The Business Ethics Blog

Outsourcing is an interesting topic, both economically and ethically. The outsourcing of entire pharmaceutical research projects — clinical trials — is particularly interesting, not to mention controversial.

(For those of you who don’t already know, “outsourcing” generally means when a company sends work to be done beyond its own walls. That might happen either because the company lacks the expertise to have the work done in-house, or simply because it’s cheaper to have someone else do it. And note that those 2 factors are not unrelated. “Outsourcing” can also mean sending work to be done overseas. In this particular case it refers to when companies that need research done — usually pharmaceutical companies — arrange to have that research done in another country, typically a less-developed one.)

Outsourcing of all kinds is subject to criticism. When companies with unionized workforces outsource work to cheaper, non-unionized companies, unions get upset. When North American companies outsource work (e.g., sewing clothes) to other countries, there’s always criticism — some of it rooted in concern for overseas working conditions, and some of it clearly rooted in bigoted protectionism if not downright xenophobia.

The source of much of the hullabaloo over outsourcing, of course, is that outsourcing involves a shifting of costs and benefits. When GM outsources assembly of engines (let’s say), that typically transfers work — income — from unionized employees to non-unionized employees. It also likely transfers money from employees to consumers, in the form of lower prices. Same goes for outsourcing overseas: it tends to transfer jobs from North Americans to people in less-developed nations, and typically results in a net transfer of wealth to customers and/or shareholders.

Whether the transfers of risks & benefits involved in particular cases of outsourcing are a good thing or not is hard to say. Some North Americans will argue that too many benefits are being transferred to foreign countries; others will argue that too many risks (e.g., environmental risks) are being pawned off on people who are already living, in some cases, difficult lives.

Take all of that complexity, and mix it with a) the passions aroused by anything having to do with medical research, and b) fairly-well-founded skepticism about the behaviour and motives of major pharmaceutical companies, and you’ve got a recipe for serious controversy.

Case in point: researchers at Duke University recently published a critique of the outsourcing of drug trials, in the New England Journal of Medicine. Here’s the full text of the paper: Ethical and Scientific Implications of the Globalization of Clinical Research (PDF). The paper raises a number of concerns, ranging from questions about the qualifications of clinician-researchers in developing nations to oversee complex trials, to concerns about potential injustices in access to the products that (hopefully) result from clinical trials.

Here’s the story as reported in the NY Times: Outsourcing of Drug Trials Is Faulted. The NY Times story raises good questions about the data used by the Duke researchers, but it remains true that there are good questions to be asked about the standards that get applied to clinical trials run in less-than-modern settings. I think the issue that is least-well-analyzed in this study is the issue of justice in access; I suspect that insight could be gained by comparing the outsourcing of clinical trials to other forms of outsourcing. How is outsourcing clinical trials different from outsourcing, say, customer support or manufacturing or assembly of electronics? Is the inability of the average Bangladeshi to afford major pharmaceutical products importantly different from the average Chinese factory worker’s inability to afford the Nokia cellphone she assembles? If so, how and why?
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Addendum: for a Research Ethics perspective on this story, see today’s posting over at the Research Ethics Blog, here.

A couple of days ago I wrote about efforts by a cigarette company to show off its corporate social responsibility activities. That posting generated some healthy skepticism, in the comments section of the blog. Now, a company from another skepticism-inducing industry is showing its stuff. As reported by the New Scientist: Big Pharma shows its caring side.

BIG Pharma has a heart after all. GlaxoSmithKline will slash the cost of its medicines and patents to the world’s poor, raising hopes that its rivals will follow suit.

In a speech at Harvard Medical School on 13 February, the chairman of GSK, Andrew Witty, declared that his company would “earn its right to exist” by meeting the expectations of society, not just shareholders. He said that GSK would cut the prices of all its medicines in 50 poor countries – to no more than 25 per cent of the price in wealthy nations. The company will also provide free access to its patents relating to neglected diseases – those into which there is a lack of current research.

A summary of Witty’s speech is here: Big Pharma as a Catalyst for Change (PDF).

