On the Birth of Corporate Social Responsibilty in 1869

Referring to the speculation in gold that was engineered by Jay Gould and others in 1869 to enrich themselves and the Erie Railroad, Henry Adams (1838-1918), a grandson of John Quincy Adams and great grandson of John Adams, wrote at the time:

“For the first time since the creation of these enormous corporate bodies, one of them has shown its power for mischief, and has proved itself able to override and trample on law, custom, decency, and every restraint known to society, without scruple, and as yet without check. The belief is common in America that the day is at hand when corporations far greater than the Erie [Railroad] — swaying power such as has never in the world’s history been trusted in the hands of mere private citizens  . . . — will ultimately succeed in directing government itself. Under the American form of society, there is now no authority capable of effective resistance.” (1)

Gould had wanted the price of gold to rise not only because he had bought some to sell at a higher price, but also because as a stockholder of the Erie, he would benefit from the railroad transporting more wheat from the Midwest to the east coast for export. A higher price in gold meant a lower dollar. Wheat being based in dollars, a lower dollar meant more exports. The strategy was essentially to devalue the dollar, which Gould assured President Grant would be in the national interest economically. As the price of gold rose to $165 in 1869, Grant, fearing a bubble, pulled the plug by having the Treasury sell $4million in gold.  The collapse in the gold market triggered a drop in the stock-market. Even if it might have been in the short term interest of the speculators and railroads, the manufactured bubble was not in the national interest after all. Gould’s bribes of administration officials had been in vain.

Henry Adams saw the imprint of corporate power eviscerating both societal norms and democracy in the scandal.  In other words, the new-found corporate power eventuated in the birth of the need for corporate social responsibility amid capitalism eclipsing democracy. In academic terms, corporate social responsibility and (corporate) business & government, although discrete fields, were both first publicly recognized in 1869.

The corporate power occasioning Adam’s recognition was a novelty at the time, according to Brands, because the large corporation had only come into being as the railroads incorporated in the 1850s. Looking back after the Civil War, Henry Adams observed, "The last ten years had given to the great mechanical energies — coal, iron, steam — a distinct superiority in power over the old industrial elements -- agriculture, handwork, and learning." (2)  The power of steam in particular translated into large, publicly-held, corporations first in the railroad industry.

On account of their size and scope, and the associated equity capital requirements given the risk faced by lenders, the railroads were the first large American corporations to be publicly traded. The diffusion of ownership — a consequence of the large capital demands — led to a separation of ownership from control and to a new ownership interest: that of the short-term-oriented speculator. A short-seller, for example, seeks lower corporate earnings in the future, while a long-term investor hopes for higher dividends, and thus profits. Managers can exploit this difference in order to pursue their interests in the name of the corporation at the expense of societal norms and democratic governance.

Undergirding the managerial basis in skill, the railroads were the first companies to develop the methods of corporate administration. For example, there were supervisors over supervisors—in other words, multilayered organizational charts. Furthermore, dovetailing with the need for safety and efficiency (given the competition), the railroads developed precise management of their operations, including the development of standards for measuring performance. In short, the railroads were the first to develop a cadre of managers specialized in administration in the particular industry. (3)

Regarding the private power based on technique (i.e., managerial power), Henry Adams announced in 1869 that there was no authority, whether in society or government, capable of resisting it. The normative call for corporate social responsibility and the political call for a resurgence of democracy amid the encroaching capitalism were born. In other words, with great power came a recognition of a need for great responsibility. The corporate social responsibility movement began as precisely this recognition even as the modern large corporation was in its second decade.

Punctum Saliens, the large corporate type of commercial organization itself is inherently powerful relative to societal norms and even potential governmental or regulatory restraints. That is to say, the invention of the large corporation may have been inherently problematic, essentially involving systemic risk to the republic itself on account of the private power of the managements. To paraphrase Nietzsche, power cannot be but powerful. To unleash an inherently powerful feeding machine and expect it not to eat the grass is naive, if not patently irresponsible. To expect the managements of extremely wealthy corporations to be willingly socially responsible when their economizing and power-aggrandizing nature is to run through such non-constraints is simply ideological, if not fanciful. Fundamentally, the problem with corporate management is its inherent proclivity to bristle at any external constraint. It is the underlying maximizing egoism that is innately antithetical to the limiting natures of government regulation and corporate social responsibility.

Endnotes:

1. Henry Adams, “The New York Gold Conspiracy,” in Charles F. Adams, Jr. and Henry Adams, Chapters of Erie (Ithaca: Cornell University Press, 1956), pp. 135-36.

2. Henry Adams, The Education of Henry Adams (1907; Boston: Houghton Mifflin, 1961), p. 238.

3. H. W. Brands, American Colossus: The Triumph of Capitalism 1865-1900 (New York: Doubleday, 2010), pp. 22-23.

Tension between Wall Street and Main Street: A Case beyond the Reach of Corporate Social Responsibility

In October 2011, Gerald Seib wrote that political and economic pressures in the wake of the financial crisis were “pushing business leaders into the public cross hairs.”[1] I submit that the very existence of the largest American banks was becoming an issue. In such a case in which a gulf between business and society is so fundamental or deep, corporate social responsibility programs do not suffice and may even backfire. While it is normal for the norms and values of a business sector to differ from those of the wider whole (i.e., society), it is uncommon for a rupture to be so deep that corporate marketing and CSR are not sufficient business responses. I submit that in such cases and where corporations have a lot of power over government officials, CEOs extend their toolset to government to fill in the trench. The "Occupy Wall Street" protests is a case in point. 

From the corporate standpoint, the time was ripe for the field of business and society, whose topics include corporate social responsibility, corporate citizenship, and stakeholder management. The fundamental matter to be “managed,” or assuaged, in that field of business concerns divergent norms as well as values between the individual corporations or the business sector and the wider society. Tension is not always or invariably present, but the fact that a corporation and even the business sector is a part of a wider whole (i.e., a society) suggests that the respective interests, perspectives, norms, and values are likely to differ. Generally speaking, the interests of a part are not identical to the interests of the whole of which the part is a subunit or part. An externality such as from dumping chemicals in a river or polluting the air means that a company's interest, norms, and values can differ from those of a society. 

