Santa Clara University


Business Ethics in the News

A discussion of the week's top business ethics stories by Kirk O. Hanson, Executive Director of the Markkula Center for Applied Ethics and John Courtney Murray S.J. University Professor of Social Ethics

The following postings have been filtered by category Public Relations. clear filter
  •  OCULUS VR: Leaving Early Backers Out to Dry?

    Friday, Mar. 28, 2014
    Source: llh3
    Source: llh3

    In the wake of Facebook’s $2 billion buyout of virtual reality startup Oculus VR, a number of Oculus’ 9,522 early backers are up in arms. In an ongoing trend, Oculus took to crowd funding site Kickstarter to raise seed money for their company, and it was an outright success raising over $2.4 million. While the backers “invest” knowing they receive no ownership in the company (instead receiving early access to products or memorabilia), many of the backers feel that the Oculus pulled a “bait and switch” by taking the Facebook deal: “I might as well have handed my money right to Facebook and I feel a little sick.” Adding insult to injury, as recent as last month, Oculus’ founder assured backers that he had no intention of selling the company. Backers flocked to Oculus believing that the company was their best hope for an independent platform for virtual reality gaming, but now “it’s Facebook’s platform.” Did Oculus wrong their Kickstarter cofunders? Do companies owe anything to their early internet “backers?”

      Patrick: I sympathize with the disgruntled backers, but Oculus is in the clear here. For one, Oculus raised an additional $16 million from traditional sources. Second, consulting or “even keeping in the loop” 9,522 backers is the equivalent of opening up the company’s boardroom to the general public. The only thing Oculus owes its early backers is the items offered in exchange for the contribution: t-shirts, posters, and development kits. Beyond that, Oculus ought to treat the early backers as loyal enthusiasts. No more, no less.

    Cofunders of the Maker of Oculus Rift Denounce a Facebook Buyout (NY Times)

    Oculus Rift (Kickstarter)

    A Framework for Thinking Ethically (Markkula Center)


    NEXT STORY: Keurig Backs Clean Water Initiatives

  •  HERBALIFE: Selling Short and Trashing the Company

    Tuesday, Mar. 18, 2014
    Source: Wikipedia
    Source: Wikipedia

    Billionaire investor, William Ackman got his wish this month as the Federal Trade Commission has launched in investigation into allegations that Herbalife is a pyramid scheme. In December of 2012, Mr. Ackman began a high profile campaign against the direct seller of vitamins and health supplements, betting $1 billion that the company’s stock would fall. Since then, Mr. Ackman’s hedge fund Pershing Square has enlisted the help of PR firms to organize protests, conferences, and letter writing campaigns, in addition to converting a number of high ranking politicians to its cause — most notably, United States Senator Edward J. Markey. Mr. Ackman claims that Herbalife generates the majority of its profits from recruiting new distributors, as opposed to sales of goods to consumers. Herbalife, which reached a record $4.8 billion in sales last year, has aggressively denied the claims, even launching a massive campaign of its own. The case raises the question whether a short seller can use political tactics and advocacy for “victims” to further his own financial position.

      Kirk: I have no doubt that many others will copy Ackman’s strategy, but there is something distasteful about appearing to advocate for the public interest while actually only looking out for one’s self-interest. Regulators and lawmakers will have to watch that they don’t find themselves in a conflict of interest. Senator Markey should find it uncomfortable to be in partnership with Ackman.

      Patrick: There are definitely some concerns here — market manipulation, political influence for sale, and the like — but what if Herbalife is actually a pyramid scheme? Yes, Ackman stands to gain from their potential downfall, but if he’s right it’s an instance of the profit mechanism in the financial markets bringing about greater transparency and maybe even justice. The great fear is that, as Kirk mentions, other investors launch smear campaigns against perfectly legitimate businesses in hope of cashing in on their investments.

    After Big Bet, Hedge Fund Pulls the Levers of Power (NY Times)

    A Framework for Thinking Ethically (Markkula Center)


    NEXT STORY: Chipotle Steps Forward on Climate Change

  •  FROM THE COURTROOM TO THE CLASSROOM: MPAA Looks to Send Message Through School Curriculum

    Monday, Nov. 11, 2013

    In the most recent development in the longstanding debate over the role of corporations in the production of school curriculum, the Center for Copyright Information is creating a school curriculum to teach elementary age students the evils of piracy and the importance of protecting copyrights. Backed by the Motion Picture Assn. of America, the curriculum named “Be the Creator,” is still under revision, but is aimed at students in kindergarten through 6th grade. The project has faced heavy criticism, as many see it as another tool to push Hollywood’s biased agenda. Others have raised the concern that this curriculum will take away from valuable class time, in an age where public schools are struggling to effectively teach the basics. Then again, copyrights and patents are an important part of our economic system, and organizations like the MPAA are entitled to promote their interests. The question remains, should the classroom be off-limits to this type of discourse, or is the MPAA in the clear?

