Citizens United Decreases Governance Effectiveness in Both Government and Business

The challenge with Citizens United vs the Federal Election Commission (Library, 2010) is how to approach it. One can view it through the lens of ethics (Silver, 2014), through which it is a terrible decision. You could examine it from an empirical standpoint and, even given the limited time since it was decided, there’s already sufficient evidence to suggest it is (further) corrupting the electoral process in the United States (Spencer & Wood, 2014). One could also view it from a governance standpoint, examining whether it will increase or decrease the efficacy of boards over their corporations (Coates IV, 2012). Since the narrow definition of the role of the board it to increase corporate value, it is fairly straightforward to measure the effects of Citizen’s United and, according to Coates, it has been surprisingly negative.
The lens through which I want to address Citizens United is that of electoral and governance accountability: Does Citizens United increase or decrease the ability to hold our elected officials and our corporations accountable for their actions? I think, in spite of some commentators claims to the contrary (Bedford, 2010; Meyer, 2012), Citizens United exacerbated the already existing problem of what Monks calls “Drone Corporations,” (Monks, 2013) those in which ownership is too diffuse to apply any power over the Board and, consequently, instilling more power in the managerial class. By giving corporate executives even more unrestrained power to lobby, bribe, hire, and otherwise influence political decision-making, it allows them to continue to tip the scales away from workers and toward themselves, and takes away more of the influence of the electorate and puts it squarely in the hands of deep-pocketed business interests.
First, electoral accountability.  Citizens United essentially takes the previous legal fiction of corporate personhood and makes it a both metaphysical and legal fact. The decision gives corporations the power to anonymously spend unlimited amounts of money influencing the electoral process based on the First Amendment’s free speech guarantees.  The managerial class has done a very effective job of increasing the amount of money that goes into their pockets and decreasing worker pay over the last 30 years (McCall & Percheski, 2010). Through their destruction of/decrease in participation in unions and conducting race-to-the-bottom labor arbitrage, the rich have become richer and the poor, poorer. While money does not determine elections, in competitive, non-incumbency races, campaign contributions have a significant effect on a candidate’s chances of winning (Erikson & Palfrey, 1998) and it buys influence and access. Thus, with corporations having significantly more money than individuals, they will be able to significantly affect elections and elected representatives will feel most accountable to them for their continued support. Thus, Citizens United takes power away from actual people and decreases electoral accountability.
Nearly as concerning is the effect it has on accountability in corporate governance. While the problems of drone boards, interlocking directorates, powerful chairmen and passive/diffused investors, all of which serve to decrease the power of the shareholder and increase the power of the managerial class existed before Citizens United, the decision gives managers increased powers in the halls of government (Monks, 1913). An excellent example of the way this effects governance is through the activity of the Business Roundtable, an organization of CEOs of large (mostly drone) corporations in fighting all “say-on-pay” provisions of the Dodd-Frank act, as toothless and merely advisory as those provisions are. Thus, by giving managers even more power, effective governance becomes ever more difficult. The managerialism that has increased in the U.S. for the past three decades (Locke & Spender, 2011) seems likely to significantly increase as a result of Citizens United. Thus, both corporations and the government move further out of our democratic control.

