Solving the executive pay problem

The idea that executive pay can be "too high" is a touchy issue. While many regular Joes are seeing their jobs disappear, or have been forced to endure cut backs to salary and benefits, CEO pay continues to escalate. Bonuses in the financial sector - never popular among the general public - are largely back to their stratospheric pre-crisis levels, much to the chagrin of the tax payers who funded the bailouts that kept them in business. And there is the growing chasm between those at the top and the bottom of the pay ladder that helped galvanize the Occupy movement. According to one recent study, the gap between CEO and average U.S. worker pay was 325-to-1 in 2010. In 1965, it was 24:1.

The business community, of course, continues to argue that it should have the right to determine its own remuneration levels. The global market for executives, they say, forces them to offer high salaries to attract the top talent. But stagnant performance is prompting many to question the logic of that argument. Why should companies be rewarding top executives for failure when everyone else is tightening belts?

Unsurprisingly, regulators have started talking tough. But progress has been limited. Three years ago President Obama announced that he would cap the salaries of executives of companies in receipt of TARP balilouts, yet by 2010 could do nothing to stop those companies awarding huge bonuses, judged to be "ill advised" by his newly appointed pay czar. A more systematic approach was promised with the Dodd Frank financial regulation, but efforts to rein in pay have had limited success. After much sword rattling from senior British politicians, the announcement by the UK government on January 23rd of a new approach to regulating executive pay claims to be the start of a more concerted response to the problem. The trouble is, it is not a very convincing solution. And perhaps even worse, it is not at all clear what the problem really is that they are trying to solve.

The "problem" with executive pay is that it is in fact a whole set of related problems. And each of these require different types of solutions. Income disparity between high and low earners is one thing, whereas CEOs being rewarded for poor performance is quite another. Setting the pay of bailed out businesses is yet another. And so on.

Regulators have to work out which of these problems they are trying to solve and what the best combination of regulation, encouragement, incentives, and sanctions should be to achieve desired results. Take the problem of pay disparity and those troubling pay ratios.  Blunt regulation probably isn't going to be very helpful here. For a start no one really knows what the "right" ratio should be. A maximum permitted ratio of say 100:1 may be feasible in some industries, less so in others. And as many have pointed out, the unintended effects might be that companies start outsourcing any of the low wage jobs they still have to generate a lower ratio.

Incentives, such as tax breaks for companies reaching certain thresholds, may offer more potential, although it would be technically complicated to administer effectively. A pay-ratio credits type market could also be devised whereby those companies failing to meet their targeted ratio could buy credits from those that over-achieve theirs. Much like in carbon markets, these types of systems help to even out differences across industries.

The "transparency" option trumpeted by the current UK government speaks to a more typical way of government providing the framework for corporate social responsibility initiatives. In creating a mechanism for pay ratios to be compared across companies (such as through mandatory reporting of pay, and support for some type of league tables comparing performance) governments can spur companies to improve their ranking. This avoids any necessity of setting limits or levels of acceptable performance and instead relies on competitive forces to drive improvements. As with all these incentives type approaches, it remains up to companies themselves to determine how to improve their performance, whether through increasing the remuneration of lower paid workers or decreasing that of higher paid executives. It stops regulators getting directly involved in setting pay limits and enables businesses the freedom to determine what works best for them from a competitive point of view.

Of course, there are also other less direct ways to encourage better pay equity. George Monbiot the UK journalist and environmental campaigner has recently put forward a spirited defense of a "maximum wage". Others argue for incentives or regulations to encourage increased employee share ownership among the lower paid. Such initiatives avoid the risk of companies simply "gaming" the pay ratio statistics, but also run into other problems, such as resistance from the business community and difficulties in implementation. Still, there is plenty of scope for interesting and imaginative ideas to help solve this and the other executive pay problems, and the UK in particular seems to be at a crucial tipping point in terms of public support for change.

Where the current UK government's proposals largely fall flat is in their over-emphasis on enhancing shareholder control of executive pay. For a start this does nothing directly about pay equity (which is what the public wants) but rather focuses more on the problem of whether senior executives are being rewarded for poor performance. Whilst giving shareholders more input into executive pay is not a bad thing, first you need to have shareholders that are active participants in the companies they invest in. In our dispersed ownership model of financial capitalism where shares are often held for matters of minutes, hours, and days rather than months and years, we often simply don't have sufficient shareholder engagement for such initiatives to make all that much difference. Similar rules imposed by the Dodd Frank Act in the US have done little to curb executive pay.

