The Business Ethics Blog

Lots of people have weird ideas about food. And that includes weird ideas about sugar. Some people seem to think that white sugar isn’t as, I dunno, not as groovy, somehow, as other kinds of sugar because it’s more “refined” (though I’ll bet you a dozen honey-glazed donuts that 9 out of 10 people can’t tell you what “refined” really means in this context). And when people have weird ideas about food, the food marketers of the world are not exactly predisposed to offering clear, unbiased corrective information on the topic.

From the NY Times: Sugar Is Back on Food Labels, This Time as a Selling Point

Sugar, the nutritional pariah that dentists and dietitians have long reviled, is enjoying a second act, dressed up as a natural, healthful ingredient.
From the tomato sauce on a Pizza Hut pie called “The Natural,” to the just-released soda Pepsi Natural, some of the biggest players in the American food business have started, in the last few months, replacing high-fructose corn syrup with old-fashioned sugar.

The trouble? It’s a sham.

Though research is still under way, many nutrition and obesity experts say sugar and high-fructose corn syrup are equally bad in excess. But, as is often the case with competing food claims, the battle is as much about marketing as it is about science.

“As much?” No, it’s arguably far more about marketing. As far as I can tell, the battle between sugar and HFCS has a lot in common with the battle between Coke and Pepsi, or between Marlboro and Camel. Choose your poison.

Litter is a classic example of what economists refer to as a “negative externality.” A negative externality is basically a cost, resulting from a transaction, but imposed on people not party to the transaction. Voluntary transactions are efficient when all the costs and benefits are borne by those who are part of the transaction. When others are forced to pay costs, that means the buyer isn’t paying the full cost of the good, and so too much of that good is likely to be purchased, from a social point of view. Economists call that “inefficient.” The rest of us call it annoying, and unfair. What can, or should, businesses do to help?

From the BBC: Store owner takes on litterbugs

A village shopkeeper is marking sweet wrappers and drinks bottles with the names of children who buy them in a bid to discourage them from littering.

Yvonne Froud, 52, took action after becoming fed up with the rubbish collecting in Joys Green in the Forest of Dean, Gloucestershire.

She said the village, particularly the children, had taken the campaign on board.

“It’s made a great difference. The whole village is a lot cleaner.”

It’s a neat idea (no pun intended). Of course, it only works because Froud’s shop is in a small town, and she literally knows all of her customers by name. So there’s no way for kids to give a fake name & avoid accountability.

Two thoughts occur:
1) Is some version of this possible, or desirable, in larger towns where the shopkeepers don’t know their customers by name? Presumably it’s not impossible, from a technological point of view: swipe an ID card at the till, the register prints out small ID stickers that the cashier slaps onto each item, etc. Worth it? Probably not, though maybe there’s a simpler way that I’m not thinking of.

2) As far as the BBC story mentions, the policy only applies to kids. My guess is that it only applies to kids because adults wouldn’t accept Froud’s well-intentioned meddling — even if they ought, ethically, to welcome it.

Left hand, meet right hand. Right hand, meet left hand.

From Business Week: Prosecutors charge Madoff’s accountant with fraud

Bernard Madoff’s longtime accountant was arrested on fraud charges Wednesday, accused of aiding the man who has admitted cheating thousands of investors out of billions of dollars in the past two decades.

The charges against David Friehling, 49, come as federal authorities turn their attention to those who they believe helped Madoff fool 4,800 investors into thinking that their longtime investments were growing comfortably each year. Friehling is the first person to be arrested since the Madoff scandal broke three months ago….

How did it happen? Apparently, Friehling was on the one hand “pretending” to do at least some minimal sort of audit. But apparently not telling the people who could have checked his work:

The SEC accused Friehling of lying to the American Institute of Certified Public Accountants for years, denying he conducted any audit work, because he was afraid that his work for Madoff would be subject to peer review.

In other words, the left hand (AICPA) wasn’t in communication with the right hand (investors). Essentially, Friehling was flying under the radar of professional peer-review; no one checks your work if no one knows you’re doing the work. I sense an opportunity for a regulatory connecting of dots, here.
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Addendum: The fact that AICPA was in the dark came out back in December. See CNN Money: Madoff’s auditor… doesn’t audit?.

If I’m wrong, help me understand why. Seriously.

Over the last 2 days, I’ve twice supported, on this blog, a very unpopular view. I’ve argued that, ethically, AIG is right to honour its legal obligation to pay $165 million in retention bonuses.

