Ethics pledges, business schools, and the financial crisis

With all the talk recently of greedy bankers and guilty fraudsters, some people have been looking to business schools as a potential source of some of the problems. The New York Times recently published a stinging criticism highlighting the failure of schools to focus their students' skills and attention on anything more than short term shareholder value. Not surprisingly, it generated a lot of attention, not only in the business school community, but also among the broader readership of the paper.

Obviously schools can not be wholly to blame for sowing the seeds of the financial crisis, but the points made about the inattention to ethics and social responsibility in many MBA programs are well made. Things are changing, but there are still only a few schools (among which we'd count our own) where such critical issues have become deeply and meaningfully embedded in the curriculum. Students meanwhile have demonstrated that they are increasingly attentive to social and environmental issues. Survey evidence, growing course enrollments, and escalating membership of student clubs and competitions around CSR issues are all testament to that. Another way that this has started to surface though is in the emergence of "ethics pledges" - a growing phenomenon, particularly in the USA.


Emanating originally from Bentley University in the USA, the ‘Graduation Pledge of Social and Environmental Responsibility’ is perhaps the best known of these pledges. It is based around a pledge to ‘to explore and take into account the social and environmental consequences of any job’ that signers might consider, and commits signers ‘to try to improve these aspects of any organizations for which [they] work.’ The initiative’s website enables potential organizers to learn about how to organize on-campus campaigns, and to download posters, wallet cards, and other resources. So basically, the pledge is about sticking to your values, regardless of the various pressures or seductions of the workplace. Of course, making career choices can be hard when you want to make a difference in society. What if a potential employer seems to be offering you a great position but you’re not convinced that it shares your values? The ethics pledge aims to help students navigate these tough choices while keeping their commitments to ethics and social responsibility intact.

More than a hundred schools and colleges are using the pledge, but other initiatives have also emerged including the ‘Shanghai Consensus’ pledge organized by the China-Europe International Business School (CEIBS) in Shanghai, and for business leaders, the ‘Business Ethics Pledge’, which begins ‘I pledge allegiance, in my heart and soul, to the concepts of honesty, integrity, and quality in business.’ Unlike the other alternatives, the Business Ethics Pledge even allows you to sign electronically and start advertising your business on-line as a signatory.

As might be expected, such pledges have been particularly popular in North America and, to a lesser extent China and Taiwan, reflecting perhaps the focus in such cultures on individual level agency in business ethics. Those who subscribe to such initiatives clearly believe in the importance of personal integrity and of the power of individuals to make a difference. As the Business Ethics Pledge founder, Shel Horowitz says, ‘This is about changing the world! About creating a climate where businesses are expected to behave ethically, and where executives who try to drag their companies into the unethical swamplands find that nobody's willing to carry out their orders.’

We're not wholly convinced by this - especially since so many of the problems we're seeing today are not so much the result of individual miscreants (well, OK, maybe Bernie Madoff could have done with keeping to a decent pledge), but because of deeper level structural issues in financial markets, governance and remuneration systems, and regulatory problems. But still, when the focus of attention is so much on changing the culture of business, a good old fashioned pledge of allegiance may not be such a bad idea. After all, you've got to start somewhere. And it will certainly show those business schools that've been slow to get their ethics education together that their students mean business. Just not business at any cost.

Toronto’s 6th Timeraiser – The unlikely marriage of glamour and charity

So, what scene do we imagine when we hear the word ‘art auction’? Well, lots of money for sure, champagne, posh people, sophisticated conversations, a fair share of vanity – you get the picture. Now think of ‘charity work’: mmhh, not quite the same I guess. More like hard selfless toiling away facing tasks normally shun by many people, such as feeding the homeless, attending the sick, helping the unemployed etc.

Yesterday in Toronto one could see the unlikely union of both worlds. It was Toronto’s 6th Timeraiser Event which displayed once again what a creative, vibrant space can be created by imaginative civil society activists. The core idea is as brilliant as it is simple: The auction features some 30 works of local artists and the interested art collectors make their bid in form of committing time to volunteer for selected charities – rather than bidding money. For most pieces of art people were happy to bid up to 125 hours of their time! This is a heck of a lot of time if – like most folks at the event – you are in a full-on career in business.

So here we are: a great art gallery space in Toronto’s distillery district, nice drinks, great hors d’oeuvres, beautiful people, and of course, pretty cool artwork. While checking out which piece takes your fancy you also have a chance to talk to 40ish agencies which offered various volunteering opportunities to the potential bidders. In the end, it was not only a lot of fun to see who bids where and who gets outbid for which item but it was also an incredibly successful raising of time for charity: last year’s event raised more than 11,500 hours of volunteer time from the guests of the event.

What is great about the event is that it does not confine the ability to be charitable to the Trumps, Buffets or Gates’s of this world who can do so by virtue of their checkbooks. This is based on the one resource where all people are more or less equal: the 24 hours we have per day.

The other aspect from our perspective is of course this one: the entire event was made possible financially through the support of 10 Toronto based companies. As such, this represents a clever form of CSR. Having just published some research on how volunteering creates social capital, this event was a great ‘laboratory’ to observe from the point of view of a researcher.

‘Social Capital’ consists of three things: networks, trust and norms. Such an event creates new networks between the business-, arts- and charity-community which are beneficial for all parties involved. By showing that people working in business are willing to commit substantial chunks of their time to community work it also helps to address the trust issue. The latter being particularly valuable in a time where business has gambled away quite a bit of that trust recently… But it also helps to instill new norms and values into all actors involved. From our perspective this is particular crucial for business folks: having real time exposure to many of the pressing social needs and problems in our view has the potential to challenge a mindset which is all too often confined to just financial results and career advancement.

