Thursday, December 19, 2013

The virtues of disclosure

For years, pharma firms have paid doctors to speak on behalf of their products at professional conferences and meetings, in the understanding that it is potent tool to persuade doctors. For years, this practice has been criticized on the grounds that it unduly influences the information doctors give each other and the possibility of prescribing drugs inappropriately (or for the wrong reasons). But the practice was and is legal. Now, with the Obama administration’s health care law, such practices and payments by pharmaceutical companies must be made public next year. And apparently that has made Glaxo announce, this week, that by 2016, they will no longer pay health care professionals to speak on its behalf “to audiences who can prescribe or influence prescribing.” Glaxo will no longer provide direct financial support to doctors to attend medical conferences, a practice that is prohibited in the United States (through an industry-based ethics code) but still allowed in other countries. According to the NYT's report (here), a handful of drug makers are adopting similar actions for several reasons, "including concerns about the reaction to the required disclosure of such payments that will begin next fall under a provision of the health care law."
Glaxo also announced it will extend its new integrity initiatives to its global business: for example, beginning in 2015, it will no longer compensate sales representatives based on the number of prescriptions doctors write. Instead, its sales representatives worldwide would be paid based on their technical knowledge, the quality of service they provided to clients, and the company’s business performance.
These initiatives may help improving the relationships between pharma firms as physicians. Dr. Raed Dweik, the new chairman of the conflict of interest committee at the Cleveland Clinic is quoted saying that he, as a physician, often meet with the pharma firm's sales reps and that they come in armed with information about he that he does not even know, like the number of prescriptions he has written for the drug company’s product: “I feel that’s not really a comfortable interaction to have.”
My colleagues, however, are not so confident about the potential of disclosure requirements. You can check the work by Daylian Cain about how disclosure helps conflicted advisors and harms their advisees. For example, he found that advisors feel comfortable giving more biased advice, but advisees do not properly adjust for this and so fail to discount biased advice (here).

Friday, December 13, 2013

Moral virtues make the difference

Many things have been said about Mandela during the last week. One of the pieces I really liked was the one written by journalist John Carlin (here). His central thesis is that defining characteristic of Nelson Mandela, about and beyond his actions, was a crucial feature of his personality. As Carlin puts it, “The thing about Mandela,” he said, “is that you can’t see the cracks.”
Technically, we call that moral integrity. And the whole article is providing evidence in support of the claim that Mandela was a man of integrity. Those who believe that virtues do not exist, that situations rule our behavior, should read this piece and try to find a compelling explanation for why Mandela did what he did without appealing to his personality. They will have a hard time. 

Wednesday, November 27, 2013

Pope Francis teaches business ethics

Yesterday, Pope Francis released his “Evangelii Gaudium” (the Joy of the Gospel), an apostolic exhortation (which is less authoritative than an encyclical, but an important statement). The document is, above all, an ethics piece. And it has a lot of overlap with our course contents, especially with the justification of capitalism, the purpose of business firms, and the dangers of moral relativism. Here are some of key quotes from “Evangelii Gaudium”:

On moral relativism:
"As the bishops of the United States of America have rightly pointed out, while the Church insists on the existence of objective moral norms which are valid for everyone, ‘there are those in our culture who portray this teaching as unjust, that is, as opposed to basic human rights. Such claims usually follow from a form of moral relativism that is joined, not without inconsistency, to a belief in the absolute rights of individuals. In this view, the Church is perceived as promoting a particular prejudice and as interfering with individual freedom’. We are living in an information-driven society which bombards us indiscriminately with data – all treated as being of equal importance – and which leads to remarkable superficiality in the area of moral discernment. In response, we need to provide an education which teaches critical thinking and encourages the development of mature moral values."

