Archive for the ‘ethics’ Category

Top 5 Business Ethics Movies

There are lots of ways you can learn about ethical issues in business. You can do some reading. You can take a course. But hey, it’s summer, so let’s talk movies. Here’s a list of my 5 favourite business ethics documentaries. Granted, these aren’t exactly great date movies. Nor are they action-packed blockbusters. But trust me you could do a lot worse.

So grab a bag of popcorn. Here they are, in no particular order:

Let’s start with one you’ve likely heard of, namely The Corporation (2003). This one was popular out of all proportion to either educational or entertainment quality. It’s full of half-truths and bizarre omissions. And its central theme, namely that the corporation is in some sense a psychopath, simply cannot withstand even cursory critical examination. But it’s still useful to watch — if only to understand the source and shape of so much anti-capitalist sentiment. (The Corporation is freely available online here.)

Next on my list is another what we might call ‘anti-business’ documentary, namely Walmart: The High Cost of Low Price (2005). This is one of my favourite videos for classroom use, because it’s a good test of students’ critical thinking skills. Some of the criticisms levelled at Walmart in the movie are entirely on-target: labour code violations, racist HR practices, etc. Other criticisms point to things that are in some sense sad, perhaps — the loss of so many mom-and-pop stores, for example — but far from evil. Others are downright ludicrous, such as blaming Walmart for random murders in their parking lots. Watching this one is a great way to see what is right, and what is wrong, with so many criticisms of business today.

The most recent of my top 5 is already a couple of years old. And while Food, Inc. isn’t about business per se, it is about the production of food, something that is increasingly industrialized and dominated by big business. And as businesses go, none could be more important to us than the food business. The movie does a good job of pointing out problems, but is regrettably short on solutions. A not-unrelated criticism is that the documentary makes too little use of relevant experts. How could a film make concrete recommendations about the future of food without bothering to interview, say, a food economist or two? At any rate, it’s a thought-provoking hour and a half.

Next on my list is a movie you probably haven’t heard of, namely The Take (2004). This one isn’t really a criticism of any particular company, or of any particular industry. At heart, it’s a plea for a different economic model — though the details here are a bit vague. The Take tells the true story of a group of Argentinian factory workers who, when their cruel capitalist boss shut down operations for obscure reasons, seize the factory, start up the machines, and try to make a go of it. The workers’ motto — “Occupy, Resist, Produce” — is in spirit awfully close to “Workers of the world, unite!” It’s a good story. Unfortunately, the movie ends before the story does. As the film closes, the workers have seized the factory and started up the machines and are full of optimism that they can do better without a boss. Can they really do it? Can they beat their little workers’ paradise beat the odds? The film leaves us with lots of idealistic hopes, but few answers.

My next recommendation is admittedly the dullest of the bunch, but still worth considering. A Decent Factory is a story about audits. Not financial audits, but supply-chain audits carried out by Nokia at the factories of one of its Chinese subcontractors. There are two striking aspects of this quiet film. The first is how the auditors seem to struggle with just how much to push their Chinese subcontractors on various issues. The auditors’ job is not an easy one. They are there to evaluate, but also to insist on improvements, or sometimes just to suggest, encourage, and cajole. The path forward is far from clear. This is related to the second striking aspect of the film, which is that the conditions at the Chinese factory are, well, mediocre. They’re not the kind of awful sweatshop that would make for a gripping exposé. Remember what your grade-school English teacher told you about the adjective “nice”? It’s a weak word, one that tells the reader little. That’s the sense in which the makers of this film use the word “decent” in their title. The Chinese factory is a…decent…factory. Not great. But not awful. And just what to think about that is left to the viewer.

Last but certainly not least is Enron: The Smartest Guys in the Room (2005). This one is arguably the best of the bunch. Based on the book by journalists Bethany McLean and Peter Elkind, the movie is a fun, accessible, and best of all plausible telling of the story of what is still the biggest and most complex business-ethics scandal of the century so far. Perhaps the thing that most attracts me to this documentary is its refusal to resort to easy answers. There’s no attempt to say it was “all about greed” or that “capitalism is evil.” The truth about Enron, and about capitalism more generally, is much more complex, and much more interesting, than that.

Ethics on Wall Street: Hate the Player, Not the Game!

A recent survey of Wall Street executives paints a bleak picture of the moral tone of a central part of our economic system.

