Bribery, Legal Clarity, and Lame Excuses
Bribery is quite probably among the very oldest of unethical business practices, right up there with short-changing your customers and adulterating your products. Many modern economies have recognized that bribery has no place in a fair and efficient market, and have rightly taken action to prohibit what is widely acknowledged to be a pernicious practice. But not everyone is consistently appreciative of legislative efforts at curbing bribery. Take the U.S. Chamber of Commerce, for example. To see why the Chamber isn’t altogether happy about the U.S. government’s anti-bribery efforts, see this story from the Washington Post’s David S. Hilzenrath: “Quandary for U.S. companies: Whom to bribe?”
American companies doing business abroad have a problem: They don’t know whom to bribe.
Federal law prohibits the bribery of some people but not others. And the business world argues that the rules of the road are not clear. One guy’s bribe, as it turns out, is another guy’s cost of doing business….
A few points:
1) In principle, at least, bribery is an ethical no-brainer. There really is no pro-bribery point of view. Some may argue that it’s a necessary evil, something that companies are forced into by practical considerations in some countries. But that’s at least nominally different from thinking that bribery is ethically OK. Bribery involves inducing someone to violate a duty of loyal service, and it diverts resources that ought to go to more legitimate ends. And besides, bribery is a zero-sum game, which means that by definition the business community as a whole cannot win.
2) The Chamber’s basic plea, here, is an entirely reasonable one: the law does need to be clear. One fundamental element of the rule of law is the notion that citizens (and, derivatively, corporations) must be able to know what the law requires of them. Ignorance is no excuse, but uncertainty may be, at least when lack of certainty is the legislator’s fault. In other words, if the citizen is ignorant of the law, shame on the citizen. But if the law is opaque, shame on the state.
3) If the law really is unclear in dangerous ways, the evidence for that is remarkably thin. The Chamber cites just one anecdote, quite possibly apocryphal, about a company that nearly got prosecuted for a trivial non-offence (paying for a bureaucrat’s taxi ride). We only have Hilzenrath’s account to work with, here, but clearly if there’s a real issue here the Chamber needs to do a better job of making the case.
4) There are just two kinds of situations in which bribery seems truly necessary, and neither of them reflects well on the businesses involved. One is when you’re operating in a context where bribery truly is endemic, and you need to engage in bribery just to keep up. The number of places where that’s true is likely exaggerated. And besides, that need is a lousy excuse, frankly, and any self-respecting businessperson should think seriously about why they want to do business at all in such places. The other situation, of course, in which bribery seems like a true business necessity is one in which you simply aren’t good enough at what you do to compete effectively without doing things you know to be wrong.
Ethics & Economics 3: Efficiency
This is the third in an occasional series on the relationship between ethics and economics.
The topic of this posting is efficiency. As it happens, efficiency has been in the news this week. Michigan lawmakers are currently debating changes in fuel-efficiency standards for cars. (The White House wants to raise efficiency standards, something that is of clear concern to auto-makers in Detroit.) Secondly, the Washington Post reports today that the World Trade Organization is expressing concern that a recent wave of trade accords may hamper the efficiency of international trade.
In its generic sense, efficiency is just a measure of how good some system is at turning out maximum outputs given minimum inputs. Efficiency is arguably the only virtue contemplated by economics. Economics texts have relatively little to say, for example, about justice or about rights. Economists are proficient at explaining the conditions under which markets function efficiently, but they tend to back away (or to plump for their own intuitions or ideologies) when asked whether particular market outcomes are fair.
But what about efficiency as a moral value? In general, efficiency is morally good, and so it is a mistake to think of efficiency as merely an economic value. Certainly few people would argue in favour of inefficiency. Inefficiency means waste. Inefficient use of resources typically implies unnecessary environmental damage. And inefficient production typically means fewer people benefiting than might have been under more efficient production methods.
But efficiency is not always good; it depends on the outputs being sought. Recall that Hitler’s death camps were designed to be a highly efficient means of genocide. More generally, efficiency in the production of something bad is a bad thing. For example, GreenPeace is sure to see the efficiency of modern logging machines or deep-sea trawlers as a bad thing.
