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 Startup Ethics. clear filter
  •  STARTUP ETHICS: Is the New Sharing Economy Unfair for Workers?

    Wednesday, Aug. 27, 2014

    Source: Alfredo Mendez

    The “sharing economy,” where individuals offer their time, skills, or assets to their peers, is in full swing. Investors have bought into the sharing economy, driven in large part by the companies’ ability to avoid the typical payroll costs by using independent contractors to serve as their chauffeurs, personal assistants, and handymen. The result? Lower prices for customers and better margins for investors.

    Proponents of the sharing economy see an upside for the workers too. In exchange for the stability of a regular job, workers get the freedom to control their hours and the tasks they take on. Also, some companies have begun offering their workers access to discounted healthcare and other services.

    But many think that those gains are at the expense of the workers, even fearing the rise of a new indentured servitude. While some are drawn to the flexibility of the job, many are forced into this “gig economy” due to lack of other job opportunities. While possible, earning a livable wage often equates to being “always on call” to take on new gigs, without the security and benefits of a traditional job.

    Are the workers of the sharing economy being treated unfairly? If so, what needs to change?

      Joe: In question are the implications of participating in an unregulated industry. The rapid evolution of technology and the “new normal” supply of unemployed and underemployed are the “sharing economy” enablers, outstripping the pace of regulations so far. Set aside the “collaborative sharing” of “stuff” (tools, cars, apartments, etc.); and only focusing on the providing of services; ignoring issues of skirting employment law (1099 v. W-2) by “connectors” and the consumers of services.

    Set aside the issues of Business and Self Employment Tax laws for the providers of services. Then the question becomes what are the benefits, abuses, and the ethical obligations for both the provider and consumer?

    The “sharing economy” provides the unemployed easy access to the dignity of work. To the consumer of services it delivers speed and competition.

    What remains for both the consumer and the provider of services are the reciprocal ethical issues of character, respect, and fairness. The possibilities of abuse are many and go both ways. The possibilities for good are there as well.

    The “sharing economy” depends on the level of “trust” in our society. On the strength of that foundation it will either prosper or collapse. Will a few well publicized incidents of abuse scuttle trust; will an uptick in employment remove the fuel that powers it; or will regulations come into play crushing the spirit of the enterprise? As with most innovations it will stabilize on some plateau of normality. What exactly that will look like will be interesting to see.

      Marty: As a proponent of the new era of the entrepreneur, I’m a big fan of the so-called sharing economy. It makes all of these people entrepreneurs – meaning they are all competing for business, and succeeding according to their own creativity, skills, and effort. What could be more fair?

    Of course, they face all the potential ethical issues of any business, but I don’t see any ethical issue with the basic premise. I have always found it interesting that so many people who have traditional jobs yearn for the freedom of choosing their own hours, working from home, making their own decisions, and the other positives of the entrepreneur lifestyle. Yet so few want the challenges – no guaranteed workload, salary, benefits, vacations, and the costs of marketing, skill building, and competition. You can’t have it both ways.

      Elizabeth: I see the new sharing economy as an exciting time of unlimited opportunities. In addition to the potential benefits and concerns about the “sharing economy”, I am seeing an increased demand that contractors and other part-time individuals assign or otherwise release their intellectual property rights in inventions, creations, and even ideas to the contractor, in exchange for the contract and employment.

    While the standard invention assignment clause, which ideally is included in any tech company employment agreement, has been in use for decades, we are seeing a more aggressive approach being used with independent contractors.

    So, with an independent contractor or part-time employee, is it exploitive to require that individual to assign all inventions, works of authorship, and ideas to the hiring party in all instances? What about the hiring party – what happens to the software code written by the student intern, that is incorporated into the launched website? What would happen if that student owned the code? Is it ok for the student to then ask for an ongoing royalty payment for that work?

    As with any legal issue, as well as ethical issue, there are multiple sides to the same story, competing legitimate interests, and a requirement of thoughtful decision-making when considering jumping into the “sharing economy.”

    In the Sharing Economy, Workers Find Both Freedom and Uncertainty (NY Times)

    A Framework for Thinking Ethically (Markkula Center)


    NEXT STORY: Who should pay for maternity leave?

  •  STARTUP ETHICS: When Do Startups Have to Grow Up and Embrace Diversity?