I think there’s every reason to suspect that much of what Witty is proposing makes a good deal of business sense for GSK, in terms of building new markets. And I don’t think there’s anything wrong with that. Sounds like a win-win idea. But whether win-win models of CSR count for much is a matter of some debate within certain circles.

Here’s an interesting short piece from Forbes blogger Matthew Herper: Could GM’s Union Negotiations Hurt Health Care? Herper quotes analyst Les Funtleyder at the trading firm Miller, Tabak + Co.

“Because of the size of retirees and existing workforce as reduction in benefits could have significant knock-on effects for companies in health care,” Funtleyder wrote in a morning note to investors. “We will be watching to see how severe the cuts to the plan are (which we view as inevitable) to gauge the magnitude of the decline to the sector.”

Interesting thought. It’s also an interesting question to bounce off a couple of the leading analytic frameworks in business ethics.

Take Stakeholder Theory, for example. That theory (or maybe just ‘framework’) says, roughly, that in making decisions, companies should consider the interests of all “stakeholders” — that is, the interests of everyone who has a stake in the fortunes of the company. It’s an idea that lots of people like. The hard part is figuring out who gets to count as stakeholders (there are real dangers in defining that term too broadly or too narrowly) and how to balance the competing interests of those stakeholders. So, to adherents of stakeholder theory: are companies (and employees thereof) in the healthcare sector stakeholders in GM’s negotiations with the union, and if so, how much weight should their interests get?

Alternatively, if you’re an adherent of Corporate Social Responsibility, ask yourself this: do executives at GM have have a social responsibility to consider the effect of their decisions on other sectors of society (e.g., the healthcare industry)? Or are the current negotiations a private matter between GM, its employees, and its shareholders? Either way, why?

Back in November I blogged about ethically producing and marketing controversial products. I proposed this thought experiment:

“If you think product X is unethical (or maybe just morally ‘problematic’), can you engage in a constructive discussion about how to make that product more acceptable (while still selling it) or how to sell it more ethically?”

Today I got to see first hand what it looks like when a company tries to have such a discussion. I was invited to be part of a round-table discussion designed to provide Imperial Tobacco of Canada with constructive feedback on its ‘sustainability’ framework. (Imperial is now a member of Canadian Business for Social Responsibility. CBSR hosted the event.)

Here’s a link to Imperial’s Corporate Social Responsibility page. Their most recent report on their activities in this area is called Taking Responsibility…An Update On Our Commitments. That document is prefaced by a letter from CEO Benjamin J. Kemball, who (oddly, I think) signals that the company’s next report will be not a “social responsibility” report, but a “sustainability” report. And much of today’s discussion was framed in terms of “sustainability.” (I think the shift is odd, and I told them so at today’s meeting, because the sorts of things they’re doing, the sorts of activities they report on in this document, have little to do with what most people mean when they talk about “sustainability.” Corporate citizenship, maybe, or corporate responsibility, but not sustainability. For a forestry company, finding a way to operate sustainably is a worthy ethical goal. For most companies, it sounds like aiming low.)

According to the document cited above, Imperial’s key commitments (to sustainability or corporate responsibility or whatever) fall into 3 categories:

• Fighting the illegal tobacco trade;
• Developing harm reduced tobacco products;
• Preventing underage smoking.

(Those 3 are the focus of the document, though we talked this morning about other relevant stuff they’ve got going on, including some supply-chain management stuff, ethics requirements for suppliers, etc.)

Anyway, the document is interesting reading. And this morning’s conversation was a fruitful one. It was interesting to see what an apparently-earnest company can do to differentiate itself ethically — short of stopping selling its dangerous product.

I still think you can only get so far in terms of genuine “goodness” (whether framed in terms of corporate citizenship, sustainability, etc.) when the product you sell is one that you acknowledge to be dangerous. But I think the answer to my hypothetical question — about whether a constructive conversation can be had about ethics in the making and marketing of a controversial product — is clearly “yes.”

The Guardian had an interesting editorial on corporate social responsibility and tax avoidance, Saturday:

Tax Gap: Corporate social responsibility.

