Friday, July 20, 2012

Should Ethics Be a Required Business-School Course?

Since I'm an ethicist, and a business-school graduate, you'd think I'd be in favor of including one or more required ethics classes in business school curricula.

But I'm not.

By the time a student gets to business school, he or she should have a pretty well-developed moral compass. One required class (or even more) won't fix that. An amoral student will simply learn what's expected from the professor in order to earn that all-important A.

Does that mean that ethics is irrelevant to a business-school education?

By no means.

University of Chicago Business School Professor Luigi Zingales agrees. In an article ("Do Business Schools Incubate Criminals?") published at Bloomberg View (here) and Huffington Post (here), he argues that "ethics should become an integral part of the so-called core classes -- such as accounting, corporate finance, macroeconomics and microeconomics -- that tend to be taught by the most respected professors."

A few weeks ago, I made a reference to the late University of Chicago economist Milton Friedman's 1970s comment that the corporation's responsibility is "generally ... to make as much money as possible." (full blog post, here) I allowed that Friedman qualified that much-quoted line, by adding, "while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom."

I saw a lot of wiggle-room in that qualification.

Prof. Zingales chooses a similar Friedman quote (from his Capitalism and Freedom):
There is one and only one social responsibility of business -- to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.

Zingales considers the qualification "a very big caveat, and one that is not stressed nearly enough in our business schools." -- on that we certainly both agree.

Zingales notes,
Lobbying to secure a competitive advantage from the government certainly does not represent "open and free competition." Similarly, preying on customers’ addictions or cognitive limitations constitutes deception, if not outright fraud. Not to mention using clients’ confidential information for personal gain, manipulating a major interest-rate benchmark such as Libor [the London Inter-Bank Offered Rate], or selling financial products you know to be flawed. 
So why is such unethical (and, frequently, criminal) behavior so common? What's gone wrong?

In Zingales' view, "our business schools are partly to blame" for a general decline in ethical standards in business. Why? Because economists have taken to teaching their subject as though it were a natural science: economists "liken themselves to physicists, who teach how atoms do behave, not how they should behave."

But (as Zingales continues) atoms' behavior do not have moral implications, while our behavior does.

Students may then make an unethical, if logical, leap: "if teachers pretend to be agnostic [on matters of ethics], they subtly encourage amoral behavior without taking any responsibility [for that behavior]."

Adam Smith (who was, if you recall, a professor of moral philosophy at Glasgow University before writing The Wealth of Nations) would be appalled to think that economic behavior could be divorced from ethical behavior. I'm glad that Prof. Zingales is working to bring the two together again.

Not a moment too soon.

Monday, July 16, 2012

Slow Down: You Move Too Fast

Two unrelated articles had me thinking last weekend about how we make decisions and why so many of them don't turn out as well as we had hoped.

Friday's New York Times carried an article by Steven Greenhouse about a discrimination lawsuit filed against an apparel retailer, Wet Seal, "asserting that the company had a high-level policy of firing and denying pay increases and promotions to African-American employees because they did not fit its 'brand image'."

Wow, I thought. If the allegations are true, that's a trifecta: illegal, immoral, and stupid.

The retailer of course denies all allegations, while the lawsuit claims that a former senior vice president of the company "ordered various managers to 'lighten up' the work force in stores with a large white clientele by hiring more whites and had told a regional manager that she must have 'lost her mind' to have put a black person in charge of a particular store."

A senior vice president said that?

So it looks as though we can throw out the extremely-young-inexperienced-supervisor excuse. Is it simply a case of racism? Most likely, yes and no.

Assuming the facts of the lawsuit are correct, this case would appear to be, to quote a law professor that Greenhouse interviewed, "a slam-dunk." As the professor noted, "Even if there is a consumer preference for employees to be of a certain race, even if it might reduce patronage, the law doesn't provide an exception for you to discriminate that way."

I immediately thought of Dr. Martin Luther King Jr.'s comment that "while it may be true that morality cannot be legislated, behavior can be regulated. It may be true that the law cannot change the heart but it can restrain the heartless. It may be true that the law cannot make a man love me but it can keep him from lynching me and I think that is pretty important, also." (from a 1963 speech given at Western Michigan University; full transcript here)

But there may be another issue here, too, beyond the stunning racism.