References
Bedford, K. (2010). Citizens United v. FEC: The Constitutional Right That Big Corporations Should Have But Do Not Want. Harvard Journal of Law & Public Policy, 34(2), p639–661.
Coates IV, J. C. (2012). Corporate Politics, Governance, and Value Before and After Citizens United. Journal of Empirical Legal Studies, 9(4), 657–696. doi:10.1111/j.1740-1461.2012.01265.x
Erikson, R. S., & Palfrey, T. R. (1998). Campaign Spending and Incumbency: An Alternative Simultaneous Equations Approach. The Journal of Politics, 60(02), 355–373. doi:10.2307/2647913
Library, H. O. U. S. S. C. Citizens United v Federal Election Commission (2010).
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.
McCall, L., & Percheski, C. (2010). Income Inequality: New Trends and Research Directions. Annual Review of Sociology, 36(1), 329–347. doi:10.1146/annurev.soc.012809.102541
Meyer, J. M. (2012). The Real Error in Citizens United. Washington and Lee Law Review, 69(4), 2171–2232.
Monks, R. A. G. (2013). Citizens DisUnited: Passive Investors, Drone CEOs, and the Corporate Capture of the American Dream. Miniver Press.
Silver, D. (2014). Business Ethics After Citizens United: A Contractualist Analysis. Journal of Business Ethics, 127(January 2014), 385–397. doi:10.1007/s10551-013-2046-y
Spencer, D., & Wood, A. (2014). Citizens United, States Divided: An Empirical Analysis of Independent Political Spending. Indiana Law Journal, 89(1), 315–372.

Ethics and Compliance Applications of Open Data

Although my skills as a data analyst are nascent, it occurred to me very early on that the emerging trend toward Open Data would be transformative in ways we couldn’t anticipate. This isn’t a novel idea, as a look at any of the following TED talks will show:

The Year Open Data Went Worldwide
How Open Data is Changing International Aid
Demand a More Open Source Government

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$trade_nm))  
 big2  10)  
 sorted2 <- big2[order(-big2$Freq), ]  
 topten <- sorted2[1:10 , ]  
 barplot(topten$Freq, names.arg=topten$Var1)

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.  

Corporate Governance and Behavioural Ethics

There are two ideas that underlie most theories about corporate governance, and those reflect the assumptions of the classical economic theory of homo economicus, or economic man (or, more politically correctly, economic person). Economic man encapsulates two assumptions about human behaviour, i.e., that human beings always act in ways that are both rational and self-interested. While these assumptions are the bedrock of most classical and liberal economics, they have only recently begun to be tested empirically in the fields of behavioral economics and behavioral ethics. As I wrote in my 2011 article in Compliance and Ethics Professional, the empirical examination of rational self-interest has exposed some substantial faults in these assumptions. What has not yet happened, as far as I can see, is for these insights about human behaviour to be propogated to the study of corporate governance.

There are two primary theories of corporate governance, the shareholder/agency theory and the stakeholder theory. Each makes different moral assumptions about the purpose of the corporation and the ethical and practical responsibilities of the senior-most decision makers in the corporate structure, the board of directors. The agency theory is more representative of the Friedmanite view that the sole responsibility of the corporation is to maximise legal returns to shareholders. Stakeholder theory holds that society gives the corporation its license to operate and therefore there are other groups, or stakeholders, to whom are owed consideration in addition to shareholders. Examples of these stakeholders are customers, workers, suppliers, communities, and society at large as representative of common/societal goods, such as the environment.

What both both these theories have in common, however, is that they both view the actors within the corporate system as self-interested and rational. In fact, agency theory is a direct expression of the assumption of selfishness. It suggests that because management and ownership are separated, the agent (the manager) will be motivated to behave in his or her best interest, not in the best interest of the principle (the shareholders/owners). Without the assumption of selfishness, the principle/agent problem disappears (or is at least diluted). This in turn calls into question many of the incentives used to align shareholder interests with those of the management (stock options, restricted stock, and contingent bonus plans). Much of the research done into employee motivation suggests that, beyond a certain minimal level, compensation is one of the least effective motivators of employee performance. This thus provides an ex post facto indictment of the belief in the centrality of selfishness for corporate governance.

While stakeholder theory demotes the importance of self-consideration, it places a greater emphasis on rationality. In fact, it requires an assumption quite the reverse of selfishness, in that assumes that managers and/or corporate boards can place their own self-interest in abeyance and, without bias, consider the interest of other actors. Prominent researchers (Kahneman, Tenbrunesel, Messick) have empirically demonstrated several varieties of self-interested decision-making bias. Perhaps even more consequentially, these biases are usually unconscious and/or self-deceptive, so the decision-maker doesn’t know he or she acting in a self-interested way, even when the entire project of stakeholder consideration is to combat narrow self-interest.

