Ethics Newsline®

As the computer revolution transforms the corporate world, it raises all sorts of ethical issues. Among them: Should everyone from CEO to custodian have email access? If so, should the boss monitor everyone to be sure they use computers strictly for “business” reasons?

Soon after a friend posed that conundrum to me, I found myself driving past one of New England’s 19th-century woolen mills — transformed, these days, into a banking facility. In the industrial revolution, when they were spinning thread instead of credit, they didn’t fear the introduction of computers. So what, I asked myself, might they have feared?

Well, how about a communication device that was, in its day, revolutionary: the inexpensive lead pencil? Imagine the arguments that could rage around a 19th-century corporate decision to provide pencils for the entire staff.

On one hand, a pencil for every employee could be a tremendous breakthrough. People at all levels could communicate quickly, easily, without fear of inkblots and poor penmanship. What’s more, since they no longer needed inkwells, they could carry their pencils with them throughout the whole building. Why, they could even jot down quick notes standing up (imagine that!) in the halls (astonishing!).

But consider the dangers. What would they use the pencils for? What if they began writing personal notes to one another? Maybe they’d use their pencils for noncompany business like jotting down shopping lists. Pencils could also be used perversely by one sex to woo the other, by gamblers to mark their racing forms, or by the lascivious to line up prostitutes — right from work. And, given their small size, pencils might even be stolen and sold on the black market.

But suppose, despite the downside risk, our ancestral woolen millers took the plunge for pencils. Might they then seek to control illicit use? First would come the codes of compliance, the training programs, the posted placards: “Use of pencils for private writing is strictly prohibited.” They would instruct the senior staff to monitor their staffs — looking over shoulders, snooping into dark corners, keeping a sharp eye out about town. They might even take the custodial route, instructing office cleaners to scan the trashcans for crumpled love notes and other evidence of misuse.

And then one of the mills, in an epiphany of trust, would decide to view its employees as fundamentally honest. They would give pencils to everyone. Would that eliminate the temptations of theft, prostitution, and gambling? No. But it would shift the focus from managing the pencils to managing the temptations. Introducing pencils, they would also introduce an ethic about their use. Imagine the change that would ensue — from policing miscreants to creating value. Imagine the resulting uptick in employee morale, in teamwork, in retention. And imagine the surge in productivity — enough to offset the cost of the few pencils stolen and a few hours misused each year.

The point? With this hypothetical history in mind, consider the results of a new study from International Data Corporation of Framingham, Massachusetts. It finds that the market for software that monitors email — letting management search for harassing letters, leaks in trade secrets, or other misuse by individual employees — will explode by 14 times over the next four years into a business worth $952 million. Already, says another study done in April by the American Management Association, 73 percent of major U.S. firms record and monitor employee phone calls, 54 percent monitor employee internet use, and 38 percent save and review employee emails.

You can see the corporate temptation for monitoring. But maybe there’s another way. Yes, the introduction of computers is new. But the ethical issue they raise is as old as business itself. And over time there have been twin responses to this issue: Some plump for compliance; others move toward ethics.

These days, the issue of email monitoring is being presented as a question of privacy. It’s deeper than that. The real question is whether we settle for a culture of compliance or strive to create traditions of trust.

(c)2000 by Rushworth M. Kidder

The head of the Canadian Centre for Corporate & Public Governance, J. Richard Finlay, told the press last week that it often “takes a train wreck to get better transportation laws and higher safety standards.” Referring to an ethics scandal that has tarnished the reputation of one of the world’s premier banks, he added: “This has been a train wreck in the investment community….”

Those comments are from our lead story this week, where we link you to various reports about allegations that traders for the pension arm of the Royal Bank of Canada used financial trickery to boost the perceived value of their portfolios. We follow with a story from our Canadian correspondent capsulizing some of the media’s take on the incident.

Next, another item dealing with finance: a move by bankers in Liechtenstein to abolish anonymous accounts.

From the international business desk come three stories: a report claiming Coca-Cola’s brand value has been diminished, partly on account of European contamination scares and U.S. discrimination suits; a denial by the Angolan government of charges that it accepted bribes; and an end to so-called “bonded labor” in Nepal.

Two stories this week deal with the intersection of ethics and legislation: a bill to ban online gambling and a reconfiguration of many U.S. retirement-contribution laws.

We follow with a report form the environmental file dealing with a multimillion dollar settlement in an air-pollution case.

And from the health and medical ethics desk, we have a summary of and links to a controversial and intriguing essay questioning the ethics of recruiting doctors from the developing world to work in wealthy nations.

