Is U.S. Society Serious About Business Ethics?
By Robert Shattuck, Jr.
Self-seeking motivations are powerful and predominant in the human species. Altruism is weak.
A fundament of societal organization is subservience of an individual’s self-seeking motivation to a greater common good. This is based on an analysis that an individual’s promotion of the survival and well being of a group can significantly contribute to the survival and well being of the individual as a member of the group.
Society has multifarious mechanisms to mitigate self-seeking behavior and to alter or channel it to promote a greater common good. These include religion; the promulgation of codes of conduct coupled with the bestowal of honor, esteem and emoluments on individuals who are exemplary; formal education programs that teach business, medical and other professional ethics; and systems of shame and legal punishments regarding individuals who violate society’s strictures.
Different societies have different structures and substructures and varying degrees of complexity. In the U.S. society, an individual exists within a number of organizational substructures. These include the family, corporations, political parties, churches, and labor unions. An entire nation can be considered a smaller unit within the world community.
Under society’s rules, an individual is called on to subjugate his interests to the interests of a group. The interests of a smaller group may be further required to be subjugated to the interests of a larger group.
The family is typically the smallest unit in which an individual is called on to subjugate self for the good of the group. At this smallest unit level, there can develop a very strong sense of identity between the individual’s interests and the family’s interests. As one moves up the organizational scale, the individual’s interests and those of the larger unit are less susceptible of conflation, and more cognate tools are employed to articulate society’s prescriptions relative to self-seeking behavior.
The repeated use of the word "subjugation" connotes the proposition stated above that the strongest motivations of the actions of the individual (or of a smaller unit) are the selfish interests of the individual (or of the smaller unit), and it is those motivations that need to be mitigated in order to promote the greater common good.
At the individual level, the powerful self-seeking motivations are for money, power, material possessions, social standing, sex, honors, esteem and emoluments, aesthetic refinements, recreational pleasures and ego gratification. The first listed motivator of money can contribute significantly to the procuring of the other desired objects. Much of the motivation at a larger unit level, such as a corporation, is a collective expression of the motivations of the individuals involved to obtain money and other objects of their desires.
Lying, cheating, stealing, defrauding, misrepresentation, concealment, breach of fiduciary obligations, bribery, blackmail, harassment, and lack of proper regard for the interests of others, have enormous potential for individuals and larger units such as corporations to obtain money. This is done, however, to the detriment of other individuals and other units in the society
Further, it is the case that, equipped with intelligence, the human species is excellently endowed to conceive and implement the foregoing kinds of dishonest activities, and particularly to take advantage of an environment where knowledge and information are critical, and possession of particular knowledge and information especially lends itself to carrying out dishonest activities against others who do not have the specific information and knowledge.
The extent and pervasiveness of dishonest, self-seeking activities by human beings is extremely difficult to gauge.
Dishonest activities that are carried out successfully have likely been concealed, and any researcher trying to estimate the magnitude of the aggregate of dishonest behavior is ignorant of the concealed activities that have taken place.
Dishonest activities on a large scale are discovered get reported in the news. There is an unending procession of wrongdoings in the commercial world reported daily news that exhibits great pervasiveness, interesting combinations of novelty and repetition, and sometimes surprising audacity and scope. In this daily news about commercial wrongdoing, making an evaluation is complicated by the presence of large swaths of gray areas of right and wrong and varying degrees of culpability of involved individuals. On the newsworthy level there is the problematic fact that the news reports only dishonest activities that were not successfully concealed, and one is at loss in trying to guess at the quantum of large scale dishonest activities that are successfully concealed.