Much more remains to be said about efficiency. The key point to make, however, is that efficiency is not “merely” an economic value. We all need to care about efficiency. And even when other important values are at stake — as is almost always the case — we do well to begin by understanding which of the available solutions is most efficient, and what loss or gain in efficiency is going to accompany any proposal to change things in pursuit of other values.
Values-Based Consumerism as Double-Edged Sword
Filed under: consumers, corporate citizenship, CSR, discrimination, transparency, values |
Comments (2) It’s a game of connect-the-dots. Do you, as a consumer, feel any responsibility for the purposes to which the companies you patronize put their profits? Do you care about a company’s values, beyond the effect those values have on how the company conducts business? What about its CEO’s values, or the values of its biggest shareholder? Do those factors enter into your purchasing decisions? Should it?
To make the question more concrete, consider the following:
- If you’re politically left-leaning, do you want to patronize a store owned by someone on the right?
- If you are a Christian, would you buy a car from an atheist?
- If you’re pro-choice, would you buy groceries from a chain of stores owned by a staunch pro-life advocate?
- If you’re in favour of strict gun control, do you want to boost the profits of a company that donates to the National Rifle Association?
For a less-hypothetical example, see this story (in which I’m quoted) by Nicole Neroulias in the Albany Times Union: “Corporate giving is questioned”. The focus of Neroulias’s story is a recent controversy regarding TOMS shoes. The short version goes like this: Blake Mycoskie, head of TOMS, agreed to be interviewed by Jim Daly, president of the right-wing Christian group Focus on the Family. Feminists and defenders of gay rights protested, and Mycoskie issued an apology. On his blog, he wrote: “TOMS, and I as the founder, are passionate believers in equal human and civil rights for all.” Without questioning his sincerity here, it’s clear that Mycoskie had become aware that his flirtation with FOTF had riled his company’s socially-progressive customer base. Why would someone socially progressive continue to support a company perceived to be in cahoots with the Christian right?
Three quick points:
1) On one hand, it seems to me that, yes, at least in principle, consumers must take an interest in the causes supported by the companies they patronize. We are responsible for the causes we support, even indirectly. Of course, most of us contribute far too little to the coffers of even our favourite companies to make any appreciable difference at all. If a company has a 1% profit margin, and gives 1% of that to some cause, that means that one penny out of every hundred dollars you spend goes to that cause. But then, even merely symbolic contributions matter.
2) People who want corporations to adopt social causes should be careful what they wish for. It’s all well and good to say that companies should do something to “give back” to the community. But when they agree to do so, what’s to say that they’re going to give to a cause that you believe in, rather than one you find abhorrent? Would you rather your favourite software company contributed to your least-favourite charity, or just stopped contributing to charities at all?
3) One of the most interesting things about all this is that what we’re seeing here is the undoing of the competitive market’s tendency to prevent people from acting out their biases. One of the best things about modern markets is that they punish prejudice, and make it more difficult. It’s easy to discriminate against the minority cobbler down the street by traveling a few extra blocks to buy from “your own kind”; it’s much harder to act out your racist biases when buying shoes at a big department store because, well, you have no idea what colour or sex or sexual orientation of the person who made those shoes is. Market transactions today are effectively anonymous and depersonalized, in a way that makes biases of various kinds effectively impotent. The push for certain kinds of corporate social responsibility, accelerated by moves toward corporate transparency and social media, is effectively undoing this.
In the end, it’s not at all clear whether it is a good thing that the market is becoming another avenue for acting out our ideological disagreements.
Rupert Murdoch and Corporate Governance
Filed under: accountability, boards, CEOs, governance, leadership |
Comments (1) Given a scandal of the size of that unfolding at News of the World, it’s not surprising that people are beginning to look at root causes. One important causal factor is the way in which News of the World‘s parent company, News Corporation, is governed.
I wanted to hear from someone who really knows about this stuff, not just from an academic point of view but from the point of view of someone who has seen up-close just how corporate boards function, and how they malfunction. So I decided to fire a few questions at Prof. Richard Leblanc, an expert on governance and someone who has been engaged by corporations to perform board evaluations.