Self-interest can obviously affect norms and values. A powerful corporation's executives and board may believe that the company's power over members of the U.S. Congress is normal and right because such dominance is in the corporation's financial interest. Meanwhile, voters may feel that such a distended dominance by the moneyed interest harms democracy and is thus a norm that should not exist. 

According to Seib, societal populists and corporate executives were not on the same page in 2011. In as much as the executives were utilizing corporate social responsibility to create the impression that the corporate norms and values being espoused were in line with societal norms and values, the field of business and society may not have been equipped to deal with divergent talking points that are grounded in antipodal, or antithetical, social realities. In short, corporate social responsibility as marketing or "window-dressing" can be detected as fake, thereby increasing the rift rather than reducing it. Indeed, it can be said that the topic began as an ideal  to bridge the gap between corporations and societies only to end up in marketing.[2] Foisting the illusion of convergent corporate and societal values can backfire by illuminating boardrooms as places where only a narrow perspective of short-term profit pervades.

In the context of the “Occupy Wall Street” protests spreading across the U.S. during the Fall of 2011, Seib pointed to the existence of “a radical disconnect between the picture populist critics paint from the outside, and the one business leaders describe from inside.”[3] This disconnect had gone back to September 2008, when bankers viewed the collapse of the housing market (and those of related financial products, such as CDOs) as a result of over-reaching, dishonest and languid mortgage borrowers. 

Meanwhile, the wider society saw greedy and fraudulent mortgage originators and investment bankers behind the adjustable-arm steep mortgages and the "crap" bonds that were based on those risky mortgages. This disconnect infuriated the general public, especially because contrition would not come from Wall Street. Greed refuses any constraint, including even acknowledging even some responsibility. Banks would engage in mass foreclosures without a hint of guilt for having misled people into going for oversized houses. The mortgage producers at Countrywide and other companies conveniently made the bad assumption that a few years of mortgage payments would enable the mortgage borrowers to shift from step-wise increasing-rate to fixed 20-year mortgages so as to avoid the higher interest payments. This flawed assumption was no doubt helped out by the fact that more mortgages would be sold, and thus higher bonues received. The interest of the economy, not to mention society as a whole, was of lesser concern. Hence the clash in norms and values between the part and the whole. 

In the populist protests, the crowd also saw American companies with enough profit and cash to create jobs domestically yet without the will to do so. In the first decade of the twenty-first century, American corporations had cut their work forces in the U.S. by nearly 3 million, while increasing employment abroad by almost 2.5 million. In the fall of 2011, Standard & Poor predicted corporate earnings growth of 13.5% for the third quarter, which, according to Seib, suggested “to Wall Street protesters that companies were hoarding profits without creating work.”[3] Saving money by moving factories "off shore" fits the business value of efficiency, and even the maxim in trade that goods should be produced where doing so is cheapest (e.g., where the goods are most plentiful). The cost of such a norm of and value on going abroad is externalized to the host country, which is left with the impaired social contract between a large corporation and the society. 

Generally speaking, a government says, in effect, to a company: We'll let you incorporate and even expand into multinational corporations but we expect you to provide jobs in addition to benefiting your customers with goods and services. This version of the social contract that includes the obligation to provide as many jobs as possible (i.e., while still allowing for a reasonable profit, and thus dividends) is controversial, however, because CEOs could retort that providing goods and services that reduce suffering and increase happiness is sufficient. From a utilitarian standpoint, therefore, such CEO's could even claim an ethical justification. Such a justification would likely merely be marketing to craw back some of the lost reputational capital, a long-term intangible asset. 

According to Seib, business leaders cited more practical factors that more easily fit into the traditional business calculus. From the business perspective, third-quarter expectations were less than expected. The managers pointed to the benefits of an artificially weak dollar that had already strengthened at the expense of exports. More broadly, businesses were looking at weak consumer demand and increasing costs with government regulations, which make augmenting the domestic work force more costly. Seib juxtaposes this business view of a hostile business environment with the societal view that looked angrily at unpatriotic and greedy corporate chieftains. 

I submit that when a divide is so gaping, depating the factors in the business environment doesn't fit. Corporate social responsibility programs, such as having employees volunteer at soup kitchens, are not restorative. Firstly, the benefit from such programs would not come close to the original costs borne by society from the reckless and even fraudulent banking practices. Secondly, the people hurt from those practices are not necessarily helped by a program. This is especially true if the "restorative" program in oriented to another society problem, such a disease. Thirdly, corporations benefit from the good public relations from a CSR program. An angry populist is not likely to be pleased that one of the selfish, reckless banks is actually benefiting as it makes contrition. Fourthly, the gap between the business sector (or an industry, but not likely an individual company) and a society can be so deep enough that capitalism itself is severely questioned at large. Filling in such a deep trench goes beyond what CSR can do; a bulldozer rather than some shovels are needed in such cases. I contend that the "Occupy Wall Street" protests that took place three years after the financial crisis deepened or perhaps only exposed such a trench. I suspect this is why the U.S. Government, which was refusing to hold mortgage producers and investment bankers criminally accountable for the fraud--protecting the powerful financial sector--took an active role in stopping the protests. To have the very legitimacy of corporate America, or even just the banking sector, even questioned in such a public way was likely too much for a government whose elected officials could receive unlimited campaign contributions. 

1. Gerald F. Seib, “Populist Anger Over Economy Carries Risks for Big Business,” The Wall Street Journal, October 11, 2011. More generally, see Skip Worden, Essays on the Financial Crisis.

