Archive for the ‘transparency’ Category

Credit Card Laws & Ethics

Credit cards: we love them, and we hate them. We love the convenience, but we hate the high interest rates. But really, based on our patterns of usage, it seems like the love/hate relationship is tilted in favour of love; it looks like our fondness for those super-convenient pieces of plastic is getting the better of us. The result: many North Americans are utterly buried under credit card debt. The natural temptation is to blame the banks, and certainly many financial institutions have preyed upon both our fondness of convenient purchasing, and our lack of attention to fine print, to turn credit cards into a cash cow.

But see this story, by Jennifer Liberto, for CNN Money: Credit card laws working, says bank critic

A year after new credit card laws curbed interest rate hikes and forced new disclosures, consumers are paying fewer late fees and have a better understanding of what their cards cost, according to a federal study released Tuesday.

White House official Elizabeth Warren, best known for her outspoken criticism of the banking industry, is expected to praise that same group during a Tuesday conference on the one-year anniversary of the credit card laws….

Now unless I’m mistaken, what banks are being force to disclose is stuff that would previously likely have been buried in the notorious ‘fine print’ of credit card agreements. And fine print is a hard problem, ethically. We all know that consumers should read the fine print; there can be important information there. But we also all know that almost nobody does read the fine print. Fairness requires at least some attention to what we can reasonably expect consumers to do. But on the other hand, is it really a bank’s fault if they disclose something important and you simply don’t bother to read it? While you could argue the fairness point back and forth, it’s also worth pointing out that there’s an economic efficiency argument here, too. Information asymmetries are the enemy of economic efficiency. (An “information situation” is any situations in which one party to a transaction understands that transaction much better than the other.) So we have here the foundation for an argument that says that, even if it is fair to expect consumers to read all the fine print, the fact that they do not do so is resulting in socially sub-optimal patterns of purchasing. This means a social reason, not just a paternalistic reason, to want to help consumers by forcing banks to change how it is that they disclose information.

The other interesting aspect of this story has to do with the persuasive force of law. According to Warren, “much of the industry has gone further than the law requires in curbing repricing and overlimit fees.” In other words, this may be a case in which the law not only prescribed a certain set of behaviours, but also set the tone for the industry. I think this aspect of law is too often overlooked. This suggests that even when we are skeptical about a new law because, for instance, we are skeptical about the potential for strict enforcement, we ought to consider the possibility that an industry will take the passage of a law as sending a signal about the overall tenor of society’s perspective on their business. We also ought to consider also the possibility that the law will give those subject to it an excuse to do what they thought they ought to be doing in the first place.

Sustainability Rankings, the Global 100, and Greenwashing

What’s so sustainable about the Global 100 “World’s Most Sustainable Companies”? Not much, as far as I can see.

The ranking was released just a few days ago, as reported here by Helen Coster for Forbes: Ranking The World’s Most Sustainable Companies

The term “sustainable”–like “green” and “all-natural” before it–conveys an abstract sense of do- gooding that many companies have been happy to adopt. Corporate Knights, a Toronto-based media company, applies hard metrics to the otherwise fuzzy term, and Saturday it released its seventh-annual list of the world’s most sustainable companies….

So, what does sustainability mean, here? Toby Heaps, Corporate Knights’ editor-in-chief, says one key is to ask this question: “how are companies squeezing more wealth from the resources that they use?” So far so good — I suspect that kind of efficiency measure has something to do with what most people take “sustainability” to mean. But next Heaps strays into strange territory when he asks, in addition, “How are they doing a better job of respecting the social contract, like paying taxes or having diverse leadership?” Huh? We’ll get back to the issue of criteria in a moment. First let’s look at the rankings.

The top end of the list is dominated by global brands from the telecommunication, pharmaceutical, and energy industries (Nokia, Johnson & Johnson and Intel are all in the top 5). But an oil company takes top honours (Norwegian oil and gas company Statoil). Yes, an oil company. Now, for many people, the petroleum industry is the epitome of unsustainable business. So this will immediately raise alarms for some people. Should it? Let’s take a closer look.