On inequality:
"How can it be that it is not a news item when an elderly homeless person dies of exposure, but it is news when the stock market loses two points? This is a case of exclusion. Can we continue to stand by when food is thrown away while people are starving? This is a case of inequality. Today everything comes under the laws of competition and the survival of the fittest, where the powerful feed upon the powerless. As a consequence, masses of people find themselves excluded and marginalized: without work, without possibilities, without any means of escape."

On libertarianism:
"In this context, some people continue to defend trickle-down theories which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world. This opinion, which has never been confirmed by the facts, expresses a crude and naïve trust in the goodness of those wielding economic power and in the sacralized workings of the prevailing economic system."

On financial markets:
"While the earnings of a minority are growing exponentially, so too is the gap separating the majority from the prosperity enjoyed by those happy few. This imbalance is the result of ideologies which defend the absolute autonomy of the marketplace and financial speculation. Consequently, they reject the right of states, charged with vigilance for the common good, to exercise any form of control. A new tyranny is thus born, invisible and often virtual, which unilaterally and relentlessly imposes its own laws and rules.

On the rule of market:
"In this system, which tends to devour everything which stands in the way of increased profits, whatever is fragile, like the environment, is defenseless before the interests of a deified market, which become the only rule."

On state regulation:
"A financial reform open to such ethical considerations would require a vigorous change of approach on the part of political leaders. I urge them to face this challenge with determination and an eye to the future, while not ignoring, of course, the specifics of each case. Money must serve, not rule! The Pope loves everyone, rich and poor alike, but he is obliged in the name of Christ to remind all that the rich must help, respect and promote the poor."

Thursday, November 7, 2013

Halloween and Insider Trading

It does not fail. Each time I teach insider trading there is a piece by a libertarian intended to show why it is harmless and hence should not be made illegal. This op-ed by Tim Harford (The Undercover Economist) appeared in the Financial Times last week: What’s so scary about insider trading?

"It was Halloween on Thursday, so let’s meet a frightening ghoul who haunts our financial markets: the insider trader. The Halloween metaphor is not mine but that of economist Donald Boudreaux, who asks if the insider trader is a genuinely dangerous monster or a comical apparition in a fright mask, fit only for the scaring of children."

This is a summary of the reasons why insider trading should not be illegal according to Prof. Boudreaux:
  1. despite intensive monitoring, it’s hard to detect and even harder to prove. People with inside information can profit by not taking action and that is undetectable.
  2. market prices are supposed to reflect all available information, the better to allocate capital and insider trades simply accelerate the process. 
  3. insider trading is a crime without a victim
Some arguments in favor of banning insider trading are more compelling, though. Take a look at Prof. Strudler's piece on the law of insider trading (click here).

Wednesday, November 6, 2013

Honesty and honest behavior

The Financial Times is inadvertently endorsing virtue ethics in business (at least today). The "excuse" is the failure of the Co-operative Group in the UK. The bank is announcing a restructuring. The restructured company’s articles of association will include a commitment to moral behavior. The justification, in the end, is that honesty is the best policy. But the FT reporter (here) is skeptical about it. He writes:
"The slogan that good business is profitable business is superficial – an attempt to make moral dilemmas dissolve in a warm bath of goodwill. When the right thing to do is also in your own self interest, you do not need advice from philosophers and theologians. Ethics are about what to do when good behaviour and profitable business are not necessarily the same thing."
And then he goes to make a difference between honesty and honest behavior:
"the difference between the honest man and the man for whom honesty is the best policy. When you deal with the man for whom honesty is the best policy, you never know when it might be the occasion on which honesty is no longer the best policy. Bankers, not bishops, deliver lectures extolling their own personal integrity; the man who repeatedly reminds us how honest he is rarely acquires, or deserves, our trust. The integrity we value is a personal or organisational characteristic, not a business strategy."
So, he concludes, "if honesty is the best policy then the best policy is to be honest from conviction."

