Just what are corporate boards obligated to know? More precisely, what lengths are they obligated to go to in order to get to know the things they ought to know?
The topic came to mind when I read today’s story about how the salary of the CEO of Canada’s biggest banks, RBC, had gone up 44 per cent to $10.9 million during his first year on the job. One has to ask: just what information does RBC’s board have at hand that would justify that level of compensation, and that very substantial change in level of compensation?
The question is not a trivial one. In fact, it’s the topic of a program of research we are currently conducting at the Ted Rogers School of Management’s Ted Rogers Leadership Centre. The question, more generally, is about what boards are obligated to know. Of all the things a board could know, which things must it know, in order to do its job properly?
The question turns out to be harder than it sounds. Boards typically need of quite a lot of information, and face plenty of obstacles to getting it.
What do boards need to know? Boards of directors are ethically and legally responsible for the oversight of firms. While it is not the job of directors to manage the firm, it is the job of directors to govern it. Both individually and collectively, directors have fiduciary responsibilities to govern the firm by selecting, paying, guiding, and assisting top management. Performing those tasks well requires considerable information. In general, directors need to have sufficient information about the firm they are directing, as well as about the industry within which it operates. They need to understand the relevant bits of corporate law, and to have basic financial literacy. With regard to specific decisions, directors may need very special information. With regard to a major strategic decision such as merger or acquisition, for example, directors may need to have detailed information about not one but two organizations, as well as detailed valuations and reliable market forecasts. With regard to setting executive compensation, boards may need not just detailed information about performance, but also information about industry benchmarks as well as information about what a given CEO’s other employment options are.
Why is it so hard for boards to get the right information? The fundamental problem is that most directors are, at least vis-a-vis the specific organization, amateurs. They are (mostly, preferably) outsiders — they are outsiders on purpose — and so by definition they spend much less time in direct contact with the organization than, say, the CEO or other employees. So they are automatically subject to relative information poverty.
The result is that they have to rely on others. Who do they rely on? First and foremost, they rely on insiders, especially the insider with whom they have the most interaction, namely the CEO. But of course, there’s always the worry that the CEO will, shall we say, “filter” information. After all, if no one particularly wants to give the boss bad news, who on earth wants to give the board bad news? Boards also may get information from other firms. The board’s audit committee, for example, ought to be able to get information directly from the firm’s accounting department, but such direct access is not universally available.
Boards also sometimes look to outsiders, a category that includes consultants (such as compensation consultants, strategy consultants, and governance consultants) and professionals (such as external accountants and outside legal counsel). Compensation consultants are a key example here: many large firms make use of those. But anecdotal evidence, at least, suggests that directors often doubt the reliability and value of comp consultants, even after having paid good money for their advice.
That’s why our research is focused on the wide range of structural and procedural principles that we argue boards ought to attend to. The right structures and procedures need to be in place to make sure (or to make it more likely) that boards will be diligent and effective in their pursuit and use of information.
So, for example, how do you ensure that boards will seek and appreciate a wide range of information? Start by having a nominating committee that is dedicated to seeking out real diversity. How do you make sure that boards have the right expertise to make good use of the financial information available to them? Implement a ‘board skills matrix’ to identify gaps in their collective knowledge. How do you make sure that boards make proper use of consultants? Make sure the board has the appropriate budget, but also implement policies to reduce redundant use or other kinds of over-use of consultants of dubious value.
In the end, that’s what governance is about. It’s about not just doing the right things, but putting the right processes in place to make it more likely you’ll do the right things on an ongoing basis. So the shareholders (and other stakeholders) of RBC need to ask not just is David McKay worth $10.9 million, and not just did the board gather the right information in making that decision, but did the board put in place the policies and procedures to make sure that it has the right information, and uses it correctly, on an ongoing basis? That, after all, is what a board is really for.
By Chris MacDonald and Hasko von Kriegstein
It’s not all that surprising that restaurants that focus on fast, cheap food look to suppliers who focus on fast, cheap production methods. Fast food chains and factory farms, in other words, seem like a match made in heaven. But from the point of view of animals, it’s a match made in hell. The fast food industry’s capacity to efficiently turn ingredients into meals implies a huge demand for the products of the cruelty-prone meat and dairy industries. You don’t have to be a zealous animal rights activist to cringe every time you see images of battery hens, and imagine what a life — even with the very basic mental life of a chicken — would be like in a tiny, crowded cage.
