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How Can You Fix Ethics if You Can’t Spell Ethics?

Imagine Bankers Playing Badminton with Your Money

The Economist recently published an article called Fine and Punishment: The Economics of Crime Suggests that Corporate Fines Should Be Even Higher. It’s fascinating reading: it suggests that we can economically calculate how to deter corporate malfeasance.

As the article puts it:

The economics of crime prevention starts with a depressing assumption: executives simply weigh up all their options, including the illegal ones. Given a risk-free opportunity to mis-sell a product, or form a cartel, they will grab it. Most businesspeople are not this calculating, of course, but the assumption of harsh rationality is a useful way to work out how to deter rule-breakers.

In the US, anti-trust penalties run up to 40%; in the UK, they’re more like 10%.  In either country, the article notes, crime pays.  In fact, the ROI is downright incentivizing.  So it’s no surprise, the article suggests, that crime seems to be undeterred.

Prosecute the Bastards!

You might think, well then, raise the penalties – massively.  Here’s the Economist’s logic on why that is, tut-tut, really not such a good idea at all, don’t you know:

There are plenty of arguments against ultra-high fines. One is that false convictions carry too high a cost. Another is that fines of this sort could cripple firms, reducing competition.

Really.

Argument the first. The cost of a false conviction in a personal capital case is, let me see – oh yes, personal death. The cost of a false conviction in a corporate cartel case is – the falsely accused corporate entity pays money. Why do I feel the “too high a cost” argument doesn’t cut it here?

Argument the second. Ultra-high fines could reduce competition. Unlike anti-trust violations? Unlike price-fixing? Is this really The Economist proposing this twaddle?

Ethics Without the Ethical Part

Here’s the thing.  The entire article is about ethical issues, yet never once mentions ethics. It’s one thing to include a caveat like, “Here we’ll discuss a purely utilitarian view of ethical behavior.” Fine. But to never even mention the existence of another approach to ethics is fodder for paranoid amateur ethicists like me.

Do you think maybe, just maybe, one of the reasons white collar crime is so much on the rise is that no one – most especially not the Fourth Estate – chooses to describe unethical behavior as being – unethical?!

Some of it, I suspect, is style. In too many self-congratulatory business and academic circles it is just uncool to use that word. It’s hip to be a deconstructionist, neuro-whateverist, or a student of behavioral incentives – and maybe to study ethics in kind of an anthropological way.  But certainly not to believe in the stuff!

Sorry: if we conduct business solely as an exercise in self-aggrandizing profit maximization, then we will get self-aggrandizing profit-maximizing behavior. If we teach business ethics as a series of cases analyzing the balance of power between “stakeholders,” we will get what we teach.

What would it look like if we actually called ethical violations by their proper name?  We would have business, social end educational leaders insisting on massive sanctions, and not because of their deterrent power – but because of their symbolism.

Where is the language of outrage? To fix LIBOR rates, to rip off customers, to lie to the public – these things should be called by their proper names. Those names would be right and wrong, unethical, immoral, outrageous, anti-societal, sociopathic. Mostly just “wrong.”

The ultimate proper penalty is not more of the same lousy financial currency.  It is another currency – the currency of social respect.  We need to see condemnations, demands for apology – we need public shaming.

Not Just an English Economist Affectation

And now, ripped from the headlines: a few days ago, the IOC booted four pairs of Olympic badminton teams for intentionally throwing their games.  In an intriguing HBR article called Bad(minton) by Design, authors Scott Page and Simon Wilkie argue that:

While many are blaming the players, the real fault lies with the organizers for designing a tournament that encouraged throwing matches. The solution — apart from banning those pesky Danes and other “upsets” — lies in better design. [Italics mine].

They point out – quite rightly – that the design of the tournament (single elimination after pool play) provides perverse incentives to throw a match – assuming that your objective is to maximize your chances to win an Olympic medal. Interesting, to be sure. And their suggestions make sense; after all, why suborn unethical behavior unnecessarily?

We might even agree with the authors’ conclusion: “If you don’t consider incentives and strategic behavior, there will come a day when strategy trumps ethos. We would do much better to design organizations from the outset with Denmark in mind.”

Here’s the problem. In describing the situation, the authors suggest that throwing a game in order to win the tournament is in principle no different from a lob shot in tennis, or going out slow in the 5000m run – a short term tactic in support of a long-term goal.  Can you say, “the end justifies the means?”

