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

  •  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)



  •  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)



  •  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)



  •  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)



  •  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) 



  •  TESLA: Under Fire from the Press and Regulatory Bodies

    Monday, Nov. 25, 2013

    Tesla, the manufacturer of high-end luxury electric cars, is under intense media and regulatory scrutiny as three incidents have surfaced of the lithium ion battery within Tesla’s Model S catching fire after a collision. In each case, the battery, which is located beneath the passenger cabin, ignited after the undercarriage was struck in the collision by a concrete wall, curved part of a truck, and a trailer hitch, respectively. Tesla rightly says no one was injured due to the fires, as the onboard computer warned each driver to exit the vehicle, and its CEO, Elon Musk, has been very vocal about the rate of battery fires for the Tesla Model S being much lower than that of conventional cars. As with any emerging technology, safety issues are paramount to public trust, as demonstrated by the temporary grounding of the new Boeing 787 aircraft over the safety of its lithium ion batteries. Tesla is facing at least three alternative actions: strengthening the undercarriage, thereby increasing the weight of the car and reducing performance; investing heavily in attempts to preempt the lithium ion battery’s tendency to catch fire; or doing nothing, continuing to point out that the fire risk is very small and is not a substantial safety risk to drivers. What role does ethical deliberation play in this decision? What should Tesla do?

      Kirk: As with any manufacturer of consumer products, Tesla’s ethical obligation is to have a deliberate and sustained commitment to the continual improvement of the safety of its products. But in business ethics, there is no such thing as an ethical decision that is insulated from the pressure of profits, losses, and incentives that often dictate behavior in the business world. Tesla’s current dilemma will force their executive team to make some tough decisions in addressing the tension between performance and cost efficiency on one hand, and safety on the other. Regardless of the balance that Tesla strikes, in addition to complying with automobile safety regulations, it is on them to openly convey the thinking behind these decisions, and to take into account the wishes of their customer base in their deliberation.

      Patrick: I think the media is overhyping the Tesla fires, but it’s no surprise. With the celebrity of its CEO, the Consumer Reports records set by the Model S, and the general novelty of the company, Tesla is a journalist’s go-to option for peaking their audience’s attention. Sometimes you have to take the good with the bad. As for Tesla’s next move, it largely depends on the findings of the National Highway and Transportation Safety Administration’s investigation. Up until this point, Tesla has increased the warranty to cover any incident of battery fire, even if caused by driver error; has increased the speed in which the Model S lowers itself 1 inch for aerodynamic purposes; and has put its effort into countering false claims about the Model S. For now, I think Tesla is in the clear.

    U.S. Safety Agency Launches Investigation Into Tesla Fires (WSJ)

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



  •  JPMORGAN: Doing Business With China's Elite

    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)



  •  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)



  •  HOLDING THE CEO'S FEET TO THE FIRE: Should Chief Execs Be Penalized for Failing to Appoint Women to Senior Positions?

    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)