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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.

  •  Top Business Ethics Stories of 2013

    Monday, Jan. 27, 2014

    Current events never leave us with a shortage of new business ethics issues to wrestle with; and 2013 was no exception. Here are the 10 business ethics stories of 2013 that you need to know. 

     

    Click the link to view the interactive version on Scribd.

     

    1. NSA’s Surveillance Program (PRISM)

    Without a doubt, the revelations of the NSA’s widespread surveillance network made the biggest waves this year. Among the troubling details that emerged was the participation of Google, Apple, and Facebook in the program.

    2. Snowden 

    Certainly impossible to separate from the PRISM program, but in addition to the privacy issues raised, Snowden’s actions also forced a reconsideration of what an organizational whistleblower is, and what role conscience plays in such matters.

    3. Bangladesh Factory Collapse

    The collapse of Rana Plaza, a multistory textile factory, in April last year is among the worst industrial disasters ever. In the fallout of the collapse, Western retailers faced a great deal of public pressure, and were forced to reevaluate their labor policies in Bangladesh.

    4. The London Whale

    The London Whale trading debacle of 2012 continued to play out in 2013, resulting in over $6 billion in loses and a slew of regulatory fines. Senate reports revealed widespread instances of JPMorgan traders hiding underperforming derivatives, exceeding risk limits, and the outright manipulation of investments.

    5. Rise of the Activist Shareholder

    Among the buzzwords thrown around this year, “activist shareholder” got around more than most. Procter and Gamble, Apple, Sony, and a handful of others found themselves in the line of fire. In their wake, a number of questions regarding fairness, fiduciary responsibility, and investor relations have emerged. 

    6. International Tax Loopholes

    Certainly not a new issue, but with governments at all levels strapped for cash, the issue of tax avoidance is as important as ever. As always, firms have gotten amazingly efficient at exploiting loopholes, particularly those that emerge in the international arena. The question remains, are firms obligated to adhere to the “letter” or “spirit” of tax law?

    7. Cyber Attacks

    Despite being pushed out of the public consciousness by the NSA revelations, the number of cyber attacks aimed at U.S. firms reached troubling levels. Among the fallout of these attacks is the issue of how companies ought to respond to a security breached. Many chose to sweep it under the rug, but there has been a growing trend toward transparency.

    8. Twitter IPO and Gender Diversity

    In light of Facebook’s IPO, Twitter seemed to do everything right; that is, everything except having a gender balanced leadership team. At the time of filing, Twitter had no women amongst its board, major investors, or its executives (save for Vijaya Gadde who was appointed 5 weeks before filing). The story grabbed headlines and brought the issue of female representation in startup and tech companies to the front page.

    9. Culture Clash in Business Dealings in China

    GlaxoSmithKline and JPMorgan raised eyebrows this year for its business practices in China (the former even facing criminal action). The Foreign Corrupt Policies Act forbids companies “from offering anything of value to foreign officials to gain improper advantages.” On the flip side, gift giving is a major part of business relationships in that part of the world, leaving U.S. firms with a thin line to walk.

    10. ObamaCare and Corporate Conscience 

    ObamaCare is the most hotly contested piece of legislation in recent history. Among the many resulting storylines is the string of court cases in which small business owners claim that ObamaCare infringes on their “corporation’s religious conscience.” The issue still remains and is proving to be the next saga in the corporate personhood debate.

     

    NEXT STORY: ARE APP DEVELOPERS ON THE HOOK?

  •  GOOGLE: Are App Developers On the Hook?

    Thursday, Jan. 23, 2014
    Monday, Google removed two Chrome browser extensions (think “apps added to your web browser”) from its store after they were found to be installing unwanted software and redirecting users to affiliate links. The two extensions, “Tweet this Page” and “Send to Feedly,” began as legitimate services, created by individual developers and offered free of charge. In both cases, the original developer sold the extension to a company who then took advantage of existing subscribers to disseminate ads. Send to Feedly’s founder, Amit Agarwal, sold his extension used by 30,000 to an unidentified party. “It was a 4-figure offer for something that had taken an hour to create and I agreed to the deal, says Amit. He has since published a blog post apologizing to existing users, and stated that taking the deal was a bad decision. While many corporations publish apps and extensions, a great deal of these services are made by nonbusiness entities and are offered free of charge. Do independent developers have the same obligations to their users as corporations? Is Amit Agarwal correct in calling his decision a bad one?
     

      Kirk: Anytime you have 30,000 people using a product, you have an obligation to not sell out to someone who might corrupt it or change it in ways that exploit users. Agarwal and others like him clearly want to cash out, and rightfully so. But the glaring problem here is that Agarwal did not identify whom he was dealing with. In this case, it seems like the buyers refused to identify themselves, or at least made it very hard to do so. This alone is enough to say Agarwal should've passed on the deal.