Clearly the time is right for action on the manifold problems of executive pay. But for those seeking to tackle them, whether in industry, government, academia, or civil society, it is imperative that there is clarity on which problems are going to be addressed. And dealing with such complex issues is going to require more creativity in terms of solutions, and more joined-up-thinking in terms of the causes of those problems, than we've generally seen so far.

Photo by GDS Infographics. Reproduced under Creative Commons Licence

Top 10 Corporate Responsibility Stories of 2011

It's that time of year again when we consider the big news events around corporate responsibility during the past twelve months. It has undoubtedly been a significant year, with some stories potentially having a huge impact on future corporate responsibility practice or government policy. Nuclear accidents, protests galore, high level corruption - there's been a lot of ugliness again this year. But sometimes you've got to go down before you can go up. Let's hope 2011 will be looked back on as the year that business finally woke up to the new realities of corporate responsibility.

1. Fukushima nuclear disaster
As with the BP oil leak in 2010, no corporate responsibility story dominated the media in the same way that Fukushima did. And for good reason. The world's second worst nuclear disaster (after Chernobyl) slammed home just how risky the nuclear industry could be. Tokyo Electric Power (TEPCO), the company operating the plant, has had to shoulder a lot of the blame for its shoddy risk management, poor planning and siting, falsified safety records, governance procedures, and lots more besides. Its now mired in debt, awaiting either nationalization or a government bail-out. Japanese regulators meanwhile failed in providing adequate oversight, in large part due to overly cosy relations with the energy industry. Not surprising then that Fukushima also had huge impacts more broadly, most notably in a massive swing away from nuclear in the clean energy debate. Germany for one has made a 180 degree switch away from nuclear. Really this was the mother of all corporate responsibility disasters in 2011.

2. The 'Occupy' movement
Starting with Los Indignados in Spain, gradually hitting the headlines with Occupy Wall Street, and then turning into a global phenomenon, the Occupy Movement thrust social equity and democracy into the corporate responsibility debate like never before. We've had anti-capitalism protests before, but the Occupy Movement took a much more focused aim at the titans of the financial sector, and kept an unlikely conversation going for months. The challenges the unruly movement posed for business may not always have been crystal clear, but they've struck such a chord with the general public, and even among senior business leaders, that they can't just be ignored. Demands for tax justice, banking regulation, and more controls on corporate political influence have all received a fillip by the movement. Who know's? Maybe in time, the legacy of Occupy for corporate responsibilty may even surpass that of Fukushima.

3. News International phone hacking scandal
Few corporate responsibility stories can claim the scalp of an entire business, but the closing of the UK newspaper the News of the World, and the arrest of its editor, Rebekah Brooks, in July of 2011 showed just how significant the phone hacking story surrounding News International had become. When the story also took the scalp of the UK's most senior police officer, and landed veteran media mogul Rupert Murdoch in a Parliamentary inquiry, the reverberations were felt near and far. We like our journalists to pursue truth. But when they cross the line and illegally tap the private phones of bereaved families, it's clearly time for a clean up in the media. On the bright side, the story was broken, and vigorously investigated over several years, by the Guardian newspaper. So while we may not trust journalists all that much any more (if we ever did), the story also demonstrated the importance of a strong and independent media as a corporate responsibility watchdog.

4. FIFA's corruption own-goal
2011 was a bad year for integrity in sport. The Pakistani cricket betting scandal, the Sumo wrestling bout-fixing revelations, the Penn State University football coaching sex abuse case, the continued flow of scandals convulsing the Chinese Football Association and the Turkish Football Federation - few sports or countries have managed to come out looking clean. But rising above them all has been the FIFA corruption story, which more than any other sporting corruption story of 2011, demonstrated not just how deeply ingrained corruption is in sport but even how much it is embedded in sporting management and administration. The scandal has been rumbling on at least since 2010 when allegations about bought votes in the 2018 and 2022 World Cup hosting competition started pouring in. After bribery allegations, resignations, and an unopposed re-election of beleaguered FIFA chair Sepp Blatter, the organization finally looked to be getting itself back on track with an internal inquiry and a life-ban for the President of the Asian Football Confederation. But FIFA's proposed roadmap for tackling its integrity problems fell far short of the root and branch surgery that was necessary, and the recent withdrawal of Transparency International from the reform process demonstrates that the FIFA leadership still don't understand the basic principles of ethics management. Students of corporate responsibility need no better case study of how to get it all so wrong.

