Introduction
Corruption and social values are two related phenomena which have probably existed in various forms since the creation of our society. In this short note, we shall only discuss these issues as they relate to business. There are undoubtedly many examples of ethical dilemmas and questionable social values in other parts of the lives of mankind too, but these shall be left for others to deal with.
As I see it there are at least five major areas within our business world that may be particularly prone to the existence of ethical/social value dilemmas:
Asymmetric information
Canceling agreed-upon contracts
Misleading valuation
Corruption
Tax-evasion
Cost-cutting actions
In the following, we shall discuss a total of nine issues that fall into these five areas. But first, let us give you an example, stemming from my own experience in selling a business to Chinese parties, which hopefully does not only illustrate what might be intricate ethical dilemmas but also how, what might be seen as ethical or not may, at least to some extent, the dilemma may be a function of different social values, among various nations.
One final caveat. I shall draw on my own experiences throughout. While this might add some authenticity to the discussion, it undoubtedly also shall imply that there shall be many issues within the ethics/social values domain that I shall not be covering – such issues may have simply fallen outside of my own experience.
As we shall see from the examples to be given below, what is seen as ethical is typically a reflection of a society’s more basic social values. Thus, what may seem to be unethical in one society may be considered to be entirely ethical in another society, with different social values. This reality might, by the way, represent the biggest challenge to global business activities. Often such dilemmas in social values may make it difficult to come up with business transactions that might seem ethical for all.
Let me illustrate this with an example from my own experience. As many of the readers may know, I sold a business school, lakeside location and all, to Chinese buyers. Adjacent to this was a derelict water works facility which belonged to the local municipality. I got a commitment from the Chinese buyers who had recently become owners of the school, that they would purchase the water works property from the local community, but only after I had paid another neighbor a significant amount of money for abandoning a loan she had on the property.
This raises two ethical dilemmas right away:
Was it ethically ok for me to position myself as a “middle-man” in this transaction? Why could not the Chinese rather buy this property directly from the local municipality? Could I have been more open in sharing information between these two parties so that they might have been dealing with each other directly? Also, was it ethical to pay the neighbor directly for having her give up her loan on the property? The Chinese buyers then abruptly withdrew their commitment to buy the water works property from me. I consequently found myself being the owner of a property that would have little commercial value to me! Subsequently, the Chinese came back with a new offer, but at a lower price than that had initially been agreed upon. This was accepted by me, and the deal was completed. Was this ethical? From my point of view, the answer was clearly not. We already had an agreed-upon deal – clear and simple! According to the social norms that I was operating under, an agreement is an agreement – a deal is a deal, binding! But the Chinese buyers’ social values indicate something different, namely that it is the norm, and to be expected, that one might negotiate further even after an initial agreement had been reached. So, for the Chinese party, the set of actions taken by them were seen as ethically fine, and in line with their own social norms! And, in the end the price did come down.
Here lies the dilemma. Difference in social norms may, in turn, lead to different interpretation regarding what might be seen as ethical or not.
In the following I shall discuss several ethical issues. For each one I shall attempt to relate this back to underlying societal norms or values. And, in many of these cases we shall see that there may be no clear answers. Difficult dilemmas may arise!
Now to the five areas to be covered:
Asymmetric Information
What are the ethical constraints on persons who shall be having access to information not available to others? Board members, senior managers, lawyers, bankers, as well as friends/family members of board members or senior managers may be examples of such persons who might get access to such so-called privileged information.
Clearly there are quite strict regulations in some countries when it comes to taking advantages of such privileged information. Regulations regarding so-called insider trading is particularly explicit. But there are still differences between countries when it comes to these issues. Board members, for instance, have much more freedom to utilize privileged information in some countries than others. Legislation may be enforced in a more relaxed way, or it may even be non-existent. Social norms of countries differ when it comes to these issues. What may be acceptable or permitted in a certain developing country may be illegal in many developed countries, for instance. The social values are different! Actors may feel that they act ethically as long as they adhere to the social values!
