Archive for the ‘risk’ Category

Should Rioters be Fired?

The post-Stanley Cup riots in Vancouver last week have generated a minor landslide of commentary. Much of it has focused on just who the malefactors were. In an age of social media, this has amounted to more than mere speculation: the identities of quite a few of the trouble-makers have come to light. Those who participated in the riots have thus brought very public shame upon themselves and their city. But what about the shame brought upon their employers?

Over at the “Double Hearsay” law blog, the question is asked from a legal point of view: Can employers fire Vancouver rioters? The short version of the legal analysis there is this. Any employer can fire an employee “without cause” as long as they give proper notice. In order to fire without giving a couple weeks’ notice, an employer has to have “cause:”

Generally speaking, an employee can be fired for his private conduct if that conduct is “wholly incompatible” with the proper discharge of his employment duties, or if it would tend to prejudice the employer….

The latter possibility is the relevant one here. If an employee participates in a riot and is widely known a) to have participated in shameful behaviour and b) to be your employee, then the employee has effectively done something “prejudicial” (i.e., likely to negatively effect your business).

OK, so that’s the legal side. Labour law draws a reasonably clear line around what you as an employer can do, and what the court will support your having done. But that still leaves open the question, should you even attempt to fire an employee who you know to have participated in a riot, say like the recent one in Vancouver or last year’s at the G20 in Toronto?

Here are a few quick considerations:

1) The legal issue of an employee behaving in a way that is “prejudicial” to the employer is also of course a very reasonable ethical consideration. A riot like the one in Vancouver is accompanied by significant public outrage, and guilt by association is a very real problem. In many industries, a business lives or dies by its reputation. As Warren Buffett has said, “Lose money for the firm, and I will be understanding. Lose a shred of reputation for the firm, and I will be ruthless.”

2) By participating — even somewhat passively, let’s say — in a riot, an employee reveals quite a lot about his own character and judgment. Do you really want someone with that little judgment working for you? Your company, no matter how laid back its corporate culture, has some sort of authority structure. It’s fair to ask just how suitable an employee is to work within any authority structure when they’ve publicly egged on another human being in burning cop cars or assaulting firefighters.

3) Even from an ethical point of view, the legal notion of “due process” is relevant. So if you’re considering firing someone for taking part in a riot, you can’t in all fairness do so based on mere hearsay, or without giving him a chance to defend himself. The right process is at least as important as the right outcome.

4) Finally, it is worth considering whether there are alternatives to firing. Maybe being laid off for a few weeks is sufficient. Or perhaps the employee can demonstrate his contrition by doing volunteer work. But it should be remembered that the solution has to fit the reason for firing in the first place. If your worry is that participation in a riot demonstrates a fundamental lack of judgment, then volunteer work isn’t going to erase that worry.

As a lawyer friend of mine put it, “rioting seems to strike at the core of social order.” And social order is at the core of business. It’s not unreasonable to think that participation in a riot is a disqualification for employment — but such a conclusion still has to be implemented prudently and fairly.

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Thanks to Dan Michaluk for tweeting this story and bringing it to my attention.

Who Else is Too Big to Fail?

The notion that some companies are “too big to fail” — too large and too interconnected with the rest of the economy for their failure to be permitted by government — is lamentably familiar to most of us in the wake of the 2007-2010 financial crisis. The term has most famously been applied to the biggest American banks (e.g., Bank of America) and insurance companies (e.g., AIG), and it motivated the multi-multi-billion-dollar government bailouts of 2008/2009. In some ways, it’s a radical notion: for most of modern economic history, the assumption has been that the economy could operate according to something like survival of the fittest. If a company is so mismanaged that it fails, so be it. That’s life in a competitive market. Of course, governments have from time to time propped up companies seen as particularly important employers, but such moves are always divisive. There has seldom been such widespread agreement that certain companies really are so big, and so important, that they cannot be allowed to fail.

But outside of the financial industry, what companies might reasonably be thought of as “too big to fail?” Are there companies the failure of which would be truly catastrophic? What companies are there such that, if they suddenly ceased operations, the result would be disastrous not just for individual customers, employees, and shareholders, but for society as a whole?

