Markkula Center of Applied Ethics

2006-07 Business Ethics Outlook Press Briefing

Listen: Audio clips from the event

The Business Ethics Outlook, an agenda of five critical ethical issues facing American businesses in the coming year, was presented at a briefing for press on Oct. 26, 2006. A transcript of the briefing follows. Jerry Ceppos, former vice president for news, Knight Ridder, moderated, and the issues were presented by Kirk Hanson, executive director of the Markkula Center for Applied Ethics and University Professor of Organizations and Society; and Robert Finocchio, Dean’s Executive Professor at the SCU Leavey School of Business and former CEO of Informix.

Jerry Ceppos: Good morning. My name is Jerry Ceppos -- I’m on the Advisory Board of the Markkula Center For Applied Ethics at Santa Clara University and a former editor of the “San Jose Mercury News” and former vice president for news of Knight Ridder.”

This is the fifth year for the Ethics Center to identify key emerging ethical issues, as we call them, and this year, for the first time, they’re focused on one slice of life, and that is business ethics.

And to discuss the issues that we’ve identified and tell you about them, we have two people with us -- Kirk Hanson, executive director of the Markkula Center For Applied Ethics and University Professor of Organizations and Society. Kirk is also honorary chair of the Center for International Business Ethics in Beijing and probably will make a reference to that later on.

Also joining us is Bob Finocchio, who’s now Dean’s Executive Professor at Leavey School of Business, Santa Clara University. Bob is a former CEO of Informix and a board member of three prominent Silicon Valley companies: Sun Microsystems, Altera and Echelon.

Kirk, with that, why don’t you start us on why we want to raise these five issues.

Kirk Hanson: Thanks, Jerry. Welcome. Good morning. What we’ve done for the last five years is try to identify the issues that we believe will have the greatest role in shaping the moral character of the United States—unresolved issues whose answers will determine a lot about what the American character is. We also think they’re the issues that you all will be writing most about during the next year, and so there’s a bit of prediction in this, but it’s based upon our judgment that these are the most critical unresolved issues facing the country right now….

I’ll quickly state them and then Bob Finocchio and I will describe each of them briefly, a couple of minutes each. The five issues we picked were:

1) The subject of business and personal information -- what is the business organization’s responsibility for data privacy.

2) Private equity and business ethics -- raising the question of whether we’re in a new era of corporate raiders -- the role of private equity.

3) Fooling with or fiddling with the free market -- is the market price always right? …

4) What’s the role of business in the most important public policy issues of our time: immigration, global warming, free trade, health care, etcetera.

5) The reemergence of the debate over how American and other Western companies operate in the Third World and to a great extent, in Asia.”

And as Jerry said, I’ve just come back from China where I served as the honorary chair of the First Business Ethics Center in China and so I’ll be talking about that particular issue.

So we’re going to talk about each one briefly and why we think it is so critical over the next year. I should also state that you may be asking yourself, “Why aren’t certain issues in this list?”

Over the last three years we’ve had at least one business ethics issue covered in each of our Ethics Outlook presentations, and the three that we identified over the last three years we think have proven to be absolutely central to how we shape our moral character.

One is conflict of interest, particularly in financial services, and we identified that prior to Eliot Spitzer moving so critically and heavily into that area. [Two is] the ethical challenges facing governing boards, and we hit that sort of right at the time that Sarbanes-Oxley was starting to be rolled out and then resulted in so many questions about when boards should act and how they should act. And finally, executive compensation. Though it’s been around for awhile, we said last year this was going to come to a crescendo during the next couple of years and we think that’s happening. So, let me start -- I’ll cover the first then and Bob will cover the next two.

Business and personal information -- what is an organization’s responsibility for data privacy?

While … all of us have talked about and you’ve written stories over the past ten years about data mining, it’s our belief that this issue has become much more critical during the past year.

The symbol of that is the double whammy [of the Hewlett-Packard pretexting scandal]: First, “Oh, my Gosh, HP can get our telephone records” -- and telephone records are apparently easy to get, as that incident seemed to communicate. But the second whammy of that story was, “My gosh, even a distinguished and moral company -- a company that we thought of as representing the best (value-wise) could engage in this shoddy practice.”

So, that is focusing much more attention and, we believe, scrutiny over the next year on how companies manage the data that they are collecting in their various data files. Through every interaction, of course, data is being generated.

