Monday, June 29, 2009

A major day in business ethics

June 29, 2009, might go into the annals as a big day in the history of business ethics. Right on top of many US news sites, we learn, first, that Bernie Madoff got his whopping 150 years sentence and, second, the US supreme court ruled in a landmark case in favor of 18 white firefighters who were suing their employer for what is often called ‘reverse discrimination’.

The Madoff case is in some ways your run-of-the-mill textbook case for unethical behavior in business – if it were not on such a biblical scale and in these dire times. And for a change not only hitting poor or middle class people but the wealthy. For us this example of fraud and theft points to the clear limits and boundaries of business ethics: the strong approach to deregulation and self-regulation of the financial industry in the US (and elsewhere) in the past has delegated a lot of ethical issues into the realm of the voluntary.
Funnily, they interviewed Harry Markopolos, a stockbroker, recently on 60 Minutes who as early as in the year 2000 had filed a complaint to the Securities and Exchange Commission (SEC), the self-regulatory body overseeing Wall Street. Four more he filed over the years, mostly because he was mad at Madoff as a competitor who offered these fairy tale returns. Remember, this was the time of Enron etc, where one would have expected the SEC to take complaints about unethical behavior seriously. Based on mathematical modeling Markopolos ("It took me five minutes to know that it was a fraud. It took me another almost four hours of mathematical modeling to prove that it was a fraud.") could prove back then what the SEC never took serious. Madoff was just too respected and too powerful on Wall Street for the SEC to even daring to question his practices. It shows that ethical behavior in business still is very dependent on strong institutions, independent regulators and, no less, skilled and professional oversight. The ‘Case Madoff’ in that sense is in fact a ‘Case SEC’.

The second incident is equally important and will have massive consequences. The case is about the fire department of New Haven (a small town north of New York City) which had made their firefighters pass a test as the basis of promotion. None of the black firefighters passed the test. Out of fear to appear racist, the City of New Haven then refrained from promoting all the (white) guys who did pass. These 18 white guys (one of them Hispanic) went to court and now finally won fighting their case through all the levels.
For a long time, the business ethics literature has actually addressed these issues of retributive justice in rather favorable terms. Because of past injustices against a particular group, that group should now receive preferred treatment. The black guys, so the argument goes, did not fail the test for reasons in their control, but because they belong to an ethnic group, which in the US still struggles in education, family stability and other factors which make people successful. The problem here is though that in doing so, you discriminate against other groups in a similar way. The fact that a court now rules against this in some ways is a sea change in the way we will deal with affirmative action in years to come. The ruling will have massive implication for business too, as it is based on laws that apply not only to the public sector. It will surely lead to many complex discussions and tricky decisions in business.

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