Here are my questions, and Richard’s answers:
CM: Rupert Murdoch is both CEO and Chairman of the Board at News Corp. From a practical point of view, why does that create problems in how a board operates?
RL: From a practical point of view, he’s running the meetings and controlling the agenda and the information flow. And as an independent director, you’re sitting there and you owe your position to him because he’s the significant shareholder. So you really aren’t independent, in the sense of making the final calls. You’re more of an advisor, or a friend, is what directors tell me who sit on control block boards.
CM: The Board at News Corp doesn’t seem to have a lot of independence. You’ve interviewed dozens of directors about what makes a board work well. How does lack of independence play out in terms of actual board dynamics? Does it really mean everyone just saying “yes sir” to the CEO?
RL: Independence is a state of mind. There are formal rules but that doesn’t capture the co-optation by the CEO, and personal and social ties. Second, independence should reflect reasonable perception standards, and in this case, independence from the significant shareholder. So when you have a non-independent board, or several directors who are beholden, things don’t get discussed, information doesn’t reach you, you don’t have executive sessions as you need to, and there’s less tone-checking.
CM: Without reference to News Corp in particular, what connection do you see between a well-functioning board and the likelihood of wrongdoing at a firm?
RL: I’ve assessed some of the best run corporate boards in the world. I’ve also assessed boards that have had massive failures, including death, property destruction and monetary loss. The best boards are independent, competent, transparent, constructively challenge management, and set the ethical tone and culture for the entire organization. Usually where there is some ethical failure, or corporate wrongdoing, there is some defect at the board level I find. Undue influence, bullying, poor design, lack of industry knowledge, and directors who are not engaged, or don’t have the power or incentives to be engaged, are some of the red flags.
The Complexity of Executive Compensation
Filed under: accountability, boards, CEOs, compensation, consultants, governance, pay, regulations |
Comments (2) Many jurisdictions have moved recently to give shareholders a “say on pay,” which typically means that companies are required to hold advisory (i.e., non-binding) shareholder votes on compensation. In other words, establishing executive pay remains the responsibility of the Board of Directors, but shareholders are given an opportunity to voice their approval or disapproval.
The Wall Street Journal recently reported that when given their say, shareholders at a resounding 98.5% of American companies have said “yes.” So it seems that, thus far, shareholders are hesitant to challenge Boards in their compensation decision-making.
This is not surprising, given the complexity of the decision that Boards face in setting executive pay. Setting executive pay is a task typically delegated to a Board’s “Compensation Committee.” Now consider the task faced by a Compensation Committee in establishing the total pay-and-incentive package offered to their CEO.
The question facing a Compensation Committee is this: what combination of cash, bonuses, equity, and perks should we put on the table in order to inspire our CEO to perform optimally? In practice, this is a pretty complex question, one not admitting of cookie-cutter solutions. A Comp Committee needs to consider, just for starters:
- pressures from shareholder (and other stakeholders),
- pressures from proxy advisory firms and various think-tanks,
- human psychology, including their particular CEO’s character and motivational levers,
- the managerial experience and expertise of Committee members,
- corporate objectives (profit, market share, sales, social responsibility, etc.),
- their company’s ‘risk appetite’ (roughly speaking, are they trying to incentivize their CEO to be bold, or conservative?),
- expert opinion about optimal compensation structures (which is deeply divided, to say the least).
The problem here is as much one of epistemology as it is one of ethics. Compensation Committees need to take an enormous amount of information and opinion and distill it into a decision that will work and that will be defensible in the face of enormous scrutiny.
Of course, there is no shortage of compensation consultants, ready and willing to help Compensation Committees with this task. But recent (not-yet-published) research at the Clarkson Centre suggests that many corporate directors are skeptical about the value of compensation consultants.
Given this complexity, it’s not surprising that shareholders — even sophisticated institutional shareholders — are so far pretty hesitant to do much second-guessing. Whether or not that’s a good thing is a separate issue.