The Forbes story says that Statoil topped the list “thanks in part to improvements in its water productivity.” Fair enough: water productivity (efficiency of water use) is a clear sustainability issue. But what comes next is odd. The oil company apparently did well in the ranking in part because it is “also a healthy contributor to Norway’s coffers and has a diverse board”. In other words, this oil company scored well on a sustainability ranking by doing a whole bunch of stuff that has little to nothing to do with sustainability.

For still more detail, we can look at the ranking and an explanation of the methodology behind it on the Global 100 website. According to the Methodology page, the ranking is established by looking at “environmental, social, governance (ESG) and financial data.” Already we see here a rather expansive understanding of the word “sustainability.” Next, let’s look at specific measures they used.

Some of the metrics used make perfect sense, such as energy productivity and waste productivity. Some of them, however, are hard to figure, such as CEO-to-average-worker pay ratio. Executive compensation is an interesting (and, I think, complicated) ethical issue, but how does it relate to sustainability? The detailed explanation of the various criteria offers this rationale:

A disproportionate share of compensation expenditure going to one person can lead to lower overall workforce motivation, and can also be indicative of potential governance risks, or misalignments of interests.

All of that seems true, but largely irrelevant. Sure, those risks are real, and they may (may!) have something to do with keeping the company in business. But surely that is not what anyone beyond a handful of consultants means by the word “sustainability.” When the public wonders whether Walmart’s business is “sustainable,” they are certainly not wondering whether the company’s business practices are going to let them keep chugging along.

Another mystifying criterion is “Leadership Diversity: % of women board directors.” Again, that’s an important issue; companies need to do more to get women into senior leadership positions, including on the board. But is there really a clear link — either conceptual or empirical — between having women on the board and the company being sustainable? Unfortunately, while that criterion is mentioned on the Criteria & Weights page, it is missing entirely from the more detailed explanation of those criteria (see PDF document here) so what the link is supposed to be is anyone’s guess.

Other weird criteria include “Safety Productivity”, “% tax paid” and “Innovation Capacity,” though the latter makes at least a modicum of sense. As far as I can see, fully half of the ten criteria used have no clear link to sustainability. And given that all criteria are given equal weight in the Global 100 methodology, that means the ranking is actually only half about sustainability, and half about other stuff.

Now, I’ve been critical of the term “sustainability” before (see “Sustainability is Unustainable.”) A lot of what I’ve said before has to do with confusion over the meaning of the term, and the resulting difficulty in measuring and tracking companies’ performance in this area. I think the Global 100 ranking ends up providing a wonderful case in point.

But the real problem, here, is that the kind of sustainability measure instantiated by the Global 100 profits directly from the confusion over the meaning of the term “sustainability.” (And I do mean “profits” — Corporate Knights is a for-profit organization, as presumably are the research firms that helped develop the Global 100 and the vast majority of sustainability consultants who help companies preen for such rankings.) Now, I don’t actually have anything against profits, and I’m not impugning anyone’s intentions. My point is that the only reason this particular set of measures can be thought to add up to “sustainability” is that the term itself is ambiguous and means different things to different people.

What’s really being measured here is a broad range of indicators having to do with all kinds of things. Again, it includes “environmental, social, governance…and financial data.” And it’s all important stuff. So the Global 100 ranking really does tell us something important (but vague) about the companies listed. But what is announced is that ‘these companies are sustainable.’ What does that mean to the public? Environment. So the list implies that these companies are environmental good guys. The result: greenwash.

So, what’s the public to do? Maybe all the public can do is realize that what sustainability consultants and gurus mean by “sustainability” has relatively little to do with what they mean by that word.

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.

Corporate Citizenship, Apple, and WikiLeaks

What kinds of political obligations do corporations have? In particular, do they have obligations, like governments do, not to interfere with things like people’s ability to express themselves?

See this short blog entry by Leander Kahney, at Cult of Mac: Apple Pulled Wikileaks App Because It “Violated Dev Guidelines”

Apple has joined the shameful list of companies that have denied support for Wikileaks.

Apple confirmed that it removed a Wikileaks App from the online App Store, as reported earlier, and did so because it “violated our developer guidelines.”

“Apps must comply with all local laws and may not put an individual or group in harm’s way,” Apple spokeswoman Trudy Muller told the New York Times.

