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

  •  INTERNSHIP SWAPPING: Is It Unethical to Trade Internships?

    Thursday, May. 30, 2013

    Small business owners and corporate executives have long faced the problem of whether to hire their children for summer internships and entry-level positions. On one hand, executives know the importance of gaining “real-world” experience at an early age, but on the other, hiring direct family raises many concerns of favoritism and conflict of interest. In response, a recent trend has emerged: “internship swapping.” The quid pro quo arrangement works something like this; “I’ll hire your daughter for the summer at my law firm, if you give my son an internship at your accounting agency.” Taken at face value, it appears to be an elegant solution as neither firm has a familial connection to the new hire. Still, some argue that this is just another way of protecting the special opportunities for the well-connected. Should top executives be engaging in internship swapping?

      Patrick: Internship swapping is unethical as it involves manipulating company resources for personal gain. The company misses out on hiring the best available candidate, or worse, the position is created solely for the sake of “the swap” adding to bloat and inefficiency at the company. Hiring based on reputation and personal endorsements will always have a place in business, but internship swapping crosses the line.

      Kirk: Every company with a limited number of internships should develop a way of allocating those spots without favoritism. There is little difference between a top executive telling the head of internships to "hire my son" and "hire my friend's son." Either grants special treatment to the sons and daughters of the wealthy and well-connected. This is but a fig leaf to disguise the exercise of privilege.

    The Great Internship Swap

    A Framework for Thinking Ethically



  •  THE GOOD NEWS: Ethical Marketing at Coca-Cola

    Tuesday, May. 28, 2013

    This month, Coca-Cola CEO Muhtar Kent announced four worldwide business commitments toward promoting global health and well-being. In the press release, Mr. Kent sees the new commitments as “an evolution, not revolution—an elevation, not a revelation,” in Coca-Cola’s goal of making a positive difference in the communities they serve. The four commitments are:

    1. Offer low- and no-calorie options in every market we serve.
    2. Provide transparent product information, with calorie counts on the front of all of our packages.
    3. Help get more people moving by supporting physical activity programs in all of the 200-plus countries we proudly serve.
    4. Market responsibly, including no advertising to children under 12 anywhere in the world. 

    We think this is a step in the right direction for Coca-Cola, and a sign they are taking their social responsibility seriously. What do you think?

    Coke CEO on Global Well-Being Commitments

    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



  •  APPLE: The Ethics of Exploiting Tax Loopholes

    Tuesday, May. 21, 2013

    Monday, Congressional investigators disclosed a report finding that Apple avoided tens of billions in taxes on overseas earnings through a web of subsidiaries unprecedented in scope and complexity. Among the subsidiaries is Apple Operations International, AOI, which was incorporated in Ireland but is run by top executives in Cupertino. AOI’s income between 2009 and 2012 was $30 billion, yet has not filed tax returns in the past five years. In the US, corporations are taxed depending on where they were incorporated, whereas in Ireland it is dependent on where they are operated and managed. Accordingly, Apple has used the gray area between the two countries tax codes to create a “stateless” corporation exempt from taxes, record keeping requirements, and tax return filings. The panel has not accused Apple of breaking any laws, and Apple is certainly not the only company with similar tax practices. Nonetheless, some argue Apple is failing to pay its “fair share” of taxes to the US and other countries where it generates revenue. Does Apple have an ethical obligation to pay more taxes?

      Kirk: No one has argued that Apple disobeyed the law and no company is obligated to pay more taxes than legally required. However, Apple is exploiting outdated tax laws and the lack of coordination between countries to shield its profits. The result is that Apple pays far less than its “fair share.” Real people suffer when tax revenues are low. Apple’s ethical obligation is to take a public-minded role in the creation of a new tax regime that closes the loophole it’s exploiting.