The Ethics of Closing Up Shop
Filed under: accountability, corporate citizenship, decision-making, employees, ethics, management, values |
Comments (1) 
At what point are a company’s misdeeds sufficiently grave that the right thing to do is simply to shut the doors, permanently?
As was widely reported yesterday, the printing presses at News of the World (part of Rupert Murdoch’s News Corp.) will be grinding to a stop after this Sunday’s edition. The paper’s shameful history of phone-hacking and other scuzzy “journalistic” practices has finally caught up with it.
Under what conditions is such a move the right one? When is a company obligated to commit the corporate equivalent of the ancient Japanese tradition of seppuku (a.k.a. harakiri), or even just to sacrifice a corporate “limb”?
Some people might say, “when doing so best serves the interests of your shareholders.” Others might say, “when doing so best serves the interests of the full range of stakeholders.” Still others might say that it has nothing to do with anybody’s interests, but rather with what’s in the the interest of justice. “Let justice be done,” as the ancient legal saying goes, “though the heavens fall.” So it may be thought that the organization, as a whole, needs to pay a penalty for its wrongdoing.
But there are of course counter-arguments that could apply, even where the corporate wrong is significant. For one, in shutting down an entire corporation for the wrongdoing of a few, you are effectively punishing a large number of innocent employees. And in some cases, that might be justified. Sometimes there is collateral damage along the road to justice. But surely that damage is not irrelevant.
In other cases, shutting a company down may amount to a cynical attempt to insulate sister companies or a parent company from fallout. Or to protect a favoured employee. In such cases, shutting the company is likely blameworthy, rather than worthy of praise. In such cases, surely the honourable thing to do is not to perform seppuku, but rather to stand to face the music. Accept the scrutiny, pay the price, and then rebuild under new management.
But all such considerations presume that the initial crime is sufficiently grave to make such an extreme solution plausible in the first place. In the News of the World case, the offence is serious and multi-faceted. Individual rights were violated; law enforcement officials were bribed; and the journalistic profession was arguably sullied. And all of that was perpetrated in pursuit of an utterly trivial objective, namely the production of yet more trashy tabloid “news.” Compare: there were few serious calls for BP to be dismantled after the Deepwater Horizon spill, despite that spill’s very serious human and environmental impact. But then, unlike News of the World, BP actually produces a socially valuable product.
‘Doing the Right Thing:’ A Brief Guide to the Jargon
Filed under: corporate citizenship, CSR, definitions, ethics, sustainability |
Comments (5) Everyone agrees that business should “do what’s right,” even if they disagree over what the right thing is. One significant barrier to even talking about doing the right thing is vocabulary. The vocabulary applied to “doing the right thing” is messy and varied. Here’s a brief critical guide to the most common terminology:
- Business Ethics. This is the most general term, and the one that can be defined more or less uncontroversially. As a field of study, business ethics can be defined as the critical, structured examination of how people & institutions should behave in the world of commerce. There are two problems with the term. One is that the word is too often associated with scandal. I once had a business group ask me to come speak to its members, but could I please not use the word “ethics.” The second problem is that people sometimes (wrongly) associate the word “ethics” with a narrow range of questions about personal integrity, or about professional standards.
- Corporate Social Responsibility (CSR). This is an incredibly popular term, but generally poorly defined. Most definitions you’ll find don’t actually look like definitions. If you look around online, you’ll find that CSR is generally thought to have something to do with giving back to the community, and making a social contribution. But it’s too narrow a term to cover the full range of issues involved in doing the right thing in business. Not all businesses are corporations. Not all business obligations are social ones. And we’re interested not just in the responsibilities of business, but also permissions, duties, rights, entitlements, and so on.
- Sustainability. The word “sustainability” has roots in environmentalism, where it nicely picks out the issue of how we as a society can continue to make use of resources in a way that makes sure there continues to be enough, especially for enjoyment by future generations. But the term is badly abused in the world of business. Sometimes it just refers to the ability to sustain profits, which is pretty far from its original meaning. Other people try to pack too much into the word. I recently had a sustainability consultant tell me that the word “sustainability” no longer means, you know, sustainability…it just means “all the good stuff.” But lots of “good stuff” in business has nothing to do with sustaining anything. It takes tortured logic and wishful thinking to say that all matters of doing the right thing in business can simply be boiled down to sustainability.
