In Defense of (some) Elitism

Why democracy depends on fact, logic, and education



Populists of both the right and left wings of US politics have been apparently unified in one thing: their condemnation of “elites”. While they agree on little else, both Trumpists and Sanders supporters have located the critical flaw in American politics as the undue influence of “elites” in our political, cultural, and economic lives. And while they are not wrong, there is an essential ambiguity in the term “elites” that has badly confused the conversation and which masks an important distinction in the way the two sides use the term. For this reason, it’s important that we disambiguate the term and begin to clarify what each side is actually implying by their respective condemnation of “elites”. While neither side is blameless, unpacking the claims of each side will show that only one has a credible ethical claim. The other, in fact, is merely anti-intellectualism masquerading as a principled political stance.

The Economic Anti-Elitism of the Left

The left and progressively-minded liberals have a long tradition of critiquing the economically and politically powerful. Although the phrase lacked (at the time) the universal appeal it eventually acquired, the Declaration of Independence claimed that “all men are created equal.” In the context of the political and social hierarchies of the 18th century, such a declaration was, indeed, radical. At the time, “men” meant white, land-owning males, but most Americans have since come to believe that there was a wisdom in that statement that was ahead of its time. Over the last 240 years, the US has attempted to make that statement mean what we now understand it to mean, that no one should be disadvantaged under the law by virtue of their race, class, sex, or any of the other characteristics that are not ethically relevant.

Intellectual history first began to take differences in class and political power seriously in the 19th century. Liberals and progressives placed social class at the center of the emergent, yawning economic inequalities. First in Europe as the industrial revolution began to exacerbate long-standing class stratification, then in the U.S., as the differences in scale of the agrarian economy became differences in kind under American laissez-faire capitalism, the problem of economic elites was laid bare. Marx, whose criticism of capitalism was far more accurate than his pseudo-Hegelian prescriptions, understood that the different classes have different interests; what is good for the textile factory owner is probably not good for the workers. In fact, Marx and other critics of unbridled capitalism correctly saw that the power imbalance between large companies and the individual workers was a magnification of the feudal hierarchies that had existed since the Dark Ages.

It against economic elites that we find the progressives and the left of today being most effective: arguing against the 50-year project among conservatives to dismantle the social safety net that was intended to mitigate the worst of the excesses of capitalism. Even more, writers like Anand Giridharadas (Winners Take All: The Elite Charade of Changing the World), Chris Hayes (Twilight of the Elites: America After Meritocracy), and Robert A.G. Monks (Corporate Governance) have argued the underlying ideology of American life has come to deify the rich and blame the poor and eroding middle class for their own decreasing quality of life. There has always been a puritanical assumption in America (which Europeans generally don’t share) that the rich deserve their wealth and the poor, well, they must lack the character, intelligence, or hard-working ethos of the wealthy. When the CEO made six or eight or even ten times as much as the average worker, this was an idea that existed had some credibility. As inequality has grown, however, and the average CEO now makes 278 times that of the average worker, it has become obvious that something beyond hard work is at play. Behavioral economists (Dan Ariely, et al) have furthermore proven the degree to which luck, race, and social class are far more determinative of wealth than intelligence, hard work, or character.

So when people on the left are critical of “elites”, they are generally talking about the economic top 1–2% and the twin myths that those who own the vast majority of wealth “deserve” their wealth. Consequently, the rampant social ills in the U.S. (falling lifespans, the opioid/addiction epidemic, rising suicide rates among the working class, poor health among the poorest of Americans) are the result of character flaws in the middle and working classes. The elites who run the companies that extract wealth from our workers, having decreased union membership under disingenuous “right to work” laws. They slavishly perpetuate the myth of “shareholder value,” to justify paying people as little as they can and lobbying the government to roll back worker and community protections. These are the “elites” that progressives are arguing should be held to account; they should pay their fair share for their increasing share of the economic pie and to keep our country a healthy and equitable place to live.

It’s true that some on the left go too far in their condemnation of the “elites”. Noam Chomsky and many true Marxists go beyond criticizing the ethos of the elites to constructing a conspiracy wherein that ethos is replicated by every television show, every news medium, and every commentator who doesn’t call for a workers’ revolution. These folks are pretty easy to spot: because of their Manichean view of the world (since you’re either with them or against them) anyone to the right of Bernie Sanders is an “enemy of the people” who will not get their vote, regardless of the consequences. The other moral secret of many on the far left is that they would prefer another four years of Trump in order hasten the revolution, and they believe that those who merely want to prevent a headlong descent into autocracy by voting for Biden are just victims of “false consciousness”. The left is generally correct in its focus on relieving the economic elite of its undemocratic power in both economic and political spheres, but all movements have their nutters.

The Cultural Anti-Elitism of the Populist Right

The populist right (and their thought leaders at Fox News) seem to let the economic elites, who are responsible for hollowing out of the middle class and most of the social ills that we’ve seen infect the “Red States”, off the hook entirely. Instead, their ire is focused on cultural elites. This is a more complicated position than it first appears. For a long time, I felt that cultural anti-elitism was merely a thinly disguised proxy for anti-intellectualism and racism. When the American media were wringing their hands over the economic disenfranchisement that they imagined caused the rust belt to vote for Trump, I wrote at the time that “they are right to be mad, but they are mad at the wrong people; these are just guys who want to be able to use the n-word and not be lectured about it.” It turns out I was only partly right about that. There are actually two different strains of anti-elitism on the populist right and the left is partly to blame for giving the right ammunition to feed one of those strains. The problem is that the right uses the overzealousness of some on the left as a blanket justification for its entire anti-intellectual agenda.

The first kind of cultural anti-elitism is aimed at higher education. It’s important to point out that there is a difference between the anti-intellectualism of the Republican establishment and its populist manifestation among the rank and file. The leaders of the Republican party know that the critical thinking and logical skills that are often acquired in college make it harder for them to make baseless claims about the economy and government (like advocating for supply-side economics and the blanket condemnation of any government program as “socialism”). There has been a concerted effort among the Republican establishment to instill a distrust of universities and of educated people in order to keep a segment of the population vulnerable to the jingoism, the hyperbolic patriotism, and the lazy magical thinking that often passes for policy on the right. The right knows an educated citizenry will be less likely to fall for propaganda and falsehoods. Instead, the educated “elites” have been demonized as unamerican, anti-Christian, and as communists-in-academic-gowns.

While it’s true that there is a strong correlation between a college education and moving to the left politically, it’s also true that the left hasn’t helped itself by making itself an easy target for criticism. Even when I was in graduate school in the early 90s, the critiques of “political correctness” and “thought policing” were not without substance. The 2010s have seen an acceleration of the impulse toward silencing political heterodoxy and “de-platforming” people with right-wing views. The thought-policing mob on left-wing twitter, “cancel culture”, and the idea of the entire university as a “safe space” for oppressed people, have made higher education an easy target of the Fox News talking heads. Tucker Carlson (ironically) has made particular hay out of the excesses of a few individuals on the left to discredit the entire project of higher education. And the left has walked right into the trap.

On the other hand, this debate is substantially disingenuous. The degree to which the average blue-collar worker’s life is in any way affected by the PC policing on college campuses is negligible. Beyond being told by her or his kids not use racial or other bigoted language when they are home on summer break (which I’m sure rankles, but hey — do you really want to base your political views on the fact you’d really like to be able to use the “N-word” at the dinner table?), the vast majority of those who claim to be voting against the “fascist left” have never actually come in contact with it. But the Fox News/Brietbart/OAN media outlets have created a credible-seeming threat to “freedom of thought” out of a few lefty professors and their admittedly overboard students.