I leave it to you, the readers. Can you spot the difference between a tennis lob shot and throwing an Olympic match? If so, congratulations – your ethical instincts are more intact than those whose profession is “competition economics.”

Bonus point: can you tell the difference between throwing a match at the Olympics and throwing the World Series? Me neither. Except that one is being “explained” in the Harvard Business Review as a case of misaligned incentives, and the other – quite properly – is considered the gold standard for sports scandals.

Would somebody please tell the economics profession that they’re missing a few letters in “ethics?” Particularly, the letters e, t, h, i, c and s.

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Filed Under: Trust and Culture | Trust Principles

  • Robert Terson

    Charlie, we’re living in a world revolving around an “Every Man for Himself,” “Win at Any Cost” mentality. In politics it’s power at any cost, damn what’s good for society; in business it’s the bottom line, never mind if it’s in the best interest of the customer, even legal, or if it’s going to bring the world economy to its knees; in sports if there’s a way to grab an edge by cheating, not a problem. Hell, “everybody does it,” right? It’ll never change unless WE, all of us, demand change. When politics stops being a team sport, when “My Party (Team), Right or Wrong” stops being the norm; when businesspeople are more fearful of being shamed than they are hungry for illicit profits; when the fans get so disgusted by cheating athletes that they refuse to buy tickets and stay home (got to take a look at that one myself). When collectively we stop yawning and take harsh action–that’s when things will start changing. Alas, don’t hold your breath. The “businesspeople” who caused this mini-depression are doing just fine, Charlie, aren’t they? They aren’t the ones being tossed from their houses. What’s wrong with us, Charlie? Why aren’t we in the streets with–figuratively speaking–a few ropes in our hands? Why is all this unethical behavior so acceptable? To quote my late father, that’s the 64-dollar question. Loved the article, despite the rise in my blood pressure.

  • Rich Sternhell

    Charlie, I believe the Supreme Court settled this issue in the Citizens United case…Corporations are people. Therefore, I would argue that they should be subject to the same penalties as people…up to and including the death penalty in jurisdictions where it still exists. No doubt it would make Texas a bit less business friendly. Unfortunately, in the years since an indictment put Arthur Andersen out of business, the government has been hesitant to use those powers. In any event, most corporations indemnify their officers and directors from almost all charges of malfeasance. While a small business person may go to jail for defrauding his or her customers, a corporate executive at worst will get a severance package. But note that I am speaking of “ethics” in legal terms. I just don’t buy in to your conclusion that ethical violations called by their proper name would generate the outrage you imagine. After all, the NCAA only imposed sanctions after Sandusky was convicted. And the Pennsylvania Attorney General knew of the accusations for years before the charges were brought and supported the case being brought only after he was elected Governor.
    Pardon my cynicism, but there was a time when the concept of shame held some power. Now it lasts only as long as the cable news cycle.
    Rich

  • Rich Sternhell

    Charlie, As a follow on I would note that Arthur Andersen’s demise has not precluded any of the remaining Big 4 accounting firms from embroiling themselves in scandals. Perhaps human nature is such that my cynicism is well justified.

  • http://twitter.com/CharlesHGreen Charles H. Green

    Ha ha, well thanks both Rich and Robert for chiming in. I think we’re all not so far apart, though Rich obviously may appear more cynical.

    But Rich, for the sake of discussion let’s grant your point about social cynicism. I’d like to hear what you think about my other point: the apparent unwillingness of economists and strategists to view these issues as anything other than exercises in rational benefits calculation.

    Think about it: the professor of “competition economics” compares throwing a match with a tennis lob shot – just another short-term tactic in a game whose sole purpose is to win the end prize.

    By that logic, intentionally walking someone in baseball is on a moral par with intentionally muffing a fly ball in the bottom of the ninth. Benching the star basketball player when he has four fouls is morally indistinguishable from intentionally fouling out. A golfer who calls a stroke on himself for unintentionally moving the ball is not upholding the standards of the game, he is simply a fool.

    I get it: if your view of sports is so warped that all you can see are strategies to win the end prize, then you can see throwing a match in the Olympics. And apparently that’s how a few countries’ teams had come to think.

    But note: the IOC didn’t think that way, nor did the popular press, nor did the man on the street. In these cases it’s the leadership: the team coaches, the academic and business elite, who are leading us down the moral garden path, not the public at large.

    The players throwing the game were taught by the coaches; the execs double-crossing their clients were taught how to think that way by the economics departments and business schools they attended.