      Patrick: First, kudos to Amit for acknowledging his role in the situation. To start, I get where Amit was coming from: “I’m just a guy that made an extension… I don’t have customers.” But the way I see it, when Amit entered the market to sell the extension those existing users became “paying customers;” that is, he was then using them as leverage to get a deal. With that, I think certain obligations emerge; at the least, Amit should’ve announced the change in ownership to existing users.

    Google pulls malware Twitter and Feedly extensions from Chrome (The Guardian)

    I Sold a Chrome Extension but it was a bad decision (Digital Inspiration)

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

     

    NEXT STORY: HOW MANY MINUTES DOES IT TAKE TO EAT A HAPPY MEAL?

  •  MCDONALDS: How Many Minutes Does It Take To Eat A Happy Meal?

    Friday, Jan. 17, 2014
    How many minutes does it take to eat a McDonald's “happy meal?” A New York City McDonald’s has walked into a firestorm, as the leaders in the local borough's Korean community are calling for a national boycott of the fast food chain. For sometime now, elders in the Korean community frequent a particular McDonald’s daily, arriving at 5 AM and staying nearly until closing.
    So what’s the problem? Each person buys no more than a cup of coffee each, tipping the scales at $1.09, while on other days the group will split a small packet of fries between them. The store manager first posted a “20-minute time limit” above the tables (there’s your answer), but when the group refused to leave, called the police to escort the elderly patrons out. The store management has defended the decision by contending that the elders were driving away business. Korean community leaders understand the business concern, but argue that its business interest is superseded by the respect that elders are entitled to in Korean communities—an entitlement that McDonald’s infringed on by “treating them like criminals.” Is it reasonable to limit the amount of time customers sit in the restaurant? Is McDonald’s obligated to align its values with those of the Korean community that it operates in?
     

      Kirk: I think McDonald’s was insensitive to the cultural factors in play, but did not necessarily act unethically. No business is obligated to provide what is essentially a public service: providing a place for the elderly to spend the day. But, in this case, McDonald’s clearly should have gone further to help the community address the need for places for the elderly to congregate. McDonald’s might contribute cash toward the creation of such a space; it might even provide contributions of food a day a week. There IS a general ethical obligation to try to help the community deal with its problems, and there is an ethical obligation to do much more before violating the local cultural norms; in this case, respect for the elderly.

      Patrick: Let’s look at this from the other side. McDonald’s has aggressively expanded its McCafé brand in attempt to draw business from Starbucks and similar coffee shops. Do you think that Starbucks could get away with 20-minute time limits? No way; you could order a small hot chocolate and spend the whole day there, Wi-Fi included. The key consideration here is that Starbucks presumably benefits from creating that “neighborhood coffee shop feel” that goes hand in hand with letting people stay as long as they please. In the McDonald’s case, I think it comes down to this: if the local community wants to express the value they put on respect for elders, and wants local businesses to do the same, they should frequent the McDonald’s MORE for hosting the elderlies daily hangout, even if it means there are less tables available. Vote with your dollar people.

    Korean Community Leaders Urge McDonald's Boycott (NY Times)

    A Framework for Thinking Ethically (Markkula Center)

     

    NEXT STORY: DISAPPEARING MESSAGES IN THE WORKPLACE?

  •  CONFIDE: Disappearing Messages in the Workplace?

    Monday, Jan. 13, 2014
    Private messaging apps, led by Snapchat, are becoming immensely popular as a way of sending messages to friends and family, and a new app is now looking to bring private messaging into the workplace. Confide, made for use by Apple devices, allows users to send vanishing text messages (as opposed to Snapchat’s pictures), which disappear immediately after being read. Many are already raising red flags, with the fear that disappearing messages will allow individuals, and even corporations, to systematically erase any record of improper communications or behavior: including matters of insider trading, discrimination in the work place, and messages that constitute sexual harassment. Moreover, messaging services like this will without a doubt undermine the legal discovery process, which has effectively revealed wrongdoing in recent years through email history. Then again, these “off the record” conversations are going on regardless, and new tech developments always open doors for possible misuse. Should employers allow these private messaging apps in the workplace? Would you condemn a company that provides this service for its employees?
     

      Kirk: While business ethics involves many things, managing an ethical business often comes down to effectively managing incentives. Offering this capability will undoubtedly give the message, inadvertently or otherwise, that you can say or do anything as long as you don’t get caught. This is particularly troubling, given that we are in a time where investigations of corporate wrongdoing are heavily dependent on email records. No company can afford to permit this type of communication without putting the state of its ethical culture at risk.

