Author Archive
Conflict of Interest at the Business/Politics Interface
Filed under: accountability, conflict of interest, ethics, government, politics, taxpayers |
Leave a comment People tend not to trust big business. And they tend not to trust the world of politics. But when those two worlds intersect, people really get nervous.
Witness, for example, this story by Eric Lipton, for yesterday’s New York Times: A Journey From Lawmaker to Lobbyist and Back Again
The story is about Dan Coats, a former corporate lobbyist recently elected to the US Senate.
Dan Coats, then a former senator and ambassador to Germany, served as co-chairman of a team of lobbyists in 2007 who worked behind the scenes to successfully block Senate legislation that would have terminated a tax loophole worth hundreds of millions of dollars in additional cash flow to Cooper Industries.
…
As part of the Republican wave in this year’s midterm elections, Mr. Coats will join the Senate again and is seeking a coveted spot on the Finance Committee, the same panel that tried to shut the tax loophole and that the Obama administration has pushed to again consider such a move.
The worry alluded to in the NYT piece, but not explored in any depth, is that of conflict of interest. The vague worry is roughly that there is — well, some sort of conflict between Mr. Coats’ old allegiances and his new position.
Coincidentally, here’s a piece (just published today) that I wrote about conflict of interest in the Canadians Prime Minister’s Office: Conflict of Interest in the PMO: Just What is the Worry?
The main point of my article is neither to accuse nor to absolve. It’s to point out that we need to get clear on just what the worry is, in any particular situation. A vague worry that “something ain’t right, here” is fine as a starting point, but if we want to go beyond that, and if we want to prescribe smart solutions, we need to get clearer about what the problem is.
Some scholarly definitions cast the matter as a question of judgment. Under such definitions, conflict of interest is said to occur if there is good reason to think that the judgment of the individual in question will be impaired. In other words, will she be able to exercise judgment impartially, or will her judgment be clouded by other factors that ought to, for ethical reasons, be excluded?
Other definitions frame the issue as one about the interests of those being served: a conflict is said to occur if there is reason to doubt the individual’s ability to faithfully serve the interests of those they are sworn to serve.
Whatever their differences, both definitions focus on service. We worry about conflict of interest when the incentives present in a given situation give us reason to doubt the quality of an individual’s service as a trusted advisor or decision-maker. This analysis suggests that, whatever the Conflict of Interest Act may say, the real question in the case of Wright is whether the judgment that he exercises in his capacity as the chief of staff can reasonably be expected to be skewed (consciously or subconsciously) by the interests of his former, corporate, employers.
The same could, and presumably should, be asked about Mr. Coats. But, as always, I am at pains to point out that a conflict of interest is a situation, not an accusation. If there is reason to worry about Mr. Coats’ judgment, that is not a matter of impugning Mr. Coats’ integrity. Rather, it is a matter of considering what measures (if any) are sufficient to make sure that the value of his service to the public outweighs the risks.
MBA Ethics Education: Designing the Designers
As a Visiting Scholar at the Rotman School of Management (more specifically at the Clarkson Centre for Business Ethics and Board Effectiveness), I’ve been thinking a lot lately about how we educate tomorrow’s business leaders. This is the first of a series of blog entries on that topic.
Clearly, what we need to teach future managers (especially MBA students) about ethics depends crucially on what we understand the role of managers to be. And with regard to management ethics, we should carefully distinguish two very different educational needs, rooted in managers’ two very different roles.
One role managers play is that of decision-maker, and so the first issue to consider with regard to managerial ethics concerns the ethical behaviour of managers themselves. In this regard, business schools are in the business of educating decision-makers. Such being the case, it makes sense to teach MBA students about various ethical theories, about what can be learned from various scandals, about social expectations with regard to business, and so on. We want to instill in MBA students that doing the right thing matters, and give them the skills to figure out what that requires of them. (Relatedly: I blogged recently about the MBA Oath and the question of professionalizing management.)
