Essay on Politically Correct Harvard Case Method: continued

MBAs and Ethics

Ethics For Employee-Bosses

It is not that American executives at the start of the twenty-first century were unethical by their own lights, but rather that their ethics were based on different premises from those of their ancestors.

Under agricultural capitalism, at the dawn of the American republic, property rights were on a par with the Bill of Rights. People lived in small communities and knew each other.

The person who violated community standards of integrity could escape the consequences only by ‘going West’. Personal responsibility for paying debts and keeping one’s word was appropriate when the majority of fellow citizens were also owners of business properties.

Two hundred years later, property rights had become gravely abrogated by government and were replaced by new civil rights, privacy rights, and novel interpretations of the ancient Bill of Rights.

The real ‘capital’ of the average American today is his or her ability to gain employment.

This was the outcome of demographic evolution that led to most citizens being dependent on being engaged as hired hands (however lofty in rank), rather than on a personal commitment to manage a family business or farm.

The assets of most Americans were no longer capital, essential to a family business or farm, but rather consumer property or funds put aside for future consumption.

The real ‘capital’ of the average American today is his or her ability to gain employment. Consequently, the perceived rights of job-holders now take precedent over property rights of capitalists.

The Case Method vs. the Politically Correct

The following mock case, illustrates the difficulty of arriving at a useful conclusion from group debate in the ‘distinctive amphitheater classrooms’ of Harvard Business School:

The XYZ Computer Software Company designs and develops accounting systems for America’s largest banks, responsible for trillions of dollars in deposits. Systems analysts and programmers are hired through a recruiter on the basis of skills acquired in prior employment and academic training in computer science.

The systems under development are complex and errors are unavoidable. Sometimes, programmers have put ‘Easter Eggs’ (personal code, to signal authorship or as a prank) into programs shipped to clients, but this is contrary to company policy.

After September 11, 2020, the executive in charge of programming notes that thirty of the firms' three hundred programmers are Muslim and many of these employees have relatives and current contacts in Middle Eastern countries.

The department head realizes that any programmer with the intent to sabotage the banking system might be able to slip malicious code into software delivered to bank clients.

If undetected, such code could lead to losses of tens of billions of dollars to the firm’s clients, to hundreds of thousands of public depositors, and to the government.

The company could be sued and forced into bankruptcy. Is there a problem here, and, if so, what should the executive do?

If the ethical standards of agricultural or industrial capitalism still prevailed, the answer would be simple: the thirty Muslims would be fired and the company would set up a surveillance system into the personal affairs of the remaining employees, backed by strict auditing and testing of program code during development and prior to shipping.

The principle is simple: the safety of the country and the company is paramount; employees must accept this precept.

However, under workers’ capitalism, such stern measures against the department’s staff would be unacceptable, because employee rights now trump property rights.

It would be embarrassing to even to have this case debated openly among ninety Harvard Business School students, some of whom may be from abroad (insensitive, perhaps, to the issue of U.S. national security) and even might be Muslims (the group under suspicion, perhaps unjustly).

There is 'no right answer' except that which is 'politically correct'.

With the premise that ‘there is no right answer’, the students would be constrained to come up with a politically correct, bland resolution to the problem that would offend no one, even though the risk to the nation, to the company, and to thousands of clients may be unabated.

It is unlikely that many Harvard professors would design cases that cut so close to the bone of political rectitude, but this exaggerated example serves to show how ethics and morals are shaded by assumptions regarding the relative importance of property and employee rights.

If a case were made out of the Boeing Company nine billion dollar buyback, described in a separate essay, students might not even perceive that a similar conflict exists between the property rights and interests of long-term shareholders and short-term pecuniary motives of company executives and fund managers – essentially the property-employee rights debate in more subtle clothing.

Leaders With No Guiding Light

The New York Stock Exchange is a non-profit, self-regulatory membership organization that is charged under U.S. securities laws to police its members and ensure that the public has a fair and orderly market in securities that it lists.

In September 2003, Richard Grasso, the CEO of the New York Stock Exchange, was forced to resign because he accepted a pay packet that exceeded $140 million.

Neither the directors that approved this payment nor the over-paid executive seemed to have done anything illegal, or even anything that, before the public reaction was known, might have been condemned as unethical by a group of MBA candidates in Harvard’s amphitheaters.

Indeed, the NYSE had, prior to September 2003, busied itself by lecturing other companies on good ‘corporate governance’.

No one expected Madame Albright to be more than a figurehead — a phony symbol of independence and integrity.

The NYSE board was chaired by Madeleine K. Albright, Secretary of State under President Bill Clinton.

As a life-long public servant, Madame Albright was supremely unlikely to have any substantive knowledge of the fine points of operating stock exchanges and clearinghouses, or of the subtle principles of self-regulation under the securities laws, or of the conflicts between different factions of exchange members, the management of listed companies and institutional investors, and the needs of the general public.

In fact, when the pay scandal reached the front pages of the Wall Street Journal, Madame Albright was generally not included in press criticism of NYSE directors, partly because of the liberal bias of the press, but mainly because few expected her to be more than a figurehead, selected to dress up the board as a phony symbol of independence and integrity.

On the other hand, the Compensation Committee, the independent directors that approved this extraordinary remuneration, included Herbert M. Allison Jr., Chairman of TIAA-CREF, the champion of ‘good corporate governance’, and Gerald M. Levin, retired CEO of AOL Time Warner.

Mr. Allison was the successor at TIAA-CREF to Mr. Biggs, the director who chaired the compensation committee in the Boeing Company case described in a separate essay, while Mr. Levin, also mentioned another essay, had won CalPERS’ Corporate Governance Award of Courage for the year 2000.

The NYSE board was sprinkled with MBAs, including Mr. Allison who had his degree from Stanford.

On the other hand, Mr. Grasso, the beneficiary of the board’s munificence, had not even finished college.

Again, we see the problems wrought by simmering conflicts between the interests of employee-managers, the rights of property-holders, and the interests of the nation.

Relativistic Wall Street

The ethical ambivalence taught in the nation’s business schools appears to be linked to the multitude of ‘corporate governance’ scandals that became more noticeable after the collapse of the Great Bubble.

The NYSE board seemed to perceive that the level of Mr. Grasso’s remuneration exceeded the limits of the absurd only after the story made headlines and aroused the ire of the Chairman of the SEC, Dick Grasso’s former boss, William Donaldson.

Mr. Grasso’s excessive remuneration was of greater significance in exposing the ethical problems of workers’ capitalism than the collapse of Enron, because this case revealed the flabby, debilitated, relativistic, amoral heart of Wall Street, the NYSE – the institution that had led the campaign for shareholding by the masses half a century earlier.

Paying lip-service to ‘good corporate governance’ and appointing independent directors can never substitute a lack of consensus regarding ethical behavior.

A capital market depends not only upon law, but on a common ethical consensus that supercedes law.

As the law allows a defense of insanity to those who cannot tell the difference from right and wrong, perhaps this should be the defense of all those corporate leaders who fill their pockets at shareholders' expense.

In this sense, the ethical ambiguity and moral relativism taught at Harvard Business School and other MBA factories, might be considered a form of social insanity.

Without the guiding light of common understanding as to what is virtue and what is right and wrong, we are left only with the question, "Is it legal?".

Furthermore, if we start by selecting future business leaders because they are smart and proven mercenaries, how can we hope to create CEOs who have a real sense of fiduciary responsibility to distant shareholders?


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