Putting a Face on Risk – WWT: Often we focus on the ‘what’ and ‘how’ of breaches, but understanding who is behind breaches and their motivation is equally important. A link to an article I wrote for my then-employer, World Wide Tehnology
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What hadn’t occurred to me, however, was how revelatory even cursory looks at data might be for an ethicist. As part of my ongoing project to learn the R programming language (R is a statistical and data analysis application, freely available), I decided on an exploratory mission to find out something ethically interesting with the tool. Armed with only my intermediate (at best) knowledge of statistics and my introductory level of expertise with R, I wanted to see if I could find out something I didn’t already know.
After spending a few minutes looking for relevant datasets, I found the Wage and Hour Enforcement database at theU.S. Department of Labor. It seemed to me that we might be able to learn something about the way businesses are treating their workers. This dataset includes all enforcement actions, both successful and unsuccessful, since 2007.
Though there is a near-infinity of ways you could these data, I decided to look at two questions: which are the worst industries to work in from a wage and hour perspective and which companies are worst to work at from the same perspective. I expected that these enforcement actions would be relatively normally distributed and proportional to worker population. They turned out to be neither. A few R commands (which I’ll preserve for anyone interested in learning R) and I was able to see that some industries and some companies are far worse than others.
The dataset has a separate record for every enforcement action and every record has an industry code. To see which industries were the worst, I just had to count the number of times each industry was mentioned. There are over 1500 industry classifications, so sorted the list by number of appearances and took the top 15:
ncaisclasscount <- as.data.frame(table(whd$naics_code_description))
sortedncaisclass <- ncaisclasscount[order(-ncaisclasscount$Freq),]
topfifteen <- sortedncaisclass[1:15,]
barplot(topfifteen$Freq, names.arg=topfifteen$Var1, las = 2, cex.lab=.1, horiz=TRUE)
For ease of interpretation, I then put it into a horizontal bar chart
barplot(topfifteen$Freq, names.arg=topfifteen$Var1, las = 2, cex.lab=.1, horiz=TRUE)
which looks like this (click through for PDF version that you can zoom into: because of the size of the labels, it wasn’t possible to capture this in a graphic that fit in the blog format, ditto below)
So it turns out that restaurants are a terrible business if you’re an employee (if you use Wage and Hour enforcements as a proxy for bad behaviour by employers). They hold the top 2 places which, combined, are 5 times worse than the next industry.
How about individual companies, then? Is the revelation that restaurants are not particularly good employers borne out in the company data? For this, I essentially repeated the previous process, only I counted employer frequencies rather than industries.
df2 <- as.data.frame(table(whd$trade_nm))
sorted2 <- big2[order(-big2$Freq), ]
topten <- sorted2[1:10 , ]
which resulted in (click here for PDF version):
So the industry data is definitely proven out by the company data, but there are some surprises. Subway looks to be a really terrible company to work for, followed by MacDonald’s (there were some data quality issues I didn’t take the time to correct but the combined MacDonald’s plots would equal about 500 enforcements.) To really get an idea of how relatively bad each company was, you’d have to combine these data with how many employees are employed by each company, but this, at least, gives you a high-level view.
I can’t emphasise enough how cursory and incomplete this look at this data is. The point is to demonstrate how useful open data can be for pointing out practical issues in ethics. This could be the starting point for a lot more analysis, like investigating why the restaurant industry has so many enforcements and if anything could be done about it.
Professor MacDonald is absolutely right about a) in that much of the theoretical underpinning for market economies is that information is freely available to the market. I’d add that, as an assumption, it’s a dodgy one. While auditors, accountants, risk managers and compliance managers are employed, in one way or another to make this assumption true, we’ve seen rather a lot of examples of where it has not been. There’s also the issue regarding the difference between the availability of information and its comprehensibility. If one makes data available but similarly depends on your exchange partner not understanding its import, the same damning ethical judgement obtains, I think.
Point b) is also salient, though I may not have been entirely unambiguous in my original comment. I don’t think that the requirement for equitability is a strict one. In fact, the only requirement is that both parties judge the transaction as equitable. I’m not sure there would be a non-relative way of showing equitability, in any case.
Extending the idea a little further, take for instance the examples of monopolies or cartels. There’s a general view that monopolies and cartels (except in some limited instances) are pragmatically and ethically suspect. The reason for this comes back to the judgement of equitability. If a monopolist charges an above-market rate for his product because there are, by definition, no other sources of that product, his exchange partners may be driven by need to purchase that product with full information. They won’t, however, consider it an equitable trade. In this case, the requirement for full, comprehensible information disclosure is met but there is still a lack of equity and, therefore, ethical good.
As always, my ideas on the subject are open to discussion and further refinement, but I think there is something vital about both conditions for ethical exchange, full information and the mutual judgement of equitability. I’d be interested to hear from anyone who has a different view on the matter.
Research suggests that once an organisation grows beyond 150 people, the scale is too large for traditional mechanisms of trust and reciprocity to function. Anonymity and free-riding become problems and the incentives to work together begin to disappear. It’s no wonder there’s so little accountability in many of these legislative bodies, which is compounded by the influence of money, crony capitalism, too many people represented per candidate, and (in the case of the U.S.) an electoral process that ensures radicalised candidates. Without any of the reputational incentives of a smaller organisation or the accountability that comes with a small constituency, the influence of large corporate, labour, and wealthy donors will continue to be the prime motivating factor in U.S. congressional legislation.
I’ve left this for posteriority. My views have changed substantially since I wrote this nearly a decade ago. If you must read it, please do so with generosity.