The other role played by managers is that of a designer: managers essentially are tasked with designing organizations (or parts of organizations — teams, branches, functional units, and so on). And so the other key ethical issue with regard to managers is whether they will have the skills to design business units that make it easier, rather than harder, for subordinates to act ethically. MBA students, then, need to be taught about the ethically-salient elements of organizational design. They need to be taught, for example, about the kinds of incentive structures and the kinds of organizational cultures that foster rather than frustrate, good ethical decision-making, so that they can try to design such structures and cultures in the workplace.
But it’s worth noting that even individual ethical decision-making (and not just the design of decision-making contexts) itself involves design. As Caroline Whitbeck points out (in an excellent article* that I recently taught to my Business Ethics class), there is a very strong analogy to be made between ethical decision-making and the kind of design thinking that engineers engage in. Ethical decision-making, like engineering design, involves an attempt to solve a problem, in order to achieve certain objectives, taking into consideration a set of constraints. And it involves attempting to find a good solution, in a situation in which there may be multiple adequate solutions, no clear best solution, but many clearly unacceptable ones. Ethical decision-making, in other words, is precisely not like a multiple-choice exam question. Real ethical questions are very seldom of the form “Should we choose option A or option B?” More often, the question is “what options are feasible?” And, “what would those options look like, in practice?” And, “what series of steps will that option include, and what will happen if we do X and so-and-so does Y in response?” Ethical decision-making is a design process.
So, whether we are thinking about training MBAs to make particular decisions, or training them to build the contexts in which particular decisions are to be made, business schools are in the business of designing designers. The question, then, is not just which ethical principles ought to be used as the building materials of good decisions, but what ethical principles ought to govern the design process itself.
__________
*Caroline Whitbeck “Ethics as Design: Doing Justice to Moral Problems” (from Hastings Centre Report, Vol. 26, No. 3, 1996).
Walmart & Free Shipping: Who Will Suffer?
Filed under: competition, consumers, CSR, internet, marketing, pricing, profits, retail, SME, strategy |
Comments (7) 
Once again, Walmart is making headlines with a business practice that will be good for its customers, and bad for its competitors. Here’s the story, by Stephanie Clifford for the NYT: Wal-Mart Says ‘Try This On’: Free Shipping
For years, Wal-Mart has used its clout as the nation’s largest retailer to squeeze competitors with rock-bottom prices in its stores. Now it is trying to throw a holiday knockout punch online.
Starting Thursday, Wal-Mart Stores plans to offer free shipping on its Web site, with no minimum purchase, on almost 60,000 gift items, including many toys and electronics. The offer will run through Dec. 20, when Wal-Mart said it might consider other free-shipping deals….
Not surprisingly, Walmart’s competitors are alarmed. Smaller on-line businesses don’t get the kinds of sweet shipping rates that Walmart gets from UPS and FedEx, and they don’t have the regional distribution centres that allow Walmart to keep its shipping costs low. It’s pretty clear that this move by Walmart is going to put serious pressure — maybe even fatal pressure — on some of its competitors.
Just 2 quick points to make:
1) It’s worth noting (for the benefit of those who don’t know) that Walmart’s profit margins are already razor-thin. Yes, the make big profits overall, but that’s due to their mind-bogglingly huge volume of sales. On a per-sale basis, their profit is very small. So the money for shipping a given product (for free) isn’t coming out of the profits on sales of that product — the profits just aren’t there. Something has to give. One possibility is that it really is a short-term gimmick, perhaps intended precisely to drive competitors out of business. That would potentially count as an instance of predatory pricing, which would be at least arguably unethical and potentially illegal — in spite of the short-term benefits to consumers.
2) Normally when we think about Walmart’s effect on competitors, we think about its effect on its very small competitors, the ‘mom & pop’ operations. But I wonder whether that’s the case here. I’m no expert on the structure of the industry, but it seems that the companies most likely to be hurt are Walmart’s large and mid-sized competitors, i.e., companies that occupy roughly the same strategy space as Walmart. It seems to me (and it’s just a hypothesis) that most small retailers will have significantly different business strategies than Walmart, and hence won’t be competing directly with Walmart in ways that would let them fall victim to this latest maneuver. If I’m right, then if Walmart really can sustain this free shipping policy (and they haven’t claimed they’ll even try to) it would be very bad for its medium-sized and large competitors. If that’s the case, will people have the same kinds objections as they tend to have when Walmart’s consumer-friendly strategies are instead bad for small businesses?
