The Business Ethics Blog

Here’s a good story about the (non)protection of shareholder interests, and the (non)homogeneity of shareholder interests.

From Forbes.com: Potential Roadblock For Imclone Deal.

Although it spent weeks teasing investors about the identity of its suitor, ImClone failed to satisfy all of its shareholders that a $6.5 billion bid from Eli Lilly fairly values the biotech business.

A pension plan, the State-Boston Retirement System, has filed a lawsuit in the New York State Supreme Court against the directors of ImClone … including its billionaire chairman, Carl Icahn, and against Eli Lilly … claiming that the biotech ‘s board failed to live up to its fiduciary duties when pursuing the offer and did not provide the necessary information to shareholders to make a proper decision.

The standard folk-view of the corporate world is that corporate boards are obsessed with pursuing the interests of shareholders — indeed, many people seem to think that the pursuit of profits for shareholders is the source of all corporate evil. Yet here’s a story where a group of shareholders feel like their interests are emphatically not being protected by the board.

Another standard element of the folk-view of the corporate world is that shareholders are a relatively homogenous group, all with roughly the same interests. Here, again, this story provides a counter-example. Icahn, chair of ImClone’s board, is also a very significant shareholder. (According to the WSJ, “Icahn owns 11.67 million shares of ImClone”.) Yet the shareholders represented by the SBRS seem to think their interests are not at all well lined up with his.

As always, the world is a somewhat more complicated place than is typically thought.
—
Thanks to Pharmalot.

Here’s an unusual example of a high-profile company taking a high-profile position on a controversial social issue that is not clearly & directly related to their business interests. Apple says No on Prop 8.

Apple is publicly opposing Proposition 8 and making a donation of $100,000 to the No on 8 campaign. Apple was among the first California companies to offer equal rights and benefits to our employees’ same-sex partners, and we strongly believe that a person’s fundamental rights — including the right to marry — should not be affected by their sexual orientation. Apple views this as a civil rights issue, rather than just a political issue, and is therefore speaking out publicly against Proposition 8.

Proposition 8 is a ballot measure in California, seeking to amend the state constitution to deny same-sex couple s the right to marry. In joining the fight against Prop 8, Apple was joining that other tech powerhouse, Google. Taking this kind of strong stance on a social issue is relatively uncommon for companies. And some have been critical, not just of the particular position Apple is taking on Prop 8, but of the fact they’re taking a position on this controversial matter at all. Why would it be a corporation’s role even to have a view on this sort of thing? How can management be advancing long-term shareholder value by doing this? Well, it just may be that in some cases, some issues are so important, and the morally right answer so obvious, that management just can’t contain themselves. But there’s another (more cynical?) explanation that has to do with employee morale. As Google’s Press Release points out, “we do not generally take a position on issues outside of our field, especially not social issues. …. However… it is the chilling and discriminatory effect of the proposition on many of our employees that brings Google to publicly oppose Proposition 8. While we respect the strongly-held beliefs that people have on both sides of this argument, we see this fundamentally as an issue of equality.”

Apparently Apple and Google are not the only companies that feel strongly about this. See this press release about other companies joining the Equality Business Advisory Council to Defeat Prop 8. I’m of the view that interpreting the moral motivations of companies — figuring out why they did certain morally-loaded things — is somewhere between difficult and a metaphysical impossibility. But I would love to find a source of insight into this particular case. Who really made these decisions? CEOs? PR departments? Boards? Anyone have any ideas?

—
Please note that any inflammatory partisan comments about Prop 8 will be deleted. Obviously. Cynical and/or moralistic and/or optimistic conjectures about corporate motives, however, are welcomed.
—
Update: comments are now closed.

Yesterday at noon I attended an excellent talk by Joseph Heath from the University of Toronto, called “The Ethics of Risk: From Friendly Societies to Collateralized Debt Obligations” (sponsored by the Kenan Institute for Ethics and the Center on Leadership and Ethics at Duke.)