5. Raj Rajaratnam's insider trading trial
No list of corporate responsibility stories is complete without a big fish being caught. In 2010 we saw the sacking of HP CEO Mark Hurd for expense claims fraud. This year, we had a two-for-price-of-one bonanza with the trial of former hedge fund boss Raj Rajaratnam giving us a guilty verdict, 11 years in jail and a $10m fine for insider trading .... plus the charging of his friend and former McKinsey head Rajat Gupta with securities fraud for passing on insider information to Rajaratnam. As the New York Times said: "it was the longest-ever prison sentence for insider trading, [and] a watershed moment in the government’s aggressive two-year campaign to root out the illegal exchange of confidential information on Wall Street."

6. UBS and the not so 'rogue' trader
Another big story of personal ethical failure was the revelation back in September that UBS trader Kweku Adoboli had managed to lose the company a staggering $2.3bn in authorized trading. With a loss that big, this one makes the list on scale alone. But the real story here was not so much the ethical failings of Adoboli himself (though that clearly was one of the issues at play here), but the failure of UBS to manage the problem before it got out of hand, and the inherent risk-taking at the heart of the financial services industry. In desperate need to repair its flagging reputation, UBS subsequently accepted the resignation of its CEO and installed a new leader with a mandate to move into less risky and less complex investment banking.

7. Twitter revolutions and Blackberry riots
You know when your reputation is in good shape when you get associated with progressive political revolutions like the Arab Spring. After a government telecom crackdown in Egypt, companies like Twitter and Google found themselves center stage in the flourishing revolution. Switch to the ever declining fortunes of Canadian tech pioneers RIM and their Blackberry device, and all you get is an association with mindless looting in London. But whichever way you cut it, 2011 will indelibly be marked as the year that tech companies realized that for better or worse, social protest - and government response to protest - was an inevitable part of their business. Message to CR department: write a policy.

8. Michael Porter's popularization of 'Creating Shared Value'
It was certainly not the most popular article among CSR commentators, but Porter and Kramer's piece in the January issue of the Harvard Business Review on 'Creating Shared Value' has probably done more to get corporate responsibility issues into the boardroom than anything else written this year. Sure, it's simplistic, derivative, and takes cheap shots at a version of CSR that most us don't even recognize. But it's also compelling, endearingly positive, and says a lot of things that most of us have been trying to say for years without anyone taking much notice. Plus it couldn't be more prescient with its "capitalism is under siege" motif. Oh, and Michael Porter said it. So it must be true. Take it from us, CSV is here to stay.

9. Facebook's privacy adventures
There was little doubt back in January that Facebook would probably be hitting a whole bunch of corporate responsibility snags during the year. Once you get so big and popular, it is inevitable that the critics will start sharpening their knives. Greenpeace pushed hard on the coal powered energy issue and eventually scored a well-earned success. But the big issue dogging Facebook in 2011 was privacy. The tech giant wasn't alone since privacy and security continued to afflict a number of companies especially with the shift to cloud computing. But Facebook's privacy battles stand out simply because they affect so many of us and therefore mark the front line of the personal privacy battles with tech companies and regulators. Remarkably, despite a surge of criticism the company initially managed to stave off too big a hit on its business during the year. But last month's settlement with US regulators saw Facebook accused of "unfair and deceptive practices" and resulted in the company facing an extraordinary obligation to submit to independent privacy audits for the next 20 years. And late in December the Irish data protection commissioner gave Facebook 6 months to comply with a raft of new privacy measures for all of its non US and Canadian users. As a result the company has started adopting a far more conciliatory tone with its critics but the road ahead will be marked by yet more battles as we gradually move to some kind of a post-privacy future.

