The Business Ethics Blog

The Business Ethics Blog is shifting gears for summer!

I’ll be busy, working intensively on a book project (on business ethics issues within the biotech industry).

Rather than shut the blog down for the summer, I’ve decided to put it on auto-pilot, so to speak. I’ll endeavour to keep posting, but postings will be limited to:

a) links & news items (sans commentary, for the most part)
and
b) the occasional longer posting directly related to my book project (like yesterday’s posting about GM crops).

The blog will return to business as usual, during the first week of September, 2007.

Here’s an interesting article about using genetically-modified (GM) crops as a source of pharmaceutically-useful chemicals. From The Guardian: Down on the pharm
The story starts off at a high-security, sealed research lab where GM plants are being grown:

The plants are tobacco, but they are not intended to be smoked. Instead, the scientists who work on them believe they could save lives. Each has been genetically engineered to carry a gene that is usually found in common algae. Inside its cells, the foreign DNA forces the tobacco plant to churn out a protein that is useless to it, but that happens to be a potent drug against HIV. The scientists say the drug, and others like it, could save millions of lives across the developing world. The technique has been dubbed pharmaceutical farming, or pharming, and it is emerging as the latest battleground in the war over genetic modification.

The fundamentals of the battle are pretty familiar:

One one side, activist groups such as Genewatch, who fear that “If they put these genes into food crops then it is only a matter of time until there is a mix-up and they get into the food chain.”
On the other side: scientists, frustrated by the possibility that a technology they see as having the potential to save millions of lives may be stymied by fears that they see as unfounded.

What about the corporate side of things? Mostly, industry hasn’t been that interested. Why? The Guardian piece cites two reasons. The first has to do with market. The places most likely to benefit from pharming are also among the least able to pay. Here’s why pharming holds promise for poor countries:

Conventional ways to make modern medicines are expensive, which means pharmaceutical companies generally target those diseases that affect lots of people who can pay. Plants can be grown, harvested, and the useful medicine purified from them at a fraction of the price, so using them as leafy drug factories saves a fortune, and opens the doors to treating people in poorer countries. Advocates say just 250 acres of GM potato crop could churn out enough hepatitis B vaccine to protect the entire population of south-east Asia from the disease for a year.

But as the story notes: “With a few exceptions, the big companies do not smell big profits in the vulnerable people or regions of the world that would benefit most.”
The second reason has to do with what some might call “contextual” or (broadly) “environmental” issues. According to one industry spokesperson: “There is no tolerance, either regulatory or in public perception, for a human gene-based pharmaceutical to end up in the world’s food supply.” In other words, even if industry believes this process is safe, not enough people outside of industry are convinced of that to make it a viable business.

A final twist in this story has to do with stakeholders:

Britain has rejected GM plants once already – a media and consumer backlash persuaded most companies there was little market in the UK for crops that have had their genes tweaked to be resistant to pests or herbicides. But with pharming the battle lines are less clearly defined, as protesters who trashed experimental GM corn plants in France discovered. The crops were making a protein that could be used to treat cystic fibrosis, and when patient groups angrily denounced the action, mainstream green campaigners were forced to deny involvement.

So, what is a company engaged in this sort of work supposed to do when told (as companies often are) that they’re ethically obligated to take stakeholders into account? Key stakeholders, here, disagree with each other. Should the company side with patient groups (how could anyone have more of a stake than them?) or with environmental groups (who, after all, claim to represent the interests of nothing less than the planet and every living thing on it)?

This is just the kind of real-life case-study that everyone with a theory (or even just an opinion) about business ethics ought to be thinking about. Ask yourself this: does your way of thinking about business ethics (or the theory proposed by your favourite guru) help you sort your way through to a reasonable point of view on pharming?

(In fact, I find this stuff so interesting that I’m writing a book on it. That will be the topic of my very next posting.)

I’m still blogging “on the road,” reporting from sunny Southern California. I’m in Claremont, primarily for a symposium on “Biotechnology and Human Rights: Industry’s Responsibility?” at the Keck Graduate Institute. (Here’s the symposium website.)

