Tag Archives: business ethics

The risk of repetition without repentence

John Dalla Costa writes that an unsettling revelation attending the current global financial crisis is that some of those who structured the most problematic credit derivatives that put the economy in jeopardy were alumni of Enron. Additionally, some CEOs in the financial sector are pushing back on demands for better regulation and more moderate compensation. . .

John Dalla Costa

John Dalla Costa

Among the many unsettling revelations attending the current global financial crisis is that some of the traders who structured the most problematic credit derivatives that put the whole economy in jeopardy were alumni of Enron. Rather than learn lessons about the excesses of the dot-com boom, investment banks and insurance companies readily employed what one author famously called “the smartest guys in the room.”

Economists tell us that markets are cyclical and that busts or failures are part of the self-correcting mechanism of self-interest writ large. But that pattern may itself be more of an excuse than inevitability. One study of cycles shows that the frequency of crisis has in fact accelerated and that each successive wave wreaks significantly more damage.

Some of us will remember the scandal-plagued failure of junk bond innovator Drexel Burnham in the late 1980s. But few will know that the person at the center of AIG’s current debacle (and until recently head of its U.K. derivatives business) was one of the swashbucklers from long-deposed Drexel Burnham. In effect, the business meltdown now causing so much grief to investors, workers and communities is not a distinct event but part of a continuity of malfeasance. Our failure to learn history’s lessons means more than risking the repeat of its excesses. In fact, our forgetting, amplified by technology and intensified by globalization, begets ethical failures that are ever wider in scope and graver in their impact on society.

How can this be? Why are we so willing to quickly adopt technological or knowledge innovations to reduce risk, while resisting the prudence and moral care that are in fact intrinsic to stability and fairness? We know from long experience with business ethics that great mistakes by boards or CEOs rarely come from intentionally choosing to do the wrong thing. While the press and public look for sinister subterfuges or high profile scapegoats, the reality is that business leaders in the middle of ethical storms are often not only accomplished in their field, but of responsible personal reputation. The mystery that deserves serious scrutiny is not that a “few bad apples” disregard the rules, but that so many that we would generally regard as “good persons” also lose sense of ethical proportion or decency.

Experts have coined terms like “group think” to explain the momentum of expedience that opens the way for mass amorality, but this psychological model tends to let us all off the hook too easily. One report of a recent national meeting of mainstream economists observed little-to-no self-critical analysis. Session topics included some admission that the profession had made mistakes, but the general assumption of presenters and participants was that models, not people, were to blame.

Similarly, some CEOs in the financial sector have now begun to push back on public demands for better regulation and more temperate compensation, essentially disregarding that their companies had off-loaded the moral hazard from their practices onto the public — which has so far spent hundreds of billions of dollars bailing them out. Such resistance to explore personal culpability in the face of the greatest financial calamity in 70 years means that we may already be planting the seeds for future irresponsibility.

The Jesuit theologian Bernard Lonergan recognized that the group thinking that led to a moral breakdown could not in itself resolve the problems it created. Lonergan explained that only conversion could release the human heart and mind from what he called “the bias of common sense.” As it has throughout Christian history, such conversion hinges on a confessional moment of recognizing one’s inadequacy before God.

Importantly, this sacramental moment is not to wallow in guilt, but rather to resume our relationship with holiness — to recognize our human frailty and needs, to take responsibility for what is broken in our souls or society, and to welcome the grace that is the ultimate resource for hope and renewal. Repentance is a sacrament for this reason: It frees us by God’s love from the “habitual imperfections” that otherwise keep us locked in the prison of repetitive disregard for what is right.

Catholic business people have as their vocation that extra duty to bring an imagination for repentance and reconciliation to their workday responsibilities. As Jesus taught about prayer and fasting, this need not be a public display of piety. The charge, instead, is for daily internal prayer that transforms one’s daily external actions.

Saints have taught us to pray on waking so as to discern the terms of God’s call or will in the day ahead. They remind us to withdraw from busy activity during the day, if only for a few seconds, to recall the close proximity of Jesus walking with us. And many saints modeled an evening prayer based on examination of conscience, to tally the gifts of the day we have offered to God, and to see patterns where we missed heeding the moral need of moments or situations we encountered. Recent events show that we cannot bring ethics in business up to the challenge of systemic impropriety without changing the system that denies personal responsibility. Confession is a creative act, without which we paradoxically remain in repetitive destruction.

