Friday, March 14, 2014

Today’s Headline: “The Public Does Not Trust Big Business”

   For decades now, we in the U.S. have analyzed, discussed and debated issues relating to corporate social responsibility and corporate governance.  Regulators regulate, legislators legislate, and business leaders, policymakers, and academics have spent, and continue to spend a great deal of time writing, speaking and thinking about the governance and social responsibility of big business.  Is anyone listening?  Has the protracted discussion about CSR and governance mattered?  It does not seem so.  Just look at the business section of today’s New York Times (March 14, 2014).

     One story reports that General Motors ignored serious problems with the ignition switch on some of its models.  The ignition switch problem seems to have caused airbags to fail.  Drivers and passengers died.  Some were seriously injured.  And GM now faces a public relations nightmare that it could have avoided.  In failing its consumers, GM may also have failed its shareholders if the publicity about the debacle impacts the company’s profits.  Also printed today is a story about Target and the financial harm suffered by Target shoppers because the company ignored alerts to suspicious activity generated by its computer security system.  Hackers infiltrated the company’s system and consumers suffered harms that could have been avoided if Target observed even minimal governance and social responsibility practices.  In another story revealing harm imposed on consumers by big business, a journalist observes that the Justice Department has failed to hold accountable large banks and their executives for engaging in massive mortgage fraud that included falsifying documents.  Most acknowledge that the fraud in which many banks engaged was a major factor in precipitating the 2008 financial crisis.  So this story is about more than harm to consumers.  It is a story of harm to the U.S. economy.  Another story in today’s Times is about harm to the financial markets themselves.  The 10th former executive of SAC Capital will face insider-trading charges.  And, there is a story about harm to workers who allege that McDonalds and its franchisees engaged in fraud that left the workers underpaid.

     More than ten years after the massive fraud that brought down companies like Enron, WorldCom, Adelphia, and Tyco, badly governed and socially irresponsible companies continue to harm workers, consumers and communities.  This is true even after the passage of the Sarbanes-Oxley Act of 2002, and the 2010 Dodd-Frank Act.  In Enron’s aftermath, there was a great deal of discussion about whether the company was an outlier.  Observers tossed around the famously overused bad-apples metaphor.  Enron, WorldCom, Adelphia, Tyco, etc., were just a few bad apples, the argument went.  Yet, in 2014, we continue to grapple with what seems to be inadequate governance and deplorable social irresponsibility that too frequently occurs. 

     Also in the business section of today’s Times is an article about the reputational harm that some companies have suffered and recent attempts to improve corporate governance.  The journalist in this article declares that, “the public doesn’t trust big business”.   This public distrust is not a new phenomenon.  It is almost laughable to think that the public would feel any other way.  But it is laughable that we, the public, continue to invest in poorly governed and socially irresponsible firms.   Clearly, not all companies are irresponsible and badly governed.  It is up to us, the investors, to do some of the work and ask that our mutual and pension fund managers ask the kinds of tough questions that may uncover poor corporate governance practices and irresponsible behavior.

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