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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.

  •  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

     

    NEXT STORY: FEDERAL PROSECUTORS REIN IN KICKBACKS TO DOCTORS

  •  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

     

    NEXT STORY: INNOCENT LOBBYING OR TAX EVASION?

  •  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

     

    NEXT STORY: ARE PRIVACY CONTRACTS ONLY AS GOOD AS THE LAW THAT MANDATES THEM?

  •  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

     

    NEXT STORY: CAN GUN MANUFACTURERS ADVOCATE THEIR NARROW ECONOMIC INTERESTS?

  •  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

     

    NEXT STORY: WHEN TO STEP DOWN FROM THE BOARD

  •  HP: When to Step Down from the Board

    Friday, Apr. 5, 2013

    Thursday, Hewlett-Packard announced that board chairman Raymond Lane had stepped down as chair, but will continue to serve on the board, while two other directors resigned from the board entirely. Lane, along with other directors, have been key supporters of a series of mishaps that led to HP writing off $18 billion from failed acquisitions in the fiscal year of 2012 alone; most notably the $11.1 billion acquisition of Autonomy, considered to be among the worst acquisitions in history. Ranging from the Autonomy acquisition to the ill-fated appointment of former CEO Léo Apotheker, who was hired without meeting many of the board members, shareholders accused the board of serious shortcomings in its role of providing risk oversight. At the HP investor meetings last month, Lane received only 59 percent of the vote for reappointment to the board. While a majority vote is technically enough for reappointment, such a low percentage is indicative of very low shareholder confidence. Were HP’s board members duty bound to resign, despite obtaining the majority vote?

      Patrick: Yes, I think the board members were duty bound to resign, but not for the reason implied. In terms of shareholder support alone, majority vote is sufficient for accepting reappointment. The truth of the matter is that Lane and the other board members are obstacles to HP’s turnaround, and their presence alone was a detriment to the company—out of this concern alone were they duty bound to resign.

      Kirk: I think the HP directors were late in resigning and I think Lane should have resigned entirely from the board. We allow CEO’s to “bet the company” on giant acquisitions and reversals of strategy, subject only to the board’s evaluation of the risk involved. If directors fail miserably in that risk assessment, they should immediately apologize to shareholders and resign. We need a much stronger sense of accountability in all areas of American life, but particularly among corporate directors.

    H.P. Chairman Steps Down as 2 Resign From Board

    A Framework for Thinking Ethically

     

    NEXT STORY: DOES SINCERITY MATTER IN PUBLIC APOLOGIES?

  •  APPLE: Using Public Apologies as a Response to Political Pressure

    Wednesday, Apr. 3, 2013

    Monday, Apple’s CEO Tim Cook issued an apology in response to growing outrage over its warranty policies in China; the warranty for the IPhone (1 year) does not meet the two-year requirement set by Chinese law. The criticism began on March 15 when China’s biggest state-run television network, China Central Television, aired an investigative report on Apple’s mistreatment of Chinese customers. Among analysts there is concern that the report is part of a larger power play against American technology giants by the Chinese government. Assuming the campaign orchestrated against Apple is trumped up, is it acceptable for Apple to act like it has done something wrong and apologize, or even obligatory in order to protect shareholders?

      Patrick: Acquiescing to political manipulation is a sure-fire way to ensure this problem continues. The stakes are high for Apple, China is its second largest market, so choosing its battles carefully is critical but does not mean inaction is the appropriate response. Facing a political force, it becomes clear there is a need for Apple to seek out political support, in the form of the US federal government to protect Apple and other American firms from unfair scrutiny abroad.

      Kirk: I think we are uncomfortable mixing a political motive with what is typically a moral act—apologizing. Nonetheless, to protect its shareholders, arguably out of ethical responsibility, it must play the political game. The world is a messy place and you are not obliged in every case to challenge power. You have an ethical obligation to pick your battles to reduce the potential damage to your stakeholders. This is not a free pass to collaborate with evildoers, but a plea to give some consideration to the costs of resistance.

