Business Ethics in the News
A discussion on the week's top business ethics stories by Professor Kirk O. Hanson, Executive Director of the Markkula Center for Applied Ethics, and Patrick Coutermarsh, Fellow in Applied Ethics and recent graduate of Santa Clara University.
The following postings have been filtered by category Executive Accountability
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Monday, Nov. 18, 2013
JPMorgan Chase is under the gun again, as investigators are looking into the bank’s dealings in China. Between 2006 and 2008, JPMorgan partnered with Fullmark Consultants, an obscure consulting firm in Hong Kong, “to promote activities and standing” of the bank’s operations in China. The problem? Fullmark’s executive, operating under the alias, Lily Chang, is actually Wen Ruchun; the only daughter of Wen Jiabao, who at the time was China’s prime minister in charge of overseeing its economy and financial institutions. Throughout the partnership, JPMorgan secured a contract as an underwriter for China Railway Group’s public offering, a company overseen by Ms. Wen’s father, as well as held a stake in the private equity firm, New Horizon Capital, which was founded by Ms. Wen’s brother. While JPMorgan has not been accused of any wrongdoing, the bank has a history of pushing the boundaries of the Foreign Corrupt Policies Act, which prevents companies from offering anything of value to foreign officials to gain an improper advantage in retaining business. Is hiring well-connected people in China just another “cost of doing business” overseas, or is this an ethical failing on the part of JPMorgan’s top brass?
Patrick: Maybe it’s just me, but the line between bribery and strategic partnerships seems to have all but disappeared. Did JPMorgan enter into a contract with Ms. Wen to utilize her familial connections? It sure seems that way, but isn't that what we all do? If you've recently undertaken a job hunt, you know full well the premium that LinkedIn puts on “connections,” and who wouldn’t ask their well-connected relative for an introduction? Nepotism is a real danger here, but we must also acknowledge that if business is about building relationships, we have to expect firms to act accordingly.
Kirk: It’s no surprise multinational firms are hiring the sons and daughters of influential officials, not just in China, but in any area of operation for the company. Particularly in China, business is largely predicated on the development of relationships, often involving the mutual giving of favors. As in this case, the danger is when firms take shortcuts in developing these relationships. The cultivation of authentic relationships is the solution here. It’s not easy, and it certainly takes time, but it’s the line that firms must walk when conducting business overseas.
JPMorgan's Fruitful Ties to a Member of China's Elite (NY Times)
A Framework for Thinking Ethically (Markkula Center for Applied Ethics)
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Friday, Nov. 8, 2013
“Chief executives should be challenged for explanations and even have their pay cut if they fail to appoint women to senior positions,” said the Business Council of Australia in a letter this week to its members. The BCA, the representative body of the chief executives of Australia’s 100 largest companies, is urging its members to adopt a “checklist of reforms” aimed at addressing the underrepresentation of women in senior positions, and to consider docking CEO pay if they do not implement the reforms. In Australia, women have been outpacing men in earning college degrees since 1985 and make up 46% of the workforce, but hold only 16% of board positions and 3.5% of chief executive roles. The BCA aims to double the number of women in senior positions in the next 10 years, and claims this isn’t just an equality issue, but also an economic issue: “We risk not getting the best talent for the job.” Even if we take for granted that equal opportunity for women in senior positions is a laudable goal, is tying executive compensation to the promotion of women ethically problematic? (Here in Silicon Valley, the Silicon Valley Business Journal reports that only 4% of executive positions and 9% of board positions in Silicon Valley are held by women.)
Kirk: Unfortunately, progress in cracking the glass ceiling, in Australia or in Silicon Valley, has been glacial without an effective "stick" to prod it along - be it regulation or board-imposed pay cuts. The Australian business council needs the cooperation of corporate boards - but of course there are so few women on those boards the issue may be ignored. Reluctantly, I have to conclude that only government regulation and requirements, in some form, can bring about the needed change. In the interim, certainly corporate boards should set specific goals for their CEOs - and for themselves. The CEOs pay should be cut if he or she does not make progress; the boards themselves should admit they are failing if they don't make progress.