There are still potential dilemmas. Here is one that I am grappling with. I am on the board of a European company, and all shareholders know that this company is being “dressed up for sale” within the next few years. While I have no intention to buy additional shares, of course (potentially insider trading) I shall nevertheless get an early knowledge regarding an imminent sale of the company. This will allow me to plan how such a sale might be better handled within my own investment company (S. Ugelstad Invest). Is this ethical or not? Or is this simply a dilemma that would face any involved board member, appreciated by all? Especially when the board member or person with privileged information has his/her “skin in the game”.
Walking away from agreed-upon contracts
Let us start out with potential dysfunctional effects from the Corona virus threat when it comes to this issue. It is a fact that many businesses have run into considerable difficulty when it comes to this. Some may actually be hit so hard that they are facing closure. As a valid way to attempt to pull through this crisis it seems key to line up to the diction that “cash is king”.
Contracts that have been agreed upon already might therefore be cancelled. Some, say having to do with large gatherings of people (sports events, classes, meetings) may be perhaps cancelled as a function of the fact that such events may no longer be legal, due to the new governmental emergency regulations (i.e. no social crowding). Other agreements may have to be cancelled due to sheer insolvency by the contracting party. The ethical norms have been kept to be relatively clear here. But there are clearly other situations too.
Rental payments, for instance, may be negotiated by corporations which might affect these payments, per se. Or, employees may now have to be let go, bypassing normal “safety regulations”.
And, here is one case that has had direct impact on me: I had agreed to purchase a certain number of shares in company X, for a given price, before the crisis. I am honoring this commitment. In contrast, another person located on another continent had also agreed to purchase this type of shares from someone else. The prospective buyer decided to “walk away” from the deal! This canceling purchaser does indeed have a good reputation! Difference in social values may be at play here. Clearly too, personal values are involved. Just as groups, markets and countries have social values, we individuals also have personal values and at times there are nuances of differences at play.
There may also be that excessive stress might lead a party to cancel a contract. For instance, when I was board member of a large shipping company the following incident happened. A large VLCC which was on charter to another large ship-owner, with a good reputation up until then, was canceled. The other ship-owner (the charterer) was under economic stress, it turned out, and later went bankrupt. The shipping company whose board I was on, also ran into considerable economic problems. While in my opinion, the ethics of canceling such a charter was clearly over-stepped, the dire economic conditions of the charterer were such that they created a lot of stress for this entity. Perhaps this might explain why the ethical borders were overstepped? But such stress was certainly not an excuse!
To be realistic and to provide full disclosure seems paramount when it comes to these situations. I had, for instance, entered into an agreement with a major newspaper for its journalists to offer several workshops for the Lorange Network, a wholly owned entity within S. Ugelstad Invest. The first few workshops were clearly in conflict with governmental regulations forbidding crowds to gather, such as in classrooms settings, i.e. opening up to cancelation by me, via “force majeure”, however the remaining workshops were to be offered further out in time. Thus, at that later point in time, the social gathering requirement may perhaps be lifted – still a “force majeure”? When I shared all realities of this with the other party, and above all the reality of the uncertainties that had now been created among our potential customers, the leaders of the newspaper were quick to say that we should both work together to find a solution. Thus, honesty and reason prevailed, and there would be no ethics questions!
Misleading an Investor
It goes without saying that an entrepreneur shall typically try to push valuation of the company as high as realistically possible. But, are there some ethical limits here? Above all, are there existing customers or orders that can be documented? Or, are we talking about nothing more than un-documented expectations? There are always two parties to a deal, of course. Still, a sense of reality, especially regarding the income-generating side of a business, is very important.
In my own experience, I have unfortunately run into several such incidents when the entrepreneur started with such a high valuation for the company that I had a hard time to reconcile this with realism. And, interestingly, which I must confess at times I wondered whether ethical limits had been reached, each entrepreneur involved evidently did not seem to feel this way. Were the entrepreneurs under some kind of survival pressure, i.e. in “desperate” need to secure new capital?
A related issue can be seen in reference to the question of how new capital is going to be put to use in an entrepreneurial entity. Specifically, does all, or parts of the new capital, go to pay off old debt, or to “repay” initial investments by the entrepreneur, even in kind (time) investments rather than cash investments? Clearly an entrepreneur should have a clear requirement to be explicit here. In my opinion, to pay off old debt and/or to remunerate him/herself is clearly unethical, unless this has been explicitly made clear to the person(s) investing, and in a completely transparent and straight-forward way. “Old” cash must be prepared to become diluted, even wiped out.
