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

by Rushworth M. Kidder

Last week, the Obama administration proposed significant cutbacks in executive pay for bailed-out financial institutions — a move that produced some curious ethical responses.

On one hand, some who support pay czar Kenneth Feinberg’s work would have us believe that high pay is by definition unethical — a reasonable point, but only if you think free enterprise is intrinsically evil and success should be penalized.

At the other extreme, a bizarre philosophical position surfaced during a London debate on morality in the marketplace. The British public, said Goldman Sachs vice chairman Brian Griffiths, should “tolerate the inequality” inherent in executive bonuses “as a way to achieve greater prosperity for all.” (See our lead report, below, on executive pay.)

When well-meaning people suggest that prosperity is immoral but inequality is ethical, there’s a deeper confusion at work. So step back for a moment and consider a popular but untested assumption, which is this: If you constrain executive pay, corporate excellence will be damaged because current talent will leave and top talent can no longer be recruited.

True, if you want the smartest guys in the room, you have to pay handsomely. But do such high fliers always produce corporate cultures that build a better world? Or are they just as apt to create cultures that degrade ethics? Will top pay guarantee the strongest possible financial sector?

During game five of the American League Championship series last week — stay with me, here, I’m not changing the subject — the Los Angeles Angels leapt to a 4-0 lead in the first inning. Their early advantage held for six innings, which for them was a very good thing: This game, if lost, would end their bid to play in the World Series. But in the top of the seventh inning, the Yankees mounted a massive rally. As it grew, Angels manager Mike Scioscia pulled out his pitcher and brought in a reliever. And that’s when everything came unglued. By the time the Angels came to bat, the tide had turned to a 6-4 Yankee lead.

The Angels later won that game. But what if they’d lost? And what if we later learned that the Angels’ manager was on the take? What if he’d secretly been paid an enormous amount to throw the game to the Yankees? What if his change in pitchers was designed to make sure he’d lose?

Now, there’s not a shred of evidence for what I’ve just said. But what if, in place of the real Mike Scioscia, you’d had his evil twin? What if the man in the dugout that night had immense leadership talents, deep experience, a sixth sense for the right move — and no moral sense whatever? His lifelong quest (which he’d never shared with the team that hired him, of course) had always been to make himself rich by any means possible. If at times he sounded and looked ethical or even based an occasional decision on principle — well, that was all part of the show. Give him a once-in-a-lifetime choice between retiring rich or honest, and there wouldn’t even be a question: Go for the green.

There’s not a baseball fan in the world who would want that guy as their manager. Sure, the credentials look great. But if it’s all about self and in the end he can’t be trusted … get rid of him as fast as you can.

Which brings us back to pay packages. What if companies cut compensation and lots of well-credentialed executives leave? Is it possible that might be the healthiest thing that could happen for the financial sector? Sure, it’s possible that future historians, studying this recession, will tell us that the companies paying the largest bonuses:

1. Engaged in the fewest deceptive mortgage practices,
2. Invented the least number of complex, hyper-risky products, and
3. Were hardly ever inclined to think government should bail them out if things turned sour.

I can already hear our readers snorting in derision. What brought us into this recession, many would say, were just the opposite characteristics: deception, irresponsibility, and calculated greed. Do we really want to preserve the talent that did that to us?

But what about attracting the best talent for the years ahead? Won’t we be in danger on that front? Well, which sounds more logical: (1) that massive compensation frees executives from concern about making money, making them less egocentric and more focused on others, or (2) that enormous pay packages reinforce their desire to make even more money, leading them to become even less interested in the moral sense? There’s extensive, if still controversial, behavioral research suggesting that when you replace intrinsic motivation with monetary reward, the quality of work goes down. Called over-justification theory, it seeks to explain why three-year-olds who are promised rewards are less engaged in their play activities — do a poorer job playing, really — than those who are rewarded unexpectedly after the fact.

It’s hard to see why such promises wouldn’t change the mindset of adults, too. I’m not saying there’s a necessary connection between high pay and low ethics. There are lots of people of great integrity who are very well paid. I’m arguing a different point, which is that there’s no guarantee that high pay brings high ethics with it. We know it will bring you all of the other credentials of the evil twin. But will it bring you the manager you really want in your dugout during life’s playoffs?

©2009 Institute for Global Ethics

Find this and previous weeks’ commentaries online as a podcast titled Ethicast™ now available on iTunes. Subscribe today!