According to the survey (conducted for Labaton Sucharow LLP), 24 percent of respondents believe that financial professionals need to engage in unethical behaviour in order to get ahead. 26 percent report having observed some form of wrongdoing, and 16 percent suggested that they would engage in insider trading if they thought they could get away with it.

Two points are worth making, here.

First, some perspective. Far from alarming, I think the number produced by this survey are relatively encouraging. Indeed, the numbers are so encouraging that I can’t help but suspect unethical attitudes and behaviours were seriously underreported by respondents. Only 26 percent had seen something unethical? Seriously? That seems unlikely. And the fact that only 16 percent said they would engage in insider trading is also relatively benign. There are, after all, people who believe that insider trading isn’t unethical at all, and shouldn’t be illegal. They argue that insider trading just helps make public information that shouldn’t be private in the first place. I don’t think that point of view hold water, but the fact that it’s put forward with a straight face makes it pretty unsurprising that a small handful of Wall Street types are going to cling to the notion.

Second, a survey like this highlights the difference between our ethical evaluation of capitalists, on one hand, and our ethical evaluation of capitalism, on the other. One of the major virtues of the capitalist system is that it is supposed to be able to produce good outcomes even if participants aren’t always squeaky clean. In no way does it assume that all the players will be of the highest virtue. Adam Smith himself took a pretty dim view of businessmen. In The Wealth of Nations, Smith wrote:

“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public.”

And yet despite his dim view of capitalists, Smith remained a great fan of capitalism — or rather (since the term “capitalism” hadn’t been coined yet) a fan of what he referred to as “a system of natural liberty.” The lesson here is that evidence (such as it is) of low moral standards on Wall Street shouldn’t make us panic. Perhaps it should make us shrug, and say, “Such is human nature.” The challenge is to devise systems that take the crooked timber of humanity and mould it in constructive ways. Governments need to take corporate motives as they are and devise regulations that encourage appropriate behaviour. And executives need to take the motives of their employees as they are and devise corporate structures — hierarchies, teams, incentive plans — that motivate those employees in constructive ways. In both cases, while the players should of course look inward at what motivates them, the rest of us should focus not on the players, but on the game.

5 Business Ethics Must-Reads

Business Ethics is an academic discipline, as well as a field of practical expertise and increasingly a central business function.

There are many ways to educate yourself about Business Ethics as a field of study and understanding. But if your interest in the topic is sufficiently deep, you could do worse than to read a handful of papers by some of the leading scholars in the field.

So here are five of what I regard as essential readings in business ethics, along with an explanation of their significance.

The List

In order to say anything useful about ethical issues in the marketplace, you first need to understand something about how markets work, how they fail, and what the ethical argument for their existence is. And simply being in business doesn’t guarantee that you understand markets, any more than being an athlete guarantees that you understand physiology. You need to go to someone who has a deep understanding just of one particular market — the market for mobile phones, say, or for cars — but of markets in general.

So the first bit of essential reading is a decent chunk of…

1. Adam Smith’s The Wealth of Nations. (It’s freely available online, and I recommend reading at least the first three chapters of Book 1, Volume 1.) Smith, one of the great philosophers of the Scottish Enlightenment, wasn’t the first to speculate about how economies work, but he’s generally thought of as the guy who more or less got it right. Smith is to economics what Darwin is to biology. In The Wealth of Nations, Smith outlines the basic way in which trade produces mutual advantages, the way those advantages encourage specialization, and — importantly — the way self-interest is sufficient to get the whole process started. (But a word of caution: Smith is often wrongly thought to have encouraged greed. Nothing could be further from the truth. For useful correctives, read Nobel-prizewinning economists Ronald Coase and Amartya Sen.)

#2. My next suggestion is to read something by Edward Freeman on what’s known in academic circles as “Stakeholder Theory.” His co-authored piece called “Stakeholder Capitalism” would do, as would any of a number of papers he’s authored or co-authored over the last 3 decades. The basic idea that Freeman defends is that corporate managers shouldn’t see themselves as beholden primarily to shareholders, but rather as ethically obligated to balance the interests of a wide range of stakeholders. The idea is attractive, but also deeply flawed, for reasons that the next two readings explain. One way or the other, the stakeholder idea forms an important part of the debate over how we should think about the central obligations of managers. (For my review of one of Freeman’s recent books on the notion, see here: Review of Managing for Stakeholders.)

