For more information, see this week’s Research Report.

by Rushworth M. Kidder

America has a love-hate relationship with risk taking. We adulate the guts, nerve, and bravura of those who hazard everything, though we recoil at their ego and arrogance. While we fawn over the bold and daring, we’re put off by their Teflon insensitivity and unyielding fanaticism. Put simply, we’re fascinated by risk takers, often admiring of what they do but sometimes repulsed by the way they do it.

That’s nowhere clearer than in the nation’s latest round of outrage at executive bonuses, which coalesced last week into a House bill to limit executive pay. The 237-to-185 vote was fueled by a new report on Wall Street’s 2008 bonus practices, released by the New York attorney general’s office. It found that financial firms didn’t distribute bonuses broadly in small dollops, but concentrated them instead into massive payments to the firm’s swashbuckling traders and high-stakes risk takers. Most galling, these payments were made while the firms were losing money but (in a number of cases) receiving government handouts: According to the report, the nine banks that got federal funds lost $81 billion yet doled out $32.6 billion in bonuses.

To be fair, some of these banks are still standing — a good thing, given how close they skated to failure. But was it right for them to pay these kinds of bonuses? Did these incentives encourage inherently dangerous behavior? Did unconscionable amounts of public money gush forth into private hands — not to reward great performance, but simply to keep big egos happy? Did the stimulus package stimulate even greater risk by executives who knew they would get to keep any winnings while the government would have to absorb any losses?

Those are complex moral issues on which history must render judgment. Meanwhile, they raise a startling question: Is Wall Street, in its lust for risk taking, becoming the institutional equivalent of a pathological gambler?

It has long been understood that problem gambling, as it’s popularly known, can be a destructive addiction. As defined by the American Psychiatric Association in its Diagnostic and Statistical Manual of Mental Disorders — Fourth Edition (or DSM-IV), this form of excessive risk taking becomes pathological when it’s clearly associated with various indicators. These indicators describe individuals rather than firms. But what if they were adjusted to describe banks, insurers, brokerage houses, and other institutions? Might that help explain why excessive bonus paying strikes the public as a kind of moral pathology?

Let’s try. In the following 10-point list, I’ve done nothing but replace the words gambling or gamble with some form of the phrase bonus paying. Otherwise, except for some clarifying words in square brackets, I’ve used the exact language of the DSM-IV. Here’s the result:

There’s evidence of problem bonus paying if the senior executive team at a firm:

1. is preoccupied with bonus paying (e.g., preoccupied with reliving past bonus paying experience,… planning the next venture, or thinking of ways to get money with which to pay bonuses),
2. needs to pay bonuses with increasing amounts of money in order to achieve the desired excitement,
3. has repeated unsuccessful efforts to control, cut back, or stop bonus paying,
4. is restless or irritable when attempting to cut down or stop bonus paying,
5. pays bonuses as a way of escaping from … feelings of helplessness, guilt, anxiety, [or] depression,
6. after losing money paying bonuses, often returns another day to get even (”chasing” one’s losses),
7. lies to family members, therapist, or others [such as clients, regulators, or the press] to conceal the extent of involvement with bonus paying,
8. has committed illegal acts such as forgery, fraud, theft, or embezzlement to finance bonus paying,
9. has jeopardized or lost a significant relationship, job, or educational or career opportunity because of bonus paying, [and/or]
10. relies on others to provide money to relieve a desperate financial situation caused by bonus paying.

According to the DSM-IV, you don’t have to fail in all 10 categories to be in trouble. The presence of any five of these 10 indicators is enough to warrant classification as a pathological bonus payer.

It kind of makes the point, doesn’t it? Like individuals, firms can get hooked on risk. They can get a collective high from pushing the envelope and dealing on the edge. Intending to stop, they find they can’t. Called to account, they lie to “conceal the extent of involvement.” And if, just as they’re about to plummet into self-destruction, “others provide money to relieve a desperate financial situation,” they learn nothing from the experience, but continue their risky behavior with renewed relish.

Two points, then. First, not everyone gambles, and many who do aren’t problem gamblers. Nor is every financial firm a pathological bonus payer. We need to learn to distinguish good compensation structures from those that aren’t.

Second, like extreme gambling, extreme bonus paying can be seen, faced, and stopped — not by ruling out all risk, but by helping individuals and firms distinguish between the prudent and the compulsive. If risk is the life-blood of free enterprise, excessiveness is the poison that kills the entire system. As a culture, we’re smart enough to expel the latter in order to save the former.

©2009 Institute for Global Ethics

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“Companies must give shareholders all material information about corporate transactions they are asked to approve. Failing to disclose that a struggling company will pay out billions of dollars in performance bonuses obviously violates that duty and warrants the significant financial penalty imposed by today’s settlement.”

