Posts Tagged ‘business ethics’

21st Century citadel

Citadel for 21st Century aristocrats?

One thing absent from this blog is a ‘Theory of Everything’, reducing everything back to one fundamental explanation. The closest I’ve come may be a recurring¬†line that¬†humans tend to make decisions in a reactive way, a.k.a.¬†short-termism. Locke and Spender’s¬†book¬†Confronting Managerialism: How the Business Elite and Their Schools Threw Our Lives Out of Balance¬†certainly provides a grand unified theory of everything wrong with the world of commerce, including the issues with globalisation that I highlight¬†on this blog and a lot more besides.

The idea can be summed up very briefly: “managerialism” (as distinct from management) is the belief that membership of the management caste and its codified knowledge gives one an entitlement to govern, and not just to govern companies but governments and nonprofit institutions as well. This knowledge is acquired in business school. Yet, the authors argue,¬†business school education is disconnected from real life. It¬†describes the world¬†in quantitative terms that¬†assume perfect, closed systems and ignores¬†tacit knowledge. It¬†mistakes the balance sheet for reality.¬†Despite its hubris, Business education had no role in instigating the¬†biggest revolutions in business in the last 40 years: the quality revolution¬†and the tech start-up phenomenon, both of¬†which happened in spite of rather than because of what people learn in business school.

That wouldn’t be so bad if managerialism was a purely theoretical belief but business schools are not fringe organisations; people instilled with these notions do become real-world managers. The result is managers who, with their excessive emphasis on financialisation, believe their main task is to drive up the stock price, not to make products well. Products are of secondary importance only. The results speak for themselves: tottering companies in the Anglophonic world that lurch from one stock price boosting initiative to the next, undermining their own long-term value before being bought out or collapsing under their own weight (not that the responsible executives care, having long since departed for new pastures). Locke and Spender contrast this with German and Japanese firms where managers do not think of themselves as a caste apart and adopt more collaborative governance styles aimed at the long-term prospering of the enterprise for the benefit of all involved including, not least, customers.

Locke and Spender also comment on the failure of Christian Churches in the English-speaking world to provide a moral counterbalance to the amorality of Business School education (something I too noticed last year in this post). In both the Chinese and Islamic worlds, economics is paired with ethical imperatives. By contrast, ethics as taught in Business school is subservient to economic values and therefore ultimately futile:

self-interest in financial firms cannot be a “good” unless their market trades are involved in wealth creation. Since they are not, and business schools are doing nothing institutionally to promote financial markets as wealth-creating entities, business school talk about ethics is a concoction of fantasy (p. 173).

Ouch.

My only criticism of the book is that it spends lots of time talking about cultural differences which is all very illuminating but I expected more space would have been allocated¬†to business education specifically. I’d suggest¬†William Deresiewicz’s¬†Excellent Sheep might make¬†a better starting point for anyone interested.

Postscript

Right on the second page, there¬†is an acknowledgment of¬†former Christian Brother Godfrey Regio’s film Koyaanisqatsi as the source of¬†the book’s subtitle “How the Business Elite and Their Schools Threw Our Life Out of Balance”. In a pleasing circularity,¬†the end credits of¬†Koyaanisqatsi acknowledge the work of former Jesuit Ivan Illich for ‘inspiration and ideas’ and¬†Illich, fittingly, is best known for a book titled Deschooling Society.

I wrote about¬†Illich’s ideas in this post.

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CompendiumOfSocialDoctrineThe last week saw a watershed moment for Catholicism in the Anglosphere: the Catholic Bishops Conference for the U.S. state of Maryland endorsed the political objective of raising the minimum wage.

Why is this a big deal? For decades the Church’s hierarchy in the USA have been more inclined to speak out on personal morality issues. Pundits might attribute the shift to the Pope Francis effect but really it’s a moment that had to come sooner or later as the American Dream is manifestly not working out and the majority of the country is seeing their living standards go backwards.

What it draws attention to is just how anemic English-speaking Catholicism is on economic matters. Other than the Maryland bishops, who is seeking to apply the clear words of the Gospels or of papal and conciliar documents into specific, present-day proposals?