Interestingly, even though the Symposium was (at least judging by its title) about biotechnology, a lot of the day’s discussion ended up centering on the pharmaceutical industry. There’s an increasing convergence, of course, between the pharma industry and health-related biotech. But there was almost no mention at all of the other two branches of biotech, namely agricultural biotech and industrial biotech. (There was a fair bit of talk about Intellectual Property rights, which in principle span all 3 branches, but most of the examples cited — in fact, I think all of them — had to do with drug patents.) The focus on pharma (and bio-pharma) probably has a lot to do with the awful, awful reputation the pharma industry currently has in North America.

Look, for example, at this press release from Ipsos about Pharma’s public image.

The pharmaceutical sector is suffering from a poor reputation among Americans, according to new research by marketing research firm Ipsos. … [N]nearly as many Americans hold an “unfavorable” opinion of the pharmaceutical sector (32%) as have a “favorable” opinion (35%), while 33% are neither favorable nor unfavorable. Among other sectors measured, only the oil and gas, chemicals, and tobacco industries fare worse than the pharmaceutical sector.

What’s the solution? The folks at Ipsos have exactly the wrong idea:

Pharmaceutical companies receive little recognition from the public for their social contributions and investments. … If pharmaceutical companies could raise awareness of their philanthropic actions, they would undoubtedly make gains in countering negative feelings toward the sector.

Well, to be fair, the industry does engage in some significant philanthropy (for example they give away millions of dollars worth of drugs every year — a drop in the bucket, given the world’s needs, but still big big dollars by anyone’s accounting). But doing better at advertising that fact is highly unlikely to make everything all better. In point of fact, the Pharma industry gets slammed for two main problems, neither of which is going to be easiy papered over by philanthropy:
1) Drug development is relatively expensive, the market for drugs is mostly unregulated (from a pricing point of view) and the ‘market price’ for many crucial drugs is quite high. The result is that not everyone (even in affluent America) has good access. To make things worse, certain governments do little to help their poorest citizens gain access. This is largely beyond Pharma’s control & responsibility.
2) The industry keeps getting caught doing sleezy things. Or at least, some of the big players (and probably others) are getting caught doing things like defrauding governments, jeopardizing patient safety, and interfering in the peer review process for scientific publications. Unlike the previous problem, this is entirely within Pharma’s control & responsibility.

There is a very good argument in favour of the public not expecting philanthropy at all, but for the public (and their elected representatives) being much more demanding of Pharma in terms of basic business integrity.

(By the way, the Symposium was fantastic. Gary Cohen and his team at KGI deserve a huge round of applause for putting together a programme that was both stimulating and well-run.)

I’m blogging from the road again, this time from Claremont, California, where I’ll be part of a symposium tomorrow called, provocatively, “Biotechnology and Human Rights: Industry’s Responsibility?” at the Keck Graduate Institute. (Here’s the symposium website.)

My talk tomorrow is going to cover a range of material, from the nature of rights, through an introduction to Business Ethics, to rights-claims in biotech, ending with a bit on how to evaluate rights claims.

I’ll be presenting (or maybe just implying) two main conclusions:

1) The website for the conference asks whether biotech companies should undertake a reorientation from thinking in terms of bioethics to thinking in terms of human rights. I’m going to suggest that while thinking in terms of bioethics is certainly problematic (after all, bioethics is also know as healthcare ethics, and not all biotech is health-related), switching to a human rights framework would be a bad idea. Basically, I think that all sensible people ought to applaud the proliferation & spread of human rights across the globe, but I think a commitment to human rights would be a very incomplete description of any firms actual responsibilities, and one that’s not very useful beyond a narrow range of questions.

2) While businesses ought to be committed to respecting a handful of basic human rights, such as freedom of association (for workers), we should be hesitant to encourage businesses to shoulder, as some have suggested, the burdens associated with things like the right to healthcare. We ought to be very careful about imposing additional duties on business that go beyond the role we really want them to play in a free market (roughly to produce useful goods & services, while behaving honestly and cleaning up any messes they make).