I’ll mention a few possibilities, and then open the floor for discussion:

BP, Chevron, and the other very large oil companies. As unpopular as they are, it’s hard to deny that their product is utterly essential, at least for the time being. Any one of the biggest companies going out of business would, I suspect, have a terrible impact on the reliability of supplies of gasoline and heating fuel, and would most certainly result in increased prices. On the other hand, most of the world’s oil supply flows through the big state-owned oil companies of the middle east, rather than through private companies like Exxon and Shell the others, the ones that come most readily to mind for North American and European consumers.

Big pharma. Again, not a popular industry. And much of what they produce — treatments for baldness, erectile dysfunction, etc. — is far from essential. But some of their more important products, including things like antibiotics and vaccines, truly are essential and an interruption in their supply could have catastrophic consequences, from a public health point of view. But then, that industry has enough players in it, with overlapping product lines, that it’s unlikely the collapse of any one company would have a huge impact. But really, I’m guessing here. Perhaps the collapse of the maker of whatever the single most antibiotic is would be catastrophic. (Does anyone know?)

What about UPS? That one may surprise you, but the company handles something over 5 million packages per day, which I’ve heard adds up to a non-trivial percentage of American GDP. If UPS disappeared tomorrow, of course, Fedex and the USPS would take up some of the slack, but the short-term effect on American business (and hence consumers) would be significant.

Locally, surely, there are lots of companies that might be considered essential. Companies involved in ensuring the quality of municipal water supplies might count (including the ones that provide the chemicals needed for water purification). And in places where fire departments are privately-run, those would obviously count. But really, I’m looking for examples of companies the failure or disappearance of which would have widespread effects from a social point of view.

Of course, the phrase “too big to fail” isn’t just descriptive. In the world of finance, it is seem as having immediate policy implications. In 2009, Alan Greenspan, the former chairman of the US Federal Reserve (and no fan of government intervention in the economy), said “If they’re too big to fail, they’re too big.” Are there companies outside of finance where such an argument could be made?

Unethical Innovation

Innovation is a hot topic these days, and has been an important buzzword in business for some time. As Simon Johnson and James Kwak point out in their book, 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown, innovation is almost by definition taken to be a good thing. But, they also point out, it’s far from obvious that innovation is in fact always good. They focus especially on financial innovation, which they say has in at least some instances led to financial instruments that are too complex for purchasers to really understand. Innovation in the area of finance — often lionized as crucial to rendering markets more efficient and hence as a key driver of social wealth — is actually subject to ethical criticism, or at least caution. And the worry is not just that particular innovations in this area have been problematic. The worry is that the pace of innovation has made it hard for regulators, investors, and ratings agencies to keep up.

In what other cases is “innovation” bad, or at least suspect? One other example of an area in which innovation might be worrisome is in advertising. Consider the changes in advertising over the last 100 years. Not only have new media emerged, but so have new methods, new ways of grabbing consumers’ attention. Not all of those innovations have been benign. When innovative methods have been manipulative — subliminal advertising is a key example — they’ve been subject to ethical critique.

Some people would also add the design and manufacture of weaponry to the list. But then, almost all innovations by arms manufacturers have some legitimate use. Landmines and cluster bombs are controversial, largely because of their tendency to do too much “collateral dammage” (i.e., to kill civilians). But they do both have legitimate military uses. So it’s debatable whether the innovation, itself, is bad, instead of just the particular use of the innovation.

Are there other realms in which innovation, generally taken to be a good thing, is actually worrisome? One caveat: the challenge, here, is to point out problematic fields of innovation without merely sounding like a luddite.

Ethics of Doing Business in Libya

Amidst the upheaval in Libya, questions arise about foreign companies doing business there. Many firms, of course, are pulling out and evacuating any employees currently on the ground, for obvious reasons related to safety. But there are apparently still a few reasonably safe places in Libya, places far from the major cities that are the focus on the current fighting. And certainly business done from afar is still an option. So, that leaves companies with choices. Should Libya be considered entirely off-limits? At this point in the conflict, various governments have issued orders that put restrictions in place. But that doesn’t mean that Libya is, from a legal point of view at least, a no-go zone. (Canada’s government, for example, has clarified that Canadian firms are still allowed to do business in Libya, generally, but not with the Libyan government or with the Libyan Central Bank.)