10. The tar sands failed ethical makeover
The year started with the Canadian Environment Minister seeking to make the seemingly indefensible case that the tar sands were an ethical source of oil because they came from a democratic country that respected human rights. The argument was designed to influence US and European policy makers in the run up to critical energy decisions during 2011 such as the controversial Keystone XL Pipeline plan which was designed to bring oil sands crude directly into the US, and the European Commission's deliberations over whether to label tar sands oil as a "dirty fuel" due to its higher carbon intensity. So far the Canadian government and the oil sands producers have failed to win the argument with the Keystone decision being postponed by President Obama and the EC approving the dirty fuel label, which also then attracted further backing from a similar initiative in the State of California. Recently the story has spiraled into the more absurd territory of a banana boycott. The announcement by fruit company Chiquita to reduce their use of tar sands oil in its fleet sparked a concerted campaign by Ethicaloil.org to boycott Chiquita for discriminating against Canada's "ethical oil". You couldn't make this stuff up.

Looking at the two stories book-ending our top ten - the seriousness of a world of nuclear disaster and increasingly dirty sources of conventional energy (such as the tar sands and gas fracking) - not to mention the erosion of privacy, a crisis in capitalism and the never ending scourge of corruption that populate the middle order, it is clear that the corporate responsibility stakes have never been higher. Next year promises to be more of the same.

Photo by IAEA Imagebank. Reproduced under Creative Commons Licence

The tents are gone. But what about the ideas?

The tents are gone in New York’s Zuccotti Park and many other cities - including Toronto's St James Park. Daily we can follow how other Occupy sites in the US are closed down by more or less forceful police actions. By and large, one has to say that the movement as such is fading out, at least in its initial shape.

A good time then to assess two important questions. What, if anything, has the movement achieved? And, equally important: Where is it going from here?

As to the first question, even skeptics like Jeffrey Simpson from the Globe and Mail admit that the movement has put the finger on an important issue, namely the one of income inequality in most developed democracies. He has quite impressive numbers to make his case - that while Canada, thanks to a tighter regulated banking sector, has not felt the brunt of the current crisis quite as badly, the issue of inequality is no less a matter close to home. As Politico’s Ben Smith has shown, the mentioning of ‘income inequality’ in print and web media has quintupled over the course of the Occupy protests (from 91/week to over 500).

So there can be little doubt that the movement has raised long acknowledged issues and has given them a legitimate place in the public. That is a success - no doubt. Other than that though, I am quite pessimistic about the impact of the protests. Despite sympathizing with many of the concerns and this new way of political protest I am rather disillusioned because – by and large – most media outlets, print and TV alike, have not really taken the issue seriously. This certainly applies to the Canadian papers, and apart from TVO, I have a hard time to see some more engaging coverage on TV. Similar observations hold true to the US media – which nearly unanimously ignored Occupy Wall Street for the first couple of days. Even with lone voices such as Keith Olbermann’s on Current TV it is hard to mobilize a broader public when your message is somewhat obscured, watered down or ridiculed.

This leads to my second question of where the movement is going. A good measure of the validity of an argument is still the determination of its opposition. Pepper spraying peaceful students (UC Davis) and 84 years old ladies (Seattle), or fracturing the sculls of Iraq veterans (Oakland) are just the tip of that iceberg which is the violent response from public authorities in the United States.

The destruction of public spaces or safety concerns were popular arguments in Canada. My home is right next to St. James Park where Occupy Toronto took place. The park, a hangout for homeless people and drug consumers on normal days, has never been safer than during Occupy. And it were police vehicles that ploughed the turf into a brown mess two weeks ago.

Be that as it may, the reaction to the movement was decisive and uncompromising. Perhaps no one other than Frank Luntz, long time strategist for the Republican Party has put the underlying sentiments in better terms:

I'm so scared of this anti-Wall Street effort. I'm frightened to death... They're having an impact on what the American people think of capitalism.

He said these words instructing Republican campaigners on how to clean up their language to immunize it against Occupy’s agenda. In my book, that endorsement just takes the cake.

The tension in a society that embraces both capitalism, free markets and private property on the one hand and democracy on the other has always been there. In the early decades of the 20^th century we saw it spiraling out of control, leading to fascism or communism in Europe. In the US it led to the great depression, upon which Franklin Roosevelt took leadership in assigning a new role to government in bridging this inherent contradiction.