#3. The best antidote to Stakeholder Theory is to read Joseph Heath’s “Business Ethics Without Stakeholders”. Heath argues that the stakeholder idea, however evocative, only muddies the water without providing managers with any useful direction. Heath’s paper basically outlines the fundamental debate over shareholders-vs-stakeholders in business ethics. In that regard, it’s a useful summary of the field. Heath argues that shareholder-driven and stakeholder-driven theories of business ethics both have virtues, but that both are also subject to fatal flaws. Heath argues for an alternative, which he calls the Market Failures theory. According to the Market Failures theory, the guiding ethical notions for businesses ought to be to honour the preconditions for market efficiency. In other words, they shouldn’t engage in the kinds of behaviours that make markets fail: they shouldn’t seek to profit from information asymmetries, or from externalities, or from exercising monopoly power.

#4. A bit of middle ground can be found in the work of John Boatright, including especially his article “What’s Wrong—and What’s Right—with Stakeholder Management”. In previous writings, Boatright has generally not been a fan of stakeholder theory. But in this paper, he says that the stakeholder idea can play a legitimate role in the corporation, if used properly. In particular, Boatright says that the stakeholder idea should only be held up as an ideal, a source of a sense of mission, a motivator reminding corporate insiders that all participants need to find long-term benefit. He says that the stakeholder idea is much less likely to serve the role that Freeman and his fans think it ought to play, namely that of a principle for corporate governance.

#5. All of the above is aimed at helping frame the question of how businesses (or people in business) ought to behave. But sometimes the problem isn’t with knowing the answer, but with putting it into action. And that seems to be a problem. After all, there’s a good deal of wrongdoing in the world of business. And yet look around you: most of the people you know (starting with yourself!) are pretty decent, honest folks. How do so many good people end up doing bad things.

In this regard, I have to recommend another paper by Joseph Heath, namely his “Business Ethics and Moral Motivation”. Heath points out that, when asked about what motivates wrongdoing, most people say it has a lot to do with greed, or with other deep character flaws. The trouble with this, he says, is that the scholars who study wrongdoing in the most depth — namely, criminologists — long ago considered and rejected those as key factors in wrongdoing. The real source of trouble, says Heath, lies in the ability people have to offer themselves excuses, and in particular to redescribe their behaviour their behaviour in ways that lets them rationalize it. “Sure, I took the money. But I wasn’t stealing — I was just taking what I was owed.” To get people to behave better, you need to help them see that such rationalizations are unsupportable, and we need to work to avoid institutional cultures that actually encourage thinking in those ways.

So that’s my list. It’s admittedly a particular take on the field — all of the authors cited above are philosophers. But hey, I’m a philosopher by training, and so I’m committed to the idea that an understanding of fundamental principles always helps. As someone once said, there’s nothing so practical as a good theory. Reading these won’t guarantee excellence in ethical decision-making, but they will help you understand what is fundamentally at stake in our ongoing exploration of what behaviour is right, and what behaviour is wrong, in the world of business.

A Business Ethics Syllabus

Here is a reading list that is typical of the one I use for my 1-term undergraduate Business Ethics courses. In some cases, there are hyperlinks directly to the work in question. In other cases, unfortunately, the link just leads to an abstract. Note that for the last decade, most of my teaching has been in a Philosophy department, and so this list includes more philosophical readings, and fewer case studies, than would be the case for a course at a business school.

Section 1: The Market

In order to say anything sensible about ethics in the marketplace, you need first to understand at least a bit about the marketplace itself, and the basic underlying mechanisms. So…

But a lot of people misunderstand Smith, especially his view on the role of self-interest in the marketplace. So I recommend reading these two Nobel-prizewinning economists, both of whom believe that Smith is far too important to get wrong:

  • Ronald Coase, “Adam Smith’s View of Man” (Coase explores Smith’s moral psychology, and points out that Smith neither thought people are entirely selfish, nor thought they should be).
  • Amartya Sen, “Does Business Ethics Make Economic Sense?” (Sen points out that, on Smith’s account, self interest merely explains what motivates people to engage in exchange. That’s important, but it leaves lots to be explained. And, Sen argues, much of what remains to be explained requires a richer set of values than the popular, cartoonish version of Smith usually includes.)

Section 2: For Whose Benefit?

In this section, we read about “stakeholder theory,” along with modifications of, and objections to, that idea.