The practical implication of the outdated assumptions of both agency and stakeholder theories is that there can be a substantial mismatch between the intentions of corporate board, the decisions that boards make, and subsequent behaviour of management. At the very least, new systems of remuneration and incentives need to be developed to align corporate direction with management activity. Additionally, when incorporating a stakeholder approach to corporate governance, it is important to verify the interests of other stakeholders with those stakeholders themselves as self-interest biases can yield incorrect assessments in this regard. There are considerable opportunities in both academic and practitioner realms for the development of new, comprehensive theories of corporate governance and practical frameworks to control for bias and diverse motivations.

The transparent exchange of value

Business ethics professor and blogger Chris MacDonald posted an insightful entry yesterday regarding whether it is ethical to depend on your customers not understanding your business model for your success.  You can read his initial post here.  I’ve given a lot of thought to what might count as the most important business ethics principle and, while my reflections are by no means complete, I’ve come to the interim conclusion that full disclosure and comprehension of value is the essential requirement for ethical business transactions.  Here’s the comment I left Professor MacDonald and his response to it, and below that some further commentary from me.

I think you are on to something very central here, Professor MacDonald. The most important justification for capitalism is that the people who exchange goods and services do so for a net gain in utility/value. I give you my money for your widget because the widget is worth more to me than the money (or the other things I could buy with it) and you sell me the widget because the money (or the other things you could buy with) is worth more to you than the widget. Without this rationale for the market system, its moral basis quickly falls apart. An unstated assumption is that both parties have complete knowledge (or reasonably complete knowledge) about the utility of the goods or services exchanged. Thus I think that *the* ethical question one has to ask of any transaction is: “if the partner in this exchange knew everything that I do about the exchange, would s/he still think this is an equitable exchange”. If the answer is no, then you are treading ethically questionable territory. As you point out, there are firms (some credit card companies, many of the lenders in the run-up to the subprime crisis, e.g.) that depend upon their customers not understanding the terms and conditions of the exchange. Or, in some cases (many pre-Dodd-Frank banks) firms assume that customers don’t understand the way the product works (e.g. overdraft charges that were manipulated by selecting which transactions were processed first). I think the basic idea here is correct, but I think it is a specific instance of a more general principle about information, utility, and ethics in the market system. While I can imagine limited counterexamples, as rule any firm that benefits from hiding information or, more subtly, relies on predictable cognitive bias (see your recent blog posting re: same) in order to trick an exchange partner into participating in an exchange is very likely an ethically bad actor.
Reply
  • Chris MacDonald on January 17, 2012
    Thanks for your comment. This sounds right, but I’ll just make two clarifications:
    a) The information assumption isn’t really unstated, at least to economists — it’s an important precondition for ideal markets;
    b) Seeking “equitable exchange” is hard; but the information requirement is needed for something even more basic than that, though, namely mutual advantage. Guaranteeing equitable benefit is a much tougher requirement.

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.

Governance and Organisational Size

 This chart, in The Economist about how the UK has fewer constituents per representative than any other developed country, got me thinking about governance and how organisational size impacts productivity:

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.