Our report concludes with a Trendlines feature on a spike in the number of discrimination suits filed against U.S. companies, and a “Whatever Happened to” follow-up on a hot controversy over British ice cream.

Have a productive, ethical week.

– Carl Hausman

TORONTO
The pension branch of a Canadian bank caught up in a stock-manipulation scandal that has shaken the securities industry last week agreed to a far-reaching settlement with Canadian regulators, including a $2 million fine and suspension of many of the traders and executives accused of taking part in a plan that artificially inflated the value of portfolios.

The so-called “high-closing scandal” at the Royal Bank of Canada allegedly involved trades made late in the day or on the last day of the year that boosted the paper value of the holdings, producing high closing numbers used to tout the value of stocks even though those stocks may have traded, on average, at much lower rates throughout the rest of the day or year.

Under terms of the settlement, the firm’s senior vice president, Peter Larkin, was fined $5,400 and banned from securities trading for life. Other senior executives were barred from being officers at securities firms for varying periods of time, the Reuters news agency reported.

In addition, 21 employees received suspensions and/or fines totaling nearly $370,000 plus court costs. Royal Bank also agreed to submit its pension-fund trading procedures for review by an independent auditor, and to adopt that auditor’s recommendations for change, according to Reuters.

“All clients who purchase investments through an adviser … have the right to assume registrants will act ethically,” Ontario Securities Commission head John Geller said when announcing last week’s settlement.

J. Richard Finlay, head of the Canadian Centre for Corporate & Public Governance, told the Globe & Mail that the high-profile scandal should cause companies to rethink their policies and devotion to ethics.

“I think it really behooves the entire investment community to look at better ways of instilling a culture of ethics and values and honesty in those organizations…. It’s often the case [that] it takes a train wreck to get better transportation laws and higher safety standards,” Finlay told the Globe & Mail. “This has been a train wreck in the investment community….”

Special to Newsline from Canadian correspondent Errol P. Mendes

TORONTO
The Ottawa Citizen is reporting that some observers of the capital markets in Canada are dismissing the apology by the chairman of the Royal Bank of Canada, John Cleghorn, for the alleged stock manipulation practices of its pension management arm, Royal Trust, as belated and insincere.

In an open letter published in Canada’s leading newspapers on July 14, two weeks after the Ontario Securities Commission (OSC) went public with its stock manipulation charges against Royal Trust, Mr. Cleghorn called the actions of some employees at Royal Trust “unacceptable” and on behalf of the board of directors and management he went on to apologize to the clients and community at large “for this situation.”

But David Driscoll, vice president of equities at Toronto Capital Markets Inc., called the apology “banal” and “hollow,” according to the Ottawa Citizen.

The OSC has charged that staff at Royal Trust “intentionally, repeatedly, and openly” manipulated the end of trading closings for 26 stocks at the end of 1998 and into 1999. The OSC accused the management and board of directors of being “willfully blind” to this manipulation.

According to the Ottawa Citizen, one business expert is claiming that a major failing on the part of Mr. Cleghorn was to leave the initial crisis management response to less senior corporate officials, such as the vice president of communications. According to the Citizen, professor Alan Middleton of the Schulich Business School at York University in Toronto is quoted as saying, “Public relations people learned way back during the Tylenol scare that if there’s a problem, don’t hide it; fess up to it and hope it goes away quickly…. But even Bill Clinton didn’t get it, so why should a bank?”

BENDERN, Liechtenstein
Liechtenstein’s banks last week announced that they would no longer allow anonymous accounts, a move they hope will help alleviate the principality’s reputation as a harbor for money laundering.

Liechtenstein, a mountainous principality of 32,000 people between Austria and Switzerland, has been accused of condoning money laundering in two separate reports from the G7 economic power group and the Organization for Economic Cooperation and Development, the BBC reported.

Stung by the criticism, the Liechtenstein Bankers Association (LBA) last week announced it would crack down on the movement of illicit funds through Liechtenstein accounts by launching a “Know Your Customer” program.

Under the program’s terms, banks will require accountholders and their agents to disclose the names of depositors they represent. Those identities will then be verified by the banks, according to the Associated Press.

“By extending our own customer identification checks to all customer relationships, we are expressing our determination to keep dirty money out of Liechtenstein,” LBA president Benno Buechel said.

The program is expected to affect about one-third of the customers at the LBA’s 10 member banks. Association leaders expressed hope that the six banks outside of the LBA will enact similar measures, the Associated Press reported.

The new ban on anonymous accounts currently is voluntary, but is expected to eventually become part of Liechtenstein’s banking law, according to the AP report.