      Patrick: An education, among other things, should prepare an individual to be a citizen capable of contributing to the democratic process. By and large, this means teaching them how to think, not what to think. “Be Creative” is not about teaching creativity, it’s about the MPAA trying to stop the next wave of would be copyright violators. If you want to teach kids the importance of creativity, you don’t start with copyrights and fair use doctrine. How about funding creative writing programs, on-campus theatre productions, or even filmmaking courses?

      Kirk: The debate over the role of corporations in the production of curricular materials is even more important today, where individual teachers can pick and choose the material they incorporate in the classroom from online resources. Given this, it is incredibly easy to incorporate material from advocacy groups, despite the assumption that school materials are insulated from these pressures. While corporations are entitled, and even encouraged, to contribute to the “basics” such as math, science, and technology, but “Be the Creator” crosses the line. Schools are going to need to introduce new ways to monitor the curricular materials that make their way into the classroom.

    MPAA backs anti-piracy curriculum for elementary school students (LA Times)

    "Be Creative" Curriculum: Scope and Sequence (Common Sense Media)

    A Framework for Thinking Ethically (Markkula Center for Applied Ethics)



  •  SJSU: Corporate Transparency in High Profile Terminations

    Monday, Jun. 24, 2013

    After ten months since the initial accusation of sexual battery, San Jose State University (SJSU) has ended its relationship with lecturer Jeffrey Mathis. Last August, Mathis allegedly sexually assaulted a female student during a private meeting set up to discuss the student’s grade. SJSU took little action over the first nine months and refused to discuss the matter publicly; although, a university spokeswomen confirmed that there was no formal disciplinary hearing or punishment for the accusations. In response to heightened public scrutiny, spurred by a NBC Bay Area report and a student-led petition, the university has informed students “Mr. Mathis is no longer employed by SJSU.” While many are pleased with Mathis’ departure, there is growing concern over the lack of transparency in SJSU’s decision, including whether Mathis left voluntarily. In cases that raise important questions about boss-subordinate or professor-student relations, are employees or students entitled to know how the issue was resolved? Is the public entitled to an explanation of Mathis’ departure?

      Kirk: Companies and universities often resolve situations informally and with no formal admission of guilt. That can be the right solution, but it can also be a cover for letting the perpetrator off easily, and can create distrust in management. It’s a close call, but I think managers have to have the ability to resolve cases quietly and informally. Remember, that in 1973, the Attorney General let Spiro T. Agnew resign as U.S. Vice President rather than prosecute him, in order that they could get him out of the line of presidential succession immediately.

      Patrick: The details of this incident demand more transparency than SJSU has offered. For one, SJSU is a public institution that should be accountable not only to its students, but also the taxpayers that support it. Also, there appears to be grounds for at least investigation into criminal charges, making transparency even more critical. Incidents such as this are opportunities for institutions to “put their money where their mouth is” when it comes to mission statements and compliance agreements, and students/employees are entitled to know that they did right by the organization’s values.

    No Discipline for Faculty Member Who Admitted Crossing the Line

    Faculty Member Accused of Sexual Assault No Longer at San Jose State

    A Framework for Thinking Ethically



  •  P&G: The Rise of the Activist Shareholder

    Friday, May. 24, 2013

    In an unexpected turn of events, Proctor and Gamble CEO, Robert A. McDonald, announced his resignation Thursday. Proctor and Gamble has faced a great deal of scrutiny from Pershing Square Capital’s hedge fund manager William A. Ackman, who faults Mr. McDonald for not addressing the company’s widespread inefficiency and excessive marketing costs. In a meeting in September, Mr. Ackman urged the board to replace Mr. McDonald, and again in a presentation this month where he argued that Mr. McDonald has been distracted by external commitments, among them serving on the boards of other companies. Mr. Ackman’s open battle versus Proctor and Gamble and its board leadership is hardly an isolated incident. Activist investors are becoming more prominent and outspoken: ranging from Mr. Einhorn calling for dividends at Apple; Mr. Loeb for splitting up Sony; to Mr. Ackman’s role in J.C. Penney’s failed transition. Activist investors are on the rise, and they are using tactics which some argue do damage to the company. Should the investing public welcome the rise of the activist investor? Or seek to limit their ability to make trouble?