Here are a few key paragraphs:

Public companies do frequently claim to practise “corporate social responsibility” (CSR), and most leading businesses boast of charitable and green activities in their annual reports.

Barclays Bank calls itself a “responsible global citizen”, with concerns ranging from carbon emissions to credit card fees. It even has a reputation committee, chaired by deputy chairman Nigel Rudd. But nowhere does its policy mention Barclays’ tax avoidance schemes.

The advertising group WPP, before moving to the Irish Republic last November to cut its taxes, boasted six different kinds of “corporate responsibility”, including minimising its environmental impact and only engaging in “ethical marketing”. Tax did not figure in the list.

It’s a hard question, or at least harder than it looks.

Clearly, if the question were “does business have a social responsibility to pay the taxes it is legally obligated to pay?” then the obvious answer is “yes.”
And if the question were “does business have a social responsibility not to use valid deductions put in place by government for various public-policy reasons?” the answer is probably “no.”

The harder question is in between those two: “does business have an obligation not to find innovative ways to reduce or avoid paying taxes, ways that follow the letter but not the spirit of the law?”

To understand the complexity of tax avoidance, and just how far some companies have gone beyond merely using valid exemptions, it’s worth taking a look at the Guardian’s series: Tax Gap.

(This is also a good example of the damage done to the vocabulary of business ethics by the capturing of the phrase “corporate social responsibility” by those who choose to capitalize the 3 words that make it up. Those 3 words ought to signify a topic for discussion: what are a corporation’s social responsibilities? Instead, they almost always imply a statement: these are a corporation’s social responsibilities. Why does this story use that phrase? Why not just ask if tax avoidance is unethical?)

Some people use the term “corporate social responsibility” when they want to talk about “business ethics.”

That’s a mistake.

CSR is a particular thesis, or perhaps more properly a movement, within the larger topic of business ethics. Business ethics asks, quite generally, how businesses ought to behave. CSR is — roughly — the thesis that business ought to take into consideration the interests of society at large in their decision making.

Another way of putting the CSR idea is that, from a CSR point of view, it makes perfect sense to admit that a business:

• makes a useful product or provides a useful service;
• provides employment;
• provides an investment opportunity for investors;
• follows scrupulously all laws and regulations to which it is subject; and
• pays its taxes….

…and then to ask of that business, “Yes, but what do you contribute to society? How does society as a whole figure in your daily decision-making?”

Three quick criticisms of CSR:

1) Misunderstands capitalism: The central tenet of CSR — namely that the best way for business to contribute socially is through good works — is faulty, and implies a misunderstanding of the basic wealth-and-welfare generating function of markets. Businesses contribute by producing things we want; they facilitate voluntary exchanges of goods and services that, when conducted honestly, leave all concerned better off. (Ask yourself: when did Bill Gates start contributing to society? Was it in 1994, when he founded the Bill & Melinda Gates Foundation? Or was it in, say, 1975, when Gates founded the firm — Microsoft — that would help put the power of computers in of millions of offices and homes? I’m no fan of Microsoft or its products, but to think that Gates’ contribution began with the founding of his admittedly wonderful foundation is just silly.)

2) Smokescreen: when companies are cooking the books, or flouting environmental laws, who cares what CSR activities they’re engaging in? OK, I’m exaggerating. Of course good works are good works. But it’s not at all clear that they make up for other transgressions. We should stay focused. When business leaders start bragging about their CSR activities, we should smile politely, and then enquire how their companies are doing in terms of honest advertising, corporate governance and regulatory compliance.

3) Waste of Public / Activist / Media Attention. In the face of corporate scandals and economic instability, what we ought to be asking of business executives is that they focus on doing their job honestly and diligently. In any given week, millions of dollars are being spent on academic and industry conferences, round-tables, and dinners to talk about the importance of CSR. In any given week, newspaper stories are being drafted about which companies are doing well, or badly, in their CSR efforts. And in any given week, activists are staging protests, writing letters, and educating the public about the failures of companies to be “socially responsible.” What would happen, I wonder, if all of that money and effort were redirected to the simple idea of getting more people, in more businesses, to behave more consistently according to basic rules of honesty and integrity?