Dishonesty that goes on a smaller scale that is not newsworthy also seems widespread but is essentially unknowable. Sometimes many small-scale activities of a similar, wrongful nature get reported by the news in the aggregate. On an anecdotal basis or through other experience, one gains a sense that lots and lots of "shenanigans" go on in any type of commercial situation. Usually it is the commercial provider who, because of the provider’s greater knowledge and information, is the perpetrator, but customers and consumers perpetrate a significant quantum of dishonesties as well. All in all, the total quantum of small-scale dishonesty is unknowable, but many people are frequently distrustful in hundreds or thousands of commercial transactions they enter into during their lives.
Business ethics is supposed to counter and lessen the perpetration of dishonest activity in the commercial world.
How serious is the U.S. society about business ethics?
The tools at society’s disposal for inculcating business ethics include religious instruction, teachings of business ethics at schools, honorariums and awards for ethical behavior, and infliction of shames and legal punishments upon perpetrators of wrongdoing.
It is submitted that, without the shames and punishments, society is rendering but a pathetic lick and a promise and is not at all serious about business ethics, and that society’s seriousness is manifested in how rigorous and exacting it is in designing and implementing a regime of shames and punishments for business ethics wrongdoers and violators. It is particularly troublesome sign about the lack of seriousness if society tries to fool itself into thinking that its system of shames and punishments evidences seriousness, whereas in fact the regime has woeful shortcomings in its approach and is obviously self-serving of the interests of a group that has substantial control over the regime and is clearly conflicted between its own interests and society’s interests.
The law is the chief instrument in a society’s regime of shames and punishments for business ethics violators. What is needed in the law for it to be rigorous and exacting?
One component is exacting attention to whether something is done deliberately and intentionally, or whether something is done negligently, or whether an action is without fault. If a party who is innocent and without fault is punished and force to pay a cost, that can undermine the regime in various ways. It can deflect attention from making sure that intentional wrongdoers are appropriately punished (i.e., the potential for societal self-deception to the effect, well, punishment was meted out so the law must have been doing its job). In this vein it offers opportunity for guilty parties actively to avoid responsibility and punishment by accomplishing a shift of punishment or costs to innocent parties. Further, would be wrongdoers can be encouraged by the idea that the responsibility can be shifted away from them if they are found out if they go forward with their wrongdoing. Innocent parties who are punished, and observers of innocent parties who are punished, will also lose respect for the law, all to the detriment of the law properly performing its important social function.
Also, a rigorous and exacting approach recognizes a significant difference between intentional wrongdoing and negligent wrongdoing. A regime of shames and punishments is rightful to be more unforgiving of intentional wrongdoing and less strict with negligent wrongdoing. This is on the basis that people, as regards intentional wrongdoing, can and should be required in an absolute way that, instead of making an intentional decision to do a wrong, they make the opposite intentional decision not to do the wrong. With respect to negligent wrongdoing, that can and does happen to everyone and our sense of deterrence is that it is proper, in trying to be exacting and rigorous, to not be as strict with negligent wrongdoing as we should be with intentional wrongdoing.
Differentiating among intentional wrongdoers, negligent wrongdoers, and parties who are without fault should be in the foreground in dealing with entities that represent conglomerations of individuals. If a society is serious about business ethics and is being exacting and rigorous in its regime of shames and punishments, it must make sure it punishes individuals who are responsible for intentional wrongdoing. If it is not serious about doing that, it is not serious about business ethics and is fooling itself or making a mockery of things in indiscriminately punishing innocent parties and letting guilty parties escape. The guilty parties who escape will go on to be repeat offenders, probably laughing on the way to the bank, other would be wrongdoers will take note and be encouraged to take their chances, and innocent and guilty alike will hold the law in contempt and disrespect.
In a typical case of corporate wrongdoing, what are the fundamentals of the situation?
The corporation’s main objective is to operate as profitably as possible. The greater the profits, the more shareholders and employees can be rewarded monetarily. There are pressures on a daily basis for employees to advance the corporation’s business. Time frames can be quite short, such as for the corporation to attain this month’s or this quarter’s or this year’s revenue and profit goals. Bonuses for the contributions that employees make towards those goals are typically paid on an annual basis. The employees’ jobs are their means of livelihood and of providing for their families. Plugging away every day to keep the business running profitably and giving security for this year’s source of income is a top priority for employees.