NEW YORK
Coca-Cola, hurt by contamination scares in Europe and discrimination suits in the United States, lost 13 percent of its brand value and came perilously close to losing its top-ranking spot among brand names worth a billion dollars or more, according to a report released last week by the Interbrand consultancy group.

Interbrand calculates brand value by gauging market capitalization, revenues, and other factors, CNET reported.

Coca-Cola, long considered unassailable as the dominant brand name in the global marketplace, is in danger of being bumped from the top spot by Microsoft Corp., which enjoyed a 24 percent rise in name value over the past 12 months ending in June, according to Interbrand.

The crash in Coca-Cola’s value, coupled with Microsoft’s rise, puts the companies only $2.3 billion apart, with Coke valued at $72.5 billion and Microsoft at $70.2 billion.

To assess the threat to Coca-Cola’s top position, Interbrand points to last year’s rankings, in which Coke held an $83.8 billion value — far above Microsoft’s $56.7 billion, reported the Financial Times.

Over the past year, Coke has been hard hit by contamination scares in Europe, massive employee discrimination suits in the United States, slow sales worldwide, and corporate turnover.

Microsoft, beset by a landmark antitrust case with the U.S. government, seems to have evaded a similar fate, enjoying increased popularity despite its professional woes, noted the Times.

“Microsoft has actively managed its brand over the last year. I think they recognize the value of retaining goodwill of customers,” Interbrand executive Raymond Perrier explained to the Associated Press. “Coke has been somewhat arrogant and complacent.”

Tech firms IBM, Intel, and Nokia rounded out the top five rankings in Interbrand’s survey. Though U.S. firms took 42 of the 75 slots, Interbrand noted that Ford was the only U.S. automaker to make the cut.

LUANDA, Angola
Angola’s president last week denied allegations that his administration had accepted bribes from France’s state-owned oil firm, Elf Aquitaine.

Two weeks ago, the former director of Elf Aquitaine’s African division, Andre Tarallo, said that his company had paid roughly $40 million annually in bribes for the past 20 years to curry favor with politicians around the world, the BBC reported.

Tarallo named Angola, where oil accounts for 90 percent of all national exports, as the recipient of one of the largest series of bribes in Africa.

The Angolan president’s office last week said any actions taken to help Elf Aquitaine with its African acquisitions were simply sound business actions, and warned that Angola may take legal action to refute the claims, according to the BBC.

KATHMANDU, Nepal
Nepal last week announced an immediate end to the country’s use of bonded labor, the practice of forcing men, women, and children into servitude while they pay off their debts.

Nepal has approximately 36,000 bonded laborers, many of whom were forced into the condition by landlords after being unable to pay their rent for housing or land, the BBC reported.

The landlords then often pay a wage so low that the workers are forced to take out loans, creating a vicious cycle of unending debt and servitude.

A recent series of protests by bonded laborers forced the government to examine the practice and move toward its eventual abolition.

Land Reforms minister Siddha Raj Ojha warned that employers who continue to use bonded laborers could face legal action, according to the BBC report.

Last week’s government decree sets all bonded laborers free immediately and writes off their debt.

WASHINGTON
Online gambling firms last week won a reprieve from the U.S. House of Representatives, which voted down a proposed bill that would have barred use of the Internet for gambling and placing bets.

The bill, which would have required Internet service providers to pull the plug on gambling sites, won a majority of votes but fell 25 short of the 270 needed to pass the measure via an expedited process that would not allow amendments to the bill.

Odd alliances marked both sides in the House battle, with conservative coalitions, gambling interests, Republicans, and Democrats scattered throughout, noted the Washington Post.

Horse and dog racing groups had pushed for the bill’s passage, hoping that their weakening hold on gamblers would be bolstered by the elimination of competition from online gambling.

More than 700 online sites currently offer gambling activities, pulling in roughly one million U.S. users each day, according to a report from the New York Times. Profits from such sites are expected to exceed $3 billion by 2002.

While those figures concern conservative evangelists and moderate lawmakers alike, there is little agreement about how to tackle the thorny issue without spawning a full-fledged debate over government regulation of the Internet.

Rep. Christopher Cox (R.-Calif.) praised the voted-down bill as “well-intentioned,” but cautioned that it would have created “enormous regulatory problems…. You would have the federal government dictate to Internet service providers what services they can offer.”

Similar sentiments doomed the measure before it could reach President Clinton, who had criticized the bill for exempting online gambling on jai alai and horse and dog races, observed the Times.

Sue Schneider, chairwoman of the pro-gambling Interactive Gaming Council, welcomed last week’s House vote, warning that an outright ban is both unnecessary and impractical since many online gambling sites are based outside of the United States and are therefore exempt from U.S. law.