– Robert Khuzami, director of the U.S. Security and Exchange Commission’s (SEC) division of enforcement, writing in a statement about Monday’s settlement between the SEC and Bank of America. On Monday, the SEC accused Bank of America of lying to investors by concealing plans to pay nearly $6 billion in bonuses to executives at Merrill Lynch, which Bank of America bought in a $50 billion merger last year.

Bank of America received a bailout from taxpayers even while quietly planning to dispense the bonuses, reports the New York Times. The bank on Monday agreed to pay $33 million without admitting or denying guilt, calling the deal a “constructive conclusion to this issue.”

Source: New York Times, Aug. 3.

For more information, see: Washington Post, Aug. 3 — Related Newsline Commentary, Aug. 3 — Related Newsline story, Aug. 3.

Bonus payments also a fiery ethical issue in Britain, as government report advocates end to bank bonuses and more transparency in compensation

NEW YORK
Ethics issues related to executive compensation topped the news last week after it was revealed that nine banks that received a government bailout paid employees nearly $33 billion in bonuses last year.

Those bonuses came despite huge losses that plunged the nation into economic turmoil, the Wall Street Journal reports.

According to an analysis by the Associated Press, the report, released by New York State attorney general Andrew Cuomo and compiled from subpoenaed information, does not identify individual bonus recipients or their jobs.

Cuomo’s report shows that much of the bonus money went to star performers who may have produced substantial income and that bonus payments did not, overwhelmingly, go to CEOs. However, several million-dollar payouts are listed, reports the AP, and a relatively small number of people enjoyed the biggest payouts.

In related news, the House Financial Services Committee last Friday approved legislation that would let regulators ban incentive pay at banks and give shareholders a say in awarding bonuses, according to the Washington Post.

And in the United Kingdom, a government-commissioned report has called for tighter control on bank bonuses and more transparent pay structures for all high earners, the BBC reports.

Sources: AP, Aug. 1 — Wall Street Journal, July 30 — BBC, July 30 — Washington Post, July 29.

For more information, see: Related Newsline Commentary, Aug. 3 — Related Newsline Commentary, July 13 — Related Newsline story, June 22 — Related Newsline story, June 8 — Related Newsline story, May 25 — Related Newsline story, Apr. 27.

Legislators, newspapers, and citizens across the state call for resignations of other elected officials swept up in massive corruption and money-laundering sting

NEWARK, N.J.
Outrage over indictments in a federal corruption probe intensified last week in New Jersey.

Leading the news was Friday’s resignation of Peter Cammarano as mayor of Hoboken a week after he was among 44 people arrested in the sting, Bloomberg reports.

Cammarano was charged with accepting $25,000 in bribes from an undercover cooperating witness posing as a real estate developer, according to UPI.

Earlier in the week, angry residents gathered at Hoboken’s city hall to insist that Cammarano leave office, while in town halls across the state, residents and local legislators considered demanding the same of others caught up in the probe, according to the Newark Star-Ledger.

In Trenton, Assembly speaker Joe Roberts suspended the salaries and benefits of three legislators facing corruption and money-laundering charges, reports the Cherry Hill, N.J., Courier-Post.

The Asbury Park Press, an influential New Jersey paper, called on indicted officeholders to resign, saying in an editorial, “The only thing more appalling than the greed of public officials charged with trading the dignity of their office for bribes or campaign donations is their arrogance in refusing to resign from the offices they have disgraced.”

The paper also endorsed a proposal to call a special legislative session on corruption.

Sources: Bloomberg, July 31 — UPI, July 30 — Asbury Park Press, July 30 — Newark Star-Ledger, July 30 — Cherry Hill Courier Post, July 30.

For more information, see: Related Newsline Commentary, July 27 — Related Newsline story, July 27 — Related Newsline story, July 13 — Related Newsline story, Sep. 29, 2008 — Related Newsline story, Sept; 10, 2007 — Related Newsline story, Nov. 6, 2006.

Meeting over beer at White House isn’t exactly happy hour, but parties agree to keep talking; Jefferson case goes to jury; more wrangling over VIP mortgage program; CEOs find there’s no free lunch at the White House

WASHINGTON
Several stories from the ethics file last week dealt with the U.S. federal government. Among them:

