Canada's corruption problem

Barely a day goes by at the moment here in Canada without a new twist or turn in a corruption story hitting the headlines. Last week we got news of SNC Lavalin offering an amnesty for any employees providing information about their huge ongoing bribery scandal. The police also announced last week their intent to extradite Dr Arthur Porter for his part in allegedly receiving $22m in return for granting a contract to SNC to build the McGill University Health Centre in Montreal.

Meanwhile, Stephen Harper's government is embroiled in a major, and very persistent, scandal involving an attempted cover-up of some dodgy expenses claims by a conservative senator. This involved Harper's (now resigned) Chief of Staff giving a "gift" of $90,000 to Senator Mike Duffy to reimburse his questionable claim and stave off any further the investigation. Oh, and who can ignore the now internationally ridiculed mayor of Toronto, who in the wake of allegations about him being caught on video smoking crack, has now had 5 members of his administration resign or get fired for, so far, unspecified reasons. Add to that the other revelations trickling out of the ongoing Charbonneau Inquiry into corruption in Quebec, and a second Laval city mayor in a matter of months accused of taking bribes and clearly all is not well in the country formerly known for peace, order and good governance.

On the face of it, Canada has a serious corruption problem. So it was refreshing to hear last week at the aptly timed Spotlight on Anti-Corruption organized by Transparency International Canada that actually, with respect to upholding its obligations for combating international bribery, Canada is actually in the midst of a major upswing. Following years of apathy and a failure to prosecute any violations of the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, in the last few years we have seen the setting up of a dedicated and fully resourced police department responsible for anti-corruption, and since 2011 the first handful of persecutions. Remarkably, the Canadian police are now investigating no less than 35 cases of alleged bribery by Canadian companies overseas.

The general consensus among the anti-corruption community here is that, if not a leader, Canada is no longer a laggard. So one way of explaining away what might seem like a major corruption problem is to put it largely down to increased enforcement and in general a greater attention to corruption in the country. As delegates at TI's Spotlight event last week put it, the 'moral compass' on corruption has shifted for the better.

This view has some truth to it. But in our view, there is more to it than that. After all, the corruption that is hitting the headlines is of a very specific variety. It's not just petty corruption but is in fact involving some of our most senior business and political leaders - CEOs, hospital directors, city mayors, even the PM's office. And many of these leaders are not seemingly ready to take a public stand condemning the practice and doing all they can to root it out. SNC Lavalin is still aiming for a 'rogue employee' defense, whilst the approach of Harper's government seems to be one of secrecy and a refusal to admit any kind of wrongdoing.

This is the kind of corruption that in terms of 'tone at the top' is sending a very dangerous message to the rest of us that no amount of increased enforcement is going to compensate. Corruption, these leaders are implicitly saying, is something we are immune to.

So what is to be done? Well, rather than necessarily seeing this as an intractable problem, all the attention around corruption at the moment also offers a couple of important opportunities.

First, now is the time for our leaders to take a genuine leadership position on corruption. The public is ready to support it, there is a renewed vigor in the anti-corruption community, and Canada has a genuine opportunity to start staking a place closer to the head of the table rather than just aiming for not being quite so bad.

Second, now is also the time for a rethink about the regulatory environment around corruption. The Corruption of Foreign Public Officials Act was a good start and the amendments proposed in the 2013 Bill S-14: Fighting Foreign Corruption Act will make some incremental improvements. But as several delegates at the TI Spotlight pointed out, one reason why the US and other countries are so much more effective at prosecuting corruption is that they can also prosecute through civil law through the SEC. This makes the burden of proof lower and the likelihood of a successful prosecution higher. Institutions like the Ontario Securities Commission should be playing a much greater role in enforcement. Consider that 70% of all of the equity raised for the world's public mining companies happened on the Toronto Stock Exchange last year. This is a real concentration of financing for a major corruption risk industry which means that greater devolution of powers to prosecute corruption here could help enhance the reputation of an industry integral to Canada's economic prosperity.

As the old saying goes, never let a good crisis go to waste.

Photo by IntangibleArts. Reproduced under Creative Commons Licence

The beautiful game? You bet!

Ethics in sports has become a big talking point. In North America, we are just at the end of a humongous news cycle on Lance Armstrong’s ‘confessions’ on the Oprah Winfrey Show. Armstrong’s story very much turned – as many ethical issues tend to – into a story of character, personal integrity and individual morality. Even though most people know by now that doping in cycling is endemic and that he is probably much more the product of entrenched practices in the business of professional cycling. We have commented on ethics in sports here and there in the past and this week’s installment of scandals in professional sports seems another good occasion to add some observations from a business ethics angle.

We are talking about the news from Europol (the pan-European crime investigation unit) revealing large-scale match fixing activity in global professional football (or soccer, for our North American readers). They claim to having identified 380 manipulated games (at all levels) and 425 individuals implicated in making some €8m by betting on games with individual players, referees or officials accepting bribes up to €140,000 in one case! The international network of criminals betting on football games by bribing those with influence on the outcome of the games was allegedly run out of Singapore. With football being a multibillion industry itself this case of corruption seems to have all the trimmings of a good business ethics case.