But there are signs that things are changing in this regard. See, for example, the recent announcement by Burger King, along with iconic Canadian coffee chain Tim Horton’s, (both of which are owned by the same parent company) promising to use only cage-free eggs by 2025.
Just how big a deal is such an announcement?
It’s easy to be cynical about a target that’s nearly a decade out. Given that the average tenure of a CEO is far less than that, it risks looking like a leadership team making a promise that someone else is going to have to keep. The key question, of course: Is there a plan in place? Is substantive action underway already? If so, then this is long-term planning, rather than punting.
There are also big questions about supply chains. A big restaurant chain can simply decide to change what it sells if it can’t find a source. So the announcement of the restaurant chains’ intentions implies a need for big changes within the egg industry. And, perhaps not surprisingly (given the purchasing power of the two chains) there are signs that the industry is listening: witness the recent announcement that Canadian egg farmers aim to abandon battery cages by 2036.
Finally, it also should be noted that this move sets a powerful precedent for other restaurants. A pair of restaurant chains, even popular ones, can’t change the practices of the egg industry on their own, and hence can’t make a meaningful dent in the total quantity of cruelty in the industry. But the move by these two (although not the first) could have knock-on effects in several ways.
First, it helps establish a supply chain (see above). Second, it signals to consumers that cruelty-free eggs can be had, even at a fast-food joint, and so it’s OK to expect that from a fast-food joint. Finally, it gives implicit permission to managers at other fast-food chains to live according to their own values. No one prefers eggs from unhappy chickens, but many managers may feel that competitive pressures won’t allow the alternative. Burger King and Tim Horton’s have essentially signalled that they see a path to that alternative, and are willing to follow their conscience to it.
Could this all be a marketing ploy? Of course it could. But in the end, that may not matter. As long as BK and Tim’s see good reason to move to cage-free eggs, they will do it, and there’s good reason to believe that other restaurant chains will follow.
Is it unethical to watch the Super Bowl?
As evidence mounts that professional football is essentially a highly-organized mechanism for inducing brain injury in large numbers of young men with few other options, the question arises whether watching the causing of all that brain injury is itself unethical.
If the game itself is ethically problematic, is watching problematic, too? Is it wrong to find joy in watching young men sustain brain damage?
The question is amplified with regard to the Super Bowl, which sees millions of non-football-fans tuning in, nachos and beer at their sides, to watch the spectacle. Are those millions of game-day converts complicit in the carnage?
We should start by acknowledging that there is of course no plausible causal connection between the casual viewer and the brain damage being done to players. An individual viewer tuning in on Super Bowl Sunday doesn’t matter a bit. But then, in the aggregate, we matter a lot — pro football wouldn’t be such a high-paying endeavour or such an enticement to the men who risk their brains to play it, if millions of us didn’t tune in on a regular basis.
But at very least we might wonder about the extent to which our watching amounts to a kind of tacit endorsement. It might be considered unseemly to enjoy watching the brutality in the say way that it’s unseemly to enjoy watching a serious car accident. You didn’t cause the accident, let us assume, but that doesn’t mean it’s OK to enjoy watching it.
And an argument could be made that enjoying watching football is even more unseemly than enjoying watching a car crash, because the damage inflicted during football is intentional, and hence morally suspect. When you watch football, you’re enjoying not just watching brain damage, but watching young men lured into brain damage by large financial incentives. And in case you think the financial incentives justify the brain damage — “those guys are well paid to risk their brains!” — remember that most of them still probably don’t fully understand the risks. In part, that’s because probably no one has a full understanding of those risks, and because even when we know about risks, we tend to brush them aside in irrational ways when factors like pride are at play.
So hey, I hope you enjoyed the game. I did. But none of us should be altogether proud of that fact.
In addition to blogging here, I also co-edit a news & commentary website called BusinessEthicsHighlights.com. Below is a list my co-editor, Alexei Marcoux, and I have put together of the Top 10 business ethics stories of 2015. Enjoy! (If you prefer the PDF version, click here: BEH Year in Review, 2015.)