The corporate wrongdoing in question is usually something that benefits the corporation financially, such as increasing revenues, reducing expenses or avoiding or lessening potential losses in the corporation’s business. The corporate acts and actions that comprise the wrongdoing are conceived of, authorized and carried out by some of the officers and employees of the corporation, usually a small fraction of all the corporation’s officers and employees. Of the perpetrating group, some have more complete knowledge of the overall plan and the nature and details of the corporate acts in question. A large number of officers and employees may have no knowledge of the wrongful actions of the corporation. Most or all of the shareholders are likely ignorant that wrongdoing is going on. The officers and employees who do know what is going on view it as part of their job performance to do things that benefit the corporation’s business. Doing this as part of their job shows value to the corporation and it may augment the amount of bonuses they receive or result in a salary increase for next year.
If an officer or an employee who is part of the group that knows what is going on thinks the activity is questionable or that it is a clear wrongdoing that has risks of being discovered, and if the officer or employee has qualms about what is being done, there is significant internalized pressure nonetheless to go along with what the corporation is doing and to not try to block the activity. Raising objections can be viewed very negatively by one’s peers in the corporation or by higher ups and result in adverse impact on the employee’s status and compensation in the corporation. The actions in question may be in a gray area and not clearly wrong. A tipping factor for the employee to go along can be a perception that, if something untoward happens as a result, only the corporation as a whole will bear the brunt and the employee will escape any personal punishment for his role in the corporate wrongdoing. In short, all corporations are in the business of earning profits, by going along the employee is just doing his job and what others wanted him to do, the requested action is in a gray area, his employer will not punish him for what he did, and any other corporation that might learn what he did to help his current corporation and of his willingness to go along with what others wanted to him to do will not hold that against him in getting another job.
Then what happens if, at some point, the corporate wrongdoing is discovered?
Plaintiffs’ lawyers are part of the human species and their most powerful motivations are the same self-seeking motivations that are the most powerful for the rest of us. For plaintiffs’ lawyers, the big bucks are in suing the corporation. Those big bucks come in small bits out of lot of different pockets, many of which are entirely innocent of the wrongdoing, including all the shareholders who may receive slightly reduced dividends, innocent employees who may suffer slightly reduced wages, or future customers of the corporation who wind up paying slightly higher prices later on.
To the extent that is all that happens and no special punishment is ever imposed on the group of officers and employees who were in the know, there is going to be a substantial failure of deterrence effect, to wit, the officers and employees who were responsible are confirmed in their previous view that the wrongdoing they participated in had short term favorable financial results for the corporation, they the officers and employees got rewarded for the year in the compensation they received, the wrongdoing might never come to light and everything would be the rosier for it, too bad the wrongdoing was discovered, but we officers and employees have come away basically unscathed, and either our current employer corporation may try a new trick next time, or else we have proved our mettle and the next corporation that employs us will be interested in seeing what we can come up for it.
If big bucks come from going after the corporation and getting small amounts out of the pockets of a very large number of innocent employees, shareholders and customers, big bucks do not come from going after individual officers and employees. While fines or liabilities that could get imposed on individual officers and employees are not those big bucks for plaintiffs’ lawyers, they can still be big to the individual officers and employees and can have deterrent effect on their future actions and the actions of officers and employees at other corporations.
To be serious about business ethics, society must be rigorous and exacting in fining, jailing or otherwise punishing the corporate officers and employees who are responsible for conceiving of, designing and implementing the act or actions comprising the wrongdoing. Otherwise, it is fair to say that society is not serious about business ethics and is fooling itself or making a mockery of things if all that goes on under the law is large transfers of funds from innocent parties to other parties that have suffered harms or losses as a result of actions of responsible officers and employees who go unpunished for their bad deeds.
