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Do shareholders encourage unethical practices?

Richard Bunning

Faculty Blog

Johnson and Johnson, at one time considered a paragon of ethical business practices, now finds itself in great legal difficulties for its role in the American opioid epidemic.  Other drug companies could well be implicated as well.  
How did J & J come to find itself with such a daunting legal and public relations challenge?  And is it a problem unique to the pharmaceutical industry?
The opiate problem is not because America has an older or more ailing population than other countries, requiring more pain relievers.  For it doesn’t.  Yet Americans consume 80% of worldwide opioid prescriptions.  A large part of the problem appears to be that, almost uniquely among western countries, US pharmaceutical companies can market their products, leading to increased prescribing and usage practices which has brought huge industry profits.   And, in turn, political clout.  For instance, three years ago the pharmaceutical industry successfully pressured the US Drug Enforcement Agency to curtail attempts to hold opioid companies accountable for shipping ‘…massive numbers of opioids to pill mills…’*
Which doubting CEO of an opioid producing firm could withstand board pressure to increase the production and marketing of opioids?  And get a share of expanding profits?
Perhaps a parallel can be drawn with the 2008 financial crisis.  Much of the problem developed because the US government, in an attempt to encourage wider home ownership, allowed the establishment of the subprime mortgage program.  Clever financial institutions then bundled these risky mortgages with other mortgages into so called derivatives which were sold on, creating a bubble which ultimately burst.  As with the opioid epidemic, government policy opened the door to risky behaviours, encouraged by clever finance staff and investors’ scramble for profits,  leading to the largest crash since the Great Depression.   Many would claim that the bankers’ behaviours were unethical and even illegal, yet only one banker was ever jailed.
In the crisis aftermath, I recall hearing an interview with an executive whose small conservative bank had declined to participate in that derivatives market.  ‘I didn’t half get a lot of pressure from my board members, questioning why we were not pursuing easy profits like our competitors,’ he stated.  ‘Board meetings were far from easy for me for a number of months.  Fortunately my board ended up thanking me!’
In both instances, a focus on profits seems to have trumped other considerations.  And it is likely the same concerns for profitability drove Volkswagen to develop software designed to outsmart US emissions tests.  Complying with the new US standards by modifying its engines would have resulted in Volkswagen needing to raise its prices and reduce product performance with lower fuel economy: which was the right thing to do,  but not the most profitable.  All three examples, opioids, derivatives, emissions testing, appear to have garnered short term profits while being far more costly in the longer term.
And we must wonder what companies are, right now, making unethical yet profitable decisions which will prove ever so costly in the long run? A market economist might give a wan smile at such business and human disasters and note that they serve to remind everybody that the “open society market” will always punish the wrongdoers, that risk of loss is real and buyer beware. However the human costs are real too. Regulatory failure has real costs.
So as shareholders demand annual profits, how can firms ensure their executives are able to make ethical long term decisions, not only for the benefit of shareholders, but also for stakeholders?  It is, in my mind, a critical dilemma which our society does not seem close to resolving.  
Nevertheless, we can begin to decide whether a course of action is ethical or not by asking a few basic questions.               

  • Is the practice such that it is hidden so as not to arouse criticism? As soon as it is felt that a behaviour must be hidden from others, it is clearly open to ethical scrutiny.

  • Is the practice harmful to people or does it impinge on human dignity?  The fair and considerate treatment of employees, the organisation’s shareholders, customers and other stakeholders is undoubtedly a key consideration in choosing ethical behaviours.

  • Is the practice harmful to the environment? Given the considered view of many that an environmental crisis looms, this question can only be of increasing importance.

  • Does the practice provide gains to individuals at the expense of the organisation? Just as the organisation must show concern for individuals, so must individuals respect the organisation.

If the answer to any of these questions is ‘yes’, then it would be a sign that the behaviour should be examined by the board and the executives as to whether or not it is ethical.

But determining what is right, is only the first part of ethical leadership.  The second and perhaps most demanding part is actually doing it!