From that partially-credible critique, the populist right springboards to a broader critique of a different kind of cultural elites, the “coastal cultural elites”. Having established that this is part of a university-led assault on “American values” of freedom of thought and speech, they extend this a belief in a broad conspiracy to undermine religious freedom, “traditional values,” and “freedom” in general by people who live in cosmopolitan centers on the coasts. It manifests itself, they believe, in over-representing minority racial, sexual, and gender-identities in media and forcibly restructuring the country, the society, and the family. More importantly, however, it has sought to justify a kind of anti-intellectualism which is, at root, destroying America’s political and civil discourse more than any other trend. It’s a short road from believing that Universities are primarily left-wing institutions of indoctrination to rejecting all critical thinking, all logic, all science in favor of the right-wing troll-culture that rejects the established ways of proving the truth.

Without Truth, Political Discourse Is Reduced to Power

When the founders of the American republic enshrined freedom among its primary values, it did so in the very particular intellectual context of the enlightenment. They felt, in broad strokes, that democracy was the best form of government for a number of reasons. Primary among them was the enlightenment belief that once people saw the superiority of rational discussion and the scientific method, they would be less vulnerable to demagoguery and mass hysteria. While we can argue about the degree to which people are still given to such breakdowns, it is true that democracy is impossible without an agreement on rationality and the importance of facts. In the past forty years, the right has undergone a transition from Burkean conservatism, which shared a set of goals with the left (better life for everyone) but disagreed on policies, to a nihilistic, almost Nietzschean ideology in which power is its own goal and its own justification. It is this change that has disturbed the balance of power in the US and has the country heading down the path of third-world authoritarianism.

For a time in US history, there was general agreement between right and left that, while they got things wrong occasionally (sometimes catastrophically), the journalistic ethics of mainstream journalism were sufficient to correct for intentional bias. While the left criticized the mainstream media for being insufficiently critical of the status quo and the right felt that the media were culturally too liberal, in general both the public and our political institutions agreed that the media were in the business of holding politicians accountable to the truth.

Starting with the Gingrich revolution, the right has destroyed the ability to have fact and reason-based conversations about politics. Beginning as far back as the 1990s (and seeing its first expression in the 2000 election), there has been a concerted effort to create an alternate media ecosystem where conservatives of any stripe could find support for their ideas. As the right-wing media sphere has expanded, and with people on the right lacking the critical thinking skills, we have moved away from being able to have good-faith arguments. Fox News “Entertainment” stars have perfected sophistic arguments that seem compelling to people who don’t recognize the informal logical fallacies they are built on. Add to that that the distrust of the educated “elites” who will point out the fallacies in their thinking, and we have come to a place the founding fathers couldn’t have anticipated: one where democracy is actually impossible because we have one set of citizens who have given up reason and cherry-pick their own facts and another set of citizens who (however imperfectly) aspire to be led by the facts, science, and use reason in their determination of their beliefs.

Once you’ve given up on facts and reason as the normative guides, all that really matters is power. If you have power, you can use it and if you don’t, you can’t. Power becomes its own justification. We’ve seen that in large ways, such as the hypocritical ways in which the Senate Majority Leader has stopped even arguing that he’s right, only that he’s got the power and he will use his power as he sees fit. We also see it in small ways, like the growth of troll culture online and the retort “Well, he’s still your President! Deal with it!” as if that was in any way a substantive argument.

The Only Way To Save Democracy Is the Rejection of Anti-Intellectualism and the Politics of Power

So where do we go from here? It’s not clear there is any way out. Germany found itself in a similar place during the ascent of the Nazi party, where intellectuals were villainized in favor of the “Folk”. There have been entire books written about the history of anti-intellectualism in America and how it has been with us since before the Revolution. So I don’t really have a path out of it, beyond forcefully advocating for the educational and cultural elite. There really is a difference between a good argument and a bad one. There really is a difference between actual facts and “alternative facts.” We can’t allow Trump and his minions to destroy civil discourse, once of the bedrock principles that democracy is predicated on. Unless we call out each and every lie, point out every fallacy and push back against this demonization of the educated, we will lose our republic. If you can’t have a discussion about politics, the only thing left is power. And down that way, the destruction of democracy lies.

Late Stage Capitalism is a Zombie Apocalypse

“Cash Flowwww…I mean….Brains…..”

There’s No Cabal of Elites Destroying Our Lives and Our Democracy: Only Zombie Corporations

One of the least discussed aspects of capitalism is that there is no one running the joint. Most people imagine CEOs with near-infinite power, the buck stopping with them. Even though CEOs today have far more control than they have historically ever had (Monks and Minnow, 2011), they are still ultimately beholden to their shareholders. What do their shareholders want? Like zombies only want brains, shareholders only want cash. The vast majority of stocks are held anonymously, which is to say, as part of a mutual fund or balanced portfolio or indexed fund. With very, very few exceptions (mostly institutional investors and investment bankers), no one knows what companies are in their investment portfolios, nor do most people care. They just want to see a significant positive number at the end of the year.

To the Republican free-market fundamentalists that have been carefully nurtured by well-funded and well-organized think-tanks (e.g., Cato Institute, Heritage Foundation, Olin Foundation (Mayer & Potter)), there is a magical belief in the power of markets. We’ll discuss the philosophical and economic background of the free market fundamentalism another time. Still, a close look at their views suggests that if we do nothing but what we want to do, and let everyone act in her or his self-interest, voila! The greatest good for the greatest number. Given the economic disasters that have visited us since the dawn of the industrial revolution, they must believe one of two things:

1) That God is the invisible hand, and therefore anything that happens as a result of that system must be just, by definition. Given the explicit Calvinist overtones of today’s Republican party, this is actually consistent; The losers at the game of capitalism are just living out God’s plan for them (as are the winners).

2) Economics is the only social science where a complex set of problems is solved by a single principle (they hold this in common with Marxists).

As an ex-Libertarian myself, I know the lengths to which free-market fundamentalists will go to protect their ideology from obvious examples of market failures. Their favorite retort, when faced with the Panic of 1873 or the Great Depression, is “but laissez-faire capitalism has never really been tried before! It’s the regulations that caused the market failures!” If you consider the full spectrum of income redistribution to the rich since 1980, this is a hard argument to make. Still, you will find young, clean-cut students claiming that if only FDR had left the market alone, we’d be living in a capitalist utopia.

Which, in a sense, we are. Due to the combination of decreased power in boardrooms, anonymous investors, regulatory and legislative capture, we live in a world where CEOs enrich themselves and drive decisions toward the bottom line alone. They are acting exactly the way the system incentivizes them to. The instability we are currently facing both individually and as firms is built into the system. Corporations are disincentivized from carrying rainy day funds; shareholders will insist that the money be invested in the business or returned to the shareholders.

So when jobs were taken from the middle class and shipped off to become part of “labor arbitrage,” that CEO was maximizing the only thing her shareholders cared about: cash flow. When the big box company comes into your town and forces all the mom and pop stores out of business and offers you $13/hour and no health insurance, the CEO was only doing what his shareholders expected: cash flow growth. And when, in cahoots with the most regulatorily captured administration in history, the oil company drills off the coast and spoils the ocean and kills the fish and destroys the ecosystem, everyone was acting the way the system incentivizes them to. At the center of capitalism is a zombie that forces those in it to bring more brains to feast on: cash flow.

Citizens United has made the problem exponentially worse. Now, the zombies have the right to lobby the government and spend unlimited money on pro-zombie candidates. The Trump administration, among its many crimes, is the pro-zombie administration, cutting zombie taxes and rolling back regulations on the zombies.

