When corporations treat society like casinos

People joke that there is no such thing as “business ethics.” They call it an oxymoron – a concept that combines contradictory ideas. Sadly, the critics are right. Changing that may require holding those guilty of unethical behavior personally responsible for their actions.

In just the last several weeks a former peanut company owner was sent to prison for 28 years for his role in knowingly selling salmonella-tainted peanut butter that killed nine people. Volkswagen, the world’s biggest automaker, had software in the firm’s diesel-powered cars that cleverly put a lid on emissions during testing. Turing Pharmaceuticals jacked up the price of a 62-year-old lifesaving drug from $13.50 to $750 a pill. And the beat goes on.

All these examples capture the zeitgeist of an unethical, winner-take-all business climate in which bottom line-obsessed high flyers treat society like a giant casino and give the public the middle finger. Is it any wonder that business leaders are among the nation’s least trusted groups, ranking only slightly ahead of members of Congress?

People’s trust in business and those who lead it is eroding. It seems to many that executives no longer run their companies for the benefit of consumers or even shareholders and employees, but rather for the pursuit of personal ambition and financial gain.

In the wake of recent corporate scandals, it is again time to ask the most fundamental of questions: What is the scope of corporate social responsibility?

Maximizing shareholder value has for decades been executives’ top priority. Milton Friedman put it succinctly in a famous New York Times Magazine piece: “The Social Responsibility of Business is to Increase its Profits.” He referred to the concept of businesses having social responsibility as a “fundamentally subversive doctrine.” For Friedman, the role of business was clearly not to act as a social worker.

This formulation is one side of an ongoing debate regarding corporate responsibility. Milton Friedman’s formulation overlooks the fact that, as shareholders’ agents, business leaders have important responsibilities that extend beyond maximizing stockholder wealth. Simply put, many people believe that corporations are licensed by society to pursue profits with the expectation that they will produce goods and services that are of value to society.

Corporations should also remember that the way to maximize shareholder value is by maximizing customer satisfaction. Or as Peter Drucker, hailed as “the man who invented management,” put it, the purpose of business is to create and keep customers. For him, shareholders benefit when customer satisfaction: is the major priority.

While there are no black-and-white judgments, corporations can reasonably be expected to identify stakeholders beyond owners and investors, such as customers and employees.

Balancing shareholders’ expectations of maximum return against other priorities is a fundamental problem confronting corporate management. For starters, being responsible means obeying the laws and also behaving in a fashion that society universally values even if it is not required by law.

Believing that the markets will eventually sort the good from the bad is naive. What the public can now see, in hindsight , is that discussions about market discipline and increased government regulation are endless and don’t amount to much.

With the rise of institutional investing represented by large private and public pension funds, ownership in many large corporations is concentrated in the hands of a relatively small number of investors. The public may well have to rely on these investors to monitor managerial misconduct and corporate social responsibility before embarking on another wave of regulatory reform.

Of course, the dearth of personal risk associated with performance failures increases the incentives for corporate misbehavior and argues for personal punishment of the perpetrators. Real punishment may not cure the disease that lies at the core of the business culture and create a new vision of corporate responsibility, but behaving responsibly would surely be taken more seriously by all concerned.

Originally Published: October 24, 2015

Corporations’ interest vs. the public interest

There is much truth to the cliche that politicians are primarily interested in getting re-elected. To achieve this goal they cater to the small group of voters who are paying attention to the details of the legislative process – and often looking to cook up a raiding party on the public interest to promote their own goals.

Take a provision tucked into the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd­ Frank), one of the most sweeping financial reform bills in U.S. history, which President Obama signed into law in 2010. Dodd-Frank demonstrates that policy making is dominated by powerful businesses and other well-organized special interests.

In the aftermath of the historic bailout of the financial system and major banking houses in 2008 and 2009, which precipitated the worst economic downturn since the Great Depression, the financial industry fell under intense criticism and scrutiny. The omnibus 2,300-page bill was passed in response to this financial and economic crisis.

Its stated aim was to “promote the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘too big to fail,’ to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purpose.” It was supposed to reduce system-wide risk and prevent a financial collapse like the one in 2008.

While the law did not lay a hand on Fannie and Freddie Mac, major players in the 1997-2007 housing bubble and the subsequent financial crisis, it did address the subject of “conflict minerals” that was promoted by certain non-governmental organizations supported by celebrities such as George Clooney and Brad Pitt.

These activists lobbied Congress and got them to state that the exploitation and trade of certain conflict minerals was fueling a humanitarian crisis in the Democratic Republic of the Congo that warranted the imposition of disclosure requirements.

The NGOs argued that profits from conflict minerals have helped fund the conflict between rebel militias and government troops in Congo that has claimed millions of lives and resulted in widespread human rights abuses, including violence against women and the conscription of children as soldiers.

The conflict minerals are tantalum, tin, tungsten, and gold, which are used in many industries. Tungsten, for example, is used in the screens of cellphones and tin is used to solder circuit boards.

Congress directed the Securities and Exchange Commission to promulgate a rule requiring thousands of publicly traded U.S. companies to investigate whether they or any of their suppliers use minerals mined in the conflict-ridden parts of Congo and to annually disclose the origins of conflict minerals necessary to its operations if the minerals originate from Congo or an adjoining country.

Supporters of the Dodd-Frank conflict minerals provision and of the SEC implementing rule argue that such disclosures reduce the violence involved with the mining of conflict minerals. Opponents argue that they are burdensome and costly to administer.

Combating brutal human rights abuses in the Congo is surely a good idea, but is a Wall Street Reform bill the appropriate place to do it? And is the SEC the right entity to implement the law?

And what are the boundaries of corporate social responsibility? How much responsibility does a firm have for its supply chain? Are there alternative and transparent approaches to dealing with the issue of conflict minerals? Corporations cannot be asked to solve all the world’s problems.

The financial industry was widely criticized for its intense lobbying efforts to shape Dodd-Frank’s legislative and rule making process. But they were not the only ones to convince lawmakers eager to curry favor with powerful special interests to include provisions in the legislation that promote their own rather than the public interest.

Originally Published: October 10, 2015