Capitalism is hampered by two things. First, its inequality of wealth distribution and second, its cyclical ups and downs. Both of which have always put those in a precarious spot who just had their labor to bring to the party of capitalism. The reason capitalism and democracy have now been able to coexist for some 60 years in many developed countries has to do with the fact that mechanisms of economic empowerment and redistribution had been implemented to mitigate against those two problems.

Keynes’ solution was that government addresses the problem, by guaranteeing basic welfare state provision and actively spending in times of economic downturn. The ‘neoliberal’ solution, linked to Reagan and Thatcher’s approach in the 1980s has been to turn labor into ‘mini-capitalists’: boosting home ownership and moving from tax-based to investment-based entitlement plans (e.g. retirement, life insurance) has given millions an active stake in the capitalist systems.

The financial crisis has pointed out the limits of both approaches. The reality of the Occupy movement is that it has been strongly driven by those ‘middle class’ Americans who fell into poverty in the last years. The movement only started now just because the effects of a rigged system are only now painfully palpable for a critical mass of people, as described in the current issue of the New Yorker.

The issue of inequality therefore is here to stay, never mind the preliminary seizure of Occupy protests this past autumn. Looking at the Republican presidential contest in the US offers a somber glimpse at the alternatives. Candidates with no interest in governing and no interest in the institutions that have provided some peace and prosperity for quite some time, dominate the debate. Even George W. Bush’s former speechwriter agonizes about that.  If democracies cannot secure a stake for those who just bring their labor to the market of the capitalist system, it has to come up with some other ‘mortar’ for keeping the social fabric together: religion, xenophobia or crude nationalism are just some of the offers we currently see.

This is not just a North American problem. The rise of the far Right in Europe – from The Netherlands to Hungary – or the militant protests in Greece point into the same direction. A system of majority based rule only works if the majority has some ‘stake’, some form of participation and real grounds of aspiration with regard to the 'system'. This is exactly what is eroding under our eyes. Occupy deserves credit for making these shifts manifest.

One of the sources of antagonism towards the movement was its strong anti-corporate bias. In some ways this preoccupation points towards one avenue of solutions. Heavily indebted governments or individuals disenfranchised by the financial system are not generating the solutions any more which we dearly relied on so far. If we ask for securing the buy-in of the working middle class in the capitalist system, a more active role falls to the corporate sector. In some ways one might argue that this demand has been well heard – the vociferous efforts to shut the movement down certainly allow this interpretation. The social responsibilities of business – beyond avoiding all these obvious scandals surfaced in the financial crisis – certainly extend now beyond pure philanthropy. Paying decent middle class wages, providing employment and affordable access to basic products and services is an imperative - provided we want to see an ongoing coexistence of basic forms of both democracy and free markets. It is in the ‘enlightened self interest’ of business to live up to these demands.

So yes, the tents are gone. But the core issue is here to stay. As is the struggle to address these them.

Happy 2 months birthday, OWS!

Its two months today that Occupy Wall Street had occupied Zuccotti Park in New York. And after strong reluctance from the big media (it took most of big US networks more than a week to cover the story) the movement has successfully occupied the news channels for the last weeks.

New York’s mayor duly used the two month anniversary of the movement to finally evict them from their initial site. Ironically though, that decision seems to just have added that other bit of publicity the movement could handily use. By the time of writing, between 15,000 and 35,000 people, depending whose estimate you want to believe, are currently marching in the streets of New York. Mike Bloomberg still does not disappoint as the most effective PR agent of the Occupy movement.

I had a strange déjà vu today when stumbling over one bit of news. Obviously, the evicted protesters in New York are flocking to church buildings to get food and shelter, and to be secure from police harassment. The last time when churches were the only safe haven for civil unrest was when people in East Germany took to the streets in the summer of 1989. Those famous ‘Monday demonstrations’ and their organization started in churches (note: this was before facebook and twitter). By November 9^th that year, the wall had finally fallen. And with it the regime that held the country in its grip for some 40 years.

Certainly in Toronto, where the Occupy movement has camped in St. James Park, co-owned by the Anglican Church, a similar pattern is visible. Even though support currently seem to falter, initially the church was one of the crucial supporters of the protest, supplying them with vital access to amenities.

