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

  •  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



  •  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



  •  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



  •  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



  •  GOOGLE: Creating a Company Culture that Respects Private Data Despite Profiting from its Collection

    Thursday, Mar. 14, 2013

    On March 12th, Google agreed to pay a fine of $7 million for collecting personal data during recording for its Google Maps Street View feature. Google's mobile vans, in addition to filming "street views," were also collecting emails, medical and finance records, and passwords from unprotected wireless networks as they passed by. This is not the first time Google has been penalized for privacy transgressions; last year Google was fined $22 million for bypassing security settings on Apple's Safari browser. Many are concerned that the fine of $7 million is not enough to force Google to change, pointing to the company's net profit of $32 million per day. As part of the settlement, Google has agreed to offer employee education on privacy, invest in educating the public on securing the wireless networks, and will destroy the data collected from the Street View cars. Given the value of "big data" to Google, company managers face a dilemma in determining where to draw the line between data they should collect and data that violates privacy: a growing concern in light of emerging technologies that allow for even more opportunities for data collection. What directives should Google's management give its employees?

      Kirk: This is a classic dilemma where the company's self-interest and strategy threatens the public interest in personal privacy. Google must create a respect for privacy among all its managers and employees. And it must create a system for reviewing decisions, like letting Street View vans collect such data, before they are implemented. Such a system would demonstrate a companywide commitment to respecting user privacy, while offering clear guidelines to employees. Many observers think they have failed to do either. 

      Patrick: Speaking from the perspective of a college student, I believe many of my peers share my sentiment that I am not too concerned about Google and firms like it collecting data from its users. Google offers a number of incredibly useful products--Gmail, YouTube, and many others--free of charge. Advertising, and the data collection which enhances it, allows these products to be free; in consequence, if you are using these products you should reasonably expect data to be collected. Although, in this case Google was in the wrong because they collected data from people who were not directly using their products. While communication with employees is important, the key here for Google is to work toward transparency with its users, allowing them to know exactly what they are agreeing to when they use Google products.

    Google Pays Fine Over Street View Privacy Breach

    A Framework for Thinking Ethically



  •  AMAZON: Should Labor Practices of Multinationals be Judged by the Standards of their Home Country or the Country of its Operation?

    Friday, Mar. 8, 2013

    Last Thursday, a group of representatives from ver.di, one of Germany's largest labor unions, marched on one of Amazon's eight German distribution centers. Armed with 37,000 petition signatures, the group demanded a meeting with Amazon executives to negotiate a union wage contract for its German workforce. Amazon, which employs 8,000 people in Germany, has refused to communicate with union officials, emphasizing that it already pays above the union rate. The union has protested the "Big Brother" atmosphere where "everything is measured, everything is calculated, everything is geared toward efficiency." The union is also protesting the treatment of the 10,000 temporary workers that Amazon buses in from Spain and Romania to meet Christmas demand, citing German legislation, introduced in 2005 that lowered labor regulations, as a main contributor to the problem. Amazon is quickly becoming despised for personifying the qualities of American-style management that Germans despise: "People want to be treated with respect," argues the union leader. Should Amazon operate by more generous worker policies than it does in the US?

      Kirk: Amazon and other multinationals must operate with sensitivity to local standards and expectations. They cannot just operate by their home country practices. In this case, however, the union seems unhappy with recent German legislation as with Amazon. Nonetheless, Amazon needs to resist the temptation to "race to the bottom," and should refrain from enacting more aggressive policies towards workers and the union. But in this case, refusing to negotiate with the union may be the only way to retain enough flexibility to operate profitably in Germany.

      Patrick: While I agree that Amazon and other multinationals must operate under local standards, demanding that they adhere to local expectations has too many problems associated with it. The union is by no means an objective measure of cultural expectations as they have both political and economic interests; which leads to the question: Where can Amazon turn to decipher the expectations it should meet? The labor laws and regulations of the country. Legal code offers a clear set of rules for multinationals allowing them to know what they are getting into before they invest, as well as ensure that their current operations are compliant.

    Amazon's Labor Relations Under Scrutiny in Germany

    A Framework for Thinking Ethically



  •  DELL: Is the Dell Buyout Deal an Instance of Insider Trading?

    Monday, Feb. 25, 2013

    The current buyout proposal for Dell, headed by company founder Michael Dell and Silver Lake Partners, is being criticized by many for undervaluing the company. At $13.65, the offer represents a 37% premium on the company's average stock price over the last three months, but little has been said about the relation between the offer price and future prospects: Dell refused to make projections at the latest conference call citing uncertainty due to the pending deal. Southeastern Asset Management, among the largest stakeholders in Dell, claims that based on publicly available information the company should be valued at $23.72 a share. Outside investor organizations, such as The Shareholder Forum, are concerned that shareholders are at risk due to lack of access to company information. The Forum has proposed that Dell be subjected to an independent, peer reviewed evaluation of its enterprise value to ensure fairness for all parties. Alex Mandl, chairman of the special committee tasked with ensuring all shareholders are treated fairly throughout the buyout process, has stated that he will not support an independent review of the company. Can shareholders get a fair deal without a third party review?