  • R. Edward Freeman, et al., “Stakeholder Capitalism” (In this and many other papers published over the last quarter century, Freeman defends the idea that corporate managers have strong, positive obligations not just to corporate shareholders, but to a wide range of stakeholders.)
  • Kenneth Goodpaster, “Business Ethics and Stakeholder Analysis” (Goodpaster offers a friendly amendment to Freeman’s theory. He says we should understand stakeholder theory as implying that managers have strong fiduciary duties to shareholders, and regular non-fiduciary duties to other stakeholders — such as the duty not to lie, not to steal, etc.)
  • John Boatright, “What’s Wrong—and What’s Right—with Stakeholder Management” (Boatright says that the stakeholder idea can play a legitimate role in the corporation, but only as a motivator, giving corporate insiders a sense of mission. He says that the stakeholder idea is unlikely to serve as a good principle for corporate governance.)
  • Alexei M. Marcoux, “A Fiduciary Argument against Stakeholder Theory” (Marcoux argues that the relationship between corporate managers and their shareholders is in important ways very similar to that between doctors and their patients or lawyers and their clients. As a result, he says, shareholders — and shareholders alone — have a strong claim to managers’ loyalty as fiduciaries.)
  • Joseph Heath, “Business Ethics Without Stakeholders” (Heath argues that shareholder-driven and stakeholder-driven theories of business ethics both have virtues, but that both also have fatal flaws. He argues for an alternative, which he calls the Market Failure theory, according to which the ethical compass of a corporation should be to avoid behaviours that tend rob the market of its promise as a mechanism for mutual benefit.)

Section 3: Decision-Making

The last section of the course deals with individual decision-making, and barriers to making good decisions.

  • Aviva Geva, “A Typology of Moral Problems in Business” (Geva argues that not all problems in business ethica are of a single kind. She presents a framework for categorizing such problems, and argues that diagnosis is the first step towards effective resolution.)
  • Caroline Whitbeck, “Ethics as Design: Doing Justice to Moral Problems” (Whitbeck says that ethics classes too often treat ethical dilemmas as if they were multiple-choice problems, in which the decision-maker merely needs to choose from the available alternatives. Instead, Whitbeck suggests that we think of ethics in a more active way as a design process, involving seeking a best available solution given a set of objectives and a range of constraints.)
  • Joseph Heath, “Business Ethics and Moral Motivation: A Criminological Perspective” (Heath says that the “folk” theories regarding why people do bad things are generally deeply flawed, rejected long ago by thorough criminological studies. He says the key to wrongdoing is the process of rationalization or “neutralization,” according to which the wrongdoer finds ways of redescribing their own behaviour in order to soothe their own conscience.)
  • Nina Mazar, On Amir, and Dan Ariely, “The Dishonesty of Honest People: A Theory of Self-Concept Maintenance” (Ariely and colleagues ask why it is that so many honest people engage in dishonesty. They propose a theory according to which people frequently find ways to be just a bit dishonest, but not so dishonest as to stop them from thinking of themselves as decent people.)

Here are a few other items I have sometimes included:

It’s important to note what this list leaves out. Absent are direct discussion of workplace health and safety, honesty in advertising, product safety, environmental issues, and so on (though the readings above do of course draw examples from those sorts of topics). A different sort of course would deal with those, one by one, in some depth. The hope in my course is to provide students with the philosophical grounding to think about those sorts of practical issues in a well-informed way.

Organic Foods and Bad Behaviour

Is labelling foods as “organic” a positive thing or not? The Environmental Working Group certainly thinks so. To support this notion, the EWG has just released its annual “dirty dozen” list, consisting of fruits and veggies that are especially high in pesticide residue.

But check out this recent study, which suggests that seeing and thinking about organic foods can make people less ethical. The researchers report that test subjects asked to look at and rank (basically, to focus on) either a bunch of organic-labelled foods or to look at and rank either comfort foods (e.g., ice cream) or a more neutral food (e.g., mustard). Following this, the test subjects were given tests to evaluate a) their willingness to help a needy stranger, and b) the harshness of their evaluation of various apparent moral transgressions. The result: people exposed to organic foods were both less likely to help others, and more likely to be harshly moralistic.

This is an interesting result in its own right, but it has particular implications for marketing. Very roughly, the study suggests that marketing produce as organic can have negative effects on consumers’ attitudes and behaviour. That is, the study says nothing negative about organic food itself, or about consuming it. The implication is specifically for labelling it and promoting it as organic.