      Patrick: Apple’s not the problem here: it’s the symptom of a failing tax code. To date, the tax code sets the rules of the game and companies play within them. The tax code needs to consistently adapt and change to companies’ behavior to ensure the desired results are achieved and that the proper incentives for those results are in place. Apple’s ethical failing, in this case, is their reluctance to call it like it is: Tim Cook at Tuesday’s Congressional hearing, “We don’t use tax gimmicks.” If the shoe fits . . .

    Apple's Web of Tax Shelters Saved It Billions, Panel Finds

    A Framework for Thinking Ethically



  •  DISNEY: Should Retailers Cut and Run from Bangladesh?

    Thursday, May. 2, 2013

    Western apparel companies have been under tremendous public scrutiny after the fallout of last week’s factory fire in Bangladesh that killed 400 workers. Retailers are torn between staying and improving conditions, and leaving Bangladesh entirely. Bangladesh is the second largest apparel exporter with $18 billion, 3.6 million garment workers, and some of the lowest wages in the world. Wal-Mart, GAP, and Children’s Place met in private recently to discuss improving worker conditions, while Benetton has repeatedly had to revise its explanation of relations to the factory. After a factory fire 6 months ago, Disney announced a one-year phase-out of all manufacturing in Bangladesh ending in March 2014. While retailers determine if they will follow Disney’s example, labor groups are urging them to stay and improve conditions as opposed to cutting their losses and running. Do these retailers have an obligation to improve working conditions in Bangladesh once they have used subcontractors there? Is it better to walk away and source clothes in another low-cost location? Is the problem instead that U.S. companies expect their clothes to be made at unrealistically low prices?

      Kirk: There is plenty of blame to go around. The worldwide search for cheap production does contribute to unsafe conditions. If the U.S. companies want low-cost production, they have to resist doing business with the very lowest cost suppliers who are most likely to be cutting corners. They have to find suppliers who produce quality clothes in quality factories. Most are only screening for the first. I hope they stay in Bangladesh; they will have the same problem in another country in five years if they don’t change their selection process.

      Patrick: Once Disney leaves another retailer will take its place to exploit the cost structure; and as Kirk mentions, the problem will migrate to the next low-cost region free of the public outrage associated with Bangladesh working conditions. To stop the cycle, monitoring groups such as the Business Social Compliance Initiative, which certified two factories in the building of the fire in Bangladesh, need to step up their standards. Higher standards will necessitate better margins for the factories providing the funds for building compliance, fire safety training, and adequate wages. It’s on retailers to only do business with certified factories, and up to consumers to hold them to it.

    Some Retailers Rethink Role in Bangladesh

    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



  •  EBAY: Innocent Lobbying or Tax Evasion?

    Thursday, Apr. 25, 2013

    This week, eBay ramped up opposition to the Marketplace Fairness Act, a bill that would allow states to collect sales tax on goods bought from out-of-state online retailers. The campaign included a widely distributed email from eBay President John Donahoe, in which Donahoe frames the legislation as a threat to small business growth, claiming it treats small businesses and multi-billion dollar companies exactly the same. eBay is calling for a compromise of an exemption for companies with less than 50 employees or less than $10 million in out-of-state sales. It is no surprise that eBay is up in arms over the bill; its online marketplace model directly benefits from the online retailers that use its service, but there is concern that eBay is using its lobbying power to assist small businesses in tax evasion. Are eBay’s actions justified in the name of protecting small business? Or is eBay complicit in tax evasion? Also, is there anything wrong with eBay using its subscriber list for lobbying purposes?

      Patrick: eBay’s plight for the mom and pop online retailers seems to check out until it comes to light that the Marketplace Fairness Act excludes companies with less than $1 million in gross sales. While companies with just over $1 million in sales aren’t going to compete with Amazon head-to-head, they are big enough to be paying taxes. There’s a lot at stake for eBay in the decision so I do not fault them for attempting to keep the status quo, but their argument just doesn’t cut it. On leveraging their email list, I’m for a free market approach: if users don’t want to receive eBay’s messages, political or otherwise, they should unsubscribe.