      Patrick: The way I see it, companies would not be at fault for allowing this type of service to be used, although I would find it troubling if a company adopted disappearing messages as a provided service. “Off the record” conversations between individuals happen and there’s no stopping them. Yes, this technology makes having these conversations easier, but the price of technological advancement is often the possibility of misuse. On the other hand, if a company paid for or encouraged the use of this service, I would no longer see it as an off the record discussion, but rather an official forum provided for by the corporation—one which should be subject to review just like phone and email communications.

    A Snapchat for executives? (Washington Post)

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

     

    NEXT STORY: HACKER ATTACK OR PUBLIC SERVICE?

  •  SNAPCHAT: Hacker Attack or Public Service

    Tuesday, Jan. 7, 2014
    Snapchat, one of the hottest startups of 2013, is under heavy fire this week over a security breach that compromised the usernames and phone numbers of 4.6 million Snapchat users. “Gibson Security,” a group of unidentified “white hat" hackers that first uncovered the vulnerabilities, warned Snapchat privately in August to no avail, leading Gibson to publish a detailed account of the security flaws on an online website. On New Year’s Eve, a different group of hackers used Gibson’s information to “steal” user information, and then posted the usernames and phone numbers (partially redacted) on its own website to raise awareness on the issue.

    Snapchat’s CEO, Evan Spiegel, responded with a cryptic tweet, stating that Snapchat was working with law enforcement, and later called the incident an “attack” and “abuse” of its system. Numerous journalists have criticized Snapchat for ignoring the initial warnings, the lack of apology, and for depicting the “hack” as a malicious attempt, as opposed to the benevolent effort many believe it to be. Nonetheless, Snapchat’s system was “attacked,” and millions of users’ private information was published online. Should the actions of Gibson and the other hacker group be seen as abuses of the system or as a public service to be lauded?

      Kirk: I’ve never had much affection for “white hat” activists, especially when they facilitate the misuse of private and confidential information. These groups often due more harm than good, even when their intentions are in the right place. Real “white hat” groups should be able to accomplish their goals without publicly revealing data or methods for exploiting security weaknesses. Snapchat’s inability to respond to these warnings needs to be addressed--they have since created a direct email to receive security related messages--but Gibson Security is not blameless here.

      Patrick: I see the upside of “white hats,” when done right they provide a counterbalance to keep corporations and governments honest. The flip side to this is that there is no counterbalance, no accountability, and often no way to prosecute these white hat groups, all of which should make the public hesitant to fully embrace them. My concern is over the publishing of the “recipe” for hacking the system—why wasn’t that also partially redacted? I think they got lucky another supposedly white hat group was the one to capitalize on the loopholes.

    Snapchat Breach Exposes Weak Security (Times)

    Snapchat GibSec Full Disclosure (Gibson Security)

    SnapchatDB ("second hacker group")

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

     

    NEXT STORY: WELLS FARGO INITIATES PROACTIVE ETHICS REVIEW

  •  THE GOOD NEWS: Wells Fargo Initiates Proactive Ethics Review

    Wednesday, Dec. 18, 2013

    Wells Fargo & Co. announced that it will be conducting a 2-year internal ethics review, set to start January 1st. The review will be conducted by the newly formed Ethics Program Office, along with deputy counsel, Christine Meuers. The review will examine business conduct guidelines for Well Fargo's 80+ business lines, in regards to issues such as conflict of interest, gift giving, and insider trading. 

    "[The review] is a self-initiated effort that builds on our strong track record of ethics and integrity to assess our current approach and make recommendations for continuous improvement." Mary Eshet, Wells Fargo spokeswoman

    We're delighted to see Wells Fargo taking proactive steps to create a strong ethical culture, along with preventing unlawful behavior. Check out the news story and Wells Fargo's Code of Ethics below!

    Well Fargo Plans Ethics Review Amid Bank Scrutiny (Bloomberg)

    Wells Fargo Team Member Code of Ethics and Business Conduct (Wells Fargo)

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

     

    NEXT STORY: THE PITFALLS OF PERFORMANCE-BASED PAY

  •  LLOYDS BANKING GROUP: The Pitfalls of Performance-Based Pay

    Monday, Dec. 16, 2013

    Wednesday, Lloyds Banking Group was fined £28 million ($46 million) by the U.K. Financial Conduct Authority for “serious failings” in the bonus and pay structure for its sales staff. The incentive structure, which ranged from substantial pay increases (and cuts), cash bonuses, and even bottles of wine, resulted in widespread instances of sales representatives pushing products that customers did not necessarily want or need. The FCA said that the incentive structure was so extreme, at times increasing or cutting a sales representative’s pay by 50%, that sales staff were likely driven to sell ill-suited products to customers. The FCA also expressed concern over a conflict of interest, as sales managers, whose compensation was tied to the performance of the sales staff, were in charge of administering the incentive structure.