Of course, we can’t immediately condemn such marketing based on this kind of evidence. It may well be that the net effect of selling lots of organic food outweighs the effect such marketing has on people’s attitudes and behaviour. But at very least, this should make us stop and think.

Now, it’s highly unlikely that this effect is specific to organic foods. Presumably, labelling food as organic here is relevant because for many people that label implies something virtuous. So the implication is that promoting foods (or presumably other products) in terms of virtue could be a mistake.

In general, labels that indicate a product’s characteristics help consumers get what they’re looking for. This is especially important with regard to characteristics that can’t be seen with the naked eye, including key characteristics of most so-called ethical products. You can’t tell by looking at an apple, for instance, whether it’s been sprayed with pesticides — unless, of course, you see the “Certified Organic” label on it. Labels of various kinds help people get what they value, and in that way help achieve the promise of a free market.

The alternative to using labels to help people find products that match their own values is to rely on government regulation and industry “best practices.” If there were widespread agreement that organic foods really were better, ethically, they there would be some justification for having government use legislation to drive non-organic foods from the market. We rely on labels and third-party certifications precisely because there isn’t sufficient consensus to warrant a general standard. But the study described above highlights one of the costs of the path we’ve chosen. By moralizing the marketplace we may, ironically enough, be encouraging immoral behaviour.

Thanks to Andrew Potter for pointing me to the study discussed here.

MBA’s, Ethics, and the Facebook IPO

I’m an educator, so my natural bias is always to assume that yes, education matters. But it is in part because of this bias that it pains me when I see someone who is plainly overstating the case. And that’s the feeling I got when I read the Washington Post‘s Vivek Wadhwa asking, “Would the Facebook IPO have bombed if Mark Zuckerberg had an MBA?”

The answer — contrary to what Wadhwa argues — is “well, probably, yes!” The IPO almost certainly still would have bombed even if Facebook’s CEO had had an MBA. The fate of the company’s IPO depended a great deal on the way it was handled by Morgan Stanley, and on the appetite of institutional investors for the company’s stock. And that appetite depended a great deal on investors’ thinking on a lot of different questions, including things like whether Facebook still has room to grow or not. But there’s little readon to think that the educational pedigree of the CEO would have made much difference on its own.

It’s also worth pointing out that while Zuckerberg doesn’t have an MBA, he presumably has more than a few MBA’s working for him, and he certainly could afford to hire more. It’s pretty hard to make the case that the man himself having an MBA was utterly essential. So, while Wadhwa may well be right that having an MBA would mean that “Zuckerberg would have better understood the rules of corporate finance and capital markets,” it can hardly be argued that there was no one around with the relevant training to advise Zuckerberg on such matters.

Interestingly, Wadhwa twice mentions the importance of ethics in business, and rightly points to the ethics as being of central importance in an MBA education. But it’s far from clear just how Wadhwa thinks that is connected to the Facebook IPO having “bombed.”

Hopefully no one really thinks that getting an MBA is going to make you more ethical. If the ethics course you take during your MBA is a good one, it may do something to enrich and deepen the way you think about ethics, and to help you design and manage the kinds of systems that will help your employees act ethically. But even on the broadest and most inclusive understanding of the word “ethics,” there’s little reason to think that learning about ethics is going to make you better able to shepherd a company through an IPO. Nor is training in ethics any guarantee that individuals won’t engage in the kind of selective disclosure of information that is at the heart of the company’s post-IPO legal woes. The kind of ethics education that goes along with an MBA may well teach you more than you already knew about the nature of fiduciary duties and the importance of fostering trust, but an MBA-level ethics course is neither necessary, not sufficient, to make a business leader ethical.

Financial Advice, Competency, and Consent

I blogged recently on a California case about an insurance agent who was sentenced to jail for selling an Indexed Annuity — a complex investment instrument — to an elderly woman who may have been showing signs of dementia. I argued that giving investment advice is just the sort of situation in which we should expect professionals to live up the standard of ‘fiduciary’, or trust-based duty. An investment advisor is not — cannot be — just a salesperson.

But asserting that investment advisors have fiduciary duties doesn’t settle all relevant ethical questions. It settles how strong or how extensive the advisor’s obligation is; but it doesn’t settle just how the financial advisor should go about living up to it.

The story alluded to above again serves as a good example of that complexity. How should a financial advisor, in his or her role as fiduciary, handle a situation in which the client shows signs of a lack of decision-making competency? Sure, the advisor needs to give good advice, but in the end the decision is still the client’s. How can an advisor know whether a client is competent to make such a decision?

