The Business Ethics Blog

I’ll put this on the table as a fundamental ethical principle for commerce:

If your business model relies upon customers not understanding your business model, your business model is not an ethical one.

We might justify this principle in at least a couple different ways. We could work from first principles, and say that making sure your customers aren’t deceived goes along with basic standards of respect for other human beings. A decent company wants its customers to benefit, and thinks it has genuine value to offer them. Or we could point out that information is essential to the functioning of markets, and that the moral underpinning of markets requires that market transactions at least approach the ideal of full information for all parties.

Ponzi schemes are the extreme example: they rely entirely on “customers” (i.e., victims) not knowing that they are part of a Ponzi scheme.

But there are plenty of other, less extreme examples. For instance, when pricing is central to your business model (e.g., positioning yourself as an airline offering low-cost flights) then deceiving people about the true cost of your product essentially means hoping they don’t understand your business model, which is essentially as follows: “Advertise low prices but charge high prices by adding hidden fees.”

Here are a few current headlines about companies that seem to violate this principle:

• Subprime loan websites ‘mislead customers’
• New rules require airline ads to include all costs
• Consumers Can’t Sue Credit Repair Companies
• BBB Warns Consumers About Puzzle Contests From Opportunities Unlimited Publications Of Kansas City

Note that this principle doesn’t stipulate that all (or even any) customers actually understand your business model. (There are lots of reputable companies I that I deal with every day without having any real clue what their business model is.) The principle only says that your business model can’t rely upon people not understanding. If you’re relying on people not to understand, that means you essentially have nothing of genuine value to offer them in the first place.

And for that reason, it strikes me that deception about one’s business model is even more egregious than other kinds of deception in business.

Who is responsible for a consumer’s subconscious and erroneous conclusions about a particular product? What if a manufacturer honestly and accurately says “our product does X”, and consumers mistakenly believe, as a result, that the product also does Y?

Case in point: a study was recently reported, indicating that consumers are more likely to perceive chocolate as low in calories when they are told that it is fairly-traded. This is a great example of the “halo effect,” according to which humans have a tendency to attribute a variety of unrelated positive attributes to any person or thing that they perceive in a positive light to begin with.

Now, it’s clear that consumers are being led astray, here, though presumably that deception is not the intention of the sellers of fair-trade chocolate. But, on the other hand, whatever their intentions in the past, the sellers of fair-trade chocolate now know that consumers are susceptible to this error. Do they now have a responsibility to disabuse consumers of this particular misconception about chocolate?

Now hold on, you say. Companies that label and advertise their products accurately and honestly can’t be responsible for every crazy, false idea that enters a customer’s head. Surely companies can assume a degree of common sense; and surely anyone with a bit of common sense knows that there’s no link between fair-trade and calories.

(It’s worth noting that companies sometimes do see fit to warn consumers about matters that ought to be common sense: “Don’t use hairdryer in tub;” “Results are not typical;” “Keep knives away from children.” Etc.)

But here’s the problem. The halo effect is a species of cognitive bias, which is the term applied to any of a large number of pervasive, subconscious mental leanings that tend to lead human reasoning astray. When subject to cognitive biases, humans tend to make decisions that are not rational, not in line with their own values and preferences. The point here is that no one is actually saying to themselves, “Gee, this is fair-trade chocolate, and therefore it must be low in calories.” That would be insane. But cognitive biases don’t work by rational processes; indeed, they short-circuit rational thought. That’s the whole problem.

So, do such effects, when discovered, result in new obligations for companies? Maybe. Sometimes. At least, if the effects of a particular cognitive bias are significant. The example cited above is pretty trivial — presumably the effect in question is not sufficiently powerful to send droves of consumers onto chocolate-eating binges. But more serious cases are easy enough to imagine. And surely some bit of responsibility comes with knowledge: companies tend to have sophisticated knowledge about their products, and are more likely than consumers to know when a dangerous bias is in the offing.

But the real challenge — for both companies and consumers — is that these sorts of subconscious effects are legion. And as more and more of them come to light, we’re going to understand better and better just how little we understand our own minds. Bit by bit, whatever is left of the idea that market exchanges occur under conditions of full information is going to evaporate. What that will mean for business ethics is hard to say; but the time to start thinking about it is now.

Canadian’s largest independent chicken-processing company, Maple Lodge foods, was recently slapped with no fewer than 60 criminal charges related to inhumane treatment of chickens in transport.

This is a nice example to use to continue our exploration of the relation between ethics and the law. (Two weeks ago we discussed why what’s legal isn’t always ethical; last week we explored why following the law can be hard and hence breaking the law sometimes ethically forgivable.)

The Maple Lodge case is still before the courts, but let’s make a leap and assume, for sake of argument, that the company’s treatment of its chickens does turn out to be criminal. (I should add that my non-expert sense of things is that these charges are far from making Maple Lodge unique — legal violations seem pretty common in the business of processing animals for food.)

So let’s accept for the sake of argument that ML’s behaviour is criminal. Is it unethical?