To understand the reasons, dimensions and mechanisms of such an ethics scandal we always find it useful to look at the structure of an ‘industry’ and the basic characteristics of the environment in which it operates. Our colleague Wolfram Eilenberger (former University of Toronto Philosophy Professor and football wonk)  has done so in an interview this week on German radio. Here are some of the take-aways.

Uncertainty. ‘Folks go watching football because they don’t know the outcome’, Eilenberger cites the legendary German coach of the 1954 world cup winning team Sepp Herberger. Uncertainty is a core element of football – but also its Achilles heel. It is a game which despite any such intimation has never been able to be fully determined by money, skill, legacy or past glory. Just one example: when Roman Abramovic took over the English Premier League Club Chelsea F.C. in 2003 with endless amounts of cash, despite a buying spree of the top players and coaches, it still took the club seven years to finally win the ultimate prize in European football, the Champions League. This has always been the fascination of football. It is at once the strongest temptation to manipulate the game and the reason why this betting scandal is also its greatest threat.

Rare events. Football is not basketball or cycling. Success is not measured by many scores, many moves, multiple chances and efforts on the pitch, or by a long period of competition. It may be one lucky goal – or even in some cases in a tournament no goal at all - which may win the game for one side. It is therefore a relatively minor effort to link bets to the outcome of football games. It is not about orchestrating a complicated team of actors, or manipulating a complex set of circumstances. If you can somehow influence this one event, this one goal (or its absence for that matter), you can have a fairly strong handle on the outcome of the game.

Small number of key actors. Closely connected is the fact that in order to manipulate the outcome of a football game you only need to manipulate a relatively small number of actors. Most prominently the referee, the goalkeeper, and maybe one of the key strikers would come to mind here. The temptation then to bribe these individuals is very high as the limited number makes it not only economically more viable but would also allow for better chances to keep the entire thing under the carpet. This then makes the manipulation of the game relatively easy (compared to other sports). For a referee: an extra penalty given, another red or yellow card can very directly change the result; for a goalkeeper: to deliberately jump into the ‘wrong’ corner at a penalty kick, to make simple ‘errors of judgment’ which lead to a goal; for a striker: to make the ball miss the goal, to make a ‘sloppy’ pass or to give a corner kick to the opposite side.

Global execution networks. The scandal uncovered by Europol involves a global network of actors based in Asia (most notably Singapore), which operate from different jurisdictions, use opaque channels of communication and dispose of a clandestine network of financial transactions.

All these characteristics apply to other infractions in business ethics. Insider trading comes to mind, where often a small number of players, focusing on rare events (such as the insider information about an impending innovation, losses etc of a company), in a climate of uncertainty (such as the stock market) collude in global networks to perpetrate their crimes. We discussed the recent example of Raj Rajaratnam and his small network of executives perpetrating one of the largest insider scandals in recent history.

Currently, the debate on how to tackle this form of corruption is in full swing. The majority of suspects are allegedly in Germany, Turkey and Switzerland. Obviously one focus is on how to change the incentives of the few individuals who can change the outcome of the game. A clear indication seems to be incentives: often match fixing occurs (or starts) on lower level leagues or leagues with relatively low pay of players and referees. That seems to be one of the reasons why the English Premier League shows relatively lesser cases of criminal incidents in this context. By the same token, the debate now seems to focus on increasing the punishment of convicted game-riggers.

It remains to be seen if this approach is going to work. It currently seems that the very nature of football seems to invite this specific type of crime. And very little seemingly can be done about it without avoiding changes in the fundamental structure of the game.

Photo by gnews pics. Reproduced under Creative Commons Licence.

Four reasons why we're so hard on our leaders' ethical lapses

The list of prominent leaders being turfed out of office for ethics violations seems to be growing at an exponential rate. Here in Canada, Toronto mayor Rob Ford's ouster this week for breaking conflict of interest rules is no less than the third Canadian city major to bite the dust this month due to questions of integrity (the others, Gerald Tremblay of Montreal and Gilles Vaillancourt of Laval both resigned without admitting any guilt in face of corruption investigations).

 In the last month we've also seen the Director of the CIA in the US, David Patreus resign due to an admission of "extremely poor judgement" in conducting an extramarital affair. The same week, the incoming CEO of the multinational defense company Lockheed Martin resigned over "a close personal relationship" with a subordinate. Even Hurricane Sandy took its toll with the resignation of the CEO of the Long Island Power Authority after thousands of its customers were left without electricity. And over in the UK, the Director General of the BBC resigned this month due to the organization's botched child abuse investigations.

But its not just a sudden blip. Earlier in the year, Bob Diamond, the CEO of Barclays Bank, resigned in the wake of the Libor scandal, adding to a CEO head count that already included the CEO of Yahoo (falsified CV), Best Buy (inappropriate relationship with a subordinate), Nomura (insider trading), Restoration Hardware (relationship with a subordinate), Stryker (extramarital affair with subordinate), and Lotus cars (expenses irregularities). And just to stoke the fires even more, the former CEO of SNC Lavalin who resigned in March (corruption scandal), has just been arrested on fraud charges.