John Dalla Costa is funding director of the Centre for Ethical Orientation, a Toronto-based consultancy providing ethics, governance and integrity services. He is the author of five management books.

Does Fair Trade help the poor?

The Acton Institute’s Michael Miller writes that Fair Trade coffee is touted as a way to help the poor — a win-win for everybody with heart. Many Christian organizations connect fair trade to Christian values. Fair Trade positions itself as the solution to the injustice of free trade, but in some ways it creates obstacles to free competition by artificially establishing higher prices.

Dr. Michael Miller

Dr. Michael Miller

Fair Trade coffee is touted as a way to help the poor. It’s billed as a win-win for anybody with heart. For only a slight premium on our coffee, we help poor farmers while sitting in the comfort of a café.

Many Christian organizations — Catholic Relief Services, Presbyterian Church USA and Lutheran World Relief — connect fair trade to Christian values. The Fair Trade movement argues that the free market trading system hurts the poor by paying less than equitable prices for commodities. The movement aims to empower producers to become economically self-sufficient and to promote sustainable development, gender equality and environmental protection. Producers who meet fair trade standards of labor, development, and environmental sustainability become “certified” and thus receive higher than market prices for their goods.

While all of this sounds good, it still leaves me with questions. First, what makes it more “fair” than free trade? With free trade no one is coerced to enter into an exchange. If the trade is really free, then there are no subsidies to distort the market or to protect certain industries or sectors, thereby artificially raising prices. What makes trade unfair is when countries subsidize certain industries or put tariffs on foreign products and thereby artificially lower the price domestically so that foreign producers can’t compete. This is the case with U.S. farm subsidies and the Common Agricultural Policy of the European Union. If those subsidies were removed, farmers from developing nations could compete with American and European farmers on an equal playing field. This would not only lower prices for consumers, it would generate more income in developing countries.

Fair Trade positions itself as the solution to the injustice of free trade, but in some ways it creates obstacles to free competition by artificially establishing higher prices than the market would provide. In Economics in One Lesson, Henry Hazlitt defined economics as seeing the effects of a policy not only on one group but on many and paying attention to unintended consequences.

Consider the possible unintended consequences of Fair Trade coffee. First, only certain “Fair Trade Certified” farmers receive higher prices for their beans. This means that other farmers in the area find it harder to compete. It can create incentives for corruption because it is difficult to determine whether all of the beans came from the specific “certified” farm or whether that farmer bought them at a lower price from non-fair trade farms, including farms that might use slave labor.

Second, the artificially inflated prices create incentives for people to remain in coffee farming instead of moving into industries that will be more profitable in the long run. Fair Trade also creates incentives for more people to produce coffee which could create an oversupply, creating dire consequences.

Third, does fair trade help the poor move up the value chain into activities such as processing, roasting and packaging coffee? Or do the artificially higher prices create incentives for them only to grow the beans, leaving the value-added work to companies in the U.S. and Europe?

We need to be vigilant against exploitative labor practices, and for this the Fair Trade movement should be commended. Perhaps too, Fair Trade has genuinely helped some farmers, but any long-term success seems to rely on its remaining fashionable. Like many anti-market plans that have come and gone, Fair Trade will likely hurt the poor rather than helping them.

The best way to create sustainable long-term growth is not faddish movements like Fair Trade, but the same institutions that enabled the West to grow rich: secure private property, the rule of law and free exchange. When these are in place, trade becomes fair, more people benefit from trade, and the truly fair market unleashes the entrepreneurial spirit that is the source of wealth and prosperity. Free trade and markets have lifted more people out of poverty than all the fashionable political movements loaded with good intentions but pernicious consequences.

Michael Miller is the Director of Programs at the Acton Institute for the Study of Religion and Liberty in Grand Rapids, Mich.

Say what you mean, mean what you say

Catholic business ethics expert Dave Durand contents that conviction is more than a strategy for attracting top talent. Demonstrating conviction is a leader’s moral obligation. One of the most powerful ways leaders can and should communicate conviction is to say what they mean and mean what they say. People need to know the depth of your conviction.