I’ll apologize if it strikes you as crazy to ask whether inhumane treatment of animals is unethical, but we can often learn something by asking questions the answers to which seem obvious. There is, on the surface, broad consensus that animals are ethically significant — that they ought not, for example, be abused or tortured — but that consensus papers over an enormous number of differences of opinion with regard to exactly how animals should (and should not) be treated and exactly why.

The ethical basis for the presumption against animal cruelty, as it turns out, is far from clear and far from being a matter of consensus. Is animal cruelty bad because all suffering is bad? Because animals are part of our moral community? Because God made them? Because cruelty to animals engenders cruelty to humans?

And there are indeed respectable philosophical points of view that hold that animals don’t have any (direct) ethical significance at all, though the philosophers who hold such views are often at pains to reconcile those views with common human sympathies. The point here is that it’s not clear that inhumane treatment of animals is unethical per se. It’s clear that all ‘normal’ people feel sympathy for animal suffering, but that’s not the same thing.

The point here is not to pull the rug out from under the idea that hurting animals is unethical. The point is to say that, with regard to particular behaviours, we need to make an argument rather than just attempting to subsume all such behaviours under the general heading of “unethical behaviour.”

There’s another way to get at the ethics of animal welfare, and that’s to point to the general ethical obligation to follow the law.

In a reasonably-well-governed democracy, we all have a basic obligation to obey the law. There are, of course, a few well-understood exceptions. Speeding to get an injured child to the hospital can be ethically justified. And civil disobedience can be ethically OK (or even ethically obligatory) if done right. But such exceptions are rare, and it remains true that most of us should — ethically — follow the law, most of the time. If you disagree with the law, you should try to get it changed; wanton failure to comply isn’t activism, it’s just lawlessness. In a large democracy, there are an enormous number of differences of opinion, and there are always going to be a few laws that you, in particular, don’t really agree with. But you still — generally — need to follow the law. And that goes for corporations, too.

And so there’s a sense in which Maple Lodge’s behaviour may have been unethical, even if we set aside the thorny issue of the moral status of animals, if the company failed in its ethical duty to treat animals as it is legally required to treat them. But of course, that just brings the philosophical question full-circle: laws themselves stand in need of moral justification. And as I argued above, the moral foundation for animal cruelty laws is far from clear. So, question for discussion: in order to justify passing a law, is it enough to have broad social consensus that a business practice is wrong, or do we need to have agreement on the underlying moral principles?

The Globe and Mail reported yesterday that Ontario hospitals are “scrambling” to eliminate executive perks, in the face of new rules stating that compensation practices must be made public. Ontario’s hospitals are funded by tax dollars, and clearly they don’t want to be seen spending those dollars on things the public is likely to find dubious.

A few quick thoughts:

1. To a certain extent, transparency is an alternative to good governance: we the public want access to the details if we worry that the people who are supposed to be taking care of those details aren’t doing a good job of it. Yet the Globe story makes no mention of governance. There are quotations from a couple of board members, but no discussion of what hospital boards do and whether they’ve been doing it well.

2. The comments under the Globe story provide reason (though not necessarily a conclusive reason) against transparency. In particular, many of the comments reveal lack of understanding of what it takes to run a hospital or other major institution, and a general cluelessness about executive perks. (Example: A perk like membership in an exclusive private club might look odd from the outside, but a moment’s reflection should reveal that an executive who is responsible for massive fundraising efforts genuinely needs to be part of the kind of clubs where he or she can network with the right sorts of people.) Of course, if the public has a genuine ‘right to know,’ then that cluelessness is lamentable but not decisive. The public ain’t always right, but it’s always the public.

3. The fact that this story is about taxpayer money makes no difference, ethically. Some people will be aghast at the perks being paid “out of taxpayers’ pockets.” That’s silly. If there’s a good business case for offering perks, there’s a good business case for offering them at a public institution. If there isn’t a good business case, then offering them would be just as much an affront to shareholders as it would be to taxpayers.

4. Beware the perverse effects of transparency. In the the world of corporate (private sector) executive compensation, it’s been suggested that transparency is part of the problem. The worry is that a CEO at one firm sees how much executives at other firms are making, and not surprisingly asks to receive the same or more. And boards, not wanting to publicly declare their own CEO to be “below average”, give in. So transparency fosters a ratcheting effect that is partly responsible for current insane levels of compensation. Will the same happen at hospitals?

5. Currently, it looks like transparency is driving hospitals to eliminate perks. But the more likely long-term effect is that, rather than accepting reduced overall compensation, executives will simply ask for the cash equivalent of the perks they no longer receive. I’m not an expert on compensation, but my intuition says that that would end up costing hospitals (and hence taxpayers) more. Compare: my own contract with the university I work for allows me some benefits that I don’t make use of (and that, hence, the university ends up not paying for). If I demanded the cash value of those benefits instead, it would cost my employer more. So again, we need to return to the question of governance. If institutions are well-governed, then we on the outside shouldn’t sweat the details. If they’re not being well governed, the key question should be why not?