Depending on how you look at it, these various resignations, firings, and now arrests could be seen as a sign that leaders' ethical standards are tumbling fast .... or that our standards are tightening and that tolerance for any kind of ethical violations is shrinking. Regardless, it is always a big decision to terminate the boss, especially given the huge costs involved in terms of severance packages, the loss of valued experience, skills, and continuity - and in the context of public officials, the costs of going through another expensive election. To give a sense of what we're talking about here: Mayor Ford's removal may force a new by-election which will cost the city, and therefore Toronto taxpayers, some $7m. The termination of HP CEO Mark Hurd in 2010 for minor financial irregularities cost the firm a huge $37m pay-off, saw the share price tumble by 9%, and led to a period of significant decline for the firm after Hurd's successors failed to match his winning formula.

So why do we do it, especially when the "crimes" don't always seem to be that big: a fabricated qualification here, a few thousand in dodgy expenses there, a little bit of infidelity with a colleague when you should be home with the family. Are these really worth the trouble and expense of ousting the most important person in the organization? Here's four reasons why they might be.

1. Leaders are the chief ethics officers.
Leaders are ultimately responsible for the success or otherwise of their organizations. And that goes for ethics too. Leaders need to be the guardians of the organization's ethics. So if things go wrong, the logic goes, it is the leader that should be held accountable, regardless even of whether they knew what was going on further down their organization. And if its the leader who's actually breaking the rules, then they are putting their organization at risk ... of scandal, of fines, or of ethical culture problems further down the line.

2. Leaders set the tone.
You can't build an ethical culture if the boss breaks the rules with impunity. Many will argue that termination is too strong for relatively minor indiscretions, but they often overlook the knock-on effect of being seen to be too lenient. Employees throughout the organization can get the message that ethics isn't really taken too seriously and that although you may get your wrist slapped, the rewards in terms of bending the rules may outweigh the costs. Termination makes that risk-reward calculation crystal clear.

3. Leaders personify problems
Many ethics problems, especially when they break into the public domain, get associated with the organization's leader who becomes the public face of the scandal - and often the target of approbation. So any strategy for dealing with the problem has to tackle the issue of the leader. That's why organizations sometimes fire their leaders in the face of ethics scandals - its an attempt to demonstrate that the problem has been dealt with. The reality is rarely so simple, but the optics matter.

4. Leaders already have disproportionate power
Even minor indiscretions can gain a greater significance when its the boss who is involved. We all make mistakes from time to time, but when the leader crosses the ethical line, the stakes are immediately raised because he or she is already in a position of such power. Fiddling the expenses or having an affair with a subordinate are not just breaking the rules; when its the boss whose doing it, its an abuse of power - or even worse, its sending a message that leaders are above the rules that govern everyone else.

Of course, individual cases will also bring up unique reasons specific to that case, but the message here is simple. Terminating the leader may not make sense economically, and it may not even solve the problem ... but it still can make sense if you're looking to build a truly ethical organization.

Image by cali.org. 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

Can India hit corruption for six?

India, a country of cricket fanatics, has been in serious celebration mode since the national team's thrilling victory in the cricket world cup last weekend. News and media outlets here have covered little else for days. It's been front page news in the national press and all the rolling news programmes have been swamped with wall-to-wall coverage. Now though, as the euphoria starts to die down after Sunday's big victory, attention is beginning to turn to another major issue facing the country - corruption. The big question is though, will India be as victorious in fighting corruption as it has been at fighting its cricketing rivals. And the answer, we fear, is almost certainly no.

Corruption has been a serious problem in India for longer than anyone cares to remember. At 87th, it currently ranks about half way up the Corruption Perception Index from Transparency International. A score of 3.3 (out of a possible 10) suggests a major corruption problem. But recent events, such as the 2G bandwidth auction scandal, and investigations of widespread corruption at last year's Commonwealth Games in Delhi, have suggested a growing willingness by the media to investigate and report on corruption issues, and there is discontent with the practice amongst ordinary Indian people.

Much of the attention has understandably focused on public sector corruption, but few cases exclude companies as alleged bribe payers too. Late in 2010 Telecommunications Minister Andimuthu Raja was forced to resign over allegations that he lost the Indian Government some $38 billion in revenues by offering 2G telecom spectrum licences to favoured companies on beneficial terms. This week, struggling for media attention amongst the cricket hullabaloo, Raja, eight other individuals, and three companies were formally charged with criminal conspiracy, forgery, cheating and corruption in relation to the case. Meanwhile a parliamentary committee investigating the scandal this week quizzed Ratan Tata the head of the Tata Group about his role in the scandal, although unlike some of its rivals, there is no suggestion that Tata is likely to be subject to any charges.

The 2G scandal is gradually gathering momentum, and is putting significant pressure on the Indian government to do something serious about the escalating corruption problems. As yet, though, little tangible action is on the cards. One significant piece of legislation, the Jan Lokpal Bill, proposes to introduce an independent corruption ombudsman body at both national and state levels, but has been held up in protracted redrafting. The country was first promised such a law some 40 years ago. Now, with a view to preventing the government from procrastinating further and watering down the bill, social activist Anna Hazare from India Against Corruption, has pledged to go on an indefinite hunger strike to force the authorities to act. His demand is that they allow civil participation in the bill's review rather than let the government simply force through a toothless version that will do little to address the country's endemic corruption problems. Hazare's promise to fast until death is garnering huge attention and hundreds of people are now planning to join the fast.