• Harvard professor Henry Louis Gates and Cambridge Police Sgt. Jim Crowley met for a beer at the White House last week. The men, as well as President Obama, became embroiled in a racial controversy after Crowley arrested Gates for disorderly conduct while investigating why Gates — a prominent African-American scholar — broke open his own front door. ABC News reports that Gates and Crowley emerged from the meeting, held with President Obama, without any apparent reconciliation, though each said they agreed to keep talking.
• Jury deliberations began late last week in the trial of former U.S. Rep. William Jefferson of Louisiana. Jefferson, who among other charges stands accused of stashing $90,000 in potential bribe money in his freezer, is facing 16 counts in a federal corruption case, reports the New Orleans Times-Picayune.
• Republican members of the House Oversight Committee continue to push for a probe into a special program at mortgage lender Countrywide Financial that benefited several government officials, including two Democratic senators, reports the Hill. Rep. Edolphus Towns (D-N.Y.), chair of the House Committee on Oversight and Government Reform, early last week decided not to open a probe into the program, which reportedly offered favorable terms to VIPs, including Sen. Chris Dodd (D-Conn.), who has denied knowledge of receiving any special treatment. Towns said it would be inappropriate for his committee to take up the matter because there are ongoing Senate Ethics Committee and Justice Department probes into Countrywide’s practices, according to the Hill.
• There’s no free lunch at the White House for four of the most powerful CEOs in the country: The Obama administration took credit card numbers and charged the top executives of AT&T, Coca-Cola, Honeywell, and Xerox when they met the president for lunch, Politico.com reports. A White House spokeswoman said that “from time to time” guests are charged for meals in order to avoid the appearance of a conflict of interest.

Sources: Hill, July 30 — New Orleans Times-Picayune, July 30 — ABC News, July 30 — Politico.com, July 30.

For more information, see:  Related Newsline story, July 27 — Related Newsline Commentary, July 27 — Related Newsline story, June 23 — Related Newsline story, Dec. 15, 2008 — Related Newsline story, Sep. 10, 2007.

Military considers crackdown on social networking; study shows we know texting while driving is dangerous, but we do it anyway; continued furor over the electronic yanking of books from Kindles; apparent suicide in China highlights zealous security over technological developments; “mommy bloggers” criticized for accepting perks and writing favorable product reviews

VARIOUS DATELINES
The ethical aspects of technology were prominent in last week’s news. Among the stories:

• The U.S. military is considering a near-total ban on social networking sites such as Facebook and Twitter, reports Wired. Sources from the Defense Department tell Wired that in addition to worries over sensitive information being leaked out, the military worries that malicious code could be spread over social networks.
• A new study shows that texting while driving is probably even more dangerous than suspected, with data showing truckers sending messages were 23 times more likely to end up in a collision. But the most disturbing new data from an ethical standpoint, according to an editorial in the San Francisco Chronicle, is that many people know better than to text while driving but do it anyway. Even though 87 percent of respondents to one survey acknowledged that texting while driving is a “very serious” safety hazard, one out of five drivers admitted having done so. The figure climbs to half among drivers 16 to 24.
• Amazon CEO Jeff Bezos last week apologized for an incident in which the company remotely yanked copies of two books — ironically, works by George Orwell — from the electronic memories of Kindle reading devices after discovering the firm did not properly secure the rights to the books. “Our ’solution’ to the problem was stupid, thoughtless, and painfully out of line with our principles,” Bezos wrote, according to the Philadelphia Daily News. The incident continued to provoke discussion about the ethics of obliterating electronic copies of books and, according to the Daily News’s Jonathan Takiff, “the idea that Amazon could take back content without user permission — even under legal duress and with an instant refund to the subscriber’s account — has raised a firestorm of protest and dire predictions…. What if a work such as 1984 (or perhaps we should imagine a 2024) was only available via electronic tablet — as some books may be 10 to 15 years from now? In one high-tech book-burning moment, with just the tap of a few computer keys, all copies might be summarily destroyed.”
• Foxconn, the Chinese company that manufactures Apple’s iPhones, plans to compensate the family of a Chinese engineer who fell to his death after a prototype iPhone in his possession disappeared. According to trade journal EWeek, Sun Danyong fell from a twelfth floor apartment in the Chinese city of Shenzhen, an incident ruled to be a suicide by local officials. Sun reportedly had sent a text message to a friend saying he had been beaten by Foxconn security personnel, a charge Foxconn’s security chief denied. According to EWeek, Foxconn has been the source of public relations problems for Apple before, including a 2006 British newspaper investigation that claimed the Chinese manufacturer violated labor practices. The latest incident also highlights the security concerns related to development of high-tech products in a market where knockoffs often are marketed as soon as the new technology officially hits the shelves, reports the Reuters news agency.
• There’s a growing rift among bloggers over what some are calling “blog-ola” –payments, products, or perks for covering certain topics or giving positive reviews. According to National Public Radio, one critic claims that so-called mommy bloggers, who write about motherhood issues, often receive free products and admit to only writing favorable reviews to keep the flow coming. Other experts interviewed for the piece say that many bloggers now are writing directly for the sponsors, making no effort to separate editorial and commercial content.

Sources: Wired, July 30 — San Francisco Chronicle, July 30 — EWeek, July 30 — Philadelphia Daily News, July 29 — NPR, July 28.

For more information, see: Related Newsline story, July 20 — Related Newsline story, July 13 — Related Newsline story, June 29 — Related Newsline story, Apr. 20 — Related Newsline story, Sep. 22, 2008.