Most of Joe’s talk was about the relationship between risk and social benefit. John Rawls famously referred to society as a “cooperative venture for mutual advantage.” But as Joe pointed out, that leaves open the question of how, exactly, social interaction produces mutual benefits. Joe noted that the most obvious benefits of cooperation come from economies of scale. Some jobs only become possible, and others become more efficient, when more people lend a hand. But less obvious — and less frequently discussed — sources of benefit come in the form of gains from trade (when you & I engage in commercial exchange, we both end up better off) and from risk pooling (the most obvious example of which is insurance).

It’s a topic Joe knows a lot about (see e.g., his paper “The Benefits of Cooperation,” in Philosophy and Public Affairs, vol. 34, 2006). But it’s a set of ideas that turns out to be highly relevant to the current financial crisis. Joe basically argued, in the last segment of his talk, that you can’t really understand the source of the housing bubble and its collapse, nor can you assess the US government’s response to the collapse, without understanding the difference between trading in risk, on one hand, and pooling risk, on the other.

This morning I attended a workshop on the relationship between business ethics and “the theory of the firm,” put on by the Kenan Institute for Ethics at Duke.

“The theory of the firm” is the name given to the contentious set of questions about why business firms exist in the first place, what their boundaries are, and why they tend to be structured as they are. Most people don’t give the question much thought, but stop and think for a minute about why companies exist, and why so many of them exist in roughly the form they do. From the point of view of ideal market theory, the fact that firms exist at all needs explaining: they’re lumps, aggregations of people working together within what would otherwise be a homogenous field of buyers and sellers of goods and services. (For a pretty decent summary of the topic, see the Wikipedia page on Theory of the Firm.)

The basic idea of the workshop was that our theory of the firm — our understanding of what business firms are — ought to influence how we think corporations should behave. Or thinking about it from the opposite direction, before you can say something significant about how businesses ought to behave, you need to have some understanding of what kind of beast the firm is, its role within the market and within society, and so on. The alternative is to start more or less from scratch, assume that people working within complex organizations are for all purposes “just people,” and arrive at behavioural prescriptions based either on simple moral intuitions, or, for scholars, based on philosophical ethical theories. But doing it that way tends to be less that satisfactory. As one of the participants in this morning’s sessions put it, “When you simply try to apply standard philosophical theories, you end up saying trivial things, or hitting dead-ends.”

(FYI, the view (which I share) that says theories of the firm matter in business ethics owes a great deal to the work of John Boatright, and we were lucky enough to have John with us at the session this morning. His seminal paper on the topic was “Business Ethics and the Theory of the Firm,” American Business Law Journal, vol 34 1996.)

Sometimes great power is to be lamented; other times, it is to be applauded. Generally, Wal-Mart has been the subject of criticism regarding its immense power and influence in the world of retail. But this story shows the upside:

Wal-Mart announces new ethical and environmental principles

Wal-Mart announced Wednesday in Beijing that it would require manufacturers supplying goods for its stores to adhere to stricter ethical and environmental standards, the latest effort by the world’s biggest retailer to answer criticism of its business practices.

At a gathering of more than 1,000 suppliers, Chinese officials and advocacy groups, Wal-Mart executives revealed a new supplier agreement that would require manufacturers to allow outside audits and to adhere to specific social and environmental criteria. The agreement will be phased in beginning in January, Wal-Mart said.

Is Wal-Mart the new Nike? Recall that, a couple of decades ago, Nike was widely criticized for giving contracts to factories using sweatshop labour in developing nations. Today — due in large part to publicity, boycotts, and other forms of public pressure — Nike is widely regarded as an ethical leader within the apparel industry. But Nike’s changes only affected a few factories (maybe a few dozen? a hundred or two?) making shoes and athletic apparel. Wal-Mart is going to affect the behaviour of over 1,000 companies, each owning who knows how many factories, making a huge range of consumer goods. That’s a lot of impact. It’s too soon to see how effective Wal-Mart’s move will be at actually changing behaviour along its supply chain, but when it comes to pressure on manufacturers, nobody throws their weight around like Wal-Mart.