I’ve defended that view on two entirely separate grounds.

First, I argued that the payments should be made because they were promised, contractually, and it’s ethically important to honour contracts. We are duty-bound to uphold the law, even in defence of people we think are unethical or even criminal. (I even admitted, then, that the contracts might have been poorly-thought-out in the first place, but they’re still valid.)

Next, I argued that violating the contracts (by not making the payments) would be wrong because it could have disastrous effects. Namely, it would make it harder for AIG to attract and retain talent, and generally make it hard for AIG to make promises credibly.

So, I gave two very different reasons: one based on bad consequences, one based on rights and duties. Both arguments point in the same direction.

Lots of people offered counter arguments. “They’re all crooks.” “Why reward poor managers?” “Contracts are broken all the time.” “It’s symbolic.” Etc. I didn’t find any convincing.

But I pride myself on being reasonable; in fact, being open to reason(s) and counter-arguments is a professional requirement. So I have to ask myself: “What would it take to get me to change my mind on this?”

Two things come to mind. If you could show me either, it would weaken my support for the retention payments. If you could show me both, I guarantee I’d change my conclusion.

1) Show me that the individuals receiving the payments are culpable. (Culpability on its own doesn’t obviate one’s rights, but at least then you could make an argument that these payments are analogous to the “proceeds of crime.”) If only some of them are culpable, tell me why it’s fair to punish the innocent, along with the guilty.

2) Show me that failing to meet this contractual obligation would not hobble AIG, arguably the most important corporation in America. I’d like some evidence (not just conjecture) that a) there are qualified people (ones who won’t demand retention bonuses!) ready to step in at AIG and replace those who leave, and that b) AIG’s ability to make credible promises won’t seriously be shaken.

(p.s., this is a great exercise. I recommend it to everyone. Set out in writing what would change your mind. If the answer is “nothing,” then you’re operating on ideology or passion alone. And that’s your right; just don’t expect to convince anyone who doesn’t already share your view.)

What on earth should Edward Liddy do? Liddy was asked a year ago by the US government to take over as CEO of beleaguered insurance company, A.I.G. I’m not sure why anyone would want such a job. (Liddy is being paid $1/year, plus equity grants which give him a vested interest in seeing the company do well). Anyway, tough job.

Latest challenge on Liddy’s agenda: the recent dustup over $165 million in bonuses scheduled to be paid to executives. Bonuses? To executives? At A.I.G.? Why give bonuses to a bunch of people who so mismanaged their own company, and indeed contributed to destabilizing the entire U.S. economy? How on earth could that be ethical?

I blogged about this yesterday . I said I thought A.I.G. should honour the contracts, pay the bonuses. I argued that — distasteful as it might be — we ought to hold our noses and support Liddy’s intention to pay those bonuses. They are, after all, part of legally binding contracts. And though ethics and the law are not equivalent, honouring the law is ethically important. It’s just unethical to toss important rights out the window simply because we don’t approve of the people who benefit from them. I even offered a rather unflattering comparison: we supply state-appointed attorneys to (accused) child molesters (or even to ones who have confessed). Part of what it means to be a nation of laws is that the law protects even those we think unworthy. (Almost no one agreed with me, yesterday. I got accused of being an apologist, insensitive to the plight of those harmed by A.I.G.’s wrongdoing, etc.)

But yesterday I overlooked the significance of one fact: the bonuses in question are not performance bonuses. They’re retention bonuses, designed to keep people from fleeing the company for greener pastures. (Andrew Ross Sorkin, writing for the NY Times, explains this well: The Case for Paying Out Bonuses at A.I.G.) So, these bonuses are not backward-looking ‘rewards’…they’re forward-looking incentives.

OK, so, knowing all that, ask yourself this: what’s Liddy to do, if he really wants to rescue A.I.G.? To answer that, I think Liddy needs to know two things.

First, he needs to know whether the bonuses were a good idea in the first place. That is, are the people receiving these retention bonuses people worth retaining? Let’s assume, for the sake of argument (but I happen to think it’s a realistic assumption) that they’re mixed bag. Some of them are smart & honest, others are deadwood, and still others are untalented and/or dishonest.

Second, he needs to know whether, legally, he could in principle get away with breaking these contracts. Opinions seem to differ on that question. Glenn Greenwald, writing for Salon, says “yes.” A.I.G.’s external counsel says “no.” Let’s assume, for sake of argument, that he could.