My Philosophy regarding Business Ethics, the short version

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

Being ethical in today’s world isn’t easy. There are a host of systemic, structural, political, and cognitive factors in the business context that make discerning the right thing to do and then acting on it more challenging than ever before. Despite this, another set of developments has created a world where acting ethically in all areas of business is perhaps the most imperative driver of business success. Business ethics has undergone a change from regulatory requirement or inconvenient distraction to a necessity for the global marketplace and source of competitive advantage.
We humans are meaning-making beings. More than reason, the ability to use tools, or the ability to create complex social systems, what sets us apart from other species is the ability to ask ourselves “why?” and consider the answer important. Philosophers from Aristotle in the 4th century BC to 20th century philosophers like Paul Tillich and Jean-Paul Sartre have pointed out that it is the ability, in fact the indispensability, of answering questions of existential import that defines humanity. Our responses to the questions of “why” and “how” go a long way to defining who we are. How we spend our lives, whom we choose to love and why, and what we find ourselves called to do in our careers are the central questions of value that make us who we are.
Paradoxically, the economic system we live under has no such values. Capitalism, in its pure form, is amoral. Although many libertarians argue that there is an implicit moral code to capitalism, it is inchoate and partial at best. Whereas we human beings choose what we will do based a variety of existential and practical factors, capital responds only to cash flows. Notwithstanding recent trends toward socially responsible investing, the vast majority of investment decisions are made not in terms of what makes the world a better place but strictly on the basis of risk-adjusted net present value. Milton Friedman, in his famous 1970 New York Times Magazine article, argued that the only responsibility of a firm is to increase profits and to consider any social impacts was in fact unethical.
Beyond lacking a moral compass, there are several factors within modern market-oriented capitalism that actually militate against ethical and socially responsible decision-making. Friedman felt that as long as something was legal, it was permissible. However, the structure of western democracies allow large corporations a voice in making the laws, thereby encouraging all sorts of externalities and, in some cases, outright fraud. The recent “Citizens United” decision by the U.S. Supreme Court has given corporations an even greater role in governmental policy, and the quarterly reporting structure of the capital markets encourages short-term thinking without consideration for the long-term impacts of meeting each period’s earnings estimates.
Beyond these structural and political factors, there are also cognitive and social factors that make consistently good ethical decision-making challenging. Recent academic and popular works by authors Dan Ariely, Max Bazerman, Zoe Chance, and Francesca Gino (among others) have focused on the ways our minds and our social situations influence our ethical decision-making, usually without our even knowing it. A successor to behavioural economics, this nascent field of “behavioural business ethics” was the sole topic of the most recent British Journal of Management, one of the most respected academic journals in study of business. What Ariely, et al, have done is shown how even people with the best intentions and motivations can be led astray in their decision-making by mental blind spots and distortions like anchoring, overestimating the ethical behaviour of both ourselves and those in our social group, and underestimating the creative and technical contributions of others. Whereas ethical behaviour has historically been considered a simple issue of character and will, these scholars have shown it to be the result of a complex interplay of factors that make context and corporate culture almost as important as moral fibre.

The New World of Consumer and Employee Power

Even if the combination of the amorality of capitalism, the systemic challenges of capital-driven corporate performance, and the emerging understanding of the complexity of ethical decision-making were the totality of why principled business performance was important, it would still be one of the most important aspects of business one could study and, hopefully, effect. These factors are, however, only half the story. In spite of all these challenges to effective ethical decision-making, a series of cultural, social, and technological innovations in recent past have elevated the significance of business ethics to what should be the highest place among the concerns of management.
Corporations were previously able to craft their image to control information and perceptions of themselves and used command-and-control, hierarchical governance structures to insure employee performance. These methods no longer function. Customers and employees now demand that the firms they buy from and work for are in alignment with their values and the ways they make meaning in their lives. Even though many of the factors discussed in the first section traced from the dawn of industrial capitalism, both employees and consumers couldn’t do (and, in many cases, didn’t want to do) anything to change them. There was a dearth of information about the ways companies did business and what information was available was carefully managed. Companies had extensive marketing operations that were aimed at instilling a specific set of ideas, associations, and feelings about the firms. Very little was left to chance and what customers knew about a company and operations was what the company wanted them to know.
With the advent of the collaborative Internet, where anyone can express any opinion and share any information, this way of doing business is rapidly going the way of the buggy-whip. Blogs, forums, easy to set-up protest web sites like bankofamericasucks.com, and, most recently, Wikileaks, are creating a totally transparent (if not always accurate) world where nothing about a firm can be hidden from the public. The corporate communications department is no longer primarily a shaper of perceptions but is instead focused on engaging the public in co-developing brands. Due to this information chaos, whatever a company does will eventually come to light. No longer can a firm engage in ethically suspect behaviour presuming it is the manager of public perception. With this new transparency, and with the increasing engagement of customers as intentional consumers, the need for proactive transparency has become paramount.
It’s not just consumers who require that companies align with their values, but employees, as well. In the past two decades, we’ve seen a wholesale shift from industrial work to knowledge work and consequentially a shift in how employees see themselves and their relationship to their employers. As Peter Drucker noted, knowledge workers don’t exist thrive within the traditional industrial command-and-control framework but instead are co-creators of value and, as such, are responsible for managing themselves. They therefore have come to demand more meaningful work, more meaningful participation in governance, and closer alignment of their work to their values. And, as with consumers, they are increasingly able to determine whether the work they do indeed matches their higher aspirations. Nothing will cause an exodus of the very knowledge workers who are essential for business success faster than internal politics and hierarchical governance systems, except for perhaps outright unethical business practices.