I’m sure many will be tempted to say that foreign companies should pull out entirely. But then, it’s not clear that such a blanket prohibition does much good for the people of Libya as a whole. Note, for example, that Libya currently imports about 75% of its food. Stopping doing business with Libya would mean starving its population.

Of course, even before the current crisis, Libya was a dubious place to do business — at least some kinds of business. Note, for example, that a Canadian company has faced questions about its role in building a fancy new prison for the Gadhafi government. (From the Globe & Mail, see: SNC-Lavalin defends Libyan prison project.)

(An interesting side-note: SNC-Lavalin was recently ranked as one of the best-governed corporations in Canada. Note also that the companies shares are down, apparently because of worries not just about Libya, but about the entire region. About a quarter of the country’s income comes from the Middle East and Africa.)

Building a prison for use by a dictatorship is exactly the kind of project that is likely to draw fire. But that’s not entirely fair, either. As the G&M notes, Libya has been under international pressure to modernize its prisons. And if it is a legitimately good thing for a dictator to upgrade his prisons, then it’s hard to claim that it’s unethical for a company to make a profit by helping him do so.

Charlie Sheen as Toxic Asset

While actor Charlie Sheen may not be a ‘toxic asset’ in the technical sense, he’s clearly become too much of a liability for the companies who have thus far been profiting richly from his services.

In case you don’t already know all the gory details, here’s one version of the story, by Bill Carter, writing in the Business section the NY Times: Sheen Tantrum Likely to Cost in the Millions

Charlie Sheen’s latest antics may leave CBS and Warner Brothers with a quarter-billion-dollar headache.

The two companies decided on Thursday to halt production of the hit CBS comedy “Two and a Half Men” after Mr. Sheen, the star of the show, unleashed a barrage of vituperative comments about the sitcom’s creator, Chuck Lorre.

The loss of next season’s episodes would mean forgoing about $250 million in revenue between Warner Brothers, which produces the show, and CBS….

Sheen, of course, was already a famously problematic ‘talent’ long before his decision to publicly and viciously bite the hand that feeds him. Sheen has a long history of handing the tabloids easy headlines through his penchant for drugs and booze and prostitutes and property damage and domestic violence.

Several writers have already suggested that all of that should have been enough to make Sheen persona non grata, but it wasn’t. As the LA Times’ Mary McNamara put it,

If you are the star of a hit comedy on CBS, you can keep your job in spite of accusations of: threatening your pregnant second wife; holding a knife to your third wife’s throat on Christmas Day; and indulging in cocaine-fueled weekends during which your bizarre behavior causes your female companion to fear for her life.

I think from a Business Ethics point of view, we can look at this in two ways.

1) Employment. From an employment point of view, this is a question of CBS and Warner Brothers having an employee with serious behavioural problems, most of which have been after-hours problems rather than on-the-job problems. As McNamara reports, Sheen’s bosses referred to his domestic abuse troubles as “very personal and very private.” Of course, any employer needs to recognize that it will always be the case that at least some of their employees will have personal troubles, and it’s not entirely clear that such problems are grounds for dismissal. But what employers cannot ignore is insubordination, and that’s basically what Sheen’s recent outburst amounts to.

2) Production methods. In an age of conscious consumerism, people are paying a lot more attention to the way in which the products they enjoy are produced. The average consumer is more likely than ever to want to know whether their clothes were made in third-world sweatshops or whether coffee was made with beans that were traded fairly. For the bizarrely popular product that is “Two and a Half Men”, Charlie Sheen is a major part of the means of production. And all available evidence suggests that consumers of that product just don’t care that, in order to produce it, CBS and Warner Brothers had to turn a blind eye to behaviour that was by turns childish, unethical, and criminal.

Employment, Smokers, and Fundamental Ethical Conflicts

I’ve seen two interesting stories recently about smokers — of various kinds — facing trouble with their employers. Both stories raise difficult, perhaps intractable, ethical difficulties, because in both cases the objectives sought by employers are, on the face of things, entirely reasonable; and yet the freedoms sought by employees in these cases are also, I think, very reasonable ones to seek.