I was pleased to learn that a French author Antoine R. Cuny, a layman, has written a book called Finance Catholique;¬†a wholesale critique of the existing system of global finance in the light of Christian values (alas it has not as yet been translated into English). He sets out in pretty direct language what financial practices are and aren’t acceptable to Christian morality. What a refreshing change from the timid, oblique suggestions English speakers have become accustomed to. This is his list of eleven ‘financial sins’:

  1. Price volatility due to speculation
  2. Wage inequality
  3. Excessive use of leverage
  4. Commodification of workers
  5. Short-termism
  6. Losing sight of non-economic values such as scarcity & productivity
  7. Failure to share the profits from an enterprise
  8. Anonymity and disempowerment of investors
  9. Tax havens and tax avoidance generally
  10. Adverse effects on the environment
  11. Lack of transparency

In the employment relations field, there used to be an entire confederation of trade unions active in Latin America and Continental Europe which promoted Christian social doctrine in economic matters, the World Confederation of Labour. It merged with the International Confederation of Free Trade Unions (now ITUC) in 2006 and its voice disappeared into the secular arguments used by the larger organisation. Nothing against secular arguments, but there is definitely a loss of synergy with the pulpit, the result being that churchgoers waste time fretting about cultural trends that they can’t influence while not looking too closely in the mirror when they go to work.

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Olympus E-PM2 with Tokina 80-400mm

Olympus E-PM2 with Tokina 80-400mm (Photo credit: hto2008)

I was really looking forward to reading ‘Exposure: Inside the Olympus Scandal‘. Perhaps unfortunately it has parallels to the fictional ‘Rising Sun‘ so I¬†was hoping for a similarly dramatic story of moral uprightness in the face of wrongdoing. Maybe some readers found that to be the case, but¬†as I worked through the book I thought the ethics of the situation became murkier.

In brief: Briton Michael Woodford was made President of Olympus in 2011. Just a few months into the job he became aware of an accounting fraud when it was leaked to independent magazine Facta by an anonymous employee. He tells his executives to investigate it but gets stonewalled and, when he pushes the issue, the board dismisses him.

The fraud in question was a loss incurred all the way back in the late 1980s during Japan’s property slump, when an investment turned sour. Company insiders had kept it out of the accounts all that time before deciding to realise the loss in 2008 by purchasing a phoney company and counting the $700 million debt as an ‘advisory fee’. Woodford wryly¬†comments that, had it been real, it would have been the largest advisory fee in history.

But that’s as far as the scandal goes. There’s no hidden agenda, no underworld involvement, not even any personal enrichment arising from these shenanigans. The perpetrators were motivated purely by the desire to protect their own company.¬†A victimless crime then? Not exactly; the shareholders were clearly being misled, however massaging of ugly facts is so commonplace in Japan that it’s difficult to call it wrongdoing (see earlier post about laws vs norms). The Economist described the Olympus affair as “not so much a scandal as a state of mind”.

Is it just a simple clash of¬†Anglo American vs¬†Japanese values? Woodford didn’t think so.¬†He argues forcefully while at Olympus (and again in his book) that such practices are rotten and need to change. Japan’s closed-rank corporate culture, he says, did wonders for the country in the postwar era but now that those companies have grown up they need to be able to adapt to changing circumstances. Unquestioning deference does not allow people to take the necessary risks to fight off competitors, notably including those in next-door Korea. Woodford passionately wants Olympus to succeed¬†but¬†sees¬†its own corporate¬†culture as its biggest challenge. How much impact his actions will have in the long term remains to be seen.

Here he is talking about his experience on Australian television:

Shareholder value versus value to other stakeholders

On the narrower question of the fraud itself, I¬†can empathise with¬†the unknown people who were trying to correct the damage. They remind me of the hapless crew of the Battleship Yamato who continued to man the guns even when the ship’s fate was sealed. Woodford comes from an Anglo-American perspective of shareholder capitalism. In his view the profitability of the company is the number one value. The Japanese, on the other hand, see the company in a more embedded fashion: it exists in a web of relationships including the other members of its keiretsu conglomerate, suppliers, customers, employees and factory towns. It sounds noble to make the company face the music, but what effect does it have on the ongoing wellbeing of all those stakeholders?¬†(If that sounds touchy-feely, don’t laugh;¬†the¬†U.S. Government used exactly these justifications to¬†rescue both the financial industry and¬†General Motors)

Faced with¬†such ludicrously high responsibility, it’s not hard to see why the poor devils working in Olympus’s back offices¬†opted to¬†delay the day of reckoning. I’m not saying¬†it was¬†the right call, just that¬†it’s¬†understandable with the pressure they would have felt.