Year in Review: The Top 10 Business Ethics Stories of 2015
By the editors of Business Ethics Highlights (BusinessEthicsHighlights.com)
It has been a busy year in business ethics and corporate social responsibility. From the cheating carmaker to the price-gouging pharma-bro, to the coffee company that wanted us to have a casual chat about race with the barista, the year has been a cornucopia of case studies in the ethics of commerce. Just about any media outlet’s “year in review” could serve as fodder for a year-long course in business ethics. But we’ve gone ahead and drawn you a roadmap.
Below, the editors of Business Ethics Highlights present their entirely unscientific Top 10 Business Ethics Stories of 2015. This is our list of the top 10 items we reported on during 2015.* To create this list, we looked both for individual stories that had made a big splash, and for companies or individuals who had made the news multiple times for different reasons.
In no particular order, here they are.
Volkswagen was perhaps the biggest business ethics story of the year. The attention it got springs from two main sources: first, VW is a big, big, well-regarded company, not some fly-by-night operation. Second, the company didn’t just engage in some sort of minor rule-bending, fiddling along the margins: it outright lied to regulators and to customers regarding a key aspect of its cars’ performance. No wonder people were so interested in the lies the company told, in how it tried to scapegoat its engineers, and in the possibility that there just might not be very much that’s special about Volkswagen, in terms of the company’s likelihood to engage in wrongdoing.
In September, the CEO of Turing Pharmaceuticals, Martin Shkreli, quickly went from utter obscurity to being the world’s most hated chief executive by buying a company that makes a life-saving pharmaceutical and promptly raising the price from $13.50 to $750 per tablet. Most recent update: Shkreli has been arrested, for fraudulent activity unrelated to his price-gouging. Few tears are being shed, even among those who would defend his price-gouging as an unremarkable side-effect of an otherwise-beneficial free market.
Another issue that has seen a lot of attention this year is the sale of homeopathy, and other ‘alternative’ medicines. Toward the end of 2015, we featured a piece by BEH co-editor Chris MacDonald, which generated a huge amount of discussion on social media and which, within 24 hours of publication, became Canadian Business magazine’s most commented-upon story of the entire year. Check out “Homeopathy: the Ponzi Scheme of Healthcare.” The key idea: relevant experts know that Ponzi schemes can’t make you rich, so they’re illegal. So, by analogy, why hasn’t homeopathy been outlawed yet?
BEH’s own most popular item of the year was a story about BBQ restaurants being “banned” in Austin, Texas. The bylaw the city passed was not a ban, per se, though it was sometimes referred to that way. But it was a proposed limitation on restaurants’ right to emit smoke, which raised interesting philosophical questions about just what counts as pollution, and what counts as nuisance. Frankly, we’re not quite sure why this ‘tempest in a teapot’ topped our stats; are visitors finding our site by mistake while googling BBQ recipes?
Various elements of the so-called ‘sharing economy’ were big in the news this year, and continued to generate controversy. Fans and foes have been vocal. For example, back in September the New York Post published an op-ed on why Airbnb helps make New York more affordable, contradicting those who claim that the accommodations service is driving up the price of lodgings. And ride-sharing service Uber continued to please users while angering traditional taxi companies and frustrating municipal lawmakers.
Another of the big stories of the year involved an organization that most wouldn’t think of as a business in the traditional sense, namely FIFA (the Fédération Internationale de Football Association)—the governing body for soccer worldwide. In May, several of the organization’s leaders were arrested for corruption—but not its bombastic president, Sepp Blatter. The following month, Blatter resigned, and was more recently banned, for 8 years, from participation in any soccer-related activities, by FIFA’s ethics committee.
Fast-food company Chipotle created a tempest in a taco by announcing that it would stop using genetically modified ingredients. Critics called the move anti-scientific, citing the lack of evidence to support anti-GMO sentiment. More recently, suspicions arose that Chipotle’s anti-GMO stance was a smokescreen to distract from the company’s dodgy sanitation practices. Why keep the kitchen clean when you can impress people with your holier-than-thou sourcing practices?
Not surprisingly, wage inequality continued to be an important theme. August saw the release of a list of “CEOs who make at least 800 times more than their employees.” One of the richest men in the world, Warren Buffett, chimed in and agreed that inequality is a problem, but added that one standard prescription – raising minimum wage – is not a solution.