Whether the Indian government will see this perfect storm around corruption reform as an opportunity to address a problem that drags down growth and hampers social equity remains to be seen. We certainly hope so. As Rahm Emanuel said at the time of the financial crisis in 2009, "you never want a serious crisis to go to waste."So far though, Prime Minister Singh's Government looks set to do exactly that - waste a perfectly good crisis. India, the country of world champions, deserves better.

Is too much transparency a bad thing?

It’s been quite a week or so for transparency. The incendiary WikiLeaks release of almost a quarter of a million classified cables from the US diplomatic service has set news media across the world alight with daily revelations that have acutely embarrassed politicians everywhere. Last week also saw the FIFA bribery scandal reach new heights with the screening of the BBC Panorama program alleging corruption, followed by last Thursday’s selection of Russia and Qatar as the hosts of the 2018 and 2022 World Cups respectively. Yes, that’s Russia, the country labeled a “virtual mafia state” in one of the WikiLeaks cables. Both cases involve a whole host of ethical issues, but perhaps more than anything they pose critical questions about the appropriate limits of transparency. How much should we know about what goes on behind the scenes in organizations such as the US diplomatic service or a global sporting body such as FIFA? And can too much transparency really be a bad thing?

WikiLeaks is clearly the most significant case of the two, and it looks set to be something of a landmark on the ethics of transparency in the digital age. On the one side, high profile rightwingers in the US, including Presidential hopeful Mike Huckerbee, have responded by suggesting the source of the leaks should be tried for treason. “Anything less than execution is too kind a penalty,” he commented. WikiLeaks founder Julian Assange is under investigation in the US and Australia, wanted for questioning in Sweden (for an unrelated charge), and on Interpol’s red list – not to mention being cast by Sarah Palin as an “anti-American operative” who should be pursued with “the same urgency [as] al Qaeda and Taliban leaders”. Bradley Manning the army private who is supposedly the original source of the material is sitting in a military jail awaiting court marshal and a possible 52 years in jail. US internet companies Amazon, Paypal and EveryDNS, meanwhile, have responded to pressure by US authorities and ceased supporting WikiLeaks by allow it to use their servers, domains, and payment services respectively. As a result, the organization has been forced offline several times in the last week.

On the other side of the debate, five respected news organizations – the New York Times, The Guardian, Le Monde, El País, and Der Spiegel – received prior access to the cables and have shown little hesitation in splashing front page stories over the past 10 days. Various commentators, hackers, and net activists have heralded the leaks as a new phase in the radical transparency of digital information. Columbia, meanwhile, has offered Assange immunity, whilst Amazon has been touted as a boycott target for caving to “censorship” and political restrictions on “free speech”. Clearly, things are complicated, to say the least.

The publishing of the embassy cables by WikiLeaks is in many ways a more ethically ambiguous act than many of their previous leaks, most notably the well known Iraq and Afghanistan war logs which detailed the hidden impacts of US military action. Other WikiLeaks though have also won acclaim focusing on documents alleging political and corporate corruption, public interest media reports suppressed by injunction, and secret Congressional research reports. The embassy cables, just by their sheer volume, represent a less focused campaign.

Yes, there are clearly some important public interest revelations in the material that has come to light. These include: the exposure of a US spying campaign targeted at UN leaders; the naming by US diplomats of China’s propaganda chief Li Changchun as the orchestrator of the Google hacking late last year; and disclosures that the Brazilian government deliberately covered up the existence of terrorist suspects within its borders to protect the country’s image, to name just a few. Oh and of course claims that the media organization al-Jazeera is heavily influenced by state foreign policy in Quatar, where the 2022 World Cup is going to be held. But it has to be said that many of the big news stories are no more than allegations by diplomats in what they thought were confidential dispatches rather than necessarily well-founded or verified facts. There is also a whole lot more material that is just plain gossip and rumor-mongering rather than what you might genuinely call ‘intelligence’.

All this makes the WikiLeaks cables less clear cut in terms of making the hidden “truth” public. They provide us with a unique insight into how international diplomacy works, and what emerges is hardly pretty or a paragon of honesty and integrity. But it is hardly the case of a whistleblower bringing a miscarriage of justice to light or an exposé of corporate malfeasance or political corruption, except in the very broadest of terms. Sure the material in the leaks is incredibly interesting, but how we have to ask how much of it is genuinely in the public interest. If it doesn’t pass this test, then why should supposedly classified information become public?

On the other hand, the arguments emanating from the US that the release of the cables has injured the national interest and put lives at risk is also rather flimsy. Yes it has embarrassed the government, but then who hasn’t it embarrassed? Putin, Burlosconi, and others have been just as much the target as those in the US. And no one yet has managed to unearth anything that has genuinely put lives at risk even if it has probably hampered US diplomatic efforts in general. This of course begs the question of why so much information should be classified in the first place if it’s not actually protecting anything.

