Is the world ready to review its system of carrots and sticks for corporations?, asks Muhammad Umar Boodo

Boodoo, Muhammad Umar

DECEIT, FRAUD, REGULATORY EVASIONS, WINDOW DRESSING: words that have become far too familiar in business news headlines. The Volkswagen emissions scandal is the latest example of disingenuous corporate malpractice that has already had far-reaching consequences for the ordinary customer, shareholder, and any other stakeholder directly or indirectly impacted by the actions of a few

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Volkswagen affair : global coordination is needed to enforce ethical corporate behaviour

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08/10/2015Volkswagen affair: global coordination is needed to enforceethical corporate behaviourblogs.lse.ac.uk/businessreview/2015/10/08/volkswagen-affair-global-coordination-is-needed-to-enforce-ethical-corporate-behaviour/DECEIT, FRAUD, REGULATORY EVASIONS, WINDOW DRESSING: words that have become far too familiar inbusiness news headlines. The Volkswagen emissions scandal is the latest example of disingenuous corporatemalpractice that has already had far-reaching consequences for the ordinary customer, shareholder, and any otherstakeholder directly or indirectly impacted by the actions of a few.The outrage against the VW Group is coming from all quarters, akin to outcries over child labour in Asia, factoryaccidents and lack of safety measures, oil spills, irresponsibility and greed in the financial sector, and the list goeson. Yet, company after company, industry after industry keeps us riddled in this vicious circle of harm, followed byreparations until a new harm is imposed (typically by another party) and new reparations are implemented tomitigate the impact of externalities.  The wheel keeps turning, and sadly I believe the VW scandal is just anotherspoke on this wheel, unless the world is ready to review its system of carrots and sticks for corporations, and inparticular for the agents (those in the C-suites and in managerial positions), who are supposed to allocate others’(shareholders’) monies to their most efficient and most effective use.If we start with the premise that human beings are inherently ethical, then unethical practices must arise out of somecombination of situational- and/or organizational-level culture, enticement, expectation, and pressure. Managershave long been incentivized to act in the interest of shareholders through schemes such as stock options and otherlong-term incentive plans. Increasing market share, lowering costs, increasing revenues and profits are the vehiclesthrough which management receives warm glow from the company’s shareholders and they also form the basisupon which management is seen as efficient and effective, and for which it is rewarded (more than) accordingly. Ifmanagement does not deliver, then the people in the team get replaced, while receiving a decent severancepackage (after) having cashed their options when the latter were ‘in the money’. After some time, the people in theteam get hired somewhere else or they open their own businesses, even though others may have suffered(sometimes fatally) because of the reckless actions of a few.1/2Let us take a breather here and recall our starting premise: these people are not inherently bad, nor did theyinherently want to cause harm to others. Yet, they CHOSE to act unethically, because they could see the carrot; thestick, on the other hand, is simply not stiff enough to deter people from acting unethically. The question that needs tobe posed here is: is society satisfied with this cycle of post-harm reparations, or does society want to think about theorigins of capitalism, rethink its ideas about the modern-day corporation, and try to halt this epidemic of unethicalbusiness practices?  At the root cause of every scandal, be it an oil spill, a factory collapsing, a food inspectionmishap, is the desire of management to be most efficient and effective so it can reap the fruits of its actions. Giventhis state of affairs, one should not be surprised at the consequences of such actions.In my opinion, fundamental changes are required at a globally-coordinated level to achieve a state of ethicalbehaviour. Corporations are founded on the premise of limited liability, i.e. individuals are not responsible if somecorporate behaviour causes harm to stakeholders. In other words, the company has an identity of its own and canlitigate and defend itself. In the case of VW, some members of the Top Management Team (TMT) will probably beprosecuted. However, the biggest loser thus far is still VW: it is this “identity’’ that has caused harm to consumersand to the environment, and so it shall pay for its actions. As I write this (albeit in a ludicrously simple fashion), Ihope to get my message around: a corporation does not exist on its own, rather it is a sum of individuals, and eachindividual should be accounted for when the corporation meddles in unethical behaviour.  I am not calling forretroactive action, but rather for proactive action to serve as a credible deterrence to unethical practices.I end with a little anecdote. I was just at a major academic conference in strategic management. In one of thesessions on Corporate Social Responsibility, I asked one of the most prominent scholars on the subject aboutwhether he believed in ethics. His response, and I paraphrase: I believe in individual ethics…a corporation is notcreated on the basis of ethics, and therefore, cannot be expected to act in socially responsible ways…the best wecan hope for is that its strategic positioning in terms of its policies, programmes etc. to help stakeholders, are also inthe best interests of society at every given point in time. Perhaps Milton Friedman rightly said that the only socialresponsibility of a company is to increase shareholder value. It cannot be expected to act ethically, because unlikehumans it is not predisposed to behave in this manner. It is high time we connect humans to corporations again, forTHAT will be in the interest of society.♣♣♣Featured image credit: Petr Magera CC-BY-2.0 Inside photo credit: frankieleon CC-BY-2.0Muhammad Umar Boodoo is a PhD candidate in Industrial Relations and Human Resourcesat the University of Toronto. Prior to his doctoral studies, he earned an Honours Bachelor’sdegree in Economics and Mathematics from Glendon College, York University, Canada. Hejoined LSE as a Fellow in the Department of Management  in September 2015 to complete hisdoctoral thesis, “Institutional and Stakeholder Influence on CEO Compensation and CorporateSocial Responsibility”, and work on new research projects. He has published a book chapteron human capital and growth in Asian countries, and has also published an article in theIndustrial Relations Journal. Currently, he has more articles under review at journals inEmployment Relations and Management. Copyright © 2015 London School of Economics2/2

Volkswagen affair: global coordination is needed to enforce ethical corporate behaviour

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