Europeans don’t get to heaven

Both Crane and Matten are in Europe right now. And witnessing one of the most severe disruption of airtravel since 9/11.

The closure of large parts of the European airspace has caused a lot of havoc here. Eurepean cities are full of stranded passengers and there is no train and no bus left to take them home. Even the German Chancellor or her Defense Minister had to put up with a 3 day hitchike from Lisbon and Istanbul, respectively. What a democratizing catastrophe, we are all in it together...

What is instructive about this incident is that this little volcano in small Iceland had such far reaching impacts. This place did not only start the ‘Financial Crisis’ recently, but now puts Europe out of the game. In the first chapter of our book we essentialise globalization as ‘deterritorialisation’ – and we know, its a hell of a term. But this situation makes it evident. Cheap, reliable and easy air travel has made territory irrelevant – where to relax, where to do business or where to celebrate your wedding. It can all happen wherever desired. Unless – the key driver of this globalising movement defaults. Such as airtravel (it might as well be the internet, or cars or trains, you get the picture).

But there is another edge to the case. Lufthansa, British Airways and other airlines as of yesterday have disputed the closing of the airspace. Of course, they are losing a lot of money. The closing of the airspace was based on governmental restrictions. But as it turns out, it was based on rather limited information. Just the simulations of one agency. It all amounts to the assessment of the risk. So BA and Lufthansa ran their own assessments by sending up planes into the sky.

It all points to the ethics of risk assessment. Plane crashes are considered as ‘low risk’ but ‘high impact’ catastrophes. And further, they are risks on which the individual has no influence. If the plane goes down, you have no way to influence the result. So the perceived impact of a potential air crash is much higher than, say, a road accident. This explains why governments all over Europe take these precautions, just to avoid the one air disaster that could happen if planes continued flying. As the German Transport Minister put it, defending his decisions against attacks by Lufthansa, he would never allow "the risk to passengers' life and limb to be offset against loss of revenue."

It will be interesting to see how long this view will be governing the policies of European governments. Not only the airlines loose an estimated €150m/day but supply chains are disrupted and shortages of some foods are already visible. With more palpable consequences the assessment of the necessary precautions will certainly change. After all most governments in Europe which ban flying are very happy to run nuclear power stations or other high risk technologies.

Photo by Pylon757 reproduced under the Creative Commons License.

A legal victory for B Corporations

A few weeks ago we discussed the B Corporation phenomenon which certifies firms that formally amend their corporate governing documents to incorporate stakeholder interests beyond those of shareholders.This week brings news of the first legal victory for B Corps with the signing into the Maryland legislation provisions for the legal creation of such "Benefit Corporations". According to the press release from B Lab, the outfit behind the B Corporation initiaitive: "Benefit Corporations must by law create a material positive impact on society; consider how decisions affect employees, community and the environment; and publicly report their social and environmental performance using established third-party standards. The legislation, sponsored by Senators Jamie Raskin and Brian Frosh and Delegate Brian Feldman, passed the Maryland Senate with a vote of 44 – 0 and the Assembly 135 - 5."

The press release also states that "Maryland is the first state to pass Benefit Corporation legislation, but others are quickly following Maryland’s lead.  Vermont Bill S.263, co-sponsored by Senators Hinda Miller and Peter Shumlin, has already passed the Senate and will be considered by the Vermont Assembly over the next 30 days.  Other states considering the legislation include Colorado, New York, North Carolina, Oregon, Pennsylvania, and Washington"

An interesting development for sure, though time will tell whether it has much material impact. Still, any initiative that seeks to get deep into the DNA of companies like this certainly qualifies as an exciting and ambitious experiment aimed at genuinely doing something different. The press release from B Lab puts it this way:

"The new law addresses a long time concern among entrepreneurs who need to raise growth capital but fear losing control of the social or environmental mission of their business. These entrepreneurs and other shareholders of Benefit Corporations now have additional rights to hold directors accountable for failure to create a material positive impact on society or to consider the impact of decisions on employees, community, and the environment. From a company’s point of view, the new law empowers directors of Benefit Corporations to consider employees, community and the environment in addition to shareholder value when they make operating and liquidity decisions. And, it offers them legal protection for those considerations."

Critics will for sure be concerned that this represents a weakening of the economic incentive at the heart of capitalism  ... and one that may compromise economic value creation. But surely the time is ripe for efforts like this to balance value creation for all in a systematic way. So congrats to B Lab for getting this going.  The road ahead will be long, but this could be an important bridge that has just been crossed.