    When do performance-based pay structures result in improper practices? How could Lloyds adjust its incentive structure to alleviate these concerns?

      Kirk: There is an ethical risk within any performance-based pay structure. Managers must strike a balance between incentivizing to produce “at all costs,” and incentives that promote productivity within the context of the company’s values. By and large, maintaining an ethical culture is the only way to walk that line. The more pressure there is on sales teams to produce, the importance of a strong ethical culture grows exponentially. Without it, financial incentives will inevitably lead to improper behavior. A good first step for Lloyds would be to remove the conflict of interest in the program’s administration, and make good with the customers who were adversely affected.

      Patrick: Financial incentives, particularly in sales, just plain work (Lloyds business in areas with these incentives increased by 66% in a 2-year period). In a vacuum, I find nothing wrong with these pay structures: its on sales staff to follow the code of conduct, regardless of the potential payout. But that notion falls apart when it comes to light that Lloyds continued to reward bonuses, despite knowing that customers were being sold unnecessary products. Lloyds incentivized, and validated, the type of production “at all costs” that Kirk mentions above. This program needs a complete overhaul.

    Lloyds Fined Over Sales Bonuses (WSJ)

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

     

    NEXT STORY: GM PROMOTES FIRST FEMALE CEO

  •  THE GOOD NEWS: GM Promotes First Female CEO

    Friday, Dec. 13, 2013

    General Motors made the news this week with its announcement that Mary T. Barra would be its next CEO, making her the first woman to lead a major auto company. After 33 years at GM, Ms. Barra has worn a number of hats at the company; including, engineer, plant manager, head of corporate human resources, and director of global product development.

    Current CEO Daniel F. Akerson, retiring due to his wife’s health condition, had this to say to investors: “Mary was picked for her talent, not her gender.” The auto industry has long ben male-dominated, making Ms. Barra’s promotion a major milestone for both GM, and the industry at-large. “This is truly the next chapter in G.M.’s recovery and turnaround history … And I’m proud to be a part of it.” Ms. Barra, at a town-hall style meeting at GM.

    Also, Bloomberg Businessweek published an interesting study comparing gender diversity in leadership positions versus the size of the company, inspired partly by the GM announcement (link below).

    New G.M. Chief Is Company Woman, Born to It (NY Times)

    For Women in the Boardroom, Bigger Companies Do Better (Businessweek)

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

     

    NEXT STORY: HEDGE FUNDS SET TO OFFER BONUSES TO PREFERRED BOARD CANDIDATES

  •  PAYING BOARD NOMINEES TWICE: Hedge Funds Set to Offer Bonuses to Preferred Candidates

    Tuesday, Dec. 3, 2013

    As more and more hedge funds are getting their preferred candidates on the board of directors, a new trend has emerged: some hedge funds are offering their candidates a bonus in addition to the traditional compensation offered by the company. While there has yet to be a director who has taken up one of these offers, corporate governance commentators are already up in arms over the potential pitfalls. Detractors are calling the practice a "golden leash" that will inevitably lead to a conflict of interest, leaving it up in the air who the director is really working for. The hedge funds have responded that because the bonus will be tied to company performance it suits everyone's best interest, and that the additional incentive will help attract better, and more devoted, directors. Are hedge funds entitled to compensate preferred candidates? What is in the best interest of shareholders?

      Kirk: I believe this arrangement will create a conflict of interest, even with the bonus being tied to company performance. Board members owe their allegiance to all of the company’s shareholders, not just the hedge funds with money to throw their way. Where things get complicated is when a hedge fund employee is also serving on the board of a company that the fund has invested in. In this case, the hedge fund is free to compensate the employee, but only for the service and benefits attributed to the hedge fund. Hedge funds should not be compensating the board member on behalf of the company. If each party picks up their own tab, the conflict of interest concern is resolved.

      Patrick: My concern is with the economic incentive placed on the director to manage for the short term. “Maximizing shareholder value” leaves a lot of questions unanswered: Which shareholders? Maximize shareholder value today, this year, or ten years from now? Activist hedge funds are notorious for going after short-term gains, regardless of the effect on the long-term health of the company. Such is their right, but these bonuses serve to align the director’s goals and time horizon with that of the hedge fund: get the stock price up in the near future and get your bonus. 

    A Debate Over Paying Board Nominees of Activist Funds (NY Times)

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

     

    NEXT STORY: TESLA UNDER FIRE FROM PRESS AND REGULATORY BODIES