We’re happy to let you know that in response to requests from many readers, we’ve activated Ethics Newsline’s comment-box function. You now may enter your views about commentaries and news items without leaving our site.

A few guidelines and suggestions:

• At this point, comments can be made only from single-article pages, not from the full version of the weekly edition. (We’re working on that.) For now, though, if something piques your interest and you’d like to comment, just click on the article’s headline to go to its solo view and post your comment.
• When there are several comments after an article, be sure you scroll down to the end of the page; that’s where you’ll find the comment box for entering your text.
• Your name and email address are required. Your name will be published with your comment, but your email address will remain private. (We need your email address in case it’s necessary to verify or clarify something you’ve written.)
• We will screen comments to eliminate inappropriate language, defamatory content, and spam. Unfortunately, there are many automated programs that hack comment boxes and insert advertising, so we have to be vigilant about that. Inappropriate comments will be blocked in their entirety.
• Because of legal issues relating to the publication of reader views, Newsline will not edit your comments for grammar, spelling, punctuation, and content.
• Briefer is generally better. Most readers tend to move their attention from lengthy responses, so it’s a good idea to keep your entries short and focused.

Thanks for reading Ethics Newsline — and helping to create a community for thoughtful analysis of today’s top ethics issues. Happy reading … and commenting!

“The Associated Press raised serious questions in its recent coverage of insurance companies and homeowners’ drywall claims. Some of these companies need to be shamed into doing the right thing.”

– U.S. Sen. Bill Nelson of Florida, talking to the AP last week about insurance companies’ efforts to cancel the policies of people whose homes were built with defective Chinese drywall.

Thousands of people across the country own homes built with the faulty drywall, which emits fumes, contains traces of a chemical that can produce a sulfurous odor, and corrodes “copper pipes, destroying TVs and air conditioners and blackening silverware,” according to the report.

Following the original AP story, the Florida-backed Citizens Property Insurance Corp. announced that it had changed its mind and wouldn’t cancel the policy of the couple featured in the article. “We’re just elated. I mean, you never hear of an insurance company changing their mind,” said homeowner James Ivory.

Source: AP, Oct. 23.

For more information, see related Newsline story, Oct. 19.

“Pay czar” slashes compensation; New York Times analysis says solution must be responsibility of shareholders with the power to remove board members; big compensation garners some defenders among those who argue that bonuses and salaries should be viewed as an investment in firms that owe TARP money

NEW YORK and LONDON
Many executives at top firms that still hold billions of dollars in government bailout money saw their compensation slashed last week by the Obama administration’s compensation overseer.

“Pay czar” Kenneth Feinberg’s decision to link compensation more closely to performance seemed to strike a balance between taxpayer anger and the need for companies to retain talent, a New York Times analysis last week reports.

The piece also contends that responsibility for a complete overhaul of pay structures across Wall Street is probably beyond the ability of any official overseer and instead rests in the hands of shareholders.

The Times quotes Nell Minow, cofounder of the Corporate Library and an advocate of executive compensation reform, as saying that the only way to change things is to “throw the bums out” — allowing shareholders the ability to vote directors off the board if they feel they are improperly governing compensation or any other aspect of the firm’s operation.

At present, writes the Times’s Joe Nocera, “the deck is so stacked that [voting a director off], is nearly impossible, especially since many companies don’t allow simple, majority votes to elect (or reject) directors. But the most straightforward way to shrink the oversize pay of Wall Street executives — and, more generally, curb the excesses of executive pay — would be to make directors more accountable to the company’s shareholders.”

CNN reports that the hardest case confronting Feinberg was AIG, which had lobbied hard to let three of its executives keep their bonuses, ruling that paying the extra money was in the public interest because those employees are critical to helping AIG pay back its government bailout.

Feinberg went along with most provisions of that request.

Therein lies the practical and moral dilemma, notes the Los Angeles Times: Some experts are cautioning that pay curbs could lead to a brain drain at bailed-out companies, meaning that taxpayers will never be reimbursed for their TARP investment.

That issue was echoed in Britain last week as the vice chairman of Goldman Sachs told spectators at an ethics debate that big payouts to bankers should be seen as an investment in London’s economy, according to a report from Reuters.

Brian Griffiths said he was not “ashamed” of the bank’s compensation package, which has, according to Reuters, inflamed the debate about bonuses when details were recently released.

The British pubic, Griffiths said, should “tolerate the inequality as a way to achieve greater prosperity for all.” He spoke at a public debate in which participants discussed the role morality should play in the marketplace.