The Essential Challenge of Ethical Business
The New World of Consumer and Employee Power
Principled Business Culture = Winning Competitive Strategy
This morning’s New York Times featured a fascinating article on a number of yet unpublished studies on high school bullying called “Web of Popularity, Achieved by Bullying“. Whereas most studies of bullying have previously focused on out-group members, social outliers, and pathological bullies, these studies have tried to determine the extent of bullying within the primary social groups of high school. So, instead of looking at the nerds, geeks, and dweebs, (and the badly adjusted kids who are assumed to victimise them) these studies look at everyone, including popular and moderately popular kids.
What they found seemed to surprise the researchers but shouldn’t really come as a surprise to anyone with a vivid memory of high school (or parents of teenagers, for that matter). Instead of bullying being focused on out-group members, it seemed to be used primarily as a means gaining and solidifying status in the social hierarchy. Interactions between rivals, kids who were close to each other on the social ladder and who were jockeying for position, were most likely to be aggressive or bullying. When students reached the “top” of the social ladder, they stopped aggressive behaviour not because they were nice people, the researchers hypothesise, but instead because they no longer needed to be agressive to gain position.
While there are a lot of questions still to be answered in the final version of the research, I think there are some substantial implications for the business world. A plurality of the comments under the Times article reflected my first thought: high school actually mirrors much of the business world. Although I’ve had the privilege to work in some very enlightened, very non-aggressive environments, that has by no means been the case everywhere I’ve worked. What’s most interesting in the high school study is the motivation for such aggression and it’s less obvious manifestations (sarcasm, unconstructive criticism, gossip): movement up the social hierarchy. In my experience, that motivation extends into the business world, as well. Workers use these negative tools as ways of climbing or solidifying their places in the often very hierarchical world of business. In a world where your title is a proxy for your value to the company, it’s natural that people would use whatever tools at their disposal to claim those titles, even if the net effect is less trust, less productivity, and less value to the company.
Recent research and case studies suggest that by taking away multiple layers of management and flattening the hierarchy, the incentives for agressive and near-aggressive behaviour are eliminated. Horizontal governance structures, while counter to the corporate tradition of command and control governance, seem to enable trust, productivity, and value creation. While I’m afraid (especially given my own kids’ social struggles in middle school) that there’s not much we can do to eliminate the social hierarchy that kids seem to create all on their own (though I could be/hope I am wrong about that), corporate governance structures are something that are within a firm’s control. More than that, by developing the sort of work environments which foster trust, collaboration, and the development of powerful networks by the elimination of unproductive (or, indeed, counterproductive) hierarchies, firms can become more effective competitors in a world where these are the very qualities that will determine the winners.
Whenever I see a parent who has a toddler at the end of a leash, my first reaction is one of horror. But my girlfriend always reminds me that nobody just gets the leash. No parent arbitrarily decides putting their kid at the end of a tether would be a good idea; they do it because, at least once, their toddler tried to run out into the street. Though the Chamber of Commerce seems to be horrified by the proliferation of regulation under the Dodd-Frank Act, it’s precisely the same situation. The financial services industry earned the leash.
I try to steer away from political topics on the blog. They tend to divide people more than they bring them together and often provide more heat than light. A post by the formerly mainstream, now free-market-fundamentalist Chamber of Commerce has inspired me to break that proscription, however, because it goes directly to the issues of ethic, risk, and compliance.
The page, http://www.chamberpost.com/2011/01/dodd-frank-unleashes-a-tsunami-of-regulation-a-visual.html, features a very well-done graphic on the number and scope of rules and regulations mandated by the Dodd-Frank act. The contention is clearly that the overwhelming profusion of regulatory activity is going to damage U.S. competitiveness as a provider of capital market services.
What it missing from the discussion is a review of why Dodd-Frank was enacted in the first place; the capital markets have proved, over and over, utterly incapable of regulating themselves. The fact is that there were trillions of dollars of real value lost in the financial meltdown of 2007/2008, and no one has gone to jail, and almost no one lost their job, and all the bankers and bond traders and rating agency executives got to keep the billions of dollars in bonuses they made in the run up to 2007. So the scoreline reads Wall Street 3-0 Main Street.
We have laws for a reason. In a world with both limited resources that must be competed for and the unlimited right to stockpile those resources, some people will do things that may not be illegal but that are unethical. In some spheres of life the social pressure against doing the unethical countervails the reward. Additionally, some people are just decent and won’t exploit others on principal. But as the rewards grow into the millions and billions, like they do in the capital markets, internal and external non-legal pressures fail and we get collusion, insider-dealing, and revolving-door quid-pro-quo deals.
Furthermore, risk is hard. All the academic research suggests that people are not wired to understand risk well, especially when it occurs at the far ends of the bell curve (we tend to overestimate rare risks and underestimate common risks). Without incentives to understand it correctly (i.e. that the companies themselves will be left holding the bag in case of failure), it gets ignored and/or externalised.
And that’s precisely what happened in the subprime, derivatives, and insurance scandals of the last half of the decade. And, as above, what essentially resulted was a huge wealth transfer from the investors and taxpayers to the financial services companies. Through both the bonuses that happened in the run-up and the the bail-out in the aftermath, the capital markets firms internalised return but externalised risk.
So while the infographic on the COC website might make Dodd-Frank seem like an overreaction, remember what it is reacting to. There is absolutely no reason, given the evidence of recent and/or past history, to think that the capital markets can overcome the human tendencies for greed and risk ignorance. In the long run, prudent regulation makes the capital markets more competitive by increasing stability and transparency. And that’s what really want out of Wall Street, not seven figure bonuses.
I’ve got a long-ish consulting engagement that’s taking a lot of my time right now, so blog posts will be a little thin on the ground for while. What I do find time for is the occasional LinkedIn group debate, this one on the Ethics Professionals group, debating the original poster’s view that Codes of Ethics do nothing to stop unethical behaviour. I, and others, jump in.