Principled Business Culture = Winning Competitive Strategy

The shift from marketing and branding to transparency for consumers and the shift from command-and-control industrial governance to participative knowledge work for employees have combined to exponentially magnify the importance of ethical and sustainable business practices. Business ethics is no longer something limited to the compliance department so that it can check the appropriate boxes to stay out of trouble with regulators and enforcement agencies. It’s a critical aspect of competitive advantage. And as such it’s something that has to be part of everything a company does, in its DNA, its corporate culture.
This, I think, is the crux of the matter regarding ethical business and principled performance. It goes far beyond training and risk management where it’s traditionally lived and is instead a vital part of a company’s strategy. A principled corporate culture can’t be duplicated easily, if at all. In a business world where innovation and continuous improvement are the necessary conditions for success, the value of an engaged and passionate workforce can’t be overstated.
Unanimity is rare in academic literature, but the closest I’ve ever seen is the consensus that corporate culture is the primary determinant of ethical behaviour. My own experience bears this out, as well. When I worked for Washington Mutual’s corporate technology group, the ethical standards were very high and it was assumed that one owed a primary allegiance to the truth. In the rare cases when ethical dilemmas presented themselves (such as accepting gifts from vendors), there was, once acculturated, no question of what the right thing to do was, nor was there really any question of not doing it. Conversely, when I worked for Long Beach Mortgage Company (the sub-prime business unit of the same corporation), a business unit that had been acquired and which had an entirely different culture, it was very difficult to raise these ethical issues. It was, in fact, the realisation of how easy it is for good people to make bad decisions when influenced by corporate culture that inspired me to change careers back to one that was more aligned with my ultimate values.  There were times when I should have spoken up, to question the investment bankers and the corporate leadership, but because I was new in my position and the culture inhibited that sort of dialogue, I remained silent. Though I’m not so self-centred as to believe that I could have averted the sub-prime crisis (see the fantastic The Big Short http://www.amazon.com/Big-Short-Inside-Doomsday-Machine/dp/0393072231, Michael Lewis’s newest book, for more reasons why) , I might have at least cushioned the blow for WaMu and left with a clear conscience.
Since then I’ve done quite a bit of time reflecting on these issues, and I’ve concluded that, for the reasons above and given my experience as a consultant, teacher, and researcher, helping businesses achieve principled performance is the best possible path for my career. There are many people who can do business strategy consulting, many others that can do technology strategy consulting. In trying to figure out my unique value in the world of business, I realised that there are very few people with the business and technology background I have who are also deeply committed, interested, and sophisticated about business ethics. As a strategist, you help companies determine what their unique capabilities are and how they can bring those to the market. In the past two years, I’ve turned my strategist lens on myself and realised that working for a company whose mission is helping companies deliver principled performance would be the best use of not only my skills and experience, but my passion and my sense of what’s ultimately important. It’s this pursuit of significance, of existential as well as commercial success, that has driven me to explore the possibility of working with try to find a position with a firm that specialises in ethics and compliance.
 