It is this – the transparency versus confidentiality issue – that is at stake here. Some would clearly like to see all but the most critical security information made public so that the state can be held to account. Others believe that a communication made under the presumption of confidentiality should remain that way unless there is a clear public interest reason for disclosing it. In the FIFA case, there seems little doubt that the BBC was right to go public with its allegations of corruption, even if some commentators were unhappy that it potentially hampered England’s bid to host the 2018 tournament. And even if FIFA President Sepp Blatter complained of “the evils of the media"

The WikiLeaks cables though are so indiscriminate as to fail the public interest test, at least when considered as a whole. However, with appropriate sorting and contextualizing (which the newspapers appear to be doing a pretty good job of), this changes the complexion somewhat. Newspapers like the New York Times and The Guardian have given a good account of their motives and methods. As the New York Times editor says:

"The more important reason to publish these articles is that the cables tell the unvarnished story of how the government makes its biggest decisions, the decisions that cost the country most heavily in lives and money. They shed light on the motivations — and, in some cases, duplicity — of allies on the receiving end of American courtship and foreign aid. They illuminate the diplomacy surrounding two current wars and several countries, like Pakistan and Yemen, where American military involvement is growing. As daunting as it is to publish such material over official objections, it would be presumptuous to conclude that Americans have no right to know what is being done in their name."

With appropriate journalistic selecting and framing, there is little doubt that there is an important if rather delicate media task at work here. This doesn’t condone the release of the cables en masse, though, which in our opinion is harder to defend from an ethical point of view, unless one’s view is that all government should be 100% transparent.

Regardless of the rights and wrongs of WikiLeaks in this particular case, though, the broader lesson seems to be fairly clear. In business ethics, one of the standard rules of thumb is the New York Times test – if you wouldn’t want your actions to be reported on the front page of the newspaper then maybe you shouldn’t be doing it. No doubt US diplomats didn’t expect this to so literally come true, but in a digital world, the prospects for doing so are increasing exponentially. And if you don’t want to be a news star, then you’ll need to work a lot harder than the US government in making sure what is said in confidence stays that way.



WikiLeaks graphic by Anna Lena Schiller reproduced under Creative Commons Licence
America Shhh image reproduced from Boycott Amazon for Dumping Wikileaks  

Client 9: the Rise and Fall of Eliot Spitzer

"All I ask for is an unfair advantage.” Reputedly a favourite line of Hank Greenberg, the former Chair and CEO of AIG, it makes for an apposite tagline for a leader forced to resign by his own board as a result of investigations into financial impropiety. The Greenberg investigations were instigated by then New York Attorney General, Eliot Spitzer, who made a habit of making enemies amongst the city's most powerful  corporate leaders during his uncompromising campaign to prosecute corporate misconduct. And as writer and director Alex Gibney argues in Client 9: the Rise and Fall of Eliot Spitzer it was the foes he created in his day job as much as the night time friends he sought among the high class escort world that ultimately brought him down.

Gibney, the oscar winning documentary maker of Taxi to the Dark Side, Casino Jack, and Enron: the Smartest Guys in the Room, is no stranger to the twilight morality of big business, and the powerplays of American politics. In Client 9 he weaves the two together in a fascinating and surprisingly gripping account of Spitzer's downfall. It's played out like a battle of giants, Spitzer the so-called "Sheriff of Wall Street" fiercely defending the moral purpose of his achievements, and a cast of highly entertaining, and visibly bristling combatants like Greenberg who can hardly contain their pleasure at tough-guy Spitzer's remarkable demise ... and their own part in contributing to it.

There's no shortage of insight here about the ethics of business and politics, and especially in Spitzer's spectacular rise and fall, about the intersection of public virtue and private vice.  He gives a frank and compelling interview to camera, insightful and erudite on his public achievements and then stilted and seemingly at a loss to explain his private problems. The question at the heart of this is how could someone so vigorous in policing the law so knowingly engage in illegality. Spitzer himself doesn't offer too many answers. But one of his aides makes the case in terms of a balance sheet - on the one side cracking down on the financial misdemeanours that led to a worldwide financial crisis that cost billions and billions of dollars - and on the other side having sex a few times with a prostitute. In those terms, Spitzer is on the side of moral good. The good he did far outweighed the bad - at least that is how Gibney couches it in a balanced but ultimately sympathetic portrayal of someone that tends to divide opinions. But Spitzer also admits to hubris, albeit in rather ironically self-important terms. “The only metaphor I can think of" he says at the outset of the movie, "is Icarus. Those whom the gods would destroy, they make all powerful.”

It's not just Spitzer's brittle character though that gives Gibney's movie it's edge. It also features some wonderfully revealing portraits of his enemies and other players in the story. These include: Kenneth Langone, a billionaire American businessman and an outspoken critic of Spitzer; Roger Stone, the infamous lobbyist with a Richard Nixon tatoo on his back; Joseph Bruno, Spitzer’s chief political rival when he became governor of New York; “Angelina” his preferred escort; and audience favourite Cecil Suwal, the disarmingly ditzy CEO of Emperors Club VIP, the escort agency at the heart of the scandal. It's a feast of moral messiness, perhaps best summed up  by the giggling Suwal who admits to getting "confused" about the illegality of high end prostitition given the huge sums of money involved. Gibney doesn't give us any reason to believe that she was the only one.