However, exactly how or why the app doesn’t comply with the law — or puts individuals or groups in harm’s way, Muler didn’t explain. She also didn’t discuss the First Amendment or the freedom of the press….

(I’ve already blogged on the more general question of whether companies are justified in ceasing to do business with WikiLeaks. See: Should Companies Judge the Ethics of Those With Whom they Do Business?)

But what’s particularly interesting in the bit quoted above is that Kahney mentions the First Amendment, implying that Apple ought to support WikiLeaks because it has a First-Amendment obligation to do so.

On the face of it, from a legal point of view, that’s surely false. The First Amendment says:

Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances

Now, on the face of it, that’s a restriction on what the US Congress may do; it implies nothing at all about what private organizations (including corporations like Apple) may or may not do. (If there are experts on US Constitutional Law out there, please feel free to correct me!) But it may well be that the precepts enunciated in the US Constitution and Bill of Rights (or in other nations’ constitutional documents) should be thought of as having not just legal force, but also moral force, and that that moral force should be thought of as extending to all kinds of institutions, not just government. If that’s the case, then you could argue that, even though corporations are not legally bound by such principles, they ought ethically to be guided by them.

The whole issue of whether corporations have specifically political obligations to citizens (and not just more general ethical obligations to consumers) is a difficult one. Are we gaining something, or losing something, by thinking of corporations that way? Does thinking about corporations as playing a quasi-governmental role illuminate their moral obligations, or obscure them? In this regard, if you’re academically inclined it’s worth taking a look at this masterful article by my friend Pierre-Yves Néron: “Business and the Polis: What Does it Mean to See Corporations as Political Actors?”

Wikileaks, Credit-Card Companies, and Complicity

I was interviewed last night on CBC TV’s “The Lang & O’Leary Exchange” about Mastercard and Visa’s decision to stop acting as a conduit for donations to the controversial secret-busting website Wikileaks. [Here’s the show. I’m at about 15:45.] (For those of you who don’t already know the story, here’s The Guardian‘s version, which focuses on retaliation against Mastercard by some of Wikileaks’ fans: Operation Payback cripples MasterCard site in revenge for WikiLeaks ban. )

Basically, the show’s hosts wanted to talk about whether a company like Mastercard or Visa is justified in cutting off Wikileaks, and essentially taking a stand on an ethical issue like this.

Here’s my take on the issue, parts of which I tried to express on L&O. Now just to be clear, what follows is not intended to convince you whether you should be pro- or anti-Wikileaks. The question is specifically whether Mastercard and Visa, knowing what they know and valuing what they value, should support Wikileaks’s activities.

I think that, yes, Mastercard & Visa are justified in cutting off Wikileaks. And I don’t think that conclusion depends on arriving at a final conclusion about the ethics of Wikileaks itself. The jury is still out on whether the net effect of Wikileaks’ leaks will be positive or negative. Likewise it is still unclear whether Wikileaks’ activities are legal or not. And who knows? History may be kind to Wikileaks and its front-man, Julian Assange. The question is whether, knowing what we know now, it is reasonable for Mastercard & Visa to choose to dissociate themselves. I think the answer is clearly “yes.” The key here is entitlement: the secrets that Wikileaks is disclosing are not theirs to disclose. They don’t have any clear legal or moral authority to do so, and so Mastercard & Visa are very well-justified in declaring themselves unwilling to aid in the endeavour.

One question that came up in last night’s interview had to do with complicity. Is a company like Mastercard or Visa complicit in the activities of Wikileaks? The answer to that question is essential to answering the question of whether the credit card companies might have been justified in simply claiming to be neutral, neither endorsing nor condemning Wikileaks but merely acting as a financial conduit. I think the answer to that question depends on at least 3 factors.

  • 1. To what extent does Mastercard or Visa actually endorse Wikileaks’ activities?
  • 2. To what extent does Mastercard or Visa know about those activities? and
  • 3. To what extent does Mastercard or Visa actually make Wikileaks’ activities possible? That is, what is the extent of their causal contribution? Do they play an essential role, or are they a bit player?