Gender equity was also a big topic in 2015. Women fighting for equality got a boost from high-profile women, including Jennifer Lawrence (lamenting gender-based pay disparities in Hollywood) and tennis superstar Venus Williams (trying to correct the gender-based pay differential in pro sports).
In March, Starbucks announced an ambitious – some would say quixotic – plan to get Americans talking about race. The idea was to encourage customers to chat with baristas about what is without a doubt one of the most pressing social issues of the day, namely race. Skeptics scoffed, mocked, and rolled their eyes. The foam had barely settled on the latte before Starbucks declared that the #RaceTogether campaign was over.
There you have it, our year in review. Each of the stories above involved winners and losers. But then interesting times are always a mixed blessing.
* In fact, BEH only began publishing in March of this year, so our review of the year naturally only goes back to then.
© 2015 Journal Review Foundation
This post has been updated with comment from Loblaws.
Imagine you walked into your local bank, and saw a sign that read:
“Lottery tickets have the potential to ensure a comfortable retirement. Ask us to help you select the lottery that’s right for you!”
You would, I am sure, be shocked. Anyone with the slightest bit of financial common sense knows that lotteries are a losing proposition. For every one person who (temporarily, at least) gets rich, there must necessarily be thousands or millions more who lose money. Lottery tickets are a bad bet, and to advise someone to buy lottery tickets as an investment strategy would be fraudulently bad investment advice.
But worse still would be a sign that read:
“Ponzi schemes have the potential to ensure a comfortable retirement. Ask us to help you select the Ponzi scheme that’s right for you!”
Here’s a sign that greeted me in the back corner of my local Loblaws supermarket:
“Homeopathy has the potential to stimulate the body’s own healing powers. Ask us to help you select a remedy.”
The problem here is of course that homeopathy doesn’t work. It cannot work, as a matter of simple biology, and it’s been thoroughly tested and proven not to work. Scientific consensus is clear and unambiguous on this. For some symptoms, homeopathy can provide a short-lived placebo effect. But that’s very limited, and it’s not the claim being made when homeopathy is sold. A company the size of Loblaw Cos. Ltd. has no excuse for not knowing this.
Of course, some people claim that homeopathy works for them. This can readily be explained by reference to any of a number of perceptual failings and cognitive biases. The short version is that personal perceptions and recollections are not reliable: medicine needs to be rigorously tested using blinded trials. After all, many of us know someone—a former neighbour or second cousin once removed—who scored big on the lottery. That doesn’t mean lotteries are a reliable investment strategy.
Presumably Loblaws thinks they can get away with this because of the weasel words they use: words like “potential” presumably mean they’re dodging making any specific claim about cause and effect. That may keep them on the right side of the law. But it still makes the company’s behaviour deeply unethical. If by “potential” they merely mean “it’s not logically impossible,” then the claim about homeopathy may be true. But if they mean that stimulating the body’s own healing powers realistically could happen, then it’s false.
If Loblaws isn’t selling something that works, are they at least selling hope? Perhaps. And hope is a wonderful thing. But many desperate people also buy lottery tickets as a matter of hope, in a desperate attempt to get themselves out of poverty. In both cases, what is being sold is at best false hope, and there’s no honour in selling that.
Homeopathy is the healthcare equivalent of a Ponzi scheme. Loblaws—and any other retail outlet that sells it—should be ashamed.
The publication of the commentary above (here and on Canadian Business) created a minor firestorm on social media. Within 24 hours this commentary became Canadian Business’s most commented-upon piece for the year. About 24 hours after the commentary appeared, Loblaws responded via twitter, as follows:
Interestingly, the company makes no effort to defend homeopathy itself, or to justify the enthusiastic claim made by the sign shown and quoted above.
The question arose recently, as I spent a weekend as a speaker and judge at the terrific Ethics in Action case competition, held at Dalhousie University’s Rowe School of Business.
For those not familiar with the concept, a ‘case competition’ is an event in which teams of business students (typically 4 per team) are presented with business scenarios and tasked with giving a presentation, recommending to a panel of judges (playing the role of the ‘board of directors’) how the company should deal with the crisis. Students are judged on the quality of their analysis, the strength of their recommendation, and the poise with which they present it.
At the Dal competition, one of the cases teams had to address involved a company trying to recover from a string of bribery crises. The dilemma effectively was this: what should the company do, going forward, to recover from its problems and to attempt to prevent future trouble?
