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

  •  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) 



  •  GMOs: Should Corporations Curb Their Political Power in Local Elections?

    Monday, Nov. 4, 2013

    Tomorrow, Washington state residents will vote on Initiative 522, a law that would require genetically modified foods sold in stores to be labeled “clearly and conspicuously.” While the debate on labeling is as contentious ever, Initiative 522 made the news for another reason: for raising more money than any other initiative campaign in Washington state history. Proponents of labeling have raised a respectable $8.4 million, the majority of which coming from small donations and advocacy groups. But the record setting belongs to the campaign against 522. Backed by out-of-state biochemical and food-industry corporations, the No on I-522 Committee has raised over $22 million. The law on this is clear. In the Citizens United case in 2010, the Supreme Court ruled that corporations are entitled to make unlimited contributions to political campaign ads and other political tools. The question remains, are Monsanto, Coca-Cola, and Kellogg—contributors to No on I-522—unfairly influencing the political process? Even if legally permissible, should they hold back on their financing of Initiative 522 ads?

      Patrick: With 20 other states considering similar initiatives, and growing support from Congress at the Federal level, Initiative 522 cannot be viewed in isolation. It is certainly troubling that an out-state corporation can potentially sway a local or state level election (we’ll find out for sure Tuesday), but we have to recognize that these corporations are very much stakeholders in this decision. Initiative 522 may very well set the precedent for how this matter is decided on a national level: a legitimate concern of these corporations. Provided that corporations stay within the bounds of campaigning regulations, I don’t see it reasonable to compel corporations to “hold back” their legal powers to influence political decisions. Whether unlimited campaign contributions should be a right granted to corporations is another story.

    Washington could be the first state to require labels on GMOs. Here are the stakes. (Washington Post)

    Foes of food-labeling Initiative 522 set funding record (Seattle Times)

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



  •  NFL: Broadcast Blackouts and the Public Good

    Friday, Nov. 1, 2013

    In her final days as Chairwoman of the FCC, Mignon Clyburn has her sights set on nixing the FCC’s enforcement of broadcast blackouts. Most commonly used by the NFL, blackouts occur when a game has not been sold out, resulting in the game not being televised in areas within close proximity to the stadium. Roger Goodell, Commissioner of the NFL, defends the policy by claiming that blackouts drive people to games, in turn bolstering the stadium experience. In recent years, blackouts have come under heavy scrutiny causing the NFL to ease up on its definition of sold out: now standing at 85%. Leading the charge is a group of sports economists who claim that blackouts have no effect on ticket sales and only serve to punish consumers. While the NFL can bypass the FCC’s ruling by amending their contracts with providers, it still leaves the question: is the broadcast blackout an unethical business practice?

      Patrick: The first thing that needs to be said is that using blackouts is a dumb business practice. Blackout rules force networks and sponsors, who stand to lose the most from a blackout, to buy thousands of tickets to meet the “sold out” requirement. Now, with the reports showing that they have no effect on attendance, it makes one wonder why this is even a question. But, is it ethical? Probably not. While there are a number of ways to approach this one, including the discrimination between local and national customers, the fact that most stadiums are funded with public money offers a quick fix. Local residents invest in the stadium to have the option of going out to watch the game, not to be forced to do so.

    Acting FCC Chairwoman Clyburn looks to gut NFL blackout rule (LA Times)

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



  •  CONSCIENCE: Do Corporations Have a Conscience?

    Monday, Oct. 28, 2013

    In the wake of the Affordable Care Act (ACA), in particular the provision that companies must offer a wide range of contraceptives under their coverage, those in opposition are taking to the courts with a novel argument: the ACA violates their companies’ religious conscience. Three appellate courts have heard the case—two striking down that religious expression applies to corporations and one left undecided—meaning this issue may be on its way to the Supreme Court. Corporations have a long precedent of being considered “persons” on a range of issues, but many fear the consequences of granting corporations free expression of religion. For one, corporations could select new hires, as well as terminate employees, for partaking in perfectly legal behavior that happens to violate the company’s religious code; for example, becoming pregnant out of wedlock, or marrying someone of the same sex. On the other hand, the plaintiffs claim that their companies are an extension of their religious lives and should be granted the same protections. So what do you think? Do corporations have a “religious conscience?”

      Patrick: Granting corporations a “conscience” would be worst-case scenario for promoting ethical business practices. For one, the plaintiffs’ argument is self-defeating. They argue that their companies’ have religious standing by extension of their own individual rights to religious expression, not by virtue of the corporation itself. Religious reflection, prayer, and decision making do not happen at the corporate level: it’s the people that make up the corporation that engage in matters of conscience. “Corporate conscience” guarantees only one outcome, the complete undermining of the conscience of its employees. Perhaps the biggest impediment to ethical business is the belief that individual autonomy is reserved only for those at highest pay grade. Corporations are made up of people. It’s time we remember that.

    Can corporations pray? The next expansion of corporate 'personhood' (LA Times)

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



  •  THE GOOD NEWS: Primark Steps Forward

    Thursday, Oct. 24, 2013

    With a death toll of 1,129, the Rana Plaza factory collapse earlier this year stands as one of the most devastating industrial accidents in history. There were many ethical failings that led to the collapse, but one company is setting the example on how to move forward. Primark, a global clothing retailer based in Ireland, announced three major initiatives today continuing their support of the victims of the collapse, in addition to their efforts to improve worker conditions.

    1. Primark has set a timetable for beginning long-term compensation to the victims and/or their dependents; the first company to do so.
    2. Primark has committed to a third short-term financial payment to the victims and/or their dependents.
    3. Primark is calling upon other brands involved to make a contribution by paying short-term aid to the 3,600 workers.

    Primark spokesperson: "The Company calls on other brands sourcing from Rana Plaza to now contribute a fair share of this tranche of aid.”

    Statement from Primark Stores on Rana Plaza

    ETHICAL TRADING: Our Work in Bangladesh