Schneider and other industry representatives have said that legalizing the business under government regulation and taxation — a system already practiced in 50 other countries — would be a better plan, according to the Times.

WASHINGTON
In an attempt to adapt to a changing workplace and financial environment, the U.S. House of Representatives last week overwhelmingly approved a series of measures designed to make it easier for employers and workers to contribute to pension and individual retirement account (IRA) plans.

“The workplace has changed, our retirement needs have changed, and the pension system has changed,” said Bill Archer (R.-Tex.), head of the House Ways and Means Committee. “Now is the time to update our pension system and expand IRAs so that more Americans can have the opportunity for a safe and secure retirement.”

Archer and other lawmakers warned that a decade-long trend of increasing red tape has dangerously reduced the number of employers offering pension plans to their workers.

According to Rep. Rob Portman (R.-Ohio), co-author of the House bill, 114,000 businesses offered traditional pension plans to their workers in 1987. Ten years later, that number had plummeted to 45,000.

Seventy million workers today lack any type of pension coverage — a problem especially prominent among smaller U.S. business and nonprofits, reported the Baltimore Sun.

Last week’s House bill is an attempt to reverse that trend by making it easier for employers to fund pension plans and for employees to contribute a greater portion of their salaries to employer-sponsored 401(k) and IRA plans.

The bill would relax government-imposed restrictions, make it easier for workers to transfer their pension plans from one employer to another, and shorten the vesting period for pension-benefit eligibility from five to three years.

The bill also would raise the limit on individuals’ contributions to Roth IRAs from today’s $2,000 to $5,000 by 2003. It would also lift the limit on 401(k) contributions from the current $10,500 to $15,000 in 2005.

Though the bill now moves to the Senate, where it already enjoys considerable support, it is expected to receive a frosty reception from President Clinton, who says the measures benefit more affluent employees at the expense of low-income workers.

A final version of the bill, which may be expanded to help boost the contributions made by poorer workers, is expected after negotiations with the White House in the fall, according to the Sun report.

WASHINGTON
Oregon-based wood products company Willamette Industries last week agreed to pay more than $90 million to settle charges that the company evaded Clean Air Act regulations at 13 plants in four states.

The company’s settlement includes an $11.2 million fine, $8 million to sponsor environmental projects, and $74 million to fit its factories with pollution-control devices, the Associated Press reported.

The settlement follows a government investigation into Willamette’s factory expansions over the past 20 years, U.S. attorney general Janet Reno explained last week.

Reno said that when the company built new factories, “Willamette did not follow the law.” As a result, she claimed, “thousands of tons of pollution were illegally released into the air.”

Environmental Protection Agency head Carol Browner said the company’s planned reforms to factory emissions will “keep an average of 27,000 tons of pollution out of the air. That is the equivalent of taking 287,000 cars off the road … approximately the number of cars in the city the size of Portland.”

Willamette, which denies any intentional wrongdoing, insists that it obtained all the needed permits from state regulators when expanding its operations. Still, the company conceded that its factories failed to meet national pollution limits.

NEW YORK
Wealthy nations are ethically obligated to re-examine the way they recruit trained medical personnel from the world’s developing nations because the migration of professionals is hurting the developing world’s healthcare systems, two researchers warned last week.

“The ethics of national policies, which allow countries to recruit en masse the most qualified physicians, at no cost or penalty to themselves, should now be challenged,” Dr. Peter Bundred of the University of Liverpool, U.K., and Dr. Cheryl Levitt of McMaster University in Canada, wrote in the current issue of the medical journal Lancet.

Bundred and Levitt contend that such policies, which effectively lure trained doctors away from developing nations, deplete those nations’ healthcare systems and represent a threat to struggling populations.

Moreover, their report suggests that third-world doctors who move to affluent nations often are treated inequitably, receiving assignments in less-desirable locales, according to the Reuters news agency.

In the United States, for example, the report’s authors argue that many inner-city hospitals “rely almost exclusively on graduates of foreign medical schools” to provide services to the poor.

In Britain, it’s no better, Bundred and Levitt contend, noting that foreign graduates are often relegated to “areas of the country in which British doctors would not live, and in work that was below their professional qualifications.”

It is reasonable, the report notes, for physicians from developing nations to continue their training abroad. But if they stay after their training is completed, affluent countries should offer some form of compensation to the poorer nations that paid for the bulk of the doctors’ education, according to Bundred and Levitt.

The report calls for the creation of an international code of ethics “for recruiting physicians from less-developed countries” to guard against the destabilization and “disintegration of healthcare for the world’s most impoverished citizens.”