Sources: CNN, Oct. 23 — New York Times, Oct. 22 — Los Angeles Times, Oct. 22 — Reuters, Oct. 20.

For more information, see: Related Newsline Commentary, Oct. 26 — Related Newsline story, Oct. 19 — Related Newsline story, Sep. 21 — Related Newsline story, Aug. 3 — Related Newsline story, Aug. 3 — Related Newsline Commentary, July 13.

Some of the disputes are turning downright nasty — in one, lawmakers change the locks to a hearing room

WASHINGTON and OTTAWA
At the top of the news from the political-ethics file:

• An ethics dispute in the U.S. House of Representatives devolved into melodrama last week after Democrats on a House committee literally changed the locks on a hearing room door to shut out Republicans, who had had enraged the Democrats by posting an embarrassing video online, the Washington Post reports. The dispute started when Democrats failed to attend an Oversight and Government Reform Committee hearing on allegations that certain members of Congress received preferential treatment in mortgage applications, according to the Post. Video of the Democrats leaving a private meeting in another room through a back door was posted on the party’s website and YouTube, set to the tune, “Hit the Road, Jack.” Later, reported the Post, panel Democrats had the locks changed because, in the words of chairman Edolphus Towns, the Republicans “don’t know how to behave.”
• The chief justice of South Carolina’s Supreme Court last week implied that embattled Gov. Mark Sanford is trying to delay an ethics panel investigation of his activities, UPI reports. Justice Jean Toal told Sanford’s lawyers that she believes the governor is using a “four corners” offense in the case, referring to a basketball game-delaying strategy that originated in the Carolinas. Sanford’s lawyers said their client actually wants an expedited hearing. Sanford instigated various questions about his conduct when he disappeared from his state for a week, secretly traveling to Argentina to be with a mistress.
• The Charles Rangel saga continued to play out in the U.S. House of Representatives last week, with at least one influential publication speculating that it’s being drawn out on purpose. Politico reports: “Convinced that Rep. Charles Rangel (D-NY) is on the ropes because of a tangle of ethical issues, House GOP leaders are debating whether to aggressively press for his removal as chairman of the Ways and Means Committee or try to drag out the controversy as long as possible for maximum political advantage.” Politico reports that while the Democratic wall of support for Rangel, who faces a variety of ethics charges related to allegations that he failed to report income and misused his position, is showing cracks, some Republicans are reticent to press the issue because they face their own ethics problems and don’t want a full-scale shootout. Nor, Politico notes, do they want to build a sympathy backlash for Rangel.
• Canadian lawmakers are embroiled in a dispute over whether members of Parliament should be allowed to put their names and party logos on economic stimulus checks, according to a report from the Canadian Press. Opposition members say the Conservatives are flaunting oversize ceremonial checks with their party’s insignia. “Conservative members have tried to funnel $600,000 of taxpayers’ money to their ridings as if this money belonged to the Conservative party…. It’s an ethical matter,” Liberal leader Michael Ignatieff charged, according to the CP report. The parliamentary ethics commissioner will examine the complaints.

Sources: Washington Post, Oct. 23 — UPI, Oct. 22 — Canadian Press, Oct. 21 — Politico, Oct. 19.

For more information, see: Related Newsline story, June 1 — Related Newsline story, Feb. 23 — Related Newsline story, Jan. 5 — Related Newsline story, Oct. 9, 2000 — Related Newsline story, Oct. 9, 2000.

How far, analysts wonder, should you pursue a story about an obvious hoax that was perpetrated simply to attract attention?

DENVER
The misadventures of 6-year-old Falcon Heene, better known to the public as the “balloon boy,” could present a teachable moment in media ethics, according to a variety of press reports last week.

Falcon’s parents may face charges in the aftermath of the stunt, during which authorities believed the 6-year-old was adrift in a homemade balloon cast loose from the Heene home in Fort Collins, Colorado. Falcon was later found at home, raising speculation that the stunt had been arranged by his parents to attract attention and create a television reality show, reported the trade journal Broadcasting & Cable.

As if those circumstances weren’t unusual enough, the story was revived late last week as news media began to examine their own behavior in covering the apparent hoax — then remained fixated on it for more than a week.

