The Business Ethics Blog

Conflict of interest occurs in (roughly) any situation in which someone is expected to exercise judgment on behalf of others, but in which that judgment is liable to be biased by some “other” interest (often, but not always, a private financial interest). Is COI a worry because those “other” (often financial) interests always corrupt judgment? No. Absolutely not. Most people tasked with exercising judgment on behalf of others are persons of integrity. People often — perhaps usually — are able to put their personal interests aside and exercise judgment properly, when their role requires them to do so. No, the problem with COI is not that it always brings corruption. The problem is not that the person on whose behalf judgment is being exercised might not be served well (though that can certainly be an issue). The problem is that in situations involving COI, our faith is shaken — sometimes just our faith in the objectivity of a particular decision-maker, but more often, and more seriously, our trust in an entire institution.

For a great example of a company totally missing that point, see this story by Natasha Singer, writing for the NY Times: Medical Papers by Ghostwriters Pushed Therapy

Newly unveiled court documents show that ghostwriters paid by a pharmaceutical company played a major role in producing 26 scientific papers backing the use of hormone replacement therapy in women, suggesting that the level of hidden industry influence on medical literature is broader than previously known.

The articles, published in medical journals between 1998 and 2005, emphasized the benefits and de-emphasized the risks of taking hormones to protect against maladies like aging skin, heart disease and dementia. That supposed medical consensus benefited Wyeth, the pharmaceutical company that paid a medical communications firm to draft the papers, as sales of its hormone drugs, called Premarin and Prempro, soared to nearly $2 billion in 2001….

Here’s the part, from a Wyeth spokesperson, that demonstrates a complete misunderstanding of Conflict of Interest:

Doug Petkus, a spokesman for Wyeth, said the articles on hormone therapy were scientifically sound and subjected to rigorous review by outside experts on behalf of the medical journals that published them.

…which, of course, entirely misses the point. The point, the reason why critics decry the practice of ghost-writing, is not that we think the articles that result are necessarily inaccurate. They may (may) be fully scientifically sound. But who knows if they are? That’s the point. Ghostwriting corrupts the institution of scholarly publication upon which physicians rely to make the best decisions on behalf of their patients. It literally does not matter, even a little, if Wyeth is correct in claiming that the papers it paid to have ghost-written are 100% sound. They’ve cast doubt upon an entire body of medical literature, and on the scientific foundation of medicine itself. That is the point.

Here’s an update on a not-so-new topic. It’s got lots of good stuff in it. Distributive justice. The public good. The weight of contractual obligations. The consequences of government intervening in (indeed, micro-managing) private enterprise. And so on…

From David Segal, for the NY Times: $100 Million Payday Poses Problem for Pay Czar

In a few weeks, the Treasury Department’s czar of executive pay will have to answer this $100 million question: Should Andrew J. Hall get his bonus?

Mr. Hall, the 58-year-old head of Phibro, a small commodities trading firm in Westport, Conn., is due for a nine-figure payday, his cut of profits from a characteristically aggressive year of bets in the oil market.

There is little doubt that Mr. Hall is owed the money under his contract. The problem is that his contract is with Citigroup, which was saved with roughly $45 billion in taxpayer aid….

I’m not sure I’ve got much that’s new to say on this topic. (Recall that I argued back in the spring that AIG should pay its controversial bonuses.) Segal does a good job of laying out the terrain, in the story above. I think really it comes down to the fact that Hall earned the money: he did what he promised to do, and so the money is owed to him. He didn’t ask for the bailout. (If you think he didn’t earn the money — perhaps because no one deserves that much money — feel free to suggest a generalizable principle for what that kind of work is really worth.) But hey, whether basic norms about meeting contractual obligations ought to hold in a situation like this really is a question of public policy, and this is just a business ethics blog. The question more relevant for this blog is the business question, namely whether the bonus should have been promised in the first place. Is $100 million too much? Well, that depends on whether the company involved, Phibro, is well-managed. It could be that it’s run by dummies making silly promises to pay silly bonuses for work that someone else, equally talented, would do for less. But minus evidence to that effect, surely the default has to be to let the company live up to its promises.

A couple of weeks ago, I asked Why the “C” in “CSR”? After all, not all companies are corporations, and most people interested in CSR seem really to be interested in the ethical responsibilities of companies quite generally.