Providing services to the bereaved is a tricky business. You’re trying to make money, trying to make a living. Fair enough. So, you offer services. And you charge for them. Fair enough. And then you push your business one step too far.

Witness this sleazy marketing strategy, from Legacy.com. Legacy provides web-based obituaries for newspapers, including the Ottawa Citizen (and, apparently, many other papers). Place an obituary in the Citizen, and part of the package is an online obituary and online guestbook, where friends & family can leave their condolences. Nice feature.

What happens a year later isn’t so nice.

A year later, the clock runs out on the guestbook. OK, that’s reasonable. You’ve paid for a service, but not necessarily a perpetual one. But what does Legacy.com do next? They contact everyone who signed the guestbook, and ask if they would like to pay — $89 — to keep the guestbook going. You can imagine friends of the family everywhere doing a double-take, staring at the email. “Me? Do I want to keep the guestbook going?” Huh?

Now imagine the next-of-kin, humiliated at learning that Legacy.com is soliciting money from their friends, from the kind souls who offered their condolences in a time of grief.

Here’s a sample of the email Legacy.com sends out:

Hmm.
Well, maybe when this supportive friend-of-the-family signed the guestbook to start with, they somehow agreed to be contacted later?

Nope. Here’s what their guestbook looks like, just prior to signing:

Several checkboxes, but none that says “Yes, please feel free to contact me in a year to ask me for money.” The result is just an out-of-the-blue grab for cash, from confused-and-embarrassed friends of the dearly departed.

This is a great business ethics case. Legacy.com’s behaviour here is perfectly legal, as it should be. But it’s sleazy. And they should be told so. And the Citizen (and the other newspapers that deal with Legacy.com) should tell them so. Unsolicited commercial emails are bad. Unsolicited commercial emails to the friends and family of the bereaved? Shameful!
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Addendum
I’m having second thoughts about having asserted that what Legacy.com does is “perfectly legal” (but sleazy). It may not be legal after all. A couple of colleagues have pointed out that Legacy.com might be violating privacy legislation, including the Personal Information Protection and Electronic Documents Act . I’m no expert on privacy legislation, so I can’t say whether Legacy.com has violated PIPEDA. But they’ve certainly violated its spirit.

Two Harvard MBA students — Umaimah Mendhro and Abhinav Sinha — wrote the following, for Forbes: Three Keys To Staying Ethical In The Age Of Madoff.

The whole thing is worth a read. Here are the opening paragraphs:

What separates a Rod Blagojevich from a Patrick Fitzgerald? A Bernard Madoff from a Warren Buffett? What makes such people, at either extreme, so different from any of us? Everything–and not too much.

As citizens of Pakistan and India who are students at Harvard Business School, we spent a considerable amount of time over the past several months interviewing and drawing lessons from 12 leaders in Pakistan and seven in India who are carrying the torch of ethical business behavior. Come factory shutdowns, forced resignations or life threats, they’ve been standing up against corruption in environments where corruption is the rule.

Conventional wisdom and our own preconceptions hold that a mix of many complex, research-worthy characteristics and influences separates the highly moral from the corrupt. What we found suggested, to the contrary, that it all comes down to three simple things…

What 3 things? The authors distill the lessons learned from the execs they studied into the following 3 injunctions:

• “Call corruption corruption.” (Basically, avoid euphemisms for practices you know are corrupt.)
• “Enforce behavior that creates new values.” (This is essentially the Aristotelian point that what we do changes who we are.)
• “Give up on the security of wavering.” (Roughly: don’t let yourself get away with thinking there are lots of moral “grey zones.”)

Sounds like pretty good advice, over all. I’ll only comment briefly on the last point.

The authors applaud the executives they studied for their attachment to “moral absolutism.” If that means doing the right thing when the right thing is clear, then that’s a fine thing to praise. Showing some spine in the face of pervasive corruption is hard, and to be commended. That’s pretty much the definition of “integrity.” On the other hand, a lack of sensitivity to context isn’t a virtue. Pretty much all good rules are subject to valid exceptions. The tricky part is enunciating a clear conception of what those exceptions are, and making sure the exceptions apply to everyone, not just you.