2. William C. Frederick, my doctoral professor in the field of Business & Society, came to this conclusion, as did I. When upon retirement from teaching he turned to the application of the natural sciences to economizing and power-aggrandizement in relation to societal "ecologizing" forces, and then to management, I truly became one of his students (for twenty years). I gave a conference paper, for example, on how a company could be run on ecologizing rather than profit-maximizing principles. The field of Business & Society is indeed wider and more abstract than the CSR topic. 

3. Seib, “Populist Anger Over Economy Carries Risks for Big Business.”

Nissan's CEO Caught in the Crosshairs of Business and Society in Japan

Ordinarily, courses that include business & society (with business & government, and business ethics material also included as if the three fields were somehow one) have been relegated to the periphery in American business schools. Perhaps the business sector and its sycophantic deans have simply assumed that little actual cost comes from business managements deviating from societal norms and values. Admittedly, such a schism decreases reputational capital, a long-term intangible asset. Even so, the long-term-oriented and intangible can manifest as immediate jolts to such capital, with actual, measurable financial costs kicking in. They are triggered by news-worthy incidents in which a company or even one high-level manager, such as a CEO, are perceived societally as being in the wrong. The general perception of wrongness in turn depends on how far a company or manager have deviated from societal norms and values. Crucially but typically ignored, even though societal norms and values can absorb certain ethical principles or theories, business ethics is a distinct field because reasoning from or to ethical principles or theories lies at the core there. That is, no philosophical reasoning is involved in business & society; rather, the norms/values of a business sector, industry, or company are compared or contrasted with relevant societal norms and values. In this essay, I analyze the case of Carlos Ghosn, who was CEO of Nissan, Renault, and Mitsubishi on November 19, 2018 when he was arrested “on allegations that for years he had withheld millions of dollars in income from Nissan’s financial filings.”[1]
In 1999, Ghosn came to Japan “to carry out an American-style restructuring of a failing Nissan. The Japanese carmaker had $35 billion in debt, provided lifetime employment to a bloated work force and produced a fleet of the kind of cars you’d dread getting at the rental counter.”[2] He closed factories, cut suppliers, and laid off 14 percent of the workforce. As a VP at Renault, he “had helped oversee a turnaround at the middling French automaker, which had agreed to spend $5.4 billion to buy a 36.8 percent stake in Nissan Motors.”[3] On both counts, he was successful even though the CEO of General Motors at the time said Nissan was fixable.

In Japan, whose culture generally viewed outsiders with distrust, Ghosn “achieved a status bestowed on only a handful of chief executives. . . . In 2004, Emperor Akihito awarded him a Blue Ribbon Medal for his extraordinary contributions, making him the first foreign business leader to receive the honor.”[4] Ghosn, “a brash Brazilian-born and Lebanese- and French-educated engineer,” had been accepted in one of the most closed societies in the world.[5] Accolades aside, this made him extremely vulnerable should he intentionally or unintentionally violate a major societal norm or value. “From the start, he faced distrust from the Japanese policymaking and business establishment. The very idea of an outsider’s bringing free-market capitalism to Japan’s quasi-socialist corporate culture jabbed at historical wounds” even though Ghosn was not an American.[6] In other words, in “representing” a foreign economic system that a victor in World War II wore like a crown for the world to admire (even where it didn’t), Ghosn inadvertently put himself in a long-simmering wound in Japan. Not that any ethical principle had been violated; rather, his subtle predicament was predicated on a divide between a strongly valued societal norm and him as well as the company he ran. At the firm level, his “splashy—some would say autocratic—presence was out of sync with modest Japanese culture.”[7] As one Nissan employee put it, “No one dared to say anything that would confront [Ghosn’s] opinions.”[8] So a cleft between business and society can affect the degree to which a business leader’s style is accepted organizationally. That he cut 21,000 jobs but spent more than $200 million for Nissan to be a sponsor of the Rio Olympics in 2016, and that he hopped between homes paid by Nissan and flew in company jets would likely put him out in virtually any society in the world only gave the Japanese fetter for distrusting the foreigner in spite of his early contributions to Nissan and thus Japan’s economy.

The triggering incident that brought down Ghosn’s reputational capital in a flash stemmed from a divergence between how he had handled the matter of his compensation (i.e., business) and how CEO’s in Japan were supposed to handle it (i.e., society). “In Japan, salarymen slave away at the kaisha (or company) with a sense of communal pride almost as important as the salary.”[9] In 2017, Ghosn made $16.9 million ($8.4 million from Renault, $6.5 million from Nissan, and $2 million from Mitsubishi), which was nearly 11 times what the chairman of Toyota, the world’s largest automaker at the time, earned.[10] Astonishingly, Ghosn had “made the case to the public that he was underpaid.”[11] Even at the annual meeting in June, 2018, he said the company remained “financially very disciplined” in rewarding senior management.[12] Asked at the time by the Financial Times if he was overpaid, he laughed and replied, “You won’t have any C.E.O. say, ‘I’m overly compensated.”[13] Breaching yet again a valued societal norm in Japan, his “brazenness rankled employees and the public in Japan.”[14]

So when a whistle-blower in Nissan said in October, 2018, that the CEO had been instructing Greg Kelly, a top aide and a board member (which represents a conflict of interest) to split Ghosn’s compensation between that which would be paid in the current year and reported in the annual report and securities filings, and that which would be paid only after the CEO will have left the company. Nissan went to prosecutors to allege that Ghosn had been underreporting his income since 2009. The company added that Ghosn and Kelly had developed future plans to pay Ghosn a further $124 million in cash and other financial instruments—some as compensation for an advisory position after the CEO’s retirement. The issue was that of committed compensation (yet not to be paid in the year committed) not being reported in securities filings (as well as the annual report). Stakeholders, and the Japanese public at large, could be harmed by not knowing the full amount of the company’s long-term liabilities.