      Patrick: While Dell isn't obligated to open its doors to a third party review, it's in the wrong for not grounding the offer price in future projections. Uncertainty over the buyout deal is no excuse for not making routine projections expected of any publicly traded company. The management team is well aware of future products, emerging markets, and strategies going forward, and shareholders are entitled to this information as well. To alleviate this conflict of interest, shareholders should demand more transparency from management, and should push to have a go-shop clause added: giving a fixed time period for other potential buyers to best management's offer.

      Kirk: Buyouts led by current management are very problematic, and while transparency is a step in the right direction, a third party review is a necessity. The buyout team has an incentive to get the lowest price possible, but it's at the expense of the shareholders they are also supposed to represent. Management is doing it because they think the company is worth more than the current stock price. They ought to be making the rationale behind this case publicly to ensure a fair stock valuation. The temptation to withhold some information or to argue this case without enthusiasm is much too great. Only a third party evaluation with complete access to company data can protect shareholders.

    Dell's Intentions Get a Hard Look

    A Framework for Thinking Ethically



  •  CYBER ATTACKS: Should Companies Admit They've Been Hacked?

    Sunday, Feb. 24, 2013

    Cyber attacks on American companies have become increasingly more common, but not all companies respond to security breaches the same way. Companies such as Facebook, Twitter and Apple, have voluntarily gone public with their security troubles. Alternatively, a number of companies have continued to deny cyber attacks, despite reports stating otherwise; including, Exxon Mobil, Coca-Cola, Baker Hughes, and others. The U.S. government has encouraged transparency on cyber attacks as part of a wider effort to protect American intellectual property. Advocates of disclosing breaches claim it will set a precedent for other companies to get more active in fighting cyber attacks. The majority of company lawyers advise not to disclose, pointing to potential shareholder lawsuits, embarrassment and fear of inciting future attacks. Health and insurance companies must disclose breaches of patient information, and publicly traded companies must when an incident effects earnings. What policy should companies adopt when dealing with a cyber security breach?

      Kirk: The common good demands a united effort by public and private institutions to fight cyber attacks. Companies owe it to the public to admit they've been hacked and to use their experience toward improving efforts against hacking. Anything short of full participation will guarantee that cyber attacks will continue to be a problem, and companies will be picked off one by one as they stand silent. Due to the sheer number of incidents the stigma of being hacked has decreased dramatically, opening the door for more companies to come forward. It's time for companies to think of the common good over protecting their own tail.

      Patrick: The focus here should be on the legal system, not the victims of cyber attacks. Hacked companies are being further victimized by being pressured to release security breaches, while being inadequately protected from the liability that comes with it. This is not to say that companies should not be held accountable for a reasonable amount of preventative security, but the U.S. government is sending companies mixed messages. If the Federal Government really wants collaboration from hacked companies they should consider offering anonymous participation in their current initiatives, as well as insulate companies from unwarranted shareholder lawsuits.

    Some Victims of Online Hacking Edge Into the Light

    A Framework for Thinking Ethically



  •  HP: Are Companies Paying Suppliers Enough to Allow for Good HR Practices?

    Tuesday, Feb. 12, 2013

    Hewlett-Packard Co. announced this week that it would tighten oversight on its Chinese suppliers' use of student interns and temporary workers. Chinese factories often resort to interns and temporary workers to supplement its workforce while avoiding the costs associated with full-time employment, and reports of abuse of these workers are on the rise: such as long hours and being underpaid. In response to these trends, HP is imposing a limit on the number of student workers allowed at its suppliers, as well as mandating that they must be working in an area related to their field of study. While labor groups view HP's announcement as a positive step forward, many fear that the source of the problem is directly linked to HP not paying high enough supplier fees, forcing suppliers to cut corners to win contracts. Is HP obligated to take additional steps toward addressing this problem?

      Patrick: While additional steps toward preventing labor force abuse should be taken, HP is not obligated to increase the amount they pay in supplier fees. Let's not forget that HP isn't the only moral agent here, suppliers and factory owners have a role to play as well. Accordingly, it is the responsibility of suppliers and factory owners not to take contracts that they cannot legally fulfill. Aggressive negotiation is well within HP's right and does not serve as an excuse for factory worker abuse. Despite this, HP should consider additional measures toward preventing this problem; such as, increasing the screening that suppliers and factories must go through, as well as implementing a penal system for transgressions.

      Kirk: I think you let HP and other firms off too easily. The competitive bidding process inevitably leads to visible and hidden cost reduction. HP needs to do something concrete to demonstrate it is willing to pay for safe and humane working conditions. Imposing one or more standards, such as limiting intern workers, will likely lead to cost cutting elsewhere unless HP and other global forms that outsource can "lean against" bad practices by deep engagement and communication with suppliers.

    H-P Steps Up Oversight of Chinese Suppliers

    A Framework for Thinking Ethically