There is no cabal of elites stealing people’s future on purpose. Oh, there is an economic elite, and they are taking away the future of the middle class, but they are acting as the market insists they must. There’s just no cabal — just a bunch of individual zombie corporations. The only way to stop the elites is to re-imagine how we organize our economic institutions. We need to enshrine human values in the market. The most enlightened, best-intentioned CEO is still just a cog in the zombie cash-flow generating machine that all C corporations are. When push comes to shove, the zombies are going to get what the zombies want. If we want to stop them, we need to look at the “B” corporation movement and make corporations (that we’ve given most of the rights of humans) less like zombies and more like humans.

References

Mayer, J., & Potter, K. (2016). Dark Money: The Hidden History of the Billionaires Behind the Rise of the Radical Right. New York: Doubleday.

Monks, R. A. G., & Minnow, N. (2011). Corporate Governance. Chichester, UK: Wiley.

Why I’ve Stopped Arguing with Trumpists


Or: How ignoring the rules of logic will make people ignore *you*

I’m generally open to arguing politics with anyone, but I’ve come to believe, from repeated exposure, that Trumpists are not good faith arguers. In fact, I’ve always prided myself on being open to friendship with people of all political orientations. And this makes sense, because over my lifetime I’ve evolved across the political spectrum and have enjoyed my political conversations along the way (as opposed to the old chestnut about growing more conservative as one grows older, I was a 16-year-old libertarian and find myself getting more and more critical of the status quo as I progress through middle-age). I understand what is attractive about almost all political positions (except social conservatism…that’s just bigotry [mostly] and I really don’t get that). So, because throughout my life I’ve been a person of good faith seeking truth, I treat everyone else as if they bring the same spirit to conversations.

On the other hand, I don’t argue with people who don’t approach conversations in good faith and it has been my universal experience that Trumpists are bad faith arguers. Good faith in argument consists of several attitudes, the absence of any one of them means you are not interested in engaging in conversation to advance knowledge. Here are my rules for good faith discussions

  1. You are open to having your mind changed.

2. You are aware of (and follow) the rules of logic.

3. You apply principles consistently.

Rule One

The first of these is really the most important. Many people (on both right and left, but research has shown it is far more prevalent on the right [for a non-technical overview, see The Republican Brain by Chris Mooney]) are so firm in their beliefs that no piece of evidence would ever change their mind about anything. A couple of good examples are the belief in capitalism among libertarians and the belief in Communism among Marxists. There is generally nothing you can say to dissuade someone who holds these views. Tell a capitalist that children were exploited and essentially enslaved in early capitalism and they often retort that it was better for people because they were able to support their families or (with shocking backward logic) that it was somehow because real, “pure” capitalism has never really been tried and it was really the fault of whatever minor regulation was in place at the time. Similarly, argue with a Marxist that human beings are, as a group, too selfish for Communism and that history has shown this to be the case, and you’ll likely be accused of not having a raised consciousness and the very fact you’re arguing against Communism shows that don’t get it.

So here’s the question I always pose to people: Can you imagine some fact [or set of facts], occurrence, or circumstance that would change your mind about this issue? If you claim that gay people adopting children will create emotionally unstable children, how would you react if a raft of academic articles show that (as they have) what effects emotional stability is how loving and stable a family is, not the gender of the parents? Will you claim that academic articles are just written by left-wing academics and therefore can be disregarded? If so, you fail the “open-mindedness” rule and I’m uninterested in talking further with you. If you believe that centrally planned economies are better for people than one based in a market system, how would you react if shown historical data showing that people were poorer under communist regimes? Would you claim that the statistics have been manipulated by capitalist tool researchers that are beholden to corporate benefactors? Same deal. You fail. If there’s nothing that can change your mind, your mind is closed. Arguing with logic and facts against a closed mind is like talking louder to someone who doesn’t speak your language: it seems like the right thing to do, but you’re just wasting your breath. Trumpists, to a person (in my experience), lack open minds.

Rule 2

Logic, of both the formal and informal varieties, comprises the rules of what makes sense. It is as exact, in almost all respects, as math and other sciences. There a formal rules you need to follow for your conclusion to follow from your premises, and there are informal fallacies you must avoid in order to be certain you are arguing correctly. If you argue, as Mitt Romney did, that because President Obama wants to extend early voting to all Ohioans he’s trying to take away the rights of the military, who currently enjoy that right already, you are guilty of a formal logical mistake. If (m) is a member of set (EV), making (a) a member of that set doesn’t make (m) no longer a member of (EV). It’s not even a particularly hard rule of logic. Donald Trump and his followers make these kinds of mistakes with startling regularity.

Similarly, if you use any of the informal logical fallacies that you should have been taught in Introduction to Critical Thinking, you similarly fail this rule. Fact is, everyone indulges in these from time to time, but if it’s pointed out to you, a person arguing in good faith will admit her or his error and back down. If you double down or change your argument, you’ve lost the credibility necessary for civil discourse. For example, if I say “X is a liar and here are 10 examples”, the only credible response is: “no, you are wrong: here are facts that refute your claim, or here is how your reasoning has gone wrong”. Saying “your guy also lies” (red herring — whether my guy lies or not is a separate question and has no bearing on the truth of my claim about your guy), “the lame stream media has a left wing bias and that’s why you think this” (appeal to motive or the ad hominem fallacy — who makes a claim is independent of whether a claim is true), “over 50% of the people in the United States believe that he’s telling the truth” (appeal to popularity: whether an idea is widely held says nothing about its truth: remember Copernicus), or “only a left-wing liberal would think that” (ad hominem — again, my politics are irrelevant to the truth or falsity/validity of my argument), it means that you’re not looking for truth, you’re only trying to score points. I don’t argue with people for sport (mostly), but to come to greater understanding. If we don’t share that goal, there’s no reason to continue the discussion. And this is where Trumpists are most guilty: the “but Obama…”, “but Hillary…”, or now, “but Biden…” retorts are never in order when some damning fact about president* Trump is pointed out.

Rule 3

The greatest philosopher of the 20th century (Ludwig Wittgenstein) argued persuasively that we only need to engage people in argument if they actually believe what they are saying. His example was determinism, but it is an easily generalizable principle. If you are making an argument for the importance of some principle (say, some activity makes you a bad person that shouldn’t be elected) in a particular case (usually one’s political opponents), I only need to actually answer the argument if I think you hold that view as a principle. If, however, you wouldn’t apply the same rule to someone who shares your political views, then you don’t actually hold the view you claim to hold.

To see what I mean by this, imagine how people on the right would react if someone from Barack Obama’s senior leadership had leaked the name of a CIA agent so that he would be exposed. They would characterize it as “treason”, and rightly so. Yet, when the same thing happened in the George W. Bush administration, they defended the actions and claimed that Scooter Libby was the target of a “witch hunt”. The sad implication of this some people have no moral core, that they use ideology and ethics as nothing more than a stick to gain power over their opposition. Over and over during Trump’s administration, acts that would have been considered grounds for impeachment (or worse) had they been done by President Obama have been excused by his followers. Calling something “fake news” doesn’t, in fact, make it so. What is more likely, that Mr. Trump is guilty of (most of) the things he’s been accused of by the *all* of the mainstream media, or that he (and his followers) are guilty of cherry-picking data sources?