This historical parallel is more than just a co-incidence. Like the demonstrations in 1989, the Occupy movement is only loosely organized, has some rather sweeping demands and has little sense of translating their agenda into the institutional setting of how our society is governed. All they have is a legitimate issue. They are concerned with the fact that governments no longer represent the people, the ‘99%’, and that wealth is blatantly unfairly distributed. It all sounds so familiar to me, up the chants to remain non violent by OWS protesters, very much like the famous ‘Keine Gewalt’ (‘no violence’) choruses which became the signature slogan of East German protestors 22 years ago.

Like communism, the current form of capitalism has created a governance system, where some very few are perceived to control societies and where large parts of the population feel disenfranchised and curtailed in many ways.

The crucial difference to today’s US seems to be that in most US cities the reaction of the police is rather uncompromising and violent. Events in Oakland or the pepper spraying of an 84 year old lady in Seattle are just a tip of the iceberg. In some ways the starkest prove that these protestors have a point is the remarkable police presence. When I visited Zuccotti Park in late October my guess would be that the ratio of police to protesters was at least 2:1.

If it is true that OWS is ‘not productive’ (Michael Bloomberg), why do we need so many police there? The fear of the establishment is palpable. New York just serves as the test tube for this: the Mayor Bloomberg, himself firmly in the ‘1%’, symbolizes the seizure of corporate interests of the political process. To become the ‘democratically’ elected mayor he spent $250m out of his private wealth.

Drawing the parallel to the fall of communism 22 years ago, one big difference seems to be that there is no ‘Gorbachev’ figure. There is no strong, prominent, visible leader on the other side, who understands the legitimacy of the issues and, as Michael Gorbachev at the time, refuses to use the power at his disposal to crush this movement.

This said though, some of the ‘1%’ understand the movement and take it seriously. As business school professors, we occasionally have to go to events where we rub shoulders with these guys. Just yesterday, I was totally flabbergasted listening to one of Canada’s real estate tycoons arguing that this movement is serious and here to stay and that it is something business leaders better take seriously.

It is difficult to predict where this movement is going. At the moment, the fact that it has stayed non-violent has certainly helped to make people sympathize with it that do not ordinarily go out on the streets demonstrating. The other element is the core issue of the movement. It seems that the blatant inequality of wealth and the co-optation of governments by business interests are the common denominator of the protests.

In some ways we have nothing to add to our earlier comments. There are strong parallels between the green movement starting off in the 1970s with pretty similar features. David McTaggart and the other founders of Greenpeace where hardly taken seriously by the establishment back then. But we all know which impact that movement had on politics, business and civil society.

So again, Happy Birthday Occupy Wall Street! And many happy returns!

DM

Photo by David Shankbone, reproduced under the Creative Commons Licence.

Hannah Arendt And The Banality of (Corporate) Evil

In this world of ongoing financial turmoil and unrest against the current form of capitalism it is interesting to see how the search for intellectual resources to fuel our thinking about a changed world is taking us to new shores.

This week, as part of the Holocaust Education Week, an exhibition about the philosopher Hannah Arendt started in Toronto. In many ways, this could not have been a timelier moment to have her heritage reinvigorated. Arendt is a staple in many discussions over 20^th century history and philosophy. Of Jewish origin, born in Germany in 1906, she emigrated to the US during the Nazi regime and became a vocal analyst on how oppression, totalitarianism and violence affects the individual and what the conditions and options of resistance are.

Now much of this seems to be a far cry from the life of many of us in the 21^st century. But it gets much more colorful if we add Arendt’s voice audible in later phases of her work: most notably, her book on the trial of Adolf Eichmann in the 1960s. It is here where the famous phrase of the ‘banality of evil’ was coined. It adumbrates the fact that Eichmann – in today’s lingo the ‘logistics-zsar’ of the holocaust – talked about his ‘job’ in his trial in Israel just like any Fed-Ex or UPS manager would describe her/his work today. It was just about ‘getting the job done’. That he was managing a ‘supply chain’ that started in ordinary people’s home and ended in a gas chamber was just a minute detail for Eichmann – otherwise a (more or less) faithful husband and a loving father of four. It was just a slight ethical glitch that his nine-to-five-job happened to be in the business of delivering some six million people to the gas chambers as smooth, efficient and cost-effective as possible. And boy, he was good at that!

