Category: Ethics

The Russian Death Sentence

On Tuesday, the Russian Olympic Committee was suspended from participating in the Olympic Winter Games at PyeongChang in February 2018. The action was in response to “the systemic manipulation of the anti-doping rules and system in Russia, through the Disappearing Positive Methodology and during the Olympic Winter Games Sochi 2014″. These penalties for doping are without precedent in Olympics history. Plenty of athletes have been kicked out or lost their medals for doping. This is the first time an entire county was kicked out.

This all stems back to the corrupt doping testing facilities at Sochi. Thomas Bach, president of I.O.C., noted that Russia’s cheating was widespread. Even worse,  it corrupted the Olympic laboratory that handled drug testing at the Sochi Games on orders from Russia’s Olympic officials. Russia’s sports ministry formed a team that tampered with more than 100 samples to conceal evidence of athletes’ steroid use throughout the course of the Sochi Games.

This is a terrible outcome for Russian athletes and will likely have a huge negative impact on the PyeongChang Games. The Russian athletes have excelled in many of the winter competitions. Clearly, some of that was from doping. But not all. (Do you believe in miracles?)

The IOC opened the door for some Russian athletes to compete under a neutral flag as Olympic Athletes from Russia. The IOC has organized a group to extend invitation to a select group of athletes, support staff and officials to participate in this manner. As you might expect, the athletes must not have had a prior doping violation and must go through a battery of tests before the Games.

It’s not clear how big this pool of invitees will be. Yevgenia Medvedeva, a favorite to medal in figure skating favorite, said that she “can not accept” competing in PyeongChang as a neutral athlete. She pointed out that she was 14 during the Sochi Games and not a member of the national team.

This is obviously a huge blow to the Russian sports federation, but the IOC indicated that the Russian flag may be allowed to fly at the closing ceremonies, presumably as a symbolic indication that they can move past this and compete clean in future events.

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Warding Off Unethical Behavior

Legend has it that if you string garlic around your house, you can ward off vampires. What if there was something similar you could do to ward off unethical behavior in the workplace? Apparently, religious symbols may keep you away from an unethical boss.

Bunches of garlic hanging on a black background

A forthcoming study in the Academy of Management Journal found that if employees displays moral symbols, it could help prevent their managers from asking them to cheat or engage in other bad behavior. Sreedhari Desai of the University of North Carolina at Chapel Hill conducted field research at Indian firms to test whether those who kept a religious symbol at their desks were treated differently by their bosses to those who did not. She found that managers were less likely to ask employees to act unethically if they displayed some indication of moral values.

The research used a broad swath of items to be considered moral symbols: quotes in email signatures, religious symbols, pictures of Martin Luther King, Jr., etc.

In one experiment, participants had to decide whether to ask one of their subordinates to tell a business lie. Only 46% of those who read the moral quote chose to issue that request, but nearly 64% of those who saw a neutral quote did. Among subjects who decided to give the unethical instruction, those who saw the moral message in the email signature from one employee were more likely to ask another employee instead.

She came up with three theories:

  • Managers may be reluctant to put seemingly moral employees in an awkward situation.
  • Managers may fear that such people are more likely to blow the whistle on any improper demands.
  • Exposure to a moral sentiment or symbol makes a manager reconsider the improper behavior and change the request.

It may that this experiment is an effect similar to what Dan Ariely saw in some experiments. Reminding people to do the right thing has a positive effect on creating more ethical behavior.

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Halloween Garlic from Graphic Leftovers

If You Recommend It, You Have to Mean It

The Securities and Exchange Commission charged an investment bank’s research analyst with publishing a rating on a stock that was inconsistent with his own view. Charles P. Grom gave a public “buy” recommendation to the retailer Big Lots, but privately expressed his concerns about the company.

“We just had them in town so it’s not kosher to downgrade on the heels of something like that,” he said on an internal conference call, according to the S.E.C.

Stock Market Launch

Regulation Analyst Certification (Reg AC) came out of the Dot Com bubble burst. Investment banks were handing out favorable public analyst recommendations to their clients, but providing conflicting advice to their institutional clients. Sarbanes-Oxley required the SEC to adopt a rule addressing analyst conflicts.