In the field of healthcare ethics, there is an enormous literature on the question of ‘informed consent,’ including the conditions under which consent may not be fully valid, and the steps health professionals should take to safeguard the interests of patients in such cases.

The way the concept is explained in the world of healthcare ethics, informed consent has three components, namely disclosure, capacity and voluntariness. Before a health professional can treat you, he or she needs to disclose the relevant facts to you, make sure you have the mental and emotional capacity to make a decision, and then make sure your decision is voluntary and uncoerced. And the onus is on the professional to ensure that those three conditions are met. But there’s really nothing very special about healthcare in this regard. Selling someone an Indexed Annuity isn’t as invasive, perhaps, as sticking a needle in them, but it often has much more serious implications.

Of the three conditions cited above — disclosure, capacity and voluntariness — disclosure is of course the easiest for those in the investment professions to agree to. Of course you need to tell your client the risks and benefits of the product you’re suggesting to them. But of course, many financial products have an enormous range of obscure and relatively small risks — must the client be told about those, too? There’s only so much time in a day, and most clients won’t care about — or be able to evaluate — those tiny details.

Voluntariness might also be thought of as pretty straightforward. A client who shows up alone and who doesn’t seem distressed is probably acting voluntarily, and it’s unlikely that we want investment professionals poking around our personal lives to find out if there’s a greedy nephew lurking in the background and badgering Aunt Florence to invest in penny stocks.

What about capacity? That’s the tough one, the one implicated in the court decision alluded to above. Notice that in most areas of the market, no one tries to assess your capacity before selling to you. I bought a car recently, and all the salesperson cared about was a driver’s licence and my ability to pay. No one tried very hard to figure out if I was of sound mind — beyond immediate appearances — and hence able to make a rational purchase.

Investment professionals do typically recognize a duty to ensure the “suitability” of an investment, and presumably whether an investment is suitable depends on more than just the client’s financial status. It also depends in part upon whether the client is capable of understanding the relevant risks. Being a true professional and earning the social respect that goes with that designation is going to require that financial advisors of all sorts adopt a fiduciary view of their role. That means learning at least a bit about the signs of dementia and other forms of diminished capacity. It also means knowing how and when to refer a client to a relevant health professional. Finally and most crucially, it means putting the client first — solidly and entirely first — and hence being willing to forego a sale when that is clearly the right thing to do.

Investment Advice and Fiduciary Duties

Most of us rely on accredited professionals for a range of services. Doctors, lawyers, accountants and so on play a huge role in our lives, giving us advice and rendering services that we would be foolish to provide for ourselves. Some topics, in other words, are beyond the ken of even the dedicated do-it-yourselfer. Financial planning is in that category. If you plan to do anything much beyond storing your money in a mattress, you probably want help from a professional. And you hope — really, really hope — that that professional is on the ball and has your best interests at heart.

A recent story highlights some of the difficulties in this regard. The story is about an independent insurance agent facing jail time for selling a particular kind of investment — an indexed annuity — to an 83-year-old woman. The catch: prosecutors say the woman showed signs of dementia, and the implication is that the agent took advantage of the fact that the buyer may not have understood the limits and disadvantages of the investment instrument she was buying.

Even minus the question of the buyer’s competency, there are worries here. For perspective on this story, I talked to Prof. John Boatright, who literally wrote the book on ethics in finance. He pointed out to me that Equity-Indexed Annuities are so complex that they’re a dubious product quite generally. He also pointed out that such annuities are investment instruments sold by people in the insurance industry who are not truly investment specialists. Most investment instruments are regulated such that they can only be sold by investment professionals with suitable training and credentials.

But regardless of the kind of professional you go to for investment advice, the underlying ethical question is whether that professional is going to have your best interests at heart. When the thing you’re buying is too complex to understand, you have to put your trust in the seller. Such trust is best underpinned by what are called fiduciary duties. A fiduciary, roughly speaking, is someone to whom something of value is entrusted. And a professional who bears a fiduciary duty has a stronger obligation than a mere salesman. Someone out to sell you something — a car, a stereo, whatever — has a plain obligation not to deceive you, but generally isn’t obligated to make sure that the product is right for you. Whether the product is right for you is up to you to decide. But a fiduciary is held to a higher standard. As Alexei Marcoux points out, we are vulnerable in various ways to professionals of various kinds, and that vulnerability generates duties on the part of those professionals, not just to be honest to us but to put our interests first. The transaction between a professional and a client is not a regular market transaction; rather, it is (or ought to be) governed by the higher standard implied by a fiduciary relationship.