But most of all, it's a lot of fun! Or as one journalist put it: 'Good is getting really sexy!'

Economic crisis (again) – how do we get out of the mess?

Finally he is back. Bill Maher’s new season of ‘Real Time’ started again last Friday. He is one of the funniest guys on TV in North America right now, and certainly one of the smartest. The first show this season was all about – yes – the economy. Could you have imagined that in normal times? ‘The economy? On a comedy program??’ But here we are.

The show started off with reminding us that the crisis on Wall Street is just about to unravel, we have just seen the beginning. ‘Skank of America’ or ‘Shittybank’ (BM) are still close to the abyss, despite the earlier $700bn bailout. The central contention of the show was this: should the government be involved with another bailout, or should we just allow the system to collapse. After all, this is America, the home of the free market and individual liberty. Let the market sort it out, so Ron Paul on the show.

That didn’t go down well with the other guests. Crystia Freeland, North America Editor of the Financial Times, wasn’t having any of it. Her best comment was that since the bankers of the private sector had failed on such a megalomaniac scale, putting government bureaucrats in charge could certainly not make things worse, hopefully even better. Could you have imagined such a benevolent statement about government involvement in the economy from a Financial Times editor a year ago?

It was fascinating to see how ethical issues dominated the entire program. Congresswomen Maxine Waters, another guest, made an interesting suggestion: there should be the ‘Nuremberg trial for bankers’! That, however, was at least more realistic than Bill Maher’s very funny black humored piece on just ‘hanging’ two bankers, you know, symbolically. As they did in China with the managers who caused the milk scandal some months ago. That might teach these Wall Street guys a lesson…

It is a time of deep navel gazing in America and beyond. Bill Maher’s suggestion was that the last years have given rise not to the ‘American dream’ but rather to the ‘American fantasy’. What happened was not the pursuit of happiness through hard work which makes dreams come true but luring people into the illusion to raise their standard of living based on money that didn’t exist. And he concluded: ‘There is a difference between a fantasy and a dream. Boy do I know!'…

Ethics of executive pay limits

As discussed in our last blog, executive compensation is a hot ethical issue at the moment. There's been lots of talk about the ethics of excessive salaries, especially for the Wall Street 'fat cats' and the rogue's gallery of bosses who took home big bonuses whilst their firms went looking for government bailouts in the wake of the financial crisis.

But now we have a new ethical question: what about the solution proposed by Barack Obama this week? Should we applaud Obama's proposal to limit the compensation of all senior executives at any companies receiving 'exceptional' government loans to $500,000? Has Obama's executive 'paydar' hit ethical pay dirt?

The executive pay limit has certainly stirred a lot of debate. On the one side are those that view it as an appropriate response to protect the public interest given the amount of public money that is being pumped into failing companies. Many believe that government's have moral duty to ensure that the taxpayer's money does not simply disappear into the pockets of senior executives. On the other side are those that argue that the pay limit will burden already struggling firms with an inability to attract the best executive talent. As one analyst told Bloomberg Television "No one goes into Wall Street to save the world ... compensation is the motivating factor." These folks tend to think that governments shouldn't interfere in labour markets to 'fix' wages as this leads to unnecessary inefficiencies - and can harm the very industries that the government is seeking to rescue.

From an ethical point of view, and put rather crudely, this is largely a question of principles versus consequences. But given that we're off the page at the moment in terms of the usual 'rules of the game', this is pretty much an ethical free for all. No one really can say for sure what the rights or responsibilities are of governments in situations like this because we haven't got too many precedents to work it all out from. And who knows what the consequences will be when no one is very sure at the moment what's going to happen next anyway. These are uncertain times indeed. One thing we do know though is that if the big threat looming over all this is that Wall Street will lose it's best talent because the grass is, well ... greener elsewhere, then maybe we shouldn't really be all that concerned anyway. After all, executives that have no concern for the public interest, who think that paying themselves bonuses while their employees are being laid off is good management, and who pretty much launched us into the most devastating financial crisis of our times might not be exactly the kind of 'talent' we need right now.

But from our point of view, all this ethical to-ing and fro-ing is probably missing the bigger point anyway. The real issue here is not so much the rights or wrongs of the Obama proposal itself, but the bigger message it is sending about executive compensation and corporate governance. Read between the lines and what the US President is saying is this: 'the system isn't working right, so get your act together and fix it or we'll do it for you - and you won't much like the results if we do'. And it's not just in the US - according to the FT, European governments are beginning to float similar ideas too.

Now, it is unlikely that any of these governments will step further than paycaps in bailed out institutions - after all this is where they have a more direct stake. But the writing is on the wall that they will have their eyes on deeper governance reforms if firms continue to revel in what Obama calls 'shameful' compensation deals. Smart firms and industry bodies, not to mention the more forward thinking think tanks and reformers, should be taking this opportunity to get ahead of the curve and start crafting a new moral direction for corporate governance. The deeper questions about what kinds of success should exec comp be rewarding, and how should this be structured to achieve fair rewards for all stakeholders need to be back on the front burner - and quickly so. Time is of the essence before another dirty bomb gets launched into mangled mess of Wall Street.


Photo copyright David Paul Ohmer. Reproduced under Creative Commons license

‘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…