(Related to that last point, I strongly recommend Joseph Heath’s wonderfully instructive paper “Business Ethics Without Stakeholders,” Business Ethics Quarterly, 2006, Vol 16 Iss 3. It’s the best business ethics paper I’ve read in the last year.)

We Canadians are generally modest folks, but we do like to remind the world of our accomplishments now and then. This is true even regarding business scandals. We’ve got ’em, just like everyone else does.

Here’s an article by Al Rosen, Canada’s dean of forensic accounting: On trusts and Greedy Media from yesterday’s Financial Post.

The article is about how the business media in Canada are complicit in hurting the investing public by unreflectively promoting “Income Trusts.” [Wiki-Warning] The technical details aren’t important here, so suffice it to say that investment trusts are essentially a kind of investment vehicle, more common in Canada than in the U.S., designed to produce a constant trickle of income for investors and (until recently) offering certain tax advantages over other investments.

Rosen’s main point about Income Trusts is that, as investments, they’re a mixed bag. Because of this they ought to be invested in only very carefully, something perhaps best left to professional fund managers and avoided by “retail” investors.

But Rosen has a more general point to make about the naivete of Canadian investors regarding the security of their investments — which depends, of course, in part on credible financial reporting:

Whereas the evidence is overwhelming that financial reporting chicanery abounds in our prosecution-free country, we choose to our detriment to pretend otherwise. Instead of being able to name 25 recent Canadian fiascos, most Canadian investors can refer only to U.S. examples. The home-grown disasters are simply not registering in our collective consciousness, and our national media are a significant reason for that.

Instead of referencing Canadian misfortunes such as Bre-X, Livent, YBM Magnex, Castor Holdings, Nortel, Royal Group, Biovail, Hollinger, Atlas Cold Storage, Heating Oil Partners, FMF Capital, Specialty Foods and others, our media use U.S. examples like Enron and Worldcom.

The media leave the impression that Canada is largely free of any major financial reporting dustups, leaving an investing public that is naive, overly trusting, and all too ripe for the next scam.

Mea culpa! It’s not just the media that is to blame. I teach business ethics — at a Canadian university — yet I too am much more apt to mention Enron and Worldcom during lectures and in conference presentations than I am to mention any of the Canadian examples Rosen mentions. My lazy excuse is that students and others recognize the name “Enron” — heads nod knowingly when I mention it — but would surely stare blankly if I mentioned “Bre-X”, even though the latter is a Canadian scandal that also happens to be the biggest mining scandal in history.

But the risk here isn’t just that Canadian students (or investors!) will forget that we, too, have had our share of corporate scandals. The point is that the overuse of now-standard American examples like Enron and Worldcom is liable to allow people to assume that there is something special about those companies, or perhaps about the American financial market, that allowed those scandals to happen. The truth of course is that no one has cornered the market on dodgy financial reporting. Financial reporting is always going to be fraught with challenges, first because it involves a complex 3-party relationship between a company, its investors, and auditors who are paid by the former yet serve the latter. The second reason why financial reporting is always (and everywhere) a challenge is that it involves a considerable degree of human judgment, judgment that is inevitably affected by varying degrees of greed, incompetence, and excesses of optimism. And those frailties, unfortunately, are universal.

From today’s New York Times: Makers of Artificial Sweeteners Go to Court

The makers of Equal are suing the makers of Splenda over Splenda’s tagline: “Made from sugar, so it tastes like sugar.”

The maker of Equal contends that Splenda has been misleading millions of consumers by fostering the notion, through television and print advertising, that Splenda is made from sugar and is natural. Splenda’s maker counters that the process to make the sweetener does indeed start with sugar.