Harvard Business Review ran an article last month titled ‘Long CEO Tenure Can Hurt Performance’. It compared the stock return of several companies against the length of tenure of their CEO and, sure enough, the short-term CEOs saw the greatest rise in stock price. What was omitted was whether the companies stock prices performed better after the CEO in question departed; not as well, I suspect. However that is a tactical argument.¬†The real point is that bundled into the article is the Anglo-American assumption that the share price is the measure of a company’s worth,¬†and what it accomplishes in the real world is only an adjunct to this. I’m not convinced.

See also:

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Law School

Law School (Photo credit: Tulane Public Relations)

A little over a week ago, the Australian Council of Trade Unions released recommendations for unions to improve their internal governance, primarily in the area of finances. The panel was announced at last year’s tri-ennial Congress as a response to allegations of misuse of union funds at one particular union.

It should be noted that the people involved in this incident have since been charged with fraud so there is no deficiency of regulation. The recommendations propose tightening-up of internal procedures so that it is more difficult for this kind of conduct to take place unseen.

This got me thinking again about the difference between regulatory compliance and ethics.

All laws have the effect of categorising human behaviour as acceptable or unacceptable. The problem is, the real world does not lend itself to tidy distinctions, so laws become more complicated as they define exceptions and then define exceptions to exceptions. Moreover, this process doesn’t take place in a vacuum; as soon as you proscribe one form of misconduct, another will spring up in its place. You could call this the ‘Hydra Effect’.

It’s worth asking what effect, if any, does legislative redress have on people’s sense of right and wrong?

I don’t think there is a hard and fast answer to this but can see three interpretations:

  1. It sends the message that society disapproves of the conduct and thus the law has a normative effect. This may be true in some areas -notably criminal law- but it seems a little naive to believe that law and morality could be so closely correlated in an era when the laws of the state run to thousands of pages. I once attended a defensive driving course where there was a free-for-all discussion about what were the correct road rules in certain situations – everyone was just guessing! (We know what drivers really do when faced with¬†such ambiguous situations:¬†they don’t consult the rule book, they simply¬†fall back on politeness and¬†decide who will¬†give way¬†using hand signals)
  2. Legislation could in some situations have the perverse effect of lowering standards.¬†Take financial regulation for example: most people involved with finances are behaving honestly at the outset. Then, in response to the actions of a few individuals, the law steps in to set a certain benchmark. That benchmark will most likely be¬†lower than people’s personal standards, as it sets only a minimum standard of behaviour. The normative effect of the law makes them ask themselves, ‘Why should I bother? Here is a clear signal that I don’t need to take as much care as I have been’. How many times have you heard someone say, defensively “But we were acting within the law”?¬†Mandatory CSR targets¬†fall into this category, e.g.¬†carbon emissions treaties and ‘Fair Trade’ standards (see earlier post).
  3. You could attempt to sidestep this dilemma by taking a position that law-makers oughtn’t be interested at all in whether or not the law has a normative effect on people, they should simply see it in an instrumental fashion designed to bring about a particular result – or, even more cynically, see it as a way of reacting to public opinion. You might call this the ‘checks and balances’ view. Immigration laws are an example. Stock exchange rules are another: their purpose is simply to avoid certain outcomes and the moral status of human actors involved becomes irrelevant. This view has its place (see post) but if you apply it universally, you will end up ascribing unrealistic levels of responsibility to Governments, as if¬†their mere fiat alone is sufficient to determine what people do in the real world. Or, if you admit that they can’t, then you’d have to advocate allowing individuals completely to follow their own moral lights. That is basically an optimist’s vision of the law of the jungle.

This leaves us between a rock and a hard place. Yes, laws do carry a normative effect but you can’t rely on that alone.

There was a book by Jim Collins a few years back that advocated the use of “Stop Doing” lists. The idea is that more work will always find its way to you, creating the need for an ever-lengthening “To Do” list; so, to be able to stay on top of things you need to discipline yourself to make a list of what you need to stop doing to free up the necessary time.

Legislators and pressure groups, take heed: more law isn’t always the solution. It might help, but of itself it won’t be enough to bring about the intended change.

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Red Packets

Red Packets (Photo credit: xcode)

Reciprocity is so fundamental to social organisation yet we don’t often bother to name or think about it.