Social Responsibilities of Business
Filed under: corporations, CSR, Friedman, pollution, shareholders |
Comments (13) The question of what a company’s social obligations are is an interesting one, and a vexed one. Unfortunately, the question is complicated by the fact that the very term “Corporate Social Responsibility” (“CSR”) has come to be associated with a particular view about the right answer to that question. As I’ve argued here before, the term “CSR” is now (regrettably) typically used to refer to the particular point of view that says that companies have an obligation to contribute socially, beyond the contribution they make by providing a valued product or service, by providing jobs, by providing investment opportunities, and by paying taxes.
That point of view was preemptively (but, to many, unconvincingly) criticized by economist Milton Friedman, in his famous 1970 article The Social Responsibility of Business is to Increase its Profits. Friedman asked whether it made sense to say that a corporation (or rather, a corporation’s management) has responsibilities to engage in such pro-social activities as:
- keeping their prices low, in order to fight inflation;
- spending more than required by law to reduce pollution;
- hiring the hard-core unemployed (rather than simply focusing on hiring the most-qualified candidates).
Oversimplifying somewhat, Friedman argued that a corporation’s managers have neither skill-set, nor the obligation, nor indeed the right, to use shareholders‘ money for such objectives. What they ought to do, according to Friedman, is to stick to what they know best — which also happens typically to be the job they were entrusted to do, namely to make profits for shareholders within the boundaries of law & general ethical rules.
Here are 2 modern examples of opportunities for companies to do business in a way that is explicitly aimed at positive social outcomes:
- Pharmaceutical companies have choices about how to focus their research & development efforts. For example, they can focus their efforts at producing lifestyle drugs (for things like erectile dysfunction or hair loss), or they can aim at producing “me-too” drugs in categories that are already well supplied (e.g., ), Or they can focus on cures for so-called “orphan” diseases. Or they can search for new antibiotics in response to the growing problem of drug-resistant infections. The latter would meet a real social need. I don’t know how promising such lines of research would be, nor how lucrative. In the absence of such information, could we still say that pursing the development of new antibiotics is a social responsibility of drug companies?
- With U.S. unemployment rates just below the double-digit mark (and Canada’s just slightly lower), governments are looking to industry (and sometimes to particular industries, such as biotech) to boost employment. And some people are liable to point to a social responsibility on the part of corporations to do some hiring. Certainly, people are prone to call it socially irresponsible when profitable companies lay off employees. But then, employment for its own sake is unlikely to be good for a company. If employees aren’t needed, then hiring them (or keeping them) is liable to reduce profits, and indeed liable to reduce the viability of the company as an entity that produces all kinds of benefits for a range of stakeholders.
Whatever you think of such purported social responsibilities, one thing is clear. If they really are responsibilities, they are at very least genuine examples of social responsibilities — responsibilities to promote the interests of something like society as a whole (as opposed to the interests of one particular stakeholder, like customers or employees).
Management Ethics & Oaths Without Professionalization
Filed under: accountability, CSR, honesty, management, MBA, professionalism |
Comments (2) Here’s a piece I wrote as part of a debate on the MBA Oath, in a recent Canadian Business magazine: The MBA oath helps remind graduates of their ethical obligations.
In the article, I express the view that the MBA Oath, in its current incarnation, is “not a revolutionary thing, not a perfect thing, [but] definitely a good thing.” The real thrust of my defence of the Oath is that most of the criticisms of it are simply off-base. Critics either expect too much of a simple oath, or conversely underestimate the value of having people stand up and say “I promise.”
My conclusion:
But overall, the main problem with the MBA oath isn’t really a problem with the oath at all — it’s a problem with people’s expectations. Dismissive critics say that no oath will solve the deep and abiding moral problems that beset the world of business. That’s surely true, but no one could seriously have thought otherwise. It’s trite, but also true, to say that the world of business is increasingly complex. The ethical demands on business are higher than ever. In particular, business executives are called upon with increasing regularity to account for their actions and their policies, and to justify them to an increasing range of stakeholders. Add to that the enormous, lingering cultural rift regarding the proper role of corporations and markets. The MBA oath is of course not going to solve all of the ethical challenges that arise in such a context. Nor is it going to ensure that none of its signatories ever crosses the line into regrettable or disreputable or even disgraceful behaviour. But if given half a chance, the MBA oath might just turn out to play a small but not insignificant role in keeping the discussion alive.