While such harm (as well as the economic inequality even in the CEO’s current compensation) could be useful in an ethical analysis, but in this business-and-society analysis, the issue comes down to whether Ghosn’s deviations from valued societal beliefs and norms added to the severity of the government’s response in going after the gilded CEO—a foreigner nonetheless and thus at bottom to be distrusted in Japan. The issue is not whether Japan’s norms are ethical; rather, in this analysis they are taken as given so a qualitative measure of Ghosn’s deviations can be made and related even causally to the outcome (i.e., the arrests without bail, as well as the extent of the blow to the man’s—and perhaps even his company’s reputational capital). It is indeed easy to conflate such an analysis proper in the field of business & society with that of business ethics, for we tend to apply should or should not to valued norms whether in business or society. Whereas existing norms (and cultural beliefs) are descriptive, ethical principles are normative. The two fields do share a border, however, as in asking whether a cleft between the norms (and related policies and conduct) of a business and of societies in which it conducts business is ethical or not. In going from the descriptive to the normative, ethical analysis is necessary, so I would classify this matter to lie within business ethics, drawing on the descriptive in business & society.

To be sure, legal analysis of the acts of Ghosn and Kelly would carry us a considerable distance in getting to bottom of this case study. Just when the Japanese police were going to release the CEO on bail, they rearrested him “on new charges that he shifted personal losses during the 2008 financial crisis temporarily onto Nissan’s books.”[15] The matter of an associated deviation from societal values may not be a material factor due to the crime itself, which rendered it offensive in virtually any civilized society at least at the time. This crime arguably goes beyond the failure to include committed but not paid out compensation in financial reports to the government (and in company annual reports). The impact of business & society as distinct from legal analysis was likely more significant in the failure to disclose committed compensation because Ghosn had at least gone through the company (admittedly via Kelly) in structuring his compensation. It was not as if he would get the total committed compensation in the years committed. In other words, going against valued societal norms can render a person or company particularly vulnerable, other things equal.

Business managers—even CEOs—may not recognize their own vulnerability and that of the company at which they work. For one thing, we humans tend to discount low-probability, high-cost events, especially if they are not expected in the short term. The immediacy of quarterly earnings (whether for their impact on managerial compensation or investors in the stock market) is typically of much greater concern. The design of Capitalist economy systems that emphasizes the short term is likely due in part to the fact that human beings (homo sapiens) have been “hardwired” through almost 2 million years to be oriented to immediate cravings such as hunger and sex (i.e., survival) and threats (i.e., to avoid getting eaten). Almost all of the natural selection, which gradually changes a species, took place during the hunter-gatherer stage of humanity; agriculture has only existed for the last 9,000 years. In other words, immediacy being foremost is a result not just of economic, political, and social systems giving it emphasis, but also of the context (i.e., hunter-gatherer) of human natural selection. As the context today is greatly different, perhaps systems should be designed that emphasize the long-term so as to counter how our species has evolved.

On the impacts of human evolution (and other sciences) on modern management, see William C. Frederick, Natural Corporate Management, available at Amazon.
For cases of unethical business, see Skip Worden, Cases of Unethical Business, available at Amazon.

---

1. Amy Chozick and Motoko Rich, “The Rise and Fall of Carlos Ghosn,” The New York Times, December 30, 2018.

2. Ibid.

3. Ibid.

4. Ibid.

5. Ibid.

6. Ibid.

7. Ibid.

8. Ibid.

9. Ibid.

10. Ibid.

11. Ibid.

12. Ibid.

13. Ibid.

14. Ibid.

15. Ibid.

Superficial Hospitality in Hospitality Management: A Case of Weak Accountability?

Staying at a motel or in a hotel can involve being at close quarters with people coming with various backgrounds and cultures, and with different lifestyles. A group of teenagers may be in one room, while an elderly couple is trying to sleep next door. It seems to me that hospitality management should take a look at Crowne Plaza's instituting “snore monitors” to patrol corridors in the designated quiet zones in the hotels in London, Leeds and Manchester in the E.U. While the monitors were apparently particularly oriented to detecting particularly loud snorers, such an understanding of the problem may be superficial, for most noise issues, I submit, involve others things, such as people shouting, or loud television or music. In short, the sheer extent of inconsiderateness toward strangers in society generally is doubtlessly reflected in hotels and motels. What may be surprising is the extent to which employees and even managers working in the hotels or motels are inconsiderate themselves in refusing or otherwise failing to enforce their own noise rules. This weakness may have a wider extent within the business sector, at least in the U.S., wherein employees and their supervisors act as individuals (with momentary power over customers) rather than as agents, for significantly less power is involved in the latter than the former role/mentality.
I applaud the management of Crowne Plaza for having instituted floor monitors, but I suspect that limiting them to snorers and only on quiet floors did not go far enough. It would have more optimal had the company had its monitors walk through the non-quiet areas at night so as to be on guard for excessive noise that could be expected to keep other people up. Hotels (and especially motels) should not simply assume that assigning or reassigning customers to particular “zones” is the way of handling the situation of noise. The wider problem is that hotel (and especially motel) employees and even managers too often refuse to enforce their own noise restrictions. Such weakness, whether out of fear of sheer laziness, has come to characterize too many franchisees especially, except on the high end. 

Sometimes weakness can be in the building itself. The building types built by Extended Stay and Studio Plus, for example, have virtually no insulation between floors so customers might get to hear stomping late at night and even into the morning. I once tried to move rooms because of an "all nighter" in the room above mine, but the front desk employee decided to ignore my reserved room change, telling me it had been cancelled and the other room had been given to another customer, or “guest.” Another employee remarked in a matter-of-fact tone, "People can walk in their rooms." Trying to correct for that situation involved even more headaches in dealing with the corporate "customer service" people, who also made promises and went back on them with impunity. Meanwhile, I discovered the local “area” manager had a penchant for eves-dropping on customers, or “guests.”