Today’s question: Why the “S” in CSR? What’s so social about Corporate Social Responsibility? The short answer, presumably, is that CSR is intended to get managers to think not just about their responsibilities to shareholders, but to society more generally. Indeed, much of the debate over CSR has focused on whether managers are a) can (i.e., are they qualified to), and b) should (are they justified to), use shareholders’ resources to achieve social objectives.

But (echoing part of my point from 2 weeks ago) most CSR advocates don’t seem to want to define the scope of CSR narrowly: they generally want CSR to cover the full range of ethical issues in business, and perhaps even for CSR to supplant (or engulf) business ethics.

But it’s worth noting that many ethical issues in business simply can’t straightforwardly be cast in terms of social obligations. Here are three examples that come quickly to mind:

1) Responsibilities to employees. What are an employer’s responsibilities in terms of workplace health and safety? Whatever they are, surely they constitute a central ethical issue for businesses, and a crucial set of responsibilities. But in what sense are they “social?” The need to act responsibly toward employees is a good example of why “social” isn’t a good stand in for “beyond-shareholders.”

2) Environmental ethics. If you believe that the environment is important only because it’s useful to humans (the “anthropocentric” point of view), then it could make sense to think subsuming environmental issues under the heading “social responsibilities.” But if (as many people believe) the environment is important in its own right, independent of human needs (the “ecocentric” point of view) then environmental issues have to stand on their own, and the needs of ecosystems could in theory conflict with social needs.

3) Obligations to avoid Conflict of Interest. In business settings, conflict of interest arises when someone has a private or personal interest sufficient to appear to influence the objective exercise of his or her official duties. So, imagine you work in Human Resources for a major corporation. You’re involved in a hiring decision, and your sister is applying for the job. In order to avoid Conflict of Interest, you should not take part in the hiring process. That’s an obligation you owe to your employer — part of your obligation to make sure the best person is hired — and an obligation you owe to other job applicants, an obligation to make sure the hiring process gives everyone a fair chance. It’s not in any obvious way a “social” obligation.

Feel free to think up other examples.

Now, again, none of this is intended to say that corporations don’t have social obligations; nor is it an answer to (difficult) questions regarding what the extent of such obligations might be. I’m just pointing out that regardless of the answers to those questions, the notion of “social” obligations simply cannot capture most of what we think is ethically important in corporate behaviour.

One of the interesting developments in business ethics over the last few years is the proliferation of senior positions, at major corporations, with the word “ethics” in their titles. (The people filling those positions even have their own association: the Ethics & Compliance Officer Association.) One one hand, it’s good to see senior positions dedicated to ethics. On the other hand, the obvious risk is that ethics becomes ghettoized, relegated to one department that’s now expected to “take care of”, you know, “that ethics thing.”

Case in point: this story, from the Washington Post: Amid Reviews, DynCorp Bolsters Ethics Practices

DynCorp International, a major government security contractor, is strengthening its ethics practices in the wake of government investigations of its programs in Afghanistan and other conflict zones.
…
In response to … incidents and because senior executives had been discussing such a move, DynCorp in May established a position of chief compliance officer with a specific focus on ethics, business conduct, related investigations and regulatory compliance, company spokesman Douglas Ebner said.

It’s certainly good to see a company with a billion-dollar-plus contract to train an entire nation’s police-force making a public commitment to acting ethically. That seems pretty important.

But, well, a couple of points. First, notice the reference to strengthening “ethics practices.” I don’t know if that phrase came from DynCorp itself, or is the journalist’s own turn of phrase, but it’s pretty cringe-worthy. Ethics is (very roughly) about figuring out the right thing to do, and ethical questions arise in all aspects of business. There are, I suppose, a few specific activities that can be thought of as especially ethics-related (such as training your staff about the corporate Code of Ethics). But is that really what the story is talking about? If DynCorp is really just talking about amending its policies and practices to make wrongdoing less likely, why not just say so?

See also this bit of ethics-slash-PR-speak from a company spokesman:

“We’re absolutely dedicated to a framework of governance and compliance that ensures a transparent and accountable business environment,” Ebner said. “Whether it’s misconduct, or public perception or allegations of misconduct, these can tarnish a company’s ability to work in challenging environments.”