This is actually a challenging rule to follow. We are always more likely to think our friends are motivated by good and our enemies are not. But it is a necessity for intellectual and civil honesty. I try very hard to make sure I’m holding myself, and my political compatriots, to the same standards I hold everyone else. For example, I’ve was very disappointed in the Obama administration for the way they continued the “War on [some] Drugs”, as I was by the way they let the same financial interests that caused the 2008 meltdown run the Treasury. But beyond admitting they don’t like his “style” sometimes, Trumpists seem absolutely unable to apply the same rules of evidence to their leader’s actions as to those of everyone else.

Conclusion

There’s an essential humility to arguing in good faith. It’s the humility of a person who knows that the truth exists and also how easily we can be lead astray by bad logic and unconscious bias. I’m honest enough to know that I’ve been persuaded by bad arguments and believed things that were not true. Life is too short to hang on to beliefs that are false. That’s the only reason to argue about things with people, to try to come to a better understanding of the world. But if you don’t have this humility, which is to say that you aren’t arguing in good faith by following the rules I outlined above, you’re just taking up minutes of a life that is far too short, minutes that could be far better spent spending time with my family, writing my dissertation or even just watching an old soccer match during the quarantine. So please don’t comment on things I post on Facebook or Medium unless you share my love of truth and my ethos of civil conversation. I understand an occasional post to show you’re in disagreement, but unless you are interested in a true rational conversation, not just one where you might be seen to score a rhetorical point or two, I’d suggest supporters of Mr. Trump take their bad faith, cult-like arguments elsewhere.

Addendum/Edit: I want to clarify one point. This is a descriptive piece, not a prescriptive one. I don’t say I’ll never argue with Trumpists, only that I’ve stopped doing so because I’ve too much inductive evidence (4 or so years of engaging with them) without a single good-faith arguer among them. All inductive arguments are only probable, not deductively certain, so I would argue one is justified in making the probabilistic judgment that Trumpists are overwhelmingly likely to argue in bad faith. As I say in the article, I will engage with people up until they show themselves to be bad faith arguers. It usually takes only a sentence or two. The Fox News epistemological bubble is so self-reinforcing that I’ve found otherwise reasonable people making fallacious arguments as soon as the topic of Trump comes up. Once, an otherwise smart Christian coworker of mine, when I pointed out the hypocrisy of the way the good and decent family man Obama was treated compared to the womanizing, seemingly hateful Trump, responded “well, you know Michelle Obama is a man, right?” with a totally straight face. I consider not engaging with him at that point to be both justified and an object lesson for every other interaction I’ve had with Trumpists.

Why is Good Governance is So Hard?

Since the dawn of the corporation (and even before, whenever investors and management were not identical, such a ship owners and ship captains), the “agency problem” has plagued business (Wright & Mukherji, 1999). The agency problem essentially boils down to this: when a group of investors essentially turns their business over to someone else (professional managers) to run the business, the interests of the owners and managers can diverge. We saw extravagant examples of this in the late 90s/early oughts when senior management in companies like WorldCom and Global Crossing used corporate treasuries as their own personal piggy banks.  A less egregious example of this behavior is empire building (e.g., unnecessary/non-accretive M&A activities, outsized pay packages, and sinecures and senior positions for long-time associates (Robert A G Monks, 2002)).

When global corporation are so badly run that they result in scandal and massive loss of equity value, bad corporate governance is nearly always one of the culprits (Locke & Spender, 2011).  Bad corporate governance can be broken down into two categories: inept governance and badly structured governance.  Inept governance is usually set up in a way that should provide value for the stockholders, but because of the power of the CEO and/or other senior managers, the directors owe their seats to senior management so any kind of aggressive investigation or oversight is unlikely. These directors know that if they contradict management’s plans or look too closely at them, they are unlikely to be re-nominated the next time they come up for election.

Structural issues that lead to agency problems/opportunistic behavior are the lack of appropriate committees and/or inappropriate appointments to those committees.  For example, the head of the audit committee should be someone with a background in finance, but in several of the most flagrant cases, the audit committee was composed of people with no finance background at all. Likewise, the remuneration committee should be composed or led by someone with an HR background.  Otherwise, compensation consultants recommended by the CEO engage in a race to the top and result in frankly outrageous pay packages that appear to incentivize performance but, according to several studies, pay out no matter whether the company does well or poorly (Robert A. G. Monks, 2005).

So whether it’s by ineptitude or poor structure, poor governance has predictable results according to agency theory. When added to the diffuse nature of share ownership and the difficulty in changing the board or having any activist say in the running of a corporation, the problem of managerialism, disconnected agency, and opportunism gets worse and worse.  

I was re-watching “The Smartest Guys In the Room” (about the Enron debacle) recently and I was amazed by how much intentional (motivated) ignorance there was on the part of the Board of Directors regarding the operations of Fastow’s finance department.  Not only was he obviously breaking many conflict-of-interest laws, but also many commonly accepted accounting practices.  The fact that even Arthur Andersen was complicit is mindboggling.

The behavioral economists and ethicists call this “motivated reasoning” and it’s one of the primary problems with most boards and board committees today. They all have motivations (keeping their profitable board seats) to look the other way and not exercise their fiduciary duty. It’s not till shareholders and institutional investors start holding them accountable will they lose the motivation to look the other way.  And then maybe the particle, now watched, will start behaving differently.  

Will it ever be possible to have good corporate governance under the current structure of shareholder capitalism? Again, following Monks (2008), there are a number of factors that make it unlikely that managerialism (the primacy of management over shareholders) will be displaced anytime soon:

  • Shareholder diffusion: the fact that shares are widely dispersed means that no shareholder has enough power to insist on governance change or insist on creation of greater shareholder value.
  • Management control of board selection process: In most companies, the directors are recommended by the management. This means that the directors  owe their jobs to the CEO.
  • The lack of rights of shareholders to recall or replace shareholders. The management had most of the rights to elect boards and are protected from takeovers that might benefit the shareholders.
  • Motivated reasoning: Until there is some countervailing motivation or structures are built into the board to hold board members accountable, wishful thinking is likely to keep boards docile and dependent.

Until these structural flaws are dealt with, it seems that management will continue to run companies with very little interference or oversight from the Boards of Directors. 

References

Katz, C. M., Choate, D. E., Ready, J. R., Nuňo, L., Kurtenbach, C. M., Kevin, S., … Nuňo, L. (2014). Evaluating the impact of officer-worn body cameras in the Phoenix Police Department. , (December), 1–43.

Locke, R., & Spender, J.-C. (2011). Confronting Managerialism: How the Business Elite and Their Schools Threw Our Lives Out of Balance (Economic Controversies). London: Zed Books.

Monks, R. A. G. (2002). Creating Value Through Corporate Governance. Corporate Governance10(3), 116–123.

Monks, R. A. G. (2005). Corporate Governance – USA – Fall 2004 Reform – The Wrong Way and the Right Way. Corporate Governance13(2), 108–113. doi:10.1111/j.1467-8683.2005.00409.x

Wright, P., & Mukherji, A. (1999). Inside the firm : Socioeconomic versus agency perspectives on firm competitiveness. Science28, 295–307.

From the Jan 2017, Prescient Alarm Bells from Before Trump Even Took Office: “Can Ethicists Save Democracy?”

Most voices from the ethics establishment have been remarkably measured in response to the recent election of Donald Trump. This is not surprising since the prudent reaction to normal political changes is a studious agnosticism. We in the ethics field want to be seen as on the side of business but also on the side of the right and the good. If every shift in political wind inspired an intense reaction, we could be seen as biased (the very thing ethics seeks to avoid). We aspire to read the political tea leaves while having no investment in the outcome. And so it should be in normal political times. Even though much of the mainstream media, political establishment and academic commentariats are treating the Trump administration as a new and novel risk, (with notable exceptions) those who speak for the ethics and compliance community have been much less emphatic.