People have always made business decisions based on insufficient data, but there is more and more pressure to make decisions fast. There's a problem? Fix it. Now. (Because there's another problem coming down the pike right behind the first. Not to mention that if the first one's not fixed, it'll cause us so much trouble that we may never recover.)

So, if, for example, you see sales slumping at one of your locations, you're going to want to move fast to turn that around.

But is the fast decision the right decision? In the 7 July issue of The Economist, columnist "Schumpeter" writes "in praise of procrastination." Specifically, the columnist calls out some research by Brian Gunia of Johns Hopkins University, who, with three co-authors, conducted research that indicates that slow right-wrong decisions are more likely to be ethical: "Our findings suggest that contemplation and conversation ... seem to provide alternate routes to ethicality, while immediate choice and self-interested conversations seem to provide detours around it."

In other words, slow down and think about that decision before you act on it. Or talk it through with a colleague, preferably one with a strong moral compass.

(The complete paper, "Contemplation and Conversation: Subtle Influences on Moral Decision Making," was published in the Academy of Management Journal, 55(1). Available online here as PDF. Note that Gunia et al. were considering "right-wrong" decisions, where one option is in line with values and the other is not, as opposed to "right-right" decisions, where two moral values are in competition.)

Gunia and his fellow authors suggest that some organizational cultures may be at greater risk for unethical behavior:
Organizations with a "fast pulse" or tendency to reward quick decision making may suffer ethical penalties by discouraging contemplation and conversation. Organizations that afford time to think and talk with others—especially ethical others—should benefit from more ethical action. Similarly, organizations with interdependent workflows, which encourage conversation, might promote more ethical action than organizations of independent silos.

Schumpeter reads "fast pulse" and thinks immediately of banks, noting, "The current LIBOR scandal engulfing Barclays in Britain supports this idea."

I think of companies like Wet Seal, which specializes in fast fashion for notoriously fickle teens, heralding "top trends" and "just arrived" on their web site.

To quote the business philosophers Simon & Garfunkel:

Slow down; You move too fast.

Friday, July 13, 2012

Bankers Behaving Badly -- What Else is New?

Oh, bankers! What would I find to do without you? (Alas, plenty.)

But today seems like a Friday the 13th windfall in banking news. In the New York Times alone, there were four articles about questionable bank dealings:
  • Ben Protess, in the DealBook blog, explores the widening Barclays-LIBOR scandal (see my earlier post here; Protess' article is here); apparently Tim Geithner, now Treasury Secretary, then head of the Federal Reserve Bank of New York, was questioning possible bank manipulation of the London InterBank Offered Rate as far back as 2008, and urging British authorities to "strengthen governance and establish a credible reporting procedure" and to "eliminate [the] incentive to misreport."
  • Elsewhere in DealBook, Azad Ahmed and Peter Lattman write about the widening Peregrine Financial turmoil, with $215 million (and counting!) in customer money missing. Its founder is in the hospital following a suicide attempt. Lawsuits have been filed, and Peregrine has filed for bankruptcy. It now appears that regulators missed red flags for years. A Peregrine client apparently "sent a letter to the National Futures Association, the firm’s primary regulator, and the C.F.T.C., asking it to intervene to prevent the firm from misusing its customers’ money" in 2004.
  • Wells Fargo has agreed to pay a fine of at least $175 million for allegedly steering black and Latino borrowers into riskier subprime mortgages, charging them higher fees and rates, and otherwise discriminating against minority borrowers during the housing boom, according to Charlie Savage's article. The company denied the Justice Department charges, but in a statement by the president of Wells Fargo Home Mortgage, said that it was settling "to avoid a long and costly legal fight, and to instead devote our resources to continuing to contribute to the country’s housing recovery."
  •  And Landon Thomas Jr. and Mark Scott, also in DealBook, report that we can expect, as early as next week, to hear that HSBC senior officials apologizing to U.S. officials "for not cracking down soon enough on money-laundering activities in America." The money laundering, now being investigated by a Senate subcommittee, occurred from 2004 to 2010 and involved drug deals and terrorism, and "could result in HSBC paying fines of up to $1 billion." So much for HSBC's reputation as "one of the more conservatively run and trustworthy of the financial giants based in London.
Add in this morning's breaking news that JPMorganChase's losses "on a soured credit bet" could mount to more than $7 billion, as its "traders may have intentionally tried to conceal the extent of the red ink on the disastrous position." (This is from an article by Jessica Silver-Greenberg, posted on the Times' DealBook blog this morning)

What does all this tell me?