- Corporate Citizenship. Citizenship is essentially a political notion, having to do with the relationship between the individual and the state. The term “corporate citizenship” is evocative. It reminds us that businesses aren’t free-floating; they exist in a social and political context, and that context brings obligations. But just as all of your obligations are not citizenship obligations, not all of a corporation’s obligations are obligations of corporate citizenship.
- Triple Bottom Line. Luckily, this one seems to be dying out. The Triple Bottom Line (3BL) is rooted in the very sane idea that business managers should manage not just the financial performance of their companies, but also their social and environmental performance. Unfortunately, the term implies something much bolder, namely that each of those areas of performance can be boiled down to a “bottom line.” And that’s simply not true. (Just try asking a company what their social “bottom line” was last year.) The result is that the term sounds tough-minded, but usually ends up being just the opposite. For more about the problems with 3BL, see here.
So choose your words wisely. We shouldn’t be scared off by the varied terminology. But we ought to recognize that each of these terms has its problems. Different constituencies will find different vocabularies attractive, and perhaps congenial to their interests. And also keep in mind that each of these terminologies is promoted by a different set of consultants and gurus, all eager to tell you that thinking in terms of their favourite vocabulary is the key.
Corporate Rights as Stand-in for Human Rights
Filed under: corporations, law, personhood, rights, shareholders, stakeholders |
Comments (5) The rights of corporations are back in the news this week, as the US Supreme Court decided that a California law restricting sale of violent video games to minors constituted an infringement of the constitutional right to free speech.
Far from being shocking, the notion that corporations should be protected by certain rights ought to be utterly commonplace. Here’s why.
Do you believe that human individuals should have a right against unreasonable search and seizure?
Do you believe that human individuals should have strong rights to free speech?
If so, then you must, logically, be in favour of according such rights to corporations. Why? Not because corporations are legally persons, and not because corporations are “like” human individuals in any particular way. We don’t necessarily need to appeal to any checklist of characteristics that a thing must have in order to be accorded rights.
The reason you must logically be in favour of granting such rights to corporations is that granting them to corporations is — in at least some cases — an essential part of protecting such rights for individual humans.
Consider the right against unreasonable search and seizure. Such a right (for individuals) is a central tenet of all civilized societies. It is crucial for our wellbeing that the government not be allowed simply to show up, search our homes, and take our stuff. What about a corporation’s “stuff”? It must be protected as well. Why? Not because corporations feel fear or have interests of their own to protect. No, corporations’ property must be protected because the interests of real, flesh-and-blood people depend on the protection of such property.
Roughly the same argument goes with regard to free speech. It is literally impossible to shut up a corporation without thereby shutting up human persons. If a human being has the right to speak freely, then she also has the right to speak freely about her commercial interests, including about the products and services and viewpoints of the entities (corporations, partnerships, unions, etc.) that advance those interests.
None of this suggests that the rights accorded to corporations must be exactly the same in kind and in character as those accorded to humans. Rights for corporations are largely instrumental, and need only be accorded where doing so protects important human interests. Nor must such rights be unlimited: there are limits on free speech for humans, and those limits generally should also apply to non-human persons such as corporations and unions and clubs and churches. What is essential, here, is to see that corporate rights are not the bogeyman. Just like human rights, they are a tool for helping us get along, and thrive, as a community.
Pepsi Under Pressure
Filed under: activism, brands, CEOs, competition, consumers, corporate citizenship, food, health, marketing |
Comments (3) It’s not easy selling carbonated sugar-water. Or rather, the selling part is all too easy. The hard part is steering a course between the conflicting desires of shareholders and activists. Shareholders want profits. That means selling more of high-profit-margin products like Pepsi and Doritos. Activists want companies to stop pushing unhealthy products like Pepsi and Doritos, and to focus on healthier — but less profitable — products.