An underlying norm of reciprocity is by itself a powerful engine for motivating, creating, sustaining, and regulating the cooperative behavior required for self-sustaining social organizations, as well as for controlling the damage done by the unscrupulous. (Wikipedia)

An example of reciprocity in action are the hundreds of millions of packets of money being exchanged around the world today wherever Chinese culture has had an influence.

Reciprocity as a norm pre-dates its more recent manifestations such as the Golden Rule of Christianity or the similar formulation promulgated by Confucius (Do not do to others what you would not have them do to you).

In¬†contemporary nation-states¬†it finds its way into positive law and, when it doesn’t, it is what drives activism to make laws fairer.

The problem is that it is something we devised in a small group world, where co-operation is necessary for survival, whereas today we live in a planetary society. However the underlying necessity is no less valid, in fact if anything it is even more valid than it was in millennia past.

Pre-modern humans knew survival skills. They knew how to find their own food and could survive if isolated from their community. Larger scale social organisation meant specialisation and abandoning the ability to fend for oneself in every respect. Now that has gone a step further and arguably entire nations are now integrated in the same manner.

Yet … where’s the reciprocity gone in this equation? Those people who work in other nations making our clothes, growing our food, assembling our consumer knick-knacks, what do they get for their trouble? Poverty wages that would never allow them to aspire to the same kind of lifestyle. How fair is that?

We all tolerate this, we are all aware that we are tolerating it, and we feel uneasy about it because of reciprocity. If they were merely poor it would be another matter, but they are poor because people pay them peanuts, in the name of the consumer: i.e. you and me.

All of this because “they” are so far away we never get to meet them or learn their names.

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Deutsch: Kreuzwinkelständer der Modekette KiK

Deutsch: Kreuzwinkelständer der Modekette KiK (Photo credit: Wikipedia)

A couple of weeks ago we saw the tragic death of at least 250 Pakistani apparel workers in an unregulated factory, the worst such disaster in history.

It later emerged that this factory was supplying garments to the European market including Germany’s KiK.

It also emerged that this very factory was audited by RINA (Registro Italiano Navale Group) at the behest of New York-based Social Accountability International (SAI) just a short while before the fire occurred, and certified as meeting the SA8000 standard as a fair and safe supplier.

SA8000 is a voluntary standard promoted by SAI as a means of ensuring that suppliers are ethical. No one would suggest that it is anything but sincere but this incident makes a mockery of it.

When interviewed by Al Jazeera, SAI’s Executive Director didn’t seem particularly upset or contrite about the incident either:

True, if the deaths were anyone’s fault it was the negligent factory owners (who are now on murder charges). Plus, if you look narrowly at the¬†auditing aspect, it’s more RINA’s fault than SAI’s as they were the people on the ground.

However it really doesn’t rescue SAI. To blame it on RINA is to use the precise defense that suppliers try to use but know they can’t get away with. Imagine if Mattel said that in 2007 when it had the toxic paint problem: “Well, hey, it’s not our supplier, it’s our supplier’s supplier doing the wrong thing, so how are we to know?” If SAI, the supposed leader, can’t monitor their¬†own contractors, how are companies supposed to?

This tragic episode underscores¬†the shortcomings¬†of SA8000. You can’t manage workers’ rights in the same way that you might manage food additive levels or child restraint shock resistance, as something that can be measured and implemented but always¬†imparted. All companies need to do is stand back and listen to what people want (like … ventilation and fire exits, let’s say). It’s not really that difficult.

Asia Monitor Resource Centre recently published a book about this very issue, titled The Reality of Corporate Social Responsibility: Case Studies on the Impact of CSR on Workers in China, South Korea, India and Indonesia. You can download the PDF on their site here: http://www.amrc.org.hk/system/files/Book%20-%20The%20Reality%20of%20CSR%20-%20AMRC.pdf It is well worth checking out.

This book is written by people at the front line thoughout developing Asia and documents how Corporate Social Responsibility (CSR) that reflects the corporate agenda is not only unhelpful to workers in the developing world but is frequently used as a strategy to prevent workers and other community groups from having their place at the table.