Is anyone reassured by that? Should we be? As far as I can tell, the real message there is:

“Blah blah blah governance blah blah compliance blah blah blah transparent blah accountable….”

You can fill in just about any other words you want in between…it really doesn’t change the message. What matters from a PR point of view is the use of those key words. From an ethics point of view, all such a statement proves is that someone at DynCorp has done some basic homework on what the appropriate buzzwords are. But that, quite literally, is not saying much.

Interestingly, the article above doesn’t even mention DynCorp’s current Chief Compliance Officer, Curtis L. Schehr — who, for better or for worse, doesn’t have the word “ethics” in his title.

This is getting a bit crazy, don’t you think?

From The Guardian: Food products should carry ‘water footprint’ information, says report

Food and drink products should carry a new label to give consumers more information about their “water footprint” – the hidden amount of water used in the manufacturing process – two health and food lobby groups will recommend this week.

More transparency is needed about the huge volumes of water used to produce food, which most consumers are unaware of, said the joint report by the Food Ethics Council (FEC) and the health and food group Sustain.

It is calling for the proposed new label to reflect good practice, by taking into account the extent to which some companies and manufacturers are already working to use water in ways that are fair and environmentally sustainable….

Now, to be clear, I think water is very important. Clean, fresh water is critical for all life on this planet, and its continuing availability is in question. I also think consumer choice is important. Consumers understanding the products available to them, and choosing on that basis, is in fact fundamental to market capitalism.

But I’m increasingly skeptical that labelling products (especially food products) with everything that anyone thinks matters is the route to consumer empowerment. (My views on labelling GM foods, for example, are here.)

The basic problem is that “the market” is complex, as are consumers’ interests and desires. It’s far from clear what the best way is for consumers’ various interests to be accommodated (thinking both in terms of good outcomes, as well as in terms of other important values such as autonomy). It might be worth sketching a rough typology of options.

Option 1) Label everything in as much detail as possible. I suspect this is a bad option. I don’t think consumers are empowered by overloading them with information, particularly where that information consists in metrics that are the subject of disagreement among experts. (I can see it now. An ernest consumer approaches a shelver at the local grocery store and says, “I found the low-carbon-footprint, organic, shade-grown, FairTrade coffee, but I was looking for the low-carbon-footprint, low-water-footprint, organic, shade-grown, FairTrade coffee. Can you tell me where that is?”) It’s also worth mentioning that such labelling is likely to be disproportionately burdensome for small, local producers. How many small farmers know how many litres of water it takes to produce a pound of beef or a bushel of apples?

Option 2) Let the market handle it — in particular, let the market (subject to suitable taxes & regulations) determine how much of various scarce resources is consumed. Part of the reason a resource like water gets overconsumed is that it is either free or underpriced. If water was suitably priced, then as water prices climbed, the price of water-intensive foods would climb, and people would buy less of them. You wouldn’t need a ‘water footprint’ label, then; everything the consumer needed to know would be shown on the price tag. Similarly, as the price of oil climbs (as many people think inevitable) the price of goods made from petroleum will climb, and we’ll inevitably buy less of them.

Option 3) Let government handle it. This could be done in a variety of non-mutually-exclusive ways. With regard to water, government could alter the price of water (see #2 above) by taxing it. Or the government could tax companies that make water-intensive foods. Or they could simply ban certain kinds of foods on the grounds that they’re, e.g., water-wasteful.

Option 4) Educate consumers. If people had a better understanding of which kinds of products generally have which kinds of background characteristics (e.g., which ones take the most water or petroleum or whatever else to produce) then you wouldn’t need as much labelling on the product itself.

Option 5) Use admittedly-imperfect aggregate scoring systems. This apparently is what Walmart is up to with its forthcoming sustainability index. Of course, aggregating along even what is supposedly a single dimension (like sustainability) is hard and bound to raise controversies; aggregating along more than one dimension is fool’s gold. (How do you rate a product that is high-sustainability, but scores low in terms of human rights? Trying to do so amounts to a version of the ‘triple bottom line’ fallacy.)

Of course, what we’re likely to end up with is a mish-mash of the above options. Governments will ban or tax the hell out of some disfavoured products. They’ll require labelling of some product characteristics they see as particularly useful to know about (for food: ingredients, basic nutritional info, etc.) Governments & activists will also do what they can to educate consumers. And a few single-issue labelling regimes will capture the hearts and minds of a handful of well-intentioned single-issue consumers. The big prize goes to whomever can figure out a compelling general argument for what combination of mechanisms fits what categories of consumer goods.

From the National Post: Toyota slams Ontario’s plan to jolt hybrid sales

Toyota Motor Corp. is raising concerns over the Ontario government’s plan to offer rebates of up to $10,000 to people who buy plug-in hybrid and battery electric vehicles, saying the move looks like a deliberate ploy to help General Motors Co. — of which the provincial and federal governments are now minority shareholders….

(Now, to clarify: Toyota does make hybrid cars, but they’re behind GM in the specific kind of hybrid that the Ontario government is favouring.)

Basically, the accusation is that the government of Ontario is in a conflict of interest — and evidence of that conflict is to be seen in the government’s decision to favour one technology over another, with differential impact on auto-makers, including the one it now has a stake in. In essence, the Ontario government (and, through it, Ontario taxpayers) are now shareholders in GM, and are hence now in competition with shareholders of other companies.

Of course, there’s room for broader criticism. According to one industry analyst (Dennis DesRosiers) cited in the Post story:

A cynic would say this is just government subsidizing a product that is produced by a company they own. I think that is a bit too cynical. I just think it is bad policy from a variety of perspectives.

Perhaps what Mr. DesRosier has in mind is a worry (voiced by many already with regard to the auto-industry bailout) about government’s involvement in private industry. One relevant sub-set of such worries has to do with government attempting to influence decisions — including decisions about competing novel technologies — better left to the market. Not that there’s necessarily anything wrong with government promoting socially-beneficial technological change, but in the present case, it’s not clear that it’s time to declare one particular sub-type of hybrid best in that regard.

(p.s. On the issue of government involvement in industry, I found the following scholarly paper tremendously useful. It’s closely related to the topic at hand: Stakeholder Theory, Corporate Governance and Public Management: What can the History of State-Run Enterprises Teach us in the Post-Enron era? by Joseph Heath and Wayne Norman)

A few people have asked me what I thought about the Pope’s recent Encyclical touching on business ethics, “Caritas in Veritate” (Charity in Truth).

Well, in truth, I haven’t read it. And I probably won’t get around to it. I’m relying on second-hand news sources, such as this piece from the Globe and Mail: Pope denounces profits at all costs. Based on those reports, the Pope’s essay seems a mixed bag. “Profit is useful if it serves as a means toward an end” — that’s a good bit. The globalized economy has “lifted billions of people out of misery” — also a good bit. “The economy needs…an ethics which is people centred” — not sure what he thinks the alternative is, but OK. “[P]eople from developed countries… have benefited more from the liberalization that has occurred in the mobility of capital and labour…” — I’m pretty sure that’s empirically false, if we’re talking relative benefit, but at very least it’s unsupported in the Encyclical itself (would it kill him to cite data?)

But really, my main reason not to bother with the Pope’s new essay — with all due respect to my friends among the several hundred million Catholics in the world — is that he’s writing from a particularly isolated sub-branch of one moral tradition, and the Pope’s particular train of thought is one that doesn’t seem interested in engaging with the broader conversation over the appropriate role of business in the world. Want proof? Check out the footnotes at the end of “Caritas in Veritate”. 159 footnotes, and not a single one refers to any modern scholar in business ethics or any cognate discipline. Not even to any of the many fine Catholic scholars in that field. The only footnote that isn’t to either the Pope himself, or to some past Pope, is a trivial footnote to the ancient, Pre-Socratic Greek philosopher Heraclitus. Why would I, or anyone else not especially fascinated by Catholic teachings, bother to pay attention?

“CSR” stands for “Corporate Social Responsibility.” Just what “Corporate Social Responsibility” itself means is subject to more than a little debate within CSR circles. There’s no clear definition, though there seems to be rough agreement that it has something to do with corporations, and their social responsibilities.

(I’ve blogged before about problems with CSR: Down With CSR! Up With Business Ethics!)

Today’s question: Why is there a “C” in “CSR?” That is, why is CSR about specifically Corporate social responsibilities? To see why the “C” is odd, it’s important to note that not all businesses are corporations, and that at least some (maybe not all) CSR advocates define CSR in such a way that it at least seems relevant to all commercial organizations. (At least one CSR textbook goes so far as to define “business ethics” as a sub-topic within CSR.) Certainly lots of CSR advocates take the term to be at least roughly equivalent to, and perhaps a superior replacement for, the term “business ethics.” So why the focus on corporations in particular, rather than businesses in general?

Some possible answers:

1) Corporations have unique social responsibilities, ones that make it worth singling them out. Well, corporations do have some special characteristics (aggregation of labour & capital; separation of ownership & management; limited liability, etc.), but none of them is unique to corporations.

2) All the biggest, most important companies are corporations. That’s false. The accounting firm Ernst & Young, for example, is one of the biggest companies in the U.S., and it’s not a corporation. It’s a Limited Liability Partnership. Trusts and co-operatives can also be pretty big and pretty important commercial entities. Presumably they have social responsibilities too.

3) The word “corporate” in “CSR” doesn’t refer to Corporations in the narrow legal sense of a business corporation — it refers to the more general idea of a ‘corporate’ entity, a collective which may-or-may-not be involved in commerce. That makes some sense, technically. But in actual usage the term “CSR” is only used to refer to business corporations — not other ‘corporate’ entities such as clubs and charities.

4) Its just a term of convenience. The name doesn’t matter. When we say ‘corporate’ we mean ‘company.’ Well, OK. I have some sympathy for shorthand. But for people who are supposed to be experts, papering over an important distinction seems odd — especially when the details so often do matter, when it comes to attributing responsibilities.

If anyone has a better answer to why there’s a “C” in “CSR,” I’d be happy to hear it.

Regulate yoga? Oh my, they want to regulate yoga? How could anyone want to impose rules and regulations on something as lovely and groovy as…yoga?

From the New York Times: Yoga Faces Regulation, and Firmly Pushes Back

Citing laws that govern vocational schools, like those for hairdressers and truck drivers, regulators have begun to require licenses for yoga schools that train instructors, with all the fees, inspections and paperwork that entails. While confrontations have played out differently in different states, threats of shutdowns and fines have, in some cases, been met with accusations of power grabs and religious infringement — disputes that seem far removed from the meditative world yoga calls to mind….

The rationale for regulation? Well, ostensibly, it’s consumer protection:

Regulators said licensing the schools would allow states to enforce basic standards and protect customers who usually spend $2,000 to $5,000 on training courses, not to mention provide revenue for cash-starved governments. “If you’re going to start a school and take people’s money, you should play by a set of rules…”

Now at least some of the opposition to regulation is off-base. The notion of “forcing [an] ancient tradition to conform to Western business practices” isn’t silly at all if by “Western business practices” you mean record-keeping and assuring customers of quality and if that ancient tradition is being used as a way to make money.

The “playing by a set of rules” thing sounds great — except that, as businesses, yoga schools are of course already bound by a set of rules, namely the set of rules that govern commercial transactions more generally. The question at hand is whether you need a regulatory structure specific to yoga. On that matter, the NYT story isn’t all that helpful (i.e., the people interviewed for the story aren’t that helpful). I’m a big fan of regulation where it serves to protect customers. But in all but the most dangerous of situations, I’m also a fan of waiting to see a problem actually happen, before leaping in to fix it.
—–
Thanks to Wn for this story.

I took this picture at my cozy neighbourhood Starbucks yesterday:

The poster advertises the company’s “10-year partnership with Conservation International to make the world a better place for coffee farmers — and everyone else.”

But what struck me was the “Everything we do, you do” part. On one hand, it’s a cute little bit of feel-good advertising. (“Wow, by spending $5 for a fancy coffee, I’m making the world a better place!) On the other hand, it’s an interesting point about the metaphysics of corporations. Now, I don’t buy the idea that corporations are merely legal fictions, incapable of intending things, taking action, being responsible for things, and so on. But there’s a perfectly good sense in which the corporation’s actions do depend quite crucially on the actions of various human beings, and that includes managers, employees, shareholders and, yes, customers. Everything Starbucks does is funded by sales of coffee (etc.). So everything they do does depend on its customers. Of course, customers aren’t directly responsible for any particular action by the company. So, question: what actions — good or bad — can sensibly be attributed, in some sense, to a company’s customers? And are all customers equal in that regard?