Now, I do think there are some valid criticisms of the MBA Oath. One kind of criticism has to do with its content. I think, for example, that the Oath needs to be more clear regarding the balancing of the interests of various stakeholders. Note also that the current version of the Oath has MBA’s swearing not to engage in “business practices harmful to society”, a category so broa and contentious as to provide practically zero moral guidance.
But another set of criticisms has to do not with the Oath’s content, but with the its goals. At least some supporters of the Oath liken it to the Hippocratic Oath, and look to the day when Management can take its place alongside professions like Medicine, law, Accounting, and others. That, I think, is a mistake.
To see why, you can begin with this very recent piece by Ben W. Heineman, Jr., on his Harvard Business Review Blog: Management as a Profession: A Business Lawyer’s Critique.
Heineman’s focus isn’t on the question of oaths, but (as the title implies) on the question of professionalism more generally. He suggests that people who promote ethics in management by analogy to the professions misunderstand the nature of professionalism — and in particular, misunderstand his own profession, law. Heineman agrees that business schools face serious ethical questions. But, he says:
…these significant questions for business schools can be addressed without putting them in a context of the imperfect and potentially misleading analogy to legal professionalism
Another view on the question of professionalism is provided by Roger Martin (Dean of the Rotman School of Management), on his Harvard Business Review Blog: Management Is Not a Profession — But It Can Be Taught.
Martin points out two key characteristics of “the professions,” as those are traditionally understood. One is information asymmetry — basically, professionals like physicians and lawyers know stuff that their patients or clients generally do not. For example, I can of course look up basic facts of anatomy on Wikipedia, but it takes a trained dermatologist to tell me if that little bump is a harmless cyst or a potentially-deadly carcinoma.
The other element of professionalism that Martin points to is regulation. Information asymmetry is a problem in lots of industries, but only in some cases does it result in professionalization:
[When such a service]…is delivered by an identifiable individual practitioner, it tends to become a regulated profession. Doctors are regulated professionals because if they screw up, people die….
So, failure by identifiable individuals, says Martin, is the key:
The higher the cost of failure, the more likely the individual practice in question is to become a regulated profession.
That, he says, is why managers are unlikely every to be professionals in the narrow sense. For managers…
…[f]ailure is seen as the product of a team of managers doing a poor job in concert, rather than the product of one manager. Of course, CEOs get singled out for disproportionate blame. But the question is not whether being a CEO should be a profession but rather whether management should be a profession.
Of course, none of this is to say that managers can’t be expected to behave “like professionals” or to “conduct themselves in a professional manner,” in the looser sense of the word “professional.” The information asymmetry that exists between corporate managers and (for example) the company’s shareholders is very considerable, and it ought to be seen as bringing real responsibilities. The same goes for most front-line workers; lacking high-level business education and lacking direct access to the company’s books, they are left to trust senior managers to keep the company solvent in order to maintain job security. Being a manager may not make you a professional, but it is an awful lot like being a professional, in ethically-important ways. It is in that looser sense that the MBA Oath ought to be understood as seeking to instill in MBAs a sense of professionalism.
—–
(p.s. I blogged about this back in May of 2009: Harvard Students Take Ethics Pledge.)
Pennies-Be-Gone: The Ethics of Rounding
The always-useful Consumerist brings us this story, with a self-explanatory title: A Lone Dunkin’ Donuts Sort Of Abolishes Pennies
One donut shop is taking a stand against the bacteria-ridden zinc disks of suck that are pennies. Reader Tom sent us [a photo of a sign] from a store he recently visited. In a policy change that was probably born during an 8 AM rush, this franchise appears to be are rounding customer totals up or down to the nearest five cents, and only providing pennies to those annoying people who actually want them….