As we judges recognized, there’s no right answer here — or at least, no clear one. Lots of moves could be and were suggested: enhanced compliance training, careful screening of business partners, establishing a whistleblower hotline, and so on. But none of those moves, either individually or collectively, could come close to guaranteeing that scandal would not strike again at some point in the future. But each of them made a good deal of sense, and all were ingredients of a plausible path forward. Probably.
This implies a useful perspective on ethical problem-solving generally, namely this: every decision made in response to an ethical crisis is a kind of hypothesis. It is a guess — hopefully an educated guess — about what is going to work
This follows more generally from what we might call a “design” perspective on ethical decision-making. Because design (whether of machines or institutions) just is a process of hypothesis formulation and testing. In terrific 1985 book, To Engineer is Human – The Role of Failure in Successful Design, Henry Petroski argues that every structure that engineers build is an hypothesis — an educated guest to the effect that ‘yes, indeed, this bridge IS strong enough to bear the weight of all that traffic on a daily basis.’
What does this perspective imply about good ethical decision-making?
The most insightful work I know of on this topic is to be found in a brilliant 1996 paper by Caroline Whitbeck, called Ethics as Design: Doing Justice to Moral Problems. In her paper, Whitbeck discusses ethical decision-making as a design problem. The parallel between problem solving in engineering and problem solving in ethics, Whitbeck argues, suggests the following advice:
1) Some design problems have have no real “solutions”, where “solution” means “perfect answer. Sometimes we have to cope with a problem, rather than fixing it. Other problems are amenable to several possible design solutions, any of which might be “pretty good.”
2) Some practical problems are liable to suggest answers — design solutions — that are clearly wrong. Even if there’s no clear right solution, there may be plenty of clearly wrong solutions, and weeding those out is pretty useful.
3) Competing “pretty good” solutions may have different advantages & disadvantages. Just as two engineering solutions might have competing strengths (one offers better safety, where the other offers better durability, perhaps), different ethical solutions can have different virtues (as when one produces better outcomes, but the other does more to protect the rights of the vulnerable). Such competing virtues can be incommensurable, and it’s important to admit as much.
4) Finally, solutions to ethical problems, like solutions to engineering problems, typically need to achieve a particular performance or goal (there’s a job to get done), conform to specifications & constraints (you don’t have all the time and money in the world), and be reasonably secure against accidents and changes.
Overall, this design perspective has two major benefits. First, it reminds us that we are human, that our problem-solving is always a matter of looking for better solutions, not perfect ones. But it also reminds us that progress is possible, and that hard work to arrive at better solutions can pay off. There’s always a way to build a better mousetrap.
Should a bookseller help a convicted murderer and rapist earn a living? In brief: yes. It’s not an appealing conclusion, so sold your nose, and listen to the reasons.
Amazon apparently disagrees with me, or is at least willing to bow to public pressure on the matter. The company has apparently removing an ebook apparently written by convicted Canadian killer and rapist Paul Bernardo from its website.
Amazon came under fire last week for selling the ebook. The book, importantly, is not about Bernardo’s own criminal exploits — he’s not profiting off his own crimes. Rather, the book is supposedly a political thriller of some sort. But many people were far from thrilled to see the widely-despised convict publishing at all.
Why should Amazon distribute Bernardo’s book? Some commentators have mentioned the need to protect free speech: Bernardo is a convict, but even convicts retain fundamental rights. But free speech is a red herring in this context. Amazon would be within its rights not to publish Bernardo’s book. No one has a right to be published. That’s not what the right to “free speech” implies. The right to free speech simply means that when you attempt to speak (or write) no one may rightly take action to forcibly stop you from speaking or writing.
So Amazon is within their rights to stop selling the book, but they are still wrong to do so.
Consider the precedent Amazon is setting here. For the sake of consistency, we need to realize that Amazon is now effectively claiming the right — and perhaps the obligation — to vet every author prior to agreeing to sell his or her book. And in doing so, what principles should they apply? Should all murderers be excluded, or only murderer-rapists like Bernardo? Or all criminals? How about war criminals. That’s a category that (ethically if not legally) includes a number of past heads of state. Should Amazon sell CDs by rappers with criminal convictions? And so on.