This is a mistake. By treating the Trump administration as just another transition from one party occupying the White House to another, those who watch compliance and ethics trends for a living are ignoring what we know about the ways ethics and lawfulness spread through organizations. While it’s not always possible to generalize from corporate compliance to the national level or vice versa, both history and compliance experience suggest that we are about to enter a new and dangerous world. While Mr. Trump is not yet president as of this writing, his personal and business behavior, as well as many of his cabinet picks, indicate that we are moving into uncharted territory. Never in my half-century on the planet has there been a president and an administration so ethically compromised before even taking office.

The professional class was nearly unanimous in its rejection of Trump as little more than a common grifter with a flair for the dramatic. Even those who agree with some of his political platform (such as it is, completely lacking in a coherent ideology beyond a rejection of “elites”) can see that his lack of transparencyconflicts of interest, and purposeful self-dealing are well beyond even the most flagrant recent examples of corruption in the executive branch. The Bush II and Nixon administrations had substantial conflicts of interest but even they never emanated from the office of the President itself.

After eight years of scandal-free democracy under the Obama administration, perhaps we’ve forgotten just what kind of havoc corruption in the executive branch can wreak. For example, his cabinet choice of Rex Tillerson, a man with no diplomatic experience and with substantial business ties to Russia, to head the State Department is extremely suspect. In Trump, we have not occasional mistakes made against a backdrop of conformance to ethical norms, but a presidency aiming toward kleptocracy. Mr. Trump’s refusal to follow the traditions of putting his business assets into a blind trust or complete divestiture should set off every ethics and compliance professional’s radar. It appears that Mr. Trump will be shaping his administration in his own interest-conflicted, self-dealing image, and that is very troubling indeed.

One of the bedrock principles of organizational ethics and compliance is “Tone at the Top.” All organizations take their ethical cues from the top manager and those around her or him. Many of Mr. Trump’s cabinet picks share are a lack of experience in their portfolioa fundamental ideological disagreement with the mission of the departments they are meant to lead, or personal and/or professional gain from the activities of their departments. Many of these appointments would be considered laughable in any other administration. Given both Mr. Trump’s own ethical challenges and the various practical and theoretical challenges of his cabinet, the principle of “Tone at the Top” implies two main outcomes. First, we can expect scandal and corruption to be normalized not only in the administration, but in business as well. As illustrated colorfully in the book “The Dictator’s Handbook” (de Mesquita and Smith, 2012), the business community must play along with the corruption of the administration in a kleptocracy. We’ve already seen Mr. Trump lash out at companies that he feels aren’t paying him the proper fealty. One instructive example is his comments regarding Raytheon after the CEO of that firm made comments critical of Mr. Trump. Its market valuation decreased by 2.8% because of one tweet. If there were any doubts that real consequences will befall firms that resist Mr. Trump’s demands, this clear abuse of power should put those doubts to rest. It will begin with companies doing business with the government, but this necessity to hew the line is likely to spread to other firms as the Trumpocracy takes hold.

This is how the corruption of the Trump administration will spread to corporate America. As the norms of governance begin to erode, so do those of business (by both necessity and emulation). In a kleptocracy, the only principles that matter are those of quid pro quo and power consolidation. Businesses become both a revenue stream for the government and a powerful ally against the interests of workers and citizens. Those who are charged with enforcing the rule of law selectively or vindictively choose their targets based on the interests of those at the top; the rules that protect both investors and workers fall by the wayside. As those in the C-suite become (often by necessity) reciprocally entangled in the lawless trading of favors, power, and money with the government, they lose moral authority within their firms. As laws are selectively applied, the entire infrastructure of trust that makes market capitalism work begins to disintegrate.

This is the path we could be on, from first world democracy to a system more like present-day Russia. What differentiates successful advanced economies from less developed countries, what drives our productivity and markets, is the knowledge that decisions made in both boardrooms and the halls of government are made to benefit shareholders and citizens, respectively, not to line the pockets of the decision-makers. Oligarchs are those who learn how to play by the new kleptocratic rules and are rewarded handsomely. Everyone else suffers as the rent-seekers in both government and business overwhelm the informal norms that are required for liberal democracy. This should be obvious to anyone who has studied ethics and compliance. It’s hard enough for employees, faced by the challenging economics of extreme inequalities of wealth, to overcome the conflicts of interest and the other temptations to cut ethical corners. When they see their political and business leaders engaged in such behavior, the entire edifice of our functioning democracy is imperiled. It’s time for those in the ethics and compliance community to stand up and say so. If there was ever a time to make our expertise count for something in a larger context, it is now.

References

Bueno de Mesquita, B., & Smith, A. (2011). The dictator’s handbook : why bad behavior is almost always good politics. Public Affairs.

Combatting Global Corruption and Bribery

Among the more surprising results of the research for this article is the paucity of successful examples of global anti-bribery and corruption, as well as a lack of empirical evidence for interventions that are widely prescribed in business literature. As a consultant in this field for several years, I have learned a sort of “received wisdom” regarding the best and most pragmatic programs that are prescribed to firms to decrease their risk of exposure to bribery and corruption. Though one still finds these suggestions in the popular business press and, to a lesser degree, in the academic press, the evidence for these intuitive and common-sense measures widely prescribed is thin. Nonetheless, that does not mean that these measures are ineffective, only that there have not been sufficient studies to prove the claims made for them by their proponents. This article will approach the wide range of recommendations that are made to combat various forms of bribery and corruption and attempt to determine how well they are supported by statistically sound research.

Defining Corruption

Corruption seems like a concept that would be easy to define. However, upon closer inspection, it turns out not to yield easily to a set of necessary and sufficient conditions by which one can identify corruption. Even paradigmatic examples aren’t as useful as one might hope, particularly because of the differences between public/governmental and private/business classes of corruption. For this reason, it seems that legislative and regulatory bodies have begun their fights against international corruption with the more easily identifiable (and arguably more damaging) governmental corruption (Posadas, 2000). The 1977 U.S. Foreign Corrupt Practices Act, for example, was the first law of its kind in the world: it considered bribing foreign officials for business purposes to be illegal. Other countries were slow to follow.

"The FCPA...focus[es] only on foreign officials..ignoring private bribery."

One of the interesting features of the FCPA from today’s perspective is that if focused only on foreign officials. In addition to allowing what it termed “facilitation payments” (payments to speed a public service that would eventually be delivered), it completely ignored the issue of private bribery. In fact, the vast majority of legislative and regulatory activity that prohibits corruptions focuses only on public corruption. For example, both the 1999 Canadian CFPOA (Corruption of Foreign Public Officials Act) and the 2012 Law Against Corruption in Public Procurement (Ley Federal Anticorrupción en Contrataciones Públicas) contained no provisions for prosecuting commercial or private bribery (Alldridge, 2012).

The tide seems to be turning, however. At least the United Kingdom’s UK Bribery Act chose to focus on bribery in general, prohibiting any bribe regardless of whether the recipient is a government official or a private citizen. This applies to anyone from the United Kingdom, citizen or resident. More importantly, it applies to companies formed in the UK and companies that have a presence in the UK. Continuing its groundbreaking approach, the UK also introduced a new crime: the corporate offense of failing to prevent bribery (Slavin, 2010). In addition to national laws prohibiting both public and private bribery, international bodies such as the Organisation for Economic Co-operation and Development (OECD) (Recommendation of the Council for Further Combating Bribery of Foreign Public Officials in International Business Transactions, 2009) and the UN (United Nations Convention Against Corruption, 2003), in addition to widening the scope of prohibited activities for public officials, are beginning to include provisions prohibiting private bribery. However, it should be noted that, until recently, bribes were tax-deductible in several developed countries (e.g., Germany and France), so endemic to the nature of doing business was the giving of bribes(Rubin, 1998). Thus, we should assume that the global fight against corruption is far from over.