Catholic Church Ethics

In the current 3ED of our book (out this month) we have extended a bit the consideration of religion in business ethics. After all, religion is a source of ‘right and wrong’ for a lot of people on earth.
However, the debate on religion has received an interesting twist recently with the way the Catholic Church has dealt with the child abuse cases, which have popped up recently in an unprecedented manner. The case shows that ‘business’ ethics, or more broadly, organizational ethics, is also a topic for a church.
In some ways, one could see the Catholic Church as the oldest and one of the largest ‘multinational corporations’ globally, with roughly 2,800 subsidiaries (dioceses) and 1.5bn members in nearly every country of the world. In some ways it is to no surprise that ethical infractions occur in such an organisation. Albeit that the current problems of the church are going beyond the normal ethical problems of MNCs and consist of criminal actions and human rights violations commited by their ‘executives’ (some of them senior), most notably towards children.
From a business ethics perspective, the current handling of the crisis by the official hierarchy of the church, most notably the Holy See, is questionable - to say the least. The effects on the ‘brand’ already now are disastrous. Looking at the classic tools of business ethics, such as codes of ethics, or reporting and auditing systems, the Catholic Church is virtually devoid of all these tools. But most crucially, every business ethics expert knows the pivotal role of ethical leadership – and it is here, where the Church has probably its biggest problems.
Apart from blaming all sorts of other factors, such as homosexuality (argued by Cardinal Tarcisio Bertone, No 2 after the Pope in the Church hierarchy) or the sexual revolution in general (by the German Bishop Walter Mixa, himself now accused of child abuse in his early years as a priest) the spotlight now focuses on Pope Benedict himself. There is ample ground for speculation that the Church has systematically obstructed justice towards offenders and has mostly attempted at covering up known cases of sexual and other abuse of children by Church officials. Even the letter of the Pope to the Irish Church is considered by many as too little too late, as it only deals with just one country, while the scandal now seems to be endemic in the church in many other countries, most notable the US, Germany and Austria.
In our book we take the simplistic starting point that ‘business ethics begins where the law ends’. For the Catholic Church this might become true in the opposite sense: Famous Oxford biologist Richard Dawkins and Vanity Fair columnist and author Christopher Hitchens have now hired lawyers in the UK to check whether the Pope himself could be arrested on the grounds of systematic cover up of criminal acts, once he visits the UK in September. However tantallizing the idea might be for some, one has to doubt whether they will be successful. But simply having a debate on legal implications of the scandal might finally accelerate thinking about change within the Church. It has happened before in many other cases of 'business' ethics. It will continue to be an interesting case. We keep you posted...

Microcredit as loan sharking?

Microfinance - the design and delivery of specialist financial services to poor consumers - doesn't often make it onto the front pages of the global media. So it was no surprise that the front page story about microcredit on the International Herald Tribune (and the New York Times) today ended up focusing on some of the industry's more unsavoury elements. Prime among these are the sky high interest rates that some microcredit organizations charge their low income customers - in Mexico, for instance, the average rate is currently some 70%, although the global average is around 37% (which is still considerably higher than rates for "normal" lending). Neil MacFarquhar, the NYT reporter lays the blame squarely on the takeover of microcredit by "a raft of banks and financial institutions", which he claims has got microfinance advocates "wringing their hands over the direction it has taken" and created a "fracas over preserving the field's saintly aura"

Such debates about the direction and financing of microcredit are hardly hot off the press. In fact, in our recently published Business Ethics textbook, we've written a case on Microfinance ("Targeting the poor with microfinance: hype or hope for poverty reduction?") that deals with exactly these concerns. Now we like to claim the book is cutting edge, but we don't expect to break the news ahead of the New York Times. Still, MacFarquhar's critique is timely in some respects in that it does at least put an important debate around microfinance in the mainstream at last. And it helps put to rest a little of the unabashed enthusiasm that tends to accompany a lot of discussion about microfinance. But in other respects, the article is rather uneven in its criticism and probably rather misses the point with its castigation of banks.

There are in fact three quite distinct issues at stake here. The first concerns what a fair price for poor consumers to pay might be in terms of interest rates. Microcredit consumers almost by definition represent a higher cost to serivce for financial institutions because they are difficult to reach and do not fit the existing banking infrastructure. As we say in our case, "providing financial services to the poor may not be as risky as once thought, but it remains expensive because of the large numbers of small transactions that need to be processed and the considerable resources that need to go into developing education and outreach services." This is why much microcredit began as a nonprofit exercise funded by donations. But when it comes to for profit providers, are lenders bound by a "fair price principle" that may not be in evidence in other markets? Isn't the fair price what consumers are willing to pay? Well, not exactly. Fair prices are those that are transparent, understandable, and where customers have an opportunity to switch. These are conditions that are not always met in microcredit markets, suggesting that some kind of addition protections may indeed be necessary to prevent exploitation.