(p.s. I predicted here two and a half years ago that “within 5 years, Wal-Mart will be at the TOP of at least some business ethics / corporate social responsibility / corporate citizenship rankings.” I’m not saying that’s come true just yet, but let’s just say I’m feeling pretty good about my prediction at this point.)

Just read a neat story about using magnetic pulses to treat certain kinds of depression. (It’s a pretty limited technology. The effect is small, and it’s only recommended for a small subset of patients with clinical depression.)

My worry is that this weak, but scientifically-grounded, new product will only encourage (and, to those who don’t read the fine print, sanctify) the huge “magnet therapy” industry. “Magnet therapy” companies sell magnets to be applied to various ailing body parts. There are magnetic bracelets, magnetic mattress pads, magnetic ankle-wraps, and so on.

Problem is, “magnet therapy” doesn’t work. You can’t use magnets to cure lower back pain, carpal tunnel syndrome, or anything else. It’s quackery. But it’s legal (in most places?) as long as you don’t make any specific health claims. You can get away with implying health effects. You just can’t make them explicit. If you made them explicit, you’d have to back them up with, say, evidence. Which you can’t. Because there isn’t any. But companies can still make a killing (perhaps literally, if people are misled to use magnets rather than something that works) by playing on people’s naiveté.

Take just one company as an example. The website ProMagnet.com sells a whole range of “therapeutic” products, and boasts a “satisfaction guarantee”, probably based on the knowledge that most unsatisfied customers will lose their receipt, forget about the guarantee, blame themselves, or whatever. To avoid lawsuits, the company is careful to avoid medical claims. In fact, buried in the fine print at the bottom of their “Guarantee” page is the following:

Norso magnetic therapy products are not sold as medical devices. Our Norso magnetic products are not sold to cure diseases. No guarantee of effectiveness of product is made…

It’s an entirely unethical business (not a verdict I spout very often). Am I being unfair? After all, the people selling these products could actually believe in their own products, in which case they’re merely fools, not unethical. But when — disclaimers aside — you sell a product intended to help people, it seems to me that you have an obligation to figure out whether it really does.

For more info, see this editorial from the British Medical Journal: Magnet therapy: Extraordinary claims, but no proved benefits.

Just how useful are the products offered by “personalized genomics” companies? Are they clinically useful? Harmless entertainment? A little of both?

(You may have noticed I’ve been blogging a lot about genomics, genetics, biotechnology, etc., lately. Many of you know that industry is a special interest of mine. But I think even those without a special interest may find these postings useful, simply because in many cases the biotechnology industry faces all the same ethical issues as other industries do, and in fact many of those standard issues take on special significance for these companies doing commerce in cutting-edge science.)

Thursday evening I attended this very good event: Personalized medicine: Are we ready?, put on here in Toronto by the Canadian Institute for Advanced Research (CIFAR).

Representatives from the personalized genomics companies 23andMe and Navigenics were on the panel, as were several top geneticists and a health lawyer (namely my pal Tim Caulfield). 23andMe and Navigenics are “personalized genomics” companies. Both offer customers broad genetic tests covering a wide range of health-related genes. Prices range from several hundred dollars to several thousand.

Oversimplifying greatly, what I took home from the panel discussion was this: the companies believe that their products can provide useful information, and can at the very least get consumers to focus on their own health; the other members of the panel thought that the usefulness of such tests for the general public is severely limited. The key worry was about clinical validity and clinical utility of these tests. Basically, can the information they provide actually help customers make better health decisions? And will buying these tests lead customers to better health outcomes? So far, there’s reason for skepticism.