Combatting Corruption

Part of the difficulty with determining how to combat corruption is defining scope. As outlined above, at least part of the response to widespread corruption has been legislative, regulatory, and international. However, there are issues with approach (termed by Disch, Vigeland, & Sundet (2009) the “neo-patrimonial” approach) including state capture. According to Disch, et al, “In a neo-patrimonial system, politics and governance are oriented towards maintaining control and influence through personal, commercial or financial bonds (or directly through controlling the state’s repressive apparatus). State capture denotes a situation where business and political elites are able to influence policies and manipulate the state apparatus to their advantage.” This induces a spiral of corruption that doesn’t provide any incentive for the ruling government to reduce or eliminate corruption.

Ignoring for a moment the issues with state capture (which is primarily an issue in the developing countries but which can also be seen in the United States [see Citizen United (876, 2012; Avi-Yonah, 2010; Monks, 2013)]), the primary focus of anticorruption efforts has been enforcement on firms to prevent them from offering bribes. The remainder of this article will outline the principle policies, standards, and operational activities firms use to approach the problem of both public and private corruption.

Businesses’ Responses to Laws Prohibiting Corruption

"[In the early 1970s] nearly all multinational firms...maintained 'slush funds'...to bribe foreign officals"

An unexpected outcome of the United States Watergate investigation was the revelation that nearly all the multinational firms based in the United States maintained “slush funds” which they used to bribe foreign officials (Public Broadcasting Company, 2009). This was, until that time, considered a legal, ethical, and necessary part of business. After the fallout of the Watergate scandal led, in part, to the enactment of the FCPA in 1977, firms were faced with not only changing the way they did business, but also enacting controls and other measures to prevent what was, essentially, standard operating procedure.

The standard way of enacting these controls prior to the 1992 Department of Justice Federal Sentencing Guidelines (Ferrell, Leclair, Ferrell, & Leclair, 2015; Murphy et al., n.d.) was to issue a corporate policy or standard and hope for compliance, perhaps auditing to the standard on occasion (Feller, 1982). Since 1992, the Federal Sentencing Guidelines have recommended the central document of compliance for companies be the Code of Ethics (or Code of Conduct). Many firms have integrated their anti-bribery policies into their Codes of Ethics, with varying degrees of effectiveness (Gordon & Miyake, 2001; Miyake, 2001).

As pointed out by Gordon & Miyake, the relative ineffectiveness of the Code of Ethics as a vehicle for decreasing bribery and corruption has led businesses to develop other strategies. For example, the use of bribery-specific codes was proven to decrease bribery and corruption.

Financial Record Keeping

One of the primary requirements of the FCPA is record keeping and many firms focus on this as a prime weapon in the arsenal against bribery (Abbott & Snidal, 2002; Pitman & Sanford, 1994). Because financial control is a mature business discipline, using record keeping, accounting, and auditing has been, in practice, an effective measure against bribery. The principal shortcoming with using record keeping and financial controls is that, although some controls are preventative, most are detective, corrective, or recovery-oriented. These can help the firm develop a culture of anti-bribery over time, but they are ex post facto and do nothing prevent bribery. Directive and preventative controls are a priori and should be the focus of much of the energy for anti-bribery programs (Weiss, Davis-or, Giffen, & James, 2009).

Whistleblowing Facilities

Another common organizational feature used to combat international bribery is the development of systems to encourage and protect “whistleblowers” (Lewis, 2008; Lewis & Vandekerckhove, 2011). Whistleblowing is one of the more fraught activities an employee can engage in and, in firms that are not properly organized to support it, can have severe adverse effects on the professional and personal lives of the whistleblowers (Cherrington, 2002). However, in firms that effectively institute whistleblowing systems, such as anonymous hotlines and websites, the effect is both preventative and detective (Kang & Frey, 2014).

Training

Perhaps the most widely used bribery countermeasure is training (Weber, 2007). Surprisingly, there seems to be little empirical evidence for the effectiveness of training as an international bribery control or disincentive. This is the most surprising finding of my research; I’ve worked with 3 of the major suppliers of training for business ethics as either an employee or a consultant. The vast majority of the money spent by firms we consulted with was on training; they ignored (or nearly ignored) many of the other ethics programs suggested by both best practice and legislative and regulatory regimes. I have been unable to find empirical research that bolstered the claim that training makes an appreciable difference in the behavior of employees. I can imagine many reasons this might be the case: methodological challenges, lack of company cooperation and senior management support. However, when an entire industry has emerged to address this aspect of deterrence, it is surprising to see how little research seems to have been done. While training seems an intuitively effective tool, its effectiveness could be mitigated or negated by countervailing incentives or cultural expectations.

Third Party Due Diligence

Much of the liability for bribery in developing countries stems from third party actors. Under many legislative and regulatory regimes, organizations may be held liable for corruption by their third parties such as their agents, consultants, suppliers, distributors, joint-venture partners, or any other entity that has a business relationship with the firm. Due diligence on third parties is now expected in signatory firms of the United Nations Convention Against Corruption or the OECD Anti-Bribery Convention (PACI, 2013). Again, like training, there seems to have been little study on the efficacy of systems of due diligence. In this case, this may be because it’s a relatively recent requirement, emerging in force only within the last decade, specifically as part of the UK Bribery Act.

Conclusion

This article has only been able to touch on the definitional, methodological, practical, and empirical challenges faced when determining the effectiveness antibribery countermeasures. Some of the more difficult challenges, such as cultural differences, have been excluded in the interest of space. While there is no question that international bribery and corruption are among the most significant issues faced by ethics and compliance professionals, it is also clear that in needs additional empirical study.

References

876, 130 S. Ct. (2012). Citizens United v. Federal Election Commission. The Tea876(2010), 1–81. http://doi.org/10.2307/1098453

Abbott, K. W., & Snidal, D. (2002). Values and Interests: International Legalization in the Fight against Corruption. The Journal of Legal Studies31(S1), S141–S177. http://doi.org/10.1086/342006

Alldridge, P. (2012). The Bribery Act 2010. Business Law Review6(2), 140–144. http://doi.org/10.5235/175214412800135015

Avi-Yonah, R. S. (2010). Citizens United and the Corporate Form. Wisconsin Law Review2010, 999. http://doi.org/10.2202/2152-2820.1048

Cherrington, D. J. (2002). Whistleblowers: Broken Lives and Organizational Power. Administrative Science Quarterly47(2), 381–384. http://doi.org/10.2307/3094815

Disch, A., Vigeland, E., & Sundet, G. (2009). Anti-Corruption Approaches: A literature Review.

Feller, L. H. (1982). An Examination of the Accounting Provisions of the FCPA. Syracuse Journal of International Law and Commerce, 9(2), 245–254. http://doi.org/10.1177/1069072712471506

Ferrell, A. O. C., Leclair, D. T., Ferrell, L., & Leclair, D. T. (2015). The Federal Sentencing Guidelines for Organizations : Framework for Ethical Compliance. The Journal of Business Ethics17(4), 353–363.

Gordon, K., & Miyake, M. (2001). Business Approaches to Combating Bribery : A Study of Codes of Conduct *. Journal of Business Ethics34(2001), 161–173.