Bullying and the Case for Horizontal Governance

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.

Rules, Risk, and the Dodd-Frank: They Earned It

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.

The efficacy and/or necessity of Codes of Ethics

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.


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You see, there are two aspects to ethics: discernment – knowing right from wrong – and discipline – having the moral will power to do what’s right. A code can help define what’s right and acceptable and provide a basis for imposing sanctions on those who don’t follow it. But unless it reinforces an established ethical culture, it won’t do much to assure that people do what’s right
James Meacham • Saying that Codes of Ethics don’t make people ethical is about the same as saying laws don’t make people law-abiding. Kind of obvious, really. Having a Code of Ethics is perhaps a necessary, though clearly not a sufficient, condition for ethical behaviour. They are helpful in a couple of ways. First, they make it clear what the ethical aspirations of your organization are, they set the tone for ethical engagement. While it’s true that they can be empty words, mere shelf-ware if they are not reinforced and modeled at the top of the organization, they can act as a rallying point for what the the leadership decide they want to aim for, ethically speaking. Second, they can help disambiguate and/or clarify questions that are not obvious, especially issue where “the right thing” for the organization might be a sort of dilemma (e.g., bribery).

No one who wants to be evil (or ethically non-compliant) is going to be persuaded to do so by a Code of Ethics. There are very few of those people, though. Most employees want to do the right thing, they just need to be reminded of the importance of doing it and given some guidance in how to. That’s why we need Codes of Ethics.


Leslie Levy • The 10 Commandments is an ethics code. How much do you think people understand it, much less comply?

Think back. Ethics codes were introduced in corporate governance by active shareholders who thought an ethics code would be useful, in court or otherwise, in proving that executives had been sinning. Next thing we knew, half the corporate world had ethics codes, only no one was sure what to put in them. Directors and senior managements, on the whole, figured ethics codes were harmless and gladly created them as a no-cost concession to activists. Only a few companies (probably mostly the Minnesota contingent) took ethics codes seriously.

I listened to debates on ethics and ethics codes ad nauseam in the days when a session on ethics preceded (but wasn’t fully part of) the national conference of the then American Society of Corporate Secretaries. At the time, “corporate ethics” was an oxymoron. The term literally lacked meaning. Lots of discussion since is beginning to create some consensus on ordinary usage. As I keep pointing out, we need to be schooled in Wittgenstein to make sense of this topic (admittedly a difficult challenge). Wittgenstein said, if people apply a term in ordinary usage in the same way or at least in ways that can be linked to one another, then the term gains meaning, and its meaning or meanings solidify over time.

What really interests me, however, aside from question of how all this fits with Milton Friedman’s theories of economics, is this: How about thinking about ethics codes, not in terms of what action they DETER, but in terms of what action they INSPIRE.