    Pressured by China, Apple Apologizes for Warranty Policies

    A Framework for Thinking Ethically

     

    NEXT STORY: USE OF REWARDS AND PENALTIES TO IMPROVE EMPLOYEE HEALTH

  •  CVS: Use of Rewards and Penalties for Improving Employee Health on the Rise

    Thursday, Mar. 28, 2013

    Monday, Aon Hewitt released a survey of 800 companies on the use of incentives for employee participation in programs aimed at improving employee health, with the hope of lowering company medical costs. The study found that 79% of companies offer rewards for participating in programs (e.g. completing a health risk questionnaire or biometric screenings); 5% utilize punishments for not participating (CVS Caremark requires a $600 fee for employees who do not report their weight, blood sugar, and cholesterol); and 16% use a mix of both. Proponents of the use of incentives, such as CVS Caremark, point to an overall blood sugar and cholesterol level decrease, and the reality that "Like it or not, in this country, employment and health insurance and health care are all intimately related." Detractors worry that incentive programs reward already healthy employees while singling out workers most in need of affordable health care with higher costs. Are these programs an invasion of personal privacy or unfairly manipulative?

      Kirk: We accept auto insurance that is more expensive if one has speeding tickets or past accidents, or if one is very young. This is no different, though I think programs should always be structured as rewards or discounts for good health behaviors, not penalties. Let’s face it; good health is good for the employee and good for the company. Get over it!

      Patrick: I’m all for looking at this through a consequentialist lens—improving employee health is good in itself and the bottom line—but the manner in which these programs are administered makes all the difference. Some guidelines companies should follow are employees must consent before being asked personal medical information and the results of questionnaires and tests must be kept confidential.

    Companies Get Strict on Health of Workers

    Aon Hewitt Survey

    A Framework for Thinking Ethically

     

    NEXT STORY: SHOULD MANAGEMENT BE HELD RESPONSIBLE FOR THE ACTIONS OF EMPLOYEES?

  •  JPMORGAN: Should Management be Held Accountable for the Actions of Individual Employees?

    Thursday, Mar. 21, 2013

    Friday, the Permanent Subcommittee on Investigations held hearings on JPMorgan's $6.2 billion trading debacle from earlier this year. According to the 307-page Senate report released Thursday, traders in JPMorgan's chief investment office hid underperforming derivatives; routinely exceeded bank mandated risk limits; and manipulated the valuation of unprofitable investments to minimize losses. In addition, the report found that JPMorgan used intimidation and deception to mislead regulators. Executives, including the person who managed the London operation, passed the buck down to lower level employees, claiming that attempts to reduce risky investments were undermined by individual traders undervaluing existing positions to minimize losses. Regulators at the Office of the Controller of the Currency were also criticized for not identifying the losses sooner, as well as for not being aware of JPMorgan's $156 billion high-risk derivatives portfolio. How should blame be allocated for the mishap? Do senior executives get a free pass for actions of subordinates hidden from them? Or does the buck stop at the top? Should the boss always bear the ultimate blame?

      Kirk: We can't let senior executives off the hook when things go awry in their operations. It just leads to convoluted games of deniability. Besides, senior executives should know about anything important in their operations. One of their key responsibilities is to create effective and transparent information systems to ensure things cannot be hidden. Heads should always roll at the top.

      Patrick: I'd have to agree: JPMorgan's management has failed to maintain a company culture that values accountability, and executives should bear the blame. While management should be held accountable, let's not forget that the "London Whale" incident also represents a failure on the part of regulators. Banks are certainly not justified in bullying regulators, but regulators don't get a free pass just because they face resistance.

    Withering Questions at Senate Heaing on JPMorgan Loss

    A Framework for Thinking Ethically

     

    NEXT STORY: RESPECTING PRIVATE INFORMATION DESPITE PROFITING FROM ITS DISTRIBUTION