The second issue is about what it takes for microfinance to really take off and go mainstream. First we derided banks for ignoring poor people. Now that microcredit organizations have shown that it can be profitable (and relatively low risk) to target them, we still deride the banks for greedily entering the market. But in reality, few large banks have yet to take up microcredit with much enthusiasm. And even those that have, typically only have a small percentage of their business accounted for with microloans. Despite what MacFarquhar hints at, microfinance is still not a big bank phenomenon and much of the microfinance world is still looking to further its inroads into the commercial sector to prove that its not just charity but actually good business as well.

And firnally, the third major issue is whether microfinance actually has any major effect on poverty reduction. This "fierce debate" as MacFarquhar terms it, is a crucial one for the long term complexion of microfinance, because without substantial impacts on poverty, microfinance has far less attraction to the development world (though it will stay in vogue for the finance industry whilst it maintains it sheen of profitability mixed with principles). And the truth is, the definitive answer to that one is still not apparent. In our case, we put it like this:

"The evidence on the impact of microfinance on poverty alleviation is limited. In part, this is simply due to the relative youth of the industry, as well as the very real problem of providing any definitive correlations given the range of variables involved in determining poverty levels. Despite numerous case studies of successful initiatives, hard empirical evidence is lacking.At best, the existing evidence seems to suggest that, on average, microfinance reduces vulnerability and dependence among client groups, even if it doesn’t necessarily make them richer."

Critics therefore suggest that efforts should be targeted at other approaches to poverty reduction whilst advocates, even in the absence of hard evidence, still endorse the more organic, inclusive and bottom-up approach to develoment represented by microfinance. This argument isn't likely to go away any time soon, but the need is clearly there to develop more sophisticated impact assessment tools to gauge its effectiveness.

So the upshot is, the picture is probably rather more messy than the New York Times presents it, but also somewhat more nuanced. Microcredit is not about big banks versus nonprofit providers battling for the heart and soul of a "saintly" practice, but about a form of lending that can and will be practiced in a variety of ways to serve a variety of ends.

Google in China (cont'd)

We have blogged in the past a couple of times about Google’s business operations in China and in the fresh from the press 3^rd Edition of our book we have an entire case (in Chapter 5) on the issue. In recent weeks this story has gotten a new instalment with Google’s reaction to hacker attacks on their Chinese based servers.

On the surface, Google’s decision to leave China and to base their operations in Hong Kong (which is not subject to the same censorship as mainland China) might make good business sense. After all China contributes only an estimated 1-2% to Google’s overall turnover and the attacks on their source code by (allegedly government employed ) Chinese hackers touches on vital commercial secrets of the company. And much of the lamented censorship in fact can also be seen as nothing more than a thinly disguised effort by the Chinese to favor local competitors against foreign providers, most notably the Chinese engine Baidu.

However, last week’s edition of the German magazine DER SPIEGEL raises some interesting further aspects of the case: ‘For the first time a Western company has dared to openly criticise Beijing’s comprehensive control of the Internet as a trade barrier and to draw consequences.’ The magazine in fact sees Google’s stance as nothing less than a new phase in geopolitics: ‘Now there is war: Google against China, a new transnational superpower against another new superpower which uses ... decades old means of power and oppression. The soft power of a gigantic agglomeration of knowledge faces the hard power of a classic nation state.’

This provides a remarkable context for Google’s recent decision. By relocating their operations they have done what many heads of state have not dared to raise with similar clarity: that censorship is fundamentally opposed to the core values of most Western democracies and that the Chinese approach, to put it neutrally, is not compatible with it. Given the substantial reactions to Google’s decision by their Chinese customers and supporters one could argue that Google has attempted something similar to those who gathered on Tiananmen Square 21 years ago (hence the title of DER SPIEGEL).

In this context it is largely irrelevant whether Google’s decision was just a sound business proposition. Even if so, it shows how globalization has transformed private companies in political players on the world stage. Though in all fairness, there is also ample ground to admire Google’s decision from an ethical perspective. After all, China remains a huge future market for internet services. As Google co-founder Sergey Brin said in an interview in DER SPIEGEL, his decision was also informed by his experiences of government harassment and violence growing up in the Soviet Union. So the Google case will continue to showcase some of the basic insights of business ethics: to marry ethical and economic constraints is a struggle and the choice is rarely between the good and the evil option, rather than between the lesser of two evils or the best of two good options.

Photo reproduced under Creative Commons license.