The court case apparently hings on the meaning of the phrase “made from.” The science is a little complicated, but basically the idea is that the process for making Splenda starts with real sugar, and then adds chlorine atoms to the sugar molecules…through which process sugar (chemically known as sucrose) ceases to be sugar and becomes a novel substance known as sucralose (which is much sweeter than sucrose, but contains no usable calories). So, the question is whether that makes it true, or false, or just misleading, to say that Splenda is “made from” sugar. The process certainly begins with sugar. But to say that Splenda is “made from” sugar is a bit like saying that a certain bit of table salt (sodium chloride) was “made from” hydrochloric acid (because a chemical process that uses sodium hydroxide and hydrochloric acid can be used to “build” sodium chloride chemically). Would people be frightened if told that your table salt was “made from” hydrochloric acid? Probably, at least until someone explained how little that chemical fact matters.

But let’s look again at that tagline: “Made from sugar, so it tastes like sugar.”

It’s important to see that Splenda’s tagline makes 3 separate claims. Two of those claims are obvious: it claims that Splenda is made from sugar and it claims that Splenda tastes like sugar. The dispute is over the first claim; no one seems to dispute the 2nd. But there’s a third claim, namely a causal claim about what it is that results in Splenda tasting like sugar. And the claim is that being made from sugar is what makes Splenda taste like sugar.
The problem is that being made from sugar (in the sense of “made” apparentely intended here) is neither necessary nor sufficient to cause something to taste like sugar. It’s not necessary, because there are other ways to make sucralose, ways that don’t begin with natural sugar. And it’s not sufficient, because there are presumably lots of chemicals that could be made from degraded sucrose molecules that wouldn’t taste at all like sugar.

So, even if we accept the dubious claim that Splenda is “made from” sugar in some meaningful sense, we certainly shouldn’t accept the causal claim about what it is that results in the product’s flavour.

(This blog posting is dedicated to the students in my Critical Thinking class!)

There are narrow and broad interpretations of the scope of the field of “Business Ethics.” The narrow interpretation suggests that Business Ethics is strictly concerned with commercial enterprises (corporations and other kinds of companies).
The broad interpretation suggests that Business Ethics is about organizations of all kinds (with the possible exception of government). On this latter undertanding, charitable organizations and NGOs (NonGovernmental Organizations) are part of the purview of Business Ethics: after all, just like any commercial enterprise, charities and NGOs are involved in providing some product or service, subject to constraints imposed by demand, budget, human resources, etc., all of which raise ethical issues.

Another useful perspective on charitable organizations is provided by Henry Hansmann, in his extraordinary book, The Ownership of Enterprise. Hansmann points out the essential similarity between charitable organizations and for-profit firms (essentially, the provision of some service) as well as the essential difference: the difference, says Hansmann, lies in the separation of buyer and beneficiary that typifies charitable organizations. That is, when I give money to Wal-Mart, it is so that I can receive some benefit in return, but when I give money to a charity, it is so that someone else can receive some benefit. That difference changes some of the ethical issues that will arise, remedying some and worsening others.

We’re all familiar with the kinds of things we look for in assessing corporate ethics. But much less gets said (or written) about assessing NGOs and charities.

So here’s a quick framework for assessing NGOs and charities.

1) Mission
How ethical is the organization’s mission? Many NGOs and charities have goals that are very widely accepted (e.g., improving literacy, feeding the world’s hungry). Others have goals that are more controversial (e.g., bringing an end to animal agriculture).

2) Methods
The ends don’t always justify the means, so it’s worth evaluating the means employed by an organization. NGOs and charities employ a range of means, from the unobjectionable (awareness campaigns, shipping food to those in need, etc.) to the highly questionable (e.g., desctruction of private or public property).

3) Integrity
The internal operations of NGOs and charities can be assessed just like the internal operations of business firms. So, NGOs and charities can be assessed in terms of such things as their careful shepparding of donated money, the honesty of their advertising, and their success at avoiding conflicts of interest.

4) Legitimacy
NGOs and charities generally promote “good causes,” but no one gets the right to speak for some cause just by claiming it. Legimitacy amounts to a measure of the degree of justification with which an organization speaks or acts to promote the things it promotes. Some NGOs and charities gain legitimacy from a broad base of members or donors. So, some environmental organizations, for example, gain authority from their claim to speak on behalf of thousands or even millions of members or donors. Others can’t make such claims. Some NGOs and charities, rather than grounding their legitimacy in terms of the number of people they represent, gain legitimacy from their track record of successfully using donor money to promote their stated goals. Others lack legitimacy precisely because they’re so bad at doing what they claim to do. (There’s a good paper on legitimacy — “Four Criteria of Development NGO Legitimacy” by Iain Atack — that lays out a more detailed framework.)