So, we’re assuming a) that Liddy could weasel out of paying the bonuses, and b) that the employees in question are of mixed quality. So, Liddy has a genuine, non-obvious choice to make.

Here, as far as I can tell, are the 3 things that would follow a decision not to enforce the contracts:
1) A lot of people would cheer. They’d feel like they’d been granted just a little bit of vengeance, like they’d seen a little justice done.
2) Capable employees would flee A.I.G. (According to the NYT‘s Sorkin, ‘word on the street’ is that A.I.G. personnel are already being recruited by other firms.) That might include some of the execs who were owed bonuses; and it might include other A.I.G. employees who realize the company’s promises aren’t worth much. And do not assume they’d all be easy to replace. Would you take a job at A.I.G., if you were qualified? I wouldn’t, in part because…
3) A.I.G.’s credibility for signing contracts would be shot. No one in their right mind would accept employment, or supply goods or services.

Seriously. What should Liddy do?

It’s not unethical to pay people money you are contractually obligated to pay them. Even if doing so makes you, or other people, want to pull your hair out. It’s the right thing to do. Not always because the person getting the money deserves it, in some abstract sense, but because you promised.

From the NY Times: A.I.G. Paying $165 Million in Bonuses After Federal Bailout

The American International Group, which has received more than $170 billion in taxpayer bailout money from the Treasury and Federal Reserve, plans to pay about $165 million in bonuses by Sunday to executives in the same business unit that brought the company to the brink of collapse last year.

Word of the bonuses last week stirred such deep consternation inside the Obama administration that Treasury Secretary Timothy F. Geithner told the firm they were unacceptable and demanded they be renegotiated, a senior administration official said. But the bonuses will go forward because lawyers said the firm was contractually obligated to pay them….

You don’t have to like it, any more than you have to like providing state-appointed attorneys to child molesters (not that I’m comparing…well, you know.) Anyway, the point is: there are some things a civilized people governed by laws (rather than by the passions of the moment) have to uphold. The right of the accused to assistance in his defense is one; the right to speak (even if what you say is abhorrent) is a second; and the fulfillment of contracts is another.

The key source of outrage here is the fact that A.I.G. execs did such a miserable job, and yet are being rewarded with public money. Isn’t that worth violating even legally-binding contracts? Two points need to be made about that.

First, let’s not forget that although there is surely plenty of blame to go around within the walls of A.I.G., it’s highly unlikely that every single one of the people who is owed a bonus payment was derelict in their duties. I’m not sure it’s fair to want to punish everyone.

Second, if people are owed bonuses despite having done a lousy job, that means a mistake was made when the bonus system was set up. Putting appropriate incentive structures in place is, believe it or not, a challenging corporate governance problem. It looks like bad choices were made in setting that system up at A.I.G. And, unfortunately, those are bad choices that the U.S. taxpayer inherits (along with many others, no doubt) as the new de facto owners of A.I.G. It was a miscalculated (perhaps inept) promise, but the solution is not to renege on that promise now.

Over the last couple of months I’ve blogged a couple of times about ethics in the use of corporate jets. (See here and here.)

Last Friday, I participated in a ‘webinar’ sponsored by the National Business Aviation Association, called The Business Case for Business Aviation. My co-panelists were people who know a lot more about the aviation side than I do, including people who run Aviation departments for major corporations. They had interesting stuff to say about utilization policies, and the role aviation plays in the day-to-day affairs of a big company.

I kept my own comments pretty brief. I made two key points:

1) Appropriate use of aircraft is a matter of governance and accountability. At well-governed organizations, decisions promote the stated goals of the organization, whether those be be profits, expansion of market share, reduction in carbon footprint, etc. That means that at well-governed organizations, corporate jets will only be used in ways that advance legitimate corporate objectives. And that’s true for private firms, publicly-traded firms, nonprofit organizations, etc., and it’s true whether or not a company is getting some form of aid from the government.

2) The ethics case is part of the business case for business aviation. Business today depends on the goodwill of many stakeholders. In order to argue that corporate aviation makes good business sense, a company also has to justify their choices to key stakeholders, whether those be shareholders or taxpayers or someone else. Stakeholders who aren’t convinced can make life difficult. So, even a tool (e.g., an aircraft) that a company finds operationally useful can become impractical if the ethics case can’t be made to key stakeholders

It seems that human ingenuity really is limitless…at least when it comes to new and devious ways to adulterate food in profit-maximizing ways.

And yes — *sigh* — the evidence, yet again, is a case from China.

From China Journal:
Water-Injected Meat: The Next Chinese Food Scandal?

