Can business be both profit seeking and ethical?

The theory of late economist Milton Freedman, said that seeking profits for shareholders would alone allow a company to prosper, keep people employed, and fuel the economy. 

In a world where people are aware of destructive corporate practices, consensus for this sort of thinking is slowly growing dim.

Businesses play a vital role in the economy by creating jobs, fostering innovation and providing essential goods and services. However, there is a need to adhere to values that allows to also deliver value to customers, invest in employees, deal fairly and ethically with our suppliers and support the communities in which we work.

From antitrust and privacy concerns in the tech world to compliance officer liability in the pharmaceutical industry to unethical practices in the banking and accounting professions, more than a dozen companies made Compliance Week’s list of the biggest compliance fails in 2019.

Big Tech

In March, the European Commission hit Google with a €1.49 billion (U.S. $1.7 billion) fine—the third in three years for the internet giant—for breaching competition rules. In that case, the Commission fined Google for blocking rival online search advertisers from getting a foothold in the market.

In the States, Facebook was facing regulatory troubles: After a year-long investigation prompted by the Cambridge Analytica scandal, the Federal Trade Commission in July slammed the social media giant with a groundbreaking $5 billion penalty for deceiving users about their ability to control the privacy of their personal information. It was the largest fine ever handed out for violating consumers’ privacy and nearly 20 times more than the largest penalty related to data privacy or security ever imposed worldwide.

More impactful than the penalty amount was the FTC’s 20-year settlement order, which imposes significant structural reforms on how Facebook must do business moving forward, including greater corporate accountability and more rigorous compliance monitoring.

Both actions were just a precursor of more to come.

Opioid drug manufacturers and distributors

This year also revealed the pharmaceutical industry has a serious drug problem, following several significant enforcement actions against drug makers, including:

  • $225 million global resolution Insys Therapeutics reached in June to resolve separate criminal and civil investigations concerning deceptive marketing and distribution of its opioid drug, Subsys, before subsequently filing for bankruptcy.
  • A $700 million potential settlement Novartis announced in July in a protracted lawsuit over allegations the Swiss drug maker paid hundreds of millions of dollars in kickbacks to doctors to induce them into prescribing drugs to patients to boost their sales.

Rochester Drug Co-Operative, one of the 10 largest pharmaceutical distributors in the United States, and its former chief compliance officer, William Pietruszewski, were also among those to face criminal charges for “knowingly and intentionally” violating federal narcotics laws by distributing opioids to pharmacy customers that it knew were being sold and used illicitly.

In a statement, DEA Special Agent in Charge Ray Donovan said the charges “should send shockwaves throughout the pharmaceutical industry, reminding them of their role as gatekeepers.” Compliance officers should heed the warning, particularly given that the Justice Department has indicated in its budget request for 2020 that fighting the opioid crisis remains a priority.

KPMG

Among the Big Four, KPMG has had a difficult  year, culminating in a $50 million settlement with the Securities and Exchange Commission over allegations that KPMG audit leaders not only stole confidential information belonging to the Public Company Accounting Oversight Board in an effort to improve the results of the PCAOB’s annual inspections of KPMG audits, but also cheated on internal exams that were intended to test whether they understood a variety of accounting principles and other topics of importance.

Mobile TeleSystems

Russian telecommunications provider Mobile TeleSystems (MTS) in March reached settlements with both the Justice Department and the SEC to resolve violations of the Foreign Corrupt Practices Act relating to bribes paid to an Uzbek official who was related to the former President of Uzbekistan and had influence over the Uzbek telecommunications regulatory authority.

“The company engaged in egregious misconduct for nearly a decade, secretly funneling hundreds of millions of dollars to a corrupt official,” said Charles Cain, chief of the SEC Enforcement Division’s FCPA Unit.

Banks that failed to heed compliance warnings

CW reported the handful of banks that ignored the sound advice of their compliance officers. In one case, a Swiss Bank ignored recommendations made by its compliance officer to put controls in place to reduce the risk of helping bank clients evade U.S. taxes. Ultimately, the bank made no formal policy changes until two years later, when a grand jury indicted a Swiss asset manager for his role in the tax evasion scheme. The bank would pay $10.7 million to the DOJ to resolve the case.