Dave Durand

Dave Durand

Conviction is the music of leadership. I once heard a famous psychiatrist decry the fact that a single song can have greater influence on a person’s brain activity than a therapist can in years. Music captures emotions and frees the mind. It can prepare you for battle and calm you during stress. The more dramatic the music is, the more powerfully the lyrics are received. We all know what it’s like to listen to uninspired music. It repels sophisticated and educated people. They don’t “buy” it in spirit or in stores.

Well-intentioned leaders who fail to communicate their vision with conviction fail to attract great people to their teams just like bad music repels listeners. Unfortunately, weak followers sometimes don’t care what the music or lyrics sound like. They’ll listen to anything, which is why some leaders fill their staffing requirements but can’t seem to attract top talent.

Setting your message to music — or conviction, as the metaphor implies — is more than a strategy for attracting top talent. Demonstrating conviction is a leader’s moral obligation. It’s a sign of integrity. Sending subordinates on a mission that you, as a leader, don’t believe in is dubious at best. There are, of course, nuances in leadership that may include allowing subordinates to discover and innovate in areas that a leader might not fully buy into. Making room for those situations is smart as long as the leader communicates his concerns so there aren’t any surprises in the end. Expressing your concerns is expressing your convictions. Open communication creates an atmosphere of security. It’s better for subordinates to be given the blessing of a leader with open doubts than the false support of a leader who demonstrates insincerity.

Communicating your convictions as a leader is so important that it actually makes sense to establish a strategic plan for doing so. In other words, making a plan not so much for the words, but for the music, is crucial. Tragically, I have seen many leaders with strong convictions and great ideas who fail to communicate them in a believable way. This is true no matter what the setting. It can be seen in corporate America, politics, the Church and even at home.

When I was in high school, I remember listening to catechism teachers mumble out a few pre-scripted ideas about what it “might mean” to sin. They had such little conviction that I not only didn’t hear what they said, I didn’t care what they said. On the other hand, my football coach, who was a perennial winner for 30 years, always spoke with conviction. I believed everything he said about the game and I did everything he asked me to on the field. He inspired me because I believed him. I used his conviction as my own. He was great because through his obvious convictions he got others to believe in their own greatness and the team’s united mission.

There are three powerful ways that leaders can and should communicate conviction. First, they must only say what they mean and mean what say. George Burns once said, “The key to acting is sincerity. Once you learn to fake that you have it made.” The world is filled with actors in leadership roles. Scripture tells us to be sure our yes means yes and our no means no. The Bible also cautions that many people have tongues of deceit and flattery which are used only for their personal gain. Far too often weak leaders say things out of selfish motives. They tell subordinates to do things under the false guise that they have their best intentions in mind, when in reality nothing could be further from the truth. Public examples of this in politics and business are so frequently reported that I will refrain from dredging them up. The point is that “selling an idea” you don’t buy yourself is bad for all parties and terrible for your soul.

The second way that leaders should communicate conviction is by backing up what they say. Recently there have been some heroic examples of leaders showing concern for their employees during these challenging times. There are inspiring stories of private companies whose leaders have reduced their own compensation in order to prevent layoffs. When a CEO asks his staff to take a 10% cut in pay because it will save jobs, it can be received skeptically. But it has huge meaning when he puts his conviction behind the message by cutting his own compensation by 80%. This demonstrates that conviction is not simply about presentation and communication skills. It’s about principle.

The third thing that a leader should do to communicate his convictions effectively is to engage in healthy conflict, which means putting your convictions and principles ahead of your comfort. Being straight with your team is essential. It may not always be easy, but it will create an atmosphere of security. People need to know where you stand and how deep your roots of conviction run.

Dave Durand is best-selling author of “Perpetual Motivation,” executive of a $250 million company, and trainer of well over 100,000 individuals in sales, marketing and business management. He writes a regular column for the National Catholic Register.

Signs of unsettling times

Our call as Christians is to be a light in the darkness, insisting on hope not fear . . .

John Dalla Costa

The credit crisis has morphed into an even more dangerous bubble involving lost credibility. Markets are bereft of confidence, unleashing equities deflation, job losses and factory closings that only exacerbate what is now a globally shared sense of fear and gloom.