CBS legal analyst notes that ethical and legal standards now are under the microscope

LAS VEGAS
Medical ethics were under scrutiny in the continuing investigation into whether Michael Jackson’s personal physician contributed to the singer’s death.

Search warrants were issued late last week for the home and office of Dr. Conrad Murray, marking the second time the courts have allowed investigators to look for evidence on Murray’s property.

According to CNN, the warrants state that there is probable cause for investigators to search for evidence that Murray knowingly prescribed drugs to an addict and overprescribed a dangerous anesthetic.

Murray has not been charged with a crime, though experts consulted by Fox News say the scope of the searches suggests that prosecutors are building a criminal case against him.

Other doctors also are being investigated in relation to Jackson’s death, according to the Agence France-Presse.

The latest warrant specified that investigators were searching for evidence related to possible manslaughter, CBS News reports.

CBS legal analyst Andrew Cohen notes that there are two components to the case: “The first is whether the doctors violated their oaths and medical ethics rules that would put them in the doghouse with a licensing board. The other is whether their conduct constitutes a crime. And there is some legal room between the two standards.”

“One key question no matter where the investigation goes from here,” Cohen says, “is what role Jackson himself played in his own death or the steps leading up to it. If we do see a criminal case here, one defense will be that Jackson knew the risks of taking all those meds and chose to continue to do so.”

Sources: CBS News, July 30 — CNN, July 30 — AFP, July 30 — Fox News, July 30.

For more information, see:  Related Newsline story, June 8 — Related Newsline story, July 7, 2008 — Related Newsline story, Mar. 3, 2008 — Related Newsline Commentary, June 20, 2005 — Related Newsline story, Jan. 26, 2004.

Wikipedia publishes Rorschach tests along with most common interpretations; New York Times reports that some in psychological community worry that giving away the answers to the famous inkblots will hurt patients and make decades of research less meaningful

NEW YORK
Observers are seeing different views of an ethics dispute involving a Wikipedia posting that apparently has given away some of the answers to the Rorschach test, according to a report from the New York Times.

The famous test — a series of 10 inkblots from which psychologists are supposed to interpret results based on what the subject sees in the images — has been reproduced in its entirety on the popular Internet encyclopedia.

Common responses also are listed — something like the “equivalent of posting an answer sheet to next year’s SAT,” writes the Times’s Noam Cohen.

While the various blots in the 10-plate series had appeared elsewhere on the web, this is the first time they’ve been collected in a cohesive whole and accompanied by explanations of what popular answers usually are interpreted to mean.

Some psychologists say they are concerned not only because readers may be tempted to game the system after learning the meanings ascribed to certain responses, but also because so much research — tens of thousands of studies — might be endangered by publication of the Rorschach plates.

Moreover, one researcher tells the Times, psychologists’ ethics codes mandate that tests be kept secure.

An attorney for Wikipedia appeared to shrug off legal and ethical objections lodged by the publishing company that controls some of the writings of test originator Herman Rorschach. The individual who posted the plates, Canadian physician Dr. James Heilman — noted that the Snellen Eye Chart is also posted on Wikipedia.

“If someone had previous knowledge of the eye chart, you can go to the car people, and you could recount the chart from memory. You could get into an accident. Should we take it down from Wikipedia?” Heilman asked.

Source: New York Times, July 29.

For more information, see:  Related Newsline story, July 6 — Related Newsline story, June 1 — Related Newsline story, Apr. 16, 2007 — Related Newsline story, May 15, 2006 — Related Newsline story, May 8, 2008.

Convicted star quarterback’s future remains undecided until mid-October

From Rasmussen Reports:

“The National Football League on Monday partially reinstated Michael Vick after his 18-month prison term for running a dogfighting ring, but Americans are closely divided over whether it’s a good idea for the league to let the former Atlanta Falcons quarterback play again.

“A new Rasmussen Reports national telephone survey shows that 35% favor allowing Vick to return to the NFL, while 39% oppose the move. Seventeen percent (17%) say they’ve never heard of the disgraced quarterback, and 10% are not sure what the league should do.

“The survey was taken prior to the NFL’s announcement of Vick’s conditional reinstatement and his unsuccessful efforts thus far this week to find a team that is interested in him….

“Men by a 45% to 40% margin say Vick should be allowed to play again. Women by 11 points — 37% to 26% — disagree….

“Under the conditional reinstatement, Vick can participate in practices and the final two games of pre-season, but he cannot play in regular season games until at least mid-October. NFL Commissioner Roger Goodell has said he will consider Vick’s full reinstatement at that time….”

For the full release from Rasmussen, July 30, click here.

“The man who questions opinion is wise; the man who quarrels with facts is a fool.”

– Frank A. Garbutt (U.S. inventor, industrialist, and movie pioneer, 1869-1947)