Kang, E. T., & Frey, B. D. (2014). The FCPA and the Financial Industry: Understanding and Mitigating Risk. Journal of Taxation & Regulation of Financial Institutions27(5), 37–45.

Lewis, D. (2008). Ten years of public interest disclosure legislation in the UK: Are whistleblowers adequately protected? Journal of Business Ethics82(2), 497–507. http://doi.org/10.1007/s10551-008-9899-5

Lewis, D., & Vandekerckhove, W. (2011). Whistleblowing and Democratic ValuesNetwork.

Miyake, M. (2001). Business Approaches to Combating Bribery : A Study of Codes of Conduct *. Journal of Business Ethics, 161–173.

Monks, R. A. G. (2013). Citizens DisUnited: Passive Investors, Drone CEOs, and the Corporate Capture of the American Dream. Miniver Press.

Murphy, D. E., Rocedures, B. P., He, I. V. T., Of, I. M., Rganizational, T. H. E. O., & Onclusion, V. I. I. C. (n.d.). The Federal Sentencing Guidelines for Organizations : A Decade of Promoting Compliance and Ethics. Iowa Law Review.

PACI. (2013). Good Practice Guidelines on Conducting Third-Party Due Diligence.

Pitman, G. A., & Sanford, J. P. (1994). The Foreign Corrupt Practices Act Revisited: Attempting to Regulate “Ethical Bribes” in Global Business. International Journal of Purchasing and Materials Management30(2), 14–20. http://doi.org/10.1111/j.1745-493X.1994.tb00192.x

Posadas, A. (2000). Combating Corruption Under International Law. Duke J. Comp. & Int’l L.10(345), 1–65.

Public Broadcasting Company. (2009). Spotlight: History of the FCPA. Frontline. Frontline/World.

Rubin, N. M. (1998). A Convergence of 1996 and 1997 Global Efforts to Curb Corruption and Bribery in International Business Transactions: The Legal Implications of the OECD Recommendations and Convention for the United States, Germany, and Switzerland. American University International Law Review14(1), 257–319.

Slavin, J. (2010). Bribery Act 2010 Overview and FCPA Comparison. Waltham, MA.

Weber, J. A. (2007). Business ethics training: Insights from learning theory. Journal of Business Ethics70(1), 61–85. http://doi.org/10.1007/s10551-006-9083-8

Weiss, D. C., Davis-or, D., Giffen, J., & James, D.–or. (2009). Student Note Foreign Corrupt Practices Practices Act , SEC Disgorgement Disgorgement of and the Nd the Evolving Volving International International Bribery Regime : Weighing Proportionality , Retribution , and Deterrence. Michigan Journal of International Law30(December 2008), 471–514.

Compliance: Strategic or Cosmetic?

An Open Letter to Colleagues

A dozen years ago, I changed my career from business risk and IT to ethics and compliance consulting; even now, it surprises me how much compliance and how little ethics I do. Like new years’ resolutions, each year I witness well-meaning colleagues and thought leaders churn out column after column claiming that we’ve achieved “Compliance 2.0/3.0” — claiming we’ve finally turned the corner toward building more ethical companies. From where I’m standing, that’s wishful thinking (at best). Except for the B-corp movement, which integrates values into company charters (but represents a negligible piece of the business pie), what I hoped would be a 70% compliance/30% ethics split in our work is still closer to less than 5% actual ethics. Why, after Enron, WorldCom, the subprime debacle, the Volkswagen scandal, and the currently-unfolding Boeing coverup, are we still a reactive discipline more concerned with mere legal compliance than building ethical businesses?

We’re unlikely to make progress toward more ethical firms without a fundamental change to the way individual states charter corporations. Over 99% of C- and S- Corps are legally obliged to prioritize profit over all other considerations. Comparatively, a human who put her short-term utility above all else would be considered sociopathic. This is the crux of the problem. There is no incentive for businesses to behave ethically when nearly all companies are chartered to privilege shareholder value to the exclusion of all else. The only preventive measures to the business-as-sociopath scenario are legislative and regulatory regimes that attempt to regulate externalities (pollution) and bribery.

Instead of a proactive government that helps put guardrails on laissez-faire capitalism, the US Supreme Court has poured gasoline on the fire with the Citizens United decision, and the current administration has put dismantling regulatory guardrails at the top of its to-do list. Capitalism works best if its risks and excesses are acknowledged, and governments have the regulatory tools to mitigate and constrain them. The demos in democracy stands for the people. When each person has one vote, we have the opportunity to work together, and, at least theoretically, push back for the greater good. Until very recently, there was a consensus among Americans that the wealthy and their corporations shouldn’t have more say than the rest of us.

Citizens United introduced a fox into the electoral henhouse and gave corporations unlimited ability to tip the electoral scales through investing in Super-PACs. The outcome has been distressing, yet entirely predictable. Now, companies not only have no existential reasons to act ethically, but they wield far more power in actual electoral, legislative, and regulatory processes. And while we previously had issues with the revolving door of our representatives becoming lobbyists, we now have the lobbyists themselves appointed to oversee the regulatory agencies that they once lobbied against. The regulatory oversight that compliance programs are designed to enforce is waning.

Finally, regardless of one’s politics, the way the President has been abusing whistleblowers, the rule of law, and the power of his office is providing a tragic example of leadership behavior. His transparent, chaotic bullying and attempted retaliation toward the Ukraine whistleblower(s) could create knock-on effects in both private and public arenas. My exposition on the lack of ethics in business is trivial when a president of the world’s largest democracy treats the office like it’s his own personal piggy bank, mercenary force, and re-election campaign. We all preach the importance of “Tone at the Top,” but right now, the “Leader of the Free World” is acting more like a Mafia don than a CEO; we have some big political fish to fry before we can structure a properly functioning capitalist economy.

Even without the current administration’s aspiring kleptocracy, if we honestly reflect on the underlying goal of compliance and ethics departments, it can often be reduced to “protecting senior management from a ‘perp walk’ in front of the news media.” For most companies, the motivation behind complying with the United States Federal Sentencing Guidelines is purely defensive and legal, not expansive or inspirational.

If ethics was principally important, we would see firms creating compliance and ethics departments without strong legal incentives and integrating them within strategic, operational, and technical decision-making. While there are firms that apply a superset of the USFSG requirements and use ethical standards as part of their branding appeal, they are few in number and often ring hollow. In my last decade as a consultant, I’ve met with exactly one CEO of a Fortune 1000 company who believed that ethics made his company more competitive. The rest of the senior managers I’ve talked with would confess they consider compliance and ethics to be a burdensome cost center that slows them down and decreases competitiveness.

So what do we do, with the triple threats of shareholder-value supremacy, weak oversight, and legal or political obstacles? Our Codes of Ethics, policies, and training are not aimed at the strategic, big-picture questions of whether our companies are choosing right or wrong paths, helping or hurting society, or accelerating the destruction of the planet. Instead, these Codes focus on keeping employees in line, saving firms money from fines, and avoiding deferred prosecution agreements.

I’d ask my colleagues to reflect, as I have: are you having a positive impact on the world beyond keeping your CEO out of jail? If not, is there anything we can do to expand the “ethics” part of our job in a world that desperately needs it? This is a discussion that we badly need to have.