Setting aside paranoia about pennies causing germs, what should we say about this policy, from an ethical point of view?
First, the efficiency argument is worth noting. Lines are annoying. Lining up (i.e., standing behind other people) to get something you’re anxious for (like coffee) is doubly annoying. Speeding things up is good. So, improving the efficiency of the payment system is good.
Second, it’s worth pointing out that the system intends to treat everyone equally. Every customer is subject to the same system of rounding. In principle, no customer is disadvantaged relative to any other customer, and indeed (importantly) the customer is not disadvantaged relative to the coffee shop. Round up or round down — it’s all just a matter of math.
Third, in practice, this system may not actually end up treating everyone equally. As one person (with the pseudonym “Pecan”) who commented on the Consumerist piece pointed out, regulars who buy the exact same thing every day are going to be either systematically advantaged or systematically disadvantaged. If their change is “supposed” to be 27 cents, they’re only going to get 25 cents — every time. If they don’t realize that, then they’re going to lose money, time after time, in a way that will add up. Clearly, it would take a long time to add up to an amount that most of us might care about, but it’s still worth noting.
Finally, it’s worth pointing out that such a system allows the coffee shop a new way of acting unethically. Not that the rounding is itself unethical — it’s not. But if accepted by customers, the rounding offers the shop the opportunity to set its prices so that, on average, it ends up rounding in its own favour more often than it rounds in customers’ favour. Prices that end in “8”, for example (such as $1.38) will always result in exact change ending in “2”. For example, a price of $1.38 results in 62 cents expected back from two dollars. When the exact change is an amount ending in “2”, that will always be rounded down to zero, resulting in 2 cents’ extra profit on every transaction. On low-priced items like coffee and donuts, that could mean a significant increase in the store’s profit margin.
UNICEF’s Deal With Cadbury: A Trick, or a Treat?
Filed under: advertising, charity, corporations, food, health, protest |
Comments (10) 
This is now an entire genre of ethics stories, involving a charity facing criticism for aligning itself with a corporate sponsor whose values seem inconsistent with its own.
Here’s the story, by Carly Weeks, for the Globe and Mail: UNICEF sold out by making deal with Cadbury, medical journal says
One of the world’s most influential medical journals is accusing UNICEF Canada of selling out its values by allowing candy giant Cadbury to use its logo to sell Halloween candy.
In an editorial published online Saturday, the Lancet slammed UNICEF Canada for accepting $500,000 from Cadbury Adams Canada Inc. over a three-year period for construction of schools in Africa in exchange for allowing the company to plaster the iconic – and valuable – UNICEF logo on millions of product packages a year….
Just a few thoughts:
1) It seems to me that the worry expressed in the editorial is really that UNICEF is promoting candy, and candy is unhealthy. I’m no marketing expert, but I strongly suspect that if UNICEF’s tacit endorsement does anything at all, it won’t be to boost anyone’s consumption of candy. Rather, it will be to increase sales of Cabury’s candy relative to other brands.
2) Candy isn’t evil. Eating too much candy, too often, is bad for you. But candy is fun. While obesity trends are not irrelevant, here, I’m not sure we need to demonize candy to such an extent that all association with it is considered toxic.
3) It’s worth thinking carefully about the mutual benefits that come from the UNICEF/Cadbury deal. As the G&M story points out,
“the relationship is…lucrative for corporate sponsors because many consumers look favourably on companies that are aligned with good causes, which can help drive sales.”
But why do consumers look favourably on companies that align themselves with good causes? To spell it out plainly, consumers do so because they think that it is a good thing for companies to contribute socially. So it’s not like there’s any trickery here. If consumers think Cadbury is doing something good, Cadbury will be rewarded.
4) Finally, is it worth it for UNICEF? I’m generally hesitant to hand out advice beyond my expertise. I’m not an experienced fund-raiser. So, far be it from me to tell the experts at UNICEF that the decision to align with a candy company is short-sighted. But it does seem plain to me that a charity only has one real asset: it’s brand, and the trust people place in it. In comparison, a carmaker can lose public trust and then regain it by proving that they really do make a great product. Charities make no product; all the public can judge is behaviour.