Kris Kodrich, an officer of the Society of Professional Journalists and an associate professor of journalism at Colorado State University, summed it up in a Denver Post commentary: “This really has become more of a story about the media now,” he writes. “Sure, it was gripping TV as it was happening. When a student mentioned it right before my Thursday afternoon media ethics class, I admit I put the latest details from CNN’s home page on screen for the class. But this week we’ve turned our attention toward the media coverage itself: Why was it so extensive? Was it responsible, and why is it a continuing story?”

TIME commentator James Poniewozik contends that the event is symptomatic of the new media equation: acting out means getting paid.

“Modern media did not invent greed, eccentricity or lust for attention. What they did was monetize them,” Poniewozik argued. “There have long been odd families and obscure men pursuing bizarre theories and cobbling together flying machines in their backyards. But only in the reality-TV era has unstable behavior become a valid career choice. Only now are questionable parenting decisions the stuff of a lucrative family business. Say whatever you want about Jon and Kate Gosselin, their divorce proceedings entail numbers with a lot more zeroes than your typical young Pennsylvania family encounters.”

What was the teachable moment in all of this? Patti Dennis, news director at KUSA-TV in Denver, told the media think tank publication Poynter Online: “There are more and more people who are likely to fool and manipulate the media. You must have a process of vetting the consumer contributions to journalism. Everyone in the newsroom must be diligent in checking tips and calls. We get hundreds of tips each week.”

“We spend a lot of time trying to determine if there is a story and how to work around the agenda the news tipper probably has,” Dennis said. “Nothing too profound, but just sound journalism in an age where everyone gets to play.”

Sources: TIME, Nov. 2 — Poynter Online, Oct. 23 — Broadcasting & Cable, Oct. 22 — Denver Post, Oct. 22.

For more information, see: Related Newsline story, Oct. 19 — Related Newsline story, Sep. 21 — Related Newsline story, Sep. 8 — Related Newsline story, May 19 — Related Newsline story, June 15.

“If the White House can reach out to the Iranians and North Koreans … they can talk to Shepard Smith,” one commentator chides

WASHINGTON and NEW YORK
A confrontation between President Obama and Fox News has raised dual ethics issues: whether it’s right for a network to offer what critics say is slanted coverage, and whether the President’s efforts to stanch the network’s criticism go too far.

The Christian Science Monitor writes, “With its concerted campaign against Fox — including not sending administration members to talk to Fox News Sunday’s Chris Wallace — the White House has stepped up an unusual campaign on a major media organization.”

Critics of Fox News contend that that organization is more a source of political propaganda than news. Jacob Weisberg, writing in Slate, argues that the network is deceitful in its coverage and should not be regarded as a venue for serious journalism.

“Whether the White House engages with Fox is a tactical political question. Whether we journalists continue to do so is an ethical one,” Weisberg writes. “By appearing on Fox, reporters validate its propaganda values and help to undermine the role of legitimate news organizations. Respectable journalists … should stop appearing on its programs.”

But a journalists who has blasted Fox for conservative bias nevertheless wrote a piece sharply skeptical of a boycott.

“I’m not a fan of slippery slope arguments,” notes the Atlantic’s Matthew Cooper, “but where does the boycott Fox approach end? Skipping the Simpsons or the NFL because they’re broadcast on the Fox network or not reading Harper Collins books … would seem extreme…. If appearing on Fox News is a morally dubious act, why support any part of the company? Engagement has been the mantra of the Obama years. Talk to your enemies. If the White House can reach out to the Iranians and North Koreans, for gosh sakes, they can talk to Shepard Smith. As for me, I’ll keep watching Rachel Maddow.”

Sources: Christian Science Monitor, Oct. 23 — USA Today, Oct. 21 — Atlantic, Oct. 20 — Slate, Oct. 17.

Business media notes that insider trading is a difficult charge to prove: There’s a fine line between gathering good market intelligence and illegal nonpublic information

NEW YORK
A hedge fund embroiled in an alleged insider-trading scandal last week announced that it will shut down its funds.

The Galleon Group LLP plans an “orderly wind down” of its funds after investors pulled out millions of dollars in the wake of charges against manager Raj Rajaratnam, the Associated Press reports. Rajaratnam maintains his innocence.

Galleon, reports the London Independent, became one of the top hedge funds because its traders aggressively sought out information on companies that they would use in assessing future share price moves.

But there’s a fine line between seeking valuable intelligence and benefiting from illegal inside information, notes BusinessWeek, which reports that the U.S. Securities and Exchange Commission (SEC) case against Rajaratnam came as part of a new government offensive against insider trading — a probe based on informants, wiretaps, and software tools.