I think these four measures amount to a pretty robust way of evaluating the ethics of NGOs and charities. Putting forward such a framework and encouraging its use is in no way intended to cast aspersions on the good work so many NGOs and charities do. But as is increasingly being recognized, it’s important that organizations not be assumed to be ethical, just because they seek to promote the public good.

Relevant Books:
The Power and Limits of NGOs edited by Mendelson and Glenn
NGO Accountability: Politics, Principles and Innovations by Jordan and van Tuijl
The Ownership of Enterprise by Henry Hansmann

Great story in Salon today about organic certification:
Is this the end of organic coffee? by Samuel Fromartz (subscription required)

Last month, the U.S. Department of Agriculture quietly released a ruling that alarmed organic certifiers and groups who work with third-world farmers. The decision tightens organic certification requirements to such a degree that it could sharply curtail the ability of small grower co-ops to produce organic coffee — not to mention organic bananas, cocoa, sugar and even spices.

The issue is basically this: to be certified as organic, a farm has to be inspected yearly so that its methods can be verified. Such inspections cost money. This isn’t a problem for large farms and plantations: the cost of a yearly inspection is trivial for them. But for small farms in the Third World, it’s a big problem. So the USDA regulations formerly allowed small forms to aggregate into collectives, and for inspections to be carried out on just a percentage of farms within the collective each year. The new USDA ruling changes that, and requires every farm to be inspected & certified individually.

So, small-time growers will either have to suffer substantial increases in their costs, which may price them out of the market altogether, or simply abandon organic agriculture.

There’s nothing terribly surprising about this. It just reminds us of why productive capacity gets aggregated into firms — including large farms — in the first place. Ronald Coase (winner of the 1991 Nobel Prize in Economics) argued as far back as 1937 that a key function of the firm is to reduce transaction costs. Included among those transaction costs are agency costs, which include most importantly the costs of monitoring people to make sure they do what they say they’re going to do.

So, what does this imply about organic coffee? The point here is that bigger farms are better at producing what consumers of organic coffee want, namely certified organic coffee. They work better not just because of the usual things we think of as “economies of scale” (access to capital to buy heavy machinery, ability to buy supplies at bulk prices, etc.) but also because it’s efficient to certify a single production system, overseen by a single management team. The idea of supporting small-time growers is of course appealing. It’s romantic. But if you’re going to stipulate that you want your coffee organic, you’re imposing a constraint, an additional monitoring cost. So don’t be surprised if costs go up or if the only producers that can supply the goods at an acceptable price are large firms. That’s what they do best!

Of course, you can also keep monitoring costs down just by turning a blind eye, which is what the USDA’s former rules permitted. The old system relied on trust — it trusted the majority of small-time growers to follow the rules in the absence of inspection. In at least some cases, that trust is likely to be violated. Is that an acceptable cost? Seems to me that’s debatable, and in the end depends upon whether consumers of organic coffee (and other organic foods) want something that’s actually organic, or just something that carries an organic label.

Links
USDA’s National Organic Program

Relevant Books:
Organic Agriculture: A Global Perspective by Paul Kristiansen, Acram Taji, and John Reganold
The Omnivore’s Dilemma: A Natural History of Four Meals, edited by Charles A. Francis et al.
Developing And Extending Sustainable Agriculture: A New Social Contract
The Firm, the Market, and the Law, by RH Coase

Business ethics isn’t always about multinational corporations, high-stakes finance, and multi-million dollar lawsuits. This story is sort of a tempest-in-a-teapot compared to big stories like Enron, but I think it usefully illustrates some interesting points:

Here’s the story, from CBC news, about the Samosa stall at a farmer’s market in Fredericton, New Brunswick.