Just how unserious is society about business ethics, and, if it is unserious, why is it unserious?
It is submitted that the answer to the first question is that our United States society is unserious about business ethics, and a main contributing reason is society’s inability to confront plaintiffs’ lawyers and apply to the precepts of business ethics to them, i.e. subjugate the powerful self-seeking, self-interested motivations of their desire for money to the greater societal interest of being serious about business ethics and going after and punishing responsible individuals for corporate wrongdoing.
The crux of the problem can be seen in a comparison of plaintiffs’ lawyers with governmental regulators, criminal prosecutors, state attorneys general and legislators. The latter parties work on behalf of the public to design, implement and enforce laws and regulations and a regime of legal punishment to curtail dishonest commercial practices and conduct. The compensation they receive is reasonable for the work done, and in particular it is not geared to the dollar amount of economic activity that their public work affects (i.e., legislators and regulators don’t get paid millions of dollars because they put into effect large governmental budgets, levy commensurate amounts of taxes, and write and enforce laws and regulations that affect billions of dollars of economic activity and that impose and allocate large economic costs on and among businesses, consumers and other parties.)
Plaintiffs’ lawyers perform a similar public role in the design, implementation and enforcement of legal punishments to curtail dishonest commercial practices. A problem arises, however, that they receive huge amounts of compensation that is geared to the amounts of economic activity that their work affects and economic costs that they get shifted around among various parties, and the larger the scope of their lawsuits and the greater the dollar amount of the costs they can get shifted around, the greater their compensation. The plaintiffs’ lawyers’ compensation thus creates very powerful incentives for them to seek the objectives of (i) expansion of harms or detriments for which a payment should be made, (ii) higher rather than lower amounts that should be paid, (iii) expansion of liability where there is no fault, (iv) disregard of distinctions between intentionally culpable, negligently culpable and faultless defendants (and other parties who bear the cost), (v) disregard of culpability of plaintiffs in their own injuries and harms, (vi) disregard of rational cost/benefit principles, (vii) the invocation of junk science, and (viii) expansion of the usurpation by them and the courts of the powers of the legislative branch and the executive branch regulatory apparatus.
As discussed above, the foregoing objectives are inconsistent with what is needed for the law to be serious about contributing to the inculcation of business ethics. The plaintiffs’ lawyers have been very successful in achieving those objectives. This has bred contempt and disdain for the law, swallowed up large amounts of public resources that could be available for serious activities to inculcate business ethics, and has greatly undermined that inculcation as more fully discussed above.
Our country has seen enough in recent years of baneful effects of large amounts of compensation creating conflicts of interest and the following of a course of action that will increase that compensation and contrary to obligations owed to other individuals and groups. Corporate executives standing to gain fortunes from stock options committed massive accounting frauds that contributed to maintaining and increasing lofty stock price levels that would enormously benefit them under their stock options and other compensation arrangements. Accountants have been charged with faulty accounting work arising from the conflict of having lucrative consulting work with the audit client. Stock analysts have been inappropriately influenced in their stock reports by reason of getting compensation based on investment banking business their employer gets from companies the analyst covers. Brokerage firms corrupted the IPO market by allocating stock in hidden exchanges for inflated commissions on unrelated transactions. Mutual funds and insurance brokers have acted in wrongful disregard of conflicts of interest in order to increase their revenues and profits.
Plaintiffs’ lawyers are no different. They are conflicted to the core by their compensation arrangements and are incapable of rendering to society any honest evaluation of how well the current civil liability system is serving society’s legitimate interests, including that of the law being an effective tool for the inculcation of business ethics. Until U.S. society (including its lawmakers) can understand what is going on with plaintiffs’ lawyers, confront them and apply the precepts of business ethics to them, and alter the civil liability system in ways that evidence greater seriousness about the inculcation of business ethics, U.S. society will simply remain unserious about business ethics.