Not surprisingly, much of the mistrust for this crash is directed at business leaders. I would argue however, that this historic unwinding of false fortunes – derived from suspect mitigation of credit risk – indicts the very understanding we have of business ethics. As a business ethicist, I include myself in this criticism. Our mistake, at its most basic, has been reinforcing a binary diagnostic in which good ethics led to good companies, while failed companies proved wanting of sound ethical restraint. This has allowed us to study and apply the business case for ethics without engaging the larger systemic dimensions. This is no longer viable. Business ethics as we have practiced them are no longer credible for three reasons:

First, as Alan Greenspan admitted before Congress, the “self-interest” of companies and managers proved a “flawed” basis for “self-regulation.” Since business ethics were designed as the corporate skills for exercising responsibility, the flaw in self-regulation bespeaks a flaw in the discipline for achieving it. We are getting proof again that the self-interest of millions, multiplied over billions of transactions, does not yield the common good.

Pope John XXIII and Pope John Paul II repeatedly focused Catholic social teaching on interdependence. Self-interest is not a negative in itself, but we have tended to categorize morality as a private or solitary preoccupation of managers rather than as an exercise in solidarity. Of course we must be personally responsible for our decisions and actions, but the Church’s premise is that the moral dynamics of integrity, such as repentance and courage for righteousness, hinge on sacramental community and grace. Self-interest is never without shared risks or vulnerabilities, so self-regulation must be cooperatively defined and collaboratively managed.

Second, except in rare instances, business ethics have become an instrumental tool for companies — either to advance competitive advantage by burnishing reputation or to provide a hollow exercise in compliance to avoid legal liability. Again and again the logic has been to build the business case for ethics. Many scholars and practitioners have indeed provided the empirical data for making this case, which has many worthwhile lessons to teach. Lost in this priority to prove practicality is that utility does not exhaust the moral claims of ethical life, especially for Christians. Rather than a “heart of facts,” we need as Ezekiel taught a “heart of flesh.”

With bailouts and stimulus packages, we want to recover the economy, beliefs and patterns that we had before without addressing the biases and imbalances that led to the current crisis. Restoring authentic confidence will require something else — the ethics not for more transparency but for more truthfulness; not simply to prevent malfeasance but to also inspire the creative commitment for making markets more responsible and companies more human.

Third, our current bias is to make the morality of the organization rest on the ethical shoulders of individuals. We have had numerous examples of whistle-blowing failures — either when managers opted not to blow despite having whistles or (as in the Madoff case) when those persons with the courage to risk blowing whistles were ignored by authorities who had their heads buried in the sands of the status quo. This is not to be anti-market or against business, but rather to acknowledge that we must engage markets and business as imperfect human institutions that require on-going moral scrutiny by the community at large.

Some researchers have described the “taboos” around business ethics. Faith is one voice for penetrating these taboos and creating the space for individuals to draw moral sustenance from tradition, history and their respective living faith communities.

In Spe Salvi, Pope Benedict XVI reminds us “that every generation has the task of engaging anew in the arduous search for the right way to order human affairs; this task is never simply completed” (#25). In the swirl of our economic crisis, business leaders and ethicists have indispensable roles in this “arduous search.” We must be the ones to apply ourselves to new skills of governance: for example, creating audit committees for social and justice impacts, or setting compensation structures for executives that are reasonable, fair and motivating. We must be the ones who end the schism between strategy and morality, insisting that business and its outcomes are too important to human flourishing to be left to one-dimensional metrics of profitability; and we must be the ones who revitalize ethics in business to stir prophetic qualities that will help managers see beyond the exigencies of this quarter or fiscal year, and see the work of business in its proper long-term horizon as part of God’s gift and calling.

As always, our calling as Christians is to be a light in the darkness, insisting on hope rather than fear, and embracing responsibility for contributing our talents to “the right order.”

John Dalla Costa is funding director of the Centre for Ethical Orientation, a Toronto-based consultancy providing ethics, governance and integrity services. He is the author of five management books. He is a Regis College doctoral candidate in theology focusing on moral resources for sustainable development.