Fredericton’s four-week samosa drought ended Saturday when Samosa Delite reopened at its usual location at the Boyce Farmers’ Market.
But the popular vendor will move outside to a trailer in the parking lot in two weeks.
For the first time in 30 years, there had been no samosas available at the market Saturday mornings as the treats became a victim of their own popularity. Lineups clogged the market’s walkways, obstructing stalls belonging to other vendors and causing market officials last month to ask the two samosa vendors in the market, Samosa Delite and Patel’s, to move to an outdoor food court.

So, a few random observations:

1) This is a classic, small-time example of “externalities.” Third parties (other vendors) were suffering negative consequences of the simple market transactions being conducted at the samosa stall. Crowding is a form of pollution. Samosa Delite was able to “externalize” that pollution, extruding it into public space. It would be hard (though not, I think, impossible) to measure this negative externality and have Samosa Delite compensate the owners of adjacent stalls.

2) Notice the complexity of the interests involved…other vendors were being affected (negatively) by the lineup for samosas, but presumably they also benefited from the additional foot traffic near their stalls.

3) Notice that Samosa Delite was apparently unwilling to act on its own to limit the effect its business had on others. (Question: how much negative impact — measured how? — would Samosa Delight have to have before it would have been morally obligatory for them to do something to mitigate their own impact? What could/should they have done?)

4) Notice also the (for better or for worse) authoritarian solution: the managers of the market forced Samosa Delite to switch locations.

5) Notice (perhaps most importantly) that this ethical issue probably has nothing to do with wrongdoing. Too often businesses think that ethics is all about avoiding wrongdoing. But the owner of Samosa Delight was likely just trying to make an honest living, serve his customers well, keep his employees employed, etc. Nonetheless, his interests conflicted with those of people around him, and so something had to give. The point is that identifying this as an ethically interesting case doesn’t immediately mean that anyone did anything wrong.

This one’s got everything it takes to soak up public attention: race, healthcare, and paternity. It’s like a perfect storm. Add in the word “lawsuit” and you’ve got everything a good scandal needs.

The story is about a couple suing a New York fertility clinic for a sperm mixup that resulted in a baby racially unlike its supposed parents.

As one faithful reader of this blog asked, “Is this a business ethics issue, or a bioethics issue, or are the parents just being jerks?”

Here’s the story as reported by one NBC affiliate: Fertility Clinic Sued Over Too-Dark Baby

After they saw a baby girl they had gone to a fertility clinic to conceive, her parents became convinced something was wrong, according to court papers.
The girl’s skin was darker than either parent’s, a judge wrote in allowing the parents to proceed with a lawsuit that claims the clinic botched the insemination of the wife’s eggs.

The title of the story obviously refers to the fact that the reason the girl’s paternity came into question in the first place is that she’s darker skinned than either parent. But the point here isn’t that the clinic gave the parents a black baby. The point is that the clinic did such sloppy work that they gave the couple a baby that’s not related to her own supposed father. (The parents have actually tried to sue both for malpractice and for emotional distress, etc. The court is proceeding with the former, but not the latter.)

Now, certain corners of the web have been awash in commentary about the parents being jerks. And it’s easy enough to sympathize with that conclusion. It might not exactly be great for this kid to know she was at the centre of this kind of controversy. The girl (whom the parents say they love dearly) is too young to understand now, but she’ll understand eventually. (Paging Dr. Phil…!)

But we shouldn’t let that distract us from the fact that the clinic was seriously sloppy and completely botched the job they were paid to do. They should be held accountable. It seems unlikely that we want fertility clinics to be the only commercial entitites that still get to resort to the old standard of “caveat emptor.” Are the parents supposed to not hold the clinic accountable, out of fear for this little girl’s dignity?

Of course, this double-bind is fodder for the folks who argue against the commodification of fertility services. “Tsk, tsk, parents! You wouldn’t have unseemly little binds like this, if you weren’t out buying babies to start with.” I’m not saying that would be my conclusion, but this case is a pretty good example of a few of the consequences of commercializing repro-medicine. At very least, this stuff ought to be foreseen & dealt with preemptively.