When I shop at Safeway -- Safeway has a complete record of my purchases, and it’s selling those patterns to different individuals. I told the students when we presented these five issues on campus yesterday that when they took the SAT -- their scores, their interests, were all made into mailing lists and those were sold to universities around the country -- including Santa Clara -- that bought those lists and sent solicitations to students above certain SAT levels.

So this is a ubiquitous problem, and we think that the HP case will fuel a much greater scrutiny of this over the next year, also encouraged by new advances in technology -- which are making the matching of databases easier and easier -- and what appears to the public to be a willingness of companies to exploit this data and a feeling that they can get away with it.

And so we think that’ll force some very deep thinking about this issue, and companies may well distinguish themselves by their philosophies towards protecting the data that they have on customers, employees and so on.

I’ll turn to Bob Finocchio, who will talk about the next two.

Robert Finocchio: Thanks Kirk and good morning. The first issue I want to present is:

Private Equity and Business Ethics

[This is] subtitled “Are we in a new era of corporate raiders or are these corporate raiders not the kinder, gentler corporate raiders we knew from the past?” We’re sort of faced with a perfect storm of economic and environmental issues here that are enabling this.

First, a billion -- perhaps trillion depending on what you count -- dollars are pouring into private equity and hedge funds. Secondly, we may be experiencing some of the side effects, perhaps unintended -- of regulations like Sarbanes-Oxley that make it less and less pleasant and more and more expensive and perhaps more dangerous to be a public corporation. And also interest rates have been at historical lows. And all these things together are really creating a dramatic new emphasis in the marketplace on private equity. These firms are… white hot alternative investments -- sort of the hottest area for pension funds and endowments to put their money -- including university endowments. And what we’re seeing is perhaps the dark side of shareholder activism.

This raises a series of issues -- in the one column you might call them public policy issues. Those would be:

  • The resulting concentration of economic power in the hands of a few large firms, as opposed to widely distributed ownership that would exist in public markets.
  • Less transparency in international markets -- in terms of the way these firms operate.
  • What are the fiduciary duties of private equity and hedge fund operators when they’re (pooling) with corporations that have other shareholders?
  • Should we regulate this stuff or would regulation make it even worse?
  • What’s the role of bankruptcy in bankruptcy law in this process?
  • And the ongoing debate on what are fiduciary duties -- long term versus short term?

These are all tough public policy issues. But equally pressing are the business ethics issues raised by this in terms of the behavior of the actors -- the people involved in these businesses and transactions. What are the duties of boards when they get raided? Do some shareholders deserve more respect than other shareholders? Is hot money from a private equity firm or a hedge fund just as virtuous as a long-term shareholder’s money?

What are the duties of executives? How do they remain independent when deals are placed in front of them where they might have extreme self-interest? What about the behavior of the actors in this business?

We read recently articles in “Business Week” about “strip and flip” and very high fees, commissions, loading up companies with debt to pay dividends. What about the impact on various constituents when this happens -- the collateral damage?

And what about fund managers who have a political agenda? Say people in a pension fund that take a particular position that might benefit some minority actors but may not be in the best interest of all of the people whose interest they’re supposed to be representing? So, we think this is a pretty hot issue right now that should deserve an awful lot of debate. The second issue I’d like to talk about, which is our third issue, is:

Fooling with the Free Market

Now this is not a new debate -- it’s gone on for hundreds of years -- but it has been very, very visible in the last year or so. It gets very visible whenever we have a natural disaster, and the price of hotel rooms goes up.

It gets very visible when the price of plywood goes up after a natural disaster. There was a piece, in “The Wall Street Journal,” I think, about somebody complaining about hotel rooms going up in South Bend, Indiana, every time Notre Dame had a football game. And was that ethical or not. So clearly it’s become an important issue of policy makers when the price of oil goes up. What should we do about that?

Of course, you know, politicians rush to sort of arm waving: “Let’s pass a law and prevent all this gouging,” but nothing really happens. Of course an economist will always say that if we try to fool with the free market, it’s likely to backfire and actually impede recovery from disasters and shortages….

It’s also manifest in other issues that come up -- such as the price of health care or the living wage ordinances that have been popping up in a lot of cities around the U.S. -- which may benefit some people but may actually drive out other businesses.