The most famous case under Reg AC was Henry Blodget. In 2003, the former Merrill Lynch tech stock analyst paid $4 million in fines and disgorgement and was permanently barred from the industry. (Mr. Blodget neither admitted nor denied wrongdoing as part of the settlement.) Ten investment banks paid $1.4 billion in fines for publishing analyst recommendations that conflicts.

It’s been quiet under Reg AC for a decade. I assume banks took steps to correct the conflicts.

I also assume that they enforced the “Fight Club Rule.” The First Rule and Second Rule being that you do not talk about Fight Club.  Analyst should not speak about any conflicting advice.

Mr. Grom broke the rule and revealed that investment banks may not have taken Regulation AC to heart.

On March 2, 2012, Mr. Grom published a “Buy” rating on Big Lots.

On March 28, Mr. Grom and the bank hosted Big Lots executives and spent most of the day with them.

Over the course of the day Mr. Grom told a trader to sell 25,000 shares from the bank’s proprietary account.

Over the course of the same day Mr. Grom spoke with four of the bank’s top priority “Global Research Service Level 1” hedge funds. Each of those funds then sold all of their positions in Big Lots.

Then on March 29. Mr. Grom issued a research report on Big Lots entitled “Not All Is Good In Buckeye Land,” in which he reiterated his BUY rating.

On that same day he said on  a conference call with the bank’s research and sales personnel: “We just had them in town so it’s not kosher to downgrade on the heels of something like that.”

Then on April 24 he revealed that he had violated Reg AC on a call with the bank’s research and sales personnel

“[F]ortunately we told many clients a few weeks back to sell the stock.. . . I think the writing was on the wall [that] we were getting concerned about it, but I was trying to maintain, you know, my relationship with them. So, that’s why we didn’t downgrade it a couple of weeks back.”

Oops.

The question that comes to mind: how did Grom get caught? Perhaps it was internal compliance who reviewed the internal call. That would be a double face palm event for violating Fight Club Rule 1 and Rule 2. Maybe it was SEC or FINRA examiners reviewing a recording of those conference calls.  It’s an easy win for them.

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OptOutside: REI Taking an Ethical Stance on Black Friday

I hate Black Friday. Being at a store in a sea of sleep-deprived shoppers to find bargains would likely make me lose a little faith in humanity. REI, the outdoor retailer, decided to stand behind its core value:

“We believe a life outdoors is a life well-lived.”

While the rest of the world is fighting it out in store aisles, REI hopes to see you in the great outdoors.

optoutside

REI is closing all of its stores on Black Friday and paying its employees to be outside.

We’re passionate about bringing you great gear, but we’re even more passionate about the experiences it unlocks for all of us. Perhaps John Muir said it best back in 1901: “thousands of tired, nerve-shaken, over-civilized people are beginning to find out that going to the mountains is going home.”

We think Black Friday is the perfect day to remind people of this essential truth.

Is this a move about ethics and corporate value? It sure seems that way.

OptOutside will not be cheap for REI.

It will forego sales. Black Friday is one of its top ten days for sales.

REI will pay nearly all of its 12,000+ employees for the day off. I assume there be some employees still working to keep operations running.

It may even have to pay fines or breach its leases to its landlords at shopping malls. Many retail leases in shopping centers requires stores to be open with the rest of the stores.

Other big retailers taking an ethical stance against Black Friday are merely stopping short of opening on Thanksgiving. REI is standing behind its core values.

I think I will join the stance. I’m already planning a Black Friday bike ride, far away from shopping malls.

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Cheating In Ethics Class

Dartmouth_logo

Is this the worst ethics teacher?

64 Dartmouth Students Charged With Cheating In Ethics Class

According to the story, attendance in religion professor Randall Balmer’s “Sports, Ethics and Religion” was measured using handheld devices known as “clickers.” In late October, some students passed their clickers to fellow classmates. Those classmates then used the clickers to answer questions which made it appear as though they were present in class.

The ethics course was originally intended to help student-athletes. In its second year, the class grew to more than 280 students. Attendance and cheating became a problem.