First, this piece by A.G. Sulzberger for the NY Times: Hospitals Shift Smoking Bans to Smoker Ban

…More hospitals and medical businesses in many states are adopting strict policies that make smoking a reason to turn away job applicants, saying they want to increase worker productivity, reduce health care costs and encourage healthier living….

I’ve blogged about this issue before. (See: “Smokers Need Not Apply”, from January of 2009.) My conclusion back then was that an employer, no matter how well-intentioned, has no right to tell employees what to do on their own time. They have a right to demand a certain level of performance on the job, and that might have implications for what employees do at home. But what employers have a right to is performance, rather than to a particular lifestyle in pursuit of that performance. Besides, there are lots (and lots and lots) of things employees can do at home that will limit their performance at work. I don’t see smoking as being unique among those, and letting employers screen for (and monitor?) all such behaviours would obviously constitute a massive invasion of privacy.

And then there’s this Reuters piece, reported by Clare Baldwin: Wal-Mart employee fired for medical pot loses case

A federal judge in Michigan on Friday upheld Wal-Mart Stores Inc’s dismissal of an employee for testing positive for marijuana, even though he was using the drug under the state’s medical marijuana law.

Former Wal-Mart employee Joseph Casias said he was using the marijuana to treat pain from an inoperable brain tumor and sinus cancer, and was doing so legally, with a medical marijuana registry card…

This one is trickier because the implications of marijuana — cannabis — for workplace performance are much clearer. Pot (even pot prescribed for very good reasons by a physician) is very likely to affect judgment. And the effects of smoking it can last 2-3 hours — so smoking just before work, or during a break, could reasonably be expected to have a negative impact on performance. But in the case above, the employee involved had what sound like very good reasons, if ever there were any. Wal-Mart is a company that is trying hard to polish its image, and firing people for trying to deal with the pain from their inoperable brain tumor seems inconsistent with that objective.

For me, this is one of those short news stories that immediately makes me wonder what’s really going on here. Is the employee one of “those” employees that a company looks for reasons to fire? Or was his manager an unsympathetic jerk? Or what? Because surely this is an issue that could have been sorted out among reasonable adults, without resorting to lawyers. Could the worker be moved to a position where the possible effects of at-home cannabis use would not be as problematic? Could the employee agree to limit the hours during which he would use cannabis, in return for an exemption from the company’s testing regimen? I don’t know the answer. But living and working together means that we find ways of getting along together, even when we cannot find ways of agreeing.

Steve Jobs’ Health & a CEO’s Privacy

How much privacy does a CEO deserve? Is his or her health a private matter, or a matter that should be open to the scrutiny of the public (and, in particular, of the investing public)?

See, for example, this piece by Miguel Helft, at the NYT: Jobs Takes Sick Leave at Apple Again, Stirring Questions

Steven P. Jobs, the visionary co-founder and chief executive of Apple, is taking a medical leave of absence, a year and a half after his return following a liver transplant. The leave raises questions about both his long-term prognosis and the leadership of the world’s most valuable technology company….

So, should Jobs tell all, letting shareholders and potential shareholders (and other stakeholders?) just what’s up with his health, so that everyone can adjust their decision-making accordingly? Some say a CEO has as might right to privacy as anyone else. Others say a CEO’s obligation to be transparency overrides that.

As Slate’s Annie Lowrey tells us:

While publicly traded corporations need to disclose events and changes that might “materially” affect the company, the Securities and Exchange Commission does not specifically require disclosures about CEO health. That vagueness in the law means that Apple has remained within the letter of the law with its disclosures….

I don’t have a strong view on this, but here are some thoughts:

1) Information is good; it’s what lets markets operate more rather than less efficiently. But a big part of what matters most is equal access to information, and so far there’s no worry about that here, as far as I can see. (It may be that some are worried that top insiders will trade Apple’s stock based on their insider knowledge. Doing so would probably be illegal, and hence very dangerous.)