For what it’s worth, Amazon currently sells books by a number of other serial killers and mass murderers, including the likes of John Wayne Gacy, David “Son of Sam” Berkowitz, and the most infamous mass murderer of all time, Adolf Hitler.
The argument for a nonjudgmental approach by Amazon is strengthened by the fact that it’s Amazon, in particular, that we’re talking about. Amazon’s dominant position in both book publishing and book selling means that it would be incredibly dangerous for the company to start picking and choosing, on moral grounds, which authors it chooses to work with. We, the public, should not want Amazon to help itself to that kind of moral authority.
Amazon should reverse its decision, and go back to selling Bernardo’s book. And we should respect that decision. Not because we think Paul Bernardo is especially worthy (or even, frankly, minimally worthy). The question isn’t who he is, but who we are.
Valeant Pharmaceuticals has suffered a crisis of trust over the last few weeks. More specifically, the trust that investors had in the company was substantially diminished in the wake of revelations that Valeant had an unclear but apparently too-cozy relationship with specialty pharmacy called Philidor. The loss in trust in this case was quite concrete, measured by a substantial drop in the company’s share price.
The source of this loss of trust was, as is generally the case, a question about the company’s ethics.
Doing business in the long run absolutely requires ethics. At the very least, doing business requires a degree of mutual respect, embodied in our commitment to getting things from others by offering them what we think they want in return. It also requires a commitment to basic honesty, and a commitment to honour our contracts. These ethical basics are essential because they are the foundation of trust. And if you don’t trust someone—at some level—you’re just not going to do business with them.
If trust enables business, then trust has a real value, in real dollars and cents. So what, then, is the dollar value of trust? I estimate the dollar value of trust, within the global economy, at roughly $102 trillion—in other words, the entire nominal Gross World Product for 2014. Without trust, all commerce on the planet would literally grind to a halt.
The fact that trust is crucial in markets is evidenced by the fact that businesses have come up with such a dizzying array of mechanisms designed to generate trust—everything from brands (which carry reputations) through to warranties, return policies, endorsements and third-party guarantors.
But what exactly is trust? What does it mean to trust someone? Functionally, it’s an expectation that someone will behave in certain ways. Trust is also an attitude—part calculation, part emotion—that involves an expectation of goodwill, or at least good behaviour. It is an expectation that the other party to a transaction will not do us harm. As my friend and fellow philosopher Daryl Koehn once put it, trust is a mean between paranoia and foolish faith.
But what happens when trust is broken? How can a company like Valeant (or Volkswagen, for that matter) regain the trust of consumers and the investing public? There are many ways to rebuild trust, and none of them is quick.
A company that has lost the trust of the investing public is likely going to need to show a consistent pattern of trustworthy behaviour over a substantial period of time. And the focus, here, is on the showing. CEO Michael Pearson has said how important ethics is to the company. And—present appearances aside—that may well be true. But in the light of the current wave of mistrust, the company is going to need to do more. It is going to need to engage in substantial disclosures, far beyond detailing the nature of its relationship with Philidor. In the face of a failure of disclosure, the company may well find that that it needs to engage in more disclosure than any company—even one with nothing to hide—would be fully comfortable with.
What’s the connection between ethics and competence in business? What part was played in Volkswagen’s wrongdoing by the fact that the companies engineers were apparently technically incapable of making good on the promises their marketing department was apparently intent on making?
I’ve written before about my hypothesis that cheating is often a way of covering up for your lack of talent. This hypothesis suggests that executives cook the books to hide the failure of their strategies. Companies offer bribes because they know their product or service isn’t good enough to compete otherwise. Salespeople fudge their sales numbers because they’re not as good at their jobs as they need to be.
A year or so ago I heard a presentation by someone who worked in compliance at a global company that had, some years ago, been embroiled in a bribery scandal. One of the most shocking things the speaker said is that, during the years in which the bribery scandal took place, it was not uncommon for a few hundreds of thousands of dollars to go missing from the books — not “missing” in the metaphorical sense (“That money is — wink, wink! — missing“), but missing in the literal “we don’t know where the money went” sense. The very strong suggestion here was that bribery on a large scale went hand-in-hand with very loose and unprofessional accounting standards. The managers at this company simply literally did not have a good sense of where their money was.
