The pursuit of profits in different industries: what is the impact on the practice of business ethics?

Author:McCuddy, Michael K.
Position:Report
 
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  1. EXPLORING THE PRACTICE OF BUSINESS ETHICS: ESTABLISHING A CONTEXT

    During the recent Great Recession and in its aftermath, much commentary has appeared in newspapers, news magazines, news broadcasts, blogs, and other assorted media outlets regarding the ethical practices of businesses--or cast from a more cynical perspective, the unethical practices of businesses --and the factors that likely influence those practices, whether they are ethical or unethical. A significant share of the criticism regarding businesses' ethical practices has been targeted toward three sectors of the economy: financial services, including commercial banking, mortgage lending, and investment banking; energy, particularly petroleum exploration, refining, and retailing; and healthcare, including pharmaceuticals. A sampling of various media reports regarding these three sectors will suffice to set the stage for the research questions being explored in this study.

    Financial services. Ethical concerns with the financial services sector cuts a broad swath. With regard to the financial services sector in general, one observer asserts that "Wall Street firms ... exist primarily to enrich their owners and top-level executives with little regard for anyone else" (Conway, 2012). In a more targeted criticism, an April 13, 2011 press release from "[t]he Office of the Comptroller of the Currency [of the United States] ... announced formal enforcement actions against eight national bank mortgage servicers and two third-party servicer providers for unsafe and unsound practices related to residential mortgage loan servicing and foreclosure processing" (Comptroller of the Currency , 2011). The public outrage over extraordinarily large--some commentators would say obscenely large--executive pay packages has contributed to a call for reforms in executive compensation. "The need to reform pay structures is not, as many have claimed, simply a politically convenient sideshow. Even if the type of incentives given to executives of [failed] Bear [Stearns] and Lehman [Brothers]--and others with similar pay structures--were not the cause of risk taking in the past, they could be in the future. Financial institutions, and the regulators overseeing them, should give the necessary priority to redesigning bonuses and equity-based compensation to avoid rewarding executives for short-term results that are subsequently reversed" (Bebchuk, Cohen, & Spamann, 2009). Perhaps the dissatisfaction -indeed, even disgust--with the questionable ethics of far too many companies in the financial services sector is best captured in a letter published in The New York Times public opinion page. Using this forum, Greg Smith publicly resigned from Goldman Sachs, indicating in part, "[t]he interests of the client continue to be sidelined in the way the firm operates and thinks about making money" (Smith, 2012).

    Energy, especially petroleum. Three quotations will suffice to set the context of the media's--and the public's--questioning of the ethics of the energy sector. In September 2011, an anonymously authored Associated Press article indicated that "[s]ome of the nation's largest oil refineries are seeking huge tax refunds that could force school districts and local governments across Texas tens of millions of dollars they were counting on to pay teachers and provide other services" (Anonymous, 2011). In March 2012, The Telegraph, a United Kingdom-based newspaper reported that "[o]il giant BP is investigating a 'serious case of bribery and corruption' alleged to have been taking place in the company's tanker chartering division" (Russell, 2012). Without a doubt, BP's handling of the Deepwater Horizon oil spill in the Gulf Mexico also raised public concern about the company's decisions and actions. In addition, there is growing public concern regarding the extraordinary profits made by some large petroleum companies and the exceptionally high salaries awarded their top executives.

    Health care, including pharmaceuticals. In early 2011, Stobbe (2011a) reported that KV Pharmaceutical was raising the price of single dose of a drug used in high-risk pregnancies to prevent premature births; the price increased from $10 to $1,500. A couple of weeks later in the face of substantial public outcry and movement by federal regulators to insure the existence of a lower cost supply, the company slashed the price of a single dose to $690 (Stobbe, 2011b). In commenting on another healthcare issue Geraldine Ferraro provided a perspective that is nonetheless relevant to the price of the premature birth drug. Ferraro (2007) says, "I'm glad the drug companies are making a profit. That's the American way. But I do want them to understand that the way they are doing it is killing our health-care system, and lots of Americans are dying prematurely and unnecessarily." While pharmaceutical companies have a significant impact on the cost of health care in the United States, insurers might be the major beneficiaries of overall healthcare reform. Terhune and Epstein (2009, p. 35) assert that the real winners are likely to be the giant insurance companies. They say that the insurance industry deftly lobbied behind the scenes in Washington, D.C. to influence health care reform so they could profit from it.

    The questionable ethics that are embedded in the aforementioned media reports also contribute to the growing public perceptions of (a) inequality and inequity in American economic life and (b) a growing failure of society's institutions to effectively deal with these and other ethical challenges. Inequality and inequity are manifested, for example, in the fact that "[f]rom 1960 to 1984, Wall Street's share of total U.S. corporate profits averaged 17 percent according to economist Sameer Khatiwada of the International Institute for Labor Studies, but from 1985 to 2008, its share rose to an average of 30 percent" (Meyerson, 2012). Additionally, economist Emmanuel Saez reports that "the share of pretax income going to the wealthiest 0.01 percent [of Americans] reached its highest level [in 2010] since the IRS began recording incomes in 1913" (Meyerson, 2012). Conway, (2012) suggests the society consider the negative impact of "companies that grow large enough (i.e., rich enough) to purchase other companies and then squeeze every ounce of profit they can from those companies by closing stores and factories and laying off hundreds or thousands of their employees." Increasing concentration of income among the wealthiest citizens and the growing proportion of corporate profits that end up in Wall Street coffers are "the result of decades-long campaigns by Wall Street and corporate leaders to lower their tax rates; to craft a pay a structure for executives that caused their incomes to soar, often at the expense of shareholders; to weaken domestic manufacturing; and to create ever more ingenious ways to market credit, which ultimately enriched bankers and nobody else" (Meyerson, 2010).

    The perception of economic inequality/inequity in America contributes to growing beliefs regarding the failure of societal institutions. "Huge majorities agree that corporate special interests have too much clout in Washington, that inequality has gotten out of control, that taxes should be raised on the successful, that the gamblers of Wall Street deserve some direct comeuppance for the wreckage they have bestowed on the rest of us" (Sullivan, 2011, p. 41). This sense of despair is also documented in the observation that "[t]here is simply a limit beyond which economic inequality threatens democratic life, when the majority suspect that a tiny minority has fixed the system beyond repair through the existing institutions, and when the powerful minority begins to think of its own interests as distinct from the interests of it compatriots" (Sullivan, 2011, p. 44). If the powerful minority pursues its own interests without appropriate recognition of the how they benefit from the societal infrastructure and without appropriate regard for the common good, they should not be surprised at any backlash that occurs. For instance, Clyde Prestowitz, a top United States trade negotiator in President Ronald Reagan's administration, states, "'Whenever some executive says, 'I have a fiduciary responsibility to my shareholders and not to the U.S.,' I say, 'Well, OK, then don't come to me when you have problems with the theft of intellectual property' "(Lyons, 2012).

    Clearly, there is substantial negative opinion regarding the ethical decisions and actions of various businesses, and especially those in financial services, energy, and healthcare. Is this negativity justified? Has the ethical climate of businesses deteriorated? And of...

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