Patrick: People respond to incentives. Whether they are social, ethical, or in this case, economic, incentives bring about change. We’d like to think that this is a problem that figures itself out over time, but it’s clear that there are biases in play that prevent this from happening. Tying executive pay to fair hiring practices will ensure that this problem is addressed, despite making it an issue of compliance instead of conscience. Hopefully measures like this are only needed for a period of time, like a ladder you throw away after you have climbed up it.
Business Council: CEOs accountable for failure to promote women (The Guardian)
Increasing the Number of Women in Senior Executive Positions (BCA)
A Framework for Thinking Ethically (Markkula Center for Applied Ethics)
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Thursday, Mar. 21, 2013
Friday, the Permanent Subcommittee on Investigations held hearings on JPMorgan's $6.2 billion trading debacle from earlier this year. According to the 307-page Senate report released Thursday, traders in JPMorgan's chief investment office hid underperforming derivatives; routinely exceeded bank mandated risk limits; and manipulated the valuation of unprofitable investments to minimize losses. In addition, the report found that JPMorgan used intimidation and deception to mislead regulators. Executives, including the person who managed the London operation, passed the buck down to lower level employees, claiming that attempts to reduce risky investments were undermined by individual traders undervaluing existing positions to minimize losses. Regulators at the Office of the Controller of the Currency were also criticized for not identifying the losses sooner, as well as for not being aware of JPMorgan's $156 billion high-risk derivatives portfolio. How should blame be allocated for the mishap? Do senior executives get a free pass for actions of subordinates hidden from them? Or does the buck stop at the top? Should the boss always bear the ultimate blame?
Kirk: We can't let senior executives off the hook when things go awry in their operations. It just leads to convoluted games of deniability. Besides, senior executives should know about anything important in their operations. One of their key responsibilities is to create effective and transparent information systems to ensure things cannot be hidden. Heads should always roll at the top.
Patrick: I'd have to agree: JPMorgan's management has failed to maintain a company culture that values accountability, and executives should bear the blame. While management should be held accountable, let's not forget that the "London Whale" incident also represents a failure on the part of regulators. Banks are certainly not justified in bullying regulators, but regulators don't get a free pass just because they face resistance.
Withering Questions at Senate Heaing on JPMorgan Loss
A Framework for Thinking Ethically
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Monday, Feb. 25, 2013
The current buyout proposal for Dell, headed by company founder Michael Dell and Silver Lake Partners, is being criticized by many for undervaluing the company. At $13.65, the offer represents a 37% premium on the company's average stock price over the last three months, but little has been said about the relation between the offer price and future prospects: Dell refused to make projections at the latest conference call citing uncertainty due to the pending deal. Southeastern Asset Management, among the largest stakeholders in Dell, claims that based on publicly available information the company should be valued at $23.72 a share. Outside investor organizations, such as The Shareholder Forum, are concerned that shareholders are at risk due to lack of access to company information. The Forum has proposed that Dell be subjected to an independent, peer reviewed evaluation of its enterprise value to ensure fairness for all parties. Alex Mandl, chairman of the special committee tasked with ensuring all shareholders are treated fairly throughout the buyout process, has stated that he will not support an independent review of the company. Can shareholders get a fair deal without a third party review?
Patrick: While Dell isn't obligated to open its doors to a third party review, it's in the wrong for not grounding the offer price in future projections. Uncertainty over the buyout deal is no excuse for not making routine projections expected of any publicly traded company. The management team is well aware of future products, emerging markets, and strategies going forward, and shareholders are entitled to this information as well. To alleviate this conflict of interest, shareholders should demand more transparency from management, and should push to have a go-shop clause added: giving a fixed time period for other potential buyers to best management's offer.
Kirk: Buyouts led by current management are very problematic, and while transparency is a step in the right direction, a third party review is a necessity. The buyout team has an incentive to get the lowest price possible, but it's at the expense of the shareholders they are also supposed to represent. Management is doing it because they think the company is worth more than the current stock price. They ought to be making the rationale behind this case publicly to ensure a fair stock valuation. The temptation to withhold some information or to argue this case without enthusiasm is much too great. Only a third party evaluation with complete access to company data can protect shareholders.
Dell's Intentions Get a Hard Look
A Framework for Thinking Ethically
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