In the Q&A after the panel discussion, I asked the panel whether their doubts about the validity & utility of these tests would be best handled by government regulation, ethical restraint on the part of genomics companies, professional standards among geneticists, or education for potential customers. No one seemed to have a satisfying answer. But identifying the right levers may be as important here as deciding just how good or bad the product is.

I gave a talk today at Ryerson University in Toronto, on “Resolving Social Conflict Over BioEngineered Foods.” The talk was part of Ryerson’s Ethics Speakers Series. (The whole talk will eventually be podcast via the Speakers Series page, but it may take a couple of weeks before it’s available.)

Basically I talked about various institutional mechanisms for dealing with fundamental disagreement, within society, over particular products, technologies or social policies. Democratic government is one such mechanism. We empower a government to act on our behalf. We won’t all agree with everything that government does, but if the process has been reasonably democratic, we can at least endorse that. It lets us get along despite disagreement. Professions and expert bodies can play some of the same role: in at least some places, social disagreement over abortion, nuclear power, and defence of child abusers has been defused by handing decision-making over to physicians, engineers, and lawyers respectively. The same goes for markets: we may be socially divided over pornography or Wal-Mart or the need for food to be prepared according to biblical rules, but the market provides a mechanism by which each of us can satisfy our preferences, without those preferences being imposed on others.

I argued today that a regulated market is the appropriate social mechanism for dealing with controversy over bioengineered foods. I noted that while expert opinion on the safety of such foods is overwhelmingly positive, some people have lingering doubts that seem unlikely to be resolved through further debate or additional data or more expert opinion. I then noted the standard view that the proper role of a liberal democratic government is to promote the wealth & well-being of its citizens, but to do so in a way that is neutral with regard to what constitutes “the good life” (which includes metaphysical questions such as whether fiddling with genes constitutes an offence unto God, Mother Nature, etc.). Such being the case, the right decision for government to take with regard to GM foods is to get expert input regarding safety, and then to allow the market to operate. Note that this is not simple market fundamentalism. The point here is not that markets are always right, but that in some cases markets allow us to agree to disagree.
—-
Update: my talk is now online.

Yesterday I blogged about expensive and not-necessarily-useful genetic tests. Today I stumbled across a much cheaper genetic test being sold retail. I’m hanging out at Ryerson University in Toronto, today, and giving a talk here tomorrow on bioengineered foods. At a drugstore around the corner I happened to spot the test pictured above.

Here’s the company’s website: dermaDNA

Now for the first time, dermaDNA can help you understand how your skin ages, how much it has aged prematurely, and what you can do to give yourself a more youthful appearance.

With its patented Cellular DNA Assessment Test, dermaDNA will measure your skin cell DNA damage and provide you with a personalized product regime designed to repair and protect. Increased elasticity plus a reduction in wrinkling, hyperpigmentation and skin cell DNA damage equals younger, healthier- looking skin. And it all takes place on the cellular level.

Here in Toronto the test kit sells for $160. It apparently includes the tools to take one swab of the bridge of your nose (to test for genetic damage already done by the sun) and one swab of the inside of your cheek (to test for a gene associated with susceptibility to skin cancer). Just mail the swabs away to the company, and get test results back in about 2 weeks. The results are presumably intended to guide consumers in their decisions about exposure to UV-rays (from sunlight) and in their decisions about purchasing dermaDNA’s own line of skin care products.

I can’t speak to just how informative this genetic test is (i.e., whether the test result is likely to point to health-related advice other than what everyone is already being told by dermatologists). But at least it’s not terribly expensive, and the marketing doesn’t rely on fear-mongering.

One further note. Some genetic testing companies are using consumer-oriented testing as a way of gathering genetic samples from a large population, to build a commercially valuable database. In some cases, consumers may not be aware that that’s the case. Not so with this product. In the Frequently Asked Questions section of the company’s website, it says:

Your DNA will be stored at the lab for quality control and independent auditing purposes for up to 6 months. After that time it will be destroyed, according to stringent FDA-established operating procedures.