    Tuesday, Jul. 8, 2014

    Source: Wikimedia

    For a long time, Silicon Valley’s Internet titans have refused to publicly report on the diversity of their workforce. Earlier this year, Google reversed the trend by releasing their employment diversity statistics. Yahoo, Facebook, and others soon followed. While there has long been a perception of a Silicon Valley diversity problem, the stats are now here to show it. Women only comprise 30% of Google’s total staff, and only 17% in the company’s tech staff. Over 60% of its employees are Caucasian, 30% are Asian, and only 5% are Black or Hispanic. Silicon Valley firms often point to the lack of diversity in the job applicant pool to defend their statistics, but critics also point to the prevalent “sexist culture” in startups that drives women away. This news raises two critical questions. Do startups get a “pass” on creating diversity in their rapidly growing staffs? If so, for how long? Second, at what point do startups owe the public transparency about their worker diversity?

      Joe: Staffing statistics are an outcome of supply. Silicon Valley’s move into primary and secondary education, to excite and motivate students about computer science careers and entering into supporting curriculums, is the same path other technology industries have taken decades ago. In spite of the effort, the U.S. supply demographics for technology industries still does not match the general population and probably never will. Regardless, the whole diversity debate is upside down. Diversity is not an end but a means. It’s that simple. Companies who have broken that code leverage it and thrive. Startups succeed by putting together people who have the core intelligence, the passion, and the ability to communicate. A startup is in a street fight. Sexism, diversity, etc. are non issues – survival is. Each member depends on each other and are blind to race, sex, national origin, etc. . “Corporate think” is the most strategic task of leadership. Founders may not always get that. “Thinking” can easily get corrupted in the process of staffing during rapid expansion. Ne'er′-do-well management types can creep in and have a corrosive effect on all aspects of the culture before a founder who isn’t paying attention recognizes the impact. As far as public transparency – really? Companies hire “locally”. Would a software company founded and operating in India get a diversity 5-star rating versus a company founded and operating in South Bay?

      Marty: I believe that a diverse workforce is a worthy aspiration, and certainly implementing cultural diversity can give rise to ethical issues. Yet I don’t believe that any business, especially private ones (startups), have any ethical obligation to embrace diversity. Everyone and every company has societal obligations, but there are many ways to help society, like feeding the hungry, or paying a living wage, which don’t involve diversity. So accusing a company of an ethical violation, just because they don’t embrace diversity, doesn’t make any sense. You should be looking at the bigger picture of what they do in total to benefit society. For companies that do embrace diversity, there are many potential ethical issues. For example, in some cultures, government agents expect businesses to provide incentive payments to expedite approval of requests such as permit and variance applications. In others, these are considered bribes, which violate ethical business practices, as well as the laws. Does that mean a company should never hire employees from any of these cultures? There are many other religious and gender practices which can cause ethical conflicts.

      Elizabeth: Discrimination goes hand-in-hand with such a diversity discussion. Title VII of the Civil Rights Act applies to employers with 15 or more employees. This Act prohibits discrimination in hiring and firing decisions, as well as decisions regarding promotion or demotion, compensation, and similar employment matters. Technology companies, per se, are not exempt from a Title VII violation (which is policed by the Equal Employment Opportunity Commission, or EEOC). Google, Yahoo!, and other technology companies are just as responsible for its discriminatory actions and its hostile work environments as any other company with more than 15 employees. How is this an ethical issue for small start-up companies with fewer than 15 employees? As Joe noted, excluding talent does not benefit anyone. Start-up companies should find the best talent suited for its needs as possible. This can best occur when individuals are not intimidated, discouraged, or prevented from applying for a job or from performing in a job. A society functions best when the individual members cooperate and augment resources, not quash them. Thus, if ethics is put into a societal context, then start-up companies, like any other company, have an ethical obligation to create a micro- and macro-environment that realizes and optimizes diversity. It not only is legally mandatory, but it also makes good business sense and is part of the larger corporate social responsibility of every business entity.

    Getting to work on diversity at Google (Google)

    Google statistics show Silicon Valley has a diversity problem (Washington Post)

    Framework for Ethical Thinking (Markkula Center)


    NEXT POST: Betting on the Death of Employees

  •  STARTUP ETHICS: General Solicitation and Startup Fundraising

    Thursday, May. 8, 2014
    Source: Wikipedia

    The regulations overseeing startup fundraising got a boost late last year with startups now allowed to publicly advertise they are seeking investments, but its effect is still not clear. General solicitation, the act of announcing and inviting the general public to participate in an investment round, was previously banned by the SEC in order to protect investors and to entice companies to go public via IPO. With the ban in place, startups had to seek out investments through private conversations and going direct to investors, severely limiting the pool of money they could draw from. With the ban on general solicitation removed, startups can use newsletters, social media, and public speaking to announce their investment rounds to the general public. Is the investor now at risk?