The true colors of the management mentality at the company really came out after I stopped a huge water-leak from the room above mine from flooding my room and the room below mine (a toilet overflow, which the customer failed to report). Essentially, I began and headed the multiple-pan and towel operation, with the able (and friendly) assistance of the young woman working at the front desk. In spite of the fact that I saved the company thousands of dollars, however, the management was unwilling to compensate me in any way, such as by offering me a discount on my bill (or even promising the same rate should I have extended, which I did not, or potentially stay again at an Extended Stay or Studio Plus—which I would not recommend to anyone). Even the front desk person who had assisted me was astonished that her company’s management had been so niggardly in its response to my generous efforts, which, by the way, had been spontaneous and unconditional even given the noise issue). 

The lesson is perhaps the following: When a sordid (i.e., unreliable) management ensconced in a company as its very culture is combined with a cheap building model, the question is perhaps how such a company could survive bankruptcy and continue operating. This is not to say that the company operating Studio Plus and Extended Stay is the only culprit from which we can assess how far down the hospitality industry goes.

I also had to contend with noise while staying once at a Red Roof Inn. I complained about late night noise (a drunken party) in the room next door only to have the front desk person give up because he "got a busy signal" when he tried to call the room. Couldn't he have knocked on the room's door or at least have called security? One would think that the report of a party going on at 1am on a weeknight would trigger something more than giving up because of a busy signal. Part of the problem, I later learned from a front desk employee, was that the management had instructed the employees to accept virtually anyone of age who wanted a room. “We can’t anticipate what someone might do from how they act when they arrive at the front desk,” the employees were apparently told. The manager of the particular motel was also retaining rather than refunding the accumulated room tax owed by law to customers, or “guests,” staying more than thirty days. Ironically, both the manager and her desk employees were self-described Christians, and had no qualms in expressing their views of sinful “orientations.” Out of the blue, one front desk employee told me that another employee only seems gay, but is actually a “wholesome Bible brotha.” I was still back on how tax fraud jives with being Christian. What stood out for me most during my stay at that motel was that none of the employees seemed capable of recognizing that they could be mistaken, even as they were incompetent (and unethical) in many ways. This fault applies to the management of Extended Stay as well.

Convenient excuses, abuse of discretion, and lack of follow-through may be ubiquitous at badly-managed motels and hotels. It astonishes me that one industry can have such a breadth of quality within it. I'm glad that a hotel chain is instituting hall monitors. Doubtless not every motel and hotel will do so.

It seems to me that hospitality management may ironically be at the bottom end of management practice. Perhaps the existence of bad practice in at least part of the industry has given the entire industry a sense of (or tacit invitation to) shallowness, for even at the best hotels the hospitality is only skin-deep, being conditioned on money and thus utterly contingent and shallow. Indeed, using the word “guest” and conditioning it on paying money not only misuses the term itself, but also renders “hospitality” rather superficial and may even belie its very meaning. This can manifest even as "higher end" hotels, whose employees can be very rude indeed to real guests.

I remember, for example, being invited to the weekday late-afternoon reception at a Staybridge hotel by a "guest" staying at the hotel on business. He told me it was not uncommon for "guests" there on business to invite a friend or coworker from time to time--a practice that the hotel management went along with to please its business "guests." However, because I was not a "real" guest, but, rather, a guest more in keeping with the meaning of the term, the employees involved in the reception (and at the front desk) made it rather obvious to me that they were ignoring me while being nice to my host--their "guest." It occurred to me that the employees had no idea how to treat a real guest--one not conditioned on having paid money for the "privilege." The fraud of the "hospitality" at Staybridge was thus made transparent to me as well as to their "guest." In short, hotels use "guests" too conditionally, as well as in a way contrary to the term's meaning, for no real host would charge a guest. The hospitality industry seems to have decided to use a term at odds with that term's meaning, so as to reap the benefits nonetheless. Such hypocracy, which people can readily sense, is ultimately as counter-productive as it is self-serving, and yet hotel managers are utterly unrepentant in their usurption--as if they have done nothing of the sort.

Considering the hospitality industry's "mindset," or default, it is perhaps not completely unexpected that even some of the companies reputed to be among the best are actually rather superficial with respect to hospitality, while some motels, such as Extended Stay and Red Roof Inn, continue to operate without any hint of salubriousness and yet somehow manage to remain in the industry. Perhaps the industry itself is problematic, at least relative to the standards of management in other industries. The hospitality industry itself may simply be rather inhospitable, or low, as in base, under the subterfuge of hospitality itself.

In such a context, unethical conduct can spread unchecked. For example, while staying at a Best Western hotel, I negotiated with the general manager on a rate on which I would extend my stay. He gave me a counter-offer and a day or two to decide. On the second day, I accepted his rate in deciding to extend, but his assistant told me, "The manager changed his mind. He wants quite a bit more."  I called Best Western's "customer service," but to no avail as there was no accountability. I did not extend my stay. I subsequently heard that the manager was part of a class action lawsuit alleging that he improperly conducted himself with waitresses in the hotel's bar. Hospitality management, it would seem, may be an inferior sort of management under the facade of hospitality.

Source:

Msnbc.com, “Light Sleepers Rejoice: Hotel Chain Drafts ‘Snore Patrols’ as Shuteye Sentries,” July 21, 2011. 

On Nietzsche's moral philosophy applied to business managers and employees, see On the Arrogance of False Entitlement: A Nietzschean Critique of Business Ethics and Management, which is available at Amazon.

Facebook Secretly Shared Users' Friend's Data with Business Partners: A Case of Betrayal

According to The New York Times at the end of 2018, internal documents generated at Facebook in 2017 showed that the company “gave Microsoft, Amazon, Spotify, and others far greater access to people’s data” even after having raised a privacy wall than Facebook had disclosed.[1] That is, Facebook effectively exempted some of its business partners from the company’s privacy rules without notifying users. In many quarters, this would be called lying, which in turn would suggest a sordid management at Facebook. The more subtle astonishment, I submit, is that 2.2 billion users had stayed with Facebook after the hidden use of personal data for political purposes. The partnership between Facebook and Cambridge Analytica had hardly been made in heaven. Why such enduring trust in spite of external data being clear grounds for losing trust and giving up using Facebook? How many betrayals would be necessary? In literal marriages, trust can be lost “like that!” Similarly, when a child even unconsciously loses trust for her parents, the solid basis of trust in a normal parent-child relationship is lost most likely forever. Why has Facebook—a distant business punctuated by lies—get a pass?