Along with the recurring scandals, China’s food industry is plagued by a number of troubling “open secrets.” Everybody knows about them, it seems, and it’s no big deal until someone gets hurt and then it becomes a very big deal.

The latest open secret may be the practice of injecting meat with water to raise the weight (and hence value) of the product. This week, Feng Ping, a CPPCC delegate and expert at the China Meat Products Integrated Research Center, publicly challenged the lack of government oversight that has allowed the practice to go on for over 20 years, according to the Chinese-language Southern Weekend. (An English summary of the report, from Shanghai Daily, is available here).

According to the report, the practice, in its more gruesome-sounding forms, involves either forcing water into the stomachs of pigs and cattle shortly before slaughter, or injecting water into the hearts of recently slaughtered animals, so that the water will quickly flow into the animals’ flesh through the blood vessels. Another method involves simply soaking chunks of meat in water to absorb the liquid.

Eek. Lovely.

OK, now while my first paragraph above pandered shamelessly to your cynicism about profit seeking, I’m next going to try to convince you that the problem, here, isn’t profit-seeking.

The problem in cases such at this can no more be laid at the feet of profit-seeking than can the problem of thugs cornering people in alleyways and stealing their wallets. This isn’t just a case of profit-seeking. It’s a case of profit-seeking-by-socially-non-preferred methods. There are good ways to seek profits (ways that go by names like “innovation” and “improved efficiency”) and there are bad ways to seek profits (ways with names such as “lying” and “stealing”). In fact, here’s a rule of thumb: next time someone screams “profit motive,” remind them how little that explains. Ask them, “OK, sure. Someone wanted to make a profit. But what was the particular means of profit-making here, why was it objectionable, and how did they end up getting away with it?

(For more on the distinction between socially preferred and socially non-preferred ways of seeking profit, see the terrific paper “Business Ethics Without Stakeholders,” by my pal Joe Heath. You can find it on Joe’s page.)

A few weeks back, I blogged about layoffs at profitable companies. “Profitable” is one thing; how about “record-breaking” profits? Check this out: the French oil giant, Total, has announced that it’s laying off 550 people. This, despite making a “record profit of EUR 13.9 billion in 2008.”

From Expatica: France slams ‘scandalous’ Total job cuts

France on Tuesday attacked the “scandalous” behaviour of its biggest company, oil giant Total, after it said it would slash jobs despite reaping the highest annual profit in French corporate history.

“That a group like Total, which made billions in profits, isn’t able to set an example in terms of employment at a time like this sticks in my throat,” said Employment Minister Laurent Wauquiez.

“They’d be well advised to change their behaviour quickly,” warned Wauquiez, who said the move by Total was “scandalous” but did not elaborate on how the government might make the company change its mind.

This great quotation deserves attention:

“Total says it makes 90 percent of its profits abroad, but it should not forget where it comes from and what it owes to France,” said one protestor.

Two quick thoughts:
1) It’s not at all clear whether Total owes France an obligation never to reduce its workforce, or even not to reduce it during bad economic times. I think obligations should be established before the fact, rather than shouted about during the crisis.
2) The process of criticism during events like this might well be regarded as part of the process of establishing just what a corporation’s (informal, socially-enforced) obligations are.

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Thanks to BusinessAPE.

Law prof Lawrence Lessig is one smart dude. I’ve been a fan since his brilliant 1999 book, Code and Other Laws of Cyberspace. These days his work (as a scholar and as an activist) is focused mostly on political corruption.

In this blog entry, Lessig makes a great point about just why Conflict of Interest is a problem: And again: the point: DEFINE: “Good Soul Corruption”

I’m not even accusing anyone of anything unethical. My charge is that by (a) introducing legislation that has no good public policy justification behind it and which (b) does not benefit your own constituents while (c) being disproportionately supported in financial contributions by the single industry that would benefit from the legislation, you invite the charge (as 88% of citizens in my district believe) that “money buys results in Congress.” WHETHER OR NOT “money bought” this result, you have committed this wrong. The wrong is the relationship, and the suggestion the relationship begs. It is not — and again, NOT — that the person accused is “being paid off” by anyone.

In other words, while finding yourself in a conflict of interest (COI) is not unethical, doing something avoidable that put yourself into a COI, and thereby threatens public trust in an important institution, is.

Take 4 minutes to watch the short presentation video embedded in Lessig’s blog entry. It’s a wonderfully effective presentation, and works well to drive home Lessig’s point about COI.