Consider also the case of the prosecution of GlaxoSmithKline, a few years ago, for selling adulterated drugs. The problem again was incompetence. Some of the pills manufactured at the company’s Cidra facility, in Puerto Rico, had been mislabeled. Others had been found to contain more (much more!), or less, of their active ingredient, than they were supposed to. Still others contained metal particles, the result apparently of machinery having broken and then repaired in an amateurish way that resulted in metal parts rubbing together. Through and through, the story is one of general incompetence — front-line work being done badly, managers ignoring problems, and senior managers failing to institute remedies once serious deficiencies in manufacturing practices were brought to their attention.
These anecdotes suggest at least several different connections between failures of ethics and plain business incompetence.
One connection involves resorting to unethical behaviour to cover up for mistakes or poor performance. Once you’ve found out that sloppy work has led to a poor product, you can either face up to it (but that’s inconvenient and painful and maybe expensive) or you can unethically (and maybe dangerously) sweep the problem under the carpet.
Another connection is that in some cases poor management makes unethical behaviour easier to get away with. This might involve sloppy accounting, but it could just as easily involve poor training, poor oversight, and unclear lines of accountability.
And then (perhaps more commonly) there are more complex cases, in which lack of business skill (say, at providing high-quality service) results in a desire by some employees to engage in compensatory wrongdoing, and that wrongdoing is made easier by ongoing incompetent accounting.
We all prefer simple stories, ones with clear villains. And, to paraphrase Homer Simpson, just as we like our beer cold, our TV’s loud, and our corporate villains evil. So it’s hard to accept that sometimes the truth is both more complex, and less dramatic. But we’ll do better at understanding, and avoiding, corporate wrongdoing if we come to grips with the messier truth.
It’s a bad week for corporate bosses. Volkswagen CEO, Martin Winterkorn, resigned this week in light of revelations that the car maker had, on his watch, falsified emissions tests on what may turn out to be millions of diesel VW’s. Even more dramatically, former Peanut Corporation of America owner, Stewart Parnell, was sentenced to 28 years in prison for his role in a deadly outbreak of salmonella poisoning.
Just how does this sort of thing happen? Are these corporate leaders bad apples? Do they lack a conscience? Are they devoid of normal human scruples? Are these corporate wrongdoings a whole different species from decent, ethical people like you and me? Not necessarily. Members of Mr Parnell’s family, after all, testified that the man “has a heart always to put others before himself”. Frankly, I don’t doubt it.
The notion that nice, regular folks can, in the right circumstances, do very bad things is not exactly new. Back in the early 60’s, the famous Milgram Experiments provided substantial evidence. In that series of experiments, fully two thirds of experimental subjects — volunteers from various walks of life — demonstrated that they were willing to administer a lethal dose of electricity to a stranger, just because an authority figure in a white lab coat told them to.
And modern psychology and criminology tell us there are lots of factors that can push good people to do bad things.
One factor is the ethical equivalent of inattentional blindness — failure to see something that is in plain sight. Sometimes this happens because we are so focused on the narrow definition of our own job. Sexual harassment? Dealing with that is not my job, so why would I think it’s a problem, or even notice it?
Another important factor is the slow, steady erosion of our moral sensibilities that goes with incrementally-worsening ethical behaviour. Tell a harmless little lie…then tell a bigger lie…then tell a huge lie. Eventually serious wrongdoing creeps up on you, maybe without even realizing when it was that you crossed that line.
Finally, there’s rationalization, the self-serving process of redescribing our behaviour so that we can accept that we did it without accepting that the thing we did was bad. “I didn’t steal the money, I just took what I deserved.” Or, “Sure, we fudged the numbers, but no one got hurt!” Or, “Yeah, we bent the rules, but everyone does it.” Rationalizations amount to a crummy exercise of critical thinking skills, but they can be pretty psychologically persuasive.
The net result of these various psychological factors is that you too could screw up the way Martin Winterkorn and Stewart Parnell did. If you think you couldn’t — that you’re simply above such behaviour — you’re deluding yourself.
Admitting that this is the case is a good start.
So, what to do? First, beware. You’re human, and so you’re subject to the usual human failures. Second, don’t tolerate rationalizations in others, and don’t ask them to tolerate them in you. Finally, think twice before bending the rules and thinking that you’ll do it “just this one time.” Because down that path lies ruin.