Balmer discovered the problem when he noticed a discrepancy in the number of student responses to in-class questions using handheld clickers and the number of students in the classroom on Oct. 30, 2014. Balmer presented both a hard copy version and a clicker version of certain questions, and noted that 43 students did not respond to the paper version of the questions but did respond using clickers.

Obviously the students are at fault for breaking the school’s honor code. Clearly, professor Balmer did not make an impression on his students’ ethics during the first few classes. They felt they could cheat and still get a good grade.

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Cheating Your Way Into the Olympics

Vanessa_Mae_holding_olympic_torch

Vanessa Mae really wanted to compete in the Olympics, but she is better violinist than a skier. She has sold 10 million records so that is a very high bar. The International Ski Federation decided that she cheated her way into the Olympics.

When Eddie the Eagle competed in the 1988 Olympics, some thought it was a great underdog story and some thought it was degrading the biggest sports event. In response, the International Olympic Committee instituted a new rule in 1990 which requires Olympic hopefuls to compete and place well.

In Sochi the musician raced for Thailand and finished last of 67 competitors in the two-run giant slalom. Her quote after the race:

“You’ve got the elite skiers of the world and then you’ve got some mad old woman like me trying to make it down.”

To qualify, Ms. Mae raced four times in Slovenia in January in a last-ditch bid to meet the Olympic qualifying standard. Under current Olympic qualification rules, countries with no skier ranked in the world’s top 500 may send one man and one woman to to compete in slalom and giant slalom if those athletes meet racing criteria.

Thailand has no skiers ranked in the world’s top 500.  To meet the racing criteria, Mae had to produce an average of 140 points or fewer over five recognized races. She slid under the wire and made the score.

But it turns out those races in Slovenia were a fraud, staged to get Mae the points she needed. According to the FIS report:

  • The results of two giant slalom races on 19th January included a competitor who was not present at, and did not participate.
  • At least one competitor started away from the starting gate outside the automatic timing wand that was manually opened by the starter when she was already on the course.
  • A previously retired competitor with the best FIS points in the competition took part for the sole purpose of lowering the penalty to the benefit the participants in the races.
  • The races courses were not changed for the second runs as is required by the FIS rules.
  • One of the races was a junior championship, with Mae being 15 years older than all of the other racers.

The FIS banned five officials from Slovenia and Italy for between one and two years for their role in the scandal. Ms. Mae is banned from skiing for four years. But she still achieved her dream of competing in the Olympics.

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“Vanessa Mae holding olympic torch” by Yemisi Blake from London, United Kingdom. Licensed under CC BY 2.0 via Wikimedia Commons.

Compliance and Ebola

ebola and compliance

There is clearly an Ebola scare happening in the United States. It’s a nasty disease and that has attracted widespread media attention. Is there anything your compliance team should do about Ebola?

I’ll assume that your firm does not have operations or personnel in West Africa. If it does, then yes, you should be concerned about Ebola and contacting professionals.

For the rest of us, there is little to worry about.

There have been three confirmed cases of Ebola in the United States and one death. Those are tragic. But very small. If your compliance program is so robust that you can worry about such infinitesimal risks, I congratulate you.

Let’s put the Ebola risk in perspective.

Influenza, the seasonal flu, typically kills between 3,000 and 49,000 people each year according to the CDC. Influenza is much more contagious and can spread through the air in the workplace. (Ebola cannot.) It sounds like your compliance team should spend much more time making sure all employees get their flu shots than to worry about Ebola.

There were 4,405 fatal workplace injuries in 2013. Nine percent of those were homicides. It sounds like you should be more worried about an active shooter than Ebola.

There were three workplace deaths attributed to lightning in 2013. You are three time more likely to die from a lightning strike at work as you are to catch Ebola in the United States. How is your lightning compliance program?

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The NFL Teaches Us the Difference Between Ethics and Compliance

protect the shield

The National Football League is by far the most popular sport in the US. NFL Commissioner Roger Goodell talks about what he calls “protecting the shield.”

He originally handed down a two-game suspension to Ray Rice for a punch to the head of Mr. Rice’s fiance that left her lying unconscious on the floor of an elevator.