Here is where Hannah Arendt’s unique vantage point kicks in: she was not so much interested in the individual’s guilt, evilness or criminal inclinations. In fact she thought that those aspects were rather marginal. The evil of Eichmann’s actions was in fact ‘banal’ as it occurred to amount just to some ‘executive decisions’ of an individual who never questioned the ethical nature of the wider organization he was operating in.

It is indeed a rather contemporary perspective. We are in the middle of a ‘financial crisis’ which has dominated our lives and attention now for more than three years. The ‘Occupy Wall Street’ protests have taken over globally and – despite a cacophonic range of claims – have highlighted the fact that our current economic and political system produces outcomes that are patently unethical by most available standards of judgment. And apart from Bernie Madoff or Raj Rajaratnam we had a hard time to attribute this mess to any particular individual.

Hannah Arendt’s legacy speaks to the fact that ethical agency of individuals is intricately interwoven and embedded in the social systems in which they are enacted. Fine. Maybe not that much of a spectacular finding, some of us might think. But it nevertheless raises the question of how ethical the systems are in which we live and work. What I like about Arendt is that she was not just stopping to blame the specific historical contingencies of the holocaust. It was never about just taking fascism, the Nazis or, for that matter, Germany as a culprit to task. Her central analytic take-away was that societies are able to ‘rationalize’ all sorts of atrocities. Consequently, in the 1970s, when the creeping ecological destruction of our planet reared its first signs of appearance, she talked about the capitalist system as a form of ‘economic totalitarianism’ which rationalizes the destruction of the planet. She plainly coined it as ‘eco-cide’ (as a pun on ‘genocide’).

In the current situation, Arendt’s vantage point highlights many of the questions, the ‘Occupy...’ movement elucidates. These are ongoing questions which will, it has to be said, occupy us a little longer than this blog can last. However, Arendt also raises the important question (initially with regard to her study of Adolf Eichmann):

‘The moment you come to the individual person, the question to be raised is no longer, how did this system function, but why did the defendant become a functionary of this organization?’

This is in some ways the more compelling question. How do we individually act in a system that, by many people’s conviction, has created blatant inequality, ecological destruction, and a public largely disenfranchised from democratic decision making? Arendt in this sense is a master optician alerting us to the ‘grey zones’ of human ethical existence. But also lets us never get off the hook in terms of questioning our role in the wider societal or organizational contexts we are embedded in.

Monday night in Toronto the opening of the ‘Hannah Arendt Denkraum’ (= thinking space) took place. In some ways it was an event riddled by irony. Located in the German Consulate it appeared, in language and in ritual, like yet another atonement for the empirical backdrop of Arendt’s work. This contextualization in some ways could not be further from Arendt’s initial ideas. Equally ironic, the speaker rather skillfully highlighted the general implications of Arendt’s work, and its damning view of contemporary capitalism etc. – while the entire event was sponsored by the German multinational Miele whose executives were rather uncomfortably clinging on to their wine glasses hoping the speech would be over rather sooner than later. What all those millionaire-sponsors of the Holocaust Education Week, listening to a fairly astute reading of Arendt’s anti-capitalist messages were thinking – I could hardly guess. I am very sure though what Arendt - hardly ever photographed without a cigarette in her mouth - would have thought of the oppressive North American 'ethics' on smoking indoors if she would have ever dared to light a fag on this event in her honour in the German Consulate...


The picture on top is from the 'Hannah Arendt Denkraum' exhibition by ovit, the picture below was taken from G4Gti - all reproduced under the Creative Commons Licence.

Why Occupy Wall Street should occupy corporate leaders' minds

This weekend, the Occupy Wall Street protest will go global. Protests, marches and occupations are planned across the world, with almost a thousand events across every continent scheduled to go ahead on October 15th. Here in Toronto, the financial district around Bay Street is preparing for an occupation that has so far garnered more than 9000 followers on Facebook. In London, social media sites have registered more than 15000 followers for the planned occupation of the London Stock Exchange. Similar smaller scale events are in the offing from everywhere from Alaska to Auckland. Whatever the success of these protests, it is remarkable the speed at which a local event in New York which was hardly reported on two weeks ago, has now been turned into a global movement.