2) Health is a spectrum. There are people in the pink of health, and people on death’s doorstep, and everything in between. All CEOs are somewhere on that spectrum, and there’s simply no clear line beyond which a CEO’s health becomes a worry. So if Steve Jobs needs to disclose his diagnosis, the same likely goes for all CEOs (and other senior executives?) Note also that medical prognosis is as much art as science. So even if, say, Jobs were to reveal that his doctors were giving him a year to live — well, frankly, that could mean he’d be dead in a month or in 5 years. We have good evidence that doctors just aren’t good at making those estimates.

3) The basic, crucial info — that Jobs has ongoing health problems, likely quite serious ones — is already out there. As a former SEC chair Arthur Levitt says,

Jobs going on medical leave sends a message to the market,” Levitt continues. “An intelligent investor should know the risks of Jobs having a relapse. For the board to opine on what the extent of the illness is right now I don’t think is really necessary.”

In the end, I guess I’m most worried about the slippery slope, here. There are lots of things investors could want to know, and lots of things they could argue they need to know. But that doesn’t mean we want to push on down that road.

Lead Content in Products for Children Adults

Selling products for kids is a tricky business. We adults are, to a certain extent, willing to adopt a “buyer beware” attitude. But kids deserve protection — the duty to protect children is a universal ethical norm. Add to that the fact that they are simply more physically vulnerable, and it’s not hard to see why we expect (and impose) higher standards of behaviour on the part of companies that make products aimed at kids.

That implies all kinds of ways in which manufacturers need to exercise caution: in product design, in the sourcing of parts and ingredients, in the manufacturing process, and in marketing. One way to avoid the extra hassle: make a product for kids, ignore the relevant safety standards, but make sure that you claim, when asked, that it’s really not for kids at all.

Here’s the story, by Justin Pritchard for The Associated Press: Feds dismiss recall on lead glasses

A federal agency reversed itself Friday and said lead-laced Wizard of Oz and superhero drinking glasses are, in fact, for adults — not children’s products subject to a previously announced recall.

The stunning about-face came after the Consumer Product Safety Commission said last month the glasses were children’s products and thus subject to strict federal lead limits.

Lab testing by the Associated Press found lead in the colored decorations up to 1,000 times the federal maximum for children’s products. The CPSC has no limits on lead content on the outside of adult drinking glasses….

The story here is in part about the odd decision by the Consumer Product Safety Commission. But I want to focus on the decision the company here made.

Now, I might have been a bit harsh when I implied above that the company making these glasses is being disingenuous when they say the glasses really aren’t for kids. Who knows what their intentions were? Our default assumption about people’s intentions should be a fair and charitable one, in the absence of evidence to the contrary. But that of course highlights the difficulty with a regulation based on divining a company’s intentions:

Under federal law, an item is a “children’s product” if it is “primarily intended” for those 12 and under.

Now on one hand, regulation based on intent makes a good deal of sense. If the relevant standards for kids’ products really is different, there really is no other way to draw a line between what counts as a product for kids and a product for adults. There’s nothing stopping parents from giving their kids access to products that are clearly “for” adults. So it seems fair for companies to be able to say, look, we intended that product for adults…it’s not our fault if some parents decided, instead, to give our product to their kids.

But I also think it’s worth pointing out that while regulations may focus on the manufacturer’s intentions, the relevant ethical standard should point to reasonable expectations. The makers of the glasses in question here may well have intended their product to be used primarily by adults, but the question they should have asked themselves is whether glasses with fantasy characters on them can in fact reasonably be expected to end up in the hands of kids. And if so, they should adhere to standards that are relevant to that expectation.


Thanks to LH for alerting me to this story.

Deadly Crashes, “Agency Theory” & the Challenges of Management

Sometimes for a corporation to “do the right thing” requires excellent execution of millions of tasks by thousands of employees. It thus requires not just good intentions, but good management skills, too.

For an example, consider the story of the crash of a Concorde supersonic jet a decade ago. The conditions leading up to the crash were complex, but one factor (according to the court) was negligence on the part of an aircraft mechanic. Whether (or to what extent) that mechanic’s employer is responsible for that negligence, and hence at least partly responsible for the crash, is a difficult matter.