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Thanks to Suzie and Gini for the article.

I’ve blogged before about the complex relationship between business and regulation. Most people assume business hates government interference, but it’s not uniformly true. Sometimes regulations make for a more level competitive playing-field, and in some cases clear regs make a business’s legal footing clear enough to permit investment.

Sometimes, an industry’s plea for regulation is less clearly benign. Check this piece by Emily Burke, writing for Maclean’s: “This isn’t illegal.”

The battle to keep kids from smoking just keeps getting stranger. A new study shows that making it illegal for kids to smoke can help to reduce youth smoking rates. But oddly, Canada’s convenience stores, which make a considerable chunk of their profits from selling cigarettes, support the study’s recommendation to ban youth smoking—while anti-smoking groups, such as Physicians for a Smoke-Free Canada, oppose it.

It’s worth making a distinction, here: what the industry is proposing is a limitation on someone else’s behaviour, namely that of consumers. But still, it’s a change that stands to lower demand for a profitable product.

Why does the physicians’ group oppose the move?

…Cynthia Callard, executive director of the anti-smoking advocacy group Physicians for a Smoke-Free Canada, says the very fact that the CCSA supports such a ban is evidence that it won’t work. “I can’t overstate how relevant it is that the only people who are pushing for youth possession laws are tobacco companies and tobacco retailers,” she says. “That should give anyone pause.”

Actually, it’s not evidence that it won’t work. Callard’s implication: Why would an industry promote a legal change that would reduce demand for its product? Well, as long as the law is enforced uniformly, no store will be at a comparative disadvantage, and perhaps they expect to make up the difference with sales of other products. And it’s at least possible that, under the current rules, there are store operators who would rather not sell so many cigarettes (or sell them at all), but who know that they’d be at a huge competitive disadvantage if they unilaterally stopped selling them.

But in the end, even if vendors want this legal change for the wrong reasons, is that enough reason to oppose a regulation that could save lives?

Corporate ethics rankings are a funny thing. Neat idea, in principle. But so much hangs on methodology. (I’ve blogged about such rankings here, here and here.) In fact — as it turns out — so much hangs on what you measure that one ranking organization’s villain can be another organization’s hero.

See this ranking, released last week by Multinational Monitor: The 10 Worst Corporations of 2008.

Of special note, General Electric is included on the list, due to its “creative accounting.”

In June, former New York Times reporter David Cay Johnston reported on internal General Electric documents that appeared to show the company had engaged in a long-running effort to evade taxes in Brazil. In a lengthy report in Tax Notes International, Johnston reported on a GE subsidiary’s scheme to invoice suspiciously high sales volume for lighting equipment in lightly populated Amazon regions of the country. These sales would avoid higher value added taxes (VAT) in urban states, where sales would be expected to be greater.

Johnston wrote that the state-level VAT at issue, based on the internal documents he reviewed, appeared to be less than $100 million. But, he speculated, the overall scheme could have involved much more.

Johnston did not identify the source that gave him the internal GE documents, but GE has alleged it was a former company attorney, Adriana Koeck. GE fired Koeck in January 2007 for what it says were “performance reasons.”

OK, so why have I singled out G.E., among the companies that Multinational Monitor includes on its list of corporate villains?

Well, as it turns out, G.E. was also included on Corporate Knights’ list of the
Best 50 Corporate Citizens 2008. In fact, G.E. was in the top 10!

Now, the Corporate Knights ranking has in its favour that it actually has (and states) a method: they look at a range of factors, and calculate a numerical score. As far as we can tell, Multinational Monitor is just picking companies with high-profile scandals. Having a clear method is good, both for consistency and for transparency. But of course, 2 years ago Corporate Knights’ ranking method put tobacco giant Rothmans Inc. at #2 on the list, and giving ethics kudos to a company that kills so many will strike many as, um, counterintuitive.

I’m not going to try to settle the fight. But Multinational Monitor and Corporate Nights probably ought to talk.