NEW YORK
The number of discrimination lawsuits filed against U.S. companies has more than doubled since 1992, a trend that is expected to continue, according to a report last week from the Reuters news agency.

During the fiscal year ending last September, plaintiffs filed 22,490 suits accusing companies of civil rights violations — most commonly racial, sexual, and other types of discrimination.

The boom in bias suits caught the public eye back in 1996, when Texaco settled with plaintiffs in a racial discrimination case for a record $176 million. The next year, race bias suits jumped 11 percent, according to Reuters.

Over the past year alone, U.S. businesses — including Boeing, Coca-Cola, MetLife, Nextel Communications, Prudential, and a host of others — have been charged with discriminating against employees or customers.

Reuters notes that those complaints are costing U.S. companies an average of $100,000 each time the case goes before a jury. And a third of those juries are slapping companies with an additional $100,000 in punitive damages.

As the price tag and probability of on-the-job bias rises, a growing number of businesses are seeking refuge by taking out insurance policies against discrimination suits, a type of policy offered now by more than 60 insurers.

Another factor fueling the rise in civil rights complaints may be the growing number of minority workers employed by U.S. businesses, analysts suggest. The U.S. Labor Department projects a 20 percent rise in black employment and a 37 percent rise in Hispanic employment by 2008, according to Reuters.

LONDON
Britain’s biggest ice cream company, Birds Eye Wall’s, last week bowed to government pressure, saying it would change its distribution policies to break what the government claimed was a stranglehold on the nation’s ice cream market.

Birds Eye, a division of Unilever, came under official investigation earlier this year after small-store retailers complained that they were being strong-armed into stocking only Birds Eye ice cream, the BBC reported.

According to the complaints, Birds Eye often required exclusivity contracts and routinely barred retailers from storing other firms’ ice cream in freezers given to the retailers by Birds Eye.

Because many stores only have space for one freezer, the retailers said the Birds Eye policy essentially froze out the company’s competitors.

Last May, the U.K. Competition Commission agreed, publishing a report that documented Birds Eye’s lock on the market for impulse ice-cream novelties such as prepackaged ice cream cones.

While Birds Eye insists its policies are “perfectly legitimate,” the company last week conceded defeat, promising changes to avoid “further turbulence in the marketplace,” reported the BBC.

U.K. Department of Trade and Industry secretary Stephen Byers welcomed Birds Eye’s announcement, saying “consumers should see greater choice and keener prices in the shops.”

From the Gallup News Service:

“The American public disagrees with the verdict handed down by the Florida jurors who … awarded $145 billion dollars to smokers who have become ill as a result of smoking. Not only do a majority of Americans say that they disapprove of the verdict, a majority also say that smokers themselves, rather than the tobacco companies, are the ones responsible for the injurious effects of smoking. The tendency of Americans to blame smokers rather than the cigarette companies has been evident in Gallup poll data for the past several years. These feelings persist despite the fact that almost all Americans consider smoking to be harmful and to be a cause of lung cancer and heart disease.

“In 1994, Gallup first asked the American public where they put the blame for smoking-related problems. At that time, 64 percent of the public said that smokers themselves are either mostly or completely to blame for ‘the health problems faced by smokers in this country,’ while only 25 percent said that the tobacco industry was either completely or mostly to blame. Now, six years later, in a poll that came immediately in the wake of the Florida verdict, there has been very little substantive change on this measure. Fifty-nine percent of Americans in the current poll say that smokers are to blame for their own problems, with just 26 percent saying, as the jurors did, that the tobacco companies are mostly or completely to blame. Fourteen percent say both are to blame equally.

“This same type of sympathetic support for industry has also been found in other areas. The public was asked last December if they sided with the U.S. Justice Department, which was attempting to recover the costs associated with gun-related crimes, or with the gun manufacturing industry. In this situation, the public sided with the gun industry, by a 67 percent to 28 percent margin, further suggesting that Americans have less sympathy for efforts to hold industry accountable for what the users of their products do than some might have imagined….

“Support for the Florida decision declines with age, although in no case does a majority of any age group approve. Forty-four percent of younger Americans, ages 18-29, say that they approve, compared to 34 percent of those who are 50 and older.

“Support for the verdict is much higher on the two coasts, with those in the Midwest and the South much less likely to approve. In fact, only 28 percent of Americans living in the South — home of much of this nation’s tobacco production — say they agree with the jury, compared to 46 percent of Easterners and 45 percent of those living in the West….”

“The lure of the distant and the difficult is deceptive. The great opportunity is where you are.”

– John Burroughs (U.S. naturalist, 1837-1921)