Tuesday, November 5, 2013


A moving story about courage and kindness at the BBC website (here).
Back in 1996, Keshia Thomas, then a teenager saved the life of a man believed to be a white supremacist affiliated with the KKK from an angry mob (see the pic above). Her explanation is revealing: "When people are in a crowd they are more likely to do things they would never do as an individual. Someone had to step out of the pack and say, 'This isn't right.'"
Today, Keshia keeps committed to make a difference:
"The biggest thing you can do is just be kind to another human being. It can come down to eye contact, or a smile. It doesn't have to be a huge monumental act."

Monday, November 4, 2013

Investing in or giving back?

According to this NYT report, Goldman Sachs gave $241.3 million to charity, making the firm the fourth-largest corporate giver in America. Goldman Sachs has been one of the leading corporate philanthropists in the last five years. Since 2008, the firm has given away more than $1.6 billion, in a remarkable effort to change its tarnished reputation. Whether that works or not is something to be decided but, apparently, it is creating bad feelings between the bank - which has been cutting back sharply on expenses - and the Goldman Sachs Foundation- which is giving the money away. Communication is also an issue: an employee is quoted saying that the philanthropy program is “run as if it’s a Broadway show,” against Goldman Sachs' culture of discretion.
Another, major, concern is voiced  by Warren Buffett, whose holding company is one of Goldman’s largest shareholders. He is troubled by the principle of large-scale corporate philanthropy because, as Milton Friedman used to say, this money comes out of shareholders’ pockets. Buffett reportedly added that "he didn’t look up how much Goldman gave to charity when he bought a giant stake in the firm during the depths of the financial crisis, and that Goldman’s generosity — or lack of it — has never factored into any investment decision he has made." The firm is giving to charity much more than before the real estate collapse now that corporate charitable donations are going down in the USA.
Motivations? This is what the reporter tells us:
"At the time Goldman started the program it made no public connection between the largest single charitable contribution in its history and public anger over its role in the financial crisis, but it was clear the money was part of the price of reputation reclamation."
Results? We need to wait a bit more but apparently it does help bolstering the firm's reputation. Malene Barnett, who graduated from one of the prograns funded by Goldman Sachs, has changed her opinion about Goldman: “All I knew before was a lot of people there made a lot of money... Now I see they are trying to give back. Before I didn’t have that impression but I believe now they are really trying.”

Wednesday, October 23, 2013

Do bankers need biz ethics training?

According to a recent post at the WSJ (click here) 98,000 employees of Deutsche Bank, 13,000 senior bankers at Goldman Sachs and 140,000 staff members at Barclays are being taken through ethics programs, which are aimed at reinforcing codes, values, and behavior. This is in response to the scandals and reputational blows at the three banks. The debate is centrally connected to our discussion on corporate governance and accountability. And it is also about the effectiveness of ethics training in the workplace and in the financial industry.
The report states that if team members at Deutsche Bank score less than 80% in a mandatory online test on compliance, they are red-flagged to their team leader and their career could be affected. And at Goldman Sachs, senior bankers have to spend hours debating a fictional case study about a big player on the brink of collapse.
At Barclays, CEO Antony Jenkins set out the bank’s “Transform” program after the Libor scandal. Sessions for senior leaders "take place in a room at headquarters styled like a Roma agora to encourage open discussion". Staff members start watching this clip (take a look at it). Then, they engage in case studies sessions which echoes the sort of dilemmas they face daily. They are also asked to vote on the best action after watching video scenarios like the ones we examine in class. Barclays’ workshops are reportedly led by 1,500 “values leaders” trained by a faculty of outside experts. Besides training, they need to change the structure of incentives and the organizational culture. They should measure "good conduct" and they should give it weight in bonus decisions, for example.
Mr. Jenkins argues that “I’ve been clear that [this] is a five to 10-year journey, so this isn’t sprinkling a bit of PR magic and life suddenly gets better.” Humm...

Thursday, September 26, 2013

Larry Summers, again and again

Here is Larry, again. Before his appointment as Harvard President, when he was chief economist at the World Bank (yes, he never served as a trainee... after all he was the nephew of Paul Samuelson and Kenneth Arrow!) - he wrote the following memo:

“Just between you and me, shouldn’t the World Bank be encouraging more migration of the dirty industries to the less developed countries? I can think of three reasons:
1. The measurement of the costs of health-impairing pollution depends on the foregone earnings from increased morbidity and mortality. From this point of view a given amount of health-impairing pollution should be done in the country with the lowest cost, which will be the country with the lowest wages. I think the economic logic behind dumping a load of toxic waste in the lowest wage country is impeccable and we should face up to that.
2. The costs of pollution are likely to be non-linear as the initial increments of pollution probably have very low cost ... Only the lamentable facts that so much pollution is generated by non-tradable industries (transport, electrical generation) and that the unit transport costs of solid waste are so high prevent world-welfare enhancing trade in air pollution and waste.
3. The demand for a clean environment for aesthetic and health reasons is likely to have very high income elasticity ... Clearly trade in goods that embody aesthetic pollution concerns could be welfare enhancing.
The problem with the arguments against all of these proposals for more pollution in least developed countries (intrinsic rights to certain goods, social concerns, lack of adequate markets, etc.) could be turned around and used more or less effectively against every Bank proposal for liberalization.”

(quoted from "Economic Analysis, Moral Philosophy and Public Policy" by Daniel Hausman and Michael McPherson).

The memo was intended for internal World Bank use only. It caused a public commotion when The Economist leaked it to the public. And, BTW, no professional economists has seriously questioned the "impeccable" economic logic of this argument. When asked about the memo, Summers responded to the reporter: "I think the best that can be said is to quote La Guardia and say, "When I make a mistake, it’s a whopper.’" Yes. Believe or not, that is what he said.
I will not use adjectives to describe Larry Summers (I may succumb to FAE). I will simply ask you to remember what we learned about the stages of the decision-making process. Remember the first step: moral awareness.

Thursday, September 19, 2013

Larry's explanation of gender inequality

The race is over. Last Sunday, Larry Summers sent President Obama a letter withdrawing his name from consideration to be the next chairman of the Federal Reserve. Summers, a former Harvard President who served in the Obama White House as director of the National Economic Council until 2010, was the front-runner to succeed Ben Bernanke at the Federal Reserve Board. Until Sunday.
One of the critical factors that explain his withdrawal was an old speech he made at the 2005 National Bureau of Economic Research conference. Summers provided there an explanation for the underrepresentation of female scientists at top universities, namely, the natural differences between men and women. Here is a small fragment of his controversial comments (clicking here you access the full version)
"(...) It does appear that on many, many different human attributes—height, weight, propensity for criminality, overall IQ, mathematical ability, scientific ability—there is relatively clear evidence that whatever the difference in means—which can be debated—there is a difference in the standard deviation, and variability of a male and a female population."
The storm surrounding Summers' hypothesis lead to his resignation from Harvard in 2006. And now that he was running for the Federal Reserve, these words made at least five Democrats on the Senate Banking Committee say they would vote against even bringing Summers's nomination to the floor. A coalition of progressive groups spearheaded by the National Organization for Women and Ultraviolent pushed hard against his nomination, and more than 450 economists signed onto a letter to support his rival, Janet Yellen, currently vice-chair of the Fed.
Other economists do not disagree with Summers's assertion, though. Watch the clip above. Featuring Steve Levitt, Distinguished Professor of Economics at the University of Chicago.

Anyway, we will keep talking about Summers this semester. Here we have a kick-off piece to begin the conversation on inequalities, their explanations, and (possible) moral justifications. Enjoy it!

Wednesday, September 11, 2013

September 11, Business, and Politics

Today is September 11. Chile commemorates the most tragic day of its modern history, culminating a week of remembrances dedicated to the 40th anniversary of the most brutal military coup. Forty years ago, democratically elected President Salvador Allende was toppled by general Augusto Pinochet, earlier chosen by Allende to lead the Chilean army.
The videos and pictures of that September 11 are startling. The whole Chilean army, with the support of the CIA and DIA, against a defenseless old man and 22 followers. Declassified documents related to the military coup (they were declassified during the Clinton administration) have shown the involvement of the CIA and the USA Defense Intelligence Agency. Allegedly, the CIA and DIA secured the missiles used to bombard the La Moneda Palace (the Chilean White House). Yes, the Chilean Air Force bombarded the La Moneda palace with Allende and his 20 supporters inside!
The declassified documents also show that powerful American business leaders like David Rockefeller were active supporters of the military coup. Indeed, according to Edward Korry, former U.S.A. ambassador to Chile in 1973, Rockefeller and other prominent business leaders from the copper industry, played a key role in the military plot with the collaboration of the USA President Richard Nixon and his Secretary of State Henry Kissinger. More than 3,200 people - not only political dissidents and Allende's supporters - were killed or disappeared between 1973 and 1990. 40,000 Chileans survived political imprisonment and torture. At least 262 people have been sentenced for human rights violations in Chile, according to figures from Amnesty International.
Americans have other, strong reasons, to commemorate September 11. But we should not forget the other, the first, September 11. And the role of business in it. The "Chilean economic miracle", announced and praised by the Wall Street Journal at the time, was only possible through brutal political repression and massive human right violations. 
Just prior to the capture of the presidential palace, President Allende made his famous farewell speech to Chileans on live radio (Radio Magallanes). The president spoke of his love for Chile and that he would not take an easy way out or be used as a propaganda tool by the traitors. That he would pay with his life the loyalty of the Chilean people. The radio address was made while gunfire and explosions were clearly audible in the background. Right after, reportedly, he shot himself. But he did not surrender the government elected by the Chilean people.
His last words:

"Workers of my country, I have faith in Chile and its destiny. Other men will overcome this dark and bitter moment when treason seeks to prevail. Keep in mind that, much sooner than later, the great avenues will again be opened through which will pass free men to construct a better society. Long live Chile! Long live the people! Long live the workers!"

Wednesday, September 4, 2013

Lost wallets and character evaluations

This is the story we discussed in class yesterday (from Huffington Post):
KINGSTON, N.Y. -- Hassel Junior Barber lives on the streets of Kingston by choice. He sleeps in doorways and on stoops. And, police say, he's an honest man.
Barber found a wallet plopped down on a sidewalk Sunday in the Hudson Valley city. Inside: $485. Money, Detective Lt. Thierry Croizer said, that Barber certainly could have used for food, shelter, clothes. Instead, the 50-year-old homeless man marched the wallet to the police station and turned it in. No reward needed. "He told us that he did not want anything in return," Croizer said Wednesday. "That he did it because it was the right thing to do, and those are his words, the right thing to do."
In a tough town sometimes scarred by serious crime, Croizer said he wanted to publicize a "feel good" story, and hopes people learn the same lesson he did when he dealt with Barber on a new level.
"It made me reevaluate my perception of people, my first instinct, when I first observe someone," Croizer said.

This coming Friday, we will discuss why Detective Croizer is not entitled to say that.

Monday, July 15, 2013

The market for government espionage

For years we have criticized Chinese information policies and praised Google and other IT firms for leaving China in defense of the right to privacy and information. But then Edward Snowden came to the scene. And a noxious multimillion-dollar market has emerged, as Anne Flaherty shows in a recent piece for AP (see here). AT&T charges a $325 activation fee for each wiretap (plus $10 a day to maintain it). Verizon records are more expensive: $775. Numbers climb quickly. One narcotics case in New York in 2011 cost the government $2.9 million alone. Is this the best way to spend tax-payers money? Is it true that Google and other firms are indeed serving intelligence purposes like any of its Chinese competitors?
In any case, be careful! Your email records may be only $25 worth!