In terms of question #1, it’s worth noting the significance of the particular values at stake, here. Wikileaks stands for transparency and for publicizing confidential information. Visa and Mastercard stand for pretty much the exact opposite. Visa and Mastercard, like other financial institutions, are able to do business because so many people trust them with their financial and other personal information. And so the credit card companies are, of all the companies you can think of, pretty clearly among the least likely to be able to endorse Wikileaks’ tactics, whatever they think of the organization’s objectives.

It’s also worth noting the significance of the notion of “corporate citizenship,” here. That term is widely abused — sometimes it’s used to refer to any and all social responsibilities, broadly understood. But if we take the “citizenship” part of “corporate citizenship” seriously, then companies need to think seriously about what obligations they have as corporate citizens, which has to have something to do with their obligations vis-a-vis government. Regardless of how this mess all turns out, the charges currently being bandied about include things like “treason” and “espionage” and “threat to national security.” These are things that no good corporate citizen can take lightly.

Business Ethics and the “New York Times” Rule

On Monday, the front page of the New York Times featured at story about financial firms adjusting the timing of bonuses in response to anticipated changes in tax laws. I mention this story not because of the particular ethical issues involved, but because it was featured on the front page of The Times. How would you like your decision-making subject to that kind of scrutiny?

From some perspectives, ethics is simple: “do the right thing.” For others (especially for philosophers like myself) it is incredibly complex, involving an ongoing centuries-old debate between arcane theories like deontology, utilitarianism, social contract theory, virtue theory, and others. In-between, we see lots of bits of ethical wisdom bundled into rules of thumb for ethical decision-making. Some of them are useful, some are misleading.

The one I’d like to discuss briefly today is the so-called “Front Page of the Newspaper” test, or sometimes “The New York Times Rule.” In one of its standard versions, it gets stated this way: “never do anything you wouldn’t want to see reported on the front page of the New York Times.” Some versions have additional qualifiers. Some, for example, say that you shouldn’t do anything you wouldn’t want to see fairly reported on the front page. That qualifier rules out slanted or malicious reporting — there are presumably plenty of fully-justifiable behaviours that we wouldn’t want to see reported in a malicious way, on the front page of the NYT or anywhere else.

The first thing to say about the Newspaper Test is that it probably is a useful heuristic. Asking the question it poses at very least serves as an opportunity to pause and ask yourself whether the action you’re about to take is one that could withstand publicity and scrutiny.

But there are two clear problems with the Newspaper Test.

One problem is that it can seem to serve as an argument against actions that are actually perfectly ethical. John Hooker, in his book Business Ethics as Rational Choice, gives this example: Imagine you’re CEO of a large corporation, and due to tough economic times you’re forced to lay off several thousand employees. Imagine that some of those employees slide into clinical depression. Others become alcoholics and end up beating their children. Lives are ruined. You probably wouldn’t want all of that reported on the front page of the NY Times, but that doesn’t mean your choice was unethical. In fact, Hooker points out, it might have been the least-bad option available. The point here is that sometimes even ethically good decisions are ones that we wouldn’t want publicized, either because their negative consequences are more visible than their positive ones, or because the reasons behind those decisions are reasons that, despite being good reasons, would be difficult or even impossible to explain.

The other problem is that it can seem to condone behaviour that is actually unethical. Most obviously, it can let you go ahead with an unethical plan if you happen either to be either generally insensitive to bad publicity or blind to subtle ethical dimensions of the question at hand. The former possibility is pretty self-explanatory: some people (and some companies) just don’t seem to care what the public thinks of them, or believe themselves to be above all need for accountability. As an example of the latter possibility (ethical blindness), picture a company sending its CEO to Washington on a private jet, with the aim of asking for money, and being utterly oblivious to the idea that the public might find this unseemly. If you don’t recognize, or care, that someone might object to your decision, then conducting the Newspaper Test isn’t going to stop you from doing something you shouldn’t.

The thing to remember about the Newspaper Test is that, like so many other catchy rules of thumb, it is at best a heuristic, and not an algorithm. It doesn’t automatically crank out an answer that is both determinate and correct. What it really is is an ‘intuition pump.’ It is a way to force yourself to ask, as part of a well-rounded ethical decision-making process, whether your decision is one that, in principle, you could defend in public. The hidden strength of the Newspaper Test lies in the notion of accountability, i.e., of having to give reasons for your actions in order to make them understandable to society at large.

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