Britain's bribery shame to end?

For the past few years, we have watched with sagging spirits the abject failures of the UK authorities to get to grips with overseas bribery by British firms. It's been a real stain on the reputation of the country, its rule of law, and its businesses. With the US pressing ahead with numerous convictions under its beefed up enforcement of the Foreign Corrupt Practices Act (i.e. any firm listed in the US is liable to prosecution for bribery wherever in the world it may have occurred), Britain has become something of an international embarrassment. So much so, that at the end of last year, the former head of Transparency International UK, Laurance Cockcroft bemoaned "Britain's bribery shame".


Cockcroft's article in the magazine Ethical Corporation, written following a damning report from the OECD's working group on bribery, made the case pretty starkly:

"This extraordinarily feeble performance by the UK is regarded as symptomatic of a profound lack of commitment to addressing corruption. The report of the OECD working group suggests the UK government’s inaction is creating a situation where UK-based companies can behave with impunity in the payment of bribes to win overseas business. ... [Earlier] the OECD had raised the question of whether the UK’s failure was effectively “systemic”. This implied that the nexus of inadequate legislation, feeble prosecuting agencies and a political willingness to buckle to an ally (Saudi Arabia) made uncomfortable by a criminal investigation meant that the UK was totally unable to address corruption. This fear was quietly reinforced by the fact that in Transparency International’s corruption perceptions index, published in September this year, the UK fell from 12th to 16th place."

We've talked here before about the huge BAE scandal in the UK, and the country's decline on the TI rankings. In the new edition of our business ethics book, which is just going into production, we explore the events in even more detail. But those of you that want the 2 second overview, the bottom line is that the Serious Fraud Office was forced by the British government to cave in on its investigation of BAE's alleged millions in bribes paid to Saudi Arabian officials after heavy lobbying from the company and the Saudi government. The whole episode spoke of a huge ethical failure - and even a wrenching of the basic rule of law. As Cockcroft put it (and he was among the more reserved commentators): "Ten years ago, the international community relied on the UK to be progressive in this arena. Now, disappointment at the lack of a serious stand has turned to disbelief, and disbelief to anger."

Today though, comes news of a small but significant breakthrough, with the announcement by the SFO of its first conviction of a major British firm for overseas bribery. The firm, Mabey and Johnson, a signifant player in the world of bridge-building firm, was found to have paid bribes totalling £1m to foreign politicians and officials to secure export orders. Operated through covert middlemen, the bribes were paid to officials in a range of developing countries in Africa, Asia and the Caribbean. The SFO, learning something from its US cousins, tconcluded its first plea bargain type conviction which saw Mabey and Johnson slapped with more than £6.5m in fines and reparations to foreign governments.

This can only be good news for the beleagured SFO which only a few months ago had been left dispirited and demoralized by the BAE failure. Its head and the main BAE investigator had both left the organization soon after the government had effectively closed down their biggest ever bribery investigation. Now, media reports suggest that the new director, Richard Alderman, may be ready to push for a plea bargain at BAE too.

Today's news can only be welcomed by those of us with an interest in seeing the UK get back into the driving seat on dealing with overseas bribery. However, it will take more than one prosecution to wash away the shame of its pitiful performance over the past decade. The country's record of investigating and prosecuting bribery is still woeful in comparison to its peers – at the end of 2008, only two cases had been brought, compared with 103 in the US, 43 in Germany and 19 in France. Let's not pretend that this is because British companies are so much more honest when it comes to bribery than their contemporaries - it's more a case of them simply being able to get away with it. And realistically, only a conviction of BAE is going to change the perception of Britain as a soft-touch country, at least in the short to medium term. The SFO has little time to lose - especially if they don't want to be further embarassed by the Americans prosecuting the iconic British firm before they do. But it's still not clear if the ethics will simply get submerged by the politics again.

Ethics and MP's expenses: storm in a (claimable) teacup?

Crane and Matten have been in the UK this week, and the big issue absolutely dominating the media has been that of the expense claims of the country's Members of Parliament (MPs). The press and TV have been all over this one like a bad rash, and don't look ready to letup soon. Now no one likes to see elected politicians misappropriating the public's hard earned money - and Britain has already seen itself slipping down the greasy poll of the corruption perception rankings as we mentioned last autumn. But over the course of the past few weeks the media storm has relentlessly criticised politicians from across the political spectrum for abusing the public's trust to such a degree that we've already seen one senior figure resign (the Speaker of the House of Commons), various politicians have had their knuckles rapped and have promised to repay their overenthusiastic claims, and party leaders have been scrabbling for the moral high ground in trying to instigate new systems of control.

When all is said and done, there is little evidence in all this that any of the politicians involved have actually broken any rules; in fact, it would appear that in many instances, their claims were not only approved, but actively encouraged by administrators. This has all been going on for years without anyone getting in much of a commotion about it. Besides, the padding of expenses is a problem that is hardly unique to poilitical circles - the private sector has just as many problems to deal with, and the media industry itself is hardly whiter than white. So is this all a fuss about nothing? Not exactly. There are some real issues here, especially around how to maintain public trust. There are also many lessons to be learnt about business ethics too - particuarly in terms of the limits to compliance systems in managing ethics, and the importance of getting to the deeper problems of how institutions are governed. Some of these points are dissected nicely in some recent posts on the Added Values blog by the folks in the Professional Ethics Network at the University of Leeds. They also link to a nice little interview clip from everyone's favourite Twitter-er Stephen Fry.