A Wall Street Journal analysis notes that insider-trading cases are notoriously difficult to pursue because prosecutors need to show that the accused had a culpable state of mind, and also establish that the defendant had a duty not to trade on the nonpublic information.

Likely to be part of the prosecution’s case in any insider-trading action, reports the Journal, is that fact that all hedge funds registered with the SEC have codes of conduct requiring employees to pledge they will not make trades based on inside information.

Sources: AP, Oct. 22 — Independent, Oct. 22 — BusinessWeek, Oct. 21 — Wall Street Journal, Oct. 20.

For more information, see: Related Newsline story, May 11 — Related Newsline story, Jan. 7, 2008 — Related Newsline story, Apr. 23, 2007 — Related Newsline story, Mar. 5, 2007 — Related Newsline story, Sep. 27, 2004.

More complaints come in about Google and privacy; ‘Net Neutrality’ issue surfaces again after FCC vote; and there’s continuing controversy over genetically engineered crops

VARIOUS DATELINES
Top technology news took an ethical slant last week. Among the coverage:

• The battle over “net neutrality” — an important if nascent ethics issue in the communication infrastructure — is just beginning, reports CNET, even though U.S. Federal Communications Commission (FCC) officials voted in favor of the doctrine last week. Net neutrality is the concept that all users of the Internet have their information moved at the same speed. Some major Internet service providers (ISPs) have argued that they should have the right to slow some traffic — particularly file sharing, which they claim clogs the whole system for all users even though it involves just a few. Net neutrality proponents say that all traffic should be put on the same track, because ISPs must inspect traffic in order to slow it — a presumed invasion of privacy. Critics also warn that putting some clients on a faster track will inevitably favor users with deep pockets. CNET reports that even before the FCC vote was complete, a bill was introduced in the Senate to block the FCC from regulating the Internet.
• Britain’s National Academy of Science said that genetically modified crops are an essential tool for feeding the exploding world population. Opposition groups counter with ethically based objections, saying the move toward genetically modified food will hurt small farmers, who cannot afford the practices needed to sustain it, according to the Voice of America. Some opponents claim that the practice will raise the risk of unknown scientific mutations and health consequences for crops and consumers, reports the Times of London.

Sources: CNET, Oct. 22 — Voice of America, Oct. 22 — Times of London, Oct. 20.

For more information, see: Related Newsline story, Sep. 21 — Related Newsline story, Aug. 4 — Related Newsline story, Apr. 14, 2008 — Related Newsline story, Feb. 17, 2004 — Related Newsline story, May 11, 1998.

“Many people prefer to buy locally grown, or organic, produce and ‘green’ products from environmentally-friendly companies, but not if they are much more expensive,” poll finds

From Harris Interactive:

“It’s quite popular for people to claim that they care about the environment. In fact many millions of people — from 18% to 39% of all adults — say that their purchasing behavior and other interactions with companies is sometimes influenced by environmental factors. However, in reality, only a very small minority is willing to pay substantially more for ‘green’ products or goods produced by environmentally-friendly companies….

“Over 30% of adults say that they often or always purchase locally grown products or seek out and are willing to pay more for ‘green’ products. And a quarter of all adults say that environmental issues are very important to them when deciding what products to buy. But only a few people seek out and buy green products if they have to pay a lot more for them (2%) or say the cost doesn’t matter (3%).

“Some of the findings of this Harris Poll include:

• “26% of all adults say that environmental issues are extremely or very important to them when deciding what products or services to buy;
• “17% say that environmental issues are extremely or very important to them when deciding what company to work for;
• “Fully 32% say they seek out ‘green’ products and are willing to pay at least a little more for ‘green’ products…

“…The survey also found that most people were taking some action, however modest, to limit their use of electricity, water or gasoline. While two-thirds (67%) of these people said that they were doing this to benefit the environment, over half (55%) said that they were doing this to save money….

“The most important conclusion to be drawn from these findings is that ‘green marketing’ surely appeals to substantial numbers of consumers. Everything else being equal, many millions of people would prefer to buy products and services that are ‘green’ or are produced by environmentally-friendly companies. However, if ‘green’ products cost significantly more than less ‘green’ products, relatively few people will buy them. When push comes to shove, in these economic times especially, price usually trumps environmental factors.”

For the full release from Harris, Oct. 23, click here.

“Thinking is the talking of the soul with itself.”

– Plato (Greek philosopher, ca 428 – ca 348 B.C.)