See this story, by Mike Esterl and Valerie Bauerlein, for the WSJ: PepsiCo Wakes Up and Smells the Cola
…The snack-food and beverage giant is launching the first new advertising campaign for its flagship Pepsi-Cola in three years—offering one of the most visible signs PepsiCo is throwing new weight behind its biggest brand after it sank to No. 3 in U.S. soda sales last year, trailing not only Coke but Diet Coke….
When industry market share numbers came out in March, showing Pepsi-Cola slipped to No. 3, analysts quickly accused PepsiCo—and Chairman and Chief Executive Indra Nooyi—of taking their eyes off the company’s biggest brand….
There’s a lesson here for activists who think that reforming corporate behaviour is a simple matter of willpower, that companies can shift to healthier foods (or to less-violent video games) if only they had the guts to try it. Shifting your business practices in a way not endorsed by consumers is, well, a recipe for disaster.
Then again, maybe that’s a pretty decent outcome, from an activist’s point of view.
What’s the long-term prognosis? An ebb and flow of corporate strategy, in response to a range of pressures. Activists will win a few battles, as well as surely losing a few. Forcing companies to do what you want means forcing consumers to consume what you want. Because as everyone in business knows, while it’s simply not true that “the customer is always right,” it surely is true that the customer is always the customer.
Diversity on Corporate Boards: Board Challenge or Social Challenge?
Diversity of corporate directors is arguably the hardest challenge in the realm of corporate governance. It’s hard because what constitutes diversity in the relevant sense is controversial. It’s hard because it’s not always easy to find directors who both possess the right talents and experience and who come from a range of demographic groups. And it’s hard because, well, old habits (not to mention old biases and vested interests) die hard.
Financial Post Magazine recently ran this editorial by Pamela Jeffrey, president of the Canadian Board Diversity Council: A call to action
…the Canadian Board Diversity Council in partnership with KPMG published the first-ever baseline study of corporate board diversity. The results were disappointing: 15% of board seats are held by women; 5.3% by visible minorities; 2.9% by persons with disabilities; and 8% by Aboriginals including First Nations, Inuit and Métis. In spite of these results, the council does not support the introduction of quotas in Canada. We support a made-in-Canada approach: collaboration with FP500 directors, our growing group of member companies, governments, academic institutions, aspiring directors, individual shareholders and institutional investors to speed up the pace of change….
A couple of points to make here. First, It is interesting to note that, statistically, Aboriginals are actually OVERrepresented on Canadian boards (8% of directors, but only 3 or 4% of population). So it’s odd to include them in the “disappointing” results that Jeffrey cites. But I’ll return to those stats later.
Second, it is important not to confuse what is true of boards collectively with what is true of individual boards. It would be good if there were a lot more women on boards, for example. But from that it doesn’t immediately follow that there should be a lot more women on any particular board.
There are a couple possible reasons why an individual board should aim at including more women. One is the idea that diversity makes for better decision-making. There’s a fair bit of consensus on that point, though there’s disagreement on what kind of diversity matters most.
A second is the idea that having more women on your board will help to motivate and inspire women within your firm in various ways, and show them that you value them too.
A third is the idea that, as a society, we should give women a bigger role in corporate decision-making and so we need to do more to open doors that were previously stubbornly held shut. But in that regard, the question remains as to what obligation particular boards have to help achieve that social objective. A societal goal is not automatically a board obligation, especially given the special role-related responsibilities that boards have to the organizations they oversee. So the extent of such an obligation is a hard moral problem.
Now putting more women on the board might be thought of as part of a company’s “social” or “citizenship” obligations (as opposed to an obligation owed to the handful of women who would benefit directly from membership on that particular board). But even then, you have to consider the extent to which a given board’s actions can have an impact. Even if your board is 50% or even 90% women, that doesn’t fix the social problem.
But then, it also cuts the other way: the fact that Aboriginals are seemingly well-represented on Canadian corporate boards “in general” is no reason for any particular board to be complacent about that issue. There may well be more your board can do, and should do, in that regard.
The Business Ethics Blog 