Whether financial advisors and financial planners proclaim and live up to such a high standard is another matter. It certainly seems they should. In some places, financial professionals are explicitly expected to live up to the standard applied by a fiduciary duty, and other jurisdictions are moving in that direction. If ever there were a circumstance in which we were vulnerable, a situation in which we are trusting a stranger to tell us what to do with our life’s savings seems to fit the bill.

Greg Smith, Goldman Sachs, and Corporate Culture

By now everyone has heard that a guy named Greg Smith wrote a letter this week. Who is Greg Smith and why does anyone care? Why is Greg Smith’s letter getting attention from anyone who isn’t a Goldman Sachs employee, customer, or shareholder? Sure, he’s a mid-level executive at one of the world’s most powerful financial institutions. So he’s certainly not a nobody. And sure, Goldman, like other big financial institutions today, is seen by many as the corporate embodiment of evil, and so people are bound to be fascinated by an insider’s repudiation of the firm — especially accompanied, as it was, by a good dollop of juicy details. But there’s more to it than that, and the “more” here is instructive.

I think the key to understanding why Smith’s letter caused such an uproar is the fact that Greg Smith’s letter taps into the deep, dark fear that every consumer has, namely the fear that, somewhere out there, someone who is supposed to be looking out for us is instead trying to screw us. Smith’s letter basically said that that is exactly what is going on at Goldman, these days: the employees charged with advising clients about an array of complex financial decisions are, according to Smith, generally more focused on making money than they are on serving clients.

Now, first a couple of words about the letter. It goes without saying that we should take such a letter with a grain of salt. It’s just one man’s word, after all. Now that doesn’t make Smith’s account of the tone at Goldman implausible. He’s not the first to suggest that there’s something wonky at Goldman. It just means that we should balance his testimony against other evidence, including for example the kinds of large-scale surveys of Goldman employees that the company’s own response to Smith’s letter cites. Then again, such surveys are themselves highly imperfect devices. Either way: buyer beware.

(Note: one group that must take this stuff seriously is Goldman’s Board of Directors. A loyal employee taking a risk like Smith has is not a good sign, and his story deserves to be investigated thoroughly by the Board.)

OK, so let’s bracket the reliability of Smith’s account, and ask — if it accurately reflects the tone at Goldman — why that matters.

It matters because of this awkward fact: in many cases, in business, all that stands between you the customer and getting ripped off is that amorphous something called “corporate culture.” Most of us are susceptible to being ripped off in all kinds of ways by the businesses we interact with. That’s true whether the business in question is my local coffee shop (is that coffee really Fair Trade?) or a financial institution trying to get me to invest in some new-fangled asset-backed security. My best hope in such cases is that the business in question fosters a culture within which employees are expected to tell me the truth and help me get the products I really want.

Now culture is a notoriously hard thing to define, and harder still to manage. Culture is sometimes explained as “a shared set of practices” or “the way things are done” or “the glue that holds a company together.”

Why does culture matter? It matters because, other things being equal, the people who work for a company won’t automatically feel inspired to spend their day doing things that benefit either the company or the company’s clients. People need to be convinced to provide loyal service. In part, such loyalty can be had through a combination of rewards and penalties and surveillance. Work hard, and you’ll earn a bonus. And, Treat our customers well, or your fired. And so on.

But sticks and carrots will only get you so far. Far better if you can get employees to adopt the right behaviours voluntarily, to internalize a set of rules about loyal service and fair treatment. An employee who thinks that diligence and fair treatment just go with the turf is a lot more valuable than one who needs constantly to be cajoled. And, humans being the social animals that we are, getting employees to adopt and internalize a set of rules is a lot easier if you make it part of the ethos of a group of comrades. Once you’ve got the group ethos right, employees don’t act badly because, well, that’s just not the sort of thing we do around here! In the terminology used by economists and management theorists, culture helps solve ‘agency problems.’ Whatever it is that you want employees to be focusing their energies on, corporate culture is the key.