A recent experience of mine comes to mind. After having invested an initial amount, by the way at a relatively high valuation – my decision, I was asked to put more funds into the company. A too-high burn-rate had led to a very tight cash situation. I put in the additional funds, only to find, one month later, that the firm was out of cash again. “My” funds had been used to pay old debt, i.e. a fact which I had not been briefed about.
Corruption
Corruption is typically something we associate with “payments under the table” so as to obtain a favor, such as “special” payments to individuals who might have influence on us getting, say, a particularly lucrative contract. This seems to be quite common, within a number of industries, including defense. And, this practice seems to be quite common in many parts of the world, even though there are strong regulations that try to stop this practice in many countries. The US’s “Foreign Corrupt Practices Act” is perhaps the most prominent. This “forbids” companies to engage in any sort of corruption anywhere in the world, as long as such firms are US-based or are doing business in the US.
A particular phenomenon that we need to comment on when it comes to the potential for corruption is so-called “Islamic banking” where there is no interest (forbidden by the Koran), but fees to be paid instead. While no interest, or a low interest rate, is good for business – easier access to cheap capital – this practice clearly opens up for potentially corrupt practices. The fees paid may be particularly conducive to such “contamination”.
As noted, outright “payments-related corruption” seems to be most common in developing countries. But there are clearly other forms of corruption too, and some of these corruption forms are quite ordinary in developed countries as well. For instance, it is quite custpmary that practices involving the granting of physical favors exist, often quite informal arrangements: “You scratch my back, I scratch yours”. In many countries there are regulations that limit the value of gifts, for instance, intended to ameliorate or block this form of corruption.
Tax Evasion
Very few persons like to pay taxes. During much of the history of mankind this has been considered as a “necessary evil” by many. But, in many societies, it is considered as unethical to try to cheat on taxes, once the rules for tax payments have been set by the government. Tax evasion is seen as a crime, unethical!
But in some countries, this is not the case. To “cheat” on paying taxes is seen as “fine” in many countries, even though it is still illegal. But, typically only a few get caught! The social values are different in these countries, in the sense that tax fraud is considered to be acceptable if done discreetly.
The fact that the tax code has become so complicated in many countries that even the most ethically conscious taxpayer might make a mistake clearly represents a dilemma. But, to make an honest mistake should not be a crime. Here, Switzerland differs from many other developed countries.
Cost Cutting
We have already discussed some of the ethical dilemmas associated with breaking contracts that have already been entered into at an earlier date. These acts are clearly motivated by desires to cut costs too, quite necessary for many countries now when facing the economic realities stemming from the Corona virus threat. As we saw, being able to declare “force majeure” is typically not unethical. But to walk away from a contract beyond this, definitely seems to be!
Let us, in this section, address another issue raising potential ethical problems, however. Namely the trimming of the labor costs. In most developed countries we have specific laws relating to minimum wages. Further, there tend to be regulations stating how to scale down salaries, or to terminate employees. However, crises such as the one we are facing now seem to open up to short-cuts here. Thus, large numbers of employees are now without work – there is record unemployment! While companies clearly shall have to take actions when it comes to trimming labor costs, it is important that they do this in such a way that are deemed fair, i.e. ethical. And, no actions should be taken to trim labor costs now which a firm’s leadership might have had planned to undertake anyway, before the present crisis. To utilize the current emergency as an excuse to cut labor costs is not ethical!
Conclusions
As we have seen, we live in a world where both norms and legal regulations call for certain ethics. And, social values clearly come in. Yet social values typically differ from country to country, from one world regime to another, thus often opening up dilemmas when it comes to generality of what is to be considered ethical. What would clearly be unethical in some countries, may be seen as entirely ethical elsewhere.
Also, we saw that even for many key economic considerations in a particular economy, excuses due to economic crisis situations and/or stress might lead some to act in ways that the rest of us may consider to be unethical. There are perhaps difficult dilemmas without any clear solutions.
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