You know my mantra: Regulate, regulate, regulate.

And while you're at it: Regulate the regulators.

And make sure that if bankers are wildly compensated for successful trades, they are equally wildly un-compensated for disastrous losses.

I miss the days when banking was boring.

Thursday, July 5, 2012

What We Do Best is Delude Ourselves

I am not revealing any deep dark secret -- at least not to anyone who has read even one of my posts -- by saying that I'm a big fan of regulation (example post, here). Much though I would like to think that we can all police ourselves and behave ethically without the imposition of laws and penalties, I don't believe it (and if I did, you would -- rightly -- call me naive.).

We humans are much too good at covering up for ourselves, at rationalizing our ethically questionable behaviors.

I've been thinking about this for several days, ever since the story broke (on Wednesday 27 June) that giant British bank Barclays had agreed to pay $450 million to resolve accusations that it had manipulated Libor, the London interbank offered rate (used to set commercial and consumer loan rates), to its own benefit (selected New York Times DealBook articles here, here, and here; all by Mark Scott; the first by Scott and Ben Protess).
In the Barclays case, regulators say they uncovered “pervasive” wrongdoing that spanned a four-year period and touched top rungs of the firm, including members of senior management and traders stationed in London, New York and Tokyo. A 45-page complaint laid bare the scheme that unfolded from 2005 to 2009, describing how Barclays had made false reports with the aim of manipulating rates to increase the bank’s profits. Barclays was also accused of “aiding attempts by other banks to manipulate” Euribor [Euribor is the European interbank offered rate].

Barclay's American chief executive, Robert Diamond, originally offered apologies and announced that he and three other top officers would voluntarily give up their bonuses. A day later, Diamond was offering to give up his entire year's compensation. By Tuesday (2 July), Diamond had resigned.

Yesterday, he was reported to have told a Parliamentary committee that while the actions of 14 Barclays traders in manipulating the Libor made him "physically sick", it wasn't just Barclays that was to blame.

According to Scott's article, Diamond said that "the bank had raised concerns multiple times with American and British authorities about discrepancies over how Libor ... was set. The bank was not told to stop the practice."

In other words, there were other banks doing it too, and besides, the regulators could have stopped us.

Nor would Diamond accept sole responsibility for Barclays' actions (it is not clear how much Diamond knew, how early): "I don’t feel personal culpability. What I do feel is a strong sense of responsibility."

What prompted me to write this particular blog post was an episode of "On Point" that I heard this morning. Tom Ashbrook interviewed (here) Dan Ariely, a professor of psychology and behavioral economics at Duke, and author of a new book, The Honest Truth About Dishonesty: How We Lie to Everyone -- Especially Ourselves.

The whole interview was fascinating, and I'm looking forward to reading the book. Some interesting snippets that I recall:

* Golfers are in near-unanimous agreement that picking up the ball and moving it four inches to line up a better shot is a complete no-no. Nudging it with your foot, somehow, seems a little different, and significantly less "wrong". And tapping it gently with the club? More likely still, and almost OK. But we're still talking about the same four inches!

* The further away from the person we affect by our cheating, the more easily we are able to rationalize it: The individual who would never shoplift an actual CD from a music store has no problem downloading that music illegally.

* If "everybody else is doing it", we're much more likely to as well -- especially if there is an inherent conflict of interest. We have all ranted about evil bankers nearly bringing the whole system down, but can we be so sure that we would have behaved that much better, had we been incentivized in the same way and surrounded by other bankers behaving badly? ("Wow, these mortgage-backed securities don't look very good. But the more of them I sell, the bigger my bonus will be. And their quality doesn't seem to worry any of these smart guys I work with, so maybe they're really OK?")

Barclay's ex-CEO can blame the regulators (in part) and he may be right: they may not have been careful enough. Prof. Ariely's research indicates that, while clear rules may not stop all  the liars and cheats, they will deter many. University honor rules work -- even if not perfectly.

So the answer is better, stricter regulation.