Corporate Ethics – An Oxymoron

Please note that the term “corporate” and not “business” constitutes the oxymoron in the above title. There are literally millions of honest small and medium-sized businesses in the U.S. and Canada whose owners and managers are ethical; these enterprises are also the ones which create jobs. Many of the Fortune 500 companies and some of the tiers below the 500 are busily firing as many employees as possible and either off-shoring the jobs or having them done by “contractors.” When the colossal Enron swindle in 2002 caused that company to collapse, editorialists were quick to point out that there were only a few rotten apples in the barrel, and that most CEOs of large enterprises were honest. This isn’t true. At the same time it is virtually impossible to create reliable statistics on this subject. Is everyone honest who has not been convicted of a crime? Are persons honest who play dirty pool but at the same are not breaking the law? Are persons honest who are simply doing what everyone else is doing and have not been caught? The possibilities are many.

Let’s get specific and start at the top. Exxon/Mobil is the most profitable company in the world and one which is worried that the problem of climate change due to the emission of greenhouse gases is a danger to its health. Some other petroleum companies have started to look seriously into alternative sources of energy such as wind power, but not Exxon-Mobil. It has tried and is presumably still trying to discredit the opinion of the great majority of climatologists and the public that there is a direct connection between global warming and the emission of greenhouse gases which are produced by automobiles, aircraft, factories and the majority of power plants. In order to propagate this minority view, it supports publications and organisations which agree with the Corporation. Surprisingly, one of them is the Congress of Racial Equality. But that is not enough. The Corporation also supports a “think tank” called the George C. Marshall Institute which denies the link between climate change and greenhouse gases. All of this is detailed in a long article by George Monbiot entitled “The denial industry” that appeared in the British Guardian Weekly (September 29 – October 5, 2006). Since I do not consider myself gullible, I looked up the Marshall Institute on the Web, and sure enough, Monbiot is on to something. Earlier denial activities of Philip Morris with regard to passive tobacco smoke are also mentioned.

Wal-Mart is by far the largest retail chain in the world. While urging its suppliers to have work done in China to lower costs and make their goods more attractive, Wal-Mart seems to have a permanent bias in favor of cheating its employees. Several years ago it came to the attention of various labour departments that the company kept its employees in the stores to tidy up the premises after the customers had left. This work was unpaid, considered housekeeping, and violated all applicable labour laws. After complaints by various government agencies, Wal-Mart abandoned the practice, but a number of individuals and groups such as “China Labour Watch” became interested in the Company as employer. On December 16, 2005, a Bloomberg news article by Lauren Coleman-Lochner reported that Wal-Mart used a factory in southern China which paid less than the minimum wage in Guandong Province. Mattel, who used the same factory, was also involved. According to Bill Wertz, a spokesperson for the Company, as a consequence of this publicity, Wal-Mart increased its number of inspectors, who working in pairs, check the contractors. Yet, suprisingly, surveys have indicated that Wal-Mart’s customers are not interested in the treatment of foreign workers. Closer to home, Wal-Mart had a store in Jonquière on the Saguenay River of northern Québec whose employees voted to join a union in accordance with provincial law. Instead of attacking the validity of the vote, or using delaying devices to slow the progress of the union, Wal-Mart simply closed the store and left the area. It was an eloquent signal that if someone wanted to be a "Wal-Mart associate", it was wise not to vote for a union. Lastly, another Bloomberg report, of October 14, 2006, stated that a Pennsylvania jury found for the “associates” in a class-action law suit for payments due for missed rest breaks and hours worked beyond regular shifts between 1998 and 2001 in the amount of $78.5 million. This award follows a similar case last December in California where the verdict was for $172 million.

Leaving the two giants we get to other games being played by large corporations. One of these is Late Trading. This is an illegal accommodation by certain mutual funds to allow favoured major customers to place orders after the New York Stock Exchange has closed. Apparently, certain corporate announcements are made after the close of trading in order for everyone to have the same opportunity to buy or sell. If a major customer is allowed to trade after such an announcement is made, and have the trade “booked” the prior day, the customer has a great advantage. According to Pro Futures, which offers articles about investments, Canary Capital Partners LLC agreed to pay $30 million in restitution and a $10 million penalty for Late Trading, while other big customers including Bank of America and Banc One are currently under investigation. Lately, another scheme has come to light, the back dating of options of top officers of corporations in order to increase the options’ value when exercised. An article in the Economist (October 21, 2006, p. 73) states:

The toll has now reached 34 top executives and directors, and counting, including no fewer than six chief executives in the past week. Corporate America has never seen anything quite like the carnage caused by the scandal over the backdating of employee share options. Over 100 companies are known to be under investigation for allegedly backdating options to value them at low points in their share prices, and several hundred more have come under suspicion.

Lastly, an article in Time on the “The Enron Effect” (June 5, 2006, p. 38) says:

Enron joins WorldCom, Adelphia and Tyco among the big companies busted by George W. Bush’s Corporate Fraud Task Force, which has won 1,063 convictions, including guilty verdicts against 36 chief financial officers and 167 corporate CEOs and presidents.

Two additional comments are in order. When you hear or see mention of “just a few rotten apples” in connection with the behaviour of large North American companies, and you have a garden, it is time to get a shovel. Your plants and flowers will benefit. Secondly, how much of this problem is due to the behavior of individual and mutual-fund shareholders who are speculators and not investors? What kind of environment has been created for responsible management when it is judged by share-price movement in a 90-day period?

December 2006