James Meacham • I’m not sure what your point about Wittgenstein’s theory of language is, Leslie. Maybe you can say a little more about that? Are you arguing that because of the tension between Friedman’s idea that the *only* imperative for management is to maximise shareholder value and any ethical consideration that might preempt that the term “corporate ethics” was oxymoronic? I can’t say I’m convinced by that because clearly everyone has always known that there’s a difference between ethical and non-ethical behaviour in the corporate setting, even if it was a fairly inchoate sense. There’s a difference in arguing that and, as I do, that Friedman is just wrong. All that said, I tend to agree with you that inspiration is a more interesting question than deterrance, though I think both have value. Have you read Dov Seidman’s book, “How”? I underestimated it based on my first, brief read through and my recent, more careful reading changed that view. Even though it’s a popular book (as opposed to a technical book of philosophy), Seidman has a background in philosophy and does a nice job of differentiating between the ethics of deterrence and the ethics of aspiration.
Leslie Levy • Hi, James. It’s almost midnight, but I’ll do my best — but tackling Wittgenstein at this hour is beyond my ability. I’ll find time tomorrow or the next day. For now, I’d say only that understanding Wittgenstein is, in my opinion, absolutely essential to understanding language, including the language of ethics. But enough of that for the moment. On to your other points. First, I thought (perhaps incorrectly) that Friedman said corporations were supposed to maximize profit, not shareholder value. Do you regard those as identical? Or do I have incorrect ideas about Friedman? I went through business school with a group of followers of the theory of economic man, and I don’t think they believed that “…everyone has always known that there’s a difference between ethical and non-ethical behaviour in the corporate setting….” Frankly, I found deplorable some of their behavior that they justified by economic-man theory; that is, they acted in what they said was their own interest, justified their behavior by reference to economic-man theory, and to me seemed motivated all too often by unadulterated selfishness. I haven’t read “How,” but will try to get it. I think popular books often say more or more useful things than academic tomes, so I’m glad to hear that, if I follow your suggestion, I won’t be in for boredom!

The one thing that troubles me after all this is that I seem to have to keep explaining Wittgenstein’s impact on business theory to so many business audiences, over and over, and I wonder why we don’t just make it a required part of the MBA curriculum. The closest I know to it (and a lot easier and more fun) is Fritz Roethlisberger’s “The Elusive Phenomena.” (It’s out of print, hard to get, and costly, but worth every penny.) Roethlisberger’s recitation of how he learned to think is a pretty good way to stumble one’s way to Wittgenstein, though I think Roethlisberger’s chapter on conceptual frameworks is slightly off, with consequences that could be more than slightly important.

And finally, yes, let’s think about how to “incentivize” desirable behavior. Lord knows, compensation committees would be glad to have this knowledge.


James Meacham • I find Wittgenstein a challenge at 10 in the morning with a full night sleep and 2 cups of coffee, so no worries. I do think his point that language acquires meaning through use is a good place to start when talking about definitions, but beyond that, I’m not sure I’ve found a lot applicability of his philosophy in business. As I begin my doctoral program (focusing on business ethics) next month, I may change my mind, but until then…

I guess I do considering maximising shareholder value as equivalent to maximising profit since thats where profit accrues in a corporate system. I think Friedman (and those who support the “economic man” theory) is just wrong on the evidence. There are two kinds of ethical misbehaviour (at least): actions that are clearly wrong in any context (these are the sorts of things I was talking about) and those actions and attitudes that you are referring to, things like greed, lack of empathy, etc. The economic man theory tends to justify the latter, you are right. There are a ton of problems with that theory (as behavioural economics and history have borne out) and I think it’s been mostly discredited except among the libertarian zealots. One attraction to the economic man theory is how simple and consistent it is. One thing I think those of us who disagree that (selfishness + selfishness == good for everyone) is to come up with a compelling alternative theory. That’s why aspirational business ethics is so important, I think.

I hope that made some sense…now it’s late here, too. 🙂


Leslie Levy • So, what you learn in school doesn’t affect your practice? Hmmm. If not, there certainly is a disconnect that should not exist. Good teaching should clearly connect the two.

I like some of what LaDon Berndt-Kuncewicz said. I think it’s especially important, when a senior manager is fired for ethical misconduct, whether or not the company has a code, that what he or she did wrong should be crystal clear to employees and also to the outside world. I don’t think that’s the case at HP. I suspect there’s still a lot more to that story.