Happy hallowe’en, everyone!
Governance, Both Political and Corporate
Filed under: boards, conflict of interest, corporations, governance, government, politics |
Comments (4) The word “governance” (as in, “corporate governance”) is obviously quite similar to the word “government.” And just as obviously, that’s no coincidence. The two words share the same roots. In the abstract, the word “governance” just refers to the act of governing something. But it’s not just the meaning of the words that overlaps — it’s the people doing the work. At the highest levels, people often move from the world of business into the world of politics, and vice versa.
A few quick points about this.
1) The fact that there’s some flow back-and-forth between government and the corporate world is not at all surprising. After all, there’s considerable overlap in the skill-sets required in leadership positions in both domains. For example, I recently heard a top expert on corporate governance say that ex-politicians actually make very good corporate directors (and that was said based entirely on their skill-set — not, as you might guess, based on their political connections).
2) Some people do question the extent to which one world is good training for the other. See, for example, this recent story about former EBay CEO, Meg Whitman, who is currently in the running to become governor of California: Is EBay a proper primer for a governor? (by Stuart Pfeifer for the LA Times). Here’s one relevant bit:
Some former employees and Silicon Valley observers question whether a forceful corporate executive used to getting her way would be capable of the compromise needed in government.
“You certainly have many more freedoms as a CEO than you do as an elected official,” said Larry Gerston, a political science professor at San Jose State. “We don’t elect kings.”
3) It’s also noteworthy when a major politician acts in a way more common in the corporate world. In this regard, see the review (by Jordan Timm) in this week’s Canadian Business magazine (unfortunately not online yet) of Lawrence Martin’s Harperland, a book about Canadian Prime Minister, Stephen Harper. According to the review,
…this Prime Minister’s office has enjoyed privilege and authority more in the style of the corporate C-suite than the executive branch of a traditional Westminster government. That approach has been responsible for many of the Harper government’s successes, but it has also been at fault for many of its blunders and setbacks. And though the business and political worlds feature very different rules and accountabilities, executives can learn many lessons, both constructive and cautionary from Stephen Harper’s Ottawa.
4) In both kinds of governance (political and corporate) the main challenge lies in turning the will (and values) of the many (votes in one case, shareholders in the other) into decisions by a few (politicians in one case, executives and directors in the other) to be implemented by an in-between number (of civil servants in one case, and of corporate employees in the other). And in both cases, effective leadership seems to require that the leader engage in a combination of a) listening to their constituents, and b) exercising independent judgment.
I don’t have a grand point to make on this topic. But can anyone recommend essential reading on the intersection between corporate and political governance and/or leadership?
Is a Board Position a Conflict of Interest?
Filed under: accountability, boards, conflict of interest, corporations, employees, governance, professionalism |
Comments (2) Here’s an story (in which I was quoted) by Paul Turenne, in the Winnipeg Sun: Gerrard slams WRHA manager’s ‘moonlighting’.
The story is basically about a senior executive (Brock Wright) at the Winnipeg Regional Health Authority (the public body responsible for administering hospitals in and around that city) who took a position on the Board of Directors of a small American medical technology company. Critics (like Opposition leader Gerard, named in the headline) called that a Conflict of Interest.
Now, a conflict of interest is basically any situation in which a person has a private or personal interest sufficient to appear to influence the objective exercise of judgment in his or her official duties.
So, to figure out whether there’s a problem here, a few elements need to be considered.
1) Does taking a Board position constitute an “personal interest” in the relevant sense? The one that’s usually (but not always) at stake is an interest in money. Well, And corporate board membership isn’t typically volunteer work. It involves a significant stipend, along with a good deal of personal prestige.