      Kirk: The rise of hedge funds and other accumulations of capital has allowed some large investors to manipulate short-term stock prices to serve their own self-interest while damaging the well being of long-term investors. They act more like day traders than those investors in it for the long haul. Their objective is often just to raise the stock price long enough for them to get out. The rise of social media and other new media help their game. Management and long term investors must stiffer their backbones to resist such tactics.

      Patrick: I share Kirk’s concerns, but I think there’s an upside for everyday investors here. The current framework for communication between shareholders is fragmented and ineffective, making coordinated action difficult: probably intentionally. Prominent investors have the power to “round up the troops” and work toward collective shareholder goals. In response, companies will have to facilitate better communication between investors in order to check the power of individual activist investors. That way, companies will be insulated from rogue investors and shareholders get their voice heard.

    Abruptly, P.&G. Chief Ends Career of 33 Years

    A Framework for Thinking Ethically



  •  NOVARTIS: Federal Prosecutors Rein in Kickbacks to Doctors

    Tuesday, Apr. 30, 2013

    Novartis Pharmaceuticals is once again under scrutiny from federal prosecutors over its educational speaking programs, which prosecutors allege are nothing more than kickbacks to doctors for prescribing their products. Prosecutors allege that Novartis’ U.S. business unit essentially bribed doctors in the form of lavish dinners, fishing trips, and speaking fees between $750 and $1500, all under the guise of educational programs. It has been a long-standing practice for drug companies to pay doctors to educate other doctors about new prescriptions, but regulators have struggled to define when payments to doctors for educational purposes become bribery. Are payments by pharmaceutical firms to doctors for educational purposes legitimate?

      Kirk: I am happy this lawsuit will finally disrupt what has been “business as usual.” Pharmaceutical and medical device firms have long “bribed” doctors to prescribe the firm’s products. Novartis’ payments, if accurately described, clearly cross the line into bribery. The cost to society is huge as health care costs escalate to cover the payments. Coming disclosures of payments under health care reform will dampen the payments. This lawsuit should help too.

      Patrick: It is clear that Novartis took substantial liberties with its “educational programs.” At the same time, Novartis’ claims that such practices are “accepted and customary practice in the industry,” do bear some weight despite not absolving them of wrongdoing. The source of the controversy is the ambiguity between money for educational purposes and bribery for prescribing a firm’s drugs. Let’s face it; companies will continue to use the grey area to their advantage until regulators set clear standards.

    U.S. Sues Novartis Again, Accusing It of Kickbacks

    A Framework for Thinking Ethically



  •  APPLE: Using Public Apologies as a Response to Political Pressure

    Wednesday, Apr. 3, 2013

    Monday, Apple’s CEO Tim Cook issued an apology in response to growing outrage over its warranty policies in China; the warranty for the IPhone (1 year) does not meet the two-year requirement set by Chinese law. The criticism began on March 15 when China’s biggest state-run television network, China Central Television, aired an investigative report on Apple’s mistreatment of Chinese customers. Among analysts there is concern that the report is part of a larger power play against American technology giants by the Chinese government. Assuming the campaign orchestrated against Apple is trumped up, is it acceptable for Apple to act like it has done something wrong and apologize, or even obligatory in order to protect shareholders?

      Patrick: Acquiescing to political manipulation is a sure-fire way to ensure this problem continues. The stakes are high for Apple, China is its second largest market, so choosing its battles carefully is critical but does not mean inaction is the appropriate response. Facing a political force, it becomes clear there is a need for Apple to seek out political support, in the form of the US federal government to protect Apple and other American firms from unfair scrutiny abroad.

      Kirk: I think we are uncomfortable mixing a political motive with what is typically a moral act—apologizing. Nonetheless, to protect its shareholders, arguably out of ethical responsibility, it must play the political game. The world is a messy place and you are not obliged in every case to challenge power. You have an ethical obligation to pick your battles to reduce the potential damage to your stakeholders. This is not a free pass to collaborate with evildoers, but a plea to give some consideration to the costs of resistance.

    Pressured by China, Apple Apologizes for Warranty Policies

    A Framework for Thinking Ethically