Here’s the story Saskya Vandoorne, for CNN: Continental Airlines and mechanic guilty in deadly Concorde crash

The fiery crash that brought down a Concorde supersonic jet in 2000, killing 113 people, was caused partially by the criminal negligence of Continental Airlines and a mechanic who works for the company, a French court ruled Monday.

Continental Airlines was fined 202,000 euros ($268,400) and ordered to pay 1 million euros to Air France, which operated the doomed flight.

Mechanic John Taylor received a fine of 2,000 euros ($2,656) and a 15-month suspended prison sentence for involuntary manslaughter….

I don’t know the details of this story well enough to have any sense of whether the mechanic in this case really did act negligently. But what intrigues me, here, is the issue of corporate culpability. Note the difficulty faced by airline executives who (for the sake of argument) want desperately to achieve 100% efficiency and never, ever to risk anyone’s life. In order to achieve those goals, executives have to organize and motivate hundreds or perhaps thousands of employees. They need to design and administer a chain of command and a set of working conditions (including a system of pay) that is as likely as possible to result in all those employees diligently doing their very best, all of the time. That challenge is the subject of an entire body of political & economic theory known as “agency theory.”

Agency theory and the various mechanisms available to motivate employees in the right direction are things that every well-trained business student knows about, because those are central challenges of managing any corporation, or even any small team. What is recognized too seldom, I think, is just how central a role agency problems play in assessing and responding to ethical challenges in particular.

Chilean Miners: What is Rescue Worth?

Happily, rescue crews seem to have made better progress than anticipated toward rescuing 33 Chilean miners trapped deep underground since August.

Here’s a recent story giving details, by Alexei Barrionuevo and Christine Hauser writing for the NYT: Drill Reaches Miners in Chile, but Risks Remain

As the rescue proceeds, most of us will (rightly) be focused on the human side of this story, the ordeal those 33 men have gone through. But this story also has an important business- and economic component. Last month, I blogged about whether the trapped miners ought to be paid, and by whom. But another issue is that the rescue effort itself is likely to be exceptionally expensive. What should the companies doing the drilling be paid? Back in April, after a mine collapse in West Virginia, I blogged about the Ethical Obligation to Save Trapped Miners, and pondered the extent of the financial obligations of the mining company and the government in the face of such a disaster. Today, I’d like to look at the question from a different angle. How much should drilling companies involved in such a rescue be charging for their work?

Now, just to be clear, I’m not talking about the actual companies involved.
Brandon Fisher, founder & president of US-based Center Rock Inc., the company that made the drill used, is reported to have nobler motives:

He says the Chilean government is paying for his time and equipment — “that’s the plan anyway.” But he is not at the Mina San Jose for the money. He is there for the miners.

“I don’t know that there’s 10 minutes that you’re out here that you don’t look down there and think, ‘There’s 33 guys 600 feet below our feet,’ ” he said. “Whenever you’re tired, it’s real easy to think, ‘Hey, I’m out here seeing sunlight and breathing fresh air. It’s time to suck it up and get these guys out of here.’ ”

It’s also worth noting that, in fact, this is a competitive arena — there are apparently quite a few companies with relevant capacities, and they’re likely competing with each other to bid for the work. Perhaps they’re even charging less for this high-profile job than they normally would, because it’s good advertising. But let’s set that complication aside for the moment.

So, a thought experiment: what if there were only one company qualified to do the rescue work, or only one company available locally? What should that company charge?

A few quick options:

1. They should charge whatever the market will bear, which would essentially amount to charging the most the Chilean government and/or the mining company involved are willing to pay.

2. They should charge nothing. They should be happy to be involved, and to charge anything would be to put a price on human lives, which is unacceptably exploitative.

3. They should charge just enough to cover their own costs — machinery, fuel, and maybe their own workers’ wages.

4. They should charge exactly the same to drill this hole as they would to drill any other hole of similar size, depth, and complexity. No more (that would be exploitative), and no less (that would be foolish).

Do you favour one of those four? On what grounds? Or can you suggest another principled answer?

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Addendum: I found a story that offers the following relevant detail: “Local newspaper La Tercera reported that the rescue efforts, expected to last three to four months, will cost anywhere from $10 million to $20 million.”

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