Compliance and ethics professionals have to stop our self-congratulation and take a hard look at what we’re accomplishing (and not accomplishing). We need to initiate discussions that will establish ethics as a driving force in business. Until ethical decisions are considered alongside ROI (Return on Investment) and DCF (Discounted Cash Flow), we’re adding little more than a veneer of respectability to the sociopathy of unconstrained return to shareholder value. This will require compliance professionals to step out of the comfortable world of writing Codes of Ethics and developing compliance training….we will have to actually consider what is right and wrong in the business world and do some real ethics by stepping into the worlds of strategy and politics.

More Important Than Ever: Business Ethics and Compliance

Three years ago, shortly before the Trump inauguration, I wrote a brief piece about how an obvious grifter with no values beyond is own self-enrichment would have deleterious effects on business. While it hasn’t had precisely the effects I had imagined, in many ways the ethical situation in the Anglo-American business world is worse than it’s been since at least 1974.  Arguments could be made for setting that back another century, making the current administration tangentially responsible for some of the most hypocritical and horrifying actions of my lifetime.

When I decided I wanted to make a change from being a technology, strategy, and risk consultant to being an ethics and compliance professional, I imagined the job would entail more actual ethical decision making or at least framework-building. Unfortunately, that’s not been the case. Not once in the last decade, during the pursuit of both Master and PhD degrees in business ethics and working for a variety of firms both a consultant and in-house compliance officer, has anyone approached me and said “James, we have a problem. We have two courses of action and it’s not clear if either of them are ethical. Can you help?”  Not once.

The reconceptualization of compliance and ethics by OCEG (the Open Compliance and Ethics Group) as Governance, Risk, and Compliance, has helped by focusing on what businesses are really concerned with: not losing the company and not going to jail. (I’ve often said that the one true metric of a compliance officer is whether the CEO has had to do the “Perp Walk”). However, structural and systematic issues in business, politics, and our culture are militating against good ethical decision-making by everyone involved. So much of what we thought we once shared in common understanding seems to have been stripped by political, economic, cultural, and educational forces.  Ultimately, one must understand the problem to begin to fix it. The purpose of this blog is for me to try out some of my ideas and if I gather some readers and we can start some discussions, even better.

One warning: I’m not one of those assiduously non-political writers, lest I alienate someone who might want to engage my services. I assume, perhaps naively but certainly more generously than political neutrals, that people capable of following my arguments will also be able to separate the arguments from the arguer. Also, I think much of what has led us to the unfortunate position we’re in today has its genesis in politics, not ethics.

Could Ethicists Save Democracy?

Most voices from the ethics establishment have been remarkably measured in response to the recent election of Donald Trump. This is not surprising since the prudent reaction to normal political changes is a studious agnosticism. We in the ethics field want to be seen as on the side of business but also on the side of the right and the good. If every shift in political wind inspired an intense reaction, we could be seen as biased (the very thing ethics seeks to avoid). We aspire to read the political tea leaves while having no investment in the outcome. And so it should be in normal political times. Even though much of the mainstream media, political establishment and academic commentariats are treating the Trump administration as a new and novel risk, (with notable exceptions) those who speak for the ethics and compliance community have been much less emphatic.

This is a mistake. By treating the Trump administration as just another transition from one party occupying the White House to another, those who watch compliance and ethics trends for a living are ignoring what we know about the ways ethics and lawfulness spread through organizations. While it’s not always possible to generalize from corporate compliance to the national level or vice versa, both history and compliance experience suggest that we are about to enter a new and dangerous world. While Mr. Trump is not yet president as of this writing, his personal and business behavior, as well as many of his cabinet picks, indicate that we are moving into uncharted territory. Never in my half-century on the planet has there been a president and an administration so ethically compromised before even taking office.

The professional class was nearly unanimous in its rejection of Trump as little more than a common grifter with a flair for the dramatic. Even those who agree with some of his political platform (such as it is, completely lacking in a coherent ideology beyond a rejection of “elites”) can see that his lack of transparency, conflicts of interest, and purposeful self-dealing are well beyond even the most flagrant recent examples of corruption in the executive branch. The Bush II and Nixon administrations had substantial conflicts of interest but even they never emanated from the office of the President itself.

After eight years of scandal free democracy under the Obama administration, perhaps we’ve forgotten just what kind of havoc corruption in the executive branch can wreak. For example, his cabinet choice of Rex Tillerson, a man with no diplomatic experience and with substantial business ties to Russia, to head the State Department is extremely suspect. In Trump we have not occasional mistakes made against a backdrop of conformance to ethical norms, but a presidency that appears to be aiming toward kleptocracy. Mr. Trump’s refusal to follow the traditions of putting his business assets into a blind trust or complete divestiture should set off every ethics and compliance professional’s radar. It appears that Mr. Trump will be shaping his administration in his own interest-conflicted, self-dealing image, and that is very troubling indeed.

One of the bedrock principles of organizational ethics and compliance is “Tone at the Top.” All organizations take their ethical cues from the top manager and those around her or him. Many of Mr. Trump’s cabinet picks share are a lack of experience in their portfolio, a fundamental ideological disagreement with the mission of the departments they are meant to lead, or personal and/or professional gain from the activities of their departments. Many of these appointments would be considered laughable in any other administration. Given both Mr. Trump’s own ethical challenges and the various practical and theoretical challenges of his cabinet, the principle of “Tone at the Top” implies two main outcomes. First, we can expect scandal and corruption to be normalized not only in the administration, but in business as well. As illustrated colorfully in the book “The Dictator’s Handbook” (de Mesquita and Smith, 2012), the business community must play along with the corruption of the administration in a kleptocracy. We’ve already seen Mr. Trump lash out at companies that he feels aren’t paying him the proper fealty. One instructive example is his comments regarding Raytheon after the CEO of that firm made comments critical of Mr. Trump. Its market valuation decreased by 2.8% because of one tweet. If there were any doubts that real consequences will befall firms that resist Mr. Trump’s demands, this clear abuse of power should put those doubts to rest. It will begin with companies doing business with the government, but this necessity to hew the line is likely to spread to other firms as the Trumpocracy takes hold.

This is how the corruption of the Trump administration will spread to corporate America. As the norms of governance begin to erode, so do those of business (by both necessity and emulation). In a kleptocracy, the only principles that matter are those of quid pro quo and power consolidation. Businesses become both a revenue stream for the government and a powerful ally against the interests of workers and citizens. Those who are charged with enforcing the rule of law selectively or vindictively choose their targets based on the interests of those at the top; the rules that protect both investors and workers fall by the wayside. As those in the C-suite become (often by necessity) reciprocally entangled in the lawless trading of favors, power, and money with the government, they lose moral authority within their firms. As laws are selectively applied, the entire infrastructure of trust that makes market capitalism work begins to disintegrate.

This is the path we could be on, from first world democracy to a system more like present-day Russia. What differentiates successful advanced economies from less developed countries, what drives our productivity and markets, is the knowledge that decisions made in both boardrooms and the halls of government are made to benefit shareholders and citizens, respectively, not to line the pockets of the decisionmakers. Oligarchs are those who learn how to play by the new kleptocratic rules and are rewarded handsomely. Everyone else suffers as the rent-seekers in both government and business overwhelm the informal norms that are required for liberal democracy. This should be obvious to anyone who has studied ethics and compliance. It’s hard enough for employees, faced by the challenging economics of extreme inequalities of wealth, to overcome the conflicts of interest and the other temptations to cut ethical corners. When they see their political and business leaders engaged in such behavior, the entire edifice of our functioning democracy is imperiled. It’s time for those in the ethics and compliance community to stand up and say so. If there was ever a time to make our expertise count for something in a larger context, it is now.

References

Bueno de Mesquita, B., & Smith, A. (2011). The dictator’s handbook : why bad behavior is almost always good politics. Public Affairs.