Of course, there’s still the problem of what exactly employees should be focusing their energies on. Should they be taking direct aim at maximizing profit? Or should they be serving customers well, on the assumption that good service will result in profits in the long run? In any reasonably sane market — one without ‘TBTF‘ financial institutions — the latter strategy would be the way to go, practically every time. And that fact is precisely what makes large-scale commerce practical. Consumers enjoy an enormous amount of protection from everyday wrongdoing due to the simple fact that most businesses promote basic honesty and decency on the part of their employees.

Unfortunately, it’s far from clear that Goldman operates in a sane market. So it is entirely plausible that the company could have allowed its corporate culture to drift away from seeing customers as partners in long-term value creation, toward seeing them as sources of short-term revenue. I don’t know whether Greg Smith’s tale is true, and representative of the culture at Goldman Sachs. But if it is, that means not just that Goldman isn’t serving its clients well. It means that Goldman embodies a set of values with the potential to undermine the market itself.

Social Class and Unethical Behaviour

Hating the rich comes pretty naturally to a lot of people. And so it’s not surprising that a widely-reported study apparently demonstrating that the rich are less ethical resulted in a combination of glee and eye-rolling proclamations that “we already knew that.”

There’s plenty to say about the study — lots of people (mostly in the comments accompanying various reports on the study) have pointed to what they say are methodological weaknesses related to sample size, how participants were chosen, what kinds of tests are taken as proxies for a lack of ethics, etc.

But if we take as given the conclusion that the rich do behave less ethically (by certain measures) this raises the question of what causes such behaviour on the part of the rich. To their credit, the study’s authors at least gesture at subtlety: “This finding is likely to be a multiply determined effect involving both structural and psychological factors.” But the authors do spend an awful lot of time discussing what they clearly take to be the key causal factor, namely greed. “Greed,” the authors write, “is a robust determinant of unethical behaviour.”

But the role that greed plays is in fact very far from obvious. The citations given by the authors are not entirely compelling, and as I’ve pointed out before, there’s considerable evidence (found primarily in the literature on criminology) that greed is not a key explanatory factor in much wrongdoing. Wrongdoing is more generally explained by the capacity for rationalization, for telling oneself compelling stories about why one’s own behaviour isn’t wrong after all.

It’s also worth pointing out the more general problem with establishing causal relationships. Note that the title of the study says only that “Higher social class predicts increased unethical behaviour” [emphasis added]. But the headline writers for various news outlets are not so careful: Wired, for example, tells us that “Wealth Could Make People Unethical” [emphasis added]. And the distinction is important. Owning an ashtray may predict increased tendency toward lung cancer, but we’re pretty sure that ashtrays don’t cause lung cancer. So is being rich making people unethical, or is being unethical a route to getting rich, or are both the result of some third factor, like ambition?

What’s the practical upshot of all this? That, too, depends on the direction of causation. If being rich makes less ethical, then you have a reason — perhaps not a compelling one — to worry about the effect that your own increasing wealth might have on your morals. And, given what I said above about the role of rationalization, you ought to watch yourself for signs that you’re telling yourself those comforting little stories that make you feel better about behaviour that you know, deep down, is unethical.

If, on the other hand, being less ethical is a route to riches — well, that points in a couple of different directions. For individuals, the dangerous and cynical conclusion is that you need to learn to bend the rules to get ahead. But from a systems point of view, the implication is quite different: how do we design institutions so that ethical, socially-constructive behaviour is rewarded, and that socially-destructive but individually-profitable behaviour is not?

The third possibility — that some third factor, like ambition is the crucial causal factor — has implications also. This possibility raises the question of social tradeoffs. What if a certain amount of anti-social behaviour is the quid pro quo of entrepreneurship and creativity? Is the amount of social good done by ambitious people sufficient to make us tolerate a certain amount of unethical behaviour? History is full of accounts of crummy human beings with the vaulting ambition to produce great works of art, literature, and science. Steve Jobs was, by all accounts, a difficult guy to say the least, and had a habit of treating people very, very badly throughout his career. But then, he also gave the world a lot of ‘insanely great,’ innovative products.

Of course, whether such trade-offs are worthwhile is a world-class philosophical problem, the answer to which is far from clear. But what’s much more clear is that individuals can’t rightly help themselves to the relevant justifications. We can’t excuse our own bad behaviour by pointing to our productivity. We are all far, far too likely to overestimate our own social contributions, and to underestimate our own foibles and peccadilloes. And that, it seems to me, is the root of a much more likely explanation of patterns of unethical behaviour than is the simplistic assumption — an assumption that all too often simply reaffirms a cynical worldview — that it all really boils down to greed.

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