compliance. Of course, as the Arnold and Oakley study demonstrates, it doesn’t always work.
And there’s a powerful argument in favour of making use of self-regulation where feasible. After all, government can’t be everywhere, and if it could be we couldn’t want it to be. Having government pass rules about every aspect of business operations and then monitor compliance with those rules would be both terribly expensive and brutally intrusive. The question isn’t whether self-regulation is a good idea. The question is for which issues will self-regulation work, and under what conditions? We need as a society to be able to rely on a good deal of self-regulation, and business needs to figure out how to do it.
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:
We all agree on the need to play by the rules of the game. But what do we do when the rules need changing? Under what circumstances should the rules be changed? What should the process be? What are the rules of the game with regard to changing the rules of the game?
These kinds of questions arise in any competitive, rule-governed domain, whether organized sport or politics or the world of business. In sport, the rules in question are the ones established by various leagues. In politics, the rules are legislative and sometimes constitutional. In business, the rules in question are the ones established by government regulators.
Last week, McGill philosopher Daniel Weinstock gave a talk on this topic, in a Business Ethics Speakers’ series that I host at the Ted Rogers School of Management. His talk was called, “Should business dictate the business of rule change in sport?” He was taking aim at the suspicion on the part of many sports fans that rule changes are sometimes effected by for-profit professional leagues for mere financial reasons that have nothing to do with the spirit of the game.
Along the way, Weinstock suggested that if you look at the patterns of rule changes in professional sport, you see that there are basically four kinds of reasons given to justify such changes. They are:
1) Increasing safety;
2) Closing loopholes in existing rules;
3) Increasing entertainment value of the game;
4) Improving the precision of adjudication by referees.
Sports fans will find it easy to think of examples of rules being changed by various professional leagues for just the reasons cited. But Weinstock’s framework can also be applied usefully to the broader question of how and when rules are changed in rule-governed domains more generally.
Weinstock’s first category is easy to apply to business: there are plenty of occupational health and safety regulations and consumer protection legislation that fall under this heading. Rule changes that fit the second category — loopholes — are also plentiful. The third category, entertainment, seems out of place at first glance. But think of it this way: Weinstock is basically referring to rule changes that are aimed at keeping the game productive, making sure it continues to produce the ‘good’ it is intended to produce. Seen this way, any regulatory change intended to promote efficiency or competition fits something akin to Weinstock’s third category.
Finally, there’s the fourth category, which has to do with improving the accuracy of referees. In regulatory terms, this includes rule changes that make it easier for regulators to do their jobs, including record-keeping and disclosure requirements of all kinds.
Are these the only valid reasons for effecting regulatory changes in the world of business? Probably not. But using something like Weinstock’s framework as a lens gives us a good start at making sense of the overall pattern of regulatory requirements to which business is subject. Not all rules are good ones, but neither are they arbitrary. Seeing the patterns is the first step towards sorting the good from the bad.
OK, so the answer to the question in the title is almost certainly “no,” but outlawing ethical investing is precisely what is being implied, no doubt inadvertently, by a new plan being attributed to the UK’s Labour Party.
Over the weekend, several UK news sources reported on a press release indicating that the Labour Party’s leader, Ed Miliband, was about to announce his intention (if elected) to impose tough new rules on the financial industry. The idea was to be put forward during a speech at the party’s annual conference this past weekend. According to the Daily Mail,
Mr Miliband is proposing a sweeping new legal duty on any financial service which manages savings, including pension funds and banks, to maximise the saver’s returns. Failure to do so would mean them breaking the law.
(While I haven’t seen the actual press release upon which this analysis is based, a very similar report appeared in The Guardian.)
On the face of it, this is just another promise by a politician to fight for the little guy by imposing constraints on big business.
But hold on a minute. As Tim Worstall at Forbes.com astutely points out, requiring a bank to maximise a saver’s financial returns implies a legal duty not to pay attention to any factor other than money. No more attention to sustainability. No more doing good deeds. No more avoiding investing in tobacco or arms dealers. It’s gotta be all about the money.
But focusing on something other than money is precisely what financial institutions promise to do when then offer various ‘ethical’ or values-based investment instruments. The promise made by such funds is that they’ll aim at a “solid” return on investment, while at the same time paying due attention to social and/or environmental concerns. Miliband’s proposal would make such funds illegal. Indeed, if taken seriously, Miliband’s proposal goes much farther than that: it would criminalize all attempts at corporate social responsibility by financial services companies.