In PP v Nick Leeson, Nick Leeson by his unethical, unauthorised and criminal acts at the Singapore Xchange  collapsed the UK  Barings Bank , a 223 year old bank , which was established in 1762 and which up to 1995 one of the world’s oldest merchant banks, renowned for having facilitated the Louisiana Purchase. The Bank declared bankruptcy after losing 827 million pounds.  

The most prominent ethical deficiency in this case was that Leeson headed both the trading desk and the settlement operations: duties usually filled by two separate people. Lesson was able to settle and account for his open trades which allowed him to hide fraudulent activities. Not only was he able to to hide his losses of 200 million pounds, in 1994 he actually reported a profit of 102 million pounds, which amounted to 10% of Barings’ annual profit.

You need to separate the control groups from the trading groups.

Regulators across the world then became more aware of risk management; and imposed internal safeguards against fraud like enforced leave of financial employees. 

How can we better instill a true, dynamic, awareness of risk management in organisations, where compliance and ethics programmes are not mindlessly followed limits on bad behaviour, but rather where they are living practices toward good behaviour within the organisations and without?

Unless we heed the lessons there will be more Nick Leesons, more collapsed institutions and more customers in pain. 

But why do managers, even at large, prestigious banks, – permit an environment where unethical behaviour seems to flourish just beneath the surface?

A number of people have attempted to answer this question.

An article in the Harvard Business Review (Ethical Breakdowns, by Max H. Blazerman and Ann F Tenbrunsel, also co-authors of “Blind Spots: Why We Fail to Do What’s Right and What to Do about it”) highlights five factors that can lead managers to overlook unethical behaviour in their organisations:

  1. Ill-conceived goals. Goals set to encourage positive behaviour inadvertently  reward bad behaviour 
  2. Motivated blindness. We may overlook bad behaviour when it serves our own self-interest.  
  3. In direct blindness. Unethical behaviour is easier to overlook when it is carried by a third party.
  4. The slippery slope. Lapses in ethical standards are easy to miss if the standards erode slowly.
  5. Overvaluing outcomes. When the ends are positive, these are less likely to be scrutinised.

To sum up, here are two points to end off with:

Financial institutions need to review and perhaps restructure their compensation systems so that ethical behaviour, good judgment and solid decision-making processes are rewarded, not just outcomes alone.

Top managers need to ask themselves: “What type of behaviour do we want our employees to exhibit, and how does our compensation/reward system encourage or motivate that behaviour?”  

Second: Organisations must promote an internal culture that recognises the reality of situational influences.  People who make bad decisions, lose their moral bearings, and get caught in a cycle that they did not know how to break.  The Nick Leeson case is clear example.

Let us return to the question asked in the title: Can an organization be profitable and ethical at the same time? Is there a balance between being successful and meeting one’s obligations to society?

Certainly.

Organisations such as Google, Kellogg and Xerox are living proof of this concept. All three well-known and successful companies appeared on the Forbes’ “Most Ethical Companies” list for 2015.

The award focuses on organisations that have missions and procedures revolving around environmental-friendly approaches to business practices. For example, Google’s motto of “Don’t be evil” seems to align with its business practices.

The company’s Google Green Programme has donated over US$1 billion to renewable-energy projects and has decreased its own impact by investing in energy-efficient buildings and transport.  Google is well known for its extensive employee benefits package, which includes access to free health care and treatment from on-site doctors, free legal advice and free on-site nursery.

Organisations in the 21st century are exposed to dynamic changes, including geopolitical and protective policies. Corporations rise and fall based on their values, business culture and associated actions. Changing corporate values, breeding a principled environment and adapting customised training based on organisational need are paramount for the success of these organisations.

The above article is based on a speech by Richard Magnus, a retired senior district judge and chairman of Temasek Foundation Cares and Temasek Foundation Nurtures. This was presented in a speech to the RHT GRACE Institute on November 5th

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