    Startups can only receive investments from “accredited investors” and will now have to ensure that their investors are in fact accredited; that is, either having an annual income of $200K or a net worth of over $1 million. Does a system that restricts investments to accredited investors do enough to protect against snake oil salesmen? Some have argued the burdensome system for verifying that investors are accredited will inevitably lead to a new set of problems: a compliance nightmare, resulting in both fines and an impediment to innovation. Will it?

      Elizabeth Powers: Trade secret law is the only law that protect ideas – patents protect inventions (more than an idea); copyrights protect unique expressions of the idea; trademarks are marketing tools. Trade secrets must remain secret, which inherently challenges an entrepreneur who needs to disclose her idea to a potential investor. Often, potential investors do not want to sign a Non-Disclosure Agreement (NDA), that would restrict the investor’s right to copy or use the disclosed information – what if the investor had already invested in another company with the same idea? Or chooses to invest in a different company that presented the same idea? Investors simply don’t want that risk.

    So, as with any potential investor pitch, the entrepreneur seeking investment in a new business idea, either from a commercial bank, an angel investor, a venture capital fund, or a family member, must carefully consider the information disclosed to the investor. The entrepreneur must carefully remove any unnecessary information from the publication or disclosure (e.g., the actual algorithm, how the website will function, etc.)

    Easier said than done. For example, if the idea is for a website (or a mobile app) that allows users to post and organize photos of garden designs, the idea itself is the trade secret. Once the entrepreneur tells someone that idea, without an NDA, there is no clear restriction preventing that person from creating the same website/mobile app, because there is no “secret” algorithm or functionality associated with implementing this particular idea. When solicitations for investment are published, there is no NDA associated with the publication – it makes any idea or information essentially available to the public. With this new freedom to advertise, the entrepreneur must carefully consider what MUST be published to convey enough information to entice investors, and what does NOT need to be published. I see an opportunity for a creative solution here.

      Joe Schmid: Opening a new avenue for raising money doesn’t mean going down that road is right for every situation. The JOBS Act did not eliminate the struggle between disclosure and protection of ideas and intellectual property as Elizabeth warns.

    “Misrepresentation” and “concealment” are watchwords for both the issuer and the investor coming to terms with the definition of “material facts”. The JOBS Act did not strip away compliance with antifraud prohibitions; and it didn’t lessen the requirement of investor diligence.

    Startups are high risk. The classification of accredited investors by wealth and income uses a presumption of investor sophistication as well as a notion of limiting exposure. The verification process is to protect the issuers not the investors. Non-accredited investors tend to be more problematic anyway.

    The best advice is to thoroughly understand where the venture is at any point in time and carefully select how to manage increasing cash demands. Because its ‘new’ or you can leverage ‘social media’ doesn’t mean it’s a fit for the situation at hand. Maxing credit cards and Uncle Bernie may still be the better option.

      Martin Zwilling: It remains to be seen whether the right to general solicitation by entrepreneurs brings more value to them than the cost of validating that every potential investor is accredited. I believe the entrepreneur is more at risk than the investor. Compliance is definitely a new burden, and could become a nightmare.

    Investors have long been required to "certify through signature" that their net worth or income qualifies them to become accredited, so their burden and risk haven't changed yet. Some investors fear that this new general solicitation rule will lead to bank statement or tax return disclosures, which will be a bigger burden, and will likely cause many qualified investors to back out of the pool. Angel groups fear the loss of many members for the same reason. Here again, the entrepreneur will be the one hurt, having less access to money.

    We are all still waiting for how general solicitation to non-accredited investors (equity crowd funding) will work. Overall, it's still too early to jump to conclusions

     Eliminating the Prohibition Against General Solicitation (SEC)

    A Framework for Ethical Thinking (Markkula Center) 


    NEXT STORY: Meet Our Startup Ethics Bloggers!

  •  STARTUP ETHICS: Meet Our Startup Ethics Bloggers!

    Wednesday, May. 7, 2014

    The Business Ethics in the News blog is introducing a special series on startup ethics. Each month we will take a look at a new and pressing issue in the startup community, and will offer ethical analysis on the topic. We're very fortunate to have assembled a team of experts in the field to lead the conversation. Meet them below!

      Elizabeth Powers – Attorney at Silicon Valley Law Group specializing in trademark prosecution, licensing, and technology transactions, in addition to being a Professor of Practice at Santa Clara University's Law and Business Schools. More on Elizabeth here

      Joe Schmid – Managing Principle of Oak Leaf Consulting with over 30 years experience in change leadership, lean operations, and developing high performance organizations. Oak Leaf Consulting Website

      Marty Zwilling – CEO & Founder of Startup Professionals, Inc; Blogger at Startup Professional Musings; and author of several startup books. Startup Professionals Website


    NEXT STORY: Should Executives be on Social Media?