In the Asian¬†context, CSR mostly involves activities like adopting villages for what¬†they call a ‚Äėholistic development‚Äô, in which they provide medical and¬†sanitation facilities, build school and houses, and helping villagers¬†become self-reliant by teaching them vocational and business skills.¬†Such corporate strategies have been effectively hegemonic, providing a¬†strong legitimacy and license for corporations to sustain the exploitation¬†of human and natural resources. More importantly, it leads people to¬†wrongly assume that the business houses, and not the states, are¬†responsible for citizens‚Äô basic rights to better education, clean water,¬†healthcare, etc. It disciplines the un-informed poor motivating them to¬†behave in ways that make state regulation obsolete, while leaving them¬†at the mercy of market forces. (pp. 2-3)

Rights aren’t something that you can “give” or impart, they are something that you acknowledge. That’s the problem with CSR: it is by definition an after-thought that merely papers over an existing way of doing things without seriously challenging them.

Aftermath

SAI’s mistake¬†was not promoting SA8000, it was disowning this catastrophic¬†system failure. They haven’t made¬†a peep of a suggestion that they need to re-examine¬†their way¬†of doing things.

SAI is funded by the companies that obtain its certification (rather like FairTrade), which¬†leads me to think it will soldier on through the crisis, notwithstanding the harm that’s been done to its reputation.

There¬†is more than one group¬†operating in this space and it’s really important that they¬†aren’t all¬†tarred with the same brush.¬†All up, six groups belong to the Joint Initiative on Corporate Accountability and Workers Rights.

SAI is one. Another, the Fair Labor Association (FLA), was set up during the Clinton administration. It has also been criticised for being too soft on business (they are the company auditing Foxconn).

Of the others, Fair Wear Foundation, Clean Clothes Campaign and the Workers Rights Consortium all put the promotion of union membership and worker consultation and participation front and centre and really need to be lauded for the great work they do in partnership with developing-world worker organisations.

The last, the UK-based Ethical Trading Initiative, seems to adopt a tripartite ILO-type approach which presumes unions’ involvement without pushing it too hard.

The best thing that could come out of this disaster is that FWF, CCC and WRC start getting some phone calls from companies whose motivation isn’t white-washing but who want to know that their suppliers are¬†decent places to work in reality.

Related posts on FairForAll.org:

English: in Chicago, Illinois, USA.

English: in Chicago, Illinois, USA. (Photo credit: Wikipedia)

I’m sorry, Dave. I’m afraid I can’t do that.

-The shipboard computer HAL in 2001: A Space Odyssey

For a while, I worked in the Chicago Loop.

I’d always turn to glance at the impressive Board of Trade building with its Art Deco statue of Ceres, the god of agriculture, dominating LaSalle Street as far as Lincoln Park, at which point the street bends slightly westward.

A short walk away, on the other side of the River, lies the Chicago Mercantile Exchange.¬†In 2007 the two merged and became one company. It’s the largest futures and commodities exchange on the planet.

The prices of oil, wheat, corn, cocoa, copper, tin, oil, tantalum … you name it … are largely set on this exchange, along with the fates of millions of primary producers around the world.

I recently learned something fascinating: the blocks around these two exchanges are starting to bristle with microwave dishes. Trading companies want to know what’s happening in the CME servers those few thousandths of a second faster than their competitors relying on copper-cable based internet connections.

Why? Because today the majority of trading is done by computers, without the input of a human being.

The computer decides to buy or sell based on algorithms, and it does it many many times faster than the guys in the mustard yellow jackets can.

Admittedly, these traders don’t exactly go around touting their moral credentials (see earlier post) but a computer can’t even pretend. Non-monetary values are invisible to it. All that triple bottom line stuff? Not in the program. E-trading programs don’t care, don’t even know that a huge spike in the price of corn is going to take food off tables around the globe.

Bad enough that people have to contend with natural disasters, but this has come about because people have willfully taken their hands off the wheel.

It’s the same story on Wall Street – a similar proportion of company stocks are traded electronically. It’s no surprise that institutional investors fail to exercise their voting rights at AGMs: the real-life people in those companies don’t even know what stocks they are holding and what they are selling.¬†That emphasis on quarterly results at all costs, and the harmful short-term thinking that it engenders, is increasingly being done to appease these ‘robot overlords’. Worse, I don’t hear anyone out there with the stomach to seriously challenge the wisdom of this system.

Fact starts to emulate science fiction.

*Update (3 October): New York Times reports that several other jurisdictions¬†are seeking to rein in¬†high-speed trading. No¬†sign on Wall Street or Chicago’s South Loop however.¬†The¬†article also¬†says¬†that 65% of¬†U.S. stock trades that are performed by computers.¬†Here’s the link:¬†Beyond Wall Street, Curbs on High-Speed Trades Proceed (New York¬†Times,¬†26 September 2012)

Further reading: