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.”