      Kirk: It’s simply unfair to give online businesses an advantage over brick and mortar companies. It is time we abandon this charade that the economy will be hurt if we tax online businesses. If anything, the revenues collected will shore up local government, which provides the infrastructure for all economic activity. The $1 million exemption Patrick mentions gives more than enough help to the smallest businesses. I am more worried than Patrick about eBay’s political clout from using their subscriber list aggressively.

    In Sales Tax Fight, Amazon Hands Baton to eBay

    A Framework for Thinking Ethically



  •  CISPA: Are Privacy Contracts Only as Good as the Law that Mandates Them?

    Monday, Apr. 22, 2013

    Thursday, the House of Representatives passed CISPA (Cyber Intelligence Sharing and Protection Act): part of which allows companies to break privacy contracts and share consumer personal information with other firms and the US government for “cyber security purposes.” The bill allows companies such as Facebook and Twitter to share account information, messages, and other user data they determine to be cyber threat information, and to be protected from lawsuits if they do. They can do this even when there is no warrant for the information and also when the company has signed a contract explicitly stating it would disclose personal information. While the bill must survive the Senate and a potential veto from the President, many consumer rights advocates are up in arms. Provided that CISPA is passed into law, are companies ethically obligated to honor their preexisting contracts with users?

      Kirk: This is bill is a significant threat to personal privacy. There are tough choices to be made regarding the threat of terrorism, but, as written, this bill goes much too far. Any company could arbitrarily decide what is cyber threat information and then release it without being accountable for the breach of privacy. Privacy guarantees from Facebook, Google, AT&T, and Comcast would be worth next to nothing. It is not surprising some companies are supporting it; they get immunity from lawsuits for violating privacy contracts.

      Patrick: I agree, this bill goes way too far. Nonetheless, if passed, it seems unreasonable to expect companies to opt out of this “free pass” of being insulated from civil lawsuits. The emphasis then becomes how the company handles this transition and the procedure it uses for deeming content “cyber threat” relevant. Companies are obligated to be transparent with users, most importantly in notifying existing users that the privacy agreement and terms of service has changed, and would be obliged to use discretion in releasing information. Hopefully the Senate corrects the House of Representatives’ mistake.

    CISPA Vote: House Passes Cybersecurity Bill To Let Companies Break Privacy Contracts

    A Framework for Thinking Ethically



  •  GUN MANUFACTURERS: Can Gun Manufacturers Advocate Their Narrow Economic Interests?

    Thursday, Apr. 18, 2013

    The defeat of new gun control legislation, despite polls that indicated the vast majority of the American people supported it, has focused renewed attention on the political lobbying of corporations, in this case gun manufacturers. If, as critics charge, the National Rifle Association is primarily funded by gun manufacturers, is there anything ethically wrong with this arrangement? Is it wrong for a company to spend significant amounts of money lobbying for laws and regulations that serve its economic interests? Is there any obligation to consider the social or human effects of the political position advocated? Is there any obligation to respect the will of a substantial majority of the American people?

      Kirk: We want to protect the political rights of all individuals and institutions. Where we hesitate are cases where companies seem to frustrate the “popular will” and inflict damage to individuals or the environment solely to serve their economic interests. We respect those companies that understand their dual obligation to represent their shareholders AND the good of society. In my view, the gun manufacturers are way over the line in this case, promoting their own profits regardless of the continued carnage from unregulated guns. The NRA, their chosen instrument, has demonstrated a disdain for the truth, for the popular will, and for the victims of gun violence.

      Patrick: Companies are expected, if not obligated, to attempt to influence policy in the interest of their shareholders. The NRA and gun manufacturers are by no means exempt from moral transgressions, but this problem goes above single actors: it's a political problem. Current campaign contribution practice and regulation yield too much power to special interest groups and will inevitably lead to similar circumstances for a number of other industries. Sure, we can hold the NRA in contempt for leveraging their clout to influence policy, but can we blame them?

    Senate Blocks Drive For Gun Control

    A Framework for Thinking Ethically