Although the range of issues and demands of the Occupy Wall Street campaign and its various international incarnations are many and diverse, they share a strong single point of focus. The financial sector is very much the villain here. This is in some contrast to the movement that the current events most parallel, the anti-globalization protests that took to the streets in late 1990s and early 2000s, exemplified best by the Battle in Seattle in 1999. At that time, although many of the issues were the same as those receiving attention now, the main point of focus was international finance and trade organizations such as the WTO and the IMF, and meetings of political leaders such as the G8 were major targets. Now, by occupying the financial centers of major cities, the focus is much tighter. The financial sector is public enemy no.1.

In many respects, this is not too surprising. Economies across much of the developed world have been in a constant state of crisis for the past three years. Austerity measures are biting hard. Unemployment is up. And a significant proportion of society feels excluded, exploited, and ready for an alternative. The financial sector is an obvious target because it is here that the systemic risks have been created, and it is here that so much of taxpayers money has ended up, shoring up institutions that are too big to fail. When these same organizations continue to post substantial profits, pay out huge bonuses and generally carry on as before, it is fairly predictable that they will become the focus of so much public ire.

Much of the initial response to Occupy Wall Street has been dismissive. The financial sector, which must be getting quite used to being the bad guy these days, has hardly raised a murmur in response. As of yet, we haven't seen a single press release on the events from major financial services organizations such as Bank of America, Barclays, Citigroup, Goldman Sachs, HSBC, or anyone else. Don't business leaders have anything to say about what's going on?  Don't they want to be part of the conversation? Or are they just so concerned that anything they say will just be ridiculed by the protesters, or simply set them up as even more of a fall guy, that they are fearful of trying to put their position across in public?

But big business, and big finance in particular, needs to take this seriously. Here's why.

First, because governments are looking to be responsive and populist, especially with elections around the corner in the US. That could mean tighter controls, less freedom and more regulation. As even Dominic Barton of McKinsey made clear in the Harvard Business Review earlier this year, "Business leaders face a choice: They can reform the system, or watch as the government exerts control ... there is growing concern that if the fundamental issues revealed in the crisis remain unaddressed and the system fails again, the social contract between the capitalist system and the citizenry may truly rupture, with unpredictable but severely damaging results." Better regulation might fix some of these problems, but knee-jerk regulation, borne of anti-corporate prejudice is not going to be the best fix for the capitalist system, and not necessarily the one that we need.

Second, because the protests create a great opportunity for collective action on the part of business. Problems of financial risk, executive pay and corporate lobbying aren't going to be fixed by individual company initiatives, or even by national government regulation. If one firm or one country reduces its attractiveness by, for example, controlling pay, then talent will likely migrate to more rewarding shores. If one company puts a limit on government influence, then the attention of policy makers will simply be taken up by its competitors. That's the savage logic of the global marketplace. The best recipe for meaningful change is collective action across an entire industry. Like a financial sector executive pay protocol. Or a banking industry code of practice on political influence. But to be effective these would need to include government and civil society participation and include effective monitoring and sanctions across borders. No one is pretending this wouldn't require a huge effort. But crises of trust, like the current protests, could be the context that is needed for collective action such as this to arise and prosper.

Third, because these protests clearly signal that for some proportion of the population, all the money, time and effort expended on CSR simply isn't working. And spending more isn't going to make a difference. These people are looking for a change in the system, in the rules that govern business and it's relationship with government.They're looking for more accountability, less political influence, and if their demands are for better corporate citizenship, they mean the kind of citizenship where you pay your fair share of taxes and don't just simply offshore when it suits you. This requires a very different approach to CSR than the one now predominant in the corporate sector. It means fixing attention on how to devise better rules, not how to behave better within the existing rules.

The challenge here, clearly, is a big one. Perhaps then it is no surprise that corporate leaders have been content so far to just cover their ears and hope it all blows over. But there are fundamental issues that need addressing at the heart of our model of global capitalism. Occupying Wall Street, Bay Street, or the City of London may not be any kind of solution, but that does not mean it should just be dismissed either. Business leaders would be foolish not to see this as an opportunity to create an improved system of capitalism that serves us all better.

Photo by david_shankbone. Reproduced under Creative Commons licence