The newspaper’s valuable discovery offered the fullest picture yet of the wide extent, or scale, to which personal data was traded through at least 2018 “by some of the most powerful companies in Silicon Valley and beyond.”[2] In fact, The New York Times points in its investigative reporting to the “extraordinary power over the personal information of its 2.2 billion users—control it has wielded with little transparency or outside oversight.”[3] The lack of transparency should be a giant red flag concerning the unethical climate at Facebook’s “upper” management levels. Betrayal drips off the screen in Mark Zuckerberg’s decision to allow “Microsoft’s Bing search engine to see the names of virtually all Facebook users’ friends without consent” and give “Netflix and Spotify the ability to read Facebook users’ private messages.”[4] Facebook also “permitted Amazon to obtain users’ names and contact information through their friends, and [Facebook] let Yahoo view streams of friends’ posts . . . despite public statements that [Facebook] had stopped that kind of sharing years earlier.”[5] Specifically, in the wake of revelations (not from Facebook!) that the company had allowed a political consulting firm, Cambridge Analytica, to use user data to help Donald Trump’s 2016 presidential campaign, Zuckerberg publicly claimed that his company was instituting stricter privacy protections for users. Therein lies a lie, for he said nothing about permitting gaping exemptions.  

Even so, how many of Facebook’s users left because of the Cambridge Analytica scandal?  Astonishing, or maybe not!, because over two billion users remained, which implies that plenty of users behaved as herd animals, going on as usual in spite of having reason to delete their accounts. Many of the users must have sensed, even if unconsciously, that their trust in Facebook no longer had a viable foundation (i.e., a basis in fact). With the subsequent revelations of the New York Times detailed here, would what was by that point a squalid track record register in the minds of the 2.2 billion users? If not, a gap would still exist between users including personal information and pictures and trust that Facebook would not betray those users yet again. In a perfect market, viable competitors to Facebook would exist and consumers would--especially given the low barriers to entry--readily switch over. Perhaps Facebook's practice of buying up potential competitors early (and for a lot of money) had rendered the market oligarchical. Yet even this would not explain why the status quo had been favoring Facebook rather than the naive, oblivious, or neutral users. I submit that this case represents a market failure from the standpoint of competitive, free-market Capitalism. 
Lest it be assumed that the U.S. Government would increase oversight on Facebook (and other social-media companies), would any action really come from government (including regulatory oversight) even as wealthy mega-companies like Facebook (and its “partners”!) could doubtlessly make very substantial political campaign contributions? Given this conflict of interest, at least in the U.S., relying on the users to protect themselves seems naive. On this problem, I submit that the explanation lies in psychology. Are human beings--or most humans--too prone to act on an instinctual urge to act as herd animals rather than as trend-setting individuals? Nietzsche thought so, and he argues in his books that such people are herdish because they are weak. Can 2.2 billion people be weak, or is the problem external, such as a dearth of information or simply a calculation that what comes free in a Facebook account is worth more than the company's betrayals? 

See also the booklet, Taking the Face Off Facebook, available at Amazon. On Nietzsche's moral philosophy applied to business ethicists and managers alike, see On the Arrogance of False Entitlement: A Nietzschean Critique of Business Ethics and Management, available at Amazon.

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1. Gabriel Dance, Michael LaForgia, and Nicholas Confessore, “As Facebook Raised a Privacy Wall, It Carved an Opening for Tech Giants,” The New York Times, December 18, 2018.

2. Ibid.

3. Ibid.

4. Ibid.

5. Ibid., italics added.

BP's Criminal Guilt in the Deepwater Horizon Oil Rig Disaster

More than two years after the worst oil disaster in U.S. history, BP agreed in 2012 “to accept criminal responsibility for the . . . disaster that killed 11 workers.” What does it mean for an association to “accept criminal responsibility”? The notion seems unwholesomely anthropomorphic, if not chimeric in nature. Taken even just practically, holding a corporation itself criminally responsible may not be make sense, even as a deterrent. I contend that the notion of criminality applies only to human beings, whereas civil charges are suitable for associations including corporations.

From a corporate perspective, criminality would of course be viewed in financial terms, ideally from the standpoint of the financial welfare of the stockholders. Accordingly, the “criminal responsibility” translates into $4.5 billion in “fines and restitution.” The figure includes nearly $1.3 billion in criminal fines. The settlement includes payments of $2.394 billion to the National Fish and Wildlife Foundation, $350 million to the National Academy of Sciences over five years, and $525 million to the Securities and Exchange Commission for having misled investors by lying to Congress. The fines relate to BP pleading guilty on 11 felony counts of misconduct or neglect of ships officers, one felony count of obstruction of Congress and one misdemeanor count each under the Migratory Bird Treaty Act and the Clean Water Act. The 11 counts related to the workers' deaths are under a provision of the Seaman's Manslaughter Act.

It is the outflow of cash, rather than “pleading guilty” to 11 felony counts of “seaman’s manslaughter” relating to the deaths of the 11 workers onboard the rig and one felony count of obstruction of Congress in providing false information on the rate that oil was gushing from the deep-water well, that “translates” directly into corporate terms. During the three months in which the well was gushing uncontrollably into the Gulf, the U.S. Government relied on BP for accurate information on the rate of output, and the company executives in turn were aware of this reliance and yet chose to lie—misleading investors as well as the U.S. Government. It could be argued that the fines are essentially the same as pleading guilty, but then such fines are generally perceived as qualitatively different than those in the civil cases against BP. It is this qualitative distinction that does not translate into a business calculus other than in terms of the negative financial impact in terms of reduced reputational capital from headlines such as, “Oil Giant to . . . Plead Guilty to Criminal Charges.” What really registers in the bewindowed albeit closed offices at BP is the “to Pay $4.5 Billion” part of the headline.