    The fact that some academics can’t distinguish a lob from a lie-down is pretty telling; they’ve literally forgotten how to define right and wrong in sports. And sports is the all-time favorite metaphor for business.

  • http://twitter.com/davidgebler David Gebler

    One of the reasons why “ethics” is not part of the conversation is that the social norms that govern the behavior in many industries do not include values that promote trust. So long as the stakeholders that matter to the corporations do not impose social costs on their actions, companies will fall back on tried and true rational cost-benefit analysis to govern decisions. Just look at today’s news regarding Standard Chartered Bank and Iran.
    The bad news is that we will cheat if we can get away with it. The good news is that we are still vulnerable to shame and will stop when the social costs imposed by stakeholders we either respect or need make the unethical actions the outliers instead of the norm.

    David Gebler
    http://www.skoutgroup.com

  • Barbara Garabedian

    One has to ask, what the hell is wrong w/ the general public? We continue to allow scandal after scandal to occur and see the “perps” walk away w/ a slap on the wrist (or nothing) and we’re not screaming in outrage and asking for reform and their heads!!! We deserve what we get. Rich is right…there is no such thing as shame holding any power any longer, that has been usurped by bragging rights regarding winning. We hold the winners in high esteem, consider their behavior the rule of thumb for success, provide them w/ gigantic salaries & bonuses & give them multimillion $$ endorsements, and, in some instances, allow them to spearhead political machines. Evidently Gordon Gecko is alive a well…greed is good and do whatever it takes to win!!!

  • Rich Sternhell

    Fair points by both David and Charlie. But ethics are first taught at home long before people decide to go to business school or become college professors or economists. I would note that the IOC has been somewhat inconsistent itself. A British cyclist purposely causing a crash at startup to allow a restart was not sanctioned. Clearly baseball allows intentional walks and the NFL allowed bonuses for “taking out” opponents until they got caught. And I’m not sure that would have changed were it not for the major lawsuits on brain injury facing the NFL. The argument of the plaintiffs bar against tort reform has long been that massive class action cases are the only effective deterrent to corporate or organizational bad behavior. I’m just not convinced that you can “teach” ethical behavior to people who haven’t learned it by the time they get to business school. It would certainly be great if they emphasized a zero tolerance policy for ethical violations and didn’t name buildings after bad apples, but that may be too much to hope for.

  • Greg Kelemen

    Charlie, I like what you write about: it’s important. But I have to take issue with your premise here. What about the ethics and morality of the government rule-makers and the rules they create? People will always come up with ways to get around impediments to what they want – it’s just basic human nature.

    Why doesn’t anyone see that bad created by all the rules and enforcement by government? I’m not saying business is squeaky clean. But why is it always business and business people that get short shrift? Isn’t the government run by people too? Are those in government service a special brand of human being and not prone to unethical behaviour? Where is the regulation of government?

    Why doesn’t anyone talk about how it’s actually government rules that give rise to this behaviour?

    “Those who are convinced that the government has to “do something” when the economy has a problem almost never bother to find out what actually happens when the government intervenes.” Thomas Sowell

  • Rich Sternhell

    Greg, there is no doubt that any establishment of a rule creates an incentive to find a a way around it. And few if any will support the notion that politicians’ ethics exceed those of business people. But your premise is that the absence of a rule would eliminate the incentive to bad behavior. I’ll follow Hobbes on that one. “Life without government would be nasty, brutish and short”. Certainly the industrial age of the late 19th early 20th century where rules were virtually absent does not provide evidence of your argument.
    To Charlie’s point, I do worry about the career limitations we would place on business school graduates loaded with ethics teachings as they entered JP Morgan, Standard Charter or any other financial institution
    Rich

  • Leanne Hoagland-Smitgh

    Possibly part of the issue here is ethics requires judgements and being judgmental in today’s culture is continually frowned upon.

  • http://twitter.com/PeterHHockey C Peter Hutchinson

    So the widely read The Economist thinks, to my sorrow, actions should have no consequences? I think insufficient fines, and the lack of conjuring public shame by the 4th Estate, give green lights to the person who nakedly calculates for personal gain over the proper place of ethical behavior in society and business.

    Mr. Green is correct in my view, by pointing out that society-defeating personal beliefs are wrong to us, only so far as they are established in our mind’s firmament; not getting caught, or worrying about getting caught, is a green light to the criminal and “un-quiet” mind, like saying, in effect, you may go ahead and beat me up, take over the world’s realm myself included, I deserve your scorn – make a mockery of justice.

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