2) What bits of judgment might Wright need to exercise on behalf of WRHA that might be jeopardized by his board membership? The most obvious one is his involvement in purchasing decisions for the WRHA. In that regard, a spokesperson for the WRHA says:
This is a company the WRHA has no business relationship with. We have not purchased anything from them. If at any time they were to try to sell us something, Dr. Wright would of course remind us of his relationship with them and recuse himself from any discussions. Having said that, he’s not in a position to make decisions like that. We have a very strict policy about the tendering process
The bigger issue (though perhaps not insurmountable) is the judgment that Wright (or any employee) needs to exercise with regard to his own time management. Being a member of a corporate board isn’t an honourary thing: it comes with real responsibilities, and can take considerable time. So the question I would want to ask, if I where the WRHA, is how Wright plans to satisfy his duties as a member of the TearLab board (including possibly several trips a year to attend meetings in California) without diminishing the quality of his work in Winnipeg. If there’s reasonable plan to make that happen,
3) Finally, it’s worth noting (again and again) that being in a Conflict of Interest isn’t automatically unethical. (So it’s not, contrary to the headline used in another newspaper’s story about this issue, an accusation.) It is possible to end up in a Conflict of Interest through no fault of your own. And, finding yourself in a COI, what matters is what you do about it. Disclosing the COI to the person or organization relying on your judgment is usually considered step 1, and removing yourself from key decisions, if possible, is another standard move. But COI is at least sometimes worth tolerating, if managed appropriately. That does mean, though, that we should all be expected to think carefully, before putting ourselves into a Conflict of Interest, whether the risks are manageable, and whether in the end those risks are sufficient to constitute a disservice to those who rely upon our judgment.
Corporate Governance and Ethics
Filed under: accountability, boards, corporations, CSR, governance, shareholders |
Comments (10) 
“Corporate governance” is the term used to refer to the policies and processes by which a corporation (or other large, complex institution) is controlled and directed. It refers especially to the way power and accountability flow between shareholders, boards of directors, CEOs, and senior managers.
For most corporations, the basic governance structure is this: shareholders vote for, and hence empower, a board of directors, who then have a fiduciary responsibility to look out for shareholders’ interests. The board hires a CEO, who is accountable to the board. The CEO (sometimes with input from the board) hires a management team, and so on. At each step, there is a flow of power down the chain (from shareholders through to front-line employees), and a flow of accountability back up that chain. And there are all sorts of rules — including various policies and principles of good governance — that establish how that power and accountability is to be implemented. There will be internal rules, for example (partly determined by relevant corporate law), about how board elections are to be carried out. There are also governance principles that apply to things like the inclusion of external, “independent” directors on the board.
In case it’s not obvious, I’ll say it explicitly: corporate governance is out-and-out a matter of ethics. It is about who is responsible to whom, and for what, and under what conditions.
Now, to an investor, governance might look first and foremost like a matter of economics: no one particularly wants to invest in a poorly-governed company. And governance is also legal matter (for example, the Sarbanes-Oxley Act of 2002 includes a number of requirements about corporate governance). Governance is properly a legal matter because (at least arguably) shareholders need protection from unscrupulous or merely lazy boards of directors and executives, and because the public interest is at stake when large companies are mis-governed. Enron used to be the prime example of poor governance practices having a devastating effect on shareholders and the broader public. These days we could probably look to a few major financial institutions for object lessons in the ill effects of bad governance.
But even where the law is silent, governance remains important: regardless of whether you think in terms of a narrow, shareholder-driven, profits-first perspective, or instead in terms of a broader ‘stakeholder’ approach, you simply have to agree that the way decisions get made, and the interests that corporate policies tell decision-makers to serve, are ethically important matters.
My mind is on governance a lot lately, not least because I’m currently a Visiting Scholar at the Clarkson Centre for Business Ethics and Board Effectiveness (at the University of Toronto’s Rotman School of Management).
While I’m at Clarkson, I’m helping out with the CCBE blog. The blog is focused primarily on governance and board effectiveness, but in most cases the ethical implications of those issues are pretty clear. Today, for instance, the blog features a posting about changes in the way boards of directors are elected — and how at last some companies (including one Canadian company, Linamar Corp.) have been slow to catch on. Here’s the blog entry: Trend Watch: How are Directors Elected?
See also: the entry on Corporate Governance in the Concise Encyclopedia of Business Ethics.
- What Directors Need to Know: Corporate Governance, by Carol Hansell (the focus of this book is on Canada, but much of it is generally applicable)
- Harvard Business Review on Corporate Governance
The Business Ethics Blog 