So, the issue is, you know -- should the market always be free to set wages and prices or are there moral goals that should help guide the invisible hand?

If you take the view of the economist, you’ll say, “No, don’t fool with markets. The side effects will be far more negative than you can imagine.” But you still want to protect people that may be hurt on the fringes of this. How do we as a society build safety nets without destroying the benefits of market pricing? Kirk?

Kirk Hanson: Great. I’ll talk about the last two. The fourth is:

What’s the role of business in public policy debates?

We are having a wide range of very difficult public policy debates -- be it on immigration policy, on global warming and other environmental issues, on free trade, on health care access and coverage for the uninsured.

What should businesses’ role be in all of this? Should they be full players? The fact that there are so many very difficult public policy debates -- and the potential for business to be heavily involved in those—is, our group thinks, raising very difficult questions and a crescendo of interest in whether business has too much political power. That’s the public policy question and, therefore, I think there will be increasing questions about pharmaceutical firms heavily engaged in this particular year’s political campaigns.

There have been a couple of stories in the last week -- the ongoing discussion about the role of lobbying in the aftermath of the Abramoff Scandals and the fact that the number of lobbyists in Washington representing private corporations has increased dramatically over the last five years.

We think that issue is going to come to a head -- it will focus on public policy but it will also focus on what is the ethical obligation of individual businesses. When they do engage in lobbying regarding immigration law or global warming -- should they play from their pure self-interest or what they perceive to be the self-interest of their company? Or should they have some sense of the public weal, the public benefit, the common good in mind.

Companies, frankly, have split over this. To take global warming, there are some oil companies, which are arguing from narrow self-interest in our view, that are arguing, indeed, global warming is still not a proven fact and we ought to not take action for alternative energies dramatically until there is absolute scientific proof. Other oil companies and oil industry interests are saying there is enough evidence on the table, and in the public’s interest, we have got to work very aggressively on alternative energy sources and on ways of controlling global warming.

We think these questions will very much animate public interest during the coming year around the public policy role of businesses.

The last issue is another issue that we believe -- while it has been with us for a number of years -- will reach a new level of attention during the coming year.

How should Western businesses or any businesses operate when they move outside of their home countries?

Do you do as the Romans do? The issue is hot at this point, frankly, because of a series of dramatic incidents over the last year: Google and Yahoo! facing censorship in China. Yahoo! being asked for the records of some of the users of its Chinese system and having provided those records. The Chinese government used the records that Yahoo! provided …to imprison at least one individual. Yahoo! got a black eye from this, but it raised more broadly the question of how you operate abroad.

The two other dimensions of this that seem to be attracting great attention are repressive governments in general -- authoritarian governments -- how do we operate in those environments? What is the expectation of businesses? How much can they tolerate in terms of behavior by those governments that hurts the human rights interests of their own citizens as well as those who come from other countries. Human rights will be a major dimension of this debate over how companies operate outside their own countries.

There was also one other dimension to this that seems to us to be really important, and that is the increasing tribal warfare in a variety of countries around the world, be it Nigeria -- where you have …if not civil war, at least civil strife, and companies are being placed in very awkward positions on how to react to that -- or in countries like Burma, where you have a very active opposition but a very repressive government. To what extent should companies follow just what the formal authoritarian government says and to what extent should they pay attention to the concerns and the values of very prominent minorities?

While this issue’s been around since the time of the Sullivan Principles in South Africa, we believe that many developments in the past year will make this a major topic of debate over the next year, and we would predict results in a new set of principles.

There are some private discussions going on in Washington involving Google and Yahoo!, Cisco and others who operate in China trying to develop principles to deal with that. And that’s being reflected in debates in the extractive industries -- oil and mining -- about how to deal with internal conflict and strife between either tribes or political interests in the different countries. Out of that we think will emerge a new set of global principles that will guide companies as they deal with these inevitable realities of global business….

When I was in Beijing this last weekend, we had some very poignant debates between individuals from India and China and the United States over where moral authority is going to come from in the years ahead. It’s clear that these countries don’t want to simply be dictated to by the United States, but at the same time they are interested in our ethical and moral perspective. And it is so critical we get it right so that we can participate in the broader global debate on ethics for the century ahead.

Thank you all very much.

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