Another way of looking at this is to try and understand why such problems have gone on for so long, and how such a culture of corruption ever managed to get cemented into the heart of government in the UK. One of our favourite concepts in exploring institutionalised bad behaviour is "rationalization tactics", as described by Anand et al in the Academy of Management Perspectives. It doesn't take much effort to see in the case of MP's expenses some clear examples of how processes such as incrementalism, socialization, and cooptation have successively socialized MPs into unethical behaviour ... and how rationalizations such as appealing to higher loyalties and balancing the ledger have given them the kinds of excuses that deny wrongdoing and keep everyone in a state of denial. Of course, if we follw this path, the obvious solution that comes to mind therefore, is a fundamental culture change, a new broom in the dusty cupboards of Parliament. But for that, it's going to take a whole lot more than the rhetoric we've heard so far.

‘Shameful’.

That was President Obama’s comment on this week's news that Wall Street Bankers had been paid a total of $18.4bn in bonuses for 2008. The very banks in fact that had just received a multibillion dollar bailout package from the government, i.e. the American taxpayer. The most blatant case being Merrill Lynch (annual loss 2008: $15.3bn) which paid bonuses earlier than normal in December, just before being taken over by Bank of America with expected new government funding of $20bn.

The news came on the day when we discussed the corruption perception index of Transparency International in class at Schulich. We had a nice discussion why it is that often poor countries range high on the list and one student suggested that in poorer countries bribes are just that much more seductive as people are relatively poorer, and therefore more tempted to take advantage of a situation. But its not just poverty: comparing Sweden and Italy – countries of similar wealth one could argue – it is interesting to see the difference of more than 4 points on the 10 point scale. Italy is a more collectivist culture, where family ties and long term relationships matter more than in individualistic and meritocratic countries.

From an ethical perspective the question really is: why is it so much more corrupt to succumb to the temptations of poverty or to give preferential treatment to friends and family (earning you a bad score on the TI index) than to do what has been standing practice in business now for decades: to reward managers according to the market performance of the assets under their fiduciary trust?

These practices raise eyebrows and produce anger (one has hardly seen Obama so agitated in 2 years on the campaign trail) now where these bonuses come directly out of the taxpayers’ pockets and happen in the face of utter failure of the rewarded managers. But in our view it just exacerbates the general issue: what exactly is the ethical justification for the explosion of executive compensation particularly in the Anglo-Saxon parts of the world? Being rewarded for success – fine. But more often than not, the link between stock prices and individual managers’ performance is more than tenuous.

This ‘height of irresponsibility’ (Obama) will ask for new rules for the game. Obama will hardly avoid addressing this problem of executive compensation. Certainly in the eyes of most Americans (and the rest of us, for that matter) there is something deeply questionable about these practices. Bank of America CEO Thain has resigned over the scandal. Whether he paid back his bonus though was not reported…

The Oscars of Corruption

One of the most important rankings in the world of business ethics was updated and released last week: the ‘Corruption Perception Index’ (CPI) of Transparency International. Founded by the former UN aid worker Peter Eigen the Berlin based organization regularly collects extensive data on how countries in the world are perceived with regard to corruption in business and politics.

Sweden, New Zealand and Denmark top the list while Iraq, Myanmar and Somalia come out at the very bottom. But it is not just a list where rich Western industrial democracies win while poor developing nations lag behind. It’s interesting to see who went up and who went down. Britain took a hit, as did France and Germany – all due to high profile corruption cases in recent years. We talked about the BAE scandal in the UK in this blog which appears to have led to a drop in the UK's rating – in particular the government’s decision not to pursue the case due to ‘national security concerns’. Endemic corruption at one of Germany’s biggest companies, Siemens, arguably contributed to a drop in the ranking for Europe’s biggest economy. The US comes out 18th – just before St. Lucia – largely perhaps because of dubious campaign finance practices and special interest lobbying in Washington.

You might by now have noticed that one of the recent ‘pet theories’ of Crane and Matten focuses on the political role of the firm. Seen through the lens of the CPI the collusion and non transparent role of business in politics is interpreted as a form of corruption. And the fact that by no means all democratic countries lead the ranking and some of the them even dropped can be seen as an indicator that the political role of the corporation is on the rise.

So what is the solution? Clearly, there is still a role for strong government. The top countries, in particular Sweden and Denmark, are long standing democracies with a strong welfare state where the spheres of business and politics are reasonably held apart. Georgia, Nigeria, South Korea or Turkey – all countries which improved their ranking – did so mostly through improvements in the political governance of these countries.

But generally, we would argue that the CPI reflects the rise of private business in influencing politics, both for better or for worse. One way of addressing this then might be to just tackle these issues from the business angle. Some of the most creative approaches to eradicating corruption focus on business-government relations, such as the Extractive Industries Transparency Initiative (chaired by Eigen). Creating more transparency, clearer accountability and new forms of democratic control, both for governments and powerful corporations can be effective in addressing corruption. After all, corruption is not just an ethical issue: a one point improvement in the CPI coincides with 0.5 percent increase in GDP and a 4 percent rise in average income of a country. In particular in the global south, corruption translates into a matter of life and death for ordinary people...