That decision was complaint with the NFL rules, which did not carry a specific penalty for domestic violence.

That two game suspension was shorter that the season long penalty handed down to Josh Gordon for his use of marijuana.

That decision was compliant with the NFL rules. Marijuana happens to be legal in two NFL cities and is subject to regulated use in many of the other NFL cities.

The Minnesota Vikings suspended Adrian Peterson for one game after being indicted for child abuse. The team reinstated him to allow the judicial process to proceed.

That decision was compliant with NFL rules.

Those are just three examples where the NFL was being complaint with the law and its own rules. Those are three examples where the NFL came to the wrong outcome.

Ray Rice has now been suspended indefinitely, Josh Gordon’s punishment has been reduced and Adrian Peterson is suspended.

It leaves you wondering what the NFL Commissioner means by “protecting the shield.”

During this tenure as commissioner, he negotiated very lucrative television contracts for the NFL owners. He negotiated a collective bargaining agreement that is very favorable to the NFL owners. He has made a great deal of money for his 32 bosses, the NFL owners.

The NFL has continued to grow in popularity. Gregg Easterbrook in his Tuesday Morning Quarterback column has been noting for five years: “There is no law of nature that says the NFL must remain popular.”

Now there is a perception that Goodell engaged in a cover-up to control the narrative of the Ray Rice story. The initial suspension for domestic violence was dramatically shorter than the punishment for use of a largely legal drug. Peterson was only suspended after a key sponsor cried foul and pulled its support of the Vikings.

“Protecting the shield” is not about making money for the owners in the short term. It’s about protecting the integrity of the game and the league. It’s about ensuring the long-term popularity of the game and the league. It’s the difference between acting ethically and being compliant.

Compliance and Breaking Bad

compliance and breaking badI was up last night hooked into latest episode of Breaking Bad. Besides it being a great show, it highlights a focus of compliance. How do you prevent your employees from going bad?

For those of you who haven’t seen the show, Walter White, a mild-mannered high school chemistry teacher helps ends meet by making drugs. As the story progresses and Walter makes a series of bad choices, he transforms into the murderous drug lord Heisenberg.

Perhaps the evil has always been inside Walter. Perhaps it was a mid-life crisis gone horrible wrong. Perhaps it was pure greed.

Walter’s first choice was clearly across the line when he met with his former student to cook his first batch of crystal meth. As he escapes each increasingly threat to his life and his livelihood he moves progressively further from Walter to Heisenberg. The success of each bad act leads to more bad acts.

One goal of company’s compliance program is discourage an employee from going bad. And to the extent an employee goes bad, to promptly catch them to prevent further bad acts.

Are You Systemically Important?

too_big_to_fail_poster

One of the catchphrases that came out of the 2008 financial crisis was “too big to fail.” It’s a great concept, but hard to define in a meaningful way. Many think that there is no private company that should not be allowed to fail. Dodd-Frank created a concept of systemically important, trying to create additional oversight for “financial companies” that could be too big to fail.

The trick was trying to define a “financial company.” Many companies use derivatives to hedge their business risks. Many big manufacturing companies use hedging to limit exposure to commodities they use. Companies with overseas operation use foreign exchange derivatives to hedge currency risks. The tough part was drawing the line.

The Federal Reserve Board on Wednesday announced approval of a final rule that establishes the requirements for determining when a company is “predominantly engaged in financial activities.” The requirements will be used by the Financial Stability Oversight Council when it considers the potential designation of a nonbank financial company for consolidated supervision by the Federal Reserve.

The final rule defines the terms “predominantly engaged in financial activities”, “significant nonbank financial company” and “significant bank holding company.” The FSOC must consider the extent and nature of the company’s transactions and relationships with other significant nonbank financial companies and significant bank holding companies. If designated, those nonbank financial companies will be required to submit reports to the Federal Reserve, the FSOC, and the Federal Deposit Insurance Corporation on the company’s credit exposure to other significant nonbank financial companies and significant bank holding companies as well as the credit exposure of such significant entities to the company. Consistent with the proposal, a firm will be considered significant if it has $50 billion or more in total consolidated assets or has been designated by the FSOC as systemically important.

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