I also like James Meacham’s attack on economic man. When I took my MBA and doctorate, economic man was still almost universally respected. People like me who said, “Whoa, lots of people don’t act like economic man,” were considered dim. I’m delighted that current research seems to have debunked economic man. However, note that the only rewards doled out by Compensation Committees (with rare exceptions) are dollars. That suggests that those attracted to the top of our corporations will be the ones who most love dollars, and these people are as close as you can get to economic man. Peter Goldman tells us that managers in “the real world” must produce “‘hard’ results.” Well, what about producing soft results? Doesn’t that also matter.

And so we turn back to ethics. Is ethics concerned exclusively with producing hard results, or do soft ones matter, too? And if soft ones also matter, precisely how are they to be taken into account in evaluating behavior? Should (and do) we evaluate differently within corporations?


Roy Snell • I agree that a code alone is of little help. A code of ethics can be a very helpful tool, but there is a catch. It’s all about enforcement to me. Having a code is easy, but finding someone with the ability to enforce it is tough. Few people who are really into ethics like to talk about the stick; they feel the carrot is more effective. Ironically, all talk and no action might hurt your efforts to create an ethical environment. If you have a code that no one enforces, some will not follow it. If people don’t see it being enforced, some will follow the lead of those who don’t follow it. Some will become bitter. The culture could be negatively impacted. If you enforce the code equally amongst all employees, more people will follow it, few will become bitter, and the culture will be more positive. It may be possible that an unenforced code does more damage than no code at all.


James Meacham • I’m currently doing some research for a client on specific topic (cross-sell in financial services companies). The funny thing is, I’ve done this same research for other companies in the past because *all* financial services companies want to do this well. But very few do, in spite of saying they want to. There are a couple that do actually do cross-sell well, but they make a point of mentioning it in every meeting, every investor call, ever piece of internal collateral. For at least a decade, the companies that are good at it have been making it a priority. The reason I bring it up is because it the same is true in the ethics context. All the companies that said they wanted to do cross-sell but didn’t are like the companies that did a code of ethics and stuck it on a shelf–they are no closer to being ethical than they were before and, as Roy suggested, not following through may engender some unintended consequences.

To be an ethical company in a system (market capitalism) that militates against ethical behaviour takes an extended, concerted effort that doesn’t stop. It has to be top of mind, or close to it, for it to be something your company is known for excelling at (like cross-sell). Clearly, as we’ve seen in the discussion above, there are levels of effort which will correspond roughly with the outcome. There’s a continuum, I think, that goes something like this, one’s place on the continuum is suggested but what paradigm of ethical behaviour you follow:

1) Ethical Leader Paradigm: Where there is a code of ethics that is talked about, kept at top of mind, reinforced through both aspirational statements and enforcement. A supererogatory view of ethics.

2) Evil Avoidance Paradigm: Where there’s a code of ethics but it is not at top of mind. It is reinforced primarily through enforcement and compliance, but the efforts in this area are universal, consistent, and well-understood. A deontological view of ethics.

3) Legal Avoidance Paradigm: There’s a code of ethics but it mostly shelf-ware.You might have to do your “yearly compliance training” but the language is always in terms of compliance and compliance is seen as something that is imposed from without. A pragmatic view of ethics.

4) Compliance-only Paradigm (I need a better more descriptive name for this one). This is the company that probably doesn’t have a code of ethics because they are silly, fluffy, and add no value. If it does it’s only because they have to. It’s never talked about again. Compliance is seen as a burden and this company wouldn’t think about it if it weren’t for the Sentencing Guidelines. In the marketplace, it views whatever it can get away with as ok. A lassiez-faire, relativist or Nietzschean view of ethics.

My point is that while you can get into trouble with a code of ethics, I don’t imagine a company that falls on the exemplary end of the spectrum without one. Indeed, you can even be an evil- or law-breaking-avoidant company without one. Again, I think it’s necessary but not sufficient. Enforcement, to Roy and others’ point, is necessary but not sufficient either. And to really be an ethically great company, you need both, while if you want to be an ethically mediocre company, you can try it with enforcement alone.