Indeed, legally requiring banks to maximize return to savers is exactly parallel to the (fictional) requirement for corporations to maximize return to shareholders. (Why “fictional?” Because the directors of a corporation are only legally obligated to serve loyally, not to maximize profits per se.)
Now as Worstall points out, such announcements regarding what a politician is going to say sometimes don’t come true. And heaven knows that even if Mr. Miliband does or did make the promise out loud, there’s no guarantee that he will make good on it, even if he has the opportunity. Hopefully he or his advisors have seen the folly in such a law, and will find some subtler way to achieve their policy objectives.
The makers of POM Wonderful want you to use your heart, not your brain.
At least, that’s the distinct impression we get from the company’s recent battle with the US Federal Trade Commission. Last week, an administrative law judge for the FTC found that at least some of POM’s ads made “false and misleading” claims about the health benefits of the trendy, branded pomegranate juice. And the company is fighting back with a series of ads that, by quoting the judge out of context, makes it look like he actually looked favourably upon their product.
The tagline for these ads: “FTC v. POM: You be the judge”.
So POM wants you to be the judge. On the surface, that sounds like they want you to think for yourself. And who could complain about that? But context matters. So when the company is pushing back against the FTC’s assertion (and the court’s finding) that the health claims made on behalf of its juice just don’t stand up to scientific scrutiny, the implied message is that yes, you the consumer should decide, but you shouldn’t use your head in doing so. After all, if you used your head and thought it through rationally, you would want to look at the evidence. And, well, the evidence doesn’t look so good for POM. But the makers of POM, it seems, would rather you look inward instead of looking at the evidence. C’mon, you’ve tasted it. It’s delicious. It must be good for you. And you, dear customer, are smart enough to know that, right? Forget what the science says.
This kind of thing is arguably part of a larger social trend. See this recent essay by Joseph Heath and Andrew Potter, on the way politicians, in particular over the last decade, have found new ways to play fast-and-loose with the truth. Heath and Potter point out the new popularity of the trick of using stubborn repetition as means of bullying your way past awkward facts. A lie can be convincing, in particular when it feels right, when the claim being made fits with your world view or how you want the world to be. And who wouldn’t like to believe that a tasty serving of fruit juice could prevent heart disease or cancer?
The makers of POM are certainly not unique among advertisers wanting you to use your heart, rather than your brain. But they are unusually bold about it, going on the offensive and thumbing their noses at the people whose job it is to do the fact-checking. So consumers beware: when a company wants you not to take a hard look at the facts, it’s usually time to do just that.
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.
Cheng Yi Liang, a chemist for the US Food and Drug Administration, has been found guilty of Insider Trading and sentenced to 5 years in prison. (I first blogged about this case back in March, when Liang was arrested.)
As it happens, the Liang verdict dovetailed nicely with the topic covered yesterday in the Management Ethics class I teach at the Ted Rogers School of Management. The class was led by a terrific guest speaker, compliance consultant and retired RBC compliance officer Georges Dessaulles.
The Liang case serves as a great example of one of the points Georges emphasized in his presentation, namely that when it comes to Insider Trading, highly-placed executives are far from the only concern. In the Freeport McMoran case in the mid-90’s, for example, the central figure was a consulting geologist, not an employee of the mining company itself. In the 2001 case related to Nortel’s acquisition of Clarify, the central figure was an executive working at a public relations firm that had a contract with Clarify. And now, in the Liang case, the guilty party not only didn’t work for the company in question, he didn’t have any contractual or other financial relationship with the company. Instead, he was a scientist at a regulatory agency. Other cases have involved administrative assistants, or even employees at companies printing corporate reports.
This highlights an important point about the ethics of insider trading. The stereotypical cases of insider trading involve executives, making use of undisclosed knowledge to gain an unfair advantage over outsiders in buying or selling stock. In taking unfair advantage, executives not only perpetrate a basic injustice, but also violate their duties to shareholders. But the kinds of cases cited above point to a different reason for the wrongness of insider trading. In the Freeport and Nortel cases, and now in the FDA case, the central figure wasn’t someone with direct obligations to corporate shareholders. There was thus no breach of fiduciary duty (at least not in the usual sense). What’s really at stake, in such cases, is the undermining of the basic principle of free-and-voluntary exchange on which the a free-market economy is based.
The challenge for organizations is to make sure that employees and contractors with access to sensitive information understand the definition of — and penalties for — insider trading. But that’s a serious challenge, especially at big companies. Better still would be for more people to understand the moral underpinnings of free markets quite generally, and to have the moral reasoning skills to figure out the rest from there.