Fundamentally, a company’s management is geared in its very perspective to the interest of the company, and ideally its stockholders, rather than to the business environment, even when the company has created harm to the latter. How does a corporation even accept responsibility for something like manslaughter or lying? It is not as though an organization has a mind, much less a conscience. A business mindset is more like that of a shark—a feeding machine. It does not make sense to hold a shark responsible; it can only be kept out of Sydney’s swimming areas, for example, by nets.

Organizations are basically the people who run and operate them. “Company” is actually a plural noun, as in “a company of men.” Accordingly, the individuals who formulate, sign off on, and implement a policy, procedure or decision that results in harm to others (or the environment) can and should be held criminally responsible. Put another way, human beings rather than associations can feel punishment and thus can be subject to it.

Fortunately, besides the criminal settlement, “three former BP employees were charged by a federal grand jury with felonies in the incident, two of them for allegedly failing to carry out a critical safety test properly” and “to alert onshore engineers to problems with the drilling.” The two oil well supervisors were charged with 11 counts of “seaman’s manslaughter,” 11 counts of involuntary manslaughter and one violation of the Clean Water Act. The third, “David Rainey, BP’s former head of Gulf of Mexico exploration, who took a lead role in the disaster response, was charged with obstruction of Congress and making false statements to a law enforcement officer for allegedly lying about how much crude was spewing from the well.” Unless decided on his own to lie, others at BP should have been charged criminally too.

The fact that criminal charges were made against particular persons at BP is extremely important, both in itself (i.e., justice) and as a deterrent. Two years after the disaster, BP was still the largest oil producer in the Gulf of Mexico. Additionally, the oil giant was exploring for oil and gas in Texas, Oklahoma, Arkansas, Louisiana, and Ohio. The company would likely have to send executives to the Hill to testify in the future, and those executives should know that they could go to prison for deciding to lie or even “just following orders” to mislead Congress.

As for the criminal fines, they may actually be insufficient financially, given the wealth of the oil giant. The $4.5 billion is merely 17% of the company's profit in 2011 alone. To cover most of the cost of the criminal fines, the company simply sold its Texas City, Texas refinery—where fifteen people had been killed in an accident in 2005—for $2.5 billion. Meanwhile, the multinational company was able to maintain “strategically important” refineries in Washington, Ohio and Indiana in the U.S. alone. Although “leaner,” the well-publicized company might even benefit in terms of public relations in the future from being rid of the sordid refinery in Texas.

To be sure, the civil claims pending at the time could include up to $20 billion under the Clean Water Act if the company is held grossly negligent (i.e., “conscious and voluntary disregard”). Additionally, the company has spent about $14 billion on spill response and clean-up and more than $9 billion in claims to business and individuals. A related claim was up to $7.8 billion when BP announced the criminal settlement in late 2012. Also, Louisiana, Mississippi, and Florida were suing BP for civil fines. Clearly, these fines dwarf the monetary element of criminality. I contend that the other elements of criminality do not register at the company level.

In spite of having agreed to have BP plead guilty, the company’s executives did not seem particularly interested in admitting guilt. "We believe this resolution is in the best interest of BP and its shareholders," said Carl-Henric Svanberg, BP's Chairman. "It removes two significant legal risks and allows us to vigorously defend the company against the remaining civil claims and to contest allegations of gross negligence in those cases." This is hardly an acknowledgement of criminal guilt. Rather, it is a statement of how the settlement benefits the company! This is like boy sent to his room as a punishment bragging about being able to play video-games from his bed. Surely his mother hearing this would wonder whether she had in fact just punished her son or rewarded him for bad behavior.

From BP’s standpoint, the decision to plead guilty on criminal charges was done in the best interest of the shareholders by reducing legal risk. This is not to accept and acknowledge being blameworthy in a criminal sense. Accordingly, on the day in which the criminal settlement was announced, shares of BP actually rose 14 cents, ending the day at $40.30. Relatedly, the Journal reports that analysts “reacted positively to BP’s settlement of its criminal liability.” There is no sense in this reaction of how you or I might react to a person who “pleads guilty to criminal charges.” We would not exactly buy stock in that person. A company is different—it is a financial machine wherein a settlement that provides a ceiling on the cash to be spent translates as “limiting legal risk.”

In my view, the various civil fines are what must have registered at the company level at BP because of the sheer amount of cash involved. It can be asked from this case whether it even makes sense to hold a company criminally guilty. “Fighting crime” could be more focused against the persons involved—expanding what counts as who is “in the know” on a given policy or a decision that harms others—while the monetary aspect to a company is in civil crimes.

Alternatively, if a corporation truly is to be held criminally guilty in a given country, then it would seem to me that “going to prison” would mean that the company could not do business inside or even with that country or its businesses during the length of its sentence. Lest it be answered that an oil giant would hardly agree to a settlement under those terms, I answer that criminals don’t necessarily agree to plead guilty and there is, after all, the alternative of a criminal trial and verdict. A company being found guilty rather than agreeing to plead guilty deprives it of its share of control while still implying the ethical obligation to admit rather than deny the guilt implied in the verdict. In short, either being criminally guilty should mean something besides reducing legal risk (i.e., something bad ) or concept should not apply at all—to companies, that is.

Sources:

Michael Kunzelman, “BP Oil Spill Settlement Announced,” The Huffington Post, November 15, 2012.

Tom Fowler, “BP Slapped With Record Fine,” The Wall Street Journal, November 16, 2012.