Ethics and financial crisis

With stock markets plummeting, financial institutions going belly-up, and governments on both sides of the Atlantic stepping in to bail out failing companies, the prospects for investors, the financial community, and even tax payers do not look good. And with the likely knock on effects for employment in other sectors almost certain to result in job losses, the fall-out from the current market turmoil is going to be widely felt.

For us business ethics professors, however, the picture is somewhat mixed. On the one hand, issues of social responsibility tend to be higher on the agenda when times are good. On the other, when greed and corruption contribute to downturns (such as in the post Enron wake of the early 2000s), significantly more attention can shift to issues of integrity and governance in business. Its no coincidence that the 2000s have witnessed perhaps the most sustained growth yet in the corporate responsibility 'industry' and in courses, books, conferences, and workshops on the subject.

Today's financial crisis clearly has at least some of its roots in corporate iresponsibility around the subprime mortgage market in the US. If 'responsible lending' practices had been observed (or if tighter regulatory oversight had been imposed), we might not all be in this position right now. Certainly, the financial industries of other countries appeared to be more attuned to the problem than in the US, such as in the UK, where the British Banking Association has in place a code on responsible lending:

Responsible lending is providing credit, based on background checks and professional judgement, to people who can accommodate regular repayments without getting into financial difficulty.

But although the sub-prime problem was the rockfall that got the financial landslide going, there are a number of structural issues that also need to be considered. And here we need to perhaps look at deeper institutional issues rather than the ethics of individual people or companies. As with Enron, the fault lines for disaster run through the system of risk management, regulation, transparency, business interdependence, and reward systems, not simply rogue traders crossing the ethical boundaries.

There are ethical issues here too of course, but they are at a different level to the ones that most people think of when they think about corporate responsibility. Here, we are talking about the ethics embedded in business systems and institutions, and how ethics and the law intersect to ensure that markets work effectively, fairly, and ultimately securely. Sure, a lot of our current problems with the financial crisis can be put down to individual greed, mismanagement, and bad decisions, but ultimately it goes deeper than that. Whether this means that the current crisis will be a boon to business ethics however depends on how well us ethical experts manage to get to grips with these deeper level problems.

For further reading on this, check out our paper on challenges to the business ethics curriculum, published in an early version available free online and later in the Journal of Business Ethics.

Getting an ethics fix

This week’s blog is a bit late. Sorry, but there is an excuse: Crane and Matten have recently been introduced to the TV series ‘The Wire’ and, though we are somewhat behind the rest of the civilized world in this, have been avidly watching the third season on DVD. This stuff is so addictive that one of us even managed to watch all 12 episodes in 2 ½ days. Well, sometimes you need to stop writing, and just starting watching…

The Wire is set in Baltimore and introduces us to the world of drugs, smuggling, crime, dodgy police and sleazy backroom local politics. As far as we’re concerned it’s probably one of the best TV serials ever made. The storylines are gripping, the plot credible and the acting is just superb. Each series operates between two ‘camps’. ‘The Law’ is basically the police, prosecutors, lawyers and local politicians. On the other side, there is the ‘The Street’: the local drug trade, constituted by various rivaling gangs.

There are many reasons for the popularity of the show, one of which is the apparent amorality with which the two camps are displayed. Unlike in many standard cop shows, the ‘good guys’ are actually not quite that good. And the ‘bad guys’ are even at times fairly decent: despite the drug dealing and murdering, there are strict rules, very clear notions of fairness and an honor code among the gangsters. Most of all, nearly all characters are so likeable. If bad things happen, they are mostly the result of ‘the system’ – be it the police bureaucracy, politics or the power relations within and between gangs.

Now – some of you might be wondering by now what all this has to do with business ethics – or if it does, why Crane and Matten can’t even have the least bit of fun without bringing their ethics perspective into everything. Fair enough, so let us just say this much: ‘The Wire’ is absolutely superb if you want a lively laboratory of what we call ‘context related factors’ in ethical decision making (Chapter 4 of our business ethics book). The show gives a pretty vivid account of why it is that normal people end up doing some pretty bad things. This is what the Stanford University psychology professor Philip Zimbardo (of the infamous Stanford Prison Experiment) calls the ‘Lucifer Effect’ in his latest book: how personal morality is fundamentally shaped by social context.

And, besides, the link to business here is by no means artificial either. Stringer Bell, one of the gang leaders in the Wire, is actually doing a business degree part-time in the show, and he brings to bear some of the lessons from the classroom to his business on the street. Mind you, we doubt that he’ll have spent much time in any ethics classes. But that’s a shame. Not only could he have learnt more about why ‘The Street’ and ‘The Law’ behave the way they do, but he could also have provided us with some knowledge in the other direction. As some of our European colleagues have discussed recently, we can learn a thing or two about CSR from the way that organized crime outfits like the Sicilian mafia offer very instrumentalized forms of philanthropy to survive and flourish in governance vacuums. Oh, yes, but that was another show…