Angel Gonzalez and Daniel Gilbert, “Accident Fails to Dent British Firm’s Ambitions in U.S.,” The Wall Street Journal, November 16, 2012.

Extrapolating from the Arab Spring to Corporate Social Responsibility

Richard Branson, founder of Virgin Atlantic and a myriad of other companies, sees a natural extension or follow-through from the pro-democracy protests in the Middle East and North Africa to more corporate social responsibility. As much as I would like to think that the twenty-first century proffers a new world, I think we have to acknowledge the weight of the political, economic and social strictures that we have uncritically inherited.

According to USA Today, “Branson says it took him seven years to realize businesses are part of the problem as they focus narrowly on profit and exhaust natural resources. Now, he believes the world has changed in the last several months, with revolutions in the Middle East, the earthquake and tsunami in Japan, riots in London, famine in East Africa, and debt crises around the world. He quotes the band REM: "It's the end of the world as we know it … and I feel fine." Seven years? Branson has been thinking on all cylinders. Even if businesses are not part of the problem, the default of business is to make profit by turning resources into products to be consumed. This is the raison d’etre (i.e., the reason for being) of the modern corporation. Viewing its inherent function, as per its design, as part of “the problem” may simply be due to the sheer magnitude of a large corporation’s operations. In other words, a large foot is apt to leave a large footprint.

Moreover, changes in government, protests, natural disasters and a systemic overreliance on debt-financing by governments do not necessarily mean the end of the world as we know it. I wish this were so, but people in power have a nasty habit of retaining it, even if under subterfuges if necessary. For example, the military rule in Egypt at least as of the beginning of 2012 may put the “revolution” in 2011 in perspective. That is to say, the old guys are still in charge, so how much of a revolution was it? Furthermore, it would be naïve to believe that the corrupt relationship between business and government in Japan has been expunged by the post-tsunami clean-up. It is doubtful, for example, that TEPCO has been born-again as if baptized by the tsunami. 

The larger point Branson is making in his statement is that corporations will no longer be part of the problem because the world as we know it is no more. He cites several instances of corporate social responsibility to make his point. However, the business of business is still to make money, and much of CSR is still essentially marketing writ large. Without changing the design in corporate law, it is foolhardy to believe in a brave new world of corporate capitalism. It is at the very least a stretch to assume that pro-democracy protests or changes in government will somehow convince business executives to engage in CSR. Even in terms of corporate or “stakeholder” democracy, the linkage is tenuous because the expectation that governments should be democratic does not extend to corporations because the two are typically viewed as different domains. So to Branson, I would say, nice job with your companies and even on CSR, but let’s not get carried away on some jet to nirvana. As much as we would like to see the world remade rather than carrying on with baggage from the twentieth-century, we would get further toward this goal by keeping our legs on the ground.

Source:

Kathryn Caravan, “Branson’s ‘Screw Business As Usual’ Has High Points,” USA Today, January 23, 2012. 

Decoupling Responsibility from Power: The Case of Transocean in the BP Disaster

With much power comes implicit responsibility. Hence, on February 21, 2011, the world recoiled when Gaddafi violently turned on his own people--using his power sans responsibility in a selfish attempt to stay in power. So too, the world had been shocked in April, 2010 when BP's Deepwater Horizon oil rig exploded in the Gulf of Mexico and that the Gulf itself was at risk. That a company could ruin something as big as the Gulf of Mexico came as a surprise to many. That a company, or three in this case, could have minimized such a risk by, for example, sending the U.S. Government contingency plans on Gulf clean up that included rescuing sea animals that actually live in the Arctic, shocked the public just as much. How could people holding such power treat its use with such carelessness concerning any downside?  The defense of having followed company policy or having excuted business procedures pales in comparison with the societal demand that power, whether public or private, be handled responsibly.  In other words, people take it for granted that power is given to adults rather than to children.  I think we would be surprised how often this has not been the case.  The case of Transocean demonstrates this thesis.

Transocean, which owned the Deep Water Horizon oil rig that exploded in April of 2010,  was the subject of a criminal investigation into possible tax fraud in Norway. The company indicated in S.E.C. filings that Norwegian officials could assess it about $840 million in taxes and penalties. The filings also contended that a final ruling against Transocean could have a “material impact” on the company. The company was also the target of tax inquiries in the United States and Brazil. Furthermore, drilling equipment from Transocean was shipped by a forwarder through Iran and until 2009 the company had held a stake in a company that did business in Syria. The State Department claimed at the time that Syria and Iran sponsor terrorism.

In reaction to these charges,  a Transocean statement simply claimed that the managers at the company had always acted appropriately and that they would prevail in any investigations. This is interesting, for “always” is quite an accomplishment.  Once I took a self-inventory and one question was “I always tell the truth.”  Of course, no one always tells the truth, so the question was geared to assessing how truthful one is in taking the test.  Had I answered yes, I would have been lying. The transocean statement, taken by itself, indicates a proclivity to lie, for no human being always acts appropriately. Transocean's statement evinces a certain arrogance, as if to say, "We are above reproach."  Such an attitude is dangerous where there is sufficient power at one's disposal that one's actions can do real damage to the planet.

Transocean, which drilled in some 30 countries and employed more than 18,000 people, owned nearly half of the 50 or so deepwater platforms in the world in 2010. “These people are capable and considered the gold standard of deepwater drilling,” said Peter Vig, managing director at RoundRock Capital Management, an energy hedge fund in Dallas.  I contend that expertise in drilling does not sufficiently counter the kind of charges that were brought against the company. To focus only on expertise in operating machinery or in managing a company as though they were all that matters in business is to hold an extremely narrow perspective on what counts. Furthermore, to let blantantly false asseverations stand (such as of always acting appropriately) is to enable a pattern that can literally destroy a major marine ecosystem.

Source:

Barry Meier, "Owner of Exploded Rig Is Known for Testing